EX-7.2 4 ex7-2.txt EXHIBIT 7.2 KINGSTON SALES CORPORATION Financial Statements Six Months Ended June 30, 2002 and 2001 KINGSTON SALES CORPORATION TABLE OF CONTENTS Financial Statements Balance Sheets......................................................... 1 Statements of Operations............................................... 2 Statement of Stockholders' Equity...................................... 3 Statements of Cash Flows............................................... 4 Notes to Financial Statements.......................................... 5 KINGSTON SALES CORPORATION BALANCE SHEETS ASSETS
Unaudited Audited June 30, December 31, 2002 2001 CURRENT ASSETS Accounts receivable - net of allowance for doubtful accounts $ 1,921,000 $ 1,996,000 Inventory 659,000 505,000 ----------- ----------- Total Current Assets 2,580,000 2,501,000 ----------- ----------- OTHER ASSETS Office equipment 161,000 151,000 Vehicles 117,000 105,000 Leasehold improvements 166,000 162,000 Accumulated depreciation (98,000) (67,000) ----------- ----------- Total Other Assets 346,000 351,000 ----------- ----------- TOTAL ASSETS $ 2,926,000 $ 2,852,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Amount due to bank $ 124,000 $ 111,000 Line of credit 619,000 512,000 Accounts payable 192,000 203,000 Current maturities of long-term debt 15,000 15,000 Current maturities of capital lease obligations 1,000 1,000 Accrued payroll and related expenses 7,000 7,000 Accrued Expenses 59,000 67,000 Deferred revenue 260,000 223,000 ----------- ----------- Total Current Liabilities 1,277,000 1,139,000 ----------- ----------- LONG-TERM LIABILITIES Long-term debt, less current maturities $ 14,000 $ 21,000 Capital lease obligations, less current maturities -- -- ----------- ----------- Total Current Liabilities 14,000 21,000 ----------- ----------- STOCKHOLDERS' EQUITY Common stock 1,000 1,000 Additional paid-in capital 110,000 110,000 Retained earnings 1,524,000 1,581,000 ----------- ----------- Total Stockholders' Equity 1,635,000 1,692,000 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,926,000 $ 2,852,000 =========== ===========
See Accompanying Summary of Accounting Policies and Notes to Unaudited Interim Financial Statements. 1 KINGSTON SALES CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED) Six Months Ended June 30, June 30, 2002 2001 NET REVENUES $ 5,380,000 $ 6,569,000 COST OF REVENUES 4,257,000 5,213,000 ----------- ----------- GROSS PROFIT (LOSS) 1,123,000 1,356,000 OPERATING EXPENSES Selling, general and administrative expenses 844,000 462,000 Depreciation and amortization 30,000 19,000 ----------- ----------- Total operating expenses 874,000 481,000 ----------- ----------- Operating income 249,000 875,000 OTHER INCOME (EXPENSE) Interest income -- 7,000 Interest expense (16,000) (52,000) Net loss on sale of equipment -- (18,000) Other income 27,000 8,000 ----------- ----------- Total other income (expense) 11,000 (55,000) ----------- ----------- NET INCOME $ 260,000 $ 820,000 =========== =========== See Accompanying Summary of Accounting Policies and Notes to Unaudited Interim Financial Statements. 2 KINGSTON SALES CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY Six-Months Ended June 30, 2002 and 2001
Common Additional Retained Stock Paid-in Capital Earnings Total BALANCE AT DECEMBER 31, 2000 $ 1,000 $ 110,000 $ 856,000 $ 967,000 Dividends paid to shareholders -- -- (176,000) (176,000) Net Income -- -- 820,000 820,000 ----------- ----------- ----------- ----------- BALANCE AT June 30, 2001 $ 1,000 $ 110,000 $ 1,500,000 $ 1,611,000 =========== =========== =========== =========== BALANCE AT DECEMBER 31, 2001 $ 1,000 $ 110,000 $ 1,581,000 $ 1,692,000 Dividends paid to shareholders -- -- (317,000) (317,000) Net Income -- -- 260,000 260,000 ----------- ----------- ----------- ----------- BALANCE AT June 30, 2002 $ 1,000 $ 110,000 $ 1,524,000 $ 1,635,000 =========== =========== =========== ===========
See Accompanying Summary of Accounting Policies and Notes to Unaudited Interim Financial Statements. 3 KINGSTON SALES CORORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, June 30, 2002 2001 OPERATING ACTIVITIES Net income $ 260,000 $ 820,000 Adjustments to reconcile net income to net cash (used) by operating activities: Depreciation and amortization 30,000 19,000 Loss on disposal of equipment -- 18,000 (Increase) decrease in certain operating assets: Accounts receivable 75,000 (1,412,000) Inventory (154,000) (63,000) Increase (decrease) in certain operating liabilities Amount due to bank 13,000 78,000 Accounts payable (11,000) 131,000 Accrued expenses and other current liabilities (8,000) 19,000 Deferred Revenue 37,000 97,000 ----------- ----------- Net Cash Provided (Used) by Operating Activities 242,000 (293,000) ----------- ----------- INVESTING ACTIVITIES Purchases of vehicles, equipment and leasehold improvements (25,000) (172,000) ----------- ----------- Net Cash Provided (Used) by Investing Activities (25,000) (172,000) ----------- ----------- FINANCING ACTIVITIES Net borrowings (repayments) under line of credit 107,000 648,000 Principal payments on long-term debt (7,000) (7,000) Principal payments under capital lease obligations -- -- Dividends and distributions paid to stockholders (317,000) (176,000) ----------- ----------- Net Cash Provided (Used) by Financing Activities (217,000) 465,000 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS -- -- CASH AND EQUIVALENTS Beginning of Period -- -- ----------- ----------- End of Year Period $ -- $ -- =========== =========== SUPPLEMENTAL DISCLOSURES Interest paid $ 17,000 $ 54,000
See Accompanying Summary of Accounting Policies and Notes to Unaudited Interim Financial Statements. 4 KINGSTON SALES CORPORATION Notes to Financial Statements June 30, 2002 and 2001 Note 1 - Nature of Business and Summary of Significant Accounting Policies: Basis of presentation: The accompanying unaudited financial statements have been prepared by Kingston Sales Corporation ("the Company") without audit and therefore do not include all information and disclosures necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States (GAAP). These unaudited financial statements contain, in the opinion of management, all adjustments (consisting of normal accruals and other recurring adjustments) necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. The operating results for the six-month periods ended June 30, 2002 and 2001, are not necessarily indicative of the operating results to be expected for the full fiscal year. Nature of business: Kingston Sales Corporation, an Indiana corporation organized in 1971, is a manufacturer's representative and distributor for prominent national companies in the electronic, sound, security, and video markets. Kingston Sales Corporation offers the latest technology in TVs, sound systems, electronic locking devices, wire, cable and fiber optics, and intercom systems. Estimates: Management uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses. Actual results could vary from the estimates that were used. Revenue recognition: Revenue from the sale of products is recognized according to the terms of the sales arrangement, which is generally upon shipment. Commission revenue is recognized when realizable and earned, which is typically upon receipt of the commission payment. Payments received where there are delivery elements required to be met in order to retain those payments are recorded as deferred revenue under current or long-term liabilities, as appropriate, and taken into income when the criteria are met. Revenue is reduced by appropriate allowances, estimated returns, price concessions, and similar adjustments, as applicable. Cost of revenues consist primarily of purchases of goods that are resold to customers, but also consist of salaries, wages and benefits to employees, depreciation, fuel and other vehicle expenses, equipment rentals, subcontracted services, insurance, facilities expenses, and supplies. Selling, general and administrative expenses consist primarily of compensation and related benefits to management, administrative salaries and benefits, marketing, office rent and utilities, communications and professional fees. Cash and equivalents may include money market fund shares, bank time deposits and certificates of deposits, and other instruments with original maturities of three months or less. Inventories: Inventories are recorded at the lower of cost (primarily first-in, first-out) or market value and consist of entirely goods purchased for resale. Shipping and handling: Costs incurred for shipping and handling are included in the Company's financial statements as a component of costs of revenue. 5 Note 1 - Nature of Business and Summary of Significant Accounting Policies (Continued): Property, equipment, and depreciation: Property and equipment are carried at cost and includes expenditures for new additions and those, which substantially increase the useful lives of existing assets. Depreciation is computed at various rates by use of the straight-line method and certain accelerated methods. Depreciable lives are generally ranging from 3 to 39 years. Expenditures for normal repairs and maintenance are charged to operations as incurred. The cost of property or equipment retired or otherwise disposed of and the related accumulated depreciation are removed from the accounts in the year of disposal with the resulting gain or loss reflected in earnings or in the cost of the replacement asset. The provision for depreciation amounted to $30,000 and $19,000 for the six months ended June 30, 2002 and 2001, respectively. Long-lived assets, including the Company's property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the related asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets. Advertising: Advertising costs are expensed when incurred and are included in selling, general, administrative and other costs and expenses. Advertising expenses amounted to $10,000 and $9,000 for the six-months ended June 30, 2002 and 2001, respectively. Income taxes: During the reporting period, the Company, with the consent of its stockholders, had elected under the Internal Revenue Code to be an S corporation. In lieu of corporation income taxes, the stockholders of an S corporation are taxed on their proportionate share of the Company's taxable income. Therefore, no provision for income taxes has been included in the financial statements. Note 2 - Subsequent Event, Change In Control: Fortune Diversified Industries, Inc., a Delaware corporation ("FDVI"), acquired from Robert J. Kingston 1,000 shares of the common stock, no par value, of Kingston Sales Corporation, constituting all of the outstanding shares of Kingston Sales Corporation's capital stock, pursuant to the terms of a Stock Purchase Agreement by and among FDVI, Kingston Sales Corporation and Robert J. Kingston, effective July 31, 2002. FDVI intends for Kingston Sales Corporation, as a wholly-owned subsidiary of FDVI, to continue to operate as it did prior to the acquisition. Mr. Kingston will continue as president of Kingston Sales Corporation under the terms of an employment agreement, dated July 31, 2002 and incorporated into the Stock Purchase Agreement. Mr. Kingston was also elected to the Board of Director's of FDVI. The Company entered into a lease with Kingston Design, LLC, a Company controlled by Mr. Kingston. Said lease is for the facility in which Kingston Sales Corp. currently operates, and was incorporated into the Stock Purchase Agreement. 6 Note 3 - Accounts Receivable: Accounts receivable included the following: June 30, December 31, 2002 2001 ----------- ----------- Amounts currently due $ 2,421,000 $ 2,216,000 Less allowance for doubtful accounts (400,000) (120,000) Less allowance for sales returns (100,000) (100,000) ----------- ----------- $ 1,921,000 $ 1,996,000 =========== =========== Note 4 - Amount Due to Bank: The Company's primary bank account is maintained under a cash management arrangement. Under this account arrangement, the Company's line of credit is decreased by any bank deposits and is increased by any checks and miscellaneous charges processed by the bank. The amount due to bank of approximately $124,000 and $111,000 represents outstanding checks that have not been presented to the bank for payment at June 30, 2002 and December 31, 2001, respectively. Note 5 - Line of Credit: The Company had a $2,500,000 line of credit available through July 31, 2002. Interest on the line was charged at .25% below the prime interest rate. Outstanding borrowings amounted to approximately $619,000 and $512,000 at June 30, 2002 and December 31, 2001, respectively. This line was replaced as a result of the transaction described in Note 2. Note 6 - Long-term Debt: Long-term debt consisted of the following: June 30, December 31, 2002 2001 -------- -------- Notes payable to financial institutions: Due in monthly installments of $434, including interest at 4.9% through January 2005. Secured by a vehicle. $ 13,000 $ 15,000 Due in monthly installments of $418, including interest at 9.03% through December 2004. Secured by a vehicle. 11,000 13,000 Due in monthly installments of $563, including interest at 9% through March 2003. Secured by a vehicle. 5,000 8,000 -------- -------- 29,000 36,000 Less current maturities (15,000) (15,000) -------- -------- $ 14,000 $ 21,000 ======== ======== 7 Note 6 - Long-term Debt (Continued): Principal payments due on long-term debt outstanding at June 30, 2002, are as follows: Year Ending June 30, -------------------- 2003 $ 15,000 2004 13,000 2005 1,000 --------- $ 29,000 ======== Note 7 - Capital Leases: Long-term leases relating to the financing of fixed assets are accounted for as installment purchases. The capital lease obligations reflect the present value of future rental payments, discounted at the interest rate implicit in the lease, and a corresponding amount is capitalized as the cost of the fixed assets. The fixed assets are being depreciated over a period of seven years. The following is an analysis of fixed assets under capital lease: June 30, December 31, 2002 2001 ---------- ------------ Equipment $ 4,000 $ 4,000 Less allowances for depreciation 1,000 1,000 ---------- ------------ $ 3,000 $ 3,000 ========== ============ Following is a schedule of future minimum lease payments due under the capital lease obligations together with the present value of net minimum lease payments as of June 30, 2002: Year Ending June 30, -------------------- 2003 $ 1,000 ------------ Total minimal lease payments 1,000 Less amounts representing interest 0 ------------ Present value of net minimum lease payments 1,000 Less current portion (1,000) ------------ Long-term portion $ 0 ============ 8 Note 8 - Stockholders' Equity The following are the details of the Company's shares of common stock:
Number of Shares Authorized Issued Outstanding Amount June 30, 2002 Common stock, no par value 1,000 1,000 1,000 $1,000 ====== December 31, 2001 Common stock, no par 1,000 1,000 1,000 $1,000 value ======
Note 9 - Operating Lease Commitments: The Company leases its office and warehouse facilities from a limited liability company in which the Company's principal shareholder during the reporting period covered was a member. The agreement expires in April 2022. The agreement includes a renewal option, which allows the Company to extend the lease term for an additional six years. In addition to base monthly rent, the agreement requires the Company to pay its proportionate share of real estate taxes, insurance, and common area maintenance expenses. Rent expense under this agreement amounted to $42,000 and $21,000 for the six-months ended June 30, 2002 and 2001. The Company is also committed to a vehicle lease, which expires in August 2004. Lease expense under all agreements amounted to $3,000 and $0 for the six-months ended June 30, 2002 and 2001, respectively. Future minimum commitments under these agreements are as follows at June 30, 2002: Year Ending June 30, Facilities Vehicles -------------------- ---------- -------- 2003 84,000 5,000 2004 84,000 3,000 2005 84,000 0 2006 84,000 0 2007 84,000 0 Later Years (2008 - 2022) 1,246,000 0 ----------- ---------- $ 1,666,000 $ 8,000 =========== ========== Note 10 - Related Party Transactions: The Company buys certain products from a corporation in which the principal shareholder of the Company during the reporting period was a shareholder. Purchases from this related corporation amounted to approximately $8,000 and $12,000 for the six-months ended June 30, 2002 and 2001, respectively. The Company is a guarantor on two loans used for the construction of the building it currently leases from another related party. The outstanding balances of these debt obligations as reflected on the books of the related party were approximately $892,000 and $904,000 at June 30, 2002 and December 31, 2001, respectively. 9 Note 11 - Concentration of Credit Risk: The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivables. The Company places its cash and cash equivalents with high credit quality institutions. At times, such amounts may be in excess of the FDIC insured limit. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its accounts receivable credit risk exposure is limited. Note 12 - Economic Dependency on Suppliers: The Company purchased approximately 81% and 90% of its inventories from one vendor for the six-months ended June 30, 2002 and 2001, respectively. 10