<PAGE> 1
EX-20.1 AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF DTI HOLDINGS, INC
Auditors' report
To the Board of Directors of DTI Holdings, Inc.
We have audited the consolidated balance sheets of DTI Holdings, Inc. as at
December 31, 1998 and 1999 and the consolidated statements of operations and
deficit, shareholders' equity and cash flows for the period from October 1, 1998
to December 31, 1998 and the year ended December 31, 1999. 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
in the United States. 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 consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1998
and 1999 and the results of its operations and its cash flows for the period
from October 1, 1998 to December 31, 1998 and the year ended December 31, 1999
in accordance with generally accepted accounting principles in the United
States.
KPMG, LLP
Chartered Accountants
Toronto, Canada
June 2, 2000
<PAGE> 2
DTI HOLDINGS, INC.
Consolidated Balance Sheets
(Expressed in U.S. dollars)
DECEMBER 31,
-------------------------
1998 1999
---- ----
Assets
Current assets:
Cash $ 245,562 $ 651,009
Accounts receivable, net of allowance
for doubtful accounts of $68,363 at
December 31, 1998 and $147,277 at
December 31, 1999 765,078 1,119,495
Due from related parties (note 3) 15,163 20,052
Inventory (note 4) 755,635 896,200
Prepaid and other 31,851 32,064
Corporate taxes receivable 25,610 --
--------- ----------
Total current assets 1,838,899 2,718,820
Deferred taxes (note 11) 178,588 2,619,259
Fixed assets (note 5) 271,719 247,997
Other assets 38,922 1,350
Goodwill, less accumulated amortization of
$217,098 at December 31, 1998 and $868,392 at
December 31, 1999 2,388,078 1,519,686
---------- ----------
Total assets $4,716,206 $7,107,112
---------- ----------
<PAGE> 3
DECEMBER 31,
-------------------------
1998 1999
---- ----
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 7) $ 414,031 $ --
Accounts payable 510,718 488,390
Accrued liabilities (note 6) 170,456 676,999
Corporate taxes payable -- 223,195
Due to related parties (note 3) -- 42,551
Due to Troy Holdings International Inc. (note 3) -- 54,019
Deferred revenue -- 90,000
Current portion of long-term debt 249,995 380,004
---------- ----------
Total current liabilities 1,345,200 1,955,158
Long-term liabilities:
Long-term debt (note 8) 1,187,505 1,219,478
Note payable (note 9) 1,350,000 --
---------- ----------
Total long-term liabilities 2,537,505 1,219,478
Shareholders' equity:
Common stock:
Authorized:
30,000,000 shares, at par value
of $0.01
Issued and outstanding:
10,000,000 shares at
December 31, 1998
and December 31, 1999 1,000,000 1,000,000
Additional paid-in capital -- 6,417,000
Deferred stock compensation -- (1,604,250)
Deficit (166,499) (1,880,274)
---------- ----------
Total shareholders' equity 833,501 3,932,476
Lease commitments (note 10)
---------- ----------
Total liabilities and shareholders' equity $4,716,206 $7,107,112
---------- ----------
See accompanying notes to consolidated financial statements.
<PAGE> 4
DTI HOLDINGS, INC.
Consolidated Statements of Operations and Deficit
Period from October 1, 1998 to December 31, 1998 and
the year ended December 31, 1999
(Expressed in U.S. dollars)
1998 1999
---- ----
Revenue:
Hardware $ 1,760,219 $10,469,526
Software -- 812,797
Maintenance 25,944 83,386
----------- -----------
1,786,163 11,365,709
Cost of revenue 907,083 4,982,080
----------- -----------
Gross margin 879,080 6,383,629
Expenses:
Sales and marketing 293,002 1,413,077
Research and development 264,055 1,163,894
General and administrative 177,057 1,138,211
Depreciation 21,619 115,205
Amortization of goodwill 217,098 868,392
Amortization of stock-based compensation -- 4,812,750
Interest 81,523 274,038
----------- -----------
1,054,354 9,785,567
----------- -----------
Loss before the undernoted (175,274) (3,401,938)
Other income 46,165 313,797
----------- -----------
Loss before income taxes (129,109) (3,088,141)
Income taxes (recovery):
Current 37,390 1,066,305
Deferred -- (2,440,671)
----------- -----------
37,390 (1,374,366)
----------- -----------
Loss for the period (166,499) (1,713,775)
Deficit, beginning of period -- (166,499)
----------- -----------
Deficit, end of period $ (166,499) $ (1,880,274)
----------- -----------
Shares used in computing basic loss
per common share 10,000,000 10,000,000
Basic loss per common share $ (0.02) $ (0.17)
----------- -----------
See accompanying notes to consolidated financial statements.
<PAGE> 5
DTI HOLDINGS, INC.
Consolidated Statements of Shareholders' Equity
Period from October 1, 1998 to December 31, 1998 and
the year ended December 31, 1999
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
Common shares Additional Deferred Total
--------------------- paid-in stock-based shareholders
Number Amount capital compensation Deficit equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1998 -- $ -- $ -- $ -- $ -- $ --
Issued for cash 10,000,000 1,000,000 -- -- -- 1,000,000
Loss for the period -- -- -- -- (166,499) (166,499)
--------------------------------------------------------------------------------------------
Balance,
December 31, 1998 10,000,000 1,000,000 -- -- (166,499) 833,501
Deferred stock-based
compensation -- -- 6,417,000 (6,417,000) -- --
Amortization of deferred
stocked-based
compensation -- -- -- 4,812,750 -- 4,812,750
Loss for the period -- -- -- -- (1,713,775) (1,713,775)
--------------------------------------------------------------------------------------------
Balance,
December 31, 1999 10,000,000 $1,000,000 $6,417,000 $(1,604,250) $(1,880,274) $ 3,932,476
--------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
DTI HOLDINGS, INC.
Consolidated Statements of Cash Flows
Period from October 1, 1998 to December 31, 1998 and
the year ended December 31, 1999
(Expressed in U.S. dollars)
------------------
1998 1999
------------------
Cash flows from operating activities:
Loss for the period $ (166,499) $(1,713,775)
Items not involving cash:
Depreciation 21,619 115,205
Amortization of goodwill 217,098 868,392
Amortization of stock-based compensation -- 4,812,750
Loss on disposal of capital asset -- 1,568
Deferred taxes recovery -- (2,440,671)
Change in non-cash working capital:
Decrease (increase) in accounts receivable 69,994 (354,417)
Decrease (increase) in due from related parties 15,163 (4,889)
Decrease (increase) in inventory 168,934 (140,565)
Decrease (increase) in prepaid and other 6,800 (213)
Decrease (increase) in corporate taxes receivable (25,610) 25,610
Increase in other assets (38,922) (1,350)
Increase (decrease) in accounts payable 158,361 (22,328)
Increase (decrease) in accrued liabilities (167,546) 506,543
Increase in deferred revenue -- 90,000
Increase in corporate taxes payable -- 223,195
Increase in due to related parties -- 42,551
Increase in due to Troy Holdings International Inc. -- 54,019
---------- -----------
Cash flows from operating activities 259,392 2,061,625
Cash flows from financing activities:
Issuance of common shares 1,000,000 --
Increase in long-term debt 1,437,500 161,982
Increase (decrease) in bank indebtedness 414,031 (414,031)
Increase (decrease) in note payable 1,350,000 (1,350,000)
---------- -----------
Cash flows from (used in) financing activities 4,201,531 (1,602,049)
Cash flows from investing activities:
Acquisition of Digital Techniques Inc. (4,250,000) --
Purchase of equipment (13,722) (54,129)
---------- -----------
Cash flows used in investing activities (4,263,722) (54,129)
---------- -----------
Increase in cash 197,201 405,447
Cash, beginning of period 48,361 245,562
---------- -----------
Cash, end of period $ 245,562 $ 651,009
---------- -----------
Supplemental cash flow information:
Interest paid $ 46,564 $ 261,535
Taxes paid 63,000 817,500
---------- -----------
See accompanying notes to consolidated financial statements.
<PAGE> 7
DTI Holdings, Inc. (the "Company") is incorporated under the laws of the State
of Texas. The Company is controlled by Troy Holdings International Inc., a
corporation incorporated under the laws of Ontario, Canada. The Company was
incorporated on September 24, 1998, and commenced operations on the acquisition
of Digital Techniques Inc. ("DTI") on September 30, 1998.
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
The accompanying consolidated financial statements include the results
of the Company and its operating subsidiary, DTI.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles in the
United States, which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the reported amounts of revenue and expenses during the reporting
period. Actual results may differ from those estimates. All amounts
are stated in U.S. dollars unless otherwise indicated.
(b) Revenue recognition:
Hardware revenue is recognized when a product is delivered and
accepted by the customer, consistent with the Company's terms of sale.
Maintenance revenue is deferred and recognized on a straight-line
basis over the terms of the maintenance agreement.
Revenue from the license of software products is recognized upon
delivery when collectibility is reasonably assured. Provisions for
estimated losses on contracts are recorded when identifiable. The
difference between costs plus estimated earnings and billings on
individual contracts is reported as either work in progress or
deferred revenue.
(c) Inventory:
Raw materials are stated at the lower of cost, determined on a
first-in, first-out basis, and replacement cost. Work in process and
finished goods inventory are stated at the lower of cost, determined
as average cost, and net realizable value.
<PAGE> 8
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) Fixed assets:
Fixed assets are recorded at cost less accumulated amortization.
Amortization is calculated on a straight-line basis over the following
terms:
Computer equipment 5 years
Engineering equipment 5 - 10 years
Manufacturing equipment 5 - 10 years
Furniture and fixtures 7 - 10 years
The Company regularly reviews the carrying values of its property and
equipment by comparing the carrying amount of the asset to the
expected future cash flows to be generated by the asset. If the
carrying value exceeds the amount recoverable, a writedown of the
asset to estimated fair value is charged to the statement of
operations.
(e) Warranty reserve:
Hardware sales include a warranty that offers technical support, parts
and service for one year. The warranty reserve included in accrued
liabilities represents the estimated costs to provide technical
support and service on hardware products sold and is accrued monthly
based on sales and prior claims experience.
(f) Income taxes:
Under the asset and liability method of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), 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. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
consolidated statement of operations in the period that includes the
enactment date.
<PAGE> 9
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(g) Research and development:
Costs related to research, design and development of products are
charged to research and development expenses as incurred. Development
costs are capitalized beginning when a product's technological
feasibility has been established, which generally occurs upon
completion of a working model, and ending when a product is available
for general release to customers. To date, completing a working model
of the Company's product and the general release of the product have
substantially coincided. As a result, the Company has not capitalized
any development costs since such costs have not been significant.
(h) Goodwill:
Goodwill represents the excess of purchase consideration over the fair
value of net assets acquired.
Amortization of goodwill is calculated on a straight-line basis over a
three-year term.
The carrying value of goodwill is reviewed on a regular basis to
determine whether any impairment has occurred. To date, no such
impairment has been identified.
(i) Currency translation:
The Company's functional currency is the U.S. dollar. Monetary items
denominated in foreign currencies are translated to U.S. dollars at
exchange rates in effect at the balance sheet date and non-monetary
items are translated at rates in effect when the assets were acquired
or the obligation incurred. Revenue and expenses are translated at
rates in effect at the time of the transaction. Foreign exchange
translation gains and losses are included in loss for the period.
<PAGE> 10
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(j) Stock-based compensation:
The Company follows Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees" and related
interpretations, in accounting for its variable employee stock
options arrangement. Under APB 25, deferred stock-based compensation
is recorded at the option grant date at an amount equal to the
difference between the fair market value of a common share and the
exercise price of the option. Deferred stock-based compensation for
options which are contingently issuable based upon the achievement of
performance criteria is recorded based upon the current fair market
value of the shares at each reporting period. Deferred stock-based
compensation resulting from employee option grants is amortized over
the vesting period of the individual options, which is from 15 to 27
months.
(k) Loss per common share:
Loss per common share has been calculated on the basis of loss
divided by the weighted average number of common shares outstanding
during each period.
(l) Comprehensive income:
SFAS No. 130, "Reporting Comprehensive Income", issued by the
Financial Accounting Standards Board ("FASB") establishes standards
for the reporting and presentation of comprehensive income. This
standard defines comprehensive income as the changes in equity of an
enterprise except those resulting from shareholder transactions. For
the periods presented comprehensive loss is the same as the net loss.
(m) Recent accounting pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes methods of accounting
for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company
has not assessed the impact on its financial position, results of
operations or cash flows of adopting SFAS No. 133. The Company will
be required to implement SFAS No. 133, as amended by SFAS No. 137 for
its fiscal year ending December 31, 2001.
<PAGE> 11
2. ACQUISITION OF BUSINESS:
On September 30, 1998, the Company purchased 100% of the outstanding
shares of DTI for $4,250,000, comprised of $4,000,000 in cash and a 5%
vendor take back note in the amount of $250,000. DTI specializes in
the design and manufacture of enhancement products for PBX
Telecommunications Systems. The purchase price has been allocated to
the fair values of the assets and liabilities of DTI at the time of
purchase as follows:
Current assets $2,055,406
Capital assets 279,594
Current liabilities (690,176)
Goodwill 2,605,176
-----------
Total consideration $4,250,000
-----------
The acquisition has been accounted for using the purchase method with
the results of operations of the acquired business being consolidated
from the date of acquisition.
<PAGE> 12
3. RELATED PARTY TRANSACTIONS:
The following balances are receivable from subsidiaries of the Company's
parent company:
1998 1999
---- ----
Due from Datapulse PLC $ 15,163 $ 16,206
Due from Telecorp Inc. -- 3,846
--------- --------
$ 15,163 $ 20,052
--------- --------
The following balances are payable to subsidiaries of the Company's parent
company:
1998 1999
---- ----
Due to Troy Capital Corporation $ -- $ 40,047
Due to Telecorp Inc. -- 2,504
--------- --------
$ -- $ 42,551
--------- --------
The following balance is payable to the Company's parent company:
1998 1999
---- ----
Due to Troy Holdings International Inc. $ -- $ 54,019
--------- --------
The above amounts are unsecured, non-interest bearing and have no specific
terms of repayment.
<PAGE> 13
3. RELATED PARTY TRANSACTIONS (CONTINUED):
The following transactions were undertaken with related parties:
1998 1999
---- ----
Fees for management services provided by:
Troy Holdings International Inc. $ -- $ 54,019
Troy Capital Corporation -- 40,047
--------- --------
$ -- $ 94,066
--------- --------
These transactions have been measured at the exchange amount, which is the
amount of consideration established and agreed to by the related parties.
4. INVENTORY:
1998 1999
---- ----
Raw materials $ 428,585 $471,718
Finished goods and work in process 327,050 424,482
---------- --------
$ 755,635 $896,200
---------- --------
5. FIXED ASSETS:
Accumulated Net book
1998 Cost amortization value
------------------------- ---------- ------------ ----------
Computer equipment $ 423,586 $ 291,444 $132,142
Engineering equipment 377,008 281,955 95,053
Manufacturing equipment 105,328 80,704 24,624
Furniture and fixtures 73,818 53,918 19,900
---------- ---------- --------
$ 979,740 $ 708,021 $271,719
---------- ---------- --------
Accumulated Net book
1999 Cost amortization value
------------------------- ---------- ------------ ----------
Computer equipment $ 461,582 $ 332,736 $128,846
Engineering equipment 375,015 299,867 75,148
Manufacturing equipment 102,945 84,004 18,941
Furniture and fixtures 82,751 57,689 25,062
---------- ---------- --------
$1,022,293 $ 774,296 $247,997
---------- ---------- --------
<PAGE> 14
6. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
1998 1999
---- ----
Payroll-related expenses $103,531 $162,455
Warranty reserve 53,499 210,870
Other 13,426 303,674
-------- --------
$170,456 $676,999
-------- --------
7. BANK INDEBTEDNESS:
The Company's operating subsidiary has an operating line of credit of up to
$1,000,000 with Bank of America. The operating line is payable on demand,
bears interest at prime and is secured by a first charge on all accounts
receivable, inventory and capital assets. As at December 31, 1999, there
was no amount drawn on this line of credit (1998 - $414,031).
8. LONG-TERM DEBT:
The Company's operating subsidiary has a term note due to Bank of America.
The term note has a three-year term maturing October 1, 2002 and bears
interest at prime. The term note requires monthly principal payments of
$31,667 plus interest. Total interest expense on the note for the year
ended December 31, 1999 was $126,593 (1998 - $26,563). Security for this
facility is the same as for the operating line of credit of $1,000,000
(note 7).
The Company also has a promissory note payable in the amount of $250,000.
The note matures on October 1, 2002 and bears interest at 5%. Interest on
the note is calculated annually in arrears but is only to be paid on
October 1, 2002. Principal payments can be made at any time. The note is
secured by 25% of the common shares of DTI. Total interest expense on the
note for the year ended December 31, 1999 was $15,629 (1998 - $3,125).
<PAGE> 15
9. NOTE PAYABLE:
The note payable in the amount of $1,350,000 was due to Troy Holdings
International Inc., the Company's parent company, was unsecured and bore
interest at a rate of 12.5% per annum. The principal and all accrued
interest were repaid in full during 1999. Total interest expense was
approximately $134,972 (1998 - $42,188).
10. LEASE COMMITMENTS:
The Company and its subsidiary are committed to payments under operating
leases for equipment and premises in the amount of approximately
$1,039,605. Annual payments are as follows:
2000 $ 222,460
2001 225,460
2002 223,685
2003 220,000
2004 148,000
----------
$1,039,605
----------
Rent expenses were $40,365 and $183,387 for the period ended December 31,
1998 and year ended December 31, 1999, respectively.
<PAGE> 16
11. INCOME TAXES:
The provision for income taxes differs from the amount computed by applying
the combined federal and state effective income tax rate of 38.5% to the
loss before provision for income taxes as a result of the following:
1998 1999
---- ----
Loss before income taxes $ (129,109) $(3,088,141)
---------- -----------
Computed expected tax recovery $ (49,707) $(1,188,934)
Decrease (increase) in income
tax recovery resulting from
change in valuation allowance 87,097 (185,432)
---------- -----------
$ 37,390 $(1,374,366)
---------- -----------
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax
liabilities at December 31, 1998 and 1999 are presented below:
1998 1999
---- ----
Deferred income tax assets:
Non-deductible reserves $ 200,414 $ 200,414
Deductible stock compensation expense -- 1,852,909
Deductible goodwill 919,410 587,762
---------- -----------
1,119,824 2,641,085
Less valuation allowance (919,410) --
Deferred income tax liability:
Fixed assets due to differences
in depreciation (21,826) (21,826)
---------- -----------
Net deferred income tax assets $ 178,588 $ 2,619,259
---------- -----------
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the future
tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of deferred taxable income during
the periods in which those temporary differences become deductible.
Management considers projected future taxable income uncertainties related
to the industry in which the Company operates and tax planning strategies
in making this assessment.
<PAGE> 17
12. FINANCIAL INSTRUMENTS:
The fair values of cash, accounts receivable, bank indebtedness, accounts
payable and accrued liabilities approximate their carrying values due to
their short-term nature.
The fair value of the long-term debt approximates its carrying value based
on rates currently available to the Company for similar instruments.
The fair values of the note payable and amounts due to or from related
parties are not determinable due to their related party nature and terms.
13. CONCENTRATION OF CREDIT RISK:
The Company's operating subsidiary's customers are concentrated in the
telecommunications industry. The Company's operating subsidiary performs
ongoing credit evaluation of its customers' financial condition and
maintains a provision for accounts for which collection is determined to be
uncertain.
14. EMPLOYEE AND DIRECTORS STOCK OPTION PLAN:
The Company and its parent company, Troy Holdings International Inc., has
entered into option agreements with certain of the employees of its
operating subsidiary. Under the terms of these agreements, the employees
have been granted options to purchase common shares of the Company upon the
achievement of performance milestones as set out in the agreements.
As at December 31, 1999, 2,710,000 options to purchase common shares at a
price of $0.10 per share were outstanding. 1,395,000 of those options were
fully vested as at December 31, 1999 and the remainder will vest on
December 31, 2000, if the specified performance milestones for 2000 are
achieved.
Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant dates for the awards under
the arrangement consistent with the method under SFAS 123, "Accounting for
Stock-Based Compensation," the Company's income on a proforma basis would
be $1,246,066 and proforma income per common share would be $0.12 . To
determine the fair value of each option on the grant date under SFAS 123,
the following assumptions were used: dividend yield of 0.0%, zero
volatility, a weighted average risk-free interest rate of 6.00% and a
weighted average expected life of options of two years.
<PAGE> 18
15. SEGMENTED INFORMATION:
The Company operates in one business segment.
All long-lived assets relating to the Company's operations are located in
the United States. Revenue per geographic location, which is attributable
to geographic location based on the location of the external customer, is
substantially generated in the United States.
For the year ended December 31, 1998, one customer accounted for 20% of
revenue. For the year ended December 31, 1999, three customers accounted
for 25%, 13% and 11% of revenue.
As of December 31, 1998, the Company had receivables from one significant
customer amounting to 13% of total accounts receivable. As of December 31,
1999, the Company had accounts receivable from two significant customers,
accounting for 24% and 17% of total accounts receivable.
