REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Shareholders
Americable, Inc.
We have audited the accompanying balance sheets of Americable, Inc. (a
wholly-owned subsidiary of 4J2R1C Limited Partnership) as of December 31, 2002
and 2001 and the related statements of operations, shareholder's equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Americable, Inc. as of
December 31, 2002 and 2001 and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note A to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets on January 1, 2002.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note B, the Company
has incurred negative cash flows from operations and experienced net losses.
These factors, among others, raise substantial doubt about the Company's ability
to continue as a going concern. Management's plan in regard to these matters
are also described in note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Minneapolis, Minnesota
April 14, 2003
AMERICABLE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF
4J2R1C LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS 2002 2001
-------------- ------------
CURRENT ASSETS
Cash and equivalents $ 2,117,801 $ 3,049,687
Accounts receivable, net 590,071 1,079,754
Investments 174,420 458,896
Due from affiliates 176,549 13,296
Due from officer 71,411 -
Inventories 1,374,476 2,357,353
Prepaid expenses 87,313 197,805
-------------- ------------
Total current assets 4,592,041 7,156,791
PROPERTY AND EQUIPMENT - AT COST
Office, production and computer equipment 2,348,416 2,330,403
Leasehold improvements 793,535 793,535
-------------- ------------
3,141,951 3,123,938
Less accumulated depreciation 2,065,681 1,665,235
-------------- ------------
1,076,270 1,458,703
OTHER ASSETS
Goodwill - 3,466,147
Restricted cash 235,000 235,000
-------------- ------------
$ 5,903,311 $12,316,641
============== ============
LIABILITIES AND SHARE-
HOLDER'S EQUITY (DEFICIT) 2002 2001
-------------- ------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,171,984 $ -
Accounts payable 343,968 594,957
Accrued liabilities:
Compensation 305,338 395,695
Other 278,767 263,198
-------------- ------------
Total current liabilities 2,100,057 1,253,850
LONG-TERM DEBT, less current maturities 6,912,223 7,763,131
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDER'S EQUITY (DEFICIT)
Common stock - no par value; 5,000,000 shares
authorized, 4,000,000 shares issued and
outstanding at December 31, 2002 and 2001 - -
Additional paid-in capital 13,296,291 13,296,291
Accumulated deficit (16,405,260) (9,996,631)
-------------- ------------
(3,108,969) 3,299,660
-------------- ------------
$ 5,903,311 $12,316,641
============== ============
The accompanying notes are an integral part of these financial statements.
5
AMERICABLE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF
4J2R1C LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------ -------------
Revenues $ 9,247,084 $ 14,601,382
Operating and product costs 6,712,304 10,924,396
------------ -------------
Gross profit 2,534,780 3,676,986
Selling, general and administrative expenses 4,609,827 6,132,160
Goodwill impairment 3,466,147 542,945
------------ -------------
Operating loss (5,541,194) (2,998,119)
Interest expense, net 696,200 510,155
Realized and unrealized loss on investments 188,476 476,986
------------ -------------
Net loss before income taxes (6,425,870) (3,985,260)
Income tax expense (benefit) (17,241) 5,000
------------ -------------
NET LOSS $(6,408,629) $ (3,990,260)
============ =============
The accompanying notes are an integral part of these financial statements.
6
AMERICABLE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF
4J2R1C LIMITED PARTNERSHIP)
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2002 AND 2001
Additional
Common paid-in Accumulated
shares capital deficit Total
--------- ----------- ------------- ------------
Balance at January 1, 2001 4,000,000 $13,296,291 $ (6,006,371) $ 7,289,920
Net loss - - (3,990,260) (3,990,260)
--------- ----------- ------------- ------------
Balance at December 31, 2001 4,000,000 13,296,291 (9,996,631) 3,299,660
Net loss - - (6,408,629) (6,408,629)
--------- ----------- ------------- ------------
Balance at December 31, 2002 4,000,000 $13,296,291 $(16,405,260) $(3,108,969)
========= =========== ============= ============
The accompanying notes are an integral part of these financial statements.
7
AMERICABLE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF
4J2R1C LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
Cash flows from operating activities
Net loss $(6,408,629) $(3,990,260)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 417,314 641,320
Loss on goodwill impairment 3,466,147 542,945
Loss on short-term investments 188,476 476,986
Changes in operating assets and liabilities:
Accounts receivable 489,683 1,693,656
Inventories 982,877 1,633,353
Accounts payable (250,989) (2,289,089)
Accrued liabilities 247,440 (469,968)
Prepaid expenses, due from affiliates and officer (124,172) 24,845
Proceeds from sale of trade securities 96,000 114,118
------------ ------------
Net cash used in operating activities (895,853) (1,622,094)
Cash flows from investing activities
Capital expenditures (34,881) (220,617)
------------ ------------
Net cash used in investing activities (34,881) (220,617)
The accompanying notes are an integral part of these financial statements.
8
AMERICABLE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF
4J2R1C LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
--------------- ---------------
Cash flows from financing activities
Proceeds from long-term debt $ 15,000 $ 7,635,608
Principal payments on long-term debt (16,152) (1,184,420)
Net payments on note payable - (1,640,000)
--------------- ---------------
Net cash provided by (used in)
financing activities (1,152) 4,811,188
--------------- ---------------
NET INCREASE (DECREASE)
IN CASH (931,886) 2,968,477
Cash and equivalents at beginning of year 3,049,687 81,210
--------------- ---------------
Cash and equivalents at end of year $ 2,117,801 $ 3,049,687
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 402,902 $ 360,134
=============== ===============
Cash paid for taxes $ 2,500 $ 5,000
=============== ===============
Supplemental disclosure of noncash financial activities:
Accrued interest added to the principal balance of
the debentures $ 322,228 $ 127,523
=============== ===============
The accompanying notes are an integral part of these financial statements.
9
AMERICABLE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF
4J2R1C LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Americable, Inc. (the Company), a wholly-owned subsidiary of 4J2R1C a limited
partnership, is a value added manufacturer of fiber optic and copper
connectivity solutions, with sales predominately throughout the United States.
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:
Cash and Cash Equivalents
- -------------------------
The Company maintains its cash balances in one financial institution located in
Minneapolis, Minnesota. These balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. Cash equivalents are highly liquid
marketable securities with original maturities of three months or less.
Accounts Receivable
- -------------------
The Company grants credit to customers in the normal course of business, but
generally does not require collateral or any other security to support amounts
due. Management performs on-going credit evaluations of customers. The Company
maintains allowances for potential credit losses which when realized have been
within management's expectations. The allowance was $70,000 and $266,000 at
December 31, 2002 and 2001.
Investments
- -----------
Investments represent shares of Vicom, Inc. common stock and is classified as
trading securities, which are recorded at fair value with unrealized gains and
losses included in operations. The Company sold 73,000 and 36,200 shares for
$96,000 and $114,000 during the years ended December 31, 2002 and 2001.
10
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Inventories
- -----------
Inventories consist of finished goods and are stated at the lower of average
cost (which approximates first-in, first-out method) or market.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Depreciation and amortization are
provided in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated useful lives under the straight-line method.
Leasehold improvements are amortized over the estimated service life of the
asset or the term of the lease, whichever is shorter. The useful lives are
estimated at two to ten years.
Goodwill
- --------
Goodwill represents the excess of the purchase price and related costs over the
fair value of net assets of businesses acquired. Prior to January 1, 2002,
goodwill was amortized on a straight-line basis over a period of 40 years.
Effective January 1, 2002 the Company adopted Statement of Financial Accounting
Standards (SFAS) 142, Goodwill and Intangible Assets. SFAS 142 eliminates the
amortization of goodwill and other intangible assets with indefinite lives and
requires that these assets be tested for impairment annually or whenever an
impairment indicator arises. Effective January 1, 2002, the Company discontinued
the amortization of goodwill.
The Company completed its annual goodwill impairment test at December 31, 2002
and determined that the carrying value of goodwill was not supported at December
31, 2002 and, accordingly, wrote down the balance of goodwill by $3,466,147. The
annual impairment test was completed utilizing enterprise fair market value,
based on an offer term sheet received from a unrelated third party shortly after
the end of the year which indicated impairment existed. The Company then
reviewed the fair value of all assets and liabilities and determined that the
goodwill was unsupported.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Accumulated amortization of goodwill was $2,069,000 at December 31, 2001. The
Company determined that the expected future cash flows from a portion of its
business supporting goodwill from two previous acquisitions no longer supported
the carrying value of that portion of its goodwill. The remaining unamortized
goodwill balance related to those acquisitions of approximately $543,000 was
written off at December 31, 2001.
The pro forma effect of adopting SFAS 142 for the year ended December 31, 2001
would have resulted in a net loss of $3,831,500.
Stock Based Compensation
- ------------------------
The Company utilizes the intrinsic value method of accounting for stock based
employee compensation plans. All options granted have an exercise price equal to
the market value of the underlying common stock on the date of grant and
accordingly, no compensation cost is reflected in net earnings for the years
ended December 31, 2002 and 2001. Had the Company elected to use the fair value
method for valuing options granted, the pro forma net loss for the years ended
December 31, 2002 and 2001 would not have been materially different than what
was reported.
Use of Estimates
- ----------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain 2001 amounts have been reclassified to conform to the presentation used
in 2002. The reclassifications had no effect on total assets, liabilities, net
loss or shareholder's equity (deficit) as reported.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Recent Accounting Pronouncements
- --------------------------------
In June 2002, FASB issued Statement of Financial Accounting Standards (SFAS) No.
146, Accounting for Costs Associated with Exit or Disposal Activities. This
statement provides financial and reporting guidance for costs associated with
exit or disposal activities, including one-time terminations benefits, contract
termination costs other than for a capital lease, and costs to consolidate
facilities or relocate employees. This statement is effective for the Company
for all exit and disposal activities initiated after December 31, 2002.
Management does not believe the adoption of this pronouncement will have a
material effect on the Company.
Effective for the year ending December 31, 2002, the Company adopted SFAS 148,
Accounting for Stock-Based compensation - Transaction and Disclosure. SFAS 148
amends the disclosure and certain transition provisions of statement 123,
Accounting for Stock-Based Compensation. The disclosure requirements of this
pronouncement are included in the financial statements for the year ended
December 31, 2002.
In November 2002, FASB issued Interpretation No. 45 (FIN 45), Guarantor's
Accounting and Disclosure for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 requires that a guarantor is required to measure
and recognize the fair value of the guarantee at inception. It must also provide
new disclosures regarding the nature of any guarantees and certain other items,
including product warranties. The disclosure requirements are effective for the
Company for the year ending December 31, 2002 and the initial recognition and
measurement provisions are effective prospectively, that is, for guarantees
issued or modified on or after January 1, 2003. The Company provides a limited
warranty to its customers, which has been immaterial and management does not
believe the adoption of this pronouncement will have a material effect on the
Company.
In January 2003, the FASB issued Interpretation 46 (FIN 46), Consolidation of
Variable Interest Entities. FIN 46 requires the preparation of consolidated
financial statements when one entity has a controlling financial interest in a
second entity. This interpretation is not expected to affect the Company's
financial statements.
NOTE B - LIQUIDITY AND GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. The Company has incurred negative cash flows from
operations and experienced net losses resulting in an accumulated deficit of
$16,405,260 as of December 31, 2002. Management expects to continue to operate
at a net loss and experience negative cash flow from operating activities
through the foreseeable future. At December 31, 2002, the Company's cash
resources and available borrowings are insufficient to fund operations for the
next 12 months without additional borrowings or equity capital. These factors
raise substantial doubt about its ability to continue as a going concern.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon profitable operations of the Company and access to
working capital financing. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
Management currently is exploring available options for additional capital
including additional borrowings or restructuring existing borrowings. However,
there is no assurance that such funds will be available on terms acceptable to
the Company. If the Company is not successful in obtaining additional funding,
it may not be able to continue as a going concern.
NOTE C - RESTRICTED CASH
The lessor of the Company's building requires an irrevocable, unconditional
standby letter of credit in the amount of $235,000 and accordingly, the Company
maintains restricted cash deposits with a bank for this amount. The letter of
credit must be maintained through the expiration of the lease term on September
30, 2006.
NOTE D - NOTE PAYABLE AND LONG-TERM DEBT
Credit Agreements with a Bank
- -----------------------------
During 2001, the Company maintained a revolving line of credit and a $1,200,000
term note payable with a bank. The line provided for borrowings up to the lesser
of $3,250,000 or a defined borrowing base based on eligible accounts receivable
and inventory with interest payable monthly. These facilities were paid in full
during 2001 with the proceeds from the issuance of the Company's debenture notes
payable.
Debentures
- ----------
In December 2000, the Company filed a registration statement with the State of
Minnesota, which was amended in April 2001, to allow the Company to sell
$10,000,000 of subordinated debentures with maturities of two, five and ten
years. The subordinated debentures are unsecured, bear interest at rates of
7.25%, 8.50% and 9.75% (weighted average effective interest rate of 9.16% and
8.75% at December 31, 2002 and 2001), and are due in varying installments
beginning in June 2003 through December 2011. The debentures are redeemable at
the Company's option at any time prior to maturity on at least 30 days notice to
each holder without a premium. There were no unissued debentures at December 31,
2002 as the Company discontinued its registration to sell debentures during
2002.
Aggregate future maturities of debentures are as follows:
Years ending December 31,
-------------------------
2003 $1,171,984
2004 15,481
2005 -
2006 4,108,975
2007 -
Thereafter 2,787,767
---------
$8,084,207
=========
NOTE E - INCOME TAXES
The provision for income taxes consisted of the following:
2002 2001
------------- ------------
Current income tax expense (benefit) $ (17,241) $ 5,000
Deferred income tax benefit (1,115,000) (1,243,000)
Increase in deferred tax asset
valuation allowance 1,115,000 1,243,000
------------- ------------
$ (17,241) $ 5,000
============= ============
The difference between amounts computed by applying the statutory federal and
state income tax rates to operating results before income taxes and the actual
tax provision is principally related to changes in Company's valuation allowance
on deferred tax assets, either created or utilized, to offset the deferred tax
(benefit) expense generated in the respective years.
The Company has a deferred income tax assets of approximately $2,818,000and
$1,703,000 at December 31, 2002 and 2001 resulting primarily from net operating
loss carryforwards, accruals, asset valuation reserves and differences between
book and tax depreciation, which are not currently deductible for income tax
purposes. The Company continues to maintain a full valuation allowance against
these deferred tax assets, as future realization of these assets is not assured.
At December 31, 2002, the Company has approximately $5,900,000 of net operating
loss carryforward available, which begins to expire in 2021.
NOTE F - LEASE COMMITMENT
The Company conducts its operations in a leased facility under an operating
lease expiring September 2006. The lease provides that real estate taxes,
insurance, and maintenance expenses are obligations of the Company. Rent
expense, including real estate taxes and maintenance expenses, was approximately
$393,000 and $314,000 for the years ended December 31, 2002 and 2001. The
following is a schedule of minimum rental commitments for base rent:
2003 $293,662
2004 301,085
2005 298,998
2006 224,249
NOTE G - EMPLOYEE BENEFIT PLAN
The Company's employees participate in the defined contribution plan of Corstar
Inc. (a company affiliated through common ownership). Full-time employees of the
Company who have at least one year of continuous employment are eligible to
participate, as defined in the Plan. Prior to June 15, 2001, the Company matched
50% of the first 6% of each participants eligible compensation. Effective June
15, 2001, the Company changed to a discretionary contribution plan with matching
contributions at the discretion of the Company's Board of Directors. There was
no matching contribution awarded during the period June 15, 2001 through
December 31, 2001. There were no contributions to the plan for the year ending
December 31, 2002. Contributions made by the Company to this plan were
approximately $88,000 for the year ending December 31, 2001.
NOTE H - STOCK OPTION PLANS
The Company maintains a non-qualified stock option plan for the benefit of
selected officers and key employees. The current plan, approved by the Company's
Board of Directors in 2000, reserved 1,000,000 shares for issuance. Options
granted to date under the plan have been at management's estimate of the fair
market value on the date of the grant. Each grant awarded specifies the period
for which the options are exercisable (generally 10 years), the rate at which
they vest, and provides that the options shall expire at the end of such period.
NOTE H - STOCK OPTION PLANS - Continued
Option transactions under this plan are summarized as follows:
Weighted Weighted
Number average average
of exercise remaining
shares price contractual life
--------- --------- ----------------
Outstanding at January 1, 2001 607,500 $ 0.90
Canceled/forfeited (295,000) 0.90
---------
Outstanding at December 31, 2001 312,500 0.90
Canceled/forfeited (215,000) 0.90
--------- ---------
Outstanding at December 31, 2002 97,500 $ 0.90 7.08 years
========= =========
Options exercisable at:
December 31, 2002 80,600 $ 0.90 7.14 years
========= =========