COMTEC INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-1
Balance Sheets at December 31, 1994 and June 30, 1995 F-2
Statements of Operations for the period from inception to
December 3 1,
1994, the six months ended June 30, 1995 and cumulative
amounts from inception to June 30, 1995 F-4
Statements of Changes in Stockholders' Equity (Deficit) for the
period
from inception to June 30, 1995 F-5
Statements of Cash Flows for the period from inception to
December 31,
1994, the six months ended June 30, 1995 and cumulative
amounts from inception to June 30, 1995 F-8
Notes to Consolidated Financial Statements F-11
KEY COMMUNICATIONS GROUP, INC.
KEY CAR FINANCE COMPANY
WHOLLY OWNED SUBSIDIARIES OF
KEYSTONE HOLDING CORPORATION, INC.
Combined Financial Statements
December 31, 1994 and April 30, 1995
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Key Communications Group, Inc.
Key Car Finance Company
We have audited the accompanying combined balance sheet of Key
Communications Group, Inc. and Key Car Finance Company (development
stage enterprises) as of December 31, 1994, and the related combined
statements of operations, stockholders equity (deficit), and cash
flows for the period from inception to December 31, 1994. These
financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined financial position of
Key Communications Group, Inc. and Key Car Finance Company
(development stage enterprises) at December 31, 1994, and the results
of their operations and their cash flows for the period from
inception to December 31, 1994 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming
that the Companies will continue as a going concern. As shown in the
financial statements, the Companies have incurred substantial losses
since inception, and on a combined basis reflect a deficit in
capital, which raises substantial doubt about the ability of the
Companies to continue as a going concern. Management's plans in
regard to those matters are described in Note 1. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Causey Demgon & Moore, Inc.
Denver, Colorado
June 14,, 1996
Combined Balance Sheet
December 31, April 30,
1994 1995
(Unaudited)
Assets
Current assets
Cash $ 737 $ -
Accounts receivable - employees 100 -
Total current assets 837 -
Property and equipment (Notes 2, 3 and 4)
Land (Note 6) 203,951 203,951
Building (Note 6) 188,263 188,263
Communications equipment 300,000 300,000
Automobile 5,150 5,150
Computer equipment 9,069 9,069
706,433 706,433
Less accumulated depreciation (5,993) (16,781)
Net property and equipment 700,440 689,652
$ 701,277 $ 689,652
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Bank overdraft $ - $ 2,317
Accounts payable 21,727 22,789
Accrued payroll and payroll taxes 123,034 2,299
Accrued management fees payable - related 5,262 15,262
party (Note 4)
Other accrued expenses 11,548 13,321
Notes payable - related parties (Note 156,648 149,706
2)
Deferred income 13,862 13,862
Current portion oflong-term note 2,478 3,349
payable (Note 2)
Advances from affiliate (Note 4) 178,090 -
Total current liabilities 512,649 222,905
Long-term note payable (Note 2) 348,744 347,072
Commitments and contingencies (Note 2)
Stockholders' equity (deficit) (Note 3)
Key Car convertible preferred stock, $1
authorized, 172,720 shares issued and
outstanding 172,720 172,720
Key Car common stock, no par value;
100,000,000 shares authorized, 10,000 100 100
shares issued and outstanding
Key Comm preferred stock, no shares - -
issued or outstanding
Key Comm common stock, no par value;
100,000 shares authorized, 3,600,000 260,000 260,000
shares issued and outstanding
Additional paid-in capital (280,506) 120,989
Deficit accumulated during the (312,430) (434,134)
development stage
Total stockholders' equity (160,116) 119,675
(deficit)
$ 701,277 $ 689,652
Combined Statement of Operations
For the Period from Inception to December 31, 1994, the Four Months
Ended April 30, 1995 and Cumulative Amounts from
Inception to April 30, 1996
Cumulative
December 31, April 30, Amounts from
1994 1995 Inception
(Unaudited) (Unaudited)
Revenues
Rent income $ 3,862 $ 18,587 $ 22,449
Other 12 4,564 4,576
Total revenues 3,874 23,151 27,025
Expenses
General and 259,399 121,161 380,560
administrative (Note 3)
Interest expense 36,905 13,694 50,599
Management fees - related
party (Note 4) 20,000 10,000 30,000
Total expenses 316,304 144,855 461,159
Net loss (Note 5) $(312,430) $(121,704) $(434,134)
Combined Statement of Changes in Stockholders' Equity (Deficit)
For the Period from Inception to April 30, 1995
Key Car Key Car
Preferred Stock Common Stock
Shares Amount Shares Amount
Issuance of common stock
to Keystone Holding - $ - 10,000 $ 100
(Note 3)
Issuance of preferred
stock for purchase of 172,720 172,720 - -
land and building
(Note 3)
Issuance of common stock
to Keystone upon - - - -
incorporation (Note 3)
Issuance of common stock
to Keystone upon
purchase of - - - -
communication equipment
(Note 3)
Special distribution to
shareholder of Key Car - - - -
(Note 3)
Net loss for the period
ended December 31, 1994 - - - -
Balance at December 31, 172,720 172,720 10,000 -
1994
Contributions to capital
of accrued wages to
officers (unaudited) - - - -
(Note 3)
Forgiveness of amounts
owed by Key Comm and Key
Car to Keystone for - - - -
advances made
(unaudited) (Note 3)
Net loss for the four
months ended April 30, - - - -
1995 (unaudited)
Balance, April 30, 1995 172,720 $172,720 10,000 $ 100
(unaudited)
Continued on following page.
Combined Statement of Changes in Stockholders' Equity (Deficit)
For the Period from Inception to April 30, 1995
Continued from previous page.
Deficit
Accumulated
During
Key Comm Additional the
Common Stock Paid-in Development
Shares Amount Capital Stage
Issuance of common stock
to Keystone Holding - $ - - $ -
(Note 3)
Issuance of preferred
stock for purchase of - - - -
land and building
(Note 3)
Issuance of common stock
to Keystone upon 1,200,000 - - -
incorporation (Note 3)
Issuance of common stock
to Keystone upon
purchase of 2,400,000 260,000 - -
communication equipment
(Note 3)
Special distribution to
shareholder of Key Car - - (280,506) -
(Note 3)
Net loss for the period
ended December 31, 1994 - - - (312,430)
Balance at December 31, 3,600,000 260,000 (280,506) (312,430)
1994
Contributions to capital
of accrued wages to - - 217,000 -
officers (unaudited)
(Note 3)
Forgiveness of amounts
owed by Key Comm and Key
Car to Keystone for - - 184,495 -
advances made
(unaudited) (Note 3)
Net loss for the four
months ended April 30, - - - (121,704)
1995 (unaudited)
Balance, April 30, 1995 3,600,000 $260,000 120,989 $(434,134)
(unaudited)
Combined Statement of Cash Flows
For the Period from Inception to December 31, 1994, the Four Months
Ended April 30, 1995 and Cumulative Amounts from
Inception to April 30, 1996
Cumulative
December 31, April 30, Amounts from
1994 1995 Inception
(Unaudited) (Unaudited)
Operating activities
Net loss $(312,430) $(121,704) $ (434,134)
Adjustments to reconcile
net loss to net cash used
in operating activities
Depreciation 5,993 10,788 16,781
Changes in assets and
liabilities
Accounts receivable -
employees (100) 100 -
Accounts payable 21,727 1,062 22,789
Accrued payroll and
payroll taxes 123,034 96,265 219,299
Other accrued 16,810 10,000 26,810
liabilities
Deferred income 13,862 (6,942) 6,920
181,326 111,273 292,599
Net cash used in
operating activities (131,104) (10,431) (141,535)
Cash used in financing
activities
Bank overdraft - 2,317 2,317
Notes payable - 1,773 1,773
Payments on note payable -
related parties (45,471) - (45,471)
Payments on mortgage (778) (801) (1,579)
payable
Advances from related 178,090 6,405 184,495
party
Net cash provided by
financing activities 131,841 9,694 141,535
Increase (decrease) in cash 737 (737) -
Cash, beginning of period - 737 -
Cash, end of period $ 737 $ - $ -
Continued on following page.
Combined Statement of Cash Flows
For the Period from Inception to December 31, 1994, the Four Months
Ended April 30, 1995 and Cumulative Amounts from
Inception to April 30, 1996
Supplemental disclosures of non-cash investing and investing
activities
During the year ended December 31, 1994, the Companies financed
the acquisition of land and building, and of communications
equipment from officers of the companies through the issuance of
notes payable and issuance of common and preferred stock.
Additionally, the Companies financed the acquisition of an
automobile and computer equipment from related parties through
notes payable.
Cumulative
December 31, April 30, Amounts from
1994 1995 Inception
(Unaudited) (Unaudited)
Purchase of building:
Land $203,951 $ - $203,951
Building 188,263 - 188,263
Note payable - mortgage (352,000) - (352,000)
assumed
Preferred stock (172,720) - (172,720)
Note payable (148,000) - (148,000)
Special distribution 280,506 - 280,506
$ - $ - $ -
During the period ended April 30, 1995, the officers of Key Comm
relieved the Company from liability for accrued salaries for a
period of five months amounting to $217,000 (Note 3).
Additionally, Keystone, an affiliated company, forgave amounts
owed by Key Comm and Key Car in the amount of $184,495 (Note 4).
Cumulative
December 31, April 30, Amounts from
1994 1995 Inception
(Unaudited) (Unaudited)
Cash paid for interest $ 27,429 $ 5,616 $ 33,045
Note 1 - Organization and Summary of Significant Accounting Policies
Key Car Finance Company (Key Car) was incorporated in Colorado on
March 15, 1994 for the purpose of owning and renting land and a
building in Parker, Colorado to a single tenant. Key Communications
Group, Inc. (Key Comm) was incorporated in Colorado on March 30, 1994
for the purpose of entering the communications industry. The
Companies are considered to be in the development stage as more fully
defined in Financial Accounting Standards Board Statement No. 7. Key
Car and Key Comm were both wholly owned subsidiaries of Keystone
Holding Corporation, Inc. (Keystone) until May 10, 1995 at which time
both entities were sold to another related entity in a stock for
stock exchange (Note 7).
These financial statements have been prepared on a combined basis
since both companies were wholly owned subsidiaries of Keystone. All
significant intercompany accounts and transactions have been
eliminated in these combined financial statements.
Basis of Presentation
The accompanying financial statements for the four months ended April
30, 1995 and cumulative amounts from inception to April 30, 1995 have
been prepared by the Companies without audit and reflect, in the
opinion of management, all adjustments necessary for a fair
presentation of the combined financial position as of April 30, 1995,
and the combined results of operations and cash flows for the periods
ended April 30, 1995.
Continuing Operations
The Companies' financial statements have been presented on a going
concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
liquidity of the Company has been adversely affected by net losses of
$434,134 since inception. The Companies, continued existence is
dependent upon its ability to achieve profitable operations, and
obtain additional equity and debt financing (Note 7).
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.
Note 1 - Organization and Summary of Significant Accounting Policies
Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the assets' estimated useful
lives as follows:
Year
Building
28
Communications equipment
10
Automobile
5
Computer equipment
5
Income Taxes
Income taxes are provided based on earnings reported in the
financial statements. The Companies follow Statement of Financial
Accounting No. 109 whereby deferred income taxes are provided on
temporary differences between reported earnings and taxable income.
Cash Flows
For purposes of the statement of cash flows, the Companies consider
cash and all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Note 2 Notes Payable
Notes payable consisted of the following at December 31, 1994 and
April 30, 1995:
December 31, April 30,
1994 1995
10% notes payable, due to
officers/directors of Key Comm, principal
and interest due prior to February 5, $ 10,947 $ 11,500
1995, unsecured (in default) (Note 6)
10% notes payable, due to officers of Key
Comm, principal and interest due December 13,504 17,004
2, 1995, unsecured
Note 2 Notes Payable
Notes payable consisted of the following at December 31, 1994 and
April 30, 1995:
December 31 April 30,
1994 1995
10% note payable, due to officer of Key
Comm, principal and interest due December
2, 1995, unsecured (in default) (Notes 3 40,000 40,000
and 6)
16.5% note payable, due to officer of Key
Car, $50,000 due on or before December
31, 1994 and $98,000 due on or before
April 30, 1995, secured by unfiled deed 92,197 81,202
of trust on the land and building (in
default)
$ 156,648 $149,706
Long-term debt consists of the following:
December 31, April 30,
1994 1995
9% mortgage payable, principal and
interest payments payable at the rate of
$2,832 monthly, balloon payment due $ 351,222 $ 350,421
August 1, 2004, secured by land and
building
Less current portion (2,478) (3,349)
$ 348,744 $ 347,072
Note 2 - Notes Payable (continued)
Maturities of long-term debt are as follows:
December 31,
1995 $ 2,478
1996 2,710
1997 2,965
1998 3,243
1999 3,547
Thereafter 336,279
$351,222
Note 3 - Stockholders' Equity
Stock Issuances
In connection with the organization of Key Car on March 15, 1994,
Keystone was issued 10, 000 shares of Key Car common stock in
exchange for $100.
On June 17, 1994, Key Car purchased from its president land and
building for $672,720. The consideration to be paid consisted of the
assumption of a first mortgage of $352,000 to an unrelated
individual, the issuance of 172,720 shares of $1 stated value per
share convertible preferred stock and a note payable to Key Car's
president for $148,000 bearing interest at 16.5% with the final
payment due April 30, 1995 (Note 2). The preferred stock is
convertible into common stock of Key Car at the rate of one share of
common stock for each share of preferred stock. If such preferred
stock were converted to common stock, Key Car's president would own
approximately 95% of Key Car. Key Car's president had entered into
an agreement to purchase the property on March 10, 1994 for $392,214
from an unrelated individual. Therefore, for financial statement
purposes, this land and building is recorded at the president's cost
basis of $392,214 and the additional price paid by Key Car of
$280,506 is recorded as a special distribution to Key Car's
president.
In connection with the organization of Key Comm on March 30, 1994,
Keystone was issued 1,200,000 shares of Key Comm common stock for
services provided for organization of the Company.
Note 3 - Stockholders' Equity (continued)
Stock Issuances (continued)
On November 23, 1994, Key Comm purchased communication equipment from
Keystone for 2,400,000 shares of Key Comm common stock (valued at
$260,000) and the assumption of a $40,000 note payable. The asset
has been recorded at Keystone's cost basis in the asset of $300,000.
Additional Paid-in-Capital
During April 1995, Keystone forgave $184,495 in advances made to Key
Comm and Key Car and received no additional common shares (Note 4).
During April 1995, three officers of Key Comm contributed as capital
$217,000 of accrued wages receiving no shares of common stock.
Stock Split
During May 1995, Key Comm's board of directors effected a 3:1
forward stock split. All Key Comm shares reflected in these
financial statements have been restated to reflect the stock split.
Note 4 - Related Party Transactions
On April 30, 1994, Key Car entered into a three-year management
agreement, with an officer of the Company to provide services with
regards to managing the land and building owned by Key Car at the
rate of $2,500 per month.
During the year ended December 31, 1994 and the four months ended
April 30, 1995, the Companies were advanced, $178,090 and $6,405,
respectively, from Keystone. During April 1995, Keystone forgave
the $184,495 balance owed Keystone by the Companies.
Note 5 - Income Taxes
As of December 31, 1994 and April 30, 1995, total deferred tax
assets, liabilities and valuation allowance are as follows:
December 31, April 30,
1994 1995
Deferred tax assets resulting from net
operating loss carry-forwards $ 20,900 $ 47,300
Valuation allowance (20,900) (47,300)
$ - $ -
At April 30, 1995, the Company had net operating loss carryforwards
of approximately $215,000, which if not used, will expire as
follows:
Year of Expiration
2009 $95,000
2010 120,000
$215,000
Note 6 - Commitments and Contingencies
Employment Agreements
In October 1994, Key Comm entered into three-year employment
agreements with two officers which contain self -renewing terms,
subject to the option of the Company to terminate the self-renewing
provision near the end of each term. The agreements provide
severance benefits under certain conditions, of either one times
annual salary payable upon termination of employment or the remainder
due under the agreement. The aggregate estimated contingency under
these agreements at April 30, 1995 is $280,000. The agreements also
contain a non-compete clause which requires the employee to pay Key
Comm liquidated damages of $75,000 each if the clause is violated.
During December 1995, these two employees were terminated by Key Comm
allegedly for cause. As of April 30, 1995, these two employees were
owed $48,301 for notes payable and $46,000 for accrued wages.
Note 6 - Commitments and Contingencies (continued)
Employment Agreements (continued)
In October 1994, Key Comm also entered into a five-year employment
agreement with its president which is renewable for an additional
five-year period upon acceptance by Key Comm's president. The
agreement provides severance benefits under certain conditions of
either one times annual salary or the remainder due under the
agreement. The aggregate estimated contingency under this agreement
is $470,000 at April 30, 1995.
Litigation
Key Comm filed a complaint against two former employees of Key Comm
alleging the former employees breached their fiduciary duty to the
Company by engaging in an enterprise directly in competition with Key
Comm. The former employees filed a countersuit against Key Comm
alleging that Key Comm misrepresented and omitted material facts that
led to the former employees accepting employment with Key Comm. One
June 28, 1996, Key Comm and the former employees entered into a
settlement agreement in favor of Key Comm.
Lease Agreement as Lessor
On December 1, 1994, Key Car entered into a two-year lease with an
unrelated individual, leasing the land and building as a used car
lot. The tenant was granted an option to purchase the land and
building for $500,000 through November 30, 1996 subject to the
payment of certain minimum option payments which would be applied
against the purchase price. As of December 31, 1994, $10,000 was
received as an option payment. Minimum future rentals due Key Car
under the lease are as follows:
December 31,
1995 $46,347
1996 42,484
$88,831
Note 6 - Commitments and Contingencies (continued)
Lease Agreement as Lessor (continued)
December 31, April 30,
1994 1995
Land and building $ 392,214 $ 392,214
Less accumulated depreciation (3,362) (5,603)
$ 388,852 $ 386,611
Note 7 - Subsequent Events
Acquisition Agreement
On May 10, 1995, Keystone exchanged all of the common shares of both
Key Car and Key Comm to Comtec International, Inc. (Comtec) for
11,228,971 shares of Comtec's common stock. The acquisition will be
accounted for as a reverse acquisition with all assets recorded at
historical cost. Since the acquisition, Comtec has advanced in
excess of $200,000 to Key Comm.
Pledge of Key Car Assets as Security for Comtec Debt
Subsequent to the reverse acquisition of Comtec, the Companies
allowed Comtec to enter into a promissory note for $121,000 with an
unrelated entity secured by a second deed of trust on the Key Car
land and building and an assignment of rents.
Letters-of-Intent
On July 28, 1995, Key Comm entered into a letter of intent to
acquire 100% of the outstanding stock of PCC Management, Inc. (PCC),
an unrelated entity, in exchange for $9,000,000 of restricted
convertible preferred stock of Key Comm. PCC is in the business of
constructing and managing Specialized Mobile Radio (SMR) systems.
Closing of this transaction has not yet occurred.
Note 7 - Subsequent Events (continued)
Letters-of-Intent (continued)
On July 31, 1995, Key Comm entered into an option agreement with
Mobile-One Communications, Inc. (Mobile-One), an unrelated entity, to
acquire certain SMR systems. Key Comm paid $50,000 for a two month
option and was scheduled to pay an additional $125,000 by September
30, 1995 to extend the option for an additional two months. This
payment was not made and the option was allowed to lapse.
On August 5, 1995, Key Comm entered into an Acquisition Agreement
with Omni Range Communications (OMNI) , an unrelated entity, to
acquire Management and Option Agreements for approximately 185
unconstructed 800 MHz channels for $75,000. Key Comm paid $25,000
and issued a note payable for the $50,000 balance, which note is
secured by a - second deed of trust - on an office building owned by
Comtec.