Exhibit 99.2
SACO TECHNOLOGIES INC.
BALANCE SHEETS
MARCH 31, 2006 AND MARCH 31, 2005
(Unaudited; in thousands of Canadian dollars)
| | | | | | |
| | | March 31,
2006 | | Dec. 31,
2005 | | March 31,
2005 |
| | | $ | | $ | | $ |
ASSETS | | | | | | |
Current assets | | | | | | |
Cash and term deposit | | 554 | | 737 | | — |
Accounts receivable | | 6,734 | | 4,726 | | 1,896 |
Accounts receivable from a related joint-venture | | — | | — | | 906 |
Investment tax credits recoverable | | 486 | | 486 | | 159 |
Due from related parties | | — | | — | | 1,740 |
Inventories | | 5,191 | | 2,131 | | 1,091 |
Deferred royalties | | — | | — | | 281 |
Prepaid expenses and deposits | | 385 | | 323 | | 103 |
| | | | | | |
| | 13,350 | | 8,403 | | 6,176 |
| | | | | | |
Investment - software development (Note 3) | | — | | — | | 900 |
Property, plant and equipment (Note 4) | | 4,147 | | 4,452 | | 2,907 |
Intellectual property | | 2,108 | | 2,172 | | 188 |
| | | | | | |
| | 19,605 | | 15,027 | | 10,171 |
| | | | | | |
LIABILITIES AND SHAREHOLDER’S EQUITY | | | | | | |
Current liabilities | | | | | | |
Bank indebtedness (Note 5) | | 2,400 | | 2,500 | | 1,266 |
Accounts payable and accrued liabilities | | 3,648 | | 2,017 | | 2,617 |
Income taxes payable | | 437 | | 814 | | 333 |
Future income tax liability | | — | | — | | 48 |
Customer advances | | 2,378 | | — | | — |
Current portion of term loan (Note 6) | | 1,411 | | 1,403 | | 450 |
| | | | | | |
| | 10,274 | | 6,734 | | 4,714 |
| | | | | | |
Due to related parties | | 437 | | 734 | | — |
Term loan, rental equipment & units (Note 6) | | 4,477 | | 2,450 | | 1,575 |
Long-term debt, equipment financing (Note 6) | | 57 | | 87 | | 83 |
Class C preferred shares | | 830 | | 830 | | 230 |
| | | | | | |
| | 16,075 | | 10,835 | | 6,602 |
| | | | | | |
Shareholder’s equity | | | | | | |
Share capital | | 1,500 | | 1,500 | | 1,500 |
Retained earnings | | 2,030 | | 2,692 | | 2,069 |
| | | | | | |
| | 3,530 | | 4,192 | | 3,569 |
| | | | | | |
| | 19,605 | | 15,027 | | 10,171 |
| | | | | | |
See accompanying notes to the financial statements
SACO TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
(Unaudited; in thousands of Canadian dollars)
| | | | | |
| | | Three Months Ended
March 31 |
| | | 2006 | | | 2005 |
| | | $ | | | $ |
Revenues – Sales | | 1,249 | | | 2,484 |
Research and development revenue (Note 3) | | — | | | 256 |
| | | | | |
| | 1,249 | | | 2,740 |
| | | | | |
Cost of goods sold | | 717 | | | 1,315 |
| | | | | |
Gross profit | | 532 | | | 1,425 |
| | |
Expenses | | | | | |
Selling, general and administrative (Note 3) | | 617 | | | 475 |
Royalties | | — | | | 124 |
Net research and development | | 273 | | | 233 |
Amortization of property, plant and equipment | | 352 | | | 82 |
Amortization of intellectual property | | 65 | | | — |
Interest and bank charges | | 213 | | | 53 |
Foreign exchange loss | | (43 | ) | | 7 |
| | | | | |
Income before provision for income taxes | | (945 | ) | | 451 |
| | | | | |
Provision for income taxes | | | | | |
Current | | (283 | ) | | 135 |
Future | | — | | | — |
| | | | | |
| | (283 | ) | | 135 |
| | | | | |
Net income for the period | | (662 | ) | | 316 |
| | |
Retained earnings, beginning of year | | 2,692 | | | 1,753 |
Refundable dividend tax on hand | | — | | | — |
| | | | | |
Retained earnings, end of period | | 2,030 | | | 2,069 |
| | | | | |
See accompanying notes to the financial statements
SACO TECHNOLOGIES INC.
STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
(Unaudited; in thousands of Canadian dollars)
| | | | | | |
| | | Three Months Ended
March 31 | |
| | | 2006 | | | 2005 | |
OPERATING ACTIVITIES | | | | | | |
Net income for the period | | (662 | ) | | 316 | |
Amortization of property, plant and equipment | | 350 | | | 71 | |
Amortization of intellectual property | | 64 | | | 11 | |
| | | | | | |
| | (248 | ) | | 398 | |
Changes in non-cash working capital | | (1,490 | ) | | (1,841 | ) |
| | | | | | |
| | (1,738 | ) | | (1,443 | ) |
| | | | | | |
FINANCING ACTIVITIES | | | | | | |
Due to related parties | | (297 | ) | | — | |
Issuance of long-term debt | | 2,392 | | | 73 | |
Repayment of long-term debt | | (395 | ) | | (121 | ) |
| | | | | | |
| | 1,700 | | | (48 | ) |
| | | | | | |
INVESTING ACTIVITIES | | | | | | |
Acquisition of property, plant and equipment | | (45 | ) | | (156 | ) |
| | | | | | |
| | (45 | ) | | (156 | ) |
| | | | | | |
Net (decrease) in cash and cash equivalents | | (83 | ) | | (1,647 | ) |
Cash and cash equivalents, beginning of period | | (1,763 | ) | | 381 | |
| | | | | | |
Cash and cash equivalents, end of period | | (1,846 | ) | | (1,266 | ) |
| | | | | | |
Cash and cash equivalents are comprised of: | | | | | | |
Cash and term deposits | | 554 | | | — | |
Bank indebtedness | | (2,400 | ) | | (1,266 | ) |
| | | | | | |
| | (1,846 | ) | | (1,266 | ) |
| | | | | | |
See accompanying notes to the financial statements
SACO TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
(Unaudited; in thousands of Canadian dollars)
| 1. | DESCRIPTION OF BUSINESS |
The Company was incorporated under the laws of Canada on December 5, 2001 and carried on no activities until December 31, 2001. The Company designs, manufactures and distributes large video screens and LED lighting systems.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
These unaudited interim financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles, the more significant of which are outlined below. These unaudited financial statements do not include all of the information and notes required by GAAP for annual financial statements and therefore should be read in conjunction with the audited financial statements and notes included in the audited financial statements for the year ended December 31, 2005.
REVENUE RECOGNITION
Sales are recognized when products are delivered or when services are provided, and collection is reasonably assured except for long-term contracts, many of which provide for periodic payments, for which revenue is recognized under the percentage-of-completion basis. Provisions for estimated losses on uncompleted contracts are made in the period in which the probable amounts of such losses are determined.
INVENTORIES
Inventories are valued at the lower of cost and replacement cost. Cost is determined on a first-in, first-out basis. The Company generally manufactures to order and does not hold finished goods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at acquisition cost and are amortized over their estimated useful lives. When circumstances or events indicate a potential decline in the net recoverable value of these assets, the carrying value is written-down to the recoverable amount. The methods and rates used to amortize the property, plant and equipment are as follows:
| | | | |
| Manufacturing equipment | | Straight-line | | 4 years |
| | |
| Furniture and fixtures | | Straight-line | | 5 years |
| | |
| Computer equipment | | Straight-line | | 3 years |
| | |
| Leasehold improvements | | Straight-line | | Term of lease – 10 years |
| | |
| Rental equipment | | Straight-line | | 4 years |
INTELLECTUAL PROPERTY
Intellectual property related to the screens is recorded at cost and amortized on a straight-line basis over 5 years, its expected useful life. The lighting intellectual property is amortized on a straight-line bases over 10 years.
SACO TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
| (Unaudited; | in thousands of Canadian dollars) |
| 2. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
IMPAIRMENT OF LONG-LIVED ASSETS
On a periodic basis, management reviews the carrying value of property, plant and equipment and intellectual property and considers whether there have been events or changes in circumstances that indicate that the carrying value may not be recoverable. The review is based on the assessment of technological changes, the Company’s intended use and the projected estimated net undiscounted cash flows expected to be generated from the underlying assets together with its residual value (net recoverable value). If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds its fair value generally determined on a discounted expected cash flow basis. Any impairment results in a write-down of the assets and a charge to income during the year.
MEASUREMENT UNCERTAINTY
The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements.
Significant areas requiring the use of estimates relate to the assessment of the recoverable value of accounts receivable and inventories and the useful life of property, plant and equipment and intellectual property for purposes of the calculation of amortization. Actual results could differ from those estimates by a material amount.
CURRENCY TRANSLATION
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate in effect at the date of the balance sheet. Other balance sheet items are translated at historical exchange rates. Revenue and expense items are translated monthly at the average exchange rate of the period. Exchange gains or losses arising from currency translations are included in the income for the period.
SACO TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
(Unaudited; in thousands of Canadian dollars)
| 3. | RELATED PARTY TRANSACTIONS |
| | | | | |
| | | Three Months Ended
March 31 |
| | | 2006 $ | | | 2005 $ |
Due (to) from related companies | | (434 | ) | | 1,740 |
The amounts due to and from related parties are non-interest bearing and have no fixed repayment terms.
RELATED PARTY TRANSACTIONS
Related party transactions during the period included the following:
| | | | | |
| | | Three Months Ended
March 31 | |
| | | 2006 $ | | 2005 $ | |
Rental expense | | 150 | | 150 | |
Research and development services (income) | | — | | (256 | ) |
INVESTMENT IN JOINT VENTURE
In 2003, Saco Technologies Inc. advanced $ 660 to a sister Company Saco Holding U.S.A. which invested the funds in a joint venture with ANC Sports Enterprises LLC. This advance was repaid in 2004. This joint venture was a sale and marketing organization for sales of certain products into the USA. This joint venture’s sales operations were terminated on August 31, 2004 and replaced by an exclusive purchase agreement whereby ANC Sports will deal directly with the Company. The Company has however, made an investment of $ 900 in the joint venture through Saco Holdings USA. which represents their share of the intellectual property developed jointly by ANC Sports and the Company. In 2005 the investment was written-down to reflect the lower of cost and net realizable value.
| 4. | PROPERTY, PLANT AND EQUIPMENT |
| | | | | | | |
| | | Cost $ | | Accumulated
amortization | | | Net book
value |
March 31, 2006 | | | | | | | |
Manufacturing equipment | | 646 | | (575 | ) | | 71 |
Furniture and equipment | | 190 | | (134 | ) | | 56 |
Computer equipment | | 180 | | (161 | ) | | 19 |
Leasehold improvements | | 371 | | (90 | ) | | 281 |
Rental equipment | | 4,688 | | (968 | ) | | 3,720 |
| | | | | | | |
| | 6,075 | | (1,928 | ) | | 4,147 |
SACO TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
| (Unaudited; | in thousands of Canadian dollars) |
| 4. | PROPERTY, PLANT AND EQUIPMENT (continued) |
| | | | | | | |
| | | Cost $ | | Accumulated
amortization | | | Net book
value |
March 31, 2005 | | | | | | | |
Manufacturing equipment | | 642 | | (414 | ) | | 228 |
Furniture and equipment | | 173 | | (98 | ) | | 75 |
Computer equipment | | 157 | | (157 | ) | | — |
Leasehold improvements | | 335 | | (54 | ) | | 281 |
Rental equipment | | 2,323 | | — | | | 2,323 |
| | | | | | | |
| | 3,630 | | (723 | ) | | 2,907 |
On August 27, 2004, the Company obtained an operating line of credit, authorized for an amount up to $ 2,500 bearing interest at the bank’s prime rate plus 1.50%. The bank has first ranking moveable hypothec over all tangible and intangible assets of the Company and a Company under common control. As of March 31, 2006 and March 31, 2005, an amount of $2,400 and $1,266, respectively, has been drawn down on the line of credit.
| | | | |
| | | 2006 $ | | 2005 $ |
Term loan bearing interest at prime rate plus 2.75% payable in 60 equal monthly installments with the final payment due on September 26, 2009 | | 1,573 | | 2,025 |
Term loan bearing interest at prime plus 2.25% payable in 60 equal monthly installments with the final payment due November 2010 | | 4,290 | | — |
Equipment loan bearing interest at fixed rate of 6.50% payable in 60 equal consecutive monthly installments with the final payment due on May 31, 2009 | | 82 | | 83 |
| | | | |
| | 5,945 | | 2,108 |
| | | | |
Less current portion | | 1,411 | | 450 |
| | | | |
| | 4,534 | | 1,658 |
| | | | |
The term loan requires the Company to meet certain financial covenants, all of which were met at March 31, 2006 and March 31, 2005.
SACO TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
(Unaudited; in thousands of Canadian dollars)
| 7. | DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES ACCEPTED IN CANADA AND IN THE UNITED STATES |
| | a) | FOREIGN CURRENCY TRANSLATION |
Under Canadian GAAP, monetary assets and liabilities denominated in U.S. dollars are translated at the exchange in effect at the date of the balance sheet. Under U.S. GAAP, long-term debt, one of the monetary liabilities, is translated at the historical exchange rate in effect when the debt was originally issued.
Management has evaluated other foreign currency translation differences between Canadian and U.S. GAAP and believes the effects of these differences are immaterial.
| | | | | |
| | | Three Months Ended March 31 |
| | | 2006 $ | | | 2005 $ |
Net income for the period under Canadian GAAP | | (662 | ) | | 316 |
Translation adjustment required to adjust the long-term debt using a historical exchange rate | | 12 | | | — |
| | | | | |
Net income for the period under U.S. GAAP | | (650 | ) | | 316 |
| | | | | |
Under Canadian GAAP, the change in the current portion of long-term debt is shown as cash flow under operating activities whereas under U.S. GAAP, the current portion of long-term debt is shown as cash flow under financing activities. Also, under Canadian GAAP, cash and cash equivalents are comprised of cash and bank indebtedness whereas under U.S. GAAP, bank indebtedness is shown as cash flow under financing activities.
STATEMENTS OF CASH FLOW PRESENTED UNDER U.S. GAAP
| | | | | | |
| | | Three Months Ended March 31 | |
| | | 2006 $ | | | 2005 $ | |
Cash flows (used in) operating activities | | (1,746 | ) | | (1,443 | ) |
Cash flows (used in) investing activities | | (45 | ) | | (156 | ) |
Cash flows from financing activities | | 1,608 | | | 668 | |
| | | | | | |
Net (decrease) in cash and cash equivalents | | (183 | ) | | (931 | ) |
Cash and cash equivalents – beginning of period | | 737 | | | 931 | |
| | | | | | |
Cash and cash equivalents – end of period | | 554 | | | 0 | |
| | | | | | |
