Exhibit 2.2
Advanced Acoustical Concepts, Inc.
Contents
Independent auditors' report 3
Financial statements:
Balance sheets 4
Statements of operations and comprehensive loss 5
Statements of changes in stockholders' equity (deficit) 6
Statements of cash flows 7
Notes to financial statements 8-16
Independent Auditors' Report
To the Board of Directors
Advanced Acoustical Concepts, Inc.
Dayton, OH 45414
We have audited the accompanying balance sheets of Advanced Acoustical Concepts,
Inc. as of December 31, 2000 and 1999, and the related statements of operations
and comprehensive loss, changes in stockholders' equity (deficit) 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Acoustical Concepts,
Inc. at December 31, 2000 and 1999, and the results of its operations and
comprehensive loss, stockholders' equity (deficit), and its cash flows for the
years then ended in conformity with generally accepted accounting principles in
the United States of America.
BDO Seidman, LLP
Woodbridge, New Jersey
September 14, 2001
3
Advanced Acoustical Concepts, Inc.
Balance Sheets
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December 31, 2000 1999
-------------------------------------------------------------------------------------------- ----------- -----------
Assets
Current:
Cash $ -- $ 18,780
Accounts receivable, net of allowance for doubtful accounts of $58,000
and $32,000, respectively 1,906,448 1,333,069
Costs and estimated earnings in excess of billings on uncompleted
contracts 693,795 272,987
Inventories 377,063 400,884
Due from stockholder 34,614 --
Prepaid expenses and other current assets 54,961 18,189
-------------------------------------------------------------------------------------------- ----------- -----------
Total current assets 3,066,881 2,043,909
-------------------------------------------------------------------------------------------- ----------- -----------
Property and equipment, net 394,221 426,475
Other assets 14,451 15,888
-------------------------------------------------------------------------------------------- ----------- -----------
$ 3,475,553 $ 2,486,272
============================================================================================ =========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Cash overdraft $ 2,469 $ --
Current portion of long-term debt and capital lease obligations 285,210 62,546
Accounts payable and accrued expenses 2,177,529 884,604
Billings in excess of cost and estimated earnings on uncompleted
contracts 1,024,719 513,666
Deferred maintenance contract revenue 390,709 181,923
Short-term borrowings 543,945 745,282
Due to stockholders -- 86,267
-------------------------------------------------------------------------------------------- ----------- -----------
Total current liabilities 4,424,581 2,474,288
Long-term debt and capital lease obligations 35,471 3,571
-------------------------------------------------------------------------------------------- ----------- -----------
Total liabilities 4,460,052 2,477,859
-------------------------------------------------------------------------------------------- ----------- -----------
Stockholders' equity (deficit):
Common stock, no par value, 10,000,000 shares authorized; 1,110,000
shares issued and outstanding 50,000 50,000
Additional paid-in capital 143,581 8,581
Cumulative foreign currency translation adjustment 6,719 --
Retained deficit (1,184,799) (50,168)
-------------------------------------------------------------------------------------------- ----------- -----------
Total stockholders' equity (deficit) (984,499) 8,413
-------------------------------------------------------------------------------------------- ----------- -----------
$ 3,475,553 $ 2,486,272
============================================================================================ =========== ===========
See accompanying notes to financial statements.
4
Advanced Acoustical Concepts, Inc.
Statements of Operations and Comprehensive Loss
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Year ended December 31, 2000 1999
------------------------------------------------------------ ------------ -----------
Revenue $ 10,199,099 $ 9,027,456
Cost of revenues 7,436,456 7,366,479
------------------------------------------------------------ ------------ -----------
Gross margin 2,762,643 1,660,977
Selling, general and administrative expenses 3,513,315 2,309,520
------------------------------------------------------------ ------------ -----------
Loss from operations (750,672) (648,543)
------------------------------------------------------------ ------------ -----------
Other income (expense):
Interest expense, net (369,860) (126,431)
Exchange gain on foreign currency 9,435 --
Loss on sale of assets (875) (585)
Other income (expense) (22,659) 7,398
------------------------------------------------------------ ------------ -----------
Total other expense (383,959) (119,618)
------------------------------------------------------------ ------------ -----------
Net loss (1,134,631) (768,161)
Other comprehensive income:
Foreign currency translation adjustments 6,719 --
------------------------------------------------------------ ------------ -----------
Comprehensive loss $ (1,127,912) $ (768,161)
============================================================ ============ ===========
See accompanying notes to financial statements.
5
Advanced Acoustical Concepts, Inc.
Statements of Changes in Stockholders' Equity (Deficit)
--------------------------------------------------------------------------------
Cumulative Other
Additional Paid-In Comprehensive Retained Earnings
Common Stock Capital Income (Deficit) Total
--------------------------------------- ------------- ------------------ -------------- ------------------- -------------
Balance, December 31, 1998 $50,000 $ 8,581 $ -- $ 746,313 $ 804,894
Net loss -- -- -- (768,161) (768,161)
Distributions -- -- -- (28,320) (28,320)
--------------------------------------- ------------- ------------------ -------------- ------------------- -------------
Balance, December 31, 1999 50,000 8,581 - (50,168) 8,413
Foreign currency translation adjustment -- -- 6,719 -- 6,719
Capital contribution -- 135,000 -- -- 135,000
Net loss -- -- -- (1,134,631) (1,134,631)
--------------------------------------- ------------- ------------------ -------------- ------------------- -------------
Balance, December 31, 2000 $50,000 $143,581 $6,719 $(1,184,799) $ (984,499)
======================================== ============= ================== ============== =================== =============
See accompanying notes to financial statements.
6
Advanced Acoustical Concepts, Inc.
Statements of Cash Flows
--------------------------------------------------------------------------------
Year ended December 31, 2000 1999
------------------------------------------------------------------------------------------------ ----------- ---------
Cash flows from operating activities:
Net loss $(1,134,631) $(768,161)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 155,920 173,533
Provision for bad debts 26,000 32,000
Provision for inventory obsolescence -- 270,000
Loss on sale of assets 875 585
Changes in operating assets and liabilities:
Accounts receivable (599,379) 992,337
Cost and estimated earnings in excess of billings on uncompleted
contracts (420,808) 426,263
Inventory 23,821 25,922
Prepaid expenses and other current assets (36,772) 20,045
Accounts payable and accrued expenses 1,516,818 (514,871)
Billings in excess of costs and estimated earnings on uncompleted
contracts 511,053 361,760
Deferred maintenance contract revenue 208,786 (35,809)
Other assets 1,437 777
------------------------------------------------------------------------------------------------ ----------- ---------
Net cash provided by operating activities 253,120 984,381
------------------------------------------------------------------------------------------------ ----------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment 2,593 500
Purchase of property and equipment (72,847) (160,645)
------------------------------------------------------------------------------------------------ ----------- ---------
Net cash used in investing activities (70,254) (160,145)
------------------------------------------------------------------------------------------------ ----------- ---------
Cash flows from financing activities:
Payments on short-term borrowings (201,337) (802,150)
Payments on long-term debt (62,115) (155,245)
Proceeds on notes payable 125,000 --
Payments on notes payable (82,007) --
Payments/proceeds to stockholders (120,881) 86,267
Payments on capital leases (4,494) --
Capital contribution 135,000 --
Distributions -- (28,320)
------------------------------------------------------------------------------------------------ ----------- ---------
Net cash used in financing activities (210,834) (899,448)
------------------------------------------------------------------------------------------------ ----------- ---------
Effect of exchange rate changes on cash 6,719 --
------------------------------------------------------------------------------------------------ ----------- ---------
Decrease in cash and cash equivalents (21,249) (75,212)
Cash, at beginning of year 18,780 93,992
------------------------------------------------------------------------------------------------ ----------- ---------
Cash, at end of year $ (2,469) $ 18,780
================================================================================================ =========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 370,546 $ 134,343
Non-cash investing and financing activities:
Acquisition of equipment through capital leases $ 54,287 $ --
Issuance of notes for accounts payable $ 223,893 $ --
================================================================================================ =========== =========
See accompanying notes to financial statements.
7
Advanced Acoustical Concepts, Inc.
Notes to Financial Statements
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1. Summary of Significant Nature of Operations
Accounting Policies
Advanced Acoustical Concepts, Inc. (the
"Company") was incorporated in the state of
Washington on June 1, 1998. The Company's main
office is located in Dayton, Ohio.
The Company contracts with private companies,
government agencies and the military to provide
video conferencing installation and maintenance
services, audio/video engineering, media room
construction and other electronic communication
services. The Company's customers are located
throughout the United States.
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 and Cost Recognition
Revenues from fixed-price construction
contracts are recognized on the
percentage-of-completion method, measured by
the percentage of cost incurred to date to
estimated total cost for each contract. This
method is used because management considers
total cost to be the best available measure of
progress on the contracts. Because of the
inherent uncertainties in estimated costs, it
is at least reasonably possible that estimates
used will change within the near term.
As these contracts extend over one or more
periods, revisions in costs and profit
estimated during the course of the work are
reflected in the accounting period in which the
facts that require the revision become known.
8
Advanced Acoustical Concepts, Inc.
Notes to Financial Statements
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Contract costs include all direct materials,
labor and subcontracting costs and those
indirect costs relating to contract
performance, such as indirect labor, supplies,
tools, repairs and depreciation. Selling,
general and administrative costs are charged to
expense as incurred. Provisions for estimated
losses on uncompleted contracts are made in the
period in which such losses are determined.
Changes in job performance, job conditions and
estimated profitability, including those
arising from final contract settlements, may
result in revisions to costs and income and are
recognized in the period in which the revisions
are determined.
The asset, "Costs and estimated earnings in
excess of billings on uncompleted contracts",
represents revenues recognized in excess of
amounts billed. The liability, "Billings in
excess of costs and estimated earnings on
uncompleted contracts," represents billings in
excess of revenues recognized.
Revenues on maintenance contracts are
recognized ratably over the life of the
contract using the straight-line method.
Deferred revenue is recorded for the excess of
maintenance contract billings over revenues
recognized. Contract costs are recognized as
incurred. Provisions of estimated losses on
uncompleted maintenance contracts are made in
the period in which such losses are determined.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts
receivable, prepaid expenses, accounts payable
and accrued expenses approximate fair value
because of the current maturity of these items.
Inventories
Inventories, consisting of finished goods and
spare parts, is valued at the lower of cost
(determined on a first in, first out basis) or
market.
Property and Equipment
Property and equipment are stated at cost.
Depreciation and amortization are computed
using the straight-line method over the
estimated useful lives of the assets, generally
3-10 years. The cost of maintenance and repairs
is charged to operations as incurred.
9
Advanced Acoustical Concepts, Inc.
Notes to Financial Statements
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Cash and Cash Equivalents
All highly liquid investments with original
maturities of three months or less are
considered to be cash equivalents.
Income Taxes
The Company, with the consent of its
stockholders, has elected under the Internal
Revenue Code to be an "S" corporation. The
election was effective for federal and Ohio
State income tax purposes, but was not
effective in two other states. Accordingly, the
Company may incur income tax obligations
relating to those states only, and the
financial statements may include a provision
for those taxes. Earnings and losses for
federal income tax purposes are reported on the
individual income tax returns of the
stockholders based upon their proportionate
share. Therefore, no provision or liability for
Federal income taxes has been included in these
financial statements.
Foreign Currency Translation
Foreign currency exchange gains or losses
arising from transactions denominated in
foreign currencies are translated at average
exchange rates. The effects of these exchange
adjustments are included in operations. Foreign
currency denominated cash accounts are
translated at year-end exchange rates. The
effects of the translation adjustments are
recognized as a separate component of
shareholders' deficit.
10
Advanced Acoustical Concepts, Inc.
Notes to Financial Statements
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Long-Lived Assets
The Company follows SFAS No. 121 "Accounting
for Impairment of Long-Lived Assets to be
Disposed Of" ("SFAS 121"). In accordance with
SFAS 121 the Company periodically reviews the
carrying value of certain of its assets in
relation to historical results, current
business conditions and trends to identify
potential situations in which the carrying
value of assets may not be recoverable. If such
reviews indicate that the carrying value of
such assets may not be recoverable, the Company
would determine whether the estimated amounts
recoverable through future operations and sale
of a property on an undiscounted basis are
below the property's carrying value. If the
property is determined to be impaired, it must
be written down to fair value. As of December
31, 2000, no write-downs were required.
2. Property, Plant Property, plant and equipment consists of the
and Equipment following:
December 31, 2000 1999
-------------------------------------------- ---------------- ---------------
Technical and demonstration equipment $ 548,262 $ 496,968
Office furniture and equipment 538,469 523,320
Transportation equipment 14,555 14,555
Leasehold improvements 38,977 38,977
Equipment under capital leases 54,287 --
-------------------------------------------- ---------------- ---------------
1,194,550 1,073,820
Less: accumulated depreciation and
amortization (800,329) (647,345)
-------------------------------------------- ---------------- ---------------
$ 394,221 $ 426,475
============================================ ================ ===============
11
Advanced Acoustical Concepts, Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------
3. Costs and Estimated Information with respect to
Earnings on Uncompleted contracts-in-progress at December 31, 2000 and
Contracts 1999 is as follows:
2000 1999
-------------------------------------------- ---------------- ---------------
Costs incurred on uncompleted contracts $3,844,697 $2,770,426
Estimated gross profit 1,503,886 955,725
-------------------------------------------- ---------------- ---------------
5,348,583 3,726,151
Less: billings to date 5,679,507 3,966,830
-------------------------------------------- ---------------- ---------------
$ (330,924) $(240,679)
============================================ ================ ===============
Included in accompanying balance sheets under the following captions:
2000 1999
-------------------------------------------- ---------------- ---------------
Costs and estimated earnings in excess of $ 693,795 $ 272,987
billings on uncompleted contracts
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,024,719) (513,666)
-------------------------------------------- ---------------- ---------------
Total $(330,924) $(240,679)
============================================ ================ ===============
4. Short-Term Borrowings The Company had a line of credit with a
financial institution during 1999. Balances
under the line are due on demand. Interest is
payable monthly at the bank's reference rate
plus 1.25%. Total borrowings under the line are
limited to the lesser of 80% of eligible
accounts receivable plus 40% of stock inventory
(maximum $200,000) or the unused portion of the
line of credit up to $2,500,000. The line is
collateralized by contract receivables,
inventory and equipment and is guaranteed by
the Company's stockholders. Total amounts
outstanding at December 31, 1999 was $745,282.
This line was paid in full and terminated
during 2000.
12
Advanced Acoustical Concepts, Inc.
Notes to Financial Statements
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In February 2000, the Company entered into an
Agreement with a financial institution whereby
the Company factors certain of its accounts
receivables. The Company receives up to 80% of
the aggregate net face value of the
receivables. The Company is required to pay
fees on the gross face value of the accounts
sold based upon the number of days elapsed
between the date the account is purchased and
collection of each account occurs. The fees
range from 2.5% to 13%. At December 31, 2000
borrowings under this agreement totaled
$339,475.
In March 2000, the Company added an addendum to
the Agreement. Under this addendum, the
Company, in addition to financing certain of
its accounts receivables, can also finance its
irrevocable purchase orders from their
customers. An initial discount is charged based
on the gross amount of each purchase order. The
discount varies based upon the ratio of the sum
of all advances, payments, guarantees and
letters of credit made to the total of all
gross receivables. The discount ranges from
3.99% to 5.99%. At December 31, 2000 borrowings
under the addendum totaled $204,470.
13
Advanced Acoustical Concepts, Inc.
Notes to Financial Statements
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5. Long-Term Debt and Long-term debt and capital lease obligations
Capital Lease consisted of the following:
Obligations
December 31, 2000 1999
----------------------------------------------- ------------- -------------
Note payable - National City Bank, interest
at prime plus 1-1/2%, monthly payments of
$9,723 plus interest, final payment due
April 2000, collateralized by receivables
and equipment, guaranteed by stockholders $ -- $38,864
Note payable - National City Bank, interest
at 9.25%, monthly payments of $3,125
including interest, final payment due June
2000, collateralized by receivables and
equipment, guaranteed by stockholders -- 18,700
Note payable - GMAC, interest at 8.734%,
monthly payments of $461 including
interest, final payment due September 2001,
collateralized by vehicle 4,002 8,553
Note payable - Broad Street Financial
Company, interest at 10%, principal and
interest due 2001 125,000 --
Note payable - Picture Tel Corporation,
interest at 11.25%, monthly payments of
$29,180, due 2001 141,886 --
Obligations under six capital leases with
Dell Financial Services payable in
monthly installments ranging from $89 - $163
with implicit interest at rates ranging from
16.9 to 19.4 per annum 17,026 --
Obligations under eight capital leases with
Vision Financial Group, Inc., payable in
monthly installments ranging from $61 -
$172 with implicit interest at rates
ranging from 19.5 - 21.3 per annum 32,767 --
----------------------------------------------- ------------- -------------
320,681 66,117
Less: current maturities 285,210 62,546
----------------------------------------------- ------------- -------------
$ 35,471 $ 3,571
=============================================== ============= =============
14
Advanced Acoustical Concepts, Inc.
Notes to Financial Statements
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Maturities of long-term debt and capital lease
obligations in each of the years ending
December 31, are as follows:
----------------------------------------------- -------------
2001 $285,210
2002 17,452
2003 18,019
----------------------------------------------- -------------
$320,681
----------------------------------------------- -------------
6. Due to Stockholders In September 1999, the Company entered into
unsecured loans with two stockholders for
$100,000. The loans call for optional partial
payments or one balloon payment to be made on
or before December 31, 1999, plus interest at
8%. These notes were paid off during 2000.
7. Profit Sharing Plan The Company provides a qualified profit sharing
plan and trust for substantially all of its
employees. Contributions are at the discretion
of the Board of Directors, and are limited to
15% of the aggregate compensation of all plan
participants. There were no contributions for
the years ended December 31, 2000 and 1999.
This plan was terminated in April 2000.
8. Leases The Company leases its main office in Ohio on a
month-to-month operating lease. Rent expense
for the years ended December 31, 2000 and 1999
were $88,027 and $117,928, respectively.
Future minimum lease payments required under
capital leases in each of the years ending
December 31, are as follows:
----------------------------------------------- -------------
2001 $23,006
2002 23,006
2003 19,794
----------------------------------------------- -------------
Total future minimum lease payments 65,806
Less amount representing interest 16,013
----------------------------------------------- -------------
$49,793
=============================================== =============
15
Advanced Acoustical Concepts, Inc.
Notes to Financial Statements
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9. Commitments and Some of the Company's contracts contain
Contingencies warranty clauses which obligate the Company to
perform repairs of installed equipment for
various periods of time after completion of the
initial contracts. The Company has not
experienced significant costs relating to these
clauses as of December 31, 2000, and management
is not able to accurately estimate the future
costs relating to existing warranty
obligations. Accordingly, no accrual for these
future costs is included in the accompanying
financial statements.
The Company has also entered into maintenance
contracts which obligate the Company to perform
maintenance services on an "as needed" basis
during the contractual period. The Company
records revenues and costs under the contracts
as described in Note 1.
The Company is involved in litigation with a
former employee. The employee has brought suit
against the Company alleging that the Company
failed to pay sales commissions to him over a
three year period. The Company has accrued
$50,000 related to this suit.
10. Concentration of Credit The Company maintains its cash balances in one
Risk financial institution. The balances are insured
by the FDIC up to $100,000. At December 31,
2000, the Company had no uninsured balances.
11. Subsequent Events On July 17, 2001, Wire One Technologies, Inc.
acquired the assets and certain liabilities of
the Company. The total consideration was
$794,000, which was paid in the form of 145,429
shares of Wire One common stock valued at the
time of the acquisition.
16