Exhibit 99.2
MOK, SHEN & COMPANY
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
Board of Directors
Arescom Inc.
Fremont, California
We have audited the accompanying balance sheet of Arescom Inc. as of June 30,
1998 and the related statements of loss, changes in stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted out audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Arescom Inc. as of June 30,
1998, and the results of its operations and its cash flows for the year ended
in conformity with generally accepted accounting principles.
Mok, Shen & Company
December 20, 1999
ARESCOM INC.
BALANCE SHEET
JUNE 30, 1998
ASSETS
CURRENT ASSETS:
Cash ..................................... $ 727,191
Accounts Receivable....................... 101,311
Inventories (Note 2) ..................... 1,823,750
Employee Advances ........................ 12,092
Commission Advances ...................... 4,285
Other current assets...................... 14,557
----------
Total current assets ................... 2,683,186
Property and Equipment (Note 2)
Furniture and fixtures ................... 79,296
Equipment ................................ 286,114
Software and other fixed assets........... 148,296
Leasehold improvement .................... 28,871
Less: accumulated depreciation............ (217,512)
----------
Total property and equipment, net........ 325,065
Other Assets:
Deposits ................................. 59,242
Life insurance ........................... 23,000
Organization cost ........................ 1,959
Less accumulated amortization ............ (949)
----------
Total other assets ..................... 83,252
Total Assets .............................. $3,091,503
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable & accrued expenses ...... $ 150,580
Sales tax payable ........................ 1,245
Customer deposit ......................... 9,293
Stockholder loan ......................... 50,000
Other payables ........................... 3,244
-----------
Total current liabilities .............. 214,362
Stockholders' Equity:
Common stock, no par value; 200 million shares
authorized, 27,800,000 shares issued
and outstanding ......................... 7,491,600
Retained earnings ........................ (4,614,459)
------------
Total Stockholders' Equity .............. 2,877,141
Total Liabilities and Stockholders' Equity.. $3,091,503
============
See accompanying independent accounts' audit report and notes
to financial statements
ARESCOM INC.
STATEMENT OF LOSS
FOR THE YEAR ENDED JUNE 30, 1998
Sales ..................................... $ 313,449
Cost of sales ............................. 205,539
-------------
Gross Profit .............................. 107,910
Operating Expenses:
Selling, general and administrative expenses 2,901,197
Research and development (Note 8)......... 139,765
------------
Total operating expenses ................ 3,040,962
Operating Loss ............................ (2,933,052)
Other income (expenses):
Interest income .......................... 31,811
Other income ............................. 81,827
Other expenses ........................... (5,544)
Gain/loss on sale of assets .............. (1,022)
------------
Total other income (expenses) ........... 107,072
State income tax provision ................ (800)
Net loss .................................. $ (2,826,780)
==============
See accompanying independent accounts' audit report and notes
to financial statements
ARESCOM INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1998
Common Stock Retained Earnings Total
---------------- ------------------ -----------
Balance, July 1, 1997 ....... $ 3,891,600 $ (1,787,679) $ 2,103,921
Issuance of common stock .... 3,600,000 --- 3,600,000
Current year loss ........... --- (2,826,780) (2,826,780)
-------------- ------------------ -------------
Balance, June 30, 1998 $ 7,491,600 $ (4,614,459) $ 2,877,141
See accompanying independent accounts' audit report and notes
to financial statements
ARESCOM INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1998
Cash flows from operating activities:
Net Loss .................................. $ (2,826,780)
Adjustments to reconcile net loss to net cash
Used by operating activities:
Depreciation and amortization ............ 167,705
Loss on sale of assets ................... 1,022
Decrease (increase) in:
Accounts receivable ..................... (34,576)
Inventories ............................. (821,441)
Employee advances ....................... (11,124)
Commission advances ..................... (4,285)
Other current assets .................... (10,623)
Deposits ................................ (1,954)
Life insurance .......................... (12,000)
Increase (decrease) in:
Accounts payable & accrued expenses....... 54,037
Stockholder loan ......................... 50,000
Other payable ............................ 3,764
Customer deposit ......................... 543
-----------
Net cash used in operating activities...... (3,445,721)
Cash flows from investing activities:
Sale of furniture and fixtures ........... 10,569
Additions to equipment ................... (26,770)
Additions to other fixed assets .......... (58,105)
Additions to leasehold improvement ....... (8,660)
----------
Net cash used in investing activities ..... (82,966)
Cash flows from financing activities:
Issuance of common stock ................. 3,600,000
-----------
Net cash provided by financing activities.. 3,600,000
Net increase in cash ...................... 71,313
Cash balance, beginning of year ........... 655,878
----------
Cash balance, end of year ................. $ 727,191
==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ............................. None
Income taxes .......................... $ 800
======
See acompanying independent accounts' audit report and notes
to financial statements
Arescom Inc.
Note of Financial Statements
1) The Company
Arescom Inc. (the Company) was incorporated in 1996 in the State of California.
Its principal business is designing and manufacturing a complete line of inter-
networking router equipment for PSTN, ISDN, xDSL and Ethernet environments.
The Company's headquarter is located in Fremont, California.
2) Summary of Accounting Policies
Basis of Accounting
The Company's financial statements are presented using the accrual method of
accounting.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost or market with cost determined on
a first-in first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided by the straight-line method over the estimated useful
lives of each asset. Leasehold improvements are amortized on a straight-line
basis over the lease term.
Allowance for Bad Debt
Bad debts are provided by the allowance method based on historical experience
and management's evaluation of outstanding account receivable. There was no
allowance for doubtful account at June 30, 1998.
Income Taxes
The Company's income taxes are accounted for under the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires the liability method of accounting.
Uncertainty Due to the Year 2000 Issue
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
Year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problem may arise in
some systems which use certain dates in 1999 to represent something other
than a date. The effects of the Year 2000 issue may be experienced before, on
or after January 1, 2000 and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect a company's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 issue
affecting Arescom Inc. including those related to the efforts of customers,
suppliers or other third parties will be fully resolved.
3) Lease Commitment
The Company leased its office at Lakeview Boulevard, Fremont, California, from
Renco Investment Company. The lease term is five years starting April 1, 1997.
Currently, the monthly rental payment is $14,294 and will be increased on each
anniversary date. In addition to the monthly base rent, the Company was
required to pay for its estimated share of operating and property tax expense.
The Company paid $44,596 as security deposit for the lease. The Company also
leases an office in San Jose for $5,371 per month. The minimum future lease
payments at June 30, 1998 are as follows:
Years Total
----------- ------------
1999 $ 189,357
2000 180,090
2001 186,915
2002 144,081
-----------
Total $ 700,443
4) Retirement Plan
In January 1996, the Company established a qualified cash-or-deferred profit
sharing retirement plan under Section 401(k) of the Internal Revenue Code.
Under the plan, Qualified full-time employees may defer up to 15% of their
compensation, subject to the limits set by the Internal Revenue Code.
5) Subsequent Event
In March 1999, Lotus Pacific, Inc., a public traded company, became the major
stockholder of the Company.
In November 1999, the Company relocated to 3541 Gateway Blvd., Fremont.