<PAGE> 1
Exhibit 99.1
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements - As of and for the five months ended June 30, 2000
Balance sheet............................................................1
Statement of operations..................................................2
Notes to financial statements............................................3
Financial Statements - As of and for the year ended January 31, 2000
Independent Auditor's Report.............................................4
Balance Sheet............................................................5
Statement of income and retained earnings (deficit)......................6
Statement of cash flows..................................................7
Notes to financial statements............................................8
</TABLE>
<PAGE> 2
FREBON INTERNATIONAL CORPORATION 1
UNAUDITED CONDENSED BALANCE SHEET
June 30, 2000
(in thousands, except per share amount)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 213
Accounts receivable, net of allowance
for doubtful accounts 4,090
Inventory 1,850
Other current assets 354
-------
Total current assets 6,507
Property and equipment, net of
accumulated depreciation 914
Other noncurrent assets 54
-------
Total assets $ 7,475
=======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,214
Accrued expenses and other
current liabilities 5,376
-------
Total current liabilities 9,590
Long-term debt 236
Stockholders' deficit:
Common stock, $0.0018 par value 37
Additional capital 214
Accumulated deficit (2,602)
-------
Total stockholders' deficit (2,351)
-------
Total liabilities and stockholders'
deficit $ 7,475
=======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
<PAGE> 3
FREBON INTERNATIONAL CORPORATION 2
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FIVE MONTHS ENDED JUNE 30, 2000
(in thousands)
(UNAUDITED)
<TABLE>
<S> <C>
Revenue $ 6,876
Operating costs and expenses:
Operating costs 4,768
Selling, general and administrative 3,233
Depreciation and amortization 53
-------
Loss from operations (1,178)
Other income (expenses):
Miscellaneous income 27
Interest income 5
Interest expense (145)
-------
Loss before provision for income taxes (1,291)
Provision for income taxes --
-------
Net Loss $(1,291)
=======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
<PAGE> 4
FREBON INTERNATIONAL CORPORATION 3
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(a) BASIS OF PREPARATION
The accompanying financial statements as of June 30, 2000 and for
the five month period ended June 30, 2000 together with the
related notes, are unaudited but include all adjustments which in
the opinion of management, are necessary for a fair presentation,
in all material respects, of the financial position and operating
results for the interim date and period presented. Certain
information and footnote disclosures, normally included in the
financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations. Results for the interim
period ended June 30, 2000 are not necessarily indicative of
results for the entire fiscal year or future periods. These
financial statements should be read in conjunction with the
financial statements and related notes thereto for the year ended
January 31, 2000.
(2) INVENTORIES
At June 30, 2000 the Company's inventory consists of finished goods which
are available for resale.
(3) ACQUISITION
On July 7, 2000 the Company was acquired by NET2000 Communications, Inc.
("NET2000"). Under the terms of the Agreement, approximately 400,000
shares of NET2000 common stock were issued to the former stockholders of
the Company, and approximately $9.1 million was paid to the former
stockholders of the Company.
<PAGE> 5
4
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
FreBon International Corporation
McLean, Virginia
We have audited the accompanying balance sheet of FreBon International
Corporation as of January 31, 2000, and the related statements of income and
retained earnings (deficit), and cash flows for the year then ended. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FreBon International
Corporation as of January 31, 2000, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Brown, Dakes & Wannall, P.C.
Fairfax, Virginia
June 8, 2000, except for Footnote 14 to which the date is July 7, 2000.
<PAGE> 6
FREBON INTERNATIONAL CORPORATION 5
BALANCE SHEET
January 31, 2000
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 98,088
Accounts receivable 2,733,724
Net investment in sales-type lease 48,674
Inventory 941,153
Prepaid expenses and other assets 233,256
Refundable income taxes 178,840
-----------
Total current assets 4,233,735
-----------
PROPERTY AND EQUIPMENT, net 863,360
-----------
OTHER ASSETS
Net investment in sales-type lease 9,711
Other assets 89,637
-----------
99,348
-----------
$ 5,196,443
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Line of credit $ 1,995,767
Current obligations under capital lease 87,238
Current maturities of notes payable 796,338
Accounts payable 2,655,742
Accrued commissions 35,469
Accrued expenses and other liabilities 110,129
Unearned warranty and other income 309,667
Income taxes payable 1,074
-----------
Total current liabilities 5,991,424
-----------
LONG-TERM DEBT
Obligations under capital leases, less
current portion 219,724
Notes payable, less current maturities 45,245
-----------
264,969
-----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $0.0018 per share,
authorized 100,000,000 shares, issued and
outstanding 20,399,723 36,539
Additional paid-in capital 214,114
Retained earnings (deficit) (1,310,603)
-----------
(1,059,950)
-----------
$ 5,196,443
===========
</TABLE>
See Notes to Financial Statements.
<PAGE> 7
FREBON INTERNATIONAL CORPORATION 6
STATEMENT OF INCOME AND RETAINED EARNINGS (DEFICIT)
Year Ended January 31, 2000
<TABLE>
<S> <C>
Net sales $ 10,509,720
Cost of sales 8,005,192
------------
Gross profit 2,504,528
Operating expenses 4,365,987
------------
Operating loss (1,861,459)
------------
Other income (expense)
Loss on disposal of assets (4,675)
Rental and other miscellaneous income 37,604
Interest income 18,557
Interest and finance charge expense (249,901)
------------
(198,415)
------------
Loss before income taxes (2,059,874)
Provision for income taxes (benefit) (135,149)
------------
Net loss (1,924,725)
Retained earnings, balance beginning 614,122
------------
Retained earnings (deficit), balance ending $ (1,310,603)
============
</TABLE>
See Notes to Financial Statements.
<PAGE> 8
FREBON INTERNATIONAL CORPORATION 7
STATEMENT OF CASH FLOWS
Year Ended January 31, 2000
Increase (Decrease) in Cash
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net loss $(1,924,725)
-----------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 205,995
Loss on sale/disposal of equipment 4,675
Change in assets and liabilities:
Accounts receivable 1,266,556
Inventory (263,138)
Prepaid expenses and other assets 57,990
Refundable income taxes (178,840)
Deferred tax assets 78,000
Accounts payable and accrued expenses 784,184
Unearned warranty income (94,260)
Income taxes payable (59,268)
Deferred tax liability (41,500)
-----------
1,760,394
-----------
Net cash used by operating activities (164,331)
-----------
INVESTING ACTIVITIES
Principal payments received on sales-type lease 30,839
Purchase of equipment (259,087)
Payments received on stockholder advances 39,902
-----------
Net cash used by investing activities (188,346)
-----------
FINANCING ACTIVITIES
Net borrowings - line-of-credit (88,326)
Proceeds from long-term debt 718,433
Principal payments on long-term debt (224,922)
-----------
Net cash provided by financing activities 405,185
-----------
Increase in cash 52,508
Cash, beginning of year 45,580
-----------
Cash, end of year $ 98,088
===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Capital lease obligation incurred
for the purchase of equipment $ 130,369
===========
</TABLE>
See Notes to Financial Statements.
<PAGE> 9
FREBON INTERNATIONAL CORPORATION 8
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business, Organization and Significant Accounting Policies
Nature of business and organization:
FreBon International Corporation (the Corporation) was formed in April
1991 under the laws of the Commonwealth of Virginia.
FreBon International Corporation is a provider of visual conferencing
systems. The Corporation also provides services related to the equipment
sales including installation, support, and extended warranty services.
Significant accounting policies:
Method of revenue recognition
The Corporation uses the accrual method of accounting for both
financial reporting and income tax purposes. Sales revenue is recorded
as deliveries are made to customers or service is completed.
Inventory
Inventory is maintained for video equipment and parts and is stated at
the lower of cost or market. The video equipment and parts costs are
both determined by using the first-in first-out method.
Accounts receivable
Management has elected to record bad debts using the direct write-off
method. Generally accepted accounting principles require that the
allowance method be used to reflect bad debts. However, the effect of
the use of the direct write-off method is not materially different
from the results that would have been obtained had the allowance
method been followed.
Property and equipment and depreciation
Property and equipment are capitalized and stated at cost.
Expenditures for ordinary maintenance and repair items are charged to
operations as incurred. Upon the sale or other disposition of
property, the cost and related accumulated depreciation will be
eliminated from the accounts and any resulting gain or loss will be
reflected in the results of operations. Depreciation of property and
equipment is computed using the straight-line method over the
estimated useful life ranging between three and seven years. Leasehold
improvements are amortized over the lesser of the related lease term
or the useful life.
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS 9
1. Nature of Business, Organization and Significant Accounting Policies
(Continued)
Advertising costs
All direct-response advertising costs are expensed as incurred.
Advertising expense was $144,011 for the year ended January 31,
2000.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair value of financial instruments
The Corporation considers the recorded value of its financial assets
and liabilities, consisting primarily of cash, accounts receivable,
accounts payable, accrued expenses, and debt to approximate the fair
value of the respective assets and liabilities at January 31, 2000.
2. Net Investment in Sales-Type Lease
The Corporation is the lessor of video teleconferencing equipment. The
lease is accounted for as a sales-type lease and expires April 2001. For
sales-type leases, the present value of the minimum rentals to be
received is recorded currently as net sales revenue, and unearned finance
income is amortized into income over the term of the lease.
The following lists the components of the net investment as of January
31, 2000:
Future minimum lease payments to be received:
<TABLE>
<S> <C>
2001....................................... $ 56,429
2002....................................... 9,959
------------
66,388
Less unearned income....................... 8,003
------------
Net investment 58,385
Less current portion 48,674
------------
Long-term $ 9,711
============
</TABLE>
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS 10
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<S> <C>
Furniture and fixtures $ 93,185
Equipment and software 1,186,812
Vehicles 119,486
Leasehold improvements 135,602
----------
1,535,085
Less accumulated depreciation
and amortization 671,725
----------
$ 863,360
==========
</TABLE>
Depreciation expense charged to operations was $205,995 for the year
ended January 31, 2000.
4. Obligations Under Capital Leases
The Corporation is the lessee of various equipment under capital leases
expiring in various years through 2005. The Corporation had $423,168 of
assets held under capital leases at January 31, 2000.
Amortization on property under capital lease is included in depreciation
expense.
The following is a schedule of the future minimum payments under capital
leases together with present value of the net minimum lease payments as
of January 31, 2000.
<TABLE>
<S> <C>
2001...................................................... $130,190
2002...................................................... 104,845
2003...................................................... 88,290
2004...................................................... 60,044
2005...................................................... 9,091
--------
Total minimum lease payments................... 392,460
Less amounts representing interest............. 85,498
--------
Present value of net minimum lease payments.... 306,962
Less current portion........................... 87,238
--------
Long-term portion.............................. $219,724
========
</TABLE>
Interest rates on capitalized leases vary from 4 to 18 percent.
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS 11
5. Notes Payable
<TABLE>
<S> <C>
Note payable to bank, monthly installments of $1,726 including interest
at prime plus 2.75 percent, until September 2002, guaranteed 85 percent
by the Small Business Administration, personal guarantee of
stockholders, second lien on all business assets $ 40,020
Notes payable to finance companies, total monthly installments of
$1,206, including interest ranging from 7 to 9 percent, collateralized
by specific vehicles 33,653
Note payable to former stockholder, annual installments of $50,000,
interest at 8 percent payable monthly, until April 2001 100,000
Note payable to equipment vendor, weekly installments of $6,221, including
interest at 15 percent, until January 2001, collateralized by equipment 300,000
Note payable to bank, 11 regular payments of $8,430 and one irregular last
payment estimated at $343,074 due July 2000, including interest at prime
plus 1.5 percent, secured with lien on business assets and third deed
of trust on real property owned by stockholder 367,910
--------
841,583
Less current maturities 796,338
--------
$ 45,245
========
Maturities of long-term notes payable as of January 31, 2000 are as
follows:
2001......................................................................... $796,338
2002......................................................................... 31,355
2003......................................................................... 13,890
--------
$841,583
========
</TABLE>
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS 12
5. Notes Payable (Continued)
At January 31, 2000, the Corporation had a $2,800,000 bank
line-of-credit. The bank line-of-credit bears interest at the prime
lending rate plus 1.5 percent (10.25 percent at January 31, 2000), is
collateralized by all business assets and is personally guaranteed by the
stockholders. Under the terms of the line-of-credit agreement, the
Corporation is required to maintain certain financial covenants, which
were not met at January 31, 2000. Subsequent to year-end, the
Corporation's lender extended the line-of-credit to May 31, 2000 and
waived existing defaults at year-end through the extension date of May
31, 2000.
At January 31, 2000, borrowings under the line-of-credit agreement
totaled $1,567,858.
The Corporation has a second line-of-credit of $500,000 that can be drawn
upon as needed to fund expansion. Repayment is based on a 36-month
amortization and bears interest at prime plus 1.5 percent. At January 31,
2000, $427,909 was drawn upon the line.
The Corporation paid interest of $249,901 related to the notes payable
and capital leases for the year ended January 31, 2000.
6. Major Customers
For the year ended January 31, 2000, sales to five major customers
totaled $6,156,292. The amounts due from these customers included in
accounts receivable totaled $1,843,684 as of January 31, 2000.
7. Major Supplier
The Corporation obtains most of its supplies from one primary source.
Purchases of approximately $1,686,022 were made from this source for the
year ended January 31, 2000. The Corporation had a payable to the
supplier in the amount of $309,294 as of January 31, 2000.
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS 13
8. Office Rent
The Corporation leases office and storage space under various lease
agreements.
Future minimum lease payments under these leases are as follows:
For the year ending January 31,
<TABLE>
<S> <C>
2001.............................................. $ 454,273
2002.............................................. 417,214
2003.............................................. 131,260
2004.............................................. 135,074
2005.............................................. 91,917
---------------
Total $ 1,229,738
===============
</TABLE>
Rent expense totaled $392,681 for the year ended January 31, 2000.
9. Income Taxes
The Corporation accounts for taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109").
Under SFAS 109, deferred tax liabilities and assets are determined based
on the difference between the financial statement and tax basis of assets
and liabilities using enacted rates expected to be in effect during the
year in which the differences reverse.
At January 31, 2000, the Corporation had a net operating loss for Federal
income tax purposes of approximately $1.6 million. The timing and manner
in which the operating loss carryforward may be utilized in any year by
the Corporation will be limited to the Corporation's ability to generate
future earnings. Current net operating loss carryforwards will expire in
2018. As no assurance can be made of future earnings needed to utilize
these net operating losses, a valuation allowance in the amount of the
net deferred tax asset has been recorded.
At January 31, 2000, the net deferred tax asset consists of:
<TABLE>
<S> <C>
Tax liability
Depreciation $ (70,300)
Prepaid expense (84,920)
Tax assets
Net operating loss carryforward 669,845
Deferred revenue 120,460
Accrual expenses 4,740
Contribution carryforward 1,530
---------
641,355
---------
Valuation allowance (641,355)
---------
Net deferred tax asset $ -
=========
</TABLE>
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS 14
9. Income Taxes (Continued)
The provision for income taxes consists of the following components:
<TABLE>
<S> <C>
Current tax expense (benefit)
Federal $(152,668)
States (18,981)
---------
(171,649)
---------
Deferred tax expense (credit)
Federal (510,213)
States (94,642)
Valuation allowance 641,355
---------
36,500
---------
$(135,149)
=========
</TABLE>
The Corporation paid income taxes of $66,459 for the year ended January
31, 2000.
A summary of the items which cause the recorded income taxes to differ
from the statutory Federal income tax rate is as follows:
<TABLE>
<S> <C>
Tax expense (benefit) at statuary Federal rate $(720,956)
Effect of:
State income tax, net of Federal tax benefit (77,758)
Other 22,210
Increase in valuation allowance 641,355
---------
Income tax expense (benefit) $(135,149)
=========
</TABLE>
10. Pension Plan
The Corporation on behalf of its employees, established a Simplified
Employee Pension Plan in 1996. Eligible employees must be at least
twenty-one years old and meet minimum service requirements. The SEP plan
was terminated as of December 31, 1999. Contributions were $-0- in 2000.
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS 15
11. Concentrations of Credit Risk
Financial instruments that potentially subject the Corporation to
concentrations of credit risk consist principally of cash and trade
accounts receivable. The Corporation maintains cash balances with a
financial institution which at times exceed the amount insured by the
Federal Deposit Insurance Corporation. At January 31, 2000 the uninsured
balance was $18,789. The Corporation does a significant amount of
business with Federal and state governments. Therefore, concentrations of
credit risk with respect to trade receivables are primarily limited to
credit extended to governmental agencies.
12. Stock Split
On August 9, 1999, the Board of Directors authorized a 558.3-for-1 stock
split, thereby increasing the number of issued and outstanding shares to
20,399,723 and decreasing the par value of each share to $0.0018.
13. Stock Appreciation Plan
Effective December 2, 1999 the Corporation established a Stock
Appreciation Plan. Under this Plan the Corporation may grant performance
units to eligible employees. At times provided for in the Plan, the
participant shall be entitled to exercise a vested performance unit for
the difference between the established market value on the date of the
grant and established market value effective at the date of exercise.
Subsequent to year end, the Plan was terminated. (See Note 14.)
At January 31, 2000 the Corporation had issued 2,187,000 performance
units.
14. Subsequent Event
Subsequent to year end, the Corporation's shareholders sold all the
outstanding shares of the Corporation to a company that provides
telecommunications services. In contemplation of this sale, the
Corporation terminated its stock appreciation plan. The Corporation paid
the Plan's participants $835,254 in cash and stock in complete
satisfaction of any rights under the Plan.
