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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON June 25, 1999
REGISTRATION NO. 333-76451
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No. 2
to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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LORECOM Technologies, Inc.
(Name of small business issuer in its charter)
OKLAHOMA 443112 73-1548771
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(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
LORECOM Technologies, Inc. Joseph O. Evans
12101 North Meridian 12101 North Meridian
Oklahoma City, Oklahoma 73120 Oklahoma City, Oklahoma 73120
Telephone: (405) 748-8888 Telephone: (405) 748-8888
Facsimile: (405) 516-2345 Facsimile: (405) 516-2345
(ADDRESS AND TELEPHONE NUMBER OF (NAME, ADDRESS AND TELEPHONE
PRINCIPAL EXECUTIVE OFFICES AND NUMBER OF AGENT FOR SERVICE)
PRINCIPAL PLACE OF BUSINESS)
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Copies to:
David J. Ketelsleger, Esq. Mark A. Robertson, Esq.
McAfee & Taft A Professional Corporation Robertson & Williams
Tenth Floor, Two Leadership Square 3033 N.W. 63rd
211 North Robinson Suite 160
Oklahoma City, Oklahoma 73102 Oklahoma City, Oklahoma 73116
Telephone: (405) 235-9621 Telephone: (405) 848-1944
Facsimile: (405) 235-0439 Facsimile: (405) 843-6707
Approximate date of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF DOLLAR PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
REGISTERED REGISTERED SHARE OFFERING PRICE REGISTRATION FEE
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Common Stock, $.01 par value (1) (1) $19,200,000(2) $5,338
per share...............
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(1) Omitted pursuant to Rule 457(o).
(2) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS
June 25, 1999
[LORECOM Technologies, Inc. LOGO]
1,600,000 SHARES OF COMMON STOCK
LORECOM Technologies, Inc.
12101 North Meridian
Oklahoma City, Oklahoma 73120
Telephone: (405) 748-8888
This is our initial public offering, and no public market currently exists
for our shares. The offering price may not reflect the market price of our
shares after the offering.
Proposed Trading Symbol:
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PRICE TO PUBLIC UNDERWRITING DISCOUNTS PROCEEDS TO LORECOM
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MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM
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Per share............ $10.00 $12.00 $.80 $.96 $9.20 $11.04
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Total................ $16,000,000 $19,200,000 $1,280,000 $1,536,000 $14,720,000 $17,664,000
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* The underwriter is offering the common stock on a firm commitment basis. The
minimum price per share is expected to be $10.00 and the maximum price per
share is expected to be $12.00.
** If the underwriter exercises in full its 45-day option to purchase up to
240,000 additional shares to cover over-allotments, the totals would be
$18,400,000, $1,472,000 and $16,928,000 for the minimum offering and
$22,080,000, $1,766,400 and $20,313,600 for the maximum offering.
This investment involves a high degree of risk and substantial dilution.
You should only purchase shares if you can afford a complete loss. Before
investing, you should carefully read this prospectus and any supplement, paying
particular attention to the "Risk Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CAPITAL WEST SECURITIES, INC.
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TABLE OF CONTENTS
A summary of our goals, strategy, Summary...................................
financial 1
history and other factors relevant to your About LORECOM............................. 1
investment decision. Our Business and Growth Strategy.......... 2
The Offering.............................. 2
Summary Financial Data.................... 3
Important factors you should consider Risk Factors..............................
before 4
investing. Forward-Looking Statements................ 7
A selection of our financial information Summary Combined Financial Information....
and 7
information regarding use of proceeds and Unaudited Pro Forma Combined Financial
dilution. Statements................................ 14
Capitalization............................ 20
Use of Proceeds........................... 20
Dilution.................................. 21
About LORECOM and our relationships with Business.................................. 22
the interconnect partners. LORECOM's Business and Growth Strategy.... 22
The Market................................ 23
Products and Services..................... 24
The Interconnect Partners................. 25
The Acquisitions.......................... 27
Fairness Opinion of Houlihan Smith &
Company, Inc. ....................... 29
Competition............................... 29
Property.................................. 30
Employees................................. 30
Legal Proceedings......................... 30
Where You Can Find More Information....... 30
Our plan of operations during the first Management's Plan of Operation............ 32
12 months. Overview.................................. 32
Purpose of Organization................... 32
Plan of Operation......................... 32
Impact of Year 2000 Issues................ 33
About our directors, executive officers, Management and Principal Stockholders..... 35
significant employees and principal Directors, Executive Officers and
Significant
stockholders. Employees................................. 35
Compensation.............................. 37
Employment Agreements with Executive
Officers............................. 38
Deferred Compensation and Stock Incentive
Plans................................ 38
Limitation on Directors' and Officers'
Liability............................ 40
Ownership of Management and Principal
Stockholders......................... 41
Certain Relationships and Related
Transactions......................... 42
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4
The common stock. Description of Common Stock............... 44
About the Common Stock.................... 44
Dividend Policy........................... 45
Market for Common Stock and Shares
Eligible for Future Sale............. 45
Transfer Agent............................ 46
About the underwriters, the accountants, The Underwriter and the Plan of
Distribution......................... 46
and the validity of the common stock. The Underwriting Agreement................ 46
Determining the Offering Price............ 48
Experts................................... 48
Validity of Common Stock.................. 49
Financial information about Index to Financial Statements............. F-1
LORECOM and our partners.
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SUMMARY
This section is only a summary and does not contain all the information
that may be important to you. You should read the more detailed information
contained later in this prospectus and all other information relating to this
offering at the sources identified in the paragraph "Where you can find more
information" on page 32. In addition to the information in this summary, more
detailed information and financial statements appear throughout this prospectus.
You should review all of these documents thoroughly before making your
investment decision. Unless we indicate otherwise, the information we provide in
this prospectus gives effect to the acquisition of the interconnect companies,
reflects a 2,850-for-one stock split and cancellation of certain shares, both
effected on April 9, 1999, and assumes that the underwriter's over-allotment
option is not exercised.
ABOUT LORECOM
On September 4, 1998, LORECOM incorporated under the name Advantage
Business Solutions, Inc. Advantage was formed to consolidate the operations of
certain interconnect companies in Oklahoma. On March 17, 1999, Advantage changed
its name to The Alliance Group, Inc. On May 12, 1999, Alliance changed its name
to LORECOM. Unless we state otherwise, when we refer to LORECOM we are also
referring to Alliance and Advantage.
When we complete this offering, we plan to acquire thirteen interconnect
companies. Typically, interconnect companies:
- Sell, install and maintain a customer's telephone equipment and connect
that equipment to the public telephone network;
- Represent customers before local and long distance providers in
determining local and long distance service requirements; and
- Sell and install software applications for telephone systems that enhance
the features and functions of the telephone equipment.
Customer telephone equipment includes all telecommunications equipment
located at the customer's office. This equipment normally consists of the
telephone system, the telephones, the cabling system on the customer's premises,
the telephone company's lines that connect the customer's telephone system to
the public network and dedicated lines used for transmitting high-speed data or
voice traffic between the customer's equipment and public or private networks.
We believe that interconnect companies enjoy the respect of both customers
and telephone companies. The interconnect company is the customer's telephone
equipment expert.
LORECOM identifies the thirteen interconnect companies it is acquiring as
"partners." We will acquire ten of the companies through mergers and three
companies through asset acquisitions. The issued and outstanding stock of the
merging companies will be converted into cash and common stock of LORECOM. Three
companies will sell their assets to us in exchange for cash and LORECOM common
stock. The number of shares of common stock issued in the acquisitions depends
on the initial public offering price of the common stock. We estimated the
number of shares of common stock issued in the acquisitions to be approximately
380,682 based on an assumed initial public offering price of $11.00 per share.
Houlihan Smith & Company, Inc., a National Association of Securities Dealers
member and independent investment banker, has delivered an opinion to us and our
shareholders that the consideration to be paid for each of the interconnect
partners is fair from a financial point of view. After joining LORECOM, each of
the partners will continue operating under its own name through 1999. Initially,
the partners will also continue to be primarily responsible for their individual
businesses and will maintain their business relationships with existing
customers. Presently, LORECOM has no significant business operations other than
its efforts to complete this offering and acquire the thirteen interconnect
companies.
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OUR BUSINESS AND GROWTH STRATEGY
According to the 1998 MultiMedia Telecommunications Market Review and
Forecast, in 1997, U.S. customers spent over $400 billion on telecommunications
equipment, software and services. Upon acquisition of the interconnect partners,
we will control approximately $18 million of the total market. We intend to
increase our total market share by acquiring interconnect companies in states
contiguous to Oklahoma. We expect to benefit from economies of scale as we
consolidate the acquired companies. Our expanded customer base will provide us a
readily accessible market to distribute new telecommunication products and
services not presently offered by the interconnect partners, such as long
distance service and other voice, video and data products and services. LORECOM
will provide its customers an efficient and coordinated means of connecting them
to voice and data networks. This means that LORECOM will become the bridge
between the large network providers and the small to medium business market. As
we grow, we expect to negotiate better terms with providers of local access,
long distance, Internet access, and data communications. We also expect to
negotiate greater discounts and increased levels of marketing and technical
support with the equipment vendors. We expect that our results of operations
will improve as economics of scale permit us to increase sales and profit
margins.
Customer service is paramount to maintaining the trusted position
interconnects enjoy with customers and the benefits of economies of scale.
LORECOM expects to maintain its customers' loyalty through the installation of a
customer support center, Internet access to LORECOM services and support, and
professional training for our customer service representatives.
THE OFFERING
Common stock offered by LORECOM......... 1,600,000 shares.
Common stock to be outstanding after
this offering........................... shares.
Use of proceeds......................... Assuming an offering price to the
public of $11.00 per share, we
expect to have net proceeds of
approximately $14.9 million. We
plan to use the net proceeds to pay
the cash portion of the purchase
price for the interconnect
partners, to retire indebtedness
incurred to finance the
acquisitions and this offering, to
purchase management information
systems, for future acquisitions
and for general corporate purposes.
Proposed Symbol...............
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SUMMARY FINANCIAL DATA
Each of the interconnect partners will either merge with or sell its assets
to a newly formed, wholly-owned subsidiary of LORECOM. The acquisitions will
occur concurrently with the completion of this offering. The following unaudited
pro forma combined summary financial data presents certain data for LORECOM, for
the interconnect partners on an historical combined basis and for LORECOM on a
pro forma combined basis, as adjusted to give effect to the acquisitions and the
offering and the application of the proceeds therefrom. For more information,
you should read the Unaudited Pro Forma Combined Financial Statements and notes
beginning on page 14.
THREE MONTHS ENDED MARCH 31
YEAR ENDED ----------------------------------------------------
DECEMBER 31, 1998 1998(1) 1999
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INTERCONNECT INTERCONNECT INTERCONNECT
PARTNERS PRO FORMA PARTNERS PARTNERS PRO FORMA
HISTORICAL AS HISTORICAL HISTORICAL AS
COMBINED LORECOM ADJUSTED COMBINED COMBINED LORECOM ADJUSTED
------------ --------- ----------- ------------ ------------ --------- ----------
Statement of Operations Data:
Net sales....................... $17,814,781 $ -- $17,814,781 $3,801,456 $4,613,868 $ 26,436 $4,640,304
Cost of sales................... 8,227,477 -- 8,227,477 1,774,075 2,239,822 26,436 2,266,258
Total cost and expenses......... 17,471,509 113,078 18,389,427 3,860,037 4,585,696 235,158 4,847,834
Income (loss) before income
taxes......................... 343,272 (113,078) (574,646) (58,581) 28,172 (208,722) (207,530)
Income tax expense.............. (108,843) -- (128,403) 6,580 (18,042) -- (7,850)
Net income (loss)............... 234,429 (113,078) (703,049) (52,001) 10,130 (208,722) (215,380)
Net loss per share.............. (.29) (0.09)
Shares used in computing pro
forma per share amounts....... 2,456,632 2,456,632
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(1) LORECOM was not in existence during the three months ended March 31, 1998.
AS OF MARCH 31, 1999
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INTERCONNECT
PARTNERS PRO FORMA
HISTORICAL AS
COMBINED LORECOM ADJUSTED
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Balance Sheet Data:
Cash and cash equivalents................................. 293,445 28,981 5,306,900
Working capital........................................... 1,206,243 (407,893) 5,936,494
Total assets.............................................. 4,353,540 668,207 21,945,096
Total long-term debt, including current portion........... 848,026 32,221 882,847
Stockholders' equity (deficit)............................ 1,594,331 178,210 18,846,960
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RISK FACTORS
Buying our common stock involves a high degree of risk. You should
carefully consider the following risk factors and all other information
contained in this prospectus before buying our common stock. Any of the risk
factors discussed in this prospectus could materially adversely affect our
business, operating results and financial condition and could result in a
complete loss of your investment.
THE TELECOMMUNICATIONS INDUSTRY MAY NOT CHANGE AS WE EXPECT.
If the products and services we represent are not accepted for any reason,
our business will be adversely affected. The market for our products may grow
more slowly than we expect. Technologies, customer requirements and industry
standards may change rapidly. We must improve our products to keep up with these
changes. New or improved products from competitors could make our products less
competitive or obsolete.
WE EXPECT OPERATING EXPENSES WILL INCREASE AND THIS COULD ADVERSELY AFFECT US.
The interconnect partners have been successful in recent years, but we may
not continue their success and profitability. We expect our expenses will
increase substantially as we:
- Increase our sales and marketing activities;
- Develop our products and technology to keep up with the changes in the
telecommunications industry;
- Expand our state and regional markets; and
- Pursue strategic relationships and acquisitions.
We expect the net proceeds from this offering to satisfy our capital
requirements until our next significant acquisition. However, many factors could
cause us to need additional capital sooner. We may not be successful in
expanding our markets and our activities may be more expensive than we currently
expect. We may not experience any revenue growth in the future, and, in fact,
our revenue could decline. As a result, we cannot predict our future operating
results with any degree of certainty.
WE CANNOT GROW SUCCESSFULLY IF WE DO NOT INCREASE SALES TO EXISTING CUSTOMERS.
We plan to grow by selling additional products and services to our existing
customers. We will also introduce new products and services to the partners'
customers. If we cannot coordinate the partners' products and services, or
cross-sell products and services economically, we will not be able to grow
adequately.
We depend on the partners' existing customers for future revenues. If the
partners' customers do not purchase additional products and services, or do not
continue to be customers, our business will be adversely affected. These
customers may not purchase additional products, upgrades or professional
services.
WE ARE A START UP COMPANY.
We were incorporated on September 4, 1998. At March 31, 1999, we had an
accumulated deficit of $321,800, and stockholders' equity of $178,210. We can
provide no assurance that we will continue as a going concern or reduce our
accumulated net deficit. You must evaluate us in light of the uncertainties,
delays, and difficulties and expenses commonly experienced by companies in the
early operating stage, including intense competition. In addition, our future
performance will be subject to factors beyond our control, including general
economic conditions and conditions in the telecommunications industry or
targeted commercial markets.
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LORECOM AND THE INTERCONNECT PARTNERS HAVE NOT PREVIOUSLY DONE BUSINESS
TOGETHER.
LORECOM has not conducted significant operations except to complete this
offering and the acquisitions. The combined and pro forma combined financial
information provided in this prospectus may not indicate LORECOM's actual
operating results and financial condition for the periods presented if the
acquisitions had occurred on the dates indicated. Until we establish centralized
accounting, management information and other administrative systems, we must
rely on the separate systems of the acquired companies. To be successful, we
must centralize systems, eliminate duplication of functions and integrate the
businesses we acquire. Systems, hardware and software of some partners may be
incompatible with others. Customer and employee turnover occurs regularly during
and after acquisitions.
OUR NEW EXECUTIVE TEAM MAY NOT BE ABLE TO MEET OUR BUSINESS OBJECTIVES.
Almost all of our executive officers, including our nominee for President
and Chief Executive Officer, the Vice President of Operations and Chief
Technical Officer and the Chief Financial Officer have been employed by LORECOM
for a relatively short period of time. Since joining LORECOM, the new management
team has devoted substantial efforts to expanding our sales, marketing and
professional services activities. This management team has not worked together
previously and may not be able to meet our goals.
WE MAY BE UNABLE TO SUCCESSFULLY CLOSE ALL THE ACQUISITIONS OF THE PARTNERS AND
INTEGRATE THE PARTNERS INTO OUR BUSINESS.
We expect to complete the acquisition of the thirteen companies
concurrently with closing this offering. However, each acquisition is subject to
certain closing conditions which may not be met. We cannot assure you that we
will be able to close all thirteen acquisitions. Even if we can, we must then
integrate the businesses and operations of those thirteen companies. If we are
unsuccessful our business may be adversely affected. Additionally, we may never
achieve the anticipated synergies from the acquisition of the partners,
including marketing, distribution or other operational benefits. We may have
difficulties in integrating the partners, because the companies are
geographically separated, have different corporate cultures and have personnel
with different business backgrounds. We could have problems with:
- Retaining the partners' key employees;
- Standardizing sales quotas, territories and incentive compensation plans
for sales personnel; and
- Keeping the partners' customers.
RISKS ARE INVOLVED IN ACQUIRING COMPANIES.
We expect to grow by acquiring more companies. Other companies have similar
goals and may try to acquire the same companies. Many of our competitors have
greater resources than ours and may be willing to pay higher prices than
LORECOM. The stock of larger public companies may be more acceptable to people
who want to sell their companies. Management's attention and resources may focus
on acquisitions and cause a loss of existing business. Additionally, past
operations of, and unanticipated problems with, acquired businesses pose a great
deal of risk. Customer dissatisfaction or performance problems of a single
acquired company could harm LORECOM's reputation generally. We may not succeed
in integrating and profitably managing additional businesses.
We may rely on common stock, cash, notes or other consideration for future
acquisitions. Our ability to use our stock depends on its market value. If we do
not use stock, our ability to raise capital from other sources may be limited.
Significant additional debt could adversely affect LORECOM and the value of the
common stock.
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OKLAHOMA LAW AND OUR GOVERNING INSTRUMENTS MAY RESTRICT POTENTIAL ACQUISITION
BIDS FOR LORECOM AND ADVERSELY AFFECT OUR OPERATIONS.
Approximately one-third of our board of directors will be elected each
year. Members of the board of directors cannot be removed except for cause. Our
Certificate of Incorporation permits the board of directors to issue preferred
stock with dividend, redemption, conversion and exchange rights selected by the
board without prior approval of LORECOM stockholders. The difficulty of removing
members of the board, and the board's ability to issue preferred stock, could
delay or prevent a change of control of LORECOM. As a result, these provisions
may prevent the market price of LORECOM common stock from reflecting the effects
of actual or rumored takeover attempts. These provisions may also prevent
changes in the management of LORECOM.
Additionally, Oklahoma laws may inhibit potential acquisition bids for
LORECOM. Oklahoma law prevents LORECOM from engaging in a business combination
with any interested stockholder for three years following the date that the
stockholder became an interested stockholder. A business combination includes a
merger or consolidation involving LORECOM and the interested stockholder or the
sale of more than 10% of LORECOM's assets.
If we have 1,000 or more shareholders and meet other conditions, we will be
subject to Oklahoma's control shares act. With exceptions, this act prevents
holders of more than 20% of our stock from voting those shares. This at least
delays the time it takes anyone to gain control of LORECOM. Also, shareholder
action by written consent without a meeting requires unanimous shareholder
consent.
OUR UNDERWRITER HAS LIMITED UNDERWRITING EXPERIENCE.
Capital West Securities, Inc. was first registered as a broker-dealer in
May 1995. Capital West has participated in only nine public equity offerings as
an underwriter, although certain of its employees have had experience in
underwriting public offerings while employed by other broker-dealers.
Prospective purchasers of the securities offered in this prospectus should
consider Capital West's limited underwriting experience in evaluating this
offering.
ADDITIONAL RISK FACTORS DISCUSSED IN OUR PROSPECTUS.
You should consider the additional risk factors set forth in this
prospectus before buying our common stock. In particular, you must understand
that we are in a highly competitive industry. If we cannot compete successfully,
we will be adversely affected. We also have no intention of paying dividends now
or at any time in the foreseeable future. We are also dependent upon certain
vendors that provide us equipment and services for resale. We may also suffer
losses as a result of year 2000 problems. You should not consider the initial
public offering price to be an indication of the actual value of our common
stock. You will also suffer substantial dilution of the tangible net book value
of the common stock that you purchase in this offering. In addition, you may
suffer adverse effects from the sale of shares that are eligible for future
sale. Please refer to the "Business," "Management's Plan of Operation,"
"Dilution," "The Underwriter and the Plan of Distribution" and "Description of
Common Stock" sections of this prospectus for further information regarding
these risk factors.
We, like many other businesses, depend on our key executives and operating
personnel. If we lose our key personnel, we may not be able to hire adequate
replacements and our business may be adversely affected. Similarly, like many
companies pursuing an initial public offering, no prior market exists for our
stock and, if a market does develop, the price of our common stock may be
volatile. Please refer to the "Business" and "Description of Common Stock"
sections of this prospectus for further information regarding these risk
factors.
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FORWARD-LOOKING STATEMENTS
We have included some forward-looking statements in this prospectus about
our expectations for LORECOM after the acquisitions. These forward-looking
statements contain substantial risks and uncertainties that may cause our actual
results to differ significantly from our forward-looking statements. You can
identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate" and "continue" or similar words.
You should read statements that contain these words carefully because they:
- Discuss our future expectations;
- Contain projections of our future operating results or of our future
financial condition; or
- State other "forward-looking" information.
We believe it is important to communicate our expectations to you, but
events may occur in the future over which we have no control and which we are
not accurately able to predict.
SUMMARY COMBINED FINANCIAL INFORMATION
The following tables set forth the condensed historical financial data of
LORECOM and the interconnect partners (1) for the periods ended and as of
December 31, 1998, except for Telkey Communications, Inc. and Terra Telecom,
Inc., whose information is as of September 30, 1998 and for the twelve months
then ended, and (2) for the three month periods ended and as of March 31, 1999.
The December 31, 1998 financial data of Access Communications Services, Inc.,
LORECOM Technologies, Inc., American Telcom, Inc., Banner Communications, Inc.,
Communication Services, Inc., Telephone and Paging Divisions of EIS
Communications, Telkey Communications, Inc., Terra Telecom, Inc. and Travis
Business Systems, Inc. are derived from the financial statements of each
company, which have been audited by Deloitte & Touche LLP, independent auditors.
The December 31, 1998 financial data of Commercial Telecom Systems, Inc. are
derived from its financial statements, which have been audited by Hunter, Atkins
& Russell, PLC, independent auditors. The December 31, 1998 financial data of
Nobel Systems, Inc. are derived from its financial statements, which have been
audited by Saxon & Knol, P.C., independent auditors. The December 31, 1998
financial data of Able Communication Incorporated, Perkins Office Machines, Inc.
and The Phone Man Sales and Services, Inc. set forth in the "Others" column, as
well as the March 31, 1999 financial data of LORECOM and the interconnect
partners, are derived from the unaudited financial statements of each company,
which, in the opinion of each company's management, present fairly the financial
condition and results of operations of the company. The tables also set forth
the unaudited condensed historical financial data of the interconnect partners
and of LORECOM on a combined basis for the periods indicated. The information
should be read in conjunction with the historical financial statements and the
Unaudited Pro Forma Combined Financial Statements and the notes thereto included
elsewhere in this prospectus.
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LORECOM TECHNOLOGIES, INC.
HISTORICAL COMBINED BALANCE SHEETS
DECEMBER 31, 1998
(UNAUDITED)
ASSETS
AMERICAN ACCESS BANNER CSI CTS EIS NOBEL
-------- -------- -------- -------- -------- -------- --------
CURRENT ASSETS:
Cash.................................... $82,545 $187,464 $ 13,486 $ 26,440 $ 54,532 $ -- $ --
Accounts receivable..................... 230,324 127,953 148,033 98,354 72,080 239,130 85,237
Inventory............................... 25,484 51,820 68,939 32,482 90,902 177,340 51,976
Other current assets.................... 2,800 3,864 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total current assets.............. 341,153 371,101 230,458 157,276 217,514 416,470 137,213
PROPERTY AND EQUIPMENT, NET............... 75,659 143,044 79,140 45,944 14,843 19,212 32,489
OTHER ASSETS.............................. -- 198,977 -- 200 610 -- --
-------- -------- -------- -------- -------- -------- --------
TOTAL............................. $416,812 $713,122 $309,598 $203,420 $232,967 $435,682 $169,702
======== ======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable........................ $50,751 $191,484 $ 68,432 $ 68,511 $137,590 $123,327 $ 46,083
Current portion of long-term debt....... 66,827 73,474 50,073 29,445 4,044 11,064 71,567
Other current liabilities............... 87,351 79,595 32,646 51,813 159,341 55,923 16,822
-------- -------- -------- -------- -------- -------- --------
Total current liabilities......... 204,929 344,553 151,151 149,769 300,975 190,314 134,472
Long-term debt.......................... -- 116,748 44,807 28,195 7,348 16,581 17,228
-------- -------- -------- -------- -------- -------- --------
Total liabilities................. 204,929 461,301 195,958 177,964 308,323 206,895 151,700
STOCKHOLDERS' EQUITY (DEFICIT)............ 211,883 251,821 113,640 25,456 (75,356) 228,787 18,002
-------- -------- -------- -------- -------- -------- --------
TOTAL............................. $416,812 $713,122 $309,598 $203,420 $232,967 $435,682 $169,702
======== ======== ======== ======== ======== ======== ========
HISTORICAL COMBINED STATEMENTS OF OPERATIONS
DECEMBER 31, 1998
(UNAUDITED)
AMERICAN ACCESS BANNER CSI CTS EIS NOBEL
---------- ---------- ---------- -------- ---------- ---------- --------
NET SALES................................ $1,168,070 $1,345,576 $1,548,874 $807,432 $1,437,932 $2,349,845 $953,046
COSTS AND EXPENSES:
Cost of sales.......................... 463,476 523,506 798,261 350,793 694,385 1,232,744 439,803
Salaries and benefits.................. 365,055 523,127 452,068 285,823 386,413 678,442 330,795
Selling, general and administrative.... 200,126 234,004 216,801 156,493 133,253 421,877 166,224
Interest............................... 3,028 47,444 6,689 4,335 5,099 2,226 9,729
Depreciation and amortization.......... 18,802 27,594 28,837 16,799 10,121 15,085 14,926
---------- ---------- ---------- -------- ---------- ---------- --------
Total costs and expenses......... 1,050,487 1,355,675 1,502,656 814,243 1,229,271 2,350,374 961,477
---------- ---------- ---------- -------- ---------- ---------- --------
INCOME (LOSS) BEFORE INCOME TAXES........ 117,583 (10,099) 46,218 (6,811) 208,661 (529) (8,431)
INCOME TAX (EXPENSE) BENEFIT............. (31,955) 1,515 -- -- (76,316) -- --
---------- ---------- ---------- -------- ---------- ---------- --------
NET INCOME (LOSS)........................ $ 85,628 $ (8,584) $ 46,218 $ (6,811) $ 132,345 $ (529) $ (8,431)
========== ========== ========== ======== ========== ========== ========
8
13
LORECOM TECHNOLOGIES, INC.
HISTORICAL COMBINED BALANCE SHEETS -- (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
ASSETS
INTERCONNECT
PARTNERS COMBINED
TELKEY TERRA TRAVIS OTHERS COMBINED LORECOM TOTAL
-------- -------- ---------- -------- ------------ -------- ----------
CURRENT ASSETS:
Cash.................................. $140,053 $ 20,946 $ 153,409 $ 12,962 $ 691,837 $ 79,700 $ 771,537
Accounts receivable................... 154,280 118,120 381,421 63,644 1,718,576 -- 1,718,576
Inventory............................. 88,748 131,035 485,695 4,971 1,209,392 -- 1,209,392
Other current assets.................. 19,065 -- 46,063 282 72,074 1,933 74,007
-------- -------- ---------- -------- ---------- -------- ----------
Total current assets............ 402,146 270,101 1,066,588 81,859 3,691,879 81,633 3,773,512
PROPERTY AND EQUIPMENT, NET............. 73,494 64,920 118,640 28,469 695,854 40,721 736,575
OTHER ASSETS............................ 16,862 8,096 5,884 543 231,172 20,498 251,670
-------- -------- ---------- -------- ---------- -------- ----------
TOTAL........................... $492,502 $343,117 $1,191,112 $110,871 $4,618,905 $142,852 $4,761,757
======== ======== ========== ======== ========== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable...................... $ 31,364 $126,585 $ 172,654 $ 15,596 $1,032,377 $ 32,464 $1,064,841
Current portion of long-term debt..... 59,782 59,143 -- 13,000 438,419 8,049 446,468
Other current liabilities............. 54,701 86,145 382,341 5,953 1,012,631 98,296 1,110,927
-------- -------- ---------- -------- ---------- -------- ----------
Total current liabilities....... 145,847 271,873 554,995 34,549 2,483,427 138,809 2,622,236
Long-term debt........................ 24,780 56,362 -- 75,173 387,222 26,119 413,341
-------- -------- ---------- -------- ---------- -------- ----------
Total liabilities............... 170,627 328,235 554,995 109,722 2,870,649 164,928 3,035,577
STOCKHOLDERS' EQUITY (DEFICIT).......... 321,875 14,882 636,117 1,149 1,748,256 (22,076) 1,726,180
-------- -------- ---------- -------- ---------- -------- ----------
TOTAL........................... $492,502 $343,117 $1,191,112 $110,871 $4,618,905 $142,852 $4,761,757
======== ======== ========== ======== ========== ======== ==========
HISTORICAL COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
INTERCONNECT
PARTNERS COMBINED
TELKEY TERRA TRAVIS OTHERS COMBINED LORECOM TOTAL
---------- ---------- ---------- -------- ------------ --------- -----------
NET SALES........................... $1,393,165 $1,956,623 $4,198,047 $656,171 $17,814,781 $ -- $17,814,781
COSTS AND EXPENSES:
Cost of sales..................... 566,249 1,052,621 1,771,499 334,140 8,227,477 -- 8,227,477
Salaries and benefits............. 476,800 650,889 1,814,593 204,155 6,168,160 63,267 6,231,427
Selling, general and
administrative.................. 249,538 204,014 618,179 81,264 2,681,773 46,983 2,728,756
Interest.......................... 7,161 19,747 9,177 11,136 125,771 850 126,621
Depreciation and amortization..... 46,874 29,459 43,353 16,478 268,328 1,978 270,306
---------- ---------- ---------- -------- ----------- --------- -----------
Total costs and expenses.... 1,346,622 1,956,730 4,256,801 647,173 17,471,509 113,078 17,584,587
---------- ---------- ---------- -------- ----------- --------- -----------
INCOME (LOSS) BEFORE INCOME TAXES... 46,543 (107) (58,754) 8,998 343,272 (113,078) 230,194
INCOME TAX (EXPENSE) BENEFIT........ (11,792) 16 9,689 -- (108,843) -- (108,843)
---------- ---------- ---------- -------- ----------- --------- -----------
NET INCOME (LOSS)................... $ 34,751 $ (91) $ (49,065) $ 8,998 $ 234,429 $(113,078) $ 121,351
========== ========== ========== ======== =========== ========= ===========
9
14
LORECOM TECHNOLOGIES, INC.
HISTORICAL COMBINED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
ASSETS
AMERICAN ACCESS BANNER CSI CTS EIS NOBEL
-------- -------- -------- -------- -------- -------- --------
CURRENT ASSETS:
Cash................................... $ 64,934 $ 25,136 $ 1,670 $ 73,033 $ 46,264 $ -- $ 3,175
Accounts receivable.................... 113,998 215,972 71,195 83,051 107,011 166,718 67,733
Inventory.............................. 23,142 60,465 73,939 29,282 95,402 303,741 39,392
Other current assets................... 2,800 3,143 -- -- -- -- 22,241
-------- -------- -------- -------- -------- -------- --------
Total current assets............. 204,874 304,716 146,804 185,366 248,677 470,459 132,541
PROPERTY AND EQUIPMENT, NET.............. 70,959 170,691 74,462 41,501 12,343 16,712 30,987
OTHER ASSETS............................. -- 28,400 -- 133 610 -- --
-------- -------- -------- -------- -------- -------- --------
TOTAL............................ $275,833 $503,807 $221,266 $227,000 $261,630 $487,171 $163,528
======== ======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable....................... $ 20,492 $177,520 $ 68,224 $ 89,685 $133,719 $168,237 $ 52,108
Current portion of long-term debt...... 26,825 74,765 49,174 27,410 4,400 11,352 60,645
Other current liabilities.............. 37,215 60,755 25,066 38,121 167,571 51,725 31,199
-------- -------- -------- -------- -------- -------- --------
Total current liabilities........ 84,532 313,040 142,464 155,216 305,690 231,314 143,952
Long-term debt......................... -- 102,675 39,760 26,398 5,739 13,831 14,250
-------- -------- -------- -------- -------- -------- --------
Total liabilities................ 84,532 415,715 182,224 181,614 311,429 245,145 158,202
STOCKHOLDERS' EQUITY (DEFICIT)........... 191,301 88,092 39,042 45,386 (49,799) 242,026 5,326
-------- -------- -------- -------- -------- -------- --------
TOTAL............................ $275,833 $503,807 $221,266 $227,000 $261,630 $487,171 $163,528
======== ======== ======== ======== ======== ======== ========
10
15
LORECOM TECHNOLOGIES, INC.
HISTORICAL COMBINED BALANCE SHEET -- (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
ASSETS
INTERCONNECT
PARTNERS COMBINED
TELKEY TERRA TRAVIS OTHERS COMBINED LORECOM TOTAL
-------- -------- ---------- -------- ------------ -------- ----------
CURRENT ASSETS:
Cash....................................... $ 49,002 $ 20,884 $ -- $ 9,347 $ 293,445 $ 28,981 $ 322,426
Accounts receivable........................ 167,461 212,241 738,111 45,615 1,989,106 26,436 2,015,542
Inventory.................................. 112,389 94,726 415,950 26,122 1,274,550 1,274,550
Other current assets....................... 16,067 -- 34,913 99 79,263 2,721 81,984
-------- -------- ---------- -------- ---------- -------- ----------
Total current assets................. 344,919 327,851 1,188,974 81,183 3,636,364 58,138 3,694,502
PROPERTY AND EQUIPMENT, NET.................. 69,329 44,695 112,847 24,312 668,838 100,425 769,263
OTHER ASSETS................................. 9,673 8,096 884 542 48,338 509,644 557,982
-------- -------- ---------- -------- ---------- -------- ----------
TOTAL................................ $423,921 $380,642 $1,302,705 $106,037 $4,353,540 $668,207 $5,021,747
======== ======== ========== ======== ========== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable........................... $ 38,247 $155,618 $ 104,176 $ 27,832 $1,035,858 $268,873 1,304,731
Current portion of long-term debt.......... 14,424 51,943 185,000 13,000 518,938 8,255 527,193
Other current liabilities.................. 31,700 74,277 351,358 6,338 875,325 188,903 1,064,228
-------- -------- ---------- -------- ---------- -------- ----------
Total current liabilities............ 84,371 281,838 640,534 47,170 2,430,121 466,031 2,896,152
Long-term debt............................. 13,108 37,338 -- 75,989 329,088 23,966 353,054
-------- -------- ---------- -------- ---------- -------- ----------
Total liabilities.................... 97,479 319,176 640,534 123,159 2,759,209 489,997 3,249,206
STOCKHOLDERS' EQUITY (DEFICIT)............... 326,442 61,466 662,171 (17,122) 1,594,331 178,210 1,772,541
-------- -------- ---------- -------- ---------- -------- ----------
TOTAL................................ $423,921 $380,642 $1,302,705 $106,037 $4,353,540 $668,207 $5,021,747
======== ======== ========== ======== ========== ======== ==========
11
16
LORECOM TECHNOLOGIES, INC.
HISTORICAL COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
AMERICAN ACCESS BANNER CSI
------------------- ------------------- ------------------- -------------------
1999 1998 1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- -------- -------- --------
NET SALES.............................. $261,415 $216,119 $363,303 $287,023 $240,355 $276,409 $263,503 $158,053
COSTS AND EXPENSES:
Cost of sales........................ 129,797 107,578 147,845 117,680 125,177 144,334 124,528 70,370
Salaries and benefits................ 104,001 72,806 132,439 137,234 125,828 94,191 78,551 69,047
Selling, general and
administrative..................... 49,024 30,026 62,789 58,999 49,990 48,179 33,924 22,131
Interest............................. 544 626 7,390 8,012 2,467 1,245 1,820 1,043
Depreciation and amortization........ 4,700 5,866 7,903 7,796 5,559 3,900 4,750 4,199
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses....... 288,066 216,902 358,366 329,721 309,021 291,849 243,573 166,790
-------- -------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES......................... (26,651) (783) 4,937 (42,698) (68,666) (15,440) 19,930 (8,737)
INCOME TAX (EXPENSE)
BENEFIT.............................. 6,069 -- (1,000) 8,581 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS)...................... $(20,582) $ (783) $ 3,937 $(34,117) $(68,666) $(15,440) $ 19,930 $ (8,737)
======== ======== ======== ======== ======== ======== ======== ========
CTS EIS NOBEL
------------------- ------------------- -------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
NET SALES........................................... $332,225 $349,347 $588,396 $465,079 $298,942 $264,905
COSTS AND EXPENSES:
Cost of sales..................................... 189,634 206,792 301,433 197,056 156,881 128,845
Salaries and benefit.............................. 70,830 96,957 164,754 171,046 98,896 90,682
Selling, general and administrative............... 33,566 32,763 103,906 94,845 51,034 31,868
Interest.......................................... 263 805 224 -- 1,647 3,110
Depreciation and amortization..................... 2,500 1,805 2,500 -- 3,160 3,000
-------- -------- -------- -------- -------- --------
Total costs and expenses.................... 296,793 339,122 572,817 462,947 311,618 257,505
-------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES................... 35,432 10,225 15,579 2,132 (12,676) 7,400
INCOME TAX (EXPENSE) BENEFIT........................ (9,875) (2,026) (2,340) -- -- --
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS)................................... $ 25,557 $ 8,199 $ 13,239 $ 2,132 $(12,676) $ 7,400
======== ======== ======== ======== ======== ========
12
17
LORECOM TECHNOLOGIES, INC.
HISTORICAL COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
TELKEY TERRA TRAVIS OTHERS
------------------- ------------------- --------------------- -------------------
1999 1998 1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- ---------- -------- -------- --------
NET SALES......................... $388,836 $244,959 $605,247 $448,477 $1,140,659 $897,513 $130,987 $193,572
COSTS AND EXPENSES:
Cost of sales................... 176,884 95,227 268,308 264,505 549,820 331,185 69,515 110,503
Salaries and benefit............ 141,464 102,508 227,105 152,232 442,828 408,155 52,178 37,906
Selling, general and
administrative................ 41,554 43,189 71,131 61,993 106,143 136,686 23,686 19,717
Interest........................ (226) 815 6,274 415 1,539 1,350 1,148 3,376
Depreciation and amortization... 7,450 6,889 8,100 7,500 7,722 6,931 2,819 4,119
-------- -------- -------- -------- ---------- -------- -------- --------
Total costs and
expenses................ 367,126 248,628 580,918 486,645 1,108,052 884,307 149,346 175,621
-------- -------- -------- -------- ---------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES........................... 21,710 (3,669) 24,329 (38,168) 32,607 13,206 (18,359) 17,951
INCOME TAX (EXPENSE) BENEFIT...... (3,257) 550 (4,754) 5,732 (6,553) (2,653) 3,668 (3,604)
-------- -------- -------- -------- ---------- -------- -------- --------
NET INCOME (LOSS)................. $ 18,453 $ (3,119) $ 19,575 $(32,436) $ 26,054 $ 10,553 $(14,691) $ 14,347
======== ======== ======== ======== ========== ======== ======== ========
INTERCONNECT PARTNERS
COMBINED LORECOM COMBINED TOTAL
----------------------- ---------------- -----------------------
1999 1998 1999 1998 1999 1998
---------- ---------- --------- ---- ---------- ----------
NET SALES........................................ $4,613,868 $3,801,456 $ 26,436 -- $4,640,304 $3,801,456
COSTS AND EXPENSES:
Cost of sales.................................. 2,239,822 1,774,075 26,436 -- 2,266,258 1,774,075
Salaries and benefits.......................... 1,638,874 1,432,764 121,323 -- 1,760,197 1,432,764
Selling, general and administrative............ 626,747 580,396 84,455 -- 711,202 580,396
Interest....................................... 23,090 20,797 484 -- 23,574 20,797
Depreciation and amortization.................. 57,163 52,005 2,460 -- 59,623 52,005
---------- ---------- --------- --- ---------- ----------
Total costs and expenses................. 4,585,696 3,860,037 235,158 -- 4,820,854 3,860,037
---------- ---------- --------- --- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES................ 28,172 (58,581) (208,722) -- (180,550) (58,581)
INCOME TAX (EXPENSE) BENEFIT..................... (18,042) 6,580 -- -- (18,042) 6,580
---------- ---------- --------- --- ---------- ----------
NET INCOME (LOSS)................................ $ 10,130 $ (52,001) $(208,722) -- $ (198,592) $ (52,001)
========== ========== ========= === ========== ==========
13
18
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the acquisitions by LORECOM of the outstanding capital stock or assets of the
interconnect partners. The acquisitions will be accounted for using the purchase
method of accounting. LORECOM has been identified as the accounting acquiror.
December 31, 1998 unaudited pro forma statements of operations. The
unaudited pro forma combined statement of operations give effect to these
transactions as if they had occurred on January 1, 1998. All of the historical
financial information included in the "Interconnect Partners Historical
Combined" column below is as of December 31, 1998 and for the twelve months then
ended, except for Telkey Communications, Inc. and Terra Telecom, Inc., whose
information is for the nine months ended September 30, 1998.
March 31, 1999 unaudited pro forma combined financial statements. The
unaudited pro forma combined balance sheet gives effect to the acquisitions and
the offering as if they had occurred on March 31, 1999. The unaudited pro forma
combined statements of operations give effect to these transactions as if they
had occurred on January 1, 1998. All of the historical financial information
included in the "Interconnect Partners Historical Combined" column below is as
of March 31, 1999 and for the three months then ended.
For purposes of computing the purchase price for accounting purposes, the
value of shares is determined using an estimated discounted value of $9.90 per
share, which represents a discount of 10 percent from the initial public
offering price of $11.00 per share due to restrictions on the sale and
transferability of the shares issued. The purchase price has been allocated to
the interconnect companies' historical assets and liabilities based on their
respective carrying values as these carrying values are deemed to represent the
fair market value of these assets and liabilities. LORECOM has allocated a
portion of the purchase price to noncompete agreements based on an analysis
prepared by LORECOM. The allocations of the purchase price are considered
preliminary until such time as the closing of the offering and the acquisitions.
LORECOM has preliminarily analyzed the savings that it expects to realize
from reductions in salaries and benefits to certain stockholders of the
interconnect partners who will not be employees of LORECOM. Net reductions have
been reflected in the pro forma combined statements of operations for the
stockholders and management of the interconnect partners who will not be
employed by LORECOM and for certain other cost savings, including the overhead
allocations made by the parent of one of the interconnect partners. These
savings have been offset by the incremental increase in costs related to
consulting agreements and LORECOM's new management. Subsequent to the offering,
LORECOM believes that it can realize savings from (1) increased productivity of
its technical service staff, (2) greater volume discounts from suppliers, and
(3) consolidation of insurance programs and other corporate operations, such as
financial and management reporting. Integration of the interconnect partners may
also present opportunities to reduce costs through the elimination of
duplicative functions and through increased employee utilization. However,
subsequent to the offering, LORECOM will incur additional costs and expenditures
for corporate expenses related to being a public company, systems development
and corporate administration. Neither these anticipated savings nor the
anticipated off-setting costs have been included in the pro forma combined
financial statements of LORECOM.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma combined financial data do not purport to represent
what LORECOM's financial position or results of operations would actually have
been if such transactions in fact had occurred on those dates and are not
necessarily representative of LORECOM's financial position or results of
operations for any future period. Since the interconnect partners were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma combined
financial statements should be read in conjunction with the risk factors
starting on page 4 of this prospectus and the financial statements and notes
thereto included elsewhere in this prospectus.
14
19
LORECOM TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
ASSETS
INTERCONNECT
PARTNERS PRO FORMA
HISTORICAL PRO FORMA AS
COMBINED LORECOM ADJUSTMENTS NOTES ADJUSTED
------------ --------- ----------- ----- -----------
Cash................................ $ 293,445 $ 28,981 $ 5,056,474 1 $ 5,306,900
(72,000) 7
Accounts receivable................. 1,989,106 26,436 2,015,542
Inventory........................... 1,274,550 1,274,550
Other current assets................ 79,263 2,721 81,984
---------- --------- ----------- -----------
Total current assets...... 3,636,364 58,138 4,984,474 8,678,976
Property and equipment, net......... 668,838 100,425 (17,800) 7 751,463
Goodwill and other intangible
assets............................ 12,466,319 2 12,466,319
Other assets........................ 48,338 509,644 (509,644) 1 48,338
---------- --------- ----------- -----------
TOTAL..................... $4,353,540 $ 668,207 $16,923,349 $21,945,096
========== ========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable.................... $1,035,858 $ 268,873 $ (153,670) 1 $ 1,151,061
Accrued expenses.................... 26,235 35,233 61,468
Current portion of long-term debt... 518,938 8,255 527,193
Other current liabilities........... 849,090 153,670 1,002,760
---------- --------- ----------- -----------
Total current
liabilities............. 2,430,121 466,031 (153,670) 2,742,482
Long-term debt...................... 329,088 23,966 2,600 7 355,654
STOCKHOLDERS' EQUITY
Common stock........................ 8,938 7,610 10,869 1 27,417
Additional paid-in capital.......... 185,952 492,400 18,462,991 1 19,141,343
Retained earnings................... 1,399,441 (321,800) (1,399,441) 1 (321,800)
---------- --------- ----------- -----------
Total stockholders'
equity.................. 1,594,331 178,210 17,074,419 18,846,960
---------- --------- ----------- -----------
TOTAL..................... $4,353,540 $ 668,207 $16,923,349 $21,945,096
========== ========= =========== ===========
15
20
LORECOM TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
INTERCONNECT
PARTNERS PRO FORMA
HISTORICAL PRO FORMA AS
COMBINED LORECOM ADJUSTMENTS NOTES ADJUSTED
------------ --------- ----------- ----- -----------
Net sales............................ $17,814,781 $17,814,781
----------- -----------
Cost of sales........................ 8,227,477 8,227,477
Salaries and benefits................ 6,168,160 $ 63,267 $(107,708) 3 6,123,719
Selling, general and
administrative..................... 2,681,773 46,983 2,728,756
Interest............................. 125,771 850 126,621
Depreciation and amortization........ 268,328 1,978 912,548 4 1,182,854
----------- --------- --------- -----------
Total costs and expenses... 17,471,509 113,078 804,840 18,389,427
----------- --------- --------- -----------
Income (loss) before income taxes.... 343,272 (113,078) (804,840) (574,646)
Income tax (expense) benefit......... (108,843) (19,560) 5 (128,403)
----------- --------- --------- -----------
Net income (loss).................... $ 234,429 $(113,078) $(824,400) $ (703,049)
=========== ========= ========= ===========
Net loss per share (both basic and
diluted)........................... 6 $ (0.29)
===========
Number of shares used in computing
net loss per share................. 2,456,632
===========
16
21
LORECOM TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
INTERCONNECT
PARTNERS PRO FORMA
HISTORICAL PRO FORMA AS
COMBINED LORECOM ADJUSTMENTS NOTES ADJUSTED
------------ --------- ----------- ----- ----------
Net sales.............................. $4,613,868 $ 26,436 $4,640,304
---------- --------- ----------
Cost of sales.......................... 2,239,822 26,436 2,266,258
Salaries and benefits.................. 1,638,874 121,323 $(201,157) 3 1,559,040
Selling, general and administrative.... 626,747 84,455 711,202
Interest............................... 23,090 484 23,574
Depreciation and amortization.......... 57,163 2,460 228,137 4 287,760
---------- --------- --------- ----------
Total costs and expenses..... 4,585,696 235,158 26,980 4,847,834
---------- --------- --------- ----------
Income (loss) before income taxes...... 28,172 (208,722) (26,980) (207,530)
Income tax (expense) benefit........... (18,042) 10,192 5 (7,850)
---------- --------- --------- ----------
Net income (loss)...................... $ 10,130 $(208,722) $ (16,788) $ (215,380)
========== ========= ========= ==========
Net loss per share (both basic and
diluted)............................. 6 $ (0.09)
==========
Number of shares used in computing net
loss per share....................... 2,456,632
==========
17
22
LORECOM TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1
To record the issuance of stock, net of offering costs, from the sale of
shares in the offering and from the issuance of stock in the acquisitions as
follows:
MARCH 31,
1999
------------
Cash proceeds.......................................... $ 17,600,000
Offering costs......................................... (2,700,000)
Less costs incurred.................................... 509,644
Payment to related party............................... (153,670)
------------
Net proceeds........................................... 15,255,974
Less amount of proceeds paid to partners............... (10,199,500)
------------
Net cash proceeds...................................... $ 5,056,474
============
The equity effect was recorded at an assumed issuance of 1,600,000 shares
at $11.00 per share, and 380,682 shares at a value of $9.90 per share, with a
par value of $.01 per share for LORECOM common stock.
Also to eliminate the interconnect partners' historical combined total
equity, including $8,938 in common stock and $185,952 in additional paid-in
capital.
NOTE 2
To reflect allocation of the $13,968,250 purchase price of the interconnect
partners as follows:
Cost of net tangible assets........................... $ 1,501,931
-----------
Identified intangible assets.......................... 1,688,631
Goodwill.............................................. 10,777,688
-----------
Adjustment to other assets............................ 12,466,319
-----------
Total purchase price........................ $13,968,250
===========
Identified intangible assets consist of noncompetition agreements with the
interconnect partners' stockholders.
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NOTE 3
To reflect:
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
Expense reductions:
Salaries and benefits for stockholders of the interconnect
partners that will not continue subsequent to the
acquisition............................................ $172,277 $ 689,108
Overhead allocation from the parent of an interconnect
partner that will not continue......................... 76,618 309,333
-------- ---------
Total estimated cost reductions................... 248,895 998,441
Less additional costs resulting from the purchase:
Consulting agreements with certain interconnect
partners............................................... (39,000) (156,000)
Salaries and benefits for administrative employees of
LORECOM for a twelve month period, net of actual
expenses incurred...................................... (8,738) (734,733)
-------- ---------
Pro forma adjustment to salaries and benefits............... $201,157 $ 107,708
======== =========
NOTE 4
To reflect amortization of goodwill over periods ranging from 5 to 20 years
and identified intangible assets over a four to eight-year period.
NOTE 5
To reflect the incremental provision for federal and state income taxes,
assuming each company acquired was subject to federal and state income tax, and
provide the income tax benefit of pro forma net expenses. The adjustment assumes
a corporate income tax rate of 38% and that a majority of the goodwill and
intangible asset amortization is non-deductible.
NOTE 6
Unaudited pro forma net loss per share (both basic and diluted) is
calculated using 2,456,632 shares of common stock. Shares outstanding include
1,600,000 shares sold pursuant to this offering, 380,682 shares issued to
interconnect partners and 475,950 shares owned by the existing shareholders of
LORECOM following the cancellation of 285,000 shares from an exiting
stockholder.
NOTE 7
To reflect certain asset distributions from certain of the interconnect
partners to their stockholders and assumption of certain liabilities prior to
the acquisitions consisting of:
Cash....................................................... 72,000
Property and equipment..................................... 17,800
Long-term debt............................................. 2,600
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CAPITALIZATION
The following table sets forth, as of March 31, 1999, the cash, long-term
debt, including current maturities, and capitalization of (1) LORECOM on an
actual basis, (2) the interconnect partners on an historical combined basis and
(3) LORECOM on a pro forma combined basis to give effect to the acquisitions and
the offering and the application of the estimated net proceeds therefrom. This
table should be read in conjunction with the Unaudited Pro Forma Combined
Financial Statements of LORECOM and the related notes included elsewhere in this
prospectus.
MARCH 31, 1999
------------------------------------------------
INTERCONNECT PARTNERS LORECOM
LORECOM HISTORIC PRO FORMA AS
ACTUAL COMBINED ADJUSTED
--------- --------------------- ------------
Cash.............................................. $ 28,981 $ 293,445 $ 5,306,900
========= ========== ===========
Long-term debt; including current portion(1):..... 32,221 848,026 882,847
Stockholders' equity:
Preferred Stock: $.01 par value, 500,000 shares
authorized: no shares issued and
outstanding.................................. -- -- --
Common Stock: $.01 par value, 4,500,000 shares
authorized: 760,950 shares issued and
outstanding, LORECOM; 2,456,632 shares issued
and outstanding, LORECOM pro forma as
adjusted..................................... 7,610 8,938 27,417
Additional paid-in capital...................... 492,400 185,952 19,141,343
Retained earnings (deficit)..................... (321,800) 1,399,441 (321,800)
--------- ---------- -----------
Total stockholders' equity.............. 178,210 1,594,331 18,846,960
--------- ---------- -----------
Total debt and capitalization........... $ 210,431 $2,442,357 $19,729,807
========= ========== ===========
- ---------------
(1) For a description of each company's debt, see the notes to financial
statements of the interconnect partners included elsewhere in this
prospectus.
USE OF PROCEEDS
The net proceeds to LORECOM from the issuance and sale of its common stock
offered hereby, after deducting the underwriting discount and expenses of the
offering, are estimated to be $14.9 million ($17.3 million if the underwriter's
over-allotment option is exercised in full), assuming an offering price of
$11.00 per share. The following table illustrates the sources and uses of the
net proceeds to LORECOM, as estimated by its management, in connection with the
offering:
SOURCE OF FUNDS
---------------
Offering of common stock....... $14,900,000
-----------
Total sources of funds.... $14,900,000
===========
USES OF FUNDS
-------------
Acquisition of the interconnect
partners..................... $10,199,500
Repayment of the debt(1)....... 540,000
Management information
system....................... 500,000
Future acquisitions............ 2,000,000
Working capital................ 1,660,500
-----------
Total uses of funds....... $14,900,000
===========
- ---------------
(1) Consists of balance due under a loan from our principal shareholder.
Advances under the loan agreement were used to complete this offering, to
acquire the interconnect partners and for working capital. The loan is
payable on the earlier to occur of the closing of this offering or December
31, 1999, and bears interest at 10%. See "Certain Relationships and Related
Transactions."
Pending their use, all net proceeds from this offering to be used for the
purchase and installation of a management information system and for future
acquisitions will be invested in federally insured or guaranteed short-term
interest bearing investments.
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DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of LORECOM's common stock. As a result, investors
purchasing common stock in this offering will incur immediate dilution in net
tangible book value per share of common stock. The historical combined net
tangible book value of LORECOM as of March 31, 1999 was approximately
$1,262,897, or approximately $1.47 per share, after giving effect to the
acquisitions. See "Summary Combined Financial Information." The historical
combined net tangible book value per share represents our pro forma net tangible
assets as of March 31, 1999 divided by the number of shares to be outstanding
after giving effect to the acquisitions. After giving effect to the sale of an
estimated 1,600,000 shares that we are offering at an assumed initial public
offering price of $11.00 per share and deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by LORECOM,
our pro forma net tangible book value as of March 31, 1999 would have been
approximately $6,380,641 or approximately $2.60 per share. This represents an
immediate increase in pro forma net tangible book value of approximately $1.13
per share to existing stockholders and an immediate dilution of approximately
$8.40 per share to new investors purchasing shares in the offering. The
following table illustrates this pro forma dilution:
Assumed initial public offering price per share............. $11.00
------
Pro forma net tangible book value per share before the
offering.................................................. 1.47
Increase in pro forma net tangible value per share
attributable to existing stockholders..................... 1.13
------
Pro forma net tangible book value per share after the
offering.................................................. 2.60
------
Dilution per share to new investors......................... $ 8.40
======
The following table sets forth, on a pro forma basis as of June 15, 1999,
the number of shares of common stock purchased from LORECOM, the total
consideration to LORECOM and the average price per share paid to LORECOM by
existing stockholders and the new investors purchasing shares from LORECOM in
the acquisitions and the offering (before deducting underwriting discounts and
commissions and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
Existing stockholders............. 475,950 19.37% $ 500,001 2.29% $1.05
Interconnect partners............. 380,682 15.50% 3,768,750 17.23% 9.90
New Investors..................... 1,600,000 65.13% 17,600,000 80.48% 11.00
--------- ----- ----------- ----- -----
Total................... 2,456,632 100% $21,868,751 100% $8.90
========= ===== =========== ===== =====
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BUSINESS
LORECOM was incorporated in Oklahoma on September 4, 1998, under the name
Advantage Business Solutions, Inc., which changed its name to The Alliance
Group, Inc. on March 17, 1999 and then to LORECOM on May 12, 1999. We formed
LORECOM so that we could consolidate the operations of certain interconnect
companies in Oklahoma. When we refer to LORECOM throughout this prospectus, we
are also referring to The Alliance Group and Advantage Business Solutions.
LORECOM is a subchapter S corporation. We intend to terminate our subchapter S
status prior to the closing of this offering. LORECOM is in the process of
trademarking its name and expects to receive its trademark in the first quarter
of 2000.
LORECOM'S BUSINESS AND GROWTH STRATEGY
Our objective is to become a leader in the next evolution of
interconnection. Interconnect companies have traditionally served as bridges or
integrators between the customers' telecommunications equipment and the public
telephone network. LORECOM anticipates the interconnect's role as a telephone
equipment provider to expand and to include other products and services related
to the merging of voice and data networks. LORECOM also believes that the nature
of the customer-interconnect relationship will put LORECOM in a position to
provide its customers with best-of-class products and services. At the same
time, vendors and suppliers can channel their products through LORECOM to our
consolidated customer base.
LORECOM's primary growth strategy will be the acquisition of interconnect
companies in states contiguous to Oklahoma. Following the acquisitions of the
thirteen original interconnect partners, LORECOM expects to duplicate that model
in the surrounding states. We believe that economies of scale will benefit the
company as it utilizes its growing customer base as a means of distributing
telecommunications products and services.
LORECOM will maintain its market presence in support of traditional
telephone equipment, and will capitalize on as well as take advantage of the
strong demand for emerging technologies in telecommunication equipment and
services. The telecommunications industry has begun to merge traditionally
separate networks of voice and data into one consolidated network. Therefore,
LORECOM will serve as the integrator or bridge between the communications
service provider and the customer.
We believe that LORECOM will gain a significant share of the
interconnect-related telecommunications service business in its regional market.
As part of our business strategy, we will concentrate on:
Providing an integrated portfolio of services. We believe that substantial
demand exists among customers in our target markets for a "one stop" integrated
portfolio of services that satisfies all of their telephone equipment and
related software applications needs. By bundling a wide variety of services and
equipment, we will provide our customers "one stop" shopping for all of their
data networking, data communication and telecommunications needs.
Cross-selling additional services to existing customers. Our interconnect
partners will become multi-service companies. We believe we can increase our
revenues at a relatively minor incremental cost by offering an expanded range of
services to the customers of the interconnect partners. We will have a
substantial reservoir of prospective business customers that are already
familiar with some aspects of our services.
Utilizing the regional customer base. We plan to utilize the consolidated
regional customer base with emerging network providers of voice and data to
provide enhanced services and increase our market presence.
Exploring potential acquisitions and mergers. While we expect to grow
through expanded sales, service and cross marketing efforts, we believe that
there are a number of attractive acquisition candidates in Oklahoma and the
surrounding region.
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Focusing on small and medium-sized customers. We will principally target
small and medium-sized business customers, initially in Oklahoma, and then
throughout the surrounding region. Growth and spending by these companies, which
generally have fewer than 1,000 telephone, modem and fax connections, reflects a
trend in the overall economy which shows that small and medium-sized companies
are acquiring the technology previously available only to larger companies.
These companies are acquiring more sophisticated technology and, as a result,
requiring more service and support coverage.
Marketing and customer service. We will seek long-term service contracts
with our customers and hope to maintain a low customer attrition rate. We intend
to use an information system which provides immediate access to customer
service, facility inventory and billing records, allowing seamless provisioning
of new service, quick response to service problems and inquiries and a single
invoice for all services.
THE MARKET
The telecommunications industry in the United States is immense and robust.
According to the 1998 MultiMedia Telecommunications Market Review and Forecast,
spending on telecommunications equipment, software and services totaled $406.7
billion in 1997, an increase of 11.3% over 1996 -- nearly twice the 5.8 percent
rate of growth of the economy as a whole. The need to transmit larger volumes of
information, the increased spending by small and medium-sized companies, the
desire to integrate voice and data, the need for more compatible equipment
stemming from the development of standards and the search for cost-effective
solutions are among the principal factors fueling the telecommunications
industry.
Services in support of telecommunications equipment. As the installed base
of high-technology telecommunications equipment rises, demand for services
associated with the support of this equipment grows too. According to the 1998
MultiMedia Telecommunications Market Review and Forecast, industry spending for
these services totaled $82 billion in 1997 and increased by 17.3% in 1997. These
services include market segments in which LORECOM will be positioning itself for
future growth, such as:
- Maintenance and repair;
- Logistical support;
- Providing integration of products from different vendors;
- Technical assistance for hardware and software operations;
- End-user training; and
- Information technology consulting.
Equipment-based sales. The Telecommunications Industry Association market
studies indicate that the telephone system markets will continue strong growth
fueled by system replacements, add-on lines, new purchases and shifts away from
older technology. The majority of shipments and the fastest growth have occurred
in companies with fewer than 1,000 telephone, modem and fax connections,
reflecting the trend in the overall economy in which small and medium-sized
companies are acquiring the technology previously available only to larger
companies. This market segment coincides directly with the target market for the
LORECOM partners. LORECOM believes the small to medium-sized companies will
directly influence its future growth.
Agency agreements for local and long distance. Local and long distance
carriers use agents, like the LORECOM partners, as a cost-effective way to sell
services with commissions ranging from approximately 6% to 15% and, generally,
being paid over the life of the contract. Carriers tend to seek out business
partners who can add value by providing access to new market segments. Some of
the LORECOM partners already enjoy a good agency relationship with Southwestern
Bell. LORECOM would like to enter into similar relationships with long distance
carriers and data communication carriers.
In each of our targeted markets, a number of interconnect companies provide
telecommunications services. Consequently, we have numerous opportunities to
acquire companies that will supply us with
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important technical support personnel, as well as management expertise. The
interconnect companies' business customers would provide us with a base for
further expansion, increased cash flow and product line development.
In general, an interconnect company has a client base that is considerably
more stable than the traditional carrier-driven long distance consumer base.
Industry data suggest that interconnect companies have client relationships that
last from five to ten years, or longer. On the other hand, long distance
companies, on average, retain customers for only 18 months. Accordingly, the
foundation of our success will be our partners' relationships with their base of
business customers. Many of the business customers have been satisfied clients
for years, in several cases for as long as 15 or 20 years. The longevity of
these business relationships reflects the integrity and quality of service
provided by the partners.
PRODUCTS AND SERVICES
Each of the interconnect partners has two or three primary lines of
telephone equipment it sells and supports. However, many of them perform
maintenance on three to four times that many different manufacturers' products.
This broad base of experience has allowed the interconnect partners to service a
wide range of customers and gain expertise in a wide array of communication
products.
LORECOM intends to focus on equipment lines that have a broad base of
support with the partners, have a strong market share in target market segments
and provide equipment that can easily be updated to accommodate new and emerging
technologies. LORECOM expects to enter into agreements with some vendors that
would not have been available to the partners without LORECOM. LORECOM has
provided the partners with new products to sell their customers and the
opportunity to compete in additional geographic areas.
We will provide new products and services to our interconnect partners.
Some of the partners will enjoy increased margins in their current equipment
lines due to the combined purchasing power of two or more partners. We plan to
market and support the following products and services through the interconnect
partners:
- Telephone equipment sales and support;
- Telecommunications network design for medium to large companies and
companies having multiple locations, intrastate and/or interstate;
- Remote management and support of customer premise telephone equipment;
- Telephone software applications such as:
(1) Voice mail;
(2) Unified messaging -- combines voice mail, fax and e-mail to allow
users to access all of their messages through the telephone or at
their personal computer;
(3) Interactive voice recognition -- systems that allow individuals to
access information in an organization's computer data base and to
receive that information either verbally, using an ordinary touch-tone
phone, or on a personal computer via the Internet; and
(4) Automated call distribution -- the distribution of incoming calls in
some logical pattern to a group of operators;
- Call center design and installation for telemarketing;
- Video conferencing design and installation;
- Design and installation of standards-based cabling systems for both
copper and fiber;
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- Engineering, installation and administration of data communications
networks used to link computers and peripheral devices; and
- Coordinating and providing local access and long distance telephone
service.
Network provider agency program. LORECOM will secure the local access, long
distance and data communications portion of its business strategy through the
network provider agency program. Rather than committing substantial investments
to build a facilities-based network, initially, LORECOM will secure agency
agreements with leading local exchange carriers or competitive local exchange
carriers and long distance or inter-exchange carrier companies. Later, LORECOM
will have the opportunity to utilize the combined customer base to provide
enhanced network services as a telecommunications reseller, and finally as a
facility-based provider.
Under the agency agreements, we expect to be able to represent the
carriers' mature product lines with the following benefits:
- Extensive service offerings, including enhanced product capabilities;
- Co-branding of the LORECOM name alongside the providers;
- Name recognition and regional marketing support;
- Competitive cost of services, with equal access to direct sales for
promotional and special pricing; and
- Ability to attract and retain top sales representatives which provides
our customers with stable account management.
Targeted business customers that are not currently clients of the partners
may deal with several providers of communication equipment and services. A
typical business customer could employ four or more providers to acquire,
install and maintain voice and data networks. Each of these providers produces
separate invoices, separate contact points for sales and service, and separate
pricing based on specific services rather than solution-based pricing. LORECOM
intends to reduce the number of contacts and provide a single interface for the
customer premise equipment.
A foundational service strategy is to retain customers and increase our
business by maintaining a consistent presence before the customer and being more
responsive to the customer's needs than traditional telephone service providers.
The interconnect partners are not the lowest priced providers and they generally
price their products to permit quality of service and timely response for
support. All of the partners enjoy good working relationships with their
customers and are trusted to provide sound business advice in the
telecommunications area of their businesses.
At this time, we are dependent on Southwestern Bell to provide our local
telephone service. If our customers prefer other providers, we may lose
business. Similarly, we depend on our relationships with, and the success of,
third parties that provide Internet, voice and data services and related
equipment and services. We do not know if we will be able to get these services
on a competitive basis. Our agreements with these third parties are generally
terminable at will. If any of the agreements are terminated, we may not be able
to replace those products or services.
THE INTERCONNECT PARTNERS
Initially the LORECOM partners will continue to be primarily responsible
for their individual businesses and will keep their business relationships with
existing customers. Each partner presently operates as a traditional
interconnect, bridging the customer to the public telephone network through
equipment sales and service. The interconnect partners can combine their sales
and technical abilities, enabling each of them to provide products and services
which are not presently available to them individually. For example, as of the
date of this prospectus, four of the interconnect partners sell and install
equipment related to data communications. Upon completing the acquisitions and
forming
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LORECOM, each of the thirteen partners will be able to provide customers with
data communications services.
As the following descriptions indicate, LORECOM's interconnect partners
represent a diverse range of telephone products and services and related
software applications that complement one another and can be used to build a
more complete and solid business base.
Able Communication Incorporated: Able was incorporated in 1987 and is based
in Oklahoma City, Oklahoma. Able provides business communications solutions to
small and medium sized business customers. Able is a preferred dealer for the
Comdial product line and coordinates the local access services and data cabling
requirements for its customers. Able has three employees.
Access Communications Services, Inc.: Access Communications was formed in
1986 and is based in Oklahoma City, Oklahoma. Access has 12 employees who sell,
install and maintain a wide range of telecommunication products and services.
Access is a Panasonic DBS, Mitel and Harris dealer. Access also designs,
installs and maintains long distance inter-exchange switch facilities.
American Telcom, Inc.: American Telcom was formed in 1987 and is based in
Del City, Oklahoma. American Telcom currently has 11 employees who sell, install
and maintain telecommunications systems as well as copper and fiber cabling
systems. American services its clients communications needs with a wide variety
of products and services. American is an authorized Toshiba and NEC dealer.
American is also a Southwestern Bell local service and wireless agent and is an
agent for TSR and Pagenet paging services.
Banner Communications, Inc.: Banner was established in 1987 and is based in
Tulsa, Oklahoma. Banner has 13 employees and is a leading provider of voice and
data communicators in northeastern Oklahoma. Banner is a Mitel "Elite" dealer, a
Telrad dealer, an NEC associate, an AVT dealer, an NT Right Fax dealer, a
Spectralink Wireless dealer and a Lucent Data Value Added Reseller. Banner is
also an authorized agent of Southwestern Bell Telephone Company.
Commercial Telecom Systems, Inc.: CTS was incorporated in 1988 and is based
in Oklahoma City, Oklahoma. CTS has eight employees who sell, install and
maintain telecommunications and data equipment for business customers. CTS is a
Newbridge direct distributor that provides digital cross connects, access
concentrators and ATM switches. CTS specializes in telemedicine and hospital
environments.
Communication Services, Inc.: CSI was formed in 1987 and is based in
Shawnee, Oklahoma. CSI has 12 employees who sell, install and maintain
telecommunications systems and digital cellular services. CSI serves the greater
Shawnee area including Oklahoma City with Comdial and Panasonic. CSI is a
premiere authorized agent for Southwestern Bell Telephone Company and
Southwestern Bell wireless. CSI also serves as a cellular service retailer.
Electrical & Instrument Sales Corp. d/b/a EIS Communications: EIS was
formed in 1975 and is located in Tulsa, Oklahoma. EIS is an authorized dealer
for Nortel Norstar and Meridian products and is also a Lucent Technologies
representative. EIS also provides Polycom video teleconferencing services and
private label paging services. The telecom and paging division of EIS, which are
the subject of EIS's asset purchase agreement with us, employs nine people.
Nobel Systems, Inc.: Nobel was formed in 1984 and is based in Oklahoma
City, Oklahoma. Nobel currently has 14 employees who sell, install and maintain
telecommunication systems. Nobel is an authorized Comdial, Key-Voice and Active
Voice dealer. Nobel also installs equipment in support of local and wide area
networks.
Perkins Office Machines, Inc.: Perkins was founded in 1982 and is based in
Lawton, Oklahoma. Perkins began selling telephone equipment in 1989. Perkins
sells, installs and maintains telephone systems and voice mail systems. Perkins
also provides data cabling services for its customers. Perkins has three
employees.
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31
The Phone Man Sales and Services, Inc.: The Phone Man was incorporated in
1987 and is based in Oklahoma City, Oklahoma. The Phone Man installs, services
and maintains telephone systems and communication cabling systems. Some of The
Phone Man's customers include a large hospital complex and a multi-location
financial institution.
Telkey Communications, Inc.: Telkey was incorporated in 1984 and is based
in Tulsa, Oklahoma. Telkey has 14 employees who sell, install and maintain
telephone systems. Telkey is the exclusive Tadiran dealer in the state of
Oklahoma. Telkey's customer base includes large school systems which require a
complex network design. Telkey is also an agent for Southwestern Bell and
Southwestern Bell wireless.
Terra Telecom, Inc.: Terra Telcom was founded in 1980 and is based in
Tulsa, Oklahoma. Terra employs 16 people who install and service voice and data
equipment for its customers. Terra was the first ITT/Cortelco PBX authorized
distributor in the United States. Terra is also an authorized Toshiba dealer and
an authorized Southwestern Bell agent.
Travis Business Systems, Inc.: Travis Business Systems was formed in 1988,
and is headquartered in Oklahoma City, Oklahoma. Travis is the exclusive
distributor in Oklahoma for Lanier Worldwide's voice products division and is a
Lucent and Inter-tel telephone distributor. Travis is also an authorized
Southwestern Bell agent. Travis employs 39 people and has offices in Tulsa,
Dallas, Houston, San Antonio and Springdale, Arkansas featuring its Digital
Communications Recording Division for the rapidly expanding call center market.
Travis is the third largest interconnect in Oklahoma and was recently recognized
as the 31st fastest growing company in Oklahoma.
THE ACQUISITIONS
The agreements. LORECOM entered into definitive agreements with each of the
thirteen interconnect partners. LORECOM will acquire the assets of Able
Communication Incorporated, Electrical & Instrument Sales Corp. and The Phone
Man Sales and Service, Inc. by asset purchase and will acquire the assets of the
other ten partners by merger. Each acquisition's closing is subject to the
closing of this offering and several standard conditions, including accuracy of
the representations and warranties made, performance of covenants included in
the agreements, execution of employment and consulting agreements by certain
employees of the interconnect partners and no material adverse change in the
results of operations, financial condition or business of the interconnect
partners. Additionally, any or all of the acquisition agreements may be
terminated before this offering closes:
- By the mutual consent of the boards of directors of LORECOM and the
affected interconnect partner;
- If the offering and the acquisitions are not closed by May 31, 1999;
- By the interconnect partner if its schedules to its acquisition agreement
are amended to reflect a material adverse change and such amendment is
rejected by LORECOM; or
- If a material breach or default under the agreement by one party occurs
and is not waived.
We cannot assure you that the conditions to the closing of all the
acquisitions will be satisfied or waived or that each acquisition will close.
Commercial Telecom Systems, Inc. has agreed to extend the May 31, 1999 deadline
to July 31, 1999. All other interconnect partners have extended the May 31, 1999
deadline to the date LORECOM terminates its efforts to register its common
stock. For information about the employment and consulting agreements to be
entered into by stockholders of the interconnect partners, see the "Employees"
paragraph on page 32 of this "Business" section.
The consideration. The aggregate consideration LORECOM is paying in the
acquisitions is approximately $13.97 million, which is to be paid $10.2 million
in cash and $3.77 million in LORECOM common stock. The common stock issued as
purchase consideration will be valued at the initial public offering price less
a 10% discount due to sale and transferability restrictions. The actual number
of shares of common stock to be issued in the acquisitions depends on the
initial public offering price. Each merger
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32
and asset purchase agreement provides that the number of shares of common stock
to be issued will be calculated by dividing the initial public offering price
into the designated dollar amount. LORECOM will also assume the current
liabilities and long-term debt of the partners, issue a limited number of
warrants and permit certain distributions to be made by the interconnect
partners to their stockholders prior to closing. LORECOM determined the amount
of consideration it would pay in the acquisitions in arm's length negotiations
between its representatives and representatives of each of the respective
companies.
The following table summarizes information relating to the consideration
payable to the interconnect partners pursuant to the mergers and asset
acquisitions:
AMOUNT OF PURCHASE PRICE PAID IN
-----------------------------------------------------------
CASH STOCK(1)
----------- ---------------------------------------------
VALUE AT OFFERING DISCOUNTED VALUE
COMPANY PRICE ($11.00 PER SHARE) ($9.90 PER SHARE)
- ------- ------------------------ ------------------
Able Communication Incorporated............. $ 15,000 $ 50,000 $ 45,000
Access Communications Services, Inc. ....... 600,000 300,000 270,000
American Telcom, Inc. ...................... 850,000 250,000 225,000
Banner Communications, Inc. ................ 1,275,000 225,000 202,500
Commercial Telecom Systems, Inc. ........... 1,300,000 100,000 90,000
Communication Services, Inc. ............... 200,000 275,000 247,500
Electrical & Instrument Sales Corp.......... 1,250,000 500,000 450,000
Nobel Systems, Inc. ........................ 385,000 325,000 292,500
Perkins Office Machines, Inc. .............. 187,000 125,000 112,500
The Phone Man Sales and Service, Inc. ...... 37,500 37,500 33,750
Telkey Communications, Inc. ................ 650,000 350,000 315,000
Terra Telecom, Inc. ........................ 1,050,000 450,000 405,000
Travis Business Systems, Inc. .............. 2,400,000 1,200,000 1,080,000
----------- ---------- ----------
TOTAL:............................ $10,199,500 $4,187,500 $3,768,750
=========== ========== ==========
- ---------------
(1) Total purchase price paid in LORECOM stock is the discounted value of the
LORECOM stock, or $3,768,750. The number of shares to be issued, however, is
based on the initial public offering price of the LORECOM stock. As a
result, the number of shares to be issued to the interconnect partners is
approximately 380,682, or $4,187,500 divided by $11.00 per share.
Other consideration.
Cash and stock. The agreement between LORECOM and Electrical & Instrument
Sales Corp. permits an increase in the purchase price by the amount of net
current assets existing on the date of closing, but not to exceed $150,000.
Electrical & Instrument's cash consideration could also increase by an
additional $150,000 if its gross revenues exceed $2,350,000 for the twelve
months ended May 31, 1999. Electrical & Instrument's total consideration
received will also increase by an additional $50,000 in cash, or $100,000 in
LORECOM stock, as purchase price for its paging business. LORECOM expects that
Electrical & Instrument will meet the net asset and gross revenue tests, and
will elect to take cash in consideration for its paging business. As a result,
the cash consideration reflected as payable to Electrical & Instrument in the
table above has been increased by $350,000.
Debt. LORECOM is assuming certain current liabilities and long-term debt of
the partners. As of March 31, 1999, total assumed current liabilities would have
been approximately $2.37 million and total assumed long-term debt would have
been approximately $425,000, including the assumed debt of a shareholder of
Communication Services, Inc., which was approximately $24,000 on March 31, 1999.
Although the debt is in the name of the shareholder, the proceeds were used for
the benefit of Communications Services, Inc.
Other distributions. Banner Communications, Inc. and Perkins Office
Machines, Inc. are Subchapter S corporations. Prior to the closing of the
acquisitions, both Banner and Perkins will distribute cash to
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their stockholders, not to exceed the stockholders' individual tax liabilities
resulting from the partners' 1998 operations. The distribution for Banner was
$9,035 and the distribution for Perkins is expected to be no more than $10,000.
Prior to closing, Commercial Telecom Systems, Inc. will distribute cash to its
stockholders in an amount equal to the excess of its net worth on the date of
closing over its net worth existing on December 31, 1998.
Able Communication Incorporated, Access Communications Services, Inc.,
American Telcom, Inc., Banner Communications, Inc. and Travis Business Systems,
Inc. will each distribute certain automobiles to their stockholders prior to
closing. The stockholders will assume all liabilities and obligations related to
the automobiles for a net distribution of approximately $60,000. Access will
also distribute a time-share condominium to a shareholder prior to closing. The
time-share is valued at approximately $10,500. Also prior to closing, American
Telcom will cancel notes receivable from its stockholders and distribute cash
and certificates of deposit in the aggregate amount of $99,477.
LORECOM will issue to Commercial Telecom Systems, Inc. 10,000
non-transferable, four-year warrants to purchase common stock exercisable at the
initial public offering price. The warrants are exercisable commencing one year
after the closing of the acquisitions and carry registration rights similar to
those provided to shareholders of the interconnect partners.
FAIRNESS OPINION OF HOULIHAN SMITH & COMPANY, INC.
On , 1999, Houlihan Smith & Company, Inc., a National
Association of Securities Dealers member and independent investment banker,
delivered its written opinion that, as of such date and subject to certain
assumptions, factors and limitations, the consideration to be paid to the
shareholders of the interconnect partners was fair to LORECOM and its
shareholders, from a financial point of view. Houlihan's opinion was based upon
market, economic, financial and other conditions as they existed and could be
evaluated as of the date of their opinion. Events and conditions subsequent to
such date have not been considered and may materially alter the assumptions
relied upon in the conclusions stated by Houlihan in its opinion. Houlihan has
no obligation to update, revise or reaffirm its fairness opinion and LORECOM has
no intent to seek any such updating, revisions, or reaffirmation by Houlihan.
LORECOM engaged Houlihan on a non-contingent fee basis.
COMPETITION
Our business is highly competitive. Many companies provide the same
products and services that we provide, and many of those companies have greater
capital resources and more established reputations than LORECOM. Although each
of our partners have competed in the interconnect industry, we have not done so.
We do not have an established reputation in the industry, and our competitive
position remains to be determined. We will compete primarily on the basis of
pricing, quality of service and customer loyalty. Our ability to compete
effectively will depend on our ability to maintain high quality services at
prices generally equal to or below those charged by our competitors. If our
competitors lower their prices or we are forced to lower ours, we will be
adversely affected.
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements. They may also be able to
devote greater resources to the development, promotion and sale of their
products and services than we can. We do not believe that a significant number
of other companies provide single-source solutions for the data networking, data
transport and telecommunications requirements of our target customers, but
numerous competitors can provide one or more of those requirements. Many of our
competitors also have long-standing relationships with their customers and
greater name recognition than LORECOM. Our products and services do not
necessarily have any particular competitive advantage over other industry
participants. We believe we are more capable of satisfying our customers' needs
than larger providers which are traditionally impersonal and slow to respond to
the customers' needs. Additionally, we are better equipped than other smaller
service providers because these smaller competitors generally do not have the
financial capability to provide a complete range of telecommunication products
and services.
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PROPERTY
Our principal administrative, sales, marketing, consulting, education,
customer support and research and development facilities are located at 12101
North Meridian, Oklahoma City, Oklahoma 73120. LORECOM currently occupies an
aggregate of approximately 2,200 square feet of office space in the Oklahoma
City facility that is leased on a month-to-month basis. Our liability for rent
and overhead allocations are currently annualized at $18,296.00 per year. We
expect to execute a two-year lease for approximately 5,700 square feet of space
on or before July 15, 1999. Our monthly lease cost is expected to be $4,950.00
per month. Once LORECOM acquires the interconnect partners, it will be
responsible for a total of nine leased facilities in Oklahoma and will own one
facility in Shawnee, Oklahoma. We believe that these facilities will exceed our
current and future requirements and that certain of these leases will be
terminated in accordance with their terms.
EMPLOYEES
As of April 1, 1999, LORECOM had six full-time employees. None of our
employees are currently represented by a collective bargaining agreement. We
believe that we enjoy good relationships with our employees. The interconnect
partners currently have approximately 157 full-time employees, including 19
members of management, 46 in sales and customer service, 71 in technical support
and 21 in finance, administration and operations. None of these employees are
currently represented by a collective bargaining agreement. We expect that we
will have good relationships with employees of the interconnect partners upon
their acquisition.
Several of the interconnect partners' stockholders will execute employment
or consulting agreements with LORECOM. These agreements are intended to ensure
that LORECOM retains the goodwill created by each interconnect partner's
relationship with its customer base. The employment agreements have terms of
three years, provide for aggregate annual base salaries of approximately
$900,000, provide for bonuses generally based on performance and include
noncompete provisions. The consulting agreements have terms of two years and
have aggregate annual payments of $150,000. Consultants will be bound by the
two-year noncompete provisions set forth in the acquisition agreements with each
of the interconnect partners.
To be successful, we must keep the services of a small number of key
management and operating personnel, including certain sales, technical and
marketing personnel. If one or more of these people joins a competitor or
otherwise competes against LORECOM, it could materially hurt our business. If we
lose key people, we may not be able to hire adequate replacements. We intend to
purchase a key-man life insurance policy on Mr. Travis.
Competition for personnel in the telecommunications and data communications
industries is intense. In addition, new employees generally require substantial
training. This training will require substantial resources and management
attention.
LEGAL PROCEEDINGS
Neither LORECOM nor the interconnect partners are involved in any material
legal proceedings nor are they a party to any pending or threatened claim that
could reasonably be expected to have a material adverse effect on LORECOM's
financial condition or results of operations.
WHERE YOU CAN FIND MORE INFORMATION
Because this is our first public offering, we have never been subject to
the reporting requirements of the Securities and Exchange Act of 1934. We filed
a registration statement on Form SB-2 with the Securities and Exchange
Commission under the Securities Act of 1933 describing and discussing the common
stock offered in this prospectus. As allowed by the Securities and Exchange
Commission, this prospectus, which is part of the registration statement, does
not contain all of the information included in the registration statement.
Additionally, statements we make in the prospectus about contracts and other
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documents are not necessarily complete. For more information about LORECOM and
our common stock, you should read the registration statement and any attached
exhibits and schedules.
You can read and copy our registration statement and any other materials we
file with the Securities and Exchange Commission at the Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 or on the
Internet at http://www.sec.gov. You can get information about the operation of
the public reference room by calling the Commission at 1-800-SEC-0330. You may
also access information regarding us through our web page on the Internet at
http://www.lorecom.com.
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MANAGEMENT'S PLAN OF OPERATION
OVERVIEW
You should read the following discussion and analysis in conjunction with
the Unaudited Pro Forma Combined Financial Statements and related notes found
elsewhere in this document.
LORECOM is an Oklahoma corporation and was incorporated on September 4,
1998. With limited exceptions, LORECOM has not started its business operations.
In early 1999, LORECOM executed two contracts to provide services. LORECOM
effectively assigned all benefits and obligations under these contracts to one
of the interconnect partners. LORECOM does not have any significant assets and
has not engaged in any material business operations relating to service
associated with the maintenance and installation of telephone equipment. Our
activities have effectively been limited to acquiring the interconnect partners,
addressing organizational matters, conducting research and due diligence and
preparing and filing the registration statement of which this prospectus is a
part.
PURPOSE OF ORGANIZATION
We organized LORECOM to consolidate and continue the operations of thirteen
interconnect partners in Oklahoma in order to (1) take advantage of economies of
scale, (2) position the partners' combined customer base as a channel for new
products and services and (3) become a leader in the next evolution of
interconnect companies by adding value as the bridge between service providers
and the business market. If successful, LORECOM will gain a competitive
advantage in its operating markets, which will allow LORECOM to expand its base
of operations to the contiguous states surrounding Oklahoma.
PLAN OF OPERATION
Our plan of operation throughout the next twelve months includes (1)
maintenance of current operations within the individual interconnects, (2)
development and installation of supporting information systems, (3)
implementation of new service offerings to the customer base, (4) consolidation
of certain operating facilities within the two major metropolitan areas serviced
by LORECOM and (5) acquisition of additional interconnects initially in Texas,
Arkansas, Missouri or Kansas.
We will retain at least one of the former business owners as manager in
their respective base of business to be responsible for maintaining revenue and
profitability. Management is reinforcing a business as usual directive for the
first few months in order to manage the transition process for the partners'
customers and vendors.
LORECOM has contracted with an organizational and systems design consultant
to document current processes and deliver a recommendation for best practice in
sales and service management. LORECOM is in the process of reviewing information
systems to support sales and service as well as financial system requirements,
project management, call center/technical support and the Internet interface for
internal and external users. LORECOM is also researching the database
requirements to support the consolidation of customer information to include
customer premise equipment, system configuration, cabling system, access lines,
type of services and software applications.
LORECOM intends to implement new service offerings immediately following
the acquisition process. LORECOM will prepare the sales staff to offer
company-wide local access and long distance services within the first 60 days of
consolidated operations. Data communication services, like IP, Frame Relay and
ATM, local area and wide area network support and Internet access will soon
follow (some individual partners currently provide such services). Additional
offerings like unified messaging, interactive-voice response and other
sophisticated voice applications will be marketed as sales and technical staff
is qualified to support the products.
We are currently reviewing plans to consolidate technical, sales and
support staff within our areas of operation, which include Oklahoma City, Tulsa,
Shawnee and Lawton. We have included the partners in
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operational task groups to determine the most efficient means of consolidating
and the most effective means of maintaining customer support and employee
morale.
After we complete the offering and the initial thirteen acquisitions, we
will utilize a similar acquisition model in the states surrounding Oklahoma.
Already, companies in Texas, Arkansas and Missouri have demonstrated interest in
joining LORECOM. Much like the original partners, these companies expressed
interest in merging due to the accelerating change in technology and the lack of
access to adequate capital to fund growth.
On a combined basis, the interconnect partners generate sufficient cash
flow to satisfy our expected cash requirements for on-going operations. Proceeds
from this offering will provide the additional cash needed to complete the
consolidation and integration of the interconnect partners. Our only foreseeable
need for additional capital would be to fund the consummation of any additional
significant acquisitions. We intend to pursue one or more significant
acquisitions within the next 12 months, and as a result, expect to raise
additional capital by issuing debt or equity in either a public or private
offering or incurring bank financing.
Our management expects the consolidation phase of our operations to last
approximately six to twelve months. Barring any unexpected delays, we expect to
consolidate the financial and administrative functions of all of the
interconnect partners within this time frame. LORECOM will operate each
partner's base of business, while one of that partner's original owners serves
as business manager. Each partner will be responsible for its own base of
business, much like a professional services company. Operating in this manner
will allow LORECOM to retain the partners' customers, reduce implementation
barriers to new service offerings and provide coordination for changes in policy
and procedure.
We do not anticipate any significant reduction in employees. The growth
that we expect to experience should provide opportunities for existing
employees, allowing them to accept new or different responsibilities. At the
same time, these opportunities may require the employees to obtain additional
training. We have already started our training program in order to ensure
continued professional training and technical staff certifications. We are also
considering using state vocational-technical institutions to ensure adequate
staffing in critical support areas, such as engineering, installation and
support of voice and data networks.
IMPACT OF YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs using two digits
rather than four digits when defining the year in question. It is possible
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This mistake in recognition could result in system failures
or miscalculations causing disruptions of operations, including a temporary
inability to process transactions, send invoices or engage in similar routine
business activities.
Company readiness. LORECOM's and the interconnect partners' information
systems are generally maintained on personal computers using packaged software
from outside vendors. Management believes that such systems are year 2000
compliant. If not, management believes that most of the tasks performed by the
systems can be temporarily performed manually, and that any costs necessary to
upgrade or replace noncompliant systems will be insignificant.
Readiness of others. It is possible that noncompliance with year 2000
issues of other companies, including but not limited to the regional or national
telephone network or power grid, could delay LORECOM's provision of services to,
or receipt of revenues from, its customers. LORECOM and the interconnect
partners do not provide any assurance of year 2000 compliance for the equipment
they sell or install. Upon request, the interconnect partners have provided
their customers year 2000 compliance documentation from the equipment
manufacturers. LORECOM will continue to communicate with the telephone equipment
manufacturers to coordinate year 2000 compliance.
The interconnect partners regularly warrant the equipment and software they
sell. LORECOM is presently investigating its potential liability for
noncompliant equipment and software which is (1) under a
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manufacturer's warranty, (2) under an extended warranty of the interconnect
partner, or (3) not under a warranty of any kind. Presently, LORECOM does not
believe it will have any material liability under these warranties.
Contingency plans. LORECOM has no contingency plan for conversion of its
own equipment or business application software, and none will be formulated.
With regard to contingency plans for the failure, or possible failure, of
others, each major source of revenues or services will be handled on a case-
by-case basis, with full preparedness by December 31, 1999.
Risks. If any equipment or software of third-party providers does not
recognize the difference between 1900 and 2000, we may incur unexpected expenses
to remedy the problem. Additionally, a regional or national failure in the
telephone network or power grid could prevent LORECOM from servicing its
customers and generating revenues. LORECOM does not have a contingency plan if
any of these events occur.
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MANAGEMENT AND PRINCIPAL STOCKHOLDERS
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information concerning each of
LORECOM's directors and executive officers and certain other significant
employees. The board of directors presently consists of one director serving in
one of the three classes of directors serving staggered terms. LORECOM has
nominated six (6) additional directors to fill all three classes effective upon
closing this offering. Directors and executive officers of LORECOM are elected
to serve until they resign or are removed or are otherwise disqualified to
serve, or until their successors are elected and qualified. Directors of LORECOM
are elected at the annual meeting of the stockholders and the board of directors
appoints the officers shortly after each annual meeting of stockholders.
Following the closing of this offering, LORECOM will maintain at least two
independent directors on its board of directors.
DIRECTOR
TERM
NAME AGE(1) POSITION(S) EXPIRES
- ---- ------ ----------- --------
DIRECTORS AND OFFICERS
Ricky Naylor........... 45 Chairman of the Board; Director 2000
Larry Travis(2)........ 52 President and Chief Executive Officer; Director 2002
William J. Hartwig..... 43 Vice President of Operations and Chief Technical Officer
Joseph O. Evans(3)..... 45 Chief Financial Officer and Secretary; Director 2001
Debra G. Morehead...... 38 Chief Accounting Officer
Wesley E.
Cantrell(3).......... 64 Director 2002
Wayne Stone(3)......... 49 Director 2000
John J. Wiesner(3)..... 61 Director 2001
Andrew May(3).......... 41 Director 2002
SIGNIFICANT EMPLOYEES
Roger Clanton.......... 51 Vice President -- Sales and Marketing
Becky Brittain......... 33 Major Accounts Manager
Don DeWald............. 42 Network Technical Services Manager
- ---------------
(1) Ages as of June 15, 1999.
(2) Mr. Travis is presently President of Travis Business Systems, Inc., an
interconnect partner. Mr. Travis has agreed to be the President and Chief
Executive Officer and a director of LORECOM upon completion of this offering
and the acquisitions.
(3) Messrs. Cantrell, Evans, Stone, Wiesner and May have agreed to serve as a
director of LORECOM upon completion of this offering and the acquisitions.
Ricky Naylor, Chairman of the Board and Director. Mr. Naylor has served as
a director of LORECOM since September 8, 1998, and as Chairman of the Board of
LORECOM since March 26, 1999. Mr. Naylor has devoted all his efforts to serving
as President and a director of each of the Naylor Companies during the past five
years, or since inception of the companies. The Naylor Companies presently
include Naylor Concrete, Naylor Concrete and Steel, Milestone General
Contractors, Milestone Real Estate, Interstate Consulting and Prestige
Investments, Inc. Mr. Naylor serves as Chairman of the board of the National
Christian Collegiate Athletic Association.
Larry Travis, President and Chief Executive Officer and Director. Mr.
Travis has served as President and Chief Executive Officer of Travis Business
Systems since 1988 and has served as President of Digital Transcription Systems,
Inc. since 1992. Mr. Travis is on the board of directors of Milner Business
Products, a computer and telephone interconnect company in Atlanta, Georgia. Mr.
Travis is also a board member of The Independent Distributor Association and has
served as President of the Independent Distributor Association twice. Mr. Travis
is a current board member of Medical Transcription Industry
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Alliance and is a former Vice President National Sales Manager for Lanier
Worldwide in Atlanta, Georgia. Mr. Travis is a graduate of Texas A&M Commerce
with a BBA in marketing.
William J. Hartwig, Vice President of Operations and Chief Technical
Officer. Mr. Hartwig has served as Vice President of Operations and Chief
Technical Officer of LORECOM since May 10, 1999, served as President and Chief
Operating Officer of LORECOM from March 26, 1999 to May 10, 1999, and served as
Vice President -- Operations of LORECOM from November, 1998 to March 26, 1999.
From 1991 to 1998, Mr. Hartwig served as Systems Development Manager for Braum's
Ice Cream and Dairy Stores. Mr. Hartwig also managed Braum's telecommunications
requirements over a five-state area, with over 270 locations. Mr. Hartwig also
installed technologies related to networking, cabling, telecommunications and
personal computer hardware, including the installation and maintenance of token-
ring, Ethernet and TCP/IP topologies, Unix, Novell, and NT Networks, Cisco,
3Com, Ascend routers, PBX and voice mail systems, T1 and ISDN communications and
structured cabling systems. Prior to his time at Braum's, Mr. Hartwig was
Contracting and Billing Manager for AAR Oklahoma, Inc. where he managed a
department that provided contract administration, job costing, contract billing
and sales accounting for five aviation division offices. Mr. Hartwig holds a
B.S. in Business Administration from the University of Central Oklahoma and also
has earned several technical certifications.
Joseph O. Evans, Chief Financial Officer and Secretary and Director. Mr.
Evans has served as Chief Financial Officer and Secretary of LORECOM since
November, 1998. From 1997 to 1998, Mr. Evans served as Senior Vice President and
Financial Advisor of Energy Lending for the First National Bank of Commerce in
New Orleans, Louisiana. Prior to 1997, Mr. Evans practiced as an audit partner
of Deloitte & Touche LLP, with an emphasis in SEC practice. From 1990 to 1997,
Mr. Evans served as an Associate Professional Practice director for the Oklahoma
practice of Deloitte & Touche LLP, related to technical accounting and auditing
issues and quality control. Mr. Evans is a Certified Public Accountant and holds
a B.S. in Accounting from the University of Central Oklahoma.
Debra G. Morehead, Chief Accounting Officer. Ms. Morehead has served as
Chief Accounting Officer of LORECOM since September 8, 1998. Ms. Morehead has
served as controller of The Naylor Companies since May of 1998. From June 1993
to May 1998, Ms. Morehead was a partner at the accounting firm of Olson &
Potter, CPA's. Ms. Morehead is a Certified Public Accountant and received a B.S.
in accounting from the University of Central Oklahoma.
Wesley E. Cantrell, Director. Mr. Cantrell is President and CEO of Lanier
Worldwide, Inc. based in Atlanta. Lanier Worldwide, Inc., with revenues in
excess of $1.5 billion annually is one of the world's largest providers and
designers of document management solutions and services. Lanier globally markets
a wide array of tailored DOCutivity(TM) solutions, including color and digital
copiers, facsimile systems, digital dictation systems, print on demand
solutions, Systems integration and fully integrated healthcare information
management systems. Mr. Cantrell was selected to the Board of Directors of
Oxford Industries, formerly Lanier's parent company in 1974 and was named
President of Lanier Business Products in 1977. Mr. Cantrell was President of
Lanier when the company was acquired by Harris Corp. in 1983. In 1987, he was
named President and CEO of Harris/3M Document Products, Inc., a joint venture
between Harris and the 3M Company. Mr. Cantrell was named to his current
position and elected an officer of Harris Corporation in 1989. Mr. Cantrell
serves on the Board of Directors of First Union National Bank of Georgia in
Atlanta and Ann Taylor Stores in New York.
Wayne Stone, Director. Mr. Stone is currently a principal of Ward-Stone
Company, a real estate development firm. From October 1997 to August 1998, Mr.
Stone served as Chairman, President and Chief Executive Officer of Bank of
Arkansas. From 1994 to 1997, Mr. Stone served as President of Bank of Oklahoma,
Oklahoma City, Oklahoma, Financial Corporation. Mr. Stone was previously
President and Chief Executive Officer of Founders Bank and Trust Company in
Oklahoma City, Oklahoma. He has also served as a director of Bank of Oklahoma,
Tulsa, Oklahoma and as Executive Vice-President of Management Associates, Inc.,
a bank acquisition and management company.
John J. Wiesner, Director. Mr. Wiesner has been a business consultant and a
director of Stage Stores, Inc. since July 1997. Mr. Wiesner serves on Stage's
audit committee. Mr. Wiesner held various
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positions at C.R. Anthony, including Chairman of the Board and President, from
1987 to 1997. Mr. Wiesner also serves as a director of Lamonts Apparel, Inc. and
Elder-Beerman Department Stores, Inc. In each case, Mr. Wiesner serves on the
compensation committee.
Andrew W. May, Director. Mr. May has been in the investment industry for 24
years and has benefited from significant experience ranging from money
management to investment banking. Currently, Mr. May is the owner of May Capital
Management L.L.C., which is the General Partner to The May Strategy Fund LP. Mr.
May was a founder of ComVest Partners Inc., a Dallas, Texas-based institutional
research and investment banking and broker-dealer specializing in the
telecommunications and networking arenas. He served as President of ComVest from
1995 until 1999. Mr. May was Managing Director in charge of institutional sales
at William K. Woodruff & Co. Inc., an institutional research boutique from 1983
to 1995. Between 1975 and 1983, Mr. May was employed by Ivory & Sime, PLC, an
investment management organization based in Edinburgh, Scotland. Mr. May was
employed in various capacities of which the final four years was as a portfolio
manager/research analyst specializing in high growth companies, primarily in the
technology sectors.
Roger Clanton, Vice President Sales and Marketing. Mr. Clanton has served
as Vice President Sales and Marketing for LORECOM since March 1, 1999. Mr.
Clanton was with AT&T prior to joining LORECOM, where he managed the
implementation of advanced communication services for a critical large market
account. From 1987 to 1998, Mr. Clanton served as Major Account Manager for
Sprint. During his tenure with Sprint, he managed Sprint's largest accounts in
Oklahoma City and Tulsa, Oklahoma.
Becky Brittain, Major Accounts Manager. Ms. Brittain became Major Account
Manager for LORECOM on March 1, 1999. Prior to that date, Ms. Brittain was
employed as Major Account Executive for Williams Communications and Major
Account Manager for GTE, Inc. Ms. Brittain also served as National Accounts
Manager, System Designer and Management Information Systems with Nortel, Siemens
Rolm and MCI.
Don DeWald, Network Technical Services Manager. Mr. DeWald was appointed
Network Technical Services Manager on March 1, 1999. Prior to that date, Mr.
DeWald was Manager of Engineering Services for Global Data. From 1996 to 1997,
Mr. DeWald served as Systems Engineer for Precision Computer Services in
Oklahoma City. From 1992 to 1996, Mr. DeWald served as Technology Trainer and
Developer for Wave Technologies. As Technology Trainer and Developer, Mr. DeWald
wrote several training manuals on topics on computer networking and TCP/IP and
was selected by Wave to teach their initial offerings of administration and
advanced administration for Novell NetWare. Mr. DeWald is a Master Certified
Novell Engineer and a Microsoft Certified Systems Engineer.
The board of directors will have two standing committees, which are the
Compensation Committee and the Audit Committee. Each Committee will be composed
of at least two independent directors. Upon closing of this offering, the board
of directors will appoint independent directors to the Compensation and Audit
Committees and determine the duties of each committee.
COMPENSATION
Executive Officers. LORECOM has not conducted any significant operations
except those related to the acquisitions and this offering. In 1998, LORECOM
paid its Chief Executive Officer, David W. Aduddell, $33,615, plus a car
allowance. In 1999, LORECOM paid David Aduddell $44,500, plus a car allowance.
See "Certain Relationships and Related Transactions" for a discussion of why Mr.
Aduddell is no longer LORECOM's Chief Executive Officer. In 1999, we will pay
our continuing executive officers and officer nominees in accordance with their
employment agreements described under the heading "Employment Agreements with
Executive Officers." We are paying Mr. Travis $12,500 per month as a management
fee for his services provided between April 7, 1999 and the closing of this
offering and the acquisitions.
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Directors. Directors of LORECOM who are also employees will not receive
directors' fees. LORECOM will pay non-employee directors fees of $1,000 for each
board meeting attended and will reimburse the directors for reasonable
out-of-pocket travel expenditures.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
We have employment agreements with Messrs. Travis, Evans and Hartwig for an
initial term expiring on the third anniversary of the closing of this offering,
subject to annual extensions of one year. Each of the employment agreements
carry the same terms with the exception of compensation. Mr. Travis will receive
an annual base salary of $150,000, Mr. Evans will receive an annual base salary
of $135,000 and Mr. Hartwig will receive an annual base salary of $110,000.
Messrs. Evans and Hartwig will also receive a one time bonus of $10,000 payable
upon the closing of this offering. Messrs. Travis, Evans and Hartwig are
eligible for bonuses, but only if LORECOM meets certain financial performance
criteria to be determined by the board. Messrs. Travis, Evans and Hartwig will
be reimbursed for all reasonable, ordinary and necessary business expenses, and
will receive a life insurance policy with premiums not to exceed $2,000.
Each of Messrs. Travis, Evans and Hartwig may be terminated by us for death
or cause, and they may terminate our agreements upon a change of control or for
good reason. Upon death, the employee's representatives will receive (1) the
employee's base salary for a period equal to the greater of the remaining
portion of the employment term or two years (the "Continuation Period"), and (2)
any pro rata bonus payable in the year of death. If an employment agreement is
terminated for any reason other than death or cause, or by the employee upon a
change of control or for good reason, the employee will receive (1) his base
salary for the Continuation Period, (2) for each year during the Continuation
Period, the highest annual bonus paid to the employee for any proceeding
calendar year, pro rated for any partial years, and (3) vacation pay for the
Continuation Period, pro rated for any partial years. The employee is also
provided continuing coverage under our group health, life and disability
insurance plans for one year after the termination date. If the employee's
employment is terminated by us for cause, or voluntarily by the employee, the
employee will receive his base salary and group health, life and disability
insurance coverage for one year after his termination date.
Messrs. Travis, Evans and Hartwig cannot compete against us during the term
of his employment or any period during which he is receiving payments or for
which he has been paid pursuant to his employment agreement. However, the
non-competition provisions do not apply if Messrs. Travis, Evans or Hartwig are
terminated without cause. Similarly, Messrs. Travis, Evans and Hartwig cannot
solicit our customers or employees, and cannot interfere with our contractual
relations with others, for the greater of the five-year anniversary of his
employment agreement or two years following termination of the employment
agreement.
DEFERRED COMPENSATION AND STOCK INCENTIVE PLANS
We have adopted a deferred stock compensation plan and an omnibus long-term
incentive plan to provide incentive to our directors, officers and certain other
key employees and consultants by making available to them an opportunity to
acquire a proprietary interest or to increase their proprietary interest in
LORECOM.
Deferred Stock Compensation Plan. The LORECOM Deferred Stock Compensation
Plan is effective on the closing date of this offering. The plan enables our
directors and officers to defer compensation and fees in cash and to elect
payments of such compensation and fees in LORECOM common stock. All officers and
directors are automatically entitled to participate in the plan. We have
reserved 50,000 shares of common stock for issuance under the plan. Initially,
there will be five individuals eligible to participate in the plan. The plan
will be administered by our Compensation Committee. Directors may elect to defer
a minimum of 25% of their compensation and fees or a greater amount in 25%
increments, and officers may elect to defer a minimum of 5% of compensation and
fees or a greater amount in 5% increments. All director's fees deferred under
the plan are credited to a stock unit account and are converted into
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LORECOM common stock by dividing the amount of compensation and fees deferred by
the fair market value of one share of common stock as of the date the fees would
have otherwise been paid. All officer compensation deferred under the plan is
credited to a stock unit account and is converted into LORECOM common stock by
dividing the amount of the compensation deferred for each calendar quarter by
the fair market value of one share of common stock on the first day of the
calendar quarter following the deferral quarter. Once the person ceases to be an
officer or director, his or her participation in the plan automatically
terminates and LORECOM common stock is distributed to the officer or director
either in lump sum or over time not to exceed three years. The plan is subject
to standard anti-dilution provisions.
1999 Long-Term Incentive Plan.
General Description. The 1999 Long-Term Incentive Plan (the "Omnibus Plan")
is effective on the closing date of this offering. The Omnibus Plan provides for
compensatory awards (each an "Award") representing or corresponding to up to
450,000 shares of our common stock. Awards may be granted for no consideration
and consist of stock options, restricted stock, stock appreciation rights
("SARs"), other stock-based awards (such as phantom stock) and performance
awards consisting of any combination of the foregoing. Any shares of common
stock subject to an Award under the Omnibus Plan, which Award for any reason
expires, is cancelled or is terminated unexercised as to such shares, shall
again be available for the grant of other Awards under the Omnibus Plan;
provided, however, that forfeited common stock or other securities shall not be
available for further Awards if the grantee has realized any benefits of
ownership from such common stock. The Compensation Committee will administer the
Omnibus Plan. The Compensation Committee will have the full power and authority,
subject to the provisions of the Omnibus Plan, to designate participants, grant
Awards and determine the time at which all Awards shall be granted. No Award,
other than a nonqualified stock option, can be sold, pledged, assigned,
transferred or encumbered by a grantee other than by will or by the laws of
descent and distribution.
Stock Awards. The Compensation Committee has the right to grant Awards of
shares of common stock which are subject to such restrictions (including
restrictions on transferability and limitations on the right to vote or receive
dividends with respect to the restricted shares) and such terms regarding the
lapse of restrictions as are deemed appropriate. Generally, upon termination of
employment for any reason during the restriction period, restricted shares shall
be forfeited to LORECOM.
SARs. An Award may consist of SARs. Upon exercising a SAR, the holder will
be paid an amount in cash equal to the difference between the fair market value
of the shares of common stock on the date of exercise, and the fair market value
of the shares of common stock on the date of the grant of the SAR, less
applicable withholding of Federal and State taxes. The applicable percentage and
exercise price shall be established by the Compensation Committee at the time
the SAR is granted and shall not be less than the fair market value of a share
of common stock on the date the SAR is granted.
Options Issued Under Omnibus Plan. The terms of specific options will be
determined by the Compensation Committee. The Compensation Committee may grant
options designated as either nonqualified or incentive stock options. The
exercise price of any stock option will be determined by the Compensation
Committee, and for incentive stock options, will not be less than the fair
market value of the common stock subject to the option on such date. However, if
the grantee is a ten percent or more shareholder, the exercise price of an
incentive stock option will not be less than 110% of the fair market value of
the common stock subject to the option on such date. Each option will be
exercisable for the period or periods specified in the option agreement, which
will generally not exceed 10 years from the date of grant. The Compensation
Committee may provide for termination of an option in the case of termination of
employment or directorship or any other reason. If a grantee dies or becomes
subject to a disability prior to termination of his or her right to exercise an
option, the stock option agreement may provide that the option may be exercised
to the extent that the shares with respect to the option could have been
exercised by the grantee on the date of his or her death or disability.
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Performance Awards Consisting of Options and SARs Issued in Tandem Under
Omnibus Plan. SARs may be granted in tandem with an option, in which event, the
grantee has the right to elect to exercise either the SAR or the option. Upon
the grantee's election to exercise one of these Awards, the other Award is
subsequently terminated. SARs may also be granted as an independent Award. In
the case of an SAR granted in tandem with an incentive stock option to an
employee who is a ten percent shareholder on the date of such grant, the amount
payable with respect to each SAR shall be equal in value to the applicable
percentage of the excess, if any, of the fair market value of a share of common
stock on the exercise date over the exercise price of the SAR, which exercise
price shall not be less than 110% of the fair market value of a share of common
stock on the date the SAR is granted.
Other Performance Awards Issued Under the Omnibus Plan. The Omnibus Plan
authorizes the Compensation Committee to grant, to the extent permitted under
Rule 16b-3 promulgated under the Exchange Act and applicable law, other Awards
that are denominated or payable in, valued by reference to, or otherwise based
on or related to shares of our common stock. Furthermore, the amount or terms of
an Award may be related to our performance or to such other criteria or measure
of performance as the directors or, if appointed, the Compensation Committee may
determine.
On June 21, 1999, the board of directors approved the issuance to each of
Messrs. Travis, Evans and Hartwig nonqualified stock options to purchase an
aggregate of 75,000 shares of common stock at an exercise price per share equal
to the offering price of our common stock in this offering. 15,000 options vest
immediately. The remaining options will vest in 15,000 increments over the next
four years.
LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY
LORECOM's Certificate of Incorporation provides for the indemnification of
officers and directors to the fullest extent permitted by the Oklahoma General
Corporation Act. All of the Company's directors and officers will be covered by
insurance policies maintained by it against certain liabilities for actions
taken in their capacities as such.
Pursuant to the underwriting agreement filed as an exhibit to the
registration statement, the underwriter has agreed to indemnify LORECOM, each
officer and director of LORECOM and each person, if any, who controls LORECOM
within the meaning of the Securities Act, against certain liabilities resulting
from information in this prospectus provided by the underwriter.
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and each controlling
person of LORECOM pursuant to its Certificate of Incorporation, Bylaws, Oklahoma
law or otherwise, LORECOM has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by LORECOM of expenses incurred or paid by a director, officer or
controlling person of LORECOM and the successful defense of any person, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, LORECOM will, unless in the
opinion of its counsel the matter has been settled by a controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
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OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of June 15, 1999 by (a) LORECOM's
executive officers, (b) each of LORECOM's directors (including persons who will
become directors upon consummation of the offering), (c) all executive officers
and directors of LORECOM as a group and (d) each other person (or group of
affiliated persons) who we know beneficially owns 5% or more of LORECOM's common
stock.
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP PERCENT
-------------------------------- --------------------------------
BEFORE OFFERING AFTER OFFERING BEFORE OFFERING AFTER OFFERING
AND AND AND AND
NAME ACQUISITIONS ACQUISITIONS ACQUISITIONS ACQUISITIONS
- ---- --------------- -------------- --------------- --------------
Ricky Naylor.......................... 452,153 452,153 95% 18%
821 S.W. 66th
Oklahoma City, OK 73139
Larry Travis.......................... -- 107,727(1)(2) -- 4%(1)(2)
4200 Perimeter Center Drive
Suite 100
Oklahoma City, OK 73112
William J. Hartwig.................... -- 15,000(2) -- <1%(2)
12101 North Meridian
Oklahoma City, OK 73120
Joseph O. Evans....................... -- 15,000(2) -- <1%(2)
12101 North Meridian
Oklahoma City, OK 73120
Debra G. Morehead..................... 4,759 4,759 1% <1%
821 S.W. 66th
Oklahoma City, OK 73139
Wesley E. Cantrell.................... -- -- -- --
2300 Parklake Drive, N.E.
Atlanta, Georgia 30345
Wayne Stone........................... -- -- -- --
710 Cedar Lake Blvd.
Suite 200
Oklahoma City, OK 73114
Jack Wiesner.......................... -- -- -- --
228 Robert S. Kerr Avenue
Suite 350
Oklahoma City, OK 73118
Andrew May............................ -- -- -- --
3309 Westminster
Dallas, Texas 75205
All officers and directors as a group
(9 persons)......................... 456,912 594,639 96% 24%
- ---------------
(1) Mr. Travis is an officer and a director of the general partner of Wylie
Limited Partnership. Wylie Limited Partnership is expected to receive 92,727
shares of LORECOM common stock from the acquisition of Travis Business
Systems, Inc., an interconnect partner, by LORECOM. Mr. Travis owns 25% of
the general partner of Wylie Limited Partnership and owns 50% of the limited
partnership interests in Wylie Limited Partnership. The remaining interests
in the general partner, and
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limited partner interests in Wylie Limited Partnership, are owned by Mr.
Travis' wife and children. Mr. Travis disclaims any beneficial ownership
with respect to these interests.
(2) Messrs. Travis, Evans and Hartwig will each be issued 75,000 nonqualified
stock options upon closing this offering. 15,000 of the options will vest
immediately.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LORECOM was incorporated by David Aduddell on September 4, 1998 under the
name Advantage Business Solutions, Inc. Aduddell capitalized LORECOM with $10.00
cash and certain intangible personal property, including business plans,
organizational documents and economic projections relating to several
consolidating company opportunities. Aduddell was the sole shareholder until
September 8, 1998, when Advantage Business Solutions, Inc. sold 62.5% of its
outstanding stock to Ricky Naylor in exchange for $10.00 cash and a binding
agreement to pay LORECOM $499,990 upon demand. At June 15, 1999, Naylor had paid
LORECOM all amounts owed under this agreement.
David Aduddell is subject to a noncompetition agreement which prohibits him
from (1) directly or indirectly selling local and long distance service in
competition with a certain telephone service provider, and (2) owning an
interest in a competitor of the telephone service provider, except that he can
own up to 1% of a publicly traded competitor. As a result, Aduddell's
affiliation in any way with LORECOM would restrict LORECOM's ability to sell
local and long distance service. Similarly, if LORECOM sells local and long
distance service, Aduddell could only own up to 1% of LORECOM. Aduddell believed
that LORECOM could substantially increase its revenues and net income by selling
local and long distance services through the interconnect partners' customer
bases. Therefore, on April 9, 1999, Aduddell cancelled his 32.5% interest
(285,000 shares) in LORECOM. Also, on April 9, 1999, David Aduddell resigned as
Chief Executive Officer and a director of LORECOM to ensure that LORECOM's
ability to sell local and long distance services would not be restricted by his
affiliation with LORECOM.
David Aduddell also owns 33.33% of Access Communications Services, Inc.,
one of the interconnect partners. Aduddell will receive $100,000 in cash and
LORECOM common stock equal to $200,000 (estimated to be 18,182 shares) upon the
acquisition of Access by LORECOM. Upon completion of the offering and
acquisition of the interconnect partners, we anticipate having approximately
2,456,632 shares of common stock issued and outstanding. Aduddell's 18,182
shares will represent less than 1% of our total outstanding stock.
Steve Aduddell is David Aduddell's brother. Steve Aduddell owns 67.67% of
Access Communications Services, Inc., one of the interconnect partners. Steve
Aduddell will receive $500,000 in cash and LORECOM common stock equal to
$100,000 (estimated to be 9,091 shares) upon the acquisition of Access by
LORECOM.
Aduddell Enterprises owns the lease space where our principal offices are
located. David Aduddell and Steve Aduddell each own 50% of Aduddell Enterprises.
Aduddell Enterprises has sold the lease space, and as a result, LORECOM must
vacate the premises. LORECOM will abandon approximately $22,800 of leasehold
improvements, and Access Communications will abandon approximately $18,000 of
leasehold improvements, which could be deemed to have inured to the benefit of,
and been reflected in the sales price of the building for, Aduddell Enterprises.
Wylie Limited Partnership is expected to receive 92,727 shares of LORECOM
common stock from the acquisition of Travis Business Systems, Inc., an
interconnect partner, by LORECOM. Mr. Travis owns 25% of the general partner of
Wylie Limited Partnership and 50% of the limited partnership interests in Wylie
Limited Partnership.
Ricky Naylor agreed to fund, and has funded through an affiliate, the
operations of LORECOM prior to the closing of this offering. Any and all amounts
loaned to LORECOM are unsecured, bear interest at 10% per year and are payable
on the earlier of the closing of this offering or December 31, 1999. This
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loan, together with accrued interest, will be repaid from the proceeds of this
offering. As of June 15, 1999, the principal amount due Mr. Naylor was
approximately $535,000.
Management believes each transaction between LORECOM and our officers,
directors or principal stockholders or their affiliates were on terms no less
favorable to our officers, directors or principal stockholders or their
affiliates than could reasonably have obtained in an arm's length transaction
with independent third parties. In most cases, however, at the time the
transactions took place, we lacked sufficient disinterested independent
directors to ratify the transactions.
LORECOM's Certificate of Incorporation provides that all transactions
between LORECOM or its subsidiaries and a director, officer or other affiliate
of LORECOM will be void or voidable unless the material facts regarding the
relationship and the transaction are disclosed, or are known to the board, and a
majority of the disinterested directors in good faith authorize the transaction;
or the material facts regarding the relationship and the transaction are
disclosed, or are known to the stockholders entitled to vote on the transaction,
and a majority of the disinterested stockholders approve the transaction. As a
result of these provisions, any future transactions with directors, officers,
employees or affiliates of LORECOM are anticipated to be minimal and will, in
any case, be approved in advance by either a majority of the independent and
disinterested directors or disinterested stockholders of LORECOM. Similarly, all
of our future material affiliate transactions, loans, any forgiveness of loans
and any issuance of preferred stock must be approved by a majority of our
independent directors who do not have an interest in the transactions and who
had access, at our expense, to our legal counsel, or to independent counsel.
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DESCRIPTION OF COMMON STOCK
ABOUT THE COMMON STOCK
As of the date of this prospectus, LORECOM is authorized to issue 4,500,000
shares of common stock, par value $.01 per share, and 500,000 shares of
preferred stock, par value $.01 per share. The summary of the terms of LORECOM's
authorized and outstanding capital stock found below is qualified in its
entirety by reference to LORECOM's Certificate of Incorporation, a copy of which
is included as an exhibit to the registration statement of which this prospectus
is a part.
Common stock. Owners of common stock will be entitled to dividends declared
by LORECOM's board of directors out of funds legally available. The common
stockholders are entitled to one vote per share for the election of directors
and other corporate matters. In the event of liquidation, dissolution or winding
up, common stockholders would be entitled to share ratably in all of LORECOM's
assets available for distribution. The common stock carries no preemptive
rights. All outstanding shares of common stock are, and the shares of common
stock to be sold by LORECOM in the offering when issued will be, duly
authorized, validly issued, fully paid and nonassessable. We are making
application to list the common stock on the .
Preferred stock. The board of directors is authorized to issue from time to
time, without stockholder authorization, in one or more designated series,
500,000 shares of preferred stock with such dividend, redemption, conversion,
liquidation and exchange provisions as are provided in the particular series.
Except as expressly provided by law, or except as may be provided by resolution
of the board of directors, the preferred stock shall have no right or power to
vote on any question or in any proceeding or to be represented at, or to receive
notice of, any meeting of LORECOM's stockholders. No shares of preferred stock
are issued or outstanding and the board of directors has no present plans to
issue any of the preferred stock. We will only offer shares of preferred stock
to a promoter, officer, director or 5% shareholder on the same terms as offered
to all other existing stockholders or to new stockholders.
Possible anti-takeover effects. The board is divided into three classes.
Each class of directors consists, as nearly as possible, of one-third of the
total number of directors constituting the entire board. LORECOM's Bylaws
provide that, subject to the rights of the holders of any series of preferred
stock, the number of directors may be fixed from time to time by resolution of
the board, but will consist of not less than one nor more than nine members. The
term for directors in the first class expires at the annual meeting of
stockholders to be held in 2000; the initial term for directors in the second
class expires at the annual meeting of stockholders to be held in 2001; and the
initial term for directors in the third class expires at the annual meeting of
stockholders to be held in 2002. A director of LORECOM may be removed only for
cause and only upon the affirmative vote of the holders of a majority of the
outstanding capital stock entitled to vote at an election of directors. The
board provisions set forth in LORECOM's Certificate of Incorporation may not be
amended without the approval of at least 66 2/3 percent of the voting power of
all shares entitled to vote generally in the election of directors, voting
together as a single class. The provisions of LORECOM's Certificate of
Incorporation and Bylaws, together with the ability of the board to issue
preferred stock without further stockholder action, could delay or frustrate the
removal of incumbent directors and could also discourage or make more difficult
a merger, tender offer or proxy contest even if such event would be favorable to
the interests of stockholders.
Section 1090.3 of the Oklahoma General Corporation Act prohibits a publicly
held Oklahoma corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (1)
prior to the date of the business combination, either the business combination
or the transaction which resulted in such person becoming an interested
stockholder is approved by the board of directors; (2) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock; or (3) on or after such date the business combination is approved
by the board of directors and by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. A
"business combination"
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includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns 15% or more of the
corporation's voting stock. The effect of such statute may be to discourage
certain types of transactions involving an actual or potential change in control
of LORECOM.
If we have 1,000 or more shareholders and meet other conditions, we will be
subject to Oklahoma's control shares act. With exceptions, this act prevents
holders of more than 20% of our stock from voting those shares. This provision
at least delays the time it takes anyone to gain control of LORECOM. Also,
shareholder action by written consent without a meeting must be unanimous.
DIVIDEND POLICY
LORECOM intends to retain earnings, if any, to finance the expansion of its
business and for general corporate purposes. We do not expect to pay dividends
for the foreseeable future. Future lenders may also impose restrictions on our
ability to pay dividends.
MARKET FOR COMMON STOCK AND SHARES ELIGIBLE FOR FUTURE SALE
No public market currently exists for LORECOM's common stock. The offering
price of our common stock does not necessarily indicate the price at which the
common stock will trade. Stock prices and trading volumes for many
telecommunication companies fluctuate for a number of reasons, including some
reasons which may be unrelated to their business or results of operation. An
active trading market for the common stock may not develop or continue after the
offering.
We presently have four stockholders of record. Upon completion of the
offering, 2,456,632 shares of common stock are expected to be outstanding. All
of the 1,600,000 shares expected to be purchased in the offering (1,840,000
shares if the underwriter's over-allotment option is exercised in full) will be
freely tradeable without registration or other restriction under the Securities
Act, except for shares purchased by affiliates of LORECOM. All of the remaining
shares of common stock outstanding, which are the restricted shares, may be sold
only pursuant to an effective registration statement filed by LORECOM or
pursuant to an applicable exemption, including an exemption under Rule 144 under
the Securities Act. In this regard, 23,797 of the restricted shares of common
stock will be eligible for resale pursuant to Rule 144 no later than September,
1999, approximately 287,955 of the restricted shares of common stock will be
eligible for resale pursuant to Rule 144 no later than one year following the
consummation of this offering, and approximately 544,880 of the restricted
shares will be eligible for resale pursuant to Rule 144 no later than two years
following the consummation of this offering. The effect, if any, that future
market sales of shares or the availability of shares for sale will have on the
prevailing market prices for the common stock cannot be predicted. Nevertheless,
sales of a substantial number of shares in the public market could adversely
affect prevailing market prices for the common stock.
In general, Rule 144 provides that if a person (excluding an affiliate)
holds restricted shares (regardless of whether such person is the initial holder
or a subsequent holder of such shares), and if at least one year has elapsed
since the later of the date on which the restricted shares were issued or the
date that they were acquired from an affiliate, then such person is entitled to
sell within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of such stock during the four calendar weeks preceding the
sale. After the restricted shares are held for two years by a person who is not,
and has not been during the preceding three months, deemed an "affiliate" of
LORECOM, the holder would be entitled to sell such shares under Rule 144 without
regard to the volume limitations described above.
The holders of approximately 380,682 shares of common stock and warrants to
purchase an additional 10,000 shares of common stock will have certain rights to
require LORECOM to register such shares for resale under the Securities Act. If,
subsequent to the consummation of the offering, we propose to register any of
our securities under the Securities Act, such holders are entitled to notice of
such registration and to include their shares in such registration with their
expenses borne by LORECOM, subject to the right of an underwriter participating
in the offering to limit the number of shares included in such registration.
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In addition, the holders of a majority of such shares of common stock have the
right to immediately demand, subject to certain limitations, that LORECOM file
one registration statement covering sales of their respective shares, and we are
obligated to pay the expenses of such registration.
Our directors and executive officers (including those holders with
registration rights described above) have agreed that, during the two-year
period following the close of the offering they will not, and LORECOM has agreed
that for a period of 180 days following the date of this prospectus it will not,
without the prior written consent of Capital West Securities, Inc., offer, sell,
contract to sell or otherwise dispose of any shares of common stock or any
securities convertible into, or exercisable or exchangeable for, common stock,
except that we may grant units or awards under our deferred stock compensation
plan and the Omnibus Plan, and may issue shares of common stock (1) in
connection with the acquisitions, or (2) pursuant to the exercise of awards or
distributions of units under our incentive plans.
TRANSFER AGENT
The transfer agent for the common stock is Continental Stock Transfer and
Trust Company.
THE UNDERWRITER AND THE PLAN OF DISTRIBUTION
THE UNDERWRITING AGREEMENT
Capital West Securities, Inc. has agreed, subject to the terms and
conditions set forth in the underwriting agreement between LORECOM and Capital
West, to purchase from LORECOM, and LORECOM has agreed to sell to Capital West,
1,600,000 shares of common stock, excluding the over-allotment option. Capital
West is offering the common stock on a firm commitment basis.
The underwriting agreement provides that the obligations of Capital West to
purchase the shares listed above are subject to certain conditions. The
underwriting agreement also provides that Capital West is committed to purchase,
and we are obligated to sell, all of the shares offered by this prospectus, if
any of the shares being sold pursuant to the underwriting agreement are
purchased (without consideration of any shares that may be purchased through the
exercise of the underwriter's over-allotment option).
Capital West has advised us that it proposes to offer the shares to the
public initially at the public offering price set forth on the cover page of
this prospectus and to certain dealers at such price, less a concession not to
exceed $ per share. Capital West may allow, and the dealers may reallow, a
concession to other dealers not to exceed $ per share. After the initial
public offering of the shares, the public offering price, the concessions to
selected dealers and the reallowance to other dealers may be changed by Capital
West.
Capital West was first registered as a broker-dealer in May 1995. Capital
West has participated in only nine public equity offerings as an underwriter,
although certain of its employees have had experience in underwriting public
offerings while employed by other broker-dealers. Prospective purchasers of the
securities offered in this prospectus should consider Capital West's limited
underwriting experience in evaluating this offering.
We have granted Capital West an option, exercisable during the 45-day
period after the date of this prospectus, to purchase up to an additional
240,000 shares of common stock at the initial public offering price set forth on
the cover page of this prospectus, less underwriting discounts and commissions.
Capital West may exercise such option only to cover over-allotments, if any,
incurred in the sale of shares.
We have agreed to indemnify Capital West against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that Capital West may be required to make in respect thereof. Capital West has
informed us that it does not intend to confirm sales to any account over which
it exercises discretionary authority.
We agreed to pay to Capital West a non-accountable expense allowance of 2%
of the gross proceeds derived from the sale of the common stock (including the
sale of any shares of common stock subject to
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Capital West's over-allotment option), $16,000 of which has been paid as of the
date of this prospectus. The non-accountable expense allowance will cover all
expenses incurred in connection with qualifying our common stock for sale under
the laws of such states as Capital West may designate, including filing fees and
fees and expenses of counsel retained for such purposes by the underwriter, and
registering the offering with the National Association of Securities Dealers,
Inc.
In connection with this offering, LORECOM has agreed to sell to Capital
West, for a price of $.001 per warrant, warrants to purchase shares of common
stock equal to 10% of the total number of shares of common stock sold pursuant
to this offering, excluding shares subject to the over-allotment option. The
Capital West warrants are exercisable at a price equal to 120% of the initial
public offering price ($13.20 assuming an initial public offering price of
$11.00 per share) for four years, commencing one year from the date of this
prospectus. The Capital West warrants grant to Capital West, with respect to the
registration under the Securities Act of the securities directly and indirectly
issuable upon exercise of Capital West's warrants, one demand registration right
during the exercise period, as well as piggyback registration rights at any
time. Subject to limited exceptions, the warrants will be restricted from sale,
transfer, pledge or assignment for a period of one year from the effective date
of the offering.
Pursuant to the relevant merger or asset purchase agreement, holders of
approximately 12% of the shares of LORECOM's common stock (including LORECOM's
directors and executive officers) outstanding after completion of this offering
have agreed for a period of 12 months after the date of closing the offering,
they will not offer, sell or otherwise dispose of any shares of common stock
owned by them. LORECOM's executive officers and directors have agreed to enter
into a 24 month lock-up agreement with regard to shares of common stock they
own, representing approximately 24% of the common stock outstanding after
completion of this offering.
The shares of common stock are expected to be listed on the
under the trading symbol " ." Any listing is contingent, among other
things, upon LORECOM obtaining 400 shareholders. In connection with this
offering, Capital West may engage in transactions that stabilize, maintain or
otherwise affect the market price of the common stock. Such transactions may
include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase common
stock for the purpose of stabilizing its market price. Capital West also may
create a short position by selling more common stock in connection with the
offering than it is committed to purchase from LORECOM, and in such case, may
purchase common stock in the open market following completion of the offering to
cover all or a portion of such short position. Capital West may also cover all
or a portion of such short position, up to 240,000 shares of common stock, by
exercising its over-allotment option referred to above. In addition, Capital
West may impose "penalty bids" under contractual arrangements with the
underwriters whereby it may reclaim from an underwriter (or dealer participating
in the offering) for the account of the other underwriters, the selling
concession with respect to common stock that is distributed in the offering but
subsequently purchased for the account of the underwriters in the open market.
Any transactions described in this paragraph may result in the maintenance of
the price of the common stock at a level above that which might otherwise
prevail in the open market. None of the transactions described in this paragraph
are required, and, if they are undertaken, they may be discontinued at any time.
The estimated aggregate expenses, to be paid solely by LORECOM, in
connection with the acquisitions and the distribution of the securities being
registered is approximately $2.7 million.
47
52
DETERMINING THE OFFERING PRICE
Prior to this offering, there has been no public market for LORECOM's
common stock. We determined the initial public offering price in negotiations
with Capital West. Among the factors we considered in determining the initial
public offering price, in addition to prevailing market conditions, were the
following:
- Our financial information and prospects for future revenues;
- The history of, and the prospects for, LORECOM and the industry in which
it competes;
- That LORECOM and its interconnect partners have not previously engaged in
business transactions before;
- That on a pro forma basis, LORECOM experienced a loss for 1998;
- An assessment of our management;
- LORECOM's past and present operations;
- The dilution that new investors in LORECOM will experience;
- The present state of our development; and
- All of these factors in relation to market values and valuation measures
of other companies engaged in activities similar to LORECOM.
The initial public offering price set forth on the cover page of this
prospectus should not be considered an indication of the actual value of the
common stock. The price is subject to change as a result of market conditions
and other factors. We cannot assure you that an active trading market will
develop for the common stock or that the common stock will trade in the public
market subsequent to the offering at or above the initial public offering price.
EXPERTS
The financial statements of the following companies (for the periods
indicated) included in this prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports (as further described
below) appearing herein, and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing:
As of December 31, 1998, and for the period from September 4, 1998
(date of inception), to December 31, 1998:
LORECOM Technologies, Inc. (formerly The Alliance Group, Inc.)
As of December 31, 1998, and for the year then ended:
Access Communications Services, Inc.
American Telcom, Inc.
Banner Communications, Inc.
Communication Services, Inc.
Travis Business Systems, Inc.
As of December 31, 1998 and 1997, and for the years then ended:
Telephone and Paging Divisions of Electrical & Instrument Sales
Corporation ("EIS") (which report expresses an unqualified opinion and
includes an explanatory paragraph relating to the divisions being a
component part of EIS)
As of September 30, 1998, and for the year then ended:
Terra Telecom, Inc.
Telkey Communications, Inc.
48
53
The financial statements of the following companies (for the periods
indicated) included in this prospectus have been audited by Saxon & Knoll, P.C.,
independent auditors, as stated in their reports appearing herein, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing:
As of December 31, 1998, and for the year then ended:
Nobel Systems, Inc.
As of December 31, 1997, and for the year then ended:
Access Communications Services, Inc.
American Telcom, Inc.
Banner Communications, Inc.
Travis Business Systems, Inc.
As of September 30, 1997, and for the year then ended:
Terra Telecom, Inc.
Telkey Communications, Inc.
The financial statements of Commercial Telecom Systems, Inc. as of December
31, 1998, and for the year then ended included in this prospectus have been
audited by Hunter, Atkins & Russell, PLC, independent auditors, as stated in
their report appearing herein, and are included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
VALIDITY OF COMMON STOCK
The validity of the common stock offered hereby will be passed on for
LORECOM by McAfee & Taft A Professional Corporation, Oklahoma City, Oklahoma.
Certain legal matters in connection with the shares of common stock will be
passed on for Capital West by Robertson & Williams, Oklahoma City, Oklahoma.
49
54
INDEX TO FINANCIAL STATEMENTS
LORECOM Technologies, Inc. ................................. F-2
Access Communications Services, Inc. ....................... F-10
American Telcom, Inc. ...................................... F-21
Banner Communications, Inc. ................................ F-30
Commercial Telecom Systems, Inc. ........................... F-39
Communication Services, Inc. ............................... F-47
Telephone and Paging Divisions of EIS Communications
Combined Financial Statements............................. F-55
Nobel Systems, Inc. ........................................ F-62
Telkey Communications, Inc. ................................ F-70
Terra Telecom, Inc. ........................................ F-80
Travis Business Systems, Inc. .............................. F-90
F-1
55
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
LORECOM Technologies, Inc. (formerly
The Alliance Group, Inc.):
We have audited the accompanying balance sheet of LORECOM Technologies,
Inc. (formerly The Alliance Group, Inc.) as of December 31, 1998, and the
related statements of operations, stockholders' deficiency, and cash flows for
the period from September 4, 1998 (date of inception) to December 31, 1998.
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 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, such financial statements present fairly, in all material
respects, the financial position of LORECOM Technologies, Inc. (formerly The
Alliance Group, Inc.) at December 31, 1998, and the results of its operations
and its cash flows for the period from September 4, 1998 (date of inception) to
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
March 18, 1999 (April 9, 1999 as to
Note 7 to the financial statements, and
May 12, 1999 as to Note 8 to the
financial statements)
F-2
56
LORECOM TECHNOLOGIES, INC.
(FORMERLY THE ALLIANCE GROUP, INC.)
BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash...................................................... $ 28,981 $ 79,700
Accounts receivable....................................... 26,436 --
Other current assets...................................... 2,721 1,933
--------- ---------
Total current assets.............................. 58,138 81,633
PROPERTY AND EQUIPMENT:
Vehicles.................................................. 35,988 35,988
Leasehold improvements.................................... 22,795 --
Equipment................................................. 46,080 6,711
104,863 42,699
Less accumulated depreciation............................. (4,438) (1,978)
--------- ---------
Property and equipment, net....................... 100,425 40,721
OTHER ASSETS:
Deferred offering costs................................... 509,644 19,109
Other assets.............................................. -- 1,389
--------- ---------
Total other assets................................ 509,644 20,498
--------- ---------
TOTAL............................................. $ 668,207 $ 142,852
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 8,255 $ 8,049
Accounts payable.......................................... 268,873 32,464
Accounts payable -- related parties....................... 118,670 18,296
Note payable -- related party............................. 35,000 --
Cash advances payable..................................... -- 80,000
Other current liabilities................................. 35,233 --
--------- ---------
Total current liabilities......................... 466,031 138,809
Long-term debt, net of current portion...................... 23,966 26,119
--------- ---------
Total liabilities................................. 489,997 164,928
--------- ---------
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $.01 par value, 500,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value; 4,500,000 shares authorized;
760,950 shares issued and outstanding (see Note 7)..... 7,610 7,610
Additional paid in-capital................................ 492,400 492,400
Accumulated deficit....................................... (321,800) (113,078)
Stock subscription receivable............................. -- (409,008)
--------- ---------
Total stockholders' equity (deficiency)........... 178,210 (22,076)
--------- ---------
TOTAL............................................. $ 668,207 $ 142,852
========= =========
See notes to financial statements.
F-3
57
LORECOM TECHNOLOGIES, INC.
(FORMERLY THE ALLIANCE GROUP, INC.)
STATEMENTS OF OPERATIONS
THREE PERIOD FROM
MONTHS SEPTEMBER 4,
ENDED 1998 TO
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
NET SALES................................................... $ 26,436 $ --
COSTS AND EXPENSES:
Cost of sales............................................. 26,436 --
Salaries and benefits..................................... 121,323 63,267
General and administrative expenses....................... 86,915 48,961
Interest expense.......................................... 484 850
--------- ---------
Total costs and expenses.......................... 235,158 113,078
--------- ---------
NET LOSS.................................................... $(208,722) $(113,078)
========= =========
See notes to financial statements.
F-4
58
LORECOM TECHNOLOGIES, INC.
(FORMERLY THE ALLIANCE GROUP, INC.)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
COMMON ADDITIONAL STOCK
SHARES COMMON PAID-IN SUBSCRIPTION ACCUMULATED
(NOTE 7) STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
-------- ------ ---------- ------------ ----------- ---------
BALANCE, September 4, 1998
(Date of inception) --
Issuance of common stock......... 760,950 $7,610 $492,400 $(500,000) $ -- $ 10
Collections on stock subscription
receivable..................... -- -- -- 90,992 -- 90,992
Net loss......................... -- -- -- -- (113,078) (113,078)
------- ------ -------- --------- --------- ---------
BALANCE, December 31, 1998......... 760,950 7,610 492,400 (409,008) (113,078) (22,076)
Collections on stock subscription
receivable (Unaudited)......... -- -- -- 409,008 -- 409,008
Net loss (Unaudited)............. -- -- -- -- (208,722) (208,722)
------- ------ -------- --------- --------- ---------
BALANCE, March 31, 1999
(Unaudited)...................... 760,950 $7,610 $492,400 $ -- $(321,800) $ 178,210
======= ====== ======== ========= ========= =========
See notes to financial statements.
F-5
59
LORECOM TECHNOLOGIES, INC.
(FORMERLY THE ALLIANCE GROUP, INC.)
STATEMENTS OF CASH FLOWS
THREE PERIOD FROM
MONTHS SEPTEMBER 4,
ENDED 1998 TO
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(208,722) $(113,078)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation........................................... 2,460 1,978
Changes in current assets and liabilities:
Accounts receivable.................................. (26,436) --
Other current assets................................. (788) (1,933)
Other assets......................................... (489,146) (20,498)
Accounts payable..................................... 256,783 50,760
Other current liabilities............................ 35,233 80,000
--------- ---------
Net cash used in operating activities............. (430,616) (2,771)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (62,164) (42,699)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................. -- 10
Proceeds from borrowings.................................. 35,000 36,073
Payments on long-term debt................................ (1,947) (1,905)
Collections on stock subscription receivable.............. 409,008 90,992
--------- ---------
Net cash provided by financing activities......... 442,061 125,170
--------- ---------
NET (DECREASE) INCREASE IN CASH............................. (50,719) 79,700
CASH, beginning of period................................... 79,700 --
--------- ---------
CASH, end of period......................................... $ 28,981 $ 79,700
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 450 $ 775
Common stock issued under stock subscription receivable... $ -- $ 500,000
See notes to financial statements.
F-6
60
LORECOM TECHNOLOGIES, INC.
(FORMERLY THE ALLIANCE GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
LORECOM Technologies, Inc. (formerly The Alliance Group, Inc., formerly
Advantage Business Solutions, Inc.) (the "Company"), was incorporated on
September 4, 1998, under the laws of the State of Oklahoma. The Company was
formed solely for the purpose of identifying and acquiring interconnect
telecommunications companies.
At December 31, 1998, the Company has an accumulated deficit of $113,078
and a stockholders' deficiency of $22,076 that may raise concerns about the
Company's ability to continue as a going concern. The losses are due to costs
incurred prior to the Company earning any revenues. The stockholders' deficiency
is mainly due to the stock subscription receivable (see Note 4 to the financial
statements). Collections on such subscription will help fund future costs of the
Company. Subsequent to December 31, 1998, the Company collected $284,000 on the
stock subscription receivable through March 18, 1999. In addition, a stockholder
has agreed to fund the Company's operations prior to commencement of operations
in exchange for a note payable. Management's plans to improve the Company's
financial position include plans for expansion by acquisition (see Note 6 to the
financial statements) and seeking large telecommunication installation projects.
In February 1999 the Company obtained its first contract with a third party for
maintenance of telecommunications equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements -- The balance sheet as of March 31,
1999, and the statement of operations, stockholders' equity and cash flows for
the three months ended March 31, 1999, have been prepared by the Company without
audit. In the opinion of management, all adjustments (which included only
normal, recurring adjustments) necessary to present fairly the financial
position at March 31, 1999, and the results of operations and cash flows for the
three months ended March 31, 1999, have been made. The results of operations for
the three months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the full year.
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 sales and expenses during
the reporting period. Actual results could differ from those estimates.
Property and Equipment -- Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated depreciation are
removed from the respective accounts. Any gains or losses resulting from
disposal are included in current period income or loss.
Property and equipment owned by the Company are depreciated using the
straight-line method over their estimated useful lives of three to seven years.
The Company records impairments to its long-lived assets when it becomes
probable that the carrying values of the assets will not be fully recovered over
their estimated lives. Impairments are recorded to reduce the carrying value of
the assets to their estimated fair values determined by the Company based on
facts and circumstances in existence at the time of the determination. No
impairments were recorded in 1998.
Income Taxes -- The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under those provisions, the Company
does not pay federal corporate income taxes
F-7
61
LORECOM TECHNOLOGIES, INC.
(FORMERLY THE ALLIANCE GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
on its taxable income. Instead, the stockholders are liable for individual
federal income taxes on their respective shares of the Company's taxable income.
Advertising -- Advertising costs incurred by the Company are expensed
during the period in which the advertising occurs.
Fair Value Disclosure -- The Company's financial instruments include cash,
short-term payables, and notes payable. The carrying amounts of cash and
short-term payables approximate fair value due to their short-term nature. The
carrying amounts of notes payable approximate fair value based on borrowing
terms currently available to the Company.
3. LONG-TERM DEBT
The Company's long-term debt at December 31, 1998, consists of the
following:
Note payable to a bank, due in monthly principal and
interest payments, interest rate of 8.75%, secured by a
vehicle, due in 2002...................................... $34,168
Less current maturities..................................... 8,049
-------
Total long-term debt........................................ $26,119
=======
Maturities of long-term debt for the next four years are as follows:
1999 -- $8,049; 2000 -- $8,782; 2001 -- $9,583; and 2002 -- $7,754.
4. STOCK SUBSCRIPTION RECEIVABLE
In 1998, the Company sold 475,950 shares of common stock to a director in
exchange for a stock subscription receivable of $500,000. Collections have been
made on the subscription as funds were needed to fund operations during the
initial start-up period of the Company. During 1998, approximately $91,000 was
collected. Through March 18, 1999, a total of $375,000 was collected, and the
remaining balance due was $125,000.
Unaudited -- Through March 31, 1999, the remaining balance had been
collected.
5. RELATED PARTY TRANSACTIONS
The Company has recorded a liability for rent and overhead allocations in
the amount of $18,296 to an entity wholly owned and operated by a major
stockholder of the Company.
The Company has recorded a non-interest bearing cash advance payable in the
amount of $80,000 to an entity wholly owned and operated by a major stockholder
of the Company. The advance was repaid in January 1999.
During 1998, a major stockholder of the Company assigned 4,760 shares of
his stock to an employee of an entity owned and operated by the major
stockholder. The employee provided services to the Company which were invoiced
to and expensed by the Company in the amount of $10,397.
Unaudited -- During the three months ended March 31, 1999, the Company has
recorded a liability for:
- purchases of property and equipment in the amount of $35,600 to an entity
wholly owned and operated by a major stockholder of the Company.
F-8
62
LORECOM TECHNOLOGIES, INC.
(FORMERLY THE ALLIANCE GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- operating expenses of the Company in the amount of $35,000 to a major
stockholder of the Company.
- rent, purchase of property and equipment, and overhead allocations in the
amount of $38,073 to an entity wholly owned and operated by a major
stockholder of the Company.
6. DEFERRED OFFERING COSTS
The Company and its stockholders have entered into definitive agreements
with 13 Oklahoma-based telecommunications companies (the "Entities") pursuant to
which the Company will purchase all of the issued and outstanding common stock
or assets of the Entities concurrently with, and as a condition to, completion
of a public or private offering of the common stock of the Company. All of the
issued and outstanding common stock or assets of the Entities will be exchanged
for cash and common stock of the Company.
7. SUBSEQUENT EVENTS -- CAPITAL STOCK
Subsequent to December 31, 1998, the stockholders effected an increase in
the number of authorized common shares from 1,000 to 4,500,000 and a stock split
that increased the issued and outstanding common shares from 267 to 760,950. The
stockholders also authorized 500,000 shares of $.01 par value preferred stock.
These changes have been reflected in the Company's financial statements on a
retroactive basis as though they had been effected on the date of inception of
the Company.
Also, subsequent to December 31, 1998, the Company's Chief Executive
Officer ("CEO") resigned his position and directorship of the Company.
Additionally, all 285,000 shares of Company stock owned by the CEO, as adjusted
for the stock split, were voluntarily canceled. The shares canceled represented
32.5% of the total shares issued at that time. The cancellation increased the
percent of ownership of the remaining shareholders incrementally.
8. SUBSEQUENT EVENT -- COMPANY NAME CHANGE
In May 1999, the stockholders effected a change in the name of the Company
from The Alliance Group, Inc. (formerly Advantage Business Solutions, Inc.) to
LORECOM Technologies, Inc. This change has been reflected in the Company's
financial statements on a retroactive basis as though it had been effected on
the date of inception of the Company.
F-9
63
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Access Communications Services, Inc.:
We have audited the accompanying balance sheet of Access Communications
Services, Inc. as of December 31, 1998, and the related statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
1998. The financial statements as of December 31, 1997, and for the year then
ended, were audited by other auditors whose report expressed an unqualified
opinion on those financial statements. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on the 1998 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 1998 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, such 1998 financial statements present fairly, in all
material respects, the financial position of Access Communications Services,
Inc. at December 31, 1998, and the results of its operations and its cash flows
for the year ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 28, 1999
F-10
64
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Access Communications Services, Inc.:
We have audited the accompanying balance sheet of Access Communications
Services, Inc. as of December 31, 1997, and the related statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
1997. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on the 1997 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 1997 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, such 1997 financial statements present fairly, in all
material respects, the financial position of Access Communications Services,
Inc. at December 31, 1997, and the results of its operations and its cash flows
for the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ SAXON & KNOL
Oklahoma City, Oklahoma
February 28, 1999
F-11
65
ACCESS COMMUNICATIONS SERVICES, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31,
MARCH 31, --------------------
1999 1998 1997
----------- --------- --------
(UNAUDITED)
CURRENT ASSETS:
Cash..................................................... $ 25,136 $ 187,464 $ 18,922
Accounts receivable...................................... 215,972 127,953 299,553
Inventory................................................ 60,465 51,820 38,220
Other current assets..................................... 3,143 3,864 1,590
--------- --------- --------
Total current assets............................. 304,716 371,101 358,285
PROPERTY AND EQUIPMENT:
Autos and trucks......................................... 124,776 124,776 114,188
Equipment................................................ 105,074 69,524 34,744
Leasehold improvements................................... 35,213 35,213 35,213
Real estate.............................................. 15,198 15,198 15,198
--------- --------- --------
280,261 244,711 199,343
Less accumulated depreciation............................ (109,570) (101,667) (72,251)
--------- --------- --------
Property and equipment, net...................... 170,691 143,044 127,092
--------- --------- --------
RECEIVABLE FROM STOCKHOLDERS............................... 27,400 156,577 138,629
OTHER ASSETS............................................... 1,000 42,400 35,910
--------- --------- --------
TOTAL............................................ $ 503,807 $ 713,122 $659,916
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable...................................... $ 177,520 $ 191,484 $202,220
Deferred income taxes................................. 29,700 29,700 --
Other current liabilities............................. 31,055 49,895 33,537
Current portion of long-term debt..................... 54,281 53,344 40,974
Current portion of capital lease obligations.......... 20,484 20,130 11,151
--------- --------- --------
Total current liabilities........................ 313,040 344,553 287,882
Long-term debt, net of current portion................... 97,187 109,680 54,645
Deferred income taxes.................................... -- -- 29,700
Capital lease obligations................................ 5,488 7,068 27,284
--------- --------- --------
Total liabilities................................ 415,715 461,301 399,511
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $5.00 par value; 100 shares authorized,
issued and outstanding................................ 375 500 500
Additional paid in-capital............................... 1,409 168,950 168,950
Retained earnings........................................ 86,308 82,371 90,955
--------- --------- --------
Total stockholders' equity....................... 88,092 251,821 260,405
--------- --------- --------
TOTAL............................................ $ 503,807 $ 713,122 $659,916
========= ========= ========
See notes to financial statements.
F-12
66
ACCESS COMMUNICATIONS SERVICES, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- -----------------------
1999 1998 1998 1997
-------- -------- ---------- ----------
(UNAUDITED)
SALES........................................... $363,303 $287,023 $1,345,576 $1,447,155
COSTS AND EXPENSES:
Cost of sales................................. 155,748 125,476 551,100 568,732
Salaries and benefits......................... 132,439 137,234 523,127 502,620
Selling, general and administrative........... 62,789 58,999 234,004 243,562
Interest...................................... 7,390 8,012 47,444 28,641
-------- -------- ---------- ----------
Total costs and expenses.............. 358,366 329,721 1,355,675 1,343,555
-------- -------- ---------- ----------
INCOME (LOSS) BEFORE TAXES...................... 4,937 (42,698) (10,099) 103,600
INCOME TAX BENEFIT (EXPENSE).................... (1,000) 8,581 1,515 (30,000)
-------- -------- ---------- ----------
NET INCOME (LOSS)............................... $ 3,937 $(34,117) $ (8,584) $ 73,600
======== ======== ========== ==========
See notes to financial statements.
F-13
67
ACCESS COMMUNICATIONS SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON COMMON
SHARES STOCK ADDITIONAL
(100 SHARES ($5 PAR PAID-IN RETAINED
AUTHORIZED) VALUE) CAPITAL EARNINGS TOTAL
----------- ------- ---------- -------- ---------
BALANCE, January 1, 1997................ 100 $ 500 $ 168,950 $17,355 $ 186,805
Net income............................ -- -- -- 73,600 73,600
--- ----- --------- ------- ---------
BALANCE, December 31, 1997.............. 100 500 168,950 90,955 260,405
Net loss.............................. -- -- -- (8,584) (8,584)
--- ----- --------- ------- ---------
BALANCE, December 31, 1998.............. 100 500 168,950 82,371 251,821
Common stock redemption (Unaudited)... (25) (125) (167,541) -- (167,666)
Net income (Unaudited)................ -- -- -- 3,937 3,937
--- ----- --------- ------- ---------
BALANCE, March 31, 1999 (Unaudited)..... 75 $ 375 $ 1,409 $86,308 $ 88,092
=== ===== ========= ======= =========
See notes to financial statements.
F-14
68
ACCESS COMMUNICATIONS SERVICES, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
-------------------- ---------------------
1999 1998 1998 1997
--------- -------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 3,937 $(34,117) $ (8,584) $ 73,600
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation............................... 7,903 7,796 27,594 29,459
Loss on sale of assets..................... -- -- 4,185 --
Changes in current assets and liabilities:
Accounts receivable...................... (88,019) 55,524 171,600 (188,485)
Inventory................................ (8,645) 12,476 (13,600) (7,500)
Other current assets..................... 721 182 (2,274) 3,244
Other assets............................. 5,850 (640) (6,490) (1)
Accounts payable......................... (13,964) (9,442) (10,736) 39,918
Other current liabilities................ (18,840) 1,195 16,358 (3,642)
--------- -------- --------- ---------
Net cash provided by (used in)
operating activities................ (111,057) 32,974 178,053 (53,407)
--------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... -- -- (51,173) (46,991)
Proceeds from sale of property and
equipment.................................. -- -- 3,442 --
Advances to stockholders...................... (38,489) (18,693) (150,753) (178,833)
Repayment of receivable from stockholders..... -- -- 132,805 85,064
Collections of accounts receivable, other..... -- -- -- 206,380
--------- -------- --------- ---------
Net cash provided by (used in)
investing activities................ (38,489) (18,693) (65,679) 65,620
--------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings............ -- -- 181,835 --
Payments on long-term borrowings and capital
leases..................................... (12,782) (12,794) (125,667) (9,862)
--------- -------- --------- ---------
Net cash provided by (used in)
financing activities................ (12,782) (12,794) 56,168 (9,862)
--------- -------- --------- ---------
NET INCREASE (DECREASE) IN CASH................. (162,328) 1,487 168,542 2,351
CASH, beginning of period....................... 187,464 18,922 18,922 16,571
--------- -------- --------- ---------
CASH, end of period............................. $ 25,136 $ 20,409 $ 187,464 $ 18,922
========= ======== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest...... $ 7,776 $ 7,611 $ 38,027 $ 24,485
Cash paid during the period for income
taxes...................................... $ -- $ -- $ 29,503 $ 35,750
See notes to financial statements.
F-15
69
ACCESS COMMUNICATIONS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Access Communications Services, Inc. (the "Company") was incorporated in
October 1986, under the laws of the State of Oklahoma. The Company sells,
installs and maintains telephone equipment in the state of Oklahoma market area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements -- The balance sheet as of March 31,
1999, and the statements of operations, stockholders' equity and cash flows for
the three months ended March 31, 1999 and 1998, have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
included only normal, recurring adjustments) necessary to present fairly the
financial position at March 31, 1999, and the results of operations and cash
flows for the three months ended March 31, 1999 and 1998, have been made. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
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 sales and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations -- The Company currently buys most of its telephone
equipment from two manufacturers. Although there are a limited number of
manufacturers of telephone equipment, management believes that other
manufacturers could provide similar equipment on comparable terms. A change in
manufacturers, however, could cause a possible loss of sales, which would affect
operating results adversely.
Revenue Recognition -- Revenue is recognized when equipment is installed or
when maintenance services are rendered. The Company recognizes deferred revenues
for advance payment on agreements to maintain customer telephone equipment. The
deferred revenues are recognized as revenue over the period the services are
provided, which is generally 12 months. Deferred revenues are not significant as
of December 31, 1998 and 1997.
Accounts Receivable -- Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to the
allowance for doubtful accounts; recoveries of previously written off amounts
are added back to the allowance for doubtful accounts. No allowances have been
established at December 31, 1998 and 1997 as management believes no material
losses will be incurred from receivables.
Inventory -- Inventory is stated at the lower of cost or market on a
specific identification basis. Cost is determined on a first-in, first-out
method.
Property and Equipment -- Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated depreciation are
removed from the respective accounts. Any gains or losses resulting from
disposal are included in current year operations.
Property and equipment owned by the Company are depreciated using an
accelerated method over their estimated useful lives of three to seven years.
Income Taxes -- The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax consequences
of temporary differences and operating loss
F-16
70
ACCESS COMMUNICATIONS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and tax credit carryforwards by applying enacted tax rates applicable to future
years to differences between the financial statement amounts and the tax bases
of existing assets and liabilities. A valuation allowance is established if, in
management's opinion, it is more likely than not that some portion of the
deferred tax asset will not be realized. At December 31, 1998 and 1997, the
Company's temporary differences between financial and tax bases of assets and
liabilities consist primarily of timing differences in the recognition of gain
from sale of an asset in a prior period.
Product Returns and Warranty -- Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period is
returned by the Company to the manufacturer in exchange for replacement product
or refund.
Long-Lived Assets -- Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. Recoverability is assessed
and measured on long-lived assets using an estimate of the undiscounted future
cash flows attributable to the asset. Impairment is measured based on future
cash flows discounted at an appropriate rate.
Advertising -- Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
Fair Value Disclosure -- The Company's financial instruments include cash
and cash equivalents, accounts receivable, receivables from stockholders,
short-term payables, capital lease obligations, and notes payable. The carrying
amounts of cash and cash equivalents, accounts receivable, and short-term
payables approximate fair value due to their short-term nature. The carrying
amounts of receivables from stockholders do not have readily determinable fair
values due to the related party nature of the transaction (see Note 8). The
carrying amounts of capital lease obligations and notes payable approximate fair
value based on borrowing terms currently available to the Company.
3. OPERATING LEASES
The Company has noncancelable operating leases for equipment and a
noncancelable operating lease with a stockholder for its office space. The
future minimum payments by year for these leases at December 31, 1998, are as
follows:
1999...................................................... $49,223
2000...................................................... 48,000
-------
$97,223
=======
F-17
71
ACCESS COMMUNICATIONS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
The Company's long-term debt at December 31, 1998 and 1997, consisted of
the following:
1998 1997
-------- -------
Note payable to bank, due in monthly principal and interest
payments; interest rate of 10.6%; maturing in 2002;
secured by all furniture, fixtures, inventory, equipment,
accounts receivable, and 50,000 shares of Zenex Long
Distance, Inc. separately owned by shareholders of the
Company................................................... $ 86,949 $52,445
Note payable to bank, due in monthly principal and interest
payments; interest rate of 10.6%; maturing in 1999;
secured by all furniture, fixtures, inventory, equipment,
accounts receivable, 50,000 shares of Clear-Line
Communications, Inc., and 20,000 shares of Zenex Long
Distance Co., Inc. separately owned by stockholders of the
Company................................................... 46,533 --
Note payable to credit union, due in monthly principal and
interest payments; interest rate of 8.5%; maturing in
2000; secured by vehicle.................................. 9,171 14,537
Note payable to bank, due in monthly principal and interest
payments; interest rate of 10.4%; maturing in 2001;
secured by vehicle........................................ 8,997 12,174
Note payable to bank, due in monthly principal and interest
payments; interest rate of 9.2%; maturing in 2001; secured
by vehicle................................................ 6,505 9,213
Note payable to a related party, due on demand, non
interest-bearing, unsecured; settled in 1998 through
offset with related party receivable...................... -- 7,250
Note payable to bank, due in monthly principal and interest
payments; interest rate of 9.7%; maturing in 2000; secured
by vehicle................................................ 4,869 --
-------- -------
163,024 95,619
Less current maturities..................................... 53,344 40,974
-------- -------
Total long-term debt........................................ $109,680 $54,645
======== =======
5. CAPITAL LEASES
Future minimum lease payment obligations for leased assets under capital
leases as of December 31, 1998 are as follows:
1999........................................................ $20,746
2000........................................................ 7,120
-------
Total minimum lease payments................................ 27,866
Less amount representing interest........................... 668
-------
Present value of minimum lease payments..................... 27,198
Less current portion........................................ 20,130
-------
Long-term portion........................................... $ 7,068
=======
F-18
72
ACCESS COMMUNICATIONS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The income tax provision benefit (expense) consists of the following:
1998 1997
------ --------
Current benefit (expense)................................. $1,515 $(24,136)
Deferred (expense)........................................ -- (5,864)
------ --------
$1,515 $(30,000)
====== ========
The difference between the statutory Federal income tax rate of 34% and the
Company's effective Federal rate for the years ended December 31, 1998 and 1997,
is due to state taxes and the effect of graduated tax rates.
Deferred tax liabilities at December 31, 1998 and 1997, consist of timing
differences in the recognition of gain from sale of an asset in a prior period.
7. BENEFIT PLAN
All employees are eligible to participate in the Company's simple 401(k)
plan upon completion of one year of employment. Employees may contribute up to
15% of base compensation, as defined. All contributions made by employees are
100% vested at the time the contribution is made. The Company matches 100% of
employee contributions up to 3% of the employee's base compensation. The Company
made contributions totaling $9,470 and $9,602 during the years ended December
31, 1998 and 1997.
8. MAJOR CUSTOMERS
The Company has an account receivable from an individual customer that
amounts to 16% of the Company's total accounts receivable at December 31, 1998.
9. RELATED PARTY TRANSACTIONS
The Company has an investment in Zenex Long Distance, Inc. ("Zenex"), an
affiliate of the Company, of $35,550 at December 31, 1998 and 1997. The
investment is included in other assets and recorded at cost. The Company
provides services and sells equipment to Zenex. Amounts billed by the Company
for sales and services during the years ended December 31, 1998 and 1997,
totaled $108,375 and $204,000, respectively.
The Company has receivables of $156,577 and $138,629 at December 31, 1998
and 1997, respectively, from stockholders. The receivables are non
interest-bearing and unsecured. The Company advanced $150,753 and $178,833
during the years ended December 31, 1998 and 1997, respectively, of which
$132,805 and $85,064 was repaid in 1998 and 1997, respectively.
During the year ended December 31, 1998, the Company borrowed $78,000 from
an affiliated company. Interest paid during the year totaled $13,000. The amount
was repaid in full during the year.
The Company leases office space from an entity controlled by stockholders
of the Company. Lease payments to this affiliated company were $48,000 during
each of the years ended December 31, 1998 and 1997.
Unaudited -- In March 1999:
- The Company exchanged all of its shares of Zenex common stock for office
furniture and equipment from Zenex equal to the Company's investment in
Zenex. No gain or loss was recognized by the Company.
F-19
73
ACCESS COMMUNICATIONS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- The Company exchanged the receivable from stockholders for shares of the
Company's common stock. The purchase price for the shares of stock was
determined by management to equal the amount receivable by the Company
from stockholders which totaled $167,666 on the transaction date. The
transaction resulted in the reduction of the receivable from
stockholders, and the shares obtained by the Company were retired.
10. SUBSEQUENT EVENTS
The Company and its stockholders have entered into a definitive agreement
with LORECOM Technologies, Inc. ("LORECOM") (formerly The Alliance Group, Inc.)
pursuant to which the Company will be purchased by LORECOM. All of the issued
and outstanding common stock of the Company will be exchanged for cash and
common stock of LORECOM in conjunction with the consummation of the initial
public offering of the common stock of LORECOM.
F-20
74
INDEPENDENT AUDITORS' REPORT
To the Stockholders
American Telcom, Inc.:
We have audited the accompanying balance sheet of American Telcom, Inc. as
of December 31, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 1998. The financial
statements as of December 31, 1997, and for the year then ended, were audited by
other auditors whose report expressed an unqualified opinion on those financial
statements. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on the 1998 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 1998 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, such 1998 financial statements present fairly, in all
material respects, the financial position of American Telcom, Inc. at December
31, 1998, and the results of its operations and its cash flows for the year
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 19, 1999
F-21
75
INDEPENDENT AUDITORS' REPORT
To the Stockholders
American Telcom, Inc.:
We have audited the accompanying balance sheet of American Telcom, Inc. as
of December 31, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 1997. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on the 1997 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 1997 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, such 1997 financial statements present fairly, in all
material respects, the financial position of American Telcom, Inc. at December
31, 1997, and the results of its operations and its cash flows for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ SAXON & KNOL
Oklahoma City, Oklahoma
February 19, 1999
F-22
76
AMERICAN TELCOM, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31,
MARCH 31, -------------------
1999 1998 1997
----------- -------- --------
(UNAUDITED)
CURRENT ASSETS:
Cash...................................................... $ 64,934 $ 82,545 $ 32,428
Accounts receivable, net.................................. 113,998 230,324 101,645
Inventory................................................. 23,142 25,484 29,886
Other current assets...................................... 2,800 2,800 2,800
-------- -------- --------
Total current assets.............................. 204,874 341,153 166,759
PROPERTY AND EQUIPMENT:
Autos and trucks.......................................... 138,258 138,258 97,585
Fixtures and equipment.................................... 15,327 15,327 15,327
-------- -------- --------
153,585 153,585 112,912
Less accumulated depreciation............................. (82,626) (77,926) (65,211)
-------- -------- --------
Property and equipment, net....................... 70,959 75,659 47,701
-------- -------- --------
TOTAL............................................. $275,833 $416,812 $214,460
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable....................................... $ 20,492 $ 50,751 $ 19,680
Accrued compensation................................... 19,897 36,849 32,577
Current portion of long-term debt...................... 26,825 66,827 25,158
Other current liabilities.............................. 17,318 50,502 4,216
-------- -------- --------
Total current liabilities......................... 84,532 204,929 81,631
Long-term debt, net of current portion.................... -- -- 6,574
-------- -------- --------
Total liabilities................................. 84,532 204,929 88,205
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 50,000 shares authorized,
1,000 shares issued and outstanding.................... 1,000 1,000 1,000
Additional paid-in capital................................ 31,902 31,902 31,902
Retained earnings......................................... 158,399 178,981 93,353
-------- -------- --------
Total stockholders' equity........................ 191,301 211,883 126,255
-------- -------- --------
TOTAL............................................. $275,833 $416,812 $214,460
======== ======== ========
See notes to financial statements.
F-23
77
AMERICAN TELCOM, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- ---------------------
1999 1998 1998 1997
-------- -------- ---------- --------
(UNAUDITED)
NET SALES........................................ $261,415 $216,119 $1,168,070 $901,883
COSTS AND EXPENSES:
Cost of sales.................................. 134,497 113,444 482,278 432,099
Salaries and benefits.......................... 104,001 72,806 365,055 314,712
Selling, general and administrative............ 49,024 30,026 200,126 220,183
Interest....................................... 544 626 3,028 2,161
-------- -------- ---------- --------
Total costs and expenses............... 288,066 216,902 1,050,487 969,155
-------- -------- ---------- --------
INCOME (LOSS) BEFORE TAXES....................... (26,651) (783) 117,583 (67,272)
INCOME TAX (EXPENSE) BENEFIT..................... 6,069 -- (31,955) 11,818
-------- -------- ---------- --------
NET INCOME (LOSS)................................ $(20,582) $ (783) $ 85,628 $(55,454)
======== ======== ========== ========
See notes to financial statements.
F-24
78
AMERICAN TELCOM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
BALANCE, January 1, 1997................... 1,000 $1,000 $31,902 $148,807 $181,709
Net loss................................. -- -- -- (55,454) (55,454)
----- ------ ------- -------- --------
BALANCE, December 31, 1997................. 1,000 1,000 31,902 93,353 126,255
Net income............................... -- -- -- 85,628 85,628
----- ------ ------- -------- --------
BALANCE, December 31, 1998................. 1,000 1,000 31,902 178,981 211,883
Net loss (Unaudited)..................... -- -- -- (20,582) (20,582)
----- ------ ------- -------- --------
BALANCE, March 31, 1999 (Unaudited)........ 1,000 $1,000 $31,902 $158,399 $191,301
===== ====== ======= ======== ========
See notes to financial statements.
F-25
79
AMERICAN TELCOM, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- --------------------
1999 1998 1998 1997
-------- -------- --------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $(20,582) $ (783) $ 85,628 $(55,454)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation................................. 4,700 5,866 18,802 23,466
(Gain) loss on sale of assets................ -- -- (8,516) --
Changes in current assets and liabilities:
Accounts receivable........................ 116,326 44,396 (128,679) (7,464)
Inventory.................................. 2,342 17,812 4,402 (897)
Other current assets....................... -- -- -- 14,221
Accounts payable........................... (30,259) (15,222) 31,071 (49,263)
Accrued compensation....................... (16,952) -- 4,272 (2,800)
Other current liabilities.................. (33,184) 2,611 46,286 10,928
-------- -------- --------- --------
Net cash provided by (used in) operating
activities............................ 22,391 54,680 53,266 (67,263)
-------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............. -- -- (66,742) (11,050)
Proceeds from sale of property and equipment.... -- -- 28,498 --
-------- -------- --------- --------
Net cash used in investing activities... -- -- (38,244) (11,050)
-------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on long-term debt...... 83,733 32,076
Payments on long-term borrowings................ (40,002) (1,031) (48,638) (344)
-------- -------- --------- --------
Net cash provided by financing
activities............................ (40,002) (1,031) 35,095 31,732
-------- -------- --------- --------
NET INCREASE (DECREASE) IN CASH................... (17,611) 53,649 50,117 (46,581)
CASH, beginning of period......................... 82,545 32,428 32,428 79,009
-------- -------- --------- --------
CASH, end of period............................... $ 64,934 $ 86,077 $ 82,545 $ 32,428
======== ======== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest........ $ 1,337 $ -- $ 1,532 $ 2,104
Cash paid during the period for income taxes.... $ 32,000 $ -- $ -- $ 18,628
See notes to financial statements.
F-26
80
AMERICAN TELCOM, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
American Telcom, Inc. (the "Company") was incorporated in January 1987,
under the laws of the State of Oklahoma. The Company sells, installs and
maintains telephone equipment in the greater Oklahoma City area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements -- The balance sheet as of March 31,
1999, and the statements of operations, stockholders' equity and cash flows for
the three months ended March 31, 1999 and 1998, have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
included only normal, recurring adjustments) necessary to present fairly the
financial position at March 31, 1999, and the results of operations and cash
flows for the three months ended March 31, 1999 and 1998, have been made. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
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 sales and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations -- The Company currently buys most of its telephone
equipment from one manufacturer. Although there are a limited number of
manufacturers of telephone equipment, management believes that other
manufacturers could provide similar equipment on comparable terms. A change in
manufacturers, however, could cause a possible loss of sales, which would affect
operating results adversely.
Revenue Recognition -- Revenue is recognized when equipment is installed or
when maintenance services are rendered. The Company defers revenues on prepaid
agreements to maintain customer telephone equipment. The deferred revenues are
recognized as revenue over the period the services are provided, which is
generally 12 months. Deferred revenues are not significant as of December 31,
1998 and 1997.
Accounts Receivable -- Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to the
allowance for doubtful accounts; recoveries of previously written off amounts
are added back to the allowance for doubtful accounts.
Inventory -- Inventory is stated at the lower of cost or market on a
specific identification basis. Cost is determined on a first-in, first-out
method.
Property and Equipment -- Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated depreciation are
removed from the respective accounts. Any gains or losses resulting from
disposal are included in current year operations.
Property and equipment owned by the Company are depreciated using an
accelerated method over three to seven years.
Income Taxes -- The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax consequences
of temporary differences and operating loss and tax credit carryforwards by
applying enacted tax rates applicable to future years to differences between
F-27
81
AMERICAN TELCOM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the financial statement amounts and the tax bases of existing assets and
liabilities. A valuation allowance is established if, in management's opinion,
it is more likely than not that some portion of the deferred tax asset will not
be realized. As of December 31, 1998, the Company's temporary differences
between financial and tax bases of assets and liabilities are not material, and
no deferred income taxes have been recognized.
Product Returns and Warranty -- Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period is
returned by the Company to the manufacturer in exchange for replacement product
or refund.
Long-Lived Assets -- Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. Recoverability is assessed
and measured on long-lived assets using an estimate of the undiscounted future
cash flows attributable to the asset. Impairment is measured based on future
cash flows discounted at an appropriate rate.
Advertising -- Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
Fair Value Disclosure -- The Company's financial instruments include cash
and cash equivalents, receivables, short-term payables, and notes payable. The
carrying amounts of cash and cash equivalents, receivables, and short-term
payables approximate fair value due to their short-term nature. The carrying
amounts of notes payable approximate fair value based on borrowing terms
currently available to the Company.
3. OPERATING LEASES
The Company has a noncancelable operating lease for its office space with a
related party. The Company expensed and paid $37,060 and $13,850 for rent during
the years ended December 31, 1998 and 1997, respectively. The future minimum
payments by year at December 31, 1998, are as follows:
1999...................................................... $33,060
2000...................................................... 33,060
2001...................................................... 33,060
-------
$99,180
=======
4. LONG-TERM DEBT
The Company's long-term debt at December 31, 1998 and 1997, consisted of
the following:
1998 1997
------- -------
Promissory note, balloon payment of principal and interest,
interest rate of 8%, due in February 1999, secured by
vehicles.................................................. $66,827 $ --
Promissory note, due in monthly principal and interest
payments, interest rate of 7.5%, secured by vehicle....... -- 10,707
Promissory note, due in monthly principal and interest
payments, interest rate of 8%, secured by vehicle and
personal guaranties from Company owners................... -- 21,025
------- -------
66,827 31,732
Less current maturities..................................... 66,827 25,158
------- -------
Total long-term debt........................................ $ -- $ 6,574
======= =======
F-28
82
AMERICAN TELCOM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The income tax provision consists of the following:
1998 1997
-------- -------
Federal income tax (expense) benefit........................ $(29,107) $11,818
State income taxes, net of federal benefit.................. (2,848) --
-------- -------
$(31,955) $11,818
======== =======
The difference between the statutory Federal income tax rate of 34% and the
Company's effective Federal rate for the years ended December 31, 1998 and 1997,
is due to state taxes and the effect of graduated tax rates.
6. BENEFIT PLAN
All employees are eligible to participate in the Company's defined
contribution plan upon completion of two years of employment and reaching the
age of 21. Employees may contribute up to 15% of base compensation, as defined.
All contributions made by employees are 100% vested at the time the contribution
is made. Contributions by the Company are made at the discretion of management.
No contributions were made by the Company during the years ended December 31,
1998 and 1997.
7. MAJOR CUSTOMERS
Sales to the Company's largest customer amounted to approximately 10% of
net sales for fiscal year 1998. No individual customer in 1997 accounted for net
sales in excess of 10%. The Company has accounts receivable from two customers
that amount to 20% and 36% of the Company's total accounts receivable at
December 31, 1998.
8. RELATED PARTY TRANSACTIONS
The Company has recorded a liability to its president and 50% stockholder
of $26,977 at December 31, 1998 and 1997, representing unpaid accrued
compensation.
The Company made rent payments of $37,060 and $13,850 during the years
ended December 31, 1998 and 1997, respectively, for office space to an entity
owned and operated 100% by the owners of the Company.
9. SUBSEQUENT EVENTS
The Company and its stockholders have entered into a definitive agreement
with LORECOM Technologies, Inc. ("LORECOM") (formerly The Alliance Group, Inc.)
pursuant to which the Company will be purchased by LORECOM. All outstanding
shares of the Company will be exchanged for cash and common stock of LORECOM in
conjunction with the consummation of the initial public offering of the common
stock of LORECOM.
In February 1999, the Company made a payment of $40,002 on a promissory
note with a bank having a balance totaling $66,827 at December 31, 1998. The
note terms required a balloon payment for the total amount plus accrued interest
in February 1999. The bank extended the due date for the remaining unpaid amount
plus accrued interest and fees until May 1999. All other note terms remained
unchanged.
Unaudited -- In May 1999, the Company paid an additional $10,000 on the
promissory note and the bank extended the due date until August 1999.
F-29
83
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Banner Communications, Inc.:
We have audited the accompanying balance sheet of Banner Communications,
Inc. as of December 31, 1998, and the related statements of earnings,
stockholders' equity, and cash flows for the year ended December 31, 1998. The
financial statements as of December 31, 1997, and for the year then ended, were
audited by other auditors whose report expressed an unqualified opinion on those
financial statements. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on the 1998
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 1998 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, such 1998 financial statements present fairly, in all
material respects, the financial position of Banner Communications, Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
year ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 28, 1999
F-30
84
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Banner Communications, Inc.:
We have audited the accompanying balance sheet of Banner Communications,
Inc. as of December 31, 1997, and the related statements of earnings,
stockholders' equity, and cash flows for the year ended December 31, 1997. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on the 1997 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, such 1997 financial statements present fairly, in all
material respects, the financial position of Banner Communications, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ SAXON & KNOL
Oklahoma City, Oklahoma
February 28, 1999
F-31
85
BANNER COMMUNICATIONS, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31,
MARCH 31, ---------------------
1999 1998 1997
----------- --------- ---------
(UNAUDITED)
CURRENT ASSETS:
Cash.................................................... $ 1,670 $ 13,486 $ 24,796
Accounts receivable..................................... 71,195 148,033 101,305
Inventory............................................... 73,939 68,939 77,094
--------- --------- ---------
Total current assets............................ 146,804 230,458 203,195
PROPERTY AND EQUIPMENT:
Autos and trucks........................................ 160,053 160,053 125,060
Fixtures and equipment.................................. 59,532 58,651 50,384
--------- --------- ---------
219,585 218,704 175,444
Less accumulated depreciation........................... (145,123) (139,564) (121,905)
--------- --------- ---------
Property and equipment, net..................... 74,462 79,140 53,539
--------- --------- ---------
TOTAL........................................... $ 221,266 $ 309,598 $ 256,734
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Current portion of long-term debt.................... $ 19,174 $ 20,073 $ 17,644
Line of credit....................................... 30,000 30,000 --
Accounts payable..................................... 68,224 68,432 61,180
Other current liabilities............................ 25,066 32,646 5,408
--------- --------- ---------
Total current liabilities....................... 142,464 151,151 84,232
Long-term debt, net of current portion.................. 39,760 44,807 25,435
--------- --------- ---------
Total liabilities............................... 182,224 195,958 109,667
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 10,000 shares authorized,
500 shares issued and outstanding.................... 500 500 500
Retained earnings....................................... 38,542 113,140 146,567
--------- --------- ---------
Total stockholders' equity...................... 39,042 113,640 147,067
--------- --------- ---------
TOTAL........................................... $ 221,266 $ 309,598 $ 256,734
========= ========= =========
See notes to financial statements.
F-32
86
BANNER COMMUNICATIONS, INC.
STATEMENTS OF EARNINGS
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- -----------------------
1999 1998 1998 1997
-------- -------- ---------- ----------
(UNAUDITED)
NET SALES....................................... $240,355 $276,409 $1,548,874 $1,314,544
COSTS AND EXPENSES:
Cost of sales................................. 130,736 148,234 827,098 610,731
Salaries and benefits......................... 125,828 94,191 452,068 395,251
Selling, general and administrative
expenses................................... 49,990 48,179 216,801 182,200
Interest expense.............................. 2,467 1,245 6,689 6,624
-------- -------- ---------- ----------
Total costs and expenses.............. 309,021 291,849 1,502,656 1,194,806
-------- -------- ---------- ----------
NET INCOME (LOSS)............................... $(68,666) $(15,440) $ 46,218 $ 119,738
======== ======== ========== ==========
See notes to financial statements.
F-33
87
BANNER COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
------ ------ -------- --------
BALANCE, January 1, 1997............................. 500 $500 $ 50,355 $ 50,855
Dividends to stockholders.......................... (23,526) (23,526)
Net income......................................... -- -- 119,738 119,738
--- ---- -------- --------
BALANCE, December 31, 1997........................... 500 500 146,567 147,067
Dividends to stockholders.......................... (79,645) (79,645)
Net income......................................... -- -- 46,218 46,218
--- ---- -------- --------
BALANCE, December 31, 1998........................... 500 500 113,140 113,640
Dividends to stockholders (Unaudited).............. -- -- (5,932) (5,932)
Net loss (Unaudited)............................... -- -- (68,666) (68,666)
--- ---- -------- --------
BALANCE, March 31, 1999.............................. 500 $500 $ 38,542 $ 39,042
=== ==== ======== ========
See notes to financial statements.
F-34
88
BANNER COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- -------------------
1999 1998 1998 1997
-------- -------- -------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $(68,666) $(15,440) $ 46,218 $119,738
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation.................................. 5,559 3,900 28,837 15,435
Changes in current assets and liabilities:
Accounts receivable......................... 76,838 (36,168) (46,728) (22,695)
Inventory................................... (5,000) (5,200) 8,155 (2,313)
Accounts payable............................ (208) 52,469 7,252 (12,022)
Other current liabilities................... (7,580) 45,123 27,238 (23,413)
-------- -------- -------- --------
Net cash provided by operating
activities............................. 943 44,684 70,972 74,730
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............. (881) (2,544) (10,267) (2,608)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders........................ (5,932) (8,939) (79,645) (23,526)
Proceeds from borrowings under line of credit.... -- -- 30,000 --
Payments on long-term debt and line of credit.... (5,946) (9,846) (22,370) (20,861)
-------- -------- -------- --------
Net cash used in financing activities.... (11,878) (18,785) (72,015) (44,387)
-------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH.................... (11,816) 23,355 (11,310) 27,735
CASH, beginning of period.......................... 13,486 24,796 24,796 (2,939)
-------- -------- -------- --------
CASH, end of period................................ $ 1,670 $ 48,151 $ 13,486 $ 24,796
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest......... $ 2,245 $ 1,034 $ 6,689 $ 6,688
Purchase of property and equipment through
borrowings.................................... $ -- $ 30,600 $ 44,171 $ --
See notes to financial statements.
F-35
89
BANNER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Banner Communications, Inc. (the "Company") was incorporated in January
1987, under the laws of the State of Oklahoma. The Company sells, installs and
maintains telephone equipment for commercial customers in the greater Tulsa,
Oklahoma market area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements -- The balance sheet as of March 31,
1999, and the statements of operations, stockholders' equity and cash flows for
the three months ended March 31, 1999 and 1998, have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
included only normal, recurring adjustments) necessary to present fairly the
financial position at March 31, 1999, and the results of operations and cash
flows for the three months ended March 31, 1999 and 1998, have been made. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
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 sales and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations -- The Company currently buys most of its telephone
equipment from three manufacturers. Although there are a limited number of
manufacturers of telephone equipment, management believes that other
manufacturers could provide similar equipment on comparable terms. A change in
manufacturers, however, could cause a possible loss of sales, which would affect
operating results adversely.
Revenue Recognition -- Revenue is recognized when equipment is installed or
when maintenance services are rendered. The Company defers revenues for deposits
and advance payments received from customers prior to installation. Such amounts
are immaterial and are included in other current liabilities in the accompanying
financial statements.
Accounts Receivable -- Allowances for doubtful accounts receivable are
established based on historical losses, experience and knowledge of specific
items. No allowances have been established at December 31, 1998 and 1997 as
management believes no material losses will be incurred from receivables.
Inventory -- Inventory is stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment -- Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated depreciation are
removed from the respective accounts. Any gains or losses resulting from
disposal are included in current year income or loss.
Property and equipment owned by the Company are depreciated using
accelerated methods over their estimated useful lives of three to five years.
Long-Lived Assets -- Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. Recoverability is assessed
and measured on long-lived assets using an estimate of the undiscounted future
cash flows attributable to the asset. Impairment is measured based on future
cash flows discounted at an appropriate rate.
F-36
90
BANNER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes -- The stockholders of the Company have elected to be taxed as
an S corporation under provisions of the Internal Revenue Code. The items of
income, credit, deduction and loss of the Company pass through to the
stockholders and are includable in their personal income tax returns.
Accordingly, the accompanying financial statements do not reflect a provision or
benefit for income taxes nor deferred tax assets and liabilities.
Under federal income tax laws, regulations and administrative rulings,
certain types of transactions may be accorded varying interpretations.
Accordingly, the Company's financial statements and tax returns, as well as the
individual tax returns of the stockholders, may be changed to conform as a
result of a review by the Internal Revenue Service. No such review is presently
in process.
Product Returns and Warranty -- Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period is
returned by the Company to the manufacturer in exchange for replacement product
or refund.
Advertising -- Advertising costs incurred by the Company are expensed
during the period in which the advertising occurs.
Fair Value Disclosure -- The Company's financial instruments include cash,
receivables, short-term payables, notes payable and borrowings under its line of
credit. The carrying amounts of cash, receivables, and short-term payables
approximate fair value due to their short-term nature. The carrying amounts of
notes payable and borrowings under line of credit approximate fair value based
on borrowing terms currently available to the Company.
3. DEBT
The Company's long-term debt at December 31, 1998 and 1997, consist of the
following:
1998 1997
------- -------
Notes payable to bank, due in monthly principal and interest
payments, interest rates of 8.5% to 8.95%, maturing in
2002 and 2003, secured by vehicles........................ $39,708 $ --
Note payable to bank, due in monthly principal and interest
payments, interest rate of 9.25%, maturing in December
2001, secured by vehicle.................................. 11,291 14,412
Note payable to bank, due in monthly principal and interest
payments, interest rate of 8.75%, maturing in November
2000, secured by vehicle.................................. 10,543 15,166
Notes payable to banks, due in monthly principal and
interest payments, interest rates of 8.25 to 10.25%,
maturing in July and August 1999, secured by vehicles..... 3,338 9,661
Other....................................................... -- 3,840
------- -------
64,880 43,079
Less current portion of long-term debt...................... 20,073 17,644
------- -------
Long-term debt.............................................. $44,807 $25,435
======= =======
The Company also has $30,000 outstanding at December 31, 1998 under its
line of credit agreement with a bank. The agreement permits advances up to
$50,000, with interest at Chase Bank Prime plus 1.5% (9.25% at December 31,
1998) and expires March 4, 1999; however, management expects renewal of the
agreement under similar terms. The agreement is collateralized by accounts
receivable, inventory and equipment of the Company.
Maturities of long-term debt and borrowings under the line of credit for
the next five years are as follows: 1999 -- $50,073; 2000 -- $17,870;
2001 -- $14,002; 2002 -- $8,149; 2003 -- $4,786.
F-37
91
BANNER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited -- In March 1999 the bank extended the expiration date of the
line of credit to July 31, 1999. All other terms remained unchanged.
4. LEASES
The Company leases its office space under an operating lease with annual
rentals of $17,776. The lease expired in 1998 and is currently month-to-month.
5. RETIREMENT PLAN
The Company sponsors a defined contribution plan covering employees who
meet minimum age requirements. Employees may elect to contribute up to 15% of
their eligible compensation. Contributions by the Company are made at the
discretion of management.
The Company made contributions to the plan totaling $9,037 and $10,028 in
1998 and 1997, respectively.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in suits and claims incidental to its business. In
the opinion of management, the outcome of such matters will not have a material
adverse effect on the Company's business, financial position, or results of
operations.
7. SUBSEQUENT EVENT
The Company and its stockholders have entered into a definitive agreement
with LORECOM Technologies, Inc. ("LORECOM") (formerly The Alliance Group, Inc.)
pursuant to which the Company will be purchased by LORECOM. All of the issued
and outstanding common stock of the Company will be exchanged for cash and
common stock of LORECOM in conjunction with the consummation of the initial
public offering of the common stock of LORECOM.
F-38
92
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Commercial Telecom Systems, Inc.:
We have audited the accompanying balance sheets of Commercial Telecom
Systems, Inc. as of December 31, 1998 and 1997, and the related statements of
earnings, stockholders' equity, and cash flows for the years ended December 31,
1998 and 1997. 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. 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, such financial statements present fairly, in all material
respects, the financial position of Commercial Telecom Systems, Inc. as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ HUNTER, ATKINS & RUSSELL, PLC
February 18, 1999
F-39
93
COMMERCIAL TELECOM SYSTEMS, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31,
MARCH 31, -------------------
1999 1998 1997
----------- -------- --------
(UNAUDITED)
CURRENT ASSETS:
Cash...................................................... $ 46,264 $ 54,532 $ 18,667
Accounts receivable....................................... 107,011 72,080 131,811
Inventory................................................. 95,402 90,902 73,097
-------- -------- --------
Total current assets.............................. 248,677 217,514 223,575
-------- -------- --------
PROPERTY AND EQUIPMENT, at cost:
Autos and trucks.......................................... 58,055 58,055 58,055
Fixtures and equipment.................................... 39,451 39,451 39,451
Furniture and fixtures.................................... 976 976 976
Leasehold improvements.................................... 1,552 1,552 1,552
-------- -------- --------
100,034 100,034 100,034
Less accumulated depreciation............................. (87,691) (85,191) (77,970)
-------- -------- --------
Property and equipment, net....................... 12,343 14,843 22,064
-------- -------- --------
OTHER ASSETS................................................ 610 610 610
-------- -------- --------
TOTAL............................................. $261,630 $232,967 $246,249
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable.......................................... $133,719 $137,590 $ 74,865
Deferred maintenance contracts............................ 67,768 64,568 49,042
Other current liabilities................................. 99,803 94,773 20,309
Notes payable, current portion............................ 4,400 4,044 81,723
-------- -------- --------
Total current liabilities......................... 305,690 300,975 225,939
LONG-TERM LIABILITIES:
Long-term debt, net of current portion.................... 5,739 7,348 11,393
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 1,000 shares authorized and
outstanding............................................ 1,000 1,000 1,000
Treasury stock............................................ (4,924) (4,924) (4,924)
Retained earnings (Accumulated deficit)................... (45,875) (71,432) 12,841
-------- -------- --------
Total stockholders' equity (deficiency)........... (49,799) (75,356) 8,917
-------- -------- --------
TOTAL............................................. $261,630 $232,967 $246,249
======== ======== ========
See notes to financial statements.
F-40
94
COMMERCIAL TELECOM SYSTEMS, INC.
STATEMENTS OF EARNINGS
THREE MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------- -----------------------
1999 1998 1998 1997
-------- -------- ---------- ----------
(UNAUDITED)
SALES........................................... $332,225 $349,347 $1,437,932 $1,233,316
COSTS AND EXPENSES:
Cost of sales................................. 192,134 208,597 704,506 631,028
Salaries and benefits......................... 70,830 96,957 386,413 394,632
Selling, general and administrative
expenses................................... 33,566 32,763 133,253 126,167
Interest expense.............................. 263 805 5,099 6,316
-------- -------- ---------- ----------
Total costs and expenses.............. 296,793 339,122 1,229,271 1,158,143
-------- -------- ---------- ----------
INCOME BEFORE TAXES ON INCOME................... 35,432 10,225 208,661 75,173
INCOME TAX EXPENSE.............................. (9,875) (2,026) (76,316) (11,201)
-------- -------- ---------- ----------
NET INCOME...................................... $ 25,557 $ 8,199 $ 132,345 $ 63,972
======== ======== ========== ==========
See notes to financial statements.
F-41
95
COMMERCIAL TELECOM SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
RETAINED
EARNINGS
COMMON COMMON TREASURY (ACCUMULATED
SHARES STOCK STOCK DEFICIT) TOTAL
------ ------ -------- ------------ ---------
BALANCE, January 1, 1997................. 1,000 $1,000 $(4,924) $ 24,903 $ 20,979
Net income............................. 63,972 63,972
Dividends paid......................... -- -- -- (76,034) (76,034)
----- ------ ------- --------- ---------
BALANCE, December 31, 1997............... 1,000 1,000 (4,924) 12,841 8,917
Net income............................. 132,345 132,345
Dividends paid......................... -- -- -- (216,618) (216,618)
----- ------ ------- --------- ---------
BALANCE, December 31, 1998............... 1,000 1,000 (4,924) (71,432) (75,356)
Net income (Unaudited)................. -- -- -- 25,557 25,557
----- ------ ------- --------- ---------
BALANCE, March 31, 1999 (Unaudited)...... 1,000 $1,000 $(4,924) $ (45,875) $ (49,799)
===== ====== ======= ========= =========
See notes to financial statements.
F-42
96
COMMERCIAL TELECOM SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- ---------------------
1999 1998 1998 1997
-------- -------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 25,557 $ 8,199 $ 132,345 $ 63,972
Adjustments to reconcile net income to net cash
provided by operations --
Depreciation................................ 2,500 1,805 10,121 9,485
Gain on disposal of property................ -- -- (2,900) --
Changes in current assets and liabilities:
Accounts receivable....................... (34,931) 31,686 59,731 40,176
Inventory................................. (4,500) 36,306 (17,805) --
Accounts payable.......................... (3,871) 14,338 62,725 (40,181)
Deferred maintenance contracts............ 3,200 471 15,526 (14,999)
Other current liabilities................. 5,030 (3,547) 74,464 15,870
-------- -------- --------- ---------
Net cash provided by operating
activities........................... (7,015) 89,258 334,207 74,323
-------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. -- (15,774) -- (21,556)
-------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................... -- 59,550 100,900 359,834
Payments on long-term debt..................... (1,253) (87,157) (182,624) (345,747)
Dividends paid................................. -- (25,682) (216,618) (76,034)
-------- -------- --------- ---------
Net cash used in financing
activities........................... (1,253) (53,289) (298,342) (61,947)
-------- -------- --------- ---------
NET INCREASE (DECREASE) IN CASH.................. (8,268) 20,195 35,865 (9,180)
CASH, beginning of period........................ 54,532 18,667 18,667 27,847
-------- -------- --------- ---------
CASH, end of period.............................. $ 46,264 $ 38,862 $ 54,532 $ 18,667
======== ======== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest....... $ 200 $ 1,275 $ 5,099 $ 6,297
Cash paid during the period for taxes.......... $ -- $ -- $ -- $ 3,976
See notes to financial statements.
F-43
97
COMMERCIAL TELECOM SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Commercial Telecom Systems, Inc. (the "Company") was incorporated in
December 1988, under the laws of the State of Oklahoma. The Company sells,
installs and maintains telephone equipment in the state of Oklahoma.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The financial statements are prepared using the
accrual basis of accounting. Revenues are recognized when earned and expenses
are recognized when a liability is incurred.
Unaudited Interim Financial Statements -- The balance sheet as of March 31,
1999, and the statements of operations, stockholders' equity and cash flows for
the three months ended March 31, 1999 and 1998, have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
included only normal, recurring adjustments) necessary to present fairly the
financial position at March 31, 1999, and the results of operations and cash
flows for the three months ended March 31, 1999 and 1998, have been made. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
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 sales and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents -- For purposes of the Statements of Cash Flows,
the Company considers all highly liquid investments with an original maturity of
three months or less to be a cash equivalent.
Accounts Receivable -- Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to the
allowance for doubtful accounts; recoveries of previously written off amounts
are added back to the allowance for doubtful accounts.
Inventory -- Inventory is stated at the lower of cost or market on the
first in, first out basis.
Property and Equipment -- Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated depreciation are
removed from the respective accounts. Any gains or losses resulting from
disposal are included in current year income or loss. For the years ending
December 31, 1998 and 1997 the Company had $-0- and $21,556 of additions to
property and equipment, respectively.
Property and equipment owned by the Company are depreciated using the
straight-line method over the following useful lives: Autos and trucks -- 3 to 7
years; fixtures and equipment -- 5 to 7 years; furniture and fixtures -- 5 to 7
years; and leasehold improvements -- 5 to 20 years.
Depreciation expense for the years ending December 31, 1998 and 1997 was
$10,121 and $9,485, respectively.
Deferred Maintenance Agreements -- The Company recognizes deferred revenues
for advance payment on agreements to maintain customer telephone equipment. The
deferred revenues are recorded as income in the period the services are
provided, which is generally twelve months.
Income Taxes -- Temporary differences between financial and tax bases of
assets and liabilities are not material. Accordingly, no deferred income taxes
have been presented.
F-44
98
COMMERCIAL TELECOM SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Treasury Stock -- Stock held as treasury stock is stated at cost.
Error Corrections -- Certain errors resulting in an over and understatement
of balance sheet accounts occurred in calendar year 1996. These errors resulted
in an adjustment of $3,327 to retained earnings for the year ending December 31,
1997.
Product Returns and Warranty -- Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period is
returned by the Company to the manufacturer in exchange for replacement product
or refund.
Impairment -- Asset impairments are recorded when events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. Impairment is assessed and measured on long-lived assets using an
estimate of the undiscounted future cash flows.
Advertising -- Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
3. OPERATING LEASES
The Company has an operating lease for its office space. The future minimum
payments by year at December 31, 1998, are as follows:
1999....................................................... $6,825
The lease expires July 31, 1999 and has monthly payments of $975. There is
no imputed interest or current maturities associated with this lease.
4. LONG-TERM DEBT
The Company's long-term debt at December 31, 1998 and 1997, consisted of
the following:
1998 1997
------- -------
Note payable to a bank, due July 1, 2001, carrying an
interest rate of 9.5% with monthly payments of $413. The
loan was for the purchase of a vehicle that was
capitalized at $20,050.................................... $11,392 $16,491
Less current maturities..................................... (4,044) (5,098)
------- -------
Long-term portion........................................... $ 7,348 $11,393
======= =======
Maturities of long-term debt for years subsequent to December 31, 1998 are:
1999 -- $4,044; 2000 -- $4,445; 2001 -- $2,903.
The Company has a line of credit with a local commercial bank. This line of
credit matures March of each year. The line of credit is for $75,000 and carries
an interest rate of 2% of Chase Manhattan prime. As of December 31, 1998 the
Company did not owe any monies on this line of credit. As of December 31, 1997
the Company owed $64,973. This obligation is secured by bank accounts,
inventory, furniture, fixtures, equipment and the personal guarantee of the
majority stockholder.
F-45
99
COMMERCIAL TELECOM SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The Company has accrued liabilities for federal and state income taxes as
follows:
1998 1997
------- -------
Federal................................................... $63,907 $ 8,625
State..................................................... 12,409 2,576
------- -------
$76,316 $11,201
======= =======
The Company has also accrued estimates as to the penalties and interest
owed on the above obligations. Total penalties and interest accrued for both
federal and state is $15,801.
6. SUBSEQUENT EVENT
The Company and its stockholders have entered into a definitive agreement
with LORECOM Technologies, Inc. ("LORECOM") (formerly The Alliance Group, Inc.)
pursuant to which the Company will be purchased by LORECOM. All outstanding
shares of the Company will be exchanged for cash and common stock of LORECOM in
conjunction with the consummation of the initial public offering of the common
stock of LORECOM.
F-46
100
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
Communication Services, Inc.:
We have audited the accompanying balance sheet of Communication Services,
Inc. as of December 31, 1998, and the related statements of operations,
stockholder's equity, and cash flows for the year ended December 31, 1998. 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 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, such financial statements present fairly, in all material
respects, the financial position of Communication Services, Inc. at December 31,
1998, and the results of its operations and its cash flows for the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
March 9, 1999
F-47
101
COMMUNICATION SERVICES, INC.
BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash...................................................... $ 73,033 $ 26,440
Accounts receivable, net of allowance for doubtful
accounts of $42,000 at March 31, 1999 and $42,000 at
December 31, 1998...................................... 83,051 98,354
Inventory................................................. 29,282 32,482
-------- --------
Total current assets.............................. 185,366 157,276
PROPERTY AND EQUIPMENT:
Vehicles.................................................. 76,140 76,140
Equipment................................................. 22,798 26,689
-------- --------
98,938 102,829
Less accumulated depreciation............................. (57,437) (56,885)
-------- --------
Property and equipment, net.......................... 41,501 45,944
OTHER ASSETS................................................ 133 200
-------- --------
TOTAL............................................. $227,000 $203,420
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current portion of long-term debt......................... $ 9,410 $ 9,410
Line of credit............................................ 18,000 20,035
Accounts payable.......................................... 89,685 68,511
Other current liabilities................................. 38,121 51,813
-------- --------
Total current liabilities......................... 155,216 149,769
Long-term debt, net of current portion.................... 26,398 28,195
-------- --------
Total liabilities................................. 181,614 177,964
-------- --------
COMMITMENTS
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 50,000 shares authorized; 500
shares issued and outstanding.......................... 500 500
Additional paid in-capital................................ 1,774 1,774
Retained earnings......................................... 43,112 23,182
-------- --------
Total stockholder's equity........................ 45,386 25,456
-------- --------
TOTAL............................................. $227,000 $203,420
======== ========
See notes to financial statements.
F-48
102
COMMUNICATION SERVICES, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
------------------- DECEMBER 31,
1999 1998 1998
-------- -------- ------------
(UNAUDITED)
NET SALES.................................................. $263,503 $158,053 $807,432
COSTS AND EXPENSES:
Cost of sales............................................ 129,278 74,569 367,592
Salaries and benefits.................................... 78,551 69,047 285,823
Selling, general and administrative expenses............. 33,924 22,131 156,493
Interest expense......................................... 1,820 1,043 4,335
-------- -------- --------
Total costs and expenses......................... 243,573 166,790 814,243
-------- -------- --------
NET INCOME (LOSS).......................................... $ 19,930 $ (8,737) $ (6,811)
======== ======== ========
See notes to financial statements.
F-49
103
COMMUNICATION SERVICES, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -------
BALANCE, January 1, 1998..................... 500 $500 $1,774 $31,722 $33,996
Distribution to stockholder................ (1,729) (1,729)
Net loss................................... -- -- -- (6,811) (6,811)
--- ---- ------ ------- -------
BALANCE, December 31, 1998................... 500 500 1,774 23,182 25,456
Net income (Unaudited)..................... -- -- -- 19,930 19,930
--- ---- ------ ------- -------
BALANCE, March 31, 1999 (Unaudited).......... 500 $500 $1,774 $43,112 $45,386
=== ==== ====== ======= =======
See notes to financial statements.
F-50
104
COMMUNICATION SERVICES, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
------------------- DECEMBER 31,
1999 1998 1998
-------- -------- ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $19,930 $(8,737) $ (6,811)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation........................................... 4,750 4,199 16,799
Provision for losses on accounts receivable............ -- -- 37,350
Changes in current assets and liabilities:
Accounts receivable.................................. 15,303 4,903 (82,208)
Inventory............................................ 3,200 3,000 (2,597)
Other assets......................................... 67 1,000 1,108
Accounts payable..................................... 21,174 (8,732) 38,027
Other current liabilities............................ (13,692) 3,024 17,725
------- ------- --------
Net cash provided by (used in) operating
activities...................................... 50,732 (1,343) 19,393
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (307) -- (7,524)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit............. -- 7,045 20,035
Payments on long-term debt and line of credit............. (3,832) (3,351) (14,361)
Distribution to stockholder............................... -- -- (1,729)
------- ------- --------
Net cash provided by financing activities......... (3,832) 3,694 3,945
------- ------- --------
NET INCREASE IN CASH........................................ 46,593 2,351 15,814
CASH, beginning of period................................... 26,440 10,262 10,626
------- ------- --------
CASH, end of period......................................... $73,033 $12,613 $ 26,440
======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 1,697 $ 908 $ 4,335
Purchase of property and equipment through borrowings..... $ -- $21,081 $ 20,910
See notes to financial statements.
F-51
105
COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Communication Services, Inc. (the "Company") was incorporated in January
1992, under the laws of the State of Oklahoma. The Company sells, installs and
maintains telephone, wireless communication and paging equipment to commercial
and individual customers in the state of Oklahoma.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements -- The balance sheet as of March 31,
1999, and the statements of operations, stockholders' equity and cash flows for
the three months ended March 31, 1999 and 1998, have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
included only normal, recurring adjustments) necessary to present fairly the
financial position at March 31, 1999, and the results of operations and cash
flows for the three months ended March 31, 1999 and 1998, have been made. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
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 sales and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations -- The Company currently buys most of its equipment and
paging services from three manufacturers and providers. Although there are a
limited number of such manufacturers and providers, management believes that
others could provide similar equipment and services on comparable terms. A
change in manufacturers and providers, however, could cause a possible loss of
sales and services, which would affect operating results adversely.
Revenue Recognition -- Revenue is recognized when equipment is installed or
when paging and maintenance services are provided. The Company defers revenues
for deposits and advance payments received from customers prior to installation.
Such amounts are immaterial and are included in other current liabilities in the
accompanying financial statements.
Accounts Receivable -- Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to the
allowance for doubtful accounts; recoveries of previously written off amounts
are added back to the allowance for doubtful accounts.
Inventory -- Inventory is stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment -- Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated depreciation are
removed from the respective accounts. Any gains or losses resulting from
disposal are included in current year income or loss.
Property and equipment owned by the Company are depreciated using the
straight-line method over their estimated useful lives of three to seven years.
Long-Lived Assets -- Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. Recoverability is assessed
and measured on long-lived assets using an estimate of the undiscounted future
cash flows attributable to the asset. Impairment is measured based on future
cash flows discounted at an appropriate rate.
F-52
106
COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes -- The stockholder of the Company has elected to be taxed as
an S Corporation under provisions of the Internal Revenue Code. The items of
income, credit, deduction and loss of the Company pass through to the
stockholder and are includable in the stockholder's personal income tax return.
Accordingly, the accompanying financial statements do not reflect a provision or
benefit for income taxes nor deferred tax assets and liabilities.
Under federal income tax laws, regulations and administrative rulings,
certain types of transactions may be accorded varying interpretations.
Accordingly, the Company's financial statements and tax returns, as well as the
individual tax return of the stockholder, may be changed as a result of a review
by the Internal Revenue Service.
Product Returns and Warranty -- Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period is
returned by the Company to the manufacturer in exchange for replacement product
or refund.
Advertising -- Advertising costs incurred by the Company are expensed
during the period in which the advertising occurs.
Fair Value Disclosure -- The Company's financial instruments include cash,
receivables, short-term payables, notes payable and borrowings under its line of
credit. The carrying amounts of cash, receivables, and short-term payables
approximate fair value due to their short-term nature. The carrying amounts of
notes payable and borrowings under line of credit approximate fair value based
on borrowing terms currently available to the Company.
3. LONG-TERM DEBT
The Company's long-term debt at December 31, 1998, consists of the
following:
Notes payable to credit union, due in monthly principal
and interest payments, interest rate of 7.5% and 7.75%,
secured by vehicles, due in 2002 and 2003............... $37,605
Less current maturities................................... 9,410
-------
Total long-term debt............................ $28,195
=======
The Company also has $20,035 outstanding at December 31, 1998 under its
line of credit agreement with a bank which expires August 20, 1999. Borrowings
under the agreement bear interest at 10.5% and are collateralized by accounts
receivable and inventory of the Company.
Maturities of long-term debt and borrowings under the line of credit for
the next five years are as follows: 1999 -- $29,445; 2000 -- $10,688;
2001 -- $11,534; 2002 -- $5,496; 2003 -- $477.
4. OPERATING LEASES
The Company subleases its retail space under a noncancelable operating
sublease agreement. Minimum future payments under the sublease are $21,000
annually through December 31, 2001.
The Company leases its office space from its stockholder. Rentals for 1998
were $21,000.
5. RETIREMENT PLAN
The Company sponsors a defined contribution plan covering employees who
meet minimum compensation and service requirements. Company contributions to the
plan are made at the discretion of management and totaled $3,009 in 1998.
F-53
107
COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SUBSEQUENT EVENT
The Company and its stockholder have entered into a definitive agreement
with LORECOM Technologies, Inc. ("LORECOM") (formerly The Alliance Group, Inc.)
pursuant to which the Company will be purchased by LORECOM. All of the issued
and outstanding common stock of the Company will be exchanged for cash and
common stock of LORECOM in conjunction with the consummation of the initial
public offering of the common stock of LORECOM.
F-54
108
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
EIS Communications:
We have audited the accompanying combined balance sheets of the Telephone
and Paging Divisions of EIS Communications as of December 31, 1998 and 1997, and
the related combined statements of operations, division equity, and cash flows
for the years ended December 31, 1998 and 1997. 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. 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, such combined financial statements present fairly, in all
material respects, the financial position of the Telephone and Paging Divisions
of EIS Communications at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997,
in conformity with generally accepted accounting principles.
The accompanying combined financial statements have been prepared from the
separate records maintained by the Telephone and Paging Divisions of EIS
Communications and may not necessarily be indicative of the financial condition
that would have existed or the results of operations if the divisions had been
operated as unaffiliated companies. Expenses of $309,000 and $260,000 included
in the accompanying combined financial statements for 1998 and 1997,
respectively, represent allocations from EIS Communications.
/s/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
March 5, 1999
F-55
109
TELEPHONE AND PAGING DIVISIONS OF EIS COMMUNICATIONS
COMBINED BALANCE SHEETS
ASSETS
DECEMBER 31,
MARCH 31, -------------------
1999 1998 1997
----------- -------- --------
(UNAUDITED)
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
accounts of $24,000, $22,000 and $28,000,
respectively........................................... $166,718 $239,130 $208,051
Inventory................................................. 303,741 177,340 238,701
-------- -------- --------
Total current assets.............................. 470,459 416,470 446,752
PROPERTY AND EQUIPMENT:
Vehicles.................................................. 34,297 34,297 --
Less accumulated depreciation............................. (17,585) (15,085) --
-------- -------- --------
Vehicles, net..................................... 16,712 19,212 --
-------- -------- --------
TOTAL............................................. $487,171 $435,682 $446,752
======== ======== ========
LIABILITIES AND DIVISION EQUITY
LIABILITIES:
Current liabilities:
Current portion of long-term debt and notes payable.... $ 11,352 $ 11,064 $ 1,072
Accounts payable....................................... 168,237 123,327 315,794
Other current liabilities.............................. 51,725 55,923 19,852
-------- -------- --------
Total current liabilities......................... 231,314 190,314 336,718
Long-term debt, net of current portion.................... 13,831 16,581 --
-------- -------- --------
Total liabilities................................. 245,145 206,895 336,718
COMMITMENTS AND CONTINGENCIES
DIVISION EQUITY............................................. 242,026 228,787 110,034
-------- -------- --------
TOTAL............................................. $487,171 $435,682 $446,752
======== ======== ========
See notes to financial statements.
F-56
110
TELEPHONE AND PAGING DIVISIONS OF EIS COMMUNICATIONS
COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- -----------------------
1999 1998 1998 1997
-------- -------- ---------- ----------
(UNAUDITED)
NET SALES....................................... $588,396 $465,079 $2,349,845 $2,291,546
COSTS AND EXPENSES:
Cost of sales................................. 303,933 197,056 1,247,829 1,252,849
Salaries and benefits......................... 164,754 171,046 678,442 575,654
Selling, general and administrative
expenses................................... 103,906 94,845 421,877 402,970
Interest...................................... 224 -- 2,226 --
-------- -------- ---------- ----------
Total costs and expenses.............. 572,817 462,947 2,350,374 2,231,473
-------- -------- ---------- ----------
INCOME (LOSS) BEFORE TAXES...................... 15,579 2,132 (529) 60,073
INCOME TAX EXPENSE.............................. 2,340 -- -- 24,000
-------- -------- ---------- ----------
NET INCOME (LOSS)............................... $ 13,239 $ 2,132 $ (529) $ 36,073
======== ======== ========== ==========
See notes to financial statements.
F-57
111
TELEPHONE AND PAGING DIVISIONS OF EIS COMMUNICATIONS
COMBINED STATEMENTS OF DIVISION EQUITY
BALANCE, January 1, 1997.................................... $107,214
Distribution to parent.................................... (33,253)
Net income................................................ 36,073
--------
BALANCE, December 31, 1997.................................. 110,034
Contribution from parent.................................. 119,282
Net loss.................................................. (529)
--------
BALANCE, December 31, 1998.................................. 228,787
Net income (Unaudited).................................... 13,239
--------
BALANCE, March 31, 1999 (Unaudited)......................... $242,026
========
See notes to financial statements.
F-58
112
TELEPHONE AND PAGING DIVISIONS OF EIS COMMUNICATIONS
COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
--------------------- -------------------
1999 1998 1998 1997
--------- --------- --------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 13,239 $ 2,132 $ (529) $36,073
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation................................ 2,500 -- 15,085 --
Provision for losses on accounts
receivable................................ 2,000 6,900 10,690 27,724
Changes in current assets and liabilities:
Accounts receivable....................... 70,412 (29,630) (41,769) (80,791)
Inventory................................. (126,401) (45,303) 61,361 (48,227)
Accounts payable.......................... 44,910 (77,247) (192,467) 134,171
Other current liabilities................. (4,198) 40,765 36,071 (21,258)
--------- --------- --------- -------
Net cash provided by (used in)
operating activities................. 2,462 (102,383) (111,558) 47,692
--------- --------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from (distribution to) parent.... -- 102,383 119,282 (33,253)
Payments on long-term borrowing................ (2,462) -- (7,724) (14,439)
--------- --------- --------- -------
Net cash provided by (used in)
financing activities................. (2,462) 102,383 111,558 (47,692)
--------- --------- --------- -------
NET CHANGE IN CASH............................... -- -- -- --
CASH, beginning of period........................ -- -- -- --
--------- --------- --------- -------
CASH, end of period.............................. $ -- $ -- $ -- $ --
========= ========= ========= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest....... $ 4,975 $ 2,970 $ 2,226 $ --
Vehicles acquired through borrowings........... $ -- $ -- $ 34,297 $ --
See notes to financial statements.
F-59
113
TELEPHONE AND PAGING DIVISIONS OF EIS COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The accompanying financial statements present the
combined assets, liabilities, sales and expenses related to the telephone and
paging divisions (the "Divisions") of EIS Communications ("EIS"). EIS sells,
installs and maintains telephone, wireless communication, paging and radio
equipment to commercial and individual customers in the greater Tulsa, Oklahoma
market area. The financial statements have been prepared from the separate
records maintained by the Divisions and may not necessarily be indicative of the
financial conditions that would have existed or the results of operations if the
Divisions had been operated as unaffiliated companies. Expenses of $309,000 and
$260,000 included in the combined financial statements for the years ended
December 31, 1998 and 1997, respectively, represent allocations made from EIS.
Management is of the opinion that the allocations used are reasonable and
appropriate.
Unaudited Interim Financial Statements -- The combined balance sheet as of
March 31, 1999, and the combined statements of operations, division equity and
cash flows for the three months ended March 31, 1999 and 1998, have been
prepared by EIS without audit. In the opinion of management, all adjustments
(which included only normal, recurring adjustments) necessary to present fairly
the financial position at March 31, 1999, and the results of operations and cash
flows for the three months ended March 31, 1999 and 1998, have been made. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
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 sales and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations -- The Divisions currently buy most of their equipment and
paging services from four manufacturers and providers. Although there are a
limited number of such manufacturers and providers, management believes that
others could provide similar equipment and services on comparable terms. A
change in manufacturers and providers, however, could cause a possible loss of
sales, which would affect operating results adversely.
Revenue Recognition -- Revenue is recognized when equipment is installed or
when paging and maintenance services are rendered. The Divisions defer revenues
for deposits and advance payments received from customers prior to installation.
Such amounts are immaterial and are included in other current liabilities in the
accompanying financial statements.
Accounts Receivable -- Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to the
allowance for doubtful accounts; recoveries of previously written off amounts
are added back to the allowance for doubtful accounts.
Inventory -- Inventory is stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment -- Vehicles are stated at cost and are depreciated
using accelerated methods over their estimated useful lives of three years.
Income Taxes -- EIS uses the asset and liability approach to account for
income taxes. Deferred income taxes are recognized for the tax consequences of
temporary differences and operating loss and tax credit carryforwards by
applying enacted tax rates applicable to future years to differences between the
financial statement amounts and the tax bases of existing assets and
liabilities. A valuation allowance is established if, in management's opinion,
it is more likely than not that some portion of the deferred tax asset will not
be realized.
F-60
114
TELEPHONE AND PAGING DIVISIONS OF EIS COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of preparing the combined financial statements of the
Divisions, federal and state income taxes were determined as if the Divisions
filed separate income tax returns. As of December 31, 1998 and 1997, the
Divisions' temporary differences between financial and tax bases of assets and
liabilities are not material and no deferred income taxes have been recognized.
Product Returns and Warranty -- Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period is
returned by the Divisions to the manufacturer in exchange for replacement
product or refund.
Advertising -- Advertising costs incurred by the Divisions are expensed
during the period in which the advertising occurs.
Fair Value of Financial Instruments -- The carrying amounts for accounts
receivable and accounts payable approximate fair value because of the short
maturity of those instruments. The carrying amount of long-term debt
approximates fair value based on borrowing terms currently available to EIS.
2. LONG-TERM DEBT
The Divisions' long-term debt at December 31, 1998 consists of four notes
payable to a bank due in monthly installments of principal and interest through
March 2001. The notes bear interest at 9.95% and are secured by the Divisions'
vehicles. Scheduled maturities by year are as follows: 1999 -- $11,064;
2000 -- $12,216; 2001 -- $4,365.
A note payable to an individual with a balance of $1,072 at December 31,
1997 was repaid in 1998.
3. MAJOR CUSTOMERS
At December 31, 1998 and 1997, the Company had an account receivable from
an individual customer that amounted to 17% and 16%, respectively, of the
Company's total accounts receivable.
4. COMMITMENTS AND CONTINGENCIES
EIS is involved in claims and suits incidental to its business. In the
opinion of management, the outcome of such matters will not have a material
adverse effect on the Divisions' business, financial position or results of
operations.
5. SUBSEQUENT EVENT
EIS and its stockholders have entered into a definitive agreement with
LORECOM Technologies, Inc. ("LORECOM") (formerly The Alliance Group, Inc.)
pursuant to which the telephone and paging divisions will be purchased by
LORECOM in exchange for cash and common stock of LORECOM in conjunction with the
consummation of the initial public offering of the common stock of LORECOM.
F-61
115
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Nobel Systems, Inc.
We have audited the accompanying balance sheet of Nobel Systems, Inc. as of
December 31, 1998, and the related statements of earnings, stockholders' equity,
and cash flows for the year ended December 31, 1998. 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 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, such financial statements present fairly, in all material
respects, the financial position of Nobel Systems, Inc. at December 31, 1998,
and the results of their operations and their cash flows for the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ SAXON & KNOL, P.C.
February 28, 1999
F-62
116
NOBEL SYSTEMS, INC.
BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash...................................................... $ 3,175 $ --
Accounts receivable....................................... 67,733 85,237
Inventory................................................. 39,392 51,976
Other current assets...................................... 22,241 --
-------- --------
Total current assets.............................. 132,541 137,213
PROPERTY AND EQUIPMENT, at cost:
Autos and trucks.......................................... 53,117 53,117
Machinery and equipment................................... 44,126 40,062
Furniture and fixtures.................................... 4,350 11,199
-------- --------
101,593 104,378
Less accumulated depreciation............................. (70,606) (71,889)
-------- --------
Property and equipment, net....................... 30,987 32,489
-------- --------
TOTAL............................................. $163,528 $169,702
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 52,108 $ 46,083
Other current liabilities................................. 31,199 16,822
Current portion of long-term debt......................... 60,645 71,567
-------- --------
Total current liabilities......................... 143,952 134,472
LONG-TERM LIABILITIES:
Long-term debt, net of current portion.................... 14,250 17,228
-------- --------
Total liabilities................................. 158,202 151,700
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 5,000 shares authorized,
800 shares issued and outstanding...................... 800 800
Additional paid in-capital................................ 53,614 53,614
Retained earnings (accumulated deficit)................... (49,088) (36,412)
-------- --------
Total stockholders' equity........................ 5,326 18,002
-------- --------
TOTAL............................................. $163,528 $169,702
======== ========
See notes to financial statements.
F-63
117
NOBEL SYSTEMS, INC.
STATEMENTS OF EARNINGS
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
------------------- DECEMBER 31,
1999 1998 1998
-------- -------- ------------
(UNAUDITED)
SALES...................................................... $298,942 $264,905 $953,046
COSTS AND EXPENSES:
Cost of sales............................................ 160,041 131,845 454,729
Salaries and benefits.................................... 98,896 90,682 330,795
Selling, general and administrative expenses............. 51,034 31,868 166,224
Interest expense......................................... 1,647 3,110 9,729
-------- -------- --------
Total costs and expenses......................... 311,618 257,505 961,477
-------- -------- --------
NET INCOME (LOSS).......................................... $(12,676) $ 7,400 $ (8,431)
======== ======== ========
See notes to financial statements.
F-64
118
NOBEL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
RETAINED
ADDITIONAL EARNINGS
COMMON COMMON PAID-IN (ACCUMULATED
SHARES STOCK CAPITAL DEFICIT) TOTAL
------ ------ ---------- ------------ --------
BALANCE, January 1, 1998................. 500 $500 $ -- $(27,981) $(27,481)
Additional investment.................. 300 300 53,614 -- 53,914
Net loss............................... -- -- -- (8,431) (8,431)
--- ---- ------- -------- --------
BALANCE, December 31, 1998............... 800 800 53,614 (36,412) 18,002
Net loss (Unaudited)................... -- -- -- (12,676) (12,676)
--- ---- ------- -------- --------
BALANCE, March 31, 1999 (Unaudited)...... 800 $800 $53,614 $(49,088) $ 5,326
=== ==== ======= ======== ========
See notes to financial statements.
F-65
119
NOBEL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
------------------- DECEMBER 31,
1999 1998 1998
-------- -------- ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $(12,676) $ 7,400 $ (8,431)
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Depreciation and amortization........................ 3,160 3,160 14,926
Loss on sale of assets............................... -- -- 374
Changes in current assets and liabilities:
Accounts receivable................................ 17,504 61,113 72,084
Inventory.......................................... 12,584 (18,773) (25,552)
Other current assets............................... (22,241) (17,777) 10,572
Accounts payable................................... 6,025 (28,852) (52,613)
Other current liabilities.......................... 14,377 45,909 (5,136)
-------- -------- --------
Net cash provided by operating activities....... 18,733 52,180 6,224
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchases of property and equipment..................... (1,658) (6,970)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional investment................................... -- 300 53,914
Proceeds from borrowings on long-term debt.............. -- -- 10,472
Payments on long-term borrowings........................ (13,900) (48,457) (67,163)
-------- -------- --------
Net cash used in financing activities........... (13,900) (48,157) (2,777)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH........................... 3,175 4,023 (3,523)
CASH, beginning of period................................. -- 3,523 3,523
-------- -------- --------
CASH, end of period....................................... $ 3,175 $ 7,546 $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest................ $ 1,647 $ 3,110 $ 25,808
See notes to financial statements.
F-66
120
NOBEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Nobel Systems, Inc. (the "Company") was incorporated in January 1989, under
the laws of the State of Oklahoma. The Company sells, installs and maintains
telephone equipment in the state of Oklahoma market area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements -- The balance sheet as of March 31,
1999, and the statements of operations, stockholders' equity and cash flows for
the three months ended March 31, 1999 and 1998, have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
included only normal, recurring adjustments) necessary to present fairly the
financial position at March 31, 1999, and the results of operations and cash
flows for the three months ended March 31, 1999 and 1998, have been made. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
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 sales and expenses during
the reporting period. Actual results could differ from those estimates.
Basis of Presentation -- The financial statements are prepared using the
accrual basis of accounting. Revenues are recognized when earned and expenses
are recognized when a liability is incurred.
Concentrations -- The Company currently buys most of its telephone
equipment from two manufacturers. Although there are a limited number of
manufacturers of telephone equipment, management believes that other
manufacturers could provide similar equipment on comparable terms. A change in
manufacturers, however, could cause a possible loss of sales, which would affect
operating results adversely.
Accounts Receivable -- Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to the
allowance for doubtful accounts; recoveries of previously written off amounts
are added back to the allowance for doubtful accounts.
Inventory -- Inventory is stated at the lower of cost or market on a first
in, first out basis.
Property and Equipment -- Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated depreciation are
removed from the respective accounts. Any gains or losses resulting from
disposal are included in current year income or loss.
Property and equipment owned by the Company are depreciated over the
estimated useful lives using straight-line and accelerated tax-based methods.
Deferred Income -- The Company recognizes deferred revenues for advance
payment on agreements to maintain customer telephone equipment. The deferred
revenues are recorded as income in the period the services are provided, which
is generally twelve months.
Income Taxes -- The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under those provisions, the Company
does not pay federal corporate income taxes on its taxable income. Instead, the
stockholders are liable for individual federal income taxes on their respective
shares of the Company's taxable income.
F-67
121
NOBEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Product Returns and Warranty -- Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period is
returned by the Company to the manufacturer in exchange for replacement product
or refund.
Impairment -- Asset impairments are recorded when events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. Impairment is assessed and measured on long-lived assets using an
estimate of the undiscounted future cash flows.
Advertising -- Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
3. LONG-TERM DEBT
The Company's long-term debt at December 31, 1998, consisted of the
following:
Line of credit, monthly interest payments; interest rate of
11.25%; due in February 1999, secured by accounts
receivable................................................ $25,000
Note payable to a related party, due in monthly principal
and interest payments; interest rate of 12%; maturing
in May 2000; unsecured................................. 22,974
Note payable; due in monthly principal and interest
payments; interest rate of 18%; maturing in January
2000; secured by equipment............................. 9,137
Note payable to a related party, due in monthly principal
and interest payments; interest rate of 12%; maturing
in May 2000; unsecured................................. 6,364
Notes payable; due in monthly principal and interest
payments; interest rates from 8.5% to 10.5%; maturing
from January 1999 to March 2000; secured by
vehicles............................................... 21,021
Note payable, due in monthly principal and interest
payments; interest rate of 14.5%; maturing in July
1999; unsecured........................................ 4,299
-------
88,795
Less current maturities................................... (71,567)
-------
$17,228
=======
Maturities of long-term debt for the next five years are as follows:
1999 -- $71,567; 2000 -- $13,360; 2001 -- $2,996; and 2002 -- $872.
4. COMMITMENTS AND CONTINGENCIES
The transferability of the majority shareholder's stock is subject to the
satisfaction or removal of federal tax liens related to personal income tax
liabilities.
5. CONCENTRATIONS OF CREDIT RISK
Sales to the Company's three largest customers amounted to approximately
20% of net sales for fiscal year 1998. As of December 31, 1998, account balances
due from the Company's three largest customers comprise approximately 12% of
total trade accounts receivable, with the largest balance comprising
approximately 5%.
6. RELATED PARTY TRANSACTIONS
The Company has notes payable to the company's shareholders. The notes bear
interest at the approximate fair value at inception of the note. The notes are
unsecured and mature in 2000.
F-68
122
NOBEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SUBSEQUENT EVENT
The Company and its stockholders have entered into a definitive agreement
with LORECOM Technologies, Inc. ("LORECOM") (formerly The Alliance Group, Inc.)
pursuant to which the Company will be purchased by LORECOM. All outstanding
shares of the Company will be exchanged for cash and common stock of LORECOM in
conjunction with the consummation of the initial public offering of the common
stock of LORECOM.
F-69
123
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Telkey Communications, Inc.:
We have audited the accompanying balance sheet of Telkey Communications,
Inc. as of September 30, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the year ended September 30, 1998. The
financial statements as of September 30, 1997, and for the year then ended, were
audited by other auditors whose report expressed an unqualified opinion on those
financial statements. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on the 1998
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 1998 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, such 1998 financial statements present fairly, in all
material respects, the financial position of Telkey Communications, Inc. at
September 30, 1998, and the results of its operations and its cash flows for the
year ended September 30, 1998, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 26, 1999
F-70
124
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Telkey Communications, Inc.:
We have audited the accompanying balance sheet of Telkey Communications,
Inc. as of September 30, 1997 and the related statements of operations,
stockholders' equity, and cash flows for the year ended September 30, 1997.
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 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, such financial statements present fairly, in all material
respects, the financial position of Telkey Communications, Inc. at September 30,
1997, and the results of their operations and their cash flows for the year
ended September 30, 1997, in conformity with generally accepted accounting
principles.
/s/ SAXON & KNOL
Oklahoma City, Oklahoma
February 26, 1999
F-71
125
TELKEY COMMUNICATIONS, INC.
BALANCE SHEETS
ASSETS
SEPTEMBER 30,
MARCH 31, --------------------
1999 1998 1997
----------- -------- ---------
(UNAUDITED)
CURRENT ASSETS:
Cash..................................................... $ 49,002 $140,053 $ 57,247
Receivables, net......................................... 167,461 154,280 193,371
Inventory................................................ 112,389 88,748 82,164
Notes receivable -- current.............................. 7,188 15,324 --
Other current assets..................................... 8,879 3,741 905
--------- -------- ---------
Total current assets............................. 344,919 402,146 333,687
NOTES RECEIVABLE, net of current portion................... 9,673 16,862 --
PROPERTY AND EQUIPMENT:
Autos and trucks......................................... 117,419 117,419 128,164
Fixtures and equipment................................... 49,008 47,207 37,697
Rental telephone equipment............................... 88,385 83,401 64,622
--------- -------- ---------
254,812 248,027 230,483
Less accumulated depreciation............................ (185,483) (174,533) (138,404)
--------- -------- ---------
Property and equipment, net...................... 69,329 73,494 92,079
--------- -------- ---------
TOTAL............................................ $ 423,921 $492,502 $ 425,766
========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Line of credit........................................ $ -- $ 30,000 $ --
Accounts payable...................................... 38,247 31,364 26,015
Deferred income....................................... 17,834 32,200 46,567
Current portion of long-term debt..................... 14,424 29,782 19,683
Other current liabilities............................. 13,866 22,501 19,554
--------- -------- ---------
Total current liabilities........................ 84,371 145,847 111,819
Long-term debt, net of current portion................... 13,108 24,780 26,823
--------- -------- ---------
Total liabilities................................ 97,479 170,627 138,642
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 10,000 shares authorized,
300 shares issued and outstanding..................... 300 300 300
Retained earnings........................................ 326,142 321,575 286,824
--------- -------- ---------
Total stockholders' equity....................... 326,442 321,875 287,124
--------- -------- ---------
TOTAL............................................ $ 423,921 $492,502 $ 425,766
========= ======== =========
See notes to financial statements.
F-72
126
TELKEY COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------- -----------------------
1999 1998 1998 1997
-------- -------- ---------- ----------
(UNAUDITED)
NET SALES....................................... $697,104 $523,755 $1,393,165 $1,280,220
COSTS AND EXPENSES:
Cost of sales................................. 318,131 200,110 613,123 567,813
Salaries and benefits......................... 278,092 243,596 476,800 447,301
Selling, general and administrative........... 94,466 98,763 249,538 185,188
Interest...................................... 1,041 2,820 7,161 5,340
-------- -------- ---------- ----------
Total costs and expenses.............. 691,730 545,289 1,346,622 1,205,642
-------- -------- ---------- ----------
INCOME BEFORE TAXES............................. 5,374 (21,534) 46,543 74,578
INCOME TAX (EXPENSE) BENEFIT.................... (807) 3,230 11,792 15,527
-------- -------- ---------- ----------
NET INCOME (LOSS)............................... $ 4,567 $(18,304) $ 34,751 $ 59,051
======== ======== ========== ==========
See notes to financial statements.
F-73
127
TELKEY COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
------ ------ -------- --------
BALANCE, October 1, 1996............................. 300 $300 $227,773 $228,073
Net income......................................... -- -- 59,051 59,051
--- ---- -------- --------
BALANCE, September 30, 1997.......................... 300 300 286,824 287,124
Net income......................................... -- -- 34,751 34,751
--- ---- -------- --------
BALANCE, September 30, 1998.......................... 300 300 321,575 321,875
Net income (Unaudited)............................. -- -- 4,567 4,567
--- ---- -------- --------
BALANCE, March 31, 1999 (Unaudited).................. 300 $300 $326,142 $326,442
=== ==== ======== ========
See notes to financial statements.
F-74
128
TELKEY COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------- ------------------
1999 1998 1998 1997
-------- -------- -------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ 4,567 $(18,304) $ 34,751 $59,051
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation................................... 14,901 13,779 46,874 27,950
Deferred income................................ (14,366) (9,576) (14,367) --
(Gain) loss on disposal........................ (3,951) -- (500) 11,832
Changes in assets and liabilities:
Receivables.................................. (13,181) 50,663 39,091 (25,751)
Inventory.................................... (23,641) (9,033) (6,584) (34,531)
Notes receivable............................. 15,325 (9,663) (32,186) --
Other current assets......................... (5,138) (2,680) (2,836) (6,517)
Accounts payable............................. 6,883 16,609 5,349 4,340
Other current liabilities.................... (8,635) (13,380) 2,947 8,204
-------- -------- -------- -------
Net cash provided by (used in) operating
activities.............................. (27,236) 18,415 72,539 44,578
-------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............... (6,785) (12,024) (28,289) (51,289)
Proceeds from sale of property and equipment...... -- -- 500 --
-------- -------- -------- -------
Net cash used in investing activities..... (6,785) (12,024) (27,789) (51,289)
-------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.......................... -- 9,663 87,839 500
Payments on borrowings............................ (57,030) (11,838) (49,783) (22,875)
-------- -------- -------- -------
Net cash provided by (used in) financing
activities.............................. (57,030) (2,175) 38,056 (22,375)
-------- -------- -------- -------
NET INCREASE (DECREASE) IN CASH..................... (91,051) 4,216 82,806 (29,086)
CASH, beginning of period........................... 140,053 57,247 57,247 86,333
-------- -------- -------- -------
CASH, end of period................................. $ 49,002 $ 61,463 $140,053 $57,247
======== ======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.......... $ 1,070 $ 2,785 $ 5,108 $ 5,281
Cash paid during the period for income taxes...... $ 2,071 $ 6,131 $ 14,802 $15,527
See notes to financial statements.
F-75
129
TELKEY COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Telkey Communications, Inc. (the "Company") was incorporated in February
1984, under the laws of the State of Oklahoma. The Company sells, installs and
maintains telephone equipment in the greater Tulsa, Oklahoma market area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements -- The balance sheet as of March 31,
1999, and the statements of operations, stockholders' equity and cash flows for
the six months ended March 31, 1999 and 1998, have been prepared by the Company
without audit. In the opinion of management, all adjustments (which included
only normal, recurring adjustments) necessary to present fairly the financial
position at March 31, 1999, and the results of operations and cash flows for the
six months ended March 31, 1999 and 1998, have been made. The results of
operations for the six months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the full year.
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 sales and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations -- The Company currently buys most of its telephone
equipment from two manufacturers. Although there are a limited number of
manufacturers of telephone equipment, management believes that other
manufacturers could provide similar equipment on comparable terms. A change in
manufacturers, however, could cause a possible loss of sales, which would affect
operating results adversely.
Revenue Recognition -- Revenue is recognized when equipment is installed or
when maintenance services are rendered. The Company defers revenues on prepaid
agreements to maintain customer telephone equipment. The deferred revenues are
recognized as revenue over the period the services are provided, which is
generally 12 months.
Accounts Receivable -- Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to the
allowance for doubtful accounts; recoveries of previously written off amounts
are added back to the allowance for doubtful accounts.
Inventory -- Inventory is stated at the lower of cost or market on a
specific identification basis. Cost is determined on a first-in, first-out
method.
Property and Equipment -- Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated depreciation are
removed from the respective accounts. Any gains or losses resulting from
disposal are included in current year operations.
F-76
130
TELKEY COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment owned by the Company are depreciated using the
straight-line method, which includes amortization of assets under capital leases
over the following useful lives:
USEFUL LIVES
IN YEARS
------------
Autos and trucks......................................... 3 - 7
Fixtures and equipment................................... 5 - 7
Rental telephone equipment............................... 5 - 7
Income Taxes -- The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax consequences
of temporary differences and carryforwards by applying enacted tax rates
applicable to future years to differences between the financial statement
amounts and the tax bases of existing assets and liabilities. A valuation
allowance is established if, in management's opinion, it is more likely than not
that some portion of the deferred tax asset will not be realized. As of
September 30, 1998, the Company's temporary differences between financial and
tax bases of assets and liabilities are not material, and no deferred income
taxes have been recognized.
Product Returns and Warranty -- Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period is
returned by the Company to the manufacturer in exchange for replacement product
or refund.
Long-Lived Assets -- Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. Recoverability is assessed
and measured on long-lived assets using an estimate of the undiscounted future
cash flows attributable to the asset. Impairment is measured based on future
cash flows discounted at an appropriate rate.
Advertising -- Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
Fair Value Disclosure -- The Company's financial instruments include cash
and cash equivalents, receivables, notes receivable, short-term payables, and
notes payable. The carrying amounts of cash and cash equivalents, receivables,
and short-term payables approximate fair value due to their short-term nature.
The carrying amounts of notes receivable and notes payable approximate fair
value as rates reflect current market rates.
3. NOTES RECEIVABLE
Notes receivable represent long-term financing of sales to certain
customers. During the year ended September 30, 1998, the Company entered into an
agreement with a bank whereby the bank assumed all servicing rights and a
percentage of interest earned on the notes. In return, the Company received a
cash payment from the bank equal to the principal balance of the notes on the
transfer date. The Company retained all risk associated with nonpayment of any
unpaid principal through a provision in the agreement requiring full recourse.
The Company accounted for this transaction as a secured borrowing and has
recognized the related liability in current and long-term notes payable.
Interest income of $2,010 has been recognized from notes receivable and interest
expense of $1,730 has been recognized on the corresponding note payable during
the year ended September 30, 1998.
F-77
131
TELKEY COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. OPERATING LEASES
The Company has an operating lease with a related party for the Company's
office space. The Company expensed and paid rent totaling $42,000 and $38,400
for the years ended September 30, 1998 and 1997, respectively. The future
minimum payments by year at September 30, 1998, are as follows:
1999....................................................... $42,000
2000....................................................... 42,000
-------
$84,000
=======
5. DEBT
The Company's long-term debt at September 30, 1998 and 1997, consisted of
the following:
1998 1997
------- -------
Note payable to former stockholder, due in monthly principal
and interest payments, interest rate of 7.5%, maturing in
October 2000, secured by common stock..................... $10,405 $14,852
Promissory note, due in monthly principal and interest
payments, interest rate of 9.9%, paid in December 1998,
secured by vehicle........................................ 3,141 6,984
Promissory note, due in monthly principal and interest
payments, interest rate of 8.5%, maturing in January
2000...................................................... 8,830 14,808
Notes payable to bank, due in monthly principal and interest
payments, interest at no less than 2% above prime (12.0%
at September 30, 1998), maturing through August 2001,
secured by notes receivable............................... 32,186 --
Promissory note to related party, due in monthly principal
and interest payments, interest rate of 6%, paid in
September 1998, secured by vehicle........................ -- 9,862
------- -------
54,562 46,506
Less current portion of long-term debt...................... 29,782 19,683
------- -------
Long-term debt.................................... $24,780 $26,823
======= =======
Maturities of long-term debt for years subsequent to September 30, 1998 are
as follows:
1999....................................................... $29,782
2000....................................................... 18,252
2001....................................................... 6,528
-------
Total long-term debt............................. $54,562
=======
The Company also has $30,000 outstanding at September 30, 1998, under its
line of credit agreement with a bank. The agreement permitted advances up to
$150,000, with interest at the Chase New York Prime Rate plus 1% (9.5% at
September 30, 1998), and expired November 30. The Company repaid the entire
amount prior to expiration and did not renew the line.
F-78
132
TELKEY COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The income tax provision consists of the following:
1998 1997
------- -------
Federal income tax expense.................................. $ 8,542 $11,858
State income taxes, net of federal benefit.................. 3,250 3,669
------- -------
$11,792 $15,527
======= =======
The difference between the statutory Federal income tax rate of 34% and the
Company's effective Federal rate for the years ended September 30, 1998 and
1997, is due to state taxes and the effect of graduated tax rates.
7. MAJOR CUSTOMERS
Sales to the Company's largest customer amounted to approximately 9% of net
sales for fiscal year 1998. Sales to the Company's two largest customers
amounted to approximately 13% and 11%, respectively, of net sales for fiscal
year 1997.
8. RELATED PARTY TRANSACTIONS
The Company made principal payments of $9,862 and $9,290 during the years
ended September 30, 1998 and 1997, respectively, to an entity owned 100% by the
Company's owners on a promissory note for the purchase of a vehicle. The
promissory note requires monthly principal and interest payments of $849 at an
interest rate of 6%. Interest expense of $326 and $898 was recognized on the
note for the years ended September 30, 1998 and 1997, respectively. The note was
fully repaid in September 1998.
The Company has a note payable to a former owner totaling $10,405 and
$14,852 at September 30, 1998 and 1997, respectively, maturing in October 2000.
The note requires monthly principal and interest payments of $450, at an
interest rate of 7.5%. Principal payments of $4,447 and $4,127 were made during
the years ended September 30, 1998 and 1997, respectively. Interest expense of
$953 and $1,273 was recognized on the note during the years ended September 30,
1998 and 1997, respectively.
The Company made rent payments for office space of $42,000 and $38,400
during the years ended September 30, 1998 and 1997, respectively, to an entity
owned by the Company's stockholders.
9. SUBSEQUENT EVENT
The Company and its stockholders have entered into a definitive agreement
with LORECOM Technologies, Inc. ("LORECOM") (formerly The Alliance Group, Inc.)
pursuant to which the Company will be purchased by LORECOM. All outstanding
shares of the Company will be exchanged for cash and common stock of LORECOM in
conjunction with the consummation of the initial public offering of the common
stock of LORECOM.
F-79
133
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Terra Telecom, Inc.:
We have audited the accompanying balance sheet of Terra Telecom, Inc. as of
September 30, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the year ended September 30, 1998. The financial
statements as of September 30, 1997, and for the year then ended, were audited
by other auditors whose report expressed an unqualified opinion on those
financial statements. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on the 1998
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 1998 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, such 1998 financial statements present fairly, in all
material respects, the financial position of Terra Telecom, Inc. at September
30, 1998, and the results of its operations and its cash flows for the year
ended September 30, 1998, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 15, 1999
F-80
134
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Terra Telecom, Inc.:
We have audited the accompanying balance sheet of Terra Telecom, Inc. as of
September 30, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year ended September 30, 1997. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on the 1997 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, such financial statements present fairly, in all material
respects, the financial position of Terra Telecom, Inc. at September 30, 1997,
and the results of their operations and their cash flows for the year ended
September 30, 1997, in conformity with generally accepted accounting principles.
/s/ SAXON & KNOL
Oklahoma City, Oklahoma
February 15, 1999
F-81
135
TERRA TELECOM, INC.
BALANCE SHEETS
ASSETS
SEPTEMBER 30,
MARCH 31, ---------------------
1999 1998 1997
----------- --------- ---------
(UNAUDITED)
CURRENT ASSETS:
Cash.................................................... $ 20,884 $ 20,946 $ 5,364
Accounts receivable, net................................ 212,241 118,120 180,082
Inventory............................................... 94,726 131,035 129,107
--------- --------- ---------
Total current assets............................ 327,851 270,101 314,553
PROPERTY AND EQUIPMENT:
Autos and trucks........................................ 119,953 121,990 102,292
Furniture and fixtures.................................. 64,623 55,286 34,747
Machinery and equipment................................. 45,866 49,836 41,267
--------- --------- ---------
230,442 227,112 178,306
Less accumulated depreciation........................... (185,747) (162,192) (132,733)
--------- --------- ---------
Property and equipment, net..................... 44,695 64,920 45,573
OTHER ASSETS.............................................. 8,096 8,096 3,553
--------- --------- ---------
TOTAL........................................... $ 380,642 $ 343,117 $ 363,679
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Current portion of long-term debt.................... $ 51,943 $ 59,143 $ 60,873
Accounts payable..................................... 155,618 126,585 125,758
Other current liabilities............................ 74,277 86,145 55,732
--------- --------- ---------
Total current liabilities....................... 281,838 271,873 242,363
Long-term debt, net of current portion.................. 37,338 56,362 106,343
--------- --------- ---------
Total liabilities............................... 319,176 328,235 348,706
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 25,000 shares authorized;
2,000 shares issued and outstanding.................. 2,000 2,000 2,000
Additional paid-in capital.............................. 82,677 82,677 82,677
Accumulated deficit..................................... (23,211) (69,795) (69,704)
--------- --------- ---------
Total stockholders' equity...................... 61,466 14,882 14,973
--------- --------- ---------
TOTAL........................................... $ 380,642 $ 343,117 $ 363,679
========= ========= =========
See notes to financial statements.
F-82
136
TERRA TELECOM, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
--------------------- -----------------------
1999 1998 1998 1997
---------- -------- ---------- ----------
(UNAUDITED)
NET SALES..................................... $1,137,174 $937,048 $1,956,623 $1,522,718
COSTS AND EXPENSES:
Cost of sales............................... 545,828 533,488 1,082,080 825,796
Salaries and benefits....................... 398,907 279,220 650,889 486,087
Selling, general and administrative......... 127,578 119,397 204,014 195,153
Interest.................................... 8,757 7,232 19,747 24,774
---------- -------- ---------- ----------
Total costs and expenses............ 1,081,070 939,337 1,956,730 1,531,810
---------- -------- ---------- ----------
INCOME (LOSS) BEFORE TAXES.................... 56,104 (2,289) (107) (9,092)
INCOME TAX (EXPENSE) BENEFIT.................. (9,520) 350 16 1,364
---------- -------- ---------- ----------
NET INCOME (LOSS)............................. $ 46,584 $ (1,939) $ (91) $ (7,728)
========== ======== ========== ==========
See notes to financial statements.
F-83
137
TERRA TELECOM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -------
BALANCE, October 1, 1996................... 2,000 $2,000 $82,677 $(61,976) $22,701
Net loss for the year.................... -- -- -- (7,728) (7,728)
----- ------ ------- -------- -------
BALANCE, September 30, 1997................ 2,000 2,000 82,677 (69,704) 14,973
Net loss for the year.................... -- -- -- (91) (91)
----- ------ ------- -------- -------
BALANCE, September 30, 1998................ 2,000 2,000 82,677 (69,795) 14,882
Net income for six months (unaudited).... -- -- -- 46,584 46,584
----- ------ ------- -------- -------
BALANCE, March 31, 1999 (Unaudited)........ 2,000 $2,000 $82,677 $(23,211) $61,466
===== ====== ======= ======== =======
See notes to financial statements.
F-84
138
TERRA TELECOM, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------ -------------------
1999 1998 1998 1997
------- -------- -------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $46,584 $ (1,939) $ (91) $ (7,728)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation................................... 15,465 15,590 29,459 32,360
(Gain) loss on disposal........................ 8,090 (8,189) -- (10,456)
Changes in current assets and liabilities:
Accounts receivable.......................... (94,121) 43,505 61,962 (95,583)
Inventory.................................... 36,309 (2,198) (1,928) 17,218
Other assets................................. -- -- (4,543) (1,365)
Accounts payable............................. 29,033 (5,384) 827 31,221
Other current liabilities.................... (11,868) 6,945 30,413 38,779
------- -------- -------- --------
Net cash provided by operating
activities.............................. 29,492 48,330 116,099 4,446
------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............... (3,330) (15,481) (48,806) (17,003)
------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings................ -- -- 15,786 79,421
Payments on long-term borrowings.................. (26,224) (18,788) (67,498) (58,005)
------- -------- -------- --------
Net cash (used in) provided by financing
activities.............................. (26,224) (18,788) (51,712) 21,416
------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH..................... (62) 14,061 15,582 8,859
CASH, beginning of period........................... 20,946 5,364 5,364 (3,495)
------- -------- -------- --------
CASH, end of period................................. $20,884 $ 19,425 $ 20,946 $ 5,364
======= ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.......... $17,861 $ 16,134 $ 11,282 $ 13,877
See notes to financial statements.
F-85
139
TERRA TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Terra Telecom, Inc. (the "Company") was incorporated in October 1982, under
the laws of the State of Oklahoma. The Company sells, installs and maintains
telephone equipment in the greater Tulsa, Oklahoma market area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements -- The balance sheet as of March 31,
1999, and the statements of operations, stockholders' equity and cash flows for
the six months ended March 31, 1999 and 1998, have been prepared by the Company
without audit. In the opinion of management, all adjustments (which included
only normal, recurring adjustments) necessary to present fairly the financial
position at March 31, 1999, and the results of operations and cash flows for the
six months ended March 31, 1999 and 1998, have been made. The results of
operations for the six months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the full year.
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 sales and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations -- The Company currently buys most of its telephone
equipment from two manufacturers. Although there are a limited number of
manufacturers of telephone equipment, management believes that other
manufacturers could provide similar equipment on comparable terms. A change in
manufacturers, however, could cause a possible loss of sales, which would affect
operating results adversely.
Revenue Recognition -- Revenue is recognized when equipment is installed or
when maintenance services are rendered. The Company defers revenues on prepaid
agreements to maintain customer telephone equipment. The deferred revenues are
recognized as revenue over the period the services are provided, which is
generally 12 months. Deferred revenues are not significant at September 30, 1998
and 1997.
Accounts Receivable -- Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to the
allowance for doubtful accounts; recoveries of previously written off amounts
are added back to the allowance for doubtful accounts.
Inventory -- Inventory is stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment -- Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated depreciation are
removed from the respective accounts. Any gains or losses resulting from
disposal are included in current year operations.
F-86
140
TERRA TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment owned by the Company are depreciated using an
accelerated method over the following useful lives:
USEFUL LIVES
IN YEARS
------------
Autos and trucks........................................ 3-7
Furniture and fixtures.................................. 5-7
Machinery and equipment................................. 3-7
Income Taxes -- The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax consequences
of temporary differences and operating loss and tax credit carryforwards by
applying enacted tax rates applicable to future years to differences between the
financial statement amounts and the tax bases of existing assets and
liabilities. A valuation allowance is established if, in management's opinion,
it is more likely than not that some portion of the deferred tax asset will not
be realized. As of September 30, 1998, the Company's temporary differences
between financial and tax bases of assets and liabilities are not material, and
no deferred income taxes have been recognized.
Product Returns and Warranty -- Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period is
returned by the Company to the manufacturer in exchange for replacement product
or refund.
Long-Lived Assets -- Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. Recoverability is assessed
and measured on long-lived assets using an estimate of the undiscounted future
cash flows attributable to the asset. Impairment is measured based on future
cash flows discounted at an appropriate rate.
Advertising -- Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
Fair Value Disclosure -- The Company's financial instruments include cash
and cash equivalents, receivables, short-term payables, and notes payable. The
carrying amounts of cash and cash equivalents, receivables, and short-term
payables approximate fair value due to their short-term nature. The carrying
amounts of long-term debt approximate fair value based on borrowing terms
currently available to the Company.
3. OPERATING LEASES
The Company has an operating lease for the Company's office space. The
Company has expensed and paid rent of $21,514 and $21,634 for the years ended
September 30, 1998 and 1997, respectively. The future minimum payments by year
at September 30, 1998, are as follows:
1999...................................................... $23,034
2000...................................................... 5,807
-------
$28,841
=======
F-87
141
TERRA TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
The Company's long-term debt at September 30, 1998 and 1997, consisted of
the following:
1998 1997
------- --------
Notes payable to stockholders, due in monthly principal and
interest payments, interest rate of 10.5%, maturing in
April 2001, unsecured..................................... $54,830 $ 74,274
Promissory note to bank, due in monthly principal and
interest payments, interest rate of 9.25%, maturing in
August 1999, secured by all Company assets................ 30,588 55,820
Promissory note to bank, due in monthly principal and
interest payments, interest rate of 8.8%, maturing in
April 2002, secured by vehicle............................ 11,144 --
Promissory note to credit union, due in monthly principal
and interest payments, interest rate of 7.2%, maturing in
June 2002, secured by vehicle............................. 10,941 14,132
Promissory note to bank, due in monthly principal and
interest payments, interest rate of 10%, maturing in
October 1999, secured by vehicle.......................... 4,218 7,546
Promissory note to bank, due in monthly principal and
interest payments, interest rate of 11%, maturing in April
1999, secured by vehicle.................................. 3,784 7,747
Promissory note to bank, due in monthly principal and
interest payments, interest rate of 8.5%, paid in
September 1998, secured by vehicle........................ -- 2,985
Promissory note to bank, due in monthly principal and
interest payments, interest rate of 9%, paid in October
1998, secured by vehicle.................................. -- 4,712
------- --------
115,505 167,216
Less current maturities..................................... 59,143 60,873
------- --------
$56,362 $106,343
======= ========
Maturities of long-term debt for years subsequent to September 30, 1998 are
as follows:
1999...................................................... $ 59,143
2000...................................................... 30,356
2001...................................................... 21,308
2002...................................................... 4,698
Thereafter................................................ --
--------
Total long-term debt............................ $115,505
========
5. INCOME TAXES
The income tax benefit consists of the following:
1998 1997
---- ------
Federal income tax benefit.................................. $16 $1,364
State income taxes, net of federal benefit.................. -- --
--- ------
$16 $1,364
=== ======
The difference between the statutory Federal income tax rate of 34% and the
Company's effective Federal rate is due to the effect of graduated tax rates.
F-88
142
TERRA TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. MAJOR CUSTOMERS
Sales to the Company's largest customer amounted to approximately 11% of
net sales for fiscal year 1998. No individual customer in 1997 accounted for net
sales in excess of 10%. The Company has an account receivable from an individual
customer that amounts to 23% of the Company's total accounts receivable at
September 30, 1998.
7. RELATED PARTY TRANSACTIONS
The Company has a note payable to each of its two owners together totaling
$54,830 and $74,274 at September 30, 1998 and 1997, respectively. The notes are
unsecured and require monthly principal and interest payments totaling $2,050.
Interest on the notes is at 10.5%. Proceeds from the notes were utilized by the
Company for operating capital. Principal payments totaling $19,444 and $7,405
were made on the notes during the years ended September 30, 1998 and 1997,
respectively. Interest expense totaling $5,156 and $3,870 were recorded on the
notes for each of the years ended September 30, 1998 and 1997, respectively. The
notes are scheduled to mature in April 2001.
8. 401(K) PLAN
In fiscal year 1998, the Company established a 401(k) plan (the "Plan"), in
which substantially all employees of the Company are eligible to participate.
Company contributions to the Plan are made at the discretion of Company
management. Contributions totaling $8,352 were made by the Company and charged
to operations for the year ended September 30, 1998.
9. SUBSEQUENT EVENT
The Company and its stockholders have entered into a definitive agreement
with LORECOM Technologies, Inc. ("LORECOM") (formerly The Alliance Group, Inc.)
pursuant to which the Company will be purchased by LORECOM. All outstanding
shares of the Company will be exchanged for cash and common stock of LORECOM in
conjunction with the consummation of the initial public offering of the common
stock of LORECOM.
F-89
143
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Travis Business Systems, Inc.:
We have audited the accompanying balance sheet of Travis Business Systems,
Inc. as of December 31, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 1998. The
financial statements as of December 31, 1997 and for the year then ended were
audited by other auditors whose report expressed an unqualified opinion on those
financial statements. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on the 1998
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 1998 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, such 1998 financial statements present fairly, in all
material respects, the financial position of Travis Business Systems, Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
year ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 19, 1999
F-90
144
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Travis Business Systems, Inc.:
We have audited the accompanying balance sheet of Travis Business Systems,
Inc. as of December 31, 1997 and the related statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 1997. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on the 1997 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 1997 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, such 1997 financial statements present fairly, in all
material respects, the financial position of Travis Business Systems, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ SAXON & KNOL
Oklahoma City, Oklahoma
February 19, 1999
F-91
145
TRAVIS BUSINESS SYSTEMS, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31,
MARCH 31, -----------------------
1999 1998 1997
----------- ---------- ----------
(UNAUDITED)
CURRENT ASSETS:
Cash................................................... $ -- $ 153,409 $ 57,657
Accounts receivable.................................... 738,111 381,421 639,498
Inventory.............................................. 415,950 485,695 423,229
Other current assets................................... 34,913 46,063 48,277
---------- ---------- ----------
Total current assets........................... 1,188,974 1,066,588 1,168,661
PROPERTY AND EQUIPMENT:
Autos and trucks....................................... 90,749 90,749 62,166
Equipment.............................................. 67,153 66,297 54,715
Furniture and fixtures................................. 61,788 60,715 49,147
Leasehold improvements................................. 11,998 11,998 11,998
---------- ---------- ----------
231,688 229,759 178,026
Less accumulated depreciation.......................... (118,841) (111,119) (78,159)
---------- ---------- ----------
Property and equipment, net.................... 112,847 118,640 99,867
OTHER ASSETS............................................. 884 5,884 5,884
---------- ---------- ----------
TOTAL.......................................... $1,302,705 $1,191,112 $1,274,412
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 104,176 $ 172,654 $ 154,370
Deferred income........................................ 255,397 313,846 233,317
Other current liabilities.............................. 95,961 68,495 129,543
Line of credit payable................................. 185,000 -- 72,000
---------- ---------- ----------
Total current liabilities...................... 640,534 554,995 589,230
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 10,000 shares
authorized; 588 shares issued and outstanding....... 588 588 588
Additional paid-in capital............................. 19,500 19,500 19,500
Retained earnings...................................... 642,083 616,029 665,094
---------- ---------- ----------
Total stockholders' equity..................... 662,171 636,117 685,182
---------- ---------- ----------
TOTAL.......................................... $1,302,705 $1,191,112 $1,274,412
========== ========== ==========
See notes to financial statements.
F-92
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TRAVIS BUSINESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
--------------------- -----------------------
1999 1998 1998 1997
---------- -------- ---------- ----------
(UNAUDITED)
SALES......................................... $1,140,659 $897,513 $4,198,047 $3,810,617
COSTS AND EXPENSES:
Cost of sales............................... 557,542 338,116 1,814,852 1,515,984
Salaries and benefits....................... 442,828 408,155 1,814,593 1,591,483
Selling, general and administrative
expenses................................. 106,143 136,686 618,179 521,818
Interest expense............................ 1,539 1,350 9,177 3,030
---------- -------- ---------- ----------
Total costs and expenses............ 1,108,052 884,307 4,256,801 3,632,315
---------- -------- ---------- ----------
INCOME (LOSS) BEFORE TAXES ON INCOME.......... 32,607 13,206 (58,754) 178,302
INCOME TAX BENEFIT (EXPENSE).................. (6,553) (2,653) 9,689 (62,880)
---------- -------- ---------- ----------
NET INCOME (LOSS)............................. $ 26,054 $ 10,553 $ (49,065) $ 115,422
========== ======== ========== ==========
See notes to financial statements.
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TRAVIS BUSINESS SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
BALANCE, January 1, 1997................... 588 $588 $19,500 $549,672 $569,760
Net earnings............................. -- -- -- 115,422 115,422
--- ---- ------- -------- --------
BALANCE, December 31, 1997................. 588 588 19,500 665,094 685,182
Net loss................................. -- -- -- (49,065) (49,065)
--- ---- ------- -------- --------
BALANCE, December 31, 1998................. 588 588 19,500 616,029 636,117
Net income (Unaudited)................... -- -- -- 26,054 26,054
--- ---- ------- -------- --------
BALANCE, March 31, 1999
(Unaudited).............................. 588 $588 $19,500 $642,083 $662,171
=== ==== ======= ======== ========
See notes to financial statements.
F-94
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TRAVIS BUSINESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
-------------------- ---------------------
1999 1998 1998 1997
--------- -------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 26,054 $ 10,553 $ (49,065) $ 115,422
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation............................... 7,722 6,931 43,353 23,247
Loss on disposal........................... -- -- 3,021 --
Changes in current assets and liabilities:
Accounts receivable...................... (356,690) 166,807 258,077 (10,257)
Inventory................................ 69,745 38,831 (62,466) (17,781)
Other current assets..................... 11,150 (16,227) 2,214 (3,636)
Other assets............................. 5,000 -- -- 4,062
Accounts payable......................... (68,478) 122,828 18,284 (167,336)
Deferred income.......................... (58,449) (38,839) 80,529 (108,845)
Other current liabilities................ 27,466 (56,740) (61,048) 2,360
--------- -------- --------- ---------
Net cash provided by (used in)
operating activities................ (336,480) 234,144 232,899 (162,764)
--------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (1,929) (17,170) (65,147) (38,399)
--------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on credit line..................... 530,000 27,000 707,000 72,000
Principal payments on credit line............. (345,000) (99,000) (779,000) --
--------- -------- --------- ---------
Net cash provided by (used in)
financing activities................ 185,000 (72,000) (72,000) 72,000
--------- -------- --------- ---------
NET INCREASE (DECREASE) IN CASH................. (153,409) 144,974 95,752 (129,163)
CASH, beginning of period....................... 153,409 57,657 57,657 186,820
--------- -------- --------- ---------
CASH, end of period............................. $ -- $202,631 $ 153,409 $ 57,657
========= ======== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest...... $ 2,151 $ 288 $ 4,759 $ 452
Cash paid during the period for income
taxes...................................... $ -- $ 15,296 $ 83,197 $ 75,107
See notes to financial statements.
F-95
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TRAVIS BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Travis Business Systems, Inc. (the "Company") was incorporated in September
1988, under the laws of the State of Oklahoma. The Company sells, installs and
maintains telephone equipment in the state of Oklahoma market area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements -- The balance sheet as of March 31,
1999, and the statements of operations, stockholders' equity and cash flows for
the three months ended March 31, 1999 and 1998, have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
included only normal, recurring adjustments) necessary to present fairly the
financial position at March 31, 1999, and the results of operations and cash
flows for the three months ended March 31, 1999 and 1998, have been made. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
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 sales and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations -- The Company currently buys most of its communications
products from two manufacturers. Although there are a limited number of
manufacturers of communications products, management believes that other
manufacturers could provide similar products on comparable terms. A change in
manufacturers, however, could cause a possible loss of sales, which would affect
operating results adversely.
Revenue Recognition -- Revenue is recognized when equipment is installed or
when maintenance services are rendered. The Company defers revenues on prepaid
agreements to maintain customer telephone equipment. The deferred revenues are
recognized as revenue over the period the services are provided, which is
generally 12 months.
Accounts Receivable -- Allowances for doubtful accounts receivable are
established based on historical losses, experience and knowledge of specific
items. No allowances have been established at December 31, 1998 and 1997 as
management believes no material losses will be incurred from receivables.
Inventory -- Inventory is stated at the lower of average cost (first-in,
first-out method) or market.
Property and Equipment -- Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated depreciation are
removed from the respective accounts. Any gains or losses resulting from
disposal are included in current year income or loss.
Property and equipment owned by the Company are depreciated using the
straight-line method over the following useful lives:
USEFUL LIVES
IN YEARS
------------
Autos and trucks......................................... 3 - 5
Equipment................................................ 3 - 7
Furniture and fixtures................................... 3 - 5
Leasehold improvements................................... 15 - 20
F-96
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TRAVIS BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes -- The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax consequences
of temporary differences and operating loss and tax credit carryforwards by
applying enacted tax rates applicable to future years to differences between the
financial statement amounts and the tax bases of existing assets and
liabilities. A valuation allowance is established if, in management's opinion,
it is more likely than not that some portion of the deferred tax asset will not
be realized. As of December 31, 1998, the Company's temporary differences
between financial and tax bases of assets and liabilities are not material, and
no deferred income taxes have been recognized.
Product Returns and Warranty -- Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period is
returned by the Company to the manufacturer in exchange for replacement product
or refund.
Long-Lived Assets -- Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. Recoverability is assessed
and measured on long-lived assets using an estimate of the undiscounted future
cash flows attributable to the asset. Impairment is measured based on future
cash flows discounted at an appropriate rate.
Advertising -- Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
Fair Value Disclosure -- The Company's financial instruments include cash
and cash equivalents, receivables, short-term payables, and notes payable. The
carrying amounts of cash and cash equivalents, receivables, and short-term
payables approximate fair value due to their short-term nature. The carrying
amount of notes payable approximates fair value based on borrowing terms
currently available to the Company.
3. OPERATING LEASES
The Company has operating leases for its office space and certain of its
equipment. Lease expense during the years ended December 31, 1998 and 1997,
totaled $84,947 and $86,380, respectively. The future minimum payments by year
at December 31, 1998, are as follows:
1999..................................................... $ 83,717
2000..................................................... 74,400
2001..................................................... 6,480
--------
$164,597
========
4. INCOME TAXES
The income tax provision consists of the following:
DECEMBER 31,
-----------------
1998 1997
------ --------
Federal income tax benefit (expense)........................ $9,689 $(52,788)
State income taxes, net of federal benefit.................. -- (10,092)
------ --------
$9,689 $(62,880)
====== ========
The difference between the statutory Federal income tax rate of 34% and the
Company's effective Federal rate for the years ended December 31, 1998 and 1997,
is due to state taxes and the effect of graduated tax rates.
F-97
151
TRAVIS BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LINE OF CREDIT
The Company has a line of credit agreement with a bank. The agreement
permits advances up to $450,000 with interest at Chase Manhattan Bank Prime
floating (8.5% at December 31, 1998) and expires September 30, 1999; however,
management expects renewal of the agreement under similar terms. The agreement
is collateralized by the Company's bank accounts, accounts receivable,
inventory, contract rights, proceeds, goods, general intangibles and personal
guarantee from the Company's majority shareholder. There was no amount
outstanding on the line of credit at December 31, 1998. At December 31, 1997,
the amount outstanding totaled $72,000.
6. 401(k) RETIREMENT PLAN
The Company sponsors a 401(k) employee pension plan covering employees who
meet minimum age and service requirements. Employees may elect to contribute up
to 15% of their eligible compensation. Contributions by the Company are made at
the discretion of management and vest ratably after one year over the term of a
participant's employment at 20% per year. The Company made contributions to the
plan totaling $15,520 and $11,447 during the years ended December 31, 1998 and
1997, respectively.
7. MAJOR CUSTOMER
No individual customer in 1998 accounted for net sales in excess of 10%.
Sales to the Company's largest customer amounted to approximately 11% of net
sales for the year ended December 31, 1997.
8. SUBSEQUENT EVENTS
The Company and its stockholders have entered into a definitive agreement
with LORECOM Technologies, Inc. ("LORECOM") (formerly The Alliance Group, Inc.)
pursuant to which the Company will be purchased by LORECOM. All outstanding
shares of the Company will be exchanged for cash and common stock of LORECOM in
conjunction with the consummation of the initial public offering of the common
stock of LORECOM.
Subsequent to December 31, 1998, the Company recognized a loss of $157,725
for damaged inventory caused by a fire that occurred in January 1999. The
Company has since received insurance proceeds of $207,224 related to the fire.
The resulting gain of $49,499 is recorded as an offset to selling, general and
administrative expenses in the income statement.
F-98
152
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,600,000 Shares
[LORECOM Technologies, inc.]
------------------------
PROSPECTUS
------------------------
CAPITAL WEST SECURITIES, INC.
June 25, 1999
DEALER PROSPECTUS DELIVERY OBLIGATION
Until , 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
153
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
LORECOM is incorporated under the laws of the State of Oklahoma.
Section 1031 ("Section 1031") of the Oklahoma General Corporation Act, as the
same exists or may hereafter be amended, inter alia, provides that an Oklahoma
corporation may indemnify any persons who were, are or are threatened to be
made, parties to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation), by reason of the fact
that such person is or was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or preceding, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was illegal. An
Oklahoma corporation may indemnify any persons who are, were or are threatened
to be made, a party to any threatened, pending or completed action or suit by
or in the right of the corporation by reasons of the fact that such person was
a director, officer, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer,
director, employee or agent is adjudged to be liable to the corporation. Where
an officer, director, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director has actually
and reasonably incurred.
Section 1031 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him in
any such capacity arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 1031.
LORECOM's Certificate of Incorporation, as amended, eliminates in
certain circumstances the liability of directors for a breach of their
fiduciary duty as directors. These provisions do not eliminate the liability of
a director:
o For a breach of the director's duty of loyalty to LORECOM or its
stockholders;
o For acts or omissions by a director not in good faith or which
involve intentional misconduct or a knowing violation of law;
o For liability relating to the declaration of dividends and
purchase or redemption of shares in violation of the Oklahoma
General Corporation Act; or
o For any transaction from which the director derived an improper
personal benefit.
LORECOM's certificate of incorporation provides that LORECOM shall
indemnify all of its directors and officers to the full extent permitted by the
Oklahoma General Corporation Act. Under such provisions, any director or
officer, who in his capacity as such, is made or threatened to be a made a
party to any suit or proceeding, may be indemnified if the board of directors
determines such director or officer acted in good faith and in a manner he
reasonably
II-1
154
believed to be in or not opposed to the best interest of LORECOM. The
Certificate and the Oklahoma General Corporation Act further provide that such
indemnification is not exclusive of any other rights to which such individuals
may be entitled under the Certificate, any agreement, vote of stockholders or
disinterested directors or otherwise.
All of LORECOM's directors and officers will be covered by insurance
policies maintained by it against certain liabilities for actions taken in
their capacities as such.
II-2
155
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of estimated expenses, to be paid solely
by LORECOM, in connection with the distribution of the securities being
registered:
SEC Registration Fee ........................ $ 5,338
Printing and engraving expenses ............. $ 100,000
Accounting fees and expenses ................ $ 500,000
Legal fees and expenses ..................... $ 400,000
Miscellaneous expenses ...................... $ 100,000
----------
Total .............................. $1,105,338
* All amounts are estimated.
RECENT SALES OF UNREGISTERED SECURITIES
On September 4, 1998, LORECOM issued 100 shares of common stock, par
value $.01, to David W. Aduddell for aggregate consideration of $1.00 and
certain intangible personal property, including business plans, organizational
documents and economic projections relating to several consolidating company
opportunities. The transaction was exempt from registration under Section 4(2)
of the Securities Act because no public offering was involved.
On September 8, 1998, LORECOM issued 167 shares of common stock, par
value $.01, to Ricky Naylor for aggregate consideration of $500,000, which
consisted of $10.00 in cash and a binding agreement to pay LORECOM $499,990 on
demand. The transaction was exempt from registration under Section 4(2) of the
Securities Act because no public offering was involved.
On the closing date of this offering, LORECOM will issue such number
of shares to shareholders of the interconnect partners equal to $4,187,500
divided by the offering price of LORECOM's common stock pursuant to this
offering. The transactions are exempt from registration under section 4(2) of
the Securities Act and the regulations promulgated thereunder because no public
offering is involved.
II-3
156
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement.*
2.1 Agreement and Plan of Merger, dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition V Corp., Access
Communications Services, Inc., David Aduddell and Steve
Aduddell.
2.2 Agreement and Plan of Merger, dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition VI Corp.,
American Telecom, Inc., Tony B. Alexander and William R.
Pearson.
2.3 Agreement and Plan of Merger, dated March 9, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition VII Corp., Banner
Communications, Inc., Charles O'Toole and Phillip Rodger
Williams.
2.4 Agreement and Plan of Merger dated March 9, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition IX Corp.,
Communication Services, Inc. and Steve Williams.
2.5 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition VII Corp.,
Commercial Telecom Systems, Inc., John Whitten, Mark Whitten and
Jody Slape.
2.6 Amendment to Agreement and Plan of Merger dated March 24, 1999,
by and among The Alliance Group, Inc., Alliance Acquisition XIII
Corp., Commercial Telecom Systems, Inc., John Whitten, Mark
Whitten and Jody Slape.
2.7 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition III Corp., Nobel
Systems, Ken Blood, David Andres and Jim Pearson.
2.8 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition II Corp., Perkins
Office Machines, Inc. and Jack Perkins.
2.9 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition X Corp., Telkey
Communications, Inc., Michael P. Murphy and Deborah S. Murphy.
2.10 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition I Corp., Terra
Telecom, Inc., Jerry McCart, Paula L. McCart, Ron Crainshaw and
Lora M. Crainshaw.
2.11 Agreement and Plan of Merger dated March 12, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition XI Corp., Travis
Business Systems, Inc., Wylie Limited Partnership, Gregory
Mantia and Scott McCrory.
2.12 Asset Purchase Agreement dated March 10, 1999, by and among The
Alliance Group, Inc., Alliance Acquisition IV Corp. and Able
Communications Incorporated.
2.13 Asset Purchase Agreement dated March 10, 1999, by and among The
Alliance Group,Inc., Alliance Acquisition XI Corp., Electrical
and Instrument Sales Corp. d/b/a EIS Communications, and
Electronic Information Systems, L.L.C.
2.14 Asset Purchase Agreement dated March 10, 1999, by and among The
Alliance Group, Inc., Alliance Acquisition XIII Corp. and The
Phone Man Sales and Services, Inc.
2.15 Amendment to Agreement and Plan of Merger dated April 15, 1999,
by and among The Alliance Group, Inc., Alliance Acquisition V
Corp., Access Communications Services, Inc., David Aduddell and
Steve Aduddell.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Bylaws of the Registrant.
4.1 Form of Certificate representing Common Stock.**
5.1 Opinion of McAfee & Taft A Professional Corporation.*
10.1 Form of Warrant to be issued to John Whitten.**
10.2 Loan Agreement by and between Naylor Concrete and Construction
Company, Inc. and The Alliance Group, Inc. dated
January 5, 1999.**
II-4
157
10.3 Employment and Non-Competition Agreement by and between LORECOM
and Larry Travis dated June 21, 1999.**
10.4 Employment and Non-Competition Agreement by and between LORECOM
and Joe Evans dated June 21, 1999.**
10.5 Employment and Non-Competition Agreement by and between LORECOM
and Jeff Hartwig dated June 21, 1999.**
10.6 LORECOM Technologies, Inc. Deferred Stock Compensation Plan.**
10.7 LORECOM Technologies, Inc. 1999 Long-Term Incentive Plan.**
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.**
23.2 Consent of Hunter, Atkins & Russell, PLC.**
23.3 Consent of Saxon & Knol P.C.**
23.4 Consent of McAfee & Taft A Professional Corporation (contained
in Exhibit 5.1).*
23.5 Consent of Larry Travis.
23.6 Consent of Joe Evans.**
23.7 Consent of Wayne Stone.**
23.8 Consent of John J. Wiesner.**
23.9 Consent of Andrew May.**
23.10 Consent of Wesley E. Cantrell**
23.11 Consent of Houlihan Smith and Company, Inc.**
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).
27.1 Financial Data Schedule.
99.1 Fairness Opinion issued by Houlihan Smith and Company, Inc.*
99.2 Form of LORECOM Technologies, Inc. Nonqualified Stock Option
Agreement.**
99.3 Form of Lock-up Letter to be executed by executive officers,
directors and 5% shareholders of LORECOM Technologies, Inc.**
- ---------------------
* To be filed by amendment.
** Filed with this amendment.
II-5
158
UNDERTAKINGS
The small business issuer will provide to the underwriter at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule
424(b)(1), or (4) or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
II-6
159
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, LORECOM
has duly caused this Amendment No. 2 to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Oklahoma City, State of Oklahoma, on June 25, 1999.
LORECOM Technologies, Inc.
By: /s/ WILLIAM J. HARTWIG
----------------------------------------
William J. Hartwig
Vice President of Operations
Each person whose signature appears below on this Registration
Statement hereby constitutes and appoints William J. Hartwig and Joseph O.
Evans with full power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities (until
revoked in writing) to sign any and all amendments (including post-effective
amendments and amendments thereto) to this registration statement, including
any registration statement filed pursuant to Rule 462 under the Securities Act
of 1933, and to file the same with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary fully to all intents and
purposes as he might do or could do in person thereby ratifying and confirming
all that said attorney-in-fact and agent, or his substitute may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons on June 25, 1999,
in the capacities indicated:
SIGNATURE CAPACITY
--------- --------
/s/ Ricky Naylor Chairman of the Board and Director
- ------------------------
Ricky Naylor
/s/ William J. Hartwig Vice President of Operations (Principal Executive
- ------------------------ Officer)
William J. Hartwig
/s/ Joseph O. Evans Chief Financial Officer (Principal Financial Officer)
- ------------------------
Joseph O. Evans
/s/ Debra G. Morehead Chief Accounting Officer (Principal Accounting
- ------------------------ Officer)
Debra G. Morehead
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160
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement.*
2.1 Agreement and Plan of Merger, dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition V Corp., Access
Communications Services, Inc., David Aduddell and Steve
Aduddell.
2.2 Agreement and Plan of Merger, dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition VI Corp.,
American Telecom, Inc., Tony B. Alexander and William R.
Pearson.
2.3 Agreement and Plan of Merger, dated March 9, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition VII Corp., Banner
Communications, Inc., Charles O'Toole and Phillip Rodger
Williams.
2.4 Agreement and Plan of Merger dated March 9, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition IX Corp.,
Communication Services, Inc. and Steve Williams.
2.5 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition VII Corp.,
Commercial Telecom Systems, Inc., John Whitten, Mark Whitten and
Jody Slape.
2.6 Amendment to Agreement and Plan of Merger dated March 24, 1999,
by and among The Alliance Group, Inc., Alliance Acquisition XIII
Corp., Commercial Telecom Systems, Inc., John Whitten, Mark
Whitten and Jody Slape.
2.7 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition III Corp., Nobel
Systems, Ken Blood, David Andres and Jim Pearson.
2.8 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition II Corp., Perkins
Office Machines, Inc. and Jack Perkins.
2.9 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition X Corp., Telkey
Communications, Inc., Michael P. Murphy and Deborah S. Murphy.
2.10 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition I Corp., Terra
Telecom, Inc., Jerry McCart, Paula L. McCart, Ron Crainshaw and
Lora M. Crainshaw.
2.11 Agreement and Plan of Merger dated March 12, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition XI Corp., Travis
Business Systems, Inc., Wylie Limited Partnership, Gregory
Mantia and Scott McCrory.
2.12 Asset Purchase Agreement dated March 10, 1999, by and among The
Alliance Group, Inc., Alliance Acquisition IV Corp. and Able
Communications Incorporated.
2.13 Asset Purchase Agreement dated March 10, 1999, by and among The
Alliance Group,Inc., Alliance Acquisition XI Corp., Electrical
and Instrument Sales Corp. d/b/a EIS Communications, and
Electronic Information Systems, L.L.C.
2.14 Asset Purchase Agreement dated March 10, 1999, by and among The
Alliance Group, Inc., Alliance Acquisition XIII Corp. and The
Phone Man Sales and Services, Inc.
2.15 Amendment to Agreement and Plan of Merger dated April 15, 1999,
by and among The Alliance Group, Inc., Alliance Acquisition V
Corp., Access Communications Services, Inc., David Aduddell and
Steve Aduddell.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Bylaws of the Registrant.
4.1 Form of Certificate representing Common Stock.**
5.1 Opinion of McAfee & Taft A Professional Corporation.*
10.1 Form of Warrant to be issued to John Whitten.**
10.2 Loan Agreement by and between Naylor Concrete and Construction
Company, Inc. and The Alliance Group, Inc., dated
January 5, 1999.**
161
10.3 Employment and Non-Competition Agreement by and between LORECOM
and Larry Travis dated June 21, 1999.**
10.4 Employment and Non-Competition Agreement by and between LORECOM
and Joe Evans dated June 21, 1999.**
10.5 Employment and Non-Competition Agreement by and between LORECOM
and Jeff Hartwig dated June 21, 1999.**
10.6 LORECOM Technologies, Inc. Deferred Stock Compensation Plan.**
10.7 LORECOM Technologies, Inc. 1999 Long-Term Incentive Plan.**
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.**
23.2 Consent of Hunter, Atkins & Russell, PLC.**
23.3 Consent of Saxon & Knol P.C.**
23.4 Consent of McAfee & Taft A Professional Corporation (contained
in Exhibit 5.1).*
23.5 Consent of Larry Travis.
23.6 Consent of Joe Evans.**
23.7 Consent of Wayne Stone.**
23.8 Consent of John J. Wiesner.**
23.9 Consent of Andrew May.**
23.10 Consent of Wesley E. Cantrell**
23.11 Consent of Houlihan Smith and Company, Inc.**
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).
27.1 Financial Data Schedule.
99.1 Fairness Opinion issued by Houlihan Smith and Company, Inc.*
99.2 Form of LORECOM Technologies, Inc. Nonqualified Stock Option
Agreement.**
99.3 Form of Lock-up Letter to be executed by executive officers,
directors and 5% shareholders of LORECOM Technologies, Inc.**
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* To be filed by amendment.
** Filed with this amendment.