Form 8-K/A
UNITED STATES SECURITIES AND EXCHANGE COMISSION
Washington, D.C. 20549
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): June 30, 2000
EPICEDGE, INC.
(Exact name of Registrant as specified in its charter)
Texas
(State or Other Jurisdiction of
Incorporation or Organization)
0-9129 75-1657943
(Commission File Number) (IRS Employer Identification Number)
3200 Wilcrest
Suite 370
Houston, Texas 77042-3366
713-784-2374
(Address and telephone number of principal executive offices)
<PAGE>
<TABLE>
<CAPTION>
EPICEDGE, INC.
TABLE OF CONTENTS
Item 7 Item 7 of the Current Report on Form 8-K, as originally filed on
July 14, 2000, is hereby amended and restated in its entirety as
follows:
Page
----
<S> <C> <C>
Item 7 (a) Financial Statements of Acquired Business
Historical Audited Financial Statements of IPS Associates, Inc. and
Subsidiaries for the Year Ended December 31, 1999 1
Historical Unaudited Financial Statements of IPS Associates, Inc. and
Subsidiaries for the Years Ended December 31, 1998 and 1997 15
Item 7 (b) Pro Forma Financial Information
Pro forma financial information for the year ended December 31, 1999
and the six months ended June 30, 2000 29
Item 7 (c) Exhibits 33
</TABLE>
<PAGE>
IPS Associates, Inc.
and Subsidiaries
Consolidated Financial Statements as of
December 31, 1999
Together with Independent Auditors' Report
<PAGE>
IPS Associates, Inc. and Subsidiaries
Independent Auditors' Report
================================================================================
To the Board of Directors of
IPS Associates, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of
IPS Associates, Inc. (a California corporation) and subsidiaries as of December
31, 1999, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity (deficit), and cash flows for the year
then ended. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We did not audit the financial statements of IPS
Associates Asia Pte Ltd, a wholly owned subsidiary, which statements reflect
total assets of $888,258 as of December 31, 1999, and total revenues of
$2,436,134 for the year then ended. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for IPS Associates Asia Pte Ltd, is based solely
on the report of the other auditors.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, based on the report of other auditors, the
consolidated financial statements referred to in the first paragraph present
fairly, in all material respects, the financial position of IPS Associates, Inc.
and subsidiaries as of December 31, 1999, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
Elwood o Espina o Ferrell, LLP
San Mateo, California
May 3, 2000
<PAGE>
Item 7 (a) - Financial Statements of Acquired Business
<TABLE>
<CAPTION>
IPS Associates, Inc. and Subsidiaries
Table of Contents
==============================================================================================================
Page No.
--------
<S> <C>
INDEPENDENT AUDITORS' REPORT ON
CONSOLIDATED FINANCIAL STATEMENTS............................................................. 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet.................................................................... 2
Consolidated Statement of Operations and Comprehensive Loss................................... 3
Consolidated Statement of Changes in Stockholders' Equity (Deficit)........................... 4
Consolidated Statement of Cash Flows.......................................................... 5 - 6
Notes to Consolidated Financial Statements.................................................... 7 - 14
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
IPS Associates, Inc. and Subsidiaries
Consolidated Balance Sheet
================================================================================================================
December 31, 1999
----------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 770,272
Accounts receivable -
Trade, net of allowance for doubtful accounts of $46,500 1,502,169
Employee 5,000
Other 26,460
Income tax refund 49,547
Prepaid expenses and other current assets 110,171
----------------------------------------------------------------------------------------------------------------
Total current assets 2,463,619
Property and equipment, net 649,232
Other assets 2,062,426
----------------------------------------------------------------------------------------------------------------
$ 5,175,277
================================================================================================================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Note payable to bank $ 500,000
Current maturities of long-term debt 778,817
Accounts payable 318,008
Accrued expenses 973,405
Accrued taxes on income 26,007
Deferred taxes on income 28,500
----------------------------------------------------------------------------------------------------------------
Total current liabilities 2,624,737
----------------------------------------------------------------------------------------------------------------
Long-term debt, net of current maturities shown above 4,861,458
Deferred taxes on income 9,103
----------------------------------------------------------------------------------------------------------------
Commitments
Stockholders' equity (deficit):
Class A common stock, $0.001 par value, 10,000,000 shares authorized;
1,616,744 shares issued and outstanding 1,617
Class B common stock, $0.001 par value, 10,000,000 shares authorized;
1,203,704 shares issued and outstanding 1,204
Additional paid-in capital 3,641,452
Guaranteed ESOP obligations (5,281,393)
Deferred compensation (194,572)
Accumulated other comprehensive loss (4,284)
Retained earnings (deficit) (484,045)
----------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (2,320,021)
----------------------------------------------------------------------------------------------------------------
$ 5,175,277
================================================================================================================
</TABLE>
The accompanying notes are an integral part of this balance sheet.
-2-
<PAGE>
<TABLE>
<CAPTION>
IPS Associates, Inc. and Subsidiaries
Consolidated Statement of Operations and Comprehensive Loss
================================================================================================================
Year ended December 31, 1999
----------------------------------------------------------------------------------------------------------------
<S> <C>
Revenues:
Training $ 8,731,506
Consulting 3,751,966
----------------------------------------------------------------------------------------------------------------
Total revenues 12,483,472
----------------------------------------------------------------------------------------------------------------
Expenses:
Employment and related expenses 7,170,606
General and administrative expenses 5,475,993
----------------------------------------------------------------------------------------------------------------
Total expenses 12,646,599
----------------------------------------------------------------------------------------------------------------
Loss from operations (163,127)
Other income (expense):
Interest, net (347,868)
Gain on sale of property and equipment 600
Lawsuit settlement 133,744
Unrealized loss on investments (1,350,000)
Other income 1,056
----------------------------------------------------------------------------------------------------------------
Loss before provision (credit) for taxes on income (1,725,595)
Provision (credit) for taxes on income (391,202)
----------------------------------------------------------------------------------------------------------------
Net income (1,334,393)
Other comprehensive loss, foreign currency translation adjustment (7,748)
----------------------------------------------------------------------------------------------------------------
Comprehensive income $(1,342,141)
================================================================================================================
</TABLE>
The accompanying notes are an integral part of this statement.
-3-
<PAGE>
<TABLE>
<CAPTION>
IPS Associates, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
====================================================================================================================================
Year ended December 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
Accum-
ulated
Other
Class A Class B Compre- Total
Common Stock Common Stock Additional Guaranteed Deferred hensive Retained Stockholders'
------------------------------------------------------------- Paid-in ESOP Compen- Income Earnings Equity
Shares Amount Shares Amount Capital Obligations sation (Loss) (Deficit) (Deficit
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998 1,667,852 $1,668 1,203,704 $1,204 $3,794,899 $(6,132,114) $(299,223) $ 3,464 $ 926,655 $(1,703,447)
Amortization of
guaranteed ESOP
obligations - - - - (398,579) 850,721 - - - 452,142
Repurchase of
shares (88,408) (88) - - (23,605) - - - (76,307) (100,000)
Vesting of
stock grants 4,800 5 - - (5) - - - - -
Issuance of
stock options - - - - 286,962 - - - - 286,962
Exercise of
stock options 32,500 32 - - 2,405 - - - - 2,437
Amortization of
deferred
compensation - - - - - - 78,067 - - 78,067
Cancellation of
stock options - - - - (20,625) - 26,584 - - 5,959
Foreign currency
translation
adjustment - - - - - - - (7,748) - (7,748)
Net loss - - - - - - - - (1,334,393) (1,334,393)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
1999 1,616,744 $1,617 1,203,704 $1,204 $3,641,452 $(5,281,393) $(194,572) $(4,284) $ (484,045) $(2,320,021)
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of this statement.
-4-
<PAGE>
<TABLE>
<CAPTION>
IPS Associates, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
===================================================================================================================
Year ended December 31, 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C>
Operating activities:
Net loss $ (1,334,393)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 216,008
Income on restricted investments (28,015)
Income on investment (27,541)
Gain on sale of property and equipment (600)
Unrealized loss on investments 1,350,000
Amortization of deferred compensation 78,067
Cancellation of stock options 5,959
Exercise of stock options 2,437
Issuance of stock options 286,962
Amortization of guaranteed ESOP obligations 452,142
Contributions to ESOP (650,000)
Amortization of deferred finance costs 40,428
Foreign currency translation adjustment (7,748)
Changes in operating assets and liabilities-
Increase in accounts receivable (54,750)
Decrease in income tax refund 123,853
Increase in prepaid expenses and other current assets (12,900)
Decrease in deposits 4,748
Increase in accounts payable 119,882
Increase in accrued expenses 608,179
Decrease in accrued taxes on income (7,064)
Decrease in deferred taxes on income (411,705)
-------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 753,949
-------------------------------------------------------------------------------------------------------------------
Investing activities:
Payments for purchases of property and equipment (153,673)
Proceeds from sales of property and equipment 600
Proceeds from sales of marketable securities 1,600,000
Payments for purchases of investments (1,250,000)
Advances on note receivable (100,000)
-------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 96,927
-------------------------------------------------------------------------------------------------------------------
-5-
<PAGE>
IPS Associates, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Continued)
===================================================================================================================
Year ended December 31, 1999
-------------------------------------------------------------------------------------------------------------------
Financing activities:
Net payments on note payable to bank $ (275,000)
Principal payments on long-term debt (57,335)
Payment for repurchase of shares (100,000)
-------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (432,335)
-------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 418,541
Cash and cash equivalents, beginning of year 351,731
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 770,272
===================================================================================================================
Non-cash investing and financing transactions -
Stock dividend received on investment $27,541
Exercise of stock options in lieu of cash
for professional services rendered 2,437
Supplemental disclosures of cash flow information -
Cash paid during the year for:
Interest $536,487
Income taxes 50,571
</TABLE>
The accompanying notes are an integral part of this statement.
-6-
<PAGE>
IPS Associates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the year ended December 31, 1999
================================================================================
1. Nature of Operations - IPS Associates, Inc. and
Business and subsidiaries ("company") is in the business
Significant of project management training and
Accounting consulting services to high technology
Policies companies. In 1998, the company created
two classes of common stock, Class A and
Class B, each having similar rights and
preferences. During the year ended December
31, 1999, three of the company's clients
collectively provided approximately 36% of
revenues.
Principles of Consolidation - The
consolidated financial statements of the
company include the accounts of its wholly
owned subsidiaries, IPS Global Partners,
Inc., incorporated in California in October,
1996, and IPS Associates Asia Pte Ltd,
incorporated in the Republic of Singapore in
January, 1997. All intercompany transactions
and balances have been eliminated in
consolidation.
Cash and Cash Equivalents - Cash and cash
equivalents consist of cash on hand and in
banks and certificates of deposit with an
original maturity of three months or less.
Marketable Securities - The marketable
securities consist of two municipal bonds
and are classified as held-to-maturity
securities. The bonds are carried at cost in
accordance with Statement of Financial
Accounting Standard ("SFAS") 115, Accounting
for Certain Investments in Debt and Equity
Securities. The bonds mature in June, 2032
and September, 2033.
Depreciation - The company utilizes the
straight-line method of depreciation.
Equipment is being depreciated over 3 to 7
years. Leasehold improvements are being
depreciated over 11 and 15 years. Fully
depreciated assets still in use totaled
$171,523 at December 31, 1999. Accelerated
methods of depreciation are used for tax
purposes.
Deferred Finance Costs - Fees incurred in
securing long-term loans to finance the
Employee Stock Ownership Plan ("ESOP") have
been capitalized and are being amortized
over seven years, the terms of the related
loans.
-7-
<PAGE>
Investments - The company has invested in
unrelated private companies as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1,025 shares of National Cooperative Bank $102,541
925,926 shares of Vite preferred stock 150,000
1,500,000 shares of Emprend, Inc. 0
500,000 shares of XIS Incorporated preferred stock 0
--------------------------------------------------------------------------------
Total $252,541
================================================================================
</TABLE>
The investments are stated at the lower of
cost or assumed market value. In relation to
the funds borrowed by the company from a
bank to finance the ESOP, the company also
purchased 750 shares of the bank's Class B
stock for $75,000 in cash. During 1999, the
company received an additional 275 shares as
a stock patronage refund.
Restricted Investments - The company is
required by the lending bank to maintain a
collateral investment account as security
against the ESOP loans. Restricted
investments are invested in money funds and
municipal bonds.
Income Taxes - Income taxes are provided for
the tax effects of transactions reported in
the financial statements and consist of
taxes currently due and deferred taxes
resulting primarily from timing differences
which relate to depreciation, vacation
expenses, the state tax deduction, deferred
compensation, allowance for doubtful
accounts, deferred revenue and ESOP related
differences. The deferred tax liabilities
represent the future tax return consequences
of those differences, which will be taxable
when the liabilities are settled.
Use of Estimates - The preparation of
financial statements in conformity with
generally accepted accounting principles
requires management to make estimates and
assumptions that affect the reported amounts
of assets and liabilities and disclosure of
contingent assets and liabilities at the
date of the financial statements and the
reported amounts of revenues and expenses
during the reporting period. Actual results
could differ from those estimates.
2. Property and Property and equipment at December 31, 1999
Equipment consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
Equipment $ 722,778
Leasehold improvements 497,613
--------------------------------------------------------------------------------
Total 1,220,391
Less - Accumulated depreciation (571,159)
--------------------------------------------------------------------------------
Property and equipment, net $ 649,232
================================================================================
-8-
<PAGE>
3. Other Assets Other assets at December 31, 1999 consisted of the following:
Deferred finance costs, net of accumulated
amortization of $57,273 $ 185,299
Deposits 35,589
Note receivable 100,000
Marketable securities 900,000
Investments, at lower of cost or assumed
market value 252,541
Restricted investments 588,997
--------------------------------------------------------------------------------
Total $ 2,062,426
================================================================================
4. Accrued Accrued expenses at December 31, 1999 consisted of the following:
Expenses
Payroll and payroll taxes $ 435,051
Vacation 68,815
Deferred revenue 355,449
Other 114,090
-------------------------------------------------------------------------------
Total $ 973,405
===============================================================================
</TABLE>
5. Note Payable The company has a line of credit with a bank
To Bank whereby the company can borrow a maximum of
$1,000,000 with an interest rate at the
prime rate (8.5% at December 31, 1999) plus
.5%. At December 31, 1999, there was
$500,000 outstanding under this line of
credit. The line expires June 1, 2000.
The line of credit is secured by an
assignment of a security interest in the
company's accounts receivable, investments,
and equipment. Three of the principal
stockholders have also personally guaranteed
this bank credit agreement.
6. Long-Term Debt The company's long-term debt at December 31,
1999 consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
8.02% Guaranteed notes payable to bank for
ESOP financing, due in monthly principal
installments as detailed in the agreements
plus interest to July, 2005, with a final
payment due in August, 2005, secured by
accounts receivable, investments and
equipment and personally guaranteed by
three principal stockholders of the
company (see Note 9) $5,579,167
-9-
<PAGE>
7.5% Unsecured notes payable to former
employees for the repurchase of shares
upon termination of employment; the
remaining principal and interest
payments are due in 2000 61,108
------------------------------------------------------------
5,640,275
Less - Current maturities (778,817)
------------------------------------------------------------
Total $4,861,458
============================================================
The long-term debt maturities are as follows:
Year ending December 31, Amount
2000 $ 778,817
2001 812,500
2002 880,208
2003 1,110,417
2004 1,300,000
Thereafter 758,333
------------------------------------------------------------
Total $5,640,275
============================================================
</TABLE>
7. Commitments The company leases office space in San
Carlos, California, and Singapore, as well as
office equipment. The leases expire at
various dates through May, 2001. Total
minimum future payments under these leases
for the year ending December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, Amount
------------------------------------------------------------------------------
2000 $ 229,431
2001 64,620
------------------------------------------------------------------------------
Total $ 294,051
==============================================================================
Rental expense for the year ended December 31, 1999 was $258,400.
</TABLE>
8. Taxes on Income The provision (credit) for taxes on income at
December 31, 1999, consisted of the
following:
<TABLE>
<CAPTION>
<S> <C> <C>
Currently payable $ 32,621
Deferred (423,823)
--------------------------------------------------------------------------------
Total $ (391,202)
================================================================================
</TABLE>
-10-
<PAGE>
The provision (credit) for income taxes
differs from the amount that would be
obtained by applying federal statutory rates
to income before income taxes because no tax
benefit has been provided for nondeductible
expenses, there are differences between
financial and tax reporting of depreciation
and deductibility of ESOP contributions, the
company is subject to state franchise taxes
and foreign taxes, and the separate
calculations of the current and deferred
provisions each consider the effect of
graduated rates. Deferred tax liabilities
recognized for taxable temporary differences
total $37,603 at December 31, 1999. Deferred
tax assets recognized for deductible
temporary differences and loss carryforwards
total $0 at December 31, 1999, net of a
valuation allowance of $336,311. Deferred tax
assets and liabilities are individually
classified as current and noncurrent based on
their characteristics. The company has a
federal net operating loss carryforward of
approximately $179,000, which expires in
2018.
9. Employee The company sponsors a leveraged ESOP
Stock that covers all eligible employees. The
Ownership company makes annual contributions to the
Plan ESOP equal to the ESOP's debt service. The
ESOP shares initially were pledged as
collateral for its debt. As the debt is
repaid, shares are released from collateral
and allocated to active employees, based on
the proportion of debt service paid in the
year. The company accounts for its ESOP in
accordance with Statement of Position 93-6,
Employers' Accounting for Employee Stock
Ownership Plans. Accordingly, the debt of the
ESOP and the guaranteed ESOP obligations are
recorded in the consolidated balance sheet as
debt and a reduction in stockholders' equity.
As shares are released from collateral, the
company reports compensation expense equal to
the current market price of the shares, and
the shares become outstanding. ESOP compensa-
tion expense was $452,142 for the year ended
December 31, 1999. The ESOP shares as of
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Allocated shares 68,127
Shares released for allocation 157,541
Unreleased shares 978,036
-------------------------------------------------------------------------------
Total ESOP shares 1,203,704
===============================================================================
Fair value of unreleased shares at
December 31, 1999 $2,806,963
===============================================================================
</TABLE>
10. Stock Option The company adopted a stock option plan
Plan ("plan") on April 16, 1993. Incentive stock
options may be granted to employees with an
exercise price not less than the fair market
value of the stock at the date of grant as
determined by the board of directors
("Board"). Nonstatutory stock options may be
-11-
<PAGE>
granted to employees, directors and consult-
ants with an exercise price of not less than
85% of the fair market value of the stock at
the date of grant. The plan is administered
by the Board of Directors. The Board may
grant, at its discretion, options for shares
aggregating 2,300,000 from the plan. Termi-
nated options are available for subsequent
option grants under the terms of the plan.
Options generally vest over a five-year
period; however, certain options have
accelerated vesting conditions in which they
become fully vested upon certain conditions.
No option shall be exercisable after the
expiration of ten years from the date the
option was granted.
The company applies Accounting Principles
Board Opinion 25, Accounting for Stock Issued
to Employees, in accounting for its stock
compensation plan. Accordingly, no
compensation cost is recognized when the
exercise price is not less than the estimated
fair market value of stock on the date of
grant. However, in connection with certain
stock option grants issued with the exercise
price less than the fair market value on the
date of grant, deferred compensation is
recorded and amortized over the vesting
period. For the year ended December 31, 1999,
compensation expense recognized was $78,067.
The following is a summary of transactions:
<TABLE>
<CAPTION>
Total Weighted
Number Average
of Exercise
Options Price
------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, December 31, 1998 1,046,250 $ 1.39
Options granted during the year 1,002,933 1.46
Options exercised during the year (32,500) .08
Options canceled or expired
during the year (103,008) 2.34
------------------------------------------------------------------------------
Outstanding, December 31, 1999 1,913,675 $ 1.51
==============================================================================
Exercisable, December 31, 1999 1,137,810
==============================================================================
Weighted average fair value of
options granted during the year $ 1.95
==============================================================================
</TABLE>
-12-
<PAGE>
Options outstanding, exercisable and vested
by price range at December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Number of Number of
Exercise Contractual Options Options
Price Life Outstanding Exercisable
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ .01 120 Months 147,160 147,160
.08 35 Months 55,000 55,000
.19 - .32 47 Months 149,500 143,033
.45 83 Months 212,500 212,500
1.00 88 Months 276,750 198,138
1.95 109 Months 870,065 292,398
3.00 93 Months 121,200 56,693
5.00 96 Months 81,500 32,888
------------------------------------------------------------------------------
Total 1,913,675 1,137,810
==============================================================================
</TABLE>
The company adopted the disclosure-only
provisions of SFAS 123, Accounting for
Stock-Based Compensation. Had compensation
cost been determined on the basis of fair
value pursuant to SFAS 123, the company's net
income would have been reduced as follows:
Net loss:
As reported $(1,334,393)
Pro forma (1,372,449)
============================================
The fair value of each option grant is
estimated on the date of grant using the
Black-Scholes option pricing model, with the
following weighted-average assumptions used
for grants during the year ended December
31, 1999: weighted average risk-free
interest rates of 4.8 percent; expected
dividend yields of 0 percent; expected lives
of the options of five years; and expected
volatility of 0 percent.
11. Retirement Plan Retirement benefits are provided for all
eligible employees under a defined contribu-
tion plan. The plan is in compliance with
Internal Revenue Code Section 401(k) and the
Department of Labor Rules and Regulations
Act. The company contributes an amount
equal to a matching percentage determined
annually by the Board. Participants begin
to vest after two years of service and
become fully vested after six years of
service. There were no employer contribu-
tions made for the year ended December 31,
1999.
-13-
<PAGE>
12. Subsequent In April, 2000, the company acquired certain
Events assets and assumed certain liabilities of
Angel Group, LLP, a limited liability
partnership. The purchase price consisted
of 80,000 shares of the company's common
stock, $100,000 cash, and the assumption of
liabilities in the amount of approximately
$1,312,000.
In April, 2000, the board granted 30,000
stock options to two employees with a per
share exercise price of $5.00. Such option
shares shall vest over five years.
In March, 2000, the company signed a letter
of intent with EpicEdge, Inc. ("EpicEdge")
to sell selected assets and liabilities of
the company to EpicEdge for $6,000,000 in
cash and notes, plus $25,200,000 in EpicEdge
equity.
-14-
<PAGE>
IPS ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
-15-
<PAGE>
<TABLE>
<CAPTION>
IPS ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1998 AND 1997
(Unaudited)
1998 1997
--------------- ---------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 351,731 $ 503,758
Trade accounts receivable, net of allowance for doubtful accounts of $46,500 and
$60,000 1,478,879 2,342,297
Marketable securities 2,500,000 --
Income taxes receivable 173,400 --
Prepaid expenses and other current assets 96,843 109,343
--------------- ---------------
Total current assets 4,600,853 2,955,398
--------------- ---------------
PROPERTY AND EQUIPMENT, net 711,567 711,746
--------------- ---------------
OTHER ASSETS:
Deposits 40,337 47,954
Deferred financing costs, net 226,155 --
Investments, at cost 325,000 --
Restricted investments 560,982 --
--------------- ---------------
Total other assets 1,152,474 47,954
--------------- ---------------
Total assets $ 6,464,894 $ 3,715,098
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit $ 775,000 $ --
Accounts payable 198,126 349,229
Accrued liabilities 365,226 588,478
Current portion of long-term debt 707,334 106,444
Income taxes payable 33,071 360,000
Deferred income taxes 273,876 79,333
--------------- ---------------
Total current liabilities 2,352,633 1,483,484
--------------- ---------------
NONCURRENT LIABILITIES:
Long-term debt, less current portion 5,640,276 259,068
Deferred income taxes 175,432 372,356
--------------- ---------------
Total noncurrent liabilities 5,815,708 631,424
--------------- ---------------
Total liabilities 8,168,341 2,114,908
--------------- ---------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value, 6,000,000 shares authorized;
2,222,000 shares issued and outstanding at December 31, 1997 -- 19,659
Class A common stock, $0.001 par value, 10,000,000 shares authorized; 1,667,852
shares issued and outstanding at December 31, 1998 1,668 --
Class B common stock, $0.001 par value, 10,000,000 shares authorized; 1,203,704
shares issued and outstanding at December 31, 1998 1,204 --
Additional paid-in capital 3,794,899 --
Guaranteed ESOP obligations (6,132,114) --
Deferred compensation (299,223) --
Foreign currency translation 3,464 --
Retained earnings 926,655 1,580,531
--------------- ---------------
Total stockholders' equity (deficit) (1,703,447) 1,600,190
--------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 6,464,894 $ 3,715,098
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-16-
<PAGE>
<TABLE>
<CAPTION>
IPS ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
1998 1997
---------------- -----------------
<S> <C> <C>
REVENUES:
Training $ 5,544,467 $ 6,000,709
Consulting 5,104,726 5,149,804
---------------- -----------------
Total revenues 10,649,193 11,150,513
---------------- -----------------
EXPENSES:
Cost of billed materials 348,462 348,618
Employment and related expenses 8,593,563 8,288,938
Occupancy expenses 268,905 223,872
General and administrative expenses 1,452,407 1,111,919
Depreciation and amortization 212,865 139,434
---------------- -----------------
Total expenses 10,876,202 10,112,781
---------------- -----------------
Income (loss) from operations (227,009) 1,037,732
---------------- -----------------
OTHER EXPENSES:
Interest expense, net 236,507 26,954
ESOP setup costs 138,373 --
Loss on foreign currency exchange 13,679 2,915
---------------- -----------------
Total other expenses 388,559 29,869
---------------- -----------------
Income (loss) before provision for income taxes (615,568) 1,007,863
PROVISION FOR INCOME TAXES 38,308 380,000
---------------- -----------------
Net income (loss) (653,876) 627,863
OTHER COMPREHENSIVE INCOME: Translation adjustment 3,464 --
---------------- -----------------
Comprehensive income (loss) $ (650,412) $ 627,863
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-17-
<PAGE>
<TABLE>
<CAPTION>
IPS ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
Addi-
Class A Class B tional Foreign Total
Common Stock Common Stock Common Stock Paid-in Guaranteed Currency Stockholders'
------------------------------------------------------ in ESOP Deferred Trans- Retained Equity
Shares Amount Shares Amount Shares Amount Capital Obligations Compensation lation Earnings (Deficit)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December
31, 1996 2,329,500 $ 19,781 -- $ -- -- $ -- $ -- $ -- $ -- $ -- $1,104,422 $ 1,124,203
Exercise
of stock
options 12,500 937 -- -- -- -- -- -- -- -- -- 937
Re-
purchase
of
shares (120,000) (1,059) -- -- -- -- -- -- -- -- (151,754) (152,813)
Net
income -- -- -- -- -- -- -- -- -- -- 627,863 627,863
-------------------------------------------------------------------------------------------------------------------------
BALANCE,
December
31, 1997 2,222,000 19,659 -- -- -- -- -- -- -- -- 1,580,531 1,600,190
Recapi-
tali-
zation (2,222,000) (19,659) 1,666,444 1,666 555,556 556 17,437 -- -- -- -- --
Issuance
of
shares
to ESOP -- -- -- -- 648,148 648 3,499,352 (6,500,000) -- -- -- (3,000,000)
Contri-
butions
to ESOP -- -- -- -- -- -- (173,044) 367,886 -- -- -- 194,842
Re-
purchase
of
shares -- -- (76,592) (76) -- -- (458) -- -- -- -- (534)
Issuance
of
stock
options -- -- -- -- -- -- 449,370 -- (449,370) -- -- --
Exercise
of stock
options -- -- 78,000 78 -- -- 2,242 -- -- -- -- 2,320
Amorti-
zation
of
deferred
compen-
sation -- -- -- -- -- -- -- -- 150,147 -- -- 150,147
Foreign
currency
trans-
lation -- -- -- -- -- -- -- -- -- 3,464 -- 3,464
Net loss -- -- -- -- -- -- -- -- -- -- (653,876) (653,876)
-------------------------------------------------------------------------------------------------------------------------
BALANCE,
December
31, 1998 -- $ -- 1,667,852 $1,668 1,203,704 $1,204 $3,794,899 $(6,132,114) $(299,223) $3,464 $ 926,655 $(1,703,447)
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-18-
<PAGE>
<TABLE>
<CAPTION>
IPS ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
1998 1997
---------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (653,876) $ 627,863
Adjustments to reconcile net income (loss) to net cash provided by (used by)
operating activities:
Depreciation and amortization 212,865 139,434
Income on restricted investments (10,982) --
Deferred income tax benefit (2,381) (189,311)
Loss on disposal of property and equipment 6,925 --
Amortization of deferred compensation 150,147 --
Amortization of guaranteed ESOP obligations 194,842 --
Contributions to ESOP (270,833) --
Amortization of deferred financing costs 16,845 --
Provision for doubtful accounts (13,500) --
Changes in assets and liabilities:
Accounts receivable 876,918 (72,694)
Prepaid expenses and other current assets 52,500 (58,252)
Income taxes receivable (173,400) --
Deposits 7,617 (26,577)
Accounts payable (151,103) (74,549)
Accrued liabilities (223,252) (41,340)
Income taxes payable (326,929) 200,000
---------------- --------------
Net cash provided by (used by) operating activities (307,597) 504,574
---------------- --------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of property and equipment (216,147) (317,298)
Purchase of marketable securities (2,500,000) --
Purchase of investments (325,000) --
Purchase of restricted investments (550,000) --
---------------- --------------
Net cash used by investing activities (3,591,147) (317,298)
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 1,370,862 --
Repayments under line of credit (595,862) --
Payments under notes payable to bank (203,125) (48,772)
Financing costs incurred (283,000) --
Sale of common stock to ESOP 3,500,000 --
Payments for repurchase of shares (44,478) (43,986)
Proceeds from exercise of stock options 2,320 937
---------------- --------------
Net cash provided by (used by) financing activities 3,746,717 (91,821)
---------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (152,027) 95,455
CASH AND CASH EQUIVALENTS, beginning of year 503,758 408,303
---------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 351,731 $ 503,758
================ ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest
272,519 35,014
Cash paid for taxes
175,800 195,700
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-19-
<PAGE>
IPS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(Unaudited)
1. NATURE OF OPERATIONS:
IPS Associates, Inc. (incorporated in California in December 1989) and its
wholly owned subsidiaries, IPS Global Partners, Inc. (incorporated in California
in October 1996) and IPS Associates Asia Pte Ltd (incorporated in the Republic
of Singapore in January 1997) (collectively, the Company), provide project
management training and consulting services to high-technology companies
worldwide. An economic downturn in the high-technology industry could adversely
affect the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Restructuring of Stock
In April 1998, the Company amended its articles of incorporation to create two
classes of common stock, Class A and Class B, and authorized 10,000,000 shares
of each. Class A and Class B shares have similar rights, except that Class B
shares have certain preferences in liquidation. The outstanding shares of
existing common stock were converted into shares of Class A common stock on a
one-for-one basis.
The Company then converted 555,556 shares of Class A common stock owned by
certain stockholders to shares of Class B common stock on a one-for-one basis.
These Class B shares were subsequently sold to the ESOP (see Note 6).
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. Intercompany accounts and transactions have been
eliminated.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue and Expense Recognition and Concentrations
Revenues are recognized when services are provided, and expenses are recognized
as incurred.
During the year ended December 31, 1998, three of the Company's clients
individually provided 23 percent, 14 percent, and 11 percent of revenues. During
the year ended December 31, 1997, three of the Company's clients individually
provided 23 percent, 20 percent, and 12 percent of revenues.
-20-
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in banks and certificates
of deposit with an original maturity of three months or less.
Marketable Securities
Marketable securities consist of municipal bonds and are accounted for in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." These assets
are reported at cost.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed by the straight-line method over estimated useful lives. Maintenance
and repair expenditures are expensed as incurred.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------------------------------------- Estimated Useful
1998 1997 Lives
------------------------ ------------------------ -------------------------
<S> <C> <C> <C>
Furniture and equipment 639,835 619,486 3-7 years
Leasehold improvements 438,901 402,020 Lease term
------------------------ ------------------------
1,078,736 1,021,506
Less: Accumulated depreciation (367,169) (309,760)
------------------------ ------------------------
Total, net 711,567 711,746
======================== ========================
</TABLE>
Depreciation expense was $138,830 and $124,368 for 1998 and 1997, respectively.
Deferred Finance Costs
Deferred finance costs are related to obtaining loans to finance the Employee
Stock Ownership Plan (the ESOP) established in 1998 (see Note 4 and 6). The
costs are being amortized over 7 years, the terms of the related loans.
Amortization expense for the costs is $16,845 for 1998.
Investments
In relation to the funds borrowed by the Company, from a bank, to establish the
ESOP in 1998, the Company also purchased shares of the bank's Class B stock for
$75,000 in cash.
Also, in December 1998, the Company invested $250,000 in preferred stock of
Vite, an unrelated private company. Vite is designing software that assists in
determining the probable success of projects based on various factors. This
investment does not allow for the Company to exert significant influence, and
there is currently no public market for these securities. Accordingly, the
Company has recorded this investment at cost in the accompanying balance sheet.
The Company periodically reviews the recoverability of the investment and does
not believe that any impairment exists at December 31, 1998.
-21-
<PAGE>
Restricted Investments
The Company is required by the lending bank to keep a collateral account as
security against these loans. Restricted investments are invested in money
market funds and municipal bonds and are pledged as collateral for the ESOP
loans (see Note 4).
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The Company
calculates deferred taxes based on the temporary differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the years in which the differences are expected to reverse.
3. INCOME TAXES:
The provision for income taxes for the years ended December 31, 1998 and 1997,
consists of:
1998 1997
-------------- --------------
Current tax provision:
Federal $ -- $ 433,000
State -- 117,000
Foreign 31,297 19,311
-------------- --------------
Total current 31,297 569,311
-------------- --------------
Deferred tax provision (benefit):
Federal -- (121,000)
State -- (66,000)
Foreign 7,011 (2,311)
-------------- --------------
Total deferred 7,011 (189,311)
-------------- --------------
Total provision $ 38,308 $ 380,000
============== ==============
-22-
<PAGE>
Net deferred income tax liabilities comprised the following at December 31, 1998
and 1997:
1998 1997
-------------- --------------
Deferred tax assets:
Temporary differences $ 28,256 $ 48,000
Net operating losses 74,232 --
Deferred tax liabilities:
Temporary differences (198,525) (117,689)
Cash to accrual adjustment (279,039) (382,000)
Valuation allowance (74,232) --
-------------- --------------
Net deferred income tax liability $ (449,308) $( 451,689)
============== ==============
3. FINANCING ARRANGEMENTS:
Line of Credit
In July 1998, the Company entered into a line of credit facility with a bank.
The maximum borrowings under this facility are $1,000,000 and bear interest at
prime plus 0.5 percent (8.25 percent at December 31, 1998). Essentially all
assets of the Company secure borrowings under this facility. The amount
outstanding under this facility at December 31, 1998 was $775,000.
The Company previously had a revolving line of credit facility with a bank for
maximum borrowings of $600,000. The facility bore interest at prime plus 1.5
percent (10.0 percent at December 31, 1997). The amount outstanding under this
facility at December 31, 1998 and 1997, was $0 and $2,394, respectively.
ESOP Loan
In July 1998, in connection with the establishment of the ESOP (see Note 6), the
Company guaranteed two loans to a bank totaling $6,500,000, on behalf of the
ESOP. The funds were used by the ESOP to purchase shares of Class B common stock
from the Company and three of the Company's founding stockholders. The loans
have a term of 7 years and bear interest at 8.02 percent. At December 31, 1998,
the balance outstanding totaled $6,229,167. The loans are subject to various
financial and nonfinancial covenants. The Company was not in compliance with all
the relevant covenants at December 31, 1998 and has obtained waivers.
Borrowings
In November 1996, the Company entered into an agreement with a bank for a
revolving-to-term credit facility that was secured by essentially all of the
assets of the Company. The agreement provided for borrowings up to a maximum of
$250,000 for leasehold improvements and the acquisition of furniture and
equipment. The line required interest-only payments through March 1, 1997, then
monthly principal payments of $5,208 plus interest at prime plus 2 percent (10.5
percent at December 31, 1997), with any outstanding balance due and payable in
March 2001. Borrowings under this agreement during 1998 and 1997, were $0 and
$250,000, respectively, and the balance outstanding at December 31, 1998 and
1997, was $0 and $203,125, respectively. The credit facility was repaid in 1998.
-23-
<PAGE>
Employee Notes Payable
At December 31, 1998 and 1997, the Company had notes payable to former employees
for the repurchase of shares upon termination of employment. These notes are
payable over three years and bear interest at 7.5 percent.
The following amounts were outstanding at December 31, 1998 and 1997, under all
financing arrangements:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- --------------------------------------
Current Long-term Current Long-term
Portion Portion Total Portion Portion Total
---------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revolving-to-term facility $ -- $ -- $ -- $ 62,500 $ 140,625 $ 203,125
Notes payable for the
repurchase of shares 57,334 61,109 118,443 43,944 118,443 162,387
Guaranteed ESOP loans 650,000 5,579,167 6,229,167 -- -- --
---------------------------------------- --------------------------------------
Total $ 707,334 $ 5,640,276 $ 6,347,610 $ 106,444 $ 259,068 $ 365,512
======================================== ======================================
</TABLE>
Debt matures as follows:
1999 $ 707,334
2000 778,817
2001 812,500
2002 880,208
2003 1,110,417
Thereafter 2,058,334
--------------
$6,347,610
==============
5. COMMITMENTS:
The Company leases office space in San Carlos, California, and Singapore under
operating leases expiring in May 2001 and November 2000, respectively. Rent
expense under these leases was $220,433 and $160,226 for 1998 and 1997,
respectively.
-24-
<PAGE>
Future minimum rental payments under noncancelable operating leases with initial
terms in excess of one year are as follows as of December 31, 1998:
Operating
Leases
-------------
1999 $ 223,552
2000 217,312
2001 63,367
-------------
$ 504,231
=============
6. STOCKHOLDERS' equity:
Employee Stock Ownership Plan
On April 23, 1998, the Board of Directors approved the establishment of the ESOP
for the benefit of eligible employees. The Company sold 648,148 newly issued
shares of Class B common stock and certain stockholders sold 555,556 shares of
Class B common stock to the ESOP for a total of $6,500,000. The Company arranged
for and guaranteed 2 loans for a total of $6,500,000 (see Note 4) on behalf of
the ESOP for the purchase of the Class B common stock. The loans and guaranteed
ESOP obligations are recorded in the consolidated balance sheet as debt and a
reduction in stockholders' equity.
The Company will allocate shares of the Company's Class B common stock to
employees, subject to certain limitations, based on the Company's annual
contributions to the ESOP. The allocation is based on compensation of the
eligible employees, and the stock allocation is valued at the price established
by an independent appraiser. At December 31, 1998, 86,127 shares of the
Company's Class B common stock have been allocated to employees by the ESOP.
Stock Options
Under the terms of the Company's stock option plan (the Option Plan) adopted in
1993, options to purchase shares of the Company's common stock may be granted to
employees, directors, or consultants. In January 1999, the number of shares of
common stock available for issuance under the Option Plan increased from
1,300,000 shares to 2,300,000 shares.
Incentive stock options are granted with an exercise price not less than the
estimated fair market value of the stock at the date of grant as determined by
the Board of Directors. Nonqualified stock options are generally granted to
employees, directors, or consultants at a price not less than 85 percent of the
estimated fair market value of the stock at the date of grant.
Options generally vest over a five-year period. Each option terminates ten years
after the date of grant. Certain options have accelerated vesting conditions in
which they become fully vested upon: (i) a merger or consolidation in which the
Company is not the surviving entity (other than a merger or consolidation in
which there is no substantial change in the stockholders of the Company); (ii)
the sale of more than 51 percent of the shares of the Company; or (iii) the
sales of substantially all of the assets of the Company.
-25-
<PAGE>
The Company accounts for stock options under APB Opinion No. 25, under which no
compensation cost is recognized when the exercise price is not less than the
estimated fair market value of stock on the date of grant.
In connection with certain shares and stock option grants the Company recognized
deferred compensation totaling $449,370 in 1998. Amortization expense recognized
during the year ended December 31, 1998 was $150,147.
A summary of the status of all options at December 31, 1998 and 1997, and
changes during the years then ended is as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------- --------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
-------------- ------------------ -------------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,102,500 $1.09 749,250 $0.43
Granted 160,000 2.58 448,500 2.01
Exercised (78,000) 0.12 (12,500) 0.08
Canceled or expired (138,250) 1.11 (82,750) 0.24
-------------- ------------------ -------------- -----------------
Outstanding at end of year 1,046,250 $1.39 1,102,500 $1.09
============== ================== ============== =================
Exercisable at end of year 616,359 600,108
Weighted average fair value of options
granted during year $2.06 $0.71
</TABLE>
<TABLE>
<CAPTION>
Options outstanding, exercisable and vested by price range at December 31, 1998
and 1997, respectively, are as follows:
1998 1997
------------------------------------------------------ ----------------------------------------------------
Weighted Weighted
Average Average
Number of Remaining Number of Number of Remaining Number of
Options Exercise Contractual Options Options Exercise Contractual Options
Outstanding Price Life Exercisable Outstanding Price Life Exercisable
------------------------------------------------------ ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
87,500 $0.08 41 months 87,500 147,500 $0.08 51 months 145,500
126,500 0.19-0.32 74 months 97,535 212,000 0.19 - 0.32 71 months 137,168
250,000 0.45 96 months 199,417 250,000 0.45 108 months 150,217
284,250 1.00 95 months 171,907 268,000 1.00 109 months 157,039
55,000 1.95 59 months 1,833 184,000 3.00 118 months 9,500
152,000 3.00 106 months 40,866 41,000 5.00 121 months 684
91,000 5.00 77 months 17,301
-------------- ------------ ------------ ------------
1,046,250 616,359 1,102,500 600,108
============== ============ ============ ============
</TABLE>
-26-
<PAGE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Had compensation expense for the
Option Plan been determined based on fair value at the grant dates, as
prescribed by SFAS No. 123, the Company's net income (loss) would have been
reduced (increased) as follows for the years ended December 31, 1998 and 1997:
1998 1997
-------------- -------------
Net income (loss):
As reported $ (653,876) $ 627,863
Pro forma (700,579) 596,755
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following weighted-average
assumptions used for grants during the years ended December 31, 1998 and 1997:
weighted average risk-free interest rates of 5.1 percent and 6.0 percent,
respectively; expected dividend yields of 0 percent; expected lives of the
options of five years; and expected volatility of 0 percent.
7. 401(k) PLAN:
The Company sponsors a defined contribution plan covering all of its eligible,
full-time employees. The plan year is from January 1 to December 31. The
Company's contribution to the plan is calculated as 25 percent of the first
$1,000 contributed to the plan by each employee. The allocation between plan
participants is made annually based on a participant's percentage of total
participant contributions. Participants become fully vested after six years of
service, although they vest incrementally on an annual basis after two years of
service and until the six-year period is completed. The Company recorded an
expense of $12,442 and $10,657 for the years ended December 31, 1998 and 1997,
respectively, for its contributions under the plan.
-27-
<PAGE>
Item 7 (b) - Pro Forma Financial Information
Description of the Acquisition
Effective June 1, 2000, the Company acquired all of the issued and outstanding
stock of IPS Associates, Inc. (IPS), a project management firm, for $3,000,000
in cash, 1,472,585 unregistered shares of Company's common stock and options to
purchase 1,082,060 shares of the Company's common stock and the assumption of
net liabilities of $2,242,000. The aggregate value of the shares and stock
options issued in connection with the transaction was $36,405,139. The Company
also assumed an employee stock ownership plan (ESOP) from IPS. The Company
recorded unearned compensation of $9,445,240 related to 493,224 shares of common
stock issued to the ESOP in connection with the transaction that will be
amortized over a period of approximately three to five years. These shares will
be periodically revalued in accordance with Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans." In connection with
the assumption of the ESOP, the Company assumed a note payable to a financial
institution for ESOP financing of approximately $4.5 million. The note bears
annual interest of 8.02% and is due in monthly installments of principal and
interest as detailed in the agreements payable through July 2005. The note is
secured by the accounts receivable, investments, and property and equipment of
IPS.
Certain key employees of IPS entered into employment agreements with the
Company. These employment agreements terminate in June 2003 and include a
non-compete provision for the term of the agreement and one year thereafter. In
connection with the transaction, the Company paid a commission to an individual
who facilitated the execution of the transaction that consisted of a cash
payment of $300,000 and the issuance of 25,065 unregistered shares of the
Company's common stock valued at $576,495 and recorded as part of the cost of
the IPS acquisition. The acquisition was accounted for under the purchase method
of accounting.
Basis of Presentation
The following unaudited pro forma financial information gives effect to the
acquisition by EpicEdge, Inc. (EpicEdge or the Company) of IPS in a transaction
accounted for under the purchase method of accounting. The unaudited pro forma
statements of operations are based on the following:
(1) the audited historical statement of operations of EpicEdge, Inc. for
the year ended December 31, 1999 filed with the Securities and
Exchange Commission in its Annual Report on Form 10-KSB/A for the year
then ended,
(2) the unaudited historical statement of operations of EpicEdge, Inc. for
the six months ended June 30, 2000,
(3) the audited historical statement of operations of IPS for the year
ended December 31, 1999 included elsewhere in this Current Report on
Form 8-K/A, and
(4) the unaudited statement of operations of IPS for the five months ended
May 31, 2000.
As the acquisition was consummated effective June 1, 2000, the combined results
of EpicEdge and IPS for the month of June 2000 are reflected in the Company's
consolidated statement of operations for the six months ended June 30, 2000
included in its Quarterly Report on Form 10-QSB for the three and six months
ended June 30, 2000. Reference is also made to the consolidated balance sheet of
EpicEdge as of June 30, 2000 included in the Company's Quarterly Report on Form
10-QSB for the three and six months ended June 30, 2000 filed with the
Securities and Exchange Commission as the balance sheet of IPS as of June 30,
2000 is reflected in the Company's consolidated balance sheet as of June 30,
2000.
-28-
<PAGE>
The unaudited pro forma statement of operations for the year ended December 31,
1999 combines the historical results of operations of EpicEdge and IPS for the
year then ended as if the acquisition had occurred on January 1, 1999. The
unaudited pro forma statement of operations for the six months ended June 30,
2000 combines the historical results of operations of EpicEdge and IPS as if the
combination had occurred as of the beginning of each period presented, actual
results may have materially differed from the results indicated in the unaudited
pro forma financial information had the combination actually occurred as of the
beginning of the periods presented. Additionally, the unaudited pro forma
information should not be relied upon as being indicative of the future results
of operations of the combined entity. These unaudited pro forma financial
statements should be read in conjunction with the historical financial
statements and notes thereto of IPS and EpicEdge.
<TABLE>
<CAPTION>
EpicEdge, Inc.
Pro Forma Combined Statement of Operations (Unaudited)
For the Six Months Ended June 30, 2000
Pro Forma
------------------------------------
Acquisition
IPS Adjustments
EpicEdge (Note 2) (Note 1) Combined
--------------------------------------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 18,282,144 $ 5,860,756 $ - $ 24,142,900
Cost of revenues 13,915,520 2,359,569 - 16,275,089
--------------------------------------------- -----------------
Gross margin 4,366,624 3,501,187 - 7,867,811
--------------------------------------------- -----------------
Selling, general and administrative expenses 8,642,382 2,574,169 - 11,216,551
Depreciation and amortization 1,384,958 79,652 1,777,907 (a) 3,242,517
Stock-based compensation 6,945,634 - 575,613 (b) 7,521,247
--------------------------------------------- -----------------
16,972,974 2,653,821 2,353,520 21,980,315
--------------------------------------------- -----------------
Loss from operations before other income
(expense) and provision for taxes (12,606,350) 847,366 (2,353,520) (14,112,504)
Other income (expense) 13,813 (206,518) - (192,705)
--------------------------------------------- -----------------
Income before provision for taxes (12,592,537) 640,848 (2,353,520) (14,305,209)
(Provision) benefit for income taxes - (800) - (800)
--------------------------------------------- -----------------
Loss from continuing operations $(12,592,537) $ 640,048 $(2,353,520) $ (14,306,009)
============================================= =================
Basic and diluted loss per share - continuing
operations $ (0.50) $ (0.54)
================ =================
Basic and diluted common shares outstanding 25,185,562 1,227,154 (c) 26,412,716
================ ================ =================
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EpicEdge, Inc.
Pro Forma Combined Statement of Operations (Unaudited)
For the Year Ended December 31, 1999
Pro Forma
------------------------------------
Acquisition
Adjustments
EpicEdge IPS (Note 1) Combined
---------------------------------------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 29,439,569 $ 12,483,472 $ - $ 41,923,041
Cost of revenues 26,342,696 4,844,517 - 31,187,213
---------------------------------------------- ----------------
Gross margin 3,096,873 7,638,955 - 10,735,828
---------------------------------------------- ----------------
Selling, general and administrative expenses 4,827,783 6,760,507 - 11,588,290
Depreciation and amortization 648,706 216,008 4,266,974 (a) 5,131,688
Stock-based compensation 3,548,476 825,567 654,872 (b) 5,028,915
---------------------------------------------- ----------------
9,024,965 7,802,082 4,921,846 21,748,893
---------------------------------------------- ----------------
Loss from operations before other income
(expense) and provision for taxes (5,928,092) (163,127) (4,921,846) (11,013,065)
Other income (expense) (9,284) (1,562,468) - (1,571,752)
---------------------------------------------- ----------------
Income before provision for taxes (5,937,376) (1,725,595) (4,921,846) (12,584,817)
(Provision) benefit for income taxes - 391,202 391,202
---------------------------------------------- ----------------
Loss from continuing operations $ (5,937,376) $ (1,334,393) $ (4,921,846) $ (12,193,615)
============================================== ================
Basic and diluted loss per share - continuing
operations $ (0.28) $ (0.53)
=============== ================
Basic and diluted common shares outstanding 21,370,431 1,472,585 (c) 22,843,016
=============== ================= ================
<FN>
NOTE 1 - The above unaudited pro forma statements give effect to the following
pro forma adjustments which reflect the acquisition of IPS by EpicEdge:
(a) Additional amortization expense resulting from goodwill of $34,135,788
being recorded as a result of the transaction. Goodwill is being
amortized over a period of eight years.
(b) Additional stock-based compensation related to the valuation of the
157,541 shares of common stock released during the year ended December
31, 1999 by the IPS ESOP acquired in connection with the transaction.
The adjustment is calculated based on the purchase exchange ratio of
.5043 shares of EpicEdge common stock exchanged for each share of IPS
common stock. The valuation was determined based on the market price of
the EpicEdge common stock of $13.934 per share of common stock on the
release date of December 31, 1999.
Additional stock-based compensation of $575,613 for the six months
ended June 30, 2000 is based on the 163,831 shares of common stock to
be released during the year 2000.
(c) The additional outstanding shares as a result of the shares of common
stock that were issued in connection with the acquisition.
</FN>
</TABLE>
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<PAGE>
NOTE 2 - The historical financial information for IPS presented to generate the
pro forma financial information for the six months ended June 30, 2000
represents the results of operations of IPS for the five months ended May 31,
2000. The results of operations of IPS for the one month ended June 30, 2000 is
included in the consolidated results of EpicEdge for the six months ended June
30, 2000 as the acquisition was recorded as of June 1, 2000 for accounting
purposes.
* * *
-31-
<PAGE>
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 hereunto duly authorized.
EpicEdge, Inc.
Date: September 13, 2000 By /s/ Paul Ruiz
-----------------------
Paul Ruiz
Chief Financial Officer
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<PAGE>
Item 7 (c) - Exhibits
Exhibit 99.1 - Independent Auditors' Report for IPS Associates Asia Pte Ltd for
the year ended December 31, 1999
