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) November 15, 2001
e-Synergies, inc.
-------------------------------------------
(Exact name of registrant as specified in its charter)
California 000-30071 91-2021595
- -------------------------------- ------------ ----------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3 Corporate Plaza, Suite 250
Newport Beach, California 92660
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949)219-0169
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- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
This Form 8-K/A is an amendment to the Form 8-K filed on November 30, 2001,
relating to the acquisition by e-Synergies, inc. ("e-Synergies") of all of the
issued and outstanding shares of e2 Communications, Inc. ("e2") pursuant to a
Plan and Agreement of Merger dated October 12, 2001, as amended. Copies of the
Plan and Agreement of Merger dated October 12, 2001 and the Amendment to the
Plan and Agreement of Merger, dated November 14, 2001 were included with the
Form 8-K filed on November 30, 2001. The purpose of this amendment is to file
the consolidated financial statements of e2 Communications, Inc. and its
subsidiary for the years ended December 31, 2000 and December 31, 1999 and to
file the pro forma consolidated financial statements of e-Synergies for the
year ended August 31, 2001.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
a. Financial Statements of Business Acquired.
Exhibit 7.3
b. Pro Forma Financial Information.
Exhibit 7.4
c. Exhibits.
7.1 Plan and Agreement of Merger dated October 12, 2001, by and among
e-Synergies, e2 Acquisition and e2. Incorporated by reference to the same
numbered Exhibit to the Report on Form 8-K filed on November 30, 2001.
7.2 Amendment dated November 14, 2001 to Plan and Agreement of Merger.
Incorporated by reference to the same numbered Exhibit to the Report on Form
8-K filed on November 30, 2001.
7.3 Consolidated financial statements of e2 Communications, Inc. and its
subsidiary for the years ended December 31, 2000 and December 31, 1999.
7.4 Pro forma consolidated financial statements of e-Synergies, inc. for the
year ended August 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: January 29, 2002
e-Synergies, inc.
By: Thomas Ronk
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Thomas Ronk, President
Exhibit 7.3 Consolidated financial statements of e2 Communications, Inc. and
its subsidiary for the years ended December 31, 2000 and December 31, 1999.
Independent Auditors' Report
The Board of Directors and Shareholders
e2 Communications, Inc.:
We have audited the accompanying consolidated balance sheets of e2
Communications, Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of e2 Communications,
Inc. as of December 31, 2000 and 1999, and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States.
KPMG LLP
- -------------
By: KPMG LLP
Dallas, Texas
March 16, 2001
e2 Communications, Inc.
Consolidated Balance Sheets
December 31, 2000 and December 31, 1999
Assets
December 31,
2000 1999
---------- -----------
Current assets:
Cash and cash equivalents $ 272,105 1516,478
Accounts receivable, less allowance
for bad debts of approximately
$196,000 in 2000 and $71,000 in 1999 1,547,224 81,244
Prepaid expenses 49,813 9,449
---------- -----------
Total current assets 1,869,142 1,607,171
---------- -----------
Furniture, equipment and leasehold
improvements, net (note 2) 1,688,038 494,751
Other assets, net 94,905 209,684
---------- -----------
Total assets $3,652,085 2,311,606
========== ===========
Liabilities, Redeemable Convertible
Preferred Stock and Shareholders' Equity (Deficit)
Accounts payable $ 384,816 207,467
Accrued expenses 804,638 87,367
Deferred revenue 975,602 123,115
Note payable - 36,218
---------- -----------
Total liabilities 2,165,056 454,167
========== ===========
Shareholders' equity (notes 4, 5 and 6):
Preferred Stock (10,000,000 shares authorized):
Series A redeemable convertible preferred
stock, $0.01 par value, 300,000 shares
issued and outstanding at December 31, 2000
and 1999, liquidation value $2,250,000. 2,250,000 1,012,500
Series B redeemable convertible preferred
stock, $0.01 par value, 750,000 and
339,860 shares issued and outstanding at
December 31, 2000 and 1999, respectively,
liquidation value $5,625,000 5,614,199 2,379,020
Series C redeemable convertible preferred
stock, $0.01 par value, 2,181,990 shares
issued and outstanding at December 31, 2000
and 1999, liquidation value $5,454,975 5,382,116 -
Common stock, $0.01 par value:
90,000,000 shares authorized:
14,283,567 and 12,663,894 shares issued
and outstanding at December 31, 2000
and 1999, respectively 142,835 126,639
Additional paid-in-capital 6,766,656 4,568,092
Notes receivable from shareholders (700,000) -
Accumulated other comprehensive income (loss) (44,044) (3,329)
Accumulated deficit (17,924,733) (6,225,483)
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Total shareholders' equity 1,487,029 1,857,439
---------- -----------
Total liabilities and equity $ 3,652,085 2,311,606
========== ===========
See accompanying notes to consolidated financial statements.
e2 Communications, Inc.
Consolidated Statements of Operations
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------- -------- ---------
Revenues:
Hosted services $ 2,319,913 $ 156,513 $ 62,138
Professional services 871,212 17,494 51,994
Product license fees 21,330 118,614 22,435
-------- --------- ---------
Total revenue 3,212,455 292,621 136,567
Cost of revenues:
Hosted services 792,806 143,233 -
Professional services 772,716 244,224 278,730
-------- --------- ---------
Total cost of revenue 1,565,522 387,457 278,730
-------- --------- ---------
Gross profit 1,646,933 (94,836) (142,163)
Operating expenses:
Product development expense 2,728,746 901,554 488,542
Sales and marketing expense 6,921,727 1,583,735 1,413,493
-------- --------- ---------
General and administrative expense 3,741,790 1,098,345 561,877
Total operating expenses 13,392,263 3,583,634 2,463,912
-------- --------- ---------
Operating loss (11,745,330) (3,678,470) (2,606,075)
Interest and other income: 46,080 46,856 14,285
-------- --------- ---------
Net loss $ (11,699,250) $(3,631,614) $(2,591,790)
======== ========= =========
See accompanying notes to consolidated financial statements.
E2 COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------- -------- -------
Cash flows from operating activities:
Net loss $(11,699,250) $(3,631,614) $(2,591,790)
Adjustment to reconcile net loss
to cash used in operating activities:
Depreciation and amortization expense 508,307 141,487 35,569
Loss on disposal of equipment 9,044 - -
Stock compensation expense 41,688 10,422 -
Foreign translation adjustment - - -
Changes in operating assets
and liabilities, exclusive of
the effects of acquisition:
Accounts receivable, net (1,506,695) (34,226) (20,337)
Prepaid expenses and other assets (59,985) (8,860) (97,057)
Accounts payable and accrued expenses 894,620 (111,772) 336,161
Deferred revenue 852,487 123,115 -
-------- -------- -------
Cash used in operating activities (10,959,784) (3,511,448) (2,337,454)
-------- -------- -------
Investing activities:
-------- -------- -------
Purchases of capital assets (1,579,638) (393,189) (207,307)
-------- -------- -------
Payments on note payable (36,218) - -
Proceeds from disposal of equipment 3,400 - -
Cash used in investing activities (1,612,456) (393,189) (207,307)
Financing activities:
Net proceeds from issuance
of common stock 3,089,173 1,481,241 2,828,693
-------- -------- -------
Net proceeds from issuance
of preferred stock 8,238,694 3,391,520 -
Cash provided by financing activities 11,327,867 4,872,761 2,828,693
Increase (decrease) in cash (1,244,373) 968,124 283,932
Cash balance at beginning of year 1,516,478 548,354 264,422
-------- -------- -------
Cash balance at end of year $ 272,105 $ 1,516,478 $ 548,354
Summary of non-cash financing activities:
Issuance of stock in exchange
for note receivable $ 700,000 $ - $ -
============= ============ ==========
Net assets acquired in
business combination for stock $ - $ 84,375 $ -
See accompanying notes to consolidated financial statements.
E2 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND DECEMBER 31, 1999
(1) Summary of Significant Accounting Policies
(a) General Description of Business
e2 Communications, Inc. (the Company) was incorporated in Texas on September
29, 1997. The Company provides a method for customers to build brand
awareness, promote brand loyalty or to drive specific customer actions through
e-mail marketing. The Company is creating an email marketing infrastructure
using both technology and services to resolve problems of technology
development and customer reach. The Company's proprietary product, e2Mail,
provides the online marketing infrastructure to deliver email marketing
solutions to multiple businesses simultaneously, regardless of size or
industry. The Company derives substantially all of its revenues from these
hosted email marketing services and related professional services associated
with the process.
(b) Liquidity
From January 1, 1998 to December 31, 2000, the Company has generated an
accumulated deficit of approximately $18.0 million. While the Company expects
operating cash flows to meet its working capital requirements needed for 2001,
management intends to raise additional debt and/or equity financing to fund
future operations and to provide additional working capital. However, there is
no assurance that such financing will be consummated or obtained in sufficient
amounts necessary to meet the Company's needs or on terms acceptable to the
Company. If operating cash flows and/or additional financing do not provide
the expected level of cash flows, the Company's operations would be curtailed.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(d) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumption that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amount of revenue and expense during the reporting period. Actual result could
differ from those estimates.
(e) Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of three
months or less at the date of purchase to be cash equivalents. As of December
31, 2000 and 1999, cash equivalents consisted solely of a money market fund.
The Company is exposed to credit risk in the event of default by the financial
institutions to the extent of the amounts recorded on the balance sheets in
excess of amounts that are insured by the FDIC.
(f) Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are stated at cost.
Expenditures for repairs and maintenance are charged to expense as incurred.
The Company depreciates furniture and equipment using the straight-line method
over their estimated useful lives ranging from 3 to 7 years. Leasehold
improvements are amortized over the lease term using the straight-line method.
(g) Goodwill and Other Intangible Assets
The cost of acquired businesses is allocated first to identifiable assets based
on estimated fair values. Costs allocated to identifiable intangible assets
are amortized on a straight-line basis over the estimated useful lives of the
assets, as determined by underlying contract terms or independent appraisals.
The excess of the purchase price over the fair value of identifiable assets
acquired, net of liabilities assumed, is recorded as goodwill and amortized on
a straight-line basis over the estimated useful life. The useful life of
recorded goodwill has been estimated to be one year.
The Company periodically evaluates the carrying amounts of goodwill, as well as
the related amortization period, to determine whether adjustments to these
amounts or useful lives are required, based on current events and
circumstances. The evaluation is based on the Company' projection of the
undiscounted future operating cash flows of the acquired operation over the
remaining useful lives of the related goodwill. To the extent such projections
indicate that future undiscounted cash flows are not sufficient to recover the
carrying amounts of related goodwill, the underlying assets are written down by
charges to expense so that the carrying amount is equal to future undiscounted
cash flows. The assessment of recoverability of goodwill will be affected if
estimated future operating cash flows are not achieved.
(h) Stock-based Compensation
The Company accounts for stock options using the intrinsic-value method as
outlined under Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, (APB 25) and related interpretations. In accordance with
Statement of Financial Accounting Standards No. 123, Accounting for Stock-based
Compensation, the Company has disclosed pro forma net income as if the
fair-value method had been applied.
(i) Revenue Recognition
The Company provides hosted outbound and in-bound e-mail marketing services via
its product, e2 Mail. Based on this product, the Company has three types of
revenue streams: hosted services, professional services, and product licenses
and maintenance fees.
Hosted services revenue represents the set-up fee and monthly subscription to
the e2 Mail product for a set contract term, typically one year. Revenue
related to the set-up fee is deferred until the set-up is complete, and then
recognized ratably over the longer of the life of the customer relationship or
the contract term. Revenue for professional services are recognized as the
services are performed. Software license revenue is generally recognized when
the following criteria have been met: (a) a written contract for the license of
software has been executed, (b) the Company has delivered the product to the
customer, (c) the license fee is fixed or determinable, and (d) collectibility
of the resulting receivable is deemed probable. Because evidence of fair value
does not exist for the separate elements of the software arrangement, revenue
from the entire arrangement is recognized ratably over the term of the
maintenance contract.
(j) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the anticipated future tax
effects of temporary differences that arise as a result of the differences in
the financial statement carrying amount and tax bases of assets and
liabilities, and for loss carryforwards and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which the temporary differences are
expected to be recovered are settled. The Company records a valuation
allowance when it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
(k) Stock Split
On February 17, 2000, the Board of Director's declared a three-for-one common
stock split which would be effective April 28, 2000. To accomplish the split,
the Company distributed two shares of common stock for each share of common
stock outstanding at the close of business on April 28, 2000. The par value of
the of the common stock remains $0.01. All references to the number of common
shares and per common share amounts have been restated to give retroactive
effect to the stock split for all periods presented.
(2) Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold
improvements at December 31, 2000
and 1999 consisted of the following: 2000 1999
-------- --------
Furniture and fixtures $ 347,684 53,079
Computer equipment 1,371,119 487,231
Computer software 380,070 44,353
Leasehold improvements 23,627 5,392
2,122,500 590,055
Less accumulated depreciation
and amortization (434,462) (95,304)
Furniture, equipment and leasehold
improvements, net $ 1,688,038 494,751
During 2000, the Company disposed of equipment with a book value of $12,444,
net of accumulated depreciation of $34,749.
(3) Notes Receivable from Shareholders
In connection with certain stock purchase arrangements with certain
shareholders, the Company and such individuals entered into limited recourse
note arrangements which provides such employees the funds necessary to acquire
shares of common stock. These notes receivable amounting to approximately
$700,000 at December 31, 2000, are reflected as an increase to stockholders'
deficit, bear interest at approximately 6.5% and are due in full by February
2004. Additionally, the purchased shares serve as collateral for the notes
receivable.
(4) Common Stock
During 1998, 2,572,230 shares of common stock were sold to certain key
employees, directors and investors at a purchase price of $1.13 per share which
generated proceeds of $2,828,693, net of directing financing costs of $65,060.
During 1999, 1,316,664 shares of common stock were sold to certain key
employees, directors and investors at a purchase price of $1.13 per share which
generated proceeds of $1,481,241. As stated in note 9, the Company issued
75,000 shares of common stock to acquire e2 Europe Limited during 1999.
During 2000, 1,263,417 shares of common stock were issued, of which 39,942 were
issued as consideration for capital raising activities, to certain key
employees, directors and investors at a purchase price ranging from $2.33 per
share to $2.50 per share. The Company generated proceeds of $3,025,885 from
the issuance of these securities. The Company issued an additional 300,000
shares of common stock to members of management at a price of $2.33 in exchange
for notes (note 3).
(5) Stock Option Plan
The Company adopted the e2 Communications, Inc. 1998 Stock Option Plan (the
Plan) on October 29, 1998. The 1998 Plan provides for the issuance of stock
options to attract, retain and motivate management, directors and professional
employees.
The Company has reserved 4,350,000 shares of common stock for issuance under
the Plan.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its employee stock
options. APB No. 25 requires compensation expense to be recorded for any
excess of the market value of the underlying stock over the option price on the
measurement date. The exercise price equaled the market price at the date of
grant for all option grants during 2000, 1999 and 1998, and no compensation
expense has been recognized for awards with a measurement date the same as the
grant date. During September 1999, the Company granted options to certain
employees whereby the number of options to be received was contingent on
certain performance targets. These grants have been accounted for as variable
awards under the provisions of APB 25. In accordance with the provisions of
APB 25, the Company has recorded compensation expense of $10,422 and $41,688 in
1999 and 2000, respectively.
Pro forma information regarding net income and earnings per share is required
by FAS No. 123 and has been determined as if the Company has accounted for its
stock options under the fair value method defined by FAS No. 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal year 2000, 1999 and 1998: interest rates of 6% for 2000
and 1999, 5% for 1998; dividend yields of 0.0%; volatility factors of expected
market price of the Company's common stock of 0%; and expected option life of
four years. The weighted-average fair value of options granted during 2000,
1999 and 1998 was $0.31, $0.14 and $0.13, respectively.
Had the Company determined compensation cost based on the estimated fair value
of stock options at the grant date in accordance with FAS No. 123, the
Company's net loss would have been increased to the pro forma amounts indicated
below:
Net loss:
2000 1999 1998
------- ------- ------
As reported $ (11,699,250) (3,631,614) (2,591,790)
Pro forma (11,893,044) (3,700,644) (2,603,455)
A summary of the Company's stock option activity and related information
follows for the year ended December 31, 2000 and the three years ended December
31, 2000:
Number of Weighted-
shares average exercise price
--------- ----------------------
Outstanding at December 31, 1997 696,000 $ 0.03
Granted 900,000 1.13
Exercised
Canceled
Outstanding at December 31, 1998 1,596,000 0.65
Granted 271,500 1.13
Exercised
Canceled
Outstanding at December 31, 1999 1,867,500 0.72
Granted 1,461,881 2.42
Exercised (56,256) 1.13
Canceled (81,188) 1.75
Outstanding at December 31, 2000 3,191,937 $ 1.47
The options outstanding at December 31, 2000 are as follows:
Weighted-average Weighted-average
Exercise Number remaining exercise
price outstanding contractual life price
- -------- ----------- ---------------- -----------------
$ 0.03 696,000 6.92 $ 0.03
1.13 1,076,056 7.97 1.13
2.33 639,000 9.13 2.33
2.50 780,881 9.62 2.50
-----------
3,191,937
At December 31, 2000, 1,084,603 options outstanding were currently exercisable.
(6) Preferred Stock
(a) Series A Redeemable Convertible Preferred Stock
On January 21, 1999, the Company completed a private placement of preferred
stock with Monarch Partners' Venture Fund I, L.P., a Georgia limited
partnership. The Company issued 300,000 shares of series A redeemable
convertible preferred stock (Series A Preferred Stock) in exchange for gross
proceeds of $1,012,500 ($3.375 per share). The Series A Preferred Stock is
convertible into 900,000 share of common stock using a conversion price of
$1.125 per share.
Series A Preferred Stock has voting rights equal to the number of shares of
common stock into which such preferred stock is convertible. The Series A
Preferred Stock is convertible at the option of the holder into such number of
shares of common stock as is determined by dividing the original issue price of
the Series A Preferred Stock by the applicable conversion price at the date of
the conversion. In addition, holders of Series A Preferred Stock are entitled
to elect one director of the Company.
Each share of outstanding Series A Preferred Stock is required to convert to
common stock upon the closing of a firm commitment underwritten public offering
by the Company of shares of common stock, provided the aggregate net proceeds
from such offering to the Company are at least $15.0 million, and the
post-offering market capitalization of the Company is at least $60.0 million.
The outstanding shares of Series A Preferred Stock are redeemable into cash
after December 1, 2003 at the request of the majority of the holders of the
then outstanding shares of Series A Preferred Stock at an amount equal to the
greater of the then fair market value per share or the original issue price
plus all declared but unpaid dividends. Amounts due to the preferred
shareholders on redemption are payable in full on the redemption date, or, if
such payment would cause the Company to become insolvent or in default of any
loan or financing agreement, the preferred shareholders and the Company can
establish a mutually agreeable payment schedule which shall not exceed two
years.
Dividends on the Series A Preferred Stock are non-cumulative and may be
declared at the sole discretion of the Board of Directors.
(b) Series B Redeemable Convertible Preferred Stock
The Company initiated a private placement of its preferred stock with various
investors in 1999 which was completed on March 11, 2000. The Company issued
750,000 shares of series B redeemable convertible preferred stock (Series B
Preferred Stock) in exchange for proceeds of $5,235,598 ($7.00 per share), net
of direct financing costs of $14,402. The Series B Preferred Stock is
convertible into 2,250,000 shares of common stock using a conversion price of
$2.33 per share.
Series B Preferred Stock has voting rights equal to the number of shares of
common stock into which such preferred stock is convertible. The Series B
Preferred Stock is convertible at the option of the holder into such number of
shares of common stock as is determined by dividing the original issue price of
the Series B Preferred Stock by the applicable conversion price at the date of
the conversion.
Each share of outstanding Series B Preferred Stock is required to convert to
common stock upon the closing of a firm commitment underwritten public offering
by the Company of shares of common stock, provided the aggregate net proceeds
from such offering to the Company are at least $15.0 million, and the
post-offering market capitalization of the Company is at least $60.0 million.
The outstanding shares of Series B Preferred Stock are redeemable into cash
after December 1, 2003 at the request of the majority of the holders of the
then outstanding shares of Series B Preferred Stock at an amount equal to the
greater of the then fair market value per share or the original issue price
plus all declared but unpaid dividends. Amounts due to the preferred
shareholders on redemption are payable in full on the redemption date, or, if
such payment would cause the Company to become insolvent or in default of any
loan or financing agreement, the preferred shareholders and the Company can
establish a mutually agreeable payment schedule which shall not exceed two
years.
Dividends on the Series B Preferred Stock are non-cumulative and may be
declared at the sole discretion of the Board of Directors.
(c) Series C Redeemable Convertible Preferred Stock
On November 15, 2000, the Company completed a private placement of preferred
stock with various investors. The Company issued 2,181,990 shares of series C
redeemable convertible preferred stock (Series C Preferred Stock) in exchange
for proceeds of $5,382,116 ($2.50 per share), net of direct financing costs of
$72,859. The Series C Preferred Stock is convertible into 2,181,990 shares of
common stock using a conversion price of $2.50 per share.
Series C Preferred Stock has voting rights equal to the number of shares of
common stock into which such preferred stock is convertible. The Series C
Preferred Stock is convertible at the option of the holder into such number of
shares of common stock as is determined by dividing the original issue price of
the Series C Preferred Stock by the applicable conversion price at the date of
the conversion.
Each share of outstanding Series C Preferred Stock is required to convert to
common stock upon the closing of a firm commitment underwritten public offering
by the Company of shares of common stock, provided the aggregate net proceeds
from such offering to the Company are at least $15.0 million, and the
post-offering market capitalization of the Company is at least $60.0 million.
The outstanding shares of Series C Preferred Stock are redeemable into cash
after December 1, 2003 at the request of the majority of the holders of the
then outstanding shares of Series C Preferred Stock at an amount equal to the
greater of the then fair market value per share or the original issue price
plus all declared but unpaid dividends. Amounts due to the preferred
shareholders on redemption are payable in full on the redemption date, or, if
such payment would cause the Company to become insolvent or in default of any
loan or financing agreement, the preferred shareholders and the Company can
establish a mutually agreeable payment schedule which shall not exceed two
years.
Dividends on the Series C Preferred Stock are non-cumulative and may be
declared at the sole discretion of the Board of Directors.
(7) Income Taxes
The differences in federal income taxes at the statutory rate of 34% and the
provision for income taxes for the years ended December 31, 2000, 1999 and 1998
are as follows:
December 31,
2000 1999 1998
------ ------ -------
Expected income tax expense
benefit at federal
Statutory rate $ (3,978,000) (1,235,000) (881,000)
Permanent differences 66,000 30,000 13,000
Other (456,000) (140,000) (101,000)
Valuation allowance 4,368,000 1,345,000 969,000
Provision (benefit)
for income taxes $ - - -
Deferred tax assets (liabilities) are comprised of the following:
December 31,
2000 1999
------------ ------------
Deferred tax assets:
Net operating loss carryforward $ 6,655,000 2,305,000
Allowance for doubtful accounts 76,000 27,000
Amortization of goodwill 20,000 4,000
------------ ------------
6,751,000 2,336,000
Deferred tax liability - depreciation and
Amortization (70,000) (23,000)
Net deferred tax assets,
before valuation allowance 6,681,000 2,313,000
Valuation allowance (6,681,000) (2,313,000)
Net deferred tax asset $ - -
The Company records a valuation allowance when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
ultimate realization of the deferred tax asset depends on the Company's ability
to generate sufficient taxable income in the future. The Company has
recognized a full valuation allowance for the amount of net deferred tax asset
at December 31, 2000 and 1999.
At December 31, 2000, the Company has a net operating loss carryforward for
federal and state income tax purposes of approximately $17,533,000 which begins
expiring in 2017.
e2 Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 2000 and December 31, 1999
(8) Lease Commitments
The Company leases its office space under operating leases. Total rental
expense in 2000, 1999 and 1998 for all leases was $388,659, $113,127 and
$43,806, respectively.
Future minimum lease payments under noncancelable leases at December 31, 2000
follow:
Year ending December 31, Operating leases
- ------------------------ ----------------
2001 $ 317,340
2002 307,690
2003 25,641
Future minimum lease payments $ 650,671
=================
(9) Acquisitions
On October 1, 1999, the Company purchased the stock of e2 Europe Limited for
approximately $84,000, through the issuance of 25,000 shares of common stock at
$3.375 per share. The purchase price allocation resulted in approximately
$174,000 of goodwill, which is being amortized over one year. Pro forma
information required under Accounting Principles Board Opinion No. 16, Business
Combinations, has not been presented as the results of operations for e2 Europe
Limited are not significant.
The acquisition has been accounted for under the purchase method of accounting.
The results of operations of e2 Europe Limited have been included in the
Company's consolidated financial statements since the acquisition date.
Exhibit 7.4 Pro forma consolidated financial statements of e-Synergies, inc.
for the year ended August 31, 2001.
E-SYNERGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
On November 15, 2001, e-Synergies, inc. ("e-Synergies") consummated the
acquisition of e2 Communications, Inc., a Texas corporation ("e2"), as provided
for in a Plan and Agreement of Merger dated October 12, 2001, as amended (the
"Merger Agreement"), by and among e-Synergies, e2 Acquisition Corp., a Texas
corporation and wholly owned subsidiary of e-Synergies ("e2 Acquisition"), and
e2. Pursuant to the Merger Agreement, e2 Acquisition merged with and into e2
and e2 became a wholly owned subsidiary of e-Synergies. In connection with the
transaction, e-Synergies issued 6,381,006 shares of its Common Stock, $.00001
par value ("Common Stock"), to all holders of more than 3,000 shares of common
stock of e2 in exchange for such common stock and an aggregate of $18,920 in
cash to all holders of 3,000 or less shares of common stock of e2 in exchange
for such shares. Certain of the foregoing shares of e-Synergies Common Stock
are being held in escrow to secure e2's indemnification obligations under the
Merger Agreement. Such "escrow" shares and cash payment are considered a
contingent liability and have not been included in the initial purchase
transaction and associated calculation of goodwill.
The following unaudited pro forma consolidated statements of
operations present the effect of the transaction with e2 on a purchase basis.
A pro forma consolidated balance sheet presenting the financial position of
e-Synergies and e2 as of August 31, 2001 has not been included since the
transaction has already been reflected in e-Synergies's latest interim
consolidated financial statements filed on Form 10-QSB for the three month
period ended November, 30, 2001.
The unaudited pro forma consolidated give effect to the purchase by
combining the historical statements of operations of e-Synergies and e2 for the
year ended August 31, 2001 with necessary adjustments. For purposes of
preparing this pro forma information, the transaction was assumed to be
consummated at the beginning of the preceding fiscal year and at the beginning
of the current fiscal year. These unaudited pro forma consolidated financial
statements should be read in conjunction with the historical financial
statements.
The unaudited pro forma consolidated financial statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position that would have occurred if the merger had been
consummated for the periods noted, nor are they necessarily indicative of
future operating results or financial position.
E-Synergies, Inc.
Pro Forma Consolidated Statement of Operations
For the year ended August, 31, 2001
(Unaudited)
E2 Communications, Pro Forma Pro Forma
e-Synergies, Inc. Inc. Consolidated Consolidating e-Synergies, Inc.
Consolidated Consolidated Entries Consolidated
----------------- ------------------ -------------- -----------------
Sales Revenue $ 2,503,404 $ 7,746,360 $ - $ 10,249,764
Cost of Sales 1,587,174 2,435,511 - 4,022,685
Gross Profit 916,230 5,310,849 - 6,227,079
Operating Expenses 2,554,636 14,137,837(1) 503,429 17,195,902
Income (loss)
from operations (1,638,406) (8,826,988) (503,429) (10,968,823)
Other Income (Expense):
Other income
(expense), net 585 17,324 - 17,909
Interest expense, net (5,828) (3,033) - (8,861)
Gain on sale of
fixed assets 1,279 - - 1,279
Total other
income (expense) (3,964) 14,291 - 10,327
Net income (loss) $ (1,642,370) $ (8,812,697) $ (503,429) $ (10,958,496
Fully diluted
loss per share $ (0.10) $ - $ - $ (0.50)
Shares outstanding 16,415,457 - 5,382,439 21,797,896
(1) To record the straight-line amortization of goodwill ($7,551,437) associated with the purchase
over a fifteen year period.