<PAGE> 1
EXHIBIT 99.10
THE KIPPGROUP
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION> Page
====
<S> <C>
Report of Independent Public Accountants..................... 2
Balance Sheets as of December 31, 1998 and 1997.............. 3
Statements of Income for the years ended December 31, 1998
and 1997................................................... 5
Statement of Stockholders' Equity for the years ended
December 31, 1996 through 1998............................. 6
Statements of Cash Flows for the years ended December 31,
1998 and 1997.............................................. 7
Notes to Financial Statements................................ 9
</TABLE>
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of The KippGroup:
We have audited the accompanying balance sheets of THE KIPPGROUP (a California
corporation) as of December 31, 1998 and 1997, and the related statements of
income, stockholders' equity 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The KippGroup as of December
31, 1998 and 1997, and the results of their income and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
March 19, 1999
2
<PAGE> 3
THE KIPPGROUP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,608,449 $ 1,607,147
Marketable investments -- 742,801
Accounts receivable, net of allowance for doubtful
accounts of $61,000 and $250,000 at December 31,
1998 and 1997, respectively 2,710,868 3,322,283
Related party receivable -- 263,789
Inventories 1,871,500 2,272,697
Prepaid expenses 149,830 72,448
------------ ------------
Total current assets 7,340,647 8,281,165
PROPERTY, PLANT AND EQUIPMENT, net 8,522,603 8,234,261
OTHER ASSETS 28,685 14,383
------------ ------------
Total assets $ 15,891,935 $ 16,529,809
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE> 4
THE KIPPGROUP
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 597,780 $ 1,203,988
Accrued bonus 82,001 321,830
Accrued vacation 154,190 164,057
Other accrued expenses 265,213 326,341
Notes payable - lines of credit 454,466 1,213,873
Customer deposits 473,554 815,535
Current portion of long-term debt 526,809 628,819
Current portion of capital lease obligations 377,201 236,141
------------ ------------
Total current liabilities 2,931,214 4,910,584
------------ ------------
LONG TERM DEBT, net of current portion 2,335,418 2,218,882
------------ ------------
CAPITAL LEASE OBLIGATIONS, net of current portion 669,116 626,773
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; 75,000 shares
authorized, 2,000 shares issued and outstanding
at December 31, 1998 and 1997 3,181,328 3,181,328
Retained earnings 6,774,859 5,517,708
Accumulated other comprehensive income
(marketable investments valuation adjustment) -- 74,534
------------ ------------
Total stockholders' equity 9,956,187 8,773,570
------------ ------------
Total liabilities and stockholders' equity $ 15,891,935 $ 16,529,809
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
THE KIPPGROUP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
REVENUES $ 24,180,590 $ 22,186,556
COST OF SALES 14,964,842 14,009,957
------------ ------------
Gross profit 9,215,748 8,176,599
------------ ------------
OPERATING EXPENSES:
Selling 1,245,667 1,243,724
General and administrat 2,797,063 2,740,650
Research and development 246,640 226,630
------------ ------------
Total operating expenses 4,289,370 4,211,004
------------ ------------
Income before other income (expense) 4,926,378 3,965,595
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net of interest income of
$112,915 and $54,692 for the years ended
December 31, 1998 and 1997, respectively (306,290) (194,789)
Dividends received 4,421 63,517
Gain on sale of marketable securities 244,461 7,632
Other income 15,502 105,004
------------ ------------
Total other income (expense) (41,906) (18,636)
------------ ------------
Income before provision for income taxes 4,884,472 3,946,959
PROVISION FOR INCOME TAXES 36,660 800
------------ ------------
NET INCOME $ 4,847,812 $ 3,946,159
============ ============
OTHER COMPREHENSIVE INCOME:
Net income 4,847,812 3,946,159
Unrealized gain on marketable investments -
Unrealized holding gains, net 244,461 15,841
Less gains included in net income (244,461) (7,632)
------------ ------------
Total comprehensive income -- 8,209
------------ ------------
COMPREHENSIVE INCOME $ 4,847,812 $ 3,954,368
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
THE KIPPGROUP
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income
(Marketable
Investments
Common Retained Valuation
Stock Earnings Adjustment) Total
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 $ 3,181,328 $ 3,546,087 $ 66,325 $ 6,793,740
Distributions -- (1,974,538) -- (1,974,538)
Marketable investments
valuation adjustment -- -- 8,209 8,209
Net income -- 3,946,159 -- 3,946,159
BALANCE, December 31, 1997 3,181,328 5,517,708 74,534 8,773,570
Distributions -- (3,590,661) -- (3,590,661)
Marketable investments
valuation adjustment -- -- (74,534) (74,534)
Net income 4,847,812 4,847,812
------------ ------------ ---------- ------------
BALANCE, December 31, 1998 $ 3,181,328 $ 6,774,859 -- $ 9,956,187
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
THE KIPPGROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,847,812 $ 3,946,159
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 1,593,911 1,242,932
Gain on sale of marketable securities (244,461) (7,632)
Gain on sale of fixed assets -- (66,221)
Changes in assets and liabilities:
Accounts receivable 611,415 (1,812,934)
Related party receivable 263,789 14,615
Inventories 401,197 (736,828)
Prepaid expenses (77,382) (14,535)
Other assets (14,302) 42,624
Accounts payable (606,208) 763,719
Accrued bonus (239,829) (10,354)
Accrued vacation (9,867) (24,232)
Other accrued expenses (61,128) 25,696
Customer deposits (341,981) 217,621
------------ ------------
Net cash provided by operating activities 6,122,966 3,580,630
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,380,317) (4,081,766)
Proceeds from sale of equipment 18,691 68,000
Purchase of marketable securities (3,079) (413,482)
Proceeds from sale of marketable securities 915,808 348,167
------------ ------------
Net cash used in investing activities (448,897) (4,079,081)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (increase) in notes payable -
lines of credit, net (66,159) 3,238,180
Principal payments on long-term debt (678,722) (713,368)
Principal payments on capital lease
obligations (337,225) (132,737)
Net stockholders' distributions (3,590,661) (1,974,538)
------------ ------------
Net cash (used in) provided by financing
activities (4,672,767) 417,537
------------ ------------
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH $ 1,001,302 $ (80,914)
CASH AND CASH EQUIVALENTS, beginning of year 1,607,147 1,688,061
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 2,608,449 $ 1,607,147
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Income taxes $ 800 $ 800
============ ============
Interest $ 407,532 $ 250,058
============ ============
SUPPLEMENTAL DISCLOSURE OF NON CASH
INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital lease
arrangements $ 520,628 $ 712,365
============ ============
Conversion of borrowings on lines of credit to
long-term debt $ 693,248 $ 2,158,160
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE> 9
THE KIPPGROUP
NOTES TO FINANCIAL STATEMENTS
1. Business Activity
The KippGroup (the Company) engineers and manufactures plastic injection molds
and injection molded medical devices, and manufactures and sells medical
components and devices.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company generally records revenue when products are shipped.
However, from time to time, the Company retains manufactured plastic
injection molds sold to customers. The Company records revenue on these
molds when the manufacturing of the mold is complete and the customer
has been invoiced.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid temporary cash investments with original maturities of
three months or less at the time of purchase to be cash equivalents.
Investments
Statement of Financial Accounting Standards No. 115, "Accounting For
Certain Debt and Equity Securities" (SFAS No. 115) requires that all
applicable investments be classified as trading securities,
available-for-sale securities or held-to-maturity securities. At
December 31, 1997, all investments were classified as available for
sale. During the year ended December 31, 1998, the Company sold all of
its investments.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost includes material, labor and manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Costs for molds
manufactured by the Company include material, labor, overhead and
validation costs. Validation costs are incurred to provide additional
assurance that such molds produce the product according to the
appropriate specifications.
9
<PAGE> 10
The Company depreciates assets using the straight-line method over the
estimated useful lives of the various classes of assets, as follows:
<TABLE>
<S> <C>
Molds 5 to 10 years
Building improvements 8 to 31-1/2 years
Machinery 5 to 7 years
Office furniture and equipment 3 to 5 years
</TABLE>
Expenditures for major renewals and betterments that extend the useful
lives of property, plant and equipment are capitalized. Expenditures
for maintenance and repairs are charged to expense as incurred.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximates fair value. In addition, the
carrying value of all borrowings approximates fair value based on
interest rates currently available to the Company.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities; 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.
Reporting Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial
statements
Concentration of Risk
The Company maintains its cash balances in a financial institution
located in Southern California. The balances are insured by the Federal
Deposit Insurance Corporation up to $100,000. As of December 31, 1998
and 1997, the combined uninsured portion of those balances held at the
bank aggregated to $1,904,591 and $1,861,479, respectively. As of
December 31, 1998, the Company also maintains $931,457 of investments
classified as cash equivalents with an investment company. These
investments are not insured.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year presentation.
10
<PAGE> 11
3. Marketable Investments
The following is a summary of marketable investments (classified as
available-for-sale) as of December 31, 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Mutual Funds $668,267 $112,453 $(37,919) $742,801
</TABLE>
Proceeds from the sale of securities available-for-sale during the year ended
December 31, 1998 and 1997 amounted to $915,808 and $348,167, respectively. The
related realized gain recognized from the sale of these securities amounted to
$244,461 and 7,632, respectively.
During the year ended December 31, 1998, the Company sold all of its
available-for-sale securities. Proceeds from the sale of these securities were
reinvested in money market funds and are classified as cash equivalents.
4. Inventory
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 440,101 $ 468,497
Work in process 639,032 1,160,421
Finished goods 792,367 643,779
------------ ------------
$ 1,871,500 $ 2,272,697
============ ============
</TABLE>
5. Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Molds $ 5,311,881 $ 4,922,766
Building improvements 2,641,551 2,617,506
Machinery 7,673,871 7,073,593
Office furniture and
equipment 1,213,805 1,133,252
Construction in progress 893,957 125,816
------------ ------------
17,735,065 15,872,933
Less - Accumulated
depreciation and
amortization 9,212,462 7,638,672
------------ ------------
$ 8,522,603 $ 8,234,261
============ ============
</TABLE>
11
<PAGE> 12
Total property, plant and equipment includes fixed assets acquired under capital
leases. As of December 31, 1998 and 1997, accumulated fixed assets acquired
under capital leases were $1,512,672 and $992,043, respectively. Related
accumulated depreciation for those assets totaled approximately $259,000 and
$98,000 at December 31, 1998 and 1997, respectively.
6. Notes Payable - Lines of Credit
The following is a summary of the Company's lines of credit:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
$500,000 line of credit, interest charged
at the bank's reference rate (7.75
percent at December 31, 1998) and
expires May 2000. $ -- $ --
$3,100,000 line of credit, interest charged
at the bank's reference rate (7.75 percent
at December 31, 1998) plus 0.125 percent
and expires May 2000. 454,466 --
$2,000,000 (increased to $2,513,000 at
August, 1998) line of credit,
interest charged at the applicable
treasury rate (4.53 percent at
December 31, 1998) plus 2.6 percent and
expires May 1, 1999. -- 520,628
$2,000,000 line of credit, interest charged
at prime (8.50 percent at December 31,
1997) and expired December 1997. Balance
converted to long-term notes subsequent
to December 31, 1997. -- 693,245
------------ ------------
$ 454,466 $ 1,213,873
============ ============
</TABLE>
Pursuant to the $3,100,000 line of credit above, the Company may convert
outstanding balances to term notes. However, the balance outstanding under this
line of credit plus the balance outstanding of the converted balances to notes
may not exceed the $3,100,000 limit. As of December 31, 1998 and 1997, the
remaining credit under this line of credit was $1,418,812 and $1,391,478,
respectively. Similar to the $3,100,000 line of credit, the Company had the
option of converting outstanding balances under the $2,000,000 line of credit
(8.50 percent at December 31, 1997) to term notes. However, the balance
outstanding under this line of credit plus the amount converted to term notes
was not allowed to exceed the $2,000,000 limit.
Substantially all of the Company's equipment and leasehold improvements are
pledged as collateral under these lines of credit, as is specific new equipment
as purchased.
12
<PAGE> 13
The Company and Kippartners, a related party (collectively referred to as the
"co-borrowers"), are co-borrowers under the Company's loan agreements. The loans
require that together, the co-borrowers maintain certain financial and
nonfinancial covenants. Among other covenants, the co-borrowers are required to
maintain a fixed charge coverage ratio and comply with capital expenditure and
change in ownership limitations. As of December 31, 1998, the co-borrowers were
in compliance with all covenants.
7. Income Taxes
Effective April 1, 1988, the Company elected "S Corporation" status for income
tax purposes. Under "S Corp" status, the stockholders separately account for the
Company's items of income, deductions, losses and credits. However, the "S Corp"
is liable for state income tax at 1.5 percent.
The Company qualifies for the California Manufacturers' Investment Credit which
reduces its state income tax obligation. The credit is equal to 6 percent of the
cost associated with acquiring or constructing qualified manufacturing property
and equipment. The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Gross income tax $ 73,267 $ 62,098
Less: California Manufacturers'
Investment Credit used (36,607) (61,298)
---------- ----------
Net provision for income taxes $ 36,660 $ 800
========== ==========
</TABLE>
For the year ended December 31, 1998 and 1997, the Company's effective tax rate
has been substantially reduced due to usage of the California Manufacturers'
Investment Credit.
8. Retirement Plan
The Company maintains a 401(k) plan covering substantially all employees. The
Company matches employee contributions to the 401(k) plan within prescribed
monthly limitations. During the years ended December 31, 1998 and 1997, Company
matching contributions were $155,845 and $142,624, respectively.
9. Customer Deposits
The Company requires a deposit from customers for mold building. This deposit is
based on a percentage of the sales price. Customer deposits are generally
non-refundable.
10. Significant Customers
Sales to two customers amounted to approximately 18 percent and 14 percent of
total revenues for the year ended December 31, 1998 and 18 percent and 16
percent of total revenues for the year ended December 31, 1997.
13
<PAGE> 14
11. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
7.87 percent variable (Prime plus
1/8 percent) - secured by equipment
Payments of $12,665 plus accrued
interest due monthly. Debt matures
December 2003. $ 772,540 $ 911,850
9.37 percent fixed - secured by
equipment. Payments of $8,007
including interest due monthly
Debt matures May 2007. 557,973 599,627
9.0 percent fixed - secured by
equipment. Payments of $6,250
including interest due monthly
Debt matures September 2007. 453,072 485,685
Various notes secured by equipment,
with interest rates ranging from
7.87 percent to 10 percent. As
of December 31, 1998 and 1997,
payments are approximately
$29,000 and $61,000 per month,
respectively, plus accrued
interest and mature at various
dates from April 1998 through
January 2008 1,078,642 850,539
------------ ------------
2,862,227 2,847,701
Less - Current portion 526,809 628,819
------------ ------------
$ 2,335,418 $ 2,218,882
============ ============
</TABLE>
As of December 31, 1998, scheduled maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1999 $ 526,809
2000 485,912
2001 362,962
2002 371,250
2003 361,355
Thereafter 753,939
----------
$2,862,227
==========
</TABLE>
14
<PAGE> 15
12. Capital Lease Obligations
Capital lease obligations consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Various lease obligations on injection
molds expiring from 2000 through
2002. As of December 31, 1998 and 1997,
obligations were payable monthly at
$37,280 and $24,501, respectively,
including interest. $1,038,801 $ 852,240
Other 7,516 10,674
---------- ----------
1,046,317 862,914
Less - Current portion 377,201 236,141
---------- ----------
$ 669,116 $ 626,773
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments under capital
leases, together with the present value of the net minimum lease payments:
<TABLE>
<S> <C>
Year ending December 31,
1999 $ 451,587
2000 437,828
2001 270,765
2002 12,778
2003 --
Thereafter --
----------
Total minimum payments 1,172,958
Less - Amount representing interest 126,641
----------
Present value of net minimum
lease payments $1,046,317
==========
</TABLE>
13. Commitments and Contingencies
Commitments
As of December 31, 1998, scheduled future minimum rental payments
required under operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1999 $ 472,128
2000 300,000
2001 300,000
2002 300,000
2003 300,000
Thereafter 25,000
----------
$1,697,128
==========
</TABLE>
15
<PAGE> 16
Contingencies
Pursuant to certain sales contracts, the Company is obligated to
indemnify and hold the purchaser harmless against any liability,
damage, or expense resulting from third party actions claiming personal
injury or property damage arising out of defects attributable to the
Company or breach of warranty under the contract. Additionally, the
Company guarantees that all products supplied to its customers are free
from defects in materials in the applicable FDA registration. If the
Company's products fail to conform, the purchaser may return the
product for credit, refund or replacement.
14. Related Party Transactions
Related Party Receivable
An affiliated entity owed the Company $263,789 at December 31, 1997.
The balance was paid during the fiscal year ended 1998.
Related Party Lease
The Company leased a building from an affiliated entity under a month
to month lease agreement. Lease payments were approximately $300,000
and $205,000 for the years ended December 31, 1998 and 1997,
respectively.
Stockholders' Compensation
Total stockholders' compensation for the years ended December 31, 1998
and 1997 was $1,325,000 and $1,200,000, respectively, and is included
in general and administrative expenses on the accompanying statements
of income.
15. Subsequent Event
On January 13, 1999, the Company signed an agreement to be purchased.
The purchase closed on January 22, 1999.
16
