Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
July 3, 2000 (February 18, 2000)
XCEL MANAGEMENT, INC.
(Exact name of registrant as
specified in its charter)
Delaware 0-22814 87-0363613
(State or other (Commission (IRS Employer
jurisdiction of File Number Identification
incorporation) Number)
1101 Broadway Plaza
Tacoma, Washington 98402
(Address of principal executive offices and zip code)
(253) 284-2000
(Registrant's telephone number,
including area code)
(Former name or former address, if changed since last report)
Item 7. Financial Statements and Exhibits
This Form 8-K/A is being filed to include the financial statements and pro forma
financial information omitted from the current report on Form 8-K filed on March
3, 2000.
(a) Financial Statements of Business Acquired.
The required financial statements of Insynq, Inc. for the periods specified in
Rule 3-05(b) of Regulation S-X are included herein.
(b) Pro Forma Financial Information.
The pro forma financial statements of Xcel Management Inc. (the "Company")
required pursuant to Article 11 of Regulation S-X are included herein. The pro
forma data is presented for informational purposes only and may not be
indicative of future results of operations and the future financial position of
the Company. The pro forma financial information should be read in conjunction
with the historic financial statements of the Company and notes thereto.
(c) Exhibits.
2.1* Asset Purchase Agreement, dated as of February 18, 2000, by and
among Xcel Management, Inc. and Insynq, Inc. (Incorporated herein by
reference to the Company's Current Report on Form 8-K, filed
March 3, 2000, Commission File No. 000-22814.
- ----------------
* Previously Filed.
-2-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
XCEL MANAGEMENT, INC.
Dated: July 3, 2000 By: /s/ D. J. Johnson
-----------------------------------------
D. J. Johnson
Chief Financial Officer
(Principal Financial Officer)
-3-
EXHIBIT INDEX
2.1* Asset Purchase Agreement, dated as of February 18, 2000, by and
among Xcel Management, Inc. and Insynq, Inc. (Incorporated herein
by reference to the Company's Current Report on Form 8-K, filed
March 3, 2000, Commission File No. 000-22814.
______________
* Previously Filed.
-4-
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF INSYNQ, INC:
Financial Statements For Year Ended December 31, 1999 (Audited):
Report of Independent Certified Public Accountant....................................................... F-1
Balance Sheet at December 31, 1999...................................................................... F-2
Income Statement
Year Ended December 31, 1999......................................................................... F-4
Statements of Cash Flows
Year Ended December 31, 1999......................................................................... F-5
Statements of Shareholders' Equity -
Year Ended December 31, 1999......................................................................... F-6
Notes to Financial Statements........................................................................... F-7
Financial Statements For Year Ended December 31, 1998 (Audited):
Report of Independent Certified Public Accountant....................................................... F-13
Balance Sheet at December 31, 1998...................................................................... F-14
Income Statement
Year Ended December 31, 1998......................................................................... F-16
Statements of Cash Flows -
Year Ended December 31, 1998......................................................................... F-17
Statements of Shareholders' Equity -
Year Ended December 31, 1998......................................................................... F-18
Notes to Financial Statements........................................................................... F-19
FINANCIAL STATEMENTS OF XCEL MANAGEMENT, INC.:
Pro Forma Financial Statements For Nine Months Ended February 29, 2000
(Unaudited):
Report of Independent Certified Public Accountant....................................................... F-23
Pro Forma Combined Balance Sheets -
February 29, 2000 and May 31, 1999................................................................... F-24
Pro Forma Combined Income Statement
Nine Months Ended February 29, 2000 and February 28, 1999............................................ F-26
Pro Forma Combined Statement of Cash Flows -
Pro Forma Combined Nine Months Ended February 29, 2000 and February 28, 1999......................... F-27
Notes to Financial Statements........................................................................... F-28
-5-
G. BRAD BECKSTEAD
- -----------------
Certified Public Accountant
330 E. Warm Springs
Las Vegas, NV 89119
702.528.1984
425.928.2877efax
INDEPENDENT AUDITOR'S REPORT
March 15, 2000
Board of Directors
Insynq, Inc.
Tacoma, WA 98405
I have audited the Balance Sheet of Insynq, Inc. (the "Company") as of December
31, 1999, and the related Statements of Operations, Shareholders' Equity, and
Cash Flows for the year then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement presentation. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. I believe that my audit provides a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Insynq, Inc. as of December 31,
1999, in conformity with generally accepted accounting principles.
/s/ G. Brad Beckstead
G. Brad Beckstead, CPA
-F-1-
INSYNQ, INC.
BALANCE SHEET
December 31, 1999
ASSETS
Current Assets
Cash and equivalents (Note 2) $316,499
Accounts receivable, net of
allowance for doubtful accounts (Note 3) 23,789
Employee advances 3,319
Resale inventory (Note 4) 4,757
Work in process (Note 5) 46,727
Prepaid expenses 8,777
------------------------
Total Current Assets 403,869
Fixed Assets (Note 6)
Computer hardware 114,019
Computer software 80,198
Equipment 120,816
Furniture and fixtures 30,905
Capitalized lease equipment 587,517
------------------------
Total fixed assets 933,455
Less accumulated depreciation 65,182
------------------------
Book Value Fixed Assets 868,273
Other Assets
Intellectual property, net of amortization (Note 7) 97,500
Deposits 5,000
Deferred tax benefits (Note 10) 352,958
------------------------
Total Other Assets 455,458
TOTAL ASSETS $1,727,601
========================
See accompanying Independent Auditor's Report and Notes.
-F-2-
INSYNQ, INC.
BALANCE SHEET
December 31, 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 94,751
Accrued payroll taxes 10,270
Accrued business taxes 19,567
Employee benefits payable 669
Accrued bonuses 15,000
Customer deposits 29,427
Shareholder subscription refunds (Note 8) 167,488
Current portion capital lease obligation (Note 9) 166,869
-------------------------
Total Current Liabilities 504,040
Capital Lease Obligation (Note 9) 420,648
Deferred Revenue and Liabilities
Deferred income tax liability (Note 10) 50,966
Deferred revenue 4,865
-------------------------
Total Deferred Revenue and Liabilities 55,831
-------------------------
Total Liabilities and Deferred Income 980,520
SHAREHOLDERS' EQUITY (Note 15)
Common stock, no par value, authorized
20,000,000 shares, issued and
outstanding 9,895,900 shares 1,352,650
Paid in capital 1,242
Retained earnings (606,811)
-------------------------
Total Shareholders' Equity 747,081
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,727,601
=========================
See accompanying Independent Auditor's Report and Notes.
-F-3-
INSYNQ, INC.
INCOME STATEMENT
For the Twelve Months Ended December 31, 1999
Sales $ 145,722
Cost of Sales 110,083
-----------
Gross Profit 35,639
-----------
Expenses:
Depreciation and amortization expense 89,385
Interest and finance charges 12,789
General administrative expenses 819,031
-----------
Total expenses 921,205
Other income (expense) 43,423
Loss from operations before income taxes (842,143)
Federal income tax expense (Note 6)
Current expense 0
Deferred tax benefit (279,341)
-----------
Total federal income tax expense (279,341)
Net (loss) income $(562,801)
===========
See accompanying Independent Auditor's Report and Notes.
-F-4-
INSYNQ, INC.
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1999
Cash Flows From Operating Activities
Net income $ (562,801)
Adjustments to reconcile net income (loss) to net cash
provided by (used by) operating activities:
Depreciation and amortization 89,385
Gain on disposition of assets (51)
Deferred tax benefits (279,341)
(Increase) decrease in:
Accounts receivable (24,430)
Reserve for doubtful accounts 1,469
Prepaid expense (8,777)
Inventories (51,484)
Other current assets (3,319)
Deposits (5,000)
Increase (decrease) in:
Accounts payable 29,208
Accrued expenses 45,143
Other liabilities 201,780
------------------
Total Adjustments (5,418)
Net cash provided by (used in) operating activities (568,219)
Cash Flows From Investing Activities
Capital expenditures, net of dispositions (856,835)
------------------
Net cash provided by (used in) investing activities (856,835)
Cash Flows From Financing Activities
Additional paid in capital 1,242
Proceeds from issuance of common stock 1,222,650
Capital lease obligations 587,517
Net repayments of loans (70,000)
------------------
Net cash provided by (used in) financing activities 1,741,409
------------------
Net increase (decrease) in cash and cash equivalents 316,355
Cash and cash equivalents at beginning of year 146
------------------
Cash and cash equivalents at end of year $ 316,501
See accompanying Independent Auditor's Report and Notes.
-F-5-
INSYNQ, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Year Ended December 31, 1999
CAPITAL STOCK
5,500,000 common shares issued to founders $ 130,000
-----------------
Balance at December 31, 1998 130,000
Issuance of subscribed common stock to related parties
383,000 common shares 383,000
Issuance of subscribed common stock under private offering
950,988 common shares 950,988
Issuance of compensatory shares to employees and
outside vendors for services
3,229,400 common shares 56,150
Less refund of stock subscriptions to unqualified investors
167,488 common shares (167,488)
-----------------
Balance of Capital Stock at December 31, 1999 1,352,650
PAID IN CAPITAL
Excess amounts paid over fair value of common shares issued 1,242
-----------------
Total common stock and paid in capital at December 31, 1999 $1,353,892
=================
See accompanying Independent Auditor's Report and Notes.
-F-6-
INSYNQ, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
-----------------
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------
Company Background: Insynq, Inc. ("Insynq" or the "Company"), conceptualized in
1997, was incorporated as a Washington corporation on August 31, 1998. The
Company is a provider of computer hardware, software, computer/internet related
telephonic requirements and services, access to web services of all kinds,
access to internet marketing assistance and related equipment and services. It
offers these services as an integrated whole; in other words, Insynq is an on-
line provider of hardware and software, together with related support services,
on a rental, fee or sales basis.
Inventory: Inventories are stated at the lower of cost or market and represent
parts and supplies on hand for resale. Cost is determined on the first-in,
first-out method.
Property and Depreciation: Equipment and hardware is stated at cost.
Depreciation, including amortization of capital leases, for financial statement
purposes is calculated using straight-line and declining balance methods. The
cost of maintenance and repairs is charged to income as incurred; significant
replacements are capitalized.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Income Taxes: Income taxes are provided for the tax effects of transactions
reported in the financial statements, and consist of taxes currently due plus
deferred taxes. Deferred taxes are recognized on all significant differences
between the basis of assets and liabilities for financial statement and income
tax purposes. The differences relate primarily to depreciable assets (use of
different depreciation methods and lives for financial statement and income tax
purposes), and net operating losses carried forward. Deferred tax assets and
liabilities represent the future tax return consequence of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled in the future, based upon enacted tax laws and rates
applicable at that time. Non-current income tax expense reflects the net change
during the period in deferred tax assets and liabilities.
Cash and Cash Equivalents: For the purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
-F-7-
INSYNQ, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
-----------------
Note 2 - CASH
- ------
The Corporation had cash with Wells Fargo Bank that exceeded the maximum amount
of FDIC coverage. The amount at risk as of December 31, 1999 was $198,932.
Note 3 - ACCOUNTS RECEIVABLE
- ------
The Company had established an allowance for doubtful accounts based upon the
history of account collection and prior bad debts. The provision at December 31,
1999 is $1,469.
Note 4 - RESALE INVENTORY
- ------
Inventory consisting of computer hardware, parts and supplies is carried at cost
and held for resale to customers, and totaled $4,757 at December 31, 1999.
Note 5 - WORK IN PROCESS
- ------
Work in process consists of computer hardware, parts and supplies of $40,918 and
labor charges of $5,809 for jobs in process as of December 31, 1999.
Note 6 - FIXED ASSETS
- -------
Depreciation expense for the year ended December 31, 1999 is $65,182. Additions
to fixed assets for the same period are as follows:
Computer hardware $ 37,399
Computer software 80,193
Equipment 120,816
Furniture and fixtures 30,905
Capitalized lease equipment 587,517
-----------
Total additions to fixed assets $ 856,830
===========
Note 7 - INTELLECTUAL PROPERTY
- ------
The Company acquired the rights to the "Insynq Project" on September 16, 1998 in
exchange for 5,500,000 common shares of stock valued at $130,000. The "Insynq
Project" consisting of tangible and intangible properties is the development of
a proprietary data utility services system.
-F-8-
INSYNQ, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
-----------------
Note 7 - INTELLECTUAL PROPERTY (CONT.)
- ------
The cost is amortized over sixty months with accumulated amortization of $2,889
at December 31, 1998. (See Note 10)
Note 8 - SHAREHOLDER SUBSCRIPTION REFUNDS
- ------
The Company sold 950,988 shares of common stock pursuant to a private offering.
Upon detailed review, it was determined that 167,488 shares were issued to
unsophisticated investors. The Company refunded the money to the investors in
January, 2000.
Note 9 - CAPITAL LEASE OBLIGATION
- ------
The Company acquired computer hardware under a capital lease agreement with
Hewlett Packard dated August 20, 1999. The capitalized cost of the assets
acquired is included under fixed assets at a cost of $587,517 less accumulated
depreciation of $19,584 at December 31, 1999.
The lease is payable at $21,133 per month over thirty-six months beginning April
1, 2000. The future minimum lease payments are as follows for the years ending
December 31/st/:
Year Amount
---- ------
2000 $ 166,869
2001 191,064
2002 160,387
2003 35,899
------------
554,219
Add deferred discount 33,298
------------
Total lease payments over the
Contract period $ 587,517
============
Total lease payments over the contract period $ 587,517
Amount representing interest (139,954)
------------
Present value of future minimum payments 447,563
Less current portion (166,869)
------------
Long term portion $ 280,694
============
-F-9-
INSYNQ, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
-----------------
Note 10 - INCOME TAXES
- -------
Income tax expense consists of the following components:
Current provision $ 0
Deferred provision:
Tax benefit of operating loss carryforward (330,307)
Deferred tax liability on accelerated
Depreciation methods 50,966
---------
Total income tax expense (benefit) $(279,341)
=========
The following reconciles pre-tax income reported in the financial statements to
the current provision:
Pre-tax accounting income or (loss) $ (827,143)
Permanent differences arising from:
Non-deductible expenses 5,551
Temporary differences arising from:
Accelerated tax depreciation (149,900)
----------
Taxable income or (loss) $ (971,492)
==========
The Corporation has unused net operating loss carryforwards of $66,661 expiring
in the year 2013, and $971,492 expiring in the year 2014.
Note 11 - RELATED PARTY TRANSACTIONS
- --------
The Company was capitalized with $130,000 of stated value for `Intellectual
Property' acquired from the founding shareholders in exchange for 5,500,000 of
common stock (See Note 7). The Company purchased $70,000 of equipment from
Charles Benton, a founding shareholder. The equipment was purchased with a
demand note, secured by the equipment. The note was paid in full on December 20,
1999.
The Company had accounts payable totaling $118,000 due to Interactive
Information Systems Corp. Both companies have common shareholders. The debt is
represented by startup costs, current expenditures, and equipment that was paid
for on behalf of the Company. Under an agreement reached November 12, 1999
between both companies, 118,000 restricted common shares were issued in
satisfaction of the debt.
Note 12 - COMMITMENTS
- -------
The Company has an operating lease with Vantas Sacramento, LLC for use of
executive offices and administrative staff at the Roseville, California business
location dated September 13, 1999
-F-10-
INSYNQ, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
-----------------
Note 12 - COMMITMENTS (CONT.)
- -------
for a monthly fixed fee of $4,032. The term of the lease is for six months and
the minimum future rental payments total $16,128.
The Company has entered into a sublease agreement with Duane and Eddy Ashby for
office space located in the Seafirst Plaza Building, Tacoma, Washington dated
November 1, 1999 for a term commencing November 15, 1999 and expiring July 31,
2000 for a monthly fee of $2,345. There is a second lease agreement covering the
same property commencing August 1, 2000 through July 31, 2003 at $2,479 per
month. The future minimum rental payments through the year 2003 is $105,659.
Note 13 - EMPLOYEE STOCK OPTION PLAN
- --------
On November 15, 1999 the Corporation approved the implementation of an Incentive
Stock Option Plan for key employees, whereby the Board of Directors may issue
incentive stock options for the purchase of unissued common stock, no par value,
at fair market value. Such shares may not exceed 120,000 in the aggregate for
all employees. Stock options are non-transferable and must be exercised under
the terms of the plan and offering as directed by the Board of Directors. Key
employees and shareholders in common, with more than 10% ownership, may exercise
incentive stock options at 110% of fair market value. Disposition of such shares
may not occur until two years after the date of the grant of the incentive stock
option.
Note 14 - SUPPLEMENTARY CASH FLOW INFORMATION
- -------
The following non-cash transactions have been appropriately excluded from the
statement of cash flows:
The Company has entered into an agreement with Horizon Holdings I, LLC to
provide facilities management services at its location in Tacoma, Washington at
the Tacoma Technology Center. The agreement to provide collaborative management
services is effective July 1, 1999 for a monthly base fee of $3,000 and will
continue through December 31, 2000. The Company will have the use of this
location for its data utility equipment in exchange for managing the facilities.
The rental value of the office space is offset with an appropriate charge to
service income. Future minimum rental payments over the life of the agreement
total $42,000.
Note 15 - SHAREHOLDERS' EQUITY
- --------
On September 13, 1999 the Executive Board approved an offering of its common
stock, no par value, pursuant to a private offering of units for a period of
time not exceeding 180 days, including extensions. The shares will be sold as
units, consisting of one share of common stock, and one Class A warrant for an
additional share and one Class B Warrant for an additional share. Common shares
will be offered at $1.00 per share, no par value. Warrants, callable by the
-F-11-
INSYNQ, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999
-----------------
Note 15 - SHAREHOLDERS' EQUITY (CONT.)
- --------
Corporation, will be exercised at the price stipulated in the offering. As of
December 31, 1999, the Company issued 950,988 units. (See Note 8)
On September 30, 1999 the Corporation amended the Articles of Incorporation to
increase authorization of common stock to 20,000,000 shares with an additional
authorization of 5,000,000 convertible preferred shares with two for one common
share voting privileges. Upon the same date, the Board of Directors with
approval of the shareholders ratified a three for two stock split for
stockholders of record on December 16, 1999 and further authorized business
combination transactions.
NOTE 16- RETAINED EARNINGS
- -------
The amount of deferred tax asset and liability estimates as of December 31, 1998
has been reflected in the prior year retained earnings balance for presentation
purposes to conform with the Statements on Financial Accounting Standards and
generally accepted accounting principles.
NOTE 17 - SUBSEQUENT EVENTS
- -------
The Corporation has executed a nine-year lease with Colliers International, Inc.
for office space located at 1101 Broadway Plaza, Tacoma, Washington commencing
February 1, 2000 in the amount of $14,963 per month.
On February 9, 2000 the shareholders ratified an amendment to the minutes of the
September 30, 1999 board meeting to affect the stock split to 1.4 shares to be
issued for every 1 share outstanding and also to change the effective date of
the stock split for shareholders of record as of January 24, 2000. At the same
meeting, the shareholders approved and resolved the sale of all corporate assets
and liabilities to Xcel Management, Inc. in exchange for 7,604,050 shares of
restricted common stock, thereby dissolving the Corporation through liquidation
of assets.
-F-12-
G. BRAD BECKSTEAD
- -----------------
Certified Public Accountant
330 E. Warm Springs
Las Vegas, NV 89119
702.528.1984
425.928.2877efax
INDEPENDENT AUDITOR'S REPORT
March 15, 2000
Board of Directors
Insynq, Inc.
Tacoma, WA 98405
I have audited the Balance Sheet of Insynq, Inc.(the "Company"), as of December
31, 1998, and the related Statements of Operations, Shareholders' Equity, and
Cash Flows for the year then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement presentation. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. I believe that my audit provides a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Insynq, Inc. as of December 31,
1998, in conformity with generally accepted accounting principles.
/s/ G. Brad Beckstead
G. Brad Beckstead, CPA
-F-13-
INSYNQ, INC.
BALANCE SHEET
December 31, 1998
ASSETS
Current Assets
Cash and equivalents $ 146
Accounts receivable, net of
allowance for doubtful accounts (Note 2) 655
--------
Total Current Assets 801
Fixed Assets (Note 3)
Computer hardware 43,944
Computer software 7,907
Equipment 24,769
--------
Total fixed assets 76,620
Less accumulated depreciation 5,459
--------
Book Value Fixed Assets 71,161
Other Assets
Intellectual property, net of amortization (Note 4) 127,111
Organization costs, net of amortization 3,805
Trademark costs, net of amortization 1,505
Deferred tax benefits (Note 6) 20,849
--------
Total Other Assets 153,270
--------
TOTAL ASSETS $ 225,232
=========
See accompanying Independent Auditor's Report and Notes.
-F-14-
INSYNQ, INC.
BALANCE SHEET
December 31, 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 65,380
Accrued business taxes 363
Short term loans (Note 5) 70,000
--------
Total Current Liabilities 135,744
Common stock, no par value, authorized
10,000,000 shares, issued and
outstanding 5,500,000 shares 130,000
Retained earnings (40,512)
--------
Total Shareholders' Equity 89,488
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $225,232
========
See accompanying Independent Auditor's Report and Notes.
-F-15-
INSYNQ, INC.
INCOME STATEMENT
For the Twelve Months Ended December 31, 1998
Sales $ 4,471
Cost of Sales 9,068
-------------
Gross Profit (4,597)
-------------
Expenses:
Depreciation and amortization expense 8,737
Interest and finance charges 14
General administrative expenses 48,013
-------------
Total expenses 56,764
Loss from operations before income taxes (61,361)
Federal income tax expense (Note 6)
Current expense 0
Deferred tax benefit (20,849)
-------------
Total federal income tax expense (20,849)
Net (loss) income $(40,512)
=============
See accompanying Independent Auditor's Report and Notes.
-F-16-
INSYNQ, INC.
STATEMENT OF CASH FLOWS
December 31, 1998
Cash Flows From Operating Activities
Net income $(40,512)
Adjustments to reconcile net income (loss) to net cash
provided by (used by) operating activities:
Depreciation and amortization 8,737
Provision for deferred income taxes (20,849)
(Increase) or decrease in:
Accounts receivable (655)
Other assets (135,699)
Increase or (decrease) in:
Accounts payable 65,380
Accrued expenses 363
------------------
Total Adjustments (82,722)
------------------
Net cash provided by (used in) operating activities (123,234)
Cash Flows From Investing Activities
Payments for the purchase of property (76,620)
Capital expenditures 0
------------------
Net cash provided by (used in) investing activities (76,620)
Cash Flows From Financing Activities
Proceeds from loans 70,000
Proceeds from issuance of common stock 130,000
------------------
Net cash provided by (used in) financing activities 200,000
Net increase (decrease) in cash and cash equivalents 146
Cash and cash equivalents at beginning of year 0
------------------
Cash and cash equivalents at end of year $ 146
==================
Supplemental cash flow disclosures
Interest expense 14
See accompanying Independent Auditor's Report and Notes.
-F-17-
INSYNQ, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
December 31, 1998
Amount
------
Issuance of subscribed common stock from the date
of incorporation through December 31, 1998
5,500,000 common shares $130,000
---------------------
Balance of Capital Stock at December 31, 1998
$130,000
See accompanying Independent Auditor's Report and Notes.
-F-18-
INSYNQ, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1998
-----------------
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------
COMPANY BACKGROUND: Insynq, Inc. ("Insynq" or the "Company"), conceptualized in
1997, was incorporated as a Washington corporation on August 31, 1998. The
Company is a provider of computer hardware, software, computer/internet related
telephonic requirements and services, access to web services of all kinds,
access to internet marketing assistance and related equipment and services. It
offers these services as an integrated whole; in other words, Insynq is an on-
line provider of hardware and software, together with related support services,
on a rental, fee or sales basis.
INVENTORY: Inventories are stated at the lower of cost or market and represent
parts and supplies on hand for resale. Cost is determined on the first-in,
first-out method.
PROPERTY AND DEPRECIATION: Equipment and hardware is stated at cost.
Depreciation, including amortization of capital leases, for financial statement
purposes is calculated using straight-line and declining balance methods. The
cost of maintenance and repairs is charged to income as incurred; significant
replacements are capitalized.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
INCOME TAXES: Income taxes are provided for the tax effects of transactions
reported in the financial statements, and consist of taxes currently due plus
deferred taxes. Deferred taxes are recognized on all significant differences
between the basis of assets and liabilities for financial statement and income
tax purposes. The differences relate primarily to depreciable assets (use of
different depreciation methods and lives for financial statement and income tax
purposes), and net operating losses carried forward. Deferred tax assets and
liabilities represent the future tax return consequence of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled in the future, based upon enacted tax laws and rates
applicable at that time. Non-current income tax expense reflects the net change
during the period in deferred tax assets and liabilities.
CASH AND CASH EQUIVALENTS: For the purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
Note 2 - ACCOUNTS RECEIVABLE
- ------
The Company had established an allowance for doubtful accounts based upon the
history of account collection. The provision at December 31, 1998 was $0.
-F-19-
INSYNQ, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1998
-----------------
Note 3 - FIXED ASSETS
- ------
Depreciation expense for the year ended December 31, 1998 is $5,459. Additions
to fixed assets for the same period are as follows:
Computer hardware $ 43,944
Equipment 7,907
Furniture and fixtures 24,769
------------
Total additions to fixed assets $ 76,620
============
Note 4 - INTELLECTUAL PROPERTY
- ------
The Company acquired the rights to the "Insynq Project" on September 16, 1998 in
exchange for 5,500,000 common shares of stock valued at $130,000. The "Insynq
Project" consisting of tangible and intangible properties is the development of
a proprietary data utility services system. The cost is amortized over sixty
months with accumulated amortization of $2,889 at December 31, 1998. (See Note
9)
Note 5 - SHORT TERM LOANS
- ------
Loans payable consist of a promissory note dated September 16, 1998 payable to
Charles F. Benton, secured by equipment. The note is payable in monthly
installments of $2,588 beginning February 5, 1999, including interest at 8.5%
per annum. On October 31, 1999 the note was cancelled and reissued in the form
of a promissory note due on demand for the amount of unpaid principal plus
accrued interest, which was subsequently paid in full on December 20, 1999. (See
Note 9)
Note 6 - INCOME TAXES
- ------
Income tax expense consists of the following components:
Current provision $ 0
Deferred provision:
Tax benefit of operating loss carryforward (20,849)
-------------
Total income tax expense (benefit) $ (20,849)
=============
-F-20-
INSYNQ, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1998
-----------------
Note 6 - INCOME TAXES (CONT.)
- ------
The following reconciles pre-tax income reported in the financial statements to
the current provision:
Pre-tax accounting income or (loss) $ (61,361)
Permanent differences arising from:
Non-deductible expenses 540
--------------
Taxable income or (loss) $ (61,321)
==============
The Corporation's net operating loss in 1998 will carryforward to the year 2013.
Note 7 - COMMITMENTS
- ------
The Company acquired computer hardware under a capital lease agreement with
Hewlett Packard on August 20, 1999. The capitalized cost of the assets acquired
is $587,517. The lease is payable at $21,133 per month over thirty-six months
beginning April 1, 2000.
Operating Leases:
The Company entered into a six month lease agreement with Vantas Sacramento, LLC
for use of executive offices and administrative staff at a Roseville, California
business location on September 13, 1999 for a monthly fixed fee of $4,032.
The Company entered into a sublease agreement with Duane and Eddy Ashby for
office space located in the Seafirst Plaza Building, Tacoma, Washington on
November 1, 1999 for a term commencing November 15, 1999 and expiring July 31,
2000 for a monthly fee of $2,345. There is a second lease agreement covering
the same property commencing August 1, 2000 through July 31, 2003 at $2,479 per
month.
The Company has entered into an agreement with Horizon Holdings I, LLC to
provide facilities management services at its location in Tacoma, Washington at
the Tacoma Technology Center. The agreement to provide collaborative management
services is effective July 1, 1999 for a monthly base fee of $3,000 and will
continue through December 31, 2000. In lieu of the services performed the
Company will have the use of this location for its data utility equipment. The
rental value of the office space will offset service income.
-F-21-
INSYNQ, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1998
-----------------
Note 7 - COMMITMENTS (CONT.)
- ------
The Company has executed a nine-year lease with Colliers International, Inc.
for office space located at 1101 Broadway Plaza, Tacoma, Washington commencing
February 1, 2000 in the amount of $14,963 per month.
NOTE 8 - SHAREHOLDERS' EQUITY
- ------
On September 13, 1999 the Board of Directors approved an offering of its common
stock, no par value, pursuant to a private offering of units, consisting of one
share of common stock, and one Class A warrant for an additional share and one
Class B Warrant for an additional share.
On September 30, 1999 the Corporation amended the Articles of Incorporation to
increase authorization of common stock to 20,000,000 shares with an additional
authorization of 5,000,000 convertible preferred shares with two for one common
share voting privileges.
On February 9, 2000 the shareholders ratified an amendment to affect a stock
split to 1.4 shares to be issued for every 1 share outstanding effective for
stockholders of record as of January 24, 2000.
NOTE 9 - RELATED PARTY TRANSACTIONS
- ------
The Company was capitalized with $130,000 of stated value for 'Intellectual
Property' acquired from the founding shareholders in exchange for 5,500,000 of
common stock. The Company purchased $70,000 of equipment from Charles Benton,
a founding shareholder. The equipment was purchased with a demand note, secured
by the equipment. The note was paid in full on December 20, 1999.
The Company has accounts payable in the amount of $55,911 due to Interactive
Information Systems Corp., with shareholders in common. The amounts represent
startup costs, current expenditures, and equipment that were paid for on behalf
of the Company. Under an agreement reached November 12, 1999 between both
companies, restricted common shares were issued in satisfaction of the debt.
NOTE 10 - SUBSEQUENT EVENTS
- -------
On February 9, 2000, the shareholders approved and resolved the sale of all
corporate assets and liabilities to Xcel Management, Inc. in exchange for
7,604,050 shares of restricted common stock, thereby dissolving the Corporation
through liquidation of assets.
-F-22-
G. BRAD BECKSTEAD
- -----------------
Certified Public Accountant
330 E. Warm Springs
Las Vegas, NV 89119
702.528.1984
425.928.2877 (efax)
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
Board of Directors
Xcel Management, Inc.
(formerly Palace Casinos, Inc.)
Tacoma, WA
I have reviewed the accompanying balance sheet of Xcel Management, Inc.
(formerly Palace Casinos, Inc.) as of February 29, 2000 and the related
statements of income for the three-month and nine-month periods ended February
29, 2000 and February 28, 1999, and statements of cash flows for the nine-month
periods ending February 29, 2000 and February 28, 1999. These financial
statements are the responsibility of the Company's management.
I conducted my reviews in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, which will be performed for the full
year with the objective of expressing an opinion regarding the financial
statements taken as a whole. Accordingly, I do not express such an opinion.
Based on my reviews, I am not aware of any material modifications that should be
made to the accompanying financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
Other auditors have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of Xcel Management, Inc. (formerly Palace
Casinos, Inc.) (a development stage company) as of May 31, 1999, and the related
statements of operations, stockholders' equity, and cash flows for the year then
ended (not presented herein) and in their report dated December 29, 1999, they
expressed an unqualified opinion on those financial statements.
/s/ G. Brad Beckstead, CPA
June 21, 2000
Las Vegas, Nevada
License #2701
-F-23-
Xcel Management, Inc.
(formerly Palace Casinos, Inc.)
(proforma combined)
Balance Sheet
February 29, 2000 and May 31, 1999
Unaudited Unaudited
2/29/00 5/31/99
------------- ------------
Assets
Current assets:
Cash and equivalents $ 374,592 $ 501
Accounts receivable, net of allowance for doubtful 41,915 3,424
accounts
Employee advances 10,209 --
Resale inventory 8,104 2,246
Work in process 43,450 --
Prepaid expenses 21,539 --
Refundable expenses -- 30,180
------------- ------------
Total current assets 499,809 36,351
------------- ------------
Fixed assets:
Computer hardware 124,292 50,637
Computer Software 92,087 8,876
Equipment 166,450 24,948
Furniture and fixtures 74,481 --
Capitalized lease equipment 587,517 --
Leasehold improvements 35,442 --
------------- ------------
1,080,269 84,461
Less accumulated depreciation (65,182) (5,459)
------------- ------------
Total fixed assets 1,015,087 79,002
------------- ------------
Other assets:
Intellectual property, net of amortization 91,738 128,616
Deposits 164,043 --
Deferred tax benefits 352,958 43,500
------------- ------------
Total other assets 608,739 172,116
------------- ------------
Total Assets $2,123,635 $287,469
============= ============
See accompanying Independent Auditor's Report and Notes.
-F-24-
Xcel Management, Inc.
(formerly Palace Casinos, Inc.)
(proforma combined)
Balance Sheet
February 29, 2000 and May 31, 1999
Unaudited Unaudited
2/29/00 5/31/99
--------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 197,919 $ 155,330
Accrued payroll taxes 26,777 626
Accrued sales tax 13,979 1,137
Interest payable -- 6,050
Employee benefits payable 1,675 --
Accrued bonuses 15,000 --
Customer deposits 15,419 --
Offering refunds 15,000 --
Deferred revenue 3,330 --
Current portion of long-term debt 166,869 --
------------- ------------
Total current liabilities 455,968 163,143
------------- ------------
Long-Term Debt:
Capital leases payable, net of current portion 475,825 70,000
Other Liabilities:
Deferred tax liability 50,966 --
------------- ------------
Total Liabilities 982,759 233,143
------------- ------------
Stockholders' Equity:
Common stock, $0.001 par value, 50,000,000 shares 9,404 1,800
authorized, 9,404,050 shares issued and outstanding
Additional paid-in capital 2,240,271 19,601,690
Subscriptions receivable -- (25,000)
(Deficit)/Retained earnings (1,108,799) (19,524,164)
------------- ------------
Total shareholders' equity 1,140,876 54,326
------------- ------------
Total Assets $ 2,123,635 $ 287,469
============= ============
See accompanying Independent Auditor's Report and Notes.
-F-25-
Xcel Management, Inc.
(formerly Palace Casinos, Inc.)
(proforma combined)
Income Statement
For the Three Months Ending February 29, 2000 and February 28, 1999
And For the Nine Months Ending February 29, 2000 and February 28, 1999
Three Months Ending Nine Months Ending
February February
--------------------------------------- ----------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
2000 1999 2000 1999
------------- ------------ ------------ ------------
Sales $ 71,594 $ 5,334 $ 186,635 $ 8,879
Cost of Sales 179,984 6,993 345,564 25,980
------------- ------------ ------------ ------------
Gross profit (108,390) (1,659) (158,929) (17,101)
------------- ------------ ------------ ------------
Expenses
Amortization 11,932 3,278 29,611 3,278
Depreciation 54,753 5,277 59,723 5,823
Interest 1,687 3,800 7,090 3,801
General administrative expenses 876,217 31,035 1,157,353 64,587
------------- ------------ ------------ ------------
Total Expenses 944,589 43,390 1,253,777 77,489
------------- ------------ ------------ ------------
Other income (expenses) 2,678 - 45,415 -
------------- ------------ ------------ ------------
Loss from operations before income
taxes and extraordinary income (1,050,301) (45,049) (1,367,291) (94,590)
------------- ------------ ------------ ------------
Federal income tax expense:
Current expense - - - -
Deferred tax benefit 209,494 20,849 258,492 20,849
------------- ------------ ------------ ------------
Total federal income tax expense 209,494 20,849 258,492 20,849
------------- ------------ ------------ ------------
Loss from operations before
extraordinary income (840,807) (24,200) (1,108,799) (73,741)
------------- ------------ ------------ ------------
Extraordinary income:
Gain on extinguishment of debt
net of zero tax expense - 469,050 - 469,050
------------- ------------ ------------ ------------
Total extraordinary income - 469,050 - 469,050
------------- ------------ ------------ ------------
Net (loss) income (840,807) 444,850 (1,108,799) 395,309
============= ============ ============ ============
Weighted average number of common
shares outstanding 9,404,050 1,800,000 9,404,050 1,800,000
============= ============= ============ ============
Net income (loss) per share $ (0.09) $ 0.25 $ (0.12) $ 0.22
============= ============ ============ ============
See accompanying Independent Auditor's Report and Notes.
-F-26-
Xcel Management, Inc.
(formerly Palace Casinos, Inc.)
(proforma combined)
Statement of Cash Flows
For the Nine Months Ending February 29, 2000 and February 28, 1999
Unaudited Unaudited
Nine Months Ending Nine Months Ending
2/29/00 2/28/99
-------------------- ---------------------
Cash flows from operating expenses
Net (loss) income $(1,108,799) $ 395,309
Adjustments to reconcile net income to net cash (used) provided
by operating activities
Amortization expense 29,611 3,278
Depreciation expense 59,723 5,458
Deferred income tax benefits (332,109) (20,849)
Gain on extinguishment of debt -- (469,050)
(Increase) decrease in:
Accounts receivable, net (48,700) (3,900)
Prepaid expense (21,539) -
Inventories (49,308) -
Other current assets (128,164) (5,699)
Increase (decrease) in:
Accounts payable 96,340 97,975
Accrued expenses 50,966
Other liabilities 25,002 4,792
-------------- -----------
Net cash (used) provided by operating activities (1,426,977) 7,314
-------------- -----------
Cash flows from investing activities
Purchase of fixed assets (990,435) (208,165)
-------------- -----------
Net cash (used) by investing activities (990,435) (208,165)
-------------- -----------
Cash flows from financing activities
Increase in notes payable 571,611 70,000
Receipt of stock subscription 25,000 -
Issuance of common stock 2,193,650 128,760
Additional paid-in capital 1,242 2,139
-------------- -----------
Net cash provided by financing activities 2,791,503 200,899
-------------- -----------
Net increase in cash 374,091 48
Cash - beginning 501 -
-------------- -----------
Cash - ending $ 374,592 $ 48
-------------- -----------
Supplemental disclosures
Interest paid $ - $ -
============== ===========
Income taxes paid $ - $ -
============== ===========
Non-cash financing activities
Common stock issued for debt $ - $ 900
============== ===========
See accompanying Independent Auditor's Report and Notes.
-F-27-
XCEL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------
COMPANY BACKGROUND: Xcel Management, Inc. (the "Company") was incorporated in
the state of Utah on May 22, 1980, under the name "Ward's Gas & Oil," to engage
in the oil and gas business. This business was terminated after a few years of
operations. From November 1992 until approximately the end of 1995, the Company
(which had changed its name to "Palace Casinos, Inc."), was engaged, through its
then wholly-owned subsidiary, Maritime Group, Ltd. (the "Subsidiary"), in the
development of a dockside gaming facility in Biloxi, Mississippi. In April,
1994, the Subsidiary completed the development of the Biloxi gaming facility,
"Palace Casino," and commenced operations. On December 1, 1994, the Company and
the Subsidiary separately filed voluntary petitions for relief under Chapter 11
of the federal bankruptcy laws. Although the Company's original bankruptcy
petition was filed in the United States Bankruptcy Court for the District of
Utah, Central Division, the supervision of the Company's Chapter 11 proceedings
was transferred to the United States Bankruptcy Court for the Southern District
of Mississippi (the "Bankruptcy Court"). On September 22, 1995, the Company,
which had been operating as debtor-in-possession in connection with the
bankruptcy proceeding, entered into an Asset Purchase Agreement under the terms
of which it agreed, subject to the approval of the Bankruptcy Court, to sell
substantially all of the Subsidiary's operating assets. This transaction was
approved by the Bankruptcy Court, and completed in the end of 1995, with all of
the net proceeds of the transaction being distributed to creditors. Following
the completion of the sale of the Subsidiary's assets, the Company had
essentially no assets and liabilities and the Company's business operations
essentially ceased, except for efforts to complete a plan of reorganization,
described below.
On January 26, 2000, the Company entered into an Asset Purchase Agreement with
Insynq, Inc. ("Insynq"), a closely-held Washington corporation engaged in
providing hardware, software, computer internet and related telecommunications
services and products to small businesses and high-end home offices. (See Note
18 below).
INVENTORY: Inventories are stated at the lower of cost or market and represent
parts and supplies on hand for resale. Cost is determined on the first-in,
first-out method.
PROPERTY AND DEPRECIATION: Equipment and hardware is stated at cost.
Depreciation, including amortization of capital leases, for financial statement
purposes is calculated using straight-line and declining balance methods. The
cost of maintenance and repairs is charged to income as incurred; significant
replacements are capitalized .
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
INCOME TAXES: Income taxes are provided for the tax effects of transactions
reported in the financial statements, and consist of taxes currently due plus
deferred taxes. Deferred taxes are recognized on all significant differences
between the basis of assets and liabilities for financial
-F-28-
XCEL MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
- ------
statement and income tax purposes. The differences relate primarily to
depreciable assets (use of different depreciation methods and lives for
financial statement and income tax purposes), and net operating losses carried
forward. Deferred tax assets and liabilities represent the future tax return
consequence of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled in the future, based
upon enacted tax laws and rates applicable at that time. Non-current income tax
expense reflects the net change during the period in deferred tax assets and
liabilities.
CASH AND CASH EQUIVALENTS: For the purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
Note 2 - CASH
- ------
The Corporation had cash with Wells Fargo Bank that exceeded the maximum amount
of FDIC coverage. The amount at risk as of February 29, 2000 was $267,279.
Note 3 - ACCOUNTS RECEIVABLE
- ------
The Company had established an allowance for doubtful accounts based upon the
history of account collection and prior bad debts. The provision at February 29,
2000 is $1,469.
Note 4 - RESALE INVENTORY
- ------
Inventory consisting of computer hardware, parts and supplies is carried at cost
and held for resale to customers, and totaled $8,104 at February 29, 2000.
Note 5 - WORK IN PROCESS
- ------
Work in process consists of computer hardware, parts and supplies of $37,641 and
labor charges of $5,809 for jobs in process as of February 29, 2000.
-F-29-
XCEL MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 6 - FIXED ASSETS
- ------
Depreciation expense for the nine months ended February 29, 2000 is $59,723.
Additions to fixed assets for the same period are as follows:
Computer hardware $ 73,655
Computer software 83,211
Equipment 141,502
Furniture and fixtures 74,481
Capitalized lease equipment 587,517
Leasehold improvements 35,442
---------
Total additions to fixed assets $ 995,808
=========
Note 7 - INTELLECTUAL PROPERTY, PATENTS, AND OTHER INTANGIBLES
- ------
Insynq acquired the rights to the "Insynq Project" on September 16, 1998 in
exchange for 5,500,000 common shares of stock valued at $130,000. The "Insynq
Project" consisting of tangible and intangible properties is the development of
a proprietary data utility services system. The cost is amortized over sixty
months with accumulated amortization of $29,611 at February 29, 2000.
Note 8 - CAPITAL LEASE OBLIGATION
- ------
1.47% capital lease payable to Hewlett Packard with monthly principal
and interest payments beginning in April 2000 of $21,133, secured by
computer equipment, due March 2003. $ 587,517
2.14% capital lease payable to Capital Connection with monthly principal
and interest payments beginning in April 2000 of $1,186, secured by
computer equipment, due January 2003. 28,450
2.18% capital lease payable to Capital Connection with monthly principal
and interest payments beginning in February 2000 of $1,144, secured by
telephone equipment, due November 2002. 26,727
---------
642,694
Less current portion (162,735)
---------
Total long-term debt $ 479,959
=========
-F-30-
XCEL MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 8 - CAPITAL LEASE OBLIGATION (cont.)
- ------
Fiscal Year Amount
----------- ------
2001 $ 162,735
2002 210,757
2003 215,077
2004 20,827
------------
609,396
Add deferred discount 33,298
------------
Total lease payments over the
Contract period $ 642,694
============
The Corporation has executed a nine-year lease with Colliers International, Inc.
for office space located at 1101 Broadway Plaza, Tacoma, Washington commencing
February 1, 2000 in the amount of $14,963 per month.
Note 9 - INCOME TAXES
- ------
Income tax expense consists of the following components:
Current provision $ 0
Deferred provision:
Tax benefit of operating loss carryforward (403,924)
Deferred tax liability on accelerated
depreciation methods 50,966
-------------
Total income tax expense (benefit) $ (352,958)
=============
The following reconciles pre-tax income reported in the financial statements to
the current provision:
Pre-tax accounting income or (loss) $ (1,050,301)
Permanent differences arising from:
Non-deductible expenses 5,551
Temporary differences arising from:
Accelerated tax depreciation (149,900)
-------------
Taxable income or (loss) $ (1,194,650)
=============
The Company has unused net operating loss carryforwards of $66,661 expiring in
the year 2013, and $971,492 expiring in the year 2014.
-F-31-
XCEL MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 10 - RELATED PARTY TRANSACTIONS
- -------
Insynq, Inc. was capitalized with $130,000 of stated value for 'Intellectual
Property' acquired from the founding shareholders in exchange for 5,500,000 of
common stock (See Note 7). The Company purchased $70,000 of equipment from
Charles Benton, a founding shareholder. The equipment was purchased with a
demand note, secured by the equipment. The note was paid in full on December 20,
1999.
Note 11 - COMMITMENTS
- -------
The Company has an operating lease with Vantas Sacramento, LLC for use of
executive offices and administrative staff at the Roseville, California business
location dated September 13, 1999 for a monthly fixed fee of $4,032. The term of
the lease is for six months and the minimum future rental payments total
$16,128.
The Company has entered into a sublease agreement with Duane and Eddy Ashby for
office space located in the Seafirst Plaza Building, Tacoma, Washington dated
November 1, 1999 for a term commencing November 15, 1999 and expiring July 31,
2000 for a monthly fee of $2,345. There is a second lease agreement covering the
same property commencing August 1, 2000 through July 31, 2003 at $2,479 per
month. The future minimum rental payments through the year 2003 is $105,659.
Note 12 - SUPPLEMENTARY CASH FLOW INFORMATION
- -------
The following non-cash transactions have been appropriately excluded from the
statement of cash flows:
The Company has entered into an agreement with Horizon Holdings I, LLC to
provide facilities management services at its location in Tacoma, Washington at
the Tacoma Technology Center. The agreement to provide collaborative management
services is effective July 1, 1999 for a monthly base fee of $3,000 and will
continue through December 31, 2000. The Company will have the use of this
location for its data utility equipment in exchange for managing the facilities.
The rental value of the office space is offset with an appropriate charge to
service income. Future minimum rental payments over the life of the agreement
total $42,000.
NOTE 13 - RETAINED EARNINGS
- -------
The amount of deferred tax asset and liability estimates as of December 31, 1998
has been reflected in the prior year retained earnings balance for presentation
purposes to conform with the Statements on Financial Accounting Standards and
generally accepted accounting principles.
-F-32-
XCEL MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 14 - ASSET PURCHASE AGREEMENT
- -------
On January 26, 2000, the Company entered into an Asset Purchase Agreement with
Insynq, Inc. ("Insynq"), a closely-held Washington corporation engaged in
providing hardware, software, computer internet and related telecommunications
services and products to small businesses and high-end home offices. The terms
of the Agreement were substantially completed on February 18, 2000. Under the
terms of the Agreement, the Company acquired substantially all of the assets of
Insynq, and assumed substantially all of the obligations of Insynq, in exchange
for the issuance by the Company of a total of 7,604,050 shares of restricted
common stock of the Company, to the Insynq shareholders pro rata in a
liquidating distribution. As a result of the transaction, the Company now has a
total of approximately 9,404,050 shares issued and outstanding, of which
7,604,050 shares, or approximately 81% are now held by the former Insynq
shareholders. In connection with the Agreement, Insynq obtained approval of the
sale of its assets by its shareholders at a duly called and convened
shareholders' meeting.
As a result of the Agreement, the Company has acquired essentially all of the
assets, tangible and intangible, of Insynq, and has become engaged in Insynq's
business, described below. These assets include computer hardware and software,
related equipment, furniture and fixtures, proprietary technology developed by
Insynq, described below, all contractual rights including capitalized lease
equipment and other leasehold rights, tradenames and trademarks and all client
lists and marketing data and materials, cash and cash equivalents, accounts
receivable, inventory, work in progress and related assets. As indicated below,
the asset considered most valuable by Insynq and the Company in completing the
Agreement, is Insynq's proprietary data utility services system that was
designed to offer enhanced technological computer processing and communication
capabilities.
In addition, the Company has agreed to assume all equipment leases, leasehold
obligations covering office space utilized by Insynq, all consulting contracts,
and all other contract obligations. Finally, at the time of completion of the
Insynq asset acquisition, Insynq had outstanding to various shareholders, a
number of warrants and options, entitling the holders to purchase shares up to a
total of 4,267,000 shares of restricted common stock of Insynq, which warrants
and options have been converted into options and warrants to purchase a total of
approximately 4,267,000 shares of the Company's common stock, at prices of
between $.50 to $15.00 per share, not including options to purchase a total of
approximately 4,010,150 shares of common stock granted under the Company's
Incentive Plans. The exercise of all or any portion of these outstanding options
and warrants would have the effect of substantially diluting the ownership of
the present shareholders in the Company.
-F-33-