As filed with the Securities and Exchange Commission on January 30, 1998
Registration No. 333-____________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
INTERNATIONAL FIBERCOM, INC.
(Exact name of Registrant as specified in its charter)
Arizona 8-0271282
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3615 South 28th Street
Phoenix, Arizona 85040
(602) 941-1900
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------
Mr. Joseph P. Kealy
International FiberCom, Inc.
3615 South 28th Street
Phoenix, Arizona 85040
(602) 941-1900
(Name, address, including zip code, and telephone number,
including area code, of agent for service of service)
---------------
With copies to:
Christian J. Hoffmann, III
Streich Lang, P.A.
2 North Central Avenue
Phoenix, Arizona 85004-2391
(602) 229-5200
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Approximate date of commencement of proposed sale of the securities to public:
From time to time after the Registration Statement becomes effective as
determined by market conditions and the needs of the Selling Shareholders.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
---------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Security to be Registered Amount to be Proposed Maximum Proposed Maximum Amount of
Registered Offering Price (2) Aggregate Offering Price (2) Registration Fee
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value (1) 12,752,317 $6.00 76,513,902 $22,910
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Composed of shares issuable upon (a) conversion of (i) Series B
Convertible Preferred Stock, (ii) Series C Convertible Preferred Stock,
(iii) 8% Convertible Subordinated Debentures, and (iv) 5.5% Convertible
Subordinated Debentures, (b) exercise of Common Stock purchase
warrants, (c) exercise of options to purchase Common Stock and (d)
shares of Common Stock issued in private placements.
(2) Estimated for purpose of calculating registration fee.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended (the "Securities Act") or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 30, 1998
PROSPECTUS
INTERNATIONAL FIBERCOM, INC.
12,752,317 Shares of Common Stock, no par value
---------------
The securities offered hereby are 12,752,317 shares (the "Shares") of
common stock, no par value ("Common Stock"), of International FiberCom, Inc., an
Arizona corporation (the "Company"). Of the 12,752,317 Shares, (i) 1,570,131
Shares are issuable upon conversion of certain of the Company's convertible
securities ("Conversion Shares"), (ii) 3,074,589 Shares are issuable upon the
exercise of outstanding Common Stock Purchase Warrants (the "Warrant Shares"),
(iii) 2,415,000 Shares of Common Stock are issuable upon exercise of options to
purchase Common Stock (the "Option Shares") and (iv) 5,692,597 Shares of Common
Stock issued in private placements (the "Private Placement Shares").
The 1,570,131 Conversion Shares are comprised of (i) 480,000 Shares
issuable upon conversion of the Company's outstanding 8% Convertible
Subordinated Debentures (the "8% Debentures"), (ii) 657,483 Shares issuable upon
conversion of the Company's Series B Convertible Preferred Stock, no par value
(the "Series B Preferred"), (iii) 182,648 Shares issuable upon conversion of the
Company's 5.5% Convertible Subordinated Debentures (the "5.5% Debentures") and
(iv) 250,000 shares issuable upon conversion of the Company's Series C
Convertible Preferred Stock, no par value (the "Series C Preferred"). The 8%
Debentures and 5% Debentures are collectively referred to in this Prospectus as
"the Debentures."
The 3,074,589 Warrant Shares are comprised of (i) 700,000 Shares
issuable upon exercise of Common Stock Purchase Warrants issued in connection
with the Company's private placement of Series B Preferred (the "Series B
Warrants"), (ii) 378,443 Shares issuable upon exercise of Common Stock Purchase
Warrants issued in connection with the Company's private placement of shares of
its Series A Convertible Preferred Stock (the "Series A Warrants), (iii) 186,666
Shares issuable upon exercise of Common Stock purchase warrants issued in
connection with the Company's acquisitions ("Acquisition Warrants"), (iv)
1,302,480 Shares issuable upon exercise of Common Stock Purchase Warrants issued
in the Company's 1994 Public Offering ("Public Warrants"), (v) 240,000 Shares
issuable upon exercise of Common Stock Purchase Warrants issued to the
Underwriter in the Company's 1994 Public Offering (the "Underwriter's
Warrants"), and (vi) 267,000 Shares issuable upon exercise of Common Stock
Purchase Warrants issued to J.P. Carey, Inc. in connection with the Company's
private placements of Common Stock, Series C Preferred and 5.5% Debentures
("Private Placement Warrants").
The 2,415,00 Option Shares are comprised of (i) 1,900,000 Shares
issuable upon exercise of options granted to Liviakis Financial Communications,
Inc. ("Liviakis") and Robert Prag for services rendered as the Company's
financial public relations firm and representative ("Liviakis Options"), (ii)
215,000 Shares issuable upon exercise of options granted to Wallace E. Sapp in
connection with the Company's acquisition of Southern Communications Products,
Inc. ("Southern" or "SCP" and the "Sapp Options"), and (iii) 300,000 Shares
issuable upon exercise of options granted to Liviakis and Robert Prag for
services rendered in connection with the Company's 1997 Private Placement of
Common Stock.
The 5,692,597 Private Placement Shares are comprised of (i) 115,833
Shares issued in payment of a promissory note by the Company in connection with
its acquisition of Concepts, (ii) 470,588 shares issued to former shareholders
of Compass in connection with its acquisition by the Company, (iii) 2,231,661
shares issued to the shareholders of SCP in connection with its acquisition by
the Company, (iv) 2,700,000 shares issued in the Company's 1997 Private
Placement of Common Stock, (v) 34,515 shares issued as a finder's fee in
connection with the Company's acquisition of SCP, and (v) 140,000 Shares issued
as a placement agent fee in connection with the Company's 1997 Private Placement
of Common Stock.
The Conversion Shares, Warrant Shares, Option Shares and the Private
Placement Shares may be offered from time to time in one or more transactions in
the over-the-counter market, pursuant to Rule 144 under the Securities Act
pursuant to Regulation S under the Securities Act or otherwise, at market prices
prevailing at the time of the sale at prices relating to such prevailing market
prices, or at negotiated prices, without payment of any underwriting discounts
or commissions except for usual or customary selling commissions paid to brokers
or dealers. The Company will not receive any of the proceeds from the sale of
any of the Shares registered in this Offering.
---------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" ON PAGE 10 FOR A DISCUSSION OF CERTAIN RISKS RELATED
TO AN INVESTMENT IN THE SHARES.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is January ___, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C., and at the Commission's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material can
also be obtained at prescribed rates from the Public Reference section of the
Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549 upon payment of the prescribed fees. The Commission also maintains a Web
site that contains reports proxy and information statements and other materials
that are filed through the Commission's Electronic Data Gathering, Analysis, and
Retrieval system. This Web site can be accessed at http://www.sec.gov.
This Prospectus constitutes a part of a Registration Statement on Form
SB-2 (together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission under the Securities Act of
1933, as amended (the "Securities Act"). As permitted by the rules and
regulations of the Commission, this Prospectus omits certain information
contained in the Registration Statement, and reference is made to the
Registration Statement and related exhibits for further information with respect
to the Company and the securities offered hereby. Any statements contained
herein concerning the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission are not
necessarily complete, and in each instance reference is made to the copy of such
document so filed. Each such statement is qualified in its entirety by such
reference.
INCORPORATION BY REFERENCE
The Company hereby undertakes to provide without charge to each person,
including a beneficial owner, to whom a Prospectus is delivered upon written or
oral request of each person, a copy of any document incorporated herein by
reference, (not including exhibits to the document that have been incorporated
herein by reference unless such exhibits are specifically incorporated by
reference in the document which this Prospectus incorporates). Requests should
be directed to President, International FiberCom, Inc., 3615 South 28th Street,
Phoenix Arizona 85040; telephone (602) 941- 1900.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements appearing elsewhere in and
incorporated by reference into this Prospectus. The shares offered hereby are
speculative and involve a high degree of risk. Each prospective investor should
carefully review the entire Prospectus, the financial statements and all
exhibits and documents referred to therein. See "Risk Factors."
The Company
The Company offers diversified telecommunications services and products
to the telecommunications, cable television ("CATV") and other industries. The
Company provides a wide range of engineering, consulting and broadband network
systems design, installation of structured cable and fiber-optic networks,
complete telecommunication systems integration services, and sells and
distributes new and used telecommunications equipment to leading
telecommunications companies, Regional Bell Operating Companies ("RBOCS"),
telecommunications hardware resellers and other Fortune 500 companies.
The Company's strategy is to be a one-stop solution for the
telecommunications marketplace, offering a wide range of engineering, consulting
and maintenance services for fiber-optic and broadband networks and systems
integrated with local area network ("LAN") and wide area network ("WAN")
expertise and capabilities. A LAN is a group of personal computers linked
together in a building or campus to share programs, data, E-mail, peripherals
and other resources. A WAN is network that covers a large geographic area, such
as a state or country.
In 1997 the Company began to implement this strategy through strategic
acquisitions of businesses that complemented and enhanced its services or
products. At the beginning of 1997 the Company had one operating subsidiary,
Kleven Construction, Inc. ("Kleven"), a Phoenix-based company specializing in
the design, installation and maintenance of fiber-optic and other cable services
for the telecommunication and CATV industries. During 1997 the Company completed
three strategic acquisitions that resulted in a significant increase in its
revenues and net income. Effective January 1997 the Company acquired Concepts in
Communication, Incorporated ("Concepts") for total consideration of $4.8
million, consisting of $4.6 million in cash and shares of Common Stock valued at
$200,000. Concepts is a Nashville-based company specializing in systems
integration services including design, engineering, installation and maintenance
of structured cable systems, network hardware and software, workstation
peripherals and intercommunications systems, primarily within commercial,
industrial and government facilities. Effective October 1997 the Company
acquired the assets and business of Southern for total consideration of $21.4
million, consisting of $12 million in cash, 2,231,661 shares of Common Stock
valued at $6.2 million and a $3.2 million promissory note. Southern purchases,
sells and deals in used telecommunications equipment that is used in the digital
access, switching and transport systems of telecommunication service providers
on a nationwide basis. Also effective October 1997, the Company acquired Compass
Communications, Inc. ("Compass") for total consideration of approximately $2.0
million consisting of 470,588 shares of Common Stock. Compass is an
Atlanta-based company specializing in video, voice and data network development
using state of the art, fiber-optic distribution platforms. In 1997 the Company
operated in Arizona, California, Tennessee, Florida and Georgia.
The Company's clients and customers include Cox Communications,
BellSouth Telecommunications, AT&T Network Systems, Ameritech, Lucent
Technologies, US West, Time Warner, Motorola, MediaOne, Austrailia's Optus
Vision, and the City of Phoenix.
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<PAGE>
The Company maintains its principal executive offices at 3615 South
28th Street, Phoenix, Arizona 85040 and its telephone number is (602) 941-1900.
Unless the context indicates otherwise, all references to the Company or "IFC"
refer to International FiberCom, Inc. and its subsidiaries.
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<PAGE>
Summary of the Offering
Securities Offered.............................. 12,752,317 of Common Stock,
no par value
Capital Stock Outstanding
Common Stock outstanding prior to Offering 12,599,317 (1)
Common Stock outstanding after
Conversion of Series B Preferred,
Series C Preferred, 8% Debentures and
5.5% Debentures............................ 14,169,448 (2)
Common Stock outstanding after exercise
of Options and Warrants.................... 18,088,906 (3)
Series B Convertible Preferred Stock....... 1,291 shares outstanding (4)
Series C Convertible Preferred Stock....... 1,000 shares outstanding (4)
Nasdaq SmallCap Market Symbols Common Stock: "IFCI"
Warrants: "IFCIW"
Boston Stock Exchange Symbols Common Stock: "IFC"
Warrants: "IFCW"
Philadelphia Stock Exchange Symbols Common Stock: "IFC"
Warrants: "IFCW"
Plan of Distribution All of the shares offered
hereby may be sold from time
to time by certain selling
Shareholders. The Company will
not receive any of the
proceeds from the sale of the
Shares by the Selling
Shareholders. These shares may
be offered from time to time
in one or more transactions on
the Nasdaq SmallCap Market
under Rule 144 under the Act
or otherwise at market prices
prevailing at the time of the
sale, at prices related to
such prevailing market prices,
or at negotiated prices. The
Company is paying all of the
expenses in connection with
the preparation of this
Prospectus and the related
Registration Statement,
estimated at $75,000. See
"Selling Shareholders" and
"Plan of Distribution."
Risk Factors This offering involves a high
degree of risk. See "Risk
Factors and Investment
Considerations."
- ---------------
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<PAGE>
(1) Does not include any shares of Common Stock issuable upon the exercise of
(i) outstanding options to employees granted under the Company's 1994
Incentive Stock Option Plan or 1997 Incentive Stock Option Plan; (ii) the
Conversion Shares; (iii) the Warrant Shares; (iv) the Option Shares; or (v)
935,000 shares subject to options or warrants held by directors or third
parties outside of any option plan. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Liquidity and
Financial Resources."
(2) Assumes full and complete conversion of all outstanding Series B and Series
C Preferred, and the 8% and 5.5% Debentures. Does not include any of the
Option Shares or Warrant Shares
(3) Assumes exercise of all Underwriters Warrants, Series A Warrants, Series B
Warrants, Acquisition Warrants, Public Warrants, Private Placement
Warrants, Liviakis Options and Sapp Options. Does not include any of the
Conversion Shares
(4) See "Description of Securities" for terms of the Series B Preferred and
Series C Preferred.
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<PAGE>
Summary Financial Data
The following table summarizes certain selected financial data and
unaudited data of the Company and is qualified in its entirety by the more
detailed financial statements contained elsewhere in this Prospectus. The
summary financial information contained in the following table is derived from
and should be read in conjunction with the financial statements of the Company
and the notes thereto appearing elsewhere in this Prospectus. The pro forma
consolidated statement of operations data and the pro forma consolidated balance
sheet data give effect to the acquisition of Southern. The pro forma
consolidated statement of operations data give effect to such events as if they
had occurred as of the first day of the periods presented and the pro forma
consolidated balance sheet data are presented as if such events had occurred on
the balance sheet date. See "Business" and The Company's Consolidated Financial
Statements.
(in thousands, except per share date)
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
----------------------- -------------------------------
1995 1996 1996 1997
---- --------------------- ---- ---------------------
Pro Pro
Actual Actual Forma(1) Actual Actual Forma(2)
------ ------ -------- ------ ------ --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of
Operation Data:
Net sales..................... $12,050 $12,161 $42,153 $9,159 $20,362 $28,849
Cost of sales................. 11,802 11,388 26,482 8,189 15,779 18,535
------- ------- ------- ------ ------- -------
Gross profits................. 248 773 15,671 970 4,583 10,314
Selling, general and
administrative expenses...... 2,843 4,939 10,757 1,638 3,294 5,406
------- ------- ------- ------ ------- -------
Operating income (loss)....... (2,595) (4,166) 4,914 (668) 1,289 4,908
Other income (deductions)..... 196 116 (270) 79 125 (47)
------- ------- ------- ------ ------- -------
Income (loss) before
income taxes ................ (2,399) (4,050) 4,644 (589) 1,414 4,861
Income taxes.................. 211 - (1,857) - - 1,944
------- ------- ------- ------ ------- -------
Net income (loss)............. (2,188) (4,050) 2,787 (589) 1,414 2,917
Preferred stock dividends - 171 304 - 148 148
------- ------- ------- ------ ------- -------
Net income (loss) attributable
to common stockholders $2,188 ($4,221) $2,483 ($589) $1,266 $2,769
======= ======= ======= ====== ======= =======
Primary net income (loss) per
share(3).................... ($.50) ($.74) $.17 ($.13) $.10 $.15
===== ===== ==== ===== ==== ====
Primary average number of
shares outstanding.......... 4,417,072 5,716,600 16,348,266 4,417,072 14,437,109 19,068,770
========= ========= ========== ========= ========== ==========
Fully diluted income per
share....................... - - .17 - .09 .14
=== === ===== === ===== ====
Fully diluted shares
outstanding ................ - - 16,348,266 - 15,860,068 20,491,729
========= ========= ========== ========= ========== ==========
</TABLE>
(in thousands)
Nine Months Ended September 30,
-------------------------------
1997
----
(Unaudited)
-----------
Balance Sheet Data: Actual Pro Forma(2)
-------- ------------
Working capital................... $3,850 $6,500
Total assets.................... $14,372 $36,143
Short-term debt................. $4,930 $5,301
Long-term debt.................. $2,427 $5,627
Total stockholders' equity...... $7,015 $25,215
(1) The pro forma figures for the year ended December 31, 1996 include the
operating results of Concepts and Southern for their respective fiscal
years ended December 31, 1996 and the operating
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<PAGE>
results of the Company for its fiscal year ended December 31, 1996.
(2) The proforma figures include the operating results of Southern.
(3) If presented in accordance with Statements of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128) the Company would
have reported basic earnings per share of $.18 for the nine month period
ended September 30, 1997. SFAS No. 128 is effective for periods ending
after December 15, 1997.
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<PAGE>
RISK FACTORS
Investment in the Company involves a number of risks. In addition to the
risks and investment considerations discussed elsewhere in this Prospectus the
following factors should be carefully considered by anyone purchasing the
securities offered hereby.
Risks of the Company
Need for Additional Financing. The expansion of the Company's business,
particularly for working capital in its Kleven and Compass subsidiaries, and
continued implementation of its acquisition strategy may require the Company to
seek additional financing that may include bank financing or the issuance of
debt or equity securities. No assurance can be given that the Company will be
able to obtain additional capital or, if available, that such capital will be
available at terms acceptable to the Company or that such additional financing
would not result in substantial dilution of the equity interest of existing
shareholders. The ability of the Company to obtain bank financing or to raise
additional debt or equity capital will depend upon its financial condition,
results of operations, covenants and limitations of any outstanding debt
obligations at that time, and general economic conditions. See "Business -
Business Strategy."
Leverage and Liquidity. The Company has plans to obtain debt financing in
the near future in order to finance its working capital requirements and to
redeem certain of the Company's securities. There can be no assurance that the
Company will have adequate cash available to make required principal and
interest payments. The Company's ability to pay interest and principal on such
debt and to satisfy other debt obligations will depend upon its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond its control.
The Company anticipates that its operating cash flow, together with the proceeds
of warrant and option exercises will be sufficient to meet its operating
expenses and to service its debt requirements as they become due. However, if
the Company is unable to service its indebtedness, whether upon acceleration of
such indebtedness or in the ordinary course of business, the Company would be
required to pursue one or more alternative strategies such as restructuring or
refinancing its indebtedness, or seeking additional equity capital. There can be
no assurance that any of these strategies could be effected on satisfactory
terms, if at all.
Acquisition Strategy. A key element of the Company's growth to date and
its strategy for the future is expansion through the acquisition of companies
that have complementary businesses, that can utilize or enhance the Company's
existing capabilities and resources or that expand its existing range of
services or products in the telecommunications or CATV industries. As a result,
the Company continually evaluates potential acquisition opportunities, some of
which may be material in size or scope. Acquisitions involve a number of special
risks, including the time associated with identifying and evaluating future
acquisitions, the diversion of management's attention to the integration of the
operations and personnel of the acquired companies, the incorporation of
acquired products or services into the Company's products and services, possible
adverse short-term effects on the Company's operating results, the realization
of acquired intangible assets and the loss of key employees of the acquired
companies. The Company may issue equity securities and other forms of
consideration in connection with future acquisitions, which could cause dilution
to investors purchasing Common Stock of the Company. The Company completed three
major acquisitions in 1997. There can be no assurance that the Company will be
able to identify additional suitable acquisition candidates, that it will be
able to consummate or finance any such acquisitions, or that it will be able to
integrate any such acquisitions successfully into its operations. See "The
Company" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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<PAGE>
Management of Growth. The Company is currently experiencing a period of
rapid growth resulting from recent acquisitions and the expansion of its
operations, both of which have placed significant demands on the Company's
resources. The Company's success in managing its growth will require it to
continue to improve its operational, financial and management information
systems, and to motivate and effectively manage its employees. Further, the
Company has no prior experience in the systems integration, engineering or
telecommunication equipment fields and will be relying primarily upon the former
management of Concepts, Compass and SCP to provide a base of knowledge in these
fields until the Company's management gains sufficient experience. No assurance
can be given that the Company will successfully assimilate Concepts, Compass and
SCP into its existing business operations. Also, no assurance can be given that
the Company will be successful in expanding the businesses of Concepts, Compass
and SCP, that new customers can be attracted as anticipated, or that there will
be a continued, if any, demand for Concepts', Compass' or SCP's services,
technology, products or expertise in new and competitive markets. If the
Company's management is unable to manage growth effectively, the quality of the
Company's products and services, its ability to retain key personnel and its
business, financial condition and results of operations could be materially
adversely affected.
Dependence on the Telecommunications and CATV Industries. Demand for a
substantial portion of the Company's services, and therefore future increases in
its net sales and net income, depends primarily on capital spending by CATV
operators, telecommunications and other companies for constructing, rebuilding,
maintaining or upgrading their telecommunications systems. However, the Company
expects its future revenue increases to come primarily from upgrading,
retrofitting, rebuilding and maintaining existing cable systems with fiber-optic
and other cables, rather than from constructing completely new systems. The
amount of capital spending by CATV operators and telecommunications companies
and, therefore, the sales and profitability of the Company, are affected by a
variety of factors, including general economic conditions, access by cable
operators to financing, government regulation of cable operators, demand for
cable services and technological developments in the broadband communications
industry. There can be no assurances that such capital spending will occur or
occur at the level announced by the various telecommunications and CATV
companies. Such companies may depend upon their ability to obtain rate increases
or otherwise experience favorable environments for their CATV and
telecommunications rates in order to raise funds for capital spending. Federal
regulations rolling back rates for basic tier CATV services may have a negative
impact on the capital spending plans of the CATV companies and thus have a
material adverse affect on the Company's business.
Federal Regulation. CATV operators are subject to federal regulation. In
1992, Congress passed an act that repealed the 1984 deregulation of cable
television and subjected cable systems to rate regulation and other FCC-
enforced obligations. In 1996 Congress passed the 1996 Telecommunications Act
which repeals many of the major provisions of the 1992 Act. On rate regulation,
current FCC rules cable service rates will be repealed in three years, except
for the "basic tier" of cable programming. Price caps are repealed for "small"
cable companies (less than $25 million in annual revenues) immediately or for
any cable system once it faces "effective competition" from a local telephone
company providing "comparable" video programming services. It is difficult to
predict the impact, if any, this legislation might have on the
telecommunications industry in general and the Company's business in particular.
Impact of State Regulation. The Company's ability to pursue its business
activities is regulated by various agencies and departments of state
governments. Commencement of services frequently requires licenses from public
utilities commissions. There is no assurance that the Company as a whole or its
customers, will be successful in its or their efforts to obtain necessary
licenses or regulatory approvals. The inability of the Company or any of its
customers to secure any necessary licenses or approvals could have a material
adverse effect on its business. In addition to specific regulations, the
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<PAGE>
Company is subject to all federal, state and local rules and regulations imposed
upon businesses generally. The cost of compliance with regulations is an
additional cost of doing business for the Company.
Technological Developments and Risks of Technological Obsolescence. The
Company's services and products sold through its Compass or Southern
subsidiaries are subject to significant technological change and innovation.
Technological developments are occurring rapidly in the communications and
systems integration industries and, while the effects of such developments are
uncertain, they may have a material adverse effect on the demand for the
Company's services. For example, in the CATV industry, technologies are being
developed that would bypass existing cable systems and permit the transmission
of signals directly into households. The Company's success will generally depend
on its ability to penetrate and retain markets for its existing services and to
retain its expertise in installing and repairing telecommunications, CATV cable
and integrated systems on a cost-effective and timely basis. There can be no
assurance that the Company will be able to remain competitive or that its
services will not be subject to technological obsolescence. See "Business."
Competition. All aspects of the Company's business are highly
competitive. The Company competes with national, regional and local companies.
Many of the Company's competitors or potential competitors are substantially
larger and have greater resources than the Company. In addition, because of the
convergence of the CATV, telecommunications and computer industries and rapid
technological development, new competitors may seek to enter the market. See
"Business - Competition."
Work Orders Under Cox Contract. The contract that the Company has
negotiated with Cox Communications, Inc. ("Cox") is a fixed unit price contract,
under which the Company receives payment on a per lineal foot or other basis of
installed cable or on completion of a specific job. The Company receives work
orders for specific jobs from Cox from time to time under such contract. In
fiscal 1997, after including the Company's acquisitions, Cox accounted for
approximately 15% of the Company's revenues on a pro forma basis. There can,
however, be no assurance of the size of work orders that Cox will actually place
with the Company in fiscal 1998. See "Business."
Dependence Upon Major Customers and Large Contracts. The CATV industry is
highly concentrated with over 75% of U.S. domestic subscribers being served by
approximately 25 major multi- system operators ("MSO"). In fiscal 1996, the
revenues the Company derived from three customers represented approximately 50%
of its revenues on a pro forma basis (67% actual), with Cox its largest
customer, representing 25% of its revenues on a pro forma basis (45% actual).
Any decision by these major customers to cease or reduce their use of the
Company's services may have a material adverse effect on its business. A number
of the Company's contracts with its customers are substantial in size. The
failure to timely or adequately replace a contract upon its completion or
termination with one or more new contracts or customers may materially adversely
affect the business and operations of the Company. See "Business - Customers."
Risks of Possible Cost Escalation Under Fixed Price Contracts. A
substantial portion of the Company's revenues have been generated principally
under firm fixed-price contracts. Fixed-price contracts carry certain inherent
risks, including underestimating costs, problems with new technologies and
economic and other changes that may occur over the contract period. The Company
recognizes revenues using the percentage-of-completion method whereby revenue is
recognized based on actual costs incurred in relation to total estimated costs
to complete the contract. This method may result in irregular and uneven
quarterly results. Unforeseen events and circumstances can alter the Company's
estimate of the costs and potential profit associated with a particular
contract. To the extent that original cost estimates are modified, estimated
costs to complete increase, delivery schedules are delayed, or progress under a
contract is otherwise impeded, cash flow, revenue recognition and profitability
from
-12-
<PAGE>
a particular contract may be adversely affected.
Insurance and Potential Excess Liability. The Company maintains
liability insurance to protect it against damages to persons or property which
may result from its work. If the Company were to incur liability in excess of
its policy coverage, its financial condition could be adversely affected. See
"Business - Liability Insurance."
Arizona Anti-takeover Statute. The Arizona Corporate Takeover Act
("Takeover Act") was adopted in 1987. The policy of the Takeover Act is to
prevent unfriendly corporate takeover attempts by third parties. The Takeover
Act prohibits certain types of transactions, including "green mail," limits
voting rights of certain individuals acquiring shares in the market and
regulates certain business combinations respecting corporate transactions
proposed by insiders and as part of a takeover plan. The Company is subject to
the foregoing provisions. These provisions enhance the possibility that a
potential bidder for control of the Company will be required to act through
arm's-length negotiation with respect to a major transaction, such as a merger,
consolidation or purchase of substantially all of the assets of the Company.
Such provisions may also have the effect of discouraging tender offers or other
stock acquisitions, giving management of the Company power to reject certain
transactions which might be desired by the owners of the majority of the
Company's voting securities. These provisions could also be deemed to benefit
incumbent management to the extent that they deter such offers by persons who
would wish to make changes in management or exercise control over management.
The Board of Directors of the Company does not presently know any third party
that plans to make an offer to acquire the Company through a tender offer,
merger or purchase of all or substantially all of the assets of the Company. See
"Description of Securities - Arizona Anti-Takeover Statute."
Dependence Upon Suppliers. The Company does not have written agreements
with its suppliers. It is possible that the Company may encounter shortages in
parts, components, or other elements vital to its operations in the future. In
addition, there is no guarantee that the Company would be able to locate other
satisfactory suppliers, or even if other suppliers could be located, that the
Company would be able to establish commercial relationships with any such
suppliers. If the Company is unable to establish commercial relationships with
other suppliers, it may be required to suspend or curtail some of its services.
Suspension or curtailment of services could have a material adverse effect on
the Company. See "Business - Suppliers."
Dependence Upon Key Personnel. The Company is dependent on the services
of Joseph P. Kealy and Terry W. Beiriger, its principal executive officers. The
Company has entered into a five-year employment agreement with each of these
individuals, effective as of December 1995. When the Company acquired Concepts
and SCP it caused each of such subsidiaries to enter into employment agreements
with numerous "key" employees and consulting agreements with the former chief
executives of Concepts and SCP. The Company must compete with much larger
companies with significantly greater resources to attract and retain personnel.
There can be no assurance that the Company will be successful in this regard or,
if successful, that the services of such personnel can be secured on terms
deemed favorable to the Company. The loss of the services of any of the
individuals mentioned above to the Company or the inability of the Company to
attract other qualified employees could materially and adversely affect their
respective businesses and operations. See "Management."
Economic and General Risks of the Business. The success of the Company
will depend upon factors which may be beyond the control of the Company and
cannot clearly be predicted at this time. Such factors include general economic
conditions, both nationally and internationally, changes in tax laws,
fluctuating operating expenses including energy costs, changes in governmental
regulations, including regulations imposed under federal, state or local
environmental laws, labor laws, and trade laws and other trade barriers. See
"Business."
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<PAGE>
Risks Relating to Offering
Possible Depressive Effect on Market Price of Securities Eligible for
Future Sale. The officers and directors of the Company own an aggregate of
1,515,399 shares of Common Stock, including exercisable stock options. Such
shares are "restricted securities," as that term is defined in Rule 144
promulgated under the Securities Act of 1933, as amended ("Act"), and may be
sold only in compliance with Rule 144, pursuant to registration under the Act or
pursuant to an exemption therefrom. Generally, under Rule 144, each person
holding restricted securities for a period of two years may, every three months,
sell in ordinary brokerage transactions or to market makers an amount of shares
up to (and including) the greater of 1% of a company's then outstanding common
stock or the average weekly trading volume for the four weeks prior to the
proposed sale. Of such restricted securities 110,399 are eligible for sale under
Rule 144 as of December 31, 1997. Sales of substantial amounts of Common Stock
by shareholders of the Company under Rule 144 or otherwise, or even the
potential for such sales, could have a depressive effect on the market price of
shares of Common Stock and could impair the Company's ability to raise capital
through the sale of its equity securities. See "Description of Securities,"
"Principal Stockholders" and "Plan of Placement."
Possible Volatility of Stock Price. The market price of the Company's
Common Stock increased significantly during 1997. The period was marked by
generally favorable industry conditions, acquisitions of new businesses and
substantially improving operating results by the Company, including revenue and
net income from the recently acquired businesses. The trading price of the
Company's Common Stock in the future could be subject to wide fluctuations in
response to quarterly variations in operating results of the Company or its
competitors, actual or anticipated announcements of new acquisitions by the
Company or technical innovations or new products by its competitors, changes in
analysts' estimates of the Company's financial performance, general industry
conditions, general economic and financial conditions in the United States and
other events or factors. In addition, the stock market has experienced extreme
price and volume fluctuations which have particularly affected the market prices
for many technology and telecommunications companies and which have been
unrelated to the operating performance of such companies. These broad market
fluctuations and other factors may adversely affect the market price of the
Company's Common Stock. See "Price Range of Common Stock."
Because the Company services the telecommunications and CATV and the
market price of the Company's Common Stock may be affected by the market prices
of securities of companies in the telecommunications and CATV industries and
interest rates in general, which have tended to be volatile or cyclical. The
stock market has experienced volatility in market prices of telecommunications
and CATV companies which often has been unrelated to the operating results of
such companies. Announcements of combinations, mergers and changes in capital
plans of the cable and other customers of the Company may have an effect on its
business and the market price of the Common Stock may be significantly affected
by announcements of developments in the telecommunications and CATV fields
generally or the Company's obtaining or failure to obtain certain contracts.
Exercise Price Not Necessarily Related to Established Criteria of Value.
The exercise prices of the Series B and Series C Warrants were set through
negotiations conducted prior to the time of their sale, with reference to the
public trading price of the Common Stock. The price of the Common Stock in such
exercises may not necessarily bear any relationship to the Company's asset
value, net worth, earnings or any other established criteria of value at the
time of exercise. The offering price of the Conversion Shares, Warrant Shares,
Option Shares and Private Placement Shares will be determined through
negotiation between the Selling Shareholders and prospective buyers and, in most
cases, licensed broker/dealers. Such offering price may not necessarily bear any
relationship to the Company's asset value, net worth, earnings or any other
established criteria of value at the time of exercise. See "Plan of
Distribution."
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<PAGE>
Possible Issuance of Options May Dilute Interest of Stockholders. The
Company has reserved 441,707 shares of Common Stock for issuance under its 1994
Incentive Stock Option and Restricted Stock Purchase Plans, 1,200,000 shares of
Common Stock for issuance under its 1997 Incentive Stock Option and Restricted
Stock Plans and 2,000,000 shares for issuance under its Employee Stock Purchase
Plan. As of December 31, 1997, all of the options available under these
Incentive Stock Option Plans have been granted and 104,036 shares had been
purchased under the Stock Purchase Plan. The Company has also issued 75,000
stock options to each of its directors who are not employees of the Company and
450,000 shares to two directors who are officers. Such options were granted
outside of the Company's Stock Option and Restricted Stock Plan. To the extent
that stock options are granted and exercised, dilution to the interests of the
Company's stockholders may occur. Moreover, the terms upon which the Company
will be able to obtain additional equity capital may be adversely affected since
the holders of the outstanding options can be expected to exercise them at a
time when the Company would, in all likelihood, be able to obtain any needed
capital on terms more favorable to the Company than those provided in such
outstanding options. See "Management -- Stock Options and Restricted Stock."
Warrants May Adversely Affect Market Price of Common Stock. The Company
issued 1,302,480 Public Warrants in connection with its 1994 public offering.
Such Public Warrants are exercisable to purchase one share of Common Stock at
$5.50 until 5:00 p.m. Mountain Standard Time, on June 5, 1998. The Public
Warrants may be redeemed by the Company upon 30 days' written notice at $.10 per
Warrant, provided that the closing bid quotations of the Common Stock have
averaged at least $8.10 per share for any 20 consecutive trading days ending on
the third day prior to the day on which the Company gives notice.
The Company also issued 378,443 Series A Warrants in connection with the
Company's 1996 private placement of Series A Preferred. The Series A Warrants
are exercisable to purchase 378,443 shares of Common Stock at a price of $.82
per share. The Series A Warrants are exercisable until May, 2001.
In connection with its 1994 public offering of shares of Common Stock and
Public Warrants, the Company also sold to the underwriter of such offering, at
nominal consideration, Underwriter's Warrants exercisable to purchase 120,000
shares of Common Stock at $8.10 per share of Common Stock and 120,000
Underwriter's Underlying Warrants at $.15 per Underwriter's Underlying Warrant,
for a total of 240,000 shares. The Underwriter's Underlying Warrants are
exercisable at a price of $7.15 per share and will expire August 11, 1999. The
Underwriter's Warrants were exercisable commencing August 12, 1995 and
continuing for four years thereafter.
In connection with its 1997 private placement of Series B Preferred, the
Company issued 700,000 Series B Warrants. The Series B Warrants are exercisable
to purchase one share of Common Stock at varying exercise prices depending on
the tranche. The exercise price for Warrants issued with Tranche 1 is $2.25 per
share and are exercisable until March 2002, the exercise price for Warrants
issued with Tranche 2 is $2.50 per share and are exercisable until April 2002
and the exercise price for Warrants issued with Tranche 3 is $3.00 per share and
are exercisable until May 2002.
The Company issued 186,666 Acquisition Warrants in connection with
Company's acquisition of Concepts. One Hundred Fifty thousand (150,000)
Acquisition Warrants were issued to J.W. Charles Securities, Inc. One half of
such warrants are exercisable at $2.00 per share and one half at $4.00 per
share. Twenty-six thousand six hundred sixty-six (26,666) Acquisition Warrants
were issued to Entrenet, LLC. Such warrants are exercisable at $3.00 per share.
Ten thousand (10,000) Acquisition Warrants were issued to Alex Tassos. Such
warrants are exercisable at $.9375 per share. Such Warrants are exercisable
through various periods ending in 1999.
For the lives of the Public Warrants, the Series A Warrants, the Series
B Warrants, the
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<PAGE>
Underwriter's Warrants and the Acquisition Warrants, the holders will have the
opportunity to profit from an increase in the price of the underlying
securities. The existence of such Warrants may adversely affect the market price
of the Common Stock and the terms on which the Company can obtain additional
financing. The holders of such Warrants can be expected to exercise them at a
time when the Company would, in all likelihood, be able to obtain additional
capital by an offering of its unissued Common Stock on terms more favorable to
the Company than those provided by such Warrants. See "Plan of Placement."
Issuance of Securities Senior to Common Stock Could Dilute Voting Power
and Equity and Could Create Preferences Over Stockholders. The Company's
Articles of Incorporation authorize the issuance of up to 10,000,000 shares of
preferred stock ("Preferred Stock"). As of December 31, 1997, the Board of
Directors has designated 4,400 shares as Series A Preferred, all of which shares
have been converted into Common Stock, 4,400 shares as Series B Preferred and
1,000 shares as Series C Preferred. As of December 31, 1997, no shares of Series
A Preferred are outstanding, 1,291 shares of Series B Preferred are issued and
outstanding and 1,000 shares of Series C Preferred are issued and outstanding.
Shares of Preferred Stock may be issued by the Board of Directors of the Company
from time to time in one or more series, for such consideration and with such
relative rights and preferences as the Board of Directors may determine. Any
shares of Preferred Stock that may be issued in the future could be given voting
and conversion rights that could dilute the voting power and equity of holders
of shares of Common Stock, and have preferences over shares of Common Stock with
respect to dividends and in liquidation.
Lack of Dividends. Holders of Preferred Stock and Common Stock are
entitled to receive such dividends as may be declared by the board of directors
of the Company. To date, the Company has paid no cash dividends on its shares of
Common Stock and does not expect to pay cash dividends on either its Preferred
Stock or Common Stock in the near term. The Company intends to retain future
earnings, if any, to provide funds for operations of the business. Investors who
anticipate the need for dividends from investments should refrain from
purchasing the Common Stock offered hereby.
Funds Legally Available for Payment of Dividends on Preferred Stock. The
Company may not pay distributions or dividends if the Company is insolvent or
would be rendered insolvent by such a dividend or distribution. Under the
General Corporation Law of the State of Arizona, "insolvency" means the
inability of a corporation to pay its debts as they become due in the ordinary
course of its business. There can be no assurance that the Company will generate
any or sufficient earning to pay dividends on the Preferred Stock.
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<PAGE>
DETERMINATION OF OFFERING PRICE
This Prospectus may be used from time to time by the Selling Shareholders
and the Holders who offer the Common Stock registered hereby for sale. It is
anticipated that the Common Stock sold by the Selling Shareholders and the
Holders will be sold from time to time in transactions (which may include block
transactions) on the NASDAQ Stock Market at the prices then prevailing.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been listed on the Nasdaq SmallCap Market
and the Boston Stock Exchange ("BSE") since August 18, 1994. The following table
sets forth, for the fiscal periods shown, representative closing prices in
dollars per share as reported by Nasdaq.
Year Ended December 31, 1996 Low High
- ---------------------------- --- ----
First Quarter $1.13 $2.25
Second Quarter $.88 $2.00
Third Quarter $.77 $1.88
Fourth Quarter $.94 $1.38
Year Ended December 31, 1997
- ----------------------------
First Quarter $.94 $1.88
Second Quarter $1.41 $2.44
Third Quarter $2.28 $5.41
Fourth Quarter $4.41 $7.91
The number of beneficial holders of the Common Stock of the Company as
of the close of business on December 31, 1997 was approximately 1,400.
Dividend Policy
Holders of Common Stock are entitled to receive such dividends as may
be declared by the Company's Board of Directors. The Company may pay dividends
on the Series B and Series C Preferred in cash or shares of Common Stock, at its
option. The Company has paid all such dividends in shares of Common Stock. The
Company has not declared or paid cash dividends on its Common Stock and does not
anticipate that it will pay such dividends in the foreseeable future. Rather,
the Company intends to apply any earnings to the expansion and development of
its business. Any payment of future dividends on the Common Stock and the amount
thereof will be determined by the Board of Directors and will depend, among
other factors, upon the Company's earnings, financial condition and cash
requirements, and any other factors the Board of Directors may deem relevant.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table contains certain selected financial data of the
Company and is qualified by the more detailed financial statements, including
the pro forma consolidated financial statements, and the notes thereto included
elsewhere in this Prospectus. The financial data for the years ended December
31, 1995 and 1996 have been derived from the Company's financial statements,
which statements have been audited by Semple & Cooper, independent public
accountants, and are included elsewhere in this Prospectus. The financial data
for the nine months ended September 30, 1996 and September 30, 1997 have been
derived from the Company's unaudited financial statements which, in the opinion
of the Company, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of results of operations of such
periods.
The pro forma form of consolidated statement of operations data for the
year ended December 31, 1996 and for the nine months ended September 30, 1997
and the pro forma consolidated balance sheet at September 30, 1997 have been
derived from the unaudited pro forma consolidated financial statements of the
Company and Southern which give effect to the acquisition of Southern. The pro
forma consolidated statement of operations data give effect to such events as if
they occurred as of the first day of the periods presented and the pro forma
consolidated balance sheet data give effect to such events as if they had
occurred on September 30, 1997. The Company has neither declared nor paid any
cash dividends on its outstanding Common Stock. See "Business."
The pro forma results for the nine months ended September 30, 1997 are
not necessarily indicative of the results that may be expected for any
subsequent interim period or for the full year. This data should be read in
conjunction with the Company's financial statements (including the pro forma
consolidated financial statements) and the Notes thereto included elsewhere in
this Prospectus and "Management's Discussion and Analysis of Financial
Conditions and Result of Operations."
International FiberCom, Inc.
(in thousands, except per share date)
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
----------------------- -------------------------------
1995 1996 1996 1997
---- ---------------------- --------------------
(Unaudited)
Pro Pro
Actual Actual Forma(1) Actual Actual Forma(1)
------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Statement of
Operation Data:
Net sales..................... $12,050 $12,161 $42,153 $9,159 $20,362 $28,849
Cost of sales................. 11,802 11,388 26,482 8,189 15,779 18,535
------- ------- ------- ------ ------- -------
Gross profits................. 248 773 15,671 970 4,583 10,314
Selling, general and
administrative 2,843 4,939 10,757 1,638 3,294 5,406
------- ------- ------- ------ ------- -------
expenses........................
Operating income (loss)....... (2,595) (4,166) 4,914 (668) 1,289 4,908
Other income 196 116 (270) 79 125 (47)
------- ------- ------- ------ ------- -------
(deductions)....................
Income (loss) before
income taxes ................ (2,399) (4,050) 4,644 (589) 1,414 4,861
Income taxes.................. 211 - (1,857) - - 1,944
------- ------- ------- ------ ------- -------
Net income (loss)............. (2,188) (4,050) 2,787 (589) 1,414 2,917
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Preferred stock dividends - 171 304 - 148 148
--------- ------ ------ --------- ------- ------
Net income (loss)
attributable
to common stockholders $2,188 ($4,221) $2,483 ($589) $1,266 $2,769
===== ======== ===== ====== ===== =====
Primary net income (loss)
per share.(3) ..................... ($.50) ($.74) $.17 ($.13) $.10 $.15
======== ======== ====== ======== ====== =====
Primary average
number of shares outstanding..... 4,417,072 5,716,600 16,348,266 4,417,072 14,437,109 19,068,770
========= ========= ========== ========= ========== ==========
Fully diluted income per
share....................... - - .17 - .09 .14
=== === ===== === ===== ====
Fully diluted shares
outstanding ................ - - 16,348,266 - 15,860,068 20,491,729
========= ========= ========== ========= ========== ==========
</TABLE>
(in thousands)
Nine Months Ended
-----------------
September 30,
-------------
1997
----
(Unaudited)
Balance Sheet Data: Actual Pro
------ ---
Forma(2)
--------
Working capital................. $3,850 $6,500
Total assets.................... $14,372 $36,143
Short-term debt................. $4,930 $5,301
Long-term debt.................. $2,427 $5,627
Total stockholders'
equity.......................... $7,015 $25,215
(1) The pro forma figures for the year ended December 31, 1996 include the
operating results of Concepts and Southern for their respective fiscal
years ended December 31, 1996 and the operating results of the Company
for its fiscal year ended December 31, 1996.
(2) The proforma figures include the operating results of Southern.
(3) If presented in accordance with Statements of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128) the Company would
have reported basic earnings per share of $.18 for the nine month
period ended September 30, 1997. SFAS No. 128 is effective for periods
ending after December 15, 1997.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
General
The Company is a holding company for four wholly-owned subsidiaries:
(i) Kleven, which specializes in the design, installation and maintenance of
fiber-optic and other cable services for the telecommunications and cable
television industries; (ii) Concepts, which specializes in systems integration
services, including design engineering and installation and maintenance of
structured cable systems, network hardware and software, work station
peripherals and intercommunication systems, primarily within commercial,
industrial and governmental facilities; (iii) Compass, which specializes in
video, voice and data network development using state of the art, fiber-optic
distribution platforms; and (iv) Southern, which specializes in the sale of used
telecommunications equipment.
The Company derives a substantial portion of its revenue from contracts
that are accounted for under the percentage of completion method of accounting.
Under this method, revenues are recorded as construction on the job progresses
so that revenue recognized less cost incurred to date yield the percentage of
gross margin estimated for each contract. Overall gross margin percentages can
increase or decrease based upon changes in estimated gross margin percentages
over the lives of individual contracts on jobs.
The Company completed the acquisition of Concepts effective January 1,
1997. Concepts' acquisition along with existing wholly owned subsidiary Kleven
has allowed the Company to become one of the few complete telecommunications
service companies in the nation. The Company now can provide outside plant,
complete engineering, construction services, splicing and retro-fit systems
utilizing twisted pair, coaxial cable and a myriad of fiber-optic cable. In
addition, complete integration services can be provided for end users, as well
as structured cable systems and the appropriate engineering. These services will
allow the Company to service both the major telephone companies as well as cable
companies in their building of the "Information Superhighway."
Acquisition
The accompanying consolidated statements of operations include the
results of operations of Concepts which the Company acquired effective January
1, 1997.
The Unaudited Pro Forma Consolidated Statements of Operations
information contained in the Financial Statements for the Year ended December
31, 1996 give effect to the acquisition of Concepts by the Company pursuant to
the Stock Purchase Agreement between the parties, and are based on the estimates
and assumptions set forth herein and in the notes to such statements. This pro
forma information has been prepared utilizing the historical financial
statements and notes thereto. The pro forma financial data does not purport to
be indicative of the results which actually would have been obtained had the
purchase been effected on the dates indicated or of the results which may be
obtained in the future.
The pro forma financial information is based on the purchase method of
accounting for the acquisition of Concepts. The pro forma entries are described
in the accompanying footnotes to the Unaudited Pro Forma Consolidated
Statements. The Unaudited Pro Forma Consolidated Statements of Operations assume
the acquisition took place on the first day of the period presented.
Results of Operations
The comparability of the results for 1996 and 1995 and for the third
quarter of 1997 to the comparable period in 1996 were significantly impacted by
the acquisition of Concepts, as explained in the Unaudited Pro
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<PAGE>
Forma Consolidated Statements of Operations information contained in the
Financial Statements which are a part of this Registration Statement. Therefore,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for these periods discusses the operations in 1997 compared with
actual operations in 1996 and the operations in 1997 compared with 1996 pro
forma figures as if the Company had owned Concepts since January 1996, which it
has not.
Third Quarter of 1997 Compared to the same period in 1996.
Actual
- ------
Contract Revenues. Contract revenues for the three months ended
September 30, 1997 increased to $7,265,758 from $2,792,804 in 1996, an increase
of 160%. This increase in revenues is primarily attributable to the addition of
Concepts' revenues for the third quarter of 1997.
Gross Profit. The Company's gross profit increased to $1,803,694 for
the third quarter of 1997 compared with $116,684 in 1996 due to the increased
contract revenues from the Concepts acquisition and continued increase in the
gross profit margin of Kleven. The gross profit margins for the respective
periods increased from 4% of contract revenues in 1996 to 25% of contract
revenues in 1997. This increase in gross margins is primarily due to favorable
price renegotiation of ongoing contracts and increased field productivity of
Kleven.
General and Administrative Costs. The Company's general and
administrative expenses were $1,153,688 for the three months ended September 30,
1997 compared with $509,010 in 1996, an increase of 126%, chiefly due to the
addition of the general and administrative expenses of Concepts.
Other Income (Expense). The Company's net expense in this category was
$114,020 for the 1997 quarter compared with net expenses of 78,926 in the 1996
quarter. Interest expense during the third quarter of 1997 increased from 1996
primarily as a result of the issuance of $1.5 million of 8% Convertible
Subordinated Debentures ("Debentures") in February 1997 in connection with the
acquisition of Concepts. The increase in interest expense of Concepts represents
the costs associated with the Debentures.
Provision for Income Tax Benefit (Expense). No income tax expense was
accrued in 1997 or 1996 because of net operating loss carryovers of the Company
and Kleven in 1996 and prior years. Such net operating loss carryovers will be
used to offset net income the Company generates in 1997 and possibly future
years.
Net Income. The Company generated a net income of $535,986 or
approximately 7% of revenues for the three months ended September 30, 1997
compared with net loss of ($471,251) for the same period in 1996. This is
primarily a result of better profit margins and lower general and administrative
expense of Kleven over the prior period.
Preferred Stock Dividend. The Company paid a dividend of $35,000 on its
Series B Convertible Preferred Stock ("Series B Preferred) for the second
quarter of 1997. The Company elected to pay such dividend by issuing 6,747
shares of its Common Stock, valued at $5.187 per share. The foregoing dividends
decreased net income attributable to Common Stockholders by the amount of the
dividend. The shares of Common Stock outstanding will be adjusted for such
dividend at the end of the third quarter of 1997, although such shares were not
issued until October 1997.
Backlog. The Company had a backlog of approximately $3,240,000 on a
work in process basis as of September 30, 1997. The Company expects such work
orders to be completed by December 1997. Further, the
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<PAGE>
Company has work orders, which were not started at September 30, 1997, for
Gabbro Health care, the Cities of Phoenix and Peoria and other clients, which
total in excess of $8.0 million. The Company expects to commence such work
during the fourth quarter of 1997 and complete the same by June 1998.
Liquidity and Capital Resources. The Company has historically financed
its operations through operating cash flow and lines of credit. The Company's
liquidity is impacted by the nature of billing provisions under its contracts.
Generally, in the early period of contracts, cash expenditures and accrued
profits are greater than allowed billings, while contract completion results in
billing previously unfilled costs and profits. In the third quarter of 1997 the
Company funded its operations through an $800,000 line of credit and cash flow
provided by its operating activities, which was $69,478 at September 30, 1997,
and $400,000 raised through the sale of 150,000 shares of its Common Stock in a
private placement under Section 4(2) under the Securities Act of 1933 (the
"Act").
In July 1997 the holders of 1,972 shares of Series A Convertible
Preferred Stock converted such shares into 2,126,463 shares of Common Stock
under Regulation S under the Act. Accordingly, including prior conversions which
took place in 1996, there are no shares of the Series A Preferred issued and
outstanding.
In October 1997 certain holders of 8% Convertible Subordinated
Debentures converted $900,000 principal amount of such Debentures into 720,000
shares of Common Stock under Regulation S under the Act.
On November 13, 1997, the Company announced that it had completed the
acquisition of Compass Communications, Inc. a privately held telecommunications
engineering firm headquartered in Atlanta, Georgia. The Company is issuing
470,588 shares of its restricted Common Stock to acquire all of the outstanding
capital stock of Compass. In order to raise the funds required for the provision
of working capital to Compass, the Company sold $1.0 million principal amount of
5.5% Convertible Subordinated Debentures and 1,000 shares of Series C
Convertible Preferred Stock at a price of $1,000 per share, for gross offering
proceeds of $1.0 million, in a private placement on October 27, 1997. The
Company intends to apply the balance of the sales proceeds to its working
capital.
In September 1997 the Company announced that it had signed a definitive
agreement to acquire the assets, business and real estate of a privately-held
telecommunications equipment company located in the southeastern United States.
The purchase price, which is subject to adjustment under certain circumstances,
is approximately $21 million and will be comprised of a combination of cash,
subordinated debt and fewer than 2.0 million shares of the Company's Common
Stock. The Company is seeking a significant amount of financing to complete the
purchase of such company and is presently exploring a private placement of debt
or equity securities or an institutional credit facility.
The Company is also pursuing the establishment of a larger line of
credit from institutional lenders to provide working capital for its expanded
business. The Company believes that the working capital provided by its most
recent private placement, along with internally generated cash flow from the
operating activities of Kleven and Concepts, will satisfy the anticipated growth
of its existing businesses for the next 12 months, exclusive of any required
acquisition financing.
Inflation. The Company does not believe that it is significantly
impacted by inflation.
Seasonality. The Company's operations are not seasonal in nature.
Pro Forma
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Contract Revenues. On a pro forma basis, contract revenues increased 8%
from $6,712,714 in 1996 to
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$7,265,758 during the quarter ended September 30. This increase is due primarily
to additional activity of Kleven in fiber optic systems installations for Cox
Communications.
Gross Profit. On a pro forma basis, the Company's gross profit for the
1997 quarter was $1,803,694 compared with $887,116 in 1996. The gross profit in
1996 for Concepts includes an adjustment of $433,750 of overhead to indirect
costs of contract revenue to accurately and consistently state gross profit
margins. The Company's gross margin increased from 13% in the 1996 quarter to
25% in 1997. This gross margin increase is primarily attributable to improved
performance by Kleven as noted above.
General and Administrative Costs. On a pro forma basis, general and
administrative expenses for the three months ended September 30, 1997 were
$1,153,688, or 16% of revenues, compared with $1,095,179, or 16% of revenues,
for the 1996 quarter. Certain overhead of Concepts was transferred to indirect
costs of construction for the 1996 period in order to more accurately and
consistently state gross profit margins. The Company has and will continue to
consolidate duplicative administrative functions to the extent possible. In
addition, administrative expenses of the Company include amortization of
intangibles resulting from the acquisition.
Other Income (Expense). On a pro forma basis, other expense was
$114,020 in 1997 compared with a net expense of $123,839 in 1996. The reduction
is due primarily to a decrease in interest expenses of Kleven because of debt
reduction.
Net Income. On a pro forma basis, the Company's net income increased to
$535,986 compared with a loss of ($331,902), for the prior period. Such increase
was primarily due to the increased profitability of the Kleven subsidiary.
1996 Compared to 1995.
Actual
- ------
Contract Revenues. Contract revenues of the Company increased to
$12,161,263 in 1996, from $12,050,075 in 1995, a .9% increase. Approximately 54%
of total revenues was attributable to the installation of fiber-optic and
telecommunications systems for Cox Communications and US West, and 46% to
electrical, water and sewer installation and other construction.
Gross Profit. The Company had a gross profit of $773,557 in 1996
compared to a gross profit of $248,318 in 1995, an increase of 311%. The
Company's increase in gross profit margins was due to improved margins on
contracts with its customers over 1995. Kleven's margins would have been higher
had it not incurred a loss of approximately $700,000 on an approximate $2
million contract in 1996 for utility and telecommunications work in a
residential subdivision development. The Company incurred these cost overruns
because of the insolvency of a major subcontractor and delays due to
communication difficulties with the area's utility provider. The Company does
not plan to undertake further activity of this type in 1997. In addition,
margins would have been better had the Company been able to renegotiate its
contracts with Cox in 1996, which it has done for fiscal 1997. Such new
contracts contain better pricing than those in 1996. Gross Profits also improved
because the Company avoided the major losses on contracts which occurred in 1995
with AT&T, Vision Por Cable Telecab S.A. de C.V., and the general contractor for
a project for the city of Anaheim, California.
General and Administrative Expenses. The Company's general and
administrative expenses decreased to $2,261,694 in 1996 from $2,455,110 in 1995,
an 8% decrease, chiefly due to a reduction in the salaries of management and
administrative personnel.
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Provision for Doubtful Accounts. The Company's provision for doubtful
accounts in 1995 was $387,952 while there is no such provision in 1996. This
provision resulted from the Company's inability to collect development costs and
progress billings in such amounts on various projects with the government of
Romania, the Romanian Ministries of Transport and Communications and the Credit
Bank of Romania. The Company elected to write off this receivable because of the
lack of payments in 1995.
Goodwill Impairment. The Company determined to write-off the remaining
goodwill from its purchase of Kleven as a one-time, non-cash charge because of
the operating losses Kleven incurred in 1995 and 1996. The Company had been
amortizing this goodwill at the rate of $120,000 per year.
Net Loss. The Company's net loss increased to $4,221,115, or $.74 per
share, from $2,188,383, or $.50 per share, in 1995. The loss, without taking
into account payment of the dividend on the Series A Convertible Preferred Stock
and the goodwill impairment, was reduced $1,372,322, or $.24 per share, compared
with $2,188,383, or $.50 per share, in 1995, again reflecting the increase in
gross profit margins and reduction of general and administrative expenses.
Pro Forma
- ---------
The foregoing pro forma results of operations assume that the Company
owned Concepts for all of 1995 and 1996, which was not the case, and include pro
forma adjustments for impairment of goodwill, adjustment of interest expenses
and revision of the benefit for income taxes to make the periods comparable.
Contract Revenues. Contract revenues of the Company increased from
$23,673,291 in 1995 to $26,587,639, a 12.3% increase. The increase is due to an
increase in Concepts revenues, primarily in its sales of engineered systems,
including security systems, hardware sales and installation and integrated
systems.
Gross Profit. The Company had a gross profit of $4,589,321 for 1996
compared with a gross profit of $3,918,079 in 1995. The Company's increase in
gross profit is due to improved gross profit margins of Kleven, as disclosed
above. Kleven's profit margin increased from 2.1% in 1995 to 6.4% in 1996.
Gross profit margins for Concepts decreased from 31.6% in 1995 to 26.4%
in 1996. This decrease is primarily attributable to the lower margins earned on
the sales of hardware and software for integrated systems. Concepts plans to
emphasize installation and long term maintenance services in 1997 to offset
higher hardware sales, which have historically had lower profit margins.
General and Administrative Expenses. The Company's general and
administrative expenses decreased from $5,617,893 in 1995 to $5,301,399 in 1996.
This decrease is due primarily to reduction of management and administrative
personnel by Kleven of approximately $481,000. The general and administrative
expenses of Concepts in 1996 were about the same as in 1995.
Goodwill Impairment. The Company determined to write-off the remaining
goodwill from its purchase of Kleven as a one-time, non-cash charge because of
the operating losses Kleven incurred in 1995 and 1996.
The Company was amortizing this goodwill at the rate of $120,000 per year.
Net Income (Loss). The net loss in 1996 was $3,754,456 compared with a
loss of $1,596,050 in 1995. Without the Series B Preferred dividend and
write-off of goodwill, the loss in 1996 was $773,510 compared with $1,464,050 in
1995, reflecting improved profit margins in Kleven and a reduction in general
and administrative expenses of Kleven in 1996. Concepts' net income decreased
from $593,812 in 1995 to $503,096 in 1996,
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chiefly as a result of lower gross profit margins resulting from the increased
sale of hardware over maintenance and installation services and increased
general and administrative expenses due to an expansion of Concepts' sale force.
Liquidity and Capital Resources
The Company has historically financed its operations through operating
cash flow and lines of credit. The Company's liquidity is impacted by the nature
of billing provisions under its contracts. Generally, in the early period of
contracts, cash expenditures and accrued profits are greater than allowed
billings, while contract completion results in billing previously unfilled costs
and profits. In the third quarter of 1997 the Company funded its operations
through an $800,000 line of credit and cash flow provided by its operating
activities, which was $69,478 at September 30, 1997, and $400,000 raised through
the sale of 150,000 shares of its Common Stock in a private placement under
Section 4(2) under the Securities Act.
In July 1997 the holders of 1,972 shares of Series A Convertible
Preferred Stock converted such shares into 2,126,463 shares of Common Stock
under Regulation S under the Securities Act. Accordingly, including prior
conversions which took place in 1996, there are no shares of the Series A
Preferred issued and outstanding.
In October 1997 certain holders of 8% Convertible Subordinated
Debentures converted $900,000 principal amount of such Debentures into 720,000
shares of Common Stock under Regulation S under the Securities Act.
Effective October 1997, the Company acquired Compass for total
consideration of approximately $2.0 million consisting of 470,588 shares of
Common Stock. In order to raise the funds required for the provision of working
capital to Compass, the Company sold $1.0 million principal amount of 5.5%
Convertible Subordinated Debentures and 1,000 shares of Series C Convertible
Preferred Stock at a price of $1,000 per share, for gross offering proceeds of
$1.0 million, in a private placement on October 27, 1997. The Company intends to
apply the balance of the sales proceeds to its working capital.
Effective October 1997, the Company acquired the assets, business and
real estate of Southern. The total consideration was $21.4 million, consisting
of $12 million in cash, 2,231,661 shares of Common Stock valued at $6.2 million
and a $3.2 million promissory note.
The Company is also pursuing the establishment of a larger line of
credit from institutional lenders to provide working capital for its expanded
business. The expansion of the Company's business has increased the Company's
working capital requirements, particularly in its Kleven and Compass
subsidiaries, and continued implementation of its acquisition strategy may
require the Company to seek additional financing that may include bank financing
or the issuance of debt or equity securities during the next 12 months.
Inflation and Seasonality
The Company does not believe that it is significantly impacted by
inflation. The Company's operations are not seasonal in nature.
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Forward-looking Information and Risks of the Business
This Prospectus contains certain forward-looking statements and
information. The cautionary statements made in this Prospectus should be read as
being applicable to all related forward-looking statements wherever they appear
in this Prospectus. Forward-looking statements, by their very nature, include
risks and uncertainties. Accordingly, the Company's actual results could differ
materially from those discussed herein. A wide variety of factors could cause or
contribute to such differences and could adversely impact revenues,
profitability, cash flows and capital needs. Such factors, many of which are
beyond the control of the Company, include the following: the Company's success
in obtaining new contracts; the volume and type of work orders that are received
under such contracts; the accuracy of the cost estimates for the projects; the
Company's ability to complete the project on time and within budget; levels of,
and ability to, collect accounts receivable; availability of trained personnel
and utilization of the Company's capacity to complete work; competition and
competitive pressures on pricing; and economic conditions in the United States
and in the region served by the Company.
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BUSINESS
The Company offers diversified telecommunications services and products
to the telecommunications, CATV and other industries. The Company provides a
wide range of engineering, consulting and broadband network systems design,
installation of structured cable and fiber-optic networks, complete
telecommunication systems integration services, and sells and distributes new
and used telecommunications equipment to leading telephone companies, RBOCS,
telecommunications hardware resellers and other Fortune 500 companies.
The Company's strategy is to be a one-stop solution for the
telecommunications marketplace, offering a wide range of engineering, consulting
and maintenance services for fiber-optic and broadband networks and systems
integrated with LAN and WAN expertise and capabilities.
In 1997 the Company began to implement this strategy through strategic
acquisitions of businesses that complemented and enhanced its services or
products. At the beginning of 1997 the Company had one operating subsidiary,
Kleven, a Phoenix-based company specializing in the design, installation and
maintenance of fiber-optic and other cable services for the telecommunication
and CATV industries. During 1997 the Company completed three strategic
acquisitions that resulted in a significant increase in its revenues and net
income. Effective January 1997 the Company acquired Concepts for total
consideration of $4.6 million in cash and shares of Common Stock valued at
$200,000. Concepts is a Nashville- based company specializing in systems
integration services including design, engineering, installation and maintenance
of structured cable systems, network hardware and software, workstation
peripherals and intercommunications systems, primarily within commercial,
industrial and government facilities. Effective October 1997 the Company
acquired the assets and business of Southern for total consideration of $21.4
million, consisting of $12 million in cash, 2,231,661 shares of Common Stock
valued at $6.2 million and a $3.2 million promissory note. Southern purchases,
sells and deals in used telecommunications equipment that is used in the digital
access, switching and transport systems of telecommunication service providers
on a nationwide basis. Also effective October 1997, the Company acquired Compass
for total consideration approximately of $2.0 million consisting of 470,588
shares of Common Stock. Compass is an Atlanta-based company specializing in
video, voice and data network development using state of the art, fiber-optic
distribution platforms. In 1997 the Company operated in Arizona, California,
Tennessee, Florida and Georgia.
Overview of Markets and Industries
The Telecommunications/CATV Industries. Through the application of
fiber-optic technology, the telecommunications and CATV industries plan to
deliver interactive voice, data and video services to consumers over a network
of fiber-optic cable systems which has been called the "information
superhighway." Telecommunications and CATV companies are moving to provide
services which are expected to dramatically change basic functions of telephones
and CATV in the home as well as in business. Such planned services include basic
telephone, video conferencing, movies-on-demand, pay-per-view events, concerts,
interactive shopping and billing, games, classes, and high speed Internet
access.
Fiber-optics. The capabilities of fiber-optic cable based systems,
along with computers, digitized data transmission and sophisticated television
set-top boxes, will make these services possible. Fiber-optic technology is
based upon the transmission of laser light through transparent fibers of glass
or plastic. Such optical fibers can carry laser light over distances ranging
from a few inches to more than 100 miles with little signal strength loss (1%
over 78 miles). One strand of fiber is approximately 125 microns in diameter,
which is thinner than a human hair. Optical fibers can be used individually or
in bundles with over 100 fiber strands bundled into a cable that resembles
standard copper telephone cables hanging above the street. A half-inch cable can
carry up to 130 fiber strands, although most cables used are not of this size. A
majority of cables hold about 20 strands, which can provide 500-channel TV,
telephone calls and data transmission.
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Optical fibers are composed of an extremely pure core of glass or
plastic surrounded by a covering called a cladding. In fiber-optic communication
systems, special lasers transmit binary messages by flashing on and off at
extremely high speeds. The messages then travel through the optical fibers to
interpreting devices which convert the binary signals back into the form of the
original signal. Fiber-optic communication systems have a number of features
which make them superior to systems using traditional copper cables. For
instance, fiber- optic cables have little or no signal attenuation, much longer
cable run distances, less susceptibility to noise, no susceptibility to
transient voltages or impulses such as lightning strikes and higher data
transmission speeds (1.5 million bits per second with copper cables vs. 40
billion bits per second with fiber-optic cable).
Continuous changes in technology make the upgrading of systems from
copper to fiber-optic cable an on-going process. The Company believes that other
primary uses of fiber-optic cable will be on major freeways and possibly
interstate highway systems, providing up-to-date information on accidents,
weather, traffic and other pertinent information and in structured cable
systems, internal network hardware and intercommunications systems within
commercial, industrial and government facilities. Kleven has installed a highway
monitoring system in California and Concepts has installed numerous structured
cable systems.
Demand for Fiber-Optics. The push to build the information superhighway
has created a demand for installation of high speed data transmission networks.
Because of the ever-increasing need for faster transmission networks,
fiber-optics has become not only a viable alternative to copper wiring but a
necessity for any system being designed to handle future data traffic. In 1994
the National Cable Television Association estimated that the cost of wiring
United States cities coast-to-coast with fiber-optic cable will be approximately
$20 billion. This Association also estimated that more than 75% of all cable
systems currently in use will have to be rebuilt over the next ten years.
Telecommunications companies such as Bell Atlantic Corp., MCI Communications
Corp. ("MCI") and Cox have announced capital expenditure programs to upgrade
their networks for the information superhighway, including installation of
fiber-optic cable. For example, in 1995 Cox announced a $100 million capital
expenditure program to install fiber-optic cable and make other CATV system
improvements in the Phoenix metropolitan area and began implementing the program
in 1996. Cox is the third largest CATV company in the United States as measured
by the number of subscribers, with approximately 3.1 million subscribers.
Such companies also need to replace much of the existing coaxial cable
with state-of-the-art fiber-optics, including other upgrades, in order to remain
competitive. As a result of capital expenditure plans such as these, the Company
believes that it is well positioned to help service the demand with its
experience, expertise and reputation in the industry. No assurances can be
given, however, that the Company will be successful in expanding its business as
planned, that announced capital expenditure programs of the Company's current
and prospective customers will ever occur, or that the Company will obtain any
of the business from such capital expenditures.
The Systems Integration Industry. In a relatively short period,
computer networks have evolved from simple connections between desktop
workstations to mission-critical information systems. Many companies have
installed local area LAN's and WAN's in an attempt to integrate more fully the
capabilities and information of their computers and personnel. This shift from
minicomputer based systems and mainframes to network based computing has shifted
the emphasis from the physical system used for an organization's computing to
the network system that connects the organization's computers. It is no longer
the computer that is the source of an organization's informational productivity
but rather the network, with its ability to transport information wherever it is
needed. Systems integration involves the design, installation and maintenance of
such networked systems, including LAN's and WAN's.
Systems integration primarily involves the design, installation and
maintenance of structured cabling systems, network hardware and software, and
intercommunication systems. A structured cabling system is a
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cabling network designed to be adaptable, to avoid bottlenecks, and to have the
capacity to handle many times the data traffic expected in the immediate future.
The object of a structured cabling system is to provide cabling media that will
provide sufficient capacity for any application being run on the system, whether
it be voice transmission, data transmission or otherwise. Network hardware and
software and intercommunication systems are an extension of the structured
cabling system design.
Over the past five years there has been an increasing demand from
tenants in the market for commercial office space and from government entities
for advanced telecommunications and computer cabling. A primary concern for such
tenants and government entities is usually that a structured cable system be in
place prior to or as a condition to occupancy. Because of the flexibility of
such a system, neither the landlord nor the prospective tenant need worry about
the ability of the system to adapt to the tenants' needs and requirements thus
reducing the worry of system obsolescence. For these reasons, a large majority
of all new office buildings are expected to be built with a structured cabling
system in place and, as older office buildings are refurbished, structured
cabling systems will take the place of older communications systems.
Services and Products of the Company
Fiber Optic Cable and CATV Services
In August 1994, the Company acquired Kleven, which specializes in the
design, installation and maintenance of fiber-optic and other cable services for
the telecommunications and CATV market. In connection with the acquisition, the
Company caused Kleven to enter into a five-year employment agreement with its
principal operating officer, Jerry A. Kleven. Kleven has served the
telecommunication and cable industries since 1977, when it began installing CATV
in California. In 1980 Kleven commenced its CATV work in Arizona and eventually
established itself as a full service organization, providing underground systems
and aerial cable installations serving the telephone industry and municipal
governments and public and private utilities throughout Arizona. Kleven began to
install fiber-optic cable in 1982.
In the 1980s Kleven added aerial capabilities, as well as
cable-splicing and other expertise, in order to become a full service entity for
the industry. As a result of its underground and aerial capabilities, Kleven has
been able to expand its base of business with telephone companies such as US
West and CATV companies such as Cox. In connection with its telephone services,
Kleven installs and maintains underground cable and conduit, aerial lines,
manholes and telephone equipment for US West in Arizona.
Kleven installs new fiber-optic systems as well as retrofits existing
systems. In its retrofit service, Kleven upgrades existing cable with new
equipment and underground or aerial cable which is compatible with existing
equipment and other fiber-optic installations. Kleven has completed thousands of
miles of trenching and cable placement in Arizona and California. Fiber-optic
design and installation services require extreme care and the latest
technological equipment, as well as the specialized skills which Kleven has
developed.
Kleven was one of the pioneers in the rocksaw method of cable
installation, which allows it to complete projects quickly with attractive
profit margins. With the increase in fiber-optic and retrofit telecommunications
and CATV installation work, Kleven believes that its gross profit margins will
increase substantially, because such work has a higher profit margin than the
installation of utilities, such as water, sewer and irrigation systems. Kleven
plans, given sufficient capital, to concentrate most of its efforts on
fiber-optic and other cable installation, both aerial and underground, for the
telecommunications and CATV industries.
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Effective in January 1997, the Company acquired all the issued and
outstanding common stock of Concepts for the sum of approximately $4.8 million.
In connection with the acquisition, the Company caused Concepts to enter into a
two-year employment agreements with six key employees.
Concepts was formed in 1983 upon the divesture of Bell Systems. The
initial goal of the Concepts was to subcontract work from the local Bell
operating company, South Central Bell, AT&T and other major corporations, such
as IBM and BCE. By 1986, the goal of Concepts had shifted to direct marketing to
major end users in Tennessee and surrounding states. Such shift in strategy
brought significant growth versus the competition who remained primarily in the
subcontracting role, providing labor only. Material and labor sales brought
significant additional revenues and direct marketing to major customers
established Concepts' name as the leader in structured cable systems in
Tennessee.
In 1990, Concepts expanded its market focus to become a full service
system integrator. At that time Concepts began to offer LAN/WAN hardware,
network operating systems, file servers and workstations. Customer relations
built in past operations contributed to Concepts successful entry into this new
market.
Network Planning Services
Effective October 1, 1997, the Company purchased all of the issued and
outstanding common stock of Compass in exchange for 470,588 shares of Common
Stock of the Company. Compass was formed in February 1994. Compass is a contract
provider of network planning services to the telecommunications industry. Its
revenues are derived primarily from developing and supporting computerized
mapping and design of high-speed, high-capacity networks around the globe. Using
vendor software systems, Compass maps and designs hybrid fiber-optic/coaxial
cable broadband distribution networks for telecommunications operators engaged
in the provision of video, voice, data and information services.
Compass also offers "land based development," a service in which
Compass assists network operators in establishing a proper foundation consisting
of an accurate record of all of the details of existing and proposed networks.
In providing these services, Compass suggests efficient and effective ways for
the operator to capture and organize a mapping base which, when completed, will
provide a high level of functionality in an updated and expanded network. As
another aspect of its services, Compass offers field inventory project support,
an arduous effort of collecting and recording all of the information necessary
to plan, design, market and manage a broadband network capable of delivering a
wide range of interactive services, the scope of which is undefined at the time
of the inventory. Other services of Compass include the creation and maintenance
of various databases, existing network evaluation, broadband system design,
network plant testing and customer personnel training.
Telecommunications Products
Effective in December 1997, the Company purchased all or substantially
all of the assets of SCP in exchange for $12 million in cash, $3 million in the
form of a promissory note and 2,231,661 shares of Common Stock of the Company.
In connection with the acquisition, the Company caused Southern to enter into
three-year employment agreements with seven key employees.
Southern was founded in 1986 and originally focused on switch removal
and remarketing. The market for used central telephone office plug-ins, or
switches, was developed and has rapidly grown into a billion dollar industry
worldwide as the need for telecommunications equipment continues to outgrow the
capacity of manufacturers to satisfy such demand. Southern markets used digital
access, switching and transport systems to telecommunications service providers
on a nationwide basis. Digital access systems are line systems between a
telephone company's central office and each customer. A switching system
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effects call connection and routing. A transport system includes products that
carry signals throughout the network. The products Southern markets are
manufactured by such companies as Lucent Technologies, Nortel, Tellabs, DSC,
Alcatel, Fujitsu, ADC and a number of others. These products enable providers,
such as local exchange, long distance and cellular telecommunications companies
to offer data, voice and other services to their subscribers.
Southern purchases a number of different types of used equipment from a
number of telecommunications companies and resells the same to other users.
Southern obtains used equipment because the sellers generally deem the equipment
to be builder technology and not as efficient, or have access product or any one
of a number of reasons. The Company sells over 150 types of equipment with unit
prices from approximately $10 to $20,000.
One of Southern's higher dollar volume items in terms of sales is the
AT&T DDM-1000, which is a digital multiplexer used as part of a fiber-optic
cable system by telephone companies to transport between exchanges, carrying all
types of communications traffic point to point on an asynchronous basis. Another
high volume product is the Fujitsu FLM 150 ADM, a multiplexer used by telephone
companies to transport communication traffic to multiple locations in a ring
configuration, adding and dropping traffic as required at each location. A third
significant product is the Tellabs 532 Digital Access Cross-Connect System which
is a digital transmission system providing cross-connections between and test
access to voice or data channels of multiple T-Carrier facilities.
In 1998 Southern plans to offer services in constructing systems
composed of a number of products. Such systems will offer greater capabilities
and have a higher price than individual products sold on a stand-alone basis.
Southern believes that its competitive advantages are providing
equipment to telephone companies throughout the United States at discounts
ranging up to approximately 60% of original cost; locating and acquiring
products that have been discontinued by the manufacturer at a reasonable cost to
its customers; maintaining a significant amount and wide range of products; and
offering such expedited delivery to its customers. In most cases, Southern is
capable of to shipping ordered products overnight to its customers.
Southern utilizes a sophisticated inventory software system to track
all sales and request information with price sold, as well as frequency of sales
in each category of product.
Customers
Kleven's customers include, or have included, US West, United Cable
Television, Cox and the cities of Phoenix and Scottsdale, Arizona and Union City
and Anaheim, California and Times Mirror in San Diego County, California. In
fiscal 1996, Kleven's three largest customers were Cox Communications, the City
of Phoenix and Robkeal, Ltd., comprising approximately 54%, 22% and 16% of total
revenues, respectively.
In 1995 Kleven expanded its operations into California and performed
substantial services for AT&T, which was the general contractor for PacTel in
San Diego County. From July 1995 to mid-February 1996 the Company provided
fiber-optic and other cable installation services to AT&T for PacTel based on
work orders received under a unit price contract with AT&T. As a result of its
discussions with AT&T, Kleven expected to book revenues of approximately $9
million through 1996 on the project. On four separate occasions during the first
four months of the project, the engineering changed and new contract prices were
negotiated. By mid- February 1996 AT&T stopped work on the project and the
Company ceased receiving work orders. The reason for cessation of work on the
job became clear in early April 1996 when it was announced that PacTel and SBC
Communications, Inc. ("SBC") had agreed to a $16.7 billion merger.
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Kleven also has extensive background in the installation of all types
of utilities, including water, sewer, storm drainage, steel casings, specialty
boring and other state-of-the-art utility services, for governments,
municipalities, such as the city of Phoenix, and public and private utilities in
Arizona, such as SRP.
Concepts' customers include, or have included, Nissan Motor Co.,
Kimberly Clark Corp., Nike Corp., Columbia/HCA Healthcare Corp., Autozone, The
Trane Co., Caterpillar Financial Services, Ingram Micro, the State of Tennessee,
Vanderbilt University Medical Center and St. Thomas Hospital. In fiscal 1996,
Concepts' largest customer, the State of Tennessee, accounted for approximately
15% of its revenues.
Compass' customers include US West, Time Warner, Motorola, Bellcore,
MediaOne and Australia's Optus Vision. In fiscal 1996, its largest customers
were Media One and Austrailia's Optus Vision, which accounted for approximately
77% of its revenues.
Southern's clients include Bell Atlantic, Ameritech, Bellsouth, US West
Lucent Technologies, AT&T Network Systems, TDS and other providers of equipment
to the telecommunications industry. Southern's three largest customers, for the
nine-months ended September 30, 1997 were Telcor (22.8%), Bell Atlantic NSI
(10.9%) and Diversitech (8.7%).
Contracts
Under its typical CATV installation contract Kleven supplies the
expertise, equipment and labor and the customer supplies nearly all materials,
such as the fiber-optic cable and conduit. The work is generally performed under
fixed unit price contracts. Because Kleven's work is labor intensive, it will
require significant increases in machinery and manpower in order to expand its
business as described in this Prospectus. With respect to the machinery and
equipment, Kleven will require funds to make lease deposits or purchase new
equipment, including specialty trucks and splicing equipment. The expected
increase in volume will require significant additional personnel which, in turn,
will require a large amount of working capital to meet the expanded payrolls.
Kleven typically receives payment on its contracts within 30 to 45 days of
invoicing and, accordingly, must be able to finance the receivables and
work-in-progress for such period.
Under its typical installation contracts, Concepts supplies the
expertise, equipment, labor and sometimes the materials. In certain specific
system installations Concepts will also provide the required hardware.
Compass performs its work under a variety of contract, purchase orders,
standing relationships and working arrangements. Compass has entered into
indefinite master contracts with major systems operators for the services
specified in such contracts. Specific projects are undertaken pursuant to such
contracts in response to purchase orders, change orders, revised standards and
work orders. Compass also performs services for certain long-standing clients
under work orders without governing master contracts. In all cases, contracts
and work orders are terminable at will, and are expandable at will, by the
customer consistent with its network needs. Compass has also entered into
standing so-called "strategic alliances" with equipment vendors under which it
is either recommended or specified to equipment customers as the system design
vendor.
Competition
The market for the telecommunications and CATV services the Company
offers is highly competitive. The Company believes that the factors for its
success include quality, technical capability, reliability, price and promptness
of performance. In California, the Company's competition includes the Fishel
Companies, Hankel & McCoy and Burnup & Sims, Inc., the last of which is a large,
publicly held corporation. In Arizona, the Company competes against Fishel and
Hankel & McCoy in cable installations and against such companies as Pauley
Construction and Beecroft Trenching in the installation of telephone and power
lines. All of such
-32-
<PAGE>
competitors are privately held, but have either regional or national scopes of
operations. Kleven competes with Pulice Construction, Pearson Construction,
Shiya-Stephans, Lundell Construction and Western Sun Construction in the
installation of water, sewer, storm and irrigation systems in Arizona. Although
most companies in this field tend to operate in a limited geographical area, a
number of competitors may bid on a particular project without regard to
location. Kleven has operated on a regional basis and is not aware of any
competitors which could be considered dominant in the industry on a national
basis.
Kleven also provides services to utilities in Arizona. The major
competitive factor for utility service work is price, and a substantial portion
of the work performed is awarded on the basis of competitive bids. There are
numerous competitors qualified to perform the same services which Kleven
provides in this area.
Concepts competes on a regional basis with Pomeroy Computer Resources,
Anixter International and Unisys. Compass' main competition come primarily from
a number of smaller entities which operate on a local or regional basis.
Compass' main competition come primarily from a number of small entities which
operate on a local or regional basis.
Southern has five major competitors in the United States on a regional
or national basis: CTDI, Hightech Products, Diversitech, World Access and Telmar
Distributing Co. While all or substantially all of these competitors have
greater resources, one of these competitors, Work Access, is publicly held while
the others are private companies, but all have either regional or national
scopes of operations. All of such competitors are substantially larger and have
greater resources than Southern. Southern frequently purchases equipment from
its competitors and such competitors purchase equipment from Southern in order
to satisfy orders. Southern competes with these companies on the basis of price,
speed of delivery and warranty.
Licenses
Kleven, through one of its officers, holds licenses in certain
jurisdictions requiring general and specialty contractor licenses. Kleven is
licensed and/or certified in Arizona and California.
Concepts, through certain of its officers/employees, maintains licenses
in certain jurisdictions requiring general and specialty contractor licenses.
Concepts is licensed and/or certified in Tennessee and Alabama.
In general, however, the services performed on behalf of clients by
Compass do not require any special licenses or formal designer certification.
However, Compass is registered in the State of Georgia for the provision of
engineering services. Compass also employs a licensed Georgia Professional
Engineer who has ultimate public health and safety compliance responsibilities
for all of Compass' design operations. In addition, several Compass offices hold
contractor licenses in various states.
Insurance and Bonds. Kleven maintains liability insurance for claims
arising from its business. The policy has a limit of $10 million in the
aggregate and insures against both property damage and personal injury. The
policy is written on an "occurrence" basis which provides coverage for insured
risks that occur during the policy period, irrespective of when a claim is made.
Higher policy limits are sometimes purchased for individual projects when
required contractually. Kleven has performance and payment bonding capability of
$10 million.
Concepts maintains liability insurance for claims arising from its
business. The policy has a limit of $4 million in the aggregate and insures both
property damage and personal injury. The policy is written on an "occurrence"
basis, which provides coverage for insured risks that occur during the policy
period, irrespective of when a claim is made. Concepts has performance and
payment bond capability of $2 million.
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<PAGE>
In general, bonding is not required to perform the contract services
provided in Compass' operations. Compass is not normally required to post bonds
by customers or by any government agencies. Compass maintains general liability
coverage with a policy limit of $1 million and the excess umbrella coverage at a
limit of $5 million.
Southern carries a general liability policy with a limit of $2 million
and a products liability insurance with a limit of $1 million.
Backlog Orders and Work-in-Progress
The Company had a backlog of approximately $3.2 million, on a work in
process basis, as of September 30, 1997. All such work orders are expected to be
completed by June 1998. Further, the Company has work orders, which were not
started at September 30, 1997, for Gambro, the cities of Phoenix and Peoria and
other clients, which total in excess of $8.0 million. The Company commenced such
work during the fourth quarter of 1997 and expects to complete the same by the
end of third quarter of 1998.
Suppliers
The three largest suppliers of Southern for the first nine months of
fiscal 1997 were Lucent Technologies (34.4%), BellSouth Telecommunications
(13.6%), and Colorado Tele-Equipment (12.1%). Southern believes that it has
adequate alternative sources of supply.
Employees
As of December 31, 1997 the Company had approximately 475 full-time
employees, including six executive officers, and 65 engineers and technicians.
Warranties
Kleven provides a warranty of its workmanship for a period of one to
two years, depending on the requirements of its customers. Concepts provides a
warranty of its workmanship for a period of one to five years, depending on the
requirements of its customers.
While most of the equipment Southern sell, is under warranty from the
original manufacturer, competition in the market place requires Southern to
provide its own warranty to its customers in connection with the sale of the
equipment. Southern provides a one-year warranty on all equipment sold to
telephone companies and a six-month warranty to equipment sold to other vendors
who, in turn, will resell the equipment. All equipment sold by Southern is
identified by bar code warranty labels.
Compass has no written warranties covering any of its work. However, in
practice, Compass does warrant its design services to be free from error,
intra-network incompatibility or design defect to network customers
indefinitely. Generally speaking, however, the Company's warranty is met upon
completion of construction and testing of the network to which its designs
apply.
Litigation
The Company is not involved as a party to any legal proceeding other
than various claims and lawsuits arising in the normal course of its business
none of which, in the opinion of the Company's management, are individually or
collectively material to its business.
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<PAGE>
Property
The Company owns an office building of approximately 9,600 square feet
located at 3615 South 28th Street, in Phoenix. Concepts does not own any real
property.
Southern operates its business from an office/warehouse building of
approximately 28,000 square feet including 24,000 square feet of office space.
The building is located on approximately 3.4 acres of land. In addition,
Southern owns a warehouse consisting of approximately 33,000 square feet located
on five acres of land approximately eight miles from Southern's
office/warehouse.
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<PAGE>
MANAGEMENT
The following sets forth certain information with respect to directors
and executive officers of the Company with the year in which each director's
term expires in parentheses.
<TABLE>
<CAPTION>
Name Age Position with Company and Tenure
- --------------------------------- ---------- ---------------------------------------------------------
<S> <C> <C>
Joseph P. Kealy 47 Chairman of the Board of Directors, Director
since 1990 and President since 1993. (1998)
Jerry A. Kleven 43 Director since 1995. (1998)
John F. Kealy 52 Director since 1990. (1998)
Richard J. Seminoff 49 Director since 1995. (1998)
Terry W. Beiriger 46 Principal Financial Officer since 1990,
Secretary since 1995 and Treasurer since 1996.
(1998)
V. Thompson Brown, Jr. 34 Director since 1997. (1998)
</TABLE>
- ---------------
Directors hold office until the next annual meeting of shareholders and
until their successors are elected and qualified or until their prior
resignation. The terms of the executive officers are continuous, subject to the
authority of the Board.
Joseph P. Kealy is the Chairman and President of the Company and he has
served in such capacities since May 1994 and 1987, respectively. He has been a
director of the Company since September 1990. Mr. Kealy was president of
International Environmental Corporation ("IEC"), a former wholly-owned
subsidiary of the Company, from its inception in 1987 until his resignation in
March 1995 in connection with the sale of IEC. Mr. Kealy has been involved in
the construction business for 26 years in both field and management capacities.
For 16 years prior to joining the Company Mr. Kealy was the Arizona manager for
a construction company. He attended college in Hastings, Nebraska and at
Northern Arizona University.
Jerry A. Kleven is the President of Kleven. He has been involved in the
underground construction industry since 1971. He is a member of various
underground construction organizations in the United States, including the
National Underground Contracting Association. He has worked in all phases of
Kleven's business, including systems analysis, construction methodology and
final estimate pricing.
John F. Kealy has been a director of the Company since September 1990.
Mr. Kealy was the Executive Vice President and Secretary of the Company until
March 1995 when he resigned in connection with his acquisition of IEC in January
1995. He served as Chairman of the Company from September 1990 to May 1994. John
F. Kealy formed IEC with his brother, Joseph P. Kealy, in 1987. Mr. Kealy has
been involved in the construction business for 29 years in both field and
management capacities. He became a construction manager in 1967 and ran
construction company offices in Hastings, Nebraska, Farmington, New Mexico and
Phoenix Arizona from 1974 to 1989. Mr. Kealy attended Notre Dame University and
graduated from Arizona State University in 1967 with a Bachelor of Science in
Construction Management.
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<PAGE>
Richard J. Seminoff has been a Vice President at Semco Enterprises,
Inc., which is in the metal processing business, since May 1995. From April 1991
to April 1995, he has served as president of Amos, Lovitt, Touche & Seminoff, an
insurance agency in Phoenix, Arizona, since April 1, 1991. From 1979 to March
1991, he was employed by the Lasher Cowie Insurance Agency, Inc.
("Lasher-Cowie") one of the largest regional insurance agencies headquartered in
Phoenix, Arizona and he was the president of such agency from 1984 to March
1991. Lasher-Cowie became a part of Hilb, Rogal and Hamilton Company, a publicly
owned company. Mr. Seminoff resigned as president of such agency in March 1991.
Terry W. Beiriger is the principal financial officer, controller,
Treasurer and Secretary of the Company. Mr. Beiriger has served as the principal
financial officer and controller of the Company since September 1990, as
Treasurer since July 1996 and as secretary since March 1995. He became involved
in the construction business in 1979 when he joined Kealy Construction Company,
which was owned by Joseph P. Kealy and John F. Kealy, as its controller. From
1974 to 1979, he was employed as a U.S. Internal Revenue Service agent
specializing in the audits of medium-sized corporations. Mr. Beiriger graduated
from Hastings College in Nebraska in 1974 with a Bachelor of Science in Business
Administration.
V. Thompson Brown, Jr. joined Concepts in 1986. Since November 1987 he
has been the Operations Manager for Concepts where he is responsible for project
administration, materials management and bid and sales supervision. Mr. Brown
graduated from Vanderbilt University with a Bachelor of Science in Engineering
in 1984.
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<PAGE>
EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------------------- -----------------------------------------
Awards Payouts
--------------------------- ------------
Other All
Name and Annual Restricted Other
Principal Compen- Stock Options/ LTIP Compen-
Positions Year Salary Bonus sation Awards SARs(2) Payouts ation (3)
- ------------------- -------- ------------- ---------------- ----------- -------------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Joseph P. Kealy 1996 $117,092 905,000 $9,600
President and 1995 96,936 9,600
Chairman of the 1994 114,208 9,600
Board
Terry W. Beiriger 1996 75,154 235,000 9,600
Principal 1995 71,922 9,600
Financial Officer, 1994 68,229 3,200
Secretary and
Treasurer
Jerry A. Kleven 1996 150,000 190,000 10,000
Executive Vice 1995 150,000 10,000
President and 1994 150,000 10,000
Director
V. Thompson 1996 78,843 70,000
Brown 1995 75,158
Director 1994 63,626
</TABLE>
(1) In August 1994 the Company entered in to a five-year employment
agreements with Joseph P. Kealy, Jerry A. Kleven and Terry W. Beiriger
providing for an annual base salary of $150,000 for Messrs. Kealy and
Kleven and $80,000 for Mr. Beiriger.
(2) The amounts set forth in this column are the automobile allowances
received by the persons in the table under the respective employment
agreements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Commencing in 1989 the Company advanced funds to Wings Limited
Partnership, the partners of which included Joseph P. Kealy, John F. Kealy and
Joseph W. Zerbib. In 1993, a promissory note in the principal amount of
$396,732, plus accrued interest, was executed by such individuals to assume the
obligation of the Wings Limited Partnership on a joint and several basis. Such
individuals and their respective spouses secured the note by pledging 267,000
shares of their Common Stock to the Company. In June 1996, Mr. Zerbib paid
$108,035 representing his pro-rata share of the principal and accrued interest
on the note. Upon such payment the Company released him from his obligations
under the note and 107,000 shares of Common Stock that he had pledged to secure
the note The maturity date of the note has been extended on several occasions
with the most recent extension to December 31, 1998. As of December 31, 1997,
the total outstanding principal balance was $152,394 plus accrued interest.
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<PAGE>
At December 31, 1994 Jerry A. Kleven, Brad J. Kleven and Ronald Abeyta
owed the Company $81,656, $108,400 and $68,634, respectively, as a result of
advances made by the Company to such individuals in fiscal 1994. The advances
were represented by secured promissory notes bearing interest at 7% per annum,
which notes were due and payable in full on or before December 31, 1995. Also,
at December 31, 1994 International FiberCon, Inc., a California corporation
("FiberCon"), in which Jerry A. Kleven, Brad J. Kleven and Ronald Abeyta owned a
majority interest, owed the Company $210,000 as the result of advances made by
the Company to FiberCon. Jerry A. Kleven, Brad J. Kleven and Ronald Abeyta
personally guaranteed FiberCon's payment of the promissory note. In 1995
FiberCon failed to make the required payments on the note. As a result, the
Company requested payment from Jerry Kleven, Brad Kleven and Ronald Abeyta under
their respective guarantees of the note. Jerry A. Kleven paid the sum of
$100,000 toward his note to the Company and his pro rata portion of the
guarantee of the FiberCon note in 1995. The remaining balance due of $63,497 was
consolidated into a new note on December 31, 1995. The Company had received no
payment from either Brad Kleven or Ronald Abeyta on their respective notes or
guarantees under the FiberCon note as of June 1996 and therefore filed suit
against each of such individuals demanding full payment of the principal and
accrued interest on the notes and for attorney's fees in connection with the
suit. On January 15, 1998, the Company entered into a Settlement Agreement and
Mutual Release with Brad Kleven and Ronald Abeyta whereby all claims and
counterclaims were dismissed by all parties. As a part of such agreement both
such individuals agreed to three year non-compete arrangements with the Company.
As such, the receivables balance will be converted to covenants not to compete
and amortized over a three year period.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The General Corporation Law of Arizona, under which the Company is
incorporated, was amended in full effective January 1, 1996. Such amendment
permits the inclusion in the articles of incorporation, provisions limiting or
eliminating the personal monetary liability of directors to a corporation or its
shareholders by reason of their conduct as directors. The Arizona Corporate Code
limits or eliminates the liability of a director of a corporation for monetary
damages for any action taken or not taken as a director in all instances except
(i) instances where a director receives financial benefits to which he is not
entitled; (ii) any intentional infliction of harm on the corporation or its
shareholders; (iii) the making of unlawful distributions; and (iv) intentional
violations of criminal law.
The Articles of Incorporation of the Company allow for the elimination
of personal monetary liability on the part of a director to the fullest extent
permitted by Arizona law. Under a provision in the Articles, a shareholder is
able to prosecute an action against a director for monetary damages only if he
can show a breach of the duty of loyalty, a failure to act in good faith,
intentional misconduct, a knowing violation of the law, an improper personal
benefit or an illegal dividend or stock repurchase, and not "negligence" or
"gross negligence" in satisfying his duty of care. Such provision does not apply
to any act or omission occurring prior to the effective date of such provision.
In addition, such provision applies only to claims against the director arising
out of his role as a director and not, if he is also an officer, his role as an
officer or in any other capacity or to his responsibilities under any other law,
such as the federal securities laws.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
-39-
<PAGE>
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of December 31, 1997
with respect to the number of shares of Common Stock of the Company beneficially
owned by individual directors, by all directors and officers of the Company as a
group, and by persons known by the Company to own more than 5% of the Company's
Common Stock. The Company has no other class of stock outstanding.
<TABLE>
<CAPTION>
Name of Beneficial Number Percent of
Owner and Address of Shares (1) Common Stock Owned
- ---------------------------------------- --------------------------- -------------------------------------
<S> <C> <C>
Joseph P. Kealy 797,086 (2) 4.93
3615 S. 28th Street
Phoenix, Arizona 85040
John F. Kealy 186,711 (3) 1.16
520 South 52nd Street
Tempe, Arizona 85281
Jerry A. Kleven 251,174 (4) 1.55
3615 S. 28th Street
Phoenix, Arizona 85040
Terry W. Beiriger 126,206 (5) *
3615 S. 28th Street
Phoenix, Arizona 85040
Richard J. Seminoff 75,000 (6) *
5050 North 40th Street
Suite 220
Phoenix, Arizona 85018
V. Thompson Brown, Jr. 79,222 (7) *
5714 Charlotte Avenue
Nashville, Tennessee 37209
Wallace E. Sapp 2,446,661 (8) 15.14
Edna M. Sapp
1940 Highway 71 So.
Marianna, Florida 32446
Liviakis Financial Communications, Inc. 1,650,000 (9) 10.21
2420 "K" Street
Suite 220
Sacramento, California 95816
All directors and 1,515,399 9.38
officers as a group
(six persons)
</TABLE>
- ---------------
* Less than 1%
(footnotes on following page)
-40-
<PAGE>
(1) The shareholder listed has sole voting and investment power with
respect to the shares listed.
(2) Includes options to purchase 565,000 shares of Common Stock which are
presently exercisable, or which will be exercisable within 60 days of
January 30, 1998, but does not include options to purchase 340,000
shares of Common Stock which are not exercisable until July 1998.
(3) Includes options to purchase 25,000 shares of Common Stock which are
presently exercisable, or which will be exercisable within 60 days of
January 30, 1998, but does not include options to purchase 50,000
shares of Common Stock which are not exercisable until July 1998.
(4) Includes options to purchase 70,000 shares of Common Stock which are
presently exercisable, or which will be exercisable within 60 days of
January 30, 1998, but does not include options to purchase 120,000
shares of Common Stock which are not exercisable until July 1998.
(5) Includes options to purchase 115,000 shares of Common Stock which are
presently exercisable, or which will be exercisable within 60 days of
January 30, 1998, but does not include options to purchase 120,000
shares of Common Stock which are not exercisable until July 1998.
Terry Beiriger disclaims beneficial ownership of an additional 9,450
shares owned by his immediate family.
(6) Includes options to purchase 25,000 shares of Common Stock which are
presently exercisable, or which will be exercisable within 60 days of
January 30, 1998, but does not include options to purchase 50,000
shares of Common Stock which are not exercisable until July 1998.
(7) Includes options to purchase 70,000 shares of Common Stock.
(8) Includes options to purchase 215,000 shares of Common Stock. which are
presently exercisable, or which will be exercisable within 60 days of
January 30, 1998. Wallace E. Sapp and Edna M. Sapp hold such shares
jointly with right of survivorship. Wallace E. Sapp and Edna M. Sapp
were the sole shareholders of the former Southern Communications
Products, Inc., a Florida corporation. The Company purchased all or
substantially all of the assets of such company in December 1997.
Wallace E. Sapp remains an employee of the Company's subsidiary SCP.
(9) Represents options to purchase 1,650,000 shares of Common Stock granted
to Liviakis which are presently exercisable. Excludes options to
purchase 550,000 shares of Common Stock granted to Robert Prag over
which Liviakis disclaims beneficial ownership. Liviakis Financial
Communication, Inc. performs financial consulting services for the
Company pursuant to a consulting agreement effective as of November 5,
1996. Such consulting agreement was extended in December 1997 through
June 30, 1998.
-41-
<PAGE>
SELLING SHAREHOLDERS
The following table provides certain information with respect to the
Common Stock owned by the Selling Shareholders who are entitled to use this
Prospectus. The information in the table is as of the date of this Prospectus.
Except as described below, no Selling Shareholder has had a material
relationship with the Company within the past three years other than as a result
of the ownership of Common Stock. The Conversion and Dividend Shares offered by
this Prospectus may be offered from time to time by the Selling Shareholders
named below or their nominees:
<TABLE>
<CAPTION>
Shares Available Percent Owned After
Name and Address of Selling Shares for Sale Under this Completion of the
Securityholder Owned(1) Prospectus Offering (1)
- ---------------------------------------- ------------------- ---------------------- ---------------------------
<S> <C> <C> <C>
RBB Bank Aktiengesellschaft 2,270,131 (2) 2,270,131 *
Attn: Mr. Herbert Strauss
Burgring 16
8010 Graz, Austria
Wallace E. Sapp 2,446,661 (3) 2,446,661 *
Edna M. Sapp
1940 Highway 71 So.
Marianna, FL 32446
Thompson Kernaghan & Co., Ltd. 2,100,000 (4) 2,100,000 *
365 Bay Street, 10th Floor
Toronto, Ontaro, Canada MSH 2V2
Rana General Holding, Ltd. 300,000 300,000 *
c/o Rana Investment Company
P.O. Box 60148
Riyadh 11545
Saudi Arabia
J. W. Charles Securities, Inc. 150,000 (5) 150,000 *
980 North Federal Highway
Suite 310
Boca Raton, FL 33432
Glenn S. Shaffren 119,093 116,093 *
1335 Old Norcross Road
Lawrenceville, GA 30045
Dale Nielsen 117,593 116,093 *
1335 Old Norcross Road
Lawrenceville, GA 30045
John H. Naybor 116,093 116,093 *
1335 Old Norcross Road
Lawrenceville, GA 30045
H. Raymond Tucker 115,833 115,833 *
Concepts in Communications, Inc.
5714 Charlotte Avenue
Nashville, Tennessee 37209
Dan Himes 91,923 91,923 *
1335 Old Norcross Road
Lawrenceville, GA 30045
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares Available Percent Owned After
Name and Address of Selling Shares for Sale Under this Completion of the
Securityholder Owned(1) Prospectus Offering (1)
- ---------------------------------------- ------------------- ---------------------- ---------------------------
<S> <C> <C> <C>
Samuel D. Hughes 34,515 34,515 *
P.O. Box 27598
910 Cobia Dr.
Panama City, FL 32548
Eugene Michael Kennedy 16,683 16,683 *
517 S.W. 1st Avenue
Fort Lauderdale, FL 33301
James and Valerie Gibbons, JTWROS 12,819 11,419 *
1335 Old Norcross Road
Lawrenceville, GA 30045
Alex Tassos 10,000 (6) 10,000 *
Tassos and Associates
17 Stonepointe Drive
Escondido, California 92025
Dennis Cowburn 2,284 2,284 *
1335 Old Norcross Road
Lawrenceville, GA 30045
Thomas M. Swartwood 34,000 (7) 34,000 *
405 Sixth Avenue
Des Moines, Iowa 50309
T. Marshall Swartwood 80,000 (7) 80,000 *
405 Sixth Avenue
Des Moines, Iowa 50309
Glenn S. Cushman 48,000 (7) 48,000 *
405 Sixth Avenue
Des Moines, Iowa 50309
Dickinson & Co. 78,000 (7) 78,000 *
405 Sixth Avenue
Des Moines, Iowa 50309
Liviakis Financial Communications, Inc. 1,650,000 (8) 1,650,000 *
Attn: John M. Liviakis, President
2420 "K" Street
Suite No. 220
Sacramento, CA 95816
Robert Prag 550,000 (8) 550,000 *
2420 "K" Street
Suite No. 220
Sacramento, CA 95816
J.P. Carey, Inc. 378,443 (9) 378,443 *
3343 Peachtree
Suite No. 500
Atlanta, Georgia 30326
Entrenet Group, LLC 26,666 (6) 26,666 *
c/o ACS Wireless, Inc.
10 Victor Square
Scotts Valley, California 94066
</TABLE>
-43-
<PAGE>
<TABLE>
<CAPTION>
Shares Available Percent Owned After
Name and Address of Selling Shares for Sale Under this Completion of the
Securityholder Owned(1) Prospectus Offering (1)
- ---------------------------------------- ------------------- ---------------------- ---------------------------
<S> <C> <C> <C>
J.W. Charles Securities, Inc. 150,000 (6) 150,000 *
Attn: Richard A. Dunton
980 North Federal Highway
Suite 310
Boca Raton, Florida 33432
John C. Canouse Irrevocable Trust 53,400 (10) 53,400 *
Atlanta Financial Center, East Tower
3343 Peachtree Road, Suite 500
Atlanta, Georgia 30326
James P. Canouse 53,400 (10) 53,400 *
Atlanta Financial Center, East Tower
3343 Peachtree Road, Suite 500
Atlanta, Georgia 30326
Jeffrey M. Canouse 53,400 (10) 53,400 *
Atlanta Financial Center, East Tower
3343 Peachtree Road, Suite 500
Atlanta, Georgia 30326
J. P. Carey Irrevocable Trust 106,800 (10) 106,800 *
Atlanta Financial Center, East Tower
3343 Peachtree Road, Suite 500
Atlanta, Georgia 30326
Bronia GMBH 300,000 300,000 *
365 Bay Street, 10th Floor
Toronto, Ontaro, Canada MSH 2V2
Public Warrantholders as a Group 1,302,480 1,302,480 *
</TABLE>
- ---------------
(1) Percentages and share ownership numbers are based on the assumption
that, with the exception of the Shares held by RBB Bank, all Conversion
Shares, Warrant Shares, Option Shares and Private Placement Shares
registered hereunder are beneficially owned by the Selling Shareholder
and that all such Shares will be sold by the Selling Shareholder.
Excludes additional shares of Common Stock which the Selling
Shareholder may acquire from time to time subsequent to this
Registration Statement.
(2) Assumes full and complete conversion of all shares of Series B
Preferred and Series C Preferred, and Conversion of all 8% and 5.5%
Debentures and full exercise of the Series B Warrants. Shares held in
the name of RBB Bank are held for the account of foreign investors. RBB
Bank represents that no beneficial owner represents 5% or more of the
outstanding voting securities of the Company.
(3) Assumes exercise of all Sapp Options.
(4) Shares held in the name of Thompson Kernaghan & Co., for the account of
a number of imvestors, none of which represents 5% or more of the
outstanding voting securities of the Company.
(5) Assumes full and complete exercise of all Acquisition Warrants held by
such entity.
(6) Assumes full and complete exercise of all Acquisition Warrants held by
such party.
-44-
<PAGE>
(7) Assumes full and complete exercise of all Underwriters Warrants held by
such individual or entity.
(8) Assumes full and complete exercise of all Liviakis Options.
(9) Assumes full and complete exercise of all Series A Warrants.
(10) Assumes full and complete exercise of all Private Placement Warrants.
-45-
<PAGE>
PLAN OF DISTRIBUTION
This prospectus describes the offering of 12,752,317 Shares of Common
Stock. Such Shares will be sold during the time which the Registration Statement
of which this Prospectus is a part is effective.
The offering period will commence on the date the Company receives
approval from the Securities and Exchange Commission and the appropriate state
regulatory bodies and will terminate with the termination of the Registration
Statement's effectiveness. The Company is unaware of any specific plan of
distribution of the Selling Shareholders, but believes the Common Stock will be
sold at prevailing market prices, without the payment of any underwriting
commissions or discounts other than ordinary brokerage transaction fees. The
Company will not receive any proceeds from the sale of any of the Shares.
Alternatively, the Selling Shareholders may from time to time effect
sales of the shares of Common Stock offered hereunder in one or more
transactions in the over-the-counter market pursuant to Rule 144 under the
Securities Act, or otherwise, at market prices prevailing at the time of sale,
at prices relating to such prevailing market prices, or at negotiated prices. It
is anticipated that broker-dealers participating in such sales of Common Stock
will receive the usual and customary selling commissions.
The Company will pay substantially all of the expenses incident to the
registration of the Common Stock. The Company will not pay any expenses incident
to the offering and sale of the Common Stock to the public, including, but not
limited to commissions and discounts of underwriters, dealers or agents.
-46-
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 100,000,000 shares of Common Stock,
no par value per share, of which 12,752,317 shares are issued and outstanding at
the date of this Prospectus.
Holders of the Common Stock are entitled to one vote for each share
owned for all matters to be voted on by the shareholders. As required under
Arizona law, there is cumulative voting in the election of directors.
Accordingly, each shareholder is entitled to vote the number of shares owned by
him for as many persons as there are directors to be elected, or to cumulate his
votes by giving one candidate as many votes as the number of such directors
multiplied by the number of his shares, or by distributing votes on the same
principle among any number of candidates. Holders of Common Stock are entitled
to receive such dividends as may be declared from time to time by the Board of
Directors out of funds legally available therefor and, in the event of
liquidation, dissolution or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities. The holders of Common Stock have
no preemptive or conversion rights. The holders of Common Stock are not subject
to further calls or assessments. There are no redemption or sinking fund
provisions applicable to the Common Stock. The rights of the holders of the
Common Stock are subject to any rights that may be fixed for holders of
preferred stock, when and if any preferred stock is issued. The Common Stock
currently outstanding is, and the Common Stock offered by the Company hereby
will, when issued, be validly issued, fully paid and nonassessable.
The Board of Directors currently consists of five Directors. The term
of office of each Director expires at each annual meeting of shareholders or
until his or her successor is qualified and elected.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred
stock, no par value per share, of which: (i) 3,300 shares were issued as Series
A Preferred in 1996 all of which were converted and canceled in 1997,(ii) 4,400
shares were reserved for issuance as Series B Preferred of which 3,500 were
issued in 1997, 1,291 remain outstanding as of November 15, 1997, and (iii)
1,000 shares were reserved and have been issued as Series C Preferred all of
which remain outstanding as of November 15, 1997. The remaining authorized
preferred stock may, without action by the shareholders of the Company, be
issued by the Board of Directors from time to time in one or more series for
such consideration and with such relative rights, privileges and preferences as
the Board may determine. Accordingly, the Board has the power to fix the
dividend rate and to establish the provisions, if any, relating to voting
rights, redemption rate, sinking fund, liquidation, preferences and conversion
rights for any series of preferred stock issued in the future. It is not
possible to state the actual effect of the authorization of additional preferred
stock upon the rights of holders of the Common Stock until the Board determines
the specific rights of the holders of any additional series of preferred stock.
The Board's authority to issue preferred stock provides a convenient vehicle in
connection with possible acquisitions and other corporate purposes.
Dividend Rights. Dividends upon the Series B and Series C Preferred are
cumulative and accrue from the date of original issue. No cash dividend may be
declared and paid or set apart for payment upon the Common Stock until any past
dividend or cumulative accrued dividends on any outstanding series of preferred
stock, including any preferred stock with preferential dividend rights, has been
fully paid or declared and set apart for payment and until any sinking fund
obligation for redemption of any other series of preferred stock shall have been
fully paid or declared and set apart for payment. The holders of any series of
preferred stock may share ratably with the holders of any other series of
preferred stock subsequently issued by the Company in any dividends declared by
the Company.
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<PAGE>
As an Arizona corporation the Company is permitted to declare and pay
dividends only to the extent that, after giving effect to the distribution,
either (i) it will be able to pay its debts as they become due in the usual
course of business, or (ii) its total assets exceed the sum of liabilities plus
the amount that would be needed if the Company were to be dissolved at the time
of the distribution, to satisfy preferential rights on dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. Any dividends not paid will accrue. No interest will be paid on
any accrued but unpaid dividends. There can be no assurance that the Company
will generate any or sufficient earnings to pay cash dividends on either the
Series B or Series C Preferred. The ability to pay dividends will, in addition
to the ability of the Company to generate net income, be dictated by the amount
of its annual net income from year to year. See "Dividends."
Voting Rights. The affirmative vote of the holders of a majority of the
outstanding shares of all series of preferred stock voting as a class, is
required in order to authorize any amendment to the Company's Articles of
Incorporation or bylaws which would affect adversely the holders of the
preferred stock outstanding or to authorize any additional class of stock equal
to, senior to, or ranking prior to the outstanding preferred stock with respect
to dividends or distributions of assets on liquidation. The affirmative vote of
the majority of the outstanding shares of Series B or Series C Preferred, voting
separately, is required to amend the Articles of Incorporation, bylaws or the
resolution establishing the terms of either of such classes so as to affect
adversely their rights, powers or preferences, with each class considered
separately, including, without limitation, any action that would (i) increase or
decrease their par value; (ii) effect an exchange, reclassification or
cancellation of all or part of either series; (iii) effect an exchange, or
create a right of exchange, of all or any part of the shares of another class
into shares of either series; (iv) change shares of either series into the same
or a different number of shares, either with or without par value, of the same
class or another class or classes; or (v) cancel or otherwise affect dividends
on either series which have accrued but have not been declared. The creation or
issuance of any other series of existing authorized preferred stock ranking on a
parity with the Series B or Series C Preferred as to dividends or distribution
of assets on liquidation shall not be deemed to affect adversely the rights of
either series, but any increase in the amount of authorized preferred stock or
creation of a new class of preferred stock ranking superior in rights and
privileges to either series shall be considered to affect adversely the rights
of the series whose rights and privileges have been subordinated. The Series B
and Series C Preferred will be entitled to vote as a class, together with the
holders of any shares of any other series of preferred stock outstanding, on any
additional matters required to be submitted to a vote of the Company's
shareholders by Arizona law.
Company's Option to Redeem. The Company may redeem the Series B
Preferred, in whole or in part, commencing 60 days after issuance at 150% of the
purchase price of $1,000 per share. The Company has no right to redeem the
Series C Preferred.
Notice of redemption with appropriate instructions will be mailed at
least 30 days but not more than 60 days before the redemption date to each
holder of record of Preferred Stock to be redeemed at the address shown on the
Company's books.
If fewer than all shares of the Series B Preferred are to be redeemed,
the shares to be redeemed shall be determined on a pro rata basis. The Series B
Preferred are not subject to any mandatory redemption, sinking fund or similar
provisions. Shares of Series B Preferred redeemed shall assume the status of
authorized but unissued preferred stock.
Conversion Privilege - Series B Preferred. Shares of Series B Preferred
were convertible, commencing sixty (60) days after issuance, into Common Stock
at a price ("Series B Conversion Price") equal to the lower of the Average Stock
Price on the date of each monthly subscription installment or the Discounted
Average Stock Price on the date of conversion. The "Average Stock Price" is the
average of the daily closing bid prices of the Common Stock for the five
consecutive trading days immediately preceding the relevant date. The
-48-
<PAGE>
"Discounted Average Stock Price" means (i) 70% of the average of the daily
closing bid prices of the Common Stock for the five consecutive trading days
immediately preceding the date of conversion into Common Stock if such average
of the daily prices is below $3.00 per share or (ii) 75% of the average of such
daily prices if the average is above $3.00 per share. With respect to
conversion, the Series B Preferred shall be valued at $1,000 per share
("Value"), and, if converted, the Series B Preferred shall be converted into
such number of shares of Common Stock as is obtained by dividing the aggregate
Value of the Series B Preferred being so converted, together with all accrued
but unpaid dividends thereon, by the Series B Conversion Price, subject to
certain adjustments. For a one-year period after issuance of the Series B
Preferred, the Series B Conversion Price will be the lower of $.75 or 50% of the
Average Stock Price. There will be no floor on the Series B Conversion Price if
the Company fails to achieve certain gross profits in any two consecutive
quarters. Any holder of Series B Preferred may, at any time commencing sixty
(60) days after the issuance of any Series B Preferred, convert up to 100% of
his holdings of Series B Preferred.
Conversion Privilege - Series C Preferred. Shares of Series C Preferred
are convertible, commencing sixty days after issuance, into Common Stock at a
conversion price ("Series C Conversion Price") equal to the $6.48375 per share,
the market price on the date of issuance. Under the conversion formula the
Company may be required to issue additional shares of Common Stock to achieve
certain rates of return at the point of conversion based on the Average Stock
Price of the Common Stock at those points. The "Average Stock Price" is the
average of the daily closing bid prices of the Common Stock for the five
consecutive trading days immediately preceding the relevant date. With respect
to conversion, the Series C Preferred shall be valued at $1,000 per share
("Value"), and, if converted, the Series C Preferred shall be converted into
such number of Common Stock as is obtained by dividing the aggregate Value of
the Series C Preferred being so converted, together with all accrued but unpaid
dividends thereon, by the Conversion Price, subject to certain adjustments. For
a one-year period after the issuance of the Preferred Stock, the floor on the
Series C Conversion Price will be $3.42 per share.
Liquidation Preference. In the event of a voluntary or involuntary
liquidation or winding up of the Company, the holders of Series B or Series C
Preferred Stock will be entitled to receive out of the assets of the Company
available for distribution to shareholders $1,000 per Share, plus all accrued
and unpaid Dividends before any distribution is made to the holders of Common
Stock as to distribution of assets. The holders of the Series A, Series B and
Series C Preferred Stock will share ratably with the holders of any other series
of preferred stock in any distribution of other assets of the Company. No
payment on account of such liquidation or a dissolution or winding up of the
affairs of the Company shall be made to the holders of any class or series of
stock ranking on a parity with any of the Preferred Stock in respect of the
distribution of assets, unless there shall likewise be paid at the same time to
the holders of any of the Preferred Stock like proportionate distributive
amounts, ratably, in proportion to the full distributive amounts to which they
and the holders of such parity stock are respectively entitled with respect to
such preferential distribution. After payment of the full amount of the
liquidating distribution to which they are entitled, the holders of shares of
any Preferred Stock will not be entitled to any further participation in any
distribution of assets by the Company. The foregoing liquidation rights shall
not be operative in the event of (i) any consolidation or merger of the Company
with or into any other corporation, (ii) any dissolution, liquidation, winding
up or reorganization of the Company immediately followed by reincorporation of a
successor corporation or creation of a successor partnership or (iii) a sale or
other disposition of all or substantially all of the Company's assets to another
corporation or a partnership if, in each case, effective provision is made in
the certificate of incorporation of the resulting or surviving corporation or
the articles of partnership of the resulting partnership or otherwise, for the
protection of the rights of the holders of the Preferred Stock.
Miscellaneous. Holders of Preferred Stock shall have no pre-emptive
right to purchase any securities of the Company.
-49-
<PAGE>
Warrants
Public Warrants. The Company issued 1,302,480 Public Warrants in its
1994 public offering. Each Public Warrant issued entitles the registered holder
("Warrantholder") to purchase one share of Common Stock of the Company at a
price of $5.50 per share, subject to adjustment in certain circumstances. The
Public Warrants were due to expire at 5:00 p.m., Mountain Standard Time, on
August 11, 1997, however, the board of directors extended such expiration time
to 5:00 p.m., Mountain Standard Time, on June 30, 1998. The Public Warrants are
publicly traded.
The Public Warrants are redeemable in whole or in part by the Company
upon 30 days' written notice, at a price of $.10 per Public Warrant, provided
the closing bid quotation of the Common Stock has averaged at least $8.10 per
share for any 20 consecutive trading days ending on the third day prior to the
day on which the Company gives notice. The Warrantholders will have exercise
rights until the close of business on the day fixed for redemption.
The shares of Common Stock underlying the Public Warrants, when issued
upon exercise of a Public Warrant and payment of the purchase price, will be
fully paid and non-assessable and the Company will pay any transfer tax incurred
as a result of the issuance of Common Stock to the holder upon its exercise.
The Public Warrants contain provisions that protect the holders against
dilution by adjustment of the exercise price and number of shares in certain
events, such as stock dividends and distributions, stock splits,
recapitalization, mergers, consolidation and certain issues below fair market
value of the Common Stock. The holder of a Public Warrant will not possess any
rights as a shareholder of the Company until the holder exercises the Public
Warrant.
The Public Warrants may be exercised upon surrender of the Public
Warrant certificate on or prior to the expiration at the offices of the Warrant
Agent, with the exercise form on the reverse side of the Public Warrant
certificate completed and executed as indicated, accompanied by full payment of
the exercise price by certified check payable to the Company to the Warrant
Agent for the number of Public Warrants being exercised. The Warrantholders do
not have the rights or privileges of holders of Common Stock.
No Public Warrant will be exercisable unless at the time of the
exercise, the Company has filed with the Commission a current prospectus
covering shares of Common Stock issuable upon exercise of such Public Warrant
and such shares have been registered or qualified to be exempt under the
securities laws of the state of residence of the holder of such Public Warrant.
The Company will use its best efforts to have all shares so registered or
qualified on or before the exercise date and to maintain a current prospectus
relating thereto until the expiration of the Public Warrants, subject to the
terms of the Warrant Agreement. While it is the Company's intention to do so,
there can be no assurance that it will be able to accomplish the foregoing.
The Company will not issue fractional shares upon exercise of the
Public Warrants; however, if a Warrantholder exercises all Public Warrants then
owned of record by him, the Company will pay such Warrantholder, in lieu of the
issuance of any fractional shares which is otherwise issuable, an amount in cash
based upon the market value of the Common Stock, on the last trading day prior
to the exercise date.
Underwriter's Warrants. The Company, upon completion of its 1994 public
offering, sold to the Underwriter for $.001 per warrant, Underwriter's Warrants
to purchase up to 120,000 shares of Common Stock at an exercise price of $8.10
per share of Common Stock and 120,000 Underwriter's Underlying Warrants at $.15
each. The Underwriter's Warrants are exercisable only to purchase both the
Common Stock and Underwriter's Underlying Warrants. The Underwriter's Warrants
may not be sold, transferred, assigned or hypothecated during the life of the
Underwriter's Warrants, except to officers of the Underwriter and will be
exercisable for a four-year term commencing August 12, 1995. All other terms of
the purchase of shares of Common Stock and the Underwriter's Underlying Warrants
purchasable under the Underwriter's Warrants, including the redemption
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<PAGE>
provisions, are the same as the Public Warrants, except that the Underwriter's
Underlying Warrant can only be exercised at a price of $7.15 per share. Subject
to certain limitations and exclusions, the Company has agreed, at the request of
the holders of the majority of the Underwriter's Warrants, that the Company's
expense, to register the Underwriter's Warrants, the underlying shares of Common
Stock, the Underwriter's Underlying Warrants and any shares issued or issuable
upon exercise of the Underwriter's Underlying Warrants under the Securities Act
on one occasion during the Warrant exercise term and to include such securities
in any appropriate registration statement which is filed by the Company during
the four years commencing August 12, 1995.
Series A Warrants. The Company issued 378,443 Series A Warrants in
conjunction with its issuance of Series A Preferred. The Series A Warrants were
exercisable immediately upon issuance and expire in 2002. Each Series A Warrant
is exercisable to purchase one share of Common Stock at a purchase price of
$.82.
Series B Warrants. The Company issued 700,000 Common Stock purchase
warrants in conjunction with its issuance of Series B Preferred. The Series B
Warrants were exercisable immediately upon issuance and expire on the fifth
anniversary of the date of issuance. Each Series B Warrant is exercisable to
purchase one share of Common Stock at an exercise price which is 50% above the
"Average Stock Price" on its date of issue, but will not exceed certain prices,
ranging from $2.25 to $2.50 per share. The "Average Stock Price" is the average
of the daily closing bid prices of the Common Stock for the five consecutive
trading days immediately preceding the relevant date. The Company may redeem the
Series B Warrants, in whole or in part, at a price of $.01 per warrant, provided
the closing bid quotations of the Common Stock have averaged at least 130% of
the exercise prices for any given Series B Warrant for any five consecutive
trading days preceding the date of the call for redemption. The Company may not
offer redemption to the holders of Series B Warrants unless it has an effective
registration statement pertaining to the Common Stock issuable upon the exercise
of such warrants for such holders. The holders of the Series B Warrants will
have the option, for a period of 15 days after the date of notice of redemption,
to decide whether to exercise their Series B Warrants, in whole or in part, or
to have their Series B Warrants redeemed.
Acquisition Warrants. The Company issued 26,666 Common Stock purchase
warrants to Entrenet in connection with its acquisition of Concepts. Such
warrants were exercisable immediately upon issuance and expire on August 14,
1998. Each such warrant is exercisable to purchase one share of Common Stock at
an exercise price of $3.00 per share. The Company may redeem such Warrants, in
whole or in part, at a price of $.01 per warrant, provided the closing prices of
the Common Stock have averaged at least 130% of the exercise prices of any ten
consecutive trading days preceding the date of the call for redemption.
The Company also issued 10,000 Common Stock Purchase Warrants to Alex
Tassos in connection with its acquisition of Concepts. Such warrants were
exercisable immediately upon issuance and expire on January 6, 1999. Each such
warrant is exercisable to purchase one share of Common Stock at an exercise
price of $.9375 per share. The Company may redeem such warrants, in whole or in
part, at a price of $.01 per warrant, provided the closing prices of the Common
Stock have averaged at least 130% of the exercise prices of any ten consecutive
trading days preceding the date of the call for redemption.
The Company also issued 150,000 Common Stock Purchase Warrants to J.W.
Charles Securities, Inc. in connection with its acquisition of Concepts. Such
warrants were exerciseable immediately upon issuance and expire on June 9, 1999.
Seventy-five thousand of such warrants are exerciseable to purchase one share of
Common Stock at an exercise price of $2.00 per share, the remaining 75,000 of
such warrants are exerciseable at $4.00 per share.
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for
the Company by Streich Lang, P.A., Phoenix, Arizona.
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<PAGE>
EXPERTS
The consolidated financial statements and the related financial
statement schedules incorporated in this Prospectus by reference from the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996 have been audited by Semple & Cooper, independent auditors, as stated in
their reports, which are incorporated herein by reference, and have been so
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
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<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
To The Stockholders and Board of Directors of
International FiberCom, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of International
FiberCom, Inc. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1995. 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 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe our audits provide 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 International
FiberCom, Inc. and Subsidiaries as of December 31, 1996, and the results of its
operations, changes in stockholders' equity, and its cash flows for the years
ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
Semple & Cooper, P.L.C.
Certified Public Accountants
April 7, 1997
F-1
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, September 30,
1996 1997
---- ----
(Unaudited)
Current Assets:
Cash and cash equivalents (Note 1) $ 3,972 $ 69,478
Accounts receivable
- trade, net of allowance for doubtful
accounts (Notes 1, 3, 4 and 8) 2,458,477 5,812,261
- unbilled 196,815 88,124
- other 27,769 67,782
Inventory (Note 1) -- 621,686
Prepaid expenses 37,912 176,603
Accrued interest receivable -- 38,579
Costs and estimated earnings in
excess of billings on
uncompleted contracts (Notes 1 and 5) 249,546 1,905,281
----------- -----------
Total Current Assets 2,974,491 8,779,794
----------- -----------
Property and Equipment, net
(Notes 1, 6, 8 and 9) 2,899,055 3,237,822
----------- -----------
Other Assets:
Accounts receivable - long-term
(Notes 1 and 3) 88,478 38,915
Loans receivable from related parties
(Note 4) 562,025 562,025
Goodwill, net (Note 1) -- 1,555,103
Deferred acquisition costs 234,367 126,863
Other assets 15,514 38,170
Investment in limited partnership (Note 7) 28,781 33,021
----------- -----------
929,165 2,354,097
----------- -----------
Total Assets $ 6,802,711 $14,371,713
=========== ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-2
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1996 1997
---- ----
(Unaudited)
Current Liabilities:
Notes payable
- current portion (Note 8) $ 1,014,986 $ 1,122,466
- related party (Note 4) 6,000 6,000
Obligations under capital leases
- current portion (Note 9) 110,355 143,337
Accounts payable
- trade 1,965,837 2,038,912
- related parties (Note 4) 24,610 9,610
Accrued acquisition costs -- 398,000
Accrued expenses 358,585 874,813
Accrued interest -- 69,792
Billings in excess of costs and
estimated earnings on uncompleted
contracts (Note 1 and 5) 185,119 266,873
------------ ------------
Total Current Liabilities 3,665,492 4,929,803
Long-Term Liabilities:
Notes payable - long-term (Note 8) 544,833 650,751
Obligations under capital leases
- long-term (Note 9) 384,108 276,303
Convertible debentures (Note 8) -- 1,500,000
------------ ------------
Total Liabilities 4,594,433 7,356,857
------------ ------------
Commitments and Contingencies (Note 10) -- --
Stockholders' Equity: (Note 11)
Series A, 9% convertible preferred stock,
no par value; 10,000,000 shares authorized,
1,972 and 0 (unaudited) shares issued and
outstanding 1,680,997 --
Series B 4% convertible preferred stock, no par
value; 4,400 shares authorized; 0 and 3,500
(unaudited) shares issued and outstanding -- 2,789,589
Common stock, no par value; 100,000,000
shares authorized; 6,572,489 and 9,031,842
(unaudited) shares issued, 6,393,799 and
8,853,152 (unaudited) shares outstanding 8,555,176 10,986,944
Common stock warrants 99,082 99,082
Additional paid-in capital 462,073 462,073
Accumulated deficit (7,921,033) (6,654,815)
------------ ------------
2,876,295 7,682,873
Less: treasury stock, 178,690 shares, at cost (668,017) (668,017)
------------ ------------
Total Stockholders' Equity 2,208,278 7,014,856
------------ ------------
Total Liabilities and Stockholders' Equity $ 6,802,711 $ 14,371,713
============ ============
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-3
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Nine Month Periods Ended
---------------------------- -----------------------------
(Unaudited)
December 31, December 31, September 30, September 30,
1996 1995 1997* 1996*
---- ---- ---- ----
<S> <C> <C> <C> <C>
Contract Revenues $ 12,161,263 $ 12,050,075 $ 20,362,396 $ 9,158,640
Cost of Contract Revenues (11,387,706) (11,801,757) (15,779,368) (8,188,450)
------------ ------------ ------------ ------------
Gross Profit 773,557 248,318 4,583,028 970,190
General and Administrative
Expenses (2,261,694) (2,455,110) (3,294,137) (1,638,387)
Goodwill Impairment (Note 1) (2,677,490) -- -- --
Provision for Doubtful
Accounts (Note 13) -- (387,952) -- --
------------ ------------ ------------ ------------
Income (Loss) from Operations (4,165,627) (2,594,744) 1,288,891 (668,197)
------------ ------------ ------------ ------------
Other Income (Expense):
Interest income 49,086 26,229 45,602 6,088
Interest expense (141) (2,936) (104,021) (100)
Other income 16,089 102,768 1,872 36,578
Gain on sale of fixed
assets 50,781 69,485 181,937 37,082
------------ ------------ ------------ ------------
115,815 195,546 125,390 79,648
------------ ------------ ------------ ------------
Net Income (Loss) before
Income Taxes (4,049,812) (2,399,198) 1,414,281 (588,549)
Income Taxes -- 210,815 -- --
------------ ------------ ------------ ------------
Net Income (Loss) (4,049,812) (2,188,383) 1,414,281 (588,549)
Preferred Stock Dividends
(Note 11) (171,303) -- (148,063) --
------------ ------------ ------------ ------------
Net Income (Loss)
Attributable to Common
Stockholders $ (4,221,115) $ (2,188,383) $ 1,266,218 $ (588,549)
============ ============ ============ ============
Earnings (Loss) per Share (Note 1):
Primary $ (.74) $ (.50) $ .10 $ (.13)
============ ============ ============ ============
Fully diluted $ -- $ -- $ .09 $ --
============ ============ ============ ============
Weighted Average Shares (Note 1)
Outstanding:
Primary 5,716,600 4,417,072 14,437,109 4,417,072
============ ============ ============ ============
Fully diluted -- -- 15,860,068 --
============ ============ ============ ============
</TABLE>
*As restated, for comparative purposes only.
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-4
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Preferred Series B Preferred Common Stock
--------------------- ------------------- ---------------------------
Shares Amount Shares Amount Shares Issued Amount
------ ------ ------ ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' Equity,
December 31, 1994 -- $ -- -- $ -- 4,417,072 $ 7,274,929
Issuance of Series A, 9%
convertible preferred,
net of costs 2,750 2,296,382 -- -- -- --
Net Loss, 1995 -- -- -- -- -- --
------ ----------- ----- ---------- --------- ------------
Stockholders' Equity,
December 31, 1995 2,750 2,296,382 -- -- 4,417,072 7,274,929
Issuance of Series A, 9%
convertible preferred,
net of costs 550 493,559 -- -- -- --
Conversion of Series A, 9%
convertible preferred
stock to common stock (1,328) (1,108,944) -- -- 1,821,257 1,108,944
Issuance of preferred
stock dividend -- -- -- -- 155,470 171,303
Options issued for services -- -- -- -- -- --
Net Loss, 1996 -- -- -- -- -- --
------ ----------- ----- ---------- --------- ------------
Stockholders' Equity,
December 31, 1996 1,972 1,680,997 -- -- 6,393,799 8,555,176
Issuance of Series
B 4% convertible
preferred stock -- -- 3,500 2,789,589 -- --
Issuance of common
stock for
payment of debt -- -- -- -- 115,833 202,708
Conversion of Series
A 9% convertible
preferred stock to
common stock (1,972) (1,680,997) -- -- 2,126,463 1,680,997
Issuance of common
stock in private
placement -- -- -- -- 150,000 400,000
Issuance of preferred
stock dividend -- -- -- -- 67,057 148,063
Net income for the
nine month period
ended September
30, 1997 (unaudited) -- -- -- -- -- --
------ ----------- ----- ---------- --------- ------------
Stockholders' Equity,
September 30, 1997
(Unaudited) -- $ -- 3,500 $2,789,589 8,853,152 $ 10,986,944
====== =========== ===== ========== ========= ============
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(CONTINUED)
Common Additional
Stock Accumulated Paid-in Treasury
Warrants Deficit Capital Stock
-------- ------- ------- -----
Stockholders' Equity,
December 31, 1994 $99,082 $(1,511,535) $352,073 $(668,017)
Issuance of Series A, 9%
convertible preferred,
net of costs -- -- -- --
Net Loss, 1995 -- (2,188,383) -- --
------- ----------- -------- ---------
Stockholders' Equity,
December 31, 1995 99,082 (3,699,918) 352,073 (668,017)
Issuance of Series A, 9%
convertible preferred,
net of costs -- --
Conversion of Series A, 9%
convertible preferred
stock to common stock -- -- -- --
Issuance of preferred
stock dividend -- (171,303) -- --
Options issued for services -- -- 110,000 --
Net Loss, 1996 -- (4,049,812) -- --
------- ----------- -------- ---------
Stockholders' Equity,
December 31, 1996 99,082 (7,921,033) 462,073 (668,017)
Issuance of Series
B 4% convertible
preferred stock -- -- -- --
Issuance of common
stock for
payment of debt -- -- -- --
Conversion of Series
A 9% convertible
preferred stock to
common stock -- -- -- --
Issuance of common
stock in private
placement -- -- -- --
Issuance of preferred
stock dividend -- (148,063) -- --
Net income for the
nine month period
ended September
30, 1997 (unaudited) -- 1,414,281 -- --
------- ----------- -------- ---------
Stockholders' Equity,
September 30, 1997
(Unaudited) $99,082 $(6,654,815) $462,073 $(668,017)
======= =========== ======== =========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5a
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Nine Month Periods Ended
--------------------------- ---------------------------
(Unaudited)
December 31, December 31, September 30, September 30,
1996 1995 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash flows from operating activities:
Cash received from customers $ 12,190,485 $ 12,928,576 $ 19,403,959 $ 8,898,147
Cash paid to suppliers and employees (13,379,188) (12,618,292) (18,947,570) (10,075,222)
Interest paid (141) (249,488) (174,851) (279,331)
Interest received 35,340 17,075 7,024 6,088
Income tax refunds 26,000 192,565 (57,161) 26,000
------------ ------------ ------------ ------------
Net cash provided (used) by
operating activities (1,127,504) 270,436 231,401 (1,424,318)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (145,605) (215,228) (196,374) (120,569)
Loans to related parties -- (3,236) -- --
Disbursements for deferred acquisition
costs (124,367) -- (126,863) --
Collection of loans to related parties 117,294 100,000 -- 108,939
Proceeds from sale of fixed assets 104,205 138,976 302,643 66,613
Payments for investment in limited
partnership (4,240) (4,240) (4,240) (4,240)
Cash acquired in purchase of Concepts
In Communication, Incorporated -- -- 56,607 --
Purchase of Concepts In Communication,
Incorporated -- -- (276,043) --
------------ ------------ ------------ ------------
Net cash provided (used) by
investing activities (52,713) 16,272 (244,270) 50,743
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable -- 370,308 204,620 584,627
Repayment of notes payable (1,525,491) (685,307) (848,436) (1,900,762)
Repayment of loans from stockholder (54,000) (12,000) -- (50,000)
Repayment of obligations under capital
leases (112,128) (37,438) (75,809) (86,583)
Proceeds from sale of common stock -- -- 400,000 --
Proceeds from sale of preferred stock 493,559 -- -- 507,417
Collection of stock subscriptions
receivable 2,373,500 -- -- 2,373,500
Increase in accrued offering costs -- -- 398,000 --
------------ ------------ ------------ ------------
Net cash provided (used) by
financing activities 1,175,440 (364,437) 78,375 1,428,199
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (4,777) (77,729) 65,506 54,624
Cash and cash equivalents at beginning
of year 8,749 86,478 3,972 8,749
------------ ------------ ------------ ------------
Cash and cash equivalents at end
of year $ 3,972 $ 8,749 $ 69,478 $ 63,373
============ ============ ============ ============
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-6
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years Ended Nine Month Periods Ended
-------------------------- ---------------------------
(Unaudited)
December 31, December 31, September 30, September 30,
1996 1995 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Reconciliation of Net Income (Loss) to Net Cash
Provided (Used) by Operating Activities:
Net Income (Loss) $(4,049,812) $(2,188,383) $ 1,414,281 $ (588,549)
----------- ----------- ----------- -----------
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided (Used) by Operating
Activities:
Depreciation and amortization 794,974 665,142 723,789 586,620
Gain on sale of fixed assets (50,781) (69,485) (181,937) (37,082)
Interest added to principal of notes
receivable from related parties (13,746) (46,885) -- --
Accrued Regulation S stock offering
expenses -- (77,118) -- --
Impairment of goodwill 2,677,490 -- -- --
Changes in Assets and Liabilities:
Accounts receivable
- trade (20,829) 1,102,501 (709,575) 36,609
- unbilled (196,815) -- 108,691 --
- other 17,931 (11,700) (40,013) 17,931
Inventory -- 132,000 (158,713) --
Income tax refund receivable 26,000 192,565 -- 26,000
Prepaid expenses 9,698 (19,985) (122,423) (62,263)
Accrued interest receivable -- 37,731 (38,579) --
Deferred tax asset -- -- 18,258 --
Costs and estimated earnings
in excess of billings
on uncompleted contracts 201,957 (111,973) (262,849) (219,219)
Accounts receivable - long-term 67,087 60,859 49,563 60,000
Other assets 3,970 3,325 (1,225) 2,896
Bank overdraft (57,751) (122,239) -- (57,751)
Accounts payable
- trade 179,838 141,373 (668,509) (218,226)
- related parties (27,511) (131) (15,000) (58,116)
Accrued expenses (588,145) 620,497 139,498 (798,707)
Deferred income taxes
- current -- (146,146) (18,258) --
- long-term -- (64,669) -- --
Interest payable -- -- 69,792 --
Deferred revenue -- -- (1,092) --
Deferred compensation -- -- (26,926) --
Income taxes payable -- -- (57,321) --
Billings in excess of costs
and estimated earnings on
uncompleted contracts (101,059) 173,157 9,949 (114,461)
----------- ----------- ----------- -----------
2,922,308 2,458,819 (1,182,880) (835,769)
----------- ----------- ----------- -----------
Net Cash Provided (Used) by
Operating Activities $(1,127,504) $ 270,436 $ 231,401 $(1,424,318)
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-7
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, Nature of Operations and Use
of Estimates:
Nature of Corporation:
International FiberCom, Inc. is a holding corporation for two (2)
subsidiaries, Kleven Construction, Inc. and Concepts in Communications,
Incorporated. The Company has been duly formed and organized under the
laws of the State of Arizona. The Corporation was approved by the State
of Arizona on December 29, 1972.
Kleven Construction, Inc. is a Phoenix-based company specializing in the
design, installation and maintenance of fiber-optic and other cable for
the telecommunications and cable television industries. Through the
acquisition of Kleven Construction, Inc., the Company changed its
primary business focus to servicing the telecommunications and cable
television industries throughout the southwestern United States and into
Mexico.
In January, 1997, International FiberCom, Inc. acquired Concepts in
Communications, Incorporated, a privately-held Nashville, Tennessee
based company, formed in June, 1983, which also has operations in
Memphis and Knoxville. Concepts in Communications, Incorporated provides
systems integration services including design, engineering, installation
and maintenance of structured cabled systems, network hardware and
software, work station peripherals and intercommunication systems,
primarily within commercial, industrial and governmental facilities
throughout the United States.
Principles of Consolidation:
The consolidated financial statements at December 31, 1996 and 1995
include the accounts of the Company and its wholly-owned subsidiary,
Kleven Construction, Inc. The consolidated financial statements at
September 30, 1997 include the accounts of the Company and its
wholly-owned subsidiaries, Kleven Construction, Inc. and Concepts in
Communications, Incorporated. All significant intercompany transactions,
accounts and balances have been eliminated.
Interim Financial Information:
The interim financial information for the nine month period ended
September 30, 1997 is unaudited. In the opinion of management, such
statement reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair representation of the results of the
interim period. The results of operations for the nine month period
ended September 30, 1997 are not necessarily indicative of the results
for the entire year.
Reclassifications:
Certain reclassifications have been made to the interim financial
statements to conform them to the year end presentation.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-8
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and Use
of Estimates: (Continued)
Revenue and Cost Recognition:
Revenues from fixed-price and modified fixed-price construction
contracts are recognized on the percentage-of-completion method,
measured by the percentage of costs incurred to date to the estimated
total costs for each contract.
Contract costs include, amongst other things, direct labor, field labor,
subcontracting, direct materials, direct overhead, and interest costs
incurred as a result of contracting activity. Selling, general, and
administrative costs are charged to expense as incurred. Project losses
are provided for in their entirety in the period in which such losses
are determined, without reference to the percentage-of-completion. As
contracts can extend over one or more accounting periods, revisions in
costs and estimated earnings during the course of the work are reflected
during the accounting period in which the facts that require such
revisions become known.
The length of the Company's contracts vary, but are typically less than
one (1) year. Therefore, assets and liabilities are classified as
current and non-current, based on a one (1) year operating cycle.
Cash and Cash Equivalents:
Cash and cash equivalents are considered to be all highly liquid
investments purchased with an initial maturity of three (3) months or
less.
Accounts Receivable - Trade:
Accounts receivable - trade represent the amounts billed but uncollected
on completed construction contracts and construction contracts in
progress.
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense
based on a review of the individual accounts outstanding, and the
Company's prior history of uncollectible accounts receivable. At
December 31, 1996 and September 30, 1997 (unaudited), allowances have
been established for potentially uncollectible accounts receivable in
the amounts of $69,153 and $69,153 (unaudited), respectively.
Inventory:
Inventories are stated at the lower of cost, first-in, first-out method,
or market, and consist of cable and electronic supplies.
F-9
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and Use
of Estimates: (Continued)
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
over the estimated useful lives of the assets utilizing straight-line
and accelerated methods. Leasehold improvements are amortized over their
estimated useful lives or the remaining lease term, whichever is
shorter.
The estimated useful lives are as follows:
Building 31 years
Tools and equipment 5-7 years
Vehicles 3-7 years
Furniture and fixtures 5-7 years
Office equipment 5 years
Leasehold improvement 7-15 years
Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as
incurred. Betterments or renewals are capitalized when incurred. For the
years ended December 31, 1996 and 1995, depreciation expense was
$676,540 and $546,708, respectively. For the nine month periods ended
September 30, 1997 and 1996, depreciation expense was $641,889 and
$495,281 (unaudited), respectively.
The Company's capital lease agreements are recorded at the lower of the
present value of the minimum lease payments, or the fair market value of
the assets. The assets are being depreciated over the lesser of their
estimated productive lives, or their lease term. Depreciation of the
assets under the capital leases is included in depreciation expense, as
noted above, for the years ended December 31, 1996 and 1995, and for the
nine month periods ended September 30, 1997 and 1996 (unaudited).
Goodwill:
Goodwill represents the excess of the purchase price over the fair value
of Concepts in Communications, Incorporated's net assets acquired.
Goodwill is being amortized ratably over 15 years. The carrying value of
goodwill will be reviewed periodically by the Company and impairments,
if any, will be recognized when expected future operating cash flows
derived from goodwill are less than its carrying value.
During the year ended December 31, 1996, goodwill of $2,677,490, which
arose in connection with the acquisition of Kleven Construction, Inc.
was written off as it was deemed to have no continuing value due to
recurring operating losses. Amortization expense charged to operations
for each of the years ended December 31, 1996 and 1995, was $118,125.
For the nine month periods ended September 30, 1997 and 1996,
amortization expense was $81,900 and $88,594 (unaudited), respectively.
F-10
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and Use
of Estimates: (Continued)
Income Taxes:
For financial and tax accounting purposes, the Company reports income
and expenses based on the percentage-of-completion method of accounting
for long-term construction contracts.
Deferred income taxes arise from timing differences resulting from
revenues and expenses reported for financial accounting and tax
reporting purposes in different periods. Deferred income taxes represent
the estimated tax liability on additional depreciation expense reported
based upon accelerated tax depreciation methods, and timing differences
in the utilization of net operating losses.
Earnings Per Share:
Primary earnings per share amounts are computed based on the weighted
average number of shares actually outstanding plus the shares that would
be outstanding assuming conversion of the convertible preferred stock
and convertible debentures and exercise of dilutive stock options and
warrants, all of which are considered to be common stock equivalents.
The number of shares that would be issued from the exercise of stock
options has been reduced by the number of shares that could have been
purchased from the proceeds at the average market price of the Company's
stock. Net income has been adjusted for dividends on the convertible
preferred stock and interest expense (net of tax) on the convertible
debt. Primary earnings per share for the years ended December 31, 1996
and 1995, and for the nine month period ended September 30, 1996, does
not include the conversion of common stock equivalents because the
effect of such inclusion would be to increase earnings per share.
Fully diluted earnings per share amounts as of September 30, 1997, are
based on an increased number of shares that would be outstanding
assuming conversion of convertible preferred stock and convertible
debentures, and exercise of dilutive stock options and warrants. For
purposes of the fully diluted computations, the number of shares that
would be issued from the exercise of stock options has been reduced by
the number of shares which could have been purchased from the proceeds
at the market price of the Company's stock on September 30, 1997 because
the price was higher than the average market price during the period.
Net income has been adjusted for dividends on the convertible preferred
stock and interest expense (net of tax) on the convertible debt.
Fully diluted earnings per share are not presented for the years ended
December 31, 1996 and December 31, 1995 and the nine months period ended
September 30,1996 as they are anti-dilutive.
F-11
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and Use
of Estimates: (Continued)
New Accounting Pronouncements:
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) establishes a fair value method
of accounting for stock-based compensation plans and for transactions in
which an entity acquires goods or services from non-employees in
exchange for equity instruments. The Company adopted this accounting
standard on January 1, 1996. SFAS 123 encourages, but does not require
companies to record compensation cost for stock-based employee
compensation. The Company has chosen to continue to account for
stock-based compensation utilizing the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation cost for stock options
is measured as the excess, if any, of the fair market price of the
Company's stock at the date of grant over the amount an employee must
pay to acquire the stock.
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS No. 128). This pronouncement provides a different method of
calculating earnings per share than is currently required by APB 15,
Earnings per Share. SFAS No. 128 provides for the calculation of Basic
and Diluted earnings per share. Basic earnings per share include no
dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of any entity
similar to fully diluted earnings per share. This pronouncement is
effective for fiscal years and interim periods after December 15, 1997;
early adoption is not permitted. The Company would have presented a
basic earnings per share amount of $.18 per share and a diluted earnings
of $.09 per share for the period ending September 30,1997 assuming
adoption of this standard.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB
is effective for financial statements ending after December 15, 1997.
The new standard reinstates various securities disclosure requirements
previously in effect under Accounting Principles Board Opinion No. 15,
which has been superseded by SFAS No. 128. The Company does not expect
adoption of SFAS No. 129 to have a material effect, if any, on its
financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15,
1997. Earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The
Company does not expect adoption of SFAS No. 130 to have a material
effect, if any, on its financial position or results of operations.
F-12
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Fair Value of Financial Instruments:
Estimated fair values of the company's financial instruments (all of
which are held for nontrading purposes) are as follows:
December 31, September 30,
1996 1997
---- ----
(unaudited)
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and short-term
investments $ 3,972 $ 3,972 $ 69,478 $ 69,478
Long-term investments 28,781 28,781 33,021 33,021
Long-term debt 928,941 928,941 2,427,054 2,427,054
The carrying amount approximates fair value of cash and short-term
instruments. For long-term investments, fair values are estimates based
on quoted market prices. The fair value of long-term debt is based on
current rates at which the Company could borrow funds with similiar
remaining maturities.
3. Accounts Receivable - Trade:
At December 31, 1996 and September 30, 1997 (unaudited), accounts
receivable - trade consist of the following:
(Unaudited)
December 31, September 30,
1996 1997
---- ----
Contracts in progress $ 731,818 $ 2,476,934
Contracts in progress
- retention 115,621 145,000
Completed contracts 1,708,517 3,097,272
Completed contracts
- retention 60,152 201,123
----------- --------------
2,616,108 5,920,329
Less: allowance for
doubtful accounts (69,153) (69,153)
----------- --------------
2,546,955 5,851,176
Less: long-term receivable (88,478) (38,915)
----------- --------------
$ 2,458,477 $ 5,812,261
=========== ==============
The long-term receivable arose from a litigation settlement on a
contract dispute, and is being paid in installments through October,
1999.
4. Related Party Transactions:
Accounts Receivable - Trade:
As of December 31, 1996 and September 30, 1997 (unaudited), accounts
receivable - trade include $137,986 due from a related entity.
Loans Receivable from Related Parties:
At December 31, 1996 and September 30, 1997 (unaudited), loans
receivable from related parties consist of the following:
December 31, September 30,
1996 1997
---- ----
(Unaudited)
6.5% loan receivable from a corporate
stockholder, due in full December 31,
1997; secured by the Company's
common stock $75,140 $75,140
6.5% loan receivable from a corporate
stockholder, due in full December 31, 1997;
secured by the Company's common stock 77,254 77,254
F-13
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Related Party Transactions: (Continued)
Loans Receivable from Related Parties: (Continued)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
(Unaudited)
<S> <C> <C>
7.0% loan receivable from a corporate stockholder, with sixty (60)
monthly payments of $3,198, including principal and interest, due in
full April 1, 2000; unsecured
(See Note 9). 192,126 192,126
7.0% loan receivable from a corporate stockholder, with sixty (60)
monthly payments of $791, including principal and interest,
due in full April 1, 2000; unsecured. 67,942 67,942
7.0% loan receivable from a corporate stockholder, with sixty (60)
monthly payments of $2,577, including principal and interest, due in
full April 1, 2000; unsecured
(See Note 9). 149,563 149,563
---------- ----------
$ 562,025 $ 562,025
========== ==========
</TABLE>
Based upon the opinion of management of the Company, the above
receivables have been classified as long-term in the accompanying
financial statements.
The Company had commenced litigation to collect the $192,126 and
$149,563 receivables. A counterclaim was filed by the stockholders
alleging wrongful termination. Subsequent to September 30, 1997 the
Company entered into a settlement agreement and mutual release whereby
all claims of the Company and all counterclaims of such stockholders
were dismissed. As a part of such agreement the stockholders agreed to
three year non-compete arrangements with the Company. As such, the
receivables balance will be converted to covenants not-to-compete and
amortized over a three year period.
Accounts Payable - Related Parties:
Accounts payable - related parties consist of amounts owed to an officer
of the Company and to a related entity.
Notes Payable - Related Party:
At December 31, 1996 and September 30, 1997 (unaudited), notes payable
related party consists of a $6,000 non-interest bearing note payable to
a corporate stockholder, due on demand; unsecured.
F-14
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Contracts in Progress:
At December 31, 1996 and September 30, 1997, costs and estimated
earnings in excess of billings and billings in excess of costs and
estimated earnings on uncompleted contracts consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
(Unaudited)
<S> <C> <C>
Costs incurred on uncompleted
contracts $1,536,120 $5,723,270
Profit earned to date 299,123 1,894,354
---------- ----------
1,835,243 7,617,624
Less: billings to date (1,770,816) (5,979,216)
---------- ----------
$ 64,427 $1,638,408
========== ==========
</TABLE>
Included in the accompanying balance sheet under the following captions:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
(Unaudited)
<S> <C> <C>
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 249,546 $1,905,281
Billings in excess of costs
and estimated earnings on
uncompleted contracts (185,119) (266,873)
---------- ----------
$ 64,427 $1,638,408
========== ==========
</TABLE>
6. Property and Equipment:
At December 31, 1996 and September 30, 1997, property and equipment
consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
(Unaudited)
<S> <C> <C>
Building and land $ 373,201 $ 373,201
Furniture and fixtures 192,423 199,205
Vehicles 296,083 908,458
Tools and equipment 4,315,676 4,718,506
Office equipment - 259,709
Leasehold improvements 54,812 199,923
---------- ----------
5,232,195 6,659,002
Less: accumulated depreciation (2,333,140) (3,421,180)
---------- ----------
$2,899,055 $3,237,822
========== ==========
</TABLE>
F-15
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Investment in Limited Partnership:
The Company has a 12.475% ownership interest as a limited partner in the
Rio Verde Ranch Partnership. The partnership's sole activity is the
acquisition and sale of a parcel of raw land which is presently listed
for sale. Prior to the sale of the land, the Company will have future
annual funding requirements of approximately $4,000 per year due on
March 1 of each year through 1998. The investment is recorded at cost,
which management believes approximates market.
8. Notes Payable:
At December 31, 1996 and September 30, 1997 (unaudited), notes payable
consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
(Unaudited)
<S> <C> <C>
Note payable to Wells Fargo Bank on a $1,500,000 revolving line of
credit, interest only payable monthly at Wells Fargo Bank's base rate
plus 3%, due March 1, 1997; collateralized by trade accounts receivable,
property and equipment, and personal guarantees by the Company's
officers. The effective interest rate was 11.75% at December 31,
1996. $ 578,000 $ 338,000
Mortgage note payable to Bank of America, interest at prime plus 2.5%,
payable in variable monthly installments, including principal and
interest, due July 15, 2016;
collateralized by a Deed of Trust. 270,975 268,858
7.4% note payable to Wells Fargo Bank in monthly installments of
$16,513, including principal and interest, due in full on
March 1, 1997; collateralized by equipment. 66,838 -
7.38% note payable to Wells Fargo Bank in monthly installments of
$1,165, including principal and interest, due in full on February 1,
1997; collateralized by
equipment. 3,725 -
7.94% note payable to Wells Fargo Bank in monthly installments of
$4,435, including principal and interest, due in full on April
15, 1997; collateralized by equipment. 17,385 -
8.44% note payable to Wells Fargo Bank in monthly installments of
$1,491, including principal and interest, due in full on May 31, 1997;
collateralized by
equipment. 8,877 -
</TABLE>
F-16
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Notes Payable: (Continued)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
(Unaudited)
<S> <C> <C>
9.23% note payable to Wells Fargo Bank in monthly installments of
$4,816, including principal and interest, due in full on
August 1, 1997; collateralized by equipment. 37,402 -
9.23% note payable to Wells Fargo Bank in monthly installments of
$1,471, including principal and interest, due in full on
May 1, 1998; collateralized by equipment. 14,200 -
10.95% note payable to CIT in monthly installments of $2,512, including
principal and interest, due in full on February 5,
1997; collateralized by equipment. 3,418 -
Note payable to the City of Phoenix in monthly principal installments of
$2,334 plus interest at 6.9%, until paid in full;
collateralized by land and building. 10,081 10,081
8.5% note payable to KDC Financial in monthly installments of $2,911,
including principal and interest, due in full on
May 1, 1998; collateralized by equipment. 46,464 22,561
7.9% note payable to Case Credit Corp. in monthly installments of
$2,684, including principal and interest, due in full on May 1, 1998;
collateralized by equipment and a personal guarantee from an officer
of the Company. 22,531 10,917
10% note payable to Clark Credit Corp. in monthly installments of
$10,433, including principal and interest, due in full on September 22,
1998; collateralized by equipment and a personal guarantee from an
officer of the Company. 208,851 118,670
14.5% note payable to Clark Credit Corp. in monthly installments of
$252, including principal and interest, due in full on October 22, 1998;
collateralized by equipment and a personal guarantee from an officer of
the Company. 4,873 3,047
10.5% note payable to Case Credit Corp. in monthly installments of
$6,093, including principal and interest, due in full on October 16,
1999; collateralized by
equipment. 179,095 136,294
</TABLE>
F-17
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Notes Payable: (Continued)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
(Unaudited)
<S> <C> <C>
8.5% note payable to Atlas Copco in monthly installments of $1,823,
including principal and interest, due in full on December 1,
1999; collateralized by equipment. 57,750 44,658
7.5% note payable to Associates Commercial Corp. in monthly installments
of $1,934, including principal and interest, due in full on April 15,
1998; collateralized
by equipment. 29,354 13,204
6.9% - 8.5% notes payable to financial institutions with monthly
principal and interest payments from $1,065 to $6,712, due in full
through April, 2001;
collateralized by equipment. - 398,588
Note payable to First Tennessee Bank on a $800,000 revolving line of
credit, interest only payable monthly at prime plus 1%, due June 1,
1998; collateralized by accounts
receivable and inventory. - 408,339
---------- ----------
1,559,819 1,773,217
Less: current portion of notes payable (1,014,986) (1,122,466)
---------- ----------
$ 544,833 $ 650,751
========== ==========
</TABLE>
A schedule of future minimum principal payments due on notes payable
outstanding, is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
Year Ending 1996 1997
----------- ---- ----
(Unaudited)
<S> <C> <C>
1997 $1,014,986 $ -
1998 208,765 1,122,466
1999 80,864 203,416
2000 5,826 142,260
2001 6,500 58,286
Subsequent 242,878 246,789
---------- ----------
$1,559,819 $1,773,217
========== ==========
</TABLE>
In addition, as of September 30, 1997 (Unaudited) the Company has outstanding 8%
Convertible Debentures that are convertible into Common Stock at $1.25 per share
commencing October 11, 1997. If not converted, the Debentures are due in full in
February 1998.
F-18
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Obligations Under Capital Leases:
At December 31, 1996 and September 30, 1997, the Company was the lessee
of construction and office equipment, with an original cost of $741,604,
under capital lease agreements expiring through December, 2000.
Minimum future lease payments under the capital leases for each of the
next four (4) years, are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
Year Ending (Unaudited)
-----------
<S> <C> <C>
1997 $ 151,579 $ -
1998 123,890 123,890
1999 123,890 185,315
2000 203,160 185,314
---------- ----------
Total minimum lease payments 602,519 494,519
Less: amount representing interest (108,056) (74,879)
---------- ----------
Present value of net minimum lease
payments 494,463 419,640
Less: current maturities of capital lease
obligations (110,355) (143,332)
---------- ----------
$ 384,108 $ 276,303
========== ==========
</TABLE>
10. Commitments and Contingencies:
Operating Leases:
The Company leases all of its Tennessee facilities under non-cancellable
operating leases, expiring through February, 2006. In addition, the
Company leases vehicles and office equipment under operating lease
agreements, with terms of two (2) to four (4) years. Future minimum
lease payments under long-term operating lease agreements are as
follows:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
Year Ending (Unaudited)
-----------
<S> <C> <C>
1997 $ 132,665 $ -
1998 34,474 351,488
1999 - 253,965
2000 - 226,805
2001 - 233,114
2002 - 239,612
Subsequent - 767,638
---------- ----------
$ 167,139 $2,072,622
========== ==========
</TABLE>
F-19
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Commitments and Contingencies: (Continued)
Operating Leases: (Continued)
For the years ended December 31, 1996 and 1995, total rent expense
approximated $246,186 and $226,972, respectively.
For the nine month periods ended September 30, 1997 and 1996, total rent
expense approximated $276,500 and $184,500, (unaudited) respectively.
Employment Contracts:
The Company has entered into employment contracts with three (3)
officers through August, 1999, which provide for a minimum annual salary
and automobile allowance. In addition, one (1) of the agreements
contains incentives based on the Company's attainment of specified
levels of sales and earnings. As of December 31, 1996 and September 30,
1997, the total commitment was $1,074,150 and $767,250 (unaudited),
respectively.
Litigation:
The Company had filed suit against two (2) stockholders and former
officers of the Company to collect on unpaid promissory notes owed to
the Company. The two stockholders and former officers of the Company had
filed a countersuit against the Company alleging certain counterclaims.
Subsequent to September 30, 1997, the the Company and such stockholders
and former officers entered into a settlement agreement and mutual
release whereby all claims of the Company and all counterclaims of such
stockholders were dismissed. As a part of such agreement the
stockholders agreed to three year non-compete arrangements with the
Company. As such, the receivables balance will be converted to covenants
not-to-compete and amortized over a three year period.
The Company is a defendant in a lawsuit filed by a utility company
alleging that the Company caused damage to its property. Outside counsel
has advised the Company that a favorable outcome is unlikely.
Accordingly, a provision for a loss in the amount of $30,000 has been
charged to operations in the accompanying financial statements for the
year ending December 31, 1996. Subsequent to September 30, 1997, the
claim was settled for an amount less than the estimate provision.
11. Stockholders' Equity:
Preferred Stock:
The Series A 9% preferred shares are convertible into common shares at a
price equal to a thirty percent (30%) discount from the lower of the
average closing bid price of the common stock for the three (3)
consecutive trading days prior to (i) the date of subscription of the
preferred stock or (ii) the date of the conversion of the preferred
stock.
Series B 4% Preferred are convertible into Common Stock at a price equal
to the lower of the Average Stock Price on the date of each monthly
subscription installment or the Discounted Average Stock Price on the
date of conversion. The "Average Stock Price" is the average of the
daily closing bid prices of the Common Stock for the five consecutive
trading days immediately preceding the relevant date. The "Discounted
Average Stock Price" means (i) 70% of the average of the daily closing
bid prices of the Common Stock for the five consecutive trading days
immediately preceding the date of conversion into Common Stock if such
average of the daily prices is below $3.00 per share or (ii) 75% of the
average of such daily prices if the average is above $3.00 per share.
For a one year period after issuance of the Series B Preferred the
Series B Conversion Price will be the lower of $.75 or 50% of the
Average Stock Price. There will be no floor on the Series B Conversion
Price if the Company fails to achieve certain gross profits in any two
consecutive quarters. The Company may redeem the Series B Preferred, in
whole or in part, commencing 60 days after issuance at 150% of the
purchase price of $1,000 per share.
F-20
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Stockholders' Equity: (Continued)
Stock Options, Warrants and Restricted Stock Plans:
On January 7, 1997, the Board of Directors approved the 1997
International Fibercom, Inc. Stock Option Plan. The Plan authorizes the
Company to grant incentive stock options and non-qualified stock options
to key employees of the Company. In addition, the Company has adopted
the 1997 Restricted Stock Plan. This Plan authorizes the granting of
restricted shares of common stock to key employees, consultants,
researchers, and members of the Board. Under the above Plans, 1,200,000
shares of common stock are reserved for issuance.
During the year ended December 31, 1994, the Company adopted the 1994
Incentive Stock Option Plan and the 1994 Restricted Stock Plan. The
Plans authorized the granting of restricted shares of common stock and
common stock options to key employees, consultants, researchers, and
members of the Advisory Board. Under the above Plans, 441,707 shares of
common stock were reserved for issuance.
Following is a summary of the status of the stock option plans during
the year ended December 31, 1996 and the nine month period ended
September 30, 1997 (unaudited):
Weighted
Average
Number Exercise
of Options Price
---------- -----
Outstanding at January 1, 1996 40,000 $ 3.50
Granted in 1996 1,053,000 1.02
--------- -------
Outstanding at December 31, 1996 1,093,000 $ 1.11
Granted in 1997 767,200 2.30
--------- -------
Outstanding at September 30, 1997 1,860,200 $ 1.60
========= =======
Weighted
Average
Remaining
Contractual
Exercise Price Number Life
-------------- ------ ----
$.94 690,000 4.5
1.13 463,000 8.6
1.47 217,200 4.6
3.00 450,000 4.9
3.50 40,000 2.6
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's common stock on the date of
grant. In accordance with accounting for such options utilizing the
intrinsic value method, there is no related compensation expense
recorded in the Company's financial statements for the years ended
December 31, 1996 and 1995 and the nine month periods ended September
30,1997 and 1996. Had compensation cost for stock-based compensation
been determined based on the fair value of the options at the grant
dates consistent with the method of SFAS 123, the Company's net income
(loss) and earnings (loss) per share for the years ended December 31,
1996 and 1995 and the nine month periods ended September 30,1997 and
1996, would have been reduced to the proforma amounts presented below:
<TABLE>
<CAPTION>
December 31, December 31, September 30, September 30,
1996 1997 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income (loss)
As reported $(4,221,115) $(2,188,383) $ 1,266,218 $ (588,549)
Pro forma (4,282,034) (2,192,671) 826,218 (618,549)
Primary earnings (loss) per share:
As reported $ (0.74) $ (0.50) $ 0.10 $ (0.13)
Pro forma (0.75) (0.50) 0.06 (0.14)
Fully diluted earnings (loss) per share:
As reported $ -- $ -- $ 0.09 $ --
Pro forma -- -- 0.05 --
</TABLE>
F-21
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Stockholders' Equity: (Continued)
Stock Options, Warrants and Restricted Stock Plans: (Continued)
The fair value of option grants is estimated as of the date of grant
utilizing the Black-Scholes option-pricing model with the following
weighted average assumptions for grants in 1997 (unaudited), 1996 and
1995, expected life of options of 1-3 years, expected volatility of 70%,
risk-free interest rates of 8.0%, and a 0% dividend yield. The weighted
average fair value at date of grant for options granted during 1997
(unaudited), 1996 and 1995 approximated $.50, $.06 and $.11,
respectively.
The Company issued 1,302,480 Public Warrants in connection with its 1994
public offering. Such Public Warrants are exercisable to purchase one
share of Common Stock at $5.50 until June 5, 1998. The Public Warrants
may be redeemed by the Company upon 30 days' written notice at $.10 per
Warrant, provided that the closing bid quotations of the Common Stock
have averaged at least $8.10 per share for any 20 consecutive trading
days ending on the third day prior to the day on which the Company gives
notice. As of September 30, 1997 none of the Warrants have been
exercised.
The Company also issued 378,443 Series A Warrants in connection with the
Company's 1996 private placement of Series A Preferred. The Series A
Warrants are exercisable to purchase 378,443 shares of Common Stock at a
price of $.82 per share. The Series A Warrants are exercisable until
May, 2001. As of September 30, 1997 none of the Warrants have been
exercised.
In connection with its 1994 public offering of shares of Common Stock
and Public Warrants, the Company also sold to the underwriter of such
offering, at nominal consideration, Underwriter's Warrants exercisable
to purchase 120,000 shares of Common Stock at $8.10 per share of Common
Stock and 120,000 Underwriter's Underlying Warrants at $.15 per
Underwriter's Underlying Warrant, for a total of 240,000 shares. The
Underwriter's Underlying Warrants are exercisable at a price of $7.15
per share and will expire August 11, 1999. The Underwriter's Warrants
were exercisable commencing August 12, 1995 and continuing for four
years thereafter. As of September 30, 1997 none of the Warrants have
been exercised.
In connection with its 1997 private placement of Series B Preferred, the
Company issued 700,000 Series B Warrants. The Series B Warrants are
exercisable to purchase one share of Common Stock at varying exercise
prices depending on the tranche. The exercise price for Warrants issued
with Tranche 1 is $2.25 per share and are exercisable until March 2002,
the exercise price for Warrants issued with Tranche 2 is $2.50 per share
and are exercisable until April 2002 and the exercise price for Warrants
issued with Tranche 3 is $3.00 per share and are exercisable until May
2002. As of September 30, 1997 none of the Warrants have been exercised.
On November 5, 1996, the Company entered into a twenty-five (25) month
consulting agreement to assist the Company with investor communications
and relations. In consideration of the Agreement, the Company granted
its consultant a four (4) year option to purchase 1,900,000 shares of
the Company's common stock, exercisable at $1.12 per share, which
equalled the market price at the grant date. The Company has determined
that the value of the services to be received under this agreement is
$105,000, which is being amortized over the term of the agreement. The
options become exercisable on January 1, 1998.
In June, 1996, the Company entered into an agreement with a securities
broker-dealer to provide its services to seek potential acquisitions. In
consideration for the agreement, the Company granted the broker-dealer
warrants to purchase 300,000 shares of the Company's common stock for a
period of three (3) years. There are 150,000 warrants exercisable at two
dollars ($2) per share, and 150,000 warrants exercisable at four dollars
($4) per share, with a weighted average exercise price of three dollars
($3) per share. The Company has determined that the value of the
services to be received under this agreement is $5,000, which is being
amortized over the term of the agreement. As of December 31, 1996, none
of the warrants had been exercised.
12. Income Taxes and Deferred Income Taxes:
There is no provision for income taxes payable for tax reporting
purposes due to net operating losses for the years ended December 31,
1996 and 1995, and for the nine month period ended September 30, 1996.
For the period ended September 30, 1997, there is no provision for
income taxes due to the utilization of net operating loss carryforwards
in the approximate amount of $450,000.
F-22
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes and Deferred Income Taxes: (Continued)
As of December 31, 1996 and September 30, 1997 (unaudited), the
components of deferred income taxes, are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
(Unaudited)
<S> <C> <C>
Long-Term
Depreciation $ (280,000) $ (300,000)
Benefit of net operating loss
carryforward 1,500,000 1,050,000
----------- ----------
1,220,000 750,000
Less: valuation allowance (1,220,000) (750,000)
----------- ----------
Total Deferred Taxes $ - $ -
=========== ==========
</TABLE>
The Company has established a valuation allowance equal to the full
amount of the deferred tax asset as a result of its recent operating
losses.
At December 31, 1996 and September 30, 1997 (unaudited), the Company had
federal and state net operating loss carryforwards in the approximate
amounts of $4,300,000 and $3,850,000, respectively, available to offset
future federal and state taxable income primarily through December 31,
2011.
13. Provision for Doubtful Accounts:
Included in the provision for doubtful accounts expense in the amount of
$387,952 for the year ended December 31, 1995, is approximately $350,000
which the Company incurred for development costs and progress billings
on various projects with the Government of Romania, Ministries of
Transport and Communications, and the Credit Bank of Romania. It is
management's belief that this relationship, which is primarily for
fiber-optic engineering and installation with Romania, will eventually
be realized. However, the receivable has been written off as of December
31, 1995 due to the lack of financial performance over the last year on
the part of the Government of Romania.
14. Major Customers:
For the year ended December 31, 1996, the Company had three (3) major
customers representing 45%, 12%, and 10% of revenues, respectively. At
December 31, 1996, the amount due from the three (3) customers included
in accounts receivable was $1,186,713.
For the year ended December 31, 1995, the Company had five (5) major
customers representing 24%, 15%, 13%, 12%, and 11% of revenues,
respectively.
F-23
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Major Customers: (Continued)
For the nine month period ended September 30, 1997 (unaudited), the
Company had one (1) major customer representing 32%, of revenues. At
September 30, 1997 (unaudited), the amount due from the customer
included in accounts receivable was approximately $2,230,000.
For the nine month period ended September 30, 1996 (unaudited), the
Company had three (3) major customers representing 44%, 11%, and 10% of
revenues, respectively.
15. Statements of Cash Flows:
Non-Cash Investing and Financing Activities:
During the year ended December 31, 1996, the Company recognized
investing and financing activities that affected its assets,
liabilities, and stockholders' equity, but did not result in cash
receipts or payments.
These non-cash activities are as follows:
Financed the purchase of construction equipment in the amount of
$288,138, through the issuance of notes payable.
Goodwill was written off in the amount of $2,677,490.
Converted 1,328 shares of preferred stock in the amount of $1,108,744
into 1,821,257 shares of common stock.
Issued 155,470 shares of common stock valued at $171,303, as a
preferred stock dividend.
Accrued interest on loans receivable from related parties, in the
amount of $13,746 was added to the principal balance.
Issued common stock options and warrants for services rendered in the
cumulative amount of $110,000 (See Note 10).
During the year ended December 31, 1995, the Company recognized
investing and financing activities that affected its assets and
liabilities, but did not result in cash receipts or payments. These
non-cash activities are as follows:
Financed the purchase of construction and office equipment in the
amount of $1,080,627, through the issuance of notes payable and
capital leases.
Issued 2,750 shares of preferred stock for a $2,373,500 subscription
receivable, and accrued costs in relation to the offering of $77,118.
Accrued interest on loans receivable from related parties, in the
amount of $46,855 was added to the principal balance.
F-24
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Statements of Cash Flows: (Continued)
Non-Cash Investing and Financing Activities: (Continued)
During the nine month period ended September 30, 1997, the Company
recognized investing and financing activities that affected its assets
and liabilities, but did not result in cash receipts or payments. These
non-cash activities are as follows:
Financed the purchase of equipment in the amount of $430,000 through
the issuance of notes payable.
Financed the purchase of Concepts in Communication, Incorporated
through the issuance of preferred stock, and convertible debentures,
and a note payable in the approximate amount of $4,500,000.
Issued common stock as payment for debt in the amount of $202,708.
Issued 67,057 shares of common stock valued at $148,063 as a
preferred stock dividend.
16. Unaudited Proforma Condensed Consolidated Financial Statements:
The following unaudited pro forma condensed consolidated financial
statements give effect to the acquisition by International FiberCom,
Inc. of Southern Communications Products, Inc. pursuant to the Asset
Purchase and Sale Agreement between the parties, and are based on the
estimates and assumptions set forth herein and in the notes to such
statements. This pro forma information has been prepared utilizing the
historical financial statements and notes thereto, which are
incorporated by reference herein. The pro forma financial data does not
purport to be indicative of the results which actually would have been
obtained had the purchase been effected on the dates indicated or of the
results which may be obtained in the future.
The pro forma financial information is based on the purchase method of
accounting for the acquisition of Southern Communications Products, Inc.
The pro forma entries are described in the accompanying footnotes to the
unaudited pro forma condensed consolidated financial statements. The pro
forma unaudited condensed consolidated statements of operations assume
the acquisition took place on the first day of the period presented,
while the unaudited proforma condensed consolidated balance sheet
assumes the acquisition took place on the balance sheet date.
Acquisition:
Effective October 1, 1997, International FiberCom, Inc., acquired
Southern Communications Products, Inc., a privately-held Marianna,
Florida based company. Under the terms of the agreement, the Company
acquired all of the assets and liabilities of Southern Communications
Products, Inc. for approximately $21.4 million, comprised of $12 million
in cash, $6.2 million in common stock, and $3.2 million in a promissory
note.
F-25
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARY
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
September 30, 1997
Pro forma Financial Information:
The following represents a pro forma condensed consolidated balance sheet as of
September 30, 1997, assuming the Company's acquisition of Southern
Communications Products, Inc. was consummated as of that date.
<TABLE>
<CAPTION>
ASSETS
International
FiberCom, Southern Proforma
Inc. and Communications, Proforma Consolidated
Subsidiaries Products, Inc. Adjustments Amounts
------------ -------------- ----------- -------
<S> <C> <C> <C> <C>
Current Assets:
Cash $ 69,478 $ 671,477 $(12,000,000) (2) $ 2,135,955
13,395,000 (1)
Accounts receivable, net 5,968,167 741,040 6,709,207
Inventory 621,686 1,608,329 2,230,015
Other current assets 215,182 - 215,182
Costs and estimated earnings
in excess of uncompleted
contracts 1,905,281 - 1,905,281
----------- ----------- -----------
Total Current Assets 8,779,794 3,020,846 13,195,640
Property and Equipment, Net 3,237,822 354,714 3,592,536
Loans Receivable from Related Parties 562,025 - 562,025
Other Assets, Net 236,969 633 237,602
Goodwill, Net 1,555,103 - 18,394,752 (2) 19,949,855
----------- ----------- -----------
Total Assets $14,371,713 $ 3,376,193 $37,537,658
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt - current portion $ 1,271,803 $ - $ 1,271,803
Accounts payable 2,048,522 175,060 2,223,582
Accrued expenses 1,342,605 195,885 1,538,490
Billings in excess of costs
and estimated earnings on
uncompleted contracts 266,873 - 266,873
----------- ----------- -----------
Total Current Liabilities 4,929,803 370,945 5,300,748
Long-Term Liabilities:
Long-term debt 927,054 - 4,127,054
Convertible debentures 1,500,000 - 1,500,000
Stockholders' Equity 7,014,856 3,005,248 3,200,000 (2) 26,609,856
13,395,000 (1)
6,200,000 (2)
(3,005,248) (2)
----------- ----------- -----------
Total Liabilities and
Stockholders' Equity $14,371,713 $ 3,376,193 $37,537,658
=========== =========== ===========
</TABLE>
(1) Record the issuance of 2,700,000 shares of common stock sold in a private
placement to raise the funds for the acquisition.
(2) Record the purchase for $12 million cash, $3.2 million promissory note, and
$6.2 million in common stock.
F-26
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For The Year Ended December 31, 1996
Proforma Consolidated Financial Statements:
The following represents proforma condensed statements of operations for the
year ended December 31, 1996, assuming the acquisition of Concepts In
Communications, Incorporated and Southern Communications Products, Inc. was
consummated as of January 1, 1996.
<TABLE>
<CAPTION>
International
FiberCom, Concepts In Southern Proforma
Inc. and Communications, Communications Proforma Consolidated
Subsidiaries Incorporated (1) Products, Inc. Adjustments Amounts
------------ ------------ -------------- ----------- -------
<S> <C> <C> <C> <C> <C>
Contract Revenues $12,161,263 $14,426,376 $15,566,050 $42,153,689
Cost of Contract Revenues (11,387,706) (10,610,612) (4,483,609) (26,481,927)
----------- ----------- ----------- -----------
Gross Profit 773,557 3,815,764 11,082,441 15,671,762
General and Administrative
Expenses (2,261,694) (2,931,202) (1,552,120) $(1,334,803) (2) (8,079,819)
Goodwill Impairment (2,677,490) - - (2,677,490)
----------- ----------- ----------- -----------
Income (Loss) from Operations (4,165,627) 884,562 9,530,321 4,914,453
Other Income (Expense): 115,815 (57,400) 47,467 (376,000) (3) (270,118)
----------- ----------- ----------- -----------
Net Income (Loss) before
Benefit for Income Taxes (4,049,812) 827,162 9,577,788 4,644,335
Benefit (Provision) for
Income Taxes - (324,066) (3,831,115) 2,297,451 (4) (1,857,730)
----------- ----------- ----------- -----------
Net Income (Loss) (4,049,812) 503,096 5,746,673 2,786,605
Preferred Stock Dividends (171,303) - - (132,000) (3) (303,303)
----------- ----------- ----------- -----------
Net Income (Loss) Attribu-
table to Common
Stockholders $(4,221,115) $ 503,096 $ 5,746,673 $ 2,483,302
=========== =========== =========== ===========
Earnings (Loss) per Share
Primary $ (0.74) $ .17
=========== ===========
Fully Diluted N/A $ .17
=========== ===========
Weighted Average Number of
Shares Outstanding
Primary 5,716,600 16,348,266
=========== ===========
Fully Diluted N/A 16,348,266
=========== ===========
</TABLE>
(1) To present pro forma activity of Concepts in Communication, Incorporated
acquired effective January 1, 1997.
(2) To amortize goodwill in connection with the purchase of Southern
Communications Products, Inc. on a straight-line basis over fifteen years.
(3) To record interest on the convertible subordinated debentures, the note
payable, and the dividend on the preferred stock issued to fund the
acquisitions.
(4) To revise the provision for income taxes based on the foregoing proforma
results of operations.
F-27
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For The Nine Month Period Ended September 30, 1997
Proforma Consolidated Financial Statements:
The following represents proforma condensed statements of operations for the
nine month period ended September 30, 1997, assuming the acquisition of Southern
Communications Products, Inc. was consummated as of January 1, 1997.
<TABLE>
<CAPTION>
International
FiberCom, Southern Proforma
Inc. and Communications, Proforma Consolidated
Subsidiaries Products, Inc. Adjustments Amounts
------------ -------------- ----------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Contract Revenues $20,362,396 $ 8,486,849 $28,849,245
Cost of Contract Revenues (15,779,368) (2,755,785) (18,535,153)
----------- ----------- -----------
Gross Profit 4,583,028 5,731,064 10,314,092
General and Administrative Expenses (3,294,137) (1,191,856) $ (920,000) (1) (5,405,993)
----------- ----------- -----------
Income from Operations 1,288,891 4,539,208 4,908,099
Other Income (Expense): 125,390 17,741 (190,000) (2) (46,869)
----------- ----------- -----------
Net Income before Provision
for Income Taxes 1,414,281 4,556,949 4,861,230
Benefit (Provision) for Income Taxes - (1,822,780) (121,720) (3) (1,944,500)
----------- ----------- -----------
Net Income 1,414,281 2,734,169 2,916,730
Preferred Stock Dividends (148,063) - (148,063)
----------- ----------- -----------
Net Income Attributable to
Common Stockholders $ 1,266,218 $ 2,734,169 $ 2,768,667
=========== =========== ===========
Earnings per Share:
Primary (4) $ .10 $ .14
=========== ===========
Fully Diluted $ .09 $ .13
=========== ===========
Weighted Average Number of
Shares Outstanding
Primary 14,437,109 19,536,770
=========== ===========
Fully Diluted 15,860,068 20,959,729
=========== ===========
</TABLE>
(1) To amortize goodwill in connection with the purchase of Concepts In
Communications, Incorporated on a straight-line basis over fifteen years.
(2) To revise the provision for income taxes based on the foregoing proforma
results of operations.
(3) To record interest on the convertible subordinated debentures and the
dividend on the preferred stock issued to fund the acquisition.
(4) If presented in accordance with Statements of Financial Accounting Standards
No. 128 "Earnings per Share" (SFAS No. 128), the Company would have reported
basic earnings per share of $.22 on a pro forma basis for the nine month
period ended September 30, 1997.
F-28
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
To The Stockholders and Board of Directors of
Southern Communications Products, Inc.
We have audited the accompanying balance sheets of Southern Communications
Products, Inc. as of September 30, 1997 and December 31, 1996, and the related
statements of operations, changes in stockholders' equity, and cash flows for
the nine month period ended September 30, 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southern Communications
Products, Inc. as of September 30, 1997 and December 31, 1996, and the results
of its operations, changes in stockholders' equity, and its cash flows for the
nine month period ended September 30, 1997, and for the year ended December 31,
1996 in conformity with generally accepted accounting principles.
Semple & Cooper, LLP
Certified Public Accountants
November 20, 1997
F-29
<PAGE>
SOUTHERN COMMUNICATIONS PRODUCTS, INC.
BALANCE SHEETS
ASSETS
December 31, September 30,
1996 1997
---- ----
Current Assets:
Cash and cash equivalents (Notes 1 and 2) $2,524,314 $ 671,477
Accounts receivable - trade, net (Notes 1 and 7) 632,874 741,040
Loan receivable - current portion (Note 3) 8,001 --
Inventory, net (Notes 1 and 4) 935,000 1,608,329
---------- ----------
Total Current Assets 4,100,189 3,020,846
Property and Equipment, net (Notes 1 and 5) 327,155 354,714
Other Assets:
Loan receivable, less current portion (Note 3) 38,551 --
Refundable deposits 633 633
---------- ----------
Total Assets $4,466,528 $3,376,193
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Note 7) $ 547,917 $ 175,060
Accrued expenses 16,108 10,682
Accrued dividends -- 185,203
---------- ----------
Total Current Liabilities 564,025 370,945
---------- ----------
Commitments and Contingencies (Note 6) -- --
Stockholders' Equity:
Common stock, $1 par value; 7,500 shares authorized;
2,000 shares issued and outstanding 2,000 2,000
Retained earnings 3,900,503 3,003,248
---------- ----------
Total Stockholders' Equity 3,902,503 3,005,248
---------- ----------
Total Liabilities and Stockholders' Equity $4,466,528 $3,376,193
========== ==========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-30
<PAGE>
SOUTHERN COMMUNICATIONS PRODUCTS, INC.
STATEMENT OF OPERATIONS
December 31, September 30,
1996 1997
---- ----
Revenues $15,566,050 $ 8,486,849
Cost of Revenues 4,483,609 2,755,785
----------- -----------
Gross Profit 11,082,441 5,731,064
General and Administrative Expenses 1,552,120 1,191,856
----------- -----------
Income from Operations 9,530,321 4,539,208
----------- -----------
Other Income (Expense):
Interest income 47,317 40,736
Gain (loss) on sale of fixed assets 150 (22,995)
----------- -----------
47,467 17,741
----------- -----------
Net Income before Pro Forma Income Taxes 9,577,788 4,556,949
Pro Forma Income Taxes (unaudited) (Note 10) 3,831,115 1,822,780
----------- -----------
Pro Forma Net Income (unaudited) $ 5,746,673 $ 2,734,169
=========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-31
<PAGE>
SOUTHERN COMMUNICATIONS PRODUCTS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
------------- Total
Shares Retained Stockholders'
Issued Amount Earnings Equity
------ ------ -------- ------
Stockholders'
equity,
December 31,
1995 2,000 $2,000 $ 1,405,879 $ 1,407,879
Dividends paid -- -- (7,083,164) (7,083,164)
Net income for
the year ended
December 31,
1996 -- -- 9,577,788 9,577,788
----- ------ ----------- -----------
Stockholders'
equity,
December 31,
1996 2,000 2,000 3,900,503 3,902,503
Dividends paid -- -- (5,454,204) (5,454,204)
Net income for
the nine month
period ended
September 30,
1997 -- -- 4,556,949 4,556,949
----- ------ ----------- -----------
Stockholders'
equity,
September 30,
1997 2,000 $2,000 $ 3,003,248 $ 3,005,248
===== ====== =========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-32
<PAGE>
SOUTHERN COMMUNICATIONS PRODUCTS, INC.
STATEMENT OF CASH FLOWS
December 31, September 30,
1996 1997
---- ----
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $ 15,959,151 $ 8,378,683
Cash paid to suppliers and employees (6,817,062) (4,975,144)
Interest received 47,317 40,736
------------ -----------
Net cash provided by operating activities 9,189,406 3,444,275
------------ -----------
Cash flows from investing activities:
Collection of loan receivable 3,448 4,292
Disbursement for loan receivable (50,000) --
Purchase of property and equipment (113,102) (109,448)
Proceeds from sale of fixed assets 6,390 26,825
------------ -----------
Net cash used by investing activities (153,264) (78,331)
------------ -----------
Cash flows from financing activities:
Dividends paid (7,083,164) (5,218,781)
------------ -----------
Net cash used by financing activities (7,083,164) (5,218,781)
------------ -----------
Net increase (decrease) in cash and cash equivalents 1,952,978 (1,852,837)
Cash and cash equivalents at beginning of period 571,336 2,524,314
------------ -----------
Cash and cash equivalents at end of period $ 2,524,314 $ 671,477
============ ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net Income $ 9,577,788 $ 4,556,949
------------ -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 61,250 24,109
(Gain) loss on sale of fixed assets (150) 22,995
Changes in Assets and Liabilities:
Accounts receivable 393,101 (108,166)
Inventory (199,167) (673,329)
Refundable deposits (145) --
Accounts payable (654,166) (372,857)
Accrued expenses 10,895 (5,426)
------------ -----------
(388,382) (1,112,674)
------------ -----------
Net Cash Provided by Operating Activities $ 9,189,406 $ 3,444,275
============ ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-33
<PAGE>
SOUTHERN COMMUNICATIONS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, Nature of Operations and Use
of Estimates:
Nature of Corporation:
Southern Communications Products, Inc. (the Company) is a Corporation
which was duly formed and organized under the laws of the State of
Florida on December 20, 1994. Prior to that time, the Company operated
as a sole proprietorship. The Company's principal business purpose is to
sell surplus new and used telephone equipment to telephone service
providers and other vendors throughout the United States. Effective
October 1, 1997, the business was sold to International FiberCom, Inc.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Interim Financial Information:
The interim financial statements for the nine month period ended
September 30, 1996 are unaudited. In the opinion of management, such
statements reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the results of the
interim period. The results of operations for the nine month period
ended September 30, 1997 are not necessarily indicative of the results
for the entire year.
Cash and Cash Equivalents:
Cash and cash equivalents are considered to be all highly liquid
investments purchased with an initial maturity of three (3) months or
less.
Accounts Receivable:
Accounts receivable represent amounts billed but uncollected for sales
of telephone equipment.
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense
based on a review of the individual accounts outstanding, and the
Company's prior history of uncollectible accounts receivable. For the
nine month period ended September 30, 1997 and for the year ended
December 31, 1996, no allowance has been established for potentially
uncollectible accounts receivable, as management believes that all
accounts are fully collectible.
Inventory:
Inventory, composed of new and used telephone equipment, is stated at
the lower of cost (weighted average method) or market. The Company
periodically reviews its inventory and makes a provision for damaged or
obsolete inventory.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line and accelerated methods over the estimated
useful lives of the assets. Maintenance and repairs that neither
materially add to the value of the property nor appreciably prolong its
life are charged to expense as incurred. Betterments or renewals are
capitalized when incurred. The estimated useful lives for asset
classifications, are as follows:
Furniture and fixtures 5-7 years
Machinery and equipment 5-7 years
Vehicles 5 years
Leasehold improvements 10-15 years
Buildings 39 years
F-34
<PAGE>
SOUTHERN COMMUNICATIONS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and Use
of Estimates: (Continued)
Income Taxes:
For federal tax reporting purposes, the Company operates as a
Sub-chapter S Corporation. As such, all taxable income and available tax
credits are passed from the corporate entity to the individual
stockholders. It is the responsibility of the individual stockholders to
report the taxable income and related tax credits, if any, and to pay
any resulting income taxes. Therefore, as of September 30, 1997 and
December 31, 1996, there were no provisions made for federal or state
income taxes payable.
2. Concentration of Credit Risk:
The Company maintains cash and cash equivalents at two (2) financial
institutions. Deposits not to exceed $100,000 at each financial
institution are insured by the Federal Deposit Insurance Corporation.
For the nine month period ended September 30, 1997 and for the year
ended December 31, 1996, the Company had uninsured cash and cash
equivalents in the approximate amounts of $490,500 and $2,284,000,
respectively.
3. Loan Receivable:
At December 31, 1996, the loan receivable consists of the following:
<TABLE>
<S> <C>
8% loan receivable from a former employee in monthly installments of
$1,014, including principal and interest, due August, 2001;
unsecured. $ 46,552
Less: current portion of long-term loan receivable (8,001)
----------
$ 38,551
==========
</TABLE>
A schedule of future minimum principal payments due from the loan
receivable outstanding at December 31, 1996, is as follows:
Year Ending
December 31, Amount
------------ ------
1997 $ 8,001
1998 9,422
1999 10,204
2000 11,052
2001 7,873
----------
$ 46,552
==========
4. Inventory:
At September 30, 1997 and December 31, 1996, inventory consists of the
following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
<S> <C> <C>
New and used telephone equipment $ 1,984,912 $ 3,164,331
Less: allowance for obsolete
inventory (1,049,912) (1,556,002)
----------- -----------
$ 935,000 $ 1,608,329
=========== ===========
</TABLE>
F-35
<PAGE>
SOUTHERN COMMUNICATIONS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. Inventory: (Continued)
The allowance for obsolete inventory is based on management's best
estimate. Due to the market that the Company operates in, it is
reasonably possible that this estimate may change within one year.
5. Property and Equipment:
At September 30, 1997 and December 31, 1996, property and equipment
consist of the following:
December 31, September 30,
1996 1997
---- ----
Furniture and fixtures $ 51,151 $ 65,922
Machinery and equipment 11,160 28,414
Vehicles 90,669 -
Leasehold improvements 149,209 226,633
Buildings 119,333 119,333
---------- ----------
421,522 440,302
Less: accumulated
depreciation (94,367) (85,588)
---------- ----------
$ 327,155 $ 354,714
========== ==========
6. Commitments and Contingencies:
Operating Leases:
The Company leases office space and equipment under operating lease
agreements, with terms of three (3) to four (4) years. Future minimum
lease payments under long-term operating lease agreements at September
30, 1997 and December 31, 1996, are as follows:
Year Ending Year Ending
Year December 31, September 30
---- ------------ ------------
1997 $ 9,133 $ -
1998 5,474 9,133
1999 732 987
---------- ----------
$ 15,339 $ 10,120
========== ==========
The Company also leases office and warehouse facilities on
month-to-month terms from the stockholders of the Company.
For the nine month period ended September 30, 1997 and for the year
ended December 31, 1996, rent expense totalled $83,707 and $23,907,
respectively.
7. Major Customers and Vendors:
For the nine month period ended September 30, 1997 and for the year
ended December 31, 1996, the Company had two (2) major customers
representing the following percentages of revenues: twenty-three percent
(23%) and twenty-two percent (22%); and eleven percent (11%) and ten
percent (10%), respectively. At September 30, 1997 and December 31,
1996, the amounts due from the two (2) customers included in accounts
receivable totalled $2,049 and $176,043, respectively.
F-36
<PAGE>
SOUTHERN COMMUNICATIONS PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Major Customers and Vendors: (Continued)
For the nine month period ended September 30, 1997 and for the year
ended December 31, 1996, the Company had three (3) and two (2) major
vendors representing the following percentages of total purchases:
fourteen percent (14%), twelve percent (12%) and thirty-five percent
(35%); forty-eight percent (48%) and twenty-three percent (23%),
respectively. At September 30, 1997 and December 31, 1996, the amounts
due to the three and two vendors included in accounts payable were
$35,700 and $94,492, respectively.
8. Fair Value of Financial Instruments:
The carrying amounts of financial instruments including accounts
receivable, loans receivable, and other current maturities of accounts
payable and accrued expenses, approximate fair value because of their
short maturity.
9. Statements of Cash Flows:
During the nine month period ended September 30, 1997, the Company
recognized financing activities that affected assets and stockholders'
equity, but did not result in cash payments. For the nine month period
ended September 30, 1997, these non-cash activities are as follows:
The Company paid dividends to the stockholder in the amount of
$42,260 through the transfer of a loan receivable to the stockholder
individually.
The Company paid dividends to the stockholder in the amount of $7,960
through the transfer of a vehicle at net book value to the
stockholder individually.
The Company accrued dividends of $185,203, payable to the
stockholder.
10. Subsequent Events:
Pending Sale:
Effective October 1, 1997, the Company sold one hundred percent (100%)
of the assets and liabilities of the business to International FiberCom,
Inc., an Arizona publicly-traded Corporation. The accompanying
statements of operations present pro forma income tax expense and pro
forma net income, representing the effect the change in the status from
an S corporation to a C corporation would have on earnings as if the
acquisition had occurred prior to September 30, 1997.
F-37
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the offer made by this Prospectus. If given or made, such
information or representation must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer of any securities
other than the registered securities to which it relates or an offer to any
person in any jurisdiction in which such an offer would be unlawful. Neither
delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create an implication that information contained herein is correct
as of any time subsequent to the date of this Prospectus.
- ---------------
TABLE OF CONTENTS
Page
Available Information.......................... 3
Incorporation by Reference..................... 3
Prospectus Summary............................. 4
Risk Factors................................... 10
Determination of Offering Price................ 17
Market for Common Equity and
Related Stockholder Matters................... 17
Selected Consolidated Financial Data........... 18
Management's Discussion and Analysis........... 20
Business....................................... 27
Management..................................... 36
Executive Compensation......................... 38
Certain Relationships and Related
Transactions.................................. 38
Limitation of Liability and
Indemnification Matters....................... 39
Security Ownership of Certain
Beneficial Owners and Management.............. 40
Selling Shareholders........................... 42
Plan of Distribution........................... 46
Description of Securities...................... 47
Legal Matters.................................. 51
Experts........................................ 52
Financial Statements........................... F-1
================================================================================
<PAGE>
================================================================================
INTERNATIONAL
FIBERCOM, INC.
12,752,317 Shares
no par value
PROSPECTUS
January ____, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Directors and Officers.
ARTICLE XII of the Articles of Incorporation of the Registrant provides as
follows:
The Corporation shall indemnify any person against expenses, including
without limitation, attorney's fees, judgements, fines and amounts paid in
settlement, actually and reasonably incurred by reason of the fact that he or
she is or was a director, officer, employee or agent of the Corporation or is or
was serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, in all circumstances in which, to the extent that, such
indemnification is specifically permitted and provided for by the laws of the
State of Arizona as then in effect.
ARTICLE XII of the Bylaws of the registrant provide as follows:
12.01 Indemnification. To the full extent permitted by Arizona law, the
Corporation shall indemnify and pay the expenses of any person who is or was
made, or threatened to be made, a party to an action or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact that he
is or was a director, officer, employee, trustee or agent of or for the
Corporation or is or was serving at the request or with the prior approval of
the Corporation as a director, officer, employee, trustee or agent of another
corporation, trust or enterprise, against any liability asserted against him and
incurred by him in any capacity or arising out of his status as such, whether or
not the Corporation would have the power to indemnify him against such liability
under the provisions of these Bylaws.
Section 10-202(B)(1) and Chapter 8, Article 5 (Section 10-850 et seq.) of the
General Corporation Law of Arizona, as amended, apply to registrant and provide
as follows:
Section 10-202(B). The articles of incorporation shall set forth:
1. If elected by the incorporators, a provision eliminating or limiting
the liability of a director to the corporation or its shareholders for
money damages for any action taken or any failure to take any action as
a director, except for any of the following:
(a) The amount of any financial benefit received by a director
to which the director is not entitled.
(b) An intentional infliction of harm on the corporation or
the shareholders.
(c) A violation of Section 10-833.
(d) An intentional violation of criminal law.
As indicated above, the Registrant has included in its Articles of
Incorporation a provision limiting director liability in accordance with the
statute.
Chapter 8 -- Directors and Officers, Article 5 -- Indemnification.
Section 10-850. Definitions
II-2
<PAGE>
1. "Corporation" includes any domestic or foreign predecessor entity of a
corporation in a merger or other transaction in which the predecessor's
existence ceased on consummation of the transaction.
2. "Director" means an individual who is or was a director of a corporation or
an individual who, while a director of a corporation, is or was serving at the
corporation's request as a director, officer, partner, trustee, employee or
agent of another foreign or domestic corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise. A director is considered to be
serving an employee benefit plan at the corporation's request if his duties to
the corporation also impose duties on or otherwise involve services by him to
the plan or to participants in or beneficiaries of the plan. Director includes
the estate or personal representative of a director.
3. "Expenses" includes attorney fees and all other costs and expenses reasonably
related to a proceeding.
4. "Liability" means the obligation to pay a judgment, settlement, penalty or
fine, including an excise tax assessed with respect to an employee benefit plan,
or reasonable expenses incurred with respect to a proceeding and includes
obligations and expenses than have not yet been paid by the indemnified person
but that have been or may be incurred.
5. "Official capacity" means, if used with respect to a director, the office of
director in a corporation and, if used with respect to an individual other than
a director, as contemplated in Section 10-856, the office in a corporation held
by the officer or the employment or agency relationship undertaken by the
employee or agent on behalf of the corporation. Official capacity does not
include service for any other foreign or domestic corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise.
6. "Outside director" means a director who, when serving as a director, was not
an officer, employee or holder of more than five per cent of the outstanding
shares of any class of stock of the corporation.
7. "Party" includes an individual who was, is or is threatened to be made a
named defendant or respondent in a proceeding.
8. "Proceeding" means any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative and whether
formal or informal.
Section 10-851. Authority to indemnify
A. Except as provided in subsection D of this section and in Section 10-854, a
corporation may indemnify an individual made a party to a proceeding because the
individual is or was a director against liability incurred in the proceeding if
all of the following conditions exist:
1. The individual's conduct was in good faith
2. The individual reasonably believed:
(a) In the case of conduct in an official capacity with the
corporation, that the conduct was in its best interests.
(b) In all other cases, that the conduct was at least not
opposed to its best interests.
3. In the case of any criminal proceedings, the individual had no
reasonable cause to believe the conduct was unlawful
II-3
<PAGE>
B. A director's conduct with respect to an employee benefit plan for a purpose
reasonably believed to be in the interests of the participants in and
beneficiaries of the plan is conduct that satisfies the requirements of
subsection A, paragraph 2, subdivision (a) of this section.
C. The termination of a proceeding by judgment, order, settlement or conviction
or on a plea of no contest or its equivalent is not of itself determinative that
the director did not meet the standard of conduct described in this section.
D. A corporation may not indemnify a director under this section either:
1. In connection with a proceeding by or in the right of corporation in
which the director was adjudged liable to the corporation.
2. In connection with any other proceeding charging improper personal
benefit to the director, whether or not involving action in the
director's official capacity, in which the director was adjudged liable
on the basis that personal benefit was improperly received by the
director.
E. Indemnification permitted under this section in connection with a proceeding
by or in right of the corporation is limited to reasonable expenses incurred
during the proceeding.
Section 10-852. Mandatory indemnification
A. Unless limited by its articles of incorporation, a corporation shall
indemnify a director who was the prevailing party, on the merits or otherwise,
in the defense of any proceeding to which the director was a party because the
director is or was a director of the corporation against reasonable expenses
incurred by the director in connection with the proceeding.
B. Unless limited by its articles of incorporation, Section 10-851, subsection D
or subsection C of this section, a corporation shall indemnify an outside
director against liability. Unless limited by its articles of incorporation or
subsection C of this section, a corporation shall pay an outside director's
expenses in advance of a final disposition of the proceeding, if the director
furnishes the corporation with a written affirmation of the director's good
faith belief that the director met the standard of conduct described in Section
10-851, subsection A and the director furnishes the corporation with a written
undertaking executed personally, or on the director's behalf, to repay the
advance if it is ultimately determined that the director did not meet the
standard of conduct. The undertaking required by this subsection is an unlimited
general obligation of the director but need not be secured and shall be accepted
without reference to the director's financial ability to make repayment.
C. A corporation shall not provide the indemnification or advance
payment of expenses described in subsection B if this section if a
court of competent jurisdiction has determined before payment that the
outside director failed to meet the standards described in Section
10-851, subsection A, and a court of competent jurisdiction does not
otherwise authorize payment of indemnification or expenses under
subsection B of this section for more than sixty days after a request
is made unless ordered to do so by a court of competent jurisdiction.
Section 10-853. Advance for expenses
A. A corporation may pay for or reimburse the reasonable expenses incurred by a
director who is a party to a proceeding in advance of final disposition of the
proceeding if the following conditions exist:
1. The director furnishes the corporation with a written affirmation of
the director's good faith belief that the director met the standard of
conduct described in Section 10-851.
II-4
<PAGE>
2. The director furnishes the corporation with a written undertaking
executed personally, or on the director's behalf, to repay the advance
if it is ultimately determined that the director did not meet the
standard of conduct.
3. A determination is made that the facts then known to those making
the determination would not preclude indemnification under this
article.
B. The undertaking required by subsection A, paragraph 2 of this section is an
unlimited general obligation of the director but need not be secured and shall
be accepted without reference to the director's financial ability to make
repayment.
C. Determinations and authorizations of payments under this section shall be
made in the manner specified in Section 10-855.
D. This section does not apply to the advancement of expenses to or for the
benefit of an outside director. Advances to outside directors shall be made
pursuant to Section 10-852.
Section 10-854. Court ordered indemnification
Unless the corporation's articles of incorporation provide otherwise, a director
of the corporation who is a party to a proceeding may apply for indemnification
to the court conducting the proceeding or to another court of competent
jurisdiction. On receipt of an application, the court after giving notice the
court considers necessary may order indemnification if it determines either:
1. The director is entitled to mandatory indemnification under Section
10-852, in which case the court shall also order the corporation to pay
the director's reasonable expenses incurred to obtain court ordered
indemnification.
2. The director is fairly and reasonably entitled to indemnification in
view of all the relevant circumstances, whether or not the director met
the standard of conduct set forth in Section 10-851 or was adjudged
liable as described in Section 10-851, subsection D, but if the
director was adjudged liable under Section 10-851, subsection D,
indemnification is limited to reasonable expenses incurred.
Section 10-855. Determination and authorization of indemnification
A. A corporation may not indemnify a director under Section 10-851 unless
authorized in the specific case after determination has been made that
indemnification of the director is permissible in the circumstances because the
director has met the standard of conduct set forth in Section 10-851.
B. The determination shall be made either:
1. By the board of directors by a majority vote of the directors not at
the time parties to the proceeding.
2. By special legal counsel:
(a) Selected by majority vote of the disinterested directors.
(b) If there are no disinterested directors, selected by
majority vote of the board.
3. By the shareholders, but shares owned by or voted under the control
of directors who are at the time parties to the proceeding shall not be
voted on the determination.
II-5
<PAGE>
C. Neither special legal counsel nor any shareholder has any liability
whatsoever for the determination made pursuant to this section. In voting
pursuant to subsection B of this section, directors shall discharge their duty
in accordance with Section 10-830.
D. Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subsection B,
paragraph 2 of this section to select counsel.
Section 10-856. Indemnification of officers, employees and agents
Unless a corporation's articles of incorporation provide otherwise:
1. An officer of the corporation who is not a director is entitled to
mandatory indemnification against liability under Section 10-852 and is
entitled to apply for court ordered indemnification against liability
under Section 10-854, in each case to the same extent as a director.
2. The corporation may indemnify against liability and advance expenses
under this article to an officer, employee or agent of the corporation
who is not a director to the same extent as to a director.
3. A corporation may also indemnify against liability and advance
expenses to an officer, employee or agent to the extent, consistent
with public policy, that indemnification may be provided by its
articles of incorporation, bylaws, general or specific action of its
board of directors or contract, provided that if the officer, employee
or agent is also a director, indemnification against liability arising
from serving as a director is limited to the other provisions of
chapters 1 through 17 of this title.
Section 10-857. Insurance
A corporation may purchase and maintain insurance on behalf of an individual who
is or was a director, officer, employee or agent of the corporation or who,
while a director, officer, employee or agent of the corporation, is or was
serving at the request of the corporation as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against liability asserted against or incurred by the individual in that
capacity or arising from the individual's status as a director, officer,
employee or agent, whether or not the corporation would have power to indemnify
the individual against the same liability under Section 10-851 or Section
10-852.
Section 10-858. Application of article
A. A provision that treats a corporation's indemnification of or advance for
expenses to directors and that is contained in its articles of incorporation,
its bylaws, a resolution of its shareholders or board of directors or a contract
or otherwise is valid only if and to the extent the provision is consistent with
this article. If the articles of incorporation limit indemnification or advances
for expenses, indemnification and advances for expenses are valid only to the
extent consistent with the articles.
B. This article does not limit a corporation's power to pay or reimburse
expenses incurred by a director in connection with the director's appearance as
a witness in a proceeding at a time when the director has not been made a named
defendant or respondent to the proceeding.
The above discussion is qualified in its entirety by reference to the
Company's Articles of Incorporation and Bylaws. See Exhibits 3.1 through 3.7 to
this Registration Statement.
II-6
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated costs and expenses of the
Company in connection with the offering described in the Registration Statement.
Securities and Exchange Commission Registration Fee 22,910
Legal Fees and Expenses 30,000
Accounting Fees and Expenses 15,000
Other Expenses 7,090
------
Total Expenses $75,000
Item 26. Recent Sales of Unregistered Securities.
In November 1997, the Company sold 2,700,000 shares of its Common Stock
for $13.5 million in a private placement to institutional investors under
Regulation D of the Securities Act. The investors may be entitled to additional
shares in the future under certain circumstances. The Company has the right to
repurchase the Common Stock issued at premiums ranging from 110% to 120% of the
purchase price at periods through 180 days from the date of issuance. The
Company received all proceeds of the offering less commissions paid to third
parties equal to 7% of the funds raised in the offering. Such parties elected to
take a portion of such commissions, which amounted to $945,000, in the form of
140,000 shares of Common Stock, valued at $6.00 per share, and the balance in
cash.
On October 27, 1997, the Company completed a private placement of 1,000
shares of its Series C Convertible Preferred Stock at a price of $1,000 per
share and $1.0 million principal amount of its 5.5 % Convertible Subordinated
Debentures pursuant to the exemption from registration provided by Section 4(2)
and Regulation D of the Securities Act. All proceeds of the offering were
received by the Company, less a commission of 7% to a third party in connection
with the placement, for a total of $140,000. In addition, the Company issued
67,000 warrants to such party, exercisable at a price of $7.50 per share for a
term of five years.
On August 7, 1997, the Company completed the private placement of
150,000 shares of its Common Stock pursuant to the exemption from registration
provided by Section 4(2) and Regulation D of the Securities Act. All proceeds of
the offering were received by the Company.
In March, April and May of 1997, the Company made a private placement
of 3,500 shares of its Series B Convertible Preferred Stock pursuant to the
exemption from registration provided by Section 4(2) and Regulation D of the
Securities Act. The shares of Series B Preferred were bought in three tranches
consisting of 1,100, 1,100, and 1,300 shares each on March 15, April 15, and May
15, 1997. In conjunction with the issuance of the Series B Preferred the Company
issued 700,000 Series B Warrants. The Company received all proceeds from the
Offering, less a commission of 7% to a third party. In addition, the Company
issued 378,000 warrants to purchase 378,443 shares of its Common Stock,
exercisable at a price of $.82 per share for a term of five years to such third
party.
On February 13, 1997, the Company completed a private placement of $1.5
million of its 8% Convertible Subordinated Debentures pursuant to the exemption
from registration provided by Section 4(2) and Regulation D of the Securities
Act. All proceeds of the offering were received by the Company, less a
commission of 7% paid to a third party.
In January, February and May of 1996, the Company completed a private
placement of 1,000, 1,750 and 550 share respectively of its Series A Convertible
Preferred Stock for a total of 3,300 shares pursuant to the exemption from
registration provided by Regulation S of the Securities Act.
II-7
<PAGE>
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description Reference
- -------------- -------------------------------------------------------------------------------- ---------------
<S> <C> <C> <C>
2.1 Stock Purchase Agreement between the Registrant and Concepts in (1)
Communication, Inc. dated as of October 31, 1996.
2.2 Stock Purchase Agreement between the Registrant and Compass (2)
Communications, Inc. dated as of October 1, 1997
2.3 Asset Purchase and Sale Agreement between the Registrant, SCP (2)
Acquisition Corp., Southern Communications Products, Inc.,
Wallace E. Sapp and Edna M. Sapp, dated as of August 25, 1997.
3.1 Restated Articles of Incorporation of Registrant dated October 21, (3)
1981
3.2 Amendment to Articles of Incorporation of Registrant dated April (3)
18, 1986
3.3 Amendment to Articles of Incorporation of Registrant dated May 20, (3)
1987
3.4 Amendment to Articles of Incorporation of Registrant dated (3)
February 4, 1988
3.5 Amendment to Articles of Incorporation of Registrant dated August (3)
15, 1991
3.6 Amendment to Articles of Incorporation of Registrant dated June 3, (3)
1994
3.7 Amended, Revised, and Restated Bylaws of Registrant (3)
4.1 Form of Common Stock Certificate (3)
4.2 Statement pursuant toss.10-602 of the Arizona Corporate Code for *
Series A Convertible Preferred Stock
4.3 Statement pursuant toss.10-602 of the Arizona Corporate Code for *
Series B Convertible Preferred Stock
4.4 Statement pursuant toss.10-602 of the Arizona Corporate Code for *
Series C Convertible Preferred Stock
5.1 Opinion of Streich Lang, P.A. as to the legality of securities being *
registered (includes consent)
10.1 1997 Stock Option Plan (4)
10.2 1994 Incentive Stock Option Plan (5)
10.3 1994 Restricted Stock Plan (5)
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Reference
- -------------- -------------------------------------------------------------------------------- ---------------
<S> <C> <C> <C>
21.1 List of Subsidiaries of the Registrant *
23.1 Consent of Semple & Cooper *
23.2 Consent of Streich Lang, P.A. (see 5.1) *
24.1 Powers of Attorney *
27.1 Financial Data Schedule (6)
----------
</TABLE>
* Filed herewith
(1) Filed with Current Report on Form 8-K dated February 13, 1997.
(2) Filed with Current Report on Form 8-K dated December 1, 1997.
(3) Filed with Registration Statement on Form SB-2, No. 33-79730, dated August
10, 1994.
(4) Filed with 1997 Notice and Proxy Statement dated June 25, 1997.
(5) Filed with report on Form 10-KSB for the year ended December 31, 1996.
(6) Filed with report on Form 10-QSB for the quarter ended March 31, 1997.
Item 28. Undertakings
(a) Rule 415 Offering. The undersigned Registrant hereby undertakes:
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(e) Request for acceleration of effective date:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
International FiberCom, Inc. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 and has duly
caused this Registration Statement on Form SB-2 to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Phoenix and State of
Arizona on January 30, 1998
INTERNATIONAL FIBERCOM, INC., an Arizona corporation
/s/ Joseph P. Kealy
----------------------------------------------------
Joseph P. Kealy, Chairman of the Board and President
(Chief Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature and Title Date
------------------- ----
/s/ Joseph P. Kealy January 30, 1998
- -----------------------------------------------------
Joseph P. Kealy, Chairman of the Board, President,
Principal Executive Officer and Director
/s/ Terry W. Beiriger January 30, 1998
- -----------------------------------------------------
Terry W. Beiriger, Principal Financial Officer,
Controller, Treasurer and Secretary
/s/ John F. Kealy January 30, 1998
- -----------------------------------------------------
John F. Kealy, Director
/s/ V. Thompson Brown, Jr. January 30, 1998
- -----------------------------------------------------
V. Thompson Brown Jr., Director
/s/ Richard J. Seminoff January 30, 1998
- -----------------------------------------------------
Richard J. Seminoff, Director
/s/ Jerry A. Kleven January 30, 1998
- -----------------------------------------------------
Jerry A. Kleven , Director
S-1
STATEMENT PURSUANT TO ss. 10-602
of
Series A Convertible Preferred Stock
No Par Value
of
INTERNATIONAL FIBERCOM, INC.
an Arizona Corporation
INTERNATIONAL FIBERCOM, INC., a corporation organized and existing
under the laws of the State of Arizona does hereby submit this Statement
Pursuant to ss. 10-602 as follows:
1. Name: The name of the Corporation is:
INTERNATIONAL FIBERCOM, INC.
2. The text of the resolution determining the terms of the class or
series of shares:
Attached hereto as Exhibit A and by this reference incorporated herein.
3. Date of adoption:
The Resolution was adopted by all of the Directors of the Corporation
effective May 23, 1996.
4. Statement of Due Adoption:
The Resolution has been duly adopted by the Corporation's Board of
Directors and has not been amended, modified, rescinded or superseded and
remains in full force and effect.
IN WITNESS WHEREOF, the Corporation has caused this Statement to be
executed, delivered and filed as of this 26 day of June, 1996.
/s/ Joseph P. Kealy
------------------------------------
Joseph P. Kealy - President
/s/ Terry W. Beiriger
------------------------------------
Terry W. Beiriger - Secretary
STATEMENT PURSUANT TO ss. 10-602
of
Series B Convertible Preferred Stock
No Par Value
of
INTERNATIONAL FIBERCOM, INC.
an Arizona Corporation
INTERNATIONAL FIBERCOM, INC., a corporation organized and existing
under the laws of the State of Arizona does hereby submit this Statement
Pursuant to ss. 10-602 as follows:
1. Name: The name of the Corporation is:
INTERNATIONAL FIBERCOM, INC.
2. The text of the resolution determining the terms of the class or
series of shares:
Attached hereto as Exhibit A and by this reference incorporated herein.
3. Date of adoption:
The Resolution was adopted by all of the Directors of the Corporation
effective February 11, 1997.
4. Statement of Due Adoption:
The Resolution has been duly adopted by the Corporation's Board of
Directors and has not been amended, modified, rescinded or superseded and
remains in full force and effect.
IN WITNESS WHEREOF, the Corporation has caused this Statement to be
executed, delivered and filed to be effective as of the 11th day of February,
1997.
/s/ Joseph P. Kealy
------------------------------------
Joseph P. Kealy - President
/s/ Terry W. Beiriger
------------------------------------
Terry W. Beiriger - Secretary
STATEMENT PURSUANT TO ss. 10-602
of
Series C Convertible Preferred Stock
No Par Value
of
INTERNATIONAL FIBERCOM, INC.
an Arizona Corporation
INTERNATIONAL FIBERCOM, INC., a corporation organized and existing
under the laws of the State of Arizona does hereby submit this Statement
Pursuant to ss. 10-602 as follows:
1. Name: The name of the Corporation is:
INTERNATIONAL FIBERCOM, INC.
2. The text of the resolution determining the terms of the class or
series of shares:
Attached hereto as Exhibit A and by this reference incorporated herein.
3. Date of adoption:
The Resolution was adopted by all of the Directors of the Corporation
effective October 27, 1997.
4. Statement of Due Adoption:
The Resolution has been duly adopted by the Corporation's Board of
Directors and has not been amended, modified, rescinded or superseded and
remains in full force and effect.
IN WITNESS WHEREOF, the Corporation has caused this Statement to be
executed, delivered and filed to be effective as of the 27th day of October,
1997.
/s/ Joseph P. Kealy
--------------------------------------------
Joseph P. Kealy - Chairman of the Board and
President
/s/ Terry W. Beiriger
--------------------------------------------
Terry W. Beiriger - Secretary
[STREICH LANG, P.A. LETTERHEAD]
January 30, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: International FiberCom, inc.
Ladies and Gentlemen:
This firm is counsel for International FiberCom, Inc., an
Arizona corporation (the "Company"). As such, we are familiar with the Articles
of Incorporation and Bylaws of the Company. We have also acted as counsel for
the Company with respect to certain matters in connection with the preparation
of the Registration Statement on Form SB-2 registering 12,752,317 shares of
Common Stock (the "Shares") under the Securities Act of 1933. In addition, we
have examined such documents and undertaken such further inquiry as we consider
necessary for rendering the opinion hereinafter set forth below.
Based upon the foregoing, it is our opinion that:
1. The Company is a corporation duly organized and validly
existing under the laws of the State of Arizona.
2. The Shares registered under this Registration Statement
which are currently outstanding and those to be issued,
will be duly and validly issued, fully paid and
nonassessable when issued.
We acknowledge that we are referred to under the heading "Legal
Matters" of the Prospectus which is part of the Registration Statement and we
hereby consent to the use of our name in such Registration Statement. We further
consent to the filing of this opinion as Exhibit 5 to the Registration Statement
and with the state regulatory agencies in such states as may require such filing
in connection with the registration of the Shares for offer and sale in such
states.
Very truly yours,
/s/ Christian J. Hoffmann, III
Christian J. Hoffmann, III
FOR THE FIRM
Kleven Construction, Inc. d/b/a Kleven Communications, Inc.
Concepts in Communication, Inc.
Southern Communications Products, Inc.
Compass Communications, Inc.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
As independent certified public accountants, we hereby consent to the inclusion
of our report dated April 7, 1997, on the consolidated financial statements of
International FiberCom, Inc. and Subsidiaries for the years ended December 31,
1996 and 1995, in the Company's Form SB-2 Registration Statement, and to the
reference to us under the caption "Experts" contained in the Prospectus.
/s/ Semple & Cooper LLP
Certified Public Accountants Semple & Cooper LLP
Phoenix, Arizona
January 30, 1998
