UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 COMMISSION FILE NO 1-9690
INTERNATIONAL FIBERCOM, INC.
Incorporated in the State of Arizona IRS No. 86-0271282
3410 E. University Drive, Suite 180
Phoenix, AZ 85034
(602) 941-1900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Common Stock without par value 27,393,483 shares
issued and 27,187,794 outstanding at March 31, 1999
<PAGE>
INDEX
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated balance sheets - March 31, 1999 and December 31, 1998
Consolidated statements of operations - Three months ended March 31,
1999 and 1998 (audited)
Consolidated statements of cash flows - Three months ended March 31,
1999 and 1998
Notes to consolidated financial statements - March 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL FIBERCOM, INC.
By /s/ Terry W. Beiriger
----------------------------------
Terry W. Beiriger,
Chief Financial Officer
DATED: May 10, 1999
-------------------
i
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1999 1998
----------- -----------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 4,262,511 $ 4,789,547
Accounts receivable
- trade, net of allowance 20,005,474 21,860,773
- other 595,442 741,269
Costs and estimated earnings in excess
of billings on uncompleted contracts 7,664,731 5,191,428
Inventory, net of allowance (Note 2) 17,028,195 16,946,143
Prepaid expenses 335,023 262,426
Deferred tax asset 863,000 863,000
----------- -----------
Total Current Assets 50,754,376 50,654,586
Property and Equipment, net 12,788,504 10,042,072
Other Assets:
Loans receivable related party 242,481 220,200
Goodwill, net 27,239,962 22,855,531
Covenant not to compete, net 293,767 313,101
Other assets 349,089 348,551
Deferred acquisition costs 300,000 125,000
Debt issue costs, net 92,923 55,348
----------- -----------
28,518,222 23,917,731
----------- -----------
Total Assets $92,061,102 $84,614,389
=========== ===========
See notes to consolidated financial statements.
F-1
<PAGE>
INTERNATIONAL FIBERCOM, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Notes payable - current portion $11,431,541 $ 6,410,568
Notes payable - related party 1,016,791 2,029,287
Obligations under capital lease - current portion 773,753 515,386
Accounts payable 5,975,971 9,464,558
Accrued expenses 2,515,850 2,252,307
Billings in excess of cost and estimated earnings
on uncompleted contracts 557,623 449,205
Income taxes payable 2,377,912 3,036,621
----------- -----------
Total Current Liabilities 24,649,441 24,157,932
Long-Term Liabilities:
Notes payable-long term 1,835,429 2,117,522
Notes payable-related party 913,996 1,151,196
Obligations under capital lease - long term 2,950,070 807,590
Deferred income tax payable 838,079 822,327
----------- -----------
Total Long-Term Liabilities 6,537,574 4,898,635
----------- -----------
Total Liabilities 31,187,015 29,056,567
Stockholders' Equity:
Series C 4% convertible preferred stock, no par value
1,000 shares authorized, 400 shares issued and outstanding -- 306,665
Common Stock, no par value, 100,000,000 shares authorized;
27,393,483 shares issued and 27,187,794 shares outstanding
at March 31, 1999; 26,271,545 shares issued and 26,065,855
shares outstanding at December 31, 1998 50,756,451 47,361,495
Additional paid-in capital 2,581,149 2,581,149
Retained Earnings 8,366,574 6,138,600
----------- -----------
61,704,174 56,387,909
Less: treasury stock 205,689 shares, at cost 830,087 830,087
----------- -----------
Total Stockholders' Equity 60,874,087 55,557,822
----------- -----------
Total Liabilities and Stockholders' Equity $92,061,102 $84,614,389
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31
-----------------------------
1999 1998
------------ ------------
(Unaudited)
Net sales $ 27,865,337 $ 21,667,979
Cost of sales 19,402,778 14,505,050
------------ ------------
Gross profit 8,462,559 7,162,929
General and administrative expenses 4,461,491 3,506,449
------------ ------------
Income from operations 4,001,068 3,656,480
Other income (expense):
Interest income 38,421 31,784
Interest expense (392,626) (148,082)
Other income 7,414 6,421
Gain on disposal of assets 6,931 8,734
------------ ------------
(339,860) (101,143)
------------ ------------
Income before provision for income taxes 3,661,208 3,555,337
Provision for income taxes 1,429,234 631,628
------------ ------------
Net income 2,231,974 2,923,709
Preferred stock dividend 4,000 22,910
------------ ------------
Net income attributable to common stockholders
before proforma provision for income taxes $ 2,227,974 $ 2,900,799
============ ============
Proforma provision for income taxes (Note 3) -- 790,507
------------ ------------
Net income attributable to common stockholders
after proforma provision for income taxes $ 2,227,974 $ 2,110,292
============ ============
Proforma earnings per common share (Note 4):
Basic $ .08 $ .10
Diluted $ .08 $ .08
Earnings per common share:
Basic $ .08 $ .14
Diluted $ .08 $ .11
Shares used in computing earnings per share:
Basic 26,976,948 20,331,540
Diluted 29,081,368 25,834,105
See notes to consolidated financial statements.
F-3
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999 AND YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------------- -----------------------------
Series B Series C Shares Amount
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Stockholders' Equity, January 1, 1998 $1,126,837 $766,662 19,886,849 $32,390,731
Series B preferred stock conversion 792,046 1,126,837
Series C preferred stock conversion (1,126,837) (459,997) 126,316 459,997
Conversion of 5.5% convertible debentures 480,000 600,000
Accrued Interest paid in stock 7,744 46,948
Public warrants exercises 1,288,930 6,981,453
Non-Employee option/warrant exercises 2,682,632 2,013,393
Employee stock option exercises 788,745 392,150
Common shares purchased under ESPP 139,876 678,305
Riley acquisition 28,236 150,000
General acquisition 17,857 125,000
Dumbauld acquisition 41,885 250,000
Diversitec finders fee 25,131 150,000
Treasury stock repurchase
Issuance of repricing shares 300,000 1,948,959
S-Corporation shareholder distribution
Preferred stock dividends 7,771 47,722
Net income
----------- ----------- ------------- -------------
Stockholders' Equity, December 31, 1998 -- $306,665 26,614,018 $47,361,495
Series C preferred stock conversion (306,665) 79,840 306,665
AeroComm acquisition 304,908 2,134,350
Non-employee option/warrant exercises 263,800 689,944
Employee stock option exercises 130,325 259,997
Preferred stock dividends 592 4,000
Net income
=========== =========== ============= =============
Stockholders' Equity, March 31, 1999 -- -- 27,393,483 $50,756,451
=========== =========== ============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Additional
Retained Paid-In Treasury
Earnings Capital Stock Totals
------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Stockholders' Equity, January 1, 1998 $(4,570,591) $2,961,109 $(668,017) $32,006,731
Series B preferred stock conversion -
Series C preferred stock conversion -
Conversion of 5.5% convertible debentures 600,000
Accrued Interest paid in stock 46,948
Public warrants exercises (379,960) 6,601,493
Non-Employee option/warrant exercises 2,013,393
Employee stock option exercises 392,150
Common shares purchased under ESPP 678,305
Riley acquisition 150,000
General acquisition 125,000
Dumbauld acquisition 250,000
Diversitec finders fee 150,000
Treasury stock repurchase (162,070) (162,070)
Issuance of repricing shares 1,948,959
S-Corporation shareholder distribution (646,410) (646,410)
Preferred stock dividends (47,722) -
Net income 11,403,323 11,403,323
------------ ---------- --------- -----------
Stockholders' Equity, December 31, 1998 $ 6,138,600 $2,581,149 $(830,087) $55,557,822
Series C preferred stock conversion --
AeroComm acquisition 2,134,350
Non-employee option/warrant exercises 689,944
Employee stock option exercises 259,997
Preferred stock dividends (4,000) --
Net income 2,231,974 2,231,974
----------- ---------- --------- -----------
Stockholders' Equity, March 31, 1999 $ 8,366,574 $2,581,149 $(830,087) $60,874,087
=========== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,231,974 $ 2,923,709
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization 976,831 627,938
Decrease (increase) in receivables 2,105,865 (1,985,193)
Increase in inventory (82,052) (278,585)
Increase in costs and estimated earnings in
excess of billings on uncompleted contracts (2,473,303) (187,667)
Increase in prepaid expenses (72,597) (55,080)
Decrease in accounts payable (3,488,587) (1,097,227)
Increase (decrease) in accrued expenses 263,543 (170,678)
Increase in billings in excess of cost and
estimated earnings on uncompleted contracts 108,418 510,563
Increase (decrease) in income taxes payable (642,957) 555,384
----------- -----------
Net cash provided (used) by operating activities (1,072,865) 843,164
Cash flows from investing activities:
Purchase of property and equipment (3,415,598) (344,127)
Increase in deposits and other assets (127,558) (611,540)
Increase in intangible assets (2,575,987) (285,971)
Increase in deferred acquisition costs (175,000) --
----------- -----------
Net cash used by investing activities (6,294,143) (1,241,638)
Cash flows from financing activities:
Net increase (decrease) of loans, lease obligations and
other long-term liabilities 5,890,031 (937,666)
Proceeds from warrant and stock option exercises 949,941 711,982
S-Corp shareholder distribution -- (210,654)
Treasury stock repurchase -- (150,000)
----------- -----------
Net cash provided (used) by financing activities 6,839,972 (586,338)
----------- -----------
Net decrease in cash and cash equivalents (527,036) (984,812)
Cash and cash equivalents, beginning of period 4,789,547 3,355,875
----------- -----------
Cash and cash equivalents, end of period $ 4,262,511 $ 2,371,063
=========== ===========
</TABLE>
F-5
<PAGE>
INTERNATIONAL FIBERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CASH FLOW DISCLOSURES
(UNAUDITED)
Three Months Ended March 31
---------------------------
1999 1998
------------- ---------
Non-Cash Transactions:
Accrued interest paid in Common Stock $ -- $ 46,948
Common Stock issued relating to Business Acquisitions 2,134,350 --
Convertible debt converted to Common Stock -- 600,000
Series B Preferred Stock converted to Common Stock -- 168,502
Series C Preferred Stock converted to Common Stock 306,665 --
Preferred Stock dividends paid in Common Stock 4,000 22,910
F-6
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Significant accounting policies:
Basis of presentation:
In the opinion of management, the accompanying consolidated financial
statements reflect all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of March
31, 1999 and the results of its operations for the three months ended March
31, 1999. Although management believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included
in financial statements that have been prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities Exchange
Commission.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the full
year ending December 31, 1999. The accompanying consolidated financial
statements should be read in conjunction with the more detailed financial
statements, and the related footnotes thereto, filed with the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
2. Inventory:
The components of inventory consist of the following:
March 31, December 31,
1999 1998
------------ ------------
New and used telephone equipment $ 18,058,255 $ 18,058,880
Cabling and equipment 839,745 847,433
Raw Materials 90,365 --
------------ ------------
18,988,365 18,906,313
Less: allowance for obsolete inventory (1,960,170) (1,960,170)
------------ ------------
$ 17,028,195 16,946,143
============ ============
3. On September 1, 1998, the Company acquired United Tech, Inc. ("United") and
Diversitec, Inc. ("Diversitec") under the rules of poolings of interest
accounting whereby the Company exchanged shares of Common Stock for all the
shares of stock of United and Diversitec. As such, all prior period
consolidated financial statements presented have been restated to include
the combined results of operations, financial position and cash flows of
United and Diversitec as though they have always been a part of the
Company. In addition, both United and Diversitec were Subchapter S
Corporations for federal tax purposes and, accordingly, did not pay U.S.
federal income taxes up to the acquisition date. Therefore, a proforma
provision for income taxes is recorded for the period up to the acquisition
date as if both companies were C Corporation tax reporting entities since
inception.
F-7
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Stockholders' Equity:
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Proforma Numerator:
Proforma Numerator for basic earnings per share -
net income attributable to common stockholders
after proforma provision for income taxes $ 2,227,974 $ 2,110,292
Interest expense and finance expense on convertible debt 25,116 39,540
Preferred stock dividends 4,000 22,910
----------- -----------
Proforma Numerator for diluted earnings per share -
adjusted net income attributable to common
stockholders plus assumed conversions $ 2,257,090 $ 2,172,742
=========== ===========
Numerator:
Numerator for basic earnings per share - net income
attributable to common stockholders before proforma
provision for income taxes $ 2,227,974 $ 2,900,799
Interest expense and finance expense on convertible debt 25,116 39,540
Preferred stock dividends 4,000 22,910
----------- -----------
Numerator for diluted earnings per share - adjusted
net income attributable to common stockholders
plus assumed conversions $ 2,257,090 $ 2,963,249
=========== ===========
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 26,976,948 20,331,540
Effect of dilutive securities:
Convertible preferred stock 44,381 961,932
Dilutive options 1,877,391 4,181,985
Convertible debt 182,648 358,648
----------- -----------
Dilutive potential common shares 2,104,420 5,502,565
Denominator for diluted earnings per share -
adjusted weighted-average shares outstanding
and assumed conversions 29,081,368 25,834,105
=========== ===========
Proforma earnings per common share:
Basic $ .08 $ .10
=========== ===========
Diluted $ .08 $ .08
=========== ===========
Earnings per common share
Basic $ .08 $ .14
=========== ===========
Diluted $ .08 $ .11
=========== ===========
</TABLE>
F-8
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Segment Information
The Company's operations are classified into five principal reportable
segments that provide different products or services. Separate management
of each segment is required because each business unit is subject to
different marketing, production and technology strategies. Segmented
information is reported in a different manner from the 1998 annual report
to better describe how management currently analyzes its financial
information and to consolidate by division how the Company is marketed to
the general public and its clients.
March 31, 1999 (Three Month Period Ending)
<TABLE>
<CAPTION>
Infrastructure Systems Equipment
Development Integration Engineering Distribution Wireless Total
----------- ----------- ----------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 9,498,505 $5,755,876 $ 4,134,708 $ 7,551,161 $ 925,087 $27,865,337
Gross Profit 2,163,923 1,659,787 1,628,811 2,485,791 524,247 8,462,559
Interest Expense 128,609 25,895 94,383 143,414 325 392,626
Depreciation and
Amortization 484,515 52,173 129,124 302,519 8,500 976,831
Operating Income 1,239,593 596,924 543,494 1,203,067 417,990 4,001,068
Assets 23,859,684 9,708,380 7,661,731 44,626,018 6,205,289 92,061,102
March 31, 1998 (Three Month Period Ending)
Infrastructure Systems Equipment
Development Integration Engineering Distribution Wireless Total
----------- ----------- ----------- ------------ -------- -----------
Revenues $ 2,714,165 $5,699,025 $ 1,569,756 $11,685,033 $ -- $21,667,979
Gross Profit 348,426 1,414,228 422,347 4,977,928 -- 7,162,929
Interest Expense 49,088 10,849 12,688 75,457 -- 148,082
Depreciation and
Amortization 201,311 35,296 137,104 254,227 -- 627,938
Operating Income
(Loss) (137,374) 629,574 (87,558) 3,251,838 -- 3,656,480
Assets 8,388,625 7,222,294 3,449,917 31,921,329 -- 50,982,165
</TABLE>
F-9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
International FiberCom, Inc. offers a wide variety of services and
equipment to the telecommunications, cable television and other related
industries through ten wholly-owned subsidiaries. Unless the context requires
otherwise, all references to "we", "our" or "us" refer to International
FiberCom, Inc. and its subsidiaries. Our subsidiaries are separated into the
following five principal business segments:
INFRASTRUCTURE DEVELOPMENT
Our Infrastructure Development segment designs, installs and maintains
fiber-optic cable networks for cable television and telephone companies,
also known as "outside plant development". We have three subsidiaries in
this segment:
* Kleven Communications, Inc. ("Kleven")
* Kleven Communications - CA, Inc. ("Kleven-CA")
* All Star Telecom, Inc. ("All Star")
SYSTEMS INTEGRATION
Our Systems Integration segment designs, installs and maintains structured
cable systems, network hardware, software, workstations and related
peripherals, primarily within commercial, industrial and government
facilities. We have one subsidiaries in this segment:
* Concepts in Communications, Inc. ("Concepts")
ENGINEERING
Our Engineering segment specializes in the design of fiber-optic video,
voice and data networks for cable television and telephone companies. This
segment also provides project management, construction management,
consulting services and staffing. We have two subsidiaries in this segment:
* Compass Communications, Inc. ("Compass")
* IFC Staffing, Inc. ("IFC Staffing")
EQUIPMENT DISTRIBUTION
Our Equipment Distribution segment subsidiaries purchase, sell and deal in
new and used telecommunications equipment used in the digital access,
switching and transport systems of telephone companies, and other Fortune
500 companies. We have three subsidiaries in this segment:
* Southern Communications Products, Inc. ("Southern")
* Diversitec, Inc. ("Diversitec")
* United Tech, Inc. ("United Tech")
10
<PAGE>
WIRELESS
Our Wireless segment manufactures and installs specialized wireless
telecommunications equipment used to enhance radio frequency transmission
and reception in tunnels, subways and other confined environments.
* AeroComm, Inc. ("AeroComm")
Our strategy is to be a one-stop solution for the telecommunications
marketplace. This strategy involves offering a wide range of engineering,
consulting and maintenance services for fiber-optic and broadband networks and
systems integrated with local 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 a
network that covers a large geographic area, such as a state or country.
We derive a substantial portion of our revenue from contracts that are
accounted for under the percentage of completion method of accounting. Under
this method, revenues are recorded as work progresses on a contract. Overall
gross margin percentages can increase or decrease based upon changes in the
estimated gross margin percentages over the lives of the individual contracts.
In January 1999, we acquired all of the outstanding equity securities of
AeroComm for approximately $5 million paid with $2.9 million in cash and 304,907
shares of restricted common stock. The acquisition is being accounted for as a
purchase.
In February 1999, we entered into a two-year credit agreement with a
syndication of commercial banks. Under the agreement, we have the ability to
borrow, on a revolving credit basis, an aggregate of $30 million based on our
available borrowing capacity. Borrowings under this agreement will bear interest
at either LIBOR plus 2% or prime rate at our discretion. In March we took
advances under the credit agreement to pay off outstanding balances under
various credit agreements. In connection with the $30 million credit agreement,
we also entered into a $5 million lease financing agreement.
In April 1999, we purchased all of the outstanding equity securities of All
Star. All Star specializes in the engineering, development and maintenance of
telecommunications infrastructure systems, including cellular, for the CATV, LEC
and CLEC industries. The purchase agreement calls for an initial payment of
$3.85 million in cash and the issuance of 592,857 restricted shares of common
stock for a total of approximately $8 million. Additional contingent payments
(up to $13.5 million) may be payable if All Star meets certain pretax targets
over the next 3 years. Future contingent payments may be in cash or common
stock, except that over 40% of all proceeds must be paid in stock. The
acquisition will be accounted for as a purchase.
RESULTS OF OPERATIONS
NET SALES. Net sales for the first quarter of 1999 increased to $27,865,337
from $21,667,979 for the same period in 1998, an increase of 29%. This increase
in sales is primarily attributable to the increase in contract activity in the
infrastructure development and engineering segments as well as the addition of
AeroComm's revenue in the first quarter. Infrastructure development and
engineering segment revenues increased by over $9 million from the comparable
quarter of 1998 to overcome a reduction in revenues in the equipment
distribution segment of approximately $4 million. Refer to Note 5 of the
financial statements (page F-9) for further breakdown by segment.
11
<PAGE>
GROSS PROFIT. The Company's gross profit increased to $8,462,559 for the
first quarter of 1999 compared with $7,162,929 for the same period in 1998. The
increase was a result of significant growth in the infrastructure development
and engineering segments, as well as the addition of profits from our wireless
division as compared to the 1998 quarter. Such increases offset the reduction in
the profit of the equipment distribution segment of approximately $2.5 million.
GENERAL AND ADMINISTRATIVE COSTS. The Company's general and administrative
expenses were $4,461,491 for the first quarter of 1999 compared with $3,506,449
for the same period in 1998. As a percentage of net sales, the general and
administrative expenses remained constant at 16% on a quarter to quarter
comparison.
OTHER INCOME (EXPENSE). The Company's net expense in this category was
$339,860 for the first quarter of 1999 compared with $101,113 for the same
period in 1998. This increase is primarily attributable to higher borrowing
activity for the acquisitions of AeroComm in 1999, and Communications Center,
Inc., General Communications, Inc., and Riley Communications, Inc. in 1998. All
four of the above transactions were in part cash purchases.
The increase in net expenses is also partially attributable to increased
interest expenses under equipment financing arrangements as a result of
substantial equipment purchases in the infrastructure development segment to
meet increased demand for that segment's services.
PROVISION FOR INCOME TAX BENEFIT (EXPENSE). The Company accrued income tax
expense of $1,429,234 in the first quarter of 1999 compared to income tax
expense of $631,628 for 1998.
On a pro forma basis the provision for income taxes increased from
$1,422,135 in the first quarter of 1998 to $1,429,234 in the same period of
1999. The pro forma tax adjustment is stated to reflect the acquisitions of
Diversitec and United Tech as explained in Note 3 of the financial statements.
NET INCOME. The Company generated net income of $2,231,974, or
approximately 8% of revenues, for the first quarter of 1999 compared with net
income of $2,110,292, after pro forma tax adjustments, or 10% of revenues, for
the same period in 1998.
PREFERRED STOCK DIVIDEND. The Company paid a dividend of $4,000 on its
Series C Convertible Preferred Stock for the first quarter of 1999 through the
issuance of 592 shares of its Common Stock.
BACKLOG. The Company had a backlog of approximately $32.0 million on a work
in process basis as of March 31, 1999. The Company expects such work orders to
be completed by December 1999. Further, the Company has work orders, which were
not started at March 31, 1999, for Cox Communications, Inc., the State of
Tennessee, Nike, Inc., Neilsen Dillingham, TCG, Intregration Technologies, TCI,
and AT&T totaling in excess of $30 million. The Company expects to commence such
work during the second quarter of 1999 and substantially complete it by December
1999.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
OPERATIONS. The Company has historically financed its operations through
operating cash flow, lines of credit and debt and equity offerings. The
Company's liquidity is impacted, to a large degree, by the nature of billing
provisions under its installation and service contracts. Generally, in the early
periods of contracts, cash expenditures and accrued profits are greater than
allowed billings, while contract completion results in billing previously
unbilled costs and related accrued profits.
For the year to date, the Company used approximately $1,072,865 of net cash
from operations. Cash generated from operations of $5,686,631 includes net
income of approximately $2,231,974, depreciation and amortization of $976,831, a
decrease in receivables of $2,105,865, an increase in accrued expenses of
$263,543 and an increase in overbillings of $108,418. Cash expended for
operations of $6,759,496 includes an increase in inventory of $82,052, an
increase in underbillings of $2,473,303, and increase in prepaid expense of
$72,597, a decrease in accounts payable of $3,488,587 and a decrease in income
taxes payable of $642,957.
INVESTING ACTIVITIES. For the three months ended March 31, 1999 the Company
used approximately $6,294,143 in investing activities. Such amount consists of
the Company's purchase of fixed assets of approximately $3,415,598, an increase
in intangible and other assets of $2,703,545, and an increase in deferred
acquisition costs of $175,000.
FINANCING ACTIVITIES. In the first quarter of 1999, the Company's financing
activities generated approximately $6,839,972 consisting in part of an increase
in loans and other liabilities payable of approximately $5,890,031, and proceeds
from warrant and stock option exercises of $949,941.
As of March 31, 1999, the Company had a revolving line of credit with Bank
One and other participating institutions totaling approximately $30 million,
with an available balance of approximately $20.5 million. The Company believes
that with its current working capital, funds generated through its operations
and available credit balances on its lines of credit it will have sufficient
working capital to address the anticipated growth of demand and markets for its
products and services for the next 12 to 18 months. The Company may, however,
seek to obtain additional capital through an expanded working capital line of
credit at a financial institution or through additional debt or equity offerings
during this time period. The raising of additional capital in public markets
will primarily be dependent upon prevailing market conditions and the demand for
the Company's products and services.
INFLATION AND SEASONALITY. The Company does not believe that it is
significantly impacted by inflation. The Company's operations are not seasonal
in nature.
13
<PAGE>
YEAR 2000 COMPLIANCE
The Company has reviewed its computer systems to identify those areas that
could be adversely affected by Y2K software failures. The Company has converted
approximately 80% of its information systems to be Y2K compliant. The compliance
effort to date has cost of approximately $140,000 and approximately $60,000 is
budgeted to complete the remaining required systems' compliance efforts.
Although the Company expects that any future expenditures made in connection
with Y2K conversions will not be material, there can be no assurance in this
regard. The Company believes that some of its customers, particularly local
exchange and long distance carriers and cable system operators may be impacted
by the Y2K problem, which then may affect the Company. Currently, the Company
cannot predict the effect that Y2K problems may have on companies with whom it
transacts business and there cannot be any assurance that these problems will
not materially and adversely affect the Company's financial condition, cash flow
or results of operations. As a result of this uncertainty, the Company is
formulating a contingency plan to address the possible effects of problems
encountered as a result of Y2K issues.
FORWARD-LOOKING INFORMATION.
This Report contains certain forward-looking statements and information
within the meaning of section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The cautionary statements made in this
Report should be read as being applicable to all related forward-looking
statements wherever they appear in this report. 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 its projects on
time and within budget; levels of, and ability to collect amounts receivable;
availability of trained personnel and utilization of the Company's capacity to
complete work; the Company's ability to complete proposed acquisitions and, upon
their completion, to integrate the acquisitions into its organization and manage
its growth; competition and competitive pressures on pricing; and economic
conditions in the United States and in the regions served by the Company.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not involved as a party to any legal proceeding other than
various claims and lawsuits arising in the ordinary course of its business, none
of which, in the opinion of the Company's management, is material, either on an
individual or a collective basis.
ITEMS 2, 3 , 4, 5 AND 6 ARE OMITTED BECAUSE THESE ITEMS ARE INAPPLICABLE TO THIS
REPORT.
15
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