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EXHIBIT 99.2
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
SKY DIVISION OF
DURANGO GEORGIA CONVERTING LLC
December 31, 2000
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CONTENTS
Page
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Report of Independent Certified Public Accountants 3
Financial Statements
Statements of Net Assets 4
Statements of Revenues and Expenses 5
Statements of Cash Flows 6
Notes to Financial Statements 7 - 14
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
IMPRESO, INC.
We have audited the accompanying statement of net assets of the Sky Division of
Durango Georgia Converting LLC (the "Division" - see Note B) as of December 31,
2000, and the related statements of revenues and expenses and cash flows for the
year then ended. These financial statements are the responsibility of the
Division'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 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.
As described in Note B, the accompanying financial statements were prepared to
present the net assets and the revenues and expenses of the Division, which does
not have a separate legal status or existence, and are not intended to be a
complete presentation of the assets and liabilities or results of operations of
the Division.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets of the Division as of December 31, 2000,
and its revenues and expenses and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
Grant Thornton LLP
Edison, New Jersey
June 27, 2001
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Sky Division of
Durango Georgia Converting LLC
STATEMENTS OF NET ASSETS
DECEMBER 31, February 28,
ASSETS 2000 2001
----------- -----------
(unaudited)
CASH $ 630,149 $ --
ACCOUNTS RECEIVABLE (less allowance for doubtful
accounts of $493,000 and $166,000) 3,763,885 4,880,668
INVENTORY 9,090,315 9,739,700
PREPAID EXPENSES 113,068 140,741
PROPERTY, PLANT AND EQUIPMENT, net 322,622 364,468
----------- -----------
Total assets 13,920,039 15,125,577
----------- -----------
LIABILITIES
ACCOUNTS PAYABLE 1,816,115 2,087,869
CASH OVERDRAFT -- 556,191
ACCRUED LIABILITIES 1,158,261 1,633,141
----------- -----------
Total liabilities 2,974,376 4,277,201
COMMITMENTS AND CONTINGENCIES (Note H)
----------- -----------
NET ASSETS (Note B) $10,945,663 $10,848,376
=========== ===========
The accompanying notes are an integral part of these statements.
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Sky Division of
Durango Georgia Converting LLC
STATEMENTS OF REVENUES AND EXPENSES
Period from Period from
September 1, September 1,
YEAR ENDED 2000 to 1999 to
DECEMBER 31, February 28, February 29,
2000 2001 2000
------------ ------------ ------------
(unaudited) (unaudited)
Net revenues $ 42,701,604 $ 22,090,276 $ 17,868,834
Costs of goods sold 36,372,178 18,612,407 16,207,583
------------ ------------ ------------
Gross margin 6,329,426 3,477,869 1,661,251
Selling and administrative expenses 6,449,827 3,441,914 3,111,471
------------ ------------ ------------
Operating (loss) income (120,401) 35,955 (1,450,220)
Other income, principally sale of scrap paper 403,060 197,937 226,063
------------ ------------ ------------
Excess (deficiency) of revenues over expenses
before allocated income tax benefit (expense) 282,659 233,892 (1,224,157)
Allocated income tax benefit (expense) (110,041) (81,862) 428,455
------------ ------------ ------------
Excess (deficiency) of revenues over expenses $ 172,618 $ 152,030 $ (795,702)
============ ============ ============
The accompanying notes are an integral part of these statements.
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Sky Division of
Durango Georgia Converting LLC
STATEMENTS OF CASH FLOWS
Period from Period from
September 1, September 1,
YEAR ENDED 2000 to 1999 to
DECEMBER 31, February 28, February 29,
2000 2001 2000
------------ ------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities
Excess (deficiency) of revenues over expenses $ 172,618 $ 152,030 $ (795,702)
Adjustments to reconcile excess (deficiency) of
revenues over expenses to net cash provided by
(used in) operating activities
Change in allowance for doubtful accounts (116,829) 20,716 --
Depreciation 18,301 12,690 3,856
(Increase) decrease in assets
Accounts receivable (1,294,758) (936,243) 322,604
Inventories 634,105 (284,986) (107,557)
Prepaid expenses (17,485) 70,676 244,252
Increase (decrease) in liabilities
Accounts payable 820,038 356,544 (1,232,258)
Accrued liabilities 669,814 797,227 (271,912)
----------- ----------- -----------
Net cash provided by (used in) operating activities 885,804 188,654 (1,836,717)
----------- ----------- -----------
Cash flows from investing activities
Capital expenditures (60,421) (105,015) --
----------- ----------- -----------
Cash flows from financing activities
Intercompany funding with Durango Georgia
Converting LLC, net (195,234) (734,231) 724,379
Cash overdraft -- 556,191 369,266
----------- ----------- -----------
Net cash (used in) provided by financing activities (195,234) (178,040) 1,093,645
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
630,149 (94,401) (743,072)
Cash at beginning of period -- 94,401 743,072
----------- ----------- -----------
Cash at end of period $ 630,149 $ -- $ --
=========== =========== ===========
The accompanying notes are an integral part of these statements.
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Sky Division of
Durango Georgia Converting LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
NOTE A - BUSINESS AND OWNERSHIP HISTORY
The Sky Division of Durango Georgia Paper Company (the "Division") was
previously an operating division of the Gilman Pulp and Paper Division
("Gilman Pulp and Paper") of the Gilman Investment Company. On December 16,
1999, the net assets and business of Gilman Pulp and Paper were acquired in
a purchase transaction by Durango Georgia Paper Company ("Durango").
Durango is an indirect subsidiary of Corporation Durango S.A. de C.V., a
Mexican company. Through December 31, 2000, the Division conducted business
as an operating entity of Durango Georgia Converting LLC, a Delaware
limited liability company, an indirect wholly-owned subsidiary of Durango.
On April 26, 2001, pursuant to the Asset Purchase Agreement between Durango
and TST Impreso, Inc. ("TST Impreso"), the Division's net assets and
business were acquired by TST Impreso. The price paid by TST Impreso was
$12,340,231, of which (i) $11,399,653 in cash was paid at closing; (ii)
$300,000 will be paid in twenty quarterly installments of $15,000 each plus
accrued interest and (iii) $640,578 will be paid in twenty-five monthly
installments of $16,024 with a final payment of $239,976. The purchase
agreement also contains a mechanism whereby the purchase price may be
adjusted based upon any variance between the actual net assets acquired at
the acquisition date and a specified amount. No determination of the
purchase price adjustment has been made to date.
The Division operates as a converter of rolled paper into office paper
products, with sales being principally to office product wholesalers
primarily in the northeast United States. All significant intercompany
balances have been eliminated.
NOTE B - BASIS OF PRESENTATION
The accompanying financial statements present, on a historical basis, the
statement of net assets and the statement of revenues and expenses of the
Division for the year ended December 31, 2000. The Division was part of
Durango, and does not have a separate legal existence. The Division's
results of operations have historically been commingled with those of
Durango. In addition, Durango has unsecured loans incurred for business
acquisitions and working capital purposes. These statements are presented
as if the Division had existed as a separate entity during the period
presented. The accompanying financial statements are not intended to be a
complete presentation of the assets, liabilities or the results of
operations of the Division, but rather the net assets of the Division in
existence at December 31, 2000. Intercompany balances with other Durango
entities, including income taxes payable and deferred income taxes
allocated to the Division (Note C-2), have been excluded from the assets
and liabilities included in the accompanying financial statements.
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Sky Division of
Durango Georgia Converting LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2000
NOTE B (CONTINUED)
On December 17, 1999, the Division adjusted the historical book value of
its assets and liabilities to their fair values, based upon the allocated
purchase price paid by Durango of $10,420,000 to Gilman Investment Company
for the Division. As part of this adjustment the carrying amount of
property, plant and equipment was adjusted from approximately $2,000,000 to
$280,000.
The Division relies on working capital funding provided by Durango to
sustain operations.
NOTE C - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
1. Revenue Recognition
Revenue from sales of paper products is recognized at the time the
goods are shipped.
2. Income Taxes
The Division's results of operations have been included in the
consolidated Federal income tax return filed by Durango. Income tax
expense has been included in the accompanying financial statements
calculated on a separate company basis under a tax sharing arrangement
with Durango. Income taxes payable and deferred income taxes are not
presented, as they are part of the intercompany accounts with Durango,
which are excluded from the assets and liabilities included in the
accompanying financial statements.
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Sky Division of
Durango Georgia Converting LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2000
NOTE C (CONTINUED)
The components of the allocated income tax provision for the year ended
December 31, 2000 are as follows:
Current
Federal $146,762
State 5,250
--------
152,012
Deferred
Federal (40,434)
State (1,537)
--------
(41,971)
--------
$110,041
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Allocated deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes. Components of the allocated deferred income taxes,
which are recorded on the books of Durango, are as follows:
Property, plant and equipment $179,687
Accruals 1,537
Accounts receivable 58,800
--------
$240,024
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3. Property, Plant and Equipment
Property, plant and equipment are stated at the estimated net fair
value as computed on December 17, 1999 (see Note B), unless purchased
subsequent thereto, in which case property, plant and equipment are
stated at cost. Depreciation has been provided for in amounts
sufficient to relate the cost of depreciable assets to operations on
the straight-line method over their estimated lives ranging from eight
to forty years.
Maintenance and repairs are charged to expense as incurred. Major
repairs and improvements, which extend the lives of the related assets,
are capitalized and depreciated at applicable straight-line rates.
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Sky Division of
Durango Georgia Converting LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2000
NOTE C (CONTINUED)
4. Inventories
Inventory costs are stated at the lower of cost (determined by the
weighted-average and first-in, first-out methods) or net realizable
value.
5. Concentration of Credit or Market Risk
Statement of Financial Accounting Standards No. 105 ("SFAS No. 105")
requires the disclosure of significant concentration of credit or
market risk, regardless of the degree of such risk. Financial
instruments as defined by SFAS No. 105, which potentially subject the
Division and its subsidiaries to concentrations of risk, consist
principally of cash and accounts receivable. The Division manages the
credit risk by selling primarily to well-established companies,
performing ongoing credit evaluations and making frequent contact with
customers.
The Division maintains cash in checking and savings accounts, which, at
times, may exceed the Federally insured limits. The Division has not
experienced any losses on such accounts and does not believe it is
exposed to any significant credit risk on its cash balances.
6. Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
7. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107")
requires the disclosure of the fair value of financial instruments,
both assets and liabilities, that are recognized or unrecognized on the
balance sheet.
The carrying amount of cash, accounts receivable, and accounts payable
approximates fair value because of the short maturities of those
instruments.
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Sky Division of
Durango Georgia Converting LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2000
NOTE C (CONTINUED)
8. Cost Sharing Allocations
The accompanying financial statements include an allocable portion of
shared costs incurred by Durango on behalf of all of its operating
divisions. Allocated costs charged to the Division as a percentage of
corporate office, general and administrative expenses using a
consistent methodology, include salaries, legal and professional fees,
and other general and administrative costs.
9. Unaudited Interim Information
The accompanying unaudited financial information for the period from
September 1, 2000 to February 28, 2001 has been prepared and presented
in conformity with accounting principles generally accepted in the
United States of America, applicable to interim financial information.
Accordingly, it does not include all of the information and footnotes
required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments, consisting only of normal, recurring
adjustments considered necessary for fair presentation, have been
included. The accounting principles used to prepare the unaudited
interim financial information are consistent with those used to prepare
the audited financial statements.
NOTE D - SIGNIFICANT CUSTOMERS
A significant portion of the Division's sales is to two key customers,
accounting for more than ten percent of sales. Such key customers accounted
for approximately 20% and 11%, respectively, of the Division's sales for
the year ended December 31, 2000. Accounts receivable from these two
customers approximated 31% and 5%, respectively, of total accounts
receivable at December 31, 2000.
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Sky Division of
Durango Georgia Converting LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2000
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31, February 28,
2000 2001
---------- -----------
(unaudited)
Land $ 27,649 $ 27,649
Buildings 122,212 122,212
Machinery and equipment 170,993 217,344
Furniture and fixtures 20,701 20,701
--------- ---------
341,555 387,906
Less accumulated depreciation (18,933) (23,438)
--------- ---------
$ 322,622 $ 364,468
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NOTE F - INVENTORY
The composition of inventory is as follows:
DECEMBER 31, February 28,
2000 2001
---------- ----------
(unaudited)
Raw materials $3,850,029 $4,160,164
Finished goods 5,240,286 5,579,536
---------- ----------
$9,090,315 $9,739,700
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NOTE G - TRANSACTIONS WITH GROUP COMPANIES
The Company enters into various transactions with group companies during
the year as follows:
1. Purchases and Sales
The Division purchased approximately $3,015,000 of raw materials from
an affiliated company, and sold approximately $24,000 of paper products
to Durango, during the year ended December 31, 2000.
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Sky Division of
Durango Georgia Converting LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2000
NOTE G (CONTINUED)
2. Selling, General and Administrative Charges
The Division was allocated approximately $122,000 of selling, general
and administrative charges from Durango, during the year ended December
31, 2000.
NOTE H - COMMITMENTS AND CONTINGENCIES
1. Operating Leases
The Division leases certain equipment and vehicles under operating
leases expiring at various dates through 2003. Prior to the purchase in
April 2001 of the Division by TST Impreso, Durango prepaid the
Division's equipment lease and took possession of the applicable
equipment. Accordingly, lease commitments of $16,024 per month through
March 2003 ceased in April 2001.
The approximate minimum annual rental commitments under operating
leases in effect at December 31, 2000 are as follows:
Year ended December 31,
2001 $200,000
2002 196,000
2003 48,000
--------
Total minimum payments $444,000
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The annual rental expense for 2000 was approximately $214,000.
NOTE I - ACCRUED LIABILITIES
The composition of accrued liabilities is as follows:
December 31,
2000
------------
Salaries, wages and commissions $ 118,113
Accruals for inventory purchases 964,149
Other accrued expenses 75,999
----------
$1,158,261
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Sky Division of
Durango Georgia Converting LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2000
NOTE J - EMPLOYEE BENEFIT PLAN
The Division has a deferred compensation plan under Section 401(k) of the
Internal Revenue Code. Pursuant to terms of the plan, eligible salaried
employees can defer a portion of their income through contributions to the
plan and the Division will match a percentage of the participant's
contribution, subject to Internal Revenue Service limitations. For the year
ended December 31, 2000, no amounts were matched by the Division.
Participants can invest in a variety of participant-directed investment
options.
Certain management employees of the Division participate in the defined
benefit plan and postretirement benefit plan of Gilman Investment Company
pursuant to the December 17, 1999 Purchase Agreement. Durango and the
Division have no obligations with respect to such plans.
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