UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
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[XX] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
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Commission File Number: 00-09322
iEXALT, INC.
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(Exact Name of small business issuer as specified in its charter)
Nevada 75-1667097
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(State of Incorporation) (IRS Employer ID Number)
4301 Windfern Drive, Houston, Texas 77041
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(Address of principal executive offices)
(281) 600-4000
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(Issuer's telephone number)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or 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 [XX] NO[ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
June 15, 2000: 27,404,954 Shares.
Transitional Small Business Disclosure Format (check one): YES[ ] NO [XX]
<PAGE>
iEXALT, INC.
Table of Contents
PAGE
----
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis and
Plan of Operation 20
Part II - Other Information
Item 2. Changes in Securities 29
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 30
2
<PAGE>
Part I - Item 1
FINANCIAL STATEMENTS
iEXALT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
MAY 31, 2000
------------
CURRENT ASSETS
Cash and cash equivalents ................................. $ 1,442,941
Accounts receivable, trade, net ........................... 204,034
Accounts receivable, affiliate ............................ 52,789
Inventory ................................................. 88,594
Prepaid expenses and other current assets ................. 141,643
-----------
TOTAL CURRENT ASSETS ...................................... 1,930,001
-----------
PROPERTY AND EQUIPMENT, net ................................... 676,087
-----------
OTHER ASSETS
Goodwill and other intangible assets, net ................. 3,897,979
Other assets .............................................. 316,089
-----------
$ 6,820,156
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to shareholders ............................. $ 500,000
Short-term borrowings ..................................... 5,947
Accounts payable, trade ................................... 316,872
Deferred revenue .......................................... 242,772
Other accrued liabilities ................................. 161,597
-----------
TOTAL CURRENT LIABILITIES ................................. 1,227,188
-----------
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value, 20,000,000
shares authorized, no shares issued and
outstanding at May 31, 2000 ............................. --
Common stock, $.001 par value, 100,000,000
shares authorized, 27,395,542 shares
issued and outstanding at May 31, 2000 .................. 27,396
Paid-in capital ........................................... 8,041,908
Receivable from shareholder ............................... (9,239)
Retained deficit .......................................... (2,467,097)
-----------
TOTAL SHAREHOLDERS' EQUITY ................................ 5,592,968
-----------
$ 6,820,156
===========
See accompanying notes
3
<PAGE>
iEXALT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED ENDED
MAY 31, 2000 MAY 31, 2000
------------ ------------
REVENUES ................................. $ 1,222,483 $ 2,517,926
COST OF SALES AND SERVICES ............... 891,952 1,868,936
------------ ------------
GROSS PROFIT ............................. 330,531 648,990
SELLING, GENERAL, AND ADMINISTRATIVE ..... 1,167,900 2,685,927
DEPRECIATION AND AMORTIZATION ............ 56,291 111,607
------------ ------------
LOSS FROM OPERATIONS ..................... (893,660) (2,148,544)
OTHER INCOME(EXPENSES)
Interest income ..................... 22,073 27,325
Interest expense .................... (5,651) (10,015)
------------ ------------
LOSS BEFORE INCOME TAXES ................. (877,238) (2,131,234)
INCOME TAXES ............................. -- --
------------ ------------
NET LOSS ................................. $ (877,238) $ (2,131,234)
============ ============
BASIC LOSS PER SHARE ..................... $ (0.03) $ (0.09)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING ........................... 26,776,709 24,126,377
============ ============
See accompanying notes.
4
<PAGE>
iEXALT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
RECEIVABLE TOTAL
COMMON SHARES PAID-IN FROM RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL SHAREHOLDERS DEFICIT EQUITY
----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - August 31, 1999 ............. 18,423,666 $ 18,424 $ 364,802 $ (11,250) $ (335,863) $ 36,113
Issuance of common stock in
connection with reverse merger .. 2,480,500 2,481 (15,344) -- -- (12,863)
Issuance of common stock in
connection with acquisitions .... 3,962,890 3,963 3,597,158 -- -- 3,601,121
Sale of common stock ................ 1,902,042 1,902 3,358,318 (9,239) -- 3,350,981
Exercise of Options ................. 600,000 600 599,400 -- -- 600,000
Issuance of common stock for services 26,444 26 47,574 -- -- 47,600
Contribution of services ............ -- -- 90,000 11,250 -- 101,250
Net loss ............................ -- -- -- -- (2,131,234) (2,131,234)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE - May 31, 2000 ................ 27,395,542 $ 27,396 $ 8,041,908 $ (9,239) $(2,467,097) $ 5,592,968
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
iEXALT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MAY 31, 2000
-----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $(2,131,234)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization .......................... 111,607
Compensation expense for contributed services .......... 148,850
Changes in assets and liabilities, net
of effects of acquisitions:
Accounts receivable .................................. (98,821)
Inventory ............................................ (40,774)
Prepaid expenses and other current assets ............ (6,061)
Other assets ......................................... (287,410)
Accounts payable, trade .............................. 149,044
Deferred revenues .................................... 34,547
Other accrued liabilities ............................ (113,270)
-----------
Net cash used by operating activities ................ (2,233,522)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash acquired from acquisitions ...................... 61,110
Purchases of property and equipment ...................... (483,477)
-----------
Net cash used by investing activities ................ (422,367)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ................... 3,350,981
Proceeds from exercise of options ........................ 600,000
Proceeds from revolving line of credit ................... 150,000
Repayment of revolving line of credit .................... (150,000)
Proceeds from issuance of debt ........................... 300,000
Repayments of debt ....................................... (456,000)
Net change in other notes payable ........................ (47,463)
-----------
Net cash provided by financing activities ............ 3,747,518
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................... 1,091,629
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............... 351,312
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................... $ 1,442,941
===========
See accompanying notes.
6
<PAGE>
iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS AND BASIS OF PRESENTATIONS - iExalt, Inc.,
("iExalt" or "the Company"), was originally incorporated as Louisiana
Northern Gas, Inc. a Nevada corporation on April 23, 1979. The name of
the Company was changed to Sunbelt Exploration, Inc. on December 21,
1979. From 1989 until September 1, 1999, the Company had very limited
operations.
On September 1, 1999, the Company consummated a merger (hereinafter
referred to as the "Merger") with iExalt, Inc., a Texas corporation
incorporated on January 7, 1999, ("iExalt-Texas") whereby the
shareholders of iExalt-Texas acquired an approximate 89% ownership
interest in the Company. The acquisition was effected through the
issuance of 18,393,666 shares of the Company's common stock to the
shareholders of iExalt-Texas in exchange for all of the outstanding
shares of iExalt-Texas common stock. Upon the closing of the
transaction, there were 20,874,166 shares of common stock issued and
outstanding. Subsequent to the stock record date, 30,000 additional
shares were issued as of August 31, 1999 pursuant to the iExalt-Texas
Private Placement (see Note E). The Merger has been accounted for as a
reverse takeover with the Company being the surviving legal entity and
iExalt-Texas being the acquiror for accounting purposes. Concurrent
with the Merger, the Company changed its name from Sunbelt
Exploration, Inc. to iExalt, Inc.
iExalt-Texas had no revenues or expenses in the nine months ended May
31, 1999, and therefore no comparative balances are presented.
The Company blends the Internet and traditional media to provide
products and services to Christian families, businesses, schools and
other organizations. The Company currently operates as a nationwide
filtered Internet Service Provider, publishes Christian electronic
books and reference materials as well as a Christian events magazine,
produces a radio program in 48 markets five nights per week, and
operates one of the largest speakers bureaus dedicated to Christian
speakers. In addition, the Company sells tickets for Christian events,
owns and markets its own business-to-business Internet content
management products, and utilizes independent sales representatives to
market and sell a variety of products and services at discounted
prices for the individual, home and family.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been
eliminated.
7
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iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INTERIM RESULTS - The accompanying condensed consolidated financial
statements of the Company and its subsidiaries for the three-month and
nine-month periods ended May 31, 2000 reflect the results of
operations of iExalt, Inc. from the date of acquisition, September 1,
1999. The shareholders' equity in the accompanying condensed
consolidated financial statements of the Company reflects the
historical results of iExalt-Texas prior to September 1, 1999.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and nine-month
periods are not necessarily indicative of the results that may be
expected for an entire year.
For further information, refer to (1) the consolidated financial
statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended August 31, 1999, filed
effective prior to the Merger, (2) the Exchange Agreement effecting
the Merger as disclosed on form 8-K filed on September 14, 1999 and
(3) the financial statements and associated footnotes of iExalt-Texas
for the period from inception through August 31, 1999 as reported on
form 8-K/A filed on November 18, 1999.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
debt instruments having maturities of three months or less at the date
of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment is carried at original
cost or adjusted net realizable value, as applicable. Maintenance and
repair costs are charged to expense as incurred. When assets are sold
or retired, the remaining costs and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is
included in income.
For financial reporting purposes depreciation of property and
equipment is provided using the straight-line method based upon the
expected useful lives of each class of assets. Estimated useful lives
of assets were as follows: Furniture and fixtures - five to seven
years; computers and other office equipment - three to five years.
FINANCIAL INSTRUMENTS - FAIR VALUE - The carrying values of the
Company's financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and accrued
liabilities, royalties and debt, approximate their respective fair
values.
8
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iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
CREDIT RISK - The Company maintains its cash and cash equivalents with
high credit quality institutions and limits the credit exposure to any
one institution. The Company's accounts receivable arise from sales to
customers and the Company periodically evaluates its credit exposure
with its customers. To date, credit related losses have been
immaterial.
GOODWILL AND OTHER INTANGIBLES - Goodwill represents the cost in
excess of fair value of the assets of businesses acquired and is being
amortized using the straight-line method over 40 years. Other
intangible assets represent costs allocated to covenants not to
compete and other intangibles acquired in business acquisitions. Other
intangible assets are being amortized using the straight-line method
over their estimated useful lives, which range from three to ten
years. Accumulated amortization at May 31, 2000 was $52,184.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." SFAS No.121 requires
that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicated that the carrying amount of an
asset may not be recoverable. If the sum of the expected future cash
flows from the use of the asset and its eventual disposition is less
that the carrying amount of the asset, an impairment loss is
recognized based on the fair value of the asset. Management believes
there is no impairment of goodwill and other intangibles.
STOCK BASED COMPENSATION - Under SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has elected the method that
requires disclosure of stock-based compensation. Because of this
election, the Company accounts for its employee stock-based
compensation plan under Accounting Principles Board ("APB") Opinion
No. 25 and the related interpretations. Accordingly, deferred
compensation is recorded for stock-based compensation grants to
employees based on the excess of the estimated fair value of the
common stock on the measurement date over the exercise price. The
deferred compensation is amortized over the vesting period of each
unit of stock-based compensation. If the exercise price of the
stock-based compensation grant is equal to or greater than the
estimated fair value of the Company's stock on the date of grant, no
compensation expense is recorded. The Company recorded employee
stock-based compensation in the amounts of $30,000 and $90,000,
respectively, for the three and nine months ended May 31, 2000, which
transaction is further described in Note E. Additionally, for
stock-based compensation grants to consultants, the Company recognizes
as compensation expense the estimated fair value of such grants as
calculated pursuant to SFAS No. 123, recognized over the related
service period.
9
<PAGE>
iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION - The Company generally recognizes revenue on
services as they are performed and on products when they are sold net
of sales returns. Speaker revenues are recognized when the speech or
event occurs. The Company grants refunds and returns on electronic
publishing products if the software and publications sold are returned
within thirty days. Revenue from ticket operations is recognized as
tickets are sold. Although iExalt collects ticket receipts
representing the full ticket price on behalf of its clients, the
Company only records as revenue the convenience charges and handling
fees included in the ticket price.
RECLASSIFICATIONS - Certain reclassifications of costs and expenses
have been made in the accompanying financial statements when compared
to prior periods.
SEGMENT REPORTING - As of May 31, 2000, iExalt operations were all a
part of a single market segment -- the Christian Internet/Information
industry. Within that market, the Company delivers products and
services to customers using both the Internet and other media. The
Company's various offerings in the marketplace all address a common
pool of customers and the Company manages the development and delivery
of the Company's services to meet the needs of our customers using a
variety of media.
MANAGEMENT'S 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 disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
While it is believed that such estimates are reasonable, actual
results could differ from those estimates.
CONDITIONS AFFECTING ONGOING OPERATIONS - The Company hopes to obtain
additional debt and equity financing from various sources in order to
finance its operations and to continue to grow through merger and
acquisition opportunities. In the event the Company is unable to
obtain additional debt and equity financing, the Company will not be
able to continue its current level of operations. If the Company is
unable to continue its current level of operations, the value of the
Company's assets could experience a significant decline in value from
the net book values reflected in the accompanying consolidated balance
sheet.
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 or refinancing as may be required, and
ultimately to attain profitability.
10
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iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE B ACQUISITIONS
The Company acquired the proprietary assets of netFilter Technologies,
a proxy-filtering software company on October 1, 1999 for $60,000 and
60,000 shares of the Company's common stock.
On October 1, 1999, the Company acquired Wordcross Enterprises, Inc.
d/b/a Christian Happenings ("Wordcross"). In consideration for this
purchase, the selling shareholders received 850,000 shares of common
stock of iExalt, Inc. and 250,000 common stock options exercisable at
$1.80 per share. The options vest in the amount of 50,000 shares per
year on the anniversary date of the acquisition. Both former
shareholders of Wordcross have employment agreements with the Company
for a period of five years. The transaction was accounted for as a
purchase and the amount of goodwill recorded was $280,398.
On November 16, 1999, the Company acquired Solutions Global, Inc.
("Solutions Global"). In consideration for this purchase, the selling
shareholders received 40,000 shares of common stock of iExalt, Inc.
and 60,000 common stock options exercisable at $1.80 per share. The
options vest in the amount of 20,000 shares per year on the
anniversary date of the acquisition. Both former shareholders of
Solutions Global have employment agreements with the Company for a
period of three years. The transaction was accounted for as a purchase
and goodwill of $72,000 was recorded.
On December 1, 1999, the Company acquired all of the issued and
outstanding stock of Premiere Speakers Bureau, Inc. d/b/a
Christianspeakers.com ("Christian Speakers"), a Tennessee corporation
in the business of scheduling well-known speakers to speak to groups
on Christian issues. The consideration issued to the sole stockholder
of Christian Speakers, was: (i) 500,000 shares of Company common
stock, (ii) aggregate cash consideration of $40,000, of which $10,000
was payable at closing, and $5,000 was payable monthly over a period
of six months beginning January 2000, and (iii) a stock option to
purchase an aggregate 250,000 shares of Company common stock at an
exercise price of $1.80 per share. The stock option vests in the
amount of 50,000 shares per year on the anniversary date of the
acquisition, and is subject to the former owner of Christian Speakers
remaining an employee of the Company. The term of the stock option is
three years from the date of vesting. The former owner of Christian
Speakers has entered into a five-year employment agreement with the
Company. The transaction was accounted for as a purchase and goodwill
was recorded in the amount of $501,786.
Effective December 31, 1999, the Company acquired all of the issued
and outstanding stock of First Choice Marketing, Inc., ("First
Choice"), a Texas corporation in the business of directly marketing a
variety of goods and services through commission-based
representatives.
11
<PAGE>
iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE B ACQUISITIONS (continued)
The consideration payable to the shareholders of First Choice, was (i)
2,302,000 shares of Company common stock and (ii) cash consideration
of $30,000 paid to key employees in exchange for non-compete
agreements. For the years 2000 through 2002, the shareholders are also
entitled to receive 333,333 additional shares per year if certain
financial benchmarks and employment agreements are satisfied. The
Company also agreed to assume certain warrant obligations of First
Choice to a party related to the Company totaling 810,000 shares of
the Company's common stock at an exercise price of $1.00 per share.
One-third of these warrants become exercisable in each of the years
2000 through 2002 if First Choice achieves the financial benchmarks
established in each of those years for the contingent share issuance
to First Choice shareholders discussed above. Exercisable warrants
expire in 2004 if not previously exercised. A key management employee
of First Choice has entered into a three-year employment agreement
with the Company. In addition, the key employee will receive up to
150,000 stock options subject to the achievement of the financial
benchmarks referred to above. The transaction was accounted for as a
purchase and goodwill and intangible assets were recorded totaling
$2,926,434. Subsequent to the closing of the transaction, the Company
negotiated an agreement to issue 190,890 registered shares of common
stock to a related party for their consulting services in effecting
the acquisition.
The Company acquired the proprietary assets of LIFE PERSPECTIVES, a
one-hour evening radio program broadcast five nights per week in 48
markets, effective May 1, 2000 for 20,000 shares of the Company's
common stock. An additional 30,000 shares of the Company's common
stock will be issued over the next three years in the amount of 10,000
shares per year on the anniversary date of the acquisition, subject to
the founder's continuing to host the program under an employment
agreement with the Company.
In addition, the Company has entered into a management agreement and
funding agreement with a company under which iExalt will advance funds
and direct the management of the company pending completion of a
definitive acquisition agreement. Funds advanced of $234,465 are
included in Other Assets. If the acquisition is not completed, iExalt
will be entitled to repayment of the advance with interest and a fifty
percent ownership interest in the company that received the funds. The
acquisition has not been completed as of July 12, 2000, but progress
toward a definitive agreement is proceeding on schedule.
See Note I for a description of two acquisitions and an additional
funding agreement completed subsequent to May 31, 2000.
12
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iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE B ACQUISITIONS (continued)
The following unaudited pro forma combined results of operations of
the Company for the nine months ended May 31, 2000 and 1999 assume
Wordcross, Solutions Global, Christian Speakers, and First Choice
("Acquired Companies") had been acquired as of the beginning of the
respective periods.
PRO FORMA
NINE MONTHS ENDED
----------------------------
MAY 31, 2000 MAY 31, 1999
------------ ------------
Revenues ....................... $ 2,872,656 $ 2,310,442
Net loss ....................... $ (2,295,838) $ (106,072)
Earnings/(loss) per share ...... $ (0.09) $ (0.01)
ProForma Weighted Average
Number of Shares Outstanding 25,578,882 21,904,071
The following unaudited pro forma combined results of operations of
the Company for the nine months ended May 31, 2000 and 1999 assume the
Acquired Companies plus PremierCare LLC and Keener (subsequent
acquisitions - See Note I) had been acquired as of the beginning of
the respective periods.
PRO FORMA
NINE MONTHS ENDED
----------------------------
MAY 31, 2000 MAY 31, 1999
------------ ------------
Revenues ....................... $ 6,200,121 $ 4,756,386
Net loss ....................... $ (2,088,179) $ (271,675)
Earnings/(loss) per share ...... $ (0.08) $ (0.01)
ProForma Weighted Average
Number of Shares Outstanding 26,568,882 22,894,071
No attempt has been made to estimate the corporate selling, general
and administrative expense that would have been necessary in the pro
forma periods in order to have acquired and operated these companies
from the beginning of the respective periods. In management's opinion,
the pro forma combined results of operations may not be indicative of
the actual results that would have occurred had the acquisitions been
consummated at the beginning of the respective periods or of the
future operations of the combined companies.
13
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iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE C PROPERTY AND EQUIPMENT
Property and equipment as of May 31, 2000 consisted primarily of
furniture and fixtures, computers, software and other office equipment
with an original cost of $740,881. The accumulated depreciation at May
31, 2000 was $64,794.
NOTE D NOTES PAYABLE AND OTHER SHORT-TERM BORROWINGS
Notes payable and other short-term borrowings at May 31, 2000
consisted of the following:
Secured note payable to shareholder ........ $350,000
Unsecured note payable to shareholder ...... 150,000
Other unsecured notes payable .............. 5,947
----------
$ 505,947
==========
The non-interest bearing shareholder promissory note in the amount of
$350,000 is secured by certain assets and is payable at such time that
the Company's net assets are equal to or exceed $5,000,000. This note
is now due on demand.
The unsecured $150,000 note payable to shareholder was paid in full on
July 1, 2000. The note was non-interest bearing.
The Company has a revolving line of credit with a bank in the amount
of $150,000. The line of credit is secured by the personal guarantee
of a shareholder of the Company. As of May 31, 2000, no borrowing was
outstanding under the line of credit.
In the December 31, 1999 acquisition of First Choice, the Company
assumed a $156,000 unsecured note payable to a related party with
interest at 10% maturing June 2000. The note and accrued interest were
paid in full on April 28, 2000.
In January and February 2000, the Company entered into note agreements
totaling $300,000 with a shareholder of the Company to fund working
capital requirements. These non-interest bearing notes were repaid by
the Company on March 21, 2000.
14
<PAGE>
iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE E SHAREHOLDERS' EQUITY
The Company currently has a Private Placement Memorandum ("PPM")
offering 2,000,000 shares of iExalt common stock to qualified
purchasers at a price of $1.80 per share. Funds resulting from the
sale of the Company's common stock will be used for funding the
day-to-day operations of the Company, development of new products and
services, marketing, and acquisitions of other businesses in similar
industries, among other things. The Company has committed to pay six
percent of the offering proceeds raised to registered brokers as
finder's fees related to the sale of common stock subject to this
offering. This payment may be in cash or common stock. As of May 31,
2000, 1,915,389 shares had been issued pursuant to this offering and
finder's fees of $42,720 have been paid and 11,520 shares of common
stock have been issued.
Prior to the reverse takeover, a shareholder of the Company purchased
2,250,000 shares of iExalt's common stock for cash of $500,000. As
part of this purchase, the shareholder also committed the services of
an executive to assist the Company in the initial start-up and
structuring of its business for up to one year at no cash cost to the
Company. The Company recorded compensation expense of $90,000 and
$30,000 for the nine-month and three-month periods ending May 31, 2000
respectively, for such services.
During the three and nine months ended May 31, 2000, the Company
issued 26,444 shares of common stock for services. Accordingly, the
Company has recorded $38,600 in expense and $9,000 in prepaid expenses
relating to these services.
An additional 5,133 shares of the Company's common stock were sold to
an accredited investor for a receivable in the amount of $9,239.
NOTE F STOCK OPTIONS AND WARRANTS
The Company has an Employees Stock Option Plan and a Directors Stock
Option Plan ("Plans") which reserve 1,000,000 shares and 800,000
shares, respectively, of authorized but unissued common stock to be
distributed by the compensation committee of the board of directors
pursuant to the Plans.
15
<PAGE>
iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE F STOCK OPTIONS AND WARRANTS (continued)
The Company has granted stock options both within and outside of the
Plans during the nine months ended May 31, 2000. All grants are
summarized below:
AVERAGE
EXERCISE NUMBER OF
PRICE SHARES
----- ----------
Options outstanding at 8-31-99 .......... $1.80 300,000
Options granted to CSI* ................. $1.00 600,000
Options granted relating to acquisitions* $1.80 710,000
Options granted relating to loans* ...... $1.80 450,000
Other employee options granted .......... $1.80 486,000
Directors options granted ............... $1.80 125,000
Options cancelled ....................... $1.80 (52,000)
Options exercised ....................... $1.00 (600,000)
----------
Options outstanding at 5-31-00 .......... $1.80 2,019,000
==========
Options exercisable at 5-31-00 .......... $1.80 575,000
==========
*Transactions described below.
In addition, the Company has granted warrants to purchase its common
shares, as summarized below:
AVERAGE
EXERCISE NUMBER OF
PRICE SHARES
----- ---------
Warrants outstanding at 8-31-99 ........... -- --
Warrants issued to CSI* ................... $4.75 1,000,000
Warrants issued relating to acquisitions
(subject to specific earnings hurdles)* . $1.00 810,000
---------
Warrants outstanding at 5-31-00 ........... $3.07 1,810,000
=========
Warrants exercisable at 5-31-00 ........... $3.00 250,000
=========
*Transactions described below
On September 1, 1999 an agreement for consulting services with
Consulting & Strategy International, Inc., ("CSI") went into effect.
In partial consideration for the consulting services to be offered by
CSI, CSI was granted an option to purchase 600,000 shares of iExalt
stock at an exercise price of $1.00 per share on or before six months
16
<PAGE>
iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE F STOCK OPTIONS AND WARRANTS (continued)
after the first day upon which the Company's stock begins full
reporting, full compliance and publicly trading. CSI exercised this
option on April 28, 2000. In addition, CSI was granted 250,000
warrants to purchase common stock at an exercise price of $3.00 per
share; 250,000 warrants to purchase common stock at an exercise price
of $4.00 per share; 250,000 warrants to purchase common stock at an
exercise price of $5.00 per share; and 250,000 warrants to purchase
common stock at an exercise price of $7.00 per share. As of the date
of grant, the value of these options and warrants was considered
immaterial.
Options and warrants issued in conjunction with acquisitions are
described in Note B.
On January 11, 2000, the board of directors elected to issue stock
options at an exercise price of $1.80 per share to any director or
officer of the Company for a number of shares equal to the number of
dollars loaned to the Company which is either personally guaranteed by
any such officer or director, or is made by such officer or director
on a non-interest bearing basis. Within the nine months ended May 31,
2000, borrowings and guarantees in the amount of $450,000 had been
outstanding pursuant to this agreement. Accordingly, options to
purchase an aggregate at 450,000 shares of common stock have been
granted.
SFAS No. 123 requires entities that account for awards for stock-based
compensation to employees in accordance with APB 25 to present pro
forma disclosures of results of operations and earnings per share as
if compensation cost was measured at the date of grant based on the
fair value of the award. The fair value for each option or warrant
grant was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions: a risk-free interest
rate of six percent, no dividend yield, an expected volatility of 150%
and expected lives of between one and five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's stock
options and warrants have characteristics different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options and
warrants.
17
<PAGE>
iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE F STOCK OPTIONS AND WARRANTS (continued)
Had the compensation cost for all stock options and warrants been
determined under the alternative method under SFAS No. 123, the
Company's net loss for the three months and nine months ended May 31,
2000 would have changed to the following pro forma amounts:
THREE MONTHS NINE MONTHS
ENDED ENDED
MAY 31, 2000 MAY 31, 2000
------------- -------------
Net (loss):
As reported ... $ (877,238) $ (2,131,234)
Pro Forma ..... $ (1,275,150) $ (4,883,977)
Basic and diluted net
(loss) per share:
As reported ... $ (0.03) $ (0.09)
Pro Forma ..... $ (0.05) $ (0.20)
The pro forma amounts may not be representative of the future effects
on reported net income and earnings per share that will result from
the future granting of stock options since future pro forma
compensation expense may be allocated over the periods in which
options become exercisable and new option awards may be granted each
year.
NOTE G INCOME TAXES
The Company has had losses since inception and, therefore, has not
been subject to federal income taxes. As of May 31, 2000 the Company
had accumulated net operating loss ("NOL") carryforward for income tax
purposes of approximately $2.6 million, resulting in a deferred tax
asset of $0.9 million. These carryforwards begin to expire in 2019.
Additionally, because U.S. tax laws limit the time during which NOL
and tax credit carryforwards may be applied against future taxable
income and tax liabilities, the Company may not be able to take full
advantage of its NOL and tax credits for federal income tax purposes.
Since the Company has had net operating losses since inception, there
is no assurance of future taxable income. A valuation allowance has
been established to fully offset the deferred tax assets.
NOTE H LEASES
The Company's corporate offices are leased on a month-to-month basis
from a related party. Management believes that the rent paid by the
Company is consistent with market rates for similar office space. The
lease expense on the corporate offices during the nine months ended
May 31, 2000 was $33,108. The Company's other office and warehouse
space are leased under long-term operating leases from third parties.
Rental expense attributable to long-term leases for the nine months
ended May 31, 2000 was $86,926.
18
<PAGE>
iEXALT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(UNAUDITED)
NOTE I SUBSEQUENT EVENTS
Subsequent to the end of the reporting period, the Company completed
two additional acquisitions, both with an effective date of July 1,
2000. The Company has acquired all of the member interests in
PremierCare LLC, a limited liability company engaged in the delivery
of healthcare management services to hospitals in six states. The
former beneficial owners of PremierCare LLC received 540,000 shares of
iExalt common stock and will receive up to an additional 560,000
shares, depending on certain future financial events and results. The
Company's president and board member is also the president and chief
executive officer of PremierCare LLC. He will continue to serve both
PremierCare (as a subsidiary of iExalt) and iExalt in these same
capacities. In addition, three additional key employees of PremierCare
LLC executed multi-year employment agreements with iExalt. Also, in
connection with the acquisition, the Company repaid certain existing
indebtedness of PremierCare LLC on July 10, 2000, in the amount of
$677,609 including $85,408 which had been guaranteed by the Company's
president.
The Company has also acquired all of the stock of Keener
Communications Group ("Keener"), the publisher of the CHRISTIAN TIMES
newspapers based in southern California. Monthly circulation is about
180,000. The former owners of Keener received a total of 450,000
shares of iExalt's common stock. In addition, the president of Keener
entered into a five-year employment agreement with the Company and was
granted a stock option to purchase 125,000 common shares at an
exercise price of $1.80 per share, vesting ratably over five years.
Due to the recent nature of both acquisitions described above,
management cannot yet reasonably calculate goodwill.
Subsequent to the end of the reporting period, the Company has entered
into a funding agreement with a company similar to the arrangements
described in Note B. Under this agreement, the Company has advanced
funds in the amount of $120,000 in anticipation of completing a
definitive acquisition agreement. If an acquisition is not completed,
the Company is entitled to repayment of the advance plus interest and
a fifty percent ownership interest in the company that received the
funds.
Subsequent to the end of the reporting period, the Company has
completed arrangements with a bank for a one-year term loan of
$550,000 in addition to its existing $150,000 line of credit. The loan
is guaranteed by certain members of the Company's Board of Directors.
19
<PAGE>
PART I - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read together with the financial
statements of iExalt, Inc., which are included earlier in this Form 10-QSB. The
following discussion contains certain forward-looking statements regarding
iExalt's expectations for its business and its capital resources. These
expectations are subject to various uncertainties and risks that may cause
actual results to differ significantly from these forward-looking statements.
GENERAL
iExalt-Texas was incorporated on January 7, 1999. On September 1, 1999,
iExalt-Texas consummated a reverse takeover of Sunbelt Exploration, Inc., a
Nevada corporation, which had originally been incorporated on April 23, 1979, as
Louisiana Northern Gas, Inc. Sunbelt has had no significant operations since
1989. As a reverse takeover, the surviving legal entity was Sunbelt Exploration,
Inc., but iExalt-Texas was the acquiror for accounting purposes. Concurrent with
the merger, Sunbelt Exploration, Inc. changed its name to iExalt, Inc.
("iExalt", "the Company", "we" or "us").
On February 4, 1999, we acquired certain intangible assets valued on the
accompanying balance sheet at $750 from one of our shareholders in exchange for
shares of iExalt common stock.
On May 31, 1999, we acquired all of the assets and assumed certain
liabilities of Hunter Community Interests, LTD. and AgroSource, Inc. (d/b/a
NetXpress), a Houston, Texas based Internet Service Provider ("ISP") from
certain shareholders of the Company. In this purchase, we issued 3,000,000
shares of common stock and assumed a non-interest bearing note payable to a
shareholder for $350,000. The purchase price in excess of the net book value of
assets acquired of $314,000 was recognized as a reduction in paid-in capital
because the business purchased was under common control.
On June 21, 1999, we acquired certain tangible and intangible assets of
Interactive Communications Concepts of Texas, a Houston, Texas based ISP
company, for a combination of $15,000 in cash and 72,000 shares of the Company's
common stock. The purchase price in excess of the value of the assets acquired
of $6,572 was recorded as goodwill.
On July 1, 1999, we acquired certain tangible and intangible assets and
liabilities of NavPress Software, a Texas general partnership that specializes
in developing, manufacturing and marketing various types of software and
electronic books for the Christian community. As consideration for this
purchase, we executed a non-interest bearing note payable in the amount of
$150,000 due in one year and issued 900,000 shares of common stock to the
sellers. The note was repaid in full on July 1, 2000. The president of NavPress
Software also signed an employment agreement with a one-year term; we are
currently negotiating to extend the term of his agreement. The purchase price in
excess of the net value of assets acquired of $174,623 was recorded as goodwill.
NavPress Software is now conducting business as iExalt Electronic Publishing.
On October 1, 1999, we acquired WordCross Enterprises, Inc. d/b/a
Christian Happenings ("Wordcross"). As consideration, we issued 850,000 shares
of common stock and granted 250,000 common stock options exercisable at $1.80
per share to the former Wordcross shareholders. The options vest in the amount
20
<PAGE>
of 50,000 shares per year on each anniversary date of the acquisition over the
next five years. Both former shareholders of Wordcross have employment
agreements with the Company for a period of five years. The transaction was
accounted for as a purchase and the amount of goodwill recorded was $280,398.
On October 1, 1999, we also acquired the proprietary assets of netFilter
Technologies, a proxy-filtering software company for $60,000 and 60,000 shares
of our common stock.
On November 16, 1999, we acquired Solutions Global, Inc. ("Solutions
Global"). As consideration, the shareholders of Solutions Global received 40,000
shares of iExalt common stock and 60,000 common stock options exercisable at
$1.80 per share. The options vest in the amount of 20,000 shares per year on the
anniversary date of the acquisition. Both former shareholders of Solutions
Global have employment agreements with the Company for a period of three years.
The transaction was accounted for as a purchase and goodwill was recorded in the
amount of $72,000.
Effective December 1, 1999, we acquired all of the stock of Premiere
Speakers Bureau, Inc. d/b/a ChristianSpeakers.com ("Christian Speakers"), a
Tennessee corporation in the business of scheduling well-known speakers to speak
to groups on Christian issues. The consideration issued to the sole stockholder
of Christian Speakers consisted of: (i) 500,000 shares of Company common stock,
(ii) an aggregate $40,000, of which $10,000 was payable at closing, and $5,000
was payable monthly for a period of six months beginning January, 2000, and
(iii) a stock option to purchase an aggregate 250,000 shares of our common stock
at an exercise price of $1.80 per share. The stock option vests in the amount of
50,000 shares per year on each anniversary date of the acquisition over the next
five years. The former shareholder also entered into a five-year employment
agreement with the Company. The transaction was accounted for as a purchase and
goodwill in the amount of $501,786 was recorded.
Effective December 31, 1999, we acquired all of the stock of First Choice
Marketing, Inc. ("First Choice"), a Texas corporation, in exchange for 2,302,000
shares of Company common stock, assumption of a $156,000 short-term note
payable, and assumption of certain warrant obligations of First Choice by
issuance of warrants to purchase 810,000 of our common shares at an exercise
price of $1.00. The warrants can only be exercised if First Choice meets certain
earnings goals over a three-year period. The shareholders of First Choice are
entitled to additional consideration of up to 999,999 shares of our common stock
over a three-year period provided these earnings goals and certain employment
agreements are satisfied. The president of First Choice entered into a
three-year employment agreement with the Company and was granted 150,000 stock
options at an exercise price of $1.80 per share which vest ratably over three
years and are subject to the same earnings goals. Subsequent to the closing of
the transaction, we negotiated an agreement to issue 190,890 registered shares
to the principals of Consulting & Strategy International, Inc., for their
consulting services in effecting the acquisition. The transaction was accounted
for as a purchase and goodwill was recorded in the amount of $2,926,434. First
Choice is now conducting business as iExaltFamily.com.
Effective May 1, 2000, we acquired the proprietary assets of LIFE
PERSPECTIVES, an hour-long radio program broadcast five nights per week in 48
markets for 20,000 shares of Company common stock. An additional 30,000 common
shares will be issued over the next three years in the amount of 10,000 shares
21
<PAGE>
per year on the anniversary date of the acquisition, subject to the founder's
continuing to host the program under an employment agreement with the Company.
After the reporting period, we completed two additional acquisitions, both
with an effective date of July 1, 2000. We acquired all of the member interests
in PremierCare LLC, a limited liability company engaged in the delivery of
healthcare management services to hospitals in six states. The former beneficial
owners of PremierCare LLC received 540,000 shares of iExalt common stock and
will receive up to an additional 560,000 shares, depending on certain future
financial events and results. Our president and board member is also the
president and chief executive officer of PremierCare LLC. He will continue to
serve both PremierCare (as a subsidiary of iExalt) and iExalt in these same
capacities. In addition, three other key employees of PremierCare LLC executed
multi-year employment agreements with iExalt.
We also acquired all of the stock of Keener Communications Group
("Keener"), the publisher of the CHRISTIAN TIMES newspapers based in southern
California. Monthly circulation is about 180,000. The former owners of Keener
received a total of 450,000 shares of iExalt's common stock. In addition, the
President of Keener entered into a five-year employment agreement with the
Company and was granted a stock option to purchase 125,000 common shares at an
exercise price of $1.80 per share, vesting ratably over five years.
We have entered into funding agreements with two separate Internet
companies under which we are advancing funds and directing their management,
pending the completion of definitive acquisition agreements. Under the
agreements with each of these companies, if the acquisition is not consummated,
we will be entitled to repayment of the advances with interest plus a fifty
percent ownership interest in the company.
iExalt is implementing its vision to blend the Internet and traditional
media to develop and deliver products and services to meet the needs of
families, businesses and organizations that share the principles of the
Christian community.
RESULTS OF OPERATIONS
As of May 31, 2000, iExalt operations were all a part of the Christian
Internet/Information industry. Within that industry, our primary products and
services consisted of:
- Internet ISP access, Christian portal, and filtering software
- electronic publishing of books and reference materials (online and
CD)
- CHRISTIAN HAPPENINGS magazine and online Christian events website
- ChristianSpeakers.com services
- iExaltFamily.com direct marketing of products and services
- LIFE PERSPECTIVES radio program
iExalt-Texas, the accounting acquiror, was incorporated on January 7, 1999, and
had no revenues or expenses from inception through May 31, 1999. Therefore, the
discussion of results analyzes operations for the three months and nine months
ended May 31, 2000, but does not compare results to the prior year.
Our ISP became available nationwide in December, 1999, though our
marketing efforts have been limited while we determine the most effective
strategy for promoting the service. We anticipate that the results of several
22
<PAGE>
summer marketing initiatives will begin to affect ISP operations early in the
first quarter of fiscal year 2001. We acquired our portal from Solutions Global
in November, 1999, and completed a redesign of the site this quarter. We have
continued to see traffic at the site increase. Our filtering software, netFilter
Technologies, was acquired in October, 1999. This quarter we announced the
completion of our Version 4.0 upgrade and we anticipate to begin shipping the
software in the fourth fiscal quarter. As of May 31, 2000, we had licensed the
software to approximately 80 customers, from private schools to major federal
agencies, who have an aggregate of over 150,000 users. We are planning
additional releases to add enhanced features for monitoring and filtering in the
coming months. The ISP, portal and filtering software activities are early stage
businesses with high growth potential in the next twelve months.
Our Electronic Publishing business was acquired in July, 1999. Its
flagship products, WordSearchBible and LessonMaker continue to perform well.
During this quarter, the website was successfully moved to iExalt servers and
the first release of online software was launched with the number of downloads
exceeding expectations. The core business continues to be seasonal, with
November and December being the peak months. Development work continues on a
subscription-based online library and an electronic publishing shopping mall,
with releases anticipated in the first half of fiscal year 2001.
The Events division includes iEvents.net (a database of over 10,000
Christian events nationwide) and Wordcross (publisher of CHRISTIAN HAPPENINGS
magazine) since its acquisition in October, 1999. When acquired, CHRISTIAN
HAPPENINGS magazine was distributed in fourteen regions of the country east of
the Mississippi and had a circulation of approximately 250,000. At the end of
May 2000, the magazine was distributed in eighteen markets with a bi-monthly
circulation of approximately 360,000. We plan to significantly expand
publication coverage by the end of fiscal year 2001.
ChristianSpeakers.com, acquired in December, 1999, recognized very strong
revenues in the quarter ending May 31, 2000. Revenue is recognized when a
speaking engagement occurs, and therefore the business is seasonal with spring
and fall peaks. The backlog of contracted speaking engagements at May 31, 2000,
represents approximately $900,000 in future revenue.
iExaltFamily.com, which commenced initial marketing operations in
February, experienced significant growth in the quarter. The first of the
official regional launch meetings occurred on June 2000, in the Eastern Region.
We anticipate an acceleration in revenues late in the fourth quarter of fiscal
year 2000 and throughout fiscal year 2001.
LIFE PERSPECTIVES radio program, acquired in May, 2000, has been operated
by a not-for-profit entity in the past. We believe that this well-established
radio program can provide us with the basis for additional growth in this media,
marketing and name recognition for iExalt, and profitable operations. We have
added 5 stations since our involvement with the program began 7 months ago,
bringing the total number of stations served to 48. We anticipate further
expanding the number of radio stations carrying the show during the next twelve
months.
23
<PAGE>
Revenues
Overall revenues were $1,222,483 during the three months ended May 31,
2000 and $2,517,926 for the nine months then ended. Comparison to the prior year
is not meaningful; the growth in revenues from one quarter to the next was
generated both from acquisitions and internal growth.
The following table shows a breakdown of the source of our revenues during
the periods ended May 31, 2000:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
AMOUNT PERCENT AMOUNT PERCENT
-------------------- --------------------
<S> <C> <C> <C> <C>
ISP/portal/netFilter (1) ........... $ 50,307 4% $107,118 4%
Electronic publishing (2) .......... 284,393 23% 879,179 35%
CHRISTIAN HAPPENINGS/iEvents.net (3) 270,204 22% 722,513 29%
ChristianSpeakers.com (4) .......... 462,381 38% 636,857 25%
iExaltFamily.com (5) ............... 142,818 12% 159,879 6%
LIFE PERSPECTIVES (6) .............. 12,380 1% 12,380 1%
</TABLE>
The primary sources of revenues are:
(1) Subscriptions, user fees, and advertising
(2) Product sales
(3) Advertising and ticket service fees
(4) Speaker fees
(5) Merchandise and services, distributorships, and member fees
(6) Sponsorship advertising
Cost of Sales and Services
The Cost of Sales and Services was $891,952 during the three months ended
May 31, 2000, and $1,868,936 for the nine months then ended. Gross Profit
(Revenues less Cost of Sales and Services) was $330,531 and $648,990 for the
respective three-month and nine-month periods.
The following table shows a breakdown of the source of our Cost of Sales
and Services during the periods ended May 31, 2000:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
AMOUNT PERCENT AMOUNT PERCENT
-------------------- --------------------
<S> <C> <C> <C> <C>
ISP/portal/netFilter(1) ........... $ 78,444 9% $314,945 17%
Electronic publishing(2) .......... 151,977 17% 451,952 24%
CHRISTIAN HAPPENINGS/iEvents.net(3) 171,946 19% 455,815 24%
ChristianSpeakers.com(4) .......... 379,592 43% 516,804 28%
iExaltFamily.com(5) ............... 99,170 11% 118,597 6%
LIFE PERSPECTIVES(6) .............. 10,823 1% 10,823 1%
</TABLE>
The Cost of Sales and Services consist primarily of:
(1) Internet connection costs, communication costs, and personnel
(2) Materials, royalties, and direct labor
(3) Printing, shipping, credit card fees and direct labor
(4) Payments to speakers
(5) Merchandise costs and commissions
(6) Direct labor
Selling, General and Administrative
The selling, general and administrative costs for iExalt were $1,167,900
for the three months ended May 31, 2000, and $2,685,927 for the nine months then
ended. These costs reflect the effects of completing six acquisitions
24
<PAGE>
during the nine-month period and the costs necessary to support an aggressive
plan of acquisitions and rapid internal growth.
The following table shows a breakdown of the source of our Selling,
General and Administrative costs during the periods ended May 31, 2000:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
AMOUNT PERCENT AMOUNT PERCENT
-------------------- --------------------
<S> <C> <C> <C> <C>
ISP/portal/netFilter (1) $205,021 18% $ 397,471 15%
Electronic publishing (2) 122,713 10% 388,181 14%
CHRISTIAN HAPPENINGS/iEvents.net (3) 124,654 11% 290,468 11%
ChristianSpeakers.com (4) 54,580 5% 124,149 5%
iExaltFamily.com (5) 188,170 16% 325,466 12%
Corporate overhead (6) 472,762 40% 1,160,192 43%
</TABLE>
Selling, General and Administrative costs consist primarily of:
(1) Personnel and advertising
(2) Personnel and advertising
(3) Personnel and communication services
(4) Personnel and advertising
(5) Personnel, advertising and travel
(6) Personnel and professional fees
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 2000, iExalt had $1,930,001 in current assets, $1,227,188 in
current liabilities and a retained deficit of $2,467,097. We had net losses of
$877,238 for the three months ended May 31, 2000 and $2,131,234 for the nine
months then ended. Negative cash flow from operations for the nine months ended
May 31, 2000 was $2,233,522.
To fund the development of its Internet/Information products and services,
iExalt offered through a Private Placement up to two million shares of common
stock at a price of $1.80 per share. Under this private placement, iExalt has
issued 1,915,389 shares of unregistered common stock for cash invested of
$3,447,700 from sixty-six accredited investors as of May 31, 2000. In addition,
on April 28, 2000, holders of an option to purchase 600,000 shares of our common
stock at a price of $1.00 per share exercised their option, paying us $600,000.
iExalt's working capital requirements and cash flow provided by operating
activities can vary from quarter to quarter, depending on revenues, operating
expenses, capital expenditures and other factors. iExalt's on-going business
will require substantial working capital. We anticipate that iExalt will need to
raise additional capital in order to succeed and to continue in business. Since
inception, iExalt has experienced negative cash flow from operations and will
continue to experience negative cash flow for some time into the future. As of
May 31, 2000, iExalt's regular monthly cash operating expenditures exceed its
monthly cash receipts by approximately $350,000. As a result of the two
management and funding agreements described earlier, our negative monthly cash
flow is expected to increase to about $450,000. It is not expected that the
internal source of liquidity will improve until significant net cash is provided
by operating activities, and until such time, the Company intends to rely upon
external sources for liquidity. As of May 31, 2000, the Company's sources of
external and internal financing are limited.
On December 17, 1999, the Company increased its revolving line of credit
with a bank from $50,000 to $150,000. The line of credit is secured by a
personal guarantee of a shareholder of the Company. The line of credit was
25
<PAGE>
fully drawn down during December and January, and it was fully repaid on March
7, 2000. In addition, in January and February, 2000, the Company borrowed
$300,000 from a shareholder of the Company, which was fully repaid on March 21,
2000. In conjunction with the acquisition of PremierCare LLC, we repaid certain
existing indebtedness of PremierCare LLC on July 10, 2000, in the amount of
$677,609 including $85,408 which had been guaranteed by the Company's president.
We have completed arrangements with a bank for a one-year term loan of $550,000
in addition to our line of credit. The loan is guaranteed by certain members of
the Company's Board of Directors.
iExalt has not entered into any arrangements with any other financial
institutions or third parties to provide additional financing. If iExalt is
unable to obtain additional financing or raise adequate working capital in the
amounts desired and on acceptable terms, iExalt may be required to significantly
reduce the scope of its presently anticipated activities.
Management believes that net proceeds of future anticipated securities
offerings, and giving effect to revenues, which are projected to be realized
from operations, should be sufficient to fund ongoing operations of its
businesses as of May 31, 2000. However, the anticipated offerings may not be
undertaken, and if undertaken, may not be successful or the proceeds derived
from such offerings may not, in fact, be sufficient to fund operations and meet
the needs of the Company's business plans. Our current working capital may not
be sufficient to cover cash requirements for the balance of the current fiscal
year or to bring the Company to a positive cash flow position.
Substantial amounts of our common stock soon will be eligible for sale in
the public market, which may adversely affect prevailing market prices for our
common stock and could impair our ability to raise capital through the sale of
our equity securities or to use stock as a currency for our acquisition program.
Of the 27,404,954 shares of common stock issued and outstanding (as of
June 15, 2000), we believe that approximately 2,671,390 of the shares are freely
tradable without restriction or further registration under the Securities Act.
The remaining shares will become eligible for resale subject to Rule 144 as
follows:
DATES THAT HOLDING PERIOD EXPIRES NUMBER OF SHARES
--------------------------------- ----------------
September 2000 18,483,666
October 2000 973,000
November 2000 50,000
December 2000 2,802,000
January 2001 35,000
February 2001 252,278
Later 2,137,620
In general, under Rule 144, a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned such shares for
one year, may sell in the open market within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of our common stock or (ii) the average weekly trading volume in our common
stock on the OTC Bulletin Board during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain limitations on the manner
of sale, notice requirements and availability of current public information
about us. A person (or persons whose shares are aggregated) who is
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deemed not be have been an "affiliate" of ours at any time during the 90 days
preceding a sale by that person and who has beneficially owned his shares for at
least two years, will be able to sell his shares in the public market under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
notice requirements or availability of current information referred to above.
Restricted shares properly sold in reliance upon Rule 144 are thereafter freely
tradable without restrictions or registration under the Securities Act, unless
thereafter held by our affiliates.
PLAN OF OPERATIONS
iExalt is building an integrated set of products and services in the
Christian Internet/Information market, through internal development and
strategic acquisitions. We are working to establish a cohesive presence in both
the "real" world and the "virtual" world. Many services are already available
and others are in various stages of development. In addition, with the
acquisition of PremierCare LLC as of July 1, 2000, we have launched our Health
Services Division. This new line of services, which is already profitable,
expands our activities into a second, high-growth industry.
Our Internet/Information business can be divided, based on target markets,
into Business to Consumer ("B2C") and Business to Business ("B2B") groups. The
B2C group consists of Internet-related products and services designed to support
the needs of families and organizations that share the principles of the
Christian community. Services already available in this group are a nationwide
filtered ISP, a comprehensive Christian portal website, free web-based e-mail,
electronic publication of Christian books and educational material, Christian
events websites and the CHRISTIAN HAPPENINGS magazine, a Christian speakers
bureau, and direct marketing of discounted products and services for the family.
Websites included in this set of services are iexalt.net, iexalt.com,
iexaltmail.com, wordsearchbible.com, ievents.net, christianhappenings.com,
christianspeakers.com, and iexaltfamily.com.
The B2B service is licensing the Company's filtering technology to
businesses, schools, libraries, government agencies, and other organizations.
The Company's filter can run on a licensee's server and be configured to filter
out the types of content specified by the licensee. In addition to the filtering
function, our technology provides a variety of user-level monitoring
capabilities. The Company offers this service under the name netFilter
Technologies which is located on the Internet at netfilter.com.
The Company's plan of operations is to aggressively continue the
development and acquisition of related products and services. Increased
resources will also be dedicated to branding and marketing both existing and
future products.
The Company's financial statements are prepared using principles
applicable to a going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. While the Company
has succeeded in raising significant cash as of May 31, 2000, such cash may not
be sufficient to assure its continuation as a going concern and the Company may
in the future experience significant fluctuations in its results of operations.
These fluctuations may result in volatility in the price and/or value of the
Company's common stock. Shortfalls in revenues may adversely and
disproportionately affect the Company's results of operations because a high
percentage of the Company's operating expenses are relatively fixed.
Accordingly, the Company believes that period-to-period comparisons of results
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of operations should not be relied upon as an indication of future results of
operations. There can be no assurance that the Company will be profitable or
remain a going concern.
FORWARDING-LOOKING STATEMENTS
This quarterly report on Form 10-QSB includes "forward-looking statements"
within the meaning of SECTION 27A of the Securities Act of 1933 and SECTION 21E
of the Securities Exchange Act of 1934. These forward-looking statements may
relate to such matters as anticipated financial performance, future revenues or
earnings, business prospects, projected ventures, new products and services,
anticipated market performance and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. To comply with the terms of the safe harbor, we caution readers that
a variety of factors could cause our actual results to differ materially from
the anticipated results or other matters expressed in our forward-looking
statements. These risks and uncertainties, many of which are beyond our control,
include (i) the sufficiency of our existing capital resources and our ability to
raise additional capital to fund cash requirements for future operations, (ii)
uncertainties involved in the rate of growth and acceptance of the Internet,
(iii) adoption by the Christian community of electronic technology for gathering
information, facilitating e-commerce transactions, and providing new products,
websites, and services, (iv) volatility of the stock market, particularly within
the technology sector, and the ability to use our capital stock as a currency
for acquisitions, and (v) general economic conditions. Although we believe that
the expectations reflected in these forward-looking statements are reasonable,
the expectations reflected in these forward-looking statements may prove to have
been incorrect.
We cannot guarantee any future results, levels of activity, performance or
achievements. Except as required by law, we undertake no obligation to update
any of the forward-looking statements in this Form 10-QSB after the date of this
quarterly report.
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Part II - Other Information
Item 2 - Changes in Securities
The following sales of unregistered securities occurred during the three
months ended May 31, 2000, in private transactions in which the Company relied
on the exemption from registration available under SECTION 4(2) of the
Securities Act of 1933, as amended.
The Company offered to accredited investors through a Private Placement up
to two million shares of unregistered common stock at a price of $1.80 per
share. Pursuant to this Private Placement, the Company issued 1,465,111 shares
of unregistered common stock for cash invested of $2,637,200 from 47 accredited
investors between March 1, 2000 and May 31, 2000. The Company has committed to
pay six percent of the offering proceeds raised to registered brokers as
finder's fees related to the sale of common stock subject to this offering. This
payment may be in cash or common stock. As of May 31, 2000, finder's fees of
$42,720 have been paid and 11,520 shares of unregistered common stock have been
issued.
Effective September 1, 1999, the Company entered into an agreement for
consulting services with Consulting & Strategy International, Inc., ("CSI"). As
partial consideration for the consulting services to be offered by CSI under the
agreement, CSI was granted an option to purchase 600,000 shares of the Company's
common stock at $1.00 per share. This option was assigned to two accredited
investors and was exercised on April 28, 2000, with iExalt issuing 600,000
shares and receiving $600,000.
During the three months ended May 31, 2000, we issued a total of 26,444
unregistered shares of our common stock to seven investors for services valued
at $47,600. An additional 5,133 shares of unregistered common stock were issued
to an accredited investor for a receivable in the amount of $9,239.
Effective May 1, 2000, we acquired the proprietary assets of LIFE
PERSPECTIVES, an hour-long radio program broadcast five nights per week in 48
markets for 20,000 shares of Company common stock. An additional 30,000 common
shares will be issued over the next three years in the amount of 10,000 shares
per year on the anniversary date of the acquisition, subject to the founder's
continuing to host the program under an employment agreement with the Company.
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Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT DESCRIPTION OF EXHIBIT
3.1 Restated Articles of Incorporation of the Company (filed as Exhibit 3.1
to the Company's Quarterly Report on Form 10-QSB for the quarter ending
February 29, 2000 as filed with the Commission on April 14, 2000).
3.2 Amended Bylaws of the Company as adopted on April 24, 1979 (filed as
Exhibit 3.2 to the Company's Quarterly Report on Form 10-QSB for the
quarter ending February 29, 2000 as filed with the Commission on April
14, 2000).
*27.1 Financial Data Schedule
---------------------
* Filed herewith
(b) Reports on Form 8-K and Form 8-K/A filed during the three months ended
May 31, 2000:
Form 8-K/A dated March 16, 2000 reporting (i) the acquisition by iExalt of First
Choice Marketing, Inc., a Texas corporation in the business of directly
marketing a variety of goods and services through commission-based
representatives, and (ii) the financial statements and pro forma financial
information of the acquired company related to the acquisition.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
iEXALT, INC.
July 14, 2000 /s/ James W. Carroll
-----------------------
James W. Carroll
Vice President and
Chief Accounting Officer
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