SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K/A
AMENDMENT NO. 1
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 17, 1999
LABTEC INC.
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(Exact Name of Registrant as Specified in Charter)
Massachusetts 0-27302 04-3116697
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File No.) Identification No.)
1499 Southeast Tech Center Place, Suite 350, Vancouver, Washington 98683
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (360) 896-2000
AMENDMENT TO CURRENT REPORT
The Registrant's Current Report on Form 8-K, filed on March 5, 1999, to report
the merger among the Registrant, a Massachusetts corporation formerly known as
Spacetec IMC Corporation (the "Company"), SIMC Acquisition Corporation, a
Delaware corporation and wholly-owned subsidiary of the Company ("SIMC"), and
Labtec Corporation, a Delaware corporation formerly known as Labtec Inc. ("Old
Labtec"), is amended to provide financial statements and pro forma financial
information required by Item 7 of the report. There are no other changes to the
report as filed.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Report of Independent Accountants .............................. 3
Consolidated Balance Sheet ..................................... 4
Consolidated Statement of Operations ........................... 5
Consolidated Statement of Changes in
Shareholders' Equity (Deficit).................................. 6
Consolidated Statement of Cash Flows............................ 7
Notes to Consolidated Financial Statements...................... 8
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Report of Independent Accountants
To the Shareholders and
Board of Directors of
Labtec Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Labtec Inc. and its subsidiaries (the "Company") at March
31, 1997 and 1998 and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Portland, Oregon
August 3, 1998, except for Notes 8 and 10,
which are as of February 17, 1999
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LABTEC INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
1997 1998 1998
--------------- ---------------- ----------------
Assets (unaudited)
Current assets:
Cash $ 71,871 $ 988,417 $ 829,496
Accounts receivable, net 10,404,883 13,548,320 16,581,002
Interest and other receivables 24,375 19,790 4,712
Inventories 16,097,168 12,664,421 11,653,472
Current deferred income taxes 264,839 337,477 1,117,798
--------------- ---------------- ----------------
Total current assets 26,863,136 27,558,425 30,186,480
Furniture and equipment, net 1,662,417 2,190,910 2,243,642
Noncurrent deferred income taxes 1,314,258 1,591,552 1,692,397
Noncompete agreement 723,600 361,800 90,450
Debt issuance costs 376,626 2,614,880 2,333,675
Other noncurrent assets 53,386 117,116 114,927
Goodwill 3,535,046 1,767,522 441,878
--------------- ---------------- ----------------
$ 34,528,469 $ 36,202,205 $ 37,103,449
--------------- ---------------- ----------------
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Short-term borrowings $ 15,672,671 $ 2,500,000 $ -
Current portion of long-term debt 2,191,038 625,000 1,187,500
Accounts payable 3,916,686 3,644,113 8,678,554
Income taxes payable 243,808 270,925 8,841
Accrued payroll and benefits 744,451 125,645 480,798
Accrued interest 126,494 202,260 155,260
Other accrued expenses 560,584 646,054 1,574,152
--------------- ---------------- ----------------
Total current liabilities 23,455,732 8,013,997 12,085,105
Long-term debt 2,955,213 31,985,988 31,074,885
--------------- ---------------- ----------------
26,410,945 39,999,985 43,159,990
--------------- ---------------- ----------------
Redeemable warrants 1,451,937 - -
--------------- ---------------- ----------------
Commitments and contingencies (Notes 4, 5 and 9)
Shareholders' equity (deficit):
Preferred stock, par value $.01 and $0.00, 34,000 and 34,000
shares authorized, 34,000 and 0 shares outstanding at
March 31, 1997 and 1998 2,500,000
Common stock, par value $.01, 400,000 and 35,000,000 shares
authorized, 78,986, 25,164,720, and 26,228,550 shares issued and
outstanding at March 31, 1997, 1998 and December 31, 1998 790 251,647 262,285
Treasury stock (1,271,240 shares held at December 31, 1998) (195,101)
Additional paid-in capital 7,923,810 5,942,139 7,052,279
Stock subscription receivable (170,902) (134,554) (101,645)
Deferred compensation (15,854)
Accumulated deficit (3,588,111) (9,857,012) (13,058,505)
--------------- ---------------- ----------------
4,165,587 (3,797,780) (6,056,541)
--------------- ---------------- ----------------
$ 32,028,469 $ 36,202,205 $ 37,103,449
--------------- ---------------- ----------------
The accompanying notes are an integral part of this statement.
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LABTEC INC.
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTH PERIOD ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
1996 1997 1998 1997 1998
--------------- -------------- --------------- --------------- --------------
(unaudited) (unaudited)
Net sales $43,664,333 $59,779,334 $57,820,303 $42,929,345 $45,125,855
Cost of sales 29,878,433 39,680,758 38,163,280 28,019,133 30,406,711
--------------- -------------- --------------- --------------- --------------
Gross profit 13,785,900 20,098,576 19,657,023 14,910,212 14,719,144
--------------- -------------- --------------- --------------- --------------
Operating expenses:
Selling and marketing 7,099,657 8,582,171 9,903,762 7,638,578 8,320,747
General and administrative 3,876,942 4,040,278 5,176,876 3,844,491 5,239,040
Depreciation 561,999 722,906 943,449 698,340 1,059,763
Amortization of goodwill 1,767,524 1,767,524 1,767,524 1,325,643 1,325,644
Amortization of noncompete agreement 804,000 482,400 361,800 271,350 271,350
--------------- -------------- --------------- --------------- --------------
14,110,122 15,595,279 18,153,411 13,778,402 16,216,544
--------------- -------------- --------------- --------------- --------------
Income (loss) from operations (324,222) 4,503,297 1,503,612 1,131,810 (1,497,400)
Interest expense, net 2,565,516 2,610,571 3,253,795 2,255,420 2,669,999
Other nonoperating expense (income) (31,124) 1,956 2,447 (33,434)
--------------- -------------- --------------- --------------- --------------
(Loss) income before extraordinary loss
and income taxes (2,889,738) 1,923,850 (1,752,139) (1,126,057) (4,133,965)
Provision (benefit) for income taxes (312,069) 1,322,560 13,555 8,732 (932,472)
--------------- -------------- --------------- --------------- --------------
(Loss) income before extraordinary loss (2,577,669) 601,290 (1,765,694) (1,134,789) (3,201,493)
Extraordinary loss on extinguishment of debt,
debt less applicable income tax benefit
of $263,156 (510,834) (510,834)
--------------- -------------- --------------- --------------- --------------
Net (loss) income $(2,577,669) $ 601,290 $(2,276,528) $(1,645,623) $(3,201,493)
--------------- -------------- --------------- --------------- --------------
Net (loss) income per share before
extraordinary loss
Basic $ (0.19) $ 0.04 $ (0.09) $ (0.10) $ (0.13)
--------------- -------------- --------------- --------------- --------------
Diluted $ (0.19) $ 0.03 $ (0.09) $ (0.10) $ (0.13)
--------------- -------------- --------------- --------------- --------------
Net (loss) income per share
Basic $ (0.19) $ 0.04 $ (0.12) $ (0.10) $ (0.13)
--------------- -------------- --------------- --------------- --------------
Diluted $ (0.19) $ 0.03 $ (0.12) $ (0.10) $ (0.13)
--------------- -------------- --------------- --------------- --------------
The accompanying notes are an integral part of this statement.
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LABTEC INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ADDITIONAL COMMON
----------------- --------------- TREASURY PAID-IN STOCK
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL SUBSCRIPTION
------ ------ ------ ------ -------- ----------- ------------
Balance at March 31, 1995 - $ - 78,546 $ 786 $ - $ 7,842,814 $ (177,300)
Payments on common stock
subscription 6,398
Issuance of Series A
preferred stock 34,000 2,500,000
Issuance of Class A
common stock 440 4 43,996
Net loss
--------- --------- --------- -------- ---------- ------------ -----------
Balance at
March 31, 1996 34,000 2,500,000 78,986 790 - 7,886,810 (170,902)
Compensation expense on
stock options granted 37,000
Net income
--------- --------- --------- -------- ---------- ----------- -----------
Balance at
March 31, 1997 34,000 2,500,000 78,986 790 - 7,923,810 (170,902)
Payments on common stock
subscription 36,348
Preferred stock dividend
Preferred stock converted to
common stock (34,000)(2,500,000) 34,000 340 2,499,660
Compensation expense on
stock options granted 73,000
Exercise of warrants (including
cancellation of "put" rights) 5,319 53 1,901,884
Exercise of stock options 18,728 187 1,872,613
8.5853 to 1 stock split 1,039,436 10,394 (10,394)
Repurchase and retirement of
existing common stock (1,017,659) (10,176) (14,260,573)
Issuance of new common stock 1,049,426 10,494 5,900,094
Issuance of shares to sub-
ordinated debt holder 50,000 500 281,110
20 to 1 stock split 23,906,484 239,065 (239,065)
Net loss
--------- --------- ---------- ------- --------- ----------- ----------
Balance at
March 31, 1998 - - 25,164,720 251,647 - 5,942,139 (134,554)
Repurchase of common stock
for treasury (1,217,240 shares) (195,101) 134,554
Stock options granted 18,118
Issuance of common stock
to management 1,063,830 10,638 1,092,022 (101,645)
Net loss
--------- --------- ---------- -------- --------- ----------- ----------
Balance at December 31,
1998 (unaudited) $ - $ - 26,228,550 $262,285 $(195,101) $7,052,279 $(101,645)
--------- --------- ---------- -------- --------- ----------- ----------
(TABLE CONTINUED)
DEFERRED ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ----------- -----
Balance at March 31, 1995 $ - $ (1,611,732) $6,054,568
Payments on common stock
subscription 6,398
Issuance of Series A
preferred stock 2,500,000
Issuance of Class A
common stock 44,000
Net loss (2,577,669) (2,577,669)
---------- ------------ -----------
Balance at
March 31, 1996 - (4,189,401) 6,027,297
Compensation expense on
stock options granted 37,000
Net income 601,290 601,290
---------- ------------ -----------
Balance at
March 31, 1997 - (3,588,111) 6,665,587
Payments on common stock
subscription 36,348
Preferred stock dividend (435,314) (435,314)
Preferred stock converted to
common stock -
Compensation expense on
stock options granted 73,000
Exercise of warrants (including
cancellation of "put" rights) 1,901,937
Exercise of stock options 1,872,800
8.5853 to 1 stock split -
Repurchase and retirement of
existing common stock (3,557,059) (17,827,808)
Issuance of new common stock 5,910,588
Issuance of shares to sub-
ordinated debt holder 281,610
20 to 1 stock split -
Net loss (2,276,528) (2,276,528)
---------- ------------ ----------
Balance at
March 31, 1998 - (9,857,012) (3,797,780)
Repurchase of common stock
for treasury (1,217,240 shares) (60,547)
Stock options granted (15,854) 2,264
Issuance of common stock
to management 1,001,015
Net loss (3,201,493) (3,201,493)
----------- ------------ ----------
Balance at December 31,
1998 (unaudited) $(15,854) $(13,058,505) $(6,056,541)
----------- ------------ ----------
The accompanying notes are an integral part of this statement.
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LABTEC INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTH PERIOD ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
1996 1997 1998 1997 1998
-------------- ------------- -------------- ------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net (loss) income $(2,577,669) $ 601,290 $(2,276,528) $(1,645,623) $(3,201,493)
Depreciation 561,999 722,906 943,449 698,340 1,059,764
Amortization of goodwill 1,767,524 1,767,524 1,767,524 1,325,643 1,325,643
Amortization of noncompete agreement 804,000 482,400 361,800 271,350 271,350
Amortization of debt issuance costs and original
issue discount 746,249 619,854 474,857 387,722 328,588
Change in deferred income taxes (624,295) (304,640) (349,932) (881,166)
Loss on disposal of assets 1,200 -
Compensation expense on common stock
sold to management 802,660
Compensation expense on stock options granted 37,000 73,000 73,000 2,264
Write-off of debt issuance costs 296,468 296,468
Write-off of unamortized discount on refinanced
subordinated debt 307,185 307,185
Changes in current assets and liabilities:
Accounts receivable (2,535,015) 456,467 (3,143,437) (2,731,346) (3,032,682)
Interest and other receivables (9,108) (13,604) 4,585 7,225 15,078
Inventories (1,482,542) (7,080,728) 3,432,747 368,867 1,010,949
Accounts payable 2,035,475 (232,847) (272,573) 3,150,142 5,034,441
Accrued interest 126,494 75,766 353,471 (47,000)
Accrued payroll and other expenses 136,458 388,744 (533,336) (483,993) 1,283,251
Income taxes payable 424,744 (144,864) 27,117 (312,353) (262,084)
-------------- ------------- -------------- ------------- --------------
Net cash provided by (used for) operating activities (752,180) (2,574,004) 1,189,892 2,066,098 3,709,563
-------------- ------------- -------------- ------------- --------------
Cash flows from investing activities:
Capital expenditures (1,692,371) (743,116) (1,473,142) (878,728) (1,248,118)
Other assets (22,424) (63,730) (40,405) 2,189
-------------- ------------- -------------- ------------- --------------
Net cash used in investing activities (1,714,795) (743,116) (1,536,872) (919,133) (1,245,929)
-------------- ------------- -------------- ------------- --------------
Cash flows from financing activities:
Net increase (decrease) in new short-term
credit facility 2,500,000 500,000 (2,500,000)
Net (decrease) increase in old short-term
borrowing facility 1,966,900 5,672,671 (15,672,671) (15,672,671)
Proceeds from issuance of long-term debt 33,000,000 33,000,000
Repayments of long-term debt (2,000,000) (2,375,000) (5,750,000) (5,687,500) (375,000)
Debt issuance costs 51,468 (251,804) (2,820,417) (2,820,417) (19,917)
Proceeds from exercise of stock options and warrants 2,322,800 2,322,800
Repurchase and cancellation of common stock (17,827,808) (17,827,808) (60,547)
Proceeds from issuance of common stock 44,000 5,910,588 5,910,588 300,000
Proceeds from issuance of preferred stock 2,500,000
Preferred stock dividend (435,314) (435,314)
Payments on common stock subscription 6,398 36,348 36,348 32,909
-------------- ------------- -------------- ------------- --------------
Net cash provided by (used in) financing activities 2,568,766 3,045,867 1,263,526 (673,974) (2,622,555)
-------------- ------------- -------------- ------------- --------------
Net increase (decrease) in cash 101,791 (271,253) 916,546 472,991 (158,921)
Cash at beginning of period 241,333 343,124 71,871 71,871 988,417
-------------- ------------- -------------- ------------- --------------
Cash at end of period $ 343,124 $ 71,871 $ 988,417 $ 544,862 $ 829,496
-------------- -------------- -------------- ------------- ------------
The accompanying notes are an integral part of this statement.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Operations and Significant Accounting Policies
LEI Holdings, Inc. was formed June 24, 1994 to acquire, own and operate
Labtec Enterprises, Inc. ("Labtec") and its wholly owned subsidiary, Labtec
Electronics ("HK") Limited, located in Hong Kong. In 1996, LEI Holdings, Inc.
incorporated a new subsidiary under Labtec Enterprises, Inc. in Windsor, Great
Britain (Labtec Enterprises UK Limited) to facilitate sales on the European
continent. On October 6, 1997 Labtec merged with LEI Holdings, Inc., with LEI
Holdings being the survivor, in conjunction with a recapitalization transaction
through which it refinanced its debt and obtained new equity capital and
repurchased a significant portion of its previously outstanding equity interests
(approximately 86.5%) (the "Recapitalization") (see Notes 4 and 7). Labtec was
dissolved and LEI Holdings, Inc. changed its name to Labtec Enterprises, Inc. On
October 7, 1997 Labtec Enterprises, Inc. consummated the Recapitalization and
changed its name to Labtec Inc. (the "Company"). The accompanying consolidated
financial statements reflect the financial position and results of operations of
Labtec Inc. and its subsidiaries.
The Company designs, manufactures and distributes multimedia computer
peripheral products. Its world-wide customers include original computer
equipment manufacturers, distributors and retailers. The Company's products are
manufactured by various factory suppliers located in Asia and are imported to
the Company's headquarters in Vancouver, Washington and to warehouses in Great
Britain, the Netherlands and Canada for distribution.
The principal accounting policies followed by Labtec Inc. and its
subsidiaries in maintaining their financial records and preparing these
consolidated financial statements are as follows:
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company, as well as the accounts of its wholly owned subsidiaries, Labtec
Electronics ("HK") Limited and Labtec Enterprises UK, Limited. The HK subsidiary
provides research, product design and engineering, component sourcing and
quality control over the products produced for the Company from various foreign
factories. The UK subsidiary provides international marketing services for the
Company's products. All significant intercompany transactions and balances have
been eliminated.
REVENUE RECOGNITION
Revenues are recognized upon shipment of the Company's products, net of
an estimated allowance for sales returns. Gross revenues from one customer were
$4.4 million, $9.1 million and $8.8 million for the years ended March 31, 1996,
1997 and 1998, respectively, while revenues from another customer were $7.4
million for the year ended March 31, 1997. Each of these revenue amounts
accounted for more than 10% of consolidated sales for the respective period.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of cash, accounts receivable, accounts payable,
notes payable, and accrued liabilities as presented in the financial statements
approximate fair value because of the short-term maturity of these instruments.
The recorded amount of long-term debt approximates fair value because actual
interest rates approximate current competitive rates.
ACCOUNTS RECEIVABLE
Accounts receivable are net of allowances for doubtful accounts and for
sales returns. The allowance for doubtful accounts was $120,000 and $89,736 at
March 31, 1997 and 1998, respectively. The allowance for returns of merchandise
was $599,162 and $578,067 at March 31, 1997 and 1998, respectively. At March 31,
1997 and 1998, 11%, and 10%, respectively, of receivables were from one
customer.
INVENTORIES
Inventories are stated at the lower of landed cost (first-in, first-out
method) or market. Landed cost includes the cost of merchandise, freight, duty
and handling fees.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is provided on
the straight-line method for financial reporting purposes and on an accelerated
method for tax purposes over estimated useful lives ranging from three to seven
years. Depreciation expense for the years ended March 31, 1996, 1997 and 1998
was $561,999, $722,907 and $943,449, respectively.
Repair and maintenance costs are expensed as incurred.
DEBT ISSUANCE COSTS
Debt issuance costs, including bank fees of $1,608,545 and other
transaction fees relating to the Company's debt of $1,211,872, are included in
debt issuance costs at March 31, 1998 and represent all costs and fees incurred
to obtain bank financing for the refinancing of debt in October 1997 (see Notes
4 and 7). These costs are being amortized over the term of the related debt.
Remaining debt issuance costs of $296,468 related to earlier financing
arrangements were written off in October 1997 and are included in the
extraordinary loss on extinguishment of debt. Amortization for fiscal years
1996, 1997 and 1998 was $369,088, $198,864 and $285,695, respectively, and is
recorded in interest expense.
GOODWILL AND OTHER INTANGIBLE ASSETS
Costs in excess of the fair value of the net tangible assets of Labtec
acquired in fiscal 1995 consist primarily of goodwill associated with product
trade names originally recorded at $8,837,618 and a $3,350,000 noncompete
agreement with the former owner. Goodwill is being amortized using the
straight-line method over 5 years, which represents the estimated lives of the
underlying product trade names. The noncompete agreement is being amortized
using the
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
double-declining balance method over the agreement's life of 5 years to reflect
management's belief that the noncompete provision has more value in the earliest
years of the noncompete period. Periodically, the Company reviews the
recoverability of its intangible assets based on estimated undiscounted future
cash flows from operating activities compared with the carrying value of the
intangible assets. If the aggregate future cash flows are less than the carrying
value, a write-down would be required, measured by the difference between the
fair value and the carrying value of the intangible assets. The Company has not
recorded any provision related to impairment of intangible assets. Amortization
expense recognized related to goodwill was $1,767,524 for each of the years
ended March 31, 1996, 1997 and 1998. Amortization expense recognized related to
the noncompete agreement was $804,000, $482,400 and $361,800 for the years ended
March 31, 1996, 1997 and 1998, respectively.
DISCOUNT ON SUBORDINATED DEBT
In connection with the Recapitalization, the Company issued 50,000
shares of common stock (prior to the 20 to 1 stock split effected March 31,
1998) (see Note 8) to a subordinated lender and recorded the $281,610 of fair
value of the shares as a discount on the face amount of the debt. This non-cash
transaction is excluded from the accompanying statement of cash flows. The
discount is being amortized using the effective interest method over eight
years, which is the life of the subordinated note. Amortization during fiscal
1998 aggregated $17,598.
STOCK SUBSCRIPTION RECEIVABLE
In fiscal year 1995 the Company issued 1,773 shares of common stock to
the Company's president in exchange for a note aggregating $177,300. This note
receivable has been recorded as a reduction to shareholders' equity. Subsequent
to March 31, 1998, the note was forgiven. (See Note 10).
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and are
included in selling, general and administrative expenses in the accompanying
consolidated statement of operations.
ADVERTISING EXPENSES
The Company expenses advertising costs when incurred. Total advertising
expenses for the years ended March 31, 1996, 1997 and 1998 were $817,364,
$615,102 and $818,984, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("FAS 109"), Accounting for Income Taxes.
FAS 109 requires the recognition of deferred tax assets and liabilities for the
expected tax effects from differences between the financial reporting and tax
bases of assets and liabilities. In estimating future tax
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effects, FAS 109 generally considers all expected future events other than
enactments of changes in tax law or statutorily imposed rates.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares
of common stock and common stock equivalents outstanding during the periods,
computed using the treasury stock method for stock options. In fiscal year 1998
the Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share." The following table sets forth the reconciliation of the
denominator utilized in computation of basic and diluted (loss) earnings per
share. All amounts below are calculated after considering the stock splits that
occurred during fiscal year 1998.
FISCAL YEAR ENDED NINE MONTH PERIOD ENDED
MARCH 31, DECEMBER 31,
1996 1997 1998 1997 1998
-------------- --------------- -------------- -------------- ---------------
(UNAUDITED) (UNAUDITED)
Weighted average number of common
shares outstanding 13,510,209 13,562,370 19,156,928 17,190,741 24,307,248
Assumed conversion of preferred
stock 5,838,004
Assumed exercise of stock options
and warrants (net of shares
assumed acquired under the
treasury stock method) 744,576
-------------- --------------- -------------- -------------- ---------------
Diluted Shares outstanding 13,510,209 20,144,950 19,156,928 17,190,741 24,307,248
============== =============== ============== ============== ===============
DERIVATIVE FINANCIAL INSTRUMENTS
In June 1998 the Financial Accounting Standards Board issued Statement
on Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The Statement is effective
beginning with the Company's fiscal year ended March 31, 2001, and will require
the Company to record all derivative instruments at fair value on its balance
sheet. The Company has not elected to adopt the statement early, and does not
expect the standard to have a material effect on the Company's financial
position or results of operations upon adoption.
RELATED PARTIES
The former controlling shareholders of the Company provided certain
management services for which they charged a monthly fee of approximately
$14,500 for April 1998 through September 1998 (prior to the Recapitalization
Note 7) and for the years ended March 31, 1996 and 1997. The new majority
shareholders charge an annual management services fee of $500,000, of which
$250,000 was charged during fiscal 1998 and remained payable at March 31, 1998.
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The information presented as of December 31, 1998 and for the nine
month periods ended December 31, 1997 and 1998 has not been audited. In the
opinion of management, the unaudited interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position as of December 31, 1998
and the results of their operations and of cash flows for the nine month periods
ended December 31, 1997 and 1998. The interim results are not necessarily
indicative of results that may occur for the full fiscal year.
2. INVENTORIES
Inventories represent merchandise produced for the Company by foreign
factories subcontracted by the Company. Of the total inventory, $4,010,674 and
$716,715 was in transit at March 31, 1997 and 1998, respectively. The Company
takes title upon shipment.
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of:
MARCH 31,
1997 1998
------------------ -------------------
Leasehold improvements $ 147,200 $ 238,948
Tooling and molds 1,283,850 1,676,727
Furniture and equipment 795,119 1,381,983
Retail displays 796,211 1,093,227
------------------ -------------------
3,022,380 4,390,885
Less accumulated depreciation and amortization (1,359,963) (2,199,975)
------------------ -------------------
$ 1,662,417 $ 2,190,910
================== ===================
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BORROWINGS
In connection with the Recapitalization in October of 1997, the Company
repaid its $16.5 million revolving line of credit and subordinated notes with
funds obtained from a $27 million term note, a $6 million subordinated note, and
a $13 million revolving line of credit with other lenders. A termination fee of
$170,337 related to the old credit line is included in the extraordinary loss on
extinguishment of debt. At March 31, 1997 and 1998, $15.7 million and $2.5
million, respectively, was outstanding on the Company's lines of credit. At
March 31, 1997, interest was at the EURODOLLAR rate plus 3.5%. At March 31,
1998, $2,000,000 and $500,000 of the outstanding amount was accruing interest at
the EURODOLLAR rate plus 2.5% and at the prime rate plus 1.5%, respectively. The
current line of credit is secured by substantially all of the Company's assets.
Loan fees paid to the banks and transaction fees relating to the new term note,
subordinated note, and line of credit were $2,820,417 and have been recorded in
debt issuance costs (see Note 1). The current line of credit agreement expires
in October of 2002.
Long-term debt consists of:
MARCH 31,
1997 1998
------------------ -------------------
Bank note payable with varying quarterly payments,
interest at the bank's Eurodollar rate plus 3%
(8.625% at March 31, 1998), with the final
payment due September 30, 2004 secured by the
Company's assets $ - $ 26,875,000
Bank subordinated notes payable (net of $478,749
discount at March 31, 1997) with quarterly
payments of $625,000, plus interest at 12% (20%
effective interest rate after consideration of stock
warrants), with the final payment due June 30,
1999 5,146,251 -
Bank subordinated note payable (net of $264,012 discount
at March 31, 1998) 12%, with principal due
October 1, 2005 - 5,735,988
------------------ -------------------
5,146,251 32,610,988
Less amounts payable in one year (2,191,038) (625,000)
------------------ -------------------
Total long-term debt $ 2,955,213 $ 31,985,988
================== ===================
In fiscal year 1995, under the terms and conditions of the subordinated
note payable agreement, the Company issued warrants to purchase 5,319 shares of
Class A common stock to the lender at an exercise price of $84.60 per share for
nominal consideration of $200. The
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
aggregate exercise price of the warrants was $450,000. The estimated fair value
of the warrants of $1,451,937 was recorded as redeemable warrants and as a
discount to long-term debt. The warrant holder had certain "put" rights that
would require the Company to repurchase the warrants at a price to be determined
on the date the warrants are put to the Company. These warrants were exercised
and converted into common stock in conjunction with the Recapitalization
discussed in Note 7, and the $1,451,937 was reclassified as additional paid-in
capital. The reclassification of the fair value of the warrants has been
excluded from the accompanying consolidated statement of cash flows.
Debt discount amortization expense for the years ended March 31, 1996,
1997 and 1998 was $377,161, $420,990 and $189,162, respectively. The discount on
the new subordinated note payable is being amortized over the life of the note.
These amounts were recorded as part of interest expense in the consolidated
statement of operations. The unamortized balance of $307,185 on the old debt was
written off during fiscal 1998 concurrent with the Recapitalization and is
included in the extraordinary loss on extinguishment of debt.
The bank line of credit agreement and long-term debt agreements are
subject to certain restrictive covenants. The Company was in compliance with
these covenants for all periods presented in the accompanying financial
statements.
Interest payments for the years ended March 31, 1996, 1997 and 1998
were $1,850,750, $1,886,319 and $2,758,083, respectively.
Principal repayments of the long-term debt are required as follows:
FISCAL YEAR
- -------------------
1999 $ 625,000
2000 1,375,000
2001 1,875,000
2002 2,250,000
2003 3,500,000
Thereafter 22,985,988
------------------
$ 32,610,988
==================
5. EMPLOYEE BENEFITS
The Company has a defined contribution profit sharing plan for its
employees who meet certain requirements of age and length of service. Employees
may voluntarily contribute up to a maximum of 20% of their annual compensation
to the plan. The Company will also contribute up to an additional 3% of each
employee's base salary to the Plan if the Company achieves at least
-14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
80% of the operating income target in that year's business plan. In fiscal year
1997, the Company matched 50% of the employee contributions up to a maximum of
5%. For the years ended March 31, 1996, 1997 and 1998, matching contributions
for eligible employees amounted to $106,860, $91,583 and $56,212, respectively.
Discretionary bonuses of $196,545, $700,700 and $175,485 were awarded
to employees for the years ended March 31, 1996, 1997 and 1998, respectively.
6. INCOME TAXES
The income tax provision (benefit) consists of the following:
FISCAL YEAR ENDED
MARCH 31,
1996 1997 1998
---------------- ----------------- ------------------
Current tax expense $ 312,226 $ 1,627,200 $ 363,487
Deferred tax benefit (624,295) (304,640) (349,932)
---------------- ----------------- ------------------
$ (312,069) $ 1,322,560 $ 13,555
================ ================= ==================
Deferred tax assets are comprised of the following:
MARCH 31,
1997 1998
------------------ -------------------
Nondeductible accruals and allowances $ 213,636 $ 273,004
Capitalized inventory costs 51,204 64,473
Fixed asset depreciation 180,971 283,193
Intangibles 1,133,286 1,308,359
------------------ -------------------
Deferred tax assets $ 1,579,097 $ 1,929,029
================== ===================
The income tax provision is reconciled to the tax computed at the
statutory federal rate as follows:
FISCAL YEAR ENDED
MARCH 31,
1996 1997 1998
------------------ ----------------- ------------------
Tax expense (benefit) at federal statutory rate (34.00) % 34.00 % (34.00) %
Foreign taxes 0.21 .04 .39
Permanent differences 20.80 31.24 35.38
Other 2.19 3.47 (1.00)
------------------ ----------------- ------------------
(10.80) % 68.75 % .77 %
================== ================= ==================
-15-
Permanent differences primarily include nondeductible goodwill and
nondeductible meals and entertainment expense.
Income taxes paid for the years ended March 31, 1996, 1997 and 1998
were $169,262, $1,791,287, and $75,960, respectively.
7. SHAREHOLDERS' EQUITY (DEFICIT)
On October 7, 1997 the Company undertook the Recapitalization whereby
the Company: a) refinanced its existing debt by obtaining a $13 million line of
credit, a $27 million term note and a $6 million subordinated term note, and by
issuing 1,049,426 shares of common stock (pre 20 to 1 stock split) for aggregate
proceeds of $6,192,198 representing approximately 87.4% of the stock ownership
of the Company; and b) repurchased 1,017,659 shares of its previously existing
outstanding stock for aggregate cash consideration of $17,827,808, including
direct expenses of approximately $690,000. The repurchase of existing stock
resulted in the old shareholder group maintaining an approximate 12.6% interest
in the Company. (See Note 10).
All holders of common stock are entitled to one vote per share and are
entitled to dividends, provided that equivalent dividends are declared and paid
on all outstanding shares of common stock. The Company has granted stock options
and warrants to purchase shares of Class A common stock of the Company. (See
Note 8).
At March 31, 1996 and 1997, 78,986 shares of Class A common stock were
issued and outstanding.
In fiscal year 1996, the Company authorized and issued 34,000 shares of
preferred stock. At March 31, 1996 and 1997, 34,000 shares were issued and
outstanding. During fiscal year 1998 all shares of preferred stock were
converted to shares of common stock. The shares were converted in accordance
with the original terms of the preferred stock, resulting in no beneficial
conversion interests.
8. STOCK OPTIONS
The Company provided an employee incentive stock option plan (the
"Plan") which commenced on January 27, 1995. Options under the Plan were granted
at the discretion of the Board of Directors. The exercise price of these options
generally was the fair market value of shares at the date of grant as determined
by the Board of Directors. Such options were exercisable generally over ten
years from the time the options were granted, and vested over a period of three
years. Compensation cost recognized on the Company's stock option grants which
provided an exercise price below the fair value on the date of the grant was
$37,000 and $73,000 for the years ended March 31, 1997 and 1998, respectively.
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Plan allowed the granting of options to purchase up to an aggregate
of 15,645 shares (before considering stock splits) of the Company's Class A
common stock. Options granted under the Plan were nonqualified stock options as
defined by the Internal Revenue Code. All options were exercised and the Plan
was terminated pursuant to the completion of the Recapitalization in October of
1997.
In connection with the Recapitalization, the Company established a new
employee incentive stock option plan which commenced on October 7, 1997 (the
"New Plan"). The Company reserved 4,789,496 shares of common stock (post 20 to 1
stock split as described below) for issuance to certain employees under the
plan. The exercise price of these options range from $0.2816 (estimated fair
value based upon the price paid for new shares) to $0.8448 per share. Such
options may be exercised generally over 10 years from the time the options are
granted, and vest over a period of four years.
The Company adopted Statement of Financial Accounting Standards No. 123
("FAS 123"), Accounting for Stock-Based Compensation, in fiscal 1997. This
statement allows companies to choose whether to account for stock-based
compensation under the current method as prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25") or use a fair value method described in FAS 123.
The Company continues to follow the provisions of APB 25. Management has
determined that the pro forma effects of applying FAS 123 would have an
immaterial effect on the results of operations for fiscal years 1998 and 1997
based on the following assumptions: dividend yield of zero, risk-free interest
rate of 5.61% for fiscal 1998 and 6.57% for fiscal 1997, and an expected life of
five years.
During fiscal year 1998 the Company granted 2,587,667 options at an
exercise price of $0.2816 per share, which approximated fair value on the date
of grant. Of these options, 246,667 were subsequently cancelled. In addition,
the Company granted 1,293,833 options at $0.8448 per share. Of these options,
123,333 were subsequently cancelled.
The stock options granted in fiscal 1998 are presented after
considering a 8.5853 to 1 stock split that occurred on October 6, 1997 and a 20
to 1 stock split that occurred on March 31, 1998.
The following table summarizes the stock option transactions under the
Plan and the New Plan described above.
-17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHARES AVERAGE
UNDER EXERCISE
OPTION PRICE
------------------ ----------------
Balance, March 31, 1995 -
Options granted 17,982 $ 100.00
Options cancelled (1,754) 100.00
------------------
Balance, March 31, 1996 16,228 100.00
Options granted 2,500 100.00
------------------
Balance, March 31, 1997 18,728 100.00
Options exercised (18,728) 100.00
------------------
Balance, October 7, 1997 (Recapitalization date) -
Options granted 3,881,500 0.47
Options cancelled (370,000) 0.47
------------------
Balance, March 31, 1998 3,511,500 0.47
==================
Subsequent to March 31, 1998, 1,240,000 of the options granted in
fiscal 1998 were cancelled and an additional 771,500 were granted to certain
members of management at exercise prices ranging from $0.2816 (the estimated
fair value of the Company's stock) to $0.8448 per share. Of the 771,500 options
granted after March 31, 1998, 236,667 were subsequently cancelled.
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company is contractually obligated under various operating lease
agreements for warehouse and office space until April of 2006. The total rent
expense related to warehouse and office space under leases amounted to $356,822,
$352,464 and $620,657 for the fiscal years ended March 31, 1996, 1997 and 1998,
respectively.
-18-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments under these leases are as follows:
FISCAL YEAR
- ----------------------
1999 $ 605,500
2000 628,336
2001 579,084
2002 579,084
2003 611,902
Thereafter 1,935,844
------------------
Total minimum lease payments $ 4,939,750
==================
Payments for fiscal year 1999 are net of sublease revenue of $18,000 on
the Company's old facilities. The sublease expires in September of 1998.
10. SUBSEQUENT EVENTS
On April 1, 1998 the Company's president terminated employment. As part
of the severance agreement, the Company repurchased 1,217,240 shares of common
stock (post 20 to 1 stock split) for cash consideration of $104,688 and
forgiveness of the remaining balance of the stock subscription receivable of
$134,554. As discussed in Note 8, stock options issued to the Company's
president were also cancelled subsequent to March 31, 1998. In addition, the
Company agreed to pay $358,690 in cash severance payments during fiscal year
1999, which were provided for in the six-month period ended September 30, 1998.
On September 30, 1998 the Company sold 1,063,830 shares of common stock
to certain members of management for $0.282 per share. $111,383 was received in
cash and the remaining $188,617 in proceeds was recorded as a stock subscription
receivable. The difference between the fair market value of the Company's common
stock ($1.0365 per share determined by reference to the proposed merger with
Spacetec IMC Corporation discussed below) and the proceeds received was recorded
as compensation expense aggregating $802,660 during the six-month period ended
September 30, 1998.
On October 21, 1998, the Company announced the signing of a merger
agreement with Spacetec IMC Corporation ("Spacetec"), a publicly-traded company,
with annual sales of approximately $8.9 million. Spacetec is involved in the
development, manufacture and distribution of three-dimensional ("3D") input
controller devices for the PC and workstation marketplace used in both CAD/CAM
industrial applications and in consumer electronic games. The merger called for
issuance of 0.55430739 Spacetec common shares for each Labtec common share
outstanding. As a result of the merger, Labtec shareholders ultimately acquired
approximately 67% of Spacetec and therefore, the transaction will be accounted
for as a purchase of Spacetec by Labtec in a "reverse
-19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
acquisition." Based on the average trading price of Spacetec's stock of $1.87
per share and the exchange ratio, Labtec shareholders received value per share
of approximately $1.0365. The transaction closed on February 17, 1999, resulting
in Labtec becoming a publicly-traded company traded under the symbol LABT on the
NASDAQ Stock Market's National Market.
On January 5, 1999, the Company's president and the Company's chief
financial officer terminated employment. In February 1999, the Company's senior
vice president of OEM and International Sales terminated employment. As part of
the severance agreements, the Company agreed to pay a total of $537,500 in cash
severance payments during fiscal 1999. As discussed in Note 8, all stock options
granted to the terminated officers that had not vested as of their termination
dates were cancelled.
-20-
(b) PRO FORMA FINANCIAL INFORMATION.
The following Unaudited Pro Forma Combined Condensed Financial
Information gives pro forma effect to the merger by application of the pro forma
adjustments described in the accompanying notes. The merger will be accounted
for by Labtec as a "reverse acquisition" of Spacetec under the "purchase" method
of accounting. APB 16 requires the purchase price to be allocated to the
acquired assets and liabilities of Spacetec on the basis of their fair values as
of the date of acquisition. The Unaudited Pro Forma Combined Balance Sheet as of
December 31, 1998 gives effect to the merger as if it occurred on December 31,
1998. The Unaudited Pro Forma Combined Statements of Operations for the nine
months ended December 31, 1998 and for the fiscal year ended March 31, 1998 give
effect to the merger as if it occurred at the beginning of the periods
presented, and include adjustments directly attributable to the merger and
expected to have a continuing impact on New Labtec. The pro forma adjustments do
not reflect an extraordinary charge of approximately $400,000 that Labtec will
record associated with a pro-rata write-down of capitalized loan fees upon a
partial paydown of its term loan with excess Labtec and Spacetec cash upon
consummation of the merger, nor direct transaction costs to be incurred and
expensed by Spacetec of approximately $750,000.
The Unaudited Pro Forma Combined Condensed Financial Information and
related notes are provided for informational purposes only. The Unaudited Pro
Forma Combined Condensed Financial Information presented is not necessarily
indicative of the consolidated financial position or results of operations of
New Labtec as they may be in the future or as they might have been had the
merger been effected on the assumed dates. The Unaudited Pro Forma Combined
Condensed Financial Information should be read in conjunction with the
historical financial statements of Labtec and Spacetec, and the related notes
thereto, which are included elsewhere in this Form 8-K/A.
-21-
NEW LABTEC
UNAUDITED PRO FORMA COMBINED BALANCE SHEET DECEMBER 31, 1998
HISTORICAL HISTORICAL PRO FORMA ADJUSTMENTS PRO FORMA
SPACETEC LABTEC DR. CR. COMBINED
---------- ---------- --------------------- ----------
ASSETS
Cash $ 752,628 $ 829,496 $ 1,582,124
Securities available for sale 5,175,227 5,000,000 (6) 175,227
Accounts receivable 1,415,603 16,581,002 17,996,605
Interest and other receivables 11,225 4,712 15,937
Inventory 536,770 11,653,472 12,190,242
Prepaids and other assets 152,639 - 152,639
Current deferred income taxes - 1,117,798 1,117,798
--------- ----------- -----------
Current Assets 8,044,092 30,186,480 33,230,572
Furniture and equipment, net 532,295 2,243,642 2,775,937
Noncurrent deferred income taxes 1,692,397 1,692,397
Goodwill and other intangible assets 992,548 441,878 2,500,000 (3) 8,377,107
4,442,681 (2)
Noncompete agreement 90,450 90,450
Capitalized loan fees 2,333,675 364,420 (7) 1,969,255
Investment in subsidiary 12,803,877 (1) 12,803,877 (2) -
Other assets (net) 29,192 114,927 144,119
----------- ----------- -----------
Total Assets 9,598,127 37,103,449 48,279,837
============ =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current portion of LT debt 1,187,500 2,000,000 (6) 3,187,500
Accounts payable 102,504 8,678,554 2,500,000 (3) 11,281,058
Income taxes payable 8,841 8,841
Accrued payroll, bonuses, & benefits 312,178 480,798 792,976
Accrued interest 155,260 155,260
Other accrued expenses 822,249 1,574,152 2,396,401
-------- ---------- ----------
Current Liabilities 1,236,931 12,085,105 17,822,036
Long-term debt 31,074,885 7,000,000 (6) 24,074,885
Merger notes payable - 1,065,000 (5) 1,065,000
---------- -----------
Total Liabilities 1,236,931 43,159,990 42,961,921
---------- ---------- -----------
Common Stock 68,470 262,285 68,470 (2) 22,823 (1) 69,036
216,072 (4)
Preferred Stock -
Additional paid-in-capital 16,020,139 7,052,279 16,020,139 (2) 216,072 (4) 19,854,304
195,101 (8) 12,781,054 (1)
Treasury Stock (195,101) 195,101 (8) -
Stock Subscription Receivable (101,645) (101,645)
Deferred compensation (50,221) (15,854) 50,221 (2) (15,854)
Unrealized gain on available for sale sec. - -
Cumulative translation adjustment 53,075 53,075 (2) -
Accumulated deficit (7,730,267)(13,058,505) 364,420 (7) 7,730,267 (2) (14,487,925)
1,065,000 (5)
------------ ----------- ------------ ------------
Total equity (deficit) 8,361,196 (6,056,541) 5,317,916
----------- ----------- ------------
Total Liabilities and Equity $ 9,598,127 $37,103,449 $44,728,835 $44,728,835 $ 48,279,837
============ =========== ============ ============ ============
-22-
NEW LABTEC
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
HISTORICAL HISTORICAL PRO FORMA ADJUSTMENTS PRO FORMA
SPACETEC LABTEC DR. CR. COMBINED
---------- ---------- ---------------------- ----------
Net sales $ 5,218,520 $45,125,855 $50,344,375
Cost of sales 1,385,489 30,406,711 31,792,200
---------- ----------- ----------
Gross profit 3,833,031 14,719,144 18,552,175
---------- ----------- ----------
Operating expenses:
Selling and marketing 2,898,289 8,320,747 11,219,036
General, administrative and R&D 3,242,517 5,239,040 8,481,557
Depreciation and amortization 390,218 1,059,763 1,449,981
Amortization of goodwill - 1,325,644 1,735,670 (9) 3,061,314
Amortization of noncompete agreement - 271,350 271,350
------------ --------------- ------------ ----------- -------------
6,531,024 16,216,544 1,735,670 - 24,483,238
------------ --------------- ------------- ----------- -------------
(Loss) income from operations (2,697,993) (1,497,400) 1,735,670 - (5,931,063)
Other expense (income):
Interest expense (income), net (283,128) 2,669,999 283,128 (6) 308,250 (11) 2,417,278
79,875 (10) 24,346 (7)
Other expense (income) - (33,434) (33,434)
------------ -------------- ------------- ----------- -------------
Income before income taxes
and extraordinary loss (2,414,865) (4,133,965) 2,098,673 332,596 (8,314,907)
Provision for (benefit from) income taxes - 932,472 6,690 (12) (925,782)
------------ --------------- ------------- ----------- -------------
(Loss) income before extraordinary loss $ (2,414,865) $ (3,201,493) $ 2,105,363 $ 332,596 $(7,389,125)
============= =============== ============= =========== =============
Net loss per share $ (0.35) $ (0.13) $ (1.10)(13)
============= =============== =============
Weighted average number of shares outstanding 6,855,000 24,217,061 6,720,111 (13)
============= =============== =============
-23-
NEW LABTEC
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
HISTORICAL HISTORICAL PRO FORMA ADJUSTMENTS PRO FORMA
SPACETEC LABTEC DR. CR. COMBINED
---------- ----------- -------------------------- ----------
Net sales $ 8,883,669 $ 57,820,303 $66,703,972
Cost of sales 2,855,047 38,163,280 41,018,327
---------- ----------- ------------
Gross profit 6,028,622 19,657,023 25,685,645
---------- ----------- ------------
Operating expenses:
Selling and marketing 4,359,099 9,903,762 14,262,861
General, administrative and R&D 5,029,964 5,176,876 10,206,840
Depreciation and amortization 477,687 943,449 1,421,136
Amortization of goodwill - 1,767,524 2,314,227 (9) 4,081,751
Amortization of noncompete agreement - 361,800 361,800
--------------- -------------- ------------ --------------- ---------------
9,866,750 18,153,411 2,314,227 - 30,334,388
--------------- -------------- ---------------
Income from operations (3,838,128) 1,503,612 (4,648,743)
Other expense (income):
Interest expense (income), net (568,127) 3,253,795 568,127 (6) 411,000 (11) 2,914,998
106,500 (10) 34,297 (7)
Other expense (income) - 1,956 1,956
--------------- -------------- ------------ --------------- ---------------
Income before income taxes and
extraordinary loss (3,270,001) (1,752,139) 2,988,854 445,297 (7,565,697)
Provision for (benefit from) income taxes - 13,555 77,972 (12) (64,417)
--------------- -------------- ------------ --------------- ---------------
(Loss) income before extraordinary loss $ (3,270,001) $ (1,765,694) $2,988,854 $ 523,269 $ (7,501,280)
=============== =============== ============ ============== =============
Net loss per share before extordinary items
(basic and diluted) $ (0.45) $ (0.09) $ (1.26)(13)
=============== =============== ==============
Weighted average number of shares outstanding 7,195,000 19,156,928 5,937,895 (13)
=============== =============== ==============
-24-
Notes to Unaudited Pro Forma
Combined Condensed Financial Information
1. Represents the investment of Labtec in Spacetec equal to the fair value of
Spacetec calculated as 6,846,993 shares of Spacetec common stock outstanding at
October 21, 1998 at an average price of $1.87 per share. After giving effect to
the 1-for-3 reverse stock split, pro forma Spacetec shares amount to 2,282,331.
New Labtec's common stock has a par value of $0.01. Accordingly, the investment
is recorded as common stock of $22,823 and $12,781,054 of additional paid in
capital.
2. Represents the excess of the purchase price of $12,803,877 over the
$8,361,196 historical book value of Spacetec's net assets as of December 31,
1998, and represents the elimination of Labtec's initial investment in Spacetec
against Spacetec's historical net book value.
3. Represents an estimate of the capitalizable transaction costs to be incurred
in connection with the merger.
4. Represents the recapitalization of Labtec common stock to reflect "reverse
acquisition" accounting. The recapitalized number of shares is calculated by
multiplying the exchange ratio of 0.55430739 by the 25,011,310 shares of Labtec
common stock outstanding on the effective date of the merger, adding the
existing Spacetec shares outstanding of 6,846,993, and dividing the total number
of post-merger Spacetec shares of 20,710,947 by 3 (to reflect the 1-for-3
reverse stock split), and then multiplying the result of 6,903,649 shares by
$0.01 par value. This new par value of $69,036 results in an adjustment to the
historical common stock balance of $216,072.
5. Represents merger note payable to the Labtec shareholders by New Labtec.
Interest accrues and is payable quarterly at an annual interest rate of 10% and
principal is due in full six years from date of issuance.
6. Represents the cash estimated to be used to pay off existing long-term debt
of Labtec. This results in a pro forma reduction of Spacetec's interest income
of $568,127 and $283,128, respectively, for the fiscal year ended March 31, 1998
and the nine months ended December 31, 1998.
7. Represents the pro-rata write-down of capitalized debt issuance costs by
Labtec (to be classified as an extraordinary loss) related to the portion of
Labtec's existing long-term debt paid off early as discussed in 5 above. The
lower balance results in pro forma adjustments to interest expense of $34,297
and $24,346, respectively, for the fiscal year ended March 31, 1998 and for the
nine months ended December 31, 1998.
8. Represents the cancellation of Labtec's treasury stock. All shares of Labtec
common stock held in treasury immediately prior to the merger will be cancelled
and cease to exist pursuant to the terms of the Merger Agreement.
-25-
9. Represents the amortization of the preliminary allocation of excess purchase
price to goodwill and other intangible assets created by the purchase of
Spacetec as if the purchase occurred at the beginning of the period presented.
The goodwill and other intangible assets are being amortized over an estimated
average life of three years.
10. Represents interest expense at 10% incurred on the merger note payable as if
the purchase occurred at the beginning of the period presented.
11. Represents decrease in Labtec's interest expense related to the debt
estimated to be paid off upon completion of the merger. The debt to be paid off
accrues interest at the Libor rate (currently 5.22%) plus 3.00%.
12. Represents the tax effect of the increase and decrease in interest expense
as described in 6,7,10 and 11 above. The federal statutory rate of 34% is used
for the fiscal year ended March 31, 1998. Labtec's anticipated effective tax
rate of 22% for the fiscal year ended March 31, 1999 is used for the nine month
period ended December 31, 1998. Note that the goodwill and intangibles
amortization generated by the merger is not deductible, thus no tax effect is
considered.
13. Gives effect to the 1-for-3 reverse stock split to be voted on pursuant to
the merger agreement.
-26-
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: April 30, 1999
LABTEC INC.
By: /s/ Marc J. Leder
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Marc J. Leder
Senior Vice President, Finance,
Chief Financial Officer and Treasurer