-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SKFNQSF3ZDiHHfNxCIYcIc0JmIZu6+7aFHgEZC4GecTB6ZvuAfB+oZi+9LOlMfmm rM+mO/BcJO0up4HTJC24Aw== 0000950147-00-000403.txt : 20000316 0000950147-00-000403.hdr.sgml : 20000316 ACCESSION NUMBER: 0000950147-00-000403 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL FIBERCOM INC CENTRAL INDEX KEY: 0000924632 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 860271282 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13278 FILM NUMBER: 570841 BUSINESS ADDRESS: STREET 1: 3410 E UNIVERSITY STREET 2: SUITE 180 CITY: PHOENIX STATE: AZ ZIP: 85034 BUSINESS PHONE: 6029411900 MAIL ADDRESS: STREET 1: 3410 E UNIVERSITY STREET 2: SUITE 180 CITY: PHOENIX STATE: AZ ZIP: 85034 10-K405 1 REPORT DATED 12/31/99 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File No. 1-9690 INTERNATIONAL FIBERCOM, INC. ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Arizona 86-0271282 ------------------------ --------------------------------- (State of Incorporation) (IRS Employer Identification No.) 3410 E. University Drive, Ste. 180 Phoenix, Arizona 85034 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (602) 387-4000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act : Common Stock, no par value Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. Yes [X] No [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant based on the average of the high and low prices of the Registrant's Common Stock on the Nasdaq National Market on March 10, 2000 was approximately $873,796,638. This is not necessarily a conclusive determination for other purposes. As of March 10, 2000, the Registrant had 30,457,994 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement Relating to the 2000 Annual Meeting of Stockholders are incorporated by reference. The following statement is made pursuant to the safe harbor provisions for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. International FiberCom, Inc. and subsidiaries ("International FiberCom, Inc." or the "Company") may make certain statements in this Annual Report on Form 10-K. Some statements contained in this Annual Report, including, without limitation, statements that contain the words "believes," "anticipates," "estimates," "expects," and words of similar import, constitute "forward-looking statements." Forward-looking statements may related to our future growth and profitability, our competitive strengths and business strategies. Further, forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions relating to our operations, financial condition and results of operations, including rapid technological and regulatory changes in the industries we serve, the financial resources of our customers, our numerous competitors and the relatively few barriers to entry for potential competitors, the short-term nature of many of our contracts, the quarterly variations we experience in our revenue, our uncertain revenue growth, our ability to attract and retain qualified personnel, our ability to expand our infrastructure and manage our growth, our ability to identify, finance, complete and then integrate our acquisitions, and the restrictions imposed by our credit facility, among others. If any of these risks or uncertainties materialize, or if any of the underlying assumptions prove incorrect, actual results could differ materially from results expressed or implied in any of our forward-looking statements. The foregoing and other risks faced by us described in the Cautionary Factors section beginning on page 13, among others, are detailed in this Annual Report and in other documents filed by us with the Securities and Exchange Commission. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances. PART I ITEM 1. DESCRIPTION OF BUSINESS SUMMARY OF OUR BUSINESS Unless the context requires otherwise, all references to "we," "our" or "us" refer to International FiberCom, Inc., a corporation originally incorporated in the state of Arizona in 1972 and its 16 subsidiaries. We are an end-to-end solutions provider serving telecommunications industry. We deliver a broad range of solutions designed to enable, enhance and support voice, data and video communications through wired, wireless, internal and external networks. In delivering these solutions, we design, develop, install and maintain internal and external networks that support Internet-related applications and other communications for our customers. Our services range from the design, development and installation of fiber-optic networks to wireless connectivity solutions. Our products range from proprietary wireless communications equipment to new, deinstalled and refurbished communications equipment from a variety of manufacturers. We have grown significantly over the past five years as a result of consistent internal growth and strategic acquisitions. Consolidated revenues over the past five years have grown at an average annual rate of 98%. See Selected Financial Information and Note 11 - Segment Information in the accompanying consolidated financial statements for additional financial information. We deliver our products and services through three operating groups: * INFRASTRUCTURE DEVELOPMENT GROUP provides specialty design and engineering services, installation and maintenance of underground and aerial fiber optic, copper and broadband, as well as wireless, communications systems, and integrated local and wide area networks; -2- * WIRELESS TECHNOLOGIES GROUP designs, manufactures and installs proprietary wireless connectivity solutions designed to enable and enhance wireless communications, in both fixed and mobile applications; and * EQUIPMENT DISTRIBUTION GROUP sells new, deinstalled and refurbished communications equipment from a variety of manufacturers. This equipment is used in the digital access, switching and transport systems of communications service providers and other Fortune 500 companies. Our customers include a number of the largest and most prominent companies in the telecommunications and other industries, such as * incumbent local exchange carriers, * competitive local exchange carriers, * cable television operators * long distance carriers, * wireless phone companies, * telecommunications equipment vendors, * co-location facilities providers, and * other Fortune 500 and privately held companies. Our representative customers are: Ameritech GTE Pacific Telesis AT&T Corp. Level 3 Communications PF.NET Bell Atlantic Lucent Technologies The Red Cross CableVision MCI/WorldCom Sprint Charter Cable, Inc Media One Southwestern Bell Comcast Motorola U.S. General Services Cox Communications Next Link Administration Federal Express Nike U.S. West Fluor Daniels Nortel Time Warner, Inc. Gambro Healthcare For our year ended 1999, no customer accounted for more than 10% of our revenues, even though we often provide services to a single customer in multiple geographic locations through one or more of our operating groups. Our top ten customers represented 44% of our revenues in fiscal 1999 and included AT&T, CableVision, Cox Communications, Level 3 Communications, Next Link and TimeWarner. -3- INDUSTRY OVERVIEW We believe that several notable industry trends will continue to cause a significant increase in the demand for our services and products over the next several years. THE DEMAND FOR BANDWIDTH Bandwidth is the ability to transmit digital data through networks. The need for additional bandwidth has arisen from the increased growth in a number of areas: telecommunications, voice, video and data traffic, electronic commerce, transmission of high quality information, entertainment and other content over the Internet, and use of and reliance on personal computers, including for private network computing. Fiber-optics technology IS the most frequently used in new systems being designed to handle data traffic. The development of Internet based networks has also heightened the need for seamless transmission of packeted digital data over longer distances on fiber optic based networks. In response to the consumer demand for additional bandwidth, the nation's telecommunications and cable television system operators are upgrading their facilities with new technology, expanding, and in many instances, replacing their existing telecommunications infrastructure to allow for increased bandwidth capable of moving vast amounts of digital data. Major companies, including AT&T, Time Warner, Charter Cable, Inc., CableVision, and Cox Communications, all of whom are our customers, have announced major capital expenditure programs to upgrade their networks or convert their existing networks to broadband, fiber-optic based systems. Further, other new competitors of existing telecommunications and cable television companies, often referred to as competitive local exchange carriers, or "CLECs," are building extensive, high capacity local and long distance fiber optic based networks to transport digital data. THE NEED TO COVER THE "LAST MILE:" CONVERGENCE OF BROADBAND AND WIRELESS TECHNOLOGY Increasing bandwidth requires advances in technology and deployment of technology. In order for the "information superhighway" to become available on a widespread basis it will have to be simple, efficient easy to use and offered at a relatively low cost. To achieve this objective a number of alternative, and possibly complementary, technologies are being examined. The companies striving to provide more bandwidth have used wireless technology for the Internet and other applications along with and in addition to fiber-optic technology. The Internet will have to move and manipulate vast quantities of data over long distances and it will also have to provide residences and businesses with reliable access to it. Making this final connection to residences and businesses is often referred to as the "last mile." Existing copper networks and cable will play a significant role in this last connection. However, neither copper nor wireless systems can currently seamlessly connect to digital telecommunications networks without the advent of new technology. It may be that wireless technology will become the most efficient, cost effective answer to this problem. We intend to allocate significant research and development resources with the goal of developing our own proprietary technology and solutions to these connectivity issues in particular and to digital wireless and fiber-optic telecommunications systems problems in general. THE TREND TOWARD OUTSOURCING OF INFRASTRUCTURE NEEDS In the current environment where voice, video and data transmission services are converging, telecommunication service providers are bundling services that they once offered separately, and doing so in new geographic markets. Because of consolidation, deregulation and the competitive market forces at work in the telecommunications industry, companies have become integrated and geographically diverse. They are focusing on broadening the scope -4- of their core businesses in providing telecommunications services. As a result, they are turning with increasing frequency to specialists to outsource their infrastructure needs. INCREASED DEMAND FOR COMPREHENSIVE SOLUTIONS Increased competition and the resulting increase in investment in infrastructure and content by telecommunications and other service providers have led to greater concerns about the quality and reliability of infrastructure providers. We believe that our customers increasingly are seeking comprehensive end-to-end solutions to their infrastructure needs by turning to fewer qualified infrastructure service providers who have the size, financial capability and technical expertise to deliver a quality and reliable network on time. These customers are seeking service providers that can build large and complex networks quickly, with a high level of quality and who can rapidly mobilize their capital equipment, financial assets and personnel to respond effectively to the increasing scale and time constraints of customer demands. THE INCREASED DEMAND FOR INTERNAL COMMUNICATIONS SYSTEMS In a relatively short period, computer networks have evolved from simple connections between desktop workstations to complex links between multiple computer servers, work stations, mainframe computers and peripheral devices. The shift from a computer room housing one large, shared, mainframe system to personal computer-based networks has changed the emphasis from the processor to network architecture. Increases in an organization's informational productivity are now dependant on its network's ability to process multiple tasks - voice mail, e-mail, telephony, accounting, word processing and operational reporting - simultaneously and transport this data wherever it is needed. Systems integration is the design, installation and maintenance of these complicated local area networks ("LANs") and multi-locational wide area networks ("WANs"). A WAN is simply multiple lans connected through an existing telecommunications carrier or connected with proprietary cable, fiber or some other medium, such as infrared or other wireless. The backbone of any LAN is cable. In many systems, this backbone is fiber-optic cable along with network hardware and software and the related data delivery system, rather than the workstations connected to the system. This backbone is referred to as a "structured cabling system." Such systems are designed to be adaptable and provide sufficient capacity for multiple applications, including both voice and data transmission. INCREASED DEMAND FOR SECONDARY EQUIPMENT While the need to rebuild traditional telecommunications networks increases, the existing networks operated by local and long distance exchange carriers still operate and require maintenance. Original equipment manufacturers ("OEMs") continue to roll out new products with new features. These new products are costly and often incompatible with older technology, making replacement decisions difficult. Therefore, older technology continues to be employed domestically and internationally. The secondary equipment market gives end users alternatives to large capital investments in more costly new technology in cases where such investments are not economically feasible. The secondary market also gives end users access to replacement parts for existing systems for which the OEMs have discontinued lines and no longer provide product support. Our equipment distribution companies provide new OEM product lines, provide replacement parts and equipment from the secondary market and provide value added, fully assembled systems designed to add immediate capacity to an existing switching system. COMPETITIVE STRENGTHS We have pursued a strategic plan to grow internally and through accretive acquisitions to enable us to become an end-to-end solutions provider and to be able to develop proprietary wireless technologies and services to our customers. -5- The progress we have made in this plan has enabled us to capitalize on the foregoing industry trends and has resulted in the following competitive strengths: END-TO-END SOLUTIONS PROVIDER We believe we are one of the few infrastructure providers capable of providing all of the design, building, installation and maintenance services necessary for a complete telecommunications network starting from a transmission point, such as a telephone company central office or cable television head-end, and running through aerial, underground and buried cables or through wireless transmission to the ultimate end users' voice and data ports, computer terminals, cable outlets or cellular stations. TECHNICAL EXPERTISE AND RELIABLE CUSTOMER SERVICE We believe that we have established a reputation for quality and reliability, technical expertise and operating and financial efficiency. We believe that our reputation among our customers should give us an advantage in securing larger, more technically complex infrastructure projects, and a greater volume of business from our existing and new customers. WIRELESS TECHNOLOGIES AND EXPERTISE We can provide our customers with proprietary wireless connectivity solutions designed to enable and enhance wireless communications in both fixed and mobile applications. Through our team of design engineers and technology professionals, we are dedicating significant resources to research and development efforts aimed at continuing the development of solutions related to transmission and connectivity issues impacting cellular, PCS, radio and other two-way mobile communication systems. To date, we have four patents pending on products designed to improve signal clarity and to enable wireless communications in environments where wireless communication has historically not been technologically feasible. We have successfully deployed our technology solutions for customers across North America and we believe there are significant global opportunities for our product and services. AGILE FOOTPRINT We have developed an agile footprint for the services we provide. Our design, engineering and technology solutions capabilities can be deployed quickly to respond to new market opportunities, either from a specific customer or from growing demand in emerging markets. Additionally, because we provide services to customers in the telecommunications, broadband and wireless industries, we are technology neutral. These operating characteristics give us the ability to capitalize on the wide range of technological advances and other market developments that drive capital spending by our customers and to help reduce the risk of being dependent on a single geographic region or technology platform for our success. We believe that our agile footprint has helped us to attract our diverse and growing customer base, especially from the larger companies in the telecommunications industry, and that it makes us less susceptible to downturns in any particular geographic region or industry sector. INCREASING NATIONAL SCOPE AND NAME RECOGNITION We have significantly broadened our geographic presence in recent years and believe we are capable of servicing customers across the United States. We are continuing to develop the brand name "International Fibercom" across all of our operating units, with the goal of eventually achieving national branding of our name within our marketplace and further establishing us as an integrated, national company. -6- EXPERIENCED MANAGEMENT We have a strong management team to continue executing our growth strategy. During 1999 we added depth to our senior and middle management in response to the rapid growth in the size and scope of our projects. We believe that our management team has the operational, business development and financial knowledge and experience to anticipate trends in our industry and to consistently meet and exceed our clients' expectations for comprehensive and reliable solutions. BUSINESS STRATEGY Our objectives are to continue to: (i) improve and strengthen our human and financial resources in order to enhance our ability to provide end-to-end solutions for the networks supporting voice, data and video, the Internet and other communications needs of our customers; (ii) perform more integrated services for our existing customers and expand our customer base on a national level; and (iii) continue to pursue the development of proprietary wireless technologies and solutions for our customers. EXPAND EXISTING CUSTOMER RELATIONSHIPS AND PURSUE NEW CUSTOMERS We believe that our customers increasingly are seeking single national vendors to provide all of their telecommunications and energy infrastructure services needs. Consequently, we actively market our national scope, agile footprint and comprehensive service offerings to our existing and potential customers. Further, we focus on increasing the range of services we provide. We also, when necessary, team with engineering firms, equipment suppliers and other vendors to provide turnkey services to our customers. CONTINUE TO ACHIEVE OPERATING EFFICIENCIES We intend to continue to improve our profitability by focusing on ways to achieve costs savings, economies of scale and improved asset and personnel utilization. We have realigned our operations to maximize our opportunities to provide comprehensive solutions to our customers and instituted a program to improve efficiency and productivity by leveraging existing administrative personnel to support increased growth. We also intend to further develop and expand the use of integrated management information systems across our service lines to facilitate financial control, project costing and asset allocation. The goal of the program is to realize savings in overhead and other expenses and thereby improve operating margins and profitability. An element of the program includes paying our division presidents and other managers incentive compensation based upon performance. PURSUE SELECTED ACQUISITIONS Through selected acquisitions, we continue to add customers and capabilities as well as expand our geographic coverage. We have completed ten acquisitions in the United States in the last two years, targeting selected companies to expand into customer and geographic markets we did not currently serve and to expand the range and depth of services we provided. We will continue to focus our acquisition efforts on profitable companies with good reputations and strong management. We are not currently engaged in any negotiations to make any material acquisitions. -7- OUR SERVICES AND PRODUCTS We are an end-to-end solutions provider serving the communications industry. Our services range from design, development and installation of fiber optic networks to wireless connectivity solutions. Our products range from proprietary wireless communications equipment to new, deinstalled and refurbished communications equipment from a variety of manufacturers. These services and products are provided through three operating groups: Infrastructure Development, Wireless Technologies and Equipment Distribution. INFRASTRUCTURE DEVELOPMENT GROUP The Infrastructure Development Group provides three general types of services: engineering and external and internal communications services. We provide these services as individual components, as a combination, or a full turnkey solution. The Infrastructure Development Group maintains a presence in the Western, Southwestern, Southern and Southeastern regions of the United States. ENGINEERING SERVICES. We specialize in design and consulting in connection with major broadband, fiber-optic networks. Design work includes hybrid fiber-optic/coaxial cable broadband distribution networks for telecommunications and cable television companies using computer automated design and geographic conformation software. We also offer "land based development," a service which includes mapping, verification and documentation of existing network installations. This service frequently requires conversion of existing documentation into a database-oriented system using geographic information software. These platforms allow network operators an efficient and effective way to relate customer base, demographics and existing networks and equipment in a single system. For new or planned networks, we provide construction oversight, existing network evaluation, broadband system and design, network plant testing and training. After completion of our services, we inventory planning and project support team records of the information necessary to plan, design, market and manage a broadband network. EXTERNAL COMMUNICATIONS. We design, build, install and maintain the physical facilities used to provide end-to-end telecommunications service from the central office of the switching center or cable head-end to the home or business. Our services include: * placing and splicing fiber optic, coaxial and copper cable; * excavating trenches in which to place the cable; * installing related structures, such as poles, anchors, conduits, manholes, cabinets and closures; * placing drop lines from the main distribution terminals to the home or business; and * maintaining, removing and replacing these facilities. We also provide route development, right of way and other site acquisition, permitting, materials procurement, acceptance testing and as-built documentation. We bundle our services in order to better provide end-to-end solutions to our customers as follows: * INTER-EXCHANGE NETWORKS. We design, engineer and build fiber optic and other cable networks between metropolitan areas using specialty equipment such as trenchers, plows and directional borers. -8- * LOCAL EXCHANGE NETWORKS. We design, install, build and maintain telecommunications networks from the provider's point-of-presence to its customers' locations within metropolitan areas (local loop). * BROADBAND NETWORKS. We design, engineer, build and install the infrastructure for network rebuilds, upgrades and maintenance for cable television multiple system operators. * WIRELESS NETWORKS. We provide installation and maintenance services to the wireless communications industry, including the building of communication towers, placement of antennas and associated wiring, and installation of transmission equipment and shelters. INTERNAL COMMUNICATION SERVICES. We provide services consisting of the design, installation, testing and documentation of switching and transmission equipment and supporting components at a provider's point- of-presence (central office) locations. We also design, install and maintain integrated voice, data and video networks inside customer premises along with the infrastructure required to support complex intranet and Internet solutions. Our systems integration services involve the selection, configuration, installation and maintenance of software, hardware, other computing and communications equipment and cabling to provide an integrated computing and communications system. We also provide e-commerce and website development consulting services. Our internal communication services are less capital intensive than external communication services, but they require more technically skilled personnel. EQUIPMENT DISTRIBUTION GROUP This Group provides telecommunications carriers with a broad range of infrastructure equipment and related services designed to meet their specific and changing equipment needs. We offer our customers a unique combination of new, deinstalled and refurbished equipment from a variety of manufacturers, allowing them to make multi-vendor purchases from a single, cost-effective source. We supply the equipment in the form of piece parts, complete central office switches or line-extensions. The equipment includes digital access, switching and transport equipment. Digital access systems are line systems between a telecommunication company's central office and each customer. A switching system effects call connection and routing. Transport systems include products that carry signals throughout the network. To further serve our customer's needs, we offer value-added services, including: central office installation/deinstallation services, system testing; asset verification; warehousing; and inventory disposition services. We have three distribution points located in Virginia and Florida from which both the domestic and international markets can be served. We maintain extensive quantities of owned and consigned inventory and maintain an industry standard ISO 9000 Quality Control Certification. We inventory and sell equipment produced by a number of prominent companies, including AT&T, Lucent Technologies, Nortel, Tellabs, DSC, Alcatel, Fujitsu and ADC. We are a factory authorized value added re-seller of Lucent Technologies. WIRELESS TECHNOLOGIES GROUP This Group designs, manufactures and installs proprietary wireless connectivity solutions designed to enable and enhance wireless communications in both fixed and mobile applications. Through our team of design engineers and technology professionals, we are dedicating significant resources to research and development efforts aimed at continuing the development of solutions related to transmission and connectivity issues impacting cellular, PCS, radio and other two-way mobile communication systems. To date, we have four patents pending on products designed to improve signal clarity and to enable wireless communications in environments where wireless communication has historically not been technologically feasible. We have successfully deployed our technology solutions for customers across North America. -9- OUR CUSTOMERS As an end-to-end solutions provider, we often deliver our services to a single customer in multiple geographic locations through one or more operating segments. While no single customer accounted for more than 10% of revenues in 1999, our top ten customers represented 44% of revenues and included AT&T, Cablevision, Cox Communications, Level 3 Communications, Next Link and Time Warner. CONTRACTS Under a typical infrastructure development contract, we supply the expertise, equipment and labor and the customer supplies nearly all materials, such as the fiber-optic cable and conduit. The work is generally performed under fixed unit prices and we usually receive payment on contracts within 30 to 60 days of invoicing. Accordingly, we must finance receivables and work-in-progress during that period. Under a typical systems integration installation contract, we supply the expertise, equipment, labor and materials. Internal communication services are performed under both time and material and fixed price arrangements. Engineering services are performed under a variety of contracts, purchase orders, standing relationships and working arrangements. We have entered into master contracts of indefinite term with major systems operators for the services specified in such contracts. Specific projects are undertaken under these contracts in response to purchase orders, change orders, revised standards and work orders. We also perform services for certain long-standing clients under work orders without governing master contracts. In general, contracts and work orders are terminable or expandable at will by our customers consistent with the customer's network requirements. We have also entered into continuing "strategic alliances" with equipment vendors under which we are recommended or specified to equipment customers as the system design vendor. SALES AND MARKETING As part of our marketing plan, we are now emphasizing the "International FiberCom" name, with the objective of achieving nationwide name recognition within our industry. In addition, our marketing plan is to position ourselves in the telecommunications and Internet related marketplace as a seamless, end-to-end solutions provider. The management of our various service groups is carrying out local marketing efforts and executive management is supplementing their efforts on a corporate-wide basis. Our regional division presidents market to existing and potential telecommunications customers, negotiate new contracts and seek to be placed on lists of vendors invited to submit bids for master services agreements and individual projects. They are responsible for developing and maintaining productive, long-term relationships with our customers. We believe that this local orientation, with support from our headquarters, helps to gain repeat business and enter new markets. We are also finding that because we have performed well in one region, our customers are asking us to assist them in other locales that they are entering or where they already have a presence. COMPETITION The market for the products and services we offer is highly competitive and requires substantial resources and skilled and experienced personnel. We compete with other independent contractors and equipment re-sellers in most of the markets in which we operate, several of which are large domestic companies, some of which may have greater financial, technical, and marketing resources. In addition, there are relatively few, if any, barriers to entry into the markets in which we operate. As a result, any organization that has adequate financial resources and access to technical, expertise may become a competitor. A significant percentage of our revenues are currently derived from fewer than ten customers and price is often an important factor in the award of such underlying contracts. Accordingly, we could be outbid by our competitors in an effort to -10- procure such recurring or ongoing work. There can be no assurance that our competitors will not develop the expertise, experience and resources to provide services that are equal or better in terms of price and quality to our services, or that we will be able to maintain or enhance our competitive position. We may also face competition from the in-house service organizations of our existing or prospective customers, including telecommunications providers employing personnel who perform some of the same types of services we deliver. Although a significant portion of these services are currently outsourced, there can be no assurance that existing or prospective customers of the company will continue to outsource telecommunications engineering, infrastructure development and maintenance services in the future. We believe that the principal competitive factors in the market include technical expertise, reputation, price, quality of service, availability of skilled technical personnel, geographic presence, breadth of service offerings, adherence to industry standards and financial stability. We believe that we compete favorably with our competitors on the basis of these factors. LICENSES The Company and its subsidiaries, through various officers, holds licenses in certain jurisdictions requiring general and specialty contractor licenses, including California, Nevada, Arizona, Tennessee, Colorado, Texas and Florida. We are also registered in the State of Georgia to provide engineering services and we employ a licensed Georgia Professional Engineer who has public health and safety compliance responsibilities for all of our design operations. INSURANCE AND BONDS We maintain liability insurance policies for claims arising from our business. These policies have limits ranging from $1.0 million to $6.0 million in the aggregate and insure against both property damage and personal injury. The policies are written on an "occurrence" basis, which provides coverage for insured risks that occur during the policy period irrespective of when a claim is made. Higher policy limits are sometimes purchased for individual projects when contractually required. We also maintain umbrella policies with aggregate and occurrence limits of up to $10.0 million. We have performance and payment bonding capability of $200 million, total program, and $50 million, single job. Bonding capacity may be larger upon specific requirement. BACKLOG ORDERS AND WORK-IN-PROGRESS We had a backlog of approximately $142.9 million and $27 million, on a work in process basis, as of December 31, 1999 and 1998, respectively. All related work orders are expected to be completed by June 2001. In addition, at December 31, 1999, signed but unstarted backlog was approximately $34.5 million. SUPPLIERS We do not depend upon any single supplier. Because we have multiple sources of supply, we have not experienced difficulties in obtaining adequate sources of supply and adequate alternatives to satisfy our customers. We do not have formal purchase contracts for our supplies, but instead we generally purchase such items under individual purchase orders. EMPLOYEES As of December 31, 1999 we had approximately 1,600 full-time employees, including our seven executive officers and 725 engineers and technicians. We believe that our employee relations are good. -11- WARRANTIES We give warranties for workmanship on the services we provide. Warranties generally range from one to two years, but have been as high as twenty years for certain systems integration projects. From a practical standpoint, any warranty issues are generally identified during the testing and acceptance of the system installed. While most of the equipment sold by the Equipment Distribution Group is under warranty from the original manufacturer, we typically provide a one-year warranty on all equipment sold to telecommunications companies and six-months on equipment sold to resellers. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS RISKS RELATING TO OUR INDUSTRY AND THE INDUSTRIES WE SERVE THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL AND REGULATORY CHANGES THAT COULD REDUCE THE DEMAND FOR OUR SERVICES We derive and anticipate that we will continue to derive a substantial portion of our revenue from customers in the telecommunications industry. Our revenues and net income depend primarily on capital spending by telecommunications companies and others for constructing, rebuilding, maintaining or upgrading their telecommunications networks and for constructing completely new systems. Our services and products are subject to significant technological change and innovation. Technological developments are occurring rapidly in the telecommunications industry and, while the effects of such developments are uncertain, they may have a material adverse effect on the demand for our services. For example, wireline systems used for transmission of video, voice and data face potential displacement by various technologies, including wireless technologies. This could require a significant shift in our resources from wireline to wireless services. Also, the demand for our services could be adversely affected if alternative technologies are developed and implemented that enable telecommunications providers or other organizations to provide enhanced telecommunications services without physically upgrading their networks. Finally, the telecommunications industry has been characterized by a high level of consolidation that may result in the loss of one or more customers. THE VOLUME OF WORK WE RECEIVE FROM OUR CUSTOMERS IS DEPENDENT ON THEIR FINANCIAL RESOURCES AND ABILITY TO OBTAIN CAPITAL The volume of work awarded under contracts with certain of our telecommunication customers is subject to periodic appropriations during each contract's term. If one of our customers fails to receive sufficient capital appropriations, that customer could reduce the volume of work that it awards to us or delay its payments to us. These outcomes could reduce the demand for the services we provide. In addition, a number of other factors, including financing conditions in the industry, could adversely affect our customers and their ability or willingness to fund capital expenditures in the future. These factors could also reduce the demand for the services we provide. Such factors include the amount of capital spending by telecommunications companies and cable operators, our customers' access to financing, general economic conditions, government regulation of cable operators, demand for telecommunications and cable services and technological developments in the telecommunications industry. -12- THE TELECOMMUNICATIONS SERVICE INDUSTRY IS HIGHLY COMPETITIVE AND POTENTIAL COMPETITORS FACE FEW BARRIERS TO ENTRY. OUR INABILITY TO COMPETE SUCCESSFULLY COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS The industries in which we operate are highly competitive and we compete with other companies in most of the markets in which we operate on a national, regional and local basis. We may also face competition from existing or prospective customers who employ in-house personnel to perform some of the same types of services as we provide. Many of our competitors or potential competitors are substantially larger and have greater resources. In addition, because of the convergence of the telecommunications, cable television and computer industries and rapid technological development, new competitors may seek to enter the market. There are relatively few significant barriers to enter into the markets in which we operate, and as a result, any organization that has adequate financial resources and access to technical expertise may become one of our competitors. MANY OF OUR CONTRACTS MAY BE CANCELED ON SHORT NOTICE, AND WE MAY BE UNSUCCESSFUL IN REPLACING OUR CONTRACTS AS THEY ARE COMPLETED OR EXPIRE We could experience a material adverse effect on our revenue, net income and liquidity if: * our customers cancel a significant number of contracts, * we fail to win a significant number of our existing contracts upon re-bid; or * we complete the required work under a significant number of our non-recurring projects and cannot replace them with similar projects. Many of our customers may cancel our long-term contracts with them on short notice, typically 60 to 90 days, even if we are not in default under the contract. As a result, these contracts do not give us the assurances that long-term contracts typically provide. Many of our contracts, including our master service contracts, are subject to open bid at the expiration of their terms and price is often an important factor in the award of these agreements. We cannot assure you that we will be the successful bidder on our existing contracts that come up for bid. We also provide a significant portion of our services on a non-recurring, project-by-project basis. OUR MASTER SERVICE CONTRACTS SUBJECT US UNCERTAIN REVENUE GROWTH We currently derive a significant portion of our revenue from our master services contracts. A significant decline in the work our customers assign us under our master services contracts could materially and adversely affect our revenue and net income. Under our master services contracts, we may be one of several companies that perform services for the customer, and our customers have no obligations under our master services contracts to undertake any infrastructure projects or other work with us. -13- RISKS RELATING TO OUR COMPANY AND OUR BUSINESS OUR BUSINESS IS LABOR INTENSIVE, AND IF WE CANNOT ATTRACT AND RETAIN QUALIFIED EMPLOYEES WE MAY NOT BE ABLE TO IMPLEMENT OUR GROWTH STRATEGY Labor shortages or increased labor costs could have a material adverse effect on our ability to implement our growth strategy and our operations. Our business is labor intensive, and many of our operations experience a high rate of employee turnover. The low unemployment rate in the United States has made it more difficult for us to find qualified personnel at low cost in some areas where we operate. As we offer new services and pursue new markets we will also need to increase our executive and support personnel. We can offer no assurances that we will be able to continue to hire and retain a sufficient skilled labor force necessary to operate efficiently and to support our growth strategy or that our labor expenses will not increase as a result of a shortage in the supply of skilled personnel. IF WE ARE UNABLE TO EXPAND OUR INFRASTRUCTURE WE WILL NOT BE SUCCESSFUL IN MANAGING OUR RAPID GROWTH To manage our growth effectively, we will need to continuously enhance our information systems and our operational and financial systems and controls. Our anticipated growth could significantly strain our operational infrastructure and financial resources. Our growth plan may be adversely affected if we are unable to expand and continuously improve our operational infrastructure. SPECIAL RISKS OF ACQUISITIONS Acquisitions involve a number of special risks, some of which include: * the time associated with identifying and evaluating acquisition candidates; * the diversion of management's attention by the need to integrate the operations and personnel of the acquired companies into our own business and corporate culture; * the assimilation of acquired products, services and operations into our existing products, services and operations; * possible adverse short-term effects on our operating results; * the future operating results of the acquisition, including the expansion of its business, retention and growth of its customer base and the demand for its products, technologies or services; * the realization of acquired intangible assets; and * the loss of key employees of the acquired companies. COMPETITION FOR ACQUISITION CANDIDATES In addition to these risks, we believe that we will see increased competition for attractive acquisition candidates in the future. Increased competition for candidates could increase the cost of acquisitions and reduce the number of attractive candidates. We cannot assure you that we will be able to identify additional suitable acquisition candidates, consummate or finance any such acquisitions. Although we are not currently a party to any agreement, understanding or arrangement regarding any material acquisition, we are always evaluating potential acquisition prospects. -14- IF WE DO NOT MANAGE OUR GROWTH EFFECTIVELY IT COULD ADVERSELY AFFECT OUR RESULTS We are currently experiencing a period of rapid growth that has placed significant demands on our resources. Our success in managing this growth will require us to continue to improve our operational, financial and management information systems, and to motivate and effectively manage our employees. If our management is unable to manage growth effectively, to maintain the quality of our products and services and to retain key personnel, our business, financial condition and results of operations could be materially adversely affected. DEPENDENCE UPON KEY PERSONNEL We are dependent on the services of our principal executive officers. We have entered into a multi-year employment agreements with these individuals. As we acquire companies we entered into consulting or employment agreements with their key executives to continue to operate the companies. We must compete with much larger companies that have significantly greater resources to attract and retain personnel. We cannot assure you that we will be successful in this regard or, if successful, that the services of such personnel can be secured on terms deemed favorable to us. The loss of the services of any of our key executives or our inability to attract other qualified employees could materially and adversely affect our business and operations. IMPACT OF STATE REGULATION Our ability to pursue our business activities is regulated, directly or indirectly, by various agencies and departments of state governments. Licenses from public utilities commissions are frequently required prior to the commencement of services by us and our clients. There can be no assurance that we or our customers will be successful in our or their efforts to obtain necessary licenses or regulatory approvals. Our inability or the inability of any of our customers to secure any necessary licenses or approvals could have a material adverse effect on our business. In addition to specific regulations, we are subject to all federal, state and local rules and regulations imposed upon businesses generally. The cost of compliance with regulations is an additional cost of doing business for us. DEPENDENCE UPON MAJOR CUSTOMERS AND LARGE CONTRACTS Certain of our customers accounted for more than 5% of our revenues during the last year. Any decision by these major customers to cease or reduce their use of our services may have a material adverse effect on our business. A number of our contracts are substantial in size. The failure to timely or adequately replace a large contract upon its completion or termination of one or more new contracts or loss of one or more significant customers may materially adversely affect our business and operations. RISKS OF POSSIBLE COST ESCALATION UNDER FIXED PRICE CONTRACTS On an historical basis a substantial portion of our revenues have been generated principally under firm fixed-price contracts. Fixed-price contracts carry certain inherent risks, including underestimating costs, problems with new technologies and economic and other changes that may occur over the contract period. We recognize revenues using the percentage-of-completion method. Under this method revenue is recognized based on actual costs incurred in relation to total estimated costs to complete the contract. This method may result in irregular and uneven quarterly results. Unforeseen events and circumstances can -15- alter our estimate of the costs and potential profit associated with a particular contract. To the extent that original cost estimates are modified, estimated costs to complete increase, delivery schedules are delayed, or progress under a contract is otherwise impeded, cash flow, revenue recognition and profitability from a particular contract may be adversely affected. INSURANCE AND POTENTIAL EXCESS LIABILITY We maintain liability insurance to protect against damages to persons or property that may result from our work. If we were to incur liability in excess of our policy coverage, our financial condition could be adversely affected. ARIZONA ANTI-TAKEOVER STATUTE The Arizona Corporate Takeover Act ("Takeover Act") was adopted in 1987. The policy of the Takeover Act is to prevent unfriendly corporate takeover attempts by third parties. The Takeover Act prohibits certain types of transactions, including "green mail," limits voting rights of certain individuals acquiring shares in the market and regulates certain business combinations respecting corporate transactions proposed by insiders and as part of a takeover plan. We are subject to the foregoing provisions. The Takeover Act enhances the possibility that a potential bidder for our control will be required to act through arm's-length negotiation with respect to a major transaction, such as a merger, consolidation or purchase of substantially all of our assets. The Takeover Act may also have the effect of discouraging tender offers or other stock acquisitions, giving our management power to reject certain transactions which might be desired by the owners of the majority of our voting securities. The Takeover Act could also be deemed to benefit incumbent management to the extent that the Act deters such offers by persons who would wish to make changes in management or exercise control over management. Our Board of Directors does not presently know any third party that plans to make an offer to acquire us through a tender offer, merger or purchase of all or substantially all of our assets. DEPENDENCE UPON SUPPLIERS We do not have written agreements with our suppliers. It is possible that we may encounter shortages in parts, components, or other elements vital to our operations in the future. If such shortages occur, we cannot guarantee that we would be able to locate other satisfactory suppliers, or even if other suppliers could be located, that we would be able to establish commercial relationships with any such suppliers. If we are unable to establish commercial relationships with other suppliers, we may be required to suspend or curtail some of our services. Suspension or curtailment of services could have a material adverse effect on us. ECONOMIC AND GENERAL RISKS OF THE BUSINESS Our success will depend upon factors that are beyond our control and that cannot clearly be predicted at this time. Such factors include general economic conditions, both nationally and internationally, changes in tax laws, fluctuating operating expenses, including energy costs, changes in governmental regulations, including regulations imposed under federal, state or local environmental laws, labor laws, and trade laws and other trade barriers. -16- ITEM 2. DESCRIPTION OF PROPERTY We lease approximately 3,000 square feet of office space for our corporate office in Phoenix, Arizona. We also maintain the following operating facilities: The Infrastructure Development Group has principal offices in Atlanta, Georgia; Columbia, Maryland; Nashville, Tennessee; Phoenix, Arizona; and Perris and Sacramento, California. We also maintain several satellite offices throughout the United States. We own office buildings of approximately 9,600 square feet in Phoenix and 19,400 square feet in Memphis and approximately 2.5 acres of land in Phoenix and four acres of land in Perris, all of which collateralize outstanding promissory notes. In addition, we lease an aggregate of 805,000 square feet of office, warehouse and yard space under various leasing arrangements for our other locations. The Equipment Distribution Group has principal offices in Richmond, Virginia and Lakeland and Marianna, Florida. Our Marianna facility consists of an office/warehouse building of approximately 28,000 square feet, including 24,000 square feet of warehouse space and an additional warehouse consisting of approximately 33,000 square feet. The buildings are located on approximately 8.4 acres of land. In addition, we lease an aggregate of 40,000 square feet of office and warehouse space under various leasing arrangements for our other locations. The Wireless Technologies Group leases an aggregate of approximately 13,000 square feet located in Germantown, Maryland and Englewood Cliffs, New Jersey. We believe our operating facilities are adequate to meet our operational needs associated with our current backlog. ITEM 3. LEGAL PROCEEDINGS We are not involved as a party to any legal proceeding other than various claims and lawsuits arising in the normal course of our business, none of which, in our opinion, is individually or collectively material to our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. We did not submit any matter for a vote by our stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report. -17- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock is listed on the NASDAQ National Market. The following table shows the high and low bid prices in dollars per share for the last two years as reported by NASDAQ. These prices may not be the prices that you would pay to purchase a share of our common stock during the periods shown. These prices are what a securities dealer would pay for a share of our common stock and do not include any commissions you might have to pay or any retail mark-ups or mark-downs. YEAR ENDED DECEMBER 31, 1999 LOW HIGH --- ---- First Quarter $6.00 $9.00 Second Quarter $5.56 $9.13 Third Quarter $4.50 $9.09 Fourth Quarter $5.00 $9.00 YEAR ENDED DECEMBER 31, 1998 LOW HIGH --- ---- First Quarter $4.75 $6.97 Second Quarter $4.88 $9.59 Third Quarter $4.88 $9.31 Fourth Quarter $5.25 $9.75 As of March 10, 2000, there were approximately 14,842 beneficial holders of our common stock. DIVIDEND POLICY Holders of our common stock are entitled to receive dividends only when declared by our Board of Directors. To date dividends have never been declared or paid and we do not plan to make any dividend payments in the future. Instead, we will reinvest in the expansion and development of our business. If the Board of Directors decides to declare a dividend in the future, the decision will be based on our earnings, financial condition, cash requirements, and any other factors they deem relevant. A covenant in our revolving credit facility restricts us from paying dividends, except under certain circumstances. RECENT SALES OF UNREGISTERED SECURITIES In the first quarter of 1999, we issued 304,908 shares of our common stock in partial consideration for the purchase of the shares of Aerocomm, Inc. as an exempt transaction under Section 4(2) under the Act. In the second quarter of 1999, we issued 592,857 shares of common stock in partial consideration for the purchase of the assets of All Star Communications, Inc. and 51,632 shares in partial consideration for the purchase of the assets of Blueridge Solutions, LLC. -18- ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial information and consolidated balance sheet data presented below as of and for the years ended December 31, 1999 and 1998 are derived from the accompanying consolidated financial statements that have been audited by BDO Seidman LLP. The consolidated financial information and consolidated balance sheet data presented below as of and for the years ended December 31, 1997, 1996 and 1995 are derived from the consolidated financial statements that have been audited by Semple & Cooper LLP, of which the results of operations for the year ended December 31, 1997 are included in the accompanying consolidated financial statements. On September 1, 1998, the Company completed two acquisitions, both of which were accounted for using the pooling of interests method. Accordingly, the selected consolidated financial information presented below has been restated to include the results of operations of the acquisitions for all periods presented.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1999 1998 1997 1996 1995(1) --------- --------- -------- -------- -------- (in thousands, except per share amounts) Revenues $ 170,400 $ 104,976 $ 57,266 $ 33,981 $ 12,050 Cost of revenues 126,659 70,097 40,434 24,896 11,802 --------- --------- -------- -------- -------- Gross margin 43,741 34,879 16,832 9,085 248 General and administrative 29,098 16,936 12,264 9,965 2,843 --------- --------- -------- -------- -------- Income from operations 14,643 17,943 4,568 (880) (2,595) Other income (expense), net (2,518) (750) 1,464 61 196 Non-recurring acquisition expenses -- (890) -- -- -- --------- --------- -------- -------- -------- Income before provision for taxes 12,125 16,303 6,032 (819) (2,399) Provision for income taxes (4,366) (4,899) 346 (135) 211 --------- --------- -------- -------- -------- Net income 7,759 11,404 6,378 (954) (2,188) Preferred stock dividends (4) (48) (173) (171) -- --------- --------- -------- -------- -------- Net income available to common stockholders 7,755 11,356 6,205 (1,125) (2,188) Pro forma provision for income taxes (2) -- (1,268) (1,456) 435 -- --------- --------- -------- -------- -------- Net income after pro forma provision for income taxes $ 7,755 $ 10,088 $ 4,749 $ (690) $ (2,188) ========= ========= ======== ======== ======== Earnings per share: Basic $ 0.28 $ 0.48 $ 0.53 $ (0.12) $ (0.50) ========= ========= ======== ======== ======== Diluted $ 0.26 $ 0.43 $ 0.35 $ (0.12) $ (0.50) ========= ========= ======== ======== ======== Pro forma earnings per share: Basic $ 0.28 $ 0.43 $ 0.41 $ (0.07) $ (0.50) ========= ========= ======== ======== ======== Diluted $ 0.26 $ 0.38 $ 0.27 $ (0.07) $ (0.50) ========= ========= ======== ======== ======== Shares used in computing EPS: Basic 28,031 23,509 11,711 9,441 4,417 Diluted 29,818 27,176 18,580 9,441 4,417 DECEMBER 31, ------------------------------------------------------------- 1999 1998 1997 1996 1995(1) --------- --------- -------- -------- -------- Consolidated balance (in thousands) sheet data: Cash $ 3,182 $ 4,790 $ 3,356 $ 4 $ 9 Working capital 37,670 26,497 9,642 (691) 365 Total assets 160,876 84,614 48,896 6,803 12,247 Long-term debt less current portion 26,618 4,076 4,367 929 1,195 Stockholders' equity 75,752 55,558 31,982 2,208 5,655
- ---------- (1) Consolidated balance sheet data and results of operations of subsidiaries acquired on September 1, 1998 under pooling of interests method is not available for certain periods. Therefore, the consolidated balance sheet data as of December 31, 1996 and 1995 and the results of operations for the year ended December 31, 1995 have not been restated. (2) During the third quarter of 1998, the Company made certain acquisitions accounted for under the pooling of interests method. Prior to the acquisitions, the companies acquired operated as Subchapter S corporations and, accordingly, were not subject to federal income taxes. The pro forma provision for income taxes was recorded for 1998, 1997 and 1996 to present income taxes as though the consolidated operating results of the acquired companies had been subject to federal income taxes for all periods presented. (3) During 1999, the Company acquired Aerocomm, Inc., All Star Telecom, Inc., Washington Data Systems, Inc., and Blue Ridge Solutions in transactions accounted for using the purchase method of accounting. During 1998, the Company acquired Riley Underground Communications, Inc. in a transaction accounted for using the purchase method of accounting. Accordingly, the results of operations of the acquired companies have been included as of their respective acquisition dates. -19- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL We are an end-to-end solutions provider serving telecommunications industry. We deliver a broad range of solutions designed to enable, enhance and support voice, data and video communications through wired, wireless, internal and external networks. In delivering these solutions, we design, develop, install and maintain internal and external networks that support the Internet-related applications and other communications for our customers. Our services range from the design, development and installation of fiber-optic networks to wireless connectivity solutions. Our products range from proprietary wireless communications equipment to new, deinstalled and refurbished communications equipment from a variety of manufacturers. We deliver our products and services through three operating segments: infrastructure development, wireless technologies and equipment distribution. The Company derives a substantial portion of its revenue through contracts accounted for under the percentage of completion method whereby revenue is recognized based on the ratio of contract costs incurred to total estimated contract costs. As a result, gross margins can increase or decrease based upon changes in estimates during individual contracts. RESULTS OF OPERATIONS During 1999, we made several strategic acquisitions to enhance our service capabilities and broaden our geographic coverage as an end-to-end solutions provider. None of the acquisitions were material individually or in the aggregate. Details of these transactions can be found in the accompanying Consolidated Financial Statements. -20- Our operating results for 1997 and 1998 were significantly impacted by the acquisition of Southern Communications on October 1, 1997, as explained in the Unaudited Pro Forma Condensed Consolidated Statements of Operations included in the accompanying Consolidated Financial Statements. The following table summarizes the results of operations for the three years ended December 31, 1999, 1998 and 1997 and includes a pro forma presentation of the results of operations for the year ended December 31, 1997 which assumes that we had acquired Southern Communications on January 1, 1997.
Pro Forma(1) 1999(3) 1998(3) 1997 1997 ----------------- ----------------- ---------------- ---------------- Revenues $ 170,400 100.0% $ 104,976 100.0% $ 57,266 100.0% $ 65,753 100.0% Cost of revenues 126,659 74.3% 70,097 66.8% 40,434 70.6% 43,190 65.7% --------- ----- --------- ----- -------- ----- -------- ----- Gross margin 43,741 25.7% 34,879 33.2% 16,832 29.4% 22,563 34.3% General and administrative 29,098 17.1% 16,936 16.1% 12,264 21.4% 14,118 21.5% --------- ----- --------- ----- -------- ----- -------- ----- Income from operations 14,643 8.6% 17,943 17.1% 4,568 8.0% 8,445 12.8% Other income (expense), net (2,518) -1.5% (750) -0.7% 1,464 2.5% 1,278 2.0% Non-recurring acquisition expenses -- 0.0% (890) -0.9% -- 0.0% -- 0.0% --------- ----- --------- ----- -------- ----- -------- ----- Income before provision for taxes 12,125 7.1% 16,303 15.5% 6,032 10.5% 9,723 14.8% Provision for income taxes (4,366) -2.6% (4,899) -4.7% 346 0.6% (1,650) -2.5% --------- ----- --------- ----- -------- ----- -------- ----- Net income 7,759 4.5% 11,404 10.8% 6,378 11.1% 8,073 12.3% Preferred stock dividends (4) 0.0% (48) 0.0% (173) -0.3% (173) -0.3% --------- ----- --------- ----- -------- ----- -------- ----- Net income available to common stockholders 7,755 4.5% 11,356 10.8% 6,205 10.8% 7,900 12.0% Pro forma provision for income taxes (2) -- 0.0% (1,268) -1.2% (1,456) -2.5% (1,456) -2.2% --------- ----- --------- ----- -------- ----- -------- ----- Net income after pro forma provision for income taxes $ 7,755 4.5% $ 10,088 9.6% $ 4,749 8.3% $ 6,444 9.8% ========= ===== ========= ===== ======== ===== ======== =====
- ---------- (1) The pro forma results include the results of operations of Southern Communications for the period from January 1, 1997 through September 30, 1997 as well as pro forma adjustments to goodwill amortization, interest expense and income taxes. (2) During the third quarter of 1998, the Company made certain acquisitions accounted for under the pooling of interests method. Prior to the acquisitions, the companies acquired operated as Subchapter S corporations and, accordingly, were not subject to federal income taxes. The pro forma provision for income taxes was recorded for 1998 and 1997 to present income taxes as though the consolidated operating results of the acquired companies had been subject to federal income taxes for all periods presented. (3) During 1999, the Company acquired Aerocomm, Inc., All Star Telecom, Inc., Washington Data Systems, Inc., and Blue Ridge Solutions in transactions accounted for using the purchase method of accounting. During 1998, the Company acquired Riley Underground Communications, Inc. in a transaction accounted for using the purchase method of accounting. Accordingly, the results of operations of the acquired companies have been included as of their respective acquisition dates. For the purpose of the management's discussion of the results of operations, the pro forma results of operations for the year ended December 31, 1997 are used for comparative purposes as it provides for a more meaningful presentation. -21- 1999 COMPARED TO 1998 REVENUES. Revenues for 1999 increased $65.4 million, or 62%, to $170.4 million as compared to $105.0 million in 1998. The increase was due primarily to revenue growth of $70.9 million in the infrastructure development segment during 1999. The increase was the result of revenue growth from existing subsidiaries as well as incremental revenues from acquisitions made during the year. Also contributing to the overall increase in our revenues was the addition of the wireless technologies segment during the first quarter of 1999 which contributed revenues of $3.2 million in 1999. Partially offsetting revenue growth in the infrastructure and wireless segments was a decrease in revenues of $8.6 million in the equipment distribution segment in 1999 as compared to 1998. GROSS MARGIN. Gross margin for 1999 increased $8.8 million, or 25%, to $43.7 million as compared to $34.9 million in 1998. The increases were primarily the result of increased revenue volume in the infrastructure and wireless segments, partially offset by a decrease in revenue volume and sales prices in the equipment distribution segment. Gross margin, as a percentage of revenues, decreased 7% to 26% in 1999 as compared to 33% in 1998. The decrease was primarily due to declines in the gross margins within the equipment distribution segment, offset by increases in the infrastructure development segment. Gross margin in the equipment distribution segment, as a percentage of revenues, in 1999 was 32% as compared to 53% in 1998. Current year margins have declined as compared to the prior year due to changes in prevailing market conditions. During the fourth quarter of 1998, we successfully sold approximately $3.2 million of older inventory which had previously been written down. This older inventory was sold at prices in excess of its adjusted net realizable value resulting in a non-recurring higher than normal gross profit. The same market conditions did not exist during 1999, and as such, we did not sell any of the old inventory and did not achieve the same margins in the current year as in the prior year. Having made no sales of this old inventory during 1999, no significant adjustments to the reserve for obsolescence were made. Gross margin, as a percentage of revenues, in the infrastructure development segment increased 3% to 24% in 1999 as compared to 21% in 1998 primarily due to improved operating efficiencies and contract execution. GENERAL AND ADMINISTRATIVE. General and administrative expenses for 1999 increased $12.2 million, or 72%, to $29.1 million as compared to $16.9 million in 1998. The increase was primarily due to internal growth of existing subsidiaries, incremental costs associated with acquisitions made during 1999 and management additions made during 1999 to support our continued growth. General and administrative expenses, as a percentage of revenues, was 17% in 1999 as compared to 16% in 1998. OTHER INCOME (EXPENSE). Other expenses for 1999 increased $1.8 million, or 236%, to $2.5 million as compared to $750,000 in 1998. The increases are primarily due to interest expense on our credit facilities. Borrowing activity increased during 1999 due to the acquisition of several subsidiaries through purchase agreements consisting of all cash or cash and common stock terms as well as the acquisition of operating equipment to support revenue growth in the infrastructure development segment. Partially offsetting the increase in interest expense was an increase in interest and other income of $475,000 due to interest earned on deposited funds and realized gains on short-term liquid investments. NON-RECURRING ACQUISITION COSTS. Non-recurring acquisition costs were attributable to certain acquisitions made during the third quarter of 1998 accounted for under the pooling of interests method. -22- PROVISION FOR INCOME TAXES. Income tax expense for 1999 decreased $533,000, or 10.9%, to $4.4 million as compared to $4.9 million in 1998. The provision for income taxes decreased due to lower taxable earnings, partially offset by a lower effective tax rate in 1998 due to certain acquisitions accounted for under the pooling of interests method in the third quarter of 1998. Prior to the acquisitions, the companies acquired operated as Subchapter S corporations and, accordingly, were not subject to federal income taxes. A pro forma provision for income taxes was recorded for 1998 to present income taxes as though the consolidated operating results of the acquired companies had been subject to federal income taxes for all periods presented. NET INCOME. Net income attributable to common stockholders before the pro forma provision for income taxes for 1999 decreased $3.6 million, or 32%, to $7.8 million, or $0.28 and $0.26 per basic and diluted share, as compared to $11.4 million, or $0.48 and $0.43 per basic and diluted share, in 1998. Net income attributable to common stockholders after the pro forma provision for income taxes for 1999 decreased $2.3 million, or 23%, to $7.8 million, or $0.28 and $0.26 per basic and diluted share, as compared to $10.1 million, or $0.43 and $0.38 per basic and diluted share, in 1998. 1998 COMPARED TO ACTUAL 1997 REVENUES. Consolidated revenues increased $47.7 million to $105.0 million in 1998 from $57.3 million in 1997, an 83% increase. The major reason for the overall increase was greater contract activity in our infrastructure development segment. Revenues in this segment increased $27.9 million from 1997 to 1998. In addition, revenues increased in our Equipment Distribution segment by $16.7 million during the same period of which $5.6 million is attributable to an acquired subsidiary which completed its first full year of operations in 1998. GROSS MARGIN. We had a consolidated gross profit of $34.9 million for 1998 compared with a gross profit of $16.8 million in 1997, an increase of $18.1 million or 107%. Of this increase, $7.6 million is due primarily to volume increases in our equipment distribution segment, a 56% improvement over 1997, while our infrastructure development segment accounted for an increase of $4.5 million, a 63% increase primarily due to an increase in volume. Consolidated gross margins remained consistent on a year-to-year comparison. During the fourth quarter of 1998, we implemented a strategy to significantly reduce the amount of old inventory held by the equipment distribution segment. Through the acquisition of Diversitec on September 1, 1998, the Company gained the ability to cross-sell inventory items to a broader customer base between the subsidiaries within the equipment distribution segment. As a result, we leveraged this opportunity to liquidate older inventory and to reduce storage needs for slower moving products. Through these new distribution channels, we were able to sell much of the old inventory that had been previously written down at prices higher than their adjusted net realizable value which resulted in a higher than normal gross profit for the equipment distribution segment in the fourth quarter of 1998. During this period, we sold old inventory with an original cost basis of approximately $3.3 million. Of this inventory, Diversitec sold approximately $2.6 million, which had previously been completely written down, for approximately $1.9 million. There were no sales of the old inventory, and correspondingly, no adjustment in the inventory reserves of the old inventory during the first three quarters of 1998. As a result, gross profit in the fourth quarter of 1998 increased by approximately $1.9 million. Due to the concentrated effort in the fourth quarter to sell old inventory, Diversitec only sold approximately $200,000 of non-reserved inventory during the same period. -23- GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased from $12.2 million in 1997 to $16.9 million in 1998. In 1997 general and administrative expenses were 21% of gross revenues. This percentage decreased to 16% of gross revenues in 1998. Management continues to streamline overhead costs, while increasing productivity and margins. OTHER INCOME (EXPENSE). Other income and expense decreased from other income of $1.5 million in 1997 to other expense of ($750,000) in 1998. This change of $2.3 million is comprised primarily of $1,500,000 keyman life insurance proceeds recorded in 1997 and $600,000 of additional interest expense recorded in 1998. NON-RECURRING ACQUISITION COSTS. Non-recurring acquisition costs were attributable to certain acquisitions made during the third quarter of 1998 accounted for under the pooling of interests method. PROVISION FOR INCOME TAXES. In 1998, we incurred federal and state income taxes of $4.9 million as compared to a 1997 federal and state income tax benefit of $346,000 a 1,516% increase. Income taxes in 1998 represent 30% of pretax income as compared to (6%) of pretax income in 1997. The effective tax rates in 1998 and 1997 were affected by certain acquisitions during the year and usage of net operating losses and deferred assets. NET INCOME. Net income attributable to common stockholders in 1998 was $11.4 million compared with $6.2 million in 1997, an increase of $5.2 million or 83%. The increase is primarily due to the increase in revenues and gross margins between the comparable periods. 1998 COMPARED TO PRO FORMA 1997 REVENUES. Consolidated revenues increased $39.2 million to $105.0 million in 1998 from $65.8 million in 1997, a 60% increase. The major reason for the overall increase was greater contract activity in our infrastructure development segment. Revenues in this segment increased $28.9 million from 1997 to 1998. In addition, revenues increased in our equipment distribution segment by $8.2 million during the same period of which $5.6 million is attributable to an acquired subsidiary which completed its first full year of operations in 1998. GROSS MARGIN. We had a consolidated gross profit of $34.9 million for 1998 compared with a gross profit of $22.6 million in 1997, an increase of $12.3 million, or 55%. Of this increase, $7.6 million is due to increases in our equipment distribution segment, a 56% improvement over 1997, while our infrastructure development segment accounted for an increase of $4.5 million, a 63% increase. Consolidated gross margins remained consistent on a year-to-year comparison. During the fourth quarter of 1998, we implemented a strategy to significantly reduce the amount of old inventory held by the equipment distribution segment. Through the acquisition of Diversitec on September 1, 1998, the Company gained the ability to cross-sell inventory items to a broader customer base between the subsidiaries within the equipment distribution segment. As a result, we leveraged this opportunity to liquidate older inventory and to reduce the storage needs for slower moving products. Through these new distribution channels, we were able to sell much of the old inventory that had been previously written down at prices higher than their adjusted net realizable value which resulted in a higher than normal gross profit for the equipment distribution segment in the fourth quarter of 1998. During this period, we sold -24- old inventory with an original cost basis of approximately $3.3 million. Of this inventory, Diversitec sold approximately $2.6 million, which had previously been completely written down, for approximately $1.9 million. As a result, gross profit in the fourth quarter of 1998 increased by approximately $1.9 million. There were no sales of the old inventory, and correspondingly, no adjustment to the inventory reserves, during the first three quarters of 1998. Due to the concentrated effort in the fourth quarter to sell old inventory, Diversitec only sold approximately $300,000 of non-reserved inventory during the same period. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from $14.1 million in 1997 to $16.9 million in 1998. In 1997, general and administrative expenses were 22% of gross revenues. This percentage decreased to 16% of gross revenues in 1998. Management continues to streamline overhead costs, while increasing productivity and margins. OTHER INCOME (EXPENSE). Other income and expense decreased from other income of $1.5 million in 1997 to other expense of ($750,000) in 1998. This change of approximately $2.2 million is comprised primarily of $1,500,000 keyman life insurance proceeds recorded in 1997 and $600,000 of additional interest expense recorded in 1998. NON-RECURRING ACQUISITION COSTS. Non-recurring acquisition costs were attributable to certain acquisitions made during the third quarter of 1998 accounted for under the pooling of interests method. PROVISION FOR INCOME TAXES. In 1998, we incurred federal and state income taxes of $4.9 million as compared to 1997 pro forma taxes of $1.1 million, a 345% increase. Income taxes in 1998 represent 30% of pretax income as compared to 17% of pretax income in 1997. The effective tax rates in 1998 and 1997 were affected by certain acquisitions accounted for under the pooling of interests method in the third quarter of 1998. Prior to the acquisitions, the companies acquired operated as Subchapter S corporations and, accordingly, were not subject to federal income taxes. A pro forma provision for income taxes was recorded for 1998 and 1997 to present income taxes as though the consolidated operating results of the acquired companies had been subject to federal income taxes for all periods presented. NET INCOME. Net income attributable to common stockholders in 1998 was $11.4 million compared with $7.9 million in 1997, on a pro forma basis. Net income attributable to common stockholders after the pro forma provision for income taxes increased $3.6 million, or 57%, to $10.1 million as compared to $6.4 million in 1997, on a pro forma basis. The increase is primarily due to the increase in revenues and gross margins between the comparable periods. LIQUIDITY AND CAPITAL RESOURCES Our capital needs consist primarily of equipment needed to support revenue growth and working capital needed for general corporate purposes, including strategic acquisitions. We have historically financed operations through a combination of lines of credit, and debt and equity offerings. Our liquidity is impacted, to a large degree, by the nature of billing provisions under our installation and service contracts. Generally, in the early periods of contracts, cash expenditures and accrued profits are greater than allowed billings, while contract completion results in billing previously unbilled costs and related accrued profits. -25- During 1999, net cash used in operations totaled $16.4 million as compared to $3.4 million in 1998. Cash sources from operations during the period totaled $14.3 million and consisted primarily of net income of $7.8 million, depreciation and amortization totaling $5.9 million and an increase in accounts payable of $623,000. Operating assets and liabilities used operating cash flow of $30.7 million, primarily due to increases in accounts receivable, inventory, costs and estimated earnings in excess of billings and other assets and decreases in other assets, accrued expenses and income taxes. Cash used in investing activities in 1999 totaled $15.6 million, which consisted primarily of equipment purchases totaling $3.5 million and cash used in business acquisitions totaling $12.1 million. During 1999, we acquired an additional $10.0 million in equipment through capital lease financing arrangements. During 1999, financing activities generated approximately $30.4 million, which consisted primarily of net borrowings under our credit facilities totaling $30.6 million, proceeds from warrant and stock option exercises totaling $3.1 million and proceeds from stock purchased under the Employee Stock Purchase Plan totaling $1.2 million, partially offset by scheduled principal payments on long-term debt totaling $4.5 million. As of December 31, 1999, we had a cash balance of $3.2 million and additional working capital of $34.5 million. Additionally, at December 31, 1999 we had a revolving line of credit with a syndication of commercial banks totaling $60 million, with an available balance of approximately $14.3 million, and a $10 million lease line of credit, which was subsequently increased to $15 million in February 2000, with an available balance of approximately $7 million. Aggregate proceeds from current working capital, funds generated through operations and current availability under existing credit facilities are considered sufficient to fund the anticipated growth in our operations for the next 12 to 18 months. We may, however, seek to obtain additional capital through additional debt or equity offerings depending primarily upon prevailing market conditions and the demand for our products and services. INFLATION AND SEASONALITY. We do not believe that we are significantly impacted by inflation or seasonality. YEAR 2000 UPDATE. Prior to January 1, 2000, there was a great deal of concern regarding the ability of computers to adequately recognize 21st century dates from 20th century dates due to the two-digit date fields used by many systems. Most reports to date, however, are that computer systems are functioning normally and the compliance and remediation work accomplished leading up to the year 2000 was effective to prevent any problems. Computer experts have warned that there may still be residual consequences of the change in centuries and any such difficulties could result in a decrease in the services we provide, an increase in allocation of our and our client's resources to address Year 2000 problems without additional revenue commensurate with such dedication of resources, or an increase in litigation costs relating to losses suffered by us or our clients due to such Year 2000 problems. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK See Notes 1 and 3 in the accompanying consolidated financial statements. ITEM 8. FINANCIAL STATEMENTS. The consolidated financial statements and schedules are included herewith commencing on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were no changes in or disagreements with accountants on accounting and financial disclosure during the year ended December 31, 1999. -26- PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS The following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-B. Exhibit Number Description Reference - ------ ----------- --------- 2.1 Stock Purchase Agreement between the Registrant and Concepts in Communication, Inc., dated as of October 31, 1996. (1) 2.2 Stock Purchase Agreement between the Registrant and Compass Communications, Inc., dated as of October 1, 1998 (2) 2.3 Asset Purchase and Sale Agreement between the Registrant, SCP Acquisition Corp., Southern Communications Products, Inc., Wallace E. Sapp and Edna M. Sapp, dated as of August 25, 1998. (2) 2.4 Stock Purchase Agreement between the Registrant and United Tech, Inc., dated as of September 1, 1998. (3) 2.5 Stock Purchase Agreement between the Registrant and Diversitec, Inc., dated as of September 1, 1998. (3) 3.1 Restated Articles of Incorporation of Registrant, dated October 21, 1981 (4) 3.2 Amendment to Articles of Incorporation of Registrant, dated April 18, 1986 (4) 3.3 Amendment to Articles of Incorporation of Registrant, dated May 20, 1987 (4) 3.4 Amendment to Articles of Incorporation of Registrant, dated February 4, 1988 (4) 3.5 Amendment to Articles of Incorporation of Registrant, dated August 15, 1991 (4) 3.6 Amendment to Articles of Incorporation of Registrant, dated June 3, 1994 (4) 3.7 Amended, Revised, and Restated Bylaws of Registrant, (4) 4.1 Form of Common Stock Certificate (4) -27- 10.1 1998 Stock Option Plan (5) 10.2 1998 Restricted Stock Plan (5) 10.3 1994 Incentive Stock Option Plan (6) 10.4 1994 Restricted Stock Plan (6) 21.1 List of Subsidiaries of the Registrant * 23.1 Consent of Semple & Cooper * 23.2 Consent of BDO Seidman, LLP * 27.1 Financial Data Schedule * - ---------- * Filed herewith (1) Filed with Current Report on Form 8-K, dated February 13, 1997. (2) Filed with Current Report on Form 8-K, dated December 1, 1997. (3) Filed with Current Report on Form 8-K, dated September 16, 1998. (4) Filed with Registration Statement on Form SB-2, No. 33-79730, which became effective August 12, 1994. (5) Filed with 1997 Notice and Proxy Statement, dated June 25, 1997. (6) Filed with annual report on Form 10-KSB for the year ended December 31, 1996. (b) CURRENT REPORTS ON FORM 8-K None -28- 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. INTERNATIONAL FIBERCOM, INC. By /s/ Joseph P. Kealy ------------------------------------- Dated: March 15, 2000 Joseph P. Kealy, Chairman of the Board, President and Principal Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature and Title Date - ------------------- ---- /s/ Joseph P. Kealy March 15, 2000 - --------------------------------------- Joseph P. Kealy, Chairman of the Board, President, Principal Executive Officer and Director /s/ Terry W. Beiriger March 15, 2000 - --------------------------------------- Terry W. Beiriger, Principal Financial Officer, Treasurer and Secretary /s/ C. James Jensen March 15, 2000 - --------------------------------------- C. James Jensen, Director /s/ John F. Kealy March 15, 2000 - --------------------------------------- John F. Kealy, Director /s/ Jerry A. Kleven March 15, 2000 - --------------------------------------- Jerry A. Kleven, Director /s/ John P. Morbeck March 15, 2000 - --------------------------------------- John P. Morbeck, Director /s/ Richard J. Seminoff March 15, 2000 - --------------------------------------- Richard J. Seminoff, Director /s/ V. Thompson Brown, Jr. March 15, 2000 - --------------------------------------- V. Thompson Brown, Jr., Director /s/ John P. Stephens March 15, 2000 - --------------------------------------- John P. Stephens, Director -30- INTERNATIONAL FIBERCOM, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Reports of Independent Accountants F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 F-8 Notes to Consolidated Financial Statements F-10 F-1 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of International FiberCom, Inc. We have audited the accompanying consolidated balance sheet of International FiberCom, Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years ended December 31, 1999. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurances 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 presentation of the consolidated financial statements. 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 International FiberCom, Inc. and subsidiaries at December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the two years ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ BDO SEIDMAN, LLP Los Angeles, California March 10, 2000 F-2 INDEPENDENT ACCOUNTANTS' REPORT To The Stockholders and Board of Directors of International FiberCom, Inc. and Subsidiaries We have audited the accompanying consolidated statements of income, changes in stockholders' equity, and cash flows for the year ended December 31, 1997. 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 audits. We conducted our audit in accordance with generally accepted auditing standards. 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 consolidated financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations, changes in stockholders' equity, and cash flows of International FiberCom, Inc. and Subsidiaries for the year ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Semple & Cooper, LLP Semple & Cooper, LLP Certified Public Accountants March 13, 1998 F-3 INTERNATIONAL FIBERCOM, INC. CONSOLIDATED BALANCE SHEETS December 31, --------------------------- 1999 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 3,182,408 $ 4,789,547 Accounts receivable, net 48,325,259 22,602,042 Cost and estimated earnings in excess of billings 19,638,209 5,191,428 Inventory, net 18,722,334 16,946,143 Other current assets 2,625,500 262,426 Deferred tax asset 1,961,894 863,000 ------------ ------------ Total current assets 94,455,604 50,654,586 Property and equipment, net 24,599,623 10,042,072 Goodwill, net 40,398,981 22,855,531 Other 1,421,356 1,062,200 ------------ ------------ Total assets $160,875,564 $ 84,614,389 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of notes payable $ 29,656,260 $ 6,410,568 Current portion of capital lease obligations 2,278,304 515,386 Current portion of notes payable to related parties 925,911 2,029,287 Accounts payable 16,011,676 9,464,558 Accrued expenses 4,401,285 2,252,307 Billings in excess of costs and estimated earnings 3,512,562 449,205 Income taxes payable -- 3,036,621 ------------ ------------ Total current liabilities 56,785,998 24,157,932 Notes payable 19,510,373 2,117,522 Capital lease obligations 6,960,768 807,590 Notes payable to related parties 146,776 1,151,196 Deferred tax liability 1,720,146 822,327 ------------ ------------ Total liabilities 85,124,061 29,056,567 ------------ ------------ Commitments and Contingencies (Note 6) Stockholders' equity: Series C 4% convertible preferred stock, no par value, 1,000 shares authorized; 400 shares issued and outstanding at December 31, 1998 -- 306,665 Common Stock, no par value, 100,000,000 shares authorized; 29,112,194 shares issued and 28,906,505 shares outstanding at December 31, 1999; 26,614,018 shares issued and 26,408,329 shares outstanding at December 31, 1998 60,106,750 47,361,495 Additional paid-in capital 2,581,149 2,581,149 Retained earnings 13,893,691 6,138,600 ------------ ------------ 76,581,590 56,387,909 Less: Treasury Stock, 205,689 shares, at cost (830,087) (830,087) ------------ ------------ Total stockholders' equity 75,751,503 55,557,822 ------------ ------------ Total liabilities and stockholders' equity $160,875,564 $ 84,614,389 ============ ============ See accompanying notes to consolidated financial statements. F-4 INTERNATIONAL FIBERCOM, INC. CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Revenues $170,399,742 $104,975,995 $ 57,265,806 Cost of revenues 126,658,957 70,096,670 40,433,795 ------------ ------------ ------------ Gross margin 43,740,785 34,879,325 16,832,011 General and administrative 29,098,379 16,936,223 12,264,470 ------------ ------------ ------------ Income from operations 14,642,406 17,943,102 4,567,541 Other income (expense): Interest income 332,197 163,822 50,249 Interest expense (3,221,807) (979,421) (377,617) Other 372,229 65,317 1,792,157 ------------ ------------ ------------ Income before non-recurring acquisition costs and provision for income taxes 12,125,025 17,192,820 6,032,330 Non-recurring acquisition costs -- (890,000) -- ------------ ------------ ------------ Income before provision for income taxes 12,125,025 16,302,820 6,032,330 (Provision) benefit for income taxes (4,365,934) (4,899,497) 346,319 ------------ ------------ ------------ Net income $ 7,759,091 $ 11,403,323 $ 6,378,649 ------------ ------------ ------------ Preferred stock dividend (4,000) (47,722) (173,447) ------------ ------------ ------------ Net income attributable to common stockholders before proforma provision for income taxes 7,755,091 11,355,601 6,205,202 Proforma provision for income taxes -- (1,267,847) (1,456,218) ------------ ------------ ------------ Net income attributable to common stockholders after proforma provision for income taxes $ 7,755,091 $ 10,087,754 $ 4,748,984 ============ ============ ============ Earnings per common share: Basic $ 0.28 $ 0.48 $ 0.53 Diluted $ 0.26 $ 0.43 $ 0.35 Proforma earnings per common share: Basic $ 0.28 $ 0.43 $ 0.41 Diluted $ 0.26 $ 0.38 $ 0.27 Shares used in computation: Basic 28,030,988 23,508,749 11,711,024 Diluted 29,817,638 27,175,763 18,579,836
See accompanying notes to consolidated financial statements. F-5 INTERNATIONAL FIBERCOM, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1999
Preferred Stock Common Stock ----------------------------------- ------------------------ Series A Series B Series C Shares Amount ----------- ---------- -------- ---------- ----------- Balance January 1, 1997 as previously reported $ 1,680,997 $ -- $ -- 6,864,387 $ 8,559,247 Adjustments in connection with poolings of interest 3,254,000 1,513 ----------- ---------- -------- ---------- ----------- Balance January 1, 1997 as restated 1,680,997 -- -- 10,118,387 8,560,760 Issuance of 3,500 shares of Series B Preferred, net of costs 2,706,302 Issuance of 1,000 shares of Series C Preferred, net of costs 766,662 Common stock issued in connection with acquisitions 2,231,661 6,200,000 Common stock issued as payment of debt 123,212 253,207 Common stock issued in private placements, net of costs 2,850,000 11,605,513 Warrants and options issued for services rendered Series A Preferred Stock Conversion (1,680,997) 2,126,463 1,680,997 Series B Preferred Stock Conversion (1,579,465) 1,323,242 1,579,465 Conversion of 8% convertible debentures 720,000 900,000 Employee stock option exercises 30,145 37,413 Common Stock purchased under ESPP 104,036 280,929 Other Common Stock issuances 187,456 1,119,000 S-corporation shareholder distribution and stock redemption Preferred Stock dividend 72,247 173,447 Net income ----------- ---------- -------- ---------- ----------- Balance December 31, 1997 -- 1,126,837 766,662 19,886,849 32,390,731 Additional Retained Treasury Paid-in Capital Earnings Stock Totals --------- ------------ ---------- ----------- Balance January 1, 1997 as previously reported $ 947,729 $ (7,853,875) $ (668,017) $ 2,666,081 Adjustments in connection with poolings of interest 837,442 838,955 --------- ------------ ---------- ----------- Balance January 1, 1997 as restated 947,729 (7,016,433) (668,017) 3,505,036 Issuance of 3,500 shares of Series B -- Preferred, net of costs 2,706,302 Issuance of 1,000 shares of Series C -- Preferred, net of costs 766,662 Common stock issued in connection with acquisitions 6,200,000 Common stock issued as payment of debt 253,207 Common stock issued in private placements, net of costs 11,605,513 Warrants and options issued for services rendered 2,013,380 2,013,380 Series A Preferred Stock Conversion -- Series B Preferred Stock Conversion -- Conversion of 8% convertible debentures 900,000 Employee stock option exercises 37,413 Common Stock purchased under ESPP 280,929 Other Common Stock issuances 1,119,000 S-corporation shareholder distribution and stock redemption (3,759,360) (3,759,360) Preferred Stock dividend (173,447) -- Net income 6,378,649 6,378,649 --------- ------------ ---------- ----------- Balance December 31, 1997 2,961,109 (4,570,591) (668,017) 32,006,731
See accompanying notes to consolidated financial statements. F-6 INTERNATIONAL FIBERCOM, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1999
Preferred Stock Common Stock Series A Series B Series C Shares Amount --------- --------- --------- ---------- ------------ Series B Preferred Stock Conversion (1,126,837) 792,046 1,126,837 Series C Preferred Stock Conversion (459,997) 126,316 459,997 Conversion of 8% convertible debentures 480,000 600,000 Accrued interest paid in Common Stock 7,744 46,948 Public warrant exercises 1,288,930 6,981,453 Non-employee option and warrant exercises 2,682,632 2,013,393 Employee stock option exercises 788,745 392,150 Common Stock purchased under ESPP 139,876 678,305 Common Stock issued in connection with acquisitions 87,978 525,000 Finders fee paid in Common Stock 25,131 150,000 Repurchase of Treasury Stock Issuance of repricing shares 300,000 1,948,959 S-corporation shareholder distribution Preferred Stock dividend 7,771 47,722 Net income --------- --------- --------- ---------- ------------ Balance, December 31, 1998 -- -- 306,665 26,614,018 47,361,495 Conversion of Series C Preferred Stock (306,665) 79,840 306,665 Conversion of convertible debt 182,648 1,000,000 Common Stock issued in connection with acquisitions 1,021,271 7,132,711 Common Stock purchased under ESPP 189,644 1,185,645 Exercise of Common Stock options and warrants 1,024,181 3,116,234 Preferred Stock Dividends 592 4,000 Net income --------- --------- --------- ---------- ------------ Balance, December 31, 1999 $ -- $ -- $ -- 29,112,194 $ 60,106,750 ========= ========= ========= ========== ============ Additional Retained Treasury Paid-in Capital Earnings Stock Totals ----------- ------------ ---------- ------------ Series B Preferred Stock Conversion -- Series C Preferred Stock Conversion -- Conversion of 8% convertible debentures 600,000 Accrued interest paid in Common Stock 46,948 Public warrant exercises (379,960) 6,601,493 Non-employee option and warrant exercises 2,013,393 Employee stock option exercises 392,150 Common Stock purchased under ESPP 678,305 Common Stock issued in connection with acquisitions 525,000 Finders fee paid in Common Stock 150,000 Repurchase of Treasury Stock (162,070) (162,070) Issuance of repricing shares 1,948,959 S-corporation shareholder distribution (646,410) (646,410) Preferred Stock dividend (47,722) -- Net income 11,403,323 11,403,323 ----------- ------------ ---------- ------------ Balance, December 31, 1998 2,581,149 6,138,600 (830,087) 55,557,822 Conversion of Series C Preferred Stock -- Conversion of convertible debt 1,000,000 Common Stock issued in connection with acquisitions 7,132,711 Common Stock purchased under ESPP 1,185,645 Exercise of Common Stock options and warrants 3,116,234 Preferred Stock Dividends (4,000) Net income 7,759,091 7,759,091 ----------- ------------ ---------- ------------ Balance, December 31, 1999 $ 2,581,149 $ 13,893,691 $ (830,087) $ 75,751,503 =========== ============ ========== ============
See accompanying notes to consolidated financial statements. F-7 INTERNATIONAL FIBERCOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 7,759,091 $ 11,403,323 $ 6,378,649 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 5,893,134 3,093,711 1,659,521 Loss (gain) on disposal of assets 27,441 (7,154) (181,999) Acquisition fees paid in Common Stock -- 150,000 -- Provision for bad debts 47,341 94,382 172,486 Provision for obsolete inventory 12,000 (3,263,000) -- Changes in assets and liabilities net of business acquisitions: Increase in accounts receivable (13,977,674) (13,144,805) (4,773,163) Increase in costs and estimated earnings in excess of billings, net (9,557,327) (2,420,530) (2,443,498) Increase in inventory (1,600,068) (7,535,342) (4,782,063) Increase in other current assets (284,951) (142,806) (56,708) (Increase) decrease in deferred taxes, net (602,422) 54,071 (94,744) (Increase) decrease in other assets (278,712) (486,069) 1,229,853 Increase (decrease) in accounts payable 623,356 4,775,914 1,157,846 Increase (decrease) in accrued expenses (1,412,274) 1,080,653 640,140 Increase (decrease) in income taxes payable (3,062,779) 2,912,952 113,188 ------------ ------------ ------------ Net cash used in operating activities (16,413,844) (3,434,700) (980,492) ------------ ------------ ------------ Cash flows from investing activities: Acquistion of property and equipment (3,501,867) (1,404,476) (709,609) Cash payments made in business acquisitions (12,119,783) (1,476,503) (12,898,190) ------------ ------------ ------------ Net cash used in investing activities (15,621,650) (2,880,979) (13,607,799) ------------ ------------ ------------ Cash flows from financing activities: Net borrowings under line of credit agreement 29,626,143 3,740,328 1,063,240 Proceeds from notes payable 968,979 9,533,162 5,765,218 Proceeds from notes payable - related parties -- 129,157 10,210,627 Repayment of notes payable and lease obligations (3,360,850) (11,854,533) (9,060,812) Repayment of notes payable - related parties (1,107,796) (2,365,301) (3,046,793) Proceeds from exercise of stock options and warrants 3,116,234 8,696,713 37,413 Proceeds from issuance of common stock to employee stock purchase plan 1,185,645 678,305 280,929 S-Corp shareholder distribution -- (646,410) (1,449,000) Purchase of treasury stock -- (162,070) (2,310,360) Proceeds from private offerings, net -- -- 3,472,924 Proceeds from sale of common stock -- -- 12,725,227 ------------ ------------ ------------ Net cash provided by financing activities 30,428,355 7,749,351 17,688,613 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (1,607,139) 1,433,672 3,100,322 Cash and cash equivalents, beginning of period 4,789,547 3,355,875 255,553 ------------ ------------ ------------ Cash and cash equivalents, end of period $ 3,182,408 $ 4,789,547 $ 3,355,875 ============ ============ ============
See accompanying notes to consolidated financial statements. F-8 INTERNATIONAL FIBERCOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS cont'd
For the Year Ended December 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Supplemental cash flow disclosures: Cash paid during the year for interest $ 3,049,082 $ 838,833 $ 1,731,000 Cash paid during the year for income taxes 7,576,407 485,206 99,461 Supplemental disclosure of non-cash transactions: Common Stock issued in business acquisitions 7,132,711 525,000 6,200,000 Conversion of convertible debt 1,000,000 600,000 1,153,207 Conversion of Series A Preferred Stock -- -- 1,680,997 Conversion of Series B Preferred Stock -- 1,126,837 1,579,465 Conversion of Series C Preferred Stock 306,665 459,997 -- Preferred Stock dividends paid in Common Stock 4,000 47,722 173,447 Accrued interest paid in Common Stock -- 46,948 -- Accrued offering costs paid in Common Stock -- 310,323 2,013,380 Issuance of additional shares of Common Stock relating to 1997 private placement -- 1,948,959 -- Property and equipment acquired through notes payable and capital lease obligations 10,012,089 4,714,216 2,273,066
See accompanying notes to consolidated financial statements. F-9 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: International FiberCom, Inc., a C Corporation incorporated in Arizona on December 29, 1972, offers a wide range of services to the communications marketplace throughout the United States through three principle operating segments: infrastructure development, equipment distribution, and wireless technologies. Infrastructure development services include design and engineering services, installation, integration and maintenance of underground and aerial fiber optic, copper and broadband, as well as wireless, communications systems and integrated local and wide area networks. Equipment distribution services include the sale of new, deinstalled and refurbished communications equipment used in the digital access, switching and transport systems of telecommunications service providers and other Fortune 500 companies. Wireless technologies services include the design, manufacture and installation of proprietary wireless connectivity solutions designed to enable and enhance wireless communications, in both fixed and mobile applications. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. RECLASSIFICATIONS Certain balances as of December 31, 1998 and 1997 and the years then ended have been reclassified in the accompanying consolidated financial statements to conform with the current year presentation. These reclassifications had no effect on previously reported net income or stockholders' equity. USE OF 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 disclosures 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 those estimates. REVENUE RECOGNITION Revenue from the sale of telecommunications equipment is recognized upon shipment. Revenue from related services is recognized as the services are performed. Revenues from fixed-price and modified fixed-price contracts are recognized on the percentage-of-completion method based primarily on the ratio of contract costs incurred to date to total estimated contract costs. Contract costs include, among other things, direct labor, field labor, subcontracting, direct materials and direct overhead. Project losses are provided for in their entirety in the period in which such losses are determined. As contracts can extend over one or more accounting periods, revisions in costs and estimated earnings during the course of the work are reflected during the accounting period in which the facts that require such revisions become known. The length of the Company's contracts vary, but are typically less than one year. Therefore, assets and liabilities are classified as current and non-current based on a one year operating cycle. CASH AND CASH EQUIVALENTS Cash equivalents are highly liquid investments purchased with an initial maturity of three months or less. ACCOUNTS RECEIVABLE Contract billings represent the amounts billed but uncollected on completed and in-progress contracts, as well as standard trade receivables. Unbilled accounts receivable represents amounts due from customers on completed contracts not yet billed. INVENTORY Inventories are stated at the lower of cost or market, cost being determined using the first-in first-out or average cost methods, and consist primarily of new, deinstalled and refurbished telecommunications equipment. The Company periodically reviews, for all reporting periods, its inventory and makes adequate provisions for damaged or obsolete inventory. F-10 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT'D PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets utilizing straight-line and accelerated methods. Leasehold improvements are amortized over their estimated useful lives or the remaining lease term, whichever is shorter. The estimated useful lives are as follows: Construction equipment 5 - 7 years Vehicles 3 - 5 years Buildings 28 - 40 years Office furniture and equipment 5 - 10 years Software 3 - 7 years Leasehold improvements 5 - 40 years Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. The Company periodically reviews the carrying value of property and equipment and impairments, if any, will be recognized when the expected future operating cash flows derived from the assets are less than carrying value. Depreciation expense for the years ended December 31, 1999, 1998 and 1997 totaled $3,790,666, $1,700,407 and $1,214,733, respectively. GOODWILL Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. Goodwill is amortized on a straight-line basis over periods ranging from 15 to 20 years. The Company periodically reviews the carrying value of intangible assets and impairments, if any, will be recognized when the expected future operating cash flows derived from the intangibles are less than carrying value. Amortization expense for the years ended December 31, 1999, 1998 and 1997 totaled $2,022,501, $1,140,347 and $358,412, respectively. WARRANTIES The Company provides warranties for products sold and services performed. The Company has had no material warranty claims to date. INCOME TAXES The Company reports deferred taxes on an asset and liability approach. Deferred income taxes arise from timing differences resulting from revenues and expenses reported for financial accounting and tax reporting purposes in different periods. Deferred income taxes primarily represent the estimated tax liability on additional depreciation expense reported based upon accelerated tax depreciation methods, and timing differences in the utilization of net operating losses. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation arrangements in accordance with provisions of APB No. 25, "Accounting for Stock Issued to Employees" and related interpretations, and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost is recognized based on the difference, if any, on the date of grant between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. EARNINGS PER SHARE Basic earnings per share amounts include no dilution and are computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per share amounts are computed based on the weighted average number of shares actually outstanding plus the shares that would be outstanding assuming conversion of the convertible preferred stock and convertible debentures and exercise of dilutive stock options and warrants, all of which are considered to be common stock equivalents. The number of shares that would be issued from the exercise of stock options has been reduced by the number of shares that could have been purchased from the proceeds at the average market price of the Company's stock. Net income has been adjusted for dividends on the convertible preferred stock and interest and finance expenses (net of tax) on the convertible debt. F-11 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts receivable. The Company's revenues are derived principally from contracts with companies in the telecommunications industry in the United States. The Company performs ongoing credit evaluations of its customers and maintains an allowance for probable credit losses based upon its historical experience. Additionally, the Company maintains cash balances at various financial institutions. Deposits not to exceed $100,000 at the financial institution are insured by the Federal Deposit Insurance Corporation. The Company had uninsured cash of approximately $3,490,922 and $6,039,133 at December 31, 1999 and 1998, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of financial instruments, consisting primarily of notes payable and notes payable to related parties, approximate fair value based on current rates at which the Company could borrow funds with similar remaining maturities. NOTE 2 - SIGNIFICANT BALANCE SHEET COMPONENTS Significant balance sheet components consist of the following:
December 31, ---------------------------- 1999 1998 ------------ ------------ Accounts receivable, net: Contract billings $ 37,400,856 $ 16,832,307 Retainage 2,912,227 1,205,605 Unbilled receivables 832,844 467,054 Non-contract related accounts receivable 8,343,574 4,363,465 ------------ ------------ 49,489,501 22,868,431 Less: allowance for doubtful accounts (1,164,242) (266,389) ------------ ------------ $ 48,325,259 $ 22,602,042 ============ ============ Costs and estimated earnings in excess of billings: Costs incurred on contracts in progress $ 76,631,918 $ 25,061,595 Estimated earnings 21,033,140 9,024,306 ------------ ------------ 97,665,058 34,085,901 Less: billings to date (81,539,411) (29,343,678) ------------ ------------ $ 16,125,647 $ 4,742,223 ============ ============ Included in the accompanying consolidated balance sheets as follows: Costs and estimated earnings in excess of billings $ 19,638,209 $ 5,191,428 Billings in excess of costs and estimated earnings (3,512,562) (449,205) ------------ ------------ $ 16,125,647 $ 4,742,223 ============ ============ Inventory, net: Telecommunications equipment $ 19,218,888 $ 18,058,880 Cabling and equipment 1,222,039 847,433 Raw materials 253,577 -- ------------ ------------ 20,694,504 18,906,313 Less: allowance for obsolete inventory (1,972,170) (1,960,170) ------------ ------------ $ 18,722,334 $ 16,946,143 ============ ============
F-12 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SIGNIFICANT BALANCE SHEET COMPONENTS - CONT'D: December 31, ---------------------------- 1999 1998 ------------ ------------ Property and equipment, net: Construction equipment $ 21,783,522 $ 10,363,833 Vehicles 5,299,875 1,047,860 Building and land 2,854,860 2,339,447 Office furniture and equipment 4,985,467 960,821 Software 1,964,772 526,850 Leasehold improvements 725,289 341,312 ------------ ------------ 37,613,785 15,580,123 Less: accumulated depreciation (13,014,162) (5,538,051) ------------ ------------ $ 24,599,623 $ 10,042,072 ============ ============ Accrued expenses: Accrued payroll and related expenses $ 2,717,059 $ 1,516,935 Accrued sales tax 656,920 405,562 Other 1,027,306 329,810 ------------ ------------ $ 4,401,285 $ 2,252,307 ============ ============ NOTE 3 - NOTES PAYABLE Notes payable consist of the following: December 31, -------------------------- 1999 1998 ----------- ----------- Equipment notes payable to financial institutions, bearing interest at rates from 6.9% to 14.5%, monthly principal and interest payments from $252 to $18,056 and quarterly principal and interest payments of up to $150,000, due at various dates through September 2002; collateralized by equipment $ 2,711,693 $ 3,360,680 Mortgage notes payable to a bank, bearing interest at rates from 8.48% to 8.78%, monthly principal and interest payments totaling $10,334, due at various dates through December 2006, collateralized by deeds of trust 716,954 363,842 Notes payable to various banks under revolving lines of credit, interest payable monthly at variable rates based on prime plus indexes of 0.25% to 2.5%, repaid in 1999 -- 4,803,568 ----------- ----------- 3,428,647 8,528,090 Less: current portion (1,395,762) (6,410,568) ----------- ----------- $ 2,032,885 $ 2,117,522 =========== =========== OPERATING LINE OF CREDIT During 1999, the Company entered into a line of credit agreement with a syndication of commercial banks which provides for borrowings up to $60,000,000. Borrowings on the line of credit bear interest at prime plus 0.75% to 1.0% or LIBOR plus 1.75% to 3.5%, at the Company's discretion and based on certain financial covenants. Interest is payable monthly and outstanding principal is due upon the expiration date of the line of credit on April 30, 2001. Amounts due under the credit agreement at December 31, 1999 totaled $45,737,986. F-13 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - NOTES PAYABLE, CONT'D Although amounts due under the credit agreement were non-current at December 31, 1999, the Company has classified amounts borrowed for working capital purposes, totaling $28,260,498, as current for balance sheet purposes. Amounts outstanding under the line of credit are collateralized by all non-real property assets of the Company. The agreement contains certain financial covenants and minimum net worth requirements, all of which the Company was in compliance with at December 31, 1999. Future minimum payments due on notes payable and line of credit as of December 31, 1999 are as follows: 2000 $ 1,395,762 2001 46,670,515 2002 550,237 2003 123,623 2004 90,660 Thereafter 335,836 ------------ $ 49,166,633 ============ NOTE 4 - INCOME TAXES The provision (benefit) for income taxes consist of the following: Year Ended December 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Current income tax expense: Federal $ 3,353,196 $ 3,954,905 $ 125,372 State 655,923 790,777 18,437 ----------- ----------- ----------- 4,009,119 4,745,882 143,809 ----------- ----------- ----------- Deferred income tax expense (benefit): Federal 292,802 128,013 (427,292) State 64,013 25,602 (62,836) ----------- ----------- ----------- 356,815 153,615 (490,128) ----------- ----------- ----------- $ 4,365,934 $ 4,899,497 $ (346,319) =========== =========== =========== Deferred income tax assets and liabilities consist of the following: December 31, -------------------------- 1999 1998 ----------- ----------- Current deferred tax assets: Non-deductible reserves $ 1,239,957 $ 863,000 Net operating loss carryforwards 333,034 -- Payroll related accruals 165,888 -- Other 223,015 -- ----------- ----------- 1,961,894 863,000 ----------- ----------- Non-current deferred tax assets (liabilities): Net operationg loss carryforwards -- 145,000 Depreciation and amortization (1,720,146) (967,327) ----------- ----------- (1,720,146) (822,327) ----------- ----------- Net deferred tax asset $ 241,748 $ 40,673 =========== =========== F-14 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - INCOME TAXES, CONT'D At December 31, 1999, the Company had net federal and state net operating loss carryforwards totaling approximately $980,000 which expire at various times through 2014. Certain net operating losses were acquired in connection with acquisitions made during 1999 and, accordingly, are subject to annual utilization limits. The Company believes that it is more likely than not it will utilize available net operating loss carryforwards. Therefore, no valuation allowance has been recorded. The income tax rate varies from amounts computed by applying the U.S. statutory rate to income before the provision for income taxes. The effective tax rate is as follows: Year Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- Statutory rate 34.0% 34.0% 34.0% State taxes 5.3% 5.0% 1.3% Net operating loss utilization -- -2.3% -18.2% Research and development tax credits -2.5% -- -- Subchapter S income acquired -- -9.0% -22.7% Other -0.8% 2.3% -0.1% ---- ---- ---- Effective rate 36.0% 30.0% -5.7% NOTE 5 - RELATED PARTY TRANSACTIONS NOTES PAYABLE TO RELATED PARTIES Notes payable to related parties consist of the following: December 31, -------------------------- 1999 1998 ----------- ----------- Note payable to a stockholder and former employee of the Company, bearing interest at 8.5%, monthly principal and interest payments of $86,663, due in February 2001 $ 1,072,687 $ 2,051,326 Notes payable to former principles of acquired subsidiaries, bearing interest at rates from 5.5% to 12%, paid in full in 1999 -- 129,157 Convertible notes payable to a stockholder, bearing interest 5.5%, converted into 182,648 shares of Common Stock at $5.475 per share during 1999 -- 1,000,000 ----------- ----------- 1,072,687 3,180,483 Less: current portion (925,911) (2,029,287) ----------- ----------- $ 146,776 $ 1,151,196 =========== =========== COVENANT NOT TO COMPETE During the year ended December 31, 1997, the Company commenced litigation to collect certain loans receivable totaling $386,689 from two former principles of an acquired subsidiary. The officers filed a counterclaim alleging wrongful termination. In connection with the settlement in 1998, the individuals entered into an agreement whereby the receivable was converted into a five-year covenant not to compete. Amortization expense for the years ended December 31, 1999 and 1998 totaled $79,967 and $73,588, respectively. The covenant not to compete is included in other assets. NOTE 6 - COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company leases certain facilities and equipment under non-cancelable operating leases which expire through 2006. Certain operating leases contain renewal provisions and generally require the Company to pay insurance, maintenance and other operating expenses. The Company also leases certain equipment under long-term lease arrangements which are classified as capital F-15 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS leases. The Company has a capital lease line of credit with a financial institution whereby the Company can acquire up to $10 million in equipment with repayment terms of 3-5 years with interest at prevailing market rates. The leases terminate at various dates through December 2005. Equipment acquired under capital leases totaled $11,169,711 and $2,290,725 at December 31, 1999 and 1998, respectively. Future minimum lease commitments under non-cancelable operating and capital leases are as follows: Operating Capital Leases Leases ------------ ----------- 2000 $ 3,800,813 $ 2,895,065 2001 3,578,995 2,871,845 2002 3,099,147 2,063,659 2003 1,748,511 1,910,203 2004 1,083,322 1,122,704 Thereafter 926,067 8,219 ------------ ----------- $ 14,236,855 10,871,695 ============ Less: amount representing interest (1,632,623) ----------- Present value of capital lease obligations 9,239,072 Less: current portion (2,278,304) ----------- $ 6,960,768 =========== Rental expense for the years ended December 31, 1999, 1998 and 1997 totaled $3,911,816, $1,214,738 and $760,790, respectively. CONTINGENCIES The Company has legal proceedings incidental to its normal business activities. In the opinion of management, the outcome of the proceedings will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. NOTE 7 - STOCKHOLDERS' EQUITY PREFERRED STOCK The Series A 9% preferred shares are convertible into common shares at a price equal to a thirty percent (30%) discount from the lower of the average closing bid price of the common stock for the three (3) consecutive trading days prior to (i) the date of subscription of the preferred stock or (ii) the date of the conversion of the preferred stock. All shares of Series A 9% preferred stock were converted into Common Stock in 1997. The Series B 4% preferred are convertible into common stock at a price equal to the lower of the average stock price on the date of each monthly subscription installment or the discounted average stock price on the date of conversion. The "average stock price" is the average of the daily closing bid prices of the common stock for the five consecutive trading days immediately preceding the relevant date. The "discounted average stock price" means (i) 70% of the average of the daily closing bid prices of the common stock for the five consecutive trading days immediately preceding the date of conversion into common stock if such average of the daily prices is below $3.00 per share or (ii) 75% of the average of such daily prices if the average is above $3.00 per share. For a one year period after issuance of the series B preferred, the series B conversion Price floor will be the lower of $.75 or 50% of the average stock price. There will be no floor on the series B conversion price if the Company fails to achieve certain gross profits in any two consecutive quarters. The Company may redeem the series B preferred, in whole or in part, commencing 60 days after issuance at 150% of the purchase price of $1,000 per share. All of the Series B 4% preferred stock was converted into Common Shares in 1998. F-16 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Series C 4% preferred shares are convertible into common stock at a price of $6.48375 per share which approximated fair value at the date of issuance. Additional shares may be issuable upon conversion based upon certain conditions. Dividends are payable on the Series C preferred at the rate of 4% per annum in shares of common stock or cash, at the option of the Company on a quarterly basis. In 1998, 600 of the 1,000 outstanding shares of Series C 4% preferred stock was converted into Common Stock. During 1999, the remaining 400 shares were converted to Common Stock. COMMON STOCK During 1997, the Company entered into an agreement with a non-affiliated third party whereby it can repurchase 2,700,000 shares of common stock at prices ranging from $5.25 to $6.00 per share. No shares were repurchased under the agreement which expired in 1998. EMPLOYEE STOCK PURCHASE PLAN During 1997, the Company adopted an Employee Stock Purchase Plan (the "Plan") for all employees meeting certain eligibility criteria. Under the plan, eligible employees may purchase shares of the Company's common stock, subject to certain limitations, at 85% of its market value. Purchases are limited to 15% of an employee's eligible compensation, up to a maximum of $25,000 per year. An aggregate of 2,000,000 shares of the Company's common stock are authorized and available for sale to eligible employees. During the years ended December 31, 1999, 1998 and 1997, 189,644, 139,876 and 104,036 shares, respectively, were issued to employees under the Plan. EMPLOYEE STOCK OPTIONS AND RESTRICTED STOCK PLANS During the year ended December 31, 1994, the Company adopted the 1994 Incentive Stock Option Plan and the 1994 Restricted Stock Plan. The Plans authorized the granting of restricted shares of common stock and common stock options to key employees, consultants, researchers, and members of the Advisory Board. Under the above Plans, 441,707 shares of common stock were reserved for issuance. On January 7, 1997, the Board of Directors approved the 1997 International FiberCom, Inc. Stock Option Plan. The Plan authorizes the Company to grant incentive stock options and non-qualified stock options to key employees of the Company. In addition, the Company has adopted the 1997 Restricted Stock Plan. This Plan authorizes the granting of restricted shares of common stock to key employees, consultants, researchers, and members of the Board. Under the Plans, 3,200,000 shares of common stock are reserved for issuance pursuant to a Plan amendment on April 2, 1998. As of December 31, 1999, options exercisable to purchase all shares available for issuance under the 1994 Plans have been granted and options exercised to purchase 2,557,688 shares have been granted under the 1997 Plans. In addition, the Company has issued 4,722,343 options to employees and directors, not pursuant to any authorized plan. F-17 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Following is a summary of the status of the stock option plans for employees and directors during the years ended December 31, 1999, 1998 and 1997: Weighted Average Number Exercise of Options Price --------- ------ Outstanding as of January 1, 1997 443,500 $ 1.13 Granted 1,852,530 1.99 Exercised (30,145) 1.24 --------- ------ Outstanding as of December 31, 1997 2,265,885 1.83 Granted 2,275,982 5.43 Exercised (889,540) 1.06 Forfeited (63) 1.47 --------- ------ Outstanding as of December 31, 1998 3,652,264 4.23 Granted 3,151,516 5.99 Exercised (552,372) 3.55 Forfeited (107,844) 4.11 --------- ------ Outstanding as of December 31, 1999 6,143,564 $ 5.35 ========= ====== Information relating to stock options at December 31, 1999, summarized by exercise price, is as follows: Outstanding Exercisable ------------------------------ ------------------ Weighted Average Weighted Average ------------------- ------------------ Exercise Price Remaining Exercise Exercise Per Share Shares Life (Yrs) Price Shares Price --------- --------- ---------- ----- --------- ----- $ 0.94 - $1.47 478,154 4.47 $1.15 478,154 $1.15 $ 3.00 - $4.43 535,537 4.08 3.05 522,204 3.05 $ 5.00 - $7.25 4,812,373 2.78 5.74 3,589,148 5.72 $ 7.63 - $10.00 317,500 1.99 9.72 295,000 9.85 --------- ---- ----- --------- ----- 6,143,564 3.82 $5.35 4,884,506 $5.24 ========= ==== ===== ========= ===== All stock options issued to employees have an exercise price not less than the fair market value of the Company's common stock on the date of grant. In accordance with accounting for such options utilizing the intrinsic value method, there is no related compensation expense recorded in the Company's financial statements for the years ended December 31, 1999, 1998 and 1997. Had compensation cost for stock-based compensation been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts presented below: F-18 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, ------------------------------------------ 1999 1998 1997 ----------- ------------ ----------- Net income: As reported $ 7,755,091 $ 11,355,601 $ 6,205,202 Pro forma 2,718,634 5,252,498 4,362,432 Earnings per share: Basic: As reported $ 0.28 $ 0.48 $ 0.53 Pro forma 0.10 0.22 0.37 Diluted: As reported $ 0.26 $ 0.43 $ 0.35 Pro forma 0.09 0.20 0.20 The fair value of option grants is estimated as of the date of grant utilizing the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1999, 1998 and 1997: expected life of options of 2 years, expected volatility of 57%, 82%, and 82% respectively, risk-free interest rates of 8%, and a 0% dividend yield. The weighted average fair value at date of grant for options granted during 1999, 1998 and 1997 were approximately $2.18, $2.68 and $1.01, respectively. NON-EMPLOYEE STOCK OPTIONS AND WARRANTS Prior to December 31, 1997, the Company issued non-employee options and warrants to purchase shares of Common Stock in connection with certain offerings to sell Common and Preferred Stock and in exchange for services. Warrant activity for the years ended December 31, 1999, 1998 and 1997 is summarized as follows: Weighted Number Average of Options Exercise and Warrants Price ------------ ----- Outstanding as of January 1, 1997 3,970,923 $2.80 Granted 2,131,000 4.37 --------- ----- Outstanding as of December 31, 1997 6,101,923 3.47 Exercised (4,288,373) 2.63 Redeemed (7,440) 0.10 Forfeited (126,110) 6.80 --------- ----- Outstanding as of December 31, 1998 1,680,000 5.33 Exercised (480,000) 2.48 --------- ----- Outstanding as of December 31, 1999 1,200,000 $6.47 ========= ===== Warrants and non-employee options outstanding as of December 31, 1999 are exercisable at prices ranging from $0.94 to $8.10 and expire at various dates through April 2003. All services received in exchange for options and warrants during 1997 were related to stock offerings and, accordingly, the fair value of those services, as determined using the Black-Scholes pricing model, were netted against the proceeds of the related offerings. F-19 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - EARNINGS PER SHARE The following data shows amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock. Year Ended December 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Numerator: Numerator for basic earnings per share - net income attributable to common stockholders before proforma provision for income taxes $ 7,755,091 $11,355,601 $ 6,205,202 Interest and finance expense on convertible debt 31,126 157,357 113,060 Preferred Stock dividends 4,000 47,722 173,447 ----------- ----------- ----------- Numerator for diluted earnings per share $ 7,790,217 $11,560,680 $ 6,491,709 =========== =========== =========== Proforma Numerator: Proforma numerator for basic earnings per share - net income attributable to common stockholders after proforma provision for income taxes $ 7,755,091 $10,087,754 $ 4,748,984 Interest and finance expense on convertible debt 31,126 157,357 113,060 Preferred Stock dividends 4,000 47,722 173,447 ----------- ----------- ----------- Proforma numerator for diluted earnings per share $ 7,790,217 $10,292,833 $ 5,035,491 =========== =========== =========== Denominator: Denominator for basic earnings per share - weighted average shares outstanding 28,030,988 23,508,749 11,711,024 ----------- ----------- ----------- Effect of dilutive securities: Convertible preferred stock 10,943 401,001 2,426,652 Dilutive options and warrants 1,700,146 3,039,968 3,192,845 Convertible debt 75,561 226,045 1,249,315 ----------- ----------- ----------- Dilutive potential common shares 1,786,650 3,667,014 6,868,812 ----------- ----------- ----------- Denominator for diluted earnings per share 29,817,638 27,175,763 18,579,836 =========== =========== =========== Earnings per common share: Basic $ 0.28 $ 0.48 $ 0.53 Diluted $ 0.26 $ 0.43 $ 0.35 Proforma earnings per common share: Basic $ 0.28 $ 0.43 $ 0.41 Diluted $ 0.26 $ 0.38 $ 0.27 F-20 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Anti-dilutive options excluded from the calculation of earnings per share are summarized as follows: 1999 1998 1997 ------ ------ ------ Number of options 69,610 707,000 974,868 Weighted average exercise price $9.93 $7.63 $5.40 Expire on various dates through 8/13/2004 11/30/2002 11/30/2002 NOTE 9 - EMPLOYEE BENEFIT PLANS The Company sponsors a 401(k) retirement plan (the "Plan") which covers substantially all fulltime employees. The Plan allows for participants to contribute up to 15% of eligible compensation. The Plan provides for discretionary contributions by the Company. Several of the Company's subsidiaries sponsored individual defined contribution plans prior to being acquired by the Company. Upon acquisition, the plans were merged with the Company's Plan. Certain plans required the subsidiaries to make matching contributions based upon a participant's eligible compensation, subject to certain limitations. Contributions made by the Company during the years ended December 31, 1999, 1998 and 1997 totaled $37,987, $189,104 and $285,953, respectively. NOTE 10 - BUSINESS COMBINATIONS During 1999, the Company completed four acquisitions which were accounted for using the purchase method of accounting. Accordingly, the results of operations of the acquired companies have been included in the accompanying consolidated results of operations as of their respective acquisition dates. Under the purchase agreements, the Company paid both cash and stock for the acquisitions. Common stock issued in connection with the acquisitions was valued at fair market value based upon the market value of the securities over a reasonable period of time before and after the acquisition was consummated. Certain agreements included provisions for contingent consideration which is payable if certain financial targets are met over a three year period. The maximum potential contingent consideration totaled approximately $25.7 million and, to the extent earned, will be recorded as additional goodwill in future periods. Companies acquired in 1999 are located in North America and include Aerocomm, Inc., All Star Telecom, Inc., BlueRidge Solutions and Washington Data Systems, Inc. With the exception of Aerocomm, Inc., all 1999 acquisitions provide infrastructure development services to customers in the communications industry. Aerocomm, Inc. is a developer of proprietary wireless communications products and connectivity solutions. The following presents unaudited pro forma condensed results of operations for the year ended December 31, 1999 and 1998 assuming the acquisitions were consumated as of January 1, 1999 and 1998 respectively. The unaudited pro forma information does not necessarily reflect the results which would have been obtained had the acquisitions occurred on January 1, 1999 or 1998 nor are they indicative of future results which may be obtained.
(unaudited) Pro Forma International 1999 (1) Pro Forma Consolidated FiberCom, Inc. Acquisitions Adjustments Amounts -------------- ------------ ----------- ------------ Year ended December 31, 1999: Revenues $170,399,742 $21,017,814 $191,417,556 Net income 7,755,091 (41,980) (477,752)(2) 7,235,359 Earnings per share: Basic $ .28 $ .26 Diluted $ .26 $ .24 Shares used in computation: Basic 28,030,988 28,192,110 Diluted 29,817,638 29,978,760 Year ended December 31, 1998: Revenues $104,975,995 $50,303,188 $155,279,183 Net income 11,403,323 (1,137,591) (1,165,442)(2) 9,100,290 Earnings per share: Basic $ .48 $ .37 Diluted $ .43 $ .32 Shares used in computation: Basic 23,508,749 24,458,146 Diluted 27,175,763 28,125,160
- ---------- (1) Represents activity for the period from January 1, 1999 through the acquisition dates in 1999. (2) To record the after-tax effect of interest expense and of amortization of goodwill associated with the acquisitions for the period from January 1, 1998 through the acquisition dates in 1999. F-21 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In April 1998, the Company purchased the assets of Riley Underground Communications, Inc., based in Southern California, for cash and restricted shares of Common Stock. Riley installs and maintains fiber-optic networks for cable television and telephone companies. Riley was acquired for an initial payment of approximately $300,000, comprised of $150,000 in cash and $150,000 in stock. The previous owner of Riley is eligible for contingent payments totaling $2,200,000 based upon subsequent performance of Riley. The Company accounts for these contingent payments as they are earned as adjustments to the purchase price of Riley. Payments may be in cash or at the Company's election up to 50% may be paid in restricted shares of Common Stock. The purchase price exceeded the fair value of the net assets by approximately $600,000 of goodwill, which is being amortized on the straight-line basis over twenty years. The results of operations of Riley are included in the accompanying consolidated results of operations as of the date of acquisition. On September 1, 1998, the Company completed two acquisition which were accounted for under the pooling of interest method of accounting. The Company exchanged 1,502,000 and 1,752,000 shares of Common Stock for all the common stock of United Tech, Inc. and Diversitec, Inc., respectively. Both United and Diversitec sell new, deinstalled and refurbished communications equipment used in the digital access, switching and transport systems of telecommunications service providers and other Fortune 500 companies. Both United and Diversitec were Subchapter S corporations for federal tax purposes and, accordingly, were not subject to federal income taxes. In accordance with the pooling of interests accounting method, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of United and Diversitec as though it has always been a part of the Company. Additionally, a pro forma provision for income taxes has been recorded for the years ended December 31, 1998 and 1997 to present income taxes as though the consolidated operating results of the acquired companies had been subject to federal income taxes for all periods presented. In October, 1997, the Company completed a merger with Compass Communications which was accounted for under the pooling of interests method of accounting. The Company exchanged 470,588 shares of Common Stock for all of the common stock of Compass. Compass specializes in the consulting and design of major broadband, fiber-optic networks. In accordance with the pooling of interest accounting method, all prior period consolidated financial statements have been restated to include the results of operations, financial position and cash flows of Compass for all periods presented. The results of operations for the separate companies and combined amounts presented in the consolidated financial statements follow. Unaudited Pro Forma Revenues Net Income Net Income ----------- ---------- ---------- Eight months ended August 31, 1998 United Tech $10,508,497 $1,392,626 $ 835,576 Diversitec 9,288,799 2,100,218 1,260,131 ----------- ---------- ---------- Totals $19,797,296 $3,492,844 $2,095,707 =========== ========== ========== Year Ended December 31, 1997 IFCI $31,190,529 $2,128,551 $2,128,551 United Tech 8,345,581 1,061,641 636,985 Diversitec 12,595,079 3,012,523 1,807,514 Compass 5,134,617 175,934 175,934 ----------- ---------- ---------- $57,265,806 $6,378,649 $4,748,984 =========== ========== ========== Unauadited pro forma net income reflects an adjustment to present income taxes as though the operating results of United Tech and Diversitec had been subject to federal income taxes for all periods presented. In connection with the United and Diversitec acquisitions, the Company recorded a charge to operating expenses of $890,000 for direct and other acquisition related costs. Acquisition costs consisted primarily of finder's, attorney's and accounting fees. F-22 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On January 1, 1997, the Company acquired Concepts In Communications, Inc. under the purchase method of acounting. Concepts is based in Nashville, Tennessee and provides systems integration services including design, engineering, installation and maintenance of structured cable systems, network hardware and software, work station peripherals and intercommunication systems, primarily within commercial, industrial and governmental facilities throughout the United States. The purchase price of $4,800,000 was funded through the sale of $3,500,000 of Series B preferred stock and $1,500,000 from the issuance of convertible debentures. The purchase price exceeded the fair value of the net assets acquired by approximately $2,200,000 of goodwill, which is being amortized on a straight-line basis over fifteen years. The results of operations of Concepts are included in the accompanying financial statements from the date of acquisition. On October 1, 1997, the Company acquired substantially all of the assets of Southern Communications Products, Inc., based in northwest Florida. Southern sells new, deinstalled and refurbished communications equipment used in the digital access, switching and transport systems of telecommunications service providers and other Fortune 500 companies. The purchase price of $21,400,000 was funded through the sale of $13,500,000 of common stock, issuance of $6,200,000 of common stock to the former owner, and the issuance of a note payable in the amount of $3,200,000. The purchase price exceeded the fair value of the net assets acquired by approximately $17,900,000 of goodwill, which is being amortized on the straight-line basis over twenty years. The results of operations of Southern are included in the accompanying financial statements from the date of acquisition. The following unaudited pro forma condensed consolidated financial statements give effect to the acquisition in 1997 of Southern. They are based on the estimates and assumptions set forth herein and in the notes to such statements. This pro forma information has been prepared utilizing the historical financial statements and notes thereto, which are incorporated by reference herein. The pro forma financial data does not purport to be indicative of the results which actually would have been obtained had the purchase been effected on the dates indicated or of the results which may be obtained in the future. The pro forma financial information is based on the purchase method of accounting for the acquisition of Southern. The pro forma entries are described in the accompanying footnotes to the unaudited pro forma condensed consolidated financial statements. F-23 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following represents pro forma condensed consolidate statement of operations for the year ended December 31, 1997, assuming the acquisition of Southern was consummated as of January 1, 1997
Pro Forma International Pro Forma Consolidated Fibercom, Inc. Southern (4) Adjustments Amounts ------------ ----------- ----------- ------------ Revenues $ 57,265,806 $ 8,486,849 $ 65,752,655 Cost of revenues 40,433,795 2,755,785 43,189,580 ------------ ----------- ------------ Gross margin 16,832,011 5,731,064 22,563,075 General and administrative 12,264,470 1,191,856 662,000 (1) 14,118,326 ------------ ----------- ------------ Income from operations 4,567,541 4,539,208 8,444,749 Other income (expense), net 1,464,789 17,741 (204,000)(2) 1,278,530 ------------ ----------- ------------ Income before provision for income taxes 6,032,330 4,556,949 9,723,279 Provision for income taxes 346,319 -- (3,452,445)(3) (3,106,126) ------------ ----------- ------------ Net income 6,378,649 4,556,949 6,617,153 Preferred stock dividend (173,447) -- (173,447) ------------ ----------- ------------ Net income attributable to common stockholders $ 6,205,202 $ 4,556,949 $ 6,443,706 ============ =========== ============ Earnings per share: Basic $ 0.53 $ 0.42 Diluted $ 0.35 $ 0.29 Shares used in computation: Basic 11,711,024 15,514,770 Diluted 18,579,836 22,383,582
- ---------- (1) To amortize goodwill in connection with the purchase of Southern on a straight-line basis over twenty years. (2) To record interest on the convertible subordinated debentures issued to fund the acquisition. (3) Pro forma income tax provision for Diversitec, United and Southern. (4) Represents activity for the period from January 1, 1997 through September 30, 1997, the date of the acquisition. F-24 INTERNATIONAL FIBERCOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - SEGMENT INFORMATION The Company's services are provided through three principle operating segments: infrastructure development, equipment distribution, and wireless technologies. Infrastructure development includes design and engineering services, installation, integration and maintenance of underground and aerial fiber-optic, copper and broadband communications systems, as well as integrated local and wide area networks. Equipment distribution services include the sale of new, deinstalled and refurbished communications equipment used in the digital access, switching and transport systems of telecommunications service providers and other Fortune 500 companies. Wireless technologies services include the design, manufacture and installation of proprietary wireless communications equipment used to enhance radio frequency transmission in tunnels, subways and other confined environments. Summary financial information for each operating segment as of and for the years ended December 31, 1999 and 1998 is as follows:
Infrastructure Equipment Wireless Development Distribution Technologies Total ------------ ----------- ----------- ------------ For the year ended December 31, 1999: Revenues $136,150,558 $31,077,638 $ 3,171,546 $170,399,742 Gross Profit 32,739,857 9,961,171 1,039,757 43,740,785 Depreciation and amortization 4,444,732 1,152,257 296,145 5,893,134 Interest expense 2,659,469 508,922 53,416 3,221,807 Operating income (loss) 10,133,293 4,689,539 (180,426) 14,642,406 Assets 108,977,953 44,813,967 7,083,644 160,875,564 For the year ended December 31, 1998: Revenues $ 65,294,317 $39,681,678 $ -- $104,975,995 Gross Profit 13,705,616 21,173,709 -- 34,879,325 Depreciation and amortization 1,923,161 1,170,550 -- 3,093,711 Interest expense 604,597 374,824 -- 979,421 Operating income 3,606,022 13,447,080 -- 17,053,102 Assets 40,780,338 43,834,051 -- 84,614,389 For the year ended December 31, 1997: Revenues $ 34,287,148 $22,978,658 $ -- $ 57,265,806 Gross Profit 8,957,936 7,874,075 -- 16,832,011 Depreciation and amortization 1,307,711 351,810 -- 1,659,521 Interest expense 157,127 220,490 -- 377,617 Operating income 1,120,871 3,446,670 -- 4,567,541 Assets 18,606,580 30,289,172 -- 48,895,752
For the purpose of measuring the results of operations of each segment, the Company allocates corporate overhead to each segment based on a percentage of revenues. NOTE 12 - MAJOR CUSTOMERS For the year ended December 31, 1999, no single customer accounted for more than 10% of revenues. For the year ended December 31, 1998, two customers accounted for 13% and 11% of total revenues. For the year ended December 31, 1997, one customer accounted for 22% of revenues. Amounts due from these customers at December 31, 1998 and 1997 totaled approximately $5,837,000 and $2,173,000, respectively. F-25 EX-21.1 2 SUBSIDIARIES EXHIBIT 21.1 INTERNATIONAL FIBERCOM, INC. SUBSIDIARIES Kleven Communities, Inc. Concepts in Communication, Inc. Kleven Communications (CA), Inc. Southern Communications Products, Inc. Compass Communications, Inc. United Tech, Inc. Diversitec, Inc. IFC Staffing, Inc. AeroComm, Inc. Washington Data Systems, Inc. Waypoint Systems Integration, Inc. All Star Telecom, Inc. All Star Telecom (Nevada), Inc. International FiberCom (UK) Limited BTI Acquisition, Inc. NYA Acquisition, Inc. EX-23.1 3 CONSENT OF SEMPLE & COOPER, LLP CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the inclusion of our report dated March 13, 1998, on the consolidated financial statements of International FiberCom, Inc. and Subsidiaries for the year ended December 31, 1997, in the Company's Form 10-K Registration Statement, and to the reference to us under the caption "Experts" contained in the Prospectus. Certified Public Accountants Semple & Cooper, LLP Phoenix, Arizona March 15, 2000 EX-23.2 4 CONSENT OF BDO SEIDMAN, LLP CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS International Fibercom, Inc. 3410 East University Drive, Suite 180 Phoenix, Arizona 85034 We hereby consent to the incorporation by reference in the Prospectus constituting a part of this Registration Statement of our report dated March 10, 2000, relating to the consolidated financial statements of International Fibercom, Inc. appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. /s/ BDO SEIDMAN, LLP Los Angeles, California March 10, 2000 EX-27 5 FINANCIAL DATA SCHEDULE
5 924632 INTERNATIONAL FIBERCOM INC 1 US DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 3,182,408 0 49,489,501 0 18,722,334 94,455,604 37,613,785 (13,014,162) 160,875,564 56,815,998 0 0 0 60,106,750 15,644,753 160,875,564 170,399,742 170,399,742 126,658,957 158,274,716 0 0 3,221,807 12,125,026 4,365,934 7,755,091 0 0 (4,000) 7,755,091 .28 .26
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