EXHIBIT 99.1
INFOTECH SOLUTIONS CORPORATION
FINANCIAL STATEMENTS
December 31, 2001
With Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Infotech Solutions Corporation
We have audited the accompanying balance sheet of Infotech Solutions Corporation
as of December 31, 2001, and the related statements of income, stockholders'
equity, and cash flows for the year 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 audit.
We conducted our audit in accordance with U.S. 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 our audit provides 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 Infotech Solutions Corporation
as of December 31, 2001, and the results of its operations and its cash flows
for the year then ended in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 9 to the financial statements, the statements have been
restated to more accurately reflect U.S. generally accepted accounting
principles with respect to recognition of certain revenues. Specifically,
revenues were previously recognized for software license and maintenance
agreements as the licenses were sold rather than ratably over the life of the
agreements. Also, revenues, and associated costs of service, had been recognized
for certain charges passed directly through to customers.
/s/ Berry, Dunn, McNeil & Parker
Portland, Maine
January 11, 2002, except for Note 9, as to which the date is January 6, 2003
and Note 10, as to which date is October 31, 2002
INFOTECH SOLUTIONS CORPORATION
Balance Sheet (Restated)
December 31, 2001
ASSETS
Current assets
Cash and cash equivalents $ 681,818
Accounts receivable 609,014
Prepaid expenses 35,389
------------
Total current assets 1,326,221
------------
Property and equipment
Leasehold improvements 27,912
Furniture and fixtures 100,253
Computer equipment 353,064
Computer equipment under capital leases 497,369
------------
978,598
Less accumulated depreciation and amortization 591,897
------------
Net property and equipment 386,701
------------
Purchased software, net of accumulated amortization of $131,757 79,391
------------
$ 1,792,313
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations $ 98,314
Current portion of deferred revenues 152,100
Accounts payable 113,701
Accrued expenses 11,234
Advance deposits 9,000
------------
Total current liabilities 384,349
------------
Deferred revenues, excluding current portion 290,833
------------
Capital lease obligations, excluding current portion 79,854
------------
Commitments (Notes 3 and 6)
Stockholders' equity
Common stock of no par value; 1,200,000 shares authorized;
966,000 shares issued and outstanding 397,003
Retained earnings 640,274
------------
Total stockholders' equity 1,037,277
------------
$ 1,792,313
============
The accompanying notes are an integral part of these financial statements.
-2-
INFOTECH SOLUTIONS CORPORATION
Statement of Income (Restated)
Year Ended December 31, 2001
Revenues
Billing system revenues $ 4,041,134
------------
Expenses
Cost of services 1,069,398
Research and development 811,124
Sales and marketing 853,625
General and administrative 610,480
Depreciation and amortization 299,013
------------
3,643,640
------------
Operating income 397,494
Interest income 2,938
------------
Net income $ 400,432
============
Weighted average common shares outstanding:
Basic 966,000
============
Diluted 1,150,188
============
Income per common share:
Basic $ 0.41
============
Diluted $ 0.35
============
The accompanying notes are an integral part of these financial statements.
-3-
INFOTECH SOLUTIONS CORPORATION
Statement of Stockholders' Equity (Restated)
Year Ended December 31, 2001
Total
Common Retained Stockholders'
Stock Earnings Equity
----- -------- ------
Balances, December 31, 2000, as previously stated $ 397,003 $ 514,430 $ 911,433
Restatement of retained earnings (Note 9) - (101,583) (101,583)
------------ ------------ --------------
Balances, December 31, 2000, as restated 397,003 412,847 809,850
Net income - 400,432 400,432
Distributions - (173,005) (173,005)
------------ ------------ --------------
Balances, December 31, 2001 $ 397,003 $ 640,274 $ 1,037,277
============ ============ ==============
The accompanying notes are an integral part of these financial statements.
-4-
INFOTECH SOLUTIONS CORPORATION
Statement of Cash Flows (Restated)
Year Ended December 31, 2001
Cash flows from operating activities
Net income $ 400,432
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 299,013
Decrease (increase) in
Accounts receivable (343,653)
Prepaid expenses 14,393
Increase in
Accounts payable 7,285
Accrued expenses 5,456
Advance deposits 5,000
Deferred revenues 341,350
-----------
Net cash provided by operating activities 729,276
-----------
Cash flows from investing activities
Purchase of property and equipment (164,303)
Purchase of software (53,732)
-----------
Net cash used by investing activities (218,035)
-----------
Cash flows from financing activities
Distributions to stockholders (173,005)
Principal payments under capital lease obligations (134,689)
-----------
Net cash used by financing activities (307,694)
-----------
Net increase in cash and cash equivalents 203,547
Cash and cash equivalents, beginning of year 478,271
-----------
Cash and cash equivalents, end of year $ 681,818
===========
Cash flow information
Cash paid for interest $ 11,599
===========
Supplemental schedule of noncash investing and financing activities Acquisition
of computer equipment under capital lease
obligations $ 92,320
===========
The accompanying notes are an integral part of these financial statements.
-5-
Nature of Operations
The Company, which commenced operations on October 3, 1995, was formed to
design, develop and market a transaction-based billing, customer care and
management information software system. The system, named Voyager, is marketed
to the telecommunications industry. The Company offers Voyager in two distinct
ways: either utilizing a service bureau approach where the Company controls and
maintains the software at its facilities while providing clients access to the
system over high speed networks, or through a software license arrangement where
the customer installs and maintains responsibility for the software at its
facilities. Under the license arrangement, the Company enters into annual
maintenance agreements to provide updates to the software for a specific fee.
When operating in a service bureau arrangement, the Company negotiates contracts
generally covering a three-year period of performance. Service bureau charges
are based primarily upon the number of monthly bills produced or accounts
maintained within the system.
1. Summary of Significant Accounting Policies
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
disclosure 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.
Cash and Cash Equivalents
All liquid investments with an original maturity of three months or less
are considered to be cash equivalents. The Company maintains its cash in
bank deposit accounts which at times may exceed federally insured limits;
however, the Company has not experienced any losses in such accounts and
believes it is not exposed to risk with respect to these accounts.
Property and Equipment
Property and equipment are recorded at cost and depreciated over the
estimated useful lives of the assets using the straight-line method.
Computer equipment under capital leases is stated at the lower of the
present value of minimum lease payments at the beginning of the lease term
or fair value at inception of the lease, and is amortized over the lesser
of the estimated useful lives of the assets or the lease term using the
straight-line method.
1. Significant Accounting Policies (Concluded)
Software Development Costs
The Company capitalized costs incurred during 1995 and 1996 for the
production of its Voyager billing and management software program. Costs
capitalized included direct labor and related overhead for software
produced by the Company. Costs were capitalized until the software became
commercially available and employed at the Company's first client at the
end of July 1996. Amortization of the software development costs commenced
in August 1996, and is being charged to operations over five years using
the straight-line method.
Purchased Software
Purchased software is recorded at cost and amortized using the
straight-line method over five years.
Advertising
Advertising costs are charged to operations in the year incurred and
totaled $43,729 in 2001.
Income Taxes
The Company, with the consent of its stockholders, has elected to be taxed
as an S Corporation under the provisions of the Internal Revenue Code,
which provides that, in lieu of corporate income taxes, the stockholders
are taxed on their proportionate share of the Company's taxable income. The
financial statements do not include any provision or liability for
corporate federal income taxes.
Revenue Recognition
Billing system revenues are recognized as services are provided. The
Company licenses certain software applications to subscribers to the
billing system services under license and maintenance agreements. The
software license and maintenance revenues are recognized ratably over the
terms of the related agreements.
Earnings per Common Share
Basic earnings per common share ("EPS") is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. The weighted average number of common
shares outstanding for computing the basic EPS was 966,000 for the year
ended December 31, 2001. Diluted EPS reflects the potential dilution that
could occur if securities to issue common stock were exercised or converted
to common stock. The weighted average number of common shares outstanding
for computing diluted EPS, including dilutive stock options, was 1,150,188
for the year ended December 31, 2001.
2. Capital Leases
The Company leases a portion of the computer equipment used in its
operations. The present value of the minimum lease rentals relating to this
equipment has been capitalized. The related assets and obligations have
been recorded using the borrowing rate implicit in the leases at inception.
The leases are noncancellable, and expire at various dates through 2004.
The following is a schedule of leased property under capital leases:
Computer equipment $ 497,369
Less accumulated amortization 329,462
----------
$ 167,907
Amortization expense on computer equipment under capital leases was
$132,417 in 2001.
3. Lease Commitments
As of December 31, 2001, the Company leased office space under various
noncancellable operating leases. Future minimum lease payments required
under the operating and capital leases, above, are as follows:
Operating Capital
Leases Leases
------ ------
2002 $ 75,200 $ 103,937
2003 56,400 62,977
2004 - 18,614
--------- ---------
Total minimum lease payments $ 131,600 185,528
=========
Less: Amount representing interest between 2.37% and 7.92% 7,360
---------
Present value of net minimum lease payments 178,168
Less: Current portion 98,314
---------
Capital lease obligations, excluding current portion $ 79,854
=========
The Company maintains a line of credit for capital leases. The line of
credit is collateralized by all business assets and bears interest as
determined by the bank at time of execution. The Company had $287,205
available under the agreement as of December 31, 2001.
4. Line of Credit
The Company maintains a $150,000 line of credit with a bank. This line of
credit is collateralized by all general business assets and bears interest
at prime rate plus one-half percent. There are no advances outstanding as
of December 31, 2001.
5. Benefit Plan
The Company has a 401(k) plan covering all employees, which requires
Company contributions equal to 25 percent of each participant's
contribution up to five percent of salary. Contributions by the Company on
behalf of employees combined with administrative fees totaled $19,999 for
2001.
6. Common Stock Options
The Company has a nonqualified stock option plan. Under the plan adopted in
1995 and amended in 1998 and 2000, the Company may grant options to key
employees for up to 212,000 shares. Each option entitles the employee to
purchase one share of common stock. The options granted since 1997 are
subject to cliff vesting four years after their grant dates. All
outstanding options expire ten years after their grant dates. The fair
value of the options is not material.
A reconciliation of the options outstanding is as follows:
Options Granted Options Granted
Before 1998 Since 1997 Total
----------- ---------- -----
Options outstanding, December 31, 2000 132,000 42,300 174,300
Options granted - 24,950 24,950
Options forfeited - (4,000) (4,000)
---------- --------- ----------
Options outstanding, December 31, 2001 132,000 63,250 195,250
========== ========= =========
6. Common Stock Options (Concluded)
The following table summarizes information about stock options outstanding
at December 31, 2001:
Number Number Remaining Exercise
Outstanding Exercisable Contractual Life Price
----------- ----------- ---------------- -----
132,000 132,000 4.0 $ 01
5,200 - 7.0 2.25
7,000 - 8.0 2.25
26,100 - 9.0 2.25
24,950 - 10.0 2.25
----------- ----------- ----- ------
195,250 132,000 5.7 $ .74
=========== =========== ===== ======
The Company accounts for these options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." As the exercise price of each option equals the estimated
market price of the Company's stock on the date of the grant (or December
31, 2001 for the options granted since 1997), no compensation cost has been
recognized for the plan. Had the compensation cost for the plan been
determined based on the fair value of options at grant date consistent with
the method described in Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the Company's 2001 net
income would not have been materially different.
7. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Net income, as reported $ 400,432
============
Weighted-average shares outstanding 966,000
Effect of dilutive stock options 184,188
------------
Adjusted weighted-average shares outstanding 1,150,188
============
Basic earnings per share $ 0.41
============
Diluted earnings per share $ 0.35
============
The Company uses the treasury stock method to determine the effect of
dilutive stock options. The average exercise prices of options issued in
2001 were set at the estimated market price.
8. Concentration of Credit Risk
The Company had six customers that accounted for 80% of total revenues in
2001.
9. Restatement
The Company previously recognized revenues for license and maintenance
agreements as they were sold rather than ratably over the life of the
agreements. The accompanying financial statements have been restated to
properly recognize this revenue. The effect of the restatement was a
decrease in net income of $341,350 for 2001 and a reduction in beginning
retained earnings in the amount of $101,583. Additionally, revenues and
cost of services were each reduced by $1,076,332, representing costs passed
through to the customers, with no effect on net income.
10. Subsequent Event
On October 31, 2002, the Company sold all of the assets and certain
liabilities for $3.5 million in cash, plus additional contingent cash
consideration of up to $3.5 million based on attainment of certain defined
annual revenues earned from 2003 through 2005.