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Exhibit 99.1
DREW SCIENTIFIC GROUP PLC
MARCH 31, 2004
PAGE
----
Independent Auditors' Report 2
FINANCIAL STATEMENTS
Consolidated Balance Sheet 3
Consolidated Statement of Income 4
Consolidated Statement of Shareholders' Equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 15
1
DRAFT
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Drew Scientific Group PLC.
This report is made solely to the company's members as a body. Our audit work
has been undertaken so that we might state to the company's members those
matters we are required to state to them in an auditor's report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the company's members as a
body, for our audit work, for this report, or for the opinions we have formed.
We have audited the accompanying consolidated balance sheet of Drew Scientific
Group plc and its subsidiaries as of 31 March 2004, and the related consolidated
statements of income, shareholders' 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 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 misstatements. 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 Drew Scientific
Group plc and its subsidiaries as of 31 March 2004, and the results of their
operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
Baker Tilly
City Plaza
Temple Row
Birmingham
B2 5AF
5 October 2004
2
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
ASSETS
Current assets:
Cash $ 49,137
Accounts receivable, net 2,190,653
Inventory, net 2,322,560
Other current assets 635,644
------------
Total current assets 5,197,994
Furniture and equipment, net 1,475,500
Goodwill 8,097,685
Intangible assets, net 468,112
------------
Total assets $ 15,239,291
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,941,540
Current portion of long-term debt 412,476
Accounts payable 1,851,293
Payroll taxes and other taxes payable 381,640
Other current liabilities 1,492,154
------------
Total current liabilities 6,079,103
Long-term debt, net of current portion 711,503
------------
Total liabilities 6,790,606
------------
Shareholders' equity:
Common stock 915,486
Additional paid-in capital 37,666,641
Accumulated deficit (29,548,790)
Currency translation adjustment (584,652)
------------
Total shareholders' equity 8,448,685
------------
Total liabilities and shareholders' equity $ 15,239,291
============
See notes to consolidated financial statements.
3
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 2004
Revenues, net $ 14,970,458
------------
Costs and expenses:
Cost of goods sold 11,540,684
Research and development 1,239,720
Marketing, general and administrative 6,051,896
Restructuring costs 991,100
Impairment of assets 369,142
------------
Total costs and expenses 20,192,542
------------
Loss from operations (5,222,084)
Other expenses,
Interest expense 226,848
------------
Loss before income taxes (5,448,932)
Income taxes 34,665
------------
Net loss $ (5,414,267)
============
See notes to consolidated financial statements.
4
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 2004
Additional Currency Total
Common Stock Paid-in Accumulated Translation Shareholders'
Shares Amount Capital Deficit Adjustments Equity
Balance at March 31,
2003 55,568,764 $850,678 $35,394,537 $(24,134,523) $ (326,395) $ 11,784,297
Sale of stock 2,778,400 47,841 170,840 - - 218,681
Issue of stock to acquire
redeemable preferred shares
in a subsidiary 1,000,565 16,967 2,101,264 - (340,356) 1,777,875
Net loss - - - (5,414,267) (5,414,267)
Change in currency
translation account - - - - 82,099 82,099
---------- -------- ----------- ------------ ----------- ------------
Balance at March 31, 2004 59,347,729 $915,486 $37,666,641 $(29,548,790) $ (584,652) $ 8,448,685
========== ======== =========== ============ =========== ============
See notes to consolidated financial statements.
5
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,414,267)
Adjustments to reconcile net income to net cash
provided by in operating activities:
Depreciation and amortization 462,226
Impairment of assets 369,142
Change in operating assets and liabilities:
Accounts receivable, net 1,933,366
Inventory, net 2,775,078
Other current assets 865,603
Accounts payable, accrued and other liabilities (716,742)
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 274,406
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (42,269)
Purchase of intangible assets (3,676)
-----------
NET CASH USED IN INVESTING ACTIVITIES (45,945)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit repayment (656,095)
Principal payments on long-term debt (672,635)
Issuance of common stock 218,681
-----------
NET CASH USED IN FINANCING ACTIVITIES (1,110,049)
-----------
Effect of exchange rate changes on cash 67,272
NET DECREASE IN CASH (814,316)
CASH, BEGINNING OF YEAR 863,453
-----------
CASH, END OF YEAR $ 49,137
===========
Supplemental Schedule of Cash Flow Information:
Interest paid 226,848
===========
Income taxes (34,665)
===========
Issuance of Common Stock for redeemable preferred shares in a subsidiary 1,777,875
===========
See notes to consolidated financial statements.
6
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 1 DESCRIPTION OF BUSINESS
Drew Scientific Group PLC ("Drew") is a diagnostic company specializing in the
design, manufacture, sale and distribution of analytical systems for laboratory
testing worldwide. Drew is focused on providing instrumentation and consumables
for the diagnosis and monitoring of medical disorders in the area of diabetes,
cardiovascular diseases and haematology, as well as veterinary hematology and
blood chemistry. Drew is based in the United Kingdom, with additional operations
in Dallas, Texas and Oxford, Connecticut. Within this statement, the "Company"
collectively shall mean Drew and its subsidiaries:
Company Country of Operation Parent Company
- --------------------------------------------- -------------------- --------------
Drew Scientific Limited ("DSL") England Drew
Counting Technology Limited ("CTL") England Drew
Drew Scientific Distribution Limited ("DSDL") England Drew
Drew Scientific Inc. ("DSI") USA Drew
Drew Scientific Investment Limited ("DSIL") England Drew
CDC Acquisition Corp ("CDC") USA Drew
Drew Scientific Developments Limited (DSDEV) England DSIL
Danam Acquisition Corp ("DAC") USA CDC
Drew Scientific Inc. (formerly MWI, Inc) ("MWI") USA CDC
Revenue recognized from the entities operating in the United States represent
68% of total revenue for the year ended March 31, 2004
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts and transactions have been
eliminated.
Translation of Foreign Currency
The financial statements of the operations in England are measured using the
British Pound as the functional currency. Assets and liabilities of the
operations in England are translated at the exchange rate at the balance sheet
date. Shareholders' equity is translated at historical exchange rates. Income
and expense items are translated at the average annual exchange rate. Resulting
translation adjustments are recorded in the cumulative translation adjustment
account, a separate component of other comprehensive income (loss). Gains and
losses from foreign currency transactions are included in net income.
Use of Estimates
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 disclosures of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and expenses during the
reported period. Actual results could differ from those estimates.
7
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Revenue Recognition
The Company recognizes revenue from the sale of its products at the time of
shipment, when title and risk of loss transfer. The Company provides products to
its distributors at agreed wholesale prices and to the balance of its customers
at set retail prices. Distributors can receive discounts for accepting high
volume shipments. The discounts are reflected immediately in the net invoice
price, which is the basis for revenue recognition. No further material discounts
or sales incentives are given.
The Company's considerations for recognizing revenue upon shipment of a product
to a distributor are based on the following:
- Persuasive evidence that an arrangement (purchase order and sales
invoice) exists between a willing buyer (distributor) and the
Company that outlines the terms of the sale (company information,
quantity of goods, purchase price and payment terms). The buyer
(distributor) does not have an immediate right of return.
- Shipping terms are ex-factory shipping point. At this point the
buyer (distributor) takes title to the goods and is responsible for
all risks and rewards of ownership, including insuring the goods as
necessary.
- The Company's price to the buyer (distributor) is fixed and
determinable as specifically outlined on the sales invoice. The
sales arrangement does not have customer cancellation or termination
clauses.
- The buyer (distributor) places a purchase order with the Company;
the terms of the sale are cash, COD or credit. Customer credit is
determined based on the Company's policy and procedures related to
the buyer's (distributor's) creditworthiness. Based on this
determination, the Company believes that collectibility is
reasonably assured.
Shipping and Handling Revenues and Costs
Shipping and handling revenues are included in product revenue and the related
costs are included in cost of goods sold.
Inventories
Raw materials/work in process and finished goods are recorded at lower of cost
(first-in, first-out) or market. The composition of inventories at March 31,
2004 is as follows:
Raw materials $ 3,483,766
Work in process 388,662
Finished goods 777,496
------------
4,604,924
VALUATION ALLOWANCE (2,282,364)
------------
Total inventory $ 2,322,560
============
8
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 2 SIGNIFICIANT ACCOUNTING POLICIES, CONTINUED
Accounts Receivable
Accounts receivable are recorded at net realizable value. The Company performs
ongoing credit evaluations of customers' financial condition and does not
require collateral for accounts receivable arising in the normal course of
business. The Company maintains allowances for potential credit losses based on
the Company's historical losses and upon periodic review of individual balances.
Accounts are written off when they are determined to be uncollectible based on
management's assessment of individual accounts. Credit losses, when realized,
have been within the range of management's expectations. Allowance for doubtful
accounts was $489,122 at March 31, 2004.
Furniture and Equipment
Furniture and equipment is recorded at cost. Depreciation is recorded using
straight-line and reducing balance methods over the economic useful life of the
related assets. Depreciation for the year ended March 31, 2004 was $384,451.
Amortization of capital lease assets is included with depreciation expense.
Furniture and equipment at March 31, 2004 consist of the following:
Plant equipment $ 1,890,843
Office equipment 687,337
Leasehold improvements 229,725
-----------
2,807,905
Less: Accumulated depreciation and amortization (1,332,405)
-----------
$ 1,475,500
===========
Long-Lived Assets
Management assesses the recoverability of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable from its future undiscounted cash flows. If it is determined that
an impairment has occurred, an impairment loss is recognized for the amount by
which the carrying amount of the asset exceeds its estimated fair value.
Intangible Assets
The Company follows Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets," which discontinues the
amortization of goodwill. In accordance with SFAS 142, this goodwill is tested
for impairment on an annual basis.
Research and Development
All research and development costs are charged to operations as incurred.
9
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 2 SIGNIFICIANT ACCOUNTING POLICIES, CONTINUED
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized based on
the difference between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect in the years when
those temporary differences are expected to reverse. The effect on deferred
taxes of a change in tax rates, should a change occur, is recognized in income
in the period that include the enactment date.
NOTE 3 INTANGIBLE ASSETS AND GOODWILL
Intangible assets relate to costs of licenses and patents.
Licenses
The costs of licenses are being amortized over the period of the license.
Patents
It is the Company's practice to seek patent protection on processes and products
in various countries. Patent application costs are capitalized and amortized
over their estimated useful lives, not exceeding 17 years, on a straight-line
basis from the date the related patents are issued. Costs associated with
patents no longer being pursued are expensed.
Goodwill
Goodwill represents intangible assets obtained from various acquisitions.
Goodwill represents the excess of purchase price over the fair market value of
net assets acquired.
In accordance with SFAS 142, effective April 1, 2002, the Company discontinued
the amortization of goodwill. Intangible assets that have finite lives will
continue to be amortized over their useful lives. Management evaluated the
carrying value of goodwill and its identifiable intangible assets that have
indefinite lives during each of the fiscal years subsequent to April 1, 2002.
Management concluded that the carrying value of goodwill and identifiable
intangible assets did not exceed their fair values and therefore were not
impaired. Management made this conclusion after evaluating the discounted cash
flow of each of its business units. In accordance with SFAS 142, these
intangible assets will continue to be assessed on an annual basis.
10
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 3 INTANGIBLE ASSETS AND GOODWILL, CONTINUED
Goodwill, continued
The following table presents intangible assets and goodwill as of March 31,
2004:
Adjusted
Gross Gross Net
Carrying Carrying Accumulated Carrying
Amount Impairment Amount Amortization Value
Goodwill $19,022,266 $9,846,180 $9,176,086 $1,078,401 $8,097,685
=========== ========== ========== ========== ==========
Adjusted
Amortized Intangible Gross Gross Net
Assets Carrying Carrying Accumulated Carrying
Amount Impairment Amount Amortization Value
Patents $ 791,893 $ - $ 791,893 $492,776 $299,117
Licenses 459,450 - 459,450 290,455 168,995
- - -
---------- --- ---------- -------- --------
Balance as of March 31,
2004 $1,251,343 - $1,251,343 $783,231 $468,112
========== === ========== ======== ========
The following table presents amortization for the year ended March 31, 2004:
Goodwill -
Patents 57,084
Licenses 20,693
Amortization expense, relating entirely to patents and licenses are estimated to
be $67,570 in 2005, $60,995 in 2006 and $44,148 per year for 2007, 2008 and
2009.
11
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 4 LINE OF CREDIT
MWI has a line of credit with a financial institution. The amount available on
the line is $ 2,000,000, with maximum amounts available based on a borrowing
base calculation. The interest rate is 8.25% and the line is due for renewal on
November 30, 2004. The primary collateral on the loan is the foreign receivables
and all inventories of the Company. The balance as of March 31, 2004 on this
obligation is $ 944,635.
DSL has an overdraft line of credit with a United Kingdom financial institution.
The amount available on the line is 360,000 pounds. The interest rate is 2% over
the United Kingdom base rate (3.5% at March 31, 2004). The line is secured by
the Company's assets and is personally guaranteed by certain of the Company's
current directors and two former directors. The balance as of March 31, 2004 is
$ 681,559.
In addition DSL has entered into an accounts receivable factoring agreement with
another party. The agreement allows the Company to receive advances on
outstanding accounts receivable. Based on the agreement, the Company has not
surrendered control of the asset and therefore the amount advanced is not
accounted for as a sale of an asset. The balance owed to this factoring company
as of March 31, 2004 is $ 315,346.
NOTE 5 LONG-TERM DEBT
Long-term debt consists of the following:
Texas Mezzanine Fund, payable in monthly installments of $14,200,
which includes interest at 10%. The note is due in April 2008 and
is secured by certain assets of MWI $ 558,000
Synbiotics Inc., from the acquisition of the Prochem V product
line, payable in monthly installments of $8,333 with interest
at 5%. 350,000
Other 215,979
----------
1,123,979
Less: Current portion 412,476
----------
$ 711,503
==========
The annual maturities on long-term debt after March 31, 2004 are as follows:
Years Ending March 31,
- ----------------------
2005 $ 412,476
2006 237,983
2007 249,600
2008 212,190
2009 11,730
----------
$1,123,979
==========
12
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 6 INCOME TAXES
The benefit for income taxes for the year ended March 31, 2004 consist of the
following:
Current income tax provision
Federal $34,665
State -
-------
34,665
-------
Deferred income tax provision (benefit)
Federal -
State -
Change in valuation allowance -
-------
-
-------
Income tax benefit $34,665
=======
The income tax benefit represents tax credits received from the United Kingdom
as a result of research and development expenses.
As of March 31, 2004, the Company had deferred income tax assets and
liabilities. The net deferred income tax assets have been reduced by a 100%
valuation allowance. The valuation allowance is based on uncertainty with
respect to the ultimate realization of the net assets. The majority of the net
deferred tax asset represents net operating losses in both the United States and
United Kingdom.
NOTE 7 STOCKHOLDERS' EQUITY
Drew is chartered in the United Kingdom and its capital structure as of March
31, 2004 is as follows: 1 p par value, 64,000,000 shares authorized, 59,347,729
shares issued and outstanding.
13
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 8 OPERATING LEASES
The Company leases its manufacturing, research and corporate office facilities
and certain equipment under non-cancelable operating lease arrangements. The
future minimum rentals to be paid under these leasing arrangements as of March
31, 2004 are as follows:
Years Ending March 31, Amount
- ---------------------- ----------
2005 $ 426,201
2006 384,197
2007 316,433
2008 48,500
----------
Total $1,175,331
==========
Rent expense charged to operations during the year ended March 31, 2004 was
$453,429.
NOTE 9 RETIREMENT PLANS
The Company has a defined contribution plan covering substantially all
employees. Employer contribution to the plan for the year ended March 31, 2004
was $457,599.
NOTE 10 IMPAIRMENT OF LONG-LIVED ASSETS
In 2004, the Company moved its instrument production to its United States
facility and closed the plant in the United Kingdom. As a result of this
business decision, $369,142 of property, plant and equipment was abandoned.
NOTE 11 RESTRUCTURING COSTS
In 2004, the Company upon downsizing its United Kingdom instrument production
facility, incurred $991,100 of costs associated with the restructuring of the
business line.
NOTE 12 CONTINGENCIES
From time to time the Company is involved in various legal proceedings and
disputes that arise in the normal course of business. These matters have
included intellectual property disputes, contract disputes, employment disputes
and other matters. The Company does not believe that the resolution of any of
these matters has had or is likely to have a material adverse effect on the
Company's business, financial condition or results of operations.
14
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 13 SALE OF COMMON STOCK
In 2003, Drew sold 2,778,400 shares of its Common Stock for $ 218,681 after
costs associated with the offering. In addition, 1,000,565 shares were issued to
redeem previously issued redeemable preferred shares, which were issued in its
subsidiary DSIL.
NOTE 14 SUBSEQUENT EVENTS - RIGHTS ISSUE AND SALE OF THE MAJORITY OF DREW
SCIENTIFIC GROUP PLC
In April 2004, the Company completed a rights issue which raised $2.3m net of
costs.
As of July 23, 2004, 67.03% of the outstanding ordinary shares of Drew were
acquired by Escalon Medical Corp ("Escalon") a United States company, pursuant
to an exchange offer for all of the outstanding ordinary shares of Drew; and
since that date Escalon has acquired approximately 92% of the Drew shares.
Escalon expects to acquire the remaining outstanding Drew shares pursuant to
procedures under United Kingdom laws and regulations. The Company offered
900,000 shares of Escalon Common Stock in exchange for all of the ordinary
shares of Drew.
Upon the sale of all the outstanding shares of Drew, the Company's stock option
plan will be terminated and all options currently granted will be forfeited.
NOTE 15 FUTURE FINANCE
Following their acquisition of the controlling interest in Drew, Escalon has
indicated that it will provide sufficient financial support for the Company to
meet its liabilities for the foreseeable future. Accordingly, the financial
statements have been prepared on a going concern basis.
15
Independent Auditor's Report
The Board of Directors
Drew Scientific Group PLC
We have audited the consolidated balance sheet of Drew Scientific Group PLC, and
subsidiaries as of March 31, 2003, and the related consolidated statements of
income and retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to an express and 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 Drew Scientific
Group PLC as of March 31, 2003 and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
Richard L. Weisheit, P.C.
Dallas, Texas
September 30, 2004
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2003
ASSETS
Current assets:
Cash $ 863,453
Accounts receivable, net 4,454,788
Inventory, net 4,791,504
Other current assets 1,053,140
------------
Total current assets 11,162,885
Furniture and equipment, net 2,129,258
Goodwill 8,097,685
Intangible assets, net 563,751
------------
Total assets $ 21,953,579
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of Credit and short term debt $ 3,448,965
Accounts payable 3,011,051
Payroll taxes and other taxes payable 175,851
Other current liabilities 995,932
------------
Total current liabilities 7,631,799
Long-term debt, net of current portion 759,608
------------
Total liabilities 8,391,407
------------
Redeemable preferred shares 1,777,875
------------
Shareholders' equity:
Common Stock, $.01 par value, 64,000,000 shares authorized
55,568,764 shares issued at March 31, 2003 850,678
Additional paid-in capital 35,394,537
Accumulated deficit (24,134,523)
Currency translation adjustment (326,395)
------------
Total shareholders' equity 11,784,297
------------
Total liabilities and shareholders' equity $ 21,953,579
============
See notes to consolidated financial statements
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 2003
Revenues, net $ 18,697,965
Cost of Goods Sold 12,247,245
============
Gross Margin 6,450,720
============
Operating Expenses
Research and development 1,536,988
General & Administrative 5,298,465
Impairment of Goodwill 10,303,731
============
Total costs and expenses 17,139,184
------------
Loss from operations (10,688,464)
Other expenses:
Interest expense 238,233
------------
Loss before income taxes (10,926,697)
Income taxes 218,606
------------
Net loss $(10,708,091)
============
See notes to consolidated financial statements
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE YEAR ENDED MARCH 31, 2003
Common Stock Additional Currency Total
------------------------- Paid-in Accumulated Translation Shareholders'
Shares Amount Capital Deficit Adjustments Equity
---------- ---------- ----------- ----------- ----------- -------------
Balance at March 31, 2002 50,518,764 771,772 34,169,537 (13,426,432) 726,874 22,241,751
Sale of stock 5,050,000 78,906 1,225,000 - 1,303,906
Net loss - - - (10,708,091) (10,708,091)
Change in currency
translation account (1,053,269) (1,053,269)
========== ========== =========== =========== =========== ===========
Balance at March 31, 2003 55,568,764 850,678 35,394,537 (24,134,523) (326,395) 11,784,297
========== ========== =========== =========== =========== ===========
See notes to consolidated financial statements.
DREW SCIENTIFIC GROUP PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ($10,688,464)
Adjustments to reconcile net income to net cash
provided by in operating activities:
Depreciation and amortization
Goodwill Impairment 10,303,731
Current depreciation and amortization 513,513
Increase in Accounts Receivable (690,766)
Decrease in Inventory 638,602
Accounts payable, accrued and other liabilities (1,232,944)
============
NET CASH PROVIDED BY OPERATING ACTIVITIES (1,156,328)
============
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of assets 723,960
Purchase of Patents and other Intangibles (60,066)
Purchase of fixed assets (504,243)
============
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES 159,651
============
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal reduction on debt (630,698)
Proceeds from sale of common stock (net of cost) 1,319,094
============
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 688,396
============
Net increase (decrease) in cash and cash equivalents (308,281)
Cash and cash equivalents, beginning of year 1,171,734
============
Cash and cash equivalents, end of year 863,453
============
See notes to consolidated financial statements.
DREW SCIENTIFIC GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
DESCRIPTION OF BUSINESS
Drew Scientific Group PLC is a diagnostics company specializing in the design,
manufacture, and distribution of analytical systems for laboratory testing
worldwide. The group is focused on providing instrumentation and consumables for
the diagnosis and monitoring of medical disorders in the rapidly growing areas
of diabetes, cardiovascular diseases and hematology. In addition, Drew
Scientific Group PLC supplies other diagnostic systems which perform blood
component tests. Drew Scientific Group PLC is headquartered in the United
Kingdom, with additional offices and manufacturing in the U.S.
SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The statements of the Group comprise the financial statements of the company and
its subsidiaries prepared for March 31, 2003. All intercompany accounts have
been eliminated.
Foreign Currency Translation
The financial statements of the operations in England were presented using the
British Pound as the functional currency. Assets and liabilities of the England
operations are translated at the exchange rate at the balance sheet date (March
31, 2003). Shareholder's Equity was translated at historical exchange rates.
Income and expense were translated at the average annual exchange rate.
Resulting translation adjustments are recorded in the cumulative translation
adjustment account, a separate component of other comprehensive income (loss).
Gains and losses from foreign currency transactions are included in net income.
DREW SCIENTIFIC GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles of the U.S. required management to make certain estimates
and assumptions that might affect the assets and liabilities, revenues and
expenses, and the disclosures that were reported. Actual results could differ
from these estimates.
Revenue recognition
The company historically has recognized revenue at the time of shipment, at
which point the title and risk of loss also transfer. This is further
substantiated by the purchase and sales invoice language whereby the customer
does not have an immediate right of return. Shipping terms are ex-factory
shipping point. Shipping and freight revenue are included in the invoice, and
the same relevant costs are reflected in Cost of goods sold.
Accounts Receivable
Accounts receivable include trade accounts receivable for product sold. The
company is involved in an arrangement to factor a select group of customers in
the U.S. comprising less than 10% of accounts receivable. The company also has
established an allowance for uncollectible accounts based on experience and
management's evaluation of collectibility.
Inventory
Inventories include raw materials, work in process and finished goods. They are
recorded at lower of cost or market. At March 31, 2003, Inventory consists of:
Raw Materials $3,871,968
Work in process 594,872
Finished Goods 324,664
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Total $4,791,504
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DREW SCIENTIFIC GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
Property and Equipment
Assets are recorded at cost and are depreciated using straight line and reducing
methods over the economic useful life of the assets.
The major fixed asset categories together with accumulated depreciation are as
follows:
At March 31, 2003 property and equipment are as follows:
Plant equipment $ 2,962,231
Office equipment 942,097
Leasehold Improvements 208,652
Vehicles 58,485
-----------
4,171,465
Less: Accumulated depreciation (2,042,207)
-----------
Net Book Value $ 2,129,258
-----------
Intangible Assets
Goodwill and other intangible assets with indeterminate lives are tested each
year for impairment. The company no longer amortizes an amount each year as a
result of SFAS 142.
The company holds a number of patents and licenses, and these are amortized over
their useful lives.
Research & Development costs
Research and development costs are expensed as incurred.
DREW SCIENTIFIC GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
As of March 31, 2003 Intangible assets and Goodwill are as follows:
Carrying Impair-
Amt ment Adjusted Acc Amort Net
---------- --------- ---------- --------- ---------
Goodwill 19,022,266 9,846,180 9,176,086 1,078,401 8,097,685
Amortizable
Intangibles 3,147,173 - 3,147,173 2,583,422 563,751
---------- --------- ---------- --------- ---------
Balance as of
March 31, 2003 22,169,439 9,846,180 12,323,259 3,661,823 8,661,436
---------- --------- ---------- --------- ---------
Amortization expense , relating to Patents and Licenses are estimated to be
$95,639 in 2004, $67,570 in 2005, $60,995 in 2006, and $ 44,198 in both 2007 &
2008.
Lines of Credit
(1) Drew Scientific, Inc. (U. S.) I has a line of credit with a
financial institution up to $2.0 mil, the amount available of which
is determined via a borrowing base calculation. The interest rate is
1% over prime payable monthly, and the line is up for renewal at
September 30, 2003. This a govt. guaranteed working capital line
which is collateralized by foreign accounts receivable. The balance
at March 31, 2003 is $ 1,618,965.
(2) One of the subsidiaries in the U.K. has a line of credit with a
financial institution in the amount of 360,000 pounds, and at 2%
over UK base rate, and is secured by the company's assets and is
guaranteed by certain directors. At March 31, 2003 the line was
fully utilized.
DREW SCIENTIFIC GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
Long-term debt
Long-term debt consists of the following:
(1) Texas Mezzanine Fund, rate 10%,
due September 2004. $105,907
(2) Former Director of Counting Technology
Ltd. 39,518
(3) Medisys PLC 232,362
(4) Synbiotics Inc. (acquisition of
Chem. V). 349,334
(5) Others 32,487
--------
Total $759,608
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The annual maturities on long-term debt after March 31, 2003, are as follows:
March 31, 2004 $445,757
March 31, 2005 412,476
March 31, 2006 237,983
March 31, 2007 249,600
March 31, 2008 212,190
DREW SCIENTIFIC GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
Shareholder's Equity
The company was chartered in the UK and has 64,000,000 shares authorize at 1 p
par value. As of March 31, 2003, 55,568,764 were issued and outstanding.
During the year, 5,050,000 shares were issued for a premium of $1,225,000 and a
cost of $78,906.
Retirement Plan
The company has a defined contribution plan that covers virtually its employees.
Employer contributions to the plan for the year ended March 31, 2003 were $
505,824.
Operating leases
The company leases its production facilities and its offices and certain
equipment under non-cancelable operating lease agreements. The future minimum
rentals to be paid under these arrangements as of March 31, 2003 were:
Year Amount
- ----- ----------
2004 $ 453,429
2005 426,201
2006 384,197
2007 316,433
2008 48,500
Total $1,628,760
During the year $ 360,399 was charged to rent expense
DREW SCIENTIFIC GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized based on
the difference between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect in the years when
those temporary differences are expected to reverse. The effect on deferred
taxes of a change in tax rates, should a change occur, is recognized in income
in the period that include the enacted date.
Subsequent Events
Effective July 23, 2004, approximately 67% of the outstanding ordinary shares of
Drew Scientific Group PLC were acquired by Escalon Medical Corp, a US company.
This was pursuant to an exchange offer for all the outstanding shares of Drew
Scientific Group PLC. Since that time, Escalon has acquired up to 92% of the
Drew shares, with the balance expected to be acquired based on procedures and
regulations in the United Kingdom. In exchange, Escalon offered to Drew
shareholders, 900,000 shares of Escalon common stock.
Upon the acquisition of all the outstanding shares of Drew, the stock option
plan of Drew will be terminated and all options currently granted and
unexercised, will be forfeited.
Escalon had indicated that it will provide sufficient financial support for Drew
Scientific Group PLC to meet its obligations into the foreseeable future, and
thus these statements have been prepared based on this fact and that Drew will
continue to be a going concern.