<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
August 29, 1996
Wang Laboratories, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
----------------------------------------------
(State or other jurisdiction of incorporation)
1-5677 04-2192707
- ------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
600 Technology Park Drive, Billerica, Massachusetts 01821
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 967-5000
--------------
<PAGE> 2
The undersigned Registrant hereby amends Item 7 of its Current Report on
Form 8-K dated August 29, 1996 to read in its entirety as follows:
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
-----------------------------------------
(i) Audited Financial Statements
Independent Auditors' Report
I-NET, Inc. and Subsidiaries Consolidated Balance Sheets as of
December 31, 1995 and 1994
I-NET, Inc. and Subsidiaries Consolidated Statements of
Operations for the years ended December 31, 1995, 1994 and 1993
I-NET, Inc. and Subsidiaries Consolidated Statements of
Stockholders' Equity (Deficit) for the years ended
December 31, 1995, 1994 and 1993
I-NET, Inc. and Subsidiaries Consolidated Statements of Cash
Flows for the years ended December 31, 1995, 1994 and 1993
I-NET, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
(ii) Unaudited Financial Statements
I-NET, Inc. and Subsidiaries Condensed Consolidated Balance
Sheet as of June 30, 1996
I-NET, Inc. and Subsidiaries Condensed Consolidated Statements
of Operations for the six months ended June 30, 1996 and 1995
I-NET, Inc. and Subsidiaries Condensed Consolidated Statements
of Cash Flows for the six months ended June 30, 1996 and 1995
I-NET, Inc. and Subsidiaries Notes to Condensed Consolidated
Financial Statements
(b) Pro Forma Financial Information
-------------------------------
Pro Forma Combined Condensed Balance Sheet as of June 30, 1996
Pro Forma Combined Condensed Statement of Operations for the
year ended June 30, 1996
Notes to Pro Forma Combined Condensed Financial Statements
(c) Exhibits
--------
Item No. Description
-------- -----------
* 2. Stock Purchase Agreement by and among the
Company and the other stockholders of
I-NET, Inc. signatories thereto, as
amended.
23. Accountants' Consent
* 99. Amended and Restated Credit Agreement among
the Company, Wang Federal, Inc., Wang
Canada Limited, I-NET, Inc., Dataserv
Computer Maintenance, Inc., certain
Lenders, Co-Agents and a Collateral Agent
named therein, and Bankers Trust Company
as Agent and Issuing Bank dated as of
August 29, 1996.
- -----------------------------
* Previously filed
<PAGE> 3
I-NET, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
The Board of Directors
I-NET, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of I-NET, Inc. and
subsidiaries as of December 31, 1995 and 1994, 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, 1995. 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of I-NET, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Washington, D.C.
March 29, 1996, except as to note 15 which is
as of April 15, 1996, and note 16 which is
as of August 29, 1996
<PAGE> 5
I-NET, INC. AND SUBSIDIARIES
<TABLE>
Consolidated Balance Sheets
(In thousands except share data)
December 31, 1995 and 1994
<CAPTION>
=============================================================================================================
ASSETS 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and equivalents:
Restricted (notes 1 and 13) $ - 3,870
Unrestricted 1,401 2,435
Receivables, net (notes 2, 5 and 12) 94,072 87,854
Income taxes receivable 4,253 256
Inventory, net (note 5) 446 2,107
Prepaid expenses and other 775 271
Assets held for sale 332 2,345
- -------------------------------------------------------------------------------------------------------------
Total current assets 101,279 99,138
Property and equipment, net (notes 3, 5 and 13) 15,773 7,808
Other 151 289
- -------------------------------------------------------------------------------------------------------------
Total assets $117,203 107,235
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- -------------------------------------------------------------------------------------------------------------
Current liabilities:
Line of credit (notes 5 and 15) $ 47,300 38,400
Accounts payable 31,759 27,240
Accrued expenses (note 6) 16,414 9,731
Current maturities of long-term debt due to shareholder (notes 7 and 15) 7,016 -
Current maturities of other long-term debt (note 7) - 419
Current installments of obligations under capital leases (note 13) 72 -
Deferred income taxes (note 9) - 3,107
Other (note 13) - 3,615
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 102,561 82,512
Long-term debt due to shareholders, excluding current maturities (notes 7 and 15) 3,936 -
Obligations under capital leases, excluding current installments (note 13) 327 -
Deferred income taxes (note 9) - 719
- -------------------------------------------------------------------------------------------------------------
Total liabilities 106,824 83,231
- -------------------------------------------------------------------------------------------------------------
Series A redeemable convertible preferred stock, $.001 par value, 1,000,000
shares authorized; 303,273 and 227,455 shares issued and outstanding at
December 31, 1995 and 1994, respectively (note 11) 20,000 15,000
Commitments and contingencies (notes 1, 5, 7, 8, 13, 14 and 15)
Stockholders' equity (deficit) (notes 8, 10, 11, 13, 15 and 16):
Common stock, $.0002 par value, 14,500,000 shares authorized; 4,795,910 and
5,175,000 shares issued and outstanding at December 31, 1995 and 1994,
respectively 1 1
Common stock Class E, $.0002 par value, 500,000 shares authorized; no shares
issued or outstanding at December 31, 1995 and 1994 - -
Additional paid-in capital 1,225 301
Foreign currency translation adjustment (16) -
Retained earnings (deficit) (9,997) 8,893
Unearned compensation expense (834) (191)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (9,621) 9,004
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $117,203 107,235
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 6
I-NET, INC. AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Operations
(In thousands)
Years ended December 31, 1995, 1994 and 1993
<CAPTION>
==================================================================================================
1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $327,110 234,453 147,982
- --------------------------------------------------------------------------------------------------
Cost of revenues:
Direct costs 270,539 175,151 108,864
Indirect costs 54,050 32,283 22,786
General and administrative expenses 18,704 14,330 9,297
- --------------------------------------------------------------------------------------------------
343,293 221,764 140,947
- --------------------------------------------------------------------------------------------------
Operating income (loss) (16,183) 12,689 7,035
- --------------------------------------------------------------------------------------------------
Other expenses:
Interest 5,355 2,165 1,388
Other, net 925 285 31
- --------------------------------------------------------------------------------------------------
6,280 2,450 1,419
- --------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (22,463) 10,239 5,616
Provision (benefit) for income taxes (note 9) (8,272) 4,014 5,212
- --------------------------------------------------------------------------------------------------
Net earnings (loss) $(14,191) 6,225 404
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 7
I-NET, INC. AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Stockholders' Equity (Deficit)
(Dollars in thousands)
Years ended December 31, 1995, 1994 and 1993
<CAPTION>
==================================================================================================================================
Common stock Additional Foreign Retained Unearned
---------------- paid-in currency earnings compensation
Shares Amount capital translation (deficit) expense Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 6,400,000 $1 352 - 7,331 - 7,684
Net earnings - - - - 404 - 404
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 6,400,000 1 352 - 7,735 - 8,088
Purchase and retirement of 1,225,000 shares of common
stock, net of related costs of $58 (note 13) (1,225,000) - (352) - (4,921) - (5,273)
Accretion of Series A redeemable preferred stock to
liquidation value - - - - (146) - (146)
Unearned compensation relating to options granted in
1994 under the KESOP (note 8) - - 301 - - (301) -
Amortization of unearned compensation under the KESOP
(note 8) - - - - - 110 110
Net earnings - - - - 6,225 - 6,225
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 5,175,000 1 301 - 8,893 (191) 9,004
Exchange of 379,090 shares of common stock for
75,818 shares of preferred stock (note 11) (379,090) - (301) - (4,699) - (5,000)
Unearned compensation relating to options granted
in 1995 under the KESOP (note 8) - - 1,225 - - (1,225) -
Amortization of unearned compensation under the KESOP
(note 8) - - - - - 582 582
Foreign currency translation adjustment - - - (16) - - (16)
Net loss - - - - (14,191) - (14,191)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 4,795,910 $1 1,225 (16) (9,997) (834) (9,621)
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 8
I-NET, INC. AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31, 1995, 1994 and 1993
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(14,191) 6,225 404
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,993 2,151 1,275
Provisions for contract losses, doubtful receivables, and
inventory obsolescence 5,629 597 456
Compensation expense under the KESOP 582 110 -
Interest converted to long-term debt 447 - -
Loss on disposal of property and equipment - 3 13
Deferred income taxes (3,826) 1,823 2,003
Changes in assets and liabilities:
Decrease (increase) in restricted cash 3,870 (3,870) -
Increase in receivables (7,848) (42,352) (9,490)
Increase in income taxes receivable (3,997) (256) -
Decrease (increase) in inventory 1,029 (1,409) (359)
Decrease (increase) in assets held for sale 2,013 (2,345) -
Increase in prepaid expenses and other (504) (178) (69)
Decrease (increase) in other assets 138 108 (205)
Increase in accounts payable 4,519 14,065 1,199
Increase in accrued expenses 3,369 3,955 2,490
Increase (decrease) in income taxes currently payble - (2,922) 2,922
(Decrease) increase in other liabi lities (3,615) 115 -
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (8,392) (24,180) 639
- ----------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities - purchases of property and equipment (11,523) (4,316) (2,440)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds over repayments under line of credit 8,900 16,400 5,000
Proceeds from borrowings under long-term debt 10,603 350 -
Principal payments under long-term debt (586) (830) (1,823)
Repayments of capital lease obligations (36) - -
Net proceeds from issuance of convertible preferred stock - 14,854 -
Repurchase and retirement of common stock - (1,773) -
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 18,881 29,001 3,177
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in unrestricted cash and equivalents (1,034) 505 1,376
Unrestricted cash and equivalents, beginning of year 2,435 1,930 554
- ----------------------------------------------------------------------------------------------------------------------
Unrestricted cash and equivalents, end of year $ 1,401 2,435 1,930
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
5
<PAGE> 9
I-NET, INC. AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Cash Flows, Continued
(In thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest 4,113 1,959 1,116
Income taxes 487 5,369 287
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
On August 10, 1994, the Company repurchased and retired common stock held by a
minority stockholder for $5,100,000. Of this amount, $3,500,000 was not paid to
the minority stockholder until 1995.
During 1995, the Company entered into capital leases for equipment in the amount
of $435,000.
During 1995, 379,090 shares of common stock were exchanged for 75,818 shares of
Series A Preferred Stock with a liquidation value of $5,000,000.
See accompanying notes to consolidated financial statements.
6
<PAGE> 10
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
I-NET, Incorporated (the "Company") is a privately held company founded
in 1985 to provide network computing and system integration services to
commercial and government organizations. The Company's business units
offer services in communications, rightsizing and business process
re-engineering, outsourcing, engineering support, and electronic
information systems. The Company primarily conducts its business
operations in the United States, but also has operations in the United
Kingdom, Colombia and Singapore.
A portion of the Company's business is significantly impacted by the
United States budget. As the U.S. continues to reduce budget allocations
for certain expenditures, sales to U.S. Government customers may be
adversely affected. The Company has been successful in expanding sales
to companies operating in private industry in order to reduce the total
number of contracts dependent upon the U.S. Government. Approximately 59
percent, 76 percent and 83 percent of the Company's consolidated
revenues were derived from contracts or subcontracts with the U.S.
government during the years ended December 31, 1995, 1994 and 1993,
respectively.
Changes in the marketplace may significantly affect management's
estimates and the Company's financial performance. Many of the Company's
commercial contracts are for a fixed price and are long-term in
duration, which subjects the Company to substantial risks relating to
unexpected cost increases and other factors outside of the control of
the Company. Revenues and profits on such contracts are recognized using
estimates and actual results, when known, may differ from such
estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of I-NET, Incorporated and its two wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation.
REVENUE RECOGNITION
Revenues on cost-plus-fee contracts are recognized to the extent of
costs incurred plus a proportionate amount of fee earned. Revenues on
time and materials contracts are recognized to the extent of billable
rates times hours delivered plus other direct costs. Revenues on fixed
price contracts are recognized on the percentage of completion method
based on costs incurred in relation to total estimated costs. Revenues
from maintenance contracts are recognized ratably over the applicable
contractual periods. Anticipated contract losses are recognized as soon
as they become known and estimable.
(Continued)
7
<PAGE> 11
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) CONTINUED
CASH EQUIVALENTS AND RESTRICTED CASH
All highly liquid investments with original maturities of three months
or less are considered cash equivalents.
There are no cash equivalents or restricted cash balances at December
31, 1995. At December 31, 1994, restricted cash includes approximately
$255,000 held in a bank certificate of deposit as security for
performance under a contract and $3,615,000 due to a former minority
stockholder under a settlement agreement (see note 13).
INVENTORY
Inventory, consisting principally of communications equipment and
computer parts and accessories which the Company is required to maintain
under certain contracts, is valued at the lower of cost, determined on
the average cost basis, or market value.
ASSETS HELD FOR SALE
Assets held for sale consist of various property and equipment which
were sold subsequent to December 31, 1995 and 1994, and leased back
under an operating lease arrangement.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over
their estimated useful lives, ranging from three to seven years, using
the straight-line method. Assets held under capital leases and leasehold
improvements are amortized over the shorter of the lease term or
estimated useful life of the asset using the straight-line method.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. 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 the deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
Prior to 1993, the Company was treated as a Subchapter S corporation for
income tax purposes. Pursuant to this tax status, taxable income of the
Company was passed through to the Company's shareholders. During 1993,
the Company's tax status changed from a Subchapter S corporation to a
Subchapter C corporation (see notes 9 and 13). The effect of this change
in the Company's tax status is included in the 1993 income tax provision
in the accompanying statement of operations.
(Continued)
8
<PAGE> 12
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) CONTINUED
RESEARCH AND DEVELOPMENT EXPENSES
The Company expenses research and development costs as they are
incurred. Research and development expenses for the years ended December
31, 1995, 1994 and 1993, were approximately $431,000, $74,000 and
$120,000, respectively, and are included in cost of revenues in the
accompanying consolidated statements of operations.
FOREIGN CURRENCY
The financial results of foreign operations are translated to U.S.
dollars using the current exchange rates for assets and liabilities and
using weighted average exchange rates for revenues, expenses, gains and
losses. Translation gains and losses are deferred in a separate
component of stockholders' equity and transaction gains and losses are
recognized currently.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1994 consolidated financial statements
have been reclassified to conform to the 1995 presentation.
COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, and other sources are recorded when it
is probable that a liability has been incurred and the amount of the
assessment and/or redemption can be reasonably estimated.
USE OF ESTIMATES
Management of the Company makes a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities to
prepare the consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could differ
from those estimates.
(Continued)
9
<PAGE> 13
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(2) RECEIVABLES
<TABLE>
The components of receivables, net at December 31, 1995 and 1994, are as
follows:
<CAPTION>
1995 1994
----------------------------------------------------------------------
(In thousands)
<S> <C> <C>
U.S. Government:
Billed $61,521 48,985
Unbilled 4,598 19,761
----------------------------------------------------------------------
66,119 68,746
----------------------------------------------------------------------
Commercial and other:
Billed 26,161 17,978
Unbilled 3,685 1,621
----------------------------------------------------------------------
29,846 19,599
----------------------------------------------------------------------
Allowance for doubtful accounts (1,893) (491)
----------------------------------------------------------------------
$94,072 87,854
======================================================================
</TABLE>
Two commercial customers accounted for more than 5 percent each of the
Company's accounts receivable at December 31, 1995.
Included in unbilled accounts receivable are retainages due upon
completion of contracts of approximately $375,000 and $212,000 at
December 31, 1995 and 1994, respectively. Of total accounts receivable
at December 31, 1995, there is approximately $774,000 of unbilled
amounts which, based upon the Company's experience, may not be collected
within the next fiscal year.
The Company estimates an allowance for doubtful accounts based on the
credit worthiness of its customers as well as general economic
conditions. Consequently, an adverse change in those factors could
affect the Company's estimate of its bad debts.
(Continued)
10
<PAGE> 14
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(3) PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment at December 31, 1995 and 1994, consists of the
following:
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Furniture and equipment $24,663 12,947
Leasehold improvements 339 97
- -------------------------------------------------------------------------------
25,002 13,044
Accumulated depreciation and amortization (9,229) (5,236)
- -------------------------------------------------------------------------------
$15,773 7,808
===============================================================================
</TABLE>
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1995 and 1994. FASB
Statement No. 107, Disclosures about Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
<CAPTION>
1995 1994
-------------------- -------------------
Carrying Fair Carrying Fair
amount value amount value
- -----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and equivalents $ 1,401 1,401 6,305 6,305
Receivables, net 94,072 94,072 87,854 87,854
Financial liabilities:
Line of credit 47,300 47,300 38,400 38,400
Accounts payable 31,759 31,759 27,240 27,240
Accrued expenses 16,414 16,414 9,731 9,731
Long-term debt 10,952 10,004 419 419
===================================================================================
</TABLE>
The carrying amounts shown in the table are included in the consolidated balance
sheets under the indicated captions.
(Continued)
11
<PAGE> 15
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(4) CONTINUED
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and equivalents, receivables, line of credit, accounts payable
and accrued expenses:
The carrying amounts approximate fair value because of the short
maturity of those instruments.
Long-term debt:
The fair value of the Company's long-term debt is estimated by
discounting the future cash flows of each instrument at rates
currently offered to the Company for similar debt instruments of
comparable maturities.
(5) LINE OF CREDIT
At December 31, 1993, the Company had a line of credit agreement with a
bank which provided for borrowings up to $25,000,000 limited to specified
percentages of eligible receivables. The line of credit agreement expired
on March 31, 1994.
On March 14, 1994, the Company negotiated a revolving line of credit
agreement with another bank and repaid all amounts outstanding under its
previous line of credit. As of December 31, 1995, this line of credit
agreement provided for borrowings of up to $55,000,000 limited to specified
percentages of eligible receivables. Amounts available are reduced by
outstanding letters of credit (see note 13). The unused amount of the
available line of credit at December 31, 1995 was $6,700,000. Interest
under this agreement, which was 11.25 percent and 8.75 percent at December
31, 1995 and 1994, respectively, is payable at rates which fluctuate based
on the Company's consolidated leverage ratios. Borrowings under this line
of credit are collateralized by accounts receivable, inventory, property
and equipment, and general intangibles. Interest is payable monthly while
the outstanding principal balance is payable in full at the termination
date of the agreement on March 31, 1997. Under the terms of the agreement,
the Company is restricted from declaring or paying dividends if its
consolidated leverage ratio equals or exceeds 2.0 to 1.0.
The agreement also requires the Company to comply with various covenants.
At December 31, 1995, the Company was not in compliance with several of
those covenants. Subsequent to year end, the Company negotiated an
amendment to bring the Company into compliance with the terms of the
agreement (see note 15). At December 31, 1994, the Company was not in
compliance with one of the covenants and negotiated an amendment to the
agreement on March 20, 1995, to bring the Company into compliance.
(Continued)
12
<PAGE> 16
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(6) ACCRUED EXPENSES
<TABLE>
Accrued expenses at December 31, 1995 and 1994 consists of the following:
<CAPTION>
1995 1994
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Accrued salaries and related benefits $ 6,592 6,356
Contract loss provision 3,823 228
Other 5,999 3,147
- --------------------------------------------------------------------------------
$16,414 9,731
================================================================================
</TABLE>
(7) LONG-TERM DEBT
<TABLE>
Long-term debt at December 31, 1995 and 1994 consists of the following:
<CAPTION>
1995 1994
- ------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Subordinated note payable to a group of shareholders, due
January 1998 $ 5,516 -
Subordinated note payable due to the majority shareholder, due
January 1, 1998 1,833
Subordinated unsecured note payable due to the majority
shareholder, due December 15, 1995 3,603
Note payable in monthly installments of $35,000 plus
interest at 6.5%, with final payment made in October 1995 - 350
Note payable in monthly installments of $6,533, including
interest at 12.5%, with final payment made in August 1995 - 69
- ------------------------------------------------------------------------------------
Total long-term debt 10,952 419
Less current maturities 7,016 419
- ------------------------------------------------------------------------------------
Long-term debt, excluding current maturities $ 3,936 -
====================================================================================
</TABLE>
(Continued)
13
<PAGE> 17
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) CONTINUED
On January 3, 1995, the Company issued an aggregate of $5,000,000 of
subordinated pay-in-kind notes to a group of shareholders. The principal
amount of the notes, plus all accrued interest, is due on January 3, 1998.
The notes bear interest at 12 percent for the first six months and at 8
percent thereafter through maturity. In the event that at any time prior to
the repayment of the notes at their maturity, the Company proposes an
equity financing, each holder of notes shall have the right to exchange the
notes, including additional notes issued as interest payable in-kind
pursuant to the terms of the notes, in whole or in part, for newly issued
common equivalent securities. In the event of an initial public offering of
the Company's common shares, the notes are due immediately, payable in cash
or with common stock. Further, under certain circumstances, including
certain sales of assets or changes in control of the Company, the Company
is required to redeem the pay-in-kind notes at a premium. The Company
recorded interest expense of approximately $447,000 under these notes
during the year ended December 31, 1995, based on an effective interest
rate of approximately 8.7 percent. Subsequent to year end, the subordinated
pay-in-kind notes, plus all accrued interest thereon, were exchanged for
shares of the Company's Series C Preferred Stock (see note 15).
Accordingly, the outstanding amount of the notes has been classified as
current as of December 31, 1995.
Also on January 3, 1995, the Company issued a $2,000,000 subordinated note
payable to the majority shareholder. Repayment of the principal portion of
the note is due in equal quarterly installments, along with interest at 9
percent, through final maturity on January 3, 1998. This note is
subordinate to the subordinated pay-in-kind notes described above. In the
event of an initial public offering of the Company's common shares, the
note is due immediately. The Company made the first quarterly payment due
on the note, but has failed to make any quarterly payments since that time.
Under the terms of the note, the failure to make such payments allows the
holder to accelerate the maturity of the note upon demand. The Company
incurred interest expense of approximately $157,000 under this note during
the year ended December 31, 1995, of which approximately $136,000 is unpaid
as of December 31, 1995. Subsequent to year end, the Company restated the
note and extended the maturity date to September 30, 1997 (see note 15).
(Continued)
14
<PAGE> 18
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) CONTINUED
On July 15, 1995, the Company issued a subordinated unsecured note to the
majority shareholder, bearing interest at the rate of prime plus 4 percent.
The terms of the note provided for borrowings of up to approximately
$5,125,000; however, only approximately $3,603,000 was borrowed by the
Company. The note, including accrued interest, was originally due on
September 15, 1995 but was subsequently extended to December 15, 1995. The
Company did not repay the note when due on December 15, 1995. As a result,
the note bears interest at the rate of 15 percent from the date of maturity
until paid. The Company incurred interest expense of approximately
$250,000, plus a commitment fee of approximately $72,000, under this note
during the year ended December 31, 1995, of which approximately $59,000 is
unpaid as of December 31, 1995. With a portion of the proceeds of the
issuance of the Series B and C Preferred Stock (see note 15), subsequent to
year end the Company repaid $1,500,000 of the subordinated unsecured note,
which amount is classified as current as of December 31, 1995, and restated
the note and extended the maturity date to September 30, 1997.
The aggregate scheduled maturities of long-term debt for years subsequent
to December 31, 1995, irrespective of the balance sheet classifications due
to default conditions, are as follows (in thousands): 1996, $4,603; 1997,
$667; 1998, $5,167.
(8) EMPLOYEE BENEFIT PLANS
The Company sponsors an employee savings plan under Section 401(k) of the
Internal Revenue Code (IRC) that covers substantially all employees of the
Company who elect to participate on a voluntary basis. Participants may
authorize salary deferral amounts under the plan of up to 20 percent of
their compensation or the maximum amount allowed under the IRC, $9,240 in
1995 and 1994 and $8,894 in 1993. The plan also provides for discretionary
Company contributions which vest 100 percent after 1 year of service.
Participant contributions are fully vested at all times. Discretionary
Company contributions to the plan were approximately $675,000, $491,000 and
$199,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
In April 1994, the Company adopted the I-NET, Incorporated Key Employee
Stock Option Plan (the "KESOP"). Under the terms of the KESOP, 500,000
shares of Class E Common Stock are reserved for issuance to eligible
employees at the discretion of the Company's board of directors. The
exercise price per share is determined on the date of grant by the board of
directors. Granted options generally vest at a rate of 25 percent annually
beginning on the first anniversary date of the grant. During 1995 and 1994,
respectively, 99,000 and 60,600 options were granted under the KESOP at
exercise prices ranging from $.02 to $.10, resulting in total compensation
of approximately $1,225,000 and $301,000. Of these amounts, approximately
$582,000 and $110,000 was recognized as compensation expense in 1995 and
1994, respectively. As of December 31, 1995 and 1994, no options were
exercisable.
(Continued)
15
<PAGE> 19
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(9) INCOME TAXES
As discussed in notes 1 and 13, the Company's tax status changed from a
Subchapter S corporation to a C corporation during 1993.
<TABLE>
The components of income tax expense (benefit) for the years ended December
31, 1995, 1994 and 1993, are as follows:
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $(4,080) 1,794 2,628
State (770) 397 581
Foreign 404 - -
- ------------------------------------------------------------------------------------
(4,446) 2,191 3,209
- ------------------------------------------------------------------------------------
Deferred:
Federal (3,139) 1,499 1,640
State (687) 324 363
- ------------------------------------------------------------------------------------
(3,826) 1,823 2,003
- ------------------------------------------------------------------------------------
$(8,272) 4,014 5,212
====================================================================================
</TABLE>
During the year ended December 31, 1995, approximately $931,000 of earnings
before income taxes was generated from foreign sources. There was no
significant foreign-source income during the years ended December 31, 1994
and 1993.
<TABLE>
The actual expense differs from the "expected" expense, computed by
applying the U.S. federal corporate tax rate of 35 percent in 1995 and 1994
and 34 percent in 1993 to earnings (loss) before income tax expense
(benefit), as follows:
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $(7,862) 3,584 1,909
Increase in income taxes resulting from:
Federal tax on income earned in prior years (note 13) - - 2,639
State income tax, net of federal income tax benefit (947) 469 623
Increase in valuation allowance 347 - -
Other, net 190 (39) 41
- -----------------------------------------------------------------------------------------
$(8,272) 4,014 5,212
=========================================================================================
</TABLE>
(Continued)
16
<PAGE> 20
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(9) CONTINUED
<TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability at December 31, 1995 and 1994,
are presented below:
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax asset - accruals and reserves for financial statement purposes
not currently deductible for income tax return purposes $2,584 935
- -------------------------------------------------------------------------------------------
Domestic and foreign tax credits 471 -
- -------------------------------------------------------------------------------------------
Gross deferred tax assets 3,055 935
Less: Valuation allowance (347) -
- -------------------------------------------------------------------------------------------
Net deferred tax assets 2,708 935
- -------------------------------------------------------------------------------------------
Deferred tax liability:
Accounts receivable, principally due to unbillable
contract revenue 2,137 4,379
Property and equipment, principally due to differences
in depreciation methods 512 382
Other 59 -
- -------------------------------------------------------------------------------------------
Deferred tax liabilities 2,708 4,761
- -------------------------------------------------------------------------------------------
Net deferred taxes $ - (3,826)
===========================================================================================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of the deferred
tax assets is dependent upon the generation of future taxable income during
the periods in which the temporary differences reverse. Management
considers projected future taxable income, the scheduled reversal of
deferred tax liabilities, and available tax planning strategies which can
be implemented by the Company in making this assessment. Based upon the
scheduled reversal of deferred tax liabilities, management has established
a valuation allowance of $347,000 against the deferred tax assets at
December 31, 1995. No such valuation allowance was established at December
31, 1994 or 1993.
(Continued)
17
<PAGE> 21
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(10) COMMON STOCK
Each holder of the Company's common stock ("Common Stock") is entitled to
vote on all matters presented to the shareholders and each share of Common
Stock entitles the holder to one vote. On April 14, 1994, the Company's
board of directors approved a resolution which classified 500,000 shares of
the authorized capital stock of the Company as Class E Common Stock with a
par value of $.0002. The Class E Common Stock is identical to the Common
Stock in all respects except that holders of Class E Common Stock have no
voting power. In addition, the Company's board of directors approved a 5
for 1 Common Stock split in September 1994. All share amounts prior to the
date of the split have been restated in the consolidated financial
statements and notes to reflect this stock split.
On August 10, 1994, the Company's board of directors approved a resolution
to increase the authorized Common Stock of the Company to 14,500,000
shares. As of December 31, 1995, the Company has reserved 1,516,365 shares
of Common Stock for issuance upon conversion of the Series A Preferred
Stock (see note 11).
(11) REDEEMABLE PREFERRED STOCK
On August 10, 1994, the Company's board of directors approved a resolution
to authorize 1,000,000 shares of Series A convertible participating
preferred stock with a par value of $.001 ("Series A Preferred Stock").
Effective August 10, 1994, the Company entered into a Stock and Note
Purchase Agreement with its sole common stockholder ("Stockholder") and
certain other investors ("Investors") under which the Company issued
227,455 shares of its Series A Preferred Stock to the Investors at a per
share price of $65.95. Net proceeds received by the Company from the
issuance of these shares were approximately $14,854,000, net of issuance
costs of approximately $146,000. In addition to the sale of the 227,455
shares of Series A Preferred Stock, the Company issued, on January 3, 1995,
an additional 75,818 shares of Series A Preferred Stock to the Stockholder
in exchange for 379,090 shares of outstanding Common Stock held by the
Stockholder. The Stockholder, in turn, sold these preferred shares to the
Investors at a per share price of $65.95.
(Continued)
18
<PAGE> 22
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(11) CONTINUED
Each holder of the Series A Preferred Stock is entitled to vote on all
matters presented to the shareholders. Each share of Series A Preferred
Stock entitles the holder to votes equal to the number of shares of Common
Stock into which such share of Series A Preferred Stock is convertible.
Each share of Series A Preferred Stock is convertible at the option of the
holder, at any time, into the number of fully paid and nonassessable shares
of Common Stock equal to the "multiple". The "multiple" is subject to
adjustment based on future dilution of Common Stock. At December 31, 1995
and 1994, each share of Series A Preferred Stock is convertible into five
shares of Common Stock. Each share of Series A Preferred Stock has a
preference in liquidation of $65.95 per share plus accrued and unpaid
dividends, if any. In addition, at any time after August 10, 2001, the
Series A Preferred Stock is redeemable at the option of the holder at the
then fair market value. In the event the Company completes an initial
public offering for at least $30,000,000 in Common Stock, the Series A
Preferred Stock is convertible at the option of the Company. In addition,
holders of the Series A Preferred Stock have entered into demand
registration rights agreements with the Company whereby they can require
the Company, with certain exceptions, to register shares under the
Securities Act of 1933.
(12) INVESTMENTS IN AFFILIATES
<TABLE>
In November 1993, the Company formed a joint venture entity, Justice
Technology Partners ("JTP"), with two other companies for the purpose of
obtaining and performing under a certain contract. The Company has a 38
percent interest in JTP under the terms of the joint venture agreement and
is responsible for performing certain of the requirements under the
contract. Services performed for JTP by its partners are reimbursed at
cost. The equity method is used to account for the Company's interest in
JTP. Summarized unaudited financial information for this unconsolidated
joint venture entity is as follows:
<CAPTION>
December 31,
---------------------
1995 1994
------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Contract revenue $44,574 36,226
Net income 7,902 7,592
Total current assets 3,437 5,468
Total assets 3,487 5,526
Total liabilities 3,006 4,672
========================================================================
</TABLE>
At December 31, 1995 and 1994, approximately $280,000 and $3,458,000,
respectively, is included in accounts receivable in the accompanying
financial statements resulting from amounts due from JTP.
(Continued)
19
<PAGE> 23
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(13) COMMITMENTS AND CONTINGENCIES
GENERAL LITIGATION CONTINGENCY
The Company is involved in various litigation arising in the normal course
of business. In the opinion of management, any liability which may result
from the resolution of any present litigation or asserted claim will not
have a material effect on the Company's financial position or results of
operations.
AUDIT REVIEW
Substantially all payments to the Company on government cost reimbursable
contracts are provisional payments which are subject to adjustment upon
audit by the Defense Contract Audit Agency ("DCAA"). Audits through 1991
have been completed and final rates established. Audits for 1992 and
subsequent years are not expected to result in a material adverse effect on
the Company's financial position.
During 1995, DCAA found the Company to be in noncompliance with certain
government Cost Accounting Standards relating to its cost reimbursable
government contracts. Management does not expect the impact of this
noncompliance to have a material adverse effect on the Company's financial
position.
LEASES
<TABLE>
The Company is obligated under capital leases for certain equipment that
expire through June 2000. At December 31, 1995, gross amount of equipment
and related accumulated amortization recorded under this capital lease were
as follows (in thousands):
<CAPTION>
<S> <C>
Equipment $435
Less accumulated amortization 55
--------------------------------------------------------------------------
$380
==========================================================================
</TABLE>
Amortization of assets held under capital lease is included with
depreciation expense.
The Company leases its office facilities and certain equipment under
several noncancelable operating leases expiring at various times through
May 2005. The following is a schedule of future minimum lease payments
required under the Company's noncancelable operating leases and the capital
lease as of December 31, 1995:
(Continued)
20
<PAGE> 24
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
<TABLE>
(13) CONTINUED
<CAPTION>
Capital Operating
Year ending December 31, leases leases
--------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
1996 $110 9,865
1997 110 9,561
1998 110 6,818
1999 110 4,810
2000 55 3,923
Thereafter - 14,122
--------------------------------------------------------------------------
Total minimum lease payments 495 $49,099
=======
Less amount representing interest 96
----------------------------------------------------------------
399
Less current installments of obligation under
capital lease 72
----------------------------------------------------------------
Obligations under capital lease, excluding
current installments $327
================================================================
</TABLE>
Rental expense under all operating leases for 1995, 1994 and 1993
approximated $7,620,000, $2,350,000 and $1,767,000, respectively.
A significant operating lease for equipment requires the Company to comply
with various financial covenants. At December 31, 1995, the Company was not
in compliance with certain of such covenants. Under the terms of the lease,
the violation of such covenants could, at the lessor's option, require the
Company to purchase from the lessor the underlying equipment at an amount
determined based on a formula within the lease. At December 31, 1995, the
amount which the Company could be required to pay to purchase such
equipment would be approximately $3,800,000. Subsequent to year end, the
lessor waived compliance with violated covenants.
The Company leases an apartment in the vicinity of its headquarters
facility from an officer for the purpose of providing short-term lodging to
Company personnel or other visitors requiring such accommodations. The
lease is dated July 6, 1992 and extended for an initial period of one year,
after which it became a month-to-month lease. Rentals are at a rate of
$2,250 per month.
(Continued)
21
<PAGE> 25
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(13) CONTINUED
TAX MATTERS
During 1993, the District Director of the Internal Revenue Service ("IRS")
completed an examination of the Company's federal income tax returns for
its taxable years 1988 through 1991. The primary issues raised by the
District Director concerned the Company's tax accounting method and the
validity of its election to be treated as an S corporation during the tax
years under examination. In December 1993, the District Director issued an
unfavorable position report to the Company summarizing the findings of its
examination.
In February 1994, the Company filed a protest requesting that the IRS's
Regional Appeals Office review the proposed findings of the IRS
examination. In December 1994, a settlement proposal was accepted by the
Regional Appeals Office under which the Company agreed (i) to be treated as
a C corporation for the years at issue and (ii) to adopt the accrual method
of accounting beginning with the Company's 1990 tax year. The effect of
this change in the Company's tax status was recognized in the 1993 results
of operations. The accompanying 1993 statement of operations includes a
provision not only for income taxes associated with 1993 but also the
income taxes and interest for all prior years which were under examination
by the IRS. There is no effect on the 1995 or 1994 results of operations.
STOCKHOLDER LITIGATION
In 1989, a minority stockholder filed suit in Maryland State Court, seeking
to require the Company to purchase all of his outstanding shares, which
amounted to approximately 19 percent of the outstanding Common Stock of the
Company. On January 7, 1994, the Company accepted the tender of the
minority stockholder's shares but disputed the fair value placed on them by
the minority stockholder. On August 10, 1994, the Company and the minority
stockholder agreed to settle their dispute and dismiss all court actions
previously filed. Under the terms of the settlement, the Company agreed to
pay the sum of $5,100,000 to the minority stockholder and his counsel as
consideration for the repurchase of the outstanding shares. Of this total
amount, $1,600,000 was paid on August 10, 1994 and the remaining $3,500,000
was paid on January 3, 1995. At December 31, 1994, the $3,500,000, along
with accrued interest, is included in restricted cash and current
liabilities in the accompanying financial statements. All of the common
stock shares repurchased by the Company in this transaction were retired
during 1994.
In addition to the $5,100,000, the agreement provides for an additional
payment to the minority stockholder and his counsel of $3,000,000
contingent on the occurrence of any of several specific events, one of
which is a common stock public offering by the Company. No amounts have
been accrued in the accompanying consolidated financial statements related
to this potential contingency.
(Continued)
22
<PAGE> 26
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(13) CONTINUED
CONTRACT CLAIM
During 1995, the Company filed a claim for approximately $2,100,000
relating to a contract dispute with one of its former customers, the
Resolution Trust Company ("RTC"). Management of the Company believes that
it has valid claims against the RTC and that sufficient reserves are
available to offset any potential adjustments.
CONTRACT COMMITMENT
During 1995, the Company entered into a commitment with a prime contractor
(on a contract for which the Company is a subcontractor) to complete the
prime contractor's portion of the remaining contract work. The agreement
requires the Company to provide the prime contractor with a minimum of
$20,000,000 of contract bid and/or teaming opportunities over a two-year
period beginning in 1996 and award subcontracts to the prime contractor in
the cumulative amount of $9,250,000 over a three-year period beginning in
1996. In the event that the Company does not provide the prime contractor
with the minimum subcontract work, the Company has agreed to pay the prime
contractor damages in an amount no greater than 15 percent of the amount of
any subcontracting shortfalls in each year specified. No amounts have been
accrued in the accompanying consolidated financial statements related to
this potential contingency.
PURCHASE COMMITMENT
In February 1996, the Company entered into a commitment to purchase
approximately $5,000,000 of inventory from an unrelated party. The purchase
commitment provides the Company with a right to return to the vendor,
without penalty, any product not sold after six months from the date the
Company receives the inventory, up to a cumulative return amount of
$2,500,000.
LITIGATION SETTLEMENT
During 1995, in settlement of a lawsuit involving a former Company
employee, the Company agreed to pay $125,000 and to grant options for
12,000 shares of common stock to the former employee. The agreement allows
the employee to request payment in exchange for the shares under option at
a price of $500,000 on January 2, 1997 or, under certain circumstances,
following an earlier initial public offering. The agreement also provides
for the recovery of interest on that amount at a rate of 10 percent
beginning on September 18, 1996. These amounts have been recognized in the
accompanying consolidated financial statements for the year ended December
31, 1995.
OTHER
At December 31, 1995 and 1994, the Company has outstanding letters of
credit totaling approximately $1,000,000 and $2,148,000, respectively.
(Continued)
23
<PAGE> 27
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(14) OPERATING ENVIRONMENT
During 1995, the Company incurred a substantial operating loss and
encountered significant cash flow difficulties which resulted in various
default conditions relating to its line of credit and long-term debt. As
discussed in note 15, subsequent to year end the Company entered into
agreements to raise approximately $15,000,000 through the issuance of
Series B and C Preferred Stock. Concurrently, the Company obtained waivers
of the various default conditions under the line of credit and long-term
debt. The agreements also provide for the long-term debt due to the
majority shareholder to be partially repaid and the remainder restructured
and extended and the long-term debt due to the group of other shareholders
to be exchanged for Series C Preferred Stock.
Management of the Company believes that cash flow from operations and other
sources, including existing and future financing arrangements, will be
sufficient to meet the Company's obligations during 1996.
(15) SUBSEQUENT EVENTS - PRIVATE PLACEMENT AND RELATED TRANSACTIONS
On April 15, 1996, the Company's board of directors approved a resolution
which authorized the establishment of two new classes of convertible
participating preferred stock, designated as Series B Convertible
Participating Preferred Stock ("Series B Preferred Stock") and Series C
Convertible Participating Preferred Stock ("Series C Preferred Stock"). It
also reserved 1,267,250 shares of the authorized Common Stock of the
Company for issuance upon conversion of shares of either of the two new
series of preferred stock.
Both the Series B Preferred Stock and the Series C Preferred Stock shares
are entitled to a 4 1/2 percent per annum dividend. During the first three
years, dividends are payable through the issuance of additional shares of
the same series of Preferred Stock or cash, at the option of the Company.
Each share of Series B Preferred Stock and Series C Preferred Stock
is convertible into 2.23743 shares of Common Stock unless the Company
shall fail to meet certain performance or other objectives during calendar
year 1996, in which case the conversion ratio would be adjusted upward to a
level which does not exceed 2.68491 shares of Common Stock for each share
of Series B Preferred Stock or Series C Preferred Stock. The conversion
ratio is also subject to adjustment to compensate for the effects of any
dilution due to stock dividends, splits or similar transactions affecting
the Common Stock. In addition, at any time after August 10, 2001, the
Series B Preferred Stock and Series C Preferred Stock is redeemable at the
option of the holder at the then fair market value.
(Continued)
24
<PAGE> 28
I-NET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(15) CONTINUED
Both the Series B Preferred Stock and the Series C Preferred Stock have a
preference in liquidation of $50 per share. In addition, each holder of
either series is entitled to vote on all matters presented to the
shareholders in proportion to the number of shares of Common Stock into
which the shares held could be converted. In the event that the Company
completes a public offering of at least $30,000,000 of its Common Stock,
the Series B Preferred Stock and the Series C Preferred Stock are
convertible at the option of the Company. In addition, holders of the
Series B Preferred Stock and the Series C Preferred Stock have entered into
demand registration rights agreements with the Company whereby they can
require the Company, with certain exceptions, to register shares under the
Securities Act of 1933.
As of April 15, 1996, the Company entered into a series of agreements to
issue 243,000 shares of the Series B Preferred Stock and to issue 172,850
shares of the Series C Preferred Stock. The Company received $12,150,000
cash for the Series B Preferred Stock; for the Series C Preferred Stock it
received $3,000,000 cash and converted the subordinated pay-in-kind notes
originally issued January 3, 1995 (see note 7), having a principal balance
of approximately $5,650,000. The Company repaid approximately $1,672,000
principal and accrued interest of the subordinated unsecured notes payable
to the majority shareholder from the net proceeds received. The costs
incurred in connection with the transaction were approximately $300,000.
The agreements referred to above include a provision that would have, under
certain conditions, entitled the Series B Preferred Stock investor to
purchase an additional 480,000 shares of Series B Preferred Stock for an
additional $24,000,000, which would have increased that investor's
percentage ownership of the Company to approximately 23 percent, assuming
conversion to Common Stock of all shares of all series of preferred stock.
In such an event, however, the majority shareholder would still have held
slightly more than a 50 percent ownership interest. The Series B Preferred
Stock investor would have been entitled to exercise this right in the event
that the banks under the Company's line of credit (see note 5) failed to
make certain requested borrowing advances prior to August 15, 1996.
Concurrent with these transactions, the Company received waivers of the
covenant violations under its line of credit (see note 5) and an operating
lease for certain equipment (see note 13), and of the default conditions on
the subordinated notes to the majority shareholder (see note 7).
(16) SUBSEQUENT EVENT - ACQUISITION OF THE COMPANY
On August 29, 1996, the Series B Preferred Stock investor (see note 15)
acquired all of the remaining equity interests in the Company for
approximately $171 million. In accordance with the settlement of the
stockholder litigation (see note 13), the $3,000,000 contingent
consideration became due upon the change in control and was paid on
August 29, 1996.
================================================================================
25
<PAGE> 29
I-NET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<PAGE> 30
I-NET, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
$000's
<CAPTION>
June 30,
1996
--------
<S> <C>
ASSETS
Current assets
Cash $ --
Accounts receivable, net 80,655
Inventory 3,006
Prepaid expenses 6,945
--------
Total current assets 90,606
Property and equipment, net 15,841
Other assets 884
--------
Total assets $107,331
========
LIABILITY AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings due within one year $ 42,265
Accounts payable, accrued expenses and other 52,993
Deferred service revenue 704
--------
Total current liabilities 95,962
Debt 4,481
Redeemable preferred stock 39,900
Stockholders' equity (33,012)
--------
Total liabilities and stockholders' equity $107,331
========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 31
I-NET, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
$000'S
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
REVENUES $162,058 $146,322
Cost of revenues:
Direct costs 139,162 121,102
Indirect costs 30,111 24,337
General and administrative costs 10,960 8,522
-------- --------
Total costs 180,233 153,961
Operating loss (18,175) (7,639)
Other expenses:
Interest expense 2,892 2,306
Other expense, net 2,384 212
-------- --------
5,276 2,518
Loss before income taxes (23,451) (10,157)
Provision (benefit) for income taxes 226 (3,883)
-------- --------
Net loss $(23,677) $ (6,274)
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 32
I-NET, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
$000's
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(23,677) $ (6,274)
Adjustments to reconcile net earnings to cash provided
by (used in) operating activities:
Depreciation and amortization 3,169 1,513
Changes in assets and liabilities:
(Increase) decrease in receivables, net 13,418 (10,119)
(Increase) decrease in inventory (2,560) 506
(Increase) decrease in prepaid/other expenses 40
(Increase) decrease in other current assets (5,838) 2,345
(Increase) decrease in other assets (733) (438)
Increase (decrease) in accounts payable and
accrued expenses 4,327 560
Increase in deferred revenue 704 --
Increase (decrease) in income taxes currently
payable and deferred taxes 4,690 (4,166)
-------- --------
Net cash used in operating activities (6,500) (16,033)
Cash flows from investing activities:
Purchases of property and equipment (3,100) (3,670)
-------- --------
Net cash used in investing activities (3,100) (3,670)
Cash flows from financing activities:
Net proceeds over repayments under short-term borrowings (6,905) 8,700
Proceeds from borrowings under long-term debt -- 6,533
Net proceeds from sale of redeemable preferred stock 15,104 --
-------- --------
Net cash provided by financing activities 8,199 15,233
Change in cash (1,401) (4,470)
Cash - beginning of period 1,401 6,305
-------- --------
Cash - end of period $ -- $ 1,835
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 33
I-NET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
NOTE A - BASIS OF PRESENTATION
- ------------------------------
During interim periods, the Company follows the accounting policies set forth
in its audited consolidated financial statements as of and for the year ended
December 31, 1995 contained elsewhere herein. Users of financial information
produced for interim periods are encouraged to refer to the footnotes contained
in the audited consolidated financial statements as of and for the year ended
December 31, 1995 when reviewing interim financial statements.
The results of operations for the periods reported are not necessarily
indicative of those that may be expected for the full year. However, in the
opinion of management, the accompanying interim financial statements contain
all material adjustments, consisting principally of normal recurring
adjustments necessary to present fairly the financial condition, the results of
operations and cash flows of I-NET, Inc. and its subsidiaries for the interim
periods presented.
NOTE B - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
In 1989, a minority stockholder filed suit in Maryland State Court, seeking to
require the Company to purchase all of his outstanding shares, which amounted
to approximately 19 percent of the outstanding Common Stock of the Company. On
January 7, 1994, the Company accepted the tender of the minority stockholder's
shares but disputed the fair value placed on them by the minority stockholder.
On August 10, 1994, the Company and the minority stockholder agreed to settle
their dispute and dismiss all court actions previously filed. Under the terms
of the settlement, the Company agreed to pay the sum of $5.1 million to the
minority stockholder and his counsel as consideration for the repurchase of the
outstanding shares. Of this amount, $1.6 million was paid on August 10, 1994
and the remaining $3.5 million was paid on January 3, 1995. All of the common
stock shares repurchased by the Company in this transaction were retired
in 1994.
In addition to the $5.1 million, the agreement provides for an additional
payment to the minority stockholder and his counsel of $3.0 million contingent
on the occurrence of any of several events, one of which is a common stock
public offering by the Company. No amounts have been accrued in the
accompanying condensed consolidated financial statements related to this
potential contingency.
NOTE C - SUBSEQUENT EVENT
- -------------------------
On August 29, 1996, the Series B Preferred Stock investor acquired all of the
remaining equity interests in the Company for approximately $171 million. In
accordance with the settlement of the stockholder litigation, the $3.0 million
contingent consideration became due upon the change in control and was paid on
August 29, 1996.
<PAGE> 34
PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
The following Pro Forma Combined Condensed Balance Sheet as of June 30, 1996 and
the Pro Forma Combined Condensed Statement of Operations for the year ended June
30, 1996 have been prepared to reflect the effect of the acquisition by the
Company of all of the outstanding shares of I-NET, Inc. ("I-NET"), consummated
on August 29, 1996.
On May 3, 1996, the Company acquired Dataserv Computer Maintenance, Inc.
("Dataserv") in a transaction accounted for using the purchase method of
accounting. The Dataserv pro forma financial information has been aggregated
with the Company's historical results, because the Company believes these pro
forma combined results are more representative of the Company's ongoing
operations before any pro forma adjustments to reflect the acquisition of
I-NET. The I-NET pro forma information assumes that the acquisition had
occurred on June 30, 1996 for purposes of the balance sheet and at July 1, 1995
for purposes of the statement of operations. The pro forma information is based
on the historical financial statements of the Company (adjusted for Dataserv)
and I-NET, giving effect to the transaction under the purchase method of
accounting and the assumptions and adjustments in the accompanying notes to
the pro forma financial information.
The pro forma information does not purport to be indicative of the financial
position or results of operations that would have been attained had the
combinations been in effect on the dates indicated nor of future results of
operations of the Company. The pro forma combined condensed financial statements
should be read in conjunction with the separate audited financial statements and
notes thereto of Wang Laboratories, Inc. included in its Form 10-K for the year
ended June 30, 1996, the Company's pro forma financial statements related to its
acquisition of Dataserv and the Dataserv audited financial statements and notes
thereto contained in the Company's Form 8-K/A filed on July 2, 1996 and the
audited financial statements and notes thereto of I-NET contained within this
Form 8-K/A.
<PAGE> 35
<TABLE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET(1)
JUNE 30, 1996
(Unaudited)
(Dollars in millions)
<CAPTION>
Historical Historical Pro Forma Pro Forma
Wang I-NET Adjustments(2) Combined
---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Assets
Current assets
Cash and equivalents $175.3 $ -- $(87.5) $ 87.8
Accounts receivable, net 194.1 80.7 (5.9) 268.9
Inventories 19.9 3.0 -- 22.9
Other current assets 48.7 6.9 -- 55.6
------ ------ ------ --------
Total current assets 438.0 90.6 (93.4) 435.2
Depreciable assets, net 137.3 15.8 (1.4) 151.7
Other 77.6 0.6 (12.4) 65.8
Intangible assets, net 211.2 0.3 201.3 412.8
------ ------ ------ --------
Total assets $864.1 $107.3 $ 94.1 $1,065.5
====== ====== ====== ========
Liabilities and stockholders' equity
Current liabilities
Borrowings due within one year $ 21.9 $ 42.3 $ 81.1 $ 145.3
Accounts payable, accrued
expenses and other 257.6 53.0 34.2 344.8
Deferred service revenue 75.7 0.7 -- 76.4
------ ------ ------ --------
Total current liabilities 355.2 96.0 115.3 566.5
Debt -- 4.5 (4.5) --
Other long-term liabilities 77.4 -- 2.4 79.8
------ ------ ------ --------
Total long-term liabilities 77.4 4.5 (2.1) 79.8
Preferred stock 84.8 39.9 (39.9) 84.8
Stockholders' equity 346.7 (33.1) 20.8 334.4
------ ------ ------ --------
Total liabilities and stockholders'
equity $864.1 $107.3 $ 94.1 $1,065.5
====== ====== ====== ========
</TABLE>
See Notes to Pro Forma Combined Condensed Financial Statements
<PAGE> 36
<TABLE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED JUNE 30, 1996
(Unaudited)
(Dollars in millions, except per share data)
<CAPTION>
Adjusted
Historical Historical Pro Forma Pro Forma
Wang(3) I-NET Adjustments Combined
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue $1,185.4 $337.7 $(17.4)(4) $1,505.7
Costs and expenses
Cost of revenues 805.6 324.2 (20.3)(4) 1,109.5
Research and development 33.7 0.4 -- 34.1
Selling, general and
administrative 274.1 43.0 (0.4)(5) 316.7
Acquisition-related charges 27.2 -- -- 27.2
Amortization of intangibles 43.3 -- 8.1 (6) 51.4
-------- ------ ------ --------
Total costs and expenses 1,183.9 367.6 (12.6) 1,538.9
-------- ------ ------ --------
Operating income (loss) 1.5 (29.9) (4.8) (33.2)
Other (income) expense (6.4) 5.8 9.5 (7)(8)(9)(10) 8.9
-------- ------ ------ --------
Income (loss) before
income taxes 7.9 (35.7) (14.3) (42.1)
Provision (benefit) for
income taxes(11) 11.0 (4.1) -- 6.9
-------- ------ ------ --------
Net loss (3.1) (31.6) (14.3) (49.0)
Accretion and dividends on
preferred stock (22.6) -- -- (22.6)
-------- ------ ------ --------
Net loss applicable
to common stockholders $ (25.7) $(31.6) $(14.3) $ (71.6)
======= ====== ====== ========
Weighted average shares
outstanding 36.3 36.3
Net loss per share $ (0.71) $ (1.97)
======== ========
</TABLE>
See Notes to Pro Forma Combined Condensed Financial Statements
<PAGE> 37
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) On August 29, 1996, the Company completed the acquisition pursuant to the
Stock Purchase Agreement between the Company and the stockholders of
I-NET dated as of July 24, 1996 of all of the outstanding shares of
I-NET. In consideration for the shares of I-NET the Company paid the
stockholders of I-NET $100.2 million in cash and issued a $64.5 million
one-year, interest-free note. The Company has discounted the note payable
at 8.0% to $59.7 million for accounting purposes and will increase the
principal balance through charges to interest expense to the maturity
date. The final settlement of the note issued to the selling stockholders
is subject to a reduction should the Company incur losses as proscribed
by the Stock Purchase Agreement. Additionally, the Company paid $44.2
million of existing I-NET debt, $2.7 million for transaction fees and
$1.2 million related to vested stock options held by I-NET employees.
In addition, the Company assumed $81.7 million of existing I-NET
liabilities and recorded liabilities of $3.9 million for additional
transaction fees and $2.7 million related to newly issued stock options
for I-NET employees. In April, 1996, the Company had invested $12.4
million in I-NET from existing cash balances. The Company's credit
facility provided $63.7 million of cash for the initial payments and the
Company's existing cash balances provided $84.6 million. The acquisition
was accounted for according to purchase accounting principles. I-NET is
a privately-held, vendor-independent provider of outsourced network and
desktop management services. These services include enterprise network
integration and operations, network management, client/server
technologies, local area network and wide area network communications,
document management services and IT outsourcing.
The Pro Forma Combined Condensed Balance Sheet has been prepared based on
the Company's audited and I-NET's unaudited consolidated balance sheets.
The Company has a fiscal year-end of June 30, while I-NET has a fiscal
year-end of December 31. Therefore, the Pro Forma Combined Condensed
Statement of Operations for the year ended June 30, 1996 includes the
Company's historical results for the period and the I-NET results for
the fiscal year ended December 31, 1995 less the results for the six
months ended June 30, 1995 plus the results for the six months ended
June 30, 1996.
(2) To adjust the historical balance sheet of I-NET to equal the assets
acquired and the liabilities assumed. The following purchase price and
purchase accounting adjustments were made to the historical balance
sheet:
- Pro forma consideration of $100.2 million cash, $59.7 million of
discounted notes, and existing I-NET debt of $47.1 million assumed
and paid.
- Transaction costs of $6.6 million, of which $2.7 million was paid
and $3.9 million was accrued.
- Newly issued employee stock options of $2.7 million and payment for
vested stock options of $1.2 million.
- Adjustments to record costs for exiting certain I-NET businesses,
including reductions of $2.9 million and $0.5 million to accounts
receivable and depreciable assets, respectively, and the recording
of an accrual of $6.8 million for contract losses related to firm
contract commitments.
- Reduction to accounts receivable of $3.0 million to the amount
expected to be received.
- Borrowings of $63.7 million under the Company's credit facility
used for payment of a portion of the pro forma consideration.
<PAGE> 38
Notes to Pro Forma Combined Condensed Financial Statements (Unaudited) -
Continued
- Elimination of unearned compensation of $0.8 million related to a
liability not assumed by the Company.
- A charge to operations of $29.1 million in the quarter ended
September 30, 1996 (the quarter in which the acquisition was
consummated), of which $12.3 million reflects the costs associated
with combining the operations of the Company and I-NET. In
addition, a pro forma purchase accounting adjustment accrual for
I-NET integration costs of $5.7 million has been recorded. The
total I-NET integration costs of $18.0 million consist primarily of
workforce-related charges of $13 million, $4 million for the
elimination of redundant facilities and other charges, and $1
million for the writedown of certain assets. Due to the
non-recurring nature of these expenses, these charges are not
included in the Pro Forma Combined Condensed Statement of
Operations, but rather are only considered in the Pro Forma
Combined Condensed Balance Sheet as a charge to stockholders'
equity. The $5.7 million purchase accounting adjustment is recorded
as a component of goodwill, a reduction of depreciable assets and
an increase in liabilities. The Company believes that the actions
related to these initiatives will result in cost savings; however,
no anticipated cost savings have been reflected in the accompanying
Pro Forma Combined Condensed Statement of Operations. Cash
requirements for the integration and consolidation actions will
total approximately $17 million. Approximately $15 million will be
expended during the current fiscal year ending June 30, 1997; the
remainder will be expended during the next fiscal year ending June
30, 1998.
- Preliminary allocation of the purchase price and the elimination of
$33.1 million representing the historical stockholders' deficit of
I-NET. Finalization of the allocation of the purchase price,
including the Company's previously recorded $12.4 million
investment in I-NET, to assets acquired and liabilities assumed is
subject to appraisals, evaluations and other studies of the fair
value of I-NET's assets and liabilities.
(3) On May 3, 1996, the Company completed the acquisition pursuant to the
Stock Purchase Agreement among the Company, Dataserv, Inc. and Dataserv
Computer Maintenance, Inc. dated as of April 9, 1996 of all the
outstanding shares of Dataserv. In consideration for the shares of
Dataserv the Company paid $28.5 million in cash, subject to completion of
an audit of the closing balance sheet. Dataserv provides customers with
computer maintenance and support services for industry-standard servers,
desktop products, point-of-sale retail scanners and registers, as well as
application helpdesk and network integration services. The Adjusted
Historical Wang results of operations represent the Company's results of
operations for the year ended June 30, 1996 and Dataserv's results of
operations for the same period. The Dataserv pro forma financial
information has been aggregated with the Company's historical results
because the Company believes the pro forma combined results are more
representative of the Company's ongoing operations before pro forma
adjustments to reflect the acquisition of I-NET.
(4) To eliminate the revenues and direct costs related to certain I-NET
businesses, which the Company has decided not to continue.
(5) To eliminate compensation expense for a liability that was not assumed by
the Company.
(6) To record amortization expense for the intangible asset which represents
the excess of purchase price over net tangible assets acquired
established as part of the Company's purchase accounting related to the
acquisition of I-NET.
<PAGE> 39
Notes to Pro Forma Combined Condensed Financial Statements (Unaudited) -
Continued
(7) To record interest expense of $4.8 million on the note payable to the
selling stockholders. The Company issued a $64.5 million one-year,
interest-free note, which was discounted at 8.0% to $59.7 million for
accounting purposes. This adjustment reflects the increase to the
principal balance through charges to interest expense to the note's
maturity date.
(8) To reverse interest expense of $5.9 million on $47.1 million of I-NET
debt assumed and paid by the Company on the date of acquisition.
(9) To record interest expense of $5.9 million on the Company's credit
facility, assuming an average daily outstanding balance of $70.0 million
at a weighted average interest rate of 8.4%.
(10) To record the reduction of interest income of $4.7 million on $87.5
million of cash used for the pro forma consideration at an assumed rate
of 5.4% for the year ended June 30, 1996.
(11) The pro forma adjustments have not been tax affected because future
deductible amounts are not considered realizable at June 30, 1996 and
future taxable amounts will be offset against existing net operating
loss carryforwards.
<PAGE> 40
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.
WANG LABORATORIES, INC.
Dated: November 12, 1996 By: /s/ Franklyn A. Caine
------------------------------
Franklyn A. Caine
Executive Vice President and
Chief Financial Officer
<PAGE> 1
EXHIBIT 23
ACCOUNTANTS' CONSENT
The Stockholders and Board of Directors
Wang Laboratories, Inc.:
We consent to the incorporation by reference in the registration statements on
Forms S-3 (Nos. 033-58717, 333-03879 and 33-06611) and Forms S-8 (Nos.
333-01333, 333-01335, 333-12943 and 333-12963) of Wang Laboratories, Inc. of
our report, dated March 29, 1996, except as to note 15 which is as of April
15, 1996, and note 16 which is as of August 29, 1996, with respect to the
consolidated balance sheets of I-Net, Inc. and subsidiaries as of December 31,
1995 and 1994, 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, 1995, which report appears in the Form
8-K/A of Wang Laboratories, Inc. dated November 12, 1996.
KPMG Peat Marwick LLP
Washington, D.C.
November 12, 1996
