-----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, Q6b4vWN0eNGEIlxIMjuPnSjdT2cnam/Kwm4dikyn6D4d/MBSi18FeDKh/mPXhfvD BrpnbCkfd2Ha2BKSgF7uXg== 0000950147-98-000923.txt : 19981116 0000950147-98-000923.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950147-98-000923 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980916 ITEM INFORMATION: FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL FIBERCOM INC CENTRAL INDEX KEY: 0000924632 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 860271282 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-13278 FILM NUMBER: 98749065 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 8-K/A 1 AMENDMENT TO CURRENT REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): September 16, 1998 INTERNATIONAL FIBERCOM, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Arizona ---------------------------------------------- (State or other jurisdiction of incorporation) 1-9690 86-0271282 - ------------------------ ------------------------------------ (Commission File Number) (IRS Employer Identification Number) 3410 E. University, Suite 180, Phoenix, Arizona 85034 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (602) 941-1900 Not Applicable ------------------------------------------------------------ (Former name or former address, if changed since last report) ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) THE FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. The financial statements and schedules for United Tech, Inc. and Diversitec, Inc. which were previously omitted from the Form 8-K filed on August 10, 1998 are included herewith commencing on page F-1. (b) PRO FORMA FINANCIAL INFORMATION. See (a) above. (c) EXHIBITS. None. -2- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. INTERNATIONAL FIBERCOM, INC. /s/ Joseph P. Kealy --------------------------------------- Joseph P. Kealy Chairman of the Board and President Dated: November 13, 1998 -3- INDEPENDENT AUDITORS' REPORT To The Stockholders and Board of Directors of United Tech, Inc. We have audited the accompanying balance sheet of United Tech, Inc. as of December 31, 1997, and the related statements of operations, changes in stockholder's equity, and cash flows for the year ended December 31, 1997 and for the period from the date of inception, December 2, 1996 through December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United Tech, Inc. as of December 31, 1997, and the results of its operations, changes in stockholder's equity, and cash flows for the year ended December 31, 1997 and for the period from the date of inception, December 2, 1996 through December 31, 1996, in conformity with generally accepted accounting principles. Semple & Cooper, LLP Certified Public Accountants Phoenix, Arizona August 21, 1998 F-1 UNITED TECH, INC. BALANCE SHEETS
ASSETS (UNAUDITED) December 31, June 30, 1997 1998 ------------ ----------- Current Assets: Cash and cash equivalents (Notes 1 and 2) $ 329,630 $ 173,283 Accounts receivable (Notes 1 and 2) 286,820 984,095 Inventory (Note 1) 551,291 1,078,013 ----------- ----------- Total Current Assets 1,167,741 2,235,391 ----------- ----------- Property and Equipment: (Note 1) Office equipment 4,048 4,048 Furniture and fixtures 1,980 1,980 Warehouse equipment 4,316 5,125 ----------- ----------- 10,344 11,153 Less: accumulated depreciation (8,637) (9,737) ----------- ----------- 1,707 1,416 ----------- ----------- Other Assets: Refundable deposits 550 550 ----------- ----------- Total Assets $ 1,169,998 $ 2,237,357 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable (Note 2) $ 245,444 $ 312,222 Accrued pension expense (Note 4) 67,816 30,000 ----------- ----------- Total Current Liabilities 313,260 342,222 ----------- ----------- Commitments: (Note 3) -- -- Stockholders' Equity: Common stock - $1 par value; 7,500 shares authorized; 980 shares issued and outstanding 980 980 Retained earnings 855,758 1,894,155 ----------- ----------- Total Stockholders' Equity 856,738 1,895,135 ----------- ----------- Total Liabilities and Stockholders' Equity $ 1,169,998 $ 2,237,357 =========== ===========
The Accompanying Notes are an Integral Part of the Financial Statements F-2 UNITED TECH, INC. STATEMENTS OF OPERATIONS
(UNAUDITED) Year Ended Period Ended Six Month Periods Ended ---------- ------------ ----------------------- December 31, December 31, June 30, June 30, 1997 1996 1998 1997 ---- ---- ---- ---- Sales $ 8,345,581 $ -- $ 8,373,335 $ 3,771,956 Cost of Sales 5,706,945 -- 5,727,829 2,238,980 ----------- ----------- ----------- ----------- Gross Profit 2,638,636 -- 2,645,506 1,532,976 General and Adminis- trative Expenses 1,559,568 5,883 1,621,467 853,637 ----------- ----------- ----------- ----------- Income (Loss) from Operations 1,079,068 (5,883) 1,024,039 679,339 ----------- ----------- ----------- ----------- Other Income (Expense): Interest income 6,717 -- 14,358 1,350 Interest expense (24,144) -- -- (24,144) ----------- ----------- ----------- ----------- (17,427) -- 14,358 (22,794) ----------- ----------- ----------- ----------- Net Income (Loss) 1,061,641 (5,883) 1,038,397 656,545 Pro Forma Income Tax Benefit (Expense) (Unaudited) (395,894) 2,300 (396,777) (244,158) ----------- ----------- ----------- ----------- Net Income (Loss) After Pro Forma Income Tax Adjustment (Unaudited) $ 665,747 $ (3,583) $ 641,620 $ 412,387 =========== =========== =========== ===========
The Accompanying Notes are an Integral Part of the Financial Statements F-3 UNITED TECH, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Total -------------------------- Retained Stockholders' Shares Amount Earnings Equity ------ ------ -------- ------ Balance at December 2, 1996 -- $ -- $ -- $ -- Issuance of common stock 500 500 -- 500 Net loss for the period from the date of inception, December 2, 1996 through December 31, 1996 -- -- (5,883) (5,883) ----------- ----------- ----------- ----------- Balance at December 31, 1996 500 500 (5,883) (5,383) Issuance of common stock 480 480 -- 480 Net income for the year ended December 31, 1997 -- -- 1,061,641 1,061,641 Cash dividends -- -- (200,000) (200,000) ----------- ----------- ----------- ----------- Balance at December 31, 1997 980 980 855,758 856,738 Net income for the six month period ended June 30, 1998 (Unaudited) -- -- 1,038,397 1,038,397 ----------- ----------- ----------- ----------- Balance at June 30, 1998 (Unaudited) 980 $ 980 $ 1,894,155 $ 1,895,135 =========== =========== =========== ===========
The Accompanying Notes are an Integral Part of the Financial Statements F-4 UNITED TECH, INC. STATEMENTS OF CASH FLOWS
(UNAUDITED) Year Ended Period Ended Six Month Periods Ended ---------- ------------ ----------------------- December 31, December 31, June 30, June 30, 1997 1996 1998 1997 ---- ---- ---- ---- Increase (Decrease) in Cash and Cash Equivalents: Cash flows from operating activities: Cash received from customers $ 8,058,761 $ -- $ 7,676,060 $ 3,469,872 Cash paid to suppliers and employees (7,475,191) (27,149) (7,845,956) (3,118,975) Interest received 6,717 -- 14,358 1,350 Interest paid (24,144) -- -- (24,144) ----------- ----------- ----------- ----------- Net cash provided (used) by operating activities 566,143 (27,149) (155,538) 328,103 ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (7,781) (2,563) (809) (3,932) ----------- ----------- ----------- ----------- Net cash used by investing activities (7,781) (2,563) (809) (3,932) ----------- ----------- ----------- ----------- Cash flows from financing activities: Proceeds from notes payable - stockholder 363,835 132,038 -- 363,835 Repayment of notes payable - stockholder (495,873) -- -- (493,835) Proceeds from sale of common stock 480 500 -- -- Payment of dividends (200,000) -- -- -- ----------- ----------- ----------- ----------- Net cash provided (used) by financing activities (331,558) 132,538 -- (130,000) ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 226,804 102,826 (156,347) 194,171 Cash and cash equivalents at beginning of period 102,826 -- 329,630 102,826 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 329,630 $ 102,826 $ 173,283 $ 296,997 =========== =========== =========== ===========
The Accompanying Notes are an Integral Part of the Financial Statements F-5 UNITED TECH, INC. STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED) Year Ended Period Ended Six Month Periods Ended ---------- ------------ ----------------------- December 31, December 31, June 30, June 30, 1997 1996 1998 1997 ---- ---- ---- ---- Reconciliation of Net Income (Loss) to Net Cash Provided (Used) by Operating Activities: Net Income (Loss) $ 1,061,641 $ (5,883) $ 1,038,397 $ 656,545 ----------- ----------- ----------- ----------- Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities: Depreciation 8,553 84 1,100 4,277 Changes in Assets and Liabilities: Accounts receivable (286,820) -- (697,275) (302,084) Inventory (530,141) (21,150) (526,722) (173,394) Refundable deposits (350) (200) -- (200) Accounts payable 245,444 -- 66,778 75,143 Accrued pension expense 67,816 -- (37,816) 67,816 ----------- ----------- ----------- ----------- (495,498) (21,266) (1,193,935) (328,442) ----------- ----------- ----------- ----------- Net cash provided (used) by operating activities $ 566,143 $ (27,149) $ (155,538) $ 328,103 =========== =========== =========== ===========
The Accompanying Notes are an Integral Part of the Financial Statements F-6 UNITED TECH, INC. NOTES TO FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates: Operations: United Tech, Inc. is a Corporation which was duly formed and organized under the laws of the State of Florida on December 2, 1996. The principal business purpose of the Company is to sell and distribute new and secondary market telephony equipment to telephone service providers and other vendors throughout the United States. Pervasiveness 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 disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interim Financial Information: The interim financial statements for the six month period ended June 30, 1998 are unaudited. In the opinion of management, such statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair representation of the results of the interim period. The results of operations for the six month period ended June 30, 1998 are not necessarily indicative of the results for the entire year. Fair Value of Financial Instruments: Cash, accounts receivable and accounts payable approximate fair value due to their short-term nature. Cash and Cash Equivalents: For financial accounting purposes, cash and cash equivalents are considered to be all highly liquid investments purchased with an initial maturity of three (3) months or less. F-7 UNITED TECH, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 1. Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates: (Continued) Accounts Receivable: Accounts receivable represents amounts billed but uncollected for sales of telephony equipment. The Company follows the allowance method of recognizing uncollectible accounts receivable. The allowance method recognizes bad debt expense as a percentage of accounts receivable based on a review of the individual accounts outstanding, and the Company's prior history of uncollectible accounts receivable. Management believes all receivables are fully collectible as of December 31, 1997 and June 30, 1998. Accordingly, no provision for uncollectible accounts has been included in the accompanying financial statements. For the years ended December 31, 1997 and 1996, and for the six month periods ended June 30, 1998 and 1997 (unaudited), the Company had no bad debt expense. Inventories: Inventories are maintained on a perpetual system, and are stated at the lower of cost, first-in, first-out method, or market. Inventories consist of new and used telephony equipment. The Company periodically reviews its inventory and makes a provision for damaged or obsolete inventory, if necessary. No provision for damaged or obsolete inventory has been included in the accompanying financial statements. Property and Equipment: Property and equipment are recorded at cost. Depreciation is provided for on the accelerated method over the estimated useful lives of the assets. The average lives range from five (5) to seven (7) years. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized when incurred. Depreciation expense for the years ended December 31, 1997 and 1996 was $8,553 and $84, respectively. Depreciation expense for the six month periods ended June 30, 1998 and 1997 was $1,100 and $4,277, (unaudited), respectively. Warranties: The Company provides a standard ninety (90) day warranty on all products sold. The warranty requires the Company to repair or replace, at its option, all defective components on such products. At December 31, 1997 and June 30, 1998, no reserve for future warranty costs has been accrued due to limited sales returns, and management's belief that warranty costs will not be material to the operating results of the Company. F-8 UNITED TECH, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 1. Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates: (Continued) Income Taxes: For federal tax reporting purposes, the Company operates as a Sub-Chapter S Corporation. As such, all taxable income and available tax credits are passed from the corporate entity to the individual stockholders. It is the responsibility of the individual stockholders to report the taxable income and tax credits, and to pay any resulting income taxes. Accordingly, no provisions were made for federal and state income taxes payable in the accompanying financial statements. However, a pro forma income tax benefit (expense) has been provided in the statement of operations. The S Corporation election was revoked effective September 1, 1998 upon the acquisition by International FiberCom, Inc. (See Note 6). 2. Concentrations: Credit Risk: The Company maintains its checking account at Nations Bank. Deposits not to exceed $100,000 at the institution are insured by the Federal Deposit Insurance Corporation. At December 31, 1997 and June 30, 1998, the Company has uninsured cash in the approximate amounts of $330,000 and $73,000 (unaudited), respectively. Major Customers: For the year ended December 31, 1997, the Company had two (2) major customers representing forty-three percent (43%) and sixteen percent (16%) of sales, respectively. At December 31, 1997, the amount due from the two (2) customers included in accounts receivable was $25,546. For the six month period ended June 30, 1998, the Company had two (2) major customers representing fifty-nine percent (59%) (unaudited) and twelve percent (12%) (unaudited) of sales, respectively. At June 30, 1998, the amount due from the two (2) customers included in accounts receivable was $479,055 (unaudited). For the six month period ended June 30, 1997, the Company had two (2) major customers representing forty-one percent (41%) (unaudited) and twenty-two percent (22%) (unaudited) of sales, respectively. At June 30, 1997, the amount due from the two (2) customers included in accounts receivable was $78,417 (unaudited). F-9 UNITED TECH, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 2. Concentrations: (Continued) Major Suppliers: For the year ended December 31, 1997, the Company had three (3) major suppliers representing twelve percent (12%), eleven percent (11%), and eleven percent (11%) of purchases, respectively. At December 31, 1997, there were no payable amounts outstanding to the three (3) suppliers. For the six month period ended June 30, 1998, the Company had one (1) major supplier representing twenty-nine percent (29%) (unaudited) of purchases. At June 30, 1998, there were no payable amounts outstanding to the one (1) supplier. For the six month period ended June 30, 1997, the Company had three (3) major suppliers representing eighteen percent (18%) (unaudited), fifteen percent (15%) (unaudited), and fourteen percent (14%) (unaudited) of purchases, respectively. At June 30, 1997, the amount due to the three (3) suppliers included in accounts payable was $4,790 (unaudited). 3. Commitments and Contingency: Lease Commitment: The Company is currently leasing office space in Lakeland, Florida under non-cancellable operating lease agreements which expire through September, 1998. Rent expense under the lease agreements for the years ended December 31, 1997 and 1996 was $23,013 and $1,643, respectively. Rent expense under the lease agreements for the six month periods ended June 30, 1998 and 1997 was $14,815 and $7,394, (unaudited), respectively. As of December 31, 1997 and June 30, 1998, future minimum lease payments due under the non-cancellable operating lease agreements, are as follows: (UNAUDITED) Year Ending Year Ending Year December 31, June 30, ---- ------------ -------- 1998 $ 19,236 $ - 1999 - 5,175 ---------- ---------- $ 19,236 $ 5,175 ========== ========== F-10 UNITED TECH, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 4. Pension Plan: The Company adopted a Money Purchase Safe Harbor Pension Plan effective January 1, 1997, covering substantially all full-time employees. The Company will contribute an amount equal to 15.6% of an employee's annual compensation, plus an amount equal to 5.7% of an employee's annual compensation in excess of the maximum wage subject to Social Security tax as of the beginning of the Plan year. For Plan purposes, the maximum compensation allowed under the Plan is $200,000. Pension expense for the year ended December 31, 1997 was $67,816. Pension expense for the six month periods ended June 30, 1998 and 1997 was $0 (unaudited). 5. Year 2000: The Company recognizes the need to ensure its operations will not be adversely impaired by year 2000 software failures. The Company is addressing this risk to the availability and integrity of financial systems. Management does not believe the cost of achieving year 2000 compliance will have a material impact on the Company's financial position or results of operations. In addition, it is management's belief that its principal customers and suppliers either have or will be able to attain year 2000 compliance with no material effect on the operations of the Company. 6. Subsequent Event: Effective September 1, 1998, the Company sold one hundred percent (100%) of its issued and outstanding common stock for 1,502,000 shares of restricted common stock of International FiberCom, Inc. F-11 INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following unaudited pro forma condensed consolidated financial statements give effect to the acquisition by International FiberCom, Inc. of United Tech, Inc. and Diversitec, Inc., pursuant to the Stock Purchase and Sale Agreement between the parties, and 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 purpose 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 pooling method of accounting for the acquisition of United Tech, Inc. and Diversitec, Inc. The pro forma entries are described in the accompanying footnotes to the unaudited pro forma condensed consolidated financial statements. The pro forma unaudited condensed consolidated statements of operations assume the acquisition took place on the first day of the period presented, while the unaudited pro forma condensed consolidated balance sheets assume the acquisition took place on the balance sheet date. Effective September 1, 1998, International FiberCom, Inc. acquired United Tech, Inc., a privately-held company based in Florida. Under the terms of the agreement, the Company acquired all of the issued and outstanding common stock for approximately 1,502,000 shares of restricted common stock. Also, effective September 1, 1998, International FiberCom, Inc. acquired Diversitec, Inc., a privately-held company based in Virginia. Under the terms of the agreement, the Company acquired all of the issued and outstanding common stock of Diversitec, Inc. for approximately 1,752,000 shares of restricted common stock. F-12 INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) December 31, 1997 Pro Forma Financial Information: The following represents a pro forma condensed consolidated balance sheet as of December 31, 1997, assuming the Company's acquisition of United Tech, Inc. and Diversitec, Inc. was consummated as of that date.
ASSETS International FiberCom, Pro Forma Inc. and United Tech, Diversitec, Consolidated Subsidiaries Inc. Inc. Amounts ------------ ---- ---- ------- Current Assets: Cash $ 2,990,575 $ 329,630 $ 35,670 $ 3,355,875 Accounts receivable, Net 8,196,511 286,820 1,068,288 9,551,619 Inventory 2,563,509 551,291 3,033,001 6,147,801 Other current assets 378,226 -- 52,000 430,226 Costs and estimated earnings in excess of uncompleted contracts 2,540,278 -- -- 2,540,278 ----------- ----------- ----------- ----------- Total Current Assets 16,669,099 1,167,741 4,188,959 22,025,799 Property and Equipment, Net 5,573,568 1,707 41,358 5,616,633 Other Assets, Net 1,168,829 550 -- 1,169,379 Goodwill, Net 20,083,941 -- -- 20,083,941 ----------- ----------- ----------- ----------- Total Assets $43,495,437 $ 1,169,998 $ 4,230,317 $48,895,752 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Long-term debt - current portion $ 3,441,048 $ -- $ 716,003 $ 4,157,051 Accounts payable 2,618,317 245,444 1,824,883 4,688,644 Accrued expenses 1,958,494 67,816 1,292,727 3,319,037 Billings in excess of costs and estimated earnings on uncompleted contracts 218,585 -- -- 218,585 ----------- ----------- ----------- ----------- Total Current Liabilities 8,236,444 313,260 3,833,613 12,383,317 Long-Term Liabilities: Long-term debt 4,242,159 -- 124,683 4,366,842 Other 163,862 -- -- 163,862 Stockholders' Equity 30,852,972 856,738 272,021 31,981,731 ----------- ----------- ----------- ----------- Total Liabilities and Stockholders' Equity $43,495,437 $ 1,169,998 $ 4,230,317 $48,895,752 =========== =========== =========== ===========
F-13 INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) June 30, 1998 Pro Forma Financial Information: The following represents a pro forma condensed consolidated balance sheet as of June 30, 1998, assuming the Company's acquisition of United Tech, Inc. and Diversitec, Inc. was consummated as of that date.
ASSETS International FiberCom, Pro Forma Inc. and United Tech, Diversitec, Consolidated Subsidiaries Inc. Inc. Amounts ------------ ---- ---- ------- Current Assets: Cash $ 1,349,672 $ 173,283 $ 211,646 $ 1,734,601 Accounts receivable, Net 12,456,704 984,095 1,270,476 14,711,275 Inventory 6,356,602 1,078,013 2,137,277 9,571,892 Other current assets 417,235 -- 2,520 419,755 Costs and estimated earnings in excess of uncompleted contracts 2,709,375 -- -- 2,709,375 ----------- ----------- ----------- ----------- Total Current Assets 23,289,588 2,235,391 3,621,919 29,146,898 Property and Equipment, Net 7,452,907 1,416 36,047 7,490,370 Other Assets, Net 1,226,677 550 -- 1,227,227 Goodwill, Net 22,543,351 -- -- 22,543,351 ----------- ----------- ----------- ----------- Total Assets $54,512,523 $ 2,237,357 $ 3,657,966 $60,407,846 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Long-term debt - current portion $ 3,384,139 $ -- $ 1,214,870 $ 4,599,009 Accounts payable 4,502,349 312,222 178,361 4,992,932 Accrued expenses 2,557,899 30,000 1,283,889 3,871,788 Billings in excess of costs and estimated earnings on uncompleted contracts 529,971 -- -- 529,971 ----------- ----------- ----------- ----------- Total Current Liabilities 10,974,358 342,222 2,677,120 13,993,700 Long-Term Liabilities: Long-term debt 4,849,698 -- 14,847 4,864,545 Other 143,862 -- -- 143,862 Stockholders' Equity 38,544,605 1,895,135 965,999 41,405,739 ----------- ----------- ----------- ----------- Total Liabilities and Stockholders' Equity $54,512,523 $ 2,237,357 $ 3,657,966 $60,407,846 =========== =========== =========== ===========
F-14 INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For The Year Ended December 31, 1997 The following represents an unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1997, assuming the Company's acquisition of United Tech, Inc. and Diversitec, Inc. was consummated on January 1, 1997.
International FiberCom, Pro Forma Inc. and United Tech, Diversitec, Pro Forma Consolidated Subsidiaries Inc. Inc. Adjustments Amounts ------------ ---- ---- ----------- ------- Contract Revenues $36,325,146 $ 8,345,581 $12,595,079 $57,265,806 Cost of Contract Revenues 25,905,137 5,706,945 8,821,713 40,433,795 ----------- ----------- ----------- ----------- Gross Profit 10,420,009 2,638,636 3,773,366 16,832,011 General and Administrative Expenses 8,574,173 1,559,568 2,130,729 12,264,470 ----------- ----------- ----------- ----------- Profits from Operations 1,845,836 1,079,068 1,642,637 4,567,541 ----------- ----------- ----------- ----------- Other Income (Expense): Interest income 34,812 6,717 - 41,529 Interest expense (234,119) (24,144) (135,634) (393,897) Other income 91,971 - 1,485,000 1,576,971 Gain (loss) on disposal of assets 186,479 - (4,480) 181,999 ----------- ----------- ----------- ----------- 79,143 (17,427) 1,344,886 1,406,602 ----------- ----------- ----------- ----------- Net Income before income taxes 1,924,979 1,061,641 2,987,523 5,974,143 Provision for tax benefit (expense) 346,319 - - (2,735,976) (1) (2,389,657) ----------- ----------- ----------- ----------- Net Income from Continuing Operations 2,271,298 1,061,641 2,987,523 3,584,486 Discontinued operations 33,187 - - 33,187 ----------- ----------- ----------- ----------- Net income 2,304,485 1,061,641 2,987,523 3,617,673 Preferred stock dividend (173,447) - - (173,447) ----------- ----------- ----------- ----------- Net income attributable to common stockholders $ 2,131,038 $ 1,061,641 $ 2,987,523 $ 3,444,226 =========== =========== =========== =========== Basic earnings per share $ .25 $ .29 =========== =========== Diluted earnings per share $ .16 $ .20 =========== =========== Basic average shares outstanding 8,457,024 11,711,024 =========== =========== Diluted weighted average shares outstanding 15,325,836 18,579,836 =========== ===========
(1) Pro forma income tax adjustment to record the income tax effect of the conversion of United Tech, Inc. and Diversitec, Inc. to C Corporations. F-15 INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For The Year Ended December 31, 1996 Proforma Consolidated Financial Statements: The following represents an unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1996, assuming the Company's acquisition of United Tech, Inc. and Diversitec, Inc. was consummated on January 1, 1996.
International FiberCom, Pro Forma Inc. and United Tech, Diversitec, Pro Forma Consolidated Subsidiaries Inc. Inc. Adjustments Amounts ------------ ---- ---- ----------- ------- Contract Revenues $19,195,069 $ - $14,785,998 $33,981,067 Cost of Contract Revenues 15,833,378 - 9,062,375 24,895,753 ----------- ----------- ----------- ----------- Gross Profit 3,361,691 - 5,723,623 9,085,314 General and Administrative Expenses 4,484,600 5,883 2,728,288 7,218,771 Goodwill Impairment 2,677,490 - - 2,677,490 ----------- ----------- ----------- ----------- Profits (Loss) from Operations (3,800,399) (5,883) 2,995,335 (810,947) ----------- ----------- ----------- ----------- Other Income (Expense): Interest income 49,086 - - 49,086 Interest expense (141) - (55,137) (55,278) Other income 16,089 - - 16,089 Gain on disposal of assets 50,781 - - 50,781 ----------- ----------- ----------- ----------- 115,815 - (55,137) 60,678 ----------- ----------- ----------- ----------- Net income (loss) before income taxes (3,684,584) (5,883) 2,940,198 (750,269) Provision for tax benefit (expense) (135,457) - - 435,564 (1) 300,107 ----------- ----------- ------------ ----------- Net Income (Loss) from Continuing Operations (3,820,041) (5,883) 2,940,198 (450,162) Discontinued operations (68,577) - - (68,577) ----------- ----------- ------------ ----------- Net Income (Loss) (3,888,618) (5,883) 2,940,198 (518,739) Preferred stock dividend (171,303) - - (171,303) ----------- ----------- ----------- ----------- Net income (loss) attributable to common stockholders $(4,059,921) $ (5,883) $ 2,940,198 $ (690,042) =========== =========== =========== =========== Basic loss per share $ (.66) $ (.07) =========== =========== Fully diluted loss per share $ (.66) $ (.07) =========== =========== Basic average shares outstanding 6,187,188 9,441,188 =========== =========== Diluted weighted average shares outstanding 6,187,188 9,441,188 =========== ===========
(1) Pro forma income tax adjustment to record the income tax effect of the conversion of United Tech, Inc. and Diversitec, Inc. to C Corporations. F-16 INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For The Six Month Period Ended June 30, 1998 Proforma Consolidated Financial Statements: The following represents an unaudited pro forma condensed consolidated statement of operations for the six month period ended June 30, 1998, assuming the Company's acquisition of United Tech, Inc. and Diversitec, Inc. was consummated on January 1, 1998.
International FiberCom, Pro Forma Inc. and United Tech, Diversitec, Pro Forma Consolidated Subsidiaries Inc. Inc. Adjustments Amounts ------------ ---- ---- ----------- ------- Contract Revenues $30,928,477 $ 8,373,335 $ 6,762,086 $46,063,898 Cost of Contract Revenues 20,370,446 5,727,829 4,664,142 30,762,417 ----------- ----------- ----------- ----------- Gross Profit 10,558,031 2,645,506 2,097,944 15,301,481 General and Administrative Expenses 5,605,144 1,621,467 1,012,361 8,238,972 ----------- ----------- ----------- ----------- Profits from Operations 4,952,887 1,024,039 1,085,583 7,062,509 ----------- ----------- ----------- ----------- Other Income (Expense): Interest income 58,367 14,358 - 72,725 Interest expense (263,260) - (62,212) (325,472) Other income 29,425 - 1,607 31,032 Gain on disposal of assets 11,208 - - 11,208 ----------- ----------- ----------- ----------- (164,260) 14,358 (60,605) (210,507) ----------- ----------- ----------- ----------- Net income before income taxes 4,788,627 1,038,397 1,024,978 6,852,002 Provision for tax benefit (expense) (1,666,394) - - (1,074,407) (1) (2,740,801) ----------- ----------- ----------- ----------- Net Income 3,122,233 1,038,397 1,024,978 4,111,201 Preferred stock dividend (38,285) - - (38,285) ----------- ----------- ----------- ----------- Net income attributable to common stockholders $ 3,083,948 $ 1,038,397 $ 1,024,978 $ 4,072,916 =========== =========== =========== =========== Basic earnings per share $ .17 $ .19 =========== =========== Diluted earnings per share $ .14 $ .16 =========== =========== Basic average shares outstanding 18,102,201 21,356,201 =========== =========== Diluted weighted average shares outstanding 23,124,075 26,378,075 =========== ===========
(1) Pro forma income tax adjustment to record the income tax effect of the conversion of United Tech, Inc. and Diversitec, Inc. to C Corporations. F-17 INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For The Six Month Period Ended June 30, 1997 Proforma Consolidated Financial Statements: The following represents an unaudited pro forma condensed consolidated statement of operations for the six month period ended June 30, 1997, assuming the Company's acquisition of United Tech, Inc. and Diversitec, Inc. was consummated on January 1, 1997.
International FiberCom, Pro Forma Inc. and United Tech, Diversitec, Pro Forma Consolidated Subsidiaries Inc. Inc. Adjustments Amounts ------------ ---- ---- ----------- ------- Contract Revenues $16,495,951 $ 3,771,956 $ 8,001,821 $28,269,728 Cost of Contract Revenues 12,613,550 2,238,980 5,148,802 20,001,332 ----------- ----------- ----------- ----------- Gross Profit 3,882,401 1,532,976 2,853,019 8,268,396 General and Administrative Expenses 2,790,551 853,637 856,073 4,500,261 ----------- ----------- ----------- ----------- Profits from Operations 1,091,850 679,339 1,996,946 3,768,135 ----------- ----------- ----------- ----------- Other Income (Expense): Interest income 22,747 1,350 - 24,097 Interest expense (221,939) (24,144) (57,478) (303,561) Other income (expense) 2,955 - (8,197) (5,242) Gain on disposal of assets 174,378 - - 174,378 ----------- ----------- ----------- ----------- (21,859) (22,794) (65,675) (110,328) ----------- ----------- ----------- ----------- Net income before income taxes 1,069,991 656,545 1,931,271 3,657,807 Provision for tax benefit (expense) 160 - - (1,463,283) (1) (1,463,123) ----------- ----------- ----------- ----------- Net Income 1,070,151 656,545 1,931,271 2,194,684 Preferred stock dividend (113,063) - - (113,063) ----------- ----------- ----------- ----------- Net income attributable to common stockholders $ 957,088 $ 656,545 $ 1,931,271 $ 2,081,621 =========== =========== =========== =========== Basic earnings per share $ .14 $ .21 =========== =========== Diluted earnings per share $ .07 $ .12 =========== =========== Basic average shares outstanding 6,899,220 10,153,220 =========== =========== Diluted weighted average shares outstanding 14,521,004 17,775,004 =========== ===========
(1) Pro forma income tax adjustment to record the income tax effect of the conversion of United Tech, Inc. and Diversitec, Inc. to C Corporations. F-18 INDEPENDENT AUDITORS' REPORT Board of Directors Diversitec, Inc. We have audited the accompanying balance sheets of Diversitec, Inc. as of December 31, 1997 and 1996, and related statements of income and retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Diversitec, Inc. at December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. BDO Seiedman LLP Richmond, Virginia September 22, 1998 F-19 DECEMBER 31, 1997 1996 ---- ---- ASSETS (Notes 1 and 3) CURRENT Cash $ 35,670 $ 259,467 Accounts receivable 1,068,288 1,031,335 Inventory 3,033,001 1,365,738 Due from stockholders 52,000 -- ---------- ---------- Total current assets 4,188,959 2,656,540 ---------- ---------- PROPERTY AND EQUIPMENT Furniture and fixtures 80,567 72,756 Vehicles 48,123 91,098 Leasehold improvements 6,341 426 ---------- ---------- 135,031 164,280 Less accumulated depreciation and amortization 93,673 81,130 ---------- ---------- Net property and equipment 41,358 83,150 ---------- ---------- OTHER ASSETS Investment at cost which approximates market -- 15,000 ---------- ---------- -- 15,000 ---------- ---------- $4,230,317 $2,754,690 ========== ========== SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL STATEMENTS. F-20 DIVERSITEC, INC. (AN S-CORPORATION) BALANCE SHEETS - -------------------------------------------------------------------------------- DECEMBER 31, 1997 1996 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT Notes payable to bank (Note 1) $ 491,870 $ -- Accounts payable 1,824,883 1,262,353 Accrued expenses 57,100 40,927 Due to former stockholder (Note 4) 1,210,627 -- Current portion of long-term debt (Note 3) 224,133 229,069 ---------- ---------- Total current liabilities 3,808,613 1,532,349 LONG-TERM DEBT, less current maturities (Note 8) 124,683 378,216 ---------- ---------- Total liabilities 3,933,296 1,910,565 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY (Note 4) Capital stock, no par value, 5,000 shares authorized, 533 shares issued and outstanding (800 - 1996) 533 800 Retained earnings 296,488 843,325 ---------- ---------- Total stockholders' equity 297,021 844,125 ---------- ---------- $4,230,317 $2,754,690 ========== ========== SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL STATEMENTS. F-21 DIVERSITEC, INC. (AN S-CORPORATION) STATEMENTS OF INCOME AND RETAINED EARNINGS - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 1996 ---- ---- NET SALES $ 12,595,079 $ 14,785,998 COST OF SALES 8,821,713 9,062,375 ------------ ------------ Gross profit 3,773,366 5,723,623 ------------ ------------ GENERAL AND ADMINISTRATIVE EXPENSES Salaries 1,459,300 1,946,661 Pension and employee benefits (Note 2) 163,181 102,507 Bad debts -- 124,467 Insurance, group and other 114,575 97,140 Rent 113,924 126,050 Payroll taxes 60,783 76,735 Shop supplies 59,831 61,018 Travel and entertainment 33,210 38,462 Taxes and licenses 22,504 20,767 Professional fees and outside services 22,060 25,553 Depreciation and amortization 18,517 23,690 Telephone 17,320 24,551 Advertising 14,404 37,901 Postage and office supplies 13,907 14,408 Other 17,213 8,378 ------------ ------------ Total general and administrative expenses 2,130,729 2,728,288 ------------ ------------ OPERATING INCOME 1,642,637 2,995,335 ------------ ------------ OTHER INCOME (EXPENSE) Life insurance proceeds 1,500,000 -- Interest expense, net (110,634) (55,137) Loss on investment (15,000) -- Loss on disposal of vehicle (4,480) -- ------------ ------------ Total other income (expense) 1,369,886 (55,137) ------------ ------------ NET INCOME 3,012,523 2,940,198 ------------ ------------ continued... F-22 DIVERSITEC, INC. (AN S-CORPORATION) STATEMENTS OF INCOME AND RETAINED EARNINGS (CONTINUED) - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 1996 ---- ---- RETAINED EARNINGS, BEGINNING OF YEAR $ 843,325 $ 1,065,127 REDEMPTION OF CAPITAL STOCK (Note 4) (2,310,360) -- DISTRIBUTIONS TO STOCKHOLDERS (1,249,000) (3,162,000) ----------- ----------- RETAINED EARNINGS, END OF YEAR $ 296,488 $ 843,325 =========== =========== SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL STATEMENTS. F-23 DIVERSITEC, INC. (AN S-CORPORATION) STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996 ---- ---- OPERATING ACTIVITIES Cash received from customers $ 12,665,093 $ 15,605,201 Cash paid to suppliers (10,520,871) (10,204,756) Cash paid to employees (1,207,731) (2,035,353) Interest paid (120,204) (77,696) Interest received 8,720 26,509 ------------ ------------ Net cash provided by operating activities 825,007 3,313,905 ------------ ------------ INVESTING ACTIVITIES Advances to stockholder (52,000) -- Purchase of furniture and equipment (13,726) (24,215) Life insurance proceeds 1,500,000 -- ------------ ------------ Net cash provided (absorbed) by investing activities 1,434,274 (24,215) ------------ ------------ FINANCING ACTIVITIES Credit line loans (payments) net 491,870 (470,820) Redemption of stockholder interest (1,500,000) -- Distributions to stockholders (1,249,000) (3,162,000) Proceeds from long term debt -- 685,974 Retirement of long term debt (225,948) (145,224) ------------ ------------ Net cash absorbed by financing activities (2,483,078) (3,092,070) ------------ ------------ NET INCREASE (DECREASE) IN CASH (223,797) 197,620 CASH, beginning of year 259,467 61,847 ------------ ------------ CASH, end of year $ 35,670 $ 259,467 ============ ============
Continued . . . F-24 DIVERSITEC, INC. (AN S-CORPORATION) STATEMENTS OF CASH FLOWS (CONTINUED) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996 ----------- ----------- NET INCOME $ 3,012,523 $ 2,940,198 Adjustments Depreciation and amortization 18,517 23,690 Loss on disposal of vehicle 4,480 -- Loss on investment 15,000 -- Life insurance proceeds (1,500,000) -- Net cash provided (absorbed) by Accounts receivable (36,953) 943,670 Inventory (1,667,263) (154,073) Advances to employees -- 1,665 Accounts payable 562,530 (466,629) Other liabilities, including accrued stockholder compensation 416,173 25,384 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 825,007 $ 3,313,905 =========== ===========
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL STATEMENTS. F-25 DIVERSITEC, INC. (AN S-CORPORATION) SUMMARY OF ACCOUNTING POLICIES - -------------------------------------------------------------------------------- ORGANIZATION AND BUSINESS Diversitec, Inc. (the Company), a Virginia corporation organized in 1989, sells computerized central office equipment systems and various computer and hi-tech components. INCOME RECOGNITION The Company recognizes income on the sale of equipment upon delivery to customers. ACCOUNTS RECEIVABLE Receivables are reported at net realizable value. Bad debts are charged to operations by the specific write-off method in the period during which the receivables are determined to be uncollectible. Although the specific write-off method is not in accordance with generally accepted accounting principles, the practice is not material to the financial statements as reported. INVENTORY Inventory is valued at the lower of cost or market, cost determined using the first-in, first-out method. PROPERTY AND EQUIPMENT Major additions and betterments are capitalized and recorded at cost. Expenditures for ordinary repairs and maintenance are charged to operations as incurred. Depreciation is provided using accelerated and straight-line methods, based on estimated useful lives ranging from five to seven years. INCOME TAXES The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company does not pay corporate income taxes on its taxable income. Instead, the stockholders are liable for individual income taxes on their respective shares of the Company's taxable income. Accordingly, no provision for income tax expense or benefit is reported by the Company. USE OF ESTIMATES The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. F-26 DIVERSITEC, INC. (AN S-CORPORATION) SUMMARY OF ACCOUNTING POLICIES (CONTINUED) - -------------------------------------------------------------------------------- RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 129 (SFAS 129), "Disclosure of Information about Capital Structure", effective for periods ending after December 15, 1997, establishes standards for disclosing information about an entity's capital structure. SFAS 129 requires disclosure of the pertinent rights and privileges of various securities outstanding (stock, options, warrants, preferred stock, debt and participation rights) including dividend and liquidation preferences, participant rights, call prices and dates, conversion or exercise prices and redemption requirements. Adoption of SFAS 129 had no effect on the Company because it currently discloses the information specified. Statement of Financial Accounting No. 130 (SFAS 130), "Reporting Comprehensive Income", effective for periods beginning after December 15, 1997, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investment by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all required items be reported in a financial statement that is displayed with the same prominence as other financial statements. Management does not expect the application of this pronouncement to have a material effect on the financial statements of the Company. F-27 DIVERSITEC, INC. (AN S-CORPORATION) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. NOTES PAYABLE TO BANK The Company has a $2,500,000 demand working capital bank line of credit at December 31, 1997. Amounts borrowed are secured by all assets of the Company with unconditional and full guarantee of the stockholders. Interest at prime plus .75% is paid monthly. 2. PENSION PLAN The Company has a 401(K) Retirement Plan covering substantially all employees. The Company makes contributions equal to 5% of the pay of participating employees (3% for 1996), up to amounts permitted under the tax laws. The Company contributed approximately $161,000 and $102,000 for the years ended December 31, 1997 and 1996, respectively. 3. LONG-TERM DEBT Long-term debt consists of the following: December 31, 1997 1996 ---- ---- Installment note payable to bank requiring monthly payments of $18,056 plus interest at .5% over prime until maturity in June 1999, secured by the pledge of all assets and guarantee by the shareholders $325,000 $541,667 Installment notes payable to bank secured by vehicles: Requiring monthly payments of $777, including interest at 9.11% until maturity in December 2000 23,816 30,634 Requiring monthly payments of $729, including interest at 8% which was paid off in October 1997 -- 34,984 ------- ------- 348,816 607,285 Less current portion 224,133 229,069 ------- ------- $124,683 $378,216 ======== ======== F-28 DIVERSITEC, INC. (AN S-CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 3. LONG-TERM DEBT (CONTINUED) Principal repayments of long term debt are as follows: Year Ending December 31, Amount ------ 1998 $224,133 1999 116,508 2000 8,175 -------- $348,816 ======== 4. ACQUISITION OF STOCKHOLDER INTEREST One of the Company's stockholders passed away in July 1997. The Company repurchased his stock (267 shares) under an existing Buy-Sell agreement, which required payments equal to "life insurance" proceeds and a year's distribution of profits". The Company paid the $1.5 million in life insurance proceeds it received, and tendered an offer of $300,000 representing management's anticipation of one year's distribution of profits through the anniversary date of the stockholder's death. The tendered offer was disputed by the estate and during September 1998 a settlement was reached which provided for an additional payment of $810,627 for the stock repurchase and $400,000 in compensation expense. All amounts related to the settlement have been accrued in the financial statements as of December 31, 1997. 5. COMMITMENTS The Company leases part of its facilities from a related corporation owned by two of the stockholders. The lease, which is renewable annually, requires monthly payments of $4,000. Another part of the facilities are rented from a partnership owned by the shareholders and the estate of the deceased shareholder. No formal lease has been established in connection with the partnership property but monthly payments of $5,415 are being made. The Company maintains its operating cash account in one of the larger regional Virginia banks. Bank balances are usually in amounts in excess of federally insured limits resulting in a concentration of credit risk. F-29 DIVERSITEC, INC. (AN S-CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 6. SUBSEQUENT EVENTS During 1998, 100% of the Company's stock was acquired by an outside party through a stock for stock transaction. F-30 June 30, 1998 1997 ---- ---- Assets (Notes 1 and 3) Current Cash $ 211,646 $ 84,722 Accounts receivable 1,270,476 1,299,338 Other receivables 2,520 17,500 Inventory 2,137,277 2,298,396 Due from stockholders -- 99,970 ---------- ---------- Total current assets 3,621,919 3,799,926 ---------- ---------- Property and equipment Furniture and fixtures 84,756 80,273 Vehicles 48,123 95,762 Leasehold improvements 6,341 426 ---------- ---------- 139,220 176,461 Less - accumulated depreciation and amortization 103,173 93,130 ---------- ---------- Net property and equipment 36,047 83,331 ---------- ---------- Other assets Investment at cost which approximates market -- 15,000 ---------- ---------- $3,657,966 $3,898,257 ========== ========== See accompanying summary of accounting policies and notes to financial statements. F-31 DIVERSITEC, INC. (AN S-CORPORATION) BALANCE SHEETS - -------------------------------------------------------------------------------- June 30, 1998 1997 ---- ---- Liabilities and Stockholder's Equity Current Notes payable to bank (Note 1) $ 996,870 $1,257,675 Accounts payable 178,361 217,705 Accrued expenses 73,262 54,306 Due to former stockholder (Note 4) 1,210,627 -- Current portion of long-term debt (Note 3) 218,000 256,000 ---------- ---------- Total current liabilities 2,677,120 1,785,686 Long-term debt, less current maturities (Note 3) 14,847 269,175 ---------- ---------- Total liabilities 2,691,967 2,054,861 ---------- ---------- Stockholders' equity (Note 4) Capital stock, no par value, 5,000 shares authorized, 533 shares issued and outstanding (800 - 1997) 533 800 Retained earnings 965,466 1,842,596 ---------- ---------- Total stockholder's equity 965,999 1,843,396 ---------- ---------- $3,657,966 $3,898,257 ========== ========== See accompanying summary of accounting policies and notes to financial statements. F-32 DIVERSITEC, INC. (AN S-CORPORATION) STATEMENTS OF INCOME AND RETAINED EARNINGS - -------------------------------------------------------------------------------- Six months ended June 30, 1998 1997 ---- ---- Net sales $ 6,762,086 $ 8,001,821 Cost of sales 4,664,142 5,148,802 ----------- ----------- Gross profit 2,097,944 2,853,019 ----------- ----------- General and administrative expenses Salaries 580,485 482,510 Pension and employee benefits (Note 2) 82,684 91,094 Insurance, group and other 68,629 62,948 Rent 66,628 56,491 Payroll taxes 33,505 34,543 Shop supplies 33,071 40,613 Travel and entertainment 32,736 14,205 Taxes and licenses 16,178 19,764 Professional fees and outside services 47,524 10,628 Depreciation and amortization 9,500 12,000 Telephone 13,190 7,741 Advertising 7,675 6,395 Postage and office supplies 11,940 5,024 Other 8,616 12,117 ----------- ----------- Total general and administrative expenses 1,012,361 856,073 ----------- ----------- Operating income 1,085,583 1,996,946 ----------- ----------- Other income (expense) Miscellaneous, net 1,607 (8,197) Interest expense, net (62,212) (57,478) ----------- ----------- Total other income (expense) (60,605) (65,675) ----------- ----------- Net income 1,024,978 1,931,271 ----------- ----------- Retained earnings, beginning of period 296,488 843,325 Distributions to stockholders (356,000) (932,000) ----------- ----------- Retained earnings, end of period $ 965,466 $ 1,842,596 =========== =========== See accompanying summary of accounting policies and notes to financial statements. F-33 DIVERSITEC, INC. (AN S-CORPORATION) STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
Six months ended June 30, 1998 1997 ---- ---- Operating activities Cash received from customers $ 6,557,378 $ 7,840,785 Cash paid to suppliers (5,762,863) (7,526,762) Cash paid to employees (646,069) (573,754) Interest paid (53,312) (48,224) Interest received -- 1,796 ----------- ----------- Net cash provided by operating activities 95,134 (306,159) ----------- ----------- Investing activities Advances from (to) stockholders 52,000 (99,970) Purchase of furniture and equipment (4,189) (12,181) ----------- ----------- Net cash provided (absorbed) by investing activities 47,811 (112,151) ----------- ----------- Financing activities Proceeds from note payable, net 498,867 1,258,781 Distributions to stockholders (356,000) (932,000) Repayment of long term debt (109,836) (83,216) ----------- ----------- Cash absorbed by financing activities 33,031 243,565 ----------- ----------- Net increase (decrease) in cash 175,976 (174,745) Cash, beginning of period 35,670 259,467 ----------- ----------- Cash, end of period 211,646 84,722 =========== ===========
continued.... F-34 DIVERSITEC, INC. (AN S-CORPORATION) STATEMENTS OF CASH FLOWS (CONTINUED) - -------------------------------------------------------------------------------- Six months ended June 30, 1998 1997 ---- ---- Net income $ 1,024,978 $ 1,931,271 Adjustments Depreciation and amortization 9,500 12,000 Net cash provided (absorbed) by Accounts receivable (202,188) (285,503) Inventory 895,724 (932,658) Accounts payable (1,646,522) (1,044,648) Other liabilities 13,642 13,379 ----------- ----------- Net cash provided by operating activities $ 95,134 $ (306,159) =========== =========== See accompanying summary of accounting policies and notes to financial statements. F-35 DIVERSITEC, INC. (AN S-CORPORATION) SUMMARY OF ACCOUNTING POLICIES - -------------------------------------------------------------------------------- ORGANIZATION AND BUSINESS Diversitec, Inc. (the "Company") (a Virginia corporation organized in 1989) sells computerized central office equipment systems and various computer and hi-tech components. INCOME RECOGNITION The Company recognizes income on the sale of equipment upon delivery to customers. ACCOUNTS RECEIVABLE Receivables are reported at net realizable value. Bad debts are charged to operations by the specific write-off method in the period during which the receivables are determined to be uncollectible. Although the specific write-off method is not in accordance with generally accepted accounting principles, the practice is not material to the financial statements as reported. INVENTORY Inventory is valued at the lower of cost or market, cost determined using the first-in, first-out method. PROPERTY AND EQUIPMENT Major additions and betterments are capitalized and recorded at cost. Expenditures for ordinary repairs and maintenance are charged to operations as incurred. Depreciation is provided using accelerated and straight-line methods, based on estimated useful lives ranging from five to seven years. INCOME TAXES The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company does not pay corporate income taxes on its taxable income. Instead, the stockholders are liable for individual income taxes on their respective shares of the Company's taxable income. Accordingly, no provision for income tax expense or benefit is reported by the Company. USE OF ESTIMATES The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. F-36 DIVERSITEC, INC. (AN S-CORPORATION) SUMMARY OF ACCOUNTING POLICIES (CONTINUED) - -------------------------------------------------------------------------------- RECLASSIFICATION Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 1998 presentation. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 129 (SFAS 129), "Disclosure of Information about Capital Structure", effective for periods ending after December 15, 1997, establishes standards for disclosing information about an entity's capital structure. SFAS 129 requires disclosure of the pertinent rights and privileges of various securities outstanding (stock, options, warrants, preferred stock, debt and participation rights) including dividend and liquidation preferences, participant rights, call prices and dates, conversion or exercise prices and redemption requirements. Adoption of SFAS 129 had no effect on the Company because it currently discloses the information specified. Statement of Financial Accounting No. 130 (SFAS 130), "Reporting Comprehensive Income", effective for periods beginning after December 15, 1997, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investment by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all required items to be reported in a financial statement that is displayed with the same prominence as other financial statements. Management does not expect the application of this pronouncement to have a material effect on the financial statements of the Company. F-37 DIVERSITEC, INC. (AN S-CORPORATION) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. NOTES PAYABLE TO BANK The Company has a $2,500,000 demand working capital bank line of credit. Amounts borrowed are secured by all assets of the Company with unconditional and full guarantee of the stockholders. Interest at prime plus .75% is paid monthly. 2. PENSION PLAN The Company has a 401(K) Retirement Plan covering substantially all employees. The Company makes contributions equal to 5% of the pay of participating employees up to amounts permitted under the tax laws. The Company contributed approximately $83,000 and $91,000 for the six months ended June 30, 1998 and 1997, respectively. 3. LONG-TERM DEBT Long-term Debt Consists of the Following: June 30, 1998 1997 ---- ---- Installment note payable to bank requiring monthly payments of $18,056 plus interest at .5% over prime until maturity in June 1999, secured by the pledge of all assets and guarantee by the shareholders $213,696 $465,346 Installment notes payable to bank secured by vehicles: Requiring monthly payments of $777, including interest at 9.11% until maturity in December 2000 19,151 27,868 Requiring monthly payments of $729, including interest at 8% which was paid off in October 1997 -- 31,961 -------- -------- 232,847 525,175 Less - current portion 218,000 256,000 -------- -------- $ 14,847 $269,175 ======== ======== Principal repayments of long term debt are as follows: June 30, 1999 $218,000 June 30, 2000 6,300 June 30, 2001 8,547 $232,847 F-38 DIVERSITEC, INC. (AN S-CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 4. ACQUISITION OF STOCKHOLDER INTEREST One of the Company's stockholders passed away in July 1997. The Company repurchased his stock (267 shares) under an existing Buy-Sell agreement, which required payments equal to "life insurance" proceeds and a year's distribution of profits". The Company paid the $1.5 million in life insurance proceeds it received, and tendered an offer of $300,000 representing management's anticipation of one year's distribution of profits through the anniversary date of the stockholder's death. The tendered offer was disputed by the estate and during September 1998 a settlement was reached which provided for an additional payment of $810,627 for the stock repurchase and $400,000 in compensation expense. All amounts related to the settlement have been accrued in the financial statements as of June 30, 1998. 5. COMMITMENTS The Company leases part of its facilities from a related corporation owned by two of the stockholders. The lease, which is renewable annually requires monthly payments of $4,000. Another part of the facilities are rented from a partnership owned by the shareholders and the estate of the deceased shareholder. No formal lease has been established in connection with the partnership property but monthly payments of $5,415 are being made. The Company maintains its operating cash account in one of the larger regional Virginia banks. Bank balances are usually in amounts in excess of federally insured limits resulting in a concentration of credit risk. F-39 -----END PRIVACY-ENHANCED MESSAGE-----