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