<PAGE>
BOOKTECH.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business - booktech.com, inc., a Nevada corporation (the
"Company"), is a digital and on-demand publisher of custom textbooks, also
known as course packs, which are distributed primarily through college
bookstores. The Company is organized as one segment reporting to the chief
operating decision-maker, the Company's chief executive officer.
Basis of Presentation - The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going
concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.
As shown in the consolidated financial statements, the Company incurred net
losses of $7,998,543, $1,060,646 and $2,182,431 during the year ended
December 31, 2000, the five months ended December 31, 1999, and the year
ended July 31, 1999, respectively. The Company expects that it will
continue to incur losses as it continues its activities pursuant to the
current business plan, particularly those related to sales, marketing and
content development. In addition, the Company's current liabilities at
December 31, 2000 and December 31, 1999 of $6,479,351 and $5,438,929,
respectively, exceeded its current assets at those dates by $6,218,101 and
$5,127,710, respectively and a majority of the Company's accounts payable
of $4,009,090 at December 31, 2000 were beyond their normal payment terms.
The Company is also in default on certain provisions of its lending and
other contractual agreements as of December 31, 2000 and 1999, and,
accordingly, the amounts are callable by the creditors and have been
classified as current liabilities within the accompanying consolidated
balance sheets. The Company has settled a legal proceeding relative to the
non-payment of certain obligations and may not presently have available
financing to satisfy its obligations resulting from the court judgment. The
Company has historically financed its operating losses and working capital
needs principally by loans from its stockholders and from commercial
lenders. The Company is currently seeking additional financing and there
can be no assurance that any additional financing will be available to the
Company on commercially reasonable terms, or at all. Further, due to
certain non-compliance with financial reporting regulations, the American
Stock Exchange (the "AMEX") suspended trading of the Company's common stock
in April 2001. This suspension precludes the Company from seeking financing
through the public markets until such time as the AMEX lifts the
suspension. These factors, among other things, raise substantial doubt
about the Company's ability to continue as a going concern for a reasonable
period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
and classification of liabilities should the Company be unable to continue
as a going concern. For example, the Company has deferred costs related to
an ongoing patent application process and the development of the Company's
website. Completion of the patent application process and the web site will
require additional financial resources, which the Company presently does
not have. Further additional financial resources will be required for
selling, general and administrative expenses to develop a sales and
distribution channel associated with the patented business process.
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1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (Continued)
The Company's continuation as a going concern is dependent upon its ability
to obtain additional financing or refinance current obligations, generate
sufficient cash flow through increased net sales and reduced costs, comply with
the terms of its financing agreements, and ultimately to attain profitable
operations. Management is continuing its efforts to (1) obtain sufficient
short-term financing to satisfy short-term obligations; (2) reduce operating
expenses through the reduction in staffing and the renegotiation of certain
contracts; (3) negotiate extended payment terms for current obligations with
vendors and/or convert existing obligations into equity; (4) return the Company
to compliance with SEC regulations and remove the suspension of trading of the
Company's stock; and (5) further develop markets for the Company's product with
educational institutions. An investment-banking firm has been engaged by the
Company to assist management and the Board of Directors explore strategic
opportunities including, but not limited to, a sale or merger of the Company, a
recapitalization or other actions to obtain additional financial resources.
2. MERGER TRANSACTION
On March 31, 2000, EG Acquisitions Corporation, a Nevada corporation,
the wholly-owned sole subsidiary of Ebony & Gold Ventures, Inc. ("Ebony &
Gold"), merged with and into booktech.com, inc., a Massachusetts
corporation ("booktechmass"), pursuant to an Agreement and Plan of Merger
(the "Merger") dated March 31, 2000. Following the Merger, the business to
be conducted by Ebony & Gold was the business conducted by booktechmass
prior to the Merger. In conjunction with the Merger, Ebony & Gold, which is
the legal acquirer and surviving legal entity, changed its name to
booktech.com, inc. In addition, booktechmass changed its fiscal year from
July 31 to December 31 to conform to the fiscal year of Ebony and Gold.
Pursuant to its terms, the Merger involved the following transactions:
(a) the Company issued 7,520,690 shares of its authorized but unissued
common stock (the "Common Stock") and 1,100,000 shares of its authorized
but unissued Series B Preferred Stock to the former stockholders of
booktechmass in exchange for the 25,000 shares of common stock of
booktechmass issued and outstanding as of the effective time of the Merger;
(b) certain debt and accrued interest totaling $3,216,171 owed by
booktechmass to related parties was converted into 2,135,301 shares of the
Company's Series A Preferred Stock; (c) the Company sold 4,666,667 shares
of its common stock, including warrants to purchase an additional 833,333
shares of common stock, in a private placement (the "Private Placement") to
certain accredited investors for an aggregate purchase price of
approximately $7,000,000, including conversion of the notes payable,
advances and accrued interest owed to Verus Investments Holdings, Inc. (at
the time of the Merger, the Company received net cash proceeds of
$5,000,000 from the Private Placement); and (d) the Company purchased
technology and a related patent application from Virtuosity Press LLC, a
Delaware Limited Liability Company ("Virtuosity"), in exchange for
1,379,310 shares of its common stock.
At the time of the Merger, the common and preferred shares issued to
the former stockholders of booktechmass represented a majority of the
Company's voting stock, enabling them to retain voting and operating
control of the Company. The Merger was accounted for as a capital
transaction and was treated as a reverse acquisition, as the stockholders
of booktechmass received the larger portion of the voting interests in the
combined enterprise. Since the accounting applied differs from the legal
form of the merger, the Company's financial information for periods prior
to the Merger represent the financial results of booktechmass. Estimated
costs of the Merger were $582,938, which have been reflected as a reduction
in additional paid-in capital.
Under the terms of the Merger, the Company was required to use its
best efforts to file a registration statement to register 5,111,667 shares
of common stock by July 31, 2000 and an additional registration statement
to register 1,928,823 shares of common stock within six (6) months of the
effective date of the first registration
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<PAGE>
2. MERGER TRANSACTION (Continued)
statement or within 30 days of the exercise, in whole or in part, by Verus
Investments Holdings, Inc. of its warrant to purchase 833,333 shares of
common stock.
Pro Forma Disclosure - The following table presents the unaudited
pro forma results of operations for the year ended December 31, 2000, the
five months ended December 31, 1999 and the year ended July 31, 1999
assuming the merger had occurred on August 1, 1998. These pro forma results
have been prepared for comparative purposes only and are not necessarily
indicative of what would have occurred had the Merger occurred at that date
or of results which may occur in the future.
<TABLE>
<CAPTION>
Five Months
Year Ended Ended Year Ended
December 31, December 31, July 31,
2000 1999 1999
------------- ------------ ------------
<S> <C> <C> <C>
Net sales ........................... $ 1,725,019 $ 1,024,866 $1,328,8213
Loss from operations ................ (7,871,260) (938,605) (1,968,145)
Net loss ............................ (7,942,064) (933,642) (1,971,684)
Net loss attributable to common
stockholders ........................ (8,202,571) (933,642) (1,971,684)
Net loss attributable to common
stockholders per share - basic and
diluted ............................. $ (.44) $ (.05) $ (.11)
Shares used in computing basic and
diluted net loss per common share ... 18,839,830 18,556,667 18,556,667
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The Company has accounted for the Merger
as a reverse acquisition. Accordingly, the Company's financial statements
for periods prior to March 31, 2000 represent those of booktechmass, which
is considered to be the acquirer for accounting purposes. The financial
statements for periods subsequent to March 31, 2000 include the accounts of
the Company and its wholly owned subsidiary after the elimination of all
significant intercompany balances.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the balance sheet dates. Actual
results could differ from those estimates.
Fair Value of Financial Instruments - The Company's financial
instruments, including cash, accounts receivable, accounts payable, notes
payable, and short-term debt, are carried at cost which approximates their
fair values because of the short-term nature of these instruments.
Concentration of Credit Risk and Major Customer Information -
Financial instruments that potentially expose the Company to significant
concentrations of credit risk consist principally of accounts receivable.
The Company performs ongoing credit evaluations of its customers and does
not require collateral. In addition, the Company maintains allowances for
potential credit losses, and such losses, in the aggregate, have not
exceeded
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<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
management expectations. One customer accounted for 29%, 70% and 75% of net
sales for the year ended December 31, 2000, the five months ended December
31, 1999 and the year ended July 31, 1999, respectively. This same customer
accounted for 16% and 77% of the accounts receivable at December 31, 2000
and 1999, respectively.
Revenue Recognition - Revenue is recognized at the point in time when
persuasive evidence of an arrangement exits, the price is fixed and final,
delivery has occurred and there is a reasonable assurance of collection of
the sales proceeds. Provisions are recorded for estimated sales returns
based on historical data.
Equity - The Company accounts for stock options granted to employees
using the intrinsic value method in accordance with Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees",
and complies with the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
Equity instruments issued to non-employees are accounted for in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task
Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued To Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services". All transactions in which goods or services
are the consideration received for the issuance of equity instruments are
accounted for based on the fair value of the consideration received or the
fair value of the equity instrument issued, whichever is more reliably
measurable. The measurement date of the fair value of the equity instrument
issued is the earlier of the date on which the counterparty's performance
is complete or the date on which it is probable that performance will
occur.
For the purpose of reporting per share data, all amounts reflect the
effects of the Merger.
Income Taxes - Deferred tax liabilities and assets are determined
based on the difference between the financial statement carrying amounts
and tax bases of existing assets and liabilities, using enacted tax rates.
Valuation allowances are established when necessary to reduce the deferred
tax assets to those amounts expected to be realized.
Net Loss per Common Share - Basic net loss per common share is
computed by dividing net loss attributable to common stockholders by the
weighted-average number of common shares outstanding during the period.
Diluted net loss per common share reflects, in addition to the
weighted-average number of common shares, the potential dilution if common
stock options and warrants were exercised into common stock, convertible
preferred stock was converted into common stock and the vesting of
restricted stock awards, unless the effect is antidilutive. Dividends on
the convertible preferred stock Series A, which are payable in shares of
common stock on the first day of each fiscal year, have been accrued at the
rate of 8% per annum in determining the net loss attributable to common
stockholders.
Basic and diluted net loss per common share are the same for all
periods presented, as potentially dilutive stock options of 1,774,566 in
2000 (862,070 for the five months ended December 31,1999 and 344,828 for
the year ended December 31, 1999), common stock warrants of 1,083,333 in
2000 (none in the five months ended December 31,1999 and year ended July
31, 1999), 1,710,086 shares of common stock issuable upon conversion of the
convertible preferred stock, Series A and B in 2000 (none in the five
months ended December 31,1999 and year ended July 31, 1999), 85,106 shares
issuable upon conversion of the $200,000 note payable to Verus and unvested
restricted stock awards of 6,944 (none in the five months ended December
31, 1999 and year ended July 31, 1999) have not been included in the
calculation of diluted net loss per common share as their inclusion would
have been antidilutive.
Comprehensive Loss - Comprehensive loss was equal to net loss for each
period presented.
Cash and Equivalents - The Company considers all highly liquid
investments with remaining maturities of three months or less when
purchased to be cash equivalents.
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