<PAGE>
EXHIBIT 99.1
INTERTEK INC.
(A Wholly Owned Subsidiary of Testing Holdings USA, Inc.)
Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
INTERTEK, INC.
(A Wholly Owned Subsidiary of Testing Holdings USA, Inc.)
Financial Statements
December 31, 1999 and 1998
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report 1
Balance Sheets 2
Statements of Operations 3
Statements of Stockholder's Equity (Deficit) 4
Statements of Cash Flows 5
Notes to Financial Statements 6
</TABLE>
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Intertek Inc.:
We have audited the accompanying balance sheets of Intertek Inc. (the
"Company"), a wholly owned subsidiary of Testing Holdings USA, Inc., as of
December 31, 1999 and 1998, and the related statements of operations,
stockholder's equity (deficit), and cash flows for the years 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 generally accepted auditing
standards. 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 audits provide a
reasonable basis for our opinion.
As discussed in notes 1 and 11 to the financial statements, the accompanying
financial statements exclude the assets, liabilities, revenues and expenses
of Inchcape Testing Services International, Inc. ("ITS International"), a
wholly owned subsidiary of the Company. Accordingly, the presentation is not
intended to be a complete presentation of the Company's assets, liabilities,
revenues and expenses.
In our opinion, the presentation of the financial statements referred to
above presents fairly, in all material respects, the financial position of
Intertek Inc. as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG LLP
May 1, 2000
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INTERTEK INC.
(A Wholly Owned Subsidiary of Testing Holdings USA, Inc.)
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 54,401 55,004
Trade accounts receivable, net 1,636,269 3,396,115
Due from affiliates, net 741,640 --
Prepaid expenses 43,910 54,023
------------ ------------
Total current assets 2,476,220 3,505,142
Property and equipment, net 123,871 147,597
Deposits 20,005 20,170
Goodwill, net -- 2,454,250
Other assets, net -- 441,011
------------ ------------
$ 2,620,096 6,568,170
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Cash overdraft 40,600 255,900
Trade accounts payable 96,438 163,708
Interest payable on long-term debt to affiliate 191,346 295,644
Due to affiliates, net -- 106,852
Accrued expenses 227,306 383,609
------------ ------------
Total current liabilities 555,690 1,205,713
Long-term debt, due to affiliate 3,342,365 3,342,365
------------ ------------
Total liabilities 3,898,055 4,548,078
------------ ------------
Stockholder's equity:
Common stock, $1 par value. Authorized 2,000 shares;
issued and outstanding 200 shares in 1999 and 1998 200 200
Contributed capital 8,299,848 8,299,848
Accumulated deficit (9,578,007) (6,279,956)
------------ ------------
Total stockholder's equity (deficit) (1,277,959) 2,020,092
Commitments and contingencies
------------ ------------
$ 2,620,096 6,568,170
============ ============
</TABLE>
See accompanying notes to financial statements.
2
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INTERTEK INC.
(A Wholly Owned Subsidiary of Testing Holdings USA, Inc.)
Statements of Operations
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 8,058,864 11,569,256
Cost of revenues 5,473,778 8,079,858
------------ ------------
Gross profit 2,585,086 3,489,398
Selling, general and administrative expenses 2,605,171 3,223,290
Amortization of goodwill 509,833 666,840
Loss on impairment of goodwill 2,385,441 --
------------ ------------
Operating loss (2,915,359) (400,732)
------------ ------------
Other expense - interest expense 382,692 373,840
------------ ------------
Loss before income taxes (3,298,051) (774,572)
Income taxes -- --
------------ ------------
Net loss $(3,298,051) (774,572)
============ ============
</TABLE>
See accompanying notes to financial statements.
3
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INTERTEK INC.
(A Wholly Owned Subsidiary of Testing Holdings USA, Inc.)
Statements of Stockholder's Equity (Deficit)
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
TOTAL
COMMON CONTRIBUTED ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY (DEFICIT)
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Balances at December 31, 1997 $ 200 8,299,848 (5,505,384) 2,794,664
Net loss (774,572) (774,572)
-------------- -------------- -------------- ----------------
Balances at December 31, 1998 200 8,299,848 (6,279,956) 2,020,092
Net loss (3,298,051) (3,298,051)
-------------- -------------- -------------- ----------------
Balances at December 31, 1999 $ 200 8,299,848 (9,578,007) (1,277,959)
============== ============== ============== ================
</TABLE>
See accompanying notes to financial statements.
4
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INTERTEK INC.
(A Wholly Owned Subsidiary of Testing Holdings USA, Inc.)
Statements of Cash Flows
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net cash provided by operating activities
Net loss $(3,298,051) (774,572)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 580,046 788,497
Write-off of accounts receivable -- 14,836
Provision for losses on accounts receivable -- 79,928
Impairment of goodwill 2,385,441 --
Increases (decreases) in cash resulting from changes in
operating assets and liabilities:
Accounts receivable 1,759,846 (884,727)
Due from affiliates 410,096 883,263
Prepaid expenses and other 10,113 17,010
Deposits 165 10,567
Cash overdraft (159,462) (23,839)
Accounts payable (123,108) 94,449
Accrued expenses and other (156,303) (152,600)
Interest payable (104,298) (144,992)
Due to affiliates (106,852) (576,960)
------------ ------------
Net cash provided by (used in) operating activities 1,197,633 (669,140)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (46,500) (10,801)
------------ ------------
Net cash used in investing activities (46,500) (10,801)
------------ ------------
Cash flows from financing activities:
(Advances) borrowings from affiliates, net (1,151,736) 683,812
------------ ------------
Net cash (used in) provided by financing activities (1,151,736) 683,812
------------ ------------
Net increase (decrease) in cash and cash equivalents (603) 3,871
Cash at beginning of year 55,004 51,133
------------ ------------
Cash at end of year $ 54,401 55,004
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 486,990 518,832
Cash paid during the year for income taxes -- --
============ ============
</TABLE>
See accompanying notes to financial statements.
5
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INTERTEK, INC.
(A Wholly Owned Subsidiary of Testing Holdings USA, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) DESCRIPTION OF BUSINESS
Intertek Inc. (the "Company") is a wholly owned subsidiary of
Testing Holdings USA, Inc., which is a subsidiary of Intertek Testing
Services Limited, (the "parent"), a United Kingdom company which
provides international quality assurance testing. The Company
provides supply-based quality, procurement and technical services to
help customers identify, solve, and prevent problems that stem from,
or lead to, supplier and in-house defects, process malfunctions, or
delivery errors. Headquartered in Centreville, Virginia, the
Company's customer base is comprised of Fortune 50 companies in
various industry sectors, including defense contractors, aerospace
and aircraft, and telecommunications. The Company is economically
dependent on its parent as described in note 3.
(b) BASIS OF FINANCIAL STATEMENT PRESENTATION
The Company's balance sheets as of December 31, 1999 and 1998, and
its related statements of operations, stockholder's equity (deficit),
and cash flows for the years then ended, exclude the assets,
liabilities, revenues and expenses of Inchcape Testing Services
International, Inc. ("ITS International"), a wholly owned subsidiary
of the Company, as the purchase agreement between the Company and
Unitek Technical Services, Inc., described in note 11, does not
include the sale of ITS International.
(c) REVENUE RECOGNITION
The Company engages principally in fixed-rate labor hour and
unit-price contracts. Revenue on fixed-rate labor hour and unit-price
contracts is recognized as services are performed in accordance with
terms of the contract.
(d) PROPERTY AND EQUIPMENT
Computer equipment and software and office furniture and fixtures
are recorded at cost and are depreciated using the straight-line
method over the estimated useful lives of the assets, which range
from 3 to 7 years.
(e) GOODWILL
Goodwill, which represents the excess of purchase price over the
estimated fair value of net tangible and identifiable intangible
assets acquired by the parent in connection with its acquisition of
the Company in October 1996, was amortized on a straight-line basis
over the expected periods to be benefited of 20 years. The Company
assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
Company. The amount of goodwill impairment, if any, is measured based
on projected discounted future operating cash flows using a discount
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rate reflecting the Company's average cost of funds. Accumulated
amortization of goodwill as of December 31, 1998, approximated
$298,200. This asset was written off as of December 31, 1999 due to
the impairment described in note 1 (j).
(f) OTHER ASSETS
Other assets consists of the estimated fair value of a
covenant-not-to-compete agreement entered into by the parent during
its acquisition of the Company in October 1996. Pursuant to this
agreement, Inchcape, PLC, the former parent company, agreed for a
period of 3 years, not to be engaged or interested in any business
which competed with the business of the Company in the United States.
The cost of the covenant is being amortized on a straight-line basis
over the 3 year term of the agreement. Accumulated amortization
associated with this asset as of December 31, 1998 approximated
$1,146,600. This asset was fully amortized as of December 31, 1999.
(g) ADVERTISING
Advertising costs are expensed as incurred. Advertising costs
approximated $47,200 and $50,900 during 1999 and 1998, respectively.
(h) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. 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 and operating loss and tax
credit carryforwards. 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. 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.
For federal income tax purposes, the Company is included in the
consolidated tax return filed by its parent. The Company is not
reimbursed by the parent for income tax benefits the group received
which are attributable to the Company's operations. For state tax
purposes, the Company files separate income tax returns apart from
its parent.
(i) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities as of the balance
sheet dates and the reporting of revenue and expenses during the
reporting periods to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could
differ from those estimates.
7
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(j) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
During the year ended December 31, 1999, the Company recorded a
loss due to impairment of goodwill of approximately $2,385,400,
reducing this asset balance to zero. Based on the terms of the Asset
Purchase Agreement described in note 11 and significant changes in
the Company's relationship with a major customer during 1999, which
led to substantial declines in revenues and operating cash flows,
management performed an evaluation of the recoverability of its
goodwill and concluded from the results of this evaluation that a
significant impairment of this intangible asset had occurred. An
impairment charge was required because estimated discounted future
cash flows were less than the carrying value of the asset.
Considerable management judgement is necessary to estimate fair
value.
(2) CONCENTRATIONS OF CREDIT RISK
Approximately 55% and 70% of the trade accounts receivable before
allowance at December 31, 1999 and 1998, respectively, were due from four
customers. Four customers accounted for approximately 60% and 70% of the
Company's net sales during 1999 and 1998, respectively.
(3) RELATED PARTY TRANSACTIONS
The Company's due to and due from affiliates consist of payables and
receivables for services provided by Testing Holdings USA, Inc.'s
centralized management group, as well as payables and receivables related
to the Company's participation in a bank account pool with its affiliates.
Centralized management group services include administration of the 401(k),
employer and employee insurance, treasury function, and taxes; such costs
are allocated to the Company based on its net sales relative to the net
sales of affiliate subsidiaries of Testing Holdings USA, Inc. and
approximated $122,000 and $121,000 during 1999 and 1998, respectively.
In addition, the Company's due to and due from affiliates include the
impact of resource sharing arrangements between the Company and its
affiliates whereby the Company performs customer services on behalf of an
affiliate or an affiliate performs customer services on behalf of the
Company.
8
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Such arrangements are conducted at market terms and rates. The Company
recognized revenue from affiliates approximating $135,600 and $193,100
during 1999 and 1998, respectively. The Company expensed approximately
$131,700 and $834,100 during 1999 and 1998, respectively, for customer
services performed by affiliates on the Company's behalf.
The Company's interest payable on long-term debt and long-term debt
relate to affiliate party transactions further described in note 7.
(4) ACCOUNTS RECEIVABLE
Accounts receivable as of December 31, 1999 and 1998, is comprised of
the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Contract receivables:
Billed $ 1,689,770 3,245,658
Unbilled 83,690 286,735
------------ ------------
Total contract receivables 1,773,460 3,532,393
Less - allowance for doubtful accounts (137,191) (136,278)
------------ ------------
Net accounts receivable $ 1,636,269 3,396,115
============ ============
</TABLE>
Management expects the majority of unbilled receivables will be billed
and collected during the next 12 months and has made an allowance for
receivable amounts that it believes are not collectible.
(5) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Computer equipment and software $ 520,785 474,285
Office furniture and fixtures 349,795 401,421
------------ ------------
870,580 875,706
Less accumulated depreciation (746,709) (728,109)
------------ ------------
$ 123,871 147,597
============ ============
</TABLE>
9
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(6) LEASES
The Company leases office space for an initial five-year term expiring
in 2003 with an annual renewal thereafter. In addition, the Company leases
certain office equipment and an automobile. Total rent expense associated
with these leases for the years ended December 31, 1999 and 1998
approximated $265,500 and $271,500, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31,
1999 approximate:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
---------------
<S> <C>
2000 $ 269,100
2001 271,500
2002 263,700
2003 45,000
Thereafter --
---------------
Total minimum lease payments $ 849,300
===============
</TABLE>
The Company subleases certain office space under a 3-year lease agreement
established on October 1, 1999. Sublease rental income in 1999 approximated
$16,400.
Future minimum sublease receipts under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) as of
December 31, 1999 approximate:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
---------------
<S> <C>
2000 $ 65,400
2001 65,400
2002 49,100
Thereafter --
---------------
Total minimum lease receipts $ 179,900
===============
</TABLE>
(7) LONG-TERM DEBT
In 1996, the Company entered into an intra-group financing agreement
with Testing Holdings USA, Inc. (the U.S. holding company of Intertek Testing
Services Limited, the parent company,) which transferred the liability for
debt issued to acquire certain subsidiaries of Inchcape, PLC in November
1996, from the parent to the entities in the group on a pro rata basis.
Borrowings under the financing agreement mature in November 2006, 10 years
from the date of the borrowing. Upon maturity of the
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debt, the principal is to be repaid in full to Testing Holdings USA,
Inc., so as to allow the holding company to fulfill the repayment of the
principal portion of the debt. Interest on the borrowing accrues at an
effective rate of 11.3%. Terms for payment of the interest by the Company
are discretionary, based on available cash resources. The amount
outstanding under this agreement was $3,342,365 at December 31, 1999 and
1998.
(8) INCOME TAXES
There was no current or deferred income tax expense for the year ended
December 31, 1999 and 1998.
Income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 35 percent to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Computed "expected" tax expense $(1,154,318) (271,100)
Increase (reduction) in income taxes resulting from:
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets allocated
to income tax expense 61,417 114,262
Goodwill amortization and writedown 834,904 46,794
Utilization of losses for federal purposes by parent 243,632 123,599
Other, net 14,365 (13,555)
------------ ------------
$ -- --
============ ============
</TABLE>
11
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The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below.
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts $ 54,876 54,511
Accrued interest 76,538 118,258
Accrued expenses 90,873 153,443
Non-compete covenant 500,988 366,921
Net operating loss carryforwards 64,805 21,812
------------ ------------
Total gross deferred tax assets 788,080 714,945
Less valuation allowance (770,750) (709,333)
------------ ------------
Net deferred tax assets 17,330 5,612
------------ ------------
Deferred tax liabilities:
Property and equipment 17,330 5,612
------------ ------------
Total gross deferred liabilities 17,330 5,612
------------ ------------
Net deferred tax asset $ -- --
============ ============
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1999
and 1998 was $770,750 and $709,333, respectively. The net change in the
total valuation allowance for the years ended December 31, 1999 and 1998
was an increase of $61,417 and $114,262, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment.
At December 31, 1999, the Company has net operating loss carryforwards
for state income tax purposes of approximately $1,443,600 which are
available to offset future state taxable income. The net operating loss
carryforwards are not available for federal tax purposes because the
Company files a consolidated federal income tax return with its parent and
no tax sharing agreement exists.
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(9) EMPLOYEE BENEFIT PLANS
The Company has a defined contribution savings plan under the provisions
of Section 401(k) of the Internal Revenue Code. The plan is available to
substantially all domestic employees. The Company matches employees'
contributions at 50 percent of the first 4 percent of the employees'
contributions. In addition, the Company's plan allows for a discretionary
employer contribution of 2% of eligible employees contributions for the
year. During the year ended December 31, 1999 and 1998, the Company
contributed $21,100 and $66,100, respectively, to the plan.
(10) COMMITMENTS AND CONTINGENCIES
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position.
(11) SUBSEQUENT EVENT
In February 2000, the Company entered into an Asset Purchase Agreement
(APA) with Unitek Technical Services, Inc. and transferred substantially
all of its operating assets to Unitek Technical Services, Inc. for
$1,650,000. The operations of the Company's subsidiary, ITS International,
were not subject to the APA.
13
