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): December 23, 2002
IMPROVENET, INC.
(Exact name of registrant as specified in its charter)
Delaware 000-29927 77-0452868
(State or other Jurisdiction of (Commission File No.) (IRS Employer
Incorporation) Identification No.)
8930 E. Raintree Drive, Suite 300
Scottsdale, Arizona 85260
(Address of Registrant's Principal Executive Offices) (Zip Code)
1286 Oddstad Drive
Redwood City, CA 94063
(Former Address of Registrant's Principal Executive Offices)
(480) 346-0000
(Registrant's telephone number, including area code)
ITEM 1. CHANGES IN CONTROL OF REGISTRANT.
Effective December 23, 2002 (the "Effective Time"), Etech Acquisition, Inc.
("Merger Sub"), a newly formed Arizona corporation and wholly-owned subsidiary
of ImproveNet, Inc., a Delaware corporation (the "Company"), merged (the
"Merger") with and into eTechLogix, Inc., an Arizona corporation ("Etech")
pursuant to an Agreement and Plan of Merger dated July 30, 2002 (the "Merger
Agreement"). The description contained in this Item 1 of the transactions
consummated pursuant to the terms and conditions of the Merger Agreement is
qualified in its entirety by reference to the full text of the Merger Agreement,
and the amendments thereto, which are incorporated herein by reference. The
Merger Agreement is filed as Exhibit 10.39 to the Report on Form 8-K filed by
the Company on August 6, 2002 and which provides additional information
regarding the Merger Agreement. Amendment No. 1 to the Merger Agreement and
Amendment No. 2 to the Merger Agreement are filed as Exhibits 2 and 3,
respectively to the Schedule 13Ds filed separately by Jeffrey I. Rassas,
Homayoon J. Farsi and Naser Ahmad on January 2, 2003.
At the Effective Time, each outstanding share of the common stock, no par
value per share, of Etech ("Etech Common Stock") was converted into the right to
receive and became exchangeable for 5,555.555556 shares of common stock of the
Company, par value $0.001 per share ("IMPV Common Stock"). A total of 35,417,750
shares of IMPV Common Stock were issued in the Merger to eleven (11) different
shareholders of Etech Common Stock. Of the holders of Etech Common Stock,
Jeffrey I. Rassas, Homayoon J. Farsi and Naser Ahmad, the directors of Etech,
(the "Etech Directors") collectively received 30,310,740 shares of IMPV Common
Stock in the Merger and have acquired control of the Company. At the Effective
Time, the Etech Directors collectively held 57.06% of the outstanding shares of
IMPV Common Stock. There are no agreements between the Etech Directors regarding
their holdings of IMPV Common Stock.
In addition, each outstanding warrant which was exercisable to purchase
shares of Etech Common Stock was converted into a warrant to purchase a number
of shares of IMPV Common Stock equal to the number of shares of Etech Common
Stock that could have been purchased by exercising such warrant multiplied by
5,555.555556, at a price per share of IMPV Common Stock equal to the per share
exercise price of such warrant divided by 5,555.555556. Warrants to purchase
1,500,000 shares of IMPV Common Stock were issued in the Merger. Also, each
unexpired outstanding option to purchase Etech Common Stock was converted, on
the same vesting schedule, into an option to purchase a number of shares of IMPV
Common Stock equal to the number of shares of Etech Common Stock that could have
been purchased under such option multiplied by 5,555.555556, at a price per
share of IMPV Common Stock equal to the per share exercise price of $0.05 per
share. Options to acquire 788,889 shares of IMPV Common Stock were issued in the
Merger of which 222,222 had vested as of December 23, 2002.
The Merger was intended to qualify as a tax deferred reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended, and to be
accounted for on a purchase basis. Neither the Company nor any of its
affiliates, directors, or officers or any affiliate of any of the Company's
directors or officers had any material relationship with the holders of
securities of Etech at or before the Effective Time. Etech is a leading
developer and marketer of enterprise commerce management software applications
for the supply side of the building materials industry.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
The Company hereby incorporates by reference Item 1 above in response to
Item 2.
2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
Balance Sheets as of September 30, 2002 and
December 31, 2001 and 2000.......................................... 7
Statements of Operations for the Nine Months Ended
September 30, 2002 and 2001 and for the Years Ended
December 31, 2001 and 2000.......................................... 9
Statements of Stockholders' Equity for the
Nine Months Ended September 30, 2002 and 2001 and for the
Years Ended December 31, 2001 and 2000.............................. 10
Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001 and for the
Years Ended December 31, 2001 and 2000.............................. 11
Notes to Consolidated Financial Statements............................ 13
(b) Pro Forma Financial Information
INDEX TO IMPROVENET, INC. PROFORMA FINANCIAL INFORMATION
Pro Forma Unaudited Combined Condensed Balance Sheet
at September 30, 2002............................................... 25
Pro Forma Unaudited Combined Condensed Statement of Operations
for the nine months ended September 30, 2002........................ 26
Pro Forma Unaudited Combined Condensed Statement of Operations
for the year ended December 31, 2001................................ 27
Notes to Unaudited Pro Forma Combined
Condensed Financial Statements...................................... 28
3
(c) Exhibits
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger, dated July 30, 2002, by and
among ImproveNet, Inc., a Delaware corporation, eTechLogix,
Inc., an Arizona corporation, and Etech Acquisition, Inc.,
an Arizona corporation. (Incorporated by reference to
Exhibit 10.39 to the Form 8-K filed by the Company on
August 6, 2002.)
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated
October 1, 2002. (Incorporated by reference to Exhibit 2 to
each of the Schedule 13Ds filed separately by Jeffrey I.
Rassas, Homayoon J. Farsi and Naser Ahmad on
January 2, 2003.)
2.3 Amendment No. 2 to Agreement and Plan of Merger, dated
November 12, 2002. (Incorporated by reference to Exhibit 3
to each of the Schedule 13Ds filed separately by Jeffrey I.
Rassas, Homayoon J. Farsi and Naser Ahmad on
January 2, 2003.)
4
eTECHLOGIX, INC.
FINANCIAL STATEMENTS
5
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of
eTechlogix, Inc.
We have audited the accompanying balance sheets of eTechlogix, Inc. as of
December 31, 2001 and 2000, and the related statements of operations,
stockholders' equity (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 auditing standards generally accepted
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 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 eTechlogix, Inc. as of
December, 2001 and 2000, and the results of its operations, stockholders' equity
(deficit), and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14, the Company
incurred net losses in 2001 and 2000, had negative cash flows in 2001 and had an
accumulated deficit and negative working capital as of December 31, 2001. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 14. The accompanying financial statements do not include any adjustments
to the amount and classification of assets or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
Semple & Cooper, LLP
Certified Public Accountants
Phoenix, Arizona
April 30, 2002
6
eTECHLOGIX, INC.
BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2002 2001 2000
----------- ----------- -----------
(UNAUDITED)
Current Assets:
Cash and cash equivalents (Note 1) $ 3,110 $ 31,630 $ 388,343
Accounts receivable, net (Note 1) 50,697 2,575 4,205
Other receivables (Note 9) -- -- 309,248
Income tax refund receivable -- 134,180 --
Other current assets (Note 4) 302,090 -- 2,382
----------- ----------- -----------
Total Current Assets 355,897 168,385 704,178
----------- ----------- -----------
Property and Equipment: (Notes 1, 3, 4 and 5)
Computer equipment 185,892 184,520 183,198
Furniture and fixtures 231,986 231,986 231,986
Automobiles -- 169,987 169,987
Leasehold improvements -- 98,077 98,077
----------- ----------- -----------
417,878 684,570 683,248
Less: accumulated depreciation (240,917) (300,515) (168,333)
----------- ----------- -----------
176,961 384,055 514,915
----------- ----------- -----------
Total Assets $ 532,858 $ 552,440 $ 1,219,093
=========== =========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
7
eTECHLOGIX, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
SEPTEMBER 30, DECEMBER 31,
2002 2001 2000
----------- ----------- -----------
(UNAUDITED)
Current Liabilities:
Notes payable - current portion (Note 3) $ 8,654 $ 27,504 $ 45,587
Obligations under capital leases - current portion
(Notes 1 and 5) 15,337 69,303 46,009
Line of credit (Note 2) 76,813 71,813 --
Related party note payable (Note 6) -- 12,000 --
Due to bank -- -- 10,750
Accounts payable 96,610 13,166 217,981
Accrued compensation 135,000 134,000 --
Other liabilities and accrued expenses (Notes 5 and 10) 365,501 148,118 129,923
Deferred revenue 21,500 42,000 100,000
Income taxes payable -- -- 11,367
----------- ----------- -----------
Total Current Liabilities 719,415 517,904 561,617
Long-Term Liabilities:
Notes payable - long-term portion (Note 3) 7,344 85,663 102,749
Subordinated convertible notes payable (Note 4) 250,000 -- --
Obligations under capital leases - long-term portion
(Notes 1 and 5) 30,431 167,991 220,115
----------- ----------- -----------
Total Liabilities 1,007,190 771,558 884,481
----------- ----------- -----------
Commitments and Contingencies: (Notes 5 and 10) -- -- --
Stockholders' Equity (Deficit):
Common stock, no par value, 1,000,000 shares authorized 22,000 10,000 10,000
Retained earnings (deficit) (386,332) (119,118) 434,612
----------- ----------- -----------
(364,332) (109,118) 444,612
Less: treasury stock, at cost (110,000) (110,000) (110,000)
----------- ----------- -----------
Total Stockholders' Equity (Deficit) (474,332) (219,118) 334,612
----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 532,858 $ 552,440 $ 1,219,093
=========== =========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
8
eTECHLOGIX, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2002 2001 2001 2000
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues (Notes 1 and 6) $ 731,385 $ 351,382 $ 478,660 $ --
Cost of Revenues (Note 1) 194,671 136,093 203,911 --
----------- ----------- ----------- -----------
Gross Profit 536,714 215,289 274,749 --
Selling, General and Administrative Expenses 627,522 745,509 931,881 582,814
Research and Development Expenses (Note 6) 68,976 -- -- 79,898
----------- ----------- ----------- -----------
Loss from Operations (159,784) (530,220) (657,132) (662,712)
Other Revenues (Expenses):
Interest income 107 4,362 4,436 12,029
Interest expense (74,133) (30,959) (38,784) (14,265)
Miscellaneous revenues (expense) 17,891 (37,842) 3,570 26,227
Loss on disposal of fixed assets (51,295) -- -- --
----------- ----------- ----------- -----------
Loss from Operations before Income Taxes (267,214) (594,659) (687,910) (638,721)
Benefit for Income Taxes -- 134,180 134,180 142,644
----------- ----------- ----------- -----------
Net Loss from Continuing Operations (267,214) (460,479) (553,730) (496,077)
Discontinued Operations: (Note 9)
Loss from operations of the ERP software division,
net of income tax benefit -- -- -- (583,350)
Gain on disposal of the ERP software division,
net of applicable income tax expense -- -- -- 1,033,846
----------- ----------- ----------- -----------
Net Loss $ (267,214) $ (460,479) $ (553,730) $ (45,581)
=========== =========== =========== ===========
Earnings (loss) per share - Basic and Diluted
-Continuing operations attributable to common
stockholders $ (56.91) $ (127.91) $ (153.81) $ (137.80)
-Discontinued operations -- -- -- 125.14
----------- ----------- ----------- -----------
Net loss atributable to common stockholders $ (56.91) $ (127.91) $ (153.81) $ (12.66)
=========== =========== =========== ===========
Weighted Average Common Shares Outstanding 4,695 3,600 3,600 3,600
=========== =========== =========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
9
eTECHLOGIX, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
TOTAL
RETAINED STOCKHOLDERS'
COMMON STOCK TREASURY STOCK EARNINGS EQUITY
SHARES AMOUNT SHARES AMOUNT (DEFICIT) (DEFICIT)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 3,600 $ 10,000 6,400 $(110,000) $ 480,193 $ 380,193
Net loss -- -- -- -- (45,581) (45,581)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2000 3,600 10,000 6,400 (110,000) 434,612 334,612
Net loss -- -- -- -- (553,730) (553,730)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2001 3,600 10,000 6,400 (110,000) (119,118) (219,118)
Conversion of a related party note
payable for stock (unaudited) (Note 6) 1,800 12,000 -- -- -- 12,000
Net loss for the nine month period ended
September 30, 2002 (unaudited) -- -- -- -- (267,214) (267,214)
--------- --------- --------- --------- --------- ---------
Balance at September 30, 2002 (unaudited) 5,400 $ 22,000 6,400 $(110,000) $(386,332) $(474,332)
========= ========= ========= ========= ========= =========
The Accompanying Notes are an Integral Part
of the Financial Statements
10
eTECHLOGIX, INC.
STATEMENTS OF CASH FLOWS
SEPTEMBER 30, DECEMBER 31,
2002 2001 2001 2000
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Net Loss $ (267,214) $ (460,479) $ (553,730) $ (45,581)
Deduct:
Loss from discontinued operations -- -- -- 583,350
Gain on disposal of discontinued operations -- -- -- (1,033,846)
----------- ----------- ----------- -----------
Loss from continuing operations (267,214) (460,479) (553,730) (496,077)
Adjustments to reconcile net loss to net cash
provided by operations:
Depreciation and amortization 70,653 97,275 132,310 120,736
Loss on disposal of fixed assets 51,295 -- -- --
Changes in assets and liabilities:
Accounts receivable, net (48,122) (20,223) 1,630 143,689
Other receivables -- 309,248 309,248 --
Income tax refund receivable 134,180 (134,180) (134,180) --
Other current assets (302,090) 2,382 2,382 (1,732)
Due to bank -- (10,750) (10,750) 10,750
Accounts payable 83,444 (168,452) (204,815) 158,541
Accrued compensation 1,000 91,000 134,000 --
Deferred revenue (20,500) (89,000) (58,000) 100,000
Income taxes payable -- (11,367) (11,367) (14,885)
Other liabilities and accrued expenses 36,121 17,195 18,195 129,923
----------- ----------- ----------- -----------
Net cash provided (used) in operating activities (261,233) (377,351) (375,077) 150,945
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,372) -- (1,450) (144,714)
----------- ----------- ----------- -----------
Net cash used by investing activities (1,372) -- (1,450) (144,714)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from subordinated convertible notes payable 250,000 -- -- 42,198
Repayment of notes payable (10,651) (28,550) (35,169) (32,195)
Payments on capital lease obligations (10,264) (25,366) (28,830) (17,209)
Line of credit, net 5,000 61,706 71,813 (8,341)
Proceeds from related party note payable -- -- 12,000 --
----------- ----------- ----------- -----------
Net cash provided (used) by financing activities 234,085 7,790 19,814 (15,547)
----------- ----------- ----------- -----------
The Accompanying Notes are an Integral Part
of the Financial Statements
11
eTECHLOGIX, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE FOR THE YEAR
MONTHS ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
2002 2001 2001 2000
--------- -------- -------- ---------
(UNAUDITED) (UNAUDITED)
Net cash provided by discontinued operations -- -- -- 149,532
--------- -------- -------- ---------
Net increase (decrease) in cash and cash equivalents (28,520) (369,561) (356,713) 140,216
Cash and cash equivalents at beginning of period 31,630 388,343 388,343 248,127
--------- -------- -------- ---------
Cash and cash equivalents at end of period $ 3,110 $ 18,782 $ 31,630 $ 388,343
========= ======== ======== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 51,703 $ 30,959 $ 38,784 $ 57,512
========= ======== ======== =========
Income taxes $ -- $ -- $ 11,367 $ 20,357
========= ======== ======== =========
Non-Cash Activity:
Acquisition of furniture and equipment financed
by capital lease obligations $ -- $ -- $ -- $ 271,599
========= ======== ======== =========
Conversion of a related party note payable
into common stock $ 12,000 $ -- $ -- $ --
========= ======== ======== =========
Assumption of notes payable on automobiles by
related parties $ 78,246 $ -- $ -- $ --
========= ======== ======== =========
Reclassification of a capital lease liability to other
liabilities and accrued expenses (Note 5) $ 181,262 $ -- $ -- $ --
========= ======== ======== =========
The Accompanying Notes are an Integral Part
of the Financial Statements
12
eTECHLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS
AND USE OF ESTIMATES
--------------------------------------------------------------------------------
OPERATIONS
eTechLogix, Inc. (the "Company"), formerly known as First Systech International,
Inc., is headquartered in Scottsdale, Arizona. The Company licenses, installs
and maintains its proprietary e-commerce software products, which are targeted
primarily towards the building material industry throughout the world. The
Company was duly organized under the laws of the State of Texas in March, 1989.
In July, 1994, the Company relocated to the State of Arizona and incorporated
itself under the laws of the State of Arizona.
PERVASIVENESS 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an initial
maturity of three (3) months or less to be cash and cash equivalents.
CONCENTRATIONS OF RISK
The Company maintains its cash balances in a financial institution. Deposits not
to exceed $100,000 are insured by the Federal Deposit Insurance Corporation. At
December 31, 2000, the Company had uninsured cash of approximately $309,000. As
of September 30, 2002 (unaudited) and December 31, 2001, the Company had no
uninsured cash balances.
The Company extends credit to customers, which results in accounts receivable
arising from its normal business activities. The Company does not require
collateral or other security to support financial instruments subject to credit
risk. The Company routinely assesses the financial strength of its customers
and, based upon factors surrounding the credit risk of those customers, believes
that its accounts receivable credit risk exposure is limited. The Company's
customers are not concentrated in any specific geographic region, but are
concentrated in the building material industry.
ACCOUNTS RECEIVABLE
The Company follows the allowance method of recognizing uncollectible accounts
receivable. The allowance method recognizes bad debt expense as a percentage of
accounts receivable based on a review of the individual accounts outstanding and
the Company's prior history of uncollectible accounts receivable. As of
September 30, 2002, the Company has established an allowance for uncollectible
accounts receivable in the amount of $21,181 (unaudited). As of December 31,
2001 and 2000, the Company had not established an allowance for uncollectible
accounts receivable, as it is the Company's opinion that all amounts reflected
as receivable will be collected.
13
eTECHLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS
AND USE OF ESTIMATES (CONTINUED)
--------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation of property and equipment is computed by the straight-line method
at rates adequate to allocate the cost of applicable assets over their expected
useful lives. Maintenance and repairs that neither materially add to the value
of the property and equipment nor appreciably prolong its life are charged to
expense as incurred. Betterments or renewals are capitalized when incurred.
Amortization of leasehold improvements is computed using the shorter of the
lease term or the expected useful life of the assets.
Estimated useful lives are as follows:
Automobiles 5 Years
Equipment 5 Years
Furniture and fixtures 5-7 Years
Leasehold improvements 5 Years
The Company is the lessee of equipment and furniture and fixtures under various
capital lease agreements expiring through July, 2005. The assets and liabilities
under the capital lease agreements are recorded at the lower of the present
value of the minimum lease payments or the fair value of the assets. The assets
are being depreciated over their estimated productive lives.
During the nine month period ended September 30, 2002, the Company terminated
its related party operating lease and relocated to new facilities. In connection
with the termination of this lease, the Company expensed the net carrying value
of the leasehold improvements of $65,885 (unaudited) (Note 5).
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed". Capitalization of computer
software development costs begins upon the establishment of technological
feasibility for the Company's computer software products. Technological
feasibility is generally based upon the achievement of a detail program design
free of high-risk development issues. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized computer
software development costs requires considerable judgment by management with
respect to certain external factors, including, but not limited to,
technological feasibility, anticipated future gross revenues, estimated economic
life and changes in software and hardware technology. Amortization of
capitalized computer software development costs commences when the related
products become available for general release to customers. Amortization is
provided on a product-by-product basis and is the greater of the amount computed
using (a) the ratio that current gross revenues for a product bear to the total
of current and anticipated future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life of the product.
As of December 31, 2000, the Company had no capitalized software costs as a
result of the sale of the Company's primary operating business segment. During
the first nine months of 2002 and throughout 2001, the Company did not
capitalize any software costs as amounts related to internal software
development that could be capitalized under this statement were immaterial.
Research and development costs are charged to expense as incurred. Research and
development costs incurred in relation to third-party contracts are included in
cost of revenue.
14
eTECHLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS
AND USE OF ESTIMATES (CONTINUED)
--------------------------------------------------------------------------------
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SOP 97-2, Software Revenue
Recognition. This SOP provides guidance on revenue recognition of software
transactions. The Company recognizes revenue principally from the development
and licensing of its software and from consulting and maintenance services
rendered in connection with such development and licensing activities.
Maintenance contract revenue is recognized on a straight-line basis over the
life of the respective contract. The Company also derives revenue from the sale
of third party hardware and software which is recognized based on the terms of
each contract. Consulting revenue is recognized when the services are rendered.
No revenue is recognized prior to obtaining a binding commitment from the
customer.
Software development revenue from time-and-materials contracts is recognized as
services are performed. Revenue from fixed price software development contracts
and revenue under license agreements, which requires significant modification of
the software package to the customer's specifications, is recognized on the
percentage-of-completion method using the units-of-work-performed method to
measure progress towards completion. Revisions in cost estimates and recognition
of losses on these contracts are reflected in the accounting period in which the
facts become known. Revenue from software package license agreements without
significant vendor obligations is recognized upon delivery of the software.
Contract terms may provide for billing schedules that differ from revenue
recognition and give rise to costs and estimated profits in excess of billings,
and billings in excess of costs and estimated profits.
Deferred revenue represents revenue billed and collected but not yet earned.
The cost of maintenance and research and development related revenues, which
consist principally of staff payroll and applicable overhead, are expensed as
incurred.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense totaled
approximately $8,200 (unaudited), $12,200 (unaudited), $18,100 and $77,200 for
the nine month periods ended September 30, 2002 and 2001 and the years ended
December 31, 2001 and 2000, respectively.
INCOME TAXES
Deferred income taxes are provided on an asset and liability method, whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax basis.
Deferred tax assets are reduced by a valuation allowance when in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
15
eTECHLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS
AND USE OF ESTIMATES (CONTINUED)
--------------------------------------------------------------------------------
EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options and to adopt the "disclosure only"
alternative treatment under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS No. 123 requires the
use of fair value option valuation models that were developed for use in valuing
employee stock options. Under SFAS No. 123, deferred compensation is recorded
for the excess of the fair value of the stock on the date of the option grant,
over the exercise price of the option. The deferred compensation is amortized
over the vesting period of the option.
NET INCOME (LOSS) PER COMMON SHARE
Basic earnings per share include no dilution and are computed by dividing income
available to common stockholders by the weighted average number of shares
outstanding for the period.
Diluted earnings per share amounts are computed based on the weighted average
number of shares actually outstanding plus the shares that would be outstanding
assuming the exercise of dilutive stock options, all of which are considered to
be common stock equivalents. The number of shares that would be issued from the
exercise of stock options has been reduced by the number of shares that could
have been purchased from the proceeds at the average market price of the
Company's stock. In addition, certain outstanding options are not included in
the computation of diluted earnings per share because their effect would be
antidilutive.
Basic net loss per common share is computed based on weighted average shares
outstanding and excludes any potential dilution from stock options, warrants and
other common stock equivalents. Basic net loss per share is computed by dividing
loss available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted net loss per common share reflects
potential dilution from the exercise or conversion of securities into common
stock or from other contracts to issue common stock. Assumed exercise of the
outstanding stock options at September 30, 2002 of 142 (unaudited), have been
excluded from the calculation of diluted net loss per common share, as their
effect is antidilutive. No options were issued or outstanding at December 31,
2001 and 2000 or September 30, 2001 (unaudited).
RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 2001 and 2000
financial statements to conform to the September 30, 2002 classifications.
--------------------------------------------------------------------------------
NOTE 2
LINE OF CREDIT
--------------------------------------------------------------------------------
The Company has an indefinite, unsecured $95,000 line of credit agreement with a
bank. The agreement calls for interest at the bank's prime rate plus 2.75%,
(7.50% (unaudited) and 7.50% at September 30, 2002 and December 31, 2001,
respectively). The Company had outstanding balances of $76,813 (unaudited),
$71,813 and $0 as of September 30, 2002, December 31, 2001 and 2000,
respectively.
16
eTECHLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 3
NOTES PAYABLE
--------------------------------------------------------------------------------
As of September 30, 2002, December 31, 2001 and 2000, notes payable consist of
the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001 2000
--------- --------- ---------
(UNAUDITED)
9.00% note payable to a bank in 48
monthly payments of $1,051 including
principal and interest, due May, 2004;
secured by equipment $ 15,998 $ 26,649 $ 36,339
8.50% note payable to a bank in 60
monthly payments of $1,970 including
principal and interest, due May, 2006;
secured by automobiles -- 86,518 --
9.55% note payable to a bank in 36
monthly payments of $605 including
principal and interest, due October,
2001; secured by equipment -- -- 5,889
10.45% note payable to a bank in 36
monthly payments of $189 including
principal and interest, due August,
2001; secured by equipment -- -- 1,486
7.75% to 7.99% notes payable to a
bank in 60 monthly payments of $1,459
to $1,530 including principal and
interest, due April to May, 2006;
secured by automobiles -- -- 104,622
--------- --------- ---------
15,998 113,167 148,336
Less: current maturities (8,654) (27,504) (45,587)
--------- --------- ---------
$ 7,344 $ 85,663 $ 102,749
========= ========= =========
The following is a summary of future minimum principal payments on notes payable
for each of the next five years:
Year
Ended September 30, December 31,
----- ------------- ------------
(Unaudited)
2002 $ 27,504
2003 $ 8,654 29,987
2004 7,344 24,487
2005 -- 21,800
2006 -- 9,389
-------- --------
$ 15,998 $113,167
======== ========
17
eTECHLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 4
SUBORDINATED CONVERTIBLE NOTES PAYABLE
--------------------------------------------------------------------------------
During July 2002, the Company issued an aggregate of $150,000 (unaudited) of
subordinated convertible notes payable to two accredited investors. The notes
are secured by substantially all of the Company's assets and are subordinated to
the Company's 9.00% note payable to a bank (See Note 3). In conjunction with the
issuance of these subordinated convertible notes payable, the Company also
issued one year warrants to purchase an aggregate of 1,500,000 shares of
ImproveNet, Inc. ("ImproveNet") at a purchase price of $0.15 per share. The
subscription of the warrants are expressly conditioned upon closing of a merger
between the Company and ImproveNet. Refer to Note 12, ImproveNet Merger and Note
13, Subsequent Events for more information related to this merger.
During August, 2002, the Company issued an aggregate of $100,000 (unaudited) of
subordinated convertible notes payable to accredited investors and officers of
the Company (See Note 6, Related Party Transactions). The notes are secured by
substantially all of the Company's assets and are subordinated to the $150,000
aggregate subordinated convertible notes payable discussed above and the 9.00%
note payable to a bank (See Note 3).
All of the subordinated convertible notes payable described above bear interest
at a rate of 10% per annum and are due two years after the date of issue,
provided that they are not converted prior to this date. The notes are
convertible in whole, or in part, at the option of the lender at any time during
the term of the note at a rate of one share for every $555.555556 of debt
converted. The notes will automatically be converted if there is a transfer of
more than 50.0% of the voting control of the Company, in one transaction or a
series of transactions with ImproveNet directly or by merger or consolidation in
which the existing shareholders of the Company do not directly retain more than
50.0% of the voting control of the Company, or a sale of all or substantially
all assets of the Company to ImproveNet or one of ImproveNet's subsidiaries. The
shares of the Company that will be received if automatic conversion occurs will
be converted to shares of ImproveNet using the same conversion rate as all other
eTechLogix shares converted in the merger transaction.
The proceeds of the subordinated convertible notes payable were used to make a
cash deposit that is required under the terms of a merger agreement between the
Company and ImproveNet. The $250,000 deposit has been included in other current
assets as of September 30, 2002.
--------------------------------------------------------------------------------
NOTE 5
COMMITMENTS
--------------------------------------------------------------------------------
CAPITAL LEASES
The Company leases furniture and equipment through 2005 under capital leases.
The following is an analysis of leased property under these capital leases:
September 30, December 31,
2002 2001 2000
--------- --------- ---------
(Unaudited)
Capitalized cost $ 72,259 $ 271,599 $ 271,599
Less: accumulated depreciation (36,179) (99,069) (44,749)
--------- --------- ---------
Net $ 36,080 $ 172,530 $ 226,850
========= ========= =========
18
eTECHLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 5
COMMITMENTS (CONTINUED)
--------------------------------------------------------------------------------
CAPITAL LEASES (CONTINUED)
Depreciation expense on furniture and equipment under capital leases was
approximately $36,080 (unaudited), $40,740 (unaudited), $54,000 and $45,000 for
the nine month periods ended September 30, 2002 and 2001 and for the years ended
December 31, 2001 and 2000, respectively.
The following is a schedule of future minimum lease payments under the capital
leases described above, together with the present value of the net minimum lease
payments:
Year
Ended September 30, December 31,
----- ------------- ------------
(Unaudited)
2002 $ 108,989
2003 $ 20,416 79,465
2004 20,416 79,465
2005 13,610 41,167
--------- ---------
Total minimum lease payments 54,442 309,086
Less: imputed interest (8,674) (71,792)
--------- ---------
Present value of net minimum lease payments 45,768 237,294
Less: current portion (15,337) (69,303)
--------- ---------
Long-term portion $ 30,431 $ 167,991
========= =========
The interest rates under the capital lease obligations range from approximately
13% to 14% per annum, and are imputed based on the lessor's implicit rate of
return at the inception of the lease.
The Company ceased making payments under the terms of a furniture lease
agreement during 2001. This lease is being accounted for as a capital lease as
of December 31, 2001. During the third quarter of fiscal 2002, the Company has
decided to allow the leasing company to obtain a judgment in the amount of
approximately $214,150 (unaudited). Accordingly, during the third quarter of
fiscal 2002 the Company has reclassified the total principal due under the
furniture lease of $181,262 (unaudited) from obligations under capital leases to
other liabilities and accrued expenses. The Company has adjusted the accrual for
the amount due the leasing company so that as of September 30, 2002 the total
amount included in other liabilities and accrued expenses related to the
furniture lease is $214,150 (unaudited), the amount of the judgment.
19
eTECHLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 5
COMMITMENTS (CONTINUED)
--------------------------------------------------------------------------------
OPERATING LEASES
On May 1, 2000, the Company entered into a lease agreement for its operating
facility in Scottsdale, Arizona. The lease is with a related entity that has the
same principal ownership as that of the Company. Rent expense under the lease
was approximately $18,000 (unaudited), $160,000 (unaudited), $102,000 and
$179,000 for the nine month periods ended September 30, 2002 and 2001 and for
the years ended December 31, 2001 and 2000, respectively.
On January 31, 2002, the Company terminated the related party lease agreement
and entered into a new operating lease agreement with an unrelated third party
that calls for monthly payments of $4,060 expiring in March 2003. Rent expense
for the nine month period ended September 30, 2002 was $33,000 (unaudited).
Future minimum lease payments under the lease for the following twelve month
period are $22,330 (unaudited).
--------------------------------------------------------------------------------
NOTE 6
RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------
SUBORDINATED CONVERTIBLE NOTES PAYABLE
Of the aggregate $100,000 subordinated convertible notes payable issued during
August 2002, $30,000 (unaudited) of the notes were issued to officers of the
Company.
RELATED PARTY NOTE PAYABLE
During 2001, the Company borrowed a total of $12,000 from a shareholder of a
related corporation under the same common control as that of the Company. During
the first nine months of 2002, this amount was converted to 1,800 (unaudited)
shares of common stock.
RELATED PARTY FACILITY LEASE
The Company leased office space for its corporate headquarters through January
31, 2002 under an operating lease from a corporation with the same principal
ownership as that of the Company's (See Note 5).
ROYALTY FEE AND CONSULTING REVENUES
Included in revenues for the nine month periods ended September 30, 2002 and
2001, and the year ended December 31, 2001, were royalty fees and consulting
revenues that were billed by the Company to related parties under the same
common control as that of the Company, in the amounts of approximately $285,400
(unaudited), $0 (unaudited), and $26,000, respectively. The royalty fees are
based on a percentage of sales that the related party generated as a result of
sales of the Company's software products. Consulting fees are billed at normal
billing rates.
RESEARCH AND DEVELOPMENT
The Company subcontracts a portion of its research and development to
corporations with the same principal ownership as that of the Company's. During
the nine month periods ended September 30, 2002 and 2001, and for the year ended
December 31, 2001, the Company incurred expenses from these related corporations
a total of $15,600 (unaudited), $34,414 (unaudited), and $50,439, respectively,
which is included in research and development expenses in the accompanying
financial statements.
20
eTECHLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 7
INCOME TAXES
--------------------------------------------------------------------------------
The Company accounts for income taxes using an asset and liability approach.
Deferred income taxes arise from timing differences resulting from revenues and
costs reported for financial and tax reporting purposes in different periods. In
addition, a valuation allowance is recognized if it is more likely than not that
some or all of the deferred income tax assets will not be realized. A valuation
allowance is used to offset the related net deferred income tax assets due to
uncertainties of realizing the benefits of certain net operating losses.
Significant components of the Company's deferred income tax assets are as
follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001 2000
--------- --------- ---------
(UNAUDITED)
Deferred Income Tax Assets:
Excess of book over tax depreciation $ 20,000 $ 19,600 $ 9,200
Accrued officer's compensation 56,700 56,300 --
State net operating loss carryforwards 58,000 40,000 --
--------- --------- ---------
Total deferred income tax asset 134,700 115,900 9,200
Valuation allowance (134,700) (115,900) (9,200)
--------- --------- ---------
Net deferred income tax asset $ -- $ -- $ --
========= ========= =========
At September 30, 2002 and December 31, 2001, the Company had state net operating
loss carryforwards of approximately $720,000 (unaudited) and $497,000 that
expire through 2007. At September 30, 2002, the Company had a federal net
operating loss of approximately $223,000 (unaudited), which expires during 2022.
Due to the Company sustaining losses since the discontinuation of the ERP
software division (See Note 9), there is no income tax provision for the nine
month periods ended September 30, 2002 and 2001 or for the year ended December
31, 2001.
--------------------------------------------------------------------------------
NOTE 8
RETIREMENT PLAN
--------------------------------------------------------------------------------
Effective April 16, 1997, the Company adopted a 401(k) retirement plan.
Employees are eligible to participate in the plan after four (4) months of
service. Salary deferral may range from 1% to 15%. The Company matches 100% of
the amounts deferred by employees, up to 6% of an employee's annual
compensation. The Company matched contributions totaling $0 (unaudited), $1,133
(unaudited), $1,133 and $8,160 for the nine month periods ended September 30,
2002 and 2001, and for the years ended December 31, 2001 and 2000, respectively.
21
eTECHLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 9
DISCONTINUED OPERATIONS
--------------------------------------------------------------------------------
During 2000, the Company discontinued its Enterprise Resource Planning ("ERP")
software production and consulting division, which was focused toward
manufacturers within the building materials industry. On October 2, 2000, the
Company sold the division for $1,547,928, of which $1,238,680 was received on
the date of the sale with the remaining balance of $309,248, contingent upon the
collection of certain outstanding receivable balances. This unpaid receivable
balance was subsequently written off in 2001 due to circumstances arising during
2001 which made the collectibility of this balance doubtful. Of the cash
received, $336,088 was used to pay off notes payable that were attributable to
the division. As a result of the sale, the Company recognized a gain on the sale
of $1,033,846, net of applicable taxes of $316,200.
--------------------------------------------------------------------------------
NOTE 10
CONTINGENCIES
--------------------------------------------------------------------------------
As of September 30, 2002 and December 31, 2001 and 2000, the Company had various
pending claims arising from former customer disputes. The claims relate to
operations prior to the disposal of the ERP business segment (See Note 9). The
Company intends to vigorously defend these claims and expects to prevail in all
cases. In conjunction with the defense of these claims, the Company has accrued
approximately $97,750 (unaudited), $90,000 and $67,500 as of September 30, 2002,
December 31, 2001 and December 31, 2000, respectively, which represents the
Company's best estimate of future costs associated with defending the claims.
These amounts are included in other liabilities and accrued expenses in the
accompanying financial statements.
--------------------------------------------------------------------------------
NOTE 11
COMMON STOCK OPTIONS
--------------------------------------------------------------------------------
On May 1, 2002 the Company issued 247 (unaudited) common stock options to an
employee. The options vesting schedule is as follows; 10 options on June 1,
2002, and 5 options on July 1, 2002 and each succeeding month thereafter until
September 1, 2004 when all options shall be vested. The options expire on May 1,
2012 and have an exercise price of $277.78 per share.
--------------------------------------------------------------------------------
NOTE 12
IMPROVENET MERGER
--------------------------------------------------------------------------------
On July 30, 2002, the Company entered into an Agreement and Plan of Merger to
merge with ImproveNet. ImproveNet is a source for home improvement information
and services on the Internet. Pursuant to the terms of the Agreement and Plan of
Merger, the merger is scheduled to close no later than November 30, 2002. Under
the terms of the merger, ImproveNet agreed to present a cash tender offer to its
current stockholders, which is anticipated to occur immediately following the
closing of the merger. The price per share will be based in part on ImproveNet's
available cash balance at the closing of the merger. Refer to Note 13,
Subsequent Events, for more information related to the Improvenet merger.
22
eTECHLOGIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 13
SUBSEQUENT EVENTS
--------------------------------------------------------------------------------
On December 23, 2002, a wholly owned subsidiary of ImproveNet merged into
eTechLogix, Inc. As a result of this transaction, eTechLogix, Inc. is now a
wholly owned subsidiary of ImproveNet and the former shareholders of eTechLogix,
Inc. hold approximately 68% of the outstanding stock of ImproveNet. At the time
of the merger, each share of common stock of eTechLogix was converted into the
right to receive and became exchangeable for 5,555.55556 shares of common stock
of ImproveNet. A total of 35,417,750 shares of ImproveNet Common Stock were
issued in the merger. Of the holders of eTechLogix Common Stock, Jeffrey I
Rassas, Homayoon J. Farsi and Naser Ahmed, the directors of eTechLogix,
collectively received 30,310,740 shares of ImproveNet Common Stock and have
acquired control of ImproveNet.
As described in Note 4, Subordinated Convertible Notes Payable, an aggregate of
$250,000 of subordinated convertible notes payable with all accrued interest
outstanding were converted to shares of the Company's common stock at the time
the merger with ImproveNet went effective. These note holders received an
aggregate of 481.27499967 shares of eTechLogix Common Stock upon conversion.
These shares were then simultaneously converted to shares of ImproveNet at the
rate of 5,555.55556 per share of the Company's Common Stock.
During the fourth quarter of fiscal 2002, the Company issued an aggregate of 495
shares to accredited investors under Common Stock Subscription Agreements. At
the time of the merger between the Company and ImproveNet, these shares were
converted to shares of ImproveNet at a rate of 5,555.55556 shares of ImproveNet
for each share of eTechLogix.
At the time the ImproveNet merger was finalized, the Company issued warrants
subject to the terms of the subordinated convertible notes payable described in
Note 4. Also at this time, the stock options described in Note 11, Common Stock
Options, were converted to 788,889 options to purchase shares of ImproveNet
Common Stock at an exercise price of $.05 per share.
Subsequent to the merger between the Company and ImproveNet, and as provided in
the Offer to Purchase dated December 4, 2002, ImproveNet purchased 78.6% of the
previously outstanding common shares of ImproveNet prior to the merger from the
previous shareholders of ImproveNet. The purchases were made at a price of $0.14
per share and took place from the time of the merger through January 2, 2003,
the date the tender offer expired.
Subsequent to the merger between the Company and ImproveNet, the Board of
Directors of ImproveNet authorized the issuance of options for key employees.
The options are for the purchase of an aggregate of 660,000 shares of
ImproveNet's Common Stock. The options vest over a period of two years and are
to be issued with a strike price equal to the fair market value of ImproveNet's
Common Stock on the date the options are granted.
--------------------------------------------------------------------------------
NOTE 14
MANAGEMENT'S PLANS
--------------------------------------------------------------------------------
The Company's financial statements are presented on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Since the sale of the Company's ERP division in
2000 (See Note 9), the Company has continued to sustain losses and negative cash
flows, has negative working capital and negative net worth.
During 2002 (unaudited), the Company has procured contracts for software sales
of its products and has various contracts pending. The Company anticipates
increased sales volume of their primary software products throughout 2002 and
thereafter. The Company also intends to raise additional capital either through
a public or private offering of securities.
23
The additional funds from continued software sales and capital financing will be
used to finance continued operations and increase the Company's sales and
marketing functions.
The financial statements do not include any adjustments to reflect the possible
future effects of the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the uncertainty of the
Company's ability to continue as a going concern.
24
PRO FORMA UNAUDITED BALANCE SHEET AT SEPTEMBER 30, 2002
(ALL NUMBERS IN $'000'S)
ACTUAL ACTUAL
---------- ----------- PRO FORMA PRO FORMA
IMPROVENET eTECHLOGIX ADJUSTMENTS NOTES COMBINED
---------- ----------- ----------- --------- ---------
Cash and cash equivalents $ 2,697 $ 3 $ (1,712) a,b $ 988
Accounts receivable, net 560 51 -- 611
Prepaids and other current assets 499 302 (250) g 551
--------- --------- --------- ---------
Total current assets 3,756 356 (1,962) 2,150
Property, plant and equipment 221 177 (106) c 292
Intangible assets -- -- 303 b,c 303
Goodwill -- -- -- b,c --
Other assets 75 -- -- 75
--------- --------- --------- ---------
Total Assets $ 4,052 $ 533 $ (1,765) $ 2,820
========= ========= ========= =========
Line of credit $ -- $ 77 $ -- $ 77
Accounts payable 281 97 -- 378
Accrued liabilities 1,154 500 (231) b,d,g 1,423
Deferred revenue 8 21 -- 29
Capital leases-current portion -- 15 -- 15
Note payable-current portion -- 9 -- 9
--------- --------- --------- ---------
Total current liabilities 1,443 719 (231) 1,931
Notes payable-net of current portion -- 7 -- 7
Subordinated convertible notes payable -- 250 -- 250
Capital leases-net of current portion -- 31 -- 31
--------- --------- --------- ---------
Total liabilities 1,443 1,007 (231) 2,219
--------- --------- --------- ---------
Shareholders' equity (deficit)
Common stock 17 22 (14) b 25
Treasury stock (56) (110) 56 (110)
Additional paid-in capital 144,529 -- (143,457) b,a 1,072
Accumulated deficit (141,881) (386) 141,881 b (386)
--------- --------- --------- ---------
Total shareholders' equity (deficit) 2,609 (474) (1,534) 601
--------- --------- --------- ---------
Total liabilities and shareholders' equity $ 4,052 $ 533 $ (1,765) $ 2,820
========= ========= ========= =========
25
PRO FORMA UNAUDITED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(ALL NUMBERS IN $'000'S, EXCEPT PER SHARE DATA)
ACTUAL ACTUAL PRO FORMA PRO FORMA
IMPROVENET eTECHLOGIX ADJUSTMENTS NOTES COMBINED
---------- ----------- ----------- ----- --------
Revenues
Service Revenues $ 3,044 $ -- $ -- $ 3,044
Marketing Revenues 145 -- -- 145
Other revenues -- 731 -- 731
-------- -------- -------- --------
Total Revenue 3,189 731 -- 3,920
Cost of Revenues --
Service 1,889 -- -- 1,889
Marketing 65 -- -- 65
Other -- 194 -- 194
-------- -------- -------- --------
Total Cost of Revenues 1,954 194 -- 2,148
-------- -------- -------- --------
Gross Profit 1,235 537 -- 1,772
Operating Expenses --
Product development 1,135 69 -- 1,204
Selling, general and administrative expenses 4,245 628 76 e 4,949
Stock-based charges and warrant amortization 4,710 -- -- 4,710
Corporate restructing 2,569 -- -- 2,569
-------- -------- -------- --------
Total Operating Expenses 12,659 697 76 13,432
-------- -------- -------- --------
Operating Loss (11,424) (160) (76) (11,660)
Interest / Other income 136 -- (16) f 120
Interest Expense -- (74) -- (74)
Miscellaneous revenues -- 18 -- 18
Gain on disposal of fixed assets -- (51) -- (51)
-------- -------- -------- --------
Net loss $(11,288) $ (267) $ (92) $(11,647)
======== ======== ======== ========
Basic and diluted net loss per common share: $ (0.65) $ (0.30)
======== ========
Weighted average common shares outstanding 17,435 39,123
======== ========
26
PRO FORMA UNAUDITED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001
(ALL NUMBERS IN $'000'S, EXCEPT PER SHARE DATA)
ACTUAL ACTUAL PRO FORMA PRO FORMA
IMPROVENET eTECHLOGIX ADJUSTMENTS NOTES COMBINED
---------- ----------- ----------- ----- --------
Revenues
Service Revenues $ 5,805 $ -- $ -- $ 5,805
Marketing Revenues 1,499 -- -- 1,499
Other revenues -- 479 -- 479
-------- -------- -------- --------
Total Revenue 7,304 479 -- 7,783
Cost of Revenues --
Service 4,619 -- -- 4,619
Marketing 395 -- -- 395
Other -- 204 -- 204
-------- -------- -------- --------
Total Cost of Revenues 5,014 204 -- 5,218
-------- -------- -------- --------
Gross Profit 2,290 275 -- 2,565
Operating Expenses --
Product development 3,402 -- -- 3,402
Selling, general and administrative expenses 20,922 932 101 e 21,955
Stock-based charges and warrant amortization 5,022 -- -- 5,022
Corporate restructing 4,181 -- -- 4,181
Goodwill impairment 370 -- -- 370
-------- -------- -------- --------
Total Operating Expenses 33,897 932 101 34,930
-------- -------- -------- --------
Operating Loss (31,607) (657) (101) (32,365)
Interest / Other income 762 4 (22) f 744
Interest Expense -- (39) -- (39)
Miscellaneous revenues -- 4 -- 4
Gain on disposal of fixed assets -- -- -- --
Benefit for income taxes -- 134 -- 134
-------- -------- -------- --------
Net loss $(30,845) $ (554) $ (123) $(31,522)
======== ======== ======== ========
Basic and diluted net loss per common share: $ (1.78) $ (0.81)
======== ========
Weighted average common shares outstanding 17,344 39,123
======== ========
27
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRO FORMA PRESENTATION
On July 30, 2002, ImproveNet and eTechLogix entered into a merger agreement
whereby ImproveNet offered to buy back all of its outstanding shares by means of
a tender offer to its existing shareholders at a price of $0.14 per share. On
December 23, 2002 a subsidiary of ImproveNet merged into eTechLogix, eTechLogix
survived as a subsidiary of ImproveNet, and the shareholders of eTechLogix
received 35,417,750 newly issued shares of ImproveNet. On January 2, 2003 the
tender offer closed with 14,013,862 shares tendered at a total price of
$1,961,941. For accounting purposes, eTechLogix is considered to be the
acquirer. The new shareholders invested $500,000 into the capital of ImproveNet
of which $250,000 had been contributed as of September 30, 2002.
The unaudited pro forma combined condensed balance sheet as at September
30, 2002 combines the ImproveNet and eTechLogix balance sheets at September 30,
2002 as if the merger had been consummated on that date.
The unaudited pro forma combined condensed statements of operations for the
year ended December 31, 2001 and for the nine month period ended September 30,
2002 give effect to the merger as if it had occurred on January 1, 2001.
PURCHASE PRICE
The unaudited pro forma combined condensed financial statements reflect a
purchase price of approximately $519,000.
Cash consideration $ 500,000
Direct merger costs $ 19,000
-----------
Purchase price $ 519,000
===========
Under the purchase method of accounting, the purchase price is allocated to
ImproveNet's net tangible and intangible assets based on their estimated fair
value as of the date of the completion of the merger. Based on the purchase
price and management's valuation, the purchase price allocation is as follows
(in thousands):
Cash $ 485
Accounts receivable $ 560
Other current assets $ 499
Fixed assets $ 221
Web site $ 320
Contractor relationships $ 247
Goodwill $ (370)
Accounts payable $ (281)
Other liabilities $ (1,162)
-----------
Consideration $ 519
===========
Following reallocation of the identified negative goodwill, a preliminary
estimate of $303,000 has been allocated to amortizable intangible assets with
useful lives as follows: Web site -three years, Contractor relationships - three
years.
28
PRO FORMA ADJUSTMENTS
a. Represents the tender offer in which ImproveNet repurchased and
retired 14,013,862 shares of common stock at a price of $0.14 per
share.
b. Represents the recapitalization of eTechLogix for the equivalent
number of ImproveNet shares received in the merger. eTechLogix
stockholders will exchange outstanding common stock for shares of
ImproveNet, representing a 91% interest in the combined entity.
For accounting purposes, eTechLogix is considered the acquirer, and as
such ImproveNet contributed to eTechLogix its net assets and the
shareholders of ImproveNet that tendered their shares retain no
interest in the shares of the combined entity. This entry reflects the
issuance of shares as discussed above and the elimination of the
outstanding common stock of eTechLogix. This entry also adjusts
ImproveNet's net assets to their fair value and eliminates
ImproveNet's accumulated deficit.
Also represents the adjustment of ImproveNet's net assets to reflect
purchase consideration based upon the fair value of assets received
and liabilities assumed by eTechLogix, the accounting acquirer. While
ImproveNet (the issuer) is a public entity, the fair value of its
outstanding shares, including warrants and options, is less than its
cash and cash equivalents. Accordingly, management believes that the
cash contributed by eTechLogix of $500,000 together with the merger
costs of $19,000 more fairly represents the purchase consideration.
c. This entry records the intangible assets acquired in the acquisition
and adjusts the negative goodwill associated with the transaction.
d. Represents estimated transaction costs, consisting of fees for
accountants, lawyers and consultants assisting in the transaction.
e. To record the amortization of purchased intangibles over three years.
f. Represents a decrease in interest income attributable to the decrease
in cash related to the tender offer.
g. Represents the cash contributed as of September 30, 2002 in the amount
of $250,000.
29
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.
IMPROVENET, INC.
By: /s/ Homayoon J. Farsi
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Homayoon J. Farsi,
Dated: February 12, 2003 Co-Chairman and President
EXHIBIT INDEX
Exhibit No. Description
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2.1 Agreement and Plan of Merger, dated July 30, 2002, by and
among ImproveNet, Inc., a Delaware corporation, eTechLogix,
Inc., an Arizona corporation, and Etech Acquisition, Inc.,
an Arizona corporation. (Incorporated by reference to
Exhibit 10.39 to the Form 8-K filed by the Company on
August 6, 2002.)
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated
October 1, 2002. (Incorporated by reference to Exhibit 2 to
each of the Schedule 13Ds filed separately by Jeffrey I.
Rassas, Homayoon J. Farsi and Naser Ahmad on
January 2, 2003.)
2.3 Amendment No. 2 to Agreement and Plan of Merger, dated
November 12, 2002. (Incorporated by reference to Exhibit 3
to each of the Schedule 13Ds filed separately by Jeffrey I.
Rassas, Homayoon J. Farsi and Naser Ahmad on
January 2, 2003.)
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