UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest reported) July 31, 2001
------------------------------
RCS Holdings, Inc.
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(Exact name of registrant as specified in its chapter)
Colorado 0-9295 84-0794604
---------------------------- ----------- ------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.
Registrant's telephone number, including area code (303) 798-6136
--------------------
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(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS.
On September 14, 2001, Sweet Entertainment ("Sweet") filed a complaint
against our subsidiary, Rush Creek Solutions, Inc. that alleges that Rush
Creek Solutions tortiously damaged a number of Sweet's internet servers in
the course of packaging and shipping those servers to Seattle, Washington.
Sweet states various causes of action against Rush Creek Solutions,
including destruction of property, breach of warranty, negligence and
violations of the Washington Consumer Protection Act. Sweet claims actual
damages of approximately $150,000 and consequential damages (due to lost
business from unavailability of the servers) of $3,000,000. Rush Creek
Solutions' insurance carrier, St. Paul Mercury Insurance Company, is
evaluating coverage, and defense of this action under Rush Creek Solutions'
numerous liability policies. Despite the pending resolution of the
coverage issues, Rush Creek Solutions has launched a vigorous defense of
this action, which it believes is without merit.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired.
Filed herewith as part of this report are the following financial
statements: Business Products, Inc. (d/b/a Rush Creek Solutions,
Inc.) (i) Report of Independent Auditors, (ii) Consolidated
Balance Sheets as of April 30, 2001 and 2000, (iii) Consolidated
Statements of Operations for the years ended April 30, 2001, 2000
and 1999, (iv) Consolidated Statements of Stockholders' Equity
(Deficit) for the years ended April 30, 2001, 2000 and 1999, (v)
Consolidated Statements of Cash Flows for the years ended
April 30, 2001, 2000 and 1999, and (vi) Notes to Consolidated
Financial Statements.
Also filed herewith are the following unaudited interim financial
statements: Winco Petroleum Corporation (i) Consolidated Balance
Sheet as of July 31, 2001, (ii) Consolidated Statements of
Operations for the three months ended July 31, 2001 and 2000,
(iii) Consolidated Statement of Stockholders' Deficit for the
three months ended July 31, 2001, (iv) Consolidated Statements of Cash
Flows for the three months ended July 31, 2001 and 2000, and (v) Notes
to the Consolidated Financial Statements.
(b) Pro forma financial information.
Filed herewith as part of this report are RCS Holdings Inc.'s (f/k/a
Winco Petroleum Corporation) Unaudited Pro Forma Condensed Combined
Balance Sheet as of July 31, 2001, Unaudited Pro Forma Condensed
Combined Statements of Operations for the three months ended
July 31, 2001 and for the years ended April 30, 2001 and the
notes thereto.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF WINCO AND RCS
Effective July 31, 2001, the shareholders of Business Products, Inc. (d/b/a
Rush Creek Solutions, Inc., "RCS") gained control of Winco Petroleum
Corporation ("Winco") pursuant to a reverse merger resulting from a Merger
Agreement dated August 19, 2000, and amended June 1, 2001 ("Merger
Agreement"). The Merger Agreement was between Winco, its wholly owned
subsidiary, Winco Merger Corporation ("WincoMerger"), Winco Spin-off
Corporation ("WincoSpin")and RCS. Pursuant to the Merger Agreement,
Winco transferred all of its assets, liabilities and other obligations
to WincoSpin in consideration for the shares of common stock of
WincoSpin, which were distributed to the Company's shareholders before
the merger. Thereafter, RCS was merged with and into WincoMerger.
The former shareholders of RCS control Winco after the transaction,
accordingly, the merger has been accounted for as a reverse acquisition
under which, for accounting purposes, RCS is deemed to be the acquiring
entity and Winco is deemed to be the acquired entity. Under these
accounting principles the post-merger Winco financial statements represent
RCS on a historical basis consolidated with the results of operations of
post-merger Winco from the effective date of the merger. Because Winco,
after the spin-off of Winco's business to WincoSpin, is effectively a non-
operating public shell, the merger has been treated as a recapitalization
of RCS, with no goodwill recorded.
Subsequently, Winco changed its name to RCS Holdings, Inc. and WincoMerger
changed its name to Rush Creek Solutions, Inc.
2
The unaudited pro forma condensed financial statements of RCS Holdings,
Inc. are based upon the historical financial statements of Winco and
RCS, after giving effect to the spin-off of Winco's assets and
liabilities, the 40 for 1 reverse stock split and the merger with RCS.
These unaudited pro forma condensed financial statements are not
necessarily indicative of the financial position and results of
operations that would have been attained had the transactions actually
taken place at the date indicated and do not purport to be indicative
of the effects that may be expected to occur in the future.
The accompanying unaudited pro forma condensed financial statements
illustrate the spin-off, merger and the acquisition's effect on Winco's
financial position and results of operations. The unaudited pro forma
condensed combined balance sheet as of July 31, 2001 is based on the
historical balance sheets of Winco and RCS and assumes the merger took
place on that date. The unaudited pro forma condensed statements of
operations for the three months ended July 31, 2001 and the year ended
April 30, 2001 are based on the historical statements of operations of
Winco and RCS for the same periods and assumes the proposed merger and the
acquisitions occurred as of May 1, 2000. As there are effectively no
operations of Winco on a pro forma basis, the pro forma financial
statements reflect only RCS historical financial statements for the periods
mentioned above.
3
RCS HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED) JULY 31, 2001
PRO FORMA PRO FORMA
RCS WINCO ADJUSTMENTS CONSOLIDATED
7/31/01 6/30/01 (SEE NOTES) 7/31/01
------- ------- ----------- -------
ASSETS
Current Assets:
Cash $ 207,383 $ 259,740 $ (259,740)(1) $ 207,383
Securities 3,364 - - 3,364
Trade Accounts Receivable 1,313,792 25,738 (25,738)(1) 1,313,792
Prepaid Expense and Other
Current Assets 178,495 - - 178,495
Related Party Receivables - 43,121 (43,121)(1) -
Income Tax Receivable 323,104 - - 323,104
Deferred Income Tax Asset 94,037 - - 94,037
----------------------------------------- -----------
Total Current Assets 2,120,175 328,599 (328,599) 2,120,175
Other Assets:
Investment in Oil & Gas
Properties at Cost, net - 150,315 (150,315)(1) -
Property, Plant & Equipment, net 1,065,022 - - 1,065,022
Deposits and Other Assets 108,729 - - 108,729
----------------------------------------- -----------
Total Other Assets 1,173,751 150,315 (150,315) 1,173,751
----------------------------------------- -----------
TOTAL ASSETS $ 3,293,926 $ 478,914 $ (478,914) $ 3,293,926
========================================= ===========
LIABILITIES
Current Liabilities:
Accounts Payable and Accrued
Expenses $ 1,716,260 $ 34,693 $ (34,693)(1) $ 1,716,260
Accrued Compensation 743,424 - - 743,424
Payroll Taxes and Employee
Benefits Payable 69,561 - - 69,561
Accounts Payable - Related - 21,685 (21,685)(1) -
Deferred Revenue 1,046,309 - - 1,046,309
Income Taxes Payable 131,374 - - 131,374
Notes Payable 950,000 - - 950,000
----------------------------------------- -----------
Total Current Liabilities 4,656,928 56,378 (56,378) 4,656,928
Deferred Income Taxes -
Long-Term 94,037 - - 94,037
----------------------------------------- -----------
TOTAL LIABILITIES 4,750,965 56,378 (56,378) 4,750,965
----------------------------------------- -----------
SHAREHOLDERS' EQUITY
Common Stock, no par value;
RCS - 50,000 shares authorized,
1,500 shares outstanding (historical)
Winco - 500,000,000 shares
authorized, 41,152,606 shares
issued and outstanding (historical);
1,028,815 (post reverse stock split);
13,717,534 (post merger) 9,959 307,000 (307,000)(2) 9,959
Additional Paid-In Capital 356,852 1,293,520 (1,293,520)(1) 356,852
Related Party Receivables (175,369) (175,369)
Retained (Deficit) Earnings (1,648,944) (1,177,381) 1,177,381 (2) (1,648,944)
Treasury Stock - (603) 603 (2) -
Unrealized Gain on Available
for Sale Securities 463 - - 463
----------------------------------------- -----------
Total Shareholders' Equity (1,457,039) 422,536 (422,536)(2) (1,457,039)
----------------------------------------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 3,293,926 $ 478,914 $ (478,914) $ 3,293,926
========================================= ===========
NOTE: The above pro forma adjustments give effect to (1) the spin-off of
pre-merger assets, liabilities and business of Winco to WincoSpin. In
addition, the pro forma adjustments reflect (2) the recapitalization of the
surviving entity. Winco has been adjusted to include the assets,
liabilities and operations of RCS as if the merger had taken effect on July
31, 2001. Additionally, it reflects the additional 12,688,719 post reverse
stock split Winco common shares issued to RCS shareholders in conjunction
with the merger.
4
RCS HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 2001 (UNAUDITED)
AND THE YEAR ENDED APRIL 30, 2001 (UNAUDITED)
FOR THE THREE MONTHS
ENDED FOR THE YEAR ENDED
JULY 31, 2001 APRIL 30, 2001
REVENUES
Support, Update, Configuration
and Training $ 2,512,863 $ 13,510,265
Broadband Sales 607,614 7,902,669
Commissions - 1,037,539
Systems Sales - 1,710,828
Other Income 1,070 -
-------------------------------------
Total Revenues 3,121,547 24,161,301
COST OF REVENUES 2,072,165 17,495,415
-------------------------------------
GROSS PROFIT 1,049,382 6,665,886
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,821,047 8,489,287
-------------------------------------
Operating Loss (771,665) (1,823,401)
OTHER INCOME (EXPENSE)
Interest and Investment Income 3,980 (18,209)
Interest Expense (21,172) (140,411)
-------------------------------------
Total Other Income (Expense) (17,192) (158,620)
-------------------------------------
LOSS BEFORE INCOME TAX
BENEFIT (788,857) (1,982,021)
INCOME TAX BENEFIT - (274,889)
-------------------------------------
NET LOSS $ (788,857) $ (1,707,132)
====================================
5
THREE MONTHS ENDED YEAR ENDED
JULY 31, 2001 APRIL 30, 2001
------------- --------------
Basic and Diluted Loss Per Share:
Historical $ (525.90) (1) $ (1,138.09) (1)
Pro Forma $ (0.06) (2) $ (0.12) (2)
Basic and Diluted Weighted
Average Shares Outstanding:(1)
Historical 1,500 1,500
Pro Forma 13,717,534 13,717,534
(1) Historical earnings per share is calculated by dividing the net loss
for the respective period by the historical average outstanding common
shares.
(2) Pro Forma earnings per share is calculated by dividing the net loss
for the respective period by the Pro Forma average outstanding common
shares. See the reconciliation provided below for the calculation of
the Pro Forma average shares outstanding.
Reconciliation of Historical and Pro Forma Average Shares Outstanding
---------------------------------------------------------------------
Common Stock Common Stock
Outstanding Merger Outstanding
Pre-merger Exchanges Post-merger
---------- --------- -----------
RCS Holdings, Inc. Common Stock
issued to RCS 1,500 (2) (1,500) -
(4) 12,688,719 12,688,719
Winco Petroleum Reverse stock
split 41,152,606 (1) (41,152,606) -
(3) 1,028,815 1,028,815
------------- -------------
RCS weighted
average shares
outstanding post-
merger 1,500 13,717,534
(1) Winco's average outstanding common shares for the year ended September
30, 2000 and quarter ended June 30, 2001 are 41,152,606 as reflected
in Winco's 10-KSB and 10-QSB.
(2) RCS' weighted outstanding shares for the three months ended July 31,
2001, which reflects no change in common stock outstanding during the
period.
(3) Shares to be retained by Winco according to the merger agreement after
effecting the reverse stock split in a 1:40 ratio
(41,152,606/40=1,028,815) or 7.5% of the outstanding shares after the
merger.
(4) Shares to be credited to RCS according to the merger agreement of
12,688,719 (or 92.5%) of the outstanding shares after the merger.
6
NOTE: The Pro Forma Condensed Statements of Operations presented is the
result of operations of RCS for the three months ended July 31, 2001 and
the year ended April 30, 2001. Winco Petroleum Corporation post spin-off
has, in effect, no operations for the three months ended July 31, 2001 or
the year ended April 30, 2001 for the purposes of the Pro Forma Condensed
Statements of Operations presented herein.
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 hereunto duly authorized.
RCS HOLDINGS, INC.
Date October 16, 2001 By /s/ MICHAEL ST. JOHN
---------------------------- -------------------------------
Michael St. John, President
7
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
CONTENTS
--------------------------------------------------------------------------
Independent Auditors' Report 3 - 4
Consolidated Balance Sheets as of April 30, 2001 and 2000 5 - 6
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the years ended April 30, 2001, 2000
and 1999 7
Consolidated Statements of Stockholders' Equity
(Deficit) for the years ended April 30, 2001, 2000 and 1999 8
Consolidated Statements of Cash Flows for the years ended
April 30, 2001, 2000 and 1999 9 - 10
Summary of Accounting Policies 11 - 17
Notes to Consolidated Financial Statements 18 - 35
1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Business Products, Inc. (d/b/a Rush Creek Solutions, Inc.)
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Business
Products, Inc., (d/b/a Rush Creek Solutions, Inc.) (the "Company") as of
April 30, 2001 and 2000, and the related consolidated statements of
operations and comprehensive income (loss), stockholders' equity
(deficit), and cash flows for the years ended April 30, 2001, 2000 and
1999. 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 auditing standards generally
accepted in the United States of America. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Business Products, Inc. (d/b/a Rush Creek Solutions, Inc.) at April 30,
2001 and 2000, and the results of its operations and its cash flows for
the years ended April 30, 2001, 2000 and 1999 in conformity with
accounting principles generally accepted in the United States of America.
3
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's significant operating
losses and working capital deficiency raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding
those matters are also described in Note 1. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ BDO Seidman, LLP
June 29, 2001
Denver, Colorado
4
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
CONSOLIDATED BALANCE SHEETS
=================================================================================================
April 30, 2001 2000
-------------------------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash and cash equivalents $ 127,867 $ 441,318
Investment in equity securities (Note 2) 2,938 2,968
Accounts receivable, less allowance of
$450,000 and $150,000 for doubtful accounts
(Notes 3 and 9) 1,788,197 3,760,415
Commissions receivable - 593,827
Inventories - 90,575
Prepaid expenses and other current assets 202,219 199,743
Income tax refund receivable 323,104 -
Deferred income tax asset (Note 4) 142,854 347,223
-------------------------------------------------------------------------------------------------
Total current assets 2,587,179 5,436,069
-------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Office and computer equipment 1,505,208 860,946
Leasehold improvements 285,619 271,558
-------------------------------------------------------------------------------------------------
1,790,827 1,132,504
Less accumulated depreciation and
amortization 628,719 258,666
-------------------------------------------------------------------------------------------------
Net property and equipment 1,162,108 873,838
OTHER ASSETS:
Cash surrender value of life insurance policies
(Note 7) 28,225 -
Deposits and other assets (Note 6) 118,825 62,500
-------------------------------------------------------------------------------------------------
147,050 62,500
-------------------------------------------------------------------------------------------------
$ 3,896,337 $ 6,372,407
=================================================================================================
See accompanying independent auditors' report, summary of
accounting policies and notes to consolidated financial statements.
5
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
CONSOLIDATED BALANCE SHEETS
=================================================================================================
April 30, 2001 2000
-------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 5) $ 1,479,978 $ 2,598,637
Accrued payroll, commissions and
compensated absences 715,178 897,828
Payroll taxes and employee benefit
plans payable (Note 7) 71,012 382,683
Deferred revenue 930,004 756,669
Note payable (Note 3) 1,200,000 750,000
Income taxes payable (Note 4) 131,374 124,500
-------------------------------------------------------------------------------------------------
Total current liabilities 4,527,546 5,510,317
DEFERRED INCOME TAX LIABILITY (NOTE 4) 142,854 342,539
-------------------------------------------------------------------------------------------------
Total liabilities 4,670,400 5,852,856
-------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
(Notes 5, 6, 7 and 8)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value, 50,000
shares authorized; 1,500 shares
issued and outstanding (Note 14) 358,352 1,500
Related party receivables (Note 5) (272,366) (328,994)
Accumulated other comprehensive income 38 -
Retained earnings (deficit) (860,087) 847,045
-------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (774,063) 519,551
-------------------------------------------------------------------------------------------------
$ 3,896,337 $ 6,372,407
=================================================================================================
See accompanying independent auditors' report, summary of
accounting policies and notes to consolidated financial statements.
6
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
=================================================================================================
YEARS ENDED APRIL 30, 2001 2000 1999
-------------------------------------------------------------------------------------------------
REVENUES (Notes 5 and 9):
Support, update, configuration and training $21,412,934 $19,491,463 $10,387,020
Commissions 1,037,539 6,876,815 7,796,234
System sales 1,710,828 10,955,756 5,737,601
Other income - 9,376 42,930
-------------------------------------------------------------------------------------------------
Total revenues 24,161,301 37,333,410 23,963,785
COST OF REVENUES 17,495,415 30,137,238 17,625,581
-------------------------------------------------------------------------------------------------
GROSS PROFIT 6,665,886 7,196,172 6,338,204
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 8,489,287 7,971,747 4,973,841
-------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (1,823,401) (775,575) 1,364,363
OTHER INCOME (EXPENSE):
Interest and investment income (loss) (18,209) 134,074 44,039
Interest expense (140,411) (73,800) (819)
Write-off of related party advances (Note 5) - - (50,000)
-------------------------------------------------------------------------------------------------
Total other income (expense) (158,620) 60,274 (6,780)
-------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)(1,982,021) (715,301) 1,357,583
INCOME TAX EXPENSE (BENEFIT) (Note 4) (274,889) (167,000) 459,900
-------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (1,707,132) (548,301) 897,683
Other comprehensive income (loss), net of income tax:
Unrealized holding gains (losses) (Note 2) 38 (2,127) 2,127
-------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $(1,707,094) $ (550,428) $ 899,810
=================================================================================================
See accompanying independent auditors' report, summary of
accounting policies and notes to consolidated financial statements.
7
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
=============================================================================================================================
Accumulated
Common Stock Related Other Retained
---------------------- Party Comprehensive Earnings
YEARS ENDED APRIL 30, 2001, 2000 AND 1999 Shares Amount Receivables Income (Loss) (Deficit) Total
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, MAY 1, 1998 1,500 $ 1,500 $ (75,600) $ - $ 497,663 $ 423,563
Net change in related party receivables - - (143,847) - - (143,847)
Comprehensive income:
Net income for the year - - - - 897,683 897,683
Unrealized holding gains - - - 2,127 - 2,127
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 1999 1,500 1,500 (219,447) 2,127 1,395,346 1,179,526
Net change in related party receivables - - (109,547) - - (109,547)
Comprehensive income (loss):
Net loss for the year - - - - (548,301) (548,301)
Unrealized holding losses - - - (2,127) - (2,127)
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 2000 1,500 1,500 (328,994) - 847,045 519,551
Net change in related party receivables - - 56,628 - - 56,628
Capital contributions by stockholder of
investments and equipment (Note 14) - 356,852 - - - 356,852
Comprehensive income (loss):
Net loss for the year - - - - (1,707,132) (1,707,132)
Unrealized holding gains - - - 38 - 38
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 2001 1,500 $358,352 $(272,366) $ 38 $ (860,087) $ (774,063)
=============================================================================================================================
See accompanying independent auditors' report, summary of accounting policies and notes to consolidated financial statements.
8
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
=================================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED APRIL 30, 2001 2000 1999
-------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $(1,707,132) $ (548,301) $ 897,683
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 370,160 160,710 77,401
Allowance for doubtful accounts 300,000 - 94,000
Write-off of related party advances - - 50,000
Write-off of bad debts 76,007 - -
Realized (gain) loss on investment holdings 56,372 (61,115) -
Repayment of officer advances through
deductions at time of bonus payments - 135,000 -
Rent payments applied against officer advances 217,125 - -
Deferred income taxes 4,684 (291,665) 240,378
Changes in operating assets and liabilities:
Accounts receivable 1,571,211 347,970 (3,607,303)
Commissions receivable 593,827 273,914 216,169
Inventories 90,575 (37,575) (38,000)
Prepaid expenses and other current assets (25,825) 45,248 (239,594)
Accounts payable and accrued expenses (1,118,659) 490,774 1,138,304
Accrued payroll, commissions, compensated
absences, payroll taxes and employee benefit
plans payable (494,321) 409,322 34,359
Deferred revenue 173,335 210,835 59,954
Income taxes refundable and payable (316,230) (95,034) 44,812
-------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities $ (208,871) $ 1,040,083 $(1,031,837)
=================================================================================================
See accompanying independent auditors' report, summary of
accounting policies and notes to consolidated financial statements.
9
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
=================================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED APRIL 30, 2001 2000 1999
-------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment $ (482,642) $ (666,711) $ (199,884)
Purchases of investment securities - (64,000) (117,601)
Proceeds from sales of investment securities 149,799 - -
Increase in cash surrender value of life
insurance policies (28,225) - -
Additions to deposits and other assets (56,432) - (31,250)
-------------------------------------------------------------------------------------------------
Net cash used in investing activities (417,500) (730,711) (348,735)
-------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from note payable 700,000 750,000 749,484
Payments on note payable (250,000) (749,484) -
Advances to related parties (330,500) - (324,847)
Payments received from related parties 193,420 - 131,000
-------------------------------------------------------------------------------------------------
Net cash provided by financing activities 312,920 516 555,637
-------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (313,451) 309,888 (824,935)
CASH AND CASH EQUIVALENTS, at beginning of year 441,318 131,430 956,365
-------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of year $ 127,867 $ 441,318 $ 131,430
=================================================================================================
See accompanying independent auditors' report, summary of
accounting policies and notes to consolidated financial statements
10
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
SUMMARY OF ACCOUNTING POLICIES
=========================================================================
BUSINESS Business Products, Inc. (d/b/a Rush Creek Solutions,
Inc.) (the "Company") is engaged in the business of
providing value-added systems integration as an
information technology solution provider. The
Company designs and installs computer networks and
communications systems, procures and supports
computer hardware and software, performs engineering
and other technical services, facilitates broadband
services and provides staffing solutions. The
Company was incorporated in Colorado in 1975.
The Company primarily does business in Colorado,
Utah, and Washington, but may sell products or
perform services anywhere in the United States
depending on the needs of customers.
On July 9, 2000, the Company announced a change in
the Company name to Business Products, Inc., d/b/a
Rush Creek Solutions, Inc.
PRINCIPLES OF The consolidated financial statements include the
CONSOLIDATION accounts of the Company and its wholly owned
subsidiary, RCS-FSP, Inc. All significant
intercompany accounts and transactions have been
eliminated in consolidation.
CONCENTRATIONS The Company's financial instruments that are exposed
OF CREDIT RISK to concentrations of credit risk consist primarily of
cash equivalent balances in excess of the insurance
provided by governmental insurance authorities and
accounts receivable. The Company's cash equivalents
are placed with major financial institutions and are
primarily invested in money market investments. The
Company held securities available for sale in a
variety of corporate equity securities until all
securities were transferred to a corporate officer as
described in Note 2.
11
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
SUMMARY OF ACCOUNTING POLICIES
=========================================================================
A majority of the Company's business activities are
with customers in the technology, telecommunications,
government and not-for-profit industries. Net
receivables consist primarily of amounts due from a
large number of entities in these sectors. The
Company does not require collateral to support such
receivables. Approximately 58.3% of the Company's
revenues for the year ended April 30, 2001 was from
five companies in the technology and
telecommunications industries.
USE OF ESTIMATES The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States of America 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 revenues and expenses during
the reporting period. Actual results could differ
from those estimates and assumptions.
INVESTMENT IN Investment securities are classified as either held-to-
EQUITY SECURITIES maturity, available-for-sale or trading. Investment
securities classified as held-to-maturity are stated
at cost, adjusted for amortization of premiums and
accretion of discounts. Investment securities
classified as available-for-sale are carried at their
estimated market value with unrealized holding gains
and losses, net of tax, reported as a separate
component of stockholders' equity until realized.
Investment securities classified as trading are
carried at estimated market value. Unrealized holding
gains and losses for trading securities are included
in the statements of operations. Gains and losses on
securities sold are determined based on the specific
identification of the securities sold.
INVENTORIES Inventories of computer hardware and accessories are
stated at lower of cost or market on a first in,
first out basis. Effective June 2000 the Company
ceased hardware sales and has disposed of all
remaining inventories held.
12
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
SUMMARY OF ACCOUNTING POLICIES
=========================================================================
PROPERTY AND Property and equipment are stated at cost. Depreciation
EQUIPMENT is computed using accelerated methods over the
estimated useful lives (generally five to seven
years) of the assets. Leasehold improvements are
amortized over the shorter of the useful lives of the
assets or the lives of the respective leases.
Depreciation and amortization expense was $370,160,
$160,710, and $77,401 for the years ended April 30,
2001, 2000 and 1999.
LONG-LIVED ASSETS The Company follows the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets
to be Disposed of," for long-lived assets and certain
identifiable intangibles to be held and used by the
Company. These assets are reviewed for impairment
whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be
recoverable. If the fair value is less than the
carrying amount of the asset, a loss is recognized
for the difference.
REVENUE Revenues for systems sales are recognized at the time
RECOGNITION the system is configured and installed. Revenue from
block time support service agreements is deferred at
the time the agreement is executed and has been
invoiced and collected from the customer and is
recognized as the related services are provided over
the contractual period. The Company recognizes
revenues from customer training and consulting
services when such services are provided.
Shipping charges related to systems sales are
recorded in revenues. Related shipping costs are
charged to expense through cost of sales.
Agency commissions related to hardware or software
sales facilitated by the Company's sales
representatives that are direct between the
distributor and the customer are recognized when the
distributor has completed the sale to the customer.
The Company's sales of software relate to operating
systems programs and general business applications
that are installed on customer systems in connection
with system configuration of desktop and laptop
computers.
13
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
SUMMARY OF ACCOUNTING POLICIES
=========================================================================
INCOME TAXES The Company accounts for income taxes under SFAS No.
109, "Accounting for Income Taxes." Deferred income
taxes result from temporary differences. Temporary
differences are differences between the tax basis of
assets and liabilities and their reported amounts in
the financial statements that will result in taxable
or deductible amounts in future years.
CASH EQUIVALENTS The Company considers cash and all highly liquid
investments purchased with an original maturity of
three months or less to be cash equivalents.
COMPREHENSIVE The Company follows SFAS No. 130, "Reporting
INCOME (LOSS) Comprehensive Income". SFAS No. 130 requires the
reporting of comprehensive income (loss) in addition
to net income (loss) from operations. Comprehensive
income (loss) is a more inclusive financial reporting
methodology that includes disclosure of certain
financial information that historically has not been
recognized in the calculation of net income (loss).
The change in net unrealized securities gains
(losses) recognized in other comprehensive income
(loss) includes unrealized gains (losses) that arose
during the period from changes in market value of
securities that were held during the period (holding
gains (losses)).
RECLASSIFICATIONS Certain reclassifications have been made to the prior
period presentations in order to conform to the
current presentation.
14
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
SUMMARY OF ACCOUNTING POLICIES
=========================================================================
RECENT The Financial Accounting Standards Board ("FASB") has
ACCOUNTING recently issued SFAS No. 133, "Accounting for
PRONOUNCEMENTS Derivative Instruments and Hedging Activities." SFAS
No. 133, amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Hedging
Activities" established standards for recognizing all
instruments including those for hedging as either
assets or liabilities in the statement of financial
position and measuring those instruments at fair
value. SFAS No. 133 was effective for the Company May
1, 2001. The adoption of this statement did not have
a material impact on the Company's financial
position, results of operations or cash flows since
the Company does not have any significant
derivatives.
In March 2000, the FASB issued Emerging Issues Task
Force Issue No. 00-2, "Accounting for Web Development
Costs" ("EITF 00-2"), which is effective for all such
costs incurred for fiscal quarters beginning after
June 30, 2000. This Issue establishes accounting and
reporting standards for costs incurred to develop a
web site based on the nature of each cost. Currently,
as the Company has no web site development costs, the
adoption of EITF 00-2 had no impact on the Company's
financial position or results of operations. To the
extent the Company begins to enter into such
transactions in the future, the Company will adopt
the Issue's disclosure requirements in the quarterly
and annual financial statements for the year ending
April 30, 2002.
In March 2000, the FASB issued FASB Interpretation
44, "Accounting for Certain Transactions Involving
Stock Compensation" ("FIN 44"), which became
effective July 1, 2000, except that certain
conclusions in this Interpretation which covered
specific events that occurred after either December,
1998 or January 12, 2000 were to be recognized on a
prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB 25
for certain issues related to stock issued to
employees.
15
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
SUMMARY OF ACCOUNTING POLICIES
=========================================================================
RECENT The Company's existing stock based compensation
ACCOUNTING policies and procedures are in compliance with FIN 44
PRONOUNCEMENTS and therefore, the adoption of FIN 44 had no material
(CONTINUED) impact on the Company's financial condition, results
of operations or cash flows.
In December 1999, the Securities and Exchange (the
"SEC") issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements"
which provides additional guidance in applying
auditing standards generally accepted in the United
States of America to revenue recognition in financial
statements. SAB 101 was effective as of the fourth
quarter for the fiscal year ended April 30, 2001.
The adoption of this bulletin has not had a material
impact on the Company's financial statements.
In June 2001, the FASB finalized SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill
and other Intangible Assets." SFAS No. 141 requires
the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method
of accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires that
the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS No. 141 applies to all
business combinations initiated after June 30, 2001
and for purchase business combinations completed on
or after July 1, 2001. It also requires, upon
adoption of SFAS No. 142 that the Company reclassify
the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS No.141.
16
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
SUMMARY OF ACCOUNTING POLICIES
=========================================================================
SFAS No. 142 requires, among other things, that
companies no longer amortize goodwill, but instead
test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that the Company
identify reporting units for the purposes of
assessing potential future impairments of goodwill,
reassess the useful lives of other existing
recognized intangible assets, and cease amortization
of intangible assets with an indefinite useful life.
An intangible asset with an indefinite useful life
should be tested for impairment in accordance with
the guidance in SFAS No. 142. SFAS No. 142 is
required to be applied in fiscal years beginning
after December 15, 2001 to all goodwill and other
intangible assets recognized at the date, regardless
of when those assets were initially recognized. SFAS
No. 142 requires the Company to complete a
transitional goodwill impairment test six months from
the date of adoption. The Company is also required
to reassess the useful lives of other intangible
assets within the first interim quarter after
adoption of SFAS No. 142. The Company does not
believe this pronouncement will have a material
impact.
17
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
1. Going Concern The consolidated financial statements have been
and prepared assuming the Company will continue as a
Management going concern. The Company incurred losses totaling
Plans $1,707,132 during the year ended April 30, 2001 and
incurred losses of $548,301 during the year ended
April 30, 2000, resulting in an accumulated
stockholders' deficit of $860,087. For the year
ended April 30, 2001, the Company had a working
capital deficiency of $1,940,367.
Management has established plans to improve the
Company's operating performance in fiscal 2002.
These plans include the reduction of labor costs
through layoffs and increased utilization of
remaining resources. The Company has also reduced
operations in specific activities determined to be
unprofitable. In addition, the Company has
terminated operating equipment leases related to
unprofitable activities.
As of October 8, 2001, the Company has reduced its
short-term borrowings by $480,000 to an outstanding
balance of $720,000 (unaudited). The Company is
exploring additional sources of debt financing to
satisfy its current operational requirements, and is
currently contemplating additional private placements
of debt and equity, under the most favorable terms
available.
There can be no assurance that the operating funds
required during the next twelve months or thereafter
can be generated from operations or that if such
required funds are not internally generated, that
funds will be available from external sources such as
debt or equity financings or other potential sources.
The lack of additional capital resulting from the
inability to generate cash flow from operations or
the inability to raise capital from external sources,
would force the Company to substantially curtail or
cease operations and would, therefore, have a
material adverse effect on its business. Further
there can be no assurance that any such required
funds, if available, will be available on acceptable
terms or that they will not have a significantly
dilutive effect on the Company's existing
shareholders.
18
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
2. INVESTMENT IN The Company's market value of available for sale
EQUITY equity securities consisted of the following:
SECURITIES
Estimated Gross Gross
Fair Unrealized Unrealized
Value gains, net losses, net Cost
---------------------------------------------------------------------------
APRIL 30, 2001 $ 2,938 $ 38 $ - $ 2,900
April 30, 2000 $ 2,968 $ - $ - $ 2,968
April 30, 1999 $121,005 $ 9,885 $ (6,481) $117,601
---------------------------------------------------------------------------
On April 23, 2001 the Company sold virtually all of
its investment securities for net proceeds of
$149,799, which approximated the estimated fair
value. As a result of the sales, the Company
recognized approximately $56,372 in gross realized
losses for the year ended April 30, 2001.
On April 27, 2000, the Company transferred
substantially all of its investments to the Company's
President. The transaction was recorded at the fair
value of the investments as an advance to this
officer (Note 5). The estimated fair value of the
investments upon transfer to the President was
approximately $245,000. As a result of the transfer,
the Company recognized approximately $61,115 in gross
realized gains for the year ended April 30, 2000.
The officer repaid the amount advanced related to the
investment transfer in August 2000.
19
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
On January 30, 2001, the Company's President
contributed investments to the Company with an
estimated fair value upon contribution of $206,170.
The transaction was recorded at the fair value of the
investments as additional paid-in capital from the
officer. These investments were sold on April 23,
2001 as discussed above.
3. NOTE PAYABLE The Company's short-term obligation consists of a
bank promissory note payable for borrowings. The
amount payable under the note agreement was
$1,200,000, $750,000 and $749,484 at April 30, 2001,
2000 and 1999, respectively. The maximum
availability under the note is $1,500,000. The
original note matured and was renewed until October
30, 2000, at which time the note was extended until
April 30, 2001. Interest is payable monthly at the
prime rate charged by Wells Fargo Bank Colorado, N.A,
7.50% at April 30, 2001 and 9.00% at April 30, 2000.
The note is secured by accounts receivable and
general intangibles of the Company and is guaranteed
by the Company's President.
The agreement contains loan covenants that require
the Company to provide monthly accounts receivable
aging, annual and quarterly Company financial
statements, and annual personal financial statements
and tax returns of the guarantor. The loan requires
the Company to annually "rest" the loan for 60 days
with a zero balance. The Company was in compliance
with these covenants, except for the covenant to
"rest" the line for 60 days by April 30, 2001, which
the Company was in violation of at April 30, 2001.
20
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
The Company is currently in negotiations with the
bank to renew the promissory note and to obtain a
waiver for the expected loan covenant violation. The
note was renewed on April 24, 2001 with a
modification of terms. Under the modified terms the
Company was to pay down the note balance by April 30,
2001. The Company made the payment of principal on
May 1, 2001 to reduce the balance to $950,000, using
funds received from the liquidation of the
investments and a $100,000 repayment of advances from
its President. The Company further reduced the
principal balance to $720,000 as of October 8,
2001(unaudited). Once the balance is reduced to
$650,000 it is expected to be renewed as a three-year
term loan, with a second deed of trust on the
building at 8136 S. Grant Way pledged as collateral
support for the loan.
4. INCOME TAX Income tax expense (benefit) consisted of the
EXPENSE following:
(BENEFIT)
Years Ended April 30,
------------------------------------------------
2001 2000 1999
------------------------------------------------
CURRENT (BENEFIT):
Federal $ (293,800) $ 107,800 $ 191,500
State 14,200 16,700 28,000
-------------------------------------------------------------------------------------
(279,600) 124,500 219,500
-------------------------------------------------------------------------------------
DEFERRED (BENEFIT):
Federal 4,100 (252,600) 208,300
State 600 (38,900) 32,100
-------------------------------------------------------------------------------------
4,700 (291,500) 240,400
-------------------------------------------------------------------------------------
Income tax expense
(benefit) $ (274,900) $ (167,000) $ 459,900
=====================================================================================
21
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
The components of deferred income tax assets and
liabilities are as follows:
April 30,
--------------------------------
2001 2000
-------------------------------------------------------------------
DEFERRED TAX ASSETS (LIABILITIES):
CURRENT:
Contributions carryovers $ 190,200 $ 161,900
Accounts receivable reserve 169,000 56,300
Accrued compensated absences 30,900 22,600
Deferred revenue - 283,700
Cumulative effect of tax change
in accounting method (177,300) (177,300)
Net operating loss carryforward
- federal 146,300 -
Net operating loss carryforward
- states 69,100 -
-------------------------------------------------------------------
Current deferred tax asset before
valuation allowance 428,200 347,200
Valuation allowance (285,300) -
-------------------------------------------------------------------
Net current deferred tax asset 142,900 347,200
-------------------------------------------------------------------
LONG-TERM:
Deferred compensation plan 34,400 12,000
Cumulative effect of tax
change in accounting method (177,300) (354,500)
-------------------------------------------------------------------
Net long-term deferred tax liability (142,900) (342,500)
-------------------------------------------------------------------
Net deferred tax asset $ - $ 4,700
===================================================================
22
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
As of April 30, 2001, a valuation allowance equal to
the net deferred tax asset has been recorded, as
management has determined that it is more likely than
not the deferred tax asset will not be realized. The
Company has established a valuation allowance
primarily related to the uncertainty of realizing the
benefit of net operating losses and contributions
carryovers.
A reconciliation of income tax expense at the federal
statutory rate to the effective tax rate is as
follows:
Years Ended April 30,
------------------------------------------------
2001 2000 1999
-------------------------------------------------------------------------------------
Income tax expense (benefit)
computed at the federal
statutory rate $ (673,900) $ (243,200) $ 461,600
State income tax expense
(benefit), net of federal tax
benefit (45,600) 11,000 28,100
Non-deductible expenses 176,500 95,800 22,300
Rate differential (11,100) (30,600) 30,100
Adjustment relating to
accounting method change (6,100) - (82,200)
Change in valuation allowance 285,300 - -
-------------------------------------------------------------------------------------
Income tax expense (benefit) $ (274,900) $ (167,000) $ 459,900
=====================================================================================
23
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
In April 2000, the Company adopted a change in
accounting method with the consent of the Internal
Revenue Service. As a result of the change, the
Company will recognize future taxable income of
$1,890,877, ratably over a four-year period beginning
with the year ended April 30, 2000. In fiscal 2001,
one fourth of the total effect has been recognized as
current taxable income, one fourth has been recorded
as a current deferred tax liability and the remaining
one fourth has been recorded as a long-term deferred
tax liability.
The Company has the following net operating loss
carryforwards as of April 30, 2001:
Federal $ 450,200 Expires 2021
States $ 1,382,500 Expires 2016
5. RELATED LEASES
PARTY
TRANSACTIONS The Company leased its facilities from 8136 S. Grant
Way, LLC, which is 80% owned by the President of the
Company on a month-to-month basis prior to May 1,
2000. Beginning May 1, 2000 the Company entered a
two-year lease with 8136 S. Grant Way, LLC, which
expires April 30, 2002. The lease may be renewed for
an additional two-year term. Rent is $27,875
monthly, which approximates fair value. The Company
moved into the facilities at 8136 S. Grant Way in
April 1998. Rent payable to 8136 S. Grant Way was $0
at April 30, 2001 and 2000.
24
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
Rent expense under the lease was $334,500, $334,500,
and $218,029 for the years ended April 30, 2001, 2000
and 1999.
Additionally, prior to February 2000, the Company
leased a Unix computer system ($2,500 monthly) and a
phone system ($2,000 monthly) from the President of
the Company under two month-to-month leases. In
February 2000, the Company purchased the systems from
the President for the estimated fair value of
$50,000.
Rent expense under the lease was $43,156 and $54,000
for the years ended April 30, 2000 and 1999. There
was no rent expense for the year ended April 30, 2001
due to the Company purchase of the equipment in
February 2000.
ADVANCES AND RECEIVABLES
In connection with the transfer of substantially all
of the investments in equity securities to its
President in April 2000, the Company recorded an
advance receivable for the fair value of the
investments as of the date of the transfer. In
August 2000, the Company's President repaid this
advance in full. As of April 30, 2001, the Company
has made short-term advances of funds to its
President separate from the investments discussed
above and has total advances receivable from the
officer of $166,230.
25
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
As of April 30, 1999, the Company had advances
receivable of $135,000 from two officers and a demand
note receivable from E3SI, Inc., a company in which
the Company's President has a 46% ownership interest.
The $135,000 advanced to the officers at April 30,
1999 was repaid in December 1999 by deducting the
advances from the $420,000 in bonus proceeds paid to
the officers. Interest is accrued on advances to
officers at 8% per annum.
The Company also has receivables from two entities
with common ownership, 8136 S. Grant Way, LLC (80%
owned by the Company's President) and E3SI (46% owned
by the Company's President), for legal expenses paid
on behalf of these entities.
The amounts receivable which are classified for
financial reporting purposes in stockholders' equity
are as follows:
April 30,
--------------------------------
2001 2000
-------------------------------------------------------------------
Advances to officers $ 166,230 $ 245,311
Related party receivables:
E3SI, Inc. 7,869 78,849
8136 S. Grant Way, LLC 4,834 4,834
-------------------------------------------------------------------
Total related party receivables $ 248,933 $ 328,994
===================================================================
26
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
In connection with the receivable from E3SI, the
Company wrote-off amounts receivable from E3SI, Inc.
of $50,000 in the year ended April 30, 1999. The
remaining amount that had been advanced to E3SI as of
April 30, 1999 was formalized in a note agreement as
of December 27, 1999 under which interest is required
at 8% payable annually on the anniversary date of the
note.
Prior to entering the formal note agreement the
Company charged E3SI interest at 8% per annum.
Interest receivable as of the balance sheet dates is
included in stockholders' equity and consisted of the
following:
April 30,
---------------------------------
2001 2000
--------------------------------------------------------------------
INTEREST RECEIVABLE:
Advances to officers $ 4,964 $ 11,316
E3SI, Inc. 17,387 12,033
8136 S Grant Way 1,082 -
-------------------------------------------------------------------
$ 23,433 $ 23,349
===================================================================
E3SI and the Company have an ongoing business
relationship whereby occasionally either party may
perform work for the other party. Under this
arrangement the following transactions have taken
place during the periods presented:
April 30,
------------------------------------------------
2001 2000 1999
-------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE:
E3SI, Inc. (trade) $ 4,145 $ 85,250 $ 23,730
Revenues from E3SI, Inc. $ 33,973 $ 238,650 $ 24,000
=====================================================================================
27
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
ACCOUNTS PAYABLE
As of April 30, 2001 and 2000, the Company reported
accounts payable balances of $0 and $23,864 to E3SI.
E3SI provides business consulting and advisory
services to the Company.
6. LEASE The Company leases certain facilities under a
COMMITMENTS cancelable operating lease agreement. The lease
became effective August 1999 and is scheduled to end
August 31, 2004 unless terminated sooner. At the end
of the first year the Company may elect to terminate
the agreement, effective the end of the third year
(August 31, 2002). The Company has made a security
deposit of $62,500 under the agreement. During the
current fiscal year the Company leased certain office
facilities under non-cancelable operating lease
agreements, which expire at various dates through
2001. There was no rent expense under the agreements
for the years ended April 30, 1999. Rent expense for
the years ended April 30, 2001 and 2000 was $227,389
and $149,758.
The Company has leased a number of vehicles under
non-cancelable operating leases beginning in May
2000, expiring at various dates through July 2003.
The leases run for 24 to 36 months with a total
payment of approximately $20,000 monthly. The
Company also leases 50 laptop computers for $2,363
monthly under a 30-month lease, which began in August
2000 and expires in February 2003. Rent expense
under these vehicle and computer leases for the year
ended April 30, 2001 was $221,606. No rent expense
was incurred under these leases prior to May 2000.
28
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
Future minimum lease payments under the non-
cancelable portion of the operating leases are as
follows:
YEAR ENDING APRIL 30,
-----------------------------------------------------
2002 $ 788,000
2003 338,000
2004 71,000
-----------------------------------------------------
$ 1,197,000
=====================================================
7. EMPLOYEE The Company has a deferred savings plan (the "Plan")
BENEFIT which allows participants to make contributions by
PLANS salary reduction pursuant to Section 401(k) of the
Internal Revenue Code. Participants may contribute
up to 15% of their compensation; not to exceed the
maximum allowed by law. The Company makes a matching
contribution to the Plan of 100% of the first 6% of
employee contributions. The Plan was amended
effective January 1, 2001 to make the matching
contributions at the Company's discretion. The
Company did not make discretionary matching
contributions for the period from January 2001 to
April 2001. The Company may make discretionary
contributions to the Plan as determined by the
Company's Board of Directors. Participants are 100%
vested in their voluntary contributions and vest 20%
per year in Company matching contributions beginning
after two years of service. During the years ended
April 30, 2001, 2000, and 1999 the Company's
contributions to the Plan totaled $140,664, $241,580,
and $254,410.
29
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
Beginning January 2000 the Company established a non-
qualified deferred compensation plan to cover certain
key management employees. The Plan is funded by life
insurance policies on the lives of the participants.
The Company is the owner and beneficiary of record.
As of April 30, 2001 the policies had accumulated a
net cash surrender value of $28,225. The Company's
contributions to the Plan, net of increases in cash
surrender value, were $59,775 for the year ended
April 30, 2001 and $32,000 for the year ended April
30, 2000.
Once vested, the benefits under the Plan will be
equal to the initial face value of the policies and
generally will be payable evenly over a ten-year
period beginning at the time of retirement,
termination or death. Employees vest in their
benefits after five years of service from January 1,
2000. No benefits are due to any employee whose
employment is terminated prior to December 31, 2004.
8. LITIGATION The Company may be engaged in various litigation
matters from time to time in the ordinary course of
business. In the opinion of management, the outcome
of any such litigation will not materially affect the
financial position, results of operations, or cash
flows of the Company. The Company currently does not
have any significant litigation pending.
30
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
9. MAJOR The Company has historically received greater than
CUSTOMERS 10% of its annual revenues from several customers. A
summary of significant customers by period is as
follows:
2001 2000 1999
-------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE:
Customer A 25.1% 8.8% 66.2%
Customer B 25.9% 16.6% -
Customer C 4.5% 7.0% -
Customer D 17.6% - -
REVENUES:
Customer A 21.2% 29.9% 22.8%
Customer B 19.2% 6.7% -
Customer C 11.6% 3.1% -
Customer D - 9.5% -
-------------------------------------------------------------------------------------
10. SEGMENT Prior to May 1, 2000 the Company was run as one
INFORMATION business and separate discreet accounting information
was not maintained or reviewed by management.
Subsequent to May 1, 2000 the Company began operating
in two business segments; consulting services and
broadband. Results of operations of the two segments
for the year ended April 30, 2001 are shown below.
CONSULTING SERVICES The Company provides a wide
variety of interrelated services to its customers,
including customer relationship management, web
development, project management services,
engineering, staffing services and life cycle
services which formerly included sales of systems to
those customers and currently is directed toward
assisting the customer obtain the right technology
products from outside vendors with Company assistance
in the acquisition process, (procurement services)
and also includes configuration, deployment,
maintenance and disposal services.
31
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
BROADBAND SERVICES The Company provides various
services to its customers related to commercial and
residential installation of high-speed internet
access through cable and DSL lines.
The Company's reportable operating segments have been
determined in accordance with the Company's internal
management structure, which is organized based on
operating activities. The accounting policies of the
operating segments are the same as those described in
the summary of accounting policies. The Company
evaluates performance based upon several factors, of
which the primary financial measure is segment-
operating income.
YEAR ENDED APRIL 30, 2001
=====================================================
Revenues:
Consulting services $16,258,632
Broadband services 7,902,669
-----------------------------------------------------
$24,161,301
=====================================================
Operating loss:
Consulting services $ (751,888)
Broadband services (1,071,513)
-----------------------------------------------------
$(1,823,401)
=====================================================
Depreciation and amortization:
Consulting services $ 334,485
Broadband services 35,675
-----------------------------------------------------
$ 370,160
=====================================================
Expenditures for additions and long-
lived assets:
Consulting services $ 352,138
Broadband services 130,504
-----------------------------------------------------
$ 482,642
=====================================================
32
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
11. SUPPLEMENTAL Years Ended April 30,
DISCLOSURE OF ------------------------------------------------
CASH FLOW 2001 2000 1999
INFORMATION -------------------------------------------------------------------------------------
Cash paid during the period for:
Interest $ 138,153 $ 72,700 $ 819
-------------------------------------------------------------------------------------
Income taxes $ 33,506 $ 191,389 $ 174,722
-------------------------------------------------------------------------------------
Non-cash Investing and Financing Activities:
Capital contribution of
investment holdings from
majority shareholder, at fair
market value $ 206,170 $ - $ -
-------------------------------------------------------------------------------------
Capital contribution of
equipment from majority
shareholder, at cost $ 150,682 $ - $ -
-------------------------------------------------------------------------------------
Equipment received from
customer as payment on A/R at
FMV $ 25,000 $ - $ -
-------------------------------------------------------------------------------------
Transfer of investment holdings
to majority shareholder, at fair
market value $ - $ 245,311 $ -
-------------------------------------------------------------------------------------
33
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
12. COMMWORLD On March 10, 2000, the Company and its shareholders
MERGER entered into a definitive agreement for a business
TERMINATION combination with Communications World International,
Inc. ("CommWorld"). CommWorld's primary business
focus is a variety of telecommunications products and
services, including business telephone systems,
through franchises under the CommWorld name and
Company-owned outlets, including a national account
subsidiary.
In May 2000, prior to the CommWorld shareholder
meeting, the Company decided to terminate the merger
negotiations. Therefore the merger agreement was
never executed and the Company has no plans to pursue
further business with CommWorld.
13. WINCO MERGER On August 18, 2000, the Company and its shareholders
entered into a merger agreement with Winco Petroleum
Corporation ("Winco"); subject to shareholder
approval by both parties. The scheduled date of the
closing was extended from June 25, 2001 to July 31,
2001. In order to accomplish the merger, Winco has
created Winco Merger Corporation ("WMC") as a wholly
owned subsidiary of Winco. Upon completion of the
merger, the Company merged into WMC and WMC became
the surviving entity. The Company's shareholders
have received approximately 92.5% of the outstanding
Winco common stock. The merger has been accounted
for as a reverse acquisition. Under this accounting
treatment, the Company is deemed, for accounting
purposes, to be the acquirer and Winco the acquired
entity.
14. STOCKHOLDERS' In November 2000, the Company's majority shareholder
EQUITY contributed equipment with a cost basis of $150,682 as
(DEFICIT) additional capital. On January 30, 2001 the majority
shareholder contributed investment holdings with a
fair market value of $206,170 to the Company as
further discussed in Note 2.
34
BUSINESS PRODUCTS, INC.
(D/B/A RUSH CREEK SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2001, 2000 AND 1999
=========================================================================
15. VALUATION AND Balance at Deductions Balance at
QUALIFYING Beginning Charged to and Write- End of
ACCOUNTS of Period Expense Offs Period
============================================================================
YEAR ENDED APRIL 30, 2001
Allowance for doubtful
accounts $ 150,000 $ 376,007 $ 76,007 $ 450,000
YEAR ENDED APRIL 30, 2000
Allowance for doubtful
accounts $ 150,000 18,623 (18,623) $ 150,000
YEAR ENDED APRIL 30, 1999
Allowance for doubtful
accounts $ 56,000 144,000 (50,000) $ 150,000
============================================================================
35
WINCO PETROLEUM CORPORATION
CONTENTS
-------------------------------------------------------------------------
Consolidated Balance Sheet as of July 31, 2001 (unaudited) 2 - 3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the three months ended July 31, 2001
and 2000 (unaudited) 4
Consolidated Statements of Stockholders' Deficit for the three
months ended July 31, 2001 (unaudited) 5
Consolidated Statements of Cash Flows the three months
ended July 31, 2001 and 2000 (unaudited) 6 - 7
Notes to Consolidated Financial Statements 8 - 12
1
WINCO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
-------------------------------------------------------------------------
July 31, 2001
-------------------------------------------------------------------------
ASSETS
CURRENT:
Cash and cash equivalents $ 207,383
Investment in equity securities 3,364
Accounts receivable, less allowance of $450,000 for
doubtful accounts 1,313,792
Prepaid expenses and other current assets 178,495
Income tax refund receivable 323,104
Deferred income tax asset 94,037
-------------------------------------------------------------------------
Total current assets 2,120,175
-------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Office and computer equipment 1,502,231
Leasehold improvements 285,619
-------------------------------------------------------------------------
1,787,850
Less accumulated depreciation and
amortization 722,828
-------------------------------------------------------------------------
Net property and equipment 1,065,022
OTHER ASSETS:
Cash surrender value of life insurance policies 40,225
Deposits and other assets 68,504
-------------------------------------------------------------------------
108,729
$ 3,293,926
========================================================================
See accompanying notes to consolidated financial statements.
2
WINCO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
-------------------------------------------------------------------------
July 31, 2001
-------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,716,260
Accrued payroll, commissions and
compensated absences 743,424
Payroll taxes and employee benefit
plans payable 69,561
Deferred revenue 1,046,309
Note payable 950,000
Income taxes payable 131,374
-------------------------------------------------------------------------
Total current liabilities 4,656,928
Deferred income tax liability 94,037
-------------------------------------------------------------------------
Total liabilities 4,750,965
-------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, no par value, 50,000,000
shares authorized; 13,717,534 shares
issued and outstanding (Note 3) 366,811
Related party receivables (175,369)
Accumulated other comprehensive income 463
Accumulated deficit (1,648,944)
-------------------------------------------------------------------------
Total stockholders' deficit (1,457,039)
-------------------------------------------------------------------------
$ 3,293,926
=========================================================================
See accompanying notes to consolidated financial statements.
3
WINCO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
-----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31, 2001 2000
-----------------------------------------------------------------------------------------------------
REVENUES:
Support, update, configuration and training $ 2,512,863 $ 3,615,845
Broadband sales 607,614 1,586,407
Commissions - 1,056,610
System sales - 1,802,244
Other income 1,070 -
-----------------------------------------------------------------------------------------------------
Total revenues 3,121,547 8,061,106
COST OF REVENUES 2,072,165 6,169,562
-----------------------------------------------------------------------------------------------------
GROSS PROFIT 1,049,382 1,891,544
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,821,047 2,473,739
-----------------------------------------------------------------------------------------------------
OPERATING LOSS (771,665) (582,195)
OTHER INCOME (EXPENSE):
Interest and investment income 3,980 10,907
Interest expense (21,172) (30,861)
-----------------------------------------------------------------------------------------------------
Total other income (expense) (17,192) (19,954)
-----------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX BENEFIT (788,857) (602,149)
INCOME TAX BENEFIT - (202,700)
-----------------------------------------------------------------------------------------------------
NET LOSS (788,857) (399,449)
Other comprehensive income (loss), net of income tax:
Unrealized holding gains 425 16
-----------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS $ (788,432) $ (399,433)
=====================================================================================================
See accompanying notes to consolidated financial statements.
4
WINCO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
========================================================================================================
Accumulated
Common Stock Other
THREE MONTHS ENDED ---------------------- Related Party Comprehensive Accumulated
JULY 31, 2001 Shares Amount Receivables Income Deficit Total
--------------------------------------------------------------------------------------------------------
BALANCE, April 30, 2001 12,688,719 $ 358,352 $ (272,366) $ 38 $ (860,087) $ (774,063)
Net change in related
party receivables - - 96,997 - - 96,997
Effect of merger with
Winco Petroleum Corporation
(Note 3) 1,028,815 8,459 - - - 8,459
Comprehensive income (loss):
Net loss for the three
months - - - - (788,857) (788,857)
Unrealized holding gains - - - 425 - 425
--------------------------------------------------------------------------------------------------------
BALANCE, July 31, 2001 13,717,534 $ 366,811 $ (175,369) $ 463 $(1,648,944) $(1,457,039)
========================================================================================================
See accompanying notes to consolidated financial statements.
5
WINCO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
-------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED JULY 31, 2001 2000
-------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (788,857) $ (399,449)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 94,429 73,011
Stock issued for services 8,459 -
Deferred income taxes - (75,368)
Changes in operating assets and liabilities:
Accounts receivable 474,405 (208,057)
Commissions receivable - 465,838
Related party receivables (3,003) 980
Inventories - 90,575
Refundable income taxes - (127,368)
Prepaid expenses and other current assets 23,724 10,890
Other assets 50,000 -
Accounts payroll and accrued expenses 236,282 575,068
Accrued payroll, commissions, compensated absences,
payroll taxes and employee benefit plans payable 26,795 (357,965)
Deferred revenue 116,305 (213,661)
Income taxes payable - (100)
-------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 238,539 (165,606)
-------------------------------------------------------------------------------------------------
6
WINCO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
-------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED JULY 31, 2001 2000
-------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment 2,977 (323,769)
Increase in cash surrender value (12,000) -
Additions to deposits and other assets - (63,120)
-------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,023) (386,889)
-------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from note payable - 300,000
Payments on note payable (250,000) -
Payments received from related parties 100,000 (55,000)
-------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (150,000) 245,000
-------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 79,516 (307,495)
CASH AND CASH EQUIVALENTS, at beginning of period 127,867 441,318
-------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of period $ 207,383 $ 133,823
=================================================================================================
See accompanying notes to consolidated financial statements.
7
WINCO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JULY 31, 2001 AND 2000
(UNAUDITED)
=========================================================================
1. BASIS OF The accompanying consolidated financial statements of
PRESENTATION Winco Petroleum Corporation include the accounts of
Winco Merger Corporation (f/k/a Business Products,
Inc. (d/b/a Rush Creek Solutions, Inc.)) (the
"Company") and its wholly-owned subsidiary and have
been prepared pursuant to the rules of the Securities
and Exchange Commission for Quarterly reports on Form
10-Q and do not include all of the information and
footnotes required by generally accepted accounting
principles in the United States of America. These
statements should be read in conjunction with the
Company's audited financial statements and notes
thereto for the year ended April 30, 2001 included in
the accompanying Form 8-K/A.
In the opinion of management, all adjustments
considered necessary for a fair presentation have
been included consisting only of normal recurring
accruals. Operating results for the three-month
period ended July 31, 2001 are not necessarily
indicative of the results that may be expected for
the year ended April 30, 2002.
Certain reclassifications have been made to the prior
period presentations in order to conform to the
current presentation.
2. GOING CONCERN The consolidated financial statements have been
AND prepared assuming the Company will continue as a
MANAGEMENT going concern. The Company incurred losses totaling
PLANS $1,707,132 during the year ended April 30, 2001, and
has incurred losses of $788,857 for the three months
ended July 31, 2001, resulting in an accumulated
stockholders' deficit of $1,648,944 at July 31, 2001.
As of July 31, 2001, the Company had a working
capital deficiency of $2,536,753.
Management has established plans to improve the
Company's operating performance in fiscal 2002.
These plans include the reduction of labor costs
through layoffs and increased utilization of
remaining resources. The Company has also
reduced operations in specific activities
determined to be unprofitable. In addition, the
Company has terminated operating equipment leases
related to unprofitable activities.
8
WINCO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JULY 31, 2001 AND 2000
(UNAUDITED)
=========================================================================
As of October 8, 2001, the Company has reduced its
short-term borrowings by $230,000 to an outstanding
balance of $720,000. The Company is exploring
additional sources of debt financing to satisfy its
current operational requirements, and is currently
contemplating additional private placements of debt
and equity, under the most favorable terms available.
There can be no assurance that the operating funds
required during the next twelve months or thereafter
can be generated from operations or that if such
required funds are not internally generated, that
funds will be available from external sources such as
debt or equity financings or other potential sources.
The lack of additional capital resulting from the
inability to generate cash flow from operations or
the inability to raise capital from external sources
would force the Company to substantially curtail or
cease operations and would, therefore, have a
material adverse effect on its business. Further
there can be no assurance that any such required
funds, if available, will be available on acceptable
terms or that they will not have a significantly
dilutive effect on the Company's existing
shareholders.
3. WINCO MERGER On August 18, 2000, the Company and its shareholders
entered into a merger agreement with Winco Petroleum
Corporation ("Winco"), subject to shareholder
approval by both parties. The merger closed on July
31, 2001. Under the terms of the merger agreement,
Winco created Winco Merger Corporation ("WMC") as a
wholly owned subsidiary of Winco. In order to
complete the merger, Business Products, Inc. has
merged into WMC and WMC is the surviving entity. The
Company shareholders have received approximately
92.5% of the outstanding Winco common stock
(12,688,719 shares). The merger has been accounted
for as a reverse acquisition. Under this accounting
treatment, the Company is deemed, for accounting
purposes, to be the acquirer and Winco the acquired
entity. Shareholders of Winco have retained
1,028,815 shares of the outstanding common stock of
13,717,534 shares after the merger.
9
WINCO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JULY 31, 2001 AND 2000
(UNAUDITED)
=========================================================================
As Winco is a public shell, the transaction is
accounted for as a recapitalization of the Company.
Accordingly, the proforma disclosures required by APB
No. 16 are not presented.
4. LITIGATION The Company may be engaged in various litigation
matters from time to time in the ordinary course of
business. A lawsuit has been filed for
discrimination and wrongful termination employment
issues against the Company for incidents which
arose in the normal course of business. In the
opinion of management and legal counsel, the outcome
of the lawsuit now pending is not likely to have a
material adverse effect on the Company's financial
position, liquidity or operating results.
Subsequent to July 31, 2001, a complaint was filed
against the Company that alleges destruction of
personal property, breach of warranty, negligent
performance of services and violation of the
Washington Consumer Protection Act. The Company
intends to vigorously contest any lawsuit and
believes additional parties to the case would share
any liability under the complaint. In the opinion of
management and legal counsel, the outcome of this
matter is not likely to have a material adverse
effect on the Company's financial position, liquidity
or operating results.
5. SEGMENT Results of operations of the two segments, consulting
INFORMATION services and broadband services, for the three months
ended July 31, 2001 and 2000 are shown below.
CONSULTING SERVICES The Company provides a wide
variety of interrelated services to its customers,
including customer relationship management, web
development, project management services,
engineering, staffing services and life cycle
services, which previously included sales of systems
to those customers and currently is directed toward
assisting the customer obtain the right technology
products from outside vendors with Company assistance
in the acquisition process, (procurement services)
and also includes configuration, deployment,
maintenance and disposal services.
10
WINCO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JULY 31, 2001 AND 2000
(UNAUDITED)
=========================================================================
BROADBAND SERVICES The Company provides various
services to its customers related to commercial and
residential installation of high-speed internet
access through cable and DSL lines.
The Company's reportable operating segments have been
determined in accordance with the Company's internal
management structure, which is organized based on
operating activities. The Company evaluates
performance based upon several factors, of which the
primary financial measure is segment-operating
income.
THREE MONTHS ENDED JULY 31, 2001 2000
------------------------------------------------------------------
Revenues:
Consulting services $ 2,513,933 $ 6,474,699
Broadband services 607,614 1,586,407
-----------------------------
$ 3,121,547 $ 8,061,106
=============================
Operating loss:
Consulting services $ (160,814) $ (31,578)
Broadband services (610,851) (550,617)
-----------------------------
$ (771,665) $ (582,195)
=============================
Depreciation and amortization:
Consulting services $ 82,247 $ 67,154
Broadband services 12,182 5,857
-----------------------------
$ 94,429 $ 73,011
=============================
Expenditures for additions and
long-lived assets:
Consulting services $ 2,977 $ 248,081
Broadband services - 75,688
-----------------------------
$ 2,977 $ 323,769
=============================
11
WINCO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JULY 31, 2001 AND 2000
(UNAUDITED)
=========================================================================
6. SUPPLEMENTAL THREE MONTHS ENDED JULY 31, 2001 2000
DISCLOSURE OF ------------------------------------------------------------------
CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 21,172 $ 26,883
==================================================================
Income taxes $ - $ -
==================================================================
12