page 3
F-9
Executive LAN Management, Inc.,
dba Micro Visions
Notes to Financial Statements (continued)
2. INCOME TAXES
Provision (benefit) for income taxes is comprised of the following:
DECEMBER 31
------------------------
1998 1997
--------- --------
Current:
Federal $ (22,000) $201,000
State -- 53,000
--------- --------
(22,000) 254,000
--------- --------
Deferred:
Federal 162,000 120,000
State 38,000 21,000
--------- --------
200,000 141,000
--------- --------
Total provision for income taxes $ 178,000 $395,000
========= ========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (liabilities) are as follows:
DECEMBER 31
---------------------------
1998 1997
---------- ----------
Deferred tax assets:
Depreciation $ 1,000 $ 1,000
---------- ----------
Total deferred tax assets 1,000 1,000
---------- ----------
Deferred tax liabilities:
Inventory adjustment (213,000) (92,000)
Accrual to cash adjustment (223,000) (144,000)
---------- ----------
Net deferred tax liabilities (436,000) (236,000)
---------- ----------
Total net deferred tax liabilities $ (435,000) $ (235,000)
========== ==========
On July 1, 1998, the Company changed its tax status, as defined by the Internal
Revenue Code, to Subchapter S, which eliminated the requirement for the Company
to pay federal income taxes as net income is passed through and taxable to the
individual stockholders. A state provision for income taxes will be recorded
based on a California statutory rate of 1.5% for Subchapter S Corporations.
F-10
Executive LAN Management, Inc.,
dba Micro Visions
Notes to Financial Statements (continued)
2. INCOME TAXES (CONTINUED)
Income tax benefit computed at the statutory federal income tax rate (34%) and
income tax expense provided in the financial statements differ as follows for
the years ended December 31:
1998 1997
---------- --------
Benefit computed at the statutory rate $ 291,000 $317,000
S Corp income not subject to tax (111,000) --
Nondeductible expenses (6,000) 6,000
Statement income tax, net of federal income tax benefit 19,000 54,000
Other (15,000) 18,000
---------- --------
Income tax expense $ 178,000 $395,000
========== ========
3. LINE OF CREDIT
The Company entered into a $2.5 million line of credit agreement with a
financial institution to finance its inventory purchases. The available credit
line is based on a percentage of the Company's eligible accounts receivable
balance less the outstanding balance owed to the financial institution. The
outstanding balance bears interest at prime plus 3.03% (10.78% at December 31,
1998). At December 31, 1998, the unused credit line was $2,134,000.
Substantially all of the Company's assets are collateral under the credit
agreement.
4. COMMITMENTS
The Company has entered into various operating leases ranging from three to five
years for its facilities. Rentals under certain leases have rent escalation
clauses as set forth in their respective lease agreements. Future minimum rental
commitments as of December 31, 1998 are as follows:
1999 $ 279,000
2000 267,000
2001 244,000
2002 181,000
2003 91,000
----------
$1,062,000
==========
Rent expense was $135,000 and $36,000 for the years ended December 31, 1998 and
1997, respectively.
F-11
Executive LAN Management, Inc.,
dba Micro Visions
Notes to Financial Statements (continued)
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
DECEMBER 31
----------------------
1998 1997
-------- --------
Numerator:
Net income $677,000 $538,000
Denominator:
Shares used in computing basic and
diluted earnings per share
200 200
======== ========
Basic and diluted earnings per share $ 3,385 $ 2,690
======== ========
6. RELATED PARTY TRANSACTIONS
During 1997 and 1998, the Company made various advances to its officers.
Advances in 1997 aggregated $72,000 with one advance to a shareholder in the
amount of $68,000. This advance was canceled by the Company in 1998 and recorded
as a bonus payment. Outstanding advances to officers at December 31, 1998 was
$2,000.
7. PENSION PLANS
The Company has three defined contribution pension plans covering employees over
the age of 21 years with one year of service. The Company's contribution
requirements under these plans range from zero percent to one hundred percent of
participants' eligible annual compensation as defined in the plan documents. The
Company's combined contributions to these plans for the years ended December 31,
1998 and 1997 were $108,000 and $15,000, respectively.
8. SUBSEQUENT EVENTS
On June 2, 1999, the Company and the Company's shareholders signed an Agreement
and Plan of Reorganization and Merger (the "Agreement") with FutureLink
Distribution Corp. ("FutureLink"). The Agreement provides for a merger of the
Company with a subsidiary of FutureLink such that the Company's outstanding
stock shall be converted into and become a right to receive the consideration as
set forth in the agreement. The merger is to take place as soon as practicable
after the satisfaction or waiver of the conditions set forth in the Agreement
and is anticipated to be completed by October 1999.
F-12
Executive LAN Management, Inc.,
dba Micro Visions
Notes to Financial Statements (continued)
9. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company has completed
an assessment of their IT systems as well as the software and hardware sold to
its customers noting that they are Year 2000 compliant. The Company's IT systems
primarily consist of its financial reporting system. In July 1998, the Company
purchased and implemented a Year 2000 compliant financial reporting software
package totaling $42,000. The Company's non-IT systems primarily consist of
heating, sprinklers and security equipment at the Company's facilities. The
Company will complete its review and remediation of its non-IT systems and its
IT systems other than the financial reporting system by October 1, 1999. The
Company estimates that the total remaining costs to complete any required
modifications, upgrades or replacements of its IT and non-IT systems will not
have a material adverse effect on its business or results of operations. The
Company has obtained Year 2000 compliant certification letters from its major
software and hardware vendors noting that their software and hardware sold by
the Company are Year 2000 compliant. However, the failure of the Company's other
vendors and suppliers to be fully Year 2000 compliant with regards to their
products by January 1, 2000 could result in interruptions in the Company's
normal business work operations. The Company is currently developing contingency
plans to address the year 2000 issues that may pose a significant risk to the
Company's ongoing operations. The Company expects to complete the contingency
plans by October 31, 1999. |
