<PAGE>
LETTERHEAD OF PRICEWATERHOUSECOOPERS
________________________________________________________________________________
EXHIBIT 99.1
HSP Graphics Ltd./
Graphiques HSP Ltee.
Financial Statements
October 31, 1999
(expressed in U.S. dollars)
<PAGE>
LETTERHEAD OF PRICEWATERHOUSECOOPERS
________________________________________________________________________________
December 10, 1999
Auditors' Report
To the Shareholders of
HSP Graphics Ltd./Graphiques HSP Ltee.
We have audited the balance sheet of HSP Graphics Ltd. / Graphiques HSP Ltee. as
at October 31, 1999 and the statements of income, retained earnings and cash
flows for the year then ended. These financial statements are the responsibility
of the company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at October 31, 1999 and the
results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Hamilton, Ontario
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP
and other members of the worldwide PricewaterhouseCoopers organization.
<PAGE>
HSP Graphics Ltd. / Graphiques HSP Ltee.
Balance Sheet
As at October 31, 1999
________________________________________________________________________________
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Assets
Current assets
Accounts receivable (note 5) 2,120,407 2,573,334
Inventories (notes 3 and 5) 316,525 400,338
Prepaid expenses 14,161 5,859
Income taxes recoverable - 114,978
----------------------------------------
2,451,093 3,094,509
Capital assets (notes 4 and 5) 1,115,940 1,237,760
Goodwill - net of accumulated amortization of $523,184 (1998 - 1,376,012 1,439,434
$459,762)
----------------------------------------
4,943,045 5,771,703
========================================
Liabilities
Current liabilities
Bank indebtedness 75,824 765,729
Accounts payable and accrued liabilities 901,716 1,299,025
Unearned revenue - 169,918
Income taxes payable 158,864 -
Current portion of long-term debt (note 5) 236,526 239,244
-----------------------------------------
1,372,930 2,473,916
Long-term debt (note 5) 500,918 380,616
Management fee loan (notes 5 and 7) 388,605 346,969
Management bonus payable (notes 5 and 8) 143,233 127,887
Promissory note payable (note 6) - 543,737
Future income taxes 157,004 17,671
----------------------------------------
2,562,690 3,890,796
----------------------------------------
Shareholders' Equity
Capital stock (note 9) 1,025 1,025
Retained earnings 2,379,330 1,879,882
----------------------------------------
2,380,355 1,880,907
----------------------------------------
4,943,045 5,771,703
========================================
Approved by the Board of Directors
____________________________________________ Director __________________________________________ Director
</TABLE>
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HSP Graphics Ltd./Graphiques HSP Ltee.
Statement of Retained Earnings
For the year ended October 31, 1999
________________________________________________________________________________
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Retained earnings - Beginning of year 1,879,882 1,580,965
Net income for the year 499,448 298,917
----------------------------------------
Retained earnings - End of year 2,379,330 1,879,882
========================================
</TABLE>
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HSP Graphics Ltd./Graphiques HSP Ltee.
Statement of Income
For the year ended October 31, 1999
_______________________________________________________________________________
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Sales 9,933,711 8,801,365
Cost of sales 5,396,284 4,640,911
----------------------------------------
Gross margin 4,537,427 4,160,454
Operating expenses 2,933,397 2,986,679
Management fee charges - net 344,267 337,192
----------------------------------------
Income before interest expense and income taxes 1,259,763 836,583
Interest on long-term debt 75,997 75,265
Other interest 77,372 115,837
----------------------------------------
Income before income taxes 1,106,394 645,481
----------------------------------------
Provision for income taxes
Current 467,613 294,909
Future 139,333 51,655
----------------------------------------
606,946 346,564
----------------------------------------
Net income for the year 499,448 298,917
========================================
</TABLE>
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HSP Graphics Ltd./Graphiques HSP Ltee.
Statement of Cash Flows
For the year ended October 31, 1999
________________________________________________________________________________
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Cash provided by (used in)
Operating activities
Net income for the year 499,448 298,917
Adjustments for items not affecting cash
Depreciation 162,406 171,985
Amortization 63,422 63,421
Future income taxes 139,333 51,655
Write-off of capital assets 39,890 -
---------------------------------------------
904,499 585,978
Changes in non-cash working capital items
Accounts receivable 452,927 (323,069)
Inventories 83,813 (187,980)
Prepaid expenses (8,302) 776
Unearned revenue (169,918) 169,918
Accounts payable and accrued liabilities (397,309) 150,597
Income taxes recoverable/payable 273,842 (167,051)
---------------------------------------------
1,139,552 229,169
---------------------------------------------
Investing activities
Proceeds on disposal of capital assets - 6,491
Purchase of capital assets (80,476) (148,892)
---------------------------------------------
(80,476) (142,401)
---------------------------------------------
Financing activities
Increase (decrease) in long-term debt 117,584 (301,774)
Decrease in promissory note payable (543,737) (203,901)
Increase in management fee loan 41,636 37,175
Increase in management bonus payable 15,346 13,702
---------------------------------------------
(369,171) (454,798)
---------------------------------------------
Decrease (increase) in bank indebtedness 689,905 (368,030)
Bank indebtedness - Beginning of year (765,729) (397,699)
---------------------------------------------
Bank indebtedness - End of year (75,824) (765,729)
=============================================
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest 96,339 140,225
Income taxes 206,063 472,828
</TABLE>
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HSP Graphics Ltd./Graphiques HSP Ltee.
Notes to Financial Statement
October 31, 1999
________________________________________________________________________________
(expressed in U.S. dollars)
1 Basis of reporting
These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles and are measured in Canadian
dollars; however, for translation of convenience, they have been converted to
a reporting currency of U.S. dollars. The 1999 and 1998 financial statements
were converted at the October 31, 1999 rate of exchange of 0.6797 U.S.
dollars for each Canadian dollar.
2 Summary of significant accounting policies
Revenue recognition
The company follows the completed contract method of accounting for contracts
in process, whereby billings and costs are recognized as revenues and
expenses only when work is substantially complete.
Capital assets
Capital assets are valued at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of capital assets
(except for land) and is calculated on a declining balance at an annual rate
of 10% for buildings and 20% for all other assets.
Inventories
Inventories are stated at the lower of cost, determined on a first-in, first-
out basis, and market. Market is defined as replacement cost for raw
materials and as net realizable value for work-in-process.
Goodwill
Goodwill is stated net of accumulated amortization. Amortization of goodwill
is calculated on a straight-line basis over 30 years. On an annual basis,
management review the recoverability of goodwill. The measurement of possible
impairment is based primarily on the ability to recover the balance of the
goodwill from expected future operating cash flows on an undiscounted basis.
Measurement of uncertainty
The preparation of financial statements in conformity with Canadian generally
accepted accounting principles 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 may vary from the current estimates. These
estimates are reviewed periodically and, as adjustments become necessary,
they are reported in earnings in the periods in which they become known.
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HSP Graphics Ltd./Graphiques HSP Ltee.
Notes to Financial Statement
October 31, 1999
________________________________________________________________________________
(expressed in U.S. dollars)
Financial instruments
The carrying amounts of accounts receivable, accounts payable and accrued
liabilities and bank indebtedness approximate fair value due to the short-
term maturities of these instruments.
The carrying value of the demand bank loan approximates its fair value due to
the fact that interest is being charged on a floating rate basis.
Based on available market information and estimated interest rates for long-
term debt with similar terms and maturity, the carrying values of the bank
loan maturing November 14, 2001, management fee loan and management bonus
payable approximate their fair values as at October 31, 1999.
Unearned revenue
Amounts billed to customers prior to commencing a contract are deferred and
recognized as revenues in the period in which the contract is completed.
Future income taxes
The company has applied the new accounting recommendations of section 3465 of
the Handbook of the Canadian Institute of Chartered Accountants entitled
"Income Taxes". The recommendations adopt the liability method of measuring
income taxes based on temporary differences between the financial reporting
and tax bases of assets and liabilities. This change in reporting has been
applied prospectively and does not have a significant impact on net income
for the year.
3 Inventories
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Raw materials 241,368 371,818
Work-in-progress 75,157 28,520
------------------------------------------
316,525 400,338
==========================================
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HSP Graphics Ltd./Graphiques HSP Ltee.
Notes to Financial Statements
October 31, 1999
________________________________________________________________________________
(expressed in U.S. dollars)
4 Capital assets
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------- -----------
Accumulated
Cost amortization Net Net
$ $ $ $
<S> <C> <C> <C> <C>
Land 231,088 - 231,088 231,088
Buildings 757,521 290,026 467,495 478,206
Machinery and equipment 1,159,089 780,925 378,164 485,431
Computer hardware 69,582 43,278 26,304 27,815
Computer software 51,509 38,620 12,889 15,220
-----------------------------------------------------------------------------------------
2,268,789 1,152,849 1,115,940 1,237,760
=========================================================================================
5 Long-term debt
1999 1998
$ $
<S> <C> <C>
Bank loan, repayable over 25 months at $16,992 per month plus
interest at prime plus 1.5%, due on demand; however, the company
has been advised by the lender that payment in full will not be
required prior to October 31, 2000 424,795 271,868
Bank loan, repayable at $2,719 per month plus interest at 7.75%
fixed, due November 14, 2001 312,649 347,992
------------------------------------------
737,444 619,860
Less: Current portion 236,526 239,244
------------------------------------------
500,918 380,616
==========================================
</TABLE>
A general security agreement providing a first charge on accounts receivable,
inventory and equipment; personal guarantees from four shareholders to a
maximum of $67,967 each; a first collateral mortgage for $237,885 over 1249
Advance Road with applicable insurance assignment and standard mortgage
clause; and a subrogation and subordination of the management fee loan and
management bonus payable have been pledged as collateral for the demand bank
loan and the bank loan due November 14, 2001.
(3)
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HSP Graphics Ltd./Graphiques HSP Ltee.
Notes to Financial Statements
October 31, 1999
________________________________________________________________________________
(expressed in U.S. dollars)
Under the terms of the banking agreement, the aggregate amounts of principal
payments required in each of the next three years are as follows:
$
2000 236,526
2001 236,526
2002 264,392
-------------
737,444
=============
The company's banking agreements specify numerous covenant requirements. As
at October 31, 1999, these covenants were not met by the company. The company
has, however, received appropriate waivers of these covenants.
6 Promissory note payable
The promissory note, which was owing to a former employee of the company, was
repaid during the year.
7 Management fee loan
A management fee loan of $250,119 as at October 31, 1999 (1998 - $250,119)
bears interest at 12% per annum and has no fixed repayment terms.
On January 2, 1997, an agreement was reached between HSP USA Management
Corporation ("HSP USA") and the company forgiving $672,829 of the $922,948
consulting and management fee charged by HSP USA to the company during the
year ended October 31, 1995, together with related interest charged during
fiscal 1996 on the unpaid fee. The forgiveness was a result of a Revenue
Canada re-assessment of the company's 1995 taxation year. Income resulting
from the forgiveness of $672,829 and income taxes related thereto were
included in the 1996 financial statements.
The components of the management fee loan are as follows:
1999 1998
$ $
Management fee loan 250,119 250,119
Accrued interest on management fee loan 138,486 96,850
--------------------------
388,605 346,969
==========================
(4)
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HSP Graphics Ltd./Graphiques HSP Ltee.
Notes to Financial Statements
October 31, 1999
________________________________________________________________________________
(expressed in U.S. dollars)
8 Management bonus payable
A management bonus payable of $101,951 (1998 - $101,951) bearing interest at
12% per annum is owing to a shareholder of the company and has no fixed
repayment terms. The components of the management bonus payable are as
follows:
1999 1998
$ $
Management bonus payable 101,951 101,951
Accrued interest on management bonus payable 41,282 25,936
--------------------------
143,233 127,887
==========================
9 Capital stock
Authorized
Unlimited number of common shares
Issued
1999 1998
$ $
850 (1998 - 850) common shares 1,025 1,025
=========================
Under the terms of a shareholders' agreement, one of the company's
shareholders has the option (the "put option") to require the company to
purchase any or all of the shareholder's 250 common shares at a price per
share based on a predetermined formula taking into account operating results
and values of the fiscal year-end immediately prior to exercise of the put
option. The shareholder's ability to require the company to purchase the
common shares under the put option is restricted to the point where the
purchase does not cause a material default under the company's credit
facilities, nor a result in a violation of corporate law.
Under the terms of the shareholders' agreement, the company has the option
("the call option") to redeem all of the common shares of the shareholder
referred to in the preceding paragraph at a price per share based on a
predetermined formula taking into account operating results and values of the
fiscal year-end immediately prior to the exercise of the call option (refer
also to note 15).
(5)
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HSP Graphics Ltd./Graphiques HSP Ltee.
Notes to Financial Statements
October 31, 1999
________________________________________________________________________________
(expressed in U.S. dollars)
10 Operating lease commitments
Future minimum lease payments required under the terms of automobile and
office equipment leases for the next four years are as follows:
$
2000 46,095
2001 37,081
2002 31,656
2003 1,132
----------
115,964
==========
11 Pension plan
The company sponsors a defined contribution pension plan for hourly and
salary employees. Pension expense amounted to $53,059 during 1999 (1998 -
$54,294).
12 Related party transactions and balances
a) During the year, total sales of $nil (1998 - $12,630) were made to a
company controlled by one of the shareholders of the company.
b) During the year, management fees totalling $344,267 (1998 - $337,192)
were paid to a company controlled by two of the shareholders of HSP
Graphics Ltd. / Graphiques HSP Ltee.
c) Included in accounts receivable is a receivable of $40,578 (1998 - $nil)
due from a shareholder of the company.
d) Included in accounts payable is an amount of $nil (1998 - $31,769) due to
a shareholder of the company.
These transactions are in the normal course of operations and are measured at
the exchange amount, which is the amount of considerations established and
agreed by the related parties.
(6)
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HSP Graphics Ltd./Graphiques HSP Ltee.
Notes to Financial Statements
October 31, 1999
________________________________________________________________________________
(expressed in U.S. dollars)
13 Contingencies
a) During 1993, the company filed a court action against certain parties,
seeking the recovery of previous years' pension fund contributions in the
amount of $62,407 that were made by the company but not deposited to the
pension fund. In addition, the company is seeking punitive damages in the
amount of $101,951. Any recovery of pension fund contributions will be
contributed to the pension plan. The amount of additional payments, if
any, to be made to the pension plan by the company is not presently
determinable.
b) The company has been named defendant in a lawsuit in the amount of
$38,889 for breach of contract. In the opinion of management, the claim
is without merit, and no provision has been made for the claim in the
accounts.
14 Uncertainty due to the Year 2000 Issue
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise
in some systems which use certain dates in 1999 to represent something other
than a date. The effects of the Year 2000 Issue may be experienced before,
on, or after January 1, 2000, and, if not addressed, the impact on operations
and financial reporting may range from minor errors to significant systems
failure which could affect an entity's ability to conduct normal business
operations. It is not possible to be certain that all aspects of the Year
2000 Issue affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
15 Subsequent event
On November 1, 1999, the company redeemed one hundred and twenty seven of its
outstanding common shares for consideration of $1,380,416. The amount in
excess of the book value of these common shares of $154 amounted to
$1,380,262 and will be accounted for as a distribution to the common
shareholder (refer also to note 9).
(7)
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