EX-99 5 ushighland8k012210ex99.txt FINANCIAL STATEMENTS INDEPENDENT AUDITORS' OPINION To the Stockholders and Board of Directors US Highland, Inc. Jenks, Oklahoma We have audited the accompanying balance sheet of U.S. Highland, Inc. as of December 31, 2009 and the related statements of operations and retained earnings 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 auditing standards generally accepted in the United States. 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 U.S. Highland, Inc. as of December 31, 2009, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. Hood Sutton Robinson & Freeman CPAs., P.C. Certified Public Accountants Tulsa, Oklahoma March 11, 2010 U.S. Highland, Inc. Balance Sheet December 31, 2009 Assets Current Assets: Cash $ 392,766 Accounts Receivable 116,043 Inventory 4,254,582 ----------- 4,763,391 ----------- Property and Equipment: Vehicle 20,750 Furniture and Fixtures 43,297 Tooling 300,000 Accumulated Depreciation (5,168) ----------- 358,879 ----------- Other Assets: Investment in Harcom 143,820 Deposits 1,102 ----------- 144,922 ----------- Total Assets $ 5,267,192 =========== Liabilities and Stockholders' Equity Current Liabilities: Accounts Payable $ 264,097 Current Portion of Long-Term Debt 8,400 Accrued Liabilities 2,754 ----------- 275,251 ----------- Long-term Liabilities: Notes Payable 34,707 Current Portion of Long-Term Debt (8,400) ----------- 26,307 Deferred Income Taxes 8,386 ----------- 34,693 ----------- Stockholders' Equity: Common Stock, 100 million shares authorized, par $0.01, 10 million shares issued and outstanding 100,000 Paid in Capital 4,810,149 Retained Earnings 47,099 ----------- Total Stockholders' Equity 4,957,248 ----------- Total Liabilities and Stockholders' Equity $ 5,267,192 =========== The accompanying notes are an integral part of these financial statements U.S. Highland, Inc. Statement of Operations and Retained Earnings For the Year Ended December 31, 2009 Revenue: Sales $ 454,182 ------------ Operating Expenses: General and Administrative 269,484 Racing 102,031 Research and Development 15,852 Selling 3,500 Depreciation 5,168 ----------- Total Operating Expenses 396,035 ----------- Operating Income 58,147 Other Income (Expense): Interest Income 92 ----------- Income before Provision for Income Taxes 58,239 Provision for Income Taxes 11,140 ----------- Net Income 47,099 Retained Earnings, Beginning of Year - ----------- Retained Earnings, End of Year $ 47,099 =========== The accompanying notes are an integral part of these financial statements U.S. Highland, Inc. Statement of Cash Flows For the Year Ended December 31, 2009 Cash Flows From Operating Activities Cash received from customers $ 454,182 Interest received 91 Cash paid to employees and suppliers (382,571) ----------- Net Cash Provided by (Used in) Operating Activities 71,702 ----------- Cash Flows From Investing Activities Property and equipment purchases (27,377) Net purchase of investments (143,820) ----------- Net Cash Provided by (Used in) Investing Activities (171,197) ----------- Cash Flows From Financing Activities Issuance of common stock 357,149 Proceeds from short-term debt 137,075 Repayment of long-term debt (1,963) ----------- Net Cash Provided by (Used In) Financing Activities 492,261 ----------- Net Increase (Decrease) In Cash and Cash Equivalents 392,766 Cash And Cash Equivalents at Beginning of Year - ----------- Cash And Cash Equivalents at End of Year $ 392,766 =========== Reconciliation of Net Income (Loss) to Cash Provided by (Used in) Operating Activities Net income (loss) $ 47,099 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 5,168 (Increase) decrease in prepaid assets (1,102) (Increase) decrease in inventories (1,582) Increase (decrease) in accounts payable 10,979 Increase (decrease) in income taxes payable 2,754 Increase (decrease) in deferred expenses 8,386 ----------- Total Adjustments 24,603 ----------- Net Cash Provided by (Used in) Operating Activities $ 71,702 =========== Supplemental Disclosures NONCASH INVESTING AND FINANCING ACTIVITIES Assets acquired by assumption of debt $ 36,670 Assets acquired by issuance of equity $ 4,453,000 The accompanying notes are an integral part of these financial statements U.S. Highland, Inc. Notes to Financial Statements For the year ended December 31, 2009 Note 1 - Organization and Operations Organization U.S. Highland, Inc. ("Highland" or the "Company") was incorporated on January 29, 2009, under the laws of the State of Oklahoma. U.S. Highland, Inc. merged with Harcom Productions, Inc., ("Harcom") a public company, on January 22, 2010 with Harcom as the surviving corporation and with US Highland, Inc. as the name of the merged corporation. Since its formation, the Company's primary activities have consisted of launching marketing activities and gearing up for manufacturing in the United States (the Highland brand was originally launched in Sweden in 1996). Manufacturing and sales activities commenced during the last quarter of 2009. Note 2 - Summary of Significant Accounting Policies Description of Business The mission of the Company is to pursue, develop and market recreational powersports, including motorcycles, ATVs, accessories, and related products primarily, as an original equipment manufacturer. The Company's proprietary products include the following: - The Highland 250-550cc single cylinder 4 stroke engine line - The Highland 750-1150cc v-twin engine line - The Highland single cylinder and v-twin motorcycle lines - The Highland ATV product line The intellectual property was developed in Sweden by the Highland Group, originally founded in 1996. Cash and Cash Equivalents For purposes of the Statement of Cash Flows, this caption includes cash on hand and in banks, and certain short-term deposits. The Company considers all highly liquid debt instruments purchased with a maturity of three months or less from the date of purchase to be cash equivalents. Note 2 - Summary of Significant Accounting Policies (continued) Income taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which is codified at FASB ASC 740, Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, SFAS No. 109 requires the recognition of future tax benefits, such as net operating loss carry forwards, to the extent that realization of such benefits is more likely than not. The amount of deferred tax liabilities or assets is calculated using tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. Use of estimates The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from the estimates and assumptions used. Fair value of financial instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company: Current assets and current liabilities - The carrying value approximates fair value due to the short maturity of these items. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are stated at the historical carrying amount net of write-offs and allowance for doubtful accounts. The Company establishes an estimated allowance for doubtful accounts receivable based on various factors, including revenue, historical credit loss experience, current trends, and any specific customer collection issues that the Company has identified. Uncollectible accounts receivable are written off when a settlement is reached for an amount that is less than the outstanding historical balance or when the Company has determined the balance will not be collected. Inventory Inventory consists of components and finished goods inventory, powersports vehicles, equipment, and tooling and is stated at cost. Cost is determined by using the average cost method. Property, Plant and Equipment: Property and equipment is recorded at original purchase cost. Major renewals and betterments are capitalized, while maintenance and repairs are expensed when incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets, which are ten years for tooling, and five to seven years for equipment, vehicles and furniture. Note 3 - Recent Accounting Pronouncements The following are summaries of recent accounting pronouncements that are relevant to the Company: In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140" ("SFAS No. 166"). SFAS No. 166 amends SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 166 improves the comparability of information that a reporting entity provides regarding transfers of financial assets and the effects on its financial statements. SFAS No. 166 is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that SFAS No. 166 will have on its financial statements. In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS No. 167"). SFAS No. 167 amends FIN No. 46(R), "Consolidation of Variable Interest Entities" and changes the consolidation guidance applicable to a variable interest entity. Among other things, it requires a qualitative analysis to be performed in determining whether an enterprise is the primary beneficiary of a variable interest entity. SFAS No. 167 is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that SFAS No. 167 will have on its financial statements. In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification (tm) and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162" ("SFAS No. 168"). SFAS No. 168 replaces SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in accordance with generally accepted accounting principles. SFAS No. 168 is effective for interim and annual reporting periods ending after September 15, 2009. On September 30, 2009, the Company adopted SFAS No. 168, which has no effect on the Company's financial statements as it is for disclosure purposes only. Note 3 - Recent Accounting Pronouncements - (Continued) In May 2009, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 165, "Subsequent Events" ("SFAS No. 165"). SFAS No. 165 establishes the period in which management of a reporting entity should evaluate events and transactions for recognition or disclosure in the financial statements. It also describes the circumstances under which an entity should recognize events or transactions that occur after the balance sheet date. SFAS No. 165 is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not expect the adoption of SFAS No. 165 to have a material effect on its financial statements and related disclosures. Note 4 - Notes Payable On August 25, 2009 the Company financed the purchase of a van through Security Bank. The note has an interest rate of 6.78% per annum and matures September 1, 2013. The monthly principal and interest payments are $877. Below are the estimated annual principal installments due on notes payable for the four years subsequent to December 31, 2009: Year Principal 2010 $8,400 2011 9,000 2012 9,600 2013 7,707 Note 5 - Leases During 2009 the Company entered into operating lease agreements for vehicles and equipment from a single lessor, Frog Flight Financial Group, to be used in the Company's operations. The lease terms ranged from one year to two years. Some of the leases expired during the year ended December 31, 2009, while the remaining leases expire December 31, 2010. Lease expense for 2009 was $13,968. Lease expense for the year ending December 31, 2010 will be approximately $38,000. Note 6 - Income Taxes The components of the provision for income taxes for the years ended December 31, 2009 is as follows: Operating Activities: Current $ 2,754 Deferred 8,386 -------- $11,140 The provision for deferred income taxes for the years ended December 31, 2009 was entirely comprised of the difference between book and tax depreciation. Note 7 - Transfer of Assets for Stock During 2009 the Company received assets from Highland Group AB in exchange for stock. The assets received in the exchange are summarized below: Intellectual property including product designs, proprietary and patent pending technology. The Highland brand name. Inventory which included components and finished goods. New product prototypes. Note 8 - Subsequent Events U.S. Highland, Inc. merged with Harcom Productions, Inc., a public company, on January 22, 2010 with Harcom as the surviving corporation and with US Highland, Inc. as the name of the merged corporation. The Company signed an Office Lease Agreement (the "Agreement") on February 20, 2010. The Agreement commences on March 1, 2010 with a monthly rental of $8,500. The Agreement has a purchase option, which if exercised by the Company, would terminate the lease. Note 9 - Proforma Financial Statements Following is the proforma balance sheet and income statement as if the acquisition occurred on December 31, 2009. U.S. Highland, Inc. Harcom Eliminations Consolidated ------------------- ------ ------------ ------------ Assets Current Assets: Cash and cash equivalents $ 492,766 $ 32,696 $ 425,462 Accounts receivable 116,043 41,292 157,335 Inventory 4,254,582 4,254,582 ---------- --------- --------- ---------- Total current assets 4,763,391 73,988 - 4,837,379 ---------- --------- --------- ---------- Property and Equipment 364,047 217,878 581,925 Accumulated depreciation (5,168) (217,878) (223,046) ---------- --------- --------- ---------- Net property and equipment 358,879 - - 358,879 ---------- --------- --------- ---------- Other Assets: Intangible assets (net of amortization) - 72,235 72,235 Investment in subsidiary 143,820 - (143,820) - Deposits 1,102 1,500 2,602 ---------- --------- --------- ---------- Total other assets 144,922 73,735 (143,820) 74,837 ---------- --------- --------- ---------- Total Assets $5,267,192 $ 147,723 $(143,820) $5,271,095 ========== ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 264,097 $ 17,263 $ 281,360 Due to related parties - 164,070 164,070 Current portion of long-term debt 8,400 9,207 17,607 Accrued liabilities 2,754 2,754 ---------- --------- --------- ---------- Total Current Liabilities 275,251 190,540 - 465,791 ---------- --------- --------- ---------- Long-Term Liabilities: Notes payable (net of current portion) 26,307 131,660 157,967 Deferred income taxes 8,386 - 8,386 ---------- --------- --------- ---------- Total Long-Term Liabilities 34,693 131,660 - 166,353 ---------- --------- --------- ---------- Stockholders' Equity: Common stock 100,000 16,375 116,375 Paid in surplus 4,810,149 242,887 (143,820) 4,909,216 Retained earnings(deficit) 47,099 (433,739) (386,640) ---------- --------- --------- ---------- Total Stockholders' Equity (Deficit) 4,957,248 (174,477) (143,820) 4,638,951 ---------- --------- --------- ---------- Total Liabilities and Stockholders' Equity (Deficit) $5,267,192 $147,723 $(143,820) $5,271,095 ---------- --------- --------- ----------
U.S. Highland, Inc. Harcom Eliminations Consolidated ------------------- ------ ------------ ------------ Revenue $454,182 $ 230,120 $684,302 Cost of Goods Sold - - (88,984) -------- --------- -------- -------- Gross Profit 454,182 141,136 - 595,318 -------- --------- -------- -------- Operating Expenses: General and administrative 269,484 70,241 - 339,725 Racing 102,031 102,031 Research and development 15,852 15,852 Selling 35 35 Depreciation 5,168 5,168 Medical insurance 834 834 Employee compensation 167,889 167,899 -------- --------- -------- -------- Total Operating Expenses 392,570 238,964 - 631,534 Operating Income (Loss) 61,612 (97,828) (36,216) -------- --------- -------- -------- Other Income (Expense) Interest income 92 92 Interest expense (13,072) (13,072) -------- --------- -------- -------- 92 (13,072) - (12,980) -------- --------- -------- -------- Net Income before Income Taxes 61,704 (110,900) (49,196) Provision for income taxes (11,140) - (11,140) -------- --------- -------- -------- Net Income (Loss) $ 50,564 $(110,900) $ - $(60,336) ======== ========= ======== ========
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