<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
SequoiaNET.com, Inc.:
We have audited the accompanying combined balance sheet of SequoiaNET.com, Inc.
(the "Company", a Delaware Corporation) (formerly Sequoia Diversified Products,
Inc. and MicroNomics of Lansing, Inc.), as of December 31, 1999, and the related
combined statements of operations and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of SequoiaNET.com, Inc.
as of December 31, 1999, and the results of its operations and its cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
February 29, 2000 (except with
respect to the matter discussed
in Note 11, as to which the date
is April 25, 2000)
<PAGE>
SEQUOIANET.COM, INC.
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 117,072
Accounts receivable, net of allowance for doubtful accounts of
$239,171 11,214,061
Inventory 528,484
Costs in excess of billings on uncompleted contracts 163,652
Deferred tax asset 514,817
Prepaid expenses and other current assets 159,290
-----------
Total current assets 12,697,376
PROPERTY AND EQUIPMENT, NET 2,212,452
INTANGIBLES, NET OF ACCUMULATED AMORTIZATION OF $4,942,036 20,303,336
OTHER ASSETS 413,281
-----------
Total assets $35,626,445
===========
LIABILITIES AND PARENT'S INVESTMENT IN SUBSIDIARIES
CURRENT LIABILITIES:
Accounts payable $ 2,112,848
Accrued expenses and other current liabilities 4,868,972
Income Tax Payable 1,380,138
-----------
Total current liabilities 8,361,958
LINE OF CREDIT 430,701
DEFERRED TAX LIABILITY 19,875
OTHER LIABILITIES 2,479
-----------
Total liabilities 8,815,013
-----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
PARENT'S INVESTMENT IN SUBSIDIARIES 26,811,432
-----------
Total liabilities and parent's investment in subsidiaries $35,626,445
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
1
<PAGE>
SEQUOIANET.COM, INC.
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
REVENUES $57,712,824
COST OF GOODS AND SERVICES SOLD 37,414,068
-----------
GROSS PROFIT 20,298,756
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 15,518,838
-----------
OPERATING INCOME 4,779,918
DEPRECIATION AND AMORTIZATION 3,545,475
-----------
INCOME FROM OPERATIONS 1,234,443
INTEREST EXPENSE 27,764
-----------
INCOME BEFORE TAXES 1,206,679
PROVISION FOR INCOME TAXES 1,437,905
-----------
NET INCOME $ (231,226)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
SEQUOIANET.COM, INC.
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ (231,226)
Adjustments to reconcile net income to net cash flows from
operating activities-
Depreciation and amortization 3,545,475
Deferred tax benefit 1,428,936
Changes in assets and liabilities, net of effect of acquisition:
Increase in accounts receivable, net (3,061,688)
Increase in receivables from related parties (718,303)
Decrease in inventory 275,071
Decrease in costs in excess of billings 41,945
Decrease in prepaid expenses and other current assets 77,532
Increase in other noncurrent assets (75,447)
Decrease in accounts payable (38,103)
Increase in accrued expenses 849,842
Decrease in due to parent (1,076,514)
-----------
Net cash flows provided by operating activities 1,017,520
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,015,238)
Disposals of property and equipment 26,688
-----------
Net cash flows used in investing activities (988,550)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (4,565)
Purchase of stock (150,000)
Borrowing under line of credit, net 238,857
Proceeds to Parent (666,071)
-----------
Net cash flows used in financing activities (581,779)
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (552,809)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 669,881
-----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 117,072
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 34,150
===========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
SEQUOIANET.COM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
1. ORGANIZATION AND NATURE OF OPERATIONS:
SequoiaNET.com, Inc. (the "Company") was incorporated in Delaware as a result of
a merger of two entities (see Note 11), Sequoia Diversified Products, Inc.
("Sequoia") and MicroNomics of Lansing, Inc. (d/b/a Entre Computer Services,
Inc. ("Entre")). Both entities were wholly owned subsidiaries of Panurgy
Corporation ("Panurgy"), formerly IT Partners, who purchased the companies in
1998. The acquisition of the companies by Panurgy resulted in the purchase of
100 percent of each company's outstanding common stock in exchange for cash,
promissory notes and common stock of Panurgy. The total purchase price paid by
Panurgy was $2.6 million and $25.4 million for Entre and Sequoia, respectively,
which included the repayment of balances due on an outstanding line of credit
and subordinated debt and the redemption of outstanding warrants for $300,000
for Sequoia.
SequoiaNET.com, Inc., provides information technology services to help customers
design, implement and maintain desktop and network computer systems, and designs
and develops web enablement and ecommerce software The Company is based in
Auburn Hills, Michigan, and has eight domestic satellite offices: two in Ohio,
four in Michigan and one each in Texas and Missouri, and an office in Germany.
During 1999, the Company closed its offices in Sweden and England. For the
purposes of segment reporting, Panurgy included both Sequoia and Entre in the
same reportable segment. Therefore, no reportable segment information is
included in the accompanying combined financial statements.
The accompanying combined financial statements represent the accounts of the
Company as if it had operated as a combined entity during the year ended
December 31, 1999.
The accompanying combined financial statements have also been prepared in
accordance with the accounting rules prescribed for "carve-out" financial
statements. For the purpose of preparing "carve-out" financial statements, all
direct costs of the Company have been recorded. Costs of centralized operations
(e.g. payroll processing, legal, insurance) have been allocated to the Company.
With one exception, other corporate costs, such as corporate executive salaries,
have not been allocated since the Company has its own management team and does
not rely on corporate support for those services. During 1999, one corporate
executive also served as an executive of the Company. Therefore, approximately
$107,000 of salary expense paid to this executive is not recorded in the
accompanying financial statements, as it is recorded as an expense of Panurgy.
Interest on intercompany debt (see Note 5) has not been recorded, as it has not
been historically allocated to the Company. The separate-return method will be
used for income tax purposes (see Note 2).
4
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid investments with original maturities of
three months or less.
ACCOUNTS RECEIVABLE
The Company has established policies for extending credit and establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends, and other information. As of December 31, 1999,
the Company had an allowance for doubtful accounts of $239,171.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure about
Fair Value of Financial Instruments," requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
of future cash flows. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company. The book value of the Company's long-term debt approximates fair
market value as the rates are comparable to the borrowing cost for similar
credit facilities at December 31, 1999.
The carrying values of current assets and current liabilities approximate fair
value because of the relatively short maturities of these instruments. The
disclosure relates to financial instruments only. The fair value assumptions
were based upon subjective estimates of market conditions and perceived risks of
the financial instruments.
INVESTMENT
The Company has an investment in ONKO, a medical research company, that is
accounted for using the cost method. The Company holds a one-third interest in
ONKO recorded at approximately $83,000 as of December 31, 1999. The effect of
recording this investment at cost rather than using the equity method is not
reasonably determinable. Beginning in 1999, the investment in ONKO was fully
reserved as the Company does not believe that it will be able to recover the
cost of this investment.
5
<PAGE>
INVENTORY
Inventory is recorded at the lower of cost or market value using the first in
first out method of accounting. Cost elements included in inventory are
purchased computer equipment and related network and cabling supplies.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost net of accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets ranging from
three to eight years. Depreciation expense for the year ended December 31, 1999
is approximately $975,000.
The ranges used in computing estimated useful lives were as follows:
Furniture and fixtures 5-7 years
Machinery and equipment 3-8 years
Vehicles 4 years
Leasehold improvements Life of lease
INTANGIBLE ASSETS
As a result of the acquisition by Panurgy, the Company recorded identifiable
intangible assets consisting of noncompete agreements, a trademark and a
customer list which are amortized over their useful lives which range between 5
and 15 years, respectively. Goodwill is amortized over 15 years. Amortization
expense was approximately $2,570,000 for the year ended December 31, 1999.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Asset to Be Disposed Of," the Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The Company recognizes
an impairment loss when the sum of the expected future cash flows is less than
the carrying amount of the asset. The measurement of the impairment losses
recognized is based upon the difference between the fair value and the carrying
amount of the asset. The Company has not recorded a provision for impairment of
long-lived assets.
REVENUE RECOGNITION
Revenues generated from hardware sales are recognized when the products are
shipped to the customer provided that the collectibility of the receivable is
probable. In cases where the Company is receiving commissions from third parties
on hardware sales, revenue is recognized when the third party informs the
Company of the completion of the sales process. Revenue generated from services
are recognized on the percentage of completion method as the labor is incurred
or deferred until the month of service if performed over a service contract
year. Unearned service contract revenue is recorded as a liability for services
paid for but not yet performed.
6
<PAGE>
Cost in excess of billings on uncompleted contracts, as reflected on the
accompanying combined balance sheet, comprises amounts of revenue recognized on
contracts for which billings have not been rendered.
INCOME TAXES
In accordance with the rules prescribed for "carve-out" financial statements,
the Company is using the separate-return method for income tax purposes. The
Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes," which is an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the Company's combined financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax laws or rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999, and its purpose is to replace existing
pronouncements with a single, integrated accounting framework for derivatives
and hedging activities. The Company has not yet evaluated the effect of this
standard on the combined financial statements.
3. PROPERTY AND EQUIPMENT:
As of December 31, 1999, property and equipment consist of the following:
<TABLE>
<S> <C>
Furniture and fixtures $ 416,266
Machinery and equipment 3,132,257
Vehicles 550,424
Leasehold improvements 822,763
-----------
4,921,710
Less- Accumulated depreciation (2,709,258)
-----------
$ 2,212,452
===========
</TABLE>
4. INTANGIBLE ASSETS:
As of December 31, 1999, intangible assets consist of the following:
<TABLE>
<S> <C>
Noncompete agreements $ 6,300,000
Trademark 2,020,000
Customer list 1,600,000
Goodwill 15,325,372
-----------
25,245,372
Less- Accumulated amortization (4,942,036)
-----------
$20,303,336
===========
</TABLE>
7
<PAGE>
5. DEBT:
Intercompany debt of Panurgy and the associated interest have not been recorded
in the Company's combined financial statements. All of the Company's assets have
been pledged as collateral on Panurgy's debt facility. Panurgy is currently in
default on their debt facility and has entered into a standstill agreement with
its bank that expires on March 31, 2000. The total amount of Panurgy's
outstanding debt, accrued interest and seller notes is approximately $77
million.
In conjunction with the acquisition of Sequoia by Panurgy, the outstanding
balances due on a note payable and two lines of credit were extinguished. The
extinguishment of the debt is recorded in the accompanying combined financial
statements as contributed capital within the Parent's investment in
subsidiaries.
LINE OF CREDIT
The Company maintains a $750,000 revolving line of credit with a Michigan bank.
As of December 31, 1999, approximately $431,000 was outstanding. Borrowings
under the line of credit bear interest at .75 percent over the bank's published
prime rate. On December 31, 1999, the interest rate on the line of credit was
9.25 percent. The line is secured by specific lease receivables. The Company is
not required to comply with any covenants related to the line of credit.
The Company incurred interest expense on this line of credit of $31,142 for the
year ended December 31, 1999.
INVENTORY FINANCING
The Company also has a credit facility for financing its inventory purchases
with Finova Capital Corporation. Repayment terms are 45 days from the invoice
date with interest accruing at prime plus 3percent after 30 days. If invoices
are not paid on or before the due date, the interest rate increases to 6
percent. The credit facility expires on May 31, 2000. The Company had no
borrowings under the credit facility as of December 31, 1999.
6. INCOME TAXES:
Significant components of the Company's deferred tax assets as of December 31,
1999, are as follows.
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 80,251
Inventory 105,572
Tax basis of fixed assets over book basis 59,543
Other accrued expenses 269,451
---------
Total deferred tax assets $ 514,817
=========
</TABLE>
The provision for income taxes is comprised of the following:
8
<PAGE>
<TABLE>
<S> <C>
Current $1,536,752
Deferred (98,847)
----------
Total tax provision $1,437,905
==========
</TABLE>
The reasons for the differences between the applicable income taxes and the
amount computed by applying the statutory federal income tax rate of 34 percent
to income before taxes were due to the impact of the graduated tax rate changes
as well as permanent differences as follows:
<TABLE>
<S> <C>
Applicable income tax based on statutory Federal tax rate (34%) $ 376,271
Foreign tax provision at statutory rates 33,413
Goodwill and Other 1,028,221
----------
Total provision $1,437,905
==========
</TABLE>
7. EMPLOYEE BENEFIT PLANS:
The Company's employees are eligible to participate in Panurgy's 401(k) plan.
Contributions up to statutory limits can be made by eligible employees on a
voluntary basis. The plan requires matching contributions by the Company of 10
percent of the employees' contributions for the first 4 percent of employee base
salaries. The Company can also make discretionary contributions to the plan. The
Company's matching contributions were $123,279 for the year ended December 31,
1999.
Entre also has a discretionary profit sharing plan whereby Entre will set aside
35 percent of its net profit before taxes at year-end to be allocated to
employees who have worked for Entre for that full year. In general, a
distribution will not be made for persons who have not worked for Entre for the
full year. The amount due to each employee is determined by a formula that takes
into account years of service with Entre and salary level. Should an employee
leave prior to year-end, his/her share will revert back to Entre. The amount of
profit sharing expense for the year ended December 31, 1999 was $435,339
Through July 31, 1999, Sequoia had a self-funded medical benefit plan covering
all of its employees. Sequoia's policy was to accrue estimated medical claims
payable based on recent claims experience. These costs are included in accounts
payable and accrued expenses on the accompanying combined balance sheet.
Beginning on August 1, 1999, Sequoia participated in Panurgy's health care
benefits plan and has accrued their premium due under the new plan.
8. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains reserves for potential credit losses; historically, such
losses have been within management's expectations. The Company's largest
customer represents approximately 12 percent of total sales for the year ended
December 31, 1999.
9
<PAGE>
9. RELATED-PARTY TRANSACTIONS:
As part of Panurgy's cash management, the Company made payments to and received
payments from Panurgy as needed to fund operations or growth. These payments are
reflected in the accompanying combined financial statements as Parent's
investment in subsidiaries and are noninterest bearing.
Sequoia leases computer equipment to another Panurgy subsidiary. The amount due
from the subsidiary as of December 31, 1999, was approximately $170,000.
EMPLOYEE RECEIVABLES
Sequoia has an outstanding note receivable due from an employee of approximately
$168,000. The non-interest bearing note is secured by the employee's stock in
Panurgy and is payable upon demand. As of December 31, 1999, Sequoia has
recorded a reserve of $84,000 on the note, which is included in other assets in
the accompanying combined balance sheet.
10. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company leases office space, some of which is leased from a minority
stockholder of Panurgy. In addition, the Company has entered into operating
leases for various office facilities and equipment. The future minimum lease
payments on these facilities as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
---------------------
<S> <C>
2000 $ 499,424
2001 385,873
2002 225,420
2003 208,686
2004 and thereafter 1,351,941
-----------
$ 2,671,344
===========
</TABLE>
LITIGATION
Litigation and claims are filed against the Company from time to time in the
ordinary course of business. These actions are in various preliminary stages and
no judgments or decisions have been rendered by hearing boards or courts.
Management, after consulting with legal counsel, is of the opinion that the
outcome of such matters will not have a material adverse effect on the Company's
financial position or results of operations.
11. SUBSEQUENT EVENT:
On April 25, 2000, Panurgy entered into an agreement with Minneapolis-based
Analysts International Corporation ("AI") to sell the Company. The agreement
required Panurgy to merge Sequoia and Entre into a single company,
SequioaNET.com, Inc. AI acquired 80.1 percent of SequoiaNET.com for $43.5
million in cash. SequoiaNET.com, Inc. operates as a separate subsidiary of AI
and the current management team controls the remaining 19.9 percent interest.
10
