Exhibit 99.3
TITAN EMS, INC., SVPC PARTNERS, LLC
AND SVPC CIRCUIT SYSTEMS, INC.
FINANCIAL STATEMENTS
PERIODS FROM SEPTEMBER 1, 2000 TO
AUGUST 31, 2001 AND YEAR ENDED AUGUST 31, 2002
WITH INDEPENDENT AUDITORS' REPORT
CONTENTS
Page
----
Independent Auditors' Report 1-2
Financial Statements:
Balance Sheet 3
Statements of Operations and Changes in Net Assets 4
Statements of Stockholders' Equity 5
Statements of Cash Flows 6-7
Notes to Financial Statements 8-30
INDEPENDENT AUDITORS' REPORT
Board of Directors
Titan EMS, Inc.
Santa Clara, California
We have audited the accompanying balance sheet of Titan EMS, Inc. as of August
31, 2002, and the related statements of operations, stockholders' equity, and
cash flows for the year then ended. In addition, we have audited the SVPC
Circuit Systems, Inc. statement of operations and statement of stockholders'
equity (deficit) (going concern basis) for the period from September 1, 2000 to
February 28, 2001, and the statement of change in net assets (liquidation basis)
for the period from March 1, 2001 to June 30, 2001, and Titan EMS, Inc.
(formerly SVPC Partners, LLC) statement of operations (going concern basis) and
statement of stockholders' equity for the period from July 1, 2001 to August 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits 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 1 to the financial statements, SVPC Circuit Systems, Inc.
adopted a plan of liquidation on March 9, 2001. As a result, Titan changed its
basis of accounting for periods subsequent to March 9, 2001 from the going
concern basis to a liquidation basis.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Titan EMS, Inc. as of August
31, 2002, the results of its operations and its cash flows for the year then
ended, and SVPC Circuit Systems, Inc. statement of operations (going concern
basis) for the period from September 1, 2000 to February 28, 2001 and the
statement of change in net assets (liquidation basis) for the period from March
1, 2001 to June 30, 2001, and Titan EMS, Inc. (formerly SVPC Partners, LLC)
statement of operations (going concern basis) for the period from June 1, 2001
to August 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
1
The accompanying financial statements have been prepared assuming that Titan
EMS, Inc. will continue as a going concern. As discussed in Note 1 to the
accompanying financial statements, Titan EMS, Inc.'s significant working deficit
raises substantial doubt about its ability to continue as a going concern.
Management plans in regard to these matters are also disclosed in Note 1. The
financial statements do not include any adjustments to asset carrying amounts or
the amount and classification of liabilities that might result from the outcome
of this uncertainty.
/s/ STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Irvine, California
October 25, 2002
2
TITAN EMS, INC.
BALANCE SHEET - AUGUST 31, 2002
ASSETS
Current assets:
Cash and cash equivalents $ 76,707
Accounts receivable, net of allowance
for doubtful account of $80,000 1,237,750
Inventories, net 297,999
Deferred cost 35,000
Other current assets 79,262
-----------
Total current assets 1,726,718
Property, equipment and improvements, net of accumulated
depreciation and amortization 2,488,201
Intangible assets, net of accumulated amortization 49,982
Other assets 131,059
-----------
$ 4,395,960
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 1,061,777
Loans and notes payable, including
$3,127,830 to related parties 3,140,914
Current portion of long-term debt 131,692
Current portion of capital lease obligations 116,078
-----------
Total current liabilities 4,450,461
Long-term debt, less current portion 120,891
Capital lease obligations, less current portion 334,805
Stockholders' Deficit:
Common stock, $0.001 par value, 10,000,000 shares authorized;
6,880,490 issued and outstanding 6,880
Additional paid-in capital 1,178,078
Accumulated deficit (1,695,155)
-----------
Total stockholders' deficit (510,197)
-----------
$ 4,395,960
===========
See accompanying independent auditors' report and notes to financial statements.
3
TITAN EMS, INC./SVPC PARTNERS, LLC/SVPC CIRCUIT SYSTEMS, INC.
STATEMENT OF OPERATIONS FOR PERIOD FROM SEPTEMBER 1, 2000 TO
FEBRUARY 28, 2001, PERIOD FROM JULY 1, 2001 TO AUGUST 31, 2001, AND THE
YEAR FROM SEPTEMBER 1, 2001 TO AUGUST 31, 2002 AND THE
STATEMENT OF CHANGE IN NET ASSETS FROM MARCH 1, 2001 TO JUNE 30, 2001
Predecessor Company Sucessor Company
------------------------------------- -------------------------------------
Titan EMS, Inc./
SVPC Circuit Systems, Inc. SVPC Partners, LLC
------------------------------------- ------------------
Period from Period from Period from Titan EMS, Inc.
September 1, 2000 March 1, 2001 July 1, 2001 to ---------------
to February 28, to June 30, 2001 August 31, 2001 Year ended
2001 (Going (Liquidation (Going Concern August 31,
Concern Basis) Basis) Basis) 2002
----------------- ---------------- ------------------- ---------------
Revenue $ 7,373,972 $ 3,944,629 $ 1,104,824 $ 8,321,292
Cost of revenue 5,107,586 2,771,851 756,145 7,079,941
----------- ----------- ----------- -----------
Gross profit 2,266,386 1,172,778 348,679 1,241,351
Operating expenses:
Sales and marketing 535,180 299,784 147,912 851,444
General and administrative expenses 477,674 205,497 150,440 1,110,461
Non-recurring cost -- -- -- 538,531
Impairment of goodwill 5,894,934 -- -- --
----------- ----------- ----------- -----------
Loss from operations (4,641,402) 667,497 50,327 (1,259,085)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (398,095) (120,800) (43,203) (484,487)
Interest income -- 6,289 -- --
Miscellaneous 12,912 (53,901) 15,126 26,167
----------- ----------- ----------- -----------
Total other income (expense) (385,183) (168,412) (28,077) (458,320)
----------- ----------- ----------- -----------
Loss before provision
for income taxes (5,026,585) 499,085 22,250 (1,717,405)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $(5,026,585) $ 499,085 $ 22,250 $(1,717,405)
=========== =========== ===========
Adjustments to Net Assets in Liquidation 9,180,928
Net Assets (liabilities) as of February 28, 2001 (8,507,162)
-----------
Net Assets (liabilities) as of June 30, 2001 $ 1,172,851
===========
Loss per share - basic and diluted N/A N/A N/A $ (0.26)
=========== =========== =========== ===========
Weighted average shares outstanding -
basic and diluted N/A N/A N/A 6,614,601
=========== =========== =========== ===========
See accompanying independent auditors' report and notes to financial statements.
4
TITAN EMS, INC./SVPC PARTNERS, LLC/SVPC CIRCUIT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM SEPTEMBER 1, 2000 TO FEBRUARY 28, 2001, PERIOD
FROM MARCH 1, 2001 TO JUNE 30, 2001, PERIOD FROM JULY 1, 2001 TO
AUGUST 31, 2001 AND THE YEAR FROM SEPTEMBER 1, 2001 TO AUGUST 31, 2002
Common stock Additional Total
-------------------------- paid-in Accumulated stockholders'
Shares Amount capital deficit equity (deficit)
----------- ----------- ----------- ----------- ----------------
Balance as of September 1, 2000,
SVPC Circuit Systems, Inc. 1,000 $ 1,000 $ -- $(3,481,577) $(3,480,577)
Net loss -- -- -- (5,026,585) (5,026,585)
----------- ----------- ----------- ----------- -----------
Balance as of February 28, 2001 1,000 1,000 -- (8,508,162) (8,507,162)
Adjustment of conversion from
going concern basis to
liquidation basis (1,000) (1,000) -- 8,508,162 8,507,162
----------- ----------- ----------- ----------- -----------
Balance as of June 30, 2001,
SVPC Circuit Systems, Inc. -- -- -- -- --
Issance of common stock 800,000 800 898,423 -- 899,223
Net income -- -- -- 22,250 22,250
----------- ----------- ----------- ----------- -----------
Balance as of August 31, 2001,
Titan EMS, Inc. 800,000 800 898,423 22,250 921,473
Acquisition of SVPC
Partners, LLC assets 5,800,000 5,800 (800) -- 5,000
Issuance of common stock to
related party as consulting
fees at $.10 per share 100,000 100 9,900 -- 10,000
Issuance of common stock
Issuance of common stock for
compensation to related party
at $1.5 per share 50,000 50 74,950 -- 75,000
Issuance of common stock
to pay off loans payable
to related parties
at $1.5 per share 130,490 130 195,605 -- 195,735
Net loss -- -- -- (1,717,405) (1,717,405)
----------- ----------- ----------- ----------- -----------
Balance as of August 31, 2002
Titan EMS, Inc. 6,880,490 $ 6,880 $ 1,178,078 $(1,695,155) $ (510,197)
=========== =========== =========== =========== ===========
See accompanying independent auditors' report and notes to financial statements.
5
TITAN EMS, INC. / SVPC PARTNERS, LLC / SVPC CIRCUIT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM SEPTEMBER 1, 2000 TO FEBRUARY 28, 2001, PERIOD
FROM MARCH 1, 2001 TO JUNE 30, 200, PERIOD FROM JULY 1, 2001 TO
AUGUST 31, 2001 AND THE YEAR FROM SEPTEMBER 1, 2001 TO AUGUST 31, 2002
Predecessor Company Sucessor Company
------------------------------------- -------------------------------------
Titan EMS, Inc./
SVPC Circuit Systems, Inc. SVPC Partners, LLC
------------------------------------- ------------------
Period from Period from Period from Titan EMS, Inc.
September 1, 2000 March 1, 2001 July 1, 2001 to ---------------
to February 28, to June 30, 2001 August 31, 2001 Year ended
2001 (Going (Liquidation (Going Concern August 31,
Concern Basis) Basis) Basis) 2002
----------------- ---------------- ------------------- ---------------
Net loss $(5,026,585) $ 499,085 $ 22,250 $(1,717,405)
----------- ----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization 510,578 -- 65,755 433,756
Bad debt -- -- -- 126,182
Loan fees to lender -- -- -- 100,000
Non cash compensation -- -- -- 85,000
Impairment of goodwill 5,894,934 -- -- --
Changes in assets and liabilities:
(Increase) decrease in assets
Accounts receivable 52,620 602,459 (210,355) (227,668)
Inventories (161,057) 252,014 (124,763) 162,609
Other current assets 43,035 26,810 67,069 35,202
Other assets (13,250) -- -- (115,834)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 161,936 (242,849) 94,932 578,290
----------- ----------- ----------- -----------
Total adjustments 6,488,796 638,434 (107,362) 1,177,537
----------- ----------- ----------- -----------
Net cash used by operating activities 1,462,211 1,137,519 (85,112) (539,868)
----------- ----------- ----------- -----------
Purchases of assets pursuant to purchase -- -- (914,970) --
agreement
Purchases of fixed assets (78,755) (171,439) -- (620,417)
----------- ----------- ----------- -----------
Net cash used by investing activities (78,755) (171,439) (914,970) (620,417)
----------- ----------- ----------- -----------
Increase (decrease) in bank overdraft 44,443 (5,582) -- --
Repayments on advances to affiliate (1,453,888) (910,498) -- --
Principal proceeds on notes and loans
payable from related parties -- -- -- 1,582,419
Payments on notes and loans payable -- (50,000) (46,667) (334,730)
Payments on long-term debt -- -- (9,224) (104,693)
Payments on capital lease obligation -- -- (7,979) (91,138)
Proceeds from contributions by stockholders -- -- 1,244,086 5,000
----------- ----------- ----------- -----------
Net cash provided by financing activities (1,409,445) (966,080) 1,180,216 1,056,858
----------- ----------- ----------- -----------
Net increase (decrease) in cash (25,989) -- 180,134 (103,427)
Cash, beginning of year 25,989 -- -- 180,134
----------- ----------- ----------- -----------
Cash, end of year $ -- $ -- $ 180,134 $ 76,707
=========== =========== =========== ===========
See accompanying independent auditors' report and notes to financial statements.
6
TITAN EMS, INC./SVPC PARTNERS, LLC/SVPC CIRCUIT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM SEPTEMBER 1, 2000 TO FEBRUARY 28, 2001, PERIOD
FROM MARCH 1, 2001 TO JUNE 30, 2001, PERIOD FROM JULY 1, 2001 TO
AUGUST 31, 2001 AND THE YEAR FROM SEPTEMBER 1, 2001 TO AUGUST 31, 2002
Predecessor Company Sucessor Company
------------------------------------- -------------------------------------
Titan EMS, Inc./
SVPC Circuit Systems, Inc. SVPC Partners, LLC
------------------------------------- ------------------
Period from Period from Period from Titan EMS, Inc.
September 1, 2000 March 1, 2001 July 1, 2001 to ---------------
to February 28, to June 30, 2001 August 31, 2001 Year ended
2001 (Going (Liquidation (Going Concern August 31,
Concern Basis) Basis) Basis) 2002
----------------- ---------------- ------------------- ---------------
Supplemental disclosure of cash flow information:
Interest paid $ 398,095 $ 120,800 $ 18,792 $ 504,713
=========== =========== ========== ==========
Income tax paid $ -- $ -- $ -- $ --
=========== =========== ========== ==========
Non cash activities:
Loans and notes payable incurred for
purchase of property and equipment $ -- $ -- $ 175,000 $ 15,700
=========== =========== ========== ==========
Long-term debt incurred for purchase
property and equipment $ -- $ -- 366,500 $ --
=========== =========== ========== ==========
Capital lease obligations incurred for
purchase of property and equipment $ -- $ -- 550,000 $ --
=========== =========== ========== ==========
Issuance of common stock for
consulting fees $ -- $ -- $ -- $ 10,000
=========== =========== ========== ==========
Issuance of common stock to related
party as compensation $ -- $ -- $ -- $ 75,000
=========== =========== ========== ==========
Issuance of common stock to related
parties to pay off debt $ -- $ -- $ -- 195,735
=========== =========== ========== ==========
Issuance of common stock for acquisition
of intangible assets from related party $ -- $ -- $ 65,194 $ --
=========== =========== ========== ==========
Borrowings from related party to pay off
term loan $ -- $ -- $ -- $1,741,146
=========== =========== ========== ==========
See accompanying independent auditors' report and notes to financial statements.
7
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS
(1) Organization, Merger Activities and Basis of Presentation:
Business Activity:
Titan EMS, Inc. ("Titan") was formed on March 27, 2001, as a
Delaware corporation, with its principal office in Santa
Clara, California. In its Santa Clara facilities, Titan
manufactures printed circuit boards ("PCB"), with emphasis on
time critical production for both prototype and low-to-medium
volume orders. Its customers are located throughout the United
States with a concentration in California.
Merger Activity:
On August 12, 2002, Titan entered into an Agreement and Plan
of Merger (the "Merger") with Titan EMS Acquisition Corp. , a
wholly-owned subsidiary of Ventures-National, Inc.
("Ventures"). The Merger became effective on August 31, 2002
at which time Titan became a wholly owned subsidiary of
Ventures. Under the Merger, the holders of capital stock of
Titan received an aggregate of 6,880,490 shares of common
stock of Ventures, representing approximately 80% of the
outstanding common stock of Ventures immediately following the
Merger. Upon the completion of the Merger, Titan's directors
and officers became directors and officers of the merged
company. In addition, each outstanding option of Titan will be
converted into one option of Ventures.
For accounting purposes, the Merger was accounted for as a
reverse-merger, where Titan is the acquirer. Because the
Merger is accounted for as a purchase of Ventures, the
historical financial statements of Titan became the historical
financial statements of Ventures after the Merger.
The accompanying financial statements as of August 31, 2002,
include all transactions before the Merger with Ventures.
Basis of Presentation:
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles,
which contemplate continuation of Titan as a going concern.
Prior to the merger with Ventures, at August 31, 2002, Titan
had a working capital deficit of $2,723,743 and an accumulated
deficit of $1,695,155.
See accompanying independent auditors' report.
8
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) Organization, Merger Activities and Basis of Presentation, Continued:
Basis of Presentation, Continued:
Management plans to take the following steps that it believes
will be sufficient to provide Titan with the ability to
continue its operations:
Following the merger with Ventures, management intends to
raise additional equity through a private equity transaction
currently being offered to interested investors. Titan plans
to use the proceeds of the private equity transaction to
expand its current product offering to allow for additional
processing services for its customers. Management anticipates
revenues to grow as a result of additional customer offerings.
Management believes that the private equity financing and new
product offerings will enable Titan to generate positive
operating cash flows and continue its operations. The
financial statements do not include any adjustments that might
result from the outcome of the uncertainty.
The accompanying financial statements include statement of
operations for SVPC Circuit Systems, Inc. ("Circuit Systems")
for the period from September 1, 2000 to February 28, 2001, on
a going concern basis, and statement of changes in net assets
for the period from March 1, 2001 to June 30, 2001, a on
liquidation basis, and statement of operations for SVPC
Partners, LLC (after the acquisition of Circuit Systems) for
the period from July 1, 2001 to August 31, 2001, which covers
a 12-month period from September 1, 2000 to August 31, 2001.
The accompanying statements of operations also include the
operating results for SVPC Partners, LLC from September 1,
2001 to August 6, 2002 (date of merger with Titan), and for
Titan from August 7, 2002 to August 31, 2002. Circuit Systems
is referred to as Predecessor Company while Titan/SVPC
Partners, LLC is referred to as Successor Company. The
financial statements of Successor Company are not comparable
to the financial statements of the Predecessor Company.
Accordingly, a vertical line is shown to separate Successor
Company financial statements from those of the Predecessor
Company for periods prior to July 1, 2001.
See accompanying independent auditors' report.
9
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) Summary of Significant Accounting Policies:
Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and 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.
Revenue Recognition:
Titan derives its revenue primarily from the sale of PCBs
using customers' design plans and recognizes revenue when
products are shipped to customers. Provisions for discounts to
customers, estimated returns and allowances, and other
adjustments are provided for in the same period the related
revenue is recorded. At August 31, 2002, Titan provided an
allowance for discounts, sales returns and allowances of
$30,000, which was included in the allowance for doubtful
account.
Cash and Cash Equivalents:
Titan considers highly liquid investments with a maturity of
three months or less to be cash equivalents and consist
primarily of interest-bearing bank accounts and short-term
debt securities. As of August 31, 2002, Titan had no
short-term debt securities.
Concentration of Credit Risk:
Titan generally extends credit to its customers, which are
concentrated in the computer and electronics industries and
performs ongoing credit evaluations of its customers.
Typically, Titan does not require collateral. Titan routinely
reviews the collectability of its accounts receivable and
provides an allowance for potentially uncollectible amounts.
Titan's estimate is based on historical collection experience
and a review of the current status of trade accounts
receivable. It is reasonably possible that Titan's estimate of
the allowance for doubtful accounts will change. At August 31,
2002, Titan provided an allowance for doubtful accounts of
$80,000 including $50,000 for bad debt and $30,000 for sales
returns.
Three vendors accounted for approximately 55% of Titan's
purchases for the year ended August 31, 2002. At August 31,
2002, accounts payable included an outstanding balance of
approximately $114,000 owed to these three vendors.
See accompanying independent auditors' report.
10
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) Summary of Significant Accounting Policies, Continued:
Inventories:
Inventories are stated at the lower of cost (first-in,
first-out basis) or market (net realizable value).
Property, Equipment and Improvements:
Property, equipment and improvements are valued at cost.
Depreciation and amortization are provided using the
straight-line method. Leasehold improvements are amortized on
a straight-line basis over the lease term.
The estimated service lives of property, equipment and
improvements are as follows:
Automobile 5 years
Office equipment 7 years
Buildings 15 years
Production equipment 7 years
Leasehold improvements 3 years
Software 3 years
During the year ended August 31, 2002, Titan purchased certain
assembling equipment and fixed assets and incurred certain
setup cost for its System Integration Division (SID). Such
cost was being capitalized as Construction in Progress. As of
August 31, 2002, Titan has not commenced the operations of
this division. Accordingly, none of these capitalized costs
have been depreciated for the year ended August 31, 2002.
Intangible Assets:
Intangible assets include customer list representing the
customer accounts acquired, which is amortized on a
straight-line basis over a period of five years, commencing on
the date of the acquisition. Accumulated amortization was
$15,212 at August 31, 2002.
See accompanying independent auditors' report.
11
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) Summary of Significant Accounting Policies, Continued:
Long-Lived Assets:
In accordance with Statement on Financial Standards ("SFAS")
No. 121 "Accounting For The Impairment of Long-Lived Assets
and For Long-Lived Assets to Be Disposed Of," long-lived
assets to be held and used are analyzed for impairment
whenever events or changes in circumstances indicate that the
related carrying amounts may not be realizable. Titan
evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment.
If there are indications of impairment, Titan uses future
undiscounted cash flows of the related asset or asset grouping
over the remaining life in measuring whether the assets are
recoverable. In the event such cash flows are not expected to
be sufficient to recover the recorded asset values, the assets
are written down to their estimated fair value. Long-lived
assets to be disposed of are reported at the lower of carrying
amount or fair value of the asset, less cost to sell.
Advertising:
Titan expenses advertising costs when incurred. Advertising
expense totaled $7,781 for the period from September 1, 2000
to February 28, 2001, $926 for the period from March 1, 2001
to June 30, 2001, $8,816 for the period from July 1, 2001 to
August 31, 2001, and $6,146 for the year ended August 31,
2002.
Basic and Diluted Loss Per Share:
In accordance with SFAS No. 128, "Earnings Per Share," the
basic loss per common share is computed by dividing net loss
available to common stockholders less preferred dividends by
the weighted average number of common shares outstanding.
Diluted loss per common share is computed similarly to basic
loss per common share, except that the denominator is
increased to include the number of additional common shares
that would have been outstanding if the potential common
shares had been issued and if the additional common shares
were not anti-dilutive. Titan has excluded all outstanding
options and convertible debt from the calculation of diluted
net loss per share because these securities are anti-dilutive.
The number of outstanding shares and weighted average shares
reflects a stock split of 3,866.667 to 1. As of August 31,
2002, Titan has approximately 3,568,861 common stock
equivalents.
See accompanying independent auditors' report.
12
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) Summary of Significant Accounting Policies, Continued:
Income Taxes:
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 basis. Deferred tax
assets, including tax loss and credit carryforwards, 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. 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. Deferred income tax expense represents the
change during the period in the deferred tax assets and
deferred tax liabilities. The components of the deferred tax
assets and liabilities are individually classified as current
and non-current based on their characteristics. Realization of
the deferred tax asset is dependent upon generating sufficient
taxable income in future years. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
SVPC Partners, LLC was formed as a limited liability company.
Under the Internal Revenue Code provisions, the members are
liable for income tax on their respective shares of Titan's
taxable income. In addition, SVPC Partners, LLC is subject to
an $800 annual tax for California and a fee based on Titan's
annual revenues. The fee ranges from $900 to $11,790,
depending on the revenues.
Fair Value of Financial Instruments:
The carrying amount of Titan's cash and cash equivalents,
accounts receivable, notes payable, accounts payable, and
accrued expenses, none of which is held for trading,
approximates their estimated fair values due to the short-term
maturities of those financial instruments.
Comprehensive Income:
SFAS No. 130, "Reporting Comprehensive Income," establishes
standards for the reporting and display of comprehensive
income and its components in the financial statements. As of
August 31, 2002, Titan has no items that represent other
comprehensive income and, therefore, has not included a
schedule of comprehensive income in the financial statements.
See accompanying independent auditors' report.
13
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) Summary of Significant Accounting Policies, Continued:
Reporting Period:
The Company's previous year-end was December 31. The financial
statements have been prepared and presented for the years
ended August 31, 2002 and August 31, 2001 as Titan changed its
year-end to August 31.
Segment Reporting:
Based on Titan's integration and management strategies, Titan
operated in a single business segment. For the year ended
August 31, 2002 and the periods ended August 31, 2001, all
revenue has been derived from domestic operations.
Liquidation Basis of Accounting:
On September 6, 2000, Circuit Systems filed Chapter 11
reorganization. On March 9, 2001, Circuit Systems converted it
into Chapter 7 liquidation. In accordance with the liquidation
basis of accounting, assets were adjusted to estimated net
realizable values and liabilities were adjusted to estimated
settlement amounts, including estimated costs associated with
carrying out the liquidation. Net assets and liabilities were
written down to a net realizable value of $1,172,851, which
equaled the selling price of such assets to SVPC Partners, LLC
in July 2001.
The net adjustment (gain on forgiveness of debt) on March 6,
2001, required to convert from the going concern (historical
cost) basis to the liquidation basis of accounting, amounted
to a positive adjustment to net assets in liquidation of
$9,180,928, which is included in the statement of changes in
net assets (liquidation basis) for the period from March 1,
2001 to June 30, 2001. The breakdown of adjustment to net
assets in liquidation is as follows:
See accompanying independent auditors' report.
14
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) Summary of Significant Accounting Policies, Continued:
Liquidation Basis of Accounting, Continued:
Period from
March 1, 2001
to June 30, 2001
Adjustments to accounts receivable $ (249,494)
Decrease to reflect net realizable value of
fixed assets (561,528)
Other assets (56,195)
Decrease in accounts payable and accrued
Expenses 1,702,398
Decrease in loans and notes payable and
capital lease obligations 8,345,747
-----------
Net Adjustments $ 9,180,928
===========
Reserve for Estimated Costs During the Period of Liquidation:
Under the liquidation basis of accounting, Titan is required
to estimate and accrue the costs associated with executing the
Plan of Liquidation. These amounts can vary significantly due
to, among other things, the timing and realized proceeds from
property sales, the cost of retaining personnel and a trustee
to oversee the liquidation. The parent company of SVPC Circuit
Systems, Inc., Circuit Systems, Inc., absorbed such costs
during the liquidation period. Since SVPC Circuit Systems,
Inc. was sold as a continuing business, instead of individual
assets, no material liquidation cost was incurred by Titan. As
of June 30, 2001, no such cost was accrued in the accompanying
statement of changes in net assets for the period from March
1, 2001 to June 30, 2001.
See accompanying independent auditors' report.
15
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) Summary of Significant Accounting Policies, Continued:
New Accounting Pronouncements:
In July 2001, the Financial Accounting Statement Board
("FASB") issued SFAS No. 141 "Business Combinations." SFAS No.
141 supersedes Accounting Principles Board ("APB") No. 16 and
requires that any business combinations initiated after June
30, 2001, be accounted for as a purchase, therefore,
eliminating the pooling-of-interest method defined in APB 16.
The statement is effective for any business combination
initiated after June 30, 2001, and shall apply to all business
combinations accounted for by the purchase method for which
the date of acquisition is July 1, 2001 or later. The Company
has implemented the provisions of SFAS No. 141 and has
concluded that the adoption does not have a material impact on
the Company's financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and
Other Intangibles." SFAS No. 142 addresses the initial
recognition, measurement, and amortization of intangible
assets acquired individually or with a group of other assets
(but not those acquired in a business combination), and
addresses the amortization provisions for excess cost over
fair value of net assets acquired or intangibles acquired in a
business combination. The statement is effective for fiscal
years beginning after December 15, 2001, and is effective July
1, 2001, for any intangibles acquired in a business
combination initiated after June 30, 2001. The Company has
implemented the provisions of SFAS No. 142 and has concluded
that the adoption does not have a material impact on its
financial statements.
In October 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," which requires companies to
record the fair value of a liability for asset retirement
obligations in the period in which they are incurred. The
statement applies to a company's legal obligations associated
with the retirement of a tangible long-lived asset that
results from the acquisition, construction, and development or
through the normal operation of a long-lived asset. When a
liability is initially recorded, the company would capitalize
the cost, thereby increasing the carrying amount of the
related asset. The capitalized asset retirement cost is
depreciated over the life of the respective asset while the
liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded
amount or the company incurs a gain or loss. The statement is
effective for fiscal years beginning after June 30, 2002. The
Company does not expect the adoption to have a material impact
to its financial position or results of operations.
See accompanying independent auditors' report.
16
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) Summary of Significant Accounting Policies, Continued:
New Accounting Pronouncements, Continued:
In October 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." Statement
No. 144 addresses the accounting and reporting for the
impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be
disposed of. New criteria must be met to classify the asset as
an asset held-for-sale. This statement also focuses on
reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years
beginning after December 15, 2001. The Company does not expect
the adoption to have a material impact to its financial
position or results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This statement
rescinds FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that
Statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements" and FASB Statement
No. 44, "Accounting for Intangible Assets of Motor Carriers."
This statement amends FASB Statement No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The
Company does not expect the adoption to have a material impact
to its financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146 "Accounting for
Exit or Disposal Activities." The provisions of this statement
are effective for disposal activities initiated after December
31, 2002, with early application encouraged. The Company does
not expect the adoption of FASB No. 146 to have a material
impact to its financial position or results of operations.
See accompanying independent auditors' report.
17
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) Mergers and Acquisitions:
Merger with Ventures-National, Inc.
-----------------------------------
On August 12, 2002, Titan entered into an Agreement and Plan of Merger
(the "Merger") with Titan EMS Acquisition Corp., a wholly-owned
subsidiary of Ventures. The Merger became effective on August 31, 2002
(after the date was closed) at which time Titan became a wholly owned
subsidiary of Ventures. Under the Merger, the holders of capital stock
of Titan received an aggregate of 6,880,490 shares of common stock of
Ventures, representing approximately 80% of the outstanding common
stock of Ventures immediately following the Merger. Upon the completion
of the Merger, Titan's directors and officers became directors and
officers of the merged company. In addition, each outstanding option of
Titan will be converted into one option of Ventures.
For accounting purposes, the Merger was accounted for as a
reverse-merger, where Titan is the acquirer. Because the Merger is
accounted for as a purchase of Ventures, the historical financial
statements of Titan became the historical financial statements of
Ventures after the Merger.
The accompanying financial statements as of August 31, 2002, include
all transactions before the Merger with Ventures on Titan's Balance
Sheet at August 31, 2002. See Note 1 for Basis of Financial Statement
Presentation.
Merger with SVPC Partners, LLC
------------------------------
On August 6, 2002, prior to its merger with Ventures, and except for
real estate and related obligations, Titan purchased all operating
assets and assumed all operating liabilities of SVPC Partners, LLC (an
affiliate company of Titan), by issuing 800,000 shares of Titan's stock
to SVPC Partners, LLC. Before this acquisition, Titan had no revenue
and limited operating expenses. Subsequent to the transactions, SVPC
Partners, LLC owned approximately 12% of the total issued and
outstanding shares of Titan, while approximately 88% of those were
owned by Irrevocable Children's Trust ("ICT"), a trust controlled by
the chairman of Titan.
This transaction is considered a re-capitalization where the
controlling shareholder of SVPC Partners, LLC and Titan remains the
controlling shareholder of the combined company after this transaction.
The historical financial statements of SVPC Partners, LLC became the
historical financial statements of Titan up to August 5, 2002.
Immediately before this transaction, the net assets of Titan were
immaterial to the combined balance sheet.
See accompanying independent auditors' report.
18
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) Mergers and Acquisitions, Continued:
Acquisition of SVPC Circuit Systems, Inc.
On July 16, 2001, SVPC Partners, LLC purchased a substantial amount of
assets and assumed liabilities of Circuit Systems, a manufacturer of
PCBs, through the bankruptcy court to commence its operations. This
transaction constituted a business purchase.
SVPC Partners, LLC continued Circuit Systems' core business after the
acquisition. The purchase constitutes a business acquisition and was
accounted for using the purchase method of accounting. Accordingly, the
operating results of this acquired business have been included in the
accompanying financial statements since the date of the acquisition.
The total purchase price of $5,786,397 was allocated among assets
acquired and liabilities assumed based on their estimated fair values
at the date of purchase. SVPC Partners, LLC acquired Circuit Systems
through cash payments of $914,970 and other short-term and long-term
loans totaling $4,871,427.
Assets and liabilities are recorded at fair value. Accounts receivable,
other current assets, other assets, accounts payable, and accrued
expenses are recorded at the carrying values from Circuit Systems,
which approximate the fair values. Inventories were valued based on the
carrying values less the reduction of inventory values due to
obsolescence. Land and buildings are based on the amounts stated in the
appraisal. Remaining purchase price was assigned to property and
equipment, which approximates fair value based on management's
assessment.
The following table presents the allocation of the purchase price to
the assets acquired and liabilities assumed:
Accounts receivable, net $ 1,435,909
Inventories 335,845
Other current assets 181,533
Land and buildings 1,900,000
Property and equipment 2,271,435
Other assets 15,225
Accounts payable and accrued expenses (353,550)
-----------
Purchase price $ 5,786,397
===========
See accompanying independent auditors' report.
19
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) Inventories:
Inventories as of August 31, 2002 consist of the following:
Raw materials $ 152,591
Work in process 145,408
-----------
$ 297,999
===========
At August 31, 2002, the reserve for obsolescence was $20,000. Reserves
for obsolescence were increased by $20,000.
(5) Property, Equipment, and Improvements:
A summary as of August 31, 2002, is as follows:
Automobile $ 26,684
Office equipment 16,421
Production equipment 2,364,594
Leasehold improvements 17,280
Software 18,648
Construction in progress 454,023
-----------
2,897,650
Less accumulated depreciation and amortization 409,449
-----------
$ 2,488,201
===========
Depreciation and amortization expense for property, equipment, and
improvements amounted to $510,578 for the period from September 1, 2000
to February 28, 2001, $0 for the period from March 1, 2001 to June 30,
2001, $63,572 for the period from July 1, 2001 to August 31, 2001, and
$420,727 for the year ended August 31, 2002,
(6) Intangible Assets:
A summary is as follows:
Customer list $ 65,194
Less accumulated amortization 15,212
-----------
$ 49,982
===========
Amortization expense for intangible assets amounted $0 for the periods
from September 1, 2000 to February 28, 2001 and from March 1, 2001 to
June 30, 2001, $2,183 for the period from July 1, 2001 to August 31,
2001, and $13,029 for the year ended August 31, 2002.
See accompanying independent auditors' report.
S 20
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) Loans and Notes Payable:
Non-Related Parties
-------------------
In July 2001, in relation to the purchase of Circuit Systems, Titan
entered a Term Loan Agreement ("Acquisition Term Loan") with the
bankruptcy court in which it agreed to pay $3,269,927. The Acquisition
Term Loan originally matured on November 15, 2001, and was extended
until September 15, 2002. Beginning January 15, 2002, Titan made
monthly payments of $25,000. The Acquisition Term Loan carried interest
at 2% over prime and was secured by: (i) all intangible assets; (ii)
equipment excluding those under financing or lease arrangements; (iii)
investment properties, including the shopping center owned by Ohio
Investors, an affiliate of Titan; (iv) cash in bank; and (v) California
real properties, including all property improvements. In August 2002,
Ohio Investors, an affiliate, paid off the outstanding balance and this
term loan has $0 outstanding balance as of August 31, 2002
In January 2002, Titan secured a non-interest bearing auto loan for
$15,700 and is required to make monthly payments of $436 through
February 2005. Titan expects to pay off this loan in the next 12
months; therefore, the loan was classified as short-term. As of August
31, 2002, the outstanding balance of this loan was $13,084. This loan
was originally entered between SVPC Partners, LLC and the lender. Titan
assumed the outstanding balance of this loan pursuant to its purchase
of SVPC Partners, LLC on August 6, 2002.
Titan had an outstanding note payable related to an equipment purchase
through the bankruptcy court in July 2001. This note carried an
interest rate of 6.25% and was secured by production equipment. Titan
was required to make monthly payments of $12,396, including interest,
through July 2002. As of August 31, 2002, this note had been repaid in
full.
Related Parties
---------------
Before the re-capitalization between Titan and SVPC Partners, LLC on
August 6, 2002, Ohio Investors, an affiliate of Titan, paid off the
outstanding balance of the term loan for approximately $3,141,146. SVPC
Partners, LLC sold the land and buildings to Ohio Investors for
approximately $1,400,000, which reduced the amount owed to Ohio
Investors to $1,741,146. Titan entered into a $1,741,146 loan agreement
with Ohio Investors. At the option of Ohio Investors, this loan balance
is convertible into 2,321,528 shares of Ventures' common stock after
the merger with Ventures at a price of $0.75 per share, which
approximates the fair market value per share based on the management's
assessment. Based on the conversion terms, no beneficial conversion
feature is included with this convertible note. According to EIFT
00-27, no discount or premium is recorded. Subsequent to the Merger
with Ventures, the Note Agreement was converted to common stock.
See accompanying independent auditors' report.
21
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) Loans and Notes Payable, Continued:
Related Parties, Continued
--------------------------
In June 2002, Titan entered into a loan and security agreement with
Alco Financial Services, an entity owned by a member of Ventures Board
of Directors. Under the terms of the agreement, Titan can borrow up to
the sum of (1) 80% of the net face amount of Titan's eligible accounts
receivable, plus (2) the lesser of (i) $100,000 or (ii) 50% of the
eligible inventory. The loan carries an interest rate of the greater of
(a) 3.5% over the prime rate or (b) interest rate at the date of the
loan agreement (June 28, 2002), and matures on June 28, 2003. This loan
is subject to a loan fee of $24,000 for one year and a minimum monthly
interest charge of $7,500, and it is secured by all tangible assets of
Titan. Titan is subject to certain restrictions and covenants. During
the year ended August 31, 2002, Titan incurred and paid interest
expense of $202,515. As of August 31, 2002, the outstanding balance of
the loan was $733,684.
Titan has an unsecured loan payable to its major shareholder. The loan
is non-interest bearing and is due on demand. As of August 31, 2002,
the balance of this loan was $353,000. Upon completion of the merger
with Ventures, Titan converted $103,000 of the loan into 137,334 shares
of Ventures' common stock at $0.75 per share. It is Titan's intention
to repay the remaining $250,000 upon closing of its contemplated
private equity transaction.
In August 2002, Titan obtained two non-interest bearing loans payable
totaling $300,000 ($150,000 each). Upon completion of the merger with
Ventures, Titan converted the loans into 400,000 shares of Ventures'
common stock at $0.75 per share.
Titan had two unsecured 10% loans payable totaling $195,735 to
affiliated companies. On August 31, 2002, Titan converted the loans
into 130,490 shares of its common stock at $1.5.
(8) Long-Term Debt:
A summary as of August 31, 2002, is as follows:
Unsecured 6.25% note payable to a
financing company, payable in monthly
installments of $11,133, including interest,
through May 2003 $ 252,583
Less current maturities 131,692
-----------
$ 120,891
===========
See accompanying independent auditors' report.
22
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) Long-Term Debt, Continued:
A summary of the long-term debt maturities at August 31, 2002, is as
follows:
Year ending August 31,
2003 $ 131,692
2004 120,891
Thereafter --
-----------
$ 252,583
===========
(9) Obligations Under Capital Leases:
The following is a schedule by years of future minimum lease payments
required under capital lease obligations together with the present
value of the net minimum lease payments, as of August 31, 2002:
Year ending August 31,
2003 $ 148,422
2004 137,005
2005 137,005
2006 96,994
Thereafter --
-----------
Total minimum lease payments 519,426
Less amounts representing interest 68,543
-----------
Present value of net minimum lease payments 450,883
Less current portion 116,078
-----------
$ 334,805
===========
The cost of property and equipment under capitalized lease obligations
was $550,000, with related accumulated depreciation and amortization of
$91,667 as of August 31, 2002.
See accompanying independent auditors' report.
23
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) Income Taxes:
Realization of deferred tax assets is dependent on future earnings, if
any, the timing and amount of which is uncertain. Accordingly a
valuation allowance, in an amount equal to the net deferred tax asset
as of August 31, 2002, has been established to reflect these
uncertainties. As of August 31, 2002, the deferred tax asset before
valuation allowances is approximately $98,000, for federal purposes.
Income tax provision amounted to $0 for the period ended August 31,
2002 (an effective rate of 0%). A reconciliation of the provision
(benefit) for income taxes with amounts determined by applying the
statutory U.S. federal income tax rate to income before income taxes is
as follows:
Computed tax at federal statutory rate of 34% $ (584,000)
Reduction for loss from SVPC Partners, LLC 544,000
Temporary differences allocated to SVPC Partners, LLC
operations (58,000)
Change in valuation allowance 98,000
----------
$ -
==========
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. Significant components of Titan's deferred tax assets and
liabilities are as follows:
Deferred tax assets:
Allowance for doubtful accounts $ 27,000
Inventory reserve 7,000
Accrued vacation 24,000
Net operating losses carryforwards 40,000
----------
Net deferred assets before valuation allowance 98,000
Valuation allowance (98,000)
----------
Net deferred tax assets $ --
==========
At August 31, 2002, Titan has available unused net operating losses
carryforwards of approximately $110,000 for federal purposes that may
be applied against future taxable income and that, if unused, begin to
expire in 2022.
See accompanying independent auditors' report.
24
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) Stock Options:
As of August 31, 2002, Titan has not established an employee stock
option plan. However, in August 2002, Titan granted 710,000 stock
options to its Chief Executive Officer and Vice President of Sales. The
exercise price for these options, based on the management's assessment,
is equal to the fair market value of Titan's common stock at the date
of grant. Options expire no later than five years from the grant date
and are vested upon granted.
Additional information with respect to the stock option activity is as
follows:
Weighed
Number average of
of shares exercise price
---------- --------------
Outstanding at August 31, 2001 --
Granted 710,000 $ 1.50
Exercised -- --
Cancelled -- --
---------- ---------
Outstanding at August 31, 2002 710,000 $ 1.50
========== =========
Options exercisable at August 31, 2002 710,000 $ 1.50
========== =========
The following tables summarize information about stock options
outstanding and exercisable at August 31, 2002:
Weighted Outstanding Exercisable
average options options
Range of Number of remaining in weighted Number of weighted
exercise shares contractual life average shares average
prices outstanding in year exercise price exercisable exercise price
------ ----------- ------- -------------- ----------- --------------
$1.50 710,000 5.0 $1.50 710,000 $1.50
Titan has elected to follow APB Opinion No. 25 (Accounting for Stock
Issued to Employees) in accounting for its employee stock options.
Accordingly, no compensation expense is recognized in Titan's financial
statements because the exercise price of Titan's employee stock options
equaled to the fair value of Titan's common stock on the date of grant.
If under FASB Statement No. 123 (Accounting for Stock-Based
Compensation) Titan determined compensation costs based on the fair
value at the grant date for its stock options, net loss and loss per
share would have been increased to the following pro forma amounts:
See accompanying independent auditors' report.
25
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) Stock Options, Continued:
2002
----
Net loss:
As reported $(1,717,405)
Pro forma $(1,798,509)
Basic and diluted loss per share:
As reported $ (.26)
Pro forma $ (.27)
The weighted average estimated fair value of stock options granted
during 2002 was $1.5 per share, respectively. These amounts were
determined using the Black-Scholes option-pricing model, which values
options based on the stock price at the grant date, the expected life
of the option, the estimated volatility of the stock, the expected
dividend payments, and the risk-free interest rate over the expected
life of the option. The assumptions used in the Black-Scholes model for
stock options granted in 2002 were as follows:
Risk-free interest rate 4.0%
Expected volatility of common stock 1%
Dividend yield 0%
Expected life of options 2 years
The Black-Scholes option valuation model was developed for estimating
the fair value of traded options that have no vesting restrictions and
are fully transferable. Because option valuation models require the use
of subjective assumptions, changes in these assumptions can materially
affect the fair value of the options. The Company's options do not have
the characteristics of traded options, therefore, the option valuation
models do not necessarily provide a reliable measure of the fair value
of its options.
(12) Retirement Plan:
Titan has not established a 401(k) plan for the benefits of employees
and therefore made no contributions for the year ended August 31, 2002
or for the period from July 1, 2001 through August 31, 2002. Circuit
Systems previously had a 401(k) plan in place for its employees who
completed at least 12 months of service and were at least 21 years of
age and made matching contributions of $30,899 for the period from
September 1, 2000 to February 28, 2001, and $3,996 for the period from
March 1, 2001 to June 30, 2001.
See accompanying independent auditors' report.
26
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) Commitments:
The Company leases its facility. The following is a schedule by years
of future minimum rental payments required under operating leases that
have noncancellable lease terms in excess of one year as of August 31,
2002:
Real estate Other Total
----------- ----- -----
Year ending August 31,
2003 $ 400,374 $ -- $ 400,374
2004 435,787 -- 435,787
2005 438,693 -- 438,693
2006 352,934 -- 352,934
2007 406,887 -- 406,887
Thereafter 622,364 -- 622,364
------------- -------------- -------------
Total $ 2,657,039 $ -- $ 2,657,039
============= ============== =============
All leases expire prior to January 2009. Real estate taxes, insurance,
and maintenance expenses are obligations of Titan. Rent expense
totaled, $100,532 for the period from September 1, 2000 to February 28,
2001, $62,239 for the period from March 1, 2001 to June 30, 2001,
$26,094 for the period from July 1, 2001 to August 31, 2001, and
$309,614 for the year ended August 31, 2002
In May 2001, Titan entered into a consulting agreement with a related
party. Under the agreement, this related party will provide consulting
services to Titan and will receive $9,000 in monthly consulting fees.
The agreement was terminated in August 2002. During the year ended
August 31, 2002, Titan incurred $108,000 and paid $99,000 of consulting
fees to this related party.
In July 2002, Titan entered into an at-will employment agreement with
its Vice President of Sales ("VPS") that allows for either Titan or the
VPS to terminate employment at any time. Under the at-will employment
agreement, Titan will pay a base annual salary plus bonuses, which are
based on achieving certain monthly sales quotas and normal employee
benefits. This at-will employment agreement is for a term of five years
from the date of the agreement. In the event the VPS is terminated
without cause, Titan will pay three (3) months of base salary as
severance and continuation of normal employee benefits during the three
(3) month severance period. In addition, Titan has granted vested
options to purchase up to 360,000 shares of Titan's common stock at
$1.50 per share.
See accompanying independent auditors' report.
27
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) Commitments, Continued:
In August 2002, Titan entered into an at-will employment agreement with
its Chief Executive Officer ("CEO") that allows for either Titan or the
CEO to terminate employment at any time. This at-will employment
agreement is for a term of five years from the date of the agreement.
Under the agreement, the CEO will receive a minimum salary and normal
employee benefits. In addition, Titan has agreed to maintain a term
life insurance policy of $4,000,000, which, in the event of death of
the CEO, the CEO's spouse and Titan will be equal beneficiaries. In the
event the CEO is terminated without cause, Titan will pay three (3)
months of salary as severance and continuation of normal employee
benefits during the three (3) months severance period. In addition,
Titan has granted vested options to purchase up to 350,000 shares of
Titan's common stock at $1.50 per share.
In July 2001, SVPC Partners, LLC ("SVPC") entered an at-will employment
agreement with an employee. Under the at-will agreement, SVPC will pay
this employee base salary. In addition, SVPC has given 5% of SVPC's
interest as compensation. During the year ended August 31, 2002, this
employment agreement was terminated and three shareholders agreed to
acquire this former employee's shares for approximately $47,000.
(14) Non-Recurring Cost:
Merger Cost
-----------
During the year ended August 31, 2002, Titan incurred expense of
$420,611 related to the merger with Ventures. The cost includes
primarily legal and consulting fees.
Other Non Recurring Cost
------------------------
Non-recurring cost also includes certain non-capitalized costs related
to setting up its SID division totaling approximately $117,920.
(15) Subsequent Events (Unaudited):
Effective after the closing of August 31, 2002, Titan merged into
Ventures, a publicly traded "Shell" company, pursuant to the "Agreement
and Plan of Merger." All issued and outstanding shares of Titan EMS
were converted to Ventures' stock. (See Note 1 "Organization, Merger
Activity and Basis of Presentation" and Note 3 "Mergers and
Acquisitions.")
See accompanying independent auditors' report.
28
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) Subsequent Events (Unaudited), Continued:
From the period of September 2002 to November 2002, Titan received
approximately $1,200,000 from a private equity transaction. Such funds
received to date and further amounts to be raised in the private equity
transaction, net of certain professional fees, are to be used for
Titan's operations and investment in capital assets. See Note 1
"Organization, Merger Activity and Basis of Presentation."
See accompanying independent auditors' report.
29
TITAN EMS, INC., SVPC PARTNERS, LLC AND SVPC CIRCUIT SYSTEMS, INC.
PERIODS FROM SEPTEMBER 1, 2000 TO AUGUST 31, 2001
AND YEAR ENDED AUGUST 31, 2002
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) Proforma Balance Sheet:
The following unaudited proforma condensed combined balance sheet give
effect to the merger of Titan EMS, Inc. and Ventures-National, Inc. as
of August 31, 2002:
TITAN EMS, INC. AND VENTURES-NATIONAL, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET - AUGUST 31, 2002
ASSETS
PRO FORMA
PROFORMA TITAN
TITAN VENTURES ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
Current assets:
Cash and cash equivalents $ 76,707 $ -- $ -- $ 76,707
Accounts receivable, net of allowance
for doubtful account of $80,000 1,237,750 -- -- 1,237,750
Inventories 297,999 -- -- 297,999
Deferred cost 35,000 -- -- 35,000
Other current assets 79,262 -- -- 79,262
----------- ----------- ----------- -----------
Total current assets 1,726,718 --
-- 1,726,718
Property, equipment, and improvement, net
of accumulated depreciation and
amortization 2,488,201 -- -- 2,488,201
Intangible assets, net of accumulated
amortization 49,982 -- -- 49,982
Other assets
131,059 -- -- 131,059
----------- ----------- ----------- -----------
$ 4,395,960 $ -- $ -- $ 4,395,960
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 1,061,777 $ -- $ -- 1,061,777
Loans and notes payable 3,140,914 -- -- 3,140,914
Due to shareholders -- 9,660 -- 9,660
Current portion of long-term debt 131,692 -- -- 131,692
Current portion of capital lease
obligations 116,078 -- -- 116,078
----------- ----------- ----------- -----------
Total current liabilities 4,450,461 9,660 -- 4,460,121
Long-term debt, less current portion 120,891 -- -- 120,891
Capital lease obligations, less current
portion 334,805 -- -- 334,805
Stockholders' Deficit:
Common stock, $0.001 par value,
10,000,000 shares authorized 6,880 -- (6,880) --
Common stock, $0.001 par value,
950,000,000 shares authorized -- 99 6,880 6,979
Additional paid-in capital 1,178,078 2,428,858 (2,425,221) 1,181,715
Accumulated deficit (1,695,155) (2,438,617) 2,425,221 (1,708,551)
----------- ----------- ----------- -----------
Total stockholders' deficit (510,197) (9,660) -- (519,857)
----------- ----------- ----------- -----------
$ 4,395,960 $ -- $ -- $ 4,395,960
=========== =========== =========== ===========
See accompanying independent auditors' report.
30