U.S. 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): August 22, 2003
X-NET SERVICES CORP.
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(Exact Name of Registrant as Specified in its Charter)
Nevada 000-49722 87-0671807
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) No.) File Number) Identification
4933 East Highway 60
Rogersville, MO 65742
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(Address of Principal Executive (Zip Code)
Offices)
(417) 890-6556
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(Registrant's telephone number, including area code)
13537 Jackson Street, Thornton, CO 80241
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(Former Name or Former Address, if Changed Since Last Report)
Forward-Looking Statements
This report contains "forward-looking" statements including statements that
describe the proposed operations of X-Net and its subsidiary and statements with
respect to their future strategic plans, goals or objectives. Any
forward-looking statements, including those regarding X-Net or its management's
current beliefs, expectations, anticipations, estimations, projections,
proposals, plans or intentions, are not guarantees of future performance or
results and involve risks and uncertainties, such as those discussed herein
under the caption "Risk Factors." The forward-looking statements are based on
present circumstances and on X-Net's predictions respecting events that have not
occurred, that may not occur, or that may occur with different consequences and
timing than those now assumed or anticipated. Any forward-looking statements are
made only as of the date of this report and X-Net assumes no obligation to
update forward-looking statements to reflect subsequent events or circumstances.
ITEM 1. CHANGES IN CONTROL OF THE REGISTRANT
As reported in Item 2. below, on August 22, 2003, X-Net Services Corp. ("X-Net"
or the "registrant") experienced a change in control as a result of its
acquisition of Third Millennium Industries, Inc., a Nevada corporation
("Millennium"), in a "reverse merger" transaction. Prior to the transaction,
there were a total of 1,500,000 shares of X-Net common stock issued and
outstanding. In connection with the transaction, X-Net issued a total of
10,200,000 restricted shares of X-Net common stock, or approximately 87.2% of
X-Net's total issued and outstanding shares following the transaction, to the
shareholders of Millennium in exchange for all issued and outstanding shares of
Millennium. Concurrently with the closing of the reorganization, the former
officers of X-Net resigned from their positions and the persons selected by
Millennium were appointed as the new officers of X-Net. In addition, X-Net's
board of directors was increased to two persons and a person designated by
Millennium was appointed as a director of X-Net to fill the vacancy created by
such increase. The Reorganization Agreement also provides that ten days after
the closing date, or the earliest date permitted by Rule 14f-1, the other
director shall resign and be replaced by a person designated by Millennium. The
number of shares and percentage of the registrant's voting securities now held
by each officer, director and 5% or greater shareholder following the
reorganization is reported in Item 2 below.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On August 22, 2003, X-Net acquired Millennium as a wholly owned subsidiary in a
"reverse merger transaction" pursuant to an Agreement and Plan of
Reorganization, dated as of July 18, 2003, entered into among X-Net, X-Net
Merger Co., and Millennium (the " Reorganization Agreement").
Pursuant to the terms of the Reorganization Agreement, X-Net formed a new,
wholly owned subsidiary under the laws of Nevada by the name of X-Net Merger
Co., that was merged into Millennium and the outstanding shares of Millennium
were converted into restricted shares of X-Net common stock. In connection with
the transaction, X-Net issued 10,200,000 restricted shares of X-Net common stock
to the Millennium shareholders. As a result of the transaction, X-Net has a
total of 11,700,000 shares of common stock issued and outstanding, of which
10,200,000 shares, or approximately 87.2% of its total issued and outstanding
shares, are held by the persons who were shareholders of Millennium prior to the
merger and 1,500,000 shares, or approximately 12.8%, are held by the persons who
were shareholders of X-Net prior to the merger. At the closing of the
reorganization, the former officers of X-Net resigned from their positions and
the persons designated by Millennium were elected as the new officers of X-Net.
In addition, X-Net's board of directors was increased to two persons and a
person designated by Millennium was appointed as a director of X-Net to fill the
vacancy created by such increase. The Reorganization Agreement also provides
that ten days after the closing date, or the earliest date permitted by Rule
14f-1, the other director shall resign and be replaced by a person designated by
Millennium. The reorganization has been treated for accounting purposes as a
reverse acquisition of X-Net by Millennium. In connection with the
reorganization, X-Net adopted and assumed Millennium's outstanding stock options
and reserved 700,000 shares of its common stock for issuance upon the exercise
of such options. X-Net also effectively assumed Millennium's outstanding 18%
Convertible Promissory Notes in the aggregate principal amount of $625,000,
which are convertible at the option of the holders into approximately 883,333
shares of X-Net common stock.
Directors and Executive Officers
The following table sets forth the names, ages, and titles of the executive
officers and directors of X-Net.
Name Age Title*
---- --- ------
Dennis K. DePriest 48 President and Director
George G. Spencer 47 Secretary and Treasurer
Stephen D. Utley 42 Director
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* The term of office of each director is one year and until his or her
successor is elected at X-Net's annual shareholders' meeting and is
qualified, subject to removal by the shareholders. The term of office
for each officer is for one year and until a successor is elected at
the annual meeting of the board of directors and is qualified, subject
to removal by the board of directors. Each of X-Net's officers and
directors has served in the offices indicated above since August 22,
2003, except that Stephen D. Utley has been a director of X-Net since
May 11, 2003.
Certain biographical information of X-Net's directors and officers is
set forth below.
Dennis K. DePriest. Mr. DePriest is a co-founder of Third Millennium
Industries, Inc. and served as its President from its organization in February
2002 to the present. From February 2000 through February 2002, he was President
of Springfield Venture, and from November 1987 through November 1999, he was
President of Metropolymec Labs, Inc. Mr. DePriest is a nationally recognized
speaker within the home schooling community. He is 48, married, and has eight
children. Mr. DePriest has written and presented several seminars on parenting
skills. He is the holder of two U.S. Patents covering both product designs and
innovative manufacturing processes.
George G. Spencer. Mr. Spencer is a co-founder of Third Millennium
Industries, Inc. and served as its Secretary and Treasurer from its organization
in February 2002 to the present. From January 1999 through April 2002, Mr.
Spencer was a managing member of Springfield Venture Capital LLC. In 1998 Mr.
Spencer was President of Community Investment Alliances, LLC. Mr. Spencer has
completed numerous merger and acquisition transactions during the past fifteen
years. He most recently negotiated the acquisition of Gared Sports, the leading
manufacturer of backboards and goal systems. His previous experience includes a
two-year stay as CFO of a television station holding company where he was
responsible for all financial affairs of the company. He also spent thirteen
years in commercial banking, as a Vice President of commercial lending for
Centerre Bank.
Stephen D. Utley. Mr. Utley is, and has for in excess of five years,
been employed as territory manager for a regional wholesale appliance,
electronics and furniture distributor. Mr. Utley served as the President,
Secretary and Treasurer of X-Net from May 11, 2003 to August 22, 2003.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of August 23, 2003, the number of shares of
X-Net common stock, par value $0.001, owned of record or beneficially by each
person known to be the beneficial owner of 5% or more of the issued and
outstanding shares of X-Net common stock, and by each of X-Net's officers and
directors, and by all officers and directors as a group. On August 23, 2003,
there were 11,700,000 shares of X-Net common stock issued and outstanding.
Title Number of Nature of Percent
of Class Name Shares Owned(1) Ownership of Class
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Principal Shareholders
Common HIC of MO, LLC 5,332,713 Direct 45.6%
Common Greg Meador 5,332,713(2) Indirect 45.6%
Officers and Directors
Common Dennis K. DePriest 945,000 Direct 8.1%
5,332,713(3) Indirect 45.6%
6,277,713 53.7%
Common George G. Spencer 945,000 Direct 8.1%
5,332,713(3) Indirect 45.6%
6,277,713 53.7%
Common Stephen D. Utley 0 - -
Common All Officers and
Directors 1,890,000 Direct 16.2%
As a Group
(3 Persons) 5,332,713(3) Indirect 45.6%
7,222,713 61.8%
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(1) Unless otherwise indicated, all shares are held beneficially and of
record by the person indicated.
(2) Consists of 5,332,713 shares owned by HIC of MO, LLC ("HIC") of which
Mr. Meador may be deemed to be a beneficial owner as a result of his
status as the manager and a member of HIC.
(3) Consists of 5,332,713 shares owned by HIC of which Messrs. DePriest and
Spencer may each be deemed to be a beneficial owner as result of their
status as members of HIC with shared investment power over the shares
held by HIC.
INFORMATION ABOUT THIRD MILLENNIUM
History
Millennium was incorporated in Nevada in February 2002 under the name Third
Millennium Acquisitions, Inc. In March 2002, its name was changed to Third
Millennium Industries, Inc. From the date of its incorporation through the date
of its acquisition by X-Net on August 22, 2003, Millennium conducted research in
the aluminum trailer industry, developed a business plan, assembled an
experienced management team, raised working capital through loans and the
private placement of common stock, and
entered into acquisition agreements with three companies engaged in business in
the aluminum horse trailer industry. Shortly before the consummation of X-Net's
acquisition of Millennium, Millennium began the implementation of its business
plan, and satisfied one of the conditions to closing of the X-Net acquisition,
by acquiring all the capital stock of the following three companies: Campers
World, Inc. of Tulsa, Oklahoma ("Campers World"); Twister Trailers
Manufacturing, Inc., of Fort Scott, Kansas ("Twister"); and Clear Lake Trailers,
Inc. of Weatherford, Texas ("Clear Lake"), (which companies are sometimes
referred to collectively in this report as the "Millennium Subsidiaries").
Except as otherwise expressly indicated to the contrary, X-Net, Millennium and
the Millennium Subsidiaries are referred to collectively in this report as
"X-Net," the "Company," or the "Registrant."
Business Plan
Millennium was formed for the purpose of acquiring several aluminum horse
trailer related companies as the platform for an industry roll-up of similar
manufacturers located primarily within 350 miles of the company's Springfield,
Missouri base of operations. Millennium believes the horse trailer manufacturing
industry is highly fragmented and largely populated by companies that began as
small job shops or off-shoots of existing trailer manufacturers who have been
allowed by market demand to grow without having to apply the efficiency
enhancement methods and procedures common to most other industries. Millennium
believes that by acquiring several of such companies and focusing its efforts on
quality control, economies of scale, better management techniques and strong
employee relations, it can achieve significantly better results of operation on
a consolidated basis than the companies have been able to achieve on an
individual basis. Millennium believes the aluminum horse trailer market
generates total revenues of over $1 billion per year and Millennium believes
that its plan of consolidation will allow it to compete effectively in that
industry.
Millennium also plans to evaluate several opportunities for "tuck-in"
acquisitions with strong possibilities for synergistic contributions (e.g. axle
and suspension systems suppliers, aluminum extruders, living quarter conversion
suppliers, retail dealers etc.), several of which have already been identified.
Millennium ultimately plans to acquire up to approximately eight companies with
consolidated annual revenues of $130 to $150 million per year. No assurances can
be given that Millennium will be successful in acquiring such companies or that
if acquired, such companies will perform in the manner anticipated by
Millennium. Further, Millennium anticipates that it will require substantial
additional capital in the aggregate amount of approximately $20 million in order
to implement its full consolidation plan. Millennium has not received any
commitment for the provision of such financing and no assurances can be given
that such funding will be available to Millennium on terms acceptable to it or
at all.
Millennium believes that the success of its business plan will be primarily
dependent on the following three factors:
1. Adequate funding must be available for the cash portion of the
buy out. In some cases owners of the target companies are not
willing to accept equity positions, preferring to be "cashed
out" entirely. However, Millennium believes that in most cases
only a portion of the buy out will be for cash.
2. An active and liquid public market for the Company's stock
will be necessary to satisfy that portion of the buy outs
taken in the Company's stock.
3. Acceptance of new management techniques by current employees
will be critical. The Company believes strongly that its
success will depend in part on the acceptance of changes in
policies, procedures and overall management methodology it
intends to implement. This will require total participation
and cooperation from the in-place infrastructure.
Products
Millennium plans to limit its activities to aluminum horse trailers, which are
superior to steel trailers in terms of weight, durability, corrosion resistance,
maintenance and weight-to-load ratio. Millennium believes that aluminum horse
trailers fall into two categories: (i) low-end, entry-level units that are of
lesser quality, and that account for approximately 70% of the total market, or
(ii) high-end units of very high quality that are designed specifically for a
market that demands a higher benchmark and is willing to pay for it, which
account for approximately 30% of the total market. Millennium believes that the
higher end market segment is growing at a faster rate than the entry-level
market and Millennium intends initially to focus its efforts on the higher end
market. Millennium also plans to eventually market other products, which fit
into the "lifestyle leisure" market category.
Millennium plans to market several lines of all aluminum horse trailers. These
units are designed as gooseneck trailers that can be pulled by a heavy pick-up
truck equipped specifically for this purpose. Trailers will range in length from
25' to 48' and may be configured in any number of designs. Millennium's trailers
will generally include name brand tires, LED running lights, and full safety
equipment. Other available options will include custom graphics, logos and
lettering, generators, upgraded suspension systems, vents and special air flow
designs. In some instances, living quarters for trainers or owners will be
incorporated into the design specifications and may include options ranging from
simple shelves, cabinets, lockers and dressing rooms to complete living quarters
including upholstered furniture, wood or laminated finishes, air conditioning,
refrigerators, electronics, central vacuum system, dinettes and bathrooms.
Millennium believes that by consolidating the manufacturing functions of both
trailer and living quarters, it will be possible to floor plan complete units at
the retail level more effectively. The manufacturer building both parts of the
product will sign the repurchase agreement with the floor plan financing
company. This is important because if a dealer cannot floor plan units, they
cannot have them in inventory for sale, in which case the customer is forced to
wait through the lead times of ordering and building both the trailer and living
quarters, which is currently estimated at four to five months. Millennium
believes it will be able to provide dealers with a financing package that will
accept the living quarters as valid collateral and thereby assist them in
acquiring floor planning. This will enable dealers to maintain high quality
products on their lots for immediate sale.
As time progresses and Millennium can assess product performance, it plans to
begin eliminating less profitable product lines, consolidating the best product
features into the remaining lines and streamlining production around fewer
focused products. New product introduction will be considered as Millennium's
experience matures.
Potential Savings and Synergies
In determining which companies to select as acquisition targets, Millennium
generally engages an independent consultant to conduct product and process
evaluations on its potential acquisition candidates. This evaluation process
covers facilities, operations, quality control systems, human resources, product
development and process improvement. Millennium believes it is essential to have
qualified third party confirmation of manufacturing efficiency enhancement
potential before negotiating a final acquisition price. Millennium's initial
research indicates that significant improvements can be achieved through the
reduction of lead times and of work in progress, the improvement of product
quality, the improvement of overall operating efficiency, and the more efficient
utilization of floor space.
Effective use of economies of scale is also expected to have a significant
impact. Certain raw materials such as aluminum extrusions, aluminum sheeting,
windows, fasteners, suspension systems and a host of other universally used
products can be purchased centrally in bulk and drop shipped to the
manufacturing facility. Millennium believes that most of the raw materials and
standard parts it will use in its operations, including aluminum and sheet
metal, are available from multiple sources of supply.
One of the prime areas of concern for improvement in the industry has been in
the area of standardization. Most manufacturers of upper market trailers do not
have a standard product, preferring to `spec-out' each order. This requires
individual engineering, construction and costly raw product inventorying.
Typically, each manufacturer has its own unique extrusion specifications even
for innocuous parts such as struts and beams.
Millennium intends to institute a program of "Mass Customization" that will
standardize the basic trailer for each of its acquired companies, while still
giving service to some design and cosmetic individuality. Millennium will
implement its customization program by evaluating past sales to identify product
groupings and making an assessment of specific customer needs. Design packages
can be categorized within this same grouping for a cross reference and re-use
type system. Target objectives would then be to develop a standard design
package, production work instructions, bill of materials, etc., along with a
customer management program to support both the needs of the customer and the
company.
Millennium believes that product costing and resource allocation can be improved
in all instances. Millennium plans to institute stricter cost accounting
procedures to bring a higher level of financial discipline to the process by
instituting a fully integrated Enterprise Resource Planning business software
system.
Centralized purchasing and allocation are expected to bring substantial savings
through a more focused vendor relations program. It will not be necessary to
inventory raw material in a central location. Most vendors drop ship as a sales
accommodation, but centralized buying is anticipated to afford a better
bargaining position and provide stricter cost controls.
By this process of consolidation Millennium expects to realize substantial
savings in administrative costs that are currently being duplicated by each
manufacturer.
Millennium believes it can, to a degree, remedy the human resource dilemma and
increase quality and performance at the same time by bringing the employees
closer to not only the decision making process but through a sharing of the
positive benefits that will accrue.
o Better training programs. Each company is located in a state
with programs for training. In several instances cash stipends
are made available directly to the enrolling company.
o Instituting employee involvement by bringing more of the floor
personnel into production decision-making processes.
o Providing better benefits packages that make leaving a costly
proposition and staying a financial boon.
o Insurance, retirement and profit sharing programs, and above
all family involvement in the company, can result in greater
productivity and company loyalty.
o Institution of stronger quality control programs will result
in not only a higher degree of customer loyalty, but also
pride among the work force.
Marketing
Millennium believes the operations of all acquired companies can be improved
through the implementation of centralized marketing procedures and the effective
use of cross marketing techniques. The following are among the marketing
initiatives that Millennium plans to implement.
o A more ambitious advertising campaign incorporating coop
advertising, stronger manufacturer involvement in trade shows,
Internet presence and sponsorship.
o Steps to remedy the floor plan issues and lack of financial
support for sales have been instituted already. It is intended
that Dealers who offer the living quarters package will be
able to floor plan converted units through this system. This
is important because flooring is difficult to obtain for
conversion units which is a segment of the industry that is
showing the most growth and the best overall margins.
Millennium plans to engage in a blanket repurchase agreement
with the financing resources on behalf of the consolidated
companies. This will allow dealers more flexibility in
offering financing packages to customers. It will also tend to
eliminate the `special order' factor and focus sales more on
standardized and dealer stocked products.
o Better dealer support and education will be instituted from
the onset. Millennium expects to focus more toward leading the
customer to a standard product and in that manner help the
dealer lead the sale rather than be led by it.
The Millennium Subsidiaries
Millennium has implemented the initial phase of its consolidation plan through
its recent August 2003 acquisitions of Campers World, Twister and Clear Lake,
which together had total revenues in 2002 of approximately $22 Million. All of
such companies are currently financially distressed and Millennium believes it
can improve the operations of all three companies by centralizing and
standardizing operations as discussed above. A brief description of each of the
Millennium Subsidiaries is set forth below. The financial statements for each of
such companies have been filed as exhibits to this report.
Campers World
Campers World was incorporated in the State of Oklahoma in 1986. It is
a retail dealer of various types of recreational vehicles including
Class "A" motor homes, travel trailers and horse trailers. It has two
locations in the Tulsa, Oklahoma area and a total of thirty-five (35)
employees. Campers World had total revenues in 2002 of approximately
$17.6 Million.
Clear Lake Trailers
Clear Lake Trailers was incorporated in the State of Texas in 1999. It
is a retail dealer of various types of trailers including cargo,
utility and various lines of aluminum and steel horse trailers. It
has one location in Weatherford, Texas and a total of seven (7)
employees. Clear Lake had total revenues in 2002 of approximately $4
Million.
Twister Trailers Manufacturing
Twister Trailers Manufacturing was incorporated in the State of Kansas
in 1995. It is a manufacturer of custom aluminum horse trailers. It has
one location in Fort Scott, Kansas and a total of three (3) employees.
Twister had total revenues in 2002 of approximately $500,000.
Planned Future Acquisitions
Millennium's business plan is to acquire several additional companies in the
aluminum horse trailer industry and Millennium has entered into non-binding
letters of intent for the acquisition of two other companies. On May 27, 2003
Millennium entered into a non-binding letter of intent to acquire Ozark Mountain
Interiors, a privately held cabinet manufacturing company located in Missouri,
and on August 15, 2003 Millennium entered into a non-binding letter of intent to
acquire Barrett Trailers, Inc., a trailer manufacturing company in Oklahoma. The
letters of intent are subject to the negotiation of definitive agreements
acceptable to both parties and their counsel and to other conditions precedent.
No assurances can be given that Millennium will be successful in entering into
definitive agreements with either of such companies or that either acquisition
will be completed.
Employees
Millennium and the Millennium Subsidiaries have fifty (50) employees, including
their officers. Millennium's employees are not represented by unions and it
considers its relationship with its employees to be good.
Facilities
The principal executive offices of X-Net have been relocated to Millennium's
principal executive offices located at 4933 East Highway 60, Rogersville,
Missouri 65742, where its telephone number is (417) 890-6556. Such office space
is rented by Millennium from a related party on a month-to-month basis pursuant
to an oral agreement. The current rent for such facility is $4,000 per month.
Management
The President and Secretary/Treasurer of X-Net hold the same offices with
Millennium. In addition, Ron Connell serves as Millennium's Vice President of
Operations. The current directors of Millennium are Dennis K. DePriest and
George G. Spencer.
Competition
The aluminum trailer business is highly fragmented and highly competitive.
Competition is based on several factors including product quality, value, price,
reliability, turnaround time, brand name recognition, dealer services, available
financing, customer service, product development, and market research.
Millennium believes that the aluminum horse trailer industry is made up of
several small manufacturing organizations that account for over 70% of industry
sales with the remaining 30% scattered among the regional manufacturers. Among
Millennium's more prominent competitors are: Featherlite Corp., Exiss, Cherokee,
4 Star Trailers, Elite Trailers, C&C, Bloomer, Sooner Trailers, Sundowner
Trailers, and Hart Trailers, most of which have substantially longer track
records and greater financial resources and operating efficiencies than
Millennium. There can be no assurance that Millennium will be able to compete
effectively in the market.
Regulation
Millennium and its subsidiary companies and products are subject to a number of
federal, state and local laws, rules and regulations. Millennium and its
subsidiaries manufacture their trailers to the standards of the U.S. Department
of Transportation and are subject to regulations relating to employee safety,
working conditions, protection of the environment, and other items. Changes in
such laws, rules and regulations or the recall of any product by the National
Highway Transportation Safety Board, could have a material adverse effect on
Millennium's business and financial condition.
RISK FACTORS
The conduct and growth of X-Net's new business, as conducted through Millennium,
is subject to several significant risks, including those set forth below. You
should carefully read and consider such risk factors.
X-Net will require substantial additional equity or debt financing to
successfully implement its business plan and its failure to obtain such
financing could delay or curtail its operations. X-Net must obtain substantial
additional equity or debt financing to implement its business plan and to
restructure the operations of Millennium and its subsidiaries to achieve the
additional efficiencies that are expected to result in profitable operations.
The Company anticipates that it will require substantial additional capital in
the amount of approximately $20 million in order to implement its full
consolidation plan. X-Net has not entered into any agreements or arrangements
for the provision of such additional financing, and no assurance can be given
that such financing will be available on terms acceptable to X-Net or at all.
X-Net's subsidiary, Millennium, has a limited operating history and it is
difficult to evaluate its business. Millennium was only recently incorporated in
February 2002 and does not have an established history of operations. Millennium
faces all the risks inherent in a new business and there can be no assurance it
will be successful and/or profitable. Millennium's entry into the aluminum
trailer industry and its lack of a significant operating history make it
difficult to evaluate the risks and uncertainties it faces. Millennium's failure
to address these risks and uncertainties could cause its business results to
suffer.
The first three companies acquired by Millennium are financially distressed and
Millennium's failure to achieve the planned improvements in efficiencies and
operating results in a short time frame could have a materially adverse effect
on X-Net and could threaten its ability to continue as a going concern. Each of
the Millennium Subsidiaries is currently financially distressed and if X-Net
fails to achieve the planned improvements in efficiencies and operating results,
X-Net may be forced to obtain significant additional financing to fund losses
from operations. If such financing is not available to X-Net and/or if such
losses continue for a prolonged period of time, X-Net could be forced to
discontinue its operations.
The Millennium Subsidiaries are parties to financing arrangements that could
become immediately due and payable as result of Millennium's acquisition of such
companies, which would require Millennium to refinance such loans. The
Millennium Subsidiaries are parties to promissory notes and other loan
agreements with various lenders that entitle the lenders to declare the
outstanding balance of such loans to be immediately due and payable in the event
of a change in control of the borrower. Millennium's acquisition of the
Millennium Subsidiaries may constitute a change in control of each such company.
If the lenders should declare their loans to be immediately due and payable,
Millennium would be forced to obtain additional financing and no assurances can
be given that such financing would be available on terms acceptable to it or at
all. If it were not able to obtain the required financing it would be in default
under the loan documents and the lenders could foreclose on the collateral.
Millennium will be dependent on its ability to acquire the aluminum used in its
manufacturing operations at favorable prices, and increases in price or
interruptions in supply could have a material adverse effect on Millennium's
business and financial condition. Millennium uses significant amounts of
aluminum in its manufacturing operations, including aluminum extrusions and
sheets. Unforeseen upward fluctuations in the world wide prices of aluminum or
the inability of a major supplier to deliver raw materials on a timely basis
could have a material adverse effect on Millennium's business and financial
condition.
Millennium is subject to the risk of product liability claims and the loss of
any such claim in excess of its insurance coverage could have a material adverse
effect on Millennium. As a manufacturer, Millennium is subject to the inherent
risk of product liability claims. Millennium maintains product liability
insurance in amounts it believes adequate but no assurance can given that its
coverage will continue to be available at acceptable prices or that such
coverage will be adequate in scope and coverage to protect Millennium from
product liability claims.
The Registrant is substantially dependent on Dennis K. DePriest and George G.
Spencer, the founders of Millennium, and the loss of their services would have
an adverse effect on its business. The Registrant is dependent on Dennis K.
DePriest, president and a director of X-Net and Millennium, George G. Spencer,
secretary and treasurer of X-Net and secretary, treasurer and a director of
Millennium, and Ron Connell, vice president of operations of Millennium, to
operate the company and the loss of any of their services may be expected to
have an adverse impact on its operations until such time as they could be
replaced, if they could be replaced. The Company does not carry key man life
insurance on the lives of Messrs. DePriest, Spencer or Connell, although
Millennium has entered into employment agreements with each of such persons.
The limited operating history and limited resources of X-Net put it at a
significant competitive disadvantage in the aluminum trailer industry.
Millennium competes with a number of other businesses, most of which have
substantially greater resources and operating efficiencies than Millennium, such
as Featherlite Corp., Exiss, Cherokee, 4 Star Trailers, Elite Trailers, C&C,
Bloomer, Sooner Trailers, Sundowner Trailers, and Hart Trailers. The intense
competition among aluminum trailer manufacturers, and Millennium's relative lack
of resources may prevent it from successfully competing for customers.
The shares of common stock available for sale in the future could adversely
affect the market price for X-Net's common stock. Of the approximately
11,700,000 shares outstanding, approximately 1,500,000 shares are freely
tradable or eligible for resale under Rule 144 promulgated under the Securities
Act of 1933, as amended. Sales of substantial amounts of this common stock in
the public market could adversely affect the market price for X-Net's common
stock. The approximately 10,200,000 remaining shares will become available for
sale under Rule 144 on August 22, 2004, and the availability of those shares for
sale could also adversely affect the market price for X-Net's common stock.
The price for X-Net's stock could be volatile. In the event an established
market for X-Net's common stock should develop, market prices will be subject to
significant fluctuation in response to many factors, including: variations in
X-Net's operations; investors' perception of X-Net; developments with regard to
X-Net's activities, financial condition and management; investors' perceptions
of the aluminum trailer industry in general; supply and demand; interest rates;
and general economic conditions.
Control by Officers, Directors, and Principal Shareholders. The officers,
directors and principal shareholders of X-Net own approximately 62% of X-Net's
outstanding shares of common stock. As a result, these shareholders will be able
to control the management and policies of X-Net through their ability to
determine the outcome of elections for X-Net's board of directors and other
matters requiring the vote or consent of shareholders.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial statements of businesses acquired.
The following financial statements are included in this report,
immediately following the signature page:
Audited Financial Statements of Third
Millennium Industries, Inc. as of December 31,
2002 and for the period from February 11, 2002
(inception) to December 31, 2002.
Audited Financial Statements of Campers World,
Inc. as of December 31, 2002 and for the years
ended December 31, 2002 and 2001.
Audited Financial Statements of Clear Lake
Trailers, Inc. as of December 31, 2002 and 2001
and for the years then ended.
Audited Financial Statements of Twister
Trailers Manufacturing, Inc. as of December 31,
2002 and for the years ended December 31, 2002
and 2001.
The following unaudited financial information will be included in an
amendment to this report to be filed as soon as practicable, but not later than
sixty days after the due date for this report on Form 8-K:
Unaudited Financial Statements of Third
Millennium Industries, Inc. as of June 30, 2003
and for the six months then ended.
Unaudited Financial Statements of Campers
World, Inc. as of June 30, 2003 and for the six
months then ended.
Unaudited Financial Statements of Clear Lake
Trailers, Inc. as of June 30, 2003 and for the
six months then ended.
Unaudited Financial Statements of Twister
Trailers Manufacturing, Inc. as of June 30,
2003 and for the six months then ended.
(b) Pro forma financial information.
The following pro forma financial information will be included in an
amendment to this report to be filed as soon as practicable, but not later than
sixty days after the due date for this report on Form 8-K:
The Unaudited Pro-forma Condensed Combined Balance Sheet at
June 30, 2003, and the related Unaudited Pro-forma Condensed
Combined Statements of Operations for the year ended December
31, 2002 and the six months ended June 30, 2003, which give
effect to the acquisition by X-Net Services Corp. of all
issued and outstanding shares of capital stock of Third
Millennium Industries, Inc.
(c) Exhibits.
The following documents are included as exhibits to this report:
Exhibit SEC Ref.
No. No. Title of Document Location
--- --- ----------------- --------
2.1 2 Agreement and Plan of Reorganization This
among X-Net Services Corp., X-Net Merger Co., Filing
and Third Millennium Industries Inc., dated
as of July 18, 2003*
* The exhibits to the Agreement and Plan of Reorganization are not included in
the foregoing exhibits. The Registrant undertakes to furnish supplementally to
the Commission copies of any omitted items on request.
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.
X-Net Services Corp.
Dated: September 3, 2003 By /s/ Dennis K. DePriest
------------------------
Dennis K. DePriest
President
INDEX TO EXHIBITS
Exhibit SEC Ref.
No. No. Title of Document Location
- ------- -------- ----------------- --------
2.1 2 Agreement and Plan of Reorganization among This
X-Net Services Corp., X-Net Merger Co., and Filing
Third Millennium Industries, Inc., dated as
of July 18, 2003
THIRD MILLENNIUM INDUSTRIES, INC.
Financial Statements
For the Period From February 11, 2002 (Inception)
to December 31, 2002
Together with Auditors' Report
TABLE OF CONTENTS
Page
----
Independent Auditors' Report 1
Balance Sheet 2
Statements of Operations 3
Statement of Stockholders' Equity 4
Statement of Cash Flows 5
Notes to the Financial Statements 6-10
MHM
Murrell, Hall, McIntosh & Co., PLLP
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Stockholders
of Third Millennium Industries, Inc.
We have audited the accompanying balance sheet of Third Millennium
Industries, Inc. (a Nevada development stage company) as of December 31, 2002,
and the related statements of operations, stockholders' equity and cash flows
for period from February 11, 2002 (inception) to December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Third Millennium
Industries, Inc. as of December 31, 2002, and the results of its operations,
stockholders' equity and cash flows for the period from February 11, 2002
(inception) to December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ MURRELL, HALL, McINTOSH & CO., PLLP
Norman, Oklahoma
May 29, 2003 (except for Note H which the
Date is June 23, 2003)
- --------------------------------------------------------------------------------
2402 Westport Drive (405) 292-2900 P.O. Box 720360
Norman, OK. 73069-6336 FAX (405) 321-4758 Norman, OK. 73070-4265
WWW.MHMCPA.COM
THIRD MILLENNIUM INDUSTRIES, INC.
(A Development Stage Company)
Balance Sheet
December 31, 2002
ASSETS
Current Assets
Cash $ 7,204
Advances to Shareholders 104,467
-----------------
Total Current Assets $ 111,671
-----------------
Property and Equipment, at Cost
Equipment $ 6,326
Less: Accumulated Depreciation (450)
-----------------
Net Property and Equipment $ 5,876
-----------------
Other Assets
Deposits on Equipment $ 13,545
-----------------
Total Assets $ 131,092
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable $ 2,000
Accounts Payable 19,403
Accrued Salaries and Wages 75,000
Amounts Payable to Stockholders 79,253
Accrued Liabilities 813
-----------------
Total Liabilities $ 176,469
-----------------
Stockholders' Deficit
Common Stock, .0001 par value, 50,000,000 shares
authorized, 10,000,000 shares issued and outstanding $ 1,000
Paid-In Capital 330,300
Deficit Accumulated During the Development Stage (376,677)
-----------------
Total Stockholders' Equity $ (45,377)
-----------------
Total Liabilities and Stockholders' Equity $ 131,092
=================
See Accompanying Notes to Financial Statements
THIRD MILLENNIUM INDUSTRIES, INC.
(A Development Stage Company)
Statement of Operations
For the Period From February 11, 2002 (Inception) to December 31, 2002
Development Stage Costs
Contract and Professional Services $ 81,737
Depreciation Expense 450
Health Insurance 26,313
Interest Expense 813
Relocation Expense 33,000
Rent 38,958
Salaries and Wages 75,000
Telephone and Utilities 14,302
Travel and Entertainment 54,938
Vehicle Leases and Allowances 38,414
Miscellaneous Expenses 12,752
----------------
Total Development Stage Costs $ 376,677
----------------
Net Development Stage Loss $ (376,677)
================
See Accompanying Notes to Financial Statements
THIRD MILLENNIUM INDUSTRIES, INC.
(A Development Stage Company)
Statement of Stockholders' Equity
For the Period From February 11, 2002 (Inception) to December 31, 2002
Deficit
Accumulated
Common Stock During the
------------------------ Paid-In Development
Shares Amount Capital Stage Total
----------- ----------- ----------- ------------ --------------
Balance, February 11, 2002 -- $ -- $ -- $ -- $ --
Issuance of common stock 10,000,000 1,000 330,300 -- 331,300
Net Loss -- -- -- (376,677) (376,677)
----------- ----------- ----------- ------------ --------------
Balance, December 31, 2002 10,000,000 $ 1,000 $ 330,300 $ (376,677) $ (45,377)
=========== =========== =========== ============ ==============
See Accompanying Notes to Financial Statements
THIRD MILLENNIUM INDUSTRIES, INC.
(A Development Stage Company)
Statement of Cash Flows
For the Period From February 11, 2002 (Inception) to December 31, 2002
Cash Flows From Development Stage Activities
Net Development Stage Loss $ (376,677)
Adjustments to Reconcile Net Loss to Net Cash
Used by Development Stage Activities:
Depreciation and Amortization 450
Deferred Tax Benefit
Increase in Liabilities:
Accounts Payable 19,403
Accrued Salaries and Wages 75,000
Amounts Payable to Stockholders 79,253
Accrued Liabilities 813
---------------
Net Cash Used By Development Stage Activities $ (201,758)
---------------
Cash Flows From Investing Activities
Advances to Stockholders $ (104,467)
Acquisition of equipment (19,871)
---------------
Net Cash Used By Investing Activities $ (124,338)
---------------
Cash Flows From Financing Activities
Proceeds from Current Debt $ 50,000
Reduction in Other Current Debt (48,000)
Issuance of Common Stock 331,300
---------------
Net Cash Provided by Financing Activities $ 333,300
---------------
Net Increase in Cash $ 7,204
Cash at Beginning of Period --
---------------
Cash at End of Period $ 7,204
===============
Supplemental Disclosures:
Property and Equipment Acquired with Debt $ 6,326
===============
See Accompanying Notes to Financial Statements
Third Millennium Industries, Inc.
Notes to the Financial Statements
December 31, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company was incorporated in Nevada on February 11, 2002. The Company is a
development stage holding company, which has devoted substantially all of its
efforts to develop a vertically integrated structure of manufacturing facilities
and retail outlets for recreational vehicles, with a primary emphasis on premium
horse trailers.
The Company has entered into agreements to purchase three entities, including a
horse trailer manufacturer in Kansas, a retail horse trailer outlet in Texas and
a retail recreational vehicle and horse trailer outlet in Oklahoma. The
acquisitions will be made primarily with common stock of the Company. The
Company has also entered into a non-binding agreement to be acquired, in a
reverse merger, by an entity that is currently trading on the OTC Bulletin
Board. The acquisition of the Company is contingent upon the Company completing
the acquisition of the three entities described above. The transactions are all
expected to be completed in July 2003. The agreement contemplates a one for one
stock exchange.
Cash and Cash Equivalents
The Company considers all short-term investments with a maturity of three months
or less at the date acquired as cash equivalents in the statement of cash flows.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes
The Company accounts for income taxes under the liability method of accounting
for income taxes. Under the liability method, deferred tax assets and
liabilities are determined from the expected future tax consequences of
temporary differences between the reported amounts of assets and liabilities and
their tax basis.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is provided using the straight-line method, over 7 years. Expenditures
for repairs and maintenance that do not extend the useful lives of the assets
are charged to expense as incurred. Depreciation expense for the eleven months
ended December 31, 2002 was $450.
Stock-based Compensation
The Company accounts for stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation plans have been issued as of December 31, 2002. One employee option
for 280,000 shares at $1.00 per share was granted during 2002. It is exercisable
one year after the Company stock becomes available to be traded on a public
stock exchange.
Stock-based non-employee compensation is measured under the fair value
recognition standards of FASB Statement 123, Accounting for Stock-Based
Compensation. There has not been any stock-based non-employee compensation plans
issued as of December 31, 2002.
Third Millennium Industries, Inc.
Notes to the Financial Statements
December 31, 2002
NOTE B - NOTES PAYABLE
The note payable is with an individual. Interest is 8% and maturity is on
September 1, 2003. The note is unsecured.
NOTE C - INCOME TAXES
No provision for income taxes has been recorded in the accompanying financial
statements, because the Company has incurred net operating losses since its
inception. At December 31, 2002, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $376,677 that
expire in 2017. Because of the uncertainty that the Company will be able to use
the tax benefit associated with its net operating losses to date, because its
planned acquisitions may impose annual limitations in accordance with Internal
Revenue Code Section 382 and there is no guarantee of future profitability of
the Company, no tax benefit has been included in these financial statements.
NOTE D - LEASE OBLIGATIONS
Operating Lease
The Company rents facilities on a month-to-month basis at a current rate of $
4,000 per month. The facilities are being rented from Springfield Venture
Capital, LLC, which is controlled by two officers and directors of Third
Millennium Industries Inc. The rental agreement is unwritten and Springfield
Venture Capital and Third Millennium Industries, Inc. have agreed that rent paid
through December 31, 2002 is payment in full for the period. See also Note E.
The Company also leases certain vehicles and equipment from related parties as
described below in Note E.
Total rent expense for the period ended December 31, 2002 was $38,958.
NOTE E - RELATED PARTY TRANSACTIONS
The Company has advanced amounts to stockholders participating in the initial
operations of the Company in the amount of $104,467. It is anticipated that
these advances will be repaid when accrued salaries due these individuals are
paid after the Company becomes an operating entity as described below.
The Company has employment agreements with certain officers and stockholders of
the Company to pay salaries and wages earned during the initial start up period
of the Company. The amount of salaries and wages accrued through December 31,
2002 is $75,000. This is less than amounts required to be paid under the
employment agreements. The balance has been forgiven by written agreement. The
Company anticipates that such salaries will continue to accrue until the Company
operations commence and cash flow is sufficient to pay these individuals.
In addition to the salaries due to the officers and stockholders, additional
amounts are due to them for travel and entertainment expenses, vehicle
allowances and relocation expenses. As of December 31, 2002 the total amount due
was $79,253. The Company anticipates that such expenses will continue to accrue
until the Company operations commence and cash flow is sufficient to pay these
expenses.
Third Millennium Industries, Inc.
Notes to the Financial Statements
December 31, 2002
NOTE E - RELATED PARTY TRANSACTIONS (continued)
The Company leased certain vehicles and equipment, including vehicles and
equipment from related parties on a month-to-month basis. The amount of such
rents for the period ended December 31, 2002 was $31,414. Subsequent to December
31, 2002 the lease arrangements were terminated.
NOTE F - CONTINGENCIES
The Company is obligated to acquire other entities and has entered into a letter
of intent to be acquired in a reverse merger. Management of the Company has
plans to expand business operations in the near future and has made commitments,
which will require more capital resources than are currently available to the
Company. The Company's business plans include pursuing additional debt and or
equity financing with financial institutions or strategic partner(s) which will
include contracting for additional professional services in the area of
investment banking and investor relations.
In conjunction with the acquisition of the entities as described in Note A -
"Nature of Business", the Company is obligated to enter into Employment
Agreements with each of the individuals named below and the individuals will
continue to manage the respective entities that they now own. The agreements
will be for periods of five years and provide for annual salaries, which are
considered to be competitive for equivalent management personnel.
In addition the Company is obligated to grant the following options to purchase
common stock of the Company to the current owners of those entities upon
completion of the acquisitions.
Number
of Shares Price Term *
--------- ----- ------
50,000 50% Mkt. Price 5 Years
100,000 50% Mkt. Price 5 Years
100,000 50% Mkt. Price 5 Years
100,000 $0.10 2 Years
100,000 $0.10 2 Years
The term shall begin on the date that the Company's stock first becomes
available for trading on a public exchange. These options have not been
recognized in the accounting records because they are considered unissued for
accounting purposes until the acquisitions are finalized and the Company's stock
becomes available for trading on a public exchange. The optionable stock to be
granted for $.10 per share will be issued from the stock holdings of two
officers and directors.
Upon closing of the acquisition of Campers World, Inc., two officers and
directors of the Company will purchase a parcel of real estate from the current
owners and the Company will lease back the property, where the Campers World,
Inc. facilities are located. The lease will include a stipulation that lease
rates will not exceed local rates for similar properties.
The Company has paid a deposit of $13,545 on certain equipment that it intends
to purchase for the amount of $301,489. The equipment was purchased on May 28,
2003. See Note H "Subsequent Events".
Third Millennium Industries, Inc.
Notes to the Financial Statements
December 31, 2002
NOTE F - CONTINGENCIES (continued)
In October 2002 the Company entered into an agreement with a firm to provide
certain investment banking services. The agreement provides for the payment of
advisory fees in the amount of $10,000 per month and a $25,000 fee upon closing
of the reverse merger transaction, the issuance of 300,000 shares of common
stock with registration rights, and certain other fees based on services
performed by the investment banker. Such agreement may be renegotiated by the
parties as a result of changed circumstances and alleged deficiencies in
performance.
NOTE G - EQUITY TRANSACTIONS
Common Stock and Warrants
In February 2002, the Company issued a thirty-six month warrant to acquire
50,000 shares of the Company's common stock for $.001 per share to a financial
consultant. The consultant's agreement further provides that 50% of the fees
earned by the consultant shall be paid in common stock of the Company. At
December 31, 2002, the balance payable in stock was $2,903.
Stock Options
The Company has agreements to grant the following options where the term of the
options will begin on the date that the Company's stock first becomes available
for trading on a public exchange.
Number
of Shares Price Term
--------- ----- ----
50,000 $0.75 2 Years
250,000 $1.00 3 Years
50,000 $0.75 2 Years
100,000 $0.75 3 Years
These options have not been recognized in the accounting records because they
are considered unissued for accounting purposes until the Company's stock
becomes available for trading on a public exchange.
NOTE H - SUBSEQUENT EVENTS
In March 2003, a consultant to the Company exercised a warrant to purchase
50,000 shares of the Company's common stock at $.0001 per share.
On February 19, 2003, the Company issued a promissory note for $15,000 to an
entity the Company intends to be acquired by in a reverse acquisition, for the
purpose of funding a portion of the financial audit costs for the Company and
entities to be acquired. The note is payable sixty days from date of issue and
accrues interest at 9% per annum on the unpaid balance until paid. The Company
is presently in default on this note and intends to satisfy it in full upon
closing of the reverse merger transaction. Personal guarantees are in effect
with certain officers of the Company to secure this note.
During the first quarter of 2003, the Company issued 28,000 shares of its common
stock to an accredited investor in a private placement and received cash
proceeds of $42,000.
During the first quarter of 2003, two officers and directors of the Company made
additional cash contributions to the Company in the aggregate amount of $42,500.
Third Millennium Industries, Inc.
Notes to the Financial Statements
December 31, 2002
NOTE H - SUBSEQUENT EVENTS (continued)
In March 2003, the Company issued a ninety day, 18% Convertible Note in the
amount of $75,000 to an accredited investor. The investor funded $37,500 in
March and $37,500 in April of 2003, from which, $1,500 was paid in points to the
originator and $1,500 was paid in fees to a licensed placement agent. Net cash
proceeds to the Company were $72,000. The note provides that the holder can
convert the principal and interest of the note to shares of the Company's common
stock at the same price of the initial round of equity funding and, after
default, at a value of $.50 per share. The Company is currently in default on
the note. Personal guarantees are in effect with certain officers of the Company
to secure this note.
On May 27, 2003 the Company entered into a non-binding letter of intent to
acquire a cabinet manufacturing company in Missouri for the consideration of
250,000 shares of the Company's common stock. In addition, two officers and
directors will grant options to the seller to purchase 100,000 shares of the
Company's stock at 50% of its average selling price for the 30-day period
immediately preceding exercise. The acquisition is contingent upon completion of
due diligence by the Company and completion of the acquisition of the Company as
described in Note A. In addition, the Company has entered into an agreement
dated June 4, 2003 to manage the potential acquisition during the period it
conducts its due diligence for a fee of $15,000 per month.
On May 28, 2003, the Company entered into a Sponsorship Agreement with the
National Cutting Horse Association (NCHA), which shall become effective on
January 1, 2004, and shall continue in effect until December 31, 2006. Under the
agreement the Company is obligated to pay an amount of $60,000 annually, provide
life member with discounts on trailer purchases and provide event winners with
award vouchers that may be applied to the purchase of trailers. The Company is
obligated to pay $10,000 per month during the period of July through December
2003 for the 2004 sponsorship and to pay for the following two years in advance
on a quarterly basis with payments of $15,000 per quarter.
On May 28, 2003, The Company entered into an agreement to purchase raw materials
from an individual for $189,610. The payment terms for the purchase require the
Company to pay $50,000 upon the closing and the balance pursuant to the terms of
a promissory note at no interest payable 50% in cash and 50% in common stock of
the Company, on a periodic basis as raw materials are used by the Company with
any unpaid purchase price due by the cut-off date.
As part of the same transaction, the Company entered into an agreement to
purchase equipment from an LLC. The total amount of the purchase price is
$301,489. The appropriate asset and liability entries will be recorded in the
second quarter of 2003. The payment terms for the purchase required the Company
to issue a promissory note in the amount of $301,489 with principal and
interest, at the rate of 6% per annum, payable monthly, beginning June 1, 2003
and ending June 1, 2008. The Company will attempt to assume a long term loan
payable to a bank and if it is successful, the amount of such loan will be
offset against the promissory note.
Both agreements are secured by personal guarantees with certain officers of the
Company, security agreement and UCC financing statements.
CAMPERS WORLD, INC.
Financial Statements
As of December 31, 2002 and
For the Years Ended December 31, 2002 and 2001
Together with Auditors' Report
MHM
Murrell, Hall, McIntosh & Co., PLLP
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Stockholders
of Campers World, Inc.
We have audited the accompanying balance sheet of Campers World, Inc., (an
Oklahoma Corporation) as of December 31, 2002, and the related statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 2002 and 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Campers World, Inc. as of
December 31, 2002, and the results of its operations and cash flows for the
years ended December 31, 2002 and 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ MURRELL, HALL, McINTOSH & CO., PLLP
Norman, Oklahoma
April 25, 2003
- --------------------------------------------------------------------------------
2402 Westport Drive (405) 292-2900 P.O. Box 720360
Norman, OK. 73069-6336 FAX (405) 321-4758 Norman, OK. 73070-4265
WWW.MHMCPA.COM
CAMPERS WORLD, INC.
Balance Sheet
December 31, 2002
ASSETS
Current Assets
Cash $ 155,677
Trade Accounts Receivable, less allowance
for doubtful accounts of $13,700 260,474
Inventory 5,127,210
Deposits and Prepaid Expenses 4,190
---------------
Total Current Assets $ 5,547,551
---------------
Property and Equipment
Buildings and Land $ 107,687
Transportation Equipment 247,533
Equipment 223,379
Office Furniture and Fixtures 118,681
Livestock 36,860
Leasehold Improvements 46,924
---------------
$ 781,064
Less: Accumulated Depreciation (458,045)
---------------
Net Property and Equipment $ 323,019
---------------
Total Assets $ 5,870,570
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Floor Plan Payable $ 4,787,809
Current Notes Payable 377,533
Accounts Payable 185,665
Accrued Liabilities 95,800
Current Portion of Long-Term Debt 110,306
---------------
Total Current Liabilities $ 5,557,113
---------------
Long-Term Liabilities
Long-Term Debt, Net of Current Portion $ 229,943
Related Party Debt 165,144
---------------
Total Long-Term Liabilities $ 395,087
---------------
Total Liabilities $ 5,952,200
---------------
Stockholders' Deficit
Common Stock, $.50 par value, 10,000 shares
authorized, issued and outstanding $ 5,000
Paid in Capital 396,305
Retained Deficit (482,935)
---------------
Total Stockholders' Deficit $ (81,630)
---------------
Total Liabilities and Stockholders' Deficit $ 5,870,570
===============
See Accompanying Notes to Financial Statements
CAMPERS WORLD, INC.
Statements of Operations
For the Years Ended December 31, 2002 and 2001
2002 2001
----------------- -----------------
Net Sales $ 17,641,514 $ 17,754,808
Cost of Sales 15,661,221 15,416,557
----------------- -----------------
Gross Profit $ 1,980,293 $ 2,338,251
Selling, General and Administrative Expense
(including interest expense of $32,141
and $514,401) 1,868,522 2,141,815
----------------- -----------------
Income from Operations $ 111,771 $ 196,436
Other Expense (20,239) (6,480)
----------------- -----------------
Net Income $ 91,532 $ 189,956
================= =================
See Accompanying Notes to Financial Statements
CAMPERS WORLD, INC.
Statements of Operations
For the Years Ended December 31, 2002 and 2001
Common Stock
-----------------------
Shares Amount Paid in Capital Retained Deficit
--------- ------------ --------------- ---------------
Balance, December 31, 2000 10,000 $ 5,000 $ 121,305 $ (722,193)
Contributed Capital -- -- 180,000 --
Net Income -- -- -- 189,956
--------- ------------ --------------- ---------------
Balance, December 2001 10,000 $ 5,000 $ 301,305 $ (532,237)
Contributed Capital -- -- 95,000 --
Distributions to Shareholders -- -- -- (42,230)
Net Income -- -- -- 91,532
--------- ------------ --------------- ---------------
Balance, December 2002 10,000 $ 5,000 $ 396,305 $ (482,935)
========= ============ =============== ===============
See Accompanying Notes to Financial Statements
CAMPERS WORLD, INC.
Statements of Cash Flows
For the Years Ended December 31, 2002 and 2001
Cash Flows From Operating Activities
Net Income $ 91,532 $ 189,956
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operating Activities:
Depreciation 99,077 85,733
Loss on Disposition of Property and Equipment 24,924 14,350
Provision for Bad Debts 13,700 --
(Increase) Decrease in Assets:
Accounts Receivable 436,895 (488,750)
Inventory (1,480,332) 1,487,204
Prepaid Expenses 4,000 --
Increase (Decrease) in Liabilities:
Accounts Payable and Floor Plan Payable 2,019,304 (2,121,673)
Accrued Liabilities (6,409) 2,154
------------ ------------
Net Cash Provided (Used) by
Operating Activities $ 1,202,691 $ (831,026)
------------ ------------
Cash Flows From Investing Activities
Purchases of Property and Equipment $ (45,123) $ (107,693)
Proceeds from Sale of Property and Equipment 136,962 --
------------ ------------
Net Cash Provided (Used) By
Investing Activities $ 91,839 $ (107,693)
------------ ------------
Cash Flows From Financing Activities
Proceeds From Short Term Debt $ 1,419,286 $ 3,511,504
Payments on Short Term Debt (2,849,935) (2,675,709)
Proceeds From Long Term Debt 260,412 --
Reductions of Long Term Debt (148,552) (14,890)
Change in Related Party Debt 55,907 3,000
Distributions to Shareholders (42,230) --
Contribution of Capital 95,000 180,000
------------ ------------
Net Cash Provided (Used) by
Financing Activities $ (1,210,113) $ 1,003,905
------------ ------------
Net Increase in Cash $ 84,417 $ 65,186
Cash at Beginning of Year 71,260 6,074
------------ ------------
Cash at End of Year $ 155,677 $ 71,260
============ ============
Supplemental Disclosures:
Cash Paid for Interest $ 386,524 $ 534,206
============ ============
Total Purchases of Property and Equipment $ 200,100 $ 128,598
Less: Property and Equipment Acquired by Debt (154,977) (20,905)
------------ ------------
Cash Paid for Property and Equipment $ 45,123 $ 107,693
============ ============
See Accompanying Notes to Financial Statements
CAMPERS WORLD, INC.
Notes to Financial Statements
December 31, 2002
Note 1 - Summary of Significant Accounting Policies
Nature of Operations - Campers World, Inc. (the Company) was incorporated in
Oklahoma in 1986 for the purpose of the retail sale of recreational vehicles and
horse trailers.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - For the purposes of the statements of cash flows,
the Company considers all checking, savings accounts and any highly liquid debt
instruments with maturities of three months or less, when purchased, to be cash
equivalents.
Accounts Receivable - The Company requires that units sold be paid for in full
and financing received prior to delivery. Accounts receivable consists generally
of amounts due from customers receiving repair services. Warranty claims older
than one year are reserved and written off in the subsequent year. Other
delinquent receivables deemed to be uncollectible are written off as incurred.
Property and Equipment - Property and equipment is stated at cost. Maintenance
and repairs which do not improve or extend the useful lives of the assets are
expensed as incurred. Additions and betterments are capitalized. Upon retirement
or replacement, the costs and accumulated depreciation are removed from the
respective accounts and the difference is included in income.
Depreciation is computed using both the straight-line method and declining
balance methods. Estimated useful lives vary between 3 and 39 years.
Depreciation expense for 2002 and 2001 was $99,077 and $85,733 respectively.
Income Taxes - The Company has elected under the Internal Revenue Code to be
taxed as an S Corporation. Under those provisions, the Company does not pay
federal corporate taxes on its taxable income. Instead, the stockholders are
liable for individual federal taxes on their proportionate share of the
Company's taxable income. Accordingly no provision or liability for income taxes
has been made in the accompanying financial statements. There are no significant
differences between financial and taxable income.
Inventory - Inventory of new and used vehicles are stated at the lower of cost
or market, on a specific unit basis. Inventory of parts and accessories are
stated at replacement cost, which approximates cost on the first-in, first-out
basis (FIF0).
Concentrations of Credit Risk Arising from Cash Deposits in Excess of Insured
Limits - The company maintains its cash balances in several financial
institutions located in Tulsa, Oklahoma. The balances are insured by the Federal
Deposit Insurance Corporation up to $100,000. At December 31, 2002, the
company's uninsured cash balance totaled $268,418.
CAMPERS WORLD, INC. .
Notes to Financial Statements
December 31, 2002
Note 2 - Inventory
Inventory consists of the following:
Recreational Vehicles and Horse Trailers $ 5,005,812
Parts and Supplies 121,398
---------------
$ 5,127,210
===============
Note 3 - Long-Term Debt and Notes Payable
Long-Term Debt
Long-term debt consists of the following as of December 31, 2002:
Note payable to a finance company, interest at 0%,
monthly payments of $1,031, through
December, 2004, collateralized by a vehicle $ 23,704
Note payable to a bank, interest at 7.5%,
monthly payments of $421, through
August, 2006, collateralized by a vehicle 16,477
Note payable to a bank, interest at 7.5%,
monthly payments of $655, through
January, 2007, collateralized by a vehicle 30,441
Note payable to a bank, interest at 7.25%,
monthly payments of $843, through
March, 2006, collateralized by a vehicle 29,841
Note payable to a bank, interest at 7.25%,
monthly payments of $848, through
March, 2006, collateralized by a vehicle 30,050
Note payable to a bank, interest at 8.2%,
monthly payments of $691, through
July, 2003, collateralized by a vehicle 5,443
Note payable to an individual, interest at 7.25%,
monthly payments of $5,000, through
January, 2006, collateralized by inventory 166,358
Capital lease payable to a finance company
interest at 12.70% monthly payments of $1,798,
through December, 2004, collateralized by equipment 37,935
--------------
$ 340,249
Less current portion (110,306)
--------------
Net Long-Term Portion $ 229,943
==============
CAMPERS WORLD, INC..
Notes to Financial Statements
December 31, 2002
Note 3 - Long-Term Debt and Notes Payable
Maturities of Long-Term Debt at December 31, 2002 are:
2003 $ 110,306
2004 112,917
2005 87,692
2006 25,593
2007 3,741
-----------------
$ 340,249
=================
Current Notes Payable
Current notes payable consists of the following as of December 31, 2002:
Note payable to a bank, interest at 5.25%,
Maturing August 2003, collateralized by inventory $ 73,278
Note payable to a bank, interest at 5.25%,
Maturing August 2003, collateralized by inventory 162,876
Note payable to a bank, interest at 9.00%,
Maturing October 2003, collateralized by inventory 38,105
Note payable to a bank, interest at 9.00%,
Maturing October 2003, collateralized by inventory 38,105
Note payable to a bank, interest at 9.00%,
Maturing October 2003, collateralized by inventory 35,105
Note payable to a bank, interest at 7.25%,
Maturing March 2003, collateralized by inventory 30,064
-----------------
Total Current Notes Payable $ 377,533
=================
Note 4 - Leases
Capital Leases
The Company leases its computer system under a capital lease expiring December,
2004. The asset and liability under the capital lease is recorded at the present
value of the minimum lease payments. The asset is depreciated over the lease
term of 48 months and is included with furniture and fixtures. Depreciation of
the asset under the capital lease is included in depreciation expense.
Following is a summary of property held under capital lease at December 31,
2002.
Computer System $ 67,398
Less: Accumulated Depreciation 35,047
--------------
$ 32,351
==============
Note 4 - Leases (continued)
Minimum future lease payments under capital leases as of December 31, 2002 for
the next live of the lease and in the aggregate are:
Year ended December 31
----------------------
2003 $ 21,763
2004 21,763
------------
Total Minimum Lease Payments $ 43,526
Less: amount Representing Interest 5,591
------------
Present Value of Net Minimum Lease $ 37,935
============
The current portion of the obligation under capital lease is included as a part
of the overall current portion of long-term debt.
Operating Leases-Related Party
The Company leases one of its sales facilities from a related party under an
operating lease expiring April, 2004. Another facility lease from a related
party expired in November, 2002, and is currently extended on a month-to-month
basis.
Minimum future rental payments under the operating lease in effect at December
31, 2002 for each of the years remaining in the agreement are:
Year ended December 31
----------------------
2003 $ 102,000
2004 34,000
------------
Total Minimum Future Rental Payments-Related Party $ 136,000
============
Rent Expense under the operating leases for 2002 was $168,000.
Operating Leases-Other
The Company leases a forklift under an operating lease expiring May, 2003.
Minimum future rental payments under the operating lease in effect at December
31, 2002 are:
Year ended December 31
----------------------
2003 $ 1,951
============
Rent expense under this lease for 2002 was $4,682.
Note 5 - Related Party Transactions
The Company buys and sells horse trailers with a company in Texas which is
related thru the Company shareholders. Total sales to the company in 2002 were
approximately $986,000. Included in accounts receivable from this related party
is $48,268.
See also Note 4.
CLEAR LAKE TRAILERS, INC.
dba TEXAS PRO STAR
Financial Statements
For the Years Ended December 31, 2002 and 2001
Together with Auditors' Report
MHM
Murrell, Hall, McIntosh & Co., PLLP
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Stockholders
of Clear Lake Trailers, Inc.
We have audited the accompanying balance sheets of Clear Lake Trailers,
Inc., dba Texas Pro Star (a Texas Subchapter S Corporation) as of December 31,
2002 and 2001, and the related statements of operations, 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 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 audits 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 financial statements referred to above present
fairly, in all material respects, the financial position of Clear Lake Trailers,
Inc. as of December 31, 2002 and 2001, and the results of its operations,
stockholders' equity and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency, which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 9. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ MURRELL, HALL, McINTOSH & CO., PLLP
Norman, Oklahoma
March 21, 2003
- --------------------------------------------------------------------------------
2402 Westport Drive (405) 292-2900 P.O. Box 720360
Norman, OK. 73069-6336 FAX (405) 321-4758 Norman, OK. 73070-4265
WWW.MHMCPA.COM
CLEAR LAKE TRAILERS, INC.
dba TEXAS PRO STAR
Balance Sheets
December 31, 2002 and 2001
ASSETS
2002 2001
-------------- -------------
Current Assets
Cash $ 69,053 $ 21,325
Accounts Receivable 19,310 55,206
Inventory 566,635 1,116,245
Prepaid Expenses 3,350 350
-------------- -------------
Total Current Assets $ 658,348 $ 1,193,126
-------------- -------------
Property and Equipment, at cost
Furniture, Fixtures and Equipment $ 172,240 $ 182,810
Automobiles and Trucks 70,351 93,322
Livestock 25,000 25,000
-------------- -------------
$ 267,591 $ 301,132
Less: Accumulated Depreciation (154,381) (114,615)
-------------- -------------
Net Property and Equipment $ 113,210 $ 186,517
-------------- -------------
Other Assets
Intangibles, net of Accumulated
Amortization of $19,167 and $91,611 $ 55,833 $ 393,389
-------------- -------------
Total Assets $ 827,391 $ 1,773,032
============== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Floor Plan Payable $ 498,742 $ 934,516
Current Note Payable 19,341 47,395
Accounts Payable 138,758 17,062
Customer Deposits 33,585 55,588
Accrued Liabilities 27,910 5,706
Current Portion of Long-Term Debt 80,515 39,483
-------------- -------------
Total Current Liabilities $ 798,851 $ 1,099,750
-------------- -------------
Long-Term Liabilities
Long-Term Debt, Net of Current Portion $ 95,094 295,518
Payable to Stockholder 20,109 524,902
-------------- -------------
Total Long-Term Liabilities $ 115,203 $ 820,420
-------------- -------------
Total Liabilities $ 914,054 $ 1,920,170
-------------- -------------
Stockholders' Deficit
Common Stock, No par value, 10,000 shares
authorized, 1,000 shares issued and outstanding $ 70,000 $ 70,000
Paid-In Capital 645,728 --
Retained Deficit (802,391) (217,138)
-------------- -------------
Total Stockholders' Deficit $ (86,663) $ (147,138)
-------------- -------------
Total Liabilities and Stockholders' Deficit $ 827,391 $ 1,773,032
============== =============
See Accompanying Notes to Financial Statements
CLEAR LAKE TRAILERS, INC.
dba TEXAS PRO STAR
Statements of Operations
For the Years Ended December 31, 2002 and 2001
2002 2001
-------------- --------------
Net Sales $ 4,059,096 $ 4,331,697
Cost of Sales 3,490,592 3,499,988
-------------- --------------
Gross Profit $ 568,504 $ 831,709
Selling, General and Administrative Expense
(including interest expense of $34,587 and
$74,201) 821,201 993,818
Impairment of Goodwill 332,556 --
-------------- --------------
Net Loss $ (585,253) $ (162,109)
============== ==============
See Accompanying Notes to Financial Statements
CLEAR LAKE TRAILERS, INC.
dba TEXAS PRO STAR
Statements of Stockholders' Equity
For the Years Ended December 31, 2002 and 2001
Common Stock
------------------------ Paid-In Retained
Shares Amount Capital Earnings
---------- ------------ ------------ --------------
Balance, December 31, 2000 1,000 $ 70,000 $ -- $ (55,029)
Net Loss -- -- -- (162,109)
--------- ----------- ----------- -------------
Balance, December 31, 2001 1,000 $ 70,000 $ -- $ (217,138)
Owner Contributions -- -- 645,728 --
Net Loss -- -- -- (585,253)
--------- ----------- ----------- -------------
Balance, December 31, 2002 1,000 $ 70,000 $ 645,728 $ (802,391)
========= =========== =========== =============
See Accompanying Notes to Financial Statements
CLEAR LAKE TRAILERS, INC.
dba TEXAS PRO STAR
Statements of Stockholders' Equity
For the Years Ended December 31, 2002 and 2001
2002 2001
------------ ------------
Cash Flows From Operating Activities
Net Loss $ (585,253) $ (162,109)
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 58,199 94,272
Loss on Disposal of Equipment 20,109 --
Bad Debt Provision (Recovery) -- (1,500)
(Increase) Decrease in Assets:
Accounts Receivable 35,896 131,512
Inventory 549,610 (355,371)
Prepaid Expense (3,000) --
Other Assets 332,556 --
Increase (Decrease) in Liabilities:
Accounts Payable (314,079) 165,106
Accrued Liabilities 201 25,417
------------ ------------
Net Cash Provided (Used) By
Operating Activities $ 94,239 $ (102,673)
------------ ------------
Cash Flows From Investing Activities
Purchases of Property and Equipment $ -- $ (14,220)
------------ ------------
Net Cash Used By Investing Activities $ -- $ (14,220)
------------ ------------
Cash Flows From Financing Activities
Proceeds from Current Debt $ 100,397 $ 97,815
Reductions in Current Debt (128,451) (78,792)
Proceeds from Long Term Debt 45,000 179,268
Reductions of Long-Term Debt (709,185) (144,205)
Owner Contributions 645,728 --
------------ ------------
Net Cash Provided (Used) By
Financing Activities $ (46,511) $ 54,086
------------ ------------
Net Increase (Decrease) in Cash $ 47,728 $ (62,807)
Cash at Beginning of Year 21,325 84,132
------------ ------------
Cash at End of Year $ 69,053 $ 21,325
============ ============
Supplemental Disclosures:
Interest Paid $ 34,587 $ 74,201
============ ============
Property and Equipment Acquired with Debt $ -- $ 40,490
Property and Equipment Acquired with Cash -- 14,220
------------ ------------
Total Property and Equipment Acquisitions $ -- $ 54,710
============ ============
See Accompanying Notes to Financial Statements
CLEAR LAKE TRAILERS, INC.
dba TEXAS PRO STAR
Notes to Financial Statements
December 31, 2002 and 2001
Note 1 - Summary of Significant Accounting Policies
Nature of Operations - The Company was incorporated as a Texas corporation for
the primary purpose of operating as a distributor of livestock trailers for
Sooner Trailers, Inc.
Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Equivalents - Short-term investments which have an original maturity date
of 90 days or less are included as cash equivalents in the statement of cash
flows. There were no cash equivalents at December 31, 2002 and December 31,
2001.
Property and Equipment - Property and equipment are stated at cost. Maintenance
and repairs which do not improve or extend the useful lives of the assets are
expensed as incurred. Additions and betterments are capitalized. Upon retirement
or replacement, the costs and accumulated depreciation are removed from the
respective accounts and the difference is included in income.
Depreciation is provided over the estimated useful lives of the related assets
using the declining balance method. Estimated useful lives vary between 5 and 15
years.
Income Taxes - The Company has elected under the Internal Revenue Code to be
taxed as an S Corporation. Under those provisions, the Company does not pay
federal corporate taxes on its taxable income. Instead, the stockholders are
liable for individual federal taxes on their proportionate share of the
Company's taxable income. Accordingly no provision or liability for income taxes
has been made in the accompanying financial statements.
There were no significant differences between book and tax income for 2001. In
2002, due to the adoption of new required accounting rules for goodwill (see
Note 7), goodwill is no longer amortized for book purposes but continues to be
amortized for tax purposes. This difference results in an approximately $333,000
difference between financial and taxable income which will reverse as the
goodwill is amortized for tax purposes.
Inventory - Inventories of parts are valued at the lower of first-in, first-out
(FIFO) cost or market. Trailer inventories are valued at the lower of specific
cost or market.
Accounts Receivable - The Company requires that trailers be paid for in full or
that financing be in place prior to delivery. Accounts receivable consists
generally of amounts due from customers receiving repair services. There have
been very few instances of uncollectible accounts. Delinquent receivables deemed
to be uncollectible are written off as incurred. The Company does not believe a
reserve for uncollectible accounts is needed as of December 31, 2002 and 2001.
CLEAR LAKE TRAILERS, INC.
dba TEXAS PRO STAR
Notes to Financial Statements
December 31, 2002 and 2001
Note 2 - Inventories
Inventory consists of the following:
Trailers and Related Parts $ 559,685 $ 1,109,382
Supplies 6,950 6,863
----------- -------------
$ 566,635 $ 1,116,245
=========== =============
Note 3 - Long-Term Debt and Notes Payable
Long-term debt consists of the following as of December 31, 2002 and 2001:
2002 2001
------------- --------------
Note payable to a bank, interest at 8.49%,
monthly payments of $531, through
July, 2005, collateralized by a vehicle $ 14,883 $ 19,691
Note payable to a credit union, interest at 8.75%, monthly
payments of $474, through July, 2005, collateralized
by a vehicle, paid off in 2002 -- 17,568
Note payable to a bank, interest at 12%,
monthly payments of $134, through
March, 2002, collateralized by furniture -- 395
Note payable to a bank, interest at 11%,
monthly payments of $806, through
October, 2007, collateralized by furniture 33,481 40,738
Note payable to a bank, interest at 11.25%,
monthly payments of $835, through
April, 2008, collateralized by furniture 39,165 46,353
Note payable to a finance company, interest at 2.9%,
monthly payments of $894, through
October, 2005, collateralized by a vehicle 29,152 38,885
Note payable to an individual related party Interest at 8%, monthly
payments of $1,255, through May, 2021, Uncollateralized,
(see Note 9) -- 148,218
Note payable to an individual related party,
interest at 8.5%, monthly payments of $614,
through April, 2005, collateralized by a vehicle 11,957 21,166
CLEAR LAKE TRAILERS, INC.
dba TEXAS PRO STAR
Notes to Financial Statements
December 31, 2002 and 2001
Note 3 - Long-Term Debt and Notes Payable (continued)
Lease payable to a finance company, interest at 2.92%,
monthly payments of $63, through
May, 2005, collateralized by equipment 1,971 1,987
Note payable to an individual related party,
interest at 8%, monthly payments of $3,914,
through October, 2003, Uncollateralized 45,000 --
Notes payable to shareholders, no stated interest rate
or monthly payments (see Note 9) 20,109 524,902
------------- --------------
$ 195,718 $ 859,903
Less current portion (80,515) (39,483)
------------- --------------
Net Long-Term Portion $ 115,203 $ 820,420
============= ==============
Maturities of Long-Term Debt at December 31, 2002 are:
2003 $ 80,515
2004 38,848
2005 33,911
2006 20,918
2007 18,866
Thereafter 2,660
-----------------
$ 195,718
=================
The Company has a $50,000 line of credit with a bank of which $30,659 and
$2,605 was unused at December 31, 2002 and 2001, respectively. The note matures
on May 1, 2003 and carries an interest rate of 2% above the Wall Street Journal
prime rate. At December 31, 2002 and 2001, the rate was 6.25% and 6.75%,
respectively. Interest is payable on maturity. The line of credit is
collateralized by inventory.
Note 4 - Related Party Transactions
The Company leases its sales facility from its stockholders on a
month-to-month basis. Lease expense for 2002 and 2001 was $103,255 and $96,000
respectively. At December 31, 2002, the Company also has two notes payable to a
party related to the shareholders totaling $56,957. Similar notes totaled
$169,384 at December 31, 2001.
(See also note 3)
Note 5 - Concentration of Financing Activities
The Company conducts substantially all of its financing activities with
three finance companies. These activities include floor plan payable totaling
$498,742 at December 31, 2002 and $934,516 at December 31, 2001.
CLEAR LAKE TRAILERS, INC.
dba TEXAS PRO STAR
Notes to Financial Statements
December 31, 2002 and 2001
Note 6 - Long-Term Lease
The Company leased a sales facility in 2001 in Denton, Texas, which was
closed in December 2001. Lease expense for 2001 was $16,425. The lease was
settled with the lessor in 2002 for an additional $3,000.
Note 7 - Intangibles
Included in Intangibles is a franchise agreement of $75,000. The franchise
agreement is being amortized using the straight-line method over 15 years.
Accumulated amortization at December 31, 2002 and 2001 was $19,167 and $14,167,
respectively.
Also included in Intangibles at December 31, 2001 was goodwill of $410,000.
Goodwill was being amortized using the straight-line method over 15 years during
2001. Accumulated amortization at December 31, 2001 was $77,444.
Effective January 1, 2002, the Company has adopted required new accounting
rules for goodwill. These rules require the Company to discontinue amortizing
goodwill and to evaluate the goodwill for possible impairment each year. The
goodwill was evaluated as if the operations were on a stand alone basis.
Evaluation indicated total impairment and the goodwill, net of accumulated
amortization, was charged to expense in 2002.
Note 8 - Contingencies
The Company has guaranteed a personal note payable of the stockholders to a
finance company. The amount of the loan outstanding at December 31, 2002 and
2001 was $426,222 and $436,186, respectively.
Note 9 - Going Concern
During 2002, the shareholders converted some long-term debt into equity by
canceling the debt without issuing additional shares. The company still has an
equity deficit and their continued operations are dependent on additional
financing or being acquired by a company that can provide this needed capital.
TWISTER TRAILER MANUFACTURING, INC.
Financial Statements
As of December 31, 2002 and
For the Years Ended December 31, 2002 and 2001
Together with Auditors' Report
MHM
Murrell, Hall, McIntosh & Co., PLLP
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Stockholders
of Twister Trailer Manufacturing, Inc.
We have audited the accompanying balance sheet of Twister Trailer
Manufacturing, Inc. (a Kansas Subchapter S Corporation) as of December 31, 2002,
and the related statements of operations, stockholder's equity and cash flows
for the years ended December 31, 2002 and 2001. 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 audits 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 financial statements referred to above present
fairly, in all material respects, the financial position of Twister Trailer
Manufacturing, Inc. as of December 31, 2002, and the results of its operations,
stockholder's equity and cash flows for the years ended December 31, 2002 and
2001 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 5 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency, which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 5. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ MURRELL, HALL, McINTOSH & CO., PLLP
Norman, Oklahoma
April 4, 2003
- --------------------------------------------------------------------------------
2402 Westport Drive (405) 292-2900 P.O. Box 720360
Norman, OK. 73069-6336 FAX (405) 321-4758 Norman, OK. 73070-4265
WWW.MHMCPA.COM
TWISTER TRAILER MANUFACTURING, INC.
Balance Sheet
December 31, 2002
ASSETS
Current Assets
Cash $ 7,845
Inventory 104,633
----------------
Total Current Assets $ 112,478
----------------
Property and Equipment, at cost
Machinery and Equipment $ 40,928
Automobiles and Trucks 19,049
----------------
$ 59,977
Less: Accumulated Depreciation (37,167)
----------------
Net Property and Equipment $ 22,810
----------------
Total Assets $ 135,288
================
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Current Notes Payable $ 109,255
Accounts Payable 16,064
Customer Deposits 20,000
Accrued Liabilities 12,756
Current Portion of Long-Term Debt 11,346
----------------
Total Current Liabilities $ 169,421
Long-Term Liabilities
Long-Term Debt, Net of Current Portion 160,838
----------------
Total Liabilities $ 330,259
----------------
Stockholder's Deficit
Common Stock, No par value, 100 shares
authorized, issued and outstanding $ 54,196
Retained Deficit (249,167)
----------------
Total Stockholder's Deficit $ (194,971)
----------------
Total Liabilities and Stockholder's Deficit $ 135,288
================
See Accompanying Notes to Financial Statements
TWISTER TRAILER MANUFACTURING, INC.
Statements of Operations
For the Years Ended December 31, 2002 and 2001
2002 2001
-------------- --------------
Net Sales $ 479,151 $ 394,931
Cost of Sales 380,198 335,196
-------------- --------------
Gross Profit $ 98,953 $ 59,735
Selling, General and Administrative Expense
(including interest expense of $22,815 and
$11,634) 123,240 121,027
-------------- --------------
Net Loss $ (24,287) $ (61,292)
============== ==============
See Accompanying Notes to Financial Statements
TWISTER TRAILER MANUFACTURING, INC.
Statements of Stockholders' Equity
For the Years Ended December 31, 2002 and 2001
Common Stock
------------------------ Retained
Shares Amount Deficit
---------- ------------ ---------------
Balance, December 31, 2000 100 $ 54,196 $ (108,690)
Net Loss -- -- (61,292)
Distributions to Stockholder -- -- (33,472)
--------- ----------- --------------
Balance, December 31, 2001 100 $ 54,196 $ (203,454)
Net Loss -- -- (24,287)
Distributions to Stockholder -- -- (21,426)
--------- ----------- --------------
Balance, December 2002 100 $ 54,196 $ (249,167)
========== =========== ==============
See Accompanying Notes to Financial Statements
TWISTER TRAILER MANUFACTURING, INC.
Statements of Cash Flows
For the Years Ended December 31, 2002 and 2001
2002 2001
------------ ------------
Cash Flows From Operating Activities
Net Loss $ (24,287) $ (61,292)
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 10,978 4,645
(Increase) Decrease in Assets:
Accounts Receivable -- 26,180
Inventory 31,547 (51,603)
Other Assets -- 90
Increase (Decrease) in Liabilities:
Accounts Payable 13,341 (22,252)
Accrued Liabilities 31,634 (23,812)
------------ ------------
Net Cash Provided (Used) By
Operating Activities $ 63,213 $ (128,044)
------------ ------------
Cash Flows From Investing Activities
Purchases of Property and Equipment $ (19,049) $ --
------------ ------------
Net Cash Used By Investing Activities $ (19,049) $ --
------------ ------------
Cash Flows From Financing Activities
Proceeds from Current Debt $ 120,960 $ 247,134
Reductions in Current Debt (126,685) (187,318)
Proceeds from Long Term Debt -- 160,000
Reductions of Long-Term Debt (9,947) (20,696)
Distributions to Stockholder (21,426) (33,472)
Book Overdraft -- (36,825)
------------ ------------
Net Cash Provided (Used) By
Financing Activities $ (37,098) $ 128,823
------------ ------------
Net Increase (Decrease) in Cash $ 7,066 $ 779
Cash at Beginning of Year 779 --
------------ ------------
Cash at End of Year $ 7,845 $ 779
============ ============
Supplemental Disclosures:
Interest Paid $ 22,815 $ 15,366
============ ============
See Accompanying Notes to Financial Statements
TWISTER TRAILER MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2002
Note 1 - Summary of Significant Accounting Policies
Nature of Operations - The Company was incorporated in 1995 as a Kansas
corporation for the primary purpose of manufacturing livestock trailers. The
Company also has a retail sales operation for Travalong Trailers.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents - Short-term investments which have an original maturity date
of 90 days or less are included as cash equivalents in the statement of cash
flows. There were no cash equivalents at December 31, 2002.
Accounts Receivable - Custom manufacturing of trailers requires a deposit from
the customer. The balance of the sales price is due on completion and delivery
of the unit. Retail sales of trailers require payment in full at the time of the
sale. The Company has no accounts receivable at December 31, 2002.
Inventory - Inventories are valued at the lower of cost or market determined on
a first-in, first-out (FIFO) basis.
Property and Equipment - Property and equipment are stated at cost. Maintenance
and repairs which do not improve or extend the useful lives of the assets are
expensed as incurred. Additions and betterments are capitalized. Upon retirement
or replacement, the costs and accumulated depreciation are removed from the
respective accounts and the difference is included in income.
Depreciation is provided over the estimated useful lives of the related assets
using the declining balance method. Estimated useful lives vary between 3 and 39
years.
Income Taxes - The Company has elected under the Internal Revenue Code to be
taxed as an S Corporation. Under those provisions, the Company does not pay
federal corporate taxes on its taxable income. Instead, the stockholder is
liable for individual federal taxes on the Company's taxable income. There are
no significant differences between financial and taxable income.
Note 2 - Inventories
Inventory consists of the following:
Work-in-Process $ 11,600
Trailers Purchased 34,088
Parts and Supplies 58,945
-------------
$ 104,633
=============
TWISTER TRAILER MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2002
Note 3 - Long-Term Debt and Notes Payable
Long-Term Debt
Long-term debt consists of the following as of December 31, 2002:
Note payable to a bank, interest at 9.0%, monthly payments of $1,647,
through July, 2016, collateralized by personal
guarantee from a related party $ 152,523
Note payable to a finance company, interest at 4.5%, monthly payments
of $517, through May, 2006, collateralized by equipment and the
personal guarantee from a related party 19,661
--------------
$ 172,184
Less current portion (11,346)
--------------
Net Long-Term Portion $ 160,838
==============
Maturities of Long-Term Debt at December 31, 2002 are:
2003 $ 11,346
2004 12,161
2005 13,042
2006 10,127
2007 8,525
Thereafter 116,983
-----------------
$ 172,184
=================
Current Notes Payable
The Company has two lines of credit:
(1) A $70,000 line of credit with a bank of which $11,670 was unused
at December 31, 2002. The note matures on June 17, 2003 and
carries an interest rate of 7.5%. Interest is payable on
maturity. The line of credit is collateralized by inventory,
equipment and the personal guarantee of a related party.
(2) A $65,000 line of credit with a bank of which $14,075 was unused
at December 31, 2002. The note matured on January 16, 2003 and
was renewed at that time. It carries an interest rate of 1/2%
below the bank's base rate. The interest rate at December 31,
2002 was 8.00%. The line of credit is collateralized by
inventory.
Note 4 - Related Party Transactions
The Company leases its manufacturing facility from its stockholder on a
month-to-month basis thru payment of the stockholder's mortgage payments on the
property and the payment of property taxes. Rent expense for 2002 was $10,265
TWISTER TRAILER MANUFACTURING, INC.
Notes to Financial Statements
December 31, 2002
Note 5 - Going Concern
The company has an equity deficit and their continued operations are
dependent on additional financing or being acquired by a company that can
provide this needed capital.