10QSB 1 0001.txt FORM 10-QSB ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission file number 0-14731 --------------------------- EMARKETPLACE, INC. (Exact name of Registrant as specified in its charter) DELAWARE 33-0558415 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 255 WEST JULIAN STREET, SUITE 100 SAN JOSE, CALIFORNIA 95110 (Address of principal executive offices) (408) 295-6500 (Registrant's telephone number, including area code) --------------------------- Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of November 20, 2000, there were 16,790,023 shares of the Registrant's Common Stock outstanding. ================================================================================
-------------------------------------------------------------------------------- EMARKETPLACE, INC. QUARTERLY REPORT ON FORM 10-QSB FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 INDEX -------------------------------------------------------------------------------- PAGE PART I FINANCIAL INFORMATION NUMBER ------ ITEM 1. Financial Statements: Consolidated Balance Sheet as of September 30, 2000....................................... 3 Consolidated Statements of Operations for the three months ended September 30, 2000 and 1999 ............................................................ 4 Consolidated Statements of Stockholders' Equity for the three months ended September 30, 2000 ............................................................... 5 Consolidated Statements of Cash Flows for the three months ended September 30, 2000 and 1999 ...................................................... 6 Notes to Consolidated Financial Statements................................................ 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 18 PART II OTHER INFORMATION ITEM 1. Legal Proceedings......................................................................... 23 ITEM 2. Changes in Securities and Use of Proceeds................................................. 23 ITEM 3. Defaults Upon Senior Securities........................................................... 23 ITEM 4. Submission of Matters to a Vote of Security Holders....................................... 23 ITEM 5. Other Information......................................................................... 23 ITEM 6. Exhibits and Reports on Form 8-K.......................................................... 23 Signatures................................................................................ 24 2 -------------------------------------------------------------------------------- PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS -------------------------------------------------------------------------------- EMARKETPLACE, INC. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2000 (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) ASSETS: CURRENT ASSETS: Cash and Cash Equivalents $ 259 Accounts Receivable (Less Allowance For Doubtful Accounts of $1,200) 4,305 Unbilled Receivables 639 Prepaids and Other Current Assets 527 ------------ TOTAL CURRENT ASSETS 5,730 PROPERTY AND EQUIPMENT (Less Accumulated Depreciation of $1,007) 2,121 OTHER ASSETS: Intangible Assets (Less Accumulated Amortization of $3,525) 9,466 Investments and Advances 3,295 Other Assets 383 ------------ TOTAL OTHER ASSETS 13,144 TOTAL ASSETS $ 20,995 ============ LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts Payable $ 3,363 Accrued Benefits 403 Other Accrued Liabilities 619 Notes Payable to Related Party 251 Lines of Credit 1,071 Other Current Liabilities 7 Deferred Revenue 1,268 Deferred Tax Liability 610 Short Term Portion of Capital Lease 161 ------------ TOTAL CURRENT LIABILITIES 7,753 Long-Term Notes Payable 1,100 Long-Term Portion of Capital Lease 287 ------------ TOTAL LONG-TERM LIABILITIES 1,387 ------------ TOTAL LIABILITIES 9,140 COMMITMENTS (NOTE 10) Minority Interest 397 STOCKHOLDERS' EQUITY: Preferred Stock - $.0001 Par Value, 1,000,000 Shares Authorized, No Shares Issued and Outstanding -- Common Stock - $.0001 Par Value, 50,000,000 Shares Authorized, 16,790,023 Shares Issued and Outstanding 2 Capital in Excess of Par Value 27,804 Shareholder Notes Receivable (3,340) Deferred Compensation (160) Accumulated Deficit (12,848) ------------ TOTAL STOCKHOLDERS' EQUITY 11,458 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,995 ============ SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 EMARKETPLACE, INC. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended September 30, ---------------------- 2000 1999 -------- -------- REVENUE $ 7,898 $ 2,882 OPERATING COSTS AND EXPENSES: Cost of Revenue 6,235 2,678 Selling, General and Administrative 4,431 1,013 Amortization of Goodwill and Other Acquired Intangibles 487 580 -------- -------- TOTAL OPERATING COSTS AND EXPENSES: 11,153 4,271 -------- -------- LOSS FROM OPERATIONS (3,255) (1,389) Non-Operating Income/(Expense): Related Party Interest Income 60 -- Interest Income 37 3 Other Expense (2) -- Interest Expense (94) (12) -------- -------- LOSS BEFORE MINORITY INTEREST (3,254) (1,398) -------- -------- Minority Interest 1,289 18 -------- -------- NET LOSS $ (1,965) $ (1,380) ======== ======== NET LOSS PER SHARE: Basic and Diluted $ (0.12) $ (0.11) ======== ======== Weighted Average Common Shares Outstanding 16,789 12,691 ======== ======== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 EMARKETPLACE, INC. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS) (UNAUDITED) Total Preferred Stock Common Stock Capital in Shareholder Deferred Accum- Stock- ------------------- ------------------- Excess of Notes Com- ulated holders' Shares Amount Shares Amount Par Value Receivable pensation Deficit Equity --------- --------- ---------- -------- --------- ---------- --------- -------- -------- BALANCE - JUNE 30, 2000 -- -- 16,784 $ 2 $ 27,798 $ (3,340) $ (239) $(10,883) $ 13,338 Issuance of Common Stock For Option Exercises -- -- 6 6 -- -- -- 6 Amortization of Deferred Comp -- -- -- -- -- -- 79 -- 79 Net Loss -- -- -- -- -- -- -- (1,965) (1,965) --------- --------- ---------- -------- --------- ---------- --------- -------- -------- BALANCE - SEPTEMBER 30, 2000 -- -- 16,790 $ 2 $ 27,804 $ (3,340) $ (160) $(12,848) $ 11,458 ========= ========= ========== ======== ========= ========== ========= ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
EMARKETPLACE, INC. AND ITS SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS) (UNAUDITED) Three Months Ended September 30, ------------------ 2000 1999 ------- ------- OPERATING ACTIVITIES: Net Loss $(1,965) $(1,380) Adjustments to Reconcile Net Loss to Net Cash Provided (Used) by Operating Activities: Stock-based Compensation 197 Amortization of Deferred Compensation 79 168 Minority Interest (1,289) (18) Depreciation 136 -- Amortization 487 586 Changes in Assets and Liabilities: Accounts Receivable (502) (9) Prepaids and Other Assets 75 (274) Deferred Revenue 803 -- Accounts Payable 734 274 Accrued Liabilities (62) 37 Other Liabilities (34) -- ------- ------- NET CASH USED BY OPERATING ACTIVITIES (1,538) (419) ------- ------- INVESTING ACTIVITIES: Purchase of Fixed Assets (211) (14) Repayment of Notes from Related Parties 800 -- Related Party Advances (45) -- ------- ------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 544 (14) ------- ------- FINANCING ACTIVITIES: Repayment of Loans Assumed in Acquisitions -- (12) Principal Payments on Long-Term Capital Leases (7) -- Proceeds from exercise of options 6 -- Payments on Notes to Related Parties (26) -- Repayment of Notes From Stockholders -- Net Borrowings on Line of Credit 508 --
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 EMARKETPLACE, INC. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS) (UNAUDITED) Three Months Ended September 30, -------------------- 2000 1999 -------- -------- -------- -------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 481 (12) -------- -------- Decrease in Cash and Cash Equivalents (513) (445) Cash and Cash Equivalents Beginning of Periods 772 1256 -------- -------- Cash and Cash Equivalents - End of Periods $ 259 $ 811 ======== ======== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 7 EMARKETPLACE, INC. AND ITS SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED STATEMENTS (IN THOUSANDS) (UNAUDITED) (1) ORGANIZATION AND BUSINESS eMarketplace, Inc., (the "Company" or "eMarketplace") is a Delaware holding company that acquires and develops Internet businesses that provide content, commerce and online services to demographically-targeted audiences. E-Taxi, a wholly owned subsidiary acquired in April 1999, was incorporated in the state of Delaware on April 14, 1998, to develop a vertical Internet portal for the small office, home office ("SOHO") market. The acquisition of E-Taxi by the Company signified the adoption by the Company of a new corporate strategy to develop, operate and acquire Internet businesses. Additionally, in April 1999, immediately prior to the Company's acquisition of E-Taxi, E-Taxi acquired TechStore, L.L.C. ("TechStore"), an online retailer of computer hardware and software, in a business combination accounted for as a purchase. The results of operations include the results of TechStore from the date of acquisition. In November 1999, the Company and its newly formed subsidiary, TopTeam, Inc. ("TopTeam"), closed on the acquisition of six Internet consulting companies - Full Moon Interactive Group, Inc., Orrell Communications, Inc., Devries Data Systems, Inc., Muccino Design Group, Inc., Image Network, Inc., and OnCourse Network, Inc. (collectively, the "Interactive Architect Firms"). As a result of the acquisitions, i) TopTeam owned all of the outstanding capital stock of the Internet Architect Firms; and ii) eMarketplace owned approximately 44.9% of the total TopTeam shares outstanding. On February 23, 2000, Top Team changed its name to Full Moon Interactive, Inc. ("Full Moon"). Hereinafter, Top Team and its subsidiaries will be referred to as Full Moon. (2) NATURE OF OPERATIONS FULL MOON is an Internet consulting firm, which provides e-business solutions to its customers desiring to initiate or enhance their presence on the Internet. Its services include, among others, strategic market consulting and research, web site design, brand management, ancillary promotional sales, media buying and management, online marketing and software engineering and technical program management. Full Moon's primary market is the Western United States. The company has offices in Los Angeles, the Silicon Valley and in Lubbock, Texas. TECHSTORE, TOGETHER WITH OFFICE EXPRESS, INC. ("OFFICE EXPRESS") are global Internet retailers featuring over 75,000 consumer technology and related products for the home and office. Its products include computer hardware, software, electronics, other consumer technology products and office equipment and supplies. TechStore's and Office Express's headquarters are in Novato, California. E-TAXI was incorporated in April 1998 to develop a vertical Internet portal for the small office, home office ("SOHO") market. As part of this strategy, E-Taxi acquired TechStore in April, 1999, immediately prior to the reverse acquisition of Computer Marketplace, Inc. by E-Taxi. Plans to create a SOHO portal by E-Taxi have been postponed as a result of the Company's focus on developing Full Moon. E-Taxi currently has no other revenues or expenses other than those of TechStore, its wholly owned subsidiary. STARSONLINE, INC. ("STARSONLINE") was formed in February 2000 and initially capitalized with $250,000 to develop and launch an Internet based entertainment company. StarsOnline expects to build a celebrity portal that enables Internet users to access the official sites of well-known personalities in television, film, music, fashion, publishing, sports and art. StarsOnline is currently in the start-up stage and has no revenues and only nominal expenses. 8 (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies of eMarketplace, Inc. are set forth in the Company's Form 10-KSB for the year ended June 30, 2000 as filed with the Securities and Exchange Commission. BASIS OF REPORTING - The Consolidated Balance Sheet as of September 30, 2000, the Consolidated Statements of Operations for the Three Months Ended September 30, 2000 and 1999, the Consolidated Statement of Stockholders' Equity for the Three Months Ended September 30, 2000 and the Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2000 and 1999 have been prepared by the Company without audit. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary in order to make the interim financial statements not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes contained in the Company's Form 10-KSB for the year ended June 30, 2000. RECLASSIFICATION - Certain prior year amounts have been reclassified to conform to current year financial statement presentation. NET LOSS PER SHARE OF COMMON STOCK - Common stock issued in the reverse acquisition is treated as outstanding for all periods presented on the basis of the weighted average shares of common stock outstanding. Potential common shares arising from the effect of dilutive stock options and warrants using the treasury stock method are included if dilutive. For fiscal years 2001 and 2000, the per share results were computed without consideration for contingently issuable shares underlying stock options and warrants as the effect on the per share results would be anti-dilutive. SEGMENTS - Effective July 1, 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company identifies its operating segments as components of an enterprise for which discrete financial information is available that is evaluated by the chief operating decision maker or decision making group to make decisions how to allocate resources and assess performance. For the quarter ended September 30, 2000, the Company effectively has two business segments, its interactive architects business and its online retailing business, for purposes of SFAS No. 131. For the quarter ended September 30, 1999, the Company operated its online retailing activities as a single business segment. (4) GOING CONCERN As of September 30, 2000, the Company had recurring losses and difficulty meeting its financial obligations as they became due. Cash used in operations for the three months ended September 30, 2000 was $1.5 million. The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. In view of these matters, the continuation of the Company as a going concern is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements, the success of its future operations and the reduction of its cost. Management is in the process of seeking additional debt and equity financing and had implemented cost reductions. The Company is also in the process of analyzing potential equity investments. Management believes that actions presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. There can be no assurance that management will be successful in the implementation of its plans. The financial statements do not include any adjustments in the event the Company is unable to continue as a going concern. 9 (5) RELATED PARTIES LOANS On February 29, 2000, the Company received a promissory note from Gateway Advisors, Inc. ("Gateway") (a company owned and controlled by Robert M. Wallace, the Company's Chairman of the Board) in the amount of $800,000, and bearing interest at 11% per annum. The principal amount and accrued interest were due and payable on April 1, 2000. The note was paid in full on August 29, 2000. (6) DEBT LINE OF CREDIT - At September 30, 2000, Full Moon had $900,000 outstanding under a line of credit with Grand Pacific Financing Corp, a California corporation. The line of credit calls for borrowings of up to $1,500,000 and is subject to borrowing restrictions based on the accounts receivable borrowing base. This base shall not exceed the lesser of (1) 70% of eligible accounts with balances less than 30 days from the invoice date plus 35% of eligible accounts with balances over 30 days but less than 60 days from invoice date plus 15% of eligible accounts with balances over 60 days from invoice date; or $1,500,000. The line of credit is due upon the earlier of (1) February 11, 2001; (2) upon the successful initial public offering of its equity securities; (3) upon liquidation, dissolution, merger or consolidation or commencement of proceedings thereof; (4) upon equity or debt financing in excess of $5,000,000. The line of credit bears interest at prime (9.5% at the time of the loan) plus 1.00%. As additional consideration for the loan, Full Moon granted Grand Pacific warrants to purchase 33,000 shares of common stock of Full Moon at $0.01 per share. This line is secured by all of the assets of Full Moon. (7) TERMINATED ACQUISITION On August 24, 2000, the merger agreement by and among BayWeb, Inc., eMarketplace, Full Moon, M. Mitchell Stevko, and C. Jett Winter, dated as of June 26, 2000, was terminated in accordance with its terms as a result of material adverse changes in BayWeb's financial condition and operating results. (8) SEGMENT DISCLOSURES The following table presents operating results by segment for the year ended September 30, 2000.
Online Interactive Retailers Corporate Architects (a) (b) Total ---------- ---------- ---------- ---------- REVENUE $ 4,526 $ 3,368 $ 4 $ 7,898 OPERATING COSTS AND EXPENSES: Cost of Revenue 3,128 3,107 -- 6,235 Selling, General and Administrative 3,609 260 562 4,431 Amortization of Goodwill -- -- 487 487 and Other Acquired Intangibles (c) ---------- ---------- ---------- ---------- TOTAL OPERATING COSTS AND EXPENSES 6,737 3,367 1,049 11,153 ---------- ---------- ---------- ---------- LOSS FROM OPERATIONS (2,211) (1) (1,045) (3,255) NON-OPERATING INCOME/(EXPENSE) Other Income (Expense) 4 (2) (4) (2) Related Party Interest Income -- -- 60 60 Interest Income 2 -- 35 37 Interest Expense (94) -- -- (94) ---------- ---------- ---------- ---------- LOSS BEFORE MINORITY INTEREST (2,299) (1) (954) (3,254) ---------- ---------- ---------- ---------- Minority Interest -- -- 1,289 1,289 ---------- ---------- ---------- ---------- NET LOSS $ (2,299) $ (1) $ (335) $ (1,965) ========== ========== ========== ==========
10 Capital expenditures for Full Moon, Online Retailers, and Corporate were $182,000, $29,000, and $0, respectively. Total assets for Full Moon, Online Retailers, and Corporate were $12.6 million, $5.4 million and $3 million, respectively. (a) Online Retailers include Tech Store and Office Express. (b) Corporate includes all non-operating entities and StarsOnline, which year-to-date had zero revenues and approximately $72,000 of expenses, primarily start-up costs. (c) Of the total amortization of intangibles, $134,000 is attributable to the Interactive Architect Firms and $353,000 is attributable to Tech Store. 11 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- FORWARD LOOKING STATEMENTS Statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document as well as statements made in press releases and oral statements that may be made by the Company or by officers, directors or employees of the Company acting on the Company's behalf that are not statements of historical or current fact constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "believes", "belief", "expects", "intends", "anticipates" or "plans" to be uncertain forward-looking statements. The forward looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission. THE COMPANY MAY NOT BE ABLE TO ADAPT TO ITS NEW WORKFORCE STRUCTURE. As a result of the reduction in demand for Internet consulting services, to date the Company has implemented a reduction in workforce, eliminating approximately 44 employees, either voluntarily or involuntarily, or 219% of the peak staffing level. Additional employee terminations may be necessary to achieve the desired workforce structure. Additionally, many of the Company's employees who were not involuntarily terminated have chosen to terminate their employment with the Company for other opportunities. The Company's failure to adapt its business to its new workforce structure could adversely affect its performance. OVERVIEW eMarketplace, Inc. (the "Company or eMarketplace") consists of eMarketplace, Inc. and its wholly owned or controlled subsidiaries: Full Moon Interactive, Inc. ("Full Moon or FMI"), E-Taxi,Inc. ("E-Taxi"), TechStore, Inc. ("TechStore"), OfficeExpress, Inc. ("OfficeExpress") and StarsOnline, Inc. ("StarsOnline"). FULL MOON is an Internet consulting firm, which provides e-business solutions to its customers desiring to initiate or enhance their presence on the Internet. Its services include, among others, strategic market consulting and research, web site design, brand management, ancillary promotional sales, media buying and management, online marketing and software engineering and technical program management. The firm also provides creative and design services primarily related to establishing and fostering corporate image development. FMI is a professional services firm who derives its revenues from the delivery of services under project engagements that vary in amount depending on the type and duration of service being provided. TECHSTORE, TOGETHER WITH OFFICE EXPRESS are global Internet retailers featuring over 75,000 consumer technology and related products for the home and office. With over 100,000 customers world wide, together the companies offer an online "superstore" at www.techstore.com and www.officeexpress.com that provides one-stop shopping for domestic and international customers, 24 hours a day, seven days a week. The superstore features computer hardware, software, electronics, other consumer technology products and office equipment and supplies. E-TAXI was incorporated in April 1998 to develop a vertical Internet portal for the small office, home office ("SOHO") market. As part of this strategy, E-Taxi acquired TechStore in April 1999, immediately prior to the reverse acquisition of Computer Marketplace, Inc. by E-Taxi. Plans to create a SOHO portal by E-Taxi have been postponed as a result of the Company's focus on developing Full Moon. E-Taxi currently has no other operations, revenues or expenses. 12 STARSONLINE was formed in February 2000 and initially capitalized with $250,000 to develop and launch an Internet based entertainment company. StarsOnline expects to build a celebrity portal that enables Internet users to access the official sites of well-known personalities in television, film, music, fashion, publishing, sports and art. Many of these official sites will be designed, developed and managed by StarsOnline in partnership with popular celebrities. Additionally this full service vertical portal is expected to provide celebrity-driven content, products and services in an entertaining and interactive environment. StarsOnline believes it will be able, therefore, to aggregate and monetize the affinity audiences of these famous personalities. By providing real value to each of the constituencies (consumers, celebrities, commerce partners) in the star-driven entertainment marketplace, StarsOnline expects to position itself to capture multiple revenue streams. StarsOnline expects to generate revenues from sales of authentic and exclusive celebrity merchandise and memorabilia, strategic sponsorships, targeted advertising, affinity audience traffic, content syndication, premium memberships, and special promotions. StarsOnline is currently in the start-up stage and has no revenues and only nominal expenses. Our Internet businesses have a very limited operating history on which to base an evaluation of our business and prospects. Our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies with limited access to capital in new and rapidly evolving markets such as the Internet market. In view of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-period comparisons are not necessarily meaningful and should not be relied upon as indications of future performance. Please see "Risk Factors That May Affect Future Results and Safe Harbor Statement". Additionally, the dynamics of the demand for Internet consulting services are changing rapidly. During the three months ended September 30, 2000, the Company experienced a significant reduction in demand. The weakening condition or failure of many of the Internet based "dot-com" companies caused many clients to rethink or delay implementing their Internet strategy. In addition, many larger traditional companies have chosen to utilize in-house resources for the implementation of their Internet initiative in lieu of those of the Company and its competitors. As a result, the average amount of time invested by the Company to secure any given project has increased. It is possible that demand for Internet consulting services, including those offered by the Company, will remain lower than prior levels for the foreseeable future. In response to the reduction in demand for the Company's services, the Company has undertaken a restructuring plan designed to reduce the Company's workforce and operating expenses, and to "right size" the labor force relative to the fallen revenue levels. As of September 30, 2000, approximately 44 employees had been eliminated either voluntarily or involuntarily, in connection with the restructuring program. Management is continuing to restructure its operations and additional voluntary and involuntary terminations have continued into the fourth quarter. As a result of the restructuring and employee terminations, it may prove increasingly difficult for the Company to attract and retain its most 13 qualified employees. The failure to attract and retain qualified creative, technical, consulting and sales personnel could materially and adversely affect the Company's financial condition and results of operations. RESULTS OF OPERATIONS NET LOSS The Company recorded a net loss of $3.2 million for the three months ended September 30, 2000, because the cost of revenues and expenses were not sufficient to cover revenues generated. Contributing to the net loss were non-cash expenses of approximately $1 million, consisting of $623,000 of depreciation and amortization, $79,000 of amortization related to deferred compensation and a reserve against advances to Bayweb of $340,000. Offsetting these items is $1.3 million of minority interest attributable to the minority shareholders of Full Moon. Excluding these non-cash items, $1.8 million of the loss was attributable to Full Moon and $52,000 was attributable to TechStore and Office Express combined. The balance of approximately $315,000 is attributable to corporate administration. REVENUE Total revenue for the three months ended September 30, 2000 was $7.9 million, which consists $3.4 million of online retailing revenue by TechStore and Office Express, and $4.5 million of revenue generated by Full Moon. TechStore and Office Express utilize vendor drop-shipments directly to customers, and therefore do not maintain inventory. COST OF REVENUE Total cost of sales for the quarter ended September 30, 2000 was $6.2 million or 79% of revenue. Cost of sales includes the cost of products sold, credit card processing fees and freight costs for product sales, and time & materials for Internet consulting services. Online retailing by TechStore and Office Express had cost of sales of $3.1 million, or 92% of revenue for the quarter ended September 30, 2000. The Company expects margins for this segment to remain low in the near future as it uses competitive pricing as a means to obtain increased market share. TechStore is entirely dependent upon a third party for order fulfillment. Currently, TechStore utilizes fulfillment services offered by TechData Corporation, a leading full-line distributor of more than 75,000 technology products worldwide. TechData offers fulfillment services via six regional distribution centers. TechStore has no long-term contracts or arrangements with TechData that guarantee the availability, shipping, or quality of merchandise. TechStore relies upon TechData to ship merchandise directly to customers. Consequently, TechStore has limited control over the goods shipped, and at times these shipments have been subject to delays. If the quality of service provided by the distributor, TechData, falls below a satisfactory standard or if our level of returns exceeds our expectations, this could have a harmful effect on our business. The Company believes that it could establish a similar relationship with other distributors; however, there can be no assurance that such a distributor could provide the fulfillment, service and pricing currently offered by TechData to TechStore. Office Express is also entirely dependent upon a third party for order fulfillment. Currently OfficeExpress utilizes fulfillment services offered by United Stationers Supply Co., the nation's largest wholesale distributor of office, computer, and facilities management products. Full Moon's cost of sales was $3.1 million, or 69% of revenue for the quarter ended September 30, 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Total selling, general and administrative expenses for the quarter ended September 30, 2000, were $4.4 million or 56% of revenue. Selling, general and administrative expenses consist of salaries and other personnel related expenses, facilities related expenses, legal and other professional fees, bad debt expense, advertising costs, travel expenses and depreciation. The quarter ended September 30, 2000 included $79,000 in non-cash expenses related to the amortization of deferred compensation, $ 623,000 of depreciation and amortization and a $340,000 reserve against funds advanced to Bayweb in conjunction with the potential acquisition. The Company expects to incur approximately $80,000 per quarter for three more quarters for the amortization of the deferred compensation associated with warrants. TechStore and Office Express had combined SG&A of $260,000, or 8% of combined revenues for the quarter ended September 30, 2000. For the combined companies, SG&A includes of $32,000 in occupancy expense, $4,000 of office expense, $20,000 of depreciation expense, $112,000 in salaries and $80,000 of advertising. Full Moon's SG&A was $3.5 million, or 79% of revenue for quarter ended September 30, 2000. Full Moon's SG&A includes $262,000 in rent expense, $18,000 in professional fees, $2.4 million in salaries, $196,000 of contract labor, $196,000 in travel, $84,000 in depreciation and $57,000 in recruiting expenses. It also includes a non-cash expense of $340,000 representing a reserve. 14 AMORTIZATION OF GOODWILL AND OTHER ACQUIRED INTANGIBLES During the quarter ended September 30, 2000, the Company incurred $531,000 in amortization expenses associated with the acquisition of TechStore and Full Moon. The intangible assets associated with these acquisitions, consisted of $12.4 million in goodwill, $140,000 in acquired technology $160,000 in established workforce and $280,000 in trademarks, which are being amortized over their estimated useful lives of four to ten years. In the event that the Company continues to acquire other companies, amortization of goodwill will continue to have an impact on the Company's results of operations in the future. Based on acquisitions completed as of September 30, 2000, and assuming no further impairment of the value of the Company's subsidiaries resulting in a write-down of goodwill, future amortization of goodwill and identifiable intangibles will reduce net income from operations by approximately $1.9 million in fiscal years 2001, 2002, and 2003, $1.1 million in fiscal year 2004, and $500,000 in 2005. INTEREST INCOME AND EXPENSE Interest income, net of interest expense, was $3,000 for the quarter ended September 30, 2000. Interest expense related primarily to interest on loans to the Company and interest income resulted primarily from interest earned on notes to related parties. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 The Company incurred a net loss of $1.4 million for the quarter ended September 30, 1999 because the revenue generated was not sufficient to cover cost of revenues and expenses generated. Total revenue for the quarter ended September 30, 1999 was $2.8 million, which consists almost exclusively of revenue from the sale of computer hardware and software and consumer electronics by TechStore. Total cost of revenue was $2.7 million, or 93% of revenue, and included cost of product sold, credit card processing fees and freight costs. Total selling, general and administrative expenses for the quarter ended September 30, 1999 were $1 million and consisted of salaries and other personnel related costs, facilities, legal and other professional fees, advertising costs and travel expenses. The quarter also included $364,000 in non-cash expense associated with stock options issued to an accounting consultant, warrants issued to a business advisor and stock issued to minority investors in a Consolidated Subsidiary. During the quarter ended September 30, 1999, the Company incurred $580,000 in amortization expenses associated with the acquisitions of TechStore and the reverse merger between the Company and E-taxi. Interest expense, net of interest income, was $9,000 for the quarter ended September 30, 1999. Interest expense related primarily to interest on loans to the Company and interest income resulted primarily from interest earned on the remaining balance of the $1.4 million proceeds on the private placement completed by E-Taxi in April 1999. VARIABILITY OF PERIODIC RESULTS AND SEASONALITY Results from any one period cannot be used to predict the results for other fiscal periods. Revenues fluctuate from period to period, however, management does not see any seasonality or predictability to these fluctuations LIQUIDITY AND CAPITAL RESOURCES The Company's operations generated a negative cash flow for the three month period ended September 30, 2000, and management expects a significant use of cash during the upcoming fiscal year as it funds its operating businesses. The Company will require additional debt or equity financing during the first half of fiscal year 2001, the amount and timing depending in large part on our spending program. If additional funds are raised through the issuance of equity securities, the Company's stockholders may experience significant dilution. Furthermore, there can be no assurance that additional financing will be available when needed or that if available, such financing will include terms favorable to our stockholders or the Company. If such financing is not available when required or is not available on acceptable terms, the Company may be unable to pay its debts in a timely manner, to develop or enhance its operating businesses, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on its business, financial condition and results of operations. The Company also could breach payment obligations to third parties or otherwise fail to satisfy business obligations of the Company. Absence of Dividends The Company has never declared or paid, nor does it intend to pay in the foreseeable future, cash dividends on its Common Stock, but intends instead to retain any future earnings to finance expansion and operations. 15 -------------------------------------------------------------------------------- PART II. OTHER INFORMATION -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings nor are any material legal proceedings threatened against the Company; provided, however, that the Company and its subsidiaries have received numerous requests for payment of outstanding accounts payables. Given the Company's current financial condition, the failure to make payments could have a material adverse effect on the Company's business and its prospects. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None. (a) Exhibits 27.01 Financial data schedule (EDGAR only) (b) 16 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly executed on this 20th day of November, 2000. EMARKETPLACE, INC. By: /s/ ROBERT M. WALLACE ---------------------------- Robert M. Wallace Chief Executive Officer and Chairman, (Chief Accounting Officer) 17