EX-3 4 a2047042zex-3.txt EXHIBIT 3 Exhibit 3 LIQUITEK ENTERPRISES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS DECEMBER 31, 2000 LIQUITEK ENTERPRISES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS DECEMBER 31, 2000 INTRODUCTION On February 12, 2001, Liquitek Enterprises, Inc. (the "Company") completed acquiring all of the outstanding voting stock of Distech Limited ("Distech") in a purchase business combination by issuing 15,340,104 shares of its restricted common stock, warrants for 790,896 shares of its restricted common stock, and options for 69,000 shares of its restricted common stock. Distech has a March 31 year-end. The following unaudited pro forma combined financial statements (hereinafter collectively referred to as "the pro forma financial statements") are presented for illustrative purposes only, and are not necessarily indicative of the combined financial position at an earlier date, the results of operations for future periods, or the results that would have been realized had the Company and Distech been a combined entity during the specified period. The pro forma financial statements (including the notes thereto) are qualified in their entirety by reference to, and should be read in conjunction with, the historical financial statements of the Company and Distech (including the notes thereto) incorporated herein by reference or included elsewhere herein. The Company's historical financial statements incorporated herein by reference are the audited December 31, 2000 consolidated financial statements included in the related Form 10-KSB. The financial statements referred to in the preceding sentence have been filed with the Securities and Exchange Commission. The following pro forma financial statements give effect to the purchase of 100% of the equity interest in Distech by the Company using the purchase method of accounting. The pro forma financial statements are based on the respective historical financial statements and the notes thereto of the Company and Distech. The December 31, 2000 pro forma combined balance sheet, which assumes that the purchase took place on December 31, 2000, combines the audited balance sheet of the Company and the unaudited balance sheet of Distech as of such date. The pro forma combined statement of operations, which assumes that the purchase took place on January 1, 2000, combines the audited statement of operations of the Company for the year ended December 31, 2000, and the unaudited statements of operations of Distech for the three months ended March 31, 2000 and the nine months ended December 31, 2000. Of the 15,340,104 shares of the Company's restricted common stock cited above as issued in the purchase transaction, approximately 1,640,000 shares are being held in escrow as collateral for an indemnity agreement regarding any losses or claims relating to Distech's intellectual property. The indemnity agreement, which expires November 30, 2002, was provided to the Company by a former Distech stockholder/officer. To the extent that such escrowed shares are not sold to third parties to finance any expenses related to the claims described above, they will be released to the buyer in December 2001 and December 2002. The recognition of the aforementioned 1,640,000 shares in the Company's historical financial statements will be delayed until the dates noted in the preceding sentence. 1 Under Regulation S-X Rule 11-02(b)(8), a second set of pro forma financial statements based on an assumption of forfeiture of these collateral shares could be deemed appropriate. While the escrowed shares amount to approximately 10% of the total shares exchanged in the transaction, they represent only approximately 2.5% of the pro forma common shares outstanding at December 31, 2000 and only approximately 3.4% of the pro forma weighted average common shares outstanding during the year then ended. Accordingly, management has judged the differences to be immaterial and has not included a second set of pro forma financial statements. The pro forma adjustments described in the accompanying notes are preliminary, and are based on management's estimates and a preliminary third-party valuation of the estimated fair value of the net assets acquired. Such adjustments are also based on a third-party valuation of the estimated fair values of the Company's restricted common stock, warrants and options issued to the former stockholders of Distech; such values have been estimated at approximately $0.99 per share, $0.48 per warrant and $0.88 per option. Factors considered in estimating the fair value of the Company's equity securities issued in the purchase include those discussed below. Except as described in the following paragraph, the owners of the aforementioned stock (and the options and warrants described in Note D) have the right to participate in a registration statement to be filed by the Company under the Securities Act of 1933, as amended (the "Act"). Owners who exercise this right become subject to an agreement whereby they will be allowed to sell a maximum of 25% of their shares in each of three successive six-month periods, after which such restrictions are lifted. The first six-month period commences with the earlier of (a) the declaration of effectiveness of the registration statement by the Securities and Exchange Commission or (b) the date three months after completion of the audit of Distech's financial statements included herein. The date described as "b" in the preceding sentence is presently estimated to be approximately July 31, 2001. The second six-month period commences immediately after the conclusion of the first six-month period, and the third commences immediately after the second. The stock owned by shareholders who do not exercise this right will remain restricted under Rule 144 of the Act. Based on the factors described above, the matter discussed in the following paragraph, the substantial number of shares issued in the purchase (as compared to the average daily trading volume of the Company's common stock), and a third-party valuation, management has applied a discount of 40% to the average market price of the Company's common stock during the week ended November 30, 2000 to estimate its fair value. Such date is based on the Company's conclusion as of that date of the first phase of the Distech acquisition, whereby approximately 71% of the equity interests in Distech were acquired from six shareholders before tendering an offer (based on the same 3:1 exchange ratio) to the remaining shareholders for the remaining equity interests under New Zealand securities laws. As to the 1,640,000 shares of contingently issuable restricted common stock of the Company discussed above, the owner thereof is prohibited by the aforementioned indemnity agreement from selling or otherwise transferring any such shares prior to December 1, 2001. From that date until November 30, 2002, such owner may not sell or otherwise transfer 2 more than 50% of such shares. As of December 1, 2002, all transfer restrictions imposed by the indemnity agreement will be lifted. Management is in the process of assessing and formulating its integration plans; although restructuring costs (if any) are not yet known, management does not believe that they will be material. In the opinion of management, all known presently quantifiable adjustments have been made that are necessary to present fairly the accompanying pro forma financial statements. 3
LIQUITEK ENTERPRISES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED BALANCE SHEET DECEMBER 31, 2000 (in thousands) Historical Pro Forma Adjustments -------------------- --------------------- Pro Forma Liquitek Distech References Amount Combined -------- ------- ---------- ------ -------- ASSETS CURRENT ASSETS Cash $ 24 $ 87 $ - $ 111 Accounts Receivable, net 201 74 275 Advances to related party 620 134 A (620) 134 Inventory 67 323 390 Prepaid expenses 47 47 Other current assets - 66 66 -------- ------- -------- 959 684 1,023 PROPERTY, PLANT AND EQUIPMENT, NET 3,153 61 3,214 INVESTMENT IN CLOSELY HELD COMPANIES 15 15 NON-CURRENT ASSETS Deposits and other assets 297 297 Prepaid royalties to related party 150 150 Patents, net 173 173 Goodwill, net 10,023 C,J 7,947 17,970 Acquired completed technology, net 10,557 C 14,010 24,567 Other intangible assets, net 675 225 C 260 1,160 Deferred tax asset, net of valuation allowance - - - - -------- ------- ------ -------- 21,875 225 44,317 -------- ------- -------- TOTAL ASSETS $ 25,987 $ 985 $21,597 $ 48,569 ======== ======= ====== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 588 $ 176 $ - $ 764 DUE TO RELATED PARTIES 967 798 A (620) 1,145 DEFERRED INCOME TAXES 3,827 J 4,850 8,677 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock at par value 38 38 Additional paid-in capital 30,205 5,588 C,E 11,271 47,064 Stock options, warrants and deferred compensation 1,356 C 519 1,875 Accumulated deficit (10,994) (5,855) E 5,855 (10,994) Accumulated other comprehensive income - 278 E (278) - -------- ------- ------ -------- 20,605 11 37,983 -------- ------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,987 $ 985 $21,597 $ 48,569 ======== ======= ====== ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
LIQUITEK ENTERPRISES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 (in thousands, except for per share amounts) HISTORICAL PRO FORMA ADJUSTMENTS -------------------------------------------- --------------------- DISTECH DISTECH (FOR (FOR THE NINE LIQUITEK (FOR THE THREE MONTHS THE YEAR ENDED MONTHS ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER PRO FORMA 2000) 2000) 31, 2000) REFERENCE AMOUNT COMBINED -------------- ------------ ------------- --------- ------ --------- REVENUES Sales $ 989 $ - $ 126 $ - $ 1,115 Less discounts and allowances (10) - - (10) -------------- ------------ ------------- --------- Net Sales 979 - 126 1,105 COST OF SALES 686 - 170 856 -------------- ------------ ------------- --------- GROSS PROFIT 293 - (44) 249 OPERATING EXPENSES 4,910 305 802 F 1,798 7,815 -------------- ------------ ------------- --------- LOSS BEFORE OTHER INCOME (EXPENSE) (4,617) (305) (846) (7,566) OTHER INCOME (EXPENSE) Interest income (expense), net 95 (89) (5) 1 Loss from investment impairment - - (79) (79) Forgiveness of advance - (52) - (52) Write-off of acquired in-process research and development costs (970) - - (20) (990) Loss on disposal of equipment (10) - - (10) Other - - 17 17 -------------- ------------ ------------- --------- Total Other Income (Expense) (885) (141) (67) (1,113) -------------- ------------ ------------- --------- NET LOSS $ (5,502) $ (446) $ (913) $(1,818) $ (8,679) ============== ============ ============= ======= ========= BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.17) $ (0.18) ============== ========= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING DURING THE YEAR $ 31,834 15,340 47,174 ============== ======= ========= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5 LIQUITEK ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS December 31, 2000 Note (A) Basis of Presentation The pro forma combined balance sheet assumes that the purchase took place on December 31, 2000 and that 100% of the equity interest in Distech was acquired by the Company on that date. Such financial statement combines the historical balance sheets of the Company and Distech at that date. The pro forma combined statement of operations assumes that the purchase took place on January 1, 2000, and combines the historical statement of operations of the Company for calendar 2000 and the historical financial statements of Distech for the quarter ended March 31, 2000 and for the nine months ended December 31, 2000. The aforementioned historical financial statements have been adjusted as discussed in the notes below. Other than $620,000 of advances by the Company to Distech in anticipation of the purchase, there were no other significant transactions on a combined basis between the acquired entity and the Company during the period presented. Note (B) Introduction to the Unaudited Preliminary Pro Forma Adjustments The accompanying pro forma information, including the allocation of the purchase price, is based on management's preliminary estimates and a third-party valuation of (1) the net assets acquired and (2) the fair value of the equity securities issued by the Company to consummate the purchase. Based on the timing of closing the second phase of the acquisition, the finalization of the valuation, and other factors, the final purchase price adjustments may differ materially from those presented in the accompanying pro forma combined financial statements. A change in the value assigned to long-term assets and liabilities could result in a reallocation of the purchase price and a revision of certain pro forma adjustments. The impact of any such changes on the pro forma financial statements will depend on the nature and amount of the assets and/or liabilities adjusted. Management is in the process of assessing and formulating its integration plans. Though management has not yet determined the actual amount of any restructuring costs associated with the integration plans, it is not expected that such costs will be material; no amounts pertaining thereto are included in the accompanying pro forma financial statements. In addition, the pro forma financial statements have not been adjusted to reflect any cost savings or operating synergies that may result from the purchase. Note (C) To reflect the excess of the total acquisition cost over the estimated fair value of the tangible and identifiable intangible assets acquired [goodwill; see Note (J)]. The purchase price, purchase price allocation and financing of the transaction are summarized as follows: 6 Purchase price paid as: Common stock issued $ 16,854,479 Stock warrants issued 450,967 Stock options issued 67,776 ------------ Total purchase consideration 17,373,222 ------------ Allocated to: Historical book value of Distech's assets and liabilities (13,305) * Adjustments to reflect assets and lia- bilities at estimated fair value: Completed technology 14,010,000 In-process research and development written off 20,000 Assembled workforce 260,000 Deferred income taxes (4,850,000) ------------ Total allocation 9,426,695 ------------ Excess of purchase price over allocation to identifiable assets and liabilities (goodwill) $ 7,946,527 ============
* The purchase agreement included a right of rescission for the former shareholders of Distich pending securing $5 million of equity investment in the Company by September 30, 2001. The recording of the acquisition for financial statement purposes has been deferred until this contingency is satisfied. The acquisition is expected to be reported for financial statement purposes in the quarter ending June 30, 2001, except for the delayed accounting recognition related to the 1,640,000 shares of common stock described in the "Introduction" section hereof. 7 Note (D) As of February 12, 2001, the Company had issued warrants to acquire 790,896 shares of its restricted common stock to former Distech shareholders who owned warrants to purchase Distech common stock. Such warrants, which expire on May 1, 2001, and vested on their issuance dates allow the holders to acquire such Company stock at a price of NZ$1.67 per share (or approximately US$0.68 per share as of April 24, 2001). The fair value of the above warrants, which was estimated using the Black-Scholes stock option-pricing model, has been included in the purchase price. The use of such model was based on the 40% valuation discount discussed in the "Introduction" section hereof and the following assumptions: Risk-free interest rate 6.0% Expected life 5 months Estimated annualized volatility 126% Expected dividend yield Zero The Company also issued options to acquire 69,000 shares of its restricted common stock to former Distech shareholders who owned options to purchase Distech common stock. Such options, which expire on December 31, 2005, allow the holders to acquire such stock at a price of NZ$1.67 per share. The impact of assuming that the above exercise prices were translated into U.S. dollars at the exchange rates in effect on January 1, 2000 and December 31, 2000 is not material to the accompanying pro forma financial statements. The fair value of the above options, which was estimated using the Black-Scholes stock option-pricing model, has been included in the purchase price. The use of such model was based on the 40% valuation discount discussed in the "Introduction" and the following assumptions: Risk-free interest rate 5.3% Expected life 5 years Estimated annualized volatility 126% Expected dividend yield Zero The Company warrants and options described above are restricted securities under the Act. Note (E) To reflect (1) the elimination of the stockholders' equity accounts of Distech, and (2) the issuance of common stock, warrants and options by the Company as consideration for the purchase (see Notes C and D). 8 Note (F) To reflect the increase in amortization expense due to (i) the amortization of goodwill and completed technology over 10 years and (ii) the amortization of assembled workforce over 3 years. Note (G) Since the unaudited pro forma combined statement of operations reports a loss, there is no income tax effect of the above pro forma adjustments. Note (H) Basic and diluted pro forma loss per common share is calculated based on the issuance (assumed to have been on January 1, 2000) of 15,340,104 shares of the Company's restricted common stock in the purchase. Warrants and stock options, including those assumed to be outstanding as of January 1, 2000, were not considered in the computation of diluted pro forma loss per common share because their inclusion would have been antidilutive. Note (I) As of February 12 2001, the Company had advanced to Distech a total of $770,000 pursuant to the terms of the purchase agreement. Note (J) Since the purchase is intended to qualify as a non-taxable transaction, the predecessor tax bases of Distech's assets and liabilities are carried forward for U.S. income tax purposes. Therefore, the amortization of the purchase consideration allocated to certain assets acquired (see Note C) is not deductible by the Company in its future income tax returns. To account for such temporary differences, the accompanying pro forma combined balance sheet reflects a deferred tax liability (representing additional goodwill) of approximately $4,850,000 as required by accounting principles generally accepted in the United States. Note (K) The unaudited historical balance sheet and statements of operations of Distech used to develop the accompanying pro forma financial statements have been translated from New Zealand dollars into U.S. dollars based on exchange rates in effect on December 31, 2000 and the weighted average exchange rate for the year then ended, respectively. Accounting principles generally accepted in the United States require that foreign currency translation gains (approximately $234,000 for the year ended December 31, 2000, which is less than $0.01 per common share on a pro forma basis) be reported outside the statement of operations as an element of other comprehensive income. 9