BECHLER CAMS, INC.
FINANCIAL STATEMENTS
MARCH 31, 2002
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report......................................... 1
Balance Sheets....................................................... 2
Statements of Operations and Retained Earnings....................... 3
Statements of Cash Flows............................................. 4
Notes to Financial Statements.........................................5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Bechler Cams, Inc.
We have audited the accompanying balance sheet of Bechler Cams, Inc.
(the "Company"), as of March 31, 2002, and the related statements of
operations and retained earnings and cash flows for each of the years
in the two-year period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 Bechler
Cams, Inc. as of March 31, 2002, and the results of its operations and
its cash flows for each of the years in the two-year period then ended
in conformity with accounting principles generally accepted in the
United States of America.
/s/ Squar, Milner, Rheel & Williamson, LLP
September 5, 2002
Newport Beach, California
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BECHLER CAMS, INC.
BALANCE SHEETS
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ASSETS
September 30, March 31,
2002 2002
------------- -------------
(Unaudited)
Current Assets
Cash $ 2,570 $ 5,037
Accounts receivable 130,750 76,050
Inventories 114,609 119,673
Prepaid expenses and other current assets 5,666 5,767
------------- -------------
Total current assets 253,595 206,527
Property and Equipment, net 212,999 256,991
Deferred Income Tax Asset 47,000 47,000
Other Assets 8,400 11,997
------------- -------------
$ 521,994 $ 522,515
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 48,296 $ 54,615
Accrued expenses 34,840 31,678
Line-of-credit 92,262 46,947
Note payable -- 3,026
Current portion of obligations under capital leases 53,246 63,524
------------- -------------
Total current liabilities 228,644 199,790
Obligations Under Capital Leases, net of current portion 12,692 35,129
------------- -------------
Total Liabilities 241,336 234,919
------------- -------------
Commitments and Contingencies
Stockholders' Equity
Common stock, no par value, 1,000 shares authorized;
100 shares issued and outstanding 1,400 1,400
Notes receivable from stockholders (107,023) (106,085)
Retained earnings 386,281 392,281
------------- -------------
Total stockholders' equity 280,658 287,596
------------- -------------
$ 521,994 $ 522,515
============= =============
See independent auditors' report and accompanying notes to the financial
statements.
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BECHLER CAMS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
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For The Six Months Ended For The Year Ended
September 30, March 31,
2002 2001 2002 2001
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
NET SALES $ 620,903 $ 726,312 $ 1,175,055 $ 1,396,879
COST OF SALES 462,747 561,233 946,425 987,287
------------- ------------- ------------- -------------
GROSS PROFIT 158,156 165,079 228,630 409,592
OPERATING EXPENSES
Payroll and related 116,842 138,896 238,685 255,076
Selling, general and administrative 46,500 52,552 95,749 80,083
------------- ------------- ------------- -------------
163,342 191,448 334,434 335,159
------------- ------------- ------------- -------------
OPERATING (LOSS) INCOME (5,186) (26,369) (105,804) 74,433
INTEREST EXPENSE, NET 14 6,077 14,941 19,444
------------- ------------- ------------- -------------
(LOSS) INCOME BEFORE INCOME TAXES (5,200) (32,446) (120,745) 54,989
PROVISION (BENEFIT) FOR INCOME TAXES 800 800 (46,200) 800
------------- ------------- ------------- -------------
NET (LOSS) INCOME (6,000) (33,246) (74,545) 54,189
RETAINED EARNINGS - beginning of period 392,281 466,826 466,826 412,637
------------- ------------- ------------- -------------
RETAINED EARNINGS - end of period $ 386,281 $ 433,580 $ 392,281 $ 466,826
============= ============= ============= =============
Basic and diluted net (loss) income available to
common shareholders per common share $ (60) $ (332) $ (745) $ 542
============= ============= ============= =============
Basic and diluted weighted average common shares
outstanding 100 100 100 100
============= ============= ============= =============
See independent auditors' report and accompanying notes to the financial
statements.
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BECHLER CAMS, INC.
STATEMENTS OF CASH FLOWS
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For The Six Months Ended For The Year Ended
September 30, March 31,
2002 2001 2002 2001
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net (loss) income $ (6,000) $ (33,246) $ (74,545) $ 54,189
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 43,992 41,347 105,972 109,188
Changes in operating assets and liabilities:
Accounts receivable (54,700) 24,517 35,512 (33,331)
Inventories 5,064 (17,512) (22,533) (10,650)
Prepaid expenses and other 3,698 1,014 (1,477) (797)
Deferred income tax asset - - (47,000) -
Accounts payable (6,319) (5,738) 36,541 4,599
Accrued expenses 3,162 (1,008) (2,205) 6,657
------------- ------------- ------------- -------------
Net cash (used in) provided by operating activities (11,103) 9,374 30,265 129,855
------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment - - - (6,774)
------------- ------------- ------------- -------------
Net cash used in investing activities - - - (6,774)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Principal repayments (advances) on notes receivable from
stockholders (938) - 16,590 (11,591)
Net borrowings on line-of-credit 45,315 6,517 19,535 27,412
Principal repayments on note payable (3,026) (8,216) (18,024) (38,604)
Principal repayments on capital leases (32,715) (41,824) (94,774) (81,473)
------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities 8,636 (43,523) (76,673) (104,256)
------------- ------------- ------------- -------------
Net (decrease) increase in cash (2,467) (34,149) (46,408) 18,825
Cash at beginning of period 5,037 51,445 51,445 32,620
------------- ------------- ------------- -------------
Cash at end of period $ 2,570 $ 17,296 $ 5,037 $ 51,445
============= ============= ============= =============
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest $ 12,342 $ 14,682 $ 23,807 $ 29,083
============= ============= ============= =============
Income taxes $ 800 $ 800 $ 800 $ 800
============= ============= ============= =============
Supplemental disclosure of non-cash investing and financing activities:
During the year ended March 31, 2001, the Company purchased property and
equipment that was financed through capital leases of $77,138.
See independent auditors' report and accompanying notes to the financial
statements.
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BECHLER CAMS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended March 31, 2002 and 2001
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
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Bechler Cams, Inc. (the "Company") was incorporated in the State of California
in February 1957. The Company is a machine job shop specializing in the
manufacture of precision component parts. The production type contracts are
performed under fixed-price short-term contracts. The length of the Company's
contracts vary, but are usually one to two months.
In November 2002, the Company entered into a reorganization agreement to become
a wholly-owned subsidiary of a publicly traded company (see Note 9).
Concentrations of Credit Risks
- ------------------------------
Cash is maintained at various financial institutions. The Federal Deposit
Insurance Corporation insures accounts at each institution for up to $100,000.
The Company sells products to customers throughout the United States. The
Company performs periodic credit evaluations of its customers and does not
obtain collateral with which to secure its accounts receivable. The Company's
ability to collect receivables is affected by economic fluctuations in the
geographic areas served by the Company. Management periodically reviews accounts
receivable and establishes an allowance for accounts deemed uncollectible. At
March 31, 2002, management considered all accounts receivable to be fully
collectible and, accordingly, no allowance for doubtful accounts has been
established. Although management expects to collect amounts due, actual
collections may differ from the estimated amounts.
During fiscal 2002, the Company had sales to four customers, which represented
60% of net sales. During fiscal 2001, the Company had sales to two customers,
which represented 48% of net sales. At March 31, 2002, three customers accounted
for 88% of accounts receivable. If the relationship between the Company and
these customers was altered, the future results of operations and financial
condition could be significantly affected.
Risks and Uncertainties
- -----------------------
The Company operates in a highly competitive industry that is subject to intense
competition. The Company's operations are subject to significant risks and
uncertainties including financial, operational, technological and other risks
associated with operating a business including the potential risk of business
failure.
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BECHLER CAMS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended March 31, 2002 and 2001
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
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 the 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. Significant estimates made by management are, among
others, estimates for deferred taxes, realization of inventories and
collectibility of accounts receivable. Actual results could materially differ
from those estimates.
Inventories
- -----------
Inventories are stated at the lower of cost or net realizable value. Cost is
determined under the first-in, first-out method. Inventories represent cost of
work in process and finished units not shipped. Cost includes all direct
material and labor and the indirect costs related to the contract performance,
such as indirect labor, supplies and other indirect overhead items. Market is
determined by comparison with recent purchases or net realizable value. The
Company operates in an industry in which its products are subject to design
changes and are manufactured based on customer specifications. Such net
realizable value is based on managements forecast, and accordingly, should
design requirements change significantly or customer orders be canceled or
decline, the ultimate net realizable value of such products could be less than
the carrying value of such amounts. At March 31, 2002, management believes that
inventories are carried at the lower of cost or net realizable value.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from five to seven years. Equipment under capital lease obligations are
depreciated over the shorter of the estimated useful life or the term of the
lease. Maintenance and repairs are charged to expense as incurred. Significant
renewals and betterments are capitalized. At the time of retirement or other
disposition of property and equipment, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in the
statement of operations.
Long-Lived Assets
- -----------------
Statement of Financial Accounting Standards ("SFAS") No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In accordance with the provisions of SFAS 121, the
Company regularly reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. Based on this analysis, the Company's management believes that
no impairment of the carrying value of its long-lived assets existed at March
31, 2002. There can be no assurance, however, that market conditions will not
change or demands for the Company's services or products will continue which
could result in impairment of long-lived assets in the future.
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BECHLER CAMS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended March 31, 2002 and 2001
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
- -------------------
Revenues from fixed-price contracts are recognized at the time the product units
are shipped. The Company will ship units throughout the contract period and
recognize revenue and related cost on a product unit shipped basis.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. Management believes that the Company's revenue recognition policy
conforms to SAB 101.
Income Taxes
- ------------
Under SFAS 109, "Accounting for 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 bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. A valuation allowance is provided for significant deferred
tax assets when it is more likely than not that such assets will not be
recovered.
Basic and Diluted Earnings Per Common Share
- -------------------------------------------
Under SFAS 128, "Earnings Per Share", basic earnings per common share is
computed based on the weighted average number of shares outstanding for the
period. Diluted earnings per share is computed by dividing net income by the
weighted average shares outstanding assuming all dilutive potential common
shares were issued (using the treasury stock method). Because the Company has no
potential common shares, basic and diluted earnings are the same.
Fair Value of Financial Instruments
- -----------------------------------
SFAS 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments when it is
practicable to estimate that value. The carrying amount of the Company's cash,
receivables, trade payables, accrued expenses, line-of-credit, obligations under
capital leases, and note payable approximates their estimated fair values due to
the short-term maturities of those financial instruments. The fair values of
notes receivable from stockholders are not determinable as these transactions
are with related parties.
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BECHLER CAMS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended March 31, 2002 and 2001
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Significant Recent Accounting Pronouncements
- --------------------------------------------
SFAS 141, "Business Combinations," which is effective for business combinations
initiated after June 30, 2001, eliminates the pooling of interest method of
accounting for business combinations and requires that all business combinations
occurring after July 1, 2001 are accounted for under the purchase method. The
adoption of SFAS 141 did not have a material impact on the Company's financial
statements.
SFAS 142, "Goodwill and Other Intangible Assets," is effective for fiscal years
beginning after December 15, 2001. Early adoption is permitted for entities with
fiscal years beginning after March 15, 2001, provided that the first interim
financial statements have not been previously issued. SFAS 142 addresses how
intangible assets that are acquired individually or with a group of other assets
should be accounted for in the financial statements upon their acquisition and
after they have been initially recognized in the financial statements. SFAS 142
requires that goodwill and intangible assets that have indefinite useful lives
not be amortized but rather be tested at least annually for impairment, and
intangible assets that have finite useful lives be amortized over their useful
lives. SFAS 142 provides specific guidance for testing goodwill and intangible
assets that will not be amortized for impairment. In addition, SFAS 142 expands
the disclosure requirements about goodwill and other intangible assets in the
years subsequent to their acquisition. Impairment losses for goodwill and
indefinite-life intangible assets that arise due to the initial application of
SFAS 142 are to be reported as resulting from a change in accounting principle.
However, goodwill and intangible assets acquired after June 30, 2001 will be
subject immediately to the provisions of SFAS 142. The Company does not expect
SFAS 142 to have a material effect on its financial statements.
SFAS 143, "Accounting for Asset Retirement Obligations," establishes standards
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company does not
expect SFAS 143 to have a material effect on its financial statements.
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. The provisions of SFAS 144
are effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within these fiscal years, with early
adoption encouraged. The adoption of SFAS 144 did not have a material impact on
the Company's financial statements.
SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," is
effective for such activities initiated after December 31, 2002. Activities of
this type include restructurings (such as relocation of a business and
fundamental reorganizations of a business itself), which may give rise to costs
such as contract cancellation provisions, employee relocation, and one-time
termination costs. SFAS 146 prohibits liability recognition based solely on
management's intent, and requires that liabilities be measured at estimated fair
value. Management has not determined the effect, in any, of SFAS 146 on the
Company's future financial statements.
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BECHLER CAMS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended March 31, 2002 and 2001
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Unaudited Interim Financial Statements
- --------------------------------------
The accompanying unaudited financial statements as of and for the six months
ended September 30, 2002 and 2001 have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial statements. Accordingly, these financial statements do not
include certain information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. However the accompanying unaudited financial statements contain all
adjustments (consisting only of normal recurring accruals) which, in the opinion
of management, are necessary in order to fairly present the financial
statements. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the Company's audited financial
statements, and notes thereto, which are included herein.
2. INVENTORIES
Inventories consist of the following at March 31, 2002:
Raw materials and component parts $ 3,000
Work-in-process 116,673
------------
$ 119,673
============
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31, 2002:
Machinery and equipment $ 1,706,116
Leasehold improvements 69,383
Office equipment 62,733
------------
1,838,232
Less accumulated depreciation and amortization (1,581,241)
------------
$ 256,991
============
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BECHLER CAMS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended March 31, 2002 and 2001
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4. NOTES RECEIVABLE FROM STOCKHOLDERS
The Company periodically advances monies to Stockholders. The advances are due
on demand, however they have not traditionally been repaid within a year of the
borrowings and accrue interest at 8% per annum. Outstanding borrowings totaled
$106,085 at March 31, 2002. The Company earned approximately $8,900 and $9,600
of interest income on the borrowings during fiscal 2002 and 2001, respectively,
which the Company has recorded in the accompanying statements of operations. The
Company has reclassified the notes receivable as a decrease to stockholders'
equity in the accompanying balance sheet at March 31, 2002.
5. LINE-OF-CREDIT
The Company has a revolving line of credit agreement (the "Line") with a
financial institution. The Line bears interest at the prime rate (4.75% at March
31, 2002) plus 2.00% per annum. The Line is secured by substantially all the
assets of the Company and guaranteed by the stockholders. The terms of the Line
provide for borrowings of up to $100,000. At March 31, 2002, the Company's
outstanding borrowings approximated $47,000. The Line requires the Company to
maintain certain non-financial covenants, which the Company was in compliance
with as of March 31, 2002. The Line matures in August 2003, with automatic
one-year renewal features, as defined.
6. INCOME TAXES
During fiscal 2002 and 2001, the provision for taxes differs from the amounts
computed by applying the U.S. Federal income tax rate of 34% to income before
provision (benefit) for taxes as a result of the following:
2002 2001
------------ -------------
Computed "expected" tax (benefit) expense $ (41,000) $ 18,000
Addition to (reduction) in income taxes
resulting from:
State income taxes, net of federal benefit (6,000) 4,000
Tax net operating loss carryforward - (20,000)
Other 800 (1,200)
------------ -------------
$ (46,200) $ 800
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BECHLER CAMS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended March 31, 2002 and 2001
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6. INCOME TAXES (continued)
The operating loss carryforward tax effects of temporary differences that give
rise to significant portions of the deferred tax assets at March 31, 2002 are
presented below:
Deferred tax assets:
Business credit carryover $ 12,000
Net operating loss carryforwards 35,000
------------
$ 47,000
============
At March 31, 2002, the Company had net operating loss carryforwards of
approximately $90,000 and $60,000 available to offset future taxable federal and
state income, respectively. If not utilized to offset future taxable income, the
carryforwards will expire in various years through 2023.
Since the Company experienced a greater than 50% change in ownership as defined
in Section 382 of the Internal Revenue Code (see Note 9), the utilization of the
Company's tax net operating loss carryforwards could be severely restricted.
7. COMMITMENTS AND CONTINGENCIES
Leases
- ------
The Company leases the facilities in which it operates and certain equipment.
The Company entered into a non-cancelable operating lease agreement for its
corporate and manufacturing facility with its stockholders. Payments are at the
rate of $6,500 per month and the lease expires in November 2005. Equipment is
leased under operating leases which require monthly payments ranging from
approximately $800 to $2,000 through March 2004. Equipment is also leased under
capital leases which require monthly payments ranging from approximately $800 to
$3,500 at interest ranging from approximately 10% to 16% through June 2004.
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BECHLER CAMS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended March 31, 2002 and 2001
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8. COMMITMENTS AND CONTINGENCIES (continued)
Leases (continued)
Future minimum lease payments on the capital lease obligations and operating
leases for the years ending March 31 are as follows:
Operating Related Capital
Leases Party Leases Leases Total
------------ ------------ ------------ ------------
2003 $ 15,000 $ 78,000 $ 71,000 $ 164,000
2004 7,000 78,000 33,000 118,000
2005 - 78,000 4,000 82,000
2006 - 52,000 - 52,000
------------ ------------ ------------ ------------
Total minimum
lease payments $ 22,000 $ 286,000 108,000 $ 416,000
============ ============ ============
Less imputed interest (9,347)
------------
Present value of
minimum lease payments 98,653
Less current portion (63,524)
------------
$ 35,129
============
Rental expense for operating leases approximated $91,000 and $82,000, which
includes approximately $78,000 and $69,000 paid to related parties for the years
ended March 31, 2002 and 2001, respectively. Interest expense incurred pursuant
to capital lease obligations was approximately $15,000 and $24,000 for the years
ended March 31, 2002 and 2001, respectively.
The following is an analysis of the equipment under capital leases as of March
31, 2002, which is included in property and equipment in the accompanying
balance sheet (see Note 3).
Machinery and equipment $ 395,664
Office equipment 23,263
------------
418,927
Accumulated depreciation (228,073)
------------
$ 190,854
============
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BECHLER CAMS, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended March 31, 2002 and 2001
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8. COMMITMENTS AND CONTINGENCIES (continued)
Legal
- -----
The Company may be involved from time to time in various claims, lawsuits,
disputes with third parties, actions involving allegations or discrimination or
breach of contract actions incidental in the normal operations of the business.
The Company is currently not involved in any such litigation, which management
believes could have a material adverse effect on its financial position or
result of operations.
Backlog (Unaudited)
- -------------------
The following schedule shows a reconciliation of backlog representing signed
purchase orders.
Balance, April 1, 2001 $ 440,000
New contracts, April 1, 2001 through March 31, 2002 1,120,000
Less, contract revenue earned - April 1, 2001
through March 31, 2002, net (1,175,000)
------------
Balance March 31, 2002 385,000
New contracts - April 1, 2002 through September 30, 2002 615,000
Less, contract revenue earned April 1, 2002 through
September 30,2002
(630,000)
------------
Balance, September 30, 2002 $ 370,000
============
9. SUBSEQUENT EVENTS
In November 2002, the Company entered into a definitive Agreement and Plan of
Reorganization (the "Agreement") with Gateway International Holdings
("Gateway"), a publicly traded company, pursuant to which the Company became a
wholly owned subsidiary of Gateway. According to the Agreement, the shareholders
of the Company received 3,530,000 restricted common shares of Gateway in
exchange for 100 common shares of the Company, which represents all of the
outstanding shares of the Company. The transaction will be accounted for in
accordance with purchase accounting as deemed appropriate under SFAS 141.
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