September 30, 2002
BRANDMAKERS INC (BMKS.OB)
Annual Report (SEC form 10KSB)
Item 6. Management's Discussion And Analysis Or Plan Of Operation
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the financial statements and notes thereto and other financial information appearing elsewhere in this Annual Report on Form 10-KSB.
This report on Form 10-KSB contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed forward-looking statements. Without limiting the foregoing, the words believe, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, changes in the regulation of the wireless communication and internet industry at either the federal and state levels, competitive pressures in the wireless communication and internet industry and the Company's response thereto, the Company's ability to obtain and retain favorable arrangements with third-party payers, the Company's ability to obtain capital in favorable terms and conditions, and general conditions in this economy.
Overview
Through the reverse acquisition in November 1999, the Company became a public reporting company. The Company raised funds through private placements of equity securities. These funds were used to invest in all of the Company's divisions. The ZOOM Communications division provided the majority of revenues but was sold to NTN Communications due to rising losses.
Gamosity, the games and vending division, is making progress primarily with pull tab vending machines and skill games. There are also modest sales of cell phone dispensing machines as well as computer disk dispensing machines. Coin Pusher machines are also a possibility for the next fiscal year.
MailStart remains as a free service which may be accessed just once per week to encourage sign ups for WebBox, our premium subscription service. WebBox is advertising free with numerous features including up to five email accounts and 20 megs of storage. The annual fee for the unlimited use of WebBox is $15.
Results of Operations:
Year Ended June 30, 2002 compared to Year Ended June 30, 2001.
Revenues: Note that both revenues and expenses of the ZOOM Communications division are presented as losses from discontinued operations for both periods since that division was sold in April, 2002. The Company had revenues of $998,342 for the year ended June 30, 2002 as compared to $765,219 for the same period in 2001. This represents an increase of over 30.4%. The primary reason for the increase is renewal income for WebBox as well as increased sales for games and vending. MailStart-WebBox revenues increased from $403,894 in 2001 to $560,953 in 2002 while deferred revenue increased from $267,108 in 2001 to $296,162 in 2002. Deferred revenue is carried as a current liability on the balance sheet and represents WebBox income spread out over a twelve month period. Revenues for games and vending increased from 284,474 in 2001 to $437,389 in 2002.
Cost of Sales: The Company's cost of sales decreased from $313,402 for the year ended June 30, 2001 to $305,513 for the same period in 2002. This was a decrease of just over 2.5%. The gross profit in 2001 was $451,807 which is 59% while the gross profit in 2002 was $692,829 which is just over 69%. The majority of the increase in gross profits can be attributed to the increased WebBox revenues with a relatively low cost of sales.
Operating Expenses: Operating expenses for the year ended June 30, 2002 were $744,462 as compared to $984,474 for the same period in 2001. The Company experienced a loss from operations of $51,633 in 2002 including $186,332 for amortization and depreciation as compared to a loss from operations of $532,667 in 2001 including $178,149 for amortization and depreciation. Salaries and wages decreased from $415,804 in 2001 to $296,959 in 2002. Other operating expenses decreased from $285,380 in 2001 to $201,584 in 2002.
Other Income and Expense: For the fiscal year ended June 30, 2002 interest expense was $45,612 with interest income of $2,039 compared to interest expense of $107,733 and interest income of $14,784 in 2001. There was a loss on disposal of assets of $37,267 in 2002 period.
Discontinued Operations: The Company experienced a loss for the year ended June 30, 2002 of $297,870 from the operations of ZOOM Communications and a gain on the sale of ZOOM of $39,856. For the period ended 2001, there was a loss of $685,666 from the operations of K.W. Leisure and a loss $24,809 on the disposal of K.W. Leisure. There was also a loss for the 2001 period of $265,820 from the operations of ZOOM Communications.
Overall, the loss for the year ended June 30, 2002 was $390,487 as compared to a loss for the same period in 2001 of $1,601,911.
Liquidity and Capital Resources
Cash Flows from Operating Activities: The Company's net cash flow from operating activities was $157,288 in 2002 compared to $56,471 in 2001. In 2001 there were losses of $486,729 for impairment of goodwill, $24,809 for discontinued operations of K.W. Leisure and $51,525 for stock option expenses. Receivables decreased by $438,610 in 2001 compared to a decrease of $127,737 in 2002. Inventories decreased by $68,489 in 2001 versus a decrease of $139,722 in 2002. Accounts payable increased by $195,662 in 2001 compared to a decrease of $54,756 in the same period of 2002. Deferred revenues increased by $267,108 in 2001 due to WebBox subscription income being spread out over one year and increased another $29,054 in 2002. Other current liabilities decreased by $186,932 in 2001 and increased by $35,202 in 2002. Brandmakers has has had significant losses through the year ended June 30, 2002 and has negative working capital of $1,393,325. WebBox cash flow has been helpful, particularly during the months of February, March and April 2002 for past due debts and to overcome losses and expenses in the divesture of the ZOOM Communications division. Currently, games and vending sales have been increasing which is necessary to achieve an operating profit. It is recognized that the Company needs to raise additional capital.
Cash Flows from Investing Activities: Capital expenditures totaled $18,887 in 2001 and by $49,749 in 2002 plus an additional $1,855 used for purchase of certificates of deposit in 2002. In 2001, a certificate of deposit in the amount of $320,884 matured and was paid to a leasing company for MailStart-WebBox equipment.
Cash Flow from Financing Activities: The cash used in financing activities was totaled $151,377 for the year ended June 30, 2002 compared to $389,138 for the same period in 2001. There were payments on a line of credit of $54,500 in 2002 versus borrowings of $142,013 on the line of credit in 2001. Principal payments on notes payable were $17,888 in 2002 and $7,200 in 2001. Principal payments under capital lease obligations were $77,652 in 2002 compared to payments of $523,951 in 2001. Cash as of June 30, 2002 was $6,224 compared with $51,917 on June 30, 2001. Additional financing will be necessary for Brandmakers to expand activities as well as to meet obligations.
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
BRANDMAKERS, INC. AND SUBSIDIARY
June 30, 2002 and 2001
CONTENTS
INDEPENDENT AUDITORS' REPORT 3
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF OPERATIONS 5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 6
CONSOLIDATED STATEMENTS OF CASH FLOWS 7-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9-23
[Letterhead of Bearden & Smith, P.C.]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Brandmakers, Inc.
We have audited the accompanying consolidated balance sheets of Brandmakers, Inc. and Subsidiary (the Company) as of June 30, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brandmakers, Inc. and Subsidiary as of June 30, 2002 and 2001 and the results of their operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements as of June 30, 2002 have been prepared assuming that the Company will continue as a going concern. As discussed in note I to the consolidated financial statements, the Company has suffered significant losses through the year ended June 30, 2002 and has negative working capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in note I. The consolidated balance sheet at June 30, 2002 does not include any adjustments that might result from the outcome of this uncertainty.
/S/BEARDEN & SMITH, P.C.
Atlanta, Georgia
August 23, 2002
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Brandmakers, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and 2001
2002 2001
ASSETS
CURRENT ASSETS
Cash $ 6,224 $ 51,917
Receivables - trade 24,493 302,910
Less allowance for doubtful accounts 20,000 25,000
4,493 277,910
Inventories 19,233 206,402
Other current assets 808 0
Total current assets 30,758 536,229
PROPERTY AND EQUIPMENT - net 540,760 845,293
OTHER ASSETS
Certificates of deposit - pledged 38,951 37,096
Investment 20,000 0
Deposits 15,269 45,606
74,220 82,702
$ 645,738 $ 1,464,224
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 0 $ 142,013
Notes payable 825,512 843,400
Accounts payable 116,728 405,768
Deferred revenue 296,162 267,108
Other current liabilities 71,239 36,037
Current portion of long-term debt 2,153 0
Current portion of capital leases 112,289 158,915
Total current liabilities 1,424,083 1,853,241
LONG-TERM DEBT, less current portion 11,758 0
CAPITAL LEASES, less current portion 0 31,026
COMMITMENTS AND CONTINGENCIES 0 0
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - authorized 200,000,000 shares of 127,568 123,141
$.001 par value
Additional paid-in capital 2,995,672 2,979,672
Retained earnings (deficit) (3,913,343) (3,522,856)
(790,103) (420,043)
$ 645,738 $ 1,464,224
The accompanying notes are an integral part of these statements.
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Brandmakers, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 2002 and 2001
2002 2001
Revenues $ 998,342 $ 765,219
Cost of sales 305,513 313,412
Gross profit 692,829 451,807
Operating expenses
Salaries and wages 296,959 415,804
Rent 58,045 101,908
Advertising 1,542 3,233
Depreciation and amortization 186,332 178,149
Other operating expenses 201,584 285,380
744,462 984,474
Operating loss (51,633) (532,667)
Other income (expense)
Interest expense (45,612) (107,733)
Interest income 2,039 14,784
Loss on disposal of assets (37,267) 0
(80,840) (92,949)
Loss from continuing operations (132,473) (625,616)
Discontinued operations
Loss from operations of K.W. Leisure, Ltd. 0 (685,666)
Loss on disposal of K.W. Leisure, Ltd. 0 (24,809)
Loss from operations of Zoom (297,870) (265,820)
Gain on sale of Zoom 39,856 0
(258,014) (976,295)
NET LOSS $ (390,487) $ (1,601,911)
Earnings per share
Basic and diluted
Income (loss) from continuing operations $ (.00) $ (.01)
Income (loss) from discontinued operations (.00) (.01)
NET LOSS $ (.00) $ (.01)
Average number of shares outstanding
Basic 123,544,945 121,973,837
Diluted 123,544,945 123,178,055
The accompanying notes are an integral part of these statements.
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Brandmakers, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended June 30, 2002 and 2001
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
Balance at June 30, 2000 121,140,504 $121,141 $3,255,961 $(1,920,945) $ 1,456,157
Stock issued in lieu of 2,000,000 2,000 67,400 69,400
debt payments
Stock options forfeited (343,689) (343,689)
Net loss for the year 0 0 0 (1,601,911) (1,601,911)
Balance at June 30, 2001 123,140,504 123,141 2,979,672 (3,522,856) (420,043)
Stock issued for 4,426,643 4,427 16,000 20,427
consulting services
Net loss for the year 0 0 0 (390,487) (390,487)
Balance at June 30, 2002 127,567,147 $127,568 $2,995,672 $(3,913,343) $(790,103)
The accompanying notes are an integral part of these statements.
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Brandmakers, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2002 and 2001
2002 2001
Net loss ($390,487) ($1,601,911)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization 224,049 220,567
Loss on disposal of fixed assets 37,267 0
Gain on sale of Zoom -39,856 0
Loss on impairment of goodwill 0 486,729
Loss on disposal of discontinued K.W. Leisure, Ltd. 0 24,809
Stock option expense 0 51,525
Stock issued for consulting services 20,427 0
Interest on discounted notes payable 0 31,664
(Increase) decrease in assets and increase (decrease) in liabilities
Receivables - trade 127,737 438,610
Other receivables 0 50,000
Inventories 139,122 68,489
Other current assets -808 514
Deposits 30,337 9,637
Accounts payable -54,756 195,662
Deferred revenue 29,054 267,108
Other current liabilities 35,202 -186,932
Total adjustments 547,775 1,658,382
Net cash provided by operating activities 157,288 56,471
Cash flows from investing activities
Capital expenditures -49,749 -18,887
Purchase of certificates of deposit -1,855 0
Maturity of certificates of deposit 0 320,884
Net cash provided by (used in) investing -51,604 301,997
activities
Cash flows from financing activities
Net borrowings (payments) on line of credit -54,500 142,013
Principal payments on notes payable -17,888 -7,200
Principal payments on long-term debt -1,337 0
Principal payments under capital lease obligations -77,652 -523,951
Net cash used in financing activities -151,377 -389,138
Net decrease in cash and cash equivalents -45,693 -30,670
Cash and cash equivalents at beginning of year 51,917 82,587
Cash and cash equivalents at end of year $ 6,224 $ 51,917
The accompanying notes are an integral part of these statements.
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Brandmakers, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended June 30, 2002 and 2001
Supplemental schedule of noncash investing and financing activities and certain cash flow information:
The following table summarizes the noncash investing and financing activities for the years
ended June 30, 2002 and 2001.
2002 2001
Stock options forfeited $ 0 $343,689
Stock issued for debt payment $ 0 $ 69,400
Sale of Zoom division for stock $20,000 $ 0
Supplemental cash flow information:
Interest paid $63,986 $156,962
The accompanying notes are an integral part of these statements.
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Brandmakers, Inc. (the Company) is a Utah corporation consisting of two technology-based divisions with a focus on games and vending and Internet application development. Gamosity, the games and vending division, focuses on computerized games and vending machine manufacturing and distribution; MailStart engages in Internet application development and offers gateway e-mail service as well as its WebBox application. The Company grants normal trade credit to its customers who are located principally in the United States.
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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
A summary of the significant accounting policies of the Company applied in the preparation of the accompanying consolidated financial statements follows.
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Brandmakers, Inc. and its wholly-owned subsidiary, K.W. Leisure Ltd. All significant intercompany accounts have been eliminated.
2. Business Combinations
Asset Acquisitions
During February 2000, the Company acquired certain assets of Multi-Page Communications, LLC, in foreclosure, from certain individuals. The assets included inventories and fixed assets. The assets were acquired for approximately $600,000 to be paid in cash or Company stock (at the Company's option), ten months from the date of acquisition. The purchase price has been discounted to approximately $550,000 using an interest rate of 8%.
During March 2000, the Company acquired certain assets from K.W. Machines, Ltd., a British concern, for approximately 400,000£ sterling, with 200,000£ sterling being paid at closing, and the remaining 200,000£ sterling being due in September 2000. The assets consisted of inventories and fixed assets.
These acquisitions have been treated as asset acquisitions with the purchase price being allocated to the fair market values of the related assets, with any excess allocated to goodwill as follows:
Multi-Page Communications K.W. Machines, Ltd.
Inventories $160,000 $104,000
Fixed assets 106,000 48,000
Goodwill 284,000 488,000
$550,000 $640,000
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
2. Business Combinations - continued
Subsequent to the acquisition of the Multi-Page Communications assets, it was determined that the inventories did not have any significant ongoing value. Due to continued losses by this division subsequent to the acquisition, the Company determined that there had been an impairment loss related to this acquisition. As a result, the Company recognized an impairment loss of approximately $494,000, related primarily to the original inventory and goodwill amounts during the year ended June 30, 2000. The Company is currently in default on the remaining payments due on this obligation and is making alternative payments (note B).
In December 2000, the Company ceased all operations of K.W. Leisure, Ltd. Due to the lack of performance, the Company determined that there had been an impairment loss related to this acquisition. As a result, the Company closed this segment of their operations (note J) and recognized an impairment loss on goodwill of approximately $487,000. The Company is currently in default on the final installment debt payment of $320,000 that was due in September 2000.
3. Revenue Recognition
The Company recognizes revenue on products sold at the time of shipment due to no right of return by the customer. Revenue for services provided are recognized when the actual services have been performed.
Fees received for services yet to be provided are recorded as deferred revenue and recognized as income upon the services being provided over the related contractual period.
4. Foreign Currency Translation
Assets and liabilities of the Company's United Kingdom operations are translated from Pounds Sterling into U.S. dollars at the rate of currency exchange at the end of the period. Revenues and expenses are translated at average monthly exchange rates prevailing during the year. Resulting translation differences, if material, are recognized as a component of stockholders' equity and comprehensive income. The resulting translation differences for the years ended June 30, 2002 and 2001 were not significant.
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
5. Accounts Receivable
During the year ended June 30, 2001, the Company had an accounts receivable agreement, whereby a financial institution advanced the Company up to $1,000,000 on its qualified receivables. These receivables were sold with recourse. This agreement, along with qualifying accounts receivable, and outstanding advances were transferred to NTN Communications as part of the sale of the Zoom division. The details of this sale are disclosed in note J. Accounts receivable under this agreement as of June 30, 2001 consisted of the following:
Trade accounts receivable $ 302,910
Advanced from factor (142,013)
Non-factored trade accounts receivable $ 160,897
The Company provides for doubtful accounts equal to the estimated collection losses that will be incurred in the collection of all receivables. The estimated losses are based upon historical collection experience coupled with a review of the current status of all existing receivables.
6. Inventories
Inventories are stated at the lower of cost or market with cost being determined by the first-in, first-out (FIFO) method. The components of inventories at June 30, 2002 and 2001 are as follows:
2002 2001
Raw materials $16,585 $ 17,122
Finished goods 2,648 189,280
$19,233 $206,402
7. Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization are provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated useful lives by straight-line and accelerated methods. The equipment under capital leases is being amortized over the term of the leases. Depreciation and amortization expense, including amounts allocated to Zoom, totaled $224,049 and $220,567, respectively, for the years ended June 30, 2002 and 2001.
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
7. Property and Equipment - continued
The components of property and equipment as of June 30, 2002 and 2001 are as follows:
Class of Asset Estimated Useful Life 2002 2001
(years)
Equipment 3 - 7 $1,070,224 $1,133,741
Furniture and fixtures 7 13,329 58,729
Leasehold improvements 39 15,378 34,874
1,098,931 1,227,344
Less accumulated depreciation 558,171 382,051
and amortization
$ 540,760 $ 845,293
8. Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards Number 109 (SFAS 109), Accounting for Income Taxes, which requires the liability method for computing deferred income taxes.
The Company files its corporate tax returns separately from its wholly-owned United Kingdom subsidiary. The net operating loss carryforward for income tax purposes is approximately $3,952,000 and $3,543,000 at June 30, 2002 and 2001, respectively. The net operating loss carryforward may be utilized in offsetting taxable income generated and expires in periods through 2022.
SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future consequences of events that have been included in the financial statements or tax returns. The components of the net deferred tax accounts as of June 30, 2002 and 2001 are as follows.
2002 2001
Compensation - related accounts $ 151,000 $ 131,000
Impairment loss and loss on discontinued operations 358,000 388,000
Other accruals and receivables 10,000 10,000
Net operating loss carryforward 1,580,000 1,417,000
Deferred tax asset - net 2,099,000 1,946,000
Valuation allowance (2,099,000) (1,946,000)
$ 0 $ 0
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
9. Fair Value of Financial Instruments
Statement of Financial Accounting Standards Number 107 (SFAS 107), Disclosures About Fair Value of Financial Instruments, requires disclosure of the fair value of certain items, including receivables, payables, and debt. The Company believes that the amounts disclosed for such amounts within the balance sheets do not differ significantly from fair value as defined in SFAS 107.
10. Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are principally accounts receivable. Concentration of credit risk with respect to accounts receivable is limited due to the number of customers comprising the Company's customer base and the segments in which its customers operate. To reduce risk, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited.
11. Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. The Company periodically reviews projected undiscounted cash flows of the underlying long-lived asset to determine if the assets are impaired. If there is an indication of impairment, the Company records a valuation allowance against the applicable long-lived assets.
During the year ended June 30, 2001, the Company determined that impairment losses had occurred related to its investments in certain K.W. Leisure, Ltd. and Multi-Page assets, as described in note A-2, and losses of approximately $487,000 were recognized.
12. Interest
Interest costs are charged to operations as incurred.
13. Research and Development
The company incurs research and development costs on an ongoing basis due to its commitment to continued product enhancement and to develop innovative new products that meet the needs of its customers. Research and development costs, including amounts allocated to Zoom, expensed during the years ended June 30, 2002 and 2001 were $39,873 and $88,795, respectively.
14. Advertising Costs
Advertising costs are charged to operations as incurred. Advertising costs, including amounts allocated to Zoom, totaled $20,600 and $38,390, respectively, for the years ended June 30, 2002 and 2001.
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
15. Earnings Per Share
Basic earnings per share are computed based upon net earnings (loss) and the weighted average number of shares outstanding. Diluted earnings (loss) per share reflect the assumed issuance of common shares under the Company's stock option plan. The computation of diluted earnings per share does not assume exercise of securities that would have an antidilutive effect on earnings per share. Earnings per share from the gain on the sale of Zoom and the loss on disposal of the discontinued operations of K.W. Leisure, Ltd. are not material to present, and thus are excluded from financial statement presentation.
16. Other Comprehensive Income
The Company has adopted SFAS No. 130, which establishes standards for reporting and display of comprehensive income and its components. Other comprehensive income was insignificant for the years ended June 30, 2002 and 2001.
17. Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
18. Reclassifications
Certain reclassifications have been made to the financial statements for the year ended June 30, 2001 to be consistent with the classifications used for the year ended June 30, 2002.
NOTE B - NOTES PAYABLE
Notes payable consist of the following as of June 30, 2002:
Note payable to certain individuals related to the purchase of the $505,512 Multi-Page assets. The Company is in default on the remaining payment terms for this note. The Company issued 2,000,000 shares on February 1, 2001 with a market value of $69,400 in lieu of certain debt payments. Effective February 2002, the obligation was renegotiated to $100,000 with a $5,000 downpayment. The remaining $95,000 is to be amortized over five years with twelve monthly payments of $1,972 including interest at a rate of 9% with a final balloon payment of $81,200 due February 2003. If the Company defaults on the payments, the original obligation of $518,000 will be due, less any payments made. Due to the present financial condition of the Company, this contingent gain will be recognized upon satisfaction of the recognized obligation.
Note payable to a British concern in conjunction with the purchase 320,000 of the K.W. Leisure, Ltd. assets. The Company was obligated to pay the seller 200,000£ sterling on September 1, 2000. The Company is in default on payment of this note.
$825,512
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE C - LONG-TERM DEBT
Long-term debt at June 30, 2002 consists of the following:
Note payable to a bank in monthly installments of $271 including $13,911 interest at a rate of 8.5% maturing October 2007 and secured by equipment.
Less current maturities 2,153
$11,758
Maturities of long-term indebtedness subsequent to June 30, 2002 are as follows:
Year ending June 30,
2003 $ 2,153
2004 2,343
2005 2,551
2006 2,776
2007 3,021
Thereafter 1,067
$13,911
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE D - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its operating facilities under noncancelable operating lease agreements expiring at varying dates through November 2008. The Company also leases a certain operating facility under a cancelable lease agreement. Rent expense, including amounts allocated to Zoom, totaled $120,318 and $181,570, respectively, for the years ended June 30, 2002 and 2001.
The Company also leases certain equipment which has been capitalized in accordance with Statement of Financial Accounting Standards Number 13 (SFAS 13) at June 30 as follows:
2002 2001
Equipment under capital leases $900,065 $900,065
Less accumulated amortization 436,357 264,472
$463,708 $635,593
The following is a schedule of future minimum rental payments under the noncancelable operating lease agreements and the future minimum lease payments under the capital lease agreements together with the present value of the net minimum lease payments as of June 30, 2002:
Year ending June 30, Capital Leases Operating Leases
2003 $143,923 $111,633
2004 114,433
2005 107,815
2006 101,255
2007 104,277
Thereafter 152,764
Total minimum payments 143,923 $692,177
Less amounts representing interest 31,634
Present value of minimum lease payments 112,289
Less current portion 112,289
$ 0
Certain of the capital leases have been personally guaranteed by certain directors, officers and stockholders of the Company. Additionally, the Company has secured certain capital leases with a certificate of deposit in the approximate amount of $39,000.
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE D - COMMITMENTS AND CONTINGENCIES - CONTINUED
Employment Agreement
The Company has an employment agreement with one of the Company's officers which expires in February 2003. The agreement requires payment of certain minimum compensation levels to the officer. The future minimum compensation payments under this agreement total $100,000 for the year ended June 30, 2003 (note K).
Other
The Company has entered into an agreement with an investor relations firm in order to seek additional capital. Total consulting expense incurred during the year ended June 30, 2002 totaled approximately $18,000. The Company has agreed to make future payments totaling $22,500 through September 2002.
The Company from time to time has cash deposits which fluctuate in excess of the insured limitation of the Federal Deposit Insurance Corporation. If the financial institution was not to honor their contractual liability, the Company could incur losses. Management is of the opinion that there is no risk due to the financial strength of this institution.
From time to time, the Company may have asserted and unasserted claims arising in the normal course of business. The Company does not expect losses, if any, arising from these asserted and unasserted claims to have a material effect on the financial statements.
NOTE E - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Profit-Sharing Plan (the Plan) covering substantially all employees. The Plan is funded through discretionary employee contributions and allows the Company to make additional contributions at the discretion of the Board of Directors. There were no discretionary contributions for the years ended June 30, 2002 and 2001. Annual contributions are limited to the amount deductible under the applicable federal income tax provisions.
- F 17 -
-
Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE F - STOCK COMPENSATION PLANS
During the year ended June 30, 2000, the Company adopted a stock-based compensation plan under which certain employees receive stock options. The vesting periods range from immediate vesting to vesting over a 3 to 4-year period. The Company has adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-based Compensation, and as permitted under APB No. 25 and related interpretation in accounting for its plan. Compensation expense recorded under APB No. 25 was approximately $0 and $51,000 for the years ended June 30, 2002 and 2001, respectively. If the Company had elected to adopt the optional recognition provisions of SFAS No. 123 for its stock option plan, net loss and loss per share would have been changed to the pro forma amounts indicated below for the year ended June 30, 2002 and 2001, respectively:
2002 2001
Net Loss
As reported $(390,487) $(1,601,911)
Pro forma $(390,487) $(1,601,911)
Loss Per Share - Basic and Diluted
As reported $ (.00) $ (.01)
Pro forma $ (.00) $ (.01)
The fair value of the stock options used to compute pro forma net loss and loss per share disclosures is the estimated fair value at grant date using the Black-Scholes option-pricing model with the following assumptions:
Weighted Average Assumptions 2002 2001
Dividend yield 0% 0%
Expected volatility of Company stock 100% 100%
Risk-free interest rate 6% 6%
Expected holding period (in years) 2 years 2 years
- F 18 -
-
Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE F - STOCK COMPENSATION PLANS - CONTINUED
Presented below is a summary of the status of the Company stock options and related transactions for the years ended June 30, 2002 and 2001.
Weighted
Average
Shares Exercise Price
Options outstanding at June 30, 2000 3,908,383 $ .110
Options granted
Options exercised
Options forfeited (1,541,657) (.017)
Options outstanding at June 30, 2001 2,366,726 .093
Options granted
Options exercised
Options forfeited
Options outstanding at June 30, 2002 2,366,726 $ .093
The following table summarized the status of stock options outstanding and exercisable at June 30, 2002 and 2001:
As of June 30, 2002 and 2001
Stock Options Outstanding Stock Options Exercisable
Range of Shares Weighted Weighted Shares Weighted
Exercise Prices Average Average Average
Remaining Exercise Exercise
Contractual Price Price
Life (Years)
$.01 to $.25 2,366,726 No $0.093 2,366,726 $0.093
Expiration
- F 19 -
-
Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE G - COMPANY STOCK
During the year ended June 30, 2002, the Company issued 4,426,643 shares of stock in lieu of payment for consulting services, which has been recorded at the fair market value of the Company's stock at the time of issuance.
During the year ended June 30, 2001, the Company issued 2,000,000 shares of stock in lieu of debt payments at an average share price of $.035 per share. This issuance caused a reduction in debt obligations of approximately $69,400.
During the year ended June 30, 2000, the Company raised approximately $2,515,000 through the sale of 16,000,000 shares of its common stock in private offerings. In conjunction with these offerings the Company issued warrants for 6,000,000 shares of company stock at prices ranging from $.50 to $.75 per share. The warrants are callable in three years at prices ranging from $1.00 to $1.25.
Also, during the year ended June 30, 2000, the Company issued 50,000 warrants for its common stock to a supplier at $.75, which expire in five years.
NOTE H - OPERATING SEGMENTS
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, beginning with the year ended June 30, 2000. This standard requires disclosure of segment information on the same basis used internally for evaluating segment performance and for deciding how to allocate resources to segments.
In previous years, the Company had four reportable operating segments: Games and vending focuses on computerized games and vending machine manufacturing and distribution. Internet application development engages in internet application development and offers gateway e-mail service as well as its WebBox application. Wireless communications which manufactured, serviced, and distributed wireless on-site and wide-area paging systems was disposed of during March 2002 (note J). New Media which was engaged in the creation of graphic design projects ceased operations during the year ended June 30, 2001.
The two remaining reportable operating segments are strategic market units that offer distinct products and services. These segments have been determined based upon the customers and markets served by the Company. Each segment is managed separately due to the different required technologies and marketing strategies. Intersegment transactions that occur are based on current market prices and intersegment profit, if any, has been eliminated in consolidation.
Performance measurement and resource allocation for the reportable segments are based on various factors, including earnings (loss) before taxes.
- F 20 -
-
Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE H - OPERATING SEGMENTS - CONTINUED
The Company has allocated the cost of shared services based upon usage and factors that are activity based in nature. The accounting policies for the separate reportable segments are the same as those described for the Company.
Reportable Segments
Games & Internet Wireless New Corporate Totals
Vending Application Communication* Media**
Year ended June
30, 2002
Revenues $ 437,389 $ 560,953 $1,428,307 $ 0 $ 0 $ 2,426,649
Gross profit 223,768 469,063 488,505 0 0 1,181,336
Depreciation & 2,576 171,306 19,832 0 0 193,714
amortization
Operating & other 306,817 344,605 766,543 0 0 1,417,965
expenses
Operating loss (85,625) (46,848) (297,870) 0 0 (430,343)
Reclass to 0 0 297,870 0 0 297,870
discontinued
operations
Loss from (85,625) (46,848) 0 0 0 (132,473)
continuing
operations
Loss from 0 0 (297,870) 0 0 (297,870)
discontinued
operations
Gain on disposal 0 0 39,856 0 0 39,856
of segment
Net losses $ (85,625) $ (46,848) $ (258,014) $ 0 $ 0 $ (390,487)
Assets $ 24,629 $ 512,641 $ 0 $ 0 $108,468 $ 645,738
Capital $ 0 $ 3,702 $ 0 $ 0 $ 46,047 $ 49,749
expenditures
Year ended June 30, 2001
Revenues $ 284,474 $ 403,894 $3,268,857 $ 39,707 $ 0 $ 3,996,932
Gross profit 99,490 294,555 1,138,386 27,860 0 1,560,291
Depreciation & 30 173,130 21,284 280 0 194,724
amortization
Operating & other 347,337 443,793 1,382,922 82,951 0 2,257,003
expenses
Operating loss (247,877) (322,368) (265,820) (55,371) 0 (891,436)
Reclass to 0 0 265,820 0 0 265,820
discontinued
operations
Loss from (247,877) (322,368) 0 (55,371) 0 (625,616)
continuing
operations
Loss from (685,666) 0 (265,820) 0 0 (951,486)
discontinued
operations
Loss on disposal (24,809) 0 0 0 0 (24,809)
of a segment
Net losses $(958,352) $(322,368) $ (265,820) $(55,371) $ 0 $(1,601,911)
Assets $ 80,875 $ 696,553 $ 542,171 $ 1,001 $143,624 $ 1,464,224
Capital $ 0 $ 1,974 $ 0 $ 0 $ 16,913 $ 18,887
expenditures
*The Wireless Communication Systems was disposed of during March 2002.
**The New Media segment ceased operations during the year ended June 30, 2001.
- F 21 -
-
Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE H - OPERATING SEGMENTS - CONTINUED
Concentrations
The Company does not have any individual customers which represent greater than 10% of total sales. The Company does have four vendors that account for 43% of its products purchased. The Company believes that a loss of these sources for materials could have a material and adverse impact on operating results.
NOTE I - COMPANY OPERATIONS
The Company experienced a net loss of approximately $390,000 and $1,602,000 for the years ended June 30, 2002 and 2001, respectively, and has a working capital deficit of approximately $1,393,000 and $1,317,000 at June 30, 2002 and 2001, respectively. The consolidated balance sheet at June 30, 2002 does not include any adjustments related to the recoverability and classification of recorded assets, or the amount and classification of liabilities that might be necessary in the event the Company cannot continue in existence. The Company is in the process of seeking additional capital and/or renegotiating financing, while working to bring the Company's operations to a point of profitability and positive cash flows through increased sales and management of operating expenses. The Company believes that the increased sales and profitability will provide the Company with the liquidity that it will require.
NOTE J - DISCONTINUED OPERATIONS
In March 2002, the Company sold its Zoom division which provided wireless communication to NTN Communications (NTN) for 20,202 shares of NTN's stock. The stock is presented at its market value of $20,000. Accordingly, all operations of this division have been reported separately as a loss from discontinued operations in the accompanying consolidated financial statements. Additionally, all operations of Zoom during the year ended June 30, 2001 were reclassified as a loss from discontinued operations for financial statement presentation.
The following represents all components of discontinued operations of Zoom for the years ended June 30, 2002 and 2001.
2002 2001
Revenues $1,428,307 $ 3,268,857
Cost of sales (939,802) (2,130,471)
Operating expenses (768,001) (1,323,813)
Interest expenses (18,374) (80,393)
Loss on discontinued operations $ (297,870) $ (265,820)
- F 22 -
-
Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE J - DISCONTINUED OPERATIONS - CONTINUED
In December 2000, the Company ceased all operations at K.W. Leisure, Ltd. All remaining assets and liabilities were written off at June 30, 2001 as a loss on disposal of K.W. Leisure, Ltd. Accordingly, the operations of this segment have also been reported separately as a loss on discontinued operations in the accompanying financial statements.
The following represents all components of discontinued operations of K.W. Leisure, Ltd. for the year ended June 30, 2001.
Revenues $ 40,102
Cost of sales (35,267)
Operating expenses (203,772)
Loss on impairment of goodwill (486,729)
Loss from operations of K.W. Leisure, Ltd. $(685,666)
The following assets and liabilities were disposed of related to the loss on discontinued operations for the years ended June 30, 2002 and 2001.
K.W.
Zoom Leisure, Ltd.
Accounts receivable $(145,681) $ (62,087)
Inventory (48,047) (173,180)
Equipment, net of accumulated depreciation (92,966) (41,353)
Other current assets (18,325)
Line of credit 72,265
Accounts payable 234,285 242,591
Accrued liabilities 0 27,545
19,856 (24,809)
Investment received 20,000 0
Gain (loss) on disposal of segment. $ 39,856 $ (24,809)
NOTE K - SUBSEQUENT EVENTS
Effective September 2002, the Company issued 4,000,000 stock options each to three officers at an option price of $.01 per share. These three officers have agreed to forgive all deferred salaries effective September 30, 2002 and all guaranteed compensation under the existing employee agreement for the year ended June 30, 2002 (note D).
- F 23 -
- Item 8. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
No change
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Recent filings: Oct 15, 2001 (Annual Rpt) / Nov 15, 2001 (Qtrly Rpt) / Feb 12, 2002 (Qtrly Rpt) / Sep 30, 2002 (Annual Rpt)
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BRANDMAKERS INC (BMKS.OB)
Annual Report (SEC form 10KSB)
Item 6. Management's Discussion And Analysis Or Plan Of Operation
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the financial statements and notes thereto and other financial information appearing elsewhere in this Annual Report on Form 10-KSB.
This report on Form 10-KSB contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed forward-looking statements. Without limiting the foregoing, the words believe, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, changes in the regulation of the wireless communication and internet industry at either the federal and state levels, competitive pressures in the wireless communication and internet industry and the Company's response thereto, the Company's ability to obtain and retain favorable arrangements with third-party payers, the Company's ability to obtain capital in favorable terms and conditions, and general conditions in this economy.
Overview
Through the reverse acquisition in November 1999, the Company became a public reporting company. The Company raised funds through private placements of equity securities. These funds were used to invest in all of the Company's divisions. The ZOOM Communications division provided the majority of revenues but was sold to NTN Communications due to rising losses.
Gamosity, the games and vending division, is making progress primarily with pull tab vending machines and skill games. There are also modest sales of cell phone dispensing machines as well as computer disk dispensing machines. Coin Pusher machines are also a possibility for the next fiscal year.
MailStart remains as a free service which may be accessed just once per week to encourage sign ups for WebBox, our premium subscription service. WebBox is advertising free with numerous features including up to five email accounts and 20 megs of storage. The annual fee for the unlimited use of WebBox is $15.
Results of Operations:
Year Ended June 30, 2002 compared to Year Ended June 30, 2001.
Revenues: Note that both revenues and expenses of the ZOOM Communications division are presented as losses from discontinued operations for both periods since that division was sold in April, 2002. The Company had revenues of $998,342 for the year ended June 30, 2002 as compared to $765,219 for the same period in 2001. This represents an increase of over 30.4%. The primary reason for the increase is renewal income for WebBox as well as increased sales for games and vending. MailStart-WebBox revenues increased from $403,894 in 2001 to $560,953 in 2002 while deferred revenue increased from $267,108 in 2001 to $296,162 in 2002. Deferred revenue is carried as a current liability on the balance sheet and represents WebBox income spread out over a twelve month period. Revenues for games and vending increased from 284,474 in 2001 to $437,389 in 2002.
Cost of Sales: The Company's cost of sales decreased from $313,402 for the year ended June 30, 2001 to $305,513 for the same period in 2002. This was a decrease of just over 2.5%. The gross profit in 2001 was $451,807 which is 59% while the gross profit in 2002 was $692,829 which is just over 69%. The majority of the increase in gross profits can be attributed to the increased WebBox revenues with a relatively low cost of sales.
Operating Expenses: Operating expenses for the year ended June 30, 2002 were $744,462 as compared to $984,474 for the same period in 2001. The Company experienced a loss from operations of $51,633 in 2002 including $186,332 for amortization and depreciation as compared to a loss from operations of $532,667 in 2001 including $178,149 for amortization and depreciation. Salaries and wages decreased from $415,804 in 2001 to $296,959 in 2002. Other operating expenses decreased from $285,380 in 2001 to $201,584 in 2002.
Other Income and Expense: For the fiscal year ended June 30, 2002 interest expense was $45,612 with interest income of $2,039 compared to interest expense of $107,733 and interest income of $14,784 in 2001. There was a loss on disposal of assets of $37,267 in 2002 period.
Discontinued Operations: The Company experienced a loss for the year ended June 30, 2002 of $297,870 from the operations of ZOOM Communications and a gain on the sale of ZOOM of $39,856. For the period ended 2001, there was a loss of $685,666 from the operations of K.W. Leisure and a loss $24,809 on the disposal of K.W. Leisure. There was also a loss for the 2001 period of $265,820 from the operations of ZOOM Communications.
Overall, the loss for the year ended June 30, 2002 was $390,487 as compared to a loss for the same period in 2001 of $1,601,911.
Liquidity and Capital Resources
Cash Flows from Operating Activities: The Company's net cash flow from operating activities was $157,288 in 2002 compared to $56,471 in 2001. In 2001 there were losses of $486,729 for impairment of goodwill, $24,809 for discontinued operations of K.W. Leisure and $51,525 for stock option expenses. Receivables decreased by $438,610 in 2001 compared to a decrease of $127,737 in 2002. Inventories decreased by $68,489 in 2001 versus a decrease of $139,722 in 2002. Accounts payable increased by $195,662 in 2001 compared to a decrease of $54,756 in the same period of 2002. Deferred revenues increased by $267,108 in 2001 due to WebBox subscription income being spread out over one year and increased another $29,054 in 2002. Other current liabilities decreased by $186,932 in 2001 and increased by $35,202 in 2002. Brandmakers has has had significant losses through the year ended June 30, 2002 and has negative working capital of $1,393,325. WebBox cash flow has been helpful, particularly during the months of February, March and April 2002 for past due debts and to overcome losses and expenses in the divesture of the ZOOM Communications division. Currently, games and vending sales have been increasing which is necessary to achieve an operating profit. It is recognized that the Company needs to raise additional capital.
Cash Flows from Investing Activities: Capital expenditures totaled $18,887 in 2001 and by $49,749 in 2002 plus an additional $1,855 used for purchase of certificates of deposit in 2002. In 2001, a certificate of deposit in the amount of $320,884 matured and was paid to a leasing company for MailStart-WebBox equipment.
Cash Flow from Financing Activities: The cash used in financing activities was totaled $151,377 for the year ended June 30, 2002 compared to $389,138 for the same period in 2001. There were payments on a line of credit of $54,500 in 2002 versus borrowings of $142,013 on the line of credit in 2001. Principal payments on notes payable were $17,888 in 2002 and $7,200 in 2001. Principal payments under capital lease obligations were $77,652 in 2002 compared to payments of $523,951 in 2001. Cash as of June 30, 2002 was $6,224 compared with $51,917 on June 30, 2001. Additional financing will be necessary for Brandmakers to expand activities as well as to meet obligations.
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
BRANDMAKERS, INC. AND SUBSIDIARY
June 30, 2002 and 2001
CONTENTS
INDEPENDENT AUDITORS' REPORT 3
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF OPERATIONS 5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 6
CONSOLIDATED STATEMENTS OF CASH FLOWS 7-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9-23
[Letterhead of Bearden & Smith, P.C.]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Brandmakers, Inc.
We have audited the accompanying consolidated balance sheets of Brandmakers, Inc. and Subsidiary (the Company) as of June 30, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brandmakers, Inc. and Subsidiary as of June 30, 2002 and 2001 and the results of their operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements as of June 30, 2002 have been prepared assuming that the Company will continue as a going concern. As discussed in note I to the consolidated financial statements, the Company has suffered significant losses through the year ended June 30, 2002 and has negative working capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in note I. The consolidated balance sheet at June 30, 2002 does not include any adjustments that might result from the outcome of this uncertainty.
/S/BEARDEN & SMITH, P.C.
Atlanta, Georgia
August 23, 2002
- F 3 -
Brandmakers, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and 2001
2002 2001
ASSETS
CURRENT ASSETS
Cash $ 6,224 $ 51,917
Receivables - trade 24,493 302,910
Less allowance for doubtful accounts 20,000 25,000
4,493 277,910
Inventories 19,233 206,402
Other current assets 808 0
Total current assets 30,758 536,229
PROPERTY AND EQUIPMENT - net 540,760 845,293
OTHER ASSETS
Certificates of deposit - pledged 38,951 37,096
Investment 20,000 0
Deposits 15,269 45,606
74,220 82,702
$ 645,738 $ 1,464,224
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 0 $ 142,013
Notes payable 825,512 843,400
Accounts payable 116,728 405,768
Deferred revenue 296,162 267,108
Other current liabilities 71,239 36,037
Current portion of long-term debt 2,153 0
Current portion of capital leases 112,289 158,915
Total current liabilities 1,424,083 1,853,241
LONG-TERM DEBT, less current portion 11,758 0
CAPITAL LEASES, less current portion 0 31,026
COMMITMENTS AND CONTINGENCIES 0 0
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - authorized 200,000,000 shares of 127,568 123,141
$.001 par value
Additional paid-in capital 2,995,672 2,979,672
Retained earnings (deficit) (3,913,343) (3,522,856)
(790,103) (420,043)
$ 645,738 $ 1,464,224
The accompanying notes are an integral part of these statements.
- F 4 -
Brandmakers, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 2002 and 2001
2002 2001
Revenues $ 998,342 $ 765,219
Cost of sales 305,513 313,412
Gross profit 692,829 451,807
Operating expenses
Salaries and wages 296,959 415,804
Rent 58,045 101,908
Advertising 1,542 3,233
Depreciation and amortization 186,332 178,149
Other operating expenses 201,584 285,380
744,462 984,474
Operating loss (51,633) (532,667)
Other income (expense)
Interest expense (45,612) (107,733)
Interest income 2,039 14,784
Loss on disposal of assets (37,267) 0
(80,840) (92,949)
Loss from continuing operations (132,473) (625,616)
Discontinued operations
Loss from operations of K.W. Leisure, Ltd. 0 (685,666)
Loss on disposal of K.W. Leisure, Ltd. 0 (24,809)
Loss from operations of Zoom (297,870) (265,820)
Gain on sale of Zoom 39,856 0
(258,014) (976,295)
NET LOSS $ (390,487) $ (1,601,911)
Earnings per share
Basic and diluted
Income (loss) from continuing operations $ (.00) $ (.01)
Income (loss) from discontinued operations (.00) (.01)
NET LOSS $ (.00) $ (.01)
Average number of shares outstanding
Basic 123,544,945 121,973,837
Diluted 123,544,945 123,178,055
The accompanying notes are an integral part of these statements.
- F 5 -
Brandmakers, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended June 30, 2002 and 2001
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
Balance at June 30, 2000 121,140,504 $121,141 $3,255,961 $(1,920,945) $ 1,456,157
Stock issued in lieu of 2,000,000 2,000 67,400 69,400
debt payments
Stock options forfeited (343,689) (343,689)
Net loss for the year 0 0 0 (1,601,911) (1,601,911)
Balance at June 30, 2001 123,140,504 123,141 2,979,672 (3,522,856) (420,043)
Stock issued for 4,426,643 4,427 16,000 20,427
consulting services
Net loss for the year 0 0 0 (390,487) (390,487)
Balance at June 30, 2002 127,567,147 $127,568 $2,995,672 $(3,913,343) $(790,103)
The accompanying notes are an integral part of these statements.
- F 6 -
Brandmakers, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2002 and 2001
2002 2001
Net loss ($390,487) ($1,601,911)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization 224,049 220,567
Loss on disposal of fixed assets 37,267 0
Gain on sale of Zoom -39,856 0
Loss on impairment of goodwill 0 486,729
Loss on disposal of discontinued K.W. Leisure, Ltd. 0 24,809
Stock option expense 0 51,525
Stock issued for consulting services 20,427 0
Interest on discounted notes payable 0 31,664
(Increase) decrease in assets and increase (decrease) in liabilities
Receivables - trade 127,737 438,610
Other receivables 0 50,000
Inventories 139,122 68,489
Other current assets -808 514
Deposits 30,337 9,637
Accounts payable -54,756 195,662
Deferred revenue 29,054 267,108
Other current liabilities 35,202 -186,932
Total adjustments 547,775 1,658,382
Net cash provided by operating activities 157,288 56,471
Cash flows from investing activities
Capital expenditures -49,749 -18,887
Purchase of certificates of deposit -1,855 0
Maturity of certificates of deposit 0 320,884
Net cash provided by (used in) investing -51,604 301,997
activities
Cash flows from financing activities
Net borrowings (payments) on line of credit -54,500 142,013
Principal payments on notes payable -17,888 -7,200
Principal payments on long-term debt -1,337 0
Principal payments under capital lease obligations -77,652 -523,951
Net cash used in financing activities -151,377 -389,138
Net decrease in cash and cash equivalents -45,693 -30,670
Cash and cash equivalents at beginning of year 51,917 82,587
Cash and cash equivalents at end of year $ 6,224 $ 51,917
The accompanying notes are an integral part of these statements.
- F 7 -
Brandmakers, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended June 30, 2002 and 2001
Supplemental schedule of noncash investing and financing activities and certain cash flow information:
The following table summarizes the noncash investing and financing activities for the years
ended June 30, 2002 and 2001.
2002 2001
Stock options forfeited $ 0 $343,689
Stock issued for debt payment $ 0 $ 69,400
Sale of Zoom division for stock $20,000 $ 0
Supplemental cash flow information:
Interest paid $63,986 $156,962
The accompanying notes are an integral part of these statements.
- F 8 -
Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Brandmakers, Inc. (the Company) is a Utah corporation consisting of two technology-based divisions with a focus on games and vending and Internet application development. Gamosity, the games and vending division, focuses on computerized games and vending machine manufacturing and distribution; MailStart engages in Internet application development and offers gateway e-mail service as well as its WebBox application. The Company grants normal trade credit to its customers who are located principally in the United States.
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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
A summary of the significant accounting policies of the Company applied in the preparation of the accompanying consolidated financial statements follows.
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Brandmakers, Inc. and its wholly-owned subsidiary, K.W. Leisure Ltd. All significant intercompany accounts have been eliminated.
2. Business Combinations
Asset Acquisitions
During February 2000, the Company acquired certain assets of Multi-Page Communications, LLC, in foreclosure, from certain individuals. The assets included inventories and fixed assets. The assets were acquired for approximately $600,000 to be paid in cash or Company stock (at the Company's option), ten months from the date of acquisition. The purchase price has been discounted to approximately $550,000 using an interest rate of 8%.
During March 2000, the Company acquired certain assets from K.W. Machines, Ltd., a British concern, for approximately 400,000£ sterling, with 200,000£ sterling being paid at closing, and the remaining 200,000£ sterling being due in September 2000. The assets consisted of inventories and fixed assets.
These acquisitions have been treated as asset acquisitions with the purchase price being allocated to the fair market values of the related assets, with any excess allocated to goodwill as follows:
Multi-Page Communications K.W. Machines, Ltd.
Inventories $160,000 $104,000
Fixed assets 106,000 48,000
Goodwill 284,000 488,000
$550,000 $640,000
- F 9 -
Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
2. Business Combinations - continued
Subsequent to the acquisition of the Multi-Page Communications assets, it was determined that the inventories did not have any significant ongoing value. Due to continued losses by this division subsequent to the acquisition, the Company determined that there had been an impairment loss related to this acquisition. As a result, the Company recognized an impairment loss of approximately $494,000, related primarily to the original inventory and goodwill amounts during the year ended June 30, 2000. The Company is currently in default on the remaining payments due on this obligation and is making alternative payments (note B).
In December 2000, the Company ceased all operations of K.W. Leisure, Ltd. Due to the lack of performance, the Company determined that there had been an impairment loss related to this acquisition. As a result, the Company closed this segment of their operations (note J) and recognized an impairment loss on goodwill of approximately $487,000. The Company is currently in default on the final installment debt payment of $320,000 that was due in September 2000.
3. Revenue Recognition
The Company recognizes revenue on products sold at the time of shipment due to no right of return by the customer. Revenue for services provided are recognized when the actual services have been performed.
Fees received for services yet to be provided are recorded as deferred revenue and recognized as income upon the services being provided over the related contractual period.
4. Foreign Currency Translation
Assets and liabilities of the Company's United Kingdom operations are translated from Pounds Sterling into U.S. dollars at the rate of currency exchange at the end of the period. Revenues and expenses are translated at average monthly exchange rates prevailing during the year. Resulting translation differences, if material, are recognized as a component of stockholders' equity and comprehensive income. The resulting translation differences for the years ended June 30, 2002 and 2001 were not significant.
- F 10 -
Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
5. Accounts Receivable
During the year ended June 30, 2001, the Company had an accounts receivable agreement, whereby a financial institution advanced the Company up to $1,000,000 on its qualified receivables. These receivables were sold with recourse. This agreement, along with qualifying accounts receivable, and outstanding advances were transferred to NTN Communications as part of the sale of the Zoom division. The details of this sale are disclosed in note J. Accounts receivable under this agreement as of June 30, 2001 consisted of the following:
Trade accounts receivable $ 302,910
Advanced from factor (142,013)
Non-factored trade accounts receivable $ 160,897
The Company provides for doubtful accounts equal to the estimated collection losses that will be incurred in the collection of all receivables. The estimated losses are based upon historical collection experience coupled with a review of the current status of all existing receivables.
6. Inventories
Inventories are stated at the lower of cost or market with cost being determined by the first-in, first-out (FIFO) method. The components of inventories at June 30, 2002 and 2001 are as follows:
2002 2001
Raw materials $16,585 $ 17,122
Finished goods 2,648 189,280
$19,233 $206,402
7. Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization are provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated useful lives by straight-line and accelerated methods. The equipment under capital leases is being amortized over the term of the leases. Depreciation and amortization expense, including amounts allocated to Zoom, totaled $224,049 and $220,567, respectively, for the years ended June 30, 2002 and 2001.
- F 11 -
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
7. Property and Equipment - continued
The components of property and equipment as of June 30, 2002 and 2001 are as follows:
Class of Asset Estimated Useful Life 2002 2001
(years)
Equipment 3 - 7 $1,070,224 $1,133,741
Furniture and fixtures 7 13,329 58,729
Leasehold improvements 39 15,378 34,874
1,098,931 1,227,344
Less accumulated depreciation 558,171 382,051
and amortization
$ 540,760 $ 845,293
8. Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards Number 109 (SFAS 109), Accounting for Income Taxes, which requires the liability method for computing deferred income taxes.
The Company files its corporate tax returns separately from its wholly-owned United Kingdom subsidiary. The net operating loss carryforward for income tax purposes is approximately $3,952,000 and $3,543,000 at June 30, 2002 and 2001, respectively. The net operating loss carryforward may be utilized in offsetting taxable income generated and expires in periods through 2022.
SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future consequences of events that have been included in the financial statements or tax returns. The components of the net deferred tax accounts as of June 30, 2002 and 2001 are as follows.
2002 2001
Compensation - related accounts $ 151,000 $ 131,000
Impairment loss and loss on discontinued operations 358,000 388,000
Other accruals and receivables 10,000 10,000
Net operating loss carryforward 1,580,000 1,417,000
Deferred tax asset - net 2,099,000 1,946,000
Valuation allowance (2,099,000) (1,946,000)
$ 0 $ 0
- F 12 -
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
9. Fair Value of Financial Instruments
Statement of Financial Accounting Standards Number 107 (SFAS 107), Disclosures About Fair Value of Financial Instruments, requires disclosure of the fair value of certain items, including receivables, payables, and debt. The Company believes that the amounts disclosed for such amounts within the balance sheets do not differ significantly from fair value as defined in SFAS 107.
10. Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are principally accounts receivable. Concentration of credit risk with respect to accounts receivable is limited due to the number of customers comprising the Company's customer base and the segments in which its customers operate. To reduce risk, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited.
11. Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. The Company periodically reviews projected undiscounted cash flows of the underlying long-lived asset to determine if the assets are impaired. If there is an indication of impairment, the Company records a valuation allowance against the applicable long-lived assets.
During the year ended June 30, 2001, the Company determined that impairment losses had occurred related to its investments in certain K.W. Leisure, Ltd. and Multi-Page assets, as described in note A-2, and losses of approximately $487,000 were recognized.
12. Interest
Interest costs are charged to operations as incurred.
13. Research and Development
The company incurs research and development costs on an ongoing basis due to its commitment to continued product enhancement and to develop innovative new products that meet the needs of its customers. Research and development costs, including amounts allocated to Zoom, expensed during the years ended June 30, 2002 and 2001 were $39,873 and $88,795, respectively.
14. Advertising Costs
Advertising costs are charged to operations as incurred. Advertising costs, including amounts allocated to Zoom, totaled $20,600 and $38,390, respectively, for the years ended June 30, 2002 and 2001.
- F 13 -
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
15. Earnings Per Share
Basic earnings per share are computed based upon net earnings (loss) and the weighted average number of shares outstanding. Diluted earnings (loss) per share reflect the assumed issuance of common shares under the Company's stock option plan. The computation of diluted earnings per share does not assume exercise of securities that would have an antidilutive effect on earnings per share. Earnings per share from the gain on the sale of Zoom and the loss on disposal of the discontinued operations of K.W. Leisure, Ltd. are not material to present, and thus are excluded from financial statement presentation.
16. Other Comprehensive Income
The Company has adopted SFAS No. 130, which establishes standards for reporting and display of comprehensive income and its components. Other comprehensive income was insignificant for the years ended June 30, 2002 and 2001.
17. Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
18. Reclassifications
Certain reclassifications have been made to the financial statements for the year ended June 30, 2001 to be consistent with the classifications used for the year ended June 30, 2002.
NOTE B - NOTES PAYABLE
Notes payable consist of the following as of June 30, 2002:
Note payable to certain individuals related to the purchase of the $505,512 Multi-Page assets. The Company is in default on the remaining payment terms for this note. The Company issued 2,000,000 shares on February 1, 2001 with a market value of $69,400 in lieu of certain debt payments. Effective February 2002, the obligation was renegotiated to $100,000 with a $5,000 downpayment. The remaining $95,000 is to be amortized over five years with twelve monthly payments of $1,972 including interest at a rate of 9% with a final balloon payment of $81,200 due February 2003. If the Company defaults on the payments, the original obligation of $518,000 will be due, less any payments made. Due to the present financial condition of the Company, this contingent gain will be recognized upon satisfaction of the recognized obligation.
Note payable to a British concern in conjunction with the purchase 320,000 of the K.W. Leisure, Ltd. assets. The Company was obligated to pay the seller 200,000£ sterling on September 1, 2000. The Company is in default on payment of this note.
$825,512
- F 14 -
-
Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE C - LONG-TERM DEBT
Long-term debt at June 30, 2002 consists of the following:
Note payable to a bank in monthly installments of $271 including $13,911 interest at a rate of 8.5% maturing October 2007 and secured by equipment.
Less current maturities 2,153
$11,758
Maturities of long-term indebtedness subsequent to June 30, 2002 are as follows:
Year ending June 30,
2003 $ 2,153
2004 2,343
2005 2,551
2006 2,776
2007 3,021
Thereafter 1,067
$13,911
- F 15 -
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE D - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its operating facilities under noncancelable operating lease agreements expiring at varying dates through November 2008. The Company also leases a certain operating facility under a cancelable lease agreement. Rent expense, including amounts allocated to Zoom, totaled $120,318 and $181,570, respectively, for the years ended June 30, 2002 and 2001.
The Company also leases certain equipment which has been capitalized in accordance with Statement of Financial Accounting Standards Number 13 (SFAS 13) at June 30 as follows:
2002 2001
Equipment under capital leases $900,065 $900,065
Less accumulated amortization 436,357 264,472
$463,708 $635,593
The following is a schedule of future minimum rental payments under the noncancelable operating lease agreements and the future minimum lease payments under the capital lease agreements together with the present value of the net minimum lease payments as of June 30, 2002:
Year ending June 30, Capital Leases Operating Leases
2003 $143,923 $111,633
2004 114,433
2005 107,815
2006 101,255
2007 104,277
Thereafter 152,764
Total minimum payments 143,923 $692,177
Less amounts representing interest 31,634
Present value of minimum lease payments 112,289
Less current portion 112,289
$ 0
Certain of the capital leases have been personally guaranteed by certain directors, officers and stockholders of the Company. Additionally, the Company has secured certain capital leases with a certificate of deposit in the approximate amount of $39,000.
- F 16 -
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE D - COMMITMENTS AND CONTINGENCIES - CONTINUED
Employment Agreement
The Company has an employment agreement with one of the Company's officers which expires in February 2003. The agreement requires payment of certain minimum compensation levels to the officer. The future minimum compensation payments under this agreement total $100,000 for the year ended June 30, 2003 (note K).
Other
The Company has entered into an agreement with an investor relations firm in order to seek additional capital. Total consulting expense incurred during the year ended June 30, 2002 totaled approximately $18,000. The Company has agreed to make future payments totaling $22,500 through September 2002.
The Company from time to time has cash deposits which fluctuate in excess of the insured limitation of the Federal Deposit Insurance Corporation. If the financial institution was not to honor their contractual liability, the Company could incur losses. Management is of the opinion that there is no risk due to the financial strength of this institution.
From time to time, the Company may have asserted and unasserted claims arising in the normal course of business. The Company does not expect losses, if any, arising from these asserted and unasserted claims to have a material effect on the financial statements.
NOTE E - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Profit-Sharing Plan (the Plan) covering substantially all employees. The Plan is funded through discretionary employee contributions and allows the Company to make additional contributions at the discretion of the Board of Directors. There were no discretionary contributions for the years ended June 30, 2002 and 2001. Annual contributions are limited to the amount deductible under the applicable federal income tax provisions.
- F 17 -
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE F - STOCK COMPENSATION PLANS
During the year ended June 30, 2000, the Company adopted a stock-based compensation plan under which certain employees receive stock options. The vesting periods range from immediate vesting to vesting over a 3 to 4-year period. The Company has adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-based Compensation, and as permitted under APB No. 25 and related interpretation in accounting for its plan. Compensation expense recorded under APB No. 25 was approximately $0 and $51,000 for the years ended June 30, 2002 and 2001, respectively. If the Company had elected to adopt the optional recognition provisions of SFAS No. 123 for its stock option plan, net loss and loss per share would have been changed to the pro forma amounts indicated below for the year ended June 30, 2002 and 2001, respectively:
2002 2001
Net Loss
As reported $(390,487) $(1,601,911)
Pro forma $(390,487) $(1,601,911)
Loss Per Share - Basic and Diluted
As reported $ (.00) $ (.01)
Pro forma $ (.00) $ (.01)
The fair value of the stock options used to compute pro forma net loss and loss per share disclosures is the estimated fair value at grant date using the Black-Scholes option-pricing model with the following assumptions:
Weighted Average Assumptions 2002 2001
Dividend yield 0% 0%
Expected volatility of Company stock 100% 100%
Risk-free interest rate 6% 6%
Expected holding period (in years) 2 years 2 years
- F 18 -
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE F - STOCK COMPENSATION PLANS - CONTINUED
Presented below is a summary of the status of the Company stock options and related transactions for the years ended June 30, 2002 and 2001.
Weighted
Average
Shares Exercise Price
Options outstanding at June 30, 2000 3,908,383 $ .110
Options granted
Options exercised
Options forfeited (1,541,657) (.017)
Options outstanding at June 30, 2001 2,366,726 .093
Options granted
Options exercised
Options forfeited
Options outstanding at June 30, 2002 2,366,726 $ .093
The following table summarized the status of stock options outstanding and exercisable at June 30, 2002 and 2001:
As of June 30, 2002 and 2001
Stock Options Outstanding Stock Options Exercisable
Range of Shares Weighted Weighted Shares Weighted
Exercise Prices Average Average Average
Remaining Exercise Exercise
Contractual Price Price
Life (Years)
$.01 to $.25 2,366,726 No $0.093 2,366,726 $0.093
Expiration
- F 19 -
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE G - COMPANY STOCK
During the year ended June 30, 2002, the Company issued 4,426,643 shares of stock in lieu of payment for consulting services, which has been recorded at the fair market value of the Company's stock at the time of issuance.
During the year ended June 30, 2001, the Company issued 2,000,000 shares of stock in lieu of debt payments at an average share price of $.035 per share. This issuance caused a reduction in debt obligations of approximately $69,400.
During the year ended June 30, 2000, the Company raised approximately $2,515,000 through the sale of 16,000,000 shares of its common stock in private offerings. In conjunction with these offerings the Company issued warrants for 6,000,000 shares of company stock at prices ranging from $.50 to $.75 per share. The warrants are callable in three years at prices ranging from $1.00 to $1.25.
Also, during the year ended June 30, 2000, the Company issued 50,000 warrants for its common stock to a supplier at $.75, which expire in five years.
NOTE H - OPERATING SEGMENTS
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, beginning with the year ended June 30, 2000. This standard requires disclosure of segment information on the same basis used internally for evaluating segment performance and for deciding how to allocate resources to segments.
In previous years, the Company had four reportable operating segments: Games and vending focuses on computerized games and vending machine manufacturing and distribution. Internet application development engages in internet application development and offers gateway e-mail service as well as its WebBox application. Wireless communications which manufactured, serviced, and distributed wireless on-site and wide-area paging systems was disposed of during March 2002 (note J). New Media which was engaged in the creation of graphic design projects ceased operations during the year ended June 30, 2001.
The two remaining reportable operating segments are strategic market units that offer distinct products and services. These segments have been determined based upon the customers and markets served by the Company. Each segment is managed separately due to the different required technologies and marketing strategies. Intersegment transactions that occur are based on current market prices and intersegment profit, if any, has been eliminated in consolidation.
Performance measurement and resource allocation for the reportable segments are based on various factors, including earnings (loss) before taxes.
- F 20 -
-
Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE H - OPERATING SEGMENTS - CONTINUED
The Company has allocated the cost of shared services based upon usage and factors that are activity based in nature. The accounting policies for the separate reportable segments are the same as those described for the Company.
Reportable Segments
Games & Internet Wireless New Corporate Totals
Vending Application Communication* Media**
Year ended June
30, 2002
Revenues $ 437,389 $ 560,953 $1,428,307 $ 0 $ 0 $ 2,426,649
Gross profit 223,768 469,063 488,505 0 0 1,181,336
Depreciation & 2,576 171,306 19,832 0 0 193,714
amortization
Operating & other 306,817 344,605 766,543 0 0 1,417,965
expenses
Operating loss (85,625) (46,848) (297,870) 0 0 (430,343)
Reclass to 0 0 297,870 0 0 297,870
discontinued
operations
Loss from (85,625) (46,848) 0 0 0 (132,473)
continuing
operations
Loss from 0 0 (297,870) 0 0 (297,870)
discontinued
operations
Gain on disposal 0 0 39,856 0 0 39,856
of segment
Net losses $ (85,625) $ (46,848) $ (258,014) $ 0 $ 0 $ (390,487)
Assets $ 24,629 $ 512,641 $ 0 $ 0 $108,468 $ 645,738
Capital $ 0 $ 3,702 $ 0 $ 0 $ 46,047 $ 49,749
expenditures
Year ended June 30, 2001
Revenues $ 284,474 $ 403,894 $3,268,857 $ 39,707 $ 0 $ 3,996,932
Gross profit 99,490 294,555 1,138,386 27,860 0 1,560,291
Depreciation & 30 173,130 21,284 280 0 194,724
amortization
Operating & other 347,337 443,793 1,382,922 82,951 0 2,257,003
expenses
Operating loss (247,877) (322,368) (265,820) (55,371) 0 (891,436)
Reclass to 0 0 265,820 0 0 265,820
discontinued
operations
Loss from (247,877) (322,368) 0 (55,371) 0 (625,616)
continuing
operations
Loss from (685,666) 0 (265,820) 0 0 (951,486)
discontinued
operations
Loss on disposal (24,809) 0 0 0 0 (24,809)
of a segment
Net losses $(958,352) $(322,368) $ (265,820) $(55,371) $ 0 $(1,601,911)
Assets $ 80,875 $ 696,553 $ 542,171 $ 1,001 $143,624 $ 1,464,224
Capital $ 0 $ 1,974 $ 0 $ 0 $ 16,913 $ 18,887
expenditures
*The Wireless Communication Systems was disposed of during March 2002.
**The New Media segment ceased operations during the year ended June 30, 2001.
- F 21 -
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE H - OPERATING SEGMENTS - CONTINUED
Concentrations
The Company does not have any individual customers which represent greater than 10% of total sales. The Company does have four vendors that account for 43% of its products purchased. The Company believes that a loss of these sources for materials could have a material and adverse impact on operating results.
NOTE I - COMPANY OPERATIONS
The Company experienced a net loss of approximately $390,000 and $1,602,000 for the years ended June 30, 2002 and 2001, respectively, and has a working capital deficit of approximately $1,393,000 and $1,317,000 at June 30, 2002 and 2001, respectively. The consolidated balance sheet at June 30, 2002 does not include any adjustments related to the recoverability and classification of recorded assets, or the amount and classification of liabilities that might be necessary in the event the Company cannot continue in existence. The Company is in the process of seeking additional capital and/or renegotiating financing, while working to bring the Company's operations to a point of profitability and positive cash flows through increased sales and management of operating expenses. The Company believes that the increased sales and profitability will provide the Company with the liquidity that it will require.
NOTE J - DISCONTINUED OPERATIONS
In March 2002, the Company sold its Zoom division which provided wireless communication to NTN Communications (NTN) for 20,202 shares of NTN's stock. The stock is presented at its market value of $20,000. Accordingly, all operations of this division have been reported separately as a loss from discontinued operations in the accompanying consolidated financial statements. Additionally, all operations of Zoom during the year ended June 30, 2001 were reclassified as a loss from discontinued operations for financial statement presentation.
The following represents all components of discontinued operations of Zoom for the years ended June 30, 2002 and 2001.
2002 2001
Revenues $1,428,307 $ 3,268,857
Cost of sales (939,802) (2,130,471)
Operating expenses (768,001) (1,323,813)
Interest expenses (18,374) (80,393)
Loss on discontinued operations $ (297,870) $ (265,820)
- F 22 -
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Brandmakers, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE J - DISCONTINUED OPERATIONS - CONTINUED
In December 2000, the Company ceased all operations at K.W. Leisure, Ltd. All remaining assets and liabilities were written off at June 30, 2001 as a loss on disposal of K.W. Leisure, Ltd. Accordingly, the operations of this segment have also been reported separately as a loss on discontinued operations in the accompanying financial statements.
The following represents all components of discontinued operations of K.W. Leisure, Ltd. for the year ended June 30, 2001.
Revenues $ 40,102
Cost of sales (35,267)
Operating expenses (203,772)
Loss on impairment of goodwill (486,729)
Loss from operations of K.W. Leisure, Ltd. $(685,666)
The following assets and liabilities were disposed of related to the loss on discontinued operations for the years ended June 30, 2002 and 2001.
K.W.
Zoom Leisure, Ltd.
Accounts receivable $(145,681) $ (62,087)
Inventory (48,047) (173,180)
Equipment, net of accumulated depreciation (92,966) (41,353)
Other current assets (18,325)
Line of credit 72,265
Accounts payable 234,285 242,591
Accrued liabilities 0 27,545
19,856 (24,809)
Investment received 20,000 0
Gain (loss) on disposal of segment. $ 39,856 $ (24,809)
NOTE K - SUBSEQUENT EVENTS
Effective September 2002, the Company issued 4,000,000 stock options each to three officers at an option price of $.01 per share. These three officers have agreed to forgive all deferred salaries effective September 30, 2002 and all guaranteed compensation under the existing employee agreement for the year ended June 30, 2002 (note D).
- F 23 -
- Item 8. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
No change
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Recent filings: Oct 15, 2001 (Annual Rpt) / Nov 15, 2001 (Qtrly Rpt) / Feb 12, 2002 (Qtrly Rpt) / Sep 30, 2002 (Annual Rpt)
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