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): December 20, 1996
Lafayette Industries, Inc.
(Exact name of Registrant as Specified in its Charter)
Delaware 0-25384 11-3190678
(State or other jurisdiction (Commission (IRS Employer
of incorporation File No.) Identification No.)
160 Broadway, Suite 901, New York, New York 10038
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (212) 233-4500.
<PAGE>
Item 7. Financial Statements and Exhibits.
1.1 Consolidated financial statements of SES Holdings Corp.
("SESH")(1)
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at December 31. 1995 and 1994
Consolidated Statements of Operations and Accumulated Deficit
for the years ended December 31, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December
31, 1995 and 1994
Notes to Consolidated Financial Statements
1.2 Financial statements of WWR Technologies, Inc. ("WWR")(1)
Report of Independent Certified Public Accountants
Balance Sheet at December 31, 1995
Statements of Operations for the year ended December 31, 1995
Statement of Stockholder's Deficit for the year ended December
31, 1995
Statements of Cash Flows for the year ended December 31, 1995
Notes to Financial Statements
2. The pro forma financial statements of the Registrant, SESH and WWR
(1).
Unaudited Pro Forma Combined Balance Sheet at September 30,
1996.
Unaudited Pro Forma Combined Statement of Operations for the nine
months ended September 30, 1996.
Unaudited Pro Forma Combined Statement of Operations for the year
ended December 31, 1995.
3.1 Agreement (the "Agreement") dated as of December 20, 1996, by and
among SIS Capital Corp., DLB, Inc., Lewis S. Schiller and Lafayette
Industries, Inc.(2)
3.2 Exhibits to the Agreement(3)
3.3 Certificate of Designation of Lafayette Industries, Inc. setting
forth the rights, preferences and privileges of the holders of the
Series A Convertible Preferred Stock and the Series B Redeemable
Preferred Stock.(2)
3.4 Agreement dated as of December 1, 1996, between SES Holdings Corp.
and The Trinity Group, Inc.(2)
3.5 Form of Regulation S Subscription Agreement.(2)
(1) The unaudited balance sheet and statements of operations of SESH and WWR
for the nine months ended September 30, 1996 are separately shown in the
pro forma financial statements.
(2) Previously filed.
(3) To be filed by amendment.
- 1 -
<PAGE>
SIGNATURE
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.
LAFAYETTE INDUSTRIES, INC.
LEWIS S. SCHILER
----------------
Date: February 25, 1997 Lewis S. Schiller
Chairman and Chief Executive Officer
- 2 -
<PAGE>
Exhibit 1.1
SES HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1994
<PAGE>
SES HOLDINGS CORP. AND SUBSIDIARIES
Index
Page
Independent Auditor's Report 2
Consolidated Balance Sheets as of December 31, 1995 and 1994 3
Consolidated Statement of Operations and Accumulated Deficit
for the Years Ended December 31, 1995 and 1994 4
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1995 and 1994 5
Notes to Consolidated Financial Statements 6-13
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
SES Holdings Corp.
New York, New York
We have audited the accompanying consolidated balance sheets of SES
Holdings Corp. and its subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations and accumulated deficit, and cash
flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SES Holdings Corp. and its subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
consolidated financial statements and as discussed in Note 3 to the consolidated
financial statements, the Company has suffered recurring losses since its
inception, and has an accumulated deficit at December 31, 1995 of $3,426,396. In
addition, the Company is in default of a major portion of its currently due
notes payable. These conditions 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 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
MORTENSON AND ASSOCIATES, P.C.
Certified Public Accountants
Cranford, New Jersey
March 6, 1996
2
<PAGE>
SES Holdings Corp. and Subsidiaries
Consolidated Balance Sheets
December 31,
1995 1994
---- ----
Assets
Current assets:
Cash and cash equivalents $74,703 $340,662
Receivable, net of allowances 595,773 540,382
Inventories 3,648,980 3,358,995
Prepaid expenses and other current assets 88,165 18,142
------ ------
Total current assets 4,407,621 4,258,181
Property, plant and equipment, net 621,181 213,395
------- -------
Other assets:
Trademark, net 382,513 --
Investments in common stock, long-term 1,987,500 --
Other assets 58,208 29,983
------ ------
Total Other Assets 2,428,221 29,983
--------- ------
Total Assets $7,457,023 $4,501,559
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $1,198,786 $298,070
Accrued interest 246,568 124,950
Commissions payable 45,107 76,580
Notes payable 811,035 293,262
Current portion of Obligations under
capital leases 17,454 4,954
------ -----
Total current liabilities 2,318,950 797,816
--------- -------
Long-term liabilities:
Subordinated notes payable to affiliate
company 5,082,952 2,636,050
Obligations under capital leases 52,022 414
------ ---
Total long-term liabilities 5,134,974 2,636,464
--------- ---------
Minority interest 2,750,000 2,750,000
--------- ---------
Shareholders' equity:
Common stock, no par value, $10 stated
value 1,500 shares authorized, issued
and outstanding 15,000 15,000
Additional paid-in-capital, common stock 222,918 222,918
Accumulated deficit (3,426,396) (1,920,639)
Unrealized gain on investments in common
stock 441,577 --
------- -------
Total shareholders' equity (2,746,901) (1,682,721)
--------- ---------
Total Liabilities and Shareholders' Equity $7,457,023 $4,501,559
========== ==========
See Notes to Consolidated Financial Statements.
3
<PAGE>
SES Holdings Corp. and Subsidiaries
Consolidated Statement of Operations and Accumulated Deficit
Year Ended
December 31,
1995 1994
---- ----
Revenues $4,487,642 $3,653,765
Cost of Goods Sold 4,113,692 3,419,168
--------- ---------
Gross Profit 373,950 234,597
Selling, General and Administrative Expenses 1,710,720 1,530,320
--------- ---------
Loss from Operations (1,336,770) (1,295,723)
--------- ---------
Other Income (Expense):
Interest expense (169,176) (142,120)
Other income (expense) 189 (2,823)
--- -----
Total other expense (168,987) (144,943)
------- -------
Loss from Operations Before Income Taxes (1,505,757) (1,440,666)
Income Taxes -- --
--------- ---------
Net Loss (1,505,757) (1,440,666)
Accumulated deficit at beginning of year (1,920,639) (479,973)
--------- -------
Accumulated deficit at end of year ($3,426,396) ($1,920,639)
========== ==========
See Notes to Consolidated Financial Statements.
4
<PAGE>
SES Holdings Corp. and Subsidiaries
Consolidated Statement of Cash Flows
Year Ended
December 31,
1995 1994
---- ----
Operating Activities:
Net loss ($1,505,757) ($1,440,666)
Adjustments to Reconcile Net Loss to Net Cash
Used In Operating Activities:
Depreciation 83,874 28,578
Change in assets and liabilities:
Decrease (increase) in accounts receivable 418,188 (94,127)
Decrease in inventories 519,692 401,335
(Increase) decrease in prepaid expenses and
other current assets (28,398) 2,804
Increase in accounts payable and accrued
expenses 174,957 76,717
Increase in accrued interest 115,877 106,488
Decrease in commissions payable (31,473) (1,288)
------ -----
Total Adjustments 1,252,717 520,507
Net Cash Used in Operating Activities (253,040) (920,159)
------- -------
Investing Activities:
Increase in Other Assets (11,603) (5,589)
Cash of company acquired 46,600 --
Capital expenditures (71,316) --
------ ------
Net Cash Used in Investing Activities (36,319) (5,589)
------ -----
Financing Activities:
Net advances from affiliates 71,172 1,271,929
Payments Under Capital Lease Obligations (18,810) (3,959)
Proceeds from issuance of notes payable 10,039 --
Repayment of notes payable (39,001) (132,460)
------ -------
Net Cash Provided by Financing Activities 23,400 1,135,510
------ ---------
Net Increase (Decrease) in Cash (265,959) 209,762
Cash - Beginning of Year 340,662 130,900
------- -------
Cash - End of Year $74,703 $340,662
======= ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest 53,299 $19,069
Income Taxes -- --
See Notes to Consolidated Financial Statements.
Supplemental Disclosures of Noncash Investing and Financing Activities:
During the Year Ended December 31, 1995:
(1) - Acquired equipment under capital lease obligations with a net present
value of $62,697.
(2) - Acquired WWR Technology, Inc., and in conjunction therewith, recorded
assets of $3,627,586 and liabilities of $3,674,186.
5
<PAGE>
SES Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
[1] Organization, Nature of Operations and Principals of Consolidation
SES Holdings Corp., (the "Company"), was organized in 1994 as a wholly-owned
subsidiary of SIS Capital Corp., ("SISC"), a non-public holding company owned
100% by Consolidated Technology Group, Ltd, ("Consolidated"), a publicly held
holding company. As of December 31, 1995, the Company's consolidated
subsidiaries consist of Sequential Electronic Systems, Inc. ("SES"), S-Tech,
Inc., ("S-Tech") and WWR Technology, Inc., ("WWR"). SES was organized during
1986 as a wholly-owned subsidiary of Consolidated. SES took over all of the
manufacturing assets and related liabilities of the precision electronic
instrument operations of Consolidated. During 1990, all of Consolidated's shares
and notes in SES were assigned to SISC. During 1994, the stock of SES was
transferred to the Company from SISC. SES is primarily engaged in the
manufacture of electro-mechanical and electro-optical devices. S-Tech was
organized as a wholly-owned subsidiary of Consolidated. During 1990, all of
Consolidated's shares in S-Tech were assigned to SISC. During 1994, the stock of
S-Tech was transferred to the Company from SISC. S-Tech is primarily engaged in
the manufacture and assembly of aircraft instruments, electro-mechanical and
electro-optical devices, and vending devices for sale to commercial and
governmental institutions. WWR was incorporated in 1992 for the acquisition of
certain assets of the professional audio speaker business of Klipsch and
Associates, Inc. During 1993, all of the stock of WWR was acquired by and
operated as a business segment of Concept Technologies Group, Inc., ("Concept"),
a publicly held company. During 1995, Concept, a subsidiary of Consolidated,
sold all of the stock of WWR to the Company. WWR is primarily engaged in the
manufacture of a professional line of audio speaker products. The Company's
consolidated financial statements includes the accounts of SES, S-Tech and WWR
and all intercompany balances have been eliminated.
[2] Summary of Significant Accounting Policies
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Inventories - Inventories consist of raw materials, work-in-process and finished
goods. Raw materials are valued at the lower of cost (average price] or market.
The work-in-process and finished goods represent accumulated costs of raw
materials, direct labor and factory overhead on current work orders. Costs
accumulated under government contracts are net of progress payments. Management
has established an estimated reserve for obsolescence as of December 31, 1995
and 1994. Management feels that the remaining value of the inventory is
reasonable and that no further reserve is needed. This is based upon the
existence of contracts and projected sales which will require a portion of this
inventory and the expectation of future similar type contracts. Actual results
could differ from these estimates.
Property, Plant and Equipment and Depreciation - Property, plant and equipment
are stated at cost less accumulated depreciation. The cost of equipment held
under capital leases is equal to the fair value of the leased property at the
inception of the lease. Depreciation is computed generally by the straight-line
method at rates adequate to allocate the cost of applicable assets over their
expected useful lives which range from five to seven years. Amortization of
capitalized leases is included with depreciation expense.
Trademark - The acquired trademark of WWR was valued at acquisition based on
fair value and is being amortized on a straight-line basis over 25 years. This
acquired trademark gives WWR a nonexclusive trademark license for the use of
Klipsch and Associates trademark "Klipsch" for use with various professional
loudspeaker products provided that the trademark is used only in connection with
professional loudspeakers. Klipsch and Associates' predecessor was incorporated
during the 1940's and has an established name as a leader in loudspeaker design
and innovation. Management believes that the acquisition of the Klipsch
Professional product line gives WWR one of the most long-established and
recognizable brand names in the industry. WWR is currently defending its right
to continue the use of such trademark. (See note 13). The Financial Accounting
Standards Board has issued Statement 121 addressing the accounting for the
impairment of long-lived assets that will be held and used, including
6
<PAGE>
SES Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
[2] Summary of Significant Accounting Policies (continued)
certain identifiable intangibles. The statement is effective for calendar year
1996 financial statements. Management of the Company evaluates the period of
amortization for the trademark to determine whether latter events and
circumstances warrant revised estimates of useful lives. This evaluation is done
by comparing the carrying value of the trademark to the value of projected
discounted net cash flows from the related operations. Impairment is recognized
if the carrying value of the trademark is greater than the projected discounted
cash flows for related operations.
Investments - The Company maintains its investments in common stock in
accordance with Statement of Financial Accounting Standards ("SFAS") 115
"Accounting for Certain Investments in Debt and Equity Securities" which
requires certain investments that have readily determinable fair values to be
categorized as either trading, available-for-sale, or held-to-maturity. All of
the Company's equity investments in common stock are categorized as
available-for-sale and are recorded at fair value with unrealized gains and
losses recorded as a separate component of stockholders' equity. Additionally,
available-for-sale investments that are deemed to be permanently impaired are
written down to fair market value and such write down is charged to earnings as
a realized loss. As of December 31,1995, the Company's investment in common
stock consists of 1,060,000 shares of Concept as follows:
Cost basis $1,545,923
Net unrealized gain included as a separate
component of shareholders' equity 441,577
Market Value $1,987,500
Organization Costs - Organizational costs are recorded at cost and are being
amortized on a straight-line basis over five years.
Warranties - WWR provides customers with various warranties and therefore is
exposed to the risk that its ultimate warranty liability may exceed amounts
accrued in the accompanying financial statements. Management believes that
future warranty payments in excess of such amounts accrued, if any, will not
have a significant impact on the Company's financial position and results of
operations. At December 31, 1995, WWR has approximately $30,000 accrued for
estimated warranty liabilities. Actual results may differ from amounts accrued.
Revenue Recognition - Sales and profits under all fixed price type contracts are
accounted for under the unit of delivery method. Under the unit of delivery
method, sales and profits are recognized in proportion to the number of units
shipped in relation to total units ordered. Anticipated losses on contracts in
progress are charged to operations as soon as such losses can be determined.
Revenues not generated under fixed price type contracts are recognized when
product is shipped. The Company reserves amounts against revenues for estimated
product returns and sales discounts.
Research and Development - Research and development expense amounted to $87,377
for the year ended December 31, 1995.
Concentrations of Credit Risk - Financial instruments which potentially subject
the Company to concentrations of credit risk consist of cash and accounts
receivable. Generally, the Company does not require collateral or other security
to support customer receivables. The Company routinely assesses the financial
strength of its customers and based upon factors surrounding the credit risk of
its customers establishes an allowance for uncollectible accounts and, as a
consequence, believes that its accounts receivable credit risk exposure beyond
such allowances is limited. The Company places its cash with a high credit
quality financial institution. The amount on deposit that exceeds federally
insured limits is
7
<PAGE>
SES Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
[2] Summary of Significant Accounting Policies (continued)
subject to credit risk. The Company believes no significant concentration of
credit risk exists with respect to these cash deposits. Revenues from two U.S.
government agencies amounted to $893,331 and $562,584 and comprised
approximately 20% and 15% of the total revenues for the years ended December 31,
1995 and 1994, respectively.
Fair Value of Financial Instruments - The fair value of cash, accounts
receivable, accounts payable and notes payable is considered the carrying amount
because of the short maturity of such instruments. Repayment terms have not been
established for amounts payable to affiliates; therefore, it was not practical
to estimate the fair value of the such amounts.
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
reporting period. Actual results could differ from those estimates.
[3] - Going Concern
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has sustained losses
since inception and the accumulated deficit at December 31, 1995 is $3,426,396.
The ability of the Company to continue as a going concern is dependent upon the
success of the Company's marketing efforts and its access to sufficient funding
to enable it to continue operations. The ability of the Company to effect its
transition, ultimately, to profitable operations is dependent upon obtaining
adequate financing and achieving a level of revenues to support its cost
structure. The failure of the Company to generate revenues at a level in excess
of its ongoing expenses may force the Company to reduce or cease operations.
Management plans to increase revenues of WWR by way of a sound marketing plan to
increase the domestic dealer base and, by concentrating on its international
distribution. Furthermore, WWR plans to release a new "high tech" range of
loudspeakers to gain attention to the line and increase its worldwide market
share. SES and S-Tech plan to increase revenues through the introduction of new
products and through revenues which are expected to be generated in connection
with certain development agreements. Management is also in the process of
obtaining financing through financial institutions and other sources.
[4] - Receivables - Accounts receivable consist of the following at December 31,
1995 and 1994:
1995 1994
Trade accounts receivable $669,458 $562,367
Less - Allowance for bad debts 73,685 21,985
-------- --------
Receivable, net of allowances $595,773 $540,382
======= =======
[5] Inventories
Inventories as of December 31, 1995 and 1994 are as follows:
1995 1994
---- ----
Finished goods $ 67,078 --
Work-in-process 1,515,432 $1,404,860
Raw materials 2,616,470 2,124,547
--------- ---------
Total 4,198,980 3,529,407
Less: Reserve for obsolescence (550,000) (50,000)
8
<PAGE>
SES Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Less: Progress payments -- (120,412)
--------- ----------
Inventories, net $3,648,980 $3,358,995
========= =========
[5] Inventories (continued)
During the years ended December 31, 1995 and 1994, $470,000 and $306,855 was
charged to operations for the write-off of obsolete inventory.
[6] Plant, Plant and Equipment and Depreciation
Property, plant and equipment and accumulated depreciation as of December 31,
1995 and 1994 are as follows:
1995 1994
Machinery and equipment $1,671,631 $1,671,629
Vehicles 25,060 25,060
Tools and dies 600,466 144,712
Furnitures and fixtures 247,247 225,000
Leasehold improvements 150,006 --
Computer equipment 2,946 --
Equipment under capital lease obligations 326,192 245,118
---------- ----------
Total cost 3,023,548 2,311,519
Less: Accumulated depreciation (2,402,367) (2,098,124)
--------- ---------
Property, plant and equipment, net $ 621,181 $ 213,395
========== ==========
Depreciation expense charged to operations was $70,051 and $28,578 for the years
ended December 31, 1995 and 1994.
[7] Intangible Assets
Intangible assets as of December 31, 1995 and 1994 are as follows:
1995 1994
---- ----
Trademark $428,749 --
Less: Accumulated amortization (46,236) --
------- -----
Trademark, net $382,513 --
======= =====
Organization costs (included in other assets) 67,280 --
Less: Accumulated amortization (43,261) --
------- -----
Organization costs, net $ 24,019 --
======= =====
Amortization expense charged to operations was $13,823 for the year ended
December 31, 1995.
9
<PAGE>
SES Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
[8] Notes Payable
Notes payable is comprised of the following at December 31, 1995 and 1994:
1995 1994
---- ----
Note payable to Small Business
Administration, currently in default. $153,262 $153,262
Note payable to National Westminster bank, USA
payable in monthly installments of $20,000 at
prime plus 2%, an effective rate of 10.5% at
December 31, 1995, due March 20, 1996. 120,878 140,000
Note payable to a vendor, requires monthly principal
and interest installments of $3,499 expiring
February 1996 with an effective interest rate
of 12%. 6,895 --
Note payable to former stockholder, requires
monthly interest payments at 13.5% with the
principal due November 1997, currently
in default. 530,000 --
------- -------
Total notes payable $811,035 $293,262
======= =======
The note payable to former stockholder is collateralized by accounts receivable
and is guaranteed by Consolidated, Concept, The Kantor Family Foundation and
Walnut Capital. The note agreement includes covenants which include, among other
covenants, restrictions on dividend payments and borrowings of additional debt.
As of December 31, 1995, a required monthly interest payment on this note was
paid late and caused said note to be in default.
[9] Subordinated Notes Payable to Affiliate Company
The subordinated debt is due to SISC which owns 100% of the Company and has no
specified repayment provisions. Of the total amounts due to SISC, $1,109,387
bears interest at 10%, $75,000 bears interest at 8% and $3,898,565 is
non-interest bearing. Due to the non-interest bearing nature and unspecified
payment terms, it was not practical to estimate the fair value of the
subordinated amounts due to affiliate.
[10] Lease Obligations
Capitalized Lease Obligations - The Company leases equipment and vehicles under
noncancellable capital leases which are collateralized by equipment and vehicles
having a net book value of $67,356 at December 31, 1995.
Future minimum payments under capitalized lease obligations are as follows as of
December 31, 1995:
1995 $23,371
1996 22,448
1997 22,448
1998 11,837
1999 2,129
-------
Total future minimum lease payments 82,233
Less: Amount representing interest (12,757)
------
Net present value of minimum lease payments 69,476
Current portion of obligations under capital leases 17,454
------
Long-term portion of obligations under capital leases $52,022
======
10
<PAGE>
SES Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
[10] Lease Obligations (continued)
Operating Lease Obligations - SES leases equipment under noncancellable
operating leases expiring in 1997. SES currently is on a month to month lease on
its primary facility. S-Tech leases a facility under a noncancellable operating
lease expiring in 1997 and such lease includes a renewal option for an
additional two years. WWR leases its manufacturing and administrative facility
and certain office and computer equipment under noncancellable operating leases.
Minimum future rental payments under noncancellable operating leases having a
remaining term in excess of one year are as follows as of December 31, 1995:
1995 $117,675
1996 92,287
1997 76,973
1998 44,508
--------
Total minimum rental commitments $331,443
Rental expense for the years ended December 31, 1995 and 1994 was $244,948 and
$176,997, respectively.
[11] Income Taxes
The Company and its consolidated subsidiaries have adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". Adoption had no material effect on the financial statements. SES
Holdings, Corp., SES and S-Tech file Federal income tax returns on a
consolidated basis with those of Consolidated. On a consolidated basis there is
no tax expense. At December 31, 1995, SES Holdings, SES and S-Tech have net
operating loss carryforwards of approximately $3,075,000 for state income tax
purposes which expires by 2000. For SES and S-Tech, the loss carryforwards
creates a deferred tax asset of approximately $837,500 which is offset by a
valuation allowance of $837,500. Effective September 30, 1995, WWR files Federal
income tax returns on a Consolidated basis with those of Consolidated. At
December 31, 1995, WWR has net operating loss carryforwards of approximately
$1,785,900 and a deferred tax asset of approximately $827,148 which is offset by
a valuation allowance of $827,148.
[12] - Acquisition of WWR Technology, Inc.
Effective September 30, 1995, the Company purchased all of the stock of WWR
Technology, Inc. from Concept in exchange for the repayment of approximately
$2,100,000 of subordinated notes payable that WWR owed to Concept. The repayment
of such intercompany debt was satisfied by the issuance of certain preferred
convertible stock by Consolidated to Concept through SISC. As a result of this
repayment, WWR, effective as of September 30, 1995, effectively replaced
subordinated notes payable to Concept with subordinated notes payable to SISC.
At the time of the purchase, WWR's liabilities exceeded its assets by $1,545,923
and Concept issued 1,060,000 shares of its common stock to the Company which was
valued at $1,545,923 at the time of issuance. As a result of the transaction,
all historical asset and liability balances, which approximate fair market
value, were retained and no goodwill was recorded. The underlying assets and
liabilities acquired are as follows:
11
<PAGE>
SES Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
[12] - Acquisition of WWR Technology, Inc. (continued)
Assets:
Cash $ 46,600
Accounts receivable 473,579
Inventories 809,677
Property, plant and equipment 343,824
Trademark 385,606
Other assets 68,977
Liabilities:
Accounts payable and accrued expenses (731,500)
Notes payable and capital lease obligations (566,956)
Subordinated notes payable to affiliate (2,375,730)
---------
Value of common stock received from Concept
which is included in investments on the
Company's balance sheet $1,545,923
=========
For accounting purposes, WWR's operating activity is included in the Company's
statement of operations for the period from September 30, 1995 through December
31, 1995. The following pro forma unaudited results assume that the purchase of
WWR occurred at the beginning of the indicated periods:
1995 1994
---- ----
Revenues $6,675,141 $6,053,403
========= =========
Net Loss ($3,672,233) ($3,516,333)
========= =========
The pro forma information is not necessarily indicative of either the results of
operations that would have occurred had the acquisition been effective at the
beginning of the indicated periods or of the future results of operations.
[13] - Litigation - There is an action pending against WWR alleging claims
against WWR for unauthorized use of the Klipsch trademark. WWR denies these
allegations and asserts there has been no breach of contract. The case is
currently in the discovery phase and the amount of liability, if any, cannot be
estimated. Management intends to defend vigorously the claims alleged against
WWR. Nevertheless, due to uncertainties in the legal process, it is at least
reasonably possible that management's view of the outcome will change in the
near term.
12
<PAGE>
SES Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
[14] - Industry Segments
The Company currently classifies its operations into two business segments: (1)
Electro-Mechanical and Electro-Optical Products Manufacturing which consists of
subsidiaries that manufacture and sell products such as devices that measure
distance and velocity, instrumentation devices and debit card vending machines;
and (2) Audio Products Manufacturing which consists of a subsidiary that
manufactures and sells a professional line of loudspeakers. Corporate and Other
consists of the operating activities of the holding company. Intersegment sales
and sales outside the United States are not material for the years ended
December 31, 1995 and 1994. Information concerning the Company's business
segments is as follows:
<TABLE>
<CAPTION>
Electro-Mechanical
and
Electro-
Corporate
Optical Audio and Other Total
<S> <C> <C> <C> <C>
Year Ended December 31, 1995:
Revenue $3,862,133 $625,509 -- $4,487,642
========== ======== ==========
Loss from Operations $(899,576) $(437,194) -- $(1,336,770)
========== ========== ============
Net Loss $(1,050,395) $(455,362) -- $(1,505,757)
============ ========== ============
Capital Expenditures $2,946 $68,370 -- $71,316
====== ======= =======
Depreciation and Amortization $36,824 $47,050 -- $83,874
======= ======= =======
At December 31, 1995:
Identifiable Assets $3,689,269 $1,780,254 $1,545,923 $7,015,446
========== ========== ========== ==========
Year Ended December 31, 1994:
Revenue $3,653,765 -- -- $3,653,765
========== ==========
Loss from Operations $(1,295,618) -- $(105) $(1,295,723)
============ ====== ============
Net Loss $(1,421,147) -- $(19,519) $(1,440,666)
============ ========= ============
Capital Expenditures -- -- -- --
==
Depreciation and Amortization $28,578 -- -- $28,578
======= =======
At December 31, 1994:
Identifiable Assets $4,501,559 -- -- $4,501,559
========== ==========
</TABLE>
13
<PAGE>
Exhibit 1.2
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
REPORT
FOR THE YEAR ENDED DECEMBER 31, 1995
<PAGE>
March 21, 1996
Board of Directors
WWR Technology, Inc.
149 North Industrial Road
Hope, Arkansas
Gentlemen:
We have completed our audit of the financial statements of
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
for the year ended December 31, 1995.
As a result, we present the following exhibits:
EXHIBIT A: Balance Sheet as of December 31, 1995.
EXHIBIT B: Statement of Operations for the year ended December 31, 1995.
EXHIBIT C: Statement of Stockholders' Deficit for the year ended December
31, 1995.
EXHIBIT D: Statement of Cash Flows for the year ended December 31, 1995.
Respectfully submitted,
MORTENSON AND ASSOCIATES, P. C.
Certified Public Accountants.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholder of
WWR Technology, Inc.
Hope, Arkansas
We have audited the accompanying balance sheet of WWR
Technology, Inc. [d/b/a Klipsch Professional] as of December 31, 1995, and the
related statements of operations, stockholder's 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
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 about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of WWR
Technology, Inc. as of December 31, 1995, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
financial statements and as discussed in Note 3 to the financial statements, the
Company has suffered recurring losses since its inception in 1992, has a working
capital deficiency and has an accumulated deficit at December 31, 1995 of
$2,001,285. These conditions 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 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
MORTENSON AND ASSOCIATES, P. C.
Certified Public Accountants.
Cranford, New Jersey
February 23, 1996
<PAGE>
Exhibit A
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
- --------------------------------------------------------------------------------
BALANCE SHEET AS OF DECEMBER 31, 1995.
Assets:
Current Assets:
Cash $ 27,603
Accounts Receivable - Net 259,406
Inventory 676,663
Prepaid Expenses 30,120
------
Total Current Assets 993,792
Furniture, Fixtures and Equipment - Net 378,967
Trademarks - Net 382,513
Organization Costs - Net 24,019
Other Assets 963
---
Total Assets $ 1,780,254
===============
Liabilities and Stockholder's Deficit:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 827,583
Notes Payable 536,895
Current Portion of Capitalized Lease Obligations 3,372
-----
Total Current Liabilities 1,367,850
---------
Long-Term Obligations:
Capitalized Lease Obligations 13,458
Subordinated Debt - Affiliates 2,400,221
---------
Total Long-Term Obligations 2,413,679
Total Liabilities 3,781,529
Commitments and Contingencies --
--
Stockholder's Deficit:
Common Stock, $.01 Par, 1,000 Shares Authorized
Issued and Outstanding 10
Accumulated Deficit (2,001,285)
---------
Total Stockholder's Deficit (2,001,275)
---------
Total Liabilities and Stockholder's Deficit $ 1,780,254
===============
See Notes to Financial Statements.
<PAGE>
Exhibit B
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995.
Sales $ 2,813,008
Cost of Sales 2,532,148
---------
Gross Profit 280,860
-------
Operating Expenses:
Selling Expenses 552,327
General and Administrative Expenses 345,328
-------
Total Operating Expenses 897,655
-------
Loss from Operations (616,795)
Other Income and [Expenses]:
Interest Expense (92,214)
Other - Net 7,810
-----
Total Other [Expense] (84,404)
------
Net Loss $ (701,199)
===============
See Notes to Financial Statements.
<PAGE>
Exhibit C
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
- --------------------------------------------------------------------------------
STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1995.
Common Stock
1,000 Shares
Authorized,
Issued and Total
Outstanding Accumulated Stockholder's
Par $.01 Deficit Deficit
Balance at December 31, 1994 $ 10 $ (1,300,086) $ (1,300,076)
Net Loss -- (701,199) (701,199)
-- ------- -------
Balance at December 31, 1995 $ 10 $ (2,001,285) $ (2,001,275)
====== ============ ============
See Notes to Financial Statements.
<PAGE>
Exhibit D
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995.
Operating Activities:
Net Loss $ (701,199)
---------------
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 140,833
Change in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 103,078
Prepaid Expenses (26,756)
Inventory 111,105
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 417,347
-------
Total Adjustments 745,607
-------
Net Cash - Operating Activities 44,408
------
Investing Activities:
Acquisition of Fixed Assets (135,899)
Trademark Costs (3,749)
Increase in Other Assets (254)
----
Net Cash - Investing Activities (139,902)
--------
Financing Activities:
Proceeds of Issuance of Debt 26,774
Repayment of Debt (294,879)
Payments on Capital Lease Obligations (992)
Advances from Affiliate 326,875
-------
Net Cash - Financing Activities 57,778
------
Net Decrease in Cash (37,716)
Cash - Beginning of Year 65,319
------
Cash - End of Year $ 27,603
===============
See Notes to Financial Statements.
<PAGE>
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[1] Organization and Nature of Operations
WWR Technology, Inc. [the "Company"] was incorporated in September 1992 for the
acquisition of certain assets of the professional audio speaker business of
Klipsch and Associates, Inc. ["KA"], a manufacturer of both consumer and
professional speakers. On September 30, 1993, all of the stock of the Company
was acquired by and operated as a business segment of Concept Technologies
Group, Inc. ["Concept"], [a publicly held holding company]. Effective September
30, 1995, Concept sold all of the stock of the Company to SES Holdings, Inc.
["SESH"] in exchange for the repayment of approximately $2.1 million of
intercompany debt owed to Concept by the Company. The repayment of such
intercompany debt was satisfied by the issuance of certain preferred stock of
Consolidated Technology Group Ltd. ["Consolidated"], [a publicly held holding
company which owns a controlling interest in both SES and Concept] through SIS
Capital Corp. ["SISC"] [a non-public holding company owned 100% by
Consolidated]. All historical asset values were retained and no goodwill was
recorded as a result of the acquisitions.
The Company is doing business as ["d/b/a"] Klipsch Professional and is engaged
in the design, manufacture and distribution of high quality, technologically
advanced professional or commercial caliber loudspeakers for fixed and mobile
applications. The Company's products are directed primarily to end users such as
musicians and bands, night clubs, houses of worship and disc jockeys. The
Company's other markets include movie theaters, live performing art theaters,
arenas and stadiums, touring sound contractors, studios, and corporate audio
visual departments. The products are sold primarily through a dealer network of
musical instruments retailers and sound contractors, supported by a network of
independent sales representatives. The Company's customers are in the United
States, Europe and the Far East [See Note 13].
[2] Summary of Significant Accounting Policies
Cash - Cash includes cash on hand and on deposit in banks.
Inventories - Raw materials are valued at the lower of cost or market using the
first-in, first-out method. Work in process and finished goods are valued at
standard costs which approximate average costs.
Furniture, Fixtures and Equipment - Furniture, fixtures and equipment are
carried at cost less allowances for accumulated depreciation. The cost of
furniture and equipment held under capital leases is equal to the lower of the
net present value of the minimum lease payments or the fair value of the lease
property at the inception of the lease. Depreciation is computed generally by
the straight-line method at rates adequate to allocate the cost of applicable
assets over their expected useful lives. Amortization of capitalized leases is
included with depreciation expense. Leasehold improvements are amortized on a
straight-line basis over the shorter of the useful life of the improvement or
the term of the lease.
Trademark - The acquired trademark was valued at acquisition based on fair value
and is being amortized on a straight-line basis over 25 years. This acquired
trademark gives the Company a nonexclusive trademark license for the use of KA's
trademark "Klipsch" for use with various professional loudspeaker products
provided that the trademark is used only in connection with professional
loudspeakers. KA's predecessor was incorporated during the 1940's and has an
established name as a leader in loudspeaker design and innovation. Management
believes that the acquisition of the Klipsch Professional product line gives the
Company one of the most long-established and recognizable brand names in the
industry. The Company is currently defending its right to continue the use of
such trademark [See Note 14]. The Company continually monitors the trademark
value to determine whether any impairment has occurred. In making such
determination, the Company uses the undiscounted value of expected future
operating cash flows.
Research and Development - Research and development costs are expensed as
incurred. Research and development expenses for 1995 amounted to $87,377.
<PAGE>
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
NOTES TO FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Organization Costs - Organizational costs are recorded at cost and are being
amortized on a straight-line basis over five years.
Revenue Recognition - Revenue is recognized when products are shipped. The
Company reserves amounts against revenues for estimated product returns and
sales discounts.
Fair Value of Financial Instruments - The fair value of cash, accounts
receivable, accounts payable and notes payable is considered the carrying amount
because of the short maturity of such instruments.
Concentrations of Credit Risk - Financial instruments which potentially subject
the Company to concentrations of credit risk are cash and accounts receivable
arising from its normal business activities. The Company routinely assesses the
financial strength of its customers and based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts, and as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited. The Company does not require
collateral from its customers. The Company places its cash with high credit
quality financial institutions. The amount on deposit in any one institution
does not exceed federally insured limits. The Company believes no significant
concentrations of credit risk exists with respect to cash on deposit.
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
reporting period. Actual results could differ from those estimates.
[3] Going Concern
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has sustained losses
since inception, and has an accumulated deficit at December 31, 1995 of
$2,001,285. The ability of the Company to continue as a going concern is
dependent upon the success of the Company's marketing effort and its access to
sufficient funding to enable it to continue operations. The ability of the
Company to effect its transition, ultimately, to profitable operations is
dependent upon obtaining adequate financing and achieving a level of revenues to
support its cost structure. The failure of the Company to generate revenues at a
level in excess of its ongoing expenses may force the Company to reduce or cease
operations. Management plans to increase revenues by way of a sound marketing
plan to increase the domestic dealer base and, by concentrating on its
international distribution. Furthermore, the Company plans to release a new
"high tech" range of loudspeakers to gain attention to the line and increase its
worldwide market share. Management is also in the process of obtaining financing
through financial institutions and other sources.
[4] Receivables
Receivables consist of the following:
Trade Receivables $ 309,406
Less: Allowance for Doubtful Accounts (50,000)
------
Receivables - Net of Allowances $ 259,406
==================
Trade receivables include approximately $72,000 due from foreign customers.
Management believes that any additional risk from foreign accounts receivable is
adequately provided for in the allowance for doubtful accounts.
<PAGE>
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
NOTES TO FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[4] Receivables [Continued]
The changes in the allowance for doubtful accounts are summarized as follows:
Balance - January 1, 1995 $ 60,000
Provision for Doubtful Accounts (9,956)
Recoveries 1,726
Write-offs (1,770)
-----
Balance - December 31, 1995 $ 50,000
==================
[5] Inventories
Inventories consist of the following:
Finished Goods $ 67,078
Work in Process 130,888
Raw Materials 628,697
-------
Total 826,663
Less: Allowance for Obsolescence (150,000)
-------
Inventory - Net $ 676,663
==================
The work in process and finished goods represents accumulated costs of raw
materials, direct labor and factory overhead expenses on current work orders. It
is at least reasonably possible that the estimated allowance for obsolescence
will change in the near term.
[6] Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of the following:
Tooling, Dies and Fixtures $ 455,754
Office Furniture and Equipment 22,247
Leasehold Improvements 150,006
Equipment Under Capitalized Lease Obligations 18,445
------
Total 646,452
Less: Accumulated Depreciation (267,485)
Furniture, Fixtures and Equipment - Net $ 378,967
==================
Depreciation expense charged to operations was $113,335 for the year ended
December 31, 1995.
<PAGE>
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
NOTES TO FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[7] Intangible Assets
Intangible assets consist of the following:
Trademark $ 428,749
Less: Accumulated Depreciation (46,236)
-------
Trademark - Net $ 382,513
==================
Organization Costs $ 67,280
Less: Accumulated Depreciation (43,261)
-------
Organization Costs - Net $ 24,019
==================
Amortization expense charged to operations for the trademark and organization
costs was $14,167 and $13,331, respectively, for the year ended December 31,
1995.
[8] Notes Payable
Notes payable consist of the following at December 31, 1995:
Note payable to a vendor, requires monthly principal
and interest installments of $3,499 expiring February
1996 with an effective interest rate of 12%. $ 6,895
Note payable to former stockholder, requires monthly
interest payments at 13.5% with the principal due
November 1997, currently in default. 530,000
Total $ 536,895
==================
The note payable to former stockholder is collateralized by accounts receivable
and is guaranteed by Consolidated, Concept and affiliates, The Kanter Family
Foundation and Walnut Capital. The note agreement includes covenants which
include, among other covenants, restrictions on dividend payments and borrowings
of additional debt. In January 1996, a required monthly interest payment on this
note was paid late and caused said note to be in default.
[9] Subordinated Debt - Affiliates
The subordinated debt is due to SISC [a non-public holding company owned 100% by
Consolidated]. SISC owns 100% of SESH [the owner of 100% of the Company's
outstanding stock] and facilitated the repayment of approximately $2,100,000 of
amounts the Company owed to Concept [the former owners of the Company]. In
addition, SISC advanced $275,000 to the Company to facilitate the repayment of
amounts due on the trademark loan and approximately $25,000 for working capital
needs. Due to the non-interest bearing nature and unspecified payment terms it
was not practicable to estimate the fair value of the related party subordinated
debt, however, the use of discounted cash flow techniques to estimate fair value
could result in an estimated fair value substantially lower than the carrying
amount.
<PAGE>
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
NOTES TO FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
[10] Lease Obligations
Capitalized Lease Obligations - The Company leases equipment under
noncancellable capital leases which are collateralized by equipment having a net
book value of $10,759 at December 31, 1995.
Future minimum payments under capitalized lease obligations are as follows at
December 31, 1995:
1996 $ 4,257
1997 4,257
1998 4,257
1999 4,257
2000 2,129
-----
Total Future Minimum Lease Payments 19,157
Less: Amount Representing Interest (2,327)
-----
Net Present Value of Minimum Lease Payments 16,830
Less: Current Portion of Capitalized Lease Obligations (3,372)
-----
Long-Term Portion of Capitalized Lease Obligations $ 13,458
==================
Operating Lease Obligations - The Company leases its manufacturing and
administrative facility and certain office and computer equipment under
noncancellable operating leases. The facilities lease contains annual scheduled
rental increases. The Company's present facilities are located in Hope,
Arkansas. The current base rent for such premises is $4,500 per month.
Minimum future rental payments under noncancelable operating leases having a
remaining term in excess of one year are as follows:
1996 $ 74,595
1997 78,729
1998 76,973
1999 44,508
------
Total Minimum Rental Commitments $ 274,805
==================
Rent expense for the year ended December 31, 1995 approximated $67,000.
<PAGE>
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
NOTES TO FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[11] Income Taxes
Under current accounting standards, deferred income taxes reflect the net tax
effects of (a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. The tax effects
of significant items comprising the Company's net deferred tax liability as of
December 31, 1995 is as follows:
Deferred Tax Liabilities:
Difference Between Book and Tax Amortization $ 144
Book Basis of Assets in Excess of Tax Basis 3,319
-----
Total 3,463
Deferred Tax Assets:
Allowance for Doubtful Accounts not Currently Deductible 19,145
Difference Between Book and Tax Depreciation 1,020
Accrued Warranty Expense 11,487
Accrued Sales Returns 5,744
Accrued Sales Discounts 9,573
Inventory Reserves not Currently Deductible 57,435
Federal Net Operating Loss Carryforward 607,199
State Net Operating Loss Carryforward 116,056
Other 2,952
-----
Total 830,611
Valuation Allowance 827,148
Net Deferred Tax Liability $ --
==================
The Company's deferred tax asset valuation allowance was $827,148 and $520,554
as of December 31, 1995 and December 31, 1994, respectively. The increase in the
valuation allowance of $306,594 for the year ended December 31, 1995 is
comprised of the following:
Difference Between Book and Tax Depreciation $ 5,462
Difference Between Book and Tax Amortization (48)
Book Basis of Assets in Excess of Tax Basis (409)
Allowance for Doubtful Accounts not Currently Deductible (3,829)
Accrued Warranty Expense 5,743
Accrued Sales Returns 1,915
Accrued Sales Discounts (918)
Inventory Reserves not Currently Deductible 26,803
Federal Net Operating Loss Carryforward 231,473
State Net Operating Loss Carryforward 39,253
Other 1,149
-----
Total Increase $ 306,594
==================
<PAGE>
WWR TECHNOLOGY, INC.
[D/B/A KLIPSCH PROFESSIONAL]
NOTES TO FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[11] Income Taxes [Continued]
The provision for income taxes for the year ended December 31, 1995 varies from
the amount computed by applying the statutory rate for the reasons below:
Provision Based on Statutory Rate 35 %
Benefit of Graduated Rates (1)
States Tax [Net of Federal Benefit] --
Valuation Allowance (34)
--
Total -- %
The Company has a federal net operating carryforward of approximately $1,785,900
and a state net operating loss carryforward of approximately $1,785,500. The
federal net operating loss carryforwards expire in years 2007 through 2010 and
the state net operating losses expire in years 1997 through 2000.
[12] Supplemental Disclosures of Cash Flow Activities
During the year ended December 31, 1995, the Company paid approximately $85,500
in interest. Also, during 1995, Consolidated issued, through SISC, preferred
stock to Concept in exchange for all of the stock of the Company and
approximately $2,100,000 in debt owed to Concept by the Company.
[13] Business Segment Information
The Company generates all of its revenues and operating activity in one business
segment as discussed in Note 1. The following is a summary of net sales derived
by geographic region for the year ended December 31, 1995:
United States $ 2,134,678
Far East 349,334
Europe 291,493
Other 37,503
------
Total Net Sales $ 2,813,008
===============
[14] Commitments and Contingencies
Litigation - There is an action pending against the Company alleging claims
against the Company for unauthorized use of the Klipsch trademark. The Company
denies these allegations and asserts there has been no material breach of
contract. The case is currently in the discovery phase and the amount of
liability, if any, cannot be estimated. Management intends to defend vigorously
the claims alleged against the Company. Nevertheless, due to uncertainties in
the legal process, it is at least reasonably possible that management's view of
the outcome will change in the near term.
Warranty - The Company provides customers with various warranties and therefore
is exposed to the risk that is ultimate warranty liability may exceed amounts
accrued in the accompanying financial statements. Management believes that
future warranty payments in excess of such amounts accrued, if any, will not
have a significant impact on the Company's financial position and results of
operations. At December 31, 1995, the Company has approximately $30,000 accrued
for estimated warranty liabilities. Actual results may differ from amounts
accrued.
. . . . . . . . . .
<PAGE>
Exhibit 2.
Lafayette Industries, Inc. and SES Holdings, Corp.
Unaudited Pro Forma Combined Financial Statements
<PAGE>
Lafayette Industries, Inc. and SES Holdings, Corp.
Pro Forma Combined Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
Index
Page
Introduction and Basis of Presentation 1
Unaudited Pro Forma Combined Balance Sheet - September 30, 1996 2-3
Unaudited Pro Forma Combined Statement of Operations - 4
Nine Months Ended September 30, 1996
Unaudited Pro Forma Combined Statement of Operations - 5
Year Ended December 31, 1995
Notes to Unaudited Pro Forma Financial Statements 6-9
<PAGE>
Lafayette Industries, Inc. and SES Holdings, Corp.
Pro Forma Combined Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
Introduction and Basis of Presentation
The following pro forma combined balance sheet as of September 30, 1996 and the
combined statements of operations for the nine months ended September 30, 1996
and the year ended December 31, 1995 give effect to the reverse merger of
Lafayette Industries, Inc., ("Lafayette"), (a publicly held company) and SES
Holdings, Corp., ("SESH"), (an 80% owned subsidiary of SIS Capital Corp.,
("SISC"), which is a wholly owned subsidiary of Consolidated Technology Group,
Ltd., a publicly held company). The reverse merger was consummated by the
transfer of all of SESH's equity ownership to Lafayette, in exchange for two
newly created series of Lafayette Preferred stock, the Series A Convertible
Preferred Stock and the Series B Redeemable Preferred Stock.
SESH was owned 80% by SISC and 10% each by two individuals, (the "selling
shareholders"). The Series A Preferred Stock is automatically converted into
such number of shares that will give the selling shareholders (SISC and the two
individuals) a 65% ownership of Lafayette's fully diluted common stock upon the
stockholder approval of an increase in the authorized number of common shares of
Lafayette Industries Group, Inc.
The Series B Redeemable Preferred Stock has an aggregate redemption price of
$6,750,000 and was issued to SISC in exchange for $2,750,000 of preferred stock
of the underlying subsidiary's of SESH which was held by SISC and for repayment
of $4,000,000 of subordinated debt that was owed by SESH to SISC.
For accounting purposes, the transaction has been treated as a recapitalization
of SESH with SESH as the acquirer (reverse acquisition). The historical
financial statements prior to September 30, 1996 are those of SESH. The pro
forma combined balance sheet gives effect to the transaction as if it had
occurred on September 30, 1996. The pro forma combined statements of operations
for the nine months ended September 30, 1996 and the year ended December 31,
1995, give effect to the transaction as if it occurred at the beginning of the
fiscal year. Additionally, the pro forma balance sheet gives effect to the 1996
discontinuation of certain subsidiaries of Lafayette as if they had been
discontinued as the balance sheet date. The pro forma combined financial
statements also reflect, (1) the October 1, 1996 reacquisition of WWR
Technology, Inc. by SESH; and (2) the April 1, 1996 acquisition of Televend by
SESH, as if they were acquired by SESH as of the beginning of the fiscal years
and were owned by SESH for all periods presented.
The pro forma combined financial statements have been prepared by management
based upon the historical financial statements of Lafayette and SESH. These pro
forma financial statements are not necessarily indicative of what would have
occurred if the transaction had been in effect on the dates indicated.
1
<PAGE>
Lafayette Industries, Inc. and SES Holdings, Corp.
Unaudited Pro Forma Combined Balance Sheet
September 30, 1996
<TABLE>
<CAPTION>
Historicals Pro Forma Adjustments
Lafayette SES WWR Reverse
Industries Holdings Technology Merger Pro Forma
Inc. Corp. [A][1] [C] Combined
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 9,000 $ 123,000 $ 17,000 $ -- $ 149,000
Receivables, net of allowances 1,042,000 362,000 481,000 -- 1,885,000
Inventories 537,000 3,446,000 543,000 -- 4,526,000
Prepaid expenses and other current assets 22,000 18,000 11,000 -- 51,000
Refundable income taxes 190,000 -- -- -- 190,000
Receivables, related parties 155,000 -- -- -- 155,000
------- ------ ------ ------ -------
Total current assets 1,955,000 3,949,000 1,052,000 -- 6,956,000
--------- --------- --------- ------ ---------
Property, plant and equipment, net 2,710,000 200,000 374,000 -- 3,284,000
--------- ------- ------- ------ ---------
Other assets:
Net assets of discontinued subsidiaries 154,000 -- -- -- 154,000
Receivables, related parties -- 30,000 78,000 -- 108,000
Investments in common stock, long-term -- -- 1,509,000 -- 1,509,000
Trademark, net -- -- 372,000 -- 372,000
Other assets 124,000 340,000 14,000 -- 478,000
------- ------- ------ ------ -------
Total Other Assets 278,000 370,000 1,973,000 -- 2,621,000
------- ------- --------- ------ ---------
Total Assets $ 4,943,000 $ 4,519,000 $ 3,399,000 -- $12,861,000
=========== =========== =========== ====== ===========
</TABLE>
See notes to pro forma financial statements.
2
<PAGE>
Lafayette Industries, Inc. and SES Holdings, Corp.
Unaudited Pro Forma Combined Balance Sheet
September 30, 1996
<TABLE>
<CAPTION>
Historicals Pro Forma Adjustments
Lafayette SES WWR Reverse
Industries Holdings Technology Merger Pro Forma
Inc. Corp. [A][1] [C] Combined
<S> <C> <C> <C> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,415,000 $ 963,000 $ 1,080,000 -- $ 3,458,000
Accrued interest -- 337,000 5,000 -- 342,000
Due to related party 629,000 -- -- -- 629,000
Mortgage payable 2,079,000 -- -- -- 2,079,000
Notes payable 1,040,000 202,000 4,000 -- 1,246,000
Current portion of capitalized lease
obligations 461,000 13,000 3,000 -- 477,000
------- ------ ----- ------ -------
Total current liabilities 5,624,000 1,515,000 1,092,000 -- 8,231,000
--------- --------- --------- ------ ---------
Long-term liabilities:
Subordinated notes payable to affiliated
company -- 4,379,000 2,028,000 ($4,000,000)[C][2][b] 2,407,000
Long-term debt 333,000 -- 508,000 -- 841,000
Convertible debentures 750,000 -- -- -- 750,000
Capitalized lease obligations -- 29,000 11,000 -- 40,000
------- ------ ------ ------ ------
Total long-term liabilities 1,083,000 4,408,000 2,547,000 (4,000,000) 4,038,000
--------- --------- --------- --------- ---------
Minority Interest -- 2,750,000 -- (2,750,000)[C][2][b] --
------ --------- ------ ---------
Shareholders' equity:
Preferred Stock -- -- -- 130,000 [C][2][a]
6,750,000 [C][2][b] 6,880,000
Common stock 53,000 15,000 -- (15,000)[C][3] 53,000
Additional paid-in-capital, common stock 5,976,000 223,000 -- (130,000)[C][2][a]
(7,767,000)[C][3] (1,698,000)
Accumulated deficit (7,782,000) (4,392,000) (240,000) 7,782,000 [C][3] (4,632,000)
Unrealized loss on foreign exchange (11,000) -- -- -- (11,000)
------ ------ ------- --------- ------
Total shareholders' equity (1,764,000) (4,154,000) (240,000) $ 6,750,000 592,000
--------- --------- ------- ----------- -------
Total Liabilities and Shareholders' Equity $ 4,943,000 $ 4,519,000 $ 3,399,000 -- $12,861,000
=========== =========== =========== =========== ===========
</TABLE>
See notes to pro forma financial statements.
3
<PAGE>
Lafayette Industries, Inc. and SES Holdings, Corp.
Unaudited Pro Forma Combined Statements of Operations
Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Historicals Pro Forma Adjustments
Lafayette SES WWR Reverse
Industries Holdings Technology Televend Merger Pro Forma
Inc. Corp. [A][1] [B] [C] Combined
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 4,021,000 $ 2,243,000 $ 2,569,000 $ 72,000 ($4,021,000)[C][4] $ 4,884,000
Direct Costs 3,396,000 1,897,000 2,010,000 72,000 (3,396,000)[C][4] 3,979,000
--------- --------- --------- ------ --------- ---------
Gross Profit 625,000 346,000 559,000 -- (625,000) 905,000
Selling, General and Administrative 2,063,000 1,043,000 848,000 37,000 (2,063,000)[C][4] 1,928,000
--------- --------- ------- ------ --------- ---------
Loss from Operations (1,438,000) (697,000) (289,000) (37,000) 1,438,000 (1,023,000)
Other Income (Expense):
Interest expense (180,000) (110,000) (81,000) -- 180,000 [C][4] (191,000)
Other income (expense) 10,000 -- 9,000 -- (10,000)[C][4] 9,000
Total other income (expense) (170,000) (110,000) (72,000) -- 170,000 (182,000)
------- ------- ------ ------ ------- -------
Loss from Continuing Operations ($1,608,000) ($807,000) ($361,000) ($37,000) $1,608,000 ($1,205,000)
============ ========== ========== ========= ========== ============
Loss per Common Share ($0.45) ($0.34)
======= =======
Weighted Average Number of Common
Shares Outstanding 3,593,571 3,593,571
========= =========
</TABLE>
See notes to pro forma financial statements.
4
<PAGE>
Lafayette Industries, Inc. and SES Holdings, Corp.
Unaudited Pro Forma Consolidated Statements of Operations
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Historicals Pro Forma Adjustments
Lafayette SES WWR Reverse
Industries Holdings Technology Televend Merger Pro Forma
Inc. Corp. [A][1] [B] [C] Combined
<S> <C> <C> <C> <C> <C> <C>
Revenues $16,609,000 $ 4,488,000 $ 1,524,000 $ 356,000 ($16,609,000)[C][4] $ 6,368,000
Direct Costs 12,027,000 4,114,000 1,216,000 274,000 (12,027,000)[C][4] 5,604,000
---------- --------- --------- ------- ---------- ---------
Gross Profit 4,582,000 374,000 308,000 82,000 (4,582,000) 764,000
Selling, General and Administrative 5,327,000 1,711,000 363,000 216,000 (5,327,000)[C][4] 2,290,000
--------- --------- ------- ------- --------- ---------
Loss from Operations (745,000) (1,337,000) (55,000) (134,000) 745,000 (1,526,000)
------- --------- ------ ------- ------- ---------
Other Income (Expense):
Interest expense (346,000) (169,000) (49,000) -- 346,000 [C][4] (218,000)
Other income (expense) 113,000 -- 6,000 -- (113,000)[C][4] 6,000
------- ------- ----- ------ ------- -----
Total other income (expense) (233,000) (169,000) (43,000) -- 233,000 (212,000)
------- ------- ------ ------ ------- -------
Loss from Continuing Operations
Before Income Taxes (978,000) (1,506,000) (98,000) (134,000) 978,000 (1,738,000)
Income Taxes 260,000 -- -- -- (260,000)[C][4] --
------- ------ ------ ------- ------- ------
Loss from Continuing Operations ($718,000) ($1,506,000) ($98,000) ($134,000) $718,000 ($1,738,000)
========== ============ ========= ========== ======== ============
Loss per Common Share ($0.52) ($1.26)
======= =======
Weighted Average Number of Common
Shares Outstanding 1,384,520 1,384,520
========= =========
</TABLE>
See notes to pro forma financial statements.
5
<PAGE>
Lafayette Industries, Inc. and SES Holdings, Corp.
Notes to Pro Forma Combined Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
[A] - WWR Technology, Inc.:
WWR Technology, Inc., ("WWR"), was purchased by SESH effective September 30,
1995 from Trans Global Services, Inc., an affiliated company of SESH. Effective
April 1, 1996, WWR was sold to SISC, the majority stockholder of SESH. Effective
October 1, 1996, SESH reacquired WWR from SISC. The following describes the
impact of these transactions on the pro forma financial statements:
[1] - The pro forma balance sheet adjustments reflect the inclusion of WWR's
assets and liabilities as of September 30, 1996.
[2] - The pro forma statement of operations for the nine months ended September
30, 1996 reflects the assumption that WWR was an operating entity of SESH for
the entire nine months. As such, the operations of WWR for the period from April
1, 1996 to September 30, 1996 are added to the pro forma statement of operations
for the nine months ended September 30, 1996. Additionally, the operating
activity of WWR for the time period from January 1, 1996 to March 31, 1996,
which is historically presented as discontinued, is reclassed to the respective
statement of operations line items. The following gives detail for the combined
adjustment required to present WWR's operations for the entire nine month period
in the pro forma statement of operations for the nine months ended September 30,
1996:
<TABLE>
<CAPTION>
Reclass of
Inclusion of Discontinued
Operations from Operations
April 1, 1996 from January 1, Total
to September 1996 to March Pro Forma
30, 1996 31, 1996 Adjustment
-------- -------- ----------
<S> <C> <C> <C>
Revenues $1,899,000 $670,000 $2,569,000
Direct Costs 1,477,000 533,000 2,010,000
--------- ------- ---------
Gross Profit 422,000 137,000 559,000
Selling, General and Administrative 567,000 281,000 848,000
------- ------- -------
Loss from Operations (145,000) (144,000) (289,000)
------- ------- -------
Other Income (Expense):
Interest Expense (62,000) (19,000) (81,000)
Other Income (Expense) 4,000 5,000 9,000
----- ----- -----
Total Other Income (Expense) (58,000) (14,000) (72,000)
------ ------ ------
Loss from Continuing Operations ($203,000) (158,000) (361,000)
======= ======= =======
</TABLE>
[3] - The statement of operations for the year ended December 31, 1995 reflects
the assumption that WWR was an operating entity of SESH for the entire year. As
such, the operations of WWR for the period from January 1, 1995 to September 30,
1995 are added to the pro forma statement of operations for the year ended
December 31, 1995.
[B] - Televend:
Televend was purchased by SESH effective April 1, 1996 from SISC, the majority
stockholder of SESH. The pro forma statement of operations reflects the
assumption that Televend was an operating entity of SESH for the entire nine
months ended September 30, 1996 and the entire year ended December 31, 1995. As
such, the operating results of Televend for the period from January 1, 1996 to
March 31, 1996 are added to the pro forma statement of operations for the nine
months ended September 30, 1996 and the operating results of Televend for the
year ended December 31, 1995 are added to the pro forma statement operations for
the year ended December 31, 1995.
6
<PAGE>
Lafayette Industries, Inc. and SES Holdings, Corp.
Notes to Pro Forma Combined Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
[C] - Reverse Merger:
[1] - Basis of Accounting for the Reverse Merger:
Due to the significantly large number of equivalent common shares issued to
consummate the reverse merger, the thin market for the existing trading shares
of Lafayette and the volatility of the quoted stock prices of the Lafayette
common shares, it was determined that the quoted market value of the outstanding
common stock of Lafayette was not a reliable indicator of the fair value of
consideration given to consummate the reverse merger. Alternatively, the fair
market value of the underlying assets of approximately $5,300,000 and
liabilities of approximately $7,100,000 was used to determine the fair value of
the consideration given. The assets and liabilities are recorded at their fair
values and the amount by which Lafayette's liabilities exceeded assets of
approximately $1,800,000 is recorded as a decrease in additional paid-in capital
[2] - Preferred Stock:
[a] - Series A Convertible Preferred:
Lafayette issued 1,000 shares of Series A preferred stock which is convertible
at a ratio that will give SISC a 65% equity position in the common stock of the
merged company upon stockholder approval of an increase in authorized common
stock. The Series A preferred stock is valued at $130,000 which approximates the
par value of the common stock to be issued if the conversion were to take place
as of September 30, 1996. The pro forma adjustment for the issuance of the
Series A preferred stock is as follows:
September 30, 1996 Balance Sheet:
Equity:
Increase in Preferred Stock $130,000
Decrease in Additional Paid-in Capital -
Common Stock ($130,000)
[b] - Series B Redeemable Preferred:
Lafayette issued 1,000 shares of Series B preferred stock which has a redemption
value of $6,750,000. The Series B preferred stock was issued as payment to SISC
for $4,000,000 of subordinated debt due to SISC and in exchange for the
cancellation of $2,750,000 of preferred stock of the underlying entities of SESH
which was held by SISC. The redemption provisions of the Series B Preferred
stock are the following:
[i] - The Company may, at any time commencing March 1, 1997, redeem the
Series B Preferred stock in whole or in part from time to time upon not
less than ten nor more than sixty days prior written notice at the
redemption price of $6,750 per Series B preferred share. The Company is
not required to provide for the redemption of any shares of the Series
B preferred stock through the operation of a sinking fund.
7
<PAGE>
Lafayette Industries, Inc. and SES Holdings, Corp.
Notes to Pro Forma Combined Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
[C] - Reverse Merger (continued):
[2] - Preferred Stock (continued):
[b] - Series B Redeemable Preferred (continued):
[ii] - Until all of the Series B preferred stock shall have been
redeemed, the Company shall apply 25% of the net proceeds from any sale
of equity securities (including stock issued on the exercise of any
warrants or options, whether presently outstanding or hereafter issued,
and stock issued in connection with a public offering or private
placement of securities, but excluding stock issued in an acquisition
or in connection with the purchase of assets), occurring after March 1,
1997 to the redemption of the shares of the Series B preferred stock.
Net proceeds shall mean the gross proceeds less any underwriting,
brokerage, finders or investment banking fee, discount, expense
allowance (whether or not accountable), consulting contract or other
similar payments however designated, provided that, for purposes of
determining net proceeds no value shall be given to any securities
issued or transferred to the underwriter, broker, finder or investment
banker.
[iii] - Until all of the shares of the Series B preferred stock shall
have been redeemed, for each calendar year commencing with the year
ended December 31, 1997, the Company shall apply to the redemption of
the Series B preferred stock an amount equal to 25% of the amount by
which the greater of (a) the Company's income before taxes, determined
in accordance with generally accepted accounting principles
consistently applied, or (b) the Company's cash flow from operations,
determined in accordance with generally accepted accounting principles
consistently applied, less interest other than interest owed to the
Company's parent or affiliate, exceeds $250,000 to the redemption of
shares of the Series B preferred stock.
The pro forma adjustment for the issuance of the Series B preferred stock is
as follows:
September 30, 1996 Balance Sheet:
Long-term Liabilities:
Decrease in Subordinated Notes Payable
to Affiliated Company ($4,000,000)
Minority Interest:
Decrease in Minority Interest ($2,750,000)
Equity:
Increase in Preferred Stock $6,750,000
8
<PAGE>
Lafayette Industries, Inc. and SES Holdings, Corp.
Notes to Pro Forma Combined Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
[C] - Reverse Merger (continued):
[3] - Equity Recapitalization:
The accounting treatment for reverse mergers requires that the existing equity
of SESH be recapitalized into the additional paid-in capital of Lafayette. The
Series A preferred stock issued to consummate the reverse merger is recorded as
a decrease in additional paid-in capital (see [C][2][a] above). SESH's common
stock of $15,000 is recorded as a decrease in additional paid-in capital.
Because SESH is the accounting acquirer, it is SESH's accumulated deficit that
is carried forward and consequently, the existing Lafayette accumulated deficit
of $7,7882,000 reduces the additional paid-in capital. The pro forma adjustment
for the equity recapitalization (in addition to the issuance of the Series A
preferred stock, which is accounted for at [C][2][a] above) is as follows:
September 30, 1996 Balance Sheet:
Equity:
Decrease in Common Stock ($ 15,000)
======
Decrease in Additional Paid-in Capital -
Common Stock ($7,767,000
Decrease in Accumulated Deficit $7,782,000
[4] - Statements of Operations:
SESH is the accounting acquirer and the comparative historical operations will
be those of SESH and not Lafayette. As such, the pro forma adjustments on the
statement of operations reflects the exclusion of Lafayette's operations prior
to the reverse merger. Additionally, the pro forma reverse merger adjustment on
the statements of operations for selling, general and administrative expense
includes the goodwill amortization of $68,000 and $90,000, respectively for the
nine months ended September 30, 1996 and the year ended December 31, 1995.
[D] - Discontinued Subsidiaries:
During the nine months ended September 30, 1996, Lafayette discontinued a
significant portion of operating activities. No pro forma adjustments related to
the discontinued operations are made to the statement of operations for the year
ended December 31, 1995 because all of the operating results of Lafayette
Industries, Inc., prior to the reverse merger are excluded from the pro forma
operating results (see note [C], [4] above). Additionally, since all
discontinued operations are reflected in the historical September 30, 1996
restated financial statements of Lafayette, no pro forma adjustments related to
such discontinued operations are required for the pro forma balance sheet as of
September 30, 1996 or for the pro forma statement of operations for the nine
months ended September 30, 1996. Lafayette's amended September 30, 1996 10-Q
presents the restated December 31, 1995 balance sheet which gives effect to the
discontinued operations.
9
<PAGE>
