<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Advanced Digital Designs, Inc., Advanced Technologies, Inc.,
and 937 Plum Grove Road Partnership
We have audited the accompanying combined balance sheets of Advanced Digital
Designs, Inc., Advanced Technologies, Inc., and 937 Plum Grove Road Partnership
as of December 31, 1999, 1998, and 1997 and the related combined statements of
earnings and cash flows for the three 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 auditing standards generally accepted
in the United States of America. 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 combined financial position of Advanced Digital
Designs, Inc., Advanced Technologies, Inc., and 937 Plum Grove Road Partnership
as of December 31, 1999, 1998, and 1997 and the combined results of their
operations and their combined cash flows for the three years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
GRANT THORNTON LLP
Chicago, Illinois
June 19, 2000, except for note D, as
to which the date is August 18, 2000
<PAGE> 2
ADVANCED DIGITAL DESIGNS, INC., ADVANCED TECHNOLOGIES, INC.,
AND 937 PLUM GROVE ROAD PARTNERSHIP
COMBINED BALANCE SHEETS
DECEMBER 31,
================================================================================
<TABLE>
<CAPTION>
June 30, June 30,
ASSETS 1999 1998 1997 2000 1999
---------- ---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Current assets
Cash $ 64,645 $ 87,685 $ 30,913 $ 226,752 $ 170,639
Trade accounts receivable 1,004,957 481,497 422,335 508,895 453,534
---------- ---------- ---------- ---------- ----------
Total current assets 1,069,602 569,182 453,248 735,647 624,173
Building, equipment, furniture, and fixtures
Building 362,102 362,102 - 362,102 362,102
Computer equipment 95,806 86,017 57,998 111,811 91,461
Other equipment, furniture, and fixtures 23,331 23,331 5,906 23,331 23,331
---------- ---------- ---------- ---------- ----------
481,239 471,450 63,904 497,244 476,894
Less accumulated depreciation 91,957 48,098 9,063 116,195 70,027
---------- ---------- ---------- ---------- ----------
389,282 423,352 54,841 381,049 406,867
---------- ---------- ---------- ---------- ----------
TOTAL ASSETS $1,458,884 $ 992,534 $ 508,089 $1,116,696 $1,031,040
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 32,000 $ 22,000 $ 28,000 $ 32,000 $ 22,000
Accrued expenses and other current liabilities 36,640 54,675 61,858 35,180 26,419
Current maturities of long-term debt 23,760 23,760 - 23,760 23,760
---------- ---------- ---------- ---------- ----------
Total current liabilities 92,400 100,435 89,858 90,940 72,179
Long-term debt, less current maturities 241,337 243,967 - 239,974 242,649
Other long-term liabilities 8,164 8,164 - 10,864 8,164
---------- ---------- ---------- ---------- ----------
Total liabilities 341,901 352,566 89,858 341,778 322,992
Stockholders' equity 1,116,983 639,968 418,231 774,918 708,048
---------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,458,884 $ 992,534 $ 508,089 $1,116,696 $1,031,040
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 3
ADVANCED DIGITAL DESIGNS, INC., ADVANCED TECHNOLOGIES, INC.,
AND 937 PLUM GROVE ROAD PARTNERSHIP
COMBINED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31,
================================================================================
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998 1997 2000 1999
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Consulting revenue $ 3,234,435 $ 3,169,311 $ 1,964,786 $ 1,684,283 $ 1,574,476
Cost of revenue 1,230,785 1,091,282 379,177 601,090 553,571
----------- ----------- ----------- ----------- -----------
Gross profit 2,003,650 2,078,029 1,585,609 1,083,193 1,020,905
Selling, general and administrative
expenses 218,808 100,944 122,051 135,363 41,955
----------- ----------- ----------- ----------- -----------
Earnings from operations 1,784,842 1,977,085 1,463,558 947,830 978,950
Other (expense) income
Interest expense, net (8,522) (7,802) 11,756 (2,287) (4,466)
Miscellaneous 54,022 60,043 - 26,992 25,539
----------- ----------- ----------- ----------- -----------
Total other income 45,500 52,241 11,756 24,705 21,073
----------- ----------- ----------- ----------- -----------
Income before taxes 1,830,342 2,029,326 1,475,314 972,535 1,000,023
Income taxes 33,327 22,527 4,785 14,600 31,943
----------- ----------- ----------- ----------- -----------
NET INCOME $ 1,797,015 $ 2,006,799 $ 1,470,529 $ 957,935 $ 968,080
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 4
ADVANCED DIGITAL DESIGNS, INC., ADVANCED TECHNOLOGIES, INC.,
AND 937 PLUM GROVE ROAD PARTNERSHIP
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1999
================================================================================
Additional
paid-in Retained
capital earnings Total
----------- ----------- -----------
Balance at January 1, 1997 $ 166,702 $ - $ 166,702
Net earnings - 1,470,529 1,470,529
Dividends paid - (1,219,000) (1,219,000)
----------- ----------- -----------
Balance at December 31, 1997 166,702 251,529 418,231
Net earnings - 2,006,799 2,006,799
Capital contribution 134,938 - 134,938
Dividends paid - (1,920,000) (1,920,000)
----------- ----------- -----------
Balance at December 31, 1998 301,640 338,328 639,968
Net earnings (unaudited) - 968,080 968,080
Dividends paid (unaudited) - (900,000) (900,000)
----------- ----------- -----------
Balance at June 30, 1999 (unaudited) $ 301,640 $ 406,408 $ 708,048
=========== =========== ===========
Balance at December 31, 1998 $ 301,640 $ 338,328 $ 639,968
Net earnings - 1,797,015 1,797,015
Dividends paid - (1,320,000) (1,320,000)
----------- ----------- -----------
Balance at December 31, 1999 301,640 815,343 1,116,983
Net earnings (unaudited) - 957,935 957,935
Dividends paid (unaudited) - (800,000) (800,000)
Buyout of principal (unaudited) - (500,000) (500,000)
----------- ----------- -----------
Balance at June 30, 2000 (unaudited) $ 301,640 $ 473,278 $ 774,918
=========== =========== ===========
The accompanying notes are an integral part of these statements.
<PAGE> 5
ADVANCED DIGITAL DESIGNS, INC., ADVANCED TECHNOLOGIES, INC.,
AND 937 PLUM GROVE ROAD PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
================================================================================
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998 1997 2000 1999
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,797,015 $ 2,006,799 $ 1,470,529 $ 957,935 $ 968,080
Adjustments to reconcile net income to net
Cash provided by operating activities
Depreciation 43,859 39,035 8,318 24,238 21,929
Change in operating assets and liabilities
Trade accounts receivable (523,460) (59,162) (422,335) 496,062 27,963
Accounts payable 10,000 (6,000) 28,000 - -
Accrued expenses and other current liabilities (18,035) (7,183) 61,858 (1,460) (28,256)
----------- ----------- ----------- ----------- -----------
Total adjustments (487,636) (33,310) (324,159) 518,840 21,636
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities 1,309,379 1,973,489 1,146,370 1,476,775 989,716
Cash flows from investing activities
Additions to building equipment, furniture, and fixtures (9,789) (407,546) (63,159) (16,005) (5,444)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities (9,789) (407,546) (63,159) (16,005) (5,444)
Cash flows from financing activities
Payments on long-term debt - net (2,630) 275,891 - 1,337 (1,318)
Dividends paid (1,320,000) (1,920,000) (1,219,000) (800,000) (900,000)
Buyout of principal - - - (500,000) -
Capital contribution - 134,938 166,702 - -
----------- ----------- ----------- ----------- -----------
Net cash used in financing activities (1,322,630) (1,509,171) (1,052,298) (1,298,663) (901,318)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash (23,040) 56,772 30,913 162,107 82,954
Cash at beginning of year 87,685 30,913 - 64,645 87,685
----------- ----------- ----------- ----------- -----------
Cash at end of year $ 64,645 $ 87,685 $ 30,913 $ 226,752 $ 170,639
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest $ 20,263 $ 18,713 $ - $ 10,084 $ 10,129
Income taxes 33,327 22,527 4,785 - -
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
ADVANCED DIGITAL DESIGNS, INC., ADVANCED TECHNOLOGIES, INC.,
AND 937 PLUM GROVE ROAD PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying combined financial statements for Advanced Digital Designs,
Inc., Advanced Technologies, Inc., and 937 Plum Grove Road Partnership
(collectively, the "Company") follows:
INDUSTRY OPERATIONS AND CONCENTRATION OF CREDIT RISK
The Company specializes in three main areas: design services, which include
hardware, firmware, and software; process methodology consulting; and
intellectual property development. The Company services the communications,
computer, video, automotive, medical, and other industries. Three of the
Company's customers accounted for approximately 85%, 82%, and 83% of total
revenues for the years ended December 31, 1999, 1998, and 1997, respectively.
Total outstanding receivables for those three customers at December 31, 1999,
1998, and 1997 was $680,963, $279,450, and $272,135, respectively, representing
approximately 68%, 58%, and 64% of the total accounts receivable as of December
31, 1999, 1998, and 1997, respectively.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of Advanced
Digital Designs, Inc., Advanced Technologies, Inc., and 937 Plum Grove Road
Partnership, based on common ownership. All significant intercompany accounts
and transactions have been eliminated.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 could differ from those estimates.
BUILDING, EQUIPMENT, FURNITURE, AND FIXTURES
Building, equipment, furniture, and fixtures are recorded at cost and
depreciated over the estimated useful lives of the assets using the
straight-line method.
<PAGE> 7
ADVANCED DIGITAL DESIGNS, INC., ADVANCED TECHNOLOGIES, INC.,
AND 937 PLUM GROVE ROAD PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. As such, the Company's net income is treated for Federal
and State of Illinois income tax purposes substantially as if the Company were a
partnership. The net income of the Company is reportable in the stockholders'
individual Federal and state income tax returns. Accordingly, the Company is not
liable for any Federal or state income tax, except for Illinois replacement tax,
during this period.
REVENUE RECOGNITION
Revenue is recognized when the service is performed.
================================================================================
NOTE B - EMPLOYEE BENEFIT PLANS
The Company established a 401(k) retirement plan for eligible employees on April
1, 1998, in accordance with Section 401(k) of the Internal Revenue Code.
Employees are permitted to make annual contributions through salary deductions
up to 15% of their annual salary. The Company does not have a match policy in
place.
================================================================================
NOTE C - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998 1997 2000 1999
-------- -------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Notepayable to bank, dated January 26, 1998,
at a fixed rate of 7.5%, with a payment
of $1,907 plus interest to be made
monthly, for a term of 15 years with an
amortization not to exceed 30 years $265,097 $267,727 $ - $263,734 $266,409
Less current maturities 23,760 23,760 - 23,760 23,760
-------- -------- -------- -------- --------
$241,337 $243,967 $ - $239,974 $242,649
======== ======== ======== ======== ========
</TABLE>
<PAGE> 8
ADVANCED DIGITAL DESIGNS, INC., ADVANCED TECHNOLOGIES, INC.,
AND 937 PLUM GROVE ROAD PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
================================================================================
NOTE C - LONG-TERM OBLIGATIONS - CONTINUED
Annual maturities of long-term obligations as of December 31, 1999, are as
follows:
2000 $ 23,760
2001 23,760
2002 23,760
2003 23,760
2004 23,760
Thereafter 146,297
--------
$265,097
========
================================================================================
NOTE D -SUBSEQUENT EVENT
On August 18, 2000, the Company sold substantially all of its assets to Dauphin
Technology, Inc. for $6,000,000.
