UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the fiscal year ended July 31, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______________ to ______________
Commission file number: 0-24627
IDF INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
New York 11-3059399
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(State of incorporation) (I.R.S. employer identification number)
330 West 42nd St. (20th Floor)
New York, New York 10036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 563-6900
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |_| No |X|
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|
State Issuer's revenues for its most recent fiscal year: $14,066,155
Aggregate market value of Common Stock held by nonaffiliates as of October 1,
1998: $2,699,798
Number of shares of Common Stock outstanding as of October 1, 1998: 9,927,841
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1998
Annual Meeting of Stockholders are incorporated by reference to Part III of this
report.
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The statements contained in Part I and Part II herein, other than historical
information, are or may be deemed to be "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and involve factors,
risks and uncertainties that may cause the actual results of IDF International,
Inc. in future periods to differ materially from such statements. These
factors, risk and uncertainties include the relatively short operating history
of IDF; rapid technological change affecting products and services offered by
IDF; the impact of competitive services, products and pricing from other
consulting, engineering and design firms; general economic conditions and the
volitility of customers' capital building plans and their ability to obtain
financing; delays and postponements in consulting and engineering projects,
including public sector projects; the ability to obtain and keep, at profitable
levels, quality personnel; and the availability of sufficient financial
resources to enable IDF to meet both current and new customer demand for
services.
PART I
ITEM 1. BUSINESS
GENERAL
IDF International, Inc. ("IDF" or the "Company"), is a holding company
with two wholly-owned subsidiaries, TechStar Communications, Inc. ("TechStar")
and Hayden-Wegman, Inc. ("Hayden-Wegman"). TechStar provides site acquisition,
zoning and planning, architectural and engineering project management and
consulting services to the wireless communications industry. Hayden-Wegman
provides design, construction management and engineering services to
municipalities and other governmental agencies and private industry.
TechStar is headquartered in Silver Spring, Maryland (the Washington, D.C.,
metropolitan area). Established in 1993, TechStar's mission is to offer its
clients a blend of real estate, legal and telecommunications engineering
professionals who can produce turnkey wireless communications infrastructure
solutions from within one organization. Its current clients include AT&T
Wireless, Motorola, Omnipoint Communications, and Nextel Communications.
Hayden-Wegman is headquartered in New York, New York, and has offices in
Boston, Massachusetts, and Buffalo, New York as well as elsewhere in the
Northeast United States. Hayden-Wegman provides general engineering services to
both public and private clients. Established in 1931, it has developed a strong
reputation (among the variety of services it offers) for infrastructure design
and refurbishment, to include work on
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projects such as bridges, tunnels, roads, piers, marinas, garages, pumping and
electrical stations and solid waste facilities. Hayden-Wegman also performs
construction management and offers engineering, analysis and design services for
office buildings, planned unit developments and other development projects. Its
current clients include state and local departments of transportation and
general services administrations, the United Nations, AT&T, the New York Museum
of Natural History, utility companies and private developers.
INDUSTRY OVERVIEW
IDF is involved in two main industries through its subsidiaries. These are
the wireless communications consulting services industry, through TechStar, and
the building, infrastructure and environmental engineering industry, through
Hayden-Wegman.
WIRELESS COMMUNICATIONS INDUSTRY
TechStar typically serves wireless communications carriers. These carriers
need to develop or enhance networks of radio links/sites to allow for seamless
communications coverage in particular Federal Communications Commission ("FCC")
licensed geographic areas. Nationwide, cellular, paging and dispatch services
FCC license holders are in the process of completing their networks' coverage or
enhancing their existing networks to remain competitive with new market
entrants. Although some of these licenses are over a decade old, these systems
are still incomplete, particularly in suburban and rural areas. In addition,
since 1996, new carriers have acquired various new licenses from the FCC.
Some licenses were issued for the development of networks commonly
referred to as personal communications systems or "PCS" (which from users'
perspective operate similarly to traditional cellular networks), and are
currently in the process of being developed. PCS carriers are expected to
continue building out their systems to compete with existing cellular
carriers. Many initial markets have launched or are close to launching. Many
other license holders have not even begun to develop their systems due to
financial constraints, limits on foreign investment, changes in the availability
of financing through capital markets and other forces. Some holders are awaiting
decisions from the FCC or the courts regarding potential restructuring of their
license fee payments, business and/or other modifications. In addition to this,
the FCC plans or has completed auctions of licenses to the D, E and F blocks of
the radio frequency spectrum and the reauction of the license to the C block of
the radio frequency spectrum. The restructuring or
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repositioning of these licenses as well as the further development of emerging
technologies, such as local multipoint distribution system ("LMDS"), hold the
prospect of additional new activity in the wireless communications industry.
Regardless of the outcome, competition remains heavy within wireless
communications.
Internationally, wireless networks are developing at a rapid pace and
liberalization/privatization processes are at the various stages of
implementation, providing significant ongoing market opportunities for companies
that can offer wireless communications consulting services abroad. Some
countries, including those in Eastern Europe and Latin America, see wireless
communications as a much cheaper alternative to rebuilding obsolete or
malfunctioning landline communications infrastructures, and are encouraging
deployment of wireless communications systems.
INFRASTRUCTURE AND ENVIRONMENTAL ENGINEERING INDUSTRY
Hayden-Wegman provides building, infrastructure and environmental
engineering services, as well as structural rehabilitation of existing
structures, construction management services and real estate development
engineering. With the ongoing deterioration of infrastructure in this country
and abroad, Hayden-Wegman has opportunities to participate in the rebuilding
process. Looking at the industry in general, according to Engineering
News-Record, an industry trade journal, domestic billings of the top 500
domestic design firms aggregated approximately $33 billion in 1997. Billings
from infrastructure design projects accounted for about $5.3 billion for the top
500 domestic design firms. Billings from building projects account for
approximately $9 billion for such firms.
Currently in the United States, a strong need for public sector
infrastructure and environmental engineering services has developed. Numerous
public works projects such as bridges and water supply systems have reached the
point in their useful lives where they need to be either rehabilitated or
replaced with new construction. While municipalities have often hesitated, due
to budgetary constraints, to effect these necessary upgrades, currently a
confluence of factors is pushing them to do so. The two main factors are: (1)
necessity, due to projects reaching a critical stage of deterioration, and (2)
opportunity, due to current strong government revenue flows facilitated by the
strong national economy. Management believes that the deteriorating bridges in
the Northeast and New York City's failing water supply and waste water systems
offer opportunities for expansion of Hayden-Wegman's current services in these
areas.
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In addition to public sector projects, the current strong economy has led
to renascent commercial construction activity. Numerous waterfront
rehabilitation, commercial structure development and redevelopment and other
projects are underway. In the Northeast United States, there is an increasing
demand for waterfront reconstruction planning and design. These projects require
the environmental analysis and rehabilitation of many, formerly neglected,
structures and properties.
In June 1998, Congress enacted the Transportation Equity Act for the 21st
Century ("TEA-21"). TEA-21, an act to authorize funds for federal-aid highways,
highway safety programs, transit programs and other purposes, succeeds the
expired Intermodal Surface Transportation Efficiency Act. TEA-21 authorizes the
spending of up to $217 billion over the next six years, and is expected to
increase demand for design and engineering services.
TECHSTAR AND HAYDEN-WEGMAN OPERATIONS
The business activities of IDF are defined by the services provided by
TechStar and Hayden-Wegman.
TECHSTAR SERVICES
TechStar's services are generally sold to telecommunications operators and
equipment manufacturers. Telecommunications operators are the companies, both in
the United States and abroad, that design, build, manage and operate the
communications system infrastructure. In addition to landline service (telephone
service effected through a network that is physically wired together), many
operators have developed or are developing wireless communications networks
based on interconnection which includes radio waves. Most of the early wireless
networks were analog cellular networks. While cellular networks are still
prevalent, many operators are now developing or have developed digital PCS
networks, which from the users' perspective operate like a cellular network.
Also, FCC auctions of the D, E and F blocks of the radio frequency spectrum, the
reauctioning of the C block thereof and emerging technologies such as LMDS serve
to create new opportunities for TechStar's services within the industry.
Many of these wireless networks have been or are being constructed by
established companies in the telecommunications industry. Examples of these
companies include AT&T, GTE, Bell Atlantic, Pacific Bell, Sprint and others. In
addition, the sales of radio frequency licenses by the FCC has resulted in the
development of many new wireless communications operators.
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TechStar offers services directly to these operators to aid them in designing
and building their wireless communications networks.
Network operators must purchase significant amounts of new equipment
(switching, transmission, etc.) to develop and run their wireless communications
networks. A relatively small number of equipment vendors (Motorola, Ericsson,
Northern Telecom and others) compete vigorously to be chosen to be the equipment
suppliers for a given wireless network. As part of the bidding process, a number
of equipment vendors offer telecommunications operators fully operational,
turnkey wireless communications networks. Equipment vendors offer to sell the
necessary network operating equipment, and build the wireless communications
network, thereby offering to sell a fully operational wireless communications
network to a telecommunications operator. TechStar offers its services to
equipment manufacturers or other vendors to aid them in designing and building
such wireless communications networks for their customers.
TechStar's potential client base is limited to those telecommunications
companies that outsource their wireless communications infrastructure needs.
Three of TechStar's clients accounted for more than 90% of TechStar's revenues
in each of the fiscal years ended 1998 and 1997. The loss of any of these
customers, or a reduction in business from any of these customers, would have a
material adverse impact on TechStar. There has been and continues to be merger,
acquisition and consolidation activity in the telecommunications industry.
Mergers and consolidations in the future could reduce the number of TechStar's
clients or potential clients, which could have a material adverse impact on
TechStar's business and results of operations. Further, decreases or delays in
clients' capital spending would negatively impact TechStar's revenues and
results of operations.
HAYDEN-WEGMAN SERVICES
For over 65 years, Hayden-Wegman has been a recognized participant in the
consulting and engineering industry, providing services in improving and
rebuilding transportation systems, rebuilding the nation's infrastructure, and
cleaning up the environment. Hayden-Wegman is recognized within its industry and
is often cited by clients and trade associations as a provider of superior
consulting and engineering services. Hayden-Wegman has provided engineering
services for a variety of projects from major interstate transportation systems
to municipal structures, for clients such as public agencies, major corporations
and private developers. It has four primary design and construction management
market segments: infrastructure, waterfront services, parking garage specialist
services and environmental projects.
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Hayden-Wegman has four offices within the Northeast region of the United States.
These offices are located in New York, New York; Boston, Massachusetts; Buffalo,
New York and Parsippany, New Jersey.
Hayden-Wegman's infrastructure services involve projects dealing with the
design, inspection and construction management of roadways, viaducts, bridges,
terminals and tunnels. Its projects have included more than 500 miles of
interstate highways, more than 600 bridges and over seven miles of waterfront
facilities. In addition, Hayden-Wegman has developed a unique market niche in
the building envelope and garage rehabilitation industry and markets itself as
"The Garage Specialists", and as experts in the analysis and repair of failing
building facades and parapets. Hayden-Wegman's environmental design services
have ranged from major refuse projects to energy facilities, sewage treatment
plants, municipal and private sewer systems, water treatment plants and water
distribution systems. Hayden-Wegman's construction management services consist
primarily as acting as agents of project owners in the administration of
contracts between such owners and their general contractors.
A majority of work undertaken by Hayden-Wegman is with the public sector.
Approximately 75% of total billings for the fiscal years 1998, 1997 and 1996
have been derived from the public sector. In general, there are two types of
bids required when dealing with the public sector. One type of bid is known as a
lump sum bid; a bidder wins a contract under such a bid based on price. Another
type of bid is called reimbursable cost (usually with an upset limit). This type
of bid outlines the specific approach to be taken, the professional
qualifications of the individuals who would work on the project, the
qualifications of the bidding company and, finally, the anticipated man-hours to
complete the project.
Over the years, Hayden-Wegman has been successful in working on a number
of engineering projects for the public sector, including the New York State
Department of Transportation, the New York State Thruway Authority, the
Massachusetts Department of Public Works, New Jersey State Department of
Transportation, the Massachusetts Bay Transportation Authority and municipal
governments in the Northeastern and Southeastern states as well as the New York
City Department of Environmental Protection, the New York City Department of
Parks and Recreation, the New York City Department of Design and Construction
and the New York City Bureau of Bridges.
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Hayden-Wegman offers services to the private sector as well. In general,
private sector clients pay a premium over that charged to public sector clients.
Private sector projects are generally of shorter duration. Management believes
that Hayden-Wegman has the necessary qualities to increase revenues from private
sector clients due to its reputation for excellent, innovative and cost
effective results. The private sector clients include AT&T Corporation, Chase
Manhattan Bank, the United Nations and several major private developers and
high-rise and garage owners in New York City.
Hayden-Wegman has established strong public sector relationships, having
provided engineering services on more than 1,000 infrastructure projects
throughout the United States which have exceeded $2 billion in value. The
projects completed or in various stages of process include: the White Hall Ferry
Rehabilitation in New York; the Boston Central Artery -- one of the most
significant infrastructure projects of the 1990's; the relocation of a Route 7
section in Connecticut; the Henry Hudson Parkway, 158th Street Exit in New York,
New York; Malcom X Boulevard; Lift Bridges at 9th Street in Brooklyn, New York
and at Broadway in New York, New York; the modernization of New York Hospital
and the Hospital for Special Surgery, rehabilitation of Waterside Plaza in New
York, New York; the East Side Esplanard Project, including the replacement of
Pier No. 11 in New York Harbor; and marinas in Northport, on the Hudson River
and Oyster Bay, New York. Hayden-Wegman currently has a backlog of
infrastructure design work to perform for various projects within New York, New
Jersey and Massachusetts.
Additionally, as part of its environmental design services, Hayden-Wegman
has developed extensive experience in the engineering and design of water and
waste/water treatment facilities as well as refurbishments thereof. It also has
experience in the design and management of solid waste facilities. Hayden-Wegman
is currently engaged by the City of New York to design three separate waste
water projects.
Hayden-Wegman's completed projects include the 2,000 ton per day Municipal
Solid Waste Burning Facility that generates power for sale to Florida Power and
Light in Palm Beach County, Florida, totaling $180 million in value, and a 975
ton per day Mass-Burn Resource Recovery Plant serving residents of Alexandria
and Arlington, Virginia.
Hayden-Wegman is also active in the development of solid waste treatment
and storage solutions to critical waste disposal problems. For example,
Hayden-Wegman engineering solutions have been responsible for many improvements
in sanitary landfill design, including the creation of leachate treatment
facility designs such as the one it developed for the 400 ton-per-day
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sanitation landfill in Williamsport, Lycoming County, Pennsylvania. In addition,
Hayden-Wegman developed the first coordinated gas control and venting system for
a New York landfill. Working with New York City, the State of New York and
Brooklyn Union Gas Company, Hayden-Wegman developed a landfill
gas-to-electricity pilot project at the world's largest landfill located on
Staten Island, New York.
Each of Hayden-Wegman's offices, though they work in a coordinated fashion
on many projects, have also developed distinct service offerings, based upon
local needs.
Hayden-Wegman's New York office has developed expertise in environmental
and other utility related project engineering, including: (1) water mains, (2)
combined sewer overflow, (3) pumping stations, (4) sewage plant stabilization
work and (5) smaller sewage treatment plants. Management believes that the New
York City Department of Environmental Protection, an established client, will
continue to demand engineering services for continued maintenance and
modification of its 64 pumping stations.
Additionally, since early 1990, Hayden-Wegman's New York office has more
aggressively marketed hospital and traffic design engineering services, two
service segments which management views as continuing to expand. Engineering
services for hospitals include, but are not limited to, work on the utilities,
sewage treatment facilities, and traffic management. Significant engineering
services were recently provided by Hayden-Wegman to New York Hospital and the
Hospital for Special Surgery.
Hayden-Wegman's New York office has been recognized by garage owners and
operators in New York, New Jersey and Connecticut for its expertise in garage
engineering and its garage project clients have included the United Nations,
AT&T and the City and State of New York. Finally, the New York office is also
aggressively marketing construction management services.
Hayden-Wegman's Boston office primarily serves the Massachusetts
Department of Public Works and its large Boston Central Artery Project, a
significant infrastructure project. Public sector projects account for
approximately 95% of the Boston office billings and backlog. Since 1996, Boston
office revenues have become heavily concentrated in infrastructure engineering
services. Among other Boston office projects is a municipal incinerator project
in Florida and the Landfill Gas Recovery project in Rhode Island.
Hayden-Wegman's Buffalo office markets include the New York State Thruway
Authority, the Erie County Department of Public Works and the City of Buffalo
Department of Public Works. Recent
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clients have included the New York State Department of Transportation, Empire
State Development Corporation for Buffalo Inner Harbor Planning and the Buffalo
Sewer Authority, for construction of a 6-mile-long rock tunnel sewer overflow
relief project.
Finally, Hayden-Wegmen's New Jersey office's major client is the New
Jersey Department of Transportation. In addition to engineering, the New Jersey
office markets surveying services to developers in New Jersey and New York.
Hayden-Wegman is aggressively pursuing waterfront projects. Recently the
Buffalo office, together with the New York City office, received a contract for
study, planning preliminary design and final design services of the Buffalo
Inner Harbor. In addition, Hayden-Wegman is aggressively pursuing opportunities
for entering into the rapidly expanding telecommunication support services
market and into special niches in the bridge design and construction market.
BACKLOG
As of July 31, 1998, TechStar's and Hayden-Wegman's total backlog was
approximately $2,000,000 and $16,185,000, respectively.
MARKETING AND SALES STRATEGY
Each of the TechStar and Hayden-Wegman operating subsidiaries markets
its own services separately.
TECHSTAR
Management believes that TechStar's marketing and sales efforts benefit
from that company's excellent reputation in the telecommunications industry, as
reflected in its current client list, which includes AT&T, Motorola, Nextel and
Omnipoint.
Focusing on evolving market conditions, TechStar currently intends to
approach marketing of its services through three major avenues:
o FINANCING: TechStar intends to explore ways to arrange for third
party financing for its services in order to enhance its ability to
offer integrated services solutions. TechStar will also seek
opportunities to provide such financing together with equipment
providers and/or telecommunications operators.
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o SYNDICATIONS/JOINT VENTURES: TechStar intends to pursue aggressively
the syndication or partnering with potentially synergistic
competitors or complementary businesses offering access to new
markets, new customers or new service applications, nationally and
internationally. This approach would enable TechStar to offer more
comprehensive services and greater geographic coverage.
o NEW APPLICATIONS FOR SERVICES: As new and emerging technologies
develop, TechStar intends to target new applications for its
services. For example, TechStar will seek to market its services to
traditional customers and new customers who will be engaged in the
build out of LMDS systems.
TechStar's sales and marketing are managed by its President and other
senior officers of the company. In addition, in May 1998, TechStar established a
Vice President position to coordinate TechStar's marketing, sales and business
development efforts.
HAYDEN-WEGMAN
Hayden-Wegman's traditional clientele of public sector agencies provides,
and is expected to provide, the majority of its revenue. For over half a
century, Hayden-Wegman has established strong working relationships with various
public sector agencies (state and local). Its engineering expertise in the
design for infrastructure and environmental projects is also well known in the
private sector.
Hayden-Wegman plans to expand its marketing and sales capability by
engaging additional business development staff to supplement the business
development activities currently accomplished by its Hayden-Wegman's officers
and staff.
Hayden-Wegman obtains customers for its private sector engineering
services through client and vendor referrals and new business development
efforts of its internal marketing staff. Public sector agencies advertise new
engineering projects in national publications such as the Engineering News
Record, an engineering industry publication, and the Commerce Business Daily, a
weekly publication issued by the Federal Government, and state and local
publications such as the New York State Register. Hayden-Wegman is on the
qualified consultants list of New York City Department of Transportation and
Department of Environmental Protection.
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Hayden-Wegman's sales and marketing are managed by its President, a former
executive with the Port Authority of New York and New Jersey, the marketing
staff and project managers. A business development and marketing staff member in
Boston is a former Massachusetts Highway Department executive. In New York,
marketing staff members include former employees of public agencies.
Each Hayden-Wegman marketing representative based in a particular
Hayden-Wegman office reports to a senior marketing officer who is responsible
for that office's sales and marketing efforts. Each local office senior
marketing officer reports to the President of Hayden-Wegman.
Management believes that Hayden-Wegman can capitalize on Hayden-Wegman's
long standing presence and the proven ability of its highly trained professional
personnel to take advantage of the changing dynamics of the engineering services
marketplace.
The marketing plan for Hayden-Wegman's New York City office stresses the
growth of current private sector work through contacting new clients and
extending current projects with private clients, and continued pursuit of public
sector work, including transportation work in the rail and airport areas, as
well as services in support of design/build and private sector projects.
Hayden-Wegman's Boston office plans to continue to market its services to
municipalities in Massachusetts for additional roadway design work, to private
industry clients for industrial pretreatment project work, and intends to expand
its marketing efforts to the Maine and Vermont Departments of Transportation as
well as other agencies in those states.
COMPETITION
TECHSTAR
Competition in TechStar's line of business, wireless communications
network services, is strong and is concentrated primarily among less than twenty
companies. Some of these companies are represented by telecommunications
divisions of large engineering firms such as Fluor-Daniels and Bechtel. Others
are well established firms such as SBA and Entel. These companies have greater
financial resources than TechStar and thereby may be able to secure and/or
finance projects beyond the current capabilities of TechStar. Recently, a number
of carriers have slowed the development of their wireless communications
networks in order to preserve capital and focus on subscriber growth. As a
result, there has been a slowdown in building activity which has put pressure on
the existing companies in
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TechStar's line of business. This has resulted in two movements, a movement to
consolidate among industry players and a movement to diversify into new areas of
activity, such as build-to-suit arrangements. Under build to suit arrangements,
independent companies construct and own the transmission towers, and the
wireless service providers rent tower space thereon. While TechStar has begun
the process of evaluating build to suit services, it has not yet provided such
services to any carrier.
Management believes that TechStar's primary competitive advantage is its
ability to provide to its clients an integrated package of real estate,
(including site acquisition), legal (including municipal approvals and
permitting), and engineering system implementation consulting services. The
integration of these key services enhances efficiency, effectiveness and
accountability. Management also believes that TechStar has a strong asset in its
professional and administrative staff, which continues to provide superior
services at competitive pricing. In addition, TechStar is exploring new avenues
for business, such as license and franchise acquisition and development, site
management, construction consulting services and syndication and joint ventures.
HAYDEN-WEGMAN
Competition in Hayden-Wegman's line of business, engineering services, is
very fragmented. In the area of infrastructure design, Hayden-Wegman has
significant competition from other companies, which include Vollmer Associates,
Parsons Brinkerhoff and Urbitran, many of which have significantly greater
revenues and financial resources than Hayden-Wegman.
Within environmental design, Hayden-Wegman faces competition from, among
others, CH2M Hill, Inc., Camp Dresser and Mckee, Inc., SEA Consultants, Inc.,
and Weston & Sampson Engineers. All four companies provide significant
competition, and are believed to have significantly greater revenues and
financial resources than Hayden-Wegman.
Larger companies, such as Parsons Brinkerhoff, Vollmer Associates, CH2M
Hill and Camp Dresser and Mckee, all have a national presence and, as a result,
are competition for Hayden-Wegman in all regions where it is present. In New
York specifically, Hayden-Wegman also faces competition in waste water projects
from the URS Companies and from Gannett Fleming Company. These companies have
significantly greater revenues and financial resources than Hayden-Wegman. In
Boston, Hayden-Wegman faces competition from smaller regional firms.
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Management also believes that Hayden-Wegman has a strong asset in its
professional and administrative staff, which continues to provide superior
consulting and design services at competitive pricing. Hayden-Wegman has
collected years of detailed utility type and location information in New York
City. This information is key to the redevelopment of the existing utility
infrastructure and also critically important during new construction to minimize
the impacts on existing services. In building garage rehabilitation,
Hayden-Wegman has extensive experience with high-end finite element structural
analysis computerized tools and the application of state of the art materials
such as carbon fiber. Finally, in the waterfront area, Hayden-Wegman has
developed specific design solutions on major waterfront projects.
REGULATORY ENVIRONMENT
REGULATORY ENVIRONMENT
Certain of TechStar's and Hayden-Wegman's employees (e.g. engineers and
attorneys) are required to be licensed in the jurisdictions in which they
conduct business.
Wireless communications providers doing business with TechStar are subject
to federal regulation. Changes in laws, rules and regulations affecting such
clients could have an adverse material impact on the Company's results of
operation.
On a local level, transmission antennas and towers often require
local/municipal approval. Changes in local zoning ordinances which have the
effect of making it more difficult to obtain such approvals could reduce the
level of building activity which could adversely impact TechStar's results of
operations.
INTELLECTUAL PROPERTY
INTELLECTUAL PROPERTY AND RESEARCH AND DEVELOPMENT
Neither IDF nor its subsidiaries hold any patents, trademarks or other
intellectual property of significant commercial value. Also, neither IDF nor its
subsidiaries engage in any organized and significant research and development
activities.
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EMPLOYEES
As of October 1, 1998, IDF employed 2 senior executives.
As of October 1, 1998, TechStar employed approximately 30 persons, of
which approximately 15 are engineers.
As of October 1, 1998, Hayden-Wegman employed approximately 115 persons,
of which approximately 84 are engineers. The staff of engineers, designers and
construction managers have a wide range of technical expertise in the fields of
civil, environmental, structural, geotechnical, electrical and mechanical
engineering. The technical support personnel are comprised of planners, traffic
engineers, rehabilitation experts, surveyors, and CADD operators.
Relations with all employees is believed to be good. There are no collective
bargaining agreements with any employees of IDF or of its subsidiaries.
CORPORATE HISTORY
CORPORATE HISTORY
IDF, a New York corporation, was incorporated pursuant to the laws of the
State of New York on March 27, 1991. It was formed to seek potential business
opportunities which management believed may provide a profit for IDF. On
December 5, 1991, IDF completed a public offering of its securities pursuant to
which it sold 200,000 Units at $5.00 per Unit, each Unit consisting of one share
of the Common Stock and one common stock purchase warrant entitling the holder
to purchase one share of IDF Common Stock for a period of nine months expiring
on September 4, 1992, at a price of $15.00 per share. The expiration date was
extended but expired September 30, 1993. IDF's management evaluated various
prospective business opportunities, but it had no operations from its inception
in March 1991 through November 1993, when IDF acquired Hayden-Wegman.
Hayden-Wegman was incorporated in the State of New York in 1930 under the
name John M. Farley & Co., Inc. The name was subsequently changed to Leonard S.
Wegman & Co., Inc. Leonard S. Wegman & Co., Inc., was located in New York City
and provided engineering services for the public sector and private industrial
projects. In 1984, Leonard S. Wegman & Co., Inc., merged with Hayden, Harding &
Buchanan, an engineering and design firm, and changed its name to Hayden-Wegman,
Inc. Hayden, Harding & Buchanan, located in New England, had been founded in
1938 and principally provided engineering design services to the public sector.
In 1986, Alta Acquisition Corporation acquired Hayden-
14
<PAGE>
Wegman. On December 29, 1992, H/W Acquisition, Inc., a newly formed Delaware
corporation owned by the key management of Hayden-Wegman, acquired all of the
outstanding shares of Hayden-Wegman's capital stock.
Hayden-Wegman was formed before professional corporations, owned by
licensed professional surveyors and engineers, were provided for under New
York's Business Corporation Law. At present, a new corporation could not be
formed to perform the work that Hayden-Wegman performs, if the corporation were
not wholly owned by engineering professionals.
On November 3, 1993, IDF acquired all the outstanding common stock of H/W
Acquisition, Inc., in exchange for 550,000 shares of Common Stock of IDF. H/W
Acquisition, Inc., was the record holder of all the outstanding capital stock of
Hayden-Wegman, and IDF became the record holder of all of the outstanding
capital stock of H/W Acquisition, Inc. On December 29, 1993, H/W Acquisition,
Inc., changed its name to Hayden-Wegman International, Ltd. ("H-W Ltd."). H-W
Ltd. continues to be a wholly-owned subsidiary of IDF.
TechStar, formerly Broadcast Towers Site, Inc., was organized under the
laws of the State of Delaware on February 28, 1994. Effective December 11, 1996,
the shareholders of TechStar exchanged all their shares in TechStar for $780,000
in cash, 507,246 unregistered shares of American United Global, Inc. ("AUGI"),
common stock and three promissory notes aggregating $600,000. The transaction
was valued at $4,426,303 and was accounted for by the purchase method of
accounting. Goodwill in the amount of $3,905,639 was recorded on the books of
TechStar in accordance with the push down theory of accounting. Accordingly,
TechStar became a wholly-owned subsidiary of AUGI.
Effective August 1, 1997, TechStar was a party to a reverse triangular
merger with IDF, through its newly formed subsidiary, TechStar Acquisition Corp.
("Acquisition Corp."). TechStar emerged as the surviving corporation of the
merger with Acquisition Corp. and became a wholly-owned subsidiary of IDF. As a
result of this merger, IDF issued 6,171,553 shares to AUGI, resulting in AUGI
owning approximately 63% of the issued and outstanding common shares of IDF at
that date. In addition, certain officers of TechStar received options to acquire
an additional aggregate 8% of IDF Common Stock pursuant to their employment
agreements.
15
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
IDF PROPERTIES
IDF maintains its corporate headquarters at the offices of Hayden-Wegman
at 330 West 42nd Street, 20th Floor, New York, New York. IDF moved in October,
1998 from its previous location at 155 Morris Avenue, Springfield, New Jersey.
TECHSTAR PROPERTIES
TechStar maintains its corporate headquarters in Silver Spring, Maryland.
It has one other regional office in Wilmington, Delaware. All facilities are
leased and are considered adequate for TechStar's anticipated operating needs
through the foreseeable future.
TechStar's corporate headquarters is located at 8403 Colesville Road, 16th
Floor, Silver Spring, Maryland. The office floor area is approximately 31,000
square feet. The lease runs through June 2001 and is for $ 34,104 per month.
Part of the office space is subleased.
The Delaware office is currently located at 501 Silverside Road, Suite
130, Wilmington, Delaware. The lease is for $ 300 per month and is on a
month-to-month basis.
HAYDEN-WEGMAN PROPERTIES
Hayden-Wegman maintains its corporate headquarters in New York City, New
York, and has three other regional offices which are located in Parsippany, New
Jersey; Boston, Massachusetts and Buffalo, New York. All facilities are leased
and are considered adequate for Hayden-Wegman's anticipated operating needs
through the foreseeable future.
The New York City office has been in operation since 1931. The New York
City office is currently located at 330 West 42nd Street, 20th Floor, New York,
New York. The office floor area is approximately 12,000 square feet. The lease
runs through November 1999 and is for $ 20,920 per month.
The New Jersey office is located at 1055 Parsippany Blvd., Parsippany, New
Jersey. The office floor area is approximately 1,350 square feet. The lease runs
through December 1998 and is for $ 1,917 per month.
The Buffalo office has been in operation since 1970. The Buffalo office is
currently located at 455 Commerce Drive,
16
<PAGE>
Amherst, New York, a suburb of Buffalo, New York. The office floor area is
approximately 4,300 square feet. The lease runs through March 2001 and is for $
3,938 per month.
The Boston office has been in operation since 1938. The Boston office
occupies 10,000 square feet and is currently located at 214 Lincoln Street,
Boston, Massachusetts. The office floor area is approximately 10,000 square
feet. The lease runs through August 2001 and is for $ 9,687 per month through
August 1998, $ 10,462 per month from September 1998 to August 1999, and $ 11,238
per month from September 1999 to August 2001.
ITEM 3. LEGAL PROCEEDINGS
IDF is not a party to any material litigation other than routine
litigation incidental to the business.
TechStar is not a party to any material litigation other than routine
litigation incidental to its business.
Hayden-Wegman is not a party to any material litigation other than routine
litigation incidental to its business, other than the following litigation:
Anthony Pasqua v. Hayden-Wegman, Inc. Queens County Supreme Court, No. 25954/95,
in the State of New York. The plaintiff, a former employee of Hayden-Wegman,
commenced an action that is pending in which he is seeking compensatory damages
of $2,000,000 and punitive damages of $1,000,000 for allowing a long term
disability policy to lapse, thereby depriving the plaintiff of disability
benefits which he would otherwise have been eligible to receive and which, he
claims, he was contractually entitled to receive. Hayden-Wegman filed an Answer
denying the claim. Depositions are expected to be scheduled.
Kathryn M. Panda, as executrix of the Estate of Robert C. Panda and Kathryn M.
Panda, individually v. Hardat Ramroot and Halmar Corporation Halmar Corporation
v. Hayden-Wegman, Inc. Hardat Ramroot v. Hayden-Wegman, Inc. Supreme Court of
New York, Bronx County No. 25540/95
This action involves an incident in which the decedent, Robert C. Panda,
was struck and killed at a job site by a motor vehicle owned and operated by
defendant Hardat Ramroot on August 31, 1995. The decedent was an employee of
Hayden-Wegman at the time of the incident. The plaintiff is seeking $1,000,000
for pain and suffering and $10,000,000 for compensatory and punitive damages and
lost earnings. The defendant driver and his employer have brought third party
actions against certain parties,
17
<PAGE>
including Hayden-Wegman. The third party action against Hayden-Wegman alleges
that it is responsible for damages for failure to train and supervise the
decedent. Hayden-Wegman filed an Answer denying the third party claims.
Discovery is pending in the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
18
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock has been listed and traded on the OTC Electronic
Bulletin Board since March 19, 1998 under the symbol "IDFI". The following table
sets forth the high and low bid prices for each quarter as set forth below.
Quotations may reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Fiscal 1998 High Low
----------- ---- -----
Quarter ended April 30, 1998 $2.86 $2.11
(from March 19, 1998)
Quarter ended July 31, 1998 $2.86 $1.00
The Company has not paid any cash or stock dividends on the Common
Stock and does not anticipate paying dividends on the Common Stock at any time
in the foreseeable future.
As of October 1, 1998, there were approximately 9,927,841 shares of
Common Stock issued and outstanding held by approximately 163 record holders.
Institutions, as holders of record, may hold Common Stock as nominees (street
name) on behalf of multiple beneficial owners.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with IDF's
consolidated financial statements, and notes thereto. The discussion contains
statements which are or may be deemed to be forward looking. See the preface to
Part I hereof for a discussion of factors, risks and uncertainties which may
cause actual results to differ materially from such statements.
INTRODUCTION
IDF is a holding company with two wholly-owned subsidiaries, Hayden-Wegman and
TechStar. IDF acquired Hayden-Wegman in November 1993 and TechStar in August
1997. In connection with the TechStar acquisition, IDF changed its fiscal year
end to July 31 from June 30. Audited financial statements, on a consolidated
basis, for prior periods do not exist. Any comparisons in the financial analysis
are made to put the financial results for the fiscal year ended July 31, 1998 in
historical perspective. Such comparisons are made herein to the most recent
unaudited "pro forma" twelve month consolidated statement of operations for the
period ended June 30, 1997.
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RESULTS OF OPERATIONS
IDF experienced a net earnings loss of $9,929,638, or $1.02 per share of
Common Stock, for the fiscal year ended July 31, 1998. The most significant
component for this loss relates to management's revaluation of its intangible
assets which resulted in a determination that the assets are impaired. The
revaluation of IDF's intangible assets has resulted in a one-time write down of
goodwill in the amount of $7,500,000. In addition to the loss related to the
goodwill write down, IDF experienced an operating net loss of $2,429,638.
The operating environment at Hayden-Wegman has changed significantly since
August 1, 1997, and the effects of such changes have become evident over the
past few months. Hayden-Wegman's ability to compete for new contracts decreased
resulting in fewer contract awards, delays in work and decreasing gross profit
margins for those contracts which are awarded. In addition, increased
competition for qualified personnel to secure new work has intensified
significantly, further eroding gross profit margins. Hayden-Wegman's operating
costs are higher than much of its competition, primarily due to higher interest
costs related to its revolving credit facility, thereby impairing its ability to
attract qualified engineering personnel and to compete as cost effectively for
new contracts. As a result of these concerns, an evaluation of Hayden-Wegman's
goodwill as of July 31, 1998 was conducted. A determination of the estimated
future undiscounted cash flows from Hayden-Wegman's goodwill revealed that the
aggregate cash flows from goodwill did not exceed the carrying value at July 31,
1998. Accordingly, these cash flows were then discounted to the present value at
July 31, 1998 and, when compared to the carrying value of $4,408,417, resulted
in a write down of $4,000,000 as impairment of goodwill.
The nature of TechStar's operations limits its potential client base to
those telecommunications companies that outsource their wireless communications
infrastructure needs. Three of TechStar's clients accounted for more than 90% of
their revenues in 1998 and 1997. Subsequent to July 31, 1998, TechStar was
notified by two of these customers that TechStar's contracts were to be
suspended until further notice, and are likely to be reduced in scope. While
both clients indicated that the stoppages were due to industry conditions and
not due to TechStar's quality of work, the resulting changes nevertheless will
adversely impact financial results. These events and other concerns relative to
TechStar's operations necessitated an evaluation of TechStar's goodwill for
possible impairment. A determination of the estimated future discounted cash
flows from TechStar's goodwill revealed that the aggregate cash flows from
goodwill did not exceed the carrying value at July 31, 1998. Accordingly, these
cash flows were then discounted to the present value at July 31, 1998 and, when
20
<PAGE>
compared to the carrying value of $3,651,773, resulted in a write down of
$3,500,000 as impairment of goodwill.
Net revenues for IDF for the fiscal year ended July 31, 1998 aggregated
$14,066,155. This result represents a decrease from the most comparable pro
forma period of approximately $2,600,000. The most significant reduction was at
Hayden-Wegman, which had net revenues of approximately $9,000,000 for the fiscal
year ended July 31, 1998, a decrease of over $2,000,000 from the most comparable
prior twelve-month pro forma period. This decrease was primarily due to
Hayden-Wegman's inability to secure new business at a time when prior projects
were being completed. Although Hayden-Wegman maintains a solid reputation for
the quality of its engineering and construction management work, Hayden-Wegman's
ability to secure new work, particularly in the public sector, was impaired by
its poor credit position, including the failure to pay taxes on a timely basis
and make timely contributions to employee benefit plans. Hayden-Wegman has taken
steps to improve its credit position, including the payment of the
aforementioned items, and management believes its past credit difficulties
should not prevent it from securing new business in the future. TechStar's net
revenues declined by approximately $600,000 in the fiscal year ended July 31,
1998 compared to the comparable prior year period. The decline was primarily
attributable to the cancellation of a contract and the reduction in the scope of
work under another contract. TechStar was unable to replace this work due to the
general slow down in its industry.
The consolidated operating expenses for the fiscal year ended July 31,
1998 was $15,389,696. This result represents an increase from the most
comparable pro forma period of approximately $1.5 million. The prior period
results included a one-time reduction in expenses of approximately $500,000
related to a gain on a settlement of a prior obligation. The major increases in
expenses in the fiscal year ended July 31, 1998 related predominantly to
extraordinary legal and accounting expenses associated with IDF's acquisition of
TechStar and IDF's preparation and filing of a registration statement
registering the Common Stock under the Securities and Exchange Act of 1934. At
TechStar, IDF also settled two outstanding litigation matters that increased
expenses approximately $200,000 in fiscal year ended July 31, 1998. During the
1998 fiscal year, TechStar leased larger, more expensive office space at its
Silver Spring, Maryland site in anticipation of increased needs. This new lease
increased the monthly rental expense from an average of $11,000 per month in
1997 to an average of $34,000 per month in fiscal year 1998. Management has
since entered into an agreement to sublease up to 50% of that space in fiscal
year 1999 to reduce this obligation in the future. Hayden-Wegman incurred
one-time expenses of $250,000 related to
21
<PAGE>
settlements of items previously in dispute and payments for work performed by
subcontractors that were not previously paid in a timely manner. Management is
installing new accounting and information systems, designed to enhance
record-keeping and cost/payment tracking to minimize future payment disputes and
late payments.
IDF incurred interest expense in the amount of $1,124,281 for the fiscal
year ended July 31, 1998. Hayden-Wegman has a $3,000,000 revolving credit
facility with a lender (a factoring arrangement). In accordance with the
agreement, Hayden-Wegman identifies and transfers to this lender, a designated
pool of contract receivables and is advanced 80% of the aggregate face value of
such receivables. The remaining 20%, less interest, and certain reimbursable
expenses, is remitted to Hayden-Wegman once the lender receives payment for the
pooled receivables. The lender is paid interest at the rate of prime plus 1.5%
per annum and fees of approximately 1% per month based upon a sliding scale tied
to the number of days that the receivables are outstanding. The interest and
fees are computed on the full value of the receivables until all related client
payments are received. In the fiscal year ended July 31, 1998, IDF experienced
significant delays in collections which resulted in increased interest and fees
of approximately $200,000 when compared to the most recent unaudited pro forma
twelve-month period. Management believes its new accounting and information
systems will also enhance its collections.
LIQUIDITY AND CAPITAL RESOURCES
IDF ended the fiscal year ended July 31, 1998 with cash on hand of
$791,804. This amount was offset by a current liability overdraft of $264,766.
Net cash used by operating activities in the fiscal year ended July 31,
1998 was $2,639,296. This includes a decrease in receivables of $1,780,058
offset by an increase in costs and earnings in excess of billings of $1,028,985.
The net operating cash decrease was further impacted by a decrease in accrued
wages, salaries and related costs of $1,096,710 due to changes in personnel.
In September 1997, IDF sold approximately $3,000,000 aggregate principal
amount of 8% Senior Subordinate Convertible Notes (the "Notes") in a private
placement. The net proceeds of the sale of Notes of approximately $2,600,000
were used primarily to pay past due obligations, including but not limited to
payments to federal and state taxing authorities, employee 401K plans and
subcontractors.
22
<PAGE>
All of the outstanding Notes have been converted into Series A and Series
A-1 Preferred Stock. In addition, an affiliate of IDF converted an $800,000
principal loan to IDF into 400,000 shares of Series B Preferred Stock and
approximately $32,000 of accrued interest into Series A-1 Preferred Stock. The
Series A Preferred Stock, A-1 Preferred Stock and B Preferred Stock bear
dividends at the cumulative rate of 8%. Substantially all holders of Series A
Preferred Stock and all holders of Series A-1 Preferred Stock and Series B
Preferred Stock have agreed, in writing, that IDF may, at its option, pay
dividends in additional shares of Series A or Series A-1 Preferred Stock. To
date, substantially all dividends on the outstanding Preferred Stock have been
paid in additional shares rather than cash, and IDF anticipates continuing to do
so.
Hayden-Wegman's use of funds from its revolving credit facility increased
significantly in the fiscal year ended July 31, 1998. The amount outstanding
under the facility as of July 31, 1998 increased to $2,759,129 from $1,782,744
at June 30, 1997. Management had concentrated a significant amount of time in
pursuing new work, and did not sufficiently address problems in collecting
payments due it from prior and existing contracts. Further, in some instances,
management's collection of payments from customers was hindered by its desire to
secure new work from those customers. Delays in billing and collections for work
performed increased significantly Hayden-Wegman's revenues in excess of billing
in fiscal year 1998. These delays resulted in increased use of the credit
facility thereby increasing interest and fees thereunder. Management believes
its renewed focus on billings and collections, together with its new accounting
and information systems, will enhance its collections effort and in doing so
reduce financing charges in the future.
IDF believes its cash flows from operations and its revolving credit
facility will need to be supplemented in the next fiscal year to meet its
working capital needs. Certain members of the IDF Board of Directors and
significant shareholders have committed to loan up to $1,000,000 to IDF when
requested by IDF for its working capital needs. As of November 1998, the Company
has received $400,000 under this commitment. IDF may also need additional
financing in order to enable it to take advantage of new opportunities in its
core businesses. However, there can be no assurance that such financing, if
available, will be on terms acceptable to IDF or that such financing would not
result in dilution to existing shareholders.
YEAR 2000
Many existing computer programs use only the last two digits to refer to a
year. Those computer programs which do not properly recognize a year that begins
with "20" instead of the familiar "19" could fail or create erroneous results
(the "Year 2000" issue).
23
<PAGE>
In July 1998, TechStar began the installation of a new accounting and
information system, Timberline. This new system is Microsoft Windows based and
is certified by Timberline as being Year 2000 compliant. TechStar anticipates
installation to be completed by December 1998. The cost of the new Timberline
system, including training, was approximately $25,000. TechStar also uses
Microsoft Office 97 and Auto CAD version 14, which are also certified by the
vendor as being Year 2000 compliant. Management requires its employees to
perform proper system backups of material at regular intervals to minimize any
potential system problems.
Hayden-Wegman's Information Strategic Plan (ISP) calls for replacement of
existing account and project information systems with third-party
state-of-the-art applications and hardware, augmented with internally developed
client-server desktop applications. The third-party applications consist of
Microsoft Office 97 applications, Auto CAD version 14 and LARSA 1998 Finite
Element Analysis, all certified by the respective vendors as Year 2000
compliant. The implementation of ISP is expected to be completed by early in
1999.
The new account and project information system will use Harper and
Shuman's new Advantage accounting and project control software. This software
will reside on a new Dell PowerEdge 2300 server with a 9.1GB LVD SCSI hard drive
using Microsoft NTS 4.0 software. Hardware and software are both Year 2000
compliant. Historical accounting and project data on the legacy accounting
system, an older version of Harper and Shuman, which currently resides on a
Digital Equipment Corporation VAX, will be brought over to the new application.
The estimated total cost of this effort, including software, system development,
conversion of existing data and on-site training, is $100,000, of which $10,000
has been spent as of October 1, 1998.
IDF's subsidiaries are not materially dependent on the Year 2000
compliance of its customers or other third parties. The work performed by the
subsidiaries for its customers is performed relatively independent from third
parties. TechStar's and Hayden-Wegman's ability to meet customer commitments is
dependent upon its internal Year 2000 compliance. Given the recent and ongoing
installation of the new systems, IDF does not expect material business
interruptions from Year 2000 issues and, further, in management's evaluation,
the Company's reasonably likely worst case scenario from any Year 2000 issues is
not expected to be material.
24
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The Company's consolidated financial statements appear following Item 13
of this report beginning on page F-1. See Index to Financial Statements on page
F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
The Company intends to file with the Securities and Exchange Commission,
within 120 days after the end of the fiscal year covered by this report, a
definitive Proxy Statement (the "Proxy Statement") for use in connection with
the Company's Annual Meeting of Stockholders. In accordance with General
Instruction E(3) of Form 10-KSB, the information required by Items 9, 10, 11 and
12 below is incorporated herein by reference to the Proxy Statement.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item 9 is incorporated herein by
reference to the sections entitled "Election of Directors", "Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item 10 is incorporated herein by
reference to the sections entitled "Executive Compensation" and "Compensation of
Directors" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 11 is incorporated herein by
reference to the section entitled "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
25
<PAGE>
The information required by this Item 12 is incorporated herein by
reference to the section entitled "Certain Relationships and Related
Transactions" in the Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 10-KSB.
(a) The following documents are filed as part of this report:
(1) A list of the financial statements filed as a part of
this report is set forth in Item 7 and is incorporated
herein by reference. See Index to Financial Statements
on page F-1.
(2) Exhibits:
The information required by this Item 13(a)(2) is set
forth in the Index to Exhibits and is incorporated
herein by reference. Included in the Index to Exhibits
are the following management contracts, compensatory
plans and arrangements:
(i) 10.1 Employment Agreement between the Registrant
and Solon Kandel.
(ii) 10.2 Employment Agreement between the Registrant,
Hayden-Wegman, Inc. and Lembit Kald.
(iii) 10.3 Employment Agreement between the Registrant,
TechStar Communications, Inc. and Sergio Luciani.
(iv) 10.12 Registrant's Stock Option Plan.
(v) 10.17 Employment Agreement between the Registrant,
TechStar Communiciations, Inc. and Simantov
Moskona.
(b) No reports on Form 8-K were filed by the Company
during the fourth fiscal quarter ended July 31, 1998.
26
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) 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.
IDF INTERNATIONAL, INC.
Dated: November 13, 1998 By: /S/ SOLON L. KANDEL
------------------------
Solon L. Kandel
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
---------- ------ -----
<S> <C> <C>
/S/ SOLON L. KANDEL Director, Chief Executive November 13, 1998
- --------------------------- Officer and President
SOLON L. KANDEL (Principal Executive Officer)
/S/ MICHAEL LOSCH Chief Financial Officer November 13, 1998
- ---------------------------- and Chief Operating Officer
MICHAEL LOSCH (Principal Financial and
Accounting Officer)
/S/ ROBERT M. RUBIN Director and Chairman of the November 13, 1998
- ---------------------------- Board
ROBERT M. RUBIN
/S/ LEMBIT KALD Director November 13, 1998
- -----------------------------
LEMBIT KALD
/S/ LAWRENCE KAPLAN Director November 13, 1998
- ---------------------------
LAWRENCE KAPLAN
/S/ SERGIO LUCIANI Director November 13, 1998
- ---------------------------
SERGIO LUCIANI
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
PAGE(S)
<S> <C>
Independent Auditors' Report F - 3
Consolidated Balance Sheet as of July 31, 1998 F - 4
Consolidated Statement of Operations for the Year Ended July 31, 1998 F - 6
Consolidated Statement of Shareholders' Equity for the Year Ended July 31, 1998 F - 7
Consolidated Statement of Cash Flows for the Year Ended July 31, 1998 F - 8
Notes to Consolidated Financial Statements F - 10
TECHSTAR COMMUNICATIONS, INC.
Independent Auditors' Report on Financial Statements F - 27
Balance Sheets as of July 31, 1997 and December 31, 1996 F - 28
Statements of Operations for the seven month period ended July 31, 1997
and for the year ended December 31, 1996 F - 29
Statements of Shareholders' Equity for the year ended December 31, 1996
and for the seven month period ended July 31, 1997 F - 30
Statements of Cash Flows for the seven month period ended July 31, 1997 and
for the year ended December 31, 1996 F - 31
Notes to Financial Statements F - 32
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Introduction to Pro Forma Consolidated Statement of Operations F - 39
Pro Forma Consolidated Statement of Operations F - 40
Notes to Pro Forma Consolidated Statement of Operations F - 41
</TABLE>
F-1
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
<S> <C>
Independent Auditors' Report F - 3
Consolidated Financial Statements:
Consolidated Balance Sheet as of July 31, 1998 F - 4
Consolidated Statement of Operations for the Year Ended July 31, 1998 F - 6
Consolidated Statements of Shareholders' Equity for the Year Ended July 31, 1998 F - 7
Consolidated Statements of Cash Flows for the Year Ended July 31, 1998 F - 8
Notes to Consolidated Financial Statements F - 10
</TABLE>
F-2
<PAGE>
Lazar Levine & Felix LLP
Certified Public Accountants & Business Consultants
350 Fifth Avenue-Suite 6820 4 Becker Farm Road
New York, NY 10118-0170 Roseland, NJ 07068
(212) 736-1900 (973) 533-1040
Fax (212) 629-3219 Fax (973) 535-1603
- ----------
www.lazarcpa.com
INDEPENDENT AUDITORS' REPORT
To The Shareholders
IDF International, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of IDF
International, Inc. and subsidiaries, as of July 31, 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IDF International,
Inc. and subsidiaries as of July 31, 1998 and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ Lazar Levine & Felix LLP
----------------------------------
Lazar Levine & Felix LLP
New York, New York
November 10, 1998
F-3
<PAGE>
<TABLE>
<CAPTION>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET Page 1 of 2
--------------------------
AS OF JULY 31, 1998
- ASSETS (NOTES 5 AND 6) -
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2f) $ 791,804
Contract receivables - less allowances for doubtful accounts and credits of $480,000
(Notes 2f, 4 and 15) 3,283,506
Costs and earnings in excess of billings on uncompleted contracts (Note 2b) 2,590,596
Prepaid expenses and other current assets 285,792
------------
TOTAL CURRENT ASSETS 6,951,698
FIXED ASSETS (NOTES 2C AND 7):
Computer equipment $ 136,343
Furniture, fixtures and equipment 402,007
Automobiles 31,649
Leasehold improvements 81,054
Computer software 26,341
Survey equipment 154,912
------------
832,306
Less: accumulated depreciation and amortization 482,943 349,363
------------
OTHER ASSETS:
Goodwill - net of accumulated amortization of $8,197,125 (Notes 2d and 3) 560,190
Licenses - net of accumulated amortization of $7,874 (Note 2d) 149,626
Deferred costs - net of accumulated amortization of $6,752 (Note 2d) 103,748
Deferred compensation (Note 11) 15,932
Security deposits and other assets 121,110 950,606
------------ ------------
$8,251,667
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET Page 2 of 2
--------------------------
AS OF JULY 31, 1998
- LIABILITIES AND SHAREHOLDERS' EQUITY -
<S> <C> <C>
CURRENT LIABILITIES:
Bank overdraft $ 264,766
Short-term debt - subordinated (Note 5) 35,000
Revolving credit facility (Note 6) 2,759,129
Accounts payable 793,840
Billings in excess of costs and earnings on uncompleted contracts (Note 2b) 115,183
Accrued wages, salaries and related costs (Note 8) 974,610
Current portion of long-term debt (Note 7) 95,521
Income taxes payable (Notes 2e and 12) 31,838
Other current liabilities 1,147,589
-----------
TOTAL CURRENT LIABILITIES 6,217,476
LONG TERM LIABILITIES:
Long term debt-net of current portion (Note 7) 495,521
COMMITMENTS AND CONTINGENCIES (NOTES 13, 14, 15 AND 17)
SHAREHOLDERS' EQUITY (NOTES 9, 10 AND 11):
8% cumulative, Series A convertible preferred stock (aggregate liquidation
preference $1,750,000) $ 1,750,000
8% cumulative, Series B convertible preferred stock (aggregate liquidation
preference $800,000) 800,000
8% cumulative, Series C convertible preferred stock (aggregate liquidation
preference $1,534,000) 1,534,000
Common stock, $.001 par value, 120,000,000 shares authorized; 9,927,841
shares issued and outstanding 9,928
Additional paid-in capital 10,894,996
Accumulated deficit (13,432,354)
------------
1,556,570
Less: stock subscription receivable 17,900
------------
1,538,670
---------
$8,251,667
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1998
<S> <C> <C> <C> <C>
CONTRACT REVENUE EARNED (NOTES 2B AND 15) $14,066,155
Cost of revenue earned 9,936,467
-------------
GROSS PROFIT 4,129,688
Selling, general and administrative expenses $ 5,453,229
Impairment of goodwill (Note 3) 7,500,000 12,953,229
------------- ------------
LOSS FROM OPERATIONS (8,823,541)
OTHER INCOME (EXPENSE):
Interest expense (1,124,281)
Other income 77,747
-------------
(1,046,534)
------------
LOSS BEFORE PROVISION FOR INCOME TAXES (9,870,075)
Provision for income taxes (Notes 2e and 12) 59,563
---------------
NET LOSS $(9,929,638)
===============
BASIC LOSS PER SHARE (NOTE 2K) $(1.02)
======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (NOTE 2K) 9,927,841
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JULY 31, 1998
8% Convertible 8% Convertible 8% Convertible Additional
Preferred Series A Series B Series C Common Common Paid-in
Shares Preferred Stock Preferred Stock Preferred Stock Shares Stock Capital
--------- --------------- ---------------- -------------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of August 1, 1997 - $ - $ - $ - 3,620,538 $3,621 $ 3,388,111
Net loss for the year - - - - - - -
Dividends declared:
Series A, B and C preferred
dividends paid-in additional
Series C preferred stock
(Note 10d) 121,600 - - 152,000 - -
Warrants issued for services rendered
(Note 10d) - - - - - - 225
Options issued (Note 11) - - - - - - 19,302
Stock issued (Notes 1, 9 and 10) 2,905,600 1,750,000 800,000 1,382,000 6,307,303 6,307 7,487,358
---------- ----------- ---------- ----------- ---------- ----- ----------
BALANCE AS OF JULY 31, 1998 3,027,200 $1,750,000 $800,000 $1,534,000 9,927,841 $9,928 $10,894,996
========= ========== ======== ========== ========= ====== ===========
<CAPTION>
Stock
Accumulated Subscription
Deficit Receivable Total
------------ ------------ ---------
<S> <C> <C> <C> <C>
Balance as of August 1, 1997 $(3,350,716) $(17,900)$ 23,116
Net loss for the year (9,929,638) - (9,929,638)
Dividends declared:
Series A, B and C preferred
dividends paid-in additional
Series C preferred stock
(Note 10d) (152,000) - -
Warrants issued for services rendered
(Note 10d) - - 225
Options issued (Note 11) - - 19,302
Stock issued (Notes 1, 9 and 10) - - 11,425,665
------------ --------- ------------
BALANCE AS OF JULY 31, 1998 $(13,432,354) $(17,900) $ 1,538,670
============ ======== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Page 1 of 2
-------------------------------------
FOR THE YEAR ENDED JULY 31, 1998
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,929,638)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 150,163
Bad debt provision 197,723
Loss on disposal of fixed assets 9,076
Amortization of goodwill 386,386
Amortization of deferred costs 119,796
Impairment of goodwill 7,500,000
Amortization of deferred compensation 3,370
Changes in operating assets and liabilities:
Decease in contract receivables 1,780,058
(Increase) in costs and earnings in excess of billings on uncompleted contracts (1,028,985)
(Increase) in prepaid expenses and other current assets (257,855)
(Increase) in other assets (37,738)
Increase in bank overdraft 5,358
Increase in accounts payable 63,066
(Decrease) in billings in excess of costs and earnings on uncompleted contracts (38,289)
(Decrease) in accrued wages, salaries and related costs (1,096,710)
(Decrease) in income taxes payable (58,657)
(Decrease) in deferred income (200,000)
(Decrease) in other current liabilities (206,420)
-------------
NET CASH (USED IN) OPERATING ACTIVITIES (2,639,296)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets $ (154,375)
Proceeds from acquisition of subsidiary 155,500
------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,125
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in revolving credit facility 976,385
Payment of long-term debt (169,804)
Proceeds from convertible and other debt 3,000,000
Fees paid to acquire debt (410,500)
Increase in long-term debt 29,175
-------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,425,256
-------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 787,085
Cash and cash equivalents, at beginning of year 4,719
-------------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 791,804
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS Page 2 of 2
------------------------------------
FOR THE YEAR ENDED JULY 31, 1998
<S> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $933,235
Income taxes 399,173
NON-CASH TRANSACTIONS:
During the year ended July 31, 1998, the Company issued 6,171,553 shares of its
common stock to AUGI resulting from the reverse triangular merger (see Note 1).
During the year ended July 31, 1998, the term loan in the original amount of
$800,000, payable to a shareholder/board member, was converted into 400,000
shares of Series B convertible preferred stock. Accrued interest totaling
$32,000 on this note was also converted into 25,600 shares of Series C
convertible preferred stock.
During the year ended July 31, 1998, the holders of the 8% senior subordinated
convertible notes in the amount of $3,000,000 converted this outstanding debt
plus accrued interest of $100,000 into $1,750,000 (1,400,000) shares of Series A
convertible) and $1,350,000 (1,080,000 shares of Series C) preferred stock.
During the year ended July 31, 1998, the Board of Directors authorized the
issuance of 121,600 shares of Series C preferred stock in payment of preferred
stock dividends in the aggregate amount of $152,000.
During the year ended July 31, 1998, the Company issued 135,750 shares of its
common stock to the placement agent of the 8% senior subordinated convertible
notes. For financial statements purposes, these shares were valued at $70,590.
Accordingly, unamortized costs in the amount of $293,384 were offset against
additional paid-in capital.
During the year ended July 31, 1998, the Company assumed $300,000 of debt of
AUGI on notes payable to former shareholders of TechStar (see Note 1).
During the year ended July 31, 1998, the Company issued warrants to purchase
10,000 shares of the Company's common stock at $1.25 per share as partial
consideration for services rendered.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS:
IDF International, Inc., ("IDF"), is the parent of two
operating subsidiaries, Hayden-Wegman, Inc. "Hayden-Wegman" and
TechStar Communications, Inc. "TechStar" (collectively the
"Company"). Hayden-Wegman became a wholly-owned subsidiary of
IDF on November 30, 1993. Prior to this, IDF had been an
inactive public company.
Hayden-Wegman is the holder of a State of New York corporate
professional engineering and survey license and is in the
business of providing professional engineering services to
state and local government agencies, developers and other
clients concentrated in the northeast region of the United
States.
Effective August 1, 1997, subsequent to the Company's old
fiscal year end of June 30, IDF was a party to a reverse
triangular merger (through a newly formed subsidiary, TechStar
Acquisition Corp. ("Acquisition Corp.") with TechStar
Communications, Inc. ("TechStar") a wholly owned subsidiary of
American United Global, Inc. ("AUGI"). TechStar emerged as the
surviving corporation of the merger with Acquisition Corp. and
became a wholly-owned subsidiary of IDF. The transaction was
accounted for by the purchase method of accounting in the
aggregate value of $2,242,461. As part of this transaction IDF
issued 6,171,553 shares of its common stock to AUGI resulting
in AUGI owning approximately 63% of the issued and outstanding
shares of IDF at that date. Accordingly, these financial
statements reflect a consolidation of TechStar's assets and
liabilities using historical cost with IDF's assets and
liabilities using fair value to the extent acquired
(approximately 63%) and historical cost for the remainder. IDF
recorded 63% of the fair market value of previously unrecorded
licenses in the aggregate amount of $157,500 as an asset. The
fair market value of 63% of the liabilities acquired exceeded
the fair market value of 63% of the assets acquired (excluding
goodwill) and resulted in the recording of goodwill in the
amount of $3,693,931. In addition, certain officers of TechStar
received options to acquire an additional 8% of IDF pursuant to
their employment agreements.
TechStar, formerly Broadcast Towers Site, Inc. ("BTS") was
organized under the laws of the State of Delaware on February
28, 1994. Effective December 11, 1996, the shareholders of the
Company exchanged all their shares in BTS for $780,000 in cash,
507,246 unregistered shares of AUGI's common stock and three
promissory notes aggregating $600,000. In connection with the
IDF transaction, TechStar assumed $300,000 of AUGI's promissory
notes due in December 1999 provided that AUGI shall make the
remaining payments due the former shareholders of TechStar. The
transaction was valued at $4,426,303 and was accounted for by
the purchase method of accounting. Goodwill in the amount of
$3,905,639 was recorded on the books of TechStar in accordance
with the push down theory of accounting. At July 31, 1998,
TechStar reduced the carrying value of this goodwill in the
aggregate amount of $3,500,000 (see Notes 2d and 3).
F-10
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS (CONTINUED):
TechStar locates wireless tower sites pursuant to agreements
with clients, and further, upon successful location of each
site is responsible for negotiating leases, obtaining zoning
clearances, and other architecture and/or engineering tasks as
they arise. Presently TechStar conducts these services
primarily in the Washington, DC area, Philadelphia, PA area,
Connecticut and the southeast region of the United. States.
As a result of the above mentioned merger, the Company changed
its fiscal year end to July 31.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with
generally accepted accounting principles. Outlined below are
those policies which are considered particularly significant:
(A) PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the
accounts of IDF International, Inc. and its wholly-owned
subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
(B) REVENUE AND COST RECOGNITION:
The Company recognizes revenues from fixed-priced and modified
fixed-price construction contracts on the
percentage-of-completion method, measured by the percentage of
costs incurred to date to estimated total costs for each
contract. This method is used because management considers
total costs to be the best available measure of progress on the
contracts. Because of inherent uncertainties in estimating
costs, it is possible that the estimates used can change within
the near term.
Contract costs include all direct material and labor costs
related to contract performance. Selling, general and
administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Changes
in job performance, job conditions, and estimated profitability
may result in revisions of costs and income, which are
recognized in the period in which the revisions are determined.
Changes in estimated job profitability resulting from job
performance, job conditions, contract penalty provisions,
claims, change orders, and settlements, are accounted for as a
change in estimate in the current period.
The asset, "Costs and earnings in excess of billings on
uncompleted contracts," represents revenues recognized in
excess of amounts billed. The liability, "Billings in excess of
costs and earnings on uncompleted contracts," represents
billings in excess of revenues recognized.
F-11
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(C) FIXED ASSETS AND DEPRECIATION:
Fixed assets are reflected at cost. Depreciation is provided
using the straight-line method over the following useful lives:
Computer equipment 5 years
Furniture, fixtures and equipment 5 years
Automobiles 3 years
Computer software 5 years
Survey equipment 5 years
Leasehold improvements are amortized over the terms of the
leases.
(D) INTANGIBLE ASSETS:
The Company amortizes goodwill over lives ranging from 20 years
to 25 years using the straight- line method. Amortization
expense for the year ended July 31, 1998 was $386,386 (see Note
1).
The Company periodically reviews the valuation and amortization
of goodwill to determine possible impairment by comparing the
carrying value to the undiscounted future cash flows of the
related assets, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed of (see Note 3).
Debt issue and discount costs, which were incurred with the
issuance of certain short-term and convertible debt, are being
amortized on a straight-line basis over the terms of these
notes. Amortization expense charged to operations for the year
ended July 31, 1998 was $97,095 (see Note 9).
Deferred costs (incurred as a result of the reverse acquisition
(see Note 1)) which were incurred when the Company entered into
automobile leases are being amortized on a straight-line basis
over the terms of the leases. Amortization expense charged to
operations for the year ended July 31, 1998 was $8,075.
Deferred acquisition costs, which were incurred as a result of
the reverse acquisition (see Note 1), are being amortized on a
straight-line basis over 15 years. Amortization expense charged
to operations for the year ended July 31, 1998 was $6,752.
In connection with the reverse acquisition (see Note 1), the
Company recorded 63% of the fair market value of
Hayden-Wegman's existing licenses acquired by AUGI at $157,500.
Licenses are being amortized on a straight-line basis over 20
years. Amortization expense charged to operations for the year
ended July 31, 1998 was $7,874.
F-12
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(E) INCOME TAXES:
The Company has elected to file a consolidated federal income
tax return with its subsidiaries. The Company utilizes
Financial Accounting Standards Board Statement No 109 (SFAS
109) "ACCOUNTING FOR INCOME TAXES". SFAS 109 requires use of
the asset and liability approach of providing for income taxes.
Deferred income taxes are provided for on the timing
differences for certain items which are treated differently for
tax and financial reporting purposes. These items include
depreciation of fixed assets, net operating losses, the
recognition of allowances for doubtful accounts and credits
and cost and earnings in excess of billings and amortization
and write off of goodwill.
Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws on the date of enactment.
(F) CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
accounts receivable.
The Company from time-to-time, maintains cash balances which
exceed the federal depository insurance coverage limit.
Management attempts to monitor the soundness of its financial
institutions and feels that the Company_s risk is negligible.
The Company believes that risk with regards to contract and
accounts receivable is limited due to the make-up of its
customer base which consists primarily of state and local
government agencies and large corporate customers which are
concentrated in the northeast region of the United States.
(G) USE OF ESTIMATES:
In preparing financial statements in accordance with generally
accepted accounting principles, management makes certain
estimates and assumptions, where applicable, that effect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period. While actual results
could differ from those estimates, management does not expect
such variances, if any, to have a material effect on the
financial statements.
(H) FAIR VALUE OF FINANCIAL INSTRUMENTS:
As of July 31, 1998, the carrying amount of cash, contract
receivables, accounts payable and accrued expenses approximate
fair value because of the short-term maturities of these items.
The carrying amounts of current and long-term portions of
long-term obligations approximate fair market value since the
interest rates on most of these instruments change with market
interest rates.
F-13
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(I) STATEMENTS OF CASH FLOWS:
For purposes of the statement of cash flows, the Company
considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents.
(J) ADVERTISING:
The Company expenses advertising as incurred. Advertising
expense was charged to operations for the year ended July 31,
1998 was $6,680.
(K) EARNINGS (LOSS) PER SHARE:
The Company has adopted SFAS 128 "EARNINGS PER SHARE" ("SFAS
128"), which is effective for periods ending after December 31,
1997 and has changed the method of calculating earnings per
share. SFAS 128 requires the presentation of "basic" and
"diluted" earnings (loss) per share on the face of the income
statement. Prior period earnings per share data has been
restated in accordance with SFAS 128.
(L) STATEMENT OF COMPREHENSIVE INCOME:
SFAS 130 "REPORTING COMPREHENSIVE INCOME" is effective for
years beginning after December 15, 1997 and early adoption is
permitted. This statement prescribes standards for reporting
comprehensive income and its components. Since the Company
currently does not have any items of comprehensive income, a
statement of comprehensive income is not yet required.
(M) IMPACT OF THE YEAR 2000 ISSUE:
The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that
have date-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could
potentially result in a system failure or miscalculations
causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send
invoices, or engage in other similar normal business
activities. The Company has already planned on upgrading its
computer software to increase operational efficiencies and
information analysis and intends to ensure that the new systems
properly utilize dates beyond December 31, 1999. The costs of
this upgrade project, as it relates to the year 2000 issue, are
not expected to have a material effect on the operations of the
Company and will be funded through operating cash flows.
NOTE 3 - IMPAIRMENT OF GOODWILL:
The Company recognized an impairment of goodwill in accordance
with SFAS No. 121 for Hayden- Wegman and TechStar as of July
31, 1998. A variety of factors contributed to the recognition
of these impairments.
F-14
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 3 - IMPAIRMENT OF GOODWILL (CONTINUED):
The nature of TechStar's operations limits the potential client
base to those telecommunications companies that out source
their wireless communications infrastructure needs. Three of
TechStar's clients accounted for more than 90% of TechStar's
revenues in 1998 and 1997. The loss of any of these customers,
or a reduction in business from any of these customers, would
have a material adverse impact on TechStar.
Subsequent to July 31, 1998, TechStar was notified by two of
these customers that TechStar's contracts were to be
"suspended" until further notice and are likely to be reduced
in scope.
As a result, TechStar has experienced a reduction in it's
monthly revenues subsequent to being advised of the
suspensions. These events and other concerns relative to
TechStar's operations necessitated an evaluation of TechStar's
goodwill for possible impairment. Such an evaluation requires
significant judgement. A determination of the estimated future
undiscounted cash flows from TechStar's goodwill revealed that
the aggregate cash flows from goodwill did not exceed the
carrying value at July 31, 1998. Accordingly, these cash flows
were then discounted to the present value at July 31, 1998 and
when compared to the carrying value of $3,651,773 resulted in a
write off of $3,500,000 as an impairment of goodwill.
The operating environment at Hayden-Wegman has changed
significantly since August 1, 1997. Competition for projects
has intensified resulting in reducing gross profit margins and
fewer projects. In addition, competition for qualified
engineering personnel has intensified, further eroding gross
profit margins. Hayden-Wegman's operating costs are more costly
than much of its competition primarily due to higher interest
costs which further adversely affect operating income. These
operating characteristics impact Hayden-Wegman's ability to
retain and attract qualified engineering personnel. As a result
of these concerns, an evaluation of Hayden-Wegman's goodwill as
of July 31, 1998 was conducted. A determination of the
estimated future undiscounted cash flows from Hayden-Wegman's
goodwill revealed that the aggregate cash flows from goodwill
did not exceed the carrying value at July 31, 1998.
Accordingly, these cash flows were then discounted to the
present value at July 31, 1998 and when compared to the
carrying value of $ 4,408,417 resulted in a write off of
$4,000,000 as an impairment of goodwill.
NOTE 4 - CONTRACT AND ACCOUNTS RECEIVABLE:
Contract and accounts receivable consist of the following:
Billed:
Completed contracts $1,320,352
Contracts in progress 2,249,567
Retainage 193,587
-----------
3,763,506
Less: allowances for doubtful accounts
and credits 480,000
-----------
$3,283,506
===========
F-15
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 5 - SHORT-TERM DEBT - SUBORDINATED:
Short-term debt - subordinated consists of the remaining
balance of certain notes in the original amount of $800,000
issued in 1994. These notes bear interest at 8% per annum and
are secured by substantially all the assets of the Company and
are subordinated to the Company's lending institution (see Note
6). In 1997, the majority of the original noteholders agreed to
convert all or a portion of unpaid principal and interest into
such number of fully paid and non-assessable shares of common
stock of the Company at a conversion price of $1.25 per share
(as amended). The remaining noteholders chose not to convert
their notes into common stock. The Company is currently in
default to these remaining noteholders as regards to the
payment of the remaining balance of $35,000.
NOTE 6 - REVOLVING CREDIT FACILITY:
Hayden-Wegman has a $3.0 million revolving credit facility
agreement with a lender. As of July 31, 1998, the outstanding
borrowings under this facility amounted to $2,759,129. Under
this agreement, Hayden-Wegman has pledged substantially all of
its contract receivables and other tangible and intangible
assets. In accordance with the agreement Hayden-Wegman
identifies and transfers to this lender, a designated pool of
contract receivables and is advanced 80% of the aggregate face
value of such receivables. The remaining 20%, less interest,
and certain reimbursable expenses, is remitted to Hayden-Wegman
once the lender receives payment for the pooled receivables.
The lender is paid interest at the rate of prime plus 1 1/2%
per annum and fees of approximately 1% per month based on a
sliding scale tied to the number of days that the receivables
are outstanding. The interest and fees are computed on the full
value of each receivable until all related client payments are
received. Hayden-Wegman has the option to repurchase portions
of the receivable pools from the lender.
NOTE 7 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
<S> <C>
The principal amounts due are as follows:
Secured equipment notes payable in monthly installments of $6,157
through November 1999. The rate of interest on these
notes are between 7% and 8 1/4%. $ 60,239
Unsecured note payable to the former shareholders of TechStar (see
Note 1) due in December 1999. This debt bears interest at
8% per annum. 300,000
</TABLE>
F-16
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 7 - LONG-TERM DEBT (CONTINUED):
<TABLE>
<CAPTION>
<S> <C>
Unsecured promissory note payable to AUGI, which bears interest
at 8% per annum. This note is due and payable upon the earlier
of (i) the consummation of any public or private placement of
securities by IDF or any of its subsidiaries (see Note 1),
which individually or in the aggregate results in gross cash
proceeds of $2.5 million or more, or (ii) August 25, 2002.
Interest is payable quarterly commencing December 1, 1997.
During the year ended July 31, 1998, IDF reduced this debt by
$30,000 by other transactions between TechStar and AUGI. 185,000
Unsecured note payable in thirty six monthly installments of
$4,420, including interest at 9% per annum, maturing in June,
1999. This note is associated with the restructuring of Hayden-
Wegman's obligations to its landlord (see Note 14a). 45,803
----------
591,042
Less: current maturities 95,521
----------
$495,521
==========
</TABLE>
At July 31, 1998, the annual scheduled principal payments of
long-term debt are $95,521, $310,521, $-0-, $-0- and $185,000
for each of the next five years, respectively.
NOTE 8 - ACCRUED WAGES, SALARIES AND RELATED COSTS:
Accrued wages, salaries and related costs consist of the
following:
Wages and salaries $252,096
Payroll withholding and taxes in arrears including
applicable interest and penalties (a) 486,809
Savings and investment plan including applicable
interest and penalties (b) 27,750
Benefits, fringes and other 207,955
---------
$974,610
=========
F-17
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 8 - ACCRUED WAGES, SALARIES AND RELATED COSTS (CONTINUED):
(A) Prior to August 1, 1997, the Company had not been making timely
payroll withholding tax payments to the Internal Revenue
Service (IRS) and several other tax jurisdictions. As a result,
the IRS and certain state taxing authorities imposed interest
and penalties on overdue amounts along with a Federal tax lien
on all of the Company's assets. In September 1997 and pursuant
to the conditions to the merger, all past due taxes including
assessed interest and penalties that previously were being paid
under the terms of installment agreements with the Internal
Revenue Service and the New York State Department of Taxation
were paid. At July 31, 1998, the Company was again not current
with respect to payroll withholding tax payments. In August
1998 subsequent to the balance sheet date, the Company paid all
past due payroll tax liabilities.
(B) The Company sponsors a defined contribution savings and
investment plan covering substantially all full-time employees.
Participants may contribute between 2% and 15% of their
compensation. Prior to April 1, 1992, contributions (up to 2%
of earnings) were matched by the Company at a rate of 50%.
Contributions to the plan by the Company subsequent to April 1,
1992, are made at the discretion of the Company's board of
directors, but may not exceed the maximum amount deductible for
Federal income tax purposes. No Company contributions have been
made subsequent to April 1, 1992.
The Company had not made deposits of employee and employer
contributions and other payments to the plan on a timely basis,
which amounted to approximately $168,000 as of July 31, 1997.
In September 1997, and pursuant to the conditions to the
merger, the Company became current with respect to all known
outstanding obligations relative to the defined contribution
savings and investment plan. At July 31, 1998, the Company was
again not current with respect to deposits of employee
contributions. In October 1998, subsequent to the balance sheet
date, the Company paid all past due retirement liabilities.
NOTE 9 - CONVERTIBLE DEBT / PREFERRED STOCK:
(A) In September, 1997, IDF issued 8% senior subordinated
convertible notes in the amount of $3,000,000 which are
convertible into preferred stock of IDF at a conversion price
of $1.25 per share. Costs incurred (which are recorded as
deferred finance costs) with respect to this issue were
$300,000 plus the issuance of 135,750 shares of common stock to
the placement agent who is also a shareholder of IDF. IDF used
approximately $2,500,000 of the net proceeds to settle certain
past due obligations existing at July 31, 1997. In January,
1998 the holders of these notes converted the principal balance
outstanding plus accrued interest (in the amount of $100,000)
into $1,750,000 (1,400,000 shares of Series A convertible
preferred stock) and $1,350,000 (1,080,000 shares of Series C
convertible preferred stock). Accordingly, unamortized deferred
issue costs in the amount of $293,384 was offset against
additional paid-in capital (see Note 2d).
(B) Also in January 1998, a term loan payable to a
shareholder/board member in the original amount of $800,000 was
converted into 400,000 shares of Series B convertible preferred
stock. Accrued interest in the amount of $32,000 on this note
was also converted into 25,600 shares of Series C convertible
preferred stock.
F-18
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 10 - SHAREHOLDER EQUITY AND ISSUANCE OF STOCK:
During the year ended July 31, 1998, the following transactions
were authorized by the Company's Board of Directors:
(A) IDF amended its certificate of incorporation to increase the
authorized shares to 120,000,000 common stock, 1,400,000 shares
of Series A convertible preferred stock, 500,000 shares of
Series B convertible preferred stock and 2,100,000 shares of
Series C convertible preferred stock.
Each share of Series A convertible preferred stock is
convertible into common stock at a conversion price of $1.25
per share and each share of Series B convertible preferred
stock is convertible into common stock at a conversion price of
$2.00 per share.
The rights and preferences of the Series C preferred stock
shall be designated by the Board of Directors at its discretion
and without further vote of shareholders.
(B) IDF issued 135,750 shares of its common stock to the placement
agent of the 8% senior subordinated convertible notes. The
transaction was valued at $70,590 (see Note 9a).
(C) IDF issued a five year warrant to purchase 10,000 shares of the
Company's common stock at $1.25 per share as partial
consideration for professional services rendered.
(D) IDF issued 121,600 shares of Series C convertible preferred
stock in payment of preferred stock dividends in the aggregate
amount of $152,000.
See Notes 1 and 9 regarding other share issuances.
NOTE 11 - STOCK OPTIONS:
During the year ended July 31, 1998, the Company adopted SFAS
123, ACCOUNTING FOR STOCK- BASED COMPENSATION. This standard
establishes the fair value based method (the "SFAS 123 Method")
rather than the intrinsic valued base method as the preferred
accounting methodology for stock compensation agreements. The
SFAS 123 method provides for compensation cost to be charged to
results of operations at the grant date. The fair value of a
stock option is to be determined using an "option-pricing
model."
F-19
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 11 - STOCK OPTIONS (CONTINUED):
As a result of the reverse acquisition as described in Note 1,
IDF issued an aggregate of 856,550 options, exercisable over
the earlier of a five year period or November 30, 2005 to
acquire common stock of the Company for $1.25 per share to key
personnel of TechStar. The fair market value of these options
aggregated $19,302 as of the date of issuance using the
Black-Scholes model and will be amortized using the
straight-line method over five years. The Company reflected an
increase in additional paid-in capital of $19,302 in connection
with these stock options. In the event that any of these
options terminates or are canceled without having been vested
and timely exercised, AUGI will be entitled to receive, as
additional merger consideration that number of shares of IDF
common stock which shall be equal to the number of shares not
issued as a result of the termination or cancellation of these
options. No options were exercised during the year ended July
31, 1998. The Company reflected an increase in additional
paid-in capital of $19,302 in connection with these stock
options.
IDF has established an option pool consisting of performance
options for certain of its management personnel and other key
employees. During the year ended July 31, 1998, 131,777 options
were granted to employees of TechStar.
NOTE 12 - INCOME TAXES:
The provision for income taxes consists of the following:
Current taxes:
Federal $ -0-
State and local -0-
---------
Total Current Taxes -0-
Prior years federal, state and local taxes 59,563
--------
Provision for income taxes $59,563
=======
At July 31, 1998, the Company has available net operating loss
carryforwards of approximately $3,623,000, which expire in
various years through 2013. As a result of the reverse
acquisition described in Note 1, $2,200,000 of these net
operating loss carryforwards are subject to annual limitations,
and can only be applied against taxable income of
Hayden-Wegman.
F-20
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 12 - INCOME TAXES (CONTINUED):
The components of the net deferred tax assets, pursuant to SFAS
109, as of July 31, 1998 are as follows:
Deferred Tax Assets:
Accounts receivable $ 231,000
Cost and earnings in excess of billings 81,000
Net operating losses 1,743,000
-----------
Total Deferred Tax Assets 2,055,000
Deferred Tax Liabilities:
Fixed assets 29,000
-----------
Net Deferred Tax Assets 2,026,000
100% Valuation Allowance (2,026,000)
-----------
$ -
===========
SFAS 109 requires the recognition of future tax benefits such
as net operating loss carryforwards to the extent that
realization of such benefits is more likely than not. Due to
the uncertainty of the Company realizing these net deferred tax
assets, a 100% valuation allowance has been established as of
July 31, 1998.
NOTE 13 - PROFIT SHARING PLAN:
During the year ended July 31, 1998, the Company established a
new 401(k) salary deferral plan for the benefit of
substantially all its employees. Participants of the plan may
contribute a portion of their annual compensation to the extent
permitted by applicable regulations. Company contributions to
the plan are discretionary. There were no Company contributions
to the plan during the year ended July 31, 1998.
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
(A) LEASES:
As a result of the merger described in Note 1, the new lease
commitments are as follows:
The Company leases office and operating facilities in New York,
Buffalo, Massachusetts, Maryland, Delaware and Connecticut
under operating leases at annual rentals plus a portion of any
increase in real estate taxes and certain other common
expenses, expiring in various years through 2002. The Company
also leases certain vehicles and equipment under operating
leases expiring in various years through 2001. Minimum future
rental payments under non-cancelable operating leases having
remaining terms in excess of one year, as of July 31, 1998, are
as follows:
F-21
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
(A) LEASES (CONTINUED):
Year Ending July 31,
--------------------
1999 $ 838,290
2000 688,845
2001 552,782
2002 11,238
-------------
$2,091,155
=============
Rent expense was $727,272 for the year end of July 31, 1998.
Hayden-Wegman's lease on its New York office space was
restructured due to Hayden-Wegman being in arrears with respect
to its lease obligation. Under the terms of the restructured
lease, Hayden-Wegman rented this space on a month to month
basis through November 1997 and entered into a new lease for a
two year term commencing December 1997 (see also Note 7).
(B) LITIGATION MATTERS:
(I) A former employee of Hayden-Wegman commenced an action
that is pending before the Supreme Court of the State of
New York in which he is seeking, from Hayden-Wegman,
compensatory damages of $2,000,000 and punitive damages
of $1,000,000, for allowing a long-term disability policy
to lapse thereby depriving him of disability benefits
which he would otherwise have been eligible to receive
and which, he claims, he was contractually entitled to
receive. Hayden-Wegman has filed an answer denying the
claim. During the year ended July 31, 1998, the Company
changed counsel. Current counsel advises that they cannot
evaluate at this time whether there is a likelihood of an
unfavorable outcome.
(II) The estate of a former employee of Hayden-Wegman and his
widow have commenced an action against a third party
individual and corporation for damages caused when the
former employee was struck and killed by a motor vehicle
owned and operated by the third party individual. The
estate and his widow are seeking $1,000,000 for pain and
suffering and $10,000,000 for compensatory and punitive
damages and lost earnings. The third party individual and
corporation have commenced separate actions seeking
recovery from Hayden-Wegman in the event that a finding
is determined in favor of the estate and his widow
against the third party individual and corporation.
Counsel advises that they cannot determine whether there
is a likelihood of an unfavorable outcome in this matter.
(III) Hayden-Wegman is named as a defendant with two other
companies and the City of New York in an action commenced
by a husband and wife for bodily injury allegedly
sustained to the wife when she was caused to lose control
of her car due to alleged defects of the roadway she was
driving on. Counsel states that this matter is in its
early stages and that it is presently unknown whether
there is a likelihood of an unfavorable outcome in this
matter.
F-22
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
(B) LITIGATION MATTERS (CONTINUED):
(IV) Hayden-Wegman has been named in a discrimination suit by
a former employee who claims he was terminated in January
1998 due to an alleged disability. A statement of
position was filed on behalf of Hayden-Wegman. The
Company is presently waiting for notification by the US
Equal Employment Opportunity Commission as to their
investigation of the allegations and the Company's
response. This action is in it's earliest stages and
counsel can not comment on the possibility of an
unfavorable outcome in this matter.
(V) From time-to-time the Company is also involved in various
other litigation matters. At July 31, 1998, management
does not believe that these other pending matters are
material to the financial statements.
(C) EMPLOYMENT CONTRACTS:
(I) The Company executed an employment agreement with one of
the Executive Vice Presidents of the Company who is also
the President and Chief Executive Officer of
Hayden-Wegman for a term of three years commencing August
1, 1997, with annual compensation of $180,000 each year.
(II) Pursuant to the merger agreements (see Note 1), the prior
employment agreements of TechStar with three members of
management were terminated and replaced. The new three
year agreements have expiration dates through November
30, 2000 with automatic renewal terms of one year. In
addition to their base salaries (aggregating $600,000,
$675,000 and $750,000 for each of the three years
consecutively), these employees are entitled to options
exercisable over the earlier of a five year period or
November 30, 2005, entitling each of them to receive
285,517 shares ("performance options") of IDF at an
exercise price of $1.25 per share (see Note 11).
(D) CONSULTING AGREEMENT:
The Company executed a consulting agreement with the chairman
of the Board of Directors of the Company for a term of three
years, commencing January 1, 1998, with annual fees of $75,000
each year.
(5) Indemnification Agreements:
The Company has executed indemnification agreements with
directors and officers against claims for damages arising out
of or related to their services to the Company.
F-23
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 15 - MAJOR CUSTOMERS:
For the year ended July 31, 1998, revenue earned from three
customers was in excess of 10% of total consolidated revenues
and amounted to approximately $2,282,000, $1,600,000 and
$1,480,000, respectively. At July 31, 1998, contract
receivables from these customers amounted to approximately
$97,000, $-0- and $543,000, respectively.
NOTE 16 - BUSINESS SEGMENT INFORMATION:
The Companies operations have been classified into two business
segments: The civil engineering segment ("CE") is in the
business of providing professional engineering services to
state and local government agencies, developers, and other
clients concentrated in the northeast region of the United
States. The telecommunications consulting segment ("TC")
locates wireless tower sites pursuant to agreements with
clients. Upon successful location of each site, this business
segment also negotiates leases, obtains zoning clearances, and
performs other architecture and/or engineering tasks as they
arise.
Summarized financial statements by business segment for the
year ended July 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Net sales to unaffiliated customers:
CE $ 8,822,506
TC 5,243,649
-------------
$14,066,155
=============
Operating Loss:
CE (includes $4,000,000 write off of goodwill) $ (4,608,672)
TC (includes $3,500,000 write off of goodwill) (4,355,726)
-------------
$(8,964,398)
==============
Identifiable Assets:
CE $5,048,272
TC 2,260,906
-------------
$7,309,178
=============
Depreciation and Amortization:
CE $ 53,911
TC 96,252
------------
$150,163
============
Capital Expenditures:
CE $ 58,592
TC 95,783
------------
$154,375
============
</TABLE>
The majority of work undertaken by Hayden-Wegman is with the
public sector. Approximately 75% of total billings for
Hayden-Wegman were derived from this source. Approximately 90%
of TechStar's revenues were derived from three clients.
F-24
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 17 - SUBSEQUENT EVENTS:
(A) LITIGATION SETTLEMENTS:
(I) In September 1998, subsequent to the balance sheet date,
TechStar entered into a settlement agreement with a
former employee of the Company for $125,000 for
engineering work allegedly provided by the former
employee to the Company. The Company paid an initial
$62,500 and will pay the remaining balance in seven
monthly installments of $8,928 commencing October 10,
1998. The settlement was provided for at July 31, 1998.
(II) In October 1998, subsequent to the balance sheet date,
TechStar entered into another settlement with a plaintiff
for alleged breech of contract by the Company for
engineering services provided to the Company by the
plaintiff. The settlement amount is $50,000 and is
payable in five monthly installments of $10,000. This
settlement was provided for at July 31, 1998.
(B) In November 1998, subsequent to the balance sheet date, AUGI
and certain significant shareholders of the Company formalized
a commitment to loan up to $1,000,000 to the Company when
requested by the Company for its working capital needs. Through
November 1998, the Company has received $400,000 of this
amount.
(C) Commencing August 1, 1998, subsequent to the balance sheet
date, the Company executed a consulting agreement with an
entity which is controlled by an officer/director of its major
shareholder, AUGI for a term not to exceed three years. Monthly
payment under this agreement is $6,250 for the first eighteen
months, after which time the agreement may be cancelled by the
Company. The consultant would be entitled to additional
compensation and options based on the achievement of certain
performance criteria.
F-25
<PAGE>
<TABLE>
<CAPTION>
TECHSTAR COMMUNICATIONS, INC.
FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
- CONTENTS -
PAGE(S)
<S> <C>
Independent Auditors' Report on Financial Statements F - 27
Financial Statements:
Balance Sheets as of July 31, 1997 and December 31, 1996 F - 28
Statements of Operations for the seven month period ended July 31, 1997
and for the year ended December 31, 1996 F - 29
Statements of Shareholders' Equity for the year ended December 31, 1996
and for the seven month period ended July 31, 1997 F - 30
Statements of Cash Flows for the seven month period ended July 31, 1997 and
for the year ended December 31, 1996 F - 31
Notes to Financial Statements F - 32
</TABLE>
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
TechStar Communications, Inc.
Bethesda, Maryland
We have audited the accompanying balance sheets of TechStar Communications, Inc.
as of July 31, 1997 and December 31, 1996 and the related statements of
operations, shareholders' equity and cash flows for the seven month period ended
July 31,1997 and for the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying financial statements referred to above present
fairly, in all material respects, the financial position of TechStar
Communications, Inc. as of July 31, 1997 and December 31, 1996, and the results
of its operations and its cash flows for the seven month period ended July 31,
1997 and the year ended December 31, 1996 in conformity with generally accepted
accounting principles.
________________________
LAZAR LEVINE & FELIX LLP
New York, New York
July 8, 1998
F-27
<PAGE>
<TABLE>
<CAPTION>
TECHSTAR COMMUNICATIONS, INC.
BALANCE SHEETS
AS OF JULY 31, 1997 AND DECEMBER 31, 1996
- ASSETS -
1997 1996
-------------- --------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash (Note 2e) $ 155,500 $ 108,140
Accounts receivable (billed and unbilled) net of allowance for doubtful accounts
of $250,000 and $120,000 for 1997 and 1996, respectively (Notes 2e and 6) 2,522,643 942,488
Prepaid expenses and other current assets 8,175 6,000
Deferred income taxes (Notes 2d and 5) 64,742 60,418
------------- -------------
TOTAL CURRENT ASSETS 2,751,060 1,117,046
----------- -----------
FIXED ASSETS (NOTES 2B AND 4B):
Computer equipment 126,780 72,144
Furniture and fixtures 22,880 22,880
Office equipment 7,699 7,699
Leasehold improvements 20,217 20,217
Survey equipment 139,423 -
------------- ------------
316,999 122,940
Less: accumulated depreciation and amortization 61,679 27,766
------------- -------------
255,320 95,174
------------- -------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $98,485 and $7,354 for 1997
and 1996, respectively (Notes 1 and 2c) 3,807,154 3,898,285
Deferred costs, net of accumulated amortization of $5,742 and $2,531 for
for 1997 and 1996, respectively (Note 2c) 15,888 5,039
Security deposits and other assets 11,153 10,003
------------- -------------
3,834,195 3,913,327
------------- -------------
$6,840,575 $5,125,547
============= =============
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 388,862 $ 384,406
Current portion of notes payable (Note 4) 36,837 -
Deferred income (Note 2a) 200,000 -
Income taxes payable (Note 2d) 147,586 81,312
------------ -------------
TOTAL CURRENT LIABILITIES 773,285 465,718
------------ ------------
LONG-TERM LIABILITIES:
Notes payable, net of current portion (Note 4) 265,516 -
Deferred income taxes (Notes 2d and 5) 26,856 -
-------------- ---------------
292,372 -
------------- ---------------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7)
SHAREHOLDERS' EQUITY (NOTE 1):
Common stock, no par value, 1,000 shares authorized, issued and outstanding 1,000 1,000
Additional paid-in capital (Note 2d) 5,078,110 4,700,167
Retained earnings (deficit) 695,808 (41,338)
------------ -------------
5,774,918 4,659,829
------------- ------------
$6,840,575 $5,125,547
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
<TABLE>
<CAPTION>
TECHSTAR COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
1997 1996
-------------- --------------
<S> <C> <C> <C> <C>
REVENUE EARNED (NOTES 2A AND 6) $3,861,400 $4,137,857
Cost of revenue earned 1,849,112 1,843,061
----------- -----------
GROSS PROFIT 2,012,288 2,294,796
Selling, general and administrative expenses 813,250 966,247
------------ ------------
INCOME FROM OPERATIONS 1,199,038 1,328,549
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (1,872) (1,852)
Interest and other income 6,851 -
--------------- ----------
4,979 (1,852)
--------------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,204,017 1,326,697
Provision for income taxes (Notes 2d and 5) 466,871 373,594
------------ ------------
NET INCOME $ 737,146 $ 953,103
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
<TABLE>
<CAPTION>
TECHSTAR COMMUNICATIONS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Additional Retained
Common Paid-in Earnings
Shares Stock Capital (Deficit) Total
-------- ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1996 1,500 $1,500 $ - $ 477,114 $ 478,614
Net income for the period - - - 953,103 953,103
Distribution to shareholders - - - (950,453) (950,453)
Acquisition (Note 1) (500) (500) 4,427,241 (521,102) 3,905,639
Transfer of Federal tax liability as per tax
sharing agreement (Note 2d) - - 272,926 - 272,926
--------- ---------- -------------- ----------- ------------
Balance as of December 31, 1996 1,000 1,000 4,700,167 (41,338) 4,659,829
Net income for the period - - - 737,146 737,146
Transfer of Federal tax liability as per tax
sharing agreement (Note 2d) - - 377,943 - 377,943
--------- ----------- -------------- ----------- ------------
BALANCE AS OF JULY 31, 1997 1,000 $1,000 $5,078,110 $ 695,808 $5,774,918
========= =========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
<TABLE>
<CAPTION>
TECHSTAR COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
1997 1996
--------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 737,146 $ 953,103
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 27,438 10,844
Amortization of goodwill 91,131 7,354
Amortization of deferred costs 3,211 2,214
Transfer to additional paid-in capital (see Note 2d) 377,943 272,926
Bad debt provision 130,000 120,000
Deferred income taxes 22,532 (60,418)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,710,155) (609,596)
(Increase) in prepaid expenses and other current assets (2,175) (6,000)
Increase in accounts payable and accrued expenses 4,456 356,903
Increase in income taxes payable 66,274 81,312
Increase in deferred income 200,000 -
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES (52,199) 1,128,642
-------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (187,584) (77,670)
Increase in deferred costs (14,060) (7,253)
Increase in security deposits (1,150) (5,211)
-------------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (202,794) (90,134)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 396,098 -
Payments of long-term debt (93,745) -
Distributions to shareholders - (950,453)
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 302,353 (950,453)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 47,360 88,055
Cash and cash equivalents, at the beginning of the year 108,140 20,085
------------- -------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 155,500 $ 108,140
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $1,872 $ 1,852
Income tax 373 44,071
</TABLE>
NON-CASH TRANSACTION:
(1) As of December 11, 1996, the Company had federal income tax obligations of
$272,926. Pursuant to a tax sharing agreement with AUGI these federal tax
obligations in addition to current federal income taxes payable in the
amount of $377,943 associated with the seven month period ended July 31,
1997, were assumed by AUGI (see Note 2d).
(II) Goodwill in the amount of $3,905,639 was recorded in the books of the
Company resulting from the acquisition as discussed in Note 1.
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
TECHSTAR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS:
TechStar Communications, Inc. (the "Company") formerly
Broadcast Towers Site, Inc. ("BTS") was organized under the
laws of the State of Delaware on February 28, 1994. Effective
December 11, 1996, the shareholders of the Company exchanged
all their shares in the Company for $780,000 in cash, 507,246
unregistered shares of American United Global, Inc.'s ("AUGI")
common stock and three promissory notes aggregating $600,000.
The transaction was valued at $4,426,303 and was accounted for
by the purchase method of accounting. Goodwill in the amount of
$3,905,639 was recorded on the books of the Company in
accordance with the push down theory of accounting.
Accordingly, the Company became a wholly-owned subsidiary of
AUGI.
The Company locates wireless tower sites pursuant to agreements
with clients, and further, upon successful location of each
site, the Company is responsible for negotiating leases,
obtaining zoning clearances, and other architecture and/or
engineering tasks as they arise. Presently the Company conducts
these services primarily in the Washington, DC area,
Philadelphia, PA, New Jersey and Connecticut and the Southeast
region of the United States.
Effective August 1, 1997, subsequent to the balance sheet date,
the Company was a party to a reverse triangular merger with IDF
International, Inc. ("IDF"), a New York Corporation, through
its newly formed subsidiary TechStar Acquisition Corp.
("Acquisition Corp."). IDF, through its other wholly-owned
subsidiary, Hayden-Wegman International, Inc., provides
professional engineering services to state and local government
agencies, developers and other clients concentrated in the
northeast region of the United States. The Company emerged as
the surviving corporation of the merger with Acquisition Corp.
and became a wholly-owned subsidiary of IDF. As a result of
this merger IDF issued 6,171,553 shares to AUGI resulting in
AUGI owning approximately 63 % of the issued and outstanding
shares of IDF at that date. In addition, certain officers of
the Company received options to acquire an additional 8% of IDF
pursuant to their employment agreements.
As a result of the above mentioned acquisition, the Company
changed its fiscal year end to July 31.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with
generally accepted accounting principles. Outlined below are
those policies which are considered particularly significant.
(A) REVENUE RECOGNITION:
The Company recognizes revenue from contracts in a manner
similar to the percentage-of-completion method of accounting.
Deferred income consists of pre-billings (not yet earned) as of
July 31, 1997.
F-32
<PAGE>
TECHSTAR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(B) FIXED ASSETS AND DEPRECIATION:
Fixed assets are reflected at cost. Depreciation is provided
using the straight-line method over the following useful lives:
Computer equipment 3 years
Furniture, fixtures and equipment 5 years
Survey equipment 5 years
Leasehold improvements are amortized over the terms of the
lease.
(C) INTANGIBLE ASSETS:
The excess of cost over the fair value of the business acquired
(goodwill), as described in Note 1, is being amortized using
the straight-line method over 25 years. Amortization expense
charged to operations for the seven month period ended July 31,
1997 and for the year ended December 31, 1996 was $91,131 and
$7,354, respectively.
The Company periodically reviews the valuation and amortization
of goodwill to determine possible impairment by comparing the
carrying value to the undiscounted future cash flows of the
related assets, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Term Assets and Long-Term Assets to be
disposed of.
Deferred costs which were incurred when the Company entered
into automobile leases are being amortized on a straight-line
basis over the terms of the leases. Amortization expense,
charged to operations for the seven month period ended July 31,
1997 and for the year ended December 31, 1996 was $3,211 and
$2,214, respectively.
(D) INCOME TAXES
The Company will file a consolidated Federal income tax return
with AUGI for the period from the date of acquisition, December
11, 1996 through July 31, 1997. The Company utilizes Financial
Accounting Standards Board Statement No. 109 (SFAS 109)
"ACCOUNTING FOR INCOME TAXES." SFAS 109 requires use of the
asset and liability approach of providing for income taxes on
the timing differences for certain items which are treated
differently for tax and financial reporting purposes.
Deferred income taxes are provided for on the timing
differences for certain items which are treated differently for
tax and financial reporting purposes. These items include
depreciation of fixed assets, amortization of goodwill and the
recognition of bad debt expense.
F-33
<PAGE>
TECHSTAR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(D) INCOME TAXES (CONTINUED):
Prior to the date of acquisition, December 11, 1996, the
Company utilized the cash method of accounting for income
taxes. As a result, no provision for federal income taxes has
been made for the period January 1, 1996 through December 10,
1996 since the Company was an S corporation for tax reporting
purposes whereby any income taxes are the personal liability of
the shareholders. The Company's S corporation status was
automatically terminated on the date of acquisition.
On the date of acquisition, the Company had reflected deferred
federal income taxes of approximately $292,000 and deferred
state and local income taxes of approximately $62,000
associated with its use of the cash method of accounting.
Effective December 11, 1996, the Company elected to change its
tax reporting method from the cash basis of accounting to the
accrual method of accounting. The effect of this change was to
accelerate the due date of the deferred taxes.
The Company has entered into a tax sharing agreement with AUGI
whereby federal taxes aggregating approximately $273,000 and
$378,000 for the year ended December 31, 1996 and for the seven
months ended July 31, 1997, respectively, which the Company
would have had to pay were it not to file a consolidated
federal tax return with AUGI, were assumed by AUGI. This
savings to the Company resulted in the transfer of
approximately $651,000 form current federal income taxes
payable to additional paid-in-capital.
(E) CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and
accounts receivable.
The Company, from time-to-time, maintains cash balances which
exceed the federal depository insurance coverage limit.
Management attempts to monitor the soundness of its financial
institution and feels that the Company's risk is negligible.
The Company believes that concentration with regards to
accounts receivable is limited due to the sound financial
stability and reputation of its customers.
(F) USE OF ESTIMATES:
In preparing financial statements in accordance with generally
accepted accounting principles, management makes certain
estimates and assumptions, where applicable, that effect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period. While actual results
could differ from those estimates, management does not expect
such variances, if any, to have a material effect on the
financial statements.
F-34
<PAGE>
TECHSTAR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(G) FAIR VALUE OF FINANCIAL INSTRUMENTS:
At July 31, 1997, the carrying amount of cash, accounts
receivable, accounts payable and accrued expenses approximate
fair value because of the short-term maturities of these items.
The carrying amounts of current and long-term portions of
long-term obligations approximate fair market value since the
interest rates on most of these instruments change with market
interest rates.
(H) STATEMENTS OF CASH FLOWS:
For purposes of the statements of cash flows, the Company
considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents.
(II ADVERTISING:
The Company expenses advertising as incurred. Advertising
expenses for the seven month period ended July 31,1997 and for
the year ended December 31, 1996 was $421 and $476,
respectively.
NOTE 3 - RELATED PARTY TRANSACTIONS:
During the period ended July 31, 1997, the Company received a
loan (as additional working capital) in the amount of $300,000
from AUGI. The Company also incurred certain expenses on behalf
of AUGI totaling $85,000, which were charged against this loan,
and the balance of $215,000 is evidenced by a promissory note.
As discussed in Note 8, this obligation has subsequently been
exchanged for a five year promissory note to IDF and has been
reflected as such retroactively (see also Note 4a).
See also Note 2 (d).
NOTE 4 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
<S> <C>
At July 31, 1997, the principal amounts due are as follows:
(A) Promissory note to IDF, (see Notes 3a and 8) which bears
interest at 8% per annum. This note is due and payable on
the earlier of (i) the consummation of any public or
private placement of securities by IDF or any of its
subsidiaries (see Note 1), which individually or in the
aggregate results in gross cash proceeds of $2.5 million
or more, or (ii) August 25, 2002. Interest is payable
quarterly com- mencing December 1, 1997. $215,000
</TABLE>
F-35
<PAGE>
<TABLE>
<CAPTION>
TECHSTAR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
NOTE 4 - LONG-TERM DEBT (CONTINUED):
<S> <C>
(B) Non-interest bearing promissory note in the original amount of
$106,675, payable in monthly installments of $3,556 over three
years through November 1999. The present value of these
payments using a 8 1/4% interest rate amounted to $96,099. This
note is secured by survey equipment. 87,353
--------
302,353
Less: current maturities 36,837
--------
$265,516
========
</TABLE>
At July 31, 1997, the annual scheduled principal payments of
long-term debt are $36,837, $39,993 and $10,523 for each of the
next three years, respectively.
NOTE 5 - INCOME TAXES:
The provision for income taxes is comprised of the following:
1997 1996
----------- -----------
Current:
Federal $377,943 $272,926
State and local 114,030 98,301
Deferred:
Federal (20,552) 1,938
State (4,500) 429
---------- ------------
$466,871 $373,594
========== ============
The components of deferred taxes, pursuant to SFAS 109 as of
July 31, 1997 are as follows:
Deferred tax asset:
Accounts receivable $64,742 $ 46,344
Net operating loss - 27,082
---------- ----------
$64,742 $ 73,426
========== =========
Deferred tax liabilities:
Fixed assets $ (9,853) $(12,612)
Goodwill (17,003) (396)
---------- -----------
Total deferred tax liabilities $(26,856) $(13,008)
========== ==========
F-36
<PAGE>
TECHSTAR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
NOTE 6 - ECONOMIC DEPENDENCY:
For the seven month period ended July 31, 1997, the Company had
sales to three major customers of approximately $2,500,000,
$425,000 and $400,000, respectively. At July 31, 1997, the
amounts due from these customers aggregated approximately
$1,404,000, $267,000, and $390,000, respectively.
For the year ended December 31, 1996, the Company had sales to
one customer of approximately $4,079,000. At December 31, 1996,
accounts receivable from this customer aggregated approximately
to $1,065,000.
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
(A) LEASES:
The Company leases offices and operating facilities in
Bethesda, Maryland, Wilmington, Delaware, and Orange,
Connecticut under operating leases that will expire at various
times through December 1998. In addition, the Company leases
automobile and office equipment under operating leases that
will expire in various months through January 2002. Future
minimum rental payments are as follows:
For the 12 months ended July 31,
1998 $136,909
1999 47,777
2000 13,412
2001 2,248
2002 788
------------
$201,134
============
Rental expense charged to operations for the seven month period
ended July 31, 1997 and for the year ended December 31, 1996
was $68,482 and $ 52,715, respectively. In accordance with the
lease for the Bethesda premises, the Company is additionally
liable for its proportionate share of increases in real estate
taxes and other operating expenses.
(B) EMPLOYMENT CONTRACTS:
Pursuant to the merger agreements (see Note 1), the prior
employment agreements of the Company with three members of
management were terminated and replaced. The new three year
agreements have expiration dates through November 30, 2000 with
automatic renewal terms of one year. In addition to their base
salaries (aggregating $600,000, $675,000 and $750,000 for each
of the three years consecutively), these employees are entitled
to options ("performance options") exercisable over the earlier
of a five year period or November 30, 2005, entitling each of
them to receive 285,517 shares of IDF common stock at an
exercise price of $1.25 per share. In addition to the
performance options (aggregating 856,551), IDF has established
an option pool consisting of an aggregate of 131,777 additional
performance options for these and other key employees.
F-37
<PAGE>
TECHSTAR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
(II LITIGATION:
The Company is involved in a contract dispute with a vendor
over engineering services provided to the Company by the
vendor. According to the management of the Company, the vendor
filed a claim in the amount of $216,000 plus interest against
the Company. The Company notified the vendor (through its
attorney) that the vendor's work was unacceptable by the
customer, causing the Company to incur additional, cost to
compete the project and also causing the Company to lose the
contract with the customer. The Company's customer agrees with
these assertions and has been helpful in assisting the Company
with its investigative discovery process. Furthermore, the
Company filed a counterclaim against the vendor in the amount
of $2.5 million for vendor's negligence. As of the date of
issue of these financial statements the Company and the vendor
have agreed to enter into mediation for settlement discussions.
Mediation is tentatively scheduled for the later part of July
1998. The vendor's insurance carrier has agreed to take part in
the mediation discussions.
NOTE 8 - SUBSEQUENT EVENT:
(A) As described in Note 1, effective August 1, 1997, subsequent to
the balance sheet date, the Company consummated a reverse
triangular merger with IDF and one of its subsidiaries. As a
result of this merger, the loan balance due from the Company to
its former parent, AUGI, in the amount of $215,000, was assumed
by the Company's new parent, IDF (see Notes 3 and 4a). The
Company together with other subsidiaries have guaranteed IDF's
obligation to AUGI.
(B) In addition to the above, the merger agreement provides that
the Company will assume $300,000 of AUGI's acquisition debt,
due in December 1999, to the former TechStar shareholders (see
Note 1) provided that AUGI shall make the 1997 and 1998
principal and interest payments on the acquisition debt and
unconditionally guarantee the debt assumed by the Company.
(II In November 1997, the Company entered into a new lease for its
office facility for 43 months commencing on December 31, 1997
and ending on June 30, 2001 at a monthly base rent of $34,104.
In accordance with the lease, the Company is additionally
liable for its proportionate share of increase in real estate
taxes and other operating expenses.
F-38
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
INTRODUCTION TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
The following unaudited pro forma consolidated statement of operations has been
prepared based upon certain pro forma adjustments (see description of pro forma
transaction below) to the historical financial statements of IDF International,
Inc. and Subsidiaries (collectively called the Company). The pro forma financial
statement of operations should be read in conjunction with the notes thereto and
the historical financial statements of the Company.
The accompanying pro forma consolidated statement of operations has been
prepared as if the combinations occurred at July 1, 1996 the beginning of the
Company's fiscal year. This pro forma consolidated statement of operations does
not purport to be indicative of future results or of the results which would
actually have been obtained had the pro forma transactions been completed as of
July 1, 1996.
The pro forma transaction is as follows:
Effective August 1, 1997, the Company was a party to a reverse
triangular merger (through a newly formed subsidiary. TechStar
Acquisition Corp. ("Acquisition Corp.") with TechStar
Communications, Inc. ("TechStar") a wholly owned subsidiary of
American United Global, Inc. ("AUGI"). TechStar emerged as the
surviving corporation of the merger with Acquisition Corp. and
became a wholly owned subsidiary of the Company. As part of this
transaction the Company issued 6,171,553 shares of its common
stock to AUGI resulting in AUGI owning approximately 63% of the
issued and outstanding shares of the Company at that date.
F-39
<PAGE>
<TABLE>
<CAPTION>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
- Historical -
- Historical - TechStar
IDF International, Inc. Communications
and Subsidiaries Inc. Pro Forma
For the Year Ended For the Year Ended Adjustments
June 30, 1997 June 30, 1997 ---------------------------- Pro Forma
Debit Credit Consolidated
--------------------- ------------------------ ----------------------------- ---------------
<S> <C> <C> <C> <C>
NET REVENUE $11,269,590 $5,407,756 $16,677,346
COST OF GOODS SOLD 5,655,732 2,958,131 8,613,863
------------- ----------- -------------
GROSS PROFIT 5,613,858 2,449,625 8,063,483
OPERATING EXPENSES
$144,000(c)
7,900(d)
3,930,232 897,472 107,000(b) 5,086,604
------------- ----------- -------------
INCOME FROM OPERATIONS 1,683,626 1,552,153 2,976,879
------------- ----------- -------------
OTHER INCOME (EXPENSES)
Interest expense (863,741) 10,834 150,000(a) (1,002,907)
Other income 98,117 (12,687) 85,430
------------- ------------ -------------
(765,624) (1,853) (917,477)
------------- ------------ -------------
INCOME BEFORE INCOME TAXES 918,002 1,550,300 2,059,402
INCOME TAXES - 620,120 620,120
------------- ------------ --------- --------------
NET INCOME $ 918,002 $ 930,180 $408,900 $ 1,439,282
============= =========== ======== ============
</TABLE>
See notes to pro forma consolidated statement of operations.
F-40
<PAGE>
IDF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
NOTE (A) Reflects interest expense associated with the 8% senior
subordinated convertible notes.
NOTE (B) Reflects amortization expense of deferred finance and
acquisition costs associated with the 8% senior subordinated
convertible note.
NOTE (C) Reflects an net increase in the carrying value of goodwill
as of June 30, 1997 in the aggregate amount of $1,985,189 and
net increase in amortization during 1997 on this net increase
in goodwill for $144,000, representing 63% of the fair market
value of IDF's goodwill over 63% of the historical cost.
NOTE (D) Reflects recognition of 63% of the fair value of the
license at $157,500 as of June 30, 1997 and amortization of the
license for one year in the amount of $7,900 based on a useful
life of 20 years.
F-41
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
<S> <C> <C>
(3) Charter and By-Laws of IDF International, Inc.
(3.1) Certificate of Incorporation (filed March 26, 1991)(1)
Certificate of Amendment of Certificate of Incorporation
(3.2) (filed February 25, 1998)(1)
Certificate of Amendment of Certificate of Incorporation
(3.3) (filed March 23, 1998)(1)
Certificate of Amendment of Certificate of Incorporation
(3.4) (filed July 9, 1998)(1)
(3.5) Amended and Restated By-Laws of IDF International, Inc.(1)
(10.) Material Contracts
(10.1) Employment Agreement between Solon D. Kandel and IDF
International, Inc.(2)
(10.2) Employment Agreement between Lembit Kald and IDF
International, Inc., and Hayden-Wegman, Inc.(2)
(10.3) Employment Agreement between Sergio Luciani and IDF
International, Inc., and TechStar Communications, Inc.(2)
(10.4) Consulting Agreement between Robert M. Rubin and IDF
International, Inc.(2)
(10.5) Indemnity Agreement between Solon Kandel and IDF
International, Inc.(2)
(10.6) Indemnity Agreement between Robert M. Rubin and IDF
International, Inc.(2)
(10.7) Indemnity Agreement between Lembit Kald and IDF
International, Inc.(2)
(10.8) Indemnity Agreement between Sergio Luciani and IDF
International, Inc.(2)
(10.9) Indemnity Agreement between Lawrence Kaplan and IDF
International, Inc.(2)
<PAGE>
<CAPTION>
<S> <C> <C>
(10.10) Indemnity Agreement between Simantov Moskona and IDF
International, Inc.(2)
(10.11) Indemnity Agreement between Donald W. Shipley and IDF
International, Inc.(2)
(10.12) IDF International, Inc., 1997 Stock Option Plan(2)
(10.13) Sublease dated October 20, 1997 AT&T Corp. and TechStar
Communications, Inc. (3)
(10.14) Amended Stipulation of Settlement dated September 9,
1997 among Deco Tower Associates, Innovative Facilities Corporation,
Peabody Facilities, Inc. and Hayden-Wegman, Inc. (3)
(10.15) Lease dated October 18, 1996 between Philip Y.
DeNormandie and Hayden-Wegman, Inc. (3)
(10.16) Second Amendment of Lease Agreement dated April 5, 1996
between C&S Associates, VIII and Hayden-Wegman, Inc. (3)
(10.17) Employment Agreement between the Registrant, TechStar
Communications, Inc. and Simantov Moskona.(3)
*21.1 Subsidiaries of the registrant
*23.1 Consent of Independent Auditors
*27.1 Financial Data Schedule
</TABLE>
- ----------
*Filed herewith
(1) Exhibits 3.1 through 3.5 were previously filed with Registrant's
Registration Statement on Form 10-SB, Commission File No. 0-24627 as
exhibits 2.1 through 2.5 respectively, and are hereby incorporated herein
by reference.
(2) Exhibits 10.1 through 10.12 were previously filed with Registrant's
Registration Statement on Form 10-SB, Commission File No. 0-24627 as
exhibits 6.1 through 6.12, respectively, and are hereby incorporated
herein by reference.
(3) Previously filed to the corresponding exhibit number filed with
Registrant's Amendment No. 1 to Registration Statement on Form 10-SB,
Commission File No. 0-24627
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation
------- ------------------------
(1) HAYDEN-WEGMAN, INC. Delaware
(2) TECHSTAR COMMUNICATIONS, INC. Delaware
(3) HAYDEN-WEGMAN INTERNATIONAL, LTD. Delaware
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in Amendment No. 1 of the Registration Statement on Form
10-SB of our report dated November 10, 1998, relating to the financial
statements of IDF International, Inc. and subsidiaries and our report dated July
8, 1998 relating to the financial statements of Techstar Communications, Inc.
/s/ Lazar Levine & Felix LLP
----------------------------
LAZAR LEVINE & FELIX LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements for the year ended July 31, 1998 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 791,804
<SECURITIES> 0
<RECEIVABLES> 3,763,506
<ALLOWANCES> 480,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,951,698
<PP&E> 832,306
<DEPRECIATION> 482,943
<TOTAL-ASSETS> 8,251,667
<CURRENT-LIABILITIES> 6,217,476
<BONDS> 495,521
<COMMON> 9,928
0
4,084,000
<OTHER-SE> (2,555,258)
<TOTAL-LIABILITY-AND-EQUITY> 8,251,667
<SALES> 14,066,155
<TOTAL-REVENUES> 14,066,155
<CGS> 9,936,467
<TOTAL-COSTS> 9,936,467
<OTHER-EXPENSES> 12,677,759
<LOSS-PROVISION> 197,723
<INTEREST-EXPENSE> 1,124,281
<INCOME-PRETAX> (9,870,075)
<INCOME-TAX> 59,563
<INCOME-CONTINUING> (9,929,638)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,929,638)
<EPS-PRIMARY> (1.02)<F1>
<EPS-DILUTED> (1.02)<F2>
<FN>
<F1> BASIC
<F2> FULLY DILUTED
</FN>
</TABLE>
