<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
DECEMBER 3, 1996
----------------
(Date of Report)
INTERNET COMMUNICATIONS CORPORATION
----------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
COLORADO
----------------------------------------------------------------
(State or other jurisdiction of incorporation)
0-19578 84-1095516
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(Commission File Number) (IRS Employer Identification Number)
7100 E. BELLEVIEW AVE., SUITE 201, ENGLEWOOD, COLORADO 80111
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(Address of principal executive offices including zip codes)
(303) 770-7600
----------------------------------------------------------------
(Registrant's telephone number including area code)
NOT APPLICABLE
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(Former name or former address, if changed since last report)
This report consists of 32 sequentially numbered pages including exhibits.
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On September 19, 1996, Internet Communications Corporation (the
"Registrant") acquired all outstanding shares of capital stock of Interwest
Communications C.S. Corporation ("Interwest"), a Colorado Corporation, from
Interwest Group, Inc., pursuant to the Amended and Restated Acquisition
Agreement ("Agreement"), dated as of May 29, 1996 between Internet
Communications Corporation. Interwest Group, Inc., and Internet Acquisition
One, Inc. The acquisition was approved by Registrant's shareholders at a
special meeting held on September 12, 1996. The acquisition agreement
provided for and included the following provisions:
(1) the issuance and sale by the Registrant to Group, on May 29, 1996
(the "First Closing Date"), at par and for cash, of a promissory note of the
Registrant (the "Note") (a) in the principal amount of $900,000, (b) having a
maturity on December 31, 1996, or, if earlier, the date that is 30 days after
the earlier to occur of (i) the failure of the shareholders of the Registrant
to approve the Agreement at the Shareholders Meeting or (ii) the termination
of the Amended and Restated Acquisition Agreement by Group pursuant to the
terms thereof, including, without limitation, upon the breach by the
Registrant of any representation or warranty in the Agreement, the
determination by Group that the conditions to its obligations with respect to
the Second Closing Transactions described below are not capable of being met
by September 5, 1996 (which stipulation was subsequently waived) and (c) the
note bears interest at a rate of 8.0% per annum from May 29, 1996 to and
including a date that is 60 days after May 29, 1996 (or, if the Second
Closing Date shall then have occurred, the date that is 90 days after May 29,
1996) and the rate of 12.5% per annum thereafter, payable monthly in arrears
or, upon the occurrence and during the continuation of a default under the
Note, at a rate of interest 3.5% per annum greater than the rate otherwise
applicable; PROVIDED that, if the Registrant shall fail to pay in full the
principal amount of the Note and all interest accrued there on at the
maturity thereof (whether at scheduled maturity, on the date of any required
prepayment or, after the expiration of applicable grace periods and cure
periods, upon acceleration), then, at any time during the period commencing
the day after the date of such maturity of the Note (if the principal amount
thereof and all interest accrued thereon shall then not have been paid in
full) and ending on a date that is 45 days after the date of such maturity,
Group may elect to convert the Note into 300,000 shares of the Registrant's
Common Stock (the "Conversion Shares") at a price of $3.00 per share (as such
number of shares and price per share may be adjusted pursuant to the terms
thereof).
(2) At the Second Closing Date, the parties to the Agreement caused
Acquisition One, Inc., to merge into Interwest with the result that
Acquisition One, Inc., ceased to exist and Interwest was the surviving
corporation. Internet owns all outstanding shares of Interwest. In exchange
Internet issued 2,306,541 of Internet Common Stock to Group, which shares
equal 49.0% of the shares of Registrant's Common Stock issued and outstanding
immediately following consummation of the Acquisition, assuming for these
purposes that there are no stock options, warrants or other rights then
outstanding to acquire shares of the Company's Common Stock other than those
currently outstanding and set forth in the Share Exchange Agreement.
-2-
<PAGE>
The Amended and Restated Acquisition Agreement also provided for
representations and warranties by each party regarding corporate existence
and power, authorization, approvals and consents, binding effect, financial
information, financial condition, absence of defaults under outstanding debt
instruments (with respect to which waivers have not been obtained), absence
of certain changes or events, taxes, litigation, compliance with laws,
licenses, employee matters, labor disputes, subsidiaries, property,
equipment, leases, proprietary right, insurance, liens and encumbrances,
debt, capitalization, environmental matters, books and records, material
contracts, misstatements and omissions, documents filed by the Registrant
with the Securities and Exchange Commission, the approval of the boards of
directors, shareholders and creditors of the respective parties, the absence
of other merger agreements, the absence of fees for brokers and finders and
continuing representations and warranties.
The Agreement contained covenants of each party including, without
limitation, (a) a covenant not to solicit mergers and acquisitions prior to
the Second Closing, (b) a covenant by the Registrant to increase the size of
its board of directors from four to eight, form three classes of directors
whose terms shall be for three (3) year periods and to cause three
individuals designated by Group to be elected as a directors of the
Registrant, (c) additional affirmation covenants of each party, as
applicable, requiring the maintenance of records, maintenance of properties,
conduct of business, maintenance of insurance, compliance with laws, payment
of taxes, reporting of specified information to the other party, reservation
by the Registrant of a sufficient number of shares of Common Stock to be
issued to Group, qualification by the Registrant of the shares of Common
Stock to be issued to Group for inclusion in the National Association of
Securities Dealers Automated Quotations/Small Cap Market ("NASDAQ/Small Cap
Market"), maintenance of existence, compliance with laws, use of best efforts
to complete the Agreement, coordination of publicity regarding the Agreement,
maintenance of confidentiality of information and further assurances, and (d)
negative covenants of each party, as applicable and subject to certain
transactions undertaken in the ordinary course of business with respect to
amendment of charter documents, issuance of securities, creation of liens and
encumbrances, incurrence of debt, restricted payments, investments, merger
agreements or agreements with respect to other business combinations, leases,
disposing of assets, transactions with affiliates, accounting changes,
disposing of capital stock of a subsidiary, compensation of executive
officers, union contracts, settling or compromising tax liabilities, settling
litigation, delisting securities of the Registrant from NASDAQ/Small Cap
Market, amending any of the Share Exchange Agreement without the prior
approval of the other party and imposing limitations on the rights enjoyed by
Group as a shareholder of the Registrant after the Share Exchange Agreement.
Finally, the Amended and Restated Acquisition Agreement contained
conditions precedent to the closing of the Second Closing Date including,
without limitation, satisfaction of each party with the terms and conditions
of the other Exhibits to the Agreement, receipt of all necessary approvals
and consents from the shareholders and creditors of the respective parties,
governmental authorities and other persons, the absence of pending or
threatened actions that would restrict in any material respect or prohibit
the Second Closing, the
-3-
<PAGE>
determination that the acquisition will be characterized as a tax-free
reorganization under section 368(a)(1)(A) or 368(a)(1)(B) of the Internal
Revenue Code of 1986, as amended, the absence of any violation or default
with respect to any regulation of any governmental body by any of the parties
or their respective subsidiaries, the continued accuracy and correctness of
the representations and warranties of each party as contained in the
Agreement, the performance by each party of its obligations under the
Agreement, the delivery of certificates from appropriate officers of the
respective parties and the delivery of opinions of counsel for each party
acceptable to the other party in its sole discretion.
Concurrent with the execution of the Agreement, the Registrant and Group
entered into a registration rights agreement (the "Registration Rights
Agreement") pursuant to which Group and its successors and assigns will have
the right on five occasions, commencing on May 29, 1998, to cause the
Registrant to register the Registrant's Shares (including shares issued to
Group for its shares of Interwest and shares that may be converted upon
default of the Note) for sale under the Securities Act of 1933, as amended
(the "Securities Act"), and, commencing on May 29, 1997, to cause the
Registrant to include the Registrant's Shares in any registration statement
filed under the Securities Act offering any other shares of the Registrant's
Common Stock.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Unaudited Pro Forma Combined, Condensed Financial Information with
notes. See pages F-3 through F-7.
(b) Financial Statements of Business Acquired - Interwest Communications
C.S. Corporation and Subsidiaries. See pages F-8 through F-27
-4-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERNET COMMUNICATIONS CORPORATION
By: /s/ Benjamin T. Kelly
-------------------------------
Benjamin T. Kelly
Date: December 3, 1996
-5-
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
--------
1. UNAUDITED PRO FORMA COMBINED, CONDENSED FINANCIAL INFORMATION
A. Introduction F-3
B. Pro Forma Combined, Condensed Balance Sheet F-4
- Internet Communications Corporation as of July 31,
1996
- Interwest Communications C.S. Corporation as of
August 31, 1996
C. Pro Forma Interim Combined, Condensed Statement of Operations F-5
- Internet Communications Corporation for the Six
Months Ended July 31, 1996
- Interwest Communications C.S. Corporation for the
Eight Months Ended August 31, 1996
D. Pro Forma Fiscal Combined, Condensed Statement of Operations F-6
- Internet Communications Corporation for the Year
Ended January 31, 1996
- Interwest Communications C.S. Corporation for the
Year Ended December 31, 1995 (Recasted)
E. Notes to Pro Forma Financial Information F-7
II. INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF INTERWEST GROUP, INC.)
A. Report of Independent Public Accountants F-8
B. Consolidated Balance Sheets as of August 31, 1996 F-9
(Unaudited) and December 31, 1995
C. Consolidated Statements of Operations for the Eight F-11
Months Ended August 31, 1996 (Unaudited) and the Seven
Months Ended December 31, 1995
D. Consolidated Statement of Changes in Stockholder's Equity F-12
for the Period from May 31, 1995 to August 31, 1996
(Unaudited)
E. Consolidated Statements of Cash Flows for the Eight Months F-13
Ended August 31, 1996 (Unaudited) and the Seven Months Ended
December 31, 1995
F. Notes to the Consolidated Financial Statements F-14
F-1
<PAGE>
PAGE NO.
--------
III. INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
A. Independent Auditor's Report F-21
B. Combined Statements of Income and Retained Earnings F-22
for the Two Months Ended May 31, 1995, and for the Years
Ended March 31, 1995 and 1994
C. Combined Statements of Cash Flows for the Two Months Ended F-23
May 31, 1995, and for the Years Ended March 31, 1995 and 1994
D. Notes to Combined Financial Statements F-24
Financial statements of Internet are included in the Company's Form 10-KSB
and Form 10-QSB which accompany the Proxy document as Appendixes E and F,
respectively.
F-2
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INTRODUCTION TO PRO FORMA COMBINED, CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
On September 19, 1996, Internet Communications Corporation (Internet or the
Company) completed a purchase with Interwest Communications C.S. Corporation
(Interwest) whereby Internet issued 2,306,541 shares of common stock (49% of the
common stock outstanding after the transaction) and acquired 100% of Interwest's
outstanding common stock. Interwest, prior to the merger, was a wholly owned
subsidiary of Interwest Group, Inc. (Group), a holding company for several
diverse enterprises. Group effectively acquired Interwest from its prior
shareholder (an individual and his spouse) on June 1, 1995 in a monetary
purchase transaction. In conjunction with Internet's acquisition of Interwest,
Group has advanced Internet $900,000 in the form of a promissory note, which if
not paid when due on December 31, 1996, is convertible into common stock at
$3.00 per share.
The attached pro forma combined condensed balance sheet combines the balance
sheets of Internet as of July 31, 1996 with Interwest as of August 31, 1996, as
if the merger had occurred on the balance sheet dates. This merger is being
treated for financial accounting purposes as a purchase transaction.
The pro forma combined condensed statement of operations combines Internet's and
Interwest's six-month and eight-month interim periods, respectively, and year-
end operations as if the merger has occurred at the beginning of the period
presented. Internet's fiscal year-end is January 31, 1996. Interwest, prior to
the acquisition by Group, had a March 31 year-end, which changed to a calendar
year-end as a result of the acquisition by Group. Therefore, Interwest's
operations for the 12 months ended December 31, 1995, have been recasted to
reflect a full fiscal year.
These statements are not necessarily indicative of future operations or the
actual results that would have occurred had the transaction been consummated at
the beginning of the period indicated. The pro forma combined financial
statements should be read in conjunction with the historical financial
statements and notes thereto which for Interwest are accompanying pro forma
information and for Internet are included in its Form 10-KSB and Form 10-QSB
accompanying the Proxy document as Appendixes E and F, respectively.
F-3
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
PRO FORMA COMBINED, CONDENSED BALANCE SHEET (UNAUDITED)
<TABLE>
INTERNET INTERWEST
------------ ----------
JULY 31, AUGUST 31,
1996 1996 ADJUSTMENTS COMBINED
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 399,000 $ 72,000 $ (100,000) (B) $ 371,000
Receivables 3,750,000 3,879,000 - 7,629,000
Inventory 1,109,000 1,908,000 - 3,017,000
Other 293,000 313,000 - 606,000
------------ ---------- ---------- -----------
5,551,000 6,172,000 (100,000) 11,623,000
PROPERTY AND EQUIPMENT, net 1,818,000 813,000 - 2,631,000
OTHER ASSETS, net 100,000 (B)
117,000 2,128,000 1,614,000 (A) 3,959,000
------------ ---------- ---------- -----------
TOTAL ASSETS $ 7,486,000 $9,113,000 $1,614,000 $18,213,000
------------ ---------- ---------- -----------
------------ ---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 2,200,000 $ 236,000 $ - (B) $ 2,436,000
Accounts payable 1,194,000 1,558,000 - 2,752,000
Unearned income 752,000 164,000 - 916,000
Payable to affiliate - 1,436,000 - 1,436,000
Accrued expenses and other 496,000 1,299,000 - 1,795,000
------------ ---------- ---------- -----------
4,642,000 4,693,000 - 9,335,000
LONG-TERM DEBT - 183,000 - 183,000
OTHER - 167,000 - 167,000
MINORITY INTEREST - 204,000 - 204,000
------------ ---------- ---------- -----------
- 554,000 - 554,000
EQUITY:
Common stock 5,207,000 3,732,000 1,748,000 (A) 10,687,000
Accumulated deficit (2,328,000) 140,000 (140,000) (A) (2,328,000)
Other (35,000) (6,000) 6,000 (A) (35,000)
------------ ---------- ---------- -----------
2,844,000 3,866,000 1,614,000 8,324,000
------------ ---------- ---------- -----------
TOTAL LIABILITIES AND EQUITY $ 7,486,000 $9,113,000 $1,614,000 $18,213,000
------------ ---------- ---------- -----------
------------ ---------- ---------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO COMBINED, CONDENSED FINANCIAL INFORMATION.
F-4
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
PRO FORMA COMBINED, CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
INTERNET INTERWEST
----------- -------------
FOR THE SIX FOR THE EIGHT
MONTHS ENDED MONTHS ENDED PRO FORMA
JULY 31, AUGUST 31, --------------------------
1996 1996 ADJUSTMENTS COMBINED
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES - $8,500,000 $13,716,000 $ - $22,216,000
Cost of sales 6,007,000 10,535,000 - 16,542,000
---------- ----------- ----------- -----------
GROSS MARGIN 2,493,000 3,181,000 - 5,674,000
OPERATING EXPENSES 2,571,000 2,993,000 12,000 5,576,000
---------- ----------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS - (78,000) 188,000 (12,000) 98,000
Other (expense) income - (111,000) - (111,000)
---------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES - (78,000) 77,000 (12,000) (13,000)
Income tax benefit - 63,000 (63,000) -
---------- ----------- ----------- -----------
NET INCOME (LOSS) $ (78,000) $ 140,000 $ (75,000) $ (13,000)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
NET LOSS PER COMMON
SHARE $ (.03) $ 3.50 $ (.003)
---------- ----------- -----------
---------- ----------- -----------
AVERAGE NUMBER OF
SHARES OUTSTANDING 2,452,288 40,000 4,707,000
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO COMBINED, CONDENSED FINANCIAL INFORMATION.
F-5
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
PRO FORMA COMBINED, CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
INTERNET INTERWEST
------------ ------------
FOR THE YEAR FOR THE YEAR
ENDED ENDED PRO FORMA
JANUARY 31, DECEMBER 31, ---------------------------
1996 1995 ADJUSTMENTS COMBINED
------------ ------------ ----------- -----------
(RECASTED)
<S> <C> <C> <C> <C>
NET REVENUES - $18,526,000 $15,482,000 $ - $34,008,000
Cost of sales 13,502,000 11,384,000 - 24,886,000
----------- ----------- --------- -----------
GROSS MARGIN 5,024,000 4,098,000 - 9,122,000
OPERATING EXPENSES 6,087,000 4,099,000 140,000 (D) 10,326,000
----------- ----------- --------- -----------
LOSS FROM OPERATIONS - (1,063,000) (1,000) (140,000) (1,204,000)
Other (expense) income (43,000) 79,000 - 36,000
----------- ----------- --------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES - (1,106,000) 78,000 (140,000)(D) (1,168,000)
Income tax (expense)
benefit 128,000 (25,000) 25,000 (E) 128,000
----------- ----------- --------- -----------
NET INCOME (LOSS) $ (978,000) $ 53,000 $(115,000) $(1,040,000)
----------- ----------- --------- -----------
----------- ----------- --------- -----------
NET LOSS PER COMMON SHARE $ (0.41) $ N/A $ (.22)
----------- ----------- -----------
----------- ----------- -----------
AVERAGE NUMBER OF SHARES
OUTSTANDING 2,397,000 N/A 4,704,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO COMBINED, CONDENSED FINANCIAL INFORMATION.
F-6
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO PRO FORMA FINANCIAL INFORMATION
A. To reflect the acquisition of Interwest by Internet, which is valued at
approximately $5,480,000. As the cost basis of Interwest assets
approximate the market value, an excess amount of purchase price over net
assets acquired (goodwill) of approximately $1,614,000 will be recorded,
plus cost of the share exchange. This amount is in addition to
approximately $1,400,000 of goodwill remaining on Interwest balance sheet
from its prior acquisition in June 1995 by Group.
B. To record estimated additional cost of the acquisition.
C. To reflect additional amortization of goodwill recorded in the transaction,
which will be amortized over 20 years.
D. To reduce income tax expense (benefit) based on combined pro forma losses.
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Interwest Communications
C.S. Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Interwest
Communications C.S. Corporation and Subsidiaries (a Colorado corporation and
wholly owned subsidiary of Interwest Group, Inc.) as of December 31, 1995, and
the related consolidated statements of operations, stockholder's equity and cash
flows for the seven-month period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interwest Communications C.S.
Corporation and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the seven-month period then ended in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Denver, Colorado
June 14, 1996
F-8
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF INTERWEST GROUP, INC.)
CONSOLIDATED BALANCE SHEETS
AUGUST 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 72,000 $ 143,000
Accounts receivable:
Unbilled 2,049,000 1,401,000
Trade and other 1,943,000 1,715,000
Allowance (113,000) (82,000)
Inventory 1,908,000 1,169,000
Prepaid expenses 208,000 86,000
Deferred tax asset 105,000 81,000
---------- ----------
Total current assets 6,172,000 4,513,000
PROPERTY AND EQUIPMENT:
Machinery, equipment and other 664,000 555,000
Furniture and fixtures 365,000 336,000
Vehicles 304,000 272,000
Leasehold improvements 85,000 82,000
---------- ----------
1,418,000 1,245,000
Less accumulated depreciation (605,000) (436,000)
---------- ----------
813,000 809,000
---------- ----------
OTHER ASSETS:
Goodwill, net 1,342,000 1,408,000
Noncompete agreements, net 451,000 531,000
Other, net 335,000 344,000
---------- ----------
Total other assets 2,128,000 2,283,000
---------- ----------
TOTAL ASSETS $9,113,000 $7,605,000
---------- ----------
---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-9
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF INTERWEST GROUP, INC.)
CONSOLIDATED BALANCE SHEET
AUGUST 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $1,558,000 $1,428,000
Accounts payable - parent 1,436,000 422,000
Deferred revenue and deposits 164,000 387,000
Accrued salaries and wages 206,000 186,000
Other accrued liabilities 1,064,000 297,000
Income taxes payable 29,000 31,000
Revolving line-of-credit -- 272,000
Current maturities of long-term debt 236,000 182,000
---------- ----------
Total current liabilities 4,693,000 3,205,000
LONG-TERM DEBT 183,000 293,000
DEFERRED REVENUE 164,000 101,000
NET DEFERRED TAX LIABILITIES 3,000 44,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 204,000 239,000
COMMITMENTS (Notes 5 and 8)
STOCKHOLDER'S EQUITY:
Common stock, no par value; 100,000 shares
authorized, 40,000 shares issued and
outstanding 3,635,000 3,635,000
Common stock, non-voting, no par value;
10,000 shares authorized, 1,000 shares
issued and outstanding 91,000 91,000
Retained earnings (deficit) 140,000 (3,000)
---------- ----------
Total stockholder's equity 3,866,000 3,723,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $9,113,000 $7,605,000
---------- ----------
---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-10
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF INTERWEST GROUP, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
EIGHT SEVEN
MONTHS MONTHS
ENDED ENDED
AUGUST 31, DECEMBER 31,
1996 1995
----------- -----------
(UNAUDITED)
REVENUE $13,716,000 $10,284,000
DIRECT LABOR AND MATERIALS 10,535,000 6,490,000
----------- -----------
Gross profit 3,181,000 3,794,000
DEPRECIATION AND AMORTIZATION 368,000 347,000
SELLING, GENERAL AND ADMINISTRATIVE 2,625,000 3,343,000
----------- -----------
Income (loss) from operations 188,000 104,000
INTEREST EXPENSE (81,000) (62,000)
INTEREST INCOME 9,000 3,000
MINORITY INTEREST (39,000) (3,000)
----------- -----------
INCOME BEFORE INCOME TAXES 77,000 42,000
INCOME TAX (EXPENSE) BENEFIT 63,000 (45,000)
----------- -----------
NET INCOME (LOSS) $ 140,000 $ (3,000)
----------- -----------
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-11
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF INTERWEST GROUP, INC.)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
NON-VOTING
COMMON STOCK COMMON STOCK RETAINED TOTAL
------------------- -------------------- EARNINGS STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT (DEFICIT) EQUITY
------ ------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, May 31, 1995 1,000 $ -- 40,000 $ 12,000 $ 1,614,000 $1,626,000
Fair value adjustments related to
the acquisition of the Company by
Interwest Group, Inc.:
Retained earnings -- 39,000 -- 1,575,000 (1,614,000) --
Purchase accounting adjustments -- 52,000 -- 2,048,000 -- 2,100,000
------ ------- ------ ---------- ----------- ----------
BALANCES, June 1, 1995 1,000 91,000 40,000 3,635,000 -- 3,726,000
Net loss -- -- -- -- (3,000) (3,000)
------ ------- ------ ---------- ----------- ----------
BALANCES, December 31, 1995 1,000 91,000 40,000 3,635,000 (3,000) 3,723,000
Net income -- -- -- -- 143,000 143,000
------ ------- ------ ---------- ----------- ----------
BALANCES, August 31, 1996 (Unaudited) 1,000 $91,000 40,000 $3,635,000 $ 140,000 $3,866,000
------ ------- ------ ---------- ----------- ----------
------ ------- ------ ---------- ----------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-12
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF INTERWEST GROUP, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
EIGHT SEVEN
MONTHS MONTHS
ENDED ENDED
AUGUST 31, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 140,000 $ (3,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 368,000 347,000
Gain on sale of assets and other (6,000) (15,000)
Deferred income tax benefit (65,000) (27,000)
Minority interest (34,000) 3,000
(Increase) decrease in:
Accounts receivable, net (1,092,000) (1,115,000)
Prepaid expenses 107,000 6,000
Inventory (739,000) 148,000
Other assets -- 78,000
Increase in accounts payable and accrued
liabilities 962,000 161,000
Increase (decrease) in:
Deferred revenue and deposits -- (121,000)
Accounts payable - parent 732,000 422,000
Income taxes payable 11,000 31,000
----------- -----------
Net cash provided by (used in) operating activities 384,000 (85,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (106,000) (398,000)
Purchase from sale of property and equipment -- 33,000
----------- -----------
Net cash used in investing activities (106,000) (365,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 45,000 6,000
Repayments of long-term debt (122,000) (219,000)
Borrowings under revolving line-of-credit 955,000 868,000
Repayments under revolving line-of-credit (1,227,000) (632,000)
----------- -----------
Net cash provided by (used in) financing activities (349,000) 23,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (71,000) (427,000)
CASH AND CASH EQUIVALENTS, at beginning of year 143,000 570,000
----------- -----------
CASH AND CASH EQUIVALENTS, at end of year $ 72,000 $ 143,000
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash payments for:
Interest $ 74,000 $ 58,000
Income taxes $ 33,000 $ 427,000
----------- -----------
----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Effective June 1, 1995, Interwest Group, Inc. (formerly known as West Hazmat
Companies, Inc.) acquired all of the outstanding common stock of Interwest
Communications C.S. Corporation and its related entities (see Note 1). The
cost of the purchase has been pushed down to the accompanying financial
statements and as a result of purchase accounting adjustments there was a
noncash increase in assets and stockholder's equity of $2,100,000.
During the seven-month period ended December 31, 1995, the Company transferred
approximately $100,000 from inventory to property and equipment.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-13
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF INTERWEST GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND ACQUISITION:
OPERATIONS - Interwest Communications C.S. Corporation (Interwest C.S.)
and subsidiaries (the "Company") are engaged primarily in the business
of selling, leasing, installing, and maintaining telephone
communication systems for various customers primarily in the state of
Colorado.
ACQUISITION - Effective June 1, 1995, Interwest Group, Inc. (Interwest
Group) (formerly known as West Hazmat Companies, Inc.), a wholly owned
subsidiary of the Anschutz Company (Anschutz), purchased 100% of the
common stock of the Company. The purchase price, including acquisition
costs, was approximately $3,726,000 and consisted of cash of
approximately $1,482,000 and a note payable issued to the seller of
approximately $2,244,000 which is reflected as a liability of Interwest
Group.
This acquisition was accounted for using the purchase method of
accounting. Goodwill of approximately $1,470,000 and noncompete
agreements of $600,000 were recorded in connection with the purchase
and are being amortized on a straight-line basis over fifteen and five
years, respectively.
Unaudited pro forma revenue and net income for the year ended December
31, 1995, prepared as if the Company was purchased by Interwest Group
on January 1, 1995, are $15,790,000 and $37,000, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Interwest C.S.; its 58.2% subsidiary, Work
Telcom Services, Inc.; its 97% subsidiary, Interwest Cable Network
Systems, Inc.; its 51% subsidiary, Interwest Communications Pueblo
Corporation; and its 50% subsidiary, Omega Business Communications
Services, Inc. The minority interests of the above subsidiaries are
owned by the respective managers of each company and two of the
managers have the option to acquire a stated number of additional
shares at a specified price, but the managers would still own less than
50% of their respective entity. All material intercompany transactions
and amounts have been eliminated in consolidation.
INTERIM FINANCIAL STATEMENTS - The consolidated financial statements of
the Company as of August 31, 1996, presented herein have been prepared
by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. The financial statements
reflect all adjustments (consisting of only normal recurring accruals)
which, in the opinion of management, are necessary to present fairly
the financial position, results of operations and cash flows of the
Company as of August 31, 1996, and for the period then ended.
ACCOUNTING ESTIMATES - Preparation of financial statements in
conformity with generally accepted accounting principles requires that
management make certain estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and
F-14
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF INTERWEST GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
liabilities as of the balance sheet date and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from these estimates.
REVENUE RECOGNITION - The Company utilizes the percentage-of-completion
method under which revenues from long-term contracts are recognized by
measuring the percentage of costs incurred to date to estimated total
costs for each contract. Contract costs include direct material and
labor costs and those indirect costs related to contract performance,
such as indirect labor, supplies, tools, repairs, and depreciation
costs. Operating costs are charged to expense as incurred. Provisions
for estimated losses on incomplete contracts are made in the period in
which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, may result in revisions to
costs and income and are recognized in the period in which the
revisions are determined.
Following the acquisition by Interwest Group, the Company changed its
method of accounting for long-term contracts from the completed
contract method to the percentage of completion method. The percentage
of completion method is considered preferable when an entity can
reasonably estimate contract revenues and expenses and the extent of
progress toward completion because a proportionate share of contract
revenues and expenses are recognized during the period earned rather
than at the completion of the contract. If the Company had continued
to use the completed contract method, the net loss for the seven-month
period ended December 31, 1995 and the eight-month period ended August
31, 1996 would have been approximately $370,000 and $120,000,
respectively.
DEFERRED REVENUE AND DEPOSITS - The Company has entered into
maintenance and extended warranty contracts with customers which
require payment in advance. Revenue received in advance is deferred
and recognized on a straight-line basis over the lives of the
maintenance and extended warranty contracts which are one and five
years, respectively.
Deposits represent advance payments received from customers which are
required prior to the commencement of an installation project. At
December 31, 1995 and August 31, 1996, the Company has received and
deferred approximately $255,000 and $238,000, respectively, of unearned
deposits from customers.
PROPERTY AND EQUIPMENT - Significant additions and improvements are
capitalized at cost, while maintenance and repairs which do not improve
or extend the life of the respective assets are charged to operations
as incurred.
Depreciation and amortization is provided using the straight-line
method over the estimated useful lives of the related assets as follows:
Machinery, equipment and other 3-7 years
Furniture and fixtures 3-5 years
Vehicles 3-5 years
Leasehold improvements 5 years
F-15
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF INTERWEST GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS - All highly liquid cash investments with
original maturity dates of three months or less are classified as cash
equivalents.
INTANGIBLES - Goodwill is being amortized on a straight-line basis over
a period of 15 years. Accumulated amortization at December 31, 1995
and August 31, 1996, is approximately $62,000 and $128,000,
respectively.
The Company is amortizing noncompete agreements on a straight-line
basis over the five year life of the agreements. At December 31, 1995
and March 31, 1996, the related accumulated amortization is
approximately $69,000 and $149,000, respectively.
Other assets is comprised primarily of purchased customer lists which
are being amortized on a straight-line basis over five years. At
December 31, 1995 and August 31, 1996, the related accumulated
amortization is approximately $56,000 and $104,000, respectively.
The amortization expense for the seven months ended December 31, 1995
and the eight months ended August 31, 1996, for the above intangibles
was approximately $173,000 and $194,000, respectively.
INVENTORY - Inventory is stated at the lower of cost or market using
the weighted average cost method and is comprised primarily of
telephone systems and related parts.
INCOME TAXES - Interwest C.S. and Interwest Cable Network Systems, Inc.
are included in the consolidated federal income tax return of Anschutz
and the other subsidiaries file their own federal income tax return.
The income taxes of the Company are computed by applying the asset and
liability method to the Company as if it were a separate taxpayer. The
Company receives or makes cash payments to Anschutz based upon the
benefits or liabilities it generates.
The current provision for income taxes represents actual or estimated
amounts payable or refundable on tax returns filed or to be filed for
each year. Deferred tax assets and liabilities are recorded for the
estimated future tax effects of: (a) temporary differences between the
tax basis of assets and liabilities and amounts reported in the
consolidated balance sheets, and (b) operating loss and tax credit
carryforwards. The overall change in deferred tax assets and
liabilities for the period measures the deferred tax expense or benefit
for the period. Effects of changes in enacted tax laws on deferred tax
assets and liabilities are reflected as adjustments to tax expense in
the period of enactment. The measurement of deferred tax assets may be
reduced by a valuation allowance based on judgmental assessment of
available evidence if deemed more likely than not that some or all of
the deferred tax assets will not be realized.
F-16
<PAGE>
3. DEBT:
Long-term debt at August 31, 1996 and December 31, 1995 consists of the
following:
August 31, December 31,
1996 1995
---------- ------------
Note payable, due in 48 monthly installments
of $4,751 including interest at 9.25%, final
payment due on May 1, 2000, unsecured. $ 143,000 $ 145,000
Installment note for purchase of equipment,
interest accrues at the bank's prime rate,
plus 1.5% (10.00% at December 31, 1995), payable
in 60 monthly payments of $4,167 plus interest,
final payment due on January 1, 1998, secured by
equipment with a carrying value of $59,000 at
December 31, 1995. 69,000 102,000
Note payable, due in 36 monthly installments of
$3,000, including interest at 6.66%, final payment
due on November 1, 1997, unsecured. 40,000 62,000
Note payable, due in 36 monthly installments of
$2,059, including interest at 8.00%, final payment
due on June 1, 1998, unsecured. 40,000 54,000
Note payable to a bank, due in 36 monthly
installments of $3,051, including interest at 9.75%
rate, final payment due on February 1, 1998,
unsecured. 39,000 61,000
Notes payable, due in monthly installments from
$216 to $854, including interest from 8.00% to
14.06%, final payments due from August 12, 1996 to
April 27, 1998, secured by vehicles with a carrying
value of $52,000 at December 31, 1995. 46,000 51,000
Note payable, due in 24 monthly installments of
$2,055, including interest at 9%, final payment
due June 1, 1998, unsecured. 42,000 -
--------- ---------
419,000 475,000
Less current maturities of long-term debt (236,000) (182,000)
--------- ---------
Long-term debt $ 183,000 $ 293,000
--------- ---------
--------- ---------
F-17
<PAGE>
Annual maturities of long-term debt are as follows:
Year Ending December 31,
------------------------
1996 $182,000
1997 174,000
1998 57,000
1999 44,000
2000 18,000
--------
$475,000
--------
--------
The Company has outstanding borrowings of $272,000 and $-0- under a
$500,000 revolving line-of-credit with a bank at December 31, 1995 and
August 31, 1996, respectively. Interest accrues at the bank's prime rate
plus 1% (9.5% at December 31, 1995), and is payable monthly. The line-of-
credit is secured by all funds in the bank's custody and the Company's
accounts receivable and inventory balances.
In June 1996, the Company paid the outstanding balance and terminated this
line-of-credit agreement.
In April 1996, the Company along with Interwest Group and affiliates
entered into a $4.3 million revolving line-of-credit agreement and the
Company is jointly and severally liable under the agreement. This
agreement includes a provision that should the Company's ownership change
by more than 49%, it will be considered an event of default.
Under the provisions of certain debt agreements, the Company is required to
maintain compliance with certain financial covenants, among other
restrictions, including a trading ratio which is based on the ratio of
various fixed assets to accounts payable, accrued expenses and principal
outstanding on the loan, and a maximum borrowings ratio based on accounts
receivable and inventory.
4. INCOME TAXES:
Deferred income tax assets and liabilities at December 31, 1995, are as
follows:
Current:
Allowance for doubtful accounts $31,000
Deferred revenue 50,000
-------
Current deferred tax asset $81,000
-------
-------
F-18
<PAGE>
Noncurrent:
Amortization of noncompetes $ 18,000
Deferred revenue 38,000
Customer lists 38,000
Accelerated depreciation for tax and other (138,000)
---------
Noncurrent deferred tax liabilities, net $ (44,000)
---------
---------
Components of the income tax expense are as follows:
Current expense $ 72,000
Deferred benefit (27,000)
--------
Income tax expense $ 45,000
--------
--------
5. COMMITMENTS:
The Company has several operating leases for office space, vehicles and
equipment, which expire at various times through 2001. In addition, the
Company leases its Colorado Springs office and operations facility from a
related party under an operating lease agreement which expires on May 31,
2000. Rent expense, related to the operating leases, for the seven months
ended December 31, 1995 was $141,000. Aggregate minimum annual rentals
under such leases are as follows:
Year Ending December 31,
------------------------
1996 $ 337,000
1997 300,000
1998 260,000
1999 235,000
2000 182,000
Thereafter 80,000
----------
$1,394,000
----------
----------
6. RETIREMENT AND BONUS PLANS:
The Company has established a 401(k) retirement plan covering substantially
all of their employees who have been employed with the Company for one year
and who are at least 21 years of age. Each employee's contribution up to a
maximum of 10% is matched 50% by the Company. The Company may also make
additional cash contributions at the discretion of the Board of Directors.
Employees are fully
F-19
<PAGE>
vested in employer contributions after they complete six years of service.
Contributions of $38,00 were made for the seven months ended December 31,
1995.
The Company awards bonuses to certain management personnel which are based
on various performance factors and are awarded at the discretion of the
Company's management.
7. RELATED PARTY TRANSACTIONS:
At December 31, 1995 and August 31, 1996, the Company owed approximately
$422,000 and $1,436,000 to Interwest Group primarily for cash draws and for
its share of insurance which is provided by Anschutz and allocated to the
Company.
8. CONTINGENCIES:
The Company is a party to three employment related legal and or
administrative proceedings which have arisen out of the ordinary course of
business. Although the ultimate resolution of these matters is uncertain,
management believes that the actions are without merit and that the outcome
will not have a material adverse effect on the Company's financial position
or results of operations. The Company has not recorded any liability
amounts related to these matters.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, and other accrued liabilities. The carrying
amounts for these financial instruments approximate fair value due to the
short-term maturity of these instruments. Debt is also a financial
instrument and based upon the difference in prevailing interest rates when
the debt was issued and the prevailing interest rates at December 31, 1995,
the carrying values approximate fair values.
F-20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Interwest Communications C.S. Corporation
Colorado Springs, CO
We have audited the combined balance sheets (not separately included herein) of
Interwest Communications C.S. Corporation and affiliates as of May 31, 1995,
March 31, 1995 and 1994 and the accompanying related combined statements of
income, retained earnings, and cash flows for the two months ended May 31, 1995
and the years ended March 31, 1995 and 1994. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined balance sheets referred to above present fairly, in
all material respects, the combined financial position of Interwest
Communications C.S. Corporation and affiliates as of May 31, 1995, March 31,
1995 and March 31, 1994 and the results of their operations and their cash flows
for the two months ended May 31, 1995 and the years ended March 31, 1995 and
March 31, 1994 in conformity with generally accepted accounting principles.
Hilderbrand & Associates, P.C.
Certified Public Accountants
Colorado Springs, Colorado
August 11, 1995
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
TWO MONTHS FOR THE YEARS ENDED
ENDED MARCH 31,
MAY 31, -------------------------
1995 1995 1994
---------- ----------- -----------
NET SALES $1,966,000 $12,075,000 $12,219,000
Cost of Sales 1,102,000 7,011,000 7,189,000
---------- ----------- -----------
GROSS PROFIT 864,000 5,064,000 5,030,000
SELLING, GENERAL AND
ADMINISTRATIVE 865,000 4,212,000 3,912,000
---------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (1,000) 852,000 1,118,000
Other Income (Expense), net 29,000 - (23,000)
---------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 28,000 852,000 1,095,000
Provision (Benefit) for Income Taxes
Current 17,000 344,000 379,000
Deferred (9,000) (30,000) 5,000
---------- ----------- -----------
8,000 314,000 384,000
---------- ----------- -----------
INCOME BEFORE MINORITY INTERESTS 20,000 538,000 711,000
Minority Interests in Income (10,000) (71,000) (84,000)
---------- ----------- -----------
NET INCOME 10,000 467,000 627,000
RETAINED EARNINGS AT
BEGINNING PERIOD 1,603,000 1,136,000 509,000
---------- ----------- -----------
RETAINED EARNINGS AT END OF PERIOD $1,613,000 $ 1,603,000 $ 1,136,000
---------- ----------- -----------
---------- ----------- -----------
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-22
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
TWO MONTHS FOR THE YEARS ENDED
ENDED MARCH 31,
MAY 31, -----------------------
1995 1995 1994
--------- --------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 10,000 $ 467,000 $ 627,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Minority interests in net income of
consolidated subsidiary and
combined affiliates 10,000 71,000 84,000
Depreciation and amortization 40,000 118,000 157,000
Provision for bad debts 5,000 83,000 94,000
Deferred tax expense (benefit) (9,000) (31,000) 5,000
(Increase) decrease in:
Receivables 100,000 (134,000) (1,452,000)
Inventories (524,000) (194,000) 59,000
Prepaid expenses (20,000) (48,000) (21,000)
Deposits and other (10,000) 1,000 (3,000)
Increase (decrease) in:
Accounts payable 318,000 228,000 88,000
Accrued liabilities (91,000) 9,000 365,000
Deposits on uncompleted
contracts 45,000 211,000 (26,000)
Deferred revenues 29,000 22,000 (62,000)
Warranty reserves 18,000 69,000 -
--------- --------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (79,000) 872,000 (85,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection on installment sales 9,000 16,000 15,000
Purchase of property and equipment (36,000) (157,000) (49,000)
Proceeds from sales of property and
equipment - 9,000 -
Loans to minority interest shareholder - - (37,000)
Purchases of intangible assets (42,000) (30,000) -
--------- --------- -----------
NET CASH USED IN INVESTING ACTIVITIES (69,000) (162,000) (71,000)
CASH FLOWS FROM FINANCING ACTIVITY:
Proceeds from short-term debt - - 480,000
Payments on short-term debt - - (507,000)
Proceeds from long-term debt - 91,000 -
Payments on long-term debt (36,000) (150,000) (114,000)
--------- --------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (36,000) (59,000) (141,000)
--------- --------- -----------
NET INCREASE (DECREASE) IN CASH (184,000) 651,000 (297,000)
CASH, at beginning of period 754,000 103,000 400,000
--------- --------- -----------
CASH, at end of period $ 570,000 $ 754,000 $ 103,000
--------- --------- -----------
--------- --------- -----------
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-23
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION - Interwest Communications C.S. Corporation (Interwest C.S.),
Work Telcom Services, Inc. (Work Telcom), Interwest Communications Pueblo
Corporation (Interwest Pueblo), and Interwest Sound Communications, Inc.
(Interwest Sound) are incorporated under the laws of the Sate of Colorado.
The companies are affiliated through common ownership and management and
are engaged primarily in the business of selling, leasing, installing, and
maintaining telephone communication systems.
PRINCIPLES OF COMBINATION - The combined financial statements include the
consolidated accounts of Interwest C.S. and its 58.2% subsidiary, Work
Telcom and the affiliated companies of Interwest Pueblo and Interwest
Sound. The sole shareholder of Interwest C.S. owns 51% of the outstanding
common stock of Interwest Pueblo and his spouse owns 75% of the outstanding
common stock of Interwest Sound. The minority interests of Work Telcom,
Interwest Pueblo, and Interwest Sound are owned by the respective manager
of each company. All material intercompany transactions and balances have
been eliminated.
REVENUE RECOGNITION - Interwest C.S., Work Telcom, and Interwest Pueblo are
on the completed contract method under which revenues and costs are
recognized at the time a contract is completed, unless it becomes apparent
that a contract will result in a loss, then such loss is provided for
currently. Accordingly, inventory and labor costs are deferred along with
related billings until such time as the contract is complete. Interwest
C.S., Work Telcom, and Interwest Pueblo also have maintenance agreements
with customers. Revenue received in advance is deferred and recognized
over the terms of the maintenance agreements.
Interwest Sound is on the percentage-of-completion method under which
revenues from contracts are recognized by measuring the percentage of costs
incurred to date to estimated total costs for each contract. That method
is used because management considers total cost to be the best available
measure of progress on the contracts. Contract costs include direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs, and
depreciation costs. Operating costs are charged to expense as incurred.
Provisions for estimated losses on incomplete contracts are made in the
period in which such losses are determined. Changes in job performance,
job conditions, and estimated profitability, may result in revisions to
costs and income and are recognized in the period in which the revisions
are determined.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Bad debts are recognized by the
establishment of an allowance for expected losses on receivables that may
become uncollectible.
PROPERTY AND EQUIPMENT - Depreciation for property and equipment owned by
the companies is computed on a straight-line basis over the estimated life
of the related asset, which range from three to ten years. Expenditures
for major renewals and betterments that extend the useful lives of property
and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
F-24
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INCOME TAXES - The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between
the financial statements and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
RECLASSIFICATION - Certain reclassifications have been made to the combined
financial statements to present them on a consistent basis between periods.
Such reclassifications had no material effect on net income.
2. CASH FLOW INFORMATION:
Cash paid for interest and income taxes consisted of:
FOR THE
TWO MONTHS YEARS ENDED
ENDED MARCH 31,
MAY 31, ------------------
1995 1995 1994
---------- -------- -------
Interest $2,000 $ 24,000 $31,000
------ -------- -------
------ -------- -------
Income Taxes $ - $375,000 $24,000
------ -------- -------
------ -------- -------
Non-cash investing and financing activities consisted of:
Two Months Ended May 31, 1995:
Purchase of vehicles and equipment with financing through bank
loans of $156,000.
Purchase of inventory and customer lists through notes payable
for $261,000.
Year Ended March 31, 1995:
Purchase of vehicles and equipment with financing through bank
loans and capital lease arrangements of $66,000.
Year Ended March 31, 1994:
Purchase of customer list through note payable for $98,000.
F-25
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
3. INCOME TAX PROVISION:
The provisions for incomes taxes for the years ended March 31, 1995 and
1994 approximate the expected statutory rate for Federal income taxes after
considering the effects of the surtax exemption and state taxes. Also, in
fiscal 1994, the Company realized a tax benefit of approximately $23,000
from the utilization of a net operation loss carrryforward.
4. PROFIT SHARING PLAN:
The Companies have established a profit-sharing plan covering substantially
all of their employees. The plan is a defined contribution plan that
qualifies under Internal Revenue Code Section 401(k). The companies will
match an employee's contribution $.50 for every dollar contributed, and
will also make additional contributions as cash flows permit. The
employers' matching contribution expenses were as follows:
TWO MONTHS
ENDED FOR THE YEARS ENDED
MAY 31, MARCH 31,
---------- -------------------
1995 1995 1994
---------- -------- -------
Interwest C.S. and Work Telcom $7,000 $37,000 $34,000
Interwest Pueblo 1,000 8,000 7,000
Interwest Sound 1,000 3,000 4,000
------ ------- -------
$9,000 $48,000 $45,000
------ ------- -------
------ ------- -------
The Companies also made profit sharing contributions for the years ending
March 31, 1995 and 1994 of $-0- and $75,000, respectively.
5. LEASES:
PROPERTY LEASED TO OTHERS - Interwest C.S. lease various equipment, to
others, with various terms and renewal options. The operating method is
used to report revenue from those leasing activities and the cost of those
leased assets, less related accumulated depreciation is carried on the
Company's balance sheet.
PROPERTY LEASED FROM OTHERS - Interwest C.S. leases its corporate offices
and operations facilities in Colorado Springs under operating leases
expiring on March 31, 1996 from its sole shareholder. Interwest C.S. is
responsible for all taxes, maintenance and insurance on the property. Rent
expense for both years ending March 31, 1995 and 1994 was $48,000 each year
and $8,000 for the two months ended May 31, 1995. Interwest C.S. also
leases its operations facility in Denver under an operating lease which
expires September 30, 1995. Interwest Pueblo leases its operations
facility in Pueblo under a three year operating lease expiring March 1,
1997.
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<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
At March 31, 1995, future minimum lease payments by year were as follows:
CAPITAL OPERATING
YEAR ENDED MARCH 31, LEASES LEASES
-------------------- ------- ---------
1996 $15,000 $74,000
1997 14,000 10,000
------- -------
Total future minimum lease payments $29,000 $84,000
------- -------
------- -------
6. SUBSEQUENT EVENTS:
On June 1, 1995, the sole shareholder of Interwest C.S. and 51% shareholder
of Interwest Pueblo sold his common stock in those companies to Interwest
Group, Inc. (formerly West Hazmat Companies, Inc.).
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