<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 29, 2000
-----------------------------
MCSi, Inc.
(Exact name of registrant as specified in its charter)
Maryland 000-21561 31-1001529
------------------- ---------------- ------------------
(State or other jurisdiction (Commission File (IRS Employer Identification No.)
of incorporation) Number)
4750 Hempstead Station Drive, Dayton, Ohio 45429
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (937) 291 - 8282
----------------
N/A
-----------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 29, 2000, MCSi, Inc. (the "Company" or "MCSi"), through three
subsidiaries created for such purpose (the "Subsidiaries"), acquired certain
assets, primarily accounts receivable, inventories and property and equipment
and assumed certain commitments, consisting of certain operating lease
obligations and completion of certain installation agreements, from Intellisys
Group, Inc., and its two wholly-owned subsidiaries ("Intellisys"). Headquartered
in Westlake Village, California, prior to its filing of bankruptcy proceedings,
Intellisys had fourteen offices throughout California, Washington, Oregon,
Colorado, Texas, Georgia and Massachusetts. Intellisys' business was the design,
sale, installation, service and support of integrated audio-visual presentation,
conferencing, and networked media systems. Intellisys also sold a wide variety
of portable presentation equipment. The acquisition was pursuant to an approved
order of the United States Bankruptcy Court for the Central District of
California in the San Fernando Valley Division under Chapter 11 of title 11 of
the United States Code. Intellisys filed a voluntary petition in bankruptcy on
October 11, 2000. The Intellisys bankruptcy proceedings were converted to a
Chapter 7 liquidation on January 10, 2001.
The acquisition is being accounted for as a purchase business combination. The
total purchase price for the acquisition is estimated at $13.5 million, which,
pursuant to the Asset Purchase Agreement between the Company and Intellisys,
represents the amount owed by Intellisys to Fleet Business Credit Corporation,
the primary secured creditor of Intellisys ("Fleet"), on December 29, 2000 plus
certain pre-closing expenses of Intellisys incurred during the Chapter 11
process, plus related out-of-pocket expenses. The purchase price was funded by a
$4.6 million loan to the MCSi Subsidiaries from Fleet, and by an $8.5 million
loan from Zengine, Inc., an affiliate of the Company, to MCSi. The details of
the financing arrangements are set forth in the Exhibits to this Form 8-K.
Prior to the closing of this acquisition, MCSi lent to Intellisys, as debtor --
in -- possession, approximately $2.5 million in the form of credit on sales of
inventory to facilitate the completion or advancement of certain Intellisys
projects. MCSi provided this credit by purchasing a portion of a post-petition
Fleet loan to Intellisys. This loan was deemed satisfied at the closing of the
acquisition without a cash repayment.
More than 400 Intellisys sales people and technicians have joined the Company in
order to service the Company's expanded client base.
The Company issued press releases regarding the acquisition on October 9, 2000,
November 15, 2000 and on January 3, 2001. Each of those releases are attached
hereto.
Other than these transactions, there was no prior material relationship between
the Company and Intellisys or its stockholders.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL DATA
The unaudited consolidated financial statements of Intellisys, Inc. as of
September 30, 2000 and for the nine months ended September 30, 2000 and 1999, as
required by this Item are included herein on pages 4 through 7. The audited
consolidated financial statements of Intellisys as of December 31, 1998 and
December 31, 1999 and for each of the years in the three-year period ended
December 31, 1999 as required by this Item are included herein on pages 8
through 28.
The Unaudited Pro Forma Financial Information required by this Item is included
on pages 29 through 34 of this Form 8-K. The Unaudited Pro Forma Financial
Information assumes that the acquisition occurred, with respect to the September
30, 2000 balance sheet information, on September 30, 2000 and with respect to
the statements of operations information, at the beginning of the earliest
period presented.
2
<PAGE>
The Unaudited Pro Forma Financial Information is not intended to be indicative
of the financial position or results of operations had the acquisition actually
occurred on the dates indicated and is not representative of the anticipated
future financial performance of the business formerly known as "Intellisys."
The unaudited pro forma consolidated balance sheet reflects the allocation of
the purchase price to the estimated fair value of assets acquired and
liabilities assumed, with the excess of the estimated fair values of assets
acquired and liabilities assumed over the purchase price being used to reduce
long-lived assets to zero with the remainder used to reduce goodwill. By virtue
of the fact that Intellisys has filed voluntary petitions for protection under
the Federal Bankruptcy Code, there are many creditors of Intellisys who are
making claims on the assets to be acquired by the Company. Thus, the Company
will need time to assess the assets it has acquired and any liabilities or
obligations it has assumed. While the Company will continue to undertake a more
in depth evaluation of the fair value of the net assets acquired, it is not
presently expected to differ materially from the purchase price allocation
included therein.
The unaudited pro forma consolidated statements of operations reflect the
effects of the purchase price allocation described above and the resultant
amortization and additional interest expense associated with the cash used to
fund the acquisition, along with other adjustments directly attributable to the
transaction. The pro forma data reflects adjustments directly related to the
acquisition, and does not include adjustments that may arise as a consequence of
the acquisition, such as cost savings, improved efficiencies, etc. Therefore,
the pro forma data is not necessarily indicative of operating results that would
have occurred for the year ended December 31, 1999 or the nine months ended
September 30, 1999 and 2000, or in future periods, had the acquisition actually
occurred at the beginning of each period shown.
<TABLE>
<CAPTION>
EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1 Asset Purchase Agreement by and between MCSi, Inc. and
Intellisys Group, Inc. dated October 6, 2000.
2.2 Amended Asset Purchase Agreement by and between MCSi, Inc.
and Intellisys Group, Inc. dated November 13, 2000.
2.3 Amendment to the Asset Purchase Agreement by and between
MCSi, Inc. and Intellisys Group, Inc. dated November 24, 2000.
2.4 Amendment to Asset Purchase Agreement by and between MCSi,
Inc. and Intellisys Group, Inc. dated December 29, 2000.
10.1 Last Out Participation Agreement by and between MCSi, Inc.
and Fleet Business Credit Corporation dated October 6, 2000.
10.2 Loan Agreement by and between West Lake Acquisition
Corporation, Agoura Hills Corporation and MCSi-IG-PV, Inc.
and Fleet Business Credit Corporation dated December 29, 2000.
10.3 Loan Agreement by and between MCSi, Inc., West Lake
Acquisition Corporation, Agoura Hills Corporation and
MCSi-IG-PV, Inc. and Zengine, Inc. dated December 29, 2000.
23.1 Consent of Independent Auditors.
99.1 Press release issued by MCSi, Inc. on October 9, 2000.
99.2 Press release issued by MCSi, Inc. on November 15, 2000.
99.3 Press release issued by MCSi, Inc. on January 3, 2001.
99.4 Safe Harbor Under the Private Securities Litigation Reform
Act of 1995.
</TABLE>
3
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,860
Accounts, unbilled and notes
receivable, net of related allowances 18,472
Inventories, net 9,021
Prepaid expenses and other current assets 284
------------
Total current assets 30,637
Property and equipment, net of
accumulated depreciation 6,647
Other assets 1,055
------------
Total assets $ 38,339
============
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 24,901
Accrued expenses 8,959
Deferred revenue 3,730
Bank line of credit 18,935
Current portion of long-term debt 3,445
------------
Total current liabilities 59,970
Long-term debt 9,749
------------
Total liabilities 69,719
------------
Commitments and contingencies --
Series A convertible redeemable
preferred stock 11,923
------------
Stockholders' equity (deficit):
Common stock 42
Accumulated deficit (43,345)
------------
Total stockholders' equity (deficit) (43,303)
------------
Total liabilities and stockholders' equity $ 38,339
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED FINANCIAL
STATEMENTS.
4
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1999 2000
-------------- --------------
<S> <C> <C>
Sales and contract revenue $ 94,236 $ 114,582
Cost of sales 73,756 89,068
-------------- --------------
Gross profit 20,480 25,514
Selling, general, and administrative expenses 28,437 42,968
-------------- --------------
Operating loss (7,957) (17,454)
Interest expense, net 1,547 3,287
Other (income) expense (140) 95
-------------- --------------
Net loss $ (9,364) $ (20,836)
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED FINANCIAL
STATEMENTS.
5
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------
1999 2000
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,364) $ (20,836)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Allowance for doubtful accounts 1,571 3,853
Depreciation and amortization 2,012 1,652
Deferred income taxes and other 415 -
Changes in operating assets and liabilities:
Accounts, unbilled and notes receivable (2,968) 5,632
Inventories 2,041 (846)
Prepaid expenses and other current assets (2,014) 1,224
Other assets (1,390) 187
Accounts payable and accrued expenses 5,835 6,883
Income taxes (460) 1,521
Deferred revenue (349) 2,550
------------ ---------
Net cash (used in) provided by operating activities (4,671) 1,820
------------ ---------
Cash flows from investing activities:
Purchase of property and equipment and intangibles (2,246) (1,136)
------------ -----------
Net cash used in investing activities (2,246) (1,136)
------------ -----------
Cash flows from financing activities:
Net borrowings under bank line of credit 5,939 (5,243)
Proceeds from the issuance of preferred stock 406
Proceeds from debt 1,500 9,000
Debt issuance costs -- (917)
Principal payments of debt and capital leases (2,083) (936)
Other 6 --
Purchase and retirement of treasury stock -- (500)
-------------- ---------
Net cash provided by financing activities 5,768 1,404
-------------- -----------
Net (decrease) increase in cash and cash equivalents (1,149) 2,088
Cash and cash equivalents at beginning of period 1,998 772
-------------- ------------
Cash and cash equivalents at end of period $ 849 $ 2,860
============== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED FINANCIAL
STATEMENTS.
6
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
(amounts in thousands)
NOTE 1 - INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements have been prepared in accordance
with Rule 10-01 of SEC Regulation S-X. Consequently, they do not include all the
disclosures required under generally accepted accounting principles for complete
financial statements. However, in the opinion of the management of the
Intellisys Group, Inc. ("Intellisys" or the "Company"), the consolidated
financial statements presented herein contain all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows of Intellisys and its
consolidated subsidiaries. For further information regarding Intellisys'
accounting policies and the basis of presentation of the financial statements
refer to the financial statements and notes included in the Intellysis'
consolidated financial statements for the year ended December 31, 1999, which
are included herein.
NOTE 2 - LIQUIDITY AND BASIS OF PRESENTATION
As a result of Intellisys' significant losses from operations, negative working
capital, stockholders' deficiency, defaults under the Company's bank
line-of-credit agreement and limited availability of working capital sources, on
October 11, 2000 the Company filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code and began operating its
businesses as debtors-in-possession under the supervision of the Bankruptcy
Code.
On October 6, 2000, the Company entered into an Asset Purchase Agreement
("Agreement"), whereby substantially all the Company's assets would be acquired
by MCSi, Inc. On November 13, 2000, the Agreement was approved by the Bankruptcy
Court. Under the Agreement, the Company will sell substantially all of its
assets for approximately $645 plus the outstanding balance of the Company's
line-of-credit on the date of closing.
Pursuant to the Agreement, there will be significant liabilities that will be
subject to compromise in bankruptcy. The Company currently expects that the
consummation of the Agreement will result in the Company's ultimate liquidation
under Chapter 7 of the United States Bankruptcy Code. In the event of a
liquidation of the Company under Chapter 7 of the Bankruptcy Code, and the
consummation of the Agreement, management does not expect there will be any
material assets remaining after funding the administration of a Chapter 7 estate
to satisfy outstanding obligations.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered significant
losses and has experienced diminishing liquidity as a result of a deterioration
in its cash flow and limited availability of working capital sources and
commenced a voluntary proceeding under Chapter 11 of the United States
Bankruptcy Code. Such conditions raise substantial doubt about its ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
The consolidated financial statements do not show (i) as to assets, their
realizable value on a liquidation basis or their availability to satisfy
liabilities; (ii) contingencies, or the status and priority thereof; or (iii) as
to stockholder accounts, the effect of any changes that may be made in the
Company's business. The eventual outcome of these matters is not presently
determinable.
7
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Intellisys Group, Inc. and Chapter 11 Trustee of
Intellisys Group, Inc.:
We have audited the accompanying consolidated balance sheets of Intellisys
Group, Inc. and subsidiaries (the Company) as of December 31, 1998 and 1999 and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Intellisys Group,
Inc. and subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered significant losses
and has experienced diminishing liquidity as a result of a deterioration in its
cash flow and limited availability of working capital sources and commenced a
voluntary proceeding under Chapter 11 of the United States Bankruptcy Code.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans concerning these matters are also discussed
in note 1. The consolidated financial statements do not include adjustments that
might result from the outcome of these uncertainties.
/s/ KPMG LLP
Los Angeles, California
July 20, 2000, except as to
note 1, which is as of
November 16, 2000.
8
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Consolidated Balance Sheets
December 31, 1998 and 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1998 1999
---------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 1,998 772
Accounts receivable, less allowance for doubtful accounts of $330 and
$1,021, respectively 20,198 25,007
Unbilled receivables 4,506 2,814
Notes receivable 160 114
Inventories, net 9,299 8,175
Prepaid expenses 1,177 540
Other current assets -- 990
Income tax refund receivable -- 1,537
Deferred income taxes 752 --
---------------- -----------------
Total current assets 38,090 39,949
Property and equipment, net 3,896 6,436
Deferred income taxes 146 --
Intangible and other assets 11,269 325
---------------- -----------------
Total assets $ 53,401 46,710
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit $ 18,672 24,178
Current portion of long-term debt 1,373 682
Notes payable to officers and directors -- 2,933
Current portion of obligations under capital leases 113 319
Accounts payable 11,916 17,865
Accrued expenses 4,130 9,128
Income taxes payable 218 --
Deferred revenue 1,301 1,180
---------------- -----------------
Total current liabilities 37,723 56,285
Long-term debt, excluding current portion 608 202
Obligations under capital leases, excluding current portion 269 267
---------------- -----------------
Total liabilities 38,600 56,754
---------------- -----------------
Commitments and contingencies (Note 17)
Series A convertible redeemable preferred stock; $.01 par value; 1,508,000
shares authorized, issued and outstanding (entitled
to $10,500 in liquidation plus 10% annual rate of return) 9,431 11,029
---------------- ----------------
Stockholders' equity:
Preferred stock; 10,000,000 shares authorized; 1,508,000
shares issued and outstanding -- --
Common stock; $.01 par value; 30,000,000 shares authorized;
3,997,156 and 4,072,421 shares issued and outstanding,
respectively 40 41
Additional paid-in capital 2,410 1,273
Retained earnings (accumulated deficit) 2,920 (22,387)
---------------- -----------------
Total stockholders' equity (deficit) 5,370 (21,073)
---------------- -----------------
Total liabilities and stockholders' equity (deficit) $ 53,401 46,710
================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1998 1999
---------------------- ------------------- -------------------
<S> <C> <C> <C>
Sales and contract revenue $ 41,535 70,968 128,752
Cost of sales 30,196 51,599 102,014
---------------------- ------------------- -------------------
Gross profit 11,339 19,369 26,738
Selling, general and administrative expenses 9,294 16,110 34,810
Depreciation and amortization 378 1,004 2,733
Write-off of goodwill and other intangible assets -- -- 11,210
---------------------- ------------------- -------------------
Operating income (loss) 1,667 2,255 (22,015)
Interest expense, net 351 1,048 2,348
Other (income) expense -- (438) 1,503
---------------------- ------------------- -------------------
Income (loss) before income taxes 1,316 1,645 (25,866)
Income taxes 523 680 (559)
---------------------- ------------------- -------------------
Net income (loss) 793 965 (25,307)
Accretion to redemption value on Series A
preferred stock -- (93) (1,192)
---------------------- ------------------- -------------------
Net income (loss) available to common
stockholders $ 793 872 (26,499)
====================== =================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1997, 1998 and 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
------------------------------ PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY (DEFICIT)
-------------- ------------ --------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1996 3,832,886 $ 38 $ 1,217 $ 1,255 $ 2,510
Net income -- -- -- 793 793
-------------- ------------ --------------- ----------------- -------------------
Balances as of December 31, 1997 3,832,886 38 1,217 2,048 3,303
Issuance of common stock, net 156,177 2 998 -- 1,000
Exercise of stock options 8,093 -- 6 -- 6
Warrants issued in connection with
debt financing -- -- 189 -- 189
Accretion to redemption value on
Series A preferred stock -- -- -- (93) (93)
Net income -- -- -- 965 965
-------------- ------------ --------------- ---------------- ------------------
Balances as of December 31, 1998 3,997,156 40 2,410 2,920 5,370
Exercise of stock options 75,265 1 5 -- 6
Warrants issued in connection with
debt financing -- -- 50 -- 50
Accretion to redemption value on
Series A preferred stock -- -- (1,192) -- (1,192)
Net loss -- -- -- (25,307) (25,307)
-------------- ------------ --------------- ----------------- ------------------
Balances as of December 31, 1999 4,072,421 $ 41 $ 1,273 $ (22,387) $ (21,073)
============== ============ =============== ================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------ -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 793 $ 965 $ (25,307)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Allowance for doubtful accounts 30 229 1,555
Depreciation and amortization 378 1,004 2,733
Write-off of goodwill and other intangible assets -- -- 11,210
Interest expense in connection with issuance of warrants -- 189 50
Deferred income taxes (199) (766) 898
Changes in operating assets and liabilities:
Accounts receivable (2,741) (7,156) (3,511)
Inventories (326) (582) 1,579
Prepaid expenses 56 (875) (694)
Other assets (1) (221) 84
Accounts payable and accrued expenses 1,304 4,177 8,813
Income taxes payable/receivable 584 (316) (1,755)
Deferred revenue 360 574 (121)
------------ -------------- --------------
Net cash provided by (used in) operating activities 238 (2,778) (4,466)
------------ -------------- --------------
Cash flows from investing activities:
Purchase of intangible assets in connection with acquisitions -- (9,196) (55)
Purchase of property and equipment in connection with acquisitions -- (1,410) --
Purchase of net current assets in connection with acquisitions -- (2,140) --
Purchase of long term debt in connection with acquisitions -- 1,359 --
Purchases of property and equipment (447) (1,527) (2,794)
Notes receivable, net (60) -- 46
------------ -------------- --------------
Net cash used in investing activities (507) (12,914) (2,803)
------------ -------------- --------------
Cash flows from financing activities:
Exercise of stock options -- 6 6
Issuance of common stock, net -- 1,000 --
Issuance of preferred stock, net -- 9,338 --
Proceeds from receivable for issuance of preferred stock -- -- 406
Net borrowings under bank line of credit 446 8,798 5,506
Proceeds from short-term debt -- 1,020 2,250
Repayments of short-term debt -- (1,020) (1,829)
Proceeds from long-term debt 97 -- --
Repayments of long-term debt and capital leases (194) (1,574) (296)
------------ -------------- --------------
Net cash provided by financing activities 349 17,568 6,043
------------ -------------- --------------
Net increase (decrease) in cash 80 1,876 (1,226)
Cash at beginning of year $ 42 $ 122 $ 1,998
------------ -------------- --------------
Cash at end of year $ 122 $ 1,998 $ 772
============ ============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest $ 365 $ 937 $ 2,027
Income taxes 119 1,741 221
Noncash investing and financing activities:
Acquisition of equipment under capital leases 9 445 410
Issuance of notes payable in connection with acquisition
of intangibles -- 1,787 465
Warrants issued in connection with debt financing -- 189 50
Issuance of notes payable in connection with purchases of
equipment -- -- 349
Accrued liability and goodwill recorded in connection with
acquisition -- -- 900
============ ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
(1) LIQUIDITY AND BASIS OF PRESENTATION
As a result of Intellisys Group, Inc. and subsidiaries' (the Company)
significant losses from operations, negative working capital,
stockholders' deficiency, defaults under the Company's bank line of
credit agreement and limited availability of working capital sources on
October 11, 2000, the Company filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code and
began operating its businesses as debtors-in-possession under the
supervision of the Bankruptcy Court.
On October 6, 2000, the Company entered into a Purchase Agreement
(Agreement), whereby substantially all of the Company's assets would be
acquired by MCSi, Inc. On November 16, 2000, the Agreement was approved
by the Bankruptcy Court. Under the Agreement, the Company will sell
substantially all of its assets for approximately $645 plus the
outstanding balance of the Company's line of credit on the date of
closing.
If the Agreement is consummated as currently approved by the Bankruptcy
Court, there will be significant liabilities that will be subject to
compromise in bankruptcy. The Company currently expects that the
consummation of the Agreement will result in the Company's ultimate
liquidation under Chapter 7 of the United States Bankruptcy Code. In the
event of a liquidation of the Company under Chapter 7 of the bankruptcy
code, and the consummation of the Agreement, management does not expect
there will be any material assets remaining after funding the
administration of a Chapter 7 estate to satisfy outstanding obligations.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
has suffered significant losses and has experienced diminishing liquidity
as a result of a deterioration in its cash flow and limited availability
of working capital sources and commenced a voluntary proceeding under
Chapter 11 of the United States Bankruptcy Code. Such conditions raise
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
The consolidated financial statements do not show (i) as to assets, their
realizable value on a liquidation basis or their availability to satisfy
liabilities; (ii) contingencies, or the status and priority thereof; or
(iii) as to stockholder accounts, the effect of any changes that may be
made in the Company's business. The eventual outcome of these matters is
not presently determinable.
13
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the
accounts of Intellisys Group, Inc., formerly EISI, and its wholly
owned subsidiaries, Higginbotham Enterprises, Inc., Proline
Industries, Inc. and Proline Video, Inc. (the Subsidiaries). The
Company operates in one business segment and sells, designs,
installs, services and supports multimedia presentation and
communication technology systems to corporations, government
agencies and educational institutions.
On October 15, 1998, Intellysis Group, Inc. was reincorporated in
the state of Delaware. In connection with the reincorporation, the
Company increased its authorized shares of Common Stock to
30,000,000, authorized the issuance of 10,000,000 shares of
Preferred Stock and declared a common stock split on an
approximately 4.047-for-1 basis. The accompanying consolidated
financial statements have been restated to reflect these changes.
All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) REVENUE RECOGNITION
The Company derives revenue from three sources: equipment sales,
integrated systems contracts and maintenance contracts. Sales of
equipment are recognized upon shipment.
Integrated systems contracts generally have terms ranging from two
months to one year. Revenue from the equipment component of a
contract is recognized upon shipment. Revenue on the technical
services portion of a contract is recognized based on the
percentage that labor costs incurred to date bear to total
estimated labor costs. Losses expected to be incurred are recorded
when such losses are known.
The Company sells maintenance contracts for new and existing
multimedia equipment installations. These contracts cover labor,
parts and materials. Revenue is recognized using the straight-line
method over the life of the contract. Revenue from these contracts
has not been significant.
(c) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is
calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to seven years.
Leasehold improvements are amortized over the shorter of the lease
term or estimated useful life of the asset.
(d) INVENTORIES
Inventories are valued at the lower of cost (first in, first out)
or market.
14
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
(e) INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, workforce and
noncompete agreements arising from the application of purchase
accounting. Goodwill and workforce are amortized on a
straight-line basis over their estimated useful lives of ten and
five years, respectively. Noncompete agreements are amortized on a
straight-line basis over their terms which range from three to
five years.
The Company assesses the recoverability of its intangible assets,
including goodwill, by determining whether the amortization of the
asset over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired
operation. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount
rate reflecting the Company's average cost of funds. The
assessment of the recoverability of intangibles will be impacted
if estimated future operating cash flows are not achieved. The
Company determined that its intangible assets were impaired as of
December 31, 1999 and recorded a charge of $11,210 for the
write-off of goodwill and other intangible assets.
(f) IMPAIRMENT OF LONG-LIVED ASSETS AND
LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net undiscounted cash flows
expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell.
(g) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash, accounts receivable, accounts payable and
accrued expenses approximate their carrying values because of the
short-term maturities of those instruments. Although no quoted
market prices are available and a portion is due from a related
party, the Company believes the fair value of the notes receivable
approximates its carrying value. The fair value of the Company's
bank line of credit approximates its carrying value because it
primarily consists of variable rate loans which adjust to market
rates. The fair value of long-term debt approximates carrying
value given the short-term maturity of such debt.
(h) STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards (SFAS)
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company has
elected to follow Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations in accounting
15
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
for its employee stock options. Under APB Opinion No. 25,
generally, no compensation expense is recognized when the exercise
price of options equals the fair value of the underlying stock on
the date of grant. The Company also provides the disclosure-only
provisions of SFAS No. 123.
(i) INCOME TAXES
The Company accounts for income taxes using the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is recorded to
reduce deferred tax assets to their estimated net realizable
value.
(j) USE OF ESTIMATES
The Company's management has made a number of estimates and
assumptions relating to the reporting of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(k) CONCENTRATION OF CREDIT RISK
The Company grants credit to its customers located primarily in
the United States. The Company's ability to collect the amounts
due from its customers is affected by economic conditions in its
industry and the geographical area in which it conducts business.
Accounts receivable from the Company's customers are generally due
within 30 days and are subject to credit risk. The Company
monitors extensions of credit and records an allowance for
doubtful accounts based on its historical experience and
management's assessment of collectibility of specific accounts.
(l) RECLASSIFICATIONS
Certain reclassifications have been made to the prior years'
financial statements to conform with the 1999 presentation.
(m) COMPREHENSIVE INCOME
The Company had no components of comprehensive income other than
net income (loss) during the periods reported.
16
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
(3) CONVERTIBLE REDEEMABLE PREFERRED STOCK
During November and December of 1998, the Company sold 1,508,000 shares
of Series A convertible redeemable preferred stock (Series A preferred
stock) for $10,500. $500 of the proceeds were received in January 1999.
The issuance costs of $697 were netted against the carrying amount of the
Series A preferred stock on the accompanying consolidated balance sheets.
Conversion of the Series A preferred stock is at the option of the holder
after the first anniversary of the date of initial issuance. Redemption
is at the option of the holders after November 10, 2003. The Series A
Preferred Stock is automatically convertible, under specific conditions,
into shares of common stock upon the consummation of the Company's sale
of its common stock in a firm commitment underwritten public offering.
Initially, each share of Series A preferred stock is convertible into one
share of common stock. In the event of any liquidation, dissolution or
winding up of the affairs of the Company, holders of the Series A
preferred stock shall be entitled to receive, prior and in preference to
any other series of preferred stock or common stock, an amount per share
equal to $6.9629 for each outstanding share of Series A preferred stock,
plus any declared but unpaid dividend on such share and an amount equal
to a 10% annual rate of return compounded annually on the original
issuance price. The difference between the carrying value of the Series A
preferred stock and its mandatory redemption value, which includes the
10% annual rate of return, is being accreted using the effective-interest
method.
(4) NOTES RECEIVABLE
During 1996, the Company loaned $100 to one of its vendors, Dupuis Group,
L.L.C. The Company's Chairman owns 100% of Dupuis Group, L.L.C. and has
guaranteed payment of this note. The note is due on demand, and interest
is accrued quarterly at the bank's prime rate of 8.50% plus 0.75% (9.25%
at December 31, 1999). During 1997, 1998 and 1999, the Company paid
Dupuis Group, L.L.C. $74, $55 and $2, respectively, for design and
graphic services.
During 1997, the Company loaned $60 to Durand Communications, Inc. The
Company's Chairman is a member of the Board of Directors of Durand
Communications, Inc. The loan bears interest at 10% and is due on demand.
The note was paid in full in 1999.
(5) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------
1998 1999
------------------ -------------------
<S> <C> <C>
Portable equipment 7,460 6,395
Parts and materials 1,839 1,780
------------------ -------------------
9,299 8,175
================== ===================
</TABLE>
17
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
(6) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
USEFUL ------------------------------------------
LIFE 1998 1999
-------------------- ------------------ ------------------
<S> <C> <C> <C>
Vehicles 5 years $ 1,065 1,670
Furniture and equipment 7 years 5,663 7,416
Leasehold improvements 3 - 7 years 472 715
Software 3 years 602 2,348
------------------ ------------------
7,802 12,149
Less accumulated depreciation and
amortization 3,906 5,713
================== ==================
Property and equipment, net $ 3,896 6,436
================== ==================
</TABLE>
As of December 31, 1998 and 1999, the gross amount of equipment recorded
under capital leases was $509 and $919, respectively, and related
accumulated amortization was $30 and $178, respectively. Amortization of
assets held under capital leases is included with depreciation expense.
(7) INTANGIBLE AND OTHER ASSETS
Intangible and other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
Goodwill $ 10,388 11,893
Workforce 492 492
Noncompete covenants 310 330
Other 355 363
------------------- -------------------
11,545 13,078
Less accumulated amortization and write-off 276 12,753
------------------- -------------------
Intangible and other assets, net $ 11,269 325
=================== ===================
</TABLE>
(8) COMMITMENTS
The Company leases its offices and warehouse facilities under various
operating leases that expire on various dates through 2005. Rent expense
for these facilities was $352, $728 and $1,580 for the years ended
December 31, 1997, 1998 and 1999, respectively.
18
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future
minimum capital lease payments as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------------------- -------------------
<S> <C> <C>
Year ending December 31:
2000 $ 295 1,756
2001 225 1,272
2002 109 1,062
2003 44 719
2004 13 392
Thereafter -- 152
------------------- -------------------
Total future minimum lease payments 686 $ 5,353
===================
Less amount representing interest 100
-------------------
Present value of minimum lease payments 586
Less current portion of obligations under capital leases 319
-------------------
Obligations under capital leases, excluding current
portion $ 267
===================
</TABLE>
(9) BANK LINE OF CREDIT
The Company has pledged substantially all Company assets as security for
a bank line of credit with maximum borrowings of $25,000, including an
over advance line of $5,000, subject to an eligible accounts receivable
and inventory borrowing base requirement. The maximum borrowings were
increased to $30,000 on January 3, 2000. The Series A Preferred
Stockholders have guaranteed $5,000 and the Company's Chairman has
personally guaranteed $2,000 of this line of credit. The Company may
borrow at the bank's prime rate (8.5% at December 31, 1999) plus 0.5% or
at the Euro rate (6.5% at December 31, 1999) plus 3.25%. The
weighted-average interest rate under the bank line of credit was 8.85%
and 9.00% at December 31, 1998 and 1999, respectively. The Company is
required either to maintain a daily average
19
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
loan amount of $7,500 or pay a fee equal to the shortfall multiplied by
the applicable interest rate charged for prime rate-based loans. The line
of credit has certain restrictive financial covenants and expires on
September 3, 2000. The Company was not in compliance with various
financial covenants at December 31, 1999 and is in default on such bank
line of credit.
(10) ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
Commissions $ 962 1,496
Wages and bonuses 1,378 2,823
Additional consideration payable for acquisition 500 900
Other 1,290 3,909
------------------- -------------------
$ 4,130 9,128
=================== ===================
</TABLE>
(11) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
Note payable to bank; secured; repaid in 1999 $ 105 --
Subordinated convertible notes payable for acquisition; 7% interest;
payable in six monthly installments of $100 including interest
through June 2000 537 537
Notes payable for acquisitions; repaid in 1999 1,250 --
Vehicle loans 89 347
------------------- -------------------
Total long-term debt 1,981 884
Less current portion 1,373 682
------------------- -------------------
Long-term debt, excluding current portion $ 608 202
=================== ===================
</TABLE>
The Company issued three subordinated convertible promissory notes
totaling $537 in connection with the acquisition of the net assets of
Digital Networks Corporation in August 1998. If, prior to January 1,
2000, the Company consummates a sale of its Common Stock in a firm
commitment underwritten public offering, the notes automatically convert
into 72,619 shares of Common Stock. The notes are convertible at the
option of the noteholder anytime up to December 31, 1999. If the notes
are not converted by December 31, 1999, the outstanding principal and
interest will be paid in six equal monthly installments
20
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
beginning January 1, 2000. The notes were not converted by December
31, 1999; and according to the terms of the agreement, payments of
principal and interest will commence January 1, 2000.
The aggregate maturities of long-term debt subsequent to December 31,
1999 are as follows: 2000, $682; 2001, $141; 2002, $55; and 2003, $6.
(12) NOTES PAYABLE TO OFFICERS AND DIRECTORS
During 1999, certain officers and directors loaned an aggregate of $2,250
to the Company. The loans are unsecured and subordinated to the bank line
of credit. The loans bear interest at the bank's prime rate (8.50% at
December 31, 1999) and are payable on demand.
During 1999, an officer assumed loans to the Company in an aggregate of
$683. The loans are unsecured and subordinated to the bank line of
credit. The loans bear interest at the bank's prime rate (8.50% at
December 31, 1999) and are payable on demand.
(13) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1997, 1998
and 1999 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------
1997 1998 1999
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Current:
Federal $ 572 1,174 (1,573)
State and local 150 272 116
-------------------- ------------------- -------------------
722 1,446 (1,457)
-------------------- ------------------- -------------------
Deferred:
Federal (156) (621) 752
State and local (43) (145) 146
-------------------- ------------------- -------------------
(199) (766) 898
-------------------- ------------------- -------------------
$ 523 680 (559)
==================== =================== ===================
</TABLE>
21
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
Income tax expense differed from the amounts computed by applying the
statutory federal income tax rate of 34% to pretax income (loss) as a
result of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------
1997 1998 1999
------------------- -------------------- --------------------
<S> <C> <C> <C>
Computed expected tax expense (benefit) $ 447 559 (8,794)
State and local taxes, net of federal tax
benefit 80 82 (1,285)
Valuation allowance -- -- 4,727
Nondeductible goodwill amortization and
write-off -- -- 4,663
State NOL limitation -- -- 136
Other (4) 39 (6)
------------------- -------------------- --------------------
Total $ 523 680 (559)
=================== ==================== ====================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31,
1998 and 1999 are presented below.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
Deferred tax assets:
State income taxes $ 8 32
Accounts receivable, principally due to allowance for doubtful
accounts 134 752
Inventory reserve and additional costs inventoried for tax purposes 263 1,931
Accrued expenses 514 1,561
Depreciation 146 270
Net operating loss carryforwards -- 525
Minimum tax credit -- 97
------------------- -------------------
Total gross deferred tax assets 1,065 5,168
Less: valuation allowance -- 4,727
------------------- -------------------
Total deferred tax assets 1,065 441
------------------- -------------------
Deferred tax liabilities:
State income tax -- 342
Other 167 99
------------------- -------------------
Total deferred tax liabilities 167 441
------------------- -------------------
Net deferred tax assets $ 898 --
=================== ===================
</TABLE>
22
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
historical taxable income and projected taxable income and tax planning
strategies in making this assessment. Based upon those factors, as of
December 31, 1999, management believes it is more likely than not that
the Company will not realize the benefits of these deductible
differences. Accordingly, the Company has recorded a valuation allowance
related to these deferred tax assets at December 31, 1999 to reserve for
net operating loss carryforwards and temporary differences which may
expire prior to utilization.
As of December 31, 1999, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $941 and for California
franchise tax purposes of approximately $2,728, which expire through 2019
and 2004, respectively.
The income tax refund receivable at December 31, 1999 results from the
recovery of estimated tax payments and carryback of 1999 net operating
losses.
(14) PENSION BENEFITS
The Company sponsors a qualified 401(k) plan. All regular employees over
the age of 18 are eligible to participate upon date of hire. The Company
matches 50% of an employee's contribution up to 6% of an employee's
annual compensation. During 1997, 1998 and 1999, the Company contributed
$26, $41 and $205, respectively, to the 401(k) plan.
(15) STOCK OPTIONS AND WARRANTS
The Board of Directors agreed to issue up to 1,150,000 nonqualified stock
options to certain employees. The exercise price of options granted must
be at least equal to the fair value of such shares on the date of grant,
as determined by the Board of Directors. The options vest over five years
and expire ten years from the grant date.
23
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
A summary of stock option activity during 1997, 1998 and 1999 follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED- EXERCISE
AVERAGE PRICE OF
EXERCISE PRICE OPTIONS OPTIONS
OPTIONS OF OPTIONS EXERCISABLE EXERCISABLE
OUTSTANDING OUTSTANDING AT YEAR-END AT YEAR-END
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 274,356 $ 0.16 213,658 0.00025
Granted 44,512 1.48
----------------
Balance as of December 31, 1997 318,868 0.35 225,798 0.04
Granted 121,279 2.19
Exercised (8,093) 0.74
Forfeited (12,139) 0.74
----------------
Balance as of December 31, 1998 419,915 0.86 233,891 0.09
Granted 687,200 9.50
Exercised (75,265) 0.08
Forfeited (16,188) 1.48
----------------
Balance as of December 31, 1999 1,015,662 6.75 204,733 0.45
================ =============== ===============
</TABLE>
The weighted-average per share fair value of options granted during 1997,
1998 and 1999 was $1.06, $0.91 and $0.00, respectively.
24
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
The following table summarizes information about the Company's stock
options as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ------------------------------------------------------------
REMAINING WEIGHTED-
NUMBER CONTRACTUAL WEIGHTED-AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICES EXERCISABLE EXERCISE PRICE
----------------------- ------------- ------------ ----------------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
$ 0.00025 142,441 4.17 $ 0.00025 142,441 $ 0.00025
0.74 40,464 6.36 0.74 24,279 0.74
1.48 135,557 7.86 1.48 36,013 1.48
Lesser of 9.50 or IPO Lesser of $9.50 or
price 687,200 9.63 IPO price -- --
10.00 10,000 8.84 10.00 2,000 10.00
------------- -------------
1,015,662 8.49 204,733 0.45
============= =============
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock
options. The exercise price for stock options granted to employees in
1997, 1998 and 1999 was equal to or greater than the fair value of the
Company's common stock at the date of grant. Accordingly, no compensation
cost has been recognized for these stock options. Had compensation cost
been determined pursuant to SFAS No. 123, the Company's 1997, 1998 and
1999 net income (loss) would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------
1997 1998 1999
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Net income (loss):
As reported $ 793 965 (25,307)
Pro forma 790 934 (25,314)
==================== ==================== ===================
</TABLE>
The fair value of the stock options was calculated using the
minimum-value method with the following assumptions:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------
1997 1998 1999
------------------- -------------------- --------------------
<S> <C> <C> <C>
Weighted-average risk free rate 6.30% 5.55% 4.77%
Average expected life (years) 3.17 3.03 3.00
Dividend yield -- -- --
=================== ==================== ====================
</TABLE>
In connection with a bridge loan financing transaction during 1998, the
Company issued 47,140 warrants to purchase shares of the Company's common
stock at $6.72 per share. The fair value of these warrants of $189 was
determined using the Black-Scholes model and was charged to interest
expense during 1998.
25
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
In connection with their $5,000 guarantee on the bank line of credit
during 1999, the Series A Preferred Stockholders (stockholders) obtained
the right to acquire the number of shares of Series A preferred stock
determined by dividing the principal amount of the then outstanding
borrowings under the over advance facility plus accrued and unpaid
interest thereon, by $6.9629. The fair value of these rights of $50 was
determined using the Black-Scholes model and was charged to interest
expense over the life of the guarantee. Upon purchase of these shares by
the stockholders, the Company will issue to them warrants to purchase
additional shares of Series A preferred stock at $6.9629.
(16) BUSINESS ACQUISITIONS
Effective June 1, 1998, the Company acquired all of the outstanding stock
of B. Higginbotham Enterprises, Inc. (Higginbotham), located in Texas,
for $1,600 in cash and a $500 note to the seller. The acquisition was
accounted for using the purchase method of accounting and, accordingly,
the results of operations of Higginbotham are included in the Company's
consolidated financial statements from June 1, 1998. The excess of the
cost over the fair value of the acquired identifiable assets of $1,428
was recorded as goodwill and is being amortized over ten years. The
purchase agreement also provides for additional payments up to $900,
payable in Common Stock, if Higginbotham achieves certain income levels
for the 12 months ended June 30, 1999. Higginbotham achieved these
earnings levels by June 30, 1999, and accordingly, the Company recorded
additional goodwill of $900.
Effective June 1, 1998, the Company acquired the net assets of Alford
Media Sales, Inc. (Alford) located in Texas for $565 in cash. The
acquisition was accounted for using the purchase method of accounting
and, accordingly, the results of operations of Alford have been included
in the Company's consolidated financial statements from June 1, 1998. The
excess of the cost over the fair value of the acquired identifiable
assets of $32 was recorded as goodwill and is being amortized over ten
years. Alford was subsequently merged into the Company.
Effective August 24, 1998, the Company acquired the net liabilities of
Digital Networks Corporation (Digital) located in California for $1,000
in cash, $400 in a promissory note and an aggregate of $537 in
convertible promissory notes. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the results of operations
of Digital have been included in the Company's consolidated financial
statements from August 24, 1998. The excess of the cost over the fair
value of the acquired identifiable assets of $2,226 was recorded as
goodwill and is being amortized over ten years. The purchase agreement
also provides for additional payments up to $500 if Digital achieves
certain income levels for the year ending December 31, 1998. As of
December 31, 1998, Digital achieved these earnings level and the Company
recorded $500 as additional goodwill.
Effective December 8, 1998, the Company acquired all of the outstanding
stock of Proline Industries, Inc. (Proline) located in Washington, for
$6,400 in cash. The acquisition was accounted for using the purchase
method of accounting and, accordingly, the results of operations of
Proline have been included in the Company's consolidated financial
statements from December 9, 1998. The excess of the cost over the fair
value of the acquired identifiable assets of $5,066 was recorded as
goodwill and is being amortized over ten years.
26
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
Effective December 8, 1998, the Company acquired the net assets of Aurora
Visual Systems (Aurora), located in Washington, for $1,400 in cash. The
acquisition was accounted for using the purchase method of accounting
and, accordingly, the results of operations of Aurora have been included
in the Company's consolidated financial statements from December 10,
1998. The excess of the cost over the fair value of the acquired
identifiable assets of $1,429 was recorded as goodwill and is being
amortized over ten years.
Effective April 1, 1999, the Company acquired all of the outstanding
stock of Pro Line Video, Inc. for approximately $70 in cash and
subordinated promissory notes in the aggregate principal amount of
approximately $465. The acquisition was accounted for using the purchase
method of accounting, and accordingly, the results of the operations have
been included in the Company's consolidated financial statements from
April 1, 1999. The excess of the cost over the fair value of the acquired
identifiable assets of $312 was recorded as goodwill and is being
amortized over ten years. The purchase agreement also calls for
additional payments up to $96 based on performance of the Company through
February 2000. Such amounts, if any, will be recorded as compensation
expense when incurred.
The following unaudited pro forma financial information presents the
combined results of operations of the Company, Higginbotham, Alford,
Digital, Aurora and Proline as if the acquisitions had occurred as of
January 1, 1997, after giving effect to certain adjustments, including
amortization of goodwill and other intangibles, additional depreciation
expense, accretion to redemption value on preferred stock, increased
interest expense on debt related to the acquisition and related income
tax effects. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the
companies constituted a single entity during such periods.
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1997 1998
-------------------- --------------------
(Unaudited)
<S> <C> <C>
Revenue 97,590 120,340
Net income (loss) 195 (212)
==================== ====================
</TABLE>
(17) CONTINGENCIES
The Company is currently undergoing a software investigation conducted by
an outside consultant at the request of Business Software Alliance (BSA).
BSA, which represents several different software manufacturers, is
investigating whether the Company was using the software of various BSA
clients without proper licenses. The investigation has not been
completed; however, the Company's information at this time does not
indicate that the resolution of these matters will have a material
adverse effect on the Company's consolidated financial position, results
of operations or liquidity.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
27
<PAGE>
INTELLISYS GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(All amounts in thousands, except share data)
(18) SUBSEQUENT EVENTS
On March 31, 2000, the Company borrowed $9,000 of Senior Subordinated
Term Loan due March 31, 2005 and bearing 12% annual interest. The holder
of the note is entitled to purchase 380,442 shares of common stock at
$6.96 per share and the note is secured by a second lien on all of the
Company's assets. In relation to the borrowing, the Company signed an
amendment (the Amendment) to its Bank Line of Credit which decreased the
maximum borrowings under the line to $28,500 and amended certain
nonfinancial covenants. In connection with the Amendment, $3,500 of the
Bank Line of Credit was guaranteed by the Series A Preferred
Stockholders.
Subsequent to December 31, 1999, options to purchase 142,438 shares of
common stock were exercised at an exercise price of $0.00025 per share.
Subsequent to December 31, 1999, the Company repurchased 52,632 shares of
common stock from stockholders for $500.
28
<PAGE>
MCSi, INC.
INTRODUCTION TO UNAUDITED
PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro Forma Financial Information is included on pages 29 through
34 of this Form 8-K. The Unaudited Pro Forma Financial Information assumes
that the acquisition occurred, with respect to the September 30, 2000 balance
sheet information, on September 30, 2000, and with respect to the statements
of operations information, at the beginning of the earliest period presented.
The Unaudited Pro Forma Financial information is not intended to be indicative
of the financial position or results of operations had the acquisition actually
occurred on the dates indicated and is not representative of the anticipated
future financial performance of the business formerly known as "Intellisys."
The unaudited pro forma consolidated balance sheet reflects the allocation of
the purchase price to the estimated fair value of assets acquired and
liabilities assumed, with the excess of the estimated fair values of assets
acquired and liabilities assumed over the purchase price being used to reduce
long-lived assets to zero with the remainder used to reduce goodwill. By
virtue of the fact that Intellisys has filed voluntary petitions for
protection under the Federal Bankruptcy Code, there are many creditors of
Intellisys who are making claims on the assets to be acquired by MCSi. Thus,
MCSi will need time to assess the assets it has acquired and any liabilities
or obligations it has assumed. While MCSi will continue to undertake a more
in depth evaluation of the fair value of the net assets acquired, it is not
presently expected to differ materially from purchase price allocation
included therein.
The unaudited pro forma consolidated statements of operations reflect the
effects of the purchase allocation described above and the resultant
amortization and additional interest expense associated with the cash used to
fund the acquisition, along with other adjustments directly attributable to
the transaction. The pro forma data reflects adjustments directly related to
the acquisition, and does not include adjustments that may arise as a
consequence of the acquisition, such as cost savings, improved efficiencies,
etc. Therefore, the pro forma data is not necessarily indicative of operating
results that would have occurred for the year ended December 31, 1999 or the
nine months ended September 30, 1999 and 2000, or in future periods, had the
acquisition actually occurred at the beginning of each period shown.
29
<PAGE>
MCSi, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Assets/
MCSI Intellisys liabilities not
September 30, September 30, acquired from Pro forma Pro forma,
2000 2000 Intellisys adjustments (1) as adjusted
------------- ------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,585 $ 2,860 $ (2,860) $ -- $ 2,585
Accounts receivable 142,745 18,472 -- -- 161,217
Inventories 73,285 9,021 -- -- 82,306
Prepaid expenses and other
current assets 1,476 284 (284) -- 1,476
Deferred income taxes 621 -- -- (621) (c) --
---------- ---------- ---------- ---------- ----------
Total current assets 220,712 30,637 (3,144) (621) 247,584
Property and equipment, net 35,452 6,647 -- (6,647) (b) 35,452
Intangible assets 140,422 -- -- (4,508) (b) 135,914
Equity investments 27,105 -- -- -- 27,105
Other assets 1,603 1,055 (1,055) -- 1,603
---------- ---------- ---------- ----------- -----------
Total assets $425,294 $ 38,339 $ (4,199) $ (11,776) $447,658
========== ========== ========== =========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 85,179 $ 24,901 $(24,901) $ -- $ 85,179
Accrued expenses 12,723 8,959 (8,959) -- 12,723
Short term loans -- 18,935 (18,935) 19,980 (a) 19,980
Deferred revenue -- 3,730 (3,730) -- --
Deferred income taxes -- -- -- 2,384 (c) 2,384
Current portion of long-term debt 608 3,445 (3,445) - 608
---------- ---------- ---------- ----------- -----------
Total current liabilities 98,510 59,970 (59,970) 22,364 120,874
Long-term debt 163,890 9,749 (9,749) -- 163,890
Deferred income taxes 10,769 -- -- -- 10,769
Preferred stock -- 11,923 (11,923) -- --
Stockholders' equity 152,125 (43,303) 43,303 -- 152,125
---------- ---------- ---------- ----------- -----------
Total liabilities and stockholders'
equity $ 425,294 $ 38,339 $(38,339) $ 22,364 $447,658
========== ========== ========== =========== ===========
</TABLE>
See the notes to the Unaudited Pro Forma Information.
30
<PAGE>
MCSi, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Historical Pro forma Pro forma,
MCSi Intellisys adjustments as adjusted
------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net sales $ 662,729 $ 114,582 $ -- $ 777,311
Cost of sales 514,230 89,068 -- 603,298
------------- ------------ ------------ -------------
Gross profit 148,499 25,514 -- 174,013
Selling, general and administrative expenses 118,934 -- (225) (2) 118,709
Selling, general and administrative expenses -- 42,968 -- 42,968
------------- ------------ ------------ -------------
Operating income (loss) 29,565 (17,454) 225 12,336
Other income (expense):
Interest expense (10,925) -- (1,348) (3) (12,273)
Interest expense -- (3,287) 3,287 (3) --
Other income (expense) 447 (95) -- 352
------------- ------------ ------------ -------------
Income (loss) before taxes 19,087 (20,836) 2,164 415
Provision (benefit) for income taxes 8,158 -- (7,559) (4) 599
------------- ------------ ------------ -------------
Net income (loss) 10,929 (20,836) 9,723 (184)
Accretion to redemption value on preferred
securities (288) -- (288)
------------- ------------ ------------ -------------
Net income (loss) available to common shareholders $ 10,641 $ (20,836) $ 9,723 $ (472)
============= ============ ============ =============
Earnings (loss) per share of common stock - basic $ 0.87 $ (0.04)
Earnings (loss) per share of common stock -
diluted $ 0.84 $ (0.04)
Average shares outstanding - basic 12,268,711 12,268,711
Average shares outstanding - diluted 12,594,439 12,594,439
</TABLE>
See the notes to the Unaudited Pro Forma Information.
31
<PAGE>
MCSi, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Historical Pro forma Pro forma,
MCSi Intellisys adjustments as adjusted
------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 494,166 $ 94,236 $ -- $ 588,402
Cost of sales 397,590 73,756 -- 471,346
------------- ------------ ------------- -------------
Gross profit 96,576 20,480 -- 117,056
Selling, general and administrative expenses 75,736 -- (225) (2) 75,511
Selling, general and administrative expenses -- 28,437 (942) (2) 27,495
------------- ------------ ------------- -------------
Operating income (loss) 20,840 (7,957) 1,167 14,050
Other income (expense):
Interest expense (7,173) -- (1,348) (3) (8,521)
Interest expense -- (1,547) 1,547 (3) --
Other income 352 140 -- 492
------------- ------------ ------------- -------------
Income (loss) before taxes 14,019 (9,364) 1,366 6,021
Provision (benefit) for income taxes 6,307 -- (3,666) (4) 2,641
------------- ------------ ------------- -------------
Net income (loss) $ 7,712 $ (9,364) $ 5,032 $ 3,380
============= ============ ============= =============
Earnings per share of common stock - basic $ 0.67 $ 0.30
Earnings per share of common stock - diluted $ 0.66 $ 0.29
Average shares outstanding - basic 11,439,605 11,439,605
Average shares outstanding - diluted 11,644,718 11,644,718
</TABLE>
See the notes to the Unaudited Pro Forma Information.
32
<PAGE>
MCSi, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Historical Pro forma Pro forma,
MCSi Intellisys adjustments as adjusted
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 686,749 $ 128,752 $ -- $ 815,501
Cost of sales 546,618 102,014 -- 648,632
------------ ------------ ------------- ------------
Gross profit 140,131 26,738 -- 166,869
Selling, general and administrative expenses 111,537 -- (300) (2) 111,237
Selling, general and administrative expenses -- 48,753 (1,266) (2) 47,487
------------ ------------ ------------- ------------
Operating income (loss) 28,594 (22,015) 1,566 8,145
Other income (expense):
Interest expense (9,773) -- (1,798) (3) (11,571)
Interest expense -- (2,348) 2,348 (3) --
Other income (expense) 710 (1,503) -- (793)
------------ ------------ ------------- ------------
Income (loss) before taxes 19,531 (25,866) 2,116 (4,219)
Provision (benefit) for income taxes 8,393 (559) (9,903) (4) (2,069)
------------ ------------ ------------- ------------
Net income (loss) 11,138 (25,307) 12,019 (2,150)
Accretion to redemption value on preferred
securities (100) -- (100)
------------ ------------ ------------- ------------
Net income (loss) available to common stockholders $ 11,038 $ (25,307) $ 12,019 $ (2,250)
============ ============ ============= ============
Earnings (loss) per share of common stock - basic $ 0.96 $ (0.19)
Earnings (loss) per share of common stock - diluted $ 0.94 $ (0.19)
Average shares outstanding - basic 11,548,589 11,548,589
Average shares outstanding - diluted 11,732,355 11,732,355
</TABLE>
See the notes to the Unaudited Pro Forma Information.
33
<PAGE>
MCSi, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. The unaudited pro forma balance sheet has been adjusted to reflect:
a. MCSi's pro forma borrowing of $ 18,935, to fund the purchase
price, the administrative costs incurred relating to the bankruptcy
proceedings of $645, and the related direct costs of the acquisition
estimated to be $400. The Asset Purchase Agreement between MCSi and
Intellisys requires that MCSi repay amounts owed by Intellisys to Fleet
on the closing date. On September 30, 2000, the amount owed to Fleet
totaled $18,935 and this is the amount used on a pro forma basis
assuming the transaction had occurred on September 30, 2000. The actual
amount owed to Fleet on the closing date of the Asset Purchase
Agreement was approximately $12.6 million.
b. The allocation of the purchase price to the estimated fair value of
assets acquired and liabilities assumed. Since the fair value of the
assets acquired exceeded the purchase price, the excess was used to (i)
reduce property and equipment to zero, (ii) recognize deferred taxes as
described in (c) below, and (iii) allocate the residual to negative
goodwill of $4,508.
c. Deferred tax liabilities which arise by virtue of differences in the
tax basis and financial reporting basis of the inventories acquired.
There is no book/tax basis difference in the other assets acquired.
2. To reflect amortization of negative goodwill over an estimated useful life
of 15 years and to eliminate historical amortization expense related to
goodwill of Intellisys.
3. To reflect increased interest expense based on MCSi's borrowing as
described in 1(a) above at 9% per annum, and the elimination of interest
expense related to Intellisys.
4. To record an estimated income tax provision, as if the transaction had
occurred at the beginning of each period presented at an estimated rate
of 40%. On a pro forma basis, the effective tax rate is higher than the
statutory rate by virtue of MCSi's non-deductible goodwill amortization and
other permanent differences.
34
<PAGE>
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.
MCSi, Inc.
Date: January 11, 2001
/s/ IRA H. STANLEY
------------------------------------
Ira H. Stanley
Vice President and Chief Financial Officer
35
