-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MBS2Psr0yp41ruw6G0Rc1gnKm8uWMKEezl7BYiNIXshs7UggaRwaq6FqUmYr2a9n ZbTRr/chrkdLByffXpD3ug== 0000950144-99-011581.txt : 20000211 0000950144-99-011581.hdr.sgml : 20000211 ACCESSION NUMBER: 0000950144-99-011581 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990823 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990930 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAHAINA ACQUISITIONS INC CENTRAL INDEX KEY: 0000855684 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 841325695 STATE OF INCORPORATION: CO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-27480 FILM NUMBER: 99721003 BUSINESS ADDRESS: STREET 1: 5895 WINDWARD PARKWAY STREET 2: SUITE 200 CITY: ALPHARETTA STATE: GA ZIP: 30005 BUSINESS PHONE: 7707546140 MAIL ADDRESS: STREET 1: 5895 WINDWARD PARKWAY STREET 2: SUITE 200 CITY: ALPHARETTA STATE: GA ZIP: 30005 8-K/A 1 LAHAINA ACQUISITIONS, INC. 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF EARLIEST EVENT REPORTED: AUGUST 23, 1999 LAHAINA ACQUISITIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) COLORADO 0-27480 84-1325695 (STATE OF OTHER JURISDICTION OF (COMMISSION FILE (IRS EMPLOYER INCORPORATION OR ORGANIZATION) NO.) IDENTIFICATION NO.) (770) 754-6140 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME OF FORMER ADDRESS, IF CHANGED SINCE LAST REPORT) - -------------------------------------------------------------------------------- 2 ITEM 1. NOT APPLICABLE ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS Incorporated by reference to Item 2 of Lahaina Acquisitions, Inc.'s Current Report on Form 8-K, dated August 23, 1999, as filed with the Securities and Exchange Commission on September 7, 1999. ITEMS 3 THROUGH 6. NOT APPLICABLE ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial statements -2- 3 INDEPENDENT AUDITORS' REPORT To the Board of Directors The Accent Group, Inc. We have audited the accompanying consolidated balance sheet of The Accent Group, Inc. and subsidiaries (the "Company") as of July 9, 1999. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement 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 balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion. In our opinion, such balance sheet presents fairly, in all material respects, the consolidated financial position of the Company at July 9, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Atlanta, Georgia September 13, 1999, except for note 9 which is as of September 21, 1999 -3- 4 THE ACCENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JULY 9, 1999 ASSETS: Cash and cash equivalents $ 296,255 Restricted certificates of deposit 125,435 Loans receivable 531,692 Mortgage loans held for sale, net -- Real estate held for development 700,000 Foreclosed real estate 593,960 Options to acquire real estate 80,000 Due from related parties and stockholders 100,000 Goodwill 1,171,651 Other assets 190,689 ----------- Total assets $ 3,789,682 =========== LIABILITIES AND STOCKHOLDERS' DEFICIT LIABILITIES: Notes payable $ 2,103,943 Due to related parties and stockholders 886,057 Note payable-warehouse line 1,132,442 Note payable-stage funding line 528,891 Accrued interest payable 130,362 Accounts payable and accrued expenses 630,250 ----------- Total liabilities 5,411,945 ----------- REDEEMABLE STOCK: Common stock, no par value; 325,000 shares issued and outstanding entitled to redemption under certain circumstances 70,577 ----------- STOCKHOLDERS' DEFICIT: Common stock (no par value; 100,000,000 shares authorized, 1,000,100 shares issued and outstanding) -- Additional paid-in capital (1,571,840) Accumulated deficit (121,000) ----------- Total stockholders' deficit (1,692,840) ----------- Total liabilities and stockholders' deficit $ 3,789,682 ===========
See notes to Consolidated Balance Sheet -4- 5 THE ACCENT GROUP, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED BALANCE SHEET AS OF JULY 9, 1999 1. FORMATION The Accent Group, Inc. (the "Company") was formed on July 9, 1999 through a series of transactions (the "Formation Transactions") as follows: - The majority stockholder and his family contributed land and options to acquire land to the Company and the Company assumed $2,700,000 in related notes payable in exchange for 852,500 shares of common stock. Due to common ownership and control, the contributed land and options were recorded by the Company at the majority stockholder and his family's cost basis ($700,000). Of the shares issued to the majority stockholder, 120,000 shares are contingent upon the majority stockholder delivering options to acquire three family entertainment centers located in Roswell, Georgia, Cocoa Beach, Florida and Pensacola, Florida (collectively the "Family Facilities"). In the event the majority stockholder fails to make available for acquisition by the Company any one or more of the Family Facilities for a total consideration (including the assumption of all debts) not in excess of $1 million by July 9, 2000, the majority stockholder will forfeit and convey to the Company, (i) 60% of the contingent shares in the event the Roswell facility is not made available for acquisition, (ii) 35% of the contingent shares in the event the Cocoa Beach facility is not made available for acquisition, (iii) 5% of the contingent shares in the event the Pensacola facility is not made available for acquisition. If the majority stockholder makes any one or more of the Family Facilities available for acquisition for a cost in excess of $1 million and fails to contribute to the capital of the Company cash or other consideration equal to the amount of such excess, then the majority stockholder shall forfeit and convey to the Company a fraction of the 120,000 shares calculated as the consideration paid in excess of $1 million divided by $1 million. The 120,000 shares of common stock has been recorded as redeemable common stock as it is redeemable by the Company for conditions outlined above, which are not solely within the control of the Company. -5- 6 THE ACCENT GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED BALANCE SHEET AS OF JULY 9, 1999 (Continued) - The Company acquired Accent Mortgage Services, Inc. ("AMSI") for 362,600 shares of its common stock, plus the assumption of certain outstanding debt and other liabilities. The stock was valued at $580,160 or $1.60 per share based on an independent appraisal of the Company's stock at the date of formation. For the purposes of securing certain of the AMSI shareholders' performance under the obligations imposed under the purchase agreement, certain of the AMSI shareholders' have pledged 145,000 shares of the Company's common stock. The 145,000 shares of common stock has been recorded as redeemable common stock as it is redeemable by the Company for conditions which are not solely within the control of the Company. If AMSI either (i) during the one year period ending July 9, 2000 fails to produce $500,000 or more of total pre-tax income including an allocation of the Company's overhead or (ii) during the two year period ending July 9, 2001, fails to produce $1.5 million or more of total pre-tax income including an allocation of the Company's overhead, then certain of the AMSI shareholders shall forfeit 50,000 of the 145,000 shares. The remaining 95,000 pledged shares are pledged to secure obligations against an indemnity provided to the Company by certain of the AMSI shareholders. These shares will remain pledged until the Company is satisfied that all obligations of certain of the AMSI shareholders have been fully satisfied. At July 9, 1999, the former AMSI shareholders owed the Company $257,423 under the indemnity, which has been recorded as a reduction of the redeemable common stock. In addition, such shareholders assumed from AMSI the obligation to repay certain notes payable to banks in the amount of $247,821 such notes continue to be collateralized by $125,435 of certificates of deposit owned by AMSI. The assignment of fair values to assets acquired and liabilities assumed for AMSI is preliminary and subject to revision based on the resolution of certain pre-acquisition contingencies. The Company applied the purchase method of accounting to this acquisition and "pushed down" its basis in the acquired assets and liabilities to AMSI. The net purchase price allocated consisted of common stock valued at $580,160 and professional costs associated with the acquisition of $172,500, net of $257,423 due under the indemnity from the former AMSI Shareholders. Values assigned to the assets and liabilities of AMSI is as follows: Cash and cash equivalents $ 246,255 Certificates of deposit 125,435 Loans receivable 531,692
-6- 7 THE ACCENT GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED BALANCE SHEET AS OF JULY 9, 1999 (Continued) Foreclosed real estate 593,960 Goodwill 1,171,651 Other assets 33,666 Due to related parties and stockholders, net (135,477) Note payable-warehouse line (1,132,442) Note payable-stage funding line (528,891) Other liabilities (410,612) ----------- $ 495,237 ===========
- The Company acquired an option to purchase certain real estate located in Tennessee for 10,000 shares of common stock. The Company recorded the option at $16,000 or $1.60 per share based on an independent appraisal of the fair value of the Company's stock at the date of formation. In the event the Company does not exercise the option to acquire real estate, the shares will be returned to the Company. - The Company acquired an option to purchase certain real estate located in Atlanta, Georgia for 40,000 shares of common stock. The Company recorded the option at $64,000 or $1.60 per share based on an independent appraisal of the fair value of the Company's stock at the date of formation. In the event the Company does not exercise the option to acquire real estate, the shares will be returned to the Company. - The Company issued 60,000 shares of common stock to two consulting firms that aided the Company in structuring the formation of the Company. The Company has recorded the issuance of the shares as consulting expense at $1.60 per share. If on or before July 1, 2001 either (i) the common stock of the Company is not being traded in a public market at a price-to-projected earnings (as determined by the Board of Directors) multiple of at least 15 or (ii) the Company has not received capital contributions or financings in connection with the new capital stock issuances and sales totaling more than $7.5 million ($1,015,000 being procured by the consulting firms), then the consulting firms will forfeit and convey to the Company all of its stock. The common stock -7- 8 THE ACCENT GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED BALANCE SHEET AS OF JULY 9, 1999 (Continued) has been recorded as redeemable common stock as it is redeemable by the Company for conditions which are not solely within the control of the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business - The Company was formed in 1999 to acquire a mortgage brokerage company and certain tracts of land. The Company is closely held with the majority stockholder and his family controlling approximately 65% of the outstanding voting common stock at July 9, 1999. As a result of the acquisitions and contributions, the Company, through its subsidiaries, will provide mortgage brokerage services to individuals and will develop real estate for sale. Principles of Consolidation - The consolidated balance sheet of the Company includes the accounts of their respective wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Basis of presentation - The consolidated balance sheet has been prepared in conformity with generally accepted accounting principles and with general practices in the mortgage brokerage and real estate industries. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ significantly from those estimates. Cash and cash equivalents - The Company considers its highly-liquid investments with maturities of three months or less to be cash equivalents. Restricted certificate of deposit - The Company has pledged certificates of deposit to secure certain indebtedness of former AMSI shareholders. Loans receivable - The loans receivable represent short-term stage financing on manufactured housing. The purpose of the loan is to provide financing until the manufactured housing is in place and is then repaid through permanent financing. The loans are for a term of less than 90 days and are secured by the manufactured house. -8- 9 THE ACCENT GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED BALANCE SHEET AS OF JULY 9, 1999 (Continued) Mortgage loans held for sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Concentration and credit risk - The Company is subject to concentration of credit risk with respect to the portfolio of mortgages receivable as changes in the economic environment might adversely impact the borrowers ability or willingness to repay such mortgages. Additionally, the value of such mortgages can be impacted by fluctuations in interest rates and the credit markets. Valuation of real estate - The Company has adopted Statement of Financial Accounting Standard No. 121 ("SFAS No. 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the 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 value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Foreclosed real estate - Foreclosed real estate is reported at the lower of cost or fair value less estimated disposal costs, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. Goodwill - Goodwill represents the excess of the purchase price over the fair market value of the assets and liabilities of Accent Mortgage Services, Inc. which was acquired by the Company on July 9, 1999. The goodwill is amortized using the straight-line method over a period of 15 years. Income Taxes - The Company has adopted the provisions of SFAS 109, "Accounting for Income Taxes", which requires the use of the asset and liability approach in accounting for income taxes. Fair Value of Financial Instruments - The provisions of Statement of Financial Accounting Standards ("SFAS") 107 Disclosure About Fair Value of Financial Instruments, require the disclosure of fair value information about both on and off balance sheet financial instruments where it is practicable to estimate such values of its financial instruments. For certain instruments that are short-term in nature, such as cash and cash equivalents, carrying values approximate fair value. Loans receivable are recently executed and short-term in nature, therefore carrying values approximate fair value. Management has estimated that the fair value for the loans issued under notes payable (see Note 5) and the warehouse line and loan agreement (see Note 5) approximates carrying value. -9- 10 THE ACCENT GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED BALANCE SHEET AS OF JULY 9, 1999 (Continued) 3. MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale at July 9, 1999 consist of a pool of non-performing loans that were purchased by AMSI in July and August 1998 from SGE Mortgage Funding Corp. ("SGE"). Many of the loans that were acquired were also sold by SGE to other institutions, thereby, putting the ownership of the loans in question. Management believes that the collection of these amounts is unlikely and therefore a valuation allowance of $845,591, representing AMSI's investment, has been recorded against these loans. 4. STOCK OPTIONS The Company has adopted the 1999 Stock Option Plan which is open to participation of all directors, employees and key consultants to the Company or any subsidiary or affiliate of the Company. Under the terms of the plan, not more than 200,000 shares of Accent are available to be optioned and not more than 20,000 shares of Accent may be subject to options granted to any one individual in the aggregate in any one fiscal year of Accent. Options are granted at not less than fair market value of the underlying stock at date of grant and vest ratably over a three year period. Such options expire five years from date of grant. Compensation expense will be recorded for grants to non-employees, directors and consultants. Employee stock options will be accounted for under APB 25 using the intrinsic value method. No compensation expense will be recorded for employee options. Options for 40,000 shares have been granted on July 9, 1999 at a price of $3.40 per share. Such price was determined to be fair market value at the date of the Company's merger with Lahaina as described in Note 9. No options were exercisable on July 9, 1999. Had the Company adopted FAS 123, "Accounting for Stock-Based Compensation" and recognized stock options on a fair value basis, such options would have no significant value using the minimum value methodology in the Black-Scholes model. 5. NOTES PAYABLE The Company has the following notes payable at July 9, 1999: Note payable to a bank secured by certain parcels of the land held for development. The note bears interest 8.25% and is payable quarterly. The principal balance is due in full on March 23, 2000. $ 992,500 Note payable to a bank secured by certain parcels of the land held for development. The note bears interest at a rate 75 basis points above the lender's prime rate (8.75% at July 9, 1999) and is payable quarterly. The principal balance is due in full on March 1, 2000. 255,000 Note payable to a bank secured by certain parcels of the land held for development. The note bears interest 8.25% and is payable quarterly. The principal balance is due in full on March 30, 2002. 456,443
-10- 11 THE ACCENT GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED BALANCE SHEET AS OF JULY 9, 1999 (Continued) Note payable to an investment bank secured by certain parcels of the land held for development. The note bears interest 8.25% and is payable quarterly. The principal balance is due in full on June 1, 2000. 400,000 ----------- Total notes payable $ 2,103,943 =========== Note payable to a related party secured by certain parcels of the land held for development. The note bears interest 8.25% and is payable quarterly. The principal balance is due in full on July 1, 2000. $ 596,057 Unsecured note payable to the majority stockholder. The note has no stated interest rate and is due by July 31, 1999. 40,000 Unsecured note payable to a related party. The note bears Interest at a rate of 10% and is due on November 6, 1999 250,000 ----------- Due to related parties and stockholders $ 886,057 ===========
Scheduled maturities on notes payable and due to related parties and stockholders as of July 9, 1999 are as follows:
Calendar Year: 1999 $ 290,000 2000 2,243,557 2001 -- 2002 456,443 ----------- $ 2,990,000 ===========
At July 9, 1999, the Company had $1,132,442 outstanding under a $2,000,000 warehouse line. The warehouse line bears interest at a rate equal to 11.75% and is payable monthly. The warehouse line is secured by the underlying mortgages originated using proceeds from draws on the warehouse line and foreclosed real estate. The warehouse line was suspended as of July 9, 1999 due to violation of certain debt covenants and failure to repurchase or otherwise remove aged loans pursuant to the line of credit agreement. The -11- 12 THE ACCENT GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED BALANCE SHEET AS OF JULY 9, 1999 (CONTINUED) Company intends to cure the default by liquidating certain assets to repay the line of credit. On January 15, 1999, AMSI entered into a revolving Loan Agreement (the "Agreement") with Accent Partners I, L.L.L.P. (a related party) for the purpose of making short term loans to consumers for the purpose of financing the purchase of real property, installation of improvements and the purchase of a manufactured home as part of an "on-your-lot" program for the acquisition of manufactured homes. The revolving loan is repaid as permanent financing is obtained. At July 9, 1999 outstanding loans totaled $528,891. In addition AMSI pays a loan fee equal to 1.25% of each borrowing made under this Agreement at the time of such borrowing. Interest accrues on the unpaid principal amount of loans outstanding at a rate per annum which is 1% above the Prime Rate (8% at July 9, 1999). 6. REDEEMABLE COMMON STOCK The Company has issued common stock during the Formation Transactions that is subject to redemption at the Company's option under certain circumstances for reasons beyond the Company's control, as described in Note 1. 7. INCOME TAXES The Company files a consolidated tax return with its subsidiaries and allocates income tax benefits and expenses based upon the income or loss of each company computed on a stand-alone basis. Temporary differences that give rise to deferred tax assets and liabilities at July 9, 1999 consist of net operating loss carry forwards, expense accruals, the allowance for loan losses and the use of accelerated depreciation methods. Net deferred taxes at July 9, 1999 was a deferred tax asset of $745,000 which was offset by a valuation allowance as the Company has not demonstrated the sustained profitability necessary to record such asset. 8. COMMITMENTS AND CONTINGENCIES In July and August 1998, AMSI acquired from SGE Mortgage Funding Corp. and related entities notes secured primarily by first security interests in residences. The selling entity (SGE) has been placed in receivership by Order of the Superior Court of Tift County, Georgia. The receiver is charged with the responsibility of settling competing claims, if any, to loans made and sold by SGE. Many of the loans acquired by the Company from SGE were later sold to Matrix Bank for a total purchase price of $623,032. Matrix Bank contends some of the loans are subject to competing claims or are non-performing assets, and has demanded that the Company reacquire these loans. The Company is negotiating with Matrix to resolve these issues, however, the ultimate resolution is unknown at this time. The Company has not provided for any loss which may result from the Matrix transaction. At July 9, 1999, AMSI was not in compliance with Department of Housing and Urban Development (HUD) net worth requirements. The Company is taking corrective action; however, the ultimate resolution of the matter and the effects it may have on the Company's operations are not known. The Company is also subject to various litigation in the ordinary course of business. In the opinion of management, resolution of such matters -12- 13 THE ACCENT GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED BALANCE SHEET AS OF JULY 9, 1999 (Continued) will not have a significant effect on the financial position of the Company. 9. SUBSEQUENT EVENTS On July 21, 1999, the Company entered into an Agreement and Plan of Merger with Lahaina Acquisitions, Inc. ("Lahaina") whereby all shareholders of the Company would receive 10 shares of common stock of Lahaina in exchange for each share of the Company's common stock. On August 23, 1999, the Company completed the merger with Lahaina. The merger was accounted for as a reverse acquisition as the Company's shareholders obtained a majority interest in Lahaina and the Company's management team replaced Lahaina's management team. On September 21, 1999, the Company contributed to AMSI, its subsidiary, a subsidiary of Lahaina, a sister company, which owned an investment real estate property on Amelia Island, Florida. Such transfer was made to cure the deficit in net worth at AMSI and achieve compliance under the HUD net worth regulations for mortgage companies. -13- 14 INDEPENDENT AUDITORS' REPORT To the Stockholder and Board of Directors of Accent Mortgage Services, Inc. We have audited the accompanying balance sheet of Accent Mortgage Services, Inc. as of June 30, 1999 and the related statements of operations, stockholder's equity (deficit) and cash flows for the six months 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 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, the financial statements referred to above present fairly, in all material respects, the financial position of Accent Mortgage Services, Inc. as of June 30, 1999 and the results of its operations and its cash flows for the six months then ended in conformity with generally accepted accounting principles. HOLLAND SHIPES VANN, P.C. Atlanta, Georgia September 9, 1999, except for Note 12 as to which the date is September 21, 1999 -14- 15 ACCENT MORTGAGE SERVICES, INC. BALANCE SHEET
- ----------------------------------------------------------------------------- JUNE 30, 1999 - ----------------------------------------------------------------------------- ASSETS Mortgage portfolio, net $ 1,030,842 Restricted certificates of deposit 125,435 Cash and cash equivalents 81,255 Accrued interest receivable 12,634 Property and equipment, less accumulated depreciation 32,166 Foreclosed real estate 593,960 Due from related company 189,523 Other assets 1,500 - ----------------------------------------------------------------------------- $ 2,067,315 ============================================================================= LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) LIABILITIES Lines of credit $ 1,632,342 Notes payable 776,713 Due to stockholders 153,094 Accrued interest payable 208,080 Other liabilities 280,251 - ----------------------------------------------------------------------------- 3,050,480 - ----------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES - ----------------------------------------------------------------------------- STOCKHOLDER'S EQUITY (DEFICIT) Common stock, no par value, 1,000,000 shares authorized; 400,000 shares issued and outstanding 60,000 Additional paid-in capital 624,595 Accumulated (deficit) (1,667,760) - ----------------------------------------------------------------------------- (983,165) - ----------------------------------------------------------------------------- $ 2,067,315 =============================================================================
See accompanying notes to financial statements. -15- 16 ACCENT MORTGAGE SERVICES, INC. STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 1999 - ----------------------------------------------------------------------------- REVENUES Brokerage services $ 560,097 Interest income 9,188 - ----------------------------------------------------------------------------- 569,285 - ----------------------------------------------------------------------------- OTHER EXPENSES Brokerage services expense 323,222 Interest expense 30,986 Provision for losses 50,000 Administrative and general 386,878 Loss on disposal of property and equipment 167,645 - ----------------------------------------------------------------------------- 958,731 - ----------------------------------------------------------------------------- NET LOSS $ (389,446) =============================================================================
See accompanying notes to financial statements. -16- 17 ACCENT MORTGAGE SERVICES, INC. STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
- ------------------------------------------------------------------------------------------------------------ Additional Total Common Paid-in Accumulated Stockholder's Stock Capital (Deficit) Equity (Deficit) - ------------------------------------------------------------------------------------------------------------ BALANCE, December 31, 1998 $ 60,000 $ 124,595 $(1,278,314) $(1,093,719) Net loss for the six months ended June 30, 1999 (389,446) (389,446) Capital contribution 500,000 500,000 - --------------------------------------------------------------------------------------------------------- BALANCE, June 30, 1999 $ 60,000 $ 624,595 $(1,667,760) $ (983,165) =========================================================================================================
See accompanying notes to financial statements. -17- 18 ACCENT MORTGAGE SERVICES, INC. STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 1999 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (389,446) - ----------------------------------------------------------------------------- Adjustments to reconcile net loss to net cash used in operating activities:- Depreciation 16,568 Loss on disposal of property and equipment 167,645 Changes in assets and liabilities: Accrued interest receivable 47,959 Other assets (1,500) Accrued interest payable (34,835) Other liabilities 35,135 - ----------------------------------------------------------------------------- 230,972 - ----------------------------------------------------------------------------- NET CASH USED IN OPERATING ACTIVITIES (158,474) - ----------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Advances to related company (189,523) Proceeds from sale of mortgages 2,199,119 Purchase of certificates of deposit (2,354) Proceeds from sale of equipment 13,500 - ----------------------------------------------------------------------------- NET CASH PROVIDED BY INVESTING ACTIVITIES 2,020,742 - ----------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Capital contribution 500,000 Loans from stockholders 2,794 Decrease in lines of credit (2,855,222) Proceeds from notes payable 528,891 Principal payments on notes payable (23,526) - ----------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (1,847,063) - ----------------------------------------------------------------------------- NET INCREASE IN CASH 15,205 CASH AND CASH EQUIVALENTS, beginning of period 66,050 - ----------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of period $ 81,255 =============================================================================
See accompanying notes to financial statements. -18- 19 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 1. ORGANIZATION Accent Mortgage Services, Inc. (AMSI) was AND SUMMARY OF incorporated in the State of Georgia on August 21, SIGNIFICANT 1991. The Company engages in residential and ACCOUNTING commercial brokerage services and in the purchase POLICIES and sale of mortgages. The Company provides these services primarily to residential mortgage customers in the Southeastern United States. In 1999, the Company expanded its services to include net branch brokerage services, which allows outside agents to broker loans utilizing the Company's licenses, and provide short-term stage financing for modular home purchasers. At June 30, 1999, the Company was a wholly-owned subsidiary of Accent Holdings, Inc. Effective July 9, 1999, Accent Holdings, Inc. exchanged 400,000 shares of Accent Mortgage Services, Inc. for 362,000 shares of common stock of The Accent Group, Inc., thereby making AMSI a wholly-owned subsidiary of The Accent Group. The Accent Group, Inc. then entered into a reverse merger with Lahaina Acquisitions, Inc. In connection with the merger, shareholders of The Accent Group received 86% of the common stock of Lahaina. The Accent Group, Inc. is now the surviving parent of AMSI. MANAGEMENT The preparation of financial statements in conformity ESTIMATES with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. MORTGAGE Mortgage loans are held for sale and are carried at PORTFOLIO the lower of cost or fair value with any unrealized losses included in current period earnings. The accrual of interest on mortgages is discontinued when the mortgages become delinquent for 90 days or more. Any accrued interest on delinquent mortgages is charged against current-period interest income. Subsequent interest income on such mortgages is recognized only to the extent that cash payments are received. -19- 20 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (Continued) ALLOWANCE FOR The allowance for losses is based on an analysis of LOSSES the mortgage portfolio. The analysis considers credit profile factors such as mortgage characteristics and actual and expected loss experience. Increases in the allowance are charged to the provision for losses. Reductions in the allowance result from charge-offs, net of recoveries. In management's judgment, the allowance is adequate to provide for expected losses. PROPERTY AND Property and equipment are recorded at cost. EQUIPMENT Depreciation is provided utilizing the straight-line method over the estimated useful lives of the individual assets, which are generally five to seven years. Depreciation expense totaled $16,568 for the six months ended June 30, 1999. CASH AND CASH The Corporation considers highly liquid investment EQUIVALENTS instruments with an original maturity of three months or less to be "cash equivalents." Cash equivalents are carried at cost, which approximates market value. CREDIT RISK Concentration of credit risk with respect to the Company's mortgages receivable exists since borrowers are susceptible to changes in economic conditions that could affect their ability to meet their obligations. Additionally, the Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enacted date. FORECLOSED Foreclosed real estate is carried at the lower of REAL ESTATE cost or estimated fair value less estimated costs to sell. -20- 21 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (Continued) 2. MORTGAGE The Company's mortgage portfolio represents mortgages PORTFOLIO closed either directly from borrowers or purchased from other lenders. Mortgages receivable at June 30, 1999 consist of the following: Principal of mortgages securing lines of credit $ 1,244,279 Stage funding 531,692 Principal of other mortgages 944,828 Less: Purchase discounts (844,366) -------------------------------------------------------------------------- 1,876,433 Less: Allowance for losses (845,591) -------------------------------------------------------------------------- $ 1,030,842 ==========================================================================
-21- 22 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (Continued) 3. PROPERTY AND Property and equipment at June 30, 1999 are summarized EQUIPMENT as follows: Furniture and fixtures $ 13,825 Office equipment 26,269 ------------------------------------------------------ 40,094 Less: Accumulated depreciation (7,928) ------------------------------------------------------ $ 32,166 ======================================================
4. 401(K) PROFIT Effective January 1, 1998, the Company established a SHARING PLAN 401(k) profit sharing plan covering substantially all of its employees. Effective June 30, 1999, the Plan was terminated and all eligible employees became 100% vested. The Company made contributions of $953 in 1999. -22- 23 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (Continued) 5. LINES OF CREDIT Lines of credit at June 30, 1999 consist of the following: $7,000,000 warehouse line of credit, payable on demand, bearing interest at prime plus 2%, secured primarily by mortgages receivable $ 499,900 $2,000,000 warehouse line of credit, bearing interest at prime plus 2%, maturing October 1998, secured primarily by mortgages receivable and guaranteed by a principal share- holder of Accent Holdings, Inc. 1,132,442 -------------------------------------------------------------------------- $ 1,632,342 ==========================================================================
The Company is currently in default on its $2,000,000 line of credit. The loan agreement requires the Company to maintain certain net worth requirements. Additionally, the agreement requires mortgages to be removed as loan security from the line within 90 days after advances are made on the related mortgages. The Company is in violation of both of these provisions. Management is currently negotiating with the lender to cure the defaults. -23- 24 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (Continued) 6. NOTES PAYABLE Notes payable at June 30, 1999 are summarized as follows: Note payable to bank in monthly principal and interest payments of $5,144 and a final balloon payment of $167,780 in August 1999. The note bears interest at 8.5% and is secured by accounts receivable, equipment and certificates of deposit totaling $125,435 $ 170,831 Note payable to bank; interest rate of 8.5%; maturing August 1999; secured by a $107,000 certificate of deposit of a shareholder's family member 75,000 Equipment note; monthly payments of $175, bearing interest at 10%, paid July, 1999 1,991 Notes payable to affiliated company, bearing interest at prime plus 1%, maturing December 2001, secured by stage funding mortgage receivables 528,891 ------------------------------------------------------------------------ $ 776,713 ========================================================================
-24- 25 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (Continued) 7. INCOME TAXES The Company files a consolidated tax return with its parent, Accent Holdings, Inc., and allocates income tax benefits and expense based on the income or loss of each company. Temporary differences that give rise to significant portions of deferred tax assets and liabilities at June 30, 1999 consist of net operating loss carryforwards, expense accruals, the allowance for losses and the use of accelerated tax depreciation methods. Net deferred taxes at June 30, 1999 include the following components: Deferred tax assets $ 745,000 Valuation allowance (743,000) ------------------------------------------------------------------------- 2,000 Deferred tax liabilities (2,000) ------------------------------------------------------------------------- Net deferred taxes $ -0- =========================================================================
At June 30, 1999, the Company has net operating loss carryforwards for tax purposes of approximately $551,000, which are available to offset future taxable income through 2019. -25- 26 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (Continued) 8. OPERATING LEASE The Company leases office space under a noncancelable lease classified as an operating lease. Future minimum obligations are as follows:
Year Ended June 30, ----------------------------------------------------------------------- 2000 $ 158,276 2001 161,619 2002 166,468 2003 171,407 2004 176,587 Thereafter 29,576 ----------------------------------------------------------------------- $ 863,933 =======================================================================
Rental expense totaled $30,991 at June 30, 1999 and is included in administrative and general expenses. 9. RELATED PARTY During 1999, Accent Holdings, Inc. made a capital TRANSACTIONS contribution of $500,000 to the Company. At June 30, 1999, shareholders of Accent Holdings, Inc. have made non-interest bearing advances totaling $153,094 to the Company. During June 1999, the Company made $189,523 in non-interest bearing advances to The Accent Group, Inc. In 1999, the Company borrowed $528,891 from Accent Partners, a partnership of Accent Holdings, Inc. and one of its shareholders. The funds were used to finance stage funding mortgage receivables totaling $531,692 at June 30, 1999. -26- 27 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (Continued) 10. COMMITMENTS In July and August 1998, the Company purchased mortgage AND notes from SGE Mortgage Funding Corp. Subsequent to the CONTINGENCIES purchases, the Superior Court of Tift County, Georgia, placed SGE in receivership and charged the receiver with the responsibility of settling competing claims to loans made and sold by SGE. Many of the loans acquired by the Company from SGE were later sold to Matrix Bank for $623,032. Matrix Bank contends some of the loans are subject to competing claims or are nonperforming assets, and has demanded that the Company reacquire these loans. The Company is negotiating with Matrix to resolve these issues, however, the ultimate resolution is unknown at this time. The Company has not provided for losses which may result from the Matrix transaction. At June 30, 1999, the Company was not in compliance with Department of Housing and Urban Development (HUD) net worth requirements. The Company is taking corrective action; however, the ultimate resolution of the matter and the effects it may have on the Company's operations are not known. The Company is involved in several lawsuits and regulatory issues arising in the normal course of business. In the opinion of management, no material loss will result from settlement of these issues. 11. SUPPLEMENTAL The Company paid interest of $65,821 during the six CASH FLOW months ended June 30, 1999. INFORMATION -27- 28 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (Continued) 12. SUBSEQUENT As mentioned in Note 1, effective July 9, 1999, EVENTS Accent Holdings, Inc. exchanged 400,000 shares of Accent Mortgage Services, Inc. for 362,000 shares of common stock of The Accent Group, Inc., thereby making AMSI a wholly-owned subsidiary of The Accent Group. The Accent Group, Inc. then entered into a reverse merger with Lahaina Acquisitions, Inc. In connection with the merger, shareholders of The Accent Group, Inc. received 86% of the common stock of Lahaina. The Accent Group, Inc. is now the surviving parent of AMSI. In order to alleviate the Company's deficit in stockholder's equity, on September 21, 1999, The Accent Group transferred a subsidiary, Beachside Commons I, Inc. into the Company. Beachside Commons I, Inc.'s principal holding is real estate. Management estimates that the net value of the Company is approximately $1,700,000. Additionally, in the merger referred to above, the Company was relieved of stockholder loans totaling approximately $153,000 at June 30, 1999. The loans were transferred to additional paid-in capital. The effect of the two transactions is to increase net worth by approximately $1,853,000 and brings the Company into compliance with the net worth requirements of both HUD and its line of credit which is in default. -28- 29 INDEPENDENT AUDITORS' REPORT To the Stockholder and Board of Directors of Accent Mortgage Services, Inc. We have audited the accompanying balance sheets of Accent Mortgage Services, Inc. as of December 31, 1998 and 1997 and the related statements of operations, stockholder'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 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, the financial statements referred to above present fairly, in all material respects, the financial position of Accent Mortgage Services, Inc. as of December 31, 1998 and 1997 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Holland Shipes Vann, P.C. Atlanta, Georgia September 9, 1999, except for Note 13, as to which the date is September 21, 1999 -29- 30 ACCENT MORTGAGE SERVICES, INC. BALANCE SHEETS
=========== ========== December 31, 1998 1997 =========== ========== ASSETS Mortgage portfolio, net $ 3,823,921 $1,658,900 Investments, held to maturity 153,957 Restricted certificates of deposit 123,081 121,500 Cash and cash equivalents 66,050 23,156 Accrued interest receivable 60,593 25,446 Property and equipment, less accumulated depreciation 229,879 141,841 Other assets 73,548 ----------- ---------- $ 4,303,524 $2,198,348 =========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) LIABILITIES Lines of credit $ 4,487,564 $1,585,964 Notes payable 271,348 355,268 Due to stockholders 150,300 35,000 Accrued interest payable 242,915 26,719 Other liabilities 245,116 81,681 ----------- ---------- 5,397,243 2,084,632 ----------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY (DEFICIT) Common stock, no par value, 1,000,000 shares authorized; 400,000 shares issued and outstanding 60,000 60,000 Additional paid-in capital 124,595 Retained earnings (deficit) (1,278,314) 53,716 ----------- ---------- (1,093,719) 113,716 ----------- ---------- $ 4,303,524 $2,198,348 =========== ==========
See accompanying notes to financial statements. -30- 31 ACCENT MORTGAGE SERVICES, INC. STATEMENTS OF OPERATIONS
=========== =========== Year Ended December 31, 1998 1997 =========== =========== REVENUES Brokerage services $ 2,783,098 $1,910,837 Interest and investment income 92,997 42,902 ----------- ---------- 2,876,095 1,953,739 ----------- ---------- EXPENSES Brokerage services expense 1,571,852 828,747 Interest expense 262,417 62,138 Provision for losses 853,056 Administrative and general 1,520,800 1,231,261 ----------- ---------- 4,208,125 2,122,146 ----------- ---------- NET LOSS $(1,332,030) $ (168,407) =========== ==========
See accompanying notes to financial statements. -31- 32 ACCENT MORTGAGE SERVICES, INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
======== =========== ========= ================ Additional Retained Total Common Paid-in Earnings Stockholder's Stock Capital (Deficit) Equity (Deficit) ======== =========== ========== ================ BALANCE, December 31, 1996 $60,000 $ 222,123 $ 282,123 1997 net loss (168,407) (168,407) ------- --------- ----------- ----------- BALANCE, December 31, 1997 60,000 53,716 113,716 1998 net loss (1,332,030) (1,332,030) Capital contribution $ 124,595 124,595 ------- --------- ----------- ----------- BALANCE, December 31, 1998 $60,000 $ 124,595 $(1,278,314) $(1,093,719) ======= ========= =========== ===========
See accompanying notes to financial statements. -32- 33 ACCENT MORTGAGE SERVICES, INC. STATEMENTS OF CASH FLOWS
=========== ============ Year Ended December 31, 1998 1997 =========== ============ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(1,332,030) $ (168,407) ----------- ----------- Adjustments to reconcile net loss to net cash used in operating activities:- Depreciation 37,028 25,936 Amortization of discount (13,898) Provision for losses 845,591 Gain on sale of investments (31,218) Changes in assets and liabilities: Accrued interest receivable (35,147) (25,446) Other assets 73,548 16,455 Accrued interest payable 216,196 26,719 Other liabilities 163,435 33,283 ----------- ----------- 1,269,433 63,049 ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (62,597) (105,358) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of mortgages, net (3,010,612) (960,000) Acquisition of property and equipment (125,066) (62,229) Purchase of investments and certificates of deposit (1,581) (165,394) Proceeds from sale of investments 185,175 ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (2,952,084) (1,187,623) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Capital contribution 124,595 Borrowings on notes payable 75,000 492,979 Loans from stockholders 115,300 35,000 Increase in lines of credit 2,901,600 901,042 Principal payments on notes payable (158,920) (165,045) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 3,057,575 1,263,976 ----------- ----------- NET INCREASE (DECREASE) IN CASH 42,894 (29,005) CASH AND CASH EQUIVALENTS, beginning of year 23,156 52,161 ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 66,050 $ 23,156 =========== ===========
See accompanying notes to financial statements. -33- 34 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 1. ORGANIZATION Accent Mortgage Services, Inc. (AMSI) was incorporated AND SUMMARY OF in the State of Georgia on August 21, 1991. The Company SIGNIFICANT engages in residential and commercial brokerage ACCOUNTING services and in the purchase and sale of mortgages. The POLICIES Company provides these services primarily to mortgage customers in the Southeastern United States. At December 31, 1998, the Company was a wholly-owned subsidiary of Accent Holdings, Inc. Effective July 9, 1999, Accent Holdings, Inc. exchanged 400,000 shares of Accent Mortgage Services, Inc. for 362,000 shares of common stock of The Accent Group, Inc., thereby making AMSI a wholly-owned subsidiary of The Accent Group. The Accent Group, Inc. then entered into a reverse merger with Lahaina Acquisitions, Inc. In connection with the merger, shareholders of The Accent Group received 86% of the common stock of Lahaina. The Accent Group, Inc. is now the surviving parent of AMSI. MANAGEMENT The preparation of financial statements in conformity ESTIMATES with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. MORTGAGE Mortgage loans are held for sale and are carried at PORTFOLIO the lower of cost or fair value with any unrealized losses included in current period earnings. The accrual of interest on mortgages is discontinued when mortgages become delinquent for 90 days or more. Any accrued interest on delinquent mortgages is charged against current-period interest income. Subsequent interest income on such mortgages is recognized only to the extent that cash payments are received. INVESTMENTS Nonmortgage investments are classified as held-to-maturity and are carried at historical cost, adjusted for unamortized discount or premium. Interest income is recognized on an accrual basis. -34- 35 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (Continued) ALLOWANCE FOR The allowance for losses is based on an analysis of LOSSES the mortgage portfolio. The analysis considers credit profile factors such as mortgage characteristics and actual and expected loss experience. Increases in the allowance are charged to the provision for losses. Reductions in the allowance result from charge-offs, net of recoveries. In management's judgment, the allowance is adequate to provide for expected losses. PROPERTY Property and equipment are recorded at cost. AND Depreciation is provided utilizing the straight-line EQUIPMENT method over the estimated useful lives of the individual assets, generally five to seven years. Depreciation expense totaled $37,028 (1998) and $25,936 (1997). CASH AND CASH The Corporation considers highly liquid investment EQUIVALENTS instruments with an original maturity of three months or less to be "cash equivalents." Cash equivalents are carried at cost, which approximates market value. CREDIT RISK Concentration of credit risk with respect to the Company's mortgages receivable exists since borrowers are susceptible to changes in economic conditions that could affect their ability to meet their obligations. Additionally, the Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enacted date. -35- 36 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (Continued) 2. MORTGAGE The Company's mortgage portfolio represents mortgages PORTFOLIO closed either directly from borrowers or purchased from other lenders. Mortgages receivable consist of the following:
1998 1997 ---------------------------------------------------------------------- Principal of mortgages securing lines of credit $ 4,626,154 $1,658,900 Principal of other mortgages 944,828 Less: Purchase discounts (901,470) ---------------------------------------------------------------------- 4,669,512 1,658,900 Less: Allowance for losses (845,591) ---------------------------------------------------------------------- $ 3,823,921 $1,658,900 ======================================================================
3. INVESTMENTS Investments classified as held-to-maturity consisted of U. S. Government zero coupon bonds with an amortized cost of $153,957 at December 31, 1997 and a market value of $182,233. The bonds were sold in 1998 resulting in a realized gain of $31,218. -36- 37 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (Continued) 4. PROPERTY AND Property and equipment are summarized as follows: EQUIPMENT
1998 1997 ---------------------------------------------------------------------- Automobiles $ 24,160 $ 24,160 Furniture and fixtures 34,631 29,080 Office equipment 173,973 129,624 Leasehold improvements 89,206 14,040 ---------------------------------------------------------------------- 321,970 196,904 Less: Accumulated depreciation (92,091) (55,063) ---------------------------------------------------------------------- $ 229,879 $ 141,841 ======================================================================
5. 401(K) PROFIT Effective January 1, 1998, the Company established a SHARING PLAN 401(k) profit sharing plan covering substantially all of its employees. Effective June 30, 1999, the Plan was terminated and all eligible employees became 100% vested. The Company made contributions of $5,664 in 1998 to the Plan. -37- 38 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (Continued) 6. LINES OF CREDIT Lines of credit consist of the following:
1998 1997 --------------------------------------------------------------------------- $7,000,000 warehouse line of credit, payable on demand, bearing interest at prime plus 2%, secured primarily by mortgages receivable $ 3,220,875 $2,000,000 warehouse line of credit, bearing interest at prime plus 2%, maturing October 1998, secured primarily by mortgages receivable and guaranteed by a principal share- holder of Accent Holdings, Inc. 1,266,689 $1,585,964 --------------------------------------------------------------------------- $ 4,487,564 $1,585,964 ===========================================================================
The Company is currently in default on its $2,000,000 line of credit. The loan agreement requires the Company to maintain certain net worth requirements. Additionally, the agreement requires mortgages receivable to be removed as loan security within 90 days after advances are made on the related mortgages. The Company is in violation of both of these provisions. Management is currently negotiating with the lender to cure the defaults. -38- 39 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (Continued) 7. NOTES PAYABLE Notes payable are summarized as follows:
1998 1997 ------------------------------------------------------------------------------------ Note payable to bank in monthly principal and interest payments of $5,144 and a final balloon payment of $167,780 in August 1999. The note bears interest at 8.5% and is secured by accounts receivable, equipment and certificates of deposit totaling $123,081 (1998) and $121,500 (1997) $ 194,357 $ 236,481 Margin demand loan payable, secured by investments, interest paid monthly at variable rates 109,233 Note payable to bank; interest rate of 8.5%; maturing August 1999; secured by a $107,000 certificate of deposit of a shareholder's family member 75,000 Equipment notes; monthly payments of $175 (1998) and $3,700 (1997), bearing interest at rates from 9 1/2% to 17.99%, maturing June 1998 to April 1999, secured by office equipment 1,991 9,554 ------------------------------------------------------------------------------------ $ 271,348 $ 355,268 ====================================================================================
8. INCOME TAXES The Company files a consolidated tax return with its parent, Accent Holdings, Inc., and allocates income tax benefits and expense based on the income or loss of each company. -39- 40 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (Continued) Temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 1998 and 1997 consist of net operating loss carryforwards, expense accruals, the allowance for losses and the use of accelerated tax depreciation methods. Net deferred taxes at December 31, 1998 and 1997 include the following components:
1998 1997 ------------------------------------------------------------- Deferred tax assets $ 593,000 $ 67,000 Valuation allowance (575,000) (51,000) ------------------------------------------------------------- 18,000 16,000 Deferred tax liabilities (18,000) (16,000) ------------------------------------------------------------- Net deferred taxes $ -0- $ -0- =============================================================
At December 31, 1998, the Company has net operating loss carryforwards for tax purposes of approximately $210,000, which are available to offset future taxable income through 2018. 9. OPERATING LEASE The Company leases office space under a noncancelable lease classified as an operating lease. Future minimum obligations are as follows:
Year Ended December 31, ------------------------------------------------------------ 1999 $110,307 2000 159,629 2001 164,441 2002 169,343 2003 174,410 Thereafter 103,517 ------------------------------------------------------------ $881,647 ============================================================
-40- 41 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (Continued) Rental expense totaled $54,333 (1998) and $26,657 (1997) and is included in administrative and general expenses. 10. RELATED PARTY The Company received advances from and paid expenses on TRANSACTIONS behalf of several affiliated companies. During 1998, the parent company, Accent Holdings, Inc., contributed net advances of $124,595 to the capital of The Company. Shareholders of Accent Holdings, Inc. made non-interest bearing advances totaling $150,300 (1998) and $35,000 (1997) to the Company. The Company paid consulting fees of $74,482 in 1998 to a company related through common ownership to one of the shareholders of Accent Holdings, Inc. 11. COMMITMENTS In July and August 1998, the Company purchased mortgage AND notes from SGE Mortgage Funding Corp. Subsequent to the CONTINGENCIES purchases, the Superior Court of Tift County, Georgia, placed SGE in receivership and charged the receiver with the responsibility of settling competing claims to loans made and sold by SGE. Many of the loans acquired by the Company from SGE were later sold to Matrix Bank for $623,032. Matrix Bank contends some of the loans are subject to competing claims or are nonperforming assets, and has demanded that the Company reacquire these loans. The Company is negotiating with Matrix to resolve these issues, however, the ultimate resolution is unknown at this time. The Company has not provided for losses which may result from the Matrix transaction. Subsequent to December 31, 1998, the Company determined it was not in compliance with Department of Housing and Urban Development (HUD) net worth requirements. The Company is taking corrective action; however, the ultimate resolution of the matter and the effects it may have on the Company's operations are not known. -41- 42 ACCENT MORTGAGE SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (Continued) The Company is involved in several lawsuits and regulatory issues arising in the normal course of business. In the opinion of management, no material loss will result from settlement of these issues. 12. SUPPLEMENTAL The Company paid interest of $46,221 (1998) and CASH FLOW $35,419 (1997). The Company paid income taxes of INFORMATION $29,830 in 1997. 13. SUBSEQUENT As mentioned in Note 1, effective July 9, 1999, EVENTS Accent Holdings, Inc. exchanged 400,000 shares of Accent Mortgage Services, Inc. for 362,000 shares of common stock of The Accent Group, Inc., thereby making AMSI a wholly-owned subsidiary of The Accent Group. The Accent Group, Inc. then entered into a reverse merger with Lahaina Acquisitions, Inc. In connection with the merger, shareholders of The Accent Group, Inc. received 86% of the common stock of Lahaina. The Accent Group, Inc. is now the surviving parent of AMSI. In order to alleviate the Company's deficit in stockholder's equity, on September 21, 1999, The Accent Group transferred a subsidiary Beachside Commons I, Inc. into the Company. Beachside Commons I, Inc.'s principal holding is real estate. Management estimates that the net value of the Company is approximately $1,700,000. Additionally, in the merger referred to above, the Company was relieved of the stockholder loans totaling approximately $153,000 at June 30, 1999. The loans were transferred to additional paid-in capital. The effect of the two transactions is to increase net worth by approximately $1,853,000 and brings the Company into compliance with the net worth requirements of both HUD and its line of credit which is in default. -42- 43 (b) Pro Forma Financial Statements LAHAINA ACQUISITIONS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS BASIS OF PRESENTATION The following unaudited pro forma condensed combined financial statements give effect to the following transactions: (i) the acquisition of The Accent Group, Inc. ("Accent") by Lahaina Acquisitions, Inc. ("Lahaina"), (ii) consummation of Accent's acquisition of the outstanding capital stock of Accent Mortgage Services, Inc. ("AMSI"), (iii) the contribution of certain real estate and options to acquire real estate to Accent by the majority stockholder, and (iv) other Accent acquisitions. The acquisitions of AMSI and Lahaina will be accounted for using the purchase method of accounting and the contributions of real estate and options to acquire real estate from the majority shareholder will be accounted for at the majority shareholder's cost basis due to common ownership and control. In accordance with the provisions of Staff Accounting Bulletin No. 97, Accent is deemed to be the accounting acquirer of Lahaina as its stockholders will receive the largest portion of the voting rights in the combined corporation. The Unaudited Pro Forma Condensed Balance Sheet gives effect to the acquisitions as if they had occurred on June 30, 1999. The Unaudited Pro Forma Combined Statements of Operations for the nine months ended June 30, 1999 and the year ended September 30, 1998 gives effect to these transactions as if they had occurred on January 1, 1998. 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 does not purport to represent what Lahaina's financial position or results of operations would actually have been if such transactions in fact had occurred on those assumed dates and are not necessarily representative of Lahaina's financial position or results of operations for any future period. Since Lahaina, Accent and AMSI 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 other financial statements and notes thereto included elsewhere in this Form 8-K/A. The pro forma adjustments have been adjusted to reflect the 10 for 1 exchange ratio for shares issued by Lahaina to shareholders of Accent. -43- 44 LAHAINA ACQUISITIONS, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET JUNE 30, 1999
PRO FORMA PRO FORMA COMBINED HISTORICAL ADJUSTMENTS PRO FORMA ACCENT LAHAINA (note 3) COMBINED ----------- ----------- ----------- ----------- ASSETS Cash and cash equivalents $ 106,255 $ 60,261 $ -- $ 166,516 Restricted cash -- 31,000 -- 31,000 Restricted certificates of deposit 125,435 -- -- 125,435 Loans receivable 531,692 -- -- 531,692 Mortgage loans held for sale, net 499,150 -- -- 499,150 Real estate held for sale -- 2,901,799 748,201 3,650,000 Land held for development 700,000 -- -- 700,000 Foreclosed real estate 593,960 -- -- 593,960 Goodwill 1,237,487 -- 82,839 1,320,326 Due from related parties and stockholders 40,000 -- -- 40,000 Other assets 283,323 211,251 (152,500) 342,074 ----------- ----------- ----------- ----------- Total assets $ 4,117,302 $ 3,204,311 $ 678,540 $ 8,000,153 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Notes payable $ 2,103,943 $ 1,550,000 $ -- $ 3,653,943 Due to related parties and stockholders 636,057 -- -- 636,057 Notes payable-convertible debt -- 775,000 -- 775,000 Note payable-warehouse line 1,632,342 -- -- 1,632,342 Note payable-stage funding line 528,891 -- -- 528,891 Accrued interest payable 208,080 -- -- 208,080 Accounts payable and accrued expenses 628,752 540,294 -- 1,169,046 Other liabilities 1,500 9,000 -- 10,500 ----------- ----------- ----------- ----------- Total liabilities 5,739,565 2,874,294 -- 8,613,859 ----------- ----------- ----------- ----------- Redeemable stock 70,577 -- -- 70,577 Stockholders' equity (deficit): Common stock -- 37,382 (37,382) -- Convertible preferred stock -- 428,823 (428,823) -- Additional paid-in capital (1,571,840) 544,070 464,487 (563,283) Retained earnings (deficit) (121,000) (680,258) 680,258 (121,000) ----------- ----------- ----------- ----------- Total stockholders' equity (deficit) (1,692,840) 330,017 678,540 (684,283) ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity (deficit) $ 4,117,302 $ 3,204,311 $ 678,540 $ 8,000,153 =========== =========== =========== ===========
THE ACCENT GROUP, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET JUNE 30, 1999
PRO FORMA PRO FORMA ACCENT MORTGAGE ADJUSTMENTS COMBINED ACCENT SERVICES, INC. (note 3) ACCENT ----------- --------------- ----------- ----------- ASSETS Cash and cash equivalents $ 25,000 $ 81,255 $ -- $ 106,255 Restricted certificates of deposit -- 125,435 -- 125,435 Loans receivable -- 531,692 -- 531,692 Mortgage loans receivable, net -- 499,150 -- 499,150 Land held for development -- -- 700,000 700,000 Foreclosed real estate -- 593,960 -- 593,960 Goodwill -- -- 1,237,487 1,237,487 Due from related parties and stockholders 10,477 29,523 -- 40,000 Other assets 329,523 206,300 (252,500) 283,323 ----------- ----------- ----------- ----------- Total assets $ 365,000 $ 2,067,315 $ 1,684,987 $ 4,117,302 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Notes payable $ -- $ 247,821 $ 1,856,122 $ 2,103,943 Due to related parties and stockholders 40,000 153,094 442,963 636,057 Note payable-warehouse line -- 1,632,342 -- 1,632,342 Note payable-stage funding line -- 528,891 -- 528,891 Accrued interest payable -- 208,080 -- 208,080 Accounts payable and accrued expenses 350,000 278,752 -- 628,752 Other liabilities -- 1,500 -- 1,500 ----------- ----------- ----------- ----------- Total liabilities 390,000 3,050,480 2,299,085 5,739,565 ----------- ----------- ----------- ----------- Redeemable common stock -- -- 70,577 70,577 Stockholders' deficit: Common stock -- 60,000 (60,000) -- Additional paid-in capital -- 624,595 (2,196,435) (1,571,840) Retained earnings (deficit) (25,000) (1,667,760) 1,571,760 (121,000) ----------- ----------- ----------- ----------- Total stockholders' deficit (25,000) (983,165) (684,675) (1,692,840) ----------- ----------- ----------- ----------- Total liabilities and stockholders' deficit $ 365,000 $ 2,067,315 $ 1,684,987 $ 4,117,302 =========== =========== =========== ===========
-44- 45 LAHAINA ACQUISITIONS, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS For the nine months ended June 30, 1999
ACCENT PRO FORMA PRO FORMA LAHAINA ADJUSTMENTS PRO FORMA COMBINED(A) HISTORICAL (NOTE 4) COMBINED ------------- ---------- ----------- ---------- Revenues $ 1,101,448 $ 62,158 $ -- $ 1,163,606 Cost of Revenues -- -- -- -- ---------- ---------- ---------- ---------- Gross profit 1,101,448 62,158 -- 1,163,606 Selling, general and administrative expenses 1,701,989 347,119 (150,000)(B) 1,959,108 60,000 (C) Amortization of goodwill 61,874 -- 4,142 (D) 66,016 Other (income) expense: Interest expense 328,762 78,406 -- 407,168 Interest income (56,530) -- -- (56,530) ---------- ---------- ---------- ---------- Net loss $ (934,647) $ (363,367) $ 85,858 $(1,212,156) =========== ========== =========== ===========
THE ACCENT GROUP, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS For the nine months ended June 30, 1999
PRO FORMA ACCENT ACCENT MORTGAGE ADJUSTMENTS PRO FORMA ACCENT SERVICES, INC. (NOTE 4) COMBINED (A) ---------- --------------- ----------- ------------ Revenues $ -- $ 1,101,448 $ -- $ 1,101,448 Cost of Revenues -- -- -- -- ---------- ---------- ----------- --------- Gross profit -- 1,101,448 -- 1,101,448 Selling, general and administrative expenses 25,000 1,668,259 8,730 (E) 1,701,989 Amortization of goodwill -- -- 61,874 (D) 61,874 Other (income) expense: Interest expense -- 171,698 157,064 (F) 328,762 Interest income -- (56,530) -- (56,530) ---------- ---------- ----------- --------- Net loss $ (25,000) $ (681,979) $ (227,668) $ (934,647) ========== ============ =========== ===========
-45- 46 LAHAINA ACQUISITIONS, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998
ACCENT PRO FORMA PRO FORMA (A) LAHAINA ADJUSTMENTS PRO FORMA COMBINED HISTORICAL (NOTE 4) COMBINED -------------- ---------- ----------- ----------- Revenues $ 1,211,246 $ -- $ -- $ 1,211,246 Cost of Revenues -- -- -- -- ----------- --------- ---------- ----------- Gross profit 1,211,246 -- -- 1,211,246 Selling, general and administrative expenses 2,385,496 46,078 300,000(C) 2,731,574 Amortization of goodwill 82,499 -- 5,523(D) 88,022 Other (income) expense: Interest expense 465,672 -- -- 465,672 Interest income (92,997) -- -- (92,997) Other, net -- -- -- -- ----------- --------- ---------- ----------- Net loss $(1,629,424) $ (46,078) $ (305,523) $(1,981,025) =========== ========= ========== ===========
THE ACCENT GROUP, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998
PRO FORMA ACCENT ACCENT MORTGAGE ADJUSTMENTS PRO FORMA ACCENT SERVICES, INC. (NOTE 4) COMBINED (A) --------- --------------- ----------- ------------- Revenues $ -- $ 1,211,246 $ -- $ 1,211,246 Cost of Revenues -- -- -- -- --------- ----------- ----------- ------------- Gross profit -- 1,211,246 -- 1,211,246 Selling, general and administrative expenses -- 2,373,856 11,640 (E) 2,385,496 Amortization of goodwill -- -- 82,499 (D) 82,499 Other (income) expense: Interest expense -- 262,417 203,255 (F) 465,672 Interest income -- (92,997) -- (92,997) Other, net -- -- -- -- --------- ----------- ----------- ------------- Net loss $ -- $(1,332,030) $ (297,394) $ (1,629,424) ========= =========== ========== =============
-46- 47 LAHAINA ACQUISITIONS, INC. NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS NOTE 1-GENERAL Lahaina was founded in 1989 to seek, investigate and, if warranted, acquire an interest in one or more business opportunities or ventures. The historical financial statements reflect the financial position and results of operations of Lahaina Acquisitions, Inc. ("Lahaina"), The Accent Group, Inc. ("Accent"), and Accent Mortgage Services, Inc. ("AMSI") and were derived from the respective historical financial statements where indicated. The periods included in these financial statements for Lahaina are as of June 30, 1999 and for the year ended September 30, 1998 and for the nine months ended June 30, 1999. The periods included in these financial statements for Accent are as of June 30, 1999 and for the period from May 5, 1999(date of inception) to June 30, 1999. The periods included in these financial statements for AMSI are as of June 30, 1999 and for the year ended December 31, 1998 and the nine months ended June 30, 1999. The audited historical financial statements included elsewhere herein have been included in accordance with Securities and Exchange Commission Regulation S-X Rule 3-05. NOTE 2-ACQUISITIONS The acquisitions of both Lahaina and AMSI will be accounted for using the purchase method of accounting with Accent being treated as the accounting acquirer of Lahaina in accordance with Staff Accounting Bulletin No. 97 and APB 16. The assignment of fair values to assets acquired and liabilities assumed for Lahaina and AMSI are preliminary and subject to revision based on final determination of the fair values of properties acquired. The contributions by the majority shareholder of Accent which related to its formation were recorded at the majority shareholder's cost basis due to common ownership and control. NOTE 3-UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS The pro forma combined balance sheet adjustments related to the acquisition of Lahaina by Accent reflects the purchase of Lahaina consisting of 2,966,343 shares of Common Stock valued at $0.34 per share based on an independent valuation of Accent just prior to the merger with Lahaina and acquisition expenses of $152,500 for a total purchase price of $1,161,057. After the allocation of purchase price to the fair market value of the real estate ($748,201) the remaining the excess purchase price over the fair market value of the assets and liabilities acquired was recorded as goodwill ($82,839). The assignment of fair values to assets and liabilities for Lahaina is preliminary and subject to revision based on final determination of the fair values of assets and liabilities acquired. The following table summarizes unaudited pro forma combined balance sheet adjustments related to (i) Accent's acquisition of AMSI, (ii) the contribution of assets by the majority shareholder of Accent, and (iii) other Accent acquisitions and is adjusted for the 10 for 1 exchange of common stock between Accent and Lahaina:
TOTAL PRO FORMA PROFORMA ADJUSTMENTS ADJUSTMENTS ------------------------------------------------ -------------- (A) (B) (C) (D) ----------- ----------- ------- -------- ASSETS Cash and cash equivalents $ -- $ -- $ -- $ -- $ -- Restricted certificates of deposit -- -- -- -- -- Loans receivable -- -- -- -- -- Mortgage loans receivable, net -- -- -- -- -- Land held for development 700,000 -- -- -- 700,000 Foreclosed real estate -- -- -- -- -- Goodwill -- 1,237,487 -- -- 1,237,487 Due from related parties and stockholders -- -- -- -- -- Other assets -- (332,500) 80,000 -- (252,500) ----------- ----------- ------- -------- ----------- Total assets $ 700,000 $ 904,987 $80,000 $ -- $ 1,684,987 =========== =========== ======= ======== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Notes payable $ 2,103,943 $ (247,821) $ -- $ -- $ 1,856,122 Due to related parties and stockholders 596,057 (153,094) -- -- 442,963 Notes payable-warehouse line -- -- -- -- -- Note payable - stage funding line -- -- -- -- -- Accrued interest payable -- -- -- -- -- Accounts payable and accrued expenses -- -- -- -- -- Other liabilities -- -- -- -- -- ----------- ----------- ------- -------- ----------- Total liabilities 2,700,000 (400,915) -- -- 2,299,085 ----------- ----------- ------- -------- ----------- Redeemable stock -- (25,423) -- 96,000 70,577 Stockholders' deficit: Common stock -- (60,000) -- -- (60,000) Additional paid-in capital (2,000,000) (276,435) 80,000 -- (2,196,435) Retained earnings -- 1,667,760 -- (96,000) 1,571,760 ----------- ----------- ------- -------- ----------- Total stockholders' deficit (2,000,000) 1,331,325 80,000 (96,000) (684,675) ----------- ----------- ------- -------- ----------- Total liabilities and stockholders' deficit $ 700,000 $ 904,987 $80,000 $ -- $ 1,684,987 =========== =========== ======= ======== ===========
(A) Reflects the contribution of real estate and options to acquire real estate from the majority shareholder in exchange for 8,525,000 shares of Common Stock. Accent's basis in the real estate and options to acquire real estate is recorded at the majority shareholder's basis ($700,000). Accent also assumed -47- 48 LAHAINA ACQUISITIONS, INC. NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (Continued) notes payable related to the real estate of $2.7 million. The basis in the real estate and options contributed less the debt assumed is a reduction in additional paid-in capital ($2.0 million). (B) Reflects the purchase of AMSI, consisting of 3,626,000 shares of Common Stock valued at $0.16 per share (a total of $580,160) based on an independent valuation of Accent on July 9, 1999, and acquisition expenses of $172,500 for a total estimated purchase price of $752,660, resulting in an excess purchase price over the fair value of assets and liabilities acquired of $1,237,487. In conjunction with the transaction, deal costs of $160,000 that had been capitalized by AMSI in other assets were written off and the former shareholders of AMSI have assumed the notes payable of AMSI ($400,915). The Company is also indemnified, by the former shareholders of AMSI, against any accounts payable or other liabilities assumed by the Company that were recorded or arise in the future that relate to periods prior to the date of acquisition. The former shareholders have pledged 1,450,000 shares of Common Stock against the indemnity. The pledged Common Stock valued at $0.16 per share (a total of $232,000) has been recorded by the Company as Redeemable Common Stock as it is redeemable by Accent for conditions which are not solely within the control of Accent. The amount due under the indemnity at June 30, 1999 ($257,423) has been recorded as a reduction of Redeemable Common Stock. The assignment of fair values to assets acquired and liabilities assumed for AMSI is preliminary and subject to revision based on final determination of the fair values of assets and liabilities acquired. (C) Reflects the purchase of two options to acquire real estate, for 500,000 shares of Common Stock valued at $0.16 per share (a total of $80,000) based on an independent valuation of Accent on July 9, 1999. (D) Reflects the issuance of 600,000 shares of Common Stock valued at $0.16 per share (a total of $96,000) based on an independent valuation of Accent on July 9, 1999. The Common Stock was issued to consultants in exchange for services provided and is recorded as consulting expense of the combined group upon the formation of Accent. The Common Stock has been recorded as Redeemable Common Stock as it is redeemable by Accent for conditions which are not solely within the control of Accent. NOTE 4-UNAUDITED PRO FORMA COMBINED INCOME STATEMENT ADJUSTMENTS The following proforma adjustments are not adjusted for their income tax effect as none of the entities had profitable operations during these periods. At June 30, 1999, AMSI had NOL carryforwards of approximately $551,000. (A) Reflects the Pro Forma Combined Income Statement of Accent following its acquisition of AMSI. (B) Reflects the elimination of merger related expenses that were included in Lahaina's income statement. (C) Reflects the increase in compensation expense related to the terms of the new consulting agreements with former employees of Lahaina. (D) Reflects the amortization of goodwill to be recorded as a result of the acquisition of AMSI and Lahaina by Accent over a 15-year estimated life. The amortization is based on the preliminary assignment of fair values of assets acquired and liabilities assumed and is subject to revision based on final determination of the fair values of assets acquired and liabilities assumed. (E) Reflects the increase in property tax expense associated with the undeveloped real estate contributed to Accent by its majority shareholder. (F) Reflects the increase in interest expense associated with long-term debt assumed by Accent that encumbers undeveloped real estate contributed to Accent by its majority shareholder net of a decrease in interest expense for AMSI loans assumed or forgiven by former AMSI Shareholders. NOTE 5-NET LOSS PER SHARE The proforma net loss per share for the nine months ended June 30, 1999 and the year ended September 30, 1998 was $.07 and $.12, respectively. The number of shares used in computing basic and diluted net loss per share (16,217,343) is based on the outstanding shares of Lahaina before the merger (2,966,343) and the shares issued in conjunction with the Accent Merger (13,251,000) and assumes the transactions occurred on January 1, 1998. ITEMS 8 and 9. NOT APPLICABLE -48- 49 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Lahaina Acquisitions, Inc. (REGISTRANT) By: /s/ L. Scott Demerau ---------------------------------- September 30, 1999 Name: L. Scott Demerau Title: President -49- -----END PRIVACY-ENHANCED MESSAGE-----