10KSB 1 windsortech10k.txt As filed with the Securities and Exchange Commission on March 26, 2004 -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------- -------------------------------------------------------------------------------- FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 Commission File No.: 000-07539 WINDSORTECH, INC. (Exact name of small business issuer as specified in its charter) Delaware 13-2599131 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 70 Lake Drive, Hightstown, NJ 08520 (Address of Principal Executive Offices) (Zip Code) (609) 426-4666 (Issuer's Telephone Number) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosures will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year: $7,484,472 The aggregate market value of the voting stock, $.01 par value, held by non-affiliates of the Registrant, based upon the closing price of Common Stock on March 11, 2004, as reported on the Over the Counter Bulletin Board ("OTCBB") under the symbol "WRST.OB," was approximately $18,939,000 (4,676,254 shares x $4.05 per share). Shares of common stock held by each officer who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of each class of our common equity as of March 11, 2004 is as follows: Class of Common Equity Number of Shares ---------------------- ---------------- Common Stock, par value $.01 16,468,754 Documents incorporated by reference: Form 8K
TABLE OF CONTENTS ITEM DESCRIPTION PAGE PART I 1. Description of Business 1 2. Description of Property 10 3. Legal Proceedings 11 4. Submissions of Matters to a Vote of Security Holders 11 PART II 5 Market for Common Equity and Related Stockholder Matters 12 6 Management's Discussion And Analysis of Financial Condition and Results of Operations 15 7. Financial Statements 28 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28 8A. Controls and Procedures ?? PART III 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act 29 10. Executive Compensation 32 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 35 12. Certain Relationships and Related Transactions 36 13. Exhibits And Reports on Form 8-K 38 14. Principal Accountant Fees and Services 38 Signatures 40 Financial Statements and Exhibits 41
PART I ITEM 1 DESCRIPTION OF BUSINESS FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK The following discussion should be read in conjunction with our audited Financial Statements and Notes thereto included herein. Certain statements in this Report, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. We intend that such forward-looking statements be subject to the safe harbors created thereby. All such forward-looking information involves risks and uncertainties and may be affected by many factors, some of which are beyond our control. These factors include: o Our growth strategies. o Anticipated trends in our business and demographics. o Our ability to successfully integrate the business operations of recently acquired companies; and o Regulatory, competitive or other economic influences. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: our continued ability to sustain our growth through continuing vendor relationships, development of our Asset Management Group ("AMG") and future business acquisitions; the successful consummation and integration of future acquisitions; the ability to hire and retain key personnel; the continued development of our technical, manufacturing, sales, marketing and management capabilities; relationships with and dependence on third-party suppliers; anticipated competition; uncertainties relating to economic conditions where we operate and payment and clearance systems to which we are subject; uncertainties relating to government and regulatory policies; uncertainties relating to customer plans and commitments; rapid technological developments and obsolescence in the products we sell and the industries in which we operate and compete; existing and potential performance issues with suppliers and customers; governmental export and import policies; global trade policies; worldwide political stability and economic growth; the highly competitive environment in which we operate; potential entry of new, well-capitalized competitors into our markets; and changes in our capital structure and cost of capital. The words "believe", "expect", "anticipate", "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement, was made. 1 Recent Developments Change of Control of Registrant; Merger of WindsorTech, Inc. with and into Delta States Oil, Inc. On January 30, 2002, pursuant to the terms of an Agreement and Plan of Merger among WindsorTech, Inc. (the "Company" or "WTI"), Delta States Oil, Inc. ("Delta") and Alfred D. Morgan, PhD., the Company was merged with and into Delta in a tax-free merger (the "Merger"), and Delta was renamed WindsorTech, Inc. Delta, in consideration for acquiring 100%, or 25,000,000 shares, of the outstanding common stock of WTI, issued an aggregate of 9,000,000 shares of its common stock, allocated equally among Marc Sherman, Edward L. Cummings, Carl C. Saracino, Michael P. Sheerr and David A. Loppert. The exchange ratio was 0.36 Delta shares for each WTI share. Following the merger, the surviving Company had 11,999,168 shares of its Common Stock outstanding, 9,000,000, or approximately 75% of which, were then owned equally by Marc Sherman, Edward L. Cummings, Carl C. Saracino, Michael P. Sheerr and David A. Loppert. Delta, a publicly owned company with approximately 3,300 shareholders, was incorporated in Delaware on November 17, 1967 under the name Camco Systems, Inc., which was changed in December 1967 to Automated Data Sciences, Inc. and on January 28, 1974 to Delta and was previously engaged in oil and gas exploration and drilling operations but had not engaged in any active business since May 4, 1981. The business purpose of the Merger was to allow the Company to merge into and become part of an entity that would allow it to satisfy requirements for listing on a recognized stock exchange. The surviving Company, which is a Delaware corporation, is now actively engaged in purchasing and selling large volumes of off-lease/off finance excess, used, refurbished and "as-is" computer equipment and related products and has recently established the AMG to provide services to companies wishing to maximize the value of their computer equipment coming to the end of its useful or book life. For accounting purposes, the Merger of Delta and WTI was treated as a recapitalization of WTI as the acquirer (reverse acquisition). The historical financial statements of WTI became those of the Registrant and the assets and liabilities of Delta were accounted for as required under the purchase method of accounting. Pro forma information giving effect to the acquisition has not been presented since the Merger was essentially a capital transaction and not a business combination. Alfred D. Morgan, Saul Horing, Robert Maerz and Larry Neuman, who had served as officers and directors of Delta prior to the Merger resigned those positions. Marc Sherman, David A. Loppert, Andrew Paciocco and Constance K. Weaver were appointed to fill the vacancies on the board of directors created by such resignations, and the following persons became the Company's officers:
Name Age Position ------------------------------- -------- ----------------------------------------------------- Marc Sherman 40 Chairman, Chief Executive Officer and President Edward L. Cummings......... 55 Vice President, Chief Financial Officer and Treasurer Carl C. Saracino........... 34 Vice President, Operations Michael P. Sheerr.......... 47 Vice President, Sales David A. Loppert(1)........ 49 Vice President, Business Development and Secretary
(1) On February 19,2004, by Action of Consent of Majority Shareholders, David A. Loppert was removed from the Board of Directors. Thereafter, the Board of Directors removed Mr. Loppert as an officer of the Company. Change in Authorized Share Capital Delta's Stockholders and Directors voted to amend Delta's Articles of Incorporation on January 30, 2002, to increase the total number of authorized shares of capital stock of Delta to Forty Million 2 (40,000,000) shares: Thirty-five Million (35,000,000) shares of which are shares of Common Stock at $.01 par value and Five Million (5,000,000) shares of which are Preferred Stock at $.01 par value. On February 2, 2002, the Company filed an appropriate amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware. Other Information On April 5, 2002, the Board of Directors and the Stockholders approved the adoption of the Company's 2002 Flexible Stock Plan (the "Plan"). The Plan permits the Company to issue up to 5,000,000 shares of common stock plus an annual increase, effective on the first day of each calendar year, equal to 10% of the number of outstanding shares of common stock outstanding on such date, but in no event more than 30,000,000 shares in the aggregate. As of December 31, 2003, 6,491,417 options are available to be granted under the Plan, 4,305,000 of which have previously been granted by the committee designated for such purpose. On August 19, 2002, Constance K. Weaver resigned as a member of our board of directors for personal reasons. On January 13, 2003, R. Keith Elliott was appointed to fill the vacancy. On May 27, 2003, Andrew Paciocco resigned as a member of our board of directors for personal reasons. On November 1, 2003, Seth A. Grossman was appointed to fill the vacancy. On June 24, 2003, we offered 2,000,000 shares of our common stock for sale in a Confidential Private Placement to certain investors. The offering, which closed on July 18, 2003, was not fully subscribed and 1,354,586 shares were sold at $.35 per share. Officers and directors (including their children) purchased 207,200 shares, or 15.3% of the total shares sold. On August 28, 2003, we offered 20 Units at a price of $10,000 per Unit. Each Unit consists of (i) 10,000 shares of our common stock, and warrants to purchase 10,000 shares of our common stock, exercisable for a period of three years at a price of $1.00 per share (the "Warrants"). The offering closed on September 2, 2003. On February 19, 2004, by Action of Consent of Majority Shareholders, David A. Loppert was removed from the Board of Directors. Thereafter, the Board of Directors removed Mr. Loppert as an officer of the Company. WHAT WE DO We are a technology services company. We purchase and sell computer equipment and related products and provide complete equipment asset management services including data security services and environmental compliance. We purchase excess, used and off-lease "as-is" and, sometimes, refurbished computer equipment and related products from a variety of sources including Fortune 1000 companies, and leasing and finance companies, and either remarket those products to brokers, exporters, wholesalers, retailers, value added resellers, schools, corporate end-users or individuals, or we disassemble them and separate and sell the components as parts and recycle the unsaleable components, such as metal covers, plastics and other components. We sell a wide range of used, "as-is" and, occasionally, refurbished, products, including notebook and desktop computers, monitors, processors, disk drives, CD's, DVD's, modems, printers and memory. The majority of the computers we offer for sale are brand name Intel Pentium class or equivalent products manufactured by IBM, Dell, Compaq, Apple, Sony, Fujitsu, Hewlett-Packard, Gateway, Toshiba and other major manufacturers. We consider these items to be our "principal product". We operate in one segment and consider the sales of these products as our single source of revenue as one item. Our business is marginally seasonal, with the July - September period usually being slower than other periods. 3 On October 27, 2003, we filed U.S. Patent Application titled "System and Method of Erasing a Hard Drive via a Computer Network". Hard drive erasing software is installed into a software program, which simulates the booting of a floppy disk; the integrated software is subsequently installed into a software installation program and is delivered to the client's computer over the Internet or via a network. At the client computer, the hard drive erasing software is executed on the client's computer hard drive by executing the boot simulation software. This system and method provides an easy, fast and effective way for erasing hard disks, which meets US Department of Defense sanitizing standards. The erasing software is a DOS-based software program, which can remove sensitive information from a computer before the machine goes to a new or unprotected environment or to clear a hard disk of all programs and data before installing a new system. The software, which is licensed under a long-term license agreement, incorporates overwriting patterns which use up to 99 passes over hard disk sectors to ensure complete erasing of all sensitive data. All erasing procedures and results can be verified and displayed to the client. Other than this software, we do not sell any other products under license nor do we have any franchise or concession agreements. In the fourth quarter of 2002, we established an Asset Management Group ("AMG"), a new division of the Company, to provide complete computer asset management and recovery services to leasing companies and major corporations. For a fee, we will receive, inspect and test each piece of equipment, remove sensitive data and report the results in a customized audit report to our client. We will then assist the client in the disposition of the equipment. One of the many benefits providing this service is that we receive the opportunity to become aware of opportunities to acquire inventory for resale or may acquire a right of first refusal on the client's computer asset base. We had virtually no revenue from AMG clients in 2002 and very low expenses. We incurred direct AMG expenses in the first half of 2003 as we started hiring and training employees. In December 2003, we started generating continuing revenue from our AMG clients and anticipate growth during 2004. This service is different from our current business practice in that we expect to contract with a particular customer, for a fee, to receive, inspect, test, and issue an audit report. We expect to then, for an additional fee, assist the customer in the disposition of the computer equipment or store it for future use, or dispose of it, in accordance with the customer's instructions and state and federal laws. The cost to fully implement our AMG was approximately $200,000, primarily for the purchase of computer software and hardware, material handling equipment and leasehold improvements, and we expect that that we will increase the number of employees from 22 employees at December 31, 2003 to approximately 30 employees by December 31, 2004. OUR BUSINESS MODEL Demand for used or "as-is" brand name computer equipment is growing as consumers realize they can purchase excess/used/"as-is" products that can serve their needs at substantial discounts from the price of new equipment. At the same time, shorter product cycles are leading to increased off-lease and excess inventory computer equipment which vendors and leasing companies need to dispose of in large quantities without conflicting with their primary distribution channels. We offer such vendors and leasing companies the ability to conveniently sell all their products in a single transaction. We believe that our ability to acquire many different types of equipment in large quantities through our established vendor relationships provides us with a significant competitive advantage both with consumers and vendors. In order to be able to offer attractive prices to customers yet maintain our margins, we must be able to acquire a sufficient amount of equipment at favorable prices. In order to continue and expand our procurement capability, we strive to maintain and enhance existing relationships with leasing companies, manufacturers and other sources of equipment and to pursue new relationships. 4 Growth in our industry has been fueled by several factors, including: o A large and growing number of installed personal computers in the home and workplace. o Multiple computers in the home and workplace fueled by increased use and acceptance of the Internet among consumer and business users; and o Increased need for leasing companies and corporations to manage their computer assets cost effectively. In November 2002, the Gartner Group, a research and advisory firm, predicted that "end-of-life issues rather than technology innovation will be the major PC growth driver in 2003". "Budget-constrained organizations are holding on to their PC's longer as cost reduction continues to be implemented." In March 2003, Gartner Dataquest projected that PC shipments will grow 6.6 percent in 2003 and 11.4 percent in 2004. Gartner reaffirmed these forecasts in June 2003. In September 2003, Gartner reported, "recent U.S. economic data shows signs that the long-awaited recovery is beginning". Stronger than expected second quarter results caused Gartner to again increase its 2003 PC unit shipment forecast from 7.2 percent to 8.9 percent; however economic indicators suggest only moderate business buying growth in 2003. In February 2004, Gartner reported, "strong PC market growth outside the United States, coupled with an improving economy has caused us to boost our near-term PC market forecast." Gartner reported PC Unit shipment grew 10.8% in 2003 and projects it will grow 12.8% in 2004. According to a revised report published in December 2003 by International Data Corporation ("IDC"), a market research firm, and a unit of International Data Group, worldwide new PC shipments in 2004 are expected to increase by 11.4% to 169.9 million units. We expect that US corporations will most likely start to implement conversions to new operating systems late in the first quarter of 2004 or in the second quarter of 2004, including the replacement of PC computer equipment, resulting in a potential greater source of used computer equipment becoming available for resale. Gartner believes that large pools of installed PC's, purchased from 1998 to 2001, are due for replacement and it forecasts that most of the replacements will begin late in 2003 and extend into 2004. Gartner's most likely economic scenario predicts an improved economy late in the fourth quarter of 2003 and into the first quarter of 2004. They predict, "the IT market noticeably recovers one quarter after the economic upturn". Gartner believes that "sustained PC growth will depend on increased U.S. business buying", that "economic indicators suggest only moderate business buying growth in 2003" and that "a U.S. economic recovery remains and essential ingredient for a strong PC market". IDC has designed a Life Cycle Value model that organizes the cost to own, maintain and replace technology into three stages: procurement, use and disposition. Redemtech, Inc., a national equipment remarketer, estimates that end-of-life disposition costs alone constitute as much as 5% of the Total Cost of Ownership ("TCO"), nearly one-third as much as the original procurement cost. Much of this expense stems from the fact that used equipment from various diverse or distributed environments present many challenges which enterprises are generally not equipped to address such as: o Diverse equipment locations. o Unrecorded or undocumented changes in original configurations, upgrades and peripheral additions. o Inoperative units. o Varying cosmetic conditions. o Inability to dispose of large volumes in the secondary market. o Deployment of expensive technical staff against low value residuals; and o Lack of original packaging, thereby making shipping more difficult. 5 Substantial TCO savings are possible based on the timing of the purchase within the product life cycle, the technology refresh rate within an enterprise and end-of-life management practices. According to Redemtech, most technology depreciates at an average of 6% per month. Redemtech believes that the dominant factor influencing a used item's value in the marketplace is the price and power of similar, new, "state of the art" technology. They believe that for many years the trend has been toward an acceleration of new technology introductions offering even greater values as measured by power/price. In recent years, the number of companies leasing rather than purchasing computer equipment has increased significantly, primarily due to shorter product life cycles and issues involving end of life costs or residual recovery. Corporate leases generally have a three-year term after which the equipment is replaced and a new lease cycle begins. Off-lease equipment is generally from brand-name manufacturers and still has a relatively high resale value whether refurbished or not. The refurbished computer market also includes computer equipment that has been reconditioned by the manufacturer after being returned by customers. Refurbished computer equipment typically requires a nominal amount of service, such as minor repairs, cleaning and repackaging. In addition to refurbished computer equipment, large quantities of excess inventory computer products become available on a regular basis as a result of the frequent introductions of new models with incremental increases in features or capacity. This is an inherent characteristic of the personal computer industry. These excess inventory products are only marginally different from the newest models and adequately serve the needs of most users. The disposal of refurbished and excess inventory computer equipment represents a substantial burden on most owners. Such computers and accessories are currently sold through many different outlets, including wholesale distributors, catalogs, company stores or outlets, resellers and specialized retailers, as well as mass merchants that are not committed to the resale of these goods and generally sell them as a supplemental product line. Because of the highly fragmented and relatively undeveloped nature of the market for those products, prices received by leasing companies and vendors tend to be highly variable and subject to negotiation based on quantity, age and condition of the product. Our experience has indicated that leasing companies and vendors look favorably upon distribution channels that enable them to dispose of significant quantities of product quickly without affecting their traditional sales channels. A proactive, well-defined end of life management policy can reduce a client's total cost of equipment ownership. Our clients are able to deploy their information technology specialists much more productively, without having to worry about end of life equipment disposal. End-of-life disposition costs for older technology often exceed the market value of such asset, resulting in negative residuals. One of our objectives is to prevent clients from incurring negative residuals simply because they lack an effective end-of-life management program. The key to avoiding negative residuals is to retire an asset while its market value is still greater than its disposition costs. We have designed an asset management system with which we expect to assist our clients in significantly reducing their equipment lifecycle costs. Lifecycles vary, but can generally be categorized as follows: o Power Users - state of the art equipment is purchased and refreshed every 12- 24 months. These are considered high cost sites. The equipment is fully capable of performing all functions within an organization but the user must have the latest hardware and operating system. Unless this equipment is effectively redeployed within the organization, costly operating system licenses may be lost as the licenses are not be transferred to other 6 equipment or are too expensive to do so. o Three Year Lifecycle - generally, organizations that tend to refresh their technology platforms every 30 - 36 months tend to experience the lowest lifecycle costs. This practice reduces the need to perform costly upgrades on older systems, maintains an "in-warranty" inventory, and reduces the IT training load incurred when new systems are installed frequently. o Older PC's and Operating Systems and Homogeneous Environments - generally these are lower cost sites because they are slower to adopt new operating systems and tend to upgrade hardware and software simultaneously. Used technology presents a unique set of operational challenges that we can address through our asset management system: o Used system configurations are inconsistent - many have had upgrades and peripheral parts added or removed. o Many used systems are not in good working condition. o Many used systems have cosmetic damage that may affect value and suitability for other use. o Used systems contain proprietary data and software licenses which must be erased before reuse. o Manual processing methods are prohibitively costly for relatively low value used systems. The asset management system we have implemented has been designed to process an unsorted stream of technology according to a service profile developed for each client. Comprehensive reporting provides a tool for managing the asset base. Using proprietary technology, used equipment is registered, evaluated and then routed for services designed to maximize value for the equipment owner. The process is fully documented for each system in our database and: o Service delivery should be consistent because our proprietary system provides step-by-step technical instructions based on a client's unique profile. o Data reliability should be high because manual data entry will be reduced. o Service performance will be 100% audited. No equipment will be permitted to exit the process until all specified services, e.g., hard drive erasure or sanitation, have been performed. o Costs should be minimized through the application of value-appropriate services and production line efficiency, eliminating the need to sort and pre-inventory the product. o Complete accountability should be assured by maintaining serial number detail for all services performed. HOW WE ACQUIRE PRODUCTS We believe our ability to acquire computer equipment in large quantities at favorable prices is a key competitive advantage. We purchase product from finance and leasing companies, computer manufacturers, corporate information technology departments and others looking for a reliable channel for equipment disposition. Other sources for our products include independent brokers, federal, state and local governments, liquidators and educational institutions. In all instances, we either prepay for the product we purchase or we receive terms from the vendor from whom we purchase the product. In each case, we generally finance the purchase by utilizing existing cash resources, including cash generated from operations or, in some instances, from funds borrowed from our principal stockholders. In the past, we purchased a majority of our products from a small number of suppliers. For the 7 year ended December 31, 2002, we purchased approximately 64% of our products from two vendors - 45% from IBM Credit Corporation and 19% from Redemtech, Inc. As we have established our relationships with other vendors, we have reduced our reliance on purchases from IBM and Redemtech. For the year ended December 31, 2003, we purchased approximately 30% of our products from two vendors. 19% of purchases were from IBM and less than 1% of purchases were from Redemtech. We receive information about new sources of products from prior contacts, subscription to online resources, advertising, industry publications, trade associations and e-mail and fax bid requests received. We remarket our products and sell our services by word of mouth and by e-mail broadcasting on certain on-line services, and through established contacts and existing customers. Our access to sources of equipment is based primarily on relationships that our management team has established over approximately the last eight years, both through their individual associations with the Company and through their other professional experiences. Since product availability is unpredictable, a strong base of vendor relationships is important to our success. We maintain ongoing contact through e-mail and telephone calls with our vendors to learn when products will become available. The average age of the products that we purchase is approximately 30 months. The average time between our purchase of an item and sale of that item is approximately 30 days. Although we assume inventory and price risk associated with selling these products, we believe our ability to sell our inventory quickly through our distribution channels justifies the risk. We typically purchase products in large quantities, and frequently make bulk purchases on an "as-is" basis, which can result in significantly lower acquisition cost, although these purchases are without warranties except as to title and quantity of equipment. Sometimes, a small part of a particular shipment may not meet our quality standards for products we offer. In those cases, we use the products as parts or seek to immediately sell these products in bulk through brokers, who in most cases sell the products internationally. There are no set formulas for determining the purchase prices we pay to our suppliers. The pricing is usually negotiated for each transaction based on the current market prices for similar equipment, the condition and location of the equipment and the cost and effort anticipated in packing and transporting the equipment to our facility. We provide a limited "DOA Warranty" in connection with some of our product sales. DOA means "Dead On Arrival" and is a commonly used term in the computer industry. If provided to our customer, this warranty applies to used computers, disk drives, CD drives or DVD drives that do not power-up when they are received or, in some cases, for a period of up to 60 days from receipt and provides that the covered equipment can be returned for a full refund or replacement product, if available. The decision whether to provide a refund or replacement product is generally at our option, but in limited circumstances, it may be at the customer's option. We analyze our estimated warranty costs and provide an allowance as necessary based on experience. At December 31, 2003 and 2002 warranty reserves were not considered necessary. HOW WE MARKET OUR PRODUCTS AND SERVICES Prior to joining WindsorTech in 2001, Messrs. Sherman, Cummings, Saracino and Sheerr were, at various times between 1994 and 2001, all employed by Intellesale, Inc., or one of its subsidiaries or its predecessor company. Intellesale was a company that purchased and sold large volumes of off-lease/off-finance excess, used, refurbished and "as-is" computer equipment and related products. It is no longer in business. Prior to and during the period of time during which Messrs. Sherman, Cummings, Saracino and Sheerr worked at Intellesale, they were involved in sale and remarketing of off-lease/off-finance excess, 8 used, refurbished and "as-is" computer equipment and related products, and the processing and remarketing of scrap metal and semi-precious materials. As a result of these experiences, they established over a period of many years a network of domestic and international buyers and brokers from whom they bought and to whom they sold products. Utilizing those contacts, they have enabled WindsorTech to establish a network of domestic and international buyers and brokers to whom we regularly e-mail our current inventory lists and call to offer our products and who regularly buy our products. We also sell over the Internet by posting "Want To Sell" or "WTS" offers through web portals or subscription services such as Powersource, the TBN Network and Exporters.com. Generally, within 1-3 hours of posting these WTS offers, we receive e-mail offers from interested parties to purchase product. Our domestic customers generally are manufacturer authorized warranty service providers to whom we sell all types of replacement parts including hard disk drives, CD Drives, DVD Drives, power supplies, mother boards and computer cases. Our international customers generally purchase lower-end whole systems and monitors for resale in third world countries, such as in Africa, and the brokers with whom we deal purchase everything from high to low-end monitors and systems and all sorts of parts. We market our AMG services via one-on-one contact with the appropriate individuals within a potential client corporation. We develop leads on potential client corporations through our memberships in professional equipment asset management associations, by attending industry conventions and by presenting the benefits of our AMG services at conventions. We presently have two employees who conduct our marketing efforts. While we do not focus on any particular industry, we concentrate on large corporations that tend to refresh, or replace, their installed desktop or notebook computers on a regular cycle. As part of our AMG services, we market our ability to ensure "End-of-Life Data Security". Privacy laws strictly govern consumer information that may be present on computer hard drives and other media removed from service. We advise clients and potential clients on the most appropriate methods to consider when destroying corporate data when they remove systems or media from service. We are paying particular attention to healthcare organizations, banks, insurance companies, brokerages, and other financial services companies that are impacted by these privacy laws. We receive referrals from existing clients, and we monitor financial and technical news sources for workforce reductions, plant closings, and technology upgrade announcements that may provide opportunities for us to present our AMG services. In April 2003, we created and filled a senior marketing position and we are in the process of expanding our sales and marketing team. We plan to hire 2 to 3 additional marketing personnel during 2004. HOW WE DETERMINE SELLING PRICES We determine our selling prices on the basis of current market conditions and the number of items we have on hand, as well as our target profit margins for various types of products. In setting the prices, we compare prices of similar new equipment, if any, as well as prices offered by our competitors for similar products over the Internet using sources such as on-line auction houses, on-line search engines such as Google, trade publications and in other published advertisements. Given the nature of our products and the rapid technological changes in the industry, we may have to reduce prices over time, and a portion of our inventory may have to be recycled or sold as scrap. However, we attempt to take these factors into account when we purchase equipment. 9 Customers place orders by telephone, fax or via e-mail. On accepted orders, a sales order and picking slips are generated and delivered to our warehouse for processing. The product is picked and appropriately packed with foam packing, bubble wrap or other packaging material, and then is shipped by United Parcel Services, Federal Express or common carrier. We generally ship products within 12 to 48 hours following receipt of the order. DEPENDENCE ON MAJOR CUSTOMERS We do not have any exclusive long-term arrangements with our customers for the continued sales of our product. We sell and deliver computer systems, peripheral devices and parts to more than 100 customers throughout the United States and on 5 continents worldwide. For the years ended December 31, 2003 and 2002, sales to our top ten customers comprised 51.5% and 55.0% of our revenue, respectively. In each of the periods referred to, Keystone Memory Group, a "related party" for accounting purposes, was one of our top ten customers. A significant portion of our revenues is also derived from export sales. For the years ended December 31, 2003 and 2002, primarily all of our sales of computer systems, peripheral devices and parts were to remarketers based in the United States or brokers based both in and out of the United States for whom we directly exported product. For the years ended December 31, 2003, and 2002, export sales comprised 31% and 28% of revenue, respectively. EMPLOYEES As of March 11, 2004, we employed 23 full-time and 7 part-time employees. We have no collective bargaining agreements and believe our relations with our employees are good. BACKLOG Customers typically do not place recurring "long-term" orders with us, resulting in a limited order backlog at any point in time. Our failure to receive orders from customers on a continuous basis would have a material adverse effect on our financial condition, results of operations and cash flows given our lack of recurring orders. COMPLIANCE WITH ENVIRONMENTAL REGULATIONS Federal, state, and local laws or regulations which have been enacted or adopted regulating the discharge of materials into the environment have not had, and under present conditions we do not foresee that they will have, a material adverse effect on our capital expenditures, earnings, cash flows or our competitive position. We will continue to monitor our operations with respect to potential environmental issues and costs, including changes in legally mandated standards. We recycle used equipment that may contain hazardous materials through Waste Management's Recycle America - Asset Recovery Group ("ARG") division. ARG, for a fee, manages commodities and materials for recycling in accordance with applicable local, state and federal laws, rules and regulations. Upon receipt of materials for recycling, ARG provides us with a Certification of Destruction that, in part, certifies that the materials were accepted for the purpose of recycling and/or destruction in accordance with all applicable standards including federal, state and local requirements. 10 ITEM 2. DESCRIPTION OF PROPERTY We lease approximately 38,000 square feet of general warehouse and office space in Hightstown, New Jersey pursuant to a five-year lease at a current annual rental of approximately $159,000, escalating each year. In addition to fixed rentals, the real property lease requires the Company to pay all maintenance, real estate taxes and insurance. This lease expires in September 2006. Rent expense and other charges totaled $192,305and $203,664 for the years ended December 31, 2003 and 2002, respectively. The approximate minimum payments required under the lease for the years 2004 - 2006 are as follows: Year Amount --------------------- ---------------------- 2004 163,000 2005 167,000 2006 128,000 --------------------- ---------------------- $ 458,000 ===================== ====================== This facility, with approximately 34,000 feet of warehouse space, is in good condition and ideally suited to our existing business and has adequate and sufficient capacity for our current and estimated future business needs. ITEM 3. LEGAL PROCEEDINGS The Company is party to legal proceedings arising in the ordinary course of business. In the opinion of management, these proceedings are not likely to have a material adverse affect on the financial position, results of operations or cash flows of the Company. The estimate of potential impact on the Company could change in the future. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On February 19, 2004, by Action of Consent of Majority Shareholders. David A. Loppert was removed from the Board of Directors. Thereafter, the Board of Directors removed Mr. Loppert as an officer of the Company. 11 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Our Common Stock is listed on the OTC Bulletin Board under the symbol "WSRT.OB." Our Common Stock became listed on October 24, 2003. During the fourth quarter of 2003, the bid price of our common stock, as reported by Reuters, has ranged from a high of $4.40 to a low of $1.90. The prices stated represent inter-dealer quotations, which do not include retail markups, markdowns or commissions. Such prices do not necessarily represent actual transactions. Holders As of March 11, 2004, there were approximately 3,354 holders of record of our Common Stock. Dividends We do not have a history of paying dividends on our Common Stock, and there can be no expectation that we will pay any dividends in the foreseeable future. We intend to use any earnings, which may be generated, to finance the growth of our businesses. Our Board of Directors has the right to authorize the issuance of preferred stock, without further shareholder approval, the holders of which may have preferences over the holders of the Common Stock as to payment of dividends. Securities authorized for issuance under equity compensation plans Set forth in the table below is information, as of December 31, 2003, regarding securities authorized for issuance under equity compensation plans:
Number of securities remaining available for Number of Securities to Weighted-average exercise future issuance under be issued upon exercise of price of outstanding equity compensation plans outstanding options, options, warrants and (excluding securities warrants and rights rights reflected in column (a)) Plan Category (a) (b) (c) ------------------------------- ---------------------------- ---------------------------- ---------------------------- Equity compensation plans approved by security holders 4,175,000 $1.314 2,286,417 Equity compensation plans not approved by security holders 1,350,000 $0.026 - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Total 5,525,000 $0.999 2,286,417 =============================== ============================ ============================ ============================
Equity Compensation Plan not Approved by Security Holders The material features of the plan are: Option Grant. In October 2001, in connection with their initial employment, WindsorTech, Inc. (New Jersey corporation) granted to Messrs. Cummings, Loppert, Saracino, Sherman and Sheerr and two other employees options to purchase an aggregate of 1,350,000 shares of its common stock at $0.026 per share, 12 exercisable at any time after October 1, 2001 and on or before December 31, 2010. The options granted were Non-Qualified Options and immediately vested. Death. If the option recipient dies, his personal representative and/or beneficiary will have the right (which must be exercised not later than the option expiration date) to exercise the options to the extent they were not exercised at the time of the recipient's death. Non-Transferability of Rights; Designation of Beneficiaries. Except as provided below, the options cannot not be transferred by the recipient other than by will or the laws of descent and distribution, and, during the lifetime of the recipient, the options can be exercised only by the recipient, except that, during his lifetime, the recipient may transfer the options for no consideration to members of his immediate family or a trust for the benefit of himself and/or members of his immediate family subject to all of the provisions applicable to the options prior to the transfer. Withholding The Company or any affiliate that employs the recipient has the right to deduct any sums that federal, state or local tax law requires to be withheld with respect to the exercise of the options or as otherwise may be required by such laws. The Company or any such affiliate may require, as a condition to issuing stock upon the exercise of the options, that the recipient or other person exercising the options pay a sum to cover any such taxes. In the alternative, the recipient or other person exercising the options may elect to pay such sums to the Company or the affiliate by delivering written notice of that election to the Company's corporate headquarters prior to or concurrently with exercise. There is no obligation that the recipient be advised of the existence of the tax or the amount that may be withheld. Changes in Capital Structure. If there is any change in the capital structure of the Company, or if there is be any dividend upon the stock of the Company payable in stock or any other dividend payable in stock, or of there is a stock split, spin-off, split-up, spin-out, recapitalization, merger, consolidation, reorganization, combination or exchange of shares, the maximum aggregate number of shares with respect to which the options may be exercised and the number and the option price of the shares of stock with respect to which the options were granted, will be proportionately adjusted by the Company if, and to the extent, necessary to prevent dilution or enlargement of the rights of the recipient. Recent Sales of Unregistered Securities The following table lists all unregistered securities sold/issued by us in the last three years pursuant to Item 701 of Regulation S-B. These shares were issued to the persons listed below in connection with (1) the formation of WindsorTech, (2) the Merger, (3) transaction fee in connection with the merger, (4) for services rendered to Delta, (5) in lieu of compensation and, unless otherwise indicated, were issued without registration in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, or (6) Private Placement Shares.
Number of Number of Common Name/Entity/Nature Date Issued Note Persons Issued For Shares ------------------ ----------- ---- ---------- ---------- ---------------- Edward L. Cummings Oct - 2001 1 1 Capital Contribution 5,000,000 David A. Loppert Oct - 2001 1 1 Capital Contribution 5,000,000 Carl C. Saracino Oct - 2001 1 1 Capital Contribution 5,000,000 Michael P. Sheerr Oct - 2001 1 1 Capital Contribution 5,000,000 Marc Sherman Oct - 2001 1 1 Capital Contribution 5,000,000 Edward L. Cummings Jan - 2002 2 1 Merger Consideration 1,800,000 13 Number of Number of Common Name/Entity/Nature Date Issued Note Persons Issued For Shares ------------------ ----------- ---- ---------- ---------- ---------------- David A. Loppert Jan - 2002 2 1 Merger Consideration 1,800,000 Carl C. Saracino Jan - 2002 2 1 Merger Consideration 1,800,000 Michael P. Sheerr Jan - 2002 2 1 Merger Consideration 1,800,000 Marc Sherman Jan - 2002 2 1 Merger Consideration 1,800,000 Leonard P. Stone Jan - 2002 3 1 Finders Fee 450,000 William J. Barbera Jan - 2002 3 1 Finders Fee 180,000 Frederic E. Smithline Jan - 2002 4 1 Services Rendered 600,000 Brian Cockerham Dec - 2002 5 1 Compensation 5,000 Edward L. Cummings Dec - 2002 5 1 Compensation 500,000 Erik Cummings Dec - 2002 5 1 Compensation 50,000 David Harris Dec - 2002 5 1 Compensation 150,000 Robert Jackson Dec - 2002 5 1 Compensation 150,000 David A. Loppert Dec - 2002 5 1 Compensation 500,000 Eleanor McDonald Dec - 2002 5 1 Compensation 5,000 Wayne Neuls Dec - 2002 5 1 Compensation 5,000 Lou Nuccio Dec - 2002 5 1 Compensation 50,000 Carl C. Saracino Dec - 2002 5 1 Compensation 500,000 Michael P. Sheerr Dec - 2002 5 1 Compensation 500,000 Marc Sherman Dec - 2002 5 1 Compensation 500,000 Stanley Adelman July - 03 6 1 Private Placement Shares 5,000 Harvey Albert July - 03 6 1 Private Placement Shares 15,000 Mike Belise & Linda A Gary July - 03 6 2 Private Placement Shares 71,429 Bismark Intervest, Inc. July - 03 6 1 Private Placement Shares 300,000 Edward L. Cummings July - 03 6 1 Private Placement Shares 61,200 John R. Doss July - 03 6 1 Private Placement Shares 300,000 Steven Gadon & Barbara Gadon July - 03 6 2 Private Placement Shares 85,000 Andrew L. Granat July - 03 6 1 Private Placement Shares 15,000 Alan J Haber July - 03 6 1 Private Placement Shares 3,000 Barry S. Hanburger July - 03 6 1 Private Placement Shares 2,500 Bernard & Carol Harris, JT TEN July - 03 6 2 Private Placement Shares 2,000 WROS John D. Wright, cust for July - 03 6 1 Private Placement Shares 1,000 Jonathan Martin Harris, Minor Rodney D. and Linda L. Johnson, July - 03 6 1 Private Placement Shares 2,000 JT TEN WROS Craig G. Langweiler July - 03 6 2 Private Placement Shares 10,000 Monte Lang & Lillian M Lang, JT July - 03 6 2 Private Placement Shares 30,000 TEN WROS Max & Delayne Loppert, JT TEN July - 03 6 1 Private Placement Shares 70,000 WROS Anne E.B. Loppert, Minor, David July - 03 6 1 Private Placement Shares 43,500 A. Loppert, Custodian Jeffrey E.B. Loppert, Minor, July - 03 6 1 Private Placement Shares 43,500 David A. Loppert, Custodian Martin Miller July - 03 6 1 Private Placement Shares 2,857 14 Number of Number of Common Name/Entity/Nature Date Issued Note Persons Issued For Shares ------------------ ----------- ---- ---------- ---------- ---------------- Robert & Penni Parker, JT TEN July - 03 6 2 Private Placement Shares 14,300 WROS RBC Dain Rauscher Custodian, July - 03 6 1 Private Placement Shares 20,000 FBO Harvey Albert IRA Lois G. Rosenberg July - 03 6 1 Private Placement Shares 500 Paul Rosen & Wendy Rosen July - 03 6 2 Private Placement Shares 85,000 Carl Saracino July - 03 6 1 Private Placement Shares 15,000 Philip & Lilyan Sherman, JT TEN July - 03 6 2 Private Placement Shares 20,000 WROS Michael P. Sheerr July - 03 6 1 Private Placement Shares 44,000 Alexandra J. Sherman, Minor, July - 03 6 1 Private Placement Shares 28,433 Marc Sherman Custodian Maximilian B. Sherman, Minor, July - 03 6 1 Private Placement Shares 28,433 Marc Sherman Custodian Zachary T. Sherman, Minor, Marc July - 03 6 1 Private Placement Shares 28,434 Sherman Custodian Jonathan E. Stoll July - 03 6 1 Private Placement Shares 2,500 Gail M. Thompson July - 03 6 1 Private Placement Shares 1,000 Jack B. Tull Sr. July - 03 6 1 Private Placement Shares 3,000 John D. & Dorothy J. Wright, JT July - 03 6 2 Private Placement Shares 1,000 TEN WROS Bismark Intervest, Inc. July - 03 7 1 Private Placement Shares 100,000 Edith Newman Revocable Trust July - 03 7 1 Private Placement Shares 20,000 Paul Lee Newman Roth IRA July - 03 7 1 Private Placement Shares 50,000 Paul Lee Newman July - 03 7 1 Private Placement Shares 30,000
--------------------------------- 1. Represents shares issued to the founders and initial shareholders of WindsorTech in exchange for a capital contribution of $50,000 paid by each in cash. At the time of issuance, WindsorTech was not a public reporting entity, and the shares were exempt from registration pursuant to Section 4(2) of the Securities Act. The certificates representing the shares were legended to indicate that they were restricted. These shares were exchanged for the Merger Consideration shares issued in January 2002 as discussed in note 2 below and were subsequently cancelled. 2. Represents shares issued in connection with the Merger in a transaction negotiated by the WTI shareholders in connection with the Merger, which Merger transaction was exempt from registration pursuant to Section 4(2) of the Securities Act. The Merger Agreement included an acknowledgment that the sale was not registered, that the WTI shareholders were acquiring the shares for investment and not for resale, and that such shareholder acknowledged that he must hold the shares until and unless registered or transferred in another transaction exempt from registration. In addition, certificates representing the shares were legended to indicate that they were restricted. The shares were issued in exchange for 5,000,000 shares from each of the stockholders of WindsorTech, Inc. (New Jersey corporation) as merger consideration. Each share was valued at $0.0278. 3. Represents shares, valued at $0.0278 per share, issued as a transaction fee in connection with the Merger, which transaction was exempt from registration pursuant to Section 4(2) of the Act. The certificates representing the shares were legended to indicate that they were restricted. Mr. Stone and Mr. Barbera introduced the WindsorTech shareholders to Alfred Morgan, the principal stockholder of Delta and received the shares as a finders fee for making such introduction. 4. Represents shares issued to for past legal services rendered to Delta in lieu of cash. The shares issued by Delta prior to the Merger were valued by Delta at $0.01 per share. The certificate representing the shares was legended to indicate 15 that they were restricted. 5. Represents shares issued in lieu of cash compensation. Each share was valued at $0.026. The certificates representing the shares were legended to indicate that they were restricted. The shares issued to each of Mr. Cummings, Loppert, Saracino, Sheerr and Sherman are reflected in the Summary Compensation Table in Part I, Item 6, under the "Bonus" column in 2002. 6. Represents shares issued in a Confidential Private Placement. The offering closed on July 18, 2003. 1,354,586 shares were sold at $.35 per share. Officers and directors (including their children) purchased 207,200 shares, or 15.3% of the total shares sold. 7. Represents shares issued in a Confidential Private Placement. The offering closed on September 2, 2003. The offering was for 20 units at a price of $10,000 per Unit. Each Unit consisted of (i) 10,000 shares of common stock and warrants to purchase 10,000 shares of common stock, exercisable for a period of three years at a price of $1.00 per share. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the accompanying financial statements and related notes in Item 7 of this report. Certain statements made in this report may contain forward-looking statements. For a description of risks and uncertainties relating to such forward-looking statements, see the Factors Affecting Future Operation Results section later in this Item 6. OVERVIEW We operate in a highly competitive industry, which in turn places pressures on maintaining gross profit margins. Many of our product sales are of large quantities of low value used personal computers, or of component parts that are use in personal computers, such as hard disk drives, CD drives, DVD drives, memory, and system boards, some of which produce lower than average gross profit margins. To overcome those lower margins, we established an Asset Management Group ("AMG") in the 4th quarter of 2002 to provide complete computer asset management services to leasing companies and major corporations that are expected to yield higher than average gross profit margins, as we attract new AMG clients. We had virtually no revenue from AMG clients in 2002 and very low expenses. We incurred direct AMG expenses in the first half of 2003 as we started hiring and training employees. In December 2003, we started generating continuing revenue from our AMG clients and anticipate rapid growth during 2004. [Remainder of page intentionally left blank] 16 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated below, the relationships to total revenue of line items in our statements of operations for the years ended December 31, 2003 and 2002. Year Ended Year Ended ------------------------------------ December 31, December 31, 2003 2002 ------------------------------------ % % Revenue 100.0 100.0 Cost of sales 73.4 86.5 ------------------------------------ Gross profit 26.6 13.5 Selling, general and administrative expenses 26.6 23.1 Depreciation and amortization 1.0 0.3 Interest expense 1.0 0.9 ------------------------------------ Income (loss) before provision (benefit) (2.0) (10.8) for income taxes Provision (benefit) for income taxes -- (1.9) ------------------------------------ Net income (loss) (2.0) (8.9) ==================================== Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenue for the year ended December 31, 2003 was $7,484,472 compared to revenue of $6,543,147 for the year ended December 31, 2002, a $941,324 increase, or 14.4%. Revenues increased because we were able to find new sources of product, which made more products available for sale and we increased our sales staff to help increase our market penetration. In December 2003, we started generating continuing revenue from our AMG clients and anticipate rapid growth during 2004.
Our revenue by geographic segment is as follows: ---------------------- ---------- ---------- ---------- -------- ---------- ---------- Years Ended December 31, 2003 % 2002 % Change % Change United States $5,198,400 70% $4,716,122 72% $ 482,278 10% Asia 817,707 11% 1,320,633 20% (502,926) (38)% Europe 349,715 5% -- -- 349,715 100% Africa 703,073 9% 334,016 5% 369,057 111% United Kingdom 155,834 2% 118,228 2% 37,606 32% Canada 223,458 3% 64,148 1% 159,310 248% Australia 24,500 -- -- 24,500 100% South America 11,785 -- -- 11,785 100% ---------------------- ---------- ---------- ---------- -------- ---------- ---------- Total $7,484,472 100% $6,543,147 100% $ 941,325 14% ====================== ========== ========== ========== ======== ========== ==========
Gross profit for the year ended December 31, 2003 was $1,992,411 compared to a gross profit of $883,701 for the year ended December 31, 2002, a $1,108,710 increase, or 125.5%. Gross margin was 26.6% for the year ended December 31, 2003 compared to 13.5% for the year ended December 31, 2002. Gross profit increased because of increased revenues and increased gross margins. Gross margin for 2003 increased because of our ability to acquire product at more favorable prices 17 and our shift from selling complete systems to selling parts, where the margins are better. In 2004, we expect that US corporations will most likely continue to implement the conversions to new operating systems that began in the second half of 2003. This necessitates the replacement of PC computer equipment, resulting in a potential greater source of used computer equipment becoming available for resale. These expectations are supported by recent Gartner Dataquest reports. In February 2004 Gartner reported, "Strong PC market growth outside the United States, coupled with an improving economy has caused us to boost our near-term PC market forecast." Gartner reported PC Unit shipment grew 10.8% in 2003 and projects it will grow 12.8% in 2004. According to a revised report published in December 2003 by International Data Corporation ("IDC"), a market research firm, and a unit of International Data Group, worldwide new PC shipments in 2004 are expected to increase by 11.4% to 169.9 million units. Selling, general and administrative expenses for the year ended December 31, 2003, were $1,988,091 compared to selling, general and administrative expenses of $1,509,339 for the year ended December 31, 2002, a $478,752 increase, or 31.7%. Selling, general and administrative expense increased as the Company added infrastructure and hired an additional full time sales employee in 2003, a full year of employee benefit programs that were added in 2002, increased directors and officers liability insurance coverage, and annual salary increases. Depreciation and amortization for the year ended December 31, 2003, was $71,973 compared to depreciation and amortization of $20,621 for the year ended December 31, 2002, a $51,352 increase, or 249.0%, as a result of one full year of depreciation for fixed asset acquisitions and leasehold improvements that occurred throughout 2002. Interest expense for the year ended December 31, 2003, was $79,656 compared to interest expense of $59,052 for the year ended December 31, 2002, a $20,604 increase, or 34.9%, commensurate with the increase in the Company's borrowings. The Company recognized a deferred tax benefit during 2002 by decreasing its deferred tax asset valuation allowance as it anticipates that such benefit is more likely than not to be realized. During 2003, the Company did not recognize a deferred tax benefit as it increased its deferred tax asset valuation allowance. Geographic Areas We operate solely in the United States and have no assets in foreign countries. However, we sell to customers in foreign countries. For the years ended December 31, 2003 and 2002, export sales comprised approximately 31% and 28% of revenue, respectively. All of our purchases and sales are denominated in US dollars, and we recorded no foreign currency transaction gains or losses during any period. Liquidity and Capital Resources Our current ratios at December 31, 2003 and December 31, 2002 were 1.3 and 0.8, respectively. Working capital at December 31, 2003 was $236,892 compared to a negative ($147,756) at December 31, 2002. Working capital increased primarily from the proceeds received from the issuance of common stock and warrants. This amount was reduced by financing the operations of the company and by the repayment of net amounts due officers for loans and payroll. Net cash provided by operating activities for the year ended December 31, 2003 was $185,700 compared to $515,162 of cash used for the year ended December 31, 2002. Cash provided by operating activities for the year ended December 31, 2003 was primarily a result of an increase in accounts payable and accrued expenses, depreciation, and stock warrants issued for services, offset by an increase in accounts receivable and the net loss. Cash used in operations in the period ended December 31, 2002 18 was primarily from the net loss, an increase in inventory, prepaid expenses and deferred taxes, offset by depreciation and a decrease in accounts receivable, and an increase in accounts payable and accrued expenses, deferred interest and stock issued for services. Net cash used in investing activities for the years ended December 31, 2003 and 2002 was $112,358 and $164,024, respectively. For the year ended December 31, 2003, cash was used to purchase equipment, computer software and to apply for the EraseYourHardDrive.com patent. For the year ended December 31, 2002, cash was used to purchase property, equipment, computer software and fund leasehold improvements Net cash provided by financing activities for the year ended December 31, 2003 was $142,430 and was provided for by the sale of common stock and warrants and reduced by payments on notes payable and principal reductions on capital lease obligations. Net cash provided by financing activities for the year ended December 31, 2003 was $640,967, and was provided by loans from officers offset by principal payments on capital leases. We believe that cash generated from operations, together with our available cash resources, will be sufficient to meet our cash requirements for at least the next 12 months. However, we may need to raise additional funds to finance unanticipated working capital requirements or to acquire complementary businesses although we have not identified any specific acquisition candidates. Since the last quarter of 2001, there has been a general downward trend of IT spending in the US and the rest of the world. These less robust machines are not capable of supporting the newest operating systems. That fact, when coupled with the termination of manufacturer's support for widely used operating systems, such as Microsoft's Windows 95 and Windows 98 (in accordance with Microsoft's Life Cycle Support Policy), leads us to believe that end-users will be forced to upgrade their PC's in order to have fully functioning PC's and manufacturer supported operating systems. In 2004, we expect that US corporations will most likely continue to implement the conversions to new operating systems begun in the second half of 2003, including the replacement of PC computer equipment, resulting in an anticipated greater source of used computer equipment becoming available for resale. In February 2004 Gartner reported, "Strong PC market growth outside the United States, coupled with an improving economy has caused us to boost our near-term PC market forecast." Gartner reported PC Unit shipment grew 10.8% in 2003 and projects it will grow 12.8% in 2004. According to a revised report published in December 2003 by International Data Corporation ("IDC"), a market research firm, and a unit of International Data Group, worldwide new PC shipments in 2004 are expected to increase by 11.4% to 169.9 million units. We do not have any material commitments for capital expenditures nor do we expect to incur any material commitments for capital expenses during 2004. We did not have any significant elements of income or loss not arising from continuing operations in 2003 or 2002 and do not expect any in 2004. While our business is marginally seasonal, we do not expect this seasonality to have a material adverse affect on our results of operations or cash flows. Off-Balance Sheet Arrangements The company does not have any off-balance sheet arrangements. FACTORS AFFECTING FUTURE OPERATING RESULTS In addition to the other information contained herein, the following factors should be considered in evaluating our Company and our business. These risks and uncertainties include, but are not limited to those set forth herein, and from time to time in our other filings with the Securities and Exchange 19 Commission, all of which are incorporated herein by reference. Uncertainty Of Future Financial Results We are a relatively newly formed business, having commenced operations in October 2001. We have only had three profitable quarters, the quarter ended June 30, 2002, the quarter ended June 30, 2003 and the quarter ended December 31, 2003, since we commenced operations. At December 31, 2003, we had Stockholders' Equity of $174,019. Our future financial results are uncertain. There can be no assurance that we will continue to achieve profitability, and we may incur losses in the foreseeable future. Achieving and sustaining profitability depends upon many factors, including our ability to raise capital when needed, the success of our various marketing programs, and the maintenance or reduction of expense levels. Fluctuations In Future Quarterly Results We have been in business since October 2001 and have only nine quarters of historic quarterly operating results, only three of which have been profitable. Due to the uncertainty of future operating results, we may experience quarterly fluctuations in the future. Quarterly operating results may fluctuate as a result of a variety of factors, including the timing of our delivery of significant orders; the ability of manufacturers to deliver, in a timely fashion, products for which we have received orders; the length of the sales cycle; receipt of volume discounts; the demand for products and services we offer; the introduction or announcements by computer manufacturers relating to the remarketing of new and used equipment; the hiring and training of additional personnel; as well as general business conditions. We expect that the size and timing of our sales transactions may vary substantially from quarter to quarter, and we expect such variations to continue in future periods, including the possibility of losses in one or more fiscal quarters. These fluctuations may be caused by delays in shipping certain computer systems for which we receive orders that we expect to deliver during that quarter. In addition, our collection periods may fluctuate due to periodic shortages of goods available for shipment, which may result in the delay of payment from customers who will not pay until their entire order is shipped. Accordingly, it is likely that in one or more future fiscal quarters, our operating results could be below investors' expectations and, as a result, any future public offering of shares of our Common Stock could be materially adversely affected. We Have Limited Principal Markets And Customers; We Have Significant Dependence On Major Customers; There Is A Risk Of Industry Concentration We operate solely in the United States and have no assets in foreign countries. We sell and deliver computer systems, peripheral devices and parts to more than 100 customers throughout the United States and on 5 continents worldwide. For the years ended December 31, 2003, our top ten customers accounted for approximately 51% and 55% of our total revenues, respectively. In each of the periods referred to, one of those customers was Keystone Memory Group, a "related party" for accounting purposes. We do not have any exclusive long-term arrangements with our customers for the continued sales of our product. Our failure to acquire additional significant or principal customers or to maintain our relationships with our existing principal customers could have a material adverse effect on our results of operations and cash flows. 20 For the years ended December 31, 2003 and 2002, primarily all of our sales of computer systems, peripherals and parts were to remarketers based in the United States or brokers based both in and out of the United States for whom we directly exported product. For the years ended December 31, 2003 and 2002, export sales comprised 31% and 28% of revenue, respectively. All of our purchases and sales are denominated in US dollars and we recorded no foreign currency transaction gains or losses during any period. Although we are striving to broaden our market focus to include sales to other markets, such as financial services, in the immediate future we expect that we will continue to derive a substantial percentage of our sales of product to such brokers and remarketers. Accordingly, unfavorable economic conditions or factors that relate to these industries, particularly any such conditions that might result in reductions in capital expenditures or changes in such companies' information processing system requirements, could have a material adverse effect on our results of operations. We Have No Significant Operating History For The AMG We established our AMG in the fourth quarter of 2002 and are in the process of hiring and training personnel to operate this group. At this time we do not have any significant AMG clients, and there can be no assurance that we will be successful in attracting or retaining the client base we need to achieve profitability for the AMG. We Rely On Merchandise Vendors As Sources For Our Products The availability of off-lease and excess inventory computer equipment is unpredictable. We have no long-term arrangements with our vendors that assure the availability of equipment. We purchase equipment from more than 25 different vendors, and we have no formal commitments with or from any of them. We cannot assure you that our current vendors will continue to sell equipment to us as they have in the past, or that we will be able to establish new vendor relationships that ensure equipment will be available to us in sufficient quantities and at favorable prices. If we are unable to obtain sufficient quantities of equipment at favorable prices, our business will be adversely affected. In addition, we may become obligated to deliver specified types of computer equipment in a short time period and, in some cases, at specified prices. Because we have no formal relationships with vendors, we may not be able to obtain the required equipment in sufficient quantities in a timely manner, which could adversely affect our ability to fulfill these obligations. In the past, we purchased a majority of our products from a small number of suppliers. For the year ended December 31, 2002, we purchased approximately 64% of our products from two vendors - 45% from IBM Credit Corporation and 19% from Redemtech, Inc. As we have established our relationships with other vendors, we have reduced our reliance on purchases from IBM and Redemtech. For the year ended December 31, 2003, we purchased approximately 30% of our products from two vendors - 19% from IBM Credit Corporation and 11% from Qualtech International Corp. Products purchased from Redemtech, Inc. amounted to less than 1% of purchases made during 2003. There can be no assurance, however, that any of these vendors will continue to do business with us. The loss of these vendors would significantly impact our ability to offer products for sale. We Are Subject To Risks That Our Inventory May Decline In Value Before We Sell It Or That We May Not Be Able To Sell The Inventory At The Prices We Anticipate We purchase and warehouse inventory, most of which is "as-is" or excess inventory of personal computer equipment. As a result, we assume inventory risks and price erosion risks for these products. 21 These risks are especially significant because personal computer equipment generally is characterized by rapid technological change and obsolescence. These changes affect the market for refurbished or excess inventory equipment. Our success will depend on our ability to purchase inventory at attractive prices relative to its resale value and our ability to turn our inventory rapidly through sales. If we pay too much or hold inventory too long, we may be forced to sell our inventory at a discount or at a loss or write down its value, and our business could be materially adversely affected. Declining Prices For New Computer Equipment Could Reduce Demand For Our Products The cost of new computer equipment, particularly personal computers, has declined dramatically in recent years. As the price of new computer products declines, consumers may be less likely to purchase refurbished computer equipment unless there is a substantial discount to the price of the new equipment. Accordingly, if we were to sell "as-is" or refurbished equipment directly to end users, we would have to offer the products at a substantial discount to the price of new products. As prices of new products continue to decrease, our revenue, profit margins and earnings could be adversely affected. There can be no assurance that we will be able to maintain a sufficient pricing differential between new products and our "as-is" or refurbished products to avoid adversely affecting our revenues, profit margins and earnings. If We Need Additional Financing For Unanticipated Working Capital Needs Or To Finance Acquisitions, We May Not Be Able To Obtain Such Capital, Which Could Adversely Affect Our Ability To Achieve Our Business Objectives We believe that cash generated from operations, together with other available cash resources, will be sufficient to meet our cash requirements for at least the next 12 months. However, we may need to raise additional funds to finance unanticipated working capital requirements or acquire complementary businesses, although we have not identified any specific acquisition candidates. We do not yet have lending commitments from banks or other third parties and, until and unless we arrange for such commitments, we will rely on advances or investments from our principal stockholders and officers. While they have made significant loans and advances in the past, they have no obligation to advance funds to us, or invest funds in us, even if they may be willing to do so. We cannot assure you that additional financing will be available on favorable terms or at all. If funds are not available when required for our working capital needs or other transactions, our ability to carry out our business plan could be adversely affected, and we may be required to scale back our growth and operations to reflect the extent of available funding. If we are able to arrange for credit facilities or investments from other lenders or investors, the debt or equity instruments will probably include limitations on our ability to incur other indebtedness, pay dividends, create liens, sell or purchase our capital stock, sell assets or make acquisitions or enter into other transactions. Such restrictions may adversely affect our ability to finance our future operations or capital needs or to engage in other business activities. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced. These securities may have rights, preferences or privileges senior to those of our common stockholders. We Rely On Our Principal Stockholders/Executive Officers for Funding On April 24, 2002, the Company entered into a secured loan agreement with its principal stockholders. The agreement was amended on September 30, 2002 and on February 28, 2003 to extend 22 the maturity date. The loans are secured by substantially all of the assets of the Company. Each principal stockholder loaned the Company $110,000 (for an aggregate of $550,000). The loans bear interest at the rate of 12% per annum with interest only payments payable monthly in arrears. All principal and accrued interest is due and payable on January 31, 2005. If funds are not available when the loans become due, our ability to carry out our business plan could be adversely affected, and we may be required to scale back our growth and operations, or liquidate the assets of the business to satisfy the loans. If We Experience Problems In Our Distribution Operations, We Could Lose Customers In addition to product vendors, we depend on several other third parties over whom we have limited control, including, in particular, Federal Express, United Parcel Service and common carriers for delivery of products to and from our distribution facility and to our customers. We have no long-term relationships with any of those parties. We are therefore subject to risks, including risks of employee strikes and inclement weather, which could result in failures by such carriers to deliver products to our customers in a timely manner, which could damage our reputation and name. The Industry In Which We Compete In Is Highly Competitive We face intense competition in each area of our business, and many of our competitors have greater resources and a more established market position than we have. Our primary competitors include: o major manufacturers of computer equipment such as, Dell Computer Corporation, Hewlett Packard and IBM, each of which offer "as-is", refurbished and new equipment through their websites and direct e-mail broadcast campaigns; o privately and publicly owned businesses such as Redemtech, Solectron and Spacefitters that offer asset management and end-of-life product refurbishment and remarketing services; o traditional store-based computer retailers, such as Best Buy Co., Inc., Circuit City Stores, Inc., CompUSA and Gateway Country; and o online competitors and auction sites, such as e-Bay Many traditional store-based and online competitors have longer operating histories, larger customer or user bases, greater brand name recognition and significantly greater financial, marketing and other resources than we do. Many of these competitors already have an established brand name and can devote substantially more resources to increasing brand name recognition and product acquisition than we can. In addition, larger, well-established and well-financed entities may join with online competitors or computer manufacturers or suppliers as the use of the Internet and other online services increases. Our competitors may be able to secure products from vendors on more favorable terms, fulfill customer orders more efficiently or adopt more aggressive price or inventory availability policies than we can. Traditional store-based retailers also enable customers to see and test products in a manner that is not possible in the wholesale business. Our product offerings must compete with other new computer equipment and related products offered by our competitors. That competition will intensify if prices for new computers continue to decrease. No Dividends On Common Stock; Issuance Of Preferred Stock We do not have a history of paying dividends on our Common Stock, and there can be no assurance that dividends will be paid in the foreseeable future. We intend to use any earnings, which 23 may be generated to finance the growth of our businesses. Our Board of Directors has the right to authorize the issuance of preferred stock, without further shareholder approval, the holders of which may have preferences over the holders of the Common Stock as to payment of dividends. Lack Of Trading and Liquidity of Our Common Stock Our Common Stock is listed on the Over the Counter Bulletin Board ("OTCBB") under the symbol "WSRT.OB". Trading commenced on October 24, 2003 and there has been limited market activity. Prior to October 24, 2003 there was no public market for our Common Stock. Dependence On Key Individuals Our future success is highly dependent upon our ability to attract and retain qualified key employees. We are organized with a small senior management team. If we were to lose the services of the following members of our management team, our overall operations could be adversely affected. We consider our key individuals to be: Name Position ------------------------------------ ------------------------------------------- Marc Sherman ...................... Chairman, President and Chief Executive Officer, Director Edward L. Cummings.................. Vice President, CFO, Treasurer, Director David M. Harris..................... Vice President, Information Technology and Systems Control By Principal Stockholders As a result of the completion of the Merger, Edward L. Cummings, David A. Loppert, Carl C. Saracino, Michael P. Sheerr and Marc Sherman, who are all executive officers of the Company (except for Mr. Loppert who was removed as an officer on February 19, 2004), beneficially own approximately 75% of our outstanding Common Stock. Messrs. Cummings, Loppert, Saracino, Sheerr and Sherman, collectively have effective control of the Company and the power to control the outcome of matters submitted to a vote of the stockholders, such as the election of at least a majority of the members of our Board of Directors and to direct the future operations of the Company. Such concentration may have the effect of discouraging, delaying or preventing a future change in control of the Company. Anti-Takeover Provisions Certain provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-laws and Delaware law may be deemed to have an anti-takeover effect. Our certificate of incorporation provides that our Board of Directors may issue additional shares of Common Stock or establish one or more classes or series of Preferred Stock with such designations, relative voting rights, dividend rates, liquidation and other rights, preferences and limitations that the Board of Directors fixes without stockholder approval. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Each of the foregoing provisions may have the effect of rendering more difficult, delaying, discouraging, preventing or rendering more costly an acquisition of the Company or a change in control of the Company. CRITICAL ACCOUNTING POLICIES 24 Management is responsible for the integrity of the financial information presented herein. The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Where necessary, they reflect estimates based on management's judgment. When selecting or evaluating accounting alternatives, management focuses on those that produce from among the available alternatives information most useful for decision-making. Significant accounting policies that are important to the portrayal of the Company's financial condition and results, which in some cases require management's judgment, are summarized in the Notes to Financial Statements which are included herein in Item 7. The Company believes that the critical accounting policies discussed below involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset, liability, revenue and expense amounts. The Company recognizes revenue when it is realized or realizable and earned. The Company provides a limited "DOA Warranty" in connection with some of our product sales. DOA means "Dead On Arrival" and is a commonly used term in the computer industry. If provided to our customer, this warranty applies to used computers, disk drives, CD drives or DVD drives that do not power-up when they are received or, in some cases, for a period of up to 60 days from receipt and provides that the covered equipment can be returned for a full refund or replacement product, if available. The decision whether to provide a refund or replacement product is generally at our option, but in limited circumstances, it may be at the customer's option. Based on an internal study by management, we determined that less that 5% of the Company's sales are covered under this warranty and, of those sales, less than 10% are returned to the Company. If the equipment sold does not power-up, the Company has alternative methods to sell this equipment, by tearing it down and selling the working components as parts and the non-working components to metal recyclers. The alternative sales methods are rarely below the original cost of the equipment. The Company has not had any significant differences for the years ended December 31, 2003 and 2002. Therefore, no warranty reserve has been recorded. Should a reserve be recorded, it would increase both cost of sales and accrued expenses. The Company provides estimated inventory allowances for excess, slow-moving and obsolete inventory as well as for inventory whose carrying value is in excess of net realizable value. These reserves are based on current assessments about future demands, market conditions and related management initiatives. Management continually monitors its inventory valuation, and makes an assessment of its inventory allowance on a monthly basis. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required, which would be a decrease to our inventory balance and an increase to cost of sales. The Company evaluates the realizability of its deferred tax assets on an ongoing basis by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. In the determination of the valuation allowance, the Company has considered future taxable income and the feasibility of tax planning initiatives. Should the Company determine that it is more likely than not that it will realize certain of its deferred tax assets in the future, an adjustment would be required to reduce the existing valuation allowance and reduce tax expense. On the contrary, if the Company determined that it would not be able to realize a deferred tax asset created by net operating losses and other timing differences between the book and tax methods of accounting, an adjustment to increase the valuation allowance would be charged to income tax expense in the period such conclusion was made. Currently, the Company has provided for a valuation allowance. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. Although the Company is not currently being audited by any taxing authority, there is the possibility of future audits, whose resolution could have an adverse impact of the results of operations and cash flows of the Company. 25 The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Had the Company elected to account for stock-based employee compensation arrangements in accordance with SFAS No. 123 as an alternative to APB Opinion No. 25, additional expense would have been recognized in the statement of operations. For options issued to non-employees, the Company applies SFAS No. 123. Expense is recognized using the Black -Scholes option pricing model, which contains estimates on the volatility of the stock price, the risk free interest rate, and the expected life of the options granted. The Company bases its estimates on the best available information. Increases in estimated volatility, expected life, and the risk free interest rate would all increase the amount of expense recognized in the Statement of Operations. Impact Of Recently Issued Accounting Standards In May 2001, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. The Company adopted this statement in 2002, which had no impact on the Company's financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 changes the timing of when certain costs associated with restructuring activities may be recognized. SFAS No. 146 is effective for exit or disposal activities, initiated after December 31, 2002. The Company adopted SFAS No. 146 in 2003, which had no impact on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment to SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Disclosures required by this standard are included in the notes to these financial statements. The transition provisions of this statement apply upon the adoption of the SFAS No. 123 fair value based method. The Company did not change its method of accounting for employee stock-based compensation from the intrinsic method to the fair value based alternative. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No.150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The Company adopted the provisions of SFAS No. 150 effective July 1, 2003, which had no impact on the Company's financial position or results of operations. In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantor's Accounting and 26 Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company adopted this interpretation in 2003, which had no impact on the Company's financial position or results of operations. In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The Company believes that the adoption of this standard will have no impact on its financial position or results of operations. ITEM 7. FINANCIAL STATEMENTS Our financial statements included in this Annual Report on Form 10-KSB are listed in Item 13 and begin immediately after Item 14 on pages F-1 through F-22. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 8A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES It is the Chief Executive Officer's and the Chief Financial Officer's responsibility to ensure that we maintain disclosure controls and procedures designed to provide reasonable assurance that material information, both financial and non-financial, and other information required under the securities laws to be disclosed is identified and communicated to senior management on a timely basis. Our disclosure controls and procedures include mandatory communication of material events, automated accounting processing and reporting, management review of monthly results and an established system of internal controls. As of December 31, 2003, management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded the disclosure controls and procedures currently in place are adequate to ensure material information and other information requiring disclosure 27 are identified and communicated in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation Part III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT AS of March 25, 2004, Our Directors and Executive Officers are: Name Age Position --------------------------------- ---- ----------------------------------------- Marc Sherman 40 Chairman, President and Chief Executive Officer, Director R. Keith Elliott................ 60 Director Seth A. Grossman................ 38 Director Edward L. Cummings.............. 55 Vice President, Chief Financial Officer, Treasurer Carl C. Saracino................ 34 Vice President, Operations Michael P. Sheerr............... 47 Vice President, Sales Robert D. Jackson............... 37 Vice President, Investor Relations David Harris .................. 41 Vice President, Information Technology and Systems Following the Merger, Alfred D. Morgan, Saul Horing, Robert Maerz and Larry Neuman, who had served as officers and directors of Delta prior to the Merger resigned those positions. Marc Sherman, David A. Loppert, Andrew Paciocco and Constance K. Weaver were appointed to fill the vacancies. In August 2002, Constance K. Weaver resigned form the Board and in January 2003 R. Keith Elliott was appointed to the Board to fill the vacancy. Andrew Paciocco resigned from the Board of Directors in May 2003. His vacancy has not been filled. Marc Sherman founded WindsorTech, Inc. in August 2001 and has served as Chairman, President and Chief Executive Officer since then. His term of office expires at the 2004 annual meeting and he has indicated he is available for reelection. Mr. Sherman served as a director of and Chief Executive Officer of Intellesale, Inc. (and its predecessor, Universal Commodities Corp.), from December 1994 to July 2001, a company that purchased and sold large volumes of off-lease/off finance excess, used, refurbished and "as-is" computer equipment and related products and which provided technology asset management to companies wishing to maximize the value of their computer equipment coming to the end of its useful or book lives. Prior to 1994, Mr. Sherman served in key positions in various family businesses. Mr. Sherman has over fifteen years of experience in marketing, operations and executive management. Mr. Sherman is the brother-in-law of Mr. Sheerr. R. Keith Elliott was appointed to the board of directors in January 2003 to fill a vacancy. His term of office expires at the 2004 annual meeting and he has indicated he is available for reelection. Mr. Elliott is the retired chairman and chief executive officer of Hercules, Inc. He had been elected chairman and chief executive officer of Hercules, Inc. in 1997. From 1991 to April 2000, he served Hercules, Inc. as Senior Vice President and Chief Financial Officer; Executive Vice President and Chief Financial Officer; President and Chief Operating Officer; President and Chief Executive Officer; and Chairman of the Board of Directors. Hercules, Inc. is a multi-national specialty chemical manufacturer serving the paper, water, construction, pharmaceutical, food, consumer non-durable and adhesive markets and industries. Mr. Elliott is a member of the Board of Directors of Checkpoint Systems, Inc., a multi-national manufacturer of electronic labeling systems used in the retail industry to identify products and reduce theft, Sithe Energies Company, which develops peaking power plants based on gas, oil and coal fuels, 28 Wilmington Trust Company, which provides customized financial alternatives for wealth advisory clients, corporate clients, and regional banking clients, Computer Task Group, an information technology staffing and solutions company, and the Institute for Defense Analyses, a federally funded research and development company. He also serves as a member of the National Advisory Board for the University of South Carolina. Mr. Elliott serves as Chairman of the Audit Committee and is a member of the Compensation Committee of the Board of Directors. The Board of Directors has determined that Mr. Elliott is an Audit Committee Financial Expert, as that term is defined in the rules issued pursuant to the Sarbanes-Oxley Act of 2002. This designation does not impose any duties, obligations or liabilities that are greater than the duties, obligations and liabilities imposed by being a member of the audit committee or board of directors. The Board of Directors has also determined that Mr. Elliott is independent, as that term is defined under the enhanced independence standards for audit committee members in the Securities Exchange Act of 1934 and rules thereunder. Seth A. Grossman joined the Board of Directors in November 2003. His term of office expires at the 2004 annual meeting and he has indicated that he is available for reelection. Mr. Grossman is the Executive Vice President and Chief Strategic Officer of Paxson Communications Corporation (AMEX:PAX). He joined Paxson Communications in 1995 as its Director of Finance, before assuming additional responsibilities as SVP of Investor Relations and Corporate Development and then Chief Financial Officer. Prior to his tenure at Paxson, Mr. Grossman was a Senior Associate with Houlihan, Lokey, Howard & Zukin, a specialty investment bank in New York where he concentrated on corporate finance, valuation advisory and restructuring. Mr. Grossman was also a partner with McFerren Holding Co., a Central and Eastern European privatization consulting firm. Mr. Grossman holds a BBA with distinction from the University of Michigan and an MBA from the Harvard Graduate School of Business Administration. He currently sits on the Board of the Enterprise Development Corporation of South Florida, a not-for-profit technology enterprise development concern. Mr. Grossman sits on the Audit and Compensation Committees of the Board of Directors of the Company. Edward L. Cummings co-founded WindsorTech and has served as its Vice President, Chief Financial Officer and Treasurer since inception. Mr. Cummings joined the Board of Directors of the Company in February 2004 to fill vacancy. He served as Executive Vice President, Chief Financial Officer and Secretary of Intellesale, Inc. from July 1999 to February 2001. He joined its predecessor company Universal Commodities Corp. in October 1995 as controller and was elected to the board of directors in January 1997. From September 1994 to October 1995 he owned TCC, Inc., an operator of several retail gift shops. From December 1981 to September 1994 he was Chief Financial Officer and Treasurer of Albert E. Price, Inc., a giftware import and export company. Carl C. Saracino co-founded WindsorTech and has served as its Vice President, Operations since inception. He served as Vice President, Operations of Intellesale, Inc. from July 1999 to June 2001. He joined its predecessor company Universal Commodities Corp. in October 1995 as operations manager. Prior thereto, he served as assistant to Mr. Sherman in several of Mr. Sherman's businesses. Michael P. Sheerr joined WindsorTech in September 2001 as Vice President. He served as Vice President of Cybertech, Inc., a company engaged in remarketing computer memory, from January 2001 to September 2001. From September 1997 to January 2001 he was Vice President of Garden State Metals, a metal trading company. From October 1992 to September 1997 he owned Consolidated Metal Trading, a metal trading company. From 1984 to October 1992 he was Vice President and owner of Pennmetal, Inc., a metal trading company. Mr. Sheerr is the brother-in-law of Mr. Sherman. Robert D. Jackson joined WindsorTech in April 2002 as Vice President, Investor Relations. 29 From December 1999 to August 2001, Mr. Jackson served as Vice President, Investor Relations for Applied Digital Solutions, an advanced technology development company. Prior to that Mr. Jackson served on the management team at Janus mutual funds in Denver, Colorado. From February 1997 to January 1999, Mr. Jackson was President and CEO of R.D. Jackson & Associates, Inc., an investment banking and investor relations consulting firm which he founded. David M. Harris joined WindsorTech in May 2002 as Vice President, Information Technology and Systems. Mr. Harris is responsible for the development, implementation and maintenance of the Company's information technology systems and processes. Prior to joining the Company, Mr. Harris was, from October 2001 to May 2002 a private consultant and, from April 1998 to October 2001, Network and Systems Administrator for Intellesale, Inc. Prior thereto, from 1984 to 1998 he has held various positions as Network and Systems Administrator and Programmer for various companies. None of the Directors or Executive Officers of the Company: o have filed a bankruptcy petition or served as a general partner or an executive officer of any entity that has filed or had filed against it a bankruptcy petition; o have been convicted in a criminal proceeding or is the subject of a pending criminal proceeding; o are subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoined, barred or suspended or otherwise limited in their involvement in any type of business, securities or banking activities; or o have been found by a court of competent jurisdiction in a civil action, the Commission or the Commodity Futures Trading Commission to have violated federal or state securities or commodities law and the judgment has not been reversed, suspended or vacated. Code of Ethics for Staff Members and Directors The Company has adopted a Code of Ethics for Staff Members and Directors, which applies to all employees, including our Chief Executive and Chief Financial Officers. The Code is available on the "Investor Relations" portion of our web site at www.windsortechinc.com. Compliance with Section 16(a) of the Exchange Act The following directors, officers and beneficial owners of more that 10% of the common stock of the company failed to timely file Form 4 as required: Marc Sherman failed to file Form 4 upon acquiring 1,000,000 options. He has since filed such report. Edward L. Cummings failed to file Form 4 upon acquiring 250,000 options. He has since filed such a report. Carl C. Saracino failed to file Form 4 upon acquiring 150,000 options. He has since filed such a report. Michael P. Sheerr failed to file Form 4 upon acquiring 150,000 options. He has since filed such a report. 30 R. Keith Elliott failed to file Form 4 upon acquiring 100,000 options. He has since filed such a report. Seth A. Grossman failed to file Form 4 upon acquiring 225,000 options. He has since filed such a report. 31 ITEM 10. EXECUTIVE COMPENSATION The following table sets forth certain summary information concerning the total remuneration paid in 2003 and 2002 to the Company's Chief Executive Officer and its four other most highly compensated executive officers.
Summary Compensation Table -------------------------- Long-Term Compensation -------------------------------- Annual Compensation Awards Payouts ------------------------------------------------------------------------------------------------------------------------------------ Securities All Underlying Other Other Annual Restricted Options/ LTIP Compensation Name and Principal Compensation Stock SAR's Payouts Position (1) Year Salary ($) Bonus($)(2) ($) Awards ($) (#) (#) (#) ------------------------------------------------------------------------------------------------------------------------------------ Marc Sherman 2003 $ 163,384 - $ 6,000 - 1,000,000 $ - $ - Chairman, CEO and 2002 $ 100,000 $ 13,000 $ 2,500 - 125,000 $ - $ - President Edward L. Cummings 2003 $ 120,115 - $ 6,000 - 250,000 $ - $ - Vice President, Treasurer 2002 $ 100,000 $ 13,000 $ 2,500 - 100,000 $ - $ - and CFO David A. Loppert(3) 2003 $ 143,192 - $ 6,000 - 500,000 $ - $ - Director, Vice President, 2002 $ 100,000 $ 13,000 $ 2,500 - 125,000 $ - $ - Secretary Carl C. Saracino 2003 $ 120,115 - $ 6,000 - 150,000 $ - $ - Vice President, 2002 $ 100,000 $ 13,000 $ 2,500 - 100,000 $ - $ - Michael P. Sheerr 2003 $ 120,115 - $ 6,000 - 150,000 $ - $ - Vice President 2002 $ 100,000 $ 13,000 $ 2,500 - 100,000 $ - $ -
---------------------------- (1). See "Employment Contracts" below for agreements entered into with executive officers on October 1, 2001. (1) (2). The bonuses were satisfied by the issuance of 500,000 shares of restricted stock to each of the named executive officers. The shares were valued at $0.026 per share. (3) On February 19,2004, by Action of Consent of Majority Shareholders, David A. Loppert was removed from the Board of Directors. Thereafter, the Board of Directors removed Mr. Loppert as an officer of the Company. Option Grants in Last Fiscal Year The following table contains information concerning the grant of Stock Options to the named executive officers during 2003:
Individual Grants -------------------------------------------------------------------------------------------- Name Number of Securities % of Total Underlying Options Granted Grant Date Options Granted Employees in Exercise Price Present Value ($) (#) (1) 2002 ($/Sh) Expiration Date (1) ---------------------- ------------------------------------------------------------------------ ------------------- Marc Sherman 1,000,000 33.7% $ 2.00 Dec -14 $1,710,000 Edward L. Cummings 250,000 8.4% $ 2.00 Dec -14 $ 427,500 David A. Loppert 500,000 16.9% $ 2.00 Dec -14 $ 855,000 Carl C. Saracino 150,000 5.1% $ 2.00 Dec -14 $ 256,500 Michael P. Sheerr 150,000 5.1% $ 2.00 Dec -14 $ 256,500
---------------------- (1) Based on the grant date present value of $1.71 per option share which was derived using the Black-Scholes option pricing model and is not intended to forecast future appreciation of the Company's common share price. The Black-Scholes model was used with the following assumptions: dividend yield of 0%; expected volatility of 127.4%; risk-free interest rate of 3.16%; and expected lives of 5 years. 32 Option Exercises and Fiscal Year-End Values The following table sets forth information with respect to the named executive officers concerning the exercise of options during 2003 and unexercised options held on December 31, 2003:
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values Number of Securities Underlying Unexercised Value of Unexercised Options at Year End 2003 In-The-Money Options at Year Exercised in 2003 (#) End 2003 ($) ---------------------------- ------------------------------------------------------------ Name Shares Acquired Upon Value Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable --------------------------------------------------- ------------------------------------------------------------ Marc Sherman - $-- 375,000 1,000,000 1,509,000 2,050,000 Edward L. Cummings - $-- 350,000 250,000 1,408,400 512,500 David A. Loppert - $-- 375,000 500,000 1,509,000 1,025,000 Carl C. Saracino - $-- 350,000 150,000 1,408,400 307,500 Michael P. Sheerr - $-- 350,000 150,000 1,408,400 307,500
Compensation Pursuant to Plans Other than as disclosed above, the Company has no plans pursuant to which cash or non-cash compensation was paid or distributed during the last fiscal year, or is proposed to be paid or distributed in the future, to the individuals described above. Compensation of Directors Beginning in the first quarter of 2002, the non-employee director compensation was changed from receiving no compensation to fixed quarterly fees in the amount of $1,500 per non-employee director. Such fee may be paid in cash or in shares of the Company's Common Stock, at the election of the board of directors. Reasonable travel expenses are reimbursed when incurred. Individuals who become directors of the Company are automatically granted, on the date they become directors, an initial non-qualified stock option to purchase 125,000 shares of Common Stock, $.01 par value, at the closing price of the Company's Common Stock, expiring ten years from the grant date. Directors who are not also executive officers are not eligible to participate in any other benefit plan of the Company. Compensation Committee Interlocks and Insider Participation None. Employment Contracts and Termination of Employment, and Change-in-Control Arrangements The Company entered into employment and non-compete agreements with the following named executive officers on October 1, 2001. Name Length Commencing Base Compensation -------------------------------------------------------------------------------- Marc Sherman 1 Year(1) October 1, 2001 $ 100,000 (2) (3) Edward L. Cummings 1 Year(1) October 1, 2001 $ 100,000 (2) (4) David A. Loppert(6) 1 Year(1) October 1, 2001 $ 100,000 (2) (5) Carl C. Saracino 1 Year(1) October 1, 2001 $ 100,000 (2) (4) Michael P. Sheerr 1 Year(1) October 1, 2001 $ 100,000 (2) (4) ------------------------------------------ (1) Automatically renewed for successive additional one-year terms on each anniversary unless either the employee or the Company gives the other party 30 days notice of non-renewal prior to an anniversary date. The employment agreements include certain early termination 33 provisions in the event of the employee's death, retirement, or upon the occurrence of certain events of defaults in performance by either the Company or the employee, as applicable. (2) $50,000 per annum for the period from October 1, 2001 to December 31, 2001 then increasing to $100,000 per annum effective January 1, 2002. (3) $200,000 per annum, effective June 1, 2003. (4) $125,000 per annum, effective June 1, 2003. (5) $165,000 per annum, effective June 1, 2003. (6) The Company has notified Mr. Loppert that it does not intend to renew his employment contract. Key provisions of Employment and Non-Compete Agreements Compensation. In addition to the base compensation of each named executive listed above, each named executive is entitled to receive such bonuses, incentive compensation, and other compensation, if any, as the Company's board of directors or the compensation committee thereof, or other designated committee shall award such executive from time to time whether in cash, Company stock, stock options, other stock based compensation, other form of remuneration, or any combination of the foregoing. Option Grant. Each executive was granted an option to acquire 250,000 shares of the Company's common stock at $0.26 per share, exercisable at any time after October 1, 2001 and on or before December 31, 2010. Change of Control. In the event of a change in control of the Company, all options granted to the executives will immediately vest, to the extent not already vested, and will become exercisable in accordance with the plan or terms and conditions under which they were granted. If, after the announcement of a change in control, an executive is terminated by the Company other than for cause, then the executive's base compensation will be increased to three times the current base compensation and such amount shall be payable in a lump sum to the executive in US dollars within 30 days of the date of termination of employment. Excise Gross Up. In the event that any payment or benefit payable to an executive under his employment contract, and/or under any other agreement or arrangement with the Company or any person whose actions result in a change of control of the Company, is covered by Section 280G(b)(2) of the Internal Revenue Code of 1986 and is subject to the excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended, the Company will pay the executive an additional amount that covers all excise taxes incurred or to be incurred by the executive because of any such payment or benefit, plus an additional amount to cover all federal and state income taxes and excise taxes on the initial excise gross up payment. Vesting of Options. In the event of termination of the executive's employment for any reason other than termination by the Company due to his material default, as described in the employment contract, all stock options granted to him by the Company (or any subsidiary or affiliate) whether granted under and pursuant to a plan or otherwise, will become immediately exercisable to the extent not already exercisable and will remain exercisable until their expiration date. Non-Compete Provisions. During the employment term and for a period of one year after termination of employment, if such termination is either voluntarily by the executive, or for cause by the Company, the executive shall not engage, directly or indirectly, either on his own behalf or on behalf of any other person, firm, corporation or other entity, in any business competitive with the business of the Company, in any geographic area in which the Company is conducting business during such executive's employment term or at the time of termination of executive's employment, or own more than 5% of any such firm, corporation or other entity. In addition, the executive must furnish the Company with such information, as the Company shall from time to time request in order to determine that executive is in 34 compliance with his non-compete agreement. ITEM 11. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS Ownership of Equity Securities in the Company The following table sets forth information regarding beneficial ownership of the Company's Common Stock by each director and by each executive officer named in the Summary Compensation Table and by all the directors and executive officers as a group as of December 31, 2003:
-------------------- ------------------------------------------- -------------------------- -------------------------- Amount and Nature of Title of Class Name and Address of Beneficial Owner Beneficial Owner(1) Percent of Class -------------------- ------------------------------------------- -------------------------- -------------------------- Common Edward L. Cummings 2,711,200 16.7% c/o 70 Lake Drive Hightstown, NJ 08520 -------------------- ------------------------------------------- -------------------------- -------------------------- Common R. Keith Elliott 125,000 * c/o 70 Lake Drive Hightstown, NJ 08520 -------------------- ------------------------------------------- -------------------------- -------------------------- Common Seth A. Grossman 125,000 * c/o 70 Lake Drive Hightstown, NJ 08520 -------------------- ------------------------------------------- -------------------------- -------------------------- Common David A. Loppert (2) 2,762,000 17.0% c/o 70 Lake Drive Hightstown, NJ 08520 -------------------- ------------------------------------------- -------------------------- -------------------------- Common Carl C. Saracino 2,665,000 16.4% c/o 70 Lake Drive Hightstown, NJ 08520 -------------------- ------------------------------------------- -------------------------- -------------------------- Common Michael P. Sheerr 2,694,000 16.6% c/o 70 Lake Drive Hightstown, NJ -------------------- ------------------------------------------- -------------------------- -------------------------- Common Marc Sherman (3) 2,760,300 17.0% c/o 70 Lake Drive Hightstown, NJ 08520 -------------------- ------------------------------------------- -------------------------- -------------------------- Common All Directors and Executive Officers as a 14,392,500 88.5% Group (9 Persons) -------------------- ------------------------------------------- -------------------------- --------------------------
* The amount shown is less than 1% of the outstanding shares of common stock. 1. This table includes presently exercisable stock options. The following directors and executive officers hold the number of presently exercisable options (all of which may be exercised at any time) set forth following their respective names: Edward L. Cummings - 350,000; R. Keith Elliott - 125,000; Seth A. Grossman - 125,000; David A. Loppert - 375,000; Carl C. Saracino - 350,000; Michael P. Sheerr - 350,000; Marc Sherman - 375,000; and all directors and executive officers as a group (9 persons) - 2,300,000. The following directors and executive officers hold the number of unexercisable options set forth following their respective names: Edward L. Cummings - 250,000; R. Keith Elliott - 100,000; Seth A. Grossman - 100,000; David A. Loppert - 500,000; Carl C. Saracino - 150,000; Michael P. Sheerr - 150,000; Marc Sherman - 1,000,000; and all directors and executive officers as a group (9 persons) - 2,550,000. 2. Includes 87,000 shares beneficially owned by Mr. Loppert's children for whom Mr. Loppert has sole voting and dispositive power. 3. Includes 85,300 shares beneficially owned by Mr. Sherman's children for whom Mr. Sherman has sole voting and dispositive power. As of March 25, 2004, there are no persons known to the Company other than the directors and executive officers shown in the preceding table to be the beneficial owners of more than five percent of the Company's issued and outstanding Common Stock: Securities authorized for issuance under equity compensation plans This information is presented in Part II, Item 5 - "Market for Common Equity and Related Stockholder Matters" above. 35 ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Loans from Principal Stockholders/Executive Officers A. On October 12, 2001 the Company executed a Variable Amount Promissory Note in the amount of $250,000 in favor of David A. Loppert, an executive officer and director of the Company in consideration for Mr. Loppert extending to the Company a revolving line of credit of up to $250,000. The amounts outstanding were due on demand and bore interest at the rate of 12% per annum. Interest payments were paid monthly in arrears. The highest principal amount outstanding on the loan was $158,170. The Company repaid the outstanding balance on April 24, 2002. B. On April 24, 2002, the Company entered into a secured loan agreement with its principal stockholders in order to provide the Company with working capital. The agreement was amended on September 30, 2002 and on February 28, 2003 to extend the maturity date. The loans are secured by substantially all of the assets of the Company. Each principal stockholder loaned the Company $110,000 (for an aggregate of $550,000). The Company has repaid $10,000 on each loan. The balance remaining is as follows: Amount of Name Loan Maturity Interest Rate --------------------- -------------- ----------------- --------------- Marc Sherman $100,000 January 31, 2005 12% Edward L. Cummings $100,000 January 31, 2005 12% David A. Loppert $100,000 January 31, 2005 12% Carl C. Saracino $100,000 January 31, 2005 12% Michael P. Sheerr $100,000 January 31, 2005 12% The loans bear interest at the rate of 12% per annum with interest only payments payable monthly in arrears. All principal and accrued interest is due and payable on January 31, 2005. The loan agreement, as amended, provides, among other standard and customary terms, that when the Company arranges permanent long or short- term financing, the principal stockholder loans will be subordinate to such permanent financing, if required. At maturity, at the election of the principal stockholders, the Company shall repay such loans in cash or in a combination of cash and shares of the Company's Common Stock, with such stock valued at the current "market value" determined by a professional valuation service. For example, if each stockholder elects to receive all of his loan repayment in common stock, and if, for illustrative purposes only, the value of each share of common stock is $.01 at maturity, the Company will be required to issue 55,000,000 shares of its common stock. In this scenario, the Company will be required to obtain shareholder approval to increase its authorized share capital so that there will be sufficient shares available for issuance. If the Company's common stock is publicly traded at the time of maturity, the current "market value" will be based on the average of the closing price for the ten business days preceding the maturity date. If the Company's common stock is not publicly traded, the method of valuation will be selected by the professional valuation service. The Company and the principal stockholders also entered into an Intercreditor Agreement dated as of April 24, 2002, that provides, among other standard and customary terms, that until all liabilities under the loan agreement have been paid in full, any payments made by the Company in respect of the loans shall be made in equal amounts to and among the lenders, who will apportion all amounts so paid to any of them in accordance with the Intercreditor Agreement so that no lender receives any payments from the Company before or in preference to any other lender. Additionally, the Intercreditor Agreement 36 would provide for equal treatment of the lenders in connection with any bankruptcy, insolvency, receivership, liquidation or dissolution proceeding of the Company. C. In October 2002, the Company executed Company Variable Amount Promissory Notes, each in the amount of $125,000 in favor of each of Edward Cummings, David Loppert, Carl C. Saracino, Michael Sheerr and Marc Sherman, each an executive officer and principal stockholder of the Company, in consideration for each executive extending to the Company a revolving line of credit of up to $125,000. The amounts outstanding are due on demand and bear interest at the rate of 12% per annum. Interest payments are paid monthly in arrears. As of December 31, 2003, $7,192 was due under these notes. As of December 31, 2002, $341,020 was due under these notes. Sales to Related Party The Company had sales to Keystone Memory Group, a customer related to Marc Sherman, Chairman and CEO, and Michael Sheerr, Vice President, both of who are principal stockholders of the Company. Keystone Memory Group is owned by Michael P. Sheerr and his wife. Mrs. Sheerr is Marc Sherman's sister. Neither Mr. Sherman nor Mr. Sheerr has any business experience with Keystone. The Company also had sales to Micro Memory Bank, a customer related to Michael Sheerr, Vice President, who is a principal stockholder of the Company. Micro Memory Bank is owned by Michael Sheerr's brother. Mr. Sheerr does not have any business experience with Micro Memory Bank. Sales to Keystone amounted to approximately $938,000 and $1,160,000 for the years ended December 31, 2003 and 2002, respectively. Accounts receivable from Keystone amounted to $37,173 and $3,261 at December 31, 2003 and 2002, respectively. Sales to Micro Memory Bank amounted to approximately $20,000 and $3,000 for the years ended December 31, 2003 and 2002, respectively. There was no amount due from Micro Memory Bank at December 31, 2003 or December 31, 2002. Keystone primarily sells memory upgrades for Sun, HP, Cisco, Compaq and IBM workstations, servers and personal computers as well as other computer parts. We sell personal computer memory modules to Keystone in bona fide arms-length negotiated transactions at competitive fair market prices. The products primarily consist of 32Mb, 64Mb, 128Mb and 256Mb RAM, or "Random Access Memory," modules. Micro Memory Bank manufactures and sells memory modules for workstations, servers and personal computers. We sell personal computer memory modules to Micro Memory Bank in bona fide arms-length negotiated transactions at competitive fair market prices. The products primarily consist of 32Mb, 64Mb, 128Mb and 256Mb RAM or "Random Access Memory" modules. Shares issued to Principal Stockholders/Executive Officers
Number of Principal Stockholder/ Common Executive Officer Date Issued Note Issued For Shares ----------------- ----------- ---- ---------- ------ Edward L. Cummings Oct - 2001 A Capital Contribution 5,000,000 Jan - 2002 B Merger Consideration 1,800,000 Dec - 2002 C Compensation 500,000 David A. Loppert Oct - 2001 A Capital Contribution 5,000,000 Jan - 2002 B Merger Consideration 1,800,000 Dec - 2002 C Compensation 500,000 37 Carl C. Saracino Oct - 2001 A Capital Contribution 5,000,000 Jan - 2002 B Merger Consideration 1,800,000 Dec - 2002 C Compensation 500,000 Michael P. Sheerr Oct - 2001 A Capital Contribution 5,000,000 Jan - 2002 B Merger Consideration 1,800,000 Dec - 2002 C Compensation 500,000 Marc Sherman Oct - 2001 A Capital Contribution 5,000,000 Jan - 2002 B Merger Consideration 1,800,000 Dec - 2002 C Compensation 500,000
A. In October 2001, WindsorTech, Inc. (New Jersey company) sold an aggregate of 50,000 shares of its common to Edward Cummings, David Loppert, Carl C. Saracino, Michael Sheerr and Marc Sherman in consideration for $50,000 from each of them. In January 2002, WindsorTech, Inc. (New Jersey corporation) effected a 100:1 stock split. These shares were restricted within the meaning of the Securities Act of 1933. B. On January 30, 2002, in connection with the Merger, Delta issued an aggregate of 9,000,000 shares of its common stock to Edward Cummings, David Loppert, Carl C. Saracino, Michael Sheerr and Marc Sherman in exchange for their 25,000,000 shares of common stock in WindsorTech, Inc. (New Jersey corporation). The 9,000,000 shares of common stock were valued at $250,000, or $.0278 per share. These shares are restricted within the meaning of the Securities Act of 1933. C. In December 2002, the Compensation Committee of the Board of Directors awarded each executive officer a $13,000 bonus, payable in shares of the Company's restricted common stock. Each executive officer received 500,000 restricted shares of common stock valued at $0.026 per share. ITEM 13. EXHIBITS, REPORTS ON FORM 8-K AND FINANCIAL STATEMENTS Exhibits See List of Exhibits filed as part of this Report on Form 10-KSB. Reports on Form 8-K Form 8K filed on February 20, 2004, incorporated by reference The financial statements listed below appear immediately after page 42. Independent Auditors' Report F-1 Financial Statements Balance Sheet F-2 38 Statement Of Operations F-3 Statement Of Stockholders' Equity (Deficit) F-4 Statement Of Cash Flows F-5 Notes To Financial Statements F-6 - F-22 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES During 2003 and 2002, we paid the following fees, including out of pocket expense reimbursements, to Rubin, Brown, Gornstein & Co. LLP: 2003 2002 -------- -------- Audit Fees $ 55,265 $ 42,060 Audit-Related Fees (1) 7,000 4,600 Tax Fees (2) 6,200 6,200 All Other Fees (3) 20,600 --- Total $ 89,065 $ 52,860 (1) Audited-related fees include consultation concerning financial accounting and reporting standards, and work performed in connection with registration statements filed with the SEC. (2) Tax Fees include tax planning and compliance for federal and state income taxes. (3) All Other Fees represents a manufacturing process review conducted in 2003. WindsorTech, Inc.'s Audit Committee approves the engagement of an accountant to render all audit and non-audit services prior to the engagement of the accountant based upon a proposal by the accountant of estimated fees and scope of the engagement. WindsorTech, Inc.'s Audit Committee has received the written disclosure and the letter from Rubin, Brown, Gornstein & Co. LLP required by Independence Standards Board Standard No. 1, as currently in effect, and has discussed with Rubin, Brown, Gornstein & Co. LLP their independence. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WINDSORTECH, INC. (Registrant) 39 Dated: March 25, 2004 By: /s/ MARC SHERMAN ------------------------- Marc Sherman Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ MARC SHERMAN Chairman of the Board, Chief March 25, 2004 --------------------------------------- Executive Officer and President (Marc Sherman) /s/ EDWARD L. CUMMINGS Vice President, Treasurer and Chief March 25, 2004 --------------------------------------- Financial Officer (Principal Edward L. Cummings Financial Officer and Principal Accounting Officer) /s/ SETH A. GROSSMAN Director March 25, 2004 --------------------------------------- Seth A. Grossman /s/ R. KEITH ELLIOTT Director March 25, 2004 --------------------------------------- R. Keith Elliott
40 LIST OF EXHIBITS Exhibit Number Description ---------------- --------------------------------------------------------------- 2.1 Agreement and Plan of Merger by and between WindsorTech, Inc., Delta States Oil, Inc. and Alfred D. Morgan, Ph. D dated January 29, 2002 (incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with the Commission on February 13, 2002 (Commission file number 000-07539)). 3.1 Certificate of Amendment of Certificate of Incorporation of WindsorTech, Inc. ** 3.2 Amended and Restated ByLaws of WindsorTech, Inc. (Incorporated herein reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)). 4.1 Specimen Common Stock Certificate of WindsorTech, Inc. (Incorporated herein reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)). 10.1* Employment and Non-Compete Agreement - Edward L. Cummings ** 10.2* Employment and Non-Compete Agreement - David A. Loppert ** 10.3* Employment and Non-Compete Agreement - Carl C. Saracino ** 10.4* Employment and Non-Compete Agreement - Michael P. Sheerr ** 10.5* Employment and Non-Compete Agreement - Marc Sherman ** 10.6* 2002 Flexible Stock Plan (Incorporated herein reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-QSB filed with the Commission on April 16, 2002 (Commission file number 000-07539)). 10.7 Promissory Note executed by the Company. As of April 24, 2002 this note was paid in full (Incorporated herein reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)). 10.8 Loan Agreement by and among Marc Sherman, Edward L. Cummings, David A. Loppert, Carl C. Saracino, Michael P. Sheerr and WindsorTech, Inc., on and as of April 24, 2002 (Incorporated herein reference to Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)). 10.9 Lease Agreement (Incorporated herein reference to Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)). 10.10 Amendment to Loan Agreement by and among Marc Sherman, Edward L. Cummings, David A. Loppert, Carl C. Saracino, Michael P. Sheerr and WindsorTech, Inc., on and as of September 30, 2002 (Incorporated herein reference to Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-QSB filed with the Commission on November 11, 2002 (Commission file number 000-07539)). 12.1*** Statement re computation of ratios. 41 16.1 Letter from Milton Reece, CPA ("Reece") concurring with the statements made by the Registrant in the Current Report on Form 8-K reporting Reece's resignation as the Registrant's principal accountant (incorporated herein by reference to Exhibit 16 to the Registrant's Current Report on Form 8-K filed with the Commission on February 13, 2002 (Commission file number 000-07539)). 31.1*** CEO Certification 31.2*** CFO Certification 32.1*** Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ---------------- * Management contract or compensatory plan. ** Incorporated herein by reference to the same numbered exhibit in the Registrant's Transition Report on Form 10-KSB filed with the Commission on April 1, 2002 (Commission file number 000-07539). *** Attached hereto. There are no other documents required to be filed as an Exhibit as required by Item 601(a) of Regulation S-B. Contents -------------------------------------------------------------------------------- Page Independent Auditors' Report.................................................F-1 Financial Statements Balance Sheet............................................................F-2 Statement Of Operations..................................................F-3 Statement Of Stockholders' Equity (Deficit)..............................F-4 Statement Of Cash Flows..................................................F-5 Notes To Financial Statements.....................................F-6 - F-22 Independent Auditors' Report Board of Directors and Stockholders Windsortech, Inc. Hightstown, New Jersey We have audited the accompanying balance sheets of Windsortech, Inc. as of December 31, 2003 and 2002 and the related statements of operations, stockholders' equity 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Windsortech, Inc. as of December 31, 2003 and 2002 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Rubin, Brown, Gornstein & Co. LLP St. Louis, Missouri January 23, 2004
Windsortech, Inc. --------------------------------------------------------------------------------------------------------- BALANCE SHEET Assets December 31, ------------------------------- 2003 2002 ------------------------------- Current Assets Cash and cash equivalents $ 270,155 $ 54,383 Accounts receivable, net of allowance of $20,000 and $10,000 in 2003 and 2002, respectively 223,326 21,736 Accounts receivable - related party 37,173 3,261 Inventories 358,380 427,140 Prepaid income taxes -- 72,000 Prepaid expenses 46,906 22,049 Deferred income taxes 14,528 44,948 -------------------------------------------------------------------------------------------------------- Total Current Assets 950,468 645,517 Property And Equipment, Net 263,187 246,816 Deferred Income Taxes 112,492 82,072 Other Assets 64,851 39,587 -------------------------------------------------------------------------------------------------------- $ 1,390,998 $ 1,013,992 ======================================================================================================== Liabilities And Stockholders' Equity (Deficit) Current Liabilities Current maturities of capital lease obligations $ 7,555 $ 9,709 Accounts payable 268,958 252,358 Accrued expenses 152,796 122,186 Accrued payroll - principal stockholders 277,075 60,000 Notes payable - principal stockholders, current portion 7,192 349,020 -------------------------------------------------------------------------------------------------------- Total Current Liabilities 713,576 793,273 Notes Payable - Principal Stockholders 500,000 500,000 Capital Lease Obligations 3,403 10,988 -------------------------------------------------------------------------------------------------------- Total Liabilities 1,216,979 1,304,261 -------------------------------------------------------------------------------------------------------- Commitments And Contingencies (Note 11) Stockholders' Equity (Deficit) Preferred shares: authorized 5,000,000 in 2003 and 2002, $0.01 par value, none issued -- -- Common shares: authorized 35,000,000 in 2003 and 2002, $0.01 par value; 16,468,754 shares issued and outstanding in 2003 and 14,914,168 issued and outstanding in 2002 164,688 149,142 Common stock warrants 116,000 -- Additional paid-in capital 658,599 176,648 Retained earnings (deficit) (765,268) (616,059) -------------------------------------------------------------------------------------------------------- Total Stockholders' Equity (Deficit) 174,019 (290,269) -------------------------------------------------------------------------------------------------------- $ 1,390,998 $ 1,013,992 ======================================================================================================== See the accompanying notes to financial statements.Page F-2
Windsortech, Inc. ----------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS For The Years Ended December 31, ------------------------------------- 2003 2002 ----------------------------------------------------------------------------------------- Revenue $ 7,484,472 $ 6,543,147 Cost Of Sales 5,492,061 5,659,446 ----------------------------------------------------------------------------------------- Gross Profit 1,992,411 883,701 Selling, General And Administrative Expenses 1,988,091 1,509,339 Depreciation And Amortization 71,973 20,621 Interest Expense 79,656 59,052 ----------------------------------------------------------------------------------------- Loss Before Income Taxes (147,309) (705,311) Provision (Benefit) For Income Taxes 1,900 (126,620) ----------------------------------------------------------------------------------------- Net Loss $ (149,209) $ (578,691) ========================================================================================= Net Loss Per Common Share - Basic and Diluted $ (0.010) $ (0.049) ========================================================================================= Weighted Average Number of Common Shares Outstanding - Basic and Diluted 15,661,593 11,757,159 ========================================================================================= See the accompanying notes to financial statements.Page F-3
Windsortech, Inc. ------------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) For The Years Ended December 31, 2003 And 2002 Total Common Stock Common Additional Retained Stockholders' -------------------------- Stock Paid-In Earnings Equity Shares Amount Warrants Capital (Deficit) (Deficit) ------------------------------------------------------------------------------- Balance - January 1, 2002 9,000,000 $ 90,000 $ -- $ 160,000 $ (37,368) $ 212,632 Merger Consideration - Delta States Oil, Inc. (1) 2,999,168 29,992 -- (29,992) -- -- Shares Issued For Compensation 2,915,000 29,150 -- 46,640 -- 75,790 Net Loss -- -- -- -- (578,691) (578,691) ------------------------------------------------------------------------------------------------------------------------------------ Balance - December 31, 2002 14,914,168 149,142 -- 176,648 (616,059) (290,269) Common Stock Issued 1,554,586 15,546 -- 481,951 -- 497,497 Common Stock Warrants Issued -- -- 116,000 -- -- 116,000 Net Loss -- -- -- -- (149,209) (149,209) ------------------------------------------------------------------------------------------------------------------------------------ Balance - December 31, 2003 16,468,754 $ 164,688 $ 116,000 $ 658,599 $ (765,268) $ 174,019 ==================================================================================================================================== (1) Delta States Oil, Inc. shares outstanding or issued in connection with the Merger.
-------------------------------------------------------------------------------- See the accompanying notes to financial statements. Page F-4
Windsortech, Inc. -------------------------------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS For The Years Ended December 31, -------------------------------- 2003 2002 -------------------------------- Cash Flows From Operating Activities Net loss $(149,209) $(578,691) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 71,973 20,621 Deferred interest on notes payable - principal stockholders -- 45,721 Deferred income taxes -- (127,020) Common stock issued for services -- 75,790 Stock warrants issued for services 60,000 -- Change in assets and liabilities: Accounts receivable (235,502) 98,936 Inventories 68,760 (149,232) Prepaid expenses and other current assets 47,143 (77,186) Other assets (1,250) (300) Accounts payable and accrued expenses 323,785 176,199 -------------------------------------------------------------------------------------------------------- Net Cash Provided By (Used In) Operating Activities 185,700 (515,162) -------------------------------------------------------------------------------------------------------- Cash Flows Used In Investing Activities Payments for patent (24,216) -- Payments for property and equipment (88,142) (164,024) -------------------------------------------------------------------------------------------------------- Net Cash Used In Investing Activities (112,358) (164,024) -------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Proceeds from the issuance of common stock and warrants 493,997 -- Net proceeds (repayments) from notes payable - principal stockholders (341,828) 647,299 Payments on capital lease obligations (9,739) (6,332) -------------------------------------------------------------------------------------------------------- Net Cash Provided By Financing Activities 142,430 640,967 -------------------------------------------------------------------------------------------------------- Net Increase (Decrease) In Cash And Cash Equivalents 215,772 (38,219) Cash And Cash Equivalents - Beginning Of Period 54,383 92,602 -------------------------------------------------------------------------------------------------------- Cash And Cash Equivalents - End Of Period $ 270,155 $ 54,383 ======================================================================================================== Supplemental Disclosure Of Cash Flow Information Income taxes paid (refunds received) $ (70,800) $ 72,400 Interest paid 114,980 13,331 -------------------------------------------------------------------------------------------------------- Noncash investing and financing activities (Note 13) --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- See the accompanying notes to financial statements. Page F-5 Windsortech, Inc. -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS December 31, 2003 And 2002 1. Summary Of Significant Accounting Policies Business Organization Windsortech, Inc. (the Company), was incorporated in August 2001 as a New Jersey corporation and commenced business operations on October 1, 2001. The Company operates out of a 38,000 square foot facility in New Jersey and has satellite sales and business development offices in Florida. On January 30, 2002, the Company merged with and into Delta States Oil, Inc. (Delta), a publicly owned corporation incorporated in Delaware on November 17, 1967. Concurrent with the Merger, Delta changed its name to Windsortech, Inc. For accounting purposes, the Merger of Delta and the Company has been treated as a recapitalization of the Company as the acquirer of Delta (reverse acquisition). The historical financial statements of the Company became those of Delta and the assets and liabilities of Delta accounted for as required under the purchase method of accounting. Accordingly, the equity accounts of the Company have been restated based on the common shares received by the former shareholders of the Company in the merger. Pro forma information giving effect to the acquisition has not been presented since the merger was essentially a capital transaction and not a business combination. The Company purchases excess, used and off-lease "as-is" and refurbished computer equipment and related products from a variety of sources including Fortune 1000 companies and leasing and finance companies. The Company either remarkets those products to brokers, exporters, wholesalers, retailers, value added resellers, schools, corporate end-users or individuals, or disassembles them and separates and sells the components as parts and recycles the unsaleable components, such as metal covers, plastics and other components, both nationally and internationally. Toward the end of 2002, the Company established an asset management group (AMG) to provide complete computer asset management and recovery services to entities wishing to dispose of, upgrade or recycle their existing technological assets. Revenues and costs relating to the AMG were not material for the years ended December 31, 2003 and 2002. -------------------------------------------------------------------------------- Page F-6 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) Segment Reporting The Company operates in one reportable business segment. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Revenue Recognition For product sales, the Company recognizes revenue at the time products are shipped and title is transferred, which is in accordance with the stated shipping terms. Revenue is recognized in accordance with these shipping terms so long as a purchase order, electronic, writtten or phone commitment has been received or a contract has been executed, there generally are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectibility is deemed probable. If uncertainties exist regarding customer acceptance or collectibility, revenue is recognized when those uncertainties have been resolved. The Company provides a limited warranty on some of its products. The Company analyzes its estimated warranty costs and provides an allowance as necessary, based on experience. At December 31, 2003 and 2002, a warranty reserve was not considered necessary. AMG fees are recognized once the services have been performed and the results reported to the client. In those circumstances where the Company disposes of the client's product, or purchases the product from the client for resale, revenue is recognized as a "product sale" described above. Cash And Cash Equivalents The Company considers all liquid instruments purchased with a maturity of three months or less to be cash equivalents. Accounts Receivable Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Changes in the valuation allowance have not been material to the financial statements. -------------------------------------------------------------------------------- Page F-7 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) Inventories Inventories consist primarily of computer hardware, parts and related products, and are valued at the lower of average cost or market. Substantially all inventory items are finished goods. The Company closely monitors and analyzes inventory for potential obsolescence and slow-moving items on an item by item basis. Inventory items determined to be obsolete or slow moving are reduced to net realizable value. Inventory in-transit consists of items of inventory for which the Company has purchased and assumed the risk of loss, but which has not yet been received into stock at the Company's facility. Property And Equipment Property and equipment is stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged against operations as incurred. Upon retirement or sale, any assets disposed are removed from the accounts and any resulting gain or loss is reflected in the results of operations. Capitalized values of property under leases are amortized over the life of the lease or the estimated life of the asset, whichever is less. Property, equipment, computer software and leasehold improvements are depreciated or amortized using the straight-line method over two to five-year periods. Impairment losses on long-lived assets, such as equipment and improvements, are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of assets to their carrying amounts. Deposits Deposits principally consist of the lease deposit for the Company's New Jersey facility. This deposit is refundable at the expiration of the lease. Since the lease term extends beyond twelve months, the deposit is classified as a long-term asset in other assets on the balance sheet. Advertising Costs Advertising costs are expensed as incurred. Advertising expense amounted to $14,784 in 2003 and $882 in 2002. -------------------------------------------------------------------------------- Page F-8 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) Income Taxes At the commencement of its operations, the Company elected S Corporation status under provisions of the Internal Revenue Code. Through January 30, 2002, the effective date of the Merger with Delta, the Company was not liable for federal income taxes, but rather the stockholders included their distributive share of the taxable income or loss of the Company on their 2002 personal income tax returns. As of January 31, 2002, and as a result of the Merger, the Company reverted to C Corporation status under the Internal Revenue Code. As a result, the Company applies the asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided against net deferred tax assets where the Company determines realization is not currently judged to be more likely than not. No significant deferred tax assets or liabilities existed at the date of conversion to C Corporation status. Earnings (Loss) Per Share Basic earnings (loss) per share is computed on the basis of the weighted average number of common share outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of all dilutive potential common shares that were outstanding during the period. Dilutive securities were not calculated for the year ended December 31, 2002, because the Company's common stock did not have a public market at that time. The following table presents the computation of basic and diluted net loss per share:
2003 2002 --------------------------------------- Basic and diluted net loss per share: Net loss $ (149,209) $ (578,691) ========================================================================================================= Determination of basic and diluted shares: Weighted average shares outstanding 15,661,593 11,757,159 Effect of dilutive securities: Stock options -- Warrants -- --------------------------------------------------------------------------------------------------------- Basic and diluted weighted average shares outstanding 15,661,593 11,757,159 ========================================================================================================= Basic and diluted net loss per share $ (0.010) (0.049) =========================================================================================================
In 2003, the Company excluded 420,869 weighted average common share equivalents related to stock options and 106,775 weighted average common share equivalents related to stock warrants because their effect would have been anti-dilutive. -------------------------------------------------------------------------------- Page F-9 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) Fair Value Of Financial Instruments The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the relatively short maturity of these instruments. The carrying value of the notes payable and capital lease obligations, including the current portion, approximate fair value based on the incremental borrowing rates currently available to the Company for financing with similar terms and maturities. Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation (Note 7). Under APB Opinion No. 25, compensation cost is recognized over the vesting period based on the difference, if any, on the date of grant between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. Had compensation cost for these plans been determined based on the fair value at the grant dates for awards under these plans, consistent with the alternative method set forth under SFAS No. 123, the Company's net loss would have increased. The pro forma amounts are indicated below:
2003 2002 ----------------------------------------- Net loss, as reported $ (149,209) $ (578,691) Add: stock-based employee compensation expense included in reported net loss, net of related tax effects 60,790 Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (379,426) (64,194) ------------------------------------------------------------------------------------------------ Pro forma net loss $ (528,635) $ (582,095) ================================================================================================ Earnings (loss) per share: Basic and diluted - as reported $ (0.010) $ (0.049) ================================================================================================ Basis and diluted - pro forma $ (0.034) $ (0.050) ================================================================================================
The weighted average per share fair value of the options granted was $1.58 and $0.005 for the years ended December 31, 2003 and 2002, respectively. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: -------------------------------------------------------------------------------- Page F-10 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued)
2003 2002 ----------------------------------------- Risk-free interest rates 3.15% 4.5% Expected option lives 5 years 5 years Expected volatilities 117% 0% Expected dividend yields 0% 0%
Impact Of Recently Issued Accounting Standards In May 2001, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. The Company adopted this statement in 2002, which had no impact on the Company's financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 changes the timing of when certain costs associated with restructuring activities may be recognized. SFAS No. 146 is effective for exit or disposal activities, initiated after December 31, 2002. The Company adopted SFAS No. 146 in 2003, which had no impact on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment to SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Disclosures required by this standard are included in the notes to these financial statements. The transition provisions of this statement apply upon the adoption of the SFAS No. 123 fair value based method. The Company did not change its method of accounting for employee stock-based compensation from the intrinsic method to the fair value based alternative. -------------------------------------------------------------------------------- Page F-11 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No.150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The Company adopted the provisions of SFAS No. 150 effective July 1, 2003, which had no impact on the Company's financial position or results of operations. In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company adopted this interpretation in 2003, which had no impact on the Company's financial position or results of operations. In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The Company believes that the adoption of this standard will have no impact on its financial position or results of operations. -------------------------------------------------------------------------------- Page F-12 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) 2. Inventories
2003 2002 --------------------------------------- Finished goods $ 276,794 $ 263,660 Inventory in transit 96,586 183,480 Allowance for excess and obsolescence (15,000) (20,000) ------------------------------------------------------------------------------------------------ $ 358,380 $ 427,140 ================================================================================================
3. Property And Equipment
2003 2002 --------------------------------------- Furniture and fixtures $ 15,759 $ 14,037 Equipment 161,495 45,093 Leasehold improvements 7,427 7,427 Computer equipment and software 157,237 86,495 ----------------------------------------------------------------------------------------------- 341,918 153,052 Less: Accumulated depreciation (93,326) (21,555) ----------------------------------------------------------------------------------------------- 248,592 131,497 Construction in progress 14,595 115,319 ----------------------------------------------------------------------------------------------- $ 263,187 $ 246,816 ===============================================================================================
At December 31, 2003 and 2002, equipment includes assets acquired under capital lease obligations in the amount of $32,135. Related accumulated depreciation amounted to $11,291 and $4,864 at December 31, 2003 and 2002, respectively. Amortization expense of these capital leased assets is included in depreciation expense. Depreciation and amortization charged against income for all property and equipment amounted to $71,771 and $20,621 for the years ended December 31, 2003 and 2002, respectively. 4. Other Assets
2003 2002 -------------------------------------- Deposits $ 40,837 $ 39,587 Patent, net of amortization of $202 in 2003 24,014 --------------------------------------------------------------------------------------------- $ 64,851 $ 39,587 =============================================================================================
The patent is being amortized over a 20-year life. Patent amortization expense in 2003 amounted to $202. Expected amortization expense in each of the next 5 years is approximately $1,211 per year. -------------------------------------------------------------------------------- Page F-13 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) 5. Capital Leases The Company leases certain equipment under non-cancelable capital leases. The assets acquired under these leases have been capitalized and the related obligations are included as capital lease obligations in the financial statements. The remaining future minimum lease payments at December 31, 2003 are due as follows: Year Amount ------------------------------------------------------------------ 2004 $ 8,123 2005 3,477 ------------------------------------------------------------------ Total future minimum lease payments $11,600 Less: Amount representing interest 640 ------------------------------------------------------------------ Present value of future minimum lease payments 10,960 Less: Current portion 7,555 ------------------------------------------------------------------ $ 3,405 ================================================================== 6. Notes Payable - Principal Stockholders
2003 2002 --------------------------------------- Notes payable, secured by substantially all of the Company's assets, with interest only payments at 12% payable monthly in arrears, with all principal and accrued interest due and payable on January 31, 2005 $ 500,000 $ 508,000 Revolving lines of credit, secured by substantially all of the Company's assets, due on demand, bearing interest at 12% per annum 7,192 341,020 ------------------------------------------------------------------------------------------------ 507,192 849,020 Less current maturities 7,192 349,020 ------------------------------------------------------------------------------------------------ $ 500,000 $ 500,000 ================================================================================================
On April 24, 2002, the Company entered into a secured loan agreement with its principal stockholders. This agreement, as amended, provides for each principal stockholder to loan the Company $110,000 (for an aggregate of $550,000). The loan agreement, as amended, provides, among other standard and customary terms, that when the Company arranges permanent long or short-term financing, the principal stockholder loans will be subordinate to such permanent financing, if required. At maturity, and at the election of the principal stockholders, the Company shall repay such loans in cash or in a combination of cash and shares of the Company's common stock, with such common stock valued at the current "market value" determined by a professional valuation service. -------------------------------------------------------------------------------- Page F-14 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) The Company has also entered into revolving lines of credit with certain principal stockholders in the aggregate of $750,000. Advances under the lines are at the discretion of such principal stockholders, and are due on demand. At December 31, 2003 and 2002, $7,192 and $341,020, respectively, had been advanced. 7. Stockholders' Equity Stock Option Grants In October 2001, the Company granted 1,350,000 options to its shareholders and employees to acquire shares of its common stock at $0.026 per common share pursuant to individual option grants. The terms of the grants provided for immediate vesting, and the options may be exercised at any time for a period of ten years commencing October 1, 2001. In January 2002, the Company's stockholders approved the 2002 Flexible Stock Plan (the "2002 Plan"). Under the 2002 Plan, the number of shares which may be issued or sold, or for which options, stock appreciation rights (SAR's) or performance shares may be granted to certain directors, officers and employees of the Company is 5,000,000, plus an annual increase, effective of the first day of each calendar year commencing with 2003, equal to 10% of the number of shares outstanding as of the first day of such calendar year but in no event more than 30,000,000 shares in the aggregate. A summary of stock option activity is as follows:
2003 2002 ------------------------------ ------------------------------- Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price --------------- -------------- --------------- --------------- Outstanding - Beginning of Period 2,560,000 $ 0.026 1,350,000 $ 0.026 Granted 2,965,000 1.839 1,240,000 0.026 Exercised -- -- -- -- Forfeited -- -- 30,000 0.026 ------------------------------------------------------------------------------------------------------------ Outstanding on December 31 5,525,000 $ 0.999 2,560,000 0.026 ============================================================================================================ Exercisable on December 31 2,935,000 $ 0.116 2,500,000 $ 0.026 ============================================================================================================
-------------------------------------------------------------------------------- Page F-15 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) The following table summarizes information about the options outstanding at December 31, 2003:
Exercisable Stock Outstanding Stock Options Options --------------------------------------------------- ------------------------------ Weighted- Average Weighted- Weighted- Range Of Remaining Average Average Exercise Contractual Exercise Exercise Prices Shares Life Price Shares Price ---------------------- --------------- ----------------- ----------------- -- --------------- -------------- $ 0.026 2,810,000 8.0 years $ 0.026 2,810,000 $ 0.026 $ 2.00 to $ 2.13 2,715,000 10.9 years 2.006 125,000 2.13 --------------- --------------- $ 0.026 to $ 2.13 5,525,000 9.4 years $ 0.999 2,935,000 $ 0.116 =============== ===============
The Company applies APB Opinion No. 25 and related interpretations in accounting for all grants. For all options granted, the exercise price is equal to the fair market value at the date of grant, and, accordingly, no compensation cost has been recognized under these grants. Warrants In July 2003, the Company issued 400,000 warrants for investment banking services. These warrants have a strike price of $0.50 per share, and are exercisable from the date of issuance through 36 months after the effective date of a registration statement registering the shares of common stock underlying the warrants. These warrants were valued at $60,000 and recorded as expense when issued. In August 2003, the Company issued 20 Units at a price of $10,000 per Unit. Each Unit consists of (i) 10,000 shares of common stock, and warrants to purchase 10,000 shares of common stock, exercisable for a period of three years at a price of $1.00 per share. These warrants were valued at $56,000, based on the relative fair value of the warrants as compared to the common stock issued. -------------------------------------------------------------------------------- Page F-16 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) 8. Income Taxes The provision (benefit) for income taxes consists of the following: 2003 2002 --------------------------------------- Current $ 1,900 $ 400 Deferred (127,020) ------------------------------------------------------------------------- $ 1,900 $ (126,620) ========================================================================= The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:
2003 2002 --------------------------------------- Deferred Tax Assets: Liabilities and reserves $ 14,528 $ 44,850 Net operating loss carryforwards 331,387 223,723 ------------------------------------------------------------------------------------ Gross deferred tax assets 345,915 268,573 Valuation allowance (180,648) (127,000) ------------------------------------------------------------------------------------ 165,267 141,573 ------------------------------------------------------------------------------------ Deferred Tax Liabilities: Property and Equipment 28,881 14,553 Patent 9,366 -- ------------------------------------------------------------------------------------ 38,247 14,553 ------------------------------------------------------------------------------------ Net Deferred Tax Asset $ 127,020 $ 127,020 ====================================================================================
The current and long-term components of the deferred tax asset are as follows:
2003 2002 --------------------------------------- Current deferred tax asset $ 14,528 $ 44,948 Long-term deferred tax asset 112,492 82,072 ------------------------------------------------------------------------------------ $ 127,020 $ 127,020 ====================================================================================
At December 31, 2003, the Company had aggregate net operating loss carryforwards of approximately $850,000 for income tax purposes that expire beginning in 2022. -------------------------------------------------------------------------------- Page F-17 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) The reconciliation of the effective tax rate with the statutory federal income tax benefit rate is as follows:
2003 2002 -------------------------------------- % % -------------------------------------- Statutory benefit rate 34 34 State income taxes, net of federal benefits 5 6 Change in deferred tax asset valuation allowance (36) (18) Other (4) (4) --------------------------------------------------------------------------------------------------- (1) 18 ===================================================================================================
9. Concentrations Major Customers For the years ended December 31, 2003 and 2002, sales to the Company's top ten customers (including sales to a related party - see Note 12) comprised 51% and 55% of revenue, respectively. These customers also comprised 67% and 15% of the combined accounts receivable and accounts receivable - related party at December 31, 2003 and 2002, respectively. Company Data By Operating And Geographic Segment The Company has one reportable segment - Product Sales. In the future, as revenue from AMG increases, the Company will report the AMG as a separate reportable segment. The Company operates solely in the United States and has no assets in foreign countries. All of the Company's purchases and sales are denominated in US dollars. The Company has not recorded any foreign currency transaction gains or losses in 2003 or 2002. For the years ended December 31, 2003 and 2002, export sales comprised 31% and 28% of revenue, respectively. -------------------------------------------------------------------------------- Page F-18 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) Revenue by Geographic Segment comprised: 2003 2002 ------------------------------------ United States $ 5,198,400 $ 4,706,122 Asia 817,707 1,320,633 Europe 349,715 Africa 703,073 334,016 United Kingdom 155,834 118,228 Canada 223,458 64,148 Australia 24,500 -- South America 11,785 -- ------------------------------------------------------------------------------- $ 7,484,472 $ 6,543,147 =============================================================================== Purchases The Company purchases a majority of its products from a small number of suppliers. Approximately 30% and 64% of product purchases were from two vendors for the years ended December 31, 2003 and 2002, respectively. 10. Benefit Plan The Company instituted a 401(k) defined contribution benefit plan on January 1, 2003. The Company contributes three percent of eligible employees' salaries to the plan. The Company contributed $28,347 to the plan for the year ended December 31, 2003. 11. Commitments And Contingencies Lease The Company has an operating lease on real property expiring in the year 2006. In addition to fixed rentals, the real property lease requires the Company to pay all maintenance, real estate taxes and insurance. Rent expense and other charges totaled $192,305 and $203,664 for the years ended December 31, 2003 and 2002, respectively. The approximate minimum payments required under the operating lease at December 31, 2003 are: Year Amount -------------------------------------------------------- 2004 $ 163,000 2005 167,000 2006 128,000 -------------------------------------------------------- $ 458,000 ======================================================== -------------------------------------------------------------------------------- Page F-19 Windsortech, Inc. -------------------------------------------------------------------------------- Notes To Financial Statements (Continued) Environmental The Company recycles used equipment that may contain hazardous materials. The Company contracts with a licensed waste management company for the purpose of recycling or destruction of these materials in accordance with all applicable environmental standards. Therefore, management believes it is not necessary to record a liability for environmental contingencies in the accompanying financial statements. Legal Proceedings The Company is party to legal proceedings arising in the ordinary course of business. In the opinion of management, these proceedings are not likely to have a material adverse affect on the financial position, results of operations or cash flows of the Company. The estimate of potential impact on the Company could change in the future. 12. Related Party Transactions In 2003 and 2002, the Company had sales to two customers related to two stockholders and officers of the Company. Sales to such customers for the years ended December 31, 2003 and 2002 amounted to approximately $958,000 and $1,160,000, respectively. Accounts receivable from these customers amounted to $37,173 and $3,261 at December 31, 2003 and 2002, respectively. 13. Supplemental Cash Flow Information During 2003, the Company issued shares of its common stock to settle an accounts payable balance with a vendor for $59,500. During 2002, the Company acquired equipment under a capital leases in the amounts of $13,886. -------------------------------------------------------------------------------- Page F-20