FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002, OR
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission file number: (333-42640)
Endo Networks, Inc.
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(Exact name of registrant as specified in its charter)
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(Former name of registrant if changed since last report)
Nevada 75-2882833
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(State of Incorporation) (Tax ID No.)
2624 Dunwin Drive, Unite #3, Mississauga, Ontario, Canada L5L3T5
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(Address of principal executive offices) (ZIP code)
Registrant's telephone number, including area code: (905) 820-8800
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the past
12 months and (2) has been subject to such filing requirement for the past 90
days.
X YES NO
--- ---
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 30, 2002: $ 1,789,475
Shares of common stock outstanding at September 30, 2002: 12,568,966
PART I.
ITEM 1: DESCRIPTION OF BUSINESS
OVERVIEW
Endo Networks Inc. builds interactive public networks.
The component parts generally deployed within a public location include an
in-house TV service (with several strategically placed TVs), a background audio
service, and various touchscreen interactive devices (kiosks, tablet PCs,
wireless handhelds, etc.).
The corporate head office is located at 2624 Dunwin Drive, Unit 3, Mississauga,
Ontario, Canada, 20 minutes from Toronto and 60 minutes from Buffalo.
Endo Networks currently does business under two primary brands: Endo Networks
and Streamline Media. The Endo Networks (www.endonetworks.com) brand encompasses
all network related business. The Streamline Media (www.streamlinemedia.com)
brand encompasses traditional Internet and interactive design/production work
not related to the network business. The Streamline Media business provides an
important source of revenue and continually exposes our design and production
team to new ideas and technologies, which in turn benefit our Endo Networks
business as they utilize the same competencies.
As of December 2002 Endo Networks had 18 total employees, 15 full-time.
PRODUCTS/SERVICES/MARKETS
Deployment Locations
Endo Networks deployments are located in high-traffic public areas including:
Events (i.e. consumer and trade shows)
Retail stores
Restaurants
Government community centers
Endo Networks deployments are able to utilize any available form of connectivity
for remote management and content delivery.
Applications
Endo Networks deployments are used to deliver a combination of third party and
proprietary applications in the following categories:
Entertainment
Background music, In-house TV and Radio, trivia, games...
Advertising and promotion
Exterior branding, Radio-style commercials, TV commercials, Instant
coupons, Interactive promotions, Contests, 1 to 1 relationship
marketing (CRM)...
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Information and training
Nutrition guides, Directories, Store locators, Interactive staff
training...
Loyalty and rewards
Points, Rewards, 1 to 1 relationship marketing (CRM)...
Internet and eCommerce
Web link, eMail, Surf, Shop, connect to back end systems...
Essentially, any application and/or service which requires a network
technology platform for delivery.
These applications target both consumers and employees. The combination of TV,
audio and interactive creates a uniquely effective and measurable communication
medium.
Deployment Categories
Network deployments fall into one of two additional categories: Paid or Placed.
Paid Deployments
In a Paid deployment, we receive full payment with margin for every product and
service we provide, either on a recurring monthly basis (i.e. lease or rent), or
one-time (i.e. purchase). We generally also receive a commission if we bring any
cost-recovery to the deployment, i.e. an outside brand that pays to utilize some
of the network capacity in synergy with the primary client. Retail, Event and
Government deployments are all generally Paid deployments. While Paid
deployments offer the stability of one payment partner, they offer less margin
for Endo Networks long term, and require potentially lengthy approval, pilot and
expansion stages.
Placed Deployments
In a Placed deployment, Endo Networks is responsible for the cost of the
deployment, and recovers that cost with margin from a "coalition" of
stakeholders sharing the network resource. Generally, the host location receives
the base deployment at no charge providing a certain level of deployment
performance. Revenue is generated through recurring charges such as advertising
or application sales commission, transactional charges such as lead generation,
instant gift certificate or jukebox, and one-time charges such as custom
development or software license.
Stakeholders include the host location, outside brands, and Endo Networks.
* The host location receives a basic package of CRM and
promotional services at no charge, but may also subscribe to
several step-up services in the same categories.
Outside brands may be:
* brand advertisers utilizing our deployment to generate sales
leads or brand awareness, or actually conduct "e-commerce"
style transactions.
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* 3rd party applications which we re-sell into the location to
either the location or the guests within the location.
* Endo Networks utilizes the deployment to promote our own
brands, to reach more potential host locations and more
outside brands, and to drive use of the interactive stations
for increased revenue.
Network Access
In the short term, consumer and staff access to applications is via freestanding
network access points such as kiosks, while management is provided with a
wireless appliance for access to various application functionality.
In the medium term, additional network access points will be deployed for
consumer and staff access, i.e. in booths at restaurants, or dedicated
employee-access stations.
In the long term, we will provide network access via wireless local area
networking technology to the user's own device.
COMPETITORS
Endo Networks is a true convergence business - our business opportunity has been
created by (and is driven by) the continued convergence of applications and
technology onto a PC platform, enabling us to provide value to an almost endless
number of applications through effective sharing of the network resource. This
also creates a substantial number of non-direct competitors, i.e. the
non-aggregated initiatives currently providing a limited service in any of our
target categories.
In North America, there are no established initiatives in the interactive public
network space which pursue a strategy of aggregation and integration as does
Endo Networks. There may be direct competitors operating on a regional basis,
but as of December 2002 we have not encountered any direct competition. The
enormous number of potential locations means there is ample room for direct
competition, which can assist in growing the market segment.
If we look for other business initiatives that compete with us for space in a
host location, there are many. These initiatives are generally single or limited
function network or non-network devices that compete with part of the Endo
Networks service offering. In some cases, these initiatives may represent
potential application partners for Endo Networks - for example, these
applications may wish to exit the network deploy/manage segment of their
business, and instead negotiate carriage with Endo Networks. This allows the
application to focus more of their resources on improving their application, and
enhances our offering.
It is our strategy to pursue opportunities for non-exclusive partnerships with
initiatives which might currently be categorized as competitors.
4
A partial list of initiatives with which we compete or potentially partner is as
follows:
Audio services
This includes all forms of background audio used in a host location, i.e. Musac,
DMX, Radio, Jukebox, etc. The flexibility and functionality of our partner's
background audio solution greatly exceeds anything else currently available on
the market. This solution leverages our investment in infrastructure to benefit
from a powerful server, touchscreen, TVs, wireless and other peripherals, at a
cost less than building and maintaining their own network. No single purpose
network can afford this level of network deployment, and therefore they cannot
offer this level of functionality on their current business models.
Client Controlled Media (In-house TV)
An emerging market opportunity lies with Client Controlled Media (a.k.a. Place
Based Media). This technology leverages digital servers and network distribution
technology to deliver a "private label" in-house TV service. Endo currently
offers a proprietary In-house TV service which leverages our deployment for
greatly enhanced functionality. Long term, it is our desire to secure an
application partner to grow this offering. Short term, as part of our overall
integrated offering our In-house TV service is very compelling.
Gift Cards
Many retail businesses are migrating from traditional paper-based gift
certificates to gift cards, which function essentially as a private label
currency. We are currently working with leading providers of this technology to
offer a "one card" loyalty/gift/cashless ATM solution to our partners, which
will be integrated into our entire offering, essentially giving us a new form of
currency. This will also serve to reduce our cash collection costs. Once again,
the benefits of aggregating this application into our total solution provide a
substantial competitive advantage.
HR/Learning Management Systems
An interactive network access point, combined with TV and audio, affords a
unique opportunity for a retailer to measurably communicate with their own staff
as well as customers. From the initial job application, to ongoing daily
communications, to employee growth, Endo Networks will shortly deliver a unique
solution for our location partners. We are working with several partners with
leadership positions in these fields to jointly deliver this new integrated
offering in 2002. As with all other applications, the aggregation provides a
competitive advantage.
Bank machines
The primary reason a retailer offers a bank machine on their premise is because
a substantial percentage of the transactions result in money spent at that
retailer. The above mentioned Gift Card technology currently in development will
allow retailers a better alternative, integrating this functionality with their
CRM initiatives. By eliminating the need to store large amounts of cash in a
bank machine on the location, Endo Networks benefits from a substantially lower
cost of managing the service.
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Future opportunities for partnership and new competition:
POS (Cash Registers)
CRM
Gaming
Internet Access/eMail Stations
Supply Chain Management
Automation
Telecommunication
As direct competitors emerge, it will be the continual improvement of our
service offering and the continual strengthening of our network of relationships
that will entrench us with our existing clients, and make our service
increasingly more attractive to new potential clients. This will require our
employees to be "out of the box" thinkers, exceedingly synergy-minded. It will
also require a continual investment in research and development. We are pursuing
several forms of legal and contractual hardware, software, process, brand and
relationship protection to further strengthen our competitive position.
SUPPLIERS
Effective outsourcing is a key enabler of the rapid growth of Endo Networks.
We have selected hardware partners based on their ability to scale production
and delivery of physical network components to hundreds or even thousands of
units monthly. We have selected application partners with careful attention to
their infrastructure capabilities to ensure they are scalable. We are currently
evaluating regional, national and international service networks based on their
ability to provide a reliable service level, and integrate with our network
management systems. And we have selected our network management systems and
software based on scalability and functionality.
FINANCING
Operations
Current operations are financed out of cash flow, and are at the current level
of growth. Investment in operations to enable enhanced growth will be
commensurate with new revenues, although additional sources of funding to
accelerate growth will be explored.
Network Infrastructure
Endo Networks currently has access to all necessary financing for deployment of
network infrastructure. As projects move from pilot to roll-out, there will be
opportunities for new financing.
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CUSTOMERS
Deployments
Our focus has been on securing business in our four initial categories (Retail,
Food Service, Events and Government) in the Greater Toronto Area of Ontario.
Projects are selected based on their ability to expand post-pilot - therefore,
focus has been on large chains and franchises, or on particular categories where
all the locations are similar (i.e. Pubs), with particular emphasis on those
with US counterparts. Often, a customer will participate with us at several
different levels, i.e. as a host location and as an outside brand partner on a
deployment into another host location with an attractive customer demographic or
other synergies. The status of each of these categories is discussed below:
Retail
We have active deployments with several retail chains, with several more
projects nearing the deployment stage in mass merchandise retail and automotive
retail.
Food Service
We have active Food Service projects in both Pub and Casual Dining categories.
We expect expansion this year of both these categories, and new projects in
Family Dining and Night Club categories.
Events
We have a number of active event and field marketing projects. There are a
number of additional projects booked for 2003, and in proposal stage.
Government
Most governments are currently investigating the use of interactive public
network technology to improve the service they offer their citizens, and
implement a plan for future cost avoidance. Endo Networks has formalized a
relationship with a company that provides software solutions to several hundred
governments in North America. Through this relationship we will continue to
expand our projects in this category.
Future Potential Deployment Categories
Doctors Offices Shopping Malls Grocery Stores
Airports Convenience Stores
Resorts/Hotels Office Buildings
Outside Brand Partners
Outside brand partners are an important part of most Endo deployments. Based on
extremely strong, measurable results, we have a number of outside brand partner
relationships, and more in negotiation, tied to specific projects.
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There are many factors which make our offering more attractive to outside brand
partners than other advertising vehicles, however, perhaps the most important is
availability of action. We can communicate a call to action very effectively via
Audio and TV, to which the target potential customer can respond immediately via
our Interactive touchscreens - before the call to action has a chance to be
diluted by competing messages.
APPLICATION PARTNERS
Historically, a substantial portion of our application offering has been
proprietary to Endo Networks. This year, as various projects gain traction, we
have started to integrate a number of leading third-party applications for
automotive, training, behavioural profiling, CRM and background audio. We intend
to continue aggressively pursuing partnerships with leaders currently providing
non-aggregated applications into our target markets. This will allow us to
leverage their core competencies, delivering a continually-improving solution to
our partners, while allowing us to shift resources away from application
development and towards network growth.
ACQUISITION STRATEGY
Not applicable.
ITEM 2: DESCRIPTION OF PROPERTY
HARDWARE RELATED TO DEPLOYMENTS
Endo Networks currently leases infrastructure equipment (including servers,
monitors, TVs, touchscreens, Internet appliances, sound systems, switches,
etc.).
SOURCE CODE
Endo Networks currently owns source code as follows:
Proprietary applications including audio, video and interactive Content
management applications Various eCommerce applications Code related to
integrating third party applications
ITEM 3: LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II.
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a. Market Information.
The Company's common stock is currently traded on the NASDAQ bulletin board. The
following were the high and low sales prices for each quarter for which the
Company's stock traded:
Period High Low
Calendar Year 2001 4th quarter $1.25 $0.30
Calendar Year 2002 1st quarter $1.01 $0.60
2nd quarter $1.00 $0.30
3rd quarter $0.75 $0.30
b. Holders
There are approximately one hundred (100) shareholders.
c. Dividends
Registrant has not paid a dividend to the holders of its common stock and does
not anticipate paying dividends in the near future.
e. Warrants
Registrant has no warrants outstanding.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION SUMMARY OF
2002
Revenues for the year ended September 30, 2002 were $792,482 compared with
$98,531 for the period from inception (January 30, 2001) to September 30, 2001
and cost of sales for the same periods were $379,328 and $0 respectively. Sales
increased by 800% because we were developing contacts and generating business.
In the prior period we performed only service work and therefore the cost of
sales was zero. In the year ended September 30, 2002, our revenues consisted not
only of service but of product deployments which caused us to have cost of sales
of $379,328 or 48% of sales. Along with the increase in sales our expenses
increased from a total of $102,300 in the prior period to $572,941 in the year
ended September 30, 2002, a 560% increase. This was due to increased
depreciation and amortization of equipment that we deployed on jobs and
increased expenses of the work performed. One of the main reasons for the
increase in expenses was that we are growing and constantly putting more funds
back into developing new ideas and proposals to continue our growth.
Deployments
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Continued to prove the attractiveness of an aggregated model to host locations
Proved our ability to remotely manage and support a deployment Generated
substantial revenue from Paid deployments in:
- Food Service (Pub)
- Event (Field Marketing, Home Shows)
- Retail (Beer, Duty Free, Garden Center)
Initiated projects with major international brands in all target categories.
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APPLICATIONS
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Expanded our expert understanding of how to customize applications for touch and
public use.
Expanded our expert understanding of how to aggregate applications for maximum
effectiveness.
Integrated 802.11 b wireless networking
Developed initial version of applications for TabletPC and PocketPC.
Integrated Endo applications with leading application providers in Automotive
sector, and began integration with leading providers of POS, HR and CRM
applications
OUTSIDE BRAND PARTNERS
Continued to show substantial ROI to outside brand partners
Developed new relationships with outside brand partners in key categories
related to deployments.
ACQUISITION
Not applicable
OPERATIONS
Funded operations out of revenue
Introduced new management structure for increased efficiency and better
responsiveness
Endo Networks Inc. will provide an annual report including audited statements on
request.
Endo Networks Inc. files quarterly reports with the SEC.
Public may read and copy any materials filed by Endo Networks with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Public may abtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC- 0330. The SEC maintains an Internet site
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC at www.sec.gov.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This discussion may contain certain "forward-looking" statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 and information
relating to the Company and its subsidiaries that are based on the beliefs of
the Company's management as well as assumptions made by and information
currently available to the Company's management. When used in this release, the
words "anticipate," "believe," "estimate," "expect" and "intend" and words or
phrases of similar import, as they relate to the Company or its subsidiaries or
Company management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions related to
certain factors including, without limitations, changes or anticipated changes
in regulatory environments, competitive factors, general economic conditions,
customer relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonally, distribution networks,
product introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein and in other press
releases to the public or filings made by the company with the Securities and
Exchange Commission, the ability to secure partnership or joint-venture
10
relationships with other entities, the ability to raise additional capital to
finance expansion, and the risks inherent in new product and service
introductions and the entry into new geographic markets. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company does not intend to update these forward-
looking statements. For further information, which could cause actual results to
differ from the Company's expectations, as well as other factors, which could
affect the Company's financial statements, please refer to the Company's report
filed with the Securities and Exchange Commission.
Endo Networks Inc. (905) 820 8800 www.endonetworks.com
ITEM 7: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Certified Public Accountant is attached hereto.
ITEM 8: CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III.
ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following persons serve as directors and officers of Registrant:
Peter B. Day President, Secretary and Director
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Served since November 2001 and expires at the next annual
meeting
Wayne Holm
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Served since November 2001 and expires at the next annual meeting
PETER B. DAY - President, Secretary and Director Mr. Day attended the University
of Toronto from 1989 to 1992 studying English, History and Psychology and
attended Humber College in 2000 studying Telecommunications. Mr. Day work
experience follows: General Manager and Partner in Down Home Satellite
Programming, Inc. from 1996 to 1998. Marketing Director and General Manager for
Galaxy Satellite Programming, Inc. from 1998 to 2000. Vice President and Partner
in Streamline Media, Inc., a computer software and web design company from 2000
to present. President of Endo Networks, Inc. from 2000 to present.
WAYNE HOLM - DIRECTOR Mr. Holm attended Simon Frazier University from 1965 to
1970 and played in the Canadian Football League from 1969 to 1974. Mr. Holm's
recent work experience follows: In 1989 he co-founded Spectra Food Corporation
in 1989 and became Vice President. Vice President and Co-CEO for The Spectra
Group of Great Restaurants, Inc. from 1993 to 1997. Chairman of the Board for
The Spectra Group of Great Restaurants, Inc. from 1997 to 2001, and became
President and Chief Operating Officer in 2001. Mr. Holm also became the Senior
Vice President for Branding and Concept Development for Cara Operations Limited
in 2000.
ITEM 10: EXECUTIVE COMPENSATION
The Company paid no compensation to its officers and directors in the fiscal
year ended September 30, 2002.
11
The Company has no retirement or stock option or bonus plan.
ITEM 11: SECURITY OWNERSHIP OF MANAGEMENT AND BENEFICIAL OWNERS
Set forth below is the direct ownership of Registrant's common Stock by
management and any owner of 5% or more of Stock of Registrant.
TITLE OF NAME AND ADDRESS AMOUNT OF SHARES % OF CLASS
SECURITIES OF OWNER OWNED
------------------------------------------------------------------------------
COMMON PETER B. DAY 4,577,500 37.9%
2624 DUNWIN DRIVE, UNIT #3
MISSISSUAGA, ONTARIO L5L 3T5
COMMON DEAN T. HIEBERT 2,432,500 20.2%
2624 DUNWIN DRIVE, UNIT #3
MISSISSUAGA, ONTARIO L5L 3T5
COMMON WAYNE HOLM 100,000 0.8%
2624 DUNWIN DRIVE, UNIT #3
MISSISSUAGA, ONTARIO L5L 3T5
COMMON WOODBRIDGE MANAGEMENT, LTD. 2,000,000 16.6%
192 BLUE HILL ROAD SOUTH
NASSAU, BAHAMAS
COMMON ALL OFFICERS, DIRECTORS & 9,685,000 80.1%
BENEFICIAL HOLDERS AS A GROUP
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 2001, the Company issued 4,577,500 shares to its Peter B. Day and
issued 2,432,500 to Dean Hiebert in consideration for intellectual property.
12
PART IV.
ITEM 13: EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
Included in Part II, Item 8 of this report:
Report of Independent Public Accountant
Balance Sheet as of September 30, 2002
Statements of Operations - Period January 30, 2001 (date of inception) to
September 30, 2001 and for the Year Ended September 30, 2002
Statement of Stockholders' Equity - Period from January 30, 2001 (date of
inception) to September 30, 2002
Statement of Cash Flows - Period January 30, 2001 (date of inception) to
September 30, 2001 and for the Year Ended September 30, 2002
Notes to the Financial Statements
(b) The following reports on Form 8-K were filed for the Company during the
year:
None
(c) The Company is not filing any exhibits.
SIGNATURES.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Item 9: Regulation FD Disclosure
In accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, our Chief Executive Officer and Chief Financial
Officer executed the following written statements which statements accompanied
the filing with the Securities and Exchange Commission of this Quarterly Report
on Form 10-KSB:
Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of The Sarbanes-Oxley Act of 2002
I, Peter B. Day, Chief Executive Officer and Chief Financial Officer of Endo
Networks, Inc. (the "Company"), certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
13
* the Company's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report") fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
* the information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company for
the periods presented therein.
Endo Networks, Inc.
Registrant
By: Peter B. Day
------------
Peter B. Day
Its: President and Chief Financial Officer
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MALONE & BAILEY, PLLC
CERTIFIED PUBLIC ACCOUNTANTS
5444 Westheimer, Suite 2080
Houston, Texas 77056
713-840-1210 Fax 713-840-9034
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors ENDO Networks, Inc. (formerly Discount Mortgage
Source, Inc.)
We have audited the accompanying balance sheet of ENDO Networks, Inc. as of
September 30, 2002 and the related statements of operations, stockholders'
equity, and cash flows for year ended September 30, 2002 and the period from
inception (January 30, 2001) through September 30, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that I plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of ENDO Networks, Inc.
as of September 30, 2002, and the results of operations and its cash flows for
the year ended September 30, 2002 and the period from inception (January 30,
2001) through September 30, 2001 in conformity with accounting principles
generally accepted in the United States.
/S/ MALONE & BAILEY, PLLC
-------------------------
MALONE & BAILEY, PLLC
HOUSTON, TEXAS
January 13, 2003
F-1
ENDO NETWORKS, INC.
BALANCE SHEET
September 30, 2002
ASSETS
------
CURRENT ASSETS:
Cash $18,903
Accounts receivable 69,771
Parts inventory 12,700
Prepaid expenses 50,705
------------------
Total current assets 152,079
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $125,339 422,670
------------------
TOTAL ASSETS $574,749
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Accounts payable $45,439
Accrued expenses 85,335
Capitalized leases - current 142,057
------------------
Total current liabilities 272,831
Capitalized leases - net of current portion 185,767
------------------
TOTAL LIABILITIES 458,598
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 50,000,000 authorized,
12,568,866 shares issued and outstanding 12,569
Subscriptions receivable (25,308)
Additional paid-in-capital 292,446
Accumulated deficit (163,556)
------------------
Total Stockholders' Equity 116,151
------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $574,749
==================
See accompanying summary of accounting policies and notes to consolidated
financial statements
F-2
ENDO NETWORKS, INC.
STATEMENTS OF OPERATIONS
For the Year Ended September 30, 2002, and
Period from Date of Inception (January 30, 2001) to September 30, 2001
Date of inception
Year (Jan 30, 2001)
ended to
Sept 30, 2002 Sept 30, 2001
------------------------------------
REVENUE $792,482 $98,531
COST OF REVENUES 379,328
------------------------------------
GROSS PROFIT 413,154 98,531
OPERATING EXPENSE:
Depreciation and amortization 135,042 36,057
General and administrative 437,899 66,243
------------------------------------
Total Operating Expense 572,941 102,300
------------------------------------
NET INCOME (LOSS) ($159,787) (3,769)
====================================
Weighted average shares outstanding 12,404,352 7,539,344
====================================
Loss per share - basic ($0.01) ($0.00)
====================================
See accompanying summary of accounting policies and notes to consolidated
financial statements
F-3
ENDO NETWORKS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY AND ACCUMULATED DEFICIT
Period from Date of Inception (January 30, 2001) to September 30, 2002
Common Common Subscriptions Paid In Accumulated
Shares Amount Receivable Capital Deficit
------------------------------------------------------------------------------------------
Balance, January 30, 2001
(date of inception) -0- $ -0- $ -0- $ -0- $ -0-
Shares issued for:
Assets 7,060,000 7,060 21,920
Cash 359,000 359 (19,980) 83,958
Services 1,472,666 1,473 8,556
Rent and expenses 500,000 500 2,447
Reverse acquisition with
Discount Mortgage Source,
Inc. - effective 9/30/2001 2,679,300 2,679 (2,679)
Net loss (3,769)
------------------------------------------------------------------------------------------
Balance, September 30, 2001 12,070,966 12,071 (19,980) 114,202 (3,769)
Shares issued for:
Cash 497,900 498 (5,328) 178,244
Net loss (159,787)
------------------------------------------------------------------------------------------
Balance, September 30, 2002 12,568,866 $12,569 ($25,308) $292,446 ($163,556)
==========================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements
F-4
ENDO NETWORKS, INC.
STATEMENT OF CASH FLOWS
For the Year Ended September 30, 2002, and
Period from Date of Inception (January 30, 2001) to September 30, 2001
Date of inception
Year (Jan 30, 2001)
ended to
Sept 30, 2002 Sept 30, 2001
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($159,787) ($3,769)
Adjustments to reconcile net loss to net
cash (used) by operating activities:
Depreciation and amortization 135,042 36,057
Stock issued for services 10,029
(Increase) in accounts receivable (58,335) (11,436)
(Increase) decrease in customer deposits 40,345 (40,345)
(Increase) in prepaid expenses 50,563 (142)
(Increase) in parts inventory (12,700)
Increase in accounts payable 20,241 25,198
Increase in accrued expenses 69,084 16,251
------------------------------------
NET CASH USED BY OPERATING ACTIVITIES: (16,763) 31,843
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of assets (282,815) (278,936)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 178,742 84,318
Subscriptions receivable (5,328) (19,980)
Proceeds from lease financing 262,962 198,099
Payments on lease financing (118,337) (14,992)
------------------------------------
Total cash flows from financing activities 318,039 247,445
------------------------------------
NET INCREASE IN CASH $18,551 $352
CASH, BEGINNING OF PERIOD 352 0
------------------------------------
CASH, END OF PERIOD $18,903 $352
====================================
Non-cash activities in period ended March 31, 2001
---------------------------------------------------
The Company issued 6,950,000 shares for assets in January 2001.
See accompanying summary of accounting policies and notes to consolidated
financial statements
F-5
ENDO NETWORKS, INC.
Notes to Financial Statements
September 30, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Endo Networks, Inc. (ENDO) is an interactive media, promotion, application, and
advertising aggregator deploying through wireless capable public access portals
to retail and restaurant locations across North America. Endo also develops
application software and client controlled media including television and radio.
Cash Equivalents
ENDO considers all highly liquid investment instruments purchased with original
maturities of three months or less when acquired to be cash equivalents.
Revenue Recognition
ENDO recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable and
collectibility is probable. ENDO recognizes revenue from the sale of advertising
related products and services like interactive advertising, studio promotion,
and event management as the services are performed. ENDO maintains allowances
for doubtful accounts on all its accounts receivable for estimated losses
resulting from the inability of its customers and others to make required
payments. If the financial condition of ENDO's customers and others were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation of furniture and
equipment is calculated on straight-line method over the estimated useful lives
of the assets
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. No
impairment losses have been recorded since inception.
F-6
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Income (loss) per Share
The basic net loss per common share is computed by dividing the net loss
applicable to common stockholders by the weighted average number of common
shares outstanding.
Diluted net loss per common share is computed by dividing the net loss
applicable to common stockholders, adjusted on an "as if converted" basis, by
the weighted average number of common shares outstanding plus potential dilutive
securities. For the year ended September 30, 2002 potential dilutive securities
had an anti-dilutive effect and were not included in the calculation of diluted
net loss per common share. These securities consisted of 220,000 options at
September 30, 2002. For the period from inception through September 30, 2001
there were no common stock equivalents outstanding.
Recently Issued Accounting Pronouncments
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on ENDO's results of operations,
financial position or cash flow.
Stock-Based Compensation
The Company accounts for stock-based compensation under the intrinsic value
method. Under this method, ENDO recognizes no compensation expense for stock
options granted when the number of underlying shares is known and exercise price
of the option is greater than or equal to the fair market value of the stock on
the date of grant.
Foreign Currency
ENDO has the U.S dollar designated as its functional currency. Financial
statements are remeasured to U.S. dollars for reporting purposes using current
rates of exchange for monetary assets and liabilities and historical rates of
exchange for nonmonetary assets and related elements of expense. Revenue and
other expense elements are remeasured at rates that approximate the rates in
effect on the transaction dates. Remeasured gains and losses are included in
general and administrative expense.
F-7
Software Capitalization
ENDO adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". In accordance with
this standard, certain direct development costs associated with internal-use
software are capitalized, including external direct costs of material and
services, and payroll costs for employees devoting time to the software
projects. These costs are amortized over a period not to exceed five years
beginning when the asset is substantially ready for use. Costs incurred during
the preliminary project stage, as well as maintenance and training costs, are
expensed as incurred.
NOTE B - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following as of September 30, 2002:
ESTIMATED
USEFUL
LIVES IN YEARS
----------------
Furniture and equipment 5 - 7 $ 438,301
Computer equipment and software 3 - 5 22,365
Intellectual property 2 26,523
Application development (software) 3 87,343
Less: accumulated depreciation and
amortization (151,862)
----------
$ 422,670
==========
Depreciation and amortization expense was $135,042 and $36,057 for the periods
ending September 30, 2002 and 2001, respectively.
NOTE C - LEASES
The Company leases equipment under long-term lease agreements. The leases
covering certain equipment, which expire over the next four years, are
classified as capital leases. Property and equipment includes equipment under
capital leases of $367,875, less accumulated depreciation of $80,545, at
September 30, 2002.
The future minimum lease payments for capital leases and for operating leases
(with initial or remaining noncancellable terms in excess of one year) as of
September 30, 2002 follow:
F-8
CAPITAL
YEARS ENDING LEASES
---------------
2003 $ 139,861
2004 133,464
2005 51,079
2006 3,419
Total minimum lease payments 327,824
Less amount representing executory costs (2,197)
---------------
Net minimum lease payments 325,627
Less amount representing interest (38,279)
---------------
Present value of net minimum
lease payments 287,348
Less current maturities (183,460)
---------------
$ 103,888
===============
The Company leases its office space for $2,000 per month on a month to month
basis. The Company had no operating leases for the years ended September 30,
2002 and 2001.
NOTE D - INCOME TAXES
The Company had net operating losses of $163,556 for the period from inception
(January 30, 2001) to September 30, 2002. No deferred tax asset has been
recognized for the operating loss as any valuation allowance would reduce the
benefit to zero.
Operating losses expire: 2021 $ 3,769
2022 $ 159,787
The Company has adopted the asset and liability method of accounting for income
taxes as required by SFAS No. 109. In accordance with SFAS No. 109, the Company
has recorded a valuation allowance equal to the deferred tax asset as a result
of ENDO's "going concern" opinion referred to in Note F and the uncertainty that
it will be realized.
The components of the provision (benefit) for income taxes included in the
financial statements as of September 30, 2001 are as follows:
Deferred tax assets: Sept 30, 2002
-------------
Net operating loss carryforwards $(163,556)
Valuation allowance 163,556
---------
Total deferred income tax assets -0-
Total deferred income tax liabilities -0-
---------
Net deferred income tax assets $ -0-
=========
F-9
NOTE E - STOCKHOLDERS' EQUITY
Common Stock:
The Company is authorized to issue 50,000,000 common shares of stock at a par
value of $0.001 per share. These shares have full voting rights. At September
30, 2002, there were 12,568,866 shares outstanding. The Company has not paid a
dividend to its shareholders.
Stock Options:
No compensation cost has been recognized for grants under the stock option plans
since all grants pursuant to these plans have been made at the current estimated
fair values of ENDO's common stock at the grant date. Had compensation cost of
ENDO's stock options been determined based on the fair value at the grant date
for awards in fiscal 2002, ENDO's pre-tax loss in fiscal 2002 would have been
increased by approximately $33,000.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in fiscal 2002: zero dividend yield, expected
volatility of 100%; risk-free interest rate of 4.0% and expected lives of 2
years.
The options granted have an exercise price of $.50 per share and vest at the
date of issuance. The maximum term of the options is two years.
The following table summarizes stock option activity:
Outstanding, October 1, 2001 -
Granted 220,000
Canceled or expired -
Exercised -
----------
Outstanding, September 30, 2002 220,000
==========
Exercisable at September 30, 2002 220,000
==========
Weighted-average grant-date fair value of
options, granted during the year $ .15
Weighted-average remaining, years of
contractual life 1
==========
NOTE F - CONCENTRATIONS OF CREDIT RISK
As of September 30, 2002, amounts due from three customers amounted to 68% of
total trade accounts receivable.
One customer accounted for 29% and 60% of total revenues for the year ended
September 30, 2002 and for the period from inception through September 30, 2001,
respectively.
F-10