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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[OR]
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number: 0-9129
EPICEDGE, INC.
FORMERLY KNOWN AS DESIGN AUTOMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1657943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 WILCREST, SUITE 370
HOUSTON, TEXAS 77042-3366
(Address of principal executive offices)
(713) 784-2374
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
Registrant's revenues for the year ended December 31, 1999 were $29,439,569.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sales price as quoted by the American Stock
Exchange on March 29, 2000 was $204,831,572. As of March 29, 2000, the
registrant had 25,618,486 shares of common stock outstanding.
Documents Incorporated by Reference: None.
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements. These statements
relate to future events or our future financial performance and involve known
and unknown risks, uncertainties and other factors that may cause our or our
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events
or results may differ materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this report to conform our prior statements
to actual results.
ITEM 1. BUSINESS
GENERAL
EpicEdge, Inc. is a publicly-held Texas corporation listed on the American
Stock Exchange under the symbol "EDG." EpicEdge was originally incorporated
under the name Loch Exploration, Inc. in June 1979, and historically engaged in
the oil and gas business. In April 1989, the company filed for Chapter 11
bankruptcy, and was reorganized in connection with its Plan of Reorganization,
effective November 17, 1989. In December 1998, the company transferred all of
its assets and liabilities to Loch Energy, Inc., in exchange for shares of
company common stock, whereby Loch Energy became a subsidiary of Design
Automation Systems Incorporated. In January 1999, the company acquired all of
the issued and outstanding capital stock of Design Automation, a private
company, in exchange for shares of company common stock. In April 1999, Design
Automation was merged into the company, and the company changed its name to
Design Automation Systems Incorporated. In March 2000, the company changed its
name to EpicEdge, Inc. EpicEdge operates as a business to business total
solution provider through the parent corporation, and conducts oil and gas
business through its subsidiary, Loch Energy. EpicEdge intends to distribute the
shares of Loch Energy common stock held by EpicEdge to its shareholders of
record as of December 2, 1998. Our executive offices are located at 3200
Wilcrest, Suite 370, Houston, Texas 77092.
We are engaged in the business of enabling our clients to meet their business
goals through implementation of e-business strategies utilizing Enterprise
Portal Solutions that allow anytime, anywhere, device-independent sharing of
applications, information, and communication tools between trading communities.
Enterprise Portal Solutions improve collaboration among trading partners by
creating a virtual workspace for businesses. With Enterprise Portal Solutions,
all that is required is a browser and the Internet to enable real-time access to
mainframe, client/server or web-enabled applications. Enterprise Portal
Solutions enable collaborators to use common communication tools such as e-mail,
calendaring and file sharing. The existing infrastructure of applications and
systems remain intact and collaborators are not forced to change and adapt due
to constraints in technology.
We are able to deliver a common virtual workspace for employees, partners and
customers. This virtual workspace provides all of the real time information,
applications and communication tools needed by collaborators. The strength of
the Enterprise Portal System is that information, applications and communication
tools are accessible in a way that leaves intact the existing information
technology infrastructure for all trading partners. The client and its
suppliers, distributors, alliance partners and customers are not forced to adapt
due to the constraints in
technology. Clients, suppliers and partners will have access to common
collaboration tools such as e-mail, file sharing, unified messaging and
calendars. They will also have on-demand, secure access to mainframe, client-
server or web-enabled applications for real-time decision making. The Enterprise
Portal System allows access to information independent of who owns the data,
where it is located or whether the information is hosted or provided by an
internal or external partner.
Our services assist clients in dealing with issues during the entire life
cycle of their projects, including the following: strategic planning, business
process evaluation, integrated marketing and communications, brand structure and
design, system architecture and design, product acquisition, application
hosting, configuration and implementation, ongoing operational support, and
evolutions in technology. We provide solutions to complex information
technology problems focusing on enabling our clients to take advantage of the
evolving Internet economy.
We believe that our success is attributed principally to our technical
expertise, marketplace relationships, vendor alliances, direct sales strategy,
customer service orientation, strong consulting methodology, and ability to hire
and retain skilled professionals in all practices. We intend to grow primarily
through the acquisition of other strategic, geographically located consulting
service businesses with similar characteristics to EpicEdge, and by leveraging
the common pool of resources created by such acquisitions.
RECENT FINANCING
On February 18, 2000, we entered into a stock purchase agreement with
Edgewater Private Equity III, L.P., Aspen Finance Investors I, LLC, a Colorado
limited liability company, Fleck T.I.M.E. Fund L.P., a Connecticut limited
partnership, Fleck Family Partnership II L.P., a Florida limited partnership,
LJH Partners, LP, a Delaware limited partnership, Wain Investment, LLC, an Ohio
limited liability company, Gerald C. Allen, and John Paul Dejoria. Pursuant to
the stock purchase agreement, the investors purchased 2,260,000 shares of our
common stock at a purchase price of $5.00 per share, for an aggregate purchase
price of $11,300,000 which was paid in cash at the closing. In connection with
the stock purchase agreement, we executed a registration rights agreement with
the investors in which we agreed to register the shares of our common stock they
received in the transaction on or before August 18, 2000.
BUSINESS STRATEGY
Since the acquisition of Design Automation by Loch Exploration, we have
engaged in the business of providing computer system integration specializing in
UNIX client server architecture and its components, and offering system
management services with a complete software selection. We provided solutions to
complex information technology problems including system availability and
performance, UNIX/Microsoft Windows NT integration, client service database
implementation, network security and internet/intranet electronic
commerce/electronic business World Wide Web application deployment.
In 1999, we repositioned our products and services to take full advantage
of the expanding business to business Internet consulting market. Our objective
is to provide customers with comprehensive total solutions services for Internet
strategy and implementation. We plan to achieve this goal through a combination
of growth through acquisition and accelerated internal growth. Management
intends to carry out the following strategies.
Expanding New and Existing Markets Through Acquisitions.
We intend to pursue an aggressive acquisition strategy to enhance our
position in our current markets and acquire operations in new markets. In
particular, we will focus our acquisition strategy on candidates that have a
proven record of delivering high-quality technical services, a customer base of
large and mid-sized companies and which may benefit from the synergies offered
by our acquisition strategy. Management believes we will have many acquisition
opportunities in a fragmented market and be able to offer the management of
these acquisition candidates an opportunity to continue operating their
respective businesses, as well as, to participate in a company with a growth
strategy and liquid trading market for its securities. We look forward to
expanding into new and existing markets by acquiring well-established consulting
practices that are leaders in their regional markets. Given
the size and highly fragmented composition of the industry, we believe that
there is an opportunity to implement a market roll-up program within the value-
added reseller and consulting industry.
Accelerating Internal Growth.
A key component of our strategy is to accelerate internal growth of our
existing business as well as the existing business of our acquisitions.
Applying Additional Resources to Current Operations.
The consulting practice organizations, which we expect to acquire, are
primarily small, privately held companies. We intend to facilitate internal
growth of these acquisitions by providing them with access to capital resources
and technical expertise in product procurement and integration services.
Leveraging Additional Opportunity Through the Collective Skill Set.
We intend to create an environment in which each of the acquired companies
is able to cross-leverage its unique skills and markets for the benefit of the
entire organization. We believe this will result in increased operating
efficiencies without proportionate increases in administrative costs.
Increasing Services Revenues.
We plan to implement a marketing initiative designed to increase service
revenues through the development of standardized service packages. We intend to
create standardized service packages in several areas, including systems
administration, database administration, security and systems and network
performance tuning. We believe that such service packages will make our
products and services more cost-effective and accessible to customers as well as
increase our profit margins.
Developing Identity.
We intend to produce marketing materials and develop the market image and
reputation of EpicEdge as a "national organization" of regional companies, with
the goal of providing business opportunities which would not normally be
available to a regional company.
ACQUISITION STRATEGY
We believe there are many attractive acquisition candidates in our industry
because of the highly fragmented composition of the marketplace, the industry
participants' need for capital and their owners' desire for liquidity. We
intend to pursue an aggressive acquisition program to consolidate and enhance
our position in our current market and to acquire operations in new markets.
Initially, we intend to expand our business through selective, strategic
acquisitions of other companies with complementary businesses in a revenue range
of $5 million to $15 million per annum. In particular, we intend to focus our
acquisition strategy on candidates which have a strong relationship with key
technology vendors, a proven record of delivering high-quality network computing
solutions, enterprise resource planning/enterprise relationship management
("erp/erm") consulting services, e-business solutions, and a customer base of
large and mid-sized companies.
RECENT ACQUISITIONS
On March 31, 1999, we acquired all of the issued and outstanding stock of
COAD Solutions, Inc., an information technology consulting firm, in an arms-
lengths transaction between EpicEdge and the shareholders of COAD. The
consideration for the acquisition was (1) 600,000 shares of our common stock,
(2) $200,000 cash, payable $100,000 at closing, and $100,000 payable in
quarterly installments of $25,000 beginning 90 days from the closing date, and
(3) for a period of 24 months each COAD shareholder will receive a 20% royalty
on gross revenues of SQLACE products. The shareholders of COAD entered into
employment agreements, which terminate
in December 2001 and include a non-compete provision for the term of the
agreement and one year thereafter. However, we can provide no assurance the non-
compete will be enforceable. The transaction has been accounted for as a
purchase and resulted in goodwill of approximately $2,900,000, which will be
amortized over a period of eight years.
On May 28, 1999, we acquired all of the issued and outstanding stock of
Dynamic Professional Services, LLC, an information technology consulting firm,
in an arms-lengths transaction between the EpicEdge and the shareholders of
Dynamic. The consideration for the acquisition was: (1) 524,000 shares of our
common stock, (2) $200,000 cash, payable $100,000 at closing, and $100,000
payable in quarterly installments of $25,000 beginning 90 days from the closing
date, and (3) additional stock consideration if on June 1, 2000 the closing
price for our common stock for the prior 15 business days is less than $5.15 per
share in an amount equal to 5,340 shares for each $0.01 below $5.15. We have
reserved 2,750,000 shares of our common stock for the additional consideration.
Certain shareholders of Dynamic entered into employment agreements which
terminate in 2001 and include a non-compete provision for the term of the
agreement and one year thereafter. However, we can provide no assurance the non-
compete will be enforceable. This transaction has been accounted for as a
purchase and resulted in goodwill of approximately $2,800,000, which will be
amortized over a period of eight years.
Effective July 30, 1999, we acquired all of the issued and outstanding
stock of Connected Software Solutions, LLC, an electronic-business consulting
and training firm, in an arms-length transaction between the EpicEdge and the
members of Connected. The consideration for the acquisition was: (1) 300,000
shares of our common stock, (2) $300,000 cash payable in six quarterly
installments of $50,000 beginning 90 days from the closing date, and (3)
additional stock consideration if on August 1, 2000 the closing price for our
common stock for the prior 15 business days is less than $5.15 per share in an
amount equal to 3,000 shares for each $0.01 below $5.15. We have reserved
1,500,000 shares of our common stock for the additional consideration. The
members of Connected entered into employment agreements which will continue on a
year-to-year basis and include a non-compete provision for the term of the
agreement and one year thereafter. However, we can provide no assurance the
non-compete will be enforceable. This transaction has been accounted for as a
purchase, and resulted in goodwill of approximately $1,800,000, which will be
amortized over a period of eight years.
On November 29, 1999, we acquired all of the assets of Net Information
Systems, Inc., a provider of leading-edge e-business solutions that leverage
Internet communications with traditional back-office computer systems. The
consideration for the acquisition was (1) 350,000 shares of our common stock,
and (2) $230,000 cash, payable $180,000 at closing and $50,000 in quarterly
installments of $12,500 beginning 90 days from the closing date, and (3) the
assumption of a $220,000 line of credit with Wells Fargo. We have reserved
95,000 shares of our common stock for additional consideration. In addition,
certain shareholders of Net entered into employment agreements which terminate
in November 2000 and include a non-compete provision for the term of the
agreement and one year thereafter. However, we can provide no assurance the
non-compete will be enforceable. This transaction has been accounted for as a
purchase, and resulted in goodwill of approximately $1,500,000, which will be
amortized over a period of eight years.
Effective March 1,2000, we acquired all of the issued and outstanding stock
of The Growth Strategy Group, Inc., a marketing and strategic planning firm, in
an arms-length transaction between the company and the three stockholders of
Growth Strategy. The consideration for the acquisition was: (1) 277,000 shares
of our common stock, and (2) $375,000. The three stockholders of Growth Strategy
entered into employment agreements with the company, which terminate in February
2003 and include a non-compete provision for the term of the agreement and one
year thereafter. However, we can provide no assurance the non-compete provisions
will be enforceable. This transaction has been accounted for as a purchase.
PRODUCTS AND SERVICES
EpicEdge is a provider of products and consulting services that help
clients transform their business to take advantage of the speed and ubiquity of
the Internet. Taken together, this mix of products and services allow clients
to create one Internet-based interface, the Enterprise Portal, for seamless use
by all trading partners, including employees, suppliers, alliance partners, and
customers. To deliver a free flow of information and allow transactions between
natural trading partners, we provide expertise in three critical areas for
planning, building and managing Enterprise Portals: strategic planning,
creative design, and technology. Our services assist customers in dealing
with issues during the entire life cycle of their projects, including the
following: strategic planning, business process evaluation, integrated marketing
and communications, brand structure and design, system architecture and design,
product acquisition, application hosting, configuration and implementation,
ongoing operational support, and evolutions in technology.
Our customer base varies in range from relatively small companies to
Fortune 1,000 and other large and mid-sized companies. They are geographically
located in the Continental United States, primarily in Texas, Oklahoma,
Missouri, Massachusetts, Tennesee, New York and Washington; and they span
various industries including manufacturing, telecom, publishing, financial,
hospitality, distribution, energy, education, and state and local government.
Our ability to deliver integrated solutions is principally attributable to
our technical expertise and in working with industry-leading vendors of
information technology products such as Sun Microsystems Computer Corporation,
International Business Machines Corp., Hewlett-Packard Company, Oracle
Corporation, Check Point Software Technologies, Ltd., PeopleSoft, Inc., Siebel
Systems, Inc. and Cisco Systems, Inc.
We plan to implement a marketing initiative designed to increase services
revenues through the development of standardized service packages. We intend to
create standardized service packages in several areas, including systems
administration, database administration, security and systems and network
performance tuning. We believe that such service packages will make our
products and services more cost-effective and accessible to customers as well as
increase our profit margins.
We have a strategy for providing products and services in four core areas
of competency: Strategic Planning, Marketing and Creative Design, and
Technology and Implementation. Our business strategy is to combine market-
leading products with our highly-skilled technical personnel to deliver
comprehensive information-technology solutions based within these core
competencies to new and existing customers. We believe this single-source
solution reduces risk, speeds market entry, reduces consulting engagement
duration, and ensures tight alignment of overall business goals with client
e-business strategy.
Strategic Planning.
The Internet poses new territory for even the most seasoned organization.
We believe that thorough up-front analysis and planning are essential for
companies to effectively leverage the Internet. We provide consulting services
that help companies visualize the Internet as an integrated part of their
operations and provide the planning framework for the critical building and
managing phases of the engagement. Strategic planning services include the
following: alignment of business and marketing goals with Internet strategy;
evaluation of business processes; recommendations of new processes;
understanding of customers, partners, and competitors; and opportunity analysis.
Marketing and Creative Design.
We provide visual design, branding, and marketing support for clients to
ensure that clients present Portal solutions that are not only useful by easy to
use. We provide the following consultation for clients: integrated marketing
and communications plan, market research, brand structure and strategy, field
testing of concepts, web-site creation, prototype testing, and go-to-market
strategy.
Technology and Implementation.
We design and build systems that become the infrastructure for Internet-
based management of information and transactions. We believe this is the most
crucial part of client engagements. With technology changing rapidly, we
believe it is imperative that we maintain personnel who have thorough and deep
knowledge of existing and emerging technologies. We not only help clients
select and manage the appropriate technologies, but also offer full-service
implementation of such back-office systems as PeopleSoft. In addition to strong
competency in PeopleSoft implementations, we provide expertise in the major
hardware platforms as well as in such operating systems and languages as
PeopleSoft, Siebel, Java, NetDynamics and iPlanet. As the single source for
clients, engagements
drive product sales in the areas of enterprise and departmental servers,
software licenses, network components, workstations, and related equipment.
We offer expertise in the following: assessing viability and fit of latest
proven technologies; architecture and network-systems design; application
development; integration with legacy systems; integration with intranet,
extranet, and Internet applications; management and hosting of applications and
infrastructure, professional services for implementation, application hosting,
and network security.
SALES AND MARKETING
We currently focus our marketing and sales efforts on referrals from
vendors and major corporations through direct sales and marketing staff. We
believe that our direct sales and support, including having salespersons serve
as client-relationship managers, leads to better account penetration and
management, better communications and long-term relationships with our customers
and more opportunities for follow-up sales of products and services to our
existing client base. To date, we have focused our sales and marketing efforts
on large and mid-sized customers within the continental United States,
principally in Texas, Oklahoma, Missouri, Massachusetts, Tennessee and
Washington.
As part of our business strategy, we intend to expand the size of our sales
and marketing staff. Historically, we have conducted limited marketing. Most
business has been made through referrals from direct sales calls made by
individual sales personnel, and some referrals from vendors. Sales personnel
derive sales leads from individual business contacts, the marketing department's
efforts and from customer referrals from suppliers and vendors, many of whom
receive requests from customers seeking an authorized reseller to design and
install their new systems.
We benefit from the name recognition of the products we sell and have
successfully leveraged our relationships with vendors and manufacturers to build
strong product and service sales. We expect to continue to utilize these
relationships. We believe additional significant business opportunities with
some of our major global and national customers will develop as a result of the
implementation of our acquisition strategy.
We intend to hire additional sales and service personnel as the business
grows. Our sales and marketing focus continues to be technology-driven, with
systems engineers participating with direct-sales personnel as part of a team
approach to sales and marketing. Sales personnel also participate in training
programs designed to introduce new products and new versions of existing
products and to provide industry information and sales technique instruction.
We believe that we maintain a competitive advantage by hiring highly technical
sales personnel with in-depth product knowledge who require little technical
assistance in the sales process, which reduces overhead.
In addition, we have plans to develop a marketing department dedicated to
facilitating the sales process. External marketing efforts would continue to
include brochures, direct-mail programs, formulation of marketing strategies
designed to create new business opportunities, development of sales presentation
materials and follow-up of prospects introduced to us by our existing customers
and vendors. Many of our brand-name vendors have earned marketing revenue
programs in which 1%-2% of overall sales are put aside in designated marketing
funds. In addition, all of our distributors have in-house marketing programs
whose sole purpose is to assist us in our marketing efforts.
COMPETITION
The information technology value-added channel is comprised of a large
number of participants and is subject to rapid change and intense competition.
We face competition from system integrators, value-added resellers, local and
regional network services firms, telecommunications providers, network equipment
vendors and computer system vendors, many of which have significantly greater
financial, technical and marketing resources and greater name recognition and
generate greater revenue than we do. We expect to continue to face additional
competition from new entrants into our markets. Increased competition may
result in price reductions, fewer client projects, under utilization our
personnel, reduced operating margins and loss of market share, any of which
could materially adversely effect our business, operating results and financial
condition
PERSONNEL
As of December 31, 1999, we employed 82 persons, of whom 10 were engaged
in sales and marketing, 10 were engaged in providing our technical services, 42
were consultants, and 20 were engaged in finance, administration and management
functions. None of our employees is covered by a collective bargaining
agreement. There is increasing competition for experienced technical
professionals and sales and marketing personnel. We consider relations with our
employees to be excellent.
SUBSIDIARY BUSINESS
Our subsidiary, Loch Energy, is engaged in exploration for, and development
of, oil and gas reserves, primarily onshore in the Midwestern and Southwestern
area of the United States. To a lesser extent, Loch Energy has also acquired
and sold oil and gas properties, an area of business which has significant
competition. Loch Energy may be at a competitive disadvantage in acquiring oil
and gas prospects since it must compete with companies which have greater
financial resources and larger technical staffs. Various state and federal
authorities regulate the production and sale of oil and gas. In addition, Loch
Energy's activities are also subject to existing federal and state laws and
regulations governing environmental quality and pollution control.
Loch Energy presently has one full-time officer. In addition, Loch Energy
employs consultants from time-to-time to assist in its acquiring and evaluating
oil and gas properties. Pursuant to industry practice, Loch Energy expects it
will pay its consultants a retainer and cash and/or overriding bonus on
properties which prove productive which were brought to Loch Energy's attention
by one or more consultants. In November 1998, Loch Energy formed a Texas
limited liability company, Kantex LLC, in which it owns a 50% membership
interest. Kantex acquired certain oil and gas properties. Kantex also acquired
Cherokee Methane Corporation, a gas transport company located in Independence,
Kansas.
INTELLECTUAL PROPERTY RIGHTS
We rely upon a combination of trade secret, nondisclosure and other
contractual arrangements, and copyright and trademark laws, to protect our
proprietary rights. We enter into confidentiality agreements with certain of
our employees, generally require that our consultants and clients enter into
such agreements, and limit access to and distribution of our proprietary
information. There can be no assurance that the steps taken by us in this
regard will be adequate to deter misappropriation of our proprietary information
or that we will be able to detect unauthorized use and take appropriate steps to
enforce our intellectual property rights. In February 2000, we applied for the
trademark and tradename of EpicEdge, Inc. and Enterprise Portal Solutions,
however there can be no assurance that such trademarks and tradenames will be
granted.
RISK FACTORS
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-KSB or presented elsewhere by management from time
to time.
Our Success Depends on Increased Adoption of the Internet as a Means for
Commerce.
Our future success depends heavily on the acceptance and use of the
Internet as a means for commerce. The widespread acceptance and adoption of the
Internet for conducting business is likely only in the event that the Internet
provides businesses with greater efficiencies and improvements. If commerce on
the Internet does not continue to grow, or grows more slowly than expected, our
growth would decline and our business would be seriously harmed. Consumers and
businesses may reject the Internet as a viable commercial medium for a number of
reasons, including:
. potentially inadequate network infrastructure,
. delays in the development of Internet enabling technologies and
performance improvements,
. delays in the development or adoption of new standards and protocols
required to handle increased
levels of Internet activity,
. delays in the development of security and authentication technology
necessary to effect secure transmission of confidential information,
. changes in, or insufficient availability of, telecommunications
services to support the Internet, and
. failure of companies to meet their customers' expectations in
delivering goods and services over the Internet.
We may also incur substantial costs to keep up with changes surrounding the
Internet. Unresolved critical issues concerning the commercial use and
government regulation of the Internet include the following:
. security;
. cost and ease of Internet access;
. intellectual property ownership;
. privacy;
. taxation; and
. liability issues.
Any costs we incur because of these factors could materially and adversely
affect our business, financial condition and results of operations.
Our Business is Dependent on our Ability to Keep Pace with the Latest
Technological Changes.
Our market and the enabling technologies used by our clients are
characterized by rapid technological change. Failure to respond successfully to
these technological developments, or to respond in a timely or cost-effective
way, will result in serious harm to our business and operating results. We
expect to derive a substantial portion of our revenues from creating e-business
systems that are based upon today's leading technologies and that are capable of
adapting to future technologies. As a result, our success will depend, in part,
on our ability to offer services that keep pace with continuing changes in
technology, evolving industry standards and changing client preferences. There
can be no assurance that we will be successful in addressing these developments
on a timely basis or that if addressed we will be successful in the marketplace.
Our failure to address these developments could have a material adverse effect
on our business, financial condition and results of operations.
We May Not be Able to Attract and Retain Professional Staff.
Our business is labor intensive and our success will depend in large part
upon our ability to attract, retain, train and motivate highly-skilled
employees. Because of the rapid growth of the Internet, there is intense
competition for employees who have strategic, technical or creative experience
relating to the Internet. We cannot be certain that we will be successful in
attracting a sufficient number of highly skilled employees in the future, or
that we will be successful in retaining, training and motivating the employees
we are able to attract. Any inability to retain, train and motivate our
employees could impair our ability to adequately manage and complete our
existing projects and to bid for or obtain new projects. In addition, because
the competition for qualified employees in the Internet industry is intense,
hiring, training, motivating, retaining and managing employees with the
strategic, technical and creative skills we need is both time consuming and
expensive. If our employees are unable to achieve expected performance levels,
our business, financial condition and results of operations could be adversely
affected.
We May Have Difficulty Managing Our Growth.
Our growth has placed significant demands on our management and other
resources. Our revenues for 1999 increased approximately 44% over our revenues
for the year ended December 31, 1998. Our staff increased from 25 full-time
employees at December 31, 1998 to 82 at December 31, 1999. Our future success
will depend on our ability to manage our growth effectively. If we are unable
to manage our growth and projects effectively, such inability could have a
material adverse effect on the quality of our services and products, our ability
to retain key personnel and our business, financial condition and results of
operations.
Our Business Could be Adversely Affected if We are Unable to Integrate
Businesses We Acquire.
In March 1999, we acquired COAD, in May 1999; we acquired Dynamic; in July
1999, we acquired Connected; in November 1999, we acquired Net and in February
2000, we acquired Growth Strategy Group, Inc. The anticipated benefits from
these and future acquisitions may not be achieved unless the operations of the
acquired business are successfully combined with those of EpicEdge in a timely
manner. The integration of acquisitions requires substantial attention from
management. We may also encounter difficulties in integrating these acquired
businesses. We cannot be certain that customers of the acquired businesses will
continue to order services from us without reduction or that employees of the
acquired businesses will continue their employment and become well integrated
into our operations and culture. The diversion of the attention of management,
and any difficulties encountered in the transition process, could have an
adverse impact on our business, financial condition and results of operations.
The Price of Our Common Stock is Subject to Significant Fluctuation.
The trading price of our common stock could be subject to wide fluctuations
in response to:
. quarterly variations in operating results,
. changes in earnings estimates by analysts,
. any differences between reported results and analysts' published or
unpublished expectations,
. announcements of new contracts or service offerings by us or our
competitors,
. general economic or stock market conditions unrelated to our operating
performance, and
. other events or factors.
We Depend Heavily on Our Principal Clients.
We have derived, and believe that we will continue to derive, a significant
portion of our revenues from a limited number of large clients. In 1999, six
clients each accounted for more than 5% of our revenues. The volume of work
performed for specific clients is likely to vary from year to year, and a major
client in one year may not use our services in a subsequent year. The loss of
any large client could have a material adverse effect on our business, financial
condition and results of operations. In addition, revenues from a large client
may constitute a significant portion of our total revenues in a particular
quarter.
We Depend Heavily on Our Principal Vendors.
We have existing reseller agreements with industry-leading vendors of
information technology products, including Sun Microsystems, IBM and Hewlett-
Packard. For the years ended December 31, 1998 and December 31, 1999, we
purchased approximately 86% and 74%, respectively, of our products from the
foregoing vendors. The loss of any of these vendors could have a material
adverse effect on our business, results of operations and financial condition.
We Have Significant Fixed Operating Costs and Our Operating Results are
Subject to Fluctuations.
A high percentage of our operating expenses, particularly personnel and
rent, are fixed in advance of any particular quarter. As a result,
unanticipated variations in the number, or progress toward completion, of our
projects or in employee utilization rates may cause significant variations in
operating results in any particular quarter and could result in losses for such
quarter.
An unanticipated termination of a major project, a client's decision not to
proceed to the stage of a project we anticipated, or the completion during a
quarter of several major client projects could require us to maintain
underutilized employees and could therefore have a material adverse effect on
our business, financial condition and results of operations. Our revenues and
earnings may also fluctuate from quarter to quarter based on such factors as the
contractual terms and degree of completion of such projects, any delays incurred
in connection with projects, the accuracy of estimates of resources required to
complete ongoing projects, and general economic conditions.
We Enter into Fixed-Price Contracts.
Some of our projects are based on fixed-price, fixed-timeframe contracts,
rather than contracts in which payment to us is determined on a time and
materials basis. Our failure to accurately estimate the resources required for
a project or our failure to complete our contractual obligations in a manner
consistent with the project plan upon which our fixed-price, fixed-timeframe
contract was based would adversely affect our overall profitability and could
have a material adverse effect on our business, financial condition and results
of operations. We have been required to commit unanticipated additional
resources to complete certain projects, which has resulted in losses on certain
contracts. We recognize that we will experience similar situations in the
future. In addition, for certain projects we may fix the price before the
design specifications are finalized, which could result in a fixed price that
turns out to be too low and therefore adversely affect our profitability.
Many of Our Contracts can be Canceled with Limited Notice and Without
Significant Penalty.
Many of our contracts are terminable by the client following limited notice
and without significant penalty. Such terminations could result in a loss of
expected revenue and additional, un-reimbursed expenses for staff which were
allocated to that client's project. The cancellation or significant reduction
in the scope of a large project could have a material adverse effect on our
business, financial condition and results of operations.
We Face Significant Competition in Markets That are New, Intensely
Competitive and Rapidly Changing.
The markets for the services we provide are highly competitive. We believe
that we currently compete principally with strategy consulting firms, Internet
and e-business professional services providers, software integration firms,
application software vendors and internal information systems groups. Many of
the companies that provide such services have significantly greater financial,
technical and marketing resources than we do and generate greater revenues and
have greater name recognition than we do. In addition, there are relatively low
barriers to entry into our markets and we have faced, and expect to continue to
face, additional competition from new entrants into our markets.
We believe that the principal competitive factors in our markets include:
. Internet expertise and talent,
. quality of service, price and speed of delivery,
. ability to integrate strategy, technology and creative design services,
. vertical industry knowledge, and
. project management capability.
We believe that our ability to compete also depends in part on a number of
competitive factors outside our control, including:
. the ability of our competitors to hire, retain and motivate their senior
staff,
. the development by others of Internet solutions or software that is
competitive with our products and services, and
. the extent of our competitors' responsiveness to client needs.
There can be no assurance that we will be able to compete successfully with our
competitors.
Our Business is Sensitive to Economic Downturns.
Our revenues and results of operations are likely to be influenced by
general economic conditions. In the event of a general economic downturn or a
recession in the United States, Europe or Asia, our clients and potential
clients may substantially reduce their information technology and related
budgets. Such an economic downturn may materially and adversely affect our
business, financial condition and results of operations.
Increasing Government Regulation Could Affect Our Business.
We are subject not only to regulations applicable to businesses generally,
but also laws and regulations directly applicable to electronic commerce.
Although there are currently few such laws and regulations, both state, federal
and foreign governments may adopt a number of these laws and regulations. Any
such legislation or regulation could dampen the growth of the Internet and
decrease its acceptance as a communications and commercial medium. If such a
decline occurs, companies may decide in the future not to use our services to
create an electronic business channel. This decrease in the demand for our
services would seriously harm our business and operating results.
Our Business Could be Adversely Affected if We are Unable to Protect Our
Proprietary Technology.
Our success depends, in part, upon our proprietary methodologies and other
intellectual property rights. We rely upon a combination of trade secret,
nondisclosure and other contractual arrangements, and copyright and trademark
laws to protect our proprietary rights. We enter into confidentiality
agreements with our employees, generally require that our consultants and
clients enter into such agreements, and limit access to and distribution of our
proprietary information. There can be no assurance that the steps taken by us
in this regard will be adequate to deter misappropriation of our proprietary
information or that we will be able to detect unauthorized use and take
appropriate steps to enforce our intellectual property rights. In addition,
although we believe that our services and products do not infringe on the
intellectual property rights of others, there can be no assurance that such a
claim will not be asserted against us in the future, or that if asserted any
such claim will be successfully defended. A successful claim against us could
materially and adversely affect our business, financial condition and results of
operations.
We May Not Have the Right to Resell or Reuse Applications Developed for
Specific Clients.
A portion of our business involves the development of Internet and software
applications for specific client engagements. Ownership of such software is the
subject of negotiation and is frequently assigned to the client, although we may
retain a license for certain uses. Issues relating to the ownership of and
rights to use software applications can be complicated and there can be no
assurance that disputes will not arise that affect our ability to resell or
reuse such applications. Any limitation on our ability to resell or reuse an
application could require us to incur additional expenses to develop new
applications for future projects.
Our Officers and Directors Have Significant Voting Power.
Carl R. Rose, the Chairman of the Board of Directors, and Charles H.
Leaver, Jr., the Chief Executive Officer and Vice Chairman of the Board of
Directors, have voting control over 56.8% and 5.65%, respectively, of our
outstanding common stock. As a result, these shareholders have the ability to
substantially influence, and may effectively control, the outcome of corporate
actions requiring shareholder approval, including the election of directors.
This concentration of ownership may have the effect of delaying or preventing a
change in control of EpicEdge.
We are Dependent on a Number of Key Personnel.
Our success will depend in large part upon the continued services of a
number of key employees, including our Chief Executive Officer, Chief Operating
Officer and President. The loss of the services of any of these individuals or
of one or more of our other key personnel could have a material adverse effect
on us. In addition, if one or more of our key employees resigns to join a
competitor or to form a competing company, the loss of such personnel and any
resulting loss of existing or potential clients to any such competitor could
have a material adverse effect on our business, financial condition and results
of operations. In the event of the loss of any such personnel, there can be no
assurance that we would be able to prevent the unauthorized disclosure or use of
our technical knowledge, practices or procedures by such personnel.
Our Efforts to Develop Brand Awareness of our Services May Not Be
Successful.
An important element of our business strategy is to develop and maintain
widespread awareness of our brand name. To promote our brand name, we plan to
increase our marketing expenses, which may cause our operating margins to
decline. Moreover, our brand may be closely associated with the business
success or failure of some of our high-profile clients, many of whom are
pursuing unproven business models in competitive markets. As a result, the
failure or difficulties of one of our high-profile clients may damage our brand.
If we fail to successfully promote and maintain our brand name or incur
significant related expenses, our operating margins and our growth may decline.
ITEM 2. PROPERTIES
Our headquarters and principal administrative, accounting, selling and
marketing operations are located in approximately 5,424 square feet of leased
office space in Houston, Texas at a current monthly rate of approximately
$6,513. We also lease office space of approximately 2,500 square feet in
Austin, Texas, 597 square feet in St. Louis, Missouri, 3,000 square feet in
Seattle, Washington and 1,081 square feet in Nashville, Tennessee.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
EpicEdge held a special meeting of its stockholders on March 15, 2000 to
amend our Articles of Incorporation to change the name of the company from
Design Automation Systems, Inc. to EpicEdge, Inc. The number of shares of
common stock entitled to vote on the amendment was 23,081,486; of the 23,081,486
shares, 17,821,381 were voted for the amendment, 245 shares were voted against
the amendment and 563 shares abstained from voting.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Price of Common Stock
Our common stock was previously quoted on the OTC Bulletin Board, on
December 1, 1999, we began trading on the American Stock Exchange under the
symbol "EDG." The following table sets forth for the periods indicated the high
and low sale prices for EpicEdge's common stock.
FISCAL YEAR 1999 BID PRICE
---------
HIGH LOW
---- ---
1st Quarter 3.75 2.40
2nd Quarter 3.75 3.00
3rd Quarter 3.56 2.00
4th Quarter 16.25 3.00
FISCAL YEAR 1998 BID PRICE
---------
HIGH LOW
---- ---
1st Quarter 1.36 .74
2nd Quarter 1.36 .30
3rd Quarter .81 .33
4th Quarter .35 .25
On March 29, 2000, the last reported sale price of EpicEdge's Common Stock
was $22 per share. As of March 29, 2000, there were approximately 3,236
holders of record of the Common Stock.
(b) Recent Sales of Unregistered Securities
In November 1999, the Company issued an aggregate 350,000 shares of our
common stock to the Net Information Systems, Inc. stockholders in connection
with the acquisition of Net. In December 1999, the Company issued warrants to
purchase 25,000 shares of its common stock. The Company believes these
transactions were exempt from registration pursuant to Section 4(2) and/or
Regulation D promulgated under the Securities Act of 1933, as amended, as a
transaction not involving a public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and notes thereto
appearing elsewhere in this annual report. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those anticipated in
these forward- looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this annual report.
Overview
We are currently engaged in transitioning our business from a reseller to the
business of enabling our clients to meet their business goals through
implementation of e-business strategies utilizing Enterprise Portal Solutions
that allow anytime, anywhere, device-independent sharing of applications,
information, and communication tools between trading communities. Enterprise
Portal Solutions improve collaboration among trading partners by creating a
virtual workspace for businesses. With Enterprise Portal Solutions, all that is
required is a browser and the Internet to enable real-time access to mainframe,
client/server or web-enabled applications. Enterprise Portal Solutions enable
collaborators to use common communication tools such as e-mail, calendaring and
file sharing. The existing infrastructure of applications and systems remain
intact and collaborators are not forced to change and adapt due to constraints
in technology.
EpicEdge was originally incorporated under the name Loch Exploration, Inc. in
June 1979 and historically engaged in the oil and gas business. In December
1998, the company transferred all of its assets and liabilities to Loch Energy,
Inc., in exchange for shares of company common stock, whereby Loch Energy became
a subsidiary. In January 1999, Loch Exploration acquired all of the issued and
outstanding capital stock of Design Automation Systems Incorporated, a private
company, in exchange for shares of company common stock. At December 31, 1999 it
also had a 53% equity interest in Loch Energy, which is in the oil and gas
business. Loch Energy is reported as a discontinued operations, and EpicEdge
intends to distribute the shares of Loch Energy common stock held by EpicEdge to
its shareholders of record as of December 2, 1998.
SIGNIFICANT ACCOUNTING POLICIES
Revenues are generated primarily from providing customers with
comprehensive information technology products "systems integration revenue," and
services and support revenue.
Revenues from discrete hardware and software sales are recognized as
revenues when an executed agreement is received and the products are delivered
to the customer. Revenues from system integration and maintenance are recognized
primarily as the services are performed and are usually performed on a time and
material basis.
We use the percentage of completion method to account for customer
consulting contacts. Under this method, revenues are recognized as the work on
the contract progresses and defined "milestones" are reached. Accounts
receivable at December 31, 1999, include approximately $204,000 in accrued
revenue related to customer contracts for which certain milestones had been
reached, but the customer had not yet been billed. Revenues related to a service
contract signed in connection with a consulting contract are recognized ratable
over the term of the service contract, which typically begins upon completion of
the consulting contract.
Property and Equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over the following estimated useful lives: computer hardware and
software, three to five years; office furniture and fixtures, three to seven
years; and leasehold improvements, five years or over the life of the lease if
shorter.
Goodwill represents the excess of cost fair value of net assets acquired in
business combinations, is amortized on a straight-line basis over eight years
and is stated net of accumulated amortization of $593,012 at December 31, 1999.
Stock-Based Compensation arising from stock option grants is accounted for
by thee intrinsic value method under Accounting Principles Board ("APB") Opinion
No. 25. SFAS No. 123 and encourages (but does not require) the cost of
stock-based compensation arrangements to be measured based on the fair value of
the equity instrument awarded. As permitted by SFAS No. 123, we applied APB
Opinion No. 25 to our stock-based compensation awards to employees and disclosed
the required pro fonna effect on net income and earnings per share in the notes
to the financial statements.
New Accounting Standards - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"), which establishes accounting and reporting
standards for derivative instruments. SFAS No. 133 is effective beginning in
2001. We currently do not use derivative financial products for hedging or
speculative purposes and, as a result, do not anticipate any impact on the
financial statements.
RESULTS OF OPERATIONS
The results of operations for the years ended 1999 and 1998 are based on
our former reseller business, and do not reflect our current e-business
strategy. In view of the rapidly changing nature of our business, and our
recent entrance into the e-business market, we believe period to period
comparisons of our revenue and operating results are not necessarily meaningful
and should not be relied upon as indications of our future performance.
The following table sets forth certain statement of operations data
expressed as a percentage of total revenues for the periods indicated:
Year Ended December 31,
------------------------
1999 1998
---- ----
Revenues:
Systems Integrator 86.5% 100.0%
Consulting 13.5% -
----- -----
Total Revenues 100.0% 100.0%
-----
Cost of Revenues:
Systems Integrator 79.1% 88.7%
Consulting 10.30% -
----- -----
Total Cost of Revenues 89.4% 88.7%
------ -----
Gross profit 10.6% 11.3%
----- -----
Operating Expenses:
Selling, general and administrative 16.4% 10.0%
Consulting 12.0% -
Depreciation and amortization 2.2% -
----- -----
Total operating expenses 30.6% 10.0%
----- -----
Income (loss) from operations (20.1%) 1.3%
Other Income and Expense - -
----- -----
Income (loss) before income taxes and
discontinued operations (20.1%) 1.3%
(Provision) benefit for Income Taxes - -
----- -----
Income from continuing operations (20.1)% 1.3%
Discontinued Operations (1.5)% -
----- -----
Net Income (loss) (21.6%) 1.3%
===== =====
REVENUES
We generate revenues primarily from our systems integrator, and from a
lessor extent our consulting services. The systems integrator consist of
primarily hardware sales. The consulting services are a result of Peoplesoft
implementations, and e-commerce solutions.
Total Revenues. Total revenues increased 44% from $20.4 million in 1998 to
$29.4 million in 1999. In 1998, three clients individually accounted for 23%,
13%, and 12% of revenues respectively. In 1999, three clients individually
accounted for 20%, 13%, and 11% of revenues respectively. The same three clients
in the years ended 1999 and 1998 comprise these revenue percentages.
Systems Integrator Revenues. Systems integrator revenues increased 25% from
$20.4 million in 1998 to $25.5 million in 1999, representing 100% and 86.5% of
total revenues in the respective years. All of the revenues in 1998 were
generated from the systems integrator. The increase in system integrator
revenues was primarily due to sales to existing and new clients.
Consulting Revenues. Consulting revenues increased 100% to $4.0 million in
1999. The increase of consulting revenues was primarily the result of the four
acquisitions made in 1999. During 1999 we made the following acquisitions; COAD
on March 31, 1999, Dynamic on May 28, 1999, Connected on July 30, 1999, and Net
on November 30, 1999. COAD, and Dynamic provided information technology
consulting services. Connected and Net provides electronic-business consulting
and Connected also provides training.
COST OF REVENUES
Cost of Systems Integrator Revenues. Cost of systems integrator revenues was
$18.0 million in 1998, and $23.3 in 1999, representing 88.7% and 79.1% of total
revenues in the respective years. While the cost of systems integrator revenues
was relatively constant from 1998 to 1999, the decrease in cost of systems
integrator revenues as a percentage of total costs of revenues in 1999 was a
result of a shift in the mix of systems integrator revenues and consulting
revenues in 1999 compared to 1998.
Cost of Consulting Revenues. Cost of consulting revenues consists primarily
of personnel costs associated with consulting services, as well as amounts paid
to third-party consulting firms for those services. Cost of consulting revenues
was $0.0 in 1998 and $3.0 million in 1999 representing 0% in 1998 and 10.4% in
1999 of total
revenues for the respective years. The increase as a percentage of total
revenues from 1998 to 1999 was a result of the acquisitions of COAD, Dynamics,
Connected, and Net.
OPERATING EXPENSES
Sales, General and Administrative Expenses. Sales, General, and
Administrative expenses increased from $2 million in 1998 to $4.8 million in
1999, representing 10% and 16% of total revenues in the respective years. The
increase in general and administrative expenses reflects our continued
investment in increased staffing and related expenses for the enhancement of the
infrastructure necessary to support our growing business, including investor
relations programs, and the increased utilization of outside professional
service firms.
Consulting Expense. Consulting expense consists of non-cash compensation
exchanged for consulting services performed by an ouutside consulting firm, as
well as non-cash compensation issued to outside directors for consulting
services. Consulting expense was $0.0 in 1998 and $3.5 million in 1999
representing 0% in 1998 and 39% in 1999 of total operating expenses.
Goodwill Amortization. The acquisitions in 1999, as described previously in
Item 1 hereof, resulted in an aggregate $9 million of goodwill. Goodwill is
being amortized over an eight year period and resulted in $600,000 in 1999. The
$600,000 increase in goodwill increased depreciation and amortization from
$22,803 in 1998 to $648,706 in 1999, a 2,745% increase.
DISCONTINUED OPERATIONS
This represents the Company's 53% equity interest in Loch Energy. Total
revenue for year ended 1999 amounted to $72,879, and operating expenses amounted
to $452,779. The net loss for the year of $430,078 is mainly due to the
issuance of common stock for certain consulting services.
STATEMENT OF CASH FLOWS
We used cash from operating activities of $3.8 million during 1999. These
outflows were partially offset by an increase in accounts payable, and accrued
expenses. Our average days sales outstanding at December 31, 1999 decreased to
59 days, from 72 days at December 31, 1998. The overall decrease in days sales
outstanding from 1998 to 1999 reflects the improved collection efforts over the
year and the quality of our relations with our customers. The method for
calculating the average days sales outstanding was accomplished by dividing the
ending accounts receivable by the revenues for the year and multiply this amount
by 365. The average days sales outstanding can be affected by the amount of
sales at the end of the year.
During the year ended December 31, 1999, cash used in investing
activities was $1,201,401 which included the purchase of $296,856 of property
and equipment. In addition $904,545 was used in the acquisition of COAD,
Dynamic, Connected, and Net. The property and equipment investments primarily
took the form of computer hardware to support our expanding organization. For
the year ended December 31, 1998 cash used in investing activities was $644,815
which was comprised primarily of an advance to a related party. The increase of
$556,586 or 87% is primarily the result of cash outflows for acquisitions.
Cash provided by financing activities for the year ended December 31, 1999
was $1.9 million, primarily due to the line of credit and notes payable from
FINOVA Capital Corporation. As compared to cash used in financing activities of
$619,081 for the year ended December 31, 1998 which was comprised primarily of
$753,043 in repayment of debt to Finova Capital Corporation.
NET INCOME (LOSS)
BASIC INCOME (LOSS) PER COMMON SHARE
For the year ended December 31, 1999, our net loss was $6,367,454 compared
to net income of $260,332 for the year ended December 31, 1998. As discussed
above, the net loss was primarily attributed to an increase in non-cash
charges for consulting services, general and administrative expenses
associated with the integration of acquisitions and goodwill costs resulting
from such acquisitions. In addition, we had a loss per common share of $.32
for the year ended December 31, 1999, as compared to earnings per share of $.02
for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements in connection with our business plan will be
significant. As of December 31, 1999 we had negative working capital of $3.3
million and negative cash flows from operations of $3.8 million. On February 18,
2000 we sold 2,260,000 shares of its common stock for gross proceeds of $11.3
million dollars. The financing had a positive effect on working capital in that
the negative $3.3 working capital on December 31, 1999 has changed on the
February 29, 2000 balance to a positive $7 million. We intend to use the
proceeds to provide financing for future acquisitions; provide general working
capital; provide funding for capital improvements; and other corporate needs. In
addition, we also have a $4 million line of credit with Finova Capital
Corporation which as of March 27, 2000 had a balance of $2,047,877. The amount
of funds available for use under the line of credit is based upon 85% of
acceptable receivables. Management anticipates that current working capital and
revenues from operations will provide sufficient liquidity through fiscal 2000,
although this period may be shortened due to factors beyond our control, as
discussed earlier in this report. In addition, our current business strategy is
to pursue the acquisition of complimentary businesses and expand current
operations, which would increase our capital requirements. The timing, size and
success of our acquisition and expansion efforts cannot be readily predicted. We
currently intend to finance future acquisitions by using shares of our common
stock for a portion of the consideration to be paid. In the event that our
common stock does not maintain a sufficient market value, or potential
acquisition candidates are otherwise unwilling to accept common stock as part of
the consideration for the sale of their business, we may be required to utilize
more of our cash resources. If we do not have sufficient cash resources, our
growth could be limited unless we are able to obtain additional equity or debt
financing. Except for our current line of credit, we have no commitment for
additional financings or borrowings, nor can we provide you any assurance that
additional debt or equity financing will be undertaken, and if undertaken will
be successful and the proceeds derived therefrom, will in fact be sufficient to
fund operations and meet the needs of our business plan. Lower than expected
earnings resulting from adverse conditions or otherwise, could restrict our
ability to expand operations as planned, and if severe enough may shorten the
period in which the current working capital may be expected to satisfy our
requirements, force curtailed operations, or cause us to sell assets.
EPICEDGE, INC.
INDEX TO FINANCIAL STATEMENTS
ITEM 7 IN 10-KSB
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS AND NOTES:
Balance Sheet as of December 31, 1999 F-3
Statements of Operations for the Years Ended December 31, 1999 and 1998 F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1999
and 1998 F-5
Statements of Cash Flows for the Years Ended December 31, 1999 and 1998 F-6
Notes to Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of EpicEdge, Inc.:
We have audited the accompanying balance sheet of EpicEdge, Inc. (the "Company")
(formerly Design Automation Systems, Inc.) as of December 31, 1999, and the
related statements of operations, stockholders' equity and cash flows for the
year 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 audit. We did not audit the financial
statements of Loch Energy, Inc. ("LEI"), the Company's investment in which is
accounted for under the equity method. The Company's equity of $84,337 in LEI's
net assets at December 31, 1999, and of $430,078 in that company's net loss for
the year then ended are included in the accompanying financial statements as
discontinued operations and summarized in Note 6. The financial statements of
LEI were audited by other auditors whose report has been furnished to us, and
our opinion, insofar as it relates to the amounts included for such company as
discontinued operations, is based solely on the report of such other auditors.
The financial statements of the Company for the year ended December 31, 1998
were audited by other auditors whose report, dated February 1, 1999, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
1999 financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 1999, and the results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Dallas, Texas
March 17, 2000
F-2
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
EpicEdge, Inc. (formerly
Design Automation Systems, Inc.)
We have audited the accompanying balance sheets of EpicEdge, Inc. (formerly
Design Automation Systems, Inc.) as of December 31, 1998 and 1997, and the
related statements of operations, shareholders' equity (deficit) and cash flows
for each of the years in the three-year period ended December 31, 1998. 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. 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 EpicEdge, Inc. (formerly Design
Automation Systems, Inc.) as of December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Certified Public Accountants
Houston, Texas
February 1, 1999
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
Loch Energy, Inc.
We have audited the accompanying balance sheets of Loch Energy, Inc. (a Texas
Corporation) as of December 31, 1999 and 1998, and the related statements of
operations, changes in shareholders' equity and cash flows for the year ended
December 31, 1999 and the period from May 29, 1998 (inception) to December 31,
1998. 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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Loch Energy, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the year ended December 31, 1999 and the period from May 29, 1998
(inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
/S/ Farmer, Fuqua, Hunt & Munselle, P.C.
Dallas, Texas
March 24, 2000
242
EPICEDGE, INC.
BALANCE SHEET
DECEMBER 31, 1999
- --------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 1,517,065
Trade receivables, less allowance of $37,000 (Notes 1, 8 and 13) 4,551,736
Other current assets (Note 5) 247,617
-----------
Total current assets 6,316,418
PROPERTY AND EQUIPMENT - Net (Notes 1 and 4) 485,261
GOODWILL - Net (Notes 1 and 3) 8,789,669
DISCONTINUED OPERATIONS - Net assets (Notes 6) 84,337
-----------
TOTAL $15,675,685
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit and term note (Note 8) $ 2,866,471
Other notes payable (Notes 3 and 8) 375,000
Accounts payable (Note 13) 5,096,439
Accrued expenses and other current liabilities (Note 7) 1,316,866
-----------
Total current liabilities 9,654,776
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Notes 3 and 11):
Common stock, par value $.01; 50,000,000 shares
authorized; 21,786,200 shares
issued and outstanding 217,862
Common stock warrants 115,000
Additional paid-in capital 12,251,520
Accumulated deficit (6,563,473)
-----------
Total stockholders' equity 6,020,909
-----------
TOTAL $15,675,685
===========
See notes to financial statements.
F-3
EPICEDGE, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1999 AND 1998
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998
REVENUES (Notes 1 and 13):
Systems integration $25,477,609 $20,442,937
Consulting 3,961,960
----------- -----------
Total revenues 29,439,569 20,442,937
COST OF REVENUES (Note 13):
Systems integration 23,308,328 18,124,043
Consulting 3,034,368
----------- -----------
Total cost of
revenues 26,342,696 18,124,043
----------- -----------
GROSS PROFIT 3,096,873 2,318,894
OPERATING EXPENSES:
Selling, general and administrative 4,827,783 2,036,039
Consulting (Note 11) 3,548,476
Depreciation and amortization (Notes 1
and 4) 648,706 22,803
----------- --------------
Total operating
expenses 9,024,965 2,058,842
----------- --------------
(LOSS) INCOME FROM OPERATIONS (5,928,092) 260,052
OTHER INCOME (EXPENSE):
Interest expense (98,781) (61,060)
Interest income 35,176 56,074
Other 54,321 5,266
----------- --------------
Total other
income (expense) (9,284) 280
----------- --------------
(LOSS) INCOME FROM CONTINUING
OPERATIONS (5,937,376) 260,332
LOSS FROM DISCONTINUED
OPERATIONS (Note 6) (430,078)
----------- --------------
NET (LOSS) INCOME $(6,367,454) $ 260,332
=========== ===========
NET (LOSS) INCOME PER SHARE
Basic and diluted (Note 1):
Continuing operations $(0.30) $0.02
Discontinued operations $(0.02)
----------- --------------
Total $(0.32) $0.02
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - Basic and diluted
(Note 1) 19,895,928 14,405,918
=========== ===========
See notes to financial statements.
F-4
EPICEDGE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
STOCKHOLDER
RECEIVABLE
FOR RETAINED
COMMON STOCK COMMON ADDITIONAL PURCHASE OF EARNINGS
---------------------------- STOCK PAID-IN COMMON (ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL STOCK DEFICIT) TOTAL
BALANCE, JANUARY 1, 1998 14,400,000 $ 35,237 $ - $ (227,056) $ 114,239 $ (77,580)
Distribution to
stockholder 227,056 (459,382) (232,326)
Common stock grants 2,160,000 19,155 19,155
Net income 260,332 260,332
---------- ----------- ----------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1998 16,560,000 54,392 - (84,811) (30,419)
Merger with Loch, a public
company (Note 2) 69,975 69,975
Change in par value of
common stock 111,208 (111,208)
Common stock issuances:
Consulting services -
Loch (Note 11) 2,304,700 23,047 702,934 725,981
COAD acquisition (Note 3) 600,000 6,000 2,619,000 2,625,000
Connected acquisition
(Note 3) 300,000 3,000 1,542,000 1,545,000
Dynamic acquisition (Note 3) 524,000 5,240 2,690,360 2,695,600
NET acquisition (Note 3) 350,000 3,500 1,090,250 1,093,750
Consulting services (Note
11) 1,147,500 11,475 3,537,001 3,548,476
Common stock warrants (Note 11) 115,000 115,000
Net loss (6,367,454) (6,367,454)
---------- ----------- ------- ----------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1999 21,786,200 $ 217,862 115,000 $12,251,520 $ - $(6,563,473) $6,020,909
========== =========== ======= =========== ========== =========== ==========
See notes to financial statements.
F-5
EPICEDGE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
OPERATING ACTIVITIES:
(Loss) income from continuing operations $(5,937,376) $ 260,332
Adjustments to reconcile
net (loss) income to
net cash provided by
(used in) operating
activities:
Depreciation and amortization 648,706 22,803
Issuance of common stock for services 3,548,476 19,155
Changes in assets and
liabilities, net of
acquisitions:
Accounts receivable (196,513) (863,644)
Prepaid and other
assets 94,715 (117,112)
Accounts payable 1,368,485 2,362,045
Accrued expenses and
other liabilities 391,060 76,691
----------- -------------
Net cash provided by (used in)
operating activities (82,447) 1,760,270
----------- -------------
INVESTING ACTIVITIES:
Purchase of property and
equipment (296,856) (22,190)
Cash for acquisitions (904,545) -
Adv. to related parties - (654,673)
Proceeds from sale of
property and equipment 32,048
----------- -------------
Net cash used in
investing
activities (1,201,401) (644,815)
----------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of
debt 11,287,136 (753,043)
Repayment of debt (9,337,148)
Advances from
stockholder, net 133,962
----------- -------------
Net cash provided by (used in)
financing activities 1,949,988 (619,081)
----------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 666,140 496,374
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 850,925 354,551
----------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,517,065 $ 850,925
============ =============
SUPPLEMENTAL INFORMATION:
Interest paid $ 68,987 $ 61,060
============ =============
Income taxes paid $ 72,600 $ -
============ =============
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Increase in goodwill from common stock issuances 8,325,313
Elimination of shareholder receivable (227,056)
Elimination of shareholder advances 422,347
Elimination of related party receivable (654,673)
See notes to financial statements.
F-6
EPICEDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - EpicEdge (the "Company") (formerly Design Automation Systems)
Inc. engages in the business of enabling Global 1000 and dot com companies to
implement e-business strategies utilizing Enterprise Portal Solutions that
allow device-independent sharing of applications, information and
communication tools between trading communities. The Company's services
assist customers in dealing with issues related to system architecture and
design, product acquisition, configuration and implementation, ongoing
operational support and evolutions in technology to take advantage of the
evolving Internet economy.
FINANCIAL STATEMENT PREPARATION requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies as of the date of the financial statements and
revenues and expenses for the period. Differences from those estimates are
recognized in the period they become known.
REVENUES are generated primarily from providing customers with comprehensive
information technology products ("systems integration") and services and
support ("consulting").
Revenues from discrete hardware and software sales are recognized as revenues
when an executed agreement is received and the products are delivered to the
customer. Revenues from system integration and maintenance are recognized
primarily as the services are performed and are usually performed on a time
and material basis.
The Company uses the percentage-of-completion method to account for custom
consulting contacts. Under this method, revenues are recognized as the work
on the contract progresses and defined "milestones" are reached. Accounts
receivable at December 31, 1999, include approximately $204,000 in accrued
revenue related to customer contracts for which certain milestones had been
reached, but the customer had not yet been billed. Revenues related to a
service contract signed in connection with a consulting contract are
recognized ratably over the term of the service contract, which typically
begins upon completion of the consulting contract.
PROPERTY AND EQUIPMENT are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-
line method over the following estimated useful lives: computer hardware and
software, three to five years; office furniture and fixtures, three to seven
years; and leasehold improvements, five years or over the life of the lease
if shorter.
GOODWILL represents the excess of cost over fair value of net assets acquired
in business combinations (Note 3), is amortized on a straight-line basis over
eight years and is stated net of accumulated amortization of $593,012 at
December 31, 1999.
F-7
FINANCIAL INSTRUMENTS consist of cash, receivables, payables and debt, the
carrying value of which are a reasonable estimate of their fair value due to
their short maturities or variable interest rates.
STOCK-BASED COMPENSATION arising from stock option grants is accounted for by
the intrinsic value method under Accounting Principles Board ("APB") Opinion
No. 25. Statement of Financial Accounting Standards ("SFAS") No. 123 and
encourages (but does not require) the cost of stock-based compensation
arrangements to be measured based on the fair value of the equity instrument
awarded. As permitted by SFAS No. 123, the Company applies APB Opinion No. 25
to its stock-based compensation awards to employees and discloses the
required pro forma effect on net income and earnings per share in Note 11.
NET (LOSS) EARNINGS PER SHARE - Basic net (loss) income per share is computed
by dividing the net (loss) income by the weighted average number of shares of
common stock outstanding during the period. Diluted net (loss) income per
share is computed by dividing the net (loss) income by the weighted average
number of shares of common stock outstanding, and when dilutive, options and
warrants to purchase common stock. The dilutive effect of the options and
warrants to purchase common stock are excluded from the computation of
diluted net (loss) income per share if their effect is antidilutive. For the
year ended December 31, 1999, the antidilutive effect excluded from the
diluted net (loss) per share computation was 2,658,900 shares related to
common stock options and warrants.
NEW ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards for
derivative instruments. SFAS No. 133, as amended, is effective beginning
in 2001. The Company currently does not use derivative financial products
for hedging or speculative purposes and, as a result, does not anticipate
any impact on the financial statements.
2. BUSINESS COMBINATION WITH PUBLIC COMPANY
Effective January 1, 1999, Loch Exploration, Inc. ("Loch"), a public company,
acquired all of the stock of the Company in a "reverse merger," whereby the
Company is the acquirer for accounting purposes. In connection with the
acquisition, Loch exchanged with the Company's stockholders
shares of common stock. The transaction was accounted for in a manner similar
to a pooling of interests, whereby no goodwill resulted from this
transaction, and the Company's equity interest in Loch's net assets of
$69,975 was recorded at Loch's historical cost basis. As a result of the
transaction, the Company is taxed as a C Corporation; however, at the date of
the transaction, no significant basis differences existed between tax and
financial reporting purposes that resulted in deferred tax balances at that
date.
Loch's net assets were transferred to a subsidiary, Loch Energy, Inc.
("LEI"), which is in the oil gas business, and the Company intends to
distribute the shares of LEI common stock owned by the Company to its
stockholders in year 2000. Accordingly, the Company's equity interest in
Loch's net assets and operations is reported as discontinued operations in
the accompanying financial statements.
F-8
3. ACQUISITIONS
On March 31, 1999, the Company acquired all of the issued and outstanding
stock of COAD Solutions, Inc. ("COAD"), an information technology consulting
firm, in exchange for (1) 600,000 shares of the Company's common stock valued
at $2,625,000; (2) $200,000 cash, payable $100,000 at closing, and $100,000
payable in quarterly installments of $25,000 beginning 90 days from the
closing date; and (3) for a period of 24 months, each COAD stockholder will
receive a 20% royalty on gross revenues of SQLACE products. The transaction
was accounted for as a purchase and resulted in goodwill of approximately
$3,000,000.
On May 28, 1999, the Company acquired all of the issued and outstanding stock
of Dynamic Professional Services, LLC ("Dynamic"), an information technology
consulting firm, in exchange for (1) 524,000 shares of the Company's common
stock valued at $1,545,000; (2) $200,000 cash, payable $100,000 at closing,
and $100,000 payable in quarterly installments of $25,000 beginning 90 days
from the closing date; and (3) additional stock consideration if on June 1,
2000, the closing price for the Company common stock for the prior 15
business days is less than $5.15 per share in an amount equal to 5,340 shares
for each $0.01 below $5.15. The Company has reserved 2,750,000 shares of
common stock for the potential additional consideration. This transaction was
accounted for as a purchase and resulted in goodwill of approximately
$2,800,000.
On July 30, 1999, the Company acquired all of the issued and outstanding
stock of Connected Software Solutions, Inc. ("Connected"), an electronic-
business consulting and training firm, in exchange for (1) 300,000 shares of
the Company's common stock valued at $2,695,600; (2) $300,000 cash payable in
six quarterly installments of $50,000 beginning 90 days from the closing
date; and (3) additional stock consideration if on August 1, 2000, the
closing price for the Company's common stock for the prior 15 business days
is less than $5.15 per share in an amount equal to 3,000 shares for each
$0.01 below $5.15. The Company has reserved 1,500,000 shares of common stock
for the potential additional consideration. This transaction was accounted
for as a purchase and resulted in goodwill of approximately $1,800,000.
On November 29, 1999, the Company acquired substantially all of the assets of
Net Information Systems, Inc., an e-business solutions provider, in exchange
for (1) 350,000 shares of the Company's common stock valued at $1,093,750;
(2) $180,000 cash; (3) a one-year promissory note in the amount of $50,000
payable quarterly with the first payment due 90 days after closing; and (4)
the assumption of Connected's Wells Fargo debt not to exceed $220,000. This
transaction was accounted for as a purchase and resulted in goodwill of
approximately $1,500,000.
The operations of each acquired entity are included in the Company's
consolidated operations from their respective acquisition date.
F-9
The unaudited consolidated results of operations on a pro forma basis as
though the above acquisitions were made and the related common shares were
issued as of the beginning of the Company's fiscal year 1998 are as follows:
1999 1998
Revenues $31,525,390 $24,852,001
=========== ===========
Loss from continuing operations $(6,348,221) $ (729,469)
=========== ===========
Per share $ (.32) $ (0.05)
=========== ===========
Weighted average common shares outstanding 19,895,928 14,405,918
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Computer equipment $ 534,964
Office furniture and fixtures 107,605
Leasehold improvements 13,500
-----------
Total 656,069
Less accumulated depreciation and
amortization 170,808
-----------
Property and equipment - net $ 485,261
===========
5. OTHER CURRENT ASSETS
Other current assets consist of the following:
Accrued unbilled revenues $ 204,000
Supplies inventory 16,931
Prepaids 26,686
-----------
Total $ 247,617
===========
F-10
6. DISCONTINUED OPERATIONS
As a result of the reverse merger with Loch (Note 2) the Company has acquired
a 53% equity interest in Loch Energy, Inc. ("LEI"), in the oil and gas
business, as of December 31, 1999. This is presented as discontinued
operations because the Company intends to distribute these LEI common shares
to the Company's stockholders in year 2000. Summarized financial information
for LEI at December 31, 1999 is as follows:
Total assets $ 168,144
========
Total stockholders' equity $ 159,127
========
The Company's equity interest $ 84,337
========
Net loss $(811,468)
========
The Company's equity interest $(430,078)
========
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
1999
Sales tax payable $ 416,453
Accrued payroll and compensation 560,910
Other accrued expenses 339,503
----------
Total $1,316,866
==========
F-11
8. NOTES PAYABLE
Notes payable consist of the following:
Borrowings under revolving line of credit, which
expires August 10, 2001, with one year renewal
at the lender's option, bearing interest at
prime plus 1.5% (10% at December 31, 1999)
and collateralized by all investments, accounts
receivable, inventory and property $1,981,471
Borrowing under term loan facility that bears
interest at prime plus 2.5% (11% at December 31,
1999), payable in 11 monthly installments of
$25,000 beginning January 15, 2000, and one final
principal payment of $725,000 on December 31, 2000 885,000
----------
2,866,471
Debt from acquisitions - due to former owners
(Note 3) 375,000
----------
Total current debt $3,241,471
==========
REVOLVING LINE OF CREDIT AND TERM LOAN FACILITY - On August 10, 1999, the
Company entered into a Loan and Security Agreement for a total credit
facility of up to $5,000,000, limited to the available borrowing base which
is based on levels of eligible accounts receivable and inventory, as defined
in the Agreement, expiring August 10, 2001 with three one-year renewals at
the lender's option.
On December 29, 1999, the Company amended its Agreement to include a
$1,000,000 term loan under the total credit facility of $5,000,000. In
connection with this amendment the Company entered into a warrant purchase
agreement with the lender, and issued warrants to purchase 25,000 shares of
the Company's common stock (Note 11). The fair value assigned to these
warrants of $115,000 has been accounted for as debt discount, of which the
unamortized portion is reflected as a reduction of the related debt.
At December 31, 1999, the available unused balance under the Agreement was
$2,018,000.
9. INCOME TAX
Prior to reverse merger in January 1999, the Company was an S Corporation for
tax purposes. Accordingly, no provision for income taxes was made in 1998.
Based on C Corporation status for tax purposes beginning in 1999, deferred
income tax benefits total approximately $2 million at December 31, 1999,
arising principally from the tax benefits of net operating loss
carryforwards, and are fully reserved until recoverability in the future is
reasonably assured.
F-12
10. LEASES AND OTHER COMMITMENTS
LEASES - The Company leases office space under a noncancelable operating
lease. Total rent expense for the years ended 1999 and 1998 was
approximately $119,231 and $82,000, respectively. Minimum future rental
commitments under operating leases at December 31, 1999 are as follows:
Fiscal year ending December 31:
2000 $75,349
2001 58,998
2002 37,262
2003 38,049
2004 4,158
--------
Total minimum payments $213,816
========
EMPLOYMENT CONTRACTS - In connection with the reverse merger the Board of
Directors of the Company approved five-year employment agreements with three
key employees for an aggregate minimum base salary and bonus compensation of
$925,000.
In connection with the COAD acquisition the stockholders of COAD were
granted employment agreements with the Company, which expire on December 31,
2004, and continue thereafter on a year-to-year basis and include a
noncompete provision for the term of the agreement and one-year thereafter.
In connection with the Dynamic acquisition certain stockholders of Dynamic
entered into employment agreements with the Company, which continue on a
year-to-year basis and include a noncompete provision for the term of the
agreement and one-year thereafter.
In connection with the Net acquisition the Company reserved stock options
for 95,000 shares of the Company's common stock to be issued to former
employees of Net employed by the Company. Also in connection with the Net
acquisition the sole-shareholder of Net entered into an employment agreement
which terminates November 30, 2002, and includes a noncompete provision for
the term of the agreement and one-year thereafter.
11. CAPITAL STOCK
STOCK OPTIONS - In February 1999, the Board of Directors approved the 1999
Employee Stock Option Plan (the "Plan"). The Board reserved 3,000,000 shares
of common stock for issuance under the Plan. Under the terms of the Plan,
options to purchase common stock may be granted at the discretion of the
Company's compensation committee and may be subject to certain restrictions.
Generally, the options vest over a three-year life, excluding 420,000 number
of options granted in November 1999 to certain employees that vest over a
one-year period. The options expire 10 years after the date of grant. At
December 31, 1999, there were 2,633,900 options outstanding and 366,100
options available for grant under the Plan. There were 2,633,900 options
granted during 1999 at exercise prices ranging from $2.00 to $14.25 ($3.60
weighted average price). No options were exercised or expired during 1999,
and there were no options exercisable at December 31, 1999.
F-13
STOCK-BASED COMPENSATION - The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its stock option plans. No compensation
cost was recognized for the Company's stock option plans because the options
were granted at an exercise price that equaled the fair market value on the
date of grant. SFAS No. 123 prescribes a method to record compensation cost
for stock-based employee compensation plans at fair value, but allowed
disclosure as an alternative. The pro forma disclosure for December 31, 1999
as if the Company had adopted the cost recognition requirements under SFAS
No. 123 is presented below. The pro forma compensation cost may not be
representative of that expected in future years.
Net loss:
As reported $(6,367,000)
Pro forma (8,473,000)
Loss per share - basic and diluted:
As reported $ (0.32)
Pro forma (0.43)
Stock options granted 2,633,900
In the pro forma calculations, the weighted average fair value of options
granted during 1999 was estimated at $3.60 per share. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes with
the following assumptions: (i) expected volatility computed using the monthly
average of the Company's common stock market price as listed on the American
Stock Exchange for the period from April 1999, through December 1999, which
market price volatility averaged 78%; (ii) expected dividend yield of 0%;
(iii) expected option term of three years; and (iv) risk-free rate of return
as of the date of grant, which ranged from 5.5% to 6.5%, based on
extrapolated yield of five-and seven-year U.S. Treasury securities.
COMMON STOCK GRANTS - During 1999, the Company granted 1,147,500 shares of
common stock, valued at $3,548,476 in exchange for consulting services from
various consulting firms which was recorded by the Company in its 1999
operating expenses. Also, 2,304,700 common shares valued at $725,981 were
exchanged for consulting services performed by various consulting firms for
LEI in connection with the reverse merger (Note 2). This transaction
resulted in the Company recording an additional investment in LEI of
$725,981.
COMMON STOCK WARRANTS - Warrants to purchase 25,000 common shares were
granted in 1999 with the term loan (Note 8). The shares can be purchased any
time prior to March 31, 2005 at an exercise price of $11.70 per warrant
share. A fair value of $115,000 was assigned to these warrants at the date of
grant.
F-14
12. EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan under Section 401(k) of the Internal
Revenue Code, which covers substantially all employees. The Company does not
match employee contributions.
13. CONCENTRATIONS OF CREDIT RISK
Sales to significant customers and vendors as a percentage of the Company's
total revenues, accounts receivable cost of sales and accounts payable,
respectively, for 1999 and 1998 are as follows:
As a Percentage of As a Percentage of
Trade Receivables Revenues for the
at December 31 Year Ended December 31
------------------ ----------------------
1999 1999 1998
Customer A 19% 20% 23%
Customer B 14 13 13
Customer C 1 11 12
As a Percentage of As a Percentage of
Accounts Payable Cost of Sales for the
at December 31 Year Ended December 31
------------------ ----------------------
1999 1999 1998
Vendor A 26% 36% 36%
Vendor B 22 30 24
Vendor C 3 17 22
14. RELATED PARTY TRANSACTIONS
The Company had $0 and $119,497 of management fee income for the years ended
December 31, 1999 and 1998, respectively, from a company that is wholly
owned by the 1998 majority stockholder of the Company.
F-15
15. SUBSEQUENT FINANCING AND ACQUISITION
On February 18, 2000, the Company entered into a Stock Purchase Agreement
with Edgewater Private Equity Fund III, L.P.; Aspen Finance Investors I,
LLC, a Colorado limited liability company; and Fleck T.I.M.E. Fund, L.P for
them to purchase from the Company 2,260,000 shares of common stock for
$11,300,000 in cash.
On March 1, 2000, the Company acquired the stock of The Growth Strategy
Group, Inc., a marketing and strategic planning firm, in exchange for (1)
277,000 shares of the Company's common stock and (2) $375,000 in cash. The
acquisition of GrowthStrategies has been deemed "significant"; accordingly,
separate historical and pro forma financial statements will be filed by
amendment no later than 75 days after the consummation of the acquisition.
F-16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 9 TO 12 INCLUSIVE.
These items have been omitted in accordance with the general instructions to
Form 10-KSB. Prior to April 29, 2000, we will file a definitive proxy statement
or information statement that will involve the election of directors. The
information required by these items will be included in such proxy statement or
information statement and are incorporated by reference in this annual report.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are to be filed as part of the annual report:
EXHIBIT NUMBER DESCRIPTION
2.1 (1) Exchange Agreement by and between Loch Exploration, Inc. and
Design Automation Systems Incorporated
2.2 (2) Exchange Agreement by and between Loch Exploration, Inc. and
COAD Solutions, Inc.
2.3 (2) Acquisition Agreement of Cherokee Methane Corporation
2.4 (2) Plan of Merger between the Company and Design Automation
Systems Incorporated
2.5 (6) Exchange Agreement between the Company and Dynamic
Professional Services, LLC
2.6 (7) Exchange Agreement between the Company and Connected Software
Solutions, Inc.
2.7 (10) Acquisition Agreement by and among the Company COAD Solutions,
Inc. and Net Information Systems, Inc.
2.8 (11) Agreement and Plan of Merger by and between the Company, Eacq,
LLC and The Growth Strategy Group, Inc.
3.1 (3) Articles of Incorporation
3.2 (4) Amended Articles of Incorporation
3.3 (3) By-laws
4.1 (3) Common Stock Specimen
10.1 (4) 1999 Employee Stock Option Plan
10.2 (2) Employment Agreement with Carl Rose
10.3 (2) Employment Agreement with Charles Leaver
10.4 (5) Employment Agreement with Kelly Knake
10.5 (2 Lease Agreement
10.6 (2) Indirect Reseller Agreement between the Company, Hewlett-
Packard Company and Hall-Mark Computer Products
10.7 (2) Indirect Reseller Agreement between the Company, Hewlett-
Packard Company and Client Systems, Inc.
10.8 (2) Indirect Value Added Reseller Agreement between the Company
and Sun Microsystems Computer Corporation
10.9 (2) IBM Business Partner Agreement for Solution Providers
10.10 (8) 1999 Line of Credit with FINOVA Capital Corporation
10.11 (2) Line of Credit with Finova Corporation
10.12 (9) Agreement for Services with Optimization Group, LLC
10.12 (12) Finova Line of Credit
10.13 (12) Microsystem Products Purchase Agreement
10.14 (12) Sun Channel Agreement Master Terms
10.15 (12) Ferrari/Connected Software Solutions Lease
10.16 (12) Sun Trademark and Logo Policies
10.17 (12) HP Authorized Reseller Agreement
10.18 (12) IBM Business Partner/Solutions Provider Agreement
10.19 (12) HP Agreement for Authorized Solutions Direct Resellers
10.20 (12) Office Space Lease Austin
10.21 (12) Texas Association of Realtors Commercial Lease
10.22 (12) Seattle Lease Agreement
10.23 (12) St. Louis Lease Agreement
21.1 (2) List of Subsidiaries of the Registrant
27. (12) Financial Data Schedule
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(1) Filed as an exhibit to the Company's Current Report on Form 8-K dated
January 15, 1999 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's 10-KSB for the year ended December
31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Registration Statement on Form S-1
dated September 7, 1979 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Definitive Information Statement
filed March 9, 1999 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's 10-QSB for the quarter ended
March 31, 1999 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Form 8-K filed June 14, 1999 and
incorporated herein by reference.
(7) Filed as an exhibit to the Company's Form 8-K filed August 11, 1999 and
incorporated herein by reference.
(8) Filed as an exhibit to the Company's 10-QSB for the quarter ended
June 30, 1999 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's 10-QSB for the quarter ended
September 30, 1999 and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K filed
December 14, 1999 and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K filed
March 15, 2000 and incorporated herein by reference.
(12) Filed herewith.
(b) Reports on Form 8-K
8-K filed November 15, 1999
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EPICEDGE CORPORATION
/s/ CHARLES LEAVER
By: _________________________________
CHARLES LEAVER
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ CARL R. ROSE
________________________________ Chairman of the Board March 30, 2000
Carl R. Rose
/s/ CHARLES H. LEAVER, JR.
________________________________ Chief Executive Officer March 30, 2000
Charles H. Leaver, Jr. and Director
/s/ JEFFREY SEXTON
________________________________ President, Chief March 30, 2000
Jeffrey Sexton Operating Officer
and Director
/s/ ROBERT E. NELSON
________________________________ Chief Financial Officer, March 30, 2000
Robert E. Nelson Principal Accounting
Officer
/s/ BAHRAM NOUR OMID
________________________________ Director March 30, 2000
Bahram Nour Omid
/s/ JOHN STREETEN
________________________________ Director March 30, 2000
John Streeten