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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Date of report (Date of earliest event reported): NOVEMBER 5, 1999
Commission File No. 0-24833
FUTURELINK CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-4763404
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
100, 6 Morgan, Irvine, California 92618
- --------------------------------------------------------------------------------
(Address of principal executive offices) (ZIP Code)
(949) 837-8252
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
300, 250 - 6TH AVENUE S.W., CALGARY, ALBERTA CANADA T2P 3H7
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On November 5, 1999, the Company completed its previously announced
acquisition of CN Networks, Inc. ("CNI"). Pursuant to the acquisition, CNI's
shareholders received $3.9 million in cash and 1,181,816 shares of the
Registrant's common stock. The Agreement and Plan of Reorganization and Merger
dated September 7, 1999 (the "Acquisition Agreement") pursuant to which this
acquisition was completed is attached as an exhibit hereto. The Acquisition
Agreement was amended to provide that the acquisition would be effected no
later than November 9, 1999 and to clarify certain terms of the Acquisition
Agreement. This amendment to the Acquisition Agreement is also attached as an
exhibit hereto and is incorporated herein by reference.
Audited financial statements for CNI at December 31, 1998 and for the
years ended December 31, 1997 and 1998 and unaudited financial statements for
CNI at September 30, 1999 and for the nine months ended September 30, 1998 and
1999 are attached to this Current Report on Form 8-K. The Registrant intends to
file unaudited pro forma financial statements for the fiscal year ended
December 31, 1998 and for the nine months ended September 30, 1999 showing the
impact of the CNI acquisition in a subsequent Current Report on Form 8-K or
8-K/A on or before December 31, 1999.
ITEM 5. OTHER EVENTS
On November 17, 1999, the Registrant's board of directors formally
accepted the resignation of Robert J. Kubbernus as a director. Mr. Kubbernus'
resignation as Director of the Registrant is effective that date.
In his verbal reasons for resigning, Mr. Kubbernus expressed personal
reasons for his decision. Mr. Kubbernus made no reference to any disagreement
with the Registrant on any matter relating to the Registrant's operations,
policies or practices and the Registrant is not aware of any such
disagreements. A copy of Mr. Kubbernus' letter of resignation dated November
15, 1999 which was sent to the Registrant's board of directors is attached as
an Exhibit hereto.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED:
Audited financial statements for CNI as at December 31, 1998 and for the
years ended December 31, 1997 and 1998 and unaudited financial statements
for CNI as at September 30, 1999 and for the nine month periods ended
September 30, 1998 and 1999 are attached to this Report.
(b) PRO FORMA FINANCIAL INFORMATION:
Pro forma financial information is not included with this Current Report on
Form 8-K. Unaudited pro forma financial statements showing the combination
of the Registrant with CNI as at December 31, 1998 and for the year ended
December 31, 1998 and as at September 30, 1999 and for the nine months
ended September 30, 1999 will be provided in a subsequent filing which the
Registrant intends to file on or before December 31, 1999.
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(c) EXHIBITS:
2.1 Agreement and Plan of Reorganization and Merger dated
September 7, 1999 among FutureLink Distribution Corp., a Colorado
corporation, FutureLink Pleasanton Acquisition Corp., a Delaware
corporation and CN Networks, Inc., among others.
2.2 Amending Agreement dated October 31, 1999 to the Agreement and Plan
of Reorganization and Merger dated September 7, 1999 among FutureLink
Corp., a Delaware corporation (successor to FutureLink Distribution
Corp., a Colorado corporation), FutureLink Pleasanton Acquisition
Corp., a Delaware corporation and CN Networks, Inc., among others.
17.1 Letter of Resignation of Robert J. Kubbernus dated November 15, 1999
99.1 News Release of the Registrant dated November 8, 1999.
99.2 News Release of the Registrant dated November 18, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FUTURELINK CORP.
By: /s/ R. Kilambi Date: November 20, 1999
------------------------------------
Raghu Kilambi, Chief Financial Officer
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EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
2.1 Agreement and Plan of Reorganization and Merger
dated September 7, 1999 among FutureLink Distribution
Corp., a Colorado corporation, FutureLink Pleasanton
Acquisition Corp., a Delaware corporation and CN
Networks, Inc., among others.
2.2 Amending Agreement dated October 31, 1999 to the
Agreement and Plan of Reorganization and Merger dated
September 7, 1999 among FutureLink Corp., a Delaware
corporation (successor to FutureLink Distribution
Corp., a Colorado corporation), FutureLink Pleasanton
Acquisition Corp., a Delaware corporation and CN
Networks, Inc., among others.
17.1 Letter of Resignation of Robert J. Kubbernus dated
November 15, 1999
99.1 News Release of the Registrant dated November 9,
1999.
99.2 News Release of the Registrant dated November 18,
1999.
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
MORELAND & DAVIS, CPAs
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[MORELAND & DAVIS LETTERHEAD]
JANIS M. DAVIS, C.P.A.
M. WELDON MORELAND, C.P.A.
MICHAEL R. RAMIL, C.P.A.
To The Board of Directors
CN Networks, Inc.
dba Computer Networks
Pleasanton, California
We have audited the accompanying balance sheets of Computer Networks, Inc. as of
December 31, 1998 and 1997 and the related statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We have conducted our audits in accordance with generally accepted audited
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CN Networks, Inc. dba Computer
Networks as of December 31, 1998 and 1997, and the results of its operations and
cash flows for the years then ended in conformity with generally accepted
accounting principles.
MORELAND & DAVIS
Accountancy firm
/s/ Janis M. Palermo
Certified Public Accountant
August 30, 1999
MORELAND & DAVIS
ACCOUNTANCY FIRM
----------------
1390 Concannon Blvd., Livermore, CA 94550
(925) 449-0100 FAX (925) 449-0607
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
Current Assets 1998 1997
---------- ----------
Cash $ 37,628 $ 13,913
Accounts Receivable 1,060,736 1,077,401
Prepaid Federal Taxes 6,805 0
Inventory, at cost 206,672 229,783
---------- ----------
Total Current Assets 1,311,840 1,321,096
---------- ----------
Property, Plant & Equipment
Property, Plant & Equipment, at cost 226,832 209,409
Accumulated Depreciation (182,534) (99,642)
---------- ----------
Total Property, Plant & Equipment 44,297 109,767
---------- ----------
Other Assets
Lease Security Deposits 11,440 10,383
Deferred Tax Asset 14,635 7,923
---------- ----------
Total Other Assets 26,075 18,306
---------- ----------
Total Assets $1,382,213 $1,449,169
========== ==========
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable $ 381,923 $ 605,072
Notes Payable, Current Portion (See Note 3) 509,381 402,564
Sales Tax Payable 34,224 23,389
Federal Income Taxes Payable 0 13,900
State Franchise Taxes Payable 584 3,031
Deferred Tax Liability 0 1,055
---------- ----------
Total Current Liabilities 926,112 1,049,011
---------- ----------
Notes Payable, Long Term (See Note 3) 17,119 41,899
---------- ----------
Total Liabilities 943,231 1,090,910
---------- ----------
Stockholders' Equity
Common Stock, no par, 1,000,000 Shares
Authorized, 10,000 Shares Issued and Outstanding 10,000 10,000
Retained Earnings 428,981 348,258
---------- ----------
Total Stockholders' Equity 438,981 358,258
---------- ----------
Total Liabilities and Equity $1,382,213 $1,449,169
========== ==========
See Independent Auditor's Report and
Accompanying Notes
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
-------------------- ---------------------
Revenue
Net Sales $5,540,938 99.51% $6,439,637 99.43%
Sales Discounts (2,703) (0.05) (3,802) (0.06)
Freight 30,003 0.54 40,645 0.63
---------- ------ ---------- -------
Total Revenue 5,568,238 100.00 6,476,480 100.00
---------- ------ ---------- -------
Cost of Sales 3,179,433 57.10 4,308,540 66.53
Purchase Returns 0 0.00 (147) (0.00)
---------- ------ ---------- -------
Gross Profit 2,388,805 42.90 2,168,087 33.48
General and Administrative Expenses 2,229,931 40.05 1,964,094 30.33
---------- ------ ---------- -------
Net Income from Operations 158,874 2.85 203,993 3.15
---------- ------ ---------- -------
Other Income and (Expense)
Miscellaneous Income 187 0.00 1,570 0.02
Interest Expense (41,176) (0.74) (44,092) (0.68)
---------- ------ ---------- -------
Total Other Income and (Expense) (40,989) (0.74) (42,521) (0.66)
---------- ------ ---------- -------
Earnings Before Income Taxes 117,885 2.12 161,471 2.49
Provision for Income Taxes
Federal Income Taxes 24,885 0.45 43,337 0.67
State Franchise Taxes 12,277 0.22 14,863 0.23
---------- ------ ---------- -------
Net Income $ 80,723 1.45% $ 103,271 1.59%
========== ====== ========== =======
See Independent Auditor's Report and
Accompanying Notes
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ------- -------- --------
Balances as of December 31, 1996 1,000,000 $10,000 $244,987 $254,987
Net Income -- -- 103,271 103,271
--------- ------- -------- --------
Balances as of December 31, 1997 1,000,000 10,000 348,258 358,258
Net Income -- -- 80,723 80,723
--------- ------- -------- --------
Balances as of December 31, 1998 1,000,000 $10,000 $428,981 $438,981
========= ======= ======== ========
See Independent Auditor's Report and
Accompanying Notes
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
--------- ---------
Cash Flows from Operating Activities
Net Income $ 80,723 $ 103,271
Adjustments to Reconcile Net Income to Net Cash (Used)
Provided by Operating Activities
Depreciation 82,892 58,339
Deferred Income Tax (7,767) (9,931)
(Increase) Decrease In:
Accounts Receivable 16,664 (332,659)
Inventory 23,111 (153,611)
Other Assets (1,057) 15
Prepaid Income Taxes (6,805) 0
Increase (Decrease) In:
Accounts Payable (223,149) 169,757
Sales Tax Payable 10,835 16,855
Income Taxes Payable (16,347) 3,992
--------- ---------
Net Cash (Used) by Operating Activities (40,899) (143,971)
--------- ---------
Cash Flows from Investing Activities
Acquisition of Property and Equipment (17,423) (126,554)
--------- ---------
Net Cash (Used) by Investing Activities (17,423) (126,554)
--------- ---------
Cash Flows from Financing Activities
Acquisition of Debt 410,000 618,707
Repayment of Debt (327,962) (364,387)
--------- ---------
Net Cash Provided by Financing Activities 82,038 254,320
--------- ---------
Net Increase (Decrease) in Cash 23,716 (16,205)
Cash at January 1, 1998 and 1997 13,913 30,118
--------- ---------
Cash at December 31, 1998 and 1997 $ 37,628 $ 13,913
========= =========
Cash paid for income taxes for the years ended December 31, 1998 and 1997 was
$68,081 and $51,210, respectively. Cash paid for interest for the years ended
December 31, 1998 and 1997 was $41,176 and $44,092, respectively.
See Independent Auditor's Report and
Accompanying Notes
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 -- ORGANIZATION
Organization and Purpose
CN Networks, Inc., doing business as Computer Networks, Inc. (the Company) was
founded in 1991 and incorporated under the laws of the State of California in
1994 with its main office located in Pleasanton, California. The Company
provides expert consulting, design and integration services for corporate remote
LAN access and dial-out needs.
The Company is governed by a Board of Directors, comprised of the president and
corporate secretary. Financial Statements are prepared in-house and reviewed by
the directors on a monthly basis.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all highly
liquid investments with an initial maturity of three months or less to be cash
equivalents. At the financial statement date, the Company had no investments
other than cash on the books.
Inventories
Inventories are stated at the lower of cost or market, cost being determined by
the average cost method, market being replacement cost.
Property, Plant & Equipment
The cost of property, plant and equipment is depreciated over the estimated
useful lives of the related assets. For financial reporting purposes, the useful
lives of assets are 18 to 24 months for Computer Hardware and three years for
Office Furniture and Certain Software. Useful lives for tax purposes are five
years for Computer Hardware and Software and seven years for Office Furniture.
Depreciation is computed on the straight line method for financial reporting
purposes and on the double declining balance for income tax purposes.
Maintenance and repairs are charged to operations when incurred. Betterments and
renewals are capitalized.
Advertising Costs
Advertising costs are charged to operations when incurred.
See Independent Auditor's Report
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Revenue Recognition
Revenue is recognized when products are shipped, support contracts are
recognized based on the terms of the contracts, and training revenue is
recognized when performed. Losses on returns and contract costs are recorded
when they occur.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109). SFAS 109
requires, among other things, that deferred income taxes be provided for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities as part of the income tax provisions.
NOTE 3 -- INVENTORIES
Inventories at December 31, 1998 and 1997 consist of:
Hardware 75,347 Hardware 87,318
Software 131,325 Software 142,465
-------- --------
Total $206,672 Total $229,783
======== ========
See Independent Auditor's Report
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 4 -- LONG-TERM DEBT
Following is a summary of long-term debt at December 31, 1998 and 1997:
10.5% note payable to bank in monthly principal $ 31,494 $ 47,934
installments of $1,370 plus interest, through November
19, 2000, secured by the assets of the Company
10.5% note payable to bank in monthly principal 10,405 18,745
installments of $695 plus interest, through March 18,
2000, secured by the assets of the Company
11.0% note payable to bank in monthly principal 0 2,808
installments of $564 plus interest, through May 18,
1998, secured by the assets of the Company
Line of credit with bank, maturing March 31, 1999. 484,601 374,976
Interest payable monthly at 10%, maximum line of credit
is $700,000 in 1997 and $1,000,000 in 1998. Secured by
accounts receivable, expected to be refinanced. The
line of credit was renewed March 23, 1999 in the amount
of $1,000,000 maturing March 31, 2000 with a rate of
9.75%
--------- ---------
526,500 444,463
Less: Current maturities included in current liabilities (509,381) (402,564)
--------- ---------
$ 17,119 $ 41,899
========= =========
Following are maturities of long-term debt for each of the next two years:
YEAR ENDED DECEMBER 31,
-----------------------
1999 $509,381
2000 17,119
--------
$526,500
========
See Independent Auditor's Report
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 5 -- LEASES
The Company leases its main office and a training facility under operating
leases expiring in 2001. The Company has entered into a new lease agreement for
its main office effective September 1, 1999 and expiring 2004. Total rental
expense recorded in the financial statements for the years under these leases
was $113,893 for 1998 and $96,514 for 1997. In addition, on February 3, 1999 the
Company signed a lease for additional space to accommodate an expansion of the
training facility. Occupancy is scheduled for April, 1999. The Company also pays
lease payments on an automobile effective February, 1997 for 60 months. The
automobile lease expense recorded in the financial statements was $19,551 for
1998 and $24,775 for 1997. Future minimum rental payments under these operating
leases are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1999 $ 209,133
2000 245,329
2001 254,259
2002 211,691
2003 210,062
----------
$1,130,474
==========
See Independent Auditor's Report
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 6 -- INCOME TAXES
Income tax expense for the year ended December 31, 1998 and 1997 is comprised of
the following:
1998 1997
----------------------------- ----------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------ ------- -------- ------
Federal 31,505 6,620 24,885 48,538 5,201 43,337
State 14,485 2,208 12,277 16,010 1,147 14,863
------ ----- ------ ------ ----- ------
45,990 8,828 37,162 64,548 6,348 58,200
====== ===== ====== ====== ===== ======
Deferred tax (liabilities) assets comprise the following at December 31, 1998
and 1997:
Depreciation 0 (1,055)
------- ------
Gross deferred tax liabilities 0 (1,055)
------- ------
State taxes, net of federal benefit 4,564 5,808
Depreciation 10,071 2,115
------- ------
Gross deferred tax assets 14,635 7,923
------- ------
Net deferred tax assets $14,635 $6,868
======= ======
See Independent Auditor's Report
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
The net deferred tax asset represents temporary differences for future tax
deductions which can generally be realized by carryback to taxable income in
prior years.
The provisions for income taxes differ from the amount of income tax determined
by applying the applicable U.S. statutory income tax rate to pre-tax income as
follows for the year ended December 31, 1998 and 1997:
Federal statutory rate 25% 30%
State income taxes, net of federal tax benefit and
credits 7% 6%
--- ---
32% 36%
=== ===
NOTE 7 -- CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents and trade
receivables. The Company places its cash with federally insured financial
institutions and as of December 31, 1998 and 1997, the Company's balances do not
exceed federally insured limits. Fair value of these financial instruments
approximates their carrying values.
The Company believes any risk of accounting loss is significantly reduced due to
the diversity of its services, end customers and geographic sales areas. The
Company performs credit evaluations of its customers' financial condition
whenever necessary. The Company generally does not require cash collateral or
other security to support customer receivables and has historically had little
problems with collecting their accounts receivable. For the year ended December
31, 1997 the Company had two customers that individually had accounts receivable
balances exceeding 10% of the total accounts receivable balance. For the year
ended December 31, 1998 no individual customer exceeded 10% of the total
accounts receivable balance.
See Independent Auditor's Report
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
SCHEDULE OF NOTES PAYABLE
FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
-------- --------
CURRENT PORTION
Bank of Walnut Creek #104557 $484,601 $374,976
Bank of Walnut Creek #504728 0 2,808
Bank of Walnut Creek #105190 8,340 8,340
Bank of Walnut Creek #505865 16,440 16,440
-------- --------
Total Current Portion of Notes Payable 509,381 402,564
-------- --------
LONG TERM PORTION
Bank of Walnut Creek #105190 2,065 10,405
Bank of Walnut Creek #505865 15,054 31,494
-------- --------
Total Long-Term Portion of Notes Payable 17,119 41,899
-------- --------
Total Notes Payable $526,500 $444,463
======== ========
See Independent Auditor's Report
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
SCHEDULES OF GROSS PROFIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
--------------------- ----------------------
DEPARTMENT 01
Sales $ 4,291,132 100.00% $ 5,762,798 100.00%
Sales Returns (185,171) (4.32) (294,680) (5.11)
Cost of Sales (3,078,594) (71.74) (4,303,017) (74.67)
----------- ------ ----------- -------
Gross Profit -- Department 01 $ 1,027,367 23.94% $ 1,165,101 20.22%
=========== ====== =========== =======
DEPARTMENT 02
Sales $ 1,293,619 100.00% $ 1,070,597 100.00%
Sales Returns (132,306) (10.23) (112,848) (10.54)
Cost of Sales (60,637) (4.69) (3,753) (0.35)
----------- ------ ----------- -------
Gross Profit -- Department 02 $ 1,100,676 85.09% $ 953,995 89.11%
=========== ====== =========== =======
DEPARTMENT 03
Sales $ 276,854 100.00% $ 27,540 100.00%
Sales Returns (3,190) (1.15) (13,770) (50.00)
Cost of Sales (40,202) (14.52) (1,770) (6.43)
----------- ------ ----------- -------
Gross Profit -- Department 03 $ 233,462 84.33% $ 12,000 43.57%
=========== ====== =========== =======
See Independent Auditor's Report and
Accompanying Notes
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------------- -------------------
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and Wages $ 717,157 11.07% $ 569,121 8.79%
Commissions 767,206 11.85 749,765 11.58
Accounting 3,987 .06 1,667 0.03
Auto Insurance 685 0.01 1,352 0.02
Auto Lease 19,551 0.30 24,775 0.38
Bank Charges and Credit Card Fees 8,956 0.14 6,504 0.10
Brochures 4,159 0.06 8,674 0.13
Building Maintenance 1,210 0.02 839 0.01
CNI Sales Seminars 4,795 0.07 6,940 0.11
Cellular Phone 7,214 0.11 2,877 0.04
Contract Labor 750 0.01 1,500 0.02
Depreciation 82,892 1.28 58,352 0.90
Dues, Memberships and Subscriptions 20,746 0.32 9,896 0.15
Employee Benefits 46,504 0.72 43,957 0.68
Employee Training 8,978 0.14 10,263 0.16
Entertainment 1,632 0.03 4,693 0.07
Freight 30,080 0.46 47,975 0.74
Freight Insurance 12,260 0.19 69 0.00
Furniture and Equipment Lease 47,385 0.73 27,624 0.43
Installation Services 0 0.00 1,772 0.03
Inventory Losses 21,703 0.34 0 0.00
Licenses, Permits and Taxes 3,775 0.06 3,433 0.05
Lodging 14,677 0.23 19,009 0.29
Maintenance Contract Parts 13,927 0.22 15,419 0.24
Marketing Research 0 0.00 826 0.01
Meals 7,094 0.11 6,638 0.10
Office Expense 100 0.00 0 0.00
Office Supplies 15,635 0.24 12,309 0.19
Other Promotions 4,483 0.07 1,337 0.02
Packaging 275 0.00 264 0.00
Pagers 4,915 0.08 4,096 0.06
Payroll Taxes 88,152 1.36 83,037 1.28
Postage 2,987 0.05 5,671 0.09
Print Advertising 14,389 0.22 1,482 0.02
Public Relations 0 0.00 555 0.01
Relocation Expense 0 0.00 4,140 0.06
Rent -- Building 112,321 1.73 96,514 1.49
Rent -- Offsite Storage 1,572 0.02 934 0.01
Software Support Services 15,217 0.23 20,286 0.31
Telephone and Fax 51,263 0.79 45,889 0.71
Training Consultants 15,084 0.23 6,600 0.10
Transportation 42,077 0.65 46,375 0.72
Utilities 0 0.00 140 0.00
Workers' Compensation Insurance 14,138 0.22 10,527 0.16
---------- ----- ---------- -----
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES $2,229,931 40.05 $1,964,094 30.33
========== ===== ========== =====
See Independent Auditor's Report and
Accompanying Notes
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CN NETWORKS, INC.
dba COMPUTER NETWORKS
FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
MORELAND & DAVIS, CPAs
21
CN NETWORKS, INC.
dba COMPUTER NETWORKS
BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
Unaudited 1999 1998
---------- ----------
ASSETS
Current Assets
Cash $ 272,314 $ 146,665
Accounts Receivable 1,759,730 916,227
Inventory, at cost 201,807 263,537
---------- ----------
Total Current Assets 2,233,850 1,326,428
---------- ----------
Property, Plant & Equipment
Property, Plant & Equipment, at cost 242,570 209,409
Accumulated Depreciation (205,273) (166,729)
---------- ----------
Total Property, Plant & Equipment 37,297 42,680
---------- ----------
Other Assets
Lease Security Deposits 28,389 10,383
Deferred Tax Asset 18,188 10,976
---------- ----------
Total Other Assets 46,577 21,359
---------- ----------
Total Assets $2,317,724 $1,390,468
========== ==========
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable $1,143,632 $ 444,091
Notes Payable, Current Portion (See Note 3) 549,186 454,670
Sales Tax Payable 51,983 30,237
Payroll Taxes Payable 36,456 19,676
Federal Income Taxes Payable 11,970 354
State Franchise Taxes Payable 2,516 2,329
---------- ----------
Total Current Liabilities 1,795,743 951,358
---------- ----------
Notes Payable, Long Term (See Note 3) 2,724 23,314
---------- ----------
Total Liabilities 1,798,467 974,672
---------- ----------
Stockholders' Equity
Common Stock, no par, 1,000,000 Shares
Authorized, 10,000 Shares Issued and Outstanding 10,000 10,000
Retained Earnings 509,257 405,796
---------- ----------
Total Stockholders' Equity 519,257 415,796
---------- ----------
Total Liabilities and Equity $2,317,724 $1,390,468
========== ==========
22
CN NETWORKS, INC.
dba COMPUTER NETWORKS
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Unaudited 1999 1998
-------------------- --------------------
Revenue
Net Sales $5,862,391 99.37 % $3,962,871 99.62 %
Sales Discounts (1,012) (0.02) (2,101) (0.05)
Freight 38,068 0.65 17,055 0.43
---------- ------ ---------- ------
Total Revenue 5,899,447 100.00 3,977,825 100.00
---------- ------ ---------- ------
Cost of Sales 3,850,358 65.27 2,229,366 56.04
Purchase Returns 0 0.00 0 0.00
---------- ------ ---------- ------
Gross Profit 2,049,089 34.73 1,748,459 43.96
General and Administrative Expenses 1,899,508 32.20 1,630,072 40.98
---------- ------ ---------- ------
Net Income from Operations 149,581 2.54 118,387 2.98
---------- ------ ---------- ------
Other Income and (Expense)
Miscellaneous Income 0 0.00 187 0.00
Interest Expense (34,527) (0.59) (28,362) (0.71)
---------- ------ ---------- ------
Total Other Income and (Expense) (34,527) (0.59) (28,175) (0.71)
---------- ------ ---------- ------
Earnings Before Income Taxes 115,054 1.95 90,212 2.27
Provision for Income Taxes
Federal Income Taxes 20,663 0.35 22,117 0.56
State Franchise Taxes 14,116 0.24 10,558 0.27
---------- ------ ---------- ------
34,779 0.59 32,675 0.55
---------- ------ ---------- ------
Net Income 80,275 1.36 57,537 1.45
Retained Earnings at Beginning of Year 428,982 348,259
---------- ----------
Retained Earnings at End of Year $ 509,257 $ 405,796
========== ==========
23
CN NETWORKS, INC.
dba COMPUTER NETWORKS
STATEMENTS OF CASH FLOW
SEPTEMBER 30, 1999 AND 1998
Unaudited 1999 1998
--------- ---------
Cash Flows from Operating Activities
Net Income $ 80,275 $ 57,537
Adjustments to Reconcile Net Income to Net Cash (Used)
Provided by Operating Activities
Depreciation 22,739 67,087
Deferred Income Tax (3,553) (3,053)
(Increase) Decrease In:
Accounts Receivable (698,995) 161,174
Inventory 4,865 (33,754)
Other Assets (16,949) 0
Prepaid Income Taxes 6,805 0
Increase (Decrease) In:
Accounts Payable 761,709 (160,981)
Sales Tax Payable 17,759 6,848
Payroll Taxes Payable 36,456 19,676
Income Taxes Payable 13,902 (15,303)
--------- ---------
Net Cash (Used) by Operating Activities 225,014 99,231
--------- ---------
Cash Flows from Investing Activities
Acquisition of Property and Equipment (15,738) 0
--------- ---------
Net Cash (Used) by Investing Activities (15,738) 0
--------- ---------
Cash Flows from Financing Activities
Acquisition of Debt 42,819 54,914
Repayment of Debt (17,409) (21,393)
--------- ---------
Net Cash Provided by Financing Activities 25,410 33,521
--------- ---------
Net Increase (Decrease) in Cash 234,686 132,752
Cash at January 1, 1999 and 1998 37,628 13,913
--------- ---------
Cash at September 30, 1999 and 1998 $ 272,314 $ 146,665
========= =========
Cash paid for income taxes for the nine months ended September 30, 1999 and 1998
was $23,216 and $34,100, respectively. Cash paid for interest for the nine
months ended September 30, 1999 and 1998 was $34,527 and $28,362, respectively.
24
CN NETWORKS, INC.
dba COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
Unaudited
NOTE 1 -- ORGANIZATION
ORGANIZATION AND PURPOSE
CN Networks, Inc., doing business as Computer Networks, Inc. (the Company) was
founded in 1991 and incorporated under the laws of the State of California in
1994 with its main office located in Pleasanton, California. The Company
provides expert consulting, design and integration services for corporate remote
LAN access and dial-out needs.
The Company is governed by a Board of Directors, comprised of the president and
corporate secretary. Financial Statements are prepared in-house and reviewed by
the directors on a monthly basis.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of the Statement of Cash Flows, the Company considers all highly
liquid investments with an initial maturity of three months or less to be cash
equivalents. At the financial statement date, the Company had no investments
other than cash on the books.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined by
the average cost method, market being replacement cost.
PROPERTY, PLANT & EQUIPMENT
The cost of property, plant and equipment is depreciated over the estimated
useful lives of the related assets. For financial report purposes, the useful
lives of assets are 18 to 24 months for Computer Hardware and three years for
Office Furniture and Certain Software. Useful lives for tax purposes are five
years for Computer Hardware and Software and seven years for Office Furniture.
Depreciation is computed on the straight line method for financial reporting
purposes and on the double declining balance for income tax purposes.
Maintenance and repairs are charged to operations when incurred. Betterments and
renewals are capitalized.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred.
25
CN NETWORKS, INC.
dba COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
Unaudited
REVENUE RECOGNITION
Revenue is recognized when products are shipped, support contracts are
recognized based on the terms of the contracts, and training revenue is
recognized when performed. Losses on returns and contract costs are recorded
when they occur.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109). SFAS 109
requires, among other things, that deferred income taxes be provided for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities as part of the income tax provisions.
NOTE 3 -- LONG-TERM DEBT
Following is a summary of long-tern debt at September 30, 1999 and 1998:
10.5% note payable to bank in monthly principal installments $ 20,369 $ 35,604
of $1,370.00 plus interest, through November 19, 2000,
secured by the assets of the Company
10.5% note payable to bank in monthly principal installments 4,120 12,490
of $695.00 plus interest, through March 18, 2000, secured
by the assets of the Company
Line of credit with bank, maturing March 31, 1999. Interest 527,420 429,890
payable monthly at 10%, maximum line of credit is
$700,000.00 in 1997 and $1,000,000.00 in 1998. Secured by
accounts receivable, expected to be refinanced
--------- ---------
551,909 477,984
Less: Current maturities included in current liabilities (549,185) (454,670)
--------- ---------
$ 2,724 $ 23,314
========= =========
Following are maturities of long-term debt for each of the next two years:
YEAR ENDED SEPTEMBER 30,
------------------------
2000 $549,215
2001 2,724
--------
$551,939
========
26
CN NETWORKS, INC.
dba COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
Unaudited
NOTE 4 -- LEASES
The Company leases its main office and a training facility under operating
leases expiring in 2001. The Company has entered into a new lease agreement for
its main office effective September 1, 1999 and expiring 2004. Total rental
expense recorded in the financial statements for the nine months ended September
30, under these leases was $123,585 for 1999 and $87,835 for 1998. In addition,
on February 3, 1999 the Company signed a lease for additional space to
accommodate an expansion of the training facility. Occupancy is scheduled for
April, 1999. The Company also pays lease payments on an automobile effective
February, 1997 for 60 months. The automobile lease expense recorded in the
financial statements was $19,551 for 1999 and $24,775 for 1998. Future minimum
rental payments under these operating leases are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1999 $ 209,133
2000 245,329
2001 254,259
2002 211,691
2003 210,062
----------
$1,130,474
==========
NOTE 5 -- INCOME TAXES
Income tax expense for the period ended September 30, 1999 and 1998 is comprised
of the following:
1999 1998
----------------------------- ------------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------ ------- -------- ------
Federal 26,966 6,303 20,663 25,894 3,777 22,117
State 11,366 (2,750) 14,116 10,889 331 10,558
------ ------ ------ ------ ----- ------
38,332 3,553 34,779 36,783 4,108 32,675
====== ====== ====== ====== ===== ======
27
CN NETWORKS, INC.
dba COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
Unaudited
Deferred tax (liabilities) assets comprise the following at September 30, 1999
and 1998:
Depreciation 0 0
------- -------
Gross deferred tax liabilities 0 0
------- -------
State taxes, net of federal benefit 3,650 3,423
Depreciation 14,538 7,553
------- -------
Gross deferred tax assets 18,188 10,976
------- -------
Net deferred tax assets $18,188 $10,976
======= =======
The net deferred tax asset represents temporary differences for future tax
deductions which can generally be realized by carryback to taxable income in
prior years.
The provisions for income taxes differ from the amount of income tax determined
by applying the applicable U.S. statutory income tax rate to pretax income as
follows for the periods ended September 30, 1999 and 1998:
Federal statutory rate 28% 27%
State income taxes, net of federal tax benefit and
credits 3% 10%
--- ---
31% 37%
=== ===
28
CN NETWORKS, INC.
dba COMPUTER NETWORKS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
Unaudited
NOTE 6 -- CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents and trade
receivables. The Company places its cash with federally insured financial
institutions and as of September 30, 1999 and 1998, the Company's balances do
not exceed federally insured limits. Fair value of these financial instruments
approximates their carrying values.
The Company believes any risk of accounting loss is significantly reduced due to
the diversity of its services, end customers, and geographic sales areas. The
Company performs credit evaluations of its customers' financial condition
whenever necessary. The Company generally does not require cash collateral or
other security to support customer receivables and has historically had little
problems with collecting their accounts receivable. For the periods ended
September 30, 1999 and 1998 the Company had one customer that individually had
an accounts receivable balance exceeding 10% of the total accounts receivable
balance.