AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 1998.
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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IT PARTNERS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 5415 52-2056858
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
9881 BROKEN LAND PARKWAY, SUITE 102 DANIEL J. KLEIN
COLUMBIA, MARYLAND 21046 CHIEF EXECUTIVE OFFICER
(410) 309-9800 IT PARTNERS, INC.
(Address, including zip code, and 9881 BROKEN LAND PARKWAY, SUITE 102
telephone number, including area code, COLUMBIA, MARYLAND 21046
of registrant's principal executive offices) TELEPHONE (410) 309-9800
FACSIMILE (410) 309-9801
(Name, address, including zip code,
and telephone number, including area
code, of agent for service)
Copies to:
MORRIS F. DEFEO, JR., ESQ. GEORGE P. STAMAS, ESQ.
SWIDLER BERLIN SHEREFF WILMER, CUTLER & PICKERING
FRIEDMAN, LLP 2445 M STREET, N.W.
3000 K STREET, N.W., SUITE 300 WASHINGTON, D.C. 20037-1420
WASHINGTON, D.C. 20007 TELEPHONE (202) 663-6000
TELEPHONE (202) 424-7500 FACSIMILE (202) 663-6363
FACSIMILE (202) 424-7647
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TITLE OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value 6,900,000 $ 16.00 $110,400,000 $32,568
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 10, 1998
6,000,000 SHARES
[IT PARTNERS LOGO]
COMMON STOCK
------------------
All of the 6,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), offered hereby are being sold by IT Partners, Inc., a Delaware
corporation (together with its subsidiaries, "IT Partners" or the "Company"),
and will represent approximately 44% of the outstanding Common Stock upon
completion of this offering (the "Offering"). Prior to the Offering, there has
been no public market for the Common Stock. It is currently anticipated that the
initial public offering price will be between $14.00 and $16.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The Company intends to apply for quotation of the shares of Common Stock on
the Nasdaq National Market under the symbol "ITPI."
------------------
SEE "RISK FACTORS" ON PAGES 11 THROUGH 17 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share ........... $ $ $
Total(3)(4) ......... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $10.5
million, including reimbursement of certain out of pocket expenses of
Friedman, Billings, Ramsey & Co., Inc. and Piper Jaffray Inc., the
representatives of the Underwriters (the "Representatives"), including
reimbursement of fees and expenses of Underwriters' counsel. Approximately
$7.0 million of the net proceeds of the Offering, will be used to redeem
the 12% Series C Senior Redeemable Preferred Stock of the Company issued to
FBR Business Development Capital ("BDC"), an affiliate of Friedman,
Billings, Ramsey & Co., Inc., in a private placement pursuant to Regulation
D promulgated under the Securities Act. See "Use of Proceeds," "The
Recapitalization" and "Underwriting."
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 900,000 additional shares of Common Stock on the same terms and
conditions set forth above solely to cover over-allotments, if any. If the
Underwriters exercise this option in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
(4) The Underwriters have agreed to reserve up to 5% of the shares of Common
Stock offered hereby for sale to certain persons associated with the
Company, including executive officers, directors and employees and their
families and vendors, at the Price to Public. See "Underwriting."
------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made against
payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc.,
Arlington, Virginia, or in book entry form through the book entry facilities of
the Depository Trust Company, on or about , 1998.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC. PIPER JAFFRAY INC.
The date of this Prospectus is , 1998.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE>
FORWARD-LOOKING INFORMATION
The information contained in this Prospectus that are not historical facts,
including pro forma financial statements and the related notes, are
"forward-looking statements" (as such term is defined in Section 27 A of the
Securities Act and Section 21 E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), which can be identified by the use of
forward-looking terminology such as "believes," "expects," "intends," "plans,"
"may," "will," "should," or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. In addition, from time to time, the Company or
its representatives have made or may make forward-looking statements, orally or
in writing. Furthermore, such forward-looking statements may be included in, but
are not limited to, various filings made by the Company with the Securities and
Exchange Commission (the "SEC"), or press releases or oral statements made by or
with the approval of an authorized executive officer of the Company.
Management wishes to caution the reader that the forward-looking statements
referred to above and contained in this Prospectus regarding matters that are
not historical facts involve predictions. No assurance can be given that the
future results will be achieved. In addition, actual events or results may
differ materially as a result of risks facing the Company. Such risks include,
but are not limited to, changes in business conditions, changes in the
information technology industry and the general economy, competition and risks
associated with the Company's integration of businesses that it acquires,
limited operating history, managing rapid growth, ability to identify and
compete for potential acquisition candidates and to consummate acquisitions or
enter into joint ventures with companies on terms acceptable to the Company, and
the impact on the Company of computer and related problems that may arise from
the Year 2000, any or all of which will cause actual results to vary materially
from the future results indicated, expressed or implied, in such forward-looking
statements. See "Risk Factors" beginning on page 11.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF COMMON
STOCK, INCLUDING PURCHASES OF SHARES OF COMMON STOCK TO STABILIZE THE MARKET
PRICE, PURCHASES OF SHARES OF COMMON STOCK TO COVER SOME OR ALL OF A SHORT
POSITION IN THE SHARES OF COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE SHARES OF
COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
Microsoft(Reg. TM), Oracle(Reg. TM), Lucent(TM), Compaq(Reg. TM),
Novell(Reg. TM), LotusNotes(Reg. TM) and Symantec(Reg. TM) are registered
trademarks of Microsoft Corporation ("Microsoft"), Oracle Corporation
("Oracle"), Compaq Computer Corporation ("Compaq"), Novell, Inc. ("Novell"),
Lotus Development Corporation and Symantec Corporation ("Symantec"),
respectively. This Prospectus also contains trade names and registered and
unregistered trademarks of other companies that are the property of their
respective holders.
i
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the financial statements
and related notes appearing elsewhere in this Prospectus. As used in this
Prospectus, unless the context otherwise requires, the terms "Company" and "IT
Partners" refer to IT Partners, Inc., a Delaware corporation, and its
subsidiaries as of the date hereof, collectively. Industry data used throughout
this Prospectus was obtained from industry publications and has not been
independently verified by the Company. Unless otherwise indicated, the
information in this Prospectus assumes: (i) no exercise of the Underwriters'
over-allotment option; (ii) that the initial public offering price is $15.00 per
share (the midpoint of the range set forth on the cover page of this
Prospectus); and (iii) the consummation of all transactions constituting the
"Recapitalization," including a one for 1.877 reverse stock split of the Common
Stock and Common Stock equivalent securities (as described herein).
THE COMPANY
IT Partners is a growing information technology ("IT") solutions provider
that delivers comprehensive, value-added IT solutions to middle-market (i.e.,
businesses with revenues of $25 million to $500 million) and Fortune 1000
companies throughout the United States and in selected Western European
countries. Through its eight wholly-owned subsidiaries (the "Partner
Companies"), the Company provides specialized IT expertise in consulting and
planning, systems and network integration, software development and integration,
support and operations, Internet and intranet solutions, and telephony and
electronics integration. The Company also bundles specific services, software
and hardware into "solution packages" for its clients. As of June 30, 1998, the
Company had 735 employees, including 500 IT professionals, providing services to
more than 2,000 clients across a broad spectrum of industries, including
manufacturing, healthcare, education, aviation, professional services and
retail. For the fiscal year ended December 31, 1997, the eight Partner Companies
had pro forma revenues and EBITDA (as defined hereafter) of approximately $106.0
million and $4.4 million, respectively. For the three months ended March 31,
1998, the eight Partner Companies had pro forma revenues and EBITDA of
approximately $27.4 million and $2.1 million, respectively.
International Data Corporation ("IDC") estimates that the worldwide market
for IT services was approximately $282 billion in 1997 and will increase to
approximately $403 billion by 2001, representing a compounded annual growth rate
of approximately 9.4%. The Company believes that such growth is being driven by
trends towards open systems, greater affordability and improvements in operating
performance. The Company believes that the average growth rate for IT spending
is highest for those middle-market companies with 100 to 1,000 employees. The
Company estimates that these companies typically spend approximately $1 million
annually on their IT needs.
The Company believes the following key factors underlie the growing demand
for IT products and services within the middle market: (i) technology return on
investment; (ii) increased demand for network applications; (iii) declining
software and hardware prices; and (iv) outsourcing. The recent growth in the
demand for IT services and products by middle-market businesses has contributed
to the substantial growth in the solutions integration market. The Company
believes that traditional resellers and other IT providers have found it
increasingly difficult to provide comprehensive IT solutions to the middle
market. As a result, solutions integrators have emerged as a new class of IT
service providers, possessing the technical, marketing and financial resources
required to deliver more comprehensive and complex IT solutions.
The Company has developed a coordinated decentralized operating model
("CDM") which consists of methodologies to facilitate the acquisition,
integration and development of its acquired companies. CDM integrates the
skills, experience, practices and resources of the Partner Companies, while
preserving their ability to manage and grow their respective businesses. Through
CDM,
1
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IT Partners provides its Partner Companies with business development tools that
are designed to improve the Company's internal growth. The Company works with
each Partner Company to develop a sales and marketing plan and to integrate its
services and products with those of other Partner Companies. The Company also
facilitates the exchange of ideas and information about marketing programs,
cross-selling opportunities and employee training and retention at monthly
operations reviews and quarterly meetings. In addition, the Company has
established several advisory councils comprised of corporate staff of IT
Partners and selected senior managers and technical staff of the Partner
Companies to exchange ideas and provide guidance on financial, marketing,
service and technical issues.
The Company believes that an important factor in its future success is its
ability to continue to acquire well-managed local systems integrators, regional
business application providers and national specialty IT services companies. The
Company believes that the IT services industry is highly fragmented, with a
small number of large, national service providers and a large number of smaller
local service providers. The Company believes that acquisition opportunities
exist in the IT services market and that the top five vendors for IT services
represent less than 20% of total market revenues. To date, the Company has
acquired eight Partner Companies, including Sequoia Diversified Products, Inc.,
the 1998 Microsoft "Worldwide Partner of the Year," and has entered into
agreements or letters of intent to acquire an additional ten companies,
including KiZAN Corporation, the 1995 Microsoft "Outstanding Solution Provider
Partner of the Year" (today that award is known as the "Worldwide Partner of the
Year"). The Company believes that CDM and the Company's reputation will continue
to attract local, regional and national IT services companies that represent the
best of their industry niches. As part of its acquisition strategy, the Company
has developed and maintains an extensive, current database from which it
identifies acquisition candidates based on a quantitative methodology. The
Company may also pursue acquisition opportunities identified by its Partner
Companies and by the Company's financial and other advisors. The Company's
quantitative assessment of an acquisition candidate is based on a system that
evaluates numerous factors, including an acquisition candidate's business focus,
client concentration, vendor authorizations, historical financial performance,
number of employees and technical certifications. The Company's valuation
methodology is based upon historical earnings, projected earnings growth, margin
trends, opportunities for recurring revenues and future infrastructure needs.
The Company's growth strategy focuses on: (i) improving internal growth
opportunities by expanding the services segment of its business through the
application of the solutions integrator model and the development of solution
packages; (ii) continuing to pursue strategic acquisitions that will provide
access to new markets, broaden the Company's current service offerings and
expand the Company's vertical coverage in existing markets; (iii) attracting,
training, motivating and retaining highly skilled IT professionals; (iv)
capitalizing on cross-selling opportunities by developing and offering
comprehensive IT solution packages that draw upon the collective expertise of
the Partner Companies; (v) cultivating and expanding relationships with leading
vendors to enhance the Company's industry recognition and increase sales
opportunities; and (vi) maintaining efficient operations by consolidating
certain administrative functions, thereby allowing the management of the Partner
Companies to focus on the growth of their businesses.
THE PARTNER COMPANIES
Since its inception in 1996, the Company has acquired eight Partner
Companies. A brief description of the Partner Companies follows:
LOCAL SYSTEMS INTEGRATORS
Sequoia Diversified Products, Inc. ("Sequoia"), acquired January 1998, is
a network integration provider with nine offices located in the U.S., Germany,
Sweden and the United Kingdom. It is widely recognized as a leader in the
network integration industry and in 1998 was named
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"Worldwide Partner of the Year" by Microsoft. Sequoia, a Microsoft Certified
Solution Provider Partner, offers a wide range of support services for a variety
of industries, including entertainment, education, healthcare, manufacturing,
finance and government. Founded in 1990, Sequoia is headquartered in Auburn
Hills, Michigan, has 301 employees and had revenues of approximately $29.2
million for the fiscal year ended December 31, 1997.
Servinet Consulting Group, Inc. ("Servinet"), acquired June 1998, is a
full-service systems integration company, offering network integration and
consulting services, client/server software development, equipment procurement
and Internet and intranet development. Servinet, a Microsoft Certified Solution
Provider Partner, also specializes in network conversions, Internet
connectivity, document imaging and custom configurations. Founded in 1988,
Servinet is headquartered in South San Francisco, California, has 59 employees
and had revenues of approximately $23.7 million for the fiscal year ended
December 31, 1997.
A-COM, Inc. ("A-COM"), acquired June 1997, provides customized, integrated
system solutions to manage information flow and maintain a safe and secure
environment. In 1996, A-COM was named Lucent's "Rookie of the Year" for
outstanding service as a new dealer. A-COM's clients include Fortune 500
companies, health care and educational institutions, sports and multimedia
facilities, and local and federal governments. Founded in 1969, A-COM is
headquartered in Chantilly, Virginia, has 164 employees and had revenues of
approximately $20.1 million for the fiscal year ended June 30, 1997.
Computer Network Services, Inc. ("CNS"), acquired May 1997, is a network
integrator and support company that provides systems integration and technical
repair. CNS' technical staff consists of Microsoft Certified System Engineers,
Novell Certified Network Engineers, Microsoft Certified Professionals and Citrix
Winframe Certified Engineers. CNS is also a Microsoft Certified Solution
Provider. Founded in 1984, CNS is headquartered in Denville, New Jersey, has 87
employees and had revenues of approximately $11.7 million for the fiscal year
ended December 31, 1997.
Kandl Data Products, Inc. ("KDP"), acquired May 1997, offers a full range
of systems integration and communications services. KDP, a Microsoft Certified
Solution Provider Partner, has designed, installed and maintained wide area
networks ("WANs") and local area networks ("LANs") in the Mid-Atlantic. KDP has
partnered with industry leaders to provide its clients with complete,
single-source solutions for networking and communications requirements. Founded
in 1984, KDP is headquartered in Beltsville, Maryland, has 29 employees and had
revenues of approximately $5.7 million for the fiscal year ended September 30,
1997.
REGIONAL BUSINESS APPLICATION PROVIDERS
Financial System Consulting, Inc. ("FSC"), acquired October 1997, is a
provider of client/ server business applications, financial system consulting
services, integrated strategic planning, process management and technology
implementation services. In 1997, FSC was named Great Plains Software, Inc.'s
("Great Plains") largest volume business partner and has received multiple
industry awards from several accounting software publishers. FSC is also a
Microsoft Certified Solution Provider. Founded in 1994, FSC is headquartered in
Long Beach, California, has 14 employees and had revenues of approximately $3.9
million for the fiscal year ended December 31, 1997.
Call Business Systems, Inc. ("Call"), acquired May 1998, is a provider of
business applications, financial system consulting and programming services in
the Western United States. Call is a Microsoft Certified Solution Provider
Partner and a member of the Oracle Application Dealer Network. Founded in 1976,
Call is headquartered in Salt Lake City, Utah, has 30 employees and had revenues
of approximately $3.7 million for the fiscal year ended December 31, 1997.
3
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NATIONAL SPECIALTY IT SERVICES COMPANIES
Incline Corporation ("Incline"), acquired February 1998, provides technical
repair service, utilizing proprietary technologies and processes. Founded in
1995, Incline is headquartered in Newbury Park, California, has 60 employees and
had revenues of approximately $4.0 million for the fiscal year ended December
31, 1997.
The following table presents historical revenues for each of the Partner
Companies' three most recent fiscal years:
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1995 1996 1997
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(IN MILLIONS)
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Sequoia (fiscal year ended December 31) .......... $ 17.0 $ 27.0 $ 29.2
Servinet (fiscal year ended December 31) ......... 27.9 25.5 23.7
A-COM (fiscal year ended June 30) ................ 10.0 13.3 20.1
CNS (fiscal year ended December 31) .............. 9.0 10.2 11.7
KDP (fiscal year ended September 30) ............. 5.8 5.2 5.7
Incline (fiscal year ended December 31) .......... 0.2 2.0 4.0
FSC (fiscal year ended December 31) .............. 1.6 3.5 3.9
Call (fiscal year ended December 31) ............. 3.9 2.8 3.7
</TABLE>
CONSIDERATION PAID FOR ACQUISITION OF PARTNER COMPANIES
The aggregate consideration IT Partners has paid to acquire the Partner
Companies consists of: (i) approximately $37.1 million in cash; (ii)
approximately $27.3 million in shares of Common Stock, valued at the fair market
value of such shares, as approved by the Company's Board of Directors (the
"Board"); and (iii) IT Partners' notes (the "Seller Notes") in the aggregate
principal amount of approximately $11.7 million (net of discount). Five of the
acquisitions are subject to post-closing adjustments payable in 1998 and 1999 in
additional cash, shares of Common Stock and indebtedness based on the financial
performance of such Partner Company during the 12-month period specified in its
respective acquisition agreement (collectively, the "Post-Closing Adjustments").
The Post-Closing Adjustments will be determined based on the achievement of
certain operational levels and range from 15% to 25% of the total consideration
paid for such Partner Companies.
For information regarding the employment agreements entered into by the
Company with certain of the officers of the Partner Companies, see
"Management--Employment Agreements; Covenants-Not-To-Compete." For a further
description of the transactions pursuant to which the Partner Companies were
acquired, see "Certain Transactions."
THE ACQUISITION CANDIDATES
IT Partners has entered into agreements or letters of intent (collectively,
the "Planned Acquisitions" and each, a "Planned Acquisition"), which are binding
as to the number of shares of Common Stock to be issued and share price, to
acquire ten companies (collectively, the "Acquisition Candidates" and each, an
"Acquisition Candidate"). The Company estimates that the aggregate consideration
it will pay to acquire the Acquisition Candidates will consist of: (i)
approximately $20.0 million in cash; (ii) approximately $21.8 million in shares
of Common Stock, valued at the fair market value of such shares, as approved by
the Board; and (iii) approximately $6.2 million in aggregate principal amount of
notes to be issued by the Company.
The closing of each Planned Acquisition will be subject to certain
customary conditions, including the following: (i) the negotiation and execution
of definitive acquisition agreements; (ii) the continuing accuracy of
representations and warranties; (iii) the performance of covenants; and (iv) the
absence of a material adverse change in the results of operations, financial
condition or busi-
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<PAGE>
ness of such Acquisition Candidate prior to the closing date. In connection with
the closing of the Planned Acquisitions, IT Partners would typically enter into
employment agreements with each of the executives and certain key management
personnel of the Acquisition Candidates. Generally, the Company expects that
these agreements will have initial terms of two to four years and will be
automatically renewable for one-year terms thereafter. See
"Management--Employment Agreements; Covenants-Not-To-Compete."
A brief description of the Acquisition Candidates follows:
LOCAL SYSTEMS INTEGRATORS
Computer Products and Resources, Inc. ("CPR") operates as CPR/MicroAge, a
full-service computer company and an authorized computer dealer for most major
software and hardware manufacturers. CPR has planned, installed and supported
LANs, from gateways to mainframes, throughout the Midwest. Services include
equipment evaluation, system and network installation, application development
and design and support. Founded in 1982, CPR is headquartered in Grand Rapids,
Michigan, has 130 employees and had revenues of approximately $34.3 million for
the fiscal year ended April 30, 1997.
MicroNomics of Lansing, Inc. ("Entre'") operates as Entre' Computer
Services and is a full- service systems integration company. Entre' provides
design, installation, support, repair and business process consulting services
as well as connectivity services for LANs, WANs and Internet and intranet
environments. Founded in 1983, Entre' is headquartered in Lansing, Michigan, has
48 employees and had revenues of approximately $11.7 million for the fiscal year
ended December 31, 1997.
Champlain Computer Services, Inc. ("Champlain") operates as ComputerLand of
Vermont and offers product procurement, maintenance, training, network
integration and help desk services to small, medium and large businesses and
governmental entities. Founded in 1983, Champlain is headquartered in
Burlington, Vermont, has 22 employees and had revenues of approximately $8.6
million for the fiscal year ended December 31, 1997.
Light Industries Service Corporation ("Light") is a full-service provider
of business networks and information systems, delivering networking, sales force
automation, training and software solutions to over 300 businesses and
non-profit organizations each year. Its professionals are certified in
Microsoft, Novell, Lotus, Solomon Software Inc., Great Plains, Advanced
Solutions International, Inc., SalesLogix Corporation and Symantec technologies.
Founded in 1979, Light is headquartered in Millersville, Maryland, has 60
employees and had revenues of approximately $5.7 million for the fiscal year
ended August 31, 1997.
KiZAN Corporation ("KiZAN") is a Microsoft Solution Provider Partner and a
Microsoft Authorized Technical Education Center ("ATEC"). Through offices in
Louisville, Kentucky; Cincinnati and Westlake, Ohio; Knoxville, Tennessee; and
Denver, Colorado, KiZAN offers Microsoft products and a full array of services,
including system engineering consulting, client/server architectural design and
application development, project planning, implementation services and technical
training. In 1995, Microsoft selected KiZAN as its first "Outstanding Solution
Provider Partner of the Year" (today the award is known as the "Worldwide
Partner of the Year"). Founded in 1991, KiZAN is headquartered in Louisville,
Kentucky, has 75 employees and had revenues of approximately $5.5 million for
the fiscal year ended November 30, 1997.
Communications Specialists, Inc. ("CSI-VA") provides electronic systems
integration, design, engineering, installation, 24-hour service and scheduled
maintenance. Founded in 1994, CSI-VA is headquartered in Mechanicsville,
Virginia, has 30 employees and had revenues of approximately $4.7 million for
the fiscal year ended December 31, 1997.
5
<PAGE>
Richardson Associates-Electronics, Inc. ("Richardson") sells, installs and
services telephone, intercom, video distribution, closed circuit television,
fire and security, access control, nurse call and information systems.
Richardson's clients include schools, hospitals and prisons. Founded in 1963,
Richardson is headquartered in Atlanta, Georgia, has 25 employees and had
revenues of approximately $3.7 million for the fiscal year ended December 31,
1997.
Communication Systems Inc. ("CSI-PA") is a full-service provider of audio,
video, voice and data systems. Services include design, installation, service
and training for telephony, fire and security, media retrieval, video
arrangement and video conferencing systems. Founded in 1975, CSI-PA is
headquartered in Allentown, Pennsylvania, has 21 employees and had revenues of
approximately $2.0 million for the fiscal year ended December 31, 1997.
REGIONAL BUSINESS APPLICATION PROVIDERS
Business Micro Solutions, LLC ("BMS") is a provider of client/server
business applications, financial system consulting services, implementation,
training, custom development and integration services. Founded in 1988, BMS is
headquartered in East Brunswick, New Jersey, has 30 employees and had revenues
of approximately $5.0 million for the fiscal year ended December 31, 1997.
NATIONAL SPECIALTY IT SERVICES COMPANIES
Technology Applications Group, Inc. ("TAG") is a multimedia courseware and
development company specializing in the creation of custom interactive
applications. TAG offers instructional systems development, creative application
development, interactive programming and the development of advanced multimedia
programs incorporating digital video, digital audio and animation. Founded in
1990, TAG is headquartered in Troy, Michigan, has six employees and had revenues
of approximately $1.1 million for the fiscal year ended December 31, 1997.
The executive offices of the Company are located at 9881 Broken Land
Parkway, Suite 102, Columbia, Maryland 21046, and the Company's telephone number
is (410) 309-9800. The Company's Web site is located at www.itpartnersinc.com.
Information contained in the Company's Web site shall not be deemed part of this
Prospectus.
6
<PAGE>
THE RECAPITALIZATION
Simultaneously with the consummation of the Offering, the Company plans to
restructure certain of its existing relationships with certain equity holders
and in connection therewith intends to: (i) redeem all of the outstanding
shares of the Company's Series A Preferred Stock, par value $.01 per share (the
"Series A Preferred"); (ii) redeem all of the outstanding shares of the
Company's 12% Series C Senior Redeemable Preferred Stock, par value $.01 per
share ("Series C Preferred"), provided that the Offering yields proceeds (net
of underwriting commissions and discounts) to the Company of at least $40.0
million and no event of default exits under the Amended and Restated Loan and
Security Agreement dated as of March 31, 1998 among the Company, the lenders
named therein, Creditanstalt Corporate Finance, Inc. ("Creditanstalt"), as LC
Issuer, Credit Agricole Indosuez, as Co-Agent, and Creditanstalt, as the
Collateral Agent and Administrative Agent (the "Credit Facility"); (iii) amend
certain agreements to eliminate rights to put to the Company warrants to
purchase Common Stock; (iv) amend and terminate certain of the existing equity
documents to, among other things, terminate voting provisions with respect to
the composition of the Board and eliminate certain affirmative and negative
covenants which currently bind the Company; (v) modify existing registration
rights and grant new registration rights; (vi) enter into a voting agreement
with certain existing stockholders holding 4,507,351 shares of Common Stock
(and securities exercisable for or convertible into an additional 1,082,854
shares of Common Stock) pursuant to which such holders will agree to vote their
shares of Common Stock for the election of each of Daniel J. Klein and Jamie E.
Blech as directors for a period of three years; (vii) amend and restate its
Certificate of Incorporation to eliminate the Series A Preferred and the Series
C Preferred, increase the authorized number of undesignated shares of Preferred
Stock, elect to be governed by Section 203 of the Delaware General Corporation
Law ("DGCL") and require actions by written consent of the stockholders to be
unanimous; and (viii) effect the reverse stock split of one for 1.877 shares of
Common Stock and Common Stock equivalent securities (collectively, the
"Recapitalization"). See "Capitalization," "The Recapitalization" and
"Description of Capital Stock."
The Company will have outstanding on a fully-diluted basis the following
shares of Common Stock on a pro forma basis to reflect the Recapitalization and
on a pro forma, as adjusted basis to reflect the Recapitalization and the
Offering:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SHARES OF
SHARES OF COMMON STOCK
COMMON STOCK ON A FULLY
ON A FULLY DILUTED BASIS
DILUTED BASIS PRO FORMA,
PRO FORMA AS ADJUSTED
--------------- --------------
<S> <C> <C>
Common Stock ............................ 5,781,894 11,781,894
Convertible promissory notes(1) ......... 99,128 99,128
Series B Preferred Stock(2) ............. 739,184 739,184
Warrants(3) ............................. 993,850 993,850
Options(4) .............................. 62,231 62,231
Redemption Dividends(5) ................. -- 152,290
</TABLE>
- -----------
(1) The convertible promissory note issued to Servinet (the "Convertible Seller
Note") is convertible into 99,128 shares of Common Stock (based on the
assumed initial public offering price).
(2) The 793,184 outstanding shares of Series B Preferred Stock, par value $.01
per share (the "Series B Preferred"), of the Company are currently
convertible into shares of Common Stock (on a one-to-one basis) at the
option of the holders.
(3) The warrants are currently exercisable for shares of Common Stock (or at
the option of the holder an equal number of shares of Series B Preferred),
at an exercise price of $.01 per share, or may be put back to the Company
at the option of the holder (collectively, the "Put Warrants"). The Put
Rights will terminate simultaneously with the Offering. The Put Warrants
accrue dividends at a compounded rate of 8%, payable quarterly in shares of
Common Stock and/or Series B Preferred at the option of the holders.
(4) The Company has granted options to its executive officers and key personnel
exercisable for shares of Common Stock pursuant to its Amended 1997
Long-Term Incentive Plan (the "1997 Plan").
(5) The Series C Preferred is subject to a redemption dividend of 152,290
shares of Common Stock (calculated at the assumed initial public offering
price).
7
<PAGE>
THE OFFERING
Common Stock offered by the Company .................. 6,000,000 shares
Common Stock to be outstanding after the Offering..... 13,667,218 shares(1)
Use of proceeds ...................................... To repay certain Seller
Notes payable by the
Company to former
stockholders of the Part-
ner Companies, to repay
indebtedness under the
Credit Facility, to
redeem all of the Series
A Preferred and Series C
Preferred and for working
capital.
Proposed Nasdaq National Market symbol ............... "ITPI"
- -----------
(1) Assumes: (a) the exercise of all outstanding Put Warrants for 993,850
shares of Common Stock; (b) conversion of all outstanding shares of Series
B Preferred into 739,184 shares of Common Stock; (c) redemption of all
outstanding shares of Series C Preferred and payment of the redemption
dividend thereon in 152,290 shares of Common Stock (calculated at the
assumed initial public offering price); (d) the issuance of 312,270 shares
of Common Stock issued in connection with the acquisition of Call; and (e)
the issuance of 1,306,642 shares of Common Stock issued in connection with
the acquisitions of The Acquisition Candidates. Excludes: (i) up to an
aggregate of 657,103 additional shares of Common Stock (calculated at the
assumed initial public offering price) that may be issued to the former
stockholders of the Partner Companies in connection with the Post-Closing
Adjustments and upon the conversion of the Convertible Seller Note
(calculated at the assumed initial public offering price); (ii) 1,185,711
shares of Common Stock issuable upon exercise of outstanding stock options
granted under the 1997 Plan; and (iii) 581,573 shares of Common Stock
reserved for issuance under the 1997 Plan. See "Management--Stock Option
Plan," "The Recapitalization," "Description of Capital Stock," "Shares
Eligible for Future Sale" and "Underwriting."
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. See "Risk Factors" beginning on page 11.
8
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary historical financial data has been derived from the financial
statements and is presented for IT Partners. The following summary financial
data is qualified in its entirety by the more detailed information appearing in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical and pro forma financial statements, including the
related notes, appearing elsewhere in this Prospectus.
The unaudited Pro Forma Balance Sheet Data is adjusted to give effect to:
(i) the acquisitions of Call and Servinet; (ii) the Planned Acquisitions; (iii)
the issuance of Series B Preferred; and (iv) the issuance of Series C Preferred,
as if each had occurred on March 31, 1998. The unaudited Pro Forma, As Adjusted,
Balance Sheet Data is adjusted to give effect to: (i) the acquisitions of Call
and Servinet; (ii) the Planned Acquisitions; (iii) the issuance of Series B
Preferred; (iv) the issuance of Series C Preferred; and (v) the Offering, as if
each had occurred on March 31, 1998 and assuming application of the net proceeds
of the Offering as set forth in "Use of Proceeds."
The unaudited Pro Forma Statement of Operations for the year ended December
31, 1997 is adjusted to give effect to: (i) the acquisitions of the Partner
Companies; (ii) the Planned Acquisitions; (iii) the issuance of Series B
Preferred and (iv) the issuance of Series C Preferred; as if each had occurred
at the beginning of such period. The unaudited Pro Forma As Adjusted, Statement
of Operations, for the year ended December 31, 1997 is adjusted to give effect
to: (i) the acquisitions of the Partner Companies; (ii) the Planned
Acquisitions; (iii) the issuance of Series B Preferred; (iv) the issuance of
Series C Preferred; and (v) the Offering as if each had occurred at the
beginning of such period and assuming application of the net proceeds of the
Offering as set forth in "Use of Proceeds." The unaudited Pro Forma Statement of
Operations for the three months ended March 31, 1998 is adjusted to give effect
to: (i) the acquisitions of Sequoia, Incline, Call and Servinet; (ii) the
Planned Acquisitions (iii) the issuance of Series B Preferred; (iv) the issuance
of Series C Preferred; and (v) the Offering, as if each had occurred at the
beginning of such period. The unaudited Pro Forma As Adjusted, Statement of
Operations, for the three months ended March 31, 1998 is adjusted to give effect
to: (i) the acquisitions of Sequoia, Incline, Call and Servinet; (ii) the
Planned Acquisitions; (iii) the issuance of Series B Preferred; (iv) the
issuance of Series C Preferred; and (v) the Offering as if each had occurred at
the beginning of such period and assuming application of the net proceeds of the
Offering as set forth in "Use of Proceeds." The pro forma adjustments are based
upon available information and certain assumptions that the Company believes are
reasonable.
9
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
PRO FORMA,
HISTORICAL PRO FORMA AS ADJUSTED
1997 1997 1997
--------------- -------------- ---------------
(IN THOUSANDS EXCEPT SHARE, PER SHARE AND
CERTAIN OTHER DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues .............................. $ 23,781 $ 187,270 $ 187,270
Cost of goods sold .................... 17,958 127,407 127,407
---------- ---------- -----------
Gross profit .......................... 5,823 59,863 59,863
Selling, general and administrative
expenses ............................. 4,813 49,147 49,147
Merger and acquisition costs .......... 362 362 362
Organizational costs .................. 1,131 1,131 1,131
Depreciation and amortization ......... 782 8,045 8,045
---------- ---------- -----------
Operating income (loss) ............... (1,265) 1,178 1,178
Interest expense, net ................. 3,134 8,891 957
Other expenses ........................ -- 28 28
---------- ---------- -----------
Net income (loss) before income
tax provision (benefit) and ex-
traordinary loss ..................... (4,399) (7,741) 193
Income tax provision (benefit) ........ (722) (1,419) 947
---------- ---------- -----------
Net income (loss) before extraordi-
nary loss ............................ (3,677) (6,322) (754)
Extraordinary loss, net of tax ........ -- -- --
---------- ---------- -----------
Net income (loss) ..................... $ (3,677) $ (6,322) $ (754)
========== ========== ===========
Net income (loss) available to com-
mon stockholders ..................... $ (4,087) $ (6,732) $ (1,164)
========== ========== ===========
PER SHARE AMOUNTS:
Basic ................................. $ (3.45) $ (1.28) $ (0.10)
========== ========== ===========
Diluted ............................... $ (3.45) $ (1.28) $ (0.10)
========== ========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ................................. 1,186,239 5,254,607 11,254,607
Diluted ............................... 1,186,239 5,254,607 11,254,607
OTHER DATA:
EBITDA(1) ............................. $ (483) $ 9,223 $ 9,223
EBITDA margin(2) ...................... (2.0)% 4.9% 4.9%
Adjusted EBITDA(3) .................... 1,010 10,716 10,716
Adjusted EBITDA margin(2) ............. 4.2% 5.7% 5.7%
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------
HISTORICAL
---------------------------- PRO FORMA,
PRO FORMA AS ADJUSTED
1997 1998 1998 1998
(UNAUDITED) (UNAUDITED) -------------- --------------
(IN THOUSANDS EXCEPT SHARE, PER SHARE AND CERTAIN OTHER
DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues .............................. $ -- $ 17,786 $ 50,031 $ 50,031
Cost of goods sold .................... -- 11,561 32,640 32,640
-------- ---------- ---------- ------------
Gross profit .......................... -- 6,225 17,391 17,391
Selling, general and administrative
expenses ............................. -- 5,052 13,404 13,404
Merger and acquisition costs .......... -- 176 176 176
Organizational costs .................. 1,131 -- -- --
Depreciation and amortization ......... -- 1,082 2,029 2,029
-------- ---------- ---------- ------------
Operating income (loss) ............... (1,131) (85) 1,782 1,782
Interest expense, net ................. -- 3,306 4,034 852
Other expenses ........................ -- -- (12) (12)
-------- ---------- ---------- ------------
Net income (loss) before income
tax provision (benefit) and ex-
traordinary loss ..................... (1,131) (3,391) (2,240) 942
Income tax provision (benefit) ........ (452) (212) 197 569
-------- ---------- ---------- ------------
Net income (loss) before extraordi-
nary loss ............................ (679) (3,179) (2,437) 373
Extraordinary loss, net of tax ........ -- 341 341 341
-------- ---------- ---------- ------------
Net income (loss) ..................... $ (679) $ (3,520) $ (2,778) $ 32
======== ========== ========== ============
Net income (loss) available to com-
mon stockholders ..................... $ (679) $ (3,784) $ (3,042) $ 32
======== ========== ========== ============
PER SHARE AMOUNTS:
Basic ................................. $ (1.82) $ (1.00) $ (0.53) (--)
======== ========== ========== ============
Diluted ............................... $ (1.82) $ (1.00) $ (0.53) (--)
======== ========== ========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ................................. 373,043 3,777,686 5,738,525 11,876,867
Diluted ............................... 373,043 3,777,686 5,738,525 11,876,867
OTHER DATA:
EBITDA(1) ............................. $ (1,131) $ 997 $ 3,811 $ 3,811
EBITDA margin(2) ...................... -- 5.6% 7.6% 7.6%
Adjusted EBITDA(3) .................... -- 1,173 3,987 3,987
Adjusted EBITDA margin(2) ............. -- 6.6% 8.0% 8.0%
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
DECEMBER 31, HISTORICAL PRO FORMA, AS
1997 (UNAUDITED) PRO FORMA ADJUSTED
-------------- ------------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ...................... $ 3,084 $ 7,334 $ 22,211 $ 28,957
Total assets ......................... 42,192 86,956 160,227 167,123
Long-term debt(4) .................... 22,265 40,125 65,010 7,771
Put Warrants outstanding ............. 4,824 8,509 8,509 --
Redeemable preferred stock(5) ........ 545 1,054 11,054 --
Stockholders' equity (including war-
rants of $8,509)..................... 2,193 18,004 43,735 127,283
</TABLE>
- ----------
(1) EBITDA represents operating income before depreciation and amortization.
Management believes that EBITDA provides useful information regarding a
company's ability to service debt. EBITDA should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
(2) EBITDA Margin is defined as EBITDA (as defined in footnote (1) above)
divided by revenues. Adjusted EBITDA Margin is defined as adjusted EBITDA
(as defined in footnote (3) below) divided by revenues. EBITDA Margin and
Adjusted EBITDA Margin should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
(3) Adjusted EBITDA is defined as EBITDA (as defined in footnote (1) above)
plus merger and acquisition costs and non-recurring organizational costs.
Adjusted EBITDA should not be considered in isolation or as a substitute
for measures of financial performance prepared in accordance with generally
accepted accounting principles.
(4) Long-term debt includes current and noncurrent debt obligations, the Seller
Notes and other liabilities.
(5) Redeemable preferred stock consists of Series A Preferred and Series C
Preferred. See "Description of Capital Stock."
10
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing shares of
the Common Stock offered hereby. This Prospectus contains certain statements of
a forward-looking nature all of which involve risks and uncertainties and actual
events or results may differ materially from the results discussed in such
forward-looking statements.
LIMITED OPERATING HISTORY; RISKS OF INTEGRATION
IT Partners is a holding company with a limited operating history. Founded
in October 1996, IT Partners acquired its first Partner Companies, CNS and KDP,
in May 1997. The Partner Companies were operated as separate independent
entities prior to their acquisition by IT Partners, and there can be no
assurance that IT Partners will be able to integrate successfully the operations
of these businesses or institute the necessary Company-wide systems and
procedures to manage successfully the combined enterprise. There can be no
assurance that the Company's management group will be able to effectively
implement the Company's internal growth strategy and acquisition program. The
Company may need to hire additional employees to implement its growth strategy
and acquisition program, but there can be no assurance that the Company will be
able to attract and retain qualified personnel. The pro forma financial results
of the Company include periods when the Partner Companies and IT Partners were
not under common control or management and, therefore, may not be indicative of
the operating results or financial position that would have been achieved had IT
Partners and the Partner Companies been under common control and management
during the periods covered by such pro forma financial results and may not be
indicative of the Company's future results of operations, financial condition
and business.
A number of the Partner Companies offer different services, utilize
different capabilities and technologies and target different geographic markets
and client segments. These differences increase the risk inherent in
successfully completing the integration of such Partner Companies. Further,
there can be no assurance that the Company's strategy to establish itself as a
single-source provider of IT services will be successful, or that the Company's
targeted clients will accept the Company as a provider of such services. The
inability of the Company to successfully integrate the Partner Companies or lack
of client acceptance would have a material adverse effect on the Company's
results of operations, financial condition and business. See "Prospectus
Summary--The Company," "Business--Growth Strategy" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH THE COMPANY'S ACQUISITION STRATEGY
As part of its growth strategy, the Company plans to acquire additional IT
services companies. The market for acquisitions of IT services companies is
highly competitive. If competition intensifies, there may be fewer acquisition
opportunities available to the Company as well as higher prices required to
acquire companies. There can be no assurance that the Company will be able to
identify, acquire on favorable terms, integrate or manage additional IT services
companies without substantial costs, delays or other operational or financial
problems. Failure to acquire and integrate such companies may adversely affect
the Company's ability to bid successfully on certain engagements, enter certain
markets and otherwise grow its business. Client dissatisfaction or performance
problems at a single acquired company could have an adverse effect on the
reputation of the Company as a whole, resulting in increased difficulty in
marketing services or acquiring companies in the future. In addition, there can
be no assurance that the Partner Companies or other IT services companies
acquired in the future will operate profitably. Acquisitions involve a number of
additional risks, including diversion of management's attention, failure to
retain key acquired clients or personnel, risks associated with unanticipated
events or liabilities, and amortization of goodwill and acquired intangible
assets, some or all of which could have a material adverse effect on the
Company's results of operations, financial condition and business. See
"Business--Growth Strategy."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenues, gross profit, operating income and net income may
vary substantially in the future from quarter to quarter. Factors that may
affect this quarter to quarter variability include: (i) the short-term nature of
certain client commitments; (ii) patterns of IT spending by clients; (iii) loss
of a major
11
<PAGE>
client; (iv) seasonality that may accompany private or governmental sector
budget cycles; (v) the timing, size and mix of service and product offerings;
(vi) the timing and size of significant software sales; (vii) the timing and
size of new projects; (viii) the timing and magnitude of required capital
expenditures; (ix) pricing changes in response to various competitive factors;
(x) the timing and size of future acquisitions; (xi) market factors affecting
the availability of qualified technical personnel; (xii) timing and client
acceptance of new service offerings; (xiii) changes in the trends affecting the
outsourcing of IT services; (xiv) additional selling, general and administrative
expenses to acquire and support new business and acquisitions; (xv)
technological change in the industry; and (xvi) general economic conditions. The
Company's operating results will be affected by changes in technical personnel
billing and utilization rates. Technical personnel utilization rates may be
adversely affected during periods of rapid and concentrated hiring in
anticipation of future revenues. Gross margin may also be adversely affected if
the Company is required to use contract personnel rather than Company personnel
to complete certain assignments. Operating results may also be materially and
adversely affected by the cost, timing and other effects of acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In addition, most of the Company's project-based contracts are terminable
by the client with limited advance notice, typically not more than 60 days, and
without significant penalty (generally limited to fees earned and expenses
incurred by the Company through the date of termination). The cancellation or
significant reduction in the scope of a large project could have a material
adverse effect on the Company's results of operations, financial condition and
business. Although the Company's principal method of billing a project is on a
time and materials basis, the Company also undertakes projects billed on a
fixed-price basis. The cancellation of one or more significant contracts or the
failure of the Company to complete a fixed-bid project within budget would
expose the Company to risks associated with cost overruns, which could have a
material adverse effect on the Company's results of operations, financial
condition and business. See "--Project Risks Related to Service Providers,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Services."
NEED FOR ADDITIONAL FINANCING; RISKS RELATED TO ACQUISITION FINANCING
The Company plans to finance future acquisitions in part by using shares of
Common Stock. In the event that its shares of Common Stock do not maintain a
sufficient market value, or potential acquisition candidates are otherwise
unwilling to accept shares of Common Stock as part of the consideration for the
sale of their businesses, the Company may be required to use more of its cash
resources, if available, in order to pursue its acquisition program. If the
Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through debt or equity
financings. The Company has entered into the Credit Facility, which permits the
Company to borrow up to $70.0 million to pursue acquisitions. The Company plans
to use a portion of the net proceeds from the Offering to repay all amounts
outstanding under the Credit Facility and to negotiate a new credit arrangement
on more favorable terms. There can be no assurance that the Company will be able
to obtain a new credit arrangement or any other financing it will need on terms
it deems acceptable. If the Company's financial resources are inadequate to
support its acquisition activities, the Company's future operating results would
be materially and adversely affected. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
CONSIDERATION FOR PARTNER COMPANIES EXCEEDS ASSET VALUE
The purchase prices paid or payable for the Partner Companies were not
established by independent appraisals, but generally through arm's-length
negotiations between IT Partners and representatives of each Partner Company.
The consideration paid for each Partner Company was based primarily on the value
of such company as a going concern and not on the value of such company's
assets. Valuations of each Partner Company determined solely by appraisals of
the acquired assets would likely be less than the consideration the Company paid
for each Partner Company. The future performance of each Partner Company may not
be commensurate with the consideration paid.
MATERIALITY OF GOODWILL; AMORTIZATION CHARGES
The Company's pro forma, as adjusted, balance sheet as of March 31, 1998,
will include an amount designated as "goodwill" that represents approximately
47% of total assets and approximately 61% of
12
<PAGE>
stockholders' equity. Goodwill arises when an acquirer pays more for a business
than the fair value of the tangible and separately measurable intangible net
assets. Generally accepted accounting principles ("GAAP") require that these
assets and all other intangible assets be amortized over the period benefitted.
Management has determined that the period benefitted by the goodwill will range
from 20 to 40 years depending on the type of business (e.g., IT services,
electronics integrators, etc.) of the respective Partner Company. If the actual
benefit period of the goodwill is shorter than the assigned period, the Company
may recognize amortization expense in later periods without a corresponding
income benefit. Earnings in later years could also be affected if management
records a charge to earnings after determining that the remaining balance of
goodwill was impaired. Management has reviewed all of the factors and related
future cash flows which it considered in arriving at the amount incurred to
acquire the companies. Management concluded that anticipated future cash flows
associated with intangible assets recognized in the acquisitions and probable
acquisitions will continue indefinitely, and there is no persuasive evidence
that any material portion will dissipate over a period shorter than the
respective assigned lives.
MANAGEMENT OF GROWTH
The Company expects to expend significant time and effort to attempt to
expand its existing businesses and to acquire additional IT companies. There can
be no assurance that the Company's systems, procedures, controls and management
resources will be adequate to support the Company's future operations. Any
future growth also will impose significant added responsibilities on members of
senior management, including the need to attract, train, motivate and retain new
senior-level managers and executives. There can be no assurance that such
additional management will be identified and retained by the Company. To the
extent that the Company is unable to manage its growth efficiently and
effectively, or is unable to attract and retain additional qualified management,
the Company's results of operations, financial condition and business would be
materially and adversely affected. See "Business--Growth Strategy" and
"Management."
SHIFTING BUSINESS FOCUS
The Partner Companies historically have derived the majority of their
revenues from the provision of products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In the future, the
Company plans to expand its operations in areas which are more service oriented
and management believes offer the potential for more rapid growth and higher
levels of profitability. See "Business--Growth Strategy." There can be no
assurance that the Company will be successful in transitioning some of its
Partner Companies to a higher percentage of services and the Company's prospects
must be considered in light of the risks, expenses, and difficulties frequently
encountered by companies seeking to shift the focus of their business. There can
be no assurance that the Company will be successful in addressing such risks and
the failure to do so could have a material adverse effect on the Company's
results of operations, financial condition and business.
COMPETITION
The market for the Company's services and products is highly competitive.
The Company's competitors vary in size and in the scope of the products and
services that they offer. Primary competitors generally include consulting and
systems integrators, "Big Five" accounting firms, applications development
firms, service groups of computer equipment companies, programming companies,
temporary staffing firms and other IT services providers. Traditionally, the
largest service providers have focused principally on providing full-service
solutions to Global 1000 companies. The Company believes that certain IT
services companies, including Perot Systems Corporation ("Perot"), Renaissance
Worldwide, Inc. ("Renaissance"), Technology Solutions Corporation ("Technology
Solutions"), GE Capital Information Technology Solutions ("GE"), IKON Office
Solutions, Inc. ("IKON"), Whittman-Hart, Inc. ("Whittman-Hart"), Cotelligent
Group, Inc. ("Cotelligent") and Entex Information Services, Inc. ("Entex"), are
exploring opportunities within the middle market.
There are relatively low barriers to entry into the Company's markets, and
the Company expects to face competition from established and emerging
companies. Increased competition may result in greater pricing pressure, which
could adversely affect the Company's gross margins and its ability to acquire
companies. In
13
<PAGE>
addition, many of the Company's competitors have greater financial, development,
technical, marketing and sales resources than the Company. As a result, the
Company's competitors may be able to adapt more quickly to new or emerging
technologies and to changes in client requirements or to devote greater
resources than the Company to the development, promotion, sale and support of IT
products and services. In addition, there is a risk that clients may elect to
increase their internal IT resources to satisfy their IT solutions needs. The
Company also plans to enter new markets and offer new services, and expects to
face intense competition from existing and new competitors, particularly since
barriers of entry in the IT services industry are relatively low. There can be
no assurance that the Company will continue to provide IT services and products
demanded by the market or be able to compete successfully with existing or new
competitors. An inability to compete in its market effectively would have a
material adverse effect on the Company's results of operations, financial
condition and business. See "Business--Competition."
RISKS RELATED TO INTERNAL GROWTH STRATEGY
The Company's growth strategy is to increase the revenues and profitability
of the Partner Companies. One of the key components of this strategy is to
cross-sell the services and products of each Partner Company to other clients of
the Company. There can be no assurance that the Company will be able to expand
its sales of services and products to its existing clients and those of any
subsequently acquired businesses. The Company's growth strategy of broadening
its service and product offerings, implementing an aggressive marketing plan,
pursuing strategic acquisitions and deploying leading technologies has inherent
risks and uncertainties. There can be no assurance that the Company's growth
strategy will be successful or that the Company will be able to generate cash
flow sufficient to fund its operations and to support internal growth. The
Company's inability to achieve internal earnings growth or otherwise execute its
growth strategy could have a material adverse effect on the Company's results of
operations, financial condition and business. See "Business--Growth Strategy."
PROJECT RISKS RELATED TO SERVICE PROVIDERS
The nature of the Company's engagements exposes the Company to a variety of
risks. Many of the Company's engagements involve projects that are critical to
the operations of its clients' businesses. The Company's failure or inability to
meet a client's expectations in the performance of its services or to do so in
the time frame required by such client could result in a claim for substantial
damages against the Company, regardless of the Company's responsibility for such
failure. Service providers, such as the Company, are in the business of
employing people and placing them in the workplace of other businesses.
Therefore, the Company is also exposed to liability with respect to actions
taken by its employees while on assignment, such as damages caused by employee
errors and omissions, misuse of client proprietary information, misappropriation
of funds, discrimination and harassment, theft of client property, other
criminal activity or torts and other claims. Although the Company maintains
general liability insurance coverage, there can be no assurance that such
coverage will remain available on reasonable terms or in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any claim. The successful assertion of one or more large claims against
the Company that exceed available insurance coverage or changes in the Company's
insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, could have a material adverse effect on
the Company's results of operations, financial condition and business.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SOLUTIONS
The IT services industry is characterized by rapid technological change,
evolving industry standards, changing client preferences and new product and
service introductions. The Company's success will depend in part on its ability
to develop IT solutions that keep pace with continuing changes in the IT
services industry. There can be no assurance that the Company will be successful
in adequately addressing these developments on a timely basis or that, if these
developments are addressed, the Company will be successful in the marketplace.
In addition, there can be no assurance that products or technologies developed
by others will not render the Company's services non-competitive or obsolete.
The Company's failure to address these developments could have a material
adverse effect on the Company's results of operations, financial condition and
business. See "Business--Services."
14
<PAGE>
ABILITY TO ATTRACT AND RETAIN TECHNICAL PERSONNEL
The Company depends upon its ability to attract, train, motivate and retain
technical personnel who possess the skills and experience necessary to meet the
Company's own personnel needs and the staffing requirements of its clients.
Competition for individuals with proven technical skills is intense. In
addition, the IT industry in general experiences a high rate of attrition of
such personnel. The Company competes for such individuals with other systems
integrators, providers of outsourcing services, temporary personnel agencies,
computer systems consultants, clients and potential clients. Many large
competitors have recently announced extensive campaigns to hire additional
technical personnel. Competition for quality technical personnel has continued
to intensify, resulting in increased personnel costs for many IT service
providers. In addition, there can be no assurance that the Company will not have
to incur increased costs to attract and retain such personnel. There can be no
assurance the Company will be able to recruit or retain the technical personnel
necessary to execute its strategy. Failure to do so would have a material
adverse effect on the Company's results of operations, financial condition and
business. See "Business--Growth Strategy."
DEPENDENCE ON CONTINUED AUTHORIZATION TO RESELL AND PROVIDE
MANUFACTURER-AUTHORIZED SERVICES
The Company's future success with IT service and product offerings depends
in part on its continued authorization by IT vendors as a service provider and
as a certified reseller of certain software and hardware products. Without such
service and sales authorizations, the Company would be unable to provide the
range of services and products currently offered by the Company. In general, the
agreements between the Company and such manufacturers include termination
provisions, some of which permit termination without notice. There can be no
assurance that such manufacturers will continue to authorize the Company as an
approved reseller or service provider, and the loss of one or more of such
authorizations could have a material adverse effect on the Company's results of
operations, financial condition and business.
DEPENDENCE ON EXECUTIVE OFFICERS AND KEY PERSONNEL
The Company depends on the continued efforts of its executive officers and
the senior management of the Partner Companies, in particular Daniel J. Klein,
Jamie E. Blech and the president of each Partner Company. The Company will
likely be dependent on the senior management of any businesses acquired in the
future. If any of these persons is unable or unwilling to continue in his or her
role with the Company, or if the Company is unable to attract and retain other
qualified employees, the Company's results of operations, financial condition
and business could be adversely affected. Although each of the executive
officers of the Company and the Partner Companies has entered into an employment
agreement with the Company, which includes confidentiality and non-compete
provisions, there can be no assurance that any individual will continue in his
or her present capacity with the Company or Partner Company for any particular
period of time. See "Management."
SIGNIFICANCE OF RELATIONSHIPS WITH MICROSOFT
Several of the Company's Partner Companies have significant relationships
with Microsoft, from which substantial training support, general business
planning, business referrals and sales support are derived. These Partner
Companies are authorized to implement and service Microsoft's technology under
the terms of their respective partner agreements with Microsoft. If these
relationships were to deteriorate or be discontinued or if such Partner
Companies' status as a Microsoft Certified Solution Provider Partner in the
United States was to be terminated, it would have a material adverse effect on
the Company's results of operations, financial condition and business. See
"Business--Growth Strategy."
RISK OF LOSS FROM POSSIBLE FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define the applicable year, resulting in
date-sensitive software having the potential to recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or
15
<PAGE>
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. In anticipation of the year 2000,
management has developed a plan to review software that was internally developed
or externally purchased or licensed, and also to review with its key vendors and
service providers their software, for compliance with Year 2000 processing
requirements. If the Company's systems, or the systems of other companies on
whose services the Company depends, or with whom the Company's systems
interface, are not Year 2000 compliant, there could be a material adverse effect
on the Company. In addition, if the IT products that the Company provides to
clients are not Year 2000 compliant, and such clients are harmed, there is no
assurance that they will not seek recourse against the Company as supplier, even
though such products were procured by the Company from third parties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Issue."
INTELLECTUAL PROPERTY RIGHTS
The success of certain Partner Companies is dependent in part on certain
proprietary methodologies these companies use in designing, installing and
integrating computer software, systems, hardware and other proprietary
intellectual property rights. These Partner Companies rely on a combination of
nondisclosure and other contractual arrangements and trade secret, copyright,
and trademark laws to protect their proprietary rights and the proprietary
rights of third parties; enter into confidentiality agreements with their key
employees; and limit distribution of proprietary information. There can be no
assurance that the steps taken by these Partner Companies in this regard will be
adequate to deter misappropriation of proprietary information or that these
Partner Companies will be able to detect unauthorized use and take appropriate
steps to enforce their intellectual property rights.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
The market price of the Common Stock may be adversely affected by the sale,
or availability for sale, of substantial amounts of the Common Stock in the
public market following the Offering. The 6,000,000 shares being sold in the
Offering will be freely tradable unless held by affiliates of the Company. Upon
completion of the Offering: (i) the former stockholders of the Partner Companies
who received shares of Common Stock, will own in the aggregate 3,729,323 shares
of Common Stock (excluding shares of Common Stock that may be issued pursuant to
any Post-Closing Adjustment related to such acquisition); (ii) the former
stockholders of the Partner Companies will own in the aggregate 99,128 shares of
Common Stock upon conversion of the Convertible Seller Note; (iii) founders,
consultants and management of IT Partners, will own an aggregate of 678,126
shares of Common Stock and options to acquire 1,185,711 shares granted by the
Company under the 1997 Plan; and (iv) certain equity holders will own (a) an
aggregate of 739,184 shares of Series B Preferred, currently convertible into
739,184 shares of Common Stock (subject to antidilution protection) and (b) the
Put Warrants exercisable for up to 993,850 shares of Common Stock and/or Series
B Preferred (convertible on a one-for-one basis into Common Stock), at the
option of the holders. Up to 152,290 additional shares of Common Stock
(calculated at the assumed initial public offering price) may be issued, at the
discretion of the Company, as payment for certain redemption dividends on the
shares of Series C Preferred. The securities issued prior to the Offering have
not been registered under the Securities Act, and, therefore, may not be sold
unless registered under the Securities Act or sold pursuant to an exemption from
registration, such as the exemption provided by Rule 144. Certain of the
Company's executive officers, directors and existing stockholders owning in the
aggregate 5,781,894 shares of Common Stock have agreed not to offer, sell,
contract to sell, make any short sale or otherwise dispose of any shares of
Common Stock, options to acquire shares of Common Stock or securities
convertible into or exchangeable for, or any rights to purchase or acquire,
shares of Common Stock during the 12-month period following the date of this
Prospectus, without the prior written consent of Friedman, Billings, Ramsey &
Co., Inc., subject to certain limited exceptions. The Company has agreed to
provide demand and piggyback registration rights with respect to the Common
Stock issued to certain existing stockholders, including BDC. The piggyback
registration rights described above will not apply to the Offering. The Company
intends to register the 1,767,284 shares of Common Stock reserved for issuance
upon exercise of stock options granted pursuant to the 1997 Plan as soon as
practicable after the date of this Prospectus. See "Management," "The
Recapitalization," "Shares Eligible for Future Sale" and "Underwriting."
16
<PAGE>
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop and
continue subsequent to the Offering or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price for the Common Stock will be determined by negotiation between
the Company and the Representatives and may bear no relationship to the price at
which the Common Stock will trade after the Offering. See "Underwriting" for the
factors to be considered in determining the initial public offering price. The
Company has applied for quotation of the shares of Common Stock on the Nasdaq
National Market, subject to official notice of issuance, under the symbol
"ITPI." After the Offering, the market price of the shares of Common Stock may
be subject to significant fluctuations in response to numerous factors,
including variations in the annual or quarterly financial results of the Company
or its competitors, timing of announcements of acquisitions by the Company or
its competitors, changes by financial research analysts in their recommendations
or estimates of the earnings of the Company, conditions in the economy in
general or in the IT service sectors in particular, announcements of
technological innovations or new products or services by the Company or its
competitors, proprietary rights development, unfavorable publicity or changes in
applicable laws and regulations (or judicial or administrative interpretations
thereof) affecting the Company or IT service sectors. Moreover, from time to
time, the stock market experiences significant price and volume volatility that
may affect the market price of the Common Stock for reasons unrelated to the
Company's performance.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the pro forma combined net tangible book
value of their shares of $9.79 per share. In the event the Company issues
additional shares of Common Stock in the future, including shares issued in
connection with future acquisitions or pursuant to the earn-out provisions of
the agreements to acquire certain of the Partner Companies, purchasers of Common
Stock in the Offering may experience further dilution. See "Dilution."
ABSENCE OF DIVIDENDS
The Company plans to retain future net income, if any, to fund internal
growth and to help fund future acquisitions and, therefore, does not anticipate
paying any dividends on its Common Stock in the foreseeable future. In addition,
the Company's Credit Facility and the terms of the Series A Preferred restrict
the Company's ability to pay dividends. See "Dividend Policy."
POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS
IT Partners' Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), authorizes the Board to issue, without stockholder approval,
one or more series of preferred stock having such preferences, powers and
relative, participating, optional and other rights (including preferences over
the Common Stock respecting dividends and distributions and voting rights) as
the Board may determine. The issuance of this "blank-check" preferred stock
could render more difficult or discourage an attempt to obtain control of the
Company by means of a tender offer, merger, proxy contest or otherwise. The
Certificate of Incorporation contains a prohibition of stockholder action
without a meeting by less than unanimous written consent. In addition, the
By-Laws establish an advance notice procedure for stockholder proposals to be
brought before an annual meeting of stockholders of the Company, including
proposed nominations of persons for election to the Board. These provisions may
have the effect of inhibiting or delaying a change in control of the Company.
Certain provisions of the DGCL, including Section 203, may also discourage
takeover attempts that have not been approved by the Board. See "Description of
Capital Stock."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 6,000,000 shares of
Common Stock offered by the Company hereby, after deducting underwriting
discounts and commissions and estimated offering expenses, are estimated to be
approximately $79.5 million ($92.1 million if the Underwriters' over-allotment
option is exercised in full). Of such net proceeds, the Company plans to use (i)
approximately $11.7 million to repay certain Seller Notes; (ii) approximately
$53.6 million to repay outstanding borrowings under the Credit Facility,
including amounts anticipated to be drawn down to finance the cash portion of
the purchase price for the Acquisition Candidates; (iii) approximately $10.0
million to redeem all of the Series C Preferred plus accrued dividends; and (iv)
approximately $3.5 million to redeem all of the Series A Preferred. The Seller
Notes mature at various dates from May 27, 2002 through June 10, 2003, and
accrue interest at various rates ranging from 8% to 10% per annum. The Credit
Facility matures on November 30, 2001 and accrues interest at floating interest
rates ranging from 9.65% to 10.5% as of June 30, 1998. See Note 7 of Notes to
Consolidated Financial Statements of the Company, "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," and "Certain Transactions." The
balance of such net proceeds, if any, will be retained for working capital and
other general corporate purposes, including future strategic acquisitions. See
"Prospectus Summary--The Acquisition Candidates." Pending such uses, the Company
plans to invest the net proceeds in short-term, investment-grade interest
bearing instruments.
DIVIDEND POLICY
The Company plans to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. The Credit Facility and the terms of the
Series A Preferred include restrictions on the ability of the Company to pay
dividends without the consent of the lenders. In addition, it is likely that any
other credit facility that the Company may negotiate in the future will include
similar restrictions.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 (i) on an actual basis, (ii) on a pro forma basis to reflect: (a)
the acquisitions of Call and Servinet; (b) the Planned Acquisitions; (c) the
issuance of Series B Preferred and (d) the issuance of Series C Preferred, as if
all such transactions had been consummated on March 31, 1998, and (iii) on a pro
forma, as adjusted basis to give effect to the Offering and the application of
the estimated net proceeds therefrom. See "Use of Proceeds." This table should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical and pro forma financial
statements of the Company, including the related notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents ............................................. $ 1,061 $ 9,426 $ 16,172
======== ======== =========
Notes payable ......................................................... $ 538 $ 843 $ 843
Debt outstanding under Credit Facility, (net of discounts of $2,270;
$2,270 pro forma) .................................................... 29,157 47,352 --
Convertible Seller Notes (net of discounts of $476 pro forma; $476
pro forma, as adjusted) .............................................. -- 1,013 1,013
Seller Notes, (net of discounts of $1,349; $1,481 pro forma; and $616
pro forma, as adjusted) .............................................. 9,030 15,292 5,405
Series C 12% senior redeemable preferred stock, $.01 par value,
1,000 shares authorized, 0 shares outstanding, 1,000 shares outstand-
ing pro forma, no shares outstanding pro forma, as adjusted .......... -- 10,000 --
Series A preferred stock, $.01 par value, 600,000 shares autho-
rized, 354,170 shares outstanding, 354,170 shares outstanding pro
forma, no shares outstanding pro forma, as adjusted................... 1,054 1,054 --
Put Warrants outstanding(1) ........................................... 8,509 8,509 --
Stockholders' equity:
Series B preferred stock, $.01 par value, 5,000,000 shares authorized,
118,392 shares outstanding, 739,184 shares outstanding
pro forma, 739,184 shares outstanding pro forma, as adjusted ......... 1,000 6,395 6,395
Common Stock, $.01 par value, 20,000,000 shares authorized
and 4,162,981 shares outstanding, 5,781,894 shares outstanding
pro forma, 11,781,894 shares outstanding pro forma, as adjust-
ed(2) ................................................................ 42 58 118
Warrants outstanding(1) .............................................. -- -- 8,509
Additional paid-in capital(2) ........................................ 24,834 45,303 124,711
Retained earnings (accumulated deficit) .............................. (7,872) (8,021) (12,450)
-------- -------- ---------
Total stockholders' equity ........................................ 18,004 43,735 127,283
-------- -------- ---------
Total capitalization .............................................. $ 66,292 $127,798 $ 134,544
======== ======== =========
</TABLE>
- ----------
(1) The put feature of the warrants will terminate upon the consummation of the
Offering.
(2) Excludes: (i) Put Warrants for 993,850 shares of Common Stock on an actual
and pro forma basis; and (ii) all outstanding shares of Series A Preferred
and Series C Preferred (iii) up to an aggregate of 605,191 additional
shares of Common Stock (calculated at the assumed initial public offering
price) that may be issued to the former stockholders in connection with the
Post-Closing Adjustments and upon the conversion of the Convertible Seller
Notes (calculated at the assumed initial public offering price); (iv)
1,185,711 shares of Common Stock issuable upon exercise of outstanding
stock options granted under the 1997 Plan; and (v) 581,573 shares of Common
Stock reserved for issuance under the 1997 Plan. See "Management--Stock
Option Plan," "The Recapitalization," "Description of Capital Stock,"
"Shares Eligible for Future Sale" and "Underwriting."
19
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998
was a deficit of approximately $53.8 million, or $(7.01) per share of Common
Stock. Pro forma net tangible book value per share is equal to the Company's
total pro forma tangible assets less its total pro forma liabilities, Series A
Preferred and Series C Preferred divided by the number of shares of Common Stock
outstanding, including shares issuable for Put Warrants and Series B Preferred.
After giving effect to the sale by the Company of 6,000,000 shares of Common
Stock offered hereby, at an assumed initial public offering price of $15.00 per
share, and the application of the estimated net proceeds therefrom as described
under "Use of Proceeds," the pro forma net tangible book value of the Company at
March 31, 1998, would have been approximately $21.3 million, or approximately
$1.56 per share. This represents an immediate increase of $8.57 per share in the
pro forma net tangible book value to existing stockholders and an immediate
dilution of $9.79 per share in pro forma net tangible book value to new
investors purchasing Common Stock in the Offering.
The following table illustrates the per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share .......................... $ 15.00
Pro forma net tangible book value per share before the Offering ......... $(7.01)
Increase per share attributable to new investors ........................ 8.57
------
Pro forma net tangible book value per share after the Offering ........... 1.56
-------
Dilution per share to new investors(1) ................................... $ 13.44
=======
</TABLE>
- ----------
(1) The preceding table assumes no exercise of outstanding options to acquire
1,185,711 shares of Common Stock subsequent to March 31, 1998. As of March
31, 1998, an aggregate of 793,654 shares of Common Stock were issuable upon
the exercise of outstanding options at a weighted average exercise price of
$9.98 per share. To the extent that these options are exercised, the effect
would be to decrease the dilution to new investors from $13.44 to $12.98.
See "Management--Stock Option Plan."
The following table gives effect, on a pro forma basis, to the Planned
Acquisitions as if they were consummated on March 31, 1998, the number of shares
of Common Stock purchased from IT Partners, the total consideration paid and the
average price per share paid by existing stockholders (including persons who are
expected to acquire Common Stock in the Planned Acquisitions) and the new
investors purchasing shares of Common Stock in the Offering (before deducting
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT(1) PER SHARE
------------ --------- -------------------- --------------
<S> <C> <C> <C> <C>
Existing stockholders ......... 7,667,218 56.1% $ 6,649,000 $ 0.87
New investors ................. 6,000,000 43.9 90,000,000 15.00
--------- ----- -----------
Total ........................ 13,667,218 100.0% $96,649,000
========== ===== ===========
</TABLE>
- ----------
(1) Total consideration paid by existing stockholders includes only cash
consideration for Common Stock, Put Warrants and Series B Preferred.
20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial statements of the
Company set forth the unaudited pro forma combined balance sheet of the Company
as of March 31, 1998 (the "Pro Forma Balance Sheet") and the unaudited pro forma
combined statements of operations of the Company for the fiscal year ended
December 31, 1997 and the three months ended March 31, 1998 (the "Pro Forma
Statements of Operations" and, together with the Pro Forma Balance Sheet, the
"Company Pro Forma Financial Statements"). The pro forma adjustments are based
upon available information and certain assumptions that the Company believes are
reasonable.
The unaudited Pro Forma, As Adjusted, Balance Sheet is adjusted to give
effect to: (i) the acquisitions of Call and Servinet; (ii) the Planned
Acquisitions; (iii) the issuance of Series B Preferred; (iv) the issuance of
Series C Preferred; and (v) the Offering, as if such transactions occurred on
March 31, 1998 and assuming application of the net proceeds of the Offering as
set forth in "Use of Proceeds."
The unaudited Pro Forma, As Adjusted, Statement of Operations for the year
ended December 31, 1997 is adjusted to give effect to: (i) the acquisitions of
the Partner Companies; (ii) the Planned Acquisitions; (iii) the issuance of
Series B Preferred; (iv) the issuance of Series C Preferred; and (v) the
Offering, as if such transactions had occurred at the beginning of such period
and assuming application of the net proceeds of the Offering as set forth in
"Use of Proceeds."
The unaudited Pro Forma, As Adjusted, Statement of Operations for the three
months ended March 31, 1998 is adjusted to give effect to: (i) the acquisitions
of Sequoia, Incline, Call and Servinet; (ii) the Planned Acquisitions; (iii) the
issuance of Series B Preferred; (iv) the issuance of Series C Preferred; and (v)
the Offering as if such transactions had occurred at the beginning of such
period and assuming application of the net proceeds of the Offering as set forth
in "Use of Proceeds."
The Pro Forma Statements of Operations have been derived from the
historical audited statements of operations of IT Partners for the year ended
December 31, 1997 included elsewhere in this Prospectus; the audited statement
of operations of CNS and the unaudited statement of operations of KDP for the
five months ended May 31, 1997; the unaudited statement of operations of A-COM
for the six months ended June 30, 1997; the unaudited statement of operations of
FSC for the period from January 1, 1997 through October 20, 1997; the audited
statement of operations of Sequoia for the year ended December 31, 1997; the
audited statement of operations of Incline for the 12 months ended October 31,
1997; the audited statement of operations of Call, Servinet and CPR for the 12
months ended February 28, 1998; the unaudited statements of operations of
CSI-PA, CSI-VA, Richardson, TAG and Champlain for the year ended December 31,
1997; the audited statements of operations of BMS and Entre for the 12 months
ended March 31, 1998; and the unaudited statements of operations of KiZAN and
Light for the 12 months ended December 31, 1997.
The Company's Pro Forma Financial Statements as of, and for the three
months ended, March 31, 1998, have been derived from unaudited historical
financial statements as of, and for the three months ended, March 31, 1998 of IT
Partners, the unaudited statements of operations of Sequoia for the period from
January 1, 1998 to January 8, 1998; the unaudited statement of operations of
Incline for the period from January 1, 1998 to February 5, 1998; and the
unaudited financial statements as of and for the three months ended March 31,
1998 of Call, Servinet and the Acquisition Candidates.
IT Partners' acquisitions of the Partner Companies and the Acquisition
Candidates have been, or will be, accounted for under the purchase method of
accounting, pursuant to which the total purchase price of such acquisitions is
allocated to the identifiable assets and liabilities acquired based upon their
relative fair values as of the closing date, with the excess of the purchase
price over the fair value of the assets acquired, net of the liabilities
assumed, allocated to goodwill. The Company believes that the preliminary
allocations set forth herein are reasonable; however, in some cases the final
allocations will be based upon valuations and other studies that are not yet
complete. As a result, the allocations set forth herein are subject to revision
when additional information becomes available, and such revised allocations
could differ substantially from those set forth herein.
21
<PAGE>
IT PARTNERS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED
DESCRIPTION HISTORICAL CALL SERVINET
- --------------------------------------------------------- ------------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 1,061 $ 164 $ 211
Accounts receivable, net ............................... 13,985 936 3,894
Inventory .............................................. 1,816 -- 410
Costs and estimated earnings in excess of billings ..... 1,135 -- --
Deferred tax asset ..................................... 872 -- --
Prepaid expenses and other current assets .............. 1,275 572 84
-------- ------ -------
Total current assets ................................... 20,144 1,672 4,599
Property and equipment, net ............................. 3,287 462 155
Intangible assets ....................................... 62,402 -- 124
Other assets ............................................ 1,123 -- --
-------- ------ -------
Total assets ........................................... 86,956 2,134 4,878
======== ====== =======
Current liabilities:
Accounts payable ....................................... 4,167 967 1,631
Accrued expenses and other liabilities ................. 7,314 105 597
Billings in excess of costs and estimated earnings ..... 1,069 (2) --
Revolving line of credit ............................... -- -- 1,367
Current portion of notes payable ....................... 261 -- --
-------- -------- -------
Total current liabilities .............................. 12,811 1,070 3,595
Notes payable, net of discount and current portion ...... 277 -- --
Revolving line of credit, net of discounts .............. 29,157 -- --
Seller Notes, net of discounts .......................... 9,030 -- --
Convertible Seller Notes, net of discounts .............. -- -- --
Deferred tax liability .................................. 6,714 -- --
Other liabilities ....................................... 1,400 296 126
-------- -------- -------
Total liabilities ...................................... 59,389 1,366 3,721
Put Warrants outstanding ................................ 8,509 -- --
Series C Preferred ...................................... -- -- --
Series A Preferred ...................................... 1,054 -- --
Stockholders' equity:
Series B Preferred ..................................... 1,000 -- --
Common stock ........................................... 42 1 2
Warrants outstanding ................................... -- -- --
Treasury stock ......................................... -- -- --
Additional paid-in capital ............................. 24,834 -- --
Retained earnings (accumulated deficit) ................ (7,872) 767 1,155
-------- -------- -------
Total stockholders' equity ............................. 18,004 768 1,157
-------- -------- -------
Total liabilities and stockholders' equity ............. $ 86,956 $ 2,134 $ 4,878
======== ======== =======
<CAPTION>
DESCRIPTION CPR CSI-PA CSI-VA RICHARDSON BMS
- --------------------------------------------------------- ------------- -------- ---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 249 $ 20 $ 8 $ 280 $ 560
Accounts receivable, net ............................... 4,279 418 1,218 266 1,043
Inventory .............................................. 1,229 387 266 236 --
Costs and estimated earnings in excess of billings ..... -- -- 38 41 --
Deferred tax asset ..................................... 215 -- -- -- --
Prepaid expenses and other current assets .............. 70 13 86 4 610
------ ----- ------- ----- -------
Total current assets ................................... 6,042 838 1,616 827 2,213
Property and equipment, net ............................. 457 136 186 131 180
Intangible assets ....................................... -- -- -- -- --
Other assets ............................................ 1 18 63 -- 21
------ ----- ------- ----- -------
Total assets ........................................... 6,500 992 1,865 958 2,414
====== ===== ======= ===== =======
Current liabilities:
Accounts payable ....................................... 2,102 300 429 110 148
Accrued expenses and other liabilities ................. 593 10 240 50 142
Billings in excess of costs and estimated earnings ..... 1,650 -- 567 27 --
Revolving line of credit ............................... -- 150 125 -- --
Current portion of notes payable ....................... -- 27 -- -- --
------ ----- ------- ----- -------
Total current liabilities .............................. 4,345 487 1,361 187 290
Notes payable, net of discount and current portion ...... -- 75 38 -- --
Revolving line of credit, net of discounts .............. -- -- -- -- --
Seller Notes, net of discounts .......................... -- -- -- -- --
Convertible Seller Notes, net of discounts .............. -- -- -- -- --
Deferred tax liability .................................. -- -- -- -- --
Other liabilities ....................................... -- -- -- -- --
------ ----- ------- ----- -------
Total liabilities ...................................... 4,345 562 1,399 187 290
Put Warrants outstanding ................................ -- -- -- -- --
Series C Preferred ...................................... -- -- -- -- --
Series A Preferred ...................................... -- -- -- -- --
Stockholders' equity:
Series B Preferred ..................................... -- -- -- -- --
Common stock ........................................... 1 -- 3 2 --
Warrants outstanding ................................... -- -- -- -- --
Treasury stock ......................................... -- -- -- -- --
Additional paid-in capital ............................. 2,160 17 -- 769 --
Retained earnings (accumulated deficit) ................ (6) 413 463 -- 2,124
--------- ----- ------- ----- -------
Total stockholders' equity ............................. 2,155 430 466 771 2,124
-------- ----- ------- ----- -------
Total liabilities and stockholders' equity ............. $ 6,500 $ 992 $ 1,865 $ 958 $ 2,414
======== ===== ======= ===== =======
</TABLE>
22
<PAGE>
IT PARTNERS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1998 (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
DESCRIPTION ENTRE KIZAN LIGHT TAG CHAMPLAIN
- --------------------------------------------------------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 36 $ 120 $ 165 $ 14 $ 738
Accounts receivable, net ............................... 1,233 1,048 532 100 943
Inventory .............................................. 668 -- 392 -- 336
Costs and estimated earnings in excess of billings ..... -- -- -- 23 --
Deferred tax asset ..................................... 70 -- -- 4 --
Prepaid expenses and other current assets .............. 50 81 451 3 5
------ ------ ------ ------- ------
Total current assets ................................... 2,057 1,249 1,540 144 2,022
Property and equipment, net ............................. 327 327 310 25 173
Intangible assets ....................................... -- -- -- -- --
Other assets ............................................ 54 41 4 2 --
------ ------ ------ ------- ------
Total assets ........................................... 2,438 1,617 1,854 171 2,195
====== ====== ====== ======= ======
Current liabilities:
Accounts payable ....................................... 919 319 392 5 87
Accrued expenses and other liabilities ................. 65 147 82 13 767
Billings in excess of costs and estimated earnings ..... 929 157 79 148 218
Revolving line of Credit ............................... -- 273 -- 120 --
Current portion of notes payable ....................... 6 46 70 -- --
------ ------ ------ ------- ------
Total current liabilities .............................. 1,919 942 623 286 1,072
Notes payable, net of discount and current portion ...... 16 71 125 -- --
Revolving line of credit, net of discounts .............. -- -- -- -- --
Seller Notes, net of discounts .......................... -- -- -- -- --
Convertible seller notes, net of discounts .............. -- -- -- -- --
Deferred tax liability .................................. -- -- -- -- --
Other liabilities ....................................... -- 123 -- -- 138
------ ------ ------ ------- ------
Total liabilities ...................................... 1,935 1,136 748 286 1,210
Put Warrants outstanding ................................ -- -- -- -- --
Series C Preferred ...................................... -- -- -- -- --
Series A Preferred ...................................... -- -- --- -- --
Stockholders' equity:
Series B Preferred ..................................... -- -- -- -- --
Common stock ........................................... 33 -- 5 -- 5
Warrants outstanding ................................... -- -- -- -- --
Treasury stock ......................................... -- -- -- -- (65)
Additional paid-in capital ............................. 97 103 1,101 14 35
Retained earnings (accumulated deficit) ................ 373 378 -- (129) 1,010
------ ------ ------ ------- ------
Total stockholders' equity ............................. 503 481 1,106 (115) 985
------ ------ ------ ------- ------
Total liabilities and stockholders' equity ............. $2,438 $1,617 $1,854 $ 171 $2,195
====== ====== ====== ======= ======
<CAPTION>
ADJUSTED
PRO FORMA PRO FORMA OFFERING PRO FORMA
DESCRIPTION ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
- --------------------------------------------------------- ----------------- ----------- ------------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 4,925 (a) $ 9,426 6,746 (e) $ 16,172
875 (b)
Accounts receivable, net ............................... (3,894)(d) 26,001 -- 26,001
Inventory .............................................. -- 5,740 -- 5,740
Costs and estimated earnings in excess of billings ..... (23)(d) 1,214 -- 1,214
Deferred tax asset ..................................... (70)(b) 1,087 -- 1,087
(4)(d)
Prepaid expenses and other current assets .............. (3)(d) 3,301 -- 3,301
--------- -------- ----- ---------
Total current assets ................................... 1,806 46,769 6,746 53,515
Property and equipment, net ............................. (25)(d) 6,131 -- 6,131
Intangible assets ....................................... 43,476 (b) 106,002 -- 106,002
Other assets ............................................ (2)(d) 1,325 -- 1,325
--------- -------- ----- ---------
Total assets ........................................... 45,255 160,227 6,746 166,973
========= ======== ===== =========
Current liabilities:
Accounts payable ....................................... (1,521)(c) 10,055 -- 10,055
Accrued expenses and other liabilities ................. (684)(c) 9,441 -- 9,441
Billings in excess of costs and estimated earnings ..... (146)(c) 4,696 -- 4,696
Revolving line of Credit ............................... (2,035)(c) -- -- --
Current portion of notes payable ....................... (44)(c) 366 -- 366
--------- -------- ----- ---------
Total current liabilities .............................. (4,430) 24,558 -- 24,558
Notes payable, net of discount and current portion ...... (125)(c) 477 -- 477
Revolving line of credit, net of discounts .............. 18,195 (d) 47,352 (47,352)(e) --
Seller Notes, net of discounts .......................... 6,262 (d) 15,292 (9,887)(e) 5,405
Convertible seller notes, net of discounts .............. 1,013 (d) 1,013 -- 1,013
Deferred tax liability .................................. -- 6,714 -- 6,714
Other liabilities ....................................... (560)(c) 1,523 -- 1,523
--------- -------- ------- ---------
Total liabilities ...................................... 20,355 96,929 (57,239) 39,690
Put Warrants outstanding ................................ -- 8,509 (8,509)(e) --
Series C Preferred ...................................... 7,000 (a) 10,000 (10,000)(e) --
3,000 (a)
Series A Preferred ...................................... -- 1,054 (1,054)(e) --
Stockholders' equity:
Series B Preferred ..................................... 5,395 (d) 6,395 -- 6,395
Common stock ........................................... (52)(c) 58 60 (e) 118
Warrants outstanding ................................... 16 (d) -- 8,509 8,509
Treasury stock ......................................... 65 (c) -- -- --
Additional paid-in capital ............................. (4,282)(c) 45,303 79,408 (e) 124,711
20,455 (d) -- -- --
Retained earnings (accumulated deficit) ................ (6,697)(c) (8,021) (4,429)(e) (12,450)
--------- -------- ------- ---------
Total stockholders' equity ............................. 14,900 43,735 83,548 127,283
--------- -------- ------- ---------
Total liabilities and stockholders' equity ............. $ 45,210 $160,227 $ 6,746 $ 166,973
========= ======== =========== =========
</TABLE>
23
<PAGE>
IT PARTNERS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(UNAUDITED)
(a) To reflect the issuance of 1,000 shares of Series C Preferred, par value
$10,000 per share, net of $150,000 of transaction closing costs.
(b) The March 31, 1998 net assets are adjusted to reflect the elimination of
the deferred tax assets (if any) relating to the acquisitions of the
Partner Companies and the Planned Acquisitions. Pursuant to the acquisition
agreements for Call and Servinet and for the Planned Acquisitions, certain
liabilities are not assumed by IT Partners and therefore are excluded from
the pro forma combined financial statements as noted in the table below (in
thousands).
Actual/estimated purchase price ............................... $56,262
March 31, 1998 adjusted net assets ............................ 10,761
Less: assets and liabilities not acquired or assumed .......... 1,150
Less: minimum working capital requirements .................... 875
-------
Total intangible assets ...................................... 43,476
Less: identifiable intangible assets ......................... 7,864
-------
Total goodwill .............................................. $35,612
=======
The actual/estimated purchase price column excludes Post-Closing
Adjustments, the payment of which is dependent upon the future financial
performance of the individual Partner Companies and the Acquisition
Candidates. The Post-Closing Adjustments will be determined based on the
achievement of certain operational levels and range from 15% to 25% of the
total consideration. The Post-Closing Adjustments range from $0 to a
maximum of: (i) approximately $2.6 million in cash; (ii) approximately $8.5
million of Common Stock; and (iii) Seller Notes in the aggregate principal
amount of approximately $6.4 million.
(c) To reflect the assets and liabilities not assumed by the Company, pursuant
to the acquisition agreements for Call and Servinet and for the Acquisition
Candidates.
(d) To reflect anticipated increase in capitalization resulting from the
acquisitions of Call and Servinet, and the Acquisition Candidates as of
March 31, 1998. Pursuant to the acquisition agreements for Call and
Servinet and for the Acquisition Candidates, certain liabilities are not
assumed by IT Partners and therefore are excluded from the pro forma
combined financial statements as noted in the table below (in thousands).
Line of credit ................................................ $18,195
Seller Notes, net of discounts of $2,174....................... 6,262
Convertible Seller Notes ...................................... 1,013
Fair value of Common Stock .................................... 20,471
Series B Preferred ............................................ 5,395
Series C Preferred (portion to be used for acquisitions) ...... 4,925
-------
Total ........................................................ $56,262
=======
(e) To reflect the proceeds of the Offering and the Recapitalization (at an
assumed initial public offering price of $15.00 per share), net of $10.5
million of underwriting discounts and commissions and estimated offering
expenses, and the application of the proceeds therefrom as set forth in
"Use of Proceeds." There can be no assurance that the Offering will be
consummated.
24
<PAGE>
IT PARTNERS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED
DESCRIPTION HISTORICAL CNS KANDL A-COM FSC(F)
- -------------------------------------------------- ------------- ------------ ------------ ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues ......................................... $ 23,781 $4,453 $2,139 $ 9,576 $3,398
Cost of goods sold ............................... 17,958 3,430 1,415 7,636 1,654
-------- ------ ------ ------- ------
Gross profit ..................................... 5,823 1,023 724 1,940 1,744
Selling, general and administrative .............. 4,813 1,030 679 3,038 1,222
Merger and acquisition costs ..................... 362 -- -- -- --
Organizational costs ............................. 1,131 -- -- -- --
Depreciation and amortization .................... 782 9 51 62 34
-------- ------ ------ ------- ------
Operating income (loss) .......................... (1,265) (16) (6) (1,160) 488
Interest expense, net ............................ 3,134 31 (22) 81 --
Other expenses (income) .......................... -- (3) (9) (9) (117)
-------- -------- -------- ---------- ------
Income (loss) before tax provision (benefit) ..... (4,399) (44) 25 (1,232) 605
Income tax provision (benefit) ................... (722) -- 37 107 11
-------- ------- ------- --------- ------
Net income (loss) ................................ $ (3,677) $ (44) $ (12) $(1,339) $ 594
======== ======= ======= ========= ======
<CAPTION>
DESCRIPTION SEQUOIA INCLINE CALL SERVINET CPR CSI-PA
- -------------------------------------------------- ------------- ------------ ------------ ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ......................................... $29,219 $3,671 $4,953 $24,790 $31,393 $2,008
Cost of goods sold ............................... 17,521 944 1,482 20,648 23,022 1,280
------- ------ ------ ------- ------- ------
Gross profit ..................................... 11,698 2,727 3,471 4,142 8,371 728
Selling, general and administrative .............. 9,762 1,856 2,300 2,685 7,179 557
Merger and acquisition costs ..................... -- -- -- -- -- --
Organizational costs ............................. -- -- -- -- -- --
Depreciation and amortization .................... 325 40 87 36 256 38
------- ------ ------ ------- ------- ------
Operating income (loss) .......................... 1,611 831 1,084 1,421 936 133
Interest expense, net ............................ 576 -- 44 204 43 24
Other expenses (income) .......................... (3) (4) (1) -- (68) --
--------- -------- -------- ------- ------- ------
Income (loss) before tax provision (benefit) ..... 1,038 835 1,041 1,217 961 109
Income tax provision (benefit) ................... 490 -- -- 56 330 --
-------- ------- ------- ------- ------- ------
Net income (loss) ................................ $ 548 $ 835 $1,041 $ 1,161 $ 631 $ 109
======== ======= ======= ======= ======= ======
<CAPTION>
DESCRIPTION CSI-VA
- -------------------------------------------------- ------------
(IN
THOUSANDS)
<S> <C>
Revenues ......................................... $4,679
Cost of goods sold ............................... 2,969
------
Gross profit ..................................... 1,710
Selling, general and administrative .............. 1,182
Merger and acquisition costs ..................... --
Organizational costs ............................. --
Depreciation and amortization .................... 79
------
Operating income (loss) .......................... 449
Interest expense, net ............................ 1
Other expenses (income) .......................... (8)
--------
Income (loss) before tax provision (benefit) ..... 456
Income tax provision (benefit) ................... 236
-------
Net income (loss) ................................ $ 220
=======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION RICHARDSON BMS ENTRE KIZAN LIGHT TAG
- -------------------------------------------------- ------------ ------------ ---------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ......................................... $3,719 $5,653 $11,632 $6,457 $6,110 $1,067
Cost of goods sold ............................... 2,400 3,084 8,180 2,223 3,733 812
------ ------ ------- ------ ------ ------
Gross profit ..................................... 1,319 2,569 3,452 4,234 2,377 255
Selling, general and administrative .............. 1,568 1,385 3,087 3,938 1,957 213
Merger and acquisition costs ..................... -- -- -- -- -- --
Organizational costs ............................. -- -- -- -- -- --
Depreciation and amortization .................... 25 36 186 65 43 --
------ ------ ------- ------ ------ ------
Operating income (loss) .......................... (274) 1,148 179 231 377 42
Interest expense, net ............................ -- (7) 6 27 1 6
Other expenses (income) .......................... (5) 209 8 48 (10) --
-------- ------- ------- ------ ------ ------
Income (loss) before tax provision (benefit) ..... (269) 946 165 156 386 36
Income tax provision (benefit) ................... -- -- 58 48 -- 18
------- ------- ------- ------ ------ ------
Net income (loss) ................................ $(269) $ 946 $ 107 $ 108 $ 386 $ 18
======= ======= ======= ====== ====== ======
<CAPTION>
AS ADJUSTED,
PRO FORMA PRO FORMA OFFERING PRO FORMA
DESCRIPTION CHAMPLAIN ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
- -------------------------------------------------- ----------- ----------------- ----------- ----------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues ......................................... $8,572 -- $187,270 -- $187,270
Cost of goods sold ............................... 7,016 -- 127,407 -- 127,407
------ -- -------- -- --------
Gross profit ..................................... 1,556 -- 59,863 -- 59,863
Selling, general and administrative .............. 1,137 (441)(b) 49,147 -- 49,147
Merger and acquisition costs ..................... -- -- 362 -- 362
Organizational costs ............................. -- -- 1,131 -- 1,131
Depreciation and amortization .................... 23 5,868 (c) 8,045 -- 8,045
------ ----- -------- -- --------
Operating income (loss) .......................... 396 (5,427) 1,178 -- 1,178
Interest expense, net ............................ (17) 4,759 (d) 8,891 (7,934)(d) 957
Other expenses (income) .......................... -- -- 28 -- 28
------ ------ -------- ------ --------
Income (loss) before tax provision (benefit) ..... 413 (10,186) (7,741) 7,934 193
Income tax provision (benefit) ................... -- (2,088)(e) (1,419) 2,366 (e) 947
------ ------- -------- ------ --------
Net income (loss) ................................ $ 413 $ (8,098) $ (6,322) $ 5,568 $ (754)
====== ========== ======== ========== ========
</TABLE>
25
<PAGE>
IT PARTNERS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED
DESCRIPTION HISTORICAL SEQUOIA(A) INCLINE(A) CALL
- -------------------------------------------------------- ------------- ------------ ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues ............................................... $ 17,786 137 $638 $2,316
Cost of goods sold ..................................... 11,561 245 211 830
-------- --- ---- ------
Gross profit ........................................... 6,225 (108) 427 1,486
Selling, general and administrative .................... 5,052 466 211 428
Merger and acquisition costs ........................... 176 -- -- --
Organizational costs ................................... -- -- -- --
Depreciation and amortization .......................... 1,082 -- 9 61
-------- ---- ---- ------
Operating income (loss) ................................ (85) (574) 207 997
Interest expense, net .................................. 3,306 -- 1 5
Other expenses (income) ................................ -- -- (1) 1
-------- ---- ------ ------
Income (loss) before tax provision (benefit) and ex-
traordinary loss ...................................... (3,391) (574) 207 991
Income tax provision (benefit) ......................... (212) -- -- --
-------- ---- ----- ------
Income (loss) before extraordinary loss ................ $ (3,179) (574) $207 $ 991
======== ==== ===== ======
<CAPTION>
DESCRIPTION SERVINET CPR CSI-PA CSI-VA RICHARDSON BMS
- -------------------------------------------------------- ---------- --------- ---------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................................... $6,559 $8,674 $628 $977 $ 446 $1,455
Cost of goods sold ..................................... 4,597 6,637 422 468 302 927
------ ------ ---- ---- ----- ------
Gross profit ........................................... 1,962 2,037 206 509 144 528
Selling, general and administrative .................... 1,515 1,923 172 343 244 173
Merger and acquisition costs ........................... -- -- -- -- -- --
Organizational costs ................................... -- -- -- -- -- --
Depreciation and amortization .......................... 9 53 8 15 12 9
------ ------ ---- ---- ----- ------
Operating income (loss) ................................ 438 61 26 151 (112) 346
Interest expense, net .................................. 2 -- 4 -- -- (1)
Other expenses (income) ................................ -- (55) (3) 3 (2) 53
------ ------ ------ ---- -------- -------
Income (loss) before tax provision (benefit) and ex-
traordinary loss ...................................... 436 116 25 148 (110) 294
Income tax provision (benefit) ......................... 7 141 -- -- -- --
------ ------ ----- ---- ------- -------
Income (loss) before extraordinary loss ................ $ 429 $ (25) $25 $148 $(110) $ 294
====== ====== ===== ==== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION ENTRE KIZAN LIGHT TAG CHAMPLAIN
- -------------------------------------------------------- --------- ------------ ------------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues ............................................... $2,645 $1,720 $1,785 214 $4,051
Cost of goods sold ..................................... 1,689 907 599 106 3,139
------ ------ ------ --- ------
Gross profit ........................................... 956 813 1,186 108 912
Selling, general and administrative .................... 834 571 1,057 54 317
Merger and acquisition costs ........................... -- -- -- -- --
Organizational costs ................................... -- -- -- -- --
Depreciation and amortization .......................... 39 15 13 -- 14
------ ------ ------ --- ------
Operating income (loss) ................................ 83 227 116 54 581
Interest expense, net .................................. -- 6 1 2 --
Other expenses (income) ................................ 7 (8) (6) -- (1)
------ -------- -------- --- --------
Income (loss) before tax provision (benefit) and ex-
traordinary loss ...................................... 76 229 121 52 582
Income tax provision (benefit) ......................... 19 -- -- 23 --
------ ------- ------- --- -------
Income (loss) before extraordinary loss ................ $ 57 $ 229 $ 121 $ 29 $ 582
====== ======= ======= ==== =======
<CAPTION>
AS ADJUSTED
PRO FORMA PRO FORMA OFFERING PRO FORMA
DESCRIPTION ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
- -------------------------------------------------------- ----------------- ----------- ----------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues ............................................... -- $ 50,031 -- $50,031
Cost of goods sold ..................................... -- 32,640 -- 32,640
-- -------- -- -------
Gross profit ........................................... -- 17,391 -- 17,391
Selling, general and administrative .................... 44 (b) 13,404 -- 13,404
Merger and acquisition costs ........................... -- 176 -- 176
Organizational costs ................................... -- -- -- --
Depreciation and amortization .......................... 690 (c) 2,029 -- 2,029
--- -------- -- -------
Operating income (loss) ................................ (734) 1,782 -- 1,782
Interest expense, net .................................. 708 (d) 4,034 (3,182)(d) 852
Other expenses (income) ................................ -- (12) -- (12)
---- -------- ------ -------
Income (loss) before tax provision (benefit) and ex-
traordinary loss ...................................... (1,442) (2,240) 3,182 942
Income tax provision (benefit) ......................... 219 (e) 197 372 (e) 569
------ -------- ------ -------
Income (loss) before extraordinary loss ................ $(1,661) $ (2,437) $ 2,810 $ 373
======= ======== ========== =======
</TABLE>
26
<PAGE>
IT PARTNERS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(a) The Sequoia column reflects the results of operations of Sequoia from
January 1, 1998 to January 8, 1998, the date on which the acquisition was
consummated. The Incline column reflects the results of operations for
Incline from January 1, 1998 to February 5, 1998, the date on which the
acquisition was consummated.
(b) To adjust officer salary expense recorded by the Partner Companies and the
Acquisition Candidates to reflect the salaries paid or to be paid to the
respective officers pursuant to employment agreements with the Company from
January 1, 1997 through the earlier of the date of acquisition or December
31, 1997 and from January 1, 1998 through the earlier of the date of
acquisition or March 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
------------------- -------------------
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Officer salary expense ..................................... $ 3,473 $ 558
Less: Officer salary expense recorded by the
Partner Companies and the Acquisition Candidates ......... (3,914) (514)
-------- ------
Net adjustment ............................................. $ (441) $ 44
======== ======
</TABLE>
(c) To record amortization expense related to acquired or to be acquired
intangible assets and eliminate amortization expense recorded by the
Partner Companies and the Acquisition Candidates from January 1, 1997
through the earlier of the date of acquisition or December 31, 1997 and
from January 1, 1998 through the earlier of the date of acquisition or
March 31, 1998. Intangible assets are amortized over lives ranging from 5
to 40 years.
(d) To record interest expense for the year ended December 31, 1997 and three
months ended March 31, 1998 on acquisition financing relating to the
acquisitions of the Partner Companies and the Acquisition Candidates and
accretion of Put Warrants and to eliminate the interest expense recorded.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
--------------------------- --------------------------
PRO FORMA OFFERING PRO FORMA OFFERING
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest expense on acquisition financing ............ $ 6,789 (5,757) $ 986 $ (728)
Interest expense on Seller Notes remaining after the
Offering -- 931 -- 233
-------- ------ ------ --------
Less: Debt acquisition interest paid off by Series B
Preferred and Series C Preferred .................... (1,032) -- (258) --
Less: Accretion of Put Warrants ...................... -- (2,020) -- (2,252)
Less: Post-acquisition interest recorded by CNS, KDP,
A-COM, FSC, and Sequoia ............................. -- (901) -- (282)
Less: Deferred financing and amortization of debt dis-
count ............................................... -- (187) -- (153)
Less: Interest expense recorded by the Partner
Companies and the Acquisition Candidates ............ (998) -- (20) --
Net adjustment ....................................... $ 4,759 $ (7,934) $ (708) $ (3,182)
======== ======== ====== ========
</TABLE>
(e) To record the estimated tax (benefit) provision at the applicable statutory
rates for the year ended December 31, 1997 and the three months ended March
31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
--------------------------- --------------------------
PRO FORMA OFFERING PRO FORMA OFFERING
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Tax provision ..................................... $ (1,419) $2,366 $ 196 $372
Less: Tax provision recorded by the Partner
Companies and the Acquisition Candidates ......... 669 -- (23) --
-------- ------ ----- ----
Net adjustment .................................... $ (2,088) $2,366 $ 219 $372
======== ====== ===== ====
</TABLE>
(f) Net of revenues and cost of goods sold related to operations of the
discontinued Cinergi Division.
27
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected historical financial data for IT Partners for the fiscal year
ended December 31, 1997 (except pro forma amounts) have been derived from the
audited consolidated financial statements of IT Partners that are included
elsewhere in this Prospectus. The selected historical financial data provided
herein should be read in conjunction with the historical financial statements of
IT Partners, KDP, CNS and A-COM, including the related notes, the pro forma
financial information of IT Partners, including the related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere in this Prospectus.
The selected historical financial data for the three months ended March 31,
1997 and 1998 (except pro forma amounts) have been derived from unaudited
consolidated financial statements that appear elsewhere in this Prospectus.
These unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, contain all adjustments, consisting of the normal recurring
accruals, necessary for a fair presentation of the financial position and
results of operations for the periods presented. The results of operations for
the three months ended March 31, 1997 and 1998 are not necessarily indicative of
the results that may be expected for any other interim period or the entire
year.
The unaudited Pro Forma Balance Sheet Data gives effect to the acquisitions
of Call, Servinet and the Acquisition Candidates as if they occurred on March
31, 1998. The unaudited Pro Forma, As Adjusted, Balance Sheet Data gives effect
to the acquisitions of Call, Servinet and the Acquisition Candidates and the
Offering as if they occurred on March 31, 1998 and assuming application of the
proceeds of the Offering as set forth in "Use of Proceeds." The unaudited Pro
Forma Statement of Operations for the year ended December 31, 1997 is adjusted
to give effect to the acquisitions of CNS, KDP, A-COM, FSC, Sequoia, Incline,
Call, Servinet and the Acquisition Candidates as if each had occurred at the
beginning of such period. The unaudited Pro Forma, As Adjusted, Statement of
Operations for the year ended December 31, 1997 is adjusted to give effect to
the acquisitions of CNS, KDP, A-COM, FSC, Sequoia, Incline, Call, Servinet and
the Acquisition Candidates and the Offering, as if each had occurred at the
beginning of such period and assuming application of the proceeds of the
Offering as set forth in "Use of Proceeds." The unaudited Pro Forma Statement of
Operations for the three months ended March 31, 1998 is adjusted to give effect
to the acquisitions of Sequoia, Incline, Call, Servinet and the Acquisition
Candidates as if each had occurred at the beginning of such period. The
unaudited Pro Forma, As Adjusted, Statement of Operations for the three months
ended March 31, 1998 is adjusted to give effect to the acquisitions of Sequoia,
Incline, Call, Servinet and the Acquisition Candidates and the Offering, as if
each had occurred at the beginning of such period and assuming application of
the proceeds of the Offering as set forth in "Use of Proceeds". The pro forma
adjustments are based upon available information and certain assumptions that
the Company believes are reasonable.
Selected historical financial data is provided for KDP, CNS and A-COM
(collectively, the "Predecessor Companies"). The KDP, CNS and A-COM acquisitions
occurred during the two months following the inception of the Company and KDP,
CNS and A-COM comprise a substantial majority of the combined assets, net
revenues and operating income and, therefore, are deemed to be the predecessors
of IT Partners.
The selected historical financial data for KDP for the fiscal years ended
September 30, 1995 and 1996, and the eight months ended May 31, 1997 have been
derived from the audited consolidated financial statements of KDP that are
included elsewhere in this Prospectus. The selected historical financial data
for CNS for the fiscal years ended December 31, 1995 and 1996, and the five
months ended May 31, 1997 have been derived from the audited consolidated
financial statements of CNS that are included elsewhere in this Prospectus. The
selected historical financial data for the fiscal years ended December 31, 1993
and 1994 have been derived from the consolidated financial statements of CNS
that have not been audited and are not included herein. The selected historical
financial data for A-COM for the fiscal years ended June 30, 1995, 1996 and 1997
have been derived from the audited consolidated financial statements of A-COM
that are included elsewhere in this
28
<PAGE>
Prospectus. The selected historical financial data for the fiscal years ended
June 30, 1993 and 1994, have been derived from the consolidated financial
statements of A-COM that have not been audited and are not included herein.
These unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial and, in the opinion of management,
contain all adjustments, consisting of the normal recurring accruals, necessary
for a fair presentation of the financial position and results of operations for
the periods presented.
29
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
PRO FORMA,
HISTORICAL PRO FORMA AS ADJUSTED
1997 1997 1997
--------------- -------------- ---------------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND
CERTAIN OTHER DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................... $ 23,781 $ 187,270 $ 187,270
Cost of goods sold ..................... 17,958 127,407 127,407
---------- ---------- -----------
Gross profit ........................... 5,823 59,863 59,863
Selling, general and administrative
expenses .............................. 4,813 49,147 49,147
Merger and acquisition costs ........... 362 362 362
Organizational costs ................... 1,131 1,131 1,131
Depreciation and amortization .......... 782 8,045 8,045
---------- ---------- -----------
Operating income (loss) ................ (1,265) 1,178 1,178
Interest expense, net .................. 3,134 8,891 956
Other expenses ......................... -- 28 28
---------- ---------- -----------
Net income (loss) before income
tax provision (benefit) and ex-
traordinary loss ...................... (4,399) (7,741) 193
Income tax provision (benefit) ......... (722) (1,419) 947
---------- ---------- -----------
Net income (loss) before extraordi-
nary loss ............................. (3,677) (6,322) (754)
Extraordinary loss, net of tax ......... -- -- --
---------- ---------- -----------
Net income (loss) ...................... $ (3,677) $ (6,322) $ (754)
========== ========== ===========
Net income (loss) available to com-
mon stockholders ...................... $ (4,087) $ (6,732) $ (1,164)
========== ========== ===========
PER SHARE AMOUNTS:
Basic .................................. $ (3.45) $ (1.28) $ (0.10)
========== ========== ===========
Diluted ................................ $ (3.45) $ (1.28) $ (0.10)
========== ========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic .................................. 1,186,239 5,254,607 11,254,607
Diluted ................................ 1,186,239 5,254,607 11,254,607
OTHER DATA:
EBITDA(1) .............................. $ (483) $ 9,223 $ 9,223
EBITDA margin(2) ....................... (2.0)% 4.9% 4.9%
Adjusted EBITDA(3) ..................... 1,010 10,716 10,716
Adjusted EBITDA margin(2) .............. 4.2% 5.7% 5.7%
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------
HISTORICAL
---------------------------- PRO FORMA,
PRO FORMA AS ADJUSTED
1997 1998 1998 1998
(UNAUDITED) (UNAUDITED) -------------- --------------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND CERTAIN OTHER
DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................... $ -- $ 17,786 $ 50,031 $ 50,031
Cost of goods sold ..................... -- 11,561 32,640 32,640
-------- ---------- ---------- ------------
Gross profit ........................... -- 6,225 17,391 17,391
Selling, general and administrative
expenses .............................. -- 5,052 13,404 13,404
Merger and acquisition costs ........... -- 176 176 176
Organizational costs ................... 1,131 -- -- --
Depreciation and amortization .......... -- 1,082 2,029 2,029
-------- ---------- ---------- ------------
Operating income (loss) ................ (1,131) (85) 1,782 1,782
Interest expense, net .................. -- 3,306 4,034 852
Other expenses ......................... -- -- (12) (12)
-------- ---------- ---------- ------------
Net income (loss) before income
tax provision (benefit) and ex-
traordinary loss ...................... (1,131) (3,391) (2,240) 942
Income tax provision (benefit) ......... (452) (212) 197 569
-------- ---------- ---------- ------------
Net income (loss) before extraordi-
nary loss ............................. (679) (3,179) (2,437) 373
Extraordinary loss, net of tax ......... -- 341 341 341
-------- ---------- ---------- ------------
Net income (loss) ...................... $ (679) $ (3,520) $ (2,778) $ 32
======== ========== ========== ============
Net income (loss) available to com-
mon stockholders ...................... $ (679) $ (3,784) $ (3,042) $ 32
======== ========== ========== ============
PER SHARE AMOUNTS:
Basic .................................. $ (1.82) $ (1.00) $ (0.53) $ --
======== ========== ========== ============
Diluted ................................ $ (1.82) $ (1.00) $ (0.53) $ --
======== ========== ========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic .................................. 373,043 3,777,686 5,738,525 11,876,867
Diluted ................................ 373,043 3,777,686 5,738,525 11,876,867
OTHER DATA:
EBITDA(1) .............................. $ (1,131) $ 997 $ 3,811 $ 3,811
EBITDA margin(2) ....................... -- 5.6 % 7.6 % 7.6%
Adjusted EBITDA(3) ..................... -- 1,173 3,987 3,987
Adjusted EBITDA margin(2) .............. -- 6.6 % 8.0 % 8.0%
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
HISTORICAL
DECEMBER 31, HISTORICAL PRO FORMA, AS
1997 (UNAUDITED) PRO FORMA ADJUSTED
-------------- ------------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ................... $ 3,084 $ 7,334 $ 22,211 $ 28,957
Total assets ...................... 42,192 86,956 160,227 167,123
Long-term debt(4) ................. 22,265 40,125 65,010 7,771
Put Warrants outstanding .......... 4,824 8,509 8,509 --
Redeemable preferred stock(5) ..... 545 1,054 11,054 --
Stockholders' equity (including
warrants of 68,509) .............. 2,193 18,004 43,735 127,283
</TABLE>
- ----------
(1) EBITDA represents operating income before depreciation and amortization.
Management believes that EBITDA provides useful information regarding a
company's ability to service debt. EBITDA should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
(2) EBITDA Margin is defined as EBITDA (as defined in footnote (1) above)
divided by revenues. Adjusted EBITDA Margin is defined as adjusted EBITDA
(as defined in footnote (3) below) divided by revenues. EBITDA Margin and
adjusted EBITDA Margin is not a measure of financial performance under
generally accepted accounting principles and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
30
<PAGE>
(3) Adjusted EBITDA is defined as EBITDA (as defined in footnote (1) above)
plus merger and acquisition costs and one time organizational costs.
Adjusted EBITDA does not purport to represent cash provided by operating
activities as reflected in the Company's consolidated statements of cash
flows, is not a measure of financial performance under generally accepted
accounting principles and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
(4) Long-term debt includes current and noncurrent debt obligations, the Seller
Notes and other liabilities.
(5) Redeemable preferred stock consists of Series A Preferred and Series C
Preferred. See "Description of Capital Stock."
31
<PAGE>
SELECTED FINANCIAL DATA (CONTINUED)
PREDECESSOR COMPANIES
KANDL DATA PRODUCTS, INC.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER EIGHT MONTHS
30, ENDED
--------------------------- MAY 31,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................... $ 5,757 $ 5,161 $ 3,639
======== ======== =======
Operating income ........... 236 (86) 74
======== ======== =======
Net income (loss) .......... 149 (33) 73
======== ======== =======
Per share amounts:
Basic .................... $ 149.28 $ (33.04) $ 72.78
======== ======== =======
Diluted .................. $ 149.28 $ (33.04) $ 72.78
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
MAY 31,
1995 1996 1997
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets ......... $1,589 $1,459 $1,413
====== ====== ======
</TABLE>
COMPUTER NETWORK SERVICES, INC.
<TABLE>
<CAPTION>
FIVE MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------- MAY 31,
1993 1994 1995 1996 1997
----------- ----------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................... $ 6,033 $ 7,995 $ 8,984 $ 10,199 $ 4,453
======= ======= ======== ======== ========
Operating income ........... 68 83 136 93 (16)
======= ======= ======== ======== ========
Net income (loss) .......... -- 59 143 41 (43)
======= ======= ======== ======== ========
PER SHARE AMOUNTS:
Basic ...................... $ (0.34) $ 59.83 $ 142.94 $ 41.27 $ (43.60)
======= ======= ======== ======== ========
Diluted .................... $ (0.34) $ 59.83 $ 142.94 $ 41.27 $ (43.60)
======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------- MAY 31,
1993 1994 1995 1996 1997
--------- --------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets ......... $1,188 $1,678 $1,908 $2,009 $1,958
====== ====== ====== ====== ======
</TABLE>
32
<PAGE>
SELECTED FINANCIAL DATA (CONTINUED)
A-COM, INC.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- --------------- ------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................... $ 6,412 $ 8,360 $ 9,947 $ 13,292 $ 20,078
========= ========= =========== ========= ===========
Operating income ........... (173) (330) (730) 116 (897)
========= ========= =========== ========= ===========
Net income (loss) .......... (219) (283) (902) (158) (1,092)
========= ========= =========== ========= ===========
PER SHARE AMOUNTS:
Basic ...................... $ (438.00) $ (566.00) $ (1,804.28) $ (316.69) $ (2,182.98)
========= ========= =========== ========= ===========
Diluted .................... $ (438.00) $ (566.00) $ (1,804.28) $ (316.69) $ (2,182.98)
========= ========= =========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets ......... $2,967 $3,516 $2,653 $4,045 $5,906
====== ====== ====== ====== ======
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in the following discussion and analysis that are
not historical facts, are "forward-looking statements" (as such term is defined
in Section 27A of the Securities Act and Section 21E of the Exchange Act ),
which can be identified by the use of forward-looking terminology such as
"believes," "expects," "intends," "plans," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
In addition, from time to time, the Company or its representatives have made or
may make forward-looking statements, orally or in writing. Furthermore, such
forward-looking statements may be included in, but are not limited to, various
filings made by the Company with the SEC, or press releases or oral statements
made by or with the approval of an authorized executive officer of the Company.
OVERVIEW
IT Partners is a growing IT solutions provider that delivers comprehensive,
value-added IT solutions to middle-market and Fortune 1000 companies throughout
the United States and in selected Western European countries.
In October 1996, Messrs. Klein and Blech, the Company's Chief Executive
Officer and President, respectively, formed Information Technology Partners,
Inc., a Maryland corporation ("Technology"). In May 1997, Messrs. Klein and
Blech formed IT Partners, Inc., a Delaware corporation ("Old IT Partners").
Pursuant to a tax-free reorganization (i) Old IT Partners acquired all of the
stock of CNS and KDP and (ii) Technology merged with and into Old IT Partners,
with Old IT Partners as the surviving corporation and CNS and KDP remaining as
wholly-owned subsidiaries of Old IT Partners. The merger of Technology with Old
IT Partners was treated as a common control merger as required by GAAP. This
treatment requires that the transaction be accounted for in a manner similar to
a pooling of interests. This accounting method requires retroactive
consolidation of the financial statements to include Technology and Old IT
Partners from the earliest period presented.
The Company was incorporated in Delaware and commenced operations in May
1997. In June 1997 (i) the Company acquired A-COM, a Partner Company, which
became a wholly-owned subsidiary of the Company and (ii) Old IT Partners merged
with and into A-COM.
Since May 1997, the Company has acquired eight Partner Companies, including
KDP (May 1997), CNS (May 1997), A-COM (June 1997), FSC (October 1997), Sequoia
(January 1998), Incline (February 1998), Call (May 1998) and Servinet (June
1998). Each of these acquisitions was accounted for in accordance with the
purchase method of accounting whereby the initial purchase price, net of
Post-Closing Adjustments, was allocated to the fair value of the assets
purchased and liabilities assumed. The excess of the purchase price over the
acquired net assets was allocated to identifiable intangible assets and
goodwill. Since the Company had no significant operations prior to May 1997,
KDP, CNS and A-COM (collectively, the "Predecessor Companies") are deemed to be
co-predecessors of the Company.
The Company generates revenues principally from (i) fees for services
rendered to clients (including consulting, systems and network implementation
services, software development and implementation services, IT support and
operational services, and telephony design and integration services) and (ii)
sales to clients of software and hardware. Services revenues are derived from IT
services, including hardware repair and maintenance, on-site network support,
systems consulting, software installation, Web site design, installation, design
and integration of network and communication systems and other value-added IT
services. Software revenues are primarily derived from the licensing of
software, peripherals and communication devices manufactured by third parties
and sold by the Company. Hardware revenues are primarily derived from the sale
of computer hardware.
Revenues from services are recognized as services are performed or ratably
if performed over a service contract period. Revenues for material projects with
a duration of three months or longer that require installation, system design
and integration, are recognized under the percentage-of-completion method as the
work progresses. Software and hardware sales with no related service component
are
34
<PAGE>
recognized at the time of shipment provided that the collectibility of the
receivable is probable. Most of the Company's contracts are billed on a time
and materials basis. However, the Company does have several fixed price
contracts.
Cost of goods sold includes purchases of services and materials directly,
inventory adjustments, cost of hardware and software resold to clients,
subcontracted labor or other outside services, direct labor and benefits and
other direct costs.
Selling, general and administrative costs primarily include salaries,
benefits and commissions payable to the Company's sales personnel, marketing and
advertising expenses and administrative costs. The Company expects to incur
additional selling, general and administrative expenses after the Offering,
reflecting the costs of being a public company along with increased marketing
activities and costs associated with potential acquisitions of IT services
companies. The additional expenses after the Offering are expected to include
travel, fees for professional services, including audit and legal fees, and
expenses related to the Company's Board.
Prior to their acquisition, the Predecessor Companies were managed as
independent private companies and, as such, the results of operations for such
periods reflect different corporate and tax structures which have influenced,
among other things, their historical levels of owners' compensation. The owners
and key employees of the Predecessor Companies have agreed to certain reductions
in their salaries, bonuses and benefits in connection with the Company's
acquisition of such companies.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data for IT
Partners on a historical basis and as a percentage of revenues for the fiscal
year ended December 31, 1997 and for the three months ended March 31, 1997 and
1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------- -------------------------------------------
1997 % 1997 % 1998 %
---------- ---------------- ------------ ---- ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues .................................... $ 23,781 100.0% -- -- $17,786 100.0%
Cost of goods sold .......................... 17,958 75.5 -- -- 11,561 65.0
Gross profit ................................ 5,823 24.5 -- -- 6,225 35.0
Selling, general and administrative ......... 5,175 21.8 -- -- 5,228 29.4
Organizational costs ........................ 1,131 4.8 $ 1,131 -- -- --
Depreciation and amortization ............... 782 3.3 -- -- 1,082 6.1
Income (loss) from operations ............... (1,265) (5.3) -- -- (85) (0.5)
Interest expense ............................ 3,134 13.2 -- -- 3,306 18.6
Income tax provision (benefit) .............. (722) (3.0) $ (452) -- $ (212) (1.2)
Extraordinary loss .......................... -- -- -- -- 341 1.9
Other Data:
EBITDA(1) ................................... $ (483) (2.0)(2) $ (1,131) -- $ 997 5.6(2)
Adjusted EBITDA(2) .......................... 1,010 4.2 (2) -- 1,173 6.6(2)
Merger and acquisition costs ................ 362 1.5 -- -- 176 1.0
</TABLE>
- ----------
(1) EBITDA represents income from operations before depreciation and
amortization. Management believes that EBITDA provides useful information
regarding a company's ability to service debt. EBITDA should not be
considered in isolation or as a substitute for measure of performance
prepared in accordance with GAAP.
(2) Adjusted EBITDA is defined as EBITDA (as defined in footnote (1) above)
plus merger and acquisition costs and one time organizational costs.
Management believes that Adjusted EBITDA provides useful information
regarding a company's ability to service debt. Adjusted EBITDA should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with GAAP.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
The results of operations for the three months ended March 31, 1997
represent the costs incurred by Technology prior to the Company's formation in
May 1997 and prior to the acquisition of any Partner Company. See "--Predecessor
Companies" for a discussion of the results of operations of CNS, KDP and A-COM
prior to their acquisition by the Company.
35
<PAGE>
Revenues. Revenues were $17.8 million for the three months ended March 31,
1998, resulting from the operations of CNS, KDP, A-COM, FSC, Sequoia and Incline
during that period.
Gross profit. Gross profit was $6.2 million for the three months ended
March 31, 1998, resulting from the operations of CNS, KDP, A-COM, FSC, Sequoia
and Incline during that period.
Selling, general and administrative. Selling, general and administrative
expenses were $5.2 million for the three months ended March 31, 1998, resulting
from the operations of CNS, KDP, A-COM, FSC, Sequoia and Incline during that
period.
Organizational costs. The Company incurred organizational costs of $1.1
million during the three months ended March 31, 1997. These costs represent
one-time start-up costs. All such costs were incurred by Technology and were
expensed as incurred. No future organizational expenses are expected to be
incurred.
Interest expense. Interest expense was $3.3 million for the three months
ended March 31, 1998. Interest expense included interest totaling $269,000 with
respect to (i) borrowings under the Credit Facility used to finance the
acquisitions of CNS, KDP, A-COM, FSC, Sequoia and Incline, (ii) working capital
and (iii) interest on Seller Notes. In addition, the Company recognized interest
expense of $2.4 million for accretion of interest on the Put Warrants related to
the put feature and amortization of deferred financing fees and debt discounts.
Interest expense is expected to increase significantly in 1998 until the
consummation of the Offering, primarily because of the accretion of additional
interest on the Put Warrants. Interest expense is expected to decrease
significantly following the Offering because (i) the accretion of interest on
the Put Warrants will terminate upon consummation of the Offering and (ii) a
portion of the net proceeds of the Offering will be used to repay the Seller
Notes and to repay borrowings under the Credit Facility. See "Use of Proceeds."
Extraordinary loss. Extraordinary loss of $341,000, net of tax, represents
the write-off of deferred financing fees net of income tax benefit in connection
with an amendment to the Credit Facility which was treated as a substantial
modification for financial accounting purposes in accordance with GAAP. This
treatment requires the write-off of any unamortized deferred financing fees at
the time of the modification.
Income tax benefit. During 1997, the Company realized an income tax benefit
resulting from the write-off of organizational costs. It is anticipated that the
income tax provision and effective tax rate will increase significantly
subsequent to the Offering because of the increase in pretax income resulting
primarily from the anticipated reduction of interest expense and the
non-deductibility of goodwill amortization from acquisitions consummated as
stock purchases.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The results of operations for 1997 include the costs incurred by Technology
prior to the Company's formation in May 1997 and prior to the acquisition of any
Partner Company. Technology was incorporated in October 1996 but did not incur
any costs or generate any revenues during 1996.
Revenues. Revenues were $23.8 million for the year ended December 31, 1997,
resulting from the operations of CNS, KDP, A-COM and FSC during such period.
Gross profit. Gross profit was $5.8 million for the year ended December 31,
1997, resulting from the operations of CNS, KDP, A-COM and FSC during such
period.
Selling, general and administrative. Selling, general and administrative
expenses were $5.2 million for the year ended December 31, 1997, resulting from
the operations of CNS, KDP, A-COM and FSC during such period.
Organizational costs. The Company incurred organizational costs of $1.1
million during the year ended December 31, 1997. These costs represent one-time
start-up costs. All such costs were incurred by Technology and were expensed as
incurred. No future organizational expenses are expected to be incurred.
36
<PAGE>
Interest expense. Interest expense was $3.1 million for the year ended
December 31, 1997. Interest expense included interest totaling $937,000 with
respect to: (i) borrowings under the Credit Facility used to finance the
acquisitions of CNS, KDP, A-COM, FSC, Sequoia and Incline; (ii) working capital;
and (iii) interest on Seller Notes. In addition, the Company recognized interest
expense of $2.3 million for accretion of interest on the Put Warrants related to
the put feature and amortization of deferred financing fees and debt discounts.
Interest expense is expected to increase significantly in 1998 until the
consummation of the Offering primarily because of the accretion of additional
interest on the Put Warrants. Interest expense is expected to decrease
significantly following the Offering because (i) the accretion of interest on
the Put Warrants will terminate upon consummation of the Offering and (ii) a
portion of the net proceeds of the Offering will be used to repay the Seller
Notes and to repay borrowings under the Credit Facility. See "Use of Proceeds."
Income tax benefit. During 1997, the Company realized an income tax benefit
resulting from the write-off of organizational costs. It is anticipated that the
income tax provision and effective tax rate will increase significantly
subsequent to the Offering because of the increase in pretax income resulting
primarily from the anticipated reduction of interest expense and the
non-deductibility of goodwill amortization from acquisitions consummated as
stock purchases.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash of approximately $1.1 million and
working capital of approximately $7.3 million. The Company's capitalization,
defined as the sum of cash and cash equivalents, long term debt, mezzanine
equity and stockholders' equity, was approximately $66.3 million at March 31,
1998.
The Company has issued 354,170 shares of Series A Preferred and related Put
Warrants exercisable for 371,408 shares of Common Stock, for an aggregate
consideration of approximately $3.5 million. The Company has issued 739,184
shares of Series B Preferred for aggregate consideration of approximately $6.4
million. The Company has issued 1,000 shares of Series C Preferred for aggregate
consideration of approximately $10.0 million.
On May 30, 1997 the Company entered into the Credit Facility, which was
subsequently amended and restated, on March 31, 1998, providing for a revolving
line of credit in the aggregate principal amount of up to $70.0 million to
facilitate the Company's acquisition strategy. The Credit Facility matures on
November 30, 2001. At March 31, 1998, $31.4 million of the Credit Facility had
been drawn down. The aggregate amount of the Credit Facility available to the
Company at any given time is equal to varying multiples applied to the Company's
EBITDA for the most recent 12-month period, adjusted for certain nonrecurring
costs. Borrowings under the Credit Facility bear interest at either (i) the base
rate, which is the higher of the prime rate plus 2% or the federal funds rate
plus 2.5% or (ii) LIBOR plus 4%. Under the terms of the Credit Facility,
concurrently with the closing of a registered offering of stock of the Company,
the Company must prepay the loans outstanding under the Credit Facility in an
amount equal to (i) the net cash proceeds received by the Company from such
registered offering, less (ii) prepayments of Seller Notes, which prepayments
may not exceed $10.5 million unless the entire borrowings under the Credit
Facility is repaid in full. The Company has issued 327,302 related Put Warrants
to the lenders under the Credit Facility.
The Company's indebtedness outstanding under the Credit Facility is secured
by a first priority lien on all of the Company's property (including the stock
of the Partner Companies and intercompany loans). Each Partner Company has
guaranteed the Company's obligations under the Credit Facility and such
guarantees are secured by second priority liens on all property of each such
Partner Company. The Company is subject to various affirmative covenants
(including covenants regarding financial reporting, lockbox or blocked account
arrangements, insurance maintenance and compliance with laws), negative
covenants (including limitations on liens, debt incurrence, asset sales,
acquisitions, fundamental changes, issuance of equity, affiliate transactions
and prepayments of Seller Notes) and financial covenants (such as, net worth,
leverage ratio, senior debt leverage ratio and interest coverage ratio
covenants).
For the three-month period ended March 31, 1998, net cash used in operating
activities was $4.0 million. Net cash used in investing activities was $13.8
million, which consisted primarily of cash paid for
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<PAGE>
acquisitions. Net cash provided by financing activities was $17.5 million, which
consisted primarily of proceeds from the Credit Facility.
The Company has entered into agreements or letters of intent to acquire ten
Acquisition Candidates. The aggregate consideration IT Partners has agreed to
pay to acquire the Acquisition Candidates (exclusive of any post-closing
adjustments that may be negotiated) consists of: (i) approximately $18.7 million
in cash; (ii) approximately $19.9 million in Common Stock, valued at the fair
market value, as approved by the Board; and (iii) notes to be issued by the
Company in the aggregate principal amount of approximately $6.2 million. All of
these acquisitions are expected to be consummated during 1998. The Company
anticipates that it will finance the cash portion of the purchase prices for
such acquisitions with additional borrowings. Additionally, five of the Partner
Companies are, and the Company expects that all of the Acquisition Candidates
will be, subject to post-closing adjustments, payable in additional cash, shares
of Common Stock and/or notes to be issued by the Company, based on the
individual financial performance of such companies for the next 12-month period
(the "NTM Period"). The payment of any such post-closing adjustment will be due
within 90 days after the end of the NTM Period. If each of the Partner Companies
and Acquisition Candidates, subject to post-closing adjustments meets their
financial performance goals for the NTM Period, the Company will be required to
pay additional cash consideration of $450,000 and $3.8 million in 1998 and 1999,
respectively. The Company anticipates that it will finance the payment of any
such post-closing adjustments through cash from operations and additional bank
financing.
A-COM and CNS have inventory financing agreements in place with Deutsche
Financial Services Corporation (the "Floor Financing"), providing for inventory
financing. As of March 31, 1998, $46,744 was outstanding under the Floor
Financing. Through March 31, 1998 the Company was in technical default of
certain financial covenants under the Floor Financing. The Company has obtained
a waiver for all such defaults.
IT Partners' anticipated capital expenditures budget for the next 12 months
is approximately $3.0 million. This amount is primarily related to
infrastructure improvements, including the purchase of computer equipment and
leasehold improvements. This amount will vary depending upon the timing and
number of acquisitions.
The Company anticipates that its current cash on hand, cash flow from
operations, the net proceeds from the Offering and borrowings under the Credit
Facility will be sufficient to meet the Company's liquidity requirements for its
operations through the end of fiscal 1999. However, because the Company intends
to pursue acquisitions, which are expected to be funded through a combination of
cash, notes and shares of Common Stock, there can be no assurance that
additional sources of financing, including the issuance of additional debt and
equity securities, will not be required during the next 12 months or thereafter.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced and may in the future continue to experience
fluctuations in its quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary include the number of active
client projects, the requirements of client projects, the termination of major
client projects, the loss of major clients, the timing of new client
engagements, and the timing of personnel costs increases. The Company is subject
to seasonality fluctuations during any fiscal year. The second and third quarter
of each year generally produce higher revenues and EBITDA results. Due to all of
the foregoing factors, there can be no assurance that the Company's results of
operations will not be below the expectations of investors for any given period.
See "Risk Factors--Fluctuations in Quarterly Operating Results."
INFLATION
The Company does not believe that inflation has had a material impact on
its results of operations for the three months ended March 31, 1998 and 1997 or
the years ended December 31, 1996 and 1997.
38
<PAGE>
NEW ACCOUNTING PRONOUNCEMENT
Reporting Comprehensive Income. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company intends to adopt SFAS
No. 130 in the fiscal year ended December 31, 1998.
YEAR 2000 ISSUE
Many existing computer programs were designed and developed using two
digits rather than four to define the applicable year, resulting in
date-sensitive software having the potential to recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. In anticipation of the Year 2000,
management has developed a plan to review software that was internally developed
or externally purchased or licensed, and also to review with its key vendors and
service providers their software, for compliance with Year 2000 processing
requirements. The Company's analysis of its existing systems indicates that a
majority are Year 2000 compliant or will be by the end of 1998. The Company is
primarily relying on its vendors to implement Year 2000 compliance with respect
to the third-party software sold or used by the Company. To date, the cost
associated with Year 2000 readiness has been immaterial. The Company believes
that existing data backup procedures will ensure that all financial and
operational data will be retained in a safe off-site location prior to 12:00
a.m. on January 1, 2000. The Company is implementing the following procedures in
anticipation of Year 2000: (i) analyzing and contacting its vendors to ascertain
Year 2000 readiness; (ii) establishing multiple vendor relationships for each
product line to improve availability of Year 2000 ready products; (iii)
contacting customers regarding the Year 2000 readiness of the components of the
systems and products provided by the Company and reproduce invoices as needed;
(iv) establishing internal manual systems to handle certain operations such as
accounts receivable and accounts payable; and (v) analyzing power sources to
determine their Year 2000 readiness. The Company has reviewed the potential
impact of the Year 2000 issue on its business, operations and financial
condition and has concluded that it will not be material. See "Risk
Factors--Risk of Loss from Possible Failure to Achieve Year 2000 Compliance."
PREDECESSOR COMPANIES
CNS -- RESULTS OF OPERATIONS
CNS is a network integrator and support company that provides systems
integration and technical repair.
39
<PAGE>
The following table sets forth certain selected financial data for CNS on
a historical basis and as a percentage of revenues for the years ended December
31, 1995 and 1996 and the five months ended May 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, FIVE MONTHS ENDED
-------------------------------------------------- -----------------------
1995 1996 MAY 31, 1997
----------------------- ------------------------ -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues .................................... $8,984 100.0% $10,199 100.0% $4,453 100.0%
Cost of sales ............................... 7,063 78.6 8,210 80.5 3,430 77.0
Gross profit ................................ 1,921 21.4 1,989 19.5 1,023 23.0
Selling, general and administrative ......... 1,753 19.5 1,860 18.2 1,030 23.1
Income from operations ...................... 136 1.5 93 0.9 (16) ( 0.4)
</TABLE>
CNS -- FIVE MONTHS ENDED MAY 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The five-month period presented represents the results of operations of CNS
during 1997 prior to the acquisition of CNS by the Company. The remainder of
CNS's 1997 results are included in the Company's consolidated 1997 results
presented elsewhere in this Prospectus.
Revenues. Revenues were $4.5 million for the five months ended May 31,
1997. The Company recorded $7.3 million in revenues for CNS for the seven-month
period ended December 31, 1997.
Gross profit. Gross profit was $1.0 million for the five months ended May
31, 1997. Gross profit margin was 23.0% for the five months ended May 31, 1997.
During 1997, CNS increased the percentage of sales attributable to services with
higher margins, as compared to lower margin technical repair services and
product sales. The Company recorded $1.3 million in gross profit for CNS for the
seven-month period ended December 31, 1997.
Selling, general and administrative. Selling, general and administrative
expenses were $1.0 million for the five months ended May 31, 1997. The Company
recorded $900,000 in selling, general and administrative expenses for CNS for
the seven months ended December 31, 1997.
CNS -- YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues increased 13.5% to $10.2 million for the year ended
December 31, 1996, from $9.0 million for the year ended December 31, 1995. This
increase resulted from contracts with new customers and increased marketing
efforts to provide more network integration services. Initially, the network
integration business was more heavily weighted to hardware sales to support
customer networks.
Gross profit. Gross profit increased 3.5% to $2.0 million for the year
ended December 31, 1996, from $1.9 million for the year ended December 31, 1995.
Gross profit margin decreased to 19.5% during the year ended December 31, 1996,
from 21.4% during the year ended December 31, 1995. This decrease was primarily
attributable to the increase in hardware sales related to network integration
services.
Selling, general and administrative. Selling, general and administrative
expense increased 6.1% to $1.9 million for the year ended December 31, 1996,
from $1.8 million for the year ended December 31, 1995. This increase was
primarily due to the hiring of additional sales personnel and the increase in
sales.
KDP -- RESULTS OF OPERATIONS
KDP is a network integrator and support company that provides a full range
of system integration and communication services.
40
<PAGE>
The following table sets forth certain selected financial data for KDP on a
historical basis and as a percentage of revenue for the years ended September
30, 1995 and 1996 and the five months ended May 31, 1997:
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED MAY
YEAR ENDED SEPTEMBER 30, 31,
------------------------------------------------- -----------------------
1995 1996 1997
----------------------- ----------------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................... $5,757 100.0% $5,161 100.0% $3,639 100.0%
Cost of sales .......................... 4,308 74.8 4,331 83.9 2,529 69.5
Gross profit ........................... 1,449 25.2 830 16.1 1,110 30.5
Selling, general and administrative..... 1,189 20.7 883 17.1 980 26.9
Income from operations ................. 236 4.1 (86) ( 1.7) 74 2.0
</TABLE>
KDP -- EIGHT MONTHS ENDED MAY 31, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
The eight-month period presented represents the results of operations of
KDP during 1997 prior to the acquisition of KDP by the Company. The remainder of
KDP's 1997 results are included in the Company's consolidated 1997 results
presented elsewhere in this Prospectus.
Revenues. Revenues were $3.6 million for the eight months ended May 31,
1997.
Gross profit. Gross profit was $1.1 million for the eight months ended May
31, 1997. Gross profit margin was 30.5% for the eight months ended May 31, 1997.
Selling, general and administrative. Selling, general and administrative
expenses were $1.0 million for the eight months ended May 31, 1997.
KDP -- YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Revenues. Revenues decreased 10.4% to $5.2 million for the year ended
September 30, 1996, from $5.8 million for the year ended September 30, 1995.
This decrease was primarily attributable to a decrease in hardware purchases in
1996 by a customer that represented a significant portion of 1995 revenues. This
decrease was also attributable to a decrease in pricing resulting from increased
competition.
Gross profit. Gross profit decreased 42.7% to $830,000 for the year ended
September 30, 1996, from $1.4 million for the year ended September 30, 1995.
Gross profit margin decreased to 16.1% for the year ended September 30, 1996
from 25.2% for the year ended September 30, 1995. This decrease was primarily
attributable to more competitive pricing in the industry, resulting in lower
prices and margins.
Selling, general and administrative. Selling, general and administrative
expenses decreased 25.7% to $883,000 for the year ended September 30, 1996, from
$1.2 million for the year ended September 30, 1995. This decrease was
attributable to efforts by KDP to closely monitor its costs, implement cost
containment strategies and improve the efficiency of its operations.
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<PAGE>
A-COM -- RESULTS OF OPERATIONS
A-Com is a systems integrator that provides customized integrated system
solutions to manage information flow and maintain a safe and secure environment.
The following table sets forth certain selected financial data for A-COM on
a historical basis and as a percentage of revenues and for the fiscal years
ended June 30, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------------------------------
1995 1995 1997
----------------------- ------------------------ -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues .................................... $9,947 100.0% $13,292 100.0% $ 20,078 100.0%
Cost of sales ............................... 7,711 77.5 10,018 75.4 16,196 80.7
Gross profit ................................ 2,236 22.5 3,274 24.6 3,882 19.3
Selling, general and administrative ......... 1,244 12.5 1,595 12.0 2,253 11.2
Income (loss) from operations ............... (730) ( 7.3) 116 0.9 (897) ( 4.5)
</TABLE>
A-COM -- YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
Revenues. Revenues increased 51.1% to $20.1 million for the year ended June
30, 1997, from $13.3 million for the year ended June 30, 1996. This increase was
primarily attributable to increased sales to existing customers and sales to new
customers. To a lesser extent, the increase was also attributable to the
introduction of voice communication products.
Gross profit. Gross profit increased 18.6% to $3.9 million for the year
ended June 30, 1997, from $3.3 million for the year ended June 30, 1996. Gross
profit margin decreased to 19.3% for the year ended June 30, 1997, from 24.6%
for the year ended June 30, 1996. This decrease in gross profit margin resulted
primarily from an increase in sales of lower margin products.
Selling, general and administrative. Selling, general and administrative
expenses increased 41.3% to $2.3 million for the year ended June 30, 1997, from
$1.6 million for the year ended June 30, 1996. This increase was attributable to
the increase in sales. Selling, general and administrative expenses, as a
percentage of revenues, remained constant.
A-COM -- YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
Revenues. Revenues increased 33.6% to $13.3 million for the year ended June
30, 1996 from $9.9 million for the year ended June 30, 1995. This increase was
primarily attributable to increased sales to existing customers and sales to new
customers.
Gross profit. Gross profit increased 46.4% to $3.3 million for the year
ended June 30, 1996, from $2.2 million for the year ended June 30, 1995. Gross
profit margin increased to 24.6% for the year ended June 30, 1996, from 22.5%
for the year ended June 30, 1995. This increase was primarily attributable to an
increase in sales of higher margin services.
Selling, general and administrative. Selling, general and administrative
expenses increased 28.2% to $1.6 million for the year ended June 30, 1996, from
$1.2 million for the year ended June 30, 1995. Selling, general and
administrative expenses, as a percentage of revenues, remained relatively
constant between years.
42
<PAGE>
BUSINESS
OVERVIEW
IT Partners is a growing IT solutions provider that delivers comprehensive,
value-added IT solutions to middle-market (i.e., businesses with revenues of $25
million to $500 million) and Fortune 1000 companies throughout the United States
and in selected Western European countries. The Company provides specialized IT
expertise in consulting and planning, systems and network integration, software
development and integration, support and operations, Internet and intranet
solutions, and telephony and electronics integration. Through its Partner
Companies, the Company offers fully integrated and coordinated IT solution
packages that are focused on the strategic business objectives of its clients.
As of June 30, 1998, the Company had 735 employees, including 500 IT
professionals, providing services to more than 2,000 clients across a broad
spectrum of industries, including manufacturing, healthcare, education,
aviation, professional services and retail.
The Company's coordinated decentralized operating model ("CDM") integrates
the skills, experience, practices and resources of its Partner Companies, while
preserving their ability to manage and grow their respective businesses. Through
CDM, IT Partners provides its Partner Companies with business development tools
that are designed to improve the Company's internal growth. The Company works
with each Partner Company to develop a sales and marketing plan and to integrate
its services and products with those of other Partner Companies. The Company
also facilitates the exchange of ideas and information about marketing programs,
cross-selling opportunities and employee training and retention at monthly
operations reviews and quarterly meetings. In addition, the Company has
established several advisory councils comprised of the senior management of each
Partner Company and IT Partners to exchange ideas and provide guidance on
financial, marketing, services and technical issues.
The Company believes that an important factor in its future success is its
ability to continue to acquire well-managed local systems integrators, regional
business application providers and national specialty IT service companies. To
date, the Company has acquired eight Partner Companies, including Sequoia, the
1998 Microsoft "Worldwide Partner of the Year," and has entered into agreements
or letters of intent to acquire an additional ten companies, including KiZAN,
the 1995 Microsoft "Outstanding Solution Provider Partner of the Year" (today
this award is known as the "Worldwide Partner of the Year") The Company believes
that CDM and the Company's reputation will continue to attract local, regional
and national IT companies that represent the best of their industry niches. As
part of its acquisition strategy, the Company created and maintains an
extensive, updated database from which it identifies acquisition candidates
based on a quantitative methodology. The Company may also pursue acquisition
opportunities identified by its Partner Companies and by the Company's financial
and other advisors. The Company's quantitative assessment of an acquisition
candidate is based on a system that evaluates numerous factors, including an
acquisition candidate's business focus, client concentration, vendor
authorizations, historical financial performance, number of employees and
technical certifications. The Company's valuation methodology is based upon
historical earnings, projected earnings growth, margin trends, opportunities for
recurring revenues and future infrastructure needs.
MARKET OVERVIEW
Expansion of the Market
The worldwide market for IT products and services has expanded
significantly in recent years, driven by the trends toward open systems, greater
affordability and improvements in network operating performance. According to
IDC, the worldwide market for IT services was $282 billion in 1997 and will
increase to $403 billion by 2001, representing a compounded annual growth rate
of approximately 9.4%.
The Company believes that the average growth rate for IT spending is
highest for those middle-market companies with 100 to 1,000 employees. Many
middle-market companies began investing in technology infrastructure in the
1980s, primarily to improve the efficiency of their business processes. As
technology has evolved from centralized computing systems (mainframes and minis)
to client/server environments with departmental servers and powerful desktops,
businesses have made incremental in-
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<PAGE>
vestments in infrastructure in order to realize productivity and processing
advantages. Middle-market companies are taking advantage of improvements in the
price and performance of software and hardware to achieve not only efficiency
gains, but also strategic business goals.
The Company believes the following key factors underlie the growing demand
for IT services and products within the middle market:
Technology Return on Investment. As technology has become more broadly
applicable throughout all aspects of a business, technology solutions have
emerged as a competitive tool and a critical foundation for business strategies.
Accordingly, strategic business considerations are frequently the most critical
factor in determining the nature and level of IT investment.
Increased Demand for Network Applications. Competition is compelling
middle-market businesses to improve efficiency and productivity.
Technology-related solutions and, in particular, networked applications, have
become a critical component of this strategy. Businesses are increasingly
demanding IT solutions that facilitate internal communication (i.e., intranets)
and link companies with their clients and suppliers (i.e., extranets). The
availability of the Internet and its open communication standards has also
increased the demand for networked applications.
Declining Software and Hardware Prices. Middle-market companies are taking
advantage of declining prices and improving performance of software and hardware
to implement more comprehensive and complete IT solutions. High-end database
companies and enterprise resource vendors, such as Oracle, Baan Company N.V.
("BAAN"), SAP AG ("SAP") and PeopleSoft, Inc. ("PeopleSoft") continue to develop
and introduce products specifically tailored for middle-market businesses.
Outsourcing. Many middle-market businesses are outsourcing their IT
functions because of the increasing complexity of technology and the rapid rate
of technological innovation. Many middle-market businesses lack the resources to
maintain an in-house IT capability that can keep pace with constantly evolving
and increasingly complex IT requirements. Other businesses and IT departments
within Fortune 1000 businesses use solutions integrators and applications
developers to create custom solutions for their business needs.
Growth Opportunities for Solutions Integrators
The Company believes that the substantial growth in the solutions
integration market has been driven by the increasing demand in the middle market
for IT services and products. The Company believes that traditional resellers
and other IT providers have found it increasingly difficult to provide
comprehensive IT solutions to the middle market. As a result, solutions
integrators have emerged as a new class of IT service providers, possessing the
technical, marketing and financial resources required to deliver more
comprehensive and complex IT solutions.
The Company believes that the IT services industry is highly fragmented,
with a small number of large, national services providers and a large number of
small and medium-sized service providers. Large IT service providers are scaled
and structured to address the requirements of large organizations with
substantial IT requirements, whereas smaller IT services firms provide
specialized services of limited scope. Consequently, middle-market businesses
typically rely on multiple, often specialized, providers to help implement and
manage their IT systems. The Company believes middle-market reliance on multiple
service providers creates complex, inefficient vendor relationships and that
these clients are increasingly seeking a single solutions integrator that can
meet their evolving IT needs.
THE IT PARTNERS SOLUTION
The Company focuses on the delivery of comprehensive, integrated IT
solutions that are tailored to address the strategic business needs of its
clients. The Company provides, or oversees and coordinates the provision of, the
services, software and hardware components of a specific "solution package." The
Company's solutions integrator approach draws upon the following key competitive
strengths:
44
<PAGE>
Responsiveness Through Strong Local Presence. The Partner Companies'
established local reputations and presence position them to identify and address
the specific needs of middle-market clients. Clients are assigned a
locally-based project manager who is responsible for overseeing the Company's
relationship with that client. The Company believes that the strong local
presence of its Partner Companies and direct "one-on-one" approach cultivate
strong, long-term client relationships.
Capacity to Grow with Clients' Needs. The Company cross-sells value-added
business applications and specialized IT services offered by its regional and
national Partner Companies. The combined expertise of the Company's regional and
national Partner Companies addresses the increasing demand among middle-market
businesses for additional services from a single solution IT services provider.
Coordinated Decentralized Operating Model. The Company employs CDM to
develop and implement consistent service delivery standards and procedures
throughout the Company. The Company believes that CDM is a competitive advantage
because it enables the Company to draw upon and coordinate the collective
expertise of the Partner Companies' personnel. By employing CDM, the Partner
Companies retain the flexibility and autonomy to manage and grow their
respective businesses, while benefitting from the best business practices and
resources of the other Partner Companies.
Experience and Technical Expertise. The Company's Partner Companies are
managed by, and employ, skilled IT project managers, engineers, consultants and
other technical personnel. The Company's employees have significant experience
in a wide range of technical disciplines, including business process
reengineering, project management, network design and integration, client/server
development, Internet and intranet development, and computer telephony
integration ("CTI"). The depth and breadth of technical skills of the Company's
employees is critical in delivering comprehensive IT solutions. As of June 30,
1998, the Company employed 500 technical personnel.
CORE COMPETENCIES
IT Partners' ability to leverage the collective expertise of the Partner
Companies and to provide comprehensive IT solutions to meet its clients
strategic business requirements are enabled by several key core competencies,
including:
o Project Management. Dedicated project managers are assigned to all
major projects from pre-sales engineering, solution design,
development, and implementation through acceptance testing, training
and ongoing support.
o Quality Assurance. The Company has established and monitors key
quality metrics that are designed to ensure consistent, sustainable
quality throughout the Company. Partner Companies work with their
clients to define the applicable performance parameters, consistent
with appropriate industry standards, for each project.
o Technical Expertise. With over 500 technical personnel on staff, the
Company and its clients benefit from a depth and breadth of systems
and software engineering knowledge. Through ongoing recruitment and
training, the Company maintains a high level of expertise in the
analysis, design, installation and support of diverse systems and
technologies. These include Windows NT, Microsoft BackOffice, NetWare,
Unix, Winframe, client/server architectures, LAN/ WAN infrastructures,
Internet connectivity, Internet and intranet development and hosting,
E-commerce, telephony and CTI, and custom application development.
o Vertical Market Expertise. Through its Partner Companies, the Company
serves a wide range of clients in a variety of industries. As a result
the Company has developed considerable understanding and expertise in
a number of vertical markets including manufacturing, health care,
education, professional services and retail.
45
<PAGE>
GROWTH STRATEGY
The Company's growth strategy emphasizes the following elements:
Capitalize on Internal Growth Opportunities. For the 12 months ended
December 31, 1997, the Partner Companies had pro forma combined revenues of
approximately $106.0 million. For the three months ended March 31, 1998, the
Partner Companies had pro forma combined revenues of approximately $27.4
million. The Company plans to leverage its client base by providing additional
services to address its clients' increasing demands for IT services. The Company
believes that providing solution packages to address specific business problems
will increase its internal growth and profitability. The Company is seeking to
improve profitability by increasing the percentage of revenues that the Partner
Companies derive from IT services as compared to products by applying the
solutions integrator model and developing solution packages. The Company
believes that growing the services segment of its business will increase the
sale of higher margin services, increase recurring revenues and provide
additional opportunities for revenue growth.
Continue to Pursue Strategic Acquisitions. The Company plans to continue to
pursue strategic acquisitions. The Company seeks to acquire local systems
integrators, regional business application providers and national specialty
service companies that will provide access to new markets, broaden the Company's
current service offerings and expand the Company's vertical coverage in existing
markets. The Company targets companies that have a history of growth and
profitability, strong management and a reputation for providing quality
services. The Company's acquisition methodology evaluates candidates based on
their business focus, client concentration, vendor authorizations, historical
financial performance, number of employees and technical certifications. The
Company believes that CDM and the Company's reputation will continue to attract
other local, regional and national IT companies that represent the best of their
industry niches.
Attract, Train, Motivate and Retain Highly Skilled Employees. The Company
seeks to attract, train, motivate and retain highly skilled employees. An
outside vendor provides the Company's technical staff with unlimited access to
over 120 certification-oriented, computer training programs. In addition,
Microsoft and other vendors provide training support for the Company's
personnel. The Company has retained a nationally recognized human resources and
benefits consulting company which is developing a national recruitment and
employee retention program. The Company provides competitive compensation,
incentive programs and benefits, including stock options, to its employees. The
Company believes that these and other initiatives will continue to enable the
Company to attract and retain highly skilled personnel.
Capitalize on Cross-selling Opportunities. The Company believes that its
success in cross-selling services is attributable to several factors, including
CDM, the Company's solution packaging approach and the marketing of its services
and products to the same decision-makers within its client organizations. The
Company seeks to increase its revenues from existing clients by developing and
offering comprehensive IT solution packages that draw upon the collective
expertise of the Partner Companies. The Company will also continue to expand and
coordinate the local, regional and national sales and marketing efforts of the
Partner Companies. IT Partners is also implementing incentive compensation plans
among the Partner Companies on a case-by-case basis.
Expand Relationships With Leading Vendors. The Company and the Partner
Companies have developed strong relationships with leading vendors, such as
Microsoft, Oracle, Great Plains and Solomon. The Company believes that leading
vendors prefer channel partners with technical expertise, business acumen and
advanced project management capabilities in order to ensure the successful
delivery of comprehensive, integrated IT business solutions. These relationships
can result in direct client referrals and enhanced industry recognition. The
Company will continue to use these relationships to broaden its client base,
increase its competitiveness and maintain its access to the most current
information and training. The Company plans to continue to cultivate these
relationships, form alliances with other leading vendors and expand its
relationships with other clients in order to expand and increase such
opportunities.
46
<PAGE>
Maintain Efficient Operations and Low Cost Base. The Company seeks to
consolidate certain administrative and support functions on a regional and
national basis. The Company also expects to purchase insurance, employee
benefits, legal, financial and accounting services on a centralized basis. The
Company believes that this centralization will free its Partner Companies to
focus on increasing sales and project execution.
SERVICES
As a solutions integrator, the Company offers a comprehensive range of IT
services and products. The Company's technical professionals provide strategic
planning and management consulting services in a variety of business areas. IT
Partners also designs, develops and implements business applications and
provides network and system integration services. The Company's software
capabilities include the implementation of packaged business applications such
as MRP/ERP, finance and accounting, E-commerce and sales force automation
solutions. The Company also designs, develops, and maintains custom software
solutions on a variety of platforms (e.g., NT, UNIX and AIX) utilizing industry
standard development tools (e.g., Visual Basic, C++ and PowerBuilder) and a
variety of database engines (e.g., SQL, Oracle and Informix). In response to the
increasing importance of the Internet, the Company provides comprehensive
Internet and intranet design, development and implementation services. Other
services provided on an outsourcing basis include project management, data
center operations, network administration, staff supplementation and help desk
support. In addition, IT Partners offers a full range of telephony and CTI
solutions such as call center design, PBX installation, voice over IP and
interactive voice response ("IVR"). The Company's services include the
following:
<TABLE>
<CAPTION>
CONSULTING AND PLANNING SYSTEMS AND NETWORK INTEGRATION
- ----------------------------------------- ---------------------------------------------------
<S> <C>
o Technology infrastructure design o Client/server development and integration
o Systems architecture development o LAN/WAN design and implementation
o Year 2000 planning and consulting o Project management and resource planning
o Business process reengineering o Software and hardware selection
o IT needs analysis and design o Network configuration, testing and installation
o Financial systems analysis and design o Performance benchmarking
o Internet analysis and design o Diagnostic testing
o Prototype development
TELEPHONE AND ELECTRONICS INTEGRATION SOLUTIONS
---------------------------------------------------
INTERNET AND INTRANET SOLUTIONS o Telecommunications and voice mail integration
- ----------------------------------------- o Security access and monitoring
o Web site development o Fire systems installation and monitoring
o E-commerce o Cabling and installation
o Corporate intranet development
SUPPORT AND OPERATIONS
---------------------------------------------------
SOFTWARE DEVELOPMENT AND INTEGRATION o Outsourcing services and procurement
- ----------------------------------------- o IT staff supplementation
o Custom programming o Help desk
o MRP/ERP applications o Project management
o Financial applications o Repair and diagnostic
o Sales force automation o Remote network management
o Database/user interfaces o Data assurance
o Monitors and flat panel repairs
o Audio and video equipment maintenance and repair
</TABLE>
47
<PAGE>
SOLUTION PACKAGES
Solution packaging consists of a specific, integrated combination of
services, software and hardware designed to address a client's strategic
business objective. The Company intends to use solution packages to facilitate
the transfer of proven best practices and successful product offerings between
Partner Companies. The Company has adopted a standardized framework for
developing solution packages that encompasses the following elements: (i) value
proposition; (ii) standard operating procedures; (iii) implementation plan; and
(iv) marketing and sales strategy.
At present, the Company offers help desk, network audit, outsourced
operations and remote LAN/ WAN management solution packages. The Company is also
in the process of developing solution packages to address a variety of other
business needs in areas such as total cost of ownership, user productivity,
customer service, network security, E-commerce and messaging and communications.
The Company believes that the marketing of solution packages will result in
higher operating margins, improved sales closing ratios and reduced financial
risk and liability. Solution packages are also expected to stimulate
cross-selling as they incorporate the capabilities of various Partner Companies
and ensure the quality and consistency of services offered by each of the
Partner Companies.
IT PARTNERS "SOLUTION PACKAGE" MODEL
------------------------------------
[GRAPHIC OMITTED]
* Proposed solution packages under development.
48
<PAGE>
ACQUISITION METHODOLOGY
The Company believes that an important factor in its future success is its
ability to continue to acquire well-managed local systems integrators, regional
business application providers and national specialty IT services companies. The
Company seeks IT companies whose services and expertise: (i) complement those
offered by the Partner Companies; (ii) increase penetration into existing
geographic markets; and (iii) provide access to new geographic markets.
The Company believes that many attractive acquisition candidates are
available due to: (i) the highly fragmented nature of the IT consulting
business; (ii) the need for capital to expand existing IT consulting businesses;
and (iii) the wide geographic scope and the evolving purchasing and outsourcing
patterns of the Company's present and target clients.
As part of its acquisition strategy, the Company has developed and
maintains an updated database from which it identifies acquisition candidates
based on a quantitative methodology. The Company may also pursue qualified
acquisition opportunities identified by the Partner Companies and by the
Company's financial and other advisors. The quantitative assessment is based on
a qualification system that evaluates factors such as an acquisition candidate's
business focus, client concentration, vendor authorizations, historical
financial performance, number of employees and technical certifications. The
Company's valuation methodology is based upon historical earnings, projected
earnings growth, margin trends, opportunities for recurring revenues and future
infrastructure needs.
The Company's due diligence process includes an audit and a quantitative
review of the acquisition candidate's infrastructure, operations, products and
services, marketing activities and existing client base. Generally, the
Company's acquisition agreements are designed to ensure continued successful
performance of Partner Companies through the use of post-closing adjustments.
These agreements typically require the Partner Companies to achieve 20% growth
in EBITDA over the last 12-month period. The Company also intends to require the
principals and key employees of an Acquisition Candidate to execute employment
and non-competition agreements with initial terms ranging from two to four
years.
OPERATIONS
CDM leverages the local experience and relationships of each of the Partner
Companies while drawing on the benefits of shared best practices and the
oversight of central management. A primary component of CDM is the "track
system." In conjunction with its Partner Companies, the Company has developed
certain operational best practices and has packaged these practices into a set
of systems and tools known as tracks. Each track comprises both a tangible
package that is delivered to each of the Partner Companies as well as active
involvement by IT Partners' management in helping implement the practices
embodied in each track. The Company believes that application of the tracks
within a decentralized management structure helps disseminate best practices
while preserving creativity at the Partner Company level, from which new best
practices may emerge, as illustrated on the following page.
49
<PAGE>
COORDINATED DECENTRALIZED OPERATING MODEL
-----------------------------------------
[GRAPHIC OMITTED]
CDM has several key components:
Partner Track: Integration of New Partner Companies. The Partner Track
helps newly acquired Partner Companies efficiently and successfully integrate
into the Company, focusing on the following areas:
o Communications Integration. The Company helps integrate and
standardize the communication strategy and tools of its Partner
Companies, including Web site standardization as well as mission and
value alignment.
o Accounting/Financial Integration. Partner Companies work closely with
the Company's management to develop common financial and accounting
practices. The management team also conducts an operational review and
an internal systems and mission-critical applications assessment of
each newly acquired Partner Company. Examples of this coordination
include the monthly reporting package, initial current year budget and
a preliminary operations review.
o Human Resources Integration. The Company assesses Partner Company
compliance with all federal and state regulations and laws, and
implements programs to effectively attract, train, motivate and retain
top quality staff. Upon completion of the assessment, the Company
compiles a report outlining any areas of concern as well as providing
a path of measurable milestones that need to be attained within the
organization.
Growth Track: Business Development. The Company works with each Partner
Company to develop sales and marketing strategies and coordinate local, regional
and national sales and marketing strategies and initiatives. Together, the
Company and its Partner Companies identify and package cross-selling
opportunities, coordinate and automate sales forces, manage client data, and
develop corporate marketing initiatives. The Company also works with its Partner
Companies to revise their sales marketing plan annually, providing a
comprehensive summary of marketing strategy and tactics for the upcoming year,
addressing sales and marketing objectives and budgets, value propositions, media
mix and competitive positioning.
50
<PAGE>
Performance Track: Performance Review. The Company reviews and evaluates
each Partner Company's plan versus actual operating performance on a monthly
basis. The Company seeks to implement the best practices of other Partner
Companies and to identify and address problems expediently.
Career Track: Development and Training. The Company's success depends in
large part upon its ability to attract, train, motivate and retain highly
skilled technical employees. Accordingly, the Company has implemented a
strategy to reduce turnover, control costs and increase productivity. The
Company dedicates significant resources to employee recruitment and utilizes
multiple recruiting methods, such as employing regional recruiters, posting
openings on the Internet and relying on referrals from existing Company
employees. See "--Human Resources."
Quality Track: Quality Review. Attaining consistent quality levels
throughout the Partner Companies is critical to the Company's success. IT
Partners applies standardized plans based on Partner Companies' best practices
which measure and monitor the consistency of service delivery and quality,
including employee training and continuing education, employee and client focus
groups, and client satisfaction surveys. These plans provide centralized
management and oversight on a Company level, but are modified to consider the
needs and expectations of systems integrator clients, ensuring that the Partner
Company retains local management responsibility.
As part of CDM, the Company has designated national practice leaders
("National Practice Leaders") among the Partner Companies to facilitate the
exchange of best practices. Currently, the Company has National Practice Leaders
for systems integration, business applications and electronics integration.
SALES AND MARKETING
The Company focuses its marketing efforts on middle-market businesses,
which the Company believes spend in excess of $1 million annually on their IT
needs. The Company's sales and marketing plans include: (i) developing long-term
relationships with its clients as a single solution integrator; (ii) continuing
to expand the existing sales and marketing efforts of the Partner Companies;
(iii) cross-selling the complementary service capabilities of the Partner
Companies; (iv) expanding offerings of solution packages; and (v) establishing
IT Partners as a nationally recognized solutions integrator.
As of June 30, 1998, the Company had approximately 90 sales and marketing
personnel. The Company markets its services primarily through the direct sales
forces of each Partner Company. The Company works with each Partner Company to
develop a comprehensive sales and marketing plan that: (i) identifies core
competencies and target markets; (ii) develops specific sales activities and
marketing budgets; (iii) creates monthly media plans; and (iv) identifies
cross-selling opportunities. The Company continually seeks to leverage the
client base of its Partner Companies to generate additional sales of IT
services, software and hardware.
The Company generates sales leads through referrals from clients, vendors
and management consultants, responses to requests for proposals, strategic
alliances with complementary companies, the Company's Web site and associated
links, industry seminars, trade shows, direct telephone and mail campaigns, and
advertisements in trade journals. The Company seeks to expand its marketing
efforts on a Company-wide basis by coordinating the Partner Companies' responses
to requests for proposals. In addition, the Company plans to implement marketing
and advertising campaigns to establish itself as a leading provider of IT
solutions to middle-market businesses.
51
<PAGE>
CLIENTS
For the fiscal year ended December 31, 1997, no single client accounted for
more than 3% of the Company's pro forma combined revenues, including the
Acquisition Candidates. Listed below is a sample of the Company's and
Acquisition Candidates' clients:
<TABLE>
<CAPTION>
MANUFACTURING HEALTH CARE RETAIL
- ------------------------------------- ---------------------------------- -------------------------------
<S> <C> <C>
o Toshiba Corporation o Hurley Medical Center o Party City Corporation
o Lear Corporation o St. Joseph Mercy Hospital o Giant Food, Inc.
o NEC Technologies, Inc. o Delta Dental
o Cooper Tire & Rubber o Magellan Public Solutions PROFESSIONAL SERVICES
Company -------------------------------
o Cardell Corporation EDUCATION o Adecco
o Matsushita Electric Corporation ---------------------------------- o Miller Freeman, Inc.
of America o Alexandria City Public Schools o Professional Detailing, Inc.
o Dell Computer o Fairfax County Public Schools o BBDO Detroit, Inc.
o Aeroquip-Vickers, Inc. o Utica Community Schools
o Besser Company o Culpepper County School Board AVIATION
o JD OTT Company, Inc. ------------------------------
o DHL Airways, Inc.
</TABLE>
COMPETITION
The market for the Company's services is highly competitive. The Company's
competitors vary in size and in the scope of the services and products that they
offer. Primary competitors generally include consulting and systems integrators,
"Big Five" accounting firms, applications development firms, service groups of
computer equipment companies, programming companies, temporary staffing firms
and other IT service providers. Traditionally, the largest service providers
have principally focused on providing full-service solutions to Global 1000
companies. The Company believes that certain IT services companies, including
Perot, Renaissance, Technology Solutions, GE, IKON, Whittman-Hart, Cotelligent
and Entex, are exploring opportunities within the middle market.
There are relatively low barriers to entry into the Company's markets, and
the Company expects to face competition from established and emerging companies.
Increased competition may result in greater pricing pressure, which could
adversely affect the Company's gross margins and its ability to acquire
companies in the future. In addition, many of the Company's competitors have
greater financial, development, technical, marketing and sales resources than
the Company. As a result, the Company's competitors may be able to adapt more
quickly to new or emerging technologies and to changes in client requirements or
to devote greater resources than the Company to the development, promotion, sale
and support of IT products and services. In addition, there is a risk that
clients may elect to increase their internal IT resources to satisfy their IT
solution needs. The Company also plans to enter new markets and offer new
services, and expects to face intense competition from existing and new
competitors, particularly since barriers of entry in the IT services industry
are relatively low. There can be no assurance that the Company will continue to
provide IT services and products demanded by the market or be able to compete
successfully with existing or new competitors. An inability to compete in its
market effectively would have a material adverse effect on the Company's results
of operations, financial condition and business.
The Company believes that the principal competitive factors in the IT
services industry include responsiveness to client needs, availability of
technical personnel, speed of applications development, quality of service,
price, project management capabilities, technical expertise and ability to
provide a wide variety of IT services. The Company's ability to compete also
depends in part on a number of competitive factors outside of its control,
including the ability of its competitors to attract, train, motivate and retain
qualified technical personnel, the development of software that would reduce or
eliminate the need for the Company's services, the price at which others offer
comparable services and the extent of its competitors' responsiveness to client
needs.
HUMAN RESOURCES
The Company's success depends in large part upon its ability to attract,
train, motivate and retain highly skilled technical employees. Qualified
technical employees are in great demand and are likely to
52
<PAGE>
remain a limited resource for the foreseeable future. The Company dedicates
significant resources to employee recruitment and utilizes multiple recruiting
methods, such as employing regional recruiters, posting openings on the Internet
and relying on referrals from existing Company employees. The Company also
contracts with a third-party consultant to support the Partner Companies,
significantly reducing the costs associated with recruiting quality employees.
The Company typically screens candidates through detailed interviews by the
Company's recruiting personnel, technical interviews by third-party consultants
and an evaluation by the Company's managers.
The Company has developed programs to help attract, train, motivate and
retain its employees. For example, the Company plans to implement a
performance-based incentive compensation program and currently issues options to
its employees under the 1997 Plan. The Company also plans to develop training
programs to guide technical personnel through a progression of skill and
competency development programs. Most importantly, in addition to formal
programs, the Company plans to maintain an environment that fosters creativity
and recognizes technical excellence. As an example, the Company convenes regular
employee focus groups to evaluate and enhance job satisfaction and quality of
work.
As of June 30, 1998, the Company employed 735 employees, of whom 500 were
technical personnel. None of the Company's employees are represented by a
collective bargaining agreement. The Company does engage consultants as
independent contractors from time to time. The Company considers relations with
its employees to be good.
PROPERTIES
The Company's principal executive offices are located in Columbia,
Maryland. In addition to its headquarters, the Company leases office and
warehouse space in a number of locations across the United States The Company
does not believe that any of these locations are material to its operations. The
leases expire at various times through September 2004.
The following table sets forth those leases:
<TABLE>
<CAPTION>
NUMBER
APPROXIMATE RENTABLE LEASE EXPIRATION OF RENEWAL
LOCATION SQUARE FOOTAGE DATE OPTIONS TERM
- ------------------------------------ ---------------------- -------------------- --------- --------
<S> <C> <C> <C> <C>
Chantilly, Virginia ................ 63,000 September 30, 2004 -- --
Denville, New Jersey ............... 37,754 March 31, 2003 1 5 years
Auburn Hills, Michigan ............. 13,500 November 30, 2000 1 3 years
Chantilly, Virginia ................ 12,125 December 31, 2000 -- --
Newbury Park, California ........... 10,340 March 31, 2003 -- --
Beltsville, Maryland ............... 10,256 Month-to-month -- --
South San Francisco, California..... 8,130 April 1, 1999 -- --
South Jordan, Utah ................. 7,622 January 31, 2003 -- --
Newbury Park, California ........... 6,490 November 30, 1998 -- --
Denville, New Jersey ............... 6,241 March 31, 2003 1 5 years
Newbury Park, California ........... 6,136 March 31, 2002 -- --
Mount Joy, Pennsylvania ............ 5,993 September 20, 2002 -- --
Columbia, Maryland ................. 2,509 February 28, 1999 -- --
Long Beach, California ............. 2,035 Month-to-month -- --
Findlay, Ohio ...................... 580 July 31, 2000 -- --
Sylvania, Ohio ..................... 500 February 14, 1999 -- --
</TABLE>
LEGAL PROCEEDINGS
James Reppert v. Financial Systems Consulting, Inc., et al. On or about
April 24, 1998, a lawsuit was filed against FSC. The lawsuit is styled James
Reppert v. Financial Systems Consulting, Inc., et al. and has been brought in
the Superior Court of California, County of Los Angeles, South District. The
plaintiff is seeking damages primarily based on alleged wrongful termination,
for, among other things, breach of contract, breach of the covenant of good
faith and fair dealing, promissory estoppel, fraud and deceit, defamation, false
light and negligent infliction of emotional harm. On or about May 28, 1998,
53
<PAGE>
FSC counterclaimed against the plaintiff alleging, among other things, breach of
contract, money lent, intentional misrepresentation, and negligent
misrepresentation. The Plaintiff is seeking damages in excess of $4.0 million;
FSC's counterclaim is for $1,500. The Company denies these allegations and
intends to vigorously defend the suit, management believes that FSC will
ultimately prevail and does not believe the outcome, if unfavorable, would have
a material adverse effect on the Company's business, financial condition or
results of operation.
In addition to the foregoing, the Company and its Partner Companies are
parties from time to time in litigation or proceedings incidental to their
businesses. The Company is not a party to any other lawsuit or proceeding which,
in the opinion of management, is likely to have material adverse effect on the
Company's results of operations, financial condition and business.
54
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the names, ages and other information
concerning those persons who are directors, executive officers and key employees
of the Company as of August 7, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ ----- --------------------------------------------------------
<S> <C> <C>
Daniel J. Klein(1) ................. 46 Chairman, Chief Executive Officer and Director
Jamie E. Blech(1) .................. 42 President, Secretary and Director
Mark F. Yanson ..................... 39 Chief Financial Officer, Treasurer and Senior Vice
President
Anthony M. Corbi ................... 31 Chief Accounting Officer, Corporate Controller and Vice
President
William J. Costa ................... 37 Vice President of Technology
J. Richard Eagan ................... 50 Executive Vice President
Terrence Hardcastle ................ 46 Senior Vice President of Business Development
Christine E. Norcross .............. 42 Vice President of Operations
Steven J. Voss ..................... 31 Vice President of Planning and Development
John D. Bamberger(1) ............... 43 Director and President of Sequoia
Christopher R. Corbett(1) .......... 47 Director and President of A-COM
Charles Schaeffer .................. 34 Director and President of FSC
James D. Lumsden(1)(2)(3) .......... 45 Director
Martin S. Pinson(2)(3) ............. 52 Director
</TABLE>
- ----------
(1) Member of the Executive Committee of the Board.
(2) Member of the Compensation Committee of the Board.
(3) Member of the Audit Committee of the Board.
Daniel J. Klein has served as the Chairman of the Board and Chief Executive
Officer of IT Partners since co-founding the Company in 1996. He is also the
Chairman of each of the Partner Companies. Mr. Klein has over 12 years of senior
management experience in corporate operations, marketing, mergers and
acquisitions and strategic planning. Prior to co-founding IT Partners, Mr. Klein
was one of the founders of Green Spring Health Services, Inc. ("Green Spring"),
a behavioral healthcare company. From 1990 to 1993, Mr. Klein was the Senior
Vice President of Corporate Operations for Green Spring. From 1993 until 1995,
Mr. Klein served as the Senior Vice President of Strategic Planning and
Development, in charge of Green Spring's mergers and acquisitions.
Jamie E. Blech co-founded IT Partners and from October 1996 until October
1997, Mr. Blech served as the Company's Chief Operations Officer. Since that
time, Mr. Blech has served as IT Partners' President, Secretary and as a member
of the Board. Mr. Blech also serves as the Secretary, Director and Vice
President for each of the Partner Companies. Mr. Blech has over six years of
senior management experience and 17 years of industry experience in all phases
of IT. Prior to co-founding IT Partners, Mr. Blech was the Chief Information
Officer for Green Spring from August 1990 until January 1997. During this time,
Mr. Blech was responsible for the design and installation of 15 decentralized
data centers, as well as for the management of centralized applications
development, reporting, electronic data interchange, telecommunications and IT
related research and development.
Mark F. Yanson has served as the Chief Financial Officer, Treasurer and
Senior Vice President of IT Partners since May 1997. Mr. Yanson has over six
years of senior management experience in corporate financial management and
mergers and acquisitions, along with over 17 years of experience in financial
reporting, implementation of financial reporting systems and controls. Prior to
joining the Company, Mr. Yanson worked for Green Spring as the Corporate
Controller from July 1990 to August
55
<PAGE>
1994, and as Treasurer and Senior Vice President of Finance from August 1994
until May 1997. While at Green Spring, Mr. Yanson's responsibilities included
financial management, treasury operations, mergers and acquisitions and company
controls. Mr. Yanson is a Certified Public Accountant.
Anthony M. Corbi has served as the Chief Accounting Officer, Corporate
Controller and a Vice President of IT Partners since November 1997. Prior to
joining IT Partners, Mr. Corbi worked in the audit and business advisory
division of Arthur Andersen LLP from 1990 until 1997, most recently as a
Manager. Mr. Corbi is a Certified Public Accountant.
William J. Costa has served as the Vice President of Technology for IT
Partners since March 1998. Prior to joining IT Partners, Mr. Costa served as
Vice President of Information Technology at Green Spring from July 1991 until
March 1998. While at Green Spring, Mr. Costa's responsibilities included all
systems operations and research and development for information and voice
systems.
J. Richard Eagan has been an Executive Vice President of IT Partners since
July 1998. Prior to joining IT Partners, Mr. Eagan was General Manager and
President of Century 21 of the Mid Atlantic States, a regional real estate
franchiser, from 1984 until 1996. Since 1996, Mr. Eagan has been the President
of Dynamic Management International, a business consulting and management
services firm.
Terrence Hardcastle has been the Senior Vice President of Business
Development for IT Partners in charge of mergers and acquisitions since June
1997. Mr. Hardcastle has ten years of senior experience in marketing and sales,
mergers and acquisitions, and corporate operations. From November 1995 until May
1997, Mr. Hardcastle was President of Empire Community Delivery Systems, a joint
venture between Empire Blue Cross and Meritt Behavioral Health. Mr. Hardcastle
was also one of the co-founders of Green Spring, where he was Senior Vice
President of Business Development, responsible for Green Spring's merger and
acquisition activity from July 1989 until February 1995.
Christine E. Norcross has been the Vice President of Operations for IT
Partners since October 1997. Ms. Norcross has over 18 years of industry
experience in nearly all phases of information systems, including three years in
senior management. Prior to joining IT Partners, Ms. Norcross served as the
General Manager of Services for Technology Service Solution ("TSS"), a wholly
owned subsidiary of IBM, from October 1994 until October 1997. While at TSS, Ms.
Norcross was responsible for the strategic design and growth of TSS's national
network and integration services business. Before that, from December 1993 to
October 1994, Ms. Norcross worked at Microsoft as a Corporate Account Manager.
Prior to that, Ms. Norcross worked at International Business Machines
Corporation as a Manager.
Steven J. Voss has served as the Vice President of Planning and Development
for IT Partners since June 1998. Prior to joining the Company, Mr. Voss was
Senior Vice President of Strategic Planning and Acquisitions for Magellan
Behavioral Health, the nation's largest managed behavioral health care company.
Prior to that, Mr. Voss was a Manager for Ernst & Young LLP's management
consulting group from 1989 until 1994. Mr. Voss is a Certified Public
Accountant.
John D. Bamberger has served as a member of the Board since January 1998
and as a National Practice Leader of the Company for systems integration since
February 1998. Mr. Bamberger has also served as the President and Treasurer of
Sequoia since 1990.
Christopher R. Corbett has served as a member of the Board since June 1997
and as a National Practice Leader of the Company for electronics integration
since July 1997. Mr. Corbett has served as the President of A-COM since April
1983.
Charles Schaeffer has served as a member of the Board since October 1997
and as the President of FSC since May 1994. Mr. Schaeffer has also served as a
National Practice Leader of the Company for business applications since November
1997. Prior to that time, Mr. Schaeffer was an account executive responsible for
sales of accounting software for Platinum Software Corporation from November
1992 until May 1994.
James D. Lumsden has served as a member of the Board since May 1997. Mr.
Lumsden has served as the President and Managing Principal of Franklin
Street/Fairview Capital, LLC ("FS/FC"), a private investment group which he
founded in 1994. FS/FC is the manager of FF-ITP, L.P. ("FF-ITP"). Mr. Lumsden's
56
<PAGE>
responsibilities at FS/FC include the management and oversight of three
investment pools. Prior to founding FS/FC, Mr. Lumsden was President and
co-founder of Fairview Advisors, LLC from 1986 until 1994. Mr. Lumsden was an
investment banker for Merrill Lynch Capital Markets from 1983 until 1986 and
for Kidder Peabody & Co., Incorporated from 1981 until 1983. Mr. Lumsden has
also served as a director for Jotan, Inc. since 1996.
Martin S. Pinson has served as a Member of the Board since March 1998. Mr.
Pinson has served as Chairman and Chief Executive Officer of Industrial
Distribution Group, Inc., a nationwide distributor of industrial products, since
helping organize the company in June 1997. Mr. Pinson helped found U.S. Office
Products ("USOP"), a provider of office supplies, office furniture and break
room services, in the fall of 1994. While with USOP from October 1994 until
August 1996, he served as Executive Vice President, Secretary and as Chief
Financial Officer. In 1991, Mr. Pinson founded Pinson & Associates which is
engaged in a variety of investment, legal and consulting activities, primarily
for development stage companies.
All officers serve at the discretion of the Board.
BOARD COMMITTEES
The Board has established an Audit Committee, a Compensation Committee and
an Executive Committee. The Audit Committee will review the results and scope of
the audit and other services provided by the Company's independent accountants
and consists of Messrs. Pinson and Lumsden. The Compensation Committee will
approve salaries and certain incentive compensation for management and key
employees of the Company and administer the 1997 Plan and consists of Messrs.
Pinson and Lumsden. The Executive Committee is comprised of Messrs. Klein,
Blech, Lumsden, Bamberger and Corbett. The Executive Committee is authorized,
subject to certain limitations, to exercise all of the powers of the Board
during periods between Board meetings.
BOARD REPRESENTATION
Simultaneously with, or prior to, the consummation of the Offering, the
Company will enter into a voting agreement with each of the Company's existing
stockholders (except Creditanstalt and its affiliates) holding approximately
4,507,351 shares of Common Stock (and rights to acquire an additional 1,082,854
shares of Common Stock) pursuant to which the shares of Common Stock will be
voted for the election of each of Daniel J. Klein and Jamie E. Blech to the
Board for a period of three years. "The Recapitalization--Stockholder
Agreement." In addition, as long as BDC owns the majority of the outstanding
shares of Series C Preferred, it will have the right to appoint one member to
the Board and to designate a representative to attend meetings of the Board. See
"Underwriting."
DIRECTOR COMPENSATION
Following the completion of the Offering, directors who are not employees
of the Company will receive an annual fee, a meeting fee for every board meeting
attended and each committee meeting held separately and a fee for each
telephonic board meeting or telephonic committee meeting held separately. The
Company is in the process of determining such fees. All directors will be
reimbursed for out-of-pocket expenses. The Company may, from time to time and in
the sole discretion of the Company's Board, grant options to directors under the
1997 Plan or under a director stock option plan, if adopted by the Board.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid by IT Partners for services in all capacities awarded to,
earned by or paid to, the Company's Chief Executive Officer and each of the four
other most highly compensated executive officers of the Company, whose aggregate
cash and cash equivalent compensation exceeded $100,000 (collectively, the
"Named Officers"), with respect to the fiscal year ended December 31, 1997.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------
ANNUAL COMPENSATION AWARDS
---------------------------------------------------------- ----------------
SECURITIES
OTHER UNDERLYING ALL
SALARY BONUS ANNUAL OPTIONS/ OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION($) SARS (#) COMPENSATION
- -------------------------------- ------ ---------------- ---------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Klein ................ 1997 $ 64,615(1) $ 35,000(2) $ -- --(3) $ 1,000(4)
Chairman, Chief Executive
Officer and Director
John D. Bamberger .............. 1997 220,000(5) -- -- -- --
Director and President and
Treasurer of Sequoia
Christopher R. Corbett ......... 1997 190,000 -- 12,500(6) -- --
Director and President
of A-COM
Christine E. Norcross .......... 1997 25,000(7) 75,000(8) -- 26,638(9) --
Vice President of Operations
Jamie E. Blech ................. 1997 64,615(1) 35,000(2) -- --(3) 1,000(4)
President, Secretary and
Director
</TABLE>
- ----------
(1) The annual base salary for each of Messrs. Klein and Blech was $120,000
during fiscal year 1997.
(2) Messrs. Klein and Blech were each awarded a bonus of $60,000 for services
rendered from June 1997 through May 1998.
(3) Messrs. Klein and Blech were each awarded options to purchase 30,634 shares
of Common Stock at an exercise price of $10.51 per share on March 27, 1998
and options to purchase 30,634 shares of Common Stock at an exercise price
of $14.08 per share on June 10, 1998.
(4) Represents life insurance premiums paid for each of Messrs. Klein and
Blech.
(5) Mr. Bamberger entered into an employment agreement with IT Partners on
January 7, 1998, which provides for an annual salary of $200,000.
(6) Represents payments for services, as a National Practice leader, provided
in his employment agreement.
(7) The annual base salary for Ms. Norcross was $130,000 during fiscal year
1997.
(8) The total signing bonus for Ms. Norcross was $75,000, $50,000 of which was
to be paid in fiscal year 1998.
(9) Ms. Norcross was awarded options to purchase 26,638 shares of Common Stock
at an exercise price of $9.95 per share on November 16, 1997.
The following tables set forth certain information regarding options to
acquire Common Stock granted to the Named Officers with respect to the fiscal
year ended December 31, 1997:
OPTIONS GRANTED IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZEABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
PERCENT OF APPRECIATION FOR
TOTAL OPTIONS OPTION TERM(3)
OPTIONS GRANTED IN EXERCISE EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR(2) PRICE ($/SH) DATE 5%($) 10%($)
- -------------------------------- ------------ ---------------- -------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Klein ................ -- --% $ -- $ -- $ --
John D. Bamberger .............. -- -- -- -- --
Christopher R. Corbett ......... -- -- -- -- --
Christine E. Norcross .......... 26,638 17 9.95 11/16/07 359,410 684,074
Jamie E. Blech ................. -- -- -- -- --
</TABLE>
- ----------
(1) The options granted are non-qualified stock options which are exercisable
with respect to 40% of the shares covered two years from the date of grant
and thereafter in cumulative yearly amounts of 20% of the shares covered.
The options expire ten years from the date of grant.
(2) Total options granted includes all options granted to employees of IT
Partners.
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<PAGE>
(3) The dollar amounts under these columns are the results of calculations at
assumed rates of stock appreciation of 5% and 10%. These assumed rates of
growth were selected for illustration purposes only. They are not intended
to forecast possible future appreciation, if any, of stock prices. No gain
to the optionees is possible without an increase in stock prices, which
will benefit all stockholders.
No options were exercised by the Named Officers during the fiscal year
ended December 31, 1997. At December 31, 1997, Ms. Norcross was the only Named
Officer who held options. Such options are exercisable for 26,638 shares of
Common Stock at $9.95 per share, which exercise price exceeded the fair market
value per share of Common Stock as of December 31, 1997.
EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
On May 30, 1997, the Company entered into employment agreements with Daniel
J. Klein and Jamie E. Blech. The agreements provide that Mr. Klein will be
employed as the Company's Chief Executive Officer and/or Chairman and Mr. Blech
as the Company's Chief Operating Officer and/or Vice Chairman. The initial term
of each agreement is for five years commencing June 1, 1997 and ending May 30,
2002 (the "Klein and Blech Initial Term"). Each agreement establishes a base
salary of $120,000 annual base per annum. Such base salary will be reviewed
annually and may be increased by the Board or its Executive Committee. In June
1998, the Compensation Committee of the Board adjusted Messrs. Klein and Blech's
compensation from $120,000 to $150,000. In addition, Messrs. Klein and Blech
will be eligible for an annual performance bonus of up to one hundred percent
(100%) of their base salary, based upon the achievement of certain defined
annual performance goals consistent with the Company's five-year operating plan
established by the Board. The Board in its discretion may pay Messrs. Klein and
Blech bonuses in addition to the aforementioned annual performance bonus. If the
Company terminates either Messrs. Klein or Blech's employment other than for
cause or due to either Messrs. Klein or Blech's disability, then they shall be
entitled to receive, as their exclusive remedy, the payment of their then
current base salary for the remainder of the Klein and Blech Initial Term. Each
agreement contains non-competition, non-solicitation and non-disclosure
covenants which prohibit Messrs. Klein and Blech, during the term of their
employment and for a period of two years after the later of termination of the
agreement and termination of their employment with the Company, anywhere in the
United States, from engaging in competition with the Company without its consent
or soliciting or conducting business with any of the Company's clients. If the
Company terminates the agreement without cause, such restrictive covenants
extend for the shorter of two years following such termination or the period of
time after termination during which the Company continues to pay Messrs. Klein
or Blech, as applicable, their then-current base salary. The agreements also
prohibit Messrs. Klein and Blech from disclosing any confidential or proprietary
information of the Company.
Christopher R. Corbett entered into a senior executive employment agreement
with the Company on June 30, 1997 to serve as President of A-COM and National
Practice Leader of the Company's electronic systems integrators companies. The
initial term of the agreement is four years commencing June 30, 1997 and
expiring June 30, 2001 (the "Corbett Initial Term"). The agreement shall renew
automatically for subsequent terms of one (1) year each (a "Corbett Renewal
Term"), unless terminated by either party. The agreement employs Mr. Corbett as
the President of A-COM and as the National Practice Leader for the Company's
electronic systems integrator companies. The agreement establishes a base salary
of $190,000 per annum. Mr. Corbett will also receive $25,000 per year as
compensation for serving as a National Practice Leader. In addition, Mr. Corbett
will be paid a finder's fee of five percent (5%) of the first million dollars,
four percent (4%) of the second million dollars, three percent (3%) of the third
million dollars, two percent (2%) of the fourth million dollars, and one percent
(1%) of the balance of the purchase price for any other electronic systems
integration companies acquired by the Company which he has been personally and
primarily responsible for recruiting. Such finder's fee shall be paid in cash
and/or in stock of the Company at Mr. Corbett's option. These finder's fee
provisions terminate upon the closing of this Offering. If EBITDA of $1.7
million or greater is achieved by A-COM by March 31, 1998, Mr. Corbett will also
receive an amount equal to six times the amount of EBITDA in excess of $1.7
million, said amount not to exceed $1.5 million and to be paid to Mr. Corbett in
the same proportions of cash, stock or debt as was the purchase price for A-COM.
See "Certain Transactions." Mr. Corbett is also entitled to receive an annual
bonus as set forth in the Company's current
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<PAGE>
Annual Incentive Compensation Plan. If the Company terminates the agreement by
dismissing Mr. Corbett without proper cause or if Mr. Corbett terminates the
agreement for good reason, the Company shall pay Mr. Corbett his base salary and
incentive compensation equal to the amount paid for the full fiscal year
immediately preceding such termination and provide to him all benefits for the
balance of the entire applicable Corbett Initial Term or Corbett Renewal Term.
The agreement prohibits Mr. Corbett during the term of his employment with the
Company and for a period of one fiscal year thereafter, anywhere in Maryland,
Virginia, Pennsylvania or the District of Columbia, from engaging in competition
with the Company or soliciting any clients of the Company. The foregoing
restrictions do not apply if Mr. Corbett is terminated without cause during the
Corbett Initial Term. The agreement also prohibits Mr. Corbett from disclosing
proprietary or confidential information of the Company.
Christine Norcross, the Company's Vice President of Operations, entered
into an employment agreement with the Company on September 16, 1997. The term of
the agreement is three years commencing October 13, 1997 and ending October 12,
2000, (the "Norcross Initial Term"). After the Norcross Initial Term, this
agreement shall renew automatically for successive one year terms. The agreement
establishes a base salary of $130,000 per annum. Such base salary will be
reviewed annually and may be increased by the Board or its Executive Committee.
In addition, Ms. Norcross will be eligible for an annual performance bonus of up
to seventy-five percent (75%) of her base salary, based upon the achievement of
certain defined annual performance goals consistent with the Company's five-year
operating plan established by the Board. At Ms. Norcross' option, up to fifty
percent (50%) of the annual performance bonus may be paid in the form of stock
options. Such options shall be granted at an exercise price equal to the then
fair market value per share and shall vest forty percent (40%) after two years
and twenty percent (20%) each year thereafter until fully vested. Ms. Norcross
also received, within 60 days after the start of her employment, options to
purchase 26,638 shares of Common Stock at the then fair market value per share,
subject to vesting as described in the preceding sentence. The Board in its
discretion may pay Ms. Norcross a bonus in addition to the aforementioned annual
performance bonus. In addition, Ms. Norcross will be paid a signing bonus of
seventy five thousand dollars ($75,000), one-third (1/3) of which was paid on
September 16, 1997, one-third (1/3) of which was paid April 15, 1998, and
one-third (1/3) of which is to be paid on October 15, 1998. If Ms. Norcross
voluntarily leaves the Company prior to December 31, 1998, then she must repay
the signing bonus. If the Company terminates Ms. Norcross' employment without
cause or due to disability, then Ms. Norcross shall be entitled to receive the
payment of her then current base salary for the longer of (a) six months from
the date of termination, or (b) the remainder of the Norcross Initial Term. The
agreement contains non-competition and non-solicitation covenants which prohibit
Ms. Norcross, during the term of her employment and for the remainder of the
Norcross Initial Term, anywhere in the United States, from engaging in
competition with the Company without its consent or soliciting or conducting
business with any of the Company's clients. The agreement also prohibits Ms.
Norcross from disclosing confidential or proprietary information of the Company.
John D. Bamberger entered into an employment agreement with Sequoia on
January 8, 1998 as the Vice Chairman, Chief Executive Officer and Treasurer of
Sequoia. The initial term of this agreement shall be four years, commencing as
of January 8, 1998 and continuing through January 7, 2002 (the "Bamberger
Initial Term"). The Bamberger Initial Term shall renew automatically for
subsequent terms of one year each (a "Bamberger Renewal Term"), unless
terminated by either party. The agreement establishes a base salary of $200,000
per annum, subject to annual review by the Company. If Sequoia terminates this
agreement by dismissing Mr. Bamberger without proper cause or if Mr. Bamberger
terminates the agreement for "good reason," Sequoia shall pay Mr. Bamberger his
base salary (equal to the amount paid for the full fiscal year immediately
preceding such termination or, if such termination occurs during the first full
fiscal year, $200,000) and continue to provide to him all benefits for the
balance of the entire applicable Bamberger Initial Term or Bamberger Renewal
Term. The agreement contains non-competition and non-solicitation covenants
which prohibit Mr. Bamberger during the course of the agreement and for a period
of one year thereafter, anywhere in the State of Michigan, from engaging in
competition with the Company or soliciting any customers of the Company. The
foregoing restrictions do not apply if Mr. Bamberger is terminated without cause
during the Bamberger Initial Term. The agreement also prohibits Mr. Bamberger
from disclosing proprietary or confidential information of the Company.
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<PAGE>
STOCK OPTION PLAN
The Company's 1997 Plan provides that the Company may issue up to 1,000,000
shares of Common Stock pursuant to the 1997 Plan to any of the employees of the
Company or any of its subsidiaries, any member of the Board of Directors of the
Company or any of the Partner Companies, and consultants engaged by the Company
or any of its subsidiaries to provide consulting services with respect to the
business of the Company. The 1997 Plan is administered by the Compensation
Committee (the "Administrator"), which has plenary authority to make awards
under and in accordance with the terms of the 1997 Plan.
In connection with the Offering, the Company plans to amend and restate the
1997 Plan to increase the number of shares of Common Stock available for
issuance thereunder to 15% of the total number of shares of Common Stock
outstanding, which would be approximately 1,767,284 shares immediately following
the Offering (assuming no exercise or conversion of options, warrants or
convertible securities). The Company intends to structure and implement the
proposed amended and restated 1997 Plan in a manner such that compensation
attributable to awards made to the Company's employees under the 1997 Plan will
not be subject to the deduction limitations of Section 162(m) of the Code.
The 1997 Plan provides for the award of options to acquire shares of Common
Stock, which may be qualified stock options for purposes of Section 422 of the
Code or nonqualified stock options, stock appreciation rights ("SARs"),
restricted stock awards or incentive share awards.
The exercise price for options granted under the 1997 Plan may be paid in
cash or in shares of Common Stock, partial payment of such exercise price may be
made by promissory note, or the Administrator may provide for cashless exercise.
SARs may be awarded in combination with options, and the exercise thereof
will reduce the number of shares for which such option may be exercised (and,
likewise, the exercise of such options will reduce the number of shares for
which such SAR may be exercised). SARs entitle the holder thereof to receive,
without payment to the Company, shares of Common Stock in an amount equal to the
excess of the fair market of shares of Common Stock on the date of exercise over
the fair market value of shares of Common Stock on the date of award (or the
option exercise price, in the case of SARs awarded in combination with options).
Restricted stock awards are restricted against transfer, subject to
forfeiture and such other terms as the Administrator may provide. Incentive
share awards shall be issuable upon such terms and conditions as the
Administrator may provide, including terms that condition the issuance of Common
Stock upon the achievement of performance goals.
As of June 30, 1998, the Company has granted nonqualified stock options to
acquire an aggregate of 1,111,982 shares of Common Stock having exercise prices
ranging from $.02 per share to $14.08 per share. No other awards under the 1997
Plan had been made as of June 30, 1998.
The Board may amend or terminate the 1997 Plan at any time, and in any
event, the 1997 Plan will terminate on May 30, 2007. The termination of the 1997
Plan will not affect the validity of any award outstanding on the date of
termination.
EMPLOYEE STOCK PURCHASE PLAN
The Company is considering adopting an Employee Stock Purchase Plan (the
"Purchase Plan"), pursuant to which Common Stock would be reserved for future
issuance to eligible employees. The Purchase Plan would permit eligible
employees to purchase Common Stock through payroll deductions at a price equal
to 85% of the lower of the fair market value of the Common Stock on the first
day of the specified purchase period or the last day of such period. The
Purchase Plan would be designed to further the long-term stability and financial
success of IT Partners by providing a method to increase employee ownership of
Common Stock. Under the Purchase Plan, 75% of the shares of Common Stock issued
and outstanding would be available for issuance and sale under the Purchase
Plan.
61
<PAGE>
THE RECAPITALIZATION
Simultaneously with the consummation of the Offering, the Company plans to
effect the Recapitalization, including a one for 1.877 reverse stock split of
the outstanding shares of Common Stock (and shares of Common Stock issuable an
exercise or conversion of Common Stock equivalent securities).
EQUITY TRANSACTIONS
The Company's capital structure, as of August 7, 1998, was as follows:
(i) 354,170 outstanding shares of Series A Preferred (600,000 shares
authorized);
(ii) 739,184 outstanding shares of Series B Preferred (5,000,000
shares authorized);
(iii) 1,000 outstanding shares of Series C Preferred (1,000 shares
authorized);
(iv) 399,000 authorized but unissued shares of Preferred Stock, par
value $.01 per share (the "Preferred Stock");
(v) 4,401,970 outstanding shares of Common Stock (20,000,000 shares
authorized);
(vi) Put Warrants to acquire an aggregate of 325,925 shares of Common
Stock and/or Series B Preferred, in the discretion of the holder, issued in
connection with the Credit Facility and pursuant to the Amended and
Restated Warrant Agreement dated as of December 16, 1997, as amended (the
"Warrant Agreement"), between the Company and Creditanstalt (the "Debt
Warrants");
(vii) Put Warrants to acquire an aggregate of 667,925 shares of Common
Stock and/or Series B Preferred, in the discretion of the holder, issued
under the Second Amended and Restated Preferred Stock and Warrant Purchase
Agreement dated as of March 31, 1998, as amended, (the "Purchase
Agreement"), among the Company, Creditanstalt, FF-ITP, Indosuez IT
Partners, Wachovia Capital Associates, Inc ("Wachovia"), and the other
signatories thereto (the "Equity Warrants");
(viii) Options to acquire an aggregate of 1,767,284 shares of Common
Stock issued pursuant to the 1997 Plan (options to acquire 581,573 shares
of Common Stock remain available for issuance thereunder); and
(ix) Convertible Seller Notes convertible into an aggregate of 367,960
shares of Common Stock (the Call Convertible Seller Note is convertible
into 268,832 shares of Common Stock and the Servinet Convertible Seller
Note is convertible into 99,128 shares of Common Stock (calculated at the
assumed initial public offering price).
See also "Prospectus Summary--The Partner Companies" and "Prospectus
Summary--The Acquisition Candidates" for a discussion of contingent rights to
acquire shares of Common Stock pursuant to the terms of previously consummated
acquisitions of Partner Companies.
The issued and outstanding equity of the Company places various
restrictions on the Company's activities and provides various rights to the
holders of such equity, as described below.
TERMS OF THE PREFERRED STOCK
Series A Preferred. Simultaneously with the consummation of the Offering,
the Company plans to redeem the Series A Preferred in full using a portion of
the net proceeds of the Offering. See "Use of Proceeds." The Series A Preferred
ranks senior to the Common Stock and on parity with the Series B Preferred with
respect to dividends and in a liquidation of the Company. The Series A Preferred
is entitled to a liquidation preference of $10 per share plus all declared but
unpaid non-paid-in-kind dividends thereon. Except for voting rights in respect
of actions that materially and adversely affect the Series A Preferred's rights,
increase or decrease the number of shares designated as Series A Preferred, and
actions which reduce the value of the Series A Preferred by increasing the value
of any other class of stock of the Company, or as otherwise required by
applicable law, the Series A Preferred is nonvoting. Paid-in-kind dividends in
the form of additional shares of Series A Preferred accrue on the Series A
Preferred at a rate of 8% per annum, payable quarterly in arrears. Pursuant to
the Stockholder Agreement, holders of the Series A Preferred are
62
<PAGE>
entitled to certain demand and piggyback registration rights. The Company
intends to amend and restate these registration rights prior to the Offering as
described in "--Registration Rights Agreement." The Series A Preferred may be
redeemed at the Company's option at any time in whole or in part at a price per
share of $10 plus all declared but unpaid non-paid-in-kind dividends thereon and
is subject to redemption at any time after April 30, 2002, upon the demand of
holders of at least 20% of the shares of Series A Preferred then outstanding.
Series B Preferred. The Series B Preferred will remain outstanding
following the Offering. The Series B Preferred ranks senior to the Common Stock
and on parity with Series A Preferred in any liquidation of the Company and is
entitled to a liquidation preference of $.01 per share. Once the liquidation
preferences of the Series A Preferred and Seried B Preferred have been
satisfied, the holders of Series B Preferred are also entitled to participate
with the holders of Common Stock in the balance of the liquidation
distributions, ratably in accordance with the number of shares of Common Stock
into which such Series B Preferred is convertible. The Series B Preferred ranks
on parity with the Common Stock with respect to dividends and participates in
distributions with the Common Stock as if such Series B Preferred had been
converted to Common Stock pursuant to its terms. Except as required by
applicable law, the Series B Preferred is nonvoting. Each share of Series B
Preferred is convertible into one share of Common Stock (subject to certain bank
holding company regulations) and is entitled to antidilution protection.
Pursuant to the Stockholder Agreement, holders of the Series B Preferred are
entitled to certain demand and piggyback registration rights. The Company
intends to amend and restate these registration rights prior to the Offering, as
described in "--Registration Rights Agreement."
Series C Preferred. Simultaneously with the consummation of the Offering,
the Company plans to redeem the Series C Preferred in full with a portion of the
net proceeds from the Offering and to pay the redemption dividend by issuing
shares of Common Stock having an aggregate value of approximately $2.3 million
(calculated at the assumed initial public offering price). The Series C
Preferred ranks senior to the Series A Preferred and the Series B Preferred with
respect to the dividends described in the following sentence and in any
liquidation of the Company and is entitled to a liquidation preference of
$10,000 per share plus all accrued but unpaid dividends thereon. Dividends shall
accrue on the Series C Preferred at the rate of 12% per annum (subject to upward
adjustment upon certain events of noncompliance as described below). The Series
C Preferred is also entitled to a dividend upon redemption, as described below.
During the period beginning on the date of issuance of the Series C Preferred
until 18 months after such date, the Company may either pay dividends on the
Series C Preferred or permit such dividends to accrue. Dividends that accrue
during such initial 18-month period are not required to be paid until redemption
of the Series C Preferred. In addition, if an event of default exists under the
Credit Facility or would occur as a result of the payment of dividends on the
Series C Preferred, then the Company will not be obligated to pay such dividends
currently, and such dividends shall continue to accrue until the earlier of the
first dividend payment date following the date on which such event of default is
cured or waived or the redemption of the Series C Preferred. All dividends that
accrue and remain unpaid shall also accrue dividends at the rate of 12% per
annum (subject to upward adjustment upon certain events of noncompliance as
described below).
If the Company fails to redeem the Series C Preferred in certain
circumstances, fails to pay any dividends required to be paid under the
Certificate of Designation when due, fails to satisfy certain financial
covenants, or if the Company defaults on the payment of any indebtedness having
an outstanding principal amount in excess of $5.0 million (each, a "Penalty
Event"), then the dividend rate on the Series C Preferred shall increase to 15%
per annum until such Penalty Event has been cured or waived.
The Series C Preferred will be redeemed if the Offering yields net proceeds
to the Company of at least $40.0 million. Otherwise, the Series C Preferred will
not be redeemable until the first to occur of (i) a change of control of the
Company (including for this purpose, a sale, liquidation, winding up or
dissolution of the Company) and (ii) the third anniversary of the date of
issuance of the Series C Preferred. Notwithstanding the foregoing, if the
Company defaults in the payment of indebtedness having an outstanding principal
amount of at least $5.0 million and such indebtedness is accelerated by the
holder thereof, or if the Company suffers a bankruptcy event, violates the
leverage ratio set forth in the Series C Preferred Certificate of Designation or
fails to grant to the holders of the Series C Preferred
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<PAGE>
certain registration rights by the first anniversary of the issuance of the
Series C Preferred (each, an "Event of Noncompliance"), then the holders of a
majority of the Series C Preferred may require the Company to redeem all or any
part of the outstanding Series C Preferred. Nevertheless, the redemption rights
of the Series C Preferred are expressly subordinated to the Credit Facility if a
default or an event of default exists thereunder, or amounts due thereunder have
been accelerated but remain unpaid.
The Series C Preferred is also entitled to a dividend upon redemption. The
redemption dividend will be calculated differently depending upon when the
Series C Preferred is redeemed. If the Series C Preferred is redeemed in
connection with this Offering, the aggregate redemption dividend payable in
respect of the Series C Preferred will be equal to (1) the initial public
offering price per share of Common Stock, minus $8.69 (as adjusted pursuant to
certain antidilution provisions described below, the "Deduction Price"), times
(2) 361,519 (as adjusted pursuant to certain antidilution provisions described
below, the "Multiplier"), and will be payable in cash or Common Stock
(calculated at the assumed initial public offering price), at the Company's
option. If the Series C Preferred is redeemed in connection with a sale,
liquidation, dissolution, winding up or upon certain changes of control of the
Company, the aggregate redemption dividend will be equal to (1) the assets
distributed in respect of each share of Common Stock following such event, minus
the Deduction Price, times (2) the Multiplier, and will be payable in whatever
assets are distributed to other holders of Common Stock in connection with such
event. If the Series C Preferred is redeemed in connection with the third
anniversary of the date of issuance of the Series C Preferred, certain changes
of control of the Company, or upon an Event of Noncompliance, the aggregate
redemption dividend will be equal to (1) fair market value per share of Common
Stock minus the Deduction Price, times (2) the Multiplier, and will be payable
in cash or Common Stock, at the Company's option.
If the Company has not redeemed the Series C Preferred by the third
anniversary of its date of issuance, the Company shall continue to be obligated
to redeem the Series C Preferred as set forth above, but the Deduction Price
shall be reduced by 90%. In addition, the Deduction Price and the Multiplier are
entitled to the same antidilution protections applied in respect of the Series B
Preferred on or prior to July 27, 1998.
The Company expects to grant to the holders of the Series C Preferred,
prior to the Offering, certain demand and piggyback registration rights with
respect to the shares of Common Stock payable as the redemption dividend on the
Series C Preferred. See "--Registration Rights Agreement."
Without the approval of at least a majority of the outstanding shares of
Series C Preferred, the Company may not: (i) amend the Certificate of
Incorporation; (ii) impair or alter the rights of the Series C Preferred; (iii)
engage in any business other than the business currently engaged in by the
Company; or (iv) issue equity securities of the Company which are on parity with
or senior to the Series C Preferred in dividend or liquidation preference, or
issue any securities which are convertible into such equity securities. In
addition, the holders of a majority of the Series C Preferred have the right to
both (a) elect one member of the Board and (b) designate a representative to
receive Board materials and attend meetings of the Board.
WARRANT AGREEMENT AND DEBT WARRANTS
The Debt Warrants are immediately exercisable and continue to be
exercisable until the tenth anniversary of their date of issuance at an exercise
price of $.01 per Debt Warrant. The Debt Warrants are exercisable for either
Common Stock and/or shares of Series B Preferred at the discretion of the holder
(subject to bank regulatory restrictions on ownership). The holders of the Debt
Warrants are entitled to participate in dividends and antidilution protection.
In addition, the holders of the Debt Warrants have unlimited demand registration
rights for the Debt Warrants, shares issued upon exercise of the Debt Warrants
and the Equity Warrants, exercisable upon the request of the holders of at least
20% (or the amount then outstanding if less than 20%) of the remaining Debt
Warrants and the shares already issued upon exercise thereof but not yet sold to
the public. The holders of the Debt Warrants also have unlimited piggyback
registration rights. The Company intends to amend and restate each of these
registration rights prior to the Offering as described in "--Registration Rights
Agreement."
Under the terms of the Warrant Agreement, so long as any Debt Warrant is
outstanding, the Company is subject to certain affirmative and negative
covenants (such as financial reporting require-
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<PAGE>
ments and restrictions on amendments to Certificate of Incorporation). The
Company expects to amend the Warrant Agreement prior to the Offering to
terminate each of these covenants.
From November 30, 2001 until the tenth anniversary of the date of issuance
of a Debt Warrant, the holder thereof has the right to require the Company to
purchase all or a portion of its Debt Warrants and/or the shares issued upon
exercise of such Debt Warrants held by such holder. This put right terminates on
the consummation of an initial public offering with proceeds to the Company of
not less than $40.0 million. Under the Warrant Agreement, the Series A
Preferred, the Series B Preferred and the Put Warrants are subject to automatic
redemption upon the happening of certain events which would otherwise cause the
holders thereof to violate certain bank regulatory restrictions on stock
ownership. The Company expects to terminate these redemption provisions prior to
the Offering.
The Company expects that the Debt Warrants and the Warrant Agreement, as
amended, will remain in effect following the Offering.
PURCHASE AGREEMENT AND EQUITY WARRANTS
The Equity Warrants are immediately exercisable and continue to be
exercisable until the tenth anniversary of their respective dates of issuance at
an exercise price of $.01 per share. The Equity Warrants are exercisable for
either shares of Common Stock and/or shares of Series B Preferred at the
discretion of the holder (subject to bank regulatory restrictions on ownership).
The holders of the Equity Warrants are entitled to antidilution protection.
Holders of the Equity Warrants are entitled to certain demand and piggyback
registration rights pursuant to the Stockholder Agreement. See "-- Stockholder
Agreement". Holders of the Debt Warrants are also entitled to cause the
registration of certain Equity Warrants in connection with the exercise of
demand registration rights relating to the Debt Warrants (see "--Warrant
Agreement and Debt Warrants"). The Company intends to amend and restate each of
these registration rights prior to the Offering as described in "--Registration
Rights Agreement." In addition, on the first day of March, June, September and
December (beginning on September 1, 1997), for so long as shares of the Series A
Preferred remain outstanding, the number of shares issuable upon exercise of
each Equity Warrant shall be increased by 2% without any adjustment to the
exercise price thereof. The holders of the Equity Warrants also have rights to
put the Equity Warrants or the shares issued on exercise thereof back to the
Company as described under "--Stockholder Agreement." Under the Purchase
Agreement, the Series A Preferred, the Series B Preferred and the Put Warrants
are subject to automatic redemption upon the happening of certain events which
would otherwise cause the holders thereof to violate certain bank regulatory
restrictions on stock ownership. The Company expects to terminate these
redemption provisions prior to the Offering,
Under the terms of the Purchase Agreement, the Company is subject to
various affirmative covenants regarding financial statement deliveries,
inspection rights, reservation of shares for issuance under the Equity Warrants
and Series B Preferred, and negative covenants restricting, among other things,
amendments to the Certificate of Incorporation of the Company, dividends, sales
of any material portion of the assets of the Company, mergers, dissolutions,
issuances of capital stock, failure to achieve certain financial targets and
transactions with affiliates. The Company expects to amend the Purchase
Agreement prior to the Offering to terminate each of these covenants.
The Company expects that the Equity Warrants and the Purchase Agreement, as
amended, will remain in effect following the Offering.
STOCKHOLDER AGREEMENT
The existing stockholders of the Company (other than BDC) (the "Existing
Stockholders") are parties to an Amended and Restated Stockholder Agreement
dated as of March 31, 1998, as amended (the "Stockholder Agreement").
The Stockholder Agreement provides, among other things, that each Existing
Stockholder has the preemptive right to purchase such holder's pro rata share of
any capital stock the Company proposes to issue (subject to certain exceptions).
In addition, each of Creditanstalt, FF-ITP, Indosuez IT Partners, Indosuez IT
Partners II and Wachovia (the "Original Investors") has a put option with
respect to any shares issued or
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<PAGE>
issuable in respect of the Equity Warrants (the "Equity Warrant Shares"),
exercisable at any time or times after the five year six month anniversary of
the date of issuance of the Equity Warrants or upon certain extraordinary
transactions. The put option gives the Original Investors the right to put such
shares to the Company at the higher of book value or fair market value. The
Company also has a call option on the Equity Warrant Shares exercisable at any
time after May 30, 2007. The Company's call option is subject to a recapture
right which provides that if a transaction yielding proceeds per share in excess
of the amount paid for an Equity Warrant Share at the closing of the call option
is consummated at any time during the 12-month period following closing of the
call option, the Company shall be required to pay such excess in respect of each
Equity Warrant Share purchased pursuant to such call option.
The Stockholder Agreement contains certain restrictions on the transfer of
the capital stock held by the Existing Stockholders, including first refusal
rights and co-sale rights. In addition, the Stockholder Agreement provides the
Existing Stockholders with certain demand and piggyback registration rights with
respect to their holdings of Series A Preferred, Series B Preferred and Equity
Warrants, and the shares issued upon conversion thereof. After the earlier of
May 1, 2002 and six months after the effective date of the Company's initial
public offering, each of the Original Investors has two demand registration
rights and each of the Existing Stockholders has unlimited piggyback
registration rights. The Stockholder Agreement also contains a voting agreement
providing that each of the Existing Stockholders (other than the Original
Investors) will vote their capital stock in the Company such that the Board will
be composed of one designee of each of FF-ITP, Klein and Blech and three
designees appointed by a committee consisting of the presidents of certain of
the Partner Companies. FF-ITP can increase and thereby control the Board if the
Company defaults under its covenants contained in the Purchase Agreement
relating to financial statement deliveries, warrant rights and certain negative
covenants. Such voting agreement terminates by its terms upon an initial public
offering of the Company with net proceeds to the Company of at least $30.0
million.
Simultaneously with the consummation of the Offering, the Company expects
to terminate the Stockholder Agreement. Prior to such termination, the Company
expects to amend and restate the registration rights set forth therein in a new
registration rights agreement as described in "--Registration Rights Agreement,"
and to enter into a new voting agreement as described in "--Voting Agreement."
VOTING AGREEMENT
Simultaneously with, or prior to, the consummation of the Offering, the
Company expects to enter into a voting agreement with each of the Company's
existing stockholders (except Creditanstalt and its affiliates) holding
approximately 4,507,351 shares of Common Stock (and rights to acquire an
additional 1,082,854 shares of Common Stock) pursuant to which such shares of
Common Stock will be voted for the election of each of Daniel J. Klein and Jamie
E. Blech to the Board for a period of three years
REGISTRATION RIGHTS AGREEMENT
As described above under "--Warrant Agreement and Debt Warrants,"
"--Purchase Agreement and Equity Warrants" and "--Stockholder Agreement," the
Existing Stockholders of the Company have certain demand and piggyback
registration rights with respect to the Series A Preferred, the Series B
Preferred, the Warrants, securities issued upon the exercise thereof and Common
Stock. In connection with the Offering, the Company expects to modify the terms
of the existing registration rights and to grant new registration rights as set
forth below.
Under the new Registration Rights Agreement, from and after the six-month
anniversary of the consummation of the Offering, each of Creditanstalt, FF-ITP,
Indosuez IT Partners, Indosuez IT Partners II, Wachovia and BDC (the
"Institutional Holders"), will have the right on two occasions to demand the
registration of shares of Common Stock which they hold or may acquire upon the
exercise of the Put Warrants or other convertible securities. In addition, the
Institutional Holders will be entitled to certain incidental registration
rights. Each of the other Existing Stockholders and BDC will be entitled to
unlimited piggyback registration rights.
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<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
In October 1996, Messrs. Klein and Blech formed Technology. Each of Messrs.
Klein and Blech contributed capital of $1.00 in exchange for 100 shares of
Technology Common Stock, representing all of the outstanding common stock of
Technology. In November 1996, each of Messrs. Klein and Blech received an
additional 350,000 shares of Technology common stock as consideration for
services rendered to the Company
In May 1997, Messrs. Klein and Blech formed Old IT Partners. Pursuant to a
tax-free reorganization (i) Old IT Partners acquired all of the stock of CNS and
KDP and (ii) Technology merged with and into Old IT Partners, with Old IT
Partners as the surviving corporation and CNS and KDP remaining as wholly owned
subsidiaries of Old IT Partners.
Messrs. Klein and Blech formed the Company as a Delaware corporation in May
1997. In June 1997, (i) the Company acquired A-COM, a Partner Company, through a
reverse triangular merger pursuant to which A-COM merged with a wholly owned
subsidiary of the Company with A-COM surviving as a wholly owned subsidiary of
the Company and (ii) Old IT Partners merged with and into A-COM. In the merger
of Old IT Partners with A-COM, each of Messrs. Klein and Blech, being of all the
stockholders of Old IT Partners, exchanged all of their shares of Old IT
Partners stock for 293,075 shares of Common Stock in the Company.
On May 30, 1997 each of Messrs. Klein, and Blech, purchased 10,900 shares
of the Company's Series A Preferred, for $109,000.
On May 30, 1997, Mark F. Yanson, Chief Financial Officer and Treasurer of
the Company, was issued 26,638 shares of the Company's Common Stock in exchange
for services rendered.
The consideration paid for each of the Partner Companies was determined
through arm's-length negotiations between IT Partners and the representatives of
each Partner Company. The factors considered by the Company in determining the
consideration to be paid included, among others, the Partner Company's business
focus, client concentration, vendor authorizations, historical financial
performance, number of employees and technical certifications. Each Partner
Company was represented by independent counsel in the negotiation of the terms
and conditions of the acquisition.
TAX INDEMNITY AGREEMENTS
In October 1997, the Company terminated certain stock repurchase agreements
that governed the vesting of options to purchase Common Stock held by each of
Messrs. Klein, Blech, Yanson and Kandl and provided the Company with repurchase
rights for nominal consideration with respect to unvested options to purchase
shares of Common Stock (the "Stock Repurchase Agreements"). While the Company
believes that Section 83 of the Code is inapplicable to such transactions, in
connection with the termination of the Stock Repurchase Agreements, the Company
agreed to indemnify each of Messrs. Klein, Blech, Yanson and Kandl in the event
that Section 83 of the Code is applied by a taxing authority to such
transactions. The Company's indemnification liability would equal the difference
between (i) the amount of taxes payable by Messrs. Klein, Blech, Yanson and
Kandl if such transactions were taxed as ordinary income and (ii) the amount of
taxes that would have been payable had such transactions been assessed at
capital gains rates. The Company believes that the maximum exposure under this
indemnification obligation as of June 30, 1998 is approximately $473,290 in the
aggregate.
REAL PROPERTY LEASES
A-COM leases its Mount Joy, Pennsylvania facility from Corbett Rohrer
Partnership ("CRP"). CRP is a limited partnership wholly owned by Mr. Corbett,
President of A-COM and a director of the Company, and Mr. Rohrer, who is a vice
president of A-COM. The lease for the Pennsylvania space expires on September
30, 2000. A-COM paid total rents of $8,700 for the facilities during the year
ended
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<PAGE>
June 30, 1997. Expected rental payments over the term of the lease will be
approximately $184,758. The Company believes that the terms of the lease,
including the rental rate, are at least as favorable to the Company as those
which could have been negotiated with an unaffiliated third party.
Call leases its corporate headquarters office space from Call Properties,
LLC ("Call LLC"). The members of Call LLC include Mr. Call, President of Call,
as well as Mr. Call's family. The lease was signed on March 1, 1998 and expires
on March 1, 2003. Expected rental payments over the term of the lease will be
approximately $685,980. The Company believes that the terms of the lease,
including the rental rate, are at least as favorable to the Company as those
which could have been negotiated with an unaffiliated third party.
Prior to 1998, Sequoia utilized an employee leasing company, Manage Pro,
Inc., ("Manage Pro"), to pay all but five of Sequoia's employees. Alan Wise, the
owner of Manage Pro, is also the Chief Operating Officer of Sequoia and a
beneficial owner of more than 5% of the Company's Common Stock. Manage Pro
charged a 1% management fee on gross employee payroll of Sequoia during the 12
months ended December 31, 1997, amounting to approximately $66,530 after
adjustment. These amounts are included in salaries, wages and benefits in the
accompanying statements of operations for Sequoia. Effective January 1, 1998,
Sequoia ceased its relationship with Manage Pro. All employees formerly leased
from Manage Pro are currently employees of Sequoia.
SUPPLIER RELATIONSHIPS
A-COM purchases certain supplies from Mid-Atlantic Communication Supplies,
Inc. ("MACS") which is owned by Mr. Corbett. Mr. Corbett is the President of
A-COM and a director of the Company. For the fiscal years ended June 30, 1995,
1996 and 1997, A-COM's purchases from MACS totaled $239,889, $118,850 and
$375,042 respectively. The Company believes that the terms of such purchases,
including the purchase price, are at least as favorable to the Company as those
which could have been negotiated with an unaffiliated third party.
LOANS TO EXECUTIVE OFFICERS AND AFFILIATES
MACS, a company owned by Mr. Corbett has received a non-interest bearing
loan from A-COM in 1991. The maximum aggregate principal amount of the loan
outstanding at any time during the fiscal year ended December 31, 1997 was $0.
MACS repaid the loan in full during 1997.
In July 1996, Call made a loan of $138,657 to Stanton L. Call, President
of Call. This was a non-interest bearing loan with a balance of $117,211 as of
February 28, 1998. Mr. Call repaid the entire outstanding balance prior to May
31, 1998.
Sequoia has a note payable due from the Alan E. Wise, Chief Operating
Officer of Sequoia and a beneficial owner of more than 5% of the Common Stock,
and a receivable due from John D. Bamberger, Chief Executive Officer of Sequoia
and a director of the Company, in the amount of $0 as of August 1, 1998. Both
amounts were paid in full during 1998.
OTHER TRANSACTIONS
In January 1998, IT Partners acquired all of the capital stock in Sequoia
for a total purchase price of approximately $22.3 million, consisting of (i)
approximately $4.3 million in cash; (ii) approximately $14.0 million in Common
Stock; and (iii) approximately $ 4.0 million in Seller Notes due on the earlier
to occur of: (a) January 8, 2003; (b) the Company's initial public offering or
(c) the sale of all or substantially all of the stock or assets of, or the
merger of, the Company into a non-affiliate of the Company and bearing an
interest rate of 8% per annum. In exchange for his stock in Sequoia, John D.
Bamberger, the President and Treasurer of Sequoia and a director of the Company,
received: (i) approximately $2.0 million in cash; (ii) approximately $4.7
million in Common Stock; and (iii) approximately $2.5 million in Seller Notes.
The foregoing assumes that all consideration payable pursuant to Post-Closing
Adjustments in such agreements has been paid. John D. Bamberger will receive
finder's fees in the amount of $30,472, $59,475 and $41,207 relating to the
acquisition of Entre', CPR and KiZAN, respectively.
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<PAGE>
In October 1997, IT Partners acquired all of the capital stock of FSC for a
total purchase price of $9.8 million, consisting of: (i) approximately $3.7
million in cash; (ii) approximately $4.3 million in Common Stock; and (iii)
approximately $2.7 million in Seller Notes bearing interest at a rate of 8% per
annum and due on the earlier to occur of (a) October 20, 2002, (b) the Company's
initial public offering, (c) the sale of all or substantially all of the stock
or assets of the Company to a non-affiliate of the Company, or (d) the merger of
the Company into a non-affiliate of the Company in which the stockholders of the
Company immediately prior to such merger own less than 50% of the surviving
entity. In exchange for his stock in FSC, Charles Schaeffer, President of FSC
and a director of the Company, received (x) approximately $3.3 million in cash;
(y) approximately $3.9 million in Common Stock; and (z) approximately $2.4
million in Seller Notes. The foregoing assumes that all consideration payable
pursuant to Post-Closing Adjustments in such agreements has been paid. Charles
Schaeffer will receive a finder's fee of approximately $71,025 relating to the
acquisition of BMS.
In May 1997, IT Partners acquired all of the capital stock of A-COM for a
total purchase price of $10.1 million consisting of: (i) approximately $3.4
million in cash; (ii) approximately $5.6 million in Common Stock; and (iii)
approximately $2.6 million in Seller Notes bearing interest at a rate of 8% per
annum and due on the earlier to occur of (a) June 30, 2002, (b) the closing of
the Company's initial public offering, and (c) the sale of all or substantially
all of the stock or assets of the Company to, or the merger of the Company into,
a non-affiliate the Company. In exchange for his stock in A-COM, Christopher R.
Corbett, the President of A-COM and a director of the Company, received: (i)
approximately $3.4 million in cash; (ii) approximately $5.3 million in Common
Stock; and (iii) approximately $2.6 million in Seller Notes. The foregoing
assumes that all consideration payable pursuant to Post-Closing Adjustments in
such agreements has been paid. On October 31, 1997, Christopher R. Corbett and
Merrie Corbett jointly purchased 15,725 shares of Common Stock for $3.39 per
share. Christopher R. Corbett will receive finders' fees of $15,079, $39,900 and
$32,902 relating to the acquisitions of CSI-PA, CSI-VA and Richardson,
respectively.
ISSUANCES OF SECURITIES
On May 29, 1997, the Company issued 141,414 shares of Common Stock to
Martin G. Kandl and Haeyoung Kandl jointly for the aggregate consideration of
approximately $1.3 million.
On May 29, 1997, the Company issued 53,277 shares of Common Stock to Martin
G. Kandl and Haeyoung Kandl jointly for services performed for the Company.
On May 30, 1997, the Company issued 50,000 shares of Series A Preferred and
Equity Warrants to purchase 137,380 shares of either Common Stock or Series B
Preferred to Creditanstalt for the aggregate consideration of $500,000.
On May 30, 1997, the Company issued 100,000 shares of Series A Preferred
and Equity Warrants to purchase 274,760 shares of either Common Stock or Series
B Preferred to FF-ITP for the aggregate consideration of $1.0 million.
On May 30, 1997, the Company issued 10,900 shares of Series A Preferred to
Daniel J. Klein for the aggregate consideration of $109,000.
On May 30, 1997, the Company issued 10,900 shares of Series A Preferred to
Jamie E. Blech for the aggregate consideration for $109,000.
On May 30, 1997, the Company issued 293,075 shares of Common Stock to
Daniel J. Klein for nominal consideration in exchange for his shares in Old IT
Partners.
On May 30, 1997, the Company issued 293,075 shares of Common Stock to Jamie
E. Blech for nominal consideration in exchange for his shares in Old IT
Partners.
On May 30, 1997, the Company issued 26,638 shares of Common Stock to Mark
F. Yanson for services performed for the Company.
On May 30, 1997, the Company issued 165,680 shares of Common Stock to the
shareholders of CNS for the aggregate consideration of approximately $1.6
million.
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On May 30, 1997, the Company issued Debt Warrants to purchase 219,515
shares of Common Stock or Series B Preferred to Creditanstalt for nominal
consideration in connection with the execution of the Credit Facility.
On June 30, 1997, the Company issued 495,260 shares of Common Stock to
Christopher R. Corbett and Merrie Corbett jointly for the aggregate
consideration of approximately $4.6 million.
On July 11, 1997, the Company issued 23,334 shares of Series A Preferred
and Equity Warrants to purchase 64,110 shares of either Common Stock of Series B
Preferred to Creditanstalt for the aggregate consideration of $233,340.
On October 20, 1997, the Company issued 393,040 shares of Common Stock to
shareholders of FSC for the aggregate consideration of approximately $3.9
million.
On October 27, 1997, the Company issued 26,666 shares of Series A Preferred
and Equity Warrants to purchase 41,934 shares of either Common Stock of Series B
Preferred to Creditanstalt for the aggregate consideration of $266,660.
On October 31, 1997, the Company issued 10,000 shares of Series A Preferred
to FF-ITP for the aggregate consideration of $100,000.
On October 31, 1997, the Company issued 15,725 shares of Common Stock to
Christopher R. Corbett and Merrie Corbett jointly for the aggregate
consideration of $100,000.
On October 31, 1997, the Company issued 15,725 shares of Common Stock to
FF-ITP for the aggregate consideration of $100,000.
On October 31, 1997, the Company issued 7,863 shares of Common Stock to
Martin G. Kandl and Haeyoung Kandl jointly for the aggregate consideration of
$50,000.
On October 31, 1997, the Company issued 533 shares of Common Stock to
Thomas Gardner for the aggregate consideration of $3,393.
On October 31, 1997, the Company issued 38,053 shares of Common Stock to
shareholders of CNS for the aggregate consideration of $357,130.
On January 7, 1998, the Company issued 100,000 shares of Series A Preferred
and Equity Warrants to purchase 100,522 shares of either Common Stock or Series
B Preferred to Creditanstalt for the aggregate consideration of $1.0 million.
On January 7, 1998, the Company issued 118,392 shares of Series B Preferred
to Creditanstalt for the aggregate consideration of $1.0 million.
On January 7, 1998, the Company issued Debt Warrants to purchase 106,553
shares of Common Stock or Series B Preferred to Creditanstalt for nominal
consideration in connection with the execution of the Credit Facility.
On January 8, 1998, the Company issued 1,191,416 shares of Common Stock to
17 shareholders of Sequoia for the aggregate consideration of approximately
$11.9 million.
On February 5, 1998, the Company issued 700,636 shares of Common Stock to
the shareholders of Incline for the aggregate consideration of approximately
$7.0 million.
On March 31, 1998, the Company issued 345,204 shares of Series B Preferred
to Wachovia for the aggregate consideration of $3.0 million.
On March 31, 1998, the Company issued 230,136 shares of Series B Preferred
to Indosuez IT Partners for the aggregate consideration of $2.0 million.
On April 30, 1998, the Company issued Equity Warrants to purchase 8,544
shares of either Common Stock or Series B Preferred to Creditanstalt in the form
of a PIK Dividend on the outstanding Equity Warrants.
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On April 30, 1998, the Company issued 7,569 shares of Series A Preferred to
Creditanstalt in the form of a PIK Dividend.
On April 30, 1998, the Company issued 6,525 shares of Series A Preferred to
FF-ITP in the form of a PIK Dividend.
On April 30, 1998, the Company issued 668 shares of Series A Preferred to
Daniel J. Klein in the form of a PIK Dividend.
On April 30, 1998, the Company issued 668 shares of Series A Preferred to
Jamie E. Blech in the form of a PIK Dividend.
On May 1, 1998, the Company issued 45,452 shares of Series B Preferred to
Indosuez IT Partners II for the aggregate consideration of $395,000.
On May 11, 1998, the Company issued 267,433 shares of Common Stock to the
shareholders of Sequoia for the aggregate consideration of approximately $2.7
million.
On May 13, 1998, the Company issued 312,270 shares of Common Stock to
Stanton L. Call for the aggregate consideration of approximately $3.3 million.
On June 1, 1998, the Company issued 4,151 shares of Series A Preferred to
Creditanstalt in the form of a PIK Dividend.
On June 1, 1998, the Company issued 2,330 shares of Series A Preferred to
FF-ITP in the form of a PIK Dividend.
On June 1, 1998, the Company issued 231 shares of Series A Preferred to
Daniel J. Klein in the form of a PIK Dividend.
On June 1, 1998, the Company issued 231 shares of Series A Preferred to
Jamie E. Blech in the form of a PIK Dividend.
On July 28, 1998, the Company issued 700 shares of Series C Preferred to
BDC for the aggregate consideration of $7.0 million.
On August 4, 1998, the Company issued 300 shares of Series C Preferred to
Wachovia for the aggregate consideration of $3.0 million.
See "The Recapitalization" for additional information regarding other
agreements to which certain stockholders of the Company are parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company, after giving effect to the
Offering, by (i) each person known to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors, (iii)
each Named Officer and (iv) all executive officers and directors as a group. All
persons listed have an address in care of the Company's principal executive
offices and have sole voting and investment power with respect to their shares
unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED AFTER OFFERING
--------------------------------------------------
COMMON STOCK OPTIONS
------------------------ -----------------------
NAME NUMBER PERCENT NUMBER PERCENT
- ----------------------------------------------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C>
Daniel J. Klein(1) ............................ 329,739 6.7% 329,739 3.0%
Jamie E. Blech(1) ............................. 329,739 6.7 329,739 3.0
Christine E. Norcross ......................... -- * -- *
John D. Bamberger ............................. 471,457 9.6 471,457 4.3
Christopher R. Corbett ........................ 510,985 10.4 510,985 4.7
Charles Schaeffer ............................. 353,736 7.2 353,736 3.2
James D. Lumsden(2) ........................... 313,134 6.0 313,134 2.8
Martin S. Pinson .............................. 377 * 377 *
Alan Wise ..................................... 299,236 6.1 299,236 2.7
Stanton L. Call ............................... 312,270 6.4 312,270 2.9
Creditanstalt(3) .............................. 816,160 14.3 816,160 7.0
Wachovia(4) ................................... 453,660 8.5 453,660 4.0
Indosuez(5) ................................... 275,588 5.3 275,588 2.5
All executive officers and directors as a group
(14 persons)(6) .............................. 2,370,436 46.7 2,370,436 21.4
</TABLE>
- ----------
Less than 1.0%*.
(1) Includes 30,634 shares which may be acquired upon the exercise of options
exercisable within 60 days following the Offering.
(2) Includes 297,409 shares of Common Stock which may be acquired upon the
exercise of currently exercisable Put Warrants owned by FF-ITP. Mr. Lumsden
is the President and Managing Principal of FS/FC, the manager of FF-ITP.
(3) Represents shares of Common Stock which may be acquired upon the exercise
of Put Warrants and upon the conversion of Series B Preferred.
(4) Represents 345,204 shares of Common Stock currently issuable on conversion
of Series B Preferred which may be acquired upon the exercise of Put
Warrants, and 108,456 shares of Common Stock which may be acquired upon the
redemption of Series C Preferred.
(5) Represents 275,583 shares of Common Stock currently issuable on conversion
of Series B Preferred.
(6) Includes 97,496 shares of Common Stock which may be acquired upon the
exercise of options exercisable within 60 days following the Offering.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
After giving effect to the Offering and the Recapitalization, the Company's
authorized capital stock will consist of 11,781,894 shares of Common Stock, par
value $.01 per share, 5,000,000 shares of Series B Preferred, par value $.01 per
share, and 399,300 shares of undesignated Preferred Stock, par value $.01 per
share. After giving effect to the Recapitalization and the Offering, the Company
will have 11,781,894 shares of Common Stock issued and outstanding, 1,387,448
shares of Series B Preferred issued and outstanding, and no other shares of
Preferred Stock outstanding.
The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Certificate of
Incorporation and By-Laws, copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. The following is
qualified in its entirety by reference thereto.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. Subject
to the rights of any then outstanding shares of Preferred Stock, the holders of
Common Stock are entitled to such dividends as may be declared in the discretion
of the Board out of funds legally available therefor. See "Dividend Policy." The
holders of Common Stock are entitled to share ratably in the net assets of the
Company upon liquidation after payment or provision for all liabilities and any
preferential liquidation rights of any Preferred Stock then outstanding. Except
as set forth in the Stockholder Agreement, the holders of Common Stock have no
preemptive rights to purchase shares of stock of the Company. Except with
respect to certain shares of Common Stock issuable upon exercise of the Put
Warrants and conversion of the Series B Preferred, which are subject to
redemption upon the happening of certain events which would otherwise cause the
holders thereof to breach certain bank regulatory restrictions on capital stock
ownership, shares of Common Stock are not subject to any redemption provisions
and are not convertible into any other securities of the Company. All
outstanding shares of Common Stock are, and the shares of Common Stock to be
issued pursuant to the Offering will be upon payment therefor, fully-paid and
non-assessable.
The Company intends to apply for quotation of the shares of Common Stock on
the Nasdaq National Market, under the symbol "ITPI."
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board as shares
of one or more classes or series. Subject to the provisions of the Certificate
of Incorporation and limitations prescribed by law, the Board is expressly
authorized to issue the shares, to fix the number of shares and to change the
number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights, and liquidation preferences of the shares
constituting any class or series of the Preferred Stock, in each case without
any further action or vote by the stockholders. IT Partners has no current plans
to issue any shares of Preferred Stock of any class or series, except upon the
exercise of outstanding Put Warrants that are exercisable for shares of Common
Stock and/or Series B Preferred at the option of the holders.
One of the effects of undesignated Preferred Stock may be to enable the
Board to render more difficult or to discourage an attempt to obtain control of
IT Partners by means of a tender offer, proxy contest, merger or otherwise, and
thereby to protect the continuity of IT Partner's management. The issuance of
shares of the Preferred Stock pursuant to the Board's authority described above
may adversely affect the rights of the holders of Common Stock. For example,
Preferred Stock issued by IT Partners may rank prior to Common Stock as to
dividend rights, liquidation preference or both, may
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have full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock may discourage
bids for Common Stock or may otherwise adversely affect the market price of
Common Stock.
For a description of the Series A Preferred, the Series B Preferred, the
Series C Preferred, the Debt Warrants and the Equity Warrants, see "The
Recapitalization."
STATUTORY BUSINESS COMBINATION PROVISION
Upon consummation of the Offering, the Company will be subject to the
provisions of Section 203 ("Section 203") of the (DGCL). Section 203 provides,
with certain exceptions, that a Delaware corporation may not engage in any of a
broad range of business combinations with a person or an affiliate or associate
of such person, who is an "interested stockholder" for a period of three years
from the date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction is commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned (a) by persons who are directors and officers and (b) by employee
stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is (x) the owner of 15% or
more of the outstanding voting stock of the corporation or (y) an affiliate or
associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
The provisions of Section 203 could delay or frustrate a change in control
of the Company, deny stockholders the receipt of a premium on their Common Stock
and have an adverse effect on the Common Stock. The provisions also could
discourage, impede or prevent a merger or tender offer, even if such event would
be favorable to the interests of stockholders. The Company's stockholders, by
adopting an amendment to the Certificate of Incorporation, may elect not to be
governed by Section 203, which election would be effective 12 months after such
adoption.
LIMITATION ON DIRECTORS' LIABILITIES
Limitation on Liability. Pursuant to the Certificate of Incorporation and
as permitted by Section 102(b)(7) of the DGCL, directors of the Company are not
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty, except for liability in connection with a breach of duty of
loyalty, for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, for dividend payments or stock
repurchases that are illegal under Delaware law or for any transaction in which
a director has derived an improper personal benefit.
Indemnification. To the maximum extent permitted by law, the Certificate of
Incorporation and the By-Laws provide for mandatory indemnification of directors
of the Company against any expense, liability and loss to which they become
subject, or which they may incur as a result of having been a director of the
Company.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND BY-LAWS
The Certificate of Incorporation and By-Laws contain provisions that could
have an anti-takeover effect. The provisions are intended to enhance the
likelihood of continuity and stability in the composition of the Board and in
the policies formulated by the Board. These provisions also are intended to
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help ensure that the Board, if confronted by an unsolicited proposal from a
third party which has acquired a block of stock of the Company, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what it believes to be the best interest of the
stockholders. The following is a summary of such provisions included in the
Certificate of Incorporation and By-Laws of the Company.
The Certificate of Incorporation provides that stockholder action can be
taken only at an annual or special meeting of stockholders and cannot be taken
by written consent in lieu of a meeting. The Certificate of Incorporation and
the By-Laws provide that, except as otherwise required by law, special meetings
of the stockholders can only be called pursuant to a resolution adopted by a
majority of the Board or by the chief executive officer of the Company.
Stockholders are not permitted to call a special meeting or to require the Board
to call a special meeting.
The By-Laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company, including
proposed nominations of persons for election to the Board. Stockholders at an
annual meeting may only consider proposals or nominations specified in the
notice of meeting or brought before the meeting by or at the direction of the
Board or by a stockholder who was a stockholder of record on the record date for
the meeting, who is entitled to vote at the meeting and who has given to the
Company's Secretary timely written notice, in proper form, of the stockholder's
intention to bring that business before the meeting. Although the By-Laws do not
give the Board the power to approve or disapprove stockholder nominations of
candidates or proposals regarding other business to be conducted at an annual
meeting, the aforementioned procedures may have the effect of prohibiting
Stockholders from raising proposals at annual meetings if the proper procedures
are not followed or may discourage or deter a potential acquiror from conducting
a solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of the Company.
Each of the Certificate of Incorporation and By-Laws provide that the
affirmative vote of holders of at least 66 2/3% of the total votes eligible to
be cast in the election of directors is required to amend, alter, change or
repeal certain of their provisions. This requirement of a super-majority vote to
approve amendments to the Certification of Incorporation and By-Laws could
enable a minority of the Company's stockholders to exercise veto power over any
such amendments. The Board has no current plans to formulate or effect
additional measures that could have an anti-takeover effect.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock may be adversely affected by the sale,
or availability for sale, of substantial amounts of the Common Stock in the
public market following the Offering. The 6,000,000 shares being sold in the
Offering will be freely tradable unless held by affiliates of the Company. Upon
completion of the Offering: (i) the former stockholders of the Partner Companies
who received shares of Common Stock, will own, in the aggregate 3,729,323 shares
of Common Stock (excluding shares of Common Stock that may be issued pursuant to
any Post-Closing Adjustment related to such acquisition); (ii) the former
stockholders of the Partner Companies will own in the aggregate 99,128 shares of
Common Stock upon conversion of the Convertible Seller Note (at the assumed
initial public offering price); (iii) founders, consultants and management of IT
Partners, will own an aggregate of 678,126 shares of Common Stock and options to
acquire 1,185,711 shares granted by the Company under the 1997 Plan; and (iv)
certain equity holders will own (a) an aggregate of 739,184 shares of Series B
Preferred currently convertible into 739,184 shares of Common Stock (subject to
antidilution protection), and (b) the Put Warrants exercisable for up to 993,850
shares of Common Stock and/or Series B Preferred (convertible on a one-for-one
basis into Common Stock), at the option of the holders. Up to 152,290 additional
shares of Common Stock (calculated at the assumed initial public offering price)
may be issued, in the discretion of the Company, as payment for certain
redemption dividends on the shares of Series C Preferred. The securities issued
prior to the Offering have not been registered under the Securities Act, and,
therefore, may not be sold unless registered under the Securities Act or sold
pursuant to an exemption from registration, such as the exemption provided by
Rule 144.
In general, under Rule 144, if one year has elapsed since the later of the
date of the acquisition of restricted shares of Common Stock from the Company or
from any affiliate of the Company, the acquiror or subsequent holder thereof may
sell, within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of the Common Stock, or the average weekly trading
volume of the Common Stock on the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of the proposed sale is sent
to the Commission. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the later of the
date of the acquisition of restricted shares of Common Stock from the Company or
any affiliate of the Company, a person who is not deemed to have been an
affiliate of the Company at any time for 90 days preceding a sale would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations, manner of sale provisions or notice requirements.
Certain of the Company's executive officers, directors and existing
stockholders owning in the aggregate 5,781,894 shares of Common Stock have
agreed not to offer, sell, contract to sell, make any short sale or otherwise
dispose of any shares of Common Stock, options to acquire shares of Common Stock
or securities convertible into or exchangeable for, or any rights to purchase or
acquire, shares of Common Stock during the 12-month period following the date of
this Prospectus, without the prior written consent of Friedman, Billings, Ramsey
& Co., Inc., subject to certain limited exceptions. The Company has agreed to
provide demand and piggyback registration rights with respect to the Common
Stock issued to certain existing stockholders, including BDC.
The piggyback registration rights described above will not apply to the
Offering. The Company intends to register the 1,767,284 shares of Common Stock
reserved for issuance upon exercise of stock options granted pursuant to the
1997 Plan as soon as practicable after the date of this Prospectus. See
"Management," "The Recapitalization," "Shares Eligible for Future Sale" and
"Underwriting."
Prior to the Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that the sale of
shares or the availability of shares for sale will have on the market price for
the Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale, of substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the ability of the
Company to raise equity capital in the future.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
among the Company and the Underwriters (the "Underwriting Agreement"), the
Underwriters named below, through their Representatives, Friedman, Billings,
Ramsey & Co., Inc. and Piper Jaffray Inc., have severally agreed to purchase
from the Company, the respective number of shares of Common Stock offered hereby
set forth below opposite its name.
NUMBER OF
UNDERWRITER SHARES
----------- ------
Friedman, Billings, Ramsey & Co., Inc. .........
Piper Jaffray Inc. .............................
----------
Total .........................................
==========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased. The offering of Common Stock is made for delivery
when, as and if accepted by the Underwriters and subject to prior sale and to
withdrawal, cancellation or modification of the Offering without notice. The
Underwriters reserve the right to reject an order for the purchase of shares in
whole or in part.
The Underwriters propose initially to offer the shares of Common Stock
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and to certain dealers at such offering price less
a concession not to exceed $. per share of Common Stock. The Underwriters may
allow and such dealers may reallow a concession not to exceed $. per share of
Common Stock to certain other dealers. The Underwriters have informed the
Company that they do not intend to confirm sales to any accounts over which they
exercise discretionary authority. After the shares of Common Stock are released
for sale to the public, the offering price and other selling terms may be
changed by the Underwriters.
On July 27, 1998, BDC purchased 700 shares of Series C Preferred from the
Company for aggregate cash consideration of $7.0 million. The Series C Preferred
is entitled to certain liquidation preferences, periodic dividends and dividends
upon redemption. At the option of the Company, the redemption dividends may be
paid in shares of Common Stock. See "The Recapitalization." The Company intends
to redeem the Series C Preferred in full simultaneously with the closing of the
Offering. Upon such redemption, BDC will be entitled to receive (i) $7.0 million
in liquidation preference plus all accrued but unpaid periodic dividends thereon
(which accrue at a rate of 12% per annum), and (ii) a redemption dividend equal
to the product of (a) the initial public offering price, minus $4.63, times (b)
$475,000. The redemption dividend may be paid at the discretion of the Company
in cash or shares of Common Stock valued at the initial public offering price.
The Company also paid BDC an origination fee of $105,000 in connection with the
sale of the Series C Preferred. As long as BDC holds a majority of the shares of
Series C Preferred, BDC will have the right to appoint one member to the Board
of the Company and to designate a representative to attend meetings of the
Board.
In addition, the Underwriting Agreement provides that the Company will
indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act, or contribute to payments the Underwriters
may be required to make in respect thereof. In the opinion of the SEC, such
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indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. The Company has agreed to reimburse Friedman,
Billings, Ramsey & Co., Inc. for certain of its out-of-pocket expenses,
including fees and expenses of Underwriters' counsel.
The Company has granted to Friedman, Billings, Ramsey & Co., Inc.
preferential rights for one year, assuming completion of the Offering, to act as
the exclusive underwriter for, or advisor to, the Company in specified
transactions or offerings for customary fees to be mutually agreed to by the
parties.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation among
the Company and the Representatives. Among the factors to be considered in
making such determination will be the Company's financial and operating history
and condition, the prospects of the Company and its industry in general, the
management of the Company, the market prices of securities of companies engaged
in businesses similar to those of the Company, and the general conditions of the
economy and the securities markets. The estimated initial public offering price
range set forth on the cover of this Prospectus is subject to change as a result
of market conditions and other factors. There can, however, be no assurance that
the price at which the shares of Common Stock will sell in the public market
after the Offering will not be lower than the price at which they are sold by
the Underwriters.
Up to 5% of the shares of Common Stock offered hereby may be reserved for
sale to certain employees and directors of the Company at a price equal to the
initial public offering price per share. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same terms as the other shares offered
hereby.
Until the distribution of the Common Stock is completed, the rules of the
SEC may limit the ability of the Underwriters and certain selling group members
to bid for or purchase Common Stock. As an exception to these rules, the
Representatives are permitted to engage in certain transactions that stabilize
the price of shares of Common Stock. Such transactions may consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of shares
of Common Stock.
If the Underwriters create a short position in shares of Common Stock in
connection with the Offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of the Prospectus), the Representatives may
reduce that short position by purchasing shares of Common Stock in the open
market. The Representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of shares of Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold such shares of Common Stock as part of the Offering.
In general, purchases of securities for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of shares of Common Stock. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
The Company intends to apply to The Nasdaq Stock Market for quotation of
the shares of Common Stock on the Nasdaq National Market under the symbol
"ITPI." Accordingly, no assurance can be given as to the listing of the shares
of Common Stock on the Nasdaq National Market or the development or liquidity of
any market for the Common Stock.
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Certain of the executive officers, directors and stockholders of the
Company have agreed not to, without the prior written consent of Friedman,
Billings, Ramsey & Co., Inc., offer, sell, offer to sell, contract to sell,
grant any option to purchase or otherwise sell or dispose, directly or
indirectly (or announce any offer, sale, offer of sale, contract of sale, grant
of any option to purchase or other sale or disposition) any shares of Common
Stock, or any securities convertible or exercisable or exchangeable for any
shares of Common Stock for a period of 12 months from the effective date of the
Offering. The Company has agreed not to, without the prior written consent of
Friedman, Billings, Ramsey & Co., Inc., offer, sell, offer to sell, contract to
sell, grant any option to purchase or otherwise sell or dispose, directly or
indirectly (or announce any offer, sale, offer of sale, contract of sale, grant
of any option to purchase or other sale or disposition) any shares of Common
Stock, or any securities convertible or exercisable or exchangeable for any
shares of Common Stock (except for shares issuable pursuant to the 1997 Plan and
the Purchase Plan) for a period of 12 months from the effective date of the
Offering. Friedman, Billings & Ramsey & Co., Inc., at any time and without
notice, may release all or any portion of the shares of Common Stock subject to
the foregoing lock-up agreements.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Swidler Berlin Shereff
Friedman, LLP, Washington, D.C. Certain legal matters related to the Offering
will be passed upon for the Underwriters by Wilmer, Cutler & Pickering,
Washington, D.C.
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the SEC, a Registration Statement on Form S-1
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information pertaining to the
Company and the shares of Common Stock offered hereby, reference is made to such
Registration Statement, including the exhibits, financial statements and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contract or any other document are not necessarily complete and,
in each instance, reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified by such reference. The Registration Statement, including the exhibits
and schedules thereto, may be inspected and copied at the public reference
facilities maintained by the SEC at Judiciary Plaza Building, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and its regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials can be obtained from the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically. The address of the
SEC's Web site is www.sec.gov.
As a result of the Offering, the Company will be subject to the information
requirements of the Exchange Act. So long as the Company is subject to the
periodic reporting requirements of the Exchange Act, it will continue to furnish
the reports and other information required thereby to the SEC.
The Company will furnish to its stockholders annual reports containing
financial statements audited by its independent auditors and will make available
copies of quarterly reports for the first three quarters of each fiscal year
containing unaudited financial information.
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IT PARTNERS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
IT PARTNERS, INC., HISTORICAL FINANCIAL STATEMENTS
Report of Independent Public Accountants ................................ F-4
Consolidated Balance Sheets as of December 31, 1997, and March 31,
1998 (unaudited) ..................................................... F-5
Consolidated Statements of Operations for the Year Ended December 31,
1997 and the Three Months Ended March 31, 1997 (unaudited) and 1998
(unaudited) .......................................................... F-6
Consolidated Statements of Stockholders' Equity for the Year Ended
December 31, 1997 and the Three Months Ended March 31, 1997
(unaudited) and 1998 (unaudited) ..................................... F-7
Consolidated Statements of Cash Flows for the Year Ended December 31,
1997 and the Three Months Ended March 31, 1997 (unaudited) and 1998
(unaudited) .......................................................... F-8
Notes to Consolidated Financial Statements .............................. F-9
KANDL DATA PRODUCTS, INC.
Report of Independent Public Accountants ................................ F-22
Balance Sheets as of September 30, 1995 and 1996, and May 31, 1997 ...... F-23
Statements of Operations for the Years Ended September 30, 1995 and
1996, and the Eight Months Ended May 31, 1997 ........................ F-24
Statements of Stockholders' Equity for the Years Ended September 30,
1995 and 1996, and the Eight Months Ended May 31, 1997 ............... F-25
Statements of Cash Flows for the Years Ended September 30, 1995 and
1996, and the Eight Months Ended May 31, 1997 ........................ F-26
Notes to Financial Statements ........................................... F-27
COMPUTER NETWORK SERVICES, INC.
Report of Independent Public Accountants ................................ F-32
Balance Sheets as of December 31, 1995 and 1996, and May 31, 1997 ....... F-33
Statements of Operations for the Years Ended December 31, 1995 and
1996, and the Five Months Ended May 31, 1997 ......................... F-34
Statements of Stockholders' Equity for the Years Ended December 31,
1995 and 1996, and the Five Months Ended May 31, 1997 ................ F-35
Statements of Cash Flows for the Years Ended December 31, 1995 and
1996, and the Five Months Ended May 31, 1997 ......................... F-36
Notes to Financial Statements ........................................... F-37
A-COM, INC.
Report of Independent Public Accountants ................................ F-42
Balance Sheets as of June 30, 1996 and 1997 ............................. F-43
Statements of Operations for the Fiscal Years Ended June 30, 1995,
1996 and 1997 ........................................................ F-44
Statements of Stockholders' Equity for the Fiscal Years Ended June 30,
1995, 1996 and 1997 .................................................. F-45
Statements of Cash Flows for the Fiscal Years Ended June 30, 1995,
1996 and 1997 ........................................................ F-46
Notes to Financial Statements ........................................... F-47
FINANCIAL SYSTEMS CONSULTING, INC.
Report of Independent Public Accountants ................................ F-54
Balance Sheets as of August 31, 1996, and 1997, and October 20, 1997 .... F-55
Statements of Operations for the Twelve Months Ended December 31,
1995, the Eight Months Ended August 31, 1996, the Twelve Months
Ended August 31, 1997, and the Period from September 1, 1997 to .. F-56
Statements of Stockholders' Equity for the Twelve Months Ended
December 31, 1995, the Eight Months Ended August 31, 1996, the
Twelve Months Ended August 31, 1997, and the Period from September
1, 1997 to October 20, 1997 .......................................... F-57
F-1
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PAGE
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Statements of Cash Flows for the Twelve Months Ended December 31,
1995, the Eight Months Ended August 31, 1996, the Twelve Months
Ended August 31, 1997, and the Period from September 1, 1997 to
October 20, 1997...................................................... F-58
Notes to Financial Statements .......................................... F-59
SEQUOIA DIVERSIFIED PRODUCTS, INC.
Report of Independent Public Accountants ................................ F-62
Balance Sheets as of December 31, 1996 and 1997 ......................... F-63
Statements of Operations for the Years Ended December 31, 1995, 1996,
and 1997 ............................................................. F-64
Statements of Stockholders' Equity for the Years Ended December 31,
1995, 1996, and 1997 ................................................. F-65
Statements of Cash Flows for the Years Ended December 31, 1995, 1996,
and 1997 ............................................................. F-66
Notes to Financial Statements ........................................... F-67
INCLINE CORPORATION
Report of Independent Public Accountants ................................ F-74
Balance Sheets as of October 31, 1996, and 1997, and December 31, 1997 .. F-75
Statements of Operations for the Nine Months Ended December 31, 1995,
and the Ten Months Ended October 31, 1996, the Twelve Months Ended
October 31, 1997, and the Two Months Ended December 31, 1997 ......... F-76
Statements of Stockholders' Equity for the Nine Months Ended December
31, 1995, and the Ten Months Ended October 31, 1996, the Twelve
Months Ended October 31, 1997, and the Two Months Ended December
31, 1997 ............................................................. F-77
Statements of Cash Flows for the Nine Months Ended December 31, 1995,
and the Ten Months Ended October 31, 1996, the Twelve Months Ended
October 31, 1997, and the Two Months Ended December 31, 1997 ......... F-78
Notes to Financial Statements ........................................... F-79
CALL BUSINESS SYSTEMS, INC.
Report of Independent Public Accountants ................................ F-82
Balance Sheets as of December 31, 1996, and February 28, 1997 and 1998 .. F-83
Statements of Operations for the Seven Months Ended December 31, 1995,
the Year Ended December 31, 1996, the Two Months Ended February 28,
1997, and the Twelve Months Ended February 28, 1998 .................. F-84
Statements of Stockholder's Equity for the Seven Months Ended December
31, 1995, the Year Ended December 31, 1996, the Two Months Ended
February 28, 1997, and the Twelve Months Ended February 28, 1998 ..... F-85
Statements of Cash Flows for the Seven Months Ended December 31, 1995,
the Year Ended December 31, 1996, the Two Months Ended February 28,
1997, and the Twelve Months Ended February 28, 1998 .................. F-86
Notes to Financial Statements ........................................... F-87
SERVINET CONSULTING GROUP, INC.
Report of Independent Public Accountants ................................ F-91
Balance Sheet as of February 28, 1998 ................................... F-92
Statement of Operations for the Twelve Months Ended February 28, 1998 ... F-93
Statement of Stockholders' Equity for the Twelve Months Ended February
28, 1998 ............................................................. F-94
Statement of Cash Flows for the Twelve Months Ended February 28, 1998 ... F-95
Notes to Financial Statements ........................................... F-96
COMPUTER PRODUCTS AND RESOURCES, INC.
Report of Independent Public Accountants ............................... F-100
Balance Sheets as of April 30, 1997 and 1998 ........................... F-101
Statements of Operations for the Fiscal Years Ended April 30, 1996,
1997, and 1998 ...................................................... F-102
Statements of Stockholders' Equity for the Fiscal Years Ended April
30, 1996, 1997, and 1998 ............................................ F-103
Statements of Cash Flows for Fiscal Years Ended April 30, 1996, 1997,
and 1998 ............................................................ F-104
Notes to Financial Statements .......................................... F-105
F-2
<PAGE>
PAGE
----
MICRONOMICS OF LANSING, INC.
Report of Independent Public Accountants ............................... F-110
Balance Sheets as of December 31, 1996 and March 31, 1997, and 1998 .... F-111
Statements of Operations for the Year Ended December 31, 1995 and
1996, the Three Months Ended March 31, 1997, and the Twelve
Months Ended March 31, 1998 ......................................... F-112
Statements of Stockholders' Equity for Year Ended December 31, 1995
and 1996, the Three Months Ended March 31, 1997, and the Twelve
Months Ended March 31, 1998 ......................................... F-113
Statements of Cash Flows for Year Ended December 31, 1995 and 1996,
the Three Months Ended March 31, 1997, and the Twelve Months
Ended March 31, 1998 ................................................ F-114
Notes to Financial Statements .......................................... F-115
LIGHT INDUSTRIES SERVICE CORPORATION
Report of Independent Public Accountants ............................... F-121
Balance Sheet as of April 30, 1998 ..................................... F-122
Statement of Operation for the Twelve Months Ended April 30, 1998 ...... F-123
Statement of Stockholder's Equity for the Twelve Months Ended April
30, 1998 ............................................................ F-124
Statement of Cash Flows for the Twelve Months Ended April 30, 1998 ..... F-125
Notes to Financial Statements .......................................... F-126
KiZAN CORPORATION
Report of Independent Public Accountants ............................... F-131
Balance Sheets as of May 31, 1997, and 1998 ........................... F-132
Statements of Operations for the Three Months Ended November 30,
1995, the Twelve Months Ended November 30, 1996, the Five Months
Ended May 31, 1997, and Twelve Months Ended May 31, 1998 ............ F-133
Statements of Stockholders' Equity for the Three Months Ended
November 30, 1995, the Twelve Months Ended November 30, 1996, the
Five Months Ended May 31, 1997, and Twelve Months Ended May 31, 1998. F-134
Statements of Cash Flows for the Three Months Ended November 30,
1995, the Twelve Months Ended November 30, 1996, the Five Months
Ended May 31, 1997, and Twelve Months Ended May 31, 1998 ............ F-135
Notes to Financial Statements .......................................... F-136
RICHARDSON ASSOCIATES-ELECTRONICS, INC.
Report of Independent Public Accountants ............................... F-143
Balance Sheets as of December 31, 1996 and 1997, and March 31, 1998
(unaudited) ......................................................... F-144
Statements of Operations for the Years Ended December 31, 1995, 1996
and 1997, and for the three months ended March 31, 1997
(unaudited) and 1998 (unaudited) .................................... F-145
Statements of Stockholders' Equity for the Years Ended December 31,
1995, 1996 and 1997, and for the three months ended March 31,
1997 (unaudited) and 1998 (unaudited) ............................... F-146
Statements of Cash Flows for the Years Ended December 31, 1995, 1996
and 1997, and for the three months ended March 31, 1997
(unaudited) and 1998 (unaudited) .................................... F-147
Notes to Financial Statements .......................................... F-148
CHAMPLAIN COMPUTER SERVICES, INC.
Report of Independent Public Accountants ............................... F-152
Balance Sheet as of May 31, 1997 and 1998 .............................. F-153
Statement of Operations for the Twelve Months Ended May 31, 1997 and
1998 ................................................................ F-154
Statement of Stockholders' Equity for the Twelve Months Ended May
31, 1997 and 1998 ................................................... F-155
Statement of Cash Flows for the Twelve Months Ended May 31, 1997 and
1998 ................................................................ F-156
Notes to Financial Statements .......................................... F-157
F-3
<PAGE>
After the Recapitalization transaction discussed in Note 1 to IT Partners,
Inc.'s consolidated financial statements is effected, we expect to be in a
position to render the following audit report.
/s/ Arthur Andersen LLP
August 7, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of IT Partners, Inc.:
We have audited the accompanying consolidated balance sheet of IT Partners,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of IT Partners, Inc. and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Washington, D.C.
F-4
<PAGE>
IT PARTNERS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................................. $ 1,357 $ 1,061
Accounts receivable, net of allowance for doubtful accounts of $773, and $970,
respectively ......................................................................... 7,998 13,985
Inventory .............................................................................. 1,168 1,816
Costs and estimated earnings in excess of billings on uncompleted contracts ............ 743 1,135
Deferred tax asset ..................................................................... 872 872
Prepaid expenses and other current assets .............................................. 535 1,275
-------- --------
Total current assets ................................................................. 12,673 20,144
Property and equipment, net ............................................................. 1,388 3,287
Intangible assets, net .................................................................. 27,454 62,402
Other assets ............................................................................ 677 1,123
-------- --------
Total assets ......................................................................... $ 42,192 $ 86,956
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................................... $ 3,516 $ 4,167
Accrued expenses and other current liabilities ......................................... 4,928 7,313
Billings in excess of costs and estimated earnings on uncompleted contracts ............ 993 1,069
Current portion of notes payable ....................................................... 152 261
-------- --------
Total current liabilities ............................................................ 9,589 12,810
Notes payable, net of current portion ................................................... 392 277
Bank borrowings, net of discount of $1,215 and $2,270, respectively...................... 14,784 29,157
Seller notes, net of discount of $811 and $1,349, respectively........................... 5,537 9,030
Deferred tax liability .................................................................. 2,928 6,714
Other liabilities ....................................................................... 1,400 1,400
-------- --------
Total liabilities .................................................................... 34,630 59,388
-------- --------
Commitments and contingencies
Put warrants outstanding ................................................................ 4,824 8,509
Series A convertible redeemable preferred stock, 217,736; and 430,448; respectively,
shares outstanding ..................................................................... 545 1,054
STOCKHOLDERS' EQUITY:
Series B convertible preferred stock, 0; and 118,392; respectively, shares outstand-
ing .................................................................................. -- 1,000
-------- --------
Common stock, par value $.01, 20,000,000 shares authorized, 2,003,497 and 4,162,981
shares outstanding, respectively ..................................................... 20 42
-------- --------
Additional paid-in capital ............................................................. 6,260 24,834
Retained earnings (accumulated deficit) ................................................ (4,087) (7,871)
-------- --------
Total stockholders' equity ........................................................... 2,193 18,005
-------- --------
Total liabilities and stockholders' equity ........................................... $ 42,192 $ 86,956
======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-5
<PAGE>
IT PARTNERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
------------------------
FOR THE YEAR ENDED MARCH 31, MARCH 31,
DECEMBER 31, 1997 1997 1998
------------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Hardware ..................................................... $ 16,617 $ -- $ 7,198
Software ..................................................... 754 -- 628
Services ..................................................... 6,410 -- 9,960
---------- -------- ----------
23,781 -- 17,786
Cost of goods and services sold:
Hardware ..................................................... 13,003 -- 5,391
Software ..................................................... 578 -- 337
Services ..................................................... 4,377 -- 5,833
---------- -------- ----------
17,958 -- 11,561
---------- -------- ----------
Gross profit .................................................. 5,823 -- 6,225
Other operating expenses:
Selling, general and administrative .......................... 4,813 -- 5,052
Merger and acquisition costs ................................. 362 -- 176
Organizational costs ......................................... 1,131 1,131 --
Depreciation and amortization ................................ 782 -- 1,082
---------- -------- ----------
Total other operating expenses ............................. 7,088 1,131 6,310
---------- -------- ----------
Operating income (loss) ....................................... (1,265) (1,131) (85)
Interest expense .............................................. 3,134 -- 3,306
---------- -------- ----------
Loss before income tax benefit and extraordinary loss ......... (4,399) (1,131) (3,391)
Income tax benefit ............................................ (722) (452) (212)
---------- -------- ----------
Loss before extraordinary loss ............................... (3,677) (679) (3,179)
Extraordinary loss, net of income tax benefit of $226.......... -- -- (341)
---------- -------- ----------
Net loss ...................................................... $ (3,677) $ (679) $ (3,520)
========== ======== ==========
Preferred stock dividends and accretion ....................... $ (410) $ -- $ (264)
========== ======== ==========
Net loss available to common stockholders ..................... $ (4,087) $ (679) $ (3,784)
========== ======== ==========
Per common share data:
Basic--
Loss before extraordinary loss ............................. $ (3.45) $ (1.82) $ (0.91)
========== ========= ==========
Net loss ................................................... $ (3.45) $ (1.82) $ (1.00)
========== ========= ==========
Diluted--
Loss before extraordinary loss ............................. $ (3.45) $ (1.82) $ (0.91)
========== ========= ==========
Net loss ................................................... $ (3.45) $ (1.82) $ (1.00)
========== ========= ==========
Basic and diluted weighted average common shares outstand-
ing .......................................................... 1,186,239 373,043 3,777,686
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-6
<PAGE>
IT PARTNERS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
---------- -------- ------------ --------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 ........................ -- $ -- 586,149 $ 6
Issuance of common stock for cash .............. -- -- 39,846 --
Issuance of common stock in connection with
acquired businesses ........................... -- -- 1,377,502 14
Paid-in-kind dividends on Series A Preferred.... -- -- -- --
Accretion of Series A Preferred ................ -- -- -- --
Net loss ....................................... -- -- -- --
-- ------ --------- ---
Balance, December 31, 1997 ...................... -- -- 2,003,497 20
Issuance of common stock in connection with
acquired businesses (unaudited) ............... -- -- 2,159,484 22
Issuance of Series B Preferred (unaudited) ..... 118,392 1,000 -- --
Paid-in-kind dividends on Series A Preferred
(unaudited) ................................... -- -- -- --
Accretion on Series A Preferred (unaudited)..... -- -- -- --
Net loss (unaudited) ........................... -- -- -- --
------- ------ --------- ---
Balance, March 31, 1998 (unaudited) ............. 118,392 $1,000 4,162,981 $42
======= ====== ========= ===
<CAPTION>
RETAINED
EARNINGS
ADDITIONAL (ACCUMULATED
PAID-IN CAPITAL DEFICIT) TOTAL
----------------- ------------- -----------
<S> <C> <C> <C>
Balance, January 1, 1997 ........................ $ 5 $ -- $ 11
Issuance of common stock for cash .............. 254 -- 254
Issuance of common stock in connection with
acquired businesses ........................... 6,001 -- 6,015
Paid-in-kind dividends on Series A Preferred.... -- (188) (188)
Accretion of Series A Preferred ................ -- (222) (222)
Net loss ....................................... -- (3,677) (3,677)
------- -------- --------
Balance, December 31, 1997 ...................... 6,260 (4,087) 2,193
Issuance of common stock in connection with
acquired businesses (unaudited) ............... 18,574 -- 18,596
Issuance of Series B Preferred (unaudited) ..... -- -- 1,000
Paid-in-kind dividends on Series A Preferred
(unaudited) ................................... -- (103) (103)
Accretion on Series A Preferred (unaudited)..... -- (161) (161)
Net loss (unaudited) ........................... -- (3,520) (3,520)
------- -------- --------
Balance, March 31, 1998 (unaudited) ............. $24,834 $ (7,871) $ 18,005
======= ======== ========
</TABLE>
F-7
<PAGE>
IT PARTNERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
--------------------------
DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998
------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $ (3,677) $ (679) $ (3,520)
Adjustments to reconcile net loss to net cash flows from operating
activities--
Amortization of debt discount ............................................. 160 -- 119
Amortization of deferred financing costs .................................. 27 -- 34
Depreciation and amortization ............................................. 782 -- 1,082
Accretion of put warrants ................................................. 2,020 -- 2,252
Extraordinary loss, net ................................................... -- -- 341
Deferred income tax benefit ............................................... (735) (452) (226)
Changes in assets and liabilities, net of effect of acquisitions:
Increase in accounts receivable, net ..................................... (1,998) -- (1,745)
Increase in inventory .................................................... (518) -- 102
Decrease (increase) in costs in excess of billings on uncompleted con-
tracts .................................................................. 182 -- (392)
Decrease (increase) in prepaid expenses and other current assets ......... (321) 119 (276)
(Increase) decrease in other long-term assets ............................ (639) -- (430)
Increase (decrease) in accounts payable .................................. 10 938 (1,563)
Increase (decrease) in accrued expenses and other current liabilities..... 1,966 80 166
Decrease (increase) in billings in excess of costs on uncompleted con-
tracts .................................................................. (301) -- 76
--------- ------ ---------
Net cash flows from operating activities ................................ (3,042) 6 (3,980)
--------- ------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .......................................... (605) -- (509)
Cash paid for acquisitions, net of cash acquired ............................ (13,385) -- (13,263)
--------- ------ ---------
Net cash flows from investing activities ................................ (13,990) -- (13,772)
--------- ------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank credit facility and issuance of warrants ................. 15,999 -- 15,427
Proceeds from issuance of notes payable ..................................... 531 -- 29
Payment of costs related to financing ....................................... (534) -- --
Payment of costs to raise capital ........................................... (79) -- --
Net proceeds from issuance of common stock .................................. 254 -- --
Net proceeds from issuance of preferred stock and detachable warrants........ 2,218 -- 2,000
--------- ------ ---------
Net cash from financing activities ...................................... 18,389 -- 17,456
--------- ------ ---------
Net increase (decrease) in cash and cash equivalents ......................... 1,357 6 (296)
Cash and cash equivalents, beginning of period ............................... -- -- 1,357
--------- ------ ---------
Cash and cash equivalents, end of period ..................................... $ 1,357 $ 6 $ 1,061
========= ====== =========
Cash paid for interest ...................................................... $ 431 $ -- $ 318
========= ====== =========
Cash paid for income taxes .................................................. $ 326 $ -- $ --
========= ====== =========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-8
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
IT Partners, Inc. and its wholly owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in the
accompanying consolidated financial statements.
The accompanying balance sheet as of March 31, 1998, and the statements of
operations and cash flows for the three months ended March 31, 1997 and 1998,
are unaudited but, in the opinion of management, include all adjustments
(consisting of normal, recurring adjustments) necessary for a fair presentation
of results for these interim periods. Results for interim periods are not
necessarily indicative of results for the entire year.
RECAPITALIZATION
The accompanying financial statements and related notes have been
retroactively restated to effect for the reverse stock split of one for 1.877
shares of common stock in connection with a planned recapitalization and initial
public offering of common stock.
DESCRIPTION OF BUSINESS
IT Partners, Inc. was incorporated on May 29, 1997, and simultaneously
entered into a common control merger with Information Technology Partners, Inc.
("Technology") which was incorporated in October 1996. This transaction was
accounted for similar to a pooling of interests which requires retroactive
consolidation of the financial statements to include the entities from the
earliest period presented. Financial statements for the period from inception,
October 25, 1996 to December 31, 1996, and as of December 31, 1996, have not
been presented. The Company did not commence operations until 1997. The
stockholders of Technology were issued 586,615 shares of the Company's common
stock in exchange for all issued and outstanding stock of Technology. The
Company was capitalized through the sale of 171,800 shares of Series A
convertible preferred ("Series A Preferred") stock and the issuance of 26,638
shares of common stock, to the founding stockholders, a commercial bank and a
private investment group for $1,718,000. In conjunction with the capital
contributions, the Company obtained a $10,000,000 revolving line of credit from
the same commercial bank and acquired Kandl Data Products, Inc. ("KDP") and
Computer Network Services, Inc. ("CNS") (Notes 9, 16, and 17).
The Company provides a range of information technology services including
consulting, implementation and integration, support and maintenance, management
and operations. Additionally, the Company resells financial accounting software
and computer hardware primarily to middle market and fortune 100 companies
across the United States.
The Company's business objective is to acquire, operate and consolidate
small and medium size information technology service companies. Prior to their
acquisition by the Company, the acquired companies were operated as separate
independent entities, and there can be no assurance that the Company will be
able to integrate successfully the operations of these businesses. Additionally,
there can be no assurance that the Company will be able to identify and finance
suitable acquisition targets to meet its business objectives. The Company is a
holding company with a limited operating history. There can be no assurance that
the Company will be able to effectively implement the Company's internal growth
strategy and acquisition program.
The Company's future success with IT service offerings and product sales
depends in part on its continued authorization as a service provider and its
continued status as a certified reseller of certain hardware and software
products. In general, the agreements between the Company and such manufacturers
include termination provisions, some of which are without advance notification.
Several of the
F-9
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Company's wholly owned subsidiaries have significant relationships with
MicroSoft Corporation ("MicroSoft"), from which substantial contract revenue and
business referrals are derived. If these relationships were to be terminated, it
could have a material adverse effect on the Company's results of operations,
financial condition and business.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid investments with a maturity of
three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The carrying values of current assets and current liabilities approximate
fair value because of the relatively short maturities of these instruments. The
fair value of the Company's long-term debt is estimated using a discounted cash
flow analysis based on the Company's borrowing cost for similar credit
facilities, at December 31, 1997 and March 31, 1998.
INVENTORY
Inventory consists primarily of computer hardware, software, and
peripherals and electrical products held for sale and is recorded at the lower
of cost, using the first-in-first out ("FIFO") method of accounting or market
value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the expected life of the asset or
term of the lease.
The ranges used in computing estimated useful lives were as follows:
Furniture and fixtures ............... 5-7 years
Computer equipment ................... 3-5 years
Machinery and equipment .............. 5-8 years
Vehicles ............................. 4-7 years
Leasehold improvements ............... 1-7 years
F-10
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
INTANGIBLE ASSETS
In connection with its acquisitions, the Company has allocated purchase
price to identifiable intangible assets, including trade names and acquired
technology. In addition, the Company has entered into noncompete/employment
agreements with various employees who are the former owners of the acquired
companies. These identifiable intangible assets were recorded based upon an
outside appraisal and are being amortized over their estimated useful lives
ranging from two to ten years. The goodwill resulting from acquisitions is being
amortized over 20 to 40 years. The Company monitors the individual performance
of each of the subsidiaries and evaluates the realizability of intangible assets
and the existence of any impairment to its recoverability based on the projected
future net undiscounted cash flows of the respective subsidiaries.
REVENUE RECOGNITION
Service revenue is derived from information technology ("IT") services,
including hardware repair and maintenance, on-site network support, systems
consulting, software installation, web site design, installation, design and
integration of network and communication systems and other value-added IT
services. Hardware revenue is primarily derived from the sale of computer
hardware, peripherals and communication devices manufactured by third parties
and sold by the Company. Software revenue is primarily derived from the
licensing of software.
Hardware and software sales with no related service component are
recognized at the time of shipment provided that the collectibility of the
receivable is probable. Revenue from services are recognized as services are
performed or, if under a support agreement, ratably over the service contract
period. Revenue for material projects with a duration of three months or longer
that require installation, system design and integration, is recognized under
the percentage-of-completion method as the work progresses.
EARNINGS PER SHARE
Statement of Financial Accounting Standard No. 128, "Earnings per Share,"
("SFAS 128") requires the presentation of basic and diluted earnings per share.
Basic net income (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period.
The diluted net income (loss) per share data is computed using the weighted
average number of common shares outstanding plus the dilutive effect of common
stock equivalents (using the treasury stock method) unless such equivalents are
antidilutive.
ADVERTISING COSTS
All advertising costs are expensed when incurred. Such costs which are
included in selling, general and administrative expenses, were $69,615 and
$49,231 for the year ended December 31, 1997, and the three months ended March
31, 1998, respectively.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's consolidated
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax laws or rates.
F-11
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
2. INTANGIBLE ASSETS:
Intangible assets as of December 31, 1997 and March 31, 1998, consisted of
the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- ------------
(UNAUDITED)
<S> <C> <C>
Goodwill ................................. $20,792 $ 43,204
Noncompete/employment agreements ......... 7,230 17,030
Trade names .............................. -- 2,000
Acquired technology ...................... -- 1,600
------- --------
28,022 63,834
Less-- Accumulated amortization .......... (568) (1,432)
------- --------
$27,454 $ 62,402
======= ========
</TABLE>
3. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, 1997, and March 31, 1998, accrued expenses, and other
current liabilities consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- ------------
(UNAUDITED)
<S> <C> <C>
Accrued salaries and benefits ......... $2,315 $3,031
Accrued financing costs ............... -- 963
Accrued taxes ......................... 477 550
Accrued interest ...................... 473 757
Other current liabilities ............. 1,663 2,012
------ ------
$4,928 $7,313
====== ======
</TABLE>
4. PROPERTY AND EQUIPMENT:
As of December 31, 1997 and March 31, 1998, property and equipment
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- ------------
(UNAUDITED)
<S> <C> <C>
Furniture and fixtures .................. $ 161 $ 337
Computer equipment ...................... 343 949
Machinery and equipment ................. 176 537
Vehicles ................................ 663 862
Leasehold improvements .................. 216 990
------ ------
1,559 3,675
Less-- Accumulated depreciation ......... (171) (388)
------ ------
$1,388 $3,287
====== ======
</TABLE>
Depreciation expense for the periods ended December 31, 1997 and March 31,
1998, was approximately $167,000 and $217,000, respectively, and is included in
the statement of operations as other operating expenses.
F-12
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
5. CONTRACTS IN PROGRESS:
As of December 31, 1997 information related to uncompleted contracts is as
follows (dollars in thousands):
DECEMBER 31,
1997
-------------
Revenue recognized ...................................... $12,068
Costs recognized ........................................ 8,578
-------
Profit margin recognized ................................ 3,490
Costs incurred .......................................... 9,031
Billings ................................................ 12,771
-------
Costs and estimated earnings in excess of billings on un-
completed contracts .................................... 743
Billings in excess of costs and estimated earnings on un-
completed contracts .................................... (993)
-------
$ (250)
=======
6. NOTES PAYABLE:
Notes payable at December 31, 1997, consisted primarily of notes for
vehicles and other equipment with interest rates ranging from 8.75 to 13
percent. The vehicle notes are secured by specific vehicles.
Maturities on notes payable are as follows (dollars in thousands):
YEAR ENDED DECEMBER 31,
1998 .................................... $152
1999 .................................... 135
2000 .................................... 118
2001 .................................... 82
2002 and thereafter ..................... 57
----
$544
====
7. BANK BORROWINGS:
As of December 31, 1997 and March 31, 1998, the Company had approximately
$15,999,000 and $31,427,000 respectively, outstanding under its revolving line
of credit agreement (the "Credit Facility"). As of December 31, 1997 and March
31, 1998, unamortized debt discount related to the revolving line of credit was
$707,000 and $1,307,000, respectively.
On March 31, 1998, the Company substantially modified its Credit Facility
to provide, among other things, a maximum amount of borrowings of $70 million.
In connection with this amendment, the Company recorded an extraordinary loss of
approximately $341,000 net of income tax benefit of $226,000, for the write-off
of deferred financing costs. The Company incurred additional financing costs of
approximately $963,000 related to the amendment, which have been deferred as of
March 31, 1998 and will be amortized over the term of the amended agreement as
additional interest expense.
Up to four tranches of debt with different interest rates may be
outstanding at any given time. At the Company's option, the revolving line of
credit bears interest for the first year, at (1) the Base Rate, which is the
higher of the prime rate plus 2 percent, or the federal funds rate plus 2.5
percent or (2) LIBOR plus 4 percent. After the first year, the interest rate is
based upon achievement of certain financial ratios. As of December 31, 1997, the
Company had three tranches of debt outstanding. The interest rates and balances
as
F-13
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
of December 31, 1997 for the three tranches of debt are as follows, 10.5 percent
and $4,293,000, 9.84 percent and $6,162,000, and 9.875 percent and $5,544,000,
respectively. Additionally, commitment fees of 1/2 percent are payable quarterly
and recorded as additional interest expense. The average outstanding borrowings
for the year ended December 31, 1997, and for the three months ended March 31,
1998, was approximately $11.6 million and $25.8 million, respectively. For the
year ended December 31, 1997, weighted average interest rates on outstanding
tranches of the line of credit were 10.5, 9.8, and 9.875 percent, respectively.
The line of credit expires on November 30, 2001. The Company has pledged
substantially all assets as collateral under the revolving line of credit
agreement.
Under the terms of the Credit Facility, the Company is required to comply
with certain financial covenants including net worth, a leverage ratio, a senior
debt leverage ratio and an interest coverage ratio. As of December 31, 1997 and
March 31, 1998, the Company was in compliance with all financial covenants under
the Credit Facility.
The estimated fair value of the revolving line of credit at December 31,
1997 and March 31, 1998, approximates its carrying value.
8. SELLER NOTES PAYABLE:
The Company has entered into unsecured subordinated note agreements
("Seller notes") with the former owners of its subsidiaries in connection with
the purchase of the subsidiaries. Interest on the notes is payable on a
quarterly basis at a rate of 8 percent per annum. The notes have been discounted
based upon the Company's incremental borrowing rate resulting in an aggregate
initial discount of approximately $878,000 for notes issued during 1997 and
$614,000 for notes issued during the three months ended March 31, 1998, which is
being amortized over the terms of the notes as additional interest expense.
Amortization of the discount for the year ended December 31, 1997 and the three
months ended March 31, 1998, was approximately $67,000 and $76,000,
respectively. The unamortized debt discount related to the seller notes payable
was approximately $811,000 and $1,349,000, respectively, at December 31, 1997
and March 31, 1998, respectively. The notes and any remaining accrued interest
shall be due upon the earlier of: (1) five years from the date of the note; (2)
the closing date of any public offering of shares of common stock of the
Company; or (3) a change in control. These notes are subordinate to the Credit
Facility and any other obligations to the commercial bank or private investment
group.
9. STOCK AND WARRANT AGREEMENTS:
PUT WARRANT AGREEMENT
In connection with the revolving line of credit described above, the
Company issued detachable put warrants ("Put warrants") to purchase 412,579
shares of either common stock or Series A convertible preferred stock ("Series A
Preferred") at a $.01 per share and to purchase 230,136 shares of Series B
Preferred for $2,000,000. The warrants are exercisable through May 30, 2007. At
any time between November 30, 2001 and May 30, 2007, the warrant holders can
require the Company to purchase all or a portion of the warrants and/or warrant
shares for cash. The put price is the fair value of a share of the Company's
common stock as determined in accordance with the agreement. The warrants have
been accounted for in accordance with Emerging Issues Task Force ("EITF") 96-13,
whereby a portion of the proceeds received from the lender/warrant holder has
been allocated to the warrants based upon relative fair value. As a result, the
estimated fair value of approximately $1.5 million was recorded as warrants
outstanding and a corresponding debt discount as of the date of issuance. The
discount on the debt is being amortized as additional interest expense over the
term of the debt. Subsequent increases in the put value of the warrants are
being accreted through charges to interest expense. The put rights shall
terminate upon the effectiveness of a registration statement filed by the
Company with the Securities and Exchange Commission for a public stock offering
or a change in control of the Company.
F-14
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
On May 30, 1997, the Company entered into a preferred stock and warrant
purchase agreement with a commercial bank and private investment group. In
accordance with this agreement, the Company received $1.5 million and issued
150,000 shares of Series A convertible preferred stock ("Series A Preferred")
and detachable warrants to purchase either 773,586 shares of common stock or
Series B Preferred at $.01 per share. Of the $1.5 million of proceeds, the
Company initially allocated $1,500 to the Series A Preferred and $1,498,500 to
the warrants in accordance with EITF 96-13. The warrants are exercisable through
May 30, 2007. Dividends of 8 percent of the face value of the Series A Preferred
are payable in warrants each year commencing on September 1, 1997. As of
December 31, 1997, and March 31, 1998, the Company has accrued, but has not
issued, dividend warrants of 37,689 and 61,670 shares, respectively. The warrant
holders can require the Company to purchase all or a portion of the warrants or
warrant shares for cash at any time after November 30, 2001. The Company has the
right to require the warrant holders to sell to the Company all of the warrants
and warrant shares at anytime after May 30, 2007. Additionally, the Company can
be required to repurchase for cash all of the shares of the Series A Preferred
at any time after May 30, 2002. The put price and the call price will be the
higher of the book value of the Company's common stock or the fair market value.
The Series A Preferred was initially recorded at its fair value and is being
accreted up to its aggregate redemption price of $1,500,000 through May 30, 2002
through charges to retained earnings. Certain of the Series A Preferred are
owned by the founding stockholders.
In July 1997, the Company received $233,334 in exchange for 23,334 shares
of Series A Preferred and warrants to purchase 64,110 shares of either common
stock or Series B Preferred at a $.01 per share.
In October 1997, the Company received $266,666 in exchange for 36,666
shares of Series A Preferred and warrants to purchase common stock or Series B
Preferred at a $.01 per share.
Dividends of 8 percent are payable in Series A Preferred each year
commencing three months after issuance. As of December 31, 1997, the Company has
accrued, but has not issued, Series A Preferred dividends of 8,617 and 15,425
shares, respectively.
In January 1998, the Company issued 100,000 shares of Series A Preferred
with detachable put warrants. Of the $1,000,000 in proceeds, $347,584 was
allocated to the Series A Preferred and $652,416 to warrants outstanding. The
Company also issued 222,222 shares of Series B Preferred for $1,000,000.
In March 1998, the Company issued 1,079,913 shares of Series B Preferred
for $5,000,000.
In April 1998, the Company issued 15,430 shares of Series A Preferred in
the form of a paid-in-kind dividend. The Company also issued put warrants to
purchase 61,669 shares of either common stock or Series B Preferred in the form
of a paid-in-kind dividend on the outstanding put warrants.
In May 1998, the Company issued 85,313 shares of Series B Preferred for
$395,000.
In June 1998, the Company issued 6,943 shares of Series A Preferred in the
form of a paid-in-kind dividend.
In July 1998, the Company issued 700 shares of Series C Preferred for
$7,000,000.
In August 1998, the Company issued 300 shares of Series C Preferred for
$3,000,000.
F-15
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
10. INCOME TAXES:
Significant components of the Company's deferred tax assets and liabilities
are as follows (dollars in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- ------------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Organizational costs .................... $ 440 $ 364
Allowance for doubtful accounts ......... 245 307
Other ................................... 187 201
------ ------
Total deferred tax assets ................ 872 872
------ ------
Deferred tax liabilities:
Property and equipment .................. 35 12
Intangibles and other assets ............ 2,792 6,301
Other ................................... 101 401
------ ------
Total deferred tax liabilities ........... 2,928 6,714
------ ------
Net deferred tax liabilities ............. $2,056 $5,842
====== ======
</TABLE>
The provision (benefit) for income taxes is comprised of the following
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- ------------
(UNAUDITED)
<S> <C> <C>
Current:
Federal ................................. $ -- $ --
State ................................... 13 14
------ ------
Total current ............................ 13 14
------ ------
Deferred:
Federal ................................. (647) (181)
State ................................... (88) (45)
------ ------
Total deferred ........................... (735) (226)
------ ------
$ (722) $ (212)
====== ======
</TABLE>
A reconciliation between the effective income taxes and the amount computed
by applying the statutory federal income tax rate of 34% to loss before income
tax benefit and extraordinary loss were as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- ------------
(UNAUDITED)
<S> <C> <C>
Applicable income taxes based on statutory tax rate $ (1,496) $ (1,153)
State taxes, net of federal tax benefit ................. (50) (20)
Nondeductible goodwill amortization ..................... 173 120
Nondeductible accretion of warrants outstanding ......... 687 766
Other ................................................... (36) 75
-------- --------
Income tax benefit ...................................... $ (722) $ (212)
======== ========
</TABLE>
F-16
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
11. EMPLOYEE BENEFIT PLANS:
The Company maintains 401(k) profit sharing plans covering the employees of
the Company's subsidiaries. Under the plan agreements, employees may elect to
contribute a percentage of compensation. Plan participants vest immediately in
all employee elective contributions. Additionally, plan participants vest in
employer contributions over various periods. Employer contributions totaled
$12,053 for the year ended December 31, 1997.
12. LONG-TERM INCENTIVE PLAN:
Under the Company's long-term incentive plan, the Company may grant options
to its employees. The Company granted options of 134,884 shares through December
31, 1997 and 668,515 throughout March 31, 1998. The option price shall be
determined by a committee appointed by the Board of Directors and shall not be
less than the fair market value determined as of the date of the grant. The
options vest ratably over a period ranging from three to five years. In the
event of a change in control, the options become 100 percent vested as of the
effective date of the change in control.
The Company accounts for the Long Term Incentive Plan (the "Plan") under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized. Had compensation cost for the Plan been determined consistent
with SFAS No. 123, using the Black-Scholes pricing model, the Company's net loss
and earnings per share for the year ended December 31, 1997 and the three months
ended March 31, 1998 would have been reduced to the following pro forma amount
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1997 MARCH 31, 1998
-------------- ---------------
<S> <C> <C>
Historical:
Net loss .............................................. $ (3,677) $ (3,521)
Diluted net loss per common share as reported ......... $ (1.84) $ (.53)
Pro forma:
Net loss .............................................. $ (3,832) $ (3,675)
Diluted net loss per common share ..................... $ (1.91) $ (.56)
</TABLE>
A summary of the status of the Company's Plan at December 31, 1997, is
presented in the table and narrative below:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ------------------ --------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ....................... -- $ -- 134,884 $ 9.76
Granted ................................................ 134,884 9.76 533,631 10.81
Exercised .............................................. -- -- -- --
Forfeited .............................................. -- -- -- --
Expired ................................................ -- -- -- --
------- -------
Outstanding at end of year ............................. 134,884 9.76 668,515 10.57
------- -------
Exercisable at end of year ............................. 8,719 9.95 39,562 9.95
Weighted average number of shares and fair value of
options granted ...................................... 134,884 1.39 533,631 1.99
</TABLE>
F-17
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
In computing these pro forma amounts, the Company has assumed risk-free
interest rates ranging from 5.52 to 6.51 percent, dividend yields of 0 percent ,
volatility of 50 percent and expected option lives of five years.
The options outstanding at December 31, 1997 have an average remaining
contractual life of 9.7 years.
13. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains reserves for potential credit losses; historically, such
losses have been within management's expectations. The Company's largest
customer represents approximately 7.8 percent of accounts receivable at December
31, 1997. Sales to a major customer accounted for 8.0 percent for the year ended
December 31, 1997.
14. RELATED PARTY TRANSACTIONS:
A subsidiary purchases certain supplies from a company owned by a director
of the Company. For the year ended December 31, 1997, related party purchases
totaled approximately $102,000.
A subsidiary leases office space from a partnership run jointly by a
director of the Company and an employee of the Company. Rent expense for this
lease totaled $8,700 for the year ended December 31, 1997.
15. COMMITMENTS AND CONTINGENCIES:
LITIGATION
In April 1998, a lawsuit was filed against one of the company's
subsidiaries. The plaintiff is seeking damages primarily based on alleged
wrongful termination. On or about May 28, 1998, the subsidiary counterclaimed
against the plaintiff. The Plaintiff is seeking damages in excess of $4,000,000;
the subsidiary's counterclaim is for $1,500. The Company denies these
allegations and intends to vigorously defend the suit. Management believes that
the Company will ultimately prevail and does not believe the outcome, if
unfavorable, would have a material adverse effect on the Company's business,
financial condition or results of operation.
In addition to the foregoing, litigation and claims are filed against the
Company from time to time in the ordinary course of business. These actions are
in various preliminary stages, and no judgments or decisions have been rendered
by hearing boards or courts. Management, after reviewing with legal counsel,
does not believe that the ultimate resolution of any existing matter will have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
F-18
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
OPERATING LEASES
The Company leases its operating facilities under leases that expire
through October 2004. Future minimum rent payments due under existing operating
leases are as follows (dollars in thousands):
YEAR ENDED DECEMBER 31,
1998 ................................. $ 743
1999 ................................. 741
2000 ................................. 743
2001 ................................. 657
2002 and thereafter .................. 1,136
------
$4,020
======
Rent expense for the year ended December 31, 1997 totaled $494,000.
16. ACQUISITIONS:
In May 1997, the Company acquired all of the issued and outstanding stock
of KDP for an aggregate initial purchase price of approximately $3.5 million,
which includes transaction costs.
In May 1997, the Company acquired all of the issued and outstanding stock
of CNS for an aggregate initial purchase price of approximately $4.7 million,
which includes transaction costs.
In June 1997, the Company acquired substantially all of the issued and
outstanding stock of A-Com for an aggregate initial purchase price of
approximately $8.9 million, which includes transaction costs.
In October 1997, the Company acquired substantially all of the issued and
outstanding stock of FSC for an aggregate purchase price of approximately $8.4
million, which includes transaction costs.
These 1997 acquisitions were accounted for under the purchase method of
accounting whereby the purchase price was allocated to the fair value of the
assets acquired, including identifiable intangible assets, and liabilities
assumed. The aggregate excess purchase price over the fair value of acquired net
assets of approximately $43.2 million has been recorded as goodwill. If the
acquired businesses meet certain performance levels in the defined
post-acquisition periods, the Company will pay an additional amount not to
exceed $4.1 million which will be paid in cash, subordinated seller notes and
common stock.
All of the acquisitions were financed through the issuance of common stock
and subordinated seller notes, as well as borrowings on the revolving line of
credit.
Aggregate acquisition information related to assets acquired, liabilities
assumed and consideration paid is as follows (dollars in thousands):
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1997 MARCH 31, 1998
------------ --------------
Cash acquired .................................... $ 544 $ 549
Receivables acquired ............................. 6,000 4,106
Property acquired ................................ 954 1,604
Other assets acquired ............................ 1,828 1,445
Liabilities assumed .............................. (11,823) (7,105)
Intangibles ...................................... 28,022 35,226
Notes payable consideration ...................... (5,570) (3,417)
Stock consideration .............................. (6,026) (18,596)
--------- ---------
Payments for acquisitions of subsidiaries ........ 13,929 13,812
Less-- Cash acquired ............................ (544) (549)
--------- ---------
Payments for acquisitions net of cash acquired. $ 13,385 $ 13,263
========= =========
F-19
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
17. UNAUDITED PRO FORMA SUMMARY RESULTS OF OPERATIONS:
The unaudited pro forma summary consolidated results of operations for the
year ended December 31, 1997, and the three months ended March 31, 1998,
assuming the acquisitions of the outstanding stock of A-Com, CNS, FSC, KDP,
Sequoia, Incline, Call and Servinet had been consummated on January 1, 1997, and
January 1, 1998, respectively, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- ------------
<S> <C> <C>
Revenues ................................................... $105,980 $ 27,436
Cost of goods sold ......................................... 72,688 17,444
Gross profit ............................................... 33,292 9,992
Other operating expenses:
Selling, general and administrative ...................... 27,385 7,672
Merger and acquisition costs ............................. 362 176
Organizational costs ..................................... 1,131 --
Depreciation and amortization ............................ 5,848 1,265
-------- --------
Total other operating expenses .......................... 34,726 9,113
Operating income (loss) .................................... (1,434) 879
Interest expense ........................................... 6,232 3,406
-------- --------
Net income (loss) before income taxes (benefit) ......... (7,666) (2,527)
Income tax provision (benefit) ............................. (322) 271
-------- --------
Net loss ................................................... $ (7,344) $ (2,798)
======== ========
Earnings per common share:
Basic .................................................... $ (1.40) $ (0.49)
======== ========
Diluted .................................................. $ (1.40) $ (0.49)
======== ========
</TABLE>
18. MERGER AND ACQUISITION COSTS:
The Company maintains a merger and acquisition department. A significant
amount of costs are incurred by the Company to support its merger and
acquisition activity. The general and administrative costs associated with the
merger and acquisition department are expensed as incurred. The Company
capitalizes all direct legal, accounting, travel and appraisal costs associated
with its acquired companies. The direct costs associated with failed
acquisitions are expensed when it becomes known that the target company will not
be acquired. The merger and acquisition general and administrative expenses and
the costs incurred related to failed acquisitions were $85,550 and $276,616,
respectively for the year ended December 31, 1997, and $29,983 and $146,385,
respectively for the three months ended March 31, 1998. These amounts are
reported as merger and acquisition costs in the accompanying statement of
operations.
19. SUBSEQUENT EVENTS:
ACQUISITIONS
In January 1998, the Company acquired all of the issued and outstanding
stock of Sequoia Diversified Products, Inc. for an aggregate purchase price of
$25.1 million, which includes transaction costs.
In February 1998, the Company acquired all of the issued and outstanding
shares of Incline Corporation for an aggregate purchase price of $10.7 million,
which includes transaction costs.
In May 1998, the Company acquired the net assets of Call Business Systems,
Inc. for an aggregate purchase price of $6.8 million, which includes transaction
costs.
F-20
<PAGE>
IT PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
In June 1998, the Company acquired the net assets of Servinet Consulting,
Inc. for an aggregate purchase price of $10.0 million, which includes
transaction costs.
These 1998 acquisitions have been accounted for under the purchase method
of accounting. The aggregate excess purchase price over the fair value of the
acquired net assets of $22.3 million has been recorded as goodwill. If these
acquired businesses meet certain performance levels in the defined post-
acquisition periods, the Company will pay an additional amount, not to exceed
$7.1 million.
PLANNED ACQUISITIONS
The Company has entered into agreements or letters of intent (the "Planned
Acquisition"), which are binding as to the member of shares of Common Stock to
be issued and share price, to acquire ten companies. The closing of each Planned
Acquisition will be subject to certain customary conditions, including the
following: (i) the negotiation and execution of definitive acquisition
agreements; (ii) the continuing accuracy of representations and warranties;
(iii) the performance of covenants; and (iv) the absence of a material adverse
change in the results of operations, financial condition or business of such
acquisition candidate prior to the closing date.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Kandl Data Products, Inc.:
We have audited the accompanying balance sheets of Kandl Data Products,
Inc. (a Maryland corporation) as of September 30, 1995, September 30, 1996, and
May 31, 1997, and the related statements of operations, stockholders' equity and
cash flows for the years ended September 30, 1995 and 1996, and eight months
ended May 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kandl Data Products, Inc. as
of September 30, 1995, September 30, 1996, and May 31, 1997, and the results of
its operations and its cash flows for the years ended September 30, 1995 and
1996, and eight months ended May 31, 1997, in conformity with generally accepted
accounting principles.
Washington, D.C.
June 19, 1998
F-22
<PAGE>
KANDL DATA PRODUCTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MAY 31,
1995 1996 1997
--------------- --------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 708,340 $ 230,947 $ 295,637
Accounts receivable, net of allowance for doubtful accounts
of $5,000, $5,000, and $18,644, respectively................. 453,083 727,274 698,818
Lease receivable, short term .................................. 34,398 25,962 13,167
Income tax receivable ......................................... 1,587 -- --
Inventory ..................................................... 150,670 253,366 268,368
Deferred tax asset ............................................ 31,372 33,646 32,987
Prepaid expenses and other current assets ..................... 36,079 23,788 32,408
---------- ---------- ----------
Total current assets ........................................ 1,415,529 1,294,983 1,341,385
Property and equipment, net .................................... 123,660 118,664 39,925
Lease receivable, long term .................................... 49,982 45,090 31,923
---------- ---------- ----------
Total assets ................................................ $1,589,171 $1,458,737 $1,413,233
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 394,916 $ 568,188 $ 364,092
Accrued expenses .............................................. 143,951 61,050 215,569
Income taxes payable .......................................... -- 28,590 98,365
Due to related party .......................................... 262,080 112,320 --
Customer deposits ............................................. 30,467 13,594 27,317
---------- ---------- ----------
Total current liabilities ................................... 831,414 783,742 705,343
Deferred tax liability, long term ............................. 120,869 71,147 31,266
---------- ---------- ----------
Total liabilities ........................................... 952,283 854,889 736,609
---------- ---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, no par value, 1,000 shares authorized, issued
and outstanding ............................................. 80,000 80,000 80,000
Retained earnings ............................................. 556,888 523,848 596,624
---------- ---------- ----------
Total stockholders' equity .................................. 636,888 603,848 676,624
---------- ---------- ----------
Total liabilities and stockholders' equity .................. $1,589,171 $1,458,737 $1,413,233
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-23
<PAGE>
KANDL DATA PRODUCTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE EIGHT
-------------------------------- MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, MAY 31,
1995 1996 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Revenues:
Hardware ................................................... $ 5,378,831 $4,744,638 $ 3,307,833
Services ................................................... 378,530 416,451 331,349
----------- ---------- -----------
Total revenues ........................................... 5,757,361 5,161,089 3,639,182
----------- ---------- -----------
Cost of goods and services sold:
Hardware ................................................... 4,078,230 4,078,337 2,327,712
Services ................................................... 229,906 252,938 201,250
----------- ---------- -----------
Total cost of goods and services sold .................... 4,308,136 4,331,275 2,528,962
----------- ---------- -----------
Gross profit ................................................ 1,449,225 829,814 1,110,220
Other operating expenses:
Selling, general, and administrative ....................... 926,940 657,771 979,899
Marketing services from related party ...................... 262,080 225,199 --
Depreciation ............................................... 24,131 32,955 56,481
----------- ---------- -----------
Total other operating expenses ........................... 1,213,151 915,925 1,036,380
Operating income (loss) ..................................... 236,074 (86,111) 73,840
Other income (expense):
Interest income ............................................ -- 11,855 26,503
Other income ............................................... 7,128 21,302 18,246
----------- ---------- -----------
Total other income ....................................... 7,128 33,157 44,749
Net income (loss) before provision for income taxes ......... 243,202 (52,954) 118,589
Provision (benefit) for income taxes ........................ 93,925 (19,914) 45,813
----------- ---------- -----------
Net income (loss) ........................................... $ 149,277 $ (33,040) $ 72,776
=========== ========== ===========
Basic and diluted net income (loss) per share ............... $ 149.28 $ (33.04) $ 72.78
=========== ========== ===========
Weighted-average number of shares ........................... 1,000 1,000 1,000
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
KANDL DATA PRODUCTS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
-------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, September 30, 1994 ......... 1,000 $80,000 $ 407,611 $ 487,611
Net income ......................... -- -- 149,277 149,277
----- ------- --------- ---------
Balance, September 30, 1995 ......... 1,000 80,000 556,888 636,888
Net loss ........................... -- -- (33,040) (33,040)
----- ------- --------- ---------
Balance, September 30, 1996 ......... 1,000 80,000 523,848 603,848
Net income ......................... -- -- 72,776 72,776
----- ------- --------- ---------
Balance, May 31, 1997 ............... 1,000 $80,000 $ 596,624 $ 676,624
===== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
KANDL DATA PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------- FOR THE EIGHT
SEPTEMBER 30, SEPTEMBER 30, MONTHS ENDED
1995 1996 MAY 31, 1997
-------------- --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $ 149,277 $ (33,040) $ 72,776
Adjustments to reconcile net income (loss) to net cash
flows from operating activities--
Depreciation of property and equipment ................. 24,131 32,955 56,481
Provision for deferred taxes ........................... 80,935 (51,992) (39,222)
Loss on disposal of property ........................... -- -- 55,147
Changes in assets and liabilities--
Accounts receivable, net .............................. (121,394) (274,891) 29,156
Lease receivable ...................................... (14,011) 13,328 25,962
Income tax receivable ................................. (1,587) 1,587 --
Inventory ............................................. 39,944 (102,696) (15,002)
Prepaid expenses and other current assets ............. 2,175 12,291 (8,620)
Accounts payable ...................................... 14,888 173,271 (204,095)
Accrued expenses ...................................... 44,970 (82,901) 154,519
Income taxes payable .................................. (17,423) 29,286 69,075
Due to related party .................................. 262,080 (149,760) (112,320)
Customer deposits ..................................... 30,467 (16,873) 13,722
---------- ---------- ----------
Net cash flows used in operating activities ......... 494,452 (449,435) 97,579
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ....................... (29,163) (27,958) (32,889)
---------- ---------- ----------
Net cash used in investing activities ............... (29,163) (27,958) (32,889)
---------- ---------- ----------
Net increase in cash and cash equivalents ................. 465,289 (477,393) 64,690
Cash and cash equivalents, beginning of period ............ 243,051 708,340 230,947
---------- ---------- ----------
Cash and cash equivalents, end of period .................. $ 708,340 $ 230,947 $ 295,637
========== ========== ==========
Cash paid for income taxes ................................ $ 33,081 $ 16,500 $ 28,375
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-26
<PAGE>
KANDL DATA PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1995, SEPTEMBER 30, 1996, AND MAY 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Kandl Data Products, Inc. ("Kandl" or the "Company"), a Maryland
corporation, resells hardware and software systems products and provides a range
of consulting, implementation, and maintenance services to end users.
The Company's year-end is September 31. These financial statements have
been prepared for the eight months ended May 31, 1997, pursuant to an asset
purchase agreement whereby the outstanding common stock of the Company was
acquired by IT Partners, Inc. (see Note 7).
REVENUE RECOGNITION
Hardware revenue is primarily derived from the sale of computer hardware
equipment. Service revenue is derived from information technology services,
including on-site network support, systems consulting, software installation,
installation, design and integration of network systems, and other value-added
services.
Hardware sales with no related service component are recognized at the time
of shipment provided that the collectibility of the receivable is probable and
no significant vendor obligations remain. Revenue from services is recognized as
services are performed or ratably if performed over a service contract period.
Revenue for material projects with a duration of three months or longer that
require installation, system design, and integration is recognized under the
percentage-of-completion method as the work progresses.
The American Institute of Certified Public Accountants has issued Statement
of Position 97-2 "Software Revenue Recognition" ("SOP 97-2") that supersedes
Statement of Position 91-1. Management believes that the changes contained in
SOP 97-2 do not have a material impact on the Company.
CONCENTRATIONS OF MAJOR CUSTOMERS AND CREDIT RISK
The Company's largest customer represents approximately 48, 66, and 67
percent of accounts receivable at September 30, 1995, September 30, 1996, and
May 31, 1997, respectively. Sales to the Company's largest customer represent
approximately 68, 62, and 63 percent of total revenues for the years ended
September 30, 1995 and 1996, and the eight months ended May 31, 1997,
respectively. Approximately 94 percent of the total revenues generated by sales
to the Company's largest customer were for the sale of computer hardware
equipment.
Subsequent to May 31, 1997, the Company's largest customer has chosen a
different vendor for future computer hardware equipment needs. Management
believes that the Company will be able to obtain additional revenues from other
customers to replace revenues lost. No assurance can be given that management
will be successful in replacing sales previously made to this customer with
additional sales to new or existing customers or that they will be at a similar
level of profitability.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains reserves for potential credit losses; historically, such
losses have been within management's expectations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid investments with a maturity of
three months or less.
F-27
<PAGE>
KANDL DATA PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
LEASE RECEIVABLE
Lease receivables represent sales-type leases resulting from the Company
leasing computer equipment to customers over periods ranging from three to four
years. At September 30, 1995, September 30, 1996, and May 31, 1997, the lease
receivables are $84,380, $71,052, and $45,090, net of unearned finance income of
$28,995, $17,255, and $10,908, respectively. Lease finance income included in
other income in the accompanying statements of operations for the years ended
September 30, 1995 and 1996, and the eight months ended May 31, 1997, are
$7,128, $11,740, and $6,347, respectively. As of May 31, 1997, net future
minimum payments from lease receivables are as follows:
PERIOD ENDED DECEMBER 31,
-------------------------
June 1, 1997 to December 31, 1997 ...... $ 6,151
1998 ................................... 17,655
1999 ................................... 20,177
2000 ................................... 1,107
-------
$45,090
=======
INVENTORY
Inventory is recorded at the lower of cost or market value using the
first-in first-out method of accounting. Inventory consists of computer hardware
equipment, software and parts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets as follows:
Furniture and fixtures ................. 6 years
Computer equipment ..................... 3 years
Machinery and equipment ................ 8 years
Vehicles ............................... 4 years
ACCRUED EXPENSES
As of September 30, 1995, September 30, 1996, and May 31, 1997, accrued
expenses consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MAY 31,
1995 1996 1997
--------------- --------------- -----------
<S> <C> <C> <C>
Accrued salaries and benefits ......... $100,731 $39,617 $134,799
Legal expenses ........................ -- -- 56,819
Other ................................. 43,220 21,433 23,951
-------- ------- --------
$143,951 $61,050 $215,569
======== ======= ========
</TABLE>
F-28
<PAGE>
KANDL DATA PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
COST OF GOODS AND SERVICES SOLD
The Company includes the costs of computer hardware equipment, software,
and parts sold in the cost of hardware sold and the costs of technicians and
engineers who provide services in the cost of services sold in the accompanying
statements of operations.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax laws or rates. SFAS No. 109 requires that the tax benefit of net
operating loss carryforwards for financial reporting purposes be recorded as an
asset. A valuation allowance is established, if based on the evidence available
it is more likely than not, that a portion of the deferred tax assets will not
be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
As of September 30, 1995, September 30, 1996, and May 31, 1997, property
and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MAY 31,
1995 1996 1997
--------------- --------------- ------------
<S> <C> <C> <C>
Furniture and fixtures .................. $ 8,248 $ 8,248 $ --
Computer equipment ...................... 119,991 143,098 90,692
Machinery and equipment ................. 5,148 10,000 --
Vehicles ................................ 34,250 34,250 34,250
--------- --------- ---------
167,637 195,596 124,942
Less-- Accumulated depreciation ......... (43,977) (76,932) (85,017)
--------- --------- ---------
$ 123,660 $ 118,664 $ 39,925
========= ========= =========
</TABLE>
For the eight months ended May 31, 1997, the Company recorded a $55,147
loss on the disposal of computer equipment which is included in selling,
general, and administrative expense in the accompanying statements of
operations.
F-29
<PAGE>
KANDL DATA PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
3. INCOME TAXES:
Significant components of the Company's deferred tax assets and liabilities
resulting from carryforwards and temporary differences as of September 30, 1995,
September 30, 1996, and May 31, 1997, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MAY 31,
1995 1996 1997
--------------- --------------- ------------
<S> <C> <C> <C>
Current:
Deferred tax assets--
Allowance for doubtful accounts ......... $ 1,931 $ 1,931 $ 7,200
Inventory reserve ....................... 11,968 25,068 25,787
Accrued expenses/receivable ............. 17,473 6,647 --
---------- --------- ---------
Total deferred tax assets ............... 31,372 33,646 32,987
---------- --------- ---------
Long term:
Deferred tax assets (liabilities)--
Depreciation ............................ (47,757) (20,157) 9,698
Other ................................... (40,524) (23,550) (23,550)
Lease revenue ........................... (32,588) (27,440) (17,414)
---------- --------- ---------
Total deferred tax liabilities .......... (120,869) (71,147) (31,266)
---------- --------- ---------
Net deferred taxes ...................... $ (89,497) $ (37,501) $ 1,721
========== ========= =========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MAY 31,
1995 1996 1997
--------------- --------------- ------------
<S> <C> <C> <C>
Current:
Federal ........................... $11,431 $ 28,229 $ 74,831
State ............................. 1,559 3,849 10,204
------- --------- ---------
Total current ..................... 12,990 32,078 85,035
------- --------- ---------
Deferred:
Federal ........................... 71,223 (45,753) (34,515)
State ............................. 9,712 (6,239) (4,707)
------- --------- ---------
Total deferred .................... 80,935 (51,992) (39,222)
------- --------- ---------
Total provision (benefit) ......... $93,925 $ (19,914) $ 45,813
======= ========= =========
</TABLE>
The reasons for the differences between applicable income taxes and the
amount computed by applying the statutory federal income tax rate of 34 percent
to net income (loss) before taxes were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MAY 31,
1995 1996 1997
--------------- --------------- ----------
<S> <C> <C> <C>
Applicable income taxes based on statutory tax rate ......... $82,689 $ (18,004) $40,320
State taxes, net of federal tax benefit ..................... 11,236 (2,446) 5,479
Other ....................................................... -- 536 14
------- --------- -------
Income tax provision (benefit) .............................. $93,925 $ (19,914) $45,813
======= ========= =======
</TABLE>
4. PROFIT-SHARING PLAN:
The Company maintains a 401(k) profit-sharing plan (the "Plan") for all
employees meeting certain minimum service requirements. Under the Plan,
employees may elect to contribute zero to 20 percent of their compensation.
Plan participants vest immediately in all employee elective contributions. The
F-30
<PAGE>
KANDL DATA PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Company contributes an amount equal to 25 percent of the amount contributed by
employees up to 8 percent of their gross pay. Additionally, plan participants
vest in employer contributions over various periods. Employer contributions
totaled $45,098, $11,773, and $5,840 for the years ended September 30, 1995 and
1996, and the eight months ended May 31, 1997, respectively.
5. RELATED-PARTY TRANSACTIONS:
The stockholders of the Company are the stockholders of a marketing
services firm that provided the company marketing and general business
consulting services during the years 1994 through 1996. Total payments to the
related party for the years ended September 30, 1995 and 1996, and the eight
months ending May 31, 1997, are $0, $379,959 and $112,320, respectively.
6. COMMITMENTS AND CONTINGENCIES:
LITIGATION
Litigation and claims are filed against the Company from time to time in
the ordinary course of business. These actions are in various stages, and no
judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing with legal counsel, is of the opinion that the
outcome of such matters will not have a material adverse effect on the Company's
financial position or results of operations.
OPERATING LEASES
The Company leases its operating facilities under leases that expire
through June 2002. Future minimum rent payments due under existing operating
leases as of May 31, 1997, are as follows:
PERIOD ENDED DECEMBER 31,
-------------------------
June 1, 1997, to December 31, 1997 ... $ 36,055
1998 ................................. 63,393
1999 ................................. 65,929
2000 ................................. 68,566
2001 ................................. 71,309
2002 ................................. 36,354
--------
$341,606
========
Rent expense for the years ended September 30, 1995 and 1996, and eight
months ended May 31, 1997, totaled $66,004, $67,324 and $38,686 respectively.
7. SUBSEQUENT EVENT:
On May 31, 1997, all of the issued and outstanding stock of the Company was
acquired by IT Partners, Inc., for an aggregate purchase price of $3,451,669,
which includes transaction costs. These financial statements do not include the
effects of this transaction.
F-31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Computer Network Services, Inc.:
We have audited the accompanying balance sheets of Computer Network
Services, Inc. (a New Jersey corporation) as of December 31, 1995 and 1996, and
May 31, 1997, and the related statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1995 and 1996, and the five months
ended May 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Computer Network Services,
Inc. as of December 31, 1995 and 1996, and May 31, 1997, and the results of its
operations and its cash flows for the years ended December 31, 1995 and 1996,
and the five months ended May 31, 1997, in conformity with generally accepted
accounting principles.
Washington, D.C.
July 8, 1998
F-32
<PAGE>
COMPUTER NETWORK SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MAY 31,
1995 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ................................................... $ -- $ 90,286 $ 80,722
Accounts receivable, net of allowance for doubtful ac-
counts of $37,000, $37,000, and $126,534, respectively 1,269,678 1,382,062 1,413,235
Inventory .............................................. 383,719 289,897 196,655
Other current assets ................................... 22,563 44,395 83,607
---------- ---------- ----------
Total current assets ................................. 1,675,960 1,806,640 1,774,219
Property and equipment, net ............................. 116,867 101,643 88,122
Other assets ............................................ 114,974 101,062 96,152
---------- ---------- ----------
Total assets ......................................... $1,907,801 $2,009,345 $1,958,493
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 586,809 $ 604,328 $ 612,564
Accrued expenses ....................................... 228,374 194,470 228,078
Deferred revenue ....................................... 136,947 127,773 127,773
Current portion of notes payable ....................... 217,148 470,220 466,599
Due to officers ........................................ 123,688 77,028 78,546
---------- ---------- ----------
Total current liabilities ............................ 1,292,966 1,473,819 1,513,560
Notes payable, net of current portion ................... 144,242 23,664 4,392
---------- ---------- ----------
Total liabilities .................................... 1,437,208 1,497,483 1,517,952
---------- ---------- ----------
Stockholders' equity:
Common stock, 1,000 shares, no par value, $60 stated
value, authorized, issued and outstanding ............ 60,000 60,000 60,000
Additional paid-in capital ............................. 50,000 50,000 50,000
Retained earnings ...................................... 360,593 401,862 330,541
---------- ---------- ----------
Total stockholders' equity ........................... 470,593 511,862 440,541
---------- ---------- ----------
Total liabilities and stockholders' equity ........... $1,907,801 $2,009,345 $1,958,493
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-33
<PAGE>
COMPUTER NETWORK SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE FIVE
DECEMBER 31, MONTHS ENDED
--------------------------------- MAY 31,
1995 1996 1997
--------------- --------------- -------------
<S> <C> <C> <C>
Revenues:
Sales ................................................ $ 5,685,753 $ 5,860,953 $2,747,899
Service .............................................. 3,298,439 4,337,814 1,704,872
----------- ------------ ----------
Total revenues ..................................... 8,984,192 10,198,767 4,452,771
----------- ------------ ----------
Cost of goods and services sold:
Sales ................................................ 4,668,990 5,278,347 2,333,130
Service .............................................. 2,394,451 2,931,522 1,096,635
----------- ------------ ----------
Total cost of goods and services sold .............. 7,063,441 8,209,869 3,429,765
----------- ------------ ----------
Gross profit ....................................... 1,920,751 1,988,898 1,023,006
Selling, general, and administrative expenses ......... 1,753,200 1,859,926 1,030,275
Depreciation expense .................................. 31,862 36,055 9,183
----------- ------------ ----------
Operating income (loss) ............................ 135,689 92,917 (16,452)
Other income .......................................... 62,023 18,309 3,331
Interest expense ...................................... 54,776 69,957 30,482
----------- ------------ ----------
Net income (loss) ..................................... $ 142,936 $ 41,269 $ (43,603)
=========== ============ ==========
Basic and diluted net income (loss) per share ......... $ 142.94 $ 41.27 $ (43.60)
=========== ============ ==========
Weighted-average number of shares ..................... 1,000 1,000 1,000
=========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
COMPUTER NETWORK SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN
SHARES AMOUNT CAPITAL RETAINED TOTAL
-------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 ..................... 1,000 $60,000 $ -- $ 217,657 $ 277,657
Capital contribution by stockholder ......... -- -- 50,000 -- 50,000
Net income .................................. -- -- -- 142,936 142,936
----- ------- ------- --------- ---------
Balance, December 31, 1995 ................... 1,000 60,000 50,000 360,593 470,593
Net income .................................. -- -- -- 41,269 41,269
----- ------- ------- --------- ---------
Balance, December 31, 1996 ................... 1,000 60,000 50,000 401,862 511,862
Dividend .................................... -- -- -- (27,718) (27,718)
Net loss .................................... -- -- -- (43,603) (43,603)
----- ------- ------- --------- ---------
Balance, May 31, 1997 ........................ 1,000 $60,000 $50,000 $ 330,541 $ 440,541
===== ======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE>
COMPUTER NETWORK SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FIVE
YEARS ENDED MONTHS
DECEMBER 31, ENDED
----------------------------- MAY 31,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................... $ 142,936 $ 41,269 $ (43,603)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities-
Depreciation .......................................... 31,862 36,055 9,183
Changes in assets and liabilities: ....................
Increase in accounts receivable, net ................. (341,834) (112,384) (31,173)
Decrease in inventory ................................ 116,760 93,822 93,242
Decrease (increase) in other current assets .......... 20,605 (21,832) (39,212)
Decrease (increase) in other long-term assets ........ 2,392 (13,912) (4,910)
Decrease in deferred revenue ......................... (287) (9,174) --
(Decrease) increase in accounts payable .............. (18,032) 17,519 8,236
Increase (decrease) in accrued expenses .............. 89,287 (33,904) 33,608
---------- ---------- ----------
Net cash flows provided by operating activities..... 43,689 (2,541) 25,371
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ...................... (59,912) (9,673) (13,560)
---------- ---------- ----------
Net cash used in investing activities .............. (59,912) (9,673) (13,560)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in due to officers .................. (34,336) (46,660) 1,518
Proceeds from notes payable ............................. 642,621 549,490 100,000
Payments on notes payable ............................... (642,062) (400,330) (122,893)
Capital contribution from stockholder ................... 50,000 -- --
---------- ---------- ----------
Net cash provided by (used in) financing activi-
ties .............................................. 16,223 102,500 (21,375)
Net increase (decrease) in cash .......................... -- 90,286 (9,564)
Cash, beginning of period ................................ -- -- 90,286
---------- ---------- ----------
Cash, end of period ...................................... $ -- $ 90,286 $ 80,722
========== ========== ==========
Cash paid for interest ................................... $ 44,701 $ 52,119 $ 23,382
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE>
COMPUTER NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Computer Network Services, Inc. (the "Company") a New Jersey corporation,
provides repair, refurbishing, network, and integration services to the computer
industry and the business community. The Company's operations consist of
component level repair of computer and electronic assemblies, refurbishing and
logistic services for major manufacturers and original equipment manufacturers
throughout the United States. The network and systems integration business, as
well as on-site installation, repair and network support, is focused on
commercial businesses in New Jersey.
The Company's year-end is December 31. Financial statements have been
prepared for the five months ended May 31, 1997, pursuant to an asset purchase
agreement, whereby the outstanding common stock of the Company was acquired by
IT Partners, Inc.
REVENUE RECOGNITION
The Company recognizes revenue for hardware maintenance fees pro rata over
the term of the agreements, which generally have a one-year term. Revenues from
sales of hardware and software are recognized at the time of shipment and when
collection of the receivable is probable. Revenues from network installation and
related services are recognized upon completion of work and when collection of
the receivable is probable. Payments received in advance of revenue recognition
for these services and product sales are included in deferred revenue in the
accompanying financial statements.
The American Institute of Certified Public Accountants has issued Statement
of Position 97-2 "Software Revenue Recognition" ("SOP 97-2") that supersedes
Statement of Position 91-1. Management believes that the changes contained in
SOP 97-2 do not have a material impact on the Company.
CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMER
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains reserves for potential credit losses. Historically, such
losses have been insignificant and within management's expectations. The
Company's largest customer represents approximately 18.8, 8.5, and 16.5 percent
of total accounts receivable as of December 31, 1995 and 1996, and May 31, 1997,
respectively. Sales to the Company's largest customer represents approximately
17.0, 15.2, and 14.3 percent of total revenues for the years ended December 31,
1995 and 1996, and the five months ended May 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial and all
nonfinancial instruments from its disclosure requirements. Amounts reported in
the accompanying balance sheets related to accounts receivable, accounts
payable, notes payable and due to officers approximate fair value.
F-37
<PAGE>
COMPUTER NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
INVENTORY
Inventory is recorded at the lower of cost or market value using the
first-in, first-out method of accounting. Inventory consists of:
DECEMBER 31,
------------------- MAY 31,
1995 1996 1997
-------- -------- --------
Raw materials ................................. $108,571 $ 26,113 $ --
Finished goods ................................ 275,148 263,784 196,665
-------- -------- --------
$383,719 $289,897 $196,665
======== ======== ========
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets as follows:
Machinery and equipment .............. 5 years
Vehicles ............................. 7 years
Furniture and fixtures ............... 5 years
Office equipment ..................... 5 years
Leasehold improvements ............... The shorter of the term of the lease
or the life of the improvement
INVESTMENT IN AFFILIATED COMPANY
Included in other assets in the accompanying balance sheets is an
investment in a 50 percent owned subsidiary, C.N.S. Canada, Inc. ("Canada"). The
subsidiary was established on June 10, 1988 to conduct operations similar to the
Company in Canada. Canada is accounted for under the equity method. Also
included in other assets for all periods presented is $7,516 relating to a loan
made by the Company to the affiliated company. The Company's share of Canada's
net income (loss) is included in other income in the accompanying statements of
operations. The investment in affiliate consists of the following:
Investment balance, December 31, 1994 ......... $ 91,267
1995 gain .................................... 4,392
--------
Investment balance, December 31, 1995 ......... 95,659
1996 loss .................................... (6,726)
--------
Investment balance, December 31, 1996 ......... 88,933
1997 loss .................................... (4,910)
--------
Investment balance, May 31, 1997 .............. $ 84,023
========
ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-------------------- MAY 31,
1995 1996 1997
-------- -------- ---------
Accrued salaries and related taxes ......... $120,845 $142,091 $181,721
Accrued sales taxes ........................ 29,048 19,706 16,202
Other ...................................... 78,481 32,673 30,155
-------- -------- --------
$228,374 $194,470 $228,078
======== ======== ========
F-38
<PAGE>
COMPUTER NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
ADVERTISING COSTS
All advertising costs are expensed when incurred. Such costs which are
included in selling, general and administrative expenses, were $37,387, $39,284,
and $28,206 for the years ended December 31, 1995 and 1996, and the five months
ended May 31, 1997, respectively.
COST OF GOODS AND SERVICES SOLD
The Company includes the costs of computer hardware equipment, software,
and parts sold in the cost of hardware sold and the costs of technicians and
engineers who provide services in the cost of services sold. Included in
depreciation expense in the accompanying statements of operations is
depreciation expense of $27,992, $29,567, and $10,676 for the years ended
December 31, 1995 and 1996, and the five months ended May 31, 1997,
respectively.
INCOME TAXES
The stockholders elected under Subchapter S of the Internal Revenue Code to
include the Company's income in their personal income tax returns for federal
income tax purposes. Accordingly, the Company is not subject to federal income
taxes. Unapportioned income is included in the stockholders' personal income tax
returns for state income tax purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MAY 31,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Machinery and equipment ................ $ 114,023 $ 114,023 $ 116,518
Vehicles ............................... 104,656 104,656 104,656
Furniture and fixtures ................. 9,435 60,224 74,222
Office equipment ....................... 50,789 20,831 --
Leasehold improvements ................. 14,500 14,500 14,500
---------- ---------- ----------
293,403 314,234 309,896
Less- Accumulated depreciation ......... (176,536) (212,591) (221,774)
---------- ---------- ----------
$ 116,867 $ 101,643 $ 88,122
========== ========== ==========
</TABLE>
3. DUE TO OFFICERS:
The Company has demand loans to the stockholders of the Company. The loans
accrue interest at 8 percent per year. Accrued interest related to the demand
loans is $33,922, $40,112, and $40,590 as of December 31, 1995 and 1996, and May
31, 1997, respectively.
F-39
<PAGE>
COMPUTER NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
4. DEBT:
The Company's debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MAY 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Term loan .................................. $ 99,937 $250,000 $250,000
Revolving line of credit ................... -- 99,427 124,427
Demand note payable ........................ 225,000 125,000 83,333
Various notes payable for vehicles ......... 36,453 19,457 13,231
-------- -------- --------
Total debt ................................ 361,390 493,884 470,991
Less- Current portion ...................... 217,148 470,220 466,599
-------- -------- --------
Debt, net of current portion ............... $144,242 $ 23,664 $ 4,392
======== ======== ========
</TABLE>
Maturities on notes payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1997 .............................. $466,599
1998 .............................. 4,392
--------
$470,991
========
</TABLE>
The Company's term loan bears interest at the bank's prime rate plus 1
percent per year (9.5 percent at May 31, 1997). Borrowings are collateralized by
first priority security interests in substantially all of the assets of the
Company and mortgage indentures on the homes of the stockholders, and are
cross-collateralized by the Company's short-term borrowings. The effective
interest rate on term loan borrowings is 13.1, 9.4, and 9.4 percent for the
years ended December 31, 1995 and 1996, and the five months ended May 31, 1997.
The weighted average interest rate on term loan borrowings is 9.8, 9.3, and 9.4
percent for the years ended December 31, 1995 and 1996, and the five months
ended May 31, 1997.
The revolving line of credit and demand note bear interest at the bank's
prime rate plus 1 percent per year (9.5 percent at May 31, 1997). Interest is
payable monthly. Under the revolving line of credit and demand note, the Company
has pledged substantially all of its assets. The Company's stockholders have
also personally guaranteed repayment of the revolving line of credit. The
effective interest rate on revolving line of credit and demand note borrowings
is 11.6, 11.4, and 13.5 percent for the years ended December 31, 1995 and 1996,
and the five months ended May 31, 1997. The weighted-average interest rate on
revolving line of credit and demand note borrowings is 9.8, 9.3, and 9.3 percent
for the years ended December 31, 1995 and 1996, and the five months ended May
31, 1997.
Notes payable for vehicles are payable in monthly installments of principal
and interest and bear interest ranging from 2.9 to 12.9 percent. The vehicle
notes are secured by specific vehicles.
5. STOCK REPURCHASE AGREEMENT:
There is a formal agreement which requires the Company to purchase, at fair
market value, the outstanding shares in the event of a stockholder's death. In
conjunction with this agreement, the Company is the beneficiary of key-man life
insurance policies carried on the lives of its stockholders. The cash surrender
value of these policies included in other current assets in the accompanying
balance sheets is $22,117, $35,745 and $39,085 as of December 31, 1995 and 1996,
and May 31, 1997, respectively.
6. EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) Profit-Sharing Plan (the "Plan") which
covers all employees who are twenty-one years old and have at least one year of
service. Under the Plan agreement, participants may elect to defer up to the
maximum percentage allowable by the Internal Revenue Service. In addi-
F-40
<PAGE>
COMPUTER NETWORK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
tion, the Company makes a matching contribution based on 50 percent of each
eligible participant's elective deferral at up to a maximum of $500 per eligible
employee per year. The Company may also make discretionary contributions based
on operating results. Participant contributions vest immediately and employer
contributions vest at the end of the third year of service. Contributions
totaled $13,507, $8,399, and $10,838 for the years ended December 31, 1995 and
1996, and the five months ended May 31, 1997, respectively.
7. CONTINGENCIES AND COMMITMENTS:
LITIGATION
Litigation and claims are filed against the Company from time to time in
the ordinary course of business. These actions are in various preliminary
stages, and no judgments or decisions have been rendered by hearing boards or
courts. Management, after reviewing with legal counsel, is of the opinion that
the outcome of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
OPERATING LEASES
The Company leases certain office space, operating facilities, and
equipment under noncancelable operating leases that expire through 2003. Future
minimum rent payments due under existing operating leases are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1997 ........................... $ 427,787
1998 ........................... 424,507
1999 ........................... 407,936
2000 ........................... 401,961
2001 and thereafter ............ 904,412
----------
$2,566,603
==========
Rent expense for the years ended December 31, 1995 and 1996, and the five
months ended May 31, 1997, totaled $313,497, $366,586, and $152,082,
respectively.
8. SUBSEQUENT EVENT:
In May 1997, IT Partners, Inc. acquired all of the issued and outstanding
stock of the Company for an aggregate purchase price of $4,720,531, which
includes transaction costs. The investment in affiliated company (Note 1) and
cash surrender value of officers' life insurance (Note 5) were not acquired as
part of the purchase. The accompanying financial statements do not include the
effects of this transaction.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To A-COM, Inc.:
We have audited the accompanying balance sheets of A-COM, Inc. (a Delaware
corporation) as of June 30, 1996 and 1997, and the related statements of
operations, stockholders' equity (accumulated deficit) and cash flows for the
years ended June 30, 1995, 1996, and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of A-COM, Inc. as of June 30,
1996 and 1997, and the results of its operations and its cash flows for the
years ended June 30, 1995, 1996, and 1997, in conformity with generally accepted
accounting principles.
Washington, D.C.
July 28, 1998
F-42
<PAGE>
A-COM, INC.
BALANCE SHEETS
AS OF JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1997
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 54,180 $ 42,580
Accounts receivable, net of allowance for doubtful accounts of
$297,705 and $455,106, respectively................................ 1,906,342 3,407,082
Inventory, net ...................................................... 223,502 223,939
Costs and estimated earnings in excess of billings on uncompleted
contracts ......................................................... 806,271 924,979
Deferred tax asset .................................................. 177,576 192,946
Prepaid expenses and other current assets ........................... 266,920 302,769
---------- ------------
Total current assets .............................................. 3,434,791 5,094,295
Property and equipment, net ......................................... 484,066 724,075
Other assets ........................................................ 72,908 83,026
Deferred tax asset .................................................. 53,152 4,522
---------- ------------
Total assets ...................................................... $4,044,917 $ 5,905,918
========== ============
LIABILITIES AND STOCHOLDERS' EQUITY (ACCUMULATED DEFICIT)
Current liabilities:
Accounts payable .................................................... $2,000,246 $ 2,539,072
Accrued expenses .................................................... 315,825 1,554,635
Loan from stockholder ............................................... 102,232 109,000
Billings in excess of costs and estimated earnings on uncompleted
contracts ......................................................... 862,340 1,293,838
Notes payable, net of long-term portion ............................. 52,319 104,968
Line of credit ...................................................... 543,147 977,068
---------- ------------
Total current liabilities ......................................... 3,876,109 6,578,581
Notes payable, net of current portion ................................ 135,115 373,369
Other liabilities .................................................... 45,137 56,900
---------- ------------
Total liabilities ................................................. 4,056,361 7,008,850
---------- ------------
Contingencies and commitments (Note 12)
Stockholders' equity (accumulated deficit):
Common stock, par value $10, 10,000 shares authorized and
500 shares issued and outstanding ................................. 5,000 5,000
Accumulated deficit ................................................. (16,444) (1,107,932)
---------- ------------
Total stockholders' equity (accumulated deficit) .................. (11,444) (1,102,932)
---------- ------------
Total liabilities and stockholders' (accumulated deficit) ......... $4,044,917 $ 5,905,918
========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-43
<PAGE>
A-COM, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30,
1995 1996 1997
--------------- -------------- ----------------
<S> <C> <C> <C>
Revenues .............................................. $ 9,946,664 $13,291,727 $ 20,078,066
Cost of goods and services sold ....................... 7,710,516 10,017,653 16,196,095
----------- ----------- ------------
Gross profit .......................................... 2,236,148 3,274,074 3,881,971
Other operating expenses:
Salaries, wages, and benefits ........................ 1,580,683 1,422,780 2,340,762
Selling, general, and administrative ................. 1,243,814 1,594,474 2,252,954
Depreciation ......................................... 141,386 141,161 184,742
----------- ----------- ------------
Total other operating expenses ..................... 2,965,883 3,158,415 4,778,458
(Loss) income from operations ......................... (729,735) 115,659 (896,487)
Other expense ......................................... (90,403) (82,326) (161,741)
----------- ----------- ------------
Net (loss) income before taxes ........................ (820,138) 33,333 (1,058,228)
Income tax (expense) benefit .......................... (82,002) 125,014 (33,260)
----------- ----------- ------------
Net (loss) income ..................................... $ (902,140) $ 158,347 $ (1,091,488)
=========== =========== ============
Basic and diluted net income (loss) per share ......... $ (1,804.28) $ 316.69 $ (2,182.98)
=========== =========== ============
Weighted average shares outstanding ................... 500 500 500
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-44
<PAGE>
A-COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (ACCUMULATED DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance, June 30, 1994 ......... 500 $5,000 $ 727,349 $ 732,349
Net loss ...................... -- -- (902,140) (902,140)
--- ------ ------------ ------------
Balance, June 30, 1995 ......... 500 5,000 (174,791) (169,791)
Net income .................... -- -- 158,347 158,347
--- ------ ------------ ------------
Balance, June 30, 1996 ......... 500 5,000 (16,444) (11,444)
Net loss ...................... -- -- (1,091,488) (1,091,488)
--- ------ ------------ ------------
Balance, June 30, 1997 ......... 500 $5,000 $ (1,107,932) $ (1,102,932)
=== ====== ============ ============
</TABLE>
The accompanying notes are an integral part of this statements.
F-45
<PAGE>
A-COM, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
JUNE 30, JUNE 30 JUNE 30,
1995 1996 1997
-------------- ------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $ (902,140) $ 158,347 $ (1,091,488)
Adjustments to reconcile net loss to net cash flows from
operating activities--
Depreciation .......................................... 141,386 141,161 184,742
Changes in assets and liabilities--
Accounts receivable, net ............................. 190,129 (430,487) (1,500,740)
Inventory, net ....................................... 187,385 (73,990) (437)
Costs and estimated earnings in excess of billings on
uncompleted contracts .............................. 444,233 (661,754) (118,708)
Deferred tax asset ................................... 82,002 (125,014) 33,260
Prepaid expenses and other current assets ............ (152,562) (87,293) (35,849)
Other assets ......................................... 162,937 (14,739) (10,118)
Accounts payable ..................................... (399,479) 1,139,893 538,826
Accrued expenses ..................................... 17,216 61,958 1,238,810
Billings in excess of costs and estimated earnings on
uncompleted contracts .............................. 800,489 9,762 431,498
Other liabilities .................................... (2,029) -- 11,763
---------- ---------- ------------
Net cash flows provided by (used in) operating ac-
tivities .......................................... 569,567 117,844 (318,441)
---------- ---------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment ...................... (118,953) (232,664) (424,751)
---------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment of) proceeds from notes payable ............... (168,654) 145,260 290,903
(Repayment of) proceeds from line of credit .............. (208,328) (225,810) 433,921
Loan from stockholder .................................... -- 102,232 6,768
---------- ---------- ------------
Net cash (used in) provided by financing activities. (376,982) 21,682 731,592
---------- ---------- ------------
Net increase (decrease) in cash .......................... 73,632 (93,138) (11,600)
Cash, beginning of period ................................ 73,686 147,318 54,180
---------- ---------- ------------
Cash, end of period ...................................... $ 147,318 $ 54,180 $ 42,580
========== ========== ============
Cash paid for interest ................................... $ 104,373 $ 117,597 $ 161,741
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
A-COM, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1995, 1996, AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
A-COM, Inc., (the "Company") a Delaware corporation, located in Northern
Virginia, is engaged in designing, installing and servicing a diverse range of
electronic sound and security systems, as well as voice and data communication
systems. The Company also provides cabling and control wiring services.
In June 1997, all of the issued and outstanding stock of the Company was
acquired by IT Partners, Inc. ("IT Partners"), for an aggregate purchase price
of $9,055,274, which includes transaction costs.
The Company has experienced net losses through June 30, 1997. Since June
30, 1997, the Company has funded its operations through borrowings from IT
Partners. The future viability and operating performance of the Company is
dependent upon its ability to continue to generate revenue from its existing and
future customers and to manage costs.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid investments with a maturity of
three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The carrying values of current assets and current liabilities approximate
fair value due to the relatively short maturities of these instruments. The book
value of the Company's line of credit is consistent with its fair market value
as the Company's borrowing cost is comparable to similar credit facilities, at
June 30, 1995, 1996, and 1997.
This disclosure relates to financial instruments only. The fair value
assumptions were based upon subjective estimates of market conditions and
perceived risks of the financial instruments.
INVENTORY
Inventory is recorded at the lower of cost or market value using the first
in first out method of accounting. Inventory as of June 30, 1996 and 1997,
consists of:
JUNE 30, JUNE 30,
1996 1997
---------- -----------
Materials ........................ $367,887 $485,002
Less-- Inventory reserve ......... 144,385 261,063
-------- --------
Inventory, net ................... $223,502 $223,939
======== ========
F-47
<PAGE>
A-COM, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the expected life of the asset or
term of the lease. Depreciation expense for the years ended June 30, 1995, 1996,
and 1997, was $141,386, $141,161, and $184,742, respectively.
The ranges used in computing estimated useful lives were as follows:
<TABLE>
<S> <C>
Furniture and fixtures .......... 3 -- 7 years
Computer equipment .............. 5 years
Machinery and equipment ......... 5 -- 7 years
Vehicles ........................ 3 -- 7 years
Leasehold improvements .......... 12 years
</TABLE>
ACCRUED EXPENSES
As of June 30, 1996 and 1997, accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1997
---------- ------------
<S> <C> <C>
Accrued salaries and related taxes ......... $ 88,819 $ 879,497
Accrued vacation ........................... 169,083 174,537
Accrued sales and use tax .................. 17,062 99,952
Accrued rent ............................... -- 221,350
Other ...................................... 40,861 179,299
-------- ----------
Total accrued expenses .................... $315,825 $1,554,635
======== ==========
</TABLE>
Accrued salaries and related taxes increased significantly during 1997 due
to employee bonuses earned during that period. Accrued rent as of June 30, 1997,
relates to rent due on the Company's previous facility (the "Flint Lee office")
(see Note 3).
REVENUE RECOGNITION
Hardware and software sales with no related service component and time and
materials contract revenue with no related service component are recognized at
the time of shipment provided that the collectibility of the receivable is
probable and no significant vendor obligations remain. Revenue from services is
recognized as services are performed or ratably if performed over a service
contract period.
Revenue for material projects with a duration of three months or longer
that require installation, system design, and integration, is recognized under
the percentage-of-completion method as the work progresses. Revenue under these
projects is recognized as labor costs are incurred and includes a portion of the
total estimated earnings to be realized in the ratio that labor costs incurred
relate to estimated total labor costs. Estimated contract earnings are reviewed
and revised periodically as the work progresses.
Contract costs consist primarily of materials, direct labor and those
indirect costs related to contract performance, such as indirect labor, and
supplies. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability may result in revisions to costs and
income and are recognized when known.
F-48
<PAGE>
A-COM, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
Costs and estimated earnings in excess of billings on uncompleted
contracts, as reflected on the accompanying balance sheet, comprise amounts of
revenue recognized on contracts for which billings have not been rendered.
Billings in excess of cost and estimated earnings on uncompleted contracts
comprise amounts of billings recognized on contracts for which costs have not
been incurred.
For the year ended June 30, 1995, long-term project revenue, time and
materials contract revenue, and hardware and software sales revenue represented
70, 22, and 8 percent, respectively, of total revenue. For the year ended June
30, 1996, long-term project revenue, time and materials contract revenue, and
hardware and software sales revenue represented 83, 15, and 2 percent,
respectively, of total revenue. For the year ended June 30, 1997, long-term
contract revenue, time and materials contract revenue, and hardware and software
sales revenue represented 82, 9, and 9 percent, respectively, of total revenue.
Revenue from services represented less than 1 percent of total revenue for each
of the years ended June 30, 1995, 1996, and 1997.
ADVERTISING COSTS
All advertising costs are expensed when incurred and included in selling,
general and administrative expenses. Advertising costs for the years ended June
30, 1995, 1996, and 1997, were $45,942, $29,302, and $34,916, respectively.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
As of June 30, 1996 and 1997, property and equipment consist of the
following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
Furniture and fixtures .................. $ 126,803 $ 173,104
Computer equipment ...................... 123,164 176,600
Machinery and equipment ................. 132,555 201,970
Vehicles ................................ 238,861 688,016
Leasehold improvements .................. 483,654 --
--------- ---------
1,105,037 1,239,690
Less-- Accumulated depreciation ......... 620,971 515,615
--------- ---------
Property and equipment, net ............. $ 484,066 $ 724,075
========= =========
</TABLE>
F-49
<PAGE>
A-COM, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
Effective June 30, 1997, the Company moved to a new facility (the "Walney
office") and wrote off the remaining leasehold improvements balance related to
the Flint Lee office. In addition, the Company recorded a loss on the lease
related to the Flint Lee office of $221,350, which is included in accrued
expenses (see Note 1) and selling, general, and administrative expenses as of
June 30, 1997. The loss on the lease is an estimate of future rents due, net of
future rental income.
3. CONTRACTS IN PROGRESS:
As of June 30, 1996 and 1997, information related to uncompleted contracts
is as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1997
-------------- --------------
<S> <C> <C>
Revenue recognized ......................................... $ 5,631,369 $ 6,975,739
Costs recognized ........................................... (3,949,591) (4,856,548)
------------ ------------
Profit margin recognized ................................... 1,681,778 2,119,191
Costs incurred ............................................. 5,389,273 5,986,863
Billings ................................................... (7,127,120) (8,474,913)
------------ ------------
Costs and estimated earnings in excess of billings on uncom-
pleted contracts .......................................... 806,271 924,979
Billings in excess of costs and estimated earnings on uncom-
pleted contracts .......................................... (862,340) (1,293,838)
------------ ------------
$ (56,069) $ (368,859)
============ ============
</TABLE>
4. REVENUES:
The following is a summary of revenues recognized for the periods ended
June 30, 1995, 1996, and 1997:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30,
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Long-term project revenue ................... $6,916,332 $10,984,035 $16,406,833
Time and materials contract revenue ......... 2,229,880 1,956,247 1,872,985
Hardware sales and commissions .............. 800,452 351,445 1,798,248
---------- ----------- -----------
Total revenues .............................. $9,946,664 $13,291,727 $20,078,066
========== =========== ===========
</TABLE>
5. NOTES PAYABLE:
Notes payable at June 30, 1995, 1996, and 1997, consist primarily of notes
for vehicles and other equipment with interest rates ranging from 8.50 to 16.09
percent. The vehicle notes are secured by specific vehicles.
Maturities on notes payable are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
<S> <C>
1998 ............... ......... .... $104,968
1999 ............... ......... .... 104,968
2000 ............... ......... .... 100,743
2001 ............... ......... .... 96,849
2002 ............... ......... .... 70,809
--------
$478,337
========
</TABLE>
F-50
<PAGE>
A-COM, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
6. LOAN FROM STOCKHOLDER:
As of June 30, 1996 and 1997, the Company had a $100,000 note payable with
the stockholder of the Company. Interest is accrued at 9.0 percent annually and
is payable monthly. The terms of the agreement call for principal and interest
payments in the amount of $3,180 be made monthly beginning on April 1, 1996, and
continuing through March 1, 1999, the maturity of the note. In conjunction with
the purchase of the Company by IT Partners, the loan was subsequently paid in
full.
7. REVOLVING LINE OF CREDIT:
As of June 30, 1996 and 1997, the Company had $543,147, and $977,068,
respectively, outstanding under its revolving line of credit agreement. The
maximum amount of borrowings under the line of credit is $2,000,000. The
revolving line of credit bears interest, payable monthly, at the Wall Street
Journal prime rate plus 1.25 per annum. The interest rates were 9.5 and 9.75
percent at June 30, 1996 and 1997, respectively. The line of credit expires on
July 31, 1997. The Company has pledged substantially all assets as collateral
under the revolving line of credit agreement.
Under the terms of this agreement, the Company is required to comply with
certain financial covenants including net worth, a leverage ratio, a senior debt
leverage ratio and an interest coverage ratio. This debt has been presented as a
current liability for all years presented.
In conjunction with the purchase of the Company by IT Partners, the line of
credit was subsequently paid in full.
8. INCOME TAXES:
Significant components of the Company's deferred tax assets and liabilities
as of June 30, 1996 and 1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Short-term deferred tax assets:
Allowance for doubtful accounts ............... $ 114,974 $ 175,762
Inventory reserve ............................. 55,761 100,823
Accrued vacation .............................. 65,300 43,950
Other accrued expenses ........................ 108,664 11,174
Revenue adjustments ........................... 116,946 62,590
Valuation allowance ........................... (284,069) (201,353)
---------- ----------
Total short-term deferred tax assets ......... 177,576 192,946
---------- ----------
Long-term deferred tax assets:
Net operating loss carryforwards .............. 74,216 595,249
Depreciation .................................. 53,152 4,522
Valuation allowance ........................... (74,216) (595,249)
---------- ----------
Total long-term deferred tax assets .......... 53,152 4,522
---------- ----------
Net deferred tax asset .......................... $ 230,728 $ 197,468
========== ==========
</TABLE>
F-51
<PAGE>
A-COM, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
The provision (benefit) for income taxes is comprised of the following as
of June 30, 1995, 1996, and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---------- -------------- ----------
<S> <C> <C> <C>
Deferred:
Federal ................. $72,162 $ (110,012) $29,269
State ................... 9,840 (15,002) 3,991
------- ---------- -------
Total deferred ......... $82,002 $ (125,014) $33,260
======= ========== =======
</TABLE>
The reasons for the differences between applicable income taxes and the
amount computed by applying the statutory federal income tax rate of 34 percent
to loss before taxes were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Applicable income taxes based on statutory tax rate .......... $ (278,847) $ 11,333 $ (359,798)
Change in valuation allowance ................................ 392,414 (138,832) 438,317
State taxes, net of federal tax benefit ...................... (37,890) 1,540 (48,890)
Other ........................................................ 6,325 945 3,631
---------- ---------- ----------
Income tax provision (benefit) ............................... $ 82,002 $ (125,014) $ 33,260
========== ========== ==========
</TABLE>
9. EMPLOYEE BENEFIT PLANS:
The Company maintains the A-COM 401(k) Profit Sharing Plan (the "Plan"),
which covers all employees who are eighteen years old and have at least six
months of service. Under the Plan agreement, participants may elect to defer up
to 20 percent of his or her gross compensation subject to the maximum percentage
allowable by the Internal Revenue Service. The Company may make discretionary
contributions based on operating results. Participant contributions vest
immediately and employer contributions vest based on a graded schedule as
defined in the Plan. Any employer contributions are fully vested after seven
years. There were no employer contributions made for the years ended June 30,
1995, 1996, or 1997.
10. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains reserves for potential credit losses; historically, such
losses have been within management's expectations. The Company's largest
customer represents approximately 19 and 11 percent of accounts receivable at
June 30, 1996 and 1997.
11. RELATED-PARTY TRANSACTIONS:
The Company purchases certain supplies from a company owned by the owner.
For the years ended June 30, 1995, 1996, and 1997, related party purchases
totaled $239,889, $118,850, and $375,042, respectively.
As of June 30, 1996 and 1997, the Company had a non-interest demand note
receivable of $256,087 from a company owned by the owner. These amounts have
been included in prepaid expenses and other current assets.
During the period July 1, 1994 through December 29, 1995, the Company
leased the Flint Lee office from the owner of the Company. Rent expense for the
Flint Lee office for the year ended June 30, 1995, and the period ended December
29, 1995, totaled $85,000 and $42,000, respectively. Subsequent to December 29,
1995, the Company leased the Flint Lee office from an unrelated third party for
a term
F-52
<PAGE>
A-COM, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
through December 31, 2000. Effective June 30, 1997, the Company moved to the
Walney office. Effective July 1, 1998, the Company sublet the Flint Lee office
to a company owned by the owner for a monthly rental payment starting at $7,622.
The term of the lease is July 1, 1998 through December 31, 2000. The Company's
obligation for the monthly rental payment on the Flint Lee office is included in
the calculation of future minimum rent payments.
The Company provides office space in its Walney office to a company owned
by an employee at no charge. The Company purchases certain integration services
from this company, which totaled $34,012, $231,804, and $565,375 for the years
ended June 30, 1995, 1996, and 1997, respectively.
12. CONTINGENCIES AND COMMITMENTS:
LITIGATION
Litigation and claims are filed against the Company from time to time in
the ordinary course of business. These actions are in various preliminary
stages, and no judgments or decisions have been rendered by hearing boards or
courts. Management, after reviewing with legal counsel, is of the opinion that
the outcome of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
OPERATING LEASES
The Company leases its operating facilities under leases that expire
through October 2004. Future minimum rent payments due under existing operating
leases are as follows:
PERIOD ENDED JUNE 30,
---------------------
1998 ........................... $ 232,420
1999 ........................... 310,159
2000 ........................... 319,462
2001 ........................... 279,076
2002 ........................... 237,479
Thereafter ..................... 495,944
----------
$1,874,540
==========
Rent expense for the year ended June 30, 1995, 1996, and 1997, totaled
$220,667, $215,527, and $197,962, respectively.
F-53
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Financial Systems Consulting, Inc.:
We have audited the accompanying balance sheets of Financial Systems
Consulting, Inc. (a Delaware corporation) as of August 31, 1996, August 31,
1997, and October 20, 1997, and the related statements of operations,
stockholders' equity and cash flows for the twelve months ended December 31,
1995, the eight months ended August 31, 1996, the twelve months ended August 31,
1997, and the period from September 1, 1997, to October 20, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Financial Systems
Consulting, Inc. as of August 31, 1996, August 31, 1997, and October 20, 1997,
and the results of its operations and its cash flows for the twelve months ended
December 31, 1995, the eight months ended August 31, 1996, the twelve months
ended August 31, 1997, and the period from September 1, 1997, to October 20,
1997, in conformity with generally accepted accounting principles.
Washington, D.C.
June 25, 1998
F-54
<PAGE>
FINANCIAL SYSTEMS CONSULTING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, OCTOBER 20,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 87,545 $228,714 $124,473
Accounts receivable, net of allowance for doubtful
accounts of $35,132, $28,653, $84,747, respectively......... 150,858 478,806 417,135
Inventory .................................................... -- 19,980 2,220
Prepaid expenses and other current assets .................... 73,076 13,888 24,094
-------- -------- --------
Total current assets ....................................... 311,479 741,388 567,922
Property and equipment, net ................................... 103,749 101,790 101,639
Other assets - disposed segment, net .......................... -- 36,664 --
-------- -------- --------
Total assets ............................................... $415,228 $879,842 $669,561
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 58,659 $187,139 $236,373
Accrued expenses ............................................. 90,422 139,315 129,993
Deferred revenue ............................................. 103,698 80,627 51,219
-------- -------- --------
Total current liabilities .................................. 252,779 407,081 417,585
Stockholders' equity:
Common stock, no par value, 1,000 shares authorized, is-
sued and outstanding ....................................... 1,000 1,000 1,000
Retained earnings ............................................ 161,449 471,761 250,976
-------- -------- --------
Total stockholders' equity ................................. 162,449 472,761 251,976
-------- -------- --------
Total liabilities and stockholders' equity ................. $415,228 $879,842 $669,561
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-55
<PAGE>
FINANCIAL SYSTEMS CONSULTING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE TWELVE FOR THE EIGHT FOR THE TWELVE SEPTEMBER 1,
MONTHS ENDED MONTHS ENDED MONTHS ENDED 1997, TO
DECEMBER 31, AUGUST 31, AUGUST 31, OCTOBER 20,
1995 1996 1997 1997
---------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Software sales .................................. $1,102,939 $ 730,496 $2,384,491 $ 385,410
Consulting services ............................. 518,312 885,653 1,888,517 267,930
---------- ---------- ---------- ----------
Total revenues ................................ 1,621,251 1,616,149 4,273,008 653,340
---------- ---------- ---------- ----------
Cost of goods and services sold:
Software sales .................................. 490,414 314,051 1,378,515 279,918
Consulting services ............................. 233,420 262,155 714,587 9,412
---------- ---------- ---------- ----------
Total cost of goods and services sold ......... 723,834 576,206 2,093,102 289,330
---------- ---------- ---------- ----------
Gross profit ..................................... 897,417 1,039,943 2,179,906 364,010
Other operating expenses:
Selling, general, and administrative ............ 499,229 858,367 1,186,263 596,100
Depreciation and amortization ................... 28,071 16,266 51,558 3,997
---------- ---------- ---------- ----------
Total other operating expenses ................ 527,300 874,633 1,237,821 600,097
Net income (loss) from continuing opera-
tions before income taxes ....................... 370,117 165,310 942,085 (236,087)
Provision for taxes .............................. 5,458 5,700 11,309 2,300
---------- ---------- ---------- ----------
Net income (loss) from continuing opera-
tions ........................................... 364,659 159,610 930,776 (238,387)
Discontinued operations:
Income from operations of discontinued
Cinergi Division .............................. -- -- 203,936 103,576
Gain on disposal of Cinergi Division ............ -- -- -- 92,866
---------- ---------- ---------- ----------
Net income (loss) ................................ $ 364,659 $ 159,610 $1,134,712 $ (41,945)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
FINANCIAL SYSTEMS CONSULTING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ......... 1,000 $1,000 $ 72,956 $ 73,956
Distributions ..................... -- -- (15,000) (15,000)
Net income ........................ -- -- 364,659 364,659
----- ------ ---------- ----------
Balance, December 31, 1995 ......... 1,000 1,000 422,615 423,615
Distributions ..................... -- -- (420,776) (420,776)
Net income ........................ -- -- 159,610 159,610
----- ------ ---------- ----------
Balance, August 31, 1996 ........... 1,000 1,000 161,449 162,449
Distributions ..................... -- -- (824,400) (824,400)
Net income ........................ -- -- 1,134,712 1,134,712
----- ------ ---------- ----------
Balance, August 31, 1997 ........... 1,000 1,000 471,761 472,761
Distributions ..................... -- -- (178,840) (178,840)
Net loss .......................... -- -- (41,945) (41,945)
----- ------ ---------- ----------
Balance, October 20, 1997 .......... 1,000 $1,000 $ 250,976 $ 251,976
===== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-57
<PAGE>
FINANCIAL SYSTEMS CONSULTING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
FOR THE EIGHT TWELVE PERIOD FROM
YEAR MONTHS MONTHS SEPTEMBER 1,
ENDED ENDED ENDED 1997 TO
DECEMBER 31, AUGUST 31, AUGUST 31, OCTOBER 20,
1995 1996 1997 1997
-------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 364,659 $ 159,610 $1,134,712 $ (41,945)
Adjustments to reconcile net income (loss) to net
cash flows from operating activities--
Depreciation of property and equipment .............. 28,071 16,266 51,558 3,997
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net..... (37,939) 17,978 (360,737) 94,460
Decrease (increase) in inventory ................... 61,633 27,225 (19,980) 17,760
(Increase) decrease in prepaid expenses and
other current assets ............................. (22,113) (50,963) 59,188 (10,206)
Increase (decrease) in accounts payable ............ (94,804) (17,259) 163,171 75,829
Increase (decrease) in accrued expenses ............ 50,830 29,760 61,741 (43,456)
Increase (decrease) in deferred revenue ............ -- 103,698 (23,071) (29,408)
---------- ---------- ---------- ----------
Net cash flows used in operating activities ...... 350,337 286,315 1,066,582 67,031
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................... (128,142) (13,570) (61,013) (3,566)
Disposal of property and equipment .................... -- 26,343 -- 11,134
---------- ---------- ---------- ----------
Net cash used in investing activities ............ (128,142) 12,773 (61,013) 7,568
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to stockholder ........................... (15,000) (420,776) (824,400) (178,840)
Decrease in stockholder payable ....................... -- -- (40,000) --
---------- ---------- ---------- ----------
Net cash provided by financing activities ........ (15,000) (420,776) (864,400) (178,840)
---------- ---------- ---------- ----------
Net increase in cash and cash equivalents .............. 207,195 (121,688) 141,169 (104,241)
Cash and cash equivalents, beginning of period ......... 2,038 209,233 87,545 228,714
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period ............... $ 209,233 $ 87,545 $ 228,714 $ 124,473
========== ========== ========== ==========
Cash paid for income taxes ............................ $ 5,500 $ 4,500 $ 11,309 $ 2,300
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE>
FINANCIAL SYSTEMS CONSULTING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Financial Systems Consulting, Inc., ("FSC" or the "Company"), a California
S Corporation, sells a range of accounting and financial software products and
provides consulting, implementation and maintenance services to emerging and
middle market enterprise companies.
In October 1997, all of the issued and outstanding stock of the Company was
acquired by IT Partners, Inc., and a new basis of accounting was established in
accordance with the purchase method of accounting. The Company operates on a
December 31, year end. However, these financial statements have been prepared
for the periods presented pursuant to the purchase by IT Partners, Inc., on
October 20, 1997. The financial statements have been prepared for the year ended
December 31, 1996, the eight months ended August 31,1996, the twelve months
ended August 31, 1997, and the period from September 1, 1997, to October 20,
1997.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid investments with a maturity of
three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The carrying values of current assets and current liabilities approximate
fair value because of the relatively short maturities of these instruments.
INVENTORY
Inventory is recorded at the lower of cost or market value using the
first-in-first-out ("FIFO") method of accounting. Inventory as of August 31,
1996 and 1997, and October 20, 1997, consisted entirely of retail stock.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the expected life of the asset or
term of the lease.
The ranges used in computing estimated useful lives were as follows:
Furniture and fixtures .................. 5--7 years
Computer equipment ...................... 3--5 years
Vehicles ................................ 4--7 years
F-59
<PAGE>
FINANCIAL SYSTEMS CONSULTING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
ACCRUED EXPENSES AND OTHER LIABILITIES
As of August 31, 1996, August 31, 1997, and October 20, 1997, accrued
expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, OCTOBER 20,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Accrued salaries, vacation and related taxes ......... $34,666 $ 93,888 $ 60,962
Travel and related personnel expenses ................ -- 24,921 10,392
Sales tax payable .................................... 8,736 10,429 34,897
Miscellaneous office expenses ........................ 7,020 10,077 23,742
Stockholder reimbursement payable .................... 40,000 -- --
------- -------- --------
$90,422 $139,315 $129,993
======= ======== ========
</TABLE>
REVENUE RECOGNITION
Revenue generated from software sales is recognized when the products are
shipped to the customer. Revenue generated from consulting and service contracts
is recognized when the time has been incurred. These contracts are generally
variable contracts based on hourly and daily pre--negotiated rates.
DEFERRED REVENUE
The Company records retainer fees for consulting projects and prepaid
consulting as deferred revenue. Revenue will be recognized when retainer fees
are applied to the customer's final invoice and as prepaid consulting is applied
as payment on consulting invoices. Consulting projects typically last less than
three months.
INCOME TAXES
The stockholders have elected to be taxed under the provisions of the
Internal Revenue Code as an S Corporation. Under these provisions, the Company
does not recognize any tax effect on its income or loss. The stockholders
recognize their proportionate share of any income or loss on their individual
income tax returns. The income taxes recorded in the accompanying statements of
operations relate to California state taxes required to be paid by California
corporations.
STOCKHOLDER DISTRIBUTIONS
The Company makes distributions to the stockholders at the request of the
stockholder and approval of the Board of Directors.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current period presentation.
F-60
<PAGE>
FINANCIAL SYSTEMS CONSULTING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, OCTOBER 20,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Equipment .............................. $ 113,916 $ 160,207 $ 168,933
Furniture and fixtures ................. 41,922 43,883 43,883
--------- ---------- ----------
155,838 204,090 212,816
Less- Accumulated depreciation ......... (52,089) (102,300) (111,177)
--------- ---------- ----------
$ 103,749 $ 101,790 $ 101,639
========= ========== ==========
</TABLE>
3. CREDIT RISK:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains reserves for potential credit losses; historically, such
losses have been within management's expectations.
4. CINERGI DIVISION:
In March 1997, the Company began providing management consulting services
referred to as Cinergi. Consultants for management consulting projects help
customers determine and find the type of software to meet their needs. In
addition, consultants may be contracted to manage the implementation project
provided by the third party selling the software, although the consultants do
not participate in the actual implementation.
On October 16, 1997, the stockholders of the Company sold the Cinergi
division to another unrelated entity for $104,000. The related assets and
liabilities and results of operations have been reflected in the accompanying
financial statements as discontinued operations. The gain recognized on the sale
totaled $92,866.
5. CONTINGENCIES AND COMMITMENTS:
LITIGATION
Litigation and claims are filed against the Company from time to time in
the ordinary course of business. These actions are in various preliminary stages
and no judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing with legal counsel, is of the opinion that the
outcome of such matters will not have a material adverse effect on the Company's
financial position or results of operations.
OPERATING LEASES
The Company leases its operating facilities under a monthly lease
agreement. The company has no other lease commitments.
Rent expense for the twelve months ended December 31, 1995, the eight
months ended August 31, 1996, the twelve months ended August 31, 1997, and the
period ended October 20, 1997, totaled $29,126, $40,327, $42,229, and $5,785,
respectively.
F-61
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Sequoia Diversified Products, Inc.:
We have audited the accompanying consolidated balance sheets of Sequoia
Diversified Products, Inc. (a Michigan corporation) and subsidiaries (the
"Company") as of December 31, 1996 and 1997, and the related combined statements
of operations, stockholders' equity and cash flows for the year ended December
31, 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years ended December 31, 1996 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sequoia Diversified
Products, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years
ended December 31, 1995, 1996, and 1997, in conformity with generally accepted
accounting principles.
As explained in Note 1 to the combined and consolidated financial
statements, effective November 1, 1997, the Company changed its method of
accounting for its cabling installation revenues.
Washington, D.C.
July 20, 1998
F-62
<PAGE>
SEQUOIA DIVERSIFIED PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
CONSOLIDATED
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 83,250 $ 193,302
Accounts receivable, net of allowance for doubtful accounts of $185,000,
and $185,000, respectively ........................................... 5,763,387 3,751,176
Inventory .............................................................. 472,777 799,698
Prepaid expenses and other current assets .............................. 100,537 212,284
Deferred tax asset ..................................................... 142,460 142,460
---------- ----------
Total current assets ................................................. 6,562,411 5,098,920
Property and equipment, net ............................................. 541,664 1,205,427
Deferred tax asset ...................................................... 48,419 12,736
Other assets ............................................................ 228,849 219,983
---------- ----------
Total assets ......................................................... $7,381,343 $6,537,066
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses .................................. $3,751,711 $2,158,457
Line of credit ......................................................... 2,918,939 1,675,500
Bank overdraft ......................................................... 696,618 --
Notes payable, current portion ......................................... 36,087 93,336
Other current liabilities .............................................. 113,926 769,342
---------- ----------
Total current liabilities ............................................ 7,517,281 4,696,635
Notes payable, net of discount of $268,750 in 1997 and current portion .. 255,146 1,231,250
Warrants outstanding .................................................... -- 300,000
---------- ----------
Total liabilities .................................................... 7,772,427 6,227,885
Commitments and contingencies: (Note 10)
Stockholders' equity (deficit):
Common stock - $1 par value--
Voting - 50,000 shares authorized, 960 and 960 issued and
outstanding, respectively ........................................... 960 960
Nonvoting - 10,000 shares authorized, 315 and 325 issued and
outstanding, respectively ........................................... 315 325
Additional paid-in capital ............................................. 215,975 223,465
Notes receivable--
Common stock purchases ............................................... (236,250) (90,962)
Retained earnings (accumulated deficit) ................................ (372,084) 175,393
---------- ----------
Total stockholders' equity (deficit) ................................. (391,084) 309,181
---------- ----------
Total liabilities and stockholders'
equity (deficit) .................................................... $7,381,343 $6,537,066
========== ==========
</TABLE>
The accompanying notes are an integral part of these
combined and consolidated statements.
F-63
<PAGE>
SEQUOIA DIVERSIFIED PRODUCTS, INC.
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
------------------------------- ---------------
1995 1996 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenues ................................................ $16,977,619 $27,033,589 $29,218,798
Cost of goods and services sold ......................... 12,656,482 20,049,416 17,521,386
----------- ----------- -----------
Gross profit ............................................ 4,321,137 6,984,173 11,697,412
Operating expenses:
Selling, general, and administrative ................... 4,039,978 7,003,807 9,562,443
Compensation expense related to
common stock transactions ............................ -- -- 200,000
Depreciation and amortization .......................... 127,247 182,031 324,948
----------- ----------- -----------
Total operating expenses ............................. 4,167,225 7,185,838 10,087,391
Operating income (loss) ................................. 153,912 (201,665) 1,610,021
Interest expense ........................................ (124,559) (242,131) (575,844)
----------- ----------- -----------
Income (loss) before (provision) benefit for income
taxes and change in accounting principle ............... 29,353 (443,796) 1,034,177
(Provision) benefit for income taxes .................... (10,002) 145,939 (490,000)
----------- ----------- -----------
Income (loss) before change in accounting principle ..... 19,351 (297,857) 544,177
Cumulative effect of a change in accounting principle,
net of tax provision of $1,700 in 1997 ................. -- -- 3,300
----------- ----------- -----------
Net income (loss) ....................................... $ 19,351 $ (297,857) $ 547,477
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
combined and consolidated statements.
F-64
<PAGE>
SEQUOIA DIVERSIFIED PRODUCTS, INC.
COMBINED AND CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
NOTES RETAINED
COMMON STOCK RECEIVABLE ADDITIONAL EARNINGS
------------------------ COMMON STOCK PAID-IN (ACCUMULATED
VOTING NONVOTING PURCHASES CAPITAL DEFICIT) TOTAL
------------ ----------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ............ $ 35,620 $ -- $ -- $ -- $ 83,272 $ 118,892
Net income ........................... -- -- -- -- 19,351 19,351
--------- ---- ---------- --------- ---------- ----------
Balance, December 31, 1995 ............ 35,620 -- -- -- 102,623 138,243
Buyback of common shares ............. (40) -- -- (19,960) -- (20,000)
Issuance of common shares ............ -- 315 (236,250) 235,935 -- --
Dividends payable .................... (34,620) -- -- -- (176,850) (211,470)
Net loss ............................. -- -- -- -- (297,857) (297,857)
--------- ---- ---------- --------- ---------- ----------
Balance, December 31, 1996 ............ 960 315 (236,250) 215,975 (372,084) (391,084)
Issuance of common shares ............ -- 10 -- 7,490 -- 7,500
Payments on notes receivable ......... -- -- 145,288 -- -- 145,288
Net income ........................... -- -- -- -- 547,477 547,477
--------- ---- ---------- --------- ---------- ----------
Balance, December 31, 1997 ............ $ 960 $325 $ (90,962) $ 223,465 $ 175,393 $ 309,181
========= ==== ========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these
combined and consolidated statements.
F-65
<PAGE>
SEQUOIA DIVERSIFIED PRODUCTS, INC.
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
--------------------------------- ---------------
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................ $ 19,351 $ (297,857) $ 547,477
Adjustments to reconcile net income (loss) to net cash flows
from operating activities-
Amortization of debt discount ............................. -- -- 31,250
Depreciation and amortization ............................. 127,247 182,031 324,948
Changes in assets and liabilities--
(Increase) decrease in accounts receivable, net ........... (1,279,816) (2,308,835) 2,012,211
Increase in inventory ..................................... (150,181) (4,883) (326,921)
Decrease (increase) in prepaid expenses and other
current assets ........................................... 330,610 (86,333) (111,747)
(Increase) decrease in other assets ....................... (18,733) (205,216) 8,866
(Decrease) increase in deferred tax assets ................ (43,126) (145,939) 35,683
Increase (decrease) in accounts payable and
accrued expenses ......................................... 722,522 1,358,162 (1,593,254)
Increase (decrease) in bank overdraft ..................... 230,674 366,587 (696,618)
(Decrease) increase in other current liabilities .......... (32,756) 49,648 655,416
------------ ------------ ------------
Net cash flows (used in) provided by
operating activities ................................... (94,208) (1,092,635) 887,311
------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment .......................... (248,680) (348,218) (1,012,461)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings/(repayments) on line of credit ............... 496,275 1,497,664 (1,243,439)
Proceeds from notes payable ................................. 492 91,404 1,033,353
(Increase) decrease to notes receivable related to the
issuance of common stock .................................. -- (236,250) 145,288
Warrants issued ............................................. -- -- 300,000
------------ ------------ ------------
Net cash provided by financing activities ................ 496,767 1,352,818 235,202
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ......... 153,879 (88,035) 110,052
Cash and cash equivalents, beginning of period ............... 17,406 171,285 83,250
------------ ------------ ------------
Cash and cash equivalents, end of period ..................... $ 171,285 $ 83,250 $ 193,302
============ ============ ============
Cash paid for interest ....................................... $ 105,799 $ 224,156 $ 606,196
============ ============ ============
Cash paid for income taxes ................................... $ 14,000 $ 48,950 $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
combined and consolidated statements.
F-66
<PAGE>
SEQUOIA DIVERSIFIED PRODUCTS, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995, 1996, AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Sequoia Diversified Products, Inc. (the "Company"), a Michigan corporation,
provides information technology products and services to help customers design,
implement and maintain desktop and network computer systems. The Company,
founded in 1990, is based in Auburn Hills, Michigan, and has five domestic
satellite offices, two each in Ohio and Michigan and one in Texas, as well as
offices in England, Germany, and Sweden. The Company operates on a calendar
year-end basis.
On December 31, 1996, the Company, pursuant to a stock purchase agreement,
purchased all of the issued and outstanding stock of Sequoia Services, Inc. and
Sequoia Financial, LLC. Prior to December 31, 1996, the Company, Sequoia
Services, Inc. and Sequoia Financial, LLC were under common control and
financial results are presented on a combined basis in these financial
statements. As of December 31, 1996, these entities are presented as a
consolidated entity. During 1995, these entities were separate and therefore are
reported as combined entities in these financial statements. All intercompany
balances and transactions among these entities have been eliminated in the
consolidation and combination.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid investments with a maturity of
three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The carrying values of current assets and current liabilities approximate
fair value due to the relatively short maturities of these instruments. The book
value of the Company's line of credit approximates fair market value as the
rates are comparable to the borrowing cost for similar credit facilities at
December 31, 1996 and 1997.
This disclosure relates to financial instruments only. The fair value
assumptions were based upon subjective estimates of market conditions and
perceived risks of the financial instruments.
INVENTORY
Inventory is recorded at the lower of cost or market value using the
first-in first-out method of accounting. Cost elements included in inventory are
purchased computer equipment and related network and cabling supplies.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using an
accelerated depreciation method, based on estimated useful lives of the assets.
Leasehold improvements are amortized over the lesser of the expected life of the
asset or term of the lease.
F-67
<PAGE>
SEQUOIA DIVERSIFIED PRODUCTS, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
The ranges used in computing estimated useful lives were as follows:
Furniture and fixtures ................ 5 -- 7 years
Machinery and equipment ............... 5 -- 7 years
Vehicles .............................. 5 years
Leasehold improvements ................ Life of lease
REVENUE RECOGNITION
Revenue generated from hardware sales are recognized when the products are
shipped to the customer. In cases where the Company is receiving commissions
from third parties on hardware sales, revenue is recognized when the third party
informs the Company of the completion of the sales process. Revenue generated
from network services is recognized on the percentage-of-completion method as
the labor is incurred. Revenue generated from cable installation is recognized
upon completion of the project.
The Company has accounted for revenue and costs for its cabling
installation business using the percentage-of-completion method for the two
months ended December 31, 1997, whereas in prior periods, revenue and costs were
recognized upon completion of the project. This cumulative effect of a change in
accounting principle is reflected net of a tax provision on the accompanying
statement of operations for the year ended December 31, 1997. This change
resulted in an increase to operating income of approximately $60,000 during the
year ended December 31, 1997, over the amount which would have been reported
under the completed contract method.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's consolidated
financial statements or tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
As of December 31, 1996 and 1997, property and equipment consist of the
following:
1996 1997
---------- -------------
Furniture and fixtures .................. $ 46,958 $ 140,665
Machinery and equipment ................. 561,061 861,597
Vehicles ................................ 257,792 273,216
Leasehold improvements .................. 64,163 563,040
-------- ----------
929,974 1,838,518
Less- Accumulated depreciation .......... 388,310 633,091
-------- ----------
$541,664 $1,205,427
======== ==========
F-68
<PAGE>
SEQUOIA DIVERSIFIED PRODUCTS, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
3. REVENUES AND COST OF GOODS AND SERVICES SOLD:
The following is a summary of revenues recognized and cost of goods and
services sold for the years ended December 31, 1995, 1996, and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------- ----------------------- -----------------------
AMOUNT % AMOUNT % AMOUNT %
-------------- -------- -------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Hardware sales and commissions .................. $12,936,739 76% $17,755,387 66% $12,894,562 44%
Network services ................................ 1,986,940 12 4,354,169 16 11,084,818 38
Cabling sales and service ....................... 682,909 4 2,710,472 10 3,093,783 11
Maintenance and repairs ......................... 832,025 5 1,628,168 6 1,746,914 6
Other ........................................... 539,006 3 585,393 2 398,721 1
----------- --- ----------- --- ----------- ---
Total revenues ................................ $16,977,619 100% $27,033,589 100% $29,218,798 100%
=========== === =========== === =========== ===
Cost of goods and services sold:
Hardware sales and commissions ................... $10,627,637 $15,346,528 $ 9,523,157
Network services ................................. 1,217,266 2,658,789 6,190,124
Cabling sales and service ........................ 161,424 1,515,602 1,235,244
Maintenance and repairs .......................... 150,610 371,636 414,381
Other ............................................ 499,545 156,861 158,480
----------- ----------- -----------
Total cost of goods and services sold ......... $12,656,482 $20,049,416 $17,521,386
=========== =========== ===========
</TABLE>
One customer provided approximately 28, 13 and 11 percent of the Company's
revenues for the years ended December 31, 1995, 1996, and 1997, respectively.
4. DEBT:
Borrowings under long-term debt agreements at December 31, 1996 and 1997,
are as follows:
<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C> <C>
LIBBCO subordinated debt ................. $ -- $1,500,000
Related party notes payable .............. 216,493 51,934
Automobile note payable .................. 74,740 41,402
--------- ----------
291,233 1,593,336
Less- Current portion .................... (36,087) (93,336)
Less- Unamortized debt discount .......... -- (268,750)
--------- ----------
Notes payable, net of discount and current
portion ................................. $ 255,146 $1,231,250
========= ==========
</TABLE>
LIBBCO SUBORDINATED DEBT
In July 1997, the Company issued a $1,500,000 four-year note payable for
working capital purposes. The note is subordinate to the bank line of credit and
is collateralized by substantially all assets of the Company. The note bears
interest at 3.5 percent over the published prime rate. On December 31, 1997, the
published prime rate was 8.5 percent, making the interest rate 12.0 percent. The
debt was initially recorded net of debt discount of $300,000 at the date of
closing. Through December 31, 1997, $31,250 of this discount had been amortized
as additional interest expense. Amortization is on a straight-line basis which
approximates the effective interest method.
During the years indicated, the Company had the following lines of credit.
F-69
<PAGE>
SEQUOIA DIVERSIFIED PRODUCTS, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
COMERICA BANK LINE OF CREDIT
The Company had a line of credit arrangement with Comerica Bank that
permitted borrowings up to 80 percent of eligible accounts receivable, limited
to $3,500,000. Borrowings under the line of credit were due on demand and
accrued interest at 1.75 percent over the bank's published prime rate. On
December 31, 1996, that rate was 8.25 percent making the interest rate 10.0
percent. The Company carried a balance on this line of credit of $2,918,939 on
December 31, 1996. Borrowings were collateralized by substantially all assets of
the Company.
OLD KENT BANK LINE OF CREDIT
In February 1997, the Company executed a new $4,500,000 working capital
line of credit with Old Kent Bank and paid off their existing line of credit
with Comerica Bank. The new line of credit permits the Company to borrow 90
percent of commercial accounts receivable, 80 percent of government accounts
receivable and 30 percent of eligible inventory. Borrowings under the line of
credit are due on demand and bear interest at 1 percent over the bank's
published prime rate. On December 31, 1997, the published prime rate was 8.5
percent making the interest rate 9.5 percent. As of December 31, 1997, the
Company had an outstanding line of credit balance of $1,675,500. The new line is
collateralized by substantially all assets of the Company.
The Company incurred interest expense on all debt of $124,559, $242,131,
and $575,844 for the years ended December 31, 1995, 1996, and 1997,
respectively.
Maturities on notes payable and the lines of credit are as follows:
YEAR ENDED DECEMBER 31,
1998 ............................ $1,768,836
1999 ............................ 400,000
2000 ............................ 600,000
2001 ............................ 500,000
----------
$3,268,836
==========
5. STOCK AND WARRANT AGREEMENTS:
COMMON STOCK
In November 1996, the Company bought back 40 shares of voting Class B
common stock for $500 per share. On December 31, 1996, the Company issued 315
shares of nonvoting Class B common stock for $7.50 per share. On July 1, 1997,
the Company issued 10 shares of nonvoting Class B common stock for $7.50 per
share.
WARRANTS OUTSTANDING
In connection with the July 1997 issuance of $1,500,000 of subordinated
note payable, the Company issued to the lender detachable warrants to acquire up
to 5 percent of the Company's outstanding common stock. The warrants are
exercisable through July 2001 at $1,400,000 and callable after November 1, 1997.
The call price from November 1, 1997, to July 30, 1998, is the greater of
$1,700,000 or 5 percent of revenue for the trailing twelve months, less the
exercise price and increases to the greater of $2,300,000 or 5 percent of
revenue for the trailing twelve months, less the exercise price from July 1,
2000, to June 30, 2001. From January 1, 1998, to June 30, 2001, the lender also
has an option to put the shares obtained by exercise of the warrant to the
Company for cash. The put price shall be the lesser of $3,000,000 or 5 percent
of revenues for the twelve month period ending the last day of the month prior
to the month during which the put option is exercised. The warrants have been
recorded at their estimated fair value of $300,000 (see Note 11).
F-70
<PAGE>
SEQUOIA DIVERSIFIED PRODUCTS, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
6. INCOME TAXES:
Significant components of the Company's deferred tax assets as of December
31, 1996, and 1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts ................... $ 62,900 $ 62,900
Deferred salary ................................... 21,760 21,760
Inventory ......................................... 20,400 20,400
Unrealized loss on software contract .............. 37,400 37,400
-------- --------
Total deferred tax assets ........................ 142,460 142,460
-------- --------
Long-term deferred tax assets:
Net operating loss ................................ 35,683 --
Tax basis of fixed assets over book basis ......... 12,736 12,736
-------- --------
Total long-term deferred tax assets .............. 48,419 12,736
-------- --------
Total deferred tax assets ........................ $190,879 $155,196
======== ========
</TABLE>
The Company evaluates deferred tax assets based on net income projections
to ensure that the assets are realizable.
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ---------- --------------
<S> <C> <C> <C>
Current .................................. $ -- $ -- $ (454,317)
Deferred ................................. (10,002) 145,939 (35,683)
--------- -------- ----------
Income tax (provision) benefit .......... $ (10,002) $145,939 $ (490,000)
========= ======== ==========
</TABLE>
The reasons for the differences between applicable income taxes and the
amount computed by applying the statutory federal income tax rate of 34 percent
to income (loss) before taxes were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ----------- --------------
<S> <C> <C> <C>
Applicable income taxes based on
Federal statutory tax rate ............... $ (9,980) $145,492 $ (351,620)
Permanent book to tax differences ......... (22) 447 (138,380)
--------- -------- ----------
Income tax (provision) benefit ............ $ (10,002) $145,939 $ (490,000)
========= ======== ==========
</TABLE>
7. EMPLOYEE BENEFIT PLANS:
The Company has a deferred compensation 401(k) tax savings plan.
Contributions up to statutory limits may be made by eligible employees on a
voluntary basis. The plan requires matching contributions by the Company of 10
percent of the employees' contributions for the first 4 percent of employee base
salaries. The Company's matching contribution was $9,496, $13,836, and $23,294
for the years ended December 31, 1995, 1996, and 1997.
The Company has a self-funded medical benefit plan covering all of its
employees. The Company's policy is to accrue estimated medical claims payable
based on recent claims experience including a reserve for incurred but not
reported claims. These costs are included in accounts payable and accrued
expenses on the accompanying consolidated balance sheet. The Company has
insurance for specific individual losses in excess of $25,000 through the plan
year ended March 31, 1998.
F-71
<PAGE>
SEQUOIA DIVERSIFIED PRODUCTS, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
8. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains reserves for potential credit losses; historically, such
losses have been within management's expectations. The Company's largest
customer represents approximately 15 and 26 percent of accounts receivable at
December 31, 1996 and 1997.
9. RELATED-PARTY TRANSACTIONS:
EMPLOYEE LEASING COMPANY
Beginning in 1996, the Company utilized an employee leasing company, Manage
Pro, Inc., to pay all but five of the Company's employees. The owner of Manage
Pro, Inc. is also the Chief Operating Officer and a stockholder of the Company.
Manage Pro, Inc. charged the Company a 1 percent management fee on gross
employee payroll during the years ended December 31, 1996 and 1997, amounting to
approximately $60,000 and $66,600, respectively.
EMPLOYEE RECEIVABLES
The Company has several related party receivables with employees, including
a receivable due from the Chief Operating Officer in the amount of $17,050 and
$102,800 and a receivable due from the Chief Executive Officer in the amount of
$24,800 and $219,855 at December 31, 1996 and 1997, respectively.
STOCKHOLDER LOANS
The Company has recorded notes receivable for common stock purchases of
four minority stockholders in the amount of $236,250 and $90,962 as of December
31, 1996 and 1997, respectively. The terms of the notes receivable provide for
payment at the earlier of December 31, 1999, or on demand. The interest accrues
on these notes at prime plus 1 percent. On December 31, 1996 and 1997, the
published prime rate was 8.25 and 8.5 percent, respectively.
10. CONTINGENCIES AND COMMITMENTS:
LITIGATION
Litigation and claims are filed against the Company from time to time in
the ordinary course of business. These actions are in various preliminary
stages, and no judgments or decisions have been rendered by hearing boards or
courts. Management, after reviewing with legal counsel, is of the opinion that
the outcome of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
STOCK REDEMPTION
As of December 31, 1996, the Company has entered into buy and sell
agreements with all of its employee stockholders (representing 97 percent of all
stockholders). The Company has the right, but is not obligated, to redeem voting
shares at book value and nonvoting shares at 150 percent of stockholders' equity
per share in the event the employment of a stockholder is terminated. The
Company records compensation expense related to the increase in the redemption
formula price.
LEASE COMMITMENTS
The Company occupies 12,900 square feet of office space, which is leased
from a minority stockholder. The Company moved to this refurbished facility
during October 1997 and committed to an operating lease through November 30,
2000. Monthly payments of $6,500 began December 1997. In addition, the Company
has entered into operating leases for various other office facilities. The
future minimum lease payments on these facilities as of December 31, 1997, are
as follows:
F-72
<PAGE>
SEQUOIA DIVERSIFIED PRODUCTS, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
YEAR ENDING DECEMBER 31,
1998 ............................ $ 90,000
1999 ............................ 78,825
2000 ............................ 71,500
--------
$240,325
========
11. SUBSEQUENT EVENTS:
On January 8, 1998, the Company completed the first step of a two-step
business combination with IT Partners, Inc. ("IT Partners"), whereby 100 percent
of the Company's outstanding common stock was redeemed by IT Partners in
exchange for cash, a promissory note and common stock of IT Partners. The total
purchase price paid by IT Partners on that date was approximately $21,600,000.
In connection with this transaction, IT Partners repaid the remaining balances
due on the Old Kent Bank Line of Credit and LIBBCO Subordinated Debt (see Note
4). In addition, the outstanding warrants described in Note 5 were also redeemed
for $300,000, representing the estimated fair value on the date of the
transaction. On March 11, 1998, the consideration received by the stockholders
was subsequently adjusted by $4,475,525 based on the final operating results of
the Company for the year ended December 31, 1997.
F-73
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Incline Corporation:
We have audited the accompanying balance sheets of Incline Corporation (a
California corporation) as of October 31, 1996, October 31, 1997, and December
31, 1997, and the related statements of operations, stockholders' equity and
cash flows for the nine months ended December 31, 1995, the ten months ended
October 31, 1996, the twelve months ended October 31, 1997, and the two months
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Incline Corporation as of
October 31, 1996, October 31, 1997, and December 31, 1997, and the results of
its operations and its cash flows for the nine months ended December 31, 1995,
the ten months ended October 31, 1996, the twelve months ended October 31, 1997,
and the two months ended December 31, 1997, in conformity with generally
accepted accounting principles.
Washington, D.C.
June 8, 1998
F-74
<PAGE>
INCLINE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, DECEMBER 31,
1996 1997 1997
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $185,121 $ 352,147 $ 11,093
Accounts receivable, net of allowance for doubtful
accounts of $10,000, $10,000, and $25,000, respectively..... 209,418 759,474 771,136
Prepaid expenses and other current assets .................... 1,529 112,546 7,875
-------- ---------- ----------
Total current assets ....................................... 396,068 1,224,167 790,104
Property and equipment, net ................................... 79,363 351,437 410,309
Other assets .................................................. 7,908 12,156 11,314
-------- ---------- ----------
Total assets ............................................... $483,339 $1,587,760 $1,211,727
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 16,258 $ 146,707 $ 63,758
Accrued expenses ............................................. 79,788 240,633 236,601
Other current liabilities .................................... 1,950 -- 6,906
Line of credit ............................................... -- -- 200,000
-------- ---------- ----------
Total current liabilities .................................. 97,996 387,340 507,265
-------- ---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, par value $1; 10,000 shares authorized and
outstanding ................................................ 10,000 10,000 10,000
Additional paid-in capital ................................... 200 200 200
Retained earnings ............................................ 375,143 1,190,220 694,262
-------- ---------- ----------
Total stockholders' equity ................................. 385,343 1,200,420 704,462
-------- ---------- ----------
Total liabilities and stockholders' equity ................. $483,339 $1,587,760 $1,211,727
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-75
<PAGE>
INCLINE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE FOR THE TEN FOR THE TWELVE FOR THE TWO
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31,
1995 1996 1997 1997
-------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Service revenues ......................... $ 207,775 $1,490,803 $3,670,722 $ 855,925
Cost of services ......................... 53,493 360,097 943,453 338,507
---------- ---------- ---------- -----------
Gross profit ............................. 154,282 1,130,706 2,727,269 517,418
Operating expenses:
Salaries, wages and benefits ............ 200,101 432,912 1,465,009 797,501
Selling, general, and administrative .... 72,021 163,348 390,758 201,052
Depreciation ............................ 4,265 9,218 40,028 16,058
---------- ---------- ---------- -----------
Total operating expenses .............. 276,387 605,478 1,895,795 1,014,611
(Loss) income from operations ............ (122,105) 525,228 831,474 (497,193)
Other (expense) income ................... (11,626) (16,354) 3,845 1,235
---------- ---------- ---------- -----------
Net (loss) income ........................ $ (133,731) $ 508,874 $ 835,319 $ (495,958)
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-76
<PAGE>
INCLINE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, March 20, 1995 ............ -- $ -- $ -- $ -- $ --
Net loss .......................... -- -- -- (133,731) (133,731)
------ ------- ---- ---------- ----------
Balance, December 31, 1995 ......... -- -- -- (133,731) (133,731)
Issuance of common stock .......... 10,000 10,000 200 -- 10,200
Net income ........................ -- -- -- 508,874 508,874
------ ------- ---- ---------- ----------
Balance, October 31, 1996 .......... 10,000 10,000 200 375,143 385,343
Stockholder distribution .......... -- -- -- (20,242) (20,242)
Net income ........................ -- -- -- 835,319 835,319
------ ------- ---- ---------- ----------
Balance, October 31, 1997 .......... 10,000 10,000 200 1,190,220 1,200,420
Net loss .......................... -- -- -- (495,958) (495,958)
------ ------- ---- ---------- ----------
Balance, December 31, 1997 ......... 10,000 $10,000 $200 $ 694,262 $ 704,462
====== ======= ==== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-77
<PAGE>
INCLINE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE TEN TWELVE
FOR THE NINE MONTHS MONTHS FOR THE TWO
MONTHS ENDED ENDED ENDED MONTHS ENDED
DECEMBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31,
1995 1996 1997 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ........................................... $ (133,731) $ 508,874 $ 835,319 $ (495,958)
Adjustments to reconcile net (loss) income to net
cash flows from operating activities-
Depreciation .............................................. 4,265 9,218 40,028 16,058
Changes in assets and liabilities:
Accounts receivable, net ................................. (43,840) (165,578) (550,056) (11,663)
Prepaid expenses and other current assets ................ (3,180) 1,651 (107,614) 104,670
Other assets ............................................. (7,650) (258) (5,156) 842
Accounts payable ......................................... 4,852 11,406 126,000 (82,948)
Accrued expenses ......................................... 126,673 (46,885) 160,848 (4,032)
Other current liabilities ................................ 1,396 554 -- 6,906
---------- ---------- ---------- ----------
Net cash flows from operating activities ............... (51,215) 318,982 499,369 (466,125)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .......................... (42,231) (50,615) (312,101) (74,929)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit ................................ -- -- -- 200,000
Proceeds from notes payable ................................. 93,607 -- -- --
Repayment of notes payable .................................. -- (93,607) -- --
Proceeds from issuance of common stock ...................... -- 10,200 -- --
Stockholder distribution .................................... -- -- (20,242) --
---------- ---------- ---------- ----------
Net cash from financing activities ..................... 93,607 (83,407) (20,242) 200,000
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ......... 161 184,960 167,026 (341,054)
Cash and cash equivalents, beginning of period ............... -- 161 185,121 352,147
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period ..................... $ 161 $ 185,121 $ 352,147 $ 11,093
========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ...................................... $ -- $ 29,701 $ 400 $ --
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE>
INCLINE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Incline Corporation (the "Company"), a California corporation, operates a
flat panel display repair business in southern California.
On February 5, 1998, all of the issued and outstanding stock of the Company
was acquired by IT Partners, Inc. As a result of the acquisition a new basis of
accounting was established.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid investments with an original
maturity of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The carrying values of current assets and current liabilities approximate
fair value because of the relatively short maturities of these instruments. The
book value of the revolving line of credit approximates its fair market value as
the Company's borrowing cost is consistent with similar credit facilities.
This disclosure relates to financial instruments only. The fair value
assumptions were based upon subjective estimates of market conditions and
perceived risks of the financial instruments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the expected life of the asset or
term of the lease. Depreciation expense for the periods ended October 31, 1996,
October 31, 1997, and December 31, 1997, was $9,218, $40,028, and $16,058,
respectively.
The ranges used in computing estimated useful lives were as follows:
Furniture and fixtures .......... 7 years
Computer equipment .............. 3 years
Machinery and equipment ......... 5 years
Leasehold improvements .......... 2 years
ACCRUED EXPENSES
As of October 31, 1996, October 31, 1997, and December 31, 1997, accrued
expenses consist of the following:
OCTOBER 31, OCTOBER 31, DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
Accrued salaries and related taxes ... $49,328 $154,247 $115,611
Accrued vacation ..................... 6,858 28,913 31,116
Accrued warranty costs ............... 8,254 31,586 21,832
Other accrued expenses ............... 15,348 25,887 68,042
------- -------- --------
$79,788 $240,633 $236,601
======= ======== ========
F-79
<PAGE>
INCLINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenues upon shipment of repaired flat screens to
its customers.
WARRANTY
The Company warrants its repair services for a period of six months.
Estimated warranty costs are charged to cost of services in the period in which
revenue from the related product sale is recognized.
RESEARCH AND DEVELOPMENT
The Company incurs research and development costs in efforts to increase
yields of LCD screen repair. These costs are charged to operations when
incurred. During the periods ended October 31, 1996, October 31, 1997, and
December 31, 1997, total research and development costs were approximately
$2,252, $43,000, and $2,201, respectively.
INCOME TAXES
The Company began operations in 1995 as a sole proprietorship. On January
1, 1996, the Company converted to an S corporation. Substantially all taxable
income and losses are passed through to the stockholders of the Company.
Accordingly, there is no provision for income taxes in the accompanying
financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
As of October 31, 1996, October 31, 1997, and December 31, 1997, property
and equipment consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, DECEMBER 31,
1996 1997 1997
------------- ------------- -------------
<S> <C> <C> <C>
Furniture and fixtures ................. $ 7,012 $ 42,763 $ 45,227
Computer equipment ..................... 19,843 62,949 69,518
Machinery and equipment ................ 61,565 182,984 263,252
Construction in progress ............... -- 56,286 40,805
Leasehold improvements ................. -- 53,308 54,417
-------- --------- ---------
88,420 398,290 473,219
Less- Accumulated depreciation ......... (9,057) (46,853) (62,910)
-------- --------- ---------
Property and equipment, net ............ $ 79,363 $ 351,437 $ 410,309
======== ========= =========
</TABLE>
3. NOTES PAYABLE:
Notes payable at December 31, 1995, consist of notes payable to officers
related to initial funding of start-up costs with interest rates of 10 percent.
Total notes payable of $93,607 was current as of December 31, 1995. The full
amount was repaid during the ten months ended October 31, 1996.
F-80
<PAGE>
INCLINE CORPORATION
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
4. REVOLVING LINE OF CREDIT:
On November 18, 1996, the Company entered into a $150,000 revolving credit
loan agreement with a commercial bank. On June 2, 1997, the bank amended this
loan agreement to provide for maximum borrowings of $250,000. The loan bears
interest at the rate of prime plus 1.5 percent per annum and is secured by
substantially all assets of the Company, including inventory, accounts
receivable, equipment and certain contract rights. In addition, the four
stockholders of the Company have personally guaranteed the loan. The loan was
repaid in full prior to the due date of June 1, 1998. As of October 31, 1997,
and December 31, 1997, the outstanding balance on the line of credit was
$200,000 and $0, respectively. During the year ended October 31, 1997, and the
period ended December 31, 1997, total interest expense related to this agreement
was $200 and $900, respectively.
5. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains reserves for potential credit losses; historically, such
losses have been within management's expectations. The Company's three largest
customers represented 93 percent of total revenue for the period ended December
31, 1995. The Company's largest customer represented 82, 70, and 75 percent of
total revenue for the periods ended October 31, 1996, October 31, 1997, and
December 31, 1997, respectively. The Company does not have a formal agreement
with this customer. Should the Company lose this customer, the Company's ability
to generate revenue at comparable price levels could be adversely effected. No
other customer represented more than 10 percent of the Company's total revenues
in those periods.
6. COMMITMENTS AND CONTINGENCIES:
LITIGATION
Litigation and claims are filed against the Company from time to time in
the ordinary course of business. These actions are in various preliminary
stages, and no judgments or decisions have been rendered by hearing boards or
courts. Management, after reviewing with legal counsel, is of the opinion that
the outcome of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
OPERATING LEASES
The Company leases its operating facilities under leases that expire
through March 2003. Future minimum rent payments due under existing operating
leases are as follows:
PERIOD ENDED DECEMBER 31,
-------------------------
1998 ............................ $165,862
1999 ............................ 134,184
2000 ............................ 134,184
2001 ............................ 134,184
2002 ............................ 101,808
Thereafter ...................... 21,405
--------
$691,627
========
Rent expense for the periods ended December 31, 1995, October 31, 1996,
October 31, 1997, and December 31, 1997 totaled $24,627, $39,508, $94,040, and
$15,750, respectively.
F-81
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Call Business Systems, Inc.:
We have audited the accompanying balance sheets of Call Business Systems,
Inc. (a Utah corporation) as of December 31, 1996, and February 28, 1997 and
1998, and the related statements of operations, stockholder's equity (deficit)
and cash flows for the seven months ended December 31, 1995, the year ended
December 31, 1996, the two months ended February 28, 1997, and the twelve months
ended February 28, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Call Business Systems, Inc.
as of December 31, 1996, and February 28, 1997 and 1998, and the results of its
operations and its cash flows for the seven months ended December 31, 1995, the
year ended December 31, 1996, the two months ended February 28, 1997, and the
twelve months ended February 28, 1998, in conformity with generally accepted
accounting principles.
Washington, D.C.
July 10, 1998
F-82
<PAGE>
CALL BUSINESS SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28,
DECEMBER 31, ---------------------------
1996 1997 1998
------------- ------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ....................................................... $ -- $ 18,334 $ 673
Accounts receivable, net of allowance for doubtful ac-
counts of $40,000, $41,000, and $50,000, respectively..... 463,687 745,733 1,750,884
Note receivable - stockholder .............................. 87,274 84,874 372,317
Prepaid expenses ........................................... 94,262 182,221 --
Other current assets ....................................... 13,242 7,104 20,286
---------- ---------- ----------
Total current assets ..................................... 658,465 1,038,266 2,144,160
---------- ---------- ----------
Property and equipment, net ................................. 84,693 101,398 450,098
---------- ---------- ----------
Total assets ............................................. $ 743,158 $1,139,664 $2,594,258
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (ACCUMULATED DEFICIT)
Current liabilities:
Accounts payable ........................................... $ 108,280 $ 229,430 $ 450,845
Accrued expenses ........................................... 102,006 344,282 355,609
Line of credit ............................................. 199,134 230,655 387,877
Deferred maintenance and service revenue ................... 454,310 392,014 16,312
Current portion of capital lease obligations ............... -- -- 82,542
---------- ---------- ----------
Total current liabilities ................................ 863,730 1,196,381 1,293,185
---------- ---------- ----------
Capital lease obligations, net of current portion .......... 1,529 -- 316,877
---------- ---------- ----------
Total liabilities ........................................ 865,259 1,196,381 1,610,062
---------- ---------- ----------
Commitments and contingencies (Note 6)
Stockholder's equity (deficit):
Common stock, $1 par value, 50,000 shares authorized,
1,000 shares issued and outstanding ...................... 1,000 1,000 1,000
Retained earnings (accumulated deficit) .................... (123,101) (57,717) 983,196
---------- ---------- ----------
Total stockholder's equity (deficit) ....................... (122,101) (56,717) 984,196
---------- ---------- ----------
Total liabilities and stockholder's equity (deficit) ....... $ 743,158 $1,139,664 $2,594,258
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE>
CALL BUSINESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SEVEN FOR THE YEAR FOR THE TWO FOR THE TWELVE
MONTHS ENDED ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28, FEBRUARY 28,
1995 1996 1997 1998
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Service fees ..................................... $ 744,569 $ 1,417,904 $199,664 $1,380,520
Software sales and commissions ................... 845,656 407,848 142,450 2,495,099
Hardware sales ................................... 353,532 354,672 148,261 1,077,537
Software support fees ............................ 214,751 569,481 94,596 --
---------- ----------- -------- ----------
Total revenues ................................. 2,158,508 2,749,905 584,971 4,953,156
---------- ----------- -------- ----------
Cost of sales:
Service cost of sales ............................ 591,818 998,297 178,930 348,700
Software cost of sales ........................... 296,831 60,490 7,640 287,178
Hardware cost of sales ........................... 333,238 400,978 157,578 846,534
Software support cost of sales ................... 131,950 295,196 23,148 --
---------- ----------- -------- ----------
Total cost of sales ............................ 1,353,837 1,754,961 367,296 1,482,412
---------- ----------- -------- ----------
Gross profit ................................... 804,671 994,944 217,675 3,470,744
---------- ----------- -------- ----------
Selling, general, and administrative expenses ..... 583,908 1,272,759 138,822 2,300,023
Depreciation ...................................... 35,343 64,573 9,741 87,012
---------- ----------- -------- ----------
Operating income (loss) .......................... 185,420 (342,388) 69,112 1,083,709
---------- ----------- -------- ----------
Other (expense) income, net ....................... (163,610) 7,833 4 1,125
Interest expense .................................. 6,502 5,903 3,732 43,921
---------- ----------- -------- ----------
Net income (loss) ................................ $ 15,308 $ (340,458) $ 65,384 $1,040,913
========== =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE>
CALL BUSINESS SYSTEMS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
NUMBER OF EARNINGS
SHARES (ACCUMULATED
OUTSTANDING COMMON STOCK DEFICIT) TOTAL
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance, June 1, 1995 .............. 1,000 $1,000 $ 327,183 $ 328,183
Net income ........................ -- -- 15,308 15,308
----- ------ ---------- ----------
Balance, December 31, 1995 ......... 1,000 1,000 342,491 343,491
Net loss .......................... -- -- (340,458) (340,458)
Distribution to owner ............. -- -- (125,134) (125,134)
----- ------ ---------- ----------
Balance, December 31, 1996 ......... 1,000 1,000 (123,101) (122,101)
Net income ........................ -- -- 65,384 65,384
----- ------ ---------- ----------
Balance, February 28, 1997 ......... 1,000 1,000 (57,717) (56,717)
Net income ........................ -- -- 1,040,913 1,040,913
----- ------ ---------- ----------
Balance, February 28, 1998 ......... 1,000 $1,000 $ 983,196 $ 984,196
===== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE>
CALL BUSINESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SEVEN FOR THE YEAR FOR THE TWO FOR THE TWELVE
MONTHS ENDED ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 28, FEBRUARY 28,
1995 1996 1997 1998
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................... $ 15,308 $ (340,458) $ 65,384 $ 1,040,913
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation ...................................... 35,343 64,573 9,741 87,012
Changes in operating assets and liabilities-
(Increase) decrease in accounts receivable ....... (198,053) 93,751 (282,046) (1,005,151)
(Increase) decrease in prepaid expenses .......... (10,733) (14,276) (87,959) 182,221
(Increase) decrease in other current assets ...... (269) (8,889) 6,138 (13,182)
Increase (decrease) in accounts payable .......... 87,235 (58,044) 121,150 221,415
Increase (decrease) in accrued expenses .......... 115,840 (103,152) 242,276 11,327
Increase (decrease) in deferred mainte-
nance and service revenue ...................... 238,145 31,425 (62,296) (375,702)
---------- ---------- ---------- ------------
Net cash provided by (used in) operat-
ing activities ................................ 282,816 (335,070) 12,388 148,853
---------- ---------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................. -- (28,338) (26,446) (13,823)
Principal payments received on stockholder
loan .............................................. -- -- 2,400 --
Loan to stockholder ................................. -- (87,274) -- (287,443)
---------- ---------- ---------- ------------
Net cash used in investing activities .......... -- (115,612) (24,046) (301,266)
---------- ---------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit .................... -- 199,134 31,521 157,222
Principal payments on capital lease obligations. (2,769) (4,748) (1,529) (22,470)
Distribution to owner ............................... -- (125,134) -- --
---------- ---------- ---------- ------------
Net cash (used in) provided by financing
activities .................................... (2,769) 69,252 29,992 134,752
---------- ---------- ---------- ------------
Net increase (decrease) in cash ...................... 280,047 (381,430) 18,334 (17,661)
Cash, beginning of year .............................. 101,383 381,430 -- 18,334
---------- ---------- ---------- ------------
Cash, end of year .................................... $ 381,430 $ -- $ 18,334 $ 673
========== ========== ========== ============
Supplemental disclosures:
Interest paid ....................................... $ 6,708 $ 861 $ 67 $ 34,692
========== ========== ========== ============
Acquisition of fixed assets through capital lease
obligations ....................................... $ -- $ -- $ -- $ 420,819
========== ========== ========== ============
Income taxes paid ................................... $ -- $ -- $ -- $ --
========== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE>
CALL BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Call Business Systems, Inc. (the "Company") is a Utah S Corporation
operating as a reseller and marketer of retail accounting and financial
software, and a provider of consulting services to emerging and middle market
enterprise companies in Utah, Arizona, New Mexico, Wyoming, Montana, Idaho,
Oregon and Washington. Beginning in 1996, the Company became a designated
distributor of Oracle applications under an agreement, which is renewable
annually at Oracle's option.
The Company operates on a calendar year-end. However, certain of these
financial statements have been prepared for the year ended February 28, 1998 and
1997, pursuant to an asset purchase agreement, whereby the outstanding common
stock of the Company was acquired by IT Partners, Inc. (Note 7).
REVENUE RECOGNITION
Revenue generated from software and hardware sales is recognized when the
products are shipped to the customer. In cases where the Company is receiving
commissions from third parties on software sales, revenue is recognized when the
third party informs the Company of the completion of the sales process. Revenue
generated from consulting and service contracts is recognized when the time has
been incurred on a percentage of completion basis or over the term of the
related contract. These contracts are generally time and material contracts
based on hourly and daily pre-negotiated rates. Revenue from software support
agreements is recognized on a pro rata basis over the term of the agreement,
which is generally one year.
The American Institute of Certified Public Accountants (the "AICPA") has
issued a Statement of Position (the "SOP") SOP 97-2, "Software Revenue
Recognition," and is effective for fiscal years beginning after December 15,
1997. Management believes that the changes contained in SOP 97-2 will not have a
material adverse financial impact on the Company.
CONCENTRATIONS OF MAJOR CUSTOMERS AND CREDIT RISK
The Company's largest customer represents approximately 57 percent of
accounts receivable as of February 28, 1998. Sales to the Company's largest two
customers represent approximately 17 and 28 percent of total revenues for the
seven months ended December 31, 1995. Sales to the Company's largest customer
represents approximately 16, 11, and 47 percent of total revenues for the twelve
months ended December 31, 1996, the two months ended February 28, 1997, and the
twelve months ended February 28, 1998, respectively.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains reserves for potential credit losses; historically, such
losses have been within management's expectations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. The carrying amounts of current assets and current
liabilities in the accompanying financial statements approximate fair value due
to the short maturity of these instruments. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
F-87
<PAGE>
CALL BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
PREPAID EXPENSES
In 1996 and 1997, software support services were provided to the Company's
customers by a third-party vendor. The Company pays the third party in advance
and recognizes the expense over the term of the agreement, generally one year.
The unamortized costs are reflected as prepaid expenses in the accompanying
balance sheets.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES LIFE OF THE LEASE
-------------- -----------------
<S> <C>
Computer equipment .................. 3 years
Furniture and fixtures .............. 5 years
</TABLE>
ACCRUED EXPENSES
As of December 31, 1996, February 28, 1997 and 1998, accrued expenses
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28, FEBRUARY 28,
1996 1997 1998
-------------- -------------- -------------
<S> <C> <C> <C>
Accrued salaries and benefits ......... $ 91,213 $ 99,583 $107,621
Sales tax payable ..................... 9,986 81,658 101,814
Accrued commissions ................... -- -- 119,848
Accrued purchases ..................... -- 163,041 --
Other ................................. 807 -- 26,326
-------- -------- --------
$102,006 $344,282 $355,609
======== ======== ========
</TABLE>
COST OF GOODS AND SERVICES SOLD
The Company includes the cost of computer hardware equipment, software, and
parts sold in the cost of hardware, sold and the cost of technicians and
engineers who provide services in the cost of services sold.
INCOME TAXES
The Company is an S Corporation for income tax purposes. Earnings and
losses are included in the personal income tax return of the stockholder.
Accordingly, the accompanying financial statements do not include a provision
for income taxes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses in the financial statements and in the disclosures of contingent
assets and liabilities. While actual results could differ from these estimates,
management believes that actual results will not be materially different from
amounts provided in the accompanying financial statements.
F-88
<PAGE>
CALL BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
2. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28, FEBRUARY 28,
1996 1997 1998
-------------- -------------- -------------
<S> <C> <C> <C>
Building under capital lease ........... $ -- $ -- $ 343,943
Equipment under capital lease .......... -- -- 76,876
Computer equipment ..................... 252,294 278,620 279,131
Furniture, fixtures and other .......... 54,658 80,983 94,296
---------- ---------- ----------
306,952 359,603 794,246
Less- Accumulated depreciation ......... (222,259) (258,205) (344,148)
---------- ---------- ----------
$ 84,693 $ 101,398 $ 450,098
========== ========== ==========
</TABLE>
3. PROFIT-SHARING PLAN:
The Company maintains a 401(k) profit-sharing plan (the "Plan") for all
eligible employees as defined by the Plan. Under the Plan, employees may elect
to contribute 0 to 20 percent of their compensation. The Company contributes a
maximum of $300 per employee per year. Employer contributions totaled
approximately $1,539, $2,639, $493, and $2,957 for the seven months ended
December 31, 1995, the year ended December 31, 1996, the two months ended
February 28, 1997, and the twelve months ended February 28, 1998, respectively.
Benefit plan expense is included in selling, general, and administrative
expenses in the accompanying statements of operations.
4. RELATED-PARTY TRANSACTIONS:
STOCKHOLDER LOAN
In July 1996, the Company recorded a loan to the CEO and sole stockholder
of the Company. This is a non-interest bearing loan with a balance of $117,211
as of February 28, 1998. The stockholder repaid the outstanding balance prior to
May 31, 1998.
PROPERTY AND EQUIPMENT
The Company entered into a lease with Call Properties LLC, a related party,
for office space on October 1, 1997, which has been recorded as a capital lease.
The commencement date for the lease is March 1, 1998, (see Note 6). The Company
prepaid $255,106 of lease payments, which is recorded as a stockholder loan in
the accompanying balance sheet. The stockholder loan was paid in full in 1998.
5. LINES OF CREDIT:
The Company has a $600,000 line of credit with Merrill Lynch (the "Lender")
bearing interest at the lender's prime rate plus 1 percent (9.5 percent as of
February 28, 1998). As of December 31, 1996, February 28, 1997 and 1998, the
Company has $199,134, $230,655, and $349,582, respectively, outstanding on this
line of credit. The balance on this line of credit is due on April 30, 1999.
In July 1997, the Company secured a $50,000 line of credit with Bank One of
Utah (the "Bank") bearing interest at the bank's prime rate plus 2.5 percent.
This line of credit is personally guaranteed by one of the officers of the
Company. At February 28, 1998, the Company has $38,295, outstanding on this line
of credit.
F-89
<PAGE>
CALL BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
LITIGATION
Litigation and claims are filed against the Company from time to time in
the ordinary course of business. These actions are in various stages, and no
judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing with legal counsel, is of the opinion that the
outcome of such matters will not have a material adverse effect on the Company's
financial position or results of operations.
CAPITAL LEASES
The Company has entered into capital leases for various pieces of computer
equipment and its office space. The future minimum payments under these leases
are as follows:
YEAR ENDING FEBRUARY 28,
1999 .............................................. $ 116,629
2000 .............................................. 116,629
2001 .............................................. 89,347
2002 .............................................. 86,716
2003 .............................................. 86,716
---------
496,037
Less- Amounts representing interest ............... (96,618)
---------
Present value of net minimum lease payments ....... $ 399,419
=========
OPERATING LEASES
The Company has entered into operating leases for various pieces of
computer and office equipment. The lease expense for the twelve months ended
February 28, 1998, was $4,921. The future minimum lease payments on this
equipment under noncancellable leases are as follows:
YEAR ENDING FEBRUARY 28,
1999 .............................................. $ 35,501
2000 .............................................. 35,075
2001 .............................................. 34,613
--------
$105,189
========
7. SUBSEQUENT EVENTS:
In May 1998, certain of the assets and liabilities of the Company was
acquired by IT Partners, Inc. As a result of the acquisition, a new basis of
accounting was established.
F-90
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Servinet Consulting Group, Inc.:
We have audited the accompanying balance sheets of Servinet Consulting
Group, Inc. (a California corporation) as of February 28, 1998, and the related
statements of operations, stockholders' equity and cash flows for the twelve
months then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Servinet Consulting Group,
Inc. as of February 28, 1998, and the results of its operations and its cash
flows for the twelve months then ended in conformity with generally accepted
accounting principles.
Washington, D.C.
April 24, 1998
F-91
<PAGE>
SERVINET CONSULTING GROUP, INC.
BALANCE SHEET
AS OF FEBRUARY 28, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 51,609
Accounts receivable, net of allowance for doubtful accounts of $40,000............. 4,227,868
Inventory ......................................................................... 452,323
Prepaid expenses and other current assets ......................................... 50,101
----------
Total current assets ............................................................ 4,781,901
Property and equipment, net ........................................................ 148,862
Other assets ....................................................................... 129,094
----------
Total assets .................................................................... $5,059,857
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts ................................................................... $ 32,318
Accounts payable and accrued expenses ............................................. 485,888
Taxes payable ..................................................................... 191,252
Current portion of capital lease obligations ...................................... 43,839
Lines of credit ................................................................... 3,003,019
----------
Total current liabilities ....................................................... 3,756,316
Capital lease obligations, net of current portion .................................. 58,221
----------
Total liabilities ............................................................... 3,814,537
----------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, par value $.01, 100,000 shares authorized and 55,000 shares outstand-
ing ............................................................................. 1,500
Retained earnings ................................................................. 1,243,820
----------
Total stockholders' equity ...................................................... 1,245,320
----------
Total liabilities and stockholders' equity ...................................... $5,059,857
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-92
<PAGE>
SERVINET CONSULTING GROUP, INC.
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED FEBRUARY 28, 1998
<TABLE>
<S> <C>
Revenues:
Hardware and software sales ......................................... $22,031,462
Service revenues .................................................... 2,758,312
-----------
Total revenue ..................................................... 24,789,774
Cost of goods and services sold:
Hardware and software ............................................... 18,934,936
Service costs ....................................................... 1,713,007
-----------
Total cost of goods and services sold ............................. 20,647,943
-----------
Gross profit ......................................................... 4,141,831
Operating expenses:
Selling, general, and administrative ................................ 2,685,430
Depreciation and amortization ....................................... 35,473
-----------
Total other operating expenses .................................... 2,720,903
Operating income ..................................................... 1,420,928
Interest expense, net ................................................ 203,941
-----------
Income before income tax provision ................................ 1,216,987
Income tax provision ................................................. 55,900
-----------
Net income ........................................................... $ 1,161,087
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-93
<PAGE>
SERVINET CONSULTING GROUP, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TWELVE MONTHS ENDED FEBRUARY 28, 1998
<TABLE>
<CAPTION>
COMMON STOCK
------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, February 28, 1997 ............ 55,000 $1,500 $ 284,273 $ 285,773
Distribution to stockholders ......... -- -- (201,540) (201,540)
Net income ........................... -- -- 1,161,087 1,161,087
------ ------ ---------- ----------
Balance, February 28, 1998 ............ 55,000 $1,500 $1,243,820 $1,245,320
====== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-94
<PAGE>
SERVINET CONSULTING GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED FEBRUARY 28, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................................... $ 1,161,087
Adjustments to reconcile net income to net cash flows from operating activities--
Depreciation and amortization .................................................... 35,473
Changes in assets and liabilities, net of effect of Aslan acquisition:
Increase in accounts receivable, net ............................................ (1,361,135)
Decrease in inventory ........................................................... 240,388
Decrease in prepaid expenses and other current assets ........................... 21,749
Decrease in bank overdrafts ..................................................... (132,868)
Increase in accounts payable and accrued expenses ............................... (284,000)
Increase in taxes payable ....................................................... 15,262
------------
Net cash flows used in operating activities ................................... (304,044)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................................. (33,935)
Increase in other assets ........................................................... (53,496)
Payments for acquisitions, net of cash acquired .................................... (10,271)
------------
Net cash used in investing activities ......................................... (97,702)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit ...................................................... 659,149
Principal payments on capital lease obligations .................................... (7,764)
Distributions to stockholders ...................................................... (201,540)
------------
Net cash provided by financing activities ..................................... 449,845
------------
Net increase in cash and cash equivalents ........................................... 48,099
Cash and cash equivalents, beginning of period ...................................... 3,510
------------
Cash and cash equivalents, end of period ............................................ $ 51,609
============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ............................................................. $ 221,000
============
Cash paid for income taxes ......................................................... $ --
============
Acquisition of fixed assets through capital lease obligations ...................... $ 92,325
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-95
<PAGE>
SERVINET CONSULTING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Servinet Consulting Group, Inc. (the "Company") is a California corporation
operating as a seller and marketer of retail computer and computer peripherals,
and a provider of consulting services to emerging and middle market companies in
California.
The Company operates on a calendar year-end. However, these financial
statements have been prepared for the twelve months ended February 28, 1998,
pursuant to an asset purchase agreement whereby the outstanding common stock of
the Company was acquired by IT Partners, Inc.
FRANCHISE AGREEMENT
The Company is a Computer Land franchisee in San Francisco, which provides
the Company the ability to sell computer hardware, software and related products
and services under the Computerland name. The franchise agreement provides for
an annual renewal unless the Company provides notice of termination at least 90
days prior to the renewal date. The agreement requires a quarterly franchisee
fee to be paid to the franchisor primarily based upon sales volume of .5 percent
of gross revenue, as defined. During the twelve months ended February 28, 1998,
the Company recognized franchise fee expenses totaling $111,387.
If this franchise agreement is not renewed, the Company's ability to
purchase products for resale at comparable price levels could be adversely
affected.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid investments with a maturity of
three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The carrying values of current assets and current liabilities approximate
fair value because of the relatively short maturities of these instruments.
INVENTORY
Inventory includes computers, computer peripherals and service parts.
Inventories are valued at the lower of cost or market. Cost is determined by
specific identification.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the expected life of the asset or
term of the lease.
F-96
<PAGE>
SERVINET CONSULTING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
The ranges used in computing estimated useful lives were as follows:
Furniture and fixtures ................. 5--7 years
Machinery and equipment ................ 5--7 years
Vehicles ............................... 4--7 years
Leasehold improvements ................. 5--7 years
REVENUE RECOGNITION
Service revenue is derived from information technology ("IT") services,
including hardware repair and maintenance, on-site network support, systems
consulting, software installation, web site design, installation, design and
integration of network and communication systems and other value-added IT
services. Hardware revenue is primarily derived from the sale of computer
hardware. Software revenue is primarily derived from the sale of software,
peripherals and communication devices manufactured by third parties and sold by
the Company.
Hardware and software sales with no related service component are
recognized at the time of shipment provided that the collectibility of the
receivable is probable and no significant vendor obligations remain. Revenue
from services are recognized as services are performed or ratably if performed
over a service contract period. Revenue for material projects with a duration of
three months or longer that require installation, system design and integration,
is recognized under the percentage-of-completion method as the work progresses.
INCOME TAXES
The Company is an "S" Corporation for federal income tax purposes. Earnings
and losses are included in the personal federal income tax returns of the
stockholders. Accordingly, the accompanying financial statements do not include
a provision for federal income taxes. The Company is subject to a state income
tax liability of 1.50 percent of taxable income. As a result, the accompanying
financial statements include a provision for state income taxes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
As of February 28, 1998, property and equipment consisted of the following:
Furniture and fixtures ............................. $ 11,699
Technical equipment ................................ 148,445
Furniture and fixtures under capital lease ......... 29,594
Technical equipment under capital lease ............ 72,993
----------
262,731
Less- Accumulated depreciation ..................... (113,869)
----------
$ 148,862
==========
Depreciation expense for the twelve months ended February 28, 1998, was
$35,473.
F-97
<PAGE>
SERVINET CONSULTING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
3. LINES OF CREDIT:
The Company has a $3,750,000 accounts receivable line of credit with
Deutsche Financial Services (the "Lender") bearing interest at the lender's
prime rate plus .5 percent. As of February 28, 1998, the prime rate was 8.5
percent. The average outstanding borrowings during the twelve months ended
February 28, 1998, was $2,183,391. At February 28, 1998, the Company has
$1,422,299 outstanding on this line of credit.
The Company has a $2,000,000 inventory line of credit with the Lender
whereby all purchases must be paid within thirty days. The average outstanding
borrowings during the twelve months ended February 28, 1998, was $1,367,224. As
of February 28, 1998, the Company has $1,580,720 outstanding on this line of
credit.
4. EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) profit sharing plan covering the employees
of the Company. Under the plan agreement, employees may elect to contribute a
percentage of compensation. Plan participants vest immediately in all employee
elective contributions. Additionally, plan participants vest in employer
contributions over various periods. Employer contributions are discretionary and
totaled $21,569 for the twelve months ended February 28, 1998.
5. RELATED PARTY TRANSACTIONS:
DISTRIBUTIONS TO STOCKHOLDERS
During the twelve months ended February 28, 1998, the Company distributed
$201,540 to the stockholders.
6. COMMITMENTS:
CAPITAL LEASES
The Company has entered into capital leases for various pieces of technical
equipment, furniture and fixtures. The future minimum payments under these
leases are as follows:
TWELVE MONTHS ENDING FEBRUARY 28,
---------------------------------
1999 ................................................ $ 55,945
2000 ................................................ 39,500
2001 ................................................ 21,241
2002 ................................................ 5,094
--------
121,780
Less: Amounts representing interest ................. 19,720
--------
Present value of net minimum lease payments ......... $102,060
========
F-98
<PAGE>
SERVINET CONSULTING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
OPERATING LEASES
The Company has entered into operating leases for various pieces of
computer and office equipment. The lease expense for the twelve months ended
February 28, 1998, was $165,385. The future minimum lease payments on this
equipment under non-cancelable leases are as follows:
TWELVE MONTHS ENDING FEBRUARY 28,
1999 .............................................. $224,575
2000 .............................................. 123,556
2001 .............................................. 62,677
2002 .............................................. 5,265
--------
$416,073
========
7. ACQUISITIONS:
In November 1996, the Company merged with Main Computer System, a Computer
Land franchise. The merger was accounted for under the pooling method of
accounting as it is a combination of two companies under common control.
In January 1998, the Company acquired the outstanding common stock of
Aslan, Inc. (Aslan) in San Francisco, California. The acquisition was accounted
for under the purchase method of accounting, whereby the purchase price was
allocated to the estimated fair value of the assets acquired and liabilities
assumed. The excess of the purchase price over the fair value of the net assets
acquired was $75,598 and has been recorded as goodwill. This goodwill is being
amortized over 15 years. The initial purchase price as of January 1, 1998, was
allocated as follows:
Accounts receivable ............................. $ 64,210
Other current assets ............................ 30,036
Property and equipment .......................... 92,325
Goodwill ........................................ 75,598
Accounts payable and accrued expenses ........... 160,497
Taxes payable ................................... 9,347
Capital lease obligations ....................... 92,325
In addition, the acquisition includes an earn-out agreement whereby the
Company is required to pay to the former stockholders of Aslan 15 percent of the
consulting fees generated by the Company from the Aslan operations, which will
be operated as a division of the Company, for the first eighteen months
following the acquisition, then 10 percent for the subsequent six months.
Earn-out payments are capitalized as additional goodwill.
F-99
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Computer Products & Resources, Inc.:
We have audited the accompanying balance sheets of Computer Products &
Resources, Inc. (a Michigan corporation), as of April 30, 1997 and 1998, and the
related statements of operations, changes in stockholders' equity, and cash
flows for each of the three years ended April 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Computer Products &
Resources, Inc., as of April 30, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years ended April 30, 1998,
in conformity with generally accepted accounting principles.
Washington, D.C.
June 19, 1998
F-100
<PAGE>
COMPUTER PRODUCTS & RESOURCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 404,351 $ 748,000
Marketable securities, at market value ............................. 44,199 127,597
Trade accounts receivable, net of allowance for doubtful accounts of
$50,000 in 1997 and 1998.......................................... 2,794,432 3,864,857
Inventory .......................................................... 1,353,719 1,145,568
Prepaid expenses and other assets .................................. 9,879 8,379
---------- ----------
Total current assets ............................................. 4,606,580 5,894,401
Property and equipment, net ......................................... 398,462 472,333
Due from officer .................................................... 37,798 62,646
Deferred tax asset .................................................. 248,000 270,000
---------- ----------
Total assets ..................................................... $5,290,840 $6,699,380
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $1,721,471 $2,088,967
Accrued expenses ................................................... 527,094 525,152
Deferred revenue ................................................... 1,200,538 1,644,026
---------- ----------
Total liabilities ................................................ 3,449,103 4,258,145
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, par value $1.00, 50,000 shares authorized and 1,000
shares outstanding ............................................... 1,000 1,000
Unrealized gain on marketable securities ........................... 18,678 20,755
Retained earnings .................................................. 1,822,059 2,419,480
---------- ----------
Total stockholders' equity ....................................... 1,841,737 2,441,235
---------- ----------
Total liabilities and stockholders' equity ....................... $5,290,840 $6,699,380
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE>
COMPUTER PRODUCTS & RESOURCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED APRIL 30,
------------------------------------------------
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Hardware and software ................................ $23,725,073 $28,857,627 $26,798,246
Services ............................................. 2,870,902 5,439,832 5,332,335
----------- ----------- -----------
Total revenues ..................................... 26,595,975 34,297,459 32,130,581
Cost of sales ......................................... 21,734,943 26,461,125 23,783,746
----------- ----------- -----------
Gross profit .......................................... 4,861,032 7,836,334 8,346,835
Selling, general, and administrative expenses ......... 4,860,314 6,491,065 7,450,369
----------- ----------- -----------
Operating income ...................................... 718 1,345,269 896,466
Other income (expense):
Interest expense ..................................... (88,403) (92,890) (46,082)
Other income ......................................... 277,499 13,256 68,037
----------- ----------- -----------
Total other income (expense) ....................... 189,096 (79,634) 21,955
----------- ----------- -----------
Income before income tax provision .................... 189,814 1,265,635 918,421
Income tax provision .................................. 83,300 435,747 321,000
----------- ----------- -----------
Net income ............................................ $ 106,514 $ 829,888 $ 597,421
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-102
<PAGE>
COMPUTER PRODUCTS & RESOURCES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------
RETAINED
EARNINGS COMPREHENSIVE
SHARES AMOUNT INCOME INCOME TOTAL
-------- -------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, April 30, 1995 ............... 1,000 $1,000 $ 885,657 $ 2,562 $ 889,219
Increase in unrealized gains ......... -- -- -- 5,444 5,444
Net income ........................... -- -- 106,514 - 106,514
----- ------ ---------- ------- ----------
Balance, April 30, 1996 ............... 1,000 1,000 992,171 8,006 1,001,177
Increase in unrealized gains ......... -- -- -- 10,672 10,672
Net income ........................... -- -- 829,888 -- 829,888
----- ------ ---------- ------- ----------
Balance, April 30, 1997 ............... 1,000 1,000 1,822,059 18,678 1,841,737
Increase in unrealized gains ......... -- -- -- 2,077 2,077
Net income ........................... -- -- 597,421 -- 597,421
----- ------ ---------- ------- ----------
Balance, April 30, 1998 ............... 1,000 $1,000 $2,419,480 $20,755 $2,441,235
===== ====== ========== ======= ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-103
<PAGE>
COMPUTER PRODUCTS & RESOURCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED APRIL 30,
-------------------------------------------------
1996 1997 1998
--------------- ------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 106,514 $ 829,888 $ 597,421
Adjustments to reconcile net income to net
cash from operating activities--
Depreciation and amortization ..................... 134,650 175,088 213,958
Loss from disposal of fixed assets ................ -- -- 4,756
Gain on sale of marketable securities ............. -- -- (53,592)
Changes in assets and liabilities:
Increase in accounts receivable, net ............. (51,786) (306,113) (1,070,425)
Decrease (increase) in inventory ................. (1,358,581) 1,502,472 208,151
Decrease in prepaid expenses and other
assets ......................................... 18,958 654 1,500
Decrease (increase) in due from officer .......... (39,856) 1,788 (24,848)
(Decrease) increase in accounts payable .......... 1,417,880 (985,189) 367,496
(Decrease) increase in accrued expenses .......... (24,033) (117,642) (45,942)
Increase in deferred revenue ..................... 211,989 223,972 443,488
Increase in deferred taxes ....................... 3,800 204,000 22,000
------------ ---------- ------------
Net cash flows from operating activities. 419,535 1,528,918 663,963
------------ ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ............................ (216,679) (246,605) (292,585)
Purchase of marketable securities ................... (12,632) -- (27,729)
------------ ---------- ------------
Net cash from investing activities ............. (229,311) (246,605) (320,314)
------------ ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on line of credit ...................... (257,966) (966,863) --
------------ ---------- ------------
Net cash from financing activities ............. (257,966) (966,863) --
------------ ---------- ------------
Net increase (decrease) in cash and cash equiva-
lents ............................................... (67,742) 315,450 343,649
Cash and cash equivalents, beginning of year ......... 156,643 88,901 404,351
------------ ---------- ------------
Cash and cash equivalents, end of year ............... $ 88,901 $ 404,351 $ 748,000
============ ========== ============
Supplemental cash flow information:
Cash paid for interest .............................. $ 88,403 $ 94,180 $ 46,082
============ ========== ============
Cash paid for income taxes .......................... $ 77,819 $ 414,400 $ 342,000
============ ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-104
<PAGE>
COMPUTER PRODUCTS & RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS:
Computer Products & Resources, Inc. ("CPR" or the "Company"), was formed
in August 1982 in West Michigan to provide service and support for computer
systems and equipment.
The Company is an authorized franchise of Microage Computer Stores, Inc.
("Microage"). Through this franchise agreement, the Company is able to purchase
hardware and software brands directly from Microage and subsequently resell them
to customers. The agreement with Microage expires in October 1998. If this
agreement is not renewed, it could have an adverse impact on the Company's
ability to operate as a hardware/software provider.
CPR provides the following services: sales consulting, which includes
systems planning and strategy; equipment evaluation and new product
presentation; systems and network installations; application development and
design; custom configuration services; and service and support coordination for
remote locations. CPR also provides sales and services to business accounts that
focus on the manufacturing, banking and financial, legal, government education,
and medical markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Service revenue is derived from information technology services, including
hardware repair and maintenance, on-site network support, systems consulting,
software installation, web site design, installation, design and integration of
network and communication systems and other value-added IT services. Hardware
revenue is primarily derived from the sale of computer hardware. Software
revenue is primarily derived from the sale of software, peripherals and
communication devices manufactured by third parties and sold by the Company.
A segment of the Company's business is the offering of service contracts.
These contracts are normally two to three years in duration. The income from
these contracts is recognized evenly over the life of the contract.
Hardware and software sales with no related service component are
recognized at the time of shipment provided that the collectibility of the
receivable is probable. Revenue from services is recognized as services are
performed or ratably if performed over a service contract period.
CASH AND CASH EQUIVALENTS
Investments in securities with original maturities of three months or less
are considered to be cash equivalents. Cash equivalents at April 30, 1997 and
1998, consisted of funds invested in money market instruments and a certificate
of deposit.
MARKETABLE SECURITIES
Securities are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." SFAS No. 115 requires, among other items, the determination
at the acquisition date of a security, whether such security is purchased with
the intent and ability to hold to maturity, whether it is purchased with the
intent to trade, or whether the security is available for sale. The Company's
marketable securities consist of all equity instruments as of April 30, 1997 and
1998. Management has indicated that their intent is to hold these securities for
long-term appreciation. Under SFAS No. 115, these securities are classified as
available for sale. Securities available for sale are carried at fair value,
with unrealized gains and losses, net of tax, included as a separate component
of stockholders' equity.
F-105
<PAGE>
COMPUTER PRODUCTS & RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires disclosures of fair value information about financial instruments,
whether or not recognized in the balance sheets, for which it is to estimate
that value. In cases where quoted market prices are not available, fair values
are based on estimates of future cash flows. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The carrying value of current assets and liabilities approximates fair
value due to the relatively short maturities of these instruments.
INVENTORY
Inventory is recorded at the lower of cost or market value using the
specific identification method of accounting. Inventory as of April 30, 1997 and
1998, consisted primarily of finished goods as the Company serves as an
intermediary between manufacturers and buyers.
PROPERTY AND EQUIPMENT
Furniture and equipment are stated at cost and are depreciated using
accelerated methods over their estimated useful lives of seven years, and
leasehold improvements are amortized using the accelerated method over the
shorter of their useful lives or applicable lease term. Amortization of
purchased software is recorded over its estimated useful life of three years.
LICENSES AND FEES
The Company entered into a 10-year franchise agreement with Microage in
October 1980. The purchase price of the franchise license was $15,000, and the
Company has amortized this cost using the straight-line method over 10 years.
The agreement expires in October 1998.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactment of changes
in the tax laws or rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. REVOLVING LINE OF CREDIT:
The Company has a loan agreement with Deutsche Financial for secured
revolving loan commitments of $2,500,000 as of April 30, 1998. Interest is
charged on the outstanding balance at a rate of one percent above the prevailing
prime rate for the years ended April 30, 1997 and 1998, respectively. Borrowings
under the agreement are collateralized by accounts receivable and inventories.
Under the terms of this agreement, the Company is required to comply with
certain financial covenants, including net worth and a leverage ratio.
F-106
<PAGE>
COMPUTER PRODUCTS & RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
As of April 30, 1997 and 1998, the Company had a credit balance of $297,369
and $713,134, respectively. Accordingly, the balance has been reclassed to cash
and cash equivalents.
4. MARKETABLE SECURITIES:
As of April 30, 1997 and 1998, marketable securities consisted of the
following:
APRIL 30,
------------------
1997 1998
------- --------
Cost ................................... $25,521 $106,842
Unrealized gain ........................ 18,678 20,755
------- --------
Market value ........................... $44,199 $127,597
======= ========
The Company's marketable securities are composed of equity securities.
5. PROPERTY AND EQUIPMENT:
As of April 30, 1997 and 1998, property and equipment consisted of the
following:
APRIL 30,
-----------------------------
1997 1998
------------- -------------
Furniture and fixtures ................. $ 209,089 $ 259,701
Machinery and equipment ................ 780,747 921,527
Leasehold improvements ................. 18,343 18,343
---------- ----------
1,008,179 1,199,571
Less- Accumulated depreciation ......... (609,717) (727,238)
---------- ----------
$ 398,462 $ 472,333
========== ==========
6. INCOME TAXES:
Significant components of the Company's deferred tax assets and liabilities
are as follows:
APRIL 30,
-------------------------
1997 1998
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts .......... $ 17,000 $ 17,000
Deferred revenue ......................... 215,000 215,000
Accrued vacation ......................... 36,600 45,000
Other .................................... 10,400 11,200
-------- --------
Total deferred tax assets .............. 279,000 288,200
-------- --------
Deferred tax liabilities:
Unrealized gain .......................... 6,300 7,200
Other .................................... 24,700 11,000
-------- --------
Total deferred tax liabilities ......... 31,000 18,200
-------- --------
Net deferred tax asset .................... $248,000 $270,000
======== ========
F-107
<PAGE>
COMPUTER PRODUCTS & RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
The provision for federal income taxes is composed of the following:
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------------
1996 1997 1998
---------- ------------- -----------
<S> <C> <C> <C>
Current .......... $ 86,100 $ 639,747 $ 343,000
Deferred ......... (2,800) (204,000) (22,000)
-------- ---------- ---------
Total ......... $ 83,300 $ 435,747 $ 321,000
======== ========== =========
</TABLE>
The reconciliation of the applicable income taxes and the amount computed
by applying the statutory federal income tax rate of 34 percent to income before
taxes is as follows:
<TABLE>
<CAPTION>
APRIL 30,
--------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Applicable income taxes based on statutory tax
rate ....................................... $64,537 $430,316 $312,263
Other ........................................ 18,763 5,431 8,737
------- -------- --------
Income tax benefit ........................... $83,300 $435,747 $321,000
======= ======== ========
</TABLE>
In lieu of a state income tax, the Company pays a Michigan Single Business
Tax. These amounts are included in selling, general, and administrative
expenses.
7. EMPLOYEE BENEFIT PLANS:
The Company has a profit-sharing retirement plan covering substantially all
full-time employees with more than three years of service. Contributions are
made to the plan at the discretion of the Company's Board of Directors. These
amounts were accrued and charged against income.
As of May 1, 1995, the Company instituted a 401(k) plan in addition to the
profit-sharing retirement plan. The Company's Board of Directors has elected to
match a portion of each employee's contribution. The employer's matching
contribution for the fiscal years ended April 30, 1996, 1997, and 1998, was
$60,000, $74,702, and $94,429, respectively.
8. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains reserves for potential credit losses. Historically, such
losses have been within management's expectations. The Company's largest
customer represents approximately 24 and 30 percent of accounts receivable at
April 30, 1997 and 1998, respectively.
9. RELATED PARTY TRANSACTIONS:
The Company leases certain furniture and fixtures and telephone equipment
as well as its facilities at 1001 Monroe Avenue N.W. from CPR Financial Group,
which is a leasing company owned by the Company's principal stockholder. The
leases with CPR Financial Group are operated on a month-to-month basis until
cancelled by either party upon 90 days prior written notification. During the
fiscal years ended April 30, 1996, 1997, and 1998, these lease payments totaled
$155,971, $156,843, and $186,600, respectively.
The Company has made insurance premium payments on a policy for the
principal stockholder. The Company has entered into an agreement with the
insurer and the policy-holder that provides, among other things, that the
Company will be reimbursed for all insurance payments made. Total insurance
payments made for the fiscal years ended April 30, 1997 and 1998, were $5,865
and $11,731, respectively. There were no insurance payments made in 1996.
F-108
<PAGE>
COMPUTER PRODUCTS & RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
10. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company has one noncancellable lease that expires in March 1999. Future
minimum lease payments under this noncancellable lease total $109,208.
Rent expense under this lease for the fiscal years ended April 30, 1996,
1997, and 1998, were $126,714, $109,858, and $112,704, respectively.
11. SUBSEQUENT EVENT:
In August 1998, the Company entered into a proposed business combination
agreement with IT Partners, Inc. If consummated, a new basis of accounting will
be established.
F-109
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of MicroNomics of Lansing, Inc.:
We have audited the accompanying balance sheets of MicroNomics of Lansing,
Inc. (a Michigan corporation d/b/a Entre' Computer Services, Inc., the
"Company"), as of December 31, 1996, March 31, 1997, and March 31, 1998, the
related statements of operations, changes in stockholders' equity and cash flows
for the years ended December 31, 1995 and 1996, and the three months ended March
31, 1997, and for the twelve months ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MicroNomics of Lansing,
Inc., as of December 31, 1996, March 31, 1997, and March 31, 1998, and the
results of its operations and its cash flows for the years ended December 31,
1995 and 1996, and the three months ended March 31, 1997, and for the twelve
months ended March 31, 1998, in conformity with generally accepted accounting
principles.
Washington, D.C.
July 23, 1998
F-110
<PAGE>
MICRONOMICS OF LANSING, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996,
MARCH 31, 1997, AND MARCH 31, 1998
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1998
-------------- ------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 20,550 $ 408,430 $ 36,154
Accounts receivable, net of allowance for doubtful
accounts of $20,000, $20,000 and $20,000, respectively..... 800,618 798,776 1,232,760
Inventory, net .............................................. 707,109 571,989 667,827
Deferred tax asset .......................................... 106,653 106,653 70,322
Prepaid expenses and other current assets ................... 51,046 37,998 49,915
---------- ---------- ----------
Total current assets ........................................ 1,685,976 1,923,846 2,056,978
Property and equipment, net .................................. 420,600 390,851 326,687
Other assets ................................................. 18,630 18,630 54,450
---------- ---------- ----------
Total assets ................................................ $2,125,206 $2,333,327 $2,438,115
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ....................... $ 740,025 $ 567,293 $ 918,763
Accrued compensation ........................................ 175,427 116,952 51,747
Unearned service contract revenue ........................... 774,562 765,921 929,441
Due to officer .............................................. 158,243 142,933 13,317
Line of credit .............................................. -- 325,000 --
Notes payable, net of long-term portion ..................... 12,362 12,362 5,939
---------- ---------- ----------
Total current liabilities ................................. 1,860,619 1,930,461 1,919,207
Notes payable, net of current portion ........................ 11,511 7,337 16,154
---------- ---------- ----------
Total liabilities ......................................... 1,872,130 1,937,798 1,935,361
---------- ---------- ----------
Stockholders' equity:
Common stock, par value $1; 100,000 shares authorized
and 32,500 shares outstanding ............................. 32,500 32,500 32,500
Additional paid-in capital .................................. 97,500 97,500 97,500
Retained earnings ........................................... 123,076 265,529 372,754
---------- ---------- ----------
Total stockholders' equity ................................ 253,076 395,529 502,754
---------- ---------- ----------
Total liabilities and stockholders' equity ................ $2,125,206 $2,333,327 $2,438,115
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-111
<PAGE>
MICRONOMICS OF LANSING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996,
FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
FOR THE THREE FOR THE TWELVE
DECEMBER 31, MONTHS ENDED MONTHS ENDED
--------------------------- MARCH 31, MARCH 31,
1995 1996 1997 1998
------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Hardware and software ........................ $8,078,825 $6,614,956 $1,993,183 $ 9,020,126
Services ..................................... 1,658,164 1,986,737 553,540 2,360,510
Other ........................................ 72,065 196,639 22,012 251,367
---------- ---------- ---------- -----------
Total revenues ............................. 9,809,054 8,798,332 2,568,735 11,632,003
Cost of goods and services sold ............... 7,015,835 6,034,564 1,549,110 8,179,753
---------- ---------- ---------- -----------
Gross profit .................................. 2,793,219 2,763,768 1,019,625 3,452,250
Selling, general, and administrative .......... 2,572,984 2,757,974 731,133 3,273,478
---------- ---------- ---------- -----------
Operating income .............................. 220,235 5,794 288,492 178,772
Other income (expense):
Interest income .............................. 13,651 9,495 681 10,261
Interest expense ............................. (21,163) (17,546) (8,464) (15,968)
Other ........................................ (242) (8,664) (2,319) (8,303)
---------- ---------- ---------- -----------
Total other loss ........................... (7,754) (16,715) (10,102) (14,010)
---------- ---------- ---------- -----------
Income (loss) before income tax provision ..... 212,481 (10,921) 278,390 164,762
Income tax expense (benefit) .................. 73,030 (2,576) 135,937 57,537
---------- ---------- ---------- -----------
Net income (loss) ............................. $ 139,451 $ (8,345) $ 142,453 $ 107,225
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-112
<PAGE>
MICRONOMICS OF LANSING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996,
FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN
SHARES AMOUNT CAPITAL RETAINED TOTAL
-------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ......... 32,500 $32,500 $97,500 $ (8,030) $121,970
Net income ........................ -- -- -- 139,451 139,451
------ ------- ------- --------- --------
Balance, December 31, 1995 ......... 32,500 32,500 97,500 131,421 261,421
Net loss .......................... -- -- -- (8,345) (8,345)
------ ------- ------- --------- --------
Balance, December 31, 1996 ......... 32,500 32,500 97,500 123,076 253,076
Net income ........................ -- -- -- 142,453 142,453
------ ------- ------- --------- --------
Balance, March 31, 1997 ............ 32,500 32,500 97,500 265,529 395,529
Net income ........................ -- -- -- 107,225 107,225
------ ------- ------- --------- --------
Balance, March 31, 1998 ............ 32,500 $32,500 $97,500 $ 372,754 $502,754
====== ======= ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-113
<PAGE>
MICRONOMICS OF LANSING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996,
FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
FOR THE THREE FOR THE TWELVE
DECEMBER 31, MONTHS ENDED MONTHS ENDED
-------------------------- MARCH 31, MARCH 31,
1995 1996 1997 1998
------------ ------------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 139,451 $ (8,345) $ 142,453 $ 107,225
Adjustments to reconcile net loss to net cash flows
from operating activities-
Depreciation of property and equipment ................ 90,471 99,643 29,749 185,729
Changes in assets and liabilities-
(Increase) decrease in accounts receivable, net....... (374,680) 121,481 1,842 (433,984)
Decrease (increase) in inventory ..................... 149,971 (399,473) 135,120 (95,838)
Decrease (increase) in deferred tax asset ............ 3,380 (66,673) -- 36,331
(Increase) decrease in prepaid expenses and
other current assets ............................... (6,772) 17,976 13,048 (11,917)
Increase in other long-term assets ................... (56) (1,952) -- (35,820)
Increase (decrease) in accounts payable .............. 546,389 (82,333) (172,732) 351,470
(Decrease) increase in accrued compensation .......... (31,243) 23,311 (58,475) (65,205)
Increase (decrease) in unearned service contract
revenue ............................................ 168,829 176,530 (8,641) 163,520
---------- ---------- ---------- ----------
Net cash flows provided by (used in)
operating activities .............................. 685,740 (119,835) 82,364 201,511
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ...................... (155,940) (261,029) -- (121,565)
Proceeds from sale of fixed assets ...................... 1,000 5,290 -- --
---------- ---------- ---------- ----------
Net cash used in investing activities .............. (154,940) (255,739) -- (121,565)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank credit facility ....................... (290,937) (30,787) -- (325,000)
Proceeds from notes payable ............................. -- -- 320,826 2,394
Repayment of loan to officer ............................ (129,641) -- (15,310) (129,616)
Proceeds from loan to officer ........................... -- 105,599 -- --
---------- ---------- ---------- ----------
Net cash (used in) provided by financing
activities ........................................ (420,578) 74,812 305,516 (452,222)
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ..... 110,222 (300,762) 387,880 (372,276)
Cash and cash equivalents, beginning of year ............. 211,090 321,312 20,550 408,430
---------- ---------- ---------- ----------
Cash and cash equivalents, end of year ................... $ 321,312 $ 20,550 $ 408,430 $ 36,154
========== ========== ========== ==========
Cash paid for interest ................................... $ 21,163 $ 14,600 $ 13,592 $ 13,468
========== ========== ========== ==========
Cash paid for income taxes ............................... $ 3,800 $ 119,417 $ 9,132 $ 70,880
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-114
<PAGE>
MICRONOMICS OF LANSING, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS:
MicroNomics of Lansing, Inc. d/b/a Entre' Computer Services, Inc. (the
"Company"), located in central-Michigan, is an integrator of personal computer
network systems. The Company offers personal, professional and business use
computer hardware, software-related products, services and repair and
maintenance.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The Company operates on a fiscal year that ends December 31. However, these
financial statements have been prepared pursuant to a purchase agreement whereby
the Company is expected to be acquired by IT Partners, Inc.
CASH AND CASH EQUIVALENTS
Investments in securities with original maturities of three months or less
are considered to be cash equivalents. Cash equivalents at December 31, 1996,
and March 31, 1997 and 1998, consisted of funds invested in money market
instruments.
ACCOUNTS RECEIVABLE
The Company has established policies for extending credit and establishes
an allowance for doubtful accounts based upon factors surrounding the credit
risk of customers, historical trends, and other information. As of December 31,
1996, and March 31, 1997 and 1998, the Company had a reserve of $20,000 for
doubtful accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The carrying values of current assets and current liabilities approximate
fair value because of the relatively short maturities of these instruments. The
book value of the Company's long-term debt is equal to its fair market value as
the Company's borrowing cost is consistent with similar credit facilities at
December 31, 1996, and March 31, 1997 and 1998.
This disclosure relates to financial instruments only. The fair value
assumptions were based upon subjective estimates of market conditions and
perceived risks of the financial instruments.
INVENTORY
Inventory is recorded at the lower of cost or market value using the
first-in, first-out method of accounting. Inventory as of December 31, 1996, and
March 31, 1997 and 1998, consisted primarily of finished goods, as the Company
serves as an intermediary between manufacturers and buyers. As of December 31,
1996, and March 31, 1997 and 1998, inventory reserves were $28,845, $37,269, and
$37,269, respectively.
F-115
<PAGE>
MICRONOMICS OF LANSING, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives of the assets range from three to seven years. Leasehold
improvements are amortized over the lesser of the expected life of the asset or
term of the lease. Depreciation expense for the years ended December 31, 1996,
for the three months ended March 31, 1997, and for the twelve months ended March
31, 1998, is $99,643, $29,749, and $185,729, respectively.
The estimated useful lives are as follows:
Furniture and fixtures ............... 5-7 years
Equipment ............................ 3-5 years
Vehicles ............................. 4-7 years
Leasehold improvements ............... 12 years
REVENUE RECOGNITION
Hardware and software sales with no related service component are
recognized at the time of shipment provided that the collectibility of the
receivable is probable. Revenue from services are recognized as services are
performed or ratably if performed over a service contract year. Unearned service
contract revenue is recorded as a liability for services paid for, but not yet
performed. Revenue for material projects with a duration of three months or
longer that require installation, system design and integration, is recognized
under the percentage-of-completion method as the work progresses.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's consolidated
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax laws or rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting year. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
As of December 31, 1996, and March 31, 1997 and 1998, property and
equipment consist of the following:
MARCH 31,
DECEMBER 31, -------------------
1996 1997 1998
------------ -------- ---------
Furniture and fixtures .............. $111,965 $111,965 $125,149
Equipment ........................... 425,150 419,712 448,874
Vehicles ............................ 92,801 86,301 159,304
Leasehold improvements .............. 46,198 46,198 46,198
-------- -------- --------
676,114 664,176 779,525
Less- Accumulated depreciation ...... 255,514 273,325 452,838
-------- -------- --------
$420,600 $390,851 $326,687
======== ======== ========
F-116
<PAGE>
MICRONOMICS OF LANSING, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
4. NOTES PAYABLE:
As of December 31, 1996, and March 31, 1997 and 1998, notes payable consist
of the following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, -----------------------
1996 1997 1998
------------- ---------- ----------
<S> <C> <C> <C>
GMAC note, 4.8% interest rate, due 12/19/00 ......... $ 15,058 $14,463 $11,376
GMAC note, 4.8% interest rate, due 4/21/01 .......... -- -- 10,717
CNB loan, 9.0% interest rate, due 5/2/97 ............ 8,815 5,236 --
-------- ------- -------
23,873 19,699 22,093
Less- Current portion of notes payable .............. 12,362 12,362 5,939
-------- ------- -------
Notes payable, long-term portion .................... $ 11,511 $ 7,337 $16,154
======== ======= =======
</TABLE>
Maturities on notes payable are as follows:
<TABLE>
<S> <C>
April 1, 1998 to December 31, 1998 ......... $ 5,939
1999 ....................................... 7,919
2000 ....................................... 7,919
2001 ....................................... 316
2002 and thereafter ........................ --
-------
$22,093
=======
</TABLE>
Interest expense for the years ended December 31, 1995 and 1996, for the
three months ended March 31, 1997, and for the twelve months ended March 31,
1998, was $21,163, $17,546, $8,464, and $15,968, respectively.
5. REVOLVING LINE OF CREDIT:
On January 16, 1997, the Company obtained a line of credit. As of March 31,
1997 and 1998, the Company had outstanding balances under its revolving line of
credit agreement of $325,000 and $0, respectively. The maximum amount of
borrowings under the line of credit, as amended, is $350,000. The revolving line
of credit bears interest at the prime rate plus 1 percent. The line of credit
expires on November 1, 1998. The Company has pledged accounts receivable and
inventory as collateral under the revolving line of credit agreement.
Under the terms of this agreement, the Company is required to comply with
certain financial covenants including net worth and current ratio. As of March
31, 1997 and 1998, the Company was in compliance with such covenants.
F-117
<PAGE>
MICRONOMICS OF LANSING, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
6. INCOME TAXES:
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1996, and March 31, 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, -----------------------
1996 1997 1998
------------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts ......... $ 6,800 $ 6,800 $ 6,800
Deferred income ......................... 30,139 30,139 12,069
Inventory reserve ....................... 12,671 12,671 12,671
Tax over book depreciation .............. 13,776 13,776 12,742
Other ................................... 43,267 43,267 28,845
-------- -------- -------
Total deferred tax assets ............... 106,653 106,653 73,127
-------- -------- -------
Deferred tax liabilities:
Other ................................... -- -- 2,805
-------- -------- -------
Net deferred tax assets ................. $106,653 $106,653 $70,322
======== ======== =======
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- ------------------------
1995 1996 1997 1998
---------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Current ........................... $58,464 $ 64,097 $135,937 $21,206
Deferred .......................... 14,566 (66,673) -- 36,331
------- --------- -------- -------
Total provision (benefit) ......... $73,030 $ (2,576) $135,937 $57,537
======= ========= ======== =======
</TABLE>
The reasons for the differences between the applicable income taxes and the
amount computed by applying the statutory federal income tax rate of 34 percent
to income (loss) before taxes were due to the impact of the graduated tax rate
changes as well as permanent differences:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- ------------------------
1995 1996 1997 1998
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Applicable income tax based on statutory Federal tax rate
(34%) .................................................. $72,244 $ (3,713) $ 94,653 $56,019
Other ................................................... 786 1,137 41,284 1,518
------- -------- -------- -------
Total provision (benefit) ............................... $73,030 $ (2,576) $135,937 $57,537
======= ======== ======== =======
</TABLE>
7. EMPLOYEE BENEFIT PLANS:
The Company has a 401(k) plan covering employees who meet certain age and
length of employment criteria. The Company will match 25 percent of the
employees' contributions. The Company can also make discretionary contributions
to the plan. The Company's matching contribution was $25,382, $27,141, $7,060,
and $36,579 for the years ended December 31, 1995 and 1996, for the three months
ended March 31, 1997, and for the twelve months ended March 31, 1998,
respectively. A participant will become vested in the employer's matching
contribution at the rate of 20 percent per year beginning in the second year of
continuous service.
The Company also has a discretionary profit sharing plan whereby the
Company will set aside 35 percent of its net profit before taxes at year-end to
be allocated to employees who have worked for the Company for that full year. In
general, a distribution will not be made for persons who have not
F-118
<PAGE>
MICRONOMICS OF LANSING, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
worked for the Company for the full year. The amount due to each employee will
be determined by a formula that takes into account years of service with the
Company and salary level. Should an employee leave prior to year-end, his/her
share will revert back to the Company. The amount of expense for the years ended
December 31, 1995 and 1996, for the three months ended March 31, 1997, and for
the twelve months ended March 31, 1998, was $140,000, $201,869, $70,027, and
$163,741, respectively.
8. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains reserves for potential credit losses; historically, such
losses have been within management's expectations. During the three months ended
March 31, 1997, the Company's two largest customers represented approximately 10
and 16 percent of total sales. During the twelve months ended March 31, 1998,
the Company's largest customer represented approximately 13 percent of total
sales.
As of December 31, 1996, one customer comprised 18 percent of the total
accounts receivable balance and another customer comprised 10 percent of the
total accounts receivable balance. As of March 31, 1997, one customer comprised
31 percent of the total accounts receivable balance and another customer
comprised 13 percent of the total accounts receivable balance. As of March 31,
1998, one customer comprised 24 percent of the total accounts receivable balance
and another customer comprised 21 percent of the total accounts receivable
balance.
9. RELATED-PARTY TRANSACTIONS:
LOAN TO OFFICER
In December 1994, the Company borrowed $215,000 from the sole stockholder
under a demand note with an interest rate of prime plus 2 percent. As of
December 31, 1996, and March 31, 1997 and 1998, amounts due to officer were
$158,243, $142,933, and $13,317, respectively. The amount was repaid in full
subsequent to March 31, 1998.
BONUS
The Company pays bonuses to the owners based upon annual company
performance and net income and is included in selling, general, and
administrative expense in the Statements of Operations. Bonuses paid or accrued
for the years ended December 31, 1995 and 1996, for the three months ended March
31, 1997, and for the twelve months ended March 31, 1998, were $275,000,
$125,000, $33,750, and $101,250.
10. CONTINGENCIES AND COMMITMENTS:
OPERATING LEASES
The Company leases building space in Lansing, Michigan under an operating
lease expiring in 2008. The lease provided for a renewal option of five years.
Future minimum rent payments due under existing operating leases are as follows:
YEARS ENDED MARCH 31,
---------------------
April 1, 1998, to December 31, 1998 ......... $ 122,072
1999 ........................................ 167,367
2000 ........................................ 172,388
2001 ........................................ 177,560
2002 and thereafter ......................... 1,364,063
----------
$2,003,450
==========
F-119
<PAGE>
MICRONOMICS OF LANSING, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
Rent expense for the years ended December 31, 1995 and 1996, for the three
months ended March 31, 1997, and for the twelve months ended March 31, 1998, was
$105,053, $135,188, $51,387, and $177,926, respectively.
11. SUBSEQUENT EVENTS:
On June 3, 1998, the Company entered into a proposed business combination
agreement with IT Partners, Inc. If consummated, a new basis of accounting will
be established.
F-120
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Light Industries Service Corporation:
We have audited the accompanying balance sheet of Light Industries Service
Corporation (a Maryland Corporation), as of April 30, 1998, and the related
statement of operations, stockholder's equity and cash flows for the twelve
months then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Light Industries Service
Corporation as of April 30, 1998, and the results of its operations and its cash
flows for the twelve months then ended in conformity with generally accepted
accounting principles.
Washington, D.C.
July 10, 1998
F-121
<PAGE>
LIGHT INDUSTRIES SERVICE CORPORATION
BALANCE SHEET
AS OF APRIL 30, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 209,064
Accounts receivable ............................................................. 676,608
Related party receivable, net (Note 8) .......................................... 96,450
Inventory ....................................................................... 68,261
Prepaid expenses and other current assets ....................................... 60,089
----------
Total current assets .......................................................... 1,110,472
Property and equipment, net ..................................................... 466,287
Deferred tax asset .............................................................. 28,728
Investment in WCTS .............................................................. 3,500
----------
Total assets .................................................................. $1,608,987
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ................................................................ $ 382,329
Accrued expenses ................................................................ 225,633
Unearned revenue ................................................................ 317,087
Deferred tax liability .......................................................... 107,525
Current portion of notes payable ................................................ 130,414
Customer deposits and other current liabilities ................................. 120,494
Deferred rent ................................................................... 69,200
Income tax payable .............................................................. 36,678
----------
Total current liabilities ..................................................... 1,389,360
Notes payable, net of current portion ............................................ 59,424
----------
Total liabilities ............................................................. 1,448,784
----------
Commitments and contingencies (Note 9)
Stockholder's equity:
Common stock, par value $1, 5,000 shares authorized, 5,000 shares issued and out-
standing ...................................................................... 5,000
Retained earnings ............................................................... 155,203
----------
Total stockholder's equity .................................................... 160,203
----------
Total liabilities and stockholder's equity .................................... $1,608,987
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-122
<PAGE>
LIGHT INDUSTRIES SERVICE CORPORATION
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED APRIL 30, 1998
<TABLE>
<S> <C>
Revenue:
Software and consulting ............................................. $2,605,424
Network services .................................................... 2,443,809
Programming ......................................................... 982,350
Other ............................................................... 824,796
----------
Total revenue ..................................................... 6,856,379
Cost of goods and services sold:
Software and consulting ............................................. 1,624,317
Network services .................................................... 1,583,379
Programming ......................................................... 485,692
Other ............................................................... 494,389
----------
Total cost of goods and services sold ............................. 4,187,777
----------
Gross profit ......................................................... 2,668,602
Other operating expenses:
Selling, general, and administrative ................................ 2,147,245
Depreciation and amortization ....................................... 142,663
----------
Total other operating expenses .................................... 2,289,908
----------
Operating income ..................................................... 378,694
Other expense:
Interest expense .................................................... 9,518
Other ............................................................... 18,786
----------
Total other expense ............................................... 28,304
----------
Income before tax provision .......................................... 350,390
Income tax provision ................................................. 135,251
----------
Net income ........................................................... $ 215,139
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-123
<PAGE>
LIGHT INDUSTRIES SERVICE CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE TWELVE MONTHS ENDED APRIL 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
RETAINED
SHARES AMOUNT EARNINGS TOTAL
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, April 30, 1997 ......... 5,000 $5,000 $ (59,936) $ (54,936)
Net income ..................... -- -- 215,139 215,139
----- ------ --------- ---------
Balance, April 30, 1998 ......... 5,000 $5,000 $ 155,203 $ 160,203
===== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-124
<PAGE>
LIGHT INDUSTRIES SERVICE CORPORATION
STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED APRIL 30, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................ $ 215,139
Adjustments to reconcile net income to net cash flows provided by operating
activities-
Depreciation and amortization ........................................... 142,663
Deferred income taxes ................................................... 98,573
Changes in assets and liabilities-
Accounts receivable .................................................... (71,598)
Related party receivable ............................................... (96,450)
Inventory .............................................................. 56,839
Prepaid expenses and other current assets .............................. 130,445
Accounts payable ....................................................... 200,443
Accrued expenses ....................................................... (14,999)
Unearned revenue ....................................................... (90,857)
Customer deposits and other current liabilities ........................ (408,742)
Deferred rent .......................................................... 69,200
Income tax payable ..................................................... 36,678
----------
Net cash flows provided by operating activities ...................... 267,334
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................................ (253,750)
Disposal of property and equipment ........................................ 573
Investment in WCTS ........................................................ (3,500)
----------
Net cash used in investing activities ................................ (256,677)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable ............................................... 140,000
Principal payments on notes payable ....................................... (26,870)
----------
Net cash provided by financing activities ............................ 113,130
----------
Net increase in cash and cash equivalents .................................. 123,787
Cash and cash equivalents, beginning of period ............................. 85,277
----------
Cash and cash equivalents, end of period ................................... $ 209,064
==========
Supplemental disclosures:
Cash paid for interest .................................................... $ 9,518
==========
Cash paid for income taxes ................................................ $ --
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-125
<PAGE>
LIGHT INDUSTRIES SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF APRIL 30, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Light Industries Service Corporation (the "Company"), a Maryland
corporation, resells hardware and software and provides a range of consulting,
implementation, training, maintenance and programming, and software development
services to end users.
The Company operates on an August 31 year-end. However, these financial
statements have been prepared for the twelve months ended April 30, 1998,
pursuant to an asset purchase agreement, whereby the outstanding common stock of
the Company is expected to be acquired by IT Partners, Inc. The period presented
in the related statement of operations and cash flows represent the twelve
months ended April 30, 1998.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid investments with an original
maturity of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company. The Company's current assets and current liabilities approximate
fair value because of the relatively short maturity of these instruments. The
fair value of the Company's notes payable approximates fair value based on
interest rates received on recent borrowings.
INVENTORY
Inventory is recorded at the lower of cost or market value using the first
in first out method of accounting. Inventory as of April 30, 1998, consists of
computer hardware, software, and parts to be sold to customers.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the expected life of the asset or
term of the lease.
F-126
<PAGE>
LIGHT INDUSTRIES SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
The ranges used in computing estimated useful lives were as follows:
Furniture and fixtures ............... 7 years
Office equipment and computers ....... 3-5 years
Leasehold improvements ............... Lesser of 7 years or term of lease
REVENUE RECOGNITION
Service revenue is derived from information technology services, including
programming, on-site network support and installation, software and systems
consulting, internet services, and other value-added services. Hardware revenue
is primarily derived from the sale of computer hardware. Software revenue is
primarily derived from the sale of software, peripherals and communication
devices manufactured by third parties and sold by the Company.
Hardware and software sales with no related service component are
recognized at the time of shipment provided that the collectibility of the
receivable is probable. Revenue from services are recognized as services are
performed or ratably if performed over a service contract period. Revenue for
material projects that require installation, system design and integration, is
recognized under the percentage-of-completion method as the work progresses. As
of April 30, 1998, the company has deferred $61,345 of revenue in connection
with billings in excess of revenue earned under the percentage of completion
method.
The American Institute of Certified Public Accountants has issued Statement
of Position 97-2 "Software Revenue Recognition," ("SOP 97-2"), that supercedes
Statement of Position 91-1, and is effective for the fiscal year ended April 30,
1999. Management is evaluating the effect this pronouncement will have on its
financial statements.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's consolidated
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax laws or rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
As of April 30, 1998, property and equipment consisted of the following:
Furniture and fixtures ................. $ 49,035
Office equipment and computers ......... 570,097
Leasehold improvements ................. 142,382
----------
761,514
Less- Accumulated depreciation ......... (295,227)
----------
$ 466,287
==========
F-127
<PAGE>
LIGHT INDUSTRIES SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Depreciation expense for the twelve months ended April 30, 1998, is
$142,663.
3. ACCRUED EXPENSES:
As of April 30, 1998, accrued expenses consisted of the following:
Accrued salaries and related taxes .......... $171,298
Accrued vacation ............................ 54,335
--------
$225,633
========
4. NOTES PAYABLE:
Notes payable at April 30, 1998, consist of notes with a bank with interest
rates ranging from 6.99 to 8.50 percent. The notes are secured by all deposits
and property of the Company and are guaranteed by the Company's stockholder.
Maturities on notes payable are as follows:
PERIODS ENDED DECEMBER 31,
May 1, 1998 to December 31, 1998 ......... $109,762
1999 ..................................... 63,565
2000 ..................................... 16,511
--------
$189,838
========
5. LINE OF CREDIT:
In April 1994, the Company extended its line of credit agreement (the
"Credit Agreement") with a financial institution which has been increased as of
October 1996 to $200,000. Borrowings under the Credit Agreement bear interest at
one-half percent plus the greater of the prime rate or 3-month commercial paper
rate. The principal portion of the outstanding borrowings is due on demand by
the financial institution and interest is due monthly in arrears. Collateral
under the Credit Agreement consists of the Company's equipment, inventory,
receivables, and other property. The borrowings outstanding under the Credit
Agreement are guaranteed by the Company's stockholder. As of April 30, 1998, the
Company did not have any outstanding borrowings on the Credit Agreement. As of
July 2, 1998, the Company had borrowings of approximately $115,000 outstanding
on the Credit Agreement.
6. INCOME TAXES:
Significant components of the Company's deferred tax assets and liabilities
as of April 30, 1998, are as follows:
Deferred tax assets (liabilities):
Cash to accrual for tax .................. $ (107,525)
Other .................................... 28,728
----------
Net deferred tax liabilities ............. $ (78,797)
==========
F-128
<PAGE>
LIGHT INDUSTRIES SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
The provision for income taxes is comprised of the following:
Current:
Federal ..................................... $ --
State ....................................... --
--------
Total current ....................... --
--------
Deferred:
Federal ..................................... 119,133
State ....................................... 16,118
--------
Total deferred ...................... $135,251
========
The reasons for the differences between applicable income taxes and the
amount computed by applying the statutory federal income tax rate of 34 percent
to loss before taxes were as follows:
Applicable income taxes based on statutory tax rate $119,133
State taxes, net of federal tax benefit ............ 16,118
--------
Income tax expense ................................. $135,251
========
7. EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) profit sharing plan for all employees
meeting certain minimum service requirements. Under the plan, employees may
elect to contribute a percentage of their compensation. Plan participants vest
immediately in all employee elective contributions. Additionally, plan
participants vest in employer contributions over various periods. Employer
contributions totaled approximately $45,000 for the twelve months ended April
30, 1998, which related to the year ended August 31, 1997. The Company does not
plan to make an employer contribution for the year ended August 31, 1998, and
thus no provision has been reflected in the accompanying financial statements.
Effective September 1, 1997, the Company instituted a gain sharing plan
which is available to all employees. Actual bonuses to be paid from the plan are
based on certain performance criteria for the Company, as well as individual
census data. For the twelve months ended April 30, 1998, the Company has not
accrued for bonuses under the gain sharing plan in the accompanying financial
statements as management does not believe that the bonus criteria will be met.
8. RELATED PARTY TRANSACTIONS:
Wolpoff & Company Technology Solutions, LLC ("WCTS") is a limited liability
corporation formed in 1997 by the Company and Wolpoff & Company ("Wolpoff"), who
are each 50 percent owners of WCTS. Wolpoff refers technology business
opportunities to WCTS, and work referred to WCTS is performed by Light
Industries. Light Industries accounts for this investment under the equity
method of accounting. As of April 30, 1998, the Company's share in WCTS was
$3,500, which is reflected in the accompanying balance sheet. No outstanding
amounts were due to or from WCTS by the Company as of April 30, 1998.
Balance Solutions, L.L.C. ("Balance") is a limited liability company owned
36 percent by the sole stockholder of the Company. The Company has provided
software development services for Balance. Balance has an agreement with
Chesapeake System Solutions, Inc. ("Chesapeake") to sell and distribute the
software package product produced partially through these services and partially
through services provided by Chesapeake. The Company also has a contract with
Balance to provide specific support services to the distributor, Chesapeake.
Balance pays the Company for programming, software development, and distribution
support. Revenue from Balance for the twelve months ended April 30, 1998,
F-129
<PAGE>
LIGHT INDUSTRIES SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
totaled $297,000 and are reflected in the accompanying statement of operations.
As of April 30, 1998, amounts due to the Company from Balance totaled $367,130,
and are reflected as a related-party receivable in the accompanying balance
sheet. The amounts due from Balance consist of $45,800 in short-term trade
receivables and a $275,528 note receivable. The notes receivable from Balance
accrues interest at 9 percent and requires monthly payments of $28,010 with the
final payment due on May 1, 1999. The Company recorded interest income of $2,403
for the twelve months ended April 30, 1998, related to the note receivable from
Balance. The notes receivable is shown on the accompanying balance sheet net of
a reserve of $270,680.
9. COMMITMENTS AND CONTINGENCIES:
The Company leases its operating facilities under leases that expire
through October 2004. Future minimum rent payments due under existing operating
leases are as follows and are guaranteed by the Company's stockholder:
PERIOD ENDED DECEMBER 31,
May 1, 1998, to December 31, 1998 ............ $ 97,353
1999 ......................................... 130,883
2000 ......................................... 127,854
2001 ......................................... 127,854
2002 and thereafter .......................... 330,289
--------
$814,233
========
Rent expense for the twelve months ended April 30, 1998, totaled $119,792.
10. SUBSEQUENT EVENTS:
On June 10, 1998, the Company entered into a proposed business combination
agreement with IT Partners, Inc. If consummated, a new basis of accounting will
be established.
F-130
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of KiZAN Corporation:
We have audited the accompanying balance sheets of KiZAN Corporation (a
Kentucky corporation) as of May 31, 1997 and 1998, and the related statements
of operations, stockholders' equity and cash flows for the three months ended
November 30, 1995, the twelve months ended November 30, 1996, the six months
ended May 31, 1997, and the twelve months ended May 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of KiZAN Corporation as of
May 31, 1997 and 1998, and the results of its operations and its cash flows for
the three months ended November 30, 1995, the twelve months ended November 30,
1996, the six months ended May 31, 1997, and the twelve months ended May 31,
1998, in conformity with generally accepted accounting principles.
Washington, D.C.
July 9, 1998
F-131
<PAGE>
KiZAN CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
-----------------------------
1997 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 31,691 $ 81,049
Accounts receivable, net of allowance for doubtful accounts of
$51,000, and $72,000, respectively............................... 916,674 1,260,509
Accounts receivable -- KiZAN Business Solutions ................... -- 58,566
Inventory ......................................................... 14,439 4,392
Deferred income taxes ............................................. 36,704 50,574
Costs and estimated earnings in excess of billings on uncompleted
contracts ....................................................... 22,911 50,425
Prepaid expenses and other current assets ......................... 66,580 95,415
---------- ----------
Total current assets ............................................ 1,088,999 1,600,930
Property and equipment, net ........................................ 258,603 421,781
Other assets ....................................................... 42,055 68,058
---------- ----------
Total assets .................................................... $1,389,657 $2,090,769
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 403,852 $ 257,149
Accrued expenses and other ........................................ 293,932 457,740
Income taxes payable .............................................. -- 131,747
Deferred income ................................................... 331,549 112,199
Leases payable, current ........................................... 56,133 71,253
Notes payable, current portion .................................... 174,957 388,413
---------- ----------
Total current liabilities ......................................... 1,260,423 1,418,501
Notes payable, net of current portion .............................. 1,756 16,412
Leases payable, net of current portion ............................. 20,995 75,184
---------- ----------
Total liabilities ................................................. 1,283,174 1,510,097
---------- ----------
Commitments and contingencies (Note 9)
STOCKHOLDERS' EQUITY:
Common stock, no par value, 1,750 shares authorized and 1,090
shares outstanding ............................................. 133,050 81,050
Additional paid-in capital ...................................... 63,501 241,320
Retained earnings (accumulated deficit) ......................... (90,068) 258,302
---------- ----------
Total stockholders' equity ..................................... 106,483 580,672
---------- ----------
Total liabilities and stockholders' equity ..................... $1,389,657 $2,090,769
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-132
<PAGE>
KiZAN CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE TWELVE FOR THE SIX FOR THE TWELVE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
NOVEMBER 30, NOVEMBER 30, MAY 31, MAY 31,
1995 1996 1997 1998
--------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Hardware and software sales and commissions. $ 274,299 $ 743,854 $ 524,706 $1,210,518
Services and other .................................. 387,385 2,546,311 1,730,676 5,416,282
--------- ---------- ---------- ----------
Total revenues .................................... 661,684 3,290,165 2,255,382 6,626,800
Cost of goods and services sold:
Hardware and software sales and commissions. 266,654 509,837 376,765 592,009
Services and other .................................. 136,187 1,437,652 875,977 2,988,074
--------- ---------- ---------- ----------
Total cost of goods and services sold ............. 402,841 1,947,489 1,252,742 3,580,083
--------- ---------- ---------- ----------
Gross profit ......................................... 258,843 1,342,676 1,002,640 3,046,717
Selling, general, and administrative ................. 274,178 1,179,417 1,050,379 2,359,926
Depreciation and amortization ........................ 9,121 67,025 37,949 98,367
--------- ---------- ---------- ----------
Operating (loss) income .............................. (24,456) 96,234 (85,688) 588,424
Other income (expense):
Interest expense .................................... (1,269) (20,968) (12,873) (28,120)
Other ............................................... 10 10,900 28,658 (25,282)
--------- ---------- ---------- ----------
Total other income (expense) ...................... (1,259) (10,068) 15,785 (53,402)
Net (loss) income from continuing operations be-
fore income taxes ................................... (25,715) 86,166 (69,903) 535,022
Provision (benefit)for income taxes .................. (7,348) 26,112 (28,786) 204,053
--------- ---------- ---------- ----------
Net (loss) income from continuing operations ......... (18,367) 60,054 (41,117) 330,969
Discontinued operations:
Income (loss) from operations of discontinued
KiZAN Business Solutions .......................... -- (15,462) 749 (6,440)
Gain on disposal of KiZAN Business Solutions -- -- -- 23,841
--------- ---------- ---------- ----------
Net income (loss) .................................... $ (18,367) $ 44,592 $ (40,368) $ 348,370
========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-133
<PAGE>
KiZAN CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1995 ........... 1,000 $ 31,500 $ 5,027 $ (75,925) $ (39,398)
Issuance of common stock .......... -- 57,000 -- -- 57,000
Net loss .......................... -- -- -- (18,367) (18,367)
----- --------- -------- --------- ---------
Balance, November 30, 1995 ......... 1,000 88,500 5,027 (94,292) (765)
----- --------- -------- --------- ---------
Issuance of common stock .......... -- 50 -- -- 50
Net income ........................ -- -- -- 44,592 44,592
----- --------- -------- --------- ---------
Balance, November 30, 1996 ......... 1,000 88,550 5,027 (49,700) 43,877
----- --------- -------- --------- ---------
Other ............................. -- 44,500 58,474 -- 102,974
Net loss .......................... -- -- -- (40,368) (40,368)
----- --------- -------- --------- ---------
Balance, May 31, 1997 .............. 1,000 133,050 63,501 (90,068) 106,483
----- --------- -------- --------- ---------
Issuance of common stock .......... 90 -- -- -- --
Other ............................. -- (52,000) 177,819 -- 125,819
Net income ........................ -- -- -- 348,370 348,370
----- --------- -------- --------- ---------
Balance, May 31, 1998 .............. 1,090 $ 81,050 $241,320 $ 258,302 $ 580,672
===== ========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-134
<PAGE>
KiZAN CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE TWELVE FOR THE SIX FOR THE TWELVE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
NOVEMBER 30, NOVEMBER 30, MAY 31, MAY 31,
1995 1996 1997 1998
--------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................... $ (18,367) $ 44,592 $ (40,368) $ 348,370
Adjustments to reconcile net income (loss) to net
cash flows from operating activities--
Depreciation and amortization ........................ 9,121 67,025 37,949 98,367
Other ................................................ -- (5,685) (36,370) (11,235)
Deferred income tax benefit .......................... (28,000) (2,560) (6,140) (13,870)
Changes in assets and liabilities (increase) de-
crease in--
Accounts receivable, net ............................ (20,300) (570,247) (243,657) (358,029)
Inventory ........................................... -- (430) (14,009) 10,047
Costs in excess of billings ......................... -- -- (22,911) (27,514)
Prepaid expenses and other current assets ........... (600) (17,010) (4,467) (22,389)
Accounts payable .................................... (38,733) 121,219 195,071 (146,703)
Deferred income ..................................... -- 182,383 135,996 (219,350)
Accrued expenses and other .......................... 10,097 70,821 161,953 340,333
--------- ---------- ---------- ----------
Net cash flows (used in) provided by operating
activities ......................................... (86,782) (109,892) 163,047 (1,973)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ..................... (17,340) (97,598) (200,338) (276,313)
Other .................................................. -- -- (14,184) (31,879)
--------- ---------- ---------- ----------
Net cash used in investing activities .............. (17,340) (97,598) (214,522) (308,192)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (repayments) on line of credit ........... -- 176,927 (102,026) 136,617
Proceeds from issuance of long-term debt ............... -- -- 85,699 160,804
Repayments of long-term debt ........................... -- (15,939) -- --
Issuance of common stock ............................... 57,000 50 102,974 125,819
Repayment of related party debt ........................ -- -- (4,791) (63,717)
--------- ---------- ---------- ----------
Net cash provided by financing activities .......... 57,000 161,038 81,856 359,523
--------- ---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents..... (47,122) (46,452) 30,381 49,358
Cash and cash equivalents, beginning of period .......... 94,884 47,762 1,310 31,691
--------- ---------- ---------- ----------
Cash and cash equivalents, end of period ................ $ 47,762 $ 1,310 $ 31,691 $ 81,049
========= ========== ========== ==========
Cash paid for interest .................................. $ 5,077 $ 20,968 $ 13,649 $ 29,610
========= ========== ========== ==========
Cash paid for income taxes .............................. $ -- $ 67,469 $ 20,404 $ 49,717
========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-135
<PAGE>
KiZAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
KiZAN Corporation, a Kentucky corporation, is a network solutions
integrater that utilizes technology exclusively from the Microsoft(Reg. TM)
Corporation to provide a range of consulting, implementation, training and
maintenance services to a wide variety of customers.
The Company was formed in May, 1991 as KiZAN Technologies, Inc. (KTI) when
KTI began assisting companies in implementing client-server solutions using
Microsoft(Reg. TM) Corporation technology. In May 1996, KiZAN Corporation (the
Company) was formed to eventually serve as a holding company for other
companies. In December 1996, the Company underwent a reorganization whereby the
operations of KiZAN Development Inc., KiZAN Telephony, Inc. and KiZAN Business
Solutions were merged with the Company through the issuance of Company stock.
The businesses were operated through common ownership with the Company until the
merger. In March 1997, KiZAN Internet was formed to assist companies with the
development and maintenance of commercial internet sites. In July 1997, the
operations of KiZAN Internet were merged into the Company and at the same time
KiZAN Telephony was merged into KiZAN Technologies, Inc. In November 1997, the
Company sold its interest in KiZAN Business Solutions to the minority
stockholder. In December 1997, KTI was merged into the Company. As of May 1998,
the Company consisted of KiZAN Corporation as a parent company and two
subsidiaries; KiZAN Development Inc. and KiZAN Telephony Group.
The Company is a Microsoft(Reg. TM) Authorized Technical Education Center
which offers consulting and training services to large and small organizations.
The Company also provides solution development services which provide the
architecture for building networking environments.
The Company operates on a November 30 year-end. However, certain of these
financial statements have been prepared for the six months ended May 31, 1997
and the twelve months ended May 31, 1998, pursuant to an asset purchase
agreement, whereby the outstanding common stock of the Company is expected to be
acquired by IT Partners.
DISCONTINUED OPERATIONS
On November 1, 1997, the Company reached an agreement to sell KiZAN
Business Solutions to the minority stockholder for a note receivable of
approximately $58,600. Net income for the one month period subsequent to the
measurement date was approximately $7,260. The sale was closed on November 30,
1997 and the Company realized a gain on the sale of approximately $23,800, net
of income taxes.
CONSOLIDATION
All material intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
For purposes of these financial statements, cash and cash equivalents
include cash on hand and short-term, highly liquid investments that are readily
convertible to cash.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
F-136
<PAGE>
KiZAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
The carrying values of current assets and current liabilities approximate
fair value because of the relatively short maturities of these instruments. The
fair value of the Company's long-term debt is estimated using a discounted cash
flow analysis based on the Company's borrowing cost for similar credit
facilities, and approximates carrying values at May 31, 1997 and 1998.
INVENTORY
Inventory is recorded at the lower of cost or market value using the
specific identification method of accounting.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the expected life of the asset or
term of the lease.
The ranges used in computing estimated useful lives were as follows:
Furniture and fixtures .................. 5-7 years
Computer equipment ...................... 3-5 years
Machinery and equipment ................. 5-7 years
Internal use software ................... 3-5 years
Leasehold improvements .................. 5-7 years
The Company is required to monitor current and anticipated future operating
conditions for circumstances that may indicate potential asset impairments in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."
REVENUE RECOGNITION
Service revenue is derived from information technology ("IT") services,
including hardware repair and maintenance, on-site network support, systems
consulting, software licensing and installation, web site design, installation,
design and integration of network and communication systems and other
value-added IT services. Hardware revenue is primarily derived from the sale of
computer hardware. Software revenue is primarily derived from the sale of
software, peripherals and communication devices manufactured by third parties
and sold by the Company.
Hardware and software sales with no related service component are
recognized at the time of shipment provided that the collectibility of the
receivable is probable. Revenue from services are recognized as services are
performed or ratably if performed over a service contract period. Revenue for
material projects with a duration of three months or longer that require
installation, system design and integration, is recognized under the
percentage-of-completion method as the work progresses.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's consolidated
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax laws or rates.
F-137
<PAGE>
KiZAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
As of May 31, 1997 and 1998, property and equipment consist of the
following:
<TABLE>
<CAPTION>
MAY 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Furniture and fixtures ................................. $ 25,001 $ 97,002
Computer equipment ..................................... 326,501 475,376
Machinery and equipment ................................ 43,230 67,781
Internal use software .................................. 10,753 11,741
Leasehold improvements ................................. 2,663 32,561
-------- --------
408,148 684,461
Less- Accumulated depreciation ......................... 149,545 262,680
-------- --------
$258,603 $421,781
======== ========
</TABLE>
3. CONTRACTS IN PROGRESS:
As of May 31, 1997 and 1998, information related to contracts in progress
is as follows:
<TABLE>
<CAPTION>
MAY 31,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Revenue recognized .................................. $ 329,967 $ 946,406
Billings ............................................ (307,056) (895,981)
---------- ----------
Costs and estimated earnings in excess of billings on
uncompleted contracts, net ......................... $ 22,911 $ 50,425
========== ==========
</TABLE>
F-138
<PAGE>
KiZAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
4. NOTES PAYABLE:
The Company is obligated on various notes at May 31, 1997 and 1998,
respectively. The Company's notes are summarized as follows:
<TABLE>
<CAPTION>
MAY 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Notes payable to Commonwealth Bank & Trust Co., secured by
equipment and receivables, payable in monthly installments, bear-
ing interest at prime plus 1.5% (9.75% at May 31, 1998), per
annum due July 1998 .............................................. $ 17,804 $ 2,391
Line of credit for $300,000 payable to Commonwealth Bank & Trust
Co., secured by receivables and an assignment of a $250,000 life
insurance policy on an officer, bearing interest at the prime rate
plus 1%(9.50% at May 31, 1998), due August 1998 .................. 142,909 279,526
Notes payable to certain stockholders of the Company, payable in
monthly installments, bearing interest at rates between 7.00% and
9.00%, per annum due December 1998 ............................... 16,000 71,000
Notes payable to Commonwealth Bank & Trust Co., secured by
equipment and receivables, payable in monthly installments, bear-
ing interest at prime plus 1.5% (9.50% at May 31, 1998), per
annum due November 1999 .......................................... -- 51,908
-------- --------
176,713 404,825
Less- Current portion ............................................. 174,957 388,413
-------- --------
Total .......................................................... $ 1,756 $ 16,412
======== ========
</TABLE>
The line of credit agreeement has a restrictive covenant which requires the
balance to not exceed 70 percent of the current month's accounts receivable
balance. The Company was in compliance with this restrictive covenant as of May
31, 1998, respectively.
Maturities on notes payable are as follows:
<TABLE>
<CAPTION>
PERIODS ENDED MAY 31,
---------------------
<S> <C>
1999 .................................. $388,413
2000 .................................. 16,412
--------
$404,825
========
</TABLE>
F-139
<PAGE>
KiZAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
LEASE COMMITMENTS
The Company leases its operating facilities under a 25 year lease that
expires in October, 2021. Also, the Company has several capital leases for
computers with interest rates ranging from 7.00 to 9.75 percent. The capital
leases are secured by the related equipment. Future minimum lease payments due
under existing leases are as follows:
<TABLE>
<CAPTION>
PERIOD ENDED MAY 31, OPERATING CAPITAL
-------------------- --------- -------
<S> <C> <C>
1999 ................................................. $ 83,200 $ 85,452
2000 ................................................. 83,200 69,909
2001 ................................................. 83,200 21,280
2002 ................................................. 83,200 14,209
2003 and thereafter .................................. 1,580,800 4,737
---------- --------
1,913,600 195,587
Less- Interest ....................................... -- 49,150
---------- --------
Present value of net minimum lease payments .......... $1,913,600 $146,437
========== ========
</TABLE>
Rent expense for the three months ended November 30, 1995, the twelve
months ended November 30, 1996, the six months ended May 31, 1997, and the
twelve months ended May 31, 1998, totaled $5,626, $80,159, $56,250, and
$176,167, respectively.
5. INCOME TAXES:
Significant components of the Company's deferred tax assets and liabilities
as of May 31, 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
MAY 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accrued Vacation ........................ $20,354 $26,404
Allowance for doubtful accounts ......... 16,350 24,170
------- -------
Total deferred tax assets .................. $36,704 $50,574
======= =======
</TABLE>
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
------------------------- ---------------------------
1995 1996 1997 1998
------------ ---------- ------------- -----------
<S> <C> <C> <C> <C>
Current:
Federal ............................... $ 17,010 $ 17,620 $ (18,360) $ 174,160
State and local ....................... 3,640 3,780 (3,930) 37,320
--------- -------- --------- ---------
Total current .......................... 20,650 21,400 (22,290) 211,480
--------- -------- --------- ---------
Deferred:
Federal ............................... (23,060) (2,110) (5,060) (11,420)
State and local ....................... (4,940) (450) (1,080) (2,450)
--------- -------- --------- ---------
Total deferred ......................... (28,000) (2,560) (6,140) (13,870)
--------- -------- --------- ---------
Income tax provision (benefit) ......... $ (7,350) $ 18,840 $ (28,430) $ 197,610
========= ======== ========= =========
</TABLE>
F-140
<PAGE>
KiZAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
The reasons for the differences between applicable income taxes and the
amount computed by applying the statutory federal income tax rate of 34 percent
to income (loss) before taxes were as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
------------------------- ---------------------------
1995 1996 1997 1998
------------ ---------- ------------- -----------
<S> <C> <C> <C> <C>
Applicable income taxes based on statutory tax rate ......... $ (8,230) $16,600 $ (30,830) $162,890
State taxes, net of federal tax benefit ..................... 880 2,240 2,400 34,720
-------- ------- --------- --------
Income tax provision (benefit) .............................. $ (7,350) $18,840 $ (28,430) $197,610
======== ======= ========= ========
</TABLE>
6. EMPLOYEE BENEFIT PLANS:
The Company maintains 401(k) profit sharing plans covering the employees of
the Company's subsidiaries. Under the plan agreements, employees may elect to
contribute a percentage of compensation. Plan participants vest immediately in
all employee elective contributions. Additionally, plan participants vest in
employer contributions over various periods. Employer contributions totaled
approximately $0, $0, $16,000, and $31,000 for the three months ended November
30, 1995, the year ended November 30, 1996, the six months ended May 31, 1997,
and the year ended May 31, 1998, respectively.
7. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains reserves for potential credit losses; historically, such
losses have been within management's expectations.
Five unrelated customers accounted for approximately $355,411, $1,066,859,
$765,144 and $1,743,588 of the Company's revenues for the three months ended
November 30, 1995, the twelve months ended November 30, 1996, the six months
ended May 31, 1997 and the twelve months ended May 31, 1998. Accounts receivable
at May 31, 1997 and 1998 from the five major customers aggregated approximately
$435,581 and $661,744, respectively. The largest customer of the Company
accounted for 21.4, 13.1, 13.2 and 13.1 percent of revenues for the three months
ended November 30, 1995, the twelve months ended November 30, 1996, the six
months ended May 31, 1997 and the twelve months ended May 31, 1997,
respectively. The loss of any one of these customers could have a material
effect on future results of operations of the Company.
8. RELATED PARTY TRANSACTIONS:
The Company's insurance agent is a minority stockholder of the Company. The
insurance expense related to transactions with this stockholder totaled $9,674,
$26,014, $5,959 and $23,361 for the three months ended November 30, 1995, the
twelve months ended November 30, 1996, the six months ended May 31, 1997 and the
twelve months ended May 31, 1998, respectively.
The Company leases office space from a company which is owned by an officer
and several stockholders of the Company. Rent expense for this lease totaled
$48,531 for the twelve months ended May 31, 1998.
The Company is obligated under certain notes payable (Note 4) issued in
exchange for shares redeemed upon the merger of certain subsidiaries. These
notes are held by certain current stockholders of the Company.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
Litigation and claims are filed against the Company from time to time in
the ordinary course of business. These actions are in various preliminary
stages, and no judgments or decisions have been
F-141
<PAGE>
KiZAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
rendered by hearing boards or courts. Management, after reviewing with legal
counsel, is of the opinion that the outcome of such matters will not have a
material adverse effect on the Company's financial position or results of
operations.
10. SUBSEQUENT EVENTS:
On June 1, 1998, the Company's board of directors resolved to authorize the
dissolution of KiZAN Telephony Group and KiZAN Development, Inc. The respective
business operations of these companies are now merger with KiZAN Corporation.
In June 1998, the Company entered into a proposed business combination
agreement with IT Partners, Inc. If consummated a new basis of accounting will
be established.
F-142
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Richardson Associates-Electronics, Inc.:
We have audited the accompanying balance sheets of Richardson
Associates-Electronics, Inc. (a Georgia corporation) as of December 31, 1996 and
1997 and the related statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Richardson
Associates-Electronics, Inc. as of December 31, 1996 and 1997 and the results of
its operations and its cash flows for the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Washington, D.C.
July 9, 1998
F-143
<PAGE>
RICHARDSON ASSOCIATES-ELECTRONICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1996 1997 1998
------------ -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ...................................................... $ 183,918 $ 212,352 $ 279,460
Accounts receivable, net of allowance for doubtful
accounts of $54,000 at December 31, 1996 and 1997 and
$20,000 at March 31, 1998 ............................... 273,194 540,988 266,223
Inventory ................................................. 430,819 219,177 236,305
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................... 75,662 3,871 41,350
Prepaid expenses and other current assets ................. -- 6,816 3,499
---------- ------------ ------------
Total current assets .................................... 963,593 983,204 826,837
Property and equipment, net ............................... 101,216 93,241 130,874
---------- ------------ ------------
Total assets ............................................ $1,064,809 $ 1,076,445 $ 957,711
========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 180,653 $ 49,958 $ 110,003
Accrued expenses .......................................... 100,060 210,545 50,193
Billings in excess of costs and estimated earnings on
uncompleted contracts ................................... 75,779 48,837 26,400
---------- ------------ ------------
Total current liabilities ............................... 356,492 309,340 186,596
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, $1 par value; 10,000 shares authorized,
1,000 and 1,577 shares issued and outstanding at
December 31, 1996 and 1997, respectively, and 2,300
shares issued and outstanding at March 31, 1998 ......... 1,000 1,577 2,300
Additional paid-in capital ................................ 5,523 1,987,686 2,058,423
Retained earnings (accumulated deficit) ................... 701,794 (67,438) (206,888)
Deferred compensation ..................................... -- (1,154,720) (1,082,720)
---------- ------------ ------------
Total stockholders' equity .............................. 708,317 767,105 771,115
---------- ------------ ------------
Total liabilities and stockholders' equity .............. $1,064,809 $ 1,076,445 $ 957,711
========== ============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-144
<PAGE>
RICHARDSON ASSOCIATES-ELECTRONICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
------------- ------------- --------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues ...................................... $2,066,974 $3,803,265 $ 3,718,820 $ 852,012 $ 446,584
Cost of goods sold ............................ 1,572,207 2,758,853 2,399,459 621,379 302,299
---------- ---------- ----------- ---------- ----------
Gross profit ............................... 494,767 1,044,412 1,319,361 230,633 144,285
---------- ---------- ----------- ---------- ----------
Operating expenses:
Selling, general, and administrative ......... 410,945 596,417 780,030 233,498 171,713
Stock compensation ........................... -- -- 788,680 72,170 72,000
Depreciation ................................. 15,633 36,349 24,997 7,761 12,407
---------- ---------- ----------- ---------- ----------
Total operating expenses ................... 426,578 632,766 1,593,707 313,429 256,120
---------- ---------- ----------- ---------- ----------
Operating income (loss) ....................... 68,189 411,646 (274,346) (82,796) (111,835)
Other income .................................. -- 1,253 4,992 734 1,812
---------- ---------- ----------- ---------- ----------
Net income (loss) ............................. $ 68,189 $ 412,899 $ (269,354) $ (82,062) $ (110,023)
========== ========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-145
<PAGE>
RICHARDSON ASSOCIATES-ELECTRONICS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED DEFERRED
STOCK CAPITAL DEFICIT) COMPENSATION TOTAL
-------- ------------ -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ................. $1,000 $ 5,523 $ 280,221 $ -- $ 286,744
Net income ................................ -- -- 68,219 -- 68,219
------ ---------- ---------- ------------ ----------
Balance, December 31, 1995 ................. 1,000 5,523 348,440 -- 354,963
Distributions to stockholders ............. -- -- (59,545) -- (59,545)
Net income ................................ -- -- 412,899 -- 412,899
------ ---------- ---------- ------------ ----------
Balance, December 31, 1996 ................. 1,000 5,523 701,794 -- 708,317
Issuance of stock options ................. -- 1,443,400 -- (1,443,400) --
Issuance of common stock .................. 577 538,763 -- -- 539,340
Distributions to stockholders ............. -- -- (499,878) -- (499,878)
Amortization of deferred compensation ..... -- -- -- 288,680 288,680
Net loss .................................. -- -- (269,354) -- (269,354)
------ ---------- ---------- ------------ ----------
Balance, December 31, 1997 ................. 1,577 1,987,686 (67,438) (1,154,720) 767,105
Issuance of common stock .................. 723 70,737 -- -- 71,460
Distribution to stockholders .............. -- -- (29,427) -- (29,427)
Amortization of deferred compensation ..... -- -- -- 72,000 72,000
Net loss .................................. -- -- (110,023) -- (110,023)
------ ---------- ---------- ------------ ----------
Balance, March 31, 1998 (unaudited) ........ $2,300 $2,058,423 $ (206,888) $ (1,082,720) $ 771,115
====== ========== ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-146
<PAGE>
RICHARDSON ASSOCIATES-ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ----------------------------
1995 1996 1997 1997 1998
------------- ------------- -------------- ------------- --------------
(UNAUDITED) (UNADUTIED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................... $ 68,189 $ 412,899 $ (269,354) $ (82,062) $ (110,023)
Adjustments to reconcile net loss to net cash flows
from operating activities--
Depreciation ......................................... 15,633 36,349 24,997 7,761 12,407
Stock compensation ................................... -- -- 788,680 72,170 72,000
Changes in assets and liabilities--
Accounts receivable, net ............................ 212,808 (165,167) (267,794) (279,850) 274,765
Inventory ........................................... (43,324) (138,937) 211,642 59,819 (17,128)
Costs in excess of billings on uncompleted
contracts .......................................... -- (75,662) 71,791 71,791 (37,479)
Prepaid expenses and other current assets ........... (17,412) 17,812 (6,816) -- 3,317
Accounts payable .................................... (102,153) 82,885 (130,695) 192,522 60,045
Accrued expenses .................................... (3,950) 85,554 149,825 (45,061) (88,892)
Billings in excess of costs on uncompleted
contracts .......................................... (68,253) 75,779 (26,942) 75,779 (22,437)
---------- ---------- ---------- ---------- ----------
Net cash flows provided by operating activities 61,538 331,512 545,334 72,869 146,575
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ..................... (67,866) (93,950) (33,967) -- (50,040)
Proceeds from sale of property and equipment ........... -- -- 16,945 -- --
---------- ---------- ---------- ---------- ----------
Net cash flows used in investing activities ........ (67,866) (93,950) (17,022) -- (50,040)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholders .......................... -- (59,545) (499,878) -- (29,427)
---------- ---------- ---------- ---------- ----------
Net cash used in financing activities .............. -- (59,545) (499,878) -- (29,427)
Net increase (decrease) in cash ........................ (6,328) 178,017 28,434 72,869 67,108
Cash at beginning of period ............................ 12,229 5,901 183,918 183,918 212,352
---------- ---------- ---------- ---------- ----------
Cash at end of period .................................. $ 5,901 $ 183,918 $ 212,352 $ 256,787 $ 279,460
========== ========== ========== ========== ==========
Supplemental schedule of noncash investing and
financing activities:
Issuance of common stock to employees for services $ -- $ -- $ 539,340 $ 539,340 $ 71,460
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-147
<PAGE>
RICHARDSON ASSOCIATES-ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Richardson Associates-Electronics, Inc. (the "Company") was formed during
July 1981 as an S corporation organized in the State of Georgia. The Company is
principally engaged as a systems integrator in the design and installation of
sound and intercom systems in retail, industrial, public, and commercial
buildings in the State of Georgia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM UNAUDITED FINANCIAL INFORMATION
The financial statements as of March 31, 1998 and for the three months
ended March 31, 1997 and 1998 are unaudited, however, in the opinion of
management, all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the unaudited financial statements for
these interim periods have been included. The results of interim periods are not
necessarily indicative of the results to be obtained for a full year.
INVENTORY
Inventory is valued at lower of specific cost or market. Inventory consists
primarily of parts and supplies for sound and intercom systems.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, and maintenance and repairs which
do not extend the useful lives of these assets are expensed currently. Property
and equipment are depreciated on a straight-line basis based on their estimated
useful lives, which are five years for vehicles, three to five years for
machinery and equipment, and seven years for furniture and fixtures.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment, to determine whether any impairment is other
than temporary. Management believes that long-lived assets in the accompanying
balance sheets are appropriately valued.
ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll and related taxes ......... $ 86,065 $178,763 $37,473
Other accrued expenses .................... 13,995 31,782 12,720
-------- -------- -------
$100,060 $210,545 $50,193
======== ======== =======
</TABLE>
F-148
<PAGE>
RICHARDSON ASSOCIATES-ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
INCOME TAXES
The Company files its tax return as an "S" Corporation for federal and
state income tax purposes. All taxable income or loss of an "S" Corporation is
allocable to the stockholders of the Company in proportion to their respective
ownership interests and is included in their individual income tax returns.
Accordingly, no provision for income taxes is included in the accompanying
statements of operations. Distributions are made to each stockholder to pay
income taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, and accounts payable. In management's opinion, the carrying amounts
of these financial instruments approximate their fair values at December 31,
1996 and 1997 due to the short duration of the financial instruments.
REVENUE RECOGNITION
Contract revenues are reported on the percentage-of-completion method,
measured by the percentage of direct labor cost incurred to date to estimated
total direct labor cost for each contract. That method is used because
management considers total direct labor cost to be the best available measure of
progress on the contracts.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, and repairs. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, and estimated profitability may result in
revisions to costs and income, which are recognized in the period in which the
revisions are determined.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenues recognized in excess of amounts billed. Billings in excess of
costs and estimated earnings on uncompleted contracts represent billings in
excess of revenues recognized.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1996 1997 1998
------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Vehicles ............................... $ 161,077 $ 138,883 $ 191,269
Machinery and equipment ................ 57,470 61,800 71,020
Furniture and fixtures ................. 10,153 13,167 15,473
---------- ---------- ----------
228,700 213,850 277,762
Less- Accumulated depreciation ......... (127,484) (120,609) (146,888)
---------- ---------- ----------
$ 101,216 $ 93,241 $ 130,874
========== ========== ==========
</TABLE>
4. EMPLOYEE BENEFIT PLAN:
The Company sponsors the Richardson Associates 401(k) Profit Sharing Plan
(the "Plan"), a defined contribution plan covering substantially all employees
of the company. Under the Plan's deferred compensation agreement, eligible
employees who elect the Plan may contribute the maximum as prescribed by current
Internal Revenue Service regulations. The Company matches 25 percent of the
employees' contribution and up to 4 percent of employees' eligible compensation.
The Plan commenced November 15, 1997 and the Company matched $1,140 for the year
ended December 31, 1997.
F-149
<PAGE>
RICHARDSON ASSOCIATES-ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
5. EMPLOYEE AGREEMENT AND RESTRICTED STOCK PLAN:
The Company has an employment agreement (the "Agreement") and a restricted
stock plan (the "Stock Plan") with an employee, which was entered into in
January 1997. The term of the Agreement is from January 2, 1997 through January
2, 2002 or until employment is terminated as defined in the Agreement. The
Agreement and the Stock Plan are administered by the board of directors of the
Company. The Company granted options to purchase 1,400 shares of common stock to
an employee in connection with the Stock Plan. These options can be exercised by
paying cash or by using the bonus payments under the Agreement. In recognition
of services performed in the furtherance of the Company's business, the Company
will pay the employee periodic bonuses, as defined by the Agreement. Bonuses
paid to the employee are restricted and can only be used by the employee to
exercise the options granted to the employee at the rate of $220 per share up to
a maximum of 1,360 shares of common stock. The remaining options to purchase 40
shares of common stock are exercisable by paying the cash exercise price. The
options can be exercised in accordance with the terms of the Stock Plan, as
follows: up to 250 options can be exercised on January 2, 1997; cumulatively, up
to 500 options can be exercised on January 2, 1998; cumulatively, up to 750
options can be exercised on January 2, 1999; cumulatively, up to 950 options can
be exercised on January 2, 2000; cumulatively, up to 1,150 options can be
exercised on January 2, 2001; and up to 1,360 options can be exercised on
January 2, 2002. At such time as the employee has purchased 1,400 shares of
stock for the Company pursuant to the Agreement, future bonuses paid to the
employee shall be unrestricted.
The Company recorded deferred compensation of $1,443,400 on these options
granted during 1997, as the exercise price of $220 was less than the deemed fair
value of the underlying common stock. The Company amortizes deferred
compensation over the vesting period noted above. The Company recognized
compensation expense of $288,680 for the year ended December 31, 1997 and
$72,000 for the three months ended March 31, 1998 and 1997, which is included in
stock compensation in the accompanying statement of operations.
6. STOCK OPTIONS:
As noted above, the Company granted options to purchase 1,400 shares of
common stock at $220 per share in 1997. During 1997, options to purchase 177
shares of common stock were exercised, resulting in options to purchase 1,223
shares of common stock being outstanding at December 31, 1997. At December 31,
1997, options to purchase 73 shares of common stock are exercisable.
The Company accounted for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company adopted the disclosure option of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires that companies that do not choose to
account for stock-based compensation as prescribed by the statement shall
disclose the pro forma effects on operations as if SFAS No. 123 had been
adopted. SFAS No. 123 requires that the fair value of each option grant be
estimated on the date of grant using a fair value approach. The Company
estimated the value of the options granted during 1997 using the minimum value
approach. The pro forma net loss for the year ended December 31, 1997 affecting
the impact of SFAS No. 123 would be $619,484.
7. STOCKHOLDERS' EQUITY:
During 1997, the Company issued 400 shares of common stock to an employee
for $400. The Company recognized compensation expense of $500,000 related to
this issuance of common stock based on the fair value of common stock at the
date of issuance and is included in stock compensation in the accompanying
statement of operations.
F-150
<PAGE>
RICHARDSON ASSOCIATES-ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
8. STOCKHOLDERS' AGREEMENT:
The Company and its stockholders entered into a stockholders' agreement
during January 1997. The stockholders' agreement provides for certain
restrictions on the transfer of stock by its stockholders and also provides one
stockholder with the ability to require the Company to repurchase his shares of
common stock at book value upon his death or disability at 50 percent of the
book value upon termination without cause, as defined in the stockholder
agreement. At December 31, 1997, 177 shares of common stock are subject to
repurchase.
9. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. Concentration of credit risk with
respect to accounts receivable is limited due to the large number of customers
comprising the Company's customer base and their breakdown among many different
industry lines. No single customer accounted for a significant amount of the
Company's sales at December 31, 1995, 1996, and 1997. Further, the Company
maintains reserves for potential credit losses of $54,000 at December 31, 1996
and 1997 and $20,000 at March 31, 1998, which are included in accounts
receivable in the accompanying balance sheets.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect of the Company's financial
position or results of operations.
OPERATING LEASES
The Company leases office space under an operating lease. The Company may
terminate the lease effective April 30, 1999 provided notice is given to the
lessor. Rent expense for the years ended December 31, 1995, 1996, and 1997 was
approximately $20,100, $21,200, and $23,500, respectively. Approximate minimum
annual future rental payments under the lease are as follows:
YEAR ENDED DECEMBER 31,
1998 ................................. $14,616
1999 ................................. 21,240
2000 ................................. 22,990
-------
$58,846
=======
11. SUBSEQUENT EVENTS:
On May 21, 1998, the Company entered into a proposed business combination
with IT Partners, Inc. If consummated, a new basis of accounting will be
established.
F-151
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Champlain Computer Services, Inc.:
We have audited the accompanying balance sheet of Champlain Computer
Services, Inc. (a Vermont corporation) as of May 31, 1997 and 1998, and the
related statements of operations, stockholder's equity and cash flows for the
twelve months ended May 31, 1997 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Champlain Computer Services,
Inc. as of May 31, 1997 and 1998, and the results of its operations and its cash
flows for the twelve months ended May 31, 1997 and 1998, in conformity with
generally accepted accounting principles.
Washington, D.C.
July 23, 1998
F-152
<PAGE>
CHAMPLAIN COMPUTER SERVICES, INC.
BALANCE SHEET
AS OF MAY 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 259,599 $ 810,052
Accounts receivable ........................................... 522,822 665,503
Inventory ..................................................... 109,621 225,352
Prepaid expenses and other current assets ..................... 12,523 49,630
--------- ----------
Total current assets ........................................ 904,565 1,750,537
Property and equipment, net .................................... 79,323 179,280
--------- ----------
Total assets ................................................ $ 983,888 $1,929,817
========= ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable .............................................. $ 191,330 $ 111,605
Accrued expenses .............................................. 37,371 70,423
Inventory financing ........................................... 220,809 326,094
Deferred revenue .............................................. 50,298 193,716
Customer deposits ............................................. 26,885 91,449
--------- ----------
Total current liabilities ................................... 526,693 793,287
Deferred revenue, net of current portion ....................... 14,852 208,213
--------- ----------
Total liabilities ........................................... 541,545 1,001,500
--------- ----------
Stockholder's equity:
Common stock, $1 par value, 10,000 shares authorized, 5,000 is-
sued and 2,500 outstanding .................................. 5,000 5,000
Treasury stock, 2,500 shares at cost .......................... (65,000) (65,000)
Additional paid-in capital .................................... 35,000 35,000
Retained earnings ............................................. 467,343 953,317
--------- ----------
Total stockholder's equity .................................. 442,343 928,317
--------- ----------
Total liabilities and stockholder's equity .................. $ 983,888 $1,929,817
========= ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-153
<PAGE>
CHAMPLAIN COMPUTER SERVICES, INC.
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MAY 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------- --------------
<S> <C> <C>
Revenues:
Hardware sales .................................. $6,345,625 $10,783,634
Service sales ................................... 477,137 958,069
Training and education sales .................... 256,427 635,448
---------- -----------
Total revenues ................................ 7,079,189 12,377,151
---------- -----------
Cost of goods and services sold:
Hardware sales .................................. 5,668,738 9,278,977
Service sales ................................... 216,860 325,150
Training and education sales .................... 147,495 275,566
---------- -----------
Total cost of goods and services sold ......... 6,033,093 9,879,693
---------- -----------
Gross profit ..................................... 1,046,096 2,497,458
Other operating expenses:
Selling, general, and administrative ............ 625,783 1,139,640
Depreciation and amortization ................... 86,248 35,630
---------- -----------
Total other operating expenses ................ 712,031 1,175,270
Operating income ................................. 334,065 1,322,188
Other income (loss) .............................. 11,702 15,460
---------- -----------
Net income ....................................... $ 345,767 $ 1,337,648
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-154
<PAGE>
CHAMPLAIN COMPUTER SERVICES, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE TWELVE MONTHS ENDED MAY 31, 1997 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- TREASURY PAID-IN RETAINED
SHARES AMOUNT STOCK CAPITAL EARNINGS TOTAL
-------- -------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of May 31, 1996 ............ 5,000 $5,000 $ (65,000) $35,000 $ 519,265 $ 494,265
Distributions to stockholder ......... -- -- -- -- (397,689) (397,689)
Net income ........................... -- -- -- -- 345,767 345,767
----- ------ --------- ------- ---------- ----------
Balance as of May 31, 1997 ............ 5,000 5,000 (65,000) 35,000 467,343 442,343
Distributions to stockholder ......... -- -- -- -- (851,674) (851,674)
Net income ........................... -- -- -- -- 1,337,648 1,337,648
----- ------ --------- ------- ---------- ----------
Balance as of May 31, 1998 ............ 5,000 $5,000 $ (65,000) $35,000 $ 953,317 $ 928,317
===== ====== ========= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-155
<PAGE>
CHAMPLAIN COMPUTER SERVICES, INC.
STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED MAY 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 345,767 $1,337,648
Adjustments to reconcile net income to net cash flows from
operating activities-
Depreciation and amortization .............................. 86,248 35,630
Changes in assets and liabilities:
Accounts receivable ....................................... (52,315) (142,681)
Inventory ................................................. 164,897 (115,731)
Prepaid expenses and other current assets ................. (7,383) (37,107)
Accounts payable .......................................... (12,510) (79,725)
Accrued expenses .......................................... 765 33,052
Inventory financing ....................................... (12,839) 105,285
Deferred revenue .......................................... 693 336,779
Customer deposits ......................................... (6,607) 64,564
---------- ----------
Net cash flows provided by operating activities ......... 506,716 1,537,714
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......................... (28,460) (135,587)
---------- ----------
Net cash used in investing activities ................... (28,460) (135,587)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholder ................................. (397,689) (851,674)
---------- ----------
Net cash used in financing activities ................... (397,689) (851,674)
---------- ----------
Net increase in cash and cash equivalents ..................... 80,567 550,453
Cash and cash equivalents, beginning of period ................ 179,032 259,599
---------- ----------
Cash and cash equivalents, end of period ...................... $ 259,599 $ 810,052
========== ==========
Cash paid for interest ........................................ $ --- $ 1,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-156
<PAGE>
CHAMPLAIN COMPUTER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF MAY 31, 1997 AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Champlain Computer Services, Inc., a Vermont corporation, sells hardware
and software and provides installation, training, and maintenance services to
end users. The Company is a Computer Land franchisee and operates as Computer
Land of Vermont.
The Company is able to purchase hardware and software in large quantities
through its franchise agreement. If this franchise agreement should expire, the
Company's ability to purchase products for resale at comparable price levels
could be adversely affected.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid investments with a maturity of
three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The carrying values of current assets and current liabilities approximate
fair value because of the relatively short maturities of these instruments.
INVENTORY
Inventory is recorded at the lower of cost or market value using the
first-in first-out method of accounting.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method, over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the expected life of the asset or
term of the lease. Depreciation expense for the year ended May 31, 1997 and
1998, is $86,248 and $35,630, respectively.
The ranges used in computing estimated useful lives were as follows:
Furniture and office equipment ......... 5-7 years
Vehicles ............................... 5-7 years
Leasehold improvements ................. 5-7 years
INVENTORY FINANCING
Inventory financing consists of accounts payable for purchases of inventory
from suppliers financed by third parties. These payables are due within 30 days
and are stated at cost.
F-157
<PAGE>
CHAMPLAIN COMPUTER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
REVENUE RECOGNITION
Service revenue is derived from information technology ("IT") services,
including hardware repair and maintenance, on-site network support, systems
consulting, software installation, software training and education services, and
other value-added IT services. Hardware revenue is primarily derived from the
sale of computer hardware. Software revenue is primarily derived from the sale
of software, peripherals and communication devices manufactured by third parties
and sold by the Company.
Hardware and software sales with no related service component are
recognized at the time of shipment provided that the collectibility of the
receivable is probable. Revenue from services are recognized as services are
performed or ratably if performed over a service contract period.
INCOME TAXES
The Company is an "S" corporation for income tax reporting purposes. As a
result, any taxable income generated is taxable to the stockholder of the
Company, and any taxable losses generated will benefit the stockholder.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
As of May 31, 1997 and 1998, property and equipment consisted of the
following:
1997 1998
------------- -------------
Furniture and office equipment ........ $ 138,862 $ 249,505
Vehicles .............................. 14,815 14,815
Leasehold improvements ................ 85,573 35,035
---------- ----------
239,250 299,355
Less- Accumulated depreciation ........ (159,927) (120,075)
---------- ----------
$ 79,323 $ 179,280
========== ==========
3. INVENTORY:
As of May 31, 1997 and 1998, inventory consisted of the following:
1997 1998
----------- -----------
Service goods ........................... $ 13,644 $ 18,003
Finished goods .......................... 95,977 207,349
-------- --------
$109,621 $225,352
======== ========
F-158
<PAGE>
CHAMPLAIN COMPUTER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
4. ACCRUED EXPENSES:
As of May 31, 1997 and 1998, accrued expenses consisted of the following:
1997 1998
---------- ----------
Accrued salaries and related taxes .......... $20,370 $41,683
Other accrued expenses ...................... 17,001 28,740
------- -------
$37,371 $70,423
======= =======
5. EMPLOYEE BENEFIT PLANS:
The Company maintains an IRA retirement plan covering the employees of the
Company. Under the plan agreements, employees may elect to contribute a
percentage of compensation. Plan participants vest immediately in all employee
elective contributions. Additionally, plan participants vest in employer
contributions over various periods. Employer contributions totaled $1,719 and
$19,268 for the twelve months ended May 31, 1997 and 1998.
6. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company had one customer who accounted for 32 percent of revenue for the twelve
months ended May 31, 1997. The Company had two customers who accounted for
approximately 48 and 20 percent of revenue for the twelve months ended May 31,
1998, respectively. The Company's major customers, discussed above, represent
approximately 41 and 47 percent of accounts receivable at May 31, 1997 and 1998,
respectively.
7. RELATED-PARTY TRANSACTIONS:
The Company has a royalty agreement with Computer Land, Inc. The Company
pays a franchise fee of $5,000 a year and 0.5 percent of sales each month. For
the year ended May 31, 1997 and 1998, royalty expense totaled $40,022 and
$61,666, respectively.
8. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases its operating facilities under leases that expire
through 2002. Future minimum rent payments due under existing operating leases
are as follows:
PERIOD ENDED DECEMBER 31,
-------------------------
June 1, 1998, to December 31, 1998 ......... $ 63,168
1999 ....................................... 108,288
2000 ....................................... 108,288
2001 ....................................... 108,288
2002 and thereafter ........................ 72,192
--------
$460,224
========
Rent expense for the year ended May 31, 1997 and 1998, totaled $58,840 and
$105,579, respectively.
9. SUBSEQUENT EVENTS:
In June 1998, the Company made a distribution of $405,000 to its sole
stockholder. On June 18, 1998, the Company entered into a proposed business
combination agreement with IT Partners, Inc. If consummated, a new basis of
accounting will be established.
F-159
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To IT Partners, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of IT Partners, Inc. and the financial
statements of Kandl Data Products, Inc., Computer Network Services, Inc. and
A-COM, Inc. included in this registration statement and have issued our reports
thereon dated August 7, 1998, June 19, 1998, July 8, 1998 and July 28, 1998,
respectively. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. These schedules listed in the
accompanying index are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
Washington, D.C.
August 4, 1998
S-1
<PAGE>
SCHEDULE II
IT PARTNERS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED
BEGINNING TO ENDING
BALANCE DEDUCTIONS (1) EXPENSE BALANCE
----------- ---------------- --------- ----------
<S> <C> <C> <C> <C>
PERIOD ENDED DECEMBER 31, 1996
Allowance for doubtful accounts ......... $ -- $ -- $ -- $ --
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts ......... -- (703,012) 70,332 773,344
THREE MONTHS ENDED MARCH 31, 1998
Allowance for doubtful accounts ......... 773,344 (111,282) 85,671 970,297
</TABLE>
KANDL DATA PRODUCTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED
BEGINNING TO ENDING
BALANCE DEDUCTIONS (2) EXPENSE BALANCE
----------- ---------------- --------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1995
Allowance for doubtful accounts ......... $ 5,000 $ 5,000 $ 5,000 $ 5,000
YEAR ENDED SEPTEMBER 30, 1996
Allowance for doubtful accounts ......... 5,000 5,000 5,000 5,000
EIGHT MONTHS ENDED MAY 31, 1997
Allowance for doubtful accounts ......... 5,000 31,481 45,125 18,644
</TABLE>
COMPUTER NETWORK SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED
BEGINNING TO ENDING
BALANCE DEDUCTIONS (2) EXPENSE BALANCE
----------- ---------------- --------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts ........ $37,000 $ 5,443 $ 5,443 $ 37,000
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts ........ 37,000 18,962 18,962 37,000
FIVE MONTHS ENDED MAY 31, 1997
Allowance for doubtful accounts ........ 37,000 5,785 95,319 126,534
</TABLE>
A-COM, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED
BEGINNING TO ENDING
BALANCE DEDUCTIONS (2) EXPENSE BALANCE
----------- ---------------- ---------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1995
Allowance for doubtful accounts ......... $297,705 $35,211 $ 35,211 $297,705
YEAR ENDED JUNE 30, 1996
Allowance for doubtful accounts ......... 297,705 70,501 70,501 297,705
YEAR ENDED JUNE 30, 1997
Allowance for doubtful accounts ......... 297,705 94,574 251,975 455,106
</TABLE>
- ----------
(1) Represents acquired allowance for doubtful accounts under purchase
accounting (APB No. 16) and receivables written off.
(2) Represents receivables written off.
S-2
<PAGE>
====================================== ======================================
NO PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH THE OFFERING MADE
HEREBY TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION NOT CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR 6,000,000 SHARES
MADE, SUCH OTHER INFORMATION OR
REPRESENTATION MUST NOT BE RELIED ON
AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY, TO ANY PERSON OR BY
ANYONE IN ANY JURISDICTION IN WHICH IT [IT PARTNERS LOGO]
IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT
TO THE DATE HEREOF.
--------------------------------
TABLE OF CONTENTS COMMON STOCK
PAGE
----
Prospectus Summary ............... 1
Risk Factors ..................... 11
Use of Proceeds .................. 18
Dividend Policy .................. 18
Capitalization ................... 19
Dilution ......................... 20 ---------------------------------
Selected Financial Data .......... 29
Management's Discussion and
Analysis of Financial Condition PROSPECTUS
and Results of Operations ..... 33
Business ......................... 42
Management ....................... 54 ---------------------------------
The Recapitalization ............. 61
Certain Transactions ............. 66
Principal Stockholders ........... 71
Description of Capital Stock ..... 72
Shares Eligible for Future Sale .. 75
Underwriting ..................... 76
Legal Matters .................... 78
Experts .......................... 78
Additional Information ........... 78
Index to Financial Statements .... F-1 FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
--------------------------------
UNTIL SEPTEMBER 1, 1998 (25 DAYS PIPER JAFFRAY INC.
AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN
THE SHARES OF COMMON STOCK WHETHER OR
NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS WHEN ACTING AS , 1998
UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
====================================== ======================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The table below sets forth the expenses to be incurred by the Company in
connection with the issuance and distribution of the shares registered for offer
and sale hereby, other than underwriting discounts and commissions. All amounts
shown represent estimates except the Securities Act registration fee.
Registration fee under the Securities Act of 1933. ......... $32,568
Printing and EDGAR expenses. ............................... *
Registrar and Transfer Agent's fees and expenses. .......... *
Accountants' fees and expenses. ............................ *
Legal fees and expenses. ................................... *
-------
Total. ..................................................... $ *
=======
- ----------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation and By-Laws provide, to the
maximum extent provided by applicable law, that a director of the Company shall
not be personally liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware, or (iv) for any transaction from which
the director derived an improper personal benefit. If the General Corporation
Law of the State of Delaware is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Company shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of the State of Delaware, as so
amended. Any repeal or modification of the relevant Article of By-Laws of the
Company shall not adversely affect any right or protection of a director of the
Company existing at the time of such repeal or modification.
Each person who was or is made a party or is threatened to be made a party
to or is or was involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or a person of whom he is the legal representative is
or was a director, officer or employee of the Company or is or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
Company to the fullest extent authorized by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Company to provide broader indemnification rights than said law permitted the
Company to provide prior to such amendment), against all expense, liability and
loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his heirs, executors, and
administrators; provided, however, that except as provided in the Company's
By-Laws with respect to proceedings seeking to enforce rights to
indemnification, the Company shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Company. The right to indemnification conferred in the
Company's By-Laws shall be a contract right and shall include the right to be
paid by the Company the
II-1
<PAGE>
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that if the General Corporation Law of the State
of Delaware requires, the payment of such expenses incurred by a director or
officer in his capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Company of an undertaking by or on behalf of such director of officer, to
repay all amounts so advanced if it shall ultimately be determined that such
director of officer is not entitled to be indemnified.
The Company may purchase and maintain insurance to protect itself and any
such director, officer or other person against any liability asserted against
him and incurred by him in respect of such service whether or not the Company
would have the power to indemnify him against such liability by law or under the
provisions of the Company's By-Laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following paragraphs of this Item 15 describe all sales of securities
by the Company within the past three years which were not registered under the
Securities Act of 1933.
On May 29, 1997, the Company issued 194,691 shares of Common Stock to
Martin G. Kandl and Haeyoung Kandl jointly for the aggregate consideration of
$1,328,175.
On May 30, 1997, the Company issued 50,000 shares of Series A Preferred and
Equity Warrants to purchase 137,380 shares of either Common Stock or Series B
Preferred to Creditanstalt for the aggregate consideration of $500,000.
On May 30, 1997, the Company issued 100,000 shares of Series A Preferred
and Equity Warrants to purchase 274,760 shares of either Common Stock or Series
B Preferred to FF-ITP for the aggregate consideration of $1,000,000.
On May 30, 1997, the Company issued 10,900 shares of Series A Preferred to
Daniel J. Klein for the aggregate consideration of $109,000.
On May 30, 1997, the Company issued 10,900 shares of Series A Preferred to
Jamie E. Blech for the aggregate consideration for $109,000.
On May 30, 1997, the Company issued 293,075 shares of Common Stock to
Daniel J. Klein for nominal consideration in connection with the formation of
the Company.
On May 30, 1997, the Company issued 293,075 shares of Common Stock to Jamie
E. Blech for nominal consideration in connection with the formation of the
Company.
On May 30, 1997, the Company issued 26,638 shares of Common Stock to Mark
F. Yanson for nominal consideration in connection with the formation of the
Company.
On May 30, 1997, the Company issued 165,680 shares of Common Stock to the
shareholders of CNS for the aggregate consideration of $1,554,905.
On May 30, 1997, the Company issued Debt Warrants to purchase 219,808
shares of Common Stock or Series B Preferred to Creditanstalt for nominal
consideration in connection with the execution of the Credit Facility.
On June 30, 1997, the Company issued 495,260 shares of Common Stock to
Christopher R. Corbett and Merrie Corbett jointly for the aggregate
consideration of $4,648,015.
On July 11, 1997, the Company issued 23,334 shares of Series A Preferred
and Equity Warrants to purchase 64,110 shares of either Common Stock of Series B
Preferred to Creditanstalt for the aggregate consideration of $233,340.
On October 20, 1997, the Company issued 393,040 shares of Common Stock to
shareholders of FSC for the aggregate consideration of $3,910,000.
II-2
<PAGE>
On October 27, 1997, the Company issued 26,666 shares of Series A Preferred
and Equity Warrants to purchase 41,934 shares of either Common Stock of Series B
Preferred to Creditanstalt for the aggregate consideration of $266,660.
On October 31, 1997, the Company issued 10,000 shares of Series A Preferred
to FF-ITP for the aggregate consideration of $100,000.
On October 31, 1997, the Company issued 15,725 shares of Common Stock to
Christopher R. Corbett and Merrie Corbett jointly for the aggregate
consideration of $100,000.
On October 31, 1997, the Company issued 15,725 shares of Common Stock to
FF-ITP for the aggregate consideration of $100,000.
On October 31, 1997, the Company issued 7,863 shares of Common Stock to
Martin G. Kandl and Haeyoung Kandl jointly for the aggregate consideration of
$50,000.
On October 31, 1997, the Company issued 533 shares of Common Stock to
Thomas Gardner for the aggregate consideration of $3,393.
On October 31, 1997, the Company issued 38,053 shares of Common Stock to
shareholders of CNS for the aggregate consideration of $357,130.
On January 7, 1998, the Company issued 100,000 shares of Series A Preferred
and Equity Warrants to purchase 100,522 shares of either Common Stock or Series
B Preferred to Creditanstalt for the aggregate consideration of $1,000,000.
On January 7, 1998, the Company issued 222,222 shares of Series B Preferred
to Creditanstalt for the aggregate consideration of $1,000,000.
On January 7, 1998, the Company issued Debt Warrants to purchase 106,553
shares of Common Stock or Series B Preferred to Creditanstalt for nominal
consideration in connection with the execution of the Credit Facility.
On January 8, 1998, the Company issued 1,191,416 shares of Common Stock to
17 shareholders of Sequoia for the aggregate consideration of $11,852,326.
On February 5, 1998, the Company issued 700,636 shares of Common Stock to
the shareholders of Incline for the aggregate consideration of $6,969,998.
On March 31, 1998, the Company issued 345,204 shares of Series B Preferred
to Wachovia for the aggregate consideration of $3,000,000.
On March 31, 1998, the Company issued 230,136 shares of Series B Preferred
to Indosuez IT Partners for the aggregate consideration of $2,000,000.
On April 30, 1998, the Company issued Equity Warrants to purchase 8,544
shares of either Common Stock or Series B Preferred to Creditanstalt in the form
of a PIK Dividend on the outstanding Equity Warrants.
On April 30, 1998, the Company issued Equity Warrants to purchase 8,960
shares of either Common Stock or Series B Preferred to FF-ITP in the form of a
PIK Dividend on the outstanding Equity Warrants.
On April 30, 1998, the Company issued 7,569 shares of Series A Preferred to
Creditanstalt in the form of a PIK Dividend.
On April 30, 1998, the Company issued 6,525 shares of Series A Preferred to
FF-ITP in the form of a PIK Dividend.
On April 30, 1998, the Company issued 668 shares of Series A Preferred to
Daniel J. Klein in the form of a PIK Dividend.
On April 30, 1998, the Company issued 668 shares of Series A Preferred to
Jamie E. Blech in the form of a PIK Dividend.
On May 1, 1998, the Company issued 45,452 shares of Series B Preferred to
Indosuez IT Partners II for the aggregate consideration of $400,000.
On May 11, 1998, the Company issued 267,433 shares of Common Stock to the
shareholders of Sequoia for the aggregate consideration of $2,660,446.
On May 13, 1998, the Company issued 312,270 shares of Common Stock to
Stanton L. Call for the aggregate consideration of $3,340,947.
On June 1, 1998, the Company issued 4,151 shares of Series A Preferred to
Creditanstalt in the form of a PIK Dividend.
On June 1, 1998, the Company issued 2,330 shares of Series A Preferred to
FF-ITP in the form of a PIK Dividend.
On June 1, 1998, the Company issued 231 shares of Series A Preferred to
Daniel J. Klein in the form of a PIK Dividend.
II-3
<PAGE>
On July 28, 1998, the Company issued 700 shares of Series C Preferred to
BDC for the aggregate consideration of $7,000,000.
On August 4, 1998, the Company issued 300 shares of Series C Preferred to
Wachovia for the aggregate consideration of $3,000,000.
On June 1, 1998, the Company issued 231 shares of Series A Preferred to
Jamie E. Blech in the form of a PIK Dividend.
Amended 1997 Long-Term Incentive Plan. See "Management--Stock Option Plan,"
which is incorporated by reference herein from the Prospectus included in Part I
of this Registration Statement.
Issuance of Warrants. See "The Recapitalization--Warrant Agreement and Debt
Warrants" and "The Recapitalization--Purchase Agreement and Equity Warrants,"
which is incorporated by reference herein from the Prospectus included in Part I
of this Registration Statement.
Each issuance of securities described above was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as a
transaction by an issuer not including any public offering. The issuance of the
PIK Dividends was made in reliance on the exemption from registration provided
by Rule 416 of Regulation C promulgated by the SEC. The recipients of securities
in each such transaction represented their intention to acquire the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Company, to information about the Company.
II-4
<PAGE>
ITEM 16(A). EXHIBITS.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------------------------------------------------
*1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation, as amended.
*3.2 By-Laws, as amended.
*4.1 Specimen Common Stock Certificate.
*4.2 Warrant Agreement, dated May 30, 1997, as amended.
*4.3 Amended and Restated Stockholder Agreement, dated March 31, 1998,
as amended.
*4.4 Preferred Stock and Warrant Purchase Agreement, dated May 30, 1997,
as amended.
*4.5 Promissory Note by IT Partners to Stanton L. Call, dated May 13,
1998 for $2,876,206, con- vertible into Common Stock.
*4.6 Convertible Promissory Note by IT Partners to Servinet, dated June
10, 1998, with any unpaid principal amount outstanding convertible
at Servinet's option into Common Stock.
*4.7 Stock Repurchase Agreement, dated May 29, 1997, between IT Partners
and Martin Kandl.
*4.8 Stock Repurchase Agreement, dated May 30, between IT Partners and
Daniel J. Klein.
*4.9 Stock Repurchase Agreement, dated May 30, between IT Partners and
James E. Blech.
*4.10 12.0% Series C Senior Redeemable Preferred Stock Purchase
Agreement, dated July 28, 1998, between IT Partners and FBR
Business Development Capital.
*4.11 Certificate of Designation of Preferences and Rights of 12.0%
Series C Redeemable Preferred Stock of IT Partners, dated July 28,
1998.
*4.12 12.0% Series C Senior Redeemable Preferred Stock Purchase
Agreement, dated July 31, 1998, between IT Partners and Wachovia
Capital Associates, Inc.
5.1 Opinion of Swidler Berlin Shereff Friedman, LLP.
*10.1 Asset Purchase Agreement, between IT Partners and Servinet, dated
June 10, 1998.
*10.2 Asset Purchase Agreement, between IT Partners and Stanton L. Call,
dated May 13, 1998.
*10.3 Business Combination Agreement, among IT Partners, ITP Acquisition
Corp., A-COM, Christopher Corbett and Merrie Corbett, dated June
30, 1997.
*10.4 Business Combination Agreement, among IT Partners, CNS, Stanley
Nice, and John Clement, dated May 27, 1997.
*10.5 Agreement and Plan of Organization, among IT Partners, ITP No. 4,
Inc., FSC, Charles Schaeffer and Garrett Schaeffer, dated October
20, 1997.
*10.6 Agreement and Plan of Organization, among IT Partners, ITP No. 11,
Inc., Incline, Robert Wentworth, John DeFina, Philip Tomasi and
Charles Menzel, dated February 5, 1998.
*10.7 Business Combination Agreement, among IT Partners, KDP, Martin
Kandl, and Haeyoung Kandl, dated May 29, 1997.
*10.8 Agreement and Plan of Organization, among IT Partners, ITP No. 10,
Inc., Sequoia, John Bamberger, Alan Wise, William Murray, Michael
Baltosiewich, Carl Griffin, William Church and Michael Ryan, dated
January 8, 1998.
*10.9 Amended and Restated Loan and Security Agreement, dated March 31,
1998, among IT Partners, Sequoia, FSC, Incline, A-COM, CNS, KDP and
Creditanstalt, as amended.
*10.10 IT Partners, Inc. Amended 1997 Long-Term Incentive Plan.
II-5
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------------------------------------------------
*10.11 Senior Executive Employment Agreement, between IT Partners and
Christopher R. Corbett, dated June 30, 1997.
*10.12 Executive Employment Agreement, between IT Partners and Daniel J.
Klein, dated March 7, 1997.
*10.13 Employment Agreement, between IT Partners and John D. Bamberger,
dated January 8, 1998.
*10.14 Employment Agreement, between IT Partners and Christine E.
Norcross, dated September 16, 1997.
*10.15 Executive Employment Agreement, between IT Partners and Jamie E.
Blech, dated March 7, 1997.
*10.16 Promissory Note by IT Partners to Christopher R. Corbett, for
$2,226,000, dated June 30, 1997.
*10.17 Promissory Note by IT Partners to Stanton L. Call, for $2,876,206,
dated May 13, 1998.
*10.18 Promissory Note by IT Partners to Stanley Nice, for $102,036.50,
dated July 28, 1997.
*10.19 Promissory Note by IT Partners to John Clement, for $102.036.50,
dated July 28, 1997.
*10.20 Promissory Note by IT Partners to Stanley A. Nice, for $472,409.90,
dated May 27, 1997.
*10.21 Promissory Note by IT Partners to John Clement, for $432,998.90,
dated May 27, 1997.
*10.22 Amended and Restated Promissory Note by IT Partners to
Creditanstalt for $14,000,000, dated October 1997.
*10.23 Promissory Note by IT Partners to Charles Schaeffer, for $2
199,375, dated October 20, 1997.
*10.24 Promissory Note by IT Partners to Garrett Schaeffer, for $244,375,
dated October 20, 1997.
*10.25 Promissory Note by IT Partners to Martin and Haeyoung Kandl, for
$568,790, dated May 22, 1997.
*10.26 Promissory Note by IT Partners to John D. Bamberger, for
$2,014,240, dated January 8, 1998.
*10.27 Promissory Note by IT Partners to Alan Wise, for $1,278,078, dated
January 8, 1998.
*21.1 List of Subsidiaries.
23.1 Consent of Swidler Berlin Shereff Friedman, LLP (filed as part of
Exhibit 5.1).
23.2 Consent of Arthur Andersen, LLP.
*24.1 Power of Attorney (set forth on signature page).
*27.1 Financial Data Schedule.
- ----------
* To be filed by amendment.
ITEM 16(B). FINANCIAL STATEMENT SCHEDULES.*
* To be completed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-6
<PAGE>
(2) For the purpose of determining any liability under the Securities Act,
each such post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Washington, D.C., on August 7, 1998.
IT PARTNERS, INC.
By: /s/ DANIEL J. KLEIN
----------------------------------------
Daniel J. Klein
Chairman, Chief Executive Officer and
Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Daniel J. Klein and Jamie E.
Blech, and each of them acting individually, as his attorneys-in-fact and
agents, each with full power of substitution and resubstitution, for him in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON AUGUST 7, 1998.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------- --------------------------------------- ---------------
<S> <C> <C>
/s/ DANIEL J. KLEIN Chairman, Chief Executive Officer and August 10, 1998
- ------------------------- Director (Principal Executive Officer)
Daniel J. Klein
/s/ JAMIE E. BLECH President, Secretary and Director August 10, 1998
- -------------------------
Jamie E. Blech
/s/ MARK F. YANSON Chief Financial Officer, Treasurer August 10, 1998
- ------------------------- and Senior Vice President (Principal
Mark F. Yanson Financial Officer)
/s/ ANTHONY M. CORBI Chief Accounting Officer, Corporate August 10, 1998
- ------------------------- Controller and Vice President
Anthony M. Corbi (Principal Accounting Officer)
/s/ JOHN D. BAMBERGER Director August 10, 1998
- -------------------------
John D. Bamberger
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------- --------------------------------------- ---------------
<S> <C> <C>
/s/ CHRISTOPHER R. CORBETT Director August 7, 1998
- -------------------------
Christopher R. Corbett
Director August 7, 1998
- -------------------------
Charles Schaeffer
/s/ JAMES D. LUMSDEN Director August 7, 1998
- -------------------------
James D. Lumsden
/s/ MARTIN S. PINSON Director August 7, 1998
- -------------------------
Martin S. Pinson
</TABLE>
II-9
EXHIBIT 5.1
August 10, 1998
The Board of Directors
IT Partners, Inc.
9881 Broken Land Parkway, Suite 102
Columbia, Maryland 21046
RE: REGISTRATION STATEMENT ON FORM S-1
Gentlemen:
We have acted as counsel to IT Partners, Inc., a Delaware corporation (the
"Company"), with respect to the Company's Registration Statement on Form S-1
(the "Registration Statement") filed with the Securities and Exchange
Commission, in connection with the registration under the Securities Act of
1933, as amended (the "Securities Act"), of up to 6,900,000 shares of the
Company's common stock, par value $.01 per share ("Common Shares"). This opinion
letter is furnished to you at your request to enable you to fulfill the
requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R. (section)
229.601(b)(5), in connection with the Registration Statement.
As counsel to the Company, we have examined the Company's Certificate of
Incorporation, as amended (the "Certificates"), and such Company records,
certificates and other documents and relevant statutes, regulations, published
rulings and such questions of law as we considered necessary or appropriate for
the purpose of this opinion.
In our examination, we have assumed the authenticity of original documents,
the accuracy of copies and the genuineness of signatures. We have relied upon
the representations and statements of officers and other representatives of the
Company with respect to the factual determinations underlying the legal
conclusions set forth herein. We have not attempted to verify independently such
representations and statements.
This opinion letter is based as to matters of law solely on the General
Corporation Law of the State of Delaware as currently in effect, and we express
no opinion herein as to any other laws, statutes, ordinances, rules or
regulations.
Based upon, subject to the limited by the foregoing and the other
qualifications herein, we are of the opinion that, when the Registration
Statement has become effective under the Securities Act, upon issuance and
delivery of such Common Shares against payment of valid consideration therefor
as contemplated by the Registration Statement, such Common Shares will be
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to all references to our firm in the Registration
Statement. In giving this consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules promulgated thereunder.
This opinion is rendered solely for your benefit in connection with the
transactions described above upon the understanding that we are not hereby
assuming any professional responsibility to any other person. Except as provided
in the preceding paragraph, this opinion may not be relied upon by any other
person and this opinion may not be used, disclosed, quoted, filed with a
governmental agency or otherwise referred to without our express prior written
consent. The opinions expressed in this letter are limited to the matters
expressly set forth herein, and no other opinions should be inferred beyond the
matters expressly stated herein.
Very truly yours,
/s/ SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
----------------------------------------
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
EXHIBIT 23.2
CONSENT OF ARTHUR ANDERSEN, LLP
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
August 7, 1998
