EXHIBIT 7.1
KINGSTON SALES CORPORATION
Financial Statements
Years Ended December 31, 2001 and 2000
KINGSTON SALES CORPORATION
TABLE OF CONTENTS
Independent Auditors' Report on the Financial Statements..................Page 1
Financial Statements
Balance Sheets........................................................ 2
Statements of Operations.............................................. 3
Statement of Stockholders' Equity..................................... 4
Statements of Cash Flows.............................................. 5
Notes to Financial Statements......................................... 6
Independent Auditors' Report
To the Board of Directors
KINGSTON SALES CORPORATION
Indianapolis, Indiana
We have audited the accompanying balance sheets of KINGSTON SALES CORPORATION as
of December 31, 2001 and 2000, and the related statements of operations,
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
of the United States. Those standards require that we plan and perform the
audits 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 KINGSTON SALES CORPORATION, as
of December 31, 2001 and 2000, and the results of its operations, and its cash
flows for the years then ended in conformity with generally accepted accounting
principles of the United States.
/s/ WHIPPLE & COMPANY, P.C.
October 11, 2002
KINGSTON SALES CORPORATION
BALANCE SHEETS
December 31, 2001 and 2000
ASSETS
2001 2000
CURRENT ASSETS
Accounts receivable - net of
allowance for doubtful accounts $ 1,996,000 $ 1,223,000
Inventory 505,000 204,000
----------- -----------
Total Current Assets 2,501,000 1,427,000
----------- -----------
OTHER ASSETS
Office equipment 151,000 74,000
Vehicles 105,000 105,000
Leasehold improvements 162,000 10,000
Accumulated depreciation (67,000) (42,000)
----------- -----------
Total Other Assets 351,000 147,000
----------- -----------
TOTAL ASSETS $ 2,852,000 $ 1,574,000
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Amount due to bank $ 111,000 $ 40,000
Line of credit 512,000 35,000
Accounts payable 203,000 262,000
Current maturities of long-term debt 15,000 15,000
Current maturities of capital lease obligations 1,000 1,000
Accrued payroll and related expenses 7,000 25,000
Accrued Expenses 67,000 38,000
Deferred revenue 223,000 154,000
----------- -----------
Total Current Liabilities 1,139,000 570,000
----------- -----------
LONG-TERM LIABILITIES
Long-term debt, less current maturities $ 21,000 $ 36,000
Capital lease obligations, less current maturities -- 1,000
----------- -----------
Total Current Liabilities 21,000 37,000
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 1,000 1,000
Additional paid-in capital 110,000 110,000
Retained earnings 1,581,000 856,000
----------- -----------
Total Stockholders' Equity 1,692,000 967,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,852,000 $ 1,574,000
----------- -----------
See Accompanying Summary of Accounting Policies and Notes to the Financial
Statements.
2
KINGSTON SALES CORPORATION
STATEMENTS OF OPERATIONS
Years Ended
December 31, December 31,
2001 2000
NET REVENUES $ 13,220,000 $ 10,454,000
COST OF REVENUES 11,111,000 9,416,000
------------ ------------
GROSS PROFIT (LOSS) 2,109,000 1,038,000
OPERATING EXPENSES
Selling, general and administrative expenses 1,092,000 824,000
Depreciation and amortization 41,000 31,000
------------ ------------
Total operating expenses 1,133,000 855,000
------------ ------------
Operating income 976,000 183,000
OTHER INCOME (EXPENSE)
Interest income 7,000 --
Interest expense (63,000) (48,000)
Net loss on sale of equipment (18,000) (6,000)
Other income 37,000 --
------------ ------------
Total other income (expense) (37,000) (54,000)
------------ ------------
NET INCOME $ 939,000 $ 129,000
============ ============
See Accompanying Summary of Accounting Policies and Notes to the Financial
Statements.
3
KINGSTON SALES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2001 and 2000
Common Additional Retained
Stock Paid-in Capital Earnings Total
BALANCE AT DECEMBER 31, 1999 $ 1,000 $ 110,000 $ 996,000 $ 1,107,000
Dividends paid to shareholders -- -- (269,000) (269,000)
Net Income -- -- 129,000 129,000
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2000 1,000 110,000 856,000 967,000
Dividends paid to shareholders -- -- (214,000) (214,000)
Net Income -- -- 939,000 939,000
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 $ 1,000 $ 110,000 $ 1,581,000 $ 1,692,000
=========== =========== =========== ===========
See Accompanying Summary of Accounting Policies and Notes to the Financial
Statements.
4
KINGSTON SALES CORORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 and 2000
2001 2000
OPERATING ACTIVITIES
Net income $ 939,000 $ 129,000
Adjustments to reconcile net income to net cash (used)
by operating activities:
Depreciation and amortization 41,000 31,000
Loss on disposal of equipment 18,000 6,000
(Increase) decrease in certain operating assets:
Accounts receivable (773,000) 632,000
Inventory (301,000) 100,000
Increase (decrease) in certain operating liabilities
Amount due to bank 71,000 2,000
Accounts payable (59,000) 97,000
Accrued expenses and other current liabilities 11,000 (6,000)
Deferred Revenue 69,000 154,000
----------- -----------
Net Cash Provided (Used) by Operating Activities 16,000 1,145,000
----------- -----------
INVESTING ACTIVITIES
Purchases of vehicles, equipment and leasehold improvements (263,000) (61,000)
----------- -----------
Net Cash Provided (Used) by Investing Activities (263,000) (61,000)
----------- -----------
FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit 477,000 (800,000)
Principal payments on long-term debt (15,000) (14,000)
Principal payments under capital lease obligations (1,000) (1,000)
Dividends and distributions paid to stockholders (214,000) (269,000)
----------- -----------
Net Cash Provided (Used) by Financing Activities 247,000 (1,084,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS -- --
CASH AND EQUIVALENTS
Beginning of Period -- --
----------- -----------
End of Year Period $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 61,000 $ 51,000
See Accompanying Summary of Accounting Policies and Notes to the Financial
Statements.
5
KINGSTON SALES CORPORATION
Notes to Financial Statements
December 31, 2001 and 2000
Note 1 - Nature of Business and Summary of Significant Accounting Policies:
Basis of presentation: The accompanying audited financial statements for the
years ended December 31, 2001 and December 31, 2000 have been prepared by the
Company in accordance with generally accepted accounting principles in the
United States ("GAAP").
Nature of business: Kingston Sales Corporation (the Company), an Indiana
corporation organized in 1971, is a manufacturer's representative and
distributor for prominent national companies in the electronic, sound, security,
and video markets. Kingston Sales Corporation offers the latest technology in
TVs, sound systems, electronic locking devices, wire, cable and fiber optics,
and intercom systems.
Estimates: Management uses estimates and assumptions in preparing financial
statements in accordance with accounting principles generally accepted in the
United States. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities and
the reported revenues and expenses. Actual results could vary from the estimates
that were used.
Revenue recognition: Revenue from the sale of products is recognized according
to the terms of the sales arrangement, which is generally upon shipment.
Commission revenue is recognized when realizable and earned, which is typically
upon receipt of the commission payment. Payments received where there are
delivery elements required to be met in order to retain those payments are
recorded as deferred revenue under current or long-term liabilities, as
appropriate, and taken into income when the criteria are met. Revenue is reduced
by appropriate allowances, estimated returns, price concessions, and similar
adjustments, as applicable.
Cost of revenues consist primarily of purchases of goods that are resold to
customers, but also consist of salaries, wages and benefits to employees,
depreciation, fuel and other vehicle expenses, equipment rentals, subcontracted
services, insurance, facilities expenses, and supplies.
Selling, general and administrative expenses consist primarily of compensation
and related benefits to management, administrative salaries and benefits,
marketing, office rent and utilities, communications and professional fees.
Cash and equivalents may include money market fund shares, bank time deposits
and certificates of deposits, and other instruments with original maturities of
three months or less.
Inventories: Inventories are recorded at the lower of cost (primarily first-in,
first-out) or market value and consist of entirely goods purchased for resale.
Shipping and handling: Costs incurred for shipping and handling are included in
the Company's financial statements as a component of costs of revenue.
6
Note 1 - Nature of Business and Summary of Significant Accounting Policies
(Continued):
Property, equipment, and depreciation: Property and equipment are carried at
cost and includes expenditures for new additions and those, which substantially
increase the useful lives of existing assets. Depreciation is computed at
various rates by use of the straight-line method and certain accelerated
methods. Depreciable lives are generally ranging from 3 to 39 years.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. The cost of property or equipment retired or otherwise disposed of and
the related accumulated depreciation are removed from the accounts in the year
of disposal with the resulting gain or loss reflected in earnings or in the cost
of the replacement asset.
The provision for depreciation amounted to $41,000 and $31,000 for the years
ended December 31, 2001 and 2000, respectively.
Long-lived assets, including the Company's property, plant and equipment, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability is
measured by comparison of the carrying amount to future net undiscounted cash
flows expected to be generated by the related asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount exceeds the fair market value of the assets.
Advertising: Advertising costs are expensed when incurred and are included in
selling, general, administrative and other costs and expenses. Advertising
expenses amounted to $14,000 and $7,000 for the years ended December 31, 2001
and 2000, respectively.
Income taxes: During the reporting period, the Company, with the consent of its
stockholders, had elected under the Internal Revenue Code to be an S
corporation. In lieu of corporation income taxes, the stockholders of an S
corporation are taxed on their proportionate share of the Company's taxable
income. Therefore, no provision for income taxes has been included in the
financial statements.
Note 2 - Subsequent Event, Change In Control:
Fortune Diversified Industries, Inc., a Delaware corporation ("FDVI"), acquired
from Robert J. Kingston 1,000 shares of the common stock, no par value, of
Kingston Sales Corporation, constituting all of the outstanding shares of
Kingston Sales Corporation's capital stock, pursuant to the terms of a Stock
Purchase Agreement by and among FDVI, Kingston Sales Corporation and Robert J.
Kingston, effective July 31, 2002.
FDVI intends for Kingston Sales Corporation, as a wholly-owned subsidiary of
FDVI, to continue to operate as it did prior to the acquisition. Mr. Kingston
will continue as president of Kingston Sales Corporation under the terms of an
employment agreement, dated July 31, 2002 and incorporated into the Stock
Purchase Agreement. Mr. Kingston was also elected to the Board of Director's of
FDVI.
The Company entered into a lease with Kingston Design, LLC, a Company controlled
by Mr. Kingston. Said lease is for the facility in which Kingston Sales Corp.
currently operates, and was incorporated into the Stock Purchase Agreement.
7
Note 3 - Accounts Receivable:
Accounts receivable include the following at December 31:
2001 2000
---------- ----------
Amounts currently due $2,216,000 $1,423,000
Less allowance for doubtful accounts (120,000) (120,000)
Less allowance for sales returns (100,000) (80,000)
---------- ----------
$1,996,000 $1,223,000
========== ==========
Note 4 - Amount Due to Bank:
The Company's primary bank account is maintained under a cash management
arrangement. Under this account arrangement, the Company's line of credit is
decreased by any bank deposits and is increased by any checks and miscellaneous
charges processed by the bank. The amount due to bank of approximately $111,000
and $40,000 represents outstanding checks that have not been presented to the
bank for payment at December 31, 2001 and 2000, respectively.
Note 5 - Line of Credit:
The Company had a $3,500,000 line of credit available through May 31, 2002.
Interest on the line was charged at .25% below the prime interest rate.
Outstanding borrowings amounted to approximately $512,000 and $35,000 at
December 31, 2001 and 2000, respectively. This line was replaced as a result of
the transaction described in Note 2.
Note 6 - Long-term Debt:
Long-term debt consists of the following at December 31:
2001 2000
-------- --------
Notes payable to financial institutions:
Due in monthly installments of $434, including
interest at 4.9% through January 2005. Secured by
a vehicle. $ 15,000 $ 19,000
Due in monthly installments of $418, including
interest at 9.03% through December 2004. Secured by
a vehicle. 13,000 17,000
Due in monthly installments of $563, including
interest at 9% through March 2003. Secured by
a vehicle. 8,000 15,000
-------- --------
36,000 51,000
Less current maturities (15,000) (15,000)
-------- --------
$ 21,000 $ 36,000
======== ========
8
Note 6 - Long-term Debt (Continued):
Principal payments due on long-term debt outstanding at December 31, 2001, are
as follows:
Year Ending December 31,
- ------------------------
2002 $ 15,000
2003 11,000
2004 9,000
2005 1,000
------------
$ 36,000
============
Note 7 - Capital Leases:
Long-term leases relating to the financing of fixed assets are accounted for as
installment purchases. The capital lease obligations reflect the present value
of future rental payments, discounted at the interest rate implicit in the
lease, and a corresponding amount is capitalized as the cost of the fixed
assets. The fixed assets are being depreciated over a period of seven years.
The following is an analysis of fixed assets under capital lease at December 31:
2001 2000
------- -------
Equipment $ 4,000 $ 4,000
Less allowances for depreciation 1,000 1,000
------- -------
$ 3,000 $ 3,000
======= =======
Following is a schedule of future minimum lease payments due under the capital
lease obligations together with the present value of net minimum lease payments
as of December 31, 2001:
Year Ending December 31,
- ------------------------
2002 $ 1,000
--------
Total minimal lease payments 1,000
Less amounts representing interest 0
--------
Present value of net minimum lease payments 1,000
Less current portion (1,000)
--------
Long-term portion $ 0
========
9
Note 8 - Stockholders' Equity
The following are the details of the Company's shares of common stock:
Number of Shares
Authorized Issued Outstanding Amount
---------- ------ ----------- ------
December 31, 2001
Common stock, no par
value 1,000 1,000 1,000 $1,000
======
December 31, 2000
Common stock, no par 1,000 1,000 1,000 $1,000
value ======
Note 9 - Operating Lease Commitments:
The Company leases its office and warehouse facilities from a limited liability
company in which the Company's principal shareholder during the reporting period
covered was a member. The agreement expires in April 2022. The agreement
includes a renewal option, which allows the Company to extend the lease term for
an additional six years. In addition to base monthly rent, the agreement
requires the Company to pay its proportionate share of real estate taxes,
insurance, and common area maintenance expenses.
Rent expense under this agreement amounted to $63,000 and $0 for the years ended
December 31, 2001 and 2000.
The Company is also committed to a vehicle lease, which expires in August 2004.
Lease expense under all agreements amounted to $3,000 and $0 for the years ended
December 31, 2001 and 2000, respectively.
Future minimum commitments under these agreements are as follows at December 31,
2001:
Year Ending December 31, Facilities Vehicles
- ------------------------ ---------- --------
2002 $ 84,000 $ 5,000
2003 84,000 5,000
2004 84,000 3,000
2005 84,000 0
2006 84,000 0
Later Years (2007 - 2022) 1,288,000 0
----------- ----------
$ 1,708,000 $ 13,000
=========== ==========
Note 10 - Related Party Transactions:
The Company buys certain products from a corporation in which the principal
shareholder of the Company during the reporting period was a shareholder.
Purchases from this related corporation amounted to approximately $16,000 and
$132,000 for the years ended December 31, 2001 and 2000, respectively.
The Company is a guarantor on two loans used for the construction of the
building it currently leases from another related party. The outstanding
balances of these debt obligations as reflected on the books of the related
party were approximately $904,000 and $0 at December 31, 2001 and 2000.
10
Note 11 - Concentration of Credit Risk:
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivables.
The Company places its cash and cash equivalents with high credit quality
institutions. At times, such amounts may be in excess of the FDIC insured limit.
The Company routinely assesses the financial strength of its customers and, as a
consequence, believes that its accounts receivable credit risk exposure is
limited.
Note 12 - Economic Dependency on Suppliers:
The Company purchased approximately 90% and 86% of its inventories from one
vendor for the years ended December 31, 2001 and 2000, respectively.
11