SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No. 1-9690
INTERNATIONAL FIBERCOM, INC.
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(Exact name of small business issuer as specified in its charter)
Arizona 86-0271282
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(State of Incorporation) (IRS Employer Identification No.)
3410 E. University Drive, Ste. 180
Phoenix, Arizona 85034
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 387-4000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act :
Common Stock, no par value
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the average of the high and low prices of the
Registrant's Common Stock on the Nasdaq National Market on March 10, 2000 was
approximately $873,796,638. This is not necessarily a conclusive determination
for other purposes. As of March 10, 2000, the Registrant had 30,457,994 shares
of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement Relating to the 2000 Annual Meeting
of Stockholders are incorporated by reference.
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The following statement is made pursuant to the safe harbor provisions for
forward-looking statements described in the Private Securities Litigation Reform
Act of 1995. International FiberCom, Inc. and subsidiaries ("International
FiberCom, Inc." or the "Company") may make certain statements in this Annual
Report on Form 10-K. Some statements contained in this Annual Report, including,
without limitation, statements that contain the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute "forward-looking
statements." Forward-looking statements may related to our future growth and
profitability, our competitive strengths and business strategies. Further,
forward-looking statements are based on our current expectations and are subject
to a number of risks, uncertainties and assumptions relating to our operations,
financial condition and results of operations, including rapid technological and
regulatory changes in the industries we serve, the financial resources of our
customers, our numerous competitors and the relatively few barriers to entry for
potential competitors, the short-term nature of many of our contracts, the
quarterly variations we experience in our revenue, our uncertain revenue growth,
our ability to attract and retain qualified personnel, our ability to expand our
infrastructure and manage our growth, our ability to identify, finance, complete
and then integrate our acquisitions, and the restrictions imposed by our credit
facility, among others. If any of these risks or uncertainties materialize, or
if any of the underlying assumptions prove incorrect, actual results could
differ materially from results expressed or implied in any of our
forward-looking statements. The foregoing and other risks faced by us described
in the Cautionary Factors section beginning on page 13, among others, are
detailed in this Annual Report and in other documents filed by us with the
Securities and Exchange Commission. We do not undertake any obligation to revise
these forward-looking statements to reflect future events or circumstances.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
SUMMARY OF OUR BUSINESS
Unless the context requires otherwise, all references to "we," "our" or
"us" refer to International FiberCom, Inc., a corporation originally
incorporated in the state of Arizona in 1972 and its 16 subsidiaries.
We are an end-to-end solutions provider serving telecommunications
industry. We deliver a broad range of solutions designed to enable, enhance and
support voice, data and video communications through wired, wireless, internal
and external networks. In delivering these solutions, we design, develop,
install and maintain internal and external networks that support
Internet-related applications and other communications for our customers. Our
services range from the design, development and installation of fiber-optic
networks to wireless connectivity solutions. Our products range from proprietary
wireless communications equipment to new, deinstalled and refurbished
communications equipment from a variety of manufacturers.
We have grown significantly over the past five years as a result of
consistent internal growth and strategic acquisitions. Consolidated revenues
over the past five years have grown at an average annual rate of 98%. See
Selected Financial Information and Note 11 - Segment Information in the
accompanying consolidated financial statements for additional financial
information.
We deliver our products and services through three operating groups:
* INFRASTRUCTURE DEVELOPMENT GROUP provides specialty design and
engineering services, installation and maintenance of underground and
aerial fiber optic, copper and broadband, as well as wireless,
communications systems, and integrated local and wide area networks;
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* WIRELESS TECHNOLOGIES GROUP designs, manufactures and installs
proprietary wireless connectivity solutions designed to enable and
enhance wireless communications, in both fixed and mobile
applications; and
* EQUIPMENT DISTRIBUTION GROUP sells new, deinstalled and refurbished
communications equipment from a variety of manufacturers. This
equipment is used in the digital access, switching and transport
systems of communications service providers and other Fortune 500
companies.
Our customers include a number of the largest and most prominent companies
in the telecommunications and other industries, such as
* incumbent local exchange carriers,
* competitive local exchange carriers,
* cable television operators
* long distance carriers,
* wireless phone companies,
* telecommunications equipment vendors,
* co-location facilities providers, and
* other Fortune 500 and privately held companies.
Our representative customers are:
Ameritech GTE Pacific Telesis
AT&T Corp. Level 3 Communications PF.NET
Bell Atlantic Lucent Technologies The Red Cross
CableVision MCI/WorldCom Sprint
Charter Cable, Inc Media One Southwestern Bell
Comcast Motorola U.S. General Services
Cox Communications Next Link Administration
Federal Express Nike U.S. West
Fluor Daniels Nortel Time Warner, Inc.
Gambro Healthcare
For our year ended 1999, no customer accounted for more than 10% of our
revenues, even though we often provide services to a single customer in multiple
geographic locations through one or more of our operating groups. Our top ten
customers represented 44% of our revenues in fiscal 1999 and included AT&T,
CableVision, Cox Communications, Level 3 Communications, Next Link and
TimeWarner.
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INDUSTRY OVERVIEW
We believe that several notable industry trends will continue to cause a
significant increase in the demand for our services and products over the next
several years.
THE DEMAND FOR BANDWIDTH
Bandwidth is the ability to transmit digital data through networks. The
need for additional bandwidth has arisen from the increased growth in a number
of areas: telecommunications, voice, video and data traffic, electronic
commerce, transmission of high quality information, entertainment and other
content over the Internet, and use of and reliance on personal computers,
including for private network computing. Fiber-optics technology IS the most
frequently used in new systems being designed to handle data traffic. The
development of Internet based networks has also heightened the need for seamless
transmission of packeted digital data over longer distances on fiber optic based
networks.
In response to the consumer demand for additional bandwidth, the nation's
telecommunications and cable television system operators are upgrading their
facilities with new technology, expanding, and in many instances, replacing
their existing telecommunications infrastructure to allow for increased
bandwidth capable of moving vast amounts of digital data. Major companies,
including AT&T, Time Warner, Charter Cable, Inc., CableVision, and Cox
Communications, all of whom are our customers, have announced major capital
expenditure programs to upgrade their networks or convert their existing
networks to broadband, fiber-optic based systems. Further, other new competitors
of existing telecommunications and cable television companies, often referred to
as competitive local exchange carriers, or "CLECs," are building extensive, high
capacity local and long distance fiber optic based networks to transport digital
data.
THE NEED TO COVER THE "LAST MILE:" CONVERGENCE OF BROADBAND AND WIRELESS
TECHNOLOGY
Increasing bandwidth requires advances in technology and deployment of
technology. In order for the "information superhighway" to become available on a
widespread basis it will have to be simple, efficient easy to use and offered at
a relatively low cost. To achieve this objective a number of alternative, and
possibly complementary, technologies are being examined. The companies striving
to provide more bandwidth have used wireless technology for the Internet and
other applications along with and in addition to fiber-optic technology. The
Internet will have to move and manipulate vast quantities of data over long
distances and it will also have to provide residences and businesses with
reliable access to it. Making this final connection to residences and businesses
is often referred to as the "last mile." Existing copper networks and cable will
play a significant role in this last connection. However, neither copper nor
wireless systems can currently seamlessly connect to digital telecommunications
networks without the advent of new technology. It may be that wireless
technology will become the most efficient, cost effective answer to this
problem. We intend to allocate significant research and development resources
with the goal of developing our own proprietary technology and solutions to
these connectivity issues in particular and to digital wireless and fiber-optic
telecommunications systems problems in general.
THE TREND TOWARD OUTSOURCING OF INFRASTRUCTURE NEEDS
In the current environment where voice, video and data transmission
services are converging, telecommunication service providers are bundling
services that they once offered separately, and doing so in new geographic
markets. Because of consolidation, deregulation and the competitive market
forces at work in the telecommunications industry, companies have become
integrated and geographically diverse. They are focusing on broadening the scope
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of their core businesses in providing telecommunications services. As a result,
they are turning with increasing frequency to specialists to outsource their
infrastructure needs.
INCREASED DEMAND FOR COMPREHENSIVE SOLUTIONS
Increased competition and the resulting increase in investment in
infrastructure and content by telecommunications and other service providers
have led to greater concerns about the quality and reliability of infrastructure
providers. We believe that our customers increasingly are seeking comprehensive
end-to-end solutions to their infrastructure needs by turning to fewer qualified
infrastructure service providers who have the size, financial capability and
technical expertise to deliver a quality and reliable network on time. These
customers are seeking service providers that can build large and complex
networks quickly, with a high level of quality and who can rapidly mobilize
their capital equipment, financial assets and personnel to respond effectively
to the increasing scale and time constraints of customer demands.
THE INCREASED DEMAND FOR INTERNAL COMMUNICATIONS SYSTEMS
In a relatively short period, computer networks have evolved from simple
connections between desktop workstations to complex links between multiple
computer servers, work stations, mainframe computers and peripheral devices. The
shift from a computer room housing one large, shared, mainframe system to
personal computer-based networks has changed the emphasis from the processor to
network architecture. Increases in an organization's informational productivity
are now dependant on its network's ability to process multiple tasks - voice
mail, e-mail, telephony, accounting, word processing and operational reporting -
simultaneously and transport this data wherever it is needed. Systems
integration is the design, installation and maintenance of these complicated
local area networks ("LANs") and multi-locational wide area networks ("WANs"). A
WAN is simply multiple lans connected through an existing telecommunications
carrier or connected with proprietary cable, fiber or some other medium, such as
infrared or other wireless. The backbone of any LAN is cable. In many systems,
this backbone is fiber-optic cable along with network hardware and software and
the related data delivery system, rather than the workstations connected to the
system. This backbone is referred to as a "structured cabling system." Such
systems are designed to be adaptable and provide sufficient capacity for
multiple applications, including both voice and data transmission.
INCREASED DEMAND FOR SECONDARY EQUIPMENT
While the need to rebuild traditional telecommunications networks
increases, the existing networks operated by local and long distance exchange
carriers still operate and require maintenance. Original equipment manufacturers
("OEMs") continue to roll out new products with new features. These new products
are costly and often incompatible with older technology, making replacement
decisions difficult. Therefore, older technology continues to be employed
domestically and internationally. The secondary equipment market gives end users
alternatives to large capital investments in more costly new technology in cases
where such investments are not economically feasible. The secondary market also
gives end users access to replacement parts for existing systems for which the
OEMs have discontinued lines and no longer provide product support. Our
equipment distribution companies provide new OEM product lines, provide
replacement parts and equipment from the secondary market and provide value
added, fully assembled systems designed to add immediate capacity to an existing
switching system.
COMPETITIVE STRENGTHS
We have pursued a strategic plan to grow internally and through accretive
acquisitions to enable us to become an end-to-end solutions provider and to be
able to develop proprietary wireless technologies and services to our customers.
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The progress we have made in this plan has enabled us to capitalize on the
foregoing industry trends and has resulted in the following competitive
strengths:
END-TO-END SOLUTIONS PROVIDER
We believe we are one of the few infrastructure providers capable of
providing all of the design, building, installation and maintenance services
necessary for a complete telecommunications network starting from a transmission
point, such as a telephone company central office or cable television head-end,
and running through aerial, underground and buried cables or through wireless
transmission to the ultimate end users' voice and data ports, computer
terminals, cable outlets or cellular stations.
TECHNICAL EXPERTISE AND RELIABLE CUSTOMER SERVICE
We believe that we have established a reputation for quality and
reliability, technical expertise and operating and financial efficiency. We
believe that our reputation among our customers should give us an advantage in
securing larger, more technically complex infrastructure projects, and a greater
volume of business from our existing and new customers.
WIRELESS TECHNOLOGIES AND EXPERTISE
We can provide our customers with proprietary wireless connectivity
solutions designed to enable and enhance wireless communications in both fixed
and mobile applications. Through our team of design engineers and technology
professionals, we are dedicating significant resources to research and
development efforts aimed at continuing the development of solutions related to
transmission and connectivity issues impacting cellular, PCS, radio and other
two-way mobile communication systems. To date, we have four patents pending on
products designed to improve signal clarity and to enable wireless
communications in environments where wireless communication has historically not
been technologically feasible. We have successfully deployed our technology
solutions for customers across North America and we believe there are
significant global opportunities for our product and services.
AGILE FOOTPRINT
We have developed an agile footprint for the services we provide. Our
design, engineering and technology solutions capabilities can be deployed
quickly to respond to new market opportunities, either from a specific customer
or from growing demand in emerging markets. Additionally, because we provide
services to customers in the telecommunications, broadband and wireless
industries, we are technology neutral. These operating characteristics give us
the ability to capitalize on the wide range of technological advances and other
market developments that drive capital spending by our customers and to help
reduce the risk of being dependent on a single geographic region or technology
platform for our success. We believe that our agile footprint has helped us to
attract our diverse and growing customer base, especially from the larger
companies in the telecommunications industry, and that it makes us less
susceptible to downturns in any particular geographic region or industry sector.
INCREASING NATIONAL SCOPE AND NAME RECOGNITION
We have significantly broadened our geographic presence in recent years and
believe we are capable of servicing customers across the United States. We are
continuing to develop the brand name "International Fibercom" across all of our
operating units, with the goal of eventually achieving national branding of our
name within our marketplace and further establishing us as an integrated,
national company.
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EXPERIENCED MANAGEMENT
We have a strong management team to continue executing our growth strategy.
During 1999 we added depth to our senior and middle management in response to
the rapid growth in the size and scope of our projects. We believe that our
management team has the operational, business development and financial
knowledge and experience to anticipate trends in our industry and to
consistently meet and exceed our clients' expectations for comprehensive and
reliable solutions.
BUSINESS STRATEGY
Our objectives are to continue to: (i) improve and strengthen our human and
financial resources in order to enhance our ability to provide end-to-end
solutions for the networks supporting voice, data and video, the Internet and
other communications needs of our customers; (ii) perform more integrated
services for our existing customers and expand our customer base on a national
level; and (iii) continue to pursue the development of proprietary wireless
technologies and solutions for our customers.
EXPAND EXISTING CUSTOMER RELATIONSHIPS AND PURSUE NEW CUSTOMERS
We believe that our customers increasingly are seeking single national
vendors to provide all of their telecommunications and energy infrastructure
services needs. Consequently, we actively market our national scope, agile
footprint and comprehensive service offerings to our existing and potential
customers. Further, we focus on increasing the range of services we provide. We
also, when necessary, team with engineering firms, equipment suppliers and other
vendors to provide turnkey services to our customers.
CONTINUE TO ACHIEVE OPERATING EFFICIENCIES
We intend to continue to improve our profitability by focusing on ways to
achieve costs savings, economies of scale and improved asset and personnel
utilization. We have realigned our operations to maximize our opportunities to
provide comprehensive solutions to our customers and instituted a program to
improve efficiency and productivity by leveraging existing administrative
personnel to support increased growth. We also intend to further develop and
expand the use of integrated management information systems across our service
lines to facilitate financial control, project costing and asset allocation. The
goal of the program is to realize savings in overhead and other expenses and
thereby improve operating margins and profitability. An element of the program
includes paying our division presidents and other managers incentive
compensation based upon performance.
PURSUE SELECTED ACQUISITIONS
Through selected acquisitions, we continue to add customers and
capabilities as well as expand our geographic coverage. We have completed ten
acquisitions in the United States in the last two years, targeting selected
companies to expand into customer and geographic markets we did not currently
serve and to expand the range and depth of services we provided. We will
continue to focus our acquisition efforts on profitable companies with good
reputations and strong management. We are not currently engaged in any
negotiations to make any material acquisitions.
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OUR SERVICES AND PRODUCTS
We are an end-to-end solutions provider serving the communications
industry. Our services range from design, development and installation of fiber
optic networks to wireless connectivity solutions. Our products range from
proprietary wireless communications equipment to new, deinstalled and
refurbished communications equipment from a variety of manufacturers. These
services and products are provided through three operating groups:
Infrastructure Development, Wireless Technologies and Equipment Distribution.
INFRASTRUCTURE DEVELOPMENT GROUP
The Infrastructure Development Group provides three general types of
services: engineering and external and internal communications services. We
provide these services as individual components, as a combination, or a full
turnkey solution. The Infrastructure Development Group maintains a presence in
the Western, Southwestern, Southern and Southeastern regions of the United
States.
ENGINEERING SERVICES. We specialize in design and consulting in connection
with major broadband, fiber-optic networks. Design work includes hybrid
fiber-optic/coaxial cable broadband distribution networks for telecommunications
and cable television companies using computer automated design and geographic
conformation software. We also offer "land based development," a service which
includes mapping, verification and documentation of existing network
installations. This service frequently requires conversion of existing
documentation into a database-oriented system using geographic information
software. These platforms allow network operators an efficient and effective way
to relate customer base, demographics and existing networks and equipment in a
single system. For new or planned networks, we provide construction oversight,
existing network evaluation, broadband system and design, network plant testing
and training. After completion of our services, we inventory planning and
project support team records of the information necessary to plan, design,
market and manage a broadband network.
EXTERNAL COMMUNICATIONS. We design, build, install and maintain the
physical facilities used to provide end-to-end telecommunications service from
the central office of the switching center or cable head-end to the home or
business. Our services include:
* placing and splicing fiber optic, coaxial and copper cable;
* excavating trenches in which to place the cable;
* installing related structures, such as poles, anchors, conduits,
manholes, cabinets and closures;
* placing drop lines from the main distribution terminals to the home or
business; and
* maintaining, removing and replacing these facilities.
We also provide route development, right of way and other site acquisition,
permitting, materials procurement, acceptance testing and as-built
documentation.
We bundle our services in order to better provide end-to-end solutions to
our customers as follows:
* INTER-EXCHANGE NETWORKS. We design, engineer and build fiber optic and
other cable networks between metropolitan areas using specialty
equipment such as trenchers, plows and directional borers.
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* LOCAL EXCHANGE NETWORKS. We design, install, build and maintain
telecommunications networks from the provider's point-of-presence to
its customers' locations within metropolitan areas (local loop).
* BROADBAND NETWORKS. We design, engineer, build and install the
infrastructure for network rebuilds, upgrades and maintenance for
cable television multiple system operators.
* WIRELESS NETWORKS. We provide installation and maintenance services to
the wireless communications industry, including the building of
communication towers, placement of antennas and associated wiring, and
installation of transmission equipment and shelters.
INTERNAL COMMUNICATION SERVICES. We provide services consisting of the
design, installation, testing and documentation of switching and transmission
equipment and supporting components at a provider's point- of-presence (central
office) locations. We also design, install and maintain integrated voice, data
and video networks inside customer premises along with the infrastructure
required to support complex intranet and Internet solutions. Our systems
integration services involve the selection, configuration, installation and
maintenance of software, hardware, other computing and communications equipment
and cabling to provide an integrated computing and communications system. We
also provide e-commerce and website development consulting services. Our
internal communication services are less capital intensive than external
communication services, but they require more technically skilled personnel.
EQUIPMENT DISTRIBUTION GROUP
This Group provides telecommunications carriers with a broad range of
infrastructure equipment and related services designed to meet their specific
and changing equipment needs. We offer our customers a unique combination of
new, deinstalled and refurbished equipment from a variety of manufacturers,
allowing them to make multi-vendor purchases from a single, cost-effective
source. We supply the equipment in the form of piece parts, complete central
office switches or line-extensions. The equipment includes digital access,
switching and transport equipment. Digital access systems are line systems
between a telecommunication company's central office and each customer. A
switching system effects call connection and routing. Transport systems include
products that carry signals throughout the network. To further serve our
customer's needs, we offer value-added services, including: central office
installation/deinstallation services, system testing; asset verification;
warehousing; and inventory disposition services. We have three distribution
points located in Virginia and Florida from which both the domestic and
international markets can be served. We maintain extensive quantities of owned
and consigned inventory and maintain an industry standard ISO 9000 Quality
Control Certification. We inventory and sell equipment produced by a number of
prominent companies, including AT&T, Lucent Technologies, Nortel, Tellabs, DSC,
Alcatel, Fujitsu and ADC. We are a factory authorized value added re-seller of
Lucent Technologies.
WIRELESS TECHNOLOGIES GROUP
This Group designs, manufactures and installs proprietary wireless
connectivity solutions designed to enable and enhance wireless communications in
both fixed and mobile applications. Through our team of design engineers and
technology professionals, we are dedicating significant resources to research
and development efforts aimed at continuing the development of solutions related
to transmission and connectivity issues impacting cellular, PCS, radio and other
two-way mobile communication systems. To date, we have four patents pending on
products designed to improve signal clarity and to enable wireless
communications in environments where wireless communication has historically not
been technologically feasible. We have successfully deployed our technology
solutions for customers across North America.
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OUR CUSTOMERS
As an end-to-end solutions provider, we often deliver our services to a
single customer in multiple geographic locations through one or more operating
segments. While no single customer accounted for more than 10% of revenues in
1999, our top ten customers represented 44% of revenues and included AT&T,
Cablevision, Cox Communications, Level 3 Communications, Next Link and Time
Warner.
CONTRACTS
Under a typical infrastructure development contract, we supply the
expertise, equipment and labor and the customer supplies nearly all materials,
such as the fiber-optic cable and conduit. The work is generally performed under
fixed unit prices and we usually receive payment on contracts within 30 to 60
days of invoicing. Accordingly, we must finance receivables and work-in-progress
during that period. Under a typical systems integration installation contract,
we supply the expertise, equipment, labor and materials. Internal communication
services are performed under both time and material and fixed price
arrangements.
Engineering services are performed under a variety of contracts, purchase
orders, standing relationships and working arrangements. We have entered into
master contracts of indefinite term with major systems operators for the
services specified in such contracts. Specific projects are undertaken under
these contracts in response to purchase orders, change orders, revised standards
and work orders. We also perform services for certain long-standing clients
under work orders without governing master contracts. In general, contracts and
work orders are terminable or expandable at will by our customers consistent
with the customer's network requirements. We have also entered into continuing
"strategic alliances" with equipment vendors under which we are recommended or
specified to equipment customers as the system design vendor.
SALES AND MARKETING
As part of our marketing plan, we are now emphasizing the "International
FiberCom" name, with the objective of achieving nationwide name recognition
within our industry. In addition, our marketing plan is to position ourselves in
the telecommunications and Internet related marketplace as a seamless,
end-to-end solutions provider. The management of our various service groups is
carrying out local marketing efforts and executive management is supplementing
their efforts on a corporate-wide basis. Our regional division presidents market
to existing and potential telecommunications customers, negotiate new contracts
and seek to be placed on lists of vendors invited to submit bids for master
services agreements and individual projects. They are responsible for developing
and maintaining productive, long-term relationships with our customers. We
believe that this local orientation, with support from our headquarters, helps
to gain repeat business and enter new markets. We are also finding that because
we have performed well in one region, our customers are asking us to assist them
in other locales that they are entering or where they already have a presence.
COMPETITION
The market for the products and services we offer is highly competitive and
requires substantial resources and skilled and experienced personnel. We compete
with other independent contractors and equipment re-sellers in most of the
markets in which we operate, several of which are large domestic companies, some
of which may have greater financial, technical, and marketing resources. In
addition, there are relatively few, if any, barriers to entry into the markets
in which we operate. As a result, any organization that has adequate financial
resources and access to technical, expertise may become a competitor. A
significant percentage of our revenues are currently derived from fewer than ten
customers and price is often an important factor in the award of such underlying
contracts. Accordingly, we could be outbid by our competitors in an effort to
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procure such recurring or ongoing work. There can be no assurance that our
competitors will not develop the expertise, experience and resources to provide
services that are equal or better in terms of price and quality to our services,
or that we will be able to maintain or enhance our competitive position. We may
also face competition from the in-house service organizations of our existing or
prospective customers, including telecommunications providers employing
personnel who perform some of the same types of services we deliver. Although a
significant portion of these services are currently outsourced, there can be no
assurance that existing or prospective customers of the company will continue to
outsource telecommunications engineering, infrastructure development and
maintenance services in the future. We believe that the principal competitive
factors in the market include technical expertise, reputation, price, quality of
service, availability of skilled technical personnel, geographic presence,
breadth of service offerings, adherence to industry standards and financial
stability. We believe that we compete favorably with our competitors on the
basis of these factors.
LICENSES
The Company and its subsidiaries, through various officers, holds licenses
in certain jurisdictions requiring general and specialty contractor licenses,
including California, Nevada, Arizona, Tennessee, Colorado, Texas and Florida.
We are also registered in the State of Georgia to provide engineering services
and we employ a licensed Georgia Professional Engineer who has public health and
safety compliance responsibilities for all of our design operations.
INSURANCE AND BONDS
We maintain liability insurance policies for claims arising from our
business. These policies have limits ranging from $1.0 million to $6.0 million
in the aggregate and insure against both property damage and personal injury.
The policies are written on an "occurrence" basis, which provides coverage for
insured risks that occur during the policy period irrespective of when a claim
is made. Higher policy limits are sometimes purchased for individual projects
when contractually required. We also maintain umbrella policies with aggregate
and occurrence limits of up to $10.0 million. We have performance and payment
bonding capability of $200 million, total program, and $50 million, single job.
Bonding capacity may be larger upon specific requirement.
BACKLOG ORDERS AND WORK-IN-PROGRESS
We had a backlog of approximately $142.9 million and $27 million, on a work
in process basis, as of December 31, 1999 and 1998, respectively. All related
work orders are expected to be completed by June 2001. In addition, at December
31, 1999, signed but unstarted backlog was approximately $34.5 million.
SUPPLIERS
We do not depend upon any single supplier. Because we have multiple sources
of supply, we have not experienced difficulties in obtaining adequate sources of
supply and adequate alternatives to satisfy our customers. We do not have formal
purchase contracts for our supplies, but instead we generally purchase such
items under individual purchase orders.
EMPLOYEES
As of December 31, 1999 we had approximately 1,600 full-time employees,
including our seven executive officers and 725 engineers and technicians. We
believe that our employee relations are good.
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WARRANTIES
We give warranties for workmanship on the services we provide. Warranties
generally range from one to two years, but have been as high as twenty years for
certain systems integration projects. From a practical standpoint, any warranty
issues are generally identified during the testing and acceptance of the system
installed. While most of the equipment sold by the Equipment Distribution Group
is under warranty from the original manufacturer, we typically provide a
one-year warranty on all equipment sold to telecommunications companies and
six-months on equipment sold to resellers.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS RELATING TO OUR INDUSTRY AND THE INDUSTRIES WE SERVE
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL AND REGULATORY
CHANGES THAT COULD REDUCE THE DEMAND FOR OUR SERVICES
We derive and anticipate that we will continue to derive a substantial portion
of our revenue from customers in the telecommunications industry. Our revenues
and net income depend primarily on capital spending by telecommunications
companies and others for constructing, rebuilding, maintaining or upgrading
their telecommunications networks and for constructing completely new systems.
Our services and products are subject to significant technological change and
innovation. Technological developments are occurring rapidly in the
telecommunications industry and, while the effects of such developments are
uncertain, they may have a material adverse effect on the demand for our
services. For example, wireline systems used for transmission of video, voice
and data face potential displacement by various technologies, including wireless
technologies. This could require a significant shift in our resources from
wireline to wireless services. Also, the demand for our services could be
adversely affected if alternative technologies are developed and implemented
that enable telecommunications providers or other organizations to provide
enhanced telecommunications services without physically upgrading their
networks. Finally, the telecommunications industry has been characterized by a
high level of consolidation that may result in the loss of one or more
customers.
THE VOLUME OF WORK WE RECEIVE FROM OUR CUSTOMERS IS DEPENDENT ON THEIR FINANCIAL
RESOURCES AND ABILITY TO OBTAIN CAPITAL
The volume of work awarded under contracts with certain of our telecommunication
customers is subject to periodic appropriations during each contract's term. If
one of our customers fails to receive sufficient capital appropriations, that
customer could reduce the volume of work that it awards to us or delay its
payments to us. These outcomes could reduce the demand for the services we
provide.
In addition, a number of other factors, including financing conditions in the
industry, could adversely affect our customers and their ability or willingness
to fund capital expenditures in the future. These factors could also reduce the
demand for the services we provide. Such factors include the amount of capital
spending by telecommunications companies and cable operators, our customers'
access to financing, general economic conditions, government regulation of cable
operators, demand for telecommunications and cable services and technological
developments in the telecommunications industry.
-12-
<PAGE>
THE TELECOMMUNICATIONS SERVICE INDUSTRY IS HIGHLY COMPETITIVE AND POTENTIAL
COMPETITORS FACE FEW BARRIERS TO ENTRY. OUR INABILITY TO COMPETE SUCCESSFULLY
COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
The industries in which we operate are highly competitive and we compete with
other companies in most of the markets in which we operate on a national,
regional and local basis. We may also face competition from existing or
prospective customers who employ in-house personnel to perform some of the same
types of services as we provide. Many of our competitors or potential
competitors are substantially larger and have greater resources. In addition,
because of the convergence of the telecommunications, cable television and
computer industries and rapid technological development, new competitors may
seek to enter the market. There are relatively few significant barriers to enter
into the markets in which we operate, and as a result, any organization that has
adequate financial resources and access to technical expertise may become one of
our competitors.
MANY OF OUR CONTRACTS MAY BE CANCELED ON SHORT NOTICE, AND WE MAY BE
UNSUCCESSFUL IN REPLACING OUR CONTRACTS AS THEY ARE COMPLETED OR EXPIRE
We could experience a material adverse effect on our revenue, net income and
liquidity if:
* our customers cancel a significant number of contracts,
* we fail to win a significant number of our existing contracts upon
re-bid; or
* we complete the required work under a significant number of our
non-recurring projects and cannot replace them with similar projects.
Many of our customers may cancel our long-term contracts with them on short
notice, typically 60 to 90 days, even if we are not in default under the
contract. As a result, these contracts do not give us the assurances that
long-term contracts typically provide. Many of our contracts, including our
master service contracts, are subject to open bid at the expiration of their
terms and price is often an important factor in the award of these agreements.
We cannot assure you that we will be the successful bidder on our existing
contracts that come up for bid. We also provide a significant portion of our
services on a non-recurring, project-by-project basis.
OUR MASTER SERVICE CONTRACTS SUBJECT US UNCERTAIN REVENUE GROWTH
We currently derive a significant portion of our revenue from our master
services contracts. A significant decline in the work our customers assign us
under our master services contracts could materially and adversely affect our
revenue and net income. Under our master services contracts, we may be one of
several companies that perform services for the customer, and our customers have
no obligations under our master services contracts to undertake any
infrastructure projects or other work with us.
-13-
<PAGE>
RISKS RELATING TO OUR COMPANY AND OUR BUSINESS
OUR BUSINESS IS LABOR INTENSIVE, AND IF WE CANNOT ATTRACT AND RETAIN QUALIFIED
EMPLOYEES WE MAY NOT BE ABLE TO IMPLEMENT OUR GROWTH STRATEGY
Labor shortages or increased labor costs could have a material adverse effect on
our ability to implement our growth strategy and our operations. Our business is
labor intensive, and many of our operations experience a high rate of employee
turnover. The low unemployment rate in the United States has made it more
difficult for us to find qualified personnel at low cost in some areas where we
operate. As we offer new services and pursue new markets we will also need to
increase our executive and support personnel. We can offer no assurances that we
will be able to continue to hire and retain a sufficient skilled labor force
necessary to operate efficiently and to support our growth strategy or that our
labor expenses will not increase as a result of a shortage in the supply of
skilled personnel.
IF WE ARE UNABLE TO EXPAND OUR INFRASTRUCTURE WE WILL NOT BE SUCCESSFUL IN
MANAGING OUR RAPID GROWTH
To manage our growth effectively, we will need to continuously enhance our
information systems and our operational and financial systems and controls. Our
anticipated growth could significantly strain our operational infrastructure and
financial resources. Our growth plan may be adversely affected if we are unable
to expand and continuously improve our operational infrastructure.
SPECIAL RISKS OF ACQUISITIONS
Acquisitions involve a number of special risks, some of which include:
* the time associated with identifying and evaluating acquisition
candidates;
* the diversion of management's attention by the need to integrate the
operations and personnel of the acquired companies into our own
business and corporate culture;
* the assimilation of acquired products, services and operations into
our existing products, services and operations;
* possible adverse short-term effects on our operating results;
* the future operating results of the acquisition, including the
expansion of its business, retention and growth of its customer base
and the demand for its products, technologies or services;
* the realization of acquired intangible assets; and
* the loss of key employees of the acquired companies.
COMPETITION FOR ACQUISITION CANDIDATES
In addition to these risks, we believe that we will see increased competition
for attractive acquisition candidates in the future. Increased competition for
candidates could increase the cost of acquisitions and reduce the number of
attractive candidates. We cannot assure you that we will be able to identify
additional suitable acquisition candidates, consummate or finance any such
acquisitions. Although we are not currently a party to any agreement,
understanding or arrangement regarding any material acquisition, we are always
evaluating potential acquisition prospects.
-14-
<PAGE>
IF WE DO NOT MANAGE OUR GROWTH EFFECTIVELY IT COULD ADVERSELY AFFECT OUR RESULTS
We are currently experiencing a period of rapid growth that has placed
significant demands on our resources. Our success in managing this growth will
require us to continue to improve our operational, financial and management
information systems, and to motivate and effectively manage our employees. If
our management is unable to manage growth effectively, to maintain the quality
of our products and services and to retain key personnel, our business,
financial condition and results of operations could be materially adversely
affected.
DEPENDENCE UPON KEY PERSONNEL
We are dependent on the services of our principal executive officers. We have
entered into a multi-year employment agreements with these individuals. As we
acquire companies we entered into consulting or employment agreements with their
key executives to continue to operate the companies. We must compete with much
larger companies that have significantly greater resources to attract and retain
personnel. We cannot assure you that we will be successful in this regard or, if
successful, that the services of such personnel can be secured on terms deemed
favorable to us. The loss of the services of any of our key executives or our
inability to attract other qualified employees could materially and adversely
affect our business and operations.
IMPACT OF STATE REGULATION
Our ability to pursue our business activities is regulated, directly or
indirectly, by various agencies and departments of state governments. Licenses
from public utilities commissions are frequently required prior to the
commencement of services by us and our clients. There can be no assurance that
we or our customers will be successful in our or their efforts to obtain
necessary licenses or regulatory approvals. Our inability or the inability of
any of our customers to secure any necessary licenses or approvals could have a
material adverse effect on our business. In addition to specific regulations, we
are subject to all federal, state and local rules and regulations imposed upon
businesses generally. The cost of compliance with regulations is an additional
cost of doing business for us.
DEPENDENCE UPON MAJOR CUSTOMERS AND LARGE CONTRACTS
Certain of our customers accounted for more than 5% of our revenues during the
last year. Any decision by these major customers to cease or reduce their use of
our services may have a material adverse effect on our business. A number of our
contracts are substantial in size. The failure to timely or adequately replace a
large contract upon its completion or termination of one or more new contracts
or loss of one or more significant customers may materially adversely affect our
business and operations.
RISKS OF POSSIBLE COST ESCALATION UNDER FIXED PRICE CONTRACTS
On an historical basis a substantial portion of our revenues have been generated
principally under firm fixed-price contracts. Fixed-price contracts carry
certain inherent risks, including underestimating costs, problems with new
technologies and economic and other changes that may occur over the contract
period. We recognize revenues using the percentage-of-completion method. Under
this method revenue is recognized based on actual costs incurred in relation to
total estimated costs to complete the contract. This method may result in
irregular and uneven quarterly results. Unforeseen events and circumstances can
-15-
<PAGE>
alter our estimate of the costs and potential profit associated with a
particular contract. To the extent that original cost estimates are modified,
estimated costs to complete increase, delivery schedules are delayed, or
progress under a contract is otherwise impeded, cash flow, revenue recognition
and profitability from a particular contract may be adversely affected.
INSURANCE AND POTENTIAL EXCESS LIABILITY
We maintain liability insurance to protect against damages to persons or
property that may result from our work. If we were to incur liability in excess
of our policy coverage, our financial condition could be adversely affected.
ARIZONA ANTI-TAKEOVER STATUTE
The Arizona Corporate Takeover Act ("Takeover Act") was adopted in 1987. The
policy of the Takeover Act is to prevent unfriendly corporate takeover attempts
by third parties. The Takeover Act prohibits certain types of transactions,
including "green mail," limits voting rights of certain individuals acquiring
shares in the market and regulates certain business combinations respecting
corporate transactions proposed by insiders and as part of a takeover plan. We
are subject to the foregoing provisions.
The Takeover Act enhances the possibility that a potential bidder for our
control will be required to act through arm's-length negotiation with respect to
a major transaction, such as a merger, consolidation or purchase of
substantially all of our assets. The Takeover Act may also have the effect of
discouraging tender offers or other stock acquisitions, giving our management
power to reject certain transactions which might be desired by the owners of the
majority of our voting securities. The Takeover Act could also be deemed to
benefit incumbent management to the extent that the Act deters such offers by
persons who would wish to make changes in management or exercise control over
management.
Our Board of Directors does not presently know any third party that plans to
make an offer to acquire us through a tender offer, merger or purchase of all or
substantially all of our assets.
DEPENDENCE UPON SUPPLIERS
We do not have written agreements with our suppliers. It is possible that we may
encounter shortages in parts, components, or other elements vital to our
operations in the future. If such shortages occur, we cannot guarantee that we
would be able to locate other satisfactory suppliers, or even if other suppliers
could be located, that we would be able to establish commercial relationships
with any such suppliers. If we are unable to establish commercial relationships
with other suppliers, we may be required to suspend or curtail some of our
services. Suspension or curtailment of services could have a material adverse
effect on us.
ECONOMIC AND GENERAL RISKS OF THE BUSINESS
Our success will depend upon factors that are beyond our control and that cannot
clearly be predicted at this time. Such factors include general economic
conditions, both nationally and internationally, changes in tax laws,
fluctuating operating expenses, including energy costs, changes in governmental
regulations, including regulations imposed under federal, state or local
environmental laws, labor laws, and trade laws and other trade barriers.
-16-
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
We lease approximately 3,000 square feet of office space for our corporate
office in Phoenix, Arizona. We also maintain the following operating facilities:
The Infrastructure Development Group has principal offices in Atlanta,
Georgia; Columbia, Maryland; Nashville, Tennessee; Phoenix, Arizona; and Perris
and Sacramento, California. We also maintain several satellite offices
throughout the United States. We own office buildings of approximately 9,600
square feet in Phoenix and 19,400 square feet in Memphis and approximately 2.5
acres of land in Phoenix and four acres of land in Perris, all of which
collateralize outstanding promissory notes. In addition, we lease an aggregate
of 805,000 square feet of office, warehouse and yard space under various leasing
arrangements for our other locations.
The Equipment Distribution Group has principal offices in Richmond,
Virginia and Lakeland and Marianna, Florida. Our Marianna facility consists of
an office/warehouse building of approximately 28,000 square feet, including
24,000 square feet of warehouse space and an additional warehouse consisting of
approximately 33,000 square feet. The buildings are located on approximately 8.4
acres of land. In addition, we lease an aggregate of 40,000 square feet of
office and warehouse space under various leasing arrangements for our other
locations.
The Wireless Technologies Group leases an aggregate of approximately 13,000
square feet located in Germantown, Maryland and Englewood Cliffs, New Jersey.
We believe our operating facilities are adequate to meet our operational
needs associated with our current backlog.
ITEM 3. LEGAL PROCEEDINGS
We are not involved as a party to any legal proceeding other than various
claims and lawsuits arising in the normal course of our business, none of which,
in our opinion, is individually or collectively material to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matter for a vote by our stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is listed on the NASDAQ National Market. The following
table shows the high and low bid prices in dollars per share for the last two
years as reported by NASDAQ. These prices may not be the prices that you would
pay to purchase a share of our common stock during the periods shown. These
prices are what a securities dealer would pay for a share of our common stock
and do not include any commissions you might have to pay or any retail mark-ups
or mark-downs.
YEAR ENDED DECEMBER 31, 1999 LOW HIGH
--- ----
First Quarter $6.00 $9.00
Second Quarter $5.56 $9.13
Third Quarter $4.50 $9.09
Fourth Quarter $5.00 $9.00
YEAR ENDED DECEMBER 31, 1998 LOW HIGH
--- ----
First Quarter $4.75 $6.97
Second Quarter $4.88 $9.59
Third Quarter $4.88 $9.31
Fourth Quarter $5.25 $9.75
As of March 10, 2000, there were approximately 14,842 beneficial holders of
our common stock.
DIVIDEND POLICY
Holders of our common stock are entitled to receive dividends only when
declared by our Board of Directors. To date dividends have never been declared
or paid and we do not plan to make any dividend payments in the future. Instead,
we will reinvest in the expansion and development of our business. If the Board
of Directors decides to declare a dividend in the future, the decision will be
based on our earnings, financial condition, cash requirements, and any other
factors they deem relevant. A covenant in our revolving credit facility
restricts us from paying dividends, except under certain circumstances.
RECENT SALES OF UNREGISTERED SECURITIES
In the first quarter of 1999, we issued 304,908 shares of our common stock
in partial consideration for the purchase of the shares of Aerocomm, Inc. as an
exempt transaction under Section 4(2) under the Act. In the second quarter of
1999, we issued 592,857 shares of common stock in partial consideration for the
purchase of the assets of All Star Communications, Inc. and 51,632 shares in
partial consideration for the purchase of the assets of Blueridge Solutions,
LLC.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial information and consolidated balance
sheet data presented below as of and for the years ended December 31, 1999 and
1998 are derived from the accompanying consolidated financial statements that
have been audited by BDO Seidman LLP. The consolidated financial information and
consolidated balance sheet data presented below as of and for the years ended
December 31, 1997, 1996 and 1995 are derived from the consolidated financial
statements that have been audited by Semple & Cooper LLP, of which the results
of operations for the year ended December 31, 1997 are included in the
accompanying consolidated financial statements. On September 1, 1998, the
Company completed two acquisitions, both of which were accounted for using the
pooling of interests method. Accordingly, the selected consolidated financial
information presented below has been restated to include the results of
operations of the acquisitions for all periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995(1)
--------- --------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $ 170,400 $ 104,976 $ 57,266 $ 33,981 $ 12,050
Cost of revenues 126,659 70,097 40,434 24,896 11,802
--------- --------- -------- -------- --------
Gross margin 43,741 34,879 16,832 9,085 248
General and administrative 29,098 16,936 12,264 9,965 2,843
--------- --------- -------- -------- --------
Income from operations 14,643 17,943 4,568 (880) (2,595)
Other income (expense), net (2,518) (750) 1,464 61 196
Non-recurring acquisition
expenses -- (890) -- -- --
--------- --------- -------- -------- --------
Income before provision for
taxes 12,125 16,303 6,032 (819) (2,399)
Provision for income taxes (4,366) (4,899) 346 (135) 211
--------- --------- -------- -------- --------
Net income 7,759 11,404 6,378 (954) (2,188)
Preferred stock dividends (4) (48) (173) (171) --
--------- --------- -------- -------- --------
Net income available to common
stockholders 7,755 11,356 6,205 (1,125) (2,188)
Pro forma provision for income
taxes (2) -- (1,268) (1,456) 435 --
--------- --------- -------- -------- --------
Net income after pro forma
provision for income taxes $ 7,755 $ 10,088 $ 4,749 $ (690) $ (2,188)
========= ========= ======== ======== ========
Earnings per share:
Basic $ 0.28 $ 0.48 $ 0.53 $ (0.12) $ (0.50)
========= ========= ======== ======== ========
Diluted $ 0.26 $ 0.43 $ 0.35 $ (0.12) $ (0.50)
========= ========= ======== ======== ========
Pro forma earnings per share:
Basic $ 0.28 $ 0.43 $ 0.41 $ (0.07) $ (0.50)
========= ========= ======== ======== ========
Diluted $ 0.26 $ 0.38 $ 0.27 $ (0.07) $ (0.50)
========= ========= ======== ======== ========
Shares used in computing EPS:
Basic 28,031 23,509 11,711 9,441 4,417
Diluted 29,818 27,176 18,580 9,441 4,417
DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995(1)
--------- --------- -------- -------- --------
Consolidated balance (in thousands)
sheet data:
Cash $ 3,182 $ 4,790 $ 3,356 $ 4 $ 9
Working capital 37,670 26,497 9,642 (691) 365
Total assets 160,876 84,614 48,896 6,803 12,247
Long-term debt less
current portion 26,618 4,076 4,367 929 1,195
Stockholders' equity 75,752 55,558 31,982 2,208 5,655
</TABLE>
- ----------
(1) Consolidated balance sheet data and results of operations of subsidiaries
acquired on September 1, 1998 under pooling of interests method is not
available for certain periods. Therefore, the consolidated balance sheet
data as of December 31, 1996 and 1995 and the results of operations for the
year ended December 31, 1995 have not been restated.
(2) During the third quarter of 1998, the Company made certain acquisitions
accounted for under the pooling of interests method. Prior to the
acquisitions, the companies acquired operated as Subchapter S corporations
and, accordingly, were not subject to federal income taxes. The pro forma
provision for income taxes was recorded for 1998, 1997 and 1996 to present
income taxes as though the consolidated operating results of the acquired
companies had been subject to federal income taxes for all periods
presented.
(3) During 1999, the Company acquired Aerocomm, Inc., All Star Telecom, Inc.,
Washington Data Systems, Inc., and Blue Ridge Solutions in transactions
accounted for using the purchase method of accounting. During 1998, the
Company acquired Riley Underground Communications, Inc. in a transaction
accounted for using the purchase method of accounting. Accordingly, the
results of operations of the acquired companies have been included as of
their respective acquisition dates.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
We are an end-to-end solutions provider serving telecommunications
industry. We deliver a broad range of solutions designed to enable, enhance and
support voice, data and video communications through wired, wireless, internal
and external networks. In delivering these solutions, we design, develop,
install and maintain internal and external networks that support the
Internet-related applications and other communications for our customers. Our
services range from the design, development and installation of fiber-optic
networks to wireless connectivity solutions. Our products range from proprietary
wireless communications equipment to new, deinstalled and refurbished
communications equipment from a variety of manufacturers. We deliver our
products and services through three operating segments: infrastructure
development, wireless technologies and equipment distribution.
The Company derives a substantial portion of its revenue through contracts
accounted for under the percentage of completion method whereby revenue is
recognized based on the ratio of contract costs incurred to total estimated
contract costs. As a result, gross margins can increase or decrease based upon
changes in estimates during individual contracts.
RESULTS OF OPERATIONS
During 1999, we made several strategic acquisitions to enhance our service
capabilities and broaden our geographic coverage as an end-to-end solutions
provider. None of the acquisitions were material individually or in the
aggregate. Details of these transactions can be found in the accompanying
Consolidated Financial Statements.
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<PAGE>
Our operating results for 1997 and 1998 were significantly impacted by the
acquisition of Southern Communications on October 1, 1997, as explained in the
Unaudited Pro Forma Condensed Consolidated Statements of Operations included in
the accompanying Consolidated Financial Statements. The following table
summarizes the results of operations for the three years ended December 31,
1999, 1998 and 1997 and includes a pro forma presentation of the results of
operations for the year ended December 31, 1997 which assumes that we had
acquired Southern Communications on January 1, 1997.
<TABLE>
<CAPTION>
Pro Forma(1)
1999(3) 1998(3) 1997 1997
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 170,400 100.0% $ 104,976 100.0% $ 57,266 100.0% $ 65,753 100.0%
Cost of revenues 126,659 74.3% 70,097 66.8% 40,434 70.6% 43,190 65.7%
--------- ----- --------- ----- -------- ----- -------- -----
Gross margin 43,741 25.7% 34,879 33.2% 16,832 29.4% 22,563 34.3%
General and administrative 29,098 17.1% 16,936 16.1% 12,264 21.4% 14,118 21.5%
--------- ----- --------- ----- -------- ----- -------- -----
Income from operations 14,643 8.6% 17,943 17.1% 4,568 8.0% 8,445 12.8%
Other income (expense), net (2,518) -1.5% (750) -0.7% 1,464 2.5% 1,278 2.0%
Non-recurring acquisition
expenses -- 0.0% (890) -0.9% -- 0.0% -- 0.0%
--------- ----- --------- ----- -------- ----- -------- -----
Income before provision
for taxes 12,125 7.1% 16,303 15.5% 6,032 10.5% 9,723 14.8%
Provision for income taxes (4,366) -2.6% (4,899) -4.7% 346 0.6% (1,650) -2.5%
--------- ----- --------- ----- -------- ----- -------- -----
Net income 7,759 4.5% 11,404 10.8% 6,378 11.1% 8,073 12.3%
Preferred stock dividends (4) 0.0% (48) 0.0% (173) -0.3% (173) -0.3%
--------- ----- --------- ----- -------- ----- -------- -----
Net income available to
common stockholders 7,755 4.5% 11,356 10.8% 6,205 10.8% 7,900 12.0%
Pro forma provision for
income taxes (2) -- 0.0% (1,268) -1.2% (1,456) -2.5% (1,456) -2.2%
--------- ----- --------- ----- -------- ----- -------- -----
Net income after pro forma
provision for income taxes $ 7,755 4.5% $ 10,088 9.6% $ 4,749 8.3% $ 6,444 9.8%
========= ===== ========= ===== ======== ===== ======== =====
</TABLE>
- ----------
(1) The pro forma results include the results of operations of Southern
Communications for the period from January 1, 1997 through September 30,
1997 as well as pro forma adjustments to goodwill amortization, interest
expense and income taxes.
(2) During the third quarter of 1998, the Company made certain acquisitions
accounted for under the pooling of interests method. Prior to the
acquisitions, the companies acquired operated as Subchapter S corporations
and, accordingly, were not subject to federal income taxes. The pro forma
provision for income taxes was recorded for 1998 and 1997 to present income
taxes as though the consolidated operating results of the acquired
companies had been subject to federal income taxes for all periods
presented.
(3) During 1999, the Company acquired Aerocomm, Inc., All Star Telecom, Inc.,
Washington Data Systems, Inc., and Blue Ridge Solutions in transactions
accounted for using the purchase method of accounting. During 1998, the
Company acquired Riley Underground Communications, Inc. in a transaction
accounted for using the purchase method of accounting. Accordingly, the
results of operations of the acquired companies have been included as of
their respective acquisition dates.
For the purpose of the management's discussion of the results of
operations, the pro forma results of operations for the year ended December 31,
1997 are used for comparative purposes as it provides for a more meaningful
presentation.
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<PAGE>
1999 COMPARED TO 1998
REVENUES. Revenues for 1999 increased $65.4 million, or 62%, to $170.4
million as compared to $105.0 million in 1998. The increase was due primarily to
revenue growth of $70.9 million in the infrastructure development segment during
1999. The increase was the result of revenue growth from existing subsidiaries
as well as incremental revenues from acquisitions made during the year. Also
contributing to the overall increase in our revenues was the addition of the
wireless technologies segment during the first quarter of 1999 which contributed
revenues of $3.2 million in 1999. Partially offsetting revenue growth in the
infrastructure and wireless segments was a decrease in revenues of $8.6 million
in the equipment distribution segment in 1999 as compared to 1998.
GROSS MARGIN. Gross margin for 1999 increased $8.8 million, or 25%, to
$43.7 million as compared to $34.9 million in 1998. The increases were primarily
the result of increased revenue volume in the infrastructure and wireless
segments, partially offset by a decrease in revenue volume and sales prices in
the equipment distribution segment.
Gross margin, as a percentage of revenues, decreased 7% to 26% in 1999 as
compared to 33% in 1998. The decrease was primarily due to declines in the gross
margins within the equipment distribution segment, offset by increases in the
infrastructure development segment. Gross margin in the equipment distribution
segment, as a percentage of revenues, in 1999 was 32% as compared to 53% in
1998. Current year margins have declined as compared to the prior year due to
changes in prevailing market conditions. During the fourth quarter of 1998, we
successfully sold approximately $3.2 million of older inventory which had
previously been written down. This older inventory was sold at prices in excess
of its adjusted net realizable value resulting in a non-recurring higher than
normal gross profit. The same market conditions did not exist during 1999, and
as such, we did not sell any of the old inventory and did not achieve the same
margins in the current year as in the prior year. Having made no sales of this
old inventory during 1999, no significant adjustments to the reserve for
obsolescence were made. Gross margin, as a percentage of revenues, in the
infrastructure development segment increased 3% to 24% in 1999 as compared to
21% in 1998 primarily due to improved operating efficiencies and contract
execution.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for 1999
increased $12.2 million, or 72%, to $29.1 million as compared to $16.9 million
in 1998. The increase was primarily due to internal growth of existing
subsidiaries, incremental costs associated with acquisitions made during 1999
and management additions made during 1999 to support our continued growth.
General and administrative expenses, as a percentage of revenues, was 17% in
1999 as compared to 16% in 1998.
OTHER INCOME (EXPENSE). Other expenses for 1999 increased $1.8 million, or
236%, to $2.5 million as compared to $750,000 in 1998. The increases are
primarily due to interest expense on our credit facilities. Borrowing activity
increased during 1999 due to the acquisition of several subsidiaries through
purchase agreements consisting of all cash or cash and common stock terms as
well as the acquisition of operating equipment to support revenue growth in the
infrastructure development segment. Partially offsetting the increase in
interest expense was an increase in interest and other income of $475,000 due to
interest earned on deposited funds and realized gains on short-term liquid
investments.
NON-RECURRING ACQUISITION COSTS. Non-recurring acquisition costs were
attributable to certain acquisitions made during the third quarter of 1998
accounted for under the pooling of interests method.
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<PAGE>
PROVISION FOR INCOME TAXES. Income tax expense for 1999 decreased $533,000,
or 10.9%, to $4.4 million as compared to $4.9 million in 1998. The provision for
income taxes decreased due to lower taxable earnings, partially offset by a
lower effective tax rate in 1998 due to certain acquisitions accounted for under
the pooling of interests method in the third quarter of 1998. Prior to the
acquisitions, the companies acquired operated as Subchapter S corporations and,
accordingly, were not subject to federal income taxes. A pro forma provision for
income taxes was recorded for 1998 to present income taxes as though the
consolidated operating results of the acquired companies had been subject to
federal income taxes for all periods presented.
NET INCOME. Net income attributable to common stockholders before the pro
forma provision for income taxes for 1999 decreased $3.6 million, or 32%, to
$7.8 million, or $0.28 and $0.26 per basic and diluted share, as compared to
$11.4 million, or $0.48 and $0.43 per basic and diluted share, in 1998. Net
income attributable to common stockholders after the pro forma provision for
income taxes for 1999 decreased $2.3 million, or 23%, to $7.8 million, or $0.28
and $0.26 per basic and diluted share, as compared to $10.1 million, or $0.43
and $0.38 per basic and diluted share, in 1998.
1998 COMPARED TO ACTUAL 1997
REVENUES. Consolidated revenues increased $47.7 million to $105.0 million
in 1998 from $57.3 million in 1997, an 83% increase. The major reason for the
overall increase was greater contract activity in our infrastructure development
segment. Revenues in this segment increased $27.9 million from 1997 to 1998. In
addition, revenues increased in our Equipment Distribution segment by $16.7
million during the same period of which $5.6 million is attributable to an
acquired subsidiary which completed its first full year of operations in 1998.
GROSS MARGIN. We had a consolidated gross profit of $34.9 million for 1998
compared with a gross profit of $16.8 million in 1997, an increase of $18.1
million or 107%. Of this increase, $7.6 million is due primarily to volume
increases in our equipment distribution segment, a 56% improvement over 1997,
while our infrastructure development segment accounted for an increase of $4.5
million, a 63% increase primarily due to an increase in volume. Consolidated
gross margins remained consistent on a year-to-year comparison.
During the fourth quarter of 1998, we implemented a strategy to
significantly reduce the amount of old inventory held by the equipment
distribution segment. Through the acquisition of Diversitec on September 1,
1998, the Company gained the ability to cross-sell inventory items to a broader
customer base between the subsidiaries within the equipment distribution
segment. As a result, we leveraged this opportunity to liquidate older inventory
and to reduce storage needs for slower moving products. Through these new
distribution channels, we were able to sell much of the old inventory that had
been previously written down at prices higher than their adjusted net realizable
value which resulted in a higher than normal gross profit for the equipment
distribution segment in the fourth quarter of 1998. During this period, we sold
old inventory with an original cost basis of approximately $3.3 million. Of this
inventory, Diversitec sold approximately $2.6 million, which had previously been
completely written down, for approximately $1.9 million. There were no sales of
the old inventory, and correspondingly, no adjustment in the inventory reserves
of the old inventory during the first three quarters of 1998. As a result, gross
profit in the fourth quarter of 1998 increased by approximately $1.9 million.
Due to the concentrated effort in the fourth quarter to sell old inventory,
Diversitec only sold approximately $200,000 of non-reserved inventory during the
same period.
-23-
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $12.2 million in 1997 to $16.9 million in 1998. In 1997 general
and administrative expenses were 21% of gross revenues. This percentage
decreased to 16% of gross revenues in 1998. Management continues to streamline
overhead costs, while increasing productivity and margins.
OTHER INCOME (EXPENSE). Other income and expense decreased from other
income of $1.5 million in 1997 to other expense of ($750,000) in 1998. This
change of $2.3 million is comprised primarily of $1,500,000 keyman life
insurance proceeds recorded in 1997 and $600,000 of additional interest expense
recorded in 1998.
NON-RECURRING ACQUISITION COSTS. Non-recurring acquisition costs were
attributable to certain acquisitions made during the third quarter of 1998
accounted for under the pooling of interests method.
PROVISION FOR INCOME TAXES. In 1998, we incurred federal and state income
taxes of $4.9 million as compared to a 1997 federal and state income tax benefit
of $346,000 a 1,516% increase. Income taxes in 1998 represent 30% of pretax
income as compared to (6%) of pretax income in 1997. The effective tax rates in
1998 and 1997 were affected by certain acquisitions during the year and usage of
net operating losses and deferred assets.
NET INCOME. Net income attributable to common stockholders in 1998 was
$11.4 million compared with $6.2 million in 1997, an increase of $5.2 million or
83%. The increase is primarily due to the increase in revenues and gross margins
between the comparable periods.
1998 COMPARED TO PRO FORMA 1997
REVENUES. Consolidated revenues increased $39.2 million to $105.0 million
in 1998 from $65.8 million in 1997, a 60% increase. The major reason for the
overall increase was greater contract activity in our infrastructure development
segment. Revenues in this segment increased $28.9 million from 1997 to 1998. In
addition, revenues increased in our equipment distribution segment by $8.2
million during the same period of which $5.6 million is attributable to an
acquired subsidiary which completed its first full year of operations in 1998.
GROSS MARGIN. We had a consolidated gross profit of $34.9 million for 1998
compared with a gross profit of $22.6 million in 1997, an increase of $12.3
million, or 55%. Of this increase, $7.6 million is due to increases in our
equipment distribution segment, a 56% improvement over 1997, while our
infrastructure development segment accounted for an increase of $4.5 million, a
63% increase. Consolidated gross margins remained consistent on a year-to-year
comparison.
During the fourth quarter of 1998, we implemented a strategy to
significantly reduce the amount of old inventory held by the equipment
distribution segment. Through the acquisition of Diversitec on September 1,
1998, the Company gained the ability to cross-sell inventory items to a broader
customer base between the subsidiaries within the equipment distribution
segment. As a result, we leveraged this opportunity to liquidate older inventory
and to reduce the storage needs for slower moving products. Through these new
distribution channels, we were able to sell much of the old inventory that had
been previously written down at prices higher than their adjusted net realizable
value which resulted in a higher than normal gross profit for the equipment
distribution segment in the fourth quarter of 1998. During this period, we sold
-24-
<PAGE>
old inventory with an original cost basis of approximately $3.3 million. Of this
inventory, Diversitec sold approximately $2.6 million, which had previously been
completely written down, for approximately $1.9 million. As a result, gross
profit in the fourth quarter of 1998 increased by approximately $1.9 million.
There were no sales of the old inventory, and correspondingly, no adjustment to
the inventory reserves, during the first three quarters of 1998. Due to the
concentrated effort in the fourth quarter to sell old inventory, Diversitec only
sold approximately $300,000 of non-reserved inventory during the same period.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $14.1 million in 1997 to $16.9 million in 1998. In 1997, general and
administrative expenses were 22% of gross revenues. This percentage decreased to
16% of gross revenues in 1998. Management continues to streamline overhead
costs, while increasing productivity and margins.
OTHER INCOME (EXPENSE). Other income and expense decreased from other
income of $1.5 million in 1997 to other expense of ($750,000) in 1998. This
change of approximately $2.2 million is comprised primarily of $1,500,000 keyman
life insurance proceeds recorded in 1997 and $600,000 of additional interest
expense recorded in 1998.
NON-RECURRING ACQUISITION COSTS. Non-recurring acquisition costs were
attributable to certain acquisitions made during the third quarter of 1998
accounted for under the pooling of interests method.
PROVISION FOR INCOME TAXES. In 1998, we incurred federal and state income
taxes of $4.9 million as compared to 1997 pro forma taxes of $1.1 million, a
345% increase. Income taxes in 1998 represent 30% of pretax income as compared
to 17% of pretax income in 1997. The effective tax rates in 1998 and 1997 were
affected by certain acquisitions accounted for under the pooling of interests
method in the third quarter of 1998. Prior to the acquisitions, the companies
acquired operated as Subchapter S corporations and, accordingly, were not
subject to federal income taxes. A pro forma provision for income taxes was
recorded for 1998 and 1997 to present income taxes as though the consolidated
operating results of the acquired companies had been subject to federal income
taxes for all periods presented.
NET INCOME. Net income attributable to common stockholders in 1998 was
$11.4 million compared with $7.9 million in 1997, on a pro forma basis. Net
income attributable to common stockholders after the pro forma provision for
income taxes increased $3.6 million, or 57%, to $10.1 million as compared to
$6.4 million in 1997, on a pro forma basis. The increase is primarily due to the
increase in revenues and gross margins between the comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
Our capital needs consist primarily of equipment needed to support revenue
growth and working capital needed for general corporate purposes, including
strategic acquisitions. We have historically financed operations through a
combination of lines of credit, and debt and equity offerings. Our liquidity is
impacted, to a large degree, by the nature of billing provisions under our
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.
-25-
<PAGE>
During 1999, net cash used in operations totaled $16.4 million as compared
to $3.4 million in 1998. Cash sources from operations during the period totaled
$14.3 million and consisted primarily of net income of $7.8 million,
depreciation and amortization totaling $5.9 million and an increase in accounts
payable of $623,000. Operating assets and liabilities used operating cash flow
of $30.7 million, primarily due to increases in accounts receivable, inventory,
costs and estimated earnings in excess of billings and other assets and
decreases in other assets, accrued expenses and income taxes.
Cash used in investing activities in 1999 totaled $15.6 million, which
consisted primarily of equipment purchases totaling $3.5 million and cash used
in business acquisitions totaling $12.1 million. During 1999, we acquired an
additional $10.0 million in equipment through capital lease financing
arrangements. During 1999, financing activities generated approximately $30.4
million, which consisted primarily of net borrowings under our credit facilities
totaling $30.6 million, proceeds from warrant and stock option exercises
totaling $3.1 million and proceeds from stock purchased under the Employee Stock
Purchase Plan totaling $1.2 million, partially offset by scheduled principal
payments on long-term debt totaling $4.5 million.
As of December 31, 1999, we had a cash balance of $3.2 million and
additional working capital of $34.5 million. Additionally, at December 31, 1999
we had a revolving line of credit with a syndication of commercial banks
totaling $60 million, with an available balance of approximately $14.3 million,
and a $10 million lease line of credit, which was subsequently increased to $15
million in February 2000, with an available balance of approximately $7 million.
Aggregate proceeds from current working capital, funds generated through
operations and current availability under existing credit facilities are
considered sufficient to fund the anticipated growth in our operations for the
next 12 to 18 months. We may, however, seek to obtain additional capital through
additional debt or equity offerings depending primarily upon prevailing market
conditions and the demand for our products and services.
INFLATION AND SEASONALITY. We do not believe that we are significantly
impacted by inflation or seasonality.
YEAR 2000 UPDATE.
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished leading up to the year 2000 was
effective to prevent any problems. Computer experts have warned that there may
still be residual consequences of the change in centuries and any such
difficulties could result in a decrease in the services we provide, an increase
in allocation of our and our client's resources to address Year 2000 problems
without additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by us or our clients
due to such Year 2000 problems.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
See Notes 1 and 3 in the accompanying consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS.
The consolidated financial statements and schedules are included herewith
commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants on accounting
and financial disclosure during the year ended December 31, 1999.
-26-
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B.
Exhibit
Number Description Reference
- ------ ----------- ---------
2.1 Stock Purchase Agreement between the Registrant
and Concepts in Communication, Inc., dated as of
October 31, 1996. (1)
2.2 Stock Purchase Agreement between the Registrant
and Compass Communications, Inc., dated as of
October 1, 1998 (2)
2.3 Asset Purchase and Sale Agreement between the
Registrant, SCP Acquisition Corp., Southern
Communications Products, Inc., Wallace E. Sapp
and Edna M. Sapp, dated as of August 25, 1998. (2)
2.4 Stock Purchase Agreement between the Registrant
and United Tech, Inc., dated as of September 1, 1998. (3)
2.5 Stock Purchase Agreement between the Registrant
and Diversitec, Inc., dated as of September 1, 1998. (3)
3.1 Restated Articles of Incorporation of Registrant,
dated October 21, 1981 (4)
3.2 Amendment to Articles of Incorporation of Registrant,
dated April 18, 1986 (4)
3.3 Amendment to Articles of Incorporation of Registrant,
dated May 20, 1987 (4)
3.4 Amendment to Articles of Incorporation of Registrant,
dated February 4, 1988 (4)
3.5 Amendment to Articles of Incorporation of Registrant,
dated August 15, 1991 (4)
3.6 Amendment to Articles of Incorporation of Registrant,
dated June 3, 1994 (4)
3.7 Amended, Revised, and Restated Bylaws of Registrant, (4)
4.1 Form of Common Stock Certificate (4)
-27-
<PAGE>
10.1 1998 Stock Option Plan (5)
10.2 1998 Restricted Stock Plan (5)
10.3 1994 Incentive Stock Option Plan (6)
10.4 1994 Restricted Stock Plan (6)
21.1 List of Subsidiaries of the Registrant *
23.1 Consent of Semple & Cooper *
23.2 Consent of BDO Seidman, LLP *
27.1 Financial Data Schedule *
- ----------
* Filed herewith
(1) Filed with Current Report on Form 8-K, dated February 13, 1997.
(2) Filed with Current Report on Form 8-K, dated December 1, 1997.
(3) Filed with Current Report on Form 8-K, dated September 16, 1998.
(4) Filed with Registration Statement on Form SB-2, No. 33-79730, which became
effective August 12, 1994.
(5) Filed with 1997 Notice and Proxy Statement, dated June 25, 1997.
(6) Filed with annual report on Form 10-KSB for the year ended December 31,
1996.
(b) CURRENT REPORTS ON FORM 8-K
None
-28-
<PAGE>
SIGNATURES
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/ Joseph P. Kealy
-------------------------------------
Dated: March 15, 2000 Joseph P. Kealy, Chairman of the Board,
President and Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature and Title Date
- ------------------- ----
/s/ Joseph P. Kealy March 15, 2000
- ---------------------------------------
Joseph P. Kealy, Chairman of the Board,
President, Principal Executive Officer
and Director
/s/ Terry W. Beiriger March 15, 2000
- ---------------------------------------
Terry W. Beiriger, Principal Financial
Officer, Treasurer and Secretary
/s/ C. James Jensen March 15, 2000
- ---------------------------------------
C. James Jensen, Director
/s/ John F. Kealy March 15, 2000
- ---------------------------------------
John F. Kealy, Director
/s/ Jerry A. Kleven March 15, 2000
- ---------------------------------------
Jerry A. Kleven, Director
/s/ John P. Morbeck March 15, 2000
- ---------------------------------------
John P. Morbeck, Director
/s/ Richard J. Seminoff March 15, 2000
- ---------------------------------------
Richard J. Seminoff, Director
/s/ V. Thompson Brown, Jr. March 15, 2000
- ---------------------------------------
V. Thompson Brown, Jr., Director
/s/ John P. Stephens March 15, 2000
- ---------------------------------------
John P. Stephens, Director
-30-
<PAGE>
INTERNATIONAL FIBERCOM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Reports of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-10
F-1
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Board of Directors
and Stockholders of
International FiberCom, Inc.
We have audited the accompanying consolidated balance sheet of International
FiberCom, Inc. and subsidiaries (the "Company") as of December 31, 1999 and
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the two years ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurances about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of International
FiberCom, Inc. and subsidiaries at December 31, 1999 and 1998 and the results of
their operations and their cash flows for each of the two years ended December
31, 1999, in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
March 10, 2000
F-2
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To The Stockholders and Board of Directors of
International FiberCom, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of income, changes in
stockholders' equity, and cash flows for the year ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations, changes in
stockholders' equity, and cash flows of International FiberCom, Inc. and
Subsidiaries for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Semple & Cooper, LLP
Semple & Cooper, LLP
Certified Public Accountants
March 13, 1998
F-3
<PAGE>
INTERNATIONAL FIBERCOM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,182,408 $ 4,789,547
Accounts receivable, net 48,325,259 22,602,042
Cost and estimated earnings in excess of billings 19,638,209 5,191,428
Inventory, net 18,722,334 16,946,143
Other current assets 2,625,500 262,426
Deferred tax asset 1,961,894 863,000
------------ ------------
Total current assets 94,455,604 50,654,586
Property and equipment, net 24,599,623 10,042,072
Goodwill, net 40,398,981 22,855,531
Other 1,421,356 1,062,200
------------ ------------
Total assets $160,875,564 $ 84,614,389
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 29,656,260 $ 6,410,568
Current portion of capital lease obligations 2,278,304 515,386
Current portion of notes payable to related parties 925,911 2,029,287
Accounts payable 16,011,676 9,464,558
Accrued expenses 4,401,285 2,252,307
Billings in excess of costs and estimated earnings 3,512,562 449,205
Income taxes payable -- 3,036,621
------------ ------------
Total current liabilities 56,785,998 24,157,932
Notes payable 19,510,373 2,117,522
Capital lease obligations 6,960,768 807,590
Notes payable to related parties 146,776 1,151,196
Deferred tax liability 1,720,146 822,327
------------ ------------
Total liabilities 85,124,061 29,056,567
------------ ------------
Commitments and Contingencies (Note 6)
Stockholders' equity:
Series C 4% convertible preferred stock, no par
value, 1,000 shares authorized; 400 shares
issued and outstanding at December 31, 1998 -- 306,665
Common Stock, no par value, 100,000,000 shares
authorized; 29,112,194 shares issued and
28,906,505 shares outstanding at December 31,
1999; 26,614,018 shares issued and 26,408,329
shares outstanding at December 31, 1998 60,106,750 47,361,495
Additional paid-in capital 2,581,149 2,581,149
Retained earnings 13,893,691 6,138,600
------------ ------------
76,581,590 56,387,909
Less: Treasury Stock, 205,689 shares, at cost (830,087) (830,087)
------------ ------------
Total stockholders' equity 75,751,503 55,557,822
------------ ------------
Total liabilities and stockholders' equity $160,875,564 $ 84,614,389
============ ============
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTERNATIONAL FIBERCOM, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $170,399,742 $104,975,995 $ 57,265,806
Cost of revenues 126,658,957 70,096,670 40,433,795
------------ ------------ ------------
Gross margin 43,740,785 34,879,325 16,832,011
General and administrative 29,098,379 16,936,223 12,264,470
------------ ------------ ------------
Income from operations 14,642,406 17,943,102 4,567,541
Other income (expense):
Interest income 332,197 163,822 50,249
Interest expense (3,221,807) (979,421) (377,617)
Other 372,229 65,317 1,792,157
------------ ------------ ------------
Income before non-recurring acquisition
costs and provision for income taxes 12,125,025 17,192,820 6,032,330
Non-recurring acquisition costs -- (890,000) --
------------ ------------ ------------
Income before provision for income taxes 12,125,025 16,302,820 6,032,330
(Provision) benefit for income taxes (4,365,934) (4,899,497) 346,319
------------ ------------ ------------
Net income $ 7,759,091 $ 11,403,323 $ 6,378,649
------------ ------------ ------------
Preferred stock dividend (4,000) (47,722) (173,447)
------------ ------------ ------------
Net income attributable to common stockholders
before proforma provision for income taxes 7,755,091 11,355,601 6,205,202
Proforma provision for income taxes -- (1,267,847) (1,456,218)
------------ ------------ ------------
Net income attributable to common stockholders
after proforma provision for income taxes $ 7,755,091 $ 10,087,754 $ 4,748,984
============ ============ ============
Earnings per common share:
Basic $ 0.28 $ 0.48 $ 0.53
Diluted $ 0.26 $ 0.43 $ 0.35
Proforma earnings per common share:
Basic $ 0.28 $ 0.43 $ 0.41
Diluted $ 0.26 $ 0.38 $ 0.27
Shares used in computation:
Basic 28,030,988 23,508,749 11,711,024
Diluted 29,817,638 27,175,763 18,579,836
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTERNATIONAL FIBERCOM, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------------------- ------------------------
Series A Series B Series C Shares Amount
----------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1997 as
previously reported $ 1,680,997 $ -- $ -- 6,864,387 $ 8,559,247
Adjustments in connection
with poolings of interest 3,254,000 1,513
----------- ---------- -------- ---------- -----------
Balance January 1, 1997 as restated 1,680,997 -- -- 10,118,387 8,560,760
Issuance of 3,500 shares of Series B
Preferred, net of costs 2,706,302
Issuance of 1,000 shares of Series C
Preferred, net of costs 766,662
Common stock issued in connection
with acquisitions 2,231,661 6,200,000
Common stock issued as payment of debt 123,212 253,207
Common stock issued in private
placements, net of costs 2,850,000 11,605,513
Warrants and options issued for services
rendered
Series A Preferred Stock Conversion (1,680,997) 2,126,463 1,680,997
Series B Preferred Stock Conversion (1,579,465) 1,323,242 1,579,465
Conversion of 8% convertible debentures 720,000 900,000
Employee stock option exercises 30,145 37,413
Common Stock purchased under ESPP 104,036 280,929
Other Common Stock issuances 187,456 1,119,000
S-corporation shareholder distribution
and stock redemption
Preferred Stock dividend 72,247 173,447
Net income
----------- ---------- -------- ---------- -----------
Balance December 31, 1997 -- 1,126,837 766,662 19,886,849 32,390,731
Additional Retained Treasury
Paid-in Capital Earnings Stock Totals
--------- ------------ ---------- -----------
Balance January 1, 1997 as
previously reported $ 947,729 $ (7,853,875) $ (668,017) $ 2,666,081
Adjustments in connection
with poolings of interest 837,442 838,955
--------- ------------ ---------- -----------
Balance January 1, 1997 as restated 947,729 (7,016,433) (668,017) 3,505,036
Issuance of 3,500 shares of Series B --
Preferred, net of costs 2,706,302
Issuance of 1,000 shares of Series C --
Preferred, net of costs 766,662
Common stock issued in connection
with acquisitions 6,200,000
Common stock issued as payment of debt 253,207
Common stock issued in private
placements, net of costs 11,605,513
Warrants and options issued for services
rendered 2,013,380 2,013,380
Series A Preferred Stock Conversion --
Series B Preferred Stock Conversion --
Conversion of 8% convertible debentures 900,000
Employee stock option exercises 37,413
Common Stock purchased under ESPP 280,929
Other Common Stock issuances 1,119,000
S-corporation shareholder distribution
and stock redemption (3,759,360) (3,759,360)
Preferred Stock dividend (173,447) --
Net income 6,378,649 6,378,649
--------- ------------ ---------- -----------
Balance December 31, 1997 2,961,109 (4,570,591) (668,017) 32,006,731
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTERNATIONAL FIBERCOM, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Series A Series B Series C Shares Amount
--------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Series B Preferred Stock Conversion (1,126,837) 792,046 1,126,837
Series C Preferred Stock Conversion (459,997) 126,316 459,997
Conversion of 8% convertible debentures 480,000 600,000
Accrued interest paid in Common Stock 7,744 46,948
Public warrant exercises 1,288,930 6,981,453
Non-employee option and warrant exercises 2,682,632 2,013,393
Employee stock option exercises 788,745 392,150
Common Stock purchased under ESPP 139,876 678,305
Common Stock issued in connection
with acquisitions 87,978 525,000
Finders fee paid in Common Stock 25,131 150,000
Repurchase of Treasury Stock
Issuance of repricing shares 300,000 1,948,959
S-corporation shareholder distribution
Preferred Stock dividend 7,771 47,722
Net income
--------- --------- --------- ---------- ------------
Balance, December 31, 1998 -- -- 306,665 26,614,018 47,361,495
Conversion of Series C Preferred Stock (306,665) 79,840 306,665
Conversion of convertible debt 182,648 1,000,000
Common Stock issued in connection
with acquisitions 1,021,271 7,132,711
Common Stock purchased under ESPP 189,644 1,185,645
Exercise of Common Stock options
and warrants 1,024,181 3,116,234
Preferred Stock Dividends 592 4,000
Net income
--------- --------- --------- ---------- ------------
Balance, December 31, 1999 $ -- $ -- $ -- 29,112,194 $ 60,106,750
========= ========= ========= ========== ============
Additional Retained Treasury
Paid-in Capital Earnings Stock Totals
----------- ------------ ---------- ------------
Series B Preferred Stock Conversion --
Series C Preferred Stock Conversion --
Conversion of 8% convertible debentures 600,000
Accrued interest paid in Common Stock 46,948
Public warrant exercises (379,960) 6,601,493
Non-employee option and warrant exercises 2,013,393
Employee stock option exercises 392,150
Common Stock purchased under ESPP 678,305
Common Stock issued in connection
with acquisitions 525,000
Finders fee paid in Common Stock 150,000
Repurchase of Treasury Stock (162,070) (162,070)
Issuance of repricing shares 1,948,959
S-corporation shareholder distribution (646,410) (646,410)
Preferred Stock dividend (47,722) --
Net income 11,403,323 11,403,323
----------- ------------ ---------- ------------
Balance, December 31, 1998 2,581,149 6,138,600 (830,087) 55,557,822
Conversion of Series C Preferred Stock --
Conversion of convertible debt 1,000,000
Common Stock issued in connection
with acquisitions 7,132,711
Common Stock purchased under ESPP 1,185,645
Exercise of Common Stock options
and warrants 3,116,234
Preferred Stock Dividends (4,000)
Net income 7,759,091 7,759,091
----------- ------------ ---------- ------------
Balance, December 31, 1999 $ 2,581,149 $ 13,893,691 $ (830,087) $ 75,751,503
=========== ============ ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
INTERNATIONAL FIBERCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,759,091 $ 11,403,323 $ 6,378,649
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 5,893,134 3,093,711 1,659,521
Loss (gain) on disposal of assets 27,441 (7,154) (181,999)
Acquisition fees paid in Common Stock -- 150,000 --
Provision for bad debts 47,341 94,382 172,486
Provision for obsolete inventory 12,000 (3,263,000) --
Changes in assets and liabilities
net of business acquisitions:
Increase in accounts receivable (13,977,674) (13,144,805) (4,773,163)
Increase in costs and estimated earnings
in excess of billings, net (9,557,327) (2,420,530) (2,443,498)
Increase in inventory (1,600,068) (7,535,342) (4,782,063)
Increase in other current assets (284,951) (142,806) (56,708)
(Increase) decrease in deferred taxes, net (602,422) 54,071 (94,744)
(Increase) decrease in other assets (278,712) (486,069) 1,229,853
Increase (decrease) in accounts payable 623,356 4,775,914 1,157,846
Increase (decrease) in accrued expenses (1,412,274) 1,080,653 640,140
Increase (decrease) in income taxes payable (3,062,779) 2,912,952 113,188
------------ ------------ ------------
Net cash used in operating activities (16,413,844) (3,434,700) (980,492)
------------ ------------ ------------
Cash flows from investing activities:
Acquistion of property and equipment (3,501,867) (1,404,476) (709,609)
Cash payments made in business acquisitions (12,119,783) (1,476,503) (12,898,190)
------------ ------------ ------------
Net cash used in investing activities (15,621,650) (2,880,979) (13,607,799)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings under line of credit agreement 29,626,143 3,740,328 1,063,240
Proceeds from notes payable 968,979 9,533,162 5,765,218
Proceeds from notes payable - related parties -- 129,157 10,210,627
Repayment of notes payable and lease obligations (3,360,850) (11,854,533) (9,060,812)
Repayment of notes payable - related parties (1,107,796) (2,365,301) (3,046,793)
Proceeds from exercise of stock options and warrants 3,116,234 8,696,713 37,413
Proceeds from issuance of common stock to employee
stock purchase plan 1,185,645 678,305 280,929
S-Corp shareholder distribution -- (646,410) (1,449,000)
Purchase of treasury stock -- (162,070) (2,310,360)
Proceeds from private offerings, net -- -- 3,472,924
Proceeds from sale of common stock -- -- 12,725,227
------------ ------------ ------------
Net cash provided by financing activities 30,428,355 7,749,351 17,688,613
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,607,139) 1,433,672 3,100,322
Cash and cash equivalents, beginning of period 4,789,547 3,355,875 255,553
------------ ------------ ------------
Cash and cash equivalents, end of period $ 3,182,408 $ 4,789,547 $ 3,355,875
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
INTERNATIONAL FIBERCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS cont'd
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental cash flow disclosures:
Cash paid during the year for interest $ 3,049,082 $ 838,833 $ 1,731,000
Cash paid during the year for income taxes 7,576,407 485,206 99,461
Supplemental disclosure of non-cash transactions:
Common Stock issued in business acquisitions 7,132,711 525,000 6,200,000
Conversion of convertible debt 1,000,000 600,000 1,153,207
Conversion of Series A Preferred Stock -- -- 1,680,997
Conversion of Series B Preferred Stock -- 1,126,837 1,579,465
Conversion of Series C Preferred Stock 306,665 459,997 --
Preferred Stock dividends paid in Common Stock 4,000 47,722 173,447
Accrued interest paid in Common Stock -- 46,948 --
Accrued offering costs paid in Common Stock -- 310,323 2,013,380
Issuance of additional shares of Common Stock relating to
1997 private placement -- 1,948,959 --
Property and equipment acquired through notes payable
and capital lease obligations 10,012,089 4,714,216 2,273,066
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
International FiberCom, Inc., a C Corporation incorporated in Arizona on
December 29, 1972, offers a wide range of services to the communications
marketplace throughout the United States through three principle operating
segments: infrastructure development, equipment distribution, and wireless
technologies. Infrastructure development services include design and engineering
services, installation, integration and maintenance of underground and aerial
fiber optic, copper and broadband, as well as wireless, communications systems
and integrated local and wide area networks. Equipment distribution services
include the sale of new, deinstalled and refurbished communications equipment
used in the digital access, switching and transport systems of
telecommunications service providers and other Fortune 500 companies. Wireless
technologies services include the design, manufacture and installation of
proprietary wireless connectivity solutions designed to enable and enhance
wireless communications, in both fixed and mobile applications.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
RECLASSIFICATIONS
Certain balances as of December 31, 1998 and 1997 and the years then ended have
been reclassified in the accompanying consolidated financial statements to
conform with the current year presentation. These reclassifications had no
effect on previously reported net income or stockholders' equity.
USE 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 disclosures 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.
REVENUE RECOGNITION
Revenue from the sale of telecommunications equipment is recognized upon
shipment. Revenue from related services is recognized as the services are
performed.
Revenues from fixed-price and modified fixed-price contracts are recognized on
the percentage-of-completion method based primarily on the ratio of contract
costs incurred to date to total estimated contract costs. Contract costs
include, among other things, direct labor, field labor, subcontracting, direct
materials and direct overhead. Project losses are provided for in their entirety
in the period in which such losses are determined. As contracts can extend over
one or more accounting periods, revisions in costs and estimated earnings during
the course of the work are reflected during the accounting period in which the
facts that require such revisions become known. The length of the Company's
contracts vary, but are typically less than one year. Therefore, assets and
liabilities are classified as current and non-current based on a one year
operating cycle.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments purchased with an initial
maturity of three months or less.
ACCOUNTS RECEIVABLE
Contract billings represent the amounts billed but uncollected on completed and
in-progress contracts, as well as standard trade receivables. Unbilled accounts
receivable represents amounts due from customers on completed contracts not yet
billed.
INVENTORY
Inventories are stated at the lower of cost or market, cost being determined
using the first-in first-out or average cost methods, and consist primarily of
new, deinstalled and refurbished telecommunications equipment. The Company
periodically reviews, for all reporting periods, its inventory and makes
adequate provisions for damaged or obsolete inventory.
F-10
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT'D
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over the
estimated useful lives of the assets utilizing straight-line and accelerated
methods. Leasehold improvements are amortized over their estimated useful lives
or the remaining lease term, whichever is shorter. The estimated useful lives
are as follows:
Construction equipment 5 - 7 years
Vehicles 3 - 5 years
Buildings 28 - 40 years
Office furniture and equipment 5 - 10 years
Software 3 - 7 years
Leasehold improvements 5 - 40 years
Maintenance and repairs that neither materially add to the value of the property
nor appreciably prolong its life are charged to expense as incurred. Betterments
or renewals are capitalized when incurred. The Company periodically reviews the
carrying value of property and equipment and impairments, if any, will be
recognized when the expected future operating cash flows derived from the assets
are less than carrying value. Depreciation expense for the years ended December
31, 1999, 1998 and 1997 totaled $3,790,666, $1,700,407 and $1,214,733,
respectively.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired. Goodwill is amortized on a straight-line basis over periods
ranging from 15 to 20 years. The Company periodically reviews the carrying value
of intangible assets and impairments, if any, will be recognized when the
expected future operating cash flows derived from the intangibles are less than
carrying value. Amortization expense for the years ended December 31, 1999, 1998
and 1997 totaled $2,022,501, $1,140,347 and $358,412, respectively.
WARRANTIES
The Company provides warranties for products sold and services performed. The
Company has had no material warranty claims to date.
INCOME TAXES
The Company reports deferred taxes on an asset and liability approach. Deferred
income taxes arise from timing differences resulting from revenues and expenses
reported for financial accounting and tax reporting purposes in different
periods. Deferred income taxes primarily represent the estimated tax liability
on additional depreciation expense reported based upon accelerated tax
depreciation methods, and timing differences in the utilization of net operating
losses.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in accordance
with provisions of APB No. 25, "Accounting for Stock Issued to Employees" and
related interpretations, and complies with the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation
cost is recognized based on the difference, if any, on the date of grant between
the fair value of the Company's stock and the amount an employee must pay to
acquire the stock.
EARNINGS PER SHARE
Basic earnings per share amounts include no dilution and are computed by
dividing income available to common stockholders by the weighted average number
of shares outstanding for the period.
Diluted earnings per share amounts are computed based on the weighted average
number of shares actually outstanding plus the shares that would be outstanding
assuming conversion of the convertible preferred stock and convertible
debentures and exercise of dilutive stock options and warrants, all of which are
considered to be common stock equivalents. The number of shares that would be
issued from the exercise of stock options has been reduced by the number of
shares that could have been purchased from the proceeds at the average market
price of the Company's stock. Net income has been adjusted for dividends on the
convertible preferred stock and interest and finance expenses (net of tax) on
the convertible debt.
F-11
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company's revenues are derived principally from contracts with companies in the
telecommunications industry in the United States. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for probable
credit losses based upon its historical experience. Additionally, the Company
maintains cash balances at various financial institutions. Deposits not to
exceed $100,000 at the financial institution are insured by the Federal Deposit
Insurance Corporation. The Company had uninsured cash of approximately
$3,490,922 and $6,039,133 at December 31, 1999 and 1998, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments, consisting primarily of notes
payable and notes payable to related parties, approximate fair value based on
current rates at which the Company could borrow funds with similar remaining
maturities.
NOTE 2 - SIGNIFICANT BALANCE SHEET COMPONENTS
Significant balance sheet components consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Accounts receivable, net:
Contract billings $ 37,400,856 $ 16,832,307
Retainage 2,912,227 1,205,605
Unbilled receivables 832,844 467,054
Non-contract related accounts receivable 8,343,574 4,363,465
------------ ------------
49,489,501 22,868,431
Less: allowance for doubtful accounts (1,164,242) (266,389)
------------ ------------
$ 48,325,259 $ 22,602,042
============ ============
Costs and estimated earnings in excess of billings:
Costs incurred on contracts in progress $ 76,631,918 $ 25,061,595
Estimated earnings 21,033,140 9,024,306
------------ ------------
97,665,058 34,085,901
Less: billings to date (81,539,411) (29,343,678)
------------ ------------
$ 16,125,647 $ 4,742,223
============ ============
Included in the accompanying consolidated balance
sheets as follows:
Costs and estimated earnings in excess of billings $ 19,638,209 $ 5,191,428
Billings in excess of costs and estimated earnings (3,512,562) (449,205)
------------ ------------
$ 16,125,647 $ 4,742,223
============ ============
Inventory, net:
Telecommunications equipment $ 19,218,888 $ 18,058,880
Cabling and equipment 1,222,039 847,433
Raw materials 253,577 --
------------ ------------
20,694,504 18,906,313
Less: allowance for obsolete inventory (1,972,170) (1,960,170)
------------ ------------
$ 18,722,334 $ 16,946,143
============ ============
</TABLE>
F-12
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT BALANCE SHEET COMPONENTS - CONT'D:
December 31,
----------------------------
1999 1998
------------ ------------
Property and equipment, net:
Construction equipment $ 21,783,522 $ 10,363,833
Vehicles 5,299,875 1,047,860
Building and land 2,854,860 2,339,447
Office furniture and equipment 4,985,467 960,821
Software 1,964,772 526,850
Leasehold improvements 725,289 341,312
------------ ------------
37,613,785 15,580,123
Less: accumulated depreciation (13,014,162) (5,538,051)
------------ ------------
$ 24,599,623 $ 10,042,072
============ ============
Accrued expenses:
Accrued payroll and related expenses $ 2,717,059 $ 1,516,935
Accrued sales tax 656,920 405,562
Other 1,027,306 329,810
------------ ------------
$ 4,401,285 $ 2,252,307
============ ============
NOTE 3 - NOTES PAYABLE
Notes payable consist of the following:
December 31,
--------------------------
1999 1998
----------- -----------
Equipment notes payable to financial
institutions, bearing interest at rates
from 6.9% to 14.5%, monthly principal and
interest payments from $252 to $18,056 and
quarterly principal and interest payments
of up to $150,000, due at various dates
through September 2002; collateralized by
equipment $ 2,711,693 $ 3,360,680
Mortgage notes payable to a bank, bearing
interest at rates from 8.48% to 8.78%,
monthly principal and interest payments
totaling $10,334, due at various dates
through December 2006, collateralized by
deeds of trust 716,954 363,842
Notes payable to various banks under
revolving lines of credit, interest payable
monthly at variable rates based on prime plus
indexes of 0.25% to 2.5%, repaid in 1999 -- 4,803,568
----------- -----------
3,428,647 8,528,090
Less: current portion (1,395,762) (6,410,568)
----------- -----------
$ 2,032,885 $ 2,117,522
=========== ===========
OPERATING LINE OF CREDIT
During 1999, the Company entered into a line of credit agreement with a
syndication of commercial banks which provides for borrowings up to $60,000,000.
Borrowings on the line of credit bear interest at prime plus 0.75% to 1.0% or
LIBOR plus 1.75% to 3.5%, at the Company's discretion and based on certain
financial covenants. Interest is payable monthly and outstanding principal is
due upon the expiration date of the line of credit on April 30, 2001. Amounts
due under the credit agreement at December 31, 1999 totaled $45,737,986.
F-13
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - NOTES PAYABLE, CONT'D
Although amounts due under the credit agreement were non-current at December 31,
1999, the Company has classified amounts borrowed for working capital purposes,
totaling $28,260,498, as current for balance sheet purposes. Amounts outstanding
under the line of credit are collateralized by all non-real property assets of
the Company. The agreement contains certain financial covenants and minimum net
worth requirements, all of which the Company was in compliance with at December
31, 1999.
Future minimum payments due on notes payable and line of credit as of December
31, 1999 are as follows:
2000 $ 1,395,762
2001 46,670,515
2002 550,237
2003 123,623
2004 90,660
Thereafter 335,836
------------
$ 49,166,633
============
NOTE 4 - INCOME TAXES
The provision (benefit) for income taxes consist of the following:
Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Current income tax expense:
Federal $ 3,353,196 $ 3,954,905 $ 125,372
State 655,923 790,777 18,437
----------- ----------- -----------
4,009,119 4,745,882 143,809
----------- ----------- -----------
Deferred income tax expense (benefit):
Federal 292,802 128,013 (427,292)
State 64,013 25,602 (62,836)
----------- ----------- -----------
356,815 153,615 (490,128)
----------- ----------- -----------
$ 4,365,934 $ 4,899,497 $ (346,319)
=========== =========== ===========
Deferred income tax assets and liabilities consist of the following:
December 31,
--------------------------
1999 1998
----------- -----------
Current deferred tax assets:
Non-deductible reserves $ 1,239,957 $ 863,000
Net operating loss carryforwards 333,034 --
Payroll related accruals 165,888 --
Other 223,015 --
----------- -----------
1,961,894 863,000
----------- -----------
Non-current deferred tax assets (liabilities):
Net operationg loss carryforwards -- 145,000
Depreciation and amortization (1,720,146) (967,327)
----------- -----------
(1,720,146) (822,327)
----------- -----------
Net deferred tax asset $ 241,748 $ 40,673
=========== ===========
F-14
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INCOME TAXES, CONT'D
At December 31, 1999, the Company had net federal and state net operating loss
carryforwards totaling approximately $980,000 which expire at various times
through 2014. Certain net operating losses were acquired in connection with
acquisitions made during 1999 and, accordingly, are subject to annual
utilization limits. The Company believes that it is more likely than not it will
utilize available net operating loss carryforwards. Therefore, no valuation
allowance has been recorded.
The income tax rate varies from amounts computed by applying the U.S. statutory
rate to income before the provision for income taxes. The effective tax rate is
as follows:
Year Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Statutory rate 34.0% 34.0% 34.0%
State taxes 5.3% 5.0% 1.3%
Net operating loss utilization -- -2.3% -18.2%
Research and development tax credits -2.5% -- --
Subchapter S income acquired -- -9.0% -22.7%
Other -0.8% 2.3% -0.1%
---- ---- ----
Effective rate 36.0% 30.0% -5.7%
NOTE 5 - RELATED PARTY TRANSACTIONS
NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following:
December 31,
--------------------------
1999 1998
----------- -----------
Note payable to a stockholder and
former employee of the Company,
bearing interest at 8.5%, monthly
principal and interest payments of
$86,663, due in February 2001 $ 1,072,687 $ 2,051,326
Notes payable to former principles of
acquired subsidiaries, bearing
interest at rates from 5.5% to
12%, paid in full in 1999 -- 129,157
Convertible notes payable to a
stockholder, bearing interest 5.5%,
converted into 182,648 shares of Common
Stock at $5.475 per share during 1999 -- 1,000,000
----------- -----------
1,072,687 3,180,483
Less: current portion (925,911) (2,029,287)
----------- -----------
$ 146,776 $ 1,151,196
=========== ===========
COVENANT NOT TO COMPETE
During the year ended December 31, 1997, the Company commenced litigation to
collect certain loans receivable totaling $386,689 from two former principles of
an acquired subsidiary. The officers filed a counterclaim alleging wrongful
termination. In connection with the settlement in 1998, the individuals entered
into an agreement whereby the receivable was converted into a five-year covenant
not to compete. Amortization expense for the years ended December 31, 1999 and
1998 totaled $79,967 and $73,588, respectively. The covenant not to compete is
included in other assets.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases certain facilities and equipment under non-cancelable
operating leases which expire through 2006. Certain operating leases contain
renewal provisions and generally require the Company to pay insurance,
maintenance and other operating expenses. The Company also leases certain
equipment under long-term lease arrangements which are classified as capital
F-15
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
leases. The Company has a capital lease line of credit with a financial
institution whereby the Company can acquire up to $10 million in equipment with
repayment terms of 3-5 years with interest at prevailing market rates. The
leases terminate at various dates through December 2005. Equipment acquired
under capital leases totaled $11,169,711 and $2,290,725 at December 31, 1999 and
1998, respectively.
Future minimum lease commitments under non-cancelable operating and capital
leases are as follows:
Operating Capital
Leases Leases
------------ -----------
2000 $ 3,800,813 $ 2,895,065
2001 3,578,995 2,871,845
2002 3,099,147 2,063,659
2003 1,748,511 1,910,203
2004 1,083,322 1,122,704
Thereafter 926,067 8,219
------------ -----------
$ 14,236,855 10,871,695
============
Less: amount representing interest (1,632,623)
-----------
Present value of capital lease obligations 9,239,072
Less: current portion (2,278,304)
-----------
$ 6,960,768
===========
Rental expense for the years ended December 31, 1999, 1998 and 1997 totaled
$3,911,816, $1,214,738 and $760,790, respectively.
CONTINGENCIES
The Company has legal proceedings incidental to its normal business activities.
In the opinion of management, the outcome of the proceedings will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
NOTE 7 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Series A 9% preferred shares are convertible into common shares at a price
equal to a thirty percent (30%) discount from the lower of the average closing
bid price of the common stock for the three (3) consecutive trading days prior
to (i) the date of subscription of the preferred stock or (ii) the date of the
conversion of the preferred stock. All shares of Series A 9% preferred stock
were converted into Common Stock in 1997.
The Series B 4% preferred are convertible into common stock at a price equal to
the lower of the average stock price on the date of each monthly subscription
installment or the discounted average stock price on the date of conversion. The
"average stock price" is the average of the daily closing bid prices of the
common stock for the five consecutive trading days immediately preceding the
relevant date. The "discounted average stock price" means (i) 70% of the average
of the daily closing bid prices of the common stock for the five consecutive
trading days immediately preceding the date of conversion into common stock if
such average of the daily prices is below $3.00 per share or (ii) 75% of the
average of such daily prices if the average is above $3.00 per share. For a one
year period after issuance of the series B preferred, the series B conversion
Price floor will be the lower of $.75 or 50% of the average stock price. There
will be no floor on the series B conversion price if the Company fails to
achieve certain gross profits in any two consecutive quarters. The Company may
redeem the series B preferred, in whole or in part, commencing 60 days after
issuance at 150% of the purchase price of $1,000 per share. All of the Series B
4% preferred stock was converted into Common Shares in 1998.
F-16
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Series C 4% preferred shares are convertible into common stock at a price of
$6.48375 per share which approximated fair value at the date of issuance.
Additional shares may be issuable upon conversion based upon certain conditions.
Dividends are payable on the Series C preferred at the rate of 4% per annum in
shares of common stock or cash, at the option of the Company on a quarterly
basis. In 1998, 600 of the 1,000 outstanding shares of Series C 4% preferred
stock was converted into Common Stock. During 1999, the remaining 400 shares
were converted to Common Stock.
COMMON STOCK
During 1997, the Company entered into an agreement with a non-affiliated third
party whereby it can repurchase 2,700,000 shares of common stock at prices
ranging from $5.25 to $6.00 per share. No shares were repurchased under the
agreement which expired in 1998.
EMPLOYEE STOCK PURCHASE PLAN
During 1997, the Company adopted an Employee Stock Purchase Plan (the "Plan")
for all employees meeting certain eligibility criteria. Under the plan, eligible
employees may purchase shares of the Company's common stock, subject to certain
limitations, at 85% of its market value. Purchases are limited to 15% of an
employee's eligible compensation, up to a maximum of $25,000 per year. An
aggregate of 2,000,000 shares of the Company's common stock are authorized and
available for sale to eligible employees. During the years ended December 31,
1999, 1998 and 1997, 189,644, 139,876 and 104,036 shares, respectively, were
issued to employees under the Plan.
EMPLOYEE STOCK OPTIONS AND RESTRICTED STOCK PLANS
During the year ended December 31, 1994, the Company adopted the 1994 Incentive
Stock Option Plan and the 1994 Restricted Stock Plan. The Plans authorized the
granting of restricted shares of common stock and common stock options to key
employees, consultants, researchers, and members of the Advisory Board. Under
the above Plans, 441,707 shares of common stock were reserved for issuance.
On January 7, 1997, the Board of Directors approved the 1997 International
FiberCom, Inc. Stock Option Plan. The Plan authorizes the Company to grant
incentive stock options and non-qualified stock options to key employees of the
Company. In addition, the Company has adopted the 1997 Restricted Stock Plan.
This Plan authorizes the granting of restricted shares of common stock to key
employees, consultants, researchers, and members of the Board. Under the Plans,
3,200,000 shares of common stock are reserved for issuance pursuant to a Plan
amendment on April 2, 1998.
As of December 31, 1999, options exercisable to purchase all shares available
for issuance under the 1994 Plans have been granted and options exercised to
purchase 2,557,688 shares have been granted under the 1997 Plans. In addition,
the Company has issued 4,722,343 options to employees and directors, not
pursuant to any authorized plan.
F-17
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the status of the stock option plans for employees and
directors during the years ended December 31, 1999, 1998 and 1997:
Weighted
Average
Number Exercise
of Options Price
--------- ------
Outstanding as of January 1, 1997 443,500 $ 1.13
Granted 1,852,530 1.99
Exercised (30,145) 1.24
--------- ------
Outstanding as of December 31, 1997 2,265,885 1.83
Granted 2,275,982 5.43
Exercised (889,540) 1.06
Forfeited (63) 1.47
--------- ------
Outstanding as of December 31, 1998 3,652,264 4.23
Granted 3,151,516 5.99
Exercised (552,372) 3.55
Forfeited (107,844) 4.11
--------- ------
Outstanding as of December 31, 1999 6,143,564 $ 5.35
========= ======
Information relating to stock options at December 31, 1999, summarized by
exercise price, is as follows:
Outstanding Exercisable
------------------------------ ------------------
Weighted Average Weighted Average
------------------- ------------------
Exercise Price Remaining Exercise Exercise
Per Share Shares Life (Yrs) Price Shares Price
--------- --------- ---------- ----- --------- -----
$ 0.94 - $1.47 478,154 4.47 $1.15 478,154 $1.15
$ 3.00 - $4.43 535,537 4.08 3.05 522,204 3.05
$ 5.00 - $7.25 4,812,373 2.78 5.74 3,589,148 5.72
$ 7.63 - $10.00 317,500 1.99 9.72 295,000 9.85
--------- ---- ----- --------- -----
6,143,564 3.82 $5.35 4,884,506 $5.24
========= ==== ===== ========= =====
All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of grant. In
accordance with accounting for such options utilizing the intrinsic value
method, there is no related compensation expense recorded in the Company's
financial statements for the years ended December 31, 1999, 1998 and 1997. Had
compensation cost for stock-based compensation been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS 123,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts presented below:
F-18
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31,
------------------------------------------
1999 1998 1997
----------- ------------ -----------
Net income:
As reported $ 7,755,091 $ 11,355,601 $ 6,205,202
Pro forma 2,718,634 5,252,498 4,362,432
Earnings per share:
Basic:
As reported $ 0.28 $ 0.48 $ 0.53
Pro forma 0.10 0.22 0.37
Diluted:
As reported $ 0.26 $ 0.43 $ 0.35
Pro forma 0.09 0.20 0.20
The fair value of option grants is estimated as of the date of grant utilizing
the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1999, 1998 and 1997: expected life of options of 2
years, expected volatility of 57%, 82%, and 82% respectively, risk-free interest
rates of 8%, and a 0% dividend yield. The weighted average fair value at date of
grant for options granted during 1999, 1998 and 1997 were approximately $2.18,
$2.68 and $1.01, respectively.
NON-EMPLOYEE STOCK OPTIONS AND WARRANTS
Prior to December 31, 1997, the Company issued non-employee options and warrants
to purchase shares of Common Stock in connection with certain offerings to sell
Common and Preferred Stock and in exchange for services. Warrant activity for
the years ended December 31, 1999, 1998 and 1997 is summarized as follows:
Weighted
Number Average
of Options Exercise
and Warrants Price
------------ -----
Outstanding as of January 1, 1997 3,970,923 $2.80
Granted 2,131,000 4.37
--------- -----
Outstanding as of December 31, 1997 6,101,923 3.47
Exercised (4,288,373) 2.63
Redeemed (7,440) 0.10
Forfeited (126,110) 6.80
--------- -----
Outstanding as of December 31, 1998 1,680,000 5.33
Exercised (480,000) 2.48
--------- -----
Outstanding as of December 31, 1999 1,200,000 $6.47
========= =====
Warrants and non-employee options outstanding as of December 31, 1999 are
exercisable at prices ranging from $0.94 to $8.10 and expire at various dates
through April 2003. All services received in exchange for options and warrants
during 1997 were related to stock offerings and, accordingly, the fair value of
those services, as determined using the Black-Scholes pricing model, were netted
against the proceeds of the related offerings.
F-19
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - EARNINGS PER SHARE
The following data shows amounts used in computing earnings per share and the
effect on income and the weighted average number of shares of dilutive potential
common stock.
Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Numerator:
Numerator for basic
earnings per share -
net income attributable
to common stockholders
before proforma provision
for income taxes $ 7,755,091 $11,355,601 $ 6,205,202
Interest and finance expense on
convertible debt 31,126 157,357 113,060
Preferred Stock dividends 4,000 47,722 173,447
----------- ----------- -----------
Numerator for diluted earnings
per share $ 7,790,217 $11,560,680 $ 6,491,709
=========== =========== ===========
Proforma Numerator:
Proforma numerator for basic
earnings per share - net
income attributable to common
stockholders after proforma
provision for income taxes $ 7,755,091 $10,087,754 $ 4,748,984
Interest and finance expense on
convertible debt 31,126 157,357 113,060
Preferred Stock dividends 4,000 47,722 173,447
----------- ----------- -----------
Proforma numerator for diluted
earnings per share $ 7,790,217 $10,292,833 $ 5,035,491
=========== =========== ===========
Denominator:
Denominator for basic earnings
per share - weighted average
shares outstanding 28,030,988 23,508,749 11,711,024
----------- ----------- -----------
Effect of dilutive securities:
Convertible preferred stock 10,943 401,001 2,426,652
Dilutive options and warrants 1,700,146 3,039,968 3,192,845
Convertible debt 75,561 226,045 1,249,315
----------- ----------- -----------
Dilutive potential common shares 1,786,650 3,667,014 6,868,812
----------- ----------- -----------
Denominator for diluted
earnings per share 29,817,638 27,175,763 18,579,836
=========== =========== ===========
Earnings per common share:
Basic $ 0.28 $ 0.48 $ 0.53
Diluted $ 0.26 $ 0.43 $ 0.35
Proforma earnings per common share:
Basic $ 0.28 $ 0.43 $ 0.41
Diluted $ 0.26 $ 0.38 $ 0.27
F-20
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Anti-dilutive options excluded from the calculation of earnings per share are
summarized as follows:
1999 1998 1997
------ ------ ------
Number of options 69,610 707,000 974,868
Weighted average exercise price $9.93 $7.63 $5.40
Expire on various dates through 8/13/2004 11/30/2002 11/30/2002
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) retirement plan (the "Plan") which covers
substantially all fulltime employees. The Plan allows for participants to
contribute up to 15% of eligible compensation. The Plan provides for
discretionary contributions by the Company. Several of the Company's
subsidiaries sponsored individual defined contribution plans prior to being
acquired by the Company. Upon acquisition, the plans were merged with the
Company's Plan. Certain plans required the subsidiaries to make matching
contributions based upon a participant's eligible compensation, subject to
certain limitations. Contributions made by the Company during the years ended
December 31, 1999, 1998 and 1997 totaled $37,987, $189,104 and $285,953,
respectively.
NOTE 10 - BUSINESS COMBINATIONS
During 1999, the Company completed four acquisitions which were accounted for
using the purchase method of accounting. Accordingly, the results of operations
of the acquired companies have been included in the accompanying consolidated
results of operations as of their respective acquisition dates. Under the
purchase agreements, the Company paid both cash and stock for the acquisitions.
Common stock issued in connection with the acquisitions was valued at fair
market value based upon the market value of the securities over a reasonable
period of time before and after the acquisition was consummated. Certain
agreements included provisions for contingent consideration which is payable if
certain financial targets are met over a three year period. The maximum
potential contingent consideration totaled approximately $25.7 million and, to
the extent earned, will be recorded as additional goodwill in future periods.
Companies acquired in 1999 are located in North America and include Aerocomm,
Inc., All Star Telecom, Inc., BlueRidge Solutions and Washington Data Systems,
Inc. With the exception of Aerocomm, Inc., all 1999 acquisitions provide
infrastructure development services to customers in the communications industry.
Aerocomm, Inc. is a developer of proprietary wireless communications products
and connectivity solutions.
The following presents unaudited pro forma condensed results of operations for
the year ended December 31, 1999 and 1998 assuming the acquisitions were
consumated as of January 1, 1999 and 1998 respectively.
The unaudited pro forma information does not necessarily reflect the results
which would have been obtained had the acquisitions occurred on January 1, 1999
or 1998 nor are they indicative of future results which may be obtained.
<TABLE>
<CAPTION>
(unaudited) Pro Forma
International 1999 (1) Pro Forma Consolidated
FiberCom, Inc. Acquisitions Adjustments Amounts
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Revenues $170,399,742 $21,017,814 $191,417,556
Net income 7,755,091 (41,980) (477,752)(2) 7,235,359
Earnings per share:
Basic $ .28 $ .26
Diluted $ .26 $ .24
Shares used in computation:
Basic 28,030,988 28,192,110
Diluted 29,817,638 29,978,760
Year ended December 31, 1998:
Revenues $104,975,995 $50,303,188 $155,279,183
Net income 11,403,323 (1,137,591) (1,165,442)(2) 9,100,290
Earnings per share:
Basic $ .48 $ .37
Diluted $ .43 $ .32
Shares used in computation:
Basic 23,508,749 24,458,146
Diluted 27,175,763 28,125,160
</TABLE>
- ----------
(1) Represents activity for the period from January 1, 1999 through the
acquisition dates in 1999.
(2) To record the after-tax effect of interest expense and of amortization of
goodwill associated with the acquisitions for the period from January 1,
1998 through the acquisition dates in 1999.
F-21
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 1998, the Company purchased the assets of Riley Underground
Communications, Inc., based in Southern California, for cash and restricted
shares of Common Stock. Riley installs and maintains fiber-optic networks for
cable television and telephone companies. Riley was acquired for an initial
payment of approximately $300,000, comprised of $150,000 in cash and $150,000 in
stock. The previous owner of Riley is eligible for contingent payments totaling
$2,200,000 based upon subsequent performance of Riley. The Company accounts for
these contingent payments as they are earned as adjustments to the purchase
price of Riley. Payments may be in cash or at the Company's election up to 50%
may be paid in restricted shares of Common Stock. The purchase price exceeded
the fair value of the net assets by approximately $600,000 of goodwill, which is
being amortized on the straight-line basis over twenty years. The results of
operations of Riley are included in the accompanying consolidated results of
operations as of the date of acquisition.
On September 1, 1998, the Company completed two acquisition which were accounted
for under the pooling of interest method of accounting. The Company exchanged
1,502,000 and 1,752,000 shares of Common Stock for all the common stock of
United Tech, Inc. and Diversitec, Inc., respectively. Both United and Diversitec
sell new, deinstalled and refurbished communications equipment used in the
digital access, switching and transport systems of telecommunications service
providers and other Fortune 500 companies. Both United and Diversitec were
Subchapter S corporations for federal tax purposes and, accordingly, were not
subject to federal income taxes. In accordance with the pooling of interests
accounting method, 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 it has always been a
part of the Company. Additionally, a pro forma provision for income taxes has
been recorded for the years ended December 31, 1998 and 1997 to present income
taxes as though the consolidated operating results of the acquired companies had
been subject to federal income taxes for all periods presented.
In October, 1997, the Company completed a merger with Compass Communications
which was accounted for under the pooling of interests method of accounting. The
Company exchanged 470,588 shares of Common Stock for all of the common stock of
Compass. Compass specializes in the consulting and design of major broadband,
fiber-optic networks. In accordance with the pooling of interest accounting
method, all prior period consolidated financial statements have been restated to
include the results of operations, financial position and cash flows of Compass
for all periods presented.
The results of operations for the separate companies and combined amounts
presented in the consolidated financial statements follow.
Unaudited
Pro Forma
Revenues Net Income Net Income
----------- ---------- ----------
Eight months ended August 31, 1998
United Tech $10,508,497 $1,392,626 $ 835,576
Diversitec 9,288,799 2,100,218 1,260,131
----------- ---------- ----------
Totals $19,797,296 $3,492,844 $2,095,707
=========== ========== ==========
Year Ended December 31, 1997
IFCI $31,190,529 $2,128,551 $2,128,551
United Tech 8,345,581 1,061,641 636,985
Diversitec 12,595,079 3,012,523 1,807,514
Compass 5,134,617 175,934 175,934
----------- ---------- ----------
$57,265,806 $6,378,649 $4,748,984
=========== ========== ==========
Unauadited pro forma net income reflects an adjustment to present income taxes
as though the operating results of United Tech and Diversitec had been subject
to federal income taxes for all periods presented.
In connection with the United and Diversitec acquisitions, the Company recorded
a charge to operating expenses of $890,000 for direct and other acquisition
related costs. Acquisition costs consisted primarily of finder's, attorney's and
accounting fees.
F-22
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 1, 1997, the Company acquired Concepts In Communications, Inc. under
the purchase method of acounting. Concepts is based in Nashville, Tennessee and
provides systems integration services including design, engineering,
installation and maintenance of structured cable systems, network hardware and
software, work station peripherals and intercommunication systems, primarily
within commercial, industrial and governmental facilities throughout the United
States. The purchase price of $4,800,000 was funded through the sale of
$3,500,000 of Series B preferred stock and $1,500,000 from the issuance of
convertible debentures. The purchase price exceeded the fair value of the net
assets acquired by approximately $2,200,000 of goodwill, which is being
amortized on a straight-line basis over fifteen years. The results of operations
of Concepts are included in the accompanying financial statements from the date
of acquisition.
On October 1, 1997, the Company acquired substantially all of the assets of
Southern Communications Products, Inc., based in northwest Florida. Southern
sells new, deinstalled and refurbished communications equipment used in the
digital access, switching and transport systems of telecommunications service
providers and other Fortune 500 companies. The purchase price of $21,400,000 was
funded through the sale of $13,500,000 of common stock, issuance of $6,200,000
of common stock to the former owner, and the issuance of a note payable in the
amount of $3,200,000. The purchase price exceeded the fair value of the net
assets acquired by approximately $17,900,000 of goodwill, which is being
amortized on the straight-line basis over twenty years. The results of
operations of Southern are included in the accompanying financial statements
from the date of acquisition.
The following unaudited pro forma condensed consolidated financial statements
give effect to the acquisition in 1997 of Southern. They are based on the
estimates and assumptions set forth herein and in the notes to such statements.
This pro forma information has been prepared utilizing the historical financial
statements and notes thereto, which are incorporated by reference herein. The
pro forma financial data does not purport to be indicative of the results which
actually would have been obtained had the purchase been effected on the dates
indicated or of the results which may be obtained in the future.
The pro forma financial information is based on the purchase method of
accounting for the acquisition of Southern. The pro forma entries are described
in the accompanying footnotes to the unaudited pro forma condensed consolidated
financial statements.
F-23
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following represents pro forma condensed consolidate statement of operations
for the year ended December 31, 1997, assuming the acquisition of Southern was
consummated as of January 1, 1997
<TABLE>
<CAPTION>
Pro Forma
International Pro Forma Consolidated
Fibercom, Inc. Southern (4) Adjustments Amounts
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 57,265,806 $ 8,486,849 $ 65,752,655
Cost of revenues 40,433,795 2,755,785 43,189,580
------------ ----------- ------------
Gross margin 16,832,011 5,731,064 22,563,075
General and administrative 12,264,470 1,191,856 662,000 (1) 14,118,326
------------ ----------- ------------
Income from operations 4,567,541 4,539,208 8,444,749
Other income (expense), net 1,464,789 17,741 (204,000)(2) 1,278,530
------------ ----------- ------------
Income before provision for
income taxes 6,032,330 4,556,949 9,723,279
Provision for income taxes 346,319 -- (3,452,445)(3) (3,106,126)
------------ ----------- ------------
Net income 6,378,649 4,556,949 6,617,153
Preferred stock dividend (173,447) -- (173,447)
------------ ----------- ------------
Net income attributable to
common stockholders $ 6,205,202 $ 4,556,949 $ 6,443,706
============ =========== ============
Earnings per share:
Basic $ 0.53 $ 0.42
Diluted $ 0.35 $ 0.29
Shares used in computation:
Basic 11,711,024 15,514,770
Diluted 18,579,836 22,383,582
</TABLE>
- ----------
(1) To amortize goodwill in connection with the purchase of Southern on a
straight-line basis over twenty years.
(2) To record interest on the convertible subordinated debentures issued to
fund the acquisition.
(3) Pro forma income tax provision for Diversitec, United and Southern.
(4) Represents activity for the period from January 1, 1997 through September
30, 1997, the date of the acquisition.
F-24
<PAGE>
INTERNATIONAL FIBERCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SEGMENT INFORMATION
The Company's services are provided through three principle operating segments:
infrastructure development, equipment distribution, and wireless technologies.
Infrastructure development includes design and engineering services,
installation, integration and maintenance of underground and aerial fiber-optic,
copper and broadband communications systems, as well as integrated local and
wide area networks. Equipment distribution services include the sale of new,
deinstalled and refurbished communications equipment used in the digital access,
switching and transport systems of telecommunications service providers and
other Fortune 500 companies. Wireless technologies services include the design,
manufacture and installation of proprietary wireless communications equipment
used to enhance radio frequency transmission in tunnels, subways and other
confined environments.
Summary financial information for each operating segment as of and for the years
ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Infrastructure Equipment Wireless
Development Distribution Technologies Total
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1999:
Revenues $136,150,558 $31,077,638 $ 3,171,546 $170,399,742
Gross Profit 32,739,857 9,961,171 1,039,757 43,740,785
Depreciation and amortization 4,444,732 1,152,257 296,145 5,893,134
Interest expense 2,659,469 508,922 53,416 3,221,807
Operating income (loss) 10,133,293 4,689,539 (180,426) 14,642,406
Assets 108,977,953 44,813,967 7,083,644 160,875,564
For the year ended December 31, 1998:
Revenues $ 65,294,317 $39,681,678 $ -- $104,975,995
Gross Profit 13,705,616 21,173,709 -- 34,879,325
Depreciation and amortization 1,923,161 1,170,550 -- 3,093,711
Interest expense 604,597 374,824 -- 979,421
Operating income 3,606,022 13,447,080 -- 17,053,102
Assets 40,780,338 43,834,051 -- 84,614,389
For the year ended December 31, 1997:
Revenues $ 34,287,148 $22,978,658 $ -- $ 57,265,806
Gross Profit 8,957,936 7,874,075 -- 16,832,011
Depreciation and amortization 1,307,711 351,810 -- 1,659,521
Interest expense 157,127 220,490 -- 377,617
Operating income 1,120,871 3,446,670 -- 4,567,541
Assets 18,606,580 30,289,172 -- 48,895,752
</TABLE>
For the purpose of measuring the results of operations of each segment, the
Company allocates corporate overhead to each segment based on a percentage of
revenues.
NOTE 12 - MAJOR CUSTOMERS
For the year ended December 31, 1999, no single customer accounted for more than
10% of revenues. For the year ended December 31, 1998, two customers accounted
for 13% and 11% of total revenues. For the year ended December 31, 1997, one
customer accounted for 22% of revenues. Amounts due from these customers at
December 31, 1998 and 1997 totaled approximately $5,837,000 and $2,173,000,
respectively.
F-25
EXHIBIT 21.1
INTERNATIONAL FIBERCOM, INC. SUBSIDIARIES
Kleven Communities, Inc.
Concepts in Communication, Inc.
Kleven Communications (CA), Inc.
Southern Communications Products, Inc.
Compass Communications, Inc.
United Tech, Inc.
Diversitec, Inc.
IFC Staffing, Inc.
AeroComm, Inc.
Washington Data Systems, Inc.
Waypoint Systems Integration, Inc.
All Star Telecom, Inc.
All Star Telecom (Nevada), Inc.
International FiberCom (UK) Limited
BTI Acquisition, Inc.
NYA Acquisition, Inc.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the inclusion
of our report dated March 13, 1998, on the consolidated financial statements of
International FiberCom, Inc. and Subsidiaries for the year ended December 31,
1997, in the Company's Form 10-K Registration Statement, and to the reference to
us under the caption "Experts" contained in the Prospectus.
Certified Public Accountants Semple & Cooper, LLP
Phoenix, Arizona
March 15, 2000
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
International Fibercom, Inc.
3410 East University Drive, Suite 180
Phoenix, Arizona 85034
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated March 10,
2000, relating to the consolidated financial statements of International
Fibercom, Inc. appearing in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
March 10, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 924632
<NAME> INTERNATIONAL FIBERCOM INC
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,182,408
<SECURITIES> 0
<RECEIVABLES> 49,489,501
<ALLOWANCES> 0
<INVENTORY> 18,722,334
<CURRENT-ASSETS> 94,455,604
<PP&E> 37,613,785
<DEPRECIATION> (13,014,162)
<TOTAL-ASSETS> 160,875,564
<CURRENT-LIABILITIES> 56,815,998
<BONDS> 0
0
0
<COMMON> 60,106,750
<OTHER-SE> 15,644,753
<TOTAL-LIABILITY-AND-EQUITY> 160,875,564
<SALES> 170,399,742
<TOTAL-REVENUES> 170,399,742
<CGS> 126,658,957
<TOTAL-COSTS> 158,274,716
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,221,807
<INCOME-PRETAX> 12,125,026
<INCOME-TAX> 4,365,934
<INCOME-CONTINUING> 7,755,091
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (4,000)
<NET-INCOME> 7,755,091
<EPS-BASIC> .28
<EPS-DILUTED> .26
</TABLE>
