<PAGE>
7. EQUITY (continued)
Common Stock Warrants
On March 31, 2000 in connection with the Merger, the Company issued
warrants to purchase 833,333 shares of the Company's common stock to certain
investors.
On August 31, 2000, the Company engaged an outside financial advisor. In
addition to a retainer of $15,000, the Company granted warrants to the financial
advisor to purchase 200,000 of the Company's common stock for $3.75 per share.
The Company recorded stock-based compensation expense of $402,143 representing
the fair value of the stock warrants at the date of grant. The fair value of the
stock warrants was measured using the Black-Scholes option pricing model, based
on a quoted market price of the common stock of $3.75 at the date of grant; a
risk-free interest rate of 5.84%; an expected warrant life of 2.5 years; no
dividends; and a volatility of 85%.
In November 2000, the Company issued warrants to purchase 50,000 shares of
common stock for $2.94 per share in conjunction with the issuance of convertible
debt (See Note 6).
At December 31, 2000, the weighted average exercise price of all
outstanding warrants issued was $1.98 per share.
8. WRITE-DOWN OF ACQUISITION DEPOSIT
During 2000, the Company entered into an agreement to acquire On Demand
Machine Company ("ODMC"). In connection with the proposed acquisition, the
Company deposited $300,000 with ODMC which was refundable in the event the
acquisition was not completed. The acquisition was not consummated and ODMC has
indicated to the Company that any return of the deposit will be in ODMC common
stock. Given the illiquid nature of ODMC's common stock, the Company provided
for a full valuation allowance against the common stock. A member of the
Company's management is a greater than 5% stockholder in ODMC.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company leases office facilities and certain
equipment under noncancelable operating leases expiring at various dates through
October 2005. The leases are generally renewable at the option of the Company
for an additional five years. Total rent expense under these leases was
$161,956, $52,700 and $75,600 for the year ended December 31, 2000, the five
months ended December 31, 1999 and the year ended July 31, 1999, respectively.
At December 31, 2000, future minimum lease payments under these leases are as
follows:
Year Ending December 31,
-----------------------
2001 $ 170,486
2002 166,323
2003 161,268
2004 157,104
2005 124,374
---------
Total $ 779,555
=========
58
<PAGE>
9. COMMITMENTS AND CONTINGENCIES (continued)
Purchase of Copytron, Inc. Customer List - In connection with the purchase
of a customer list on August 2, 2000, the Company may be required to issue
additional shares of common stock (See Note 5).
Consulting Agreements -In connection with the Merger, the Company entered
into a consulting arrangement with an affiliate of Verus. The consulting
agreement provided for consulting fees of $15,000 per month for a two-year
period commencing March 31, 2000. The agreement was terminated effective
September 30, 2000. The Company paid $30,000 under this agreement, and the
balance owed of $60,000 is included in accounts payable at December 31, 2000.
Services Agreement - In March 1999, the Company entered into an agreement
with Xerox Corporation ("Xerox") to provide reproduction services. The term of
the agreement is 60 months and initially included base payment increases over
the term of the agreement. The agreement was renegotiated in May 2000. The total
amount of the initial base service payments is being charged to expense using
the straight-line method over the term of the agreement. The Company has
recorded a deferred credit to reflect the excess of the services expense over
cash payments since the inception of the agreement. Deferred lease credits of
$45,000 and $33,750 are reported within other accrued expenses and $101,250 and
$146,250 are reflected in deferred lease obligation within the accompanying
balance sheets at December 31, 2000 and 1999, respectively. One member of the
Company's Board of Directors serves in an executive capacity at Xerox. Future
scheduled minimum payments under the service agreement are as follows:
Year Ending December 31,
------------------------
2001 $ 894,276
2002 894,276
2003 894,276
2004 223,569
----------
Total $2,906,397
==========
At December 31, 2000, included in accounts payable are past due amounts on prior
service payments aggregating $455,627. On January 10, 2001, the Company
refinanced this amount into a promissory note (See Note 13). A stockholder has
personally guaranteed the Company's performance under the note.
Litigation - The Company was previously in litigation with Advizex, Inc.
for which a settlement was reached on June 5, 2001. The Company intends to enter
into a Consent Judgement which will require the Company to pay $120,000 in cash
beginning in July 2001 in equal installments over a twelve month period. In
addition, the Company will be required to issue common stock to Advizex with a
value of $120,000 based on the June 5, 2001 market price per share of $.73. The
Company has provided for the cost of this settlement at December 31, 2000.
The Company is party in various legal proceedings and potential claims
arising in the normal course of business. While the ultimate outcome of these
claims cannot be predicted, and assuming the Company raises adequate funding,
management does not believe, after consultation with counsel, the settlement of
these claims, if any, will have a material effect on the Company's financial
position or the results of its operations.
59
<PAGE>
10. INCOME TAXES
Significant components of the Company's deferred tax assets (liabilities)
are as follows:
December 31,
----------------------------
2000 1999
----------- -----------
Deferred tax assets (liabilities):
Net operating loss carryforwards .............. $ 5,017,000 $ 2,019,000
Allowance for sales returns ................... 31,000 37,000
Depreciation and amortization ................. (7,000) (8,000)
Accrued vacation .............................. 23,000 14,000
Accrued interest .............................. 7,000 146,000
Deferred credit ............................... 59,000 72,000
Amortization of the customer list ............ 23,000 --
----------- -----------
5,153,000 2,280,000
Less valuation allowance ........................ (5,153,000) (2,280,000)
----------- -----------
Net deferred tax assets ...................... $ -- $ --
=========== ===========
The increase in the Company's valuation allowance for the periods presented
results principally from the increase in the Company's deferred tax assets
related to the operating losses. The Company has established a valuation
allowance at December 31, 2000 and 1999 because of uncertainties regarding its
ability to generate sufficient taxable income in the applicable tax jurisdiction
to utilize the net operating loss carryforwards during the carryforward period
and to realize the full benefit from future tax deductions.
The Company has federal and state tax net operating loss carryforwards
available for future periods of approximately $12,542,000. The federal tax net
operating loss carryforwards expire beginning in 2011 through 2020 and state tax
net operating loss carryforwards expire beginning in 2002 through 2005. As a
result of the changes in the ownership of the Company, the Company's net
operating loss carryovers and certain other tax attributes may be limited under
Section 382 of the International Revenue Code.
A reconciliation of the applicable U.S. statutory tax rate to the effective
tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended Five Months Ended Year Ended
December 31, 2000 December 31, 1999 July 31, 1999
----------------- ------------------ -------------
<S> <C> <C> <C>
Federal statutory rate............................ 34% 34% 34%
State tax, net of federal impact.................. 6 6 6
Stock-based compensation expense ................. (9) -- --
Increase in valuation allowance .................. (31) (40) (40)
---- ---- ----
Effective tax rate................................ -- % -- % -- %
==== ==== ====
</TABLE>
60
<PAGE>
11. STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock
At December 31, 2000, the Company had authorized 5,000,000 shares of
preferred stock, issuable in one or more series. Of the total shares issued at
December 31, 2000, 2,135,301 have been designated as convertible preferred
stock, Series A ("Series A") and 1,100,000 have been designated as convertible
preferred stock, Series B ("Series B").
Holders of the Series A are entitled to one vote for every three and one
half shares held on all matters submitted to a vote of the stockholders, except
that holders of a majority of the shares of Series A must approve changes to the
Certificate of Designation for the Series A and issuances of securities with
rights senior to the Series A. Dividends accrue daily at a rate of 8% of the
original issue price per annum and are settled by the issuance of shares of
common stock on January 1 of each succeeding year. In the event of liquidation,
the holders of the Series A shall receive, before any payments to the common
stock holders and the holders of the Series B, the original issue price per
share plus any accrued but unsettled dividends. Holders of the Series A may
convert the shares into common stock at any time at a rate of three and one half
shares of Series A for one share of common stock. On January 1, 2001, the
Company issued 113,608 shares for stock dividends.
Holders of the Series B are entitled to six votes for every one share held
on all matters submitted to a vote of the stockholders, except that holders of a
majority of the Series B must approve changes to the Certificate of Designation
for the Series B and issuances of securities with rights senior to the Series B.
No dividends are payable on the Series B. In the event of liquidation, the
holders of the Series B shall receive, before any payments to the common stock
holders, the original issue price per share, as determined by the Company's
Board of Directors. Holders of the Series B were permitted to convert the shares
into shares of common stock at any time. All shares of Series B were converted
into shares of common stock on March 31, 2001 in accordance with Series B
agreement. The conversion rate is one share of Series B for one share of common
stock.
Treasury Stock
In conjunction with the Merger, the Company's outstanding treasury stock
was retired.
12. TRANSACTIONS WITH RELATED PARTIES
The Company's transactions with Verus and its affiliates, Xerox, members of
management and significant stockholders described in these notes to the
financial statements are related party transactions in accordance with SFAS No.
57, "Related Party Disclosures".
13. SUBSEQUENT EVENTS
On January 1, 2001, the Company issued 113,608 common stock shares to
settle the $195,736 stock dividend accrued at December 31, 2000.
On January 5, 2001, the Company borrowed $55,000 from two of its officers.
These promissory notes are unsecured, bear interest at 5% per annum and were due
February 5, 2001. As of June 25, 2001, $46,000 has been repaid.
61
<PAGE>
13. SUBSEQUENT EVENTS (continued)
On January 10, 2001, the Company refinanced $455,627 of accounts payable
due to Xerox under the services agreement described in Note 9 with a promissory
note. The note is payable in monthly installments of $41,339, including interest
at a rate of 16% per annum, beginning on February 15, 2001. The final payment
will be due on January 10, 2002, unless the Company defaults under the terms of
the note, in which case, the note becomes fully due and payable. The Company has
not made the required payments under the promissory note in 2001 and,
accordingly, the Company is in default of the note. A stockholder has personally
guaranteed the Company's performance under this note.
On January 19, 2001 the Company borrowed $40,000 from two additional
officers. These promissory notes are unsecured, are due February 19, 2001, and
are payable with interest at a rate of 5% per annum. The notes have not been
repaid.
On February 8, 2001, the Company sold 40,000 shares of its common stock to
an accredited investor for $20,000.
On February 13, 2001 the Company borrowed $100,000 from a stockholder and
officer of the Company due and payable on June 30, 2001 with interest at 8% per
annum. This borrowing is unsecured.
On March 15, 2001, the Company offered to issue 500,000 shares of its
common stock to Dutchess Advisors, Ltd. ("Dutchess") as consideration for their
advisory services in connection with the Company's current efforts to secure
additional financing through a private placement. The shares would be issued
pursuant to Regulation D under the Securities Act, as amended. Of the total
shares that could be issued, 100,000 shares contain piggyback registration
rights. The Company rescinded the offer on June 22, 2001 and no shares have been
offered to Dutchess. An additional finder's fee may be paid in cash to Dutchess
upon completion of a private placement transaction.
On March 17, 2001, the Company entered into a factoring agreement covering
the majority of the Company's trade accounts receivable. Fees for these services
are expected to average 6% of amounts factored.
On March 22, 2001, the Company entered into an equity line of credit with a
private investor. Under the terms of the agreement, upon the effective
registration of the Company's common stock or from other available free trading
shares, the investor will purchase up to $10 million of such common stock over
the course of 36 months from the date of the agreement at an amount equal to 91%
of the market price as defined therein. The amount of shares to be put to the
investor by the Company is subject to certain average daily trading volumes for
the Company's common stock in the U.S. financial markets. In connection with
this agreement, the Company will issue 250,000 shares of common stock for no
consideration, to an affiliate of this investor.
14. NET LOSS PER SHARE
A reconciliation of net loss and weighted-average common shares outstanding
for purposes of calculating basic and diluted net income per share is as
follows:
<TABLE>
<CAPTION>
Five Months
Year Ended Ended
December 31, December 31, Year Ended
2000 1999 July 31, 1999
------------ ------------ -------------
<S> <C> <C> <C>
NUMERATOR:
Net loss ............................................. $ (7,998,543) $ (1,060,646) $ (2,182,431)
Preferred stock dividends ............................ (195,736) -- --
------------ ------------ ------------
Net loss attributable to common stockholders ......... $ (8,194,279) $ (1,060,646) $ (2,182,431)
DENOMINATOR:
Weighted average number of common shares outstanding:
Common Stock ....................................... 16,282,674 6,921,001 6,016,552
Effect of potentially dilutive common shares........ -- -- --
------------ ------------ ------------
Total ........................................... 16,282,674 6,921,001 6,016,552
------------ ------------ ------------
</TABLE>
62
</TEXT>
</DOCUMENT>
NUMBER SHARES
BTC 0338 booktech.com, inc. SPECIMEN
INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA
54,523,810 SHARES COMMON STOCK AUTHORIZED, $.00042 PAR VALUE
CUSIP 098583 10 7
SEE REVERSE FOR
CERTAIN DEFINITIONS
This certifies that
SPECIMEN
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF
============================== booktech.com, inc. ==============================
transferable only on the books of the Corporation in person or by duly
authorized attorney upon surrender of this certificate properly endorsed. This
certificate and the shares represented hereby are subject to the laws of the
State of Nevada, and to the Certificate of Incorporation and Bylaws of the
Corporation, as now or hereafter amended. This certificate is not valid unless
countersigned by the Transfer Agent.
Dated
/s/ illegible booktech.com, inc. /S/ TED J. BERNHARDT
------------------ CORPORATE SEAL -----------------------
PRESIDENT NEVADA SECRETARY
Copyright S.C.B. Co.
Copyright SECURITY-COLUMBIAN UNITED STATES BANKNOTE CORPORATION
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(Jersey City, NJ)
TRANSFER AGENT AND REGISTRAR
By SPECIMEN
AUTHORIZED OFFICER |
