BENTLEY COMMUNICATIONS CORP/DE (BTLY.OB) Annual Report (SEC form 10KSB) ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION When used in this Form 10-KSB, the words "expects," "anticipates," "estimates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties, including those set forth below under "Risks and Uncertainties," that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. This discussion should be read together with the financial statements and accompanying notes included in this Form 10-KSB. General - The Company currently engages in the business of creating an international business to business (B2B) and wholesale sourcing network. The Company's immediate focus is on E-commerce based retail and wholesale sales and distribution for consumer and industrial product oriented non-US based companies, initially in Asia and the Pacific Rim. The Company has recognized in the past fiscal year the slowdown of the E-commerce industry and of internet related retail sales in general. While the Company still believes its current business plan can bring profitability, it has begun to look at acquisitions in other internet related businesses, including online casino gaming. Subsequent to the period covered by this report, the Company has engaged in negotiations with Online Gaming, Ltd. and intends to shift its business focus from B2B product sourcing to casino gaming via the Internet. Revenues For the year ended June 30, 2001, revenues from continuing operations, which are comprised exclusively of web hosting and consulting fees, was $142,990 as compared to revenues of $17,691 during the year ended June 30, 2000. The Company reported a net loss from operations before income taxes of $1,545,390 in 2001 compared to a net loss of $3,371,221 in 2000. Costs and Expenses The Company's expenses from operations for the year ended June 30, 2000 decreased $1,700,532 to $1,688,380 from $3,388,912 during the same period in 2000. Selling, general and administrative expenses decreased $1,913,436 to $1,466,604 in 2001 from $3,380,040 in 2000. The decrease is due to a downturn in the economy and the subsequent necessary reorganization and down-sizing of the Company. In addition, the Company incurred costs of $357,650 associated with the value of common stock issued to employees and consultants for services rendered during the year ended June 30, 2001. As the Company transitions from a development stage to an operating company, the Company has incurred significant operating deficits, which have decreased the Company's working capital. Company management believes this trend will have a material impact on the Company's short-term and long-term liquidity. Management expects to fund this decrease in liquidity through the proceeds of loans from significant shareholders and the private placement of its stock. Management believes income from continuing operations may be materially impacted by the transition from a development stage to an operating company. Depreciation and amortization expense for 2001 was $31,059, an increase of $22,187 from $8,872 in 2000. The increase in depreciation expense is as a result of the acquisition of office and related equipment during the year ended June 30, 2001. Liquidity and Capital Resources - As of June 30, 2001, the Company had a working capital deficit of $830,702 compared to a deficit of $136,117 at June 30, 2000, an increase in the deficit of $694,585. The decrease in working capital was substantially due to the Company's losses from operations. In addition, the Company experienced an increase in accounts payable and accrued expenses of $381,591 at June 30, 2001 as compared to June 30, 2000. While the Company has raised capital and borrowed funds to meet its current and projected working capital needs, additional financing will be required in order to meet its obligations. The Company is seeking financing in the form of equity and debt for working capital. There are no assurances the Company will be successful in raising the funds required. The Company has borrowed funds from significant shareholders of the Company in the past to satisfy certain obligations and anticipates continuing to borrow funds to meet future working capital requirements. The Company generated a cash flow deficit from operations of $186,994 for the year ended June 30, 2001. Cash flow deficits from operating activities for the year ended June 30, 2001 is primarily attributable to the Company's net loss from operations of $1,545,390 adjusted for depreciation and amortization of $31,059, and common stock issued for services of $357,650. No cash flows were used in investing activities during the year ended June 30, 2001. Cash flow provided from financing activities was $154,885 during the year ended June 30, 2001. The source of financing in 2001 was from proceeds from related parties advances, whose funds were utilized for working capital. The effect of inflation on the Company's revenue and operating results was not significant. The Company's operations are in the southeastern United States and there are no seasonal aspects that would have a material effect on the Company's financial condition or results of operations. The Company's independent certified public accountants have stated in their report on the Company's June 30, 2001 financial statements that the Company is experiencing difficulty in generating sufficient cash flow to meet its obligations and sustain its operations, which raises substantial doubt about its ability to continue as a going concern. Recent Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pension and Other Post Employment Benefits ("SFAS 132") in the year ended June 30, 2000. SFAS 132 establishes disclosure requirements regarding pension and post employment obligations. SFAS 132 does not effect the Company as of June 30, 2000. In March 1998, Statement of Position No. 98-1 was issued, which specifies the appropriate accounting for costs incurred to develop or obtain computer software for internal use. The new pronouncement provides guidance on which costs should be capitalized, and over what period such costs should be amortized and what disclosures should be made regarding such costs. This pronouncement is effective for fiscal years beginning after December 15, 1998, but earlier application is acceptable. Previously capitalized costs will not be adjusted. The Company believes that it is already in substantial compliance with the accounting requirements as set forth in this new pronouncement, and therefore believes that adoption will not have a material effect on financial condition or operating results. The Company adopted Statement of Financial Standards No. 133, Accounting for Derivative Instruments and for Hedging Activities ("SFAS No. 133") in the year ended June 30, 2000. SFAS No. 133 requires that certain derivative instruments be recognized in balance sheets at fair value and for changes in fair value to be recognized in operations. Additional guidance is also provided to determine when hedge accounting treatment is appropriate whereby hedging gains and losses are offset by losses and gains related directly to the hedged item. SFAS No. 133's impact on the Company's consolidated financial statements is not expected to be material as the Company has not historically used derivative and hedge instruments. In December, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (" SAB 101"), Revenue Recognition in Financial Statements, which will become effective December 31, 2000. The Company does not expect the standard to have a material effect on its results. In March 2000, the Financial Accounting Standards Board issued interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB No. 25 for (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 2, 2000 but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have an affect on the Company's financial statements but may impact the accounting for grants or awards in future periods In June, 2000, Statement of Position No. 00-2, Accounting for Producers or Distributors of Films, was issued, which replaces SFAS no. 53, Financial Reporting by Producers and Distributors of Motion Picture Films. The accounting standard establishes new accounting standards for producers and distributors of films, including changes in revenue recognition and accounting for advertising, development and overhead costs. This pronouncement is effective for fiscal years beginning after December 15, 2000, but earlier application is acceptable. The Company believes that it is already in substantial compliance with the accounting requirements as set forth in this new pronouncement, and therefore believes that adoption will not have a material effect on financial condition or operating results. RISKS AND UNCERTAINTIES The Company has sought to identify what it believes to be the most significant risks to its business, but cannot predict whether or to what extent any of such risks may be realized nor can there be any assurances that the Company has identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to the Company's stock. LIMITED OPERATING HISTORY; ANTICIPATED LOSSES; UNCERTAINTY OF FUTURE RESULTS. Bentley Communications Corp. has only a limited operating history upon which an evaluation of the Company and its prospects can be based. The Company's prospects must be evaluated with a view to the risks encountered by a company in an early stage of development, particularly in light of the uncertainties relating to the new and evolving distribution methods with which the Company intends to operate and the acceptance of the Company's business model. The Company will be incurring costs to develop, introduce and enhance its interactive website, to establish marketing relationships, to acquire and develop products that will compliment each other and to build an administrative organization. To the extent that such expenses are not subsequently followed by commensurate revenues, the Company's business, results of operations and financial condition will be materially adversely affected. There can be no assurance that the Company will be able to generate sufficient revenues from the sale of their products. The Company expects negative cash flow from operations to continue for the next eight quarters as it continues to develop and market its business. If cash generated by operations is insufficient to satisfy the Company's liquidity requirements, the Company may be required to sell additional equity or debt securities. The sale of additional equity or convertible debt securities would result in additional dilution to the Company's stockholders. POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, most of which are outside the Company's control, including: the level of use of the Internet; the demand for high-tech goods; seasonal trends in both Internet use, purchases of electronics, and advertising placements; the addition or loss of advertisers; the level of traffic on the Company's Internet sites; the amount and timing of capital expenditures and other costs relating to the expansion of the Company's Internet operations; the introduction of new sites and services by the Company or its competitors; price competition or pricing changes in the industry; technical difficulties or system downtime; general economic conditions, and economic conditions specific to the Internet and Internet media. The Company's quarterly results may also be significantly impacted by the impact of the accounting treatment of acquisitions, financing transactions or other matters. Particularly at the Company's early stage of development, such accounting treatment can have a material impact on the results for any quarter. Due to the foregoing factors, among others, it is likely that the Company's operating results will fall below the expectations of the Company or investors in some future quarter. LIMITED PUBLIC MARKET, POSSIBLE VOLATILITY OF SHARE PRICE. The Company's Common Stock is currently quoted on the NASD OTC Bulletin Board under the ticker symbol BTLY. As of June 30, 2001, there were approximately 26,659,724 shares of Common Stock outstanding, of which approximately 8,433,544 were tradable without restriction under the Securities Act. There can be no assurance that a trading market will be sustained in the future. Factors such as, but not limited to, technological innovations, new products, acquisitions or strategic alliances entered into by the Company or its competitors, failure to meet security analysts' expectations, government regulatory action, patent or proprietary rights developments, and market conditions for technology stocks in general could have a material effect on the volatility of the Company's stock price. UNCERTAIN ACCEPTANCE AND MAINTENANCE OF THE COMPANY'S BRAND NAME. The Company believes that establishing and maintaining the Company's buynetonline.com E-commerce website brand name is a critical aspect of its efforts to attract and expand its Internet audience and that the importance of brand name recognition will increase due to the growing number of Internet sites and the relatively low barriers to entry in providing Internet content. If the Company is unable to provide high quality content or otherwise fails to promote and maintain its brand, or if the Company incurs excessive expenses in an attempt to improve its content or promote and maintain its brand, the Company's business, results of operations, and financial condition will be materially adversely affected. MANAGEMENT OF GROWTH The Company expects to experience significant growth in the number of employees and the scope of its operations. In particular, the Company intends to hire additional engineering, sales, marketing, content acquisition and administrative personnel. Additionally, acquisitions could result in an increase in employee headcount and business activity. Such activities could result in increased responsibilities for management. The Company believes that its ability to increase its customer support capability and to attract, train, and retain qualified technical, sales, marketing, and management personnel, will be a critical factor to its future success. In particular, the availability of qualified sales engineering and management personnel is quite limited, and competition among companies to attract and retain such personnel is intense. During strong business cycles, the Company expects to experience continued difficulty in filling its needs for qualified sales, engineering, and other personnel. The Company's future success will be highly dependent upon its ability to successfully manage the expansion of its operations. The Company's ability to manage and support its growth effectively will be substantially dependent on its ability to implement adequate improvements to financial and management controls, reporting and order entry systems, and other procedures and hire sufficient numbers of financial, accounting, administrative, and management personnel. The Company's expansion and the resulting growth in the number of its employees has resulted in increased responsibility for both existing and new management personnel. The Company is in the process of establishing and upgrading its financial accounting and procedures. There can be no assurance that the Company will be able to identify, attract, and retain experienced accounting and financial personnel. The Company's future operating results will depend on the ability of its management and other key employees to implement and improve its systems for operations, financial control, and information management, and to recruit, train, and manage its employee base. There can be no assurance that the Company will be able to achieve or manage any such growth successfully or to implement and maintain adequate financial and management controls and procedures, and any inability to do so would have a material adverse effect on the Company's business, results of operations, and financial condition. The Company's future success depends upon its ability to address potential market opportunities while managing its expenses to match its ability to finance its operations. This need to manage its expenses will place a significant strain on the Company's management and operational resources. If the Company is unable to manage its expenses effectively, the Company's business, results of operations, and financial condition will be materially adversely affected. RISKS ASSOCIATED WITH ACQUISITIONS. As part of its business strategy, the Company expects to acquire assets and businesses relating to or complementary to its operations. These acquisitions by the Company will involve risks commonly encountered in acquisitions of companies. These risks include, among other things, the following: the Company may be exposed to unknown liabilities of the acquired companies; the Company may incur acquisition costs and expenses higher than it anticipated; fluctuations in the Company's quarterly and annual operating results may occur due to the costs and expenses of acquiring and integrating new businesses or technologies; the Company may experience difficulties and expenses in assimilating the operations and personnel of the acquired businesses; the Company's ongoing business may be disrupted and its management's time and attention diverted; the Company may be unable to integrate successfully.