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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From _____ To _____
Commission File Number: 000-26903
booktech.com, inc.
------------------
(Exact name of small business issuer as specified in its charter)
Nevada 88-0409153
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(State or other jurisdiction of (IRS Employer ID. No.)
incorporation or organization)
42 Cummings Park, Woburn, Massachusetts 01801
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(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 933-5400
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock 18,568,667 Shares
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$.00042 Par Value (Outstanding on August 10, 2000)
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booktech.com, inc. and Subsidiary
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1--Financial Statements:
Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2000
and 1999.......................................................................................... 3
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2000
and 1999.......................................................................................... 4
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999........................ 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000
and 1999........................................................................................... 6
Notes to Condensed Consolidated Financial Statements................................................... 7
ITEM 2--Management's Discussion and Analysis............................................................................. 14
PART II. OTHER INFORMATION
ITEM 6--Exhibits and Reports on Form 8-K................................................................................. 17
Signatures............................................................................................................... 18
Exhibit Index............................................................................................................ 19
</TABLE>
2
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PART I. FINANCIAL INFORMATION
booktech.com, inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------
2000 1999
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<S> <C> <C>
Net sales................................................................. $ 168,009 $ 61,926
Cost of sales............................................................ 351,043 273,875
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Gross margin................................................... (211,949) (183,034)
Operating expenses:
Selling, marketing and general and administrative (excluding
stock-based compensation costs of $12,750 in 2000)................ 1,573,924 416,866
Stock-based compensation............................................... 12,750 --
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Total operating expenses....................................... 1,586,674 416,866
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Loss from operations..................................................... (1,769,708) (628,815)
Interest expense to related parties...................................... -- 50,514
Other interest expense................................................... 14,497 6,420
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Total interest expense......................................... 14,497 56,934
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Interest income.......................................................... 26,679 102
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Net loss................................................................. (1,757,526) (685,647)
Accrued dividends on preferred stock..................................... 64,771 --
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Net loss applicable to common stockholders............................... $ (1,822,297) $ (685,647)
=========== =========
Net loss applicable to common stockholders per share - basic
and diluted......................................................... $ (0.10) $ (0.11)
====== ======
Shares used in computing basic and diluted net loss per share.. 18,567,326 6,016,552
========== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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booktech.com, inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------
2000 1999
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<S> <C> <C>
Net sales................................................................. $ 492,743 $ 421,886
Cost of sales............................................................. 834,415 696,021
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Gross margin.................................................... (341,672) (274,135)
Operating expenses:
Selling, marketing and general and administrative (excluding
stock-based compensation costs of $429,992 in 2000)................ 2,534,760 709,715
Stock-based compensation................................................. 429,992 --
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Total operating expenses........................................ 2,964,752 709,715
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Loss from operations...................................................... (3,306,424) (983,850)
Interest expense to related parties....................................... 57,858 90,683
Other interest expense.................................................... 40,351 7,630
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Total interest expense.......................................... 98,209 98,313
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Interest income........................................................... 26,679 102
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Net loss.................................................................. (3,377,954) (1,082,061)
Accrued dividends on preferred stock...................................... 64,771 --
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Net loss applicable to common stockholders................................ $ (3,442,725) $ (1,082,061)
=========== ==========
Net loss applicable to common stockholders per share - basic
and diluted............................................................ $ (0.26) $ (0.18)
===== =====
Shares used in computing basic and diluted net loss per share............. 13,135,551 6,016,552
========== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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booktech.com, inc. and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 1,214,678 $ 82,753
Accounts receivable, less allowance for returns of $30,122 in
2000 and $91,732 in 1999............................................ 137,873 228,466
Other current assets.................................................... 115,707 --
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Total current assets................................................ 1,468,258 311,219
PROPERTY AND EQUIPMENT, at cost.......................................... 3,363,923 808,298
Accumulated depreciation................................................. (157,103) (73,928)
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Property and equipment, net......................................... 3,206,820 734,370
ACQUIRED TECHNOLOGY AND PATENT APPLICATION............................... 2,068,965 --
DEPOSITS AND OTHER ASSETS................................................ 312,500 25,200
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TOTAL............................................................... $ 7,056,543 $ 1,070,789
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt....................................... $ 456,443 $ 437,838
Current portion of loans from related parties........................... -- 2,953,759
Accounts payable........................................................ 1,149,485 1,282,385
Accrued payroll and other expense....................................... 1,204,841 410,817
Accrued interest expense to related parties.............................. -- 354,130
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Total current liabilities........................................... 2,810,770 5,438,929
LONG-TERM DEBT........................................................... 454,952 591,824
OTHER LONG-TERM LIABILITIES.............................................. 123,750 146,250
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Convertible preferred stock, Series A................................... 897 --
Convertible preferred stock, Series B................................... 462 --
Common stock............................................................ 7,799 760,000
Additional paid-in capital.............................................. 12,714,581 --
Treasury stock.......................................................... -- (187,500)
Accumulated deficit..................................................... (9,056,668) (5,678,714)
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Total stockholders' equity (deficiency)............................. 3,667,071 (5,106,214)
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TOTAL.................................................................... $ 7,056,543 $ 1,070,789
=========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
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booktech.com, inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $ (3,377,954) $ (1,082,061)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................................... 83,175 23,478
Stock-based compensation............................................ 429,992 --
Related party interest expense satisfied by issuing Convertible
Preferred Stock, Series A........................................ 56,839 --
Change in assets and liabilities:
Accounts receivable, net............................................ 90,593 21,588
Other current assets................................................ (115,707) (11,369)
Deposits and other assets....................................... (287,300) (1,200)
Accounts payable.................................................... (603,431) (72,675)
Accrued payroll and other expense............................... 2,919 19,441
Accrued expenses to related parties................................. (9,798) 89,394
Other liabilities................................................... (22,500) 54,000
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Total.................................................... (375,218) 122,657
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Net cash used in operating activities.................... (3,753,172) (959,404)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment............................... (459,526) (10,836)
Payment of merger costs............................................. (588,426) --
----------- -----------
Net cash used in investing activities........................ (1,047,952) (10,836)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans from related parties............................ 317,951 1,180,000
Repayments of loans to related parties.............................. (456,710) (7,000)
Proceeds from other debt financings................................. 1,500,000 --
Repayments of other debt financings................................. (428,192) (162,945)
Net proceeds from issuance of common stock.......................... 5,000,000 --
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Net cash provided from financing activities.............. 5,933,049 1,010,055
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NET INCREASE IN CASH AND EQUIVALENTS................................... 1,131,925 39,815
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................... 82,753 16,413
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CASH AND CASH EQUIVALENTS, END OF PERIOD................................ $ 1,214,678 $ 56,228
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
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booktech.com, inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business - booktech.com, inc., a Nevada corporation (the
"Company"), is a digital and on-demand publisher of custom textbooks, also
known as coursepacks, which are distributed primarily through college
bookstores. The Company is organized as one segment reporting to the chief
operating decision-maker.
Basis of Presentation - The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As shown
in the financial statements, the Company incurred net losses of $3,377,954
and $1,082,061 in the six-month periods ended June 30, 2000 and 1999,
respectively. Prior to the Merger, as defined in Note 2, the Company's
operating losses and working capital needs were funded principally by loans
from its shareholders. The Company expects that it will continue to incur
losses as it continues its activities pursuant to the current business plan,
particularly those related to sales, marketing and content development. These
factors, among others, may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company
be unable to continue as a going concern. As described in Note 4, the Company
was in default on certain provisions of its lending agreements prior to the
Merger. The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow through increased net sales to meet
its obligations on a timely basis, comply with the terms and covenants of its
financing agreements, obtain additional financing or refinancing, and
ultimately to attain profitable operations. Management is continuing its
efforts to increase net sales and obtain additional funds so that the Company
can meet its obligations and sustain operations.
2. MERGER TRANSACTION
On March 31, 2000, EG Acquisitions Corporation, a Nevada corporation, the
wholly owned sole subsidiary of the Company, merged (the "Merger") with and
into booktech.com, inc., a Massachusetts corporation ("booktechMass"),
pursuant to an Agreement and Plan of Merger dated March 31, 2000 (the "Merger
Agreement"). Following the Merger, the business to be conducted by the
Company was the business conducted by booktechMass prior to the Merger. In
conjunction with the Merger, the Company which was formerly known as Ebony &
Gold Ventures, Inc. changed its name to "booktech.com, inc."
Pursuant to the terms of the Merger Agreement, the Merger involved the
following transactions: (a) the Company issued 7,520,690 shares of its
authorized but unissued common stock (the "Common Stock") and 1,100,000
shares of its authorized but unissued Series B Preferred Stock to the former
shareholders of booktechMass in exchange for the 25,000 shares of common
stock of booktechMass issued and outstanding as of the effective time of the
Merger; (b) certain debt and accrued interest totaling $3,216,171 owed by
booktechMass to related parties was converted into 2,135,301 shares of the
Company's Series A Preferred Stock; (c) the Company sold to certain investors
(the "Purchasers") 4,666,667 shares of its Common Stock and warrants to
purchase 833,333 shares of common stock for an aggregate purchase price of
$7,000,000, including conversion of the notes payable, advances and accrued
interest owed to Verus International, Ltd. (at the time of the Merger, the
Company received net cash proceeds of $5,000,000 from this transaction); and
(d) the Company purchased technology and a related patent application from
Virtuosity Press LLC, a Delaware Limited Liability Company ("Virtuosity"), in
exchange for 1,379,310 shares of its Common Stock.
7
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At the time of the Merger, the common and preferred shares issued to the
former stockholders of booktechMass represented a majority of the Company's
voting stock, enabling them to retain voting and operating control of the
Company. Accordingly, the Merger has been accounted under the purchase method
as a reverse acquisition by the shareholders of booktechMass who received a
larger portion of the voting interests in the combined enterprise. Therefore,
for accounting purposes, booktechMass is deemed to have acquired the Company.
Estimated costs of the Merger were $588,426, which have been reflected as a
reduction to additional paid-in capital.
Under the terms of the Merger Agreement, the Company is required to
use its best efforts to file a registration statement to register 5,111,667
shares of common stock by July 31, 2000 and an additional registration
statement to register 1,928,823 shares of common stock within six (6) months
of the effective date of the first registration statement or within 30 days
of the exercise, in whole or in part, by Verus Investment Holdings Ltd. of
its warrant to purchase 833,333 shares of common stock. The Company expects
to file the initial registration statement for the shares of common stock
during the third quarter of 2000.
Since the accounting applied differs from the legal form of the
Merger, the Company's financial information for periods prior to the Merger
represent the financial results of booktechMass.
Pro Forma Disclosure - The following table presents the unaudited pro
forma results of operations for the six months ended June 30, 2000 and 1999
assuming the merger had occurred on January 1, 1999, the beginning of the
earliest period presented in the accompanying Condensed Consolidated
Statements of Operations. These pro forma results have been prepared for
comparative purposes only and are not necessarily indicative of what would
have occurred had the Merger occurred at that date or of results which may
occur in the future.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
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<S> <C> <C>
Revenue...................................................... $ 492,743 $ 421,886
Loss from operations......................................... (3,306,424) (997,075)
Net loss..................................................... (3,266,073) (1,006,969)
Net loss applicable to common stockholders................... (3,394,903) (1,135,799)
Net loss applicable to common stockholders per
share - basic and diluted................................ $ (0.18) $ (.07)
Shares used in computing net loss per common share........... 18,566,667 17,062,529
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quarterly Condensed Consolidated Financial Statements - The Company has
prepared the accompanying Condensed Consolidated Financial Statements. In the
opinion of management, the Condensed Consolidated Financial Statements
furnished herein reflect all adjustments, which in the opinion of management
are of a normal recurring nature, necessary to fairly state the Company's
financial position, cash flows and the results of operations for the periods
presented and have been prepared on a basis substantially consistent with the
audited financial statements as of and for the five-month period ended
December 31, 1999. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles for annual periods have been condensed or
omitted. Accordingly, these interim condensed consolidated financial
statements should be read in conjunction with the Company's annual financial
statements included in a Form 8-K filed with the Securities and Exchange
Commission on April 4, 2000.
Concentration of Credit Risk and Major Customer Information - Financial
instruments that potentially expose the Company to concentrations of credit
risk include cash and accounts receivable. The Company performs ongoing
credit evaluations of its customers and does not require collateral. In
addition, the Company maintains allowances for potential credit losses, and
such losses, in the aggregate, have not exceeded management expectations. One
customer accounted for 52% and 40% of net sales for the three months ended
June 30, 2000 and 1999, respectively, and 50% and 58% of net sales for the
six months ended June 30, 2000
8
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and 1999, respectively. This same customer accounted for 47% and 77% of the
accounts receivable at June 30, 2000 and December 31, 1999, respectively.
Property and Equipment - Property and equipment are recorded at cost.
Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the various classes of assets or lease
terms, whichever is shorter. Estimated ranges of useful lives are as follows:
Years
-----
Furniture and fixtures 7
Office and computer equipment 3-5
Leasehold improvements 1-5
Computer software 3
Property and equipment consisted of the following at:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
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<S> <C> <C>
Computer software............................... $ 1,793,299 $ 314,491
Office and computer equipment................... 1,226,381 263,241
Furniture and fixtures.......................... 196,364 149,934
Leasehold improvements.......................... 80,963 80,632
Vehicles........................................ 66,916 --
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Total property and equipment............... 3,363,923 808,298
Less accumulated depreciation and
amortization................................ (157,103) (73,928)
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Property and equipment, net................. $ 3,206,820 $ 734,370
============= =============
</TABLE>
The Company had $1,573,315 of computer software and related installation
costs at June 30, 2000 which are included in property and equipment in the
accompanying balance sheet, but were not yet placed in service. Accordingly,
no depreciation or amortization was recorded on these assets during the three
and six months ended June 30, 2000. The Company has adopted Statement of
Position ("SOP") No. 98-1 which requires computer software costs associated
with internal use software to be charged to operations as incurred until
certain capitalization criteria are met.
Stock-Based Compensation - The Company accounts for stock options
granted to employees and non-employee directors using the intrinsic value
method in accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and complies with the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation."
Equity instruments issued to non-employees are accounted for in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued
To Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services". All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted
for based on the fair value of the consideration received or the fair value
of the equity instrument issued, whichever is more reliably measurable. The
measurement date of the fair value of the equity instrument issued is the
earlier of the date on which the counterparty's performance is complete or
the date on which it is probable that performance will occur.
Comprehensive Income - Comprehensive loss was equal to net loss for
each period presented.
Earnings Per Share - The Company computes basic and diluted earnings
(loss) per share in accordance with SFAS No. 128, "Earnings Per Share". Basic
earnings per common share is computed by dividing the net loss applicable to
common stockholders by the weighted average number of common shares
outstanding during the
9
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period. Dividends on the Series A Preferred Stock, which are payable in
additional shares of common stock, have been accrued at the rate of 8% per
annum in determining the net loss applicable to common stockholders.
Basic and diluted loss per common share are the same for all periods
presented, as potentially dilutive stock options of 367,433 in 2000 and
344,828 in 1999 have been excluded from the calculation as their effect is
antidilutive.
Future Adoption of Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The provisions of SFAS No. 133 are effective for periods
beginning after June 15, 2000. The Company is currently evaluating, and has
not determined, the effect, if any, SFAS No. 133 will have on the Company's
financial position and its results of operations. The Company will adopt this
accounting standard on January 1, 2001, as required.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the recognition, presentation
and disclosure of revenues in financial statements filed with the Securities
and Exchange Commission. The Company is currently evaluating, and has not
determined, the effect, if any, SAB No. 101 will have on the Company's
financial position and its results of operations. The Company will adopt this
accounting standard during the fourth quarter of 2000, as required.
Reclassifications - Certain reclassifications have been made to the 1999
amounts to conform to the 2000 presentation.
Supplemental Cash Flow Information - The following table sets forth
certain supplemental cash flow information for the six-month periods ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Cash paid during the period for interest............................................. $ 10,829 $ 22,660
Non-Cash Financing Activities
Conversion of related party loans and accrued interest into preferred stock........ $ 3,216,171 $ --
Acquisition of technology and related patent application with the issuance of
common stock................................................................... 2,068,965 --
Conversion of Verus International, Ltd. notes payable, advances and related
accrued interest into common stock............................................. 2,024,537 --
Equipment acquired through the issuance of debt and trade credit................... 2,096,099 --
Liabilities to the former officers of Ebony & Gold Ventures, Inc. forgiven in
conjunction with the reverse merger............................................. 17,564 --
Conversion of accounts payable into long-term debt................................. -- 406,514
</TABLE>
4. LONG-TERM DEBT
Long-term debt consisted of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Computer equipment promissory notes............................................. $ 790,750 $ --
Capital lease obligations....................................................... 101,470 108,051
Ford Motor Credit Company....................................................... 19,175 --
Purchasers notes payable........................................................ -- 500,000
Equipment supplier promissory note.............................................. -- 231,254
Advance under line of credit.................................................... -- 95,539
</TABLE>
10
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<TABLE>
<S> <C> <C>
Small Business Administration loans............................................. -- 94,818
------------ -----------
911,395 1,029,662
Less current portion (456,443) (437,838)
------------ -----------
Long-term debt $ 454,952 $ 591,824
============ ===========
</TABLE>
Computer Equipment Promissory Notes - During the three months ended June
30, 2000, the Company financed the purchase of $790,750 in computer hardware and
software through the issuance of promissory notes with a final maturity of June
2002. Monthly payments are $36,906, which include interest at 9.4% per annum.
The promissory notes are collateralized by all the assets purchased by the
notes.
Capital lease obligations - The Company leases certain equipment under
noncancelable leases expiring at various dates through 2004. Of the total future
minimum lease payments, approximately $23,730 is due within the next twelve (12)
months and included within current long-term debt in the accompanying condensed
consolidated June 30, 2000 balance sheet.
Ford Motor Credit Company - On March 2, 2000, the Company financed the
purchase of a motor vehicle. The loan is due in 48 monthly installments of $435,
including interest at an annual rate of 0.9%, with a final maturity on April 15,
2004.
Purchasers Notes Payable - During 1999, the Company obtained two
promissory notes from Verus International, LTD. ("Verus") in the amounts of
$250,000 each, bearing an annual interest rate of 8%. The notes payable,
advances and accrued interest were converted into the Company's common stock on
March 31, 2000 in conjunction with the Merger.
Equipment Supplier Promissory Note - On April 15, 1999, the Company
converted $406,514 of amounts due to an equipment supplier into a promissory
note due December 15, 1999. At December 31, 1999, the Company was in default of
the promissory note. Accordingly, the note has been classified and included
within current long-term debt in the accompanying condensed consolidated balance
sheet at December 31, 1999. In April 2000, the Company repaid the note,
including the related accrued interest, with the proceeds from the sale of
common stock issued in conjunction with the Merger.
Line of Credit - The Company had a line of credit which allowed borrowings
up to $100,000. In April 2000, the Company repaid the line in full, including
the related accrued interest, with the proceeds from the sale of the common
stock issued in conjunction with the Merger, and the line of credit was
cancelled.
Small Business Administration Loans - In April 2000, the Company repaid
the loans in full, including the related accrued interest, with the proceeds
from the sale of common stock issued in conjunction with the Merger.
5. STOCK-BASED COMPENSATION
As discussed in Note 3, the Company accounts for stock options granted to
employees and non-employee directors in accordance with APB No. 25. Under APB
No. 25, compensation expense is recorded when options are granted at less than
the fair market value of the common stock on the date of grant.
The Company granted 344,828 options to purchase its common stock at $0.29
per share which was less than the fair market value of the common stock at the
time of the grant. Accordingly, the Company recorded compensation expense of
$417,242 on March 31, 2000 relating to these options.
On May 31, 2000, the Company awarded 2,000 restricted shares of its
common stock and granted options to purchase 4,000 shares of its common stock to
two members of the Board of Directors. Accordingly, the Company recorded
compensation expense of $12,750 in connection with the common stock awards
during the three months ended June 30, 2000.
11
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6. COMMITMENTS AND CONTINGENCIES
In connection with the Merger (Note 2), the Company entered into a
consulting arrangement with Verus International, Ltd. The consulting agreement
requires payments of $15,000 per month for a period of two years. The consulting
agreement is terminable by either party for cause with five (5) days written
notice. Additionally, Verus International, Ltd. may terminate the agreement
without cause upon five (5) days written notice. Amounts due under this
agreement at June 30, 2000 totaled $45,000 and are included in accounts payable
in the accompanying condensed consolidated balance sheet.
In March 1999, the Company entered into an agreement with a service
provider to provide reproduction services. The term of the agreement is 60
months and includes base payment increases over the term of the agreement. The
total amount of the base service payments is being charged to expense using the
straight-line method over the term of the agreement. The Company has recorded a
deferred credit to reflect the excess of the services expense over cash payments
since the inception of the agreement. Deferred credits of $168,750 and $180,000
are recorded within the balance sheets at June 30, 2000 and December 31, 1999,
respectively. One member of the Company's Board of Directors serves in an
executive capacity at the service provider.
7. TRANSACTIONS WITH RELATED PARTIES
Stockholders' Notes Payable - The Company has been financed principally by
loans from shareholders. In conjunction with the Merger, a total of $2,815,000
in loans from shareholders plus the related accrued interest of $401,171
(including $57,858 and $210,734 expensed during the years ended December 31,
2000 and 1999, respectively) were converted into 2,135,301 shares of Series A
preferred stock.
During the three months ended March 31, 2000, the Company repaid $434 in
principal on loans from shareholders. On March 31, 2000, the Company received
$317,951 in advances from a shareholder.
On March 31, 2000, the Company entered into a consulting arrangement with
Verus International, Ltd., one of its shareholders (Note 6).
On March 31, 2000, pursuant to the terms of the Merger Agreement, the
Company sold to certain investors 4,666,667 shares of its common stock and
warrants to purchase 833,333 shares of its common stock for an aggregate
purchase price of $7,000,000 including conversion of the notes payable, advances
and accrued interest owed to Verus International, Ltd.
In April 2000, the Company repaid $466,074 in principal and accrued
interest on loans from shareholders, including the $317,951 received on March
31, 2000, using a portion of the proceeds from the sale of the common stock in
conjunction with the Merger.
One member of the Company's Board of Directors serves in an executive
capacity with a service provider as described in Note 6.
8. PREFERRED STOCK
The Company has 5 million shares of authorized preferred stock. In
connection with the Merger, the Company issued 2,135,301 shares of Series A
Preferred Stock, $.00042 par value (the "Series A Preferred Stock") and
1,100,000 shares of Series B Preferred Stock, $.00042 par value (the "Series B
Preferred Stock").
The Series A Preferred Stock carries a dividend at the rate of 8% per
annum, payable on January 1 of each year in additional shares of common stock.
The number of shares of common stock issued is determined based upon the fair
market value of the Company's common stock during the twenty-five (25) days
prior to the dividend payment
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date. In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of the Series A Preferred Stock
have a liquidation preference over any distribution to securities junior to the
Series A Preferred Stock equal to $1.50 per share plus any accrued but unpaid
dividends. The Series A Preferred Stock is convertible into common stock at the
option of the holder at a ratio of three and one-half (3 1/2) shares of Series A
Preferred Stock for each common share to be issued. The conversion rate is
subject to adjustment for stock splits, stock dividends or other similar events.
The holders of the Series A Preferred Stock vote together with the holders of
the common stock. Each set of three and one half (3 1/2) shares of Series A
Preferred Stock has one (1) vote.
The Series B Preferred Stock, which is junior to the Series A Preferred
Stock, carries no dividend and is convertible into common stock at the option of
the holder at a ratio one (1) share of Series B Preferred Stock for each common
share to be issued. The conversion rate is subject to adjustment for stock
splits, stock dividends or other similar events. In the event of any
liquidation, dissolution or winding up of the Company, either voluntary or
involuntary, the holders of the Series B Preferred Stock have a liquidation
preference over any distribution to securities junior to the Series B Preferred
Stock and to the common stock equal to $1.50 per share. The holders of the
Series B Preferred Stock vote together with the holders of the common stock.
Each share of Series B Preferred Stock has six (6) votes.
9. SUBSEQUENT EVENT
On August 2, 2000, the Company entered into an asset purchase agreement
with an unrelated entity to purchase a customer list for $1,300,000. The terms
of the agreement require cash payments of $300,000, payable in four
installments, $100,000 upon closing, $50,000 on August 14, 2000, $50,000 on
September 11, 2000, and $100,000 on October 9, 2000. The balance of the purchase
price is to be satisfied through the issuance of three tranches of the Company's
common stock, a $700,000 tranche upon closing, a $150,000 tranche one year from
the closing (subject to certain performance criteria), and another $150,000
tranche two years from the closing (subject to certain performance criteria).
The number of shares to be issued in each tranche is determined at the
date of issuance utilizing the average closing price of the previous 10 trading
days. In addition, the seller may be entitled to receive additional shares of
common stock one year from the date of each issuance, if the value of the issued
shares has dropped below the original issue value. All issued shares of stock
are restricted from sale for one year from the date of issuance.
In connection with the asset purchase agreement, the Company entered into
a two-year consulting agreement (extendable for a third year at the option of
the Company) with a principal of the selling entity. The agreement provides for
annual cash compensation of $50,000.
*******
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Safe Harbor Statement
Certain statements in this Form 10-QSB, including information set forth
under Item 2 Management's Discussion and Analysis, contains trend analysis and
other "forward-looking statements." These statements relate to future events or
other future financial performance, and are identified by terminology such as
"may", "will", "should", "expects", "anticipates", "plans", "intends",
believes", "estimates", or "continues" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results could differ materially from those set forth in the forward-looking
statements. Moreover, this discussion and analysis should be read in conjunction
with the accompanying condensed consolidated financial statements for the
periods specified and the associated notes. Further reference should be made to
the Company's audited financial statements as of December 31, 1999 and for the
five months then ended.
Overview
As described in Note 2 to the Condensed Consolidated Financial Statements,
the accounting applied in the merger of booktech.com, inc., a Nevada corporation
(the "Company") and booktech.com, inc., a Massachusetts corporation
("booktechMass") differs from the legal form. As the transaction as been
accounted for as a reverse acquisition, the historical financial results of the
Company prior to the Merger are those of booktechMass.
The Company is a digital and on-demand publisher of custom textbooks, also
known as coursepacks, which are distributed primarily through college
bookstores. The Company is subject to a number of risks similar to those of
other companies in an early stage of development. Principal among these risks
are dependencies on key individuals, competition from other substitute products
and larger companies, the successful development and marketing of its products
and the need to obtain adequate additional financing necessary to fund future
operations.
The Company's business is highly seasonal in nature. More than 75% of its
revenues are generated in the third and fourth quarters of the fiscal year since
that period includes the traditional educational publishing selling season.
Operating losses have historically been greater in the first and second quarters
during a period when publishing revenues are at their lowest levels. See Note 3
to the accompanying Condensed Consolidated Financial Statements, "Concentration
of Credit Risk and Major Customers Information.
The discussion below assumes that the Company can continue to do business
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements, during the six months ended June 30, 2000 and 1999, the
Company incurred net losses of $3,377,954 and $1,082,061, respectively. These
factors, among others, raise substantial doubt about the Company's ability to
continue as a going concern.
In addition, the financial statements do not include any adjustments
relating to the recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms of its financing agreements, to obtain additional
financing, and ultimately to attain profitability.
Results of Operations - Three Months Ended June 30, 2000 and 1999
Net sales increased to $168,009 in 2000 from $61,926 in 1999 due to higher
sales volumes to the Company's largest customer, which accounted for
approximately 52% and 40% of the net sales in 2000 and 1999, respectively. No
other single customer represented 10% or more of sales during 2000 or 1999.
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Cost of sales was $351,043 in 2000 compared to $273,875 in 1999. The
higher cost of sales in 2000 was due to an increase in certain fixed production
costs as the Company expands its capacity in anticipation of increased sales
levels.
Selling, marketing, and general and administrative expenses (excluding
stock-based compensation) increased to $1,573,924 in 2000 from $416,866 in 1999
due primarily to higher compensation and related benefits and facility costs
associated with the increase in the number of employees hired by the Company to:
(a) build market share in higher education; (b) research and identify new
markets for the Company's products; (c) develop for launch the Company's
e-commerce portal to meet the demand for customized learning materials; and (d)
expand the Company's digital library of educational content. Legal and
accounting expenses also increased due to the costs normally associated with
being a public company.
Stock-based compensation costs of $12,750 in 2000 represent the fair
market value of certain restricted stock awards to two members of the Board of
Directors. There were no stock-based compensation costs in 1999.
Interest expense decreased to $14,497 in 2000 from $56,934 in 1999 due
primarily to the conversion of $2,815,000 of related party debt in conjunction
with the Merger and to the repayment of approximately $884,902 in debt during
April 2000.
Interest income increased to $26,679 in 2000 from $102 in 1999 due
primarily to higher average cash balances resulting from the sale of the common
stock in conjunction with the Merger.
The Company has no income taxes.
The net loss increased to $1,757,526 in 2000 from $685,647 in 1999,
primarily due to higher selling, marketing and general and administrative
expenses.
Results of Operations - Six Months Ended June 30, 2000 and 1999
Net sales increased to $492,743 in 2000 from $421,886 in 1999 due to
higher penetration in independent schools. Sales to the Company's largest
customer accounted for approximately 50% and 58% of the net sales in 2000 and
1999, respectively. No other single customer represented 10% or more of sales
during 2000 or 1999.
Cost of sales were $834,415 in 2000 compared to $696,021 in 1999. The
higher cost of sales in 2000 was due to an increase in certain fixed production
costs as the Company expands its capacity in anticipation of increased sales
levels, and to higher average copyright fees due to the mix of coursepacks sold.
Selling, marketing, and general and administrative expenses (excluding
stock-based compensation) increased to $2,534,760 in 2000 from $709,715 in 1999
due primarily to higher compensation and related benefits and facility costs
associated with the increase in the number of employees hired by the Company to:
(a) build market share in higher education; (b) research and identify new
markets for the Company's products; (c) develop for launch the Company's
e-commerce portal to meet the demand for customized learning materials; and (d)
expand the Company's digital library of educational content. Legal and
accounting expenses also increased due to the costs normally associated with
being a public company.
Stock-based compensation costs of $429,992 in 2000 primarily represent the
excess of the fair value of the Company's common stock over the exercise price
of certain stock option grants awarded in conjunction with the Merger. There
were no stock-based compensation costs in 1999.
Interest expense of $98,209 in 2000 approximated the $98,313 in 1999.
The Company has no income taxes.
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The net loss increased to $3,377,954 in 2000 from $1,082,061 in 1999
primarily due to higher selling, marketing and general and administrative
expenses and to the stock-based compensation costs.
Financial Condition, Liquidity and Capital Resources
To meet its financing needs, the Company has primarily depended upon loans
from stockholders and directors and sales of its common stock. Other sources of
financing have included bank debt and credit from suppliers. The Company has
generally not been in compliance with the provisions contained in certain of its
long-term debt agreements, and accordingly, the amounts outstanding under these
agreements have been classified as a current liability. As such, the Company has
generally operated from a negative working capital position. At June 30, 2000
and December 31, 1999, the Company's current liabilities of $2,810,770 and
$5,438,929, respectively, exceeded its current assets by $1,342,512 and
$5,127,710, respectively.
In conjunction with the Merger, the Company (a) refinanced $2,815,000 of
shareholder and director loans plus $401,171 in related accrued interest by the
issuance of 2,135,301 shares of Series A Preferred Stock; (b) purchased new
technology and a related patent application with the issuance of 1,379,310
shares of common stock; and (c) sold 4,666,667 shares of common stock and
warrants to purchase 833,333 shares of its common stock for an aggregate
purchase price of $7 million, including conversion of the notes payable,
advances and accrued interest owed to Verus International, Ltd.
The Company had a cash balance of $1,214,678 at June 30, 2000.
During the three months ended June 30, 2000, the Company's property and
equipment increased by $2.6 million, primarily due to the purchase of a new
management information system. Approximately, $1.6 million of the computer
software and related installation costs were not yet placed in service as of
June 30, 2000. The $2.6 million in capital equipment was financed as follows:
$.8 million in debt, $1.3 million in trade credit and the balance in cash.
On August 2, 2000, the Company entered into an asset purchase agreement
with an unrelated entity to purchase a customer list for $1,300,000. The terms
of the agreement require cash payments of $300,000, payable in four
installments, with the balance of the purchase price to be paid through the
issuance of three tranches of the Company's common stock. In connection with the
asset purchase agreement, the Company entered into a two-year consulting
agreement (extendable for a third year at the option of the Company) with a
principal of the selling entity. The agreement provides for annual cash
compensation of $50,000.
Unless the Company can generate a significant level of on-going revenue
and attain adequate profitability in the near-term, it will be necessary to seek
additional sources of equity or debt financing. Although the Company has been
successful in raising financing in the past, there can be no assurance that any
additional financing will be available to the Company on commercially reasonable
terms, or at all. Any inability to obtain additional financing when needed will
have a material adverse effect on the Company, requiring the Company to
significantly curtail or possibly cease its operations. In addition, any
additional equity financing may involve substantial dilution to the interests of
the Company's then existing shareholders.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The provisions of SFAS No. 133 are effective for periods
beginning after June 15, 2000. The Company is currently evaluating, and has not
determined, the effect, if any, SFAS No. 133 will have on the Company's
financial position and its results of operations. The Company will adopt this
accounting standard on January 1, 2001, as required.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenues in financial statements filed with the Securities and
Exchange Commission.
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The Company is currently evaluating, and has not determined, the effect, if any,
SAB No. 101 will have on the Company's financial position and its results of
operations. The Company will adopt this accounting standard during the fourth
quarter of 2000, as required.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11. Computation of Net Loss Per Common Share
27. Financial Data Schedules
(b) Reports on Form 8-K
The registrant filed a report on Form 8-K on April 4, 2000 which
reported that EG Acquisitions Corporation, a Nevada corporation, a wholly owned
subsidiary of the Company, merged with and into booktechMass, pursuant to an
Agreement and Plan of Merger dated March 31, 2000 between EG Acquisitions
Corporation, the Company, and booktechMass. Following the Merger, the business
of the Company was the business of booktechMass conducted prior to the Merger.
In conjunction with the Merger, the Company changed its name to booktech.com,
inc.
The registrant filed a report on Form 8-K on May 15, 2000 which
reported that the Company appointed Deloitte & Touche LLP as its independent
auditors.
The registrant filed a report on Form 8-K on June 16, 2000 which
reported that the purchase of a patent application with shares of the Company's
common stock should not have been reported within the Unaudited Condensed
Consolidated Statement of Cash Flows contained in the Company's Form 10-QSB for
the period ending March 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 14, 2000 booktech.com, inc.
/S/ Ted Bernhardt
---------------------------
Ted Bernhardt
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
Exhibit Description
------- -----------
11. Computation of Net Loss Per Common Share
27. Financial Data Schedules
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