<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 23, 2000
OVERLAND DATA, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of incorporation)
0-22071 95-3535285
(Commission File Number) (IRS Employer Identification No.)
8975 Balboa Avenue, San Diego, California 92123-1599
(Address of principal executive offices, including zip code)
(858) 571-5555
(Registrant's telephone number, including area code)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On February 23, 2000, Overland Data, Inc., a California corporation
(the "Company"), purchased certain inventories, fixed assets, supplies,
intellectual property, trademarks and Internet addresses (the "Acquisition")
from Tecmar Technologies International, Inc. ("TTI"), relating to its
wholly-owned subsidiary Tecmar Technologies, Inc. ("Tecmar"), pursuant
to that certain Asset Purchase Agreement, dated as of January 7, 2000, by and
among Overland Data, Inc., Tecmar Acquisition Corporation, TTI and its
wholly-owned subsidiaries. The total consideration for the purchase amounted
to approximately $3,410,000.
A description of the Acquisition is set forth in the Company's news
release, dated February 23, 2000, a copy of which is attached hereto as Exhibit
99.1 and incorporated by reference herein.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
Audited financial statements of Tecmar Technologies, Inc. for the
year ended May 31, 1997 are attached hereto as Exhibit 99.2.
Audited financial statements of Tecmar Technologies
International, Inc. for the year ended January 31, 1999 are
attached hereto as Exhibit 99.3.
Unaudited interim financial statements of Tecmar Technologies
International, Inc. for the nine months ended October 31, 1999 and 1998
are attached hereto as Exhibit 99.4.
The Acquisition reported by the Company in this Form 8-K relates to the
business of TTI. Tecmar was acquired by TTI on January 30, 1998. Prior
to its acquisition, Tecmar had a May 31 fiscal year end while TTI had
a Janaury 31 fiscal year end. Subsequent to January 31, 1998, the
results of Tecmar are included in the results of TTI. It is for these
reasons that the requirements of this Item 7(a) relating to the filing
of audited financial statements are met through inclusion of the
financial statements of Tecmar for the year ended May 31, 1997 and the
financial statements of TTI for the year ended January 31, 1999.
(b) Pro Forma Financial Information.
Attached hereto as Exhibit 99.5 is the required Pro Forma Financial
Information of the Company consisting of an Unaudited Pro Forma
Condensed Consolidated Statements of Operations for the twelve months
ended June 30, 1999 and for the six months ended December 31, 1999, and
Unaudited Pro Forma Condensed Consolidated Balance Sheet at December
31, 1999.
2
<PAGE>
(c) Exhibits.
2.1* Asset Purchase Agreement, dated as of January 7, 2000, by and
among Overland Data, Inc., Tecmar Acquisition Corporation,
Tecmar Technologies International, Inc., Tecmar Technologies,
Inc., and Ditto, Inc.
99.1* News Release dated February 23, 2000.
99.2 Consolidated Audited Financial Statements of Tecmar
Technologies Inc., for the year ended May 31, 1997.
99.3 Consolidated Audited Financial Statements of
Tecmar Technologies International, Inc. for the year
ended January 31, 1999.
99.4 Unaudited Interim Financial Statements of Tecmar Technologies
International, Inc. for the nine months ended October 31, 1999
and 1998.
99.5 Pro Forma Financial Information.
* Previously filed.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: May 5, 2000 Overland Data, Inc.
By: /s/ VERNON A. LOFORTI
---------------------------------
Vernon A. LoForti
Vice President, Chief Financial
Officer and Secretary
4
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER
- --------------
2.1* , ** Asset Purchase Agreement, dated as of January 7, 2000, by and
among Overland Data, Inc., Tecmar Acquisition Corporation,
Tecmar Technologies International, Inc., Tecmar Technologies,
Inc., and Ditto, Inc.
99.1 ** News Release dated February 23, 2000.
99.2 Consolidated Audited Financial Statements of Tecmar
Technologies, Inc. for the year ended May 31, 1997.
99.3 Consolidated Audited Financial Statements of
Tecmar Technologies International, Inc. for the year
ended January 31, 1999.
99.4 Unaudited Interim Financial Statements of Tecmar Technologies
International, Inc. for the nine months ended October 31, 1999
and 1998.
99.5 Pro Forma Financial Information.
* The table of contents to the Asset Purchase Agreement lists the exhibits and
schedules to the Asset Purchase Agreement. In accordance with Item 601(b)(2) of
Regulation S-K, the exhibits and schedules to the Asset Purchase Agreement have
been excluded; such exhibits and/or schedules will be furnished supplementally
upon request by the Securities and Exchange Commission.
** Exhibits previously filed.
5
<PAGE>
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES, INTERNATIONAL INC.)
CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE>
[KPMG LLP LOGO]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Members
Tecmar Technologies, Inc.;
We have audited the accompanying consolidated balance sheet of Tecmar
Technologies, Inc. and subsidiaries (wholly owned by Tecmar Technologies
International, Inc.) as of May 31, 1997, and the related consolidated statements
of operations and accumulated deficit and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tecmar Technologies,
Inc. and subsidiaries as of May 31, 1997, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Tecmar Technologies, Inc. will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company incurred a net loss
in 1997 and has a shareholders's deficit as of May 31, 1997. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG LLP
Denver, Colorado
July 9, 1997
1
<PAGE>
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
CONSOLIDATED BALANCE SHEET
MAY 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS (NOTE 3)
Current assets:
Accounts receivable:
<S> <C>
Trade, net of allowance for uncollectible accounts of $581,790 $ 7,682,387
Inventory 4,444,495
Prepaid expenses and other 529,550
------------
Total current assets 12,656,432
Equipment (note 2) 5,729,582
Less accumulated depreciation (2,323,830)
------------
Net equipment 3,405,752
Other assets 58,880
------------
$ 16,121,064
============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Debt (note 3) $ 4,386,089
Accounts payable 2,273,477
Accrued liabilities 2,181,902
Current portion of obligations under capital leases (note 9) 100,790
------------
Total current liabilities 8,942,258
Obligations under capital leases less current portion (note 9) 42,955
Due to Parent (note 4) 12,112,265
------------
Total liabilities 21,097,478
------------
Stockholder's deficit:
Common stock, $1.00 par value; authorized 1,000 shares; issued
and outstanding 1,000
Additional paid-in-capital 3,670,465
Accumulated deficit (8,647,879)
------------
Total stockholder's deficit (4,976,414)
Commitments and contingencies (note 9)
------------
$ 16,121,064
============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED MAY 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Sales $ 44,597,622
Cost of sales (36,296,003)
Other costs (971,000)
------------
Gross profit 7,330,619
Expenses:
General and administrative 2,879,481
Sales and marketing 5,440,157
Customer satisfaction 1,014,241
Research and development 3,737,271
Restructuring costs (note 6) 506,055
------------
Total expenses 13,577,205
------------
Loss from operations (6,246,586)
Other income (expense):
Interest expense (note 3) (618,767)
Other, net 307,088
------------
Net loss (6,558,265)
Accumulated deficit at beginning of year (2,089,614)
------------
Accumulated deficit at end of year $ (8,647,879)
============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED MAY 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss $(6,558,265)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation expense 1,050,926
Loss on disposal of property and equipment 116,992
Changes in operating assets and liabilities:
Trade accounts receivable (283,665)
Inventory 916,857
Prepaid expenses and other assets 1,033,700
Accounts payable (2,601,864)
Accrued liabilities (1,818,175)
------------
Net cash used by operating activities (8,143,494)
------------
Cash flows from investing activities:
Additions to property and equipment (903,082)
Proceeds from sale of fixed assets 42,481
------------
Net cash used by investing activities (860,601)
Cash flows from financing activities:
Net borrowings under line of credit 4,386,089
Repayment of principal under capital lease obligations (162,591)
Net advances from parent 4,230,017
------------
Net cash provided by financing activities 8,453,515
------------
Net decrease in cash (550,580)
Cash at beginning of year 550,580
------------
Cash at end of year $ -
============
Supplemental disclosures of cash flow information:
Equipment acquired through capital lease $ 56,530
============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
Tecmar Technologies, Inc. (the Company) is wholly owned by Tecmar
Technologies International, Inc., a Canadian company (the Parent). The
Company was acquired by the Parent pursuant to a plan of reorganization by
the United States Bankruptcy Court on March 4, 1996. The Company's
principal business activities include the design, manufacture and sale of
computer data storage equipment.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany transactions have been
eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As shown in the
accompanying consolidated financial statements, the Company incurred a net
loss of $6,558,265 for the year ended May 31, 1997 and has a shareholder's
deficit of $4,976,414 at May 31, 1997 which raises substantial doubt about
the Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating
to the outcome of this uncertainty. Management's plans to continue as a
going concern include increasing revenue and decreasing costs to attain
profitable operations, obtaining additional equity or debt financing, or
the sale of a portion or substantially all of the assets of the Company.
The presentation of financial statements in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions which affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses for the period reported.
Actual results could differ from these estimates.
REVENUE RECOGNITION
Sales of inventory are recognized upon shipment.
INVENTORIES
Inventories are recorded at the lower of cost or market value. Cost is
determined using the first-in, first-out basis, and includes freight, duty
and taxes, as applicable.
EQUIPMENT
Equipment is recorded at cost. Assets under capital lease are recorded at
the present value of minimum lease payments at the inception of the lease
and amortized over the remaining lease term.
5
<PAGE>
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation of equipment and computer software is computed using the
straight-line method over the estimated useful lives of the respective
assets, ranging primarily from 2 to 7 years.
INCOME TAXES
The Company files a separate U.S. federal income tax return and accounts
for income taxes under the provisions of Statements of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS 109). Under the asset
and liability method of 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. 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 income
in the period that includes the enactment date.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
LONG-LIVED ASSETS
Effective June 1 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable intangibles to be
held and used or disposed of by an entity be reviewed for impairment
whenever events or changes in circumstances indicates that the carrying
amount of an asset may not be recoverable. The adoption of SFAS 121 had no
effect on the Company's consolidated financial statements.
FINANCIAL INSTRUMENTS
The carrying values of cash, accounts receivable, bank indebtedness, and
accounts payable and accrued liabilities approximate fair values due to
their relative short term to maturity.
6
<PAGE>
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) EQUIPMENT
Equipment consists of the following at May 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $ 1,154,517
Production and service equipment 2,080,526
Research and development equipment 923,528
Leasehold improvements 533,037
Computer software 101,112
Computer hardware 515,518
Computer software and equipment under
capital lease 421,344
-----------
5,729,582
Less accumulated depreciation (2,323,830)
-----------
$ 3,405,752
===========
</TABLE>
(3) DEBT
The Company has a revolving line for borrowings of up to $10 million,
bearing interest at the bank's prime rate plus 2 1/2% due in fiscal 1998.
The line is secured by a first priority interest in all of the Company's
accounts receivable, inventory, intangibles and any unencumbered machinery
and equipment. The Company is subject to minimum net worth and
profitability covenants and limitations on capital expenditures and
intercompany transactions. The Company is not in compliance with the net
worth covenant at May 31, 1997 and, accordingly, the balance outstanding is
included in current liabilities in the accompanying consolidated financial
statements.
(4) TRANSACTIONS WITH PARENT
Advances from the Parent bear interest at 8% through February 28, 1997.
Interest after this date was waived by the Parent. The loan is due on
demand after June 1, 1998 and is subordinated to the bank debt.
(5) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company sells primarily to Original Equipment Manufacturers and
distributors of computer equipment. Although the Company's exposure to
credit risk associated by non-payment by these customers is affected by
conditions or occurrences within the industry, the Company performs ongoing
credit evaluations of its customer's financial condition to reduce credit
risk exposure. The Company has one customer representing 10.4% of sales and
27% of accounts receivable.
7
<PAGE>
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(6) RESTRUCTURING COSTS
Restructuring costs relate to the closure of the Company's Singapore
manufacturing operation and include employee severance, loss on disposition
of assets, lease termination costs and other exit costs.
(7) INCOME TAXES
The net operating losses (NOLs) of the Company for United States tax
purposes generated prior to the acquisition of the Company by the Parent on
March 4, 1996, are limited by Section 382 of the United States Internal
Revenue Code. The amount, if any, of the Company's NOLs remaining as a
result of the emerging from bankruptcy has not been determined. The NOLs
remaining will be subject to an annual usage limitation that may result in
none of the NOLs being utilized prior to expiration. Subsequent to the
acquisition, the Company has generated NOLs of $6,755,000 which are not
subject to limitations other than that they fully expire in 2012.
The Company has recorded a valuation allowance equal to the Company's net
deferred tax asset relating primarily to the net operating loss
carryforwards discussed above, due to the uncertainty of future
utilization.
(8) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution pension plan covering
substantially all employees. The plan provides for both employee and
employer discretionary contributions. The Company did not make a
contribution to the plan for the year ended May 31, 1997.
(9) COMMITMENTS AND CONTINGENCIES
The Company has committed to purchase $9,808,000 of inventory from
suppliers.
8
<PAGE>
TECMAR TECHNOLOGIES, INC.
AND SUBSIDIARIES
(WHOLLY OWNED BY TECMAR TECHNOLOGIES INTERNATIONAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has certain noncancelable operating leases for facilities and
equipment which expire on various dates through 2001 and leases certain
office equipment and computers under capital leases. At May 31, 1997,
future minimum payments under noncancelable operating and capital leases
having initial or remaining terms of one year or more are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------ ------
<S> <C> <C>
Fiscal year ended May 31:
1998 $123,819 335,453
1999 26,515 336,524
2000 9,405 49,094
2001 2,351 -
-------- -------
Total minimum lease payments 162,090 721,071
=======
Less amount representing interest (18,345)
--------
Present value of net minimum
capital lease payments 143,745
Less current portion (100,790)
--------
Capital lease obligations,
net of current portion $ 42,955
========
</TABLE>
Rent expense for the year ended May 31, 1997 totaled $673,476.
9
<PAGE>
EXHIBIT 99.3
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED AUDITED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JANUARY 31, 1999
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
TABLE OF CONTENTS
<TABLE>
1999 ANNUAL REPORT Page
<S> <C>
Reports of Independent Certified Public Accountant.................................................... 1
FINANCIAL STATEMENTS:
Consolidated balance sheets as of January 31, 1999 and 1998........................................... 2
Consolidated statements of operations for the years ended
January 31, 1999 and 1998............................................................................. 4
Consolidated statements of stockholders' equity for the years ended
January 31, 1999 and 1998............................................................................. 5
Consolidated statements of cash flows for the years ended
January 31, 1999 and 1998............................................................................. 6
Notes to consolidated financial statements ........................................................... 9
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Tecmar Technologies International,
Inc., Longmont, Colorado:
We have audited the accompanying consolidated balance sheet of Tecmar
Technologies International, Inc. and subsidiaries (the Company) as of January
31, 1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with United States (U.S.) generally
accepted auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tecmar Technologies
International, Inc. and subsidiaries as of January 31, 1999, and the results of
their operations and their cash flows for the year then ended in conformity with
U.S. generally accepted accounting principles.
BDO Seidman, LLP
Denver, Colorado
March 5, 1999, except for Note 18
which is as of March 19, 1999 and
Note 19 which is as of March 23, 1999
1
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
1999 1998
--------------------------------------
(unaudited)
<S> <C> <C>
ASSETS (Note 9)
CURRENT ASSETS:
Cash and cash equivalents $ 1,173,202 $ 576,159
Temporary cash investments 300,000 --
Investments (Note 4) 1,831,588 784,291
Accounts receivable, net of allowance for doubtful
accounts of $141,022 and $496,736 2,856,850 8,380,766
Inventories (Note 5) 2,873,670 7,137,697
Current portion of notes receivable -- 18,750
Prepaid expenses and other current assets (Note 6) 217,872 1,204,279
Refundable income taxes 149,665 --
Deferred tax asset (Note 15) -- 118,000
------------ ------------
Total current assets 9,402,847 18,219,942
EQUIPMENT AND IMPROVEMENTS, net (Note 7) 1,791,051 3,308,344
GOODWILL, net of accumulated amortization of
$276,591 and $223,970 (Note 2) 3,508,424 12,973,530
NOTES RECEIVABLE, net of current portion -- 25,000
CAPITALIZED OFFERING COSTS -- 914,106
OTHER ASSETS 102,748 86,429
------------ ------------
$ 14,805,070 $ 35,527,351
============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
2
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
JANUARY 31,
1999 1998
--------------------------------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITES:
Accounts payable $ 1,315,501 $ 4,136,836
Accrued liabilities (Note 8) 1,773,605 3,330,454
Lines of credit (Note 9) 1,686,938 4,123,534
Deferred contract service revenue -- 402,330
Income taxes payable (Note 15) -- 33,287
Current portion of long-term debt (Note 10) 182,508 8,142,509
------------- --------------
Total current liabilities 4,958,552 20,168,950
DEFERRED RENT -- 101,794
LONG-TERM DEBT, net of current portion (Note 10) 58,584 2,049,142
------------- --------------
TOTAL LIABILITIES 5,017,136 22,319,886
------------- --------------
COMMITMENTS (Notes 11 and 13)
STOCKHOLDERS' EQUITY (Notes 14, 16, 17 and 19)):
Common stock, $.10 par value; 30,000,000 shares
authorized; 18,699,999 and 8,614,423
shares issued and outstanding 1,870,000 861,442
Additional paid-in capital 37,158,755 18,955,323
Accumulated deficit (29,252,225) (6,677,276)
Unrealized gain on investments (Note 4) 11,404 7,097
Foreign currency translation adjustments -- 60,879
------------- --------------
Total stockholders' equity 9,787,934 13,207,465
------------- --------------
$14,805,070 $35,527,351
============= ==============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
3
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
JANUARY 31,
1999 1998
-------------------------------------
(unaudited)
<S> <C> <C>
NET REVENUES (Note 12) $37,906,488 $35,096,820
COST OF REVENUES (Note 1) 32,067,608 26,193,339
----------- ----------
GROSS PROFIT 5,838,880 8,903,481
OPERATING EXPENSES:
Selling 8,286,823 3,418,017
General and administrative 4,617,038 5,990,162
Research and development 3,027,418 911,513
Interest expense 234,496 113,942
Interest (income) (405,714) (295,342)
Acquired in-process research and development
write-off (Note 2) -- 6,000,000
Other (income) and expense 120,403 (11,908)
Restructuring costs (Note 3) 12,533,365 --
---------- ------------
Total operating expenses 28,413,829 16,126,384
---------- ------------
LOSS BEFORE INCOME TAX (BENEFIT) (22,574,949) (7,222,903)
INCOME TAX (BENEFIT) (Note 15) -- (31,006)
---------- ------------
NET LOSS (22,574,949) (7,191,897)
Other comprehensive income (loss):
Unrealized gain on investments 4,307 7,097
Foreign currency translation adjustment (60,879) 31,525
--------------- --------------
COMPREHENSIVE LOSS $ (22,631,521) $ (7,153,275)
=============== ==============
BASIC AND DILUTED LOSS PER SHARE $ (1.24) $ (0.89)
=============== =============
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 18,148,700 8,043,583
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
RETAINED FOREIGN
ADDITIONAL EARNINGS UNREALIZED CURRENCY TOTAL
COMMON STOCK PAID-IN (ACCUMULATED GAIN ON TRANSLATION STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT) INVESTMENTS ADJUSTMENTS EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 1, 1997 7,276,500 $ 727,650 $ 13,706,574 $ 514,621 $ -- $ 29,354 $ 14,978,199
Issuance of common stock
for cash, net of offering costs 876,666 87,665 4,894,874 -- -- -- 4,982,539
Warrants exercised for common
stock 261,257 26,127 (26,125) -- -- -- 2
Issuance of common stock in
exchange for cancellation of
accrued liability 200,000 20,000 380,000 -- -- -- 400,000
Net loss -- -- -- (7,191,897) -- -- (7,191,897)
Foreign currency translation
adjustment -- -- -- -- -- 31,525 31,525
Unrealized gain on investments -- -- -- -- 7,097 -- 7,097
---------- ---------- ----------- ------------- -------- --------- ----------
BALANCE, January 31, 1998 8,614,423 861,442 18,955,323 (6,677,276) 7,097 60,879 13,207,465
(unaudited)
Issuance of common stock for
cash, net of offering costs 10,085,576 1,008,558 18,203,432 -- -- -- 19,211,990
Net loss -- -- -- (22,574,949) -- -- (22,574,949)
Foreign currency translation
adjustment -- -- -- -- -- (60,879) (60,879)
Unrealized gain on investments -- -- -- 4,307 -- 4,307
---------- ---------- ----------- ------------- -------- --------- ----------
BALANCE, January 31, 1999 18,699,999 $1,870,000 $37,158,755 $(29,252,225) $ 11,404 $ -- $9,787,934
========== ========== =========== ============= ======== ========= ==========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
5
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
JANUARY 31,
1999 1998
---------------------------------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(22,574,949) $(7,191,897)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,626,847 921,431
Restructuring 12,005,591 --
Bad debt expense 250,233 --
Loss on write-off of note and accounts receivable
to an affiliate -- 1,170,154
Realized gain on investments (31,378) (46,179)
(Gain) loss on sale of assets 25,425 (1,557)
Acquired in-process research and development write-off -- 6,000,000
Deferred taxes -- (89,751)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net 3,770,931 1,347,023
Inventories 1,039,331 (420,871)
Prepaid expenses and other assets 611,598 (82,038)
Accounts payable and other accrued liabilities (3,068,951) (1,526,355)
Deferred contract service revenue -- 28,328
Deferred rent (101,794) (1,293)
------------- --------------
Net cash (used in) provided by operating activities (6,447,116) 106,995
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (223,235) (487,995)
Proceeds from sale of assets 136,501 --
Proceeds from sale of equipment -- 84,971
Acquisition of subsidiaries -- (768,259)
Proceeds from sale of subsidiaries 394,426 --
Issuance of notes receivable -- (4,500,000)
Collections on notes receivable -- 100,000
Purchase of temporary cash investment (300,000) --
Purchase of investments (10,664,704) (6,142,761)
Proceeds from sale of investments 9,643,476 5,671,405
-------------- --------------
Net cash used in investing activities (1,013,536) (6,042,639)
-------------- --------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
6
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
JANUARY 31,
1999 1998
-------------------------------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 21,599,152 4,982,539
Net increase (decrease) in lines of credit (2,419,481) 395,174
Payments for capitalized offering costs (1,473,056) (914,106)
Payments on debt (9,648,920) (199,195)
-------------- ---------------
Net cash provided by financing activities 8,057,695 4,264,412
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- 28,700
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 597,043 (1,642,532)
CASH AND CASH EQUIVALENTS, beginning of year 576,159 2,218,691
------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 1,173,202 $ 576,159
============== =============
SUPPLEMENTAL CASH FLOW DISCLOSURES -
Cash paid / (received) during the period for:
Interest $ 216,928 $ 152,584
============= =============
Income taxes $ (112,190) $ 471,494
============= =============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
7
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
January 31,
1999 1998
-------------------------------------
(unaudited)
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH
TRANSACTIONS:
In July 1997, the Company acquired all
the outstanding stock of Semico in a
transaction summarized as follows:
Fair value of assets acquired $ -- $ 1,491,410
Cash paid, net of cash acquired -- (586,761)
------------ ------------
Liabilities assumed $ $ 904,649
============ ============
In January 1998, the Company acquired all of the
outstanding stock of Tecmar Technologies, Inc. in a
transaction summarized as follows:
Fair value of assets acquired $ -- $20,096,565
Cash paid, net of cash acquired -- (181,498)
Acquisition payable issued -- (9,789,967)
------------ -----------
Liabilities assumed $ $10,125,100
============ ===========
Issuance of common stock for cancellation
of an accrued liability (Note 14) $ -- $ 400,000
============ ===========
Acquisition of equipment via a capital lease obligation $ 66,246 $ --
============ ===========
Reduction of goodwill and note payable under
Acquisition Agreement (Note 2) for early payment
of debt $ 325,000 $ --
============ ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
8
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION - Tecmar Technologies International,
Inc (formerly TTI Holdings Inc.) (TTI) effectively commenced operations
on September 13, 1996 when it purchased all of the outstanding stock of
Xtran, Inc. (formerly Transitional Technology, Inc.) (Xtran) and
Transitional Technology International Limited (TTI U.K). Xtran and TTI
U.K. designed, manufactured and marketed a full range of tape-based data
storage sub-systems. The consolidated financial statements for the year
ended January 31, 1998 include the operating results of Xtran and
TTI U.K.
In July 1997, TTI U.K. purchased all of the outstanding stock of Semico
Computers Vertriebs GmbH (Semico), a German distributor of TTI U.K's
products for $700,000 in cash plus contingent payments based on future
revenues of up to $1 million. Accordingly, Semico's results are only
included in the consolidated financial statements beginning in July 1997.
On January 30, 1998, TTI acquired all of the outstanding stock of Tecmar
Technologies, Inc. (Tecmar); a company primarily engaged in the design,
manufacture and distribution of computer data storage equipment in a
transaction accounted for as a purchase. Since the acquisition occurred
at the end of the 1998 fiscal year, the operating results for 1998 do not
include the results of Tecmar, except for the acquired in-process
research and development write-off of $6,000,000.
In July, 1998, the Board of Directors of TTI approved a restructuring
plan (see Note 3) that resulted in (a) the sale of the capital stock of
TTI U.K. on August 19, 1998; (b) the sale of certain assets and the
operating business of Xtran on September 29, 1998; and (c) the sale of
the capital stock of Semico on November 4, 1998. For accounting purposes,
the sales of TTI U.K. and Semico were treated as if they occurred on
August 1, 1998 as the impact on the consolidated financial statements was
not material.
Xtran, TTI U.K. and Semico are collectively referred to as "the Reseller
Business." TTI and subsidiaries are collectively referred to as
"the Company."
Subsequent to the disposition of the Reseller Business, the operations of
the Company consist principally of Tecmar.
During fiscal 1999, the Company experienced significant operating losses.
As discussed in Note 3, the Company has completed a plan to restructure
the Company's operations and to focus on the operations of Tecmar. The
restructuring plan has reduced (but not eliminated) the operating losses
being incurred in the third and fourth quarters of fiscal 1999.
Management has established plans to improve Tecmar's operating
performance in fiscal 2000. These plans include the establishment of
joint marketing programs with Imation Corp. to promote the value
proposition of the Travan NS tape drive in the network and entry level
computer server market and increase the sales of this product line. The
Company has also acquired the Ditto tape drive product line (Note 18) and
expects this acquisition to contribute significant revenue and
contribution to operating profits beginning in the second quarter of
fiscal 2000. The Company
9
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
has also hired a Norwegian investment banking company to assist as a
financial adviser in connection with the sale of new shares of common
stock of the Company, although there can be no assurance that the planned
sale will be completed. Management believes that its cash and investments
on hand and the addition of new funds from the planned stock offering
will enable it to finance the working capital necessary to fund the
planned growth of the Ditto and Travan NS product lines. Should the
planned sale of common stock be unsuccessful, management believes the
current working capital and cash flows from operations will be adequate
for the next year. Should there be any unexpected shortfalls, management
believes discretionary operating expenses can be reduced as needed.
FISCAL YEAR - The Company's fiscal year ends on January 31 and references
to a fiscal year to denote the calendar year in which the fiscal year
ended. For example "fiscal 1999" refers to 12 months ended January 31,
1999.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of TTI, Xtran, TTI U.K., Semico and Tecmar. All
significant intercompany balances have been eliminated in consolidation.
FOREIGN EXCHANGE - TTI's, Xtran's and Tecmar's functional currency is the
U.S. dollar, whereas TTI U.K.'s functional currency was the English pound
sterling ((pound)) and Semico's functional currency was the German
deutsche mark (DM). Therefore, the financial statements of TTI U.K. and
Semico have been translated to the U.S. dollar. Under the provisions of
Statement of Financial Accounting Standards (SFAS) No.52, Foreign
Currency Translation, assets and liabilities are translated at the
foreign currency exchange rate at the balance sheet date, and revenues
and expenses are translated at the weighted average foreign currency
exchange rate for the year ended January 31, 1999. Translation
adjustments are not included in determining net income, but are reported
separately and accumulated as a separate component of stockholders'
equity.
USE OF 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 and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those
estimates.
RECLASSIFICATIONS - Certain items included in the 1998 financial
statements have been reclassified to conform to the current year
presentation. Such reclassifications have no impact on the Company's
financial position or results of operations.
CASH AND CASH EQUIVALENTS - The Company considers all highly-liquid
investments with original maturities of three months or less to be cash
equivalents.
TEMPORARY CASH INVESTMENTS - The Company has cash temporarily invested
in a certificate of deposit which matures August 1999.
GOODWILL - Goodwill is amortized over a 15-year period using the
straight-line method.
10
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
INVESTMENTS - The Company accounts for investments pursuant to SFAS
No.115, Accounting for Certain Investments in Debt and Equity
Securities. At January 31, 1999 and 1998, marketable equity and debt
securities have been categorized as available for sale and, as a result,
are stated at fair value. Marketable equity and debt securities
available for current operations are classified on the balance sheet as
current assets. Unrealized holding gains and losses are included as a
component of stockholders' equity, net of tax, until realized.
CREDIT RISK - The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. The Company's cash and cash
equivalents are in demand deposit accounts placed with federally insured
financial institutions. Such deposit accounts at time may exceed
federally insured limits. For accounts receivable, the Company performs
ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit
losses (see note 12). The Company sells to international customers on a
routine basis and has obtained credit insurance policies to cover most
of the credit risk affiliated with these foreign customers. In
connection with sales to international customers, the Company has not
experienced any significant losses.
FINANCIAL INSTRUMENTS - The following methods and assumptions were used
to estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value:
ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES - Fair
values of accounts receivables, accounts payable and accrued
liabilities are assumed to approximate carrying values for these
financial instruments since they are short term in nature and their
carrying amounts approximate fair value or they are receivable or
payable on demand.
LINES OF CREDIT AND LONG-TERM DEBT - Substantially all of these notes
bear interest at a floating rate of interest based upon current
lending rates of interest.
INVENTORIES - Inventories are stated at the lower of cost (determined on
a first-in, first-out basis) or market and consist primarily of raw
materials, work in process, and finished goods.
EQUIPMENT AND IMPROVEMENTS - Equipment and improvements are stated at
cost. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the related assets, generally
two to seven years.
CAPITALIZED OFFERING COSTS - Capitalized offering costs include
professional fees directly related to the Company's stock offering. If
the stock offering is successful, costs incurred are offset against the
proceeds of the stock offering. If the stock offering is unsuccessful,
such costs are expensed.
11
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
IMPAIRMENT OF LONG LIVED ASSETS - The Company reviews for the impairment
of long lived assets and certain identifiable intangibles whenever
events and circumstances indicate that the carrying amount of an asset
may not be recoverable using the gross cash flow method in compliance
with SFAS No.121, Accounting for the Impairment of Long-Lived Assets. An
impairment loss would be recognized when estimated future cash flows
expected to result from the use of its asset and its eventual
disposition is less than its carrying amount (see note 3).
REVENUE RECOGNITION - The Company recognizes revenue upon shipment, net
of reserves for estimated returns and allowances, sales rebates, and
price protection which may occur under programs the Company has with its
customers. The Company provides for the estimated cost of past sales
support and product warranties upon shipment. Warranty liability is
accrued for based on historical returns and the Company's applicable
warranty policy. When other significant obligations remain after product
is delivered, revenue is recognized only after such obligations are
fulfilled.
VENDOR CONCENTRATION - The Company purchased approximately $12,400,000
for the year ended January 31, 1999 from one vendor. The loss of this
supply source could have a material adverse affect on the Company's
financial condition and results of operations. The Company purchased
$21,921,000 for the year ended January 31, 1998 from four suppliers.
CONTRACT MANUFACTURING - Tecmar has entered into agreements with
overseas third parties to manufacture certain of Tecmar's products and
components. There can be no assurance that such third party
manufacturing will not impair Tecmar's ability to establish, maintain or
achieve adequate product manufacturing design standards or product
quality levels. Any diminution in product quality as a result of such
third party contract manufacturing could have an adverse effect on
Tecmar's business, financial condition and results of operations.
INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No.109, Accounting for Income Taxes. SFAS No.109 is an asset and
liability approach that requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, SFAS No.109 generally
considers all expected future events other than enactments of changes in
the tax laws or rates.
STOCK-BASED COMPENSATION - The Company applies APB Opinion 25,
Accounting for Stock Issued to Employees, and the related Interpretation
in accounting for all stock options plans. Under APB Opinion 25,
compensation cost is recognized for stock options issued to employees
when the exercise price of the Company's stock options granted is less
than the market price of the underlying common stock on the date of
grant.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
Company to provide pro forma information regarding net income as if
compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in
SFAS No. 123. To provide the required pro forma information, the Company
estimates the fair value of each stock option at the grant date by using
the Black-Scholes option pricing model.
12
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
COMPREHENSIVE INCOME - TTI has adopted SFAS No. 130, Comprehensive
Income, beginning with fiscal year 1998. Comprehensive income, as
defined, includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gain/ loss on
available for sale securities.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION -
Disclosures regarding information about operating segments and related
disclosure about products and services, geographic areas and major
customers are made in compliance with SFAS No.131.
PER SHARE DATA - Net loss per share for the years ended January 31, 1999
and 1998 (unaudited) is calculated by using the weighted average
outstanding number of common shares of 18,148,700 and 8,043,583
respectively. Net loss per share is calculated in accordance with SFAS
No. 128, Earnings Per Share, which provides for the calculation of
"Basic" and "Diluted" earnings per share. Basic earnings per share
includes no dilution and is computed by dividing net loss by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to fully diluted
earnings per share. For the years ended January 31, 1999 and 1998
(unaudited), total stock options of 2,564,955 and 755,500 were
not included in the computation of diluted net loss per share
because their effect was anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS - The FASB has recently issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS
No. 133 establishes standards for recognizing all derivative instruments
including those for hedging activities as either assets or liabilities
in the statement of financial position and measuring those instruments
at fair value. This Statement is effective for fiscal years beginning
after June 30, 1999. Management believes the adoption of this statement
will have no impact on the Company's consolidated financial statements.
2. ACQUISITIONS
Effective September 13, 1996, TTI purchased all of the outstanding stock
of Xtran and TTI U.K. for $13,375,739 in cash and notes payable. The
acquisition was accounted for under the purchase method of accounting
and the purchase price was allocated $4,459,574 to net tangible assets
and $8,916,165 to goodwill, which was amortized over 15 years. Xtran's
and TTI U.K.'s operating results have been included in the Company's
consolidated financial statements from the date of acquisition. See Note
3 for the subsequent sale of TTI U.K. capital stock on August 19, 1998,
and the sale of certain assets and the operating business of Xtran on
September 29, 1998.
In July 1997, TTI U.K. purchased all of the outstanding stock of Semico,
a distributor of the Company's product, for $674,044 (including $74,044
in acquisition costs) in cash and up to $1,000,000 in additional
contingent payments based on future revenues. Upon the sale of Semico
(See Note 3) no additional contingent payments are required under the
agreement.
13
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
The acquisition was accounted for under the purchase method of
accounting, and the purchase price was allocated $183,318 to net
tangible assets and $490,726 to goodwill, which was amortized over 15
years. Semico's operating results have been included in the Company's
consolidated financial statements from the date of acquisition. See Note
3 for discussion of subsequent sale of Semico capital stock on November
4, 1998.
On January 30, 1998, TTI acquired Tecmar, a company primarily engaged in
the design, manufacture and distribution of computer data storage
equipment, in a transaction accounted for under the purchase method of
accounting. The purchase price including acquisition costs paid by TTI
consisted of $181,498 in cash, the issuance of a short term note payable
for $9,789,967 and the assumption of approximately $10,125,100 in trade
liabilities and debt. A holdback of $2,322,665 was held in escrow until
December 31, 1998. On December 31, 1998, the Company entered into an
agreement with the former parent of Tecmar to settle claims that the
Company had under the acquisition agreement and released the amounts
held in escrow to allow for the payment of the acquisition debt. Under
this agreement, the Company received a reduction in the note payable of
$325,000 and paid the remaining acquisition debt of $1,580,444 using the
funds placed in escrow. The assets acquired by TTI consisted of
receivables, inventories, fixed assets, intangible assets including
in-process research and development costs and other rights used in
Tecmar's business. In process research and development costs purchased,
valued at $6,000,000, were expensed by the Company immediately upon
completion of the acquisition.
On January 22, 1998, the definitive stock purchase agreement between TTI
and Tecmar was executed. The acquisition transaction was consummated
effective January 30, 1998, and a $4 million loan that TTI had made to
Tecmar before the acquisition date and related accrued interest was
eliminated in consolidation.
The following table presents unaudited pro forma results of operations
as if the acquisition of Tecmar had occurred on February 1, 1997. These
pro forma results do not purport to be indicative of what would have
occurred had the acquisition been made on February 1, 1997 or, results
which may occur in the future.
<TABLE>
<CAPTION>
JANUARY 31,
1998
------------
(unaudited)
<S> <C>
Net revenues $ 66,735,149
Costs and expenses (82,241,504)
-------------
Net loss $ (15,506,355)
==============
Basic and diluted loss per share $ (1.93)
==============
</TABLE>
14
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
3. RESTRUCTURING COSTS
In July 1998, the Board of Directors approved a plan to restructure the
Company's operations. The restructuring was undertaken in light of
significant and continuing operating losses along with a desire to
preserve the Company's cash to focus on the selling and marketing efforts
related to Tecmar's Travan NS products. The Company believes that future
successful results of operations will be heavily dependent upon the sales
and marketing efforts related to Tecmar's Travan NS line of tape drives.
The Company's results of operations for the year ended January 31, 1999
include a $12.5 million charge for restructuring costs related to the
plan adopted by the Board of Directors on July 20, 1998. This charge is
comprised of: (a) an accrual for the loss to dispose of TTI U.K. of $6.9
million, including a write-off of goodwill of $4.8 million, (b) an
accrual for the loss to dispose of Semico of $900 thousand, including a
write-off of goodwill of $733 thousand, (c) a write-off of $3.1 million
in goodwill related to Xtran determined to be non-recoverable from future
cash flows of that operation, and (d) $1.6 million in costs related to
the closure of Xtran's Anaheim facility, including $770 thousand in
writedowns of inventory and $530 thousand in writedowns of equipment to
net realizable value and $300 thousand of accruals for employee severance
and facility shutdown costs.
On August 19, 1998, the Company completed the sale of the capital stock
of TTI U.K. (excluding its interest in its wholly-owned subsidiary
Semico) to Storage Systems Technologies, Limited for $600 thousand,
payable $200 thousand in cash and $400 thousand in a note receivable due
to be paid over a nine month period. On September 29, 1998, the Company
transferred certain assets (principally inventory, equipment and
intellectual property) and the operating business of Xtran to AI Business
Technologies, Inc. in exchange for cash of $136,302, future royalties and
the assumption of Xtran's warranty obligations. On November 4, 1998, the
Company completed the sale of the capital stock of Semico to a group of
its employees in exchange for the release of $150,000 of collateral that
secured Semico's bank debt. As part of this transaction, the Company paid
$44,500 to the former managing director and owner of Semico for a
complete release of all claims, including any potential claims under TTI
U.K.'s acquisition of Semico. These transactions complete the
Restructuring Plan adopted by the Board of Directors in July 1998 and
subsequently focus the Company on the operations of Tecmar. A summarized
breakdown of the 1999 and 1998 operating results between Tecmar and the
Reseller Business is set forth below.
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Net Revenues:
Tecmar $23,498,130 $ --
Reseller Business 14,408,358 35,096,820
----------- ----------
37,906,488 35,096,820
----------- ----------
Gross Profit:
Tecmar 3,106,664 --
Reseller Business 2,732,216 8,903,481
---------- ----------
5,838,880 8,903,481
--------- ----------
Operating Expenses:
Tecmar 11,581,484 6,000,000
Reseller Business 16,832,345 10,126,384
----------- ----------
28,413,829 16,126,384
---------- ----------
</TABLE>
15
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
4. INVESTMENTS
Investments consist principally of mutual funds that are invested in
short-term government bonds, categorized as available for sale and
recorded at fair value.
For the purpose of determining gross realized gains and losses, the cost
of securities sold is based upon specific identification. During the
year ended January 31, 1999, the Company sold investments with an
aggregate book value of $9,643,476 for total cash proceeds of $9,612,098
resulting in realized losses of $31,378. During the year ended January
31, 1998, the Company sold investments with an aggregate book value of
$5,671,405 for $5,717,584, resulting in a realized gain of $46,179.
Unrealized holding gains as of January 31, 1999 and 1998 were $11,404
and $7,097.
5. INVENTORIES
Inventories consist of the following as of January 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Purchased parts of Reseller Business $ -- $4,280,786
Raw materials 1,342,503 1,716,393
Work in process 806,513 239,647
Finished goods 724,654 900,871
------------ ------------
* $2,873,670 $7,137,697
============ ============
</TABLE>
* Inventories are net of reserves for obsolescence of $141,000 and
$446,000.
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following as of
January 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Prepaid inventories $ 70,345 $ 507,643
Insurance claim receivable -- 98,333
Prepaid insurance 86,888 --
Other 60,639 598,303
------------ ------------
$ 217,872 $1,204,279
============ ============
</TABLE>
16
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
7. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following as of January 31:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
Machinery and equipment $ 779,373 $ 712,850
Office and computer equipment 529,064 1,174,711
Computer software 64,811 183,814
Research and development equipment 656,685 1,017,316
Furniture and fixtures 472,685 503,987
Leasehold improvements 48,941 271,394
------------ ------------
2,551,559 3,864,072
Less accumulated depreciation
and amortization 760,508 555,728
------------ ------------
$1,791,051 $3,308,344
============ ============
</TABLE>
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of January 31:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
Accrued compensation $ 432,579 $ 569,070
Accrued warranty 737,729 591,863
Accrued restructuring 88,748 --
Accrued rebates and advertising 118,178 276,590
Accrued interest 16,625 96,329
Accrued professional fees 89,646 247,940
Other 290,100 1,548,662
------------ ------------
$1,773,605 $3,330,454
============ ============
</TABLE>
9. LINES OF CREDIT
Tecmar has a revolving line of credit with Norwest Business Credit for
borrowings of up to $10 million. Borrowings under the line bear interest
at the bank's prime rate (7.25% at January 31, 1999) plus 2.5%. The line
is collateralized by a first priority interest in all of Tecmar's
accounts receivable, inventory, intangible assets and unencumbered
machinery and equipment. At January 31, 1999 and 1998, $1,686,938 and
$2,678,611 were outstanding under this line of credit. As of January 31,
1999, $300 thousand was available under the line of credit's borrowing
base formula which allows loans of up to 70% of eligible accounts
receivable, as defined. This line expires on May 31, 1999. The line of
credit agreement contained certain financial covenants, all of which the
Company was in compliance with at January 31, 1999.
17
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
Xtran had a $2,750,000 line of credit agreement with a bank, which
expired on June 30, 1998, of which $250,000 was outstanding at January
31, 1998. Borrowings under the line of credit bore interest at the bank's
reference rate (8.5% at January 31, 1998) plus 0.75% and were
collateralized by substantially all of the Company's assets. Included in
the line of credit was a standby letter of credit for $300,000 issued in
favor of a former stockholder. The line of credit agreement contained
certain financial convenants, all of which the Company was in compliance
with or had received waivers for at January 31, 1998.
TTI U.K. had a (pound)730,000 ($1,193,550) ($1,111,770 outstanding at
January 31, 1998) overdraft agreement payable on demand. Borrowings under
the overdraft agreement were limited to 50% of eligible accounts
receivable (as defined) and bore interest at the bank's base rate (6.0%
at January 31, 1998) plus 1.75% and were collateralized by substantially
all of TTI U.K.'s assets and were guaranteed up to (pound)420,000
($686,700) by TTI.
Semico had a 200,000 DM ($109,320) ($83,153 outstanding at January 31,
1998) overdraft agreement, payable on demand. Borrowings bore interest at
9.75% and were collateralized by Semico's inventories and the personal
guarantee of a former stockholder.
10. LONG-TERM DEBT
Long-term debt consists of the following as of January 31:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
Non interest-bearing acquisition payable to
Tecmar's former parent (Note 2)(1). $ -- $ 9,789,967
7% notes payable to former stockholders,
payable in quarterly principal installments
of $43,842, plus interest, due September 15, 1999 131,526 306,892
12.89% note payable to bank by TTI U.K. -- 56,102
Other 109,566 38,690
----------- ------------
241,092 10,191,651
Less current portion 182,508 8,142,509
------------ -------------
Long-term debt, net of current portion $ 58,584 $ 2,049,142
============ =============
</TABLE>
Aggregate minimum principal payment and maturities for the years
ended January 31 are as follows:
YEARS ENDING
2000 $182,508
2001 58,584
--------
$241,092
========
18
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
(1)On December 31, 1998, the Company entered into an agreement with the
former parent of Tecmar to settle claims that the Company had under the
acquisition agreement and release the amounts held in escrow to allow for
the payment of the acquisition debt. Under this agreement the Company
received a reduction in the note payable of $325,000 and paid the
remaining acquisition debt of $1,580,444 using the funds placed in
escrow.
11. COMMITMENTS
OPERATING LEASES - The Company occupies manufacturing, warehouse and
office facilities in the United States, United Kingdom and Singapore
under operating leases that expire through 2004.
As of January 31, 1999, future minimum rentals under these leases and
other noncancelable operating leases are as follows:
<TABLE>
<S> <C>
YEARS ENDING JANUARY 31
2000 $ 210,000
2001 39,000
2002 7,000
2003 7,000
2004 6,000
----------
$ 269,000
==========
</TABLE>
Rental expense amounted to approximately $729,000 and $528,000 for the
years ended January 31, 1999 and 1998, respectively.
EMPLOYMENT AGREEMENTS - The Company has entered into employment
agreements that extend until terminated under the terms of the
agreements by either the Company or the employee with six of its
officers. The agreements contain provisions for severance payments to
the officer if terminated by the Company without cause of three to six
months severance pay. The agreements also contain provisions for
severance upon change of control and termination which provide for
severance packages of one years annual compensation including base
salary, performance bonuses and car allowances and continuation of
employee benefits for one year.
UNDERWRITING AGREEMENT - On January 13, 1999, the Company entered into
an Underwriting Agreement with a Norwegian investment banking company to
assist as a financial advisor in connection with the sale of new shares
in the Company. The Company expects to pay fees and expenses, including
fees of the investment banking company, of approximately 8% of the gross
proceeds of the offering.
19
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
12. CONCENTRATION OF SALES
For the year ended January 31, 1999, the Company's top three customers
accounted for 20%, 11.8% and 11.5% of consolidated revenues. For the
year ended January 31, 1998 one customer of the Reseller Business
represented 16% of the Reseller Business consolidated net revenues. As
of January 31, 1999, four customers accounted for 27.7%, 15.2%, 13.4%
and 10.5% of the total accounts receivable. A decision by a significant
customer to decrease the amount of purchases from the Company could have
a material adverse effect on the Company's financial condition and
results of operations.
The Company sells its products in the domestic (defined as U.S. and
Canada) and international marketplace. Net sales by country for the
years ended January 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
United States $23,998,909 $16,279,176
United Kingdom 6,956,966 14,397,113
Other 6,950,613 4,420,531
------------- -------------
$37,906,488 $35,096,820
============= =============
</TABLE>
13. PROFIT-SHARING PLAN
Tecmar has a defined contribution employee profit sharing plan (the
401(k) Plan). Employees who are employed by Tecmar for 90 days are
eligible to participate in the 401(k) Plan. The 401(k) Plan allows
participating employees to defer 2% to 17% (subject to a $10,000 annual
limit) of their compensation, with Tecmar matching 25% of the first 6%
of employee contributions. The employer-matching contributions vest
equally over three years. During 1999, Tecmar contributed approximately
$39,000 to the plan.
Xtran's 401(k) Plan allowed employees who were employed by Xtran for six
months to defer 1% to 15% (subject to annual limits) of their
compensation, with Xtran matching 50% of the first 1%, plus 25% of the
next 3%, not to exceed 1.25% of employee compensation. Profit sharing
expenses associated with the 401(k) Plan were approximately $25,000 for
the year ended January 31, 1998 (unaudited). No expenses were incurred
in 1999. The Company is in the process of terminating this plan.
14. RELATED-PARTY TRANSACTIONS
During the year ended January 31, 1999, three members of the Company's
Board of Directors were paid $42,302, $2,328 and $11,500, respectively
for strategic planning and business development consulting services
provided to the Company.
During the years ended January 31, 1998 and 1997 (unaudited), the
Company loaned (including accrued interest) $1,148,979 to Nx Server
Inc. (at the time, an affiliate of the Company). This amount plus an
additional $21,175 in trade receivable was written off during the year
ended January 31, 1998 as an uncollectable bad debt.
20
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
On June 25, 1997 (unaudited), the Company issued 200,000 shares of
common stock pursuant to a letter agreement with a company affiliated
with a former director of the Company in exchange for a liability for
$400,000 for acquisition consulting services provided by the company
affiliated with this former director.
On July 9, 1997 (unaudited), the Company issued 261,257 shares of common
stock to a company affiliated with a former director of the Company
related to consulting services provided for the initial funding of the
Company.
The Company recorded interest expense of $15,494 and $34,332 on the 7%
note payable to former stockholders (Note 10) for the years ended
January 31, 1999 and 1998 (unaudited).
15. INCOME TAXES
The provision (benefit) for income taxes for the years ended January 31,
1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Current:
Federal $ -- $ (1,401)
State -- (2,526)
----------- -------------
-- (3,927)
Deferred:
Federal (7,302,718) (2,489,940)
State (969,818) (546,260)
Valuation allowance 8,272,536 2,946,448
----------- ------------
-- (89,752)
Foreign -- 62,673
----------- ------------
$ -- $ (31,006)
=========== ============
</TABLE>
A reconciliation of the income taxes at the federal statutory rate to
the effective tax rate for years ended January 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Federal income tax benefit computed
at the Federal statutory rate $ (7,675,483) $ (2,445,245)
State income tax benefit net of
federal benefit (1,072,310) (341,615)
Other - permanent differences 475,257 (190,594)
Increase in valuation of allowance 8,272,536 2,946,448
------------- -------------
Income tax benefit $ -- $ (31,006)
============= =============
</TABLE>
21
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
Significant components of the Company's deferred tax assets and
liabilities are as follows at January 31:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
Deferred tax assets:
In-process research and development write off $2,072,001 $2,520,600
Federal NOL carryforward 4,911,782 337,111
State NOL carryforward 767,466 38,576
Capital loss carryforward 3,472,845 --
Allowance for doubtful accounts 52,178 55,872
Accrued vacation 36,522 33,295
Basis difference in fixed assets -- 45,472
Inventory reserve 52,445 37,448
Other -- 25,135
------------ ------------
Total deferred tax assets 11,365,239 3,093,509
Deferred tax liabilities:
Basis difference in fixed assets 142,036 --
Other 4,219 29,061
------------ ------------
Total deferred tax liabilities 146,255 29,061
Valuation allowance (11,218,984) (2,946,448)
------------ -------------
Net deferred taxes $ -- $ 118,000
============ =============
</TABLE>
No income tax provision (benefit) was included in the statement of
operations for the year ended January 31, 1999 since the Company has a
100 percent valuation allowance for the tax benefit of net deductible
temporary differences and operating loss carryforwards. Management is not
able to determine if it is more likely than not that the deferred tax
assets will be realized.
Pursuant to Section 382 of the Internal Revenue Code (IRC), use of the
Company's net operating loss and credit carryforwards for federal and
state income tax purposes may be limited if the Company experiences a
cumulative change in ownership of greater than 50% in a moving three-year
period. Ownership changes could impact the Company's ability to utilize
net operating losses and credit carryforwards remaining at the ownership
change date. The limitation will be determined by the fair market value
of common stock outstanding prior to the ownership change, multiplied by
the applicable federal rate.
22
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
The Company has federal and state net operating loss carryforwards of
approximately $15,349,000. The federal and state net operating losses
will expire between 2013 and 2018. The Company also has federal and state
capital loss carryforwards of approximately $9,386,000 that will expire
in 2004. Capital losses may be used only to offset capital gains. Capital
losses may be carried back three years and forward five years.
Historically, the Company has generated limited capital gains. Therefore,
as of January 31, 1999, the Company did not believe it was more likely
than not that it would generate sufficient capital gains within the
appropriate time period to offset those capital losses.
16. STOCKHOLDERS' EQUITY
During February, 1998, the Company's board of directors authorized the
increase in the par value for common stock from $.00001 to $.10 per
share. All such share amounts have been restated for all periods
presented.
During February 1998, the Company issued 8,385,577 shares of common stock
in a public offering. Proceeds, net of offering expenses, were
$14,674,914. During April, 1998, the Company issued 1,699,999 shares of
common stock for net proceeds of $4,537,076.
During March 1997 (unaudited), the Company issued 876,666 shares of stock
in a secondary offering and received proceeds of $4,982,539, net of
offering costs.
On February 27, 1999 (unaudited), the Company's Board of Directors
authorized the increase of its number of authorized shares of common
stock from 30,000,000 to 75,000,000, subject to approval by stockholders.
17. STOCK INCENTIVE PLAN
During the first quarter of 1999, the Board of Directors approved a
change to the 1996 Employee Stock Option Plan (the 1996 Plan), reducing
the number of shares of common stock reserved for issuance under the 1996
plan upon the exercise of options granted thereunder from 3,000,000 to
755,500 shares and reducing the exercise price of outstanding options
from $4 to $2 per share.
In addition, the Board of Directors approved a 1998 Stock Option Plan
(the 1998 Plan) which authorized up to 2,244,500 shares of common stock
to employees, directors, and consultants at prices not less than the fair
market value at the date of grant. The 1998 Plan was subject to the
approval of stockholders, which was obtained on June 24, 1998. The
options in both the 1996 and 1998 Plans expire 10 years from the dates of
grant and become exercisable ratably over a four-year period.
23
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
On November 19, 1998, the Board of Directors froze the 1996 Plan and
transferred 566,625 remaining shares reserved for issuance under the 1996
Plan to the 1998 Plan. On January 28, 1999, the Board of Directors
offered an Option Exchange program to active employees and directors
holding options to purchase 2,127,327 shares of common stock whereby they
could elect to exchange their options with an exercise price of $2.00 per
share for options having an exercise price of $.50 per share provided
they could not exercise such options until after July 31, 1999. Holders
of 2,061,495 options to purchase common stock have accepted the company's
offer. The value of options granted to directors was considered nominal.
Option activity under the Option Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE
------------ -------------
(unaudited)
<S> <C> <C>
OUTSTANDING, April 7, 1997
(inception of plan) -- $ --
Granted 840,000 $ 4.00
Cancelled (84,500) $ 4.00
------------
Outstanding January 31, 1998 (unaudited) 755,500 $ 4.00
Granted 2,896,066 $ 0.50 - 2.00
Cancelled (1,086,611) $ 2.00
------------
OUTSTANDING, January 31, 1999 2,564,955 $ 0.50 - 2.00
============
</TABLE>
At January 31, 1999, 435,045 shares were available for future grants
under the Option Plan.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------------------------------- -----------------------------
Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life (in years) Exercise Price Exercisable Exercise Price
---------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
$0.50 2,564,955 9.4 years $0.75 443,985 $1.93
</TABLE>
SFAS No.123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
disclosure of pro forma net loss and net loss per share had the Company
adopted the fair value method as of February 1, 1997. Under SFAS No.123,
the fair value of stock-based awards to employees is calculated through
the use of option-pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option-pricing model with
the following weighted average assumptions for the years ended January
31:
24
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
Expected Life 120 months 120 months
following grant following grant
Stock volatility 23% 0%
Risk-free interest rates 4.65 - 6.28% 6.5%
Dividend rate 0% 0%
</TABLE>
Under the accounting provisions for SFAS No. 123, the Company's net loss
and net loss per share would have been increased by the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
------------ ---------------
(unaudited)
<S> <C> <C>
Net loss:
As reported $ (22,574,949) $ (7,191,897)
Pro forma $ (23,276,213) $ (7,456,794)
Net loss per share:
As reported $ (1.24) $ (.89)
Pro forma $ (1.28) $ (.93)
</TABLE>
18. SUBSEQUENT EVENTS - DITTO ACQUISITION
On March 19, 1999, the Company's newly formed, wholly-owned subsidiary,
Ditto Acquisition, Inc. acquired the rights and certain assets of the
Ditto tape drive product line from Iomega Corporation (Iomega) in
exchange for $3.0 million, payable $1 million in cash and $2 million in a
note payable. The note payable is due in equal quarterly installments of
principal and interest at the prime rate over a two-year period. Assets
acquired included intellectual property and exclusive rights to
manufacture and sell the DittoMax tape drive products worldwide,
packaging and marketing data, customer lists, tooling and manufacturing
equipment and certain raw material and work in process inventory.
Additionally, the Company acquired the exclusive right to use the Ditto
brand name and trademarks along with an exclusive license to use the
Ditto backup software for tape and tape-related products. The Company
also acquired the rights to Ditto proprietary tape media but will license
the right to sell Ditto media to Iomega through approximately July 2001.
25
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999 AND 1998 (CONTINUED)
19. SUBSEQUENT EVENTS - 1999 STOCK OPTION PLAN
On March 23, 1999, the Company's Board of Directors approved the 1999
Stock Option Plan which authorizes the number of shares of common stock
available under the Plan at any one time shall equal 25% of the
outstanding shares of Common Stock, excluding the sum of outstanding
shares of Common Stock issued through the exercise of a previously
granted option under any one or more of the Stock Option Plans, and any
unvested, vested and unexpired stock options issued under the 1996 Plan
or 1998 Plan. The shares of stock are available for issuance of options
under the Plan for employees, directors and consultants at prices not
less than the fair market value at the date of grant. The options under
the 1999 Stock Option Plan expire 10 years from the date of grant and
become exercisable ratably over a four-year period. The option plan is
subject to approval by stockholders.
26
<PAGE>
EXHIBIT 99.4
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1999
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31, 1999 OCTOBER 31, 1998 JANUARY 31, 1999
----------------- ---------------- -----------------
UNAUDITED UNAUDITED AUDITED*
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,314,656 $ 1,101,703 $ 1,173,202
Short-term investments - 3,903,148 2,131,588
Accounts receivable, net of allowance for doubtful accounts
of $160,335 (Oct 99), $494,393 (Oct 98), and $141,022 (Jan 99) 3,165,688 1,949,082 2,856,850
Inventories 6,380,149 3,192,278 2,873,670
Current portion of notes receivable - 152,505 -
Prepaid expenses and other current assets 399,642 1,539,406 367,537
Current deferred tax asset - 118,000 -
----------------- ---------------- -----------------
Total current assets 11,260,135 11,956,122 9,402,847
EQUIPMENT AND IMPROVEMENTS, net 3,121,791 1,934,650 1,791,051
GOODWILL, net of accumulated amortization 3,319,173 3,941,450 3,508,424
OTHER ASSETS 401,904 898,982 102,748
----------------- ---------------- -----------------
$ 18,103,003 $ 18,731,204 $ 14,805,070
================= ================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,733,019 $ 2,069,544 $ 1,315,501
Accrued liabilities 1,669,522 2,001,800 1,773,605
Lines of credit 1,273,162 994,557 1,686,938
Current portion of long-term debt 1,772,472 1,307,847 182,508
----------------- ---------------- -----------------
Total current liabilities 10,448,175 6,373,748 4,958,552
LONG-TERM DEBT, net of current portion 574,108 827,990 58,584
----------------- ---------------- -----------------
Total liabilities 11,022,283 7,201,738 5,017,136
STOCKHOLDERS' EQUITY:
Common stock, $ .10 par value; 75,000,000 shares authorized;
32,762,499 (Oct 99); 18,699,999 (Jan 99 and Oct 98);
shares issued and outstanding 3,276,250 1,870,000 1,870,000
Additional paid-in capital 39,584,830 37,158,755 37,158,755
Accumulated deficit (35,771,130) (27,490,964) (29,252,225)
Unrealized gain (loss) on investments (9,230) (8,325) 11,404
----------------- ---------------- -----------------
Total stockholders' equity 7,080,720 11,529,466 9,787,934
----------------- ---------------- -----------------
$ 18,103,003 $ 18,731,204 $ 14,805,070
================= ================ =================
</TABLE>
* REFER TO THE 1999 ANNUAL REPORT. CERTAIN AMOUNTS HAVE BEEN RECLASSIFIED TO
CONFORM WITH CURRENT PRESENTATION.
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED YEAR ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1999 OCTOBER 31, 1998 JANUARY 31, 1999
---------------- ---------------- ---------------- ---------------- -----------------
UNAUDITED UNAUDITED UNAUDITED UNAUDITED AUDITED*
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 6,290,626 $ 5,904,177 $ 16,573,010 $ 30,769,080 $ 37,906,488
COST OF REVENUES 5,329,625 5,198,350 13,942,168 25,962,165 32,067,608
---------------- ---------------- ---------------- --------------- -----------------
GROSS PROFIT 961,001 705,827 2,630,842 4,806,915 5,838,880
15.3% 12.0% 15.9% 15.6% 15.4%
OPERATING EXPENSES:
Selling, general and administrative 1,873,306 2,286,144 6,955,749 10,788,482 12,903,861
Research and development 309,737 566,159 1,584,161 2,515,196 3,027,418
Interest (income) expense, net 113,063 (67,087) 189,899 (113,988) (171,218)
Restructuring costs 419,028 - 419,028 12,380,225 12,533,365
Other (income) loss - 1,612 910 50,688 120,403
---------------- ---------------- ---------------- --------------- -----------------
Total operating expenses 2,715,134 2,786,828 9,149,747 25,620,603 28,413,829
---------------- ---------------- ---------------- --------------- -----------------
LOSS BEFORE INCOME TAX BENEFIT (1,754,133) (2,081,001) (6,518,905) (20,813,688) (22,574,949)
INCOME TAX BENEFIT - - - - -
---------------- ---------------- ---------------- --------------- -----------------
NET LOSS $ (1,754,133) $ (2,081,001) $ (6,518,905) $ (20,813,688) $ (22,574,949)
================ ================ ================ =============== =================
BASIC AND DILUTED LOSS PER SHARE $ (0.05) $ (0.11) $ (0.26) $ (1.16) $ (1.24)
================= ================ ================ =============== =================
WEIGHTED AVERAGE SHARES USED TO CALCULATE
BASIC AND DILUTED LOSS PER SHARE 32,762,499 18,699,999 25,472,747 17,991,908 18,148,700
================= ================ ================= =============== ================
</TABLE>
* REFER TO THE 1999 ANNUAL REPORT. CERTAIN AMOUNTS HAVE BEEN RECLASSIFIED TO
CONFORM WITH CURRENT PRESENTATION.
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED YEAR ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1999 OCTOBER 31, 1998 JANUARY 31, 1999
---------------- ---------------- ---------------- ------------------ ----------------
UNAUDITED UNAUDITED UNAUDITED UNAUDITED AUDITED*
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,754,133) $ (2,081,001) $ (6,518,905) $ (20,813,688) $ (22,574,949)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 365,032 334,150 975,741 1,344,134 1,626,847
Restructuring - - - 12,005,591 12,005,591
Bad debt expense - - - 250,233 250,233
Loss on sale of assets - - 34 25,425 25,425
(Gain) loss on investments (2,033) 46,672 (20,634) (15,424) (31,378)
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable, net (846,413) 3,386,865 (308,838) 4,928,933 3,770,931
Inventories 1,242,918 168,540 (2,260,439) 827,225 1,039,331
Prepaid expenses and other
assets 305,320 912,788 (125,231) (476,089) 611,598
Accounts payable and other
accrued liabilities (581,752) (3,087,586) 4,230,423 (3,613,485) (3,068,951)
Deferred rent - (87,021) - (101,794) (101,794)
---------------- ---------------- ---------------- --------------- -------------------
Net cash used in operating
activities (1,271,061) (406,593) (4,027,849) (5,638,939) (6,447,116)
---------------- ---------------- ---------------- --------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (84,465) (52,688) (204,190) (223,235) (223,235)
Proceeds from sale of assets - 136,501 - 136,501 136,501
Proceeds from sale of subsidaries - 394,426 - 394,426 394,426
Acquisition of Ditto product line - - (1,000,000) - -
Collections on notes receivable - - 205,683 - -
Purchase of investments - - - (10,964,704) (10,964,704)
Proceeds from sales of investments 338,616 2,212,942 1,831,588 7,844,846 9,643,476
---------------- ---------------- ---------------- --------------- -------------------
Net Cash provided by (used in)
investing activities 254,151 2,691,181 833,081 (2,812,166) (1,013,536)
---------------- ---------------- ---------------- --------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - - 4,500,000 21,599,152 21,599,152
Payments for common stock offering costs - - (667,675) (1,473,056) (1,473,056)
Net increase (decrease) in lines of credit 115,287 (1,201,540) 131,686 (3,111,862) (2,419,481)
Proceeds from issuance of debt - - 640,000 - -
Payments on debt (291,326) (446,039) (1,267,789) (8,037,585) (9,648,920)
---------------- ---------------- ---------------- --------------- -------------------
Net cash provided by (used in)
financing activities (176,039) (1,647,579) 3,336,222 8,976,649 8,057,695
---------------- ---------------- ---------------- --------------- -------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - (157,582) - - -
---------------- ---------------- ---------------- --------------- -------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,192,949) 479,427 141,454 525,544 597,043
CASH AND CASH EQUIVALENTS, beginning of
period 2,507,605 622,276 1,173,202 576,159 576,159
---------------- ---------------- ---------------- --------------- -------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,314,656 $ 1,101,703 $ 1,314,656 $ 1,101,703 $ 1,173,202
================ ================ ================ =============== ===================
</TABLE>
* REFER TO THE 1999 ANNUAL REPORT. CERTAIN AMOUNTS HAVE BEEN RECLASSIFIED TO
CONFORM WITH CURRENT PRESENTATION.
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED OCTOBER 31, 1999
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Tecmar Technologies International, Inc. (Tecmar International-
formerly TTI Holdings) and its wholly-owned subsidiaries-- Tecmar
Technologies, Inc. (Tecmar), Ditto, Inc. and Xtran, Inc.
(Xtran-formerly Transitional Technology, Inc.) engage primarily in
the development, manufacture and distribution of high-quality
computer tape storage products. During fiscal 1999, Tecmar
International sold its interest in two former wholly-owned
subsidiaries- TTI U.K on August 19, 1998 and Semico Computers
Vertriebs GmbH on November 4, 1998. Additionally, certain assets
and the operating business of Xtran was sold on September 29,
1998. The operating results for the nine months ended October 31,
1998 and the year ended January 31, 1999 include the operating
results of TTI U.K., Semico and X-tran. On March 19, 1999, Ditto,
Inc. acquired the Ditto product line from Iomega Corporation
(Iomega) and Tecmar began sales of Ditto product in June 1999. In
the following notes, Tecmar International and subsidiaries will be
referred to as the Company.
The accompanying unaudited financial statements have been prepared
in accordance with the United States generally accepted accounting
principles for interim financial information. Accordingly, they do
not include all information and footnotes required by generally
accepted accounting principles for complete financial statements.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates. These financial statements
should be read in conjunction with the January 31, 1999 audited
annual consolidated financial statements of Tecmar Technologies
International, Inc. contained in its 1999 Annual Report.
The financial information included herein assumes that the Company
continues as a going-concern (see note 2. "Liquidity") and
reflects all adjustments (consisting of normal recurring
adjustments) which are in the opinion of management, necessary for
a fair presentation of the financial position, operating results
and cash flows for the periods presented. The results of
operations for the three and nine months ended October 31, 1999
are not necessarily indicative of the results expected for the
entire fiscal year which ends January 31, 2000.
2. LIQUIDITY
At October 31, 1999, the Company had cash and cash equivalents of
US$1,314,656 and working capital of US$811,852. The Company has a
significant amount of its working capital invested in inventories
(US$ 6,380,149). Due to the working capital investment in
inventory, the Company has been forced to slow payment to its
vendors. As a result, approximately 80% of its accounts payable
of US$5,733,019 are past due the vendor's credit terms. As
further explained in note 5, the Company's bank line of credit
expires February 29, 2000 and the bank has advised the Company
that it will not likely renew or extend the line in light of the
Company's low level of tangible net worth.
Additionally, the Company continues to experience significant
losses. Although the Company has implemented a restructuring plan
(see note 7. "August 1999 Restructuring") in order to reduce the
losses being incurred, there can be no assurance that such a goal
will be achieved in the future.
Accordingly, the Company needs additional capital in order to
continue as a going-concern. As such, in October 1999, the
Company's Board of Directors implemented a plan that seeks to
raise additional capital or explore other strategic alternatives,
including a sale of all or part of the Company. To date, the
Company has been unable to raise additional capital. However, the
Company continues to explore additional alternatives of raising
additional capital of a minimum of USD 5 million and other
strategic alternatives, including the sale of all or parts of the
Company.
There can be no assurance that the capital will be raised or that
the Company will be successful in completing any other
transaction. If the minimum level of capital is not raised by
January 2000, or another transaction is not completed in that time
frame, there is likely to be an adverse effect on the Company's
business, net asset values and results of operations. Even if
another transaction is completed, there can be no assurance that
it will not have a material adverse effect on the Company's
business, net asset values and results of operations.
The interim financial statements included herein have been
prepared assuming the Company continues as a going concern. No
adjustments have been made to the carrying values of assets and
liabilities that may occur should the Company not be able to
continue as a going concern.
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED OCTOBER 31, 1999
- --------------------------------------------------------------------------------
3. STOCKHOLDERS' EQUITY
During February 1998, the Company issued 8,385,577 shares of
common stock in a public offering. Net proceeds were
US$14,674,914, net of offering expenses of US$2,096,240. In
addition, the par value for common stock was increased from
$.00001 to $ .10 per share. During April 1998, the Company issued
1,700,000 shares of common stock in a private offering. Net
proceeds were US$4,537,076, net of offering expenses of
US$467,143.
On February 27, 1999 the Company's Board of Directors authorized
the increase of its number of authorized shares of common stock
from 30,000,000 to 75,000,000. This increase in authorized shares
was approved by the stockholders in April 1999.
During June 1999, the Company issued 14,062,500 shares of common
stock in a public offering. Net proceeds were US$3,832,325, net of
offering expenses of US$667,675.
4. STOCK INCENTIVE PLANS
During the first quarter of 1998, the Board of Director's approved
a change to the 1996 Employee Stock Option Plan (1996 Plan)
reducing the number of shares of common stock reserved for
issuance under the 1996 Plan upon the exercise of options granted
thereunder from 3,000,000 to 755,500 shares and reducing the
exercise price of outstanding options from $4 per share to $2 per
share.
In addition, the Board of Director's approved a 1998 Stock Option
Plan (1998 Plan) which authorized up to 2,244,500 shares of common
stock to employees, directors and consultants at prices not less
than the fair market value at the date of grant. The 1998 Plan was
subject to the approval of stockholders, which was obtained on
June 24, 1998. The options in both the 1996 and 1998 Plans expire
10 years from the dates of grant and become exercisable ratably
over a four-year period.
On November 19, 1998, the Board of Directors froze the 1996 Plan
and transferred 566,625 remaining shares reserved for issuance
under the 1996 Plan to the 1998 Plan. On January 28, 1999, the
Board of Directors offered an Option Exchange program to active
employees and directors holding options to purchase 2,127,327
shares of common stock whereby they could elect to exchange their
options with an exercise price of $2.00 per share for options
having an exercise price of $.50 per share provided they could not
exercise such options until after July 31, 1999. Holders of
2,061,495 options to purchase common stock have accepted the
Company's offer. The value of options granted to directors was
considered nominal.
On March 23, 1999, the Company's Board of Directors approved the
1999 Stock Option Plan which authorizes the number of shares of
common stock available under the Plan at any one time shall equal
25% of the outstanding shares of Common Stock, excluding the sum
of outstanding shares of Common Stock issued through the exercise
of a previously granted option under any one or more of the Stock
Option Plans, and any unvested, vested, and unexcercised stock
options issued under the the 1996 Plan or 1998 Plan. The shares of
stock are available for issuance of options under the Plan for
employees, directors, and consultants at prices not less than the
fair market value at the date of grant. The options under the 1999
Stock Option Plan expire 10 years from the date of grant and
become exercisable ratably over a four-year period.
Option activity under the stock option plans is as follows:
<TABLE>
<CAPTION>
Number of Exercise
shares Price
--------------- ----------------
<S> <C> <C>
Options outstanding on February 1, 1999 2,564,955 $0.50 - $2.00
Options forfeited during quarter ended April 30, 1999 (183,410) $0.50
Options granted during quarter ended July 31, 1999 4,228,066 $0.32
Options forfeited during quarter ended July 31, 1999 (323,455) $0.50
Options forfeited during quarter ended October 31, 1999 (1,720,179) $0.32 - $2.00
--------------- ----------------
Options outstanding on October 31, 1999 4,565,977 $0.32 - $2.00
=============== ================
</TABLE>
At October 31, 1999, 3,624,647 shares were available for future
grants under the 1999 Stock Option Plan.
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED OCTOBER 31, 1999
- --------------------------------------------------------------------------------
5. LINE OF CREDIT
Tecmar has a line of credit with Wells Fargo Business Credit. The
line is collateralized by a first priority interest in all of
Tecmar's accounts receivable, inventory, intangible assets and
unencumbered machinery and equipment. At October 31, 1999 and
1998, US$1,273,162 and US$994,557 were outstanding under this line
of credit, respectively. At October 31, 1999, approximately
US$600,000 was available under the line of credit's borrowing base
formula which allows loans of up to 70% of eligible accounts
receivable, as defined. The line contains various financial
covenants of which Tecmar is not in compliance with. On December
1, 1999, Tecmar and Wells Fargo extended the due date of the line
of credit to February 29, 2000 and reduced the maximum commitment
under the line of credit to US$2,250,000 from US$3,000,000.
Wells Fargo officials informed the Company that it is likely that
they will not further extend the expiration date of the agreement
in light of the Company's level of minimum tangible net worth of
slightly greater than USD 3,000,000. Accordingly, the Company will
seek a replacement line of credit with another financial
institution and is presently attempting to raise additional
capital. There can be no assurance that additional capital or a
replacement line of credit will be obtained. Should the Company
not be able to raise additional capital and obtain a replacement
line of credit, the Company's business, financial condition and
results of operations will be adversely effected.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, 1999 OCTOBER 31, 1998 JANUARY 31, 1999
---------------- ---------------- ----------------
UNAUDITED UNAUDITED AUDITED
<S> <C> <C> <C>
Ditto acquisition note payable collateralized by assets acquired.
Eight quarterly installments with interest at the prime rate
beginning June 1999. $ 1,500,000 - -
12% convertible subordinated debenture, due July 31, 2000.
Convertible at option of holder to 2,000,000 shares of common stock 640,000 - -
Noninterest-bearing acquisition payable to Tecmar's former parent - $ 1,905,667 -
7% notes payable to former stockholders, payable in quarterly
principal installments of $43,842, plus interest, due
September 15, 1999* 43,842 199,826 $ 131,526
Other- primarily capital leases 162,738 30,344 109,566
---------------- ---------------- ----------------
2,346,580 2,135,837 241,092
Less current portion (1,772,472) (1,307,847) (182,508)
---------------- ---------------- ----------------
Long-term debt $ 574,108 $ 827,990 $ 58,584
================ ================ ================
</TABLE>
Aggregate minimum principal payment and maturities for the 12
months ended October 31 are as follows:
<TABLE>
<CAPTION>
12 month period ending:
<S> <C>
2000 $ 1,772,472
2001 520,564
Thereafter 53,544
-----------------
$ 2,346,580
=================
</TABLE>
* One former stockholder was paid in full in the amount of
$21,921 in November 1999. Payment of the remaining note
payable in the amount of $21,921 is pending the settlement of
an account receivable in a similar amount from the former
stockholder.
<PAGE>
TECMAR TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED OCTOBER 31, 1999
- --------------------------------------------------------------------------------
7. AUGUST 1999 RESTRUCTURING
During the first six months of fiscal 2000, the Company
experienced significant operating losses. On August 10, 1999, the
Company announced that Ernest Wassmann had resigned his positions
as the Company's President, Chief Executive Officer and Director
and that Joseph Daiutolo, formerly Chief Operating Officer was
appointed to the President's post. The Company also implemented a
restructuring plan (the August 1999 Restructuring") that included
significant cost cuts, including workforce reductions. The cost
reductions are intended to align the Company's cost structure with
the realities of the current business and to help the Company
achieve its goal of break-even on an EBITDA (earnings before
interest, taxes, depreciation and amortization) basis in the
fourth quarter of fiscal 2000. The Company has made substantial
progress in approaching break-even EBITDA but now believes that
this goal is not possible of achievment until Fiscal 2001. Third
quarter fiscal 2000 operating results include restructuring costs
for workforce reductions and closing facilities of approximately
US$570 thousand offset by the reversal of US$150 thousand in
excess restructuring accruals related to the Company's July 1998
Reseller Business restructuring. Accordingly, the net
restructuring charge included in the third quarter of fiscal 2000
is approximately US$420 thousand.
8. COMMITMENTS AND CONTINGENCIES
Under the Company's asset purchase agreement for the Ditto product
line, Iomega continued to sell Ditto tape drives through July
1999. At the end of that period, Iomega agreed to sell its
remaining Ditto finished goods tape drive inventory to the
Company. Iomega has informed the Company that it has approximately
US$1.9 million of Ditto finished goods inventory that it would
like to sell to the Company. In October 1999, the Company informed
Iomega that it would purchase a small portion of such inventory if
Iomega financed the purchase over the next six quarters. Iomega
declined the Company's offer.
A former independent contractor of the Company has advised the
Company that he intends to bring a lawsuit against the Company
alleging that he had an implied employment contract under which he
was entitled to severance benefits upon his termination in August
1999. This former independent contractor is seeking damages of
approximately US$88 thousand plus unspecified damages for
emotional distress and other remedies. The Company believes the
allegation is without merit and intends to vigorously defend the
matter and uphold performance under the independent contractor
agreement the Company had with such person.
The Company occupies assembly, warehouse and office facilities in
the United States and United Kingdom under operating leases that
expire in 2000. At October 31, 1999, the future minimum rentals
under these leases were approximately US$100 thousand.
<PAGE>
EXHIBIT 99.5
OVERLAND DATA, INC.
PRO FORMA FINANCIAL INFORMATION
<PAGE>
EXHIBIT 99.5
PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the fiscal year ended June 30, 1999 and the six months ended
December 31, 1999 present the results for Overland Data as if the Acquisition
occurred on July 1, 1998. The Unaudited Pro Forma Condensed Consolidated Balance
Sheet as of December 31, 1999 gives effect to the Acquisition as if it had
occurred on December 31, 1999.
TTI's fiscal year end is January 31, while the Company's year end is June 30. In
the Pro Forma Condensed Consolidated Statement of Operations for the fiscal year
ended June 30, 1999, the results of Tecmar for the twelve months ended April 30,
1999 have been utilized in order to bring Tecmar's results to a period within 93
days of the Company's fiscal year end. In the Pro Forma Condensed Consolidated
Statement of Operations for the six months ended December 31, 1999, the results
of Tecmar for the six months ended October 31, 1999 were utilized. In the
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31,
1999, the balances of Tecmar as of October 31, 1999 were utilized.
The Acquisition included the purchase of assets and operations related to
Tecmar Technologies, Inc., a wholly-owned subsidiary of Tecmar Technologies
International, Inc. The consolidated financial statements of the parent
included other businesses unrelated to those acquired by Overland. As a
result, the Pro Forma Financial Information presented here was developed by
combining the reported results of Overland with those of the Tecmar parent
and removing the results of the unrelated businesses. Appropriate adjustments
are also made to account for matters including the amortization of negative
goodwill associated with the purchase, interest on the cash portion of the
purchase price and effective tax rate adjustments.
The Company will account for the Acquisition under the purchase method of
accounting. The total consideration paid will be allocated to the assets
acquired and liabilities assumed based on their estimated fair values. At this
time, the estimated fair value of the assets acquired exceed the total
consideration paid and such excess has been allocated to first reduce the value
of non-current assets to zero and then to negative goodwill. These allocations
are preliminary as the Company is still in the process of evaluating the fair
value of the assets acquired. The Pro Forma Information does not give effect to
any synergies that may be realized as a result of the Acquisition. Additionally,
it does not reflect any nonrecurring costs that may be incurred to exit certain
Tecmar activities which cannot be reasonably estimated at this time.
1
<PAGE>
The Company's preliminary estimate of values and of the allocation of purchase
price are as follows ($000):
<TABLE>
<S> <C>
PURCHASE PRICE:
Cash consideration $ 3,239
Acquisition expenses 171
----------
Total 3,410 (a)
----------
PRELIMINARY ALLOCATION OF PURCHASE PRICE:
Fair value of identifiable tangible assets acquired 4,895
Less fair value of liabilities assumed (402)
----------
Total 4,493 (b)
----------
EXCESS OF FAIR VALUE OF ASSETS ACQUIRED AND
LIABILITIES ASSUMED OVER PURCHASE PRICE (a) - (b) (1,083)
Allocation of excess to reduce non-current
assets to zero value 628
----------
NEGATIVE GOODWILL RESIDUAL $ (455)
==========
</TABLE>
This Pro Forma Financial Information is presented for illustrative purposes
only. It is not necessarily indicative of the results of the combined operations
or financial position which actually would have been reported had the
Acquisition occurred as of July 1, 1998 or as of December 31, 1999, nor is it
necessarily indicative of Overland's future financial results of operations.
2
<PAGE>
OVERLAND DATA, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Tecmar Remove
Overland 12 mo Unrelated
FYE 6/99 4/99 Operations Adjustments Pro Forma
--------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Sales, net........................... $ 92,227 $ 29,468 $ (7,010) $ 114,685
Cost of goods sold................... 64,336 25,138 (5,581) 83,893
--------------------------------------------------------- --------------
Gross profit......................... 27,891 4,330 (1,429) 30,792
--------------------------------------------------------- --------------
Expenses:
Sales and marketing............. 11,825 6,894 (1,509) 17,210
Research and development........ 5,373 2,696 (249) 7,820
General and administrative...... 5,079 3,655 (1,119) $ (64) (a) 7,551
Restructuring costs............. - 12,533 (12,430) 103
--------------------------------------------------------- --------------
Total expenses............. 22,277 25,778 (15,307) (64) 32,684
--------------------------------------------------------- --------------
Operating income (loss).............. 5,614 (21,448) 13,878 64 (1,892)
Interest, net........................ 810 151 (348) (96) (b) 517
Other income (expense), net.......... 157 (47) 107 217
--------------------------------------------------------- --------------
Pretax income (loss)................. 6,581 (21,344) 13,637 (33) (1,159)
Income taxes......................... 2,599 - - (3,057) (c) (458)
--------------------------------------------------------- --------------
Net income (loss).................... $ 3,982 $ (21,344) $ 13,637 $ 3,024 $ (701)
========================================================= ==============
Net income (loss) per share:
Basic $ 0.39 $ (0.07)
============= ==============
Diluted $ 0.37 $ (0.07)
============= ==============
Shares used in computing EPS
Basic 10,222 10,222
Diluted 10,652 10,652
</TABLE>
FOOTNOTES
(a) The decrease in G&A expense accounts for the amortization of the
negative goodwill associated with the Tecmar purchase by Overland over the
currently estimated period of benefit - 36 months.
(b) The decrease in interest income represents a removal of the interest
that would have been earned on the cash portion of the purchase price of
the Tecmar assets.
(c) The adjustment to income taxes represents the adjustment required to
cause the consolidated effective tax rate to be equal to the rate recorded
by Overland. The Pro Forma consolidated loss would be carried back to a
prior tax year to claim a tax refund.
3
<PAGE>
OVERLAND DATA, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Overland Tecmar
6 Months 6 Months Remove
Ended Ended Unrelated
12/31/99 10/31/99 Operations Adjustments Pro Forma
--------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Sales, net........................... $50,314 $11,565 $ - $ - $ 61,879
Cost of goods sold................... 37,096 9,679 - - 46,775
--------------------------------------------------------- --------------
Gross profit......................... 13,218 1,886 0 0 15,104
--------------------------------------------------------- --------------
Expenses:
Sales and marketing............. 6,376 3,150 - 9,526
Research and development........ 3,245 930 - 4,175
General and administrative...... 2,964 1,955 (552) (32) (a) 4,335
Restructuring costs............. - 419 156 575
--------------------------------------------------------- --------------
Total expenses............. 12,585 6,454 (396) (32) 18,611
--------------------------------------------------------- --------------
Operating income (loss).............. 633 (4,568) 396 32 (3,507)
Interest income (expense), net....... 374 (240) (295) (48) (b) (209)
Other, net........................... 64 12 (12) 64
--------------------------------------------------------- --------------
Pretax income (loss)................. 1,071 (4,796) 89 (16) (3,652)
Income taxes......................... 423 - - (1,866) (c) (1,443)
--------------------------------------------------------- --------------
Net income (loss).................... $ 648 $(4,796) $ 89 $ 1,849 $ (2,210)
========================================================= ==============
Net income (loss) per share:
Basic $ 0.06 $ (0.22)
============= ==============
Diluted $ 0.06 $ (0.21)
============= ==============
Shares used in computing EPS
Basic 10,069 10,069
Diluted 10,410 10,410
</TABLE>
FOOTNOTES
(a) The decrease in G&A expense accounts for the amortization of the
negative goodwill associated with the Tecmar purchase by Overland over the
currently estimated period of benefit - 36 months.
(b) The decrease in interest income represents a removal of the interest
that would have been earned on the cash portion of the purchase price of
the Tecmar assets.
(c) The adjustment to income taxes represents the adjustment required to
cause the consolidated effective tax rate to be equal to the rate recorded
by Overland. The Pro Forma consolidated loss would be carried back to a
prior tax year to claim a tax refund.
4
<PAGE>
OVERLAND DATA, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
OVERLAND TECMAR
DEC. 31, OCT. 31, PRO FORMA COMBINED
1999 1999 ADJUSTMENTS PRO FORMA
-------------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,992 $ 1,314 $ (5,233) (b) $ 14,073
Accounts receivable, net 16,528 3,166 (3,166) (a) 16,528
Inventories 14,411 6,380 (1,479) (c) 19,312
Other current assets 3,186 400 (361) (d) 3,225
-------------- ------------- ----------------- ---------------
Total current assets 52,117 11,260 (10,239) 53,138
Property and equipment, net 4,172 3,122 (3,122) (e) 4,172
Goodwill, net 3,319 (3,319) (a) -
Other assets 355 402 (402) (a) 355
-------------- ------------- ----------------- ---------------
Total Assets $ 56,644 $ 18,103 $ (17,082) $ 57,665
============== ============= ================= ===============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 3,045 $ (3,045) (a)
Accounts payable $ 5,845 5,733 (5,733) (a) $ 5,845
Accrued liabilities 4,215 1,670 (1,268) (f) 4,617
-------------- ------------- ----------------- ---------------
Total current liabilities 10,060 10,448 (10,046) 10,462
Other long-term liabilities 1,314 574 45 (g) 1,933
-------------- ------------- ----------------- ---------------
Total liabilities 11,374 11,022 (10,001) 12,395
-------------- ------------- ----------------- ---------------
Shareholders' equity:
Common stock 30,808 3,276 (3,276) (a) 30,808
Additional paid-in capital 39,585 (39,585) (a) -
Retained earnings (accumulated deficit) 14,462 (35,780) 35,780 (a) 14,462
-------------- ------------- ----------------- ---------------
Total Equity 45,270 7,081 (7,081) 45,270
-------------- ------------- ----------------- ---------------
Total Liabilities and Equity $ 56,644 $ 18,103 $ (17,082) $ 57,665
============== ============= ================= ===============
</TABLE>
5
<PAGE>
FOOTNOTES
(a) These adjustments remove the assets of Tecmar that were not purchased by
Overland and the liabilities of Tecmar that were not assumed by Overland.
(b) The adjustment to cash removes the cash of Tecmar that was not purchased by
Overland and accounts for the cash paid by Overland to purchase the Tecmar
assets.
(c) The adjustment to inventory reduces the Tecmar inventories to estimated fair
market value.
(d) The adjustment to other current assets removes the assets not purchased by
Overland and accounts for the prepaid property taxes paid by Overland at the
time of purchase.
(e) In accordance with generally accepted accounting principles, since the fair
market value of the net assets acquired by Overland exceeded the total
consideration paid.
(f) The adjustment to accrued liabilities removes the Tecmar accruals that were
not assumed by Overland and accounts for the assumption of warranty liabilities
and an employee vacation accrual.
(g) The adjustment to other long-term liabilities removes the Tecmar liabilities
that were not assumed by Overland and adds the negative goodwill which resulted
from the purchase accounting and which will be amortized over the estimated
period of benefit (36 months).
6
