-----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, FrZvftketp8h1hFOWoGk3jGuQA9cDDcptFSrDa5RDcgBAm+b9hWLWa+cz1Zh2AAR go6V/5Coh56YM6AFbjBKvg== 0001014897-04-000028.txt : 20040217 0001014897-04-000028.hdr.sgml : 20040216 20040217074430 ACCESSION NUMBER: 0001014897-04-000028 CONFORMED SUBMISSION TYPE: DEFM14A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20040217 EFFECTIVENESS DATE: 20040217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREATIVE BEAUTY SUPPLY INC CENTRAL INDEX KEY: 0001011662 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 223392051 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEFM14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-26361 FILM NUMBER: 04602337 BUSINESS ADDRESS: STREET 1: 380 TOTOWA RD CITY: TOWOWA STATE: NJ ZIP: 07512 BUSINESS PHONE: 2012920125 MAIL ADDRESS: STREET 1: 380 TOTOWA ROAD CITY: TOTOWA STATE: NJ ZIP: 07512 DEFM14A 1 creativeglobalproxyam1.txt DEFINITIVE PROXY SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant [x] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only [as permitted by Rule 14a-6(e)(2)] [x] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 CREATIVE BEAUTY SUPPLY, INC. (name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [ ] No Fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1)Title of each class of securities to which transaction applies: Common stock, par value $.001 per share 2)Aggregate number of securities to which transaction applies: 23,861,000 shares of common stock; stock options to purchase an aggregate of 2,470,000 common shares 3)Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): Market price of stock $.50, 2,100,000 options exercisable at $.50 per common share and 370,000 options exercisable at $1.00 per common share 4)Proposed maximum aggregate value of transaction: $13,350,500 5) Total fee paid: $1,080.06 [ x ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: 2 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CREATIVE BEAUTY SUPPLY, INC. (the "Company") Carmine Catizone is hereby authorized to represent and to vote the shares of the undersigned in the Company at an Annual Meeting (hereinafter referred to as "Annual Meeting") of Stockholders to be held on Friday, March 5, 2004 and at any adjournment as if the undersigned were present and voting at the meeting. NOTE: Cumulative voting for directors is not allowed. 1. Proposed Acquisition of Global Digital Solutions, Inc. FOR [ ] AGAINST [ ] ABSTAIN [ ] 2. Approval of the name change of the Company to Global Digital Solutions, Inc. FOR [ ] AGAINST [ ] ABSTAIN [ ] 3. Election of Directors FOR all nominees (except as written on the line below) [ ] WITHHOLD AUTHORITY TO VOTE for all nominees listed below [ ] NOMINEES: Richard J. Sullivan, Jerome C. Artigliere, Garrett A. Sullivan and Arthur F. Noterman (INSTRUCTIONS: To withhold authority to vote for any individual nominees write the nominee's name on the line below.) ------------------------------------------------- 4. Approval of Rubin, Brown, Gornstein & Co. LLP as Independent Certified Accountants for fiscal year ending March 31, 2004. FOR [ ] AGAINST [ ] ABSTAIN [ ] 5. In their discretion, on any other business that may properly come before the meeting. The shares represented hereby will be voted. With respect to items 1 - 4 above, the shares will be voted in accordance with the specifications made and where no specifications are given, said proxies will vote for the proposals. This proxy may be exercised by a majority of those proxies or their substitutes who attend the meeting. Please sign and date and return to Creative Beauty Supply, Inc. Dated ---------------------- Signature ---------------------- Signature 3 Joint Owners should each sign. Attorneys-in-fact, executors, administrators, trustees, guardians or corporation officers, should give full title. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 4 CREATIVE BEAUTY SUPPLY, INC. 380 Totowa Road Totowa, NJ 07512 Telephone: 973-904-0004 February 17, 2004 To the Stockholders of Creative Beauty Supply, Inc. You are cordially invited to attend an Annual Meeting (hereinafter referred to as "Annual Meeting") of Stockholders of Creative Beauty Supply, Inc. (the "Company"), to be held on Friday, March 5, 2004 at 380 Totowa Road, Totowa, New Jersey 07512, at 3:00 P.M., Eastern time, to consider and vote upon the matters set forth in the accompanying Notice of Annual Meeting of Stockholders. In addition to the election of directors and the approval of independent certified public accountants for the fiscal year ended March 31, 2004, shareholders will be asked to approve the proposed acquisition of Global Digital Solutions, Inc. along with a name change. This acquisition will result in a change of control of the Company with an initial issuance of an additional 23,861,000 Common Shares to owners of Global Digital Solutions, Inc. Approval of the proposals would allow the Company to move forward with its new business plan and would be economically beneficial to the Company. Since it is important that your shares be represented at the meeting whether or not you plan to attend in person, please indicate on the enclosed proxy your decisions about how you wish to vote and sign, date and return the proxy promptly in the envelope provided. If you find it possible to attend the meeting and wish to vote in person, you may withdraw your proxy at that time. Your vote is important, regardless of the number of shares you own. Sincerely, - - ------------------------- Carmine Catizone Chairman of the Board of Directors Chief Executive Officer PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 5 CREATIVE BEAUTY SUPPLY, INC. NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To Be Held March 5, 2004 To the Stockholders of Creative Beauty Supply, Inc. NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders of Creative Beauty Supply, Inc. (the "Company") will be held on March 5, 2004 at 3:00 o'clock in the afternoon, local time at the for the following purposes; all as more specifically set forth in the attached Proxy Statement. 1. To consider and vote upon the proposal to acquire Global Digital Solutions, Inc. 2. Approval of the name change of the Company to Global Digital Solutions, Inc. 3. To consider and vote upon the election of Directors of the Company. 4. Approval of Rubin, Brown, Gornstein & Co. LLP as Independent Certified Accountants for fiscal year ending March 31, 2004. 5. To transact such other business as may properly be brought before this meeting. Only holders of record of Common Stock of the Corporation as of the close of business on February 13, 2004, are entitled to notice of or to vote at the meeting or any adjournment thereof. The stock transfer books of the Corporation will not be closed. Stockholders are encouraged to attend the meeting in person. To ensure that your shares will be represented, we urge you to vote, date, sign and mail the Proxy Card in the envelope which is provided, whether or not you expect to be present at the meeting. The prompt return of your Proxy Card will be appreciated. It will also save the Company the expense of a reminder mailing. The giving of such Proxy will not affect your right to revoke such Proxy by appropriate written notice or to vote in person should you later decide to attend the meeting. By order of the Board of Directors Carmine Catizone February 17, 2004 Chairman of the Board of Directors Chief Executive Officers PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 6 PROXY STATEMENT CREATIVE BEAUTY SUPPLY, INC. ANNUAL MEETING OF STOCKHOLDERS To Be Held Friday, March 5, 2004 INTRODUCTION This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Creative Beauty Supply, Inc., a New Jersey corporation (the "Company"), to be voted at an Annual Meeting of Stockholders of the Company to be held on Friday, March 5, 2004 at 3:00 P.M., Eastern time, at 380 Totowa Road, Totowa, New Jersey 07512 and at any adjournment thereof (the "Meeting"). The Proxy may be revoked by appropriate written notice at any time before it is exercised. See, "Voting and Solicitation of Proxies". This Proxy Statement and the accompanying Notice and Form of Proxy are being mailed on or about February 23, 2004 to record holders of the Company's Common Stock as of February 13, 2004, (the "Record Date"). As of Record Date, 3,494,650 shares of Common Stock of the Company were issued and outstanding. Each share of Common Stock entitles the holder to one vote on all matters brought before the Annual Meeting. The Company was incorporated in New Jersey on March 15, 1996. The Company is authorized to issue One Hundred Million (100,000,000) Common Shares, $.001 par value per Common Shares and Ten Million (10,000,000) Preferred Shares. There are currently 3,494,650 Common Shares issued and outstanding and no Preferred Shares issued and outstanding. The Company, through its wholly owned subsidiary, Creative Beauty Supply of New Jersey Corporation operates as a cosmetic and beauty supply distributor at both the retail and wholesale levels. The Company's various beauty and cosmetic products are purchased by it from a number of unaffiliated suppliers and manufacturers and thereafter sold on its premises to retail "walk-in" customers or directly to beauty salons. The board of directors of the Company approved the spin-off of the subsidiary to its shareholders of record as of December 31, 2003 and is currently finalizing the required SEC filings to effectuate the spin- off. ACQUISITION OF GLOBAL DIGITAL SOLUTIONS, INC. The Company is acquiring 100% of Global Digital Solutions, Inc. (the "Acquired Company") in exchange for the initial issuance of 23,861,000 Common Shares of the Company to the owners of the Acquired Company and the granting of warrants to them covering a total of 2,100,000 Common PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 7 Shares of the Company at an exercise price of $.50 per Common Share and 370,000 Series B Warrants at an exercise price of $1.00. As a result, the control of the Company will be transferred to the owners of the Acquired Company. Global Digital Solution's executive offices are located at 777 South Flagler Drive, Suite 800, West Tower, West Palm Beach, FL 33401 - Telephone #561-515-6027. Pursuant to the Agreement and Plan of Reorganization, new management has agreed not to reverse split the common stock for a period of five years. The Acquired Company has further agreed to enter into three- year employment contracts with current employees of Global, William Delgado, Brent Neville and Richard Watts. Each employment contract will provide for reasonable expense reimbursement and medical and life insurance. The employment contracts will also contain a confidentiality clause. Mr. Delgado's and Mr. Watts' agreements shall contain a covenant not to compete for a period of one year after termination of employment. Annual salaries shall be as follows: William Delgado - $200,000 Brent Neville - $125,000 Richard M. Watts, Jr. - $96,000 There are no federal or state regulatory requirements that must be complied with or approval that must be obtain in connection with the transaction. The Acquired Company is a holding company designed to target the United States government contract marketplace. Global has identified three key industry segments that will be pursued aggressively through controlled internal growth and niche acquisitions. - Communications - Security - Advanced Parts/Services The Acquired Company intends to generate approximately 70% of its revenues from government contracts and 30% from the private sector services. Communications: The Acquired Company's communications unit will be engaged in structured cabling design, installation and maintenance. Based on in-house research, the information technology and telecommunications infrastructure industries are beginning to show signs of a slow recovery. Industry estimates suggest only 10% of all office buildings are adequately wired for modern, high-speed data interchanges. New construction and the retrofitting of existing buildings provide significant growth opportunities. In the government contract sector, the dollar value of work being contracted for under the government's New Connections Contract is $35 billion. Security: According to Jane's Civil Aerospace website, www.janes.com, the security market segment is projected to reach $138 billion in 2003, with annual growth projected in the 5% to 8% rate in the coming years. The 2003 revenues include growth in the post-9/11, Homeland Security environment. For 2003, the Transportation Security Administration has PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 8 already secured $1.4 billion in funding and is seeking another $4.4 billion from the administration to fund a range of airport security projects. In addition, a total of $4 to $5 billion alone is being spent for fire, intrusion, access and video/TV monitoring. Global will concentrate its efforts with contractors that supply the service applications and infrastructure in this area, as well as manufacturers that produce the systems and the equipment involved. Advanced Services/Parts: The advanced services/parts unit will concentrate on the aerospace and military specification marketplace. Contractors that provide service maintenance and installation, as well as manufacturers, will be the selected revenue generators in this segment. In-house research indicates this marketplace totals $2.5 billion with approximately $1.1 billion in the Government contract arena. Providing an underpinning to this parts and service sector is the Bush Administration's request to increase the Pentagon's budget to $451 billion by 2007. Weapons and other military supplies could swell from $61 billion currently to $99 billion for the same period. This defense expansion provides enormous potential for prime and sub- contractors to experience sustained profitability. Examples include Lockheed-Martin's $200 billion joint strike fighter (F-35) plus its F- 22 Raptor. Also Northrop-Grumman's unmanned UAV Global Hawk and General Atomics Predator. Recent Acquisition of Pacific ComTel, Inc. The Acquired Company acquired Pacific ComTel, Inc. on January 8, 2004 PacTel provides structured cabling design, installation and maintenance for leading information technology companies, federal, state and local government, major businesses, educational institutions, and telecommunication companies. PacTel was acquired by the Acquired Company for the issuance of 6,811,000 restricted common shares. Additionally, shareholders of PacTel were issued 370,000 Series B Warrants at the exercise of $1.00 per common share in the Acquired Company in exchange for their Series B Warrants in PacTel. Employees As of January 9, 2004, post merger with PacTel, the Acquired Company had 126 full-time employees including its officers and no part time employees. None of its employees is covered by a collective bargaining agreement. The Acquired Company considers its relationship with its employees to be satisfactory. Property and Facilities As of January 9, 2004, post merger with PacTel, the following table lists the Acquired Company's offices by location which are leased: PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 9
Approximate Total Expiration Date Approximate Annual Area Leased of Lease Rental West Palm Beach, FL 150 sq. ft. 4/30/2004 $26,488 San Marcos, CA 7,500 sq. ft. 11/30/2006 $58,500 Sacramento, CA 2,966 sq. ft. 10/1/2005 $50,541 Rancho Cucamonga, CA 1,596 sq. ft. month to month $24,300 Monterey, CA 3,500 sq. ft. 12/1/2005 $54,000
MANAGEMENT OF ACQUIRED COMPANY The following individuals have served in the capacities with the Acquired Company indicated below and will serve as officers and directors of Creative or in other capacities after the approval and consummation of the acquisition/exchange of shares: NAME AGE POSITION Richard J. Sullivan 64 Chairman of the Board of Directors Jerome C. Artigliere 49 CEO, President, Chief Operating Officer, Director Garrett A. Sullivan 68 Director Arthur F. Noterman 62 Director CERTAIN TRANSACTIONS OF THE ACQUIRED COMPANY Agreement with Attkisson, Carter and Company, Inc. The Acquired Company has entered into an agreement with Attkisson, a brokerage firm, to provide investment banking services. Brett Thackston, a shareholder of the Acquired Company is an officer of the brokerage firm. Prior to its acquisition by the Acquired Company, PacTel was a wholly owned subsidiary of Jetcom, Inc. Jetcom's president provided management services for PacTel. Jetcom charged PacTel $4,375 and $8,750 for these services for the three and six months ended December 31, 2003. Additionally, Jetcom advanced funds to PacTel from time to time. The balance due to Jetcom at June 30, 2003 and December 31, 2003 amounted to $350,614 and $226,313, respectively. These advances are non-interest bearing, and are due on demand. Jetcom is not under any obligation to advance any further funds to PacTel. In January 2004, Jetcom contributed all amounts it was owed at December 31, 2003 to capital. Additionally, in August 2003, Jetcom contributed $500,000 to PacTel as additional paid in capital. ACQUIRED COMPANY'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION The Acquired Company was incorporated in October 2003. All activities prior to October 2003 were made by PacTel which was subsequently merged into the Acquired Company on January 9, 2004. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 10 Trends and Uncertainties. Demand for the Acquired Company's products and services will be dependent on, among other things, general economic conditions, which are cyclical in nature. Inasmuch as a major portion of the Acquired Company's activities will be the receipt of revenues from government contracts and installation of broadband network cabling and equipment, Acquired Company's business operations may be adversely affected by the Acquired Company's competitors, prolonged recessionary periods, as well as the flow of the government's budgetary process. Capital and Source of Liquidity. The Acquired Company requires additional capital in order to meet its ongoing corporate obligations and in order to continue and expand its current and strategic business plans. For the six months ended December 31, 2003, the Acquired Company purchased equipment and leasehold improvements of $5,116 resulting in net cash used in investing activities of $5,116. For the six months ended December 31, 2002, the Acquired Company purchased equipment and leasehold improvements of $36,503 and acquired cash in the acquisition of Pacific Comtel Monterey, Inc. of $1,000. As a result, the Acquired Company had net cash used in investing activities of $35,503 for the six months ended December 31, 2002. For the year ended June 30, 2003, the Acquired Company acquired cash in the acquisition of Pacific Comtel Monterey, Inc. of $1,000 and purchased equipment and leasehold improvements for $41,834. As a result, the Acquired Company had net cash used in investing activities of $40,834 for the year ended June 30, 2003. The year ended June 30, 2003 includes combined predecessor and successor company results as presented in the accompanying June 30, 2003 financial statements. For the six months ended December 31, 2003, the Acquired Company had a decrease in bank overdraft of $4,117, made payments on the line of credit of $1,547,211, had borrowings under receivables factoring arrangement of $712,687 and made payments on long-term debt and capital lease obligations of $1,626. Additionally, the Acquired Company paid back advances from Jetcom, Inc. of $124,301 and received capital contributions by Jetcom, Inc. of $500,000. As a result, the Acquired Company had net cash used in financing activities of $464,568 for the six months ended December 31, 2003 Prior to the merger with PacTel, Global Digital Solutions, Inc. pursued a private place of its common stock and issued common stock for cash of $327,981 for the six months ended December 31, 2003. For the six months ended December 31, 2002, the Acquired Company had a decrease in bank overdraft of $225,538, made payments on a line of credit of $105,268 and made payments on long-term debt and capital lease obligations of $15,502. As a result, the Acquired Company had net cash used in financing activities of $357,349 for the six months ended December 31, 2002. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 11 For the year ended June 30, 2003, the Acquired Company had a decrease in bank overdraft of $221,421, made repayments on the line of credit of $105,268 and made payments of $65,360 on long-term debt and capital lease obligations. Additionally, the Acquired Company received advances from Jetcom, Inc. of $65,042 and received a capital contribution by Jetcom of $122,000. As a result, the Acquired Company had net cash used in financing activities of $205,007 for the year ended June 30, 2003. On a long-term basis, liquidity is dependent on establishment of operations and receipt of revenues, additional infusions of capital and debt financing. Although the Acquired Company has raised $518,817 in a recent private placement, the Acquired Company believes that additional capital and debt financing in the short term will be need to allow the Acquired Company to pursue its business plan and acquisitions. However, there can be no assurance that the Acquired Company will be able to obtain additional equity or debt financing in the future, if at all. There are no revenues from current operations to cover existing expenses. Results of Operation. For the six months ended December 31, 2003, the Acquired Company had revenues of $5,989,760 and cost of sales of $5,467,861. Net loss for the six months ended December 31, 2003 was $1,117,492. General and administrative expenses were $1,498,633 for the six months ended December 31, 2003. For the six months ended December 31, 2002, the Acquired Company had revenues of $6,899,428 and cost of sales of $5,452,093 resulting in gross profit of $1,447,335. Net income for the six months ended December 31, 2002 was $22,279. General and administrative expenses were $1,348,157 for the six months ended December 31, 2003. Six months ended December 31, 2002 compared to six months ended December 31, 2003. Gross Margin decreased from 20.98% for the six months ended December 31, 2002 to 8.71% for the six months ended December 31, 2003. The main factors effecting the negative change in gross margin from 2002 to 2003 were are follows: - the job mix changed. In 2002, labor costs were higher with low material costs. In 2003, we experienced a high material requirement. - sales for the quarter ended December 31, 2003 dropped dramatically by almost 20% and were not even consistent from month to month in the 2003 quarter. Operations management decided that cuts would not be made to the indirect labor to align with drop in sales - Jobs were bid at lower margins to win jobs with the anticipation that PacTel's quality would enable high margin "sell" in the future The Acquired Company experienced additional one time costs associated with broker fees for the new building and a $75,000 commission to a consultant for the six months ended December 31, 2003. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 12 Payroll expense increased substantially for the six months ended December 31, 2003 compared to December 2002 due to severance payments to employees. Accounting and auditing increased substantially for the six months ended December 31, 2003 compared to December 31, 2002 due to audit costs related to the acquisition of PacTel and merger into Creative. Legal fees for the six months ended December 31, 2003 increased $88,638 due to a dispute with Coamerica. After the 2002 fiscal year end loss of $1.5 million, PacTel's major stockholder stepped in and with high level managers instituted an across the board 10% salary cut. Employees' were urged to take time off without pay or use their vacation. All areas of operations were scrutinized and cuts made from eliminating janitorial services to cell phones. For the year ended June 30, 2003, the Acquired Company had revenues of $15,444,131 and cost of sales of $12,844,705 resulting in gross profit of $2,599,426. Net loss for the year ended June 30, 2003 was $508,696. General and administrative expenses were $2,917,750 for the year ended June 30, 2003. For the year ended June 30, 2002, the Acquired Company had revenues of $12,033,878 with cost of sales of $10,291,828 resulting in gross profit of approximately $1,742,050. Net loss for the year ended June 30, 2002 was $1,532,251. General and administrative expenses were $3,395,095 for the year ended June 30, 2002. After the 2002 fiscal year end loss of $1.5 million, PacTel's major stockholder stepped in and with high level managers instituted an across the board 10% salary cut. Employees' were urged to take time off without pay or use their vacation. All areas of operations were scrutinized and cuts made from eliminating janitorial services to cell phones. Management changes made throughout the calendar year of 2003 have resulted in projected profitable operations for the quarter ended December 31, 2003. Management expects this trend to continue in the first calendar quarter of 2004. MARKET PRICE OF AND DIVIDENDS ON THE ACQUIRED COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. There is no public trading market for the Acquired Company's common equity. The Acquired Company has a total of 2,470,000 common shares that are subject to outstanding warrants to purchase common equity of the Acquired Company. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 13 There are currently 50 holders of record for the common equity of the Acquired Company. Financials of the Acquired Company Index to Financials Global Digital Solutions Financial Statements Unaudited for the period from inception to December 31, 2003 Condensed Balance Sheet (Unaudited) Condensed Statement of Operations (Unaudited) Condensed Statement of Stockholders' Equity (Unaudited) Condensed Statement of Cash Flows (Unaudited) Notes to Condensed Financial Statements (Unaudited) Global Digital Solutions Financial Statements for the period ended November 7, 2003 Independent Auditors' Reports Balance Sheet Statement of Operations Statement of Stockholders' Equity Statements of Cash Flows Notes to Financial Statements Pacific Comtel, Inc. and Subsidiary Condensed Consolidated Financial Statements Unaudited for the six months ended September 30, 2003 and 2002 Condensed Consolidated Balance Sheets (Unaudited) Condensed Consolidated Statements Of Operations (Unaudited) Consolidated Statement Of Stockholders' Equity (Unaudited) Condensed Consolidated Statements Of Cash Flows (Unaudited) Notes To Consolidated Financial Statements Pacific Comtel, Inc. and Subsidiary Consolidated Financial Statements for the year ended June 30, 2003 Independent Auditors' Reports Consolidated Balance Sheets Consolidated Statements Of Operations Consolidated Statement Of Stockholders' Equity Consolidated Statements Of Cash Flows Notes To Consolidated Financial Statements Creative Beauty Supply, Inc. Unaudited Pro Form Condensed Combined Financial Statements PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 14 GLOBAL DIGITAL SOLUTIONS, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED BALANCE SHEET December 31, 2003 (Unaudited) Assets Current Assets Cash $ 327,964 Other Assets Prepaid acquisition costs 23,706 Deposits 4,414 ---------- $ 356,084 ========== Liabilities And Stockholders' Equity Current Liabilities Accounts payable and accrued expenses $ 51,911 Due to officer 10,049 ---------- Total Current Liabilities $ 61,960 Stockholders' Equity Common stock (authorized 100,000,000 shares, $0.00001 par value; issued and outstanding 16,727,817 shares) 167 Paid in capital 317,884 Retained earnings (deficit) (23,927) ---------- Total Stockholders' Equity 294,124 ---------- $ 356,084 ========== See accompanying notes to condensed financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 15 GLOBAL DIGITAL SOLUTIONS, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENT OF OPERATIONS For The Period Beginning October 28, 2003 And Ended December 31, 2003 (Unaudited) Revenues $ - Cost Of Sales - ---------- Gross Profit - General and Administrative Expenses 23,927 ---------- Loss From Operations 23,927 Credit For Income Taxes - ---------- Net Loss $ 23,927 ========== See accompanying notes to condensed financial statements PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 16 GLOBAL DIGITAL SOLUTIONS, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY For The Period Beginning October 28, 2003 and Ended December 31, 2003 (Unaudited)
Retained Total Common Stock Paid In Earnings Stockholders' Shares Amount Capital (Deficit) Equity ---------- ---------- ---------- ---------- ---------- Balance-October 28, 2003 - $ - $ - $ - $ - Issuance of Founders Stock 16,400,000 164 - - 164 Issuance of Stock - Private Placement 327,817 3 317,884 - 317,887 Net Loss - - - (23,927) (23,927) ---------- ---------- ---------- ---------- -------- Balance-December 31, 2003 16,727,817 $ 167 $ 317,884 $ (23,927) $294,124 ========== ========== ========== ========== =========
See accompanying notes to condensed financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 17 GLOBAL DIGITAL SOLUTIONS, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENT OF CASH FLOWS For The Period Beginning October 28, 2003 and Ended December 31, 2003 (Unaudited) Cash Flows From Operating Activities Net Loss $ (23,927) Adjustment to reconcile net loss to net cash used in operating activities: Increase in deposits (4,414) Increase in accounts payable and accrued expenses 19,830 Increase in due to officer 8,494 ---------- Net Cash Used In Operating Activities (17) ---------- Cash Flows From Financing Activities Issuance of common stock 327,981 ---------- Net Cash Provided By Financing Activities 327,981 ---------- Net Increase In Cash 327,964 Cash - Beginning of Period - ---------- Cash - End of Period $ 327,964 ========== See accompanying notes to condensed financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 18 GLOBAL DIGITAL SOLUTIONS, INC. (A DEVELOPMENT STAGE ENTERPRISE) Notes To Condensed Financial Statements December 31, 2003 (Unaudited) 1. Organization and Summary Of Significant Accounting Policies Basis Of Presentation The accompanying unaudited condensed financial statements of Global Digital Solutions, Inc. as of December 31, 2003 and for the period beginning October 28, 2003 and ended December 31, 2003 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of Global Digital Solutions, Inc.'s management, all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the condensed financial statements have been made. The condensed statements of operations for the period beginning October 28, 2003 and ended December 31, 2003 are not necessarily indicative of the results that may be expected for the entire year. Global Digital Solutions, Inc. (Global), a Delaware corporation, was incorporated on October 28, 2003. Global was formed as a holding company to acquire companies operating in the United States government contracting marketplace. Estimates And Assumptions The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes The Company applies the asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided against net deferred tax assets where the Company determines realization is not currently judged to be more likely than not. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 19 2. Related Party Transactions Global has entered into an agreement with a brokerage firm to provide investment banking services. A shareholder of Global is an officer of the brokerage firm. 3. Stockholders' Equity At inception, the Company issued common stock to its founders at par value, for total cash consideration of $164. On November 6, 2003, the Company issued 2,100,000 warrants to employees and consultants to purchase shares of common stock at a strike price of $0.50 per share. These warrants are exercisable through December 31, 2008. The Company used the Black-Scholes method to determine the fair value of these warrants. This resulted in no value being assigned to these warrants. In December 2003, the Company issued an additional 327,817 shares through a private placement. 4. Subsequent Event On January 8, 2004, the Company purchased 100% of the outstanding stock of Pacific Comtel, Inc. The consideration issued consisted of 6,961,000 shares of common stock and warrants to purchase an additional 370,000 shares of common stock at a strike price of $1.00 per share. In January 2004, the Company issued an additional 191,000 shares through a private placement, resulting in proceeds of $191,000. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 20 Independent Auditors' Report Board of Directors Global Digital Solutions, Inc. We have audited the accompanying balance sheet of Global Digital Solutions, Inc. (a development stage enterprise) as of November 7, 2003 and the related statements of stockholders' equity and cash flows for the period beginning October 28, 2003 (date of inception) and ended November 7, 2003. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Global Digital Solutions, Inc. as of November 7, 2003 and its cash flows for the period beginning October 28, 2003 and ended November 7, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/Rubin, Brown, Gornstein and Co. LLP Saint Louis, Missouri November 7, 2003 PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 21 GLOBAL DIGITAL SOLUTIONS, INC. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEET NOVEMBER 7, 2003 Assets Current Assets Cash $ 164 ---------- $ 164 ========== Liabilities And Stockholders' Equity Liabilities $ - ---------- Stockholders' Equity Common Stock (Authorized 100,000,000 shares, $0.00001 par value; Issued and outstanding 16,400,000 shares) 164 Retained earnings - ---------- Total Stockholders' Equity 164 ---------- $ 164 ========== See the accompanying notes to financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 22 GLOBAL DIGITAL SOLUTIONS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF STOCKHOLDERS' EQUITY For The Period Beginning October 28, 2003 and Ended November 7, 2003 Total Common Retained Stockholders' Stock Earnings Equity ---------- ---------- ---------- Balance - October 28, 2003 $ - $ - $ - Issuance of Stock 164 - 164 ---------- ---------- ---------- Balance - November 7, 2003 $ 164 $ - $ 164 ========== ========== ========== See the accompanying notes to financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 23 GLOBAL DIGITAL SOLUTIONS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF CASH FLOWS For The Period Beginning October 28, 2003 and Ended November 7, 2003 Cash Flows From Operating Activities Net Income $ - ---------- Net Cash Provided By Operating Activities - ---------- Cash Flows From Financing Activities Issuance of Common Stock 164 ---------- Net Cash Provided by Financing Activities 164 ---------- Net Increase In Cash 164 Cash - Beginning of Period - ---------- Cash - End of Period $ 164 ========== See the accompanying notes to financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 24 GLOBAL DIGITAL SOLUTIONS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS November 7,2003 1. Operations Global Digital Solutions, Inc. (Global), a Delaware corporation, was incorporated on October 28, 2003. Global was formed as a holding company to acquire companies operating in the United States government contracting marketplace. As of November 7, 2003 Global had made no acquisitions and had no operating revenue or expenses. 2. Related Party Transactions Global has entered into an agreement with a brokerage firm to provide investment banking services. A shareholder of Global is an officer of the brokerage firm. 3. Common Stock Warrants On November 6, 2003, the Company issued 2,100,000 warrants to employees and consultants to purchase shares of common stock at a strike price of $0.50 per share. These warrants are exercisable through December 31, 2008. The Company used the Black-Scholes method to determine the fair value of these warrants. This resulted in no value being assigned to these warrants. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 25 PACIFIC COMTEL, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) Assets December 31, June 30, 2003 2003 ---------- ---------- Current Assets Cash $ 169,637 $ - Contract and Accounts receivable, net of allowance of $110,000 2,327,014 3,476,732 Inventory 220,421 207,597 Costs and estimated earnings in excess of billings on uncompleted contracts 604,651 1,411,121 Prepaid expenses and other current assets 137,199 122,252 ---------- ---------- Total Current Assets 3,458,922 5,217,702 Equipment And Leasehold Improvements 310,673 365,137 Goodwill 213,943 213,943 Other Assets 55,067 29,076 ---------- ---------- $4,038,605 $5,825,858 ========== ========== Liabilities and Stockholders' Equity (Deficit) Current Liabilities Cash overdraft - per books $ - $ 4,117 Line of credit - 1,547,211 Borrowings under receivables factoring arrangement 712,687 - Current portion of notes payable 300,000 150,000 Current obligations under capital leases 30,290 26,853 Accounts payable 2,291,639 2,636,548 Accrued expenses 433,977 551,362 Billings in excess of costs and estimated earnings on uncompleted contracts 418,259 161,158 Due to Jetcom, Inc. 226,313 350,614 ---------- ---------- Total Current Liabilities 4,413,165 5,427,863 Notes Payable 116,879 266,879 ---------- ---------- Obligation Under Capital Leases 27,743 32,806 ---------- ---------- Stockholders' Equity (Deficit) Common Stock: Authorized 1,000,000 shares; no par value; issued and outstanding 100 shares 585,391 585,391 26 Paid in capital 622,000 122,000 Retained earnings (deficit) (1,726,573) (609,081) ---------- ---------- Total Stockholders' Equity (Deficit) (519,182) 98,310 ---------- ---------- $4,038,605 $5,825,858 ========== ========== See the accompanying notes to condensed consolidated financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 27 PACIFIC COMTEL, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For The Three For The Three For The Six For The Six Months Ended Months Ended Months Ended Months Ended December 31, December 31, December 31, December 31, 2003 2002 2003 2002 ---------- ---------- ----------- ------------ Revenues $3,311,717 $4,120,239 $5,989,760 $6,899,428 Cost Of Sales 2,318,860 3,325,425 5,467,861 5,452,093 ---------- ---------- ---------- ---------- Gross Profit 992,857 794,814 521,899 1,447,335 General And Administrative Expenses 772,814 837,643 1,498,633 1,348,157 Interest Expense 58,367 40,403 140,758 76,899 ---------- ---------- --------- --------- Income (Loss) From Operations 161,676 (83,232) (1,117,492) 22,279 Credit For Income Taxes - - - - --------- --------- --------- --------- Net Income (Loss) $ 161,676 $ (83,232) $(1,117,492) $ 22,279 ========== ========= =========== =========
See the accompanying notes to condensed consolidated financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 28 PACIFIC COMTEL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS'EQUITY (Unaudited)
Additional Retained Total Common Stock Paid-In Earnings Stockholders' Shares Amount Capital (Deficit) Equity ---------- ---------- ---------- ---------- ---------- Balance - June 30, 2003 100 $ 585,391 $ 122,000 $(609,081) $ 98,310 Capital Contribution From Jetcom, Inc. - - 500,000 - 500,000 Net Loss - - - (1,117,492) (1,117,492) ------- -------- --------- ---------- ---------- Balance - December 31, 2003 100 $585,391 $ 622,000 $(1,726,573) $ (519,182) ======== ======== ========= ========== ==========
See the accompanying notes to condensed consolidated financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 29 PACIFIC COMTEL, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
For The Six For The Six Months Ended Months Ended December 31, December 31, 2003 2002 ---------- ---------- Cash Flows From Operating Activities Net income (loss) $(1,117,492) $ 22,279 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 59,580 70,166 Change in assets and liabilities: Contracts and accounts receivable 1,149,718 21,174 Inventory (12,824) 23,830 Costs and estimated earnings in excess of billings on uncompleted contracts 806,470 (189,857) Prepaid expenses and other current assets (14,947) 567,176 Deposits (25,991) 901 Accounts payable and accrued expenses (462,294) 171,841 Billings in excess of costs and estimated earnings on uncompleted contracts 257,101 (150,257) ---------- ---------- Net Cash Provided By Operating Activities 639,321 537,253 ---------- ---------- Cash Flows From Investing Activities Purchase of equipment and leasehold improvements (5,116) (36,503) Cash acquired in acquisition of Pacific Comtel Monterey, Inc. - 1,000 ---------- ---------- Net Cash Used in Investing Activities (5,116) (35,503) ---------- ---------- Cash Flow From Financing Activities Decrease in bank overdraft (4,117) (225,538) Repayment on line of credit (1,547,211) (105,268) Borrowings under receivables factoring Arrangement 712,687 -- Payments on long-term debt and capital lease obligations (1,626) (15,502) Advances from (repayments to) Jetcom, Inc. (124,301) (11,041) Capital contribution by Jetcom, Inc. 500,000 - ---------- ---------- Net Cash Used In Financing Activities (464,568) (357,349) ---------- ---------- 30 Change in Cash 169,637 144,401 Cash - Beginning of Period - - ---------- ---------- Cash - End of Period $ 169,637 $ 144,401 ========== ==========
See the accompanying notes to condensed consolidated financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 31 PACIFIC COMTEL, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Organization And Summary Of Significant Accounting Policies Basis Of Presentation The accompanying unaudited condensed consolidated financial statements of Pacific Comtel, Inc. as of December 31, 2003 and for the three and six months ended December 31, 2003 and 2002 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The June 30, 2003 financial information included herein has been extracted from Pacific Comtel, Inc.'s audited financial statements. In the opinion of Pacific Comtel, Inc.'s management, all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the condensed consolidated financial statements have been made. The condensed consolidated statements of operations for the three and six months ended December 31, 2003 are not necessarily indicative of the results that may be expected for the entire year. These statements should be read in conjunction with the Company's audited June 30, 2003 consolidated financial statements. Pacific Comtel, Inc. (the "Company"), (formerly Intersect Solutions, Inc.) was organized in 1995 to purchase the assets of an existing installation contractor of communications systems, cable and wiring for commercial and industrial buildings. On November 1, 2002, Pacific Comtel, Inc. purchased 100% of the common stock of a business engaged in cable and wiring services, as well as computer network and telephone integration sales and service. This subsidiary is named Pacific Comtel Monterey, Inc. On November 1, 2002, Jetcom, Inc. purchased 100% of the common stock of Pacific Comtel, Inc. Pacific Comtel, Inc. applied the "push down" accounting rules to this transaction, and, as such, a new basis of accounting was created on that date. Operations of Pacific Comtel, Inc. prior to November 1, 2002 have not been segregated in these condensed consolidated financial statements from those of Pacific Comtel, Inc. prior to its purchase by Jetcom,Inc. due to the fact that no substantive changes in operations have occurred due to this outside change in control. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 32 Principles Of Consolidation The condensed consolidated financial statements include Pacific Comtel, Inc. and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated upon consolidation. Estimates And Assumptions The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Business Acquisitions On November 1, 2002, Jetcom, Inc. purchased 100% of the common stock of Pacific Comtel, Inc. Jetcom, Inc. is a holding company formed for the purpose of acquiring information technology and telecommunications service companies. Jetcom, Inc. had no substantive operations prior to the purchase of Pacific Comtel, Inc. The purchase price amounted to $1,002,270. The purchase price is comprised of notes payable to selling shareholders totaling $416,879, Jetcom, Inc. Series A Preferred Stock with a value of $313,000 and direct acquisition costs of $272,391. The value of the preferred stock was determined based on that stock's stated liquidation preference. Because the acquisition resulted in a 100% change in control of Pacific Comtel, Inc., the Company applied the "push down" accounting rules. This resulted in a new accounting basis for the assets and liabilities of Pacific Comtel, Inc. The notes payable to the selling shareholders are to be funded from the operations of Pacific Comtel, Inc. Additionally, shares of Pacific Comtel, Inc. are pledged as collateral on the notes payable. As such, this liability has been reflected on the balance sheet of Pacific Comtel, Inc. as a push down accounting adjustment. Additionally, interest expense on these notes of $10,257 and $18,659 has been reflected in the financial statements of the Company for the three and six months ended September 30, 2003. In January 2004, these note agreements were amended, whereby Pacific Comtel, Inc. assumed these notes payable, and received an extension of the first payment date to June 30, 2004. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 33 The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition: Cash $ 238,360 Contract receivables 2,494,045 Inventory 207,831 Net costs and estimated earnings in excess of billings on uncompleted contracts 114,404 Other current assets 500,000 Equipment and leasehold improvements 430,524 Other assets 19,766 ---------- Total assets acquired 4,004,930 Accounts payable and accrued expense assumed 1,498,676 Line of credit and capital lease obligations 1,717,927 ---------- Net assets acquired $ 788,327 ========== The excess of purchase price over net assets acquired of $213,943 has been allocated to goodwill. On November 1, 2002, Pacific Comtel, Inc. purchased 100% of the common stock of ADS Monterey, and renamed it Pacific Comtel Monterey, Inc. Pacific Comtel Monterey, Inc. is engaged in the business of cable and wiring services, as well as computer network and telephone integration sales and service, and was purchased to expand the Company's capabilities and geographic presence. The purchase price amounted to $205,572, consisting of a cash payment of $175,000 and direct acquisition costs of $30,572. Jetcom, Inc. paid the entire purchase price and direct acquisition costs, on behalf of the Company. The results of operations of Pacific Comtel Monterey, Inc. are included in the consolidated financial statements from the date of acquisition. The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition: Accounts receivable $ 177,369 Inventory 79,617 Other current assets 1,865 ---------- Total assets acquired 258,851 Accounts payable and accrued expense assumed 53,279 ---------- Net assets acquired $ 205,572 ========== PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 34 3. Financing Agreements The Company maintained a revolving credit arrangement with a bank, which provided for borrowings up to 80% of eligible contract receivables, not to exceed $2,000,000. The line of credit initially required interest payments at the bank prime rate. The balance was payable in full on January 31, 2003. The credit agreement contained standard terms and covenants. The Company had been in violation of certain of these covenants since June 30, 2002. The credit agreement was amended in September 2002 to raise the interest rate to the prime rate plus 3.5%, and amended again in November 2002 to raise the interest rate to the prime rate plus 4.5%. In August 2002, the bank capped the Company's line of credit balance at $1,597,211. In November 2002, the bank began charging interest at the default rate of the prime rate plus 9.5%. The balance outstanding at June 30, 2003 was $1,547,211. On October 9, 2003, the Company entered into an accounts receivable factoring agreement with a finance company. Under this agreement, the Company will sell, with recourse, 81.5% of its eligible accounts receivable balances, up to $2,500,000. Interest is charged at an annual rate of 18%. The agreement is effective for one year, and is secured by a pledge of all of the Company's assets, and guarantees by Jetcom, Inc. and its principal stockholder. The Company used this source of financing to pay off its previous revolving credit agreement and to provide working capital needs. The balance outstanding at December 31, 2003 was $712,687. 4. Related Party Transactions The Company is a wholly owned subsidiary of Jetcom, Inc. Jetcom's president provides management services for the Company. Jetcom charged the Company $4,375 and $8,750 for these services for the three and six months ended December 31, 2003. Additionally, Jetcom advances funds to the Company from time to time. The balance due to Jetcom at June 30, 2003 and December 31, 2003 amounted to $350,614 and $226,313, respectively. These advances are non-interest bearing, and are due on demand. Jetcom is not under any obligation to advance any further funds to the Company. In January 2004, Jetcom contributed all amounts it was owed at December 31, 2003 to capital. Additionaly, in August 2003, Jetcom contributed $500,000 to the Company as additional paid in capital. 5. Subsequent Events Effective January 2, 2004, the Company was sold to an unrelated third party. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 35 Independent Auditors' Report Board of Directors Pacific Comtel, Inc. We have audited the accompanying consolidated balance sheet of Pacific Comtel, Inc. and subsidiary, the "Successor Company" as described in the Basis of Presentation note to the financial statements, as of June 30, 2003, and the related consolidated statements of operations, stockholders' equity and cash flows for the period November 1, 2002 to June 30, 2003. These consolidated financial statements are the responsibility of Pacific Comtel, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pacific Comtel, Inc. and subsidiary as of June 30, 2003 and the results of their operations and their cash flows for the period from November 1, 2002 to June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ Rubin, Brown, Gornstein and Co. LLP St Louis, Missouri October 3, 2003, (Except for Note 13, which is dated January 8, 2004) PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 36 Independent Auditors' Report Board of Directors Pacific Comtel, Inc. We have audited the accompanying balance sheet of Pacific Comtel, Inc., the "Predecessor Company" as described in the Basis of Presentation note to the financial statements, as of June 30, 2002, and the related statements of operations, stockholders' equity and cash flows for the year ended June 30, 2002,and the period from July 1, 2002 to October 31, 2002. These financial statements are the responsibility of Pacific Comtel, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Pacific Comtel, Inc. as of June 30, 2002 and the results of their operations and their cash flows for the year ended June 30, 2002, and the period from July 1, 2002 to October 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/Rubin, Brown, Gornstein and Co. LLP St Louis, Missouri October 3, 2003 PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 37 PACIFIC COMTEL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
Assets Successor Predecessor Company Company June 30, June 30, 2002 2003 (Restated) ---------- ---------- Current Assets Contract and accounts receivable $3,476,732 $2,937,477 Inventory 207,597 248,586 Costs and estimated earnings in excess of billings on uncompleted contracts 1,411,121 331,586 Income tax refund receivable - 440,482 Prepaid expenses and other current assets 122,252 143,815 ---------- ---------- Total Current Assets 5,217,702 4,101,946 Equipment And Leasehold Improvements 365,137 446,983 Goodwill 213,943 111,736 Other Assets 29,076 20,717 ---------- ---------- $5,825,858 $4,681,382 ========== ========== Liabilities and Stockholders' Equity (Deficit) Current Liabilities Cash overdraft - per books $ 4,117 225,538 Line of credit 1,547,211 1,652,479 Current portion of notes payable 150,000 - Current obligations under capital leases 26,853 57,719 Accounts payable 2,636,548 1,179,207 Accrued expenses 551,362 652,949 Billings in excess of costs and estimated earning on uncompleted contracts 161,158 189,503 Due to Jetcom, Inc. 350,614 - ---------- ---------- Total Current Liabilities 5,427,863 3,957,395 Notes Payable 266,879 748,573 ---------- ---------- Obligation Under Capital Leases 32,806 61,050 ---------- ---------- PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 38 PACIFIC COMTEL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Continued) Stockholders' Equity (Deficit) Common Stock: Authorized 1,000,000 shares; no par value; issued and outstanding 100 shares in 2003. Authorized 135,000,000 shares; no par value; issued and outstanding 27,000,000 shares in 2002. 585,391 71,867 Series A preferred stock: Authorized 100,000 shares of $10 par value; non-voting; issued and outstanding 7,500 shares in 2002 - 75,000 Series B preferred stock: Authorized 24,000,000 shares; no par value; non-voting; issued and outstanding 13,254,739 shares in 2002 - 600,042 Paid in capital 122,000 - Retained earnings (deficit) (609,081) (832,545) ---------- ---------- Total Stockholders' Equity (Deficit) 98,310 85,636 ---------- ---------- $5,825,858 $4,681,382 ========== ==========
See the accompanying notes to consolidated financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 38 PACIFIC COMTEL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Successor Company Predecessor Company For the For the Four For The Year Eight Months Months Ended Ended June 30, Ended June 30, October 31, 2002 2003 2002 (Restated) ------------ ------------ ------------ Revenues $ 11,469,420 $ 3,974,711 $ 12,033,878 Cost Of Sales 9,723,977 3,120,728 10,291,828 ------------ ------------ ------------ Gross Profit 1,745,443 853,983 1,742,050 General And Administrative Expenses 2,206,036 711,714 3,395,095 Interest Expense 148,488 42,884 191,888 ------------ ------------ ------------ Income (Loss) From Operations ( 609,081) 99,385 (1,844,933) Credit For Income Taxes - - (312,682) ------------ ------------ ------------ Net Income (Loss) $ ( 609,081) $ 99,385 $ (1,532,251) ============ ============ ============
See the accompanying notes to consolidated financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 39 PACIFIC COMTEL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Page 1 of 3 Predecessor Company Statement of Stockholders' Equity
Series A Series B Preferred Stock Preferred Stock Shares Amount Shares Amount ---------- ---------- ---------- ---------- Balance-July 1, 2001-As Originally Reported 7,500 $ 75,000 - $ - Prior Period Adjustment (Note 2) - - - - ---------- ---------- ---------- ---------- Balance-July 1, 2001-As Restated 7,500 $ 75,000 - - Net Loss - As Restated (Note 2) - - - - Issuance of Series B Preferred Stock - - 13,254,739 $ 600,042 ---------- ---------- ---------- ---------- Balance-June 30, 2002-As Restated 7,500 $ 75,000 13,254,739 $ 600,042 Net Income For The Four Months Ended October 31, 2002 - - - - Conversion of Series A Preferred Stock To Common Stock (7,500) (75,000) - - Conversion of Series B Preferred Stock To Common Stock - - (13,254,739) (600,042) Issuance of Common Stock To Pay Long Term Debt - - - - ---------- ---------- ---------- ---------- Balance - October 31, 2002 - - - - ========== ========== ========== ========== PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 40 PACIFIC COMTEL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Page 2 of 3 Predecessor Company Statement of Stockholders' Equity Retained Total Common Stock Earnings Stockholders' Shares Amount (Deficit) Equity ---------- ---------- ---------- ---------- Balance-July 1, 2001-As Originally Reported 27,000,000 $ 71,867 823,408 $ 970,275 Prior Period Adjustment (Note 2) - - (123,702) (123,702) ---------- ---------- ---------- ---------- Balance-July 1, 2001-As Restated 27,000,000 $ 71,867 (699,706) 846,573 Net Loss - As Restated (Note 2) - - (1,532,251) (1,532,251) Issuance of Series B Preferred Stock - - - $ 600,042 ---------- ---------- ---------- ---------- Balance-June 30, 2002-As Restated 27,000,000 $ 71,867 (832,545) $ (85,636) Net Income For The Four Months Ended October 31, 2002 - - 99,385 99,385 Conversion of Series A Preferred Stock To Common Stock 7,170,172 75,000 - - Conversion of Series B Preferred Stock To Common Stock 13,254,739 600,042 - - Issuance of Common Stock To Pay Long Term Debt 84,770,730 886,314 - 886,314 ---------- ---------- ---------- ---------- Balance - October 31, 2002 132,195,641 $1,633,223 $ (733,160) $ 900,063 ========== ========== ========== ==========
See the accompanying notes to consolidated financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 41 PACIFIC COMTEL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Page 3 of 3 Successor Company Statement of Stockholders Equity
Additional Retained Total Common Stock Paid-In Earnings Stockholders' Shares Amount Capital (Deficit) Equity ----------- ---------- ---------- ---------- ---------- Balance-October 31, 2002 Predecessor Company 132,195,641 $1,633,223 $ - $(733,160) $ 900,063 Adjustment to Reflect Purchase By Jetcom, Inc. (Note 3) (132,195,541) $ (630,953) - 733,160 102,207 Push Down of Jetcom, Inc Debt - (416,879) - - (416,879) Capital Contribution From Jetcom, Inc. - - 122,000 - 122,000 Net Loss - - - (609,081) (609 081) ---------- ---------- ---------- ---------- ---------- Balance - June 30, 2003 100 $ 585,391 $ 122,000 $ (609,081) $ 98,310 ========== ========== ========== ========== ==========
See the accompanying notes to consolidated financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 42 PACIFIC COMTEL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOW
Successor Company Predecessor Company For the For the Four For The Year Eight Months Months Ended Ended June 30, Ended June 30, October 31, 2002 2003 2002 (Restated) ------------ ------------ ------------ Cash Flows From Operating Activities Net Income (loss) $ (609,081) $ 99,385 $ (1,532,251) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 90,340 39,590 207,520 Bond and loan guarantees made by Jetcom, Inc. 80,000 - - Gain on sale of fixed assets - - (218) Deferred income taxes - - 127,000 Change in assets and liabilities: Contracts and accounts receivable (805,318) 443,432 739,825 Inventory 79,851 40,754 65,787 Costs and estimated earnings in excess of billings on uncompleted contracts (1,131,212) 51,677 149,270 Income tax refund receivable 440,482 - (440,482) Prepaid expenses and other current assets (61,869) 84,297 (124,242) Deposits (9,310) 951 (1,692) Accounts payable and accrued expenses 1,635,955 (195,738) (121,426) Billings in excess of costs and estimated earnings on uncompleted contracts (4,347) (23,998) 47,479 ------------ ------------ ------------ Net Cash Provided By (Used In) Operating Activities (294,509) 540,350 (883,430) ------------ ------------ ------------ Cash Flows From Investing Activities Proceeds from sale of fixed assets - - 1,400 Cash acquired in acquisition of Pacific Comtel Monterey, Inc. 1,000 - - Purchase of equipment and leasehold improvements (24,953) (16,881) (27,038) ------------ ------------ ------------ Net Cash Used in Investing Activities (23,953) (16,881) (25,638) ------------ ------------ ------------ Cash Flow From Financing Activities Increase (decrease) in bank overdraft 4,117 (225,538) 225,538 Advances (repayment) on line of credit (50,000) (55,268) 294,499 Payments on long-term debt and capital lease obligations (61,057) (4,303) (234,631) 43 PACIFIC COMTEL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOW (Continued) Advances from Jetcom, Inc. 65,042 - - Capital contribution by Jetcom, Inc. 122,000 - - Proceeds from issuance of preferred stock - - 600,042 ------------ ------------ ------------ Net Cash Provided by (Used In) Financing Activities 80,102 (285,109) 885,448 ------------ ------------ ------------ Change in Cash (238 360) 238,360 (23 620) Cash - Beginning of Period 238,360 - 23,620 ------------ ------------ ------------ Cash - End of Period $ - $ 238,360 $ - ============ ============ ============ Supplemental Disclosure of Cash Flow Information Interest paid $ 106,164 $ 27,859 $ 138.402 Income taxes paid (refunds received) (440,482) - 259,080 ------------ ------------ ------------
See the accompanying notes to consolidated financial statements. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 44 PACIFIC COMTEL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 1. Organization And Summary of Significant Accounting Policies Basis of Presentation Pacific Comtel, Inc. (the "Company"), (formerly Intersect Solutions, Inc.) was organized in 1995 to purchase the assets of an existing installation contractor of communications systems, cable and wiring for commercial and industrial buildings. This business, through October 31, 2002, is presented in these consolidated financial statements as that of the "Predecessor Company". On November 1, 2002, Pacific Comtel, Inc. purchased 100% of the common stock of a business engaged in cable and wiring services, as well as computer network and telephone integration sales and services. This subsidiary is named Pacific Comtel Monterey, Inc. On November 1, 2002, Jetcom, Inc. purchased 100% of the common stock of Pacific Comtel, Inc. Pacific Comtel, Inc. applied the "push down" accounting rules to this transaction, and, as such, a new basis of accounting was created on that date. Operations of Pacific Comtel, Inc. subsequent to October 31, 2002 are presented in these consolidated financial statements as those of the "Successor Company". Principles Of Consolidation The consolidated financial statements include Pacific Comtel, Inc. and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated upon consolidation. Estimates And Assumptions The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Contract And Accounts Receivable Contract and accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to contract PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 45 receivables. Included in contract receivables are retentions of $259,077 and $181,760 at June 30, 2003 and 2002, respectively. Contract and accounts receivable are stated net of an allowance for doubtful accounts of $110,000 at June 30, 2003 and $150,000 at June 30, 2002. Inventory Inventory consists primarily of construction materials and is valued at the lower of cost or market applied on a first-in, first out (FIFO) basis. Equipment and Leasehold Improvements Equipment and leasehold improvements are carried at cost, less accumulated depreciation and amortization using accelerated and straight-line methods. Equipment and leasehold improvements are depreciated over periods ranging from five to seven years. Goodwill Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at dates of acquisition and was being amortized on the straight-line method over 15 years, through June 30, 2002. Amortization expense charged to operations in the year ended June 30, 2002 was $9,860. On July 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 supersedes Accounting Principles Board Opinion No. 17, Intangible Assets, and requires goodwill and other intangible assets that have indefinite useful lives to no longer be amortized; however, these assets must be tested at least annually for impairment. See Note 6. Fair Value of Financial Instruments The carrying amounts of financial instruments including cash, contract and accounts receivable and accounts payable approximate fair value due to the relatively short maturity of these instruments. The carrying value of the line of credit, capital lease obligations and long-term debt approximate fair value based on the incremental borrowing rates currently available to the Company for financing with similar terms and maturities. Revenues And Cost Recognition Revenues from construction contracts are recognized on the percentage of completion method, measured on the basis of incurred costs to estimated total costs for each contract. This cost-to-cost method is used because management considers it to be the best available measure of progress on these contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. General and administrative costs are expensed as incurred. Provisions for PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 46 estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability are recognized in the period in which the revisions are determined. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. Income Taxes Deferred taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts. Tax consequences are based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is provided against deferred tax assets where the Company determines realization is not currently judged to be more likely than not. The Company filed income tax returns on a single company basis through October 31, 2002. As of November 1, 2002, the Company will be included in the consolidated income tax return of its parent company. The tax provision computed is based on the amounts the Company would record on a separate return basis. Segment Reporting The Company operates in one reportable business segment. Impact of Recently Issued Accounting Standards. In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB 51. The Interpretation addressed consolidation by business enterprises of certain variable interest entities (VIEs). The Interpretation is effective immediately for all enterprises with interests in VIEs created after January 31, 2003. For interests in VIEs created before February 1, 2003, the provision of this Interpretation will be applicable no later than the beginning of the first interim or annual period beginning after December 15, 2003. Further, the disclosure requirements of the Interpretation are applicable for all financial statements initially issued after January 31, 2003, regardless of the date on which the VIE was created. The adoption of this standard is not expected to have any impact on the Company's financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or "mezzanine" equity, by now requiring those instruments be PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 47 classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No, 150 requires disclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard is not expected to have any impact on the Company's financial statements. 2. Restatement of Previously Issued Financial Statements The Company has identified adjustments that have resulted in the restatement of the previously issued financial statements for the year ended June 30, 2002. The adjustments relate to items required by accounting principles generally accepted in the United States of America to be recorded in the financial statements, but were erroneously omitted. These items include contract receivables, inventory, prepaid expenses, deferred taxes, accruals for vacation earned, accruals for severance agreements, financial agreements for insurance policies and accounts payable. The effect of these items at June 30, 2001 amounted to $123,702 (net of deferred tax benefit of $97,800), which has been recorded as a prior period adjustment to the opening balance of retained earnings. The effect on the results of operations for the year ended June 30, 2002 was to increase the previously reported net loss by $406,597 (including deferred tax expense of $125,000). 3. Business Acquisitions On November 1, 2002, Jetcom, Inc. purchased 100% of the common stock of Pacific Comtel, Inc. Jetcom, Inc. is a holding company formed for the purpose of acquiring information technology and telecommunications service companies. Jetcom, Inc. had no substantive operations prior to the purchase of Pacific Comtel, Inc. The purchase price amounted to $1,002,270. The purchase price is comprised of notes payable to selling shareholders totaling $416,879, Jetcom, Inc. Series A Preferred Stock with a value of $313,000 and direct acquisition costs of $272,391. The value of the preferred stock was determined based on that stock's stated liquidation preference. Because the acquisition resulted in a 100% change in control of Pacific Comtel, Inc., the Company applied the "push down" accounting rules. This resulted in a new accounting basis for the assets and liabilities of Pacific Comtel, Inc. The Company's financial position and results of operations prior to this acquisition are presented in these consolidated financial statements as those of the "Predecessor Company". The Company's financial position and results of operations subsequent to the acquisition are presented in these consolidated financial statements as those of the "Successor Company". PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 48 The notes payable to the selling shareholders are to be funded from the operations of Pacific Comtel, Inc. Additionally, shares of Pacific Comtel, Inc. are pledged as collateral on the notes payable. As such, this liability has been reflected on the balance sheet of Pacific Comtel, Inc. as a push down accounting adjustment. Additionally, interest expense on these notes of $23,486 has been reflected in the financial statements of the Company. The following table summarizes the fair value of these assets acquired and liabilities assumed at the date of acquisition: Cash $ 238,360 Contract receivables 2,494,045 Inventory 207,831 Net costs and estimated earnings in excess of net billings on uncompleted contracts 114,404 Other current assets 500,000 Equipment and leasehold improvements 430,524 Other Assets 19,766 ---------- Total assets acquired $4,004,930 Accounts payable and accrued expenses assumed 1,498,676 Line of credit and capital lease obligations 1,717,927 ---------- Net assets acquired $ 788,327 ========== The excess of purchase price over net assets acquired of $213,943 has been allocated to goodwill. None of this goodwill is expected to be deductible for tax purposes. On November 1, 2002, Pacific Comtel, Inc. purchased 100% of the common stock of ADS Monterey and renamed it Pacific Comtel Monterey, Inc. Pacific Comtel Monterey, Inc. is engaged in the business of cable and wiring services, as well as computer network and telephone integration sales and services, and was purchased to expand the Company's capabilities and geographic presence. The purchase price amounted to $205,572, consisting of a cash payment of $175,000 and direct acquisition costs of $30,572. Jetcom, Inc. paid the entire purchase price and direct acquisition costs, on behalf of the Company. The results of operations of Pacific Comtel Monterey, Inc. are included in the consolidated financial statements from the date of acquisition. The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition: Accounts receivable $ 177,369 Inventory 79,617 Other current assets 1,865 ---------- Total assets $ 258,851 PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 49 Accounts payable and accrued expenses assumed 53,279 ---------- Net assets acquired $ 205,572 ========== 4. Costs And Estimated Earnings On Uncompleted Contracts Costs and estimated earnings on uncompleted contracts consist of: Successor Predecessor Company Company 2003 2002 ---------- ---------- Costs incurred on uncompleted contracts $6,178,723 $1,541,520 Estimated earnings 1,745,128 724,805 ---------- ---------- 7,923,851 2,566,325 Less: Billings to date 6,673,888 2,424,243 ---------- ---------- $1,249,963 $ 142,083 ========== ========== Included in the accompanying balance sheet under the following captions: Successor Predecessor Company Company 2003 2002 ---------- ---------- Costs and estimated earnings in excess of billings on uncompleted contracts $1,411,121 $ 331,586 Billing in excess of costs and estimated earnings on uncompleted contracts 161,158 189,503 ---------- ---------- $1,249,963 $ 142,083 ========== ========== 5. Equipment And Leasehold Improvements Equipment and leasehold improvements consist of: Successor Predecessor Company Company 2003 2002 ---------- ---------- Automobiles and trucks $ 86,177 $ 182,474 Field equipment 217,132 322,911 Furniture and office equipment 133,695 647,528 Leasehold improvements 18,473 19,120 ---------- ---------- 455,477 1,172,033 PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 50 Less: Accumulated depreciation and amortization 90,340 725,050 ---------- ---------- $ 365,137 $ 446,983 ========== ========== Depreciation and amortization charged against income amounted to $90,340 for the eight months ended June 30, 2003, $39,590 for the four months ended October 31, 2002 and $197,660 for the year ended June 30, 2002. 6. Goodwill On July 1, 2002, the company adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flow approach previously required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Intangible assets that do not have indefinite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121. The amortization provisions of SFAS No. 142 apply immediately to goodwill and intangible assets acquired after June 30, 2001 and are required to be adopted for all other goodwill and intangible assets beginning on January 1, 2002. Upon adoption of SFAS No. 142, the Company performed an impairment test of its goodwill. There was no impairment of goodwill upon adoption of SFAS No. 142. Pro forma net loss for the year ended June 30, 2002 adjusted to exclude goodwill amortization expense is as follows: Reported net loss - as restated $(1,532,251) Add back: goodwill amortization 9,860 ---------- Adjusted net loss - as restated $(1,522,391) ========== The change in the carrying amount of goodwill is as follows: Accumulated Net Carrying Cost Amortization Value ---------- ------------ ------------ Balance - July 1, 2002 $ 147,890 $ (36,154) $ 111,736 Parent company basis adjustment November 1, 2002 66,053 36,154 102,207 ---------- ------------ ------------ Balance - June 30, 2003 $ 213,943 $ - $ 213,943 PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 51 7. Line of Credit, Bank The Company maintains a revolving credit arrangement with a bank, which provides for borrowing up to 80% of eligible contract receivables, not to exceed $2,000,000. The line of credit initially required interest payments at the bank prime rate. The balance was payable in full on January 31, 2003. The credit agreement contains standard terms and covenants. The Company has been in violation of certain of these covenants since June 30, 2002. The credit agreement was amended in September 2002 to raise the interest rate to the prime rate plus 3.5%, and amended again in November 2002 to raise the interest rate to the prime rate plus 4.5%. In August 2002, the bank capped the Company's line of credit balance at $1,597,211. In November 2002, the bank began charging interest at the default rate of the prime rate plus 9.5%. The balance outstanding at June 30, 2003 and 2002 was $1,547,211 and $1,652,479, respectively. See Note 13 regarding replacement of the revolving credit arrangement. 8. Long Term Debt and Capital Lease Obligations Long term debt and capital lease obligations consist of: Successor Predecessor Company Company 2003 2002 ---------- ---------- Jetcom, Inc notes payable to selling shareholders of Pacific Comtel, Inc. The notes require payments of $500,000 in the aggregate and have no stated interest rate. These obligations have been discounted using an interest rate of 8%. The notes are secured by the assets of Jetcom, Inc. including 100% of the common stock of Pacific Comtel, Inc. $ 416,879 $ - Note payable - former stockholder. The note bore interest at 9.5% and was paid in full in October 2002 by issuance of shares of common stock. - 748,573 Capital leases obligations, secured by the underlying equipment, bearing interest at rates from 12% to 32%, monthly payments are approximately $3,500 in the aggregate 59,659 118,769 ---------- ---------- Total Long Term Debt and Capital Leases 476,538 867,342 Less: Current maturities of long term debt and capital lease obligations 176,853 57,719 ---------- ---------- $ 299,685 $ 809,623 ========== ========== PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 52 The secured maturities of long-term debt as of June 30, 2003 are as follows: Year Amount ---------- ---------- 2004 $ 150,000 2005 150,000 2006 116,879 ---------- $ 416,879 ========== The Company leases computers, equipment and office equipment under capital leases expiring in various years through 2007. Minimum future lease payments under these noncancellable capital leases, having remaining terms in excess of one year as of June 30, 2003, for each of the next five years in the aggregate are: Year Ending June 30, Amount -------------------- ---------- 2004 $ 32,444 2005 22,008 2006 10,666 2007 3,555 ---------- Total minimum lease payments 68,673 Less: Amount representing interest 9,014 ---------- Total present value of minimum payment 59,659 Less: Current portion of such obligation 26,853 ---------- Long Term Obligations $ 32,806 ========== Assets recorded under capital leases at June 30 are as follows: Successor Predecessor Company Company 2003 2002 ---------- ---------- Equipment, at cost $ 63,587 $ 108,710 Less: Accumulated amortization 13,989 45,050 ---------- ---------- Net Equipment $ 49,598 $ 63,660 ========== ========== PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 53 9. Related Party Transactions The Company is a wholly owned subsidiary of Jetcom, Inc. Jetcom provided guarantees on the Company's line of credit and certain construction performance bonds. Jetcom charged the Company $80,000 for these guarantees for the eight months ended June 30, 2003. Jetcom's president provides management services for the Company. Jetcom charged the Company $16,042 for these services for the eight months ended June 30, 2003. Additionally, Jetcom advances funds to the Company from time to time. The balance due to Jetcom at June 30, 2003 amounted to $350,614. These advances are non-interest bearing, and are due on demand. Jetcom is not under any obligation to advance any further funds to the Company. 10. Income Taxes The provision (credit) for income taxes consists of: Successor Company Predecessor Company For the For the Four For The Year Eight Months Months Ended Ended June 30, Ended June 30, October 31, 2002 2003 2002 (Restated) ------------ ------------ ------------ Current $ - $ - $ (439,682) Deferred income taxes - - 127,000 ------------ ------------ ------------ $ - $ - $ (312,682) ============ ============ ============ The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at June 30 consist of the following: Successor Predecessor Company Company 2003 2002 ---------- ---------- Deferred Tax Assets: Accounts receivable $ 44,000 $ 60,000 Inventory 16,000 41,000 Intangible assets 25,000 27,000 Liabilities and reserves 52,000 91,000 Net operating loss carryforwards 354,000 - ---------- ---------- Gross Deferred Tax Assets 491,000 219,000 Valuation allowance (487,000) (219,000) ---------- ---------- 4,000 - PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 54 Deferred Tax Liabilities: Goodwill 4,000 - ---------- ---------- Net Deferred Tax Asset $ - $ - ========== ========== In June 2003 and 2002, the Company determined it was more likely than not that it would be unable to realize its deferred tax assets. Therefore a valuation allowance has been recorded against the entire net deferred tax asset. The Company has available net operating loss carryforwards of approximately $880,000. These carryforwards begin to expire in the year 2020. Certain of these carryforwards are limited as to use in any particular year based on separate return year and change of ownership restrictions. The reconciliation of the effective tax rate with the statutory federal income tax rate is as follows: Successor Company Predecessor Company For the For the Four For The Year Eight Months Months Ended Ended June 30, Ended June 30, October 31, 2002 2003 2002 (Restated) ------------ ------------ ------------ % % % ------------ ------------ ------------ Federal statutory rate 34 34 34 State taxes, net of federal benefit 6 6 6 Push down interest expense 3 - - Increase in deferred tax asset valuation allowance (44) (37) (25) Other 1 (3) 2 ------------ ------------ ------------ - - 17 ============ ============ ============ 11. Commitments And Contingencies Operating Leases The Company leases three offices and various equipment and automobiles under operating leases expiring in various years through 2006. Minimum future rental payments under the non-cancelable operating leases as of June 30, 2003 are: PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 55 Year Amount ---------- ---------- 2004 $ 357,192 2005 141,798 2006 5,009 2007 328 ---------- $ 504,327 ========== Rent expense under all operating leases amounted to $188,378 for the eight months ended June 30, 2003, $122,046 for the four months ended October 31, 2002 and $352,289 for the year ended June 30, 2002. Employment Agreements The Company has entered into employment agreements with 4 management employees. The agreements provide for severance payments if the employees are terminated without cause. The Company is not liable for severance payments if the employees terminate employment voluntarily, or are terminated for cause. At June 30, 2003, the Company's maximum exposure under these severance agreements amounted to $167,500. Customer Concentration The Company has one customer that represented 57% of revenue earned for the year ended June 30, 2003. Net costs and estimated earnings in excess of billings for this customer amounted to approximately $1,300,000 at June 30, 2003. Contract receivables from this customer amounted to approximately $2,000,000 at June 30, 2003. 12. Supplemental Cash Flow Information The Company acquired equipment under capital lease obligations amounting to $6,250 for the four months ended October 31, 2002 and $82,007 for the year ended June 30, 2002. In October 2002, the Company issued common stock to an existing stockholder to pay his shareholder loan and the related accrued interest. As discussed in Note 3, the notes payable from Jetcom, Inc. to the former shareholders of Pacific Comtel, Inc. have been reflected on the balance sheet of pacific Comtel, Inc. as a push down accounting adjustment. 13. Subsequent Events On October 9, 2003, the Company entered into an accounts receivable factoring agreement with a finance company. Under this agreement, the Company will sell, with recourse, 81.5% of its eligible accounts receivable balances, up to $2,500.000. Interest is charged at an annual rate of 18%. The agreement is effective for one year and is secured by a pledge of all of the Company's assets, and guarantees by Jetcom, Inc. and its principal stockholder. The Company intends to use this source of financing to pay off its previous revolving credit agreement and to provide working capital needs. On January 8, 2004, the Company was sold to an unrelated third party. PRELIMINARY COPY FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 56 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The accompanying unaudited pro forma condensed combined financial statements reflect the combined financial position of Creative Beauty Supply, Inc. (CBS) as of December 31, 2003, and the results of its condensed combined operations for the six months ended December 31, 2003 and the year ended June 30, 2003 after giving effect to the acquisition of Global Digital Solutions, Inc. (Global), and its acquisition of Pacific Comtel, Inc. (PacTel) as more fully described below. The unaudited pro forma condensed combined balance sheet is based on the historical balance sheet of CBS, adjusted for its planned divestiture of its wholly owned subsidiary, Creative Beauty Supply of New Jersey, Inc. (CBSNJ), and gives effect to the acquisition of Global, and its acquisition of PacTel as if they had occurred on December 31, 2003. CBS's fiscal year ends on March 31. Global and PacTel's fiscal years end on June 30, 2003. The unaudited pro forma condensed combined statement of operations for the six months ended December 31, 2003 gives effect to the acquisition as if it had occurred on June 30, 2003 for CBS. The unaudited pro forma condensed combined statement of operations for the year ended June 30, 2003 gives effect to the combined results of operations for the year as if the acquisition of Global, and its acquisition of PacTel occurred at July 1, 2002. The results of operations of CBS are presented for their fiscal year ended March 31, 2003. The pro forma adjustments reflecting the consummation of the acquisition are based upon the purchase method of accounting and upon the assumptions set forth in the notes hereto. At the effective time of the merger, each share of Global common stock issued and outstanding immediately prior to the effective time of the merger will be canceled and converted into the right to receive 1 share of CBS's common stock, which amounts to 23,861,000 shares in the aggregate. Additionally, CBS will issue warrants to purchase an additional 2,000,000 shares at a strike price of $0.50 per share. In conjunction with and upon the completion of the merger, Global will be merged into CBS and CBS will be renamed Global Digital Solutions, Inc. Upon completion of the merger, Global will own approximately 87% of the outstanding common stock of CBS (which will be renamed Global Digital Solutions, Inc.). Given Global's expected ownership in CBS upon completion of the merger, Global will be considered to be the acquiror for accounting purposes and the merger will be accounted for in the financial statements of CBS as a reverse acquisition of CBS by Global. Since CBS, after its divestiture of CBSNJ, will not have any operating assets or liabilities, this reverse merger will be treated as a recapitalization of Global. Accordingly, the accompanying unaudited pro forma condensed combined financial statements reflect Global's assets and liabilities at historic cost. Global's purchase of PacTel is reflected using the purchase method of accounting. The total estimated purchase price of PacTel is based on the fair value of PacTel at the date of its sale to PRELIMINARY COPY FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 57 Global. The estimated purchase price is allocated to the net tangible and intangible assets of PacTel acquired in the purchase, based on their fair values at the purchase date. Independent valuation specialists have been engaged to assist the management of Global in determining the purchase price and its allocation. The purchase price reflected in the accompanying unaudited pro forma condensed combined financial statements reflect Global's estimate of the purchase price and its allocation. A final determination will be made upon completion of the independent valuation specialists' report. The actual amounts recorded, based on this report, may differ materially from management's original estimate. This pro forma information should be read in conjunction with the audited and unaudited financial statements and notes thereto of Global and PacTel that are included in this proxy statement and Management's Discussion and Analysis of Financial Condition and Results of Operations for Global and PacTel appearing elsewhere in this proxy statement. The pro forma adjustments do not reflect any operating efficiencies and cost savings that may be achievable with respect to the combined companies. The pro forma adjustments do not include any adjustments to historical sales for any future price changes nor any adjustments to selling and marketing expenses for any future operating changes. The following information is not necessarily indicative of the financial position or operating results that would have occurred had the merger been consummated on the dates, or at the beginning of the periods for which the consummation of the merger is being given effect. PRELIMINARY COPY FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 58 Unaudited Pro Form Condensed Combined Balance Sheet December 31, 2003
Historical Pro Forma Creative Creative Global Beauty Pro Forma Beauty Digital Supply, Adjustments Supply, Solutions Inc. {a} Inc. Inc. ---------- ---------- ---------- ---------- Assets Current assets: Cash and cash equivalents 256,668 (256,668) - 327,964 Investments 200,000 (200,000) - - Contract and accounts receivable 1,456 (1,456) - - Inventory 53,860 (53,860) - - Costs and estimated earnings in excess of billings on uncompleted contracts - - - - Prepaid expenses and other current assets 1,300 (1,300) - - ---------- ---------- ---------- ---------- Total current assets 513,284 (513,284) - 327,964 Property, plant and equipment, net 6,497 (6,497) - - Goodwill - - - - Other assets - - - 28,120 ---------- ---------- ---------- ---------- Total assets 519,781 (519,781) - 356,084 ========== ========== ========== ========== Liabilities and stockholders' equity Current liabilities Borrowings under receivables factoring arangement - - - 712,687 Current portion of notes payable and capital lease obligations - - - - Accounts payable and accrued expenses 36,490 (36,490) - 61,960 Billings in excess of costs and estimated earnings on uncompleted contracts - - - - Due to Jetcom, Inc.- - - - - ---------- ---------- ---------- ---------- Total current liabilities 36,490 (36,490) - 61,960 Notes and capital leases payable - - - - Total stockholders' equity 483,291 (483,291) - 294,124 ---------- ---------- ---------- ---------- Total liabilities and stockholders' Equity 519,781 (519,781) - 356,084 ========== ========== ========== ========== 59 (Continued) Unaudited Pro Form Condensed Combined Balance Sheet December 31, 2003 Historical Pacific Pro Forma Pro Forma Comtel Inc Adjustments Combined ---------- ---------- ---------- Assets Current assets: Cash and cash equivalents 169,637 - 497,601 Investments - - - Contract and accounts receivable 2,327,014 - 2,327,014 Inventory 220,421 - 220,421 Costs and estimated earnings in excess of billings on uncompleted contracts 604,651 - 604,651 Prepaid expenses and other current assets 137,199 - 137,199 ---------- ---------- ---------- Total current assets 3,458,922 - 3,786,886 Property, plant and equipment, net 310,673 - 310,673 Goodwill 213,943 1,019,182(b) 1,233,125 Other assets 55,067 - 83,187 ---------- ---------- ---------- Total assets 4,038,605 1,019,182 5,413,871 ========== ========== ========== Liabilities and stockholders' equity Current liabilities Borrowings under receivables factoring arrangement 712,687 - 712,687 Current portion of notes payable and capital lease obligations 326,853 - 326,853 30,000(b) Accounts payable and accrued expenses 2,725,616 30,000(c) 2,847,576 Billings in excess of costs and estimated earnings on uncompleted contracts 418,259 - 418,259 Due to Jetcom, Inc. 226,313 (226,313)(d) - ---------- ---------- ---------- Total current liabilities 4,409,728 (166,313) 4,305,375 Notes and capital leases payable 148,059 - 148,059 226,313(d) 989,182(b) Total stockholders' equity (519,182) (30,000)(c) 960,437 ---------- ---------- ---------- Total liabilities and stockholders' Equity 4,038,605 1,019,182 5,413,871 ========== ========== ==========
PRELIMINARY COPY FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 60 PRO FORMA ADJUSTMENTS AND NOTES FOR THE UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF DECEMBER 31, 2003 ARE AS FOLLOWS: {a} This adjustment gives effect to the proposed divestiture of Creative Beauty Supply of New Jersey, Inc. After the proposed divestiture, Creative Beauty Supply, Inc. will have no assets or liabilities. {b} To reflect Global's purchase of PacTel, with an estimated purchase price of $500,000, including direct acquisition costs of $30,000. {c} To reflect direct acquisition costs of Global and CBS of $30,000, which are expensed in accordance with the reverse merger treatment of the acquisition, which is treated as a recapitalization of Global. {d} To reflect the contribution of Due to Jetcom, Inc. to equity. 61 Unaudited Pro Form Condensed Combined Statement Of Operations For The Six Months Ended December 31, 2003
Historical Pro Forma Creative Creative Global Beauty Pro Forma Beauty Digital Supply, Adjustments Supply, Solutions Inc. {a} Inc. Inc. ---------- ---------- ---------- ---------- Revenues 82,650 (82,650) - - Cost of Sales 75,315 (75,315) - - ---------- ---------- ---------- ---------- Gross Profit 7,335 (7,335) - - General And Administrative Expenses 73,704 (73,704) - 23,927 Interest Expense - - - - ---------- ---------- ---------- ---------- Income (Loss) From Operations (66,369) 66,369 - (23,927) Other Income (Expense) 3,020 (3,020) - - Provision For Income Taxes - - - - ---------- ---------- ---------- ---------- Net Income (Loss) (63,349) 63,349 - (23,927) ========== ========== ========== ========== Income (Loss) Per Common Share Basic (0.02) - - - Diluted- (0.02) - - - Weighted Average Number of Common Shares Outstanding Basic 3,494,650 - 3,494,650 - Diluted 3,494,650 - 3,494,650 - 62 (Continued) Unaudited Pro Form Condensed Combined Statement Of Operations For The Six Months Ended December 31, 2003 Historical Pacific Pro Forma Pro Forma Comtel Inc Adjustments Combined ---------- ---------- ---------- Revenues 5,989,760 - 5,989,760 Cost of Sales 5,467,861 - 5,467,861 ---------- ---------- ---------- Gross Profit 521,899 - 521,899 General And Administrative Expenses 1,498,633 30,000(e) 1,552,560 Interest Expense 140,758 - 140,758 ---------- ---------- ---------- Income (Loss) From Operations (1,117,492) (30,000) (1,171,419) Other Income (Expense) - - - Provision For Income Taxes - - - ---------- ---------- ---------- Net Income (Loss) (1,117,492) (30,000) (1,171,419) ========== ========== ========== Income (Loss) Per Common Share Basic - - (0.04) Diluted- - - (0.04) Weighted Average Number of Common Shares Outstanding Basic 23,861,000(c) 27,355,650 Diluted 23,861,000(c) 27,355,650
PRELIMINARY COPY FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 63 PRO FORMA ADJUSTMENTS AND NOTES FOR THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 ARE AS FOLLOWS: {a} This adjustment gives effect to the proposed divestiture of Creative Beauty Supply of New Jersey, Inc. as of the beginning of the period presented. After the proposed divestiture, Creative Beauty Supply, Inc. will have no operations. {b} Includes Global Digital Solutions, Inc. activity from inception in October 2003 to December 31, 2003. {c} Gives effect to the additional 23,357,500 shares to be issued by Creative Beauty Supply, Inc. to purchase Global. For purposes of this presentation, it is assumed that these shares were outstanding for the entire period. {d} The merger of PacTel by Global will be accounted for under the provisions of Statement of Financial Accounting Standards No. 142 (FAS 142). For purposes of this presentation, it is assumed that the excess of fair value of PacTel's assets and liabilities is goodwill. In accordance with FAS 142, goodwill is not amortized. {e} To reflect direct acquisition costs of Global and CBS of $30,000 which are expensed in accordance with the reverse merger treatment of the acquisition, which is treated as a recapitalization of Global. PRELIMINARY COPY FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 64 Unaudited Pro Form Condensed Combined Statement Of Operations For The Year Ended June 30, 2003
Historical Creative Beauty Pro Forma Global Supply, Inc. Pro Forma Creative Digital Year Ended Adjustments Beauty Solutions Mar 31, 2003 (a) Supply Inc Inc. (b) ---------- ---------- ---------- ---------- Revenues 193,495 (193,495) - - Cost of Sales 144,103 (144,103) - - ---------- ---------- ---------- ---------- Gross Profit 49,392 (49,392) - - General and Administrative Expenses 157,337 (157,337) - - Interest Expense - - - - ---------- ---------- ---------- ---------- Income (Loss) From Operations (107,945) 107,945 - - Other Income (Expense) 23,160 (23,160) - - Provision For Income Taxes - - - - ---------- ---------- ---------- ---------- Net Income (Loss) (84,785) 84,785 - - ========== ========== ========== ========== Income (Loss) Per Common Share Basic (0.02) - - - Diluted (0.02) - - - Weighted Average Number of Common Shares Outstanding Basic 3,494,650 - - - Diluted 3,494,650 - - - 65 (Continued) Unaudited Pro Form Condensed Combined Statement Of Operations For The Year Ended June 30, 2003 Historical Pacific Comtel Inc Year Ended Pro Forma Pro Forma June 30, 2003 Adjustments Combined ---------- ---------- ---------- Revenues 15,444,131 - 15,444,131 Cost of Sales 12,844,705 - 12,844,705 ---------- ---------- ---------- Gross Profit 2,599,426 - 2,599,426 General and Administrative Expenses 2,917,750 30,000(e) 2,947,750 Interest Expense 191,372 - 191,372 ---------- ---------- ---------- Income (Loss) From Operations (509,696) (30,000) (539,696) Other Income (Expense) - - - Provision For Income Taxes - - - ---------- ---------- ---------- Net Income (Loss) (509,696) (30,000) (539,696) ========== ========== ========== Income (Loss) Per Common Share Basic - - (0.02) Diluted - - (0.02) Weighted Average Number of Common Shares Outstanding Basic- - 23,861,000(c) 27,355,650 Diluted - 23,861,000(c) 27,355,650
PRO FORMA ADJUSTMENTS AND NOTES FOR THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2003 ARE AS FOLLOWS: {a} This adjustment gives effect to the proposed divestiture of Creative Beauty Supply of New Jersey, Inc. as of the beginning of the period presented. After the proposed divestiture, Creative Beauty Supply, Inc. will have no operations. {b} Global Digital Solutions, Inc. was formed in October 2003, and had no operations through November 7, 2003. As such, no operating results are presented here. {c} Gives effect to the additional 23,357,500 shares to be issued by Creative Beauty Supply, Inc. to purchase Global. For purposes of this presentation, it is assumed that these shares were outstanding for the entire period. PRELIMINARY COPY FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 66 {d} The merger of PacTel by Global will be accounted for under the provisions of Statement of Financial Accounting Standards No. 142 (FAS 142). For purposes of this presentation, it is assumed that the excess of fair value of PacTel's assets and liabilities is goodwill. In accordance with FAS 142, goodwill is not amortized. {e} To reflect direct acquisition costs of Global and CBS of $30,000, which are expensed in accordance with the reverse merger treatment of the acquisition which is treated as a recapitalization of Global. PRELIMINARY COPY FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 67 The Board of Directors unanimously recommends a vote FOR the acquisition of Global Digital Solutions, Inc. Proxies solicited by management will be so voted unless stockholders specify otherwise. The affirmative vote of a majority of the shares of Common Stock of the Acquired Company represented and voting at the Annual Meeting is required for approval of the above Directors. ELECTION OF BOARD OF DIRECTORS Pursuant to the Bylaws, each Director shall serve until the annual meeting of the stockholders, or until his successor is elected and qualified. The Company's basic philosophy mandates the inclusion of directors who will be representative of management, employees and the minority shareholders of the Company. Directors may only be removed for "cause". The term of office of each officer of the Company is at the pleasure of the Company's Board. The principal executive officers, directors and nominees of the Company are as follows:
Name Position Held Term of Office Carmine Catizone, age 58 President, Director Inception to present Daniel Generelli, age 40 Secretary/Treasurer Inception Vice-President/Director to present Richard J. Sullivan, age 64 nominee Jerome C. Artigliere, age 49 nominee Garrett A. Sullivan, age 68 nominee Arthur F. Noterman, age 62 nominee
The resumes of current nominees for Directors of the Company are as follows: Resumes. Richard J. Sullivan: Mr. Sullivan has been a director of the Acquired Company since inception. He was elected to the board of directors and named Chief Executive Officer of Applied Digital Solutions, Inc. in May 1993. He was appointed Secretary in March 1996 and served as President and Chief Operating Officer from September 2001 to March 2002. In March 2003, Mr. Sullivan retired from all of his positions with Applied Digital Solutions, Inc. Mr. Sullivan is currently Chairman of Digital Angel PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 68 Corporation, whose majority shareholder is Applied Digital Solutions, Inc. Mr. Sullivan is also Chairman of Great Bay Technology, Inc. From August 1989 to December 1992, Mr. Sullivan was Chairman of the board of directors of Consolidated Convenience Systems, Inc., in Springfield, Missouri. He has been the Managing General Partner of The Bay Group, a merger and acquisition firm in New Hampshire, since February 1985. Mr. Sullivan was formerly Chairman and Chief Executive Officer of Manufacturing Resources, Inc., a MRP II software company in Boston, Massachusetts, and was Chairman and Chief Executive Officer of Encode Technology, a Computer-Aided Manufacturing Company, in Nashua, New Hampshire from February 1984 to August 1986. Jerome C. Artigliere: Mr. Artigliere, age 49, has been a director and officer of the Acquired Company since inception. Mr. Artigliere has over 25 years of experience in the commercial banking, accounting and acquisition fields. He was with Applied Digital Solutions, Inc. (ADSX-NASDAQ), joining that company as the President of one of its subsidiaries in January 1998, and was appointed Vice President of the Applied Digital Solutions, Inc. in April 1998 and Treasurer in December 1999. In November 2000, Mr. Artigliere was appointed Vice President and Chief Financial Officer then Senior Vice President and became Assistant Treasurer in December of 2000. He led Applied Digital Solutions, Inc. through several significant business and debt restructurings. In March 2002, he was appointed Chief Operating Officer and as part of a final restructuring completed in March of 2003, Mr. Artigliere resigned to pursue the opportunity with Global. From November 2002 through March 2003, Mr. Artigliere was the Chairman of Syscomm International (IFTH-OTC), a company in the business of providing information technology products and solutions. From 1996 to 1997, he was Regional Vice President at General Electric Capital Corporation in Portsmouth, New Hampshire. Prior to that, from 1994 to 1996, he was State Vice President at First National Bank in Portsmouth, New Hampshire, a commercial bank subsidiary of Peoples Heritage Bank of Portland, Maine. He earned an undergraduate degree in finance from Seton Hall University in 1977, and a Master of Business Administration degree from Fairleigh Dickinson University in 1980. Garrett A. Sullivan: Mr. Sullivan has been retired since January 1, 2002. From March 2000 to December 31, 2001, Mr. Sullivan was vice- chairman of Applied Digital Solutions. From April 1996 to March 2000, Mr. Sullivan served as president of Applied Digital Solutions. Mr. Sullivan earned a Bachelor of Arts degree majoring in American Literature from Boston University in 1960. He earned a MBA degree from Harvard Graduate School of Business Administration in 1962. Mr. Sulilvan is not related to Richard J. Sullivan Arthur F. Noterman: Mr. Noterman, a Chartered Life Underwriter, served as Director of Applied Digital Solutions, Inc. from February 1997 to June 2003, and served as the Chairman of the Audit Committee and a member of the Compensation Committee of the board of directors during that same period. Mr. Noterman currently serves as President and director of PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 69 P.M.G. Insurance Marketing of MA Inc. Mr. Noterman is a registered NASD broker affiliated with a West Palm Beach, Florida registered broker/dealer. Mr. Noterman attended Northeastern University from 1965 to 1975 and obtained the Chartered Life Underwriters Professional degree in 1979 from The American College, Bryn Mawr, Pennsylvania. Upon approval and consummation of the acquisition/exchange of shares, the Company will enter into employment contracts commencing on the Closing with Richard Sullivan and Jerome Artigliere in which they will serve as officers. To date, no specific terms have been determined. The affirmative vote of a majority of the shares of Common Stock of the Company represented and voting at the Annual Meeting is required for approval of the above Directors. CHANGE OF NAME Upon approval of the proposed acquisition of Global Digital Solutions, Inc., the Company will be primarily pursuing the current business of the Acquired Company. Moreover, since the Acquired Company is much larger than the Company, the Board of Directors determined that it would be economically beneficial to change the name of the Company to Global Digital Solutions, Inc. to maintain continued goodwill of the acquired business and to more accurately reflect the change in focus of the Company's operations. The Board of Directors unanimously recommends a vote FOR the Name Change. Proxies solicited by management will be so voted unless stockholders specify otherwise. The affirmative vote of the holders of a majority of the outstanding shares of the Company's Common Stock is necessary to approve the name change. APPROVAL OF SELECTION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors recommends for approval by the Shareholders the selection of Rubin, Brown, Gornstein & Co. LLP as the independent certified public accountants of the Company for the fiscal year ending March 31, 2004. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 70 Representatives of Rubin, Brown, Gornstein & Co. LLP are expected to be available via telephone at the Annual Meeting and to have the opportunity to make a statement should they desire to do so and to be available to respond to appropriate questions. The Board of Directors unanimously recommends a vote FOR the approval of Rubin, Brown, Gornstein & Co. LLP. Proxies solicited by management will be so voted unless stockholders specify otherwise. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following tables list the Company's stockholders who, to the best of the Company's knowledge, own of record or, to the Company's knowledge, beneficially, more than 5% of the Company's outstanding Common Stock; the total number of shares of the Company's Common Stock beneficially owned by each Director; and the total number of shares of the Company's Common Stock beneficially owned by the Directors and elected officers of the Company, as a group. The following does not reflect the 23,861,000 Common Shares to be issued to owners of the Acquired Company upon completion of the proposed acquisition. Currently, none of the nominees to the Board of Directors own any securities of the Company, Shareholdings at Date of This Proxy
Percentage of Number & Class(1) Outstanding Name and Address of Shares Common Shares Carmine Catizone Common 1,308,000 (direct) 31.26% 10 1/2 Walker Avenue 80,600(2) (indirect) 1.93% Morristown, NJ 07960 Daniel T. Generelli Common 80,000 1.91% 24 Kansas Street Hackensack, NJ 07601 PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 71 All Directors & Officers 1,468,600 35.10% as a group (2 persons) Pat Catizone Common 690,000 (direct) 19.74% 266 Cedar Street Common 200,000(3)(indirect) 5.72% Cedar Grove, NJ 07009 Ram Venture Holdings Corp. Common 630,000 15.06% 3040 E. Commercial Blvd. Fort Lauderdale, FL 33308 Cede & Co. Common 487,500 11.65% P.O. Box 20 Bowling Green Station New York, NY 10274
(1)Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, beneficial ownership of a security consists of sole or shared voting power (including the power to vote or direct the voting) and/or sole or shared investment power (including the power to dispose or direct the disposition) with respect to a security whether through a contract, arrangement, understanding, relationship or otherwise. Unless otherwise indicated, each person indicated above has sole power to vote, or dispose or direct the disposition of all shares beneficially owned, subject to applicable unity property laws. (2)Carmine Catizone and Phyllis Catizone are husband and wife and are deemed to be the beneficial owners of each other's shares and custodial shares. (3)Pat Catizone and Barbara Catizone are husband and wife and are deemed to be the beneficial owners of each other's shares. To date, the Company has not entered into employment agreements nor are any contemplated. Mr. Generelli and Mr. Catizone were paid approximately $30,000 per year. Although he is still an officer and director of the Company, Mr. Generelli is no longer a full time employee of the Company as of February 2001. Until March 2001, all of Mr. Catizone's $30,000 salary had been accrued.
Annual Compensation Awards Payouts --------------------------- ---------------------- ---------- Other Restricted Securities Annual Stock Underlying LTIP All Other Name and Position Year Salary($) Bonus($) Compensation($) Awards(#) Options/SARs(#) Payouts($) Compensation($) Carmine Catizone 2003 30,000 ---- ---- ---- ---- ---- ---- Chairman and 2002 30,000 ---- ---- ---- ---- ---- 136,500 President 2001 30,000 ---- ---- ---- ---- ---- ---- Daniel Generelli 2003 2,170 ---- ---- ---- ---- ---- ---- Secretary/Treasuer/ 2002 2,350 ---- ---- ---- ---- ---- ---- Director 2001 26,936 ---- ---- ---- ---- ---- ----
PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 72 On December 4, 2001, the Board of Directors granted 500,000 stock options to Carmine Catizone, President. The options were exercisable at $.12 per common share for a period of one year and granted for the consideration of $10. Market price at time of grant was $.39. Board of Directors Compensation. Members of the Board of Directors may receive an amount yet to be determined annually for their participation and will be required to attend a minimum of four meetings per fiscal year. To date, the Company has paid $0.00 in directors' expenses. There is no plan or arrangement with respect to compensation received or that may be received by the executive officers in the event of termination of employment or in the event of a change in responsibilities following a change in control. CERTAIN TRANSACTIONS OF THE COMPANY On January 31, 2002, the Company exchanged 500,000 common shares valued at $200,000 ($0.40 cents per share) for 2,000,000 shares of a corporate stockholder's common stock valued at $200,000 ($0.10 per share). This corporate stockholder was one of the consultants who received options. At the conclusion of the transaction, the corporate shareholder owned 18% of the Company's issued and outstanding shares. VOTING AND SOLICITATION OF PROXIES Stockholders represented by properly executed proxies received by the Company prior to or at the Meeting and not duly revoked will be voted in accordance with the instructions thereon. If proxies will be voted in instructions are indicated thereon, such proxies will be voted in favor of Items 1 through 4 inclusive. Execution of a proxy will not prevent a stockholder from attending the Meeting and revoking his proxy by voting in person (although attendance at the Meeting will not in itself revoke a proxy). Any stockholder giving a proxy may revoke it at any time before it is voted by giving to the Company's Secretary/Treasurer written notice bearing a later date than the proxy, by delivery of a later dated proxy, or by voting in person at the Meeting. Any written notice revoking a proxy should be sent to Creative Beauty Supply, Inc., 380 Totowa Road, Totowa, New Jersey, 07512 The Company's Board of Directors does not know of any other matters which will be presented for consideration at the Meeting. However, if any other matters which will be presented for consideration at the PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY 73 Meeting. However, if any other matters are properly presented for action at the Meeting, it is the intention of the person(s) named in the accompanying Form of Proxy to vote the shares represented thereby in accordance with their best judgment on such matters. All costs relating to the solicitation of proxies made hereby will be borne by the Company. Proxies may be solicited by officers and directors of the Company personally, by mail or by telephone or telegraph, and the Company may pay brokers and other persons holding shares of stock in their names of those of their nominees for their reasonable expenses in forwarding soliciting material to their principals. It is important that proxies be returned promptly. Stockholders who do not expect to attend the Meeting in person are urged to sign and date the accompanying Form of Proxy and mail it in a timely fashion so that their vote can be recorded. ADDITIONAL INFORMATION The Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 2003, including the consolidated financial statements and related notes thereto, together with the report of the independent auditors and other information with respect to the Company, accompanies this Proxy Statement. OTHER MATTERS The Company is not aware of any other business to be presented at the Annual Meeting. If matters other than those described herein should properly arise at the meeting, the proxies will vote on such matters in accordance with their best judgment. SHAREHOLDER PROPOSALS Proposals by Shareholders intended to be presented at the 2005 Annual Meeting must be received by the Company no later than November 15, 2005. PRELIMINARY COPY - FOR THE INFORMATION OF THE SECURITIES EXCHANGE COMMISSION ONLY -----END PRIVACY-ENHANCED MESSAGE-----