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[NACHTRAB, COUSINO, O'NEIL, TREUHAFT & CO. LETTERHEAD]
Toledo Office
3434 Granite Circle
Toledo, Ohio 43617-1160
INDEPENDENT AUDITORS' REPORT
Board of Directors
Interlink Technologies, Inc.
Maumee, Ohio
We have audited the accompanying balance sheets of Interlink Technologies, Inc.
as of August 31, 1994 and 1993, and the related statements of operations and
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interlink Technologies, Inc.
as of August 31, 1994 and 1993, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ NACHTRAB, COUSINO, O'NEIL, TREUHAFT & CO.
November 11, 1994
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INTERLINK TECHNOLOGIES, INC.
BALANCE SHEETS
AUGUST 31, 1994 AND 1993
1994 1993
---------------- -----------------
ASSETS
CURRENT ASSETS
Cash (Deficit) $ 30,866 $ (115,727)
Accounts Receivable - Trade (Note E) 1,122,823 1,209,879
Accounts Receivable - Employees 2,697 ---
Prepaid Expenses and Other Assets 10,642 19,500
Refundable Income Taxes (Note H) 97,358 ---
---------------- -----------------
Total Current Assets 1,264,386 1,113,652
PROPERTY AND EQUIPMENT (NOTES D AND E)
Furniture and Fixtures 177,415 142,125
Equipment and Hardware 461,465 435,897
Computer Software 81,847 80,311
Leasehold Improvements 67,961 64,003
Automobiles 19,178 45,208
---------------- -----------------
807,866 767,544
Less: Accumulated Depreciation 559,352 469,752
---------------- -----------------
Net Property and Equipment 248,514 297,792
SOFTWARE DEVELOPMENT COSTS, Net of
Accumulated Amortization of $345,022
and $120,690 at August 31, 1994 and
1993, Respectively (Note J) 972,338 771,982
OTHER ASSETS
Copyrights, Trademarks and Patents, Net
of Accumulated Amortization of $4,787
and $3,759 at August 31, 1994 and 1993,
Respectively 29,450 25,163
Deposits 10,668 15,337
---------------- -----------------
Total Other Assets 40,118 40,500
---------------- -----------------
TOTAL ASSETS $ 2,525,356 $ 2,223,926
================ =================
See Independent Auditors' Report and
Notes to Financial Statements
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1994 1993
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts Payable $ 707,408 $ 259,747
Demand Note Payable (Note E) 820,000 440,000
Loans Payable - Officers (Note B) 147,600 ---
Deferred Revenue 235,901 89,978
Accrued Payroll Taxes and Withholdings 2,753 97,692
Accrued Expenses and Other Liabilities (Note B) 64,186 50,861
Accrued Income Taxes --- 44,896
Current Maturities of Long-Term Debt (Note C) 84,044 107,415
Current Maturities of Capital Lease
Obligation (Note D) 5,952 23,510
Deferred Income Taxes - Current (Note H) --- 43,310
---------------- -----------------
Total Current Liabilities 2,067,844 1,157,409
LONG-TERM LIABILITIES
Note Payable - Net of Current Maturities (Note C) --- 65,692
Capital Lease Obligation, Net of Current
Maturities (Note D) 3,245 17,942
Deferred Income Taxes (Note H) 148,000 206,931
---------------- -----------------
Total Long-Term Liabilities 151,245 290,565
---------------- -----------------
TOTAL LIABILITIES 2,219,089 1,447,974
STOCKHOLDERS' EQUITY
Common Stock (750 shares authorized, 105
shares issued and outstanding, par value
of $50 per share) 5,250 5,250
Retained Earnings 301,017 770,702
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 306,267 775,952
---------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,525,356 $ 2,223,926
================ =================
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INTERLINK TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED AUGUST 31, 1994 and 1993
1994 1993
---------------- -----------------
REVENUES (NOTE I)
Software Sales $ 2,488,628 $ 3,147,385
Hardware Sales 1,350,864 1,287,461
Project Revenues 302,375 183,972
Support and Maintenance Sales 497,439 159,211
Commissions, Royalties and Other 60,765 19,402
---------------- -----------------
Total Revenues 4,700,071 4,797,431
COST OF REVENUES
Hardware Purchases 1,007,169 1,001,551
Project Related Expenses 299,435 131,884
Amortization of Software Development
Costs (Note J) 224,332 105,878
Support Costs 23,222 18,475
Commissions Paid 42,724 94,628
---------------- -----------------
Total Costs of Revenues 1,596,882 1,352,416
---------------- -----------------
GROSS PROFIT 3,103,189 3,445,015
DEPARTMENTAL EXPENSES
Technical 1,083,014 781,115
Marketing 711,143 538,111
Warehousing 27,375 40,752
General and Administrative 1,955,598 1,622,815
---------------- -----------------
Total Departmental Expenses 3,777,130 2,982,793
---------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES (673,941) 462,222
INCOME TAX (EXPENSE) BENEFIT (NOTE H) 204,256 (166,075)
---------------- -----------------
NET INCOME (LOSS) (469,685) 296,147
RETAINED EARNINGS - BEGINNING OF YEAR 770,702 474,555
---------------- -----------------
RETAINED EARNINGS - END OF YEAR $ 301,017 $ 770,702
================ =================
See Independent Auditors' Report and
Notes to Financial Statements
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INTERLINK TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1994 and 1993
1994 1993
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (469,685) $ 296,147
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 335,162 232,157
Increase (Decrease) in Deferred Income Taxes (102,241) 108,300
Gain on Disposal of Asset (4,871) ---
Changes in Operating Assets and Liabilities:
Decrease in Accounts Receivable 84,359 127,882
Decrease in Costs and Estimated Earnings in
Excess of Billings on Uncompleted Contracts --- 49,340
Increase in Refundable Income Taxes (97,358) ---
Decrease in Prepaid and Other Assets 13,527 1,876
Increase (Decrease) in Accounts Payable 447,661 (34,821)
Increase (Decrease) in Accrued Payroll
Taxes and Withholdings (94,939) 35,101
Increase in Deferred Revenue 145,923 72,270
Decrease in Accrued Expenses and
Other Liabilities (31,571) (15,614)
---------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 225,967 872,638
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (66,662) (59,625)
Proceeds on Disposal of Assets 500 ---
Increase in Software Development Costs (424,688) (442,782)
Increase in Copyrights, Trademarks, and Patents (5,315) (10,045)
---------------- -----------------
NET CASH USED BY INVESTING ACTIVITIES (496,165) (512,452)
NET CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Demand Note Payable 380,000 (609,875)
New Borrowings on Long-Term Debt --- 216,000
Payments on Long-Term Debt (89,063) (182,893)
Payments on Capital Lease Obligations (21,746) (22,296)
Increase (Decrease) in Loans Payable - Officers 147,600 (25,000)
---------------- -----------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 416,791 (624,064)
---------------- -----------------
NET INCREASE (DECREASE) IN CASH 146,593 (263,878)
CASH (DEFICIT) - BEGINNING OF YEAR (115,727) 148,151
---------------- -----------------
CASH (DEFICIT) - END OF YEAR $ 30,866 $ (115,727)
================ =================
See Independent Auditors' Report and
Notes to Financial Statements
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INTERLINK TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED AUGUST 31, 1994 and 1993
1994 1993
---------------- -----------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Paid for Interest $ 69,733 $ 71,061
Cash Paid for Income Taxes 31,833 66,856
NONCASH ACTIVITIES:
During 1994, the Corporation sold a leased automobile for $16,500. As part of
this transaction, the buyer paid off the Corporation's remaining outstanding
balance on the related capital lease obligation.
Also during 1994, the Corporation recorded $22,763 of commission income from
a reduction in the accounts payable owed to a certain vendor.
During 1993, the Corporation acquired equipment with a cost of $41,386 from a
customer by reducing that customer's accounts receivable in an equal amount.
See Independent Auditors' Report and
Notes to Financial Statements
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INTERLINK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994 AND 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by Interlink Technologies, Inc.
(the Corporation) are described below:
ORGANIZATION: The Corporation has developed a computer software package (DC
WIZARD) for the warehousing and distribution industries. Primary business
activities include sales of the packaged and modified software, along with
related computer equipment. The Corporation also provides computer technologies
consulting services and ongoing support and maintenance. These activities are
performed for a wide variety of customers located throughout the United
States. Interlink Technologies, Inc. was incorporated on September 12, 1986 and
is headquartered in Maumee, Ohio.
ACCRUAL BASIS OF ACCOUNTING: The financial statements of the Corporation have
been prepared on the accrual basis of accounting. Under this method, revenue is
recognized when earned and expenses are recorded when they are incurred,
without regard to the date of receipt or the payment of cash.
SOFTWARE REVENUES AND COSTS: The Corporation segments its long-term software
contracts into three separate components: a software license fee agreement; an
installation and modification agreement; and a system support agreement.
Revenues from the software license fee are recognized at the time the software
is delivered, while revenues from the modification agreement are recognized on
a percentage of completion basis as the work is performed. Revenues from the
system support agreement are recognized ratably over the term of the related
agreement.
Computer equipment sold during the installation of the software is recognized
by the Corporation as revenue and cost of revenue when it is shipped by the
original vendor. In addition, revenues from consulting and other software
related services are recognized as the services are rendered.
ACCOUNTS RECEIVABLE: Management has determined all accounts receivable balances
to be fully collectible at August 31, 1994 and 1993, thus, no allowance for
uncollectible accounts has been recorded. Included in accounts receivable are
certain amounts due from customers, but not yet invoiced per the terms of the
contract. These uninvoiced amounts totaled $450,000 and $388,333, respectively.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and represent
assets owned by the Corporation and those acquired under a capital lease.
Depreciation expense is provided for these costs under methods available for
federal income tax purposes, and do not differ materially from methods
available under generally accepted accounting principles. Depreciation expense
amounted to $109,802 and $124,537 for years ending August 31, 1994 and 1993,
respectively.
See Independent Auditors' Report
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INTERLINK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 1994 AND 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
SOFTWARE DEVELOPMENT COSTS: Certain software development costs, consisting of
wages, related payroll taxes and benefits, and overhead costs, including
certain general and administrative costs, have been capitalized in accordance
with Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." These
amounts represent costs incurred from the time a software product becomes
technologically feasible until it is available for general release. Software
development costs are being amortized on a straight-line basis over a five year
period. Such amortization expense amounted to $224,332 and $105,878 for years
ended August 31, 1994 and 1993, respectively.
COPYRIGHTS, TRADEMARKS AND PATENTS: Expenses incurred in developing certain
copyrights, trademarks, and patents have been capitalized. Amortization of
these costs, which is on a straight-line basis, begins when the process is
completed and all significant costs have been incurred. The amortization
period for these costs reflects the estimated economic life of the asset and
ranges from 1 to 40 years. Amortization expense for the years ended August 31,
1994 and 1993 was $1,028 and $1,741, respectively.
INCOME TAXES: Effective September 1, 1993, the Corporation adopted SFAS No.109,
"Accounting for Income Taxes."
This statement requires an asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and liabilities are
computed for those temporary differences that have future tax consequences.
Income tax expense is based on the current tax payable or refundable and the
net change in the deferred tax assets and liabilities. The cumulative effect of
this adoption is not material to the financial statements.
RECLASSIFICATIONS: Certain amounts in the prior period financial statements
have been reclassified to conform to current year presentation.
NOTE B - RELATED PARTY TRANSACTION
At August 31, 1994, the Corporation had loans payable due the officers in the
amount of $147,600. Interest, which was accrued at an annual rate of 7%,
amounted to $8,175 and is included in accrued expenses and other liabilities on
the accompanying balance sheet.
NOTE C - NOTE PAYABLE
1994 1993
--------- ----------
Note payable to an unrelated company, payable in
monthly installments of $9,573 including interest
at 6%. This note is unsecured and is due March
of 1995. (See Note I for further details on this note) $ 84,044 $ 173,107
Less: Current Maturities 84,044 107,415
--------- ---------
Note Payable, Net of Current Maturities $ --- $ 65,692
========= =========
See Independent Auditors' Report
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INTERLINK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 1994 AND 1993
NOTE C - NOTE PAYABLE, CONTINUED
Total interest expense under this and other obligations (capital leases and
demand note payable) was approximately $74,000 and $62,900, respectively, for
the years ended August 31, 1994 and 1993.
NOTE D - CAPITAL LEASE OBLIGATION
The Corporation leases an automobile from a nonrelated party under a capital
lease agreement.
Minimum annual payments on the capital lease over the remaining term of the
lease for years ending August 31 are as follows:
1995 $ 6,709
1996 3,355
---------
Total Minimum Lease Payments 10,064
Less: Amount Representing Interest 867
---------
Present Value of Capitalized Lease
Obligation at August 31, 1994 9,197
Less: Current Maturities 5,952
---------
Capital Lease Obligation, Net of
Current Maturities $ 3,245
=========
The cost and accumulated depreciation related to assets under current capital
leases have been included in property and equipment in the balance sheets at
August 31, 1994 and 1993 as follows:
1994 1993
--------- ---------
Automobiles $ 18,895 $ 44,643
Computer Equipment --- 37,020
--------- ---------
Total 18,895 81,663
Less: Accumulated Depreciation 15,156 53,477
--------- ---------
$ 3,739 $ 28,186
========= =========
Note E - Demand Note Payable
At August 31, 1994 the Corporation had a demand note payable due a bank with
availability of up to $1,000,000. Borrowings on the note are limited to a
percentage of eligible assets based on a certain collateral formula. The note
is secured by the accounts receivable and property and equipment of the
Corporation, as well as personal guarantees of the Corporation's stockholders.
Interest on the note was at 2% above the bank's base rate (7.75%) for the year
ended August 31, 1994, and 1% above the base rate (6%) for the year ended
August 31, 1993. Outstanding balances on the demand note payable at August 31,
1994 and 1993 were $820,000 and $440,000, respectively.
See Independent Auditors' Report
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INTERLINK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS,
CONTINUED AUGUST 31, 1994 AND 1993
NOTE F - OPERATING LEASES
The Corporation leases its main offices under a long-term operating lease
expiring July 31, 1996. The monthly payments are based upon a fixed base rate
plus a pro rata share of the building's operating costs. The Corporation also
leased other office and warehouse space under annual and month-to-month
agreements. These leases were cancelled by the Corporation during fiscal 1994.
Certain automobiles, along with various equipment and furniture, are also
leased under operating lease agreements which expire through 1997.
Total lease expense for the years ended August 31, 1994 and 1993 was $348,889
and $243,350, respectively.
The following is a schedule of the future minimum operating lease payments for
the next five years ending August 31 under operating leases which have an
initial or remaining term in excess of one year.
1995 $ 251,676
1996 234,278
1997 2,218
1998 ---
1999 ---
NOTE G - EMPLOYEE BENEFIT PLAN
As of February 1, 1991, the Corporation adopted a defined contribution profit
sharing 401(k) plan covering substantially all employees. The Corporation has
the option to make a contribution to the plan at the fiscal year end. No
contributions were made to the plan for the years ended August 31, 1994 and
1993.
NOTE H - INCOME TAXES
As discussed in Note A, the Corporation adopted SFAS No. 109 as of September 1,
1993. Following is a summary of the income tax effects on the financial
statements for the years ended August 31, 1994 and 1993.
The components of income taxes consists of:
1994 1993
---------- ----------
Current (Expense) Benefit $ 102,015 $ (57,775)
Deferred (Expense) Benefit 102,241 (108,300)
---------- -----------
Total (Expense) Benefit $ 204,256 $ (166,075)
========== ===========
See Independent Auditors' Report
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INTERLINK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 1994 AND 1993
NOTE H - INCOME TAXES, CONTINUED
The net deferred tax liability in the accompanying balance sheet includes the
following amounts of deferred tax assets and liabilities:
1994 1993
---------- ----------
Deferred Tax Liability $ 327,900 $ 250,241
Deferred Tax Asset 179,900 ---
---------- ----------
Net Deferred Tax Liability $ 148,000 $ 250,241
========== ==========
The deferred tax liability results primarily from the use of a different method
of accounting for software development costs for tax purposes. The deferred tax
asset results primarily from a net operating loss carryforward and tax credits.
At August 31, 1994, the Corporation had $97,358 of refundable income taxes as a
result of the current year tax benefit. In addition the Corporation had net
operating loss and tax credit carryforwards approximately $345,000 and $63,000,
respectively, which expire in 2009. The differences between the Corporation's
effective tax rate and the statutory federal rate of 34% are primarily due to
certain nondeductible expenses.
NOTE I - REFUNDED TRANSACTION
As a result of a customer's unfulfilled leasing arrangement with an outside
third party company, the Corporation was obligated to refund a software license
fee sale recognized in fiscal 1992. In March, 1993, the Corporation negotiated
repayment to the leasing company with $24,000 paid in cash and the balance of
$216,000 in the form of a 24 month note payable (See Note C).
NOTE J - CHANGE IN ACCOUNTING ESTIMATE
During the year ended August 31, 1993, the Corporation changed the estimated
economic life of its software development costs from ten to five years.
Management believes the five year life will more accurately reflect its results
of operation. The net effect of this change on fiscal year 1993 was to decrease
net income by approximately $38,750.
NOTE K - CONSULTING AGREEMENT
The Corporation entered into a consulting agreement on September 20, 1993. The
agreement provided for services to be rendered by the consultants in the area
of business management, including participation and direction of day-to-day
activities. The total commitment under this one year agreement was originally
$360,000. This agreement was terminated early. See Note N for additional
details.
See Independent Auditors' Report
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INTERLINK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 1994 AND 1993
NOTE L - UNCERTAINTY
In its normal course of business the Corporation purchases computer equipment
from third party vendors and sells it to customers. The Corporation is involved
in a software contract where the customer has deemed the vendor equipment to be
non-conforming. Sales to the customer relating to the specific equipment were
approximately $450,000 with cost of sales approximately $350,000. The outcome
of this matter is uncertain; however, management believes it will not have a
material effect on the Corporation's financial position.
NOTE M - POTENTIAL CORPORATE SALE
The stockholders of the Corporation have been involved in discussions relating
to the potential sale of the Corporation to an unrelated party. As of the date
of this report, a draft purchase agreement has been prepared and negotiations
are ongoing.
NOTE N - OPERATIONS
As shown in the accompanying financial statements, the Corporation incurred a
net loss of $469,685 for the year ended August 31, 1994, and as of that date,
current liabilities exceeded current assets by $803,458. Management has taken
certain steps and is currently implementing others to improve operating results
and continue the Corporation's viability as a going concern. Management's
actions include reducing overhead expenses, increasing sales efforts, and
expanding revenue sources.
Overhead expenses have been reduced in several areas. The consulting agreement
referred to in Note K was terminated in May, 1994. Under this agreement the
Corporation incurred expenses of $293,000 which are not expected to reoccur in
future years. The Corporation's Texas and California branch offices and its
warehouse facility were closed in May, 1994. All leases were successfully
terminated for these locations and associated operating expenses eliminated,
providing an approximately $54,000 annual savings. All Corporate operations
have been consolidated to the Maumee, Ohio headquarters. A total of nine
full-time employees were laid off in May and June, 1994, reducing payroll costs
by approximately $320,000 annually. Such employees were principally in clerical
and redundant functions and are not expected to be replaced in the future.
Sales efforts have been increased specifically by targeting and concentrating
marketing efforts in the Midwest and Northeastern states. Although the
Corporation continues to pursue any inquiries received, mailing lists and lead
sources for these closer-to-home areas are its main sales efforts. The
Corporation has emphasized its success in certain niche markets (i.e., food,
pharmaceutical, automotive) by working with previous customers to market
through their channels. In addition, the Corporation has increased its
relations with several hardware vendors and has established and received lead
sources for potential software and hardware sales.
See Independent Auditors' Report
12
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INTERLINK TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
AUGUST 31, 1994 AND 1993
NOTE N - OPERATIONS, CONTINUED
Expanded revenue sources are being accomplished by aggressively pursuing
additional sales from its existing customers. Such efforts have and continue to
generate revenue from additional program modification work, annual support
agreements, advanced training, additional hardware sales and maintenance, and
secondary site licenses and projects. The Corporation is also pursuing
hardware sales to noncustomers by expanding its VAR relations with vendors, and
by seeking regional sales leads from such vendors.
Management is focusing on reducing its current liabilities from continuing
operations and has established reseller agreements with improved terms and
payment plans with its largest vendors which are favorable to accomplishing
this goal. As a result of these efforts, management expects that the
combination of reduced sales and increased overhead which occurred in fiscal
1994 will not reoccur in future years.
See Independent Auditors' Report
13