SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 16, 1998
INTERNATIONAL FIBERCOM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Arizona
----------------------------------------------
(State or other jurisdiction of incorporation)
1-9690 86-0271282
- ------------------------ ------------------------------------
(Commission File Number) (IRS Employer Identification Number)
3410 E. University, Suite 180, Phoenix, Arizona 85034
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 941-1900
Not Applicable
------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) THE FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. The financial
statements and schedules for United Tech, Inc. and Diversitec, Inc. which were
previously omitted from the Form 8-K filed on August 10, 1998 are included
herewith commencing on page F-1.
(b) PRO FORMA FINANCIAL INFORMATION. See (a) above.
(c) EXHIBITS. None.
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERNATIONAL FIBERCOM, INC.
/s/ Joseph P. Kealy
---------------------------------------
Joseph P. Kealy
Chairman of the Board and President
Dated: November 13, 1998
-3-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of
United Tech, Inc.
We have audited the accompanying balance sheet of United Tech, Inc. as of
December 31, 1997, and the related statements of operations, changes in
stockholder's equity, and cash flows for the year ended December 31, 1997 and
for the period from the date of inception, December 2, 1996 through December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of United Tech, Inc. as of
December 31, 1997, and the results of its operations, changes in stockholder's
equity, and cash flows for the year ended December 31, 1997 and for the period
from the date of inception, December 2, 1996 through December 31, 1996, in
conformity with generally accepted accounting principles.
Semple & Cooper, LLP
Certified Public Accountants
Phoenix, Arizona
August 21, 1998
F-1
<PAGE>
UNITED TECH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(UNAUDITED)
December 31, June 30,
1997 1998
------------ -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Notes 1 and 2) $ 329,630 $ 173,283
Accounts receivable (Notes 1 and 2) 286,820 984,095
Inventory (Note 1) 551,291 1,078,013
----------- -----------
Total Current Assets 1,167,741 2,235,391
----------- -----------
Property and Equipment: (Note 1)
Office equipment 4,048 4,048
Furniture and fixtures 1,980 1,980
Warehouse equipment 4,316 5,125
----------- -----------
10,344 11,153
Less: accumulated depreciation (8,637) (9,737)
----------- -----------
1,707 1,416
----------- -----------
Other Assets:
Refundable deposits 550 550
----------- -----------
Total Assets $ 1,169,998 $ 2,237,357
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Note 2) $ 245,444 $ 312,222
Accrued pension expense (Note 4) 67,816 30,000
----------- -----------
Total Current Liabilities 313,260 342,222
----------- -----------
Commitments: (Note 3) -- --
Stockholders' Equity:
Common stock - $1 par value; 7,500
shares authorized; 980 shares
issued and outstanding 980 980
Retained earnings 855,758 1,894,155
----------- -----------
Total Stockholders' Equity 856,738 1,895,135
----------- -----------
Total Liabilities and Stockholders'
Equity $ 1,169,998 $ 2,237,357
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-2
<PAGE>
UNITED TECH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
Year Ended Period Ended Six Month Periods Ended
---------- ------------ -----------------------
December 31, December 31, June 30, June 30,
1997 1996 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 8,345,581 $ -- $ 8,373,335 $ 3,771,956
Cost of Sales 5,706,945 -- 5,727,829 2,238,980
----------- ----------- ----------- -----------
Gross Profit 2,638,636 -- 2,645,506 1,532,976
General and Adminis-
trative Expenses 1,559,568 5,883 1,621,467 853,637
----------- ----------- ----------- -----------
Income (Loss) from
Operations 1,079,068 (5,883) 1,024,039 679,339
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 6,717 -- 14,358 1,350
Interest expense (24,144) -- -- (24,144)
----------- ----------- ----------- -----------
(17,427) -- 14,358 (22,794)
----------- ----------- ----------- -----------
Net Income (Loss) 1,061,641 (5,883) 1,038,397 656,545
Pro Forma Income Tax
Benefit (Expense)
(Unaudited) (395,894) 2,300 (396,777) (244,158)
----------- ----------- ----------- -----------
Net Income (Loss) After
Pro Forma Income Tax
Adjustment
(Unaudited) $ 665,747 $ (3,583) $ 641,620 $ 412,387
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-3
<PAGE>
UNITED TECH, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Total
-------------------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- ------
<S> <C> <C> <C> <C>
Balance at December 2, 1996 -- $ -- $ -- $ --
Issuance of common stock 500 500 -- 500
Net loss for the period from the
date of inception, December 2,
1996 through December 31, 1996 -- -- (5,883) (5,883)
----------- ----------- ----------- -----------
Balance at December 31, 1996 500 500 (5,883) (5,383)
Issuance of common stock 480 480 -- 480
Net income for the year ended
December 31, 1997 -- -- 1,061,641 1,061,641
Cash dividends -- -- (200,000) (200,000)
----------- ----------- ----------- -----------
Balance at December 31, 1997 980 980 855,758 856,738
Net income for the six month
period ended June 30, 1998
(Unaudited) -- -- 1,038,397 1,038,397
----------- ----------- ----------- -----------
Balance at June 30, 1998 (Unaudited) 980 $ 980 $ 1,894,155 $ 1,895,135
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-4
<PAGE>
UNITED TECH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
Year Ended Period Ended Six Month Periods Ended
---------- ------------ -----------------------
December 31, December 31, June 30, June 30,
1997 1996 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents:
Cash flows from operating activities:
Cash received from
customers $ 8,058,761 $ -- $ 7,676,060 $ 3,469,872
Cash paid to suppliers
and employees (7,475,191) (27,149) (7,845,956) (3,118,975)
Interest received 6,717 -- 14,358 1,350
Interest paid (24,144) -- -- (24,144)
----------- ----------- ----------- -----------
Net cash provided (used)
by operating activities 566,143 (27,149) (155,538) 328,103
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and
equipment (7,781) (2,563) (809) (3,932)
----------- ----------- ----------- -----------
Net cash used by
investing activities (7,781) (2,563) (809) (3,932)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable
- stockholder 363,835 132,038 -- 363,835
Repayment of notes payable
- stockholder (495,873) -- -- (493,835)
Proceeds from sale of
common stock 480 500 -- --
Payment of dividends (200,000) -- -- --
----------- ----------- ----------- -----------
Net cash provided (used)
by financing activities (331,558) 132,538 -- (130,000)
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents 226,804 102,826 (156,347) 194,171
Cash and cash equivalents
at beginning of period 102,826 -- 329,630 102,826
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period $ 329,630 $ 102,826 $ 173,283 $ 296,997
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-5
<PAGE>
UNITED TECH, INC.
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
(UNAUDITED)
Year Ended Period Ended Six Month Periods Ended
---------- ------------ -----------------------
December 31, December 31, June 30, June 30,
1997 1996 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Reconciliation of Net Income
(Loss) to Net Cash Provided
(Used) by Operating Activities:
Net Income (Loss) $ 1,061,641 $ (5,883) $ 1,038,397 $ 656,545
----------- ----------- ----------- -----------
Adjustments to Reconcile Net
Income (Loss) to Net Cash
Provided (Used) by
Operating Activities:
Depreciation 8,553 84 1,100 4,277
Changes in Assets and
Liabilities:
Accounts receivable (286,820) -- (697,275) (302,084)
Inventory (530,141) (21,150) (526,722) (173,394)
Refundable deposits (350) (200) -- (200)
Accounts payable 245,444 -- 66,778 75,143
Accrued pension expense 67,816 -- (37,816) 67,816
----------- ----------- ----------- -----------
(495,498) (21,266) (1,193,935) (328,442)
----------- ----------- ----------- -----------
Net cash provided (used) by
operating activities $ 566,143 $ (27,149) $ (155,538) $ 328,103
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-6
<PAGE>
UNITED TECH, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, Nature of Operations and Use of
Estimates:
Operations:
United Tech, Inc. is a Corporation which was duly formed and organized
under the laws of the State of Florida on December 2, 1996. The principal
business purpose of the Company is to sell and distribute new and secondary
market telephony equipment to telephone service providers and other vendors
throughout the United States.
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 six month period ended June 30,
1998 are unaudited. In the opinion of management, such statements reflect
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 six month period ended June 30, 1998 are not
necessarily indicative of the results for the entire year.
Fair Value of Financial Instruments:
Cash, accounts receivable and accounts payable approximate fair value due
to their short-term nature.
Cash and Cash Equivalents:
For financial accounting purposes, cash and cash equivalents are considered
to be all highly liquid investments purchased with an initial maturity of
three (3) months or less.
F-7
<PAGE>
UNITED TECH, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and Use of
Estimates: (Continued)
Accounts Receivable:
Accounts receivable represents amounts billed but uncollected for sales of
telephony equipment. The Company follows the allowance method of
recognizing uncollectible accounts receivable. The allowance method
recognizes bad debt expense as a percentage of accounts receivable based on
a review of the individual accounts outstanding, and the Company's prior
history of uncollectible accounts receivable. Management believes all
receivables are fully collectible as of December 31, 1997 and June 30,
1998. Accordingly, no provision for uncollectible accounts has been
included in the accompanying financial statements. For the years ended
December 31, 1997 and 1996, and for the six month periods ended June 30,
1998 and 1997 (unaudited), the Company had no bad debt expense.
Inventories:
Inventories are maintained on a perpetual system, and are stated at the
lower of cost, first-in, first-out method, or market. Inventories consist
of new and used telephony equipment. The Company periodically reviews its
inventory and makes a provision for damaged or obsolete inventory, if
necessary. No provision for damaged or obsolete inventory has been included
in the accompanying financial statements.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided for
on the accelerated method over the estimated useful lives of the assets.
The average lives range from five (5) to seven (7) years. Maintenance and
repairs are charged to operations when incurred. Betterments and renewals
are capitalized when incurred. Depreciation expense for the years ended
December 31, 1997 and 1996 was $8,553 and $84, respectively. Depreciation
expense for the six month periods ended June 30, 1998 and 1997 was $1,100
and $4,277, (unaudited), respectively.
Warranties:
The Company provides a standard ninety (90) day warranty on all products
sold. The warranty requires the Company to repair or replace, at its
option, all defective components on such products. At December 31, 1997 and
June 30, 1998, no reserve for future warranty costs has been accrued due to
limited sales returns, and management's belief that warranty costs will not
be material to the operating results of the Company.
F-8
<PAGE>
UNITED TECH, 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 tax credits, and to pay any resulting income taxes. Accordingly, no
provisions were made for federal and state income taxes payable in the
accompanying financial statements. However, a pro forma income tax benefit
(expense) has been provided in the statement of operations. The S
Corporation election was revoked effective September 1, 1998 upon the
acquisition by International FiberCom, Inc. (See Note 6).
2. Concentrations:
Credit Risk:
The Company maintains its checking account at Nations Bank. Deposits not to
exceed $100,000 at the institution are insured by the Federal Deposit
Insurance Corporation. At December 31, 1997 and June 30, 1998, the Company
has uninsured cash in the approximate amounts of $330,000 and $73,000
(unaudited), respectively.
Major Customers:
For the year ended December 31, 1997, the Company had two (2) major
customers representing forty-three percent (43%) and sixteen percent (16%)
of sales, respectively. At December 31, 1997, the amount due from the two
(2) customers included in accounts receivable was $25,546.
For the six month period ended June 30, 1998, the Company had two (2) major
customers representing fifty-nine percent (59%) (unaudited) and twelve
percent (12%) (unaudited) of sales, respectively. At June 30, 1998, the
amount due from the two (2) customers included in accounts receivable was
$479,055 (unaudited).
For the six month period ended June 30, 1997, the Company had two (2) major
customers representing forty-one percent (41%) (unaudited) and twenty-two
percent (22%) (unaudited) of sales, respectively. At June 30, 1997, the
amount due from the two (2) customers included in accounts receivable was
$78,417 (unaudited).
F-9
<PAGE>
UNITED TECH, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Concentrations: (Continued)
Major Suppliers:
For the year ended December 31, 1997, the Company had three (3) major
suppliers representing twelve percent (12%), eleven percent (11%), and
eleven percent (11%) of purchases, respectively. At December 31, 1997,
there were no payable amounts outstanding to the three (3) suppliers.
For the six month period ended June 30, 1998, the Company had one (1) major
supplier representing twenty-nine percent (29%) (unaudited) of purchases.
At June 30, 1998, there were no payable amounts outstanding to the one (1)
supplier.
For the six month period ended June 30, 1997, the Company had three (3)
major suppliers representing eighteen percent (18%) (unaudited), fifteen
percent (15%) (unaudited), and fourteen percent (14%) (unaudited) of
purchases, respectively. At June 30, 1997, the amount due to the three (3)
suppliers included in accounts payable was $4,790 (unaudited).
3. Commitments and Contingency:
Lease Commitment:
The Company is currently leasing office space in Lakeland, Florida under
non-cancellable operating lease agreements which expire through September,
1998. Rent expense under the lease agreements for the years ended December
31, 1997 and 1996 was $23,013 and $1,643, respectively. Rent expense under
the lease agreements for the six month periods ended June 30, 1998 and 1997
was $14,815 and $7,394, (unaudited), respectively.
As of December 31, 1997 and June 30, 1998, future minimum lease payments
due under the non-cancellable operating lease agreements, are as follows:
(UNAUDITED)
Year Ending Year Ending
Year December 31, June 30,
---- ------------ --------
1998 $ 19,236 $ -
1999 - 5,175
---------- ----------
$ 19,236 $ 5,175
========== ==========
F-10
<PAGE>
UNITED TECH, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. Pension Plan:
The Company adopted a Money Purchase Safe Harbor Pension Plan effective
January 1, 1997, covering substantially all full-time employees. The
Company will contribute an amount equal to 15.6% of an employee's annual
compensation, plus an amount equal to 5.7% of an employee's annual
compensation in excess of the maximum wage subject to Social Security tax
as of the beginning of the Plan year. For Plan purposes, the maximum
compensation allowed under the Plan is $200,000. Pension expense for the
year ended December 31, 1997 was $67,816. Pension expense for the six month
periods ended June 30, 1998 and 1997 was $0 (unaudited).
5. Year 2000:
The Company recognizes the need to ensure its operations will not be
adversely impaired by year 2000 software failures. The Company is
addressing this risk to the availability and integrity of financial
systems. Management does not believe the cost of achieving year 2000
compliance will have a material impact on the Company's financial position
or results of operations. In addition, it is management's belief that its
principal customers and suppliers either have or will be able to attain
year 2000 compliance with no material effect on the operations of the
Company.
6. Subsequent Event:
Effective September 1, 1998, the Company sold one hundred percent (100%) of
its issued and outstanding common stock for 1,502,000 shares of restricted
common stock of International FiberCom, Inc.
F-11
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following unaudited pro forma condensed consolidated financial statements
give effect to the acquisition by International FiberCom, Inc. of United Tech,
Inc. and Diversitec, Inc., pursuant to the Stock 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
purpose 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 pooling method of accounting
for the acquisition of United Tech, Inc. and Diversitec, 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 pro forma condensed
consolidated balance sheets assume the acquisition took place on the balance
sheet date.
Effective September 1, 1998, International FiberCom, Inc. acquired United Tech,
Inc., a privately-held company based in Florida. Under the terms of the
agreement, the Company acquired all of the issued and outstanding common stock
for approximately 1,502,000 shares of restricted common stock.
Also, effective September 1, 1998, International FiberCom, Inc. acquired
Diversitec, Inc., a privately-held company based in Virginia. Under the terms of
the agreement, the Company acquired all of the issued and outstanding common
stock of Diversitec, Inc. for approximately 1,752,000 shares of restricted
common stock.
F-12
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
December 31, 1997
Pro Forma Financial Information:
The following represents a pro forma condensed consolidated balance sheet as of
December 31, 1997, assuming the Company's acquisition of United Tech, Inc. and
Diversitec, Inc. was consummated as of that date.
<TABLE>
<CAPTION>
ASSETS
International
FiberCom, Pro Forma
Inc. and United Tech, Diversitec, Consolidated
Subsidiaries Inc. Inc. Amounts
------------ ---- ---- -------
<S> <C> <C> <C> <C>
Current Assets:
Cash $ 2,990,575 $ 329,630 $ 35,670 $ 3,355,875
Accounts receivable, Net 8,196,511 286,820 1,068,288 9,551,619
Inventory 2,563,509 551,291 3,033,001 6,147,801
Other current assets 378,226 -- 52,000 430,226
Costs and estimated earnings
in excess of uncompleted
contracts 2,540,278 -- -- 2,540,278
----------- ----------- ----------- -----------
Total Current Assets 16,669,099 1,167,741 4,188,959 22,025,799
Property and Equipment, Net 5,573,568 1,707 41,358 5,616,633
Other Assets, Net 1,168,829 550 -- 1,169,379
Goodwill, Net 20,083,941 -- -- 20,083,941
----------- ----------- ----------- -----------
Total Assets $43,495,437 $ 1,169,998 $ 4,230,317 $48,895,752
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt - current portion $ 3,441,048 $ -- $ 716,003 $ 4,157,051
Accounts payable 2,618,317 245,444 1,824,883 4,688,644
Accrued expenses 1,958,494 67,816 1,292,727 3,319,037
Billings in excess of costs
and estimated earnings on
uncompleted contracts 218,585 -- -- 218,585
----------- ----------- ----------- -----------
Total Current Liabilities 8,236,444 313,260 3,833,613 12,383,317
Long-Term Liabilities:
Long-term debt 4,242,159 -- 124,683 4,366,842
Other 163,862 -- -- 163,862
Stockholders' Equity 30,852,972 856,738 272,021 31,981,731
----------- ----------- ----------- -----------
Total Liabilities and
Stockholders' Equity $43,495,437 $ 1,169,998 $ 4,230,317 $48,895,752
=========== =========== =========== ===========
</TABLE>
F-13
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
June 30, 1998
Pro Forma Financial Information:
The following represents a pro forma condensed consolidated balance sheet as of
June 30, 1998, assuming the Company's acquisition of United Tech, Inc. and
Diversitec, Inc. was consummated as of that date.
<TABLE>
<CAPTION>
ASSETS
International
FiberCom, Pro Forma
Inc. and United Tech, Diversitec, Consolidated
Subsidiaries Inc. Inc. Amounts
------------ ---- ---- -------
<S> <C> <C> <C> <C>
Current Assets:
Cash $ 1,349,672 $ 173,283 $ 211,646 $ 1,734,601
Accounts receivable, Net 12,456,704 984,095 1,270,476 14,711,275
Inventory 6,356,602 1,078,013 2,137,277 9,571,892
Other current assets 417,235 -- 2,520 419,755
Costs and estimated earnings
in excess of uncompleted
contracts 2,709,375 -- -- 2,709,375
----------- ----------- ----------- -----------
Total Current Assets 23,289,588 2,235,391 3,621,919 29,146,898
Property and Equipment, Net 7,452,907 1,416 36,047 7,490,370
Other Assets, Net 1,226,677 550 -- 1,227,227
Goodwill, Net 22,543,351 -- -- 22,543,351
----------- ----------- ----------- -----------
Total Assets $54,512,523 $ 2,237,357 $ 3,657,966 $60,407,846
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt - current portion $ 3,384,139 $ -- $ 1,214,870 $ 4,599,009
Accounts payable 4,502,349 312,222 178,361 4,992,932
Accrued expenses 2,557,899 30,000 1,283,889 3,871,788
Billings in excess of costs
and estimated earnings on
uncompleted contracts 529,971 -- -- 529,971
----------- ----------- ----------- -----------
Total Current Liabilities 10,974,358 342,222 2,677,120 13,993,700
Long-Term Liabilities:
Long-term debt 4,849,698 -- 14,847 4,864,545
Other 143,862 -- -- 143,862
Stockholders' Equity 38,544,605 1,895,135 965,999 41,405,739
----------- ----------- ----------- -----------
Total Liabilities and
Stockholders' Equity $54,512,523 $ 2,237,357 $ 3,657,966 $60,407,846
=========== =========== =========== ===========
</TABLE>
F-14
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For The Year Ended December 31, 1997
The following represents an unaudited pro forma condensed consolidated statement
of operations for the year ended December 31, 1997, assuming the Company's
acquisition of United Tech, Inc. and Diversitec, Inc. was consummated on January
1, 1997.
<TABLE>
<CAPTION>
International
FiberCom, Pro Forma
Inc. and United Tech, Diversitec, Pro Forma Consolidated
Subsidiaries Inc. Inc. Adjustments Amounts
------------ ---- ---- ----------- -------
<S> <C> <C> <C> <C> <C>
Contract Revenues $36,325,146 $ 8,345,581 $12,595,079 $57,265,806
Cost of Contract Revenues 25,905,137 5,706,945 8,821,713 40,433,795
----------- ----------- ----------- -----------
Gross Profit 10,420,009 2,638,636 3,773,366 16,832,011
General and Administrative
Expenses 8,574,173 1,559,568 2,130,729 12,264,470
----------- ----------- ----------- -----------
Profits from Operations 1,845,836 1,079,068 1,642,637 4,567,541
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 34,812 6,717 - 41,529
Interest expense (234,119) (24,144) (135,634) (393,897)
Other income 91,971 - 1,485,000 1,576,971
Gain (loss) on disposal
of assets 186,479 - (4,480) 181,999
----------- ----------- ----------- -----------
79,143 (17,427) 1,344,886 1,406,602
----------- ----------- ----------- -----------
Net Income before
income taxes 1,924,979 1,061,641 2,987,523 5,974,143
Provision for tax benefit
(expense) 346,319 - - (2,735,976) (1) (2,389,657)
----------- ----------- ----------- -----------
Net Income from Continuing
Operations 2,271,298 1,061,641 2,987,523 3,584,486
Discontinued operations 33,187 - - 33,187
----------- ----------- ----------- -----------
Net income 2,304,485 1,061,641 2,987,523 3,617,673
Preferred stock dividend (173,447) - - (173,447)
----------- ----------- ----------- -----------
Net income attributable to
common stockholders $ 2,131,038 $ 1,061,641 $ 2,987,523 $ 3,444,226
=========== =========== =========== ===========
Basic earnings per share $ .25 $ .29
=========== ===========
Diluted earnings per share $ .16 $ .20
=========== ===========
Basic average shares
outstanding 8,457,024 11,711,024
=========== ===========
Diluted weighted average
shares outstanding 15,325,836 18,579,836
=========== ===========
</TABLE>
(1) Pro forma income tax adjustment to record the income tax effect of the
conversion of United Tech, Inc. and Diversitec, Inc. to C Corporations.
F-15
<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 an unaudited pro forma condensed consolidated statement
of operations for the year ended December 31, 1996, assuming the Company's
acquisition of United Tech, Inc. and Diversitec, Inc. was consummated on January
1, 1996.
<TABLE>
<CAPTION>
International
FiberCom, Pro Forma
Inc. and United Tech, Diversitec, Pro Forma Consolidated
Subsidiaries Inc. Inc. Adjustments Amounts
------------ ---- ---- ----------- -------
<S> <C> <C> <C> <C> <C>
Contract Revenues $19,195,069 $ - $14,785,998 $33,981,067
Cost of Contract Revenues 15,833,378 - 9,062,375 24,895,753
----------- ----------- ----------- -----------
Gross Profit 3,361,691 - 5,723,623 9,085,314
General and Administrative
Expenses 4,484,600 5,883 2,728,288 7,218,771
Goodwill Impairment 2,677,490 - - 2,677,490
----------- ----------- ----------- -----------
Profits (Loss) from
Operations (3,800,399) (5,883) 2,995,335 (810,947)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 49,086 - - 49,086
Interest expense (141) - (55,137) (55,278)
Other income 16,089 - - 16,089
Gain on disposal of
assets 50,781 - - 50,781
----------- ----------- ----------- -----------
115,815 - (55,137) 60,678
----------- ----------- ----------- -----------
Net income (loss) before
income taxes (3,684,584) (5,883) 2,940,198 (750,269)
Provision for tax benefit
(expense) (135,457) - - 435,564 (1) 300,107
----------- ----------- ------------ -----------
Net Income (Loss) from
Continuing Operations (3,820,041) (5,883) 2,940,198 (450,162)
Discontinued operations (68,577) - - (68,577)
----------- ----------- ------------ -----------
Net Income (Loss) (3,888,618) (5,883) 2,940,198 (518,739)
Preferred stock dividend (171,303) - - (171,303)
----------- ----------- ----------- -----------
Net income (loss) attributable
to common stockholders $(4,059,921) $ (5,883) $ 2,940,198 $ (690,042)
=========== =========== =========== ===========
Basic loss per share $ (.66) $ (.07)
=========== ===========
Fully diluted loss per
share $ (.66) $ (.07)
=========== ===========
Basic average shares
outstanding 6,187,188 9,441,188
=========== ===========
Diluted weighted average
shares outstanding 6,187,188 9,441,188
=========== ===========
</TABLE>
(1) Pro forma income tax adjustment to record the income tax effect of the
conversion of United Tech, Inc. and Diversitec, Inc. to C Corporations.
F-16
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For The Six Month Period Ended June 30, 1998
Proforma Consolidated Financial Statements:
The following represents an unaudited pro forma condensed consolidated statement
of operations for the six month period ended June 30, 1998, assuming the
Company's acquisition of United Tech, Inc. and Diversitec, Inc. was consummated
on January 1, 1998.
<TABLE>
<CAPTION>
International
FiberCom, Pro Forma
Inc. and United Tech, Diversitec, Pro Forma Consolidated
Subsidiaries Inc. Inc. Adjustments Amounts
------------ ---- ---- ----------- -------
<S> <C> <C> <C> <C> <C>
Contract Revenues $30,928,477 $ 8,373,335 $ 6,762,086 $46,063,898
Cost of Contract Revenues 20,370,446 5,727,829 4,664,142 30,762,417
----------- ----------- ----------- -----------
Gross Profit 10,558,031 2,645,506 2,097,944 15,301,481
General and Administrative
Expenses 5,605,144 1,621,467 1,012,361 8,238,972
----------- ----------- ----------- -----------
Profits from Operations 4,952,887 1,024,039 1,085,583 7,062,509
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 58,367 14,358 - 72,725
Interest expense (263,260) - (62,212) (325,472)
Other income 29,425 - 1,607 31,032
Gain on disposal of
assets 11,208 - - 11,208
----------- ----------- ----------- -----------
(164,260) 14,358 (60,605) (210,507)
----------- ----------- ----------- -----------
Net income before income taxes 4,788,627 1,038,397 1,024,978 6,852,002
Provision for tax benefit
(expense) (1,666,394) - - (1,074,407) (1) (2,740,801)
----------- ----------- ----------- -----------
Net Income 3,122,233 1,038,397 1,024,978 4,111,201
Preferred stock dividend (38,285) - - (38,285)
----------- ----------- ----------- -----------
Net income attributable to
common stockholders $ 3,083,948 $ 1,038,397 $ 1,024,978 $ 4,072,916
=========== =========== =========== ===========
Basic earnings per share $ .17 $ .19
=========== ===========
Diluted earnings per share $ .14 $ .16
=========== ===========
Basic average shares
outstanding 18,102,201 21,356,201
=========== ===========
Diluted weighted average
shares outstanding 23,124,075 26,378,075
=========== ===========
</TABLE>
(1) Pro forma income tax adjustment to record the income tax effect of the
conversion of United Tech, Inc. and Diversitec, Inc. to C Corporations.
F-17
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For The Six Month Period Ended June 30, 1997
Proforma Consolidated Financial Statements:
The following represents an unaudited pro forma condensed consolidated statement
of operations for the six month period ended June 30, 1997, assuming the
Company's acquisition of United Tech, Inc. and Diversitec, Inc. was consummated
on January 1, 1997.
<TABLE>
<CAPTION>
International
FiberCom, Pro Forma
Inc. and United Tech, Diversitec, Pro Forma Consolidated
Subsidiaries Inc. Inc. Adjustments Amounts
------------ ---- ---- ----------- -------
<S> <C> <C> <C> <C> <C>
Contract Revenues $16,495,951 $ 3,771,956 $ 8,001,821 $28,269,728
Cost of Contract Revenues 12,613,550 2,238,980 5,148,802 20,001,332
----------- ----------- ----------- -----------
Gross Profit 3,882,401 1,532,976 2,853,019 8,268,396
General and Administrative
Expenses 2,790,551 853,637 856,073 4,500,261
----------- ----------- ----------- -----------
Profits from Operations 1,091,850 679,339 1,996,946 3,768,135
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 22,747 1,350 - 24,097
Interest expense (221,939) (24,144) (57,478) (303,561)
Other income (expense) 2,955 - (8,197) (5,242)
Gain on disposal of
assets 174,378 - - 174,378
----------- ----------- ----------- -----------
(21,859) (22,794) (65,675) (110,328)
----------- ----------- ----------- -----------
Net income before income taxes 1,069,991 656,545 1,931,271 3,657,807
Provision for tax benefit
(expense) 160 - - (1,463,283) (1) (1,463,123)
----------- ----------- ----------- -----------
Net Income 1,070,151 656,545 1,931,271 2,194,684
Preferred stock dividend (113,063) - - (113,063)
----------- ----------- ----------- -----------
Net income attributable to
common stockholders $ 957,088 $ 656,545 $ 1,931,271 $ 2,081,621
=========== =========== =========== ===========
Basic earnings per share $ .14 $ .21
=========== ===========
Diluted earnings per share $ .07 $ .12
=========== ===========
Basic average shares
outstanding 6,899,220 10,153,220
=========== ===========
Diluted weighted average
shares outstanding 14,521,004 17,775,004
=========== ===========
</TABLE>
(1) Pro forma income tax adjustment to record the income tax effect of the
conversion of United Tech, Inc. and Diversitec, Inc. to C Corporations.
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Diversitec, Inc.
We have audited the accompanying balance sheets of Diversitec, Inc. as of
December 31, 1997 and 1996, and related statements of income and retained
earnings, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diversitec, Inc. at December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
BDO Seiedman LLP
Richmond, Virginia
September 22, 1998
F-19
<PAGE>
DECEMBER 31, 1997 1996
---- ----
ASSETS (Notes 1 and 3)
CURRENT
Cash $ 35,670 $ 259,467
Accounts receivable 1,068,288 1,031,335
Inventory 3,033,001 1,365,738
Due from stockholders 52,000 --
---------- ----------
Total current assets 4,188,959 2,656,540
---------- ----------
PROPERTY AND EQUIPMENT
Furniture and fixtures 80,567 72,756
Vehicles 48,123 91,098
Leasehold improvements 6,341 426
---------- ----------
135,031 164,280
Less accumulated depreciation and amortization 93,673 81,130
---------- ----------
Net property and equipment 41,358 83,150
---------- ----------
OTHER ASSETS
Investment at cost which approximates market -- 15,000
---------- ----------
-- 15,000
---------- ----------
$4,230,317 $2,754,690
========== ==========
SEE ACCOMPANYING SUMMARY OF ACCOUNTING
POLICIES AND NOTES TO FINANCIAL STATEMENTS.
F-20
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Notes payable to bank (Note 1) $ 491,870 $ --
Accounts payable 1,824,883 1,262,353
Accrued expenses 57,100 40,927
Due to former stockholder (Note 4) 1,210,627 --
Current portion of long-term debt (Note 3) 224,133 229,069
---------- ----------
Total current liabilities 3,808,613 1,532,349
LONG-TERM DEBT, less current maturities (Note 8) 124,683 378,216
---------- ----------
Total liabilities 3,933,296 1,910,565
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (Note 4)
Capital stock, no par value, 5,000
shares authorized, 533 shares
issued and outstanding (800 - 1996) 533 800
Retained earnings 296,488 843,325
---------- ----------
Total stockholders' equity 297,021 844,125
---------- ----------
$4,230,317 $2,754,690
========== ==========
SEE ACCOMPANYING SUMMARY OF ACCOUNTING
POLICIES AND NOTES TO FINANCIAL STATEMENTS.
F-21
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
STATEMENTS OF INCOME AND RETAINED EARNINGS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996
---- ----
NET SALES $ 12,595,079 $ 14,785,998
COST OF SALES 8,821,713 9,062,375
------------ ------------
Gross profit 3,773,366 5,723,623
------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries 1,459,300 1,946,661
Pension and employee benefits (Note 2) 163,181 102,507
Bad debts -- 124,467
Insurance, group and other 114,575 97,140
Rent 113,924 126,050
Payroll taxes 60,783 76,735
Shop supplies 59,831 61,018
Travel and entertainment 33,210 38,462
Taxes and licenses 22,504 20,767
Professional fees and outside services 22,060 25,553
Depreciation and amortization 18,517 23,690
Telephone 17,320 24,551
Advertising 14,404 37,901
Postage and office supplies 13,907 14,408
Other 17,213 8,378
------------ ------------
Total general and administrative expenses 2,130,729 2,728,288
------------ ------------
OPERATING INCOME 1,642,637 2,995,335
------------ ------------
OTHER INCOME (EXPENSE)
Life insurance proceeds 1,500,000 --
Interest expense, net (110,634) (55,137)
Loss on investment (15,000) --
Loss on disposal of vehicle (4,480) --
------------ ------------
Total other income (expense) 1,369,886 (55,137)
------------ ------------
NET INCOME 3,012,523 2,940,198
------------ ------------
continued...
F-22
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
STATEMENTS OF INCOME AND RETAINED EARNINGS
(CONTINUED)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996
---- ----
RETAINED EARNINGS, BEGINNING OF YEAR $ 843,325 $ 1,065,127
REDEMPTION OF CAPITAL STOCK (Note 4) (2,310,360) --
DISTRIBUTIONS TO STOCKHOLDERS (1,249,000) (3,162,000)
----------- -----------
RETAINED EARNINGS, END OF YEAR $ 296,488 $ 843,325
=========== ===========
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES
AND NOTES TO FINANCIAL STATEMENTS.
F-23
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Cash received from customers $ 12,665,093 $ 15,605,201
Cash paid to suppliers (10,520,871) (10,204,756)
Cash paid to employees (1,207,731) (2,035,353)
Interest paid (120,204) (77,696)
Interest received 8,720 26,509
------------ ------------
Net cash provided by operating activities 825,007 3,313,905
------------ ------------
INVESTING ACTIVITIES
Advances to stockholder (52,000) --
Purchase of furniture and equipment (13,726) (24,215)
Life insurance proceeds 1,500,000 --
------------ ------------
Net cash provided (absorbed) by investing activities 1,434,274 (24,215)
------------ ------------
FINANCING ACTIVITIES
Credit line loans (payments) net 491,870 (470,820)
Redemption of stockholder interest (1,500,000) --
Distributions to stockholders (1,249,000) (3,162,000)
Proceeds from long term debt -- 685,974
Retirement of long term debt (225,948) (145,224)
------------ ------------
Net cash absorbed by financing activities (2,483,078) (3,092,070)
------------ ------------
NET INCREASE (DECREASE) IN CASH (223,797) 197,620
CASH, beginning of year 259,467 61,847
------------ ------------
CASH, end of year $ 35,670 $ 259,467
============ ============
</TABLE>
Continued . . .
F-24
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
STATEMENTS OF CASH FLOWS
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
----------- -----------
<S> <C> <C>
NET INCOME $ 3,012,523 $ 2,940,198
Adjustments
Depreciation and amortization 18,517 23,690
Loss on disposal of vehicle 4,480 --
Loss on investment 15,000 --
Life insurance proceeds (1,500,000) --
Net cash provided (absorbed) by
Accounts receivable (36,953) 943,670
Inventory (1,667,263) (154,073)
Advances to employees -- 1,665
Accounts payable 562,530 (466,629)
Other liabilities, including accrued stockholder compensation 416,173 25,384
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 825,007 $ 3,313,905
=========== ===========
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING
POLICIES AND NOTES TO FINANCIAL STATEMENTS.
F-25
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION AND BUSINESS
Diversitec, Inc. (the Company), a Virginia corporation organized in 1989,
sells computerized central office equipment systems and various computer
and hi-tech components.
INCOME RECOGNITION
The Company recognizes income on the sale of equipment upon delivery to
customers.
ACCOUNTS RECEIVABLE
Receivables are reported at net realizable value. Bad debts are charged to
operations by the specific write-off method in the period during which the
receivables are determined to be uncollectible. Although the specific
write-off method is not in accordance with generally accepted accounting
principles, the practice is not material to the financial statements as
reported.
INVENTORY
Inventory is valued at the lower of cost or market, cost determined using
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Major additions and betterments are capitalized and recorded at cost.
Expenditures for ordinary repairs and maintenance are charged to operations
as incurred. Depreciation is provided using accelerated and straight-line
methods, based on estimated useful lives ranging from five to seven years.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
corporate income taxes on its taxable income. Instead, the stockholders are
liable for individual income taxes on their respective shares of the
Company's taxable income. Accordingly, no provision for income tax expense
or benefit is reported by the Company.
USE OF ESTIMATES
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions regarding certain types of assets, liabilities, revenues and
expenses. Such estimates primarily relate to unsettled transactions and
events as of the date of the financial statements. Accordingly, upon
settlement, actual results may differ from estimated amounts.
F-26
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
- --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 129 (SFAS 129), "Disclosure
of Information about Capital Structure", effective for periods ending after
December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the
pertinent rights and privileges of various securities outstanding (stock,
options, warrants, preferred stock, debt and participation rights)
including dividend and liquidation preferences, participant rights, call
prices and dates, conversion or exercise prices and redemption
requirements. Adoption of SFAS 129 had no effect on the Company because it
currently discloses the information specified.
Statement of Financial Accounting No. 130 (SFAS 130), "Reporting
Comprehensive Income", effective for periods beginning after December 15,
1997, establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investment by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all required items be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Management does not expect the application of this
pronouncement to have a material effect on the financial statements of the
Company.
F-27
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NOTES PAYABLE TO BANK
The Company has a $2,500,000 demand working capital bank line of credit at
December 31, 1997. Amounts borrowed are secured by all assets of the Company
with unconditional and full guarantee of the stockholders. Interest at prime
plus .75% is paid monthly.
2. PENSION PLAN
The Company has a 401(K) Retirement Plan covering substantially all employees.
The Company makes contributions equal to 5% of the pay of participating
employees (3% for 1996), up to amounts permitted under the tax laws. The Company
contributed approximately $161,000 and $102,000 for the years ended December 31,
1997 and 1996, respectively.
3. LONG-TERM DEBT Long-term debt consists of the following:
December 31, 1997 1996
---- ----
Installment note payable to bank requiring
monthly payments of $18,056 plus interest
at .5% over prime until maturity in June 1999,
secured by the pledge of all assets and
guarantee by the shareholders $325,000 $541,667
Installment notes payable to bank secured by vehicles:
Requiring monthly payments of $777, including
interest at 9.11% until maturity in December
2000 23,816 30,634
Requiring monthly payments of $729, including
interest at 8% which was paid off in October
1997 -- 34,984
------- -------
348,816 607,285
Less current portion 224,133 229,069
------- -------
$124,683 $378,216
======== ========
F-28
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
3. LONG-TERM DEBT (CONTINUED)
Principal repayments of long term debt are as follows:
Year Ending December 31, Amount
------
1998 $224,133
1999 116,508
2000 8,175
--------
$348,816
========
4. ACQUISITION OF STOCKHOLDER INTEREST
One of the Company's stockholders passed away in July 1997. The Company
repurchased his stock (267 shares) under an existing Buy-Sell agreement, which
required payments equal to "life insurance" proceeds and a year's distribution
of profits". The Company paid the $1.5 million in life insurance proceeds it
received, and tendered an offer of $300,000 representing management's
anticipation of one year's distribution of profits through the anniversary date
of the stockholder's death. The tendered offer was disputed by the estate and
during September 1998 a settlement was reached which provided for an additional
payment of $810,627 for the stock repurchase and $400,000 in compensation
expense. All amounts related to the settlement have been accrued in the
financial statements as of December 31, 1997.
5. COMMITMENTS
The Company leases part of its facilities from a related corporation owned by
two of the stockholders. The lease, which is renewable annually, requires
monthly payments of $4,000. Another part of the facilities are rented from a
partnership owned by the shareholders and the estate of the deceased
shareholder. No formal lease has been established in connection with the
partnership property but monthly payments of $5,415 are being made.
The Company maintains its operating cash account in one of the larger regional
Virginia banks. Bank balances are usually in amounts in excess of federally
insured limits resulting in a concentration of credit risk.
F-29
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
6. SUBSEQUENT EVENTS
During 1998, 100% of the Company's stock was acquired by an outside party
through a stock for stock transaction.
F-30
<PAGE>
June 30, 1998 1997
---- ----
Assets (Notes 1 and 3)
Current
Cash $ 211,646 $ 84,722
Accounts receivable 1,270,476 1,299,338
Other receivables 2,520 17,500
Inventory 2,137,277 2,298,396
Due from stockholders -- 99,970
---------- ----------
Total current assets 3,621,919 3,799,926
---------- ----------
Property and equipment
Furniture and fixtures 84,756 80,273
Vehicles 48,123 95,762
Leasehold improvements 6,341 426
---------- ----------
139,220 176,461
Less - accumulated depreciation and amortization 103,173 93,130
---------- ----------
Net property and equipment 36,047 83,331
---------- ----------
Other assets
Investment at cost which approximates market -- 15,000
---------- ----------
$3,657,966 $3,898,257
========== ==========
See accompanying summary of accounting
policies and notes to financial statements.
F-31
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
BALANCE SHEETS
- --------------------------------------------------------------------------------
June 30, 1998 1997
---- ----
Liabilities and Stockholder's Equity
Current
Notes payable to bank (Note 1) $ 996,870 $1,257,675
Accounts payable 178,361 217,705
Accrued expenses 73,262 54,306
Due to former stockholder (Note 4) 1,210,627 --
Current portion of long-term debt (Note 3) 218,000 256,000
---------- ----------
Total current liabilities 2,677,120 1,785,686
Long-term debt, less current maturities (Note 3) 14,847 269,175
---------- ----------
Total liabilities 2,691,967 2,054,861
---------- ----------
Stockholders' equity (Note 4)
Capital stock, no par value, 5,000
shares authorized, 533 shares
issued and outstanding (800 - 1997) 533 800
Retained earnings 965,466 1,842,596
---------- ----------
Total stockholder's equity 965,999 1,843,396
---------- ----------
$3,657,966 $3,898,257
========== ==========
See accompanying summary of accounting
policies and notes to financial statements.
F-32
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
STATEMENTS OF INCOME AND RETAINED EARNINGS
- --------------------------------------------------------------------------------
Six months ended June 30, 1998 1997
---- ----
Net sales $ 6,762,086 $ 8,001,821
Cost of sales 4,664,142 5,148,802
----------- -----------
Gross profit 2,097,944 2,853,019
----------- -----------
General and administrative expenses
Salaries 580,485 482,510
Pension and employee benefits (Note 2) 82,684 91,094
Insurance, group and other 68,629 62,948
Rent 66,628 56,491
Payroll taxes 33,505 34,543
Shop supplies 33,071 40,613
Travel and entertainment 32,736 14,205
Taxes and licenses 16,178 19,764
Professional fees and outside services 47,524 10,628
Depreciation and amortization 9,500 12,000
Telephone 13,190 7,741
Advertising 7,675 6,395
Postage and office supplies 11,940 5,024
Other 8,616 12,117
----------- -----------
Total general and administrative expenses 1,012,361 856,073
----------- -----------
Operating income 1,085,583 1,996,946
----------- -----------
Other income (expense)
Miscellaneous, net 1,607 (8,197)
Interest expense, net (62,212) (57,478)
----------- -----------
Total other income (expense) (60,605) (65,675)
----------- -----------
Net income 1,024,978 1,931,271
----------- -----------
Retained earnings, beginning of period 296,488 843,325
Distributions to stockholders (356,000) (932,000)
----------- -----------
Retained earnings, end of period $ 965,466 $ 1,842,596
=========== ===========
See accompanying summary of accounting
policies and notes to financial statements.
F-33
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended June 30, 1998 1997
---- ----
<S> <C> <C>
Operating activities
Cash received from customers $ 6,557,378 $ 7,840,785
Cash paid to suppliers (5,762,863) (7,526,762)
Cash paid to employees (646,069) (573,754)
Interest paid (53,312) (48,224)
Interest received -- 1,796
----------- -----------
Net cash provided by operating activities 95,134 (306,159)
----------- -----------
Investing activities
Advances from (to) stockholders 52,000 (99,970)
Purchase of furniture and equipment (4,189) (12,181)
----------- -----------
Net cash provided (absorbed) by investing activities 47,811 (112,151)
----------- -----------
Financing activities
Proceeds from note payable, net 498,867 1,258,781
Distributions to stockholders (356,000) (932,000)
Repayment of long term debt (109,836) (83,216)
----------- -----------
Cash absorbed by financing activities 33,031 243,565
----------- -----------
Net increase (decrease) in cash 175,976 (174,745)
Cash, beginning of period 35,670 259,467
----------- -----------
Cash, end of period 211,646 84,722
=========== ===========
</TABLE>
continued....
F-34
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
STATEMENTS OF CASH FLOWS
(CONTINUED)
- --------------------------------------------------------------------------------
Six months ended June 30, 1998 1997
---- ----
Net income $ 1,024,978 $ 1,931,271
Adjustments
Depreciation and amortization 9,500 12,000
Net cash provided (absorbed) by
Accounts receivable (202,188) (285,503)
Inventory 895,724 (932,658)
Accounts payable (1,646,522) (1,044,648)
Other liabilities 13,642 13,379
----------- -----------
Net cash provided by operating activities $ 95,134 $ (306,159)
=========== ===========
See accompanying summary of accounting
policies and notes to financial statements.
F-35
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION AND BUSINESS
Diversitec, Inc. (the "Company") (a Virginia corporation organized in 1989)
sells computerized central office equipment systems and various computer
and hi-tech components.
INCOME RECOGNITION
The Company recognizes income on the sale of equipment upon delivery to
customers.
ACCOUNTS RECEIVABLE
Receivables are reported at net realizable value. Bad debts are charged to
operations by the specific write-off method in the period during which the
receivables are determined to be uncollectible. Although the specific
write-off method is not in accordance with generally accepted accounting
principles, the practice is not material to the financial statements as
reported.
INVENTORY
Inventory is valued at the lower of cost or market, cost determined using
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Major additions and betterments are capitalized and recorded at cost.
Expenditures for ordinary repairs and maintenance are charged to operations
as incurred. Depreciation is provided using accelerated and straight-line
methods, based on estimated useful lives ranging from five to seven years.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
corporate income taxes on its taxable income. Instead, the stockholders are
liable for individual income taxes on their respective shares of the
Company's taxable income. Accordingly, no provision for income tax expense
or benefit is reported by the Company.
USE OF ESTIMATES
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions regarding certain types of assets, liabilities, revenues and
expenses. Such estimates primarily relate to unsettled transactions and
events as of the date of the financial statements. Accordingly, upon
settlement, actual results may differ from estimated amounts.
F-36
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
- --------------------------------------------------------------------------------
RECLASSIFICATION
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the 1998 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 129 (SFAS 129), "Disclosure
of Information about Capital Structure", effective for periods ending after
December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the
pertinent rights and privileges of various securities outstanding (stock,
options, warrants, preferred stock, debt and participation rights)
including dividend and liquidation preferences, participant rights, call
prices and dates, conversion or exercise prices and redemption
requirements. Adoption of SFAS 129 had no effect on the Company because it
currently discloses the information specified.
Statement of Financial Accounting No. 130 (SFAS 130), "Reporting
Comprehensive Income", effective for periods beginning after December 15,
1997, establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investment by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all required items to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Management does not expect the application of this
pronouncement to have a material effect on the financial statements of the
Company.
F-37
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NOTES PAYABLE TO BANK
The Company has a $2,500,000 demand working capital bank line of credit.
Amounts borrowed are secured by all assets of the Company with
unconditional and full guarantee of the stockholders. Interest at prime
plus .75% is paid monthly.
2. PENSION PLAN
The Company has a 401(K) Retirement Plan covering substantially all
employees. The Company makes contributions equal to 5% of the pay of
participating employees up to amounts permitted under the tax laws. The
Company contributed approximately $83,000 and $91,000 for the six months
ended June 30, 1998 and 1997, respectively.
3. LONG-TERM DEBT
Long-term Debt Consists of the Following:
June 30, 1998 1997
---- ----
Installment note payable to bank requiring
monthly payments of $18,056 plus interest
at .5% over prime until maturity in June 1999,
secured by the pledge of all assets and
guarantee by the shareholders $213,696 $465,346
Installment notes payable to bank secured by vehicles:
Requiring monthly payments of $777, including
interest at 9.11% until maturity in December
2000 19,151 27,868
Requiring monthly payments of $729, including
interest at 8% which was paid off in October
1997 -- 31,961
-------- --------
232,847 525,175
Less - current portion 218,000 256,000
-------- --------
$ 14,847 $269,175
======== ========
Principal repayments of long term debt are as follows:
June 30, 1999 $218,000
June 30, 2000 6,300
June 30, 2001 8,547
$232,847
F-38
<PAGE>
DIVERSITEC, INC.
(AN S-CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
4. ACQUISITION OF STOCKHOLDER INTEREST
One of the Company's stockholders passed away in July 1997. The Company
repurchased his stock (267 shares) under an existing Buy-Sell agreement,
which required payments equal to "life insurance" proceeds and a year's
distribution of profits". The Company paid the $1.5 million in life
insurance proceeds it received, and tendered an offer of $300,000
representing management's anticipation of one year's distribution of
profits through the anniversary date of the stockholder's death. The
tendered offer was disputed by the estate and during September 1998 a
settlement was reached which provided for an additional payment of $810,627
for the stock repurchase and $400,000 in compensation expense. All amounts
related to the settlement have been accrued in the financial statements as
of June 30, 1998.
5. COMMITMENTS
The Company leases part of its facilities from a related corporation owned
by two of the stockholders. The lease, which is renewable annually requires
monthly payments of $4,000. Another part of the facilities are rented from
a partnership owned by the shareholders and the estate of the deceased
shareholder. No formal lease has been established in connection with the
partnership property but monthly payments of $5,415 are being made.
The Company maintains its operating cash account in one of the larger
regional Virginia banks. Bank balances are usually in amounts in excess of
federally insured limits resulting in a concentration of credit risk.
F-39
