TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES, INTERNATIONAL INC.)
CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
[KPMG LLP LOGO]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Members
Tecmar Technologies, Inc.;
We have audited the accompanying consolidated balance sheet of Tecmar
Technologies, Inc. and subsidiaries (wholly owned by Tecmar Technologies
International, Inc.) as of May 31, 1997, and the related consolidated statements
of operations and accumulated deficit 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 consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance 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 Tecmar Technologies,
Inc. and subsidiaries as of May 31, 1997, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Tecmar Technologies, Inc. will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company incurred a net loss
in 1997 and has a shareholders's deficit as of May 31, 1997. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG LLP
Denver, Colorado
July 9, 1997
1
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
CONSOLIDATED BALANCE SHEET
MAY 31, 1997
- --------------------------------------------------------------------------------
ASSETS (NOTE 3)
Current assets:
Accounts receivable:
Trade, net of allowance for uncollectible accounts of $581,790 $ 7,682,387
Inventory 4,444,495
Prepaid expenses and other 529,550
------------
Total current assets 12,656,432
Equipment (note 2) 5,729,582
Less accumulated depreciation (2,323,830)
------------
Net equipment 3,405,752
Other assets 58,880
------------
$ 16,121,064
============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Debt (note 3) $ 4,386,089
Accounts payable 2,273,477
Accrued liabilities 2,181,902
Current portion of obligations under capital leases (note 9) 100,790
------------
Total current liabilities 8,942,258
Obligations under capital leases less current portion (note 9) 42,955
Due to Parent (note 4) 12,112,265
------------
Total liabilities 21,097,478
------------
Stockholder's deficit:
Common stock, $1.00 par value; authorized 1,000 shares; issued
and outstanding 1,000
Additional paid-in-capital 3,670,465
Accumulated deficit (8,647,879)
------------
Total stockholder's deficit (4,976,414)
Commitments and contingencies (note 9)
------------
$ 16,121,064
============
See accompanying notes to consolidated financial statements.
2
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED MAY 31, 1997
- --------------------------------------------------------------------------------
Sales $ 44,597,622
Cost of sales (36,296,003)
Other costs (971,000)
------------
Gross profit 7,330,619
Expenses:
General and administrative 2,879,481
Sales and marketing 5,440,157
Customer satisfaction 1,014,241
Research and development 3,737,271
Restructuring costs (note 6) 506,055
------------
Total expenses 13,577,205
------------
Loss from operations (6,246,586)
Other income (expense):
Interest expense (note 3) (618,767)
Other, net 307,088
------------
Net loss (6,558,265)
Accumulated deficit at beginning of year (2,089,614)
------------
Accumulated deficit at end of year $ (8,647,879)
============
See accompanying notes to consolidated financial statements.
3
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED MAY 31, 1997
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(6,558,265)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation expense 1,050,926
Loss on disposal of property and equipment 116,992
Changes in operating assets and liabilities:
Trade accounts receivable (283,665)
Inventory 916,857
Prepaid expenses and other assets 1,033,700
Accounts payable (2,601,864)
Accrued liabilities (1,818,175)
------------
Net cash used by operating activities (8,143,494)
------------
Cash flows from investing activities:
Additions to property and equipment (903,082)
Proceeds from sale of fixed assets 42,481
------------
Net cash used by investing activities (860,601)
Cash flows from financing activities:
Net borrowings under line of credit 4,386,089
Repayment of principal under capital lease obligations (162,591)
Net advances from parent 4,230,017
------------
Net cash provided by financing activities 8,453,515
------------
Net decrease in cash (550,580)
Cash at beginning of year 550,580
------------
Cash at end of year $ -
============
Supplemental disclosures of cash flow information:
Equipment acquired through capital lease $ 56,530
============
See accompanying notes to consolidated financial statements.
4
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
Tecmar Technologies, Inc. (the Company) is wholly owned by Tecmar
Technologies International, Inc., a Canadian company (the Parent). The
Company was acquired by the Parent pursuant to a plan of reorganization by
the United States Bankruptcy Court on March 4, 1996. The Company's
principal business activities include the design, manufacture and sale of
computer data storage equipment.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany transactions have been
eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As shown in the
accompanying consolidated financial statements, the Company incurred a net
loss of $6,558,265 for the year ended May 31, 1997 and has a shareholder's
deficit of $4,976,414 at May 31, 1997 which raises substantial doubt about
the Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating
to the outcome of this uncertainty. Management's plans to continue as a
going concern include increasing revenue and decreasing costs to attain
profitable operations, obtaining additional equity or debt financing, or
the sale of a portion or substantially all of the assets of the Company.
The presentation of financial statements in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions which affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses for the period reported.
Actual results could differ from these estimates.
REVENUE RECOGNITION
Sales of inventory are recognized upon shipment.
INVENTORIES
Inventories are recorded at the lower of cost or market value. Cost is
determined using the first-in, first-out basis, and includes freight, duty
and taxes, as applicable.
EQUIPMENT
Equipment is recorded at cost. Assets under capital lease are recorded at
the present value of minimum lease payments at the inception of the lease
and amortized over the remaining lease term.
5
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation of equipment and computer software is computed using the
straight-line method over the estimated useful lives of the respective
assets, ranging primarily from 2 to 7 years.
INCOME TAXES
The Company files a separate U.S. federal income tax return and accounts
for income taxes under the provisions of Statements of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS 109). Under the asset
and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
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 expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
LONG-LIVED ASSETS
Effective June 1 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable intangibles to be
held and used or disposed of by an entity be reviewed for impairment
whenever events or changes in circumstances indicates that the carrying
amount of an asset may not be recoverable. The adoption of SFAS 121 had no
effect on the Company's consolidated financial statements.
FINANCIAL INSTRUMENTS
The carrying values of cash, accounts receivable, bank indebtedness, and
accounts payable and accrued liabilities approximate fair values due to
their relative short term to maturity.
6
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) EQUIPMENT
Equipment consists of the following at May 31, 1997:
Furniture and fixtures $ 1,154,517
Production and service equipment 2,080,526
Research and development equipment 923,528
Leasehold improvements 533,037
Computer software 101,112
Computer hardware 515,518
Computer software and equipment under
capital lease 421,344
-----------
5,729,582
Less accumulated depreciation (2,323,830)
-----------
$ 3,405,752
===========
(3) DEBT
The Company has a revolving line for borrowings of up to $10 million,
bearing interest at the bank's prime rate plus 2 1/2% due in fiscal 1998.
The line is secured by a first priority interest in all of the Company's
accounts receivable, inventory, intangibles and any unencumbered machinery
and equipment. The Company is subject to minimum net worth and
profitability covenants and limitations on capital expenditures and
intercompany transactions. The Company is not in compliance with the net
worth covenant at May 31, 1997 and, accordingly, the balance outstanding is
included in current liabilities in the accompanying consolidated financial
statements.
(4) TRANSACTIONS WITH PARENT
Advances from the Parent bear interest at 8% through February 28, 1997.
Interest after this date was waived by the Parent. The loan is due on
demand after June 1, 1998 and is subordinated to the bank debt.
(5) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company sells primarily to Original Equipment Manufacturers and
distributors of computer equipment. Although the Company's exposure to
credit risk associated by non-payment by these customers is affected by
conditions or occurrences within the industry, the Company performs ongoing
credit evaluations of its customer's financial condition to reduce credit
risk exposure. The Company has one customer representing 10.4% of sales and
27% of accounts receivable.
7
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(6) RESTRUCTURING COSTS
Restructuring costs relate to the closure of the Company's Singapore
manufacturing operation and include employee severance, loss on disposition
of assets, lease termination costs and other exit costs.
(7) INCOME TAXES
The net operating losses (NOLs) of the Company for United States tax
purposes generated prior to the acquisition of the Company by the Parent on
March 4, 1996, are limited by Section 382 of the United States Internal
Revenue Code. The amount, if any, of the Company's NOLs remaining as a
result of the emerging from bankruptcy has not been determined. The NOLs
remaining will be subject to an annual usage limitation that may result in
none of the NOLs being utilized prior to expiration. Subsequent to the
acquisition, the Company has generated NOLs of $6,755,000 which are not
subject to limitations other than that they fully expire in 2012.
The Company has recorded a valuation allowance equal to the Company's net
deferred tax asset relating primarily to the net operating loss
carryforwards discussed above, due to the uncertainty of future
utilization.
(8) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution pension plan covering
substantially all employees. The plan provides for both employee and
employer discretionary contributions. The Company did not make a
contribution to the plan for the year ended May 31, 1997.
(9) COMMITMENTS AND CONTINGENCIES
The Company has committed to purchase $9,808,000 of inventory from
suppliers.
8
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has certain noncancelable operating leases for facilities and
equipment which expire on various dates through 2001 and leases certain
office equipment and computers under capital leases. At May 31, 1997,
future minimum payments under noncancelable operating and capital leases
having initial or remaining terms of one year or more are as follows:
Capital Operating
leases leases
------ ------
Fiscal year ended May 31:
1998 $123,819 335,453
1999 26,515 336,524
2000 9,405 49,094
2001 2,351 -
-------- -------
Total minimum lease payments 162,090 721,071
=======
Less amount representing interest (18,345)
--------
Present value of net minimum
capital lease payments 143,745
Less current portion (100,790)
--------
Capital lease obligations,
net of current portion $ 42,955
========
Rent expense for the year ended May 31, 1997 totaled $673,476.
9