| | For the Years Ended | |
| |
| |
| | December 27, 2003 | | December 28, 2002 | |
| |
| |
| |
Cash flows from operating activities | | | | | | | |
Net income | | $ | 477,617 | | $ | 485,402 | |
| |
|
| |
|
| |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | |
Depreciation | | | 131,018 | | | 267,135 | |
Reserve for obsolete inventory | | | (113,499 | ) | | (446,244 | ) |
Reserve for doubtful accounts | | | 20,000 | | | (52,271 | ) |
Gain on disposal of assets | | | (132 | ) | | — | |
Changes in assets and liabilities | | | | | | | |
Accounts receivable – trade | | | 1,170,305 | | | (1,754,142 | ) |
Inventories | | | 800,581 | | | 723,547 | |
Prepaid expenses and other | | | 2,801 | | | (21,235 | ) |
Accounts payable – trade | | | (136,727 | ) | | 636,033 | |
Accruals | | | 202,177 | | | 806,240 | |
| |
|
| |
|
| |
| | | 2,076,524 | | | 159,063 | |
| |
|
| |
|
| |
Net cash provided by operating activities | | | 2,554,141 | | | 644,465 | |
| |
|
| |
|
| |
Cash flows from investing activities | | | | | | | |
Notes receivable - related party | | | (2,774,252 | ) | | (842,718 | ) |
Purchase of fixed assets | | | (64,857 | ) | | (30,970 | ) |
| |
|
| |
|
| |
Net cash used in investing activities | | | (2,839,109 | ) | | (873,688 | ) |
| |
|
| |
|
| |
Cash flows from financing activities | | | | | | | |
Advances on line of credit | | | 300,000 | | | — | |
Repayments on line of credit | | | (300,000 | ) | | — | |
| |
|
| |
|
| |
Net cash provided by financing activities | | | — | | | — | |
| |
|
| |
|
| |
Net decrease in cash | | | (284,968 | ) | | (229,223 | ) |
Cash - beginning of year | | | 1,184,809 | | | 1,414,032 | |
| |
|
| |
|
| |
Cash - end of year | | $ | 899,841 | | $ | 1,184,809 | |
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|
| |
|
| |
See notes to financial statements.
XEL COMMUNICATIONS, INC.
Notes to Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
XEL Communications, Inc. (the Company) is a provider of high-bandwidth connectivity equipment and services to telecommunications companies.
Fiscal Year-End
The Company ends its fiscal year on the final Saturday in December.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions it invests with. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits.
Accounts Receivable
The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated credit risk by performing credit checks and actively pursuing past due accounts. Management of the Company has established an allowance for doubtful accounts of $23,946 and $3,946 for the years ended December 27, 2003 and December 28, 2002, respectively based on their estimate of uncollectible accounts. Amounts determined to be uncollectible are expensed in the period such determination is made.
Concentrations of Credit Risk
During the year ended December 27, 2003, one customer accounted for 94% of total revenues and 78% of total accounts receivable at December 27, 2003. During the year ended December 28, 2002, the same customer accounted for approximately 80% of total revenues and 86% of total accounts receivable at December 28, 2002. This customer operates distinct and separate operating regions and has different purchasing centers which purchase a variety of differing products from the Company.
Inventories
Inventory consists of merchandise inventories and finished goods and is stated at the lower of cost or market, determined using the first-in, first-out method (FIFO).
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from 5 to 7 years.
F-6
XEL COMMUNICATIONS, INC.
Notes to Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Income Taxes
The Company has elected to be treated as an S-corporation for income tax purposes. Accordingly, taxable income and losses of the Company are reported on the income tax returns of the Company’s stockholder and no provisions for federal income taxes have been recorded on the accompanying financial statements.
Revenue Recognition
The Company recognizes revenue as product is shipped and as service is provided. Services include installation of products at customer locations.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were $33,828 and $15,807 for the years ended December 27, 2003 and December 28, 2002, respectively.
Research and Development Costs
Expenditures made for research and development are charged to expense as incurred.
Software Development Costs
The Company applies the provisions of Statement of Position 98-1, “Accounting for Costs of Computer Software Developed for Internal Use.” The Company accounts for costs incurred in the development of computer software as software research and development costs until the preliminary project stage is completed. Direct costs incurred in the development of software are capitalized once the preliminary project stage is completed, management has committed to funding the project and completion and use of the software for its intended purpose are probable. The Company ceases capitalization of development costs once the software has been substantially completed and is ready for its intended use. Software development costs are amortized over their estimated useful lives of five years. Due to the nature of the Company’s software development expenditures, historically minimal amounts have been capitalized.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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.
Reclassifications
Certain amounts in the 2002 financial statements have been reclassified to conform to the 2003 presentation.
F-7
XEL COMMUNICATIONS, INC.
Notes to Financial Statements
Note 2 - Balance Sheet Disclosures
Accounts receivable are summarized as follows:
| | December 27, 2003 | | December 28, 2002 | |
| |
|
| |
|
| |
Accounts receivable - trade | | $ | 2,674,680 | | $ | 3,844,985 | |
Less allowance for doubtful accounts | | | (23,946 | ) | | (3,946 | ) |
| |
|
| |
|
| |
| | $ | 2,650,734 | | $ | 3,841,039 | |
| |
|
| |
|
| |
Inventories are summarized as follows:
| | December 27, 2003 | | December 28, 2002 | |
| |
|
| |
|
| |
Merchandise inventories | | $ | 954,979 | | $ | 1,441,241 | |
Finished goods | | | 1,747,383 | | | 2,061,702 | |
Less reserve for obsolete inventory | | | (74,070 | ) | | (187,569 | ) |
| |
|
| |
|
| |
| | $ | 2,628,292 | | $ | 3,315,374 | |
| |
|
| |
|
| |
Property and equipment consist of the following:
| | December 27, 2003 | | December 28, 2002 | |
| |
|
| |
|
| |
Equipment | | $ | 3,817,347 | | $ | 3,797,120 | |
Computer equipment | | | 1,071,440 | | | 1,034,386 | |
Furniture | | | 660,165 | | | 661,187 | |
Software | | | 565,858 | | | 565,858 | |
Vehicles | | | 16,552 | | | 16,552 | |
| |
|
| |
|
| |
| | | 6,131,362 | | | 6,075,103 | |
Less accumulated depreciation | | | (5,956,228 | ) | | (5,833,940 | ) |
| |
|
| |
|
| |
| | $ | 175,134 | | $ | 241,163 | |
| |
|
| |
|
| |
Depreciation expense for the periods ended:
2003 | | $ | 131,018 | |
2002 | | $ | 267,135 | |
F-8
XEL COMMUNICATIONS, INC.
Notes to Financial Statements
Note 3 - Line-of-Credit
During 2003, the Company had available a $500,000 line-of-credit payable to a bank. The line-of-credit matured in November 2003 and was not renewed.
Note 4 - Commitments
Operating Leases
The Company leases facilities and equipment under operating leases.
Rent expense for these leases was:
Fiscal Years Ending | | | | |
| | | | |
2003 | | $ | 106,155 | |
2002 | | $ | 29,887 | |
Future minimum lease payments under these leases are approximately as follows:
Fiscal Years Ending | | | | |
| | | | |
2004 | | $ | 82,329 | |
2005 | | | 8,782 | |
| |
|
| |
| | $ | 91,111 | |
| |
|
| |
Note 5 - Related Party Transactions
The current stockholder of the Company purchased the stock of the Company for $4,900,000 from Salient 3 Communications in December 2000. The current stockholder issued a note payable to Salient 3 Communications for $4,900,000. During 2002, the current stockholder and Salient 3 Communications amended the original agreement and negotiated a reduction in the purchase price of the stock in the Company by canceling the original note payable and issuing three notes payable of $141,000, $359,000 and $1,400,000. The largest note requires principal and interest payments until maturity, which was July 31, 2003. The remaining two notes require interest only payments until maturity, which was July 31, 2003. The Company has made the principal and interest payments on behalf of the stockholder and has created the above related party receivable. $490,000 had been paid to Salient 3 Communications prior to the renegotiation of the original note.
F-9
XEL COMMUNICATIONS, INC.
Notes to Financial Statements
Note 6 - Notes Receivable - Related Party
Related party notes receivable consist of the following:
| | December 27, 2003 | | December 28, 2002 | |
| |
|
| |
|
| |
Note receivable from stockholder, variable interest rate of 1.67% at December 27, 2003, due on demand as maturity has passed and no extension has been made. | | $ | 391,999 | | $ | 391,999 | |
Note receivable from stockholder, variable interest rate of 1.67% at December 27, 2003, due on demand as maturity has passed and no extension has been made. | | | 842,718 | | | 842,718 | |
Note receivable from stockholder, variable interest rate of 1.67% at December 27, 2003, due on December 24, 2004. | | | 1,974,252 | | | — | |
Note receivable from stockholder, variable interest rate of 1.67% at December 27, 2003, due on December 24, 2004. | | | 800,000 | | | — | |
| |
|
| |
|
| |
| | $ | 4,008,969 | | $ | 1,234,717 | |
| |
|
| |
|
| |
In spite of the fact that the notes receivable have either matured or will mature in the next year, management has indicated that there is no intent to repay the notes receivable in the foreseeable future. Interest income for the years ended December 27, 2003 and December 28, 2002 was and $33,812 and $19,910, respectively.
Note 7 - Employee Benefit Plan
The Company has a 401(k) plan. All eligible employees over age 18 are able to participate the first day of employment. The plan provides for employer matching contributions of amounts equal to 100% of each participant’s eligible contributions up to 4% of participant’s plan year compensation. The Company made contributions of approximately $143,094 and $130,296 during fiscal years ended 2003 and 2002, respectively.
Note 8 - Subsequent Events
Subsequent to the year ended December 27, 2003, the Company entered into a letter of intent to sell the capital stock of the Company to an unrelated third party.
F-10
EXHIBIT INDEX
Exhibit No. | | Description |
| |
|
2.1 | | Stock Purchase Agreement, dated as of February 5, 2004, by and between Verilink Corporation and The Kennedy Company (filed herewith) (exhibits and schedules omitted but copies will be furnished supplementally to the Securities and Exchange Commission upon request). |
| | |
10.1 | | Convertible Promissory Note issued to The Kennedy Company on February 5, 2004 (filed herewith). |
| | |
23.1 | | Consent of Ehrhardt Keefe Steiner & Hottman PC (filed herewith) |