AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON __________, 1999
REGISTRATION NO. 333-76451
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------
LORECOM TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
OKLAHOMA 443112 73-1548771
------------------------------- ---------------------------- ------------------
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S.EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
LoreCom Technologies, Inc. Joseph O. Evans
12101 North Meridian 12101 North Meridian
Oklahoma City, Oklahoma 73120 Oklahoma City, Oklahoma 73120
Telephone: (405) 748-8888 Telephone: (405) 748-8888
Facsimile: (405) 516-2345 Facsimile: (405) 516-2345
(ADDRESS AND TELEPHONE NUMBER OF (NAME, ADDRESS AND TELEPHONE
PRINCIPAL EXECUTIVE OFFICES AND NUMBER OF AGENT FOR SERVICE)
PRINCIPAL PLACE OF BUSINESS)
-------------------
Copies to:
David J. Ketelsleger, Esq. Mark A. Robertson, Esq.
McAfee & Taft A Professional Corporation Robertson & Williams
Tenth Floor, Two Leadership Square 3033 N.W. 63rd
211 North Robinson Suite 160
Oklahoma City, Oklahoma 73102 Oklahoma City, Oklahoma 73116
Telephone: (405) 235-9621 Telephone: (405) 848-1944
Facsimile: (405) 235-0439 Facsimile: (405) 843-6707
Approximate date of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF DOLLAR PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
REGISTERED REGISTERED SHARE OFFERING PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par (1) (1) $15,000,000(2) $4,425
value per share
- ----------------------------------------------------------------------------------------------------------------
(1) Omitted pursuant to Rule 457(o).
(2) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Preliminary Prospectus
___________, 1999
LORECOM TECHNOLOGIES, INC.
[LOGO]
BETWEEN 1,000,000 AND 1,500,000
SHARES OF COMMON STOCK
LoreCom Technologies, Inc. We will sell, install and maintain
12101 North Meridian telecommunications equipment, including
Oklahoma City, Oklahoma 73120 related software applications, and connect that
Telephone: (405) 748-8888 equipment to the public telephone network.
We will also provide local access, long distance,
internet access and data communications.
This is our initial public offering,
and no public market currently exists
for our shares. The offering price may
not reflect the market price of our
shares after the offering.
Proposed ______________________ Trading
Symbol: ___
- -------------------------------------------------------------------------------------------------
PER SHARE 1,000,000 SHARE OFFERING 1,500,000 SHARE OFFERING
- -------------------------------------------------------------------------------------------------
PRICE TO PUBLIC
1,000,000 SHARE OFFERING
1,500,000 SHARE OFFERING
UNDERWRITING DISCOUNTS
1,000,000 SHARE OFFERING
1,500,000 SHARE OFFERING
PROCEEDS TO LORECOM
1,000,000 SHARE OFFERING
1,500,000 SHARE OFFERING
- -------------------------------------------------------------------------------------------------
*If the underwriter exercises in full its __-day option to purchase up to ____
additional shares (minimum offering) or _______ additional shares (maximum
offering) to cover over-allotments, the totals would be $___, $___ and $___ for
the minimum offering and $___, $___ and $___ for the maximum offering.
**The underwriter is offering the common stock on a firm commitment basis.
------------------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD ONLY PURCHASE
SHARES IF YOU CAN AFFORD A COMPLETE LOSS. BEFORE INVESTING, YOU SHOULD CAREFULLY
READ THIS PROSPECTUS AND ANY SUPPLEMENT, PAYING PARTICULAR ATTENTION TO THE
"RISK FACTORS" BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
CAPITAL WEST SECURITIES, INC.
TABLE OF CONTENTS
A SUMMARY OF OUR GOALS, STRATEGY, FINANCIAL Summary 1
HISTORY AND OTHER FACTORS RELEVANT TO YOUR About this Prospectus 1
INVESTMENT DECISION. Where You Can Find More Information 1
About LoreCom 1
Business and Growth Strategy 2
The Offering 3
Summary Financial Data 4
IMPORTANT FACTORS YOU SHOULD CONSIDER Risk Factors 5
BEFORE INVESTING.
A SELECTION OF OUR FINANCIAL INFORMATION. Summary Combined Financial Information 10
Unaudited Pro Forma Combined Financial
Statements 15
ABOUT LORECOM AND OUR RELATIONSHIPS WITH Business 21
THE INTERCONNECT PARTNERS. LoreCom's Business and Growth Strategy 21
The Market 22
Products and Services 23
The Interconnect Partners 25
The Acquisitions 26
Competition 29
Property 30
Employees 30
Legal Proceedings 30
Capitalization 31
OUR PLAN OF OPERATIONS DURING THE FIRST Management's Plan of Operation 32
12 MONTHS. ABOUT OUR DIRECTORS, EXECUTIVE Management and Principal Stockholders 35
OFFICERS, SIGNIFICANT EMPLOYEES AND Directors, Executive Officers and
PRINCIPAL STOCKHOLDERS. Significant Employees 35
Compensation 37
Limitation on Directors' and Officers' Liability 37
Ownership of Management and Principal
Stockholders 38
Certain Relationships and Related Transactions 39
THE COMMON STOCK. Description of Common Stock 41
About the Common Stock 41
Dividend Policy 42
Use of Proceeds 42
Dilution 42
Market for Common Stock and Shares Eligible for
Future Sale 43
Transfer Agent 44
ABOUT THE UNDERWRITERS, THE ACCOUNTANTS, The Underwriter and the Plan of Distribution 44
AND THE VALIDITY OF THE COMMON STOCK. The Underwriting Agreement 44
Determining the Offering Price 46
Experts 46
Validity of Common Stock 48
FINANCIAL INFORMATION ABOUT Index to Financial Statements F-1
LORECOM TECHNOLOGIES AND OUR PARTNERS.
2
SUMMARY
THIS SECTION IS ONLY A SUMMARY AND DOES NOT CONTAIN ALL THE INFORMATION
THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE MORE DETAILED INFORMATION
CONTAINED LATER IN THIS PROSPECTUS AND ALL OTHER INFORMATION RELATING TO THIS
OFFERING AT THE SOURCES IDENTIFIED IN THE PARAGRAPH "WHERE YOU CAN FIND MORE
INFORMATION" BELOW.
ABOUT THIS PROSPECTUS
When we complete this offering, we plan to acquire thirteen companies which
sell, install and maintain telephone systems for customers. We will acquire ten
of the companies through mergers and three companies through asset acquisitions.
The issued and outstanding stock of the merging companies will be converted into
cash and common stock of LoreCom. Three companies will sell their assets to us
in exchange for cash and LoreCom common stock. The number of shares of common
stock issued in the acquisitions depends on the initial public offering price of
the common stock. We estimated the number of shares of common stock issued in
the acquisitions to be approximately 348,960 based on an assumed initial public
offering price of $12.00 per share.
In addition to the information in this summary, more detailed information
and financial statements appear throughout this prospectus. You should review
all of these documents thoroughly before making your investment decision. We
have made some forward-looking statements in this prospectus about our plans,
objectives, expectations and intentions for LoreCom after it acquires the
thirteen companies discussed above. These statements contain a certain amount of
risk and uncertainty and our actual results may differ significantly from the
statements made in this document. Unless we indicate otherwise, the information
we provide in this prospectus gives effect to the acquisition of the
interconnect companies, reflects a 2,850-for-one stock split and cancellation
of certain shares, both effected on April 9, 1999 and assumes that the
underwriter's over-allotment option is not exercised.
WHERE YOU CAN FIND MORE INFORMATION
Because this is our first public offering, we have never been subject to
the reporting requirements of the Securities and Exchange Act of 1934. We filed
a registration statement on Form SB-2 with the Securities and Exchange
Commission under the Securities Act of 1933 describing and discussing the common
stock offered in this prospectus. As allowed by the Securities and Exchange
Commission, this prospectus, which is part of the registration statement, does
not contain all of the information included in the registration statement.
Additionally, statements we make in the prospectus about contracts and other
documents are not necessarily complete. For more information about LoreCom and
our common stock, you should read the registration statement and any attached
exhibits and schedules.
You can read and copy our registration statement and any other materials we
file with the Securities and Exchange Commission at the Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 or on the
Internet at http://www.sec.gov. You can get information about the operation of
the public reference room by calling the Commission at 1-800-SEC-0330.
ABOUT LORECOM
On September 4, 1998, LoreCom incorporated under the name Advantage
Business Solutions, Inc. Advantage was formed to consolidate the operations
of certain interconnect companies in Oklahoma. Advantage later changed its
name to The Alliance Group, Inc. On May 12, 1999, Alliance changed its name
to LoreCom. Unless we state otherwise, when we refer to LoreCom we are also
referring to Alliance and Advantage.
The primary business of the thirteen companies we will acquire is selling,
installing and maintaining telecommunications equipment and connecting that
equipment to the public telephone network. In the telecommunications industry,
these companies are called interconnect companies. An interconnect company
sells, installs and maintains telephone systems for business customers.
Interconnect companies can also represent the customer in dealings with the
local telephone company and/or long distance provider. Interconnect companies
also sell and install software applications for telephone systems that enhance
the features and functions of the telephone
3
equipment.
LoreCom identifies the thirteen interconnect companies it is acquiring as
"partners." After joining LoreCom, each of the partners will continue operating
under its own name through 1999. The partners will also continue to be
primarily responsible for their individual businesses and will maintain their
business relationships with existing customers.
Typically, interconnect companies:
- Provide and maintain a customer's telephone equipment;
- Represent customers in determining service requirements; and
- Obtain services for the customer through an agency agreement with
the local telephone service provider.
Customer telephone equipment includes all telecommunications equipment
located at the customer's office. This equipment normally consists of the
telephone system, telephones, the cabling system on the customer's premises,
the telephone company's lines that connect the customer's telephone system to
the public network and dedicated lines used for transmitting high-speed data
or voice traffic between the customer's equipment and public or private
networks. We believe that interconnect companies enjoy the respect of both
customers and telephone companies. THE INTERCONNECT COMPANY IS THE CUSTOMER
PREMISE EQUIPMENT EXPERT.
BUSINESS AND GROWTH STRATEGY
Our primary growth strategy will be to acquire interconnect companies in
states contiguous to Oklahoma. We believe we can benefit from economies of scale
as we consolidate the acquired companies. We can also distribute
telecommunication products and services to an increasing number of customers.
LoreCom intends to meet the public's growing demand for
telecommunications services and increase its market share in the regional
telecommunications market by:
- Maintaining customer loyalty through the installation of a
customer support center, Internet access to LoreCom services
and support, and professional training for our customer service
representatives.
- Utilizing the combined customer base of the partners and their
cumulative usage of voice and data services to negotiate better
terms with providers of local access, long distance, Internet
access, and data communications.
- Utilizing the combined purchasing power of the partners to
negotiate greater discounts and increased levels of marketing
and technical support with the equipment vendors.
- Utilizing the combined market share of the partners to position
LoreCom as a premiere provider of voice, video and data products
and services.
THE OFFERING
Common stock offered by LoreCom _______ to _______ shares.
Common stock to be outstanding after this offering _______ to _______ shares.
4
Use of proceeds Pay the cash portion of the purchase price for the
interconnect partners, retire indebtedness incurred
to finance the acquisitions and this offering and
general corporate purposes.
Proposed ______________________ Symbol ____
5
SUMMARY FINANCIAL DATA
Each of the interconnect partners will either merge with or sell its
assets to a newly formed, wholly-owned subsidiary of LoreCom. The acquisitions
will occur concurrently with, and as a condition to, the completion of this
offering. The following unaudited pro forma combined summary financial data
presents certain data for LoreCom, for the interconnect partners on an
historical combined basis and for LoreCom on a pro forma combined basis, as
adjusted to give effect to the acquisitions and the offering and the application
of the proceeds therefrom. For more information, you should read the Unaudited
Pro Forma Combined Financial Statements and notes beginning on page 15.
Period ending
December 31, 1998
---------------------------------------
Interconnect
Partners
Historical Pro Forma
Combined LoreCom as Adjusted
---------------------------------------
STATEMENT OF OPERATIONS DATA:
Net sales $17,814,781 $-- $ 17,814,781
Cost of sales 8,227,477 -- 8,227,477
Total cost and expenses 17,471,509 113,078 18,255,266
Income (loss) before income taxes 343,272 (113,078) (440,485)
Income tax expense (108,843) -- (128,403)
Net income (loss) 234,429 (113,078) (568,888)
Net loss per share (.27)
Shares used in computing pro forma per share amounts 2,074,910
Period ending
December 31, 1998
---------------------------------------
Interconnect
Partners
Historical Pro Forma
Combined LoreCom as Adjusted
---------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 691,837 $ 79,700 $ 3,100,037
Working capital 1,208,452 (57,176) 3,479,776
Total assets 4,618,905 142,852 18,756,726
Total long-term debt, including current portion 825,641 34,168 862,409
Stockholders' equity (deficit) 1,748,256 (22,076) 15,718,549
6
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE BUYING OUR COMMON STOCK.
WE INCLUDED SOME FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS ABOUT
OUR EXPECTATIONS FOR LORECOM AFTER THE ACQUISITIONS. THESE FORWARD-LOOKING
STATEMENTS CONTAIN SUBSTANTIAL RISKS AND UNCERTAINTIES WHICH MAY CAUSE OUR
ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM OUR FORWARD-LOOKING STATEMENTS. YOU
CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY," "WILL,"
"EXPECT," "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "CONTINUE" OR SIMILAR WORDS.
YOU SHOULD READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY BECAUSE THEY:
- DISCUSS OUR FUTURE EXPECTATIONS;
- CONTAIN PROJECTIONS OF OUR FUTURE OPERATING RESULTS OR OF OUR
FUTURE FINANCIAL CONDITION; OR
- STATE OTHER "FORWARD-LOOKING" INFORMATION.
WE BELIEVE IT IS IMPORTANT TO COMMUNICATE OUR EXPECTATIONS TO YOU, BUT
EVENTS MAY OCCUR IN THE FUTURE OVER WHICH WE HAVE NO CONTROL AND WHICH WE ARE
NOT ACCURATELY ABLE TO PREDICT. BEFORE YOU INVEST IN LORECOM, YOU SHOULD BE
AWARE THAT BUYING OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK AND ANY OF THE
FOLLOWING RISK FACTORS COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION AND COULD RESULT IN A COMPLETE LOSS OF YOUR
INVESTMENT.
THERE IS INTENSE COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY.
The industries we are in are highly competitive. We may not be able to
compete successfully against current or future competitors. If our competitors
lower their prices or we are forced to lower ours, we will be adversely
affected.
Competitors vary in size and in the products and services they offer.
Many competitors will have greater financial, technical, marketing and other
resources than we do. They may be able to respond more quickly to new or
emerging technologies and changes in customer requirements. They may also be
able to devote greater resources to the development, promotion and sale of their
products and services than we can. We do not believe that a significant number
of other companies provide single-source solutions for the data networking, data
transport and telecommunications requirements of our target customers, but
numerous competitors can provide one or more of those requirements. Many of our
competitors also have long-standing relationships with their customers and
greater name recognition than LoreCom. Our products and services do not
necessarily have any particular competitive advantage over other industry
participants.
THE TELECOMMUNICATIONS INDUSTRY MAY NOT CHANGE AS WE EXPECT.
If the products and services we represent are not accepted for any
reason, our business will be adversely affected. The market for our products may
grow more slowly than we expect. Technologies, customer requirements and
industry standards may change rapidly. We must improve our products to keep up
with these changes. New or improved products from competitors could make our
products less competitive or obsolete.
WE EXPECT OPERATING EXPENSES WILL INCREASE AND THIS COULD ADVERSELY AFFECT US.
The interconnect partners have been successful in recent years, but we
may not continue their success and profitability. We expect our expenses will
increase substantially as we:
- Increase our sales and marketing activities;
7
- Develop our products and technology to keep up with the
changes in the telecommunications industry;
- Expand our state and regional markets; and
- Pursue strategic relationships and acquisitions.
We expect the net proceeds from this offering to satisfy our capital
requirements until our next significant acquisition. However, many factors could
cause us to need additional capital sooner. We may not be successful in
expanding our markets and our activities may be more expensive than we currently
expect. We may not experience any revenue growth in the future, and, in fact,
our revenue could decline. As a result, we cannot predict our future operating
results with any degree of certainty.
WE CANNOT GROW SUCCESSFULLY IF WE DO NOT INCREASE SALES TO EXISTING CUSTOMERS.
We plan to grow by selling additional products and services to our
existing customers. We will introduce new products and services to the partners'
customers. If we cannot coordinate the partners' products and services, or
cross-sell products and services economically, we will not be able to grow
adequately.
We depend on the partners' existing customers for future revenues. If
the partners' customers do not purchase additional products and services, or do
not continue to be customers, our business will be adversely affected. These
customers may not purchase additional products, upgrades or professional
services.
LORECOM AND THE INTERCONNECT PARTNERS HAVE NOT PREVIOUSLY DONE BUSINESS
TOGETHER.
LoreCom has not conducted operations except to complete this offering
and the acquisitions. The combined and pro forma combined financial information
provided in this prospectus may not indicate LoreCom's actual operating results
and financial condition for the periods presented if the acquisitions had
occurred on the dates indicated. Until we establish centralized accounting,
management information and other administrative systems, we must rely on the
separate systems of the acquired companies. To be successful, we must centralize
systems, eliminate duplication of functions and integrate the businesses we
acquire. Systems, hardware and software of some partners may be incompatible
with others. Customer and employee turnover occurs regularly during and after
acquisitions.
WE DEPEND ON OUR KEY EXECUTIVES AND OPERATING PERSONNEL.
To be successful, we must keep the services of a small number of key
management and operating personnel, including certain sales, technical and
marketing personnel. If one or more of these people join a competitor or
otherwise compete against LoreCom, it could materially hurt our business. These
people are employees at will. If we lose people, we may not be able to hire
adequate replacements.
Competition for personnel in the telecommunications and data
communications industries is intense. In addition, new employees generally
require substantial training. This training will require substantial resources
and management attention.
OUR NEW EXECUTIVE TEAM MAY NOT BE ABLE TO MEET OUR BUSINESS OBJECTIVES.
Almost all of our executive officers, including our nominee for
President and Chief Executive Officer, the Vice President of Operations and
Chief Technical Officer and the Chief Financial Officer have been employed by
LoreCom for a relatively short period of time. Since joining LoreCom, the new
management team has devoted substantial efforts to expanding our sales,
marketing and professional services activities. This management team has not
worked together previously and may not be able meet our goals.
8
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE THE PARTNERS INTO OUR BUSINESS.
We will complete the acquisition of the thirteen companies concurrently
with closing this offering. We must integrate the businesses and operations of
those thirteen companies. If we are unsuccessful our business may be adversely
affected. Additionally, we may never achieve the anticipated synergies from the
acquisition of the partners, including marketing, distribution or other
operational benefits. We may have difficulties in integrating the partners,
because the companies are geographically separated, have different corporate
cultures and have personnel with different business backgrounds. We could have
problems with:
- retaining the partners' key employees;
- standardizing sales quotas, territories and incentive
compensation plans for sales personnel; and
- keeping the partners' customers.
RISKS ARE INVOLVED IN ACQUIRING COMPANIES.
We expect to grow by acquiring more companies. Other companies have
similar goals and may try to acquire the same companies. Many of our competitors
have greater resources than ours and may be willing to pay higher prices than
LoreCom. The stock of larger public companies may be more acceptable to people
who want to sell their companies. Management's attention and resources may focus
on acquisitions and cause a loss of existing business. Additionally, past
operations of, and unanticipated problems with, acquired businesses pose a great
deal of risk. Customer dissatisfaction or performance problems of a single
acquired company could harm LoreCom's reputation generally. We may not succeed
in integrating and profitably managing additional businesses.
We may rely on common stock, cash, notes or other consideration for
future acquisitions. Our ability to use our stock depends on its market value.
If we do not use stock, our ability to raise capital from other sources may be
limited. Significant additional debt could adversely affect LoreCom and the
value of the common stock.
OUR BUSINESS DEPENDS ON A CONTINUED MARKET FOR SOUTHWESTERN BELL SERVICES.
We depend upon the continued use and acceptance of Southwestern Bell as
a local telephone service provider. If customers prefer other providers, we will
lose business.
OUR BUSINESS DEPENDS SIGNIFICANTLY ON THIRD PARTIES.
We depend on our relationships with, and the success of, third parties
that provide Internet, voice and data services and related equipment and
services. We do not know if we will be able to get these services on a
competitive basis. Our agreements with these third parties are generally
terminable at will. If any of the agreements are terminated, we may not be able
to replace those products or services.
THE YEAR 2000 PROBLEM MAY RESULT IN BUSINESS LOSSES.
If any equipment or software of third-party providers does not
recognize the difference between 1900 and 2000, we may incur unexpected expenses
to remedy the problem. Additionally, a regional or national failure in the
telephone network or power grid could prevent LoreCom from servicing its
customers and generating revenues. LoreCom does not have a contingency plan if
any of these events occur.
NO PRIOR MARKET EXISTS FOR OUR STOCK AND PRICES MAY BE VOLATILE.
Until this offering, no public market for our common stock has existed.
We negotiated the initial public offering price with the underwriters. The
offering price does not necessarily indicate the price at which the common
9
stock will trade. Stock prices and trading volumes for many telecommunication
companies fluctuate for a number of reasons, including some reasons which may
be unrelated to their business or results of operation. We intend to list the
shares of common stock on the _______________________. However, an active
trading market for the common stock may not develop or continue after the
offering.
WE DO NOT INTEND TO PAY DIVIDENDS.
We intend to retain our earnings, if any, to finance business expansion
and for general corporate purposes. We do not anticipate paying any cash
dividends in the foreseeable future. Additionally, our ability to pay dividends
may be restricted by loan or other agreements in the future.
DILUTION WILL AFFECT THE NET TANGIBLE BOOK VALUE OF THE STOCK.
The initial public offering price is substantially higher than the book
value per share of LoreCom's common stock. As a result, investors purchasing
common stock in this offering will incur immediate dilution of $10.06 in net
tangible book value per share of common stock. This dilution figure deducts the
estimated underwriting discounts and commissions and estimated offering expenses
payable by LoreCom from the initial public offering price.
OKLAHOMA LAW MAY RESTRICT POTENTIAL ACQUISITION BIDS FOR LORECOM.
Approximately one-third of our board of directors will be elected each
year. Members of the board of directors cannot be removed except for cause. The
certificate of incorporation permits the board of directors to issue preferred
stock with dividend, redemption, conversion and exchange rights selected by the
board without prior approval of LoreCom stockholders. The difficulty of
removing members of the board, and the board's ability to issue preferred stock,
could delay or prevent a change of control of LoreCom. As a result, these
provisions may prevent the market price of LoreCom common stock from reflecting
the effects of actual or rumored takeover attempts. These provisions may also
prevent changes in the management of LoreCom.
Additionally, Oklahoma laws may inhibit potential acquisition bids for
LoreCom. Oklahoma law prevents LoreCom from engaging in a business
combination with any interested stockholder for three years following the date
that the stockholder became an interested stockholder. A business combination
includes a merger or consolidation involving LoreCom and the interested
stockholder or the sale of more than 10% of LoreCom's assets.
If we have 1,000 or more shareholders and meet other conditions, we
will be subject to Oklahoma's control shares act. With exceptions, this act
prevents holders of more than 20% of our stock from voting those shares. This at
least delays the time it takes anyone to gain control of LoreCom. Also,
shareholder action by written consent without a meeting requires unanimous
shareholder consent.
OUR UNDERWRITER HAS LIMITED UNDERWRITING EXPERIENCE.
Capital West Securities, Inc. was first registered as a broker-dealer
in May 1995. Capital West has participated in only nine public equity offerings
as an underwriter, although certain of its employees have had experience in
underwriting public offerings while employed by other broker-dealers.
Prospective purchasers of the securities offer in this prospectus should
consider Capital West's limited underwriting experience in evaluating this
offering.
10
SUMMARY COMBINED FINANCIAL INFORMATION
The following table sets forth the condensed historical financial
data of the interconnect partners for the periods ended and as of December 31,
1998, except for Telkey Communications, Inc. and Terra Telecom, Inc.,
whose information is as of September 30, 1998 and for the twelve months then
ended. The financial data of Access Communications Services, Inc., LoreCom
Technologies, Inc., American Telcom, Inc., Banner Communications, Inc.,
Communication Services, Inc., Telephone and Paging Divisions of EIS
Communications, Telkey Communications, Inc., Terra Telecom, Inc. and Travis
Business Systems, Inc. are derived from the financial statements of each
company, which have been audited by Deloitte & Touche LLP, independent
auditors. The financial data of Commercial Telecom Systems, Inc. are derived
from its financial statements, which have been audited by Hunter, Atkins &
Russell, PLC, independent auditors. The financial data of Nobel Systems, Inc.
are derived from its financial statements, which have been audited by Saxon &
Knol, P.C., independent auditors. The financial data of Able Communication
Incorporated, Perkins Office Machines, Inc. and The Phone Man Sales and
Services, Inc. set forth in the "Others" column are derived from the
unaudited financial statements of each company, which, in the opinion of each
company's management, present fairly the financial condition and results of
operations of the company. The table also sets forth the unaudited condensed
historical financial data of the interconnect partners and of LoreCom on a
combined basis. The information should be read in conjunction with the
historical financial statements and the Unaudited Pro Forma Combined
Financial Statements and the notes thereto included elsewhere in this
prospectus.
11
LORECOM TECHNOLOGIES, INC.
HISTORICAL COMBINED BALANCE SHEETS
DECEMBER 31, 1998
(UNAUDITED)
ASSETS AMERICAN ACCESS BANNER CSI CTS EIS NOBEL
------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash $ 82,545 $ 187,464 $ 13,486 $ 26,440 $ 54,532 $ * $ *
Accounts receivable 230,324 127,953 148,033 98,354 72,080 239,130 85,237
Inventory 25,484 51,820 68,939 32,482 90,902 177,340 51,976
Other current assets 2,800 3,864 * * * * *
-------- --------- --------- --------- --------- --------- ---------
Total current assets 341,153 371,101 230,458 157,276 217,514 416,470 137,213
PROPERTY AND EQUIPMENT, 75,659 143,044 79,140 45,944 14,843 19,212 32,489
NET
OTHER ASSETS * 198,977 * 200 610 * *
-------- --------- --------- --------- --------- --------- ---------
TOTAL $416,812 $ 713,122 $ 309,598 $ 203,420 $ 232,967 $ 435,682 $ 169,702
-------- --------- --------- --------- --------- --------- ---------
-------- --------- --------- --------- --------- --------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 50,751 $ 191,484 $ 68,432 $ 68,511 $ 137,590 $ 123,327 $ 46,083
Current portion of long-term debt 66,827 73,474 50,073 29,445 4,044 11,064 71,567
Other current liabilities 87,351 79,595 32,646 51,813 159,341 55,923 16,822
-------- --------- --------- --------- --------- --------- ---------
Total current liabilities 204,929 344,553 151,151 149,769 300,975 190,314 134,472
Long-term debt * 116,748 44,807 28,195 7,348 16,581 17,228
-------- --------- --------- --------- --------- --------- ---------
Total liabilities 204,929 461,301 195,958 177,964 308,323 206,895 151,700
STOCKHOLDERS' EQUITY (DEFICIT) 211,883 251,821 113,640 25,456 (75,356) 228,787 18,002
-------- --------- --------- --------- --------- --------- ---------
TOTAL $416,812 $ 713,122 $ 309,598 $ 203,420 $ 232,967 $ 435,682 $ 169,702
-------- --------- --------- --------- --------- --------- ---------
-------- --------- --------- --------- --------- --------- ---------
12
LORECOM TECHNOLOGIES, INC.
HISTORICAL COMBINED BALANCE SHEETS
DECEMBER 31, 1998
(UNAUDITED)
ASSETS INTERCONNECT
PARTNERS COMBINED
TELKEY TERRA TRAVIS OTHERS COMBINED LORECOM TOTAL
-------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash $ 140,053 $ 20,946 $ 153,409 $ 12,962 $ 691,837 $ 79,700 $ 771,537
Accounts receivable 154,280 118,120 381,421 63,644 1,718,576 * 1,718,576
Inventory 88,748 131,035 485,695 4,971 1,209,392 * 1,209,392
Other current assets 19,065 * 46,063 282 72,074 1,933 74,007
--------- --------- ---------- --------- ---------- --------- ----------
Total current assets 402,146 270,101 1,066,588 81,859 3,691,879 81,633 3,773,512
PROPERTY AND EQUIPMENT, NET 73,494 64,920 118,640 28,469 695,854 40,721 736,575
OTHER ASSETS 16,862 8,096 5,884 543 231,172 20,498 251,670
--------- --------- ---------- --------- ---------- --------- ----------
TOTAL $ 492,502 $ 343,117 $1,191,112 $ 110,871 $4,618,905 $ 142,852 $4,761,757
--------- --------- ---------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ---------- --------- ----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES:
Accounts payable $ 31,364 $ 126,585 $ 172,654 $ 15,596 $1,032,377 $ 32,464 $1,064,841
Current portion of long-term debt 59,782 59,143 * 13,000 438,419 8,049 446,468
Other current liabilities 54,701 86,145 382,341 5,953 1,012,631 98,296 1,110,927
--------- --------- ---------- --------- ---------- --------- ----------
Total current liabilities 145,847 271,873 554,995 34,549 2,483,427 138,809 2,622,236
Long-term debt 24,780 56,362 * 75,173 387,222 26,119 413,341
--------- --------- ---------- --------- ---------- --------- ----------
Total liabilities 170,627 328,235 554,995 109,722 2,870,649 164,928 3,035,577
STOCKHOLDERS' EQUITY (DEFICIT) 321,875 14,882 636,117 1,149 1,748,256 (22,076) 1,726,180
--------- --------- ---------- --------- ---------- --------- ----------
TOTAL $ 492,502 $ 343,117 $1,191,112 $ 110,871 $4,618,905 $ 142,852 $4,761,757
--------- --------- ---------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ---------- --------- ----------
13
LORECOM TECHNOLOGIES, INC.
HISTORICAL COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
AMERICAN ACCESS BANNER CSI CTS EIS NOBEL
-------------------------------------------------------------------------------------
NET SALES $1,168,070 $1,345,576 $1,548,874 $ 807,432 $1,437,932 $2,349,845 $ 953,046
COSTS AND EXPENSES:
Cost of sales 463,476 523,506 798,261 350,793 694,385 1,232,744 439,803
Salaries and benefits 365,055 523,127 452,068 285,823 386,413 678,442 330,795
Selling, general and administrative 200,126 234,004 216,801 156,493 133,253 421,877 166,224
Interest 3,028 47,444 6,689 4,335 5,099 2,226 9,729
Depreciation and amortization 18,802 27,594 28,837 16,799 10,121 15,085 14,926
---------- ---------- ---------- --------- ---------- ---------- ---------
Total costs and expenses 1,050,487 1,355,675 1,502,656 814,243 1,229,271 2,350,374 961,477
---------- ---------- ---------- --------- ---------- ---------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES 117,583 (10,099) 46,218 (6,811) 208,661 (529) (8,431)
INCOME TAX (EXPENSE)
BENEFIT (31,955) 1,515 * * (76,316) * *
---------- ---------- ---------- --------- ---------- ---------- ---------
NET INCOME (LOSS) $ 85,628 $ (8,584) $ 46,218 $ (6,811) $ 132,345 $ (529) $ (8,431)
---------- ---------- ---------- --------- ---------- ---------- ---------
---------- ---------- ---------- --------- ---------- ---------- ---------
14
LORECOM TECHNOLOGIES, INC.
HISTORICAL COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
INTERCONNECT
PARTNERS COMBINED
TELKEY TERRA TRAVIS OTHERS COMBINED LORECOM TOTAL
----------------------------------------------------------------------------------------
NET SALES $1,393,165 $1,956,623 $4,198,047 $ 656,171 $17,814,781 * $17,814,781
COSTS AND EXPENSES:
Cost of sales 566,249 1,052,621 1,771,499 334,140 8,227,477 * 8,227,477
Salaries and benefits 476,800 650,889 1,814,593 204,155 6,168,160 63,267 6,231,427
Selling, general and administrative 249,538 204,014 618,179 81,264 2,681,773 46,983 2,728,756
Interest 7,161 19,747 9,177 11,136 125,771 850 126,621
Depreciation and amortization 46,874 29,459 43,353 16,478 268,328 1,978 270,306
---------- ---------- ---------- --------- ----------- ---------- -----------
Total costs and expenses 1,346,622 1,956,730 4,256,801 647,173 17,471,509 113,078 17,584,587
---------- ---------- ---------- --------- ----------- ---------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES 46,543 (107) (58,754) 8,998 343,272 (113,078) 230,194
INCOME TAX (EXPENSE)
BENEFIT (11,792) 16 9,689 * (108,843) * (108,843)
---------- ---------- ---------- --------- ----------- ---------- -----------
NET INCOME (LOSS) $ 34,751 $ (91) $ (49,065) $ 8,998 $ 234,429 $ (113,078) $ 121,351
---------- ---------- ---------- --------- ----------- ---------- -----------
---------- ---------- ---------- --------- ----------- ---------- -----------
15
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give
effect to the acquisitions by LoreCom of the outstanding capital stock or
assets of the interconnect partners. The acquisitions will be accounted for
using the purchase method of accounting. LoreCom has been identified as the
accounting acquirer.
The unaudited pro forma combined balance sheet gives effect to the
acquisitions and the offering as if they had occurred on December 31, 1998. The
unaudited pro forma combined statements of operations give effect to these
transactions as if they had occurred on January 1, 1998. All of the historical
financial information included in the "Interconnect Partners Historical
Combined" column below is as of December 31, 1998 and for the twelve months then
ended, except for Telkey Communications, Inc. and Terra Telecom, inc, whose
information is as of September 30, 1998 and for the twelve months then ended.
LoreCom has preliminarily analyzed the savings that it expects to
realize from reductions in salaries and benefits to certain stockholders of the
interconnect partners who will not be employees of LoreCom. Net reductions have
been reflected in the pro forma combined statements of operations for the
stockholders and management of the interconnect partners who will not be
employed by LoreCom and for certain other cost savings, including the overhead
allocations made by the parent of one of the interconnect partners. These
savings have been offset by the incremental increase in costs related to
consulting agreements and LoreCom's new management. With respect to other
potential cost savings, LoreCom has not and cannot quantify these savings until
completion of the acquisitions. It is anticipated that these savings will be
partially offset by the costs of being a publicly held company. However, these
costs, like the savings that they offset, cannot be quantified accurately.
Neither these anticipated savings nor the anticipated off-setting costs have
been included in the pro forma combined financial statements of LoreCom.
The pro forma adjustments are based on estimates, available information
and certain assumptions and may be revised as additional information becomes
available. The pro forma combined financial data do not purport to represent
what LoreCom's financial position or results of operations would actually have
been if such transactions in fact had occurred on those dates and are not
necessarily representative of LoreCom's financial position or results of
operations for any future period. Since the interconnect partners were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma combined
financial statements should be read in conjunction with the risk factors
starting on page 5 of this prospectus and the financial statements and notes
thereto included elsewhere in this prospectus.
16
LORECOM TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1998
Interconnect
Partners Pro Forma
Historical Pro Forma As
Combined LoreCom Adjustments Notes Adjusted
-----------------------------------------------------------------
ASSETS
Cash $ 691,837 $ 79,700 $ 2,400,500 1 $ 3,100,037
(72,000) 7
Accounts receivable 1,718,576 1,718,576
Inventory 1,209,392 1,209,392
Other current assets 72,074 1,933 74,007
----------------------------------------- -----------
Total current assets 3,691,879 81,633 2,328,500 6,102,012
Property and equipment, net 695,854 40,721 (17,800) 7 718,775
Other assets 231,172 20,498 11,684,269 2 11,935,939
----------------------------------------- -----------
TOTAL $ 4,618,905 $ 142,852 $13,994,969 $18,756,726
----------------------------------------- -----------
----------------------------------------- -----------
LIABILITIES AND
STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,032,377 $ 32,464 $ 1,064,841
Accrued expenses 36,849 18,296 55,145
Current portion of long-term debt 438,419 8,049 446,468
Other current liabilities 975,782 80,000 1,055,782
----------------------------------------- -----------
Total current liabilities 2,483,427 138,809 2,622,236
Long-term debt 387,222 26,119 2,600 7 415,941
Other liabilities
STOCKHOLDERS' EQUITY
Common stock 9,063 7,610 4,076 1 20,749
Additional paid-in capital 353,493 83,392 15,373,993 1 15,810,878
Retained earnings 1,385,700 (113,078) (1,385,700) 1 (113,078)
----------------------------------------- -----------
Total stockholders' equity 1,748,256 (22,076) 13,992,369 15,718,549
----------------------------------------- -----------
TOTAL $ 4,618,905 $ 142,852 $13,994,969 $18,756,726
----------------------------------------- -----------
----------------------------------------- -----------
17
LORECOM TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
Interconnect
Partners Pro Forma
Historical Pro Forma As
Combined LoreCom Adjustments Notes Adjusted
-----------------------------------------------------------------
Net Sales $17,814,781 $17,814,781
Cost of sales 8,227,477 8,227,477
Salaries and benefits 6,168,160 $ 63,267 $ (107,708) 3 6,123,719
Selling, general and administrative 2,681,773 48,961 2,730,734
Interest 125,771 850 126,621
Depreciation and amortization 268,328 778,387 4 1,046,715
----------------------------------------- -----------
Total costs and expenses 17,471,509 113,078 670,679 18,255,266
----------------------------------------- -----------
Income (loss) before income taxes 343,272 (113,078) (670,679) (440,485)
Income tax (expense) benefit (108,843) (19,560) 5 (128,403)
----------------------------------------- -----------
Net income (loss) $ 234,429 $ (113,078) $ (690,239) $ (568,888)
----------------------------------------- -----------
----------------------------------------- -----------
Net loss per share (both basic and
diluted) 6 (0.27)
-----------
-----------
Number of shares used in
computing net loss per share 2,074,910
-----------
-----------
18
LORECOM TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
General - Acquisition of Interconnect Partners
LoreCom was formed to identify and acquire the interconnect partners.
Concurrent with and as a condition of closing this offering, LoreCom will
acquire the interconnect partners in separate transactions, in exchange for cash
and shares of LoreCom common stock. The acquisitions will be accounted for
using the purchase method of accounting. For purposes of computing the purchase
price for accounting purposes, the value of shares is determined using an
estimated discounted value of $9.00 per share, which represents a discount of 25
percent from the initial public offering price of $12.00 per share due to
restrictions on the sale and transferability of the shares issued.
The purchase price has been allocated to the interconnect companies'
historical assets and liabilities based on their respective carrying values as
these carrying values are deemed to represent the discounted value of these
assets and liabilities. LoreCom has allocated a portion of the purchase price
to noncompete agreements based on an analysis prepared by LoreCom. The
allocations of the purchase price are considered preliminary until such time as
the closing of the offering and the acquisitions.
Neither all of the anticipated savings nor all of the anticipated costs of
the acquisitions have been included in the pro forma adjustments because such
matters are not presently quantifiable with any degree of certainty. Subsequent
to the offering, LoreCom believes that it can realize savings from (1)
increased productivity of its technical service staff, (2) greater volume
discounts from suppliers, and (3) consolidation of insurance programs and other
corporate operations, such as financial and management reporting. Integration of
the interconnect partners may also present opportunities to reduce costs through
the elimination of duplicative functions and through increased employee
utilization. However, subsequent to the offering, LoreCom will incur additional
costs and expenditures for corporate expenses related to being a public company,
systems development and corporate administration.
19
LORECOM TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(CONTINUED)
PRO FORMA ADJUSTMENTS
NOTE 1 - To record the assumed $15,740,625 issuance of stock,
net of offering costs, from the sale of shares in the offering
and from the issuance of stock in the acquisitions as follows:
$ 15,000,000
Cash proceeds
Amount of interconnect partners' purchase price payable in stock 3,140,625
-------------
18,140,625
Offering costs (2,400,000)
-------------
Net proceeds 15,740,625
Less amount of proceeds paid to partners (10,199,500)
Less amount of proceeds paid in stock (3,140,625)
-------------
Net cash proceeds $ 2,400,500
-------------
-------------
The equity effect was recorded at an assumed issuance of
1,250,000 shares at $12.00 per share, and 348,960 shares
at a value of $9.00 per share, with a par value of $.01 per
share for LoreCom common stock.
Also to eliminate the combined companies' historical combined
total equity including $9,063 in common stock and $353,493 in
additional paid-in capital.
NOTE 2 - To reflect allocation of the $13,340,125 purchase
price of the interconnect partners as follows:
Cost of tangible assets $ 1,655,856
-------------
Identified intangible assets $ 1,694,061
Goodwill 9,990,208
-------------
Adjustment to other assets 11,684,269
-------------
Total purchase price $ 13,340,125
-------------
-------------
Identified intangible assets consist of noncompetition
agreements with the interconnect partners' stockholders.
20
NOTE 3 - To reflect:
Expense reductions:
Salaries and benefits for stockholders of the interconnect
partners that will not continue subsequent to the acquisition. $ 689,108
Overhead allocation from the parent of an interconnect partner
that will not continue. 309,333
-------------
Total estimated cost reductions 998,441
Less additional costs resulting from the purchase:
Consulting agreements with certain interconnect partners. (156,000)
Salaries and benefits for administrative employees of LoreCom
for a twelve month period, net of actual expenses incurred. (734,733)
-------------
Pro forma adjustment to salaries and benefits $ 107,708
-------------
-------------
NOTE 4 - To reflect amortization of goodwill over periods ranging from 5 to 30
years and identified intangible assets over a four to eight-year period.
NOTE 5 - To reflect the incremental provision for federal and state income
taxes, assuming all entities were subject to federal and state income tax and
provide the income tax benefit of pro forma net expenses. The adjustment assumes
a corporate income tax rate of 38% and that a majority of the goodwill and
intangible asset amortization is non-deductible.
NOTE 6 - Unaudited pro forma net loss per share (both basic and diluted) is
calculated using 2,074,910 shares of common stock. Shares outstanding include
1,250,000 shares sold pursuant to this offering, 348,960 shares issued to
interconnect partners and 475,950 shares owned by the existing shareholders of
LoreCom following the cancellation of 285,000 shares from an exiting
stockholder.
NOTE 7 - To reflect certain asset distributions from certain of the interconnect
partners to their stockholders prior to the acquisitions consisting of:
Cash 72,000
Property and equipment 17,800
Long-term debt 2,600
21
BUSINESS
LoreCom was incorporated in Oklahoma on September 4, 1998, under the
name Advantage Business Solutions, Inc., which later changed its name to The
Alliance Group, Inc. and then to LoreCom. We formed LoreCom so that we could
consolidate the operations of certain interconnect companies in Oklahoma.
When we refer to LoreCom throughout this prospectus, we are also referring
to The Alliance Group and to Advantage Business Solutions.
LORECOM'S BUSINESS AND GROWTH STRATEGY
Our objective is to become a leader in the next evolution of
interconnection. Interconnect companies have traditionally served as bridges
or integrators between the customers' telecommunications equipment and the
public telephone network. LoreCom anticipates the interconnect's role as
overall solutions provider for the customer's communications requirement
expanding to include voice traffic within data networks. LoreCom also
believes that the nature of the customer-interconnect relationship will put
LoreCom in a position to provide its customers with best-of-class products
and services. At the same time, vendors and suppliers can channel their
products through LoreCom to its consolidated customer base.
LoreCom's primary growth strategy will be the acquisition of
interconnect companies in states contiguous to Oklahoma. Following the
acquisitions of the thirteen original interconnect partners, LoreCom expects
to duplicate that model in the surrounding states. We believe that economies
of scale will benefit the company as it utilizes its growing customer base as
a means of distributing telecommunication products and services.
LoreCom will maintain its market presence in support of traditional
voice offerings, as well as take advantage of the strong demand for emerging
technologies in telecommunication equipment and services, such as voice over
IP and packet-switching networks. The telecommunications industry has begun to
merge traditionally separate networks of voice and data into one consolidated
network. Therefore, LoreCom will position itself as the integrator or bridge
between the communications service provider and the customer, where the
LoreCom partners currently enjoy the reputation as the customer premise
experts.
We believe that LoreCom will gain a significant share of the
interconnect-related telecommunications service business in its regional
market. We expect economies of scale to benefit LoreCom as we utilize our
growing customer base to distribute telecommunication products and services.
As part of our business strategy, we will concentrate on:
PROVIDING AN INTEGRATED PORTFOLIO OF SERVICES. We believe that
substantial demand exists among customers in our target markets for a "one
stop" integrated portfolio of services that meet all of their telephone
equipment and related software applications needs. We will bundle a variety
of services and provide single-source solutions for data networking, data
communication and telecommunications requirements.
CROSS-SELLING ADDITIONAL SERVICES TO EXISTING CUSTOMERS. Our
interconnect partners will become multi-service companies. We believe we can
increase our revenues at a relatively minor incremental cost by offering an
expanded range of services to the customers of the interconnect partners. We
will have a substantial reservoir of prospective business customers that are
already familiar with some aspects of our services.
UTILIZING THE REGIONAL CUSTOMER BASE. We plan to utilize the regional
customer base with emerging packet-switched network providers to provide
enhanced voice, video and data services and increase our market presence.
EXPLORING POTENTIAL ACQUISITIONS AND MERGERS. While we expect to grow
through expanded sales, service and cross marketing efforts, we believe that
there are a number of attractive acquisition candidates in Oklahoma and the
surrounding region.
FOCUSING ON SMALL AND MEDIUM-SIZED CUSTOMERS. We will principally target
small and medium-sized business customers, initially in Oklahoma, and then
throughout the surrounding region. Growth and spending by
22
these companies, which generally have fewer than 1,000 telephone, modem and
fax connections, reflects a trend in the overall economy which shows that
small and medium-sized companies are acquiring the technology previously
available only to larger companies. These companies are acquiring more
sophisticated technology and, as a result, requiring more service and support
coverage.
MARKETING AND CUSTOMER SERVICE. We will seek long-term service contracts
with our customers and hope to maintain a low customer attrition rate. We
intend to use an information system which provides immediate access to
customer service, facility inventory and billing records, allowing seamless
provisioning of new service, quick response to service problems and
inquiries and a single invoice for all services.
THE MARKET
The telecommunications industry in the United States is immense and
robust. Spending on telecommunications equipment, software and services totaled
$406.7 billion in 1997, up 11.3 percent over 1996 -- nearly twice the 5.8
percent rate of growth of the economy as a whole. The need to transmit larger
volumes of information, increased spending by small and medium-sized companies,
the desire to integrate voice and data, more compatible equipment stemming from
the development of standards and the search for cost-effective solutions are
among the principal factors fueling the telecommunications industry.
SERVICES IN SUPPORT OF TELECOMMUNICATIONS EQUIPMENT. As the installed
base of high-technology telecommunications equipment rises, demand for
services associated with the support of this equipment grows too. Industry
spending for these services totaled $82 billion in 1997 and increased by 17.3
percent in 1998. These services include market segments in which LoreCom
will be positioning itself for future growth, such as:
- Maintenance and repair;
- Logistical support;
- Providing integration of products from different vendors;
- Technical assistance for hardware and software operations;
- End-user training; and
- Information technology consulting.
EQUIPMENT-BASED SALES. Industry studies indicate that the telephone
system markets will continue strong growth fueled by system replacements,
add-on lines, new purchases and shifts away from older technology. The
majority of shipments and the fastest growth have occurred in companies with
fewer that 1,000 telephone, modem and fax connections, reflecting the trend
in the overall economy in which small and medium-sized companies are
acquiring the technology previously available only to larger companies. This
market segment coincides directly with the target market for the LoreCom
partners. LoreCom believes the small to medium-sized companies will directly
influence its future growth.
AGENCY AGREEMENTS FOR LOCAL AND LONG DISTANCE. The regional bell
operating carriers were required to establish sales agency programs in 1984
as a prerequisite for the divested Bell operating companies to market network
services and terminating equipment jointly. Carriers found that using agents,
like the LoreCom partners, proved to be a cost-effective way to sell
services with commissions ranging from approximately 6% to 15% and,
generally, being paid over the life of the contract. Carriers tend to seek
out business partners who can add value by providing access to new market
segments. Some of the LoreCom partners already enjoy a good agency
relationship with Southwestern Bell. LoreCom would like to enter into similar
relationships with long distance carriers and data communication carriers.
23
In each of our targeted markets, a number of interconnect companies
provide telecommunications services. Consequently, we have numerous
opportunities to acquire companies that will supply us with important
technical support personnel, as well as management expertise. The
interconnect companies' business customers would provide us with a base for
further expansion, increased cash flow and product line development.
In general, an interconnect company has a client base that is
considerably more stable than the traditional carrier-driven long distance
consumer base. Industry data suggest that interconnect companies have client
relationships that last from five to ten years, or longer. On the other hand,
long distance companies, on average, retain customers for only 18 months.
Accordingly, the foundation of our success will be our partners'
relationships with their base of business customers. Many of the business
customers have been satisfied clients for years, in several cases for as long
as 15 or 20 years. The longevity of these business relationships reflects the
integrity and quality of service provided by the partners.
PRODUCTS AND SERVICES
Each of the interconnect partners has two or three primary lines of
telephone equipment they sell and support. However, many of them perform
maintenance on three to four times that many different manufacturers'
products. This broad base of experience has allowed the interconnect partners
to service a wide range of customers and gain expertise in a wide array of
communication products.
LoreCom intends to focus on equipment lines that have a broad base of
support with the partners, have a strong market share in target market
segments and provide equipment that can easily be updated to accommodate new
and emerging technologies. LoreCom has entered into distribution agreements
with some vendors that would not have been available to the partners without
LoreCom. LoreCom has provided the partners with new products to sell their
customers and the opportunity to compete in additional geographic areas.
We will provide important new products and services to our interconnect
partners. Some of the partners will enjoy increased margins in their current
equipment lines due to the combined purchasing power of two or more partners.
We plan to market and support the following products and services through the
interconnect partners:
- Telephone equipment sales and support;
- Telecommunications network design for medium to large companies and
companies having multiple locations, intrastate and/or interstate;
- Remote management and support of customer premise telephone equipment;
- Telephone software applications such as:
(1) Voice mail;
(2) Unified messaging -- combines voice mail, fax and e-mail to allow
users to access all of their messages through the telephone or at
their personal computer;
(3) Interactive voice recognition -- most commonly used in conjunction
with large company customer support centers, but is becoming cost
effective for small companies; and
(4) Automated call distribution -- commonly used in call centers for
telemarketing applications;
- Call Center design and installation for telemarketing;
- Video conferencing design and installation;
- Design and installation of structured cabling systems, both copper and
fiber;
24
- Engineering, installation and administration of local and wide area data
networks;
- Coordinating and providing local access and long distance telephone
service;
NETWORK PROVIDER AGENCY PROGRAM. LoreCom will secure the local access,
long distance and data communications portion of its business strategy
through the network provider agency program. Rather than committing
substantial investments to build a facilities-based network, initially,
LoreCom will secure agent agreements with leading local exchange carriers or
competitive local exchange carriers and long distance or inter-exchange
carrier companies. The agency program will allow us to focus on building
network interfaces into the existing network infrastructure while still
allowing us to expand in the future as a facility based operator.
Under the agency agreements, we expect to be able to represent the
carrier's mature product lines with the following benefits:
- Extensive service offerings, including enhanced product capabilities.
- Co-branding of the LoreCom name alongside the providers.
- Name recognition and regional marketing support.
- Competitive cost of services, with equal access to direct sales for
promotional and special pricing.
- Residual income based on net monthly invoice totals.
- Ability to attract and retain top sales representatives which provides
our customers with stable account management.
Targeted business customers that are not currently clients of the
partners may deal with several providers of communication equipment and
services. A typical business customer could employ four or more providers to
acquire, install and maintain voice and data networks. Each of these
providers produces separate invoices, separate contact points for sales and
service, and separate pricing based on specific services rather than
solution-based pricing. LoreCom intends to reduce the number of contacts and
provide a single interface for the customer premise equipment.
A foundational service strategy is to retain customers and increase our
business by maintaining a CONSISTENT PRESENCE before the customer and being
MORE RESPONSIVE to the customer's needs than have a traditional telephone
service providers. The interconnect partners are not the lowest price
providers and they generally price their products to permit quality of
service and timely response for support. All of the partners enjoy good
working relationships with their customers and are trusted to provide sound
business advice in the telecommunications area of their businesses.
THE INTERCONNECT PARTNERS
The LoreCom partners will continue to be primarily responsible for
their individual businesses and will keep their business relationships with
existing customers. The interconnect partners can combine their sales and
technical abilities, enabling each of them to provide products and services
which are not presently available to them individually. For example, as of
the date of this prospectus, four of the interconnect partners sell and
install equipment related to data communications. Upon completing the
acquisitions and forming LoreCom, each of the thirteen partners will be
able to provide customers with data communications services.
25
As the following descriptions indicate, LoreCom's interconnect partners
represent a diverse range of telephone products and services and related
software applications that complement one another and can be used to build a
more complete and solid business base:
ABLE COMMUNICATION INCORPORATED: Able was incorporated in 1987 and is
based in Oklahoma City, Oklahoma. Able provides business communications
solutions to small and medium sized business customers. Able is a preferred
dealer for the Comdial product line and coordinates the local access services
and data cabling requirements for the customers.
ACCESS COMMUNICATIONS SERVICES, INC.: Access Communications was formed
in 1986 and is based in Oklahoma City. Access has 12 employees who sell,
install and maintain a wide range of telecommunication products and services.
Access is a Panasonic DBS, Mitel and Harris dealer. Access also designs,
installs and maintains long distance inter-exchange switch facilities.
AMERICAN TELCOM, INC.: American Telcom was formed in 1987 and is based
in Del City, Oklahoma. American Telcom currently has 11 employees who sell,
install and maintain telecommunications systems as well as copper and fiber
cabling systems. American services its clients communications needs with a
wide variety of products and services. American is an authorized Toshiba and
NEC dealer. American is also a Southwestern Bell local service and wireless
agent and is an agent for TSR and Pagenet paging services.
BANNER COMMUNICATIONS, INC.: Banner was established in 1987 and is based
in Tulsa, Oklahoma. Banner has 13 employees and is a leading provider of
voice and data communicators in northeastern Oklahoma. Banner is a Mitel
"Elite" dealer, a Telrad dealer, an NEC associate, an AVT dealer, a NT Right
Fax dealer, a Spectralink Wireless dealer and a Lucent Data Value Added
Reseller. Banner is also an authorized agent of Southwestern Bell Telephone
Company.
COMMERCIAL TELECOM SYSTEMS, INC.: CTS was incorporated in 1988 and is
based in Oklahoma City, Oklahoma. CTS has eight employees who sell, install
and maintain telecommunications and data equipment for business customers.
CTS is a direct Newbridge distributor that provides digital cross connects,
access concentrators and ATM switches. CTS specializes in telemedicine and
hospital environments.
COMMUNICATION SERVICES, INC.: CSI was formed in 1987 and is based in
Shawnee, Oklahoma. CSI has 12 employees who sell, install and maintain
telecommunications systems and digital cellular services. CSI serves the
greater Shawnee area including Oklahoma City with Comdial and Panasonic. CSI
is a premiere authorized agent for Southwestern Bell Telephone Company and
Southwestern Bell wireless. CSI also serves as a cellular service retailer.
ELECTRICAL & INSTRUMENT SALES CORP. D/B/A EIS COMMUNICATIONS: EIS was
formed in 1975 and is located in Tulsa, Oklahoma. EIS is an authorized dealer
for Nortel Norstar and Meridian products and is also a Lucent Technologies
representative. EIS also provides Polycom video teleconferencing services and
private label paging services.
NOBEL SYSTEMS, INC.: Nobel was formed in 1984 and is based in Oklahoma
City, Oklahoma. Nobel currently has 14 employees who sell, install and
maintain telecommunication systems. Nobel is an authorized Comdial, Key-Voice
and Active Voice dealer. Nobel also installs equipment in support of local
and wide area networks.
PERKINS OFFICE MACHINES, INC.: Perkins was founded in 1982 and is based
in Lawton, Oklahoma. Perkins began selling telephone equipment in 1989.
Perkins sells, installs and maintains telephone systems and voice mail
systems. Perkins also provides data cabling services for its customers.
THE PHONE MAN SALES AND SERVICES, INC.: The Phone Man was incorporated
in 1987 and is based in
26
Oklahoma City, Oklahoma. The Phone Man installs, services and maintains
telephone systems and communication cabling systems. Some of The Phone Man's
customers include a large hospital complex and a multi-location financial
institution.
TELKEY COMMUNICATIONS, INC.: Telkey was incorporated in 1984 and is
based in Tulsa, Oklahoma. Telkey has 14 employees who sell, install and
maintain telephone systems. Telkey is the exclusive Tadiran dealer in the
state of Oklahoma. Telkey's customer base includes large school systems which
require a complex network design. Telkey is also an agent for Southwestern
Bell and Southwestern Bell wireless.
TERRA TELECOM, INC.: Terra Telcom was founded in 1980 and is based in
Tulsa, Oklahoma. Terra employs 16 people who install and service voice and
data equipment for its customers. Terra was the first ITT/Cortelco PBX
authorized distributor in the United States. Terra is also an authorized
Toshiba dealer and an authorized Southwestern Bell agent.
TRAVIS BUSINESS SYSTEMS, INC.: Travis Business Systems was formed in
1988, and its headquarters is in Oklahoma City. Travis is the exclusive
distributor in Oklahoma for Lanier Worldwide's voice products division and is
a Lucent and Inter-tel telephone distributor. Travis is also an exclusive
Southwestern Bell agent. Travis employs 39 people and has offices in Tulsa,
Dallas, Houston, San Antonio and Springdale, Arkansas featuring its Digital
Communications Recording Division for the rapidly expanding call center
market. Travis is the third largest interconnect in Oklahoma and was recently
recognized as the 31st fastest growing company in Oklahoma.
THE ACQUISITIONS
THE AGREEMENTS. LoreCom entered into definitive agreements with each of
the thirteen interconnect partners. LoreCom will acquire the assets of Able
Communication Incorporated, Electrical & Instrument Sales Corp. and The Phone
Man Sales and Service, Inc. by asset purchase and will acquire the assets of
the other ten partners by merger. Each acquisition's closing is subject to
the closing of this offering and several standard conditions, including
accuracy of the representations and warranties made, performance of covenants
included in the agreements, execution of employment and consulting agreements
by certain employees of the interconnect partners and no material adverse
change in the results of operations, financial condition or business of the
interconnect partners. Additionally, any or all of the acquisition agreements
may be terminated before this offering closes:
- By the mutual consent of the boards of directors of LoreCom and the
affected interconnect partner;
- If the offering and the acquisitions are not closed by May 31, 1999;
- By the interconnect partner if its schedules to its acquisition agreement
are amended to reflect a material adverse change and such amendment is
rejected by LoreCom; or
- If a material breach or default under the agreement by one party occurs
and is not waived.
Commercial Telecom Systems, Inc. has agreed to extend the May 31, 1999
deadline to July 31, 1999. All other interconnect partners have extended the
May 31, 1999 deadline to the date LoreCom terminates its efforts to register
its common stock. We cannot assure you that the conditions to the closing of
all the acquisitions will be satisfied or waived or that each merger will
close. For information about the employment and consulting agreements to be
entered into by stockholders of the interconnect partners, see the
"Employees" paragraph on page 30 of this "Business" section.
27
THE CONSIDERATION. The aggregate consideration LoreCom is paying in the
acquisitions is approximately $13.3 million, which is to be paid $10.2
million in cash and $3.1 million in LoreCom common stock. The common stock
issued as purchase consideration will be valued at the initial public
offering price less a 25% discount due to sale and transferability
restrictions. The actual number of shares of common stock to be issued in the
acquisitions depends on the initial public offering price. Each merger and
asset purchase agreement provides that the number of shares of common stock
to be issued will be calculated by dividing the initial public offering price
into the designated dollar amount. LoreCom will also assume the current
liabilities and long-term debt of the partners, issue a limited number of
warrants and permit certain distributions to be made by the interconnect
partners to their stockholders prior to closing. LoreCom determined the
amount of consideration it would pay in the acquisitions in arm's length
negotiations between its representatives and representatives of each of the
respective companies.
The following table summarizes information relating to the consideration
payable to the interconnect partners pursuant to the mergers and asset
acquisitions:
AMOUNT OF PURCHASE PRICE PAID IN
CASH STOCK (1)
-------------------------------------------------------------------------------------
COMPANY Value at Offering Discounted Value
Price ($12.00 per share) ($9.00 per share)
-------------------------------------------------------------------------------------
Able Communication
Incorporated $ 15,000 $ 50,000 $ 37,500
Access Communications
Services, Inc. 600,000 300,000 225,000
American Telcom, Inc. 850,000 250,000 187,500
Banner Communications, Inc. 1,275,000 225,000 168,750
Commercial Telecom
Systems, Inc. 1,300,000 100,000 75,000
Communication Services, Inc. 200,000 275,000 206,250
Electrical & Instrument Sales
Corp. 1,250,000 500,000 375,000
Nobel Systems, Inc. 385,000 325,000 243,750
Perkins Office Machines, Inc. 187,000 125,000 93,750
The Phone Man Sales and
Service, Inc. 37,500 37,500 28,125
Telkey Communications, Inc. 650,000 350,000 262,500
Terra Telecom, Inc. 1,050,000 450,000 337,500
Travis Business Systems, Inc. 2,400,000 1,200,000 900,000
----------- ---------- ----------
TOTAL: $10,199,500 $4,187,500 $3,140,625
----------- ---------- ----------
----------- ---------- ----------
- ------------------------------
(1) Total purchase price paid in LoreCom stock is the discounted value of
the LoreCom stock, or $3,140,625. The number of shares to be issued,
however, is based on the initial public offering price of the LoreCom stock.
As a result, the number of shares to be issued to the interconnect partners
is approximately 348,960, or $4,187,500 divided by $12.00 per share.
OTHER CONSIDERATION.
28
CASH AND STOCK. The agreement between LoreCom and Electrical &
Instrument Sales Corp. permits an increase in the purchase price by the
amount of net current assets existing on the date of closing, but not to
exceed $150,000. Electrical & Instrument's cash consideration could also
increase by an additional $150,000 if its gross revenues exceed $2,350,000
for the twelve months ended May 31, 1999. Electrical & Instrument's total
consideration received will also increase by an additional $50,000 in cash,
or $100,000 in LoreCom stock, as purchase price for its paging business.
LoreCom expects that Electrical & Instrument will meet the net asset and
gross revenue tests, and will elect to take cash in consideration for its
paging business. As a result, the cash consideration reflected as payable to
Electrical & Instrument in the table above has been increased by $350,000.
DEBT. LoreCom is assuming certain current liabilities and long-term
debt of the partners. As of December 31, 1998, total assumed current
liabilities would have been approximately $2.48 million and total assumed
long-term debt would have been approximately $390,000, including the assumed
debt of a shareholder of Communication Services, Inc., which was
approximately $24,000 on December 31, 1998. Although the debt is in the name
of the shareholder, the proceeds were used for the benefit of Communications
Services, Inc.
OTHER DISTRIBUTIONS. Banner Communications, Inc. and Perkins Office
Machines, Inc. are Subchapter S corporations. Prior to the closing of the
acquisitions, both Banner and Perkins will distribute cash to their
stockholders, not to exceed the stockholders' individual tax liabilities
resulting from the partners' 1998 operations. The distribution for Banner is
expected to be no more than $2,500 and the distribution for
Perkins is expected to be no more than $10,000. Prior to closing,
Commercial Telecom Systems, Inc. will distribute cash to its stockholders in
an amount equal to the excess of its net worth on the date of closing over
its net worth existing on December 31, 1998.
Able Communication Incorporated, Access Communications Services, Inc.,
American Telcom, Inc., Banner Communications, Inc. and Travis Business
Systems, Inc. will each distribute certain automobiles to their stockholders
prior to closing. The stockholders will assume all liabilities and
obligations related to the automobiles for a net distribution of
approximately $60,000. Access will also distribute a time-share condominium
to a shareholder prior to closing. The time-share is valued at approximately
$10,500. Also prior to closing, American Telcom will cancel notes receivable
from its stockholders and distribute cash and certificates of deposit in the
aggregate amount of $99,477.
LoreCom will issue to Commercial Telecom Systems, Inc. 10,000
non-transferable, four-year warrants to purchase common stock exercisable at
the initial public offering price. The warrants are exercisable commencing
one year after the closing of the acquisitions.
COMPETITION
Our business is highly competitive. Many companies provide the same
products and services that we provide, and many of those companies have
greater capital resources and more established reputations than LoreCom. We
will compete primarily on the basis of pricing, quality of service and customer
loyalty. Our ability to compete effectively will depend on our ability to
maintain high quality services at prices generally equal to or below those
charged by our competitors.
We believe we are more capable of satisfying our customers' needs than
larger providers which are traditionally impersonal and slow to respond to
the customers' needs. Additionally, we are better equipped than other smaller
service providers because these smaller competitors generally do not have the
financial capability to provide a complete range of telecommunication products
and services.
PROPERTY
Our principal administrative, sales, marketing, consulting, education,
customer support and research and development facilities are located at 12101
North Meridian, Oklahoma City, Oklahoma 73120. LoreCom currently occupies an
aggregate of approximately 2,200 square feet of office space in the Oklahoma
City facility that is leased
29
on a month-to-month basis. Once LoreCom acquires the interconnect partners,
it will lease an additional nine facilities in Oklahoma and will own one
facility in Shawnee, Oklahoma. We believe that these facilities will exceed
our current and future requirements and that certain of these leases will be
terminated in accordance with their terms.
EMPLOYEES
As of April 1, 1999, LoreCom had six full-time employees. None of our
employees are currently represented by a collective bargaining agreement. We
believe that we enjoy good relationships with our employees. The interconnect
partners currently have approximately 157 full-time employees, including 19
members of management, 46 in sales and customer service, 71 in technical
support and 21 in finance, administration and operations. None of these
employees are currently represented by a collective bargaining agreement. We
expect that we will have good relationships with employees of the
interconnect partners upon their acquisition.
Several of the interconnect partners' stockholders will execute
employment or consulting agreements with LoreCom. These agreements are
intended to ensure that LoreCom retains the goodwill created by each
interconnect partner's relationship with its customer base. The employment
agreements have terms of three years, provide for aggregate annual base
salaries of approximately $900,000, provide for bonuses generally based on
performance and include noncompete provisions. The consulting agreements have
terms of two years and have aggregate annual payments of $150,000.
Consultants will be bound by the two-year noncompete provisions set forth in
the acquisition agreements with each of the interconnect partners.
LEGAL PROCEEDINGS
Neither LoreCom nor the interconnect partners are involved in any
material legal proceedings nor are they a party to any pending or threatened
claim that could reasonably be expected to have a material adverse effect on
its financial condition or results of operations.
30
CAPITALIZATION
The following table sets forth, as of December 31, 1998, the cash,
long-term debt, including current maturities, and capitalization of (1)
LoreCom on an actual basis, (2) the interconnect partners on an historical
combined basis and (3) LoreCom on a pro forma combined basis to give
effect to the acquisitions and the offering and the application of the
estimated net proceeds therefrom. This table should be read in conjunction
with the Unaudited Pro Forma Combined Financial Statements of LoreCom and
the related notes included elsewhere in this prospectus.
December 31, 1998
---------------------------------------------------------------------------
Interconnect Partners LoreCom
LoreCom Historic Pro Forma as
Actual Combined Adjusted
---------------------------------------------------------------------------
Cash $ 79,700 $ 691,837 $ 3,100,037
----------------------- ---------------------- ------------------
----------------------- ---------------------- ------------------
Long-term debt; including current
portion (1): 34,168 825,641 862,409
Stockholders' equity:
Preferred Stock: $.01 par value,
500,000 shares authorized: no
shares issued and outstanding * * *
Common Stock: $.01 par value,
4,500,000 shares authorized:
760,950 shares issued and
outstanding, LoreCom; 2,074,910
shares issued and outstanding,
LoreCom pro forma as adjusted 7,610 9,063 20,749
Additional paid-in capital 83,392 353,493 15,810,878
Retained earnings (113,078) 1,385,700 (113,078)
----------------------- ---------------------- ------------------
Total stockholders' equity (22,076) 1,748,256 15,718,549
----------------------- ---------------------- ------------------
Total debt and capitalization $ 12,092 $2,573,897 $16,580,958
----------------------- ---------------------- ------------------
----------------------- ---------------------- ------------------
- ------------------------------
(1) For a description of each company's debt, see the notes to financial
statements of the interconnect partners included elsewhere in this prospectus.
31
MANAGEMENT'S PLAN OF OPERATION
OVERVIEW
You should read the following discussion and analysis in conjunction
with the Unaudited Pro Forma Combined Financial Statements and related notes
found elsewhere in this document.
LoreCom is an Oklahoma corporation and was incorporated on September 4,
1998. To date, LoreCom has not started its business operations. LoreCom
does not have any significant assets and has not engaged in any material
business operations relating to service associated with the maintenance and
installation of equipment. Our activities have been limited to acquiring the
interconnect partners, addressing organizational matters, conducting research
and due diligence and preparing and filing the registration statement of
which this prospectus is a part.
PURPOSE OF ORGANIZATION
We organized LoreCom to consolidate and continue the operations of thirteen
interconnect partners in Oklahoma in order to (1) take advantage of economies
of scale, (2) position the partners' combined customer base as a channel for
new products and services and (3) become a leader in the next evolution of
interconnect companies by adding value as the bridge or integration between
service providers and the business market. If successful, LoreCom will gain
a competitive advantage in its operating markets, which will allow LoreCom
to expand its base of operations to the contiguous states surrounding
Oklahoma.
PLAN OF OPERATION
Our plan of operation for LoreCom throughout the next twelve months
includes (1) maintenance of current operations within the individual
interconnects, (2) development and installation of supporting information
systems, (3) implementation of new service offerings to the customer base,
(4) consolidation of certain operating facilities within the two major
metropolitan areas serviced by LoreCom and (5) acquisition of additional
interconnects in Texas, Arkansas, Missouri or Kansas.
We will retain at least one of the former business owners as manager in
their respective base of business to be responsible for maintaining revenue
and profitability. Management is reinforcing a BUSINESS AS USUAL directive
for the first few months in order to manage the transition process for the
partners' customers and vendors.
LoreCom has contracted with organizational and systems design
consultants in order to document current processes and deliver to management
a recommendation for best practice in sales and service management. LoreCom
is in the process of reviewing information systems to support sales and
service as well as financial system requirements, project management, call
center/technical support and the Internet interface for internal and external
users. LoreCom is also researching the database requirements to support the
consolidation of customer information to include customer premise equipment,
system configuration, cabling system, access lines, type of services and
software applications.
LoreCom intends to implement new service offerings immediately
following the acquisition process. LoreCom will prepare the sales staff to
offer company-wide local access and long distance services within the first
60 days of consolidated operations. Data communication services, like IP,
Frame Relay and ATM, local area and wide area network support and Internet
access will soon follow (some individual partners currently provide such
services). Additional offerings like unified messaging, interactive-voice
response and other sophisticated voice applications will be marketed as sales
and technical staff is qualified to support the products.
We are currently reviewing plans to consolidate technical, sales and
support staff within our areas of operation, which include Oklahoma City,
Tulsa, Shawnee and Lawton. We have included the partners in operational task
groups to determine the most efficient means of consolidating and the most
effective means of maintaining customer support and employee morale.
32
After we complete the offering and the initial thirteen acquisitions, we
will utilize a similar acquisition model in the states surrounding Oklahoma.
Already, companies in Texas, Arkansas and Missouri have demonstrated interest
in joining LoreCom. Much like the original partners, these companies' expressed
interest in merging due to the accelerating change in technology and the lack
of access to adequate capital to fund growth.
After completing the offering, we believe we will have adequate cash
available to support both the combined operations of the partners and the
anticipated expenditures required to complete the consolidation. We will need
additional capital in order to fund the consummation of any additional
significant acquisitions.
Our management expects the consolidation phase of our operations to last
approximately six to twelve months. Barring any unexpected delays, we expect
to consolidate the financial and administrative functions of all of the
interconnect partners within this time frame. LoreCom will operate each
partner's base of business, while one of that partner's original owners
serves as business manager. Each partner will be responsible for its own base
of business, much like a professional services company. Operating in this
manner will allow LoreCom to retain the partners' customers, reduce
implementation barriers to new service offerings and provide coordination for
changes in policy and procedure.
We do not anticipate any significant reduction in employees. The growth
that we expect to experience should provide opportunities for existing
employees, allowing them to accept new or different responsibilities. At the
same time, these opportunities may require the employees to obtain additional
training. We have already started our training program in order to ensure
continued professional training and technical staff certifications. We are
also considering using state vocational-technical institutions to ensure
adequate staffing in critical support areas, such as engineering,
installation and support of voice and data networks.
IMPACT OF YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs using two digits
rather than four digits when defining the year in question. It is possible
date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This mistake in recognition could result in system
failures or miscalculations causing disruptions of operations, including a
temporary inability to process transactions, send invoices or engage in
similar routine business activities.
COMPANY READINESS. LoreCom's and the interconnect partners' information
systems are generally maintained on personal computers using packaged
software from outside vendors. Management believes that such systems are year
2000 compliant. If not, management believes that most of the tasks performed
by the systems can be temporarily performed manually, and that any costs
necessary to upgrade or replace noncompliant systems will be insignificant.
READINESS OF OTHERS. It is possible that noncompliance with year 2000
issues of other companies, including but not limited to the regional or
national telephone network or power grid, could delay LoreCom's provision of
services to, or receipt of revenues from, its customers. LoreCom and the
interconnect partners do not provide any assurance of year 2000 compliance
for the equipment they sell or install. Upon request, the interconnect
partners have provided their customers year 2000 compliance documentation
from the equipment manufactures. LoreCom will continue to communicate with
the telephone equipment manufacturers to coordinate year 2000 compliance.
The interconnect partners regularly warrant the equipment and software
they sell. LoreCom is presently investigating its potential liability for
noncompliant equipment and software which is (1) under a manufacturer's
warranty, (2) under an extended warranty of the interconnect partner, or (3)
not under a warranty of any kind. Presently, LoreCom does not believe it
will have any material liability under these warranties.
CONTINGENCY PLANS. LoreCom has no contingency plan for conversion of
its own equipment or business application software, and none will be
formulated. With regard to contingency plans for the failure, or possible
failure, of others, each major source of revenues or services will be handled
on a case-by-case basis, with full preparedness by December 31, 1999.
33
MANAGEMENT AND PRINCIPAL STOCKHOLDERS
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information concerning each of
LoreCom's directors and executive officers and certain other significant
employees. The board of directors consists of one director serving as one of the
three classes of directors serving staggered terms. LoreCom expects to nominate
two or more directors to fill the second and third classes prior to closing this
offering. Directors and executive officers of LoreCom are elected to serve
until they resign or are removed or are otherwise disqualified to serve, or
until their successors are elected and qualified. Directors of LoreCom are
elected at the annual meeting of the stockholders and the board of directors
appoints the officers shortly after each annual meeting of stockholders.
DIRECTOR
TERM
NAME AGE(1) POSITION(S) EXPIRES
- ----------------------- --------- ------------------------------------- --------
DIRECTORS AND OFFICERS
Ricky Naylor Chairman of the Board; Director 2001
Larry Travis (2) President and Chief Executive Officer
William J. Hartwig Vice President of Operations and Chief
Technical Officer
Joseph O. Evans Chief Financial Officer and Secretary
Debra G. Morehead Chief Accounting Officer
SIGNIFICANT EMPLOYEES
Roger Clanton Vice President - Sales and Marketing
Becky Brittain Major Accounts Manager
Don DeWald Network Technical Services Manager
- ------------------------------
(1) Ages as of April 1, 1999.
(2) Mr. Travis is presently President of Travis Business Systems, Inc., an
interconnect partner. Mr. Travis has agreed to be the President and Chief
Executive Officer and a director of LoreCom upon completion of this offering
and the acquisitions.
RICKY NAYLOR, CHAIRMAN OF THE BOARD. Mr. Naylor has served as a Director
of LoreCom since September 8, 1998, and as Chairman of the Board of LoreCom
since March 26, 1999. Mr. Naylor has devoted all his prior efforts to serving
as President and a Director of one or more of the Naylor Companies. The
Naylor Companies presently include Naylor Concrete, Naylor Concrete and
Steel, Milestone General Contractors, Milestone Real Estate, Interstate
Consulting and Prestige Investments, Inc. Mr. Naylor serves as Chairman of
the Board of the National Christian Collegiate Athletic Association.
LARRY TRAVIS, PRESIDENT AND CHIEF EXECUTIVE OFFICER. Mr. Travis has
served as President and Chief Executive Officer of Travis Business Systems
since 1988 and has served as President of Digital Transcription Systems, Inc.
since 1992. Mr. Travis is on the Board of Directors of Milner Business
Products, a computer and telephone interconnect company in Atlanta, Georgia.
Mr. Travis is also a board member of The Independent Distributor Association
and has served as President of the Independent Distributor Association twice.
Mr. Travis is a current board member of Medical Transcription Industry
Alliance and is a former Vice President National Sales Manager for Lanier
Worldwide in Atlanta, Georgia. Mr. Travis is a graduate of Texas A&M Commerce
with a BBA in marketing.
WILLIAM J. HARTWIG, VICE PRESIDENT OF OPERATIONS AND CHIEF TECHNICAL
OFFICER. Mr. Hartwig has served as Vice President of Operations and Chief
Technical Officer of LoreCom since May 10, 1999, served as President and
Chief Operating Officer from March 26, 1999 to May 10, 1999, and served as
Vice President-Operations of LoreCom from November, 1998 to March 26, 1999.
From 1991 to 1998, Mr. Hartwig served as Systems Development Manager for
Braum's Ice Cream and Dairy Stores. Mr. Hartwig also managed Braum's
telecommunications requirements
34
over a five-state area, with over 270 locations. Mr. Hartwig also installed
technologies related to networking, cabling, telecommunications and personal
computer hardware, including the installation and maintenance of token-ring,
Ethernet and TCP/IP topologies, Unix, Novell, and NT Networks, Cisco, 3Com,
Ascend routers, PBX and voice mail systems, T1 and ISDN communications and
structured cabling systems. Prior to his time at Braum's, Mr. Hartwig was
Contracting and Billing Manager for AAR Oklahoma, Inc. where he managed a
department that provided contract administration, job costing, contract
billing and sales accounting for five aviation division offices. Mr. Hartwig
holds a B.S. in Business Administration from the University of Central
Oklahoma and also has earned several technical certifications.
JOSEPH O. EVANS, CHIEF FINANCIAL OFFICER AND SECRETARY. Mr. Evans has
served as Chief Financial Officer and Secretary of LoreCom since November,
1998. From 1997 to 1998, Mr. Evans served as Senior Vice President and
Financial Advisor of Energy Lending for the First National Bank of Commerce
in New Orleans, Louisiana. Prior to 1997, Mr. Evans practiced as an audit
partner of Deloitte & Touche LLP, with an emphasis in SEC practice. From 1990
to 1997, Mr. Evans served as an Associate Professional Practice Director for
the Oklahoma practice of Deloitte & Touche LLP, related to technical
accounting and auditing issues and quality control. Mr. Evans is a Certified
Public Accountant and holds a B.S. in Accounting from the University of
Central Oklahoma.
DEBRA G. MOREHEAD, CHIEF ACCOUNTING OFFICER. Ms. Morehead has served as
Chief Accounting Officer of LoreCom since September 8, 1998. Ms. Morehead
has served as controller of The Naylor Companies since May of 1998. Prior to
that time, Ms. Morehead was a partner at the accounting firm of Olson &
Potter, CPA's. Ms. Morehead is an Certified Public Accountant and received a
B.S. in accounting from the University of Central Oklahoma.
ROGER CLANTON, VICE PRESIDENT SALES AND MARKETING. Mr. Clanton has
served as Vice President Sales and Marketing for LoreCom since March 1,
1999. Mr. Clanton was with AT&T prior to joining LoreCom, where he managed
the implementation of advanced communication services for a critical large
market account. From 1987 to 1998, Mr. Clanton served as Major Account
Manager for Sprint. During his tenure with Sprint, he managed Sprint's
largest accounts in Oklahoma City and Tulsa, Oklahoma.
BECKY BRITTAIN, MAJOR ACCOUNTS MANAGER. Ms. Brittain became Major
Accounts Manager for LoreCom on March 1, 1999. Prior to that date, Ms.
Brittain was employed as Major Account Executive for Williams Communications
and Major Account Manager for GTE, Inc. Ms. Brittain also served as National
Accounts Manager, System Designer and Management Information Systems with
Nortel, Siemens Rolm and MCI.
DON DEWALD, NETWORK TECHNICAL SERVICES MANAGER. Mr. DeWald was appointed
Network Technical Services Manager on March 1, 1999. Prior to that date, Mr.
DeWald was Manager of Engineering Services for Global Data. From 1996 to 1997,
Mr. DeWald served as Systems Engineer for Precision Computer Services in
Oklahoma City. From 1992 to 1996, Mr. DeWald served as Technology Trainer and
Developer for Wave Technologies. As Technology Trainer and Developer, Mr. DeWald
wrote several training manuals for topics on computer networking and TCP/IP and
was selected by Wave to teach their initial offerings of administration and
advanced administration for Novell NetWare. Mr. DeWald is a Master Certified
Novell Engineer and a Microsoft Certified Systems Engineer.
COMPENSATION
EXECUTIVE OFFICERS. LoreCom has not conducted any operations except
those related to the acquisitions and this offering. In 1998, LoreCom paid
its Chief Executive Officer, David W. Aduddell, $33,615, plus a car allowance.
In 1999, LoreCom paid David Aduddell $44,500, plus a car allowance. See
"Management and Principal Stockholders - Certain Relationships and Related
Transactions" for a discussion of why Mr. Aduddell is no longer LoreCom's Chief
Executive Officer. We expect the following people to be the only executive
officers of LoreCom to receive compensation in excess of $100,000 in 1999.
Their expected base
35
salaries are:
NAME TITLE ANNUAL COMPENSATION
- ---- ----- -------------------
Larry Travis President and Chief Executive Officer $
William J. Hartwig Vice President of Operations and Chief $
Technical Officer
Joseph O. Evans Chief Financial Officer $
DIRECTORS. Directors of LoreCom who are also employees will not receive
directors' fees. Alliance will pay non-employee directors fees of $1,000 for
each board meeting attended and will reimburse the directors for reasonable
out-of-pocket travel expenditures.
LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY
LoreCom's Certificate of Incorporation provides for the indemnification
of officers and directors to the fullest extent permitted by the Oklahoma
General Corporation Act.
All of the Company's directors and officers will be covered by insurance
policies maintained by it against certain liabilities for actions taken in
their capacities as such.
Pursuant to the underwriting agreement filed as an exhibit to the
registration statement, the underwriter has agreed to indemnify LoreCom,
each officer and director of LoreCom and each person, if any, who controls
LoreCom within the meaning of the Securities Act, against certain
liabilities resulting from information in this prospectus provided by the
underwriter.
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling person
of LoreCom pursuant to its Certificate of Incorporation, Bylaws, Oklahoma
law or otherwise, LoreCom has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by LoreCom of expenses incurred or paid by a director,
officer or controlling person of LoreCom and the successful defense of any
person, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
LoreCom will, unless in the opinion of its counsel the matter has been
settled by a controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
36
OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of April 9, 1999 by (a)
LoreCom's executive officers, (b) each of LoreCom's directors (including
persons who will become directors upon consummation of the offering), (c) all
executive officers and directors of LoreCom as a group and (d) each other
person (or group of affiliated persons) who we know beneficially owns 5% or
more of LoreCom's common stock.
AMOUNT AND NATURE
NAME OF BENEFICIAL OWNERSHIP PERCENT
- --------------------------------- --------------------------------- ----------------------------------
Before Offering After Offering Before Offering After Offering
and and and and
Acquisitions Acquisitions Acquisitions Acquisitions
--------------- -------------- --------------- --------------
Ricky Naylor
821 S.W. 66th
Oklahoma City, OK 73139 452,153 452,153 95% 22%
Larry Travis
4200 Perimeter Center Drive
Suite 100
Oklahoma City, OK 73112 -- 85,000(1) -- 4%(1)
William J. Hartwig
12101 North Meridian
Oklahoma City, OK 73120 -- -- -- --
Joseph O. Evans
12101 North Meridian
Oklahoma City, OK 73120 -- -- -- --
Debra G. Morehead
821 S.W. 66th
Oklahoma City, OK 73139 4,759 4,759 1% < 1%
All officers and directors as
a group (4 persons) 456,912 541,912 96% 26%
- ------------------------------
(1) Mr. Travis is an officer and a director of the general partner of Wylie
Limited Partnership. Wylie Limited Partnership is expected to receive 85,000
shares of LoreCom common stock from the acquisition of Travis Business
Systems, Inc., an investment partner, by LoreCom. Mr. Travis owns 25% of the
general partner of Wylie Limited Partnership and owns 50% of the limited
partnership interests in Wylie Limited Partnership. The remaining interests
in the general partner, and limited partner interests in Wylie Limited
Partnership, are owned by Mr. Travis' wife and children. Mr. Travis disclaims
any beneficial ownership with respect to these interests.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LoreCom was incorporated by David Aduddell on September 4, 1998 under
the name Advantage Business
37
Solutions, Inc. Aduddell capitalized LoreCom with $10.00 cash and certain
intangible personal property, including business plans, organizational
documents and economic projections relating to several consolidating company
opportunities. Aduddell was the sole shareholder until September 8, 1998,
when Advantage Business Solutions, Inc. sold 62.5% of its outstanding stock
to Ricky Naylor in exchange for $10.00 cash and a binding agreement to pay
LoreCom $499,990 upon demand. At March 31, 1999, Naylor had paid LoreCom
all amounts owed under this agreement.
David Aduddell is subject to a noncompetition agreement which, (1) if
Aduddell is affiliated in any way with LoreCom, restricts LoreCom's ability
to sell local and long distance service and (2) if LoreCom sells local and
long distance service, restricts Aduddell's ability to own stock in LoreCom.
Aduddell believed that LoreCom could substantially increase its revenues and
net income by selling local and long distance services through the interconnect
partners' customer bases. Therefore, on April 9, 1999, Aduddell cancelled his
32.5% interest (285,000 shares) in LoreCom. Also, on April 9, 1999, David
Aduddell resigned as Chief Executive Officer and a director of LoreCom to
ensure that LoreCom's ability to sell local and long distance services would
not be restricted by his affiliation with LoreCom.
David Aduddell also owns 33.33% of Access Communications Services, Inc.,
one of the interconnect partners. Aduddell will receive $100,000 in cash and
LoreCom common stock equal to $200,000 (estimated to be 16,667 shares) upon the
acquisition of Access by LoreCom.
Steve Aduddell is David Aduddell's brother. Steve Aduddell owns 67.67%
of Access Communications Services, Inc., one of the interconnect partners.
Steve Aduddell will receive $500,000 in cash and LoreCom common stock equal to
$100,000 (estimated to be 8,333 shares) stock upon the acquisition of Access by
LoreCom.
Wylie Limited Partnership is expected to receive 85,000 shares of LoreCom
common stock from the acquisition of Travis Business Systems, Inc., an
interconnect partner, by LoreCom. Mr. Travis owns 25% of the general partner of
Wylie Limited Partnership and 50% of the limited partnership interests in Wylie
Limited Partnership.
Ricky Naylor has agreed to fund the operations of LoreCom prior to the
closing of this offering. Any and all amounts loaned to LoreCom will be
evidenced by a promissory note bearing interest at 10% per year and are
payable on the earlier of the closing of this offering or December 31, 1999.
This promissory note, together with accrued interest, will be repaid from the
proceeds of this offering.
LoreCom's certificate of incorporation provides that all transactions
between LoreCom or its subsidiaries and a director, officer or other
affiliate of LoreCom will be void or voidable unless the material facts
regarding the relationship and the transaction are disclosed, or are known to
the board, and a majority of the disinterested directors in good faith
authorize the transaction; or the material facts regarding the relationship
and the transaction are disclosed, or are known to the stockholders entitled
to vote on the transaction, and a majority of the disinterested stockholders
approve the transaction. As a result of these provisions, any future
transactions with directors, officers, employees or affiliates of LoreCom
are anticipated to be minimal and will, in any case, be approved in advance
by either a majority of the disinterested directors or disinterested
stockholders of LoreCom.
38
DESCRIPTION OF COMMON STOCK
ABOUT THE COMMON STOCK
As of the date of this prospectus, LoreCom is authorized to issue
4,500,000 shares of common stock, par value $.01 per share, and 500,000
shares of preferred stock, par value $.01 per share. The summary of the terms
of LoreCom's authorized and outstanding capital stock found below is
qualified in its entirety by reference to LoreCom's certificate of
incorporation, a copy of which is included as an exhibit to the registration
statement of which this prospectus is a part.
COMMON STOCK. Owners of common stock will be entitled to dividends
declared by LoreCom's board of directors out of funds legally available. The
common stockholders are entitled to one vote per share for the election of
directors and other corporate matters. In the event of liquidation,
dissolution or winding up, common stockholders would be entitled to share
ratably in all of LoreCom's assets available for distribution. The common
stock carries no preemptive rights. All outstanding shares of common stock
are, and the shares of common stock to be sold by LoreCom in the offering
when issued will be, duly authorized, validly issued, fully paid and
nonassessable. We are making application to list the common stock on the
____________________.
PREFERRED STOCK. The board of directors is authorized to issue from time
to time, without stockholder authorization, in one or more designated series,
500,000 shares of preferred stock with such dividend, redemption, conversion,
liquidation and exchange provisions as are provided in the particular series.
Except as expressly provided by law, or except as may be provided by
resolution of the board of directors, the preferred stock shall have no right
or power to vote on any question or in any proceeding or to be represented
at, or to receive notice of, any meeting of LoreCom's stockholders. No
shares of preferred stock are issued or outstanding and the board of
directors has no present plans to issue any of the preferred stock.
POSSIBLE ANTI-TAKEOVER EFFECTS. The board is divided into three classes.
Each class of directors consists, as nearly as possible, of one-third of the
total number of directors constituting the entire board. LoreCom's bylaws
provide that, subject to the rights of the holders of any series of preferred
stock, the number of directors may be fixed from time to time by resolution
of the board, but will consist of not less than one nor more than nine
members. The term for directors in the first class expires at the annual
meeting of stockholders to be held in 2000; the initial term for directors in
the second class expires at the annual meeting of stockholders to be held in
2001; and the initial term for directors in the third class expires at the
annual meeting of stockholders to be held in 2002. A director of LoreCom may
be removed only for cause and only upon the affirmative vote of the holders
of a majority of the outstanding capital stock entitled to vote at an
election of directors. The board provisions set forth in LoreCom's
certificate of incorporation may not be amended without the approval of at
least 66 2/3 percent of the voting power of all shares entitled to vote
generally in the election of directors, voting together as a single class.
The provisions of LoreCom's certificate of incorporation and bylaws,
together with the ability of the board to issue preferred stock without
further stockholder action, could delay or frustrate the removal of incumbent
directors and could also discourage or make more difficult a merger, tender
offer or proxy contest even if such event would be favorable to the interests
of stockholders.
Section 1090.3 of the Oklahoma General Corporation Act prohibits a
publicly held Oklahoma corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date
of the transaction in which the person became an interested stockholder,
unless (1) prior to the date of the business combination, either the business
combination or the transaction which resulted in such person becoming an
interested stockholder is approved by the board of directors; (2) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock; or (3) on or after such date the business
combination is approved by the board of directors and by the affirmative vote
of at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder. A "business combination" includes mergers, asset
sales and other transactions resulting in a financial benefit to the
interested stockholder. An "interested stockholder" is a person who, together
with affiliates and associates, owns 15% or more of the corporation's voting
stock. The effect of such statute may be to discourage certain types of
transactions involving an actual or potential change in control of LoreCom.
39
If we have 1,000 or more shareholders and meet other conditions, we will
be subject to Oklahoma's control shares act. With exceptions, this act
prevents holders of more than 20% of our stock from voting those shares. This
provision at least delays the time it takes anyone to gain control of LoreCom.
Also, shareholder action by written consent without a meeting must be unanimous.
DIVIDEND POLICY
LoreCom intends to retain earnings, if any, to finance the expansion of
its business and for general corporate purposes. We do not expect to pay
dividends for the foreseeable future. Future lenders may also impose
restrictions on dividends.
USE OF PROCEEDS
The net proceeds to LoreCom from the sale of the shares of common stock
offered in this prospectus, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, are estimated to
be approximately $12.6 million (approximately $_____ million if the
underwriter exercises its over-allotment option in full). Of those net
proceeds, approximately $10.1 million will be used to pay the aggregate cash
portion of the purchase price for the interconnect partners, approximately
$__ million will be used to repay outstanding indebtedness to a founding
stockholder and the remaining net proceeds will be used for general corporate
purposes.
The indebtedness of the founding stockholder to be repaid from the
proceeds of the offering bears interest at a rate of 10% per annum and
matures upon the closing of this offering or December 31, 1999. LoreCom
incurred this indebtedness to finance the professional and administrative
costs associated with the acquisition of the interconnect partners and this
offering.
DILUTION
The historical combined net tangible book value of LoreCom as of
December 31, 1998 was approximately $1,726,180, or approximately $2.09 per
share, after giving effect to the acquisitions. See "Summary Combined
Financial Information." The historical combined net tangible book value per
share represents our pro forma net tangible assets as of December 31, 1998
divided by the number of shares to be outstanding after giving effect to the
acquisitions. After giving effect to the sale of an estimated 1,250,000
shares offered hereby at an assumed initial public offering price of $12.00
per share and deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by LoreCom, our pro forma net tangible
book value as of December 31, 1998 would have been approximately $4,034,280
or approximately $1.94 per share. This represents an immediate decrease in
pro forma net tangible book value of approximately $.15 per share to existing
stockholders and an immediate dilution of approximately $10.06 per share to
new investors purchasing shares in the offering. The following table
illustrates this pro forma dilution:
Assumed initial public offering price per share $ 12.00
-----------
Pro forma net tangible book value per share before the offering 2.09
Decrease in pro forma net tangible value per share attributable to existing stockholders (.15)
-----------
Pro forma net tangible book value per share after the offering 1.94
-----------
Dilution per share to new investors $10.06
-----------
-----------
The following table sets forth, on a pro forma basis as of December 31,
1998, the number of shares of common stock purchased from LoreCom, the total
consideration to LoreCom and the average price per share paid to LoreCom by
existing stockholders and the new investors purchasing shares from LoreCom
in the acquisitions and the offering (before deducting underwriting discounts
and commissions and estimated offering expenses):
40
AVERAGE
PRICE
SHARES PURCHASED TOTAL CONSIDERATION(1) PER SHARE
----------------------------------------------------------------------
NUMBER PERCENT AMOUNT PERCENT
------------ ------------ ------------ ------------
Existing stockholders 475,950 22.94% $ 500,001 2.68% $ 1.05
Interconnect partners 348,960 16.82% 3,140,625 16.85% 9.00
New investors 1,250,000 60.24% 15,000,000 80.47% 12.00
------------ ------------ ------------ ------------ --------
Total 2,074,910 100% $18,640,626 100% $ 8.98
------------ ------------ ------------ ------------ --------
------------ ------------ ------------ ------------ --------
- ------------------------------
MARKET FOR COMMON STOCK AND SHARES ELIGIBLE FOR FUTURE SALE
No public market currently exists for LoreCom's common stock. Upon
completion of the offering, 2,074,910 shares of common stock are expected to
be outstanding. All of the 1,250,000 shares expected to be purchased in the
offering ( _____ shares if the underwriter's over-allotment option is
exercised in full) will be freely tradeable without registration or other
restriction under the Securities Act, except for shares purchased by
affiliates of LoreCom. All of the remaining shares of common stock
outstanding, which are the restricted shares, may be sold only pursuant to an
effective registration statement filed by LoreCom or pursuant to an
applicable exemption, including an exemption under Rule 144 under the
Securities Act. In this regard, approximately _____ of the currently
outstanding shares of common stock will be eligible for resale pursuant to
Rule 144 after ___ days from the date of this prospectus and the remaining
_____ shares of common stock currently outstanding or issued in the
acquisitions will be eligible for resale pursuant to Rule 144 no later than
one year following the consummation of this offering.
In general, Rule 144 provides that if a person (including an affiliate)
holds restricted shares (regardless of whether such person is the initial
holder or a subsequent holder of such shares), and if at least one year has
elapsed since the later of the date on which the restricted shares were
issued or the date that they were acquired from an affiliate, then such
person is entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of
common stock or the average weekly trading volume of such stock during the
four calendar weeks preceding the sale. After the restricted shares are held
for two years by a person who is not deemed an "affiliate" of LoreCom, the
holder would be entitled to sell such shares under Rule 144 without regard to
the volume limitations described above.
The holders of approximately 348,960 shares of common stock and warrants
to purchase an additional 10,000 shares of common stock will have certain
rights to require LoreCom to register such shares for resale under the
Securities Act. If, subsequent to the consummation of the offering, we
propose to register any of our securities under the Securities Act, such
holders are entitled to notice of such registration and to include their
shares in such registration with their expenses borne by LoreCom, subject to
the right of an underwriter participating in the offering to limit the number
of shares included in such registration. In addition, the holders of a
majority of such shares of common stock have the right to immediately demand,
subject to certain limitations, that LoreCom file one registration statement
covering sales of their respective shares, and we are obligated to pay the
expenses of such registration.
41
Our directors and executive officers and all persons acquiring common
stock in the mergers (including those holders with registration rights
described above) have agreed that, during the ________ period following the
close of the offering they will not, and LoreCom has agreed that for a
period of ___ days following the date of this prospectus it will not, without
the prior written consent of Capital West Securities, Inc., offer, sell,
contract to sell or otherwise dispose of any shares of common stock or any
securities convertible into, or exercisable or exchangeable for, common
stock, except that we may grant options under stock option plans, and may
issue shares of common stock (1) in connection with the acquisitions, or (2)
pursuant to the exercise of options granted under stock option plans.
The effect, if any, that future market sales of shares or the
availability of shares for sale will have on the prevailing market prices for
the common stock cannot be predicted. Nevertheless, sales of a substantial
number of shares in the public market could adversely affect prevailing
market prices for the common stock.
TRANSFER AGENT
The transfer agent for the common stock is ________.
THE UNDERWRITER AND THE PLAN OF DISTRIBUTION
THE UNDERWRITING AGREEMENT
Capital West Securities, Inc. has agreed, subject to the terms and
conditions set forth in the underwriting agreement between LoreCom and
Capital West, to purchase from LoreCom, and LoreCom has agreed to sell to
Capital West ________ shares of common stock. Capital West is offering the
common stock on a firm commitment basis.
The underwriting agreement provides that the obligations of Capital West
to purchase the shares listed above are subject to certain conditions. The
underwriting agreement also provides that Capital West is committed to
purchase, and we are obligated to sell, all of the shares offered by this
prospectus, if any of the shares being sold pursuant to the underwriting
agreement are purchased (without consideration of any shares that may be
purchased through the exercise of the underwriter's over-allotment option).
Capital West has advised us that it proposes to offer the shares to the
public initially at the public offering price set forth on the cover page of
this prospectus and to certain dealers at such price, less a concession not
to exceed $_____ per share. Capital West may allow, and the dealers may
reallow, a concession to other dealers not to exceed $_____ per share. After
the initial public offering of the shares, the public offering price, the
concessions to selected dealers and the reallowance to other dealers may be
changed by Capital West.
Capital West was first registered as a broker-dealer in May 1995.
Capital West has participated in only ____ public equity offerings as an
underwriter, although certain of its employees have had experience in
underwriting public offerings while employed by other broker-dealers.
Prospective purchasers of the securities offered in this prospectus should
consider Capital West's limited underwriting experience in evaluating this
offering.
We have granted Capital West an option, exercisable during the ___ day
period after the date of this prospectus, to purchase up to an additional
_____ shares of common stock at the initial public offering price set forth
on the cover page of this prospectus, less underwriting discounts and
commissions. Capital West may exercise such option only to cover
over-allotments, if any, incurred in the sale of shares.
We have agreed to indemnify Capital West against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that Capital West may be required to make in respect thereof. Capital West
has informed us that it does not intend to confirm sales to any account over
which it exercises discretionary authority.
We agreed to pay to Capital West a non-accountable expense allowance of
__% of the gross proceeds
42
derived from the sale of the common stock (including the sale of any shares
of common stock subject to Capital West's over-allotment option), $___ of
which has been paid as of the date of this prospectus. LoreCom also has
agreed to pay all expenses in connection with qualifying its common stock for
sale under the laws of such states as Capital West may designate, including
filing fees and fees and expenses of counsel retained for such purposes by
the underwriter, and registering the offering with the National Association
of Securities Dealers, Inc.
In connection with this offering, LoreCom has agreed to sell to Capital
West, for a price of $.___ per warrant, warrants to purchase shares of common
stock equal to __% of the total number of shares of common stock sold
pursuant to this offering, excluding shares subject to the over-allotment
option. The Capital West warrants are exercisable at a price equal to ___% of
the initial public offering price ($14.40 assuming an initial public offering
price of $12.00 per share) for four years, commencing one year from the date
of this prospectus. The Capital West warrants grant to Capital West, with
respect to the registration under the Securities Act of the securities
directly and indirectly issuable upon exercise of Capital West's warrants,
one demand registration right during the exercise period, as well as
piggyback registration rights at any time.
Holders of __% of the shares of LoreCom's common stock (including
LoreCom's directors and executive officers) outstanding after completion of
this offering have agreed for a period of ___ months after the date of this
prospectus, they will not offer, sell or otherwise dispose of any shares of
common stock owned by them. Certain of LoreCom's executive officers have
agreed to enter into similar lock-up agreements with regard to ___ shares of
common stock they own, representing __% of the common stock outstanding after
completion of this offering, except that the term thereof is ___ months and
the officers will be permitted to sell a limited number of shares prior to
expiration of the __-month period if certain criteria are satisfied.
The shares of common stock are expected to be listed on the ________
_____________ under the trading symbol "__." Any listing is contingent,
among other things, upon LoreCom obtaining 400 shareholders.
In connection with this offering, Capital West may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the common stock. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which such
persons may bid for or purchase common stock for the purpose of stabilizing
its market price. Capital West also may create a short position by selling
more common stock in connection with the offering than it is committed to
purchase from LoreCom, and in such case, may purchase common stock in the
open market following completion of the offering to cover all or a portion of
such short position. Capital West may also cover all or a portion of such
short position, up to _____ shares of common stock, by exercising its
over-allotment option referred to above. In addition, Capital West may impose
"penalty bids" under contractual arrangements with the underwriters whereby
it may reclaim from an underwriter (or dealer participating in the offering)
for the account of the other underwriters, the selling concession with
respect to common stock that is distributed in the offering but subsequently
purchased for the account of the underwriters in the open market. Any
transactions described in this paragraph may result in the maintenance of the
price of the common stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
The estimated aggregate expenses, to be paid solely by LoreCom, in
connection with the distribution of the securities being registered is
approximately $___________.
DETERMINING THE OFFERING PRICE
Prior to this offering, there has been no public market for LoreCom's
common stock. We determined the initial public offering price in negotiations
with Capital West. Among the factors we considered in determining the initial
public offering price, in addition to prevailing market conditions, were the
following:
- Our financial information and prospects for future revenues;
43
- The history of, and the prospects for, LoreCom and the industry in which
it competes;
- An assessment of our management;
- LoreCom's past and present operations;
- The present state of our development; and
- All of these factors in relation to market values and valuation measures
of other companies engaged in activities similar to LoreCom.
The initial public offering price set forth on the cover page of this
prospectus should not be considered an indication of the actual value of the
common stock. The price is subject to change as a result of market conditions
and other factors. We cannot assure you that an active trading market will
develop for the common stock or that the common stock will trade in the
public market subsequent to the offering at or above the initial public
offering price.
EXPERTS
The financial statements of the following companies (for the periods
indicated) included in this prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports (as further described
below) appearing herein and elsewhere in this registration statement, and are
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing:
As of December 31, 1998, and for the period from September 4, 1998 (date of
inception), to December 31, 1998:
LoreCom Technologies, Inc. (formerly The Alliance Group, Inc.)
As of December 31, 1998, and for the year then ended:
Access Communications Services, Inc.
American Telcom, Inc.
Banner Communications, Inc.
Communication Services, Inc.
Travis Business Systems, Inc.
As of December 31, 1998 and 1997, and for the years then ended:
Telephone and Paging Divisions of Electrical & Instrument Sales
Corporation ("EIS") (which report expresses an unqualified opinion and
includes an explanatory paragraph relating to the divisions being a
component part of EIS)
As of September 30, 1998, and for the year then ended:
Terra Telecom, Inc.
Telkey Communications, Inc.
The financial statements of the following companies (for the periods
indicated) included in this prospectus have been audited by Saxon & Knoll,
P.C., independent auditors, as stated in their reports appearing herein and
elsewhere in this registration statement, and are included in reliance upon
the reports of such firm given upon their authority as experts in accounting
and auditing:
As of December 31, 1998, and for the year then ended:
Nobel Systems, Inc.
As of December 31, 1997, and for the year then ended:
44
Access Communications Services, Inc.
American Telcom, Inc.
Banner Communications, Inc.
Travis Business Systems, Inc.
As of September 30, 1997, and for the year then ended:
Terra Telecom, Inc.
Telkey Communications, Inc.
The financial statements of Commercial Telecom Systems, Inc. as of
December 31, 1998, and for the year then ended included in this prospectus
have been audited by Hunter, Atkins & Russell, PLC, independent auditors, as
stated in their report appearing herein and elsewhere in this registration
statement, and are included in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing:
45
VALIDITY OF COMMON STOCK
The validity of the common stock offered hereby will be passed on for
LoreCom by McAfee & Taft A Professional Corporation, Oklahoma City,
Oklahoma. Certain legal matters in connection with the shares of common stock
will be passed on for Capital West by Robertson & Williams, Oklahoma City,
Oklahoma.
46
INDEX TO FINANCIAL STATEMENTS
LORECOM TECHNOLOGIES, INC. (formerly The Alliance Group, Inc.)
Independent Auditors' Report
Balance Sheet, December 31, 1998
Statement of Operations for the Period from September 4, 1998
(date of inception) to December 31, 1998
Statement of Stockholders' Deficiency for the Period from September 4, 1998
(date of inception) to December 31, 1998
Statement of Cash Flows for the Period from September 4, 1998 (date of
inception) to December 31, 1998
Notes to Financial Statements for the Period from September 4, 1998
(date of inception) to December 31, 1998
ACCESS COMMUNICATIONS SERVICES, INC. AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report
Independent Auditors' Report
Balance Sheets, December 31, 1998 and 1997
Statements of Operations for the Years Ended December 31, 1998 and 1997
Statements of Stockholders' Equity for the Years Ended December 31, 1998 and
1997
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997
Notes to Financial Statements for the Years Ended December 31, 1998 and 1997
AMERICAN TELCOM, INC. AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report
Independent Auditors' Report
Balance Sheets, December 31, 1998 and 1997
Statements of Operations for the Years Ended December 31, 1998 and 1997
Statements of Stockholders' Equity for the Years Ended December 31, 1998
and 1997
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997
Notes to Financial Statements for the Years Ended December 31, 1998 and 1997
BANNER COMMUNICATIONS, INC. AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report
Independent Auditors' Report
Balance Sheets, December 31, 1998 and 1997
Statements of Earnings for the Years Ended December 31, 1998 and 1997
Statements of Stockholders' Equity for the Years Ended December 31, 1998
and 1997
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997
Notes to Financial Statements for the Years Ended December 31, 1998 and 1997
COMMERCIAL TELECOM SYSTEMS, INC. AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report
Balance Sheets, December 31, 1998 and 1997
Statements of Earnings for the Years Ended December 31, 1998 and 1997
Statements of Stockholders' Equity for the Years Ended December 31, 1998
and 1997
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997
Notes to Financial Statements for the Years Ended December 31, 1998 and 1997
COMMUNICATION SERVICES, INC. AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report
F-1
Balance Sheet, December 31, 1998
Statement of Operations for the Year Ended December 31, 1998
Statement of Stockholders' Equity for the Year Ended December 31, 1998
Statement of Cash Flows for the Year Ended December 31, 1998
Notes to Financial Statements for the Year Ended December 31, 1998
TELEPHONE AND PAGING DIVISIONS OF EIS COMMUNICATIONS AUDITED COMBINED FINANCIAL
STATEMENTS
Independent Auditors' Report
Combined Balance Sheets, December 31, 1998 and 1997
Combined Statements of Operations for the Years Ended December 31, 1998
and 1997
Combined Statements of Division Equity for the Years Ended December 31, 1998
and 1997
Combined Statements of Cash Flows for the Years Ended December 31, 1998
and 1997
Notes to Combined Financial Statements for the Years Ended December 31, 1998
and 1997
NOBEL SYSTEMS, INC. AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report
Balance Sheet, December 31, 1998
Statement of Earnings for the Year Ended December 31, 1998
Statement of Stockholders' Equity for the Year Ended December 31, 1998
Statement of Cash Flows for the Year Ended December 31, 1998
Notes to Financial Statements for the Year Ended December 31, 1998
TELKEY COMMUNICATIONS, INC. AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report
Independent Auditors' Report
Balance Sheets, September 30, 1998 and 1997
Statements of Operations for the Years Ended September 30, 1998 and 1997
Statements of Stockholders' Equity for the Years Ended September 30, 1998
and 1997
Statements of Cash Flows for the Years Ended September 30, 1998 and 1997
Notes to Financial Statements for the Years Ended September 30, 1998 and 1997
TELKEY COMMUNICATIONS, INC. UNAUDITED CONDENSED FINANCIAL STATEMENTS
Balance Sheet, December 31, 1998
Statement of Operations for the Three Months Ended December 31, 1998 and 1997
Statement of Cash Flows for the Three Months Ended December 31, 1998 and 1997
Notes to Financial Statements for the Three Months Ended December 31, 1998
TERRA TELECOM, INC. AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report
Independent Auditors' Report
Balance Sheets, September 30, 1998 and 1997
Statements of Operations for the Years Ended September 30, 1998 and 1997
Statements of Stockholders' Equity for the Years Ended September 30, 1998
and 1997
Statements of Cash Flows for the Years Ended September 30, 1998 and 1997
Notes to Financial Statements for the Years Ended September 30, 1998 and 1997
TERRA TELECOM, INC. UNAUDITED CONDENSED FINANCIAL STATEMENTS
Balance Sheets, December 31, 1998 and September 30, 1998
Statement of Operations for the Three Months Ended December 31, 1998 and 1997
Statement of Cash Flows for the Three Months Ended December 31, 1998 and 1997
Notes to Financial Statements for the Three Months Ended December 31, 1998
F-2
TRAVIS BUSINESS SYSTEMS, INC. AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report
Independent Auditors' Report
Balance Sheets, December 31, 1998 and 1997
Statements of Operations for the Years Ended December 31, 1998 and 1997
Statements of Stockholders' Equity for the Years Ended December 31, 1998
and 1997
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997
Notes to Financial Statements for the Years Ended December 31, 1998 and 1997
F-3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
LoreCom Technologies, Inc. (formerly
The Alliance Group, Inc.):
We have audited the accompanying balance sheet of LoreCom Technologies, Inc.
(formerly The Alliance Group, Inc.) as of December 31, 1998, and the related
statements of operations, stockholders' deficiency, and cash flows for the
period from September 4, 1998 (date of inception) to December 31, 1998. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of LoreCom Technologies, Inc. (formerly The
Alliance Group, Inc.) at December 31, 1998, and the results of its operations
and its cash flows for the period from September 4, 1998 (date of inception)
to December 31, 1998, in conformity with generally accepted accounting
principles.
/S/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
March 18, 1999 (April 9, 1999 as to
Note 7 to the financial statements
and May 12, 1999 as to Note 8 to the
financial statements)
F-4
LORECOM TECHNOLOGIES, INC.
(FORMERLY THE ALLIANCE GROUP, INC.)
BALANCE SHEET
DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 79,700
Other current assets 1,933
-----------
Total current assets 81,633
PROPERTY AND EQUIPMENT:
Vehicles 35,988
Equipment 6,711
-----------
42,699
Less accumulated depreciation (1,978)
-----------
Property and equipment, net 40,721
OTHER ASSETS:
Deferred offering costs 19,109
Other assets 1,389
-----------
Total other assets 20,498
-----------
TOTAL $ 142,852
-----------
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt $ 8,049
Accounts payable 32,464
Cash advances payable 80,000
Other current liabilities 18,296
-----------
Total current liabilities 138,809
Long-term debt, net of current portion 26,119
-----------
Total liabilities 164,928
-----------
COMMITMENTS
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.01 par value, 500,000 shares authorized; none issued Common
stock, $.01 par value; 4,500,000 shares authorized;
760,950 shares issued and outstanding (see note 7) 7,610
Additional paid in-capital 492,400
Accumulated deficit (113,078)
Stock subscription receivable (409,008)
-----------
Total stockholders' deficiency (22,076)
-----------
TOTAL $ 142,852
-----------
-----------
See notes to financial statements.
F-5
LORECOM TECHNOLOGIES, INC.
(FORMERLY THE ALLIANCE GROUP, INC.)
STATEMENT OF OPERATIONS
PERIOD FROM SEPTEMBER 4, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
- -----------------------------------------------------------------------------------
COSTS AND EXPENSES:
Salaries and benefits $ 63,267
General and administrative expenses 48,961
Interest expense 850
-----------
Total costs and expenses 113,078
-----------
NET LOSS $ (113,078)
-----------
-----------
See notes to financial statements.
F-6
LORECOM TECHNOLOGIES, INC.
(FORMERLY THE ALLIANCE GROUP, INC.)
STATEMENT OF STOCKHOLDERS' DEFICIENCY
PERIOD FROM SEPTEMBER 4, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------
COMMON ADDITIONAL STOCK
SHARES COMMON PAID-IN SUBSCRIPTION ACCUMULATED
(SEE NOTE 7) STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
BALANCE,
September 4, 1998
(Date of inception) -
Issuance of
common stock 760,950 $ 7,610 $ 492,400 $ (500,000) $ - $ 10
Collections on stock
subscription
receivable - - - 90,992 - 90,992
Net loss - - - - (113,078) (113,078)
--------- -------- ----------- ----------- ----------- -----------
BALANCE,
December 31, 1998 760,950 $ 7,610 $ 492,400 $ (409,008) $ (113,078) $ (22,076)
--------- -------- ----------- ----------- ----------- -----------
--------- -------- ----------- ----------- ----------- -----------
See notes to financial statements.
F-7
LORECOM TECHNOLOGIES, INC.
(FORMERLY THE ALLIANCE GROUP, INC.)
STATEMENT OF CASH FLOWS
PERIOD FROM SEPTEMBER 4, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (113,078)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 1,978
Changes in current assets and liabilities:
Other current assets (1,933)
Other assets (20,498)
Accounts payable 32,464
Other current liabilities 98,296
-----------
Net cash used in operating activities (2,771)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (42,699)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 10
Proceeds from borrowings under line of credit 36,073
Payments on long-term debt (1,905)
Collections on stock subscription receivable 90,992
-----------
Net cash provided by financing activities 125,170
-----------
NET INCREASE IN CASH 79,700
CASH, beginning of period -
CASH, end of period $ 79,700
-----------
-----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 775
Common stock issued under stock subscription receivable $ 500,000
See notes to financial statements.
F-8
LORECOM TECHNOLOGIES, INC.
(FORMERLY THE ALLIANCE GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM SEPTEMBER 4, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION
LoreCom Technologies, Inc., formerly The Alliance Group, Inc., formerly
Advantage Business Solutions, Inc. (the "Company"), was incorporated on
September 4, 1998, under the laws of the State of Oklahoma. The Company
was formed solely for the purpose of identifying and acquiring
interconnect telecommunications companies.
At December 31, 1998, the Company has an accumulated deficit of $113,078
and a stockholders' deficiency of $22,076 that may raise concerns about
the Company's ability to continue as a going concern. The losses are due
to costs incurred prior to the Company earning any revenues. The
stockholders' deficiency is mainly due to the stock subscription
receivable (see Note 4 to the financial statements). Collections on such
subscription will help fund future costs of the Company. Subsequent to
December 31, 1998, the Company collected $284,000 on the stock
subscription receivable through March 18, 1999. In addition, a stockholder
has agreed to fund the Company's operations prior to commencement of
operations in exchange for a note payable. Management's plans to improve
the Company's financial position include plans for expansion by
acquisition (see Note 6 to the financial statements) and seeking large
telecommunication installation projects. In February 1999 the Company
obtained its first contract with a third party for maintenance of
telecommunications equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting period. Actual results could differ from
those estimates.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated
depreciation are removed from the respective accounts. Any gains or losses
resulting from disposal are included in current period income or loss.
Property and equipment owned by the Company are depreciated using the
straight-line method over their estimated useful lives of three to seven
years.
The Company records impairments to its long-lived assets when it becomes
probable that the carrying values of the assets will not be fully
recovered over their estimated lives. Impairments are recorded to reduce
the carrying value of the assets to their estimated fair values determined
by the Company based on facts and circumstances in existence at the time
of the determination. No impairments were recorded in 1998.
F-9
INCOME TAXES - The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences and operating loss and tax credit
carryforwards by applying enacted tax rates applicable to future years to
differences between the financial statement amounts and the tax bases of
existing assets and liabilities. At December 31, 1998, the Company has a
net operating loss carryforward of $113,078 and a related deferred tax
asset of approximately $34,000. A valuation allowance of approximately
$34,000 has been established based on management's opinion that it is more
likely than not that the deferred tax asset will not be realized.
ADVERTISING - Advertising costs incurred by the Company are expensed
during the period in which the advertising occurs.
FAIR VALUE DISCLOSURE - The Company's financial instruments include cash,
short-term payables, and notes payable. The carrying amounts of cash and
short-term payables approximate fair value due to their short-term nature.
The carrying amounts of notes payable approximate fair value based on
borrowing terms currently available to the Company.
3. LONG-TERM DEBT
The Company's long-term debt at December 31, 1998, consists of the
following:
Note payable to a bank, due in monthly principal and interest payments, interest
rate of 8.75%, secured by a vehicle, due in 2002 $ 34,168
Less current maturities 8,049
---------
Total long-term debt $ 26,119
---------
---------
Maturities of long-term debt for the next four years are as follows:
1999 - $8,049; 2000 - $8,782; 2001 - $9,583; and 2002 - $7,754.
4. STOCK SUBSCRIPTION RECEIVABLE
In 1998, the Company sold 475,950 shares of common stock to a director in
exchange for a stock subscription receivable of $500,000. Collections have
been made on the subscription as funds were needed to fund operations
during the initial start-up period of the Company. During 1998,
approximately $91,000 was collected. Through March 18, 1999, a total of
$375,000 was collected, and the remaining balance due was $125,000.
5. RELATED PARTY TRANSACTIONS
The Company has recorded a liability for rent and overhead allocations in
the amount of $18,296 to an entity wholly owned and operated by a major
stockholder of the Company.
The Company has recorded a non-interest bearing cash advance payable in
the amount of $80,000 to an entity wholly owned and operated by a major
stockholder of the Company. The advance was repaid in January 1999.
During 1998, a major stockholder of the Company assigned 4,760 shares of
his stock to an employee of
F-10
an entity owned and operated by the major stockholder. The employee
provided services to the Company which were invoiced to and expensed by
the Company in the amount of $10,397.
6. DEFERRED OFFERING COSTS
The Company and its stockholders have entered into definitive agreements
with 13 Oklahoma-based telecommunications companies (the "Entities")
pursuant to which the Company will purchase all of the issued and
outstanding common stock or assets of the Entities concurrently with, and
as a condition to, completion of a public or private offering of the
common stock of the Company. All of the issued and outstanding common
stock or assets of the Entities will be exchanged for cash and common
stock of the Company.
7. SUBSEQUENT EVENTS--CAPITAL STOCK
Subsequent to December 31, 1998, the stockholders effected an increase in
the number of authorized common shares from 1,000 to 4,500,000 and a stock
split that increased the issued and outstanding common shares from 267 to
760,950. The stockholders also authorized 500,000 shares of $.01 par value
preferred stock. These changes have been reflected in the Company's
financial statements on a retroactive basis as though they had been
effected on the date of inception of the Company.
Also subsequent to December 31, 1998, the Company's Chief Executive
Officer ("CEO") resigned his position and directorship of the Company.
Additionally, all 285,000 Shares of Company Stock owned by the CEO, as
adjusted for the stock split, were voluntarily cancelled. The shares
cancelled represented 32.5% of the total shares issued at that time. The
cancellation increased the percent of ownership of the remaining
shareholders incrementally.
8. SUBSEQUENT EVENT--COMPANY NAME CHANGE
In May 1999, the stockholders effected a change in the name of the
Company from The Alliance Group, Inc. (formerly Advantage Business
Solutions, Inc.) to LORECOM Technologies, Inc. This change has been
reflected in the Company's financial statements on a retroactive basis
as though it had been effected on the date of inception of the Company.
* * * * * *
F-11
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Access Communications Services, Inc.:
We have audited the accompanying balance sheet of Access Communications
Services, Inc. as of December 31, 1998, and the related statements of
operations, stockholders' equity, and cash flows for the year ended December
31, 1998. The financial statements as of December 31, 1997, and for the year
then ended, were audited by other auditors whose report expressed an
unqualified opinion on those financial statements. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on the 1998 financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 1998 financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 1998 financial statements present fairly, in all
material respects, the financial position of Access Communications Services,
Inc. at December 31, 1998, and the results of its operations and its cash
flows for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 28, 1999
F-12
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Access Communications Services, Inc.:
We have audited the accompanying balance sheet of Access Communications
Services, Inc. as of December 31, 1997, and the related statements of
operations, stockholders' equity, and cash flows for the year ended December
31, 1997. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on the 1997 financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 1997 financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 1997 financial statements present fairly, in all
material respects, the financial position of Access Communications Services,
Inc. at December 31, 1997, and the results of its operations and its cash
flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
/S/ SAXON & KNOL
Oklahoma City, Oklahoma
February 28, 1999
F-13
ACCESS COMMUNICATIONS SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash $ 187,464 $ 18,922
Accounts receivable 127,953 299,553
Inventory 51,820 38,220
Other current assets 3,864 1,590
----------- -----------
Total current assets 371,101 358,285
PROPERTY AND EQUIPMENT:
Autos and trucks 124,776 114,188
Equipment 69,524 34,744
Leasehold improvements 35,213 35,213
Real estate 15,198 15,198
----------- -----------
244,711 199,343
Less accumulated depreciation (101,667) (72,251)
----------- -----------
Property and equipment, net 143,044 127,092
----------- -----------
RECEIVABLE FROM STOCKHOLDERS 156,577 138,629
OTHER ASSETS 42,400 35,910
----------- -----------
TOTAL $ 713,122 $ 659,916
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable $ 191,484 $ 202,220
Deferred income taxes 29,700 -
Other current liabilities 49,895 33,537
Current portion of long-term debt 53,344 40,974
Current portion of capital lease obligations 20,130 11,151
----------- -----------
Total current liabilities 344,553 287,882
Long-term debt, net of current portion 109,680 54,645
Deferred income taxes - 29,700
Capital lease obligations 7,068 27,284
----------- -----------
Total liabilities 461,301 399,511
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 500 shares authorized,
issued and outstanding 500 500
Additional paid in-capital 168,950 168,950
Retained earnings 82,371 90,955
----------- -----------
Total stockholders' equity 251,821 260,405
----------- -----------
TOTAL $ 713,122 $ 659,916
----------- -----------
----------- -----------
See notes to financial statements.
F-14
ACCESS COMMUNICATIONS SERVICES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------
1998 1997
SALES $ 1,345,576 $ 1,447,155
COSTS AND EXPENSES:
Cost of sales 551,100 568,732
Salaries and benefits 523,127 502,620
Selling, general and administrative 234,004 243,562
Interest 47,444 28,641
------------ ------------
Total costs and expenses 1,355,675 1,343,555
------------ ------------
INCOME (LOSS) BEFORE TAXES (10,099) 103,600
INCOME TAX BENEFIT (EXPENSE) 1,515 (30,000)
------------ ------------
NET INCOME (LOSS) $ (8,584) $ 73,600
------------ ------------
------------ ------------
See notes to financial statements.
F-15
ACCESS COMMUNICATIONS SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------
ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
BALANCE,
January 1, 1997 500 $ 500 $ 168,950 $ 17,355 $ 186,805
Net income - - - 73,600 73,600
----- ----- ----------- --------- -----------
BALANCE,
December 31, 1997 500 500 168,950 90,955 260,405
Net loss - - - (8,584) (8,584)
----- ----- ----------- --------- -----------
BALANCE,
December 31, 1998 500 $ 500 $ 168,950 $ 82,371 $ 251,821
----- ----- ----------- --------- -----------
----- ----- ----------- --------- -----------
See notes to financial statements.
F-16
ACCESS COMMUNICATIONS SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (8,584) $ 73,600
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 27,594 29,459
Loss on sale of assets 4,185 -
Changes in current assets and liabilities:
Accounts receivable 171,600 (188,485)
Inventory (13,600) (7,500)
Other current assets (2,274) 3,244
Other assets (6,490) (1)
Accounts payable (10,736) 39,918
Other current liabilities 16,358 (3,642)
----------- -----------
Net cash provided by (used in) operating activities 178,053 (53,407)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (51,173) (46,991)
Proceeds from sale of property and equipment 3,442 -
Advances to stockholders (150,753) (178,833)
Repayment of receivable from stockholders 132,805 85,064
Collections of accounts receivable, other - 206,380
----------- -----------
Net cash provided by (used in) investing activities (65,679) 65,620
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 181,835 -
Payments on long-term borrowings and capital leases (125,667) (9,862)
----------- -----------
Net cash provided by (used in) financing activities 56,168 (9,862)
----------- -----------
NET INCREASE IN CASH 168,542 2,351
CASH, beginning of year 18,922 16,571
----------- -----------
CASH, end of year $ 187,464 $ 18,922
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 38,027 $ 24,485
Cash paid during the year for income taxes $ 29,503 $ 35,750
See notes to financial statements.
F-17
ACCESS COMMUNICATIONS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------
1. ORGANIZATION
Access Communications Services, Inc. (the "Company") was incorporated in
October 1986, under the laws of the State of Oklahoma. The Company sells,
installs and maintains telephone equipment in the state of Oklahoma market
area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting period. Actual results could differ from
those estimates.
CONCENTRATIONS - The Company currently buys most of its telephone
equipment from two manufacturers. Although there are a limited number of
manufacturers of telephone equipment, management believes that other
manufacturers could provide similar equipment on comparable terms. A
change in manufacturers, however, could cause a possible loss of sales,
which would affect operating results adversely.
REVENUE RECOGNITION - Revenue is recognized when equipment is installed or
when maintenance services are rendered. The Company recognizes deferred
revenues for advance payment on agreements to maintain customer telephone
equipment. The deferred revenues are recognized as revenue over the period
the services are provided, which is generally 12 months. Deferred revenues
are not significant as of December 31, 1998 and 1997.
ACCOUNTS RECEIVABLE - Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to
the allowance for doubtful accounts; recoveries of previously written off
amounts are added back to the allowance for doubtful accounts. No
allowances have been established at December 31, 1998 and 1997 as
management believes no material losses will be incurred from receivables.
INVENTORY - Inventory is stated at the lower of cost or market on a
specific identification basis. Cost is determined on a first-in, first-out
method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated
depreciation are removed from the respective accounts. Any gains or losses
resulting from disposal are included in current year operations.
F-18
Property and equipment owned by the Company are depreciated using an
accelerated method over their estimated useful lives of three to seven
years.
INCOME TAXES - The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences and operating loss and tax credit
carryforwards by applying enacted tax rates applicable to future years to
differences between the financial statement amounts and the tax bases of
existing assets and liabilities. A valuation allowance is established if,
in management's opinion, it is more likely than not that some portion of
the deferred tax asset will not be realized. At December 31, 1998 and
1997, the Company's temporary differences between financial and tax bases
of assets and liabilities consist primarily of timing differences in the
recognition of gain from sale of an asset in a prior period.
PRODUCT RETURNS AND WARRANTY - Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period
is returned by the Company to the manufacturer in exchange for replacement
product or refund.
LONG-LIVED ASSETS - Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. Recoverability
is assessed and measured on long-lived assets using an estimate of the
undiscounted future cash flows attributable to the asset. Impairment is
measured based on future cash flows discounted at an appropriate rate.
ADVERTISING - Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
FAIR VALUE DISCLOSURE - The Company's financial instruments include cash
and cash equivalents, accounts receivable, receivables from stockholders,
short-term payables, capital lease obligations, and notes payable. The
carrying amounts of cash and cash equivalents, accounts receivable, and
short-term payables approximate fair value due to their short-term nature.
The carrying amounts of receivables from stockholders do not have readily
determinable fair values due to the related party nature of the
transaction (see Note 8). The carrying amounts of capital lease
obligations and notes payable approximate fair value based on borrowing
terms currently available to the Company.
3. OPERATING LEASES
The Company has noncancelable operating leases for equipment and a
noncancelable operating lease with a stockholder for its office space. The
future minimum payments by year for these leases at December 31, 1998, are
as follows:
1999 $ 49,223
2000 48,000
----------
$ 97,223
----------
----------
F-19
4. LONG-TERM DEBT
The Company's long-term debt at December 31, 1998 and 1997, consisted
of the following:
1998 1997
Note payable to bank, due in monthly principal and interest payments;
interest rate of 10.6%; maturing in 2002; secured by all furniture,
fixtures, inventory, equipment, accounts receivable, and 50,000 shares
of Zenex Long Distance, Inc. separately owned by shareholders of the
Company $ 86,949 $ 52,445
Note payable to bank, due in monthly principal and interest payments;
interest rate of 10.6%; maturing in 1999; secured by all furniture,
fixtures, inventory, equipment, accounts receivable, 50,000 shares of
Clear-Line Communications, Inc., and 20,000 shares of Zenex Long
Distance Co., Inc. separately owned by stockholders of the Company 46,533 -
Note payable to credit union, due in monthly principal and interest
payments; interest rate of 8.5%; maturing in 2000; secured by vehicle 9,171 14,537
Note payable to bank, due in monthly principal and interest payments;
interest rate of 10.4%; maturing in 2001; secured by vehicle 8,997 12,174
Note payable to bank, due in monthly principal and interest payments;
interest rate of 9.2%; maturing in 2001; secured by vehicle 6,505 9,213
Note payable to a related party, due on demand, non interest-bearing,
unsecured; settled in 1998 through offset with related party receivable - 7,250
Note payable to bank, due in monthly principal and interest payments;
interest rate of 9.7%; maturing in 2000; secured by vehicle 4,869 -
----------- ---------
163,024 95,619
Less current maturities 53,344 40,974
----------- ---------
Total long-term debt $ 109,680 $ 54,645
----------- ---------
----------- ---------
F-20
5. CAPITAL LEASES
Future minimum lease payment obligations for leased assets under capital
leases as of December 31, 1998 are as follows:
1999 $ 20,746
2000 7,120
--------
Total minimum lease payments 27,866
Less amount representing interest 668
--------
Present value of minimum lease payments 27,198
Less current portion 20,130
--------
Long-term portion $ 7,068
--------
--------
6. INCOME TAXES
The income tax provision benefit (expense) consists of the following:
1998 1997
Current benefit (expense) $ 1,515 $ (24,136)
Deferred (expense) - (5,864)
------- ----------
$ 1,515 $ (30,000)
------- ----------
------- ----------
The difference between the statutory Federal income tax rate of 34% and
the Company's effective Federal rate for the years ended December 31, 1998
and 1997, is due to state taxes and the effect of graduated tax rates.
Deferred tax liabilities at December 31, 1998 and 1997, consist of timing
differences in the recognition of gain from sale of an asset in a prior
period.
7. BENEFIT PLAN
All employees are eligible to participate in the Company's simple 401(k)
plan upon completion of one year of employment. Employees may contribute
up to 15% of base compensation, as defined. All contributions made by
employees are 100% vested at the time the contribution is made. The
Company matches 100% of employee contributions up to 3% of the employee's
base compensation. The Company made contributions totaling $9,470 and
$9,602 during the years ended December 31, 1998 and 1997.
8. MAJOR CUSTOMERS
The Company has an account receivable from an individual customer that
amounts to 16% of the Company's total accounts receivable at December 31,
1998.
9. RELATED PARTY TRANSACTIONS
F-21
The Company has an investment in Zenex Long Distance, Inc. ("Zenex"), an
affiliate of the Company, of $35,550 at December 31, 1998 and 1997. The
investment is recorded at cost. The Company provides services and sells
equipment to Zenex. Amounts billed by the Company for sales and services
during the years ended December 31, 1998 and 1997, totaled $108,375 and
$204,000, respectively.
The Company has receivables of $156,577 and $138,629 at December 31, 1998
and 1997, respectively, from stockholders. The receivables are non
interest-bearing and unsecured. The Company advanced $150,753 and $178,833
during the years ended December 31, 1998 and 1997, respectively, of which
$132,805 and $85,064 was repaid in 1998 and 1997, respectively (see Note 9
to the financial statements).
During the year ended December 31, 1998, the Company borrowed $78,000 from
an affiliated company. Interest paid during the year totaled $13,000. The
amount was repaid in full during the year.
The Company leases office space from an entity controlled by stockholders
of the Company. Lease payments to this affiliated company were $48,000
during each of the years ended December 31, 1998 and 1997.
10. SUBSEQUENT EVENTS
The Company and its stockholders have entered into a definitive agreement
with Alliance ("Alliance") pursuant to which the Company will be
purchased by Alliance. All of the issued and outstanding common stock of
the Company will be exchanged for cash and common stock of Alliance in
conjunction with the consummation of the initial public offering of the
common stock of Alliance.
In March 1999, the Company exchanged all of its shares of Zenex common
stock for office furniture and equipment from Zenex equal to the Company's
investment in Zenex. No gain or loss was recognized by the Company.
In March 1999, the Company exchanged the receivable from stockholders for
shares of the Company's common stock. The purchase price for the shares of
stock was determined by management to equal the amount receivable by the
Company from stockholders on the transaction date. The transaction
resulted in the elimination of the receivable from stockholders, and the
shares obtained by the Company were retired.
* * * * * *
F-22
INDEPENDENT AUDITORS' REPORT
To the Stockholders
American Telcom, Inc.:
We have audited the accompanying balance sheet of American Telcom, Inc. as of
December 31, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 1998. The financial
statements as of December 31, 1997, and for the year then ended, were audited
by other auditors whose report expressed an unqualified opinion on those
financial statements. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on the
1998 financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 1998 financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 1998 financial statements present fairly, in all
material respects, the financial position of American Telcom, Inc. at
December 31, 1998, and the results of its operations and its cash flows for
the year ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 19, 1999
F-23
INDEPENDENT AUDITORS' REPORT
To the Stockholders
American Telcom, Inc.:
We have audited the accompanying balance sheet of American Telcom, Inc. as of
December 31, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 1997. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on the 1997 financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 1997 financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 1997 financial statements present fairly, in all
material respects, the financial position of American Telcom, Inc. at
December 31, 1997, and the results of its operations and its cash flows for
the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ SAXON & KNOL
Oklahoma City, Oklahoma
February 19, 1999
F-24
AMERICAN TELCOM, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash $ 82,545 $ 32,428
Accounts receivable, net 230,324 101,645
Inventory 25,484 29,886
Other current assets 2,800 2,800
---------- -----------
Total current assets 341,153 166,759
PROPERTY AND EQUIPMENT:
Autos and trucks 138,258 97,585
Fixtures and equipment 15,327 15,327
---------- -----------
153,585 112,912
Less accumulated depreciation (77,926) (65,211)
---------- -----------
Property and equipment, net 75,659 47,701
---------- -----------
TOTAL $ 416,812 $ 214,460
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable $ 50,751 $ 19,680
Accrued compensation 36,849 32,577
Current portion of long-term debt 66,827 25,158
Other current liabilities 50,502 4,216
---------- ----------
Total current liabilities 204,929 81,631
Long-term debt, net of current portion - 6,574
---------- ----------
Total liabilities 204,929 88,205
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 50,000 shares authorized,
1,000 shares issued and outstanding 1,000 1,000
Additional paid in-capital 31,902 31,902
Retained earnings 178,981 93,353
---------- ----------
Total stockholders' equity 211,883 126,255
---------- ----------
TOTAL $ 416,812 $ 214,460
---------- -----------
---------- -----------
See notes to financial statements.
F-25
AMERICAN TELCOM, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------
1998 1997
NET SALES $ 1,168,070 $ 901,883
COSTS AND EXPENSES:
Cost of sales 482,278 432,099
Salaries and benefits 365,055 314,712
Selling, general and administrative 200,126 220,183
Interest 3,028 2,161
------------ -----------
Total costs and expenses 1,050,487 969,155
------------ -----------
INCOME (LOSS) BEFORE TAXES 117,583 (67,272)
INCOME TAX (EXPENSE) BENEFIT (31,955) 11,818
------------ -----------
NET INCOME (LOSS) $ 85,628 $ (55,454)
------------ -----------
------------ -----------
See notes to financial statements.
F-26
AMERICAN TELCOM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------
ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
BALANCE,
January 1, 1997 1,000 $ 1,000 $ 31,902 $ 148,807 $ 181,709
Net loss - - - (55,454) (55,454)
------- -------- -------- ----------- -----------
BALANCE,
December 31, 1997 1,000 1,000 31,902 93,353 126,255
Net income - - - 85,628 85,628
------- -------- -------- ----------- -----------
BALANCE,
December 31, 1998 1,000 $ 1,000 $ 31,902 $ 178,981 $ 211,883
------- -------- -------- ----------- -----------
------- -------- -------- ----------- -----------
See notes to financial statements.
F-27
AMERICAN TELCOM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 85,628 $ (55,454)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 18,802 23,466
(Gain) loss on sale of assets (8,516) -
Changes in current assets and liabilities:
Accounts receivable (128,679) (7,464)
Inventory 4,402 (897)
Other current assets - 14,221
Accounts payable 31,071 (49,263)
Accrued compensation 4,272 (2,800)
Other current liabilities 46,286 10,928
----------- ----------
Net cash provided by (used in) operating activities 53,266 (67,263)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (66,742) (11,050)
Proceeds from sale of property and equipment 28,498 -
----------- ----------
Net cash used in investing activities (38,244) (11,050)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on long-term debt 83,733 32,076
Payments on long-term borrowings (48,638) (344)
----------- ----------
Net cash provided by financing activities 35,095 31,732
----------- ----------
NET INCREASE (DECREASE) IN CASH 50,117 (46,581)
CASH, beginning of year 32,428 79,009
----------- ----------
CASH, end of year $ 82,545 $ 32,428
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,532 $ 2,104
Cash paid during the year for income taxes $ - $ 18,628
See notes to financial statements.
F-28
AMERICAN TELCOM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------
1. ORGANIZATION
American Telcom, Inc. (the "Company") was incorporated in January 1987,
under the laws of the State of Oklahoma. The Company sells, installs and
maintains telephone equipment in the greater Oklahoma City area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting period. Actual results could differ from
those estimates.
CONCENTRATIONS - The Company currently buys most of its telephone
equipment from one manufacturer. Although there are a limited number of
manufacturers of telephone equipment, management believes that other
manufacturers could provide similar equipment on comparable terms. A
change in manufacturers, however, could cause a possible loss of sales,
which would affect operating results adversely.
REVENUE RECOGNITION - Revenue is recognized when equipment is installed or
when maintenance services are rendered. The Company defers revenues on
prepaid agreements to maintain customer telephone equipment. The deferred
revenues are recognized as revenue over the period the services are
provided, which is generally 12 months. Deferred revenues are not
significant as of December 31, 1998 and 1997.
ACCOUNTS RECEIVABLE - Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to
the allowance for doubtful accounts; recoveries of previously written off
amounts are added back to the allowance for doubtful accounts.
INVENTORY - Inventory is stated at the lower of cost or market on a
specific identification basis. Cost is determined on a first-in, first-out
method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated
depreciation are removed from the respective accounts. Any gains or losses
resulting from disposal are included in current year operations.
Property and equipment owned by the Company are depreciated using an
accelerated method over three to seven years.
F-29
INCOME TAXES - The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences and operating loss and tax credit
carryforwards by applying enacted tax rates applicable to future years to
differences between the financial statement amounts and the tax bases of
existing assets and liabilities. A valuation allowance is established if,
in management's opinion, it is more likely than not that some portion of
the deferred tax asset will not be realized. As of December 31, 1998, the
Company's temporary differences between financial and tax bases of assets
and liabilities are not material, and no deferred income taxes have been
recognized.
PRODUCT RETURNS AND WARRANTY - Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period
is returned by the Company to the manufacturer in exchange for replacement
product or refund.
LONG-LIVED ASSETS - Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. Recoverability
is assessed and measured on long-lived assets using an estimate of the
undiscounted future cash flows attributable to the asset. Impairment is
measured based on future cash flows discounted at an appropriate rate.
ADVERTISING - Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
FAIR VALUE DISCLOSURE - The Company's financial instruments include cash
and cash equivalents, receivables, short-term payables, and notes payable.
The carrying amounts of cash and cash equivalents, receivables, and
short-term payables approximate fair value due to their short-term nature.
The carrying amounts of notes payable approximate fair value based on
borrowing terms currently available to the Company.
3. OPERATING LEASES
The Company has a noncancelable operating lease for its office space with
a related party. The Company expensed and paid $37,060 and $13,850 for
rent during the years ended December 31, 1998 and 1997, respectively. The
future minimum payments by year at December 31, 1998, are as follows:
1999 $ 33,060
2000 33,060
2001 33,060
--------
$ 99,180
--------
--------
F-30
4. LONG-TERM DEBT
The Company's long-term debt at December 31, 1998 and 1997, consisted of
the following:
1998 1997
Promissory note, balloon payment of principal and interest, interest
rate of 8%, due in February 1999, secured by vehicles. $ 66,827 $ -
Promissory note, due in monthly principal and interest payments,
interest rate of 7.5%, secured by vehicle. - 10,707
Promissory note, due in monthly principal and interest payments,
interest rate of 8%, secured by vehicle and personal guaranties from
Company owners. - 21,025
-------- --------
66,827 31,732
Less current maturities 66,827 25,158
-------- --------
Total long-term debt $ - $ 6,574
-------- --------
-------- --------
5. INCOME TAXES
The income tax provision consists of the following:
1998 1997
Federal income tax (expense) benefit $ (29,107) $ 11,818
State income taxes, net of federal benefit (2,848) -
---------- --------
$ (31,955) $ 11,818
---------- --------
---------- --------
The difference between the statutory Federal income tax rate of 34% and
the Company's effective Federal rate for the years ended December 31, 1998
and 1997, is due to state taxes and the effect of graduated tax rates.
6. BENEFIT PLAN
All employees are eligible to participate in the Company's defined
contribution plan upon completion of two years of employment and reaching
the age of 21. Employees may contribute up to 15% of base compensation, as
defined. All contributions made by employees are 100% vested at the time
the contribution is made. Contributions by the Company are made at the
discretion of management. No contributions were made by the Company during
the years ended December 31, 1998 and 1997.
7. MAJOR CUSTOMERS
Sales to the Company's largest customer amounted to approximately 10% of
net sales for fiscal year 1998. No individual customer in 1997 accounted
for net sales in excess of 10%. The Company has accounts receivable from
two customers that amount to 20% and 36% of the Company's total accounts
receivable at December 31, 1998.
F-31
8. RELATED PARTY TRANSACTIONS
The Company has recorded a liability to its president and 50% stockholder
of $26,977 at December 31, 1998 and 1997, representing unpaid accrued
compensation.
The Company made rent payments of $37,060 and $13,850 during the years
ended December 31, 1998 and 1997, respectively, for office space to an
entity owned and operated 100% by the owners of the Company.
9. SUBSEQUENT EVENTS
The Company and its stockholders have entered into a definitive agreement
with The Alliance Group ("Alliance") pursuant to which the Company will
be purchased by Alliance. All outstanding shares of the Company will be
exchanged for cash and common stock of Alliance in conjunction with the
consummation of the initial public offering of the common stock of
Alliance.
In February 1999, the Company made a payment of $40,000 on a promissory
note with a bank having a balance totaling $66,827 at December 31, 1998.
The note terms required a balloon payment for the total amount plus
accrued interest in February 1999. The bank extended the due date for the
remaining unpaid amount plus accrued interest and fees until May 1999. All
other note terms remained unchanged.
* * * * * *
F-32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Banner Communications, Inc.:
We have audited the accompanying balance sheet of Banner Communications, Inc.
as of December 31, 1998, and the related statements of earnings,
stockholders' equity, and cash flows for the year ended December 31, 1998.
The financial statements as of December 31, 1997, and for the year then
ended, were audited by other auditors whose report expressed an unqualified
opinion on those financial statements. These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on the 1998 financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 1998 financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 1998 financial statements present fairly, in all
material respects, the financial position of Banner Communications, Inc. at
December 31, 1998, and the results of its operations and its cash flows for
the year ended December 31, 1998, in conformity with generally accepted
accounting principles.
/S/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 28, 1999
F-33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Banner Communications, Inc.:
We have audited the accompanying balance sheet of Banner Communications, Inc.
as of December 31, 1997, and the related statements of earnings,
stockholders' equity, and cash flows for the year ended December 31, 1997.
These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on the 1997 financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 1997 financial statements present fairly, in all
material respects, the financial position of Banner Communications, Inc. at
December 31, 1997, and the results of its operations and its cash flows for
the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
/S/ SAXON & KNOL
Oklahoma City, Oklahoma
February 28, 1999
F-34
BANNER COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash $ 13,486 $ 24,796
Accounts receivable 148,033 101,305
Inventory 68,939 77,094
----------- -----------
Total current assets 230,458 203,195
PROPERTY AND EQUIPMENT:
Autos and trucks 160,053 125,060
Fixtures and equipment 58,651 50,384
----------- -----------
218,704 175,444
Less accumulated depreciation (139,564) (121,905)
----------- -----------
Property and equipment, net 79,140 53,539
----------- -----------
TOTAL $ 309,598 $ 256,734
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Current portion of long-term debt $ 20,073 $ 17,644
Line of credit 30,000 -
Accounts payable 68,432 61,180
Other current liabilities 32,646 5,408
----------- -----------
Total current liabilities 151,151 84,232
Long-term debt, net of current portion 44,807 25,435
----------- -----------
Total liabilities 195,958 109,667
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 10,000 shares authorized,
500 shares issued and outstanding 500 500
Retained earnings 113,140 146,567
----------- -----------
Total stockholders' equity 113,640 147,067
----------- -----------
TOTAL $ 309,598 $ 256,734
----------- -----------
----------- -----------
See notes to financial statements.
F-35
BANNER COMMUNICATIONS, INC.
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
1998 1997
NET SALES $ 1,548,874 $ 1,314,544
COSTS AND EXPENSES:
Cost of sales 827,098 610,731
Salaries and benefits 452,068 395,251
Selling, general and administrative expenses 216,801 182,200
Interest expense 6,689 6,624
------------ ------------
Total costs and expenses 1,502,656 1,194,806
------------ ------------
NET INCOME $ 46,218 $ 119,738
------------ ------------
------------ ------------
See notes to financial statements.
F-36
BANNER COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
COMMON COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
BALANCE, January 1, 1997 500 $ 500 $ 50,355 $ 50,855
Dividends to stockholders (23,526) (23,526)
Net income - - 119,738 119,738
----- ------ ----------- -----------
BALANCE, December 31, 1997 500 500 146,567 147,067
Dividends to stockholders (79,645) (79,645)
Net income - - 46,218 46,218
----- ------ ----------- -----------
BALANCE, December 31, 1998 500 $ 500 $ 113,140 $ 113,640
----- ------ ----------- -----------
----- ------ ----------- -----------
See notes to financial statements.
F-37
BANNER COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,218 $ 119,738
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 28,837 15,435
Changes in current assets and liabilities:
Accounts receivable (46,728) (22,695)
Inventory 8,155 (2,313)
Accounts payable 7,252 (12,022)
Other current liabilities 27,238 (23,413)
---------- ----------
Net cash provided by operating activities 70,972 74,730
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (10,267) (2,608)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (79,645) (23,526)
Proceeds from borrowings under line of credit 30,000 -
Payments on long-term debt (22,370) (20,861)
---------- ----------
Net cash used in financing activities (72,015) (44,387)
---------- ----------
NET (DECREASE) INCREASE IN CASH (11,310) 27,735
CASH, beginning of year 24,796 (2,939)
---------- ----------
CASH, end of year $ 13,486 $ 24,796
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 6,689 $ 6,688
Purchase of property and equipment through borrowings $ 44,171 $ -
See notes to financial statements.
F-38
BANNER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
Banner Communications, Inc. (the "Company") was incorporated in January
1987, under the laws of the State of Oklahoma. The Company sells, installs
and maintains telephone equipment for commercial customers in the greater
Tulsa, Oklahoma market area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting period. Actual results could differ from
those estimates.
CONCENTRATIONS - The Company currently buys most of its telephone
equipment from three manufacturers. Although there are a limited number of
manufacturers of telephone equipment, management believes that other
manufacturers could provide similar equipment on comparable terms. A
change in manufacturers, however, could cause a possible loss of sales,
which would affect operating results adversely.
REVENUE RECOGNITION - Revenue is recognized when equipment is installed or
when maintenance services are rendered. The Company defers revenues for
deposits and advance payments received from customers prior to
installation. Such amounts are immaterial and are included in other
current liabilities in the accompanying financial statements.
ACCOUNTS RECEIVABLE - Allowances for doubtful accounts receivable are
established based on historical losses, experience and knowledge of
specific items. No allowances have been established at December 31, 1998
and 1997 as management believes no material losses will be incurred from
receivables.
INVENTORY - Inventory is stated at the lower of cost (first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated
depreciation are removed from the respective accounts. Any gains or losses
resulting from disposal are included in current year income or loss.
Property and equipment owned by the Company are depreciated using
accelerated methods over their estimated useful lives of three to five
years.
LONG-LIVED ASSETS - Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. Recoverability
is assessed and measured on long-lived assets using an estimate of the
undiscounted future cash flows attributable to the asset. Impairment is
measured based on future cash
F-39
flows discounted at an appropriate rate.
INCOME TAXES - The stockholders of the Company have elected to be taxed as
an S corporation under provisions of the Internal Revenue Code. The items
of income, credit, deduction and loss of the Company pass through to the
stockholders and are includable in their personal income tax returns.
Accordingly, the accompanying financial statements do not reflect a
provision or benefit for income taxes nor deferred tax assets and
liabilities.
Under federal income tax laws, regulations and administrative rulings,
certain types of transactions may be accorded varying interpretations.
Accordingly, the Company's financial statements and tax returns, as well
as the individual tax returns of the stockholders, may be changed to
conform as a result of a review by the Internal Revenue Service.
No such review is presently in process.
PRODUCT RETURNS AND WARRANTY - Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period
is returned by the Company to the manufacturer in exchange for replacement
product or refund.
ADVERTISING - Advertising costs incurred by the Company are expensed
during the period in which the advertising occurs.
FAIR VALUE DISCLOSURE - The Company's financial instruments include cash,
receivables, short-term payables, notes payable and borrowings under its
line of credit. The carrying amounts of cash, receivables, and short-term
payables approximate fair value due to their short-term nature. The
carrying amounts of notes payable and borrowings under line of credit
approximate fair value based on borrowing terms currently available to the
Company.
3. DEBT
The Company's long-term debt at December 31, 1998 and 1997, consist of the
following:
1998 1997
Notes payable to bank, due in monthly principal and interest payments,
interest rates of 8.5% to 8.95%, maturing in 2002 and 2003, secured by
vehicles $ 39,708 $ -
Note payable to bank, due in monthly principal and interest payments, interest rate
of 9.25%, maturing in December 2001, secured by vehicle 11,291 14,412
Note payable to bank, due in monthly principal and interest payments, interest rate
of 8.75%, maturing in November 2000, secured by vehicle 10,543 15,166
Notes payable to banks, due in monthly principal and interest payments,
interest rates of 8.25 to 10.25%, maturing in July and August 1999,
secured by vehicles 3,338 9,661
Other - 3,840
-------- --------
64,880 43,079
Less current portion of long-term debt 20,073 17,644
-------- --------
Long-term debt $ 44,807 $ 25,435
-------- --------
-------- --------
F-40
The Company also has $30,000 outstanding at December 31, 1998 under its
line of credit agreement with a bank. The agreement permits advances up to
$50,000, with interest at Chase Bank Prime plus 1.5% (9.25% at December
31, 1998) and expires March 4, 1999; however, management expects renewal
of the agreement under similar terms. The agreement is collateralized by
accounts receivable, inventory and equipment of the Company.
Maturities of long-term debt and borrowings under the line of credit for
the next five years are as follows: 1999 - $50,073; 2000 - $17,870;
2001 - $14,002; 2002 - $8,149; 2003 - $4,786.
4. LEASES
The Company leases its office space under an operating lease with annual
rentals of $17,776. The lease expired in 1998 and is currently
month-to-month.
5. RETIREMENT PLAN
The Company sponsors a defined contribution plan covering employees who
meet minimum age requirements. Employees may elect to contribute up to 15%
of their eligible compensation. Contributions by the Company are made at
the discretion of management.
The Company made contributions to the plan totaling $9,037 and $10,028 in
1998 and 1997, respectively.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in suits and claims incidental to its business. In
the opinion of management, the outcome of such matters will not have a
material adverse effect on the Company's business, financial position, or
results of operations.
7. SUBSEQUENT EVENT
The Company and its stockholders have entered into a definitive agreement
with The Alliance Group ("Alliance") pursuant to which the Company will
be purchased by Alliance. All of the issued and outstanding common stock
of the Company will be exchanged for cash and common stock of Alliance in
conjunction with the consummation of the initial public offering of the
common stock of Alliance.
* * * * * *
F-41
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Commercial Telecom Systems, Inc.:
We have audited the accompanying balance sheets of Commercial Telecom Systems,
Inc. as of December 31, 1998 and 1997, and the related statements of earnings,
stockholders' equity, and cash flows for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Commercial Telecom Systems, Inc. as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ HUNTER, ATKINS & RUSSELL, PLC
February 18, 1999
F-42
COMMERCIAL TELECOM SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash $ 54,532 $ 18,667
Accounts receivable 72,080 131,811
Inventory 90,902 73,097
-------- --------
Total current assets 217,514 223,575
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Autos and trucks 58,055 58,055
Fixtures and equipment 39,451 39,451
Furniture and fixtures 976 976
Leasehold improvements 1,552 1,552
-------- --------
100,034 100,034
Less accumulated depreciation (85,191) (77,970)
-------- --------
Property and equipment, net 14,843 22,064
-------- --------
OTHER ASSETS 610 610
-------- --------
TOTAL $232,967 $246,249
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $137,590 $ 74,865
Deferred maintenance contracts 64,568 49,042
Other current liabilities 94,773 20,309
Notes payable, current portion 4,044 81,723
-------- --------
Total current liabilities 300,975 225,939
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 7,348 11,393
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 1,000 shares authorized
and outstanding 1,000 1,000
Treasury stock (4,924) (4,924)
Retained earnings (71,432) 12,841
-------- --------
Total stockholders' equity (75,356) 8,917
-------- --------
TOTAL $232,967 $246,249
-------- --------
-------- --------
See notes to financial statements.
F-43
COMMERCIAL TELECOM SYSTEMS, INC.
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------
1998 1997
SALES $1,437,932 $1,233,316
COSTS AND EXPENSES:
Cost of sales 704,506 631,028
Salaries and benefits 386,413 394,632
Selling, general and administrative expenses 133,253 126,167
Interest expense 5,099 6,316
---------- ----------
Total costs and expenses 1,229,271 1,158,143
---------- ----------
INCOME BEFORE TAXES ON INCOME 208,661 75,173
INCOME TAX EXPENSE (76,316) (11,201)
---------- ----------
NET INCOME $ 132,345 $ 63,972
---------- ----------
---------- ----------
See notes to financial statements.
F-44
COMMERCIAL TELECOM SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------
COMMON COMMON TREASURY RETAINED
SHARES STOCK STOCK EARNINGS TOTAL
BALANCE, January 1, 1997 1,000 $1,000 $(4,924) $ 24,903 $ 20,979
Net income 63,972 63,972
Dividends paid - - - (76,034) (76,034)
----- ------ ------- -------- --------
BALANCE, December 31, 1997 1,000 1,000 (4,924) 12,841 8,917
Net income 132,345 132,345
Dividends paid - - - (216,618) (216,618)
----- ------ ------- -------- --------
BALANCE, December 31, 1998 1,000 $1,000 $(4,924) $(71,432) $(75,356)
----- ------ ------- -------- --------
----- ------ ------- -------- --------
See notes to financial statements.
F-45
COMMERCIAL TELECOM SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 132,345 $ 63,972
Adjustments to reconcile net income to net cash
provided by operations-
Depreciation 10,121 9,485
Gain on disposal of property (2,900) -
Changes in current assets and liabilities:
Accounts receivable 59,731 40,176
Inventory (17,805) -
Accounts payable 62,725 (40,181)
Deferred maintenance contracts 15,526 (14,999)
Other current liabilities 74,464 15,870
---------- ----------
Net cash provided by operating activities 334,207 74,323
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (21,556)
---------- ----------
Net cash used in investing activities - (21,556)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 100,900 359,834
Payments on long-term debt (182,624) (345,747)
Dividends paid (216,618) (76,034)
---------- ----------
Net cash used in financing activities (298,342) (61,947)
---------- ----------
NET INCREASE (DECREASE) IN CASH 35,865 (9,180)
CASH, beginning of year 18,667 27,847
---------- ----------
CASH, end of year $ 54,532 $ 18,667
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 5,099 $ 6,297
Cash paid during the year for income taxes $ - $ 3,976
See notes to financial statements.
F-46
COMMERCIAL TELECOM SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------
1. ORGANIZATION
Commercial Telecom Systems, Inc. (the "Company") was incorporated in
December 1988, under the laws of the State of Oklahoma. The Company
sells, installs and maintains telephone equipment in the state of
Oklahoma.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The financial statements are prepared using the
accrual basis of accounting. Revenues are recognized when earned and
expenses are recognized when a liability is incurred.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS - For purposes of the Statements of Cash
Flows, the Company considers all highly liquid investments with an
original maturity of three months or less to be a cash equivalent.
ACCOUNTS RECEIVABLE - Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge
to the allowance for doubtful accounts; recoveries of previously written
off amounts are added back to the allowance for doubtful accounts.
INVENTORY - Inventory is stated at the lower of cost or market on the
first in, first out basis.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Major additions and improvements are capitalized at cost, while
maintenance and repairs which do not extend the useful lives of the
respective assets are expensed. When assets are sold or retired, cost
and accumulated depreciation are removed from the respective accounts.
Any gains or losses resulting from disposal are included in current year
income or loss. For the years ending December 31, 1998 and 1997 the
Company had $-0- and $21,556 of additions to property and equipment,
respectively.
Property and equipment owned by the Company are depreciated using the
straight-line method over the following useful lives: Autos and trucks
-3 to 7 years; fixtures and equipment - 5 to 7 years; furniture and
fixtures - 5 to 7 years; and leasehold improvements - 5 to 20 years.
Depreciation expense for the years ending December 31, 1998 and 1997 was
$10,121 and $9,485, respectively.
F-47
DEFERRED MAINTENANCE AGREEMENTS - The Company recognizes deferred
revenues for advance payment on agreements to maintain customer
telephone equipment. The deferred revenues are recorded as income in the
period the services are provided, which is generally twelve months.
INCOME TAXES - Temporary differences between financial and tax bases of
assets and liabilities are not material. Accordingly, no deferred income
taxes have been presented.
TREASURY STOCK - Stock held as treasury stock is stated at cost.
ERROR CORRECTIONS - Certain errors resulting in an over and
understatement of balance sheet accounts occurred in calendar year 1996.
These errors resulted in an adjustment of $3,327 to retained earnings
for the year ending December 31, 1997.
PRODUCT RETURNS AND WARRANTY - Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty
period is returned by the Company to the manufacturer in exchange for
replacement product or refund.
IMPAIRMENT - Asset impairments are recorded when events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. Impairment is assessed and measured on long-lived assets
using an estimate of the undiscounted future cash flows.
ADVERTISING - Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
3. OPERATING LEASES
The Company has an operating lease for its office space. The future
minimum payments by year at December 31, 1998, are as follows:
1999 $6,825
The lease expires July 31, 1999 and has monthly payments of $975. There
is no imputed interest or current maturities associated with this lease.
4. LONG-TERM DEBT
The Company's long-term debt at December 31, 1998 and 1997, consisted of
the following:
1998 1997
Note payable to a bank, due July 1, 2001, carrying an interest
rate of 9.5% with monthly payments of $413. The loan was for
the purchase of a vehicle that was capitalized at $20,050. $11,392 $16,491
Less current maturities (4,044) (5,098)
------- -------
Long-term portion $ 7,348 $11,393
------- -------
------- -------
F-48
Maturities of long-term debt for years subsequent to December 31, 1998 are:
1999 - $4,044; 2000 - $4,445; 2001 - $2,903.
The Company has a line of credit with a local commercial bank. This line
of credit matures March of each year. The line of credit is for $75,000
and carries an interest rate of 2% of Chase Manhattan prime. As of
December 31, 1998 the Company did not owe any monies on this line of
credit. As of December 31, 1997 the Company owed $64,973. This
obligation is secured by bank accounts, inventory, furniture, fixtures,
equipment and the personal guarantee of the majority stockholder.
5. INCOME TAXES
The Company has accrued liabilities for federal and state income taxes
as follows:
1998 1997
------- -------
Federal $63,907 $ 8,625
State 12,409 2,576
------- -------
$76,316 $11,201
------- -------
------- -------
The Company has also accrued estimates as to the penalties and interest
owed on the above obligations. Total penalties and interest accrued for
both federal and state is $15,801.
6. SUBSEQUENT EVENT
The Company and its stockholders have entered into a definitive
agreement with The Alliance Group ("Alliance") pursuant to which the
Company will be purchased by Alliance. All outstanding shares of the
Company will be exchanged for cash and common stock of Alliance in
conjunction with the consummation of the initial public offering of the
common stock of Alliance.
* * * * * *
F-49
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
Communication Services, Inc.:
We have audited the accompanying balance sheet of Communication Services,
Inc. as of December 31, 1998, and the related statements of operations,
stockholder's equity, and cash flows for the year ended December 31, 1998.
These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Communication Services, Inc. at December
31, 1998, and the results of its operations and its cash flows for the year
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/S/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
March 9, 1999
F-50
COMMUNICATION SERVICES, INC.
BALANCE SHEET
DECEMBER 31, 1998
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 26,440
Accounts receivable, net of allowance for doubtful accounts of $42,000 98,354
Inventory 32,482
----------
Total current assets 157,276
PROPERTY AND EQUIPMENT:
Vehicles 76,140
Equipment 26,689
----------
102,829
Less accumulated depreciation (56,885)
----------
Property and equipment, net 45,944
OTHER ASSETS 200
----------
TOTAL $ 203,420
----------
----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 9,410
Line of credit 20,035
Accounts payable 68,511
Other current liabilities 51,813
----------
Total current liabilities 149,769
Long-term debt, net of current portion 28,195
----------
Total liabilities 177,964
----------
COMMITMENTS
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 50,000 shares authorized;
500 shares issued and outstanding 500
Additional paid in-capital 1,774
Retained earnings 23,182
----------
Total stockholder's equity 25,456
----------
TOTAL $ 203,420
----------
----------
See notes to financial statements.
F-51
COMMUNICATION SERVICES, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
NET SALES $ 807,432
COSTS AND EXPENSES:
Cost of sales 367,592
Salaries and benefits 285,823
Selling, general and administrative expenses 156,493
Interest expense 4,335
----------
Total costs and expenses 814,243
----------
NET LOSS $ (6,811)
----------
----------
See notes to financial statements.
F-52
COMMUNICATION SERVICES, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
BALANCE, January 1, 1998 500 $ 500 $ 1,774 $ 31,722 $ 33,996
Distribution to stockholder (1,729) (1,729)
Net loss - - - (6,811) (6,811)
----- ------ ------- -------- --------
BALANCE, December 31, 1998
500 $ 500 $ 1,774 $ 23,182 $ 25,456
----- ------ ------- -------- --------
----- ------ ------- -------- --------
See notes to financial statements.
F-53
COMMUNICATION SERVICES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,811)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 16,799
Provision for losses on accounts receivable 37,350
Changes in current assets and liabilities:
Accounts receivable (82,208)
Inventory (2,597)
Other assets 1,108
Accounts payable 38,027
Other current liabilities 17,725
----------
Net cash provided by operating activities 19,393
----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (7,524)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit 20,035
Payments on long-term debt (14,361)
Distribution to stockholder (1,729)
----------
Net cash provided by financing activities 3,945
----------
NET INCREASE IN CASH 15,814
CASH, beginning of year 10,626
----------
CASH, end of year $ 26,440
----------
----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 4,335
Purchase of property and equipment through borrowings $ 20,910
See notes to financial statements.
F-54
COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION
Communication Services, Inc. (the "Company") was incorporated in
January 1992, under the laws of the State of Oklahoma. The Company
sells, installs and maintains telephone, wireless communication and
paging equipment to commercial and individual customers in the state of
Oklahoma.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting period. Actual results could differ from
those estimates.
CONCENTRATIONS - The Company currently buys most of its equipment and
paging services from three manufacturers and providers. Although there are
a limited number of such manufacturers and providers, management believes
that others could provide similar equipment and services on comparable
terms. A change in manufacturers and providers, however, could cause a
possible loss of sales and services, which would affect operating results
adversely.
REVENUE RECOGNITION - Revenue is recognized when equipment is installed or
when paging and maintenance services are provided. The Company defers
revenues for deposits and advance payments received from customers prior
to installation. Such amounts are immaterial and are included in other
current liabilities in the accompanying financial statements.
ACCOUNTS RECEIVABLE - Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to
the allowance for doubtful accounts; recoveries of previously written off
amounts are added back to the allowance for doubtful accounts.
INVENTORY - Inventory is stated at the lower of cost (first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated
depreciation are removed from the respective accounts. Any gains or losses
resulting from disposal are included in current year income or loss.
Property and equipment owned by the Company are depreciated using the
straight-line method over their estimated useful lives of three to seven
years.
F-55
LONG-LIVED ASSETS - Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. Recoverability
is assessed and measured on long-lived assets using an estimate of the
undiscounted future cash flows attributable to the asset. Impairment is
measured based on future cash flows discounted at an appropriate rate.
INCOME TAXES - The stockholder of the Company has elected to be taxed as
an S corporation under provisions of the Internal Revenue Code. The items
of income, credit, deduction and loss of the Company pass through to the
stockholder and are includable in the stockholder's personal income tax
return. Accordingly, the accompanying financial statements do not reflect
a provision or benefit for income taxes nor deferred tax assets and
liabilities.
Under federal income tax laws, regulations and administrative rulings,
certain types of transactions may be accorded varying interpretations.
Accordingly, the Company's financial statements and tax returns, as well
as the individual tax return of the stockholder, may be changed as a
result of a review by the Internal Revenue Service.
PRODUCT RETURNS AND WARRANTY - Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period
is returned by the Company to the manufacturer in exchange for replacement
product or refund.
ADVERTISING - Advertising costs incurred by the Company are expensed
during the period in which the advertising occurs.
FAIR VALUE DISCLOSURE - The Company's financial instruments include cash,
receivables, short-term payables, notes payable and borrowings under its
line of credit. The carrying amounts of cash, receivables, and short-term
payables approximate fair value due to their short-term nature. The
carrying amounts of notes payable and borrowings under line of credit
approximate fair value based on borrowing terms currently available to the
Company.
3. LONG-TERM DEBT
The Company's long-term debt at December 31, 1998, consists of the
following:
Notes payable to credit union, due in monthly principal and interest payments,
interest rate of 7.5% and 7.75%, secured by vehicles,
due in 2002 and 2003 $ 37,605
Less current maturities 9,410
--------
Total long-term debt $ 28,195
--------
--------
The Company also has $20,035 outstanding at December 31, 1998 under its
line of credit agreement with a bank which expires August 20, 1999.
Borrowings under the agreement bear interest at 10.5% and are
collateralized by accounts receivable and inventory of the Company.
Maturities of long-term debt and borrowings under the line of credit for
the next five years are as follows: 1999 - $29,445; 2000 - $10,688;
2001 - $11,534; 2002 - $5,496; 2003 - $477.
F-56
4. OPERATING LEASES
The Company subleases its retail space under a noncancelable operating
sublease agreement. Minimum future payments under the sublease are $21,000
annually through December 31, 2001.
The Company leases its office space from its stockholder. Rentals for
1998 were $21,000.
5. RETIREMENT PLAN
The Company sponsors a defined contribution plan covering employees who
meet minimum compensation and service requirements. Company contributions
to the plan are made at the discretion of management and totaled $3,009 in
1998.
6. SUBSEQUENT EVENT
The Company and its stockholder have entered into a definitive agreement
with The Alliance Group ("Alliance") pursuant to which the Company will
be purchased by Alliance. All of the issued and outstanding common stock
of the Company will be exchanged for cash and common stock of Alliance in
conjunction with the consummation of the initial public offering of the
common stock of Alliance.
* * * * * *
F-57
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
EIS Communications:
We have audited the accompanying combined balance sheets of the Telephone and
Paging Divisions of EIS Communications as of December 31, 1998, and 1997, and
the related combined statements of operations, division equity, and cash
flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Telephone and Paging
Divisions of EIS Communications at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998 and 1997, in conformity with generally accepted accounting
principles.
The accompanying combined financial statements have been prepared from the
separate records maintained by the Telephone and Paging Divisions of EIS
Communications and may not necessarily be indicative of the financial
condition that would have existed or the results of operations if the
divisions had been operated as unaffiliated companies. Expenses of $309,000
and $260,000 included in the accompanying combined financial statements for
1998 and 1997, respectively, represent allocations from EIS Communications.
/S/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
March 5, 1999
F-58
TELEPHONE AND PAGING DIVISIONS OF EIS COMMUNICATIONS
COMBINED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful accounts of
$22,000 and $28,000, respectively $ 239,130 $ 208,051
Inventory 177,340 238,701
----------- -----------
Total current assets 416,470 446,752
PROPERTY AND EQUIPMENT:
Vehicles 34,297 -
Less accumulated depreciation (15,085) -
----------- -----------
Vehicles, net 19,212 -
----------- -----------
TOTAL $ 435,682 $ 446,752
----------- -----------
----------- -----------
LIABILITIES AND DIVISION EQUITY
LIABILITIES:
Current liabilities:
Current portion of long-term debt and notes payable $ 11,064 $ 1,072
Accounts payable 123,327 315,794
Other current liabilities 55,923 19,852
----------- -----------
Total current liabilities 190,314 336,718
Long-term debt, net of current portion 16,581 -
----------- -----------
Total liabilities 206,895 336,718
COMMITMENTS AND CONTINGENCIES
DIVISION EQUITY 228,787 110,034
----------- -----------
TOTAL $ 435,682 $ 446,752
----------- -----------
----------- -----------
7
See notes to financial statements.
F-59
TELEPHONE AND PAGING DIVISIONS OF EIS COMMUNICATIONS
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
NET SALES $ 2,349,845 $ 2,291,546
COSTS AND EXPENSES:
Cost of sales 1,247,829 1,252,849
Salaries and benefits 678,442 575,654
Selling, general and administrative expenses 421,877 402,970
Interest 2,226 -
------------ ------------
Total costs and expenses 2,350,374 2,231,473
------------ ------------
INCOME (LOSS) BEFORE TAXES (529) 60,073
INCOME TAX EXPENSE - 24,000
------------ ------------
NET INCOME (LOSS) $ (529) $ 36,073
------------ ------------
------------ ------------
See notes to financial statements.
F-60
TELEPHONE AND PAGING DIVISIONS OF EIS COMMUNICATIONS
COMBINED STATEMENTS OF DIVISION EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
BALANCE, January 1, 1997 $ 107,214
Distribution to parent (33,253)
Net income 36,073
----------
BALANCE, December 31, 1997 110,034
Contribution from parent 119,282
Net loss (529)
----------
BALANCE, December 31, 1998 $ 228,787
----------
----------
See notes to financial statements.
F-61
TELEPHONE AND PAGING DIVISIONS OF EIS COMMUNICATIONS
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (529) $ 36,073
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 15,085 -
Provision for losses on accounts receivable 10,690 27,724
Changes in current assets and liabilities:
Accounts receivable (41,769) (80,791)
Inventory 61,361 (48,227)
Accounts payable (192,467) 134,171
Other current liabilities 36,071 (21,258)
----------- -----------
Net cash provided by (used in) operating activities (111,558) 47,692
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from (distribution to) parent 119,282 (33,253)
Payments on long-term borrowing (7,724) (14,439)
----------- -----------
Net cash provided by (used in) financing activities 111,558 (47,692)
----------- -----------
NET CHANGE IN CASH - -
CASH, beginning of year - -
----------- -----------
CASH, end of year $ - $ -
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 2,226 $ -
Vehicles acquired through borrowings $ 34,297 $ -
See notes to financial statements.
F-62
TELEPHONE AND PAGING DIVISIONS OF EIS COMMUNICATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying financial statements present the
combined assets, liabilities, sales and expenses related to the telephone
and paging divisions (the "Divisions") of EIS Communications ("EIS"). EIS
sells, installs and maintains telephone, wireless communication, paging
and radio equipment to commercial and individual customers in the greater
Tulsa, Oklahoma market area. The financial statements have been prepared
from the separate records maintained by the Divisions and may not
necessarily be indicative of the financial conditions that would have
existed or the results of operations if the Divisions had been operated as
unaffiliated companies. Expenses of $309,000 and $260,000 included in the
combined financial statements for 1998 and 1997, respectively, represent
allocations made from EIS. Management is of the opinion that the
allocations used are reasonable and appropriate.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting period. Actual results could differ from
those estimates.
CONCENTRATIONS - The Divisions currently buy most of their equipment and
paging services from four manufacturers and providers. Although there are
a limited number of such manufacturers and providers, management believes
that others could provide similar equipment and services on comparable
terms. A change in manufacturers and providers, however, could cause a
possible loss of sales, which would affect operating results adversely.
REVENUE RECOGNITION - Revenue is recognized when equipment is installed or
when paging and maintenance services are rendered. The Divisions defer
revenues for deposits and advance payments received from customers prior
to installation. Such amounts are immaterial and are included in other
current liabilities in the accompanying financial statements.
ACCOUNTS RECEIVABLE - Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to
the allowance for doubtful accounts; recoveries of previously written off
amounts are added back to the allowance for doubtful accounts.
INVENTORY - Inventory is stated at the lower of cost (first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT - Vehicles are stated at cost and are depreciated
using accelerated methods over their estimated useful lives of three
years.
INCOME TAXES - EIS uses the asset and liability approach to account for
income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences and operating loss and tax credit
carryforwards by applying enacted tax rates applicable to future years to
differences between the financial
F-63
statement amounts and the tax bases of existing assets and liabilities. A
valuation allowance is established if, in management's opinion, it is more
likely than not that some portion of the deferred tax asset will not be
realized.
For purposes of preparing the combined financial statements of the
Divisions, federal and state income taxes were determined as if the
Divisions filed separate income tax returns. As of December 31, 1998 and
1997, the Divisions' temporary differences between financial and tax bases
of assets and liabilities are not material and no deferred income taxes
have been recognized.
PRODUCT RETURNS AND WARRANTY - Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period
is returned by the Divisions to the manufacturer in exchange for
replacement product or refund.
ADVERTISING - Advertising costs incurred by the Divisions are expensed
during the period in which the advertising occurs.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts for accounts
receivable and accounts payable approximate fair value because of the
short maturity of those instruments. The carrying amount of long-term debt
approximates fair value based on borrowing terms currently available to
EIS.
2. LONG-TERM DEBT
The Divisions' long-term debt at December 31, 1998 consists of four notes
payable to a bank due in monthly installments of principal and interest
through March 2001. The notes bear interest at 9.95% and are secured by
the Divisions' vehicles. Scheduled maturities by year are as follows: 1999
- $11,064; 2000 - $12,216; 2001 - $4,365.
A note payable to an individual with a balance of $1,072 at December 31,
1997 was repaid in 1998.
3. MAJOR CUSTOMERS
At December 31, 1998 and 1997, the Company had an account receivable from
an individual customer that amounted to 17% and 16%, respectively, of the
Company's total accounts receivable.
4. COMMITMENTS AND CONTINGENCIES
EIS is involved in claims and suits incidental to its business. In the
opinion of management, the outcome of such matters will not have a
material adverse effect on the Divisions' business, financial position or
results of operations.
5. SUBSEQUENT EVENT
EIS and its stockholders have entered into a definitive agreement with
The Alliance Group ("Alliance") pursuant to which the telephone and
paging divisions will be purchased by Alliance in exchange for cash and
common stock of Alliance in conjunction with the consummation of the
initial public offering of the common stock of Alliance.
* * * * * *
F-64
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Nobel Systems, Inc.
We have audited the accompanying balance sheet of Nobel Systems, Inc. as of
December 31, 1998, and the related statements of earnings, stockholders'
equity, and cash flows for the year ended December 31, 1998. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Nobel Systems, Inc. at December 31, 1998,
and the results of their operations and their cash flows for the year ended
December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ SAXON & KNOL, P. C.
February 28, 1999
F-65
NOBEL SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1998
- -----------------
ASSETS
CURRENT ASSETS:
Accounts receivable $ 85,237
Inventory 51,976
-----------
Total current assets 137,213
PROPERTY AND EQUIPMENT, at cost:
Autos and trucks 53,117
Machinery and equipment 40,062
Furniture and fixtures 11,199
-----------
104,378
Less accumulated depreciation (71,889)
-----------
Property and equipment, net 32,489
-----------
TOTAL $ 169,702
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 46,083
Current portion of long-term debt and notes payable 71,567
Other current liabilities 16,822
-----------
Total current liabilities 134,472
-----------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 17,228
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 5,000 shares authorized,
800 shares issued and outstanding 800
Additional paid in-capital 53,614
Retained earnings (36,412)
-----------
Total stockholders' equity 18,002
-----------
TOTAL $ 169,702
-----------
-----------
See notes to financial statements.
F-66
NOBEL SYSTEMS, INC.
STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1998
- ----------------------------
SALES $ 953,046
COSTS AND EXPENSES:
Cost of sales 454,729
Salaries and benefits 330,795
Selling, general and administrative expenses 166,224
Interest expense 9,729
-----------
Total costs and expenses 961,477
-----------
NET LOSS $ (8,431)
-----------
-----------
See notes to financial statements.
F-67
NOBEL SYSTEMS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998
- ----------------------------
ADDITIONAL
COMMON COMMON PAID-IN CAPITAL RETAINED
SHARES STOCK EARNINGS TOTAL
BALANCE, January 1, 1998 500 $ 500 $ - $ (27,981) $ (27,481)
Additional investment 300 300 53,614 - 53,914
Net loss - - - (8,431) (8,431)
----- ------ ---------- ---------- ----------
BALANCE, December 31, 1998 800 $ 800 $ 53,614 $ (36,412) $ 18,002
----- ------ ---------- ---------- ----------
----- ------ ---------- ---------- ----------
See notes to financial statements.
F-68
NOBEL SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
- ----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,431)
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 14,926
Loss on sale of assets 374
Changes in current assets and liabilities:
Accounts receivable 72,084
Inventory (25,552)
Other current assets 10,572
Accounts payable (52,613)
Other current liabilities (5,136)
----------
Net cash provided by operating activities 6,224
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,970)
----------
Net cash used in investing activities (6,970)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional investment 53,914
Proceeds from borrowings on long-term debt 10,472
Payments on long-term borrowings (67,163)
----------
Net cash provided by financing activities (2,777)
----------
NET DECREASE IN CASH (3,523)
CASH, beginning of year 3,523
----------
CASH, end of year $ -
----------
----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 25,808
See notes to financial statements.
F-69
NOBEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
- ----------------------------
1. ORGANIZATION
Nobel Systems, Inc. (the "Company") was incorporated in January 1989,
under the laws of the State of Oklahoma. The Company sells, installs
and maintains telephone equipment in the state of Oklahoma market area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting period. Actual results could differ from
those estimates.
BASIS OF PRESENTATION - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of sales and expenses during the reporting period. Actual results
could differ from those estimates.
CONCENTRATIONS - The Company currently buys most of its telephone
equipment from two manufacturers. Although there are a limited number of
manufacturers of telephone equipment, management believes that other
manufacturers could provide similar equipment on comparable terms. A
change in manufacturers, however, could cause a possible loss of sales,
which would affect operating results adversely.
ACCOUNTS RECEIVABLE - Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to
the allowance for doubtful accounts; recoveries of previously written off
amounts are added back to the allowance for doubtful accounts.
INVENTORY - Inventory is stated at the lower of cost or market on a first
in, first out basis.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated
depreciation are removed from the respective accounts. Any gains or
losses resulting from disposal are included in current year income or
loss.
Property and equipment owned by the Company are depreciated over the
estimated useful lives using straight-line and accelerated tax-based
methods.
F-70
DEFERRED INCOME - The Company recognizes deferred revenues for advance
payment on agreements to maintain customer telephone equipment. The
deferred revenues are recorded as income in the period the services are
provided, which is generally twelve months.
INCOME TAXES - The Company has elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code. Under those provisions, the
Company does not pay federal corporate income taxes on its taxable
income. Instead, the stockholders are liable for individual federal
income taxes on their respective shares of the company's taxable income.
PRODUCT RETURNS AND WARRANTY - Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty
period is returned by the Company to the manufacturer in exchange for
replacement product or refund.
IMPAIRMENT - Asset impairments are recorded when events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. Impairment is assessed and measured on long-lived assets
using an estimate of the undiscounted future cash flows.
ADVERTISING - Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
3. LONG-TERM DEBT
The Company's long-term debt at December 31, 1998, consisted of the
following:
Line of credit, monthly interest payments; interest rate of 11.25%; due
in February 1999, secured by accounts receivable $ 25,000
Note payable to a related party, due in monthly principal and interest
payments; interest rate of 12%; maturing in May 2000; unsecured 22,974
Note payable; due in monthly principal and interest payments; interest
rate of 18%; maturing in January 2000; secured by equipment 9,137
Note payable to a related party, due in monthly principal and interest
payments; interest rate of 12%; maturing in May 2000; unsecured 6,364
Notes payable; due in monthly principal and interest payments; interest
rates from 8.5% to 10.5%; maturing from January 1999 to March 2000;
secured by vehicles 21,021
Note payable, due in monthly principal and interest payments; interest
rate of 14.5%; maturing in July 1999; unsecured 4,299
----------
88,795
Less current maturities (71,567)
----------
$ 17,228
----------
----------
Maturities of long-term debt for the next five years are as follows:
1999 - $71,567; 2000 - $13,360; 2001 - $2,996; and 2002 - $872.
F-71
4. COMMITMENTS AND CONTINGENCIES
The transferability of the majority shareholder's stock is subject to the
satisfaction or removal of federal tax liens related to personal income
tax liabilities.
5. CONCENTRATIONS OF CREDIT RISK
Sales to the Company's three largest customers amounted to approximately
20% of net sales for fiscal year 1998. As of December 31, 1998, account
balances due from the Company's three largest customers comprise
approximately 12% of total trade accounts receivable, with the largest
balance comprising approximately 5%.
6. RELATED PARTY TRANSACTIONS
The Company has notes payable to the company's shareholders. The notes
bear interest at the approximate fair value at inception of the note. The
notes are unsecured and mature in 2000.
7. SUBSEQUENT EVENT
The Company and its stockholders have entered into a definitive agreement
with The Alliance Group ("Alliance") pursuant to which the Company will
be purchased by Alliance. All outstanding shares of the Company will be
exchanged for cash and common stock of Alliance in conjunction with the
consummation of the initial public offering of the common stock of
Alliance.
* * * * * *
F-72
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Telkey Communications, Inc.:
We have audited the accompanying balance sheet of Telkey Communications, Inc.
as of September 30, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the year ended September 30, 1998.
The financial statements as of September 30, 1997, and for the year then
ended, were audited by other auditors whose report expressed an unqualified
opinion on those financial statements. These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on the 1998 financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 1998 financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 1998 financial statements present fairly, in all
material respects, the financial position of Telkey Communications, Inc. at
September 30, 1998, and the results of its operations and its cash flows for
the year ended September 30, 1998, in conformity with generally accepted
accounting principles.
/S/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 26, 1999
F-73
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Telkey Communications, Inc.:
We have audited the accompanying balance sheet of Telkey Communications, Inc.
as of September 30, 1997 and the related statements of operations,
stockholders' equity, and cash flows for the year ended September 30, 1997.
These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Telkey Communications, Inc. at September
30, 1997, and the results of their operations and their cash flows for the
year ended September 30, 1997, in conformity with generally accepted
accounting principles.
/S/ SAXON & KNOL
Oklahoma City, Oklahoma
February 26, 1999
F-74
TELKEY COMMUNICATIONS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
- ---------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash $ 140,053 $ 57,247
Receivables, net 154,280 193,371
Inventory 88,748 82,164
Notes receivable - current 15,324 -
Other current assets 3,741 905
----------- -----------
Total current assets 402,146 333,687
NOTES RECEIVABLE, net of current portion 16,862 -
PROPERTY AND EQUIPMENT:
Autos and trucks 117,419 128,164
Fixtures and equipment 47,207 37,697
Rental telephone equipment 83,401 64,622
----------- -----------
248,027 230,483
Less accumulated depreciation (174,533) (138,404)
----------- -----------
Property and equipment, net 73,494 92,079
----------- -----------
TOTAL $ 492,502 $ 425,766
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Line of credit $ 30,000 $ -
Accounts payable 31,364 26,015
Deferred income 32,200 46,567
Current portion of long-term debt 29,782 19,683
Other current liabilities 22,501 19,554
----------- -----------
Total current liabilities 145,847 111,819
Long-term debt, net of current portion 24,780 26,823
----------- -----------
Total liabilities 170,627 138,642
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 10,000 shares authorized,
300 shares issued and outstanding 300 300
Retained earnings 321,575 286,824
----------- -----------
Total stockholders' equity 321,875 287,124
----------- -----------
TOTAL $ 492,502 $ 425,766
----------- -----------
----------- -----------
See notes to financial statements.
F-75
TELKEY COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------
1998 1997
NET SALES $ 1,393,165 $ 1,280,220
COSTS AND EXPENSES:
Cost of sales 613,123 567,813
Salaries and benefits 476,800 447,301
Selling, general and administrative 249,538 185,188
Interest 7,161 5,340
------------ ------------
Total costs and expenses 1,346,622 1,205,642
------------ ------------
INCOME BEFORE TAXES 46,543 74,578
INCOME TAX EXPENSE 11,792 15,527
------------ ------------
NET INCOME $ 34,751 $ 59,051
------------ ------------
------------ ------------
See notes to financial statements.
F-76
TELKEY COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------
COMMON COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
BALANCE, October 1, 1996 300 $ 300 $ 227,773 $ 228,073
Net income - - 59,051 59,051
---- ------ ---------- ----------
BALANCE, September 30, 1997 300 300 286,824 287,124
Net income - - 34,751 34,751
---- ------ ---------- ----------
BALANCE, September 30, 1998 300 $ 300 $ 321,575 $ 321,875
---- ------ ---------- ----------
---- ------ ---------- ----------
See notes to financial statements.
F-77
TELKEY COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,751 $ 59,051
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 46,874 27,950
Deferred income (14,367) -
(Gain) loss on sale of assets (500) 11,832
Changes in assets and liabilities:
Receivables 39,091 (25,751)
Inventory (6,584) (34,531)
Notes receivable (32,186) -
Other current assets (2,836) (6,517)
Accounts payable 5,349 4,340
Other current liabilities 2,947 8,204
---------- ----------
Net cash provided by operating activities 72,539 44,578
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (28,289) (51,289)
Proceeds from sale of property and equipment 500 -
---------- ----------
Net cash used in investing activities (27,789) (51,289)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 87,839 500
Payments on borrowings (49,783) (22,875)
---------- ----------
Net cash provided by (used in) financing activities 38,056 (22,375)
---------- ----------
NET INCREASE (DECREASE) IN CASH 82,806 (29,086)
CASH, beginning of year 57,247 86,333
---------- ----------
CASH, end of year $ 140,053 $ 57,247
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 5,108 $ 5,281
Cash paid during the year for income taxes $ 14,802 $ 15,527
See notes to financial statements.
F-78
TELKEY COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------
1. ORGANIZATION
Telkey Communications, Inc. (the "Company") was incorporated in February
1984, under the laws of the State of Oklahoma. The Company sells,
installs and maintains telephone equipment in the greater Tulsa, Oklahoma
market area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting period. Actual results could differ from
those estimates.
CONCENTRATIONS - The Company currently buys most of its telephone
equipment from two manufacturers. Although there are a limited number of
manufacturers of telephone equipment, management believes that other
manufacturers could provide similar equipment on comparable terms. A
change in manufacturers, however, could cause a possible loss of sales,
which would affect operating results adversely.
REVENUE RECOGNITION - Revenue is recognized when equipment is installed or
when maintenance services are rendered. The Company defers revenues on
prepaid agreements to maintain customer telephone equipment. The deferred
revenues are recognized as revenue over the period the services are
provided, which is generally 12 months.
ACCOUNTS RECEIVABLE - Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge to
the allowance for doubtful accounts; recoveries of previously written off
amounts are added back to the allowance for doubtful accounts.
INVENTORY - Inventory is stated at the lower of cost or market on a
specific identification basis. Cost is determined on a first-in, first-out
method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Major
additions and improvements are capitalized at cost, while maintenance and
repairs which do not extend the useful lives of the respective assets are
expensed. When assets are sold or retired, cost and accumulated
depreciation are removed from the respective accounts. Any gains or losses
resulting from disposal are included in current year operations.
F-79
Property and equipment owned by the Company are depreciated using the
straight-line method, which includes amortization of assets under capital
leases over the following useful lives:
USEFUL LIVES
IN YEARS
Autos and trucks 3 - 7
Fixtures and equipment 5 - 7
Rental telephone equipment 5 - 7
INCOME TAXES - The Company uses an asset and liability approach to account
for income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences and carryforwards by applying
enacted tax rates applicable to future years to differences between the
financial statement amounts and the tax bases of existing assets and
liabilities. A valuation allowance is established if, in management's
opinion, it is more likely than not that some portion of the deferred tax
asset will not be realized. As of September 30, 1998, the Company's
temporary differences between financial and tax bases of assets and
liabilities are not material, and no deferred income taxes have been
recognized.
PRODUCT RETURNS AND WARRANTY - Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty period
is returned by the Company to the manufacturer in exchange for replacement
product or refund.
LONG-LIVED ASSETS - Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. Recoverability
is assessed and measured on long-lived assets using an estimate of the
undiscounted future cash flows attributable to the asset. Impairment is
measured based on future cash flows discounted at an appropriate rate.
ADVERTISING - Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
FAIR VALUE DISCLOSURE - The Company's financial instruments include cash
and cash equivalents, receivables, notes receivable, short-term payables,
and notes payable. The carrying amounts of cash and cash equivalents,
receivables, and short-term payables approximate fair value due to their
short-term nature. The carrying amounts of notes receivable and notes
payable approximate fair value as rates reflect current market rates.
3. NOTES RECEIVABLE
Notes receivable represent long-term financing of sales to certain
customers. During the year ended September 30, 1998, the Company entered
into an agreement with a bank whereby the bank assumed all servicing
rights and a percentage of interest earned on the notes. In return, the
Company received a cash payment from the bank equal to the principal
balance of the notes on the transfer date. The Company retained all risk
associated with nonpayment of any unpaid principal through a provision in
the agreement requiring full recourse. The Company accounted for this
transaction as a secured borrowing and has recognized the related
liability in current and long-term notes payable. Interest income of
$2,010 has been recognized from notes receivable and interest expense of
$1,730 has been recognized on the corresponding note payable during the
year ended September 30, 1998.
4. OPERATING LEASES
F-80
The Company has an operating lease with a related party for the Company's
office space. The Company expensed and paid rent totaling $42,000 and
$38,400 for the years ended September 30, 1998 and 1997, respectively. The
future minimum payments by year at September 30, 1998, are as follows:
1999 $ 42,000
2000 42,000
---------
$ 84,000
---------
---------
5. DEBT
The Company's long-term debt at September 30, 1998 and 1997, consisted
of the following:
1998 1997
Note payable to former stockholder, due in monthly principal and
interest payments, interest rate of 7.5%, maturing in October 2000,
secured by common stock $ 10,405 $ 14,852
Promissory note, due in monthly principal and interest payments,
interest rate of 9.9%, paid in December 1998, secured by vehicle 3,141 6,984
Promissory note, due in monthly principal and interest payments,
interest rate of 8.5%, maturing in January 2000 8,830 14,808
Notes payable to bank, due in monthly principal and interest payments,
interest at no less than 2% above prime (12.0% at September 30, 1998),
maturing through August 2001, secured by notes receivable 32,186 -
Promissory note to related party, due in monthly principal and interest
payments, interest rate of 6%, paid in September 1998,
secured by vehicle - 9,862
--------- ---------
54,562 46,506
Less current portion of long-term debt 29,782 19,683
--------- ---------
Long-term debt $ 24,780 $ 26,823
--------- ---------
--------- ---------
Maturities of long-term debt for years subsequent to September 30, 1998
are as follows:
1999 $ 29,782
2000 18,252
2001 6,528
---------
Total long-term debt $ 84,562
---------
---------
F-81
The Company also has $30,000 outstanding at September 30, 1998, under its
line of credit agreement with a bank. The agreement permitted advances up
to $150,000, with interest at the Chase New York Prime Rate plus 1% (9.5%
at September 30, 1998), and expired November 30. The Company repaid the
entire amount prior to expiration and did not renew the line.
6. INCOME TAXES
The income tax provision consists of the following:
1998 1997
Federal income tax expense $ 8,542 $ 11,858
State income taxes, net of federal benefit 3,250 3,669
--------- ---------
$ 11,792 $ 15,527
--------- ---------
--------- ---------
The difference between the statutory Federal income tax rate of 34% and
the Company's effective Federal rate for the years ended September 30,
1998 and 1997, is due to state taxes and the effect of graduated tax
rates.
7. MAJOR CUSTOMERS
Sales to the Company's largest customer amounted to approximately 9% of
net sales for fiscal year 1998. Sales to the Company's two largest
customers amounted to approximately 13% and 11 %, respectively, of net
sales for fiscal year 1997.
8. RELATED PARTY TRANSACTIONS
The Company made principal payments of $9,862 and $9,290 during the years
ended September 30, 1998 and 1997, respectively, to an entity owned 100%
by the Company's owners on a promissory note for the purchase of a
vehicle. The promissory note requires monthly principal and interest
payments of $849 at an interest rate of 6%. Interest expense of $326 and
$898 was recognized on the note for the years ended September 30, 1998 and
1997, respectively. The note was fully repaid in September 1998.
The Company has a note payable to a former owner totaling $10,405 and
$14,852 at September 30, 1998 and 1997, respectively, maturing in October
2000. The note requires monthly principal and interest payments of $450,
at an interest rate of 7.5%. Principal payments of $4,447 and $4,127 were
made during the years ended September 30, 1998 and 1997, respectively.
Interest expense of $953 and $1,273 was recognized on the note during the
years ended September 30, 1998 and 1997, respectively.
The Company made rent payments for office space of $42,000 and $38,400
during the years ended September 30, 1998 and 1997, respectively, to an
entity owned by the Company's stockholders.
9. SUBSEQUENT EVENT
The Company and its stockholders have entered into a definitive agreement
with The Alliance Group ("Alliance") pursuant to which the Company will
be purchased by Alliance. All outstanding shares of the Company will be
exchanged for cash and common stock of Alliance in conjunction with the
consummation of the initial public offering of the common stock of
Alliance.
* * * * * *
F-82
TELKEY COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31 (UNAUDITED) AND SEPTEMBER 30, 1998
- ----------------------------------------------
DECEMBER 31, SEPTEMBER 30,
1998 1998
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash $ 105,626 $ 140,053
Receivables, net 96,647 154,280
Inventory 139,177 88,748
Notes receivable - current 7,188 15,324
Other current assets 6,190 3,741
----------- -----------
Total current assets 354,828 402,146
NOTES RECEIVABLE, net of current portion 11,806 16,862
PROPERTY AND EQUIPMENT:
Autos and trucks 117,419 117,419
Fixtures and equipment 50,200 47,207
Rental telephone equipment 88,385 83,401
----------- -----------
256,004 248,027
Less accumulated depreciation (179,565) (174,533)
----------- -----------
Property and equipment, net 76,439 73,494
----------- -----------
TOTAL $ 443,073 $ 492,502
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Line of credit $ - $ 30,000
Accounts payable 62,611 31,364
Deferred income 17,834 32,200
Current portion of long-term debt 23,146 29,782
Other current liabilities 19,153 22,501
----------- -----------
Total current liabilities 122,744 145,847
Long-term debt, net of current portion 12,340 24,780
----------- -----------
Total liabilities 135,084 170,627
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 10,000 shares authorized,
300 shares issued and outstanding 300 300
Retained earnings 307,689 321,575
----------- -----------
Total stockholders' equity 307,989 321,875
----------- -----------
TOTAL $ 443,073 $ 492,502
----------- -----------
----------- -----------
See notes to condensed financial statements.
F-83
TELKEY COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------------
1998 1997
NET SALES $ 308,268 $ 278,796
COSTS AND EXPENSES:
Cost of sales 133,797 97,994
Salaries and benefits 136,628 141,088
Selling, general and administrative 52,912 55,574
Interest 1,267 2,005
------------ ------------
Total costs and expenses 324,604 296,661
------------ ------------
LOSS BEFORE TAXES (16,336) (17,865)
INCOME TAX BENEFIT 2,450 2,680
------------ ------------
NET LOSS $ (13,886) $ (15,185)
------------ ------------
------------ ------------
See notes to condensed financial statements.
F-84
TELKEY COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,886) $ (15,185)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,451 6,890
Deferred income (14,366) (14,367)
Changes in assets and liabilities:
Receivables 57,633 75,643
Inventory (50,429) (33,773)
Notes receivable 13,192 -
Other current assets (2,449) (2,680)
Accounts payable 31,247 3,082
Other current liabilities (3,348) (2,026)
---------- ----------
Net cash provided by operating activities 25,045 17,584
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (10,396) -
Proceeds from sale of property and equipment - (3,926)
---------- ----------
Net cash used in investing activities (10,396) (3,926)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES -
Payments on borrowings (49,076) (5,865)
---------- ----------
NET (DECREASE) INCREASE IN CASH (34,427) 7,793
CASH, beginning of period 140,053 57,247
---------- ----------
CASH, end of period $ 105,626 $ 65,040
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 796 $ 1,976
Cash paid during the period for income taxes $ - $ -
See notes to condensed financial statements.
F-85
TELKEY COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------------
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited condensed financial statements and related notes have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with Rule 310 of Regulation S-B of the
Securities Act of 1933. Accordingly, certain information and footnote
disclosures normally included for complete financial statements prepared
in accordance with generally accepted accounting principles have been
omitted. The accompanying condensed financial statements and related notes
should be read in conjunction with the audited financial statements of the
Company, and notes thereto, for the year ended September 30, 1998.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. Operating
results of the interim period are not necessarily indicative of the
amounts that will be reported for the fiscal year ending September 30,
1999.
2. DEFINITIVE AGREEMENT
The Company and its stockholders have entered into a definitive agreement
with The Alliance Group ("Alliance") pursuant to which the Company will
be purchased by Alliance. All outstanding shares of the Company will be
exchanged for cash and common stock of Alliance in conjunction with the
consummation of the initial public offering of the common stock of
Alliance.
3. DEBT
At September 30, 1998, the Company had $30,000 outstanding under a line of
credit agreement with a bank. The agreement expired November 30, 1998. The
Company repaid the entire amount prior to expiration and did not renew the
line.
* * * * * *
F-86
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Terra Telecom, Inc.:
We have audited the accompanying balance sheet of Terra Telecom, Inc. as of
September 30, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the year ended September 30, 1998. The financial
statements as of September 30, 1997, and for the year then ended, were audited
by other auditors whose report expressed an unqualified opinion on those
financial statements. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on the 1998
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 1998 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1998 financial statements present fairly, in all material
respects, the financial position of Terra Telecom, Inc. at September 30, 1998,
and the results of its operations and its cash flows for the year ended
September 30, 1998, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 15, 1999
F-87
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Terra Telecom, Inc.:
We have audited the accompanying balance sheet of Terra Telecom, Inc. as of
September 30, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year ended September 30, 1997. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on the 1997 financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Terra Telecom, Inc. at September 30, 1997,
and the results of their operations and their cash flows for the year ended
September 30, 1997, in conformity with generally accepted accounting principles.
/s/ SAXON & KNOL
Oklahoma City, Oklahoma
February 15, 1999
F-88
TERRA TELECOM, INC.
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
- ---------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash $ 20,946 $ 5,364
Accounts receivable, net 118,120 180,082
Inventory 131,035 129,107
--------- ---------
Total current assets 270,101 314,553
PROPERTY AND EQUIPMENT:
Autos and trucks 121,990 102,292
Furniture and fixtures 55,286 34,747
Machinery and equipment 49,836 41,267
--------- ---------
227,112 178,306
Less accumulated depreciation (162,192) (132,733)
--------- ---------
Property and equipment, net 64,920 45,573
OTHER ASSETS 8,096 3,553
--------- ---------
TOTAL $ 343,117 $ 363,679
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Current portion of long-term debt $ 59,143 $ 60,873
Accounts payable 126,585 125,758
Other current liabilities 86,145 55,732
--------- ---------
Total current liabilities 271,873 242,363
Long-term debt, net of current portion 56,362 106,343
--------- ---------
Total liabilities 328,235 348,706
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 25,000 shares authorized;
2,000 shares issued and outstanding 2,000 2,000
Additional paid-in capital 82,677 82,677
Accumulated deficit (69,795) (69,704)
--------- ---------
Total stockholders' equity 14,882 14,973
--------- ---------
TOTAL $ 343,117 $ 363,679
--------- ---------
--------- ---------
See notes to financial statements.
F-89
TERRA TELECOM, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------
1998 1997
NET SALES $1,956,623 $1,522,718
COSTS AND EXPENSES:
Cost of sales 1,082,080 825,796
Salaries and benefits 650,889 486,087
Selling, general and administrative 204,014 195,153
Interest 19,747 24,774
---------- ----------
Total costs and expenses 1,956,730 1,531,810
---------- ----------
LOSS BEFORE TAXES (107) (9,092)
INCOME TAX BENEFIT 16 1,364
---------- ----------
NET LOSS $ (91) $ (7,728)
---------- ----------
---------- ----------
See notes to financial statements.
F-90
TERRA TELECOM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------
ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
BALANCE,
October 1, 1996 2,000 $ 2,000 $ 82,677 $ (61,976) $ 22,701
Net loss - - - (7,728) (7,728)
------- -------- -------- ---------- --------
BALANCE,
September 30, 1997 2,000 2,000 82,677 (69,704) 14,973
Net loss - - - (91) (91)
------- -------- -------- ---------- --------
BALANCE,
September 30, 1998 2,000 $ 2,000 $ 82,677 $ (69,795) $ 14,882
------- -------- -------- ---------- --------
------- -------- -------- ---------- --------
See notes to financial statements.
F-91
TERRA TELECOM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (91) $ (7,728)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 29,459 32,360
Loss on disposal - (10,456)
Changes in current assets and liabilities:
Accounts receivable 61,962 (95,583)
Inventory (1,928) 17,218
Other assets (4,543) (1,365)
Accounts payable 827 31,221
Other current liabilities 30,413 38,779
-------- --------
Net cash provided by operating activities 116,099 4,446
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (48,806) (17,003)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 15,786 79,421
Payments on long-term borrowings (67,498) (58,005)
-------- --------
Net cash (used in) provided by financing activities (51,712) 21,416
-------- --------
NET INCREASE IN CASH 15,582 8,859
CASH, beginning of year 5,364 (3,495)
-------- --------
CASH, end of year $ 20,946 $ 5,364
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 11,282 $ 13,877
Cash paid during the year for income taxes $ - $ -
See notes to financial statements.
F-92
TERRA TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------
1. ORGANIZATION
Terra Telecom, Inc. (the "Company") was incorporated in October 1982,
under the laws of the State of Oklahoma. The Company sells, installs
and maintains telephone equipment in the greater Tulsa, Oklahoma market
area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of sales and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATIONS - The Company currently buys most of its telephone
equipment from two manufacturers. Although there are a limited number of
manufacturers of telephone equipment, management believes that other
manufacturers could provide similar equipment on comparable terms. A
change in manufacturers, however, could cause a possible loss of sales,
which would affect operating results adversely.
REVENUE RECOGNITION - Revenue is recognized when equipment is installed
or when maintenance services are rendered. The Company defers revenues
on prepaid agreements to maintain customer telephone equipment. The
deferred revenues are recognized as revenue over the period the services
are provided, which is generally 12 months. Deferred revenues are not
significant at September 30, 1998 and 1997.
ACCOUNTS RECEIVABLE - Allowances for doubtful accounts are established
based on historical losses, experience and knowledge of specific items.
Receivables determined to be uncollectible are written off as a charge
to the allowance for doubtful accounts; recoveries of previously written
off amounts are added back to the allowance for doubtful accounts.
INVENTORY - Inventory is stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Major additions and improvements are capitalized at cost, while
maintenance and repairs which do not extend the useful lives of the
respective assets are expensed. When assets are sold or retired, cost
and accumulated depreciation are removed from the respective accounts.
Any gains or losses resulting from disposal are included in current year
operations.
F-93
Property and equipment owned by the Company are depreciated using an
accelerated method over the following useful lives:
USEFUL LIVES
IN YEARS
Autos and trucks 3 - 7
Furniture and fixtures 5 - 7
Machinery and equipment 3 - 7
INCOME TAXES - The Company uses an asset and liability approach to
account for income taxes. Deferred income taxes are recognized for the
tax consequences of temporary differences and operating loss and tax
credit carryforwards by applying enacted tax rates applicable to future
years to differences between the financial statement amounts and the tax
bases of existing assets and liabilities. A valuation allowance is
established if, in management's opinion, it is more likely than not that
some portion of the deferred tax asset will not be realized. As of
September 30, 1998, the Company's temporary differences between
financial and tax bases of assets and liabilities are not material, and
no deferred income taxes have been recognized.
PRODUCT RETURNS AND WARRANTY - Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty
period is returned by the Company to the manufacturer in exchange for
replacement product or refund.
LONG-LIVED ASSETS - Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable.
Recoverability is assessed and measured on long-lived assets using an
estimate of the undiscounted future cash flows attributable to the
asset. Impairment is measured based on future cash flows discounted at
an appropriate rate.
ADVERTISING - Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
FAIR VALUE DISCLOSURE - The Company's financial instruments include cash
and cash equivalents, receivables, short-term payables, and notes
payable. The carrying amounts of cash and cash equivalents, receivables,
and short-term payables approximate fair value due to their short-term
nature. The carrying amounts of long-term debt approximate fair value
based on borrowing terms currently available to the Company.
3. OPERATING LEASES
The Company has an operating lease for the Company's office space. The
Company has expensed and paid rent of $21,514 and $21,634 for the years
ended September 30, 1998 and 1997, respectively. The future minimum
payments by year at September 30, 1998, are as follows:
1999 $23,034
2000 5,807
-------
$28,841
-------
-------
F-94
4. LONG-TERM DEBT
The Company's long-term debt at September 30, 1998 and 1997, consisted
of the following:
1998 1997
Notes payable to stockholders, due in monthly principal and interest
payments, interest rate of 10.5%, maturing in April 2001, unsecured $ 54,830 $ 74,274
Promissory note to bank, due in monthly principal and interest payments,
interest rate of 9.25%, maturing in August 1999, secured by all Company
assets 30,588 55,820
Promissory note to bank, due in monthly principal and interest payments,
interest rate of 8.8%, maturing in April 2002, secured by vehicle 11,144 -
Promissory note to credit union, due in monthly principal and interest
payments, interest rate of 7.2%, maturing in June 2002, secured by
vehicle 10,941 14,132
Promissory note to bank, due in monthly principal and interest payments,
interest rate of 10%, maturing in October 1999, secured by vehicle 4,218 7,546
Promissory note to bank, due in monthly principal and interest payments,
interest rate of 11%, maturing in April 1999, secured by vehicle 3,784 7,747
Promissory note to bank, due in monthly principal and interest payments,
interest rate of 8.5%, paid in September 1998, secured by vehicle - 2,985
Promissory note to bank, due in monthly principal and interest payments,
interest rate of 9%, paid in October 1998, secured by vehicle - 4,712
-------- --------
115,505 167,216
Less current maturities 59,143 60,873
-------- --------
$ 56,362 $106,343
-------- --------
-------- --------
Maturities of long-term debt for years subsequent to September 30, 1998 are as
follows:
1999 $ 59,143
2000 30,356
2001 21,308
2002 4,698
Thereafter -
--------
Total long-term debt $115,505
--------
--------
F-95
5. INCOME TAXES
The income tax benefit consists of the following:
1998 1997
Federal income tax benefit $ 16 $1,364
State income taxes, net of federal benefit - -
---- ------
$ 16 $1,364
---- ------
---- ------
The difference between the statutory Federal income tax rate of 34% and
the Company's effective Federal rate for the years ended September 30,
1998 and 1997, is due to the effect of graduated tax rates.
6. MAJOR CUSTOMERS
Sales to the Company's largest customer amounted to approximately 11% of
net sales for fiscal year 1998. No individual customer in 1997 accounted
for net sales in excess of 10%. The Company has an account receivable
from an individual customer that amounts to 23% of the Company's total
accounts receivable at September 30, 1998.
7. RELATED PARTY TRANSACTIONS
The Company has a note payable to each of its two owners together
totaling $54,830 and $74,274 at September 30, 1998 and 1997,
respectively. The notes are unsecured and require monthly principal and
interest payments totaling $2,050. Interest on the notes is at 10.5%.
Proceeds from the notes were utilized by the Company for operating
capital. Principal payments totaling $19,444 and $7,405 were made on the
notes during the years ended September 30, 1998 and 1997, respectively.
Interest expense totaling $5,156 and $3,870 were recorded on the notes
for each of the years ended September 30, 1998 and 1997, respectively.
The notes are scheduled to mature in April 2001.
8. 401(k) PLAN
In fiscal year 1998, the Company established a 401(k) plan (the "Plan"),
in which substantially all employees of the Company are eligible to
participate. Company contributions to the Plan are made at the
discretion of Company management. Contributions totaling $8,352 were
made by the Company and charged to operations for the year ended
September 30, 1998.
9. SUBSEQUENT EVENT
The Company and its stockholders have entered into a definitive
agreement with The Alliance Group ("Alliance") pursuant to which the
Company will be purchased by Alliance. All outstanding shares of the
Company will be exchanged for cash and common stock of Alliance in
conjunction with the consummation of the initial public offering of the
common stock of Alliance.
* * * * * *
F-96
TERRA TELECOM, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31 (UNAUDITED) AND SEPTEMBER 30, 1998
- ----------------------------------------------
DECEMBER 31, SEPTEMBER 30,
1998 1998
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 44,024 $ 20,946
Accounts receivable, net 146,545 118,120
Inventory 77,557 131,035
--------- ---------
Total current assets 268,126 270,101
PROPERTY AND EQUIPMENT:
Autos and trucks 124,028 121,990
Furniture and fixtures 56,421 55,286
Machinery and equipment 49,836 49,836
--------- ---------
230,285 227,112
Less accumulated depreciation (169,557) (162,192)
--------- ---------
Property and equipment, net 60,728 64,920
OTHER ASSETS 8,096 8,096
--------- ---------
TOTAL $ 336,950 $ 343,117
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Current portion of long-term debt $ 54,416 $ 59,143
Accounts payable 139,937 126,585
Other current liabilities 55,131 86,145
--------- ---------
Total current liabilities 249,484 271,873
Long-term debt, net of current portion 45,575 56,362
--------- ---------
Total liabilities 295,057 328,235
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 25,000 shares authorized;
2,000 shares issued and outstanding 2,000 2,000
Additional paid-in capital 82,677 82,677
Accumulated deficit (42,786) (69,795)
--------- ---------
Total stockholders' equity 41,891 14,882
--------- ---------
TOTAL $ 336,950 $ 343,117
--------- ---------
--------- ---------
See notes to condensed financial statements.
F-97
TERRA TELECOM, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------------
1998 1997
NET SALES $ 531,927 $ 488,571
COSTS AND EXPENSES:
Cost of sales 269,420 261,483
Salaries and benefits 171,802 126,988
Selling, general and administrative 56,447 57,404
Interest 2,483 6,817
--------- ---------
Total costs and expenses 500,152 452,692
--------- ---------
INCOME BEFORE TAXES 31,775 35,879
INCOME TAX EXPENSE 4,766 5,382
--------- ---------
NET INCOME $ 27,009 $ 30,497
--------- ---------
--------- ---------
See notes to condensed financial statements.
F-98
TERRA TELECOM, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,009 $ 30,497
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,365 8,090
Changes in current assets and liabilities:
Accounts receivable (28,425) 35,262
Inventory 53,478 (37,476)
Other assets - 1,364
Accounts payable 13,352 12,854
Other current liabilities (31,014) 9,231
-------- --------
Net cash provided by operating activities 41,765 59,822
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (3,173) (35,578)
CASH FLOWS FROM FINANCING ACTIVITIES -
Payments on long-term borrowings (15,514) (2,551)
-------- --------
NET INCREASE IN CASH 23,078 21,693
CASH, beginning of period 20,946 5,364
-------- --------
CASH, end of period $ 44,024 $ 27,057
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 11,356 $ 10,484
Cash paid during the period for income taxes $ - $ -
See notes to condensed financial statements.
F-99
TERRA TELECOM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------------
1. UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
The unaudited condensed financial statements and related notes have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with Rule 310 of Regulation S-B of the
Securities Act of 1933. Accordingly, certain information and footnote
disclosures normally included for complete financial statements prepared
in accordance with generally accepted accounting principles have been
omitted. The accompanying condensed financial statements and related
notes should be read in conjunction with the audited financial
statements of the Company, and notes thereto, for the year ended
September 30, 1998.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the results of the interim periods presented.
Operating results of the interim period are not necessarily indicative
of the amounts that will be reported for the fiscal year ending
September 30, 1999.
2. DEFINITIVE AGREEMENT
The Company and its stockholders have entered into a definitive
agreement with The Alliance Group ("Alliance") pursuant to which the
Company will be purchased by Alliance. All outstanding shares of the
Company will be exchanged for cash and common stock of Alliance in
conjunction with the consummation of the initial public offering of the
common stock of Alliance.
* * * * * *
F-100
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Travis Business Systems, Inc.:
We have audited the accompanying balance sheet of Travis Business Systems, Inc.
as of December 31, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 1998. The financial
statements as of December 31, 1997 and for the year then ended were audited by
other auditors whose report expressed an unqualified opinion on those financial
statements. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on the 1998 financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 1998 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1998 financial statements present fairly, in all material
respects, the financial position of Travis Business Systems, Inc. at December
31, 1998, and the results of its operations and its cash flows for the year
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
February 19, 1999
F-101
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Travis Business Systems, Inc.:
We have audited the accompanying balance sheet of Travis Business Systems, Inc.
as of December 31, 1997 and the related statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 1997. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on the 1997 financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 1997 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1997 financial statements present fairly, in all material
respects, the financial position of Travis Business Systems, Inc. at December
31, 1997, and the results of its operations and its cash flows for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ SAXON & KNOL
Oklahoma City, Oklahoma
February 19, 1999
F-102
TRAVIS BUSINESS SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash $ 153,409 $ 57,657
Accounts receivable 381,421 639,498
Inventory 485,695 423,229
Other current assets 46,063 48,277
---------- ----------
Total current assets 1,066,588 1,168,661
PROPERTY AND EQUIPMENT:
Autos and trucks 90,749 62,166
Equipment 66,297 54,715
Furniture and fixtures 60,715 49,147
Leasehold improvements 11,998 11,998
---------- ----------
229,759 178,026
Less accumulated depreciation (111,119) (78,159)
---------- ----------
Property and equipment, net 118,640 99,867
OTHER ASSETS 5,884 5,884
---------- ----------
TOTAL $1,191,112 $1,274,412
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 172,654 $ 154,370
Deferred income 313,846 233,317
Other current liabilities 68,495 129,543
Line of credit - 72,000
---------- ----------
Total current liabilities 554,995 589,230
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 10,000 shares authorized;
588 shares issued and outstanding 588 588
Additional paid-in capital 19,500 19,500
Retained earnings 616,029 665,094
---------- ----------
Total stockholders' equity 636,117 685,182
---------- ----------
TOTAL $1,191,112 $1,274,412
---------- ----------
---------- ----------
See notes to financial statements.
F-103
TRAVIS BUSINESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------
1998 1997
---------- ----------
SALES $4,198,047 $3,810,617
COSTS AND EXPENSES:
Cost of sales 1,814,852 1,515,984
Salaries and benefits 1,814,593 1,591,483
Selling, general and administrative expenses 618,179 521,818
Interest expense 9,177 3,030
---------- ----------
Total costs and expenses 4,256,801 3,632,315
---------- ----------
INCOME (LOSS) BEFORE TAXES ON INCOME (58,754) 178,302
INCOME TAX BENEFIT (EXPENSE) 9,689 (62,880)
---------- ----------
NET INCOME (LOSS) $ (49,065) $ 115,422
---------- ----------
---------- ----------
See notes to financial statements.
F-104
TRAVIS BUSINESS SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------
ADDITIONAL
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
BALANCE, January 1, 1997 588 $ 588 $ 19,500 $ 549,672 $ 569,760
Net earnings - - - 115,422 115,422
---- ------ --------- ----------- ----------
BALANCE, December 31, 1997 588 588 19,500 665,094 685,182
Net loss - - - (49,065) (49,065)
---- ------ --------- ----------- ----------
BALANCE, December 31, 1998 588 $ 588 $ 19,500 $ 616,029 $ 636,117
---- ------ --------- ----------- ----------
---- ------ --------- ----------- ----------
See notes to financial statements.
F-105
TRAVIS BUSINESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (49,065) $ 115,422
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 43,353 23,247
Loss on disposal 3,021 -
Changes in current assets and liabilities:
Accounts receivable 258,077 (10,257)
Inventory (62,466) (17,781)
Other current assets 2,214 (3,636)
Other assets - 4,062
Accounts payable 18,284 (167,336)
Deferred income 80,529 (108,845)
Other current liabilities (61,048) 2,360
--------- ---------
Net cash provided by (used in) operating activities 232,899 (162,764)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (65,147) (38,399)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Utilization of credit line 707,000 72,000
Principal payments on credit line (779,000) -
--------- ---------
Net cash (used in) provided by financing activities (72,000) 72,000
--------- ---------
NET INCREASE (DECREASE) IN CASH 95,752 (129,163)
CASH, beginning of year 57,657 186,820
--------- ---------
CASH, end of year $ 153,409 $ 57,657
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 4,759 $ 452
Cash paid during the year for income taxes $ 83,197 $ 75,107
See notes to financial statements.
F-106
TRAVIS BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------
1. ORGANIZATION
Travis Business Systems, Inc. (the "Company") was incorporated in
September 1988, under the laws of the State of Oklahoma. The Company
sells, installs and maintains telephone equipment in the state of
Oklahoma market area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of sales and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATIONS - The Company currently buys most of its communications
products from two manufacturers. Although there are a limited number of
manufacturers of communications products, management believes that other
manufacturers could provide similar products on comparable terms. A change
in manufacturers, however, could cause a possible loss of sales, which
would affect operating results adversely.
REVENUE RECOGNITION - Revenue is recognized when equipment is installed or
when maintenance services are rendered. The Company defers revenues on
prepaid agreements to maintain customer telephone equipment. The deferred
revenues are recognized as revenue over the period the services are
provided, which is generally 12 months.
ACCOUNTS RECEIVABLE - Allowances for doubtful accounts receivable are
established based on historical losses, experience and knowledge of
specific items. No allowances have been established at December 31, 1998
and 1997 as management believes no material losses will be incurred from
receivables.
INVENTORY - Inventory is stated at the lower of average cost (first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Major additions and improvements are capitalized at cost, while
maintenance and repairs which do not extend the useful lives of the
respective assets are expensed. When assets are sold or retired, cost
and accumulated depreciation are removed from the respective accounts.
Any gains or losses resulting from disposal are included in current year
income or loss.
F-107
Property and equipment owned by the Company are depreciated using the
straight-line method over the following useful lives:
USEFUL LIVES
IN YEARS
Autos and trucks 3 - 5
Equipment 3 - 7
Furniture and fixtures 3 - 5
Leasehold improvements 15 - 20
INCOME TAXES - The Company uses an asset and liability approach to
account for income taxes. Deferred income taxes are recognized for the
tax consequences of temporary differences and operating loss and tax
credit carryforwards by applying enacted tax rates applicable to future
years to differences between the financial statement amounts and the tax
bases of existing assets and liabilities. A valuation allowance is
established if, in management's opinion, it is more likely than not that
some portion of the deferred tax asset will not be realized. As of
December 31, 1998, the Company's temporary differences between financial
and tax bases of assets and liabilities are not material, and no
deferred income taxes have been recognized.
PRODUCT RETURNS AND WARRANTY - Product returned by the customer due to
defective manufacture or failure during the manufacturer's warranty
period is returned by the Company to the manufacturer in exchange for
replacement product or refund.
LONG-LIVED ASSETS - Management of the Company assesses recoverability of
its long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable.
Recoverability is assessed and measured on long-lived assets using an
estimate of the undiscounted future cash flows attributable to the
asset. Impairment is measured based on future cash flows discounted at
an appropriate rate.
ADVERTISING - Advertising costs incurred by the company are expensed
during the period in which the advertising occurs.
FAIR VALUE DISCLOSURE - The Company's financial instruments include cash
and cash equivalents, receivables, short-term payables, and notes
payable. The carrying amounts of cash and cash equivalents, receivables,
and short-term payables approximate fair value due to their short-term
nature. The carrying amount of notes payable approximates fair value
based on borrowing terms currently available to the Company.
3. OPERATING LEASES
The Company has operating leases for its office space and certain of its
equipment. Lease expense during the years ended December 31, 1998 and
1997, totaled $84,947 and $86,380, respectively. The future minimum
payments by year at December 31, 1998, are as follows:
1999 $ 83,717
2000 74,400
2001 6,480
--------
$164,597
--------
--------
F-108
4. INCOME TAXES
The income tax provision consists of the following:
1998 1997
Federal income tax benefit (expense) $9,689 $(52,788)
State income taxes, net of federal benefit - (10,092)
------ --------
$9,689 $(62,880)
------ --------
------ --------
The difference between the statutory Federal income tax rate of 34% and
the Company's effective Federal rate for the years ended December 31,
1998 and 1997, is due to state taxes and the effect of graduated tax
rates.
5. LINE OF CREDIT
The Company has a line of credit agreement with a bank. The agreement
permits advances up to $450,000 with interest at Chase Manhattan Bank
Prime floating (8.5% at December 31, 1998) and expires September 30,
1999; however, management expects renewal of the agreement under similar
terms. The agreement is collateralized by the Company's bank accounts,
accounts receivable, inventory, contract rights, proceeds, goods,
general intangibles and personal guarantee from the Company's majority
shareholder. There was no amount outstanding on the line of credit at
December 31, 1998. At December 31, 1997, the amount outstanding totaled
$72,000.
6. 401(k) RETIREMENT PLAN
The Company sponsors a 401(k) employee pension plan covering employees
who meet minimum age and service requirements. Employees may elect to
contribute up to 15% of their eligible compensation. Contributions by
the Company are made at the discretion of management and vest ratably
after one year over the term of a participant's employment at 20% per
year. The Company made contributions to the plan totaling $15,520 and
$11,447 during the years ended December 31, 1998 and 1997, respectively.
7. MAJOR CUSTOMER
Sales to the Company's largest customer amounted to approximately 11% of
net sales for the year ended December 31, 1998. No individual customer
in 1997 accounted for net sales in excess of 10%.
8. SUBSEQUENT EVENTS
The Company and its stockholders have entered into a definitive
agreement with The Alliance Group, Inc. ("Alliance") pursuant to which
the Company will be purchased by Alliance. All outstanding shares of the
Company will be exchanged for cash and common stock of Alliance in
conjunction with the consummation of the initial public offering of the
common stock of Alliance.
Subsequent to December 31, 1998, the Company recognized a loss of
$161,428 for damaged inventory caused by a fire that occurred in January
1999. The Company has since received insurance proceeds of $205,016
related to the fire.
* * * * * *
F-109
UNTIL ____________, 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS'OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[BACK COVER]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is incorporated under the laws of the State of Oklahoma.
Section 1031 ("Section 1031") of the Oklahoma General Corporation Act, as the
same exists or may hereafter be amended, inter alia, provides that an
Oklahoma corporation may indemnify any persons who were, are or are
threatened to be made, parties to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person is or was an officer, director,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such action, suit
or preceding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was illegal. An Oklahoma
corporation may indemnify any persons who are, were or are threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reasons of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee
or agent of another corporation or enterprise. The indemnity may include
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit,
provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests,
provided that no indemnification is permitted without judicial approval if
the officer, director, employee or agent is adjudged to be liable to the
corporation. Where an officer, director, employee or agent is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
Section 1031 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity arising out of his status as such, whether or not the corporation would
otherwise have the power to indemnify him under Section 1031.
LoreCom's Certificate of Incorporation, as amended, eliminates in certain
circumstances the liability of directors for a breach of their fiduciary duty as
directors. These provisions do not eliminate the liability of a director:
- For a breach of the director's duty of loyalty to the Company or its
stockholders;
- For acts or omissions by a director not in good faith or which involve
intentional misconduct or a knowing violation of law;
- For liability relating to the declaration of dividends and purchase or
redemption of shares in violation of the Oklahoma General Corporation
Act; or
- For any transaction from which the director derived an
improper personal benefit.
The Company's certificate of incorporation provides that the Company shall
indemnify all of its directors and officers to the full extent permitted by the
Oklahoma General Corporation Act. Under such provisions, any director
II-1
or officer, who in his capacity as such, is made or threatened to be a made a
party to any suit or proceeding, may be indemnified if the board of directors
determines such director or officer acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
Company. The Certificate and the Oklahoma General Corporation Act further
provide that such indemnification is not exclusive of any other rights to
which such individuals may be entitled under the Certificate, any agreement,
vote of stockholders or disinterested directors or otherwise.
All of the Company's directors and officers will be covered by insurance
policies maintained by it against certain liabilities for actions taken in their
capacities as such.
II-2
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of estimated expenses, to be paid solely by
the Company, in connection with the distribution of the securities being
registered:
SEC Registration Fee $ 4,425
Printing expenses $
Accounting fees and expenses $
Legal fees and expenses $
Miscellaneous expenses $
Total $
* All amounts are estimated.
RECENT SALES OF UNREGISTERED SECURITIES
On September 4, 1998, LoreCom issued 100 shares of common stock, par value
$.01, to David W. Aduddell for aggregate consideration of $1.00 and certain
intangible personal property, including business plans, organizational documents
and economic projections relating to several consolidating company
opportunities. The transaction was exempt from registration under Section 4(2)
of the Securities Act because no public offering was involved.
On September 8, 1998, LoreCom issued 167 shares of common stock, par value
$.01, to Ricky Naylor for aggregate consideration of $500,000, which consisted
of $10.00 in cash and a binding agreement to pay LoreCom $499,990 on demand.
The transaction was exempt from registration under Section 4(2) of the
Securities Act because no public offering was involved.
II-3
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger, dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition V Corp.,
Access Communications Services, Inc,. David Aduddell and Steve
Aduddell, and form of employment and/or consulting agreement
attached as exhibit thereto.
2.2 Agreement and Plan of Merger, dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition VI Corp.,
American Telecom, Inc., Tony B. Alexander and William R.
Pearson, and form of employment and/or consulting agreement
attached as exhibit thereto.
2.3 Agreement and Plan of Merger, dated March 9, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition VII Corp.,
Banner Communications, Inc., Charles O'Toole and Phillip Rodger
Williams, and form of employment and/or consulting agreement
attached as exhibit thereto.
2.4 Agreement and Plan of Merger dated March 9, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition IX Corp.,
Communication Services, Inc. and Steve Williams, and form of
employment and/or consulting agreement attached as exhibit
thereto.
2.5 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition VII Corp.,
Commercial Telecom Systems, Inc., John Whitten, Mark Whitten
and Jody Slape, and form of employment and/or consulting
agreement attached as exhibit thereto.
2.6 Amendment to Agreement and Plan of Merger dated March 24, 1999,
by and among The Alliance Group, Inc., Alliance Acquisition
XIII Corp., Commercial Telecom Systems, Inc., John Whitten,
Mark Whitten and Jody Slape.
2.7 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition III Corp.,
Nobel Systems, Ken Blood, David Andres and Jim Pearson, and
form of employment and/or consulting agreement attached as
exhibit thereto.
2.8 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition II Corp.,
Perkins Office Machines, Inc. and Jack Perkins, and form of
employment and/or consulting agreement attached as exhibit
thereto.
2.9 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition X Corp., Telkey
Communications, Inc., Michael P. Murphy and Deborah S. Murphy,
and form of employment and/or consulting agreement attached
as exhibit thereto.
2.10 Agreement and Plan of Merger dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition I Corp., Terra
Telecom, Inc., Jerry McCart, Paula L. McCart, Ron Crainshaw
and Lora M. Crainshaw, and form of employment and/or consulting
agreement attached as exhibit thereto.
2.11 Agreement and Plan of Merger dated March 12, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition XI Corp.,
Travis Business Systems, Inc., Wylie Limited Partnership,
Gregory Mantia and Scott McCrory, and form of employment and/or
consulting agreement attached as exhibit thereto.
2.12 Asset Purchase Agreement dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition IV Corp. and
Able Communications Incorporated, and allocation of purchase
price attached as exhibit thereto.
2.13 Asset Purchase Agreement dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition XI Corp.,
Electrical and Instrument Sales Corp. d/b/a EIS Communications,
and Electronic Information Systems, L.L.C, and allocation of
purchase price and form of employment and/or consulting
agreement attached as exhibits thereto.
2.14 Asset Purchase Agreement dated March 10, 1999, by and among
The Alliance Group, Inc., Alliance Acquisition XIII Corp.
and The Phone Man Sales and Services, Inc., and allocation of
purchase price attached as exhibit thereto.
2.15 Amendment to Agreement and Plan of Merger dated April 5, 1999,
by and among The Alliance Group, Inc., Alliance Acquisition V
Corp., Access Communications Services, Inc., David Aduddell
and Steve Aduddell.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Bylaws of the Registrant.
4.1 Form of Certificate representing Common Stock.
5.1 Opinion of McAfee & Taft A Professional Corporation.
10.1 Form of Warrant to be issued to John Whitten.
10.2 Promissory Note to Ricky Naylor.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Hunter, Atkins & Russell, PLC.
23.3 Consent of Saxon & Knol P.C.
23.4 Consent of McAfee & Taft A Professional Corporation (contained
in Exhibit 5.1).
23.5 Consent of Larry Travis.
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).
27.1 Financial Data Schedule.
II-4
UNDERTAKINGS
The small business issuer will provide to the underwriter at the closing
specified in the underwriting agreement, certificates in such denominations
and registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business
issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the small business issuer will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule
424(b)(1), or (4) or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, LoreCom has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Oklahoma City, State
of Oklahoma, on May 13, 1999.
LoreCom Technologies, Inc.
By: /s/ WILLIAM J. HARTWIG
------------------------------
William J. Hartwig
Vice President of Operations
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints William J. Hartwig and Joseph O. Evans with
full power to act without the other, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities (until revoked in writing)
to sign any and all amendments (including post-effective amendments and
amendments thereto) to this registration statement, including any
registration statement filed pursuant to Rule 462 under the Securities Act of
1933, and to file the same with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary fully to all
intents and purposes as he might do or could do in person thereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons on May 13, 1999,
in the capacities indicated:
SIGNATURE CAPACITY
--------- --------
/s/ Ricky Naylor* Chairman of the Board and Director
-----------------------
Ricky Naylor
/s/ William J. Hartwig Vice President of Operations
----------------------- (Principal Executive Officer)
William J. Hartwig
/s/ Joseph O. Evans Chief Financial Officer (Principal Financial
----------------------- Officer)
Joseph O. Evans
/s/ Debra G. Morehead* Chief Accounting Officer (Principal
----------------------- Accounting Officer)
Debra G. Morehead
- --------------------
* Executed by William J. Hartwig under power of attorney
II-6
INDEX TO EXHIBITS
EXHIBIT METHOD OF
NO. DESCRIPTION FILING
- ------- ----------- ---------
1.1 Form of Underwriting Agreement. To be filed by Amendment
2.1 Agreement and Plan of Merger, dated March 10, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition V Corp.,
Access Communications Services, Inc,. David Aduddell and Steve
Aduddell, and form of employment and/or consulting agreement
attached as exhibit thereto.
2.2 Agreement and Plan of Merger, dated March 10, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition VI Corp.,
American Telecom, Inc., Tony B. Alexander and William R.
Pearson, and form of employment and/or consulting agreement
attached as exhibit thereto.
2.3 Agreement and Plan of Merger, dated March 9, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition VII Corp.
Banner Communications, Inc., Charles O'Toole and Phillip Rodger
Williams, and form of employment and/or consulting agreement
attached as exhibit thereto.
2.4 Agreement and Plan of Merger dated March 9, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition IX Corp.,
Communication Services, Inc. and Steve Williams, and form of
employment and/or consulting agreement attached as exhibit
thereto.
2.5 Agreement and Plan of Merger dated March 10, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition VII Corp.,
Commercial Telecom Systems, Inc., John Whitten, Mark Whitten
and Jody Slape, and form of employment and/or consulting
agreement attached as exhibit thereto.
2.6 Amendment to Agreement and Plan of Merger dated March 24, 1999, Previously Filed
by and among The Alliance Group Inc., Alliance Acquisition
XIII Corp., Commercial Telecom Systems, Inc., John Whitten,
Mark Whitten and Jody Slape.
2.7 Agreement and Plan of Merger dated March 10, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition III Corp.,
Nobel Systems, Ken Blood, David Andres and Jim Pearson, and
form of employment and/or consulting agreement attached as
exhibit thereto.
2.8 Agreement and Plan of Merger dated March 10, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition II Corp.,
Perkins Office Machines, Inc. and Jack Perkins, and form of
employment and/or consulting agreement attached as exhibit
thereto.
2.9 Agreement and Plan of Merger dated March 10, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition X Corp., Telkey
Communications, Inc., Michael P. Murphy and Deborah S. Murphy,
and form of employment and/or consulting agreement attached
as exhibit thereto.
2.10 Agreement and Plan of Merger dated March 10, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition I Corp., Terra
Telecom, Inc., Jerry McCart, Paula L. McCart, Ron Crainshaw
and Lora M. Crainshaw, and form of employment and/or consulting
agreement attached as exhibit thereto.
2.11 Agreement and Plan of Merger dated March 12, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition XI Corp.,
Travis Business Systems, Inc., Wylie Limited Partnership,
Gregory Mantia and Scott McCrory, and form of employment and/or
consulting agreement attached as exhibit thereto.
2.12 Asset Purchase Agreement dated March 10, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition IV Corp. and
Able Communications Incorporated, and allocation of purchase
price attached as exhibit thereto.
2.13 Asset Purchase Agreement dated March 10, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition XI Corp.,
Electrical and Instrument Sales Corp. d/b/a EIS Communications,
and Electronic Information Systems, L.L.C, and allocation of
purchase price and form of employment and/or consulting
agreement attached as exhibits thereto.
2.14 Asset Purchase Agreement dated March 10, 1999, by and among Previously Filed
The Alliance Group Inc., Alliance Acquisition XIII Corp.
and The Phone Man Sales and Services, Inc., and allocation of
purchase price attached as exhibit thereto.
2.15 Amendment to Agreement and Plan of Merger dated April 5, 1999, Previously Filed
by and among The Alliance Group Inc., Alliance Acquisition V
Corp., Access Communications Services, Inc., David Aduddell
and Steve Aduddell.
3.1 Amended and Restated Certificate of Incorporation of the Filed herewith Electronically
Registrant.
3.2 Bylaws of the Registrant. Filed herewith Electronically
4.1 Form of Certificate representing Common Stock. To be filed by Amendment
5.1 Opinion of McAfee & Taft A Professional Corporation. To be filed by Amendment
10.1 Form of Warrant to be issued to John Whitten. To be filed by Amendment
10.2 Promissory Note to Ricky Naylor. To be filed by Amendment
21.1 Subsidiaries of the Registrant. Previously Filed
23.1 Consent of Deloitte & Touche LLP. Filed herewith Electronically
23.2 Consent of Hunter, Atkins & Russell, PLC. Filed herewith Electronically
23.3 Consent of Saxon & Knol P.C. Filed herewith Electronically
23.4 Consent of McAfee & Taft A Professional Corporation (contained To be filed by Amendment
in Exhibit 5.1).
23.5 Consent of Larry Travis. Previously Filed
24.1 Powers of Attorney (included on the signature page of this Previously Filed
Registration Statement).
27.1 Financial Data Schedule. Previously Filed