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Computer Equity Corporation and
Subsidiaries
Consolidated Financial Statements and Report
of Independent Certified Public Accountants
February 29, 2000 and February 28, 1999
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Computer Equity Corporation and Subsidiaries
Contents
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Report of Independent Certified Public Accountants 3
Consolidated Financial Statements
Consolidated Balance Sheets 4
Consolidated Statements of Income 5
Consolidated Statements of Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-13
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Accountants and Grant Thornton
Management Consultants Grant Thornton LLP
The US Member Firm of
Grant Thornton International
Report of Independent Certified Public Accountants
Board of Directors
Computer Equity Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Computer Equity
Corporation and Subsidiaries (the Company) as of February 29, 2000 and February
28, 1999, and the related consolidated statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Computer Equity Corporation and Subsidiaries as of February 29, 2000 and
February 28, 1999, and the consolidated results of their operations and their
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Vienna, Virginia
April 28, 2000
Suite 375
2070 Chain Bridge Road
Vienna, VA 22182-2536
Tel: 703-847-7500
Fax: 703-848-9580
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Computer Equity Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Balance Sheets
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<S> <C> <C>
February 29, February 28,
2000 1999
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Assets
Current Assets
Cash and cash equivalents $ 4,970,000 $ 4,965,000
Short-term investments 2,654,000 ---
Accounts receivable 9,766,000 8,315,000
Inventories 130,000 903,000
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Total Current Assets 17,520,000 14,183,000
Equipment Held for Lease, net of accumulated
depreciation of $1,097,000 and $838,000
in 2000 and 1999, respectively 334,000 886,000
Property and Equipment, net of accumulated
depreciation and amortization 170,000 150,000
Other Assets 18,000 109,000
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$ 18,042,000 $ 15,328,000
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Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 8,688,000 $ 8,185,000
Deferred Income Taxes 267,000 95,000
Stockholders' Equity
Common stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding,
4,816,846 and 4,811,986 shares in 2000 and
1999, respectively 48,000 48,000
Capital in excess of par 61,000 59,000
Retained earnings 8,978,000 6,941,000
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9,087,000 7,048,000
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$ 18,042,000 $ 15,328,000
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</TABLE>
The accompanying notes are an integral part of these statements.
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Computer Equity Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statements of Income
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<S> <C> <C>
February 29, February 28,
Year ended 2000 1999
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Revenue
Sales $ 31,382,000 $ 30,982,000
Costs and Expenses
Cost of sales 24,760,000 24,482,000
General, administrative and other 4,490,000 3,823,000
Depreciation and amortization 498,000 331,000
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Income from Operations 1,634,000 2,346,000
Investment Income 1,676,000 231,000
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Income Before Provision for Income Taxes 3,310,000 2,577,000
Provision for Income Taxes 1,273,000 1,032,000
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Net Income $ 2,037,000 $ 1,545,000
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</TABLE>
The accompanying notes are an integral part of these statements.
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Computer Equity Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
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Years ended February 29, 2000 and February 28, 1999
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Capital Total
Common Stock In Excess Retained Stockholders'
Shares Amount of Par Earnings Equity
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<S> <C> <C> <C> <C> <C>
Balance, March 1, 1998 4,796,326 $ 48,000 $ 32,000 $5,396,000 $5,476,000
Exercise of stock options 6,660 --- 12,000 --- 12,000
Issuance of stock 9,000 --- 15,000 --- 15,000
Net income --- --- --- 1,545,000 1,545,000
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Balance, February 28, 1999 4,811,986 48,000 59,000 6,941,000 7,048,000
Exercise of stock options 4,860 --- 2,000 --- 2,000
Net income --- --- --- 2,037,000 2,037,000
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Balance, February 29, 2000 4,816,846 $ 48,000 $ 61,000 $8,978,000 $9,087,000
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</TABLE>
The accompanying notes are an integral part of these statements.
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Computer Equity Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
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<S> <C> <C>
Year ended February 29, February 28,
2000 1999
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Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net income $ 2,037,000 $ 1,545,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 498,000 331,000
Deferred income taxes 172,000 (33,000)
Gain on sale of equipment held for lease (41,000) (23,000)
Loss on sale of property and equipment --- 1,000
Unrealized gain on short-term investments (696,000) ---
Changes in operating assets and liabilities
Increase in accounts receivable (1,451,000) (4,181,000)
Decrease (increase) in inventories 773,000 (232,000)
Increase in short-term investments (1,958,000) ---
Decrease (increase) in other assets 91,000 (97,000)
Decrease in accounts payable and accrued expenses 503,000 3,988,000
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Net Cash (Used in) Provided by Operating Activities (72,000) 1,299,000
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Cash Flows from Investing Activities
Proceeds from sale of equipment held for lease 171,000 177,000
Additions to property and equipment (96,000) (48,000)
Additions to equipment held for lease --- (684,000)
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Net Cash Provided by (Used in) Investing Activities 75,000 (555,000)
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Cash Flows from Financing Activities
Principal payments on installment notes --- (452,000)
Issuance of common stock 2,000 27,000
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Net Cash Provided by (Used in) Financing Activities 2,000 (425,000)
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Net Increase in Cash and Cash Equivalents 5,000 319,000
Cash and Cash Equivalents, beginning of year 4,965,000 4,646,000
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Cash and Cash Equivalents, end of year $ 4,970,000 $ 4,965,000
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Supplemental Disclosures of Cash Flows Information
Cash paid during the year for:
Interest $ 3,000 $ 28,000
Taxes $ 1,411,000 $ 826,000
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</TABLE>
The accompanying notes are an integral part of these statements.
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Computer Equity Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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February 29, 2000 and February 28, 1999
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NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Computer Equity Corporation (the Company) was formed in 1987 and is engaged
principally in the sale of computers, components and telecommunications
equipment; lease of equipment; and management of trade shows. Transactions
with the U.S. government and its agencies accounted for approximately 94
percent and 95 percent of the Company's 2000 and 1999 revenue,
respectively. Accounts receivable from the U.S. government and its agencies
at February 29, 2000 and February 28, 1999, were $9,568,000 and $8,233,000,
respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company's
wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents
For the purpose of the consolidated statements of cash flows, the Company
considers all amounts deposited with its bank, including repurchase
agreements to be cash equivalents. These balances are insured by the
Federal Deposit Insurance Corporation up to $100,000 per entity.
Short-term Investments
Short-term investments consist of marketable securities and are reported at
fair value. The short-term investments are classified as trading
securities. Realized gains and losses are determined using the specific
identification method.
Inventories
Inventories consist of computer and telecommunications equipment and
electronic components and are stated at the lower of cost or market. Cost
is determined using the first-in, first-out method.
Equipment Held for Lease
Equipment held for lease is recorded at cost and is depreciated to its
estimated residual value using accelerated and straight-line methods of
depreciation.
Property and Equipment
Property and equipment are stated at cost and depreciated over the assets'
estimated useful lives of three to five years using accelerated and
straight-line methods.
Revenue Recognition
The Company recognizes sales upon shipment and fees for service as earned
over the life of the agreements.
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Computer Equity Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
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February 29, 2000 and February 28, 1999
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NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return. Deferred taxes result primarily from temporary differences from
different depreciation methods for income tax and financial reporting
purposes and unrealized gains on investments.
Employee Stock Options
The Company prices stock options at or above the fair value on the date of
the grant, and therefore no compensation expense is recognized. The pro
forma disclosures required by Statement of Financial Accounting Standards
(SFAS) No. 123 are not deemed significant and are therefore not presented.
Using Estimates in Preparing Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 1999 financial statements have been reclassified to
conform to the presentation in the 2000 statements.
NOTE 2 - EQUIPMENT HELD FOR LEASE
The Company leases transportation and telecommunication equipment primarily
to the U.S. government. These leases, accounted for as operating leases,
are for one-year periods and are renewable. Future minimum lease payments
to be received in 2000 under these operating leases are $81,000 at February
29, 2000. The amounts do not include payments to be received if leases are
renewed. Upon lease termination, the Company typically sells the equipment.
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Computer Equity Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
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February 29, 2000 and February 28, 1999
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NOTE 3 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
<S> <C> <C>
February 29, February 28,
2000 1999
Furniture and equipment $ 625,000 $ 541,000
Leasehold improvements 24,000 12,000
Vehicles 11,000 11,000
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660,000 564,000
Accumulated depreciation and amortization (490,000) (414,000)
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$ 170,000 $ 150,000
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</TABLE>
NOTE 4 - DEBT
Bank Note Payable
The Company has a $2,000,000 bank line of credit under which borrowings are
limited to 90 percent of the government accounts receivable aged less than
90 days of two subsidiaries (Government Telecommunications, Inc. and
Federal Services, Inc.). Borrowings are collateralized by all assets of the
Company's subsidiaries and are payable on demand (interest payable monthly)
with interest at the bank's prime rate plus 1/2 percent (9.25 percent and
8.25 percent at February 29, 2000 and February 28, 1999, respectively). No
borrowings were outstanding under this facility at February 29, 2000 and
February 28, 1999. The line of credit expires on June 30, 2000, and
contains a financial ratio covenant and other restrictions including
limitations on additional borrowings and changes in ownership.
Installment Notes
The Company has a lease financing agreement to finance equipment held for
lease, which agreement is subject to annual renewal. Under this agreement,
the Company has a maximum borrowing capacity of $3,000,000. The agreement
contains a financial ratio covenant and other restrictions.
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Computer Equity Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
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February 29, 2000 and February 28, 1999
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NOTE 5 - INCOME TAXES
<TABLE>
<CAPTION>
Income tax expense (benefit) consists of the following for the years ended:
<S> <C> <C>
February 29, February 28,
2000 1999
Current
Federal $ 902,000 $ 876,000
State 199,000 189,000
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1,101,000 1,065,000
Deferred
Federal 141,000 (25,000)
State 31,000 (8,000)
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172,000 (33,000)
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$ 1,273,000 $ 1,032,000
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</TABLE>
Total income tax expense differed from expected amounts computed by
applying the U.S. federal income tax rates to income before income taxes as
a result of the following for the years ended:
<TABLE>
<CAPTION>
<S> <C> <C>
February 29, February 28,
2000 1999
Computed "expected" tax expense $ 1,125,000 $ 876,000
Increase in income taxes resulting from --
State and local income taxes, net of
federal income tax benefits 153,000 119,000
Other (5,000) 37,000
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Total income tax expense $ 1,273,000 $ 1,032,000
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</TABLE>
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Computer Equity Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
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February 29, 2000 and February 28, 1999
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NOTE 6 - STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
The Company has a non-qualified stock option plan. The option price and
term of each option are determined by a committee appointed by the board of
directors. Options terminate upon cessation of employment. Changes in stock
options are as follows:
<S> <C> <C>
Shares Price per Share
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Shares under option, March 1, 1998 324,258 $ .17-3.00
Options granted 70,200 3.25-3.50
Options exercised (6,660) .17-2.50
Options canceled (106,700) 1.50-3.25
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Shares under option, February 28, 1999 281,098 $ .25-3.50
Options granted 7,500 3.50
Options exercised (4,860) .25-2.50
Options canceled (47,500) 2.50-3.25
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Shares under option, February 29, 2000 236,238 $ .25-3.50
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</TABLE>
Options for 141,010 shares were exercisable as of February 29, 2000.
At February 29, 2000, 266,628 shares of the Company's authorized and
unissued common stock were reserved for future issuance under the Company's
non-qualified stock option plan.
NOTE 7 - RETIREMENT PLAN
The Company has a defined contribution plan which conforms to the
provisions of Section 401(k) of the Internal Revenue Code. The plan covers
substantially all full-time employees and allows employees to defer
voluntarily a percentage of their income through contributions to the plan.
The Company contributes a percentage of the participant's salary. The
Company made mandatory contributions of $94,000 and $98,000 for the years
ended February 29, 2000 and February 28, 1999, respectively.
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Computer Equity Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
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February 29, 2000 and February 28, 1999
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NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases office space, vehicles and office equipment under
agreements expiring at various dates through 2004. Rent expense was
$221,000 and $190,000 for the years ended February 29, 2000 and February
28, 1999, respectively.
Future minimum operating lease payments for each year subsequent to
February 29, 2000 are as follows:
Year ending February 28/29,
2001 $ 234,000
2002 241,000
2003 247,000
2004 251,000
2005 166,000
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$ 1,139,000
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