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EX-20.2 AUDITED FINANCIAL STATEMENTS OF DIGITAL TECHNIQUES, INC.
Auditors' report
To the Directors of Digital Techniques Inc.
We have audited the balance sheet of Digital Techniques, Inc. as at September
30, 1998 and the statements of operations and deficit and cash flows for the
nine month period then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
Except as explained in the following paragraph we conducted our audit 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.
Since this is our initial engagement as auditors of the Company, we were not
present at the physical inventory taking at the beginning of the period and we
have not been able to satisfy ourselves as to inventory quantities at that date
by other auditing procedures. Accordingly, we were unable to determine whether
adjustments to cost of sales, income taxes, loss for the period and opening
deficit might be necessary.
In our opinion, except for the effect of adjustments, if any, which might have
been determined to be necessary had we been able to observe the physical
inventory taking at the beginning of the period as described in the preceding
paragraph, the statements of operations and deficit and cash flows present
fairly, in all material respects, the results of operations and cash flows of
the Company for the nine month period ended September 30, 1998 in accordance
with United States generally accepted accounting principles. Further, in our
opinion, the balance sheet presents fairly, in all material respects, the
financial position of the Company as at September 30, 1998 in accordance with
United States generally accepted accounting principles.
KPMG, LLP
Chartered Accountants
Toronto, Canada
June 2, 2000
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DIGITAL TECHNIQUES INC.
Balance Sheet
September 30, 1998
(Expressed in U.S. dollars)
Assets
Current assets:
Cash $ 48,361
Accounts receivable, net of allowance for
doubtful accounts of $68,363 865,397
Inventory (note 2) 924,569
Prepaid and other 38,651
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Total current assets 1,876,978
Fixed assets (note 3) 279,616
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Total assets $2,156,594
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Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 373,786
Accrued liabilities (note 4) 316,572
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Total current liabilities 690,358
Shareholder's equity:
Common stock:
Authorized, at par value of 0.01(cent) per share:
1,000,000 shares
Issued and outstanding:
477,057 shares at September 30, 1998 47
Contributed surplus 2,035,796
Deficit (569,607)
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Total shareholder's equity 1,466,236
Lease commitments (note 5)
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Total liabilities and shareholder's equity $2,156,594
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See accompanying notes to financial statements.
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DIGITAL TECHNIQUES INC.
Statement of Operations and Deficit
Nine month period ended September 30, 1998
(Expressed in U.S. dollars)
Revenue:
Hardware $ 5,115,744
Maintenance 109,164
----------
5,224,908
Cost of sales 2,868,172
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Gross margin 2,356,736
Expenses:
Sales and marketing 851,724
Research and development 855,600
General and administrative 656,644
Depreciation 60,234
Interest 31,832
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2,456,034
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Loss before the undernoted (99,298)
Other income 360,161
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Income before income taxes 260,863
Income taxes (note 6) 472,898
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Loss for the period (212,035)
Deficit, beginning of period (357,572)
----------
Deficit, end of period $ (569,607)
----------
Number of shares used in calculation of loss per common share 477,052
Loss per common share $ (0.44)
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See accompanying notes to financial statements.
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DIGITAL TECHNIQUES INC.
Statement of Cash Flows
Nine month period ended September 30, 1998
(Expressed in U.S. dollars)
Cash flows from operating activities:
Loss for the period $ (212,035)
Items not involving cash:
Depreciation 60,234
Future income taxes 222,432
Change in non-cash working capital:
Increase in accounts receivable 179,263
Increase in inventory 465,740
Decrease in prepaid and other (9,423)
Decrease in accounts payable (196,881)
Increase in accrued liabilities 172,672
Decrease in amount due to former parent company (1,169,625)
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Cash flows used in operating activities (487,623)
Cash flows from financing activities:
Issuance of contributed surplus 589,429
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Cash flows from financing activities 589,429
Cash flows from investing activities:
Purchase of equipment (70,012)
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Cash flows used in investing activities (70,012)
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Increase in cash 31,794
Cash, beginning of period 16,567
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Cash, end of period $ 48,361
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Supplemental cash flow information:
Interest paid $ 31,833
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See accompanying notes to financial statements.
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Digital Techniques Inc. (the "Company") is incorporated under the laws of the
State of Texas and specializes in the design and manufacture of enhancement
products for PBX Telecommunications Systems.
On September 30, 1998, the Company was purchased by DTI Holdings, Inc., a
corporation incorporated under the laws of the State of Texas which is
controlled by Troy Holdings International Inc. that is incorporated under the
laws of Ontario.
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
The accompanying 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 year. 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.
(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.
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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
statement of operations in the period that includes the enactment date.
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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) 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.
(i) 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 the period.
(j) 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 period presented
comprehensive loss is the same as the net loss.
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1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(k) 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.
2. INVENTORY:
Raw materials $ 686,714
Finished goods and work in process 237,855
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$ 924,569
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3. FIXED ASSETS:
Accumulated Net book
Cost amortization value
---- ------------ --------
Computer equipment $413,281 $279,928 $133,353
Engineering equipment 374,834 275,865 98,969
Manufacturing equipment 105,328 78,948 26,380
Furniture and fixtures 73,915 53,001 20,914
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$967,358 $687,742 $279,616
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4. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
Payroll-related expenses $ 110,848
Warranty reserve 47,288
Other 158,436
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$ 316,572
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5. LEASE COMMITMENTS:
The Company is committed to payments under operating leases for equipment
and premises in the amount of approximately $1,197,605. Annual payments are
as follows:
1998 $ 46,500
1999 111,500
2000 222,460
2001 225,460
2002 223,685
Thereafter 368,000
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$1,197,605
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Rent expense was $80,389 for the period ended September 30, 1998.
6. INCOME TAXES:
The Company's former parent filed U.S. federal income tax returns on a
consolidated basis for itself and its subsidiaries including the Company.
The income tax provision for the period reflects the payments made by the
Company. A 338(h)(10) election was made for tax purposes upon the sale of
the Company to DTI Holdings, Inc.
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7. 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 period ended September 30, 1998, three customers accounted for 16%,
12% and 12% of revenue.
As of September 30, 1998, the Company had receivables from three
significant customers, accounting for 20%, 11% and 11% of total accounts
receivable.
8. FINANCIAL INSTRUMENTS:
The fair values of cash, accounts receivable, accounts payable and accrued
liabilities approximate their carrying values due to their short-term
nature.
9. CONCENTRATION OF CREDIT RISK:
The Company's customers are concentrated in the telecommunications
industry. The Company performs ongoing credit evaluation of its customers'
financial condition and maintains a provision for accounts for which
collection is determined to be uncertain.
