-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UtSmcFKmkAsL8Wjfr2XmHd8w4fiq6OfANBwIk3mg3Kop6po7y6akndfQb2mkYS4J AAL3idECQots9UsANyLuNw== 0001019056-00-000054.txt : 20000209 0001019056-00-000054.hdr.sgml : 20000209 ACCESSION NUMBER: 0001019056-00-000054 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991123 ITEM INFORMATION: FILED AS OF DATE: 20000207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMARKETPLACE INC CENTRAL INDEX KEY: 0000900475 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 330558415 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-22014 FILM NUMBER: 525988 BUSINESS ADDRESS: STREET 1: 255 W JULIAN ST STREET 2: STE 100 CITY: SAN JOSE STATE: CA ZIP: 95110 BUSINESS PHONE: 4082956500 MAIL ADDRESS: STREET 1: 255 W JULIAN ST STREET 2: STE 100 CITY: SAN JOSE STATE: CA ZIP: 95110 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER MARKETPLACE INC DATE OF NAME CHANGE: 19930413 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K/A (Amendment No. 1) CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) NOVEMBER 23, 1999 ----------------- EMARKETPLACE, INC. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 0-14731 33-0558415 - -------------------------------------------------------------------------------- (STATE OR OTHER (COMMISSION (IRS EMPLOYER JURISDICTION OF FILE NUMBER) IDENTIFICATION NO.) FORMATION) 255 WEST JULIAN STREET, SUITE 100, SAN JOSE, CA 95110 ------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 295-6500 -------------- =============================================================== (FORMER NAME OR FORMER ADDRESS, IF CHANGES SINCE LAST REPORT) =============================================================== ITEM 7 FINANCIAL STATEMENTS, PRO FORMA FINANANCIAL INFORMATION AND EXHIBITS (a) In connection with the Current Report on Form 8-K filed with the Commission on December 8, 1999 with respect to acquisitions affected as of November 23, 1999, the Registrant includes the following information. 1. Pro Forma Condensed Combined Financial Statements of eMarketplace, Inc. 2. Financial Statements and Report of Independent Certified Public Accountants of Image Network, Inc. for the years ended July 31, 1999, 1998 and 1997. 3. Financial Statements and Report of Independent Certified Public Accountants of Devries Data Systems, Inc. for the years ended July 31, 1999, 1998 and 1997. 4. Financial Statements and Report of Independent Certified Public Accountants of Full Moon Interactive Group, Inc. for the years ended July 31, 1999, 1998 and 1997. 5. Financial Statements and Report of Independent Certified Public Accountants of Orrell Communications, Inc. for the years ended July 31, 1999, 1998 and 1997. 6. Financial Statements and Report of Independent Certified Public Accountants of Muccino Design Inc. for the years ended July 31, 1999, 1998 and 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly authorized and caused the undersigned to sign this Report on the Registrant's behalf. EMARKETPLACE, INC. By: /s/ L. WAYNE KILEY ----------------------------------------------- Name: L. Wayne Kiley Title: Chief Executive Officer and President Dated: February 7, 2000 9 EXHIBIT INDEX 1. Pro Forma Condensed Combined Financial Statements of eMarketplace, Inc. 2. Financial Statements and Report of Independent Certified Public Accountants of Image Network, Inc. for the years ended July 31, 1999, 1998 and 1997. 3. Financial Statements and Report of Independent Certified Public Accountants of Devries Data Systems, Inc. for the years ended July 31, 1999, 1998 and 1997. 4. Financial Statements and Report of Independent Certified Public Accountants of Full Moon Interactive Group, Inc. for the years ended July 31, 1999, 1998 and 1997. 5. Financial Statements and Report of Independent Certified Public Accountants of Orrell Communications, Inc. for the years ended July 31, 1999, 1998 and 1997. 6. Financial Statements and Report of Independent Certified Public Accountants of Muccino Design Inc. for the years ended July 31, 1999, 1998 and 1997. EX-1 2 EXHIBIT 1 EMARKETPLACE, INC. PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS [UNAUDITED] The following pro forma condensed combined balance sheet as of September 30, 1999, and the pro forma condensed combined statement of operations for the three months ended September 30, 1999 and for the year ended June 30, 1999 reflect the following acquisition by the Company. [I] On November 23, 1999, eMarketplace, Inc. (the "Company") and its wholly owned subsidiary, TopTeam, Inc. ("TopTeam"), closed on the acquisition of six Internet consulting companies (the "Interactive Architects"). In connection with the acquisition of the Interactive Architects, the Company issued a total of 1,045,000 shares of its common stock in exchange for shares of common stock of each of the Interactive Architects (inclusive of optionees exercising exchange rights under acquisition agreements). Concurrently therewith, (i) the Company contributed its newly purchased shares of the Interactive Architects to TopTeam in exchange for TopTeam's issuance of 3,310,000 shares of its common stock, and (ii) the stockholders of the Interactive Architects contributed all of the remaining outstanding shares of the Interactive Architects (the shares not purchased by the Company) to TopTeam in exchange for the issuance of 3,810,000 shares of TopTeam common stock. (Minority Interest) [II] In connection with the acquisition of the Interactive Architects, the Company executed a promissory note in favor of TopTeam in the aggregate amount of $1,000,000 bearing interest at a rate of seven percent (7%) per annum (the "Note"). Interest payments are due and payable monthly and the principal amount outstanding is due and payable on November 22, 2001. TopTeam is required to prepay the Note in full in the event that TopTeam consummates an initial public offering of its common stock which generates gross proceeds of not less than $25 million. In addition, as consideration for this acquisition, the Company received 250,000 shares of TopTeam common stock. The Company also purchased 250,000 shares of TopTeam Series A Convertible preferred stock for the total amount of $1,000,000. In addition, the Company received rights for 3,600,000 shares of TopTeam common Stock (See III below). [III] On December 15, 1999, the Company agreed to sell and assign the following to Internet Asset Inc. Class D for $2,000,000 as of November 23, 1999 (See II above). (a) A $1,000,000 promissory note, dated November 23, 1999, issued by TopTeam, Inc.; (b) 250,000 shares of TopTeam's common stock; (c) 250,000 shares of the TopTeam's Series A preferred stock; and (d) Subject to certain conditions, an option to exercise rights to purchase 500,000 shares of TopTeam's stock at $7.50 per share ("Option Rights"). The Option Rights expired January 20, 2000' although they were extended until the earlier of i) February 20, 2000, or ii) within five (5) days following notice of a firm commitment from a "bulge bracket" investment bank to underwrite the common stock of TopTeam. As a result of these transactions, (a) the Company presently owns (i) 3,310,100 (3,560,100 - 250,000) shares of TopTeam common stock (44.9% of the total number of shares of TopTeam common stock outstanding), and (ii) rights to purchase 3,600,000 shares of TopTeam common stock at a purchase price of $7.50 per share expiring upon the earlier of May 23, 2000, or the effective date of a TopTeam registration statement, subject to the Option Rights, and (b) TopTeam owns all of the outstanding shares of capital stock of each of the Interactive Architects. The Company is consolidating with TopTeam as it has operational control over the entities. The pro forma information is based on the historical financial statements of the Company and the acquired entities giving effect to the proposed transaction under the purchase method of accounting and the assumptions and adjustments in the accompanying notes to the pro forma financial statements. The pro forma financial statements have been prepared by management based upon the historical financial statements included elsewhere herein. These pro forma statements may not be indicative of the results that actually would have occurred if the combination had been in effect on the dates indicated or which may be obtained in the future. The pro forma financial statements should be read in conjunction with the financial statements and notes contained elsewhere herein. The pro forma balance sheet assumes the transaction occurred on the balance sheet date. The pro forma statements of operations assume the transaction was completed at the beginning of the fiscal year presented. Historical statements of operations will reflect the transaction from the date of closing onward. 1 EMARKETPLACE, INC. NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS [UNAUDITED]
I. BALANCE SHEET ADJUSTMENTS: [A] To reflect total cost of investment. 1,045,000 shares of the Company with an estimated fair value of $ 4,154,000 3,810,000 shares of TopTeam with an estimated fair value of 4,785,500 -------------- Total Purchase Cost $ 8,939,500 ==============
[B] To reflect allocation of purchase cost to acquired equities and minority interest, with the residual of $4,307,362 allocated to goodwill. Goodwill will be amortized over 10 years under the straight-line method (service based). [C] To reflect Internet Asset, Inc. Class D agreement (see III on Introductory Page). [D] To reflect an accrual of $850,089 for Pre-Paid Acquisition Costs related to the transaction (primarily legal & accounting fees) to Goodwill. II. STATEMENTS OF OPERATIONS ADJUSTMENTS: [J] To reflect expense of goodwill amortization for annual amount of $515,745 (quarterly amount of $128,936). [K] To reflect the P&L impact of Minority Interest resulting from the acquisition. [L] To reflect the elimination of Income Taxes which would not be reflected on a combined basis. III. ADJUSTMENTS NOT REFLECTED IN THE PRO FORMA FINANCIAL STATEMENTS: [1] Possible bonuses of $116,000 annually based upon predetermined corporate performance objectives determined by the Board. [2] Rights to purchase 3,600,000 + 375,000 shares of TopTeam at $7.50 per share. IV. OWNERSHIP IN TOPTEAM MINORITY INTEREST CALCULATION (exclusive of rights to purchase 3,600,000 shares of TopTeam at 7.50 per share issued to eMarketplace): Interactive Architects 3,810,000 51.7% eMarketplace 3,310,100 44.9% Class D (IAI) 250,000 3.4% ------------ 7,370,100 ============ 2
EMARKETPLACE, INC. EXHIBIT A PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1999. [UNAUDITED] Historicals ----------------------------- EMKT Acquired Pro Forma Adjustments September 30, Entities from ------------------------------- Pro Forma 1999 Schedule #1 Debit Credit Combined -------------- ------------- ------------ ------------ -------------- ASSETS: Current Assets: Cash and Cash Equivalents $ 810,942 $ 834,326 $ 2,000,000 [C] $ $ 3,645,268 Restricted Cash 2,690,124 -- 2,690,124 Accounts Receivable, net 76,825 3,473,796 3,550,621 Note Receivable to related party -- 287,751 287,751 Prepaid and Other Current Assets 328,000 287,467 615,467 -------------- ------------- -------------- Total Current Assets 3,905,891 4,883,340 10,789,231 -------------- ------------- -------------- Property and Equipment - Net 51,953 3,626,319 3,678,272 -------------- ------------- -------------- 670,000 [C] Investments -- 80,000 8,939,500 [A] 8,269,500 [B] 80,000 -------------- ------------- -------------- Other Assets: Intangible Assets, net 10,197,629 5,678 4,307,362 [B] 15,360,758 850,089 [D] Other 126,507 59,017 185,524 -------------- ------------- -------------- Total Other Assets 10,324,136 64,695 15,546,282 -------------- ------------- -------------- TOTAL ASSETS $ 14,281,980 $ 8,654,354 $ 30,093,785 ============== ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Line of credit $ -- $ 982,158 982,158 Current portion of debt -- 247,080 247,080 Accounts Payable 1,051,007 1,162,149 2,213,156 Other Accrued Liabilities 357,712 1,448,056 850,089 [D] 2,655,857 -------------- ------------- -------------- Total Current Liabilities 1,408,719 3,839,443 6,098,251 -------------- ------------- -------------- Debt Notes payable and notes payable to related party 178,600 105,331 283,931 Long-term Note Payable -- -- 1,000,000 [C] 1,000,000 Long-term portion of capital lease -- 2,879,767 2,879,767 -------------- ------------- -------------- Total Debt 178,600 2,985,098 4,163,698 -------------- ------------- -------------- TOTAL LIABILITIES 1,587,319 6,824,541 10,261,949 -------------- ------------- -------------- STOCKHOLDERS' EQUITY (DEFICIT): Common Stock 1,269 581,799 581,799 [B] 104 [A] 1,373 Common Stock Subscribed at Par 70 -- 70 Capital in Excess of Par Value 15,358,668 59,892 4,738,500 [B] 8,939,396 [A] 19,889,564 59,892 [B] 330,000 [C] Notes Receivables (71,101) -- (71,101) Preferred Stock 2,124 2,124 [B] -- Deferred Compensation (478,718) -- (478,718) Accumulated Earnings (Deficit) (2,115,527) 1,185,998 1,185,998 [B] (2,115,527) -------------- ------------- -------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 12,694,661 1,829,813 17,225,661 -------------- ------------- -------------- Minority Interest in TopTeam -- -- 2,606,175 [B] 2,606,175 -------------- ------------- ------------ ------------ -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,281,980 $ 8,654,354 $ 22,665,264 $ 22,665,264 $ 30,093,785 ============== ============= ============ ============ ==============
NOTE: TopTeam financials are included in EMKT financials. See Notes to Pro Forma Condensed Combined Financial Statements. 3
SCHEDULE #1 EMARKETPLACE, INC. ACQUIRED ENTITIES PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF OCTOBER 31, 1999. [UNAUDITED] Acquired Entities Historicals -------------------------------------------------------------------------- Total Image Devries Full Moon Orell Muccino On Course Acquired October 31, October 31, October 31, October 31, October 31, October 31, Entities to 1999 1999 1999 1999 1999 1999 Exhibit A ----------- ----------- ----------- ----------- ----------- ----------- ----------- ASSETS: Current Assets: Cash and Cash Equivalents $ 19,618 $ 205,548 $ 347,864 $ 24,612 $ 233,965 $ 2,719 $ 834,326 Accounts Receivable, net 789,748 808,586 936,074 321,705 558,836 58,847 3,473,796 Note Receivable to related party -- 287,751 -- -- -- -- 287,751 Prepaid and Other Current Assets 36,668 42,297 45,070 -- 99,892 63,540 287,467 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Current Assets 846,034 1,344,182 1,329,008 346,317 892,693 125,106 4,883,340 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Property and Equipment - Net 75,900 2,360,057 243,789 17,731 893,015 35,827 3,626,319 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Investments -- -- 80,000 -- -- -- 80,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Other Assets: Intangible Assets, net -- 193 -- 800 2,600 2,085 5,678 Other 8,000 6,776 12,497 12,392 19,352 -- 59,017 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Other Assets 8,000 6,969 12,497 13,192 21,952 2,085 64,695 ----------- ----------- ----------- ----------- ----------- ----------- ----------- TOTAL ASSETS $ 929,934 $ 3,711,208 $ 1,665,294 $ 377,240 $ 1,807,660 $ 163,018 $ 8,654,354 =========== =========== =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Line of credit $ 265,000 364,564 197,221 59,000 -- 96,373 982,158 Current portion of debt 82,700 23,048 51,301 -- 50,337 39,694 247,080 Accounts Payable 449,315 225,594 294,347 50,234 138,805 3,854 1,162,149 Other Accrued Liabilities 328,304 672,851 226,042 86,060 122,030 12,769 1,448,056 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Current Liabilities 1,125,319 1,286,057 768,911 195,294 311,172 152,690 3,839,443 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Debt Notes payable and notes payable to related party 101,097 -- -- -- -- 4,234 105,331 Long-term portion of capital lease -- 2,002,927 48,858 -- 827,982 -- 2,879,767 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Debt 101,097 2,002,927 48,858 -- 827,982 4,234 2,985,098 ----------- ----------- ----------- ----------- ----------- ----------- ----------- TOTAL LIABILITIES 1,226,416 3,288,984 817,769 195,294 1,139,154 156,924 6,824,541 ----------- ----------- ----------- ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIT): Common Stock 3,000 -- 564,400 1,520 8,129 4,750 581,799 Common Stock Subscribed at Par -- -- -- -- -- -- -- Capital in Excess of Par Value -- -- -- -- -- 59,892 59,892 Notes Receivables -- -- -- -- -- -- -- Preferred Stock -- 2,124 -- -- -- -- 2,124 Deferred Compensation -- -- -- -- -- -- -- Accumulated Earnings (Deficit) (299,482) 420,100 283,125 180,426 660,377 (58,548) 1,185,998 ----------- ----------- ----------- ----------- ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (296,482) 422,224 847,525 181,946 668,506 6,094 1,829,813 ----------- ----------- ----------- ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 929,934 $ 3,711,208 $ 1,665,294 $ 377,240 $ 1,807,660 $ 163,018 $ 8,654,354 =========== =========== =========== =========== =========== =========== =========== See Notes to Pro Forma Condensed Combined Financial Statements.
4 EXHIBIT B EMARKETPLACE, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999. [UNAUDITED]
Historicals ------------------------------- Acquired Entities from EMKT Schedule #2 Pro Forma Adjustments September 30, October 31, ------------------------------ Pro Forma 1999 1999 Debit Credit Combined -------------- --------------- ------------ ------------ ---------------- REVENUE $ 2,882,249 $ 5,526,304 $ $ $ 8,408,553 -------------- --------------- ------------ ------------ ---------------- Operating Costs and Expenses: Cost of Revenue 2,677,629 2,940,308 5,617,937 Selling, General and Administrative 914,281 2,008,333 2,922,614 Product Development 99,167 -- 99,167 Amortization of Goodwill and Other Acquired Intangibles 580,332 -- 128,936 [J] 709,268 -------------- --------------- ------------- ------------ ---------------- Total Operating Costs and Expenses 4,271,409 4,948,641 9,348,986 -------------- --------------- ------------- ------------ ---------------- INCOME (LOSS) FROM OPERATIONS (1,389,160) 577,663 (940,433) -------------- --------------- ------------- ------------ ---------------- Other Income (Expense): Interest Income 2,788 409 3,197 Interest Expense (11,908) (65,220) (77,128) Other -- 13,909 13,909 -------------- --------------- ------------- ------------ ---------------- Total Other Income (Expense) (9,120) (50,902) (60,022) --------------- --------------- ------------- ------------ ---------------- Income (Loss) Before Minority Interest and Income Tax Provision (1,398,280) 526,761 (1,000,455) Minority Interest 18,181 -- 289,714 [K] (271,533) -------------- --------------- ------------- ------------ ----------------- Income (Loss) Before Income Tax Provision (1,380,099) 526,761 (1,271,988) Income Tax Provision -- 214,000 214,000 [L] -- -------------- --------------- ------------- ------------ ---------------- NET INCOME (LOSS) $ (1,380,099) $ 312,761 $ 418,650 $ 214,000 $ (1,271,988) ============== =============== ============= ============ ================ NET LOSS PER SHARE: Basic and Diluted $ (0.11) $ (0.09) ============== ================ Weighted Average Common Shares Outstanding 12,691,460 13,736,460 ============== ================
See Notes to Pro Forma Condensed Combined Financial Statements. 5
SCHEDULE #2 EMARKETPLACE, INC. ACQUIRED ENTITIES PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 1999. [UNAUDITED] Acquired Entities Historicals ---------------------------------------------------------------------------------- Total Image Devries Full Moon Orell Muccino On Course Acquired October 31, October 31, October 31, October 31, October 31, October 31, Entities to 1999 1999 1999 1999 1999 1999 Exhibit B ----------- ----------- ----------- ----------- ----------- ----------- ----------- REVENUE $ 1,130,821 $ 1,708,797 $ 1,487,328 $ 408,855 $ 658,481 $ 132,022 $ 5,526,304 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operating Costs and Expenses: Cost of Revenue 668,219 938,047 734,737 176,522 380,605 42,178 2,940,308 Selling, General and Administrative 237,173 821,139 700,242 76,683 91,513 81,583 2,008,333 Product Development -- -- -- -- -- -- -- Amortization of Goodwill and Other Acquired Intangibles -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Operating Costs and Expenses 905,392 1,759,186 1,434,979 253,205 472,118 123,761 4,948,641 ----------- ----------- ----------- ----------- ----------- ----------- ----------- INCOME (LOSS) FROM OPERATIONS 225,429 (50,389) 52,349 155,650 186,363 8,261 577,663 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Other Income (Expense): Interest Income -- -- -- 317 92 -- 409 Interest Expense (17,422) (10,272) (9,018) (1,083) (26,170) (1,255) (65,220) Other 17,720 (106) (1,803) -- -- (1,902) 13,909 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Other Income (Expenses) 298 (10,378) (10,821) (766) (26,078) (3,157) (50,902) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income (Loss) Before Income Tax Provision (Benefit) 225,727 (60,767) 41,528 154,884 160,285 5,104 526,761 Income Tax Provision (Benefit) 97,000 (8,000) 22,000 43,000 59,000 1,000 214,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 128,727 $ (52,767) $ 19,528 $ 111,884 $ 101,285 $ 4,104 $ 312,761 =========== =========== =========== =========== =========== =========== ===========
See Notes to Pro Forma Condensed Combined Financial Statements. 6
EXHIBIT C EMARKETPLACE, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 1999. [UNAUDITED] Historicals ------------------------------ Acquired Entities from EMKT Schedule #3 Pro Forma Adjustments June 30, July 31, ------------------------------- Pro Forma 1999 1999 Debit Credit Combined -------------- --------------- ------------- ------------ ---------------- REVENUE $ 2,208,855 $ 15,767,675 $ $ $ 17,976,530 -------------- --------------- ------------- ------------ ---------------- Operating Costs and Expenses: Cost of Revenue 2,061,725 11,719,739 13,781,464 Selling, General and Administrative 453,616 3,530,667 3,984,283 Product Development 19,173 -- 19,173 Amortization of Goodwill and Other Acquired Intangibles 404,174 -- 515,745 [J] 919,919 -------------- --------------- ------------- ------------ ---------------- Total Operating Costs and Expenses 2,938,688 15,250,406 18,704,839 -------------- --------------- ------------- ------------ ---------------- INCOME (LOSS) FROM OPERATIONS (729,833) 517,269 (728,309) -------------- --------------- ------------- ------------ ---------------- Other Income (Expense): Interest Income 5,795 -- 5,795 Interest Expense (4,259) (414,645) (418,904) Other -- (136,510) (136,510) -------------- --------------- ------------- ------------ ---------------- Total Other Income (Expense) 1,536 (551,155) (549,619) -------------- --------------- ------------- ------------ ---------------- Net Loss Before Minority Interest and Income Tax Provision (728,297) (33,886) (1,277,928) Minority Interest -- -- -- -------------- --------------- ------------- ------------ ---------------- Net Loss Before Income Tax Provision (728,297) (33,886) (1,277,928) Income Tax Provision -- (117,803) 117,803 [L] -- -------------- --------------- ------------- ------------ ---------------- NET LOSS $ (728,297) $ (151,689) $ 515,745 $ 117,803 $ (1,277,928) ============== =============== ============= ============ ================ NET LOSS PER SHARE: Basic and Diluted $ (0.06) $ (0.10) ============== ================ Weighted Average Common Shares Outstanding 11,224,793 12,269,793 ============== ================
See Notes to Pro Forma Condensed Combined Financial Statements. 7
SCHEDULE #3 EMARKETPLACE, INC. ACQUIRED ENTITIES PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED JULY 31, 1999. [UNAUDITED] Acquired Entities Historicals ------------------------------------------------------------------------------------- Total Image Devries Full Moon Orell Muccino On Course Acquired July 31, July 31, July 31, July 31, July 31, July 31, Entities to 1999 1999 1999 1999 1999 1999 Exhibit C ------------ ------------ ------------ ------------ ------------ ------------ ------------ REVENUE $ 2,353,603 $ 6,190,839 $ 3,813,951 $ 980,256 $ 2,131,364 $ 297,662 $ 15,767,675 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Operating Costs and Expenses: Cost of Revenue 1,568,070 4,922,892 2,895,747 618,378 1,582,264 132,388 11,719,739 Selling, General and Admin 972,923 972,884 715,710 252,092 411,353 205,705 3,530,667 Product Development -- -- -- -- -- -- -- Amortization of Goodwill and Other Acquired Intangibles -- -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total Operating Costs and Expenses 2,540,993 5,895,776 3,611,457 870,470 1,993,617 338,093 15,250,406 ------------ ------------ ------------ ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS (187,390) 295,063 202,494 109,786 137,747 (40,431) 517,269 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Other Income (Expense): Interest Income -- -- -- -- -- -- -- Interest Expense (48,686) (250,288) (14,857) -- (96,577) (4,237) (414,645) Other (91,028) (16,605) -- -- (28,877) -- (136,510) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total Other Income (Expense) (139,714) (266,893) (14,857) -- (125,454) (4,237) (551,155) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net Income (Loss) before income taxes (327,104) 28,170 187,637 109,786 12,293 (44,668) (33,886) Income Tax Provision 800 10,063 70,470 33,471 2,999 -- 117,803 ------------ ------------ ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ (327,904) $ 18,107 $ 117,167 $ 76,315 $ 9,294 $ (44,668) $ (151,689) ============ ============ ============ ============ ============ ============ ============
See Notes to Pro Forma Condensed Combined Financial Statements. 8 EX-2 3 EXHIBIT 2 Financial Statements and Report of Independent Certified Public Accountants IMAGE NETWORK, INC. July 31, 1999, 1998 and 1997 CONTENTS Page ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 FINANCIAL STATEMENTS BALANCE SHEETS 4 STATEMENTS OF OPERATIONS 5 STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT) 6 STATEMENTS OF CASH FLOWS 7 NOTES TO FINANCIAL STATEMENTS 9 2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Image Network, Inc. We have audited the accompanying balance sheets of Image Network, Inc. (a California corporation) as of July 31, 1999 and 1998, and the related statements of operations, stockholder's equity (deficit) and cash flows for each of the three years in the period ended July 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Image Network, Inc. as of July 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 1999, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note C to the financial statements, the Company has sustained losses from operations in recent years, its total liabilities exceed its total assets and it has a net working capital deficiency that raises doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note C. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ GRANT THORNTON LLP - ------------------------------------ Los Angeles, California November 6, 1999, (except for Note L, as to which the date is November 23, 1999) 3
Image Network, Inc. BALANCE SHEETS July 31, 1999 1998 --------- --------- ASSETS CURRENT ASSETS Cash $ 180 $ 180 Accounts receivable, less allowance for doubtful accounts of $5,000 in 1999 and $40,000 in 1998 394,078 530,033 Inventory 34,026 33,257 Prepaid income taxes 13,152 16,400 Prepaid expenses and other 32,250 37,245 --------- --------- Total current assets 473,686 617,115 FURNITURE AND EQUIPMENT, net 68,570 319,159 DEPOSITS AND OTHER ASSETS 8,111 16,172 --------- --------- $ 550,367 $ 952,446 ========= ========= LIABILITIES AND DEFICIT IN STOCKHOLDER'S EQUITY CURRENT LIABILITIES Line of credit $ 265,000 $ 300,000 Accounts payable (including bank overdraft of $7,849 in 1999 and $49,256 in 1998) 419,429 352,623 Accrued expenses 103,362 77,667 Customer deposits 42,633 103,271 Current maturities of long-term debt 38,000 38,936 Current maturities of capital lease obligations 9,848 20,440 Due to stockholder 73,306 47,357 --------- --------- Total current liabilities 951,578 940,294 LONG-TERM DEBT, less current maturities 15,464 53,463 CAPITAL LEASE OBLIGATIONS, less current maturities 8,532 55,992 COMMITMENTS -- -- DEFICIT IN STOCKHOLDER'S EQUITY Common stock, no par value - 100,000 shares authorized; 100 shares issued and outstanding 3,000 3,000 Accumulated deficit (428,207) (100,303) --------- --------- (425,207) (97,303) --------- --------- $ 550,367 $ 952,446 ========= ========= The accompanying notes are an integral part of these statements
4
Image Network, Inc. STATEMENTS OF OPERATIONS Years ended July 31, 1999 1998 1997 ----------- ----------- ----------- Revenues Promotional product sales $ 2,022,444 $ 3,231,646 $ 2,914,931 Professional services 331,159 778,649 660,095 ----------- ----------- ----------- Total revenues 2,353,603 4,010,295 3,575,026 Costs and expenses Cost of products sold 1,442,501 2,412,663 2,143,476 Project personnel and expenses 125,569 377,953 226,098 Selling, general and administrative expenses 972,923 1,396,845 1,149,294 ----------- ----------- ----------- Total costs and expenses 2,540,993 4,187,461 3,518,868 ----------- ----------- ----------- Operating (loss) income (187,390) (177,166) 56,158 Other income (expense) Interest expense (48,686) (46,155) (43,854) (Loss) gain on disposal of furniture and equipment (89,980) 2,959 5,355 Other income (expense) (1,048) 2,822 16,311 ----------- ----------- ----------- (139,714) (40,374) (22,188) ----------- ----------- ----------- (Loss) income before provision (benefit) for income taxes (327,104) (217,540) 33,970 Provision (benefit) for income taxes 800 (6,285) 9,401 ----------- ----------- ----------- NET (LOSS) INCOME $ (327,904) $ (211,255) $ 24,569 =========== =========== =========== The accompanying notes are an integral part of these statements.
5
Image Network, Inc. STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT) Years ended July 31, 1997, 1998 and 1999 Common Stock Retained --------------------- earnings Number (accumulated of Shares Amount deficit) Total --------- --------- ------------ --------- Balance at August 1, 1996 100 $ 3,000 $ 86,383 $ 89,383 Net income for the year ended July 31, 1997 -- -- 24,569 24,569 --------- --------- --------- --------- Balance at July 31, 1997 100 3,000 110,952 113,952 Net loss for the year ended July 31, 1998 -- -- (211,255) (211,255) --------- --------- --------- --------- Balance at July 31, 1998 100 3,000 (100,303) (97,303) Net loss for the year ended July 31, 1999 -- -- (327,904) (327,904) --------- --------- --------- --------- Balance at July 31, 1999 100 $ 3,000 $(428,207) $(425,207) ========= ========= ========= ========= The accompanying notes are an integral part of this statement.
6
Image Network, Inc. STATEMENTS OF CASH FLOWS Years ended July 31, 1999 1998 1997 --------- --------- --------- Cash flows from operating activities: Net (loss) income $(327,904) $(211,255) $ 24,569 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities Depreciation and amortization 69,004 100,513 63,504 Loss (gain) on disposal of furniture and equipment 89,980 (2,959) (5,355) Bad debt expense 35,000 33,000 7,000 Deferred income tax expense (benefit) -- 2,915 (5,088) Change in assets and liabilities: Decrease (increase) in accounts receivable 100,955 (38,831) (23,311) (Increase) decrease in inventory (769) 140,629 (87,423) Decrease (increase) in prepaid income taxes 3,249 (4,103) (14,811) Decrease (increase) in prepaid expenses and other 9,444 (13,677) 38,698 Decrease in deposits and other assets 3,611 27,362 12,115 Increase in accounts payable 66,807 13,679 109,876 Increase (decrease) in accrued expenses 25,695 (16,282) (88,972) (Decrease) increase in customer deposits (60,638) (59,307) 42,392 --------- --------- --------- Net cash provided by (used in) operating activities 14,434 (28,316) 73,194 --------- --------- --------- Cash flows from investing activities: Proceeds from sale of furniture and equipment 50,000 -- 38,948 Acquisition of furniture and equipment (1,813) (22,221) (315,751) --------- --------- --------- Net cash provided by (used in) financing activities 48,187 (22,221) (276,803) --------- --------- --------- The accompanying notes are an integral part of these statements.
7
Image Network, Inc. STATEMENTS OF CASH FLOWS - CONTINUED Years ended July 31, 1999 1998 1997 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from line of credit $ 120,000 $ 1,547,000 $ 1,110,000 Repayments of borrowings under line of credit (155,000) (1,494,000) (1,011,000) Principal payments of capital lease obligations (14,633) (17,422) (15,391) Advances from stockholder 133,000 70,000 -- Repayments of advances from stockholder (107,051) (22,643) -- Proceeds from long-term debt -- -- 163,000 Principal payments of long-term debt (38,937) (39,016) (50,676) ----------- ----------- ----------- Net cash (used in) provided by financing activities (62,621) 43,919 195,933 ----------- ----------- ----------- Net change in cash and cash equivalents -- (6,618) (7,676) Cash and cash equivalents at beginning of period 180 6,798 14,474 ----------- ----------- ----------- Cash and cash equivalents at the end of period $ 180 $ 180 $ 6,798 =========== =========== =========== Supplemental disclosure of cash flow information: Interest paid $ 48,839 $ 47,981 $ 42,844 =========== =========== =========== Income taxes paid $ 800 $ 800 $ 17,800 =========== =========== =========== Noncash investing and financing activities: Assets acquired under capital leases $ -- $ 29,395 $ 66,934 =========== =========== =========== Principal amount of capital lease debt assumed by buyer in connection with disposal of assets under capital leases $ 43,418 $ -- $ -- =========== =========== =========== The accompanying notes are an integral part of these statements.
8 Image Network, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE A - DESCRIPTION OF BUSINESS Image Network, Inc. (the "Company") is a promotion marketing agency specializing in integrated channel and consumer promotion campaigns. The Company provides promotional solutions to technology companies utilizing custom logo merchandise. The Company's focus is to facilitate its clients' marketing, sales and human resource departments with a full service approach for programs such as: web company stores, incentive programs/contests, direct response promotions and custom logo merchandise. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Leased property under capital leases is amortized over the lives of the respective leases or over the service lives of the assets for those leases, which substantially transfer ownership. The straight-line method of depreciation is followed for substantially all assets for financial reporting and income tax purposes. The estimated lives used in determining depreciation are generally three to seven years. RECOGNITION OF REVENUE Promotional products revenue is recognized when products are shipped. Professional services revenue is recognized for time and materials-based arrangements as services are performed and fixed fee arrangements on the percentage-of-completion method. Under the percentage-of-completion method, revenues and gross profit are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs, commencing when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Customer deposits represent the amount of customer payments received in advance of services being performed or promotional products being shipped. PROJECT PERSONNEL AND EXPENSES Project personnel and expenses consist primarily of salaries and employees benefits for personnel dedicated to client projects and non-reimbursed direct expenses incurred to complete client projects. 9 Image Network, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVENTORY Inventory, consisting of promotional products, is stated at the lower of cost or market. Cost is determined by the first-in, first out (FIFO) method. INCOME TAXES Income taxes are accounted for using the liability method, under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be settled or realized. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts receivable. The Company has no significant off-balance sheet concentrations of credit risk, such as foreign exchange contracts, option contracts or hedging arrangements. Accounts receivable are typically unsecured and are derived from transactions with and from customers primarily located in the United States. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. The Company maintains an allowance for doubtful accounts based on the expected collectibility of accounts receivable. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, short-term trade receivables and payables, short-term bank borrowings and amounts due to stockholder. The carrying values of cash and short-term trade receivables and payables approximate their fair values. Based on borrowing rates currently used by the Company for financing, the carrying values of the short-term bank borrowings and amounts due to stockholder approximate their estimated fair values. USING ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. 10 Image Network, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- Continued SEGMENT REPORTING The Company is centrally managed and operate in one business segment; promotional marketing. NOTE C - GOING CONCERN MATTERS The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company has incurred losses of $327,904 and $211,255 during the years ended July 31, 1999 and 1998. The Company's total liabilities exceed its total assets at July 31, 1999. In addition, the Company has a net working capital deficiency of $478,072 at July 31, 1999. The Company is also in violation of certain financial covenants under its line of credit arrangement and has not received a waiver of such violations. These factors, among others, indicate that the Company may be unable to continue as a going concern. The Company is continuing to seek additional financing from its stockholder and is exploring alternatives that include strategic investors. See Note L for subsequent events. In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements on a continuing basis, to maintain present financing, and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. 11 Image Network, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE D - FURNITURE AND EQUIPMENT Furniture and equipment is comprised of the following at July 31: 1999 1998 ------------ ------------ Vehicles $ 33,474 $ 33,474 Furniture and office equipment 16,575 124,335 Computer equipment 71,957 140,270 Leasehold improvements 33,230 214,758 ------------ ------------ 155,236 512,837 Less - accumulated depreciation and amortization (86,666) (193,678) ------------ ------------ $ 68,570 $ 319,159 ============ ============ Included in computer equipment in 1999 and 1998 is $29,395 and $96,330 of assets acquired under capital leases. Accumulated amortization of assets under capital leases totaled $25,752 and $11,504 at July 31, 1999 and 1998, respectively. In 1999, the Company entered into an agreement to terminate its existing facility lease and relocate its office facility. In connection with the relocation, the Company received a lump sum payment of $50,000 from the building owner and disposed of furniture and equipment (primarily leasehold improvements) resulting in a loss on disposal of $89,980 in 1999. NOTE E - LINE OF CREDIT The Company has a revolving line of credit with a bank, subject to a credit limit of the lower of 75% of eligible accounts receivable or $400,000. The line of credit is collateralized by substantially all of the assets of the Company and is guaranteed by the stockholder. Borrowings under the line of credit bear interest at 2% above the bank's reference rate (effective rate of 11% at July 31, 1999). The line of credit agreement contains various financial and operating covenants which, among other requirements, imposes limitations on the Company's ability to incur additional indebtedness, sell assets except in the ordinary course of business, make certain investments, enter into leases and pay dividends. The Company is also required to comply with covenants related to minimum net worth and other financial ratios. At July 31, 1999, the Company was not in compliance with certain financial covenants. 12
Image Network, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE F - LONG-TERM DEBT Long-term debt consists of the following as of July 31: 1999 1998 ---------- ---------- Notes payable to bank, payable in monthly principal installments of $2,875 plus interest, bearing interest at 2.5% above the bank's reference rate (effective rate of 11.5% at July 31, 1999). The note is collateralized by substantially all of the assets of the Company and is guaranteed by the stockholder. $ 40,250 $ 74,750 Notes payable to bank, payable in monthly principal and interest payments of $498, bearing interest at 7.25%, collateralized by a Company vehicle. 13,214 17,649 ---------- ---------- 53,464 92,399 Less - current maturities (38,000) (38,936) ---------- ---------- Long-term portion $ 15,464 $ 53,463 ========== ========== Aggregate maturities of long term debt as of July 31, 1999 is as follows: Year Ending July 31, -------------------- 2000 $ 38,000 2001 9,750 2002 5,714 ---------- Total $ 53,464 ==========
13 Image Network, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE G - CAPITAL LEASE OBLIGATIONS The Company leases certain computer equipment under various agreements which are classified as capital leases. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of July 31, 1999: Year Ended July 31, ------------------- 2000 $ 12,177 2001 9,133 ------------ Total minimum lease payments 21,310 Less - amount representing interest (2,930) ------------ Present value of net minimum lease payments 18,380 Less - current portion (9,848) ------------ Long-term capital lease obligations $ 8,532 ============ In connection with a relocation of the Company's offices in 1999, the Company agreed to transfer its rights under a capital lease agreement to an unrelated party. The unrelated party assumed the remaining obligation under the capital lease agreement resulting in a reduction of the capital lease obligation of $43,418 in 1999. Furniture and equipment was reduced for the net carrying value of the assets under capital lease. The resulting loss was not significant. NOTE H - DUE TO STOCKHOLDER In 1999 and 1998, the stockholder made advances to the Company for working capital and cash flow purposes. These advances bear interest at 12.82% and are payable upon demand. Interest paid to the stockholder totaled $6,429 and $2,905 for the years ended July 31, 1999 and 1998, respectively. 14 Image Network, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997
NOTE I - INCOME TAXES Income tax expense (benefit) consists of the following: 1999 1998 1997 ----------- ----------- ---------- Current Federal $ -- $ (10,000) $ 9,398 State 800 800 5,091 ----------- ----------- ---------- 800 (9,200) 14,489 ----------- ----------- ---------- Deferred Federal -- 1,893 (3,569) State -- 1,022 (1,519) ----------- ----------- ---------- -- 2,915 (5,088) ----------- ----------- ---------- Total $ 800 $ (6,285) $ 9,401 =========== =========== ========== A reconciliation from the U.S. federal statutory income tax rates applicable to the Company's level of income to the effective income tax rate is as follows: 1999 1998 1997 ----------- ----------- ---------- U.S. federal statutory rate (34.0)% (34.0)% 15.0% State income taxes, net of federal tax benefit (6.0) (6.0) 7.5 Change in valuation allowance 39.9 35.7 -- Meals and entertainment .1 1.4 5.2 ----------- ----------- ---------- Income tax provision -- (2.9)% 27.7% =========== =========== ==========
15 Image Network, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE I - INCOME TAXES - Continued Significant components of the Company's deferred tax assets at July 31 are as follows: 1999 1998 ------------ ---------- Assets: Net operating loss carryforward $ 92,941 $ 20,835 Allowance for doubtful accounts 1,192 7,867 Accumulated depreciation 18,006 4,650 State taxes 6,816 2,434 ------------ ---------- Total deferred tax asset 118,955 35,786 Valuation allowance (118,955) (35,786) ------------ ---------- Net deferred tax asset $ -- $ -- ============ ========== Management periodically reviews the expected realization of the Company's deferred tax assets and records a valuation allowance, as appropriate, when existing conditions impact the probability of ultimate realization of the deferred tax asset. Due to the Company's recurring losses before income taxes, management believes it is more likely than not that the Company will not realize the net deferred tax asset. Accordingly, the Company has recorded a valuation allowance to reflect the uncertainties associated with the ultimate realization of the deferred tax assets. NOTE J - LEASE COMMITMENTS The Company has entered into non-cancellable operating leases for certain office equipment and a vehicle. In addition, the Company's office premises are leased on a month-to-month basis, which is cancellable by either party. Rent expense for the years ended July 31, 1999, 1998 and 1997 was $44,031, $49,439 and $66,748, respectively. The minimum annual payments under noncancellable operating lease agreements as of July 31, 1999 are summarized as follows: Year ending July 31, -------------------- 2000 $ 14,000 2001 1,000 ---------- $ 15,000 ========== 16 Image Network, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE K- MAJOR CUSTOMERS During the year ended July 31, 1997, sales to three customers accounted for 12%, 11%, and 11% of total revenue. During the year ended July 31, 1998, sales to one customer accounted for 23% of total revenue. During the year ended July 31, 1999, sales to two customers accounted for 15% and 10% of total revenue. NOTE L- SUBSEQUENT EVENTS On August 31, 1999, the Company borrowed $150,000 from the stockholder to be collateralized by substantially all of the assets of the Company. On November 23, 1999, the Company's stockholder agreed to exchange all of the outstanding shares of the Company's common stock for shares of eMarketplace, Inc. (a publicly traded company) and shares of TopTeam, Inc., a subsidiary of eMarketplace, Inc. As a result of this transaction, the Company became a wholly-owned subsidiary of TopTeam, Inc. 17 EX-3 4 EXHIBIT 3 FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS DEVRIES DATA SYSTEMS, INC. July 31, 1999, 1998 and 1997 CONTENTS PAGE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 FINANCIAL STATEMENTS BALANCE SHEETS 4 STATEMENTS OF INCOME 5 STATEMENT OF STOCKHOLDERS' EQUITY 6 STATEMENTS OF CASH FLOWS 7 NOTES TO FINANCIAL STATEMENTS 9 2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders DeVries Data Systems, Inc. We have audited the accompanying balance sheets of DeVries Data Systems, Inc. as of July 31, 1999 and 1998, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended July 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of DeVries Data Systems, Inc. as of July 31, 1999 and 1998, the results of its operations and its cash flows for each of the three years in the period ended July 31, 1999, in conformity with generally accepted accounting principles. /s/ GRANT THORNTON LLP - ------------------------------------ Los Angeles, California October 21, 1999 (except for Note K, as to wich the date is November 23, 1999) 3
DeVries Data Systems, Inc. BALANCE SHEETS July 31, ASSETS 1999 1998 ---------- ---------- CURRENT ASSETS Cash $ 52,921 $ 158,861 Accounts receivable, net of allowance for doubtful accounts of $147,500 and $19,400 in 1999 and 1998, respectively 484,218 441,398 Unbilled receivables 226,554 167,544 Due from stockholder 322,751 53,110 ---------- ---------- Total current assets 1,086,444 820,913 PROPERTY AND EQUIPMENT, net 2,387,402 736,170 DEPOSITS AND OTHER ASSETS 26,737 1,830 ---------- ---------- $3,500,583 $1,558,913 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Lines of credit $ 371,416 $ 33,964 Accounts payable 230,766 95,499 Accrued liabilities 179,806 139,432 Income taxes payable 80,204 93,815 Deferred income taxes 155,207 169,865 Current maturities of capital lease obligations 40,281 17,237 ---------- ---------- Total current liabilities 1,057,680 549,812 CAPITAL LEASE OBLIGATIONS, less current maturities 1,992,938 577,243 COMMITMENTS -- -- STOCKHOLDERS' EQUITY Preferred stock, aggregate liquidation value of $9,000,000; $.0001 par value; 15,000,000 shares authorized; 10,000,000 shares designated as Series A; 6,000,000 shares issued and outstanding at July 31, 1999 and 1998 2,124 2,124 Common stock, no par value; 15,000,000 shares authorized, no shares issued and outstanding -- -- Retained earnings 447,841 429,734 ---------- ---------- 449,965 431,858 ---------- ---------- $3,500,583 $1,558,913 ========== ==========
The accompanying notes are an integral part of these statements. 4
DeVries Data Systems, Inc. STATEMENTS OF INCOME Years ended July 31, 1999 1998 1997 ----------- ----------- ----------- Revenues Consulting services $ 5,658,045 $ 3,762,135 $ 1,307,977 Product sales 532,794 425,190 57,552 ----------- ----------- ----------- Total revenues 6,190,839 4,187,325 1,365,529 Costs and expenses Project personnel and expenses 4,423,571 2,718,088 1,072,448 Costs of products sold 499,321 373,060 Selling, general and administrative expenses 972,884 460,565 192,010 ----------- ----------- ----------- Total costs and expenses 5,895,776 3,551,713 1,264,458 ----------- ----------- ----------- Operating income 295,063 635,612 101,071 Interest expense 250,288 66,318 8,576 Other expense (income) 16,605 (2,341) 3,335 ----------- ----------- ----------- 266,893 63,977 11,911 ----------- ----------- ----------- Income before income taxes 28,170 571,635 89,160 Income tax expense 10,063 222,898 37,445 ----------- ----------- ----------- NET INCOME $ 18,107 $ 348,737 $ 51,715 =========== =========== ===========
The accompanying notes are an integral part of these statements. 5
DeVries Data Systems, Inc. STATEMENT OF STOCKHOLDERS' EQUITY Years ended July 31, 1997, 1998 and 1999 Series A Preferred Stock Common Stock Total -------------------- --------------------- Retained Stockholders' Shares Amount Shares Amount Earnings equity --------- ------- -------- -------- ---------- ------------- Balance, August 1, 1996 6,000,000 $ 2,124 - $ - $ 29,282 $ 31,406 Net income for the year ended July 31, 1997 - - - - 51,715 51,715 Balance at July 31, 1997 6,000,000 2,124 - - 80,997 83,121 Net income for the year ended July 31, 1998 - - - - 348,737 348,737 Balance at July 31, 1998 6,000,000 2,124 - - 429,734 431,858 Net income for the year ended July 31, 1999 - - - - 18,107 18,107 Balance at July 31, 1999 6,000,000 $ 2,124 - $ - $447,841 $ 449,965 ========= ======= ====== ======= ========= ==========
The accompanying notes are an integral part of these statements. 6
DeVries Data Systems, Inc. STATEMENTS OF CASH FLOWS Years ended July 31, 1999 1998 1997 --------- --------- --------- Cash flows from operating activities: Net income $ 18,107 $ 348,737 $ 51,715 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 120,452 40,306 9,582 Bad debt expense 153,653 51,355 -- Deferred income taxes (14,658) 129,222 35,419 Changes in operating assets and liabilities: Accounts receivable (196,473) (364,951) (58,398) Unbilled receivables (59,010) (132,196) (35,348) Deposits and other assets (24,907) 1,965 (1,052) Accounts payable 135,267 48,214 47,285 Income taxes payable (13,612) 92,785 230 Other accrued liabilities 59,257 108,091 (18,089) --------- --------- --------- Net cash provided from operating activities 178,076 323,528 31,344 Cash flows from investing activities: Purchase of capital assets (342,386) (116,289) (53,622) Increase in notes receivable from officer (269,641) (53,110) -- --------- --------- --------- Net cash used in investing activities (612,027) (169,399) (53,622) --------- --------- ---------
The accompanying notes are an integral part of these statements. 7
DeVries Data Systems, Inc. STATEMENTS OF CASH FLOWS - CONTINUED Years ended July 31, 1999 1998 1997 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from lines of credit $ 459,843 $ 85,358 $ 70,595 Repayment of lines of credit (122,391) (89,308) (32,680) Advances from stockholder 25,000 75,020 23,440 Repayments of advances from stockholders (34,441) (85,999) (21,494) ----------- ----------- ----------- Net cash provided by (used in) financing activities 328,011 (14,929) 39,861 ----------- ----------- ----------- Net (decrease) increase in cash (105,940) 139,200 17,583 Cash, beginning of period 158,861 19,661 2,078 ----------- ----------- ----------- Cash, end of period $ 52,921 $ 158,861 $ 19,661 =========== =========== =========== Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 250,288 $ 66,318 $ 8,576 =========== =========== =========== Income taxes $ 18,800 $ 800 $ 964 =========== =========== =========== Noncash investing and financing activities: Assets acquired under capital leases $ 1,429,298 $ 555,918 $ 38,560 =========== =========== ===========
The accompanying notes are an integral part of these statements. 8 DeVries Data Systems, Inc. NOTES TO FINANCIAL STATEMENTS July 31, 1999, 1998 and 1997 NOTE A - DESCRIPTION OF BUSINESS DeVries Data Systems, Inc. (the "Company") is a Delaware corporation incorporated in 1995. The Company is an information technology consulting firm offering services in the areas of systems integration, software development and software training. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Capital lease assets are amortized using the straight-line method over the useful lives of the assets. Expenditures for all maintenance and repairs are charged against income. Additions, major renewals and replacements that increase the useful lives of assets are capitalized. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the lease term or the estimated useful life of the leasehold improvements. RECOGNITION OF REVENUE Revenue is recognized for time and materials-based arrangements as services are performed and fixed fee arrangements on the percentage-of-completion method. Under this approach, revenues and gross profit are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs, commencing when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy. Unbilled receivables on contracts are comprised of costs incurred, plus earnings on certain contracts which have not been billed. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Customer deposits represent the amount of customer payments received in advance of services being performed. COSTS OF SERVICES Costs of services is comprised primarily of salaries, employee benefits, and incentive compensation of billable employees and a proportionate share of depreciation, facilities, travel and other related costs based on the ratio of billable employees to total employees. 9 DeVries Data Systems, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued INCOME TAXES Income taxes are accounted for using the liability method, under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be settled or realized. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, accounts receivable and unbilled receivables. The Company has no significant off-balance sheet concentrations of credit risk, such as foreign exchange contracts, option contracts or hedging arrangements. The Company maintains its cash balances in the form of bank demand deposits and money market accounts with financial institutions that management believes are creditworthy. Accounts receivable are typically unsecured and are derived from transactions with and from customers primarily located in the United States. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. The Company maintains an allowance for doubtful accounts based on the expected collectibility of accounts receivable. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, short-term receivables and payables, line of credit borrowings, capital lease obligations and amounts due from stockholder. The carrying values of the cash equivalents, short-term trade receivables and payables and amount due from stockholder approximate their fair values. Based on borrowing rates currently used by the Company for financing, the carrying values of the short-term bank borrowings and capital lease obligations approximate their estimated fair values. ACCOUNTING FOR STOCK BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value based method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and provides the pro forma disclosures required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock over the exercise price at the measurement date. The measurement date is the date on which both the number of shares the stock options are convertible into, and the exercise price, are known. 10 DeVries Data Systems, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued USING ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. SEGMENT REPORTING The Company is centrally managed and operates in one business segment: information technology consulting. NOTE C - PROPERTY AND EQUIPMENT Property and equipment is comprised of the following at July 31:
Estimated 1999 1998 Useful lives ---------- ---------- ------------ Buildings $1,929,063 $ 569,568 25 years Computer equipment 297,396 130,272 5 - 7 years Leasehold improvements 195,887 26,327 Life of lease Furniture and fixtures 88,844 33,307 7 - 10 years Automobiles 26,738 26,738 5 years Software 21,814 1,846 3 years ---------- ---------- 2,559,742 788,058 Less accumulated depreciation and amortization (172,340) (51,888) ---------- ---------- $2,387,402 $ 736,170 ========== ==========
11 DeVries Data Systems, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE D - LINES OF CREDIT At July 31, 1999, the Company has a working capital line of credit that provides for advances up to the lesser of $250,000 or 70% of eligible accounts receivable, as defined in the borrowing agreement. The line of credit expires on December 22, 1999. Borrowings under the working capital line of credit bear interest at the bank's index rate plus 1.5% (9.25% at July 31, 1999). Borrowings are collateralized by substantially all of the Company's assets and are guaranteed by the Company's principal stockholder. At July 31, 1999, the Company has $245,108 outstanding under this line of credit. The working capital line of credit agreement contains various financial and operating covenants which, among other requirements, imposes limitations on the Company's ability to incur additional indebtedness, sell assets except in the ordinary course of business, make certain investments, enter into leases and pay dividends. The Company is also required to comply with covenants related to minimum net worth and other financial ratios. At July 31, 1999, the Company was not in compliance with certain covenants. In addition to the working capital line of credit, the Company has two other unsecured lines of credit with available borrowings up to $130,000. One of the agreements provides for advances up to $100,000 and borrowings bear interest at the bank's reference rate plus 4.25% (11.22% and 12% at July 31, 1999 and 1998, respectively). The other line of credit totaling $30,000 bears interest at 15%. These two lines of credit may be cancelled by the lenders at any time. At July 31, 1999 and 1998, the Company had $126,308 and $33,964 outstanding under both of these arrangements. NOTE E - CAPITAL LEASE OBLIGATIONS The Company leases its operating facilities and certain equipment under capital lease agreements that expire at varying dates through February 2024. The Company is required to pay all costs related to ownership, including repairs, maintenance, insurance and property taxes. The operating facilities are leased from the principal stockholder. Interest paid to the stockholder was $217,854 and $54,816 in 1999 and 1998, respectively. 12 DeVries Data Systems, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE E - CAPITAL LEASE OBLIGATIONS - Continued At July 31, 1999, future minimum lease payments under the capital lease agreements were as follows:
Related Nonrelated YEARS ENDING JULY 31, parties parties Total ----------- ----------- ----------- 2000 $ 334,740 $ 42,801 $ 377,541 2001 334,740 32,324 367,064 2002 334,740 32,324 367,064 2003 334,740 29,001 363,741 2004 334,740 - 334,740 Thereafter 5,892,718 - 5,892,718 ----------- --------- ----------- Net minimum lease payments 7,566,418 136,450 7,702,868 Amount representing interest (5,644,044) (25,605) (5,669,649) ----------- --------- ----------- Present value of future minimum lease payments $1,992,938 $ 110,845 $ 2,033,219 ========== ========= Less current portion (40,281) ----------- $ 1,992,938 ===========
Assets recorded under capital leases are included in property and equipment as follows: 1999 1998 ---------- -------- Buildings $1,929,063 $569,568 Computer equipment 158,304 44,947 ---------- -------- 2,087,367 614,515 Accumulated amortization (101,824) (28,355) ---------- -------- $1,985,543 $586,160 ========== ======== 13 DeVries Data Systems, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE F - INCOME TAXES Income tax expense (benefit) consists of the following: 1999 1998 1997 -------- --------- --------- Current Federal $ 17,195 $ 81,777 $ 802 State 7,526 11,899 1,224 -------- --------- --------- 24,721 93,676 2,026 -------- --------- --------- Deferred Federal (10,384) 100,578 29,692 State (4,274) 28,644 5,727 -------- --------- --------- (14,658) 129,222 35,419 -------- --------- --------- Total $ 10,063 $ 222,898 $ 37,445 ======== ========= ========= A reconciliation from the U.S. federal statutory income tax rates, applicable to the Company's level of income, to the effective income tax rate is as follows:
1999 1998 1997 -------- -------- -------- U.S. federal statutory rate 15% 34% 21% State income taxes, net of federal tax benefit 7 6 6 Measurement of net deferred tax liabilities at expected future rates 14 (1) 15 ---- --- --- Income tax provision rate 36% 39% 42% ==== === === Significant components of the Company's deferred tax assets and liabilities at July 31 are as follows: 1999 1998 ---------- ---------- Assets Accounts payable and accrued liabilities $ 167,678 $ 87,580 ---------- ---------- Liabilities Accounts receivable (290,279) (240,512) Accelerated depreciation (28,365) (13,417) State taxes (4,241) (3,515) ---------- ---------- (322,885) (257,444) ---------- ---------- Net deferred tax liability $ (155,207) $ (169,865) ========== ==========
14 DeVries Data Systems, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE G - STOCKHOLDERS' EQUITY In 1999, the Company undertook a recapitalization by converting all of its outstanding common stock to Series A preferred stock. The financial statements of prior years have been restated to reflect the recapitalization. Each Series A preferred stock is convertible into one share of common stock. The holders of the Series A preferred stock are entitled to two votes per share on matters submitted to a vote. Each share of Series A preferred stock is also entitled to an annual noncumulative dividend of $0.12 as declared by the Board of Directors, prior to any distributions made to common stockholders. The Series A preferred stock shall also receive dividends equal to the amount declared and paid to common stock stockholders, if any. In the event of a liquidation, dissolution or winding up of the Company, the Series A preferred stockholders are entitled to a liquidation preference of $1.50 per share plus any declared and unpaid dividends. After payment of such liquidation preference, the remaining assets of the Company shall be distributed ratably among the common stockholders. The Company has adopted the 1998 Stock Plan (the "Plan"). Under the terms of the Plan, the Company's Board of Directors may grant incentive stock options and nonqualified stock options to directors, officers, employees and consultants to purchase up to an aggregate of 1,500,000 shares of the Company's common stock. Incentive stock options are granted at fair market value on the date of grant as determined by the Board of Directors. Nonqualified stock options are granted at not less than 85% of fair market value on the date of grant as determined by the Board of Directors. Generally, options granted under the Plan expire ten years from the date of grant and vest over four years commencing one year from the grant date. Options granted to stockholders who own greater than 10% of the Company's outstanding common stock expire five years from the date of grant and, in accordance with the provisions of the Plan, must be issued at prices not less than 110% of the fair market value of the stock on the date of grant. Options issued under the plan become fully exercisable upon the consummation of (1) the sale of more than 50% of the capital stock of the Company, or (2) the sale of all our substantially all of the assets of the Company. At July 31, 1999, the Company has reserved 1,500,000 shares of common stock for grant under its stock option plan. 15 DeVries Data Systems, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE G - STOCKHOLDERS' EQUITY - Continued Activity under the Plan for the years ended July 31, 1999 and 1998 was as follows:
1999 1998 ----------------------- ------------------------- Weighted Weighted average average exercise exercise Shares price Shares price -------- --------- ---------- ----------- Options outstanding August 1 4,000 $.34 -- -- Granted 553,000 $.34 4,000 $ .34 Cancelled (22,000) $.34 -- -- -------- --------- Options outstanding, July 31 535,000 $.34 4,000 $ .34 ======== ========= Options available for grant July 31 965,000 1,496,000 ======== =========
At July 31, 1999, options to purchase 1,000 shares of common stock were exercisable. No options were exercisable at July 31, 1998. The weighted average remaining contractual life of outstanding options was 9 years at July 31, 1999. Had compensation cost for the Company's option plan been determined based on the fair value at the grant dates, as specified by SFAS No. 123, net income for fiscal 1999 and 1998 would not reflect a material change. The weighted average fair value of options granted under the Plan during 1999 and 1998 was $.07. All options granted in 1998 and 1999 were granted at the fair value of the Company's common stock. Fair value was estimated on the date of grant using the Black-Scholes method assuming a no dividend yield, a weighted average risk-free interest rate of 6.0%, a weighted average expected life of four years and zero volatility. 16 DeVries Data Systems, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE H - RELATED PARTY TRANSACTIONS The Company leases its facilities under capital leases from its principal stockholder. The leases expire at various dates through February 2024. See Note E. The Company advanced funds to the principal stockholder in connection with the construction of the facility leased to the Company (see Note E). The amounts due from stockholder of $322,751 and $53,110 at July 31, 1999 and 1998, respectively are noninterest bearing and due upon demand. In connection with the construction of the facilities, the Company guaranteed the debt of the stockholder of approximately $1,200,000. The loan amount subject to the guarantee is expected to decline over a 30-year period before expiring in 2028. The company has not estimated the fair value of the guarantee; however, the Company does not anticipate that it will incur losses as a result of this guarantee. In fiscal 1999, 1998 and 1997, the principal stockholder made advances to the Company for cash flow purposes. These advances bear interest at 7%. At July 31, 1998, the Company had a balance due to the stockholder of $9,441, which is included in accrued liabilities. There are no amounts due at July 31, 1999. Interest paid on the advance totaled $1,501, for the year ended July 31, 1997. Interest expense from stockholder advances was not significant in 1999 and 1998. NOTE I - MAJOR CUSTOMERS During the year ended July 31, 1999, sales to one customer accounted for 16% of total revenue. During the year ended July 31, 1998, two customers accounted for 21% and 10% of total revenue. During the year ended July 31, 1997, three customers accounted for 26%, 16% and 10% of total revenue. NOTE J - EMPLOYEE BENEFIT PLAN The Company established a contributory profit sharing plan under Section 401(k) of the Internal Revenue Code covering all eligible employees. The Company may make a matching contribution, at the Company's discretion, based on a participant's eligible contributions. The Company has not made a contribution to the plan in 1999, 1998 or 1997. 17 DeVries Data Systems, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE K - SUBSEQUENT EVENTS On November 23, 1999, the Company's stockholders agreed to exchange all of the outstanding shares of the Company's preferred stock for shares of eMarketplace, Inc. (a publicly traded company) and shares of TopTeam, Inc., a subsidiary of eMarketplace, Inc. All outstanding employee stock options to purchase the Company's common stock became fully exercisable upon the closing of this agreement. As a result of this transaction, the Company became a wholly-owned subsidiary of TopTeam, Inc. In connection with the acquisition by TopTeam, Inc., the stockholder and the Company agreed to modify the terms of the facilities leases previously classified as capital leases (see Note E). The changes in the lease provisions reduced the lease terms to five years (through November, 2004). The reduction in the lease terms changed the classification of the leases from capital leases to operating leases. Accordingly, the capital asset and related obligation were removed from the balance sheet on the date of the change in the lease terms. The new lease agreements shall be accounted for as operating leases. 18 EX-4 5 EXHIBIT 4 Financial Statements and Report of Independent Certified Public Accountants FULL MOON INTERACTIVE GROUP, INC. July 31, 1999, 1998 and 1997 CONTENTS PAGE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 FINANCIAL STATEMENTS BALANCE SHEETS 4 STATEMENTS OF INCOME 5 STATEMENT OF STOCKHOLDERS' EQUITY 6 STATEMENTS OF CASH FLOWS 7 NOTES TO FINANCIAL STATEMENTS 8 2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Full Moon Interactive Group, Inc. We have audited the accompanying balance sheets of Full Moon Interactive Group, Inc. (a California corporation) as of July 31, 1999 and 1998, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended July 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Full Moon Interactive Group, Inc. as of July 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 1999, in conformity with generally accepted accounting principles. /s/ GRANT THORNTON LLP - ------------------------------------ Los Angeles, California October 28, 1999 (except for Note L, as to which the date is November 23, 1999) 3
Full Moon Interactive Group, Inc. BALANCE SHEETS July 31, ASSETS 1999 1998 ----------- --------- Current assets Cash and cash equivalents $ 49,568 $ 70,755 ----------- --------- Accounts receivable, less allowance for doubtful accounts of $25,000 in 1999 and 1998 1,070,683 539,346 Total current assets 1,120,251 610,101 Furniture and equipment, net 185,969 117,673 Deposits and other assets 90,570 10,570 ----------- --------- $ 1,396,790 $ 738,344 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short term borrowings $ 69,890 $ -- Accounts payable and accrued expenses 425,075 142,735 Due to stockholder 33,427 55,436 Billings in excess of costs incurred 295,107 180,957 Current maturities of capital lease obligations 42,611 19,323 Deferred income taxes 143,830 88,766 Income taxes payable 26,312 14,277 ----------- --------- Total current liabilities 1,036,252 501,494 Capital lease obligations, net of current maturities 32,341 25,820 ----------- --------- Total liabilities 1,068,593 527,314 Commitments -- -- Stockholders' equity Common stock, no par value - 10,000,000 shares authorized, 1,000,000 shares issued and outstanding as of July 31, 1999 and 1998 64,600 64,600 Retained earnings 263,597 146,430 ----------- --------- 328,197 211,030 ----------- --------- $ 1,396,790 $ 738,344 =========== =========
The accompanying notes are an integral part of these statements. 4
Full Moon Interactive Group, Inc. STATEMENTS OF INCOME Years ended July 31, 1999 1998 1997 ---------- ---------- ---------- Revenues $3,813,951 $2,384,854 $ 818,869 Operating expenses Project personnel and expenses 2,192,343 1,442,518 560,801 Selling, general and administrative expenses 1,419,114 660,667 204,322 ---------- ---------- ---------- Total operating expenses 3,611,457 2,103,185 765,123 ---------- ---------- ---------- Operating income 202,494 281,669 53,746 Interest expense, net 14,857 3,746 5,221 ---------- ---------- ---------- Income before provision for income taxes 187,637 277,923 48,525 Provision for income taxes 70,470 106,973 15,945 ---------- ---------- ---------- Net income $ 117,167 $ 170,950 $ 32,580 ========== ========== ==========
The accompanying notes are an integral part of these statements. 5 Full Moon Interactive Group, Inc. STATEMENT OF STOCKHOLDERS' EQUITY Years ended July 31, 1997, 1998 and 1999
Common Stock ------------------------- Number Retained Owner's of Shares Amount earnings equity Total --------- ------- --------- --------- --------- Balance at August 1, 1996 - $ - $ - $ - $ - Net income of the sole proprietorship for the period August 1, 1996 through the date of incorporation (December 30, 1996) - - - 57,100 57,100 Contribution of owner's equity on date of incorporation 850,000 57,100 - (57,100) - Issuance of common stock for services 150,000 7,500 - - 7,500 Net loss for the period December 31, 1996 through July 31, 1997 - - (24,520) - (24,520) --------- -------- --------- --------- --------- Balance at July 31, 1997 1,000,000 64,600 (24,520) - 40,080 Net income for the year ended July 31, 1998 - - 170,950 - 170,950 --------- -------- --------- --------- --------- Balance at July 31, 1998 1,000,000 64,600 146,430 - 211,030 Net income for the year ended July 31, 1999 - - 117,167 - 117,167 --------- -------- --------- --------- --------- Balance at July 31, 1999 1,000,000 $ 64,600 $ 263,597 $ - $ 328,197 ========= ======== ========= ========= =========
The accompanying notes are an integral part of these statements. 6
Full Moon Interactive Group, Inc. STATEMENTS OF CASH FLOWS Years ended July 31, 1999 1998 1997 --------- --------- --------- Cash flows from operating activities: Net income for the year $ 117,167 $ 170,950 $ 32,580 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 68,913 30,634 9,056 Provision for bad debts -- 25,000 -- Deferred income taxes 55,064 100,562 (11,796) Common stock issued for services -- -- 7,500 Change in assets and liabilities: Increase in trade accounts receivable (707,734) (518,969) (45,377) Increase in accounts payable and accrued expenses 282,340 91,593 51,141 Increase in billings in excess of costs incurred 290,547 144,707 36,250 Increase (decrease) in income taxes payable 12,034 (13,463) 27,741 Increase in deposits and other assets (80,000) (10,570) -- --------- --------- --------- Net cash provided by operating activities 38,331 20,444 107,095 --------- --------- --------- Cash flows from investing activities: Acquisition of furniture and equipment (80,582) (71,107) (25,751) --------- --------- --------- Cash flows from financing activities: Principal payments of capital lease obligations (26,817) (11,344) (4,018) Advances from principal stockholder -- 118,000 15,000 Repayments of advances from principal stockholder (22,009) (72,564) (5,000) Proceeds from line of credit 69,890 -- -- --------- --------- --------- Net cash provided by financing activities 21,064 34,092 5,982 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (21,187) (16,571) 87,326 Cash and cash equivalents at beginning of period 70,755 87,326 -- --------- --------- --------- Cash and cash equivalents at the end of period $ 49,568 $ 70,755 $ 87,326 ========= ========= ========= Supplemental disclosure of cash flow information: Interest paid $ 15,935 $ 8,547 $ 4,848 ========= ========= ========= Income taxes paid $ 3,371 $ 4,775 $ -- ========= ========= ========= Noncash investing and financing activities: Assets acquired under capital leases $ 56,626 $ 29,085 $ 31,420 ========= ========= =========
The accompanying notes are an integral part of these statements. 7 Full Moon Interactive Group, Inc. NOTES TO FINANCIAL STATEMENTS July 31, 1999, 1998 and 1997 NOTE A - DESCRIPTION OF BUSINESS Full Moon Interactive Group, Inc. (the "Company") is an Internet architect focused on developing Internet businesses and websites for Fortune 500 clients. The Company develops, deploys and operates Internet business systems and builds systems that add value to a diverse range of e-business operations: online banking, investment portfolio management, e-commerce transactions, marketing programs, post-transaction service and fulfillment, customer service, and affinity group communities. The Company operates within one industry segment. The Company was incorporated on December 30, 1996. Prior to its incorporation, the Company operated as a sole proprietorship of the current principal stockholder. On December 30, 1996, the owner's equity of the sole proprietorship was contributed to the Company in exchange for the issuance of common stock. The statements of net income, stockholders' equity and cash flows for the fiscal year ended July 31, 1997 include the activity of the sole proprietorship from August 1, 1996 through December 30, 1996 and the activity of the incorporated Company from December 31, 1996 through July 31, 1997. The Company is subject to various risks and uncertainties frequently encountered by companies in the early stages of development, particularly companies in the new and rapidly evolving market for Internet-based products and services. Such risks and uncertainties include, but are not limited to, its limited operating history, an evolving and unpredictable business model and the management of rapid growth. To address these risks, the Company must among other things, maintain and increase its customer base, implement and successfully execute its business and marketing strategy, continue to develop and upgrade its technology, provide superior customer service and attract, retain and motivate qualified personnel. There can be no guarantee that the Company will be successful in addressing such risks. The Company expects that its growth may require significant external financing within the next year. While the Company believes that it will be able to obtain such external financing from third parties or from existing shareholders, there can be no guarantee that it can do so at terms acceptable to the Company. If the Company is unable to raise the necessary financing, the Company's business, results of operations and financial condition could be materially affected. 8 Full Moon Interactive Group, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Company considers highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Leased property under capital leases is amortized over the lives of the respective leases or over the service lives of the assets for those leases, which substantially transfer ownership. The straight-line method of depreciation is followed for substantially all assets for financial reporting and income tax purposes. The estimated lives used in determining depreciation are generally three to five years. RECOGNITION OF REVENUE Revenue is recognized for time and materials-based arrangements as services are performed and for fixed fee arrangements on the percentage-of-completion method. Under the percentage-of-completion approach, revenues and gross profit are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs, commencing when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Customer deposits represent the amount of customer payments received in advance of services being performed. PROJECT PERSONNEL AND EXPENSES Project personnel and expenses consist primarily of salaries and employee benefits for personnel dedicated to client projects and non-reimbursed direct expenses incurred to complete client projects. 9 Full Moon Interactive Group, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued INCOME TAXES Income taxes are accounted for using the liability method, under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be settled or realized. Prior to the date of incorporation (December 31, 1996), the Company did not pay federal or state income taxes. The sole proprietor was taxed individually on the Company's taxable income or loss. Had the Company been a taxable entity for the entire twelve-month period in fiscal 1997, the income tax provision would not be significantly different than the amount reported in the 1997 financial statements. The Company elected to be taxed as a cash basis taxpayer following its date of incorporation. Deferred tax assets and liabilities at July 31, 1999 and 1998 consist primarily of differences between accrual basis reporting for financial statement purposes and the cash basis used for income tax reporting purposes. ACCOUNTING FOR STOCK BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value based method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and provides the pro forma disclosures required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock over the exercise price at the measurement date. The measurement date is the date on which both the number of shares the stock options are convertible into, and the exercise price, are known. SEGMENT REPORTING The Company is centrally managed and operates in one business segment: internet architecture. 10 Full Moon Interactive Group, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company has no significant off-balance sheet concentrations of credit risk, such as foreign exchange contracts, option contracts or hedging arrangements. The Company maintains its cash balances in the form of bank demand deposits and money market accounts with financial institutions that management believes are creditworthy. Accounts receivable are typically unsecured and are derived from transactions with and from customers primarily located in the United States. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. The Company maintains an allowance for doubtful accounts based on the expected collectibility of accounts receivable. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash equivalents, short-term trade receivables and payables, short-term bank borrowings and amounts due to stockholder. The carrying values of the cash equivalents and short-term trade receivables and payables approximate their fair values. Based on borrowing rates currently used by the Company for financing, the carrying values of the short-term bank borrowings and amounts due to stockholder approximate their estimated fair values. USING ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. 11 Full Moon Interactive Group, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE C - FURNITURE AND EQUIPMENT Furniture and equipment is comprised of the following at July 31:
1999 1998 ----------- ----------- Computer equipment $ 251,824 $ 129,551 Furniture and fixtures 33,259 18,323 Office equipment 9,489 9,489 ----------- ----------- 294,572 157,363 Less - accumulated depreciation and amortization (108,603) (39,690) ----------- ----------- $ 185,969 $ 117,673 =========== ===========
Included in computer equipment in 1999 and 1998 is $117,142 and $60,516 of assets acquired under capital leases. Accumulated amortization of assets under capital leases totaled $46,209 and $19,896 at July 31, 1999 and 1998, respectively. NOTE D - SHORT TERM BORROWINGS The Company has a line of credit with its bank, subject to a credit limit of $200,000. The line of credit is guaranteed by the majority stockholder, and matures on February 17, 2000. Advances against the line of credit bear interest at 2% above the bank's reference rate (effective rate of 10% at July 31, 1999). On August 2, 1999, the Company's credit limit under the line of credit increased to $400,000 with a maturity date of August 1, 2000. 12 Full Moon Interactive Group, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE E - CAPITAL LEASE OBLIGATIONS The Company leases certain computer equipment under various agreements which are classified as capital leases. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of July 31, 1999: YEAR ENDED JULY 31, 2000 $ 58,477 2001 36,652 ---------- Total minimum lease payments 95,129 Less - amount representing interest (20,177) ---------- Present value of net minimum lease payments 74,952 Less - current portion (42,611) ---------- Long-term capital lease obligations $ 32,341 ========== NOTE F - INCOME TAXES Income tax expense consists of the following: 1999 1998 1997 -------- --------- -------- Current Federal $ 10,075 $ 4,034 $ 19,592 State 5,331 2,377 8,149 -------- --------- -------- 15,406 6,411 27,741 -------- --------- -------- Deferred Federal 43,144 77,784 (8,082) State 11,920 22,778 (3,714) -------- --------- -------- 55,064 100,562 (11,796) -------- --------- -------- Total $ 70,470 $ 106,973 $ 15,945 ======== ========= ======== 13 Full Moon Interactive Group, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE F - INCOME TAXES - Continued A reconciliation from the U.S. federal statutory income tax rates applicable to the Company's level of income to the effective income tax rate is as follows:
1999 1998 1997 ------ ------ ------ U.S. federal statutory rates 30.1% 32.5% 15.0% State income taxes, net of federal tax benefit 6.2 6.0 7.5 Measurement of net deferred tax assets at expected future rates - - 8.9 Other 1.3 - 1.5 ------ ------ ----- Income tax provision 37.6% 38.5% 32.9% ====== ====== ===== Significant components of the Company's deferred tax assets and liabilities at July 31 are as follows: 1999 1998 ---------- ---------- Assets: Accounts payable and accrued liabilities $ 165,100 $ 55,439 Allowance for doubtful accounts 9,710 9,710 Unearned income 114,620 70,283 ---------- ---------- 289,430 135,432 ---------- ---------- Liabilities: Accounts receivable (425,564) (219,192) State taxes (7,696) (5,006) ---------- ---------- (433,260) (224,198) ---------- ---------- Net deferred tax liability $ (143,830) $ (88,766) ========== ==========
NOTE G - DUE TO STOCKHOLDER At July 31, 1999 and 1998, the Company had amounts due to the principal stockholder of $33,427 and $55,436, respectively, resulting from cash advances from the stockholder for cash flow purposes. The advances are noninterest bearing and due upon demand. 14 Full Moon Interactive Group, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE H - EMPLOYEE BENEFIT PLAN The Company established a contributory profit sharing plan under Section 401(k) of the Internal Revenue Code covering eligible employees at least 21 years of age and employed for a minimum of one year. The Company may make a matching contribution, to be determined after the close of the calendar year at the Company's discretion. No contributions to the plan were made for the years ended July 31, 1999, 1998 and 1997. NOTE I - STOCKHOLDERS' EQUITY The Company was incorporated on December 30, 1996. Prior to its incorporation, the Company operated as a sole proprietorship of the current principal stockholder. On December 30, 1996, the owner's equity of the sole proprietorship was contributed to the Company in exchange for 850,000 shares of common stock. Following incorporation, the Company issued 150,000 shares of common stock to an employee, resulting in compensation expense of $7,500 in the year ended July 31, 1997. In 1998, the Company adopted the 1998 Stock Award Plan (the "Plan"). Under the terms of the Plan, the Company's Board of Directors may grant incentive stock options and nonqualified stock options to directors, officers, employees and consultants to purchase up to an aggregate of 250,000 shares of the Company's common stock. Incentive stock options are granted at fair market value on the date of grant as determined by the Board of Directors. Nonqualified stock options are granted at not less than 85% of fair market value on the date of grant as determined by the Board of Directors. Generally, options granted under the Plan expire ten years from the date of grant and vest over five years commencing from the grant date. 15 Full Moon Interactive Group, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE I - STOCKHOLDERS' EQUITY - Continued Activity under the Plan was as follows for the years ended July 31, was as follows:
1999 1998 1997 ------------------------- ------------------------- -------------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price ---------- ----------- ----------- ----------- ----------- ----------- Options outstanding August 1 115,713 $1.00 98,980 $0.85 - $ - Granted 109,537 $3.74 16,733 $1.92 98,980 $0.85 Exercised - - - - - - Cancelled - - - - - - --------- -------- -------- Options outstanding, July 31 225,250 $2.33 115,713 $1.00 98,980 $0.85 ========= ======== ======== Options available for grant, July 31 24,750 134,287 151,020 ========= ======== ======== Weighted average fair value of options granted during the year are as follows: 1999 1998 1997 ---------- ---------- --------- Exercise price is below market price at date of grant $2.31 $ - $ - Exercise price equals market price at date of grant 0.63 0.31 0.14 The following information applies to options outstanding at July 31, 1999: Options outstanding Options exercisable ----------------------------------------------- ---------------------------- Weighted average Weighted Weighted remaining average average Range of Number contractual exercise Number exercise Exercise prices outstanding life (years) price exercisable price ---------------------- -------------- ------------- ------------ ------------- ----------- $0.85 - $1.92 125,713 7 $1.08 98,151 $0.98 $3.92 99,537 9 $3.92 16,962 $3.92
The fair value of options at date of grant was estimated using the Black-Scholes model with the following assumptions: expected life - 3 years; risk free interest rate - 6%; expected volatility - 0; and no expected dividends. 16 Full Moon Interactive Group, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE I - STOCKHOLDERS' EQUITY - Continued Had compensation costs for the Company's option plan been determined based on the fair value at the grant dates, as specified by Statement of Financial Standards No. 123, net income would have been: 1999 1998 1997 -------------- ------------- ------------- Net income As reported $ 117,167 $170,950 $32,580 Pro forma 101,608 166,726 30,219 NOTE J - LEASE COMMITMENTS The Company has entered into non-cancellable operating leases for the Company's office premises and certain vehicles. Rent expense for the years ended July 31, 1999, 1998 and 1997 was $75,507, $58,492 and $34,369, respectively. The minimum annual payments under noncancellable operating lease agreements as of July 31, 1999 are summarized as follows: Year ending July 31, -------------------------------- 2000 $ 84,018 2001 52,668 2002 15,681 2003 7,789 2004 7,140 --------- $ 167,296 ========= NOTE K - MAJOR CUSTOMERS During the year ended July 31, 1997, sales to four customers accounted for 30%, 19%, 17% and 16% of total revenue. During the year ended July 31, 1998, sales to three customers accounted for 36%, 18% and 16% of total revenue. During the year ended July 31, 1999, sales to four customers accounted for 16%, 13%, 10% and 10% of total revenue. 17 Full Moon Interactive Group, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE L - SUBSEQUENT EVENTS On October 26, 1999, the Company received $500,000 in exchange for 35,000 shares of common stock and a warrant to purchase an additional 65,000 shares of the Company's common stock at the price of $.01 per share. The warrant is exercisable up to one year of the agreement. On November 23, 1999, the Company's stockholders agreed to exchange all of the outstanding shares of the Company's common stock for shares of eMarketplace, Inc. (a publicly traded company) and shares of TopTeam, Inc., a subsidiary of eMarketplace, Inc. All outstanding employee stock options to purchase the Company's common stock became fully exercisable upon the closing of this agreement. As a result of this transaction, the Company became a wholly-owned subsidiary of TopTeam, Inc. 18 EX-5 6 EXHIBIT 5 Financial Statements and Report of Independent Certified Public Accountants ORELL COMMUNICATIONS, INC. July 31, 1999, 1998 and 1997 CONTENTS Page ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 FINANCIAL STATEMENTS BALANCE SHEETS 4 STATEMENTS OF INCOME 5 STATEMENT OF STOCKHOLDER'S EQUITY 6 STATEMENTS OF CASH FLOWS 7 NOTES TO FINANCIAL STATEMENTS 8 2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Orrell Communications, Inc. We have audited the accompanying balance sheets of Orrell Communications, Inc. (a California Corporation) as of July 31, 1999 and 1998, and the related statements of income, stockholder's equity and cash flows for each of the three years in the period ended July 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the financial statements referred to above, present fairly, in all material respects, the financial position of Orrell Communications, Inc. as of July 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 1999, in conformity with generally accepted accounting principles. /s/ GRANT THORNTON LLP - ------------------------------------ Los Angeles, California October 25, 1999 (except for Note H, as to which the date is November 23, 1999) 3
Orrell Communications, Inc. BALANCE SHEETS July 31, 1999 1998 -------- -------- ASSETS Current assets: Cash $ 10,668 $ 44,270 Accounts receivable, less allowance for doubtful accounts of $35,196 in 1999 117,198 110,714 Unbilled receivables 34,607 36,513 Total current assets 162,473 191,497 Furniture and equipment, net 19,136 18,229 Deposits and other assets 12,492 13,692 $194,101 $223,418 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Line of credit $ 24,000 $ 11,000 Accounts payable and accrued liabilities 74,931 91,073 Total current liabilities 98,931 102,073 Commitments -- -- Stockholder's equity Common stock, no par value - 100,000 shares authorized, issued and outstanding as of July 31, 1999 and 1998 1,519 1,519 Retained earnings 93,651 119,826 Total stockholder's equity 95,170 121,345 -------- -------- $194,101 $223,418 ======== ======== The accompanying notes are an integral part of these statements.
4
Orrell Communications, Inc. STATEMENTS OF INCOME Years ended July 31, 1999 1998 1997 -------- -------- -------- Revenues $980,256 $759,550 $655,203 Operating expenses Project personnel and expenses 618,378 497,116 415,856 Selling, general and administrative expenses 252,092 170,270 118,552 -------- -------- -------- Total operating expenses 870,470 667,386 534,408 Income before provision for state income taxes 109,786 92,164 120,795 Provision for state income taxes 1,993 1,329 1,812 -------- -------- -------- Net income $107,793 $ 90,835 $118,983 ======== ======== ======== Pro forma information (unaudited) Historical income before income taxes $109,786 $ 92,164 $120,795 Pro forma income taxes 33,471 25,997 38,355 -------- -------- -------- Pro forma net income $ 76,315 $ 66,167 $ 82,440 ======== ======== ======== The accompanying notes are an integral part of this statement.
5 Orrell Communications, Inc. STATEMENT OF STOCKHOLDER'S EQUITY Years ended July 31, 1997, 1998 and 1999 Common Stock --------------------- Number Retained of Shares Amount earnings Total --------- --------- --------- --------- Balance at August 1, 1996 100,000 $ 1,519 $ 13,706 $ 15,225 Dividends -- -- (34,154) (34,154) Net income for the year ended July 31, 1997 -- -- 118,983 118,983 --------- --------- --------- --------- Balance at July 31, 1997 100,000 1,519 98,535 100,054 Dividends -- -- (69,544) (69,544) Net income for the year ended July 31, 1998 -- -- 90,835 90,835 --------- --------- --------- --------- Balance at July 31, 1998 100,000 1,519 119,826 121,345 Dividends -- -- (133,968) (133,968) Net income for the year ended July 31, 1999 -- -- 107,793 107,793 --------- --------- --------- --------- Balance at July 31, 1999 100,000 $ 1,519 $ 93,651 $ 95,170 ========= ========= ========= ========= The accompanying notes are an integral part of these statements. 6
Orrell Communications, Inc. STATEMENTS OF CASH FLOWS Years ended July 31, 1999 1998 1997 --------- --------- --------- Cash flows from operating activities: Net income for the year $ 107,793 $ 90,835 $ 118,983 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 13,898 15,017 6,322 Provision for bad debts 39,096 16,635 9,607 Gain on sale of equipment -- (3,024) -- Change in assets and liabilities: (Increase) decrease in accounts receivable (45,580) 45,353 (113,707) Decrease (increase) in unbilled receivables 1,906 (23,946) (10,129) Decrease (increase) in deposits and other assets 1,200 773 (7,770) (Decrease) increase in accounts payable and accrued expenses (16,142) (32,240) 39,680 --------- --------- --------- Net cash provided by operating activities 102,171 109,403 42,986 --------- --------- --------- Cash flows from investing activities: Proceeds from sale of equipment -- 8,500 -- Purchases of furniture and fixtures (14,805) (14,662) (15,008) --------- --------- --------- Net cash used in investing activities (14,805) (6,162) (15,008) --------- --------- --------- Cash flows from financing activities: Net proceeds from line of credit 13,000 11,000 -- Principal payments of note payable -- (12,769) -- Dividends paid (133,968) (69,544) (34,154) --------- --------- --------- Net cash used in financing activities (120,968) (71,313) (34,154) --------- --------- --------- Net (decrease) increase in cash (33,602) 31,928 (6,176) Cash at beginning of year 44,270 12,342 18,518 --------- --------- --------- Cash at the end of year $ 10,668 $ 44,270 $ 12,342 ========= ========= ========= Supplemental disclosure of cash flow information: Interest paid $ 1,618 $ 1,150 $ 1,516 ========= ========= ========= Income taxes paid $ 1,993 $ 1,928 $ -- ========= ========= ========= Noncash investing and financing activities: Assumption of a note payable to purchase equipment $ -- $ 12,769 $ -- ========= ========= =========
7 Orrell Communications, Inc. NOTES TO FINANCIAL STATEMENTS July 31, 1999, 1998 and 1997 NOTE A - DESCRIPTION OF BUSINESS Orrell Communications, Inc. (the "Company") is a full service graphic design firm specializing in print mediums and web site design for high-tech, business to business, companies. The Company primarily serves technology companies located in California. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. The double declining method of depreciation is followed for substantially all assets for financial reporting and income tax purposes. The estimated lives used in determining depreciation are: Automobiles 5 years, computer equipment, 3-5 years; furniture and fixtures, 5 years. RECOGNITION OF REVENUE Revenue is recognized for time and materials-based arrangements as services are performed and for fixed fee arrangements on the percentage-of-completion method. Under this approach, revenues and gross profit are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs. Unbilled receivables on contracts are comprised of costs incurred, plus earnings on certain contracts which have not been billed. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Customer deposits represent the amount of customer payments received in advance of services being performed. PROJECT PERSONNEL AND EXPENSES Project personnel and expenses consist primarily of salaries and employee benefits for personnel dedicated to client projects and non-reimbursed direct expenses incurred to complete client projects. 8 Orrell Communications, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued INCOME TAXES As an S corporation, the Company pays no federal income tax, but rather the stockholder is taxed individually on the Company's taxable income or loss. Accordingly, no provisions for federal income taxes are reflected in the accompanying financial statements. Provision has been made for state and local income taxes. The unaudited pro forma tax information included in the accompanying statements of operations reflects estimates of the Company's tax provision or benefit as if it had been a C corporation in fiscal years 1997, 1998, and 1999. A reconciliation of pro forma income taxes to the Federal statutory rate follows:
1999 1998 1997 ------- ------- ------- Federal statutory rate 23.8% 21.2% 25.2% State income taxes, net of Federal tax benefit 6.7 7.0 6.6 ------- ------- ------- 30.5% 28.2% 31.8% ======= ======= =======
CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts receivable. The Company has no significant off-balance sheet concentrations of credit risk, such as foreign exchange contracts, option contracts or hedging arrangements. The Company maintains its cash balances in the form of bank demand deposits with financial institutions that management believes are creditworthy. Accounts receivable are typically unsecured and are derived from transactions with and from customers primarily located in the United States. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. The Company maintains an allowance for doubtful accounts based on the expected collectibility of accounts receivable. 9 Orrell Communications, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, short-term trade receivables and payables and short-term bank borrowings. The carrying values of the cash equivalents and short-term trade receivables and payables approximate their fair values. Based on borrowing rates currently used by the Company for financing and their variable interest rates, the carrying value of the short-term bank borrowings approximates the estimated fair value. SEGMENT REPORTING The Company is centrally managed and operates in one business segment: full service graphic design. USING ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE C - FURNITURE AND EQUIPMENT Furniture and equipment is comprised of the following at July 31: 1999 1998 -------- -------- Computer equipment $ 36,355 $ 28,230 Furniture and fixtures 11,240 4,560 -------- -------- Less - accumulated depreciation and amortization (28,459) (14,561) -------- -------- $ $ ======== ======== 10 Orrell Communications, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE D - LINE OF CREDIT The Company has a line of credit with its bank, subject to a credit limit of $75,000. The line of credit is collateralized by substantially all of the assets of the Company, and is payable on demand. Advances against the line of credit bear interest at 3% above the bank's reference rate (effective rate of 11% at July 31, 1999). NOTE E - EMPLOYEE BENEFIT PLAN The Company established a contributory profit sharing plan under Section 401(k) of the Internal Revenue Code covering all eligible employees. The Company may make a matching contribution, at the Company's discretion, based on a participant's eligible contributions. The employer also contributes, at its discretion, qualified nonelective contributions. These contributions are allocated based on the participant's total compensation for the year. Profit sharing expense charged to operations under this plan was $8,838, $4,492 and $3,048 for the years ended July 31, 1999, 1998 and 1997, respectively. NOTE F - LEASE COMMITMENTS The Company has entered into non-cancellable operating leases for the Company's office premises and certain vehicles. Rent expense for the years ended July 31, 1999, 1998 and 1997 was $38,947, $35,711 and $19,055, respectively. The minimum annual payments under noncancellable operating lease agreements as of July 31, 1999 are summarized as follows: Year ending July 31, -------------------------------- 2000 $32,564 2001 204 ----------- =========== 11 Orrell Communications, Inc. NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE G - MAJOR CUSTOMERS During the year ended July 31, 1999, sales to four customers accounted for 22%, 20%, 16% and 10% of total revenue. During the year ended July 31, 1998, one customer accounted for 28% of total revenue. During the year ended July 31, 1997, four customers accounted for 20%, 14%, 13% and 12% of total revenue. NOTE H - SUBSEQUENT EVENT On November 23, 1999, the Company's stockholder agreed to exchange all of the outstanding shares of the Company's common stock for shares of eMarketplace, Inc. (a publicly traded company) and shares of TopTeam, Inc., a subsidiary of eMarketplace, Inc. As a result of this transaction, the Company became a wholly-owned subsidiary of TopTeam, Inc. 12 EX-6 7 EXHIBIT 6 Financial Statements and Report of Independent Certified Public Accountants MUCCINO DESIGN (a division of Muccino Design Group, Inc.) July 31, 1999, 1998 and 1997 CONTENTS Page ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 FINANCIAL STATEMENTS STATEMENTS OF ASSETS, LIABILITIES AND OWNER'S INVESTMENT 4 STATEMENTS OF REVENUES AND EXPENSES 5 STATEMENT OF CHANGES IN OWNER'S INVESTMENT 6 STATEMENTS OF CASH FLOWS 7 NOTES TO FINANCIAL STATEMENTS 9 2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Muccino Design Group, Inc. We have audited the accompanying statements of assets, liabilities and owner's investment of Muccino Design (a division of Muccino Design Group, Inc.) as of July 31, 1999 and 1998, and the related statements of revenues and expenses, changes in owner's investment and cash flows for each of the three years in the period ended July 31, 1999. These financial statements are the responsibility of Muccino Design Group, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Muccino Design as of July 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 1999, in conformity with generally accepted accounting principles. /s/ GRANT THORNTON LLP - ------------------------------------ Los Angeles, California December 15, 1999 3
Muccino Design (a division of Muccino Design Group, Inc.) STATEMENTS OF ASSETS, LIABILITIES AND OWNER'S INVESTMENT July 31, 1999 1998 ---------- ---------- ASSETS CURRENT ASSETS Cash $ 62,873 $ 244,205 Accounts receivable 434,820 372,525 Unbilled receivables 143,289 109,108 Prepaid income taxes 68,147 12,232 Due from related parties 29,060 -- ---------- ---------- Total current assets 738,189 738,070 PROPERTY AND EQUIPMENT, net 887,054 836,119 DEPOSITS AND OTHER ASSETS 21,566 19,351 ---------- ---------- $1,646,809 $1,593,540 ========== ========== LIABILITIES AND INVESTMENT CURRENT LIABILITIES Accounts payable and accrued expenses $ 131,906 $ 162,667 Due to stockholder of Muccino Design Group, Inc. -- 40,508 Deferred revenue 38,970 -- Deferred income taxes 43,823 51,947 Current maturities of long-term debt 26,075 20,753 Current maturities of capital lease obligation to related party 13,738 10,600 ---------- ---------- Total current liabilities 254,512 286,475 CAPITAL LEASE OBLIGATION TO RELATED PARTY, less current maturities 794,638 725,026 LONG-TERM DEBT, less current maturities 30,438 34,967 ---------- ---------- Total liabilities 1,079,588 1,046,468 COMMITMENTS -- -- MUCCINO DESIGN GROUP, INC. INVESTMENT 567,221 547,072 ---------- ---------- $1,646,809 $1,593,540 ========== ========== The accompanying notes are an integral part of these statements.
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Muccino Design (a division of Muccino Design Group, Inc.) STATEMENTS OF REVENUE AND EXPENSES Years ended July 31, 1999 1998 1997 ---------- ---------- ---------- Revenues $2,131,364 $2,426,646 $1,467,542 Operating expenses Project personnel and expenses 1,582,264 1,507,066 1,111,071 Selling, general and administrative expenses 411,353 446,965 231,105 ---------- ---------- ---------- Total operating expenses 1,993,617 1,954,031 1,342,176 ---------- ---------- ---------- Operating income 137,747 472,615 125,366 Interest expense, net 96,577 87,793 68,808 Loss on disposal of property and equipment 28,877 39,723 3,570 ---------- ---------- ---------- Income before provision for income taxes 12,293 345,099 52,988 Provision for income taxes 2,999 113,314 13,589 ---------- ---------- ---------- Net income $ 9,294 $ 231,785 $ 39,399 ========== ========== ========== The accompanying notes are an integral part of this statement.
5
Muccino Design (a division of Muccino Design Group, Inc.) STATEMENT OF CHANGES IN OWNER'S INVESTMENT Years ended July 31, 1997, 1998 and 1999 1999 1998 1997 --------- --------- --------- Balance at beginning of period $ 547,072 $ 229,834 $ 304,899 Net income for the period 9,294 231,785 39,399 Issuance of stock options to purchase common stock of Muccino Design Group, Inc. for services to Muccino Design -- 100,000 -- Cash disbursements on behalf of Carta Fine Products, a division of Muccino Design Group, Inc. -- (25,450) (156,349) Tax benefit allocated to Carta Fine Products, a division of Muccino Design Group, Inc. 10,855 10,903 41,885 --------- --------- --------- Balance at end of period $ 567,221 $ 547,072 $ 229,834 ========= ========= ========= The accompanying notes are an integral part of this statement.
6
Muccino Design (a division of Muccino Design Group, Inc.) STATEMENTS OF CASH FLOWS Years ended July 31, 1999 1998 1997 --------- --------- --------- Cash flows from operating activities: Net income $ 9,294 $ 231,785 $ 39,399 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 80,386 62,039 58,491 Loss on sale of property and equipment 28,877 39,723 3,570 Deferred income tax expense (benefit) (8,124) 42,039 (28,296) Stock based compensation -- 100,000 -- Change in assets and liabilities: Increase in trade accounts receivable (62,295) (265,135) 8,628 Increase in unbilled receivables (34,181) 74,932 (91,773) Increase in accounts payable and accrued expenses (30,762) 60,295 3,044 Increase in billings in excess of costs incurred 38,970 -- -- Increase (decrease) in income taxes payable (45,060) 6,151 35,675 Increase in deposits and other assets (2,214) -- (14,992) --------- --------- --------- Net cash provided by (used in) operating activities (25,109) 351,829 13,746 --------- --------- --------- Cash flows from investing activities: Collection of advances to related parties 30,533 -- 85,280 Advances to related parties (59,593) -- -- Acquisition of furniture and equipment (76,796) (103,728) (64,470) Cash advances to the Carta division of Muccino Design Group, Inc. -- (25,450) (156,349) --------- --------- --------- Net cash used in investing activities (105,856) (129,178) (135,539) --------- --------- --------- The accompanying notes are an integral part of these statements.
7
Muccino Design (a division of Muccino Design Group, Inc.) STATEMENTS OF CASH FLOWS - CONTINUED Years ended July 31, 1999 1998 1997 --------- --------- --------- Cash flows from financing activities: Principalopaymentstofncapital lease obligationsvable $ (10,652) $ (7,640) $ (5,126) Principalopaymentstofnnotesopayable notes receivable (42,534) (38,226) (11,759) Borrowings under notes payable 43,327 11,108 43,779 Principal payments of amounts due to principal stockholder (40,508) (20,978) (10,136) Borrowings from principal stockholder -- -- 71,623 --------- --------- --------- Net cash (used in) provided by financing activities (50,367) (55,736) 88,381 --------- --------- --------- Net (decrease) increase in cash (181,332) 166,915 (33,412) Cash at beginning of period 244,205 77,290 110,702 --------- --------- --------- Cash at the end of period $ 62,873 $ 244,205 $ 77,290 ========= ========= ========= Supplemental disclosure of cash flow information: Interest paid $ 98,391 $ 89,541 $ 70,386 ========= ========= ========= Income taxes paid $ 56,183 $ 65,124 $ 8,280 ========= ========= ========= Noncash investing and financing activities: Increase in the obligation under capital lease due to changes in the provisions of the lease agreement $ 83,402 $ 127,789 $ 124,499 ========= ========= ========= Tax benefit allocated to Carta Design, a division of Muccino Design Group, Inc. $ 10,855 $ 10,903 $ 41,885 ========= ========= ========= The accompanying notes are an integral part of these statements.
8 Muccino Design (a division of Muccino Design Group, Inc.) NOTES TO FINANCIAL STATEMENTS July 31, 1999, 1998 and 1997 NOTE A - DESCRIPTION OF BUSINESS Muccino Design (a division of Muccino Design Group, Inc.) (the "Company") is a multidisciplinary firm that offers a complete range of strategic design and communications services, including brand development, literature design, packaging design, new media design, publication design and environmental design. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements include the accounts of Muccino Design and reflect the historical results of operations, financial position and cash flows of Muccino Design. These financial statements do not include the accounts of the other division of Muccino Design Group, Inc., Carta Fine Products. These financial statements may not be indicative of the results that would have occurred if Muccino Design operated as a stand-alone entity during the periods presented, the future results of Muccino Design or the costs which may be incurred by an unaffiliated entity to achieve similar results. In 1997 and 1998, cash generated from the Company's operations was used to fund the operations of Carta Fine Products. No interest was earned on the Company's advances to Carta Fine Products. Cash disbursements made to the Carta division have been reflected as a reduction of Muccino Design Group, Inc.'s investment in the Company, net of the tax benefit derived. FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Leased property under capital leases is amortized over the lives of the respective leases or over the service lives of the assets for those leases, which substantially transfer ownership. The straight-line method of depreciation is followed for substantially all assets for financial reporting and income tax purposes. The estimated lives used in determining depreciation are generally three to five years. 9 Muccino Design (a division of Muccino Design Group, Inc.) NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RECOGNITION OF REVENUE Revenue is recognized for time and materials-based arrangements as services are performed and for fixed fee arrangements on the percentage-of-completion method. Under the percentage-of-completion approach, revenues and gross profit are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs, commencing when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy. Unbilled receivables on contracts are comprised of costs incurred, plus earnings on certain contracts which have not been billed. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Customer deposits represent the amount of customer payments received in advance of services being performed. PROJECT PERSONNEL AND EXPENSES Project personnel and expenses consist primarily of salaries and employee benefits for personnel dedicated to client projects and non-reimbursed direct expenses incurred to complete client projects. INCOME TAXES Income taxes are accounted for using the liability method, under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be settled or realized. ACCOUNTING FOR STOCK BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value based method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and provides the pro Form disclosures required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock over the exercise price at the measurement data. The measurement date is the date on which both the number of shares the stock options are convertible into, and the exercise price, are known. Had compensation costs for the Company's options been determined based on the fair value at the grant dates, as specified by Statement of Financial Standards No. 123, net income would not have been significantly different. 10 Muccino Design (a division of Muccino Design Group, Inc.) NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, accounts receivable and unbilled receivables. The Company has no significant off-balance sheet concentrations of credit risk, such as foreign exchange contracts, option contracts or hedging arrangements. The Company maintains its cash balances in the form of bank demand deposits with financial institutions that management believes are creditworthy. Accounts receivable are typically unsecured and are derived from transactions with and from customers primarily located in the United States. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. The Company maintains an allowance for doubtful accounts based on the expected collectibility of accounts receivable. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, short-term receivables and payables, bank borrowings, capital lease obligations and amounts due from related parties. The carrying values of the cash, short-term receivables and payables and amounts due from related parties approximate their fair values. Based on borrowing rates currently used by the Company for financing, the carrying values of the bank borrowings and capital lease obligations approximate their estimated fair values. USING ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. SEGMENT REPORTING The Company is centrally managed and operates in one business segment: strategic design and communication services. 11 Muccino Design (a division of Muccino Design Group, Inc.) NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE C - PROPERTY AND EQUIPMENT Property and equipment is comprised of the following at July 31: 1999 1998 ----------- --------- Building under capital lease $ 837,419 $ 754,017 Building improvements 98,187 65,055 Office equipment 131,352 133,610 Furniture and fixtures 16,164 16,867 Vehicles 26,725 26,725 ----------- --------- Less - accumulated depreciation and amortization (222,793) (160,155) ----------- --------- $ 887,054 $ 836,119 =========== ========= Accumulated amortization of the building under capital lease totaled $122,390 and $85,393 at July 31, 1999 and 1998, respectively. NOTE D - RELATED PARTY TRANSACTIONS The Company leases its facilities under a capital lease from the principal stockholder of Muccino Design Group, Inc. The leases expires in November 2019. See Note F. At July 31, 1999, the Company has a receivable of $22,093 from the stockholder of Muccino Design Group, Inc. resulting from expenses paid by the Company on his behalf. The receivable balance is non-interest bearing and payable upon demand. In fiscal 1999, the Company made cash advances to Carta Fine Products, a division of Muccino Design Group, Inc., totaling $37,500. The advances are noninterest bearing and due upon demand. At July 31, 1999, the amount due from Carta Fine Products totaled $6,967 and is included in due from related parties in the 1999 balance sheet. The Company had a loan payable to the stockholder of Muccino Design Group, Inc. totaling $40,508 as of July 31, 1998. The loan bore interest at 7.5% and was payable on demand. Interest expense paid to the stockholder totaled $3,828 in 1998. Interest expense in 1999 and 1997 was not significant. The loan was repaid in fiscal 1999. 12 Muccino Design (a division of Muccino Design Group, Inc.) NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE E - LONG-TERM DEBT Long-term debt consists of six notes payable for various office equipment and a vehicle. The notes bear interest at rates ranging from 7% to 12% and are collateralized by the related equipment. Maturities of long-term debt is as follows: Year ending July 31, 2000 $ 26,075 2001 15,219 2002 9,310 2003 4,952 2004 957 --------- Less - current maturities (26,075) --------- Long - term portion $ 30,438 ========= Interest expense on long-term debt totaled $7,039, $10,752 and $5,897 for 1999, 1998 and 1997, respectively. 13 Muccino Design (a division of Muccino Design Group, Inc.) NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE F - CAPITAL LEASE OBLIGATION TO RELATED PARTY The Company leases its operating facilities under a capital lease with the stockholder of Muccino Design Group, Inc. The Company is required to pay all costs related to ownership, including repairs, maintenance, insurance and property taxes. Interest paid to the stockholder was $91,352, $78,788 and $64,394 in 1999, 1998 and 1997, respectively. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of July 31, 1999: Year ended July 31, ------------------- 2000 $ 110,004 2001 110,004 2002 110,004 2003 110,004 2004 110,004 Thereafter 1,668,394 ----------- Total minimum lease payments 2,218,414 Less - amount representing interest (1,410,038) ----------- Present value of future minimum lease payments 808,376 Less - current portion (13,738) ----------- Long-term capital lease obligation to related party $ 794,638 =========== In 1999, 1998 and 1997, the Company and the stockholder of Muccino Design Group, Inc. modified the original terms of the lease agreement resulting in an increase to the monthly lease payment. The modifications to the lease term resulted in an increase in the capital lease obligation and a corresponding increase in the leased building of $83,402, $127,789 and $124,499 in 1999, 1998 and 1997, respectively. NOTE G - INCOME TAXES The Company has been included in the consolidated federal and state income tax returns of Muccino Design Group, Inc. As such, the net taxable losses of the Carta division offset the taxable income (if any) of the Company. The Company allocates a portion of the overall tax liability or benefit to the Carta division in proportion to the Carta division's taxable income or loss. The Company has allocated an income tax benefit to the Carta division of $10,855, $10,903, and $41,885, in 1999, 1998 and 1997, respectively. The benefit was reflected as an adjustment to the Muccino Design Group, Inc.'s investment in the Company. 14 Muccino Design (a division of Muccino Design Group, Inc.) NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE G - INCOME TAXES - Continued The provision (benefit) for income taxes has been provided on a stand alone basis for all periods presented. A reconciliation from the U.S. federal statutory income tax rates applicable to the Company's level of income to the effective income tax rate is as follows:
1999 1998 1997 --------- --------- --------- U.S. federal statutory rates 15.0% 34.0% 16.4% State income taxes, net of federal tax benefit 7.5 5.8 7.5 Measurement of net deferred tax assets at expected future rates -- (8.0) -- Other 1.9 1.0 1.7 --------- --------- --------- Income tax provision 24.4% 32.8% 25.6% ========= ========= =========
Significant components of the Company's deferred tax assets and liabilities at July 31 are as follows:
1999 1998 ---------------- ----------------- Assets: Accounts payable and accrued liabilities $ 31,446 $ 43,660 Net operating loss carryforwards 26,019 -- Stock based compensation 23,840 26,840 State taxes 3,401 6,823 Unearned income 9,292 -- ---------------- ----------------- 93,998 77,323 ---------------- ----------------- Liabilities: Accounts receivable (137,821) (129,270) ----------------- ----------------- Net deferred tax liability $( 43,823) $(51,947) ================= ================= NOTE H - MAJOR CUSTOMERS During the year ended July 31, 1997, sales to two customers accounted for 50% and 13%% of total revenue. During the year ended July 31, 1998, sales to two customers accounted for 39% and 29% of total revenue. During the year ended July 31, 1999, sales to two customers accounted for 32%, and 31% of total revenue.
15 Muccino Design (a division of Muccino Design Group, Inc.) NOTES TO FINANCIAL STATEMENTS - CONTINUED July 31, 1999, 1998 and 1997 NOTE I - SUBSEQUENT EVENTS On October 29, 1999, Muccino Design Group, Inc. transferred the net assets of its Carta division to a new corporation controlled by the same stockholder leaving only the Company assets and activities remaining in Muccino Design Group, Inc. Following the transfer of the Carta net assets to a new entity, the stockholders of Muccino Design Group, Inc. agreed to exchange all of the outstanding shares of its common stock for shares of eMarketplace, Inc. (a publicly traded company) and shares of Top Team, Inc., a subsidiary of eMarketplace, Inc. This transaction was completed on November 23, 1999. As a result of this transaction, Muccino Design Group, Inc. became a wholly-owned subsidiary of Top Team, Inc. In connection with the acquisition by Top Team, Inc., the stockholder and the Company agreed to modify the terms of the facilities lease previously classified as a capital lease (see Note F). The changes in the lease provisions reduced the lease term to five years (through November, 2004). The reduction in the lease term changed the classification of the lease from a capital lease to an operating lease. Accordingly, the capital asset and related obligation were removed from the balance sheet on the date of the change in the lease term. The new lease agreement shall be accounted for as an operating lease. 16 -----END PRIVACY-ENHANCED MESSAGE-----