UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER: 000-09322
iEXALT, INC.
NEVADA 75-1667097
------ ----------
(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification No.)
12000 AEROSPACE AVENUE, SUITE 375
HOUSTON, TEXAS 77034-5576
(Address of principal executive offices)
281-464-8400
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [XX] NO[ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
April 3, 2002: 1,804,790 shares
Transitional Small Business Disclosure Format (check one): YES[ ] NO [XX]
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iEXALT, INC.
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
Part I Financial Information
Item 1 Condensed Consolidated Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Part II Other Information
Item 1 Legal 28
Item 2 Changes in Securities 28
Item 3 Defaults Upon Senior Securities 29
Item 4 Submission of Matters to a Vote of Security Holders 29
Item 6 Exhibits and Reports on Form 8-K 29
Signatures 35
</Table>
2
<Page>
Part I -- Item 1. Condensed Consolidated Financial Statements.
iEXALT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
ASSETS
February 28, August 31,
2002 2001
(Unaudited)
--------------- ---------------
CURRENT ASSETS
Cash and cash equivalents $ 273,098 $ 80,466
Accounts receivable, trade, net 376,326 762,201
Accounts receivable, other and notes receivable, net 31,116 189,177
Accounts receivable, affiliate 83,267 22,874
Inventory, prepaid expenses and other current assets 200,712 394,620
--------------- ---------------
TOTAL CURRENT ASSETS 964,519 1,449,338
PROPERTY AND EQUIPMENT, net 353,938 568,029
OTHER ASSETS
Goodwill and other intangible assets, net 2,551,511 4,271,540
Other assets, net 20,775 166,361
--------------- ---------------
$ 3,890,743 $ 6,455,268
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Short-term borrowings $ 509,303 $ 758,744
Notes payable to shareholders 545,000 545,000
Current maturities of long-term debt 590,121 630,941
Current maturities of obligations under capital lease 3,706 7,969
Accounts payable, trade 1,414,157 1,399,047
Accounts payable, affiliate 91,698 54,429
Deferred revenue 610,808 489,742
Other accrued liabilities 569,110 689,881
--------------- ---------------
TOTAL CURRENT LIABILITIES 4,333,903 4,575,753
--------------- ---------------
LONG-TERM DEBT 6,647 60,953
--------------- ---------------
OBLIGATIONS UNDER CAPITAL LEASE 1,411 1,411
--------------- ---------------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value, 20,000,000 shares authorized, no shares
issued and outstanding - -
Common stock, $.05 par value, 2,000,000 shares authorized, 1,754,490 and
1,346,341 shares, issued and outstanding, respectively 87,725 67,317
Paid-in capital 20,102,229 19,424,686
Deferred Compensation (127,280) (524,062)
Retained deficit (20,513,892) (17,150,790)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (451,218) 1,817,151
--------------- ---------------
$ 3,890,743 $ 6,455,268
=============== ===============
</Table>
See accompanying notes.
3
iEXALT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<Table>
<Caption>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
Feb 28, Feb 28, Feb 28, Feb 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES $ 1,253,692 $ 1,552,571 $ 3,025,690 $ 3,148,355
COST OF SALES AND SERVICES 814,153 1,069,338 2,114,862 2,238,968
------------- ------------- ------------- -------------
GROSS PROFIT 439,539 483,233 910,828 909,387
SELLING, GENERAL, AND ADMINISTRATIVE 744,374 591,612 1,363,720 3,078,576
PAYROLL COSTS 591,926 482,616 1,181,732 963,474
DEPRECIATION AND AMORTIZATION 220,246 111,681 254,699 172,421
LOSS ON DISPOSAL OF ASSETS 93,438 - 93,438 153,262
IMPAIRMENT OF LONG LIVED ASSETS - - 605,629 -
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (1,210,445) (702,676) (2,588,390) (3,458,346)
OTHER INCOME (EXPENSES)
Contract Cancellation, Interest Income, Other (408,224) 410 (398,719) 3,312
Interest Expense (45,336) (184,037) (78,962) (217,904)
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES (1,664,005) (886,303) (3,066,071) (3,672,938)
INCOME TAXES - - - -
------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (1,664,005) (886,303) (3,066,071) (3,672,938)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (92,757) 102,089 (185,382) 148,081
LOSS FROM DISPOSAL OF ASSETS OF DISCONTINUED
OPERATIONS - - (111,649) -
------------- ------------- ------------- -------------
NET LOSS $ (1,756,762) $ (784,214) $ (3,363,102) $ (3,524,857)
============= ============= ============= =============
NET LOSS PER SHARE FROM CONTINUING OPERATIONS $ (1.16) $ (1.30) $ (2.19) $ (5.64)
============= ============= ============= =============
NET LOSS PER SHARE $ (1.23) $ (1.15) $ (2.41) $ (5.42)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,428,751 680,467 1,398,118 650,785
============= ============= ============= =============
</Table>
See accompanying notes.
4
<Page>
<Table>
<Caption>
iEXALT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002
(Unaudited)
Common
Stock Total
--------------------- Paid-In Deferred Retained Shareholders
Shares Amount Capital Compensation Deficit Equity (Deficit)
-------------------------------------------------------------------------------------
BALANCE, August 31, 2001 67,317,077 $67,317 $19,424,686 $(524,062) $(17,150,790) $ 1,817,151
(Prior to 50:1 reverse split
effective December 28, 2001)
BALANCE August 31, 2001 1,346,341 $67,317 $19,424,686 $(524,062) $(17,150,790) $ 1,817,151
(Restated for effect of 50:1
reverse split)
Issuance of stock for
acquisitions 32,500 1,625 35,063 - - 36,688
Issuance of stock for services 247,670 12,383 159,777 - - 172,160
Amortization of deferred
compensation - - - 396,782 - 396,782
Issuance of stock for loans,
settlements & debenture
conversions 127,979 6,400 339,365 - - 345,765
Issue stock options/warrants - - 4,000 - - 4,000
Preferential conversion cost of
debt - - 139,338 - - 139,338
Net loss - - - - (3,363,102) (3,363,102)
-------------------------------------------------------------------------------------
BALANCE February 28, 2002 1,754,490 $87,725 $20,102,229 $(127,280) $(20,513,892) $ (451,218)
=====================================================================================
</Table>
See accompanying notes.
5
iEXALT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
Six Months Ended February 28,
--------------------------------
2002 2001
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,363,102) $(3,524,857)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 266,707 224,989
Amortization of Deferred Compensation/Other 656,055 -
Loss on disposition of assets 124,014 153,262
Loss on disposal of assets from discontinued operations 111,649 -
Impairment of long lived assets 605,629 -
Non-cash expense of issuing stock options/warrants/debt 20,849 910,251
Compensation and other expense for common shares 59,851 465,485
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 555,348 (82,052)
Inventory, prepaid expenses and other current assets 132,088 (280,315)
Other assets 2,589 (238,443)
Accounts payable 20,031 176,894
Deferred revenue 40,701 150,764
Other accrued expenses (78,812) (49,210)
------------- ------------
Net cash used by operating activities (846,403) (2,093,232)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash from acquisitions 17,122 124,291
Purchases of property and equipment (16,074) (49,507)
Disposition of Assets 938,449 -
------------- ------------
Net cash provided by investing activities 939,497 74,784
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 560,000
Proceeds from exercise of options - 12,000
Payment on borrowings from shareholders - (12,000)
Proceeds from issuance of debt 576,069 1,469,645
Proceeds from issuance of warrants - 237,694
Payments of capital lease obligations (4,263) (25,106)
Repayments of debt (472,268) (51,937)
------------- ------------
Net cash provided by financing activities 99,538 2,190,296
------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 192,632 171,848
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 80,466 278,164
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 273,098 $ 450,012
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 31,161 $ 50,771
</Table>
See accompanying notes.
6
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION - iExalt blends the
positive modern technologies available through the Internet with
traditional media to provide products, services, and Internet
solutions to Christian families, businesses, schools, communities, and
organizations. iExalt currently markets filtered internet service,
publishes Christian electronic books and reference materials, a
Christian events magazine, a Christian business directory, and a
Christian newspaper, a Christian preaching magazine, produces the Life
Perspectives radio program five nights per week and is affiliated with
a youth-oriented Christian radio program, operates a comprehensive
contemporary Christian music website, a speaker's bureau dedicated to
Christian speakers, and an agency business for Christian artists. In
addition, iExalt sells tickets for Christian events, manages Christian
portal sites, provides access to on-line web based sermon resources
through its website, and provides through the Internet an
information-packed, on-line monthly newsletter for local youth
programs. Through November 30, 2001 iExalt provided psychiatric
counseling services for senior citizens earning healthcare revenues
from the implementation and management of geriatric psychiatric
programs for hospitals and other health facilities. This business
segment was sold as more fully discussed in NOTE B.
CONDITIONS AFFECTING ONGOING OPERATIONS - The financial statements
have been prepared assuming the Company will continue to remain in
business as a going concern. The Company is currently dependent upon
external debt and equity financing to continue operations. The
Company's internally generated cash flows from operations have
historically been and continue to be insufficient for the Company's
cash needs. New debt or equity capital, if available, may have
provisions that could suppress future stock prices further, or cause
significant dilution to current shareholders and increase the cost of
doing business. In the event the Company is unable to obtain
additional debt and equity financing, the Company will not be able to
continue its operations. If the Company were unable to continue its
operations, the value of the Company's assets would experience a
significant decline from the net book values reflected in the
accompanying consolidated balance sheet. In this regard, assets that
generally suffer the greatest decline in value include; receivables as
customers recognizing the entity's problems consider not paying their
bills, inventories lose value as the entity no longer has the
capability to market and distribute its products to customers,
goodwill and other intangibles which represents amounts paid in excess
of the net book value of assets and companies purchased generally have
no value as operations cease, and property and equipment is often sold
for small percentages of net book value reflected on the accounting
records. Consequently, in the event the Company is unable to continue
as a going concern, its assets as currently reflected on the
accompanying balance sheet would provide little in the way of funds to
reduce the Company's significant debt load and liabilities. Based on
this assessment, little or nothing would remain for the Company's
creditors, shareholders and investors should the Company not remain in
business.
Management believes that net proceeds of, anticipated securities
offerings, anticipated debt financing and revenues which are projected
to be realized from operations, should be sufficient to fund ongoing
operations in the near term. However, the anticipated securities
offerings and debt financing may not be undertaken, and if undertaken,
may not be successful or the proceeds derived from such offerings may
not be sufficient to fund operations and meet the needs of the
Company's business plans or the Company's revenues may not be adequate
or realized. The Company's current deficit working capital is not
sufficient to cover cash requirements for the balance of the current
quarter or fiscal year or sufficient to allow the Company to remain in
business. Consequently, the Company may not ever become profitable and
could soon fail as a going concern. Accordingly, management and its
independent accountants believe that; period-to-period comparisons of
results of operations or anticipated future events should not be
relied upon as an indication of positive future results of operations
or future profitability, and continuance as a going concern may not be
achieved.
7
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Management continues to seek merger and acquisition opportunities for
possible growth and profitability within its business planning
activities, and these possibilities along with other factors will
impact future operations. However, possible merger and acquisition
opportunities leading to enhanced cash flow and profitability cannot
be assured.
The Company's deficit working capital, its lack of access to the debt
and equity markets, and its small market cap among other things,
significantly limits the Company's ability to successfully attract
quality merger and acquisition candidates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been
eliminated.
INTERIM RESULTS - The accompanying unaudited condensed consolidated
financial statements of the Company and its subsidiaries reflect, in
the opinion of management, all adjustments necessary to present fairly
the Company's consolidated financial position at February 28, 2002 and
the Company's consolidated results of operations for the three month
and six month periods and cash flows for the six month periods ended
February 28, 2002 and February 28, 2001. Interim period results are
not necessarily indicative of the results that may be expected for an
entire year.
These consolidated financial statements and the notes thereto should
be read in conjunction with the Company's Annual Report on Form 10-KSB
for the year ended August 31, 2001, including the financial statements
and notes thereto.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
debt instruments having maturities of three months or less at the date
of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment is carried at original
cost or adjusted net realizable value, as applicable. Maintenance and
repair costs are charged to expense as incurred. When assets are sold
or retired, the remaining costs and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is
included in income.
For financial reporting purposes depreciation of property and
equipment is provided using the straight-line method based upon the
expected useful lives of each class of assets. Estimated lives of
assets are as follows: Furniture and fixtures - five to seven years;
computers and software - three to five years; automobiles - three to
five years; and leasehold improvements - over the estimated useful
life or the remaining life of the lease, whichever is shorter.
FINANCIAL INSTRUMENTS - FAIR VALUE - The carrying values of the
Company's financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and accrued
liabilities, royalties and debt, approximate their respective fair
values because of short lives and the use of market interest rates.
CREDIT RISK - The Company maintains its cash and cash equivalents with
high credit quality financial institutions and limits the credit
exposure to any one institution. The Company's accounts receivable
primarily arise from sales to customers and generally do not require
collateral. The Company periodically evaluates its credit exposure
with its customers. Included in accounts receivable, other and other
assets at February 28, 2002 are receivables in the amount of $288,000
and $360,000, respectively due the Company from the purchaser of
selected assets of CleanWeb, one of the Company's subsidiaries. In
September 2001, the purchaser filed under the federal bankruptcy
statutes to seek protection as it reorganizes and the Company fully
reserved all of the note receivable.
8
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
GOODWILL AND OTHER INTANGIBLES - Goodwill represents the cost in
excess of fair value of the assets of businesses acquired. Other
intangible assets represent costs allocated to covenants not to
compete and other intangibles acquired in business acquisitions or
agreements. In July 2001 the FASB issued statement of Financial
Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Statement No. 141 requires,
among other things, all business combinations initiated after June 30,
2001 be accounted for using the purchase method of accounting.
Statement No. 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. Under Statement
142, goodwill will no longer be amortized over its estimated useful
life, but instead be tested for impairment at least annually.
Statement No. 142 will be effective for fiscal years beginning after
December 15, 2001 and must be adopted at the beginning of a fiscal
year. Goodwill and intangible assets acquired after June 30, 2001 will
immediately be subject to the provisions of Statement No. 142. The
Company adopted Statement No. 142 effective September 1, 2001. At
February 28, 2002, the Company had $1,946,785 in intangible goodwill
that will no longer be amortized under this statement. Had the Company
adopted SFAS 142 effective for the three month and six month periods
ending February 28, 2001, amortization expense would have been reduced
$53,555 and $76,891, respectively.
In place of amortization of intangible assets, at least annually the
Company must test all intangible assets to determine the amount of
impairment to those assets, if any. Consequently, and due in
substantial part to; the Company's and its subsidiaries inability to
generate positive cash flow and working capital; lack of profitability
and equity capital, large adjustments to intangibles may result from
impairment testing in the future.
IMPAIRMENT OF LONG LIVED ASSETS - When events or circumstances
indicate the carrying value of a long-lived asset may be impaired, the
Company uses an estimate of fair value using present value techniques
to be derived from the remaining useful life of the asset to assess
whether or not the asset is recoverable.
In August 2001, management recognized an impairment loss in the
aggregate amount of $1,103,133 with respect to the discontinued
activities of Global Christian Network $1,075,258, and Global
Solutions $27,875, two subsidiaries of the Company. The Company
purchased Global Christian Network in March 2001 and Global Solutions
in November 1999.
In September 2001, iExalt was notified that 711.NET, Inc., the
purchaser of certain assets of CleanWeb, filed for protection from
creditors to reorganize under the federal bankruptcy statutes. Based
on the information available at that time management determined that
the Company should recognize at August 31, 2001 an impairment loss in
the amount of $1,340,312 to these assets including the promissory
note, common stock value of 711.NET, Inc. and some of the goodwill.
Based upon the results of the preliminary bankruptcy hearings in
December 2001, management no longer anticipates reclaiming the
CleanWeb customer base and does not expect to collect any notes
receivable owed by 711.NET. As a result, management impaired the
remaining goodwill of $500,000 effective November 30, 2001. Notice was
given on March 15, 2002, that the 711.NET Trustee has initiated a
proposed sale and liquidation of the 711.NET assets.
Management has learned that the primary advertising provider of
ListenFirst.com, one of the Company's subsidiaries, unexpectedly
discontinued operations as of December 31, 2001. ListenFirst.com
provides an Internet website for Christian music. Its advertising
providers are critical to ListenFirst.com achieving and maintaining
profitability. The Company is currently operating ListenFirst.com's
website; however management is not optimistic about obtaining other
advertising providers that will allow the subsidiary to achieve and
maintain profitable operations.
9
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Accordingly, management impaired goodwill associated with
ListenFirst.com of $105,629 at November 30, 2001. Although management
believes that no additional impairment of goodwill and other
intangibles is required at this time, additional impairment losses may
be required in the near term.
MANAGEMENT'S ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
While it is believed that such estimates are reasonable, actual
results could differ substantially from those estimates. Because
goodwill and intangible assets represent assets that are dependent
upon the Company achieving future profitability and remaining in
business, they represent significant estimates made by management that
are subject to significant impact in the near term.
REVENUE RECOGNITION - The Company generally recognizes revenue on
services as they are performed and on products when they are sold net
of sales returns. Speaker revenues are recognized when the speech or
event occurs. Electronic publishing revenues are recorded net of a
provision for sales returns and allowances as the Company grants
refunds and returns on electronic publishing products if the software
and publications sold are returned within thirty days. Revenue from
ticket operations is recognized as tickets are sold. Although iExalt
collects ticket receipts representing the full ticket price on behalf
of its clients, the Company only records as revenue the convenience
charges and handling fees included in the ticket price. Advertising
revenue is recognized as the service is contracted.
EARNINGS PER SHARE - The dilutive effects of stock options and
warrants have not been included in the calculation of earnings per
share as they are anti-dilutive; however, may become dilutive in the
future.
REVERSE STOCK SPLIT - In December 2001, the Company's Board of
Directors declared a 50 to one (50:1) reverse stock split of the
Company's common stock. Every 50 shares of iExalt, Inc. common stock,
$0.001 par value per share, was to be converted to one share of
iExalt, Inc. common stock, $0.05 par value, and each shareholder was
entitled to receive a payment for any fractional shares that result
from the split. In addition, all holders of options or warrants to
purchase future shares of the Company's common stock were also reduced
on an equal basis of 50 to one. Accordingly, the Company has presented
all equity information as if the reverse stock split had occurred
effective September 1, 2000. The new stock symbol is IEXA and CUSIP
number is 451691208. The Company for voting, distribution, or other
purposes will not recognize certificates representing the pre-split
shares. Old certificates must be replaced with new certificates.
RECLASSIFICATION OF ACCOUNTS - Certain reclassifications have been
made to prior year balances for discontinued operations to conform to
current year presentation.
NOTE B ACQUISITIONS AND DISPOSITIONS
On November 30, 2001 the Company purchased certain assets of Barnabus
Christian Counseling Network, LLC, an on-line counseling company, for
6,500 shares of the Company's common stock. The transaction was
accounted for as a purchase and goodwill was recorded in the amount of
$16,088.
10
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
On November 30, 2001 the Company sold certain assets of PremierCare
including the assets related to the Rapha and Barnabus Christian
Counseling Network business to UMC Ten Broeck, Inc. ("Buyer").
Excluded from the asset sale was PremierCare's cash, accounts
receivable, and receivable from related parties. The Buyer did not
assume any liabilities except those liabilities outlined in the
agreement. The purchase price was $1,000,000 cash at closing plus
deferred payments equal to one third of any EBITDA generated by the
business in excess of $500,000 annually for a period of two years
following closing. Total payment in deferred purchase price shall not
exceed $750,000 on an annual basis. Excluding shared services, EBITDA
generated by Premier Care/Rapha for fiscal year ending August 31, 2001
exceeded the targeted EBITDA, however, it is not possible at this time
to determine whether future earnings from the PremierCare assets will
be sufficient to exceed the EBITDA threshold, consequently it is not
possible to determine whether the Company will receive any future
payments from this arrangement. As part of the sale, the Company
entered into a shared services agreement, whereby management of the
Company will provide consulting services to the Buyer during the
two-year period. In addition, the Company will provide advertising and
marketing services to the Buyer to promote the growth strategy of
PremierCare for a term of not less than three years. Based on the
facts and circumstances existing at the conclusion of the Company's
fiscal year end August 31, 2001 and currently existing, management of
the Company is of the opinion that the service contract has an
estimated value of approximately $750,000. Consequently, some of the
goodwill, which represented a portion of the excess cost paid by the
Company over the net book value of PremierCare's assets at the date
purchased by the Company was retained on the Company's books, treated
as an intangible asset and is being amortized over a one-year period,
commencing December 31, 2001, on a straight-line basis. This estimate
is subject to significant near term impairment should future operating
results of the sold operating assets of PremierCare not be sufficient
to generate an adequate amount of earnings.
In December 2001, the Company issued 1,000 shares of its common stock
and $5,000 to acquire the assets related to the "Youth Conference"
including but not limited to the trade names and goodwill of the Youth
Conference, all software, or other electronic information and physical
copies of all data bases to support the bookings and author
relationships including URL's, work in progress, proformas, and
contracts.
In February 2002, the Company purchased Preaching Resources, Inc., a
reference magazine for leaders within the Christian community and an
on-line Internet site, for 25,000 shares of the Company's common stock
and $9,500 cash. The transaction was accounted for as a purchase and
goodwill was recorded in the amount of $102,368. Results of operations
have been included in the statement of operations since the
acquisition date. The Company's acquisition strategy has been to
acquire, develop and manage a large channel of media (print, radio,
software and Internet). The acquisition of Preaching Resources, Inc.
is expected to increase the Company's presence and marketing potential
in the Christian media market through its subscriber base. The founder
and editor of Preaching Resources, Inc. will remain as President and
CEO, and will be entitled to a cash and stock bonus based on the
achievement of certain performance objectives. The purchase agreement
also contains a requirement to pay quarterly cash bonuses that will be
equal to 50% of the net income derived from Preaching Magazine up to
the first $40,000 of annualized net income, and 25% of the next
$40,000 in annualized net income, and 10% of all annualized net income
greater than the initial $80,000 of annualized net income, as
calculated using generally accepted accounting principles for a term
of three years commencing February 1, 2002. The stock bonus will be
equal to 1,500 shares of the Company's common stock, $.05 par value,
for each 1,000 paid subscribers to Preaching Magazine in excess of
5,000 paid subscribers, as of February 28, 2003.
11
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following unaudited pro forma combined results of operations of
the Company for the six months ended February 2002 and 2001 assume
significant acquisitions and dispositions had occurred as of the
beginning of the respective periods.
<Table>
<Caption>
PRO FORMA
Six Months Ended February 28,
-------------------------------
2002 2001
------------- -------------
Revenues $ 3,025,690 $ 2,629,522
Loss from operations $ (2,494,952) $ (3,300,548)
Net loss $ (3,049,222) $ (3,509,436)
Net loss per share $ (2.19) $ (5.28)
Pro Forma Weighted Average Number of
Shares Outstanding 1,395,466 664,587
</Table>
The pro forma financial information is not necessarily indicative
of the combined results that would have occurred had the
significant acquisitions and dispositions taken place at the
beginning of the period, nor is it necessarily indicative of results
that may occur in the future.
NOTE C PROPERTY AND EQUIPMENT
<Table>
<Caption>
February 28, August 31,
2002 2001
------------- -------------
Computer equipment and software $ 342,045 $ 347,582
Furniture, fixtures and office equipment 171,487 211,061
Automobiles 12,000 190,091
Leasehold improvements 45,029 42,036
------------- -------------
570,561 790,770
Less accumulated depreciation (216,623) (222,741)
------------- -------------
$ 353,938 $ 568,029
============= =============
</Table>
12
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE D SHORT-TERM BORROWINGS
<Table>
<Caption>
February 28, August 31,
2002 2001
------------ ------------
Revolving line of credit with bank, interest at prime
payable monthly, due December 18, 2000, guaranteed by
shareholder (1) $ 150,000 * $ 150,000
Loan, non-interest bearing, due March 22, 2001 (2) - 180,000
Convertible debenture, due July 15, 2002, interest 14% (3) - 165,936
Promissory note, due December 31, 2001, interest 21% (4) - 75,000
Convertible debenture, due Dec. 29, 2001, interest 11% (5) - 100,000
Convertible debenture, due July 16, 2002, interest 14% (8) 100,000 -
Convertible debenture, due August 1, 2002, interest 8% (9) 80,000 -
Convertible debenture, due Nov. 14, 2002, interest 8% (10) 70,000 -
Convertible debenture, due Aug. 14, 2002, interest 8% (11) 100,000 -
Discount on debentures (122,489)
Other unsecured revolving lines of credit in the form of
credit cards with interest ranging from 11.9% to 22.9%,
payable monthly 131,792 87,808
------------ ------------
$ 509,303 $ 758,744
============ ============
</Table>
(*) Debt is in default at February 28, 2002 due to lack of payment.
(1) In August 1999, the Company negotiated a $50,000 revolving line of
credit with a bank. The credit line was increased to $150,000 in
December 1999 and guaranteed by a shareholder without the Company's
authority. To date the bank has provided forbearance and the Company
continues to make interest payments and is working with the bank to
develop a mutually agreeable plan to repay the debt. This note is
subject to the litigation with Jack Tompkins as more fully discussed
in NOTE K.
(2) In February 2001, the Company negotiated two loans, each in the
amount of $90,000. The Company issued 25,714 restricted shares of its
common stock in payment of one of the loans in October 2001. In
December 2001, the Company resolved the outstanding balance of the
other loan by issuing 15,000 restricted shares of its common stock.
(3) On February 16, 2001, the Company agreed to issue $180,000 in the
form of a non-interest bearing convertible debenture. The debenture
agreement provides for conversion of $90,000 of the principal for
shares with a conversion price of $9.00 per share, is secured by
existing and future accounts receivable of PremierCare along with a
guarantee from a shareholder, and matured on April 15, 2001.
Additional consideration was issued in the form of warrants for the
purchase of up to 20,000 of the Company's common shares as follows;
16,363 at an exercise price of $5.50 and 3,636 shares at an exercise
price of $9.00. The debenture holder subsequently agreed to extend the
due date to July 15, 2002. The Company agreed to make twelve monthly
payments of $16,164.39 with the first installment due August 15, 2001
including 14% interest per annum, change the debenture conversion
provision to $5.50 per share, and change the exercise price related to
the warrants for the purchase of up to 20,000 shares to $5.50 per
share. In December 2001, the Company repaid the loan in full.
(4) On June 5, 2001, the Company agreed to issue $100,000 in the form
of a convertible debenture. The debenture bears interest payable
monthly of 450 of the Company's restricted common shares, provides for
conversion of $25,000 of the principal for common shares with a
conversion price of $4.00 per share, allows for a placement fee of
2,000 of the Company's restricted common shares if
13
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
funds are delivered prior to June 30, 2001, and matures on December
31, 2001. The conversion was exercised related to the $25,000 and a
total of 6,410 of the Company's restricted common shares were issued
to the debenture holder along with 5,150 common shares related to the
placement fee and interest. In December 2001, the Company repaid the
loan.
(5) On August 14, 2001, the Company entered into a $140,000 loan
agreement with Cresson Productions, Inc. Borrowings are to be repaid
within six months of funding and bear interest at 11%. As additional
consideration, the Company issued warrants for 8,400 shares of the
Company's common stock at an exercise price of $3.50 related to
transaction placement fees. The warrants are vested and have a
five-year term. The Company has the option to repay the principal and
interest with cash or shares of the Company's common stock which
shares will be valued at the lesser of $10.00 per share or 75% of the
average of the stock's closing price in the previous 5 trading days.
The Company ultimately borrowed $131,000 from the loan facility and in
February, 2002 the Company repaid the loan by issuing 83,161
restricted shares of its common stock to the debenture holder.
(6) On November 8, 2001, the Company entered into a $50,000 promissory
note agreement. The loan bears interest at 14%, provides warrants for
10,000 shares of the Company's common stock at an exercise price of
$2.50 and is payable in twelve monthly installments or in full upon
the closing of the PremierCare asset sale. In December 2001, the
Company repaid the loan in full.
(7) On November 12, 2001, the Company entered into a $100,000
promissory note agreement. The loan bears interest at 14% and is
payable in full within one month or upon the closing of the
PremierCare asset sale. In December 2001, the Company repaid the loan
in full.
(8) On January 16, 2001, the Company agreed to issue $100,000 in the
form of a convertible debenture. The debenture bears interest at 14%,
provides for conversion of the principal and interest for the
Company's common shares with a conversion price of $0.49, provides for
an additional amount of ten percent of the total restricted shares
issued if funds are delivered by January 31, 2002, and matures on July
16, 2002.
(9) On February 1, 2002, the Company agreed to issue $80,000 in the
form of a convertible debenture. The debenture bears interest at 8%,
provides for conversion of the principal and interest for the
Company's common shares with a conversion price of $0.50, and matures
on August 1, 2002.
(10) On February 14, 2002, the Company agreed to issue $70,000 in the
form of a convertible debenture. The debenture bears interest at 8%,
provides for conversion of the principal and interest for the
Company's common shares with a conversion price of $0.525, and
recognized the issuance of warrants dated September 20, 2000 assigned
to Balallan Limited from Travin Investments LLC as valid warrants. The
note matures on November 14, 2002.
(11) On February 20, 2002, the Company agreed to issue $100,000 in the
form of a convertible debenture. The debenture bears interest at 8%,
provides for conversion of the principal and interest for the
Company's common shares with a conversion price of $0.39, provides for
an additional amount of ten percent of the total restricted shares
issued if funds are delivered by February 28, 2002, and matures on
August 20, 2002. Russell Ivy, Chief Operating Officer for the Company,
is also a principal of the company that holds the note.
14
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE E NOTES PAYABLE TO SHAREHOLDERS
<Table>
<Caption>
February 28, August 31,
2002 2001
-------------- ---------------
Non-interest bearing note payable to shareholder, due
on demand secured by all assets of NetXpress $ 350,000* $ 350,000
Unsecured note payable to shareholder, 8% interest, due
on demand 195,000* 195,000
-------------- ---------------
$ 545,000 $ 545,000
============== ===============
</Table>
(*) Demand for payment has been made by the debt holder. The debt is
also subject to the litigation with Jack Tompkins as more fully
discussed in NOTE K.
In connection with the acquisition of NetXpress, iExalt, Inc. (Texas),
a subsidiary of the Company, assumed a $350,000 note payable to a
shareholder of the Company (iExalt, Inc. Nevada). Under the terms of
this note, the balance becomes payable on demand when net assets of
iExalt, Inc. (Texas) exceed $5,000,000. Demand for payment has been
made, however, as of February 28, 2002, the net assets of iExalt, Inc.
(Texas) do not exceed $5,000,000; therefore, management does not
believe there has been cause for demand of payment.
During August 2000, U.S. Sporting Interests, LLC loaned the Company
$195,000 under a demand note with an 8% interest rate. Demand for
payment of the $195,000 has been made. This note is subject to
litigation with Jack Tompkins as more fully discussed in NOTE K.
NOTE F LONG-TERM DEBT
<Table>
<Caption>
February 28, August 31,
2002 2001
-------------- ---------------
Note payable to bank, interest at prime payable
quarterly, due June 30, 2001, unsecured,
guaranteed by shareholder $ 550,000* $ 550,000
Vehicle notes payable, interest ranging from 1.9%
to 14.25%, maturing June 2001 to June 2004, secured
by vehicles - 90,785
Notes payable on various insurance policies 38,830 44,256
Other unsecured notes payable, due on demand 7,938 6,853
-------------- ---------------
596,768 691,894
Less: current maturities 590,121 630,941
-------------- ---------------
$ 6,647 $ 60,953
============== ===============
</Table>
(*) Debt is currently in default at February 28, 2002 due to lack of
payment.
The note payable to the bank matured on June 30, 2001; however, the
bank has provided forbearance and the Company continues to accrue
interest payments. The Company is working with the bank to develop a
mutually agreeable plan to repay the debt. This note is subject to the
litigation with Jack Tompkins as more fully discussed in NOTE K.
15
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE G SHAREHOLDERS' EQUITY
In October 2001, the Company issued 25,714 shares of the Company's
common stock for repayment of a $90,000 bridge loan that was due in
March 2001.
In October 2001, the Company issued 7,670 shares of the Company's
common stock for incentive compensation to various employees of the
Company and selected speakers who contract to perform at events
arranged by the Company's subsidiary, ChristianSpeakers.
In November 2001 the Company purchased certain assets of Barnabus
Christian Counseling Network, LLC, an on-line counseling company, for
6,500 shares of the Company's common stock.
In December 2001, the Company issued 1,000 shares of its common stock
and $5,000 to acquire the assets related to the "Youth Conference"
including but not limited to the trade names and goodwill of the Youth
Conference, all software, or other electronic information and all
physical copies of all data bases to support the bookings and author
relationships including URL's, work in progress, proformas, and
contracts.
In December 2001, the Company issued 15,000 shares of its common stock
for payment in full of any obligation related to the remaining $90,000
bridge loan provided by TCA Investments.
In December 2001, the Company issued 5,000 shares of its common stock
for settlement with the former owners of PremierCare LLC in regards to
the earn out provisions of the original purchase and sale agreement.
In February 2002 the Company purchased Preaching Resources, Inc., a
reference magazine for leaders within the Christian community and an
on-line Internet site for 25,000 shares of the Company's common stock
and $9,500.
In February 2002 the Company filed a Form S-8 with the Securities and
Exchange Commission to register 240,000 of newly issued shares of the
Company's common stock. The shares were issued as compensation for
certain consulting and legal services.
In December 2001, the Company issued 83,161 shares of its common stock
for payment in full of any obligation related to the convertible
debenture held by Cresson Productions Inc.
NOTE H STOCK OPTIONS AND WARRANTS
On November 8, 2001, the warrant agreement between the Company and I.
Leonards was amended to add an additional 10,000 shares of the
Company's common stock and the warrant exercise price was reduced to
$2.50 per share. A loan of $50,000 was advanced to the Company at an
interest rate of 14% that was fully repaid in December 2001.
NOTE I INCOME TAXES
The Company has had losses since inception and, therefore, has not
been subject to federal income taxes. As of February 28, 2002 the
Company estimates an accumulated taxable net operating loss ("NOL")
carry forward for income tax purposes of approximately $16.3 million,
resulting in a deferred tax asset of $5.7 million. These carry
forwards begin to expire in 2019 through 2021.
16
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Because U.S. tax laws limit the time during which NOL and tax credit
carry forwards may be applied against future taxable income and tax
liabilities, the Company may not be able to take full advantage of its
NOL and tax credits for federal income tax purposes. A valuation
allowance has been established to fully offset the deferred tax
assets.
NOTE J BUSINESS SEGMENTS
The Company's operations are grouped into three business segments
based on types of service and delivery media: Internet and technology
applications, print publications, and healthcare services. Internet
and technology applications consist of CleanWeb, iExalt.com (portal),
Electronic Publishing, ChristianSpeakers.com, ListenFirst.com, Global
Christian Network, ChristianArtists.com, Gilmore Marketing, iSermons,
the ParentLink, and Life Perspectives. Print publications consist of
Christian Happenings, Christian Times, Preaching Resources, and
Christian Blue Pages. Healthcare services consisted of the counseling
programs of PremierCare, Rapha and Barnabus, which were sold on
November 30, 2001.
The Company's reportable segment information for the six months ended
February 28, 2002 and 2001 are as follows:
<Table>
<Caption>
Six Months Internet & Print Health Corporate/ Reporting
Ended Technology Publications Services Other Segments
February 28, (discontinued)
------------------ ------------- -------------- -------------- ------------- -------------
Revenues:
2002 $ 2,014,096 $ 1,011,594 $ - $ - $ 3,025,690
2001 $ 2,195,770 $ 952,585 $ - $ - $ 3,148,355
Gross Profit:
2002 $ 625,150 $ 285,678 $ - $ - $ 910,828
2001 $ 614,625 $ 294,762 $ - $ - $ 909,387
Loss from
Operations:
2002 $ (1,058,796) $ (198,260) $ - $ (1,331,334) $ (2,588,390)
2001 $ (789,401) $ (95,869) $ - $ (2,573,076) $ (3,458,346)
Depreciation/
Amortization:
2002 $ 25,284 $ 21,333 $ - $ 208,082 $ 254,699
2001 $ 116,699 $ 44,354 $ - $ 11,368 $ 172,421
Assets:
2002 $ 1,659,193 $ 1,516,266 $ 49,865 $ 665,419 $ 3,890,743
2001 $ 4,155,374 $ 1,488,472 $ 2,442,003 $ 1,181,869 $ 9,267,718
</Table>
17
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table reconciles reportable segment gross profit to
the Company's consolidated loss before income taxes as follows:
<Table>
<Caption>
Six Months Ended February 28,
-------------------------------------
2002 2001
---------------- ----------------
Gross profit of reportable segments $ 910,828 $ 909,387
Other expenses 3,499,218 4,367,733
---------------- ----------------
Loss from operations (2,588,390) (3,458,346)
Other Income/(Expense)
Interest income/other (398,719) 3,312
Interest expense (78,962) (217,904)
Income (Loss) from discontinued operations (185,382) 148,081
Loss from disposal of assets of discontinued
operations (111,649) -
---------------- ----------------
Net Loss $ (3,363,102) $ (3,524,857)
================ ================
</Table>
Revenues totaled $3,025,690 for the six months ended February 28,
2002, which is a 4% decrease compared to revenues from the six
months, ended February 28, 2001. Revenues from the healthcare
segment for the six months ended February 28, 2002 totaled
$1,121,450 and expenses totaled $1,306,832, which are shown net
as results from discontinued operations. Gross profit for the six
months ended February 28, 2002 totaled $910,828 compared to
$909,387 for the six months ended February 28, 2001. Assets
related to the Health Services segment were sold on November 30,
2001 resulting in a loss on disposal of assets of $111,649 which
is reflected as loss from discontinued operations on the
accompanying condensed consolidated statement of operations.
The Company's reportable segment information for the three months
ended February 28, 2002 and 2001 are as follows:
<Table>
<Caption>
Three Months Internet & Print Health Corporate/ Reporting
Ended Technology Publications Services Other Segments
February 28, (discontinued)
------------------ ------------- -------------- -------------- ------------- -------------
Revenues:
2002 $ 741,459 $ 512,233 $ - $ - $ 1,253,692
2001 $ 1,072,542 $ 480,029 $ - $ - $ 1,552,571
Gross Profit:
2002 $ 280,598 $ 158,941 $ - $ - $ 439,539
2001 $ 358,320 $ 124,913 $ - $ - $ 483,233
Loss from
Operations:
2002 $ (277,697) $ (64,479) $ - $ (868,269) $ (1,210,445)
2001 $ (396,101) $ (67,364) $ - $ (239,211) $ (702,676)
Depreciation/
Amortization:
2002 $ 11,697 $ 10,758 $ - $ 197,791 $ 220,246
2001 $ 82,771 $ 23,226 $ - $ 5,684 $ 111,681
Assets:
2002 $ 1,659,193 $ 1,516,266 $ 49,865 $ 665,419 $ 3,890,743
2001 $ 4,155,374 $ 1,488,472 $ 2,442,003 $ 1,181,869 $ 9,267,718
</Table>
18
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table reconciles reportable segment gross profit to
the Company's consolidated loss before income taxes as follows:
<Table>
<Caption>
Three Months Ended February 28,
-------------------------------------
2002 2001
---------------- ----------------
Gross profit of reportable segments $ 439,539 $ 483,233
Other expenses 1,649,984 1,185,909
---------------- ----------------
Loss from operations (1,210,445) (702,676)
Other Income/(Expense)
Interest income/other (408,224) 410
Interest expense (45,336) (184,037)
Income(Loss) from discontinued operations (92,757) 102,089
---------------- ----------------
Net Loss $ (1,756,762) $ (784,214)
================ ================
</Table>
Revenues totaled $1,253,692 for the three months ended February 28,
2002, which is a 19% decrease compared to revenues from the three
months, ended February 28, 2001. Revenues from the healthcare segment
for the three months ended February 28, 2002 totaled $248,948 and
expenses totaled $341,705, which are shown net as results from
discontinued operations. Gross profit for the three months ended
February 28, 2002 totaled $439,539 compared to $483,233 for the three
months ended February 28, 2001, which is a decrease of 9%. Assets
related to the Health Services segment were sold on November 30, 2001
resulting in a loss on disposal of assets of $111,649 which is
reflected as loss from discontinued operations on the accompanying
condensed consolidated statement of operations.
NOTE K CONTINGENCIES
In December 2001 the Company received notice of a lawsuit from Jack
Tompkins requesting the Court to declare the Settlement and Mutual
Release Agreement dated on or about October 5, 2001 to be enforceable
in all of its terms. The lawsuit states that the Company should
deliver collateral consisting of the receivables of PremierCare to J.
P. Morgan Chase ("Chase") for the proposed restructured indebtedness
related to the $550,000 bank loan. The Company proposed alternative
collateral; however, Chase has not accepted. Management and counsel
are evaluating the lawsuit. The Company has not accrued a contingent
liability toward a settlement. In March 2002 the Company received
notice of a lawsuit filed in Federal court by Jack Tompkins alleging
breach of contract, as well as charging the Company to respond to his
allegations of short swing profits by a founder/director. The Company
believes his filing does not meet the standard of proof required, and
is filing a motion to dismiss, as is the founder/director in question.
The Company continues to have positive dialogue with Mr. Tompkins, and
expects to resolve this and other disputes via a settlement within the
near future.
In March 2002 the Company received notice of a lawsuit from Bates
Southwest, a division of Bates Advertising USA, Inc. for failure to
make payments of its professional fees in the amount of $35,793.
Management and counsel are evaluating the claim. The Company has
accrued a $17,500 contingency toward a settlement resulting from
resolution of future negotiations.
In the future we may be party to litigation arising from the ordinary
course of our business. Our insurance coverage may not be adequate to
cover all liabilities arising out of any such claims that may be
initiated in the future. A lack of sufficient insurance coverage may
have an adverse effect on our business, financial condition, and
operating results.
19
<Page>
iEXALT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE L SUBSEQUENT EVENTS
In April 2002, the Company issued 50,300 shares for services with
two consultants and employees. Under the terms of the one year
consulting agreements, the two consultants will receive additional
shares of 30,000 shares upon the expiration of each quarter.
20
Part I -- Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion should be read together with our financial
statements, which are included earlier within this Form 10-QSB. The discussion
contains certain forward-looking statements regarding our expectations for our
business and our capital resources. These expectations are subject to various
uncertainties and risks that may cause actual results to differ significantly
from these forward-looking statements.
General
iExalt blends the positive modern technologies available through the
Internet with traditional media to provide products, services, and Internet
solutions to Christian families, businesses, schools, communities, and
organizations. iExalt currently markets filtered internet service, publishes
Christian electronic books and reference materials, a Christian events magazine,
a Christian business directory, a Christian newspaper, a Christian Preaching
magazine produces a radio program five nights per week, is affiliated with a
youth oriented Christian radio program, operates a comprehensive contemporary
Christian music website, one of the largest speakers bureaus dedicated to
Christian speakers, and an agency that provides Christian artists. In addition,
iExalt sells tickets for Christian events, manages one of the most popular
Christian portal sites, provides access to on-line web based sermon resources
through its web site, and provides, through the Internet, a cutting-edge
information-packed, online monthly newsletter for local youth programs called
the Parent Link. iExalt provided psychiatric counseling services for senior
citizens from the implementation and management of geriatric psychiatric
programs for hospitals and other health facilities through November 30, 2001 at
which time this business segment was sold.
iExalt is a company formed to meet the needs of the Christian community.
Our vision is to reflect Jesus Christ by providing the highest quality Christian
products, services and technology solutions. iExalt's primary goals are as
follows:
o Media: iExalt will acquire, develop and expand our influence
through print, radio, television and the Internet
o Migration: iExalt will migrate each company in the iExalt family
to a Web related strategy
o Market: iExalt will enter fields where we can reasonably
expect to be the dominant entity
o Ministry: iExalt must ensure that each company within the
family of iExalt companies has a ministry focus, and
shares our commitment to the Christian faith
o Monetary: iExalt must create positive returns for our
shareholders
iExalt, Inc., ("iExalt" or "Company"), was originally incorporated as
Louisiana Northern Gas, Inc. a Nevada corporation on April 23, 1979. The name of
the Company was changed to Sunbelt Exploration, Inc. on December 21, 1979. From
1989 until September 1, 1999, the Company had very limited operations. The
Company consummated a merger (hereinafter referred to as the "Merger") on
September 1, 1999 with iExalt, Inc., a Texas corporation incorporated on January
7, 1999, ("iExalt-Texas") whereby the shareholders of iExalt-Texas acquired an
approximate 89% ownership interest in the Company. The Merger has been accounted
for as a reverse takeover with the Company being the surviving legal entity and
iExalt-Texas being the acquirer for accounting purposes. Concurrent with the
Merger, the Company changed its name from Sunbelt Exploration, Inc. to iExalt,
Inc.
On September 19, 2001 the Company received notice that 711.NET, Inc., the
purchaser of certain assets of CleanWeb, filed a petition in bankruptcy and that
the case is pending pursuant to Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the Western District of North Carolina. Notice was
given on March 15, 2002 that the 711.NET Trustee has initiated a proposed sale
and liquidation of the 711.NET assets. The Company recognized impairment charges
both at August 31, 2001 and an additional amount at November 30, 2001. Any
future payments received from 711.NET, if any will be considered income when
received. Also included within the six month period ended February 28, 2002 is a
$105,629 impairment loss related to ListenFirst.com, a subsidiary of the
Company. Although the Company continues to operate ListenFirst.com, other
advertising providers may not be obtained and the Company may be forced to
discontinue these operations in the near future. Management believes no
additional impairment of goodwill and other intangibles is required at this
time.
On November 30, 2001 the Company purchased certain assets of Barnabus
Christian Counseling Network, LLC, an on-line counseling company, for 6,500
shares of the Company's common stock. These assets were consolidated with
PremierCare operations and sold.
21
<Page>
On November 30, 2001 the Company sold certain assets of PremierCare
including the assets related to the Rapha and Barnabus Christian Counseling
Network business to UMC Ten Broeck, Inc. ("Buyer"). Excluded from the asset sale
is PremierCare's cash, accounts receivable, and receivable from related parties.
The Buyer did not assume any liabilities except those liabilities outlined in
the agreement. The purchase price was $1,000,000 cash at closing plus deferred
payments equal to one third of any EBITDA generated by the business in excess of
$500,000 annually for a period of two years following closing. Total payment in
deferred purchase price shall not exceed $750,000 on an annual basis. Excluding
shared services, EBITDA generated by Premier Care/Rapha for fiscal year ending
August 31, 2001 exceeded the targeted EBITDA, however, it is not possible at
this time to determine whether future earnings from the PremierCare assets will
be sufficient to exceed the EBITDA threshold, consequently it is not possible to
determine whether the Company will receive any future payments from this
arrangement. As part of the sale, the Company entered into a shared services
agreement, whereby management of the Company will provide consulting services to
the Buyer during the two-year period. In addition, the Company will provide
advertising and marketing services to the Buyer to promote the growth strategy
of PremierCare for a term of not less than three years. Based on the facts and
circumstances existing at the conclusion of the Company's fiscal year end August
31, 2001 and currently existing, management of the Company is of the opinion
that the service contract has an estimated value of approximately $750,000.
Consequently, some of the goodwill, which represented a portion of the excess
cost paid by the Company over the net book value of PremierCare's assets at the
date purchased by the Company was retained on the Company's books, treated as an
intangible asset and will be amortized over a one-year period, commencing
December 31, 2001, on a straight-line basis. This estimate is subject to
significant near term impairment should future operating results of the sold
operating assets of PremierCare not be sufficient to generate an adequate amount
of earnings.
In December 2001, the Company issued 1,000 shares of its common stock and
$5,000 to acquire the assets related to the "Youth Conference" including but not
limited to the trade names and goodwill of the Youth Conference, all software,
or other electronic information and all physical copies of all data bases to
support the bookings and author relationships including URL's, work in progress,
proformas, and contracts.
In December 2001, the Company issued 5,000 shares of its common stock to
settle all remaining issues with the former owners of PremierCare LLC in regards
to the earn out provisions of the original purchase and sale agreement.
In December 2001, the Company's Board of Directors declared a 50 to one
(50:1) reverse stock split of the Company's common stock. Every 50 shares of
iExalt, Inc. common stock, $0.001 par value per share, was converted to one
share of iExalt, Inc. common stock, $0.05 par value, and each shareholder was
entitled to receive a payment for any fractional shares that result from the
split. In addition, all holders of options or warrants to purchase future shares
of the Company's common stock were also reduced on an equal basis of 50 to one.
Accordingly, the Company has presented all equity information as if the reverse
stock split had occurred effective September 1, 2000. The new stock symbol is
IEXA and CUSIP number is 451691208. The Company for voting, distribution, or
other purposes will not recognize certificates representing the pre-split
shares. Old certificates must be replaced with new certificates.
In February 2002, the Company filed a Form S-8 with the Securities and
Exchange Commission to register 240,000 of newly issued shares of the Company's
common stock. The shares were issued as compensation for specific consulting and
legal services.
In February 2002, the Company purchased Preaching Resources, Inc., a
reference magazine for leaders within the Christian community and an on-line
Internet site, for 25,000 shares of the Company's common stock and $9,500. The
Company's acquisition strategy has been to acquire, develop and manage a large
channel of media (print, radio, software and Internet). The acquisition of
Preaching Resources, Inc. is expected to increase the Company's presence and
marketing potential in the Christian media market through its subscriber base.
The founder and editor of Preaching Resources, Inc. will remain as President and
CEO, and will be entitled to a cash and stock bonus based on the achievement of
certain performance objectives. The quarterly cash bonus will be equal to 50% of
the net income derived from Preaching Magazine up to the first $40,000 of
annualized net income, and 25% of the next $40,000 in annualized net income, and
10% of all annualized net income greater than the initial $80,000 of annualized
net income, as calculated using generally accepted accounting principles. The
stock bonus will be
22
<Page>
equal to 1,500 shares of the Company's common stock, $.05 par value, for each
1,000 paid subscribers to Preaching Magazine in excess of 5,000 paid
subscribers, as of February 28, 2003.
iExalt has a limited operating history upon which an evaluation of
business results can be based. The company is involved in a dynamic and rapidly
developing technology and is attempting to incorporate the tremendous power of
the Internet to market its products and services while seeking to generate
revenues from its internet portal through advertising and sponsorship. Partnered
with its technology efforts, iExalt is also providing products and services
through various channels. The risk and rewards associated with start-up ventures
or early developmental companies like iExalt are often volatile. iExalt has
incurred significant net losses since its inception and expects to continue to
operate at a loss unless its companies can generate revenues in excess of
expenditures at a future date. As of February 28, 2002 iExalt has experienced a
cumulative deficit of $20,513,892 comprised of both cash and non-cash
components. Although management's plans may not be successful, it has been
determined that the Company will emphasize the monetary goal, and to that end,
will execute plans that may increase revenues while simultaneously seeking
acquisitions that add immediate positive value to earnings. The Company's
deficit working capital, its lack of access to the debt and equity markets, and
its small market cap among other things significantly limits the Company's
ability to successfully attract quality merger and acquisition candidates.
Results of Operations
Our operating units are grouped into three business segments based on
types of service and delivery media: (1) Internet & Technology Applications, (2)
Print Publications, and (3) Healthcare Services. Internet & Technology
Applications consist of CleanWeb, iExalt.com (portal), Electronic Publishing,
ChristianSpeakers.com, ListenFirst.com, Global Christian Network,
ChristianArtists.com, Gilmore Marketing, iSermons, the ParentLink, and Life
Perspectives radio. Print Publications consist of Christian Happenings,
Christian Times, Preaching Resources, and Christian Blue Pages. Healthcare
Services consisted of the counseling programs of PremierCare, Rapha and Barnabus
that were sold on November 30, 2001.
Net loss for the six months ended February 28, 2002 totaled $3,363,102
compared to a net loss of $3,524,857 for the six months ended February 28, 2001.
The loss for the six months ended February 28, 2002 includes significant
non-cash expenses totaling $1,844,754 compared to $1,753,987 for the six months
ended February 28, 2001. The non-cash expenses for the six months ended February
28, 2002 are related to impairment of CleanWeb and ListenFirst.com assets,
depreciation, amortization, common stock shares issued for services, stock
options or warrants that were issued and loss on disposition of assets. The
non-cash expenses for the six months ended February 28, 2001 were related to
business disposals during September 2000, depreciation, amortization, common
stock shares issued for services, and stock options and warrants that were
issued. Excluding these non-cash expenses, the loss for the six months ended
February 28, 2002 was $1,518,348 compared to $1,770,870 for the six months ended
February 28, 2001. Net loss for the quarter ended February 28, 2002 totaled
$1,756,762 compared to a net loss of $784,214 for the same quarter in fiscal
2001.
Revenues
Internet & Technology Applications generate revenues from product sales,
speaker fees, artists fees, subscriptions, user fees, and advertising. Revenues
for Print Publications consist of advertising, subscriptions, and ticket service
fees. Healthcare Services revenues were earned from hospitals for providing
services in accordance with our contracts. Total revenues from continuing
operations were $3,025,690 for the six months ended February 28, 2002 compared
with $3,148,355 for the six months ended February 28, 2001. The decrease in
revenues within the Internet and Technology Applications segment is primarily
due to the disposal of Clean Web. The increase in revenues within the Print
Publications segment is primarily due to the acquisition of Preaching Resources,
Inc. and increased advertising sales at Christian Happenings. Revenues from the
healthcare segment for the six months ended February 28, 2002 totaled
$1,121,450, which are shown net of expenses as loss from discontinued operations
in the financial statements. Revenues for continuing operations by segment for
the two periods are as follows:
23
<Page>
<Table>
<Caption>
Six Months Ended February 28,
-------------------------------------------------------------
2002 2001
---------------------------- -------------------------
REVENUES Amount Percent Amount Percent
------ ------- ------ -------
Internet and Technology Applications $ 2,014,096 67% $ 2,195,770 70%
Print Publications 1,011,594 33% 952,585 30%
---------------------------- -------------------------
3,025,690 100% 3,148,355 100%
============================ =========================
</Table>
Total revenues from continuing operations were $1,253,692 for the three
months ended February 28, 2002 compared with $1,552,571 for the three months
ended February 28, 2001. The decrease in revenues for the Internet and
Technology Applications segment is primarily due to the disposal of Clean Web.
The increase in revenues within the Print Publications segment is primarily due
to the acquisition of Preaching Resources, Inc. Revenues for continuing
operations by segment for the two periods are as follows:
<Table>
<Caption>
Three Months Ended February 28,
-------------------------------------------------------------
2002 2001
---------------------------- -------------------------
REVENUES Amount Percent Amount Percent
------ ------- ------ -------
Internet and Technology Applications $ 741,459 59% $ 1,072,542 69%
Print Publications 512,233 41% 480,029 31%
---------------------------- -------------------------
1,253,692 100% 1,552,571 100%
============================ =========================
</Table>
Cost of Sales and Services
Cost of Sales and Services for Internet & Technology Applications includes
royalties, direct labor, payments to speakers and artists, Internet
connectivity, and communications costs. Cost of Sales and Services for Print
Publications consists of printing, shipping, delivery, credit card fees and
direct labor. Cost of sales and services from the healthcare segment for the six
months ended February 28, 2002 totaled $852,478, which are shown net as loss
from discontinued operations in the financial statements. The Cost of Sales and
Services was $2,114,862 for the six months ended February 28, 2002 compared with
$2,238,968 for the six months ended February 28, 2001. The decrease in Cost of
Sales within the Internet and Technology Applications segment is primarily due
to the disposal of Clean Web. The increase in Cost of Sales within the Print
Publications segment is primarily due to the expansion of Christian Times
newspaper circulation. Cost of Sales and Services by segment for the two periods
are as follows:
<Table>
<Caption>
Six Months Ended February 28,
-------------------------------------------------------------
2002 2001
---------------------------- -------------------------
COST OF SALES AND SERVICES Amount Percent Amount Percent
------ ------- ------ -------
Internet and Technology Applications $ 1,388,946 66% $ 1,581,145 71%
Print Publications 725,916 34% 657,823 29%
---------------------------- -------------------------
2,114,862 100% 2,238,968 100%
============================ =========================
</Table>
The Cost of Sales and Services was $814,153 for the three months ended
February 28, 2002 compared with $1,069,338 for the three months ended February
28, 2001. The decrease in Cost of Sales within the Internet and Technology
Applications segment is primarily due to the disposal of Clean Web. Cost of
Sales and Services by segment for the two periods are as follows:
24
<Page>
<Table>
<Caption>
Three Months Ended February 28,
-------------------------------------------------------------
2002 2001
---------------------------- -------------------------
COST OF SALES AND SERVICES Amount Percent Amount Percent
------ ------- ------ -------
Internet and Technology Applications $ 460,861 57% $ 714,222 67%
Print Publications 353,292 43% 355,116 33%
---------------------------- -------------------------
814,153 100% 1,069,338 100%
============================ ==========================
</Table>
Selling, General and Administrative
Selling, General and Administrative costs for Internet & Technology
Applications primarily include personnel and advertising costs. Selling, General
and Administrative costs for Print Publications consist of personnel and
communication services. Healthcare Selling, General and Administrative costs are
primarily personnel, travel and transportation. Corporate overhead costs are
primarily professional fees, costs of issuing stock options and warrants and
costs of issuing shares for services.
Selling, General and Administrative costs were $1,363,720 for the six
months ended February 28, 2002 compared with $3,078,576 for the six months ended
February 28, 2001. Selling, General and Administrative costs for the six months
ended February 28, 2001 were abnormally high due to stock options granted for
services and marketing. Additionally, $130,897 in SG&A expense for PremierCare
and Rapha for the six months ended February 28, 2002 was included in loss from
discontinued operations, which is shown net in the financial statements.
Selling, General and Administrative costs by segment for the two periods are as
follows:
<Table>
<Caption>
Six Months Ended February 28,
-------------------------------------------------------------
2002 2001
---------------------------- -------------------------
SELLING, GENERAL, AND ADMINISTRATIVE Amount Percent Amount Percent
------ ------- ------ -------
Internet and Technology Applications $ 501,512 37% $ 744,986 24%
Print Publications 184,777 14% 160,551 5%
Corporate Overhead 677,431 49% 2,173,039 71%
---------------------------- -------------------------
1,363,720 100% 3,078,576 100%
============================ =========================
</Table>
Selling, General and Administrative costs were $744,374 for the three
months ended February 28, 2002 compared with $591,612 for the three months ended
February 28, 2001. Selling, General and Administrative costs by segment for the
two periods are as follows:
<Table>
<Caption>
Three Months Ended February 28,
-------------------------------------------------------------
2002 2001
---------------------------- -------------------------
SELLING, GENERAL, AND ADMINISTRATIVE Amount Percent Amount Percent
------ ------- ------ -------
Internet and Technology Applications $ 279,601 38% $ 383,052 65%
Print Publications 91,540 12% 73,070 12%
Corporate Overhead 373,233 50% 135,490 23%
---------------------------- -------------------------
744,374 100% 591,612 100%
============================ =========================
</Table>
Payroll costs were $1,181,732 for the six months ended February 28, 2002
compared with $963,474 for the six months ended February 28, 2001. For the three
months ended February 28, 2002, payroll costs were $591,926 compared with
$482,616 for the three months ended February 28, 2001. The increase in payroll
costs is primarily due to the addition of salaries for the employees retained
from the sale of PremierCare. Additionally, $308,751 in
25
<Page>
payroll costs for PremierCare and Rapha for the six months ended February 28,
2002 were included in loss from discontinued operations, which is shown net
in the financial statements.
During the second quarter ended February 28, 2002, the Company sold its
investment in Sonora Hospital for $50,000 which is included in accounts
receivable from affiliate as of February 28, 2002. The Company recognized a
loss on asset disposal of $93,438 from the sale. In the same quarter, the
Company canceled a consulting agreement with Halden, Moseley, and Woods. The
balance of deferred compensation in connection with this consulting agreement
was written off by the Company totaling $377,813, which is included in other
expenses.
Liquidity and Capital Resources
As of February 28, 2002, iExalt had $964,519 in current assets, $4,333,903
in current liabilities and a retained deficit of $20,513,892. The Company had a
net loss of $3,363,102 for the six months ended February 28, 2002. Net cash used
by operating activities for the period was $846,403. The Company also has
$1,245,000 in debt that is either in default for lack of payment or which demand
for payment has been made.
The Company entered into the following transactions during the three
months ended February 28, 2001 to continue to finance its working capital
requirements, fund operations and service existing debt obligations.
In February 2001, the Company negotiated two loans, each in the amount of
$90,000. The Company issued 25,714 restricted shares of its common stock in
payment of one of the loans in October 2001. In December 2001, the Company
resolved the outstanding balance of the other loan by issuing 15,000 restricted
shares of its common stock.
On February 16, 2001, the Company agreed to issue $180,000 in the form of
a non-interest bearing convertible debenture. The debenture agreement provides
for conversion of $90,000 of the principal for shares with a conversion price of
$9.00 per share, is secured by existing and future accounts receivable of
PremierCare along with a guarantee from a shareholder, and matured on April 15,
2001. Additional consideration was issued in the form of warrants for the
purchase of up to 20,000 of the Company's common shares as follows; 16,363 at an
exercise price of $5.50 and 3,636 shares at an exercise price of $9.00. The
debenture holder subsequently agreed to extend the due date to July 15, 2002.
The Company has agreed to make twelve monthly payments of $16,164.39 with the
first installment due August 15, 2001 including 14% interest per annum, change
the debenture conversion provision to $5.50 per share, and change the exercise
price related to the warrants for the purchase of up to 20,000 shares to $5.50
per share. In December 2001, the Company repaid the loan in full.
On June 5, 2001, the Company agreed to issue $100,000 in the form of a
convertible debenture. The debenture bears interest payable monthly of 450 of
the Company's restricted common shares, provides for conversion of $25,000 of
the principal for common shares with a conversion price of $4.00 per share,
allows for a placement fee of 2,000 of the Company's restricted common shares if
funds are delivered prior to June 30, 2001, and matures on December 31, 2001.
The conversion was exercised related to the $25,000 and a total of 6,410 of the
Company's restricted common shares were paid to the debenture holder along with
5,150 common shares related to the placement fee and interest. In December 2001,
the Company repaid the loan.
On August 14, 2001, the Company entered into $140,000 loan agreement with
Cresson Productions, Inc. Borrowings are to be repaid within six months of
funding and bear interest at 11%. As additional consideration, the Company
issued warrants for 8,400 shares of the Company's common stock at an exercise
price of $3.50 related to transaction placement fees. The warrants are vested
and have a five-year term. The Company has the option to repay the principal and
interest with cash or shares of the Company's common stock which shares will be
valued at the lesser of $10.00 per share or 75% of the average of the stock's
closing price in the previous 5 trading days. The Company ultimately borrowed
$131,000 from the loan facility and in February, 2002 the Company repaid the
loan by issuing 83,161 restricted shares of its common stock to the debenture
holder.
On November 8, 2001, the Company entered into a $50,000 promissory note
agreement. The loan bears interest at 14% and is payable in twelve monthly
installments or in full upon the closing of the PremierCare asset sale. In
December 2001, the Company repaid the loan in full.
26
<Page>
On November 12, 2001, the Company entered into a $100,000 promissory note
agreement. The loan bears interest at 14% and is payable in full within one
month or upon the closing of the PremierCare asset sale. In December 2001, the
Company repaid the loan in full.
In December 2001, the Company received $1,000,000 in cash from the sale of
the PremierCare subsidiary assets. The cash was used to finance operations,
repay certain debt and accounts payable.
On January 16, 2002, the Company agreed to issue $100,000 in the form of a
convertible debenture. The debenture bears interest at 14%, provides for
conversion of the principal and interest for the Company's common shares with a
conversion price of $0.49, provides for an additional amount of ten percent of
the total restricted shares issued if funds are delivered by January 31, 2002,
and matures on July 16, 2002.
On February 1, 2002, the Company agreed to issue $80,000 in the form of a
convertible debenture. The debenture bears interest at 8%, provides for
conversion of the principal and interest for the Company's common shares with a
conversion price of $0.50, and matures on August 1, 2002.
On February 14, 2002, the Company agreed to issue $70,000 in the form of a
convertible debenture. The debenture bears interest at 8%, provides for
conversion of the principal and interest for the Company's common shares with a
conversion price of $0.525, settles any and all disputes which may have arisen
out of the issuance of warrants dated September 20, 2000 assigned to Balallan
Limited from Travin Investments, LLC, and matures on November 14, 2002.
On February 20, 2002, the Company agreed to issue $100,000 in the form of
a convertible debenture. The debenture bears interest at 8%, provides for
conversion of the principal and interest for the Company's common shares with a
conversion price of $0.39, provides for an additional amount of ten percent of
the total restricted shares issued if funds are delivered by February 28, 2002,
and matures on August 20, 2002. Russell Ivy, the Company's Chief Operating
Officer is a principal of the company that holds the note.
Our working capital requirements vary from quarter to quarter, depending
on revenues, operating expenses, capital expenditures and other factors. Working
capital is critical to our on-going business and from inception has been
provided primarily through external investment instead of cash flow from the
various businesses. Since inception, we have experienced negative cash flow and
expect this to continue unless significant increases to revenue from operations
or additional profitable acquisitions along with further cost reductions are
realized. The Company is currently dependent upon financing from external
sources to remain in business and is anticipated to remain dependent at least
through the end of fiscal 2002. Consequently, it is not expected that the
internal source of liquidity will improve unless operating activities provide
significant net cash, and until such time, we will need to rely upon external
sources for liquidity.
We have not entered into any arrangements with any other financial
institutions or third parties to provide additional financing. If we are unable
to maintain adequate working capital in the amounts desired and on acceptable
terms, we may be required to reduce the scope of our presently anticipated
activities and we may not be able to assure continuation as a going concern.
Our financial statements are prepared using principles applicable to a
going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. We may in the future experience
significant fluctuations in our results of operations. Such fluctuations may
result in volatility in the price and/or value of our common stock. Shortfalls
in revenues may adversely and disproportionately affect our results of
operations because a high percentage of our operating expenses are relatively
fixed. Accordingly, we believe that period-to-period comparisons of results of
operations should not be relied upon as an indication of future results of
operations.
FORWARD LOOKING INFORMATION
This report on Form 10-QSB includes "forward-looking statements" within
the meaning of SECTION 27A of the Securities Act of 1933 and SECTION 21E of the
Securities Exchange Act of 1934. These forward-looking statements may relate to
such matters as anticipated financial performance, future revenues or earnings,
business
27
<Page>
prospects, projected ventures, new products and services, anticipated market
performance and similar matters. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. To comply with
the terms of the safe harbor, we caution readers that a variety of factors
could cause our actual results to differ materially from the anticipated
results or other matters expressed in our forward-looking statements. These
risks and uncertainties, many of which are beyond our control, include (i)
the sufficiency of our existing capital resources and our ability to raise
additional capital to fund cash requirements for future operations, (ii)
uncertainties involved in the rate of growth and acceptance of the Internet,
(iii) adoption by the Christian community of electronic technology for
gathering information, facilitating e-commerce transactions, and providing
new products, websites, and services, (iv) volatility of the stock market,
particularly within the technology sector, and the ability to use our capital
stock as a currency for acquisitions, (v) general economic conditions, (vi)
acts or threats of war, terrorism and the effects of such acts of or threats
on the Company, (vii) the success or failure of management's efforts to
implement the business strategy, (viii) the ability to develop profitable
operations, (ix) the ability to attract and retain quality employees, and (x)
other risks, which may be described in future filings with the SEC. Although
we believe that the expectations reflected in these forward-looking
statements are reasonable, the expectations reflected in these
forward-looking statements may prove to be incorrect.
We cannot guarantee any future results, levels of activity, performance or
achievements. Except as required by law, we undertake no obligation to update
any of the forward-looking statements in this Form 10-QSB after the date of this
report.
Part II - Item 1. Legal
See Note K to the Consolidated Condensed Financial Statements which is
incorporated herein in response to this item.
Part II - Item 2. Changes in Securities
The following transactions involving unregistered securities occurred
during the three months ended February 28, 2002, in transactions in which the
Company relied on the exemption from registration available under SECTION 4(2)
of the Securities Act of 1933, as amended:
In December 2001, the Company issued 1,000 shares of its common stock and
$5,000 to acquire the assets related to the "Youth Conference" including but not
limited to the trade names and goodwill of the Youth Conference, all software,
or other electronic information and all physical copies of all data bases to
support the bookings and author relationships including URL's, work in progress,
proformas, and contracts.
In December 2001, the Company issued 15,000 shares of its common stock for
payment in full of any obligation related to the remaining $90,000 bridge loan
provided by TCA Investments.
In December 2001, the Company issued 5,000 shares of its common stock for
settlement with the former owners of PremierCare LLC in regards to the earn out
provisions of the original purchase and sale agreement.
In February 2002 the Company purchased Preaching Resources, Inc., a
reference magazine for leaders within the Christian community and an on-line
Internet site for 25,000 shares of the Company's common stock and $9,500.
In December 2001, the Company issued 83,161 shares of its common stock for
payment in full of any obligation related to the convertible debenture held by
Cresson Productions Inc.
During the three months ended February 28, 2002, we did not grant any new
options or warrants for the Company's common stock.
28
<Page>
Part II - Item 3. Defaults Upon Senior Securities
The Company is currently in default on the payment of principal under a
$550,000 note payable to a bank. The bank has provided forbearance and the
Company continues to accrue interest payments. The Company is working with the
bank to develop a mutually agreeable plan to repay the debt.
Part II - Item 4. Submission of Matters to a Vote of Security Holders
The Company held the annual meeting of stockholders on March 22, 2002.
The following directors were elected to serve for a one-year term and
until their successors are elected and qualified.
<Table>
<Caption>
NAME VOTES FOR VOTES AGAINST VOTES WITHHELD
---- --------- ------------- --------------
Donald W. Sapaugh 652,335 405 18,590
Hunter M. A. Carr 652,002 3,051 18,590
Victoria R. A. Carr 652,002 3,052 18,590
Morris H. Chapman 652,002 2,735 18,590
Dane B. West 652,335 400 18,590
Raymond Corson 652,335 400 18,590
James A. Ryffel 652,335 404 18,590
</Table>
The proposal to amend the Articles of Incorporation to increase the number
of authorized common shares to 100,000,000 shares was approved by a vote For of
656,588, Against 10,301, and with 4,436 abstaining.
The proposal to amend the 1998 Stock Option Plan so that the maximum total
of stock option grants available to be issued from the plan will equal five
percent of the authorized common shares was approved by a vote For of 656,979,
Against 11,049, and with 3,297 abstaining.
The proposal to amend the Directors' Stock Option Plan so that the maximum
total of stock option grants available to be issued from the plan will equal one
percent of the authorized common shares and so that stock option grants for each
Director totals 5,000 annually was approved by a vote For of 659,250, Against
10,806, and with 1,269 abstaining.
The proposal to ratify the selection of Harper & Pearson Company as
independent auditors for the fiscal year ending August 31, 2002 was approved by
a vote For of 652,117, Against 2,012, and with 17,196 abstaining.
Part II - Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<Table>
<Caption>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
3.1 Restated Articles of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Quarterly Report on Form 10-QSB for the quarter
ending February 29, 2000, as filed with the Commission on April 14,
2000, is incorporated herein by reference).
3.2 Amended Bylaws of the Company as adopted on April 24, 1979 (filed as
Exhibit 3.2 to the Company's Quarterly Report on Form 10-QSB for the
quarter ending February 29, 2000, as filed with the Commission on
April 14, 2000, is incorporated herein by reference).
3.3 * Certificate of Amendment to Articles of Incorporation For Nevada
Profit Corporations filed subsequent to the annual meeting of
shareholders on March 22, 2002.
29
<Page>
3.4 * Amendment to the 1998 Stock Option Plan as adopted on March 22,
2002.
3.5 * Amendment to the Director's Stock Option Plan as adopted on
March 22, 2002.
4.1 Registration Rights Agreement dated June 28, 2000 (filed as Exhibit
4.1 to the Company's Current Report on Form 8-K, as filed with the
Commission on July 26, 2000, is incorporated herein by reference).
4.2 First Addendum to Registration Rights Agreement, dated June 30, 2000
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K,
as filed with the Commission on July 27, 2000, is incorporated
herein by reference).
4.3 Investor's Rights Agreement, dated October 24, 2000 by and among
iExalt, Inc., certain shareholders of iExalt, and Ted L. Parker
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K,
as filed with the Commission on November 8, 2000, is incorporated
herein by reference).
4.4 Convertible Debenture issued to TCA Investments, Inc. on September
20, 2000 (filed as Exhibit 4.4 to the Company's Annual Report on
Form 10-KSB for the year ended August 31, 2000, is incorporated
herein by reference).
4.5 Convertible Debenture issued to Travin Partners LLLP on September
20, 2000 (filed as Exhibit 4.5 to the Company's Annual Report on
Form 10-KSB for the year ended August 31, 2000, is incorporated
herein by reference).
4.6 Warrants issued to TCA Investments, Inc. on September 20, 2000
(filed as Exhibit 4.6 to the Company's Annual Report on Form 10-KSB
for the year ended August 31, 2000, is incorporated herein by
reference).
4.7 Warrants issued to Travin Partners LLLP September 20, 2000 (filed as
Exhibit 4.7 to the Company's Annual Report on Form 10-KSB for the
year ended August 31, 2000, is incorporated herein by reference).
4.8 Letter Agreement between iExalt, Inc. and Consulting & Strategy
International LLC dated September 25, 2000 (filed as Exhibit 4.1 to
the Company's Form S-8 as filed with the Commission on October 6,
2000, is incorporated herein by reference).
4.9 Registration Rights Agreement dated November 1, 2000 between iExalt,
Inc. and PsyCare America LLC. (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K, as filed with the Commission on February
23, 2001, is incorporated herein by reference).
4.10 Convertible Debenture issued to Thomson Kernaghan & Co., Ltd. on
December 11, 2000 (filed as Exhibit 4.8 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended February 28, 2001, is
incorporated herein by reference).
4.11 Registration Rights Agreement dated December 11, 2000 between
iExalt, Inc. and Thomson Kernaghan & Co., Ltd. (filed as Exhibit
4.9 to the Company's Quarterly Report on Form 10-QSB for the quarter
ended February 28, 2001, is incorporated herein by reference).
4.12 Warrant issued to Thomson Kernaghan & Co., Ltd. on December 11,
2000. (filed as Exhibit 4.10 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended February 28, 2001, is incorporated
herein by reference).
4.13 Convertible Debenture issued to Ignatius Leonards on February 15,
2001. (filed as Exhibit 4.11 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended February 28, 2001, is incorporated
herein by reference).
30
<Page>
4.14 Warrant issued to Woodcrest Capital II Limited Partnership on
February 23, 2001. (filed as Exhibit 4.13 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended February 28, 2001, is
incorporated herein by reference).
4.15 Warrant issued to Woodcrest Capital, L.L.C. on February 23, 2001.
(filed as Exhibit 4.14 to the Company's Quarterly Report on Form
10-QSB for the quarter ended February 28, 2001, is incorporated
herein by reference).
4.16 Registration Rights Agreement dated February 23, 2001 between
iExalt, Inc. and Woodcrest Capital II Limited Partnership and
Woodcrest Capital, L.L.C. (filed as Exhibit 4.15 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended February 28,
2001, is incorporated herein by reference).
4.17 Convertible Debenture issued to Don Ballard on June 5, 2001. (filed
as Exhibit 4.16 to the Company's Quarterly Report on Form 10-QSB for
the quarter ended May 31, 2001, is incorporated herein by
reference).
4.18 Convertible Debenture issued to Randy James on June 5, 2001. (filed
as Exhibit 4.17 to the Company's Quarterly Report on Form 10-QSB for
the quarter ended May 31, 2001, is incorporated herein by
reference).
4.19 Warrant issued to Cresson Productions, Inc. on August 14, 2001.
(filed as Exhibit 4.19 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended August 31, 2001, is incorporated herein
by reference).
4.20 Letter agreement to amend the convertible debenture, warrant, and
registration rights agreement issued to Ignatius Leonards dated
November 8, 2001. (filed as Exhibit 4.20 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended November 30, 2001, is
incorporated herein by reference).
10.1 Exchange Agreement among the Company, iExalt, Inc.-Texas, and the
Shareholders of iExalt, Inc.-Texas dated August 12, 1999 (filed as
Exhibit 1.1 to the Company's Current Report on Form 8-K, as filed
with the Commission on September 14, 1999, is incorporated herein by
reference).
10.2 Company's Directors' Stock Option Plan (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K, as filed with the Commission
on September 14, 1999, is incorporated herein by reference).
10.3 Company 1998 Stock Option Plan (filed as Exhibit 2.2 to the
Company's Current Report on 8-K, as filed with the Commission on
September 14, 1999, is incorporated herein by reference).
10.4 Contract for Sale and Purchase of Wordcross Enterprises, Inc.
between the Company and Wordcross Enterprises, Inc. d/b/a Christian
Happenings dated October 1, 1999 (filed as Exhibit 1.1 to the
Company's Current Report on Form 8-K, as filed with the Commission
on October 15, 1999, is incorporated herein by reference).
10.5 Services Agreement between Consulting & Strategy International, Inc.
and the Company (filed as Exhibit 10.4 to the Company's Annual
Report on Form 10-KSB for the period ending August 31, 1999, as
filed with the Commission on November 29, 1999, is incorporated
herein by reference).
10.6 Stock Purchase Agreement between the Company and Christian Speakers,
Inc. dated December 1, 1999 (filed as Exhibit 1.1 to the Company's
Current Report on Form 8-K, as filed with the Commission on December
16, 1999, is incorporated herein by reference).
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10.7 Stock Purchase Agreement between the Company and First Choice
Marketing, Inc. dated December 31, 1999 (filed as Exhibit 1.1 to the
Company's Current Report on Form 8-K, as filed with the Commission
on January 28, 2000, is incorporated herein by reference).
10.8 Agreement and Plan of Reorganization, dated June 28, 2000, among
iExalt, Inc. and its Merger Subsidiaries and PremierCare, LLC and
its Direct and Indirect Members (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K, as filed with the Commission
on July 26, 2000, is incorporated herein by reference).
10.9 Agreement and Plan of Merger, dated June 28,2000,among iExalt, Inc.,
PCII Combination Corp., and PremierCare Investors, Inc. (filed as
Exhibit 2.2 to the Company'sCurrentReport on Form 8-K, as filed with
the Commission on July 26, 2000, is incorporated herein by
reference).
10.10 Agreement and Plan of Merger, dated June 28,2000, among iExalt,
Inc., PBH Combination Corp.,and Premier Behavioral Healthcare, Inc.
(filed as Exhibit 2.3 to the Company's Current Report on Form 8-K,
as filed with the Commission on July 26, 2000, is incorporated
herein by reference).
10.11 Agreement and Plan of Reorganization, dated June 30, 2000, among
iExalt, Inc., KCG Combination Corp., and Keener Communications Group
and its Shareholders (filed as Exhibit 2.1 to the Company's Current
Report on Form 8-K, as filed with the Commission on July 27, 2000,
is incorporated herein by reference).
10.12 Agreement of Merger, dated June 30, 2000, among iExalt, Inc., KCG
Combination Corp., and Keener Communications Group (filed as
Exhibit 2.2 to the Company's Current Report on Form 8-K, as filed
with the Commission on July 27, 2000, is incorporated herein by
reference).
10.13 Stock Purchase Agreement, dated September 27, 2000, between iExalt,
Inc. and iExalt Financial Services, Inc. (filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K, as filed with the
Commission on October 12, 2000, is incorporated herein by
reference).
10.14 Stock Exchange Agreement, dated October 24, 2000, between iExalt,
Inc. and Ted L. Parker, the sole shareholder of Cleanweb, Inc.
(filed as Exhibit 2.1 to the Company's Current Report on Form 8-K,
as filed with the Commission on November 8, 2000, is incorporated
herein by reference).
10.15 Employment Agreement dated November 27, 2000 between iExalt, Inc.
and Chris L. Sisk. (filed as Exhibit 10.4 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended February 28, 2001, is
incorporated herein by reference).
10.16 Amended and Restated Asset Purchase Agreement, dated February 12,
2001, between iExalt, Inc. and PsyCare America LLC. (filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K, as filed
with the Commission on February 23, 2001, is incorporated herein by
reference).
10.17 Agreement and Plan of Reorganization, dated November 30, 2000,
between iExalt, Inc., GCN Combination Corp. and Global Christian
Network, Inc. and its Principal Shareholders. (filed as Exhibit 2.1
to the Company's Current Report on Form 8-K, as filed with the
Commission on March 13, 2001, is incorporated herein by reference).
10.18 Plan of Merger, dated November 30, 2000, between iExalt, Inc., GCN
Combination Corp. and Global Christian Network, Inc. (filed as
Exhibit 2.2 to the Company's Current Report on Form 8-K, as filed
with the Commission on March 13, 2001, is incorporated herein by
reference).
10.19 Plan Asset Purchase Agreement, dated December 12, 2000, between
iExalt, Inc. and Barry Wineroth trustee for the Showcase Financial
Services, Inc. Profit Sharing Plan. (filed as Exhibit 2.3 to the
Company's Current Report on Form 8-K, as filed with the Commission
on March 13, 2001, is incorporated herein by reference).
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10.20 Written Consent of Contingent Closing of Global Christian Network,
Inc., iExalt, Inc., David Fritsche, GCN Combination Corp. & Princ.
Shareholders. (filed as Exhibit 2.4 to the Company's Current Report
on Form 8-K, as filed with the Commission on March 13, 2001, is
incorporated herein by reference).
10.21 Demand Note dated November 22, 2000 issued to Hunter M.A. Carr.
(filed as Exhibit 10.10 to the Company's Quarterly Report on Form
10-QSB for the quarter ended February 28, 2001, is incorporated
herein by reference).
10.22 Demand Note dated November 22, 2000 issued to Morris Chapman. (filed
as Exhibit 10.11 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended February 28, 2001, is incorporated herein by
reference).
10.23 Demand Note dated November 22, 2000 issued to Donald Sapaugh. (filed
as Exhibit 10.12 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended February 28, 2001, is incorporated herein by
reference).
10.24 Demand Note dated November 22, 2000 issued to Donald Sapaugh. (filed
as Exhibit 10.13 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended February 28, 2001, is incorporated herein by
reference).
10.25 Loan Agreement dated February 23, 2001 between iExalt, Inc. and
Woodcrest Capital II Limited Partnership. (filed as Exhibit 10.14
to the Company's Quarterly Report on Form 10-QSB for the quarter
ended February 28, 2001, is incorporated herein by reference).
10.26 Warrant issued to James W. Christian on March 21, 2001. (filed as
Exhibit 10.15 to the Company's Quarterly Report on Form 10-QSB for
the quarter ended February 28, 2001, is incorporated herein by
reference).
10.27 Stock Purchase Agreement issued to Don Ballard on July 3, 2001.
(filed as Exhibit 10.16 to the Company's Quarterly Report on Form
10-QSB for the quarter ended May 31, 2001, is incorporated herein by
reference).
10.28 Stock Purchase Agreement issued to Randy James on July 16, 2001.
(filed as Exhibit 10.17 to the Company's Quarterly Report on Form
10-QSB for the quarter ended May 31, 2001, is incorporated herein by
reference).
10.29 Employment Agreement dated February 28, 2001 between iExalt, Inc.
and Russell Ivy. (filed as Exhibit 10.29 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended August 31, 2001,
is incorporated herein by reference).
10.30 Loan Agreement dated August 14, 2001 between iExalt, Inc. and
Cresson Productions, Inc. (filed as Exhibit 10.30 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended August 31,
2001, is incorporated herein by reference).
10.31 Purchase and Sale Agreement dated May 31, 2001 between iExalt, Inc.
and 711.NET, Inc. (filed as Exhibit 2.4 to the Company's Current
Report on Form 8-K, as filed with the Commission on June 8, 2001,
is incorporated herein by reference).
10.32 Purchase and Sale Agreement dated November 28, 2001 between iExalt,
Inc. and UMC Ten Broeck. (filed as Exhibit 10.32 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended August 31,
2001, is incorporated herein by reference).
10.33 Promissory Note dated November 8, 2001 between iExalt, Inc. and I.
Leonards. (filed as Exhibit 10.33 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended November 30, 2001, is
incorporated herein by reference).
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10.34 Promissory Note dated November 12, 2001 between iExalt, Inc. and
JAK Unlimited Ltd. (filed as Exhibit 10.34 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended November 30,
2001, is incorporated herein by reference).
</Table>
-----------------
*Filed herewith.
(b) Reports on Form 8-K and Form 8-K/A filed during the three months
ended February 28, 2002:
Form 8-K filed on December 11, 2001, reporting the sale by the
Company of certain assets owned by the Company's subsidiary
PremierCare LLC.
Form 8-K filed on December 28, 2001, reporting the Company's Board
of Directors approval of a 50 to one reverse stock split, effective
as of December 28, 2001.
34
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IEXALT, INC.
April 12, 2002 /s/ Donald W. Sapaugh
------------------------------------------
Donald W. Sapaugh, CEO/Chairman/
President (Principal Executive Officer)
April 12, 2002 /s/ Russell Ivy
------------------------------------------
Russell Ivy, Executive Vice President/
Chief Operating Officer
April 12, 2002 /s/ Chris L. Sisk
------------------------------------------
Chris L. Sisk, Executive Vice President/CFO
(Primary Financial Officer)
35