UNITED STATES
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): January 7, 2005
EPIXTAR CORP.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 011-15499 65-0722193
- -------------------------------- --------------------- -------------------
(State or Other Jurisdiction of (Commission File No.) (I.R.S. Employer
Incorporation or Organization) Identification No.)
11900 BISCAYNE BLVD., MIAMI, FLORIDA 33181
- --------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 305-503-8600
----------------------------------------------------------------------
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
PRELIMINARY NOTE: This report amends the Current Report on Form 8-K relating to
the events dated January 7, 2005, relating to the acquisition by Epixtar Corp.
(the Company) of Innovative Marketing Strategies, Inc. and subsidiaries (IMS), a
Florida corporation, which was described in Item 2.01 of the original Form 8-K.
The Company is hereby providing the information required by paragraphs (a) and
(b) of Item 9.01 of Form 8-K relating to such acquisition.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of businesses acquired.
FINANCIAL INFORMATION RELATING TO INNOVATIVE MARKETING STRATEGIES, INC. AND
SUBSIDIARIES
Index to Financial Statements
Page
NINE MONTHS ENDED SEPTEMBER 30, 2004
Consolidated Financial Statements
Balance Sheet 2
Statement of Operations and Accumulated Deficit 3
Statement of Cash Flows 4
Notes to Financial Statements 5-10
YEAR ENDED DECEMBER 31, 2003 AND 2002
Report of Independent Certified Public Accountants 11
Consolidated Financial Statements
Balance Sheets 12
Statements of Operations and Accumulated Deficit 13
Statements of Cash Flows 14
Notes to Financial Statements 15-21
1.
INNOVATIVE MARKETING STRATEGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 148,402
Accounts receivable 545,490
Factored receivable reserve 30,000
Unbilled receivables 575,521
Due from stockholder 40,143
-----------
Total current assets 1,339,556
PROPERTY AND EQUIPMENT, NET 1,271,505
OTHER ASSETS 44,192
-----------
$ 2,655,253
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of notes payable $ 698,480
Accounts payable 1,607,688
Accrued liabilities 1,249,124
Due to officers 190,981
Note payable, Epixtar 600,000
Notes payable, officers 349,708
-----------
Total current liabilities 4,695,981
LONG-TERM LIABILITIES, less current maturities
Notes payable 633,797
-----------
5,329,778
STOCKHOLDERS' DEFICIT
Common stock, $1 par value; 7,500 shares
authorized, issued and outstanding 7,500
Accumulated deficit (2,682,025)
-----------
Total stockholders' deficit (2,674,525)
-----------
$ 2,655,253
===========
2.
INNOVATIVE MARKETING STRATEGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
OPERATIONS AND ACCUMULATED DEFICIT
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
REVENUES $ 13,803,920
EXPENSES
Personnel costs 9,990,595
Selling, general and administrative 3,629,634
Consulting fees - related party 538,256
Depreciation 432,467
------------
14,590,952
------------
INCOME FROM OPERATIONS (787,032)
OTHER INCOME (EXPENSE)
Interest expense (203,719)
Other income 7,554
------------
(196,165)
------------
LOSS BEFORE INCOME TAXES (983,197)
INCOME TAXES --
------------
NET LOSS (983,197)
ACCUMULATED DEFICIT, BEGINNING (1,698,828)
------------
ACCUMULATED DEFICIT, ENDING $ (2,682,025)
============
3.
INNOVATIVE MARKETING STRATEGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net
loss $ (983,197)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 432,467
Changes in:
Accounts receivable 422,685
Due from stockholder (13,680)
Other assets 60,657
Due to officers 108,949
Accounts payable and accrued expenses (90,384)
-----------
Net cash used by operating activities (62,503)
-----------
INVESTING ACTIVITIES
Purchase of property and equipment (807,315)
-----------
Net cash used in investing activities (807,315)
-----------
FINANCING ACTIVITIES
Principal payments on notes payable (1,081,592)
Principal payments on officers' notes payable (112,401)
Advances on notes payable 972,209
Advance on note payable, Epixtar 600,000
Advances on officers' notes payable 586,232
-----------
Net cash provided by financing activities 964,448
-----------
NET CHANGE IN CASH 94,630
CASH, BEGINNING OF YEAR 53,772
-----------
CASH, END OF YEAR $ 148,402
===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 203,719
===========
4.
INNOVATIVE MARKETING STRATEGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004
(UNAUDITED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Description of Business - Innovative Marketing Strategies, Inc. and
Subsidiaries (the "Company"), is a Florida corporation whose core
business is the operation of a network of telecommunication call
centers that provide direct marketing services. The Company, through
its subsidiaries and divisions, also offers other marketing and
advisory services.
The Company's corporate headquarters are located in Leawood, Kansas.
Call center locations include Kansas, Washington, Minnesota, West
Virginia and Manila, Philippines.
The Company is the majority owner in three Limited Liability Companies
that were organized in the State of Kansas in either 2002 or 2003:
Quantum Financial, LLC, Quantum Direct, LLC, and Quantum Marketing
Group, LLC (together "Quantum").
In September of 2003 the Company formed Innovative Marketing Strategies
Asia, Inc ("IMS Asia"), a wholly owned subsidiary located in the
Philippines that was organized to operate a call center located in the
Philippines beginning in 2004.
b. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and those of its wholly-owned and
majority-owned subsidiaries. Intercompany accounts and transactions
have been eliminated in consolidation.
c. Revenue Recognition - The Company recognizes revenues in the period in
which the corresponding services are provided. Revenue received in
advance of the delivery of service is recorded as deferred revenue. The
revenue for services provided, but not invoiced, is recorded as
unbilled receivables until invoiced.
d. Furniture, Fixtures and Equipment - Fixed assets, principally
computers, furniture and leasehold improvements, are stated at cost
less accumulated depreciation. Depreciation is computed using the
straight-line and accelerated methods over the estimated useful lives
of the corresponding assets.
e. Advertising Costs - Advertising costs are expensed as incurred.
Advertising costs for the nine month period ended September 30,2004
were $2,606.
f. Income Taxes - The Company uses the liability method for accounting for
income taxes. Deferred tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between
the financial reporting and tax bases of assets and liabilities. If
appropriate, deferred tax assets are reduced by a valuation allowance
that reflects expectations of the extent to which such assets will be
realized.
g. Cash Equivalents - All highly liquid debt investments with maturities
of three months or less when purchased are considered to be cash
equivalents.
h. Significance of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
5.
i. Impairment of long-lived assets - The Company continually evaluates the
carrying value of its long-lived assets. Impairment is recognized when
the expected future discounted operating cash flows to be derived from
such assets are less than their carrying values.
2. ACCOUNTS RECEIVABLE FACTORING AGREEMENT
The Company sells (with recourse) certain of its accounts receivables to
Wells Fargo ("WF") under a factoring agreement. Under the terms of the
agreement, WF held $30,000 at September 30, 2004 as reserve for
uncollectible accounts. During the nine month period ended September 30,
2004, the Company received approximately $8,670,000 of proceeds from the
sale of accounts receivable to WF, and paid WF $123,493 in fees during the
same nine month period.
3. FURNITURE, FIXTURES AND EQUIPMENT
Computers and equipment $ 2,223,507
Furniture and fixtures 120,235
Leasehold improvements 57,253
-----------
2,400,995
Less accumulated depreciation (1,129,490)
-----------
$ 1,271,505
===========
4. ACCRUED LIABILITIES
Taxes payable $ 489,122
Accrued payroll 412,946
Accrued settlement 163,374
Accrued termination payments 38,333
Accrued vacation 82,832
Other 62,517
-----------
$ 1,249,124
===========
5. NOTES PAYABLE
Note payable dated 2002, interest at 6.0%, due in 24
monthly installments of $1,052, through
maturity in 2004. Secured by office furniture. $ 2,189
Note payable dated 1999, interest at 10.0%, due in
monthly installments of $6,089 including
interest until paid in full. 290,194
Notes payable dated 1999, Kansas Business Development
Loans, non interest bearing, forgivable over a
five year period if defined job creation
requirements are met, subject to complete repayment
under conditions of default. 65,702
6.
5. NOTES PAYABLE (Continued)
Note payable dated 2002, variable interest (Prime
plus 3 1/4%) due in 60 monthly installments through
maturity in 2007. Secured by certain equipment. 37,787
Note payable dated 2003, West Virginia Business
Development Loan, interest at 5.0%, due in 120
monthly installments of $1,591, including interest,
through maturity in 2013. Secured by certain assets
defined in a security agreement and personal
guarantees by two of the Company's stockholders. 129,190
Note payable dated 2003, West Virginia Business
Development Loan, interest at 4.0%, due in 60
monthly installments of $5,223, including interest,
through maturity in 2008. Secured by certain assets
defined in a security agreement. 220,537
Note payable dated 2003, non-interest bearing,
due in 30 monthly installments through maturity
in 2007. Secured by certain equipment. 133,309
Note payable dated 2004, interest at 8.8%, due in
monthly installments of $36,613, through
maturity in 2005. Secured by equipment. 449,825
Notes payable, other 3,544
-----------
Total notes payable 1,332,277
Less current portion 698,480
-----------
$ 633,797
===========
Maturities of notes payable, for the years subsequent to September 30, 2004
are as follows:
AMOUNT
2005 $ 698,480
2006 255,483
2007 139,091
2008 115,218
2009 68,292
Thereafter 55,713
-----------
$ 1,332,277
===========
6. NOTES PAYABLE TO STOCKHOLDERS
As of September 30, 2004 the Company had outstanding notes payable, due on
demand, to the Company's three stockholders totaling $349,708. The
obligations are unsecured and are non-interest bearing.
7.
7. OPERATING LEASES
The Company leases equipment and office facilities under non-cancelable
operating leases. Rental expense related to these leases approximated
$578,978 during the nine-month period ended September 30, 2004. Minimum
rental commitments subsequent to September 30, 2004 under such operating
leases are as follows:
2005 $ 783,988
2006 687,433
2007 363,939
2008 200,504
-----------
$ 2,035,864
===========
8. INCOME TAXES
The difference between the effective tax rate and the statutory federal and
state income tax rates results from the effect of the timing differences on
the deductibility of certain accrued expenses and the non-recognition of a
deferred tax asset related to the Company's net operating loss
carryforwards.
SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not
be realized. The Company's ability to realize the benefit of its deferred
tax asset will depend on the generation of future taxable income. Because
the Company's operations are not currently generating taxable income,
management believes that a full valuation allowance should be provided as
of September 30, 2004.
Deferred taxes result from temporary differences between the financial
statement and tax bases of assets and liabilities. As of September 30,
2004, the sources of these differences and their cumulative tax effects
are:
Accrued liabilities $ 161,677
Operating loss carryforward 456,573
-----------
Deferred tax asset - current, net 618,250
-----------
Intangible assets - non-current 123,639
-----------
Valuation reserve (741,889)
-----------
Net deferred tax asset $ 0
===========
At September 30, 2004, the Company had net operating loss carry forwards
for income tax purposes of approximately $1,340,000.
9. 401(K) RETIREMENT PLAN
The Company maintains a 401(K) plan ("the Plan") covering all eligible
employees who desire to participate. Contributions to the plan are based
upon the amount of the employees' deferrals and the employer's matching
contribution rate of 25%. For the period ended September 30, 2004 the
Company recognized $6,992 of expense that represented their portion of the
contribution.
8.
10. RELATED PARTY TRANSACTIONS
The Company leases its corporate headquarters from an entity that is 50%
owned by the two principal stockholders of the Company. Rent expense under
this lease for the period ended September 30, 2004 was $158,866.
The amount due to officers ($190,981 as of September 30, 2004) on the
accompanying balance sheet arose as a result of accrued salaries to these
parties. The amount due from stockholder ($40,143 as of September 30, 2004)
on the accompanying balance sheet arose as a result of cash advances to a
stockholder.
During the nine-month period ended September 30, 2004, the Company expensed
$538,256 for commissions paid or payable to a minority stockholder (or his
company) for services provided under an agreement that calls for the
Company to pay up to an 8% commission based on sales to certain customers.
11. SIGNIFICANT CUSTOMERS
For the nine-month period ended September 30, 2004, the Company had sales
to one customer in the period totaling $8,605,884 or 63% of total sales.
12. EMPLOYEE SEPARATION AND MUTUAL RELEASE AGREEMENTS
In February of 2004, the Company entered into separation and mutual release
agreements with two former employees who alleged that they were entitled to
bonus payments, payment for stock certificates and payment of other
benefits. Under the terms of the agreements, the Company is required to pay
the former employees a total of $180,000 over a twelve-month period
beginning in February of 2004. The Company recorded the corresponding
$180,000 liability and expense related to these agreements as of and for
the period ended December 31, 2003. The remaining liability at September
30, 2004 is $38,333.
13. OFF BALANCE SHEET RISK AND CREDIT RISK CONCENTRATION
A substantial amount of the Company's revenues and trade receivables are
the result of business with a relatively concentrated group of companies in
the financial services industry. The Company does not require collateral or
other security on most of these accounts. The credit risk on these accounts
is controlled through credit approvals and monitoring procedures.
The industry in which the Company operates is highly regulated and subject
to restrictions that may increase as new laws and/or regulations are
passed.
14. CONTINGENCIES
The Internal Revenue Service ("IRS") has filed a lien against substantially
all of the Company's assets. The lien was filed as a result of non-payment
of payroll taxes. As of September 30, 2004 the Company's unpaid payroll
taxes, including related penalties and interest, approximated $398,000 and
are included in accrued liabilities. The Company and the IRS have
established a payment plan for the past due taxes. In the event that the
Company is unable to comply with the plan, the IRS could seize virtually
all of the Company's assets.
Numerous lawsuits, claims and proceedings are pending against the company.
The Company estimates that based on the facts and circumstances the claims
are either without merit or have been adequately reserved. These matters,
if resolved differently than management's estimates, could have a material
adverse effect on the Company's financial position, operating results and
cash flows when resolved in a future reporting period.
9.
15. SUBSEQUENT EVENTS, FINANCIAL RESULTS AND LIQUIDITY
In July of 2004, the stockholders of the Company entered into a letter of
intent to sell 100% of the Company's common stock to Epixtar Corp.
(EPIXTAR). In connection with the agreement the Company received a loan
from EPIXTAR of $600,000 in July of 2004 and an additional $300,000 in
November of 2004. In November of 2004, a $900,000 non-interest bearing
promissory note was executed in favor of EPIXTAR for the loan advances. In
the event that the transaction is not completed or an event of default
occurs, the note will become interest bearing at the rate of 18%. As of
September 30, 2004 the $600,000 advanced on the loan has been classified as
Note Payable, Epixtar.
As of September 30, 2004 the Company had a negative net worth of $2,674,525
and negative working capital of $3,356,425. In the event that the
transaction discussed above does not occur, there can be no assurance that
additional financing can be obtained from conventional sources to fund the
Company's liabilities and cash flow requirements.
The Company's independent public accountants have included a "going
concern" emphasis paragraph in their review report accompanying these
financial statements. The paragraph states that the Company's recurring
losses and negative working capital raise substantial doubt about the
company's ability to continue as a going concern and cautions that the
financial statements do not include adjustments that might result from the
outcome of this uncertainty.
Management believes that, despite the financial hurdles and funding
uncertainties going forward, it has business plans that can significantly
improve operating results. The support of the company's vendors, customers,
lenders, stockholders and employees will continue to be key to the
Company's future success.
10.
Acord Cox & Company
CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
15700 COLLEGE BLVD. SUITE 100 LENEXA, KS 66219
913. 541. 1993 FAX/913. 492. 7953
INDEPENDENT AUDITORS' REPORT
Board of Directors
Innovative Marketing Strategies, Inc. and Subsidiaries
Leawood, Kansas
We have audited the accompanying consolidated balance sheets of Innovative
Marketing Strategies, Inc. and Subsidiaries (the "Company") as of December 31,
2003 and 2002, and the related consolidated statements of operations and
accumulated deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Innovative Marketing
Strategies, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
The Internal Revenue Service {"IRS") has filed a lien against substantially all
of the Company's assets. The lien was filed as a result of non-payment of
payroll taxes. As of December 31, 2003 the Company's unpaid payroll taxes,
including related penalties and interest, approximated $590,000 and are included
in accrued liabilities. The Company and the IRS have established a payment plan
for the past due taxes. In the event that the Company is unable to comply with
the plan, the IRS could seize virtually all of the Company's assets.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 17 to the
financial statements, the Company has suffered recurring net losses and has a
retained deficit that raises substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 17. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Acord Cox & Company
September 27, 2004
11.
INNOVATIVE MARKETING STRATEGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
- ---------------------------------------------------------------------------------------------
ASSETS 2003 2002
CURRENT ASSETS
Cash $ 53,772 $ 228,947
Accounts receivable 1,018,500 2,373,086
Factored receivable reserve 40,000
Unbilled receivables 515,196 291,791
Due from stockholder 26,464
----------- -----------
Total current assets 1,653,932 2,893,824
PROPERTY AND EQUIPMENT, NET 896,655 1,051,974
OTHER ASSETS 104,849
----------- -----------
$ 2,655,436 $ 3,945,798
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of notes payable $ 349,848 $ 399,032
Accounts payable 1,356,063 1,129,777
Accrued liabilities 1,591,133 2,671,387
Due to officers 82,032
Notes payable, officers 222,421 246,418
----------- -----------
Total current liabilities 3,601,497 4,446,614
LONG-TERM LIABILITIES, less current maturities
Notes payable 745,267 645,609
----------- -----------
4,346,764 5,092,223
STOCKHOLDERS' DEFICIT
Common stock, $1 par value; 7,500 shares
authorized, issued and outstanding 7,500 7,500
Accumulated deficit (1,698,828) (1,153,925)
----------- -----------
Total stockholders' deficit (1,691,328) (1,146,425)
----------- -----------
$ 2,655,436 $ 3,945,798
=========== ===========
12.
INNOVATIVE MARKETING STRATEGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS AND ACCUMULATED DEFICIT
YEARS ENDED DECEMBER 31, 2003 AND 2002
- ---------------------------------------------------------------------------------------
2003 2002
REVENUES 18,955,422 $ 22,299,404
EXPENSES
Personnel costs 13,054,739 14,360,047
Selling, general and administrative 4,847,023 6,400,316
Consulting fees - related party 592,526 434,098
Depreciation 356,089 265,778
Impairment charge 411,669
------------ ------------
18,850,377 21,871,908
------------ ------------
INCOME FROM OPERATIONS 105,045 427,496
OTHER INCOME (EXPENSE)
Interest expense (493,313) (241,094)
Other expense (75,910) (116,967)
Other income 24,913 174,972
Loss on disposal of assets (105,638)
Loss on investment (303,885)
------------ ------------
(649,948) (486,974)
------------ ------------
LOSS BEFORE INCOME TAXES (544,903) (59,478)
INCOME TAXES -- --
------------ ------------
NET LOSS (544,903) (59,478)
ACCUMULATED DEFICIT, BEGINNING (1,153,925) (1,094,447)
------------ ------------
ACCUMULATED DEFICIT, ENDING (1,698,828) $ (1,153,925)
============ ============
13.
INNOVATIVE MARKETING STRATEGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
- ----------------------------------------------------------------------------------------------------------
2003 2002
OPERATING ACTIVITIES
Net
loss $ (544,903) $ (59,478)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 356,089 265,778
Loss on disposal of fixed assets 105,638
Impairment charge 411,669
Changes in:
Accounts receivable 1,091,180 (974,967)
Due from stockholder (26,464)
Other assets (104,849) 247,529
Due to officers 82,032
Accounts payable and accrued expenses (853,968) 938,954
----------- -----------
Net cash provided by operating activities 104,755 829,485
----------- -----------
INVESTING ACTIVITIES
Proceeds from sale of fixed assets 25,828
Purchase of property and equipment (332,236) (510,802)
----------- -----------
Net cash used in investing activities (306,408) (510,802)
----------- -----------
FINANCING ACTIVITIES
Principal payments on notes payable (524,645) (477,598)
Principal payments on officers' notes payable (50,771)
Advances on notes payable 575,120 490,662
Advances on officers' notes payable 26,774 59,252
----------- -----------
Net cash provided by financing activities 26,478 72,316
----------- -----------
NET CHANGE IN CASH (175,175) 390,999
CASH, BEGINNING OF YEAR 228,947 (162,052)
----------- -----------
CASH, END OF YEAR $ 53,772 $ 228,947
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 493,313 $ 241,094
=========== ===========
14.
INNOVATIVE MARKETING STRATEGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Description of Business - Innovative Marketing Strategies, Inc. and
Subsidiaries (the "Company"), is a Florida corporation whose core
business is the operation of a network of telecommunication call
centers that provide direct marketing services. The Company, through
its subsidiaries and divisions, also offers other marketing and
advisory services.
The Company's corporate headquarters are located in Leawood, Kansas.
Call center locations include Kansas, Washington, Minnesota, West
Virginia and Manila, Philippines.
The Company is the majority owner in three Limited Liability Companies
that were organized in the State of Kansas in either 2002 or 2003:
Quantum Financial, LLC, Quantum Direct, LLC, and Quantum Marketing
Group, LLC (together "Quantum").
In September of 2003 the Company formed Innovative Marketing Strategies
Asia, Inc ("IMS Asia"), a wholly owned subsidiary located in the
Philippines that was organized to operate a call center located in the
Philippines beginning in 2004.
b. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and those of its wholly-owned and
majority-owned subsidiaries. Intercompany accounts and transactions
have been eliminated in consolidation.
c. Revenue Recognition - The Company recognizes revenues in the period in
which the corresponding services are provided. Revenue received in
advance of the delivery of service is recorded as deferred revenue. The
revenue for services provided, but not invoiced, is recorded as
unbilled receivables until invoiced.
d. Furniture, Fixtures and Equipment - Fixed assets, principally
computers, furniture and leasehold improvements, are stated at cost
less accumulated depreciation. Depreciation is computed using the
straight-line and accelerated methods over the estimated useful lives
of the corresponding assets.
e. Advertising Costs - Advertising costs are expensed as incurred.
Advertising costs for the years ended December 31, 2003 and 2002 were
$216,197 and $101,894.
f. Income Taxes - The Company uses the liability method for accounting for
income taxes. Deferred tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between
the financial reporting and tax bases of assets and liabilities. If
appropriate, deferred tax assets are reduced by a valuation allowance
that reflects expectations of the extent to which such assets will be
realized.
g. Cash Equivalents - All highly liquid debt investments with maturities
of three months or less when purchased are considered to be cash
equivalents.
h. Significance of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
15.
i. Impairment of long-lived assets - The Company continually evaluates the
carrying value of its long-lived assets. Impairment is recognized when
the expected future discounted operating cash flows to be derived from
such assets are less than their carrying values.
2. ACCOUNTS RECEIVABLE FACTORING AGREEMENT
The Company sells (with recourse) certain of its accounts receivables to
Wells Fargo ("WF") and other factors under factoring agreements. Under the
terms of their agreement, WF held $40,000 at December 31, 2003 as reserve
for uncollectible accounts. At December 31, 2003, the Company had received
$806,968 of proceeds for trade receivables sold to WF that were subject to
recourse in the event of non collection. During 2003 the Company received
$9,096,654 of proceeds from the sale of receivables and paid $169,807 in
fees during 2003. During 2002 the Company received $2,007,193 of proceeds
from the sale of receivables and paid $35,943 in fees during 2002.
3. FURNITURE, FIXTURES AND EQUIPMENT
2003 2002
Computers and equipment $1,436,006 $1,380,874
Furniture and fixtures 101,275 128,672
Leasehold improvements 57,253 141,955
---------- ----------
1,594,534 1,651,501
Less accumulated depreciation (697,879) (599,527)
---------- ----------
$ 896,655 $1,051,974
========== ==========
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Under this standard, goodwill and intangibles with
indefinite useful lives are no longer amortized. This standard also
requires, at a minimum, an annual impairment assessment of the carrying
value of goodwill and intangibles with indefinite useful lives.
In 2002 the Company recorded an impairment charge of $411,669 as a result
of implementing SFAS No. 142. The charge, which related to acquisition of a
business in 1999, has been reflected as an operating expense in the
accompanying 2002 consolidated statement of operations.
16.
5. ACCRUED LIABILITIES
2003 2002
Taxes payable $ 591,712 $1,806,149
Accrued payroll 546,844 742,373
Accrued settlement 200,000
Accrued termination payments 180,000
Accrued vacation 50,577 111,165
Other 22,000 11,700
---------- ----------
$1,591,133 $2,671,387
========== ==========
6. NOTES PAYABLE
2003 2002
Note payable dated 2002, interest at 6.0%, due in 24
monthly installments of $1,052, through
maturity in 2004. Secured by office furniture. $ 10,330 $ 21,845
Note payable dated 2002, interest at 41.0%, due in
monthly installments of $15,000, including interest.
Secured by certain assets defined in the agreement
and a personal guarantee by a stockholder. 1,457 127,850
Note payable dated 1999, interest at 10.0%, due in
monthly installments of $6,089 including
interest, until paid in full. 315,257 353,459
Notes payable dated 1999, Kansas Business Development
Loans, non interest bearing, forgivable over a
five year period if defined job creation
requirements are met, subject to complete repayment
under conditions of default. 65,702 91,566
Note payable dated 2002, variable interest (Prime plus 3 1/4 %)
due in 60 monthly installments through maturity
in 2007. Secured by certain equipment. 48,919 75,000
Note payable dated 2003, West Virginia Business
Development Loan, interest at 5.0%, due in 120
monthly installments of $1,591, including interest,
through maturity in 2013. Secured by certain assets
defined in a security agreement and personal
guarantees by two of the Company's stockholders. 139,149 --
Note payable dated 2003, West Virginia Business
Development Loan, interest at 4.0%, due in 60
monthly installments of $5,223, including interest,
through maturity in 2008. Secured by certain assets
defined in a security agreement. 273,346 --
17.
6. NOTES PAYABLE (Continued)
Note payable dated 2003, non-interest bearing,
due in 30 monthly installments through maturity
in 2007. Secured by certain equipment. 171,398 190,442
Note payable dated 2001, secured by certain equipment
Paid in full in 2003. -- 104,882
Notes payable, other 69,557 79,597
---------- -----------
Total notes payable 1,095,115 1,044,641
Less current portion 349,848 399,032
---------- -----------
$ 745,267 $ 645,609
========== ==========
Maturities of notes payable, for the years subsequent to December 31, 2003
are as follows:
AMOUNT
2004 $ 349,848
2005 210,258
2006 161,289
2007 134,596
2008 126,135
Thereafter 112,989
-----------
$ 1,095,115
===========
7. NOTES PAYABLE TO STOCKHOLDERS
As of December 31, 2003 and 2002 the Company had outstanding notes payable,
due on demand, to the Company's three stockholders' totaling $222,421 and
$246,418, respectively. The obligations are unsecured and bear interest at
8 percent.
8. OPERATING LEASES
The Company leases equipment and office facilities under non-cancelable
operating leases. Rental expense related to these leases approximated
$907,074 and $720,651 during the years ended December 31, 2003 and 2002.
Minimum rental commitments subsequent to December 31, 2003 under such
operating leases are as follows:
2004 $ 807,566
2005 666,716
2006 583,992
2007 286,658
-----------
$ 2,344,932
===========
18.
9. INCOME TAXES
The difference between the effective tax rate and the statutory federal and
state income tax rates results from the effect of the timing differences on
the deductibility of certain accrued expenses and the non-recognition of a
deferred tax asset related to the Company's net operating loss
carryforwards.
SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not
be realized. The Company's ability to realize the benefit of its deferred
tax asset will depend on the generation of future taxable income. Because
the Company's operations are not currently generating taxable income,
management believes that a full valuation allowance should be provided as
of December 31, 2003.
Deferred taxes result from temporary differences between the financial
statement and tax bases of assets and liabilities. The sources of these
differences and their cumulative tax effects are:
2003 2002
Accrued liabilities $ 174,287 $ 37,796
Other current assets and liabilites (251,186) (289,330)
Operating loss carryforward 355,300 334,900
---------- ---------
Deferred tax asset - current, net 278,401 83,366
---------- ---------
Intangible assets - non-current 129,200 139,967
---------- ---------
Valuation reserve (407,601) (223,333)
---------- ---------
Net deferred tax asset $ 0 $ 0
========== =========
At December 31, 2003, the Company had net operating loss carry forwards for
income tax purposes of approximately $1,045,000.
10. 401(K) RETIREMENT PLAN
The Company maintains a 401(K) plan ("the Plan") covering all eligible
employees who desire to participate. Contributions to the plan are based
upon the amount of the employees' deferrals and the employer's matching
contribution rate of 25%. For the year ended December 31, 2003 the Company
recognized $15,023 of expense that represented their portion of the
contribution.
11. RELATED PARTY TRANSACTIONS
Beginning January 1, 2003, the Company leases its corporate headquarters
from an entity that is 50% owned by the two principal stockholders of the
Company. Rent expense under this lease, for the year ended December 31,
2003 was $258,543.
The amount due to officers ($82,032 as of December 31, 2003) on the
accompanying balance sheets arose as a result of accrued salaries to these
parties. The amount due from stockholder ($26,464 as of December 31, 2003)
on the accompanying balance sheets arose as a result of cash advances to a
stockholder.
During 2003 and 2002 the Company expensed $592,526 and $434,098,
respectively, for commissions paid or payable to a minority stockholder (or
his company) for services provided under an agreement that calls for the
Company to pay a commission of up to 8% of sales to certain customers.
19.
12. SIGNIFICANT CUSTOMERS
For the year ended December 31, 2003, the Company had sales to five
customers that totaled $14,448,679 or 76% of the Company's total sales.
Sales to one customer in 2003 totaled $8,234,052 or 43% of total sales.
For the year ended December 31, 2002, the Company had sales to five
customers that totaled $19,544,169 or 84% of the Company's total sales.
Sales to one customer in 2002 totaled $4,805,494 or 21% of total sales.
13. EMPLOYEE SEPARATION AND MUTUAL RELEASE AGREEMENTS
In February of 2004, the Company entered into separation and mutual release
agreements with two former employees who alleged that they were entitled to
bonus payments, payment for stock certificates and payment of other
benefits. Under the terms of the agreements, the Company is required to pay
the former employees a total of $180,000 over a twelve-month period
beginning in February of 2004. The Company recorded the corresponding
$180,000 liability and expense related to these agreements as of and for
the year ended December 31, 2003.
14. OFF BALANCE SHEET RISK AND CREDIT RISK CONCENTRATION
A substantial amount of the Company's revenues and trade receivables are
the result of business with a relatively concentrated group of companies in
the financial services industry. The Company does not require collateral or
other security on most of these accounts. The credit risk on these accounts
is controlled through credit approvals and monitoring procedures.
The industry in which the Company operates is highly regulated and subject
to restrictions that may increase as new laws and/or regulations are
passed.
15. CONTINGENCIES
The Internal Revenue Service ("IRS") has filed a lien against substantially
all of the Company's assets. The lien was filed as a result of non-payment
of payroll taxes. As of December 31, 2003 the Company's unpaid payroll
taxes, including related penalties and interest, approximated $590,000 and
are included in accrued liabilities. The Company and the IRS have
established a payment plan for the past due taxes. In the event that the
Company is unable to comply with the plan, the IRS could seize virtually
all of the Company's assets.
Numerous lawsuits, claims and proceedings are pending against the company
including MCI WorldCom, Inc.'s (MCI) demand in 2002 of $701,667 for long
distance phone services. The Company responded to MCI in 2003 with an offer
to settle for $200,000. MCI countered in early 2004 with a demand for
$417,000. The Company estimates that based on the facts and circumstances
the MCI claim should be settled for an amount that is not more than the
$200,000 offered.
These matters, if resolved differently than management's estimates, could
have a material adverse effect on the Company's financial position,
operating results and cash flows when resolved in a future reporting
period.
16. PURCHASE COMMITMENTS
In December of 2003, the Company made a deposit of $63,000 toward an
agreement to purchase certain call center equipment in the amount of
$716,500 that is expected to be installed in 2004. The deposit is recorded
as a long term asset at December 31, 2004. The balance of the purchase
price will be financed by the vendor due in monthly installments of $36,613
under a promissory note bearing interest at 8.8%, through maturity in
November of 2005.
20.
17. SUBSEQUENT EVENTS, FINANCIAL RESULTS AND LIQUIDITY
In 2004 the stockholders of the Company entered into a letter of intent to
sell 100% of the Company's common stock to another company. In connection
with the agreement the Company received a loan from the acquirer of
$600,000 that will be applied against the purchase price if the transaction
is completed.
As of December 31, 2003 the Company had a negative net worth of $1,691,328
and negative working capital of $1,947,565. In the event that the
transaction discussed above does not occur, there can be no assurance that
additional financing can be obtained from conventional sources to fund the
Company's liabilities and cash flow requirements.
The Company's independent public accountants have included a "going
concern" emphasis paragraph in their audit report accompanying these
financial statements. The paragraph states that the Company's recurring
losses and negative working capital raise substantial doubt about the
company's ability to continue as a going concern and cautions that the
financial statements do not include adjustments that might result from the
outcome of this uncertainty.
Management believes that, despite the financial hurdles and funding
uncertainties going forward, it has business plans that can significantly
improve operating results. The support of the company's vendors, customers,
lenders, stockholders and employees will continue to be key to the
Company's future success.
21.
(b) Pro forma financial information.
EPIXTAR CORP. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Index to Financial Statements
Page
Introduction to Pro Forma Condensed Consolidated Financial Statements 23
Pro forma Condensed Consolidated Balance Sheet as of September 30, 2004 24
Pro forma Condensed Consolidated Statement of Operations for the Nine Months
Ended September 30, 2004 25
Pro forma Condensed Consolidated Statement of Operations for the Year Ended
December 31, 2003 26
Notes to Pro forma Condensed Consolidated Financial Statements 27
22.
Epixtar Corp. and Subsidiaries
Introduction to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
The pro forma condensed consolidated financial statements presented herein are
based on available information and certain assumptions considered reasonable by
Epixtar Corp.'s (the Company) management.
Upon closing an acquisition, it is the Company's practice to estimate the fair
values of assets and liabilities acquired and consolidate the acquisition as
quickly as possible. Given the time it takes to obtain pertinent information to
finalize the acquired company's balance sheet (frequently with implications for
the price of the acquisition) and then to adjust the acquired company's
accounting policies, procedures, books and records to the Company's standards,
it is often several quarters before the Company is able to finalize those
initial fair value estimates. Accordingly, it is not uncommon for the initial
estimates to be subsequently revised.
The pro forma condensed consolidated financial statements included herein
reflect the Company's preliminary purchase price allocation, which will be
subject to further adjustments as Epixtar finalizes the allocation of purchase
price in accordance with accounting principles generally accepted in the United
States of America. The pro forma condensed consolidated financial statements do
not represent what the Company's financial position would have been assuming the
completion of the Company's acquisition of Innovative Marketing Strategies, Inc.
and Subsidiaries (IMS) had occurred on September 30, 2004, or what the Company's
results of operations would have been assuming the completion of the acquisition
on January 1, 2003, nor do they project the Company's financial position or
results of operations at any future date or for any future period.
These pro forma condensed consolidated financial statements should be read in
conjunction with the Company's consolidated financials statements included in
Amendment 2 to Form SB 2 filed on Form S1, filed with the Securities and
Exchange Commission on January 18, 2005.
The following pro forma condensed financial statements give effect to the
acquisition of IMS by the Company, which was completed as of January 7, 2005,
effective January 3, 2005. The pro forma condensed consolidated balance sheet of
the Company as of September 30, 2004 has been prepared as if the acquisition of
IMS had been consummated on September 30, 2004. The condensed consolidated
statements of operations for the nine months ended September 30, 2004 and the
year ended December 31, 2003 are presented as if the Company's acquisition of
IMS had occurred on January 1, 2003 and the effect was carried forward through
the balance of the year 2003 and the nine month period ended September 30, 2004.
Pursuant to the terms of the Acquisition Agreement, the Company paid or will pay
consideration consisting of: (1) a $5,105,000 collateral promissory note; (2)
$950,000 in cash and (3) a guarantee agreement for $770,000 relating to sales
commissions due to one of the IMS shareholders. The collateral promissory note
is a 24-month non interest bearing note. The Company issued 550,290 shares of
its Common Stock as payment of $385,000 of the amount due pursuant to the
guarantee agreement and the balance of $385,000 is payable over twelve months.
This agreement is non-interest bearing.
As part of the acquisition, one of the IMS shareholders entered into a new
employment agreement with the Company and two shareholders entered into
consulting agreements. The employment agreement is for a term of two years and
the consulting agreements each for terms of three years. These agreements
contained certain non compete provisions for terms of three years after the
expiration of their respective agreement. Separately, the IMS shareholders
entered into non-compete agreements with the Company.
23.
EPIXTAR CORP. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2004 (Unaudited)
Epixtar IMS Pro Forma Pro Forma
Historical Historical Adjustments Adjusted
---------------- ---------------- ---------------- --- ----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,723,000 $ 148,000 (100,000) b. 1,721,000
(amounts held in escrow,
$1,082,000) (50,000) c.
Restricted cash 175,000 - 175,000
Accounts receivable -
net 4,214,000 1,151,000 5,365,000
Note receivable 600,000 - (600,000) e. 0
Deferred loan costs, current
portion 317,000 - 317,000
Prepaid expenses and other current
assets 362,000 40,000 (40,000) d. 362,000
----------- ---------- ----------- -----------
Total current
assets 7,391,000 1,339,000 (790,000) 7,940,000
----------- ---------- ----------- -----------
Property and Equipment, Net 4,949,000 1,272,000 1,129,000 a. 7,350,000
Goodwill 3,360,000 - 3,180,000 a. 5,873,000
Intangible assets 3,975,000 a. 4,642,000
Deferred loan costs, net of current portion 398,000 - 398,000
Other assets 1,164,000 44,000 1,208,000
----------- ---------- ----------- -----------
Total assets $17,262,000 $2,655,000 $ 7,494,000 $27,411,000
=========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 2,908,000 $1,608,000 $ (385,000) c. $ 4,117,000
(14,000) c.
Accrued expenses and other
liabilities 1,607,000 1,790,000 275,000 b. 3,179,000
(19,000) b.
67,000 a.
(541,000) d.
Deferred
revenue 785,000 - 785,000
Debt, current portion 3,492,000 1,298,000 900,000 c. 7,466,000
2,553,000 c
(177,000) c.
(600,000) e
Note payable - stockholder 2,448,000 - 2,448,000
----------- ---------- ----------- -----------
Total current liabilities 11,240,000 4,696,000 2,059,000 17,995,000
----------- ---------- ----------- -----------
Long-term debt 3,552,000 634,000 2,552,000 c. 6,561,000
(177,000) c.
----------- ---------- ----------- -----------
Total liabilities 14,792,000 5,330,000 4,434,000 24,556,000
----------- ---------- ----------- -----------
Stockholders' Equity (Deficit)
Convertible preferred stock - - -
Common stock 12,000 7,000 (7,000) a. 12,000
Additional paid-in capital 21,985,000 0 385,000 c 22,370,000
Accumulated deficit (19,528,000) (2,682,000) 2,682,000 a. (19,528,000)
Accumulated comprehensive income 1,000 0 1,000
----------- ---------- ----------- -----------
Total stockholders' equity (deficit) 2,470,000 (2,675,000) 3,060,000 2,855,000
----------- ---------- ----------- -----------
Total liabilities and stockholders' equity
(deficit) $17,262,000 $ 2,655,000 $ 7,494,000 $27,411,000
=========== ========== =========== ===========
The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.
24.
EPIXTAR CORP. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004 (Unaudited)
Epixtar IMS Pro Forma Pro Forma
Historical Historical Adjustments Adjusted
---------------------------------------------------------------------------
Revenues $ 13,530,000 $ 13,804,000 $ - $ 27,334,000
Cost of sales 3,870,000 - 9,893,000 d 13,763,000
---------------------------------------------------------------------------
Gross Profit 9,660,000 13,804,000 (9,893,000) 13,571,000
---------------------------------------------------------------------------
Operating expenses
Selling, general and administrative 11,263,000 13,621,000 (9,893,000)d 14,991,000
Consulting fees-related party 2,026,000 538,000 2,564,000
Provision for doubtful accounts 318,000 - 318,000
Depreciation 789,000 432,000 282,000 a 1,503,000
Amortization of intangibles - - 1,123,000 a 1,123,000
---------------------------------------------------------------------------
Total operating expenses 14,396,000 14,591,000 (8,488,000) (20,499,000)
---------------------------------------------------------------------------
Income from operations (4,736,000) (787,000) (1,405,000) (6,928,000)
Other income (expense)
Interest expense (2,826,000) (204,000) (133,000)b (3,170,000)
(7,000)c
Gain on extinguishment of debt 1,141,000 - 1,141,000
Loss on disposal of assets - - -
Other income (expense) (8,000) 8,000 -
---------------------------------------------------------------------------
Total other income (expense) (1,693,000) (196,000) (140,000) (2,029,000)
---------------------------------------------------------------------------
Loss before income taxes (benefit) (6,429,000) (983,000) (1,545,000) (8,957,000)
Income taxes (benefit) - - - -
---------------------------------------------------------------------------
Net loss $ (6,429,000) $ (983,000) $ (1,545,000) $ (8,957,000)
===========================================================================
Cumulative Dividends
on Preferred Stock (177,000) (177,000)
------------------ ------------------
$ (6,606,000) $ (9,134,000)
================== ==================
Net income (loss) per common share:
Basic and Diluted $ (0.60) $ (0.79)
================== ==================
Weighted average number of shares
Basic and Diluted 11,006,346 f. 11,556,636
================== ==================
The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.
25.
EPIXTAR CORP. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
Epixtar IMS Pro Forma Pro Forma
Historical Historical Adjustments Adjusted
---------------------------------------------------------------------
Revenues $ 37,121,000 $ 18,955,000 $ - $ 56,076,000
Cost of sales 17,442,000 - 12,926,000 d 30,368,000
---------------------------------------------------------------------
Gross Profit 19,679,000 18,955,000 (12,926,000) 25,708,000
---------------------------------------------------------------------
Operating expenses
Selling, general and administrative 9,798,000 17,902,000 (12,926,000)d 14,774,000
Consulting fees-related party 3,538,000 592,000 4,130,000
Provision for doubtful accounts 1,534,000 - 1,534,000
Depreciation 214,000 356,000 376,000 a 946,000
Amortization of intangibles - - 1,497,000 a 1,497,000
---------------------------------------------------------------------
Total operating expenses 15,084,000 18,850,000 (11,053,000) 22,881,000
---------------------------------------------------------------------
Income from operations 4,595,000 105,000 (1,873,000) 2,827,000
Other income (expense)
Interest expense (542,000) (493,000) (177,000)b (1,236,000)
(14,000)b
(10,000)c
Gain on extinguishment of debt 325,000 - 325,000
Loss on disposal of assets - (106,000) (106,000)
Other income (expense) 1,000 (51,000) (50,000)
---------------------------------------------------------------------
Total other income (expense) (216,000) (650,000) (201,000) (1,067,000)
---------------------------------------------------------------------
Income (loss) before income taxes 4,379,000 (545,000) (2,074,000) 1,760,000
Income taxes - - - -
---------------------------------------------------------------------
Net income (loss) $ 4,379,000 $ (545,000) $ (2,074,000) $ 1,760,000
=====================================================================
Cumulative dividends on preferred stock (188,000) (188,000)
Beneficial conversion feature of preferred stock (1,884,000) (1,884,000)
------------- --------------
Income (Loss) Available to Common Stockholders $ 2,307,000 $ (312,000)
============= ==============
Net income per common share:
Basic $ 0.22 $ (0.03)
============= ==============
Diluted $ 0.16 $ (0.03)
============= ==============
Weighted average number of shares
Basic 10,554,450 f. 11,104,740
============= ==============
Diluted 14,721,639 f. 11,104,740
============= ==============
The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.
26.
Epixtar Corp. and Subsidiaries
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. Historical Financial Statements
The historical financial data presented in these pro forma condensed
consolidated financial statements include the historical balance sheet of
Epixtar Corp. and subsidiaries (the Company) and Innovative Marketing
Strategies, Inc. and subsidiaries (IMS) as of September 30, 2004, and the
historical statements of operations of Epixtar and IMS for the year ended
December 31, 2003 and the nine months ended September 30, 2004.
NOTE 2. Pro Forma Adjustments
Adjustments included in the column under the heading "Pro Forma Adjustments"
include the following:
Balance Sheet
a. Represents the preliminary allocation of the purchase price paid for
the acquisition of IMS, including (1) the assignment of values to
specifically identifiable tangible and intangible assets, and
identifiable liabilities; (2) the recording of the excess of purchase
price over the individual assigned values to goodwill and (3) the
elimination of historical stockholders' equity balances of IMS
b. Represents finders fees incurred in connection with the acquisition of
IMS by the Company.
c. Represents consideration paid for the acquisition of IMS including:
Two-year, non interest bearing promissory note for $5,105,000, recorded
at fair value; (2) advance note for $900,000; (3) $50,000 paid at
closing; (3) guaranteed agreement for amounts due IMS shareholder for
commissions, $385,000 one-year, non interest bearing guarantee
agreement and $385,000 through the issuance of 551,450 shares of the
Company's common stock. The $385,000 guarantee agreement is reflected
at fair value. The valuation assigned to the common stock was based on
the average volume and price of the stock for the month of November
2004 as provided in the acquisition agreement.
d. Represents adjustments to eliminate IMS shareholders' receivables and
payables, forgiven as part of the acquisition.
e. Represents the elimination of a note receivable and a note payable due
to the Company from IMS.
Statements of Operations
a. Adjustment to recognize the incremental depreciation of capitalized
property and equipment and amortization of intangible assets related to
clients' lists and non compete contracts, based on preliminary values
assigned to assets acquired in the IMS merger.
b. Adjustment to record 7% imputed interest on the $5.1 million
non-interest bearing note related to the IMS acquisition and on $385
thousand guarantee agreement.
c. Adjustment to recognize valuation discount on finder's fee agreement.
d. Adjustment to reclassify certain selling, general and administrative
expenses recorded by IMS to conform to classifications used by Epixtar.
e. The weighted average basic and diluted shares outstanding for the nine
months ended September 30, 2004 and the year ended December 31, 2003
include the 550,290 common shares issued in payment of $385,000 of the
guarantee agreement.
27.
SIGNATURES
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.
Dated: March 23, 2005
By: /s/ Irving Greenman
-----------------------
Irving Greenman
Chief Financial Officer
Epixtar Corp.
28.