AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 22, 2000
REGISTRATION NO. 333-39836
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM SB-2 AMENDMENT NO.1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CELEXX CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 1040 65-0728991
(State or other jurisdiction (Primary Standard (I.R.S. employer
of incorporation or Classification Code Number) identification number)
organization)
7251 WEST PALMETTO PARK ROAD
SUITE 208BOCA RATON, FLORIDA 33433
(561) 395-1920
(Address, including zip code, and telephone number , including area code,
of registrant's principal executive offices)
HARRY WINDERMAN, ESQ.GENERAL COUNSEL
CELEXX CORPORATION
7251 WEST PALMETTO PARK ROAD
SUITE 208BOCA RATON, FLORIDA 33433
(561) 395-1920
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At
such time or times as may be determined by the Selling Stockholders after this
Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. N/A
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. N/A
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. N/A
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM
AGGREGATE OFFERING PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER SHARE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE REGISTRATION FEE
- -------------------------------- ------------- ------------------- ------------------- ----------------
Common Stock, $.001 par value, 24,871,573(1) $0.42(1)(2) $10,446,061(1) $ 2,800.00
issuable upon conversion of 6%
Convertible Preferred Stock and
Warrant Shares
And Common Stock issuable to
Placement
Agent
Additional Common Stock, $.001 par
value 1,306,445 $0.42(1) $ 548,707 (1) $ 150.00
- ------------------------------------- ------------------- --------------------- ---------------- ------------------
Total . . . . . . . . . .$ 26,178,018 $0.42 $10,994,768 $ 2,950.00
- ------------------------------------- ------------------- --------------------- ---------------- ------------------
(1) Includes 200% of the number of shares of Common Stock, 12,002,453
shares, pursuant to Registration Rights Agreement issuable upon
conversion of 6% Convertible Preferred Stock at a conversion price of
$0.2968 per share, warrant shares and shares issued to the placement
agent on the sale of the above Convertible Preferred Stock and
1,306,445 shares of Common Stock for various Selling Stockholders and
consultants.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Exchange Act of 1933, as
amended (the "Securities Act"), based on $0.42, the per share average
of high and low sales prices of the Common Stock on the NASDAQ
over-the-counter Market on January 31, 2001.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
PROSPECTUS
26,178,018 SHARES
CELEXX CORPORATION
COMMON STOCK - (PAR VALUE $0.001 PER SHARE)
This Prospectus relates to the re-offer and resale by certain Selling
Stockholders (collectively the "Selling Stockholders") of shares (the "Shares")
of Common Stock, $0.001 par value per share (the "Common Stock"), of CeleXx
Corporation, a Nevada corporation comprised of an aggregate of 26,178,018 shares
of Common Stock, that includes 200% of the number of shares of Common Stock,
12,002453 shares, pursuant to Registration Rights Agreement (REFER TO SECTION
HEADED "SELLING STOCKHOLDERS" PAGE ___ FOR FURTHER DESCRIPTION AND DETAILS)
which will be issued by the Company to a certain Selling Stockholders upon the
conversion of the 6% Convertible Preferred Stock ("Preferred Stock") of the
Company and warrants and common stock received by the placement agent as part of
the same transaction. This Prospectus also relates, pursuant to Rules 417 and
457(i) promulgated under the Securities Act of 1933, as amended (the "Securities
Act"), to the offer and resale by certain Selling Stockholders of an
indeterminate number of shares of Common Stock that may become issuable by
reason of the anti-dilution provisions of the Preferred Stock and to certain
other stockholders. The Selling Stockholders have advised us that they propose
to offer such Shares which it may acquire for sale, from time to time, through
brokers in brokerage transactions on the National Association of Securities
Dealers Automated Quotation System (Over-the-Counter) ("NASDAQ"), to
underwriters or dealers in negotiated transactions or in a combination of such
methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Brokers, dealers and underwriters that
participate in the distribution of the Shares may be deemed to be underwriters
under the Securities Act of 1933 (as amended, and together with the rules and
regulations thereunder, the "Securities Act"), and any discounts or commissions
received by them from the Selling Stockholders and any profit on the resale of
Shares by them may be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Stockholders may be deemed to be an underwriter
under the Securities Act. See "Plan of Distribution".
We will not receive any part of the proceeds from the sale of the
Shares by the Selling Stockholders. The Selling Stockholders will pay all
applicable stock transfer taxes, brokerage commissions, underwriting discounts
or commissions and the fees of Selling Stockholders' counsel, but we will bear
all other expenses in connection with the offering made hereunder. We have
agreed to indemnify the Selling Stockholders and underwriters of the Selling
Stockholders against certain liabilities, including certain liabilities under
the Securities Act, in connection with the registration and the offering and
sale of the Shares.
The Shares are listed on the NASDAQ (OVER-THE-COUNTER). The closing
price per share of Common Stock on the NASDAQ (OVER-THE-COUNTER) on January 31,
2001, was $0.375.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND SHOULD ONLY BE MADE BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS" AT PAGE 7 HEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
3
The date of this Prospectus is ________________.
TABLE OF CONTENTS
Prospectus Summary............................................................ 3
Available Information......................................................... 5
Risk Factors.................................................................. 7
Use of Proceeds...............................................................13
Price Range of Common Stock...................................................13
Dividend Policy...............................................................14
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................14
Business......................................................................19
Management and Strategy.......................................................21
Security Ownership of Certain Beneficial Owners and
Management...................................................................32
Description of Capital stock..................................................34
Plan of Distribution..........................................................38
Legal Matters.................................................................39
Experts.......................................................................39
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report .........................................F- 2
Consolidated Balance Sheet as of June 30, 2000, December 31, 1999 and 1998. F- 3
Consolidated Statements of Operations and Comprehensive
Income for the years ended June 30, 2000, December 31, 1999 and 1998....... F- 4
Consolidated Statements of Changes in Stockholders' Equity for the
years ended June 30, 2000, December 31, 1999 and 1998...................... F- 5
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, December 31, 1999 and 1998.................................. F- 6
Notes to Consolidated Financial Statements .......................... F-7-F-20
INTERIM FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of September 30, 2000 (Unaudited)...... F- 21
Consolidated Statements of Operations for the three months ended
September 30, 2000 and 1999 (Unaudited)................... F-22
Consolidated Statements of Cash Flows for the three months ended
September 30, 2000 and 1999 (Unaudited)................... F23
Notes to Consolidated Financial Statements .......................... F-24-F-28
4
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 as well as at the following
regional offices: 7 World Trade Center, Suite 1300, New York, New York 10048,
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60606-2511 upon
payment of the fees prescribed by the Commission. Such material may also be
accessed electronically by means of the Commission's home page on the Internet
at http//www.sec.gov.
The Company has also filed with the Commission a Form SB-2 Registration
Statement (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Shares offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information, reference
is made to the Registration Statement.
PROSPECTUS SUMMARY
THIS IS ONLY A SUMMARY OF THE INFORMATION THAT IS IMPORTANT TO YOU AND YOU
SHOULD READ THE MORE DETAILED INFORMATION, INCLUDING THE FINANCIAL STATEMENTS
AND THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
ABOUT US
CeleXx Corporation is an integrated management company providing
Information Technology (IT) services, networking solutions and web-centric
training to its clients. In general, these services are designed to enhance the
performance of client IT systems and to improve individual performance. CeleXx's
strategy in providing these services has been accomplished through acquisition,
consolidation and operation of IT businesses in select markets. In general,
these businesses provide services such as design, engineering and installation
of network systems; customization and design of multimedia applications in all
the major formats used in the development and delivery of e-Learning, Distance
Learning, and other interactive Web-based solutions; commercial Web site
development, computer hardware and software integration, Voice over Internet
Protocol and call center telephony; as well as training and on-going technical
support to client companies.
Company operations are currently organized into four groups according
to function: Integrated Solutions, Performance Media, Information Engineering,
and Special applications.
CMI, a wholly owned subsidiary of CeleXx, is the principle business in
the Company's Integrated Solutions Group, which is involved in systems
engineering, networking, computer telephony integration and other network
support services. The Performance Media Group develops high-end multimedia
applications and delivers e-Learning, Distance Learning and other web-centric
solutions to clients in the Fortune 500 list. The Information Engineering Group
was established to develop and implement large scale data based applications,
and the Special Applications Group was established to market and distribute
select IT products and services.
Effective January 1, 2000 the Company changed its fiscal year from
December 31 to June 30.
5
OUR BUSINESS
We operate within the broad market of Information Technology (IT),
which has grown in tandem with the worldwide proliferation of computerization
over the last two decades and has expanded the rate of growth with the
commercialization of the Internet and corporate Intranets over the last five
years. Several sources, including International Data Corporation (IDC), concur
that the number of online users will grow from about 150 million worldwide now
to about 500 million by 2003. This projected growth is expected, in turn, to
fuel the demand for new computer products and services and create new market
opportunities in this field. IDC is a leading provider of information technology
data, industry analysis and strategic and tactical guidance to builders,
providers and users of information technology. IDC is based in Framingham,
Massachusetts and maintains offices in more than 40 countries around the world.
OUR OFFICES
Our executive offices are located at 7251 West Palmetto Park Rd., Suite
208, Boca Raton, Florida 33433. Our telephone number is (561) 395-1920. We have
a home page on the internet at http://www.celexx.com.
About the Offering
September 30, 2000
Common stock Offered by the Selling Stockholders 26,178,018 shares *
Common stock Outstanding as of September 30, 2000 23,319,696 shares
Common stock to be Outstanding after the Offering 49,497,714 shares
* refer to section headed "Selling Stockholders" page ___ for further
description and details
Use of Proceeds - We will not receive any of the proceeds from the sale of
shares by the Selling Stockholders.
Bulletin Board Symbol CLXX
Risk Factors - An investment in the shares involves a high degree of risk. See
"Risk Factors" beginning on page 7 of this prospectus.
Summary Financial Data:
(Dollar amounts and share data)
3 Months Ended 6 Months Ended Year Ended
INCOME STATEMENT DATA SEPTEMBER 30, 2000 JUNE 30, 2000 DECEMBER 31, 1999
- ---------------------- --------------- -------------- -----------------
Revenues $ 5,234,652 $ 3,565,274 $ 680,989
Loss from Operations $ ( 251,584) $ (2,668,294) $(1,746,443)
Net Loss $ ( 242,936) $ (3,195,341) $(1,906,397)
Basic and Diluted Net
Loss Per Common Share $ (0.02) $ (0.24) $ (0.21)
6
BALANCE SHEET DATA SEPTEMBER 30, 2000 JUNE 30, 2000 DECEMBER 31, 1999
- --------------------------------------------------------------------------------
Total Assets $ 8,585,520 $ 8,172,379 $1,480,254
Total Liabilities $ 4,735,971 $ 3,767,896 $ 724,939
Stockholders' Equity $ 3,849,549 $ 4,404,483 $ 755,315
RISK FACTORS
An investment in the shares discussed in this prospectus involves a
high degree of risk. You should carefully consider the following risk factors,
as well as the other information contained in this prospectus, before making an
investment decision.
WE ARE A COMPANY WITH A LIMITED OPERATING HISTORY
We can not be sure that we will achieve profitability or positive cash
flow in the future. We commenced operations in February 1997 and, have a limited
operating history. To September 30, 2000, we had accumulated consolidated net
losses from inception of $5,706,793. At present, the only material businesses
that we have been successful in acquiring are Pinneast and CMI. While we
continue to evaluate and seek to acquire existing businesses in accordance with
the business plan, there can be no assurances that we will be successful in our
acquisition plans or in securing financing to acquire such operating companies.
Similarly, because of our limited operating history and accumulated
losses, our ability to attract desirable businesses for acquisition will be
severely limited. Moreover, there can be no assurance that such acquisition
candidates, if found, could be acquired under terms acceptable to us.
Consequently, failure to complete planned acquisitions will severely limit our
ability to grow.
WE DO NOT HAVE SOURCES FOR ADDITIONAL WORKING CAPITAL IF NEEDED
The timing and amount of capital requirements are not entirely within
our control and cannot accurately be predicted. If working capital requirements
materially exceed those currently anticipated, we may require additional
financing sooner than anticipated. On October 17, 2000, we received a commitment
for a $10 million secured Revolving Credit Line ("Credit Line") maturing in
October 2003 from CIT Business Credit (CIT), a unit of CIT Commercial Finance
and one of six operating groups within the CIT Group, Inc. Availability under
the Credit Line is based on a formula of eligible accounts receivable and
inventory and allows for an increase in the credit facility to consummate
acquisition financing within the maximum $10 million line. Borrowings bear
interest at the Chase Bank rate plus 1% per annum and are collateralized by
essentially all assets of the Company, such as accounts receivable, inventory,
and general intangibles, including its subsidiaries. The Credit Line requires,
among other conditions, compliance with certain covenants. The consummation of
the Credit Line is subject to the completion of the asset-based lender's legal
review and documentation. The Company has not yet closed on this credit line
because it has been negotiating with CIT on certain loan costs and collateral
provisions. In addition the company has been reviewing financing proposals from
other lenders and it anticipates closing on either the CIT Credit Line or one of
the other financing transactions within a short period. The Company estimates
that the net proceeds available for working capital from any one of these
7
financing transactions, after payoff to previous lenders and loan costs, to not
exceed approximately $500,000.
In addition on October 16, 2000, the Company's Chairman and principal
shareholder along with four other officers and/or shareholders provided us with
a letter of guarantee to jointly consent to lend us up to $1,000,000 on an as
needed basis for a one year period ending in October 2001. Repayment will not be
required before such date. Certain of these individuals have indicated that they
are currently pursuing financing on their personal assets to provide funds to
the company. As of January 31, 2001 the Company's Chairman has loaned us
approximately $95,000. The Company anticipates that it will require an
additional $150,000 on or before April 1,2001 to be provided by certain of these
individuals.
On January 30, 2001, Finova, as a result of their closing of certain
aspects of their business, advised CMI and its other clients that the credit
line facility would terminate on February 9, 2001. The company has arranged with
Finova to grant CMI up to a 30day extension of the credit line and intends to
replace the Finova credit line with alternative lenders as further discussed in
the preceding paragraph.
Our subsidiaries have been generating sufficient cash flow to sustain
their own operations however, their growth will be constrained if we do not
secure additional financing to support their future growth. Unless additional
capital is secured from third party financing and/or loans from its officers our
headquarters will be incapable of meeting its current obligations and may
require utilization of cash flow from its subsidiaries which can result in
additional constraints on the future growth of our subsidiaries.
We have no other commitments for additional financing, and we can not
be sure that any additional financing would be available in a timely manner, on
terms acceptable to us, or at all. Further, any additional equity financing
could reduce ownership of existing stockholders and any borrowed money could
involve restrictions on future capital raising activities and other financial
and operational matters. If we were unable to obtain additional financing as
needed, we could be required to reduce our operations or any anticipated
expansion, which could hurt us financially.
OUR REQUIREMENT FOR ADDITIONAL WORKING CAPITAL DEPENDS ON COMPETITIVE SPENDING
We believe that the net proceeds from financing borrowings and/or loans
provided from our officers , together with other available cash, will be
sufficient to meet our operating expenses and capital requirements at least
through June 2001. However, our capital requirements depend on numerous factors
including:
o the level of resources required to expand our marketing and sales
organization, information systems and research and development activities
o the availability of hardware and software provided by third-party vendors
WE HAVE SUBSTANTIAL COMPETITION IN THE INFORMATION TECHNOLOGY SERVICE AND
SOLUTIONS BUSINESS
We cannot be certain that we will have the financial resources,
technical expertise or marketing and support capabilities to compete
successfully in the Information Technology business. System integration and
e-commerce will result in even greater competition. Inasmuch as there are no
significant barriers to entry, we believe that competition in this market will
intensify. We believe that our ability to compete successfully will depend on:
8
THE COMPANY'S FUTURE POTENTIAL COMPETITORS CAN BE DIVIDED INTO SEVERAL
GROUPS - computer hardware and service vendors and/or manufacturers such as
IBM and Hewlett Packard; Internet integrators and web presence providers
such as Agency.com and iXL Holdings; large information consulting service
providers such as Anderson Consulting, Cambridge Technology Partners and
Electronic Data Systems Corporation; telecommunications companies such as
AT&T and MCI; Internet and online service providers such as America Online,
Netcom Online and UUNet Technologies; and software vendors such as
Microsoft, Netscape, Novell and Oracle. Almost all of the Company's current
and potential competitors have longer operating histories, larger installed
customer bases, longer relationships with clients and significantly greater
financial, technical, marketing and public relation resources than the
Company and could decide at any time to increase their resource commitments
to the Company's target market. As a strategic response to changes in the
competitive environment, the Company may from time to time make certain
pricing, service technology or marketing decisions or business or
technology acquisitions that could have a material adverse effect on the
Company's business, financial condition, results or operations and
prospects. Competition of the type described above could materially
adversely affect the Company's business, results of operations, financial
condition and prospects.
In addition, the Company's ability to generate clients will depend to
a significant degree on the quality of its products and services and its
reputation among its clients and potential clients, compared with the
quality of its services provided by, and the reputations of, the Company's
competitors. To the extent the Company loses clients to its competitors
because of dissatisfaction with the Company's services, or its reputation
is adversely affected for any other reason, the Company's business, result
of operations, financial condition and prospects could be materially
adversely affected.
There are relatively low barriers to entry into the Company's
business. Because firms such as the Company rely on the skill of their
personnel and the quality of their client service, they have no patented
technology that would preclude or inhibit competitors from entering their
markets. The Company is likely to face additional competition from new
entrants into the market in the future. There can be no assurance that
existing or future competitors will not develop or offer services that
provide significant performances, price, creative or other advantages over
those offered by the Company, which could have a material adverse effect on
its business, financial condition, results of operations and prospects.
RAPID TECHNOLOGY CHANGE
The market for Information Technology services is characterized by
rapid technological change, changes in user and client requirements and
preferences, frequent new product and service introductions embodying new
processes and technologies and evolving industry standards and practices
that could render the Company's intended service practices and
methodologies obsolete. The Company's success will depend, in part, on its
ability to improve its existing products and services, develop new products
and services and solutions that address the increasingly sophisticated and
varied needs of any currently and prospective clients, and respond to
technological advances, emerging industry standards and practices and
competitive service offerings. Failure to do so could result in the loss of
customers or the inability to attract and retain customers, either of which
developments could have a material adverse effect on the Company's
business, financial condition, results of operations and prospects. There
can be no assurance that the Company will be successful in responding
quickly, cost-effectively and sufficiently to these developments. If the
Company is unable, for technical, financial or other reasons, to adapt in a
9
timely manner in response to change in market conditions or client
requirements, its business, financial condition, result of operations and
prospects would be materially adversely affected.
POTENTIAL LIABILITY TO CLIENTS
Many of the Company's intended operations involve the development,
implementation and maintenance of applications that are critical to the
operations of their clients' businesses. Our failure or inability to meet a
client's expectations in the performance of our products or services could
injure the Company's business reputation or result in a claim for
substantial damages, regardless of its responsibility for such failure. In
addition, the Company possesses technologies and content that may include
confidential or proprietary client information. Although the Company will
implement policies to prevent such client information from being disclosed
to unauthorized parties or used inappropriately, any such unauthorized
disclosure or use could result in a claim for substantial damages. The
Company will attempt to limit contractually its damages arising form
negligent acts, errors, mistakes or omissions in rendering professional
services; however, there can be no assurance that any contractual
protections will be enforceable in all instances or would otherwise protect
the Company from liability damages. The successful assertion of one or more
large claims against the company that are uninsured, exceed available
insurance coverage, if any, or result in changes to any insurance policies
the Company may obtain, including premium increases or the imposition of a
large deductible or co-insurance requirements, could adversely affect the
Company's business, results of operations and financial condition.
FAST GROWTH MAY CAUSE PROBLEMS WITH CONTROL AND PRODUCTION
We are not sure that we will be able to manage our growth effectively,
or that our facilities, systems, procedures or controls will be adequate to
support these operations. Our inability to manage growth effectively could have
a bad effect on us by limiting our ability to service our customers and to
market our products and services. We have experienced a substantial growth in
the number of our employees and our business operations. This growth has placed,
and may to continue to place, significant strain on our managerial, operational,
financial and other resources. We believe that our performance and success will
depend in part on our ability to manage growth effectively. This, in turn, will
require ongoing improvement of our operations. We have expanded our Board of
Directors to include additional business experienced people.
WE WILL DEPEND ON KEY PERSONNEL TO CONTROL OUR BUSINESS AND OUR BUSINESS MAY
SUFFER IF THEY ARE NOT RETAINED
We are not sure that we will be able to retain our employees or to
identify or rehire additional people. The need for people is particularly
important in light of the anticipated demands of future growth and the
competition of the Information Technology Service Solution industry. Our
inability to attract, hire or retain good people could have a bad effect on us.
We are highly dependent on our key employees, including technical, sales,
marketing, information systems, financial and executive personnel due to our new
products and the new markets and new sales people we have recently hired.
Therefore, our success depends upon our ability to train and retain these people
10
and to identify, hire and retain additional people as the need arises.
Competition for these people, particularly persons having technical expertise is
substantial.
We also are highly dependent on the continued services of our senior
management team, which currently is composed of a small number of individuals.
While executive officers and key employees
have employment agreements with us, agreements are of limited time and are
subject to ending under circumstances.
POSSIBLE LACK OF PROTECTION OF OUR PROPRIETARY RIGHTS; RISK OF INFRINGEMENT ON
OTHERS' RIGHTS MAY MEAN WE CANNOT SELL OUR PRODUCTS
While the Company believes that its success is ultimately dependent
upon the innovative skills of its personnel and its ability to anticipate
technological changes, its ability to compete successfully will depend, in part,
upon its ability to protect proprietary technology contained in its products. We
rely on a combination of copyright, trademark and trade secret laws and
contractual restrictions to establish and protect our products and services. We
do not know if these protections will be sufficient to prevent misappropriation
of our products, services and other proprietary property or that our competitors
will not independently develop products and services that is substantially
equivalent or superior to our products and services. Without substantial
protection, we will have nothing of value to sell to businesses.
Also due to the fact that this is a new and rapidly changing business,
we cannot assure that others will not assert that our services or its users'
content infringe their proprietary rights on our products or services. We can
not assure that infringement claims will not be asserted against us in the
future. Such claims could result in substantial costs and diversion of
resources, even if ultimately decided in favor of us, and could have an adverse
effect on us, particularly if judgments on claims were against us. In the event
a claim is asserted alleging that we have infringed the intellectual property or
information of someone else, we may be required to seek licenses to continue to
use intellectual property. We are not sure, however, that licenses would be
offered or could be obtained on commercially acceptable terms, if at all. The
failure to obtain necessary licenses or other rights could have an adverse
effect on us.
WE HAVE VOLATILITY IN OUR STOCK PRICE
Our operating results, cash flows and liquidity may fluctuate
significantly over time. Our revenues depend on our ability to attract and
retain customers. We generally offer our new customers a money-back guarantee
pro-rated over the unused duration of the service term and customers to our
services have the option of discontinuing their service for any reason. Our
expense levels are based in part on our expectations of future revenues. To the
extent that revenues are below expectations, we may be unable or unwilling to
reduce expenses proportionately, and operating results, cash flows and liquidity
therefore could be worse than expected. Due to the foregoing factors, it is
likely that, from time to time in the future, our quarterly or other operating
results and/or growth rate will be below the expectations of public market
analysts and investors. Such a failure to meet market expectations could have an
adverse effect on the market price of the common stock.
Prior to this offering, there has been a limited public market for the
common stock trading on electronic bulletin board. We are not sure that an
increased public trading market for the common stock will develop or continue
after this offering, or that the public offering price will correspond to the
price at which the common stock will trade subsequent to this offering. The
stock market has experience price and volume fluctuations that have particularly
affected the stocks of technology companies, resulting in changes in the market
prices of stocks of many companies that may not have been directly related to
11
the operating performance of those companies. Such broad market fluctuations may
adversely affect the market price of the common stock following this offering.
In addition, he market price of the common stock following this offering may be
highly volatile. Factors as variations in our interim financial results,
comments by securities analysts, announcements of technological innovations or
new products by us or its competitors, changing market conditions in the
industry (including changing demand for internet access) changing government
regulations, developments
concerning our proprietary rights or litigation, many of which are beyond our
control, may have an adverse effect on the market price of the common stock.
SHARES ELIGIBLE FOR FUTURE SALE COULD DEPRESS THE PRICE OF OUR SHARES
Sales of a substantial number of shares of common stock in the public
market following this offering, or the perception that sales could occur, could
make the market price of the common stock prevailing from time to time go down
and could impair our future ability to raise capital through a sale of our
stock. Upon completion of this registration, there will be approximately
50,000,000 shares of common stock outstanding, 29,000,000 of which will be
freely tradable without restriction.
WE WILL NOT PAY A CASH DIVIDEND IN THE NEAR FUTURE
We have never declared or paid any cash dividends on its capital stock
and do not anticipate paying cash dividends in the foreseeable future.
CONTROL BY OFFICERS, DIRECTORS AND EXISTING SHAREHOLDERS PREVENTS CHANGES IN
MANAGEMENT
Currently, the directors as a group and specifically Mr. Doug Forde and
Mr. Lionel Forde, his brother, have the right to vote a large block of the
outstanding shares of common stock. This small group will control the operations
of our company and make it very hard to elect other management for us. As a
result, the present officers, directors and shareholders will continue to
control our operations, including the election of directors and, except as
otherwise provided by law, other matters submitted to a vote of shareholders,
including a merger, consolidation or other important matters.
WE PROVIDE INDEMNIFICATION OF OFFICERS AND DIRECTORS AND IT MAY BE DIFFICULT TO
SUE THEM
The Nevada Statutes permit a corporation to indemnify persons including
officers and directors who are or are threatened to be made parties to any
threatened, pending or completed action, suit or proceeding, against all
expenses including attorneys' fees actually and reasonably incurred by, or
imposed upon, him in connection with the defense of action, suit or proceeding
by reason of his being or having been a director or officer, except where he has
been adjudged by a court of competent jurisdiction and after exhaustion of all
appeals to be liable for gross negligence or willful misconduct in the
performance of duty. Our Bylaws provide that we shall indemnify our officers and
directors to the extent permitted by the Nevada law and thereby limit the
actions that may be taken by you against the officers and directors.
WE MAKE ESTIMATES OF OUR FUTURE IN FORWARD-LOOKING STATEMENTS
The statements contained in this prospectus that are not historical
fact are "forward-looking statements," which can be identified by the use of
forward-looking terminology as "believes," "expects," "may," "will," "should,"
or "anticipates," the negatives thereof or other variations thereon or
12
comparable terminology, and include statements as to the intent, belief or
current our expectations with respect to the future operations, performance or
position. These forward-looking statements are predictions. We cannot assure you
that the future results indicated, whether expressed or implied, will be
achieved. While sometimes presented with numerical specificity, these
forward-looking statements are based upon a variety of assumptions relating to
our business, which, although considered reasonable by us, may not be realized.
Because of the number and range of the assumptions underlying our
forward-looking statements, many of which are subject to significant
uncertainties and contingencies beyond our reasonable control, some of the
assumptions inevitably will not materialize and unanticipated events and
circumstances may occur subsequent to the date of this prospectus. These
forward-looking statements are based on current information and expectation, and
we assume no obligation to update. Therefore, our actual experience and results
achieved during the period covered by any particular forward-looking statement
may differ substantially from those anticipated. Consequently, the inclusion of
forward-looking statements should not be regarded as a representation by us or
any other person that these estimates will be realized, and actual results may
vary materially. We can not assure that any of these expectations will be
realized or that any of the forward-looking statements contained herein will
prove to be accurate.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by the
Selling Stockholders.
PRICE RANGE OF COMMON STOCK
Since October, 1998, our common stock has traded on the electric
bulletin board under the trading symbol CBRA and CLXX. The following table sets
forth the average range of bid and ask quotations for our common stock as
reported by the electronic bulletin board for each full quarterly period within
the two most recent fiscal years and subsequent interim periods.
FISCAL YEAR ENDED DECEMBER 31, 1998
BY QUARTER COMMON STOCK
QTR. DATE HIGH LOW
4th December 31, 1998 $6.25 $0.06
FISCAL YEAR ENDED DECEMBER 31, 1999
BY QUARTER COMMON STOCK
QTR. DATE HIGH LOW
1st March 31, 1999 $6.00 $0.875
2nd June 30,1999 $1.53 $0.875
3rd September 30, 1999 $1.15 $0.63
4th December 31, 1999 $0.83 $0.45
13
FISCAL YEAR ENDING JUNE 30, 2000
BY QUARTER COMMON STOCK
QTR. DATE HIGH LOW
--- ---- ---- ---
1st March 31, 2000 $4.13 $0.56
2nd to June 30, 2000 $3.00 $0.20
FISCAL YEAR ENDING JUNE 30, 2001
BY QUARTER COMMON STOCK
QTR. DATE HIGH LOW
--- ---- ---- ---
1st September 30, 2000 $0.32 $0.187
2nd to December 31,2000 $0.47 $0.10
Trading transactions in our securities occur in the
over-the-counter electronic bulletin board market. All prices indicated herein
are as reported to us by broker-dealer(s) making a market in our securities. The
quotes indicated above reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
As of September 30, 2000, there were approximately 265 Holders of
record our common stock, including brokerage firms, clearinghouses, and/or
depository firms holding our securities for their respective clients. The
Company believes that there are approximately 1,800 beneficial owners of our
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our stock and do
not anticipate paying cash dividends in the foreseeable future. The payment of
cash dividends, if any, in the future will be at the sole discretion of the
Board of Directors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
CeleXx Corporation is an Information Technology company that provides
organizations with support services and integrated and telecommunications based
systems that improve individual performance. CeleXx's strategy in providing
these services has been accomplished through the acquisition and consolidation
of Information Technology (IT) businesses. In general, these businesses provide
14
services such as engineering design and layout for the installation of network
systems, Web site development, computer hardware and software integration, and
training and ongoing technical support to client companies. In certain
situations, however, computer hardware and software may be sold as part of the
overall service solution.
The Company's recent operations have consumed substantial amounts of
cash and have generated net losses and an accumulated deficit. The Company
believes that it will require a cash infusion from a private placement or other
equity financing to meet its projected working capital and other cash
requirements. Absent such additional cash infusion from a private placement or
other equity financing, the Company's continued existence is in substantial
doubt. The sale of additional equity or other securities could result in
additional dilution to the Company's stockholders. There can be no assurance
that such additional financing can be obtained on acceptable terms, if at all.
RESULTS OF OPERATIONS
Comparison of six months ended June 30, 2000 to six months ended June 30, 1999:
The Company's total revenue increased $3,339,243, or 1,477%, from
$226,031 in 1999 to 2000 as a result of its acquisitions of Pinneast in May 1999
and CMI in April 2000.
Gross profit decreased to 28% in 2000 from 58% in 1999. This decrease
is a result of the lower margins generated from the network systems business of
CMI.
Operating expenses which consist of selling, general, and
administrative ("SG&A") expenses increased $2,877,106 or 350% to $3,699,639 in
2000 from $ 822,533 in 1999. As a percentage of sales, SG&A expenses were 104%
of total sales in 2000 compared with 364% of sales in 1999. The increase in SG&A
expenses is primarily due to the recognition of $1,758,782 in non-recurring,
non-cash compensation expense for the issuance of stock for services rendered,
increases in salaries, professional expenses and transaction costs associated
with on-going acquisitions and capital raising efforts, along with an increase
in consulting and travel expenses, and the inclusion of SG&A expenses for the
Company's two acquisitions of approximately $1,200,000. Depreciation and
amortization expenses for 2000 and 1999 were $ 156,708 and $ 15,524,
respectively. The depreciation and amortization expenses are primarily due to
the acquisitions of Pinneast.com, Inc. and Computer Marketplace, Inc. in 2000.
The Company recorded no income tax expenses. At June 30, 2000,the Company has a
consolidated federal and state net operating loss carryforward of approximately
$5,418,000, expiring between the years of 2014 and 2020.
Comparison of Year 1999 to Period from Inception (July10,1998) to December
31,1998:
The Company's total revenue increased $ 680,989, or 100%, from $ 0 in
1998 to 1999 as a result of its first acquisition of Pinneast in May 1999.
Gross profit increased to 48% in 1999 from 0% in 1998. This increase is
a result of an increase in the percentage of IT revenue derived from it's the
Company's sole operating unit during this period.
Operating expenses which consist of selling, general, and
administrative ("SG&A") expenses increased by $1,758,171 or 556% to $ 2,074,292
in 1999 from $ 316,121 in 1998. As a percentage of sales, SG&A expenses were
304% of total sales in 1999 compared with no sales in 1998. The increase in SG&A
expenses is primarily due to increases in salaries, professional expenses and
15
non-cash transaction costs associated with on-going acquisitions and capital
raising efforts, along with an increase in consulting and travel expenses.
Depreciation and amortization expenses for 1999 totaled $125,920. The Company
had no depreciation and amortization expenses in 1998. The depreciation and
amortization expenses are primarily due to the acquisition of Pinneast.com, Inc.
In 1999, the Company recorded no income tax expenses. At December 31, 1999,the
Company has a federal and state net operating loss carryforward of approximately
$2,223,000.
FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL
In connection with its various acquisitions, the Company recorded
goodwill and other intangibles, that are being amortized on a straight-line
basis over a period of 7 to 10 years, its estimated period over which the
Company is expected to benefit from such intangible assets. At June 30, 2000 and
December 31, 1999, the unamortized goodwill and other intangibles combined were
$ 3,999,251 and $1,114,579, respectively (which represented 49% and 75% of total
assets and 91% and 148% of stockholders' equity, respectively). Goodwill arises
when an acquirer pays more for a business than the fair value of the tangible
and separately measurable intangible net assets of the business. For financial
reporting purposes, goodwill and all other intangible assets are amortized over
the estimated period benefited. The Company has determined the life for
amortizing goodwill based upon several factors, the most significant of which
are the relative size, historical financial viability and growth trends of the
acquired companies and the relative lengths of time such companies have been in
existence.
Management of the Company periodically reviews the Company's carrying
value and recoverability of unamortized goodwill and other intangibles. If the
facts and circumstances suggest that the goodwill and other intangibles may be
impaired, the carrying value of such assets will be adjusted accordingly, and
will result in an immediate charge against income during the period of the
adjustment and/or the length of the remaining amortization period may be
shortened, which will result in an increase in the amount of amortization during
the period of adjustment and each period thereafter until fully amortized. Once
adjusted, there can be no assurance that there will not be further adjustments
for impairment and recoverability in future periods. Of the various factors to
be considered by management of the Company in determining whether goodwill and
other intangibles is impaired, the most significant will be (i) losses from
operations, (ii) loss of customers and (iii) industry developments, including
the Company's ability to maintain its market share, development of competitive
products or services and imposition of additional regulatory requirements.
Comparison of three months ended September 30, 2000 to three months ended
September 30, 1999:
Consolidated revenues for the quarter ended September 30, 2000 were $
5,234,652 compared to $270,234 for the same quarter last year, representing an
increase of $4,964,418 or 1,837%. The increase in revenue resulted from a
substantial increase in the revenues of the company's Performance Media Group
and from the acquisition of Computer Marketplace, Inc.("CMI") in April 2000. No
revenues have been earned from the Information Engineering Group and the
revenues for the Special Applications Group were negligible.
Gross profits for the first quarter ended September 30, 2000 decreased
to 24% from 48% for the quarter ended September 30, 1999. This decrease was due
in part to disproportional revenues from the company's Integrated Solutions
Group versus its other businesses. Traditionally, the sale of computing
16
solutions, which involves, among other things, the integration of computer
hardware and software and which constitutes the business of the Integrated
Solutions Group, yields lower gross profit margins than does the service
business, which are carried out by the company's three other groups. In the
first quarter ended September 30, 2000 the company generated gross profit of 60%
from its Performance Media Group and 20% from the Integrated Solutions Group,
combined netting 24% of revenues, compared to 48% derived only from the
Performance Media Group in the same period in 1999.
For the quarter ended September 30, 2000 selling, general and
administrative expenses ("SG&A") increased by $ 729,248 or 153%, over the same
period in 1999. SG&A expenses represented 23% of total sales for the quarter
ended September 30, 2000 as opposed to 177% of total sales for 1999. The overall
increase in SG&A expenses, which amounted to $936,000 for the quarter ended
September 30, 2000, includes the selling, general and administrative expenses
for the Company's operations, non-cash compensation expense in the amount of
$152,064 for the issuance of stock rendered, as well as the salaries, wages,
professional expenses and transaction costs associated with on-going
acquisitions and the Company's on-going capital raising efforts.
Amortization of goodwill, intangibles and stock compensation increased
by $258,483 to $279,642 for the quarter ended September 30, 2000 from the same
period in 1999 primarily as a result of the Company's acquisition of CMI in
April 2000.
As a result of the overall increase in revenues and proportionately
lower operating expenses, the consolidated operating loss of $251,584 for the
quarter ended September 30, 2000 decreased by $119,196(32%) when compared to the
operating loss of $370,780 for the same period in 1999.
Net loss decreased $127,844(34%) to a net loss of $242,936 for the
quarter ended September 30, 2000 compared to $370,780 in 1999. The net loss per
common share decreased from -$0.05 for the quarter ended September 30, 1999 to
- -$0.02 in the same quarter in 2000, resulting in a change of +$0.03 per share or
60%.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has satisfied its operating cash requirements
primarily through cash flow from operations, from borrowings from shareholders
and from a revolving line of credit with limits up to $5 million from FINOVA. At
September 30, 2000, the Company had $546,248 in cash on hand and in bank
accounts.
During the three months ended September 30, 2000, cash provided by
financing activities amounting to $603,818 exceeded cash used in operating and
investing activities of $580,041 , resulting in a $23,777 increase in cash. Net
cash used by operations of $471,543 was primarily due to increases in accounts
receivable and inventory levels, which were partially offset by increases in
accounts payable and deferred revenues.
On October 16, 2000, the Company's Chairman and principal shareholder
along with four other officers and/or shareholders of the Company provided the
Company with a letter of guarantee jointly consenting to lend the Company up to
$1,000,000 on an as needed basis over a one year period ending in October 2001,
the repayment of which will not be required before such date. Certain of these
individuals have indicated that they are currently pursuing financing on their
personal assets to provide funds to the company. As of January 31, 2001 the
Company's Chairman has loaned us approximately $95,000. The Company
17
anticipates that it will require an additional $150,000 on or before April
1,2001 to be provided by certain of these individuals.
Also, on October 17, 2000, the Company received a commitment for a $10
million secured Revolving Credit Line ("Credit Line") maturing in October 2003
from CIT Business Credit, a leading asset-based lender. Availability under the
Credit Line is based on a formula of eligible accounts receivable and inventory
and allows for an increase in the credit facility to consummate acquisition
financing within the maximum $10 million line. Borrowings bear interest at the
Chase Bank rate plus 1% per annum and are collateralized by essentially all the
assets of the Company. The Credit Line requires, among other conditions,
compliance with certain covenants. The consummation of the Credit Line is
subject to the completion of the asset-based lender's legal review and
documentation. The Company has not yet closed on this credit line because it has
been negotiating with CIT on certain loan costs and collateral provisions. In
addition the company has been reviewing financing proposals from other lenders
and it anticipates closing on either the CIT Credit Line or one of the other
financing transactions within a short period. The Company estimates that the net
proceeds available for working capital from any one of these financing
transactions, after payoff to previous lenders and loan costs, to not exceed
approximately $500,000.
On January 30, 2001, Finova, as a result of their closing of certain
aspects of their business, advised CMI and its other clients that the credit
line facility would terminate on February 9, 2001. The company has arranged with
Finova to grant CMI up to a 30day extension of the credit line and intends to
replace the Finova credit line with alternative lenders as further discussed in
the preceding paragraph.
Our subsidiaries have been generating sufficient cashflow to sustain
their own operations however, their growth will be constrained if we do not
secure additional financing to support their growth. Unless additional capital
is secured from third party financing and/or loans from its officers our
headquarters will be incapable of meeting its current obligations and may
require utilization of cashflow from its subsidiaries which can result in
additional constraints on the future growth of our subsidiaries.
We have no other commitments for additional financing, and we can not
be sure that any additional financing would be available in a timely manner, on
terms acceptable to us, or at all. Further, any additional equity financing
could reduce ownership of existing stockholders and any borrowed money could
involve restrictions on future capital raising activities and other financial
and operational matters. If we were unable to obtain additional financing as
needed, we could be required to reduce our operations or any anticipated
expansion, which could hurt us financially.
The Company believes that it will require additional cash infusions to
meet the Company's projected working capital, strategic acquisitions and other
cash requirements in its current fiscal year ending June 30, 2001 and is working
closely with lenders, investment bankers and others to meet these projected
needs.
INFLATION
In our opinion, inflation has not had an effect on our results of
operations.
18
OUR BUSINESS
OVERVIEW
We were organized under the laws of the State of Nevada on February 19,
1997, under the name, "Spectrum Ventures, Inc." In February 1999, the Company
merged with Cobra Technologies International, Inc., a Delaware corporation with
the Company surviving. The name of the surviving corporation was changed to
Cobra Technologies, Inc. and in August 1999 and November 1999 was further
changed to CobraTec, Inc. and CeleXx Corporation, respectively.
On February 18, 1999, the shareholders of Spectrum Ventures, Inc. voted
to acquire all of the outstanding common stock of Cobra Technologies
International, Inc., a newly-formed Delaware corporation ("Cobra
International"), pursuant to an Agreement and Plan of Reorganization in exchange
for 4,500,000 of the Company's stock.
Effective May 25, 1999, we acquired all of the outstanding common stock
of Pinneast.com, Inc. a South Carolina corporation ("Pinneast"), pursuant to an
Agreement and Plan of Reorganization for a value of $900,000. Payment consisted
of 500,000 shares of our common stock and $100,000 in cash. Payment of the cash
portion was deferred for one year. Stephen Lounsberry and Mitchell N. Smith,
President and Vice President of Pinneast, respectively, also owning 100% of the
outstanding capital stock of Pinneast, received 275,000 and 225,000 common
shares of our stock, respectively.
At present, the only material businesses that has been successfully
combined with us is Pinneast.com, Inc. and Computer Marketplace, Inc. While we
intend to acquire existing businesses in accordance with our business plan, we
are not sure we will be successful in our acquisition plans or in securing
financing to acquire such operating companies.
To date, we have not earned a profit and can give no assurances if and
when it will turn a profit. Similarly, because of our limited operating history
and accumulated losses, our ability to attract desirable businesses for
acquisition will be severely limited. Moreover, we can not be sure that such
acquisition candidates, if found, could be acquired under terms acceptable to
us. Consequently, failure to complete planned acquisitions will severely limit
our ability to grow.
GENERAL
We are an acquirer and consolidator of Information Technology
(IT)businesses. In general, these businesses provide services such as
engineering design and layout for the installation of network systems, Web site
development, computer hardware and software integration, and training and
ongoing technical support to client companies. In certain situations, however,
computer hardware and software may be sold as part of the overall service
solution.
We completed our first acquisition in May of 1999 of Pinneast.com, Inc.
("Pinneast"), a six-year-old Columbia, South Carolina based company. Since then,
Pinneast's revenues and contracts for future business have increased
substantially. We are projecting revenues of approximately $3 million for the
year 2001. The basis for these projections is the current backlog of services
for which Pinneast holds signed contracts. Meanwhile, Pinneast is steadily
making inroads into the corporate training market. In December 1999, for
example, Pinneast signed an open-ended contract to host Dow Chemical's worldwide
19
computer based training programs. Under the terms of the agreement, Dow can
cancel the balance of the agreement at any time if, in the opinion of Dow,
Pinneast is in breach of the terms of the agreement and fails to live up to
acceptable standards of performance under the agreement. Nevertheless, Pinneast
will be required to complete all work-in-progress, without regard to the date of
cancellation of the open-ended contract. Furthermore, under the agreement Dow
must make a twenty-five percent (25%) non-refundable cash deposit with Pinneast
on all purchase orders issued by Dow and accepted by Pinneast. In addition,
Pinneast is negotiating to jointly produce books in text and video. If the pilot
programs currently being conducted are successful, Pinneast will convert books
and educational programs into CDs and Internet deliverable format for the
publisher.
Our second acquisition, Computer Marketplace, Inc. (CMI) was completed on
April 11, 2000., pursuant to an Agreement and Plan of Reorganization for a value
of $ 5,000,000. Payment consisted of 1,400,000 shares of our common stock and
$2,500,000 in cash. Payment of the cash portion was $1,500,000 at closing and a
promissory note for $1 million at 6%, payable in equal installments at the first
and second anniversaries. David Burke. Sr. and five (5) other key employees
retained their positions in CMI pursuant to 3 year employment contracts and
received a total of 200,000 common shares of our stock . CMI, located in
Tewksbury, Massachusetts, is a sixteen-year-old network solution and systems
design company, founded in 1983. CMI focuses on providing Fortune 1000
companies, government agencies and educational institutions with networking
solutions, systems integration, and computer telephony integration.
We operate within the broad market of Information Technology (IT), which
has grown in tandem with the worldwide proliferation of computerization over the
last two decades and has expanded the rate of growth with the commercialization
of the Internet and corporate Intranets over the last five years. Several
sources, including International Data Corporation (IDC), concur that the number
of online users will grow from about 150 million worldwide now to about 500
million by 2003. This projected growth is expected, in turn, to fuel the demand
for new computer products and services and create new market opportunities in
this field. IDC is a leading provider of information technology data, industry
analysis and strategic and tactical guidance to builders, providers and users of
information technology. IDC is based in Framingham, Massachusetts and maintains
offices in more than 40 countries around the world.
With the successful acquisition of CMI, in addition to its core
competencies in networking and telephony, we became involved in the delivery of
systems that use voice over IP technology. Voice over IP is an emerging
technology that allows customers voice transmission over the Internet at a
fraction of the cost of current telephone technologies. At the present time,
approximately 50% of CMI's revenues are derived from the general area of
telephony, that is, the use of computers in telephonic communications. At this
time, we are unable to forecast what impact, if any, the predicted growth in
this market will have upon us.
Finally, through our ownership of Pinneast, we operate within the general
market of business-to-business e-commerce by building websites and e-commerce
platforms for clients that facilitate the transfer of goods and services over
the Internet. Electronic commerce (or e-commerce, as it is better known) is a
relatively new area within general commerce. This area has proliferated with the
growing use of the Internet and involves the transfer of goods, services, and
funds from one point to another using the Internet. E-commerce is divided into
business-to-business and business-to-consumer segments.
According to IDC, business-to-business e-commerce is one of fastest growing
sectors of e-commerce and is expected to exceed $179 billion by 2001. To
20
capitalize on this growth, many businesses are expanding and upgrading their
Internet and networking infrastructures. The industry is highly competitive and
is characterized by numerous small companies, many offering proprietary products
and services. Although there are a few significant players, such as IBM and
Cisco, as yet, no clear leader has emerged. Currently, Pinneast holds a
negligible market share in this field, and currently has neither the capital nor
technical resources to capture meaningful market share. Nevertheless, revenues
from this source are growing.
MANAGEMENT AND STRATEGY
Our core management is composed of individuals experienced in finance,
accounting, and Information Systems. Members of our management team have been
employed by or have been consultants to startup companies and multinational
corporations such as IBM, Mc Graw-Hill and Xerox for more than two decades, Our
current president and our Chief Financial Officer have both been involved in the
financial and business aspects of mergers and acquisitions, as well as with the
investigation and business analysis of prospective acquisitions at Xerox and
McGraw-Hill and for smaller entrepreneurial firms. The core strategy of our
management team is to acquire complimentary businesses in the Information
Technology industry that add value by increasing market share, revenues, or
profits, or by reducing operating costs, or by enhancing our ability to perform
in the market place. We must caution, however, that the achievement of these
targets is highly dependent upon current management as well as upon our ability
to attract new capital. We are not sure that we will be in a position to attract
sufficient capital or that such capital will be available to us on favorable and
desirable terms. If we are unsuccessful in our attempt to raise growth and
working capital at rates that are acceptable to us, our prospects for growth
could be greatly diminished.
To date, we have focused on service companies that provide customers with
systems and network integration and computer and web based training. Companies
in systems engineering, systems design, e-commerce platform development, and
network consulting are our desired potential acquisition candidates. Through the
acquisition of CMI we are also becoming involved in developing and delivering
telecommunications systems such as telephone routers, networked e-mail systems,
and remote telephone diagnostic systems. Telecommunications is an area that the
company expects to become even more involved with over the next several years.
One important criterion for acquisition is the potential synergy of the
business to be acquired with those that already exist within our structure. CMI
and Pinneast, for example, share a number of their larger clients. CMI provides
hardware, systems, and services to several of these clients while Pinneast
provides training to assure that users understand and take full advantage of the
systems that CMI has provided. We generally look for companies that will add $5
million to $15 million, or more to revenue; companies that have been profitable
on a pretax, pre-interest basis. Acquisition valuations are often based on an
EBIT multiple of four (4) to six (6). In addition, the companies must have at
least a three-year history with recently audited financial information and a
strong management team. We require top management to stay with the company after
the acquisition and tie a portion of the final purchase price to future
performance. In any event, we reserve the right to negotiate the purchase price
and terms of an acquisition, and may, from time to time, elect to acquire a
business with a history of losses if, in the opinion of the management and our
board of directors, such an acquisition might add value to our holdings.
21
PINNEAST.COM, INC.
Pinneast.com, Inc. ("Pinneast") was formed in January 1994 in order to
capitalize on the growing demand for computer-based alternatives to instructor
led training. The company provides its customers, mainly Fortune 500 companies,
with customized interactive (i.e., can be controlled by the user) multimedia
(i.e., combining text, graphics and motion) training design and development
services. Toward this end, Pinneast evaluates the specific practices and
procedures a client might be using, and then details a plan for developing
training programs that address the client's specific requirements. For the most
part, these training programs are designed to fill specific needs; for example,
to help employees improve performance (productivity); to help employees gain
awareness of certain issues, their causes, and cures (e.g., sexual harassment);
to help employees avoid common accidents or to comply with certain governmental
regulations such as OSHA; to teach new skills (e.g., how to operate a certain
machine); or to teach general skills (e.g., computing). Pinneast also develops
and produces marketing tools (e.g., promotional material, video demonstrations,
etc.) for customers to distribute in the form of CD ROMS or via the Internet.
Today, Pinneast's clients include a broad base of industrial companies,
banks, financial institutions, government agencies and educational institutions.
Prominent among its clients are Dow Chemical, for which Pinneast produces and
hosts (maintains the site for) world-wide Web-based training programs; The US
Army, for which Pinneast develops a wide array of training programs related to
the proper use and maintenance of weapons systems; Delta Airlines, for which
Pinneast designs and produces safety training programs; and Nations Bank, for
which Pinneast develops financial training programs. All of Pinneast's programs
are high in multimedia (text, video, graphics and motion) content and delivered
to the end user via CD ROMs, the Internet (World Wide Web), or private corporate
intranets (Internet based links for a specific company or group).
Pinneast generated about $200,000 in revenue during its first year,
primarily from its first customer, Fleet Mortgage, and from a local grocery
chain, Harris Teeter Grocers. During the company's second year, it established a
two-year, $800,000 contract with Hoechst Chemical to provide OSHA mandated
training to its employees. Pinneast also continued to expand within the
financial community by generating contracts with several banks and insurance
companies.
In 1996, Pinneast became a pioneer in web-based training as it delivered an
Internet accessed medical support program, called Learners Toolkit for Open
Time, for the Thomas Jefferson University Hospital. By 1998, the company had
expanded its revenue base to more than $800,000 and established contracts with
companies throughout a variety of industries and government organizations. In
1999 on an annualized basis Pinneast earned revenues of $ 978,000 and signed an
open-ended contract to host Dow Chemical's worldwide computer based training
programs.
While Pinneast has been particularly successful with companies in a few key
industries such as finance, insurance, transportation and manufacturing, the
scope of its services can be applied to most businesses and government
organizations. Generally, however, its customers need to be large enough to have
ongoing training and training support programs for their employees. Pinneast
maintains a customer retention rate in excess of 80%.
Pinneast products fall into two categories: training and marketing.
Training products include custom computer-based training (CBT) programs, custom
web-based training (WBT) programs, instructional design, instructor-led training
and consultation. The Company's marketing products include: interactive
22
marketing CD-ROMs, corporate web page development, e-commerce systems, site
development, and consultation.
In developing and producing training programs for its clients, the Company
combines business performance consulting, instructional design, graphic design
and animation, computer methodologies and media technologies to meet the
specific performance improvement (productivity) needs of its clients. The
solutions and training programs are delivered via CD-ROM or the Web.
Furthermore, the Company markets and distributes its products and services
through trade sources, customer referrals and direct marketing.
The Company's instructional design philosophy and approach focus on helping
clients improve employee performance through training. The interactive nature of
the program permits the user (learner) to stop, start, or repeat any portion of
the program he or she may desire, at any time. Pinneast's approach to
interactive multimedia design addresses multiple learning styles in an attempt
to more effectively reach the diverse audiences for which these programs are
intended. Secondly, our interactive multimedia programs engage the learner with
simulated performance-based routines, enhanced by corrective feedback that is
directly applicable to the learner's real world performance responsibilities.
The instructional material is designed to engage or link the learner to
interactive multimedia so that real world knowledge, skills and methodologies
are practiced and developed and, thus, become directly transferable to
on-the-job performance. In addition to designing from the learner's performance
perspective and needs, Pinneast.com designs training programs within the context
of the client's business objectives and priorities so that individual
performance improvements are relevant: they impact overall business performance.
For the year 1999, Pinneast.com employed 16 full-time employees and 10
part-time employees.
COMPUTER MARKETPLACE, INC.
The acquisition of Computer Marketplace, Inc. (CMI) was completed on April
11, 2000., pursuant to an Agreement and Plan of Reorganization for a value of $
5,000,000. Payment consisted of 1,400,000 shares of CeleXx common stock and
$2,500,000 in cash. Payment of the cash portion was $1,500,000 at closing and a
promissory note for $1 million at 6%, payable in equal installments at the first
and second anniversaries. David Burke. Sr. and 5 other key employees retained
their positions in CMI pursuant to 3 year employment contracts and received a
total of 200,000 common shares of CeleXx .
CMI, located in Tewksbury, Massachusetts, is a sixteen-year-old network
solution and systems design company, founded in 1983. CMI focuses on providing
Fortune 1000 companies, government agencies and educational institutions with
networking solutions, systems integration, and computer telephony integration.
CMI has a broad and diversified client list ranging from major
telecommunications companies to public school systems throughout North America.
CMI's customers include: America On-Line, Lucent Technologies, AT&T, J.C. Penny,
Bell Canada, The Prudential Insurance Companies, the Boston Public Schools,
Sprint Corp., IBM Global Services, USA Group, USA Bank, and Hewlett Packard Co.,
among many others. CMI services these customers by designing, installing and
implementing local area network (LAN) and wide area network (WAN) systems, by
customizing software on clients' existing computer network allowing the client
the transmission of telephone conversation via the internet for long distance
23
calls and computer related maintenance functions. In 1998, CMI reported $16.7
million in revenues, with pretax earnings of approximately $922,000.
CMI started in 1983 as a retail operation and rapidly grew to five store
locations. In 1990, management undertook a major restructuring in order to
capitalize on the growing demand for software, systems and solutions rather than
just hardware. The company also recognized the opportunity to utilize this new
focus to expand its market nationwide and establish an international presence.
Consequently, the company shifted its focus from individuals and small
operations to a purely corporate focus. The company achieved this shift in focus
by eliminating the retail side of the business. It did this by closing its
retail stores and moving all its operations into a single location. In addition
the company developed new marketing strategies focusing on system integration,
services and Fortune 1000 companies. Within the last several years, CMI expanded
its network solutions business and entered into the growing field of
telecommunications. The company is divided into two basic divisions: Networking
and Telephony.
CMI provides its customers with complete, ready-to-run networks using
Novell and Windows NT platforms. CMI assesses a customer's needs, determines the
appropriate configuration, purchases the necessary software and hardware and
then assembles and tests the components at the customer's site. While certain
large installations can run as high as $1 million or more, the average order for
a network solution is about $200,000. CMI takes care of all aspects of the
installation, from delivery and setup to completing the necessary licensing and
warranty procedures. The company also provides its customers with systems
operation training, vendor updates and upgrades, as well as a 24-hour Help
Service.
Over the last few years, CMI has also expanded its services to include a
trademarked "Share-A-CNE" program, which provides customers with the benefits of
an on-call Certified Network Engineer who can work closely with the customers'
Information Services (IS) department but does not need to be employed on a
fulltime basis. The Share-A-CNE program is a cost effective way for the small
customer to receive the technical benefits that their larger counterparts
receive.
CMI is also engaged in helping its customers capitalize on the capabilities
of the Internet. More specifically, the company is helping customers implement
voice over IP (Internet Protocol) technology, which is a low cost alternative to
standard telephone service. The company does this through the design and
implementation of customized software on a client's existing computer network,
or a newly implemented network, allowing the client the transmission of
telephone conversation via the Internet for long distance calls. Network
contracts represent approximately 50% of the company's revenues.
CMI provides its customers with systems and solutions for their
telecommunications needs. The telephony division was formed about three years
ago to help some of its major telecommunications systems providers, such as
AT&T, Cisco, Lucent, Qwest and Sprint, in assisting their clients to more
effectively manage their call routing systems. The company brings in the
relevant equipment, prepares all the networking functions in terms of software
and hardware, installs the necessary telephony software, conducts in-depth
testing of the systems, and finally ships a ready to use system to the end-user
site. End customers include airlines, banks, insurance companies, investment
firms and customer oriented organizations across the US and Canada. Orders
average about $400,000 and are usually fulfilled within 4 weeks. Occasionally,
orders are received from Europe and the typical user is a Fortune 500 company.
Other:
On January 26, 2001, the Company executed what company counsel believes to
be a non-binding merger agreement with New Millennium Development Corp (NMDG).
Subsequently, on January 29, 2001, NMDG issued press releases asserting that
NMDG and CeleXx had reached agreement relating to the merger. On January 31,
2001, in response to what the company considered premature disclosures by NMDG,
and since the terms of the agreement had not reached the point of approval by
the boards of directors, or shareholders of both companies, CeleXx issued a
press release and informed NMDG that it had suspended talks and cancelled any
further interest of a proposed merger. The Company and its counsel believe that
there was no binding agreement to pursue the discussions and that the Company
has no further obligations.
24
GROWTH STRATEGY
Our current plan of operations is to expand its current worldwide
account base by offering a complete business solutions product line. We will
also seek to expand upon current information technology products and services in
the form of international acquisition or mergers into existing operations. To
achieve market acceptance for our services and products will require substantial
marketing efforts and the expenditure of significant funds to create awareness
and demand.
MARKETING
Marketing initiatives occur under the direction of the combined
company's marketing committee. The committee is comprised of qualified
leadership from all of the operating companies and is chaired by a senior
management member of an operating company and is selected by the Chief Operating
Officer. The Chief Operating Officer is a ex officio member of the committee.
One priority of the Marketing Committee is to develop strong equity in
the CeleXx brand name, world-wide. This effort includes, strategic alliances,
partnering opportunities, and the branding of all products offered through the
operating companies as CeleXx.
The marketing committee works in concert with an outside National
Marketing and Public relations firm to develop programs for the all the
operating companies, according to the requirements of the technical culture of
the specific markets they serve. The programs also address and exploit the
natural synergies between Operating Groups and provide the process by which the
combined services are best blended for use by the Group company sales
department.
Our marketing department has grown to seven employees in the last year.
The focus is to market to established industry.
COMPETITION
There is no way of identifying a specific leader in the many industry
segments in which CeleXx markets its products and services. As a provider of
specialized solutions though, the competition is for the most part, comprised of
smaller entrepreneurial organizations with strong competencies in innovative
development tools of which the marketplace in general, is in short supply, yet
in great demand. In itself, this market condition provides CeleXx with a
strategic competitive advantage. By its form as a growing public company with
multiple locations and a resource pool of innovative competencies more easily
meets the scrutiny of the larger public companies that make up most of the
client base. These requirements, traditionally, address finances, credit,
ability to complete contracts under adverse market conditions, alternatives to
completing contracts and the ability to neutralize adverse commercial
conditions. Also, the ability to finance growth and the increased capacity that
may be required by the most desirable clients. Specifically, each operating
group manages its own marketing and directly competes with companies which are
generally, considerably smaller than CeleXx.
EMPLOYEES
As of January 31,2001, we had five (5) full-time employees in the Boca
Raton, Florida office. We may also employ full-time and part-time consultants on
an as-needed basis. We consider our relationship with our employees to be
satisfactory.
25
PROPERTIES
We currently lease approximately 3,000 square feet of office space
located at 7251 West Palmetto Park Road, Boca Raton, Florida as its corporate
headquarters. Early in the year 2001, the Company plans to relocate from its
current Boca Raton location to its new corporate headquarters, consisting of
approximately 5,000 square feet, in Coral Springs, Florida. The terms and
conditions of our lease include our move to the new location. Presently, the
monthly rent is $5,300 and the lease terminates in 2004.
Pinneast leases building space at 1221 Sunset Blvd., West Colombia,
South Carolina under a three 3 year lease that requires minimum annual payments
totaling $24,672.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS:
Our directors and executive officers and their positions with us are
set forth below.
POSITION WITH
NAME/DIRECTOR THE COMPANY AGE
------------- ----------- ---
Douglas H. Forde Chairman, President and CEO 57
David C. Langle CFO, Vice President-Finance 50
Lionel Forde Director, Vice President/Treasurer 55
Vincent Caminiti Director, Sr, Vice President 47
Moty Hermon Director 57
William Lerner Director 63
David Burke Director, CEO of CMI 56
John Straatsma Secretary 45
DOUGLAS H. FORDE
Mr. Forde has been Chairman of the Board of Directors, President and Chief
Executive Officer since August 1999. From June 1998 until August 1999, he was
director of Mergers and Acquisitions for the Company. From November 1996 until
June 1998, Mr. Forde was Vice President, Strategic Planning for Computer Access
International, Inc. Prior to November 1996, Mr. Forde had been a business
consultant to numerous companies, ranging from the Fortune 500 to smaller
entrepreneurial businesses. He is a graduate of the University of the Virgin
Islands, the University of Illinois, and the Bernard M. Baruch College of the
City University of New York and holds degrees in accounting, finance, and
taxation.
DAVID C. LANGLE
Mr. Langle is currently the Company's Vice President, Finance and Chief
Financial Officer. Mr. Langle joined us in March, 2000. Prior to joining us, he
was Vice President and CFO of Terra Telecommunications Corp. since September
1997. Mr. Langle has also served in various senior management capabilities as
Vice President, Chief Financial Officer and Director for three Florida based
NASDAQ and OTC companies. From 1982 to 1991 Mr. Langle was employed by the Miami
office of Spicer & Oppenheim, CPA's, an international accounting and consulting
firm where he concluded his tenure as an Audit Partner. He is a CPA and has a
Bachelor of Science Degree from the University of Illinois in Chicago.
26
LIONEL FORDE
Mr. Forde is Vice President and Treasurer former Chief Financial Officer and a
Member of the Board of Directors since February 1999. From November 1997 until
February 1999 he was President of the international group at Computer Access
International, Inc., responsible for developing markets in the Caribbean and
Latin America. Prior to that, Mr. Forde was a senior manager in the Color Paper
Products Division at Eastman Kodak Company. He holds an MBA (Honors) degree from
Long Island University and a BS degree in Business Administration from Eastern
Illinois University.
VINCENT A. CAMINITI
Mr. Caminiti is Sr. Vice President of Business Development, former Chief
Operating Officer and a member of the Board of Directors since January, 1999.
Since June of 1998 Mr. Caminiti has devoted full time to the business
development of our business. Beginning in 1994 through 1998 Mr.. Caminiti was
Managing Director of Rendo International, LTD. with offices in Denver, Los
Angeles, Hong Kong & London, was active in business consulting for clients in
the Communications and Information Technology fields. The business included
identifying strategic business alliances and developing new market strategies
for clients, such as CBS Television to distribute programming in the Asian
markets.
MOTY HERMON
Mr. Hermon has been a Member of Board of Directors since February 1999. Mr.
Hermon has been an international investment banker and business consultant for
the past five years. From December 1979 to December 1986, he served as General
Manager of Elron, Inc., a New York Stock Exchange listed company. Elron is the
largest group of high tech companies in Israel with revenues of approximately
$1.5 billion. From December 1992 to November 1994, Mr. Hermon was the exclusive
representative and partner of Prudential Securities in Israel. He was also the
exclusive representative and partner of TA Associates from January 1986 to July
1988. TA Associates is a Boston based venture capital firm with over $1.5
billion under management. Mr. Hermon holds a BA in Economics and Political
Science from Tel-Aviv University.
WILLIAM LERNER
Mr. Lerner has been a member of the Board of Directors since February 1999.
Since 1994, Mr. Lerner has been in the private practice of corporate and
securities law with offices in Pennsylvania and Florida. Mr. Lerner is also
Counsel to the law firms of Sweeney & Associates (Pittsburgh) an Snow Becker
Krauss, PC (New York). He is a director of Seitel, Inc. (a NYSE listed oil and
gas producing company), Helm Resources, Inc. (an Amex listed company that
provides mezzanine financing to middle market companies), and
Micros-to-Mainframes, Inc. (a NASDAQ listed company and producer of high-
technology communications and computer services to Fortune 500 companies). Mr.
Lerner is a graduate of Cornell University (1955) and of the New York University
School of Law (1960). He is a member of the bars of New York and Pennsylvania.
He has served with the U.S. Securities and Exchange Commission, the American
Stock Exchange and as General Counsel to Hornblower, Weeks, Hemphill & Noyes, a
New York Stock Exchange brokerage/investment firm.
DAVID BURKE SR.
Mr. Burke was recently appointed as a member of the Board of Directors of the
Company and CEO of Computer Marketplace, Inc. (CMI), a company he founded in
1983. Prior to CMI, Mr. Burke had fifteen years in a career that spanned several
management positions including technical supervisor, manufacturing engineering
manager, production manager, and international sales manager with the
Metrigraphics Division of Dynamics Research Corporation, a multinational
manufacturer and distributor of electro-optical products. Mr. Burke received his
technical and business education at Worchester Polytechnic, Lowell Technological
Institute and Boston University. He also received specialized training in
27
information systems from Novell, Microsoft, IBM, HP, Compaq and other "Tier One"
microcomputer and software producers. He is a Member of the American Production
& Inventory Control Society. He co-authored "Metriform Fabrication, Electronic
Packaging and Production," May 1981, Chaners Publishing.
JOHN STRAATSMA
Mr. Straatsma has served as secretary since October of 1999. Since August of
1998, he has acted as a consultant to us for business development and
operations. In September 1995, Mr. Straatsma founded, and since has acted as
president of Consultants Ltd., a company that performs consulting work for
companies active in the IT industry. For January 1983 until August 1995, Mr.
Straatsma was president of Trinidad Computers Ltd., a company he helped to
found. His educational background includes a Bachelor of Commerce degree from
the University of Guelph, in Guelph, Ontario, Canada, and a Master of Science
degree in Management from Florida International University, Miami, Florida.
EXECUTIVE COMPENSATION
The following table provides information concerning the compensation paid
by the Company during the past fiscal years and for the six month period ended
June 30, 2000 to its Chief Executive Officer and its other key employees for
services rendered in all capacities. Such individuals will be hereafter referred
to as the Named Executive Officers. No other executive officer who would have
otherwise been includible in such table on the basis of salary and bonus earned
for the 2000 fiscal year has resigned or terminated employment during that
fiscal year.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
AWARDS
Securities
Other Under-
Annual Restricted Lying All Other
Name and Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Award(s) SARs Payouts sation
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- -------------------------------------------------------------------------------------------------------------------
Doug Forde, *2000 $75,000 -0- -0- -0- -0- -0- -0-
Chairman and 1999 $34,900 -0- -0- -0- -0- -0- -0-
CEO 1998 $60,000
David Langle *2000 $27,250 -0- -0- -0- -0- -0- -0- -0-
VP & CFO
Lionel Forde *2000 $60,000 -0- -0- -0- -0- -0- -0- -0-
o Represents the six month period ended June 30, 2000
28
STOCK OPTIONS
Option/SAR Grants in last Fiscal Year:
Potential Realizable Value
At Assumed Annual Alternative
Rates of Stock Price To (f) and (g)
Individual Grants Appreciation for Option Term Grant Date Value
-----------------------------------------------------------------------
Grant Date
5% ($) 10%($) Present Value $
(f) (g) (h)
- -------------------------------------------------------------------------
Doug Forde -0- -0- N/A N/A N/A N/A N/A
- -
David Langle -0- -0- N/A N/A N/A N/A N/A
Lionel Forde -0- -0- N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------
Options Exercises and Holdings:
The following table sets forth information with respect to the exercise
of options to purchase shares of common stock during the fiscal year ended
December 31, 1999, of each person named in the summary compensation table and
the unexercised options held as of the end of the 1999 fiscal year.
Aggregated Option/SAR Exercises in last Fiscal Year and Fiscal Year End:
OPTION/SAR VALUES
- -----------------------------------------------------------------------------
Number of Value Of
Securities Unexercised
Underlying In-The-Money
Unexercised Options/SARs
Options/SARs At Fiscal Year-
Shares At Fiscal Year-End End
Acquired On Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- --------------------------------------------------------------------------------
Doug Forde N/A N/A N/A N/A
David Langle -0- -0- N/A N/A N/A N/A N/A
Lionel Forde -0- -0- N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------
29
EMPLOYMENT AGREEMENTS
Douglas H. Forde - Chairman Of The Board and President :
Under the terms of an employment agreement between the Company and Mr.
Forde, in consideration for his services to the Company, Mr. Forde will receive
an annual base salary of $150,000 as of January 1, 2000. Mr. Forde is also
eligible to participate in the Company's Incentive Stock Option Plan and stock
grants as the Board of Directors may grant from time to time. Effective June 1,
2000 the employment agreement for Mr. Forde ,among other terms, was amended to
increase his annual base salary to $175,000 ,extended to five years and
requiring Keyman life insurance. On July 26, 2000 the Company's Board of
Directors authorized the grant of 7,000,000 shares of restricted Company common
stock to Mr. Forde and subject to a "lock-up" or resale restriction, pursuant to
Mr. Forde's employment agreement. The 7,000,000 shares were issued on September
1,2000.
Lionel Forde, Vice President - Vice President , Treasurer and Director :
Under the terms of an employment agreement between the Company and Mr.
Forde, in consideration for his services to the Company, Mr. Forde will receive
an annual base salary of $120,000 as of January 1, 2000. Mr. Forde is also
eligible to participate in the Company's Incentive Stock Option Plan.
David C. Langle, Vice President, Finance, Chief Financial Officer and Director :
The Company entered into an employment agreement with David C. Langle
dated as of June 1, 2000 with a term of five (5) years. Mr. Langle serves as the
Vice President of Finance and Chief Financial Officer of the Company. His
employment agreement provides compensation in the form of an annual base salary
in the amount of $125,000 per year, participation in the Company's Incentive
Stock Option Plan, and stock grants as the Board of Directors may grant from
time to time. . On July 26, 2000 the Company's Board of Directors authorized the
grant of 650,000 shares of restricted Company common stock to Mr. Langle and
subject to a "lock-up" or resale restriction, pursuant to Mr. Langle's
employment agreement. The 650,000 shares were issued on September 1, 2000.
All Executive Officers of the Company are extended Employment Contracts with
terms of three (3) to five (5) years, renewable annually thereafter.
1999 STOCK OPTION PLAN
On March 1, 1999 we adopted and implemented a Stock Option Plan (the
"Plan"). The Plan increases the employees', advisors', consultants' and
non-employee directors' proprietary interest in us and aligns more closely their
interests with the interests of our shareholders. The Plan also maintains our
ability to attract and retain the services of experienced and highly qualified
employees and non-employee directors.
Under the Plan, we reserved an aggregate of 1,000,000 shares of common
stock for issuance pursuant to options granted under the Plan ("Plan Options").
Our Board of Directors or a Committee of the Board of Directors (the
"Committee") will administer the Plan including, without limitation, the
selection of the persons who will be granted Plan Options under the Plan, the
type of Plan Options to be granted, the number of shares subject to each Plan
Option and the Plan Option price.
30
Plan Options granted under the Plan may either be options qualifying as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended, or options that do not so qualify
("Nonqualified Options"). In addition, the Plan also allows for the inclusion of
a reload option provision ("Reload Option"), which permits an eligible person to
pay the exercise price of the Plan Option with shares of common stock owned by
the eligible person and receive a new Plan Option to purchase shares of common
stock equal in number to the tendered shares. Any Incentive Option granted under
the Plan must provide for an exercise price of not less than 100% of the fair
market value of the underlying shares on the date of such grant, but the
exercise price of any Incentive Option granted to an eligible employee owning
more than 10% of our common stock must be at least 110% of such fair market
value as determined on the date of the grant. The term of each Plan Option and
the manner in which it may be exercised is determined by the Board of the
Directors or the Committee, provided that no Plan Option may be exercisable more
than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of our common stock,
no more than five years after the date of the grant.
The exercise price of Nonqualified Options shall be determined by the
Board of Directors or the Committee.
The per share purchase price of shares subject to Plan Options granted
under the Plan may be adjusted in the event of certain changes in our
capitalization, but any such adjustment shall not change the total purchase
price payable upon the exercise in full of Plan Options granted under the Plan.
Our officers, directors, key employees and consultants and our
subsidiaries (if applicable in the future) will be eligible to receive
Nonqualified Options under the Plan. Only our officers, directors and employees
who are employed by us or by any subsidiary thereof are eligible to receive
Incentive Options.
All Plan Options are non-assignable and nontransferable, except by will
or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, or if an optionee is not an employee of but is a member of our Board of
Directors and his service as a Director is terminated for any reason, other than
death or disability, the Plan Option granted to him shall lapse to the extent
unexercised on the earlier of the expiration date or 30 days following the date
of termination. If the optionee dies during the term of his employment, the Plan
Option granted to him shall lapse to the extent unexercised on the earlier of
the expiration date of the Plan Option or the date one year following the date
of the optionee's death. If the optionee is permanently and totally disabled
within the meaning of Section 22(c)(3) of the Internal Revenue Code of 1986, the
Plan Option granted to him lapses to the extent unexercised on the earlier of
the expiration date of the option or one year following the date of such
disability.
The Board of Directors or the Committee may amend, suspend or terminate
the Plan at any time, except that no amendment shall be made which (i) increases
the total number of shares subject to the Plan or changes the minimum purchase
price therefore (except in either case in the event of adjustments due to
changes in our capitalization), (ii) affects outstanding Plan Options or any
exercise right thereunder, (iii) extends the term of any Plan Option beyond ten
years, or (iv) extends the termination date of the Plan. Unless the Plan has
been suspended or terminated by the Board of Directors, the Plan shall terminate
31
in approximately 10 years from the date of the Plan's adoption. Any such
termination of the Plan shall not affect the validity of any Plan Options
previously granted thereunder.
On August 23, 2000 and September 5, 2000, the Company granted 363,225
incentive stock options to various employees of CMI with a three (3) year
vesting schedule at an exercise price of $0.437, and 2,650,000 to executive
management of the Company of which 500,000 options that are immediately
exercisable and the balance with a three (3) year vesting schedule, at an
exercise price of $0.50. All the foregoing options were granted at the fair
market value of the common stock covered by the options.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Charter and Bylaws provide that we shall indemnify all directors
and officers to the full extent permitted by the Nevada Corporation Law. Under
provisions, any director or officer who, in person's capacity as , is made or
threatened to be made a party to any suit or proceeding, may be indemnified if
the Board determines director or officer acted in good faith and in a manner
director reasonably believed to be in or not opposed to our best interest. The
Charter, Bylaws, and the Nevada Corporation Law further provide that
indemnification is not exclusive of any other rights to
which individuals may be entitled under the Charter, the Bylaws, any agreement,
any vote of stockholders or disinterested directors, or otherwise.
We have power to purchase and maintain insurance on behalf of any
person who is or was our director, officer, employee, or agent, or is or was
serving at our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, or other enterprise against any
expense, liability, or loss incurred by person in any capacity or arising out of
his status as , whether or not we would have the power to indemnify person
against liability under Nevada law.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 2000 (except where
indicated by asterisk), information regarding the beneficial ownership of our
common stock by each person we know to own five percent or more of the
outstanding shares, by each of the directors and officers, and by the directors
and officers as a group. As of December 31, 2000, there were outstanding
28,914,541 shares of our common stock.
o Beneficial ownership has been determined in accordance with Rule 13d-3
of the Securities Exchange Act of 1934. Generally, a person is deemed
to be the beneficial owner of a security if he has the right to
acquire voting or investment power within 60 days.
o Unless otherwise indicated, all addresses are at our office at 7251
West Palmetto Park Rd., Suite 208, Boca Raton, Florida 33433.
32
Name and Address of Amount of Percent of
Beneficial Owner Beneficial Ownership Class
Douglas H. Forde(3) 7,464,375* 25.8%
David Langle 650,000 2.25
Lionel Forde(1) 1,075,000 3.7
Vincent Caminiti 250,000 .**
Moty Hermon 500,000 1.7
William Lerner - -
Michelle J. Michalow(2) 625,000 2.2
David Burke, Sr. 2,570,000* 8.9
John W. Straatsma 250,000 **
E-Pawn,Com, Inc. 3,000,000 10.4%
All Executive Officers and
Directors as a group (7 persons) 12,759,375 44.13%*
- -
** Less than 1 %
- ------------------------------------------------------------------------------
(1) Lionel Forde is the brother of Douglas H.Forde. Includes 800,000 shares
owned by the spouse and family of Mr. Forde.
(2) Ms. Michalow is a former officer of CeleXx. Includes 325,000 shares
owned by the mother of Ms. Michalow.
(3) Douglas H. Forde was granted 7,000,000 shares of restricted company
common stock by the Board of Directors on May 25, 2000, pursuant to an
amended five year employment agreement.
(4) Pursuant to the April 11, 2000 acquisition of Computer Marketplace, Inc
(5) Douglas H. Forde, Lionel Forde and Michelle J. Michalow have each
pledged 250,000 shares, 250,000 shares and 325,000, respectively,shares
of restricted Company stock as collateral to the holder of the Series A
Convertible Preferred Stock.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
- -----------------------------------------------------------
SECTION 16(A) OF THE SECURITIES AND EXCHANGE ACT OF 1934 REQUIRES THE COMPANY'S
DIRECTORS AND EXECUTIVE OFFICERS, AND PERSONS WHO OWN MORE THAN TEN PERCENT
(10%) OF A REGISTERED CLASS OF THE COMPANY'S EQUITY SECURITIES, TO FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC") INITIAL REPORTS OF OWNERSHIP AND
REPORTS OF CHANGES IN OWNERSHIP OF COMMON STOCK AND OTHER EQUITY SECURITIES OF
THE COMPANY. OFFICERS, DIRECTORS AND GREATER THAN TEN PERCENT (10%) STOCKHOLDERS
ARE REQUIRED BY SEC REGULATIONS TO FURNISH THE COMPANY WITH COPIES OF ALL
SECTION 16(A) FORMS THEY FILE. DURING THE YEAR ENDED DECEMBER 31, 1999 AND AS OF
JUNE 30, 2000, NONE OF THE EXECUTIVE OFFICERS, DIRECTORS, AND BENEFICIAL OWNERS
OF 10% OR MORE OF THE COMPANY'S COMMON STOCK WERE CURRENT WITH THESE FILING
REQUIREMENTS.
33
DESCRIPTION OF CAPITAL STOCK
We have an authorized capital of 100,000,000 shares of common stock,
par value $0.01 per share, and 20,000,000 shares of Preferred stock, par value
$0.01 per share. As of September 30, 2000, approximately 24,000,000 shares of
common stock were outstanding, held of record by 265 persons, and 350 shares of
Preferred stock were outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters voted on by stockholders, including the election of directors. Except as
otherwise required by law or provided in any resolution adopted by the Board
with respect to any series of Preferred stock, the holders of common stock
exclusively possess all voting power. Subject to any preferential rights of any
outstanding series of our Preferred stock, the holders of common stock are
entitled to dividends as may be declared from time to time by the Board from
funds available for distribution to holders. No holder of common stock has any
preemptive right to subscribe to any securities of ours of any kind or class or
any cumulative voting rights. The outstanding shares of common stock are, and
the shares, upon issuance and sale as contemplated will be, duly authorized,
validly issued, fully paid and non-assessable.
CONVERTIBLE PREFERRED STOCK
On April 7, 2000, we completed a financing agreement with an
institutional investor and raised $3,500,000 through the sale of shares of our
Series A Convertible Preferred Stock. Birch is the sole owner of the Series A
Convertible Preferred Stock. The Convertible Preferred Shares will pay dividends
at the rate of 6% per annum, and the dividend may be paid in cash or our common
shares, at our option. If we elect to pay dividends on the Convertible Preferred
Shares in common shares, the number of common shares shall be determined by
dividing the cash amount of the dividend by the conversion price of the
Convertible Preferred Shares. The conversion price means the lower of: (a), the
average closing bid price on the day immediately preceding the closing of the
transaction or (b), 80 % of the 5-day trading average closing bid price of the
common shares prior the date of conversion.
OTHER PREFERRED STOCK
We may issue other preferred stock of a different class from time to
time in one or more series. The Board of Directors is authorized to determine
the rights, preferences, privileges and restrictions granted to, and imposed
upon, any series of Preferred stock and to fix the number of shares of any
series of Preferred stock and the designation of any series, subject to the
consent of the existing holders of Preferred stock in instances. The issuance of
Preferred stock could be used, under circumstances, as a method of preventing
our takeover and could permit the Board of Directors, without any action of the
holders of the common stock to issue Preferred stock which could have a bad
effect on the rights of holders of the common stock, including loss of voting
control.
REGISTRATION RIGHTS
Following this offering, only the shareholder of our Convertible
Preferred Stock will have rights to register those shares for sale to the public
under the Securities Act of 1933, as amended (the "Securities Act").
34
POTENTIAL SIGNIFICANT DILUTION
Since the number of shares of our common stock issuable upon conversion
of the preferred stock will change based upon fluctuations of the market price
of our common stock prior to a conversion, the actual number of shares of our
common stock that will be issued under the preferred stock, and consequently the
number of shares of our common stock that will be beneficially owned by Birch,
cannot be determined at this time. Because of this fluctuating characteristic,
the Company has agreed to register a number of shares of our common stock that
exceeds the number of shares beneficially owned by Birch. As of January 31,2001
based on a conversion price of $0.296 per share, the preferred stock holder
would be entitled to receive 12,002,453 shares.
The stock purchase agreements that the Company entered into with the
former shareholders of Pinnacle East, Inc. and Computer MarketPlace, Inc., in
its acquisition of these companies, provided for contingent consideration of
additional shares to be issued if the Company's average stock price would be
less than $2.00 and $2.50, respectively, at the anniversary of the closing of
the acquisitions. The additional shares that the Company would be required to
issue under this contingency based on the average closing price of $0.375 as of
January 31, 2001 would be approximately 10,000,000 shares. The Company is
currently negotiating with the former shareholders to revise the amount of
potential additional shares and date of measurement under these contingencies.
CERTAIN PROVISIONS OF OUR CHARTER AND BYLAWS AND OF NEVADA LAW
GENERAL
Our Charter and Bylaws contain provisions that could make difficult the
acquisition of control of us by means of a tender offer, open market purchases,
proxy fight or otherwise. These provisions may discourage types of coercive
takeover practices and inadequate takeover bids and encourage persons seeking to
acquire control of us first to negotiate with us. We believe that the benefits
of its potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to take over or restructure us outweigh the disadvantages
of discouraging proposals because, among other things, negotiation of proposals
could result in an improvement of their terms.
Our Certificate of Incorporation and By-laws contain provisions which
may deter, discourage, or make more difficult the assumption of control of us by
another corporation or person through a tender offer, merger, proxy contest or
similar transaction or series of transactions. These provisions include an
unusually large number of authorized shares of common stock (20,000,000) the
authorization of the Board of Directors to issue Preferred stock as described
above and the prohibition of cumulative voting. The overall effect of these
provisions may be to deter a future tender offer or other takeover attempt that
some shareholders might view to be in their best interest as the offer might
include a premium over the market price of our capital stock at the time. In
addition, these provisions may have the effect of assisting our current
management in retaining its position and place it in a better position to resist
changes which some stockholders may want it to make if dissatisfied with the
conduct of our business.
Set forth below is a summary of provisions in the Charter and Bylaws.
35
LIMITATIONS ON DIRECTORS' LIABILITY
The Charter and Nevada Corporation Law permit us to indemnify our
directors. The Charter contains provisions to eliminate the personal liability
of its directors for monetary damages resulting from breaches of their fiduciary
duty (other than breaches of the duty of loyalty, acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
violations under the Nevada Corporation Law or for any transaction from which
the director derived an improper personal benefit) indemnify its directors and
officers to the fullest extent permitted by the Nevada Corporation Law,
including circumstances in which indemnification is otherwise discretionary.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons, we has been
advised that, in the opinion of the Commission, indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. We believe that these provisions are necessary to attract and
retain qualified persons as directors and officers.
TRANSFER AGENT
The Transfer Agent and Registrar for the common stock is American
Registrar & Transfer Company, 342 East 900 South Street, Salt Lake City, Utah
84111.
SELLING STOCKHOLDERS
The following table sets forth (i) the number of shares of Common Stock
beneficially owned by the Selling Stockholders as of December 31, 2000, (ii) the
number of Shares of Common Stock to be offered for resale by the Selling
Stockholders and (iii) the number and percentage of Shares of Common Stock to be
beneficially owned by the Selling Stockholders after completion of the offering.
The Selling Stockholders has not had a material relationship with the Company
during the past three years.
Birch Circle LLC ("Birch") purchased an aggregate of $3.5 million of
convertible preferred stock and warrants from the Company in a private placement
transaction which closed on April 17, 2000. As part of that private placement,
Birch was issued shares of preferred stock that may be converted into our common
stock and warrants to acquire our common stock. The preferred stock and the
warrants are described in more detail in page [ ] of this Prospectus. Holders of
the preferred stock and warrants are prohibited from using them to convert into
and acquire shares of our common stock to the extent that such conversion or
acquisition would result in such holder, together with any affiliate thereof,
beneficially owning in excess of 4.999% and 9.999%, respectively, of the
outstanding shares of our common stock following such conversion or acquisition.
This restriction may be waived by the holder on not less than 61 days' notice to
the Company. Since the number of shares of our common stock issuable upon
conversion of the preferred stock will change based upon fluctuations of the
market price of our common stock prior to a conversion, the actual number of
shares of our common stock that will be issued under the preferred stock, and
consequently the number of shares of our common stock that will be beneficially
owned by Birch, cannot be determined at this time. Because of this fluctuating
characteristic, the Company has agreed to register a number of shares of our
common stock that exceeds the number of shares beneficially owned by Birch. The
number of shares of our common stock listed in the table below as being
beneficially owned by Birch includes the shares of our common stock that are
issuable to them, subject to the 4.999% and 9.999%, respectively, limitation,
upon conversion of their preferred stock and exercise of their warrants.
However, the 4.999% and 9.999%, respectively, limitation would not prevent Birch
from acquiring and selling in excess of 4.999% and 9.999%,
36
respectively, of our common stock through a series of conversions and sales
under the preferred stock and acquisitions and sales under the warrants.
No. of Shares
of Common Stock No. of
Beneficially Shares Shares Beneficially
Name Owned % Offered % Owned After Offering(1)
- -------------------- ----------- --- ---------- --- ----------------------
Birch Circle LLC 1,521,497 4.7% 24,871,573 4.50% 43.0%
Wellington Capital 1,400,000 4.3% 1,400,000 2.5% 0
Corporation
Wall Street 306,445 .9% 306,445 0.5% 0
Communications
- --------------------------------------------------------------------------------
(1) Assume that all Common Stock offered by the Selling Stockholders is sold
and that no other shares beneficially owned by the Selling Stockholders is
sold.
37
PLAN OF DISTRIBUTION
This Prospectus covers 26,178,018 shares of the Company's Common Stock.
All of the Shares offered hereby are being sold by the Selling Stockholders. The
Securities covered by this Prospectus may be sold under Rule 144 instead of
under this Prospectus. The Company will realize no proceeds from the sale of the
Shares by the Selling Stockholders or upon conversion of the Preferred Shares by
the Selling Stockholders.
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
38
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The Selling Stockholders may also engage in short sales against the box,
puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Selling Stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a Selling
Stockholders defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The Selling Stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Shares will be passed upon for the Company by its
counsel, Harry Winderman, Esq., Boca Raton, Florida.
EXPERTS
Our financial statements at June 30, 2000 and December 31, 1999 and for the
six months ended June 30, 2000 and the year ended December 31, 1999 and the
period July 10, 1998 (inception) through December 31, 1998, appearing in this
Registration Statement have been audited by Feldman Sherb & Co., P.C.,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
39
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING
STOCKHOLDERS OR BY ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FUNC SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SHARES DESCRIBED IN THIS PROSPECTUS OR AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY SUCH SHARES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
40
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemization of all estimated expenses
in connection with the issuance and distribution of the securities
being registered, none of which are payable by the Selling
Stockholders:
Registration Statement Filing Fee $ 1,150
Legal Fees and Expenses 5,000
Accounting fees and expenses 4,000
Miscellaneous 1,000
-------
TOTAL $11,150
-------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Prior to the Merger of CobraTec, Inc. and Spectrum Ventures, Inc.
("Spectrum"@), on February 18, 1999, Spectrum raised $11,000 from
sales made pursuant to a Regulation D - Rule 504 Offering Memorandum
dated February 27, 1997. There were 101 purchasers, including friends,
relatives or acquaintances of Spectrum's Officers, Directors and
Affiliates. The aggregate number of shares of common stock issued was
45,833. Spectrum Ventures, Inc. ("Spectrum"), a Nevada corporation,
was listed on the OTC Bulletin Board (symbol SCMV).
While pursuing its business plan, conducted a Regulation D - Rule 504
Offering pursuant to an Offering Memorandum dated February 27, 1998,
whereby it raised an additional $84,900 from 24 shareholders for an
aggregate number of 3,538 shares of Spectrum common stock.
In September 1998, three key employees were issued an aggregate of
1,397 shares of our common stock in reliance upon an exemption
provided by Section 4(2) of the Securities Act of 1933 and are
restricted securities.
In December 1998, 10,458 shares, in aggregate, of Spectrum's common
stock were issued to D. F. Mintmire - (Spectrum's Attorney), Neil Rand
- (Spectrum's Consultant), and William Custer - (Vendor for
Application Software Development, Inc.) in exchange for services and
release of personal debt of certain officers and directors of
Spectrum.
In June 1997, 28,333 shares of Spectrum's common stock were issued to
Larry K. Danley and Jacqueline C. Danley, E.H. Frankland Trust, Arthur
Hansuld, Peter S. Harlee, Jr., John Roy Gough and Virginia L. Gough,
Bill Sheffield and Angela D. Sheffield, Howard Crosby and Marc
Donovan, all shareholders of Commercial Computer Systems, Inc. in
connection with Spectrum's acquiring exclusive marketing rights to 5
proprietary software products from Commercial Computer Systems, Inc.
("CCS"), a Florida corporation, an asset purchase for which Spectrum
relied upon Regulation D - Rule 504 as an exemption from Registration.
On February 18, 1999, we merged with Spectrum Ventures, Inc.
("Spectrum"), a Nevada corporation. Pursuant to the Merger, Spectrum
shareholders received 713,475 shares of Celexx, Inc.'s common stock.
As a consideration to cancel a letter of intent for Spectrum to
41
acquire Commercial Computer Systems, Inc., we issued an additional
200,000 shares of our common stock to Commercial Computer Systems,
Inc. Accordingly, the issuance of these securities was exempt from the
registration requirements of the act pursuant to Section 4(2) of the
Act. Also on February 18, 1999 the founders of Celexx, pursuant to a
share exchange agreement with Spectrum, received 4,500,000 common
shares as a condition of the merger.
As a condition of the retirement of related party debt in the amount
of $448,640 with Edinburgh Consulting, Inc., a consulting firm owned
by Michelle Michalow, a former officer of Celexx 1,733,333 shares were
issued. Pursuant to a Consulting Agreement between Celexx and
Edinburgh, $133,333 was converted at $.10 per share. The remaining
$315,307 was converted at $.78 per share. The issuance of the
securities was exempt from registration requirements of the Act
pursuant to Section 4(2) of the Act.
In November 1998, we entered into an agreement with Girmon Investment
Co., Limited ("Girmon"), a company which is 33% owned by Moty Herman,
a member of our board of directors for corporate finance advisory
services for an initial period of 36 months. As consideration for
business, advisory and other consulting services performed on behalf
of the Company, Girmon received 500,000 shares of our common stock
valued at $125,000 or $.25 per share.
In February 1999, we issued 300,000 shares of common stock to Crabbe
Capital for $30,000, for financial advice, consulting services and
market strategies provided by Crabbe. The issuance of the securities
was exempt from registration requirements of the Act pursuant to
Section 4(2) of the Act.
In March 1999, Celexx conducted an offering of common stock at $1.00
per share pursuant to Rule 504 of Regulation D under the Act.
Management sold an aggregate of 860,250 shares of common stock for an
aggregate of $860,250. Accordingly, the issuance of securities was
exempt from registration requirements of the Act pursuant to Section
4(2) of the Act.
In May 1999, we signed a merger agreement and took effective control
of West Columbia, SC-based Pinneast.com for a combination of cash and
stock. In exchange for all of the outstanding stock of Pinneast, an
aggregate of 500,000 shares of our common stock were issued to the
Pinneast.com shareholders and a cash payment of $100,000 (deferred for
one year). The shares of common stock were valued at $1.50 per share.
Accordingly, the issuance of these securities was exempt from
registration requirements of the Act pursuant to Section 4(2) of the
Act.
On April 7, 2000, we completed a financing agreement with Birch Circle
LLC ("Birch"), a private investment banking firm, and raised
$3,500,000 through the sale of shares of our Series A Convertible
Preferred Stock. Birch is the sole owner of the Series A Convertible
Preferred Stock. The Convertible Preferred Shares will pay dividends
at the rate of 6% per annum, and the dividend may be paid in cash or
our common shares, at our option. If we elect to pay dividends on the
Convertible Preferred Shares in common shares, the number of common
shares shall be determined by dividing the cash amount of the dividend
by the conversion price of the Convertible Preferred Shares. The
conversion price means the lower of: (a), the average closing bid
price on the day immediately preceding the closing of the transaction
or (b), 80 % of the 5-day trading average closing bid price of the
common shares prior the date of conversion.
42
Our second acquisition, Computer Marketplace, Inc. (CMI) was completed
on April 11, 2000., pursuant to an Agreement and Plan of Reorganization
for a value of $ 5,000,000. Payment consisted of 1,400,000 shares of
our common stock and $2,500,000 in cash. Payment of the cash portion
was $1,500,000 at closing and a promissory note for $1 million at 6%,
payable in equal installments at the first and second anniversaries.
David Burke. Sr. and five (5) other key employees retained their
positions in CMI pursuant to 3 year employment contracts and received a
total of 200,000 common shares of our stock . CMI, located in
Tewksbury, Massachusetts, is a sixteen-year-old network solution and
systems design company, founded in 1983. CMI focuses on providing
Fortune 1000 companies, government agencies and educational
institutions with networking solutions, systems integration, and
computer telephony integration.
Douglas H. Forde was granted 7,000,000 shares of restricted company
common stock by the Board of Directors on May 25, 2000, pursuant to an
amended five year employment agreement.
David C. Langle, CFO was granted 650,000 shares of restricted company
common stock by the Board of Directors on July 26, 2000, pursuant to an
amended five-year employment agreement. The shares were issued on
September 1,2000.
On October 24, 2000, Celexx and E-Pawn.com, Inc. ("E-Pawn") entered
into a Settlement and Release Agreement ("settlement") to settle the
lawsuit that E-Pawn filed against Celexx and any claims that the
companies may have with respect to each other. The settlement included
unconditional releases and was subject to documentation and delivery of
all considerations. The settlement provides for, among other things,
the issuance of an additional 2,250,000 shares of Celexx restricted
common stock to E-Pawn (E-Pawn already has 1,000,000 shares). Celexx
was also required to cancel the $500,000 that is due from E-Pawn and
return 1,000,000 freely tradable shares of E-Pawn that it currently
holds and, issue to a shareholder of E-Pawn a warrant to purchase
250,000 shares of common stock of Celexx granting the shareholder the
right to purchase the shares at $2.50 per share until October 20, 2003.
Celexx in return will receive 5,250,000 restricted shares of common
stock of E-Pawn. The closing for the above described settlement and
exchange of documents and shares occurred on January 30, 2001.
On October 25, 2000 the company issued 500,000 shares of restricted
stock to Affliated Holdings.Com, Inc. for financial advice, consulting
services and market strategies provided by Affliated, and 50,000 shares
of restricted stock to Michael Kreinest , as principal of Creative
Impact Communications, Inc. an advertising/public relations company,
for services rendered. On December 5, 2000 the advertising/public
relations company received an additional 150,000 shares in settlement
of past due fees.
On November 17, 2000 the Company sold 1,170,000 shares of restricted
stock to David R. Burke, Sr., an officer and Director of the Company
for total proceeds of $234,000.
On December 5, 2000 the Company issued 1,200,000 shares of its common
stock to two financial consultants Rosemary Nguyen, as principal for
iCapital Corporation and Richard Walker, as principal for Windsor
Partners, Inc., under a six month and twelve month agreements for
financial advice, mergers and acquisitions, capital structures and
sources, preparation of research reports and banking methods and
systems. On December 1, 2000 the Company filed an S-8 Registration
43
Statement with Securities and Exchange Commission to register the
foregoing shares as freely tradable pursuant to the agreements. The
attorney for the financial consultants was also issued 50,000 shares
under the same arrangement for legal services provided.
ITEM 27. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Nevada Business Corporation Act (the "Corporation Act") permits the
indemnification of directors, employees, officers and agents of a
Nevada corporation. Our Certificate of Incorporation and the Bylaws
provide that the corporation shall indemnify its directors and officers
to the fullest extent permitted by the Corporation Act. Insofar as
indemnification for liabilities arising under the Act may be permitted
to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed
in the Act and is therefore unenforceable.
44
ITEM 28. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
-------------------------------------------
(a) Exhibits:
2.1 Plan of Reorganization and Agreement of Merger, dated July __,
1999, by and between Computer Marketplace, Inc., David Burke,
Sr., Betty Des Meules, Cobra Technologies, Inc. and CMI
Acquisition Corp.(1)
3.1 By-Laws
3.2 Articles of Incorporation
3.3 Articles of Amendment of Articles of Incorporation
4.1 Stock Option Plan
10.1 Lease Agreement dated May 11, 1999, between Sawgrass Realty
Holdings, Inc. and Celexx Corporation (f/k/a Cobra Technologies,
Inc.)
10.2 Employment Agreement Lionel Forde
10.3 Employment Agreement Doug Forde
10.4 Merger Agreement by and between Pinneast.com, Inc. and Celexx
Corporation, dated May 25, 1999
21.1 Subsidiaries of the Company
*23.1 -- Consent of Feldman Sherb & Co., P.C.
*23.2 -- Consent of Harry Winderman, Esq., included in Exhibit 5
*25.0 -- Power of Attorney, included on the signature page to this
Registration Statement
- ----------------------------------
* Included herein.
45
ITEM 29. UNDERTAKINGS.
-------------
The undersigned registrant hereby undertakes:
(1) File, during any period in which it offers or sales securities, a post-
effective amendment to this registration statement to;
(i) Include any prospectus required by Section 10 (a) (3) of the
Securities Act of 1993;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat each
post- effective amendment as a new registration statement of the
securities offered, and in the offering of such securities at that
time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expense
incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
46
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Boca Raton, Florida, on
the 5th day of February, 2001.
CELEXX CORPORATION
BY: /S/DOUG FORDE
-------------
Doug Forde, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Doug Forde as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, or any related registration statement that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended (the "Securities Act"), and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their,
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ Chairman of the Board,
Chief Executive Officer February 5, 2001
- -------------------------
Doug Forde
/S/ Chief Financial Officer
(Principal Accounting Officer), February 5, 2001
- ------------------------- Vice President and Director
David C. Langle
/S/ Vice President and Director February 5, 2001
- -------------------------
Lionel Forde
/S/ Director February 5, 2001
- -------------------------
Vincent Caminiti
/S/ Director February 5, 2001
- -------------------------
Moty Herman
/S/ Director February 5, 2001
- -------------------------
William Lerner
/S/ Director February 5, 2001
- -------------------------
David Burke
47
INDEX TO FINANCIAL STATEMENTS
CELEXX CORPORATION and Subsidiaries
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheets..................................................F-3
Consolidated Statements of Operations........................................F-4
Consolidated Statement of Stockholders' Equity (Deficit).....................F-5
Consolidated Statements of Cash Flows........................................F-6
Notes to Consolidated Financial Statements............................F-7 - F-20
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
CeleXx, Corporation
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of CeleXx
Corporation and Subsidiaries, as of June 30, 2000 and December 31, 1999, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the six months ended June 30, 2000 and the year ended
December 31, 1999 and the period July 10, 1998 (inception) through December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CeleXx Corporation and Subsidiaries, as of June 30, 2000 and December 31, 1999,
and the consolidated results of their operations and their cash flows for the
six months ended June 30, 2000, the year ended December 31, 1999 and for the
period July 10, 1998 (inception) through December 31, 1998, in conformity with
generally accepted accounting principles.
/s/Feldman Sherb & Co., P.C.
Feldman Sherb & Co., P.C.
Certified Public Accountants
New York, New York
September 29, 2000
(October 17,2000 with
respect to Note 14)
CELEXX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
-------------- ---------------
ASSETS
--------
CURRENT ASSETS:
Cash 522,471 $ 137,682
Accounts receivable 2,212,298 76,923
Inventory 422,744 -
Prepaid taxes 207,082 -
Other current assets 26,745 18,245
-------------- ---------------
TOTAL CURRENT ASSETS 3,391,340 232,850
-------------- ---------------
FURNITURE AND EQUIPMENT, net 291,780 39,575
MARKETABLE SECURITIES 437,000 -
GOODWILL, net 536,233 94,167
INTANGIBLE ASSETS, net 3,463,018 1,020,412
OTHER ASSETS 53,008 93,250
-------------- ---------------
$ 8,172,379 $ 1,480,254
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,347,472 $ 270,000
Note payable-related party 1,041,500 100,000
Line of credit - short term portion 1,093,811 178,247
Advances from shareholder 100,886 9,013
Deferred revenue 112,596 87,384
-------------- --------------
TOTAL CURRENT LIABILITIES 3,696,265 644,644
-------------- --------------
LINE OF CREDIT - long term portion 71,631 80,295
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $001 par value, 20,000,000
shares authorized; 350 shares of
$10,000 stated value cumulative Series A
issued and outstanding - -
Common stock, $.001 par value, 100,000,000
shares authorized; 15,619,696 and
10,907,058 shares issued and outstanding 15,620 10,907
Additional paid-in capital 12,547,805 3,216,926
Unamortized stock compensation (1,132,083) (250,000)
Other comprehensive loss - unrealized loss
on marketable securities (1,563,000) -
Accumulated deficit (5,463,859) (2,222,518)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 4,404,483 755,315
-------------- --------------
$ 8,172,379 $1,480,254
================= ===============
See notes to consolidated financial statements.
F-3
CELEXX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
July 10, 1998
Six Months Ended Six Months Ended Year Ended (Inception) to
June 30, 2000 June 30, 1999 December 31, 1999 December 31, 1998
---------------- ---------------- ----------------- -----------------
(unaudited)
REVENUE $ 3,565,274 $ 226,031 $ 680,989 $ -
COST OF REVENUE 2,533,929 94,196 353,140 -
--------------- --------------- ----------------- -----------------
GROSS PROFIT 1,031,345 131,835 327,849 -
OPERATING EXPENSES 3,699,639 822,533 2,074,292 316,121
--------------- --------------- ----------------- -----------------
LOSS FROM OPERATIONS (2,668,294) (690,698) (1,746,443) (316,121)
OTHER EXPENSES:
Interest expense 27,047 - 68,754 -
Provision for uncollectible loan receivable 500,000 - - -
Settlement of litigation - - 91,200 -
--------------- --------------- ----------------- -----------------
TOTAL OTHER EXPENSES 527,047 - 159,954 -
--------------- --------------- ----------------- -----------------
NET LOSS $ (3,195,341) $ (690,698) $ (1,906,397) $ (316,121)
Dividends on preferred stock 46,027 - - -
--------------- --------------- ----------------- -----------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (3,241,368) $ (690,698) $ (1,906,397) $ (316,121)
=============== =============== ================= =================
NET LOSS $ (3,195,341) $ (690,698) $ (1,906,397) $ (316,121)
OTHER COMPREHENSIVE LOSS:
Unrealized holding loss arising during the period
from marketable securities (1,563,000) - - -
--------------- --------------- ----------------- -----------------
COMPREHENSIVE LOSS $ (4,758,341) $ (690,698) $ (1,906,397) $ (316,121)
=============== =============== ================= =================
NET LOSS PER COMMON SHARE - basic $ (0.24) $ (0.10) $ (0.23) $ (0.07)
=============== =============== ================= =================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - basic 13,725,970 6,956,951 8,357,005 4,500,000
=============== =============== ================= =================
See notes to consolidated financial statements.
F-4
CELEXX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Convertible Preferred Stock Common Stock
--------------------------- ----------------- Additional
Number of Number of Paid-in
Shares Amount Shares Amount Capital
-------- -------- -------- -------- ----------
Balance July 10, 1998 (Inception) - $ - 4,500,000 $ 4,500 $ (4,500)
Capital Contributions - - - - 216,121
Net loss - - - - -
-------- -------- ---------- -------- ----------
Balance, December 31, 1998 - - 4,500,000 4,500 211,621
Shares issued in conjunction with merger - - 200,000 200 (200)
Issuance of common stock for exchange - - 713,475 713 (160,342)
Acquisition of subsidiary - - 500,000 500 749,250
Retirement of related party debt - - 1,733,333 1,734 446,907
Shares issued for consulting services - - 500,000 500 124,500
Sale of common stock - - 860,250 860 859,390
Issuance of stock for cash and services - - 300,000 300 299,700
Shares issued for deferred financing services - - 400,000 400 249,600
Shares issued to retire debt - - 400,000 400 183,600
Shares issued in legal settlement - - 150,000 150 91,050
Shares issued for services - - 650,000 650 161,850
Net loss - - - - -
-------- -------- ---------- ------ ------------
Balance, December 31, 1999 - - 10,907,058 10,907 3,216,926
Shares issued for services - - 2,290,555 2,291 3,148,974
Sale of convertible preferred stock 350 - - - 2,634,327
Exchange of stock for marketable securities - - 1,000,000 1,000 1,999,000
Sale of common stock - - 22,083 22 9,978
Acquisition of subsidiary - - 1,400,000 1,400 1,538,600
Accrual of preferred stock dividend payable - - - - -
Unrealized loss on marketable securities - - - - -
Net loss - - - - -
--------- ------ ---------- -------- ----------
Balance, June 30, 2000 350 $ - 15,619,696 $15,620 $12,547,805
========= ====== ========== ======== ===========
See notes to consolidated financial statements.
F-5
CELEXX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
Unamortized Other Total
Deferred Stock Comprehensive Accumulated Stockholders'
Financing Compensation Loss Deficit Equity
(Deficit)
-------- ------------ ---------- -------- -------------
- ----------------
Balance July 10, 1998 (Inception) $ - $ - $ - $ - $ -
Capital Contributions - - - - 216,121
Net loss - - - (316,121) (316,121)
---------- ------------- ---------- --------- -------------
Balance, December31, 1998 - - - (316,121) (100,000)
Shares issued in conjunction with merger - - - - -
Issuance of common stock for exchange - - - - (159,629)
Acquisition of subsidiary - - - - 749,750
Retirement of related party debt - - - - 448,641
Shares issued for consulting services - - - - 125,000
Sale of common stock - - - - 860,250
Issuance of stock for cash and services - - - - 300,000
Shares issued for deferred financing services (250,000) - - - -
Shares issued to retire debt - - - - 184,000
Shares issued in legal settlement - - - - 91,200
Shares issued for services - - - - 162,500
Net loss - - - (1,906,397) (1,906,397)
----------- -------------- ---------- ------------ ------------
Balance, December 31, 1999 (250,000) - - (2,222,518) 755,315
Shares issued for services (260,400) (1,132,083) - - 1,758,782
Sale of convertible preferred stock 510,400 - - - 3,144,727
Exchange of stock for marketable securities - - - - 2,000,000
Sale of common stock - - - - 10,000
Acquisition of subsidiary - - - - 1,540,000
Accrual of preferred stock dividend payable - - - (46,000) (46,000)
Unrealized loss on marketable securities - - (1,563,000) - (1,563,000)
Net loss - - - (3,195,341) (3,195,341)
----------- ------------- ------------ ------------ ----------------
Balance, June 30, 2000 $ - $(1,132,083) $(1,563,000) $(5,463,859) $ 4,404,483
=========== ============= =========== ============ ================
See notes to consolidated financial statements.
F-5
(Continued)
CELEXX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999 (UNAUDITED) AND THE YEAR ENDED DECEMBER
31, 1999 AND THE PERIOD JULY 10, 1998 (INCEPTION)
THROUGH DECEMBER 31, 1998
1. ORGANIZATION
CeleXx Corporation ("CeleXx" or the "Company") was originally
incorporated as Cobra Technologies International, Inc.
("International") as a Delaware corporation on July 10, 1998 to
acquire, develop, integrate and manage select private businesses that
produce, service, maintain or support the information technologies
industry.
On February 18, 1999, International was acquired by Spectrum Ventures,
Inc. ("Spectrum"), a Nevada corporation, for 4,500,000 shares of
Spectrum stock (the "Exchange"). The Exchange was completed pursuant to
the Agreement of Merger between International and Spectrum. The
Exchange has been accounted for as a reverse acquisition under the
purchase method for business combinations. Accordingly, the combination
of the two companies is recorded as a recapitalization of
International, pursuant to which International is treated as the
continuing entity. Subsequent to the Exchange, with the approval of the
Board of Directors, Spectrum changed its name to Cobra Technologies,
Inc. On August 3, 1999, Cobra Technologies, Inc. changed its name to
CobraTec, Inc. On November 4, 1999 CobraTec, Inc. changed its name to
CeleXx.
On February 18, 1999, prior to the merger with Spectrum, the Board of
Directors of Spectrum declared a 1:24 reverse stock split which
resulted in 713,475 shares outstanding. All periods presented have been
retroactively restated to give effect to this reverse stock split.
Additionally, on February 18, 1999 the Company issued 200,000 shares of
its common stock as part of the merger agreement with Spectrum in order
to receive a release from an acquisition agreement between Spectrum and
Commercial Computer Systems, Inc. These shares have been treated as a
cost of the merger with Spectrum.
On May 25, 1999 CeleXx acquired through its wholly owned subsidiary,
Pinneast.com, Inc. ("Pinneast"), all the outstanding shares of Pinnacle
East, Inc., a South Carolina Corporation, engaged in the development of
multimedia educational programs for industry and government. Pinneast
was acquired for 500,000 shares of CeleXx's common stock and a $100,000
note payable due in May 2000. Subsequent to the acquisition, Pinnacle
East, Inc. was liquidated.
F-7
On April 14, 2000, CeleXx acquired Computer Marketplace, Inc. (`CMI"),
a Massachusetts company engaged in systems engineering, design and
maintenance of computer network systems. The consideration paid was
1,400,000 shares of the Company's common stock and $1,500,000 at
closing and a note payable for $1,000,000 bearing interest at 6% due in
two equal annual installments on the anniversary of the closing date.
The acquisitions of Pinneast and CMI were accounted for using the
purchase method of business combinations.
On June 9, 2000, the Board of Directors elected to change the
Company's fiscal year end from a year ending December 31 to a year
ending June 30. The decision was made to conform to industry group
standards and administrative purposes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of consolidation - The consolidated financial
statements include the accounts of the Company and its
subsidiaries. The accounts of Pinneast. and CMI have been
included from their dates of acquisitions of May 25, 1999 and
April 14, 2000, respectively. All material intercompany
transactions have been eliminated.
B. Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
C. Cash and cash equivalents - The Company considers all highly
liquid temporary cash investments with an original maturity of
three months or less when purchased, to be cash equivalents.
D. Revenue recognition - Revenues are recognized as services are
provided. Deferred revenue arises from the proration of the
revenue provided by the services of the Company's Pinneast and
CMI subsidiaries. These contracts are generally completed in one
year or less.
E. Income taxes - Income taxes are accounted for under Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which is an asset and liability approach that requires
the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.
F-8
F. Stock based compensation - The Company accounts for stock
transactions in accordance with APB Opinion No. 25 "Accounting
for Stock Issued to Employees." Additionally, in accordance with
Statement of Financial Accounting Standards No. 123 "Accounting
for Stock Based Compensation," the Company has adopted the
proforma disclosure requirements of Statement No. 123.
G. Net loss per share - The Company has adopted Statement of
Financial Accounting Standard No. 128, "Earnings Per Share;"
specifying the computation, presentation, and disclosure
requirements of earnings per share information. Basic earnings
per share has been calculated based upon the weighted average
number of common shares outstanding. Stock opt ions and
convertible preferred stock have been excluded as common stock
equivalents in the diluted earnings per share because they are
either anti-dilutive, or their effect is not material.
H. Fair value of financial instruments - The carrying amounts
reported in the balance sheet for cash, receivables, accounts
payable and accrued expenses approximate fair value based on the
short-term maturity of these instruments.
I. Marketable securities - Investments in marketable securities are
classified as available-for-sale and are recorded at fair value
with any unrealized holding gains or losses included in other
accumulated comprehensive loss, which is a component of
stockholders' equity.
J. Intangibles assets - Intangibles assets prinapally acquired from
the acquisitions of Pinnacle East, Inc. and CMI represent
goodwill customer lists, trademarks and the acquirees' trade
names. These assets are amortized on a straight line basis over 7
10 years, . Additionally, the Company recorded the costs incurred
acquiring the marketing rights to certain software products. This
license is being amortized over 3 years.
K. Impairment of long-lived assets - The Company reviews long-lived
assets for impairment whenever circumstances and situations
change such that there is an indication that the carrying amounts
may not be recovered. At June 30, 2000, the Company believes that
there has been no impairment of its long-lived assets.
F-9
3. ACQUISITIONS
The following table summarizes the acquisitions of Pinneast and CMI:
Purchase Price Pinneast CMI
-------------- -------- ---
Cash $ - $1,500,000
Common stock, 500,000 and 1,400,000
shares issued, respectively 750,000 1,540,000
Note Payable 100,000 1,000,000
Brokerage and legal costs - 200,940
Contingent consideration
(see Note 13) 226,000 -
------------ -----------
Total Purchase Price 1,076,000 4,240,940
Less: Fair Market value of
assets acquired (248,381) (3,450,360)
Liabilities assumed 487,727 2,011,124
------------ -------------
Cost in excess of net book value
of assets acquired $1,315,346 $ 2,801,704
========== ============
The cost in excess of the net book value of assets acquired include
goodwill lists, trademark and tradename:
The final allocation of the intangibles with respect to the CMI
acquisition is subject to the Company obtaining independent appraisals.
The following unaudited pro-forma information reflects the results of
operations of the Company as though the acquisitions had been
consummated as of January 1, 1998.
Six Months Ended June 30 Years Ended December 31
------------------------ -----------------------
2000 1999 1999 1998
---- ---- ---- ----
Revenue $7,586,276 $6,038,596 $16,980,192 $17,574,262
========== ========== =========== ===========
Net loss $(3,177,469) $(501,078) $(1,832,431)$ (173,767)
========== ========== =========== ===========
Net loss per share $ (0.21) $ (0.08) $ (0.19)$ (0.02)
========== ========== ============ ===========
F-10
4. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
a. Cash - The Company maintains cash balances at several
commercial banks. Accounts at these financial institutions
are insured by the Federal Deposit Insurance Corporation up to
$100,000.
b. Accounts receivable - The concentration of credit risk in the
Company's accounts receivable is mitigated by the Company's
credit evaluation process, credit limits, monitoring
procedures and reasonably short term collections. Credit
losses have been within management's expectations and the
Company does not require collateral to support account
receivable. During the six months ended June 30, 2000, and
1999 and for the year ended December 31, 1999, two customers,
one customer and three customers, respectively accounted for
approximately 27%, 10% and 42%, respectively, of the Company's
revenue, respectively. These customers accounted for
approximately 22%, 10% and 34% respectively of the Company's
outstanding accounts receivable.
5. SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for reporting
information regarding operating segments in annual financial statements
and requires selected information for those segments to be presented in
interim financial reports issued to stockholders. SFAS also establishes
standards for related disclosures about products and services, and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker or
decision making group, in making decisions how to allocate resources
and assess performance. To date, the Company through its two
subsidiaries, has two principal segments, the development of multimedia
educational training programs for industry and government through
Pinneast, and the network systems and telephony consulting division
through CMI.
Segment information for the six months ended June 30, 2000 is as
follows:
Multimedia
Education Network Systems Total
------------ ---------------- --------------
Revenues $ 826,996 $ 2,738,278 $ 3,565,274
============ ================ ==============
Segment (Loss) Profit $ (71,447) $ 21,126 $ (50,321)
============ ================ ==============
Total Assets $ 1,096,341 $ 2,973,501 $ 4,069,842
============ ================ ==============
F-11
6. RELATED PARTY TRANSACTIONS
As of June 30, 2000 and December 31, 1999 CeleXx owes $100,886 and
$9,013, respectively, in advances primarily from one shareholder of the
Company. The advances are non-interest bearing, uncollateralized and
have no specified date for repayment.
At June 30, 2000 and December 31, 1999, the Company has a short term
note due to the former shareholders of Pinnacle East, Inc. for
$41,500.and $100,000, respectively. This note was due in May 2000 and
the Company is presently renegotiating the terms of repayment with the
shareholders.
At June 30, 2000, the Company has a note due to the former shareholders
of CMI for $1,000,000. The note is due in two annual payments due on
the anniversary of the closing of the CMI acquisition and bears
interest at 6% per annum.
7. LINE OF CREDIT
The Company's Pinneast subsidiary has three credit lines with aggregate
availability of $300,000. As of June 30, 2000 Pinneast has $221,125 on
such lines of credit which expire between July 24, 2000 and November
10, 2003 and bear interest at 10.50% per annum. At December 31, 1999,
$258,542 was outstanding on the above lines of credit. The lines are
secured by substantially all the assets of Pinneast.
F-12
The Company's CMI subsidiary has a line of credit in an amount up to
$3,000,000, which is used to purchase merchandise for resale. Interest
accrues at 1% above the prime interest rate from days 41-60. The
amounts outstanding under the line of credit are secured by accounts
receivable and inventory equal to 125 percent of the outstanding
balance. As of June 30, 2000 the outstanding balance on the line of
credit was $944,317.
9. STOCKHOLDERS' EQUITY
Common Stock Issuances:
During the year ended December 31, 1999 a related party, Edinburgh
Consulting, converted the $448,640 owed to it for 1,733,333 shares of
the Company's common stock. Pursuant to a consulting agreement between
CeleXx and Edinburgh Consulting, 1,333,333 of these shares were issued
at $0.10 per share or $133,333. The additional 400,000 shares were
issued at $0.78 per share or $315,307.
In November 1998, CeleXx entered into an agreement with an entity
partially owned by a Director of the Company for financial consulting
services. The Company paid such entity 500,000 shares of its common
stock and valued these shares at $0.25 per share and accordingly, has
recorded compensation expense of $125,000. In February 1999, the
Company entered into an agreement with a financial consultant and
issued 300,000 shares of its common stock for cash at $0.10 per share
aggregating $30,000 and recorded $270,000 in compensation expense for
services provided.
In 1999 the Company issued 860,250 shares in a private placement at
$1.00 per share for total proceeds of $860,250.
In November 1999, the Company issued 400,000 shares of its common stock
to a company which provides financial services. These services are to
include raising future equity on behalf of the Company. The Company
valued the shares at the fair market value on the date of issuance and
recorded deferred financing costs of $250,000. This financing cost will
be recorded as a reduction to additional paid-in capital pursuant to
the preferred stock offering in April 2000.
From November 1999 to December 1999, the Company issued 400,000 shares
of its common stock to a third party in order to satisfy its debt
obligations of $135,000. These shares were valued at $184,000 and the
Company recorded $49,000 in interest expense.
In November 1999, the Company issued 650,000 shares of its common stock
to two parties, each of which provided services to the Company in the
first quarter of 1999. The Company valued these shares $.25 and
recorded compensation expense of $162,500.
F-13
In December 1999, the Company issued 150,000 shares of its common stock
to settle a judgement brought against the Company. The company recorded
$91,200 in expense regarding this settlement.
On January 26, 2000, the Company issued 450,000 shares of its
restricted common stock to a consultant for services rendered. The
Company recorded $252,000 in compensation expense or $0.56 per share,
which approximates the market value on the date of issuance.
In March 2000 the Company issued 635,555 shares of its restricted
common stock to three consultants for services rendered. The Company
recorded $1,174,866 in compensation expense to record these issuances.
On February 15, 2000 the Company issued 420,000 shares of its
restricted common stock to two consultants in relation to the preferred
stock offering (see Note 9). These shares were recorded at market
value, less a discount for the restrictions on trading, netted against
the gross proceeds from the shares issued.
On April 14, 2000 the Company issued 1,400,000 shares of its common
stock for the acquisition o f Computer MarketPlace, Inc. (see Note 3).
On April 11, 2000 the Company issued 22,083 shares of its common stock
to employees of its Pinneast subsidiary for proceeds of $10,000.
Additionally, the Company issued 110,000 shares of its common stock to
settle outstanding claims against Spectrum. The Company recorded
$209,000 of compensation expense to reflect such issuances.
Also, on April 11, 2000 the Company issued 650,000 restricted shares of
its common stock to three financial consultants. These consultants have
three-year agreements with the Company. The Company recorded deferred
compensation of $1,132,083 to reflect these issuances.
On April 13, 2000 the Company issued 1,000,000 shares to E-Pawn.com,
Inc. The Company received 1,000,000 shares of E-Pawn.com, Inc. common
stock in consideration for these shares. The investment was valued at
$2.00 per share of the Company's common stock or $2,000,000. (see Notes
12 and 15).
On June 7, 2000, the Company issued 25,000 shares of its restricted
common stock to a consultant for services rendered, the Company
recorded $20,000 in compensation for this issuance.
F-14
In July 2000, the shareholders of the Company voted in favor of an
increase in the number of common shares authorized from 20,000,000
shares to 100,000,000 shares.
Preferred Stock Issuance:
On April 7, 2000, the Company issued 350 shares of 6% Series A
cumulative convertible preferred stock at $10,000 per share plus common
stock purchase warrants and received net proceeds of $3,144,727. The
preferred shares are convertible at the lower of the closing bid price
on the day preceding the closing of a common stock offering or 80% of
the five day common stock average price prior to the date of
conversion. The shares are convertible immediately upon the
effectiveness of a registration statement. The Company maintains a
redemption option at 125% of the common stock offering price.
In July 2000 the shareholders of the Company authorized an increase in
the number of preferred shares issuable from 1,000,000 shares to
20,000,000 shares, par value $.001, the terms of which may be
determined at the time of issuance by the Board of Directors without
further action by the shareholders.
9. EMPLOYMENT AGREEMENTS
The Company revised the employment agreement with its Chief Executive
Officer. The term of the agreement is for five years from June 1, 2000
with a base salary of $175,000 per annum. Additionally, the executive
shall be entitled to grants of the Company's common stock as determined
by the Board of Directors.
On June 1, 2000 the Company entered into a five-year employment
agreement with its Chief Financial Officer. The agreement stipulates a
base salary of $125,000 per annum. Additionally, the executive shall be
entitled to grants of the Company's common stock as determined by the
Board of Directors.
In connection with the CMI acquisition on April 11, 2000 the Company
entered into a three-year employment agreement with the former major
shareholder, as the Chief Executive Officer for CMI. The agreement
stipulates a base salary of $150,000 per annum plus participation in
Company benefits.
CMI and Pinneast have also extended employment agreements to various
key management personnel of CMI and Pinneast with terms of three (3)
years, aggregating $555,000 in annual base salary, renewable annually
thereafter.
F-15
10. STOCK OPTION PLAN
On March 1, 1999 the Board of Directors (the"Board") adopted the CeleXx
Corporation 1999 stock option plan. The Board or CeleXx's compensation
committee is authorized to issue to eligible persons as defined a
maximum amount of 4,500,000 options under such plan. On July 8, 2000,
the shareholders of the Company approved an increase in the number of
options from 1,000,000 to 4,500,000. As of June 30, 2000, no options
had been issued pursuant to the above plan.
11. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for
the expected future tax benefit to be derived from tax loss and tax
credit carryforwards. SFAS 109 additionally requires the establishment
of a valuation allowance to reflect the likelihood of realization of
deferred tax assets.
The provision (benefit) for income taxes differs from the amounts
computed by applying the statutory federal income tax rate to income
(loss) before provision for income taxes is as follows:
December 31,
--------------------
June 30, 2000 1999 1998
------------- ---- ----
Taxes benefit computed
at statutory rate $ 1,280,000 $ 763,000 $ 107,000
Losses for which income tax benefit
not utilized (1,280,000) (763,000) (107,000)
------------ --------- ----------
Net income tax benefit $ - $ - $ -
============ ========= ==========
The Company has a net operating loss carryforward for tax purposes
totaling approximately $5,418,000 at June 30, 2000 expiring in the
years 2014 through 2020.
Listed below are the tax effects of the items related to the Company's
deferred tax asset:
December, 31
June 30, 2000 1999 1998
------------- --------- ---------
Taxes benefit of net operating loss
carryforward $ 1,280,000 $763,000 $ 107,000
Valuation Allowance (1,280,000) (763,000) (107,000)
------------ ---------- ---------
Net deferred tax asset recorded $ - $ - $ -
============ ========== =========
F-16
12. COMMITMENTS AND CONTINGENCIES
Commitments:
Operating Leases:
In May 1999 CeleXx entered into a five-year lease for office space at
an annual base rental of $92,500 for the initial year. Such base rental
shall increase by 4% each year. The lease is to commence when such
premises are available for occupancy. CeleXx is currently leasing
temporary office space from the same landlord at $5,900 per month. Rent
expense for the six months ended June 30, 2000 and years ended December
31, 1999 and 1998 was $33,505, $63,300 and $42,400, respectively.
The Company through its CMI subsidiary leases building space in
Tewksbury, Massachusetts from a related party, under a five-year lease.
The leases require minimum annual payments of $72,000 plus maintenance
and operating costs over the lease term. Total rent expenses (including
common area maintenance) for the period ended June 30, 2000 was
$20,489.
The Company through its Pinneast subsidiary leases building space in
Columbia, South Carolina under a three-year lease. The lease requires
minimum annual payments of $24,672 and expires on November 30, 2001.
Total rent expense for the six months ended June 30, 2000 was $12,706.
The Company has various leases for office furniture and equipment,
which expire between November 2000 through April 2004.
Minimum future lease commitments are as follows:
2001 $ 185,100
2002 102,749
2003 176,519
2004 148,597
2005 142,352
Thereafter 122,962
----------
$ 878,279
==========
Other Commitments:
On May 24, 2000 the Board of Directors resolved to issue 50,000 shares
of its common stock to its General Counsel pursuant to a retainer
agreement. Such shares are to be "locked-up" or unavailable for resale
over a five-year term. As of June 30, 2000, the Company had not issued
the above shares.
F-17
The Company has accrued $226,000 as a contingent payment payable to the
former shareholders' of Pinnacle East, Inc. This accrual was recorded
pursuant to the stock purchase agreement between the Company and
Pinnacle East, Inc. which required as a contingent cost that the
Company's average stock price would be $2.50 for the year ending on the
anniversary of the closing of the acquisition.
Contingencies:
On August 1, 2000 the Company and its president were served in a
lawsuit filed by E-Pawn.com, Inc. ("E-Pawn") alleging causes of action
for breach of contract, fraud and breach of fiduciary duty. E-Pawn is
seeking damages, specific performance and an injunction. On or about
March 10, 2000, the Company's president signed an omnibus strategic
alliance agreement with E-Pawn whereby, under certain conditions: (a)
E-Pawn was to purchase 1,000,000 shares of CeleXx common stock at $5.00
per share in cash; (b) CeleXx would receive payments for management
fees as the appointed manager of E-Pawn; and (c) upon the final funding
of 1,000,000 shares of CeleXx Common Stock at $5.00 per share E-Pawn
would have the option to exchange $50 million in market value of E-Pawn
common stock for $50 million in market value of CeleXx common stock.
The closing of the above transactions was to occur on or before March
31, 2000. At E-Pawn's request, in April 2000 an amendment to the
agreement was signed to provide for the exchange of 1,000,000
restricted shares of CeleXx common stock for 1,000,000 shares of freely
trading common stock of E-Pawn to satisfy the cash payment for the
1,000,000 CeleXx shares. The option arrangement was also amended to be
completed with an exchange of 10 million shares of E-Pawn shares for 12
million shares of CeleXx common stock. Upon completion of this
exchange, the agreement also provided for an additional option for one
year to repeat the share exchange. CeleXx issued the 1,000,000 shares
of common stock to E-Pawn on April 13, 2000 and received 1,000,000
shares of free trading E-Pawn shares from a stockholder of E-Pawn.
CeleXx also loaned $500,000 to E-Pawn in the form of an unsecured,
short-term demand loan. The agreement and amendments were at all times
subject to various approvals, including the CeleXx Board of Directors.
The granting of the $50 million stock exchange would have represented a
change in control and, as a merger transaction, required CeleXx
shareholder approval.
Prior to CeleXx obtaining approvals for the above-described
transaction, the President of E-Pawn was indicted by the United States
Department of Justice for securities violations and E-Pawn was made the
target of further investigations. Further, the SEC temporarily
suspended trading in E-Pawn stock due to lack of current information
and inaccurate information. In addition, at no time did E-Pawn ever
appoint the Company as its manager, although services were performed,
invoices were tendered to E-Pawn and remain unpaid, and E-Pawn never
tendered or in any manner attempted to deliver its 10,000,000 shares to
CeleXx. Further, since CeleXx is a stockholder of E-Pawn, the Company
should have received notice of the above-described agreement and has
not received any request or proxy for said approval.
Based on the above events, the SEC's allegations that E-Pawn
disseminated false information and the possibility that the
investigation of E-Pawn might reveal other securities law violations,
the Company determined that the above agreement was never properly
approved or consummated and has been taking steps to rescind the
transaction, unwind the transfer of shares and pursue collection of the
F-18
loan receivable. The Company's counsel has opined that the above
transaction was void ab finitio (from the beginning). In response to
the Company's action, E-Pawn has commenced suit to enforce only those
sections of the agreement that the Company believes are favorable to
E-Pawn. The Company has moved to dismiss the lawsuit on grounds that
include the fact that the above agreement required the Company to
appoint Eli Leibowitz as President of the Company, even though Mr.
Leibowitz, former President of E-Pawn, is currently under indictment
and intends to vigorously defend the action. CeleXx's counsel believes
that the lawsuit is frivolous and is of the opinion that the Company
will prevail. E-Pawn has acknowledged owing the Company $500,000, which
amount exceeds the fair market value of all of the net assets of
E-Pawn. Accordingly, the Company recorded a provision for potential
uncollectibility of this loan to E-Pawn.
The Company is also party to two other matters of litigation and claims
which management believes are normal in the course of its operations.
While the results of such litigation and claims cannot be predicted
with certainty, The Company believes the final outcome of such matters
will not have a material adverse effect on its results of operations or
financial position.
13. SUBSEQUENT EVENTS
On July 26, 2000, the Board of Directors resolved to issue 7,650,000
shares of the Company's common stock to two executives. Such shares
were issued on September 1, 2000 pursuant to the executives employment
agreements and are restricted from resale during the term of these
agreements which are five years.
On August 23, 2000, the Board of Directors granted 363,225 options to
acquire shares of the Company's common stock to employees of the
Company's CMI subsidiary. These options were issued pursuant to the
Company's stock option plan (See Note 11).
On September 5, 2000, the Board of Directors authorized the grant of
2,650,000 options to acquire common stock of the Company to members of
its executive management. These options were issued pursuant to the
Company's stock option plan (See Note 11).
14. POTENTIAL BORROWINGS:
(1) On October 16, 2000, the Company's Chairman and principal
shareholder along with four other officers and/or shareholders
provided the Company with a letter of guarantee to jointly
consent to lend the Company up to $1,000,000 on an as needed
basis for a one year period ending in October 2001, repayment of
which will not be required before such date.
(2) On October 17, 2000, the Company received a $10 million secured
Revolving Credit Agreement ("Credit Agreement") maturing in
October 2003 from an asset-based lender. Availability under the
Credit Agreement is based on a formula of eligible accounts
receivable and inventory and allows for an increase in the credit
facility to consummate acquisition financing within the maximum
$10 million line. Borrowings bear interest at the Chase Bank rate
plus 1% per annum and are collateralized by essentially all
assets of the Company, such as accounts receivable, inventory,
and general intangibles, including its subsidiaries. The Credit
F-19
Agreement requires, among other conditions, compliance with
certain covenants. The consummation of the credit Agreement is
subject to the completion of the asset-based lender's due
diligence procedures.
15 SETTLEMENT OF LITIGATION (UNAUDITED)
On October 10, 2000, Celexx and E-Pawn agreed in principal to settle
the lawsuit that E-Pawn filed against Celexx and any claims that the
Companies may have with respect to each other. The settlement will
include unconditional releases and will be subject to documentation and
delivery of all considerations. The settlement includes, among other
things, the issuance of an additional 2,000,000 shares of Celexx
restricted common stock to E-Pawn (E-Pawn already has 1,000,000
shares). Celexx will also cancel the $500,000 that is due from E-Pawn
and return 1,000,000 freely tradable shares of E-Pawn that it currently
holds. Celexx in return will receive 5,250,000 restricted shares of
common stock of E-Pawn.
F-20
CELEXX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2000
- unaudited -
ASSETS
CURRENT ASSETS:
Cash $ 546,248
Accounts receivable 2,853,992
Inventory 574,216
Prepaid Taxes 207,082
Other current assets 73,065
-------------
TOTAL CURRENT ASSETS 4,254,603
MARKETABLE SECURITIES - AVAILABLE FOR SALE 125,000
FURNITURE AND EQUIPMENT, NET 393,860
GOODWILL, NET 521,080
INTANGIBLES ASSETS, NET 3,197,969
OTHER ASSETS 93,008
-------------
$ 8,585,520
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,600,111
Note payable related party 41,500
Line of credit - short term portion 1,679,728
Deferred revenue 224,214
-------------
TOTAL CURRENT LIABILITIES 3,545,553
-------------
LINE OF CREDIT - long term portion 71,631
-------------
NOTE PAYABLE AND ADVANCES - RELATED PARTIES 1,118,787
-------------
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY:
Preferred stock, $001 par value, 20,000,000 shares authorized;
350 issued and outstanding -
Common stock, $.001 par value, 100,000,000 shares authorized;
23,319,696 shares issued and outstanding 23,320
Additional paid-in capital 15,435,505
Unamortized stock compensation (4,027,483)
Other comprehensive loss -
Unrealized loss on marketable securities -
available for sale (1,875,000)
Accumulated deficit (5,706,793)
--------------
TOTAL STOCKHOLDERS' EQUITY 3,849,549
-------------
$ 8,585,520
=================
See notes to consolidated financial statements.
F-21
CELEXX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- unaudited -
Three Months Ended Three Months Ended
September 30, 2000 September 30,1999
---------------------- --------------------
REVENUE $ 5,234,652 $ 270,234
COST OF REVENUE 3,999,196 141,706
---------------------- --------------------
GROSS PROFIT 1,235,456 128,528
OPERATING EXPENSES
Selling, general and administrative expense 1,207,398 478,149
Amortization of goodwill, intangibles and stock compensation 279,642 21,159
---------------------- --------------------
1,487,040 499,308
LOSS FROM OPERATIONS (251,584) (370,780)
OTHER INCOME (EXPENSES):
Interest expense (16,941) -
Other Income (expense) 25,589 -
---------------------- --------------------
TOTAL OTHER INCOME 8,648 -
---------------------- --------------------
NET LOSS $ (242,936) $ (370,780)
====================== ====================
NET LOSS $ (242,936) $ (370,780)
OTHER COMPREHENSIVE LOSS:
Unrealized holding loss arising during the period from
marketable securities (312,000) -
---------------------- --------------------
COMPREHENSIVE LOSS (554,936) (370,780)
====================== ====================
NET LOSS PER COMMON SHARE - basic $ (0.02) $ (0.05)
====================== ====================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - basic 15,223,878 6,769,019
====================== ====================
See notes to consolidated financial statements.
F-22
CELEXX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- unaudited -
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
--------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (242,936) $ (370,780)
--------------------- ---------------------
Adjustments to reconcile net loss to net cash used in operations:
Amortization and depreciation 286,620 54,298
Changes in assets and liabilities net of effects from acquisition:
Accounts receivable (641,694) 105,000
Inventory (151,472) 95,122
Other current assets (46,320) (181,500)
Other assets (40,000) -
Accounts payable and accrued expenses 252,641 35,655
Deferred revenue 111,618 (6,000)
--------------------- ---------------------
(228,607) 102,575
--------------------- ---------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (471,543) (268,204)
--------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Marketable securities - 51,000
Capital expenditures (108,498) -
--------------------- ---------------------
NET CASH PROVIDED BY (USED IN INVESTING ACTIVIES (108,498) 51,000
--------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit 585,917 19,723
Borrowings from (repayments to) related parties 17,901 (84,144)
--------------------- ---------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 603,818 (64,421)
--------------------- ---------------------
NET INCREASE (DECREASE) IN CASH 23,777 (281,626)
CASH - beginning of period 522,471 283,576
--------------------- ---------------------
CASH - end of period $ 546,248 $ 1,950
===================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 22,184 $ -
===================== ====================
Noncash investing and financing activites:
Common stock issued for compensation and services $ 2,895,400 $ -
===================== ====================
See notes to consolidated financial statements.
F-23
CeleXx Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of CeleXx
Corporation (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. These
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related footnotes
included in the Company's Form 10-KSB for the six month transition period ended
June 30,2000.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation have been
included. The results for the three months ended September 30, 2000, and 1999,
are not necessarily indicative of financial information for the full year. For
further information, refer to the consolidated financial statements and
footnotes included in the Company's Form 10-KSB as filed with the Securities and
Exchange Commission for the six month transition period ended June 30,2000.
2. General
On May 25, 1999 CeleXx acquired through its wholly owned subsidiary,
Pinneast.com, Inc. ("Pinneast"), all the outstanding shares of Pinnacle East,
Inc., a South Carolina Corporation, engaged in the development of multimedia
educational programs for industry and government. Pinneast was acquired for
500,000 shares of CeleXx's common stock and a $100,000 note payable due in May
2000. As of September 30, 2000 the balance of the note is $41,500. Subsequent to
the acquisition, Pinnacle East, Inc. was liquidated.
On April 14, 2000, CeleXx acquired Computer Marketplace, Inc. ("CMI"),
a Massachusetts company engaged in systems engineering, design and maintenance
of computer network systems. The consideration paid was 1,400,000 shares of the
Company's common stock and $1,500,000 at closing and a note payable for
$1,000,000 bearing interest at 6% due in two equal annual installments on the
anniversary of the closing date. The former owner of CMI agreed to extend the
first annual installment of $500,000 originally due April 2000 to November 2001.
The acquisitions of Pinneast and CMI were accounted for using the
purchase method of business combinations.
On June 9, 2000, the Board of Directors elected to change the Company's
fiscal year end from a year ending December 31 to a year ending June 30. The
decision was made to conform to industry group standards and administrative
purposes.
F-24
CeleXx Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
3. Stockholders' Equity
On September 1, 2000, the Company issued 7,650,000 shares of the
Company's common stock to two executives. Such shares were issued pursuant to
the executive's employment agreements and are restricted from resale during the
term of these agreements, which are five years. In addition, 50,000 shares of
common stock were issued to an individual for services rendered. The Company has
recorded non-cash compensation charge to earnings of $49,147 and an increase to
unamortized stock compensation of $2,895,400 as relating to the issuance of the
aforementioned shares.
On August 23, 2000, the Board of Directors granted 363,225 options to
acquire shares of the Company's common stock at an exercise price of $0.437 to
employees of the Company's CMI subsidiary. On September 5, 2000, the Board of
Directors authorized the grant of 2,650,000 options at an exercise price of
$0.50 to acquire common stock of the Company to members of its executive
management. These options were issued pursuant to the Company's stock option
plan.
POTENTIAL SIGNIFICANT DILUTION:
Since the number of shares of our common stock issuable upon conversion
of the preferred stock will change based upon fluctuations of the market price
of our common stock prior to a conversion, the actual number of shares of our
common stock that will be issued under the preferred stock, and consequently the
number of shares of our common stock that will be beneficially owned by the
preferred stock holder cannot be determined at this time. Because of this
fluctuating characteristic, the Company has agreed to register a number of
shares of our common stock that exceeds the number of shares beneficially owned
by the preferred stock holder. As of January 31,2001 based on a conversion price
of $0.296 per share, the preferred stock holder would be entitled to receive
12,002,453 shares.
The stock purchase agreements that the Company entered into with the
former shareholders of Pinnacle East, Inc. and Computer MarketPlace, Inc., in
its acquisition of these companies, provided for contingent consideration of
additional shares to be issued if the Company's average stock price would be
less than $2.00 and $2.50, respectively, at the anniversary of the closing of
the acquisitions. The additional shares that the Company would be required to
issue under this contingency based on the average closing price of $0.375 as of
January 31, 2001 would be approximately 10,000,000 shares. The Company is
currently negotiating with the former shareholders to revise the amount of
potential additional shares and date of measurement under these contingencies.
F-25
4. Pro-forma Information
The following unaudited pro-forma condensed statement of operations for
the three months ended September 30, 1999 reflects the combined results of the
Company as if the acquisitions of Pinneast and CMI had occurred on July 1, 1999.
REVENUES $3,839,374
-----------
GROSS PROFIT 872,331
-----------
OPERATING EXPENSES 1,161,569
-----------
NET LOSS $( 289,238)
-----------
NET LOSS PER SHARE $ ( 0.04)
-----------
5. Line of Credit
The Company's CMI subsidiary has a line of credit with Finova Capital
Corporation (Finova)in an amount up to $3,000,000, which is used to purchase
merchandise for resale. Interest accrues at 1% above the prime interest rate
from days 41-60. The amounts outstanding under the line of credit are secured by
accounts receivable and inventory equal to 125 percent of the outstanding
balance. On January 30, 2001, Finova, as a result of their closing of certain
aspects of their business , advised CMI and its other clients that the credit
line facility would terminate on February 9, 2001. The company has arranged with
Finova to grant CMI up to a 30day extension of the credit line and intends to
replace the Finova credit line with alternative lenders as further discussed in
note 6.
6. Subsequent Events
Potential Borrowings:
On October 16, 2000, the Company's Chairman and principal shareholder
along with four other officers and/or shareholders provided the Company with a
letter of guarantee to jointly consent to lend the Company up to $1,000,000 on
an as needed basis for a one year period ending in October 2001. Repayment will
not be required before such date. Certain of these individuals have indicated
that they are currently pursuing financing on their personal assets to provide
funds to the company. As of January 31, 2001 the Company's Chairman has loaned
the Company approximately $95,000. The Company anticipates that it will require
an additional $150,000 on or before April 1,2001 to be provided by certain of
these individuals.
F-26
On October 17, 2000, the Company received a commitment for a $10
million secured Revolving Credit Line ("Credit Line") maturing in October 2003
from CIT Business Credit (CIT), a unit of CIT Commercial Finance and one of six
operating groups within the CIT Group, Inc. Availability under the Credit Line
is based on a formula of eligible accounts receivable and inventory and allows
for an increase in the credit facility to consummate acquisition financing
within the maximum $10 million line. Borrowings bear interest at the Chase Bank
rate plus 1% per annum and are collateralized by essentially all assets of the
Company, such as accounts receivable, inventory, and general intangibles,
including its subsidiaries. The Credit Line requires, among other conditions,
compliance with certain covenants. The consummation of the Credit Line is
subject to the completion of the asset-based lender's legal review and
documentation. The Company has not yet closed on this credit line because it has
been negotiating with CIT on certain loan costs and collateral provisions. In
addition the Company has been reviewing financing proposals from other lenders.
The Company estimates that the net proceeds available for working capital from
any one of these financing transactions, after payoff to previous lenders and
loan costs, to not exceed approximately $500,000.
Settlement of Litigation:
On October 24, 2000, Celexx and E-Pawn.com, Inc. ("E-Pawn") entered
into a Settlement and Release Agreement ("settlement") to settle the lawsuit
that E-Pawn filed against Celexx and any claims that the companies may have with
respect to each other. The settlement included unconditional releases and was
subject to documentation and delivery of all considerations. The settlement
provided for, among other things, the issuance of an additional 2,250,000 shares
of Celexx restricted common stock to E-Pawn (E-Pawn already has 1,000,000
shares). Celexx was also required to cancel the $500,000 that is due from E-Pawn
and return 1,000,000 freely tradable shares of E-Pawn that it currently holds
and, issue to a shareholder of E-Pawn a warrant to purchase 250,000 shares of
common stock of Celexx granting the shareholder the right to purchase the shares
at $2.50 per share until October 20, 2003. Celexx in return received 5,250,000
restricted shares of common stock of E-Pawn. The closing for the above described
settlement and exchange of documents and shares occurred on January 30, 2001.
Share issuances:
On October 25, 2000 the company issued 500,000 and 50,000 shares of
restricted stock to a consultant and advertising/public relations company,
respectively for services rendered. On December 5, 2000 the advertising/public
relations company received an additional 150,000 shares in settlement of past
due fees.
On November 17, 2000 the Company sold 1,170,000 shares of restricted
stock to David R. Burke, Sr., an officer and Director of the Company for total
proceeds of $234,000.
On December 5, 2000 the Company issued 1,200,000 shares of its common
stock to two financial consultants under a six month and twelve month agreements
for financial advice, mergers and acquisitions, capital structures and sources,
preparation of research reports and banking methods and systems. On December 1,
2000 the Company filed an S-8 Registration Statement with the Securities and
Exchange Commission to register the foregoing shares as freely tradable pursuant
to the agreements. The attorney for the financial consultants was also issued
50,000 shares under the same arrangement for legal services provided.
F-27
Other:
On January 26, 2001, the Company executed what company counsel believes to
be a non-binding merger agreement with New Millennium Development Corp (NMDG).
Subsequently, on January 29, 2001, NMDG issued press releases asserting that
NMDG and CeleXx had reached agreement relating to the merger. On January 31,
2001, in response to what the company considered premature disclosures by NMDG,
and since the terms of the agreement had not reached the point of approval by
the boards of directors, or shareholders of both companies, CeleXx issued a
press release and informed NMDG that it had suspended talks and cancelled any
further interest of a proposed merger. The Company and its counsel believe that
there was no binding agreement to pursue the discussions and that the Company
has no further obligations.
F-28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Computer Marketplace, Inc.
Tewksbury, Massachusetts
We have audited the accompanying balance sheets of Computer
Marketplace, Inc. as of February 29, 2000 and February 28, 1999 and the related
statements of income, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Computer
Marketplace, Inc. as of February 29, 2000 and February 28, 1999 and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Feldman Sherb Horowitz & Co., P.C.
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
June 2, 2000
F-29
COMPUTER MARKETPLACE , INC.
BALANCE SHEETS
ASSETS
February 29, February 28,
2000 1999
------------------ ------------------
CURRENT ASSETS:
Cash $ 655,978 $ 400,974
Accounts receivable, net 2,578,244 2,293,585
Tax receivable - refund claim 207,082 -
Inventory 294,295 524,476
------------------ ------------------
TOTAL CURRENT ASSETS 3,735,599 3,219,035
FIXED ASSETS, net 35,876 32,348
DEPOSITS 10,249 14,326
------------------ ------------------
$ 3,781,724 $ 3,265,709
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 307,333 $ 353,548
Accrued expenses 127,321 110,625
Line of credit 1,511,650 1,177,443
Officer loans 54,082 -
Income taxes payable - 230,500
Deferred revenue 301,930 108,619
------------------ ------------------
TOTAL CURRENT LIABILITIES 2,302,316 1,980,735
------------------ ------------------
STOCKHOLDERS' EQUITY:
Common stock; no par, 15,000 shares
authorized 9,250 shares issued
and outstanding 56,000 56,000
Additional paid-in capital 62,505 62,505
Retained earnings 1,400,903 1,206,469
Less treasury stock at cost: 5,000 shares (40,000) (40,000)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 1,479,408 1,284,974
------------------ ------------------
$ 3,781,724 $ 3,265,709
================== ==================
See notes to financial statements.
F-30
COMPUTER MARKETPLACE, INC.
STATEMENTS OF OPERATIONS
Years Ended
---------------------------------------
February 29, February 28,
2000 1999
------------------ -----------------
NET SALES $ 15,847,140 $ 16,733,839
COST OF SALES 12,702,599 13,384,687
------------------ -----------------
GROSS PROFIT 3,144,541 3,349,152
OPERATING EXPENSES 2,723,526 2,398,486
------------------ -----------------
INCOME FROM OPERATIONS 421,015 950,666
OTHER (INCOME) EXPENSES:
Depreciation 21,284 5,056
Interest expense 39,052 29,236
Interest income (3,755) (4,666)
(Gain) Loss on sale of mo-or vehicle - (700)
------------------ -----------------
56,581 28,926
------------------ -----------------
INCOME BEFORE INCOME TAXES 364,434 921,740
PROVISION FOR INCOME TAXES 170,000 378,502
------------------ -----------------
NET INCOME 194,434 543,238
RETAINED EARNINGS- beginning of year 1,206,469 663,231
------------------ -----------------
RETAINED EARNINGS- end of year $ 1,400,903 $ 1,206,469
================== =================
See notes to financial statements.
F-31
COMPUTER MARKETPLACE, INC.
STATEMENTS OF CASH FLOWS
Years Ended
---------------------------------------
Febraury 29, Febraury 28,
2000 1999
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 194,434 $ 543,238
------------------ ------------------
Adjustments to reconcile net income to net cash used in operations:
(Gain) on sale of motor vehicle - (700)
Depreciation 21,284 5,056
Changes in assets and liabilities:
(Increase) in accounts receivable (284,659) (1,005,780)
Decrease in inventories 230,181 107,663
(Increase) in prepaid income taxes (207,082) -
Decrease (increase) in deposits 4,077 (13,826)
(Decrease) increase in accounts payable (46,215) 162,641
Increase in accrued expenses 16,696 56,656
(Decrease) increase in income taxes payable (230,500) 102,153
Increase in deferred revenue 193,311 19,974
------------------ ------------------
Total Adjustments (302,907) (566,163)
------------------ ------------------
NET CASH USED IN OPERATIONS (108,473) (22,925)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (24,812) (19,900)
Proceeds from sale of motor vehicle - 1,651
------------------ ------------------
NET 'CASH USED IN INVESTING ACTIVITIES (24,812) (18,249)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Officer loans (repaid) borrowed 54,082 (24,227)
Increase in line of credit 334,207 207,559
------------------ ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 388,289 183,332
------------------ ------------------
NET INCREASE IN CASH 255,004 142,158
CASH - beginning of year 400,974 258,816
------------------ ------------------
CASH - end of year $ 655,978 $ 400,974
================== ==================
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 39,052 $ 29,236
================== ==================
Cash paid for taxes $ 607,582 276,349
================== ==================
See notes to financial statements.
F-32
COMPUTER MARKETPLACE, INC
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
1. ORGANIZATION
Computer Marketplace, Inc. (the "Company") is located in
Tewksbury, Massachusetts. The Company was organized in 1984 and is
engaged in the sale and service of computer equipment and peripherals
through wholesale and retail channels.
In December 1999, the Company formed a foreign subsidiary, CMI
Canada LTD which has not yet commenced operations.
In April 2000, the Company was sold to Celexx Corp.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
B. DEFERRED REVENUE - Deferred revenue arises from the proration of
service contracts sold by the Company which may vary in length from
six to twelve months.
C. INVENTORIES - Inventories are stated at the lower of cost or
market calculated on the first-in, first-out method, or market.
D. PROPERTY AND EQUIPMENT - Property and equipment is stated at
cost. Depreciation is computed using accelerated methods over the
estimated useful lives of the assets.
E. INCOME TAXES - The Company recognizes deferred tax assets and
liabilities based on the difference between the financial statements
carrying amount and the tax basis of assets and liabilities, using the
effective tax rates in the years in which the differences are expected
to reverse. A valuation allowance related to deferred tax assets is
also recorded when it is probable that some or all of the deferred tax
asset will not be realized.
F. FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value Financial
Instruments", requires disclosure of fair value information about
financial instruments whether or not recognized in the balance sheet.
The carrying amounts reported in the balance sheet for cash, trade
receivables, accounts payable and accrued expenses approximate fair
value on the short-term maturity of these instruments.
G. CARRYING VALUE OF LONG LIVED ASSETS - The Company reviews the
carrying value of the long-lived assets to determine if facts and
circumstances exist which would suggest that the assets may be
impaired or that the amortization period needs to be modified. If
impairment is indicated, then an adjustment will be made to reduce the
carrying amount of the tangible assets to their fair value. Based on
the Company's review as of February 29, 2000, no impairment of
long-lived assets was evident.
F-33
3. FIXED ASSETS
The Company's fixed assets are as follows:
February 29, February 28,
2000 1999
---------------- ----------------
Furniture and fixtures $ 15,480 $ 9,215
Equipment 139,686 138,756
Leasehold improvements 34,804 28,263
Motor Vehicles 18,500 29,695
---------------- ----------------
208,470 205,929
Less accumulated depreciation 172,594 173,581
---------------- ----------------
$ 35,876 $ 32,348
================ ================
4. LINE OF CREDIT
The Company has a line of credit in the amount of $3,000,000,
which is used to purchase merchandise for resale. Interest accrues at
1% above the prime interest rate from days 41-60. The amounts
outstanding under the line of credit are secured by accounts receivable
and inventory equal to 125 percent of the outstanding balance.
5. RELATED PARTY TRANSACTIONS
A. OFFICER LOANS - In February 2000, the Company borrowed funds without
interest, from its principal officer in the amount of $54,082. The
loan is unsecured and due on demand. In May 2000, the Company repaid
$44,000.
B. LEASE COMMITMENT - The Company leases building space in Tewksbury,
Massachusetts from a related party, under a five year lease. The
leases require minimum annual payments of $72,000 plus maintenance and
operating costs over the lease term. Total rent expenses (including
common area maintenance) for the years ended February 29, 2000 and
February 28, 1999 were $89,560 and $85,628, respectively.
The minimum rental commitments as of February 29, 2000 for all
noncancelable operating leases with initial or remaining terms in
excess of one year are as follows:
Years Ending February 28, Amount
-------------------------------------- ------------------
2001 $ 72,000
2002 72,000
2003 24,000
6. PROFIT SHARING PLAN
The Company maintains a IRC Section 401(k) plan covering
employees who meet minimum eligibility requirements. The Company made a
voluntary contribution to the Plan of $60,503 and 66,652 for the years
ended February 29, 2000 and February 28, 1999, respectively.
F-34
7. CONCENTRATION OF CREDIT RISK
A. The Company maintains cash balances at several financial
institutions located in Massachusetts. Accounts at each institution are
insured by Federal Deposit Insurance Corporation up to $100,000. At
February 29, 2000 and February 28, 1999, the Company's unsecured cash
balances were $362,176 and $63,416, respectively.
B. Concentration of credit risk with respect to trade receivables are
limited due to the large number of customers compromising the Company's
customer base and their dispersion across different industries and
geographic locations. As of February 29, 2000 and February 28, 1999 the
Company had no significant concentration of credit risk.
8. INCOME TAXES
The provision for income taxes is as follows:
February 29, February 28,
2000 1999
--------------- ---------------
Federal income taxes $ 126,000 $ 288,000
State income taxes 44,000 90,502
--------------- ---------------
Total income taxes $ 170,000 $ 378,502
=============== ===============
9. MAJOR CUSTOMERS
Sales to one customer approximated 13% of the Company's total
sales for the year ended February 29, 2000 while sales to two customers
approximated 27% for the year ended February 28, 1999. Accounts
receivables from this customer was approximately $48,000 at February
29, 2000.
F-35
CELEXX CORPORATION AND SUBSIDIARIES
UNAUDITED PRO-FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENT
On April 14, 2000, CeleXx acquired Computer Marketplace, Inc. (`CMI"), a
Massachusetts company engaged in systems engineering, design and maintenance of
computer network systems. The consideration paid was 1,400,000 shares of the
Company's common stock and $1,500,000 at closing and a note payable for
$1,000,000 bearing interest at 6% due in two equal annual installments on the
anniversary of the closing date.
The acquisition of CMI were accounted for using the purchase method of business
combinations.
The unaudited pro-forma condensed consolidated statements of operations
for the six months ended June 30, 2000 and the year ended December 31, 1999
reflects the combined results of CeleXx, Pinneast and CMI as if the acquisitions
had occurred on January 1, 1999.
The unaudited pro-forma condensed consolidated statements of operations
do not necessarily represent actual results that would have been achieved had
the companies been together from January 1, 1999, nor may they be indicative of
future operations. These unaudited pro-forma condensed consolidated financial
statements should be read in conjunction with the historical financial
statements and notes thereto of the respective companies.
F-36
CELEXX CORPORATION AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
Celexx CMI
Six Months April 13,200 Pro forma Adjustments
Ended June 30 April 13,2002 ----------------------------
2000 (Acquisition date) Debit Credit As Adjusted
--------------- ------------- ------------ ------------ ------------
REVENUE $3,565,274 $ 4,021,002 $ - $ - $ 7,586,276
COST OF SALES 2,533,929 3,225,110 - - 5,759,039
--------------- ------------- ------------ ------------ ------------
GROSS PROFIT 1,031,345 795,892 - - 1,827,237
OPERATING EXPENSES 3,993,600 837,124 (1) 143,982 - 4,974,706
--------------- ------------- ------------ ------------ ------------
OPERATING INCOME (LOSS) (2,962,255) (41,232) (143,982) - (3,147,469)
INTEREST EXPENSE - - (2) 30,000 - 30,000
--------------- ------------- ------------ ------------ ------------
NET INCOME (LOSS) BEFORE TAXES (2,962,255) (41,232) (173,982) - (3,177,469)
BENEFIT (PROVISION) FOR TAXES - - - - -
--------------- ------------- ------------ ------------ ------------
NET INCOME (LOSS) (2,962,255) (41,232) (173,982) - (3,177,469)
CUMULATIVE PREFERRED
STOCK DIVIDEND - - (3) 46,027 - 46,027
NET INCOME (LOSS) TO COMMON
--------------- ------------- ------------ ------------ ------------
SHAREHOLDERS $ (2,962,255) $ (41,232) $ (220,009) $ - $(3,223,496)
=============== ============= ========== ========== ==========
LOSS PER COMMON SHARE $ (0.24) $ - $ - $ (0.23)
=============== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 12,325,970 - 1,400,000 13,725,970
=============== ========== ========== ==========
F-37