<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number: 001-13749
COLUMBIA CAPITAL CORP.
--------------------------------------------------------
(Name of small business issuer specified in its charter)
Delaware 11-3210792
---------------------------- -----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1157 North 5th Street, Abilene, Texas 79601
-------------------------------------------
(Address of principal executive offices, including zip code)
915-674-3110
------------------------------------------------
(Issuer's telephone number, including area code)
2701 West Oakland Park Boulevard, 2nd Floor, Fort Lauderdale, Florida 33311
----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value per share
----------------------------------------
(Title of Class)
<PAGE>
Check whether the issuer: (i) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (ii) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's Common Stock as of November
18, 1998 was 12,825,000 shares.
Transactional Small Business Disclosure Format (Check one): Yes No X
----- -----
THIS QUARTERLY REPORT ON FORM 10-QSB (THE "REPORT") MAY BE DEEMED TO
CONTAIN FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT
OR HEREAFTER INCLUDED IN OTHER PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), REPORTS TO THE
COMPANY'S STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR
RELEASED BY THE COMPANY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE
(FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS,
PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON
MANAGEMENT'S BEST ESTIMATES BASED UPON CURRENT CONDITIONS AND THE MOST RECENT
RESULTS OF OPERATIONS. THESE RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE
RISKS SET FORTH HEREIN, EACH OF WHICH COULD ADVERSELY AFFECT THE COMPANY'S
BUSINESS AND THE ACCURACY OF THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
ii
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
2
<PAGE>
COLUMBIA CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND
YEAR ENDED DECEMBER 31, 1997 (AUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------------- -------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 470,393 $ 17,861
Interest bearing deposits with banks 603,578 303,578
Accounts receivable, net 759,265 522,538
Prepaid expenses 813,891 255,959
Deferred tax asset - 122,209
Other assets 4,507 93,201
------------- -------------
Total current assets 2,651,634 1,315,346
Premises and equipment 1,450,382 562,598
Less accumulated depreciation 172,524 47,914
------------- -------------
Net property and equipment 1,277,858 514,684
Other assets
Deferred tax asset 29,606 52,033
Goodwill, net of accumulated amortization of $68,988 and $32,466 904,936 941,458
------------- -------------
Total other assets 934,542 993,491
------------- -------------
TOTAL ASSETS $ 4,864,034 $ 2,823,521
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 334,867 $ 104,033
Accrued expenses and other liabilities 328,987 195,908
Notes payable - related party 700,000 1,300,000
Current portion of note payable - American State Bank 10,233 -
Accrued interest payable 14,819 11,589
Accrued federal income tax payable 15,060 -
------------- -------------
Total current liabilities 1,403,966 1,611,530
Long term portion of note payable - American State Bank 148,143 -
------------- -------------
Total liabilities 1,552,109 1,611,530
SHAREHOLDERS' EQUITY
Common stock, $.001 par value; 50,000,000 shares
authorized; 12,765,000 and 12,500,000 issued and
outstanding in 1998 and 1997 respectively 12,765 12,500
Additional paid-in capital 2,007,715 1,681,230
Retained earnings (deficit) 1,291,445 (481,739)
------------ -------------
Total shareholders' equity 3,311,925 1,211,991
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,864,034 $ 2,823,521
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
F-1
<PAGE>
COLUMBIA CAPITAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Pride $ 84,000 $ 175,800 $ 263,000 $ 301,600
Credit card 3,041,514 153,138 7,740,448 406,281
Banking 150,629 229,690 616,018 385,592
Mail operations 383,841 41,689 826,255 89,975
Courier 8,850 24,475 51,235 40,825
Other 9,561 3,957 18,877 12,863
------------ ------------ ------------ ------------
Total operating revenue 3,678,395 628,749 9,515,833 1,237,136
EXPENSES
Salaries and employee benefits 856,382 532,748 2,307,886 831,152
Travel and entertainment 40,953 33,986 92,656 37,401
Equipment lease 489,729 229,405 1,318,048 373,775
Facilities rent 113,311 77,494 333,474 101,694
Repairs and maintenance 163,785 134,304 438,642 206,795
Depreciation 53,884 3,418 124,685 22,059
Amortization of goodwill 12,174 10,146 36,522 10,146
Insurance 27,948 11,529 67,934 15,760
Computer and office supplies 166,944 50,430 459,708 78,802
Postage and delivery fees 22,382 7,502 58,198 12,480
Telephone 228,732 12,219 669,037 36,181
Professional and outside services 290,599 1,473 557,989 18,746
Taxes 15,485 9,449 52,427 15,748
Other 113,076 71,620 248,851 77,189
------------ ------------ ------------ ------------
Total operating expenses 2,595,384 1,185,723 6,766,057 1,837,928
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 1,083,011 (556,974) 2,749,776 (600,792)
Other income (expense)
Costs related to acquisition - (186,921) - (186,921)
Interest income 13,916 - 34,607 -
Interest expense (28,320) (12,057) (96,010) (14,592)
------------ ------------ ------------ ------------
Total other expense (14,404) (198,978) (61,403) (201,513)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAX 1,068,607 (755,952) 2,688,373 (802,305)
Income tax expense (benefit) 364,469 (257,024) 915,189 (257,985)
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE
COMPREHENSIVE INCOME 704,138 $ (498,928) 1,773,184 (544,320)
Comprehensive income - - - -
------------ ------------ ------------ ------------
NET COMPREHENSIVE INCOME (LOSS) $ 704,138 $ (498,928) $ 1,773,184 $ (544,320)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic earnings (loss) per share $ 0.06 $ (0.04) $ 0.14 $ (0.04)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted earnings (loss) per share $ 0.05 $ (0.04) $ 0.14 $ (0.04)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding 13,089,889 12,500,000 12,773,283 12,500,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
F-2
<PAGE>
COLUMBIA CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND
YEAR ENDED DECEMBER 31, 1997 (AUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Retained
-------------------------- Paid-In Earnings
Shares Amount Capital (Deficit) Total
---------- ---------- --------------- ---------------- ----------------
<S> <C> <C> <S> <C> <C>
BALANCE - DECEMBER 31, 1996 2,500,000 $ 2,500 $ 66,230 $ (57,371) $ 11,359
Effect of reverse stock split (1,250,000) (1,250) 1,250 - -
Equity acquired in stock exchange 11,250,000 11,250 1,588,750 - 1,600,000
Stock issued in exchange for services - - 25,000 - 25,000
Net loss - - - (424,368) (424,368)
---------- ---------- --------------- ---------------- ----------------
BALANCE - DECEMBER 31, 1997 12,500,000 12,500 1,681,230 (481,739) 1,211,991
Issuance of common stock 265,000 265 281,485 - 281,750
Stock options - - 45,000 - 45,000
Net income - - - 1,773,184 1,773,184
---------- ---------- --------------- ---------------- ----------------
BALANCE - SEPTEMBER 30, 1998 12,765,000 $ 12,765 $ 2,007,715 $ 1,291,445 $ 3,311,925
---------- ---------- --------------- ---------------- ----------------
---------- ---------- --------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
F-3
<PAGE>
COLUMBIA CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 704,138 $ (498,928) $ 1,773,184 $ (544,320)
Adjustments to reconcile net income to
net cash provided by operations
Depreciation and amortization 66,058 13,564 161,208 32,205
Deferred income tax (benefit) expense (921) (322,812) 144,636 (322,812)
(Increase) decrease in
Accounts receivable 83,023 (28,693) (236,727) 303,369
Deposits and prepaid expenses 340,522 (52,757) (469,238) (87,805)
(Decrease) increase in
Accruals and accounts payable (357,820) (59,799) 382,202 (25,473)
-------------- -------------- -------------- -------------
Net cash provided by (used in) operating activities 835,000 (949,425) 1,755,265 (644,836)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (443,339) (82,970) (887,859) (96,755)
Investment in interest bearing deposit - - (300,000) -
-------------- -------------- -------------- -------------
Net cash used in investing activities (443,339) (82,970) (1,187,859) (96,755)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit, net of payments (150,000) 1,050,000 (600,000) 963,000
Proceeds from ASB note, net of payments (1,624) - 158,376 -
Proceeds from the sale of stock 113,000 - 326,750 -
-------------- -------------- -------------- -------------
Net cash (used in) provided by financing activities (38,624) 1,050,000 (114,874) 963,000
-------------- -------------- -------------- -------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 353,037 17,605 452,532 221,409
Cash and cash equivalents at beginning of period 117,356 238,108 17,861 34,304
-------------- -------------- -------------- -------------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30, $ 470,393 $ 255,713 $ 470,393 $ 255,713
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Interest paid $ 28,320 $ 12,057 $ 96,010 $ 14,592
Taxes paid 324,000 - 760,000 24,432
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
F-4
<PAGE>
COLUMBIA CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Columbia Capital Corp. (the Company) and its wholly-owned subsidiary, First
Independent Computers, Inc. (the Subsidiary). Intercompany accounts and
transactions have been eliminated.
ORGANIZATION AND NATURE OF OPERATIONS
The Company was organized under the laws of the State of Delaware on
February 5, 1993. The Company completed a private offering of its common
stock in November 1993 (See Note 2). Central Capital Corp. (a former
Subsidiary) was organized under the laws of the State of Delaware on
February 5, 1993. Hudson Resources, Inc. (a former Subsidiary) was
organized under the laws of the State of Delaware on May 17, 1994. (See
Note 3)
The Subsidiary was incorporated on October 21, 1983, pursuant to the
provisions of the Texas Business Corporation Act. The Subsidiary's
business activities include the processing of credit card purchases for
numerous businesses in various industries throughout the United States and
data processing for various banks. (See Note 5)
MANAGEMENT REPRESENTATION
Management believes the financial statements include all adjustments
necessary in order to present a fair presentation and ensure that the
financial statements are not misleading.
CASH AND CASH EQUIVALENTS
The Company considers investments with an original maturity of three months
or less to be cash equivalents.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
ACCOUNTS RECEIVABLE
The Company utilizes the allowance method for uncollectible accounts
receivable. Management estimates the uncollectible accounts and provides
for them in the allowance. The balance of the allowance for uncollectible
accounts was $20,000 at September 30, 1998 and December 31, 1997.
REVENUE RECOGNITION
The Company recognizes revenue when services have been provided to the
customer.
F-5
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PROPERTY, PLANT AND EQUIPMENT
Fixed assets of the Company are reported at historical cost.
Depreciation and amortization on assets purchased are computed by the
following methods and useful lives:
<TABLE>
<S> <C> <C>
Furniture and fixtures Straight-line 5 years
Electronic equipment Straight-line 5-7 years
Automobiles Straight-line 3-5 years
Office equipment Straight-line 5 years
Computer software Straight-line 3 years
</TABLE>
Depreciation is computed using the straight line method over the
estimated useful lives for financial statement purposes and an
accelerated method of cost recovery over statutory recovery periods
for tax purposes. Repairs and maintenance are expensed, whereas
additions and improvements are capitalized.
INTANGIBLE ASSETS
Intangible assets are reported at historical cost and consist of
goodwill. Goodwill is amortized using the straight-line method over
20 years. The Company has adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121, under which the
Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the
asset may not be recovered. No provision for impairment has been
recognized with respect to the Company's long lived assets.
PREPAID ASSETS
The Company has expenditures which benefit future periods which are
recorded as prepaid assets or deferred costs and are amortized on a
straight-line basis over the estimated or known period of benefit.
Such prepaid assets and deferred costs include prepaid insurance,
maintenance contracts, certain software licenses and supplies used in
the normal operation of business.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for deductible and
taxable temporary differences respectively. Temporary differences are
the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets may be reduced by a
valuation allowance when and if, in the opinion of management, the
tax asset will, in part or in all, not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
F-6
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PER SHARE DATA
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128) was issued. Under SFAS 128, net
earnings per share ("EPS") are computed by dividing net earnings by
the weighted average number of shares of common stock outstanding
during the period. SFAS 128 replaces fully diluted EPS, which the
Company was not previously required to report, with EPS, assuming
dilution. The Company adopted SFAS 128 effective December 31, 1997.
The effect of this accounting change on previously reported EPS data
is not significant. The computation of earnings (loss) per share of
common stock is based on the weighted average number of shares
outstanding in 1998 and 1997 of 12,633,590 and 12,500,000
respectively, adjusted retroactively to reflect the one for two
reverse split effective September 1, 1997. The computation of diluted
earnings (loss) per share of common stock is based on the weighted
average number of shares and equivalent shares outstanding in 1998 and
1997 of 12,773,283 and 12,500,000, respectively. No potential common
shares existed at December 31, 1997; therefore, basic loss per share
equals diluted loss per share at that date.
PREFERRED STOCK
The Company, under its articles of incorporation, has the authority to
issue up to five million (5,000,000) shares of preferred stock with a
par value of $.001 each, totaling five thousand dollars ($5,000). The
Board of Directors is authorized to provide for the issuance of the
shares of preferred stock in series by filing a certificate pursuant
to the applicable law of the State of Delaware, to establish the
number of shares to be included in each such series, and to fix the
designations, powers, preferences, rights and limitations of the
shares of each series.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed herein:
CASH AND SHORT-TERM INSTRUMENTS. The carrying amounts of cash and
short-term instruments approximate their fair value.
INTEREST BEARING DEPOSITS WITH BANKS. The carrying amounts of
interest bearing deposits with banks approximate their fair value.
ACCOUNTS RECEIVABLE. For accounts which are not past due greater than
90 days and have no significant change in credit risk, fair values are
based on carrying values.
NOTES PAYABLE. The Company's notes payable arrangement bears a
variable interest rate and represents terms and conditions currently
available for the same or similar debt facility in the marketplace.
Thus, the fair value of notes payable approximates the carrying amount.
F-7
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING STANDARDS ADOPTED
In June 1997, Statements of Financial Accounting Standards (SFAS) No.
130, "Reporting of Comprehensive Income," was issued. This statement
requires that comprehensive income be reported in the basic financial
statements. Comprehensive income refers to the change in equity
during a period from transactions and events other than investments by
and distributions to owners. This statement applies to fiscal years
beginning after December 15, 1997. The Company adopted SFAS 130 on
January 1, 1998.
In June 1997, Statements of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related
Information," was issued. This Statement requires that a public
business enterprise report financial and descriptive information about
its reportable operating segments. Financial information should
include a measure of segment profit or loss, certain specific revenue
and expense items, and segment assets. Descriptive information should
include detail on how segments were determined, products and services
provided by each, and any differences in the measurements used in
reporting segment information vs. those used in the general-purpose
financial statements. This statement is effective for financial
statements for periods beginning after December 15, 1997. The Company
adopted SFAS 131 on January 1, 1998. The implementation of this
standard did not have any impact on the financial position or
disclosures of the Company or results of its operations.
NOTE 2: PRIVATE OFFERINGS OF COMMON STOCK
The Company offered shares of its common stock, $.001 par value, to a
limited number of qualified investors in 1993. The company sold
325,000 shares of common stock, at a price of $.20 per share for a
total of $65,000. The investors subscribed to a minimum of 1,000
shares. There was no minimum offering amount and there was no escrow
of any funds received from the offering and such funds were utilized
by the Company as they were received. Proceeds from the offering were
used to provide working capital to the Company.
NOTE 3: DISPOSITION OF FORMER SUBSIDIARIES CENTRAL CAPITAL CORP. AND HUDSON
RESOURCES, INC.
On February 28, 1997, the Company determined that its two subsidiary
corporations, Central Capital Corp. and Hudson Resources, Inc. had no
value and would hinder the Company in it's acquisition efforts.
Therefore, the two companies were sold to the Company's principal
shareholder, Mr. Lynn Dixon at their book value of $1,361. As a
result of this sale the Company recognized no gain or loss.
F-8
<PAGE>
NOTE 3: DISPOSITION OF FORMER SUBSIDIARIES CENTRAL CAPITAL CORP. AND HUDSON
RESOURCES, INC. - CONTINUED
Details of the net assets and operations for the subsidiaries are
presented below.
Former Subsidiaries Assets and Liabilities:
<TABLE>
<CAPTION>
February 28,
ASSETS 1997
------------
<S> <C>
Cash $ 1,109
Organization costs, net 252
------------
Total Assets $ 1,361
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Common stock $ 5,000
Contributed capital 23,609
Retained earnings (27,248)
------------
Total Liabilities and Shareholder's Equity $ 1,361
------------
------------
Former Subsidiaries Operations:
Legal and professional expense $ 1,400
Amortization expense 32
------------
Net loss $ (1,432)
------------
------------
</TABLE>
NOTE 4: AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION
In a September 19, 1997 Certificate of Amendment to Certificate of
Incorporation, pursuant to the terms of an agreement and plan of
reorganization dated August 29, 1997, the Company effectuated a 1 for
2 reverse stock split as to its shares of common stock outstanding as
of September 1, 1997, which decreased the shares from 2,500,000 to
1,250,000. The Certificate of Amendment also resolved that the
Corporation shall, as amended, have the authority to issue fifty
million (50,000,000) shares of common stock with par value of $.001
each, totaling fifty thousand dollars ($50,000) and five million
(5,000,000) shares of preferred stock with par value of $.001 each,
totaling five thousand dollars ($5,000). The board of directors is
authorized, subject to limitations prescribed by law and the
provisions of this Article, to provide for the issuance of the shares
of preferred stock in series by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish the number of
shares, to fix the designations, powers, preferences, rights,
qualifications, limitations and/or restrictions, to be included in
each such series. At September 30, 1998 and December 31, 1997, there
were no preferred shares issued or outstanding.
F-9
<PAGE>
NOTE 5: ACQUISITION OF FIRST INDEPENDENT COMPUTERS, INC.
On April 30, 1997, Mr. Glenn M. Gallant and Mr. Douglas R. Baetz
purchased all of the issued and outstanding stock of First Independent
Computers, Inc. (FICI) then owned by Security Shares, Inc., a bank
holding company, for $1,600,000. The transaction was accounted for
utilizing "pushdown accounting", whereby all assets and liabilities of
FICI were restated at their estimated market value on the purchase
date. The fair market value of the restated assets was $1,200,746 and
the fair value of the restated liabilities was $574,670 at May 1,
1997. The purchase price (equity) of $1,600,000 plus the restated
liabilities of $574,670 totaled $2,174,670 as of the date of purchase.
The difference between the revalued liabilities and equity of
$2,174,670 less the restated assets of $1,200,746 resulted in the
recording of $973,924 as goodwill to be amortized over an estimated
benefit period of twenty (20) years. Goodwill amortization expense
amounts to $4,058 monthly, with $36,525 of amortization expense
included in the period ending September 30, 1998 and $32,466 (from May
1, 1997 to December 31, 1997) of amortization expense included in the
year ending December 31, 1997 results of operation.
Effective as of September 23, 1997, Columbia Capital Corp. (the
"Company") acquired all of the common stock (the "FICI Common Stock")
of the Company's operating subsidiary, First Independent Computers,
Inc. ("FICI") from Messrs. Douglas R. Baetz and Glenn M. Gallant.
Pursuant to the terms of the agreement of acquisition of the FICI
Common Stock, dated August 29, 1997 (the "Stock Purchase Agreement"),
Messrs. Gallant and Baetz received 10,631,250 shares of Common Stock
(after the Company effectuated a 1 for 2 reverse stock split of its
Common Stock) in exchange for the FICI Common Stock, which represented
approximately 85% of the Company's then issued and outstanding Common
Stock.
In connection with the closing of the Stock Purchase Agreement, the
Company issued 618,750 shares of Common Stock to Baytree Associates,
Inc., a third party which is not an affiliate of Messrs. Baetz and
Gallant, as a fee for services rendered to the Company for arranging
the transactions which are the subject of the Stock Purchase Agreement.
The accompanying financial statements have been presented, for
accounting purposes, as a recapitalization of FICI, with FICI as the
acquirer of the Company. Further, in connection with the transactions
relating to the Stock Purchase Agreement and the acquisition of the
FICI Common Stock by Messrs. Baetz and Gallant, such persons obtained
a controlling interest in FICI and, thereafter, the Company.
Therefore, these transactions were transactions between entities under
common control. Accordingly, the business combination between the
Company and FICI was accounted for in a manner similar to a pooling of
interests, whereby the accounts of the entities involved were not
revalued, rather they were combined at their historical basis.
The Company's consolidated financial statements were restated to
include the results of operations of FICI from May 1, 1997, the
acquisition date of FICI by Messrs. Baetz and Gallant. There were no
adjustments to net assets of the combining companies necessary for
either to adopt the same accounting practices.
F-10
<PAGE>
NOTE 6: FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
----------- -----------
<S> <C> <C>
Financial assets:
Cash and interest bearing deposits with banks $ 1,073,971 $ 1,073,971
Accounts receivable 759,265 759,265
Financial liabilities:
Notes payable $ 858,376 $ 858,376
Accrued interest payable 14,819 14,819
</TABLE>
The estimated fair values of the Company's financial instruments at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
----------- -----------
<S> <C> <C>
Financial assets:
Cash and interest bearing deposits with banks $ 321,439 $ 321,439
Accounts receivable 522,538 522,538
Financial liabilities:
Notes payable $ 1,300,000 $ 1,300,000
Accrued interest payable 11,589 11,589
</TABLE>
The method(s) and assumptions used to estimate the fair value of
financial instruments are disclosed in Note 1, "Fair Values of
Financial Instruments".
NOTE 7: INCOME TAXES
The Company files a consolidated federal income tax return; however,
federal income taxes are allocated between the Company and Subsidiary
based on statutory rates. The consolidated income tax expense
(benefit), as a percentage of pretax earnings, differs from the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Statutory federal income tax rate 34.00% (34.00)% 34.00% (34.00)%
Non-deductible expenses 0.11 - .04 -
Other - - - 1.85
-------- -------- -------- --------
Effective income tax rate 34.11% (34.00)% 34.04% (32.15)%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
F-11
<PAGE>
NOTE 7: INCOME TAXES - CONTINUED
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current income tax expense (benefit) $365,390 $(257,024) $770,553 $(257,985)
Deferred income tax expense (benefit) (921) - 144,636 -
---------- ---------- ---------- ----------
$364,469 $(257,024) $915,189 $(257,985)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The tax effects of temporary differences that gave rise to deferred
tax assets as of September 30, 1998 and December 31, 1997, respectively:
<TABLE>
<S> <C> <C>
Depreciation and amortization $ 9,249 $ 52,033
Net operating loss carryforwards 13,923 122,209
Other 6,434 -
--------- ---------
Net deferred tax assets $ 29,606 $ 174,242
--------- ---------
--------- ---------
</TABLE>
The Company had available consolidated net operating loss
carryforwards for federal income tax purposes of $360,783 for December
31, 1997. The consolidated net operating loss carryforwards at
December 31, 1997 will expire as shown below.
<TABLE>
<CAPTION>
Year Amount
-------- ----------
<S> <C>
2008 $ 804
2009 4,297
2010 21,545
2011 3,359
2012 330,778
</TABLE>
The Company expects to utilize all or substantially all of the net
operating loss carryforwards in 1998; therefore, no valuation
allowance has been recorded against the deferred tax asset generated
by the net operating loss carryforward.
NOTE 8: NOTES PAYABLE
The Subsidiary, has extended an operating line of credit through
Century Financial Group, Inc., a company owned by the Company's
primary shareholders. The original line of credit with the same
Century Financial Group, Inc. provides the Subsidiary with a maximum
operating line of credit of two million dollars ($2,000,000). Advances
on the line of credit, not to exceed the maximum limit, are made at
the discretion of the Subsidiary's management. The line of credit is
secured by all assets of the Subsidiary. The line of credit carries
an annual percentage rate of ten percent (10%). Under the terms of
the line of credit, the Subsidiary pays interest on a monthly basis
with the unpaid principal due at maturity, September 15, 1999. The
outstanding balance on the line of credit as of September 30, 1998 and
December 31, 1997 was $700,000 and $1,300,000.
F-12
<PAGE>
NOTE 8: NOTES PAYABLE - CONTINUED
The subsidiary has a real estate lien note through American State Bank
formerly Security State Bank. The real estate note, dated August 1,
1998, in the amount of one hundred sixty thousand dollars ($160,000)
carries an annual interest rate of Wall Street prime plus one percent
(1%), with the unpaid principal and interest due and payable in 35
monthly installments of $2,100 and a final payment of all principal
and interest outstanding. The note has a maturity date of August 1,
2001. The note is secured by a Deed of Trust to a building in which
the note proceeds were used to purchase and renovate. The outstanding
balance on the note as of September 30, 1998 was $158,376.
NOTE 9: LEASE OBLIGATIONS
The Company has entered into various operating lease agreements. Under
terms of an operating lease with IBM Corporation, certificates of
deposit with a carrying value of $603,578 at September 30, 1998, were
pledged as collateral against Bank One letters of credit in favor of
IBM.
The future minimum payments for leased property under these
noncancellable lease agreements for each of the next five years ending
December 31, 2003, are as follows:
<TABLE>
<S> <C>
1998 $ 352,197
1999 1,081,569
2000 712,763
2001 214,457
2002 174,760
2003 73,958
-----------
Lease obligations $ 2,609,704
-----------
-----------
</TABLE>
No commitments for leased property extend more than five years.
The Company currently leases its office space, 52,248 square feet,
from American State Bank at an annual cost of approximately $400,000.
The lease made on August 1, 1997 is for a term of two years expiring
July 31, 1999.
NOTE 10: MARKET RISK AND CONCENTRATIONS
On June 30, 1997 the Subsidiary had a significant credit card
portfolio processing contract expire. This contract was not renewed.
The contract represented approximately one hundred thousand dollars
($100,000) or thirty percent (30%) of the Subsidiary's monthly
operating revenue, and its loss substantially affected the
Subsidiary's profitability in 1997. As a result, substantial
operating losses were recognized in the months July through October
1997.
On October 1, 1997 the Subsidiary entered into a five year contract to
process credit card activity and produce account statements for Best
Bank. This contract represented approximately $500,000 per month in
additional operating revenue in November and December of 1997.
F-13
<PAGE>
NOTE 10: MARKET RISK AND CONCENTRATIONS - CONTINUED
In December, 1997, the Subsidiary earned approximately five hundred
thirty-five thousand ($535,000) on the bank contract which represents
seventy-two percent (72%) of total revenue for the month.
For the year ending December 31, 1997, revenue from Security State
Bank (25%), Best Bank (43%) and Pride (14%) accounted for
approximately 82% of the Company's total revenues. No other customers
accounted for 10% or more of the Company's total revenues.
For the nine months ended September 30, 1998, revenue from the Best
Bank portfolio (the "Portfolio") accounted for approximately 84% of
the Company's total revenues. No other customers accounted for 10% or
more of the Company's total revenues. Since the Best Bank failure in
July 1998 the Company has continued its role as processor for the
Portfolio accounts and is receiving payment from the Federal Deposit
Insurance Corporation ("the FDIC") for its processing costs. As of
September 30, 1998, the Company's accounts receivable from the FDIC
relating to the Portfolio was $457,994, all current. The Company can
not speculate on the extent to which it will continue to process the
Portfolio. The loss of processing revenue associated with the
Portfolio could have a material effect on the Company's financial
statements.
NOTE 11: RELATED PARTY TRANSACTIONS
On December 1, 1997, the Subsidiary entered into a lease agreement
with The Century Group, Inc., (the "Landlord"), owned by the Company's
primary shareholders Glenn Gallant and Douglas Baetz, for office space
located at 2701 West Oakland Park Boulevard, Ft. Lauderdale, Florida,
33311. The term of the lease is for one (1) year for the sum of
thirty-one thousand seven hundred forty-six dollars ($31,746), plus
applicable sales and use taxes. The Company also agrees to pay the
Landlord, as additional rent for its share of the operating expenses
associated with the premises. The Subsidiary's financing source,
Century Financial Group, Inc., is owned by the Company's primary
shareholders, Glenn Gallant and Douglas Baetz. Interest expense and
accrued interest payable to Century Financial Group, Inc. amounted to
$55,479 and $13,479 as of September 30, 1998.
NOTE 12: STOCK OPTION PLAN
The Company has adopted a stock plan to provide for the granting of
options to senior management of the Company. As of September 30,
1998, the Company has allocated 1,250,000 shares of stock for issuance
under the plan. On July 1, 1998 the Company granted 350,000 options.
F-14
<PAGE>
NOTE 12: STOCK OPTION PLAN - CONTINUED
The following table shows the vesting schedule and the exercise price
for each of the seven directors awarded options.
<TABLE>
<CAPTION>
Options vested
------------------------------- Total
Exercise July 1, October 1, January 1, Options
Director Price 1998 1998 1999 Granted
-------------------- -------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Glenn M. Gallant $ 2.96 16,666 16,667 16,667 50,000
Douglas R. Baetz $ 2.96 16,666 16,667 16,667 50,000
Kenneth A. Klotz $ 2.28 16,666 16,667 16,667 50,000
Charles LaMontagne $ 2.28 16,666 16,667 16,667 50,000
Olan Beard $ 2.28 16,666 16,667 16,667 50,000
Donald Thone $ 2.28 16,666 16,667 16,667 50,000
Robert Feldman $ 2.28 16,666 16,667 16,667 50,000
---------
350,000
---------
---------
</TABLE>
Messrs. Baetz and Gallant, having greater than 10% of the outstanding
shares of the Company at July 1, 1998, were granted options with an
exercise price set at 110% of the fair market value of the Company's
common stock at the date of the grant. The remaining five directors
were granted options with an exercise price set at 85% of the fair
market value of the Company's common stock at the date of the grant.
As of September 30, 1998 no options under the plan had been exercised.
The Company accounts for the options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," under which compensation cost is recognized for the
difference in the option's exercise price and the fair market value of
the stock as of the date of each grant over the vesting period. The
effect of further compensation cost for the plan, had it been included
in the income statement as provided for in SFAS No. 123, "Accounting
for Stock-Based Compensation," would have resulted in an insignificant
reduction to the Company's net earnings and earnings per share on a
pro forma basis, based on estimates using an accepted options pricing
model.
NOTE 13: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY
The following represents consolidated financial information of the
parent company as of September 30, 1998 and December 31, 1997
utilizing the equity method of accounting.
CONDENSED BALANCE SHEET:
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,108 $ 1,689
Prepaid expenses and other assets 149,000 15,024
------------- ------------
Total current assets 151,108 16,713
Investment in subsidiary 3,475,384 1,379,969
------------- ------------
TOTAL ASSETS $ 3,626,492 $ 1,396,682
------------- ------------
------------- ------------
</TABLE>
F-15
<PAGE>
NOTE 13: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY - CONTINUED
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accrued expenses and other liabilities $ 37,961 5,000
Due to subsidiary 276,606 179,691
------------- ------------
Total current liabilities 314,567 184,691
SHAREHOLDERS' EQUITY
Common stock 12,765 12,500
Capital surplus 2,007,715 1,681,230
Retained earnings (deficit) 1,291,445 (481,739)
------------- ------------
Total shareholders' equity 3,311,925 1,211,991
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,626,492 $ 1,396,682
------------- ------------
------------- ------------
CONDENSED INCOME STATEMENT:
REVENUES
Undistributed earnings (loss) of subsidiary $ 2,050,415 $ (220,031)
------------- ------------
Total revenues 2,050,415 (220,031)
EXPENSES
Stockholder costs and fees 8,028 581
Professional and outside services 296,504 27,851
Marketing 112,216 -
Amortization expense - 189
Costs related to acquisition - 186,921
Other operating 1,568 647
------------- ------------
Total expenses 418,316 216,189
Net loss related to discontinued operations - (1,432)
------------- ------------
INCOME (LOSS) BEFORE FEDERAL INCOME TAX 1,632,099 (437,652)
Income tax benefit (141,085) (13,284)
------------- -------------
Net income (loss) $ 1,773,184 $ (424,368)
------------- ------------
------------- ------------
</TABLE>
F-16
<PAGE>
NOTE 13: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY - CONTINUED
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
CONDENSED STATEMENT OF CASH FLOWS:
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,773,184 $ (424,368)
Adjustments to reconcile net income (loss) to
net cash provided by operations
Undistributed earnings in subsidiary (2,050,415) 220,031
Depreciation and amortization - 189
Prepaid expenses and other assets (133,976) (13,436)
Accruals and accounts payable 129,876 209,515
------------- ------------
Net cash used by operating activities (281,331) (8,069)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 281,750 -
------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 419 (8,069)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,689 9,758
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,108 $ 1,689
------------- ------------
------------- ------------
</TABLE>
NOTE 14: CONSULTING AGREEMENTS
On March 20, 1998, Columbia Capital Corp. entered into a consulting
agreement with Worldwide Corporate Finance ("Worldwide"). Worldwide,
through its individual affiliate, Michael Markow, provides the Company
with consulting services, including long term business, managerial and
financial planning; investigating and analysis in corporate
reorganizations and expansion in merger and acquisition opportunities;
and the introduction of business opportunities for credit card
processing services. The consulting agreement expires on March 19,
1999. As compensation for services, the Company granted to Mr. Markow
options to purchase up to 300,000 shares of Common Stock, which are
the subject of a currently effective registration statement, on the
following terms and conditions: (i) options to purchase up to 150,000
shares of Common Stock at an exercise price of $0.95 per share,
exercisable from April 1, 1998 until March 31, 1999; (ii) options to
purchase up to 75,000 shares of Common Stock at an exercise price of
$0.95 per share, exercisable from June 19, 1998 until March 19, 1999;
and (iii) options to purchase up to 75,000 shares of Common Stock at
an exercise price of $0.95 per share, exercisable from September 19,
1998 until September 19, 1999.
Worldwide has elected to receive payment in the form of non-cash
transactions by exercising the options against amounts otherwise
payable for services rendered by Mr. Markow, in which the fee will be
considered to be paid in full by delivery to Mr. Markow of the shares
underlying such options upon exercise thereof.
F-17
<PAGE>
NOTE 14: CONSULTING AGREEMENTS - CONTINUED
In addition, options to purchase up to 400,000 shares of Common Stock,
have been issued to Mr. Markow, which is the subject of a currently
effective registration statement, on the following terms and
conditions: (i) options to purchase up to 100,000 shares of Common
Stock at an exercise price of $1.70 per share, exercisable from April
1, 1998 until August 31, 1998; (ii) options to purchase up to 100,000
shares of Common Stock at an exercise price of $1.70 per share,
exercisable from April 1, 1998 until October 31, 1998; (iii) options
to purchase up to 100,000 shares of Common Stock at a per share
exercise price equal to 85% of the closing bid market value of the
Common Stock on the date of exercise of such options, exercisable from
April 1, 1998 until March 31, 1999; and (iv) options to purchase up to
100,000 shares of Common Stock at a per share exercise price equal to
85% of the closing bid market value of the Common Stock on the date of
exercise of such options, exercisable from April 1, 1998 until March
31, 2000.
On March 20, 1998, the Company entered into an additional consulting
agreement with Worldwide relating to prospective financing
transactions. Compensation for these services will be paid in the
form of restricted securities on a transaction by transaction basis.
As of September 30, 1998, Worldwide has exercised options to purchase
265,000 shares of Columbia Capital Corp. Common Stock. Details of the
transactions are as follows:
On April 17, and June 1, 1998, Worldwide exercised options to purchase
150,000 and 75,000 shares, respectively, of the Company's Common Stock
at $0.95 per share resulting in a transaction valued at $142,500 and
$71,250, respectively.
On August 14, and August 19, 1998, Worldwide exercised options to
purchase 20,000 shares, for a total of 40,000 shares, of the Company's
Common Stock at $1.70 per share resulting in transactions valued at
$68,000.
The fair value of the options granted approximate the value of the
services to be provided by Mr. Markow and is being recognized as a
component of consulting fees in the income statement over the term of
the agreement.
On July 1, 1998, Columbia Capital Corp. entered into a consulting
agreement with Matthias and Berg, LLP ("the Firm"). The Firm, through
its partner, Jeffrey Berg, provides the Company with consulting and
litigation services, including long term business, managerial and
financial litigation support; investigating and analysis in corporate
reorganizations and legal expertise on merger and acquisition
opportunities. As compensation for services, the Company granted to
the Firm options to purchase up to 100,000 shares of Common Stock,
which are the subject of a currently effective registration statement,
on the following terms and conditions: (i) options to purchase up to
100,000 shares of Common Stock at an exercise price of $2.28 per
share, exercisable from July 1, 1998. The fair value of consulting
and litigation services provided by the Firm is being recognized as
the services are provided. As of September 30, 1998 no options have
been exercised under the agreement.
F-18
<PAGE>
NOTE 15: YEAR 2000
The Year 2000 issue is a programming issue that may affect many
electronic processing systems. Until recently, in order to minimize
the length of data fields, most date-sensitive programs eliminated the
first two digits of the year. This issue could affect information
technology ("IT") systems and date-sensitive embedded technology that
controls certain systems (such as telecommunications systems, security
systems, etc.) leaving them unable to properly recognize or
distinguish dates in the twentieth and twenty-first centuries and
thereafter. For example, date-sensitive calculations may treat "00"
as the year 1900 rather than the year 2000. This treatment could
result in significant miscalculations when processing critical
date-sensitive information relating to dates after December 31, 1999.
Year 2000 Compliance requires that neither performance nor
functionality be affected by dates prior to, during, and after the
year 2000. Specifically, every system must perform as follows:
1. Correctly handle date information before, during, and after
January 1, 2000 when accepting date input, providing date output,
and performing calculations on dates or portions of dates
2. Function according to the documentation before, during, and
after January 1, 2000 without changes in operation
3. Where appropriate, respond to two digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined, and
predetermined manner
4. Recognize Year 2000 as a leap year (based on the quad-centennial
rule)
These criteria were derived from the requirements established by the
British Standards Institute in DISC PD2000-1 A DEFINITION OF YEAR 2000
CONFORMITY REQUIREMENTS.
Every mission-critical IT system processed by the Company has been
fully tested and certified by its developer to meet the above
criteria. In addition, the testing process for most of the IT systems
has been certified by an independent third party such as the
Information Technology Association of America (ITAA). As part of our
Year 2000 effort, we have reviewed the scope and methodology of the
testing performed by each developer to ensure that it was inclusive of
all the processes we perform with that product. Although we are
confident each IT system is year 2000 compliant, we are currently
testing all systems to ensure that they will continue to coexist and
function properly in our environment. We are also testing with our
customers and other entities to ensure that every ancillary system
that we are using is also Year 2000 compliant.
Other IT systems are licensed from third parties. These third parties
have either assured the Company that their system is Year 2000
compliant or identified necessary system upgrades to make their system
Year 2000 compliant. The Company anticipates receiving the necessary
systems upgrades and completing Year 2000 compliance testing of these
other IT systems by March 31, 1999.
F-19
<PAGE>
NOTE 15: YEAR 2000 - CONTINUED
The Year 2000 issue may also affect the Company's date-sensitive
embedded technology, which controls systems such as the
telecommunications systems, security systems, etc. The Company does
not believe that the cost to modify or replace such technology to make
it Year 2000 compliant will be material. But, if such modifications
or replacements, if required, are not made, the Year 2000 issue could
have a material adverse effect on the operations, financial condition
and results of operations of the Company.
Ultimately, the potential impact of the Year 2000 issue will depend
not only on the corrective measures the Company undertakes, but also
on the way in which the Year 2000 issue is addressed by governmental
agencies, businesses and other entities that provide data to, or
receive data from, the Company or any of the Company's subsidiaries,
or whose financial condition or operations are important to the
Company or any of the Company's subsidiaries, such as significant
suppliers and customers. The Company is initiating communications
with significant customers and vendors to evaluate the risk of their
failure to be Year 2000 compliant and to determine the extent to which
the Company may be vulnerable to such failure. There can be no
assurance that the systems of these third parties will be Year 2000
compliant by December 31, 1999 or that the failure of these third
parties to be Year 2000 compliant will not have a material adverse
effect on the operations, financial condition and results of operation
of the Company.
The cost of IT and embedded technology systems testing and upgrades is
not expected to be material to the Company consolidated operating
results. The Company estimates incurring costs for Year 2000
compliance testing and its communications program, which will be
recorded as a non-operating expense. The Company will capitalize and
amortize the cost of system upgrades over future periods. The Company
intends to fund these costs with cash from operations.
The Company believes that the most significant Year 2000 issue risks
relate to third parties' failures to be Year 2000 compliant. But,
because the Company's assessment of and solution implementation for
the Year 2000 issue is still in process, the Company has not yet
developed contingency plans for these risks and the risk of the
Company's failure to be Year 2000 compliant. Management intends to
complete contingency plans for the Year 2000 issue by December 31,
1998.
There can be no absolute assurance that these IT systems will be Year
2000 compliant by December 31, 1999. If any of these IT systems are
not Year 2000 compliant by December 31, 1999, then the Year 2000 issue
could have a material adverse effect on the operations, financial
condition and results of operations of the Company.
F-20
<PAGE>
NOTE 16: SUBSEQUENT EVENTS
On November 2, 1998, the Company was notified by Messrs. Gallant,
Chairman of the Board and Secretary, and Baetz, a Director, who own
approximately eighty percent (80%) of the Company's issued and
outstanding stock, that they had been served by the District of
Colorado on civil actions with pleadings involving the Federal Deposit
Insurance Corporation (FDIC). The pleadings involving the FDIC are in
relation to another entity owned by Messrs. Gallant and Baetz. The
Company and it's Subsidiary are not parties in the litigation.
On November 3, 1998, the Company accepted the resignations of Messrs.
Gallant, Chairman of the Board and Secretary, and Baetz, a Director.
The resignations were accepted due to the potential conflict of
interest between Messrs. Gallant and Baetz and the Company's largest
customer, the FDIC, as receiver of BestBank.
On November 3, 1998, Kenneth Klotz, President and Director of the
Company, was named to the additional post of Chairman of the Board of
Directors. Charles LaMontagne, the Company's Chief Financial Officer,
was named to the post of Secretary. Messrs. Klotz and LaMontagne have
been senior executives of the Company's Subsidiary since 1994.
F-21
<PAGE>
COLUMBIA CAPITAL CORP.
PRO FORMA CONSOLIDATED BALANCE SHEETS
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND
YEAR ENDED DECEMBER 31, 1997 (AUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------------- ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 470,393 $ 17,861
Interest bearing deposits with banks 603,578 303,578
Accounts receivable, net 759,265 522,538
Prepaid expenses 813,891 255,959
Deferred tax asset - 122,209
Other assets 4,507 93,201
---------- ----------
Total current assets 2,651,634 1,315,346
Premises and equipment 1,450,382 562,598
Less accumulated depreciation 172,524 47,914
---------- ----------
Net property and equipment 1,277,858 514,684
Other assets
Deferred tax asset 29,606 52,033
Goodwill, net of accumulated amortization of $68,988 and $32,466 904,936 941,458
---------- ----------
Total other assets 934,542 993,491
---------- ----------
TOTAL ASSETS $4,864,034 $2,823,521
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 334,867 $ 104,033
Accrued expenses and other liabilities 328,987 195,908
Notes payable - related party 700,000 1,300,000
Current portion of note payable - American State Bank 10,233 -
Acrued interest payable 14,819 11,589
Acrued federal income tax payable 15,060 -
---------- ----------
Total current liabilities 1,403,966 1,611,530
Long term portion of note payable - American State Bank 148,143 -
---------- ----------
Total liabilities 1,552,109 1,611,530
Common stock, $.001 par value; 50,000,000 shares
authorized; 12,765,000 and 12,500,000 issued and
outstanding in 1998 and 1997 respectively 12,765 12,500
Additional paid-in capital 2,007,715 1,681,230
Retained earnings (deficit) 1,291,445 (481,739)
---------- ----------
Total shareholders' equity 3,311,925 1,211,991
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,864,034 $2,823,521
---------- ----------
---------- ----------
</TABLE>
The accompanying note is an integral part of
these pro forma consolidated financial statements.
F-22
<PAGE>
COLUMBIA CAPITAL CORP.
PRO FORMA CONSOLIDATED COMPREHENSIVE STATEMENTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Pride $ 84,000 $ 175,800 $ 263,000 $ 565,500
Credit card 3,041,514 153,138 7,740,448 1,045,981
Banking 150,629 229,690 616,018 701,707
Mail operations 383,841 41,689 826,255 186,645
Courier 8,850 24,475 51,235 72,725
Other 9,561 3,957 18,877 26,771
----------- ----------- ----------- -----------
Total operating revenue 3,678,395 628,749 9,515,833 2,599,329
EXPENSES
Salaries and employee benefits 856,382 532,748 2,307,886 1,409,972
Travel and entertainment 40,953 33,986 92,656 59,990
Equipment lease 489,729 229,405 1,318,048 662,458
Facilities rent 113,311 77,494 333,474 150,094
Repair and maintenance 163,785 134,304 438,642 363,968
Depreciation 53,884 3,418 124,685 183,704
Amortization of goodwill 12,174 10,146 36,522 18,262
Insurance 27,948 11,529 67,934 27,969
Computer and office supplies 166,944 50,430 459,708 171,773
Postage and delivery fees 22,382 7,502 58,198 33,167
Telephone 228,732 12,219 669,037 81,421
Professional and outside services 290,599 1,473 557,989 49,168
Taxes 15,485 9,449 52,427 28,263
Other 113,076 71,620 248,851 88,056
----------- ----------- ----------- -----------
Total operating expenses 2,595,384 1,185,723 6,766,057 3,328,265
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 1,083,011 (556,974) 2,749,776 (728,936)
Other income (expense)
Costs related to acquisition - (186,921) - (186,921)
Interest income 13,916 - 34,607 -
Interest expense (28,320) (12,057) (96,010) (14,592)
----------- ----------- ----------- -----------
Total other expense (14,404) (198,978) (61,403) (201,513)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE TAX 1,068,607 (755,952) 2,688,373 (930,449)
Income tax expense (benefit) 364,469 (257,024) 915,189 (257,985)
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE
COMPREHENSIVE INCOME 704,138 (498,928) 1,773,184 (672,464)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Comprehensive income - - - -
----------- ----------- ----------- -----------
NET COMPREHENSIVE INCOME $ 704,138 $ (498,928) $ 1,773,184 $ (672,464)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings (loss) per share $ 0.06 $ (0.04) $ 0.14 $ (0.05)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings (loss) per share $ 0.06 $ (0.04) $ 0.14 $ (0.05)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding 13,089,889 12,500,000 12,773,283 12,500,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying note is an integral part of
these pro forma consolidated financial statements.
F-23
<PAGE>
COLUMBIA CAPITAL CORP.
PRO FORMA CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND
YEAR ENDED DECEMBER 31, 1997 (AUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Retained
--------------------- Paid-In Earnings
Shares Amount Capital (Deficit) Total
---------- ------- ---------- ---------- ----------
<S> <C> <C> <S> <C> <C>
BALANCE - DECEMBER 31, 1996 12,500,000 $12,500 $1,681,230 $ 94,428 $1,788,158
Net loss - - - (576,167) (576,167)
---------- ------- ---------- ---------- ----------
BALANCE - DECEMBER 31, 1997 12,500,000 12,500 1,681,230 (481,739) 1,211,991
Issuance of common stock 265,000 265 281,485 - 281,750
Stock options - - 45,000 - 45,000
Net income - - - 1,773,184 1,773,184
---------- ------- ---------- ---------- ----------
BALANCE - SEPTEMBER 30, 1998 12,765,000 $12,765 $2,007,715 $1,291,445 $3,311,925
---------- ------- ---------- ---------- ----------
---------- ------- ---------- ---------- ----------
</TABLE>
The accompanying note is an integral part of
these pro forma consolidated financial statements.
F-24
<PAGE>
COLUMBIA CAPITAL CORP.
PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 704,138 $ (498,928) $ 1,773,184 $ (672,464)
Adjustments to reconcile net income to
net cash provided by operations
Depreciation and amortization 66,058 13,564 161,208 193,850
Deferred income tax (benefit) expense (921) (259,850) 144,636 (323,369)
Decrease (increase) in
Accounts receivable 83,023 (28,693) (236,727) 442,439
Deposits and prepaid expenses 340,522 (117,569) (469,238) (194,256)
Increase (decrease) in
Accruals and accounts payable (357,820) (69,307) 382,202 (210,900)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities 835,000 (960,783) 1,755,265 (764,700)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (443,339) (71,612) (887,859) (114,032)
Investment in interest bearing deposit - - (300,000) (2,578)
----------- ----------- ----------- -----------
Net cash used in investing activities (443,339) (71,612) (1,187,859) (116,610)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit, net of payments (150,000) 1,050,000 (600,000) 1,168,580
Proceeds from ASB note, net of payments (1,624) - 158,376 -
Proceeds from the sale of stock 113,000 - 326,750 -
Decrease in bank overdraft - - - (31,557)
----------- ----------- ----------- -----------
Net cash (used in) provided by financing activities (38,624) 1,050,000 (114,874) 1,137,023
----------- ----------- ----------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 353,037 17,605 452,532 255,713
Cash and cash equivalents at beginning of year 117,356 238,108 17,861 -
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30, $ 470,393 $ 255,713 $ 470,393 $ 255,713
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Interest paid $ 28,320 $ 12,057 $ 96,010 $ 14,592
Taxes paid 324,000 - 760,000 -
</TABLE>
The accompanying note is an integral part of
these pro forma consolidated financial statements.
F-25
<PAGE>
COLUMBIA CAPITAL CORP.
PRO FORMA INFORMATION - UNAUDITED
NOTE: BASIS OF PRESENTATION
The accompanying unaudited pro forma financial statements ("the
Statements") have been prepared in accordance with presentation guidelines
set forth for pro forma financial statements. Therefore, they are not
historical in nature and do not include all information and footnotes
necessary for a fair presentation of financial position and results of
operations and cash flows in conformity with generally accepted accounting
principles. The Statements are not necessarily indicative of the financial
position and results of operations and cash flows that would have been
attained if the transactions or events had actually taken place on the date
depicted and should be read in conjunction with the related historical
financial information. The Statements present the financial position and
results of operations and cash flows as if the events, in the following
paragraphs, had occurred on January 1, 1997. For the periods ended
September 30, 1998 and 1997 amortization expense for goodwill is stated at
its historic value of $36,522 and $18,262, respectively. Additionally,
accumulated depreciation at September 30,1997 associated with the restated
fixed assets is shown as if amounts accumulated through April 30, 1997 were
netted against the restated fixed assets at that date.
Effective September 23, 1997, Columbia Capital Corp. (the "Company")
acquired all of the common stock (the "FICI Common Stock") of the Company's
operating subsidiary, First Independent Computers, Inc. ("FICI") from
Messrs. Douglas R. Baetz and Glenn M. Gallant. Pursuant to the terms of
the agreement of acquisition of the FICI Common Stock, dated August 29,
1997 (the "Stock Purchase Agreement"), Messrs. Gallant and Baetz received
10,631,250 shares of Common Stock (after the Company effectuated a 1 for 2
reverse stock split of its Common Stock) in exchange for the FICI Common
Stock, which represented approximately 85% of the Company's then issued and
outstanding Common Stock. In connection with the closing of the Stock
Purchase Agreement, the Company issued 618,750 shares of Common Stock to
Baytree Associates, Inc., a third party which is not an affiliate of
Messrs. Baetz and Gallant, as a fee for services rendered to the Company
for arranging the transactions which are the subject of the Stock Purchase
Agreement.
On April 30, 1997, Mr. Glenn M. Gallant and Mr. Douglas R. Baetz
purchased all of the issued and outstanding stock of First Independent
Computers, Inc. (FICI) then owned by Security Shares, Inc., a bank
holding company, for $1,600,000. The transaction was accounted for
utilizing "pushdown accounting", whereby all assets and liabilities of
FICI were restated at their estimated market value on the purchase date.
The fair market value of the restated assets was $1,200,746 and the fair
value of the restated liabilities was $574,670 at May 1, 1997. The
purchase price (equity) of $1,600,000 plus the restated liabilities of
$574,670 totaled $2,174,670 as of the date of purchase. The difference
between the revalued liabilities and equity of $2,174,670 less the
restated assets of $1,200,746 resulted in the recording of $973,924 as
goodwill to be amortized over an estimated benefit period of twenty (20)
years. Goodwill amortization expense amounts to approximately $4,058
monthly.
F-26
<PAGE>
NOTE: BASIS OF PRESENTATION - CONTINUED
The accompanying financial statements have been presented, for accounting
purposes, as a recapitalization of FICI, with FICI as the acquirer of the
Company. Further, in connection with the transactions relating to the
Stock Purchase Agreement and the acquisition of the FICI Common Stock by
Messrs. Baetz and Gallant, such persons obtained a controlling interest in
FICI and, thereafter, the Company. Therefore, for accounting purposes,
these transactions are deemed to be transactions between entities under
common control. Accordingly, the business combination between the Company
and FICI was accounted for in a manner similar to a pooling of interests,
whereby the accounts of the entities involved were not revalued, rather
they were combined at their historical basis. The Company's historical
consolidated financial statements were restated to include the results of
operations of FICI from May 1, 1997, the acquisition date of FICI by
Messrs. Baetz and Gallant. There were no adjustments to net assets of the
combining companies necessary for either to adopt the same accounting
practices.
F-27
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THIS REPORT, INCLUDING THE DISCLOSURES BELOW, CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" REFERS TO COLUMBIA
CAPITAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, FIRST INDEPENDENT COMPUTERS,
INC. ("FICI"), THROUGH WHICH THE COMPANY PRINCIPALLY CONDUCTS ITS BUSINESS
OPERATIONS. WHEN USED HEREIN, THE TERMS "ANTICIPATES," "EXPECTS,"
"ESTIMATES," "BELIEVES" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE
COMPANY OR ITS MANAGEMENT, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS MAY
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH MATERIAL
DIFFERENCES INCLUDE THE FACTORS DISCLOSED IN THE "RISK FACTORS" SECTION OF
THIS REPORT, WHICH READERS OF THIS REPORT SHOULD CONSIDER CAREFULLY.
OVERVIEW OF PRESENTATION
As of May 1, 1997, Douglas R. Baetz and Glenn M. Gallant acquired 100%
of the issued and outstanding common stock (the "FICI Common Stock") of FICI
for $1,600,000 in cash from certain unaffiliated parties. As of September 23,
1997, the Company entered into a Stock Purchase Agreement with Messrs. Baetz
and Gallant, pursuant to which the Company issued an aggregate of 10,631,250
shares of the Company's common stock, par value $0.001 per share (the "Common
Stock") in exchange for 100% of the issued and outstanding shares of FICI
Common Stock The Company also issued 618,750 shares of Common Stock to a
third party, which is not an affiliate of Messrs. Baetz and Gallant, for
services rendered to the Company for arranging the transactions which are the
subject of the Stock Purchase Agreement. In connection with the closing of
the Stock Purchase Agreement, FICI became the sole operating subsidiary of
the Company. See " Part II-Other Information-Item 1-Legal Proceedings."
In connection with the transactions relating to the Stock Purchase
Agreement and the acquisition of the FICI Common Stock by Messrs. Baetz and
Gallant, such persons obtained a controlling interest in FICI and,
thereafter, the Company. Therefore, for accounting purposes, the
transactions relating to the Stock Purchase Agreement are deemed to be
transactions between entities under common control. Accordingly, the
business combination between the Company and FICI was accounted for in a
manner similar to a pooling of interests, whereby the accounts of the
entities involved were not revalued, but were combined at their historical
basis.
FICI's assets and liabilities have been restated at their estimated fair
market value as of May 1, 1997 on the balance sheets of the Company at
September 30, 1998 and December 31, 1997, in the Company's consolidated
financial statements for the nine (9) months ended September 30, 1998 and
1997, included elsewhere herein at May 1, 1997, utilizing "pushdown
accounting." The fair market value of the restated assets was $1,200,746 and
the fair value of the restated liabilities was $574,670 at May 1, 1997. The
purchase price (equity) of $1,600,000 plus the restated liabilities of
$574,670 totaled $2,174,670, as of the date of purchase. The difference
between the revalued liabilities and equity of $2,174,670 less the restated
assets of $1,200,746 resulted in the recording of $973,924 as goodwill. The
goodwill is anticipated to be amortized over 20 years in accordance with
generally accepted accounting principles, with a resulting expense to the
Company from goodwill amortization of approximately $4,058 per month, with
$36,525 of amortization expense included in the period ending September 30,
1998 and $32,466 (from May 1, 1997 to December 31, 1997) of amortization
expense included in the results of operations for the year ended December 31,
1997.
The Company has included in this Report the unaudited consolidated
financial statements of the Company for the nine (9) months ended September
30, 1998 and 1997, which include the consolidated balance sheets of the
Company as of September 30, 1998 (unaudited) and December 31, 1997 (audited),
and the related consolidated income statements and statements of changes in
shareholders' equity and cash flows for the nine (9) month periods ended
September 30, 1998 and 1997. The consolidated income statements and
statements of cash flows of the Company for the nine (9) months ended
September 30, 1998 and 1997, which form a part of the Company's consolidated
financial statements for such periods, reflect the results of operations and
cash flows of the parent holding company for the four (4) months ended April
30, 1997, and the consolidated results of operations and cash flows of the
parent holding company and FICI for the nine (9) months ended September 30,
1998 and the five (5) months ended September 30, 1997.
3
<PAGE>
The Company has also included elsewhere in this Report the unaudited pro
forma consolidated financial statements of the Company for the nine (9)
months ended September 30, 1998 and 1997 (the "Pro Forma Financial
Statements"). The Pro Forma Financial Statements include the consolidated
balance sheets of the Company as of September 30, 1998 and December 31, 1997,
and the related consolidated income statements and statements of changes in
shareholders' equity and cash flows for the nine (9) month periods ended
September 30, 1998 and 1997, and have been presented to reflect a
recapitalization of FICI, with FICI as the acquiror of the Company as of
September 23, 1997.
For purposes of the following discussion and analysis, the results of
operations for the nine (9) months ended September 30, 1998 and 1997 have
been presented from the financial information set forth in the Pro Forma
Financial Statements. The following discussion reflects, on a pro forma
basis, the consolidated results of operations of the parent holding company
and FICI for the nine (9) months ended September 30, 1998 and the results of
operations of FICI for the nine (9) month period ended September 30, 1997.
This method of presentation was set forth herein to permit useful comparison
between the aggregated nine (9) month periods ended September 30, 1998 and
1997 with respect to FICI, the Company's sole operating subsidiary.
Comparisons between the consolidated operations of the parent holding company
and FICI for the nine (9) months ended September 30, 1998 and the five (5)
month period ended September 30, 1997 and the operations of the parent
holding company during the four (4) months ended April 30, 1997 are not
meaningful because the parent holding company had insignificant operations
during such earlier period.
RECENT CHANGES IN THE BUSINESS OF THE COMPANY
CLOSURE OF BESTBANK AND RELATED MATTERS. On July 23, 1998, the
Colorado State Banking Board ordered the closure of BestBank and the Federal
Deposit Insurance Corporation ("FDIC") assumed the role of receiver of
BestBank. The single largest asset of BestBank was a portfolio (the
"Portfolio") of credit card accounts receivable serviced by FICI. As of
September 30, 1998, the number of active credit card accounts serviced by the
Company was 678,845, of which 643,768 were derived by the Company pursuant to
a master agreement (the "Master Agreement") with BestBank.
On October 1, 1997, the Company entered into the Master Agreement with
BestBank for processing and services for its customers with which BestBank
has entered into contractual agreements. Since the Best Bank closure in July,
1998, the Company has continued to process the Portfolio's accounts, pursuant
to the terms of the Master Agreement, which remains in effect, and has been
receiving payment from the FDIC for its processing services pursuant to the
Master Agreement. Although the Company continues to generate revenues from
the Master Agreement with BestBank, the closure of BestBank may have a
material adverse effect on the Company's future operations due to the
Company's current dependence on the revenues derived pursuant to the Master
Agreement. The FDIC has placed the Portfolio up for public sale and expects
to close the sale of these assets prior to December 31, 1998. No assurance
can be given that the Portfolio will be sold, or if sold, that the buyer will
continue to utilize the services of the Company for processing the Portfolio.
However, the Master Agreement has provisions which call for significant
liquidated damages which may have to be paid by the FDIC to the Company
should the Master Agreement be terminated, without the Company's consent,
prior to the end of its term.
The Company has been contacted by the FDIC for the purpose of
renegotiating the terms of the Master Agreement with the FDIC for the
continued processing of the Portfolio accounts. The Company does not believe
that the terms of a renegotiated agreement would be as favorable to the
Company as those of the Master Agreement, particularly with regard to the
terms of the liquidated damages provision. As of the date of this Report,
the Company and the FDIC have not reached an accord in connection with the
request of the FDIC to renegotiate the terms of the Master Agreement. The
FDIC may attempt to terminate the Master Agreement if the FDIC and the
Company are unable to reach an agreement as to the renegotiated terms of the
Master Agreement. No assurance can be given that the Company will be able to
renegotiate the terms of the Master Agreement or that the Master Agreement
will not be terminated by the FDIC.
On November 3, 1998, Glenn M. Gallant resigned as Chairman of the Board
and Secretary of the Company and Douglas R. Baetz resigned as a director.
Messrs. Baetz and Gallant, who are also the principal shareholders of the
Company, are involved in litigation with the FDIC, unrelated to the Company.
Due to the fact that the FDIC is the Company's largest customer, Messrs.
Baetz and Gallant chose to resign from their positions with the Company, while
the litigation is pending, in order to eliminate any potential conflicts of
interest or negative effects to the Company arising out of the litigation.
Kenneth Klotz was named Chairman of the Board of Directors and Charles
LaMontagne was named Secretary of the Company on that date.
AGREEMENT WITH PLATINUM-ICS, INC. On June 8, 1998, the Company entered
into an agreement with Platinum-ICS, Inc. ("Platinum") to perform data
processing and other services in connection with Platinum's credit card
portfolio. Platinum is the managing entity coordinating a group of experts
for processing, collecting, servicing and financing patient-pay accounts
receivables for the provider's participants. Platinum issues cards to the
recipients of medical care, who utilize the card to consolidate medical
bills. The agreement has an initial term of three (3) years and will
automatically renew for additional
4
<PAGE>
three (3) year terms, unless written notice is given by either party no less
than one hundred eighty (180) days prior to expiration of a given term. As
of the date of this Report, the Company has not yet began conversion of
Platinum's portfolio, but expects conversion to begin before the end of
November, 1998. The number of accounts that will be processed by FICI is
undetermined at this time.
AGREEMENT WITH GREATER NEVADA CREDIT UNION. On November 1, 1998, the
Company entered into an agreement with Greater Nevada Credit Union ("GNCU")
to perform data processing and other services in connection with GNCU's
credit card portfolio. The agreement has an initial term of five (5) years
and will automatically renew for additional three (3) year terms, unless
written notice is given by either party no less than one hundred eighty (180)
days prior to expiration of a given term. On October 30, 1998, the Company
successfully converted GNCU's current portfolio, consisting of over 8,600
credit card accounts. The Company anticipates benefiting from the future
growth of the portfolio over the life of the agreement. However, no assurance
to this effect can be given.
RESULTS OF OPERATIONS FOR THE NINE (9) MONTHS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
Total operating revenues for the nine (9) months ended September 30,
1998 increased approximately 266% to $9,515,833 from $2,599,329 for the nine
(9) months ended September 30, 1997. Total operating revenues principally
include: (i) credit card processing revenues, and (ii) banking and financial
service revenues.
Credit card processing revenues during the nine (9) months ended
September 30, 1998 increased 640% to $7,740,448 from $1,045,981 during the
nine (9) months ended September 30, 1997. This increase primarily relates to
the revenues associated with the Master Agreement. The Master Agreement with
Best Bank represented 92% of the credit card revenues for the nine (9) months
ended September 30, 1998. There were no revenues associated with the Master
Agreement in the nine (9) months ended September 30, 1997. Credit card
processing revenues during the nine (9) months ended September 30, 1997
primarily related to a credit card processing agreement with Clark Refining,
Inc. (the "Clark Agreement"), which expired on June 30, 1997.
Banking and financial service revenues during the nine (9) months ended
September 30, 1998 decreased to $616,018 from $701,707. This source of
revenues generally remained constant during the comparative periods because
the Company maintained its customer base and did not make significant
marketing efforts to develop this business segment. The Company intends to
expand this line of business by targeting banks and financial institutions
based on the increased capacity of the Company's equipment and hardware in
connection with the upgraded lease with IBM and the installation of the
Kirchman Dimension 3000 banking software. No assurances can be given that
such efforts will result in increased revenues to the Company. See "Year 2000
Compliance Issues."
As of August 1, 1998, American State Bank acquired Security State Bank
and converted its portfolio to an in-house processing system. The Company
generated revenues of approximately $75,000 per month from this account
during the previous three (3) years. The Company entered into a contract to
continue the item and backroom processing services for American State Bank
through July 31, 1999. The Company generated revenues of approximately
$42,000 for August, 1998 and $17,000 for September, 1998 from this agreement.
One time deconversion charges of approximately $25,000 were included in the
August, 1998 revenues. The Company anticipates revenues of approximately
$17,000 per month from American State Bank for the remainder of the contract.
Management believes that anticipated increases from the Company's credit
card operations and future bank processing opportunities will replace this
reduced source of revenues and that the loss of the Security State Bank
account is not anticipated to have a material adverse effect on total revenue
for fiscal 1998. However, no assurance to this effect can be given.
Revenues from Pride Refining, Inc. ("Pride") decreased to $263,000 for
the nine (9) months ended September 30, 1998 from $565,500 for the nine (9)
months ended September 30, 1997. This revenue decrease was due to a decision
of the management of Pride to take its computer processing activities
in-house. This removal of processing from the Company to Pride is being
converted in stages and should be completed by the summer of 1999. Due to
the expected increase in revenues from the Company's credit card operations
and bank processing, the loss of the Pride revenue is not anticipated to have
a material adverse effect on total revenue for fiscal year 1998. However, no
assurance to this effect can be given.
5
<PAGE>
Total operating expenses during the nine (9) months ended September 30,
1998 increased 103% to $6,766,057 from $3,328,265 during the nine (9) months
ended September 30, 1997. Total operating expenses principally include: (i)
cost of salaries and employee benefits, (ii) equipment expenses, (iii) cost
of office supplies and services, (iv) rental and facilities maintenance
expenses, and (v) depreciation and amortization expenses, as follows:
Cost of salaries and employee benefits during the nine (9) months ended
September 30, 1998 increased 64% to $2,307,886 from $1,409,972 during the
nine (9) months ended September 30, 1997. This increase primarily resulted
from an increase of approximately 21 full time employees at September 30,
1998 from September 30, 1997 to enable the Company to accommodate increased
demand for credit card processing services relating to the Master Agreement.
Equipment lease expenses during the nine (9) months ended September 30,
1998 increased 99% to $1,318,048 from $662,458 during the nine (9) months
ended September 30, 1997. This increase primarily related to the negotiation
of an equipment lease with IBM to upgrade the Company's computer hardware and
the lease of Data Card 9000 credit card production equipment during the last
quarter of the year ended December 31, 1997.
Cost of office supplies and services, including professional and outside
services, during the nine (9) months ended September 30, 1998 increased 420%
to $1,744,932 from $335,547 during the nine (9) months ended September 30,
1997. This increase related to the expanded volume of services provided by
the Company as a result of the Master Agreement.
Rental and repair and maintenance expenses during the nine (9) months
ended September 30, 1998 increased 50% to $773,116 from $514,062 during the
nine (9) months ended September 30, 1997. This increase related to the
negotiation of a new office lease agreement in August, 1997 which increased
the Company's office space from 22,000 square feet to 52,000 square feet.
In addition, depreciation and amortization expenses during the nine (9)
months ended September 30, 1998 decreased 20% to $161,207 from $201,966
during the nine (9) months ended September 30, 1997. The decrease related to
the revaluation of the Company's assets to fair market value on May 1, 1997
in connection with the completion of the transactions relating to the Stock
Purchase Agreement.
Other revenues and expenses resulted in total other expenses of $61,403
during the nine (9) months ended September 30, 1998, as compared to total
other expenses of $201,513 during the nine (9) months ended September 30,
1997. This decrease in expenses between the respective periods resulted from
$186,921 of costs related to the acquisition of FICI by the Company in the
third quarter of 1997, which were not recurring during the nine (9) months
ended September 30, 1998, and interest income of $34,607 from certain
certificates of deposit during the nine (9) months ended September 30, 1998,
as compared to none during the nine (9) months ended September 30, 1997,
offset by a net increase of interest expense of $81,418 during the nine (9)
months ended September 30, 1998 from the nine (9) months ended September 30,
1997 primarily relating to the line of credit (the "Line of Credit") provided
by Century Financial Group, Inc., ("Century"), an affiliate of Messrs. Baetz
and Gallant. See "Closure of BestBank and Related Matters."
As a result of the foregoing, the Company generated net income of
$1,773,184 during the nine (9) months ended September 30, 1998, as compared
to a net loss of $672,464 during the nine (9) months ended September 30,
1997. The Company generated income from operations of $2,749,726 during the
nine (9) months ended September 30, 1998, as compared to a loss from
operations of $728,936 during the nine (9) months ended September 30, 1997.
This increase in income from operations primarily resulted from increased
revenue related to the conversion of the BestBank credit card portfolio in
October, 1997. Due to economies of scale related to the increased number of
accounts processed, expenses increased at a much lower percentage than
revenues. Also, the Company's proposed business plan contemplates the
growth of revenues in connection with the Company's expansion strategy.
There can be no assurance that the Company's expansion strategy will result
in continued growth of demand for the Company's services or increased
revenues or profitability. See "Liquidity and Capital Resources."
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the ratio of current assets to current
liabilities was 1.89 to 1 as compared to 0.82 to 1 at December 31, 1997.
The Company's cash flow needs for the quarter ended September 30, 1998
were primarily provided from operations. The Company's cash flow needs for
the quarter ended September 30, 1997 were primarily provided from the Line of
Credit. At September 30, 1998, all trade payables and receivables were
current. At September 30, 1998, a $20,000 unallocated reserve for bad debts
was carried by the Company. At September 30, 1998, prepaid expenses were
$813,891 and are anticipated to be expensed as used in the future. Net
property and equipment was $1,277,858 at September 30, 1998. Major capital
additions during the three (3) months ended September 30, 1998 were the
construction of a credit card production facility at a cost of $269,615 and
personal computer system and network upgrades of $204,600. On April 2, 1998,
the Company obtained an interim construction loan from American State Bank in
the principal amount of $160,000 related to the purchase and construction of
a credit card production facility. On August 1, 1998, the interim loan was
converted to a note payable on August 1, 2001. The note is secured by the
production facility building, and bears interest at the prime rate plus 1%.
As of September 30, 1998, the principal outstanding balance on the note was
$158,381. Management believes that, as of September 30, 1998, and for the
foreseeable future, the Company will be able to finance costs of current
levels of operations from its operating revenues.
On September 11, 1997, as a result of the reduced cash flow relating to
the expiration of the Clark Agreement on June 30, 1997, the Company entered
into the Line of Credit. The Line of Credit provided for an aggregate
maximum amount of $2,000,000 of credit, secured by all of the Company's
assets, at an interest rate of ten percent (10%) per annum. On October 31,
1998, the Company renewed the Line of Credit, and reduced the aggregate
maximum amount of available credit to $700,000. Century also agreed to
release its security interest in the Company's assets. Century is not
obligated to make advances to the Company under the Line of Credit.
As of October 31, 1997, the Company had drawn down the principal amount
of $1,400,000 on the Line of Credit. The Line of Credit constituted a
principal source of cash flow during the period between the expiration of the
Clark Agreement and the commencement of the Master Agreement. As of September
30, 1998, the principal outstanding obligation to Century on the Line of
Credit had been reduced to $700,000 from cash flow generated from the
Company's operations.
Cash and cash equivalents were $470,393, as of September 30, 1998, as
compared to $17,861 as of December 31, 1997. This increase was primarily
attributable to positive cash flow during the nine (9) month period ended
September 30, 1998.
As of September 30, 1998 and December 31, 1997, the Company's long-term
borrowings were $148,143 and none, respectively. Long-term borrowings at
September 30, 1998 consisted of the note payable of $158,376 to American
State Bank, less the current portion of the note payable.
As of September 30, 1998, the Company had short-term borrowings in the
aggregate amount of $710,233, as compared to $1,300,000 at December 31, 1997.
The decrease in short-term borrowings primarily was attributable to payments
on the Line of Credit throughout the nine months ended September 30, 1998
generated through positive cash flow from operations.
In October, 1997, the Company entered into a 36-month equipment lease
with IBM related to the Company's credit card processing operations. The
Company upgraded the equipment lease in March, 1998 to provide for continued
increases in the Company's processing volume and efficiencies, and expansion
of business operations. The Company financed the lease agreement by the
pledge of certificates of deposit in the aggregate amount of $500,000,
$200,000 of which had initially been drawn down from the Line of Credit and
the balance of which was generated by cash flow from operations.
The certificates of deposit are for one-year terms and are automatically
renewable for an additional year. The certificates of deposit bear varying
rates of interest based on the date of the establishment of the certificates
of deposit.
7
<PAGE>
Net cash provided by (used in) operating activities was $1,755,265 and
($764,700) for the nine (9) months ended September 30, 1998 and 1997,
respectively. Net cash provided by operations during the nine (9) months
ended September 30, 1998 primarily consisted of net income from operations
and increases in accruals and accounts payable and deferred income taxes, and
depreciation and amortization, offset by increases in accounts receivable and
deposits and prepaid expenses. Net cash used by operations during the nine
(9) months ended September 30, 1997 primarily consisted of depreciation and
amortization and decreases in accounts receivable, offset by net losses from
operations, decreases in accruals and accounts payable, increases in deposits
and prepaid expenses, and deferred tax benefits.
Net cash (used in) investing activities was ($1,187,859) and ($116,610)
for the nine (9) month periods ended September 30, 1998 and 1997,
respectively. In the nine (9) months ended September 30, 1998, the Company
utilized $887,859 to purchase certain fixed assets, including the upgrade of
the IBM equipment lease and personal computer and network systems upgrades
and a credit card production facility, and utilized $300,000 to invest in the
Certificates of Deposit which are pledged to finance the lease agreements on
the Company's mainframe computer system. In the nine (9) months ended
September 30, 1997, the Company utilized $114,032 to purchase certain fixed
assets, including office furniture, credit card computer equipment and
computer software and $2,578 to invest in certain interest bearing deposits.
Net cash provided by (used in) financing activities was ($114,874) and
$1,137,023 for the nine (9) month periods ended September 30, 1998 and 1997,
respectively. In the nine (9) months ended September 30, 1998, the Company
made payments of $600,000 on the Line of Credit, which was offset by the
receipt of $326,750 from the issuance of Common Stock upon the exercise of
stock options and the receipt of proceeds of $158,376, net of payments,
pursuant to a construction loan from American State Bank to finance the
construction of a credit card production facility. In the nine (9) months
ended September 30, 1997, the Company received proceeds of $1,168,580 from
the Line of Credit, net of payments, which was utilized to finance the
Company's business operations, and which was offset by a decrease of $31,557
in the Company's bank overdraft position.
The Company's business plan contemplates continued expansion of
operations from such increased operational capacity and to acquire additional
and upgraded equipment and software based on future perceived needs by
management. There can be no assurances that the Company will be able to
generate business sources to utilize existing operational capacity or that
the Company will generate sufficient positive cash flow or develop additional
sources of financing to continue the Company's business plan of growth and
expansion.
YEAR 2000 COMPLIANCE ISSUES
One of the major challenges facing the consumer financial data
processing services industry is the problem of Year 2000 ("Y2K") compliance.
The Y2K dilemma deals with the underlying fact that many existing computer
programs use only two digits to identify a year in the date field. These
programs were designed and developed without considering the impact of the
upcoming change in the 21st century. If not corrected, many computer
applications could fail or create erroneous results by January 1, 2000. The
Y2K dilemma affects virtually all companies and organizations, including the
Company.
The philosophy and practice regarding upgrades of equipment and
software, in the opinion of management of the Company, allows the Company to
offer a meaningful alternative to existing and prospective customers as an
outsource, rather than such customers' attempting to perform these tasks
in-house. Management feels that an additional opportunity to bring in bank
processing customers exists by providing a solution to the Y2K dilemma. The
Company's new banking software is certified and fully Y2K compliant and,
therefore, a solution for banks facing this processing crisis. However, no
assurance to this effect can be given.
8
<PAGE>
Prospective and existing customers must comply with numerous required
regulatory mandates and are faced with the Y2K dilemma. These mandates
include: regulatory exams and audits supervised by the Federal Deposit
Insurance Corporation ("FDIC"), Office of the Comptroller of the Currency of
the United States (the "OCC"), and state regulatory agencies, external audits
by independent third party auditors, proper disaster recovery planning and
testing, installation of proper procedures and controls, insurance that key
personnel are properly backed up so that reliance on key individuals for
services are not interrupted and a host of other issues. The removal of
these overhead burdens from the Company's existing and prospective customers
is a significant marketing opportunity for the Company.
Over the past few years, the Company has attempted to actively address
the Y2K dilemma. The Company has had in place a project plan (the "Y2K
Plan") and project team reviewing all hardware and software, as necessary.
The Company anticipates its total investment in Y2K compliance will reach
approximately $430,000. The Company has already made a significant portion
of the investment needed to address the Y2K dilemma. As of the date of this
Report, the cost to: (i) acquire, install and implement these new software
systems has been an aggregate of approximately $170,000; and (ii) acquire new
hardware has been approximately $5,000. The Company has also instituted
policies and procedures that require all new hardware and software acquired
or licensed by the Company to be Y2K compliant. As of the date of this
Report, all hardware is expected to be Y2K compliant by the fourth quarter of
1998. It is management's opinion that any remaining Y2K issues are not
significant and should be able to be funded through normal operating revenue
and income. The Company estimates that until the Company has completed
implementation of the Y2K Plan, the Company anticipates expending an
additional $255,000, which is estimated to include $50,000 in software,
$5,000 in new hardware and $200,000 on other aspects of the implementation of
the Y2K Plan. TThe anticipated source of funds for such expenditures is
expected to be working capital generated from operations of the Company.
However, no assurance can be given that the goals for the Y2K Plan can be
achieved, and if achieved, that the amount necessary to achieve such goals
will be limited to the amounts set forth above or that the amounts will be
generated from operations. See "Item 2 - Management's Discussion and
Analysis or Plan of Operation."
Specifically, to address this problem the Company has installed newly
acquired banking software systems, licensed from The Kirchman Corporation, an
unaffiliated third party ("Kirchman"), that management believes has provided
a solution to the Company's Y2K compliance issues. The Company's new banking
software is certified by Kirchman as fully Y2K compliant. These software
upgrades are system and application functional upgrades. However, no
assurance can be given that all Y2K issues have been solved by the
acquisition of this software.
The Company has worked to develop extensive contingency plans to manage
the Company's ongoing operations, if any systems do not function correctly on
or after January 1, 2000. The Company has a contract with IBM for a "Hot
Site" at IBM's Business Recovery Center ("BRC") in Boulder, Colorado for
disaster recovery and off-site testing. The BRC maintains facilities,
hardware and software, that is identical to the Company's current hardware
and software configuration. The Company's disaster recovery specialists
perform disaster recovery tests at these facilities every year. In addition
to the Company's normal disaster recovery tests, the Company will also use
these facilities for off-site Y2K testing. This will allow the Company to
test all core business systems in a true production environment. These
facilities will serve as a contingency backup facility in several of the
Company's Y2K disaster scenarios, including disrupted utilities and
telecommunications services in the Abilene, Texas area. Other contingency
plans include agreements with several suppliers for materials and support,
ranging from computers and other hardware to software support to power
generators.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share,"
which is effective for financial statements issued for periods ending after
December 31, 1997. SFAS No. 128 requires public companies to present
specific disclosure of basic earnings per share and, if applicable, diluted
earnings per share, instead of primary and fully diluted earnings per share
based on the dilutive impacts of outstanding stock options or other
convertible securities. There was no material difference between reported
earnings per share and diluted earnings per share for the periods presented
in the Company's financial statements.
9
<PAGE>
FASB recently issued SFAS No. 130, "Reporting Comprehensive Income,"
which is required to be adopted for financial statements issued for periods
beginning after December 15, 1997. This statement establishes standards for
the reporting and display of comprehensive income and its components.
Comprehensive income is defined as revenue, expenses, gains and losses that,
under generally accepted accounting principles, are included in comprehensive
income, but excluded from net income (such as extraordinary and non-recurring
gains and losses). SFAS No. 130 requires that items of comprehensive income
be classified separately in the financial statements. SFAS No. 130 also
requires that the accumulated balance of comprehensive income items be
reported separately from retained earnings and paid-in capital in the equity
section of the balance sheet. SFAS No. 130 is not anticipated to have a
material effect on the Company's financial position or results of operations.
FASB recently issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is required to be adopted for
financial statements issued for periods beginning after December 15, 1997.
SFAS No. 131 is not required to be applied to interim financial statements in
the initial year of application. SFAS No. 131 requires that financial and
descriptive information about operating segments be reported. Generally,
financial information will be required to be reported on the basis that it is
used internally for evaluating segment performance and deciding how to
allocate resources to segments. SFAS No. 131 is not anticipated to have any
effect on the Company's financial position or results of operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On June 30, 1998, Columbia Capital Corp., FICI, Douglas R. Baetz and
Glenn M. Gallant filed a complaint in the United States District Court for
the Southern District of Florida (Case No. 98-6701) against Baytree
Associates Inc., Michael Gardner, certain former officers and directors of the
Company, and certain other parties. The complaint alleges claims against the
named defendants, including fraud, securities fraud and breach of fiduciary
duty, in connection with the transactions related to the Stock Purchase
Agreement, entered into as of September 23, 1997, among Columbia Capital
Corp., FICI, and Messrs. Baetz and Gallant. The complaint seeks relief
against the named defendants, including monetary damages relating to improper
sales of shares of Common Stock into the public market by the named
defendants and the cancellation of 618,750 shares of Common Stock issued by
the Company to Baytree Associates, Inc. for services rendered for arranging
the transactions which are the subject of the Stock Purchase Agreement.
To the best knowledge of management, there is no material litigation,
pending or threatened, or judgment entered against the Company or any
executive officers or directors of the Company in his capacity as such.
ITEM 2. CHANGES IN SECURITIES.
Not applicable. The Company did not issue any unregistered securities
during the quarter ended September 30, 1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's stockholders did not adopt any resolutions at a meeting or
by written consent during the quarter ended September 30, 1998.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company did not file any Reports on Form 8-K during the quarter ended
September 30, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The Company is currently subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information
may be inspected and copied at the public reference facilities of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549;
at its New York Regional Office, Suite 1300, 7 World Trade Center, New York,
New York, 10048; and at its Chicago Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and copies of such materials can be
obtained from the Public Reference Section of the Commission at its principal
office in Washington, D.C., at prescribed rates. In addition, such materials
may be accessed electronically at the Commission's site on the World Wide
Web, located at http://www.sec.gov.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLUMBIA CAPITAL CORP.
Dated: November 18, 1998 By: /s/ Kenneth A. Klotz.
--------------------------------
Kenneth A. Klotz
President
Dated: November 18, 1998 By: /s/ Charles La Montagne
--------------------------------
Charles La Montagne
Chief Financial Officer
12
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