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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-SB
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
INTEGRATED HOMES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
COLORADO 84-1448176
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
BOCA CORPORATE PLAZA, 1801 CLINT MOORE ROAD, SUITE 204,
BOCA RATON, FLORIDA 33487
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (561) 982-9770
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None.
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
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INTEGRATED HOMES, INC.
FORM 10-SB GENERAL FORM FOR
REGISTRATION OF SECURITIES
TABLE OF CONTENTS
Part I
Item 1. Description of Business
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Description of Property
Item 4. Security Ownership of Certain Beneficial Owners and Management
Item 5. Directors, Executive Officers, Promoters and Control Persons
Item 6. Executive Compensation
Item 7. Certain Relationships and Related Transactions
Item 8. Description of Securities
Part II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters
Item 2. Legal Proceedings
Item 3. Changes In and Disagreement with Accountants
Item 4. Recent Sales of Unregistered Securities
Item 5. Indemnification of Directors and Officers
FINANCIAL STATEMENTS
Financial Statements as of December 31, 1998 and Independent Auditor's Report
Financial Statements as of June 30, 1999, December 31, 1999 and June 30, 2000
and Independent Auditors Reports
Part III
Index to Exhibits
Signature
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This registration statement contains certain forward-looking statements. These
forward-looking statements include statements regarding marketing plans, capital
and operational expenditures, results of operations, potential utility and
acceptance of our existing and proposed services, and the need for, and
availability of, additional financing. The forward-looking statements included
herein are based on current expectations and involve a number of risks and
uncertainties. These forward- looking statements are based on assumptions
regarding our business which involve judgments with respect to, among other
things, future economic and competitive conditions and future regulatory and
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
the assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate and, therefore, actual results may differ
materially from those set forth in the forward-looking statements. Any
forward-looking statement speaks only as of the date on which such statement is
made. New factors emerge from time to time, and it is not possible for us to
predict all such factors. Further, we cannot assess the impact of each such
factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statement. In light of the significant uncertainties
inherent in the forward-looking information contained herein, the inclusion of
such information should not be regarded as a representation by us, or any other
person, that our objectives or plans will be achieved.
ITEM 1. DESCRIPTION OF BUSINESS
Integrated Homes, Inc. ("IHI") is a Colorado corporation, which is a holding
company that operates primarily through its wholly-owned subsidiary, Integrated
Homes of Florida, Inc. ("IHF"), a Florida corporation formed on June 6, 1998.
This registration statement often refers to both companies as "we", "us" or our
"company". Our Company is a startup business that has operated since June 6,
1998. Our business currently has three main components. First, we install low
voltage wiring for telephone and cable television and home security systems in
new home developments. We operate exclusively within large scale new home
building projects, often referred to as a planned residential community, within
which a home development company controls all aspects of the new community
development. Second, under our arrangements with these development companies,
our representatives meet with each new homeowner and offer them the opportunity
to select and purchase from us a customized package of consumer electronic
equipment to be installed in their house. Third, we contract with certain
community homeowners' associations to provide the security monitoring services
of certain of the security systems we install.
We are developing more sophisticated and varied products and services for the
homeowner as part of a second phase of our business plan that we propose to
launch in 2001. We plan to develop a package or "bundle" of more comprehensive
services, which include digital television, local and long distance telephone,
high speed internet connection and e-commerce services (in addition to existing
home security monitoring services). This will allow us to serve as the single
source for communication and home entertainment for each of the new homeowners
in planned residential communities in which we install wiring and security
systems. We will provide these bundled services by establishing connections to
satellite dishes and television towers and routing the signals through
communications facilities we plan to develop in planned residential communities.
In the second phase of our business plan we also plan to provide community based
information and commercial services in a "Connected Community" concept. Under
this concept, the homes and public
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facilities of a planned residential community will be connected to each other
through a fiber optic cable network and linked through our communication
facility. This network will allow homeowners to access, over a homeowner's
television screen, community services such as control of vehicular access into
the community, visual monitoring of public areas (such as playgrounds), and
concierge services such as community function schedules and a reservation
system.
In the third phase of our business plan, we plan to bring our bundled service
package to existing planned residential developments and to retrofit existing
homes within these communities. We have tested various technological solutions
to allow existing residences to receive our bundled services. For example, our
various vendor partners are working to develop a wireless system, that would
create opportunities for us to partner with major telecommunication service
providers offering existing homes the same bundled services we plan to offer to
new homes under construction that we connect within a fiber optic cable network
in our Connected Community.
During the second and third phases of our business plan, we plan to expand our
operations both within and outside the State of Florida, beginning as early as
2001. We plan to explore opportunities to serve planned residential communities
in other high-growth regions such as Atlanta, Las Vegas, Orlando, Phoenix, and
parts of California, North Carolina, South Carolina, and Texas. We seek to
achieve this expansion through our relationships with large home development
companies, telecommunication service providers and equipment vendors. We will
also explore merger and acquisition possibilities with other companies that are
either engaged in the wiring of new homes or that offer complementary services
to residential communities. Although we have conducted exploratory discussions
with several companies for all of these purposes, none of these discussions have
progressed beyond the most preliminary stages.
In summary, our plan is to expand our existing business with housing developers
and homeowner associations beyond our current wiring, electronic equipment sales
and security monitoring service offerings. We are currently investing in
research and development for the integration of existing technology and services
to offer our planned bundled services to homeowners in planned residential
communities. We are currently developing a laboratory model to demonstrate and
test equipment and software for the second phase of our business plan, including
the equipment and software that we will install in communication facilities. We
plan a third phase of expanding our business into existing homes. We will
require substantial additional financing to complete the planned development and
expansion of our business.
Our headquarters are located at 1801 Clint Moore Road, Suite 204, Boca Raton,
Florida 33487. Our telephone number is (561) 982-9770 and our fax number is
(561) 982-9779.
HISTORY
Our operating business began with the incorporation of IHF on June 6, 1998.
However, our present corporate structure results from a share exchange that
closed on March 31, 1999, in which IHI, f/k/a Automotive Technologies, Inc.
("ATI") acquired all of the stock of IHF, in exchange for ATI stock (the "Share
Exchange"). ATI was incorporated on November 13, 1997 and its common stock was
traded on
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the OTCBB at the time of the Share Exchange. In early March of 1999, Richard D.
Wedel and other private investors purchased 1,450,000 of the 1,500,000 issued
and outstanding shares of ATI. Immediately after purchasing control of ATI, its
new owners began seeking further investors and business operations for the
corporate shell that ATI had become. The Share Exchange was conducted to provide
ATI with an operating business (ATI had no material operations before this
transaction) and to afford IHF access to public capital markets.
The Share Exchange was affected pursuant to an Agreement and Plan of
Reorganization dated March 31, 1999 by and among ATI, IHF and IHF's shareholders
(the "Share Exchange Agreement"). In the Share Exchange, IHF's sole
shareholders: David Rich who held 1,200,000 shares, and Phillip Seregant who
held 800,000 shares, exchanged all of their common stock of IHF in return for
3,441,700 shares of common stock of ATI, and IHF thus became a wholly-owned
subsidiary of ATI.
Mr. Wedel was the sole director of ATI from the time of his purchase of ATI
shares through May 21, 1999, at which time John Tomassini, Philip Sergeant, and
David Rich were also elected as directors. On May 21, 1999, Mr. Rich was elected
Chief Executive Officer and Mr. Sergeant was elected President and Director of
Marketing. Mr. Tomassini resigned effective February 10, 2000.
ATI changed its name to "Integrated Homes, Inc." pursuant to the terms of the
Share Exchange and this change became effective with the State of Colorado on
May 21, 1999.
OPERATIONS
Our Company operates primarily through IHF. IHF was incorporated in 1998, and
has limited operating history. During 1999, we generated total revenues of
$941,782 and during the first half of 2000 we generated total revenues of
$776,460. We presently generate revenue by (i) installing low voltage wiring and
security systems in new homes (revenues: $466,782 in 1999, and $311,460 in the
first fiscal half of 2000); (ii) selling new homeowners packages of electronic
equipment including televisions, telephone, audio and computer equipment
(revenues: $450,000 in 1999 and $425,000 in the first fiscal half of 2000); and
(iii) selling security services (revenues: $25,000 in 1999, and $40,000 in the
first fiscal half of 2000).
We commenced our first installation of a low voltage wiring system in a new home
development on November 1, 1998 for Watermark Communities, Inc. at Parkland
Isles located in Parkland, Florida. Since then, we have received and accepted
orders to install low voltage wiring systems in eleven new home developments
throughout the State of Florida. We have installed low voltage wiring systems in
a total of approximately 1,300 homes, including approximately 750 installations
we performed in the first six months of 2000. Presently, we are wiring
approximately 170 homes per month, a figure that varies between approximately
100 to 250 homes per month based on seasonal home construction patterns. We
currently operate throughout the State of Florida, with an emphasis in South
Florida, which includes Miami-Dade, Broward, Collier, Lee, Palm Beach and Port
St. Lucie counties.
A development company generally grants us exclusive rights to provide our
services within their new planned residential communities. Home developers place
orders with us to install all of the low voltage
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wiring in the development's new homes, which includes cable television,
telephone wiring and the home security system. We install the wiring to connect
the home interior and create a shared network, such that, for example, all
computers in one home could share one printer. We presently charge an average of
approximately $1,300 to install the wiring in each new home. The amount charged
varies depending on the size of the home and the unique aspects of each project.
We wire and install the security system in each home, including wiring on the
doors and windows and a motion sensor. The developer pays us approximately 50%
when the initial wiring is installed and the remaining 50% at the closing of the
purchase of the new home by the homeowner. Thus, it is the developer, and not
the homeowner, that pays us directly for our work. Our employees perform all
wiring installation jobs. None of this labor is subcontracted. The products used
for the wiring have manufacturer's warranties, and we offer a one-year limited
warranty.
We currently obtain the majority of our materials to install telephone and cable
wiring from two suppliers. Suppliers of the raw materials used by us are
plentiful and interchangeable. We do not presently have a long-term contract
with any supplier.
In the planned residential community developments in which we install low
voltage wiring and security systems, we meet with each home purchaser during an
option selection process soon after the home purchase agreement is signed.
During this meeting, our representatives offer various packages of products and
services that connect to the wiring in the house, such as enhanced security
system upgrades (including video equipment), consumer electronic upgrades such
as home theater equipment, telephone systems, lighting control, computer
systems, intercoms, distributed audio packages, cable modems and simple home
management systems. We currently average approximately $4,000 in revenue from
each homeowner's purchase of such optional equipment and systems, although this
amount varies considerably from homeowner to homeowner. The purchase price for
the consumer electronic equipment package includes the value added costs of our
advice and assembly. The new homeowner can finance the equipment as part of
their home purchase through their mortgage. The developer commonly retains a
percentage, usually about 25%, of the amount charged the homeowner (the $4,000
revenue figure above includes commission), as a fee for introducing us to the
new homeowner. We presently finance these equipment purchases through our own
working capital. To date, we have sold approximately 850 packages of electronic
products to new homeowners.
We also sell security monitoring services in communities in which we install
security systems. In these communities, a homeowners' association assumes
control of the developments from the developers once the development has been
substantially completed. We contract with the homeowners' association to monitor
the entire community's home security systems. Currently, we perform monitoring
services for two homeowners' associations. We charge a fee to the homeowners'
association based on the number of homes in the development. We are the
exclusive provider of security monitoring services under this arrangement. For a
small number of homes in one planned residential community we are currently
billing individual homeowners on a monthly basis. Security monitoring fees
currently represent less than 5% of our total revenues. We subcontract with a
third party vendor who operates the central monitoring station in exchange for
approximately 20% of the monitoring fees we receive.
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The installation of low voltage wiring, the installation of the security
systems, the sale of consumer electronics equipment packages, and the provision
of monitoring services all comprise the first phase of our business plan. During
this initial phase, we have developed relationships with major home development
companies, evolved sales techniques for consumer electronic products for the
home, contracted with home owner associations for security monitoring services,
and performed home wiring to network the home electronic, communication and
computer equipment. We have also invested in research and development for the
second phase of our business plan, in which we plan to integrate technology and
services to create a "bundle" of services that will generate additional
recurring revenues. Our planned bundled services to the homeowner will include
digital television, local and long distance telephone, high speed internet
connection and community based services. We plan to provide these services
through communication facilities including satellite dishes and television
towers, and route these services over a community fiber optic network we plan to
develop.
In the second phase of our business plan, which will not be implemented before
2001, we plan to provide community based information and commercial services in
a "Connected Community" concept. Under this concept, we plan to connect homes
and public facilities of a planned residential community to each other through a
fiber optic cable network and connect that fiber optic network to our services
through our communication facility. We will initially seek to contract with
homeowners' associations to serve as the exclusive provider of our bundled
services, by arrangements similar to our current security contracts with the
homeowner associations. In the first phase of our business plan, when we
completed installation of wiring in a new home and sold and installed the
consumer electronic equipment package in the home, our job was complete. Our
role ended, unless the homeowners' association contracted for security
monitoring. In the second phase of our business plan, we plan to retain title to
the wiring required to provide these bundled services to the homes and obtain
easements to run a fiber optics network throughout the master planned community
developments to each new home. Through the ownership of communication facilities
and the fiber optic wiring easement, we will contractually seek the exclusive
right to sell to each homeowner bundled security, telephone, digital television,
home video and audio entertainment and internet services.
In this planned expansion of our business, each home's communications will be
delivered through its largest TV monitor. We plan to sell computerized set top
devices that connect that TV to the Internet and to all of the
telecommunications systems in the home and the planned residential community
development. The set top device will include many of the components and
functions of a personal computer, and allow the homeowner to control and monitor
the home's internal systems (phone messages, faxes, security systems, video
systems), as well as access the homeowner association's systems (community
announcements, video monitors, etc.). The system can be expanded to include
additional set-top boxes if the homeowner desires. It will be necessary to
connect these systems through a central communications facility. Thus we plan to
construct, equip and operate these facilities. Depending on the size and
functionality desired in a communications facility, the cost will range from
$2,000,000 to $3,500,000 to bring these facilities on-line. We currently plan to
purchase and install (subject to obtaining the required financing) our first
communications facility during the second quarter of year 2001 at the earliest.
Each such facility could service a radius of fifty miles, and operate through
either a fiber optic common-line carrier or a wireless connection to the fiber
optic wiring in each community. The
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communications facility we have been developing and testing to date in a
laboratory setting, is designed to provide an array of bundled services
including security, telephone, digital television, home entertainment and
internet services to each homeowner. The facility will also allow each home to
access the Connected Community services of the homeowner association, such as
vehicular access controls into the community, visual monitoring of public areas
over a homeowner's television screen, and concierge services such as community
function schedules and a reservation system.
In this second phase of our business plan, we plan to connect the entire master
planned community development to a community fiber optic network. Each
communication facility will then be connected to the fiber optic network in new
planned community developments. To date, we have developed and implemented parts
of the technology and equipment for the communication facilities only on a
laboratory basis. We contract for various elements of this project from numerous
suppliers that could be readily replaced from several sources. We are currently
in discussion with various suppliers of fiber optic network that we can have
access to on a fee for service basis. We will need to obtain other services from
providers of digital television service, Internet access, telephone (local and
long distance) services, and security monitoring. We plan to bundle these
service offerings and sell them to either the homeowner association or directly
to homeowners. For example, we could provide a basic digital television service
to the homeowners' association for all homeowners to access. Each homeowner
could have the option to select premium channels (HBO, etc.) and services
(pay-per view events or video on demand) on a selective basis. If we are
successful in raising the required financing and successfully implement the
technological features required to bundle these services, we expect that these
operations will produce most of our future revenues and profits. We face
significant challenges in implementing our business plan. Introducing equipment
and technology into an actual home development, rather than merely in a
laboratory with controlled conditions, may prove difficult. Although the key
technological components and the proven technology are available from third
parties, we believe that we are pioneering the effort to integrate them into a
single communications facility and to bundle them for sale to a community. We
expect to face the usual delays and difficulties involved in bringing any
technological and new business concept to market. Our Company is still in a
"start up" mode. Research, development and implementation of the business plan
is our first priority. For the first half of year 2000, we have spent
approximately $759,000 on research and development. To date, the Company's
operating revenues have not kept pace with the expenditures our business plan
requires. The Company has not received any revenues from the second phase of its
business plan, and does not expect to do so until we have successfully funded
and developed a communications facility, which we do not expect to take place
until the second quarter of 2001, at the earliest. We estimate that the capital
requirement for a communications facility will range between $2,000,000 to
$3,500,000 to bring a facility on-line. To date we have not concluded any
customer contracts for the planned second phase of the business plan.
Furthermore, we cannot implement the next phase of our business plan without
substantial additional financing, for which no commitments have been received.
MARKET
We presently offer our services exclusively to developers and homeowners'
associations of master planned communities in the State of Florida with a heavy
emphasis on the South Florida market. The
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"South Florida" market encompasses new home developments in or near Miami-Dade,
Broward, Lee, Collier, Palm Beach, and Port St. Lucie counties. We target
developments in which the average cost of new homes range between $130,000 and
$500,000. The South Florida housing market is robust, with approximately 70,000
new homes under development. Our largest customers are Kolter Signature Homes,
comprising 20% of our revenues; ARVIDA JMB Partners, comprising 50% of our
revenues; and Watermark Communications, Inc., comprising 30% of our revenues.
Each of these customers is a large, well established developer of new
communities, which is important to our business both because it has prevented us
from having accounts receivable problems and because strong ties to these
developers provides us with potential future contracts. The contract with each
of Arvida JMB Partners, Watermark Communities, Inc., and Kolter Signature Homes
is for basic wiring services and is terminable without cause on 30 days notice.
The loss of any one of these customers would materially and adversely affect our
business. The security monitoring contracts with each homeowners association are
multiple year agreements terminable only for cause following notice and remedy
periods.
We have accepted orders to wire and sell consumer electronic equipment packages
in eleven new home communities which have potential new home capacity exceeding
10,000 homes. We are continuously in various stages of negotiations with several
developers to wire additional new homes. Our existing relationships with a few
large developers are both a potential strength and weakness. We believe these
relationships place us in a position to take advantage of the strong new housing
market in State of Florida. However, if any of these developers were to suffer
financially such that its business experienced a significant slow-down, or if
the economy changes such that the market for new homes in Florida decreases, it
could have a direct and negative impact on our business.
The demand for technology and related services in homes is increasing along with
access to more sophisticated consumer electronics equipment and services. The
unprecedented growth of the internet over the past few years has greatly
accelerated our plans to develop our bundled services. Our success is in part
dependent on homeowners' continued desire to install more sophisticated consumer
electronic equipment in their homes. The success of our future business plan
further depends upon a high consumer demand for digital television and high
speed Internet service. We face the marketing challenge of convincing homeowners
of the benefits of new technology products and enhanced services and their
ability to pay for these services.
COMPETITION
Competitors for our wiring activities are primarily home cable, telephone and
security system wiring subcontractors. Typically these are small, local firms,
whose business consists solely of installation. There are numerous of these
kinds of firms in South Florida. Competitors in our home security monitoring
activities are also numerous and include many concerns better capitalized than
our company. Therefore, we rely upon the exclusivity provision of our contracts
and the business relationships with home developers to respond to competition. A
new master planned community development will ideally not have an established
arrangement with any competing service provider before hiring us to install low
voltage wiring
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and security systems. In such a case, we can contract not only to install low
voltage wiring and security systems, but also for the exclusive option to
provide these services to the development homeowners. The developer may,
alternatively, assign this option to the homeowner's associations.
We do not manufacture technological products or consumer electronic equipment.
Thus we compete with other manufacturers and distributors of such products for
the sales to new homeowners. However, we do have access to each new homeowner in
a planned residential community during their option selection process, which
provides us the unique role of advising a new homeowner with respect to consumer
electronic products and seeing to their installation in the new home. Our
ability to include the cost of the consumer electronic equipment into the home
mortgage is also attractive to the homeowner. This combination of consulting
services, installation and financing is not available to competitors. Currently,
we average approximately $4,000 in revenues from each homeowner's purchase of
optional equipment and systems.
If we expand our business as planned to include digital television service,
telephone services and Internet access, we will have many new competitors. We
anticipate introducing these services in year 2001. We plan to compete in all
these areas by bundling our products and services together to provide "one-stop"
wiring, installation, communications, and on-going related services. We believe
that by bundling the provision of these services, we can offer more efficient
and convenient products and services to homeowners and communities. Our plans
include contracting with the planned residential community developers and,
through them, the homeowners associations to obtain exclusive rights to offer
these services, whenever possible. We are not aware of competitors offering this
bundle of products and services as a single package comparable to that which we
plan to offer on a community-wide basis. However, if we succeed in this business
plan, such success could draw significant competition from other companies.
REGULATORY ISSUES
We believe that we currently comply with all existing laws and regulations. Our
Company is subject to federal, Florida and Colorado laws. Our Company and its
employees are subject to Florida state and local laws that require it to
maintain an electrical contractors license. If we should fail to meet these
licensing requirements, we would be prohibited by law from conducting our wiring
installation business. However, because we deal exclusively with low voltage
wiring and equipment, the burden of regulatory compliance has been relatively
light. If new state and local laws were passed imposing additional controls and
other restrictions on us, or on the home construction industry, it could
materially and adversely affect our ability to market our products and services.
This would have a negative effect on our financial conditions and operations,
although the precise impact of any future regulation cannot be predicted. The
subsequent adoption or modification of state and local laws and regulations
imposing new environmental controls, disclosure rules, zoning and other land use
restrictions could materially and adversely affect the development of new home
communities, which would have a negative effect on our financial condition and
operations. Based on our experiences to date, the cost of compliance with laws
has not had, and is not expected to have, a material effect on us. However,
changes in laws and regulations could give rise to additional compliance costs
or additional burdens to obtaining applicable regulatory approvals that could
have a material adverse effect on us.
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If we implement the second phase of our business plan in which we provide
digital television, phone service, and Internet access; we could be subject to
new regulations. Since we plan to act only as re-sellers of these services, we
are not presently aware of any significant new regulatory obligations we might
face under current laws and regulations.
EMPLOYEES
As of August 18, 2000, our Company has 66 full-time employees and no part time
employees. Approximately 45 of these employees are engaged in the installation
of cable and phone wiring, 4 are management, 11 are office/clerical and 6 are
part of the sales force. Three of our employees are subject to employment
agreements; these employees are the Chief Executive Officer, the
President/Director of Marketing, and one of the electricians. The executive
employment contracts are discussed in the Executive Compensation section of this
document.
We do not subcontract any of our services, except that our security system
monitoring services are subcontracted to a third party vendor. Under this
agreement, we agree to pay 20% of the monthly security monitoring revenues to
have the monitoring services provided. We believe that there are various
alternative companies who could provide these monitoring services on a
comparable basis.
REPORTS TO SECURITY HOLDERS
We intend to provide all of our shareholders with an annual report of our
Company, including audited financial statements for the year ended December 31,
1999.
We will file with the SEC the periodic disclosure reports that are required by
the Securities Exchange Act of 1934, when we become subject to these
requirements.
The public may read and copy any materials that the Company has on file with the
Securities and Exchange Commission ("SEC") at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling SEC at
1-800-SEC-0330. The SEC maintains an Internet site, at WWW.SEC.GOV, that
maintains reports, proxy statements, information statements and other
information that is filed with the SEC concerning the Company. Information about
the Company can be searched on the SEC's website at
WWW.SEC.GOV/CGI-BIN/SRCH-EDGAR.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ WITH THE FINANCIAL STATEMENTS AND THE
NOTES TO THOSE STATEMENTS WHICH APPEAR ELSEWHERE IN THIS REGISTRATION STATEMENT.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES, AND ACTUAL EVENTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED EVENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING DOWNTURNS IN
THE SOUTH FLORIDA HOUSING MARKET THAT COULD AFFECT OUR EXISTING BUSINESS AND THE
VARIOUS RISKS AND UNCERTAINTIES INVOLVED IN FINANCING AND IMPLEMENTING THE
SECOND PHASE OF OUR BUSINESS PLAN.
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OVERVIEW
Our Company is a startup business that has operated since June 6, 1998. There
are currently three main components to our business. First, we arrange with
developers of new master planned residential communities to install low voltage
wiring within each house being built in a community. Second, under our
arrangements with developers, our representatives meet with each new homeowner
and offer them the opportunity to select and purchase from us a customized
package of consumer electronic equipment to be installed in their house. Third,
we contract with homeowners' associations to provide the security monitoring
services through security systems we install, and then we subcontract the actual
monitoring function to third party providers of monitoring services.
We are developing more sophisticated services for the homeowners in the planned
residential communities we serve. We plan to offer bundled services which
include digital television, local and long distance telephone, high speed
internet connection and community based services (in addition to existing home
security monitoring services). We will provide these services by contracting
with third parties who offer these services and route them through
communications facilities and fiber optic networks we plan to develop in
selected planned residential communities. To date this component of our business
has only generated research and development expenses as we test the necessary
technological equipment of vendors in our laboratory and seek the financing
required to implement this phase of our business plan.
We commenced our first installation of a low voltage wiring system in a new home
development on November 1, 1998 for Watermark Communities, Inc. at Parkland
Isles located in Parkland, Florida. Since then, we have received and accepted
orders to install low voltage wiring systems in eleven new home developments
throughout the State of Florida. We have installed low voltage wiring systems in
a total of approximately 1300 homes. Presently we are performing installations
at approximately 170 homes per month, a figure that varies between approximately
100 to 250 homes per month, based on seasonal home construction patterns. We
presently charge approximately $1,300, on average, to install the wiring in each
new home. The amount varies depending on the size of the home and the unique
aspects of each project. The developer pays us approximately 50% when the
initial wiring is installed and the remaining 50% at the closing of the purchase
of the new home by the homeowner. The homeowners do not pay the Company directly
for this work. This wiring activity represents approximately 40% of our total
annual revenue.
In the planned residential community developments in which we install low
voltage wiring, we meet with each home purchaser during an option selection
process soon after the home purchase agreement is signed. During this meeting,
our representatives offer various packages of products and services that connect
to the wiring in the house, such as enhanced security systems (including video
equipment), consumer electronic equipment (including home entertainment theater
equipment), telephone systems, lighting control, computer systems, intercoms,
distributed audio packages, cable modems and simple home management systems
(such as temperature controls). We currently average approximately $4,000 in
revenue from each homeowner's purchase of optional equipment and systems,
although this amount varies considerably from homeowner to homeowner and has
been steadily increasing during the current fiscal year. The purchase price for
the consumer electronic equipment package includes the value added
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<PAGE> 13
costs of our advice and installation. The new homeowner can finance the
equipment as part of their home purchase through their mortgage. The developer
commonly retains a commission, usually about 25% of the amount charged the
homeowner, (the $4,000 revenue figure above includes commission) as a fee for
introducing us to the new homeowner. We presently finance these equipment
purchases through our own working capital and the developers pay us after the
closing of the home purchase once the homeowner closes on the purchase of his
home. To date, we have sold approximately 850 packages of electronic products to
new homeowners including 500 packages sold in the first six months of 2000. This
sales activity currently represents approximately 55% of our total annual
revenue.
We also sell security monitoring services in certain communities in which we
install security systems. The homeowner's associations which assume control of
the developments from the developers once the development has been substantially
completed will contract with us for the entire community home security
monitoring services. Currently, we perform monitoring services for two
homeowners' associations. We charge a fee to the homeowners' association based
on the number of homes in the development. We are the exclusive provider of
security monitoring services under this arrangement. For a small number of homes
in one planned residential community we are currently billing individual
homeowners on a monthly basis. Security monitoring fees currently represent less
than 5% of our total revenues. We subcontract with a third party vendor who
operates the central monitoring station in exchange for approximately 20% of the
monitoring fees we receive.
The installation of low voltage wiring, the installation of the security systems
and the provision of monitoring services, and the sale of technological
equipment packages, all comprise the first phase of our business plan. In this
phase, we have developed relationships with major home development companies,
evolved sales techniques for consumer electronic products for the home,
contracted with homeowner associations for security monitoring services, and
performed home wiring which is applicable to networking of the home electronic,
communication and computer equipment.
Implementation of the second phase of our business plan is a top priority. For
the first half of year 2000, we have spent approximately $759,000 on research
and development. To date, our operating revenues have not kept pace with the
expenditures required by our business plan. We have not received any revenues
from the second phase of our business plan, and do not expect to do so until we
have successfully funded and developed a communications facility, which we do
not expect to take place until the second quarter of 2001, at the earliest. We
estimate that the capital requirement for a communications facility will range
between $2,000,000 to $3,500,000 to bring a facility on-line. To date we have
not concluded any customer contracts for the planned second phase of the
business plan. Furthermore, we cannot implement the next phase of our business
plan without substantial additional financing, for which no commitments have
been received.
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<PAGE> 14
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
RESULTS OF OPERATIONS
REVENUE. We derive our revenues from three service areas: (a) installing low
voltage wiring and home security systems, (b) sales and installation of consumer
electronic equipment, and (c) monitoring of home security systems. Revenues from
installing low voltage wiring and security systems in homes represent
approximately 40% of our revenue and consumer electronic equipment sales and
installation have accounted for approximately 55% of our revenue. We book all of
the revenues from these activities in our Balance Sheet as Deferred Revenue when
a homeowner contracts to buy a house and orders their wiring, security and
consumer electronic packages from us. When we complete installation of the
wiring in a house, the developer pays us about 50% of our charges for this work.
This reduces our Deferred Revenue account and we recognize the cash received as
Revenue. When the homeowner closes on the purchase of the house, the developer
pays us cash for the remaining wiring and the full price for the consumer
electronics package, reduced by any commission the developer receives from the
consumer electronics sale. At this time we recognize the balance of Deferred
Revenue in our Income Statement as Revenue. It generally requires about 180 days
from the initial purchase order date until we receive final payment from a
developer. Charges we bill to homeowner associations for home security
monitoring services are recognized as Revenue when invoiced and represent less
than 5% of our revenue. Our revenue increased 234% from approximately $232,000
for the six months ended June 30, 1999 to approximately $776,000 for the six
months ended June 30, 2000. This increase primarily reflects growth both in the
number of homes we wired and an increase in the average household purchase of
consumer electronic equipment.
COST OF PRODUCT SOLD. Our direct product cost reflects what we pay our vendors
for wiring supplies and consumer electronic equipment we install in homes.
Direct product cost increased by 56% from approximately $201,000 for the six
months ended June 30, 1999 to approximately $314,000 for the six months ended
June 30, 2000. The increase reflects the growth in the number of homes we wired
and the increase in the average household purchase of consumer electronic
equipment.
COST OF LABOR. Our direct labor cost reflects (a) employees' wages and benefits
associated with the installation of wiring and electronic equipment (b)
compensation for sales personnel salaries and commissions and (c) referral fees
we pay developers for sales of consumer electronic equipment of approximately
25% of these revenues. For the home security monitoring services, direct cost
reflects what we pay our subcontractor that provides this service, which amounts
to approximately 20% of this revenue. Direct labor cost increased by 452%, from
approximately $67,000 for the six months ended June 30, 1999 to approximately
$370,000 for the six months ended June 30, 2000. As a percentage of total
revenue, these costs increased from approximately 29% for the six months ended
June 30, 1999 to approximately 48% for the six months ended June 30, 2000. This
increase reflects the increase in staffing levels in anticipation of growth in
our volume of business.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative expenses
consist of the salaries of our employees and associated benefits and the cost of
insurance, travel, entertainment, rent and utilities. These expenses increased
approximately 4% from approximately $502,000 for the six months ended June
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<PAGE> 15
30, 1999 to approximately $521,000 for the six months ended June 30, 2000. As a
percentage of total revenue these costs decreased from approximately 216% for
the six months ended June 30, 1999 to approximately 67% for the six months ended
June 30, 2000. These changes primarily reflect the growth in volume of business,
as well as increased marketing effort to secure new planned residential
community development customers.
PRODUCT DEVELOPMENT. We incurred significant expenses to develop the second
phase of our business plan, including building a model laboratory to test the
integration of technological products related to the second phase of our
business plan. These expenses include the capital cost for the equipment in a
laboratory, and the compensation for engineers, technicians, subcontractors and
management who collaborated to design and build the laboratory. For the six
months ended June 30, 2000 these expenses were approximately $759,000. These
expenditures relate to the second phase of our business plan, and we made no
such expenditures in the prior period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization (included in
selling, general and administrative) increased approximately 63% from
approximately $11,000 for the six months ended June 30, 1999 to approximately
$18,000 for the six months ended June 30, 2000. As a percentage of total
revenues, these costs were approximately 5% for the six months ended June 30,
1999 and approximately 2% for the six months ended June 30, 2000. Depreciation
will increase as we commence making capital expenditures for the deployment of
communications facilities related to the second phase of our business plan.
LOSS FROM OPERATIONS. Loss from operations increased by about 122% to
approximately $1,197,000 for the six months ended June 30, 2000 as compared to
approximately $539,000 for the six months ended June 30, 1999. Our loss
continues and increases because our operating margin in the first phase of our
business plan cannot finance the cost of developing and implementing our plan's
second phase. We expect the net losses to continue until we are able to
implement the second phase of our business plan, which will not begin to take
place before the second quarter of 2001.
OTHER INCOME (EXPENSE). Other expense consists primarily of interest paid in
cash on indebtedness. Interest expense for the six months ended June 30, 2000
was approximately $10,600 as compared to approximately $8,000 for the six months
ended June 30, 1999. This increase reflects increases in loan balances.
LIQUIDITY AND CAPITAL RESOURCES. Our capital requirements consist primarily of
general working capital requirements to cover salaries, equipment and materials
used in our business, and the costs to develop and implement the later stages of
our business plan. Our operating profits are not adequate to fund the
development and implementation of our business plan. We also need more working
capital as our business grows, since the developers pay us most of our revenues
only when a home owner closes on the purchase of a house, which averages 45 days
after we incur most of our related expenses. In the six months ended June 30,
2000, the net cash used in operating activities was approximately $1,100,000.
This was an increase of 58% over the approximately $696,134 used in operating
activities in the six month period ended June 30, 1999. For the remainder of
period from 2000-2001 we expect negative cash
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<PAGE> 16
flow from operating activities to continue at an accelerating pace, based on the
pace of increasing new home sales and increasing levels of product development
expenditures.
In the six months ended June 30, 2000 we invested approximately $759,000 in
labor, services and equipment for the development of a laboratory in order to
test the integration of technological products related to the second phase of
our business plan. These investments will need to increase to between
approximately $2,500,000 to $3,000,000 over the next year to achieve our goal of
converting the laboratory into an operational communications facility for the
second phase of our business plan.
As of June 30, 2000, we had cash, cash equivalents and marketable securities of
approximately $16,000. During the six month period ended June 30, 2000, we
funded the negative cash flow from operations and product development
expenditures with equity investments and loans from shareholders of
approximately $802,833 as further described below (See: Part II, Item 4 "Recent
Sales of Unregistered Securities"). We have a working capital deficiency of
$2,136,811 as of June 30, 2000. Included among our current liabilities are
substantial accrued taxes payable. We recognize the urgency of paying these
taxes and are working to prepare a payment plan for presentation to the tax
authorities. Our external accountants have stated in their Report of Independent
Accountants dated August 26, 2000, that "the Company's net working capital
deficiency raises substantial doubt about the entity's ability to continue as a
going concern."
Management is addressing our ongoing negative operating cash flow and capital
requirements for the next stages of its business plan by (a) working to increase
sales in order to increase the contribution of operating margin to cover general
and administrative expenses, and (b) aggressively seeking additional debt and
equity capital. If we cannot secure additional financing, we will be forced to
substantially curtail our operations and in particular, defer the development
and implementation of the next phase of our business plan. This could also
jeopardize our ability to meet our debt obligations as they are currently
structured.
TRENDS AND SEASONALITY Our business centers on new home construction. The level
of our sales activity reflects the pace at which the developers sell and build
new homes. Sales in a new community typically start slowly, accelerate after
reaching a certain critical mass, and then decelerate again as the available
home sites dwindle. The entire build-out process may last ten years or longer.
The pace of new home sales also reflects the level of demand in the housing
market in general and the competitive offering of homes available in the
surrounding area. In our market areas in Florida, we have generally benefited
from an increasing pace of new home development. Based on these trends, and our
marketing efforts in other new master planned communities, we believe that we
should continue to experience an increasing level of unit sales for the
foreseeable future.
Our business has reflected some seasonal fluctuation, with most of our revenues
and profits coming in the last quarter of each year. The developers tend to
complete a disproportionate number of homes in the last quarter of each year for
various reasons, including attainment of their annual goals. We have experienced
significant revenue increases in the last quarter of each of the last two years.
We anticipate this the last quarter of this year will show even more significant
gains, reflecting the increased number of homes
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<PAGE> 17
currently under construction that are expected to be sold by year end. Our wire
installation and electronic equipment sales are directly tied to the timing of
new home purchases and construction. This does not hold true of our home
security monitoring services, which remain generally consistent throughout the
year.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1998
The Company commenced operations as of June 6, 1998. Therefore, the financial
results for fiscal year ending December 31, 1998 reflect seven months of
activity as a startup business. Revenue increased 789 % from approximately
$106,000 for the year ended December 31, 1998 to approximately $942,000 for the
year ended December 31, 1999. This increase reflects the longer accounting
period of fiscal 1999 and the growth both in the number of homes we wired and an
increase in the average household purchase of consumer electronic equipment.
Operating loss for the year ended December 31, 1998 was approximately $509,000
as compared to an operating loss of approximately $1,430,088 for the year ended
December 31, 1999. The operating losses of both periods reflect the
developmental nature since the inception of the Company in June 1998. Cash used
in operating activities was approximately $471,000 in the year ended December
31, 1998 as compared to cash used of approximately $1,548,392 in the year ended
December 31, 1999. We funded these operating losses with equity investments and
loans from shareholders.
ITEM 3. DESCRIPTION OF PROPERTY
We maintain our principal business address at Boca Corporate Plaza, 1801 Clint
Moore Road, Suite 204, Boca Raton, Florida 33487. We lease this 4,000 square
feet of office space from Liberty Property Limited Partnership at an annual base
rental of $58,336.25. The lease is for a term of 60 months and commenced in May
of 1999. We also lease approximately 3,000 square feet of storage space located
at 11528 State Road 84, Davie, Florida, from Davie Plaza Limited Partnership at
an annual rent of $30,380. The term of this second lease is three years and the
lease became effective as of February 1, 2000.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of October 5, 2000, regarding
beneficial ownership of our common stock, par value $.001 per share, for (i)
each shareholder known by us to be a beneficial owner of five percent or more of
our outstanding common stock, (ii) each of our executive officers and directors,
and (iii) all executive officers as a group. Unless otherwise noted below, we
believe that each beneficial owner has sole voting and investment power over the
shares. As of October 5, 2000, there were outstanding 14,120,300 shares of our
common stock, par value $.001.
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<PAGE> 18
<TABLE>
<CAPTION>
Percentage
of Shares
Name and Address Number of Shares Outstanding
Title of Class of Beneficial Owner Beneficially Owned Class (%)
-------------- ------------------- ------------------ -----------
<S> <C> <C> <C>
Common Stock David Rich 2,111,520 14.95 %
Chief Executive Officer/Director
1801 Clint Moore Road, Suite 204
Boca Raton, Florida 33487
Common Stock Philip Sergeant 1,405,680 9.96%
President/Director of Marketing/Director
1801 Clint Moore Road, Suite 204
Boca Raton, Florida 33487
Common Stock Richard D. Wedel 726,750 (1) 5.15%
Chairman of the Board of Directors
3900 Woodcastle Road
Evansville, Indiana 47711
Common Stock Thomas N. Steinbach 3,825,100 (2) 24.21%(2)
Director
31 South St.
2nd Floor
Morristown, N.J. 07046
Common Stock C. Ian Sym-Smith 2,871,980 (3) 18.3%(3)
Director
485 Devon Park Drive, #119
Wayne, PA 19087-1807
Common Stock Nick V. Ganio 100,000 (4) .70%(4)
Director
104 Fox Run
Sudbury, Massachusetts 01776
Common Stock Stone Pine Venture Lending, LLC 3,725,100 (5) 23.73%(5)
410 17th Street
Denver, Colorado 80202
Common Stock Officers and directors, as a group 11,041,030 63.22%(1)
(6 persons) (1)(2)(3)(4)(5) (2)(3)(4)(5)
</TABLE>
(1) Mr. Wedel holds 242,250 shares of restricted common stock in his own
name, and he has voting control over 242,250 shares of restricted stock
held by his wife, Connie S. Wedel, and 242,250 shares of restricted
stock held by his son, Jordan T. Wedel.
(2) Mr. Steinbach, due to his position as a Managing Director of Stone Pine
Venture Lending, LLC, has a power of attorney to control all shares,
notes and warrants held by Stone Pine (see footnote 5, below, regarding
Stone Pine beneficial ownership). Mr. Steinbach also holds in his own
name
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<PAGE> 19
warrants for 100,000 shares of our common stock exercisable at $1.00 a
share, any time until June 1, 2005. This table reflects share holdings
as if all options, warrants and notes held by Stone Pine and Mr.
Steinbach were exercised or converted.
(3) Mr. Sym-Smith, and various entities controlled by Mr. Sym-Smith, are
the record holders of 1,305,480 shares of our common stock. Mr.
Sym-Smith also holds one of our 8% convertible promissory notes in the
principal amount of $104,250, which may be converted at any time until
April of 2001, at a conversion rate of $.10 a share. Mr. Sym-Smith also
holds a note made by us in the principal amount of $262,000 that is
converted would be 524,000 shares. The aggregate beneficial ownership
of Mr. Sym-Smith reflected on this registration statement treats his
note as converted. This table treats Mr. Sym-Smith's note as converted.
(4) Mr. Ganio holds one of our 8% convertible promissory notes in the
principal amount of $10,000, convertible into 100,000 share of common
stock. This table treats his note as converted.
(5) Stone Pine is the record holder of 2,147,600 shares of our common
stock. Stone Pine also holds three promissory notes in the following
principal amounts: (i) $375,000, (ii) $302,500 and (iii) $82,500, each
of which is convertible into common stock at $1 per share. Stone Pine
also holds warrants to acquire 433,000 shares of common stock
exercisable at a purchase price of $1 a share until June 1, 2005, and
warrants to acquire 384,500 shares of common stock, exercisable at a
purchase price of $2 a share until June 1, 2005. This table treats
Stone Pines' share ownership as if all of these notes were converted
and warrants exercised.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our executive officers and directors are as follows:
Name Age Position
---- --- ---------
David Rich 36 Chief Executive Officer/Director
Philip Sergeant 49 President/Director of Marketing/Director
Richard D. Wedel 51 Chairman of the Board of Directors
Thomas N. Steinbach 42 Director
C. Ian Sym-Smith 70 Director
Nick V. Ganio 40 Director
DAVID RICH
Mr. Rich has served as our Chief Executive Officer and as a Director since his
election in May of 1999. Mr. Rich has also served as the Chief Executive Officer
of IHF since its inception in June of 1998. Mr. Rich was Vice President of a
family owned mechanical business, Liber, Rich and Sons from 1990 to until 1997.
PHILIP SERGEANT
Mr. Sergeant has served as our President, Director of Marketing and as a
Director since his election to these positions in May of 1999. Mr. Sergeant has
also served as the President of IHF since its inception in June of 1998. From
1993 until June of 1998, Mr. Sergeant served as President of Concept 2 Reality,
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<PAGE> 20
Inc., a multi-national marketing consulting firm, where he was responsible for
marketing projects, including developing the African market for a consortium of
European manufacturers of hi-tech video and audio equipment, marketing a chain
of health food restaurants and developing an export market for South African
automotive products.
RICHARD D. WEDEL
From March 1999 through May of 1999, Richard D. Wedel served as our sole
director, in May, he became the Chairman of the Board of Directors. From 1981
through 1998, Mr. Wedel served as the Chief Operating Officer of Petro Union,
Inc., an oil and gas research and development company, which acquired Horizontal
Ventures, Inc., also an oil and gas research and development company in 1997,
and Mr. Wedel continued to serve as the COO post-acquisition. Mr. Wedel is also
president of Wedel Group, a consulting firm that provides consulting services to
various businesses with emphasis on providing start up funding and capital
resources. Wedel Group does not provide us any consulting services.
THOMAS N. STEINBACH
Mr. Steinbach has been one of our Directors since May of 2000. Mr. Steinbach is,
and has been since June of 1999, a Managing Director of Stone Pine Venture
Lending, LLC, a Colorado limited liability company. Stone Pine is a shareholder,
and note holder of ours. Prior to joining Stone Pine, Mr. Steinbach was with
Merrill Lynch Investments as Vice President of the Private Client Group. Mr.
Steinbach was with Merrill Lynch for 16 years.
C. IAN SYM-SMITH
Mr. Sym-Smith has been one of our directors since August of 2000. Mr. Sym-Smith
is self-employed and has been for the past five years. He is a director of the
following companies: CCC International Contractors, whose international
headquarters is in Greece; Tickets.com, a public company that sells tickets to
sporting events and artistic events; T.D. Williamson, Inc., an international
pipeline service company; Pittsburg Brewery, a regional brewer, and Stor Comm,
Inc., a clinical image management systems company.
NICK V. GANIO
Mr. Ganio has been one of our directors since August of 2000. Mr. Ganio is also
the Group Vice President of Worldwide Sales, Marketing and Services for Computer
Network Technologies, a position he has held since October of 1999. From
November 1998 to October 1999, Mr. Ganio served as Vice President of Worldwide
Sales and also as Vice President of Direct Sales Worldwide from April 1998 to
November 1998. From September 1996 to February 1998, Mr. Ganio served as Vice
President of Worldwide Sales and Marketing for Xyplex, Inc. From March 1987 to
September 1996, Mr. Ganio held various high-level positions with Digital
Equipment Corporation, including Vice President of Operations in Japan, Vice
President and General Manager of the America Networks Product business and Vice
President and Executive Assistant to the office of the President.
We are not aware of any events that have occurred in the past five years that
would be material to the evaluation of the ability or integrity of any of our
directors or executive officers.
We have six directors. All directors hold office until our next annual meeting
of shareholders and until their successors are elected and qualified. Officers
hold office until the first meeting of directors following the annual meeting of
shareholders and until their successors are elected and qualified, subject to
earlier removal by the Board of Directors.
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<PAGE> 21
ITEM 6. EXECUTIVE COMPENSATION
The following table provides certain summary information regarding compensation
paid by us to our Chief Executive Officer and President for the period of April
1999 through April 2000. We are also reporting the compensation paid by our
wholly owned subsidiary, IHF, to each of Mr. Rich and Mr. Sergeant for the
period of June 1998 through April 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------
Name and Principal Position Year (1)(2) Salary ($) Bonus ($)
--------------------------- ----------- ---------- ---------
<S> <C> <C> <C>
David Rich, Chief Executive Officer 1999 $110,000 $27,500
1998 $125,000 $10,000
Phillip Sergeant, President and Directory of Marketing 1999 $102,500 $25,625
1998 $ 90,000 $10,000
</TABLE>
(1) We were incorporated in 1998.
(2) We estimate that in fiscal 2000, Mr. Rich will receive in total
$150,000 in salary and $37,500 as a bonus, and Mr. Sergeant will
receive $130,000 in salary and $32,500 as a bonus.
COMPENSATION OF DIRECTORS
We do not currently compensate our directors; however, it is our intent to
compensate the directors, once it is financially possible, and at such time
directors may be paid through the time that they first began serving as our
director.
COMPENSATION OF OFFICERS - EMPLOYMENT AGREEMENTS
We have employment agreements with Messrs. Rich and Sergeant. The agreements
have an initial five year term expiring February 2004, and automatically renew
for subsequent one year terms, unless thirty days prior to the end of any term
either party gives the other party written notice of termination.
Mr. Rich's agreement provides for his employment as our Chief Executive Officer
at a base salary of $110,000 per year, with annual increases, up to a 35% cap on
total increases, as determined by the Board of Directors.
Mr. Sergeant's agreement provides for his employment as our President and
Director of Marketing at a base salary of $102,500 per year, with annual
increases up to a 35% cap on total increases, as determined by the Board of
Directors.
Under the employment agreements, IHI provides full medical and health insurance
coverage and a monthly automobile allowance. The employment agreements also
provide for bonus compensation, to be awarded in the discretion of the Board of
Directors. IHI has also agreed to grant to each of Messrs. Rich and Sergeant
options to purchase up to 1,000,000 shares of the common stock of IHI at a
purchase price of $.45 per share, although these options have not yet been
granted. Each of the employment agreement contains a provision ensuring the
confidentiality of Company information and a restrictive covenant to the effect
that Messrs. Rich and Sergeant will not compete with the Company in Dade,
Broward or Palm Beach County, Florida, for a period of one year after their
termination of employment.
The employment agreements may be terminated with or without cause. In the event
that either of Mr. Rich or Mr. Sergeant is terminated without cause, he shall be
entitled to a lump sum payment from us equal to the base salary discounted to
present value, that he would otherwise realize during the remainder of the term
of his employment agreement.
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<PAGE> 22
We plan to adopt benefit packages, including a stock option plan designed to
provide incentives to our management personnel.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 31, 1999, we entered into a Voting Trust Agreement with the principal
shareholders of ATI, who were David Rich and Phillip Sergeant, governing our
management. Under this agreement Mr. Rich and Mr. Sergeant acted as trustees
with the ability to vote the shares of all the parties to the agreement on
matters requiring shareholder vote. This Voting Trust Agreement was terminated
on March 31, 2000.
Pursuant to the terms of the Share Exchange Agreement dated March 31, 1999, if
we failed to raise $2,000,000 for our operations and $1,600,000 in working
capital through private offerings of our securities within one year of the date
of the Share Exchange Agreement, then Messrs. Rich and Sergeant were entitled to
be issued shares of our stock such that they would have at least a 51%
controlling interest. This provision terminated by agreement dated March 31,
2000.
During the second quarter of 2000, we and certain of our shareholders entered
into agreements with certain other of our shareholders who received our shares
and/or warrants in connection with or preceding our merger with ATI. These
shares and warrants were issued in contemplation of capital raising transactions
that did not occur. These agreements provided that those shareholders return
their shares and warrants to us and receive a release from us only from claims
arising from the issuance of the returned shares. Under these agreements, an
aggregate of approximately 1,320,000 shares of our common stock were returned by
4 shareholders for cancellation. In addition, one of our directors, Ian
Sym-Smith, purchased approximately 1,005,480 shares of common stock from one of
these other shareholders at a purchase price of $.34 a share.
We have borrowed significant amounts of money from one of our principal
shareholders, Stone Pine. These loans are evidenced by three promissory notes
aggregating $760,000 in outstanding principal amount. These notes mature in one
year and bear interest at 10% per annum. Stone Pine may convert any part or all
of the outstanding principal and accrued interest into our common stock at $1
per share.
On July 22, 2000 we issued a note in the principal amount of $262,200 bearing
interest at 8% to Mr. Ian Sym-Smith, one of our directors. This note is
convertible into 524,000 shares of common stock at $.50 a share.
ITEM 8. DESCRIPTION OF SECURITIES
Our Articles of Incorporation authorize the issuance of up to 50,000,000 shares
of common stock, $.001 par value. There are 14,120,300 shares of our common
stock currently issued and outstanding. The holders of our common stock are
entitled to one vote per share and have the sole right and power to vote on all
matters on which a vote of shareholders is taken. Voting rights are
non-cumulative. The holders of shares of common stock are entitled to receive
dividends when, as and if declared by the Board of Directors, out of funds
legally available therefor and to share pro rata in any distribution to
shareholders. Upon our liquidation, dissolution, or winding up, our holders of
common stock are entitled to receive our net assets in proportion to the
respective number of shares held by them after payment of liabilities which may
be outstanding. Holders of our common stock do not have any preemptive right to
subscribe for or purchase any shares of any class of stock. Our outstanding
shares of common stock will not be subject to further call or redemption and
will be fully paid and non-assessable.
The issuance of additional shares of our common stock is solely within the
discretion of our Board of Directors. We anticipate the issuance of a
substantial number of additional shares of common stock in connection with the
further development of our business.
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<PAGE> 23
We may also issue additional shares of our common stock, through stock incentive
plans, in connection with employment of certain employees and consultants. All
such agreements and/or issuances will have prior approval of the Board of
Directors. No such agreements or issuances have been made as of the date of this
Form 10-SB.
In April of 2000, we offered 8% Convertible Notes to certain investors as
described in Part II, Item 4 below. We covenant in these notes not to borrow
funds or incur additional debt other than (i) on terms that are less favorable
(as to terms and rank of payment, conversion into equity and otherwise) than
those provided in the 8% Convertible Notes, (ii) our then currently outstanding
debt, including the 8% Convertible Notes; (iii) borrows from any bank, savings
and loan association or financial institution; or (iv) trade debt in the
ordinary course of business, unless we first obtain permission from holders of
at least 51% of the outstanding principal on the 8% Convertible Notes.
Nevada Transfer and Trust serves as our transfer agent for our common stock.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Quotes for our common stock are currently available on the "pink sheets". In
1999, our common stock was quoted on the OTC Bulletin Board under the symbol
"HNET". Our stock does not currently trade on the OTC Bulletin Board. We are
filing this report in order to meet one of the NASD's requirements for trading
of our stock on the OTC Bulletin Board. There is no assurance that a trading
market for our common stock will be created. Accordingly, investors in us may
have to hold their securities indefinitely and may have difficulty in selling
such securities if an active trading market does not develop.
The following table sets forth, for each fiscal quarter from March 31, 1999
through June 30, 2000, the range of high and low closing bid prices of our
common stock. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 2000
---------------------------- ----------------------------
Period Low High Low High
------ -------- ------- ----- ------
<S> <C> <C> <C> <C>
Second Quarter $2 $6 5/16
Third Quarter $2 13/16 $4 5/16
Fourth Quarter $.07 $2 1/2
First Quarter $.09 $1
Second Quarter $.40 $.90
</TABLE>
Of the 14,120,300 shares of common stock outstanding, 4,165,300 shares of the
common stock are freely tradable without restriction in the public market unless
the shares are held by "affiliates", as that term is defined in Rule 144(a)
under the Securities Act. For purposes of Rule 144 under the Securities Act
("Rule 144"), an "affiliate" of an issuer is a person that, directly or
indirectly through one or more intermediaries, controls, or is controlled by or
is under common control with, the issuer. Such shares are unrestricted as a
result of being issued pursuant to rule
21
<PAGE> 24
504 of Regulation D promulgated under the Securities Act ("Rule 504") prior to
recent amendments to such rule that now make shares issued under Rule 504
restricted securities. The remaining shares of common stock outstanding are
"restricted securities" under the Securities Act and may be sold in the public
market upon the expiration of the holding periods under Rule 144, described
below, subject to the volume, manner of sale, and other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person who has beneficially
owned shares for at least one year, including an "affiliate", is entitled to
sell, within any three month period, a number of shares that does not exceed the
greater of:
1% of the then outstanding shares of our common stock (approximately
141,203 shares); or
the average weekly trading volume during the four calendar weeks
preceding filing of notice of the sale of shares of common stock.
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. A stockholder who is deemed not to have been an "affiliate" of ours at
any time during the 90 days preceding a sale, and who has beneficially owned
restricted shares for at least two years, would be entitled to sell shares under
Rule 144(k) without regard to the volume limitations, manner of sale provisions,
or public information requirements.
In addition, as of October 5, 2000, there were outstanding warrants to purchase
1,017,500 shares of our common stock and notes convertible into 4,541,000 shares
of our common stock. Sales of substantial amounts of our common stock (including
shares issued upon the exercise of outstanding warrants and the conversion of
notes) in the public market in the future could adversely affect the market
price of the our common stock. These sales may also make it more difficult for
us to sell equity or equity related securities in the future at a time and price
that the we believe is appropriate.
We have 311 holders of record of our common stock. We have not paid any
dividends on our common stock and intend to retain all earnings for use in our
operations and to finance the development and the expansion of our business. We
do not anticipate paying any dividends on our common stock in the foreseeable
future. The payment of dividends is within the discretion of our Board of
Directors. Any future decision with respect to dividends will depend on future
earnings, future capital needs and our operating and financial condition, among
other factors.
ITEM 2. LEGAL PROCEEDINGS
We are currently not a party to any material litigation which is not incidental
to the ordinary course of our business and operations.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
EQUITY
ATI originally had two shareholders: ATI issued 930,000 shares of founder's
stock to James Kern for a purchase price of $2,000 on July 1, 1998; and 70,000
shares of founder's stock to Greg Ruybal for $200 on July 1, 1998. Then, between
late July and early October of 1998, ATI issued an aggregate of 1,400,000 shares
to 22 shareholders at a purchase price of $500 for 20,000 shares. These
issuances occurred prior to the time that our present management was affiliated
with ATI, but we believe that all of these issuances were conducted pursuant to
Section 4(2) of the Securities Act and the corresponding sections of Colorado
securities law.
22
<PAGE> 25
In March of 1999, our current Chairman of the Board of Directors, Mr. Wedel, and
Wheatear Corporation, began searching for a shell company with publicly trading
shares. Stone Pine, an investment advisory group, assisted Mr. Wedel and
Wheatear Corporation to locate ATI and find investors to make capital
investments. Mr. Wedel and Wheatear Corporation executed a stock purchase
agreement with the prior shareholders of ATI and purchased 1,450,000 of the
1,500,000 issued and outstanding shares of ATI for a purchase price of $225,000.
Stone Pine introduced six investors to Mr. Wedel and Wheatear Corporation who
provided an aggregate capital investment of $200,000 to purchase ATI. These six
investors were issued ATI common stock in consideration for their capital
contributions in reliance on various Securities Act offering exemptions, all as
described below. Upon purchasing the common stock of ATI, Mr. Wedel and Wheatear
Corporation retired all of the purchased shares of ATI to treasury and then
within a month of closing the stock purchase, ATI issued shares to: Mr. Wedel
and his family; companies owned by the controlling shareholder of Wheatear
Corporation; companies owned by one of the family members of the controlling
shareholder of Wheatear Corporation; Stone Pine; the six capital investors; and
debt holders of ATI.
Specifically, pursuant to section 4(2) of the Act and section 11-51-308 (1)(i)
of the Colorado Revised Statutes, ATI issued 5,471,300 shares of restricted
stock: (i) 1,116,455 shares of restricted common stock were issued to Mr. Wedel
and 17 additional shareholders who are family members, or acquaintances of Mr.
Wedel in consideration for advisory services valued at $.02 a share rendered by
Mr. Wedel to ATI; (ii) 1,116,445 shares of restricted stock were issued to three
entities controlled by the controlling shareholder of Wheatear Corporation, and
1,116,445 shares of restricted stock were issued to three entities controlled by
a family member of the controlling shareholder of Wheatear Corporation in
consideration for advisory services valued at $.02 a share rendered by each of
these entities to ATI; (iii) 781,520 shares of restricted stock were issued to
Stone Pine in consideration for advisory services and a finder's fee valued at
$.02 a share; (iv) 334,935 shares of restricted stock were issued to four
investors, three of whom paid $.116 a share and one of whom paid $.23 a share;
and (v) 1,005,480 shares of restricted stock were issued to four individuals and
their two companies in repayment of $105,000 of debt that was owed by ATI.
ATI issued the following 4,455,000 shares in a Rule 504 offering pursuant to
Regulation D of the Act: (i) 1,700,000 shares were issued to 4 shareholders, in
payment for advisory services valued at $34,000 ($50 a share); (ii) 1,475,000
shares were issued to companies owned by the controlling shareholder of Wheatear
Corporation, 975,000 of those shares were issued to three entities in
consideration for advisory services valued at $17,500 in the aggregate, and the
remaining 500,000 shares were issued to two entities in consideration for
$12,000 cash; (iii) 100,000 shares were issued as finder's fees to two
individuals who assisted Mr. Wedel and Wheatear Corporation to locate ATI; the
value of their services was approximately $2,000; (iv) 618,860 shares were
issued in the aggregate to the six investors who provided the initial capital to
purchase ATI, three of whom paid $.116 per share, one of whom paid $.23 per
share and two of whom paid $.53 per share; (v) Stone Pine was issued 596,140
shares in consideration for an aggregate payment of $50,000; (vi) 100,000 shares
were issued to each of three holders in final repayment of $100,000 principal
and interest owed by ATI; and (vii) 5,000 shares were issued to a prior
shareholder of ATI who was not properly issued shares owed to him by ATI prior
to the purchase of the controlling stock by Mr. Wedel and Wheatear Corporation.
Having located a shell, and having compensated investors and advisors for their
efforts, ATI wanted to acquire an active business. It located IHF and entered
into an Agreement and Plan of Reorganization with IHF and IHF's founding
shareholders, David Rich and Philip Sergeant (the "Share Exchange"). Mr. Rich
held 1,200,000 shares of IHF issued as consideration for his services valued at
approximately $750,000, and Mr. Sergeant held 800,000 shares of IHF issued as
consideration for his services valued at approximately $250,000. On March 31,
1999, Messrs. Rich and Sergeant exchanged their shares of IHF pursuant to the
Share Exchange for 2,036,020 shares and 1,405,680 shares, respectively, of
common stock of ATI, par value $.001. ATI became the sole shareholder of IHF as
a result of the Share Exchange. In, March of 1999, ATI issued Mr. Rich 75,500
additional shares as payment for $36,000 in foregone salary owned him by IHF.
23
<PAGE> 26
In March of 1999, ATI collectively issued 481,500 shares of common stock to 13
ATI shareholders in repayment of $240,750 in outstanding debt of ATI, in an
offering exempt from registration under Section 4(2) of the Securities Act.
On or before April 7, 1999, ATI issued 700,300 shares of common stock in a
Regulation D Rule 504 offering to 27 shareholders for $1.00 a share.
All shares issued by ATI under Rule 504 of Regulation D were "free trading"
shares, except that stock issued to our affiliates is subject to resale
restrictions under Rule 144. All other shares issued by ATI were restricted
shares. We did not pay any underwriting commissions in connection with any of
the above described share issuances.
DEBT
On April 4, 2000, our Board of Directors authorized us, and we borrowed,
$300,000 from accredited investors to whom we issued 8% notes, convertible into
our common stock at $.10 per share at any time during the one year from the date
of issuance of the notes or at such earlier time as the notes are in default.
The notes mature in one year. Eighteen investors purchased notes ranging in
principal amounts from $2,000 to $104,250, including our current directors Mr.
Sym-Smith and Mr. Ganio.
We have borrowed from Stone Pine Venture Lending various amounts since August
22,1999, and in June of 2000, all of our prior indebtedness to Stone Pine was
replaced and superceded by three new notes made by us as of June 1, 2000 and our
issuance of 770,000 shares of common stock to Stone Pine. The shares were issued
at $.50 per share, which sum was paid by Stone Pine's cancellation of $385,000
in then outstanding debt. The three notes made by us are as follows: one note in
the principal amount of $375,000; one note in the principal amount of $302,500
and one note in the principal amount of $82,500. Each of these notes is for a
one year term, is convertible into our shares of common stock at $1.00 a share
and bears interest at 10% per annum, payable quarterly. As further consideration
for the issuance of these notes, Stone Pine has warrants for 533,000 shares at a
purchase price of $1.00 and 384,500 warrants at a purchase price of $2.00. Both
warrants are for a term of five years, which commenced June 1, 2000.
On July 2, 1999, we issued a six month term note in the principal amount of
$50,000 bearing interest at 15 % to E. C. Money Fund. This note went into
default effective January 1, 2000. On June 1, 2000, we issued an amended note in
the principal amount of $59,000 to E.C. Money Fund. This amended note has a six
month term and bears interest at the rate of 10%. This note is convertible to
common stock at $2 a share for the term of the note. In consideration for the
extension of time to repay our outstanding debt to E.C. Money Fund, we have
agreed to issue E.C. Money Fund 53,000 shares of common stock on December 1,
2000.
On July 15, 1999, we issued a six month term note in the principal amount of
$100,000 bearing interest at 15% to Eurostar. This note went into default
effective year 2000. On June 1, 2000, we issued an amended note in the principal
amount of $118,000 to Eurostar. This note has a six month term and bears
interest at the rate of 10%. This note is convertible into common stock at $2.00
a share for the term of the note. In consideration for the extension of time to
repay our outstanding debt to Eurostar, we have agreed to issue Eurostar 200,000
shares of common stock on December 1, 2000.
On July 22, 2000 we issued a note in the principal amount of $262,200 bearing
interest at 8% to Mr. Ian Sym-Smith. This note is convertible into 524,000
shares of common stock at $.50 a share.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We have authority under Title 7, Article 109 of the Colorado Business
Corporation Act to indemnify our directors and officers to the extent provided
in such statute. The provisions of the Colorado Business Corporation Act that
authorize indemnification do not eliminate the duty of care of a director, and
in
24
<PAGE> 27
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Colorado law. In addition,
each of our directors will be subject to liability for (a) violations of
criminal laws, unless the director had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe his conduct was unlawful; (b)
deriving an improper personal benefit from a transaction; (c) voting for or
assenting to an unlawful distribution; and (d) willful misconduct or a conscious
disregard for our best interests, in a proceeding by or in our right to procure
a judgment in our favor or in a proceeding by or in the right of a shareholder.
The statute does not affect a director's responsibilities under any other law,
such as the federal securities laws.
At present, there is no pending litigation or proceeding involving any of our
directors or officers as to which indemnification is being sought, nor is IHI
aware of any threatened litigation that may result in claim for indemnification
by any officer or director.
25
<PAGE> 28
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditor's Report for period ended June 30, 2000 F-1
CONSOLIDATED FINANCIAL STATEMENTS - June 30, 2000
Consolidated Balance Sheets as of June 30, 2000 F-2
Consolidated Statements of Operations for the Six Months
Ended June 30, 2000 F-3
Consolidated Statements of Stockholder's Deficit for the Six Months
Ended June 30, 2000 F-5
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2000 F-6
NOTES TO FINANCIAL STATEMENTS FOR PERIOD ENDED JUNE 30, 2000 F-7
INDEPENDENT AUDITOR'S REPORT FOR PERIOD ENDED JUNE 30, 1999 F-16
CONSOLIDATED FINANCIAL STATEMENTS - June 30, 1999
Consolidated Balance Sheets as of June 30, 1999 F-17
Consolidated Statements of Operations for the Six Months
Ended June 30, 1999 F-18
Consolidated Statements of Stockholder's Deficit for the Six Months
Ended June 30, 1999 F-20
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1999 F-21
NOTES TO FINANCIAL STATEMENTS FOR YEAR
ENDED DECEMBER 31, 1999 F-22
INDEPENDENT AUDITOR'S REPORT FOR YEAR ENDED
DECEMBER 31, 2000 F-30
CONSOLIDATED FINANCIAL STATEMENTS - December 31, 1999
F-31
Consolidated Balance Sheets as of December 31, 1999
Consolidated Statements of Operations for the Year Ended
December 31, 1999 F-32
Consolidated Statements of Stockholder's Deficit for
Year Ended December 31, 1999 F-34
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1999 F-35
NOTES TO FINANCIAL STATEMENTS FOR YEAR ENDED DECEMBER 31, 1999
F-36
INDEPENDENT AUDITORS REPORT FOR PERIOD ENDED DECEMBER 31, 1998
F-45
Consolidated Balance Sheets as of December 31, 1998
F-46
Consolidated Statement of Operations for the Six Month Period
Ended December 31, 1998 F-47
Consolidated Statement of Stockholders' Deficit for the
Six Month Period Ended December 31, 1998 F-48
Consolidated Statement of Cash Flows
for Six Months Ended December 31, 1998 F-49
NOTES TO FINANCIAL STATEMENTS FOR PERIOD
ENDED DECEMBER 31, 1998 F-50
</TABLE>
26
<PAGE> 29
PART III
ITEM 1. INDEX TO EXHIBITS
(2.1) Stock Purchase Agreement dated as of March, 1999 by and among
Richard Wedel, Wheatear Corporation and various shareholders
of Automotive Technologies, Inc.
(2.2) Agreement and Plan of Reorganization dated as of March 31,
1999, by and among the Automotive Technologies Inc.,
Integrated Homes of Florida, Inc. and the shareholders of
Integrated Homes of Florida, Inc.
(3)(i) Articles of Incorporation of the Company (formerly known as
Automotive Technologies Inc.), as amended.
(3)(ii) Bylaws of Automotive Technologies Inc.
(9) Voting Trust Agreement, dated as of March 31, 1999, by and
among the principal shareholders of Automotive Technologies,
Inc., and David Rich and Philip Sergeant as Trustees.
(10.1) Employment Agreement, dated as of March 31, 1999, by and
between Automotive Technologies, Inc. and David Rich.
(10.2) Employment Agreement, dated as of March 31, 1999, by and
between Automotive Technologies, Inc. and Philip Sergeant.
(10.3) WCI Communities Limited Partnership Construction Agreement by
and between WCI Communities Limited Partnership and Integrated
Homes of Florida, Inc. for work at Villa Sorento
(10.4) WCI Communities Limited Partnership Construction Agreement by
and between WCI Communities Limited Partnership and Integrated
Homes of Florida, Inc. for work at Chelsea and Parkland Isles,
plus additional Exhibit B
(10.5) Technology Homes Wiring Systems Services Agreement dated
November 17, 1999 by and between ARVIDA/JMB PARTNERS and
Integrated Homes of Florida, Inc.
(10.6) Kolter Homes Subcontractor Agreement dated as of October 5,
1998 by and between Integrated Homes and Kolter Homes, Inc.
(21) Subsidiaries of the Registrant.
(27.1) Financial Data Schedule (June 30, 2000)
(27.2) Financial Data Schedule. (December 31, 1999)
(27.3) Financial Data Schedule. (June 30, 1999)
(27.2) Financial Data Schedule (December 31, 1998)
27
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
INTEGRATED HOMES, INC.
DATE: October 13, 2000 By: /s/ DAVID RICH
--------------------------------
DAVID RICH
TITLE: CHIEF EXECUTIVE OFFICER
28
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Integrated Homes, Inc.
We have audited the accompanying consolidated balance sheet of Integrated Homes,
Inc. as of June 30, 2000, and the related statements of operations,
stockholders' deficit, and cash flows for the period January 1, 2000 through
June 30, 2000. 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 amount 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 Integrated Homes, Inc. as of
June 30, 2000, and the results of its operations and its cash flows for the
period January 1, 2000 through June 30, 2000, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Integrated Homes, Inc. will continue as a going concern. As discussed in Note 1
to the financial statements, the Company's net working capital deficiency raises
substantial doubt about the entity's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts and classification
of liabilities that might result from the outcome of this uncertainty.
IRA WORTHMAN, CPA
August 26, 2000
F-1
<PAGE> 32
INTEGRATED HOMES, INC.
BALANCE SHEETS
JUNE 30, 2000
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 16,201
Accounts receivable ........................................................... 1,667,888
Inventories ................................................................... 201,539
-----------
Total current assets .......................................................... 1,885,628
Property and equipment, net ................................................... 143,274
-----------
Total assets .................................................................. $ 2,028,902
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .............................................................. $ 210,231
Accrued expenses .............................................................. 800,942
Loan payable to affiliates .................................................... 252,266
Notes payable ................................................................. 1,499,000
Deferred revenue .............................................................. 1,260,000
-----------
Total current liabilities ..................................................... 4,022,439
Stockholders' Equity (deficit):
Common stock, no par value, 14,670,300 shares authorized and
issued and outstanding of which 9,570,000 shares
are restricted at December 31, 1999 ...................................... 0
Additional paid-in capital .................................................... 1,197,500
Accumulated deficit ........................................................... (3,191,037)
-----------
Total stockholders' equity (deficit) .......................................... (1,993,537)
-----------
Total liabilities and stockholders' equity (deficit) .......................... $ 2,028,902
===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
<PAGE> 33
INTEGRATED HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDING JUNE 30, 2000
Revenue
Product sales ..................... $ 776,460
-----------
Total revenue ..................... 776,460
-----------
Cost and expenses
Cost of product sold .............. 313,644
Cost of labor ..................... 370,396
Selling, general and administrative 520,735
Product Development ............... 759,000
Total costs and expenses .......... 1,963,775
-----------
Loss from operations .............. (1,187,315)
Other Income (Expense)
Interest income ................... 0
Interest expense .................. (10,605)
-----------
Net Loss .......................... ($1,197,920)
===========
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE> 34
INTEGRATED HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDING JUNE 30, 2000
SELLING, GENERAL AND ADMINISTRATIVE
Advertising ......................................... $ 16,341
Travel and entertainment ............................ 23,438
Bank charges ........................................ 4,168
Miscellaneous ....................................... 17,252
Professional fees ................................... 35,265
Depreciation expense ................................ 17,500
Dues and subscriptions .............................. 445
Equipment lease ..................................... 5,670
Insurance ........................................... 72,777
License and permits ................................. 29,876
Postage and delivery ................................ 4,708
Printing ............................................ 4,232
Rental .............................................. 56,186
Repairs and maintenance ............................. 1,330
Professional fees ................................... 49,860
Telephone ........................................... 38,904
Utilities ........................................... 5,936
Supplies ............................................ 9,694
Human Resources ..................................... 10,590
Salaries and wages .................................. 104,039
Payroll taxes ....................................... 9,300
Employee training ................................... 2,800
Sanitation .......................................... 424
--------
Selling, General and Administrative ................. $520,735
========
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE> 35
INTEGRATED HOMES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
JUNE 30, 2000
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
---------------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
# SHARES AMOUNT CAPITAL DEFICIT) EQUITY(DEFICIT)
-------- ------ ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 1,500,000 0 0 (563,029) (563,029)
Issuance of common stock
pursuant to share exchange
agreement ................ 13,170,300 0 704,000 0 704,000
Net loss for the period
ending December 31, 1999.. (1,430,088) (1,430,088)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 14,670,300 0 704,000 (1,993,117) (1,289,117)
========== ========== ========== ========== ==========
Additional paid-in capital . 0 0 493,500 0 493,500
Net loss for the period
ending June 30, 2000 ..... 0 0 0 (1,197,920) (1,197,920)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 2000 ... 14,670,300 0 1,197,500 (3,191,037) (1,993,537)
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE> 36
INTEGRATED HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
JUNE 30, 2000
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $(1,197,920)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation ........................................................... 17,500
-----------
Subtotal ........................................................... (1,180,420)
-----------
Changes in operating assets and liabilities:
Increase in accounts receivable ........................................ (193,467)
Decrease in deferred revenue ........................................... (140,000)
Increase in inventories ................................................ (22,202)
Increase in accounts payable ........................................... (190,806)
Increase in accrued expenses ........................................... 625,735
-----------
Total adjustments .................................................. 79,260
-----------
NET CASH USED IN OPERATING ACTIVITIES ....................................... (1,101,160)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................... 0
-----------
NET CASH FLOWS USED IN INVESTING ACTIVITIES ................................. 0
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and loan guarantee from affiliates ......... 618,183
Proceeds from paid-in-capital .......................................... 493,500
-----------
NET CASH FLOWS FROM FINANCING ACTIVITIES .................................... 1,111,683
-----------
NET INCREASE IN CASH ........................................................ 10,523
CASH B Beginning of Period .................................................. 5,678
-----------
CASH B End of Period ........................................................ $ 16,201
===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
<PAGE> 37
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
A. NATURE OF BUSINESS
Integrated Homes, Inc. (the "Company") is a holding company whose primary
operations are through Integrated Homes of Florida, Inc. ("IHF"), a
wholly-owned subsidiary. IHF was founded in the State of Florida on June
1, 1998 by Philip Sergeant and David Rich. IHF was formed with the
objective of developing community-wide, broad-band networks in "Master
Planned Residential Communities" for the new community development and
construction industry. IHF specializes in furnishing new homes with
infrastructures and the equipment and services necessary to give
homeowners improved access to an ever-increasing scope of entertainment,
education and communication services, including those being developed
"on-line".
The Company's headquarters are located at 1801 Clint Moore Road, Suite
204, Boca Raton, Florida 33487.
The Company was incorporated on November 13, 1997, under the name of
Automotive Technologies, Inc. ("ATI"), under the laws of the State of
Colorado, and is in the early development stage of its business. Pursuant
to an Agreement and Plan of Reorganization dated March 31, 1999 (the
"Agreement"), by and among ATI, IHF and the shareholders of IHF (the
"Shareholders"), the Shareholders exchanged all of the common stock of
IHF in return for 3,441,700 shares of common stock of ATI. IHF became a
wholly-owned subsidiary of ATI. (The directors of ATI were replaced by
Philip Sergeant, David Rich and Richard D. Wedel. On May 21, 1999, the
Board of Directors authorized and approved changing the corporate name to
Integrated Homes, Inc.).
The primary operations of the Company are through IHF, its wholly-owned
subsidiary. The Company had no significant operating history prior to the
Share Exchange. Since its inception, the Company has engaged primarily in
the development of its business. The Company's viability, profitability
and growth depend upon successful establishment of its products and
services within the new home construction industry, which cannot be
assured. The prospects for the Company's success must be considered in
light of the risks, expenses and difficulties often encountered in the
establishment of a new startup business.
To date, the Company has not had adequate operating revenues to develop
and implement its business plan, and while current orders for its
products and services are high, the Company does not believe that its
short-term significant growth will come from increases in the revenues
generated by such orders, but rather from an accumulation of such orders.
The Company anticipates that it will continue to incur costs in
connection with the development and implementation of its business plan,
however, there can be no assurance as to when the Company will be able to
achieve sufficient revenues to offset these costs.
The Company's current business consists of installing low voltage wiring
in new homes, selling packages of consumer electronic products to the
homeowners, and to a much lesser extent, providing security monitoring
services. The Company sells its wiring installation services by contracts
with the home developer, and the Company derives only minimal revenues
from homeowners. The Company's present business and its planned expansion
are based on the wiring it installs in the walls of new homes to
accommodate the distribution of broadband, low voltage services through
the home.
F-7
<PAGE> 38
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
A. NATURE OF BUSINESS (continued)
The Company's sales of packaged consumer electronic equipment targets
homeowners during the home construction stage, involving itself directly
with homeowners during the "option selection" process. The Company offers
homeowners systems and equipment which connect to the low voltage wiring
that the Company installs and which the Company believes will enhance
their lifestyle; these include security system and consumer electronic
upgrades, satellite television dishes, home theater equipment, telephone
systems, lighting controls, intercoms, distributed audio packages, cable
modems and simple home management systems. The Company offers homeowners
these products as a package or as individual options/upgrades for the new
home. The Company offers homeowners the ability to finance these
purchases as part of their new home mortgage. The Company believes that
marketing its products to homeowners at the construction stage offers the
consumer an opportunity to "future proof" their home with a wide range of
items that may be difficult to buy and install in the home after it is
built. Currently, IHF has several existing contracts with developers and
homeowners to provide its package of products and services to
approximately 12,415 homes. Additionally, the Company currently receives
recurring revenue from monitoring of security and alarm systems.
The sale and installation of these products for homeowners paves the way
for the next phase of the Company's business plan: provision of the
recurring services associated with such products. The Company believes
that this phase of its business plan will create an ongoing stream of
revenues from the communities it has wired and equipped. The Company
anticipates that a significant source of future revenue opportunities
will arise from providing CATV, local telephone and long distance
services, DSS (satellite TV) and broad band Internet services. Another
stream of revenue is expected from equipment service and maintenance
plans. The Company is developing this business plan in a laboratory, but
will require substantial additional capital to implement this plan.
The Company's business plans for future expansion are driven by a
"Connected Communities" concept in which the Company links the homes in a
development to each other and to a private central computerized network
through the installation of a fiber optic network. In this phase of its
business plan, the Company will seek to provide community-wide
enhancement systems through a fiber optic "backbone" within the
communities themselves. These systems are integrated in "master planned"
communities and act as sophisticated networks which electronically
connect the community through a basic infrastructure of common services
which provide community-wide control and information systems. This
network will link the homes of the community to each other during
construction, and enable the Company to provide enhanced communications,
entertainment, security, and other services to the community and each
home. This system allows homeowners to connect to a community "Intranet",
provides the community visibility, controls access to the community,
provides access to concierge services and many other benefits. These
benefits include services which connect the "Connected Communities" to
the outside world. Through the community "Intranet" homeowners enjoy
enhanced access to the following services: (i) local and long distance
telephone services; (ii) CATV services; (iii) satellite television and
DSS services; (iv) provision of Internet service at various access
speeds; (v) community and regional visibility; and (vi) "Extranet"
services.
F-8
<PAGE> 39
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The Company's financial statements have been
presented on a basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company intends to seek additional equity capital
through additional equity offerings to adequately fund operations,
working capital demands, and growth plans.
The Company has a working capital deficiency of $2,136,811 as of June 30,
2000. Accordingly, continued existence is dependent upon the Company's
ability to resolve its liquidity problem, principally by obtaining
additional equity capital or debt financing, neither of which can be
assured.
PRINCIPLES OF CONSOLIDATION: The financial statements include the
accounts of the Company and its wholly-owned subsidiary. All material
intercompany transactions have been eliminated.
REVENUES: Revenues from contracts to install wiring and home technology
products are recognized using the "percentage-of-completion method",
recognizing revenue relative to the proportionate progress of such
contracts as measured by the ratio which costs incurred by the Company to
date bear to total anticipated costs on each program.
INVENTORIES: Inventories consist of various wiring products and audio,
video and computer products used in contractor showrooms or in model
homes as marketing tools. These inventories will be sold as the product
lines change or as model homes are sold to close out residential
developments. The Company's management believes it will not sell
inventories below cost.
INCOME TAXES: Income taxes are accounted for under Statement of Financial
Accounting Standards 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts reported in the
balance sheet for cash, receivables, and accounts payable approximate
their fair market value based on the short-term maturity of these
instruments.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company reviews long-lived assets
for impairment whenever circumstances and situations change such that
there is an indication that the carrying amounts may not be recovered. At
June 30, 2000, the Company believes that there has been no impairment of
its long-lived assets.
F-9
<PAGE> 40
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
COMPREHENSIVE INCOME: The Company has adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive
Income". Comprehensive income is comprised of net loss and all changes to
the statements of stockholders' equity, except those due to investments
by stockholders, changes in paid-in capital and distribution
stockholders. For the period ended June 30, 2000, the Company had deemed
comprehensive income to be negligible.
RESEARCH AND DEVELOPMENT: Research and developments costs are expensed as
incurred. These costs primarily consist of costs incurred and fees paid
for the development of the Company's business plan, including costs for
equipment, hardware and software.
EARNINGS (LOSS) PER SHARE: The Company has adopted the provisions of
Financial Accounting Standards No. 128, "Earnings Per Share." Basic net
loss per share is based on the weighted average number of shares
outstanding. Potential common shares included in the computation are not
presented in the financial statements as their effect would be
anti-dilutive.
USE OF ESTIMATES AND ASSUMPTIONS IN THE PREPARATION OF FINANCIAL
STATEMENTS: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the following: (1) the reported
amounts of assets and liabilities, (2) the disclosure of contingent
assets and liabilities at the dates of the financial statements and (3)
the reported amounts of the revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK: The Company has no significant off balance
sheet concentration of credit risk such as foreign exchange contracts,
option contracts or other foreign hedging arrangements. The Company
maintains the majority of its cash balances with financial institutions.
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of the cash and cash
equivalents, marketable securities and trade accounts receivable. The
Company places its cash, cash equivalents, and marketable securities with
high credit quality financial institutions.
Revenues from significant customers are as follows:
Customer A 44%
Customer B 33%
Customer C 10%
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Costs
of major additions and betterments are capitalized; maintenance and
repairs which do not improve or extend the life of the respective assets
are charged to operations. On disposal, the related cost and accumulated
depreciation or amortization are removed from the accounts and any
resulting gain or loss is included in the results of operations.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. All laboratory, manufacturing and
office equipment have estimated useful lives of three to ten years. The
building has an estimated useful life of thirty years. Leasehold
improvements are amortized over the shorter of the estimated useful lives
of the improvements or the remaining term of the lease.
F-10
<PAGE> 41
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
BASIC AND FULLY DILUTED NET LOSS PER COMMON SHARE: Basic earnings (loss)
per share ("EPS") excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS is based upon the
weighted-average number of common shares outstanding during the period
plus the additional weighted average common equivalent shares during the
period. Common equivalent shares are not included in the per share
calculations where the effect of their inclusion would be anti-dilutive.
Common equivalent shares result from the assumed conversion of preferred
stock and the assumed exercises of outstanding stock options, the
proceeds of which are then assumed to have been used to repurchase
outstanding stock options using the treasury stock method. For the six
month period ended June 30, 2000, basic and diluted net loss per common
share is computed based on the weighted-average number of common shares
outstanding during the period.
OTHER: In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments
embedded in other contracts (collectively referred to as "derivatives"),
and for hedging activities. The statement requires companies to recognize
all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains
or losses, depends on the intended use of the derivative and its
resulting designation. In June 1999, the FASB issued SFAS No. 137, which
defers the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The company expects no immediate impact from SFAS No. 133
as it currently has no derivatives.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), which is effective no later than the quarter
ending March 31, 2000. SAB 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. The Company will adopt SAB 101 in the first
quarter of 2000 and is presently evaluating the impact of the adoption of
this new standard; however, it is not expected to have a material impact
on the Company's financial position and results of operations.
F-11
<PAGE> 42
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
C. COMMITMENTS
The Company leases certain office and warehouse space, and equipment
under operating leases commencing June 2000. These leases expire up to
and through May 2004.
<TABLE>
<CAPTION>
SQUARE MONTHLY
LESSOR FOOTAGE TERMS INCEPTION DATE PAYMENT
------ ------- ----- -------------- -------
<S> <C> <C> <C> <C> <C>
Liberty Property Trust 4,300 SF 60 months 6/12/99 $ 7,158.35
Davie Plaza Limited Partnership 3,100 SF 36 months 2/1/00 $ 3,349.40
</TABLE>
Minimum rental commitments as of June 30, 2000 are as follows:
2000 $47,415
2001 $90,764
2002 $89,150
2003 $90,947
The Company has an employment agreement with its Chief Executive Officer
for a term through February 2004. It provides for an annual salary of
$110,000 with annual increases determined by the Board of Directors. The
Company's employment agreement with the individual who serves as both the
President and the Director of Marketing is for a term through February
2004 and provides for an annual salary of $102,500 with annual increases
determined by the Board of Directors. Each agreement has bonus payments
of up to 35% of the annual salary based upon certain performance
milestones. The Company also has an employment agreement with Hendrik
Horn, Jr, a licensed electrician.
D. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash, cash equivalents and marketable securities consist of the following
at June 30, 2000:
Cash and Cash Equivalents:
Cash and money market funds $16,201
-------
Total Cash and Cash Equivalents $16,201
=======
F-12
<PAGE> 43
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
E. ACCOUNTS RECEIVABLE
The Company's trade receivables in 2000 primarily represent amounts due
to the Company from customers for its contracted products which consist
of developers of large residential communities. The Company performs
ongoing credit evaluations of its customers and generally does not
require collateral. The allowance for doubtful accounts related to
accounts receivable was $0 at June 30, 2000.
Customers with amounts due to the Company that represent greater than 10%
of the accounts receivable balance are as follows:
Customer A 24%
Customer B 49%
Customer C 14%
F. INVENTORIES
Inventories consist of the following at June 30, 2000:
Finished Goods $201,539
========
G. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2000:
Furniture and fixtures $ 61,285
Computer equipment 122,830
Office equipment 10,412
-----------
Total fixed assets 194,527
Accumulated depreciation and amortization (51,253)
-----------
Net property and equipment $ 143,274
==========
Depreciation expense was $17,500 for the year ended June 30, 2000.
H. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in accounts payable and accrued expenses is $800,942 of taxes
payable.
I. RELATED PARTY TRANSACTIONS
The Company has loans payable to related parties in the amount of
$252,266. The Company has also entered into loan transactions with a
major stockholder, which aggregated to $760,000 as of June 30, 2000.
F-13
<PAGE> 44
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
J. LOANS PAYABLE
Loans payable consists of the following:
Loan payable to related parties (See Note I) $ 204,966
Loan payable due on demand with interest rates
ranging from 0% to approximately 20.00% 47,300
----------
$252,266
==========
K. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. SFAS No. 109 additionally requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred
tax assets.
The provision (benefit) for income taxes differs from the amounts
computed by applying the statutory federal income tax rate to income
(loss) before provision for income taxes. The reconciliation is as
follows:
Taxes computed at statutory rate $(407,292)
Income tax benefit not utilized 407,292
---------
Net income tax benefit $ 0
=========
The Company has a net operating loss carryforwards for tax purposes
totaling approximately $3,191,037 at June 30, 2000 expiring in the year
2015.
Listed below are the tax effects of the items related to the Company's
net tax liability:
Tax benefit of net operating loss carryforward $ 845,592
Expenses not currently deductible
for income tax purposes 0
---------
Total 845,592
Valuation allowance (845,592)
---------
Net deferred tax asset recorded $ 0
=========
F-14
<PAGE> 45
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
L. NOTES PAYABLE
At June 30, 2000 the Company had notes payable amounting to $1,499,000.
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C> <C>
Money Fund:
A 10% interest bearing note convertible into 53,000
restricted shares on 12/1/00 at $2 per share $ 59,000
Financing Company:
10% interest bearing note convertible into 200,000
restricted shares on 12/1/00 at $2 per share 118,000
Private Investor:
8% interest bearing note convertible into 524,000
restricted shares on 6/21/01 at $.50 per share 262,000
Private Investors:
8% interest bearing notes convertible into 3,000,000
restricted shares on 4/15/01 at $.10 per share 300,000
Venture Capital Lending Company:
10% interest bearing notes 760,000
-----------
Total $1,499,000
==========
</TABLE>
M. DEFERRED REVENUES
Deferred revenues represent revenue contracts signed with customers,
however, the contracts are not completed as of June 30, 2000. Company
recognizes revenue on the percentage of completion method of accounting
for construction contracts.
F-15
<PAGE> 46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Integrated Homes, Inc.
We have audited the accompanying consolidated balance sheet of Integrated Homes,
Inc. as of June 30, 1999, and the related statements of operations,
stockholders' deficit, and cash flows for the period January 1, 1999 through
June 30, 1999. 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 amount 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 Integrated Homes, Inc. as of
June 30, 1999, and the results of its operations and its cash flows for the
period January 1, 1999 through June 30, 1999 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Integrated Homes, Inc. will continue as a going concern. As discussed in Note 1
to the financial statements, the Company's net working capital deficiency raises
substantial doubt about the entity's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts and classification
of liabilities that might result from the outcome of this uncertainty.
IRA WORTHMAN, CPA
August 31, 1999
F-16
<PAGE> 47
INTEGRATED HOMES, INC.
BALANCE SHEETS
JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 6,125
Accounts receivable ......................................................... 77,538
Inventories ................................................................. 80,713
-----------
Total current assets ........................................................ 164,376
Property and equipment, net ................................................. 120,086
-----------
Total assets ................................................................ $ 284,462
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................. $ 373,057
Accrued expenses ............................................................ 89,245
Loan payable to affiliates .................................................. 229,333
-----------
Total current liabilities ................................................... 691,635
Stockholders' Equity (deficit):
Common stock, no par value, 14,670,300 shares authorized and
issued and outstanding of which 9,570,000 shares
are restricted at December 31, 1999 .................................... 0
Additional paid-in capital .................................................. 704,000
Accumulated deficit ......................................................... (1,111,173)
-----------
Total stockholders' equity (deficit) ........................................ (407,173)
-----------
Total liabilities and stockholders' equity (equity).......................... $ 284,462
===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-17
<PAGE> 48
INTEGRATED HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
JUNE 30, 1999
Revenue
Product sales ............................... $ 231,539
---------
Total revenue ............................... 231,539
---------
Cost and expenses
Cost of product sold ........................ 201,297
Cost of labor ............................... 67,265
Cost of licence fees and royalties
Research and development
Selling, general and administrative ......... 502,340
---------
Total costs and expenses .................... 770,902
---------
Loss from operations ........................ (539,363)
Other Income (Expense)
Interest income ............................. 0
Interest expense ............................ (8,781)
---------
Net Loss .................................... ($548,144)
=========
The accompanying notes are an integral part of the consolidated
financial statements.
F-18
<PAGE> 49
INTEGRATED HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
JUNE 30, 1999
SELLING, GENERAL AND ADMINISTRATIVE
Advertising ................................. $ 17,408
Travel and entertainment .................... 60,503
Bank charges ................................ 3,577
Miscellaneous ............................... 2,250
Professional fees ........................... 23,093
Depreciation expense ........................ 11,251
Dues and subscriptions ...................... 426
Equipment lease ............................. 10,966
Insurance ................................... 18,963
License and permits ......................... 11,204
Postage and delivery ........................ 2,243
Printing .................................... 5,941
Rental ...................................... 37,178
Repairs and maintenance ..................... 2,308
Telephone ................................... 13,065
Utilities ................................... 951
Supplies .................................... 13,654
Human Resources ............................. 7,764
Salaries and wages .......................... 238,547
Payroll taxes ............................... 21,048
Employee training ........................... 0
Sanitation .................................. 0
--------
Selling, General and Administrative ......... $502,340
========
The accompanying notes are an integral part of the consolidated
financial statements.
F-19
<PAGE> 50
INTEGRATED HOMES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
JUNE 30, 1999
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
------------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
# SHARES AMOUNT CAPITAL DEFICIT) EQUITY (DEFICIT)
-------- ------ ------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 1,500,000 0 0 (563,029) (563,029)
Issuance of common stock
pursuant to share exchange
agreement ................ 13,170,300 0 704,000 0 704,000
Net loss ................... (548,144) (548,144)
---------- -------- ------- ---------- --------
Balance at June 30, 1999 ... 14,670,300 0 704,000 (1,111,173) (407,173)
========== ======== ======= ========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-20
<PAGE> 51
INTEGRATED HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $(548,144)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation ................................................. 11,251
---------
Subtotal ................................................. (536,893)
---------
Changes in operating assets and liabilities:
Increase in accounts receivable .............................. (60,001)
Increase in inventories ...................................... (80,713)
Increase in accounts payable ................................. 18,047
Increase in accrued expenses ................................. 5,261
Decrease in other payables ................................... (41,790)
---------
Total adjustments ........................................ (159,241)
---------
NET CASH USED IN OPERATING ACTIVITIES ............................. (696,134)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................................... (121,129)
---------
NET CASH FLOWS USED IN INVESTING ACTIVITIES ....................... (121,129)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from paid-in capital ................................ 704,000
Proceeds from notes payable and loan guarantee from affiliates 98,833
---------
NET CASH FLOWS FROM FINANCING ACTIVITIES .......................... 802,833
---------
NET INCREASE IN CASH .............................................. (14,430)
CASH - Beginning of Period ........................................ 20,555
---------
CASH - End of Period .............................................. $ 6,125
=========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-21
<PAGE> 52
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
A. NATURE OF BUSINESS
Integrated Homes, Inc. (the "Company") is a holding company whose primary
operations are through Integrated Homes of Florida, Inc. ("IHF"), a
wholly-owned subsidiary. IHF was founded in the State of Florida on June
1, 1998 by Philip Sergeant and David Rich. IHF was formed with the
objective of developing community-wide, broad-band networks in "Master
Planned Residential Communities" for the new community development and
construction industry. IHF specializes in furnishing new homes with
infrastructures and the equipment and services necessary to give
homeowners improved access to an ever-increasing scope of entertainment,
education and communication services, including those being developed
"on-line".
The Company's headquarters are located at 1801 Clint Moore Road, Suite
204, Boca Raton, Florida 33487.
The Company was incorporated on November 13, 1997, under the name of
Automotive Technologies, Inc. ("ATI"), under the laws of the State of
Colorado, and is in the early development stage of its business. Pursuant
to an Agreement and Plan of Reorganization dated March 31, 1999 (the
"Agreement"), by and among ATI, IHF and the shareholders of IHF (the
"Shareholders"), the Shareholders exchanged all of the common stock of
IHF in return for 3,441,700 shares of common stock of ATI. IHF became a
wholly-owned subsidiary of ATI. (The directors of ATI were replaced by
Philip Sergeant, David Rich and Richard D. Wedel. On May 21, 1999, the
Board of Directors authorized and approved changing the corporate name to
Integrated Homes, Inc.).
The primary operations of the Company are through IHF, its wholly-owned
subsidiary. The Company had no significant operating history prior to the
Share Exchange. Since its inception, the Company has engaged primarily in
the development of its business. The Company's viability, profitability
and growth depend upon successful establishment of its products and
services within the new home construction industry, which cannot be
assured. The prospects for the Company's success must be considered in
light of the risks, expenses and difficulties often encountered in the
establishment of a new startup business.
To date, the Company has not had adequate operating revenues to develop
and implement its business plan, and while current orders for its
products and services are high, the Company does not believe that its
short-term significant growth will come from increases in the revenues
generated by such orders, but rather from an accumulation of such orders.
The Company anticipates that it will continue to incur costs in
connection with the development and implementation of its business plan,
however, there can be no assurance as to when the Company will be able to
achieve sufficient revenues to offset these costs.
The Company's current business consists of installing low voltage wiring
in new homes, selling packages of consumer electronic products to the
homeowners, and to a much lesser extent, providing security monitoring
services. The Company sells its wiring installation services by contracts
with the home developer, and the Company derives only minimal revenues
from homeowners. The Company's present business and its planned expansion
are based on the wiring it installs in the walls of new homes to
accommodate the distribution of broadband, low voltage services through
the home.
F-22
<PAGE> 53
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
A. NATURE OF BUSINESS (CONTINUED)
The Company's sales of packaged consumer electronic equipment targets
homeowners during the home construction stage, involving itself directly
with homeowners during the "option selection" process. The Company offers
homeowners systems and equipment which connect to the low voltage wiring
that the Company installs and which the Company believes will enhance
their lifestyle; these include security system and consumer electronic
upgrades, satellite television dishes, home theater equipment, telephone
systems, lighting controls, intercoms, distributed audio packages, cable
modems and simple home management systems. The Company offers homeowners
these products as a package or as individual options/upgrades for the new
home. The Company offers homeowners the ability to finance these
purchases as part of their new home mortgage. The Company believes that
marketing its products to homeowners at the construction stage offers the
consumer an opportunity to "future proof" their home with a wide range of
items that may be difficult to buy and install in the home after it is
built. Currently, IHF has several existing contracts with developers and
homeowners to provide its package of products and services to
approximately 3,000 homes. Additionally, the Company currently receives
recurring revenue from monitoring of security and alarm systems.
The sale and installation of these products for homeowners paves the way
for the next phase of the Company's business plan: provision of the
recurring services associated with such products. The Company believes
that this phase of its business plan will create an ongoing stream of
revenues from the communities it has wired and equipped. The Company
anticipates that a significant source of future revenue opportunities
will arise from providing CATV, local telephone and long distance
services, DSS (satellite TV) and broad band Internet services. Another
stream of revenue is expected from equipment service and maintenance
plans. The Company is developing this business plan in a laboratory, but
will require substantial additional capital to implement this plan.
The Company's business plans for future expansion are driven by a
"Connected Communities" concept in which the Company links the homes in a
development to each other and to a private central computerized network
through the installation of a fiber optic network. In this phase of its
business plan, the Company will seek to provide community-wide
enhancement systems through a fiber optic "backbone" within the
communities themselves. These systems are integrated in "master planned"
communities and act as sophisticated networks which electronically
connect the community through a basic infrastructure of common services
which provide community-wide control and information systems. This
network will link the homes of the community to each other during
construction, and enable the Company to provide enhanced communications,
entertainment, security, and other services to the community and each
home. This system allows homeowners to connect to a community "Intranet",
provides the community visibility, controls access to the community,
provides access to concierge services and many other benefits. These
benefits include services which connect the "Connected Communities" to
the outside world. Through the community "Intranet" homeowners enjoy
enhanced access to the following services: (i) local and long distance
telephone services; (ii) CATV services; (iii) satellite television and
DSS services; (iv) provision of Internet service at various access
speeds; (v) community and regional visibility; and (vi) "Extranet"
services.
F-23
<PAGE> 54
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The Company's financial statements have been
presented on a basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company intends to seek additional equity capital
through additional equity offerings to adequately fund operations,
working capital demands, and growth plans.
The Company has a working capital deficiency of $527,259 as of June 30,
1999. Accordingly, continued existence is dependent upon the Company's
ability to resolve its liquidity problem, principally by obtaining
additional equity capital or debt financing, neither of which can be
assured.
PRINCIPLES OF CONSOLIDATION: The financial statements include the
accounts of the Company and its wholly-owned subsidiary. All material
intercompany transactions have been eliminated.
REVENUES: Revenues from contracts to install wiring and home technology
products are recognized using the "percentage-of-completion method",
recognizing revenue relative to the proportionate progress of such
contracts as measured by the ratio which costs incurred by the Company to
date bear to total anticipated costs on each program.
INVENTORIES: Inventories consist of audio, video and computer products
used in contractor showrooms or in model homes as marketing tools. These
inventories will be sold as the product lines change or as model homes
are sold to close out residential developments. The Company's management
believes it will not sell inventories below cost.
INCOME TAXES: Income taxes are accounted for under Statement of Financial
Accounting Standards 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts reported in the
balance sheet for cash, receivables, and accounts payable approximate
their fair market value based on the short-term maturity of these
instruments.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company reviews long-lived assets
for impairment whenever circumstances and situations change such that
there is an indication that the carrying amounts may not be recovered. At
June 30, 1999, the Company believes that there has been no impairment of
its long-lived assets.
COMPREHENSIVE INCOME: The Company has adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive
Income". Comprehensive income is comprised of net loss and all changes to
the statements of stockholders' equity, except those due to investments
by stockholders, changes in paid-in capital and distribution
stockholders. For the period ended June 30, 1999, the Company had deemed
comprehensive income to be negligible.
F-24
<PAGE> 55
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RESEARCH AND DEVELOPMENT: Research and developments costs are expensed as
incurred. These costs primarily consist of costs incurred and fees paid
for the development of the Company's business plan, including costs for
equipment, hardware and software.
EARNINGS (LOSS) PER SHARE: The Company has adopted the provisions of
Financial Accounting Standards No. 128, "Earnings Per Share." Basic net
loss per share is based on the weighted average number of shares
outstanding. Potential common shares included in the computation are not
presented in the financial statements as their effect would be
anti-dilutive.
USE OF ESTIMATES AND ASSUMPTIONS IN THE PREPARATION OF FINANCIAL
STATEMENTS: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the following: (1) the reported
amounts of assets and liabilities, (2) the disclosure of contingent
assets and liabilities at the dates of the financial statements and (3)
the reported amounts of the revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK: The Company has no significant off balance
sheet concentration of credit risk such as foreign exchange contracts,
option contracts or other foreign hedging arrangements. The Company
maintains the majority of its cash balances with financial institutions.
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of the cash and cash
equivalents, marketable securities and trade accounts receivable. The
Company places its cash, cash equivalents, and marketable securities with
high credit quality financial institutions.
Revenues from significant customers are as follows:
Customer A 63%
Customer B 36%
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Costs
of major additions and betterments are capitalized; maintenance and
repairs which do not improve or extend the life of the respective assets
are charged to operations. On disposal, the related cost and accumulated
depreciation or amortization are removed from the accounts and any
resulting gain or loss is included in the results of operations.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. All laboratory, manufacturing and
office equipment have estimated useful lives of three to ten years. The
building has an estimated useful life of thirty years. Leasehold
improvements are amortized over the shorter of the estimated useful lives
of the improvements or the remaining term of the lease.
F-25
<PAGE> 56
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
BASIC AND FULLY DILUTED NET LOSS PER COMMON SHARE: Basic earnings (loss)
per share ("EPS") excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS is based upon the
weighted-average number of common shares outstanding during the period
plus the additional weighted average common equivalent shares during the
period. Common equivalent shares are not included in the per share
calculations where the effect of their inclusion would be anti-dilutive.
Common equivalent shares result from the assumed conversion of preferred
stock and the assumed exercises of outstanding stock options, the
proceeds of which are then assumed to have been used to repurchase
outstanding stock options using the treasury stock method. For the period
ended June 30, 1999, basic and diluted net loss per common share is
computed based on the weighted-average number of common shares
outstanding during the period.
OTHER: In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments
embedded in other contracts (collectively referred to as "derivatives"),
and for hedging activities. The statement requires companies to recognize
all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains
or losses, depends on the intended use of the derivative and its
resulting designation. In June 1999, the FASB issued SFAS No. 137, which
defers the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The company expects no immediate impact from SFAS No. 133
as it currently has no derivatives.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), which is effective no later than the quarter
ending March 31, 2000. SAB 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. The Company will adopt SAB 101 in the first
quarter of 2000 and is presently evaluating the impact of the adoption of
this new standard; however, it is not expected to have a material impact
on the Company's financial position and results of operations.
C. COMMITMENTS
The Company leases certain office and warehouse space, and equipment
under operating leases commencing May 1999. These leases expire up to and
through May 2003.
<TABLE>
<CAPTION>
SQUARE MONTHLY
LESSOR FOOTAGE TERMS INCEPTION DATE PAYMENT
------ ------- ----- -------------- -------
<S> <C> <C> <C> <C>
A.P. DeSalvo 400 SF 1 year 5/3/99 $ 424.00
Liberty Property Trust 4,300 SF 60 months 6/12/99 $ 7,158.35
</TABLE>
F-26
<PAGE> 57
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
C. COMMITMENTS (continued)
Minimum rental commitments are as follows:
1999 $49,169
2000 $94,290
2001 $90,764
2002 $89,150
2003 $90,947
The Company has entered into two employment agreements. The agreement
with its Chief Executive Officer is for a term through February 2004. It
provides for an annual salary of $110,000 with annual increases
determined by the Board of Directors. The agreement with the individual
who serves as both President and Director of Marketing is for a term
through February 2004 and provides for an annual salary of $102,500 with
annual increases determined by the Board of Directors. Each agreement has
bonus payments of up to 35% of the annual salary based upon certain
performance milestones.
D. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash, cash equivalents and marketable securities consist of the following
at June 30, 1999:
Cash and Cash Equivalents:
Cash and money market funds $ 6,125
-------
Total Cash and Cash Equivalents $ 6,125
=======
E. ACCOUNTS RECEIVABLE
Integrated Homes' trade receivables in 1999 primarily represent amounts
due to the Company from customers for its contracted products. Integrated
Homes performs ongoing credit evaluations of its customers and generally
does not require collateral. The allowance for doubtful accounts related
to accounts receivable was $0 at June 30, 1999.
Customers with amounts due to the Company that represent greater than 10%
of the accounts receivable balance are as follows:
Customer A 60%
F. INVENTORIES
Inventories consist of the following at June 30, 1999:
Finished Goods $80,713
=======
F-27
<PAGE> 58
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
G. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1999:
Furniture and fixtures $ 61,285
Computer equipment 70,891
Office equipment 10,412
---------
Total fixed assets 142,588
Accumulated depreciation and amortization (22,502)
----------
Net property and equipment $ 120,086
=========
Depreciation expense was $11,251 for the year ended December 31, 1999.
H. ACCOUNTS PAYABLE
Included in accounts payable is $132,428 of taxes payable.
I. RELATED PARTY TRANSACTIONS
The Company has loans payable to related parties in the amount of
$229,333. (See Note J)
J. LOAN PAYABLE
Loan payable consists of the following:
Loan payable to related parties (See Note I) $ 186,333
Loan payable due on demand with interest rates
ranging from 0% to approximately 20.00% 43,000
---------
$ 229,333
=========
F-28
<PAGE> 59
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
K. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. SFAS No. 109 additionally requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred
tax assets.
The provision (benefit) for income taxes differs from the amounts
computed by applying the statutory federal income tax rate to income
(loss) before provision for income taxes. The reconciliation is as
follows:
Taxes computed at statutory rate $ (186,369)
Income tax benefit not utilized 186,369
----------
Net income tax benefit $ 0
==========
The Company has a net operating loss carryforwards for tax purposes
totaling approximately $1,111,173 at June 30, 1999 expiring in the year
2014.
Listed below are the tax effects of the items related to the Company's
net tax liability:
Tax benefit of net operating loss carryforward $ 377,799
Expenses not currently deductible
for income tax purposes 0
----------
Total 377,799
Valuation allowance (377,799)
-----------
Net deferred tax asset recorded $ 0
==========
F-29
<PAGE> 60
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Integrated Homes, Inc.
We have audited the accompanying consolidated balance sheet of
Integrated Homes, Inc. as of December 31, 1999, and the related
statements of operations, stockholders' deficit, and cash flows for
the period January 1, 1999 through December 31, 1999. 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 amount
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
Integrated Homes, Inc. as of December 31, 1999, and the results of
its operations and its cash flows for the period January 1, 1999
through December 31, 1999, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming
that Integrated Homes, Inc. will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company's net
working capital deficiency raises substantial doubt about the
entity's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts and
classification of liabilities that might result from the outcome of
this uncertainty.
IRA WORTHMAN, CPA
June 16, 2000
F-30
<PAGE> 61
INTEGRATED HOMES, INC.
BALANCE SHEETS
DECEMBER 31, 1999
ASSETS
Current assets:
Cash and cash equivalents ................... $ 5,678
Accounts receivable ......................... 1,474,421
Inventories ................................. 179,337
-----------
Total current assets ........................ 1,659,436
Property and equipment, net ................. 160,774
-----------
Total assets ................................ $ 1,820,210
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable ............................ $ 401,037
Accrued expenses ............................ 175,207
Loan payable to affiliates .................. 229,333
Notes payable ............................... 903,750
Deferred revenue ............................ 1,400,000
-----------
Total current liabilities ................... 3,109,327
Stockholders' Equity (deficit):
Common stock, no par value,
14,670,300 shares authorized
and issued and outstanding
of which 9,570,000 shares
are restricted at
December 31, 1999 ......................... 0
Additional paid-in capital .................. 704,000
Accumulated deficit ......................... (1,993,117)
-----------
Total stockholders' equity
(deficit) ................................. (1,289,117)
-----------
Total liabilities and
stockholders' equity
(equity) .................................. $ 1,820,210
===========
The accompanying notes are an integral part
of the consolidated financial
statements.
F-31
<PAGE> 62
INTEGRATED HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1999
Revenue
Product sales ............................... $ 941,782
-----------
Total revenue ............................... 941,782
-----------
Cost and expenses
Cost of product sold ........................ 562,503
Cost of labor ............................... 291,269
Cost of licence fees and royalties
Research and development
Selling, general and administrative ......... 1,496,889
-----------
Total costs and expenses .................... 2,350,661
-----------
Loss from operations ........................ (1,408,879)
Other Income (Expense)
Interest income ............................. 0
Interest expense ............................ 21,209
-----------
Net Loss .................................... ($1,430,088)
===========
The accompanying notes are an integral part
of the consolidated financial
statements.
F-32
<PAGE> 63
INTEGRATED HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1999
SELLING, GENERAL AND ADMINISTRATIVE
Advertising ................................. $ 62,732
Travel and entertainment .................... 157,970
Bank charges ................................ 6,680
Miscellaneous ............................... 4,560
Professional fees ........................... 224,713
Depreciation expense ........................ 22,502
Dues and subscriptions ...................... 1,324
Equipment lease ............................. 16,081
Insurance ................................... 52,700
License and permits ......................... 31,495
Postage and delivery ........................ 6,604
Printing .................................... 24,923
Rental ...................................... 61,402
Repairs and maintenance ..................... 7,899
Telephone ................................... 43,631
Utilities ................................... 4,391
Supplies .................................... 24,781
Human Resources ............................. 77,495
Salaries and wages .......................... 588,320
Payroll taxes ............................... 72,714
Employee training ........................... 1,935
Sanitation .................................. 2,037
----------
Selling, General and Administrative ......... $1,496,889
==========
The accompanying notes are an integral part
of the consolidated financial
statements.
F-33
<PAGE> 64
INTEGRATED HOMES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
DECEMBER 31, 1999
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
------------------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
# SHARES AMOUNT CAPITAL DEFICIT) EQUITY (DEFICIT)
-------- ------ ------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ......... 1,500,000 0 0 (563,029) (563,029)
Issuance of common stock
pursuant to share exchange
agreement ............................ 13,170,300 0 704,000 0 704,000
Net loss ............................. 0 0 0 (1,430,088) (1,430,088)
---------- ------ ------- ---------- ----------
Balance at December 31, 1999 ......... 14,670,300 0 704,000 (1,993,117) (1,289,117)
========== ====== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial
statements.
F-34
<PAGE> 65
INTEGRATED HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $(1,430,088)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation ................................................. 22,502
-----------
Subtotal ................................................. (1,407,586)
-----------
Changes in operating assets and liabilities:
Increase in accounts receivable .............................. (1,456,883)
Increase in deferred revenue ................................. 1,400,000
Increase in inventories ...................................... (179,337)
Increase in accounts payable ................................. 46,027
Increase in accrued expenses ................................. 91,178
Decrease in other payables ................................... (41,790)
Total adjustments ........................................ (140,806)
-----------
NET CASH USED IN OPERATING ACTIVITIES ............................. (1,548,392)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................................... (173,068)
-----------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES ........................................................ (173,068)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from paid-in capital ................................ 704,000
Proceeds from notes payable and loan guarantee from affiliates 1,002,583
-----------
NET CASH FLOWS FROM FINANCING ACTIVITIES ....................................... 1,706,583
-----------
NET INCREASE IN CASH .............................................. (14,877)
CASH - Beginning of Period ........................................ 20,555
-----------
CASH - End of Period .............................................. $ 5,678
===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial
statements.
F-35
<PAGE> 66
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
A. NATURE OF BUSINESS
Integrated Homes, Inc. (the "Company") is a holding company whose primary
operations are through Integrated Homes of Florida, Inc. ("IHF"), a
wholly-owned subsidiary. IHF was founded in the State of Florida on June
1, 1998 by Philip Sergeant and David Rich. IHF was formed with the
objective of developing community-wide, broad-band networks in "Master
Planned Residential Communities" for the new community development and
construction industry. IHF specializes in furnishing new homes with
infrastructures and the equipment and services necessary to give
homeowners improved access to an ever-increasing scope of entertainment,
education and communication services, including those being developed
"on-line".
The Company's headquarters are located at 1801 Clint Moore Road, Suite
204, Boca Raton, Florida 33487.
The Company was incorporated on November 13, 1997, under the name of
Automotive Technologies, Inc. ("ATI"), under the laws of the State of
Colorado, and is in the early development stage of its business. Pursuant
to an Agreement and Plan of Reorganization dated March 31, 1999 (the
"Agreement"), by and among ATI, IHF and the shareholders of IHF (the
"Shareholders"), the Shareholders exchanged all of the common stock of
IHF in return for 3,441,700 shares of common stock of ATI. IHF became a
wholly-owned subsidiary of ATI. (The directors of ATI were replaced by
Philip Sergeant, David Rich and Richard D. Wedel. On May 21, 1999, the
Board of Directors authorized and approved changing the corporate name to
Integrated Homes, Inc.).
The primary operations of the Company are through IHF, its wholly-owned
subsidiary. The Company had no significant operating history prior to the
Share Exchange. Since its inception, the Company has engaged primarily in
the development of its business. The Company's viability, profitability
and growth depend upon successful establishment of its products and
services within the new home construction industry, which cannot be
assured. The prospects for the Company's success must be considered in
light of the risks, expenses and difficulties often encountered in the
establishment of a new startup business.
To date, the Company has not had adequate operating revenues to develop
and implement its business plan, and while current orders for its
products and services are high, the Company does not believe that its
short-term significant growth will come from increases in the revenues
generated by such orders, but rather from an accumulation of such orders.
The Company anticipates that it will continue to incur costs in
connection with the development and implementation of its business plan,
however, there can be no assurance as to when the Company will be able to
achieve sufficient revenues to offset these costs.
The Company's current business consists of installing low voltage wiring
in new homes, selling packages of consumer electronic products to the
homeowners, and to a much lesser extent, providing security monitoring
services. The Company sells its wiring installation services by contracts
with the home developer, and the Company derives only minimal revenues
from homeowners. The Company's present business and its planned expansion
are based on the wiring it installs in the walls of new homes to
accommodate the distribution of broadband, low voltage services through
the home.
F-36
<PAGE> 67
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
A. NATURE OF BUSINESS (continued)
The Company's sales of packaged consumer electronic equipment targets
homeowners during the home construction stage, involving itself directly
with homeowners during the "option selection" process. The Company offers
homeowners systems and equipment which connect to the low voltage wiring
that the Company installs and which the Company believes will enhance
their lifestyle; these include security system and consumer electronic
upgrades, satellite television dishes, home theater equipment, telephone
systems, lighting controls, intercoms, distributed audio packages, cable
modems and simple home management systems. The Company offers homeowners
these products as a package or as individual options/upgrades for the new
home. The Company offers homeowners the ability to finance these
purchases as part of their new home mortgage. The Company believes that
marketing its products to homeowners at the construction stage offers the
consumer an opportunity to "future proof" their home with a wide range of
items that may be difficult to buy and install in the home after it is
built. Currently, IHF has several existing contracts with developers and
homeowners to provide its package of products and services to
approximately 3,000 homes. Additionally, the Company currently receives
recurring revenue from monitoring of security and alarm systems.
The sale and installation of these products for homeowners paves the way
for the next phase of the Company's business plan: provision of the
recurring services associated with such products. The Company believes
that this phase of its business plan will create an ongoing stream of
revenues from the communities it has wired and equipped. The Company
anticipates that a significant source of future revenue opportunities
will arise from providing CATV, local telephone and long distance
services, DSS (satellite TV) and broad band Internet services. Another
stream of revenue is expected from equipment service and maintenance
plans. The Company is developing this business plan in a laboratory, but
will require substantial additional capital to implement this plan.
The Company's business plans for future expansion are driven by a
"Connected Communities" concept in which the Company links the homes in a
development to each other and to a private central computerized network
through the installation of a fiber optic network. In this phase of its
business plan, the Company will seek to provide community-wide
enhancement systems through a fiber optic "backbone" within the
communities themselves. These systems are integrated in "master planned"
communities and act as sophisticated networks which electronically
connect the community through a basic infrastructure of common services
which provide community-wide control and information systems. This
network will link the homes of the community to each other during
construction, and enable the Company to provide enhanced communications,
entertainment, security, and other services to the community and each
home. This system allows homeowners to connect to a community "Intranet",
provides the community visibility, controls access to the community,
provides access to concierge services and many other benefits. These
benefits include services which connect the "Connected Communities" to
the outside world. Through the community "Intranet" homeowners enjoy
enhanced access to the following services: (i) local and long distance
telephone services; (ii) CATV services; (iii) satellite television and
DSS services; (iv) provision of Internet service at various access
speeds; (v) community and regional visibility; and (vi) "Extranet"
services.
F-37
<PAGE> 68
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The Company's financial statements have been
presented on a basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company intends to seek additional equity capital
through additional equity offerings to adequately fund operations,
working capital demands, and growth plans.
The Company has a working capital deficiency of $1,449,891 as of December
31, 1999. Accordingly, continued existence is dependent upon the
Company's ability to resolve its liquidity problem, principally by
obtaining additional equity capital or debt financing, neither of which
can be assured.
PRINCIPLES OF CONSOLIDATION: The financial statements include the
accounts of the Company and its wholly-owned subsidiary. All material
intercompany transactions have been eliminated.
REVENUES: Revenues from contracts to install wiring and home technology
products are recognized using the "percentage-of-completion method",
recognizing revenue relative to the proportionate progress of such
contracts as measured by the ratio which costs incurred by the Company to
date bear to total anticipated costs on each program.
INVENTORIES: Inventories consist of audio, video and computer products
used in contractor showrooms or in model homes as marketing tools. These
inventories will be sold as the product lines change or as model homes
are sold to close out residential developments. The Company's management
believes it will not sell inventories below cost.
INCOME TAXES: Income taxes are accounted for under Statement of Financial
Accounting Standards 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts reported in the
balance sheet for cash, receivables, and accounts payable approximate
their fair market value based on the short-term maturity of these
instruments.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company reviews long-lived assets
for impairment whenever circumstances and situations change such that
there is an indication that the carrying amounts may not be recovered. At
December 31, 1999, the Company believes that there has been no impairment
of its long-lived assets.
F-38
<PAGE> 69
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
COMPREHENSIVE INCOME: The Company has adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive
Income". Comprehensive income is comprised of net loss and all changes to
the statements of stockholders' equity, except those due to investments
by stockholders, changes in paid-in capital and distribution
stockholders. For the period ended December 31, 1999, the Company had
deemed comprehensive income to be negligible.
RESEARCH AND DEVELOPMENT: Research and developments costs are expensed as
incurred. These costs primarily consist of costs incurred and fees paid
for the development of the Company's business plan, including costs for
equipment, hardware and software.
EARNINGS (LOSS) PER SHARE: The Company has adopted the provisions of
Financial Accounting Standards No. 128, "Earnings Per Share." Basic net
loss per share is based on the weighted average number of shares
outstanding. Potential common shares included in the computation are not
presented in the financial statements as their effect would be
anti-dilutive.
USE OF ESTIMATES AND ASSUMPTIONS IN THE PREPARATION OF FINANCIAL
STATEMENTS: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the following: (1) the reported
amounts of assets and liabilities, (2) the disclosure of contingent
assets and liabilities at the dates of the financial statements and (3)
the reported amounts of the revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK: The Company has no significant off balance
sheet concentration of credit risk such as foreign exchange contracts,
option contracts or other foreign hedging arrangements. The Company
maintains the majority of its cash balances with financial institutions.
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of the cash and cash
equivalents, marketable securities and trade accounts receivable. The
Company places its cash, cash equivalents, and marketable securities with
high credit quality financial institutions.
Revenues from significant customers are as follows:
Customer A 50%
Customer B 28%
Customer C 10%
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Costs
of major additions and betterments are capitalized; maintenance and
repairs which do not improve or extend the life of the respective assets
are charged to operations. On disposal, the related cost and accumulated
depreciation or amortization are removed from the accounts and any
resulting gain or loss is included in the results of operations.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. All laboratory, manufacturing and
office equipment have estimated useful lives of three to ten years. The
building has an estimated useful life of thirty years. Leasehold
improvements are amortized over the shorter of the estimated useful lives
of the improvements or the remaining term of the lease.
F-39
<PAGE> 70
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
BASIC AND FULLY DILUTED NET LOSS PER COMMON SHARE: Basic earnings (loss)
per share ("EPS") excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS is based upon the
weighted-average number of common shares outstanding during the period
plus the additional weighted average common equivalent shares during the
period. Common equivalent shares are not included in the per share
calculations where the effect of their inclusion would be anti-dilutive.
Common equivalent shares result from the assumed conversion of preferred
stock and the assumed exercises of outstanding stock options, the
proceeds of which are then assumed to have been used to repurchase
outstanding stock options using the treasury stock method. For the year
ended December 31, 1999, basic and diluted net loss per common share is
computed based on the weighted-average number of common shares
outstanding during the period.
OTHER: In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments
embedded in other contracts (collectively referred to as "derivatives"),
and for hedging activities. The statement requires companies to recognize
all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains
or losses, depends on the intended use of the derivative and its
resulting designation. In June 1999, the FASB issued SFAS No. 137, which
defers the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The company expects no immediate impact from SFAS No. 133
as it currently has no derivatives.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), which is effective no later than the quarter
ending March 31, 2000. SAB 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. The Company will adopt SAB 101 in the first
quarter of 2000 and is presently evaluating the impact of the adoption of
this new standard; however, it is not expected to have a material impact
on the Company's financial position and results of operations.
C. COMMITMENTS
The Company leases certain office and warehouse space, and equipment
under operating leases commencing May 1999. These leases expire up to and
through May 2003.
<TABLE>
<CAPTION>
SQUARE MONTHLY
LESSOR FOOTAGE TERMS INSPECTION DATE PAYMENT
------ ------- ----- --------------- -------
<S> <C> <C> <C> <C> <C>
A.P. DeSalvo 400 SF 1 year 5/3/99 $ 424.00
Liberty Property Trust 4,300 SF 60 months 6/12/99 $ 7,158.35
Davie Plaza Limited Partnership 3,100 SF 3 years 2/1/00 $ 3,349.40
</TABLE>
F-40
<PAGE> 71
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
C. COMMITMENTS (continued)
Minimum rental commitments are as follows:
2000 $94,290
2001 $90,764
2002 $89,150
2003 $90,947
The Company has entered into two employment agreements. The agreement
with its Chief Executive Officer is for a term through February 2004. It
provides for an annual salary of $110,000 with annual increases
determined by the Board of Directors. The agreement with the individual
who serves as both the President and Director of Marketing is for a term
through February 2004 and provides for an annual salary of $102,500 with
annual increases determined by the Board of Directors. Each agreement has
bonus payments of up to 35% of the annual salary based upon certain
performance milestones.
D. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash, cash equivalents and marketable securities consist of the following
at December 31, 1999:
Cash and Cash Equivalents:
Cash and money market funds $ 5,678
-------
Total Cash and Cash Equivalents $ 5,678
=======
E. ACCOUNTS RECEIVABLE
Integrated Homes' trade receivables in 1999 primarily represent amounts
due to the Company from customers for its contracted products. Integrated
Homes performs ongoing credit evaluations of its customers and generally
does not require collateral. The allowance for doubtful accounts related
to accounts receivable was $0 at December 31, 1999.
Customers with amounts due to the Company that represent greater than 10%
of the accounts receivable balance are as follows:
Customer A 23%
Customer B 33%
Customer C 81%
Customer D 22%
F-41
<PAGE> 72
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
F. INVENTORIES
Inventories consist of the following at December 31, 1999:
Finished Goods $179,337
========
G. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1999:
Furniture and fixtures $ 61,285
Computer equipment 122,830
Office equipment 10,412
----------
Total fixed assets 194,527
Accumulated depreciation and amortization (33,753)
-----------
Net property and equipment $ 160,774
==========
Depreciation expense was $22,502 for the year ended December 31, 1999.
H. ACCOUNTS PAYABLE
Included in accounts payable is $309,911 of taxes payable.
I. RELATED PARTY TRANSACTIONS
The Company has loans payable to related parties in the amount of
$229,333. See Note J.
J. LOAN PAYABLE
Loan payable consists of the following:
Loan payable to related parties (See Note I) $ 186,333
Loan payable due on demand with interest rates
ranging from 0% to approximately 20.00% 43,000
----------
$229,333
==========
F-42
<PAGE> 73
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
K. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. SFAS No. 109 additionally requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred
tax assets.
The provision (benefit) for income taxes differs from the amounts
computed by applying the statutory federal income tax rate to income
(loss) before provision for income taxes. The reconciliation is as
follows:
Taxes computed at statutory rate $(486,229)
Income tax benefit not utilized 486,229
----------
Net income tax benefit $ 0
==========
The Company has a net operating loss carryforwards for tax purposes
totaling approximately $1,993,117 at December 31, 1999 expiring in the
year 2014.
Listed below are the tax effects of the items related to the Company's
net tax liability:
Tax benefit of net operating loss carryforward $ 677,659
Expenses not currently deductible
for income tax purposes 0
----------
Total 677,659
Valuation allowance (677,659)
-----------
Net deferred tax asset recorded $ 0
==========
L. NOTES PAYABLE
At December 31, 1999 the Company had notes payable amounting to $903,750.
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C> <C>
Money Fund:
A 10% interest bearing note convertible into 53,000
restricted shares on 11/30/00 at $2 per share $ 57,500
Financing Company:
10% interest bearing note convertible into 200,000
restricted shares on 11/30/00 at $2 per share 115,000
Venture Capital Lending Company:
10% interest bearing note 731,250
--------
Total $903,750
========
</TABLE>
F-43
<PAGE> 74
INTEGRATED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
M. DEFERRED REVENUES
Deferred revenues represent revenue contracts signed with customers,
however, the contracts are not completed as of December 31, 1999. The
company recognizes revenue on the percentage of completion method of
accounting for construction contacts.
F-44
<PAGE> 75
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Integrated Homes, Inc. and Subsidiaries
Boca Raton, Florida
We have audited the accompanying consolidated balance sheet of Integrated
Homes, Inc. as of December 31, 1998, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the period June 1, 1998
(Inception) through December 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 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 amount 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Homes, Inc. and Subsidiaries as of December 31, 1998, and the results of its
operations and its cash flows for the period June 1, 1998 (Inception) through
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Integrated Homes, Inc. will continue as a going concern. As discussed in Note 1
to the financial statements, the Company's net working capital deficiency raises
substantial doubt about the entity's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts and classification
of liabilities that might result from the outcome of this uncertainty.
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
June 30, 1999
F-45
<PAGE> 76
INTEGRATED HOMES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31,
1998
-----------
ASSETS
CURRENT ASSETS:
Cash $ 11,986
Accounts receivable 17,538
Inventories 47,953
Other current assets --
----------
TOTAL CURRENT ASSETS 77,477
FURNITURE AND EQUIPMENT, net 63,944
----------
$ 141,421
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 85,284
Accrued expenses 29,245
Notes payable 351,166
Due to stockholders 150,000
Common stock to be issued --
----------
TOTAL CURRENT LIABILITIES 615,695
----------
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value, 50,000,000
shares authorized;
1,500,000 and 7,941,700 shares issued
And outstanding, respectively 1,500
Additional paid-in capital 33,171
Accumulated deficit (508,945)
----------
TOTAL STOCKHOLDERS' DEFICIT (474,274)
----------
$ 141,421
==========
See notes to consolidated financial statements.
F-46
<PAGE> 77
INTEGRATED HOMES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
From
June 1, 1998
(Inception) to
December 31, 1998
-----------------
REVENUES $ 106,020
COST OF GOODS SOLD 74,800
----------
GROSS PROFIT 31,220
----------
EXPENSES:
Research and development 321,266
General and administrative 218,899
----------
540,165
----------
OPERATING LOSS (508,945)
NONCASH IMPUTED COMPENSATION EXPENSE --
----------
NET LOSS $ (508,945)
==========
LOSS PER SHARE - BASIC $ (0.34)
==========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,500,000
==========
See notes to consolidated financial statements.
F-47
<PAGE> 78
INTEGRATED HOMES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock
------------------------ Additional Total
Number of Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity (Deficit)
--------- --------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, June 1, 1998 (Inception) 1,500,000 $ 1,500 $ 33,171 $ -- $ 34,671
Net loss -- -- -- (508,945) (508,945)
--------- --------- --------- --------- ---------
Balance, December 31, 1998 1,500,000 1,500 33,171 (508,945) (474,274)
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE> 79
INTEGRATED HOMES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
From
June 1, 1998
(Inception) to
December 31, 1998
-----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (508,945)
-----------
Adjustments to reconcile net loss to net cash used in operations:
Depreciation 3,700
Noncash imputed compensation expense --
Changes in assets and liabilities:
Increase in accounts receivable (17,538)
Increase in other current assets --
Increase in inventories (47,953)
Increase in accounts payable 85,284
Increase in accrued expenses 29,245
-----------
Total adjustments 52,738
-----------
NET CASH USED IN OPERATING ACTIVITIES (456,207)
-----------
CASH FLOWS INVESTING ACTIVITIES:
Capital expenditures (32,973)
-----------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (32,973)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 351,166
Common stock to be issued --
Increase (decrease) in due to stockholders 150,000
-----------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 501,166
-----------
NET INCREASE IN CASH 11,986
CASH - beginning of period --
-----------
CASH - end of period $ 11,986
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Noncash investing activities:
Contribution of fixed assets $ 34,671
===========
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE> 80
INTEGRATED HOMES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD JUNE 1, 1998 (Inception) THROUGH DECEMBER 31, 1998
Integrated Homes of Florida, Inc. ("IHF") was formed in 1998 with the objective
of developing community-wide, broad-band networks in "Master Planned Residential
Communities" for the new community development and construction industry.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION - The Company's financial statements have been
presented on a basis that it is a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the
normal course of business.
The Company intends to seek additional equity capital through
additional equity offerings to adequately fund operations, working
capital demands, and growth plans.
The Company has a working capital deficiency of $538,218 as of
December 31, 1998. Accordingly, continued existence is dependent upon
the Company' ability to resolve its liquidity problem, principally by
obtaining additional equity capital or debt financing, neither of
which can be assured.
B. PRINCIPLES OF CONSOLIDATION - The financial statements include the
accounts of the Company and its wholly-owned subsidiary. All material
intercompany transactions have been eliminated.
C. REVENUES - Revenues from contracts to install wiring and home
technology products are recognized using the
"percentage-of-completion-method",
F-50
<PAGE> 81
recognizing revenue relative to the proportionate progress on such
contracts as measured by the ratio which costs incurred by the
Company to date bear to total anticipated costs on each program.
D. FURNITURE AND EQUIPMENT - Furniture and equipment is carried at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the various assets.
E. INVENTORIES - Inventories consist of audio, video and computer
products used in contractor showrooms or in model homes as marketing
tools. These inventories will be sold as the product lines change or
as model homes are sold to close out residential developments. The
Company's management believes it will not sell inventories below
cost.
F. INCOME TAXES - Income taxes are accounted for under Statement of
Financial Accounting Standards 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.
G. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts reported
in the balance sheet for cash, receivables, and accounts payable
approximate their fair market value based on the short-term maturity
of these instruments.
H. ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles
require 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 revenue
and expenses during the reporting period. Actual results could
differ from those estimates.
I. IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived
assets for impairment whenever circumstances and situations change
such that there is an indication that the carrying amounts may not be
recovered. At December 31, 1998, the Company believes that there has
been no impairment of its long-lived assets.
J. CONCENTRATION OF RISK - Credit losses, if any, have been provided for
in the financial statements and are based on management's
expectations. The Company's accounts receivable are subject to
potential concentrations of credit risk. The Company does not believe
that it is subject to any unusual or significant risks, in the normal
course of business.
F-51
<PAGE> 82
K. COMPREHENSIVE INCOME - The Company has adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130) "Reporting
Comprehensive Income". Comprehensive income is comprised of net loss
and all changes to the statements of stockholders' equity, except
those due to investments by stockholders, changes in paid-in capital
and distribution to stockholders. For the period ended December 31,
1998, the Company had deemed comprehensive income to be negligible.
L. RESEARCH AND DEVELOPMENT - Research and development costs are
expensed as incurred. These costs primarily consists of fees paid
for the development of the Company's software. Research and
development costs for the seven months ended December 31, 1998 were
$321,266.
M. EARNINGS (LOSS) PER SHARE - The Company has adopted the provisions
of Financial Accounting Standards No. 128, "Earnings Per Share".
Basic net loss per share is based on the weighted average number of
shares outstanding. Potential common shares included in the
computation are not presented in the financial statements as their
effect would be anti-dilutive.
2. FURNITURE AND EQUIPMENT
Furniture and equipment are as follows:
Estimated December 31,
Life 1998
--------- ------------
Tools and machinery 5 Years $9,500
Computer equipment 5 Years 48,547
Office equipment 5 Years 2,433
Office furniture 7 Years 7,164
-----------
67,644
Less: Accumulated depreciation 3,700
-----------
$63,944
===========
3. COMMITMENTS
The Company currently occupies office space leased by one of its
shareholders on a monthly basis. Rent expense from inception to
December 31, 1998 was $13,849.
F-52
<PAGE> 83
4. RELATED PARTY TRANSACTIONS
The Company has notes payable to related parties in the amount of
$158,666. These notes are non-interest bearing and are payable upon
demand.
The Company has loans, payable to a shareholder aggregating $150,000,
with interest at 1.5% above the prime rate. $100,000 has monthly interest
payments with principal due in March 1999.$50,000 is due upon demand.
The Company currently occupies office space leased by one of its
shareholders on a monthly basis. Rent expense from inception to December
31, 1998 was $13,849.
Prior to the Company's incorporation the majority stockholder incurred
$321,266 for research and development costs for the Company's benefit.
The research and development was financed from borrowings from third
parties. Upon incorporation, the borrowings were assumed by the Company,
and the related research and development costs have been expensed by the
Company at the stockholders historical cost basis.
5. NOTES PAYABLE
Notes payable consist of the following:
Notes payable to related parties (see Note 4) $ 158,666
Notes payable due on demand with interest rates
ranging from 0% to approximately 20.00%. 192,500
-----------
$ 351,166
===========
6. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for
the expected future tax benefit to be derived from tax loss and tax
credit carryforwards. SFAS No. 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets.
F-53
<PAGE> 84
The provision (benefit) for income taxes differs from the amounts
computed by applying the statutory federal income tax rate to income
(loss) before provision for income taxes. The reconciliation is as
follows:
Taxes computed at statutory rate $(173,000)
Research and development 96,000
Income tax benefit not utilized 77,000
---------
Net income tax benefit $ --
=========
The Company has a net operating loss carryforward for tax purposes
totaling approximately $400,000 at December 31, 1998 expiring in the year
2013.
Listed below are the tax effects of the items related to the Company's
net tax liability:
Tax benefit of net operating loss carryforward $173,000
Expenses not currently deductible for income tax purposes (96,000)
---------
Total 77,000
Valuation Allowance (77,000)
--------
Net deferred tax asset recorded $ --
========
7. SIGNIFICANT CONCENTRATIONS
During the period ended December 31, 1998, the Company derived 100% of
its revenues from one customer.
F-54
