-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Df01Za1/bm/rXvgMNodUMql0745UwhmM9NqAWpzw+UapTgIutHmKiOLaU7+7Lo+y otPLF6b+oZw4In1dx3aqHQ== 0000950148-01-000053.txt : 20010123 0000950148-01-000053.hdr.sgml : 20010123 ACCESSION NUMBER: 0000950148-01-000053 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001026 ITEM INFORMATION: FILED AS OF DATE: 20010112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DENSE PAC MICROSYSTEMS INC CENTRAL INDEX KEY: 0000784770 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 330033759 STATE OF INCORPORATION: CA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-14843 FILM NUMBER: 1507434 BUSINESS ADDRESS: STREET 1: 7321 LINCOLN WAY CITY: GARDEN GROVE STATE: CA ZIP: 92641 BUSINESS PHONE: 7148980007 MAIL ADDRESS: STREET 1: 7321 LINCOLN WAY STREET 2: 7321 LINCOLN WAY CITY: GARDEN GROVE STATE: CA ZIP: 92641 8-K/A 1 v68472a1e8-ka.txt AMENDMENT #1 TO 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): OCTOBER 26, 2000 DENSE-PAC MICROSYSTEMS, INC. (Exact name of registrant as specified in charter) CALIFORNIA 0-14843 33-0033759 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.)
7321 LINCOLN WAY, GARDEN GROVE, CALIFORNIA 92841 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 898-0007 NOT APPLICABLE (Former name or former address, if changed since last report.) 2 AMENDMENT NO. 1 TO FORM 8-K DATED OCTOBER 26, 2000 Dense-Pac Microsystems, Inc. hereby amends Item 7 of its Current Report on Form 8-K dated October 26, 2000, which was originally filed with the U.S. Securities and Exchange Commission on November 13, 2000, to include the historical financial statements of Productivity Enhancement Products ("PEP") and pro forma financial information required by paragraphs (a) and (b) of Item 7 of Form 8-K: ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) Financial Statements of Business Acquired: The following financial statements of PEP are filed as a part of this report as Exhibit 99.2: Audited Financial Statements: Independent Auditors' Report Consolidated Balance Sheet as of January 2, 2000 Consolidated Statement of Operations and Comprehensive Operations for the year ended January 2, 2000 Consolidated Statement of Cash Flows for the year ended January 2, 2000 Notes to the Consolidated Financial Statements as of and for the year ended January 2, 2000 Unaudited Financial Statements: Condensed Consolidated Balance Sheets as of January 2, 2000 and July 2, 2000 (unaudited) Condensed Consolidated Statements of Operations and Comprehensive Operations for the six-month periods ended July 4, 1999 and July 2, 2000 (unaudited) Condensed Consolidated Statements of Cash Flows for the six-month periods ended July 4, 1999 and July 2, 2000 (unaudited) Notes to Condensed Consolidated Financial Statements as of January 2, 2000 and July 2, 2000 and for the six-month periods ended July 4, 1999 and July 2, 2000 (Unaudited) (b) Pro Forma Financial Information: The following pro forma financial information is filed as a part of this report as Exhibit 99.3: Unaudited Pro Forma Consolidated Statements of Operations of Dense-Pac Microsystems, Inc. for the year ended February 29, 2000 and for the six-month period ended August 31, 2000 and Unaudited Pro Forma Consolidated Balance Sheet as of August 31, 2000, together with an introduction thereof and notes thereto. (c) Exhibits The following exhibits are filed with this Report: 2.1 Share Exchange Agreement, dated October 26, 2000, among the Registrant, PEP, and the Shareholder* 2.2 Registration Rights Agreement, dated October 26, 2000, between the Registrant and the Shareholder* 2.3 Non-Compete Agreement dated October 26, 2000, between the Registrant, PEP, and the Shareholder* 99.1 News release, dated October 19, 2000, related to the acquisition of PEP* 99.2 Historical Consolidated Financial Statements of PEP 99.3 Unaudited Pro Forma Financial Information 99.4 Independent Auditors' Consent 3 * Filed as the like-numbered exhibit in the Form 8-K filed on November 13, 2000 4 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to report to be signed on its behalf by the undersigned thereunto duly authorized. DENSE-PAC MICROSYSTEMS, INC. Date: January 4, 2001 By: /s/ Ted Bruce ----------------- Ted Bruce Chief Executive Officer and President 5 EXHIBIT INDEX
Exhibit Number Description - ------- ----------- 2.1 Share Exchange Agreement, dated October 26, 2000, among the Registrant, PEP, and the Shareholder* 2.2 Registration Rights Agreement, dated October 26, 2000, between the Registrant and the Shareholder* 2.3 Non-Compete Agreement dated October 26, 2000, between the Registrant, PEP, and the Shareholder* 99.1 News release, dated October 19, 2000, related to the acquisition of PEP* 99.2 Historical Consolidated Financial Statements of PEP 99.3 Unaudited Pro Forma Financial Information 99.4 Independent Auditors' Consent
* Filed as the like-numbered exhibit in the Form 8-K filed on November 13, 2000 EX-99.2 2 v68472a1ex99-2.txt EXHIBIT 99.2 1 EXHIBIT 99.2 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES Consolidated Financial Statements for the Year Ended January 2, 2000, and Independent Auditors' Report 2 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Productivity Enhancement Products, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheet of Productivity Enhancement Products, Inc. and its majority-owned subsidiaries (the Company) as of January 2, 2000, and the related consolidated statements of income and comprehensive income, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Productivity Enhancement Products, Inc. and its majority-owned subsidiaries as of January 2, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 11, the Company sold all assets of its majority-owned subsidiary, BeadleNet LLC, on October 19, 1999. Effective November 25, 1999, BeadleNet LLC was dissolved. /s/ Deloitte and Touche June 9, 2000 Costa Mesa, California 3 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF JANUARY 2, 2000 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,245,675 Investments available-for-sale, restricted 5,999,658 Accounts receivable, net of allowance for doubtful accounts of $27,600 at January 2, 2000 1,196,544 Inventories, net 404,666 Prepaid expenses 60,648 ----------- Total current assets 9,907,191 PROPERTY AND EQUIPMENT, net 124,437 DEFERRED TAX ASSETS 16,757 OTHER ASSETS 94,872 ----------- $10,143,257 ===========
See notes to consolidated financial statements 3 4 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF JANUARY 2, 2000 (CONTINUED) - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 522,045 Accrued expenses 547,337 Deferred revenue 303,648 Income taxes payable 1,891,695 Deferred tax liabilities 1,084,512 Current portion of capital lease obligations 8,363 Current portion of notes payable 30,076 ------------ Total current liabilities 4,387,676 CAPITAL LEASE OBLIGATIONS, less current portion 5,516 NOTES PAYABLE, less current portion 32,232 COMMITMENTS (Note 9) SHAREHOLDERS' EQUITY: Common stock, $0.00004 par value; 100,000,000 shares authorized; 5,125,000 shares issued and outstanding 43,000 Notes receivable (31,000) Accumulated other comprehensive income 1,885,953 Retained earnings 3,819,880 ------------ Total shareholders' equity 5,717,833 ------------ $ 10,143,257 ============
See notes to consolidated financial statements 4 5 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME FOR THE YEAR ENDED JANUARY 2, 2000 - -------------------------------------------------------------------------------- REVENUES: Product revenues $ 5,050,160 Engineering and other revenues 896,633 ----------- Total revenues 5,946,793 COST OF REVENUES 3,048,450 ----------- GROSS PROFIT 2,898,343 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 2,311,513 WRITE-OFF OF NOTE RECEIVABLE 366,519 ----------- OPERATING INCOME 220,311 OTHER EXPENSE, net (7,109) ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 213,202 PROVISION FOR INCOME TAXES (72,239) ----------- INCOME FROM CONTINUING OPERATIONS 140,963 DISCONTINUED OPERATIONS: Loss from operations of discontinued business, net of minority interest participation of $355,000, and tax benefits of $416,469 (670,801) Gain on sale of discontinued business, net of minority interest participation of $2,652,495, and tax provision of $2,160,330 3,479,615 ----------- NET INCOME 2,949,777 OTHER COMPREHENSIVE INCOME: Net unrealized gain on available-for-sale securities, net of taxes of $1,248,650 1,885,953 ----------- COMPREHENSIVE INCOME $ 4,835,730 ===========
See notes to consolidated financial statements 5 6 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED JANUARY 2, 2000 - --------------------------------------------------------------------------------
Accumulated Common stock other ----------------------- Notes comprehensive Retained Shares Amount receivable income earnings Total --------- ---------- ---------- ------------- ---------- ---------- BALANCE, January 1, 1999 5,000,000 $ 12,000 $ -- $ -- $ 870,103 $ 882,103 Exercise of stock options 125,000 31,000 (31,000) Net unrealized gain on available-for-sale securities, net of taxes of $1,248,650 1,885,953 1,885,953 Net income 2,949,777 2,949,777 --------- ---------- ---------- ---------- ---------- ---------- BALANCE, January 2, 2000 5,125,000 $ 43,000 $ (31,000) $1,885,953 $3,819,880 $5,717,833 ========= ========== ========== ========== ========== ==========
See notes to consolidated financial statements 6 7 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 2, 2000 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,949,777 Adjustments to reconcile net income to net cash used in continuing operating activities: Loss from discontinued business 670,801 Gain on sale of discontinued business (3,479,615) Provision for doubtful accounts (48,390) Depreciation and amortization 134,496 Deferred taxes (114,409) Loss on sale of property and equipment 61,314 Changes in operating assets and liabilities (net of effects from disposition): Accounts receivable (328,535) Inventories (111,293) Prepaid expenses (23,032) Accounts payable 104,503 Accrued expenses 369,733 Deferred revenues 67,643 Income taxes payable (371,173) Other long-term liabilities (16,282) Other assets (30,000) ----------- Net cash used in continuing operating activities (164,462) Net cash used in discontinued operating activities (579,801) ----------- Net cash used in operating activities (744,263) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (116,595) Proceeds from sale of discontinued business 3,406,000 Distributions to minority members of BeadleNet LLC (722,797) ----------- Net cash provided by investing activities 2,566,608 CASH FLOWS FROM FINANCING ACTIVITIES: Payments on obligations under capital leases (19,581) Proceeds from issuance of notes payable 70,189 Repayments on notes payable (28,658) ----------- Net cash provided by financing activities 21,950
See notes to consolidated financial statements 7 8 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED JANUARY 2, 2000 (CONTINUED) - -------------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS $1,844,295 CASH AND CASH EQUIVALENTS, beginning of year 401,380 ---------- CASH AND CASH EQUIVALENTS, end of year $2,245,675 ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid during the year for: Income taxes $ -- ========== Interest $ -- ========== NONCASH INVESTING AND FINANCING ACTIVITIES: Noncash proceeds in connection with sale of BeadleNet LLC - investments available-for-sale, restricted $4,850,000 ========== Distributions of shares of common stock of Watchguard Technologies, Inc. to minority members of BeadleNet LLC $1,994,570 ========== Note receivable related to distributions $ 64,872 ========== Issuance of common stock from stock option exercises in exchange for note receivable $ 31,000 ========== Unrealized gain on available-for-sale securities, net of taxes of $1,248,650 $1,885,953 ==========
See notes to consolidated financial statements 8 9 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 2000 - -------------------------------------------------------------------------------- 1. NATURE OF OPERATIONS Productivity Enhancement Products, Inc. (the Company) engineers and manufactures a variety of electronic products in both the data recognition and financial security markets. The data recognition products focus on hand-held bar code reading devices and radio frequency identification systems for the industrial and commercial marketplace. The Company is a provider in the emerging Internet security market, which includes data encryption products and noncash transaction cards. Products are produced and sold out of the corporate office in Laguna Hills, California. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Principles of Consolidation - The consolidated financial statements include the accounts of Productivity Enhancement Products, Inc. and its majority-owned subsidiaries, PEP Smart Systems, LLC and BeadleNet LLC. These subsidiaries were dissolved prior to January 2, 2000. All intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. Prior to dissolution, any revenues, assets, and liabilities related to PEP Smart Systems, LLC were insignificant except a note receivable for approximately $367,000 due to the Company from the minority shareholders. This note was written off during the year ended January 2, 2000, due to collection uncertainties. Fiscal Year - Beginning in fiscal 1999, the Company's fiscal year ends on the Sunday closest to December 31 (January 2, 2000 for fiscal 1999). Discontinued Operations - Discontinued operations in the accompanying consolidated financial statements include the Company's majority-owned subsidiary, BeadleNet LLC. See Note 11 for additional information regarding the nature of operation and disposition of the Company's discontinued operations. Stock Split - In 1998, the Company's Board of Directors approved a 4-for-1 stock split related to the Company's common stock effective January 2, 1998. All share and per share amounts have been restated to reflect the stock split for all periods presented. Cash and Cash Equivalents - Cash and cash equivalents represent highly liquid securities, consisting primarily of uninsured money market accounts, with original maturities of less than 90 days. 9 10 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 2000 (CONTINUED) - -------------------------------------------------------------------------------- Investments Available for Sale - The Company's investments in publicly traded equity securities are classified as available for sale and stated at fair value in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company records unrealized gains and losses as a separate component of stockholders' equity in accumulated other comprehensive income. Inventories - Inventories consist of finished goods, work-in-progress, and raw materials and are valued at the lower of cost or market (first-in, first-out method). Property and Equipment - Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the assets' lives, which range from three to five years. Leased assets are depreciated over the lesser of the useful life of the asset or the remaining life of the lease. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations for the period. Renewals and betterments which extend the life of an existing asset are capitalized, while normal repairs and maintenance costs are expensed as incurred. Other Assets - Other assets consist of interest-bearing notes receivable from related parties of $64,872 and unrelated parties of $30,000 (Note 11). Revenue Recognition - The Company recognizes revenue from product sales at the time of shipment. Revenue from engineering and other services is recognized when the work is performed. Revenues related to contracts that require significant modification or customization are accounted for in conformity with Accounting Research Bulletin No. 45, Long-Term Construction-Type Contracts, and Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenues from such contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total contract costs for each contract. This method is used because management considers costs incurred to date to be the best available measure of progress on these contracts. Contract costs include all direct material and labor costs related to contract performance. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Provisions for Anticipated Losses on Contracts - Provision for estimated total contract losses on uncompleted contracts is made in the period in which such losses are determined in accordance with SOP 81-1. The Company has accrued approximately $96,000 of contract losses at January 2, 2000. 10 11 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 2000 (CONTINUED) - -------------------------------------------------------------------------------- Deferred Revenue - Deferred revenue consists of customer prepayments on product orders. Those amounts are deferred when received and recognized as revenue at the time of shipment. Long-Lived Assets - The Company accounts for the impairment and disposition of long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. In accordance with SFAS No. 121, long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. There was no such impairment of the value of such assets as of January 2, 2000. Accounting For Income Taxes - The Company accounts for income taxes in accordance with SFAS No. 109, Accounting For Income Taxes, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statements and the tax bases of assets and liabilities using enacted rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Software Development Costs - Costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional costs would be capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. Because the Company believes that its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no internally generated software development costs have been capitalized as of January 2, 2000. Concentration of Credit Risk - The Company's revenues are generated primarily from product sales and engineering services. The Company performs ongoing credit evaluations of its customers and does not require collateral for its receivables. The Company establishes an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. Customer Concentrations - During the year ended January 2, 2000, sales to two customers accounted for approximately 66% of total revenues. Each of these customers accounted for greater than 10% of total revenues for the year ended January 2, 2000. The loss of, or reduction in, revenues to these customers would have a material adverse effect on the Company's business, operating results, and financial condition. No other customers accounted for more than 10% of total revenues for the year ended January 2, 2000. 11 12 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 2000 (CONTINUED) - -------------------------------------------------------------------------------- Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation - SFAS No. 123, Accounting for Stock-Based Compensation, requires the determination and disclosure of compensation costs implicit in stock option grants or other stock rights. Under the employee transaction provisions, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, but are required to disclose in a note to the financial statements pro forma net income or net loss as if the company had adopted SFAS No. 123. The Company will continue to account for employee stock-based compensation under APB Opinion No. 25. Comprehensive Income - The Company adopted SFAS No. 130, Reporting Comprehensive Income, which establishes standards for the reporting and display of comprehensive income. Comprehensive income is defined as all changes in a company's net assets except changes resulting from transactions with shareholders. At January 2, 2000, the Company had accumulated other comprehensive income comprising net unrealized gains on available-for-sale securities, net of taxes. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS No. 133 requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of adoption of SFAS No. 133 for one year. The Company will adopt SFAS No. 133 no later than the first quarter of fiscal year 2001. Adoption of the new method of accounting for derivatives and hedging activities is not expected to have a material impact on the Company's financial statements. 12 13 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 2000 (CONTINUED) - -------------------------------------------------------------------------------- 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following at January 2, 2000: Machinery and other equipment $ 119,832 Furniture and fixtures 74,170 Office equipment 150,497 Leasehold improvements 24,059 --------- 368,558 Less accumulated depreciation and amortization (244,121) --------- $ 124,437 =========
At January 2, 2000, included in machinery and other equipment is $56,151 of equipment under capital leases. At January 2, 2000, accumulated amortization of assets under capital leases was $43,167. 4. INVESTMENT IN SECURITIES At January 2, 2000, all of the Company's investments are in equity securities and classified as available for sale. At January 2, 2000, investments in equity securities have a cost of $4,113,705, gross unrealized gains of $1,885,953, net of taxes of $1,248,650, gross unrealized losses of zero and an estimated fair value of $5,999,658. There were no proceeds from the sales of equity investments during the year ended January 2, 2000. The equity securities are comprised primarily of unregistered shares of Watchguard Technologies, Inc. common stock and certain shares have been pledged as collateral through October 2000 (Note 11). 5. ACCRUED EXPENSES Accrued expenses consist of the following at January 2, 2000: Accrued payroll and bonus $195,194 E-commerce cash receipts owed to Watchguard Technologies, Inc. 122,588 Accrued contract losses 95,853 Accrued vacation 31,200 Other 102,502 -------- $547,337 ========
13 14 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 2000 (CONTINUED) - ------------------------------------------------------------------------------- 6. LINE OF CREDIT The Company has executed a revolving credit agreement with a bank which provides for maximum borrowings of $750,000. The Company's available credit under this agreement is the lesser of $750,000 or 80% of the aggregate amount of eligible accounts receivable as established by the definitions in the credit agreement. As amended, borrowings under the credit agreement bear interest at the bank's reference rate plus 1.0% (9.50% at January 2, 2000). The revolving credit agreement includes certain financial covenants including minimum tangible net worth. The Company was in compliance with all financial covenants as of January 2, 2000. There were no amounts outstanding under the credit agreement as of January 2, 2000. 7. CAPITAL LEASE OBLIGATIONS The Company leases certain computer equipment under capital leases that expire at various dates through August 2001. Minimum annual lease commitments under capital leases as of January 2, 2000 are as follows:
Fiscal year: 2000 $ 9,265 2001 5,712 -------- Total minimum lease payments 14,977 Less amount representing interest (1,098) -------- Present value of minimum lease payments 13,879 Less current portion (8,363) -------- $ 5,516 ========
8. NOTES PAYABLE Notes payable consist of the following at January 2, 2000: Note payable to a bank bearing interest at the bank's prime rate plus 1.5% (9.25% at January 2, 2000) payable in monthly principal and interest installments of $829 from November 1998 to May 2001, collateralized by primarily all assets of the Company $12,402
14 15 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 2000 (CONTINUED) - -------------------------------------------------------------------------------- Note payable to a bank bearing interest at the bank's prime rate plus 1.5% (9.25% at January 2, 2000) payable in monthly principal and interest installments of $2,050 from April 1999 to March 2002, collateralized by primarily all assets of the Company $ 49,906 -------- 62,308 Less current portion (30,076) -------- $ 32,232 ========
Principal maturities of notes payable consist of the following at January 2, 2000:
Fiscal year: 2000 $30,076 2001 26,165 2002 6,067 ------- $62,308 =======
9. COMMITMENTS The Company leases office space and certain equipment under operating leases which expire on various dates through September 2000. Future annual minimum lease payments under noncancelable operating lease arrangements at January 2, 2000 are as follows: Fiscal year 2000 $114,636 ========
Rental expense under operating leases was approximately $131,978 for the year ended January 2, 2000. 10. INCOME TAXES The provision for income taxes consists of the following for the year ended January 2, 2000: Current: Federal $70,977 State 14,669 ------- 85,646
15 16 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 2000 (CONTINUED) - -------------------------------------------------------------------------------- Deferred: Federal $(10,833) State (2,574) -------- (13,407) -------- $ 72,239 ========
A reconciliation of the provision for income taxes to the amount of income tax expenses that would result from applying the federal statutory rate of 34% to income before income tax provision is as follows for the year ended January 2, 2000: Provision for income taxes at statutory rate 34.0 % General business credit (4.1) State taxes, net of federal benefit 3.7 Other 0.4 ---- 34.0 % ====
Net deferred tax assets (liabilities) are as follows as of January 2, 2000: Current: Unrealized gain securities $(1,248,650) Bad debt allowance 11,824 Accrued vacation 13,366 Inventory reserve Warranty reserve 4,284 State tax accrual difference 127,826 Other 6,838 ----------- (1,084,512) Long Term: Depreciation and amortization 16,757 ----------- Net deferred tax assets (liabilities) $(1,067,755) ===========
16 17 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 2000 (CONTINUED) - -------------------------------------------------------------------------------- 11. DISPOSITION OF BUSINESS BeadleNet LLC - BeadleNet LLC was formed on January 1, 1999, as a majority-owned subsidiary of the Company and as a provider of secure Internet and networking solutions. Effective October 19, 1999, the Company sold the assets of BeadleNet LLC, pursuant to an asset purchase agreement dated as of October 19, 1999 to Watchguard Technologies, Inc. The total purchase price comprised: (1) $3,406,000 in cash paid at closing, and (2) 335,931 unregistered shares of Watchguard Technologies, Inc. common stock issued at closing with a fair value of $4,850,000. Of these unregistered shares, 173,160 are pledged as collateral to Watchguard Technologies, Inc. until certain indemnification obligations are satisfied through October 19, 2000. Loss from operations of discontinued business and gain on sale of discontinued business are reflected net of amounts attributed to minority interest participation. Minority interest participation was affected by direct distribution of 138,152 unregistered shares of Watchguard Technologies, Inc. common stock with a fair value of $1,994,570, cash of $722,797 to the minority interest members of BeadleNet LLC and the minority members' initial cash contribution of $355,000. The Company received a note receivable in the amount of $64,872 from an officer of BeadleNet LLC in exchange for a portion of the minority interest participation. This note receivable is due during fiscal 2001. BeadleNet LLC revenues, assets, and liabilities were insignificant at the date of sale. BeadleNet LLC recorded net losses of $1,442,270, net of tax benefits of $416,469 and minority interest participation of $355,000 during the year ended January 2, 2000. Effective November 25, 1999, BeadleNet LLC was dissolved. In connection with the Asset Purchase Agreement, Watchguard Technologies, Inc. was obligated to pay an additional $1,000,000 in contingent consideration, comprised of $400,000 in cash and a number of unregistered shares of Watchguard Technologies, Inc. common stock with a fair value of $600,000, which became due upon completion and delivery of certain technology items. These technology items were completed and delivered and the Company received $400,000 in cash and 20,189 shares of Watchguard Technologies, Inc. common stock with a fair value of $600,000 during January 2000. The Company distributed 14,132 of these shares of Watchguard Technologies, Inc. common stock and approximately $280,000 in cash to a minority member of BeadleNet LLC during January 2000. This contingent consideration was recognized as a gain by the Company during January 2000. 12. SHAREHOLDERS' EQUITY Repurchase of Common Stock - During August 1998, the Company repurchased 5,000 shares of common stock at $0.32 per share from an employee. 17 18 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 2000 (CONTINUED) - -------------------------------------------------------------------------------- Compensation Expense - On January 1, 1999, BeadleNet LLC issued a total of 2,894,000 members' units to an officer of BeadleNet LLC for no consideration. Management estimated the fair value of these members' units to be approximately $0.03 per unit. The Company has recorded compensation expense of $91,000 for this issuance during the year ended January 2, 2000, which is included in loss from operations of discontinued business in the accompanying consolidated financial statements. Stock Option Plan - In January 1997, the Company adopted the 1996 Stock Incentive Plan (the Plan), which provides for the granting of up to 1,000,000 incentive and nonstatutory stock options to purchase common stock to officers, employees, and consultants. The incentive and nonstatutory stock options may not be issued at prices less than the fair market value at the date of grant. All options expire at a maximum of 10 years from the date of grant. Incentive and nonstatutory stock options vest ratably over four years and two years, respectively. Stock option activity under the Plan is as follows: Outstanding, January 1, 1999 859,000 $ 0.29 Granted (weighted-average fair value of $0.12 per share) 309,000 $ 0.28 Exercised (125,000) $ 0.25 Canceled (167,000) $ 0.28 -------- Outstanding, January 2, 2000 876,000 $ 0.30 ========
18 19 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 2000 (CONTINUED) - -------------------------------------------------------------------------------- The following table summarizes information about stock options outstanding as of January 2, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- -------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ----------- ----------- ----------- ----------- ----------- ----------- $0.20 285,000 7.22 $0.20 270,743 $0.20 $0.28 267,000 9.84 $0.28 20,547 $0.28 $0.30 10,000 7.94 $0.30 5,144 $0.30 $0.32 314,000 8.64 $0.32 154,115 $0.32 ------- ------- 876,000 450,549 ======= =======
The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for the Plan. Had compensation cost for the Plan been determined based on the fair value at the date of grant consistent with the method of SFAS No. 123, the Company's net income would have been the pro forma amount indicated below: Net income, as reported $2,949,777 Net income, pro forma $2,929,352
The fair value of options granted under the Plan was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions during fiscal 1999: no dividend yield, risk-free interest rate of 6.0%, zero volatility, and an expected life of ten years. 13. RELATED-PARTY TRANSACTIONS The Company entered into an agreement with an officer of the Company whereby the Company will lease the officer's airplane and pay insurance costs related to the airplane. The lease agreement shall remain in force until canceled by either party. Total costs related to this agreement, recorded by the Company during the year ended January 2, 2000, were approximately $8,400. During fiscal 1999, the Company made automobile lease and insurance-related payments totaling approximately $16,200 on behalf of an officer of the Company. 19 20 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 2000 (CONTINUED) - -------------------------------------------------------------------------------- 14. SUBSEQUENT EVENTS On February 26, 2000, the Company approved a plan to buy at a price of $2.00 per share all shares of common stock issued under the Company's 1996 Stock Incentive Plan and stock options issued under the Company's 1996 Stock Incentive Plan outstanding as of January 2, 2000 (upon vesting). The Company expects to pay approximately $2,034,000 through fiscal 2003 related to this Plan. The Company expects to record approximately $1,076,000 of compensation expense and related costs during fiscal 2000 related to this Plan. On March 3, 2000, the Internal Revenue Service approved the request of the Company to be taxed as an S corporation under the provisions of the federal and state tax codes. 20 21 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JANUARY 2, 2000 AND JULY 2, 2000 (UNAUDITED) - --------------------------------------------------------------------------------
JANUARY 2, JULY 2, 2000 2000 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,245,675 $ 283,333 Investments available-for-sale, restricted 5,999,658 11,198,240 Accounts receivable, net of allowance for doubtful accounts of $27,600 and $24,022 at January 2, 2000 and July 2, 2000 1,196,544 1,025,271 Inventories, net 404,666 697,691 Prepaid expenses 60,648 82,529 Income taxes receivable 71,278 ----------- ----------- Total current assets 9,907,191 13,358,342 PROPERTY AND EQUIPMENT, net 124,437 213,073 DEFERRED TAX ASSETS 16,757 OTHER ASSETS 94,872 94,872 ----------- ----------- $10,143,257 $13,666,287 =========== ===========
See notes to consolidated financial statements 21 22 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JANUARY 2, 2000 AND JULY 2, 2000 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------
JANUARY 2, JULY 2, 2000 2000 ------------ ------------ (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 522,045 $ 678,434 Accrued expenses 547,337 357,842 Deferred revenue 303,648 297,432 Income taxes payable 1,891,695 Deferred tax liabilities 1,084,512 1,435,055 Current portion of capital lease obligations 8,363 45,312 Current portion of notes payable 30,076 728,576 ------------ ------------ Total current liabilities 4,387,676 3,542,651 CAPITAL LEASE OBLIGATIONS, less current portion 5,516 4,378 NOTES PAYABLE, less current portion 32,232 20,322 SHAREHOLDERS' EQUITY: Common stock, $0.00004 par value; 100,000,000 shares authorized; 5,140,000 and 5,125,000 shares issued and outstanding at July 2, 2000 and January 2, 2000 43,000 46,000 Notes receivable (31,000) (31,000) Accumulated other comprehensive income 1,885,953 6,706,935 Retained earnings 3,819,880 3,377,001 ------------ ------------ Total shareholders' equity 5,717,833 10,098,936 ------------ ------------ $ 10,143,257 $ 13,666,287 ============ ============
See notes to consolidated financial statements 22 23 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS FOR THE SIX MONTHS ENDED JULY 4, 1999 AND JULY 2, 2000 (UNAUDITED) - --------------------------------------------------------------------------------
SIX MONTHS ENDED ----------------------------- JULY 4, JULY 2, 1999 2000 ----------- ----------- (UNAUDITED) REVENUES: Product revenues $ 2,103,600 $ 2,932,587 Engineering and other revenues 557,987 521,465 ----------- ----------- Total revenues 2,661,587 3,454,052 COST OF REVENUES 1,810,034 2,250,087 ----------- ----------- GROSS PROFIT 851,553 1,203,965 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 831,448 1,590,026 WRITE-OFF OF NOTE RECEIVABLE 350,000 ----------- ----------- OPERATING LOSS (329,895) (386,061) OTHER INCOME (EXPENSE), net (6,519) 16,570 ----------- ----------- LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (336,414) (369,491) PROVISION (BENEFIT) FOR INCOME TAXES (113,987) 349,858 ----------- ----------- LOSS FROM CONTINUING OPERATIONS (222,427) (719,349) DISCONTINUED OPERATIONS: Loss from operations of discontinued business, net of minority interest participation of $151,223, and tax benefits of $141,142 (211,713) Gain on sale of discontinued business, net 276,470 ----------- ----------- NET LOSS (434,140) (442,879) OTHER COMPREHENSIVE INCOME: Net unrealized gain on available-for-sale securities, net of taxes 4,820,982 ----------- ----------- COMPREHENSIVE INCOME (LOSS) $ (434,140) $ 4,378,103 =========== ===========
See notes to consolidated financial statements 23 24 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JULY 4, 1999 AND JULY 2, 2000 (UNAUDITED) - --------------------------------------------------------------------------------
SIX MONTHS ENDED ----------------------------- JULY 4, JULY 2, 1999 2000 ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (434,140) $ (442,879) Adjustments to reconcile net loss to net cash used in continuing operating activities: Loss from discontinued business 211,713 Gain on sale of discontinued business (276,470) Provision for doubtful accounts (49,216) (3,578) Depreciation and amortization 62,597 59,374 Deferred taxes 49,729 170,895 Changes in operating assets and liabilities (net of effects from disposition): Accounts receivable 157,392 174,851 Inventories (27,073) (293,025) Prepaid expenses (17,928) (21,881) Accounts payable 855 156,389 Accrued expenses 128,845 (189,495) Deferred revenues (27,172) (6,216) Income taxes payable (227,606) (85,205) ----------- ----------- Net cash used in continuing operating activities (172,004) (757,240) Net cash used in discontinued operating activities (321,701) (1,877,768) ----------- ----------- Net cash used in operating activities (493,705) (2,635,008) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (46,534) (91,760) Net proceeds from sale of discontinued business 375,275 Distributions to minority members of BeadleNet LLC (280,000) ----------- ----------- Net cash (used in) provided by investing activities (46,534) 3,515
See notes to consolidated financial statements 24 25 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JULY 4, 1999 AND JULY 2, 2000 (UNAUDITED) (CONTINUED) - --------------------------------------------------------------------------------
SIX MONTHS ENDED ----------------------------- JULY 4, JULY 2, 1999 2000 ----------- ----------- (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit $ 200,000 $ -- Payments on notes payable and obligations under capital leases (21,143) (33,849) Proceeds from issuance of notes payable 64,000 700,000 Proceeds from issuance of common stock related to the exercise of stock options 3,000 ----------- ----------- Net cash provided by financing activities 242,857 669,151 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (297,382) (1,962,342) CASH AND CASH EQUIVALENTS, beginning of period 401,380 2,245,675 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 103,998 $ 283,333 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid during the period for: Income taxes $ 126,000 $ 2,116,200 =========== =========== Interest $ 6,860 $ 4,940 =========== =========== NONCASH INVESTING AND FINANCING ACTIVITIES: Noncash proceeds in connection with sale of BeadleNet LLC - investments available-for-sale, restricted $ -- $ 600,000 =========== =========== Distributions of shares of common stock of Watchguard Technologies, Inc. to minority members of BeadleNet LLC $ -- $ 419,991 =========== =========== Unrealized gain on available-for-sale securities, net of taxes of $196,405 $ -- $ 4,820,982 =========== =========== Acquisition of property and equipment and/or capital lease agreements $ -- $ 56,250 =========== ===========
See notes to consolidated financial statements 25 26 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JULY 4, 1999 AND JULY 2, 2000 (UNAUDITED) - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The financial statements at July 2, 2000, and for the six months ended July 4, 1999 and July 2, 2000 are unaudited, but include all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of financial position and operating results. Operating results for the six-month periods ended July 4, 1999 and July 2, 2000 are not necessarily indicative of results that may be expected for any future periods. The accompanying unaudited interim financial statements have been prepared with the assumption that users of the interim financial information have read Productivity Enhancement Products, Inc. and subsidiaries' audited financial statements for the year ended January 2, 2000. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in these audited financial statements have been omitted from these unaudited interim financial statements. While management believes the disclosures presented are adequate to make these financial statements not misleading, these financial statements should be read in conjunction with Productivity Enhancement Products, Inc. and subsidiaries' audited financial statements and related notes. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates. 2. ADDITIONAL CONSIDERATION RELATED TO THE SALE OF BEADLENET, LLC In connection with the Asset Purchase Agreement between the Company and Watchguard Technologies, Inc., Watchguard Technologies, Inc. was obligated to pay an additional $1,000,000 in contingent consideration, comprised of $400,000 in cash and a number of unregistered shares of Watchguard Technologies, Inc. common stock with a fair value of $600,000, which became due upon completion and delivery of certain technology items. These technology items were completed and delivered and the Company received $400,000 in cash and 20,189 shares of Watchguard Technologies, Inc. common stock with a fair value of $600,000 during January 2000. On January 14, 2000, the Company's Board of Directors approved this additional consideration to be distributed 30% to the Company and 70% to the former minority member of BeadleNet, Inc. Accordingly, the Company distributed 14,132 of these shares of Watchguard Technologies, Inc. common stock and approximately $280,000 in cash to the former minority member of BeadleNet LLC during January 2000. This contingent consideration, less the amounts distributed to the former minority member of BeadleNet LLC and legal costs was recognized as a gain by the Company during the six months ended July 2, 2000. 26 27 PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JULY 4, 1999 AND JULY 2, 2000 (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- 3. SIGNIFICANT EVENTS Effective January 3, 2000, the Company changed its tax status from a C corporation to an S corporation. As an S corporation, the Company shall not be subject to federal income tax but is only subject to a 1.5% franchise tax in the State of California. For the six months ended July 2, 2000, the provision for income taxes of $349,858 represents the adjustment necessary to eliminate deferred tax assets, as adjusted, as a result of the Company's change in tax status to an S Corporation. The Company will also be subject to federal and state income taxes on built in gains in the event assets are sold or disposed of during the ten year period subsequent to the change in status. The deferred income tax liability of $1,435,055 at July 2, 2000 represents primarily the estimated built in gains taxes on available-for-sale securities. At July 2, 2000, the Company has recorded income taxes receivable of $71,278, which represents the estimated refund due from its 1999 federal and state income tax returns. In connection with the Company's purchase of shares of common stock issued under the Company's 1996 Stock Incentive Plan and stock options issued under the Company's 1996 Stock Incentive Plan outstanding as of January 2, 2000 ( upon vesting), the Company recorded compensation expense of approximately $700,000 during the six months ended July 2, 2000. This amount is included in selling, general, and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive operations. 4. SUBSEQUENT EVENTS In October 2000, the Company was acquired by Dense-Pac Microsystems, Inc. (Dense-Pac), a designer and manufacturer of proprietary and patented three-dimensional high-density memory products. Dense-Pac issued 884,167 shares of common stock in exchange for all capital stock of the Company and the book value of liabilities. In connection with this transaction, the Company's available-for-sale investments were distributed to a shareholder of the Company. * * * * * * 27 EX-99.3 3 v68472a1ex99-3.txt EXHIBIT 99.3 1 EXHIBIT 99.3 DENSE-PAC MICROSYSTEMS, INC. AND PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION - -------------------------------------------------------------------------------- Effective October 26, 2000, the Company purchased all outstanding common stock of Productivity Enhancement Products, Inc. and subsidiaries (PEP), in exchange for 884,167 shares of Dense-Pac Microsystems, Inc. (Dense-Pac) common stock valued at $3,719,019, and the assumption of net liabilities estimated to be $1,068,304 at July 2, 2000. Transaction costs are estimated at $250,000. The following table sets out certain consolidated financial information for Dense-Pac and PEP, as well as certain pro forma combined consolidated financial information for Dense-Pac after giving effect to the acquisition. The unaudited pro forma adjustments are based upon currently available information and upon certain assumptions that management of Dense-Pac believes are reasonable under the circumstances. The following unaudited pro forma combined consolidated balance sheet as of August 31, 2000 includes the unaudited consolidated balance sheet of Dense-Pac as of August 31, 2000 and the unaudited consolidated balance sheet of PEP as of July 2, 2000 and assumes that the acquisition had occurred on August 31, 2000. The unaudited pro forma combined consolidated statement of operations for the six months ended August 31, 2000 includes the unaudited consolidated statement of operations of Dense-Pac for the six months ended August 31, 2000 and the unaudited consolidated statement of operations of PEP for the six months ended July 2, 2000. The unaudited pro forma combined consolidated statement of operations for the year ended February 29, 2000 includes the consolidated statement of operations of Dense-Pac for the fiscal year ended February 29, 2000 and the consolidated statement of operations of PEP for the year ended January 2, 2000. The unaudited pro forma combined consolidated statements of operations assume that the acquisition occurred on March 1, 1999. The pro forma financial information is intended for information purposes only and is not necessarily indicative of the future financial position or future results of operations of the Company after the acquisition, or of the financial position or results of operations of the Company that would have actually occurred had the acquisition been effected for the periods presented. Furthermore, the pro forma financial information excludes discontinued operations and other comprehensive income of PEP as the related financial information does not relate to assets or operations of PEP purchased by Dense-Pac. The acquisition will be accounted for using the purchase method of accounting. Accordingly, the cost to acquire PEP will be allocated to the assets acquired and liabilities assumed according to their estimated fair values as of the date of acquisition after giving effect to the purchase price adjustments required by the acquisition. The allocation presented herein is based on unaudited financial statements of PEP. Accordingly, the purchase allocation adjustments made in connection with the preparation of the unaudited pro forma consolidated financial information are preliminary, and have been made solely for the purpose of preparing such unaudited pro forma consolidated financial information. 28 2 DENSE-PAC MICROSYSTEMS, INC. AND PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 29, 2000 - --------------------------------------------------------------------------------
TOTAL DENSE-PAC PEP PRO FORMA FEBRUARY 29, JANUARY 2, PRO FORMA FEBRUARY 29, 2000 2000 ADJUSTMENTS 2000 ------------ ------------ ------------ ------------ Net sales $ 27,459,614 $ 5,946,793 $ -- $ 33,406,407 Cost of sales 18,181,463 3,048,450 21,229,913 ------------ ------------ ------------ ------------ Gross profit 9,278,151 2,898,343 12,176,494 Costs and expenses: Research and development 1,277,701 1,277,701 Selling, general, and administrative 5,263,039 2,311,513 724,475(2) 8,299,027 Write-off of note receivable 366,519 366,519 ------------ ------------ ------------ ------------ Total costs and expenses 6,540,740 2,678,032 724,475 9,943,247 ------------ ------------ ------------ ------------ Income from operations 2,737,411 220,311 (724,475) 2,233,247 Other expense, net 150,038 7,109 157,147 ------------ ------------ ------------ ------------ Income before income tax provision 2,587,373 213,202 (724,475) 2,076,100 Income tax provision (benefit) 22,800 72,239 (70,360)(5) 24,679 ------------ ------------ ------------ ------------ Net income from continuing operations $ 2,564,573 $ 140,963 $ (654,115) $ 2,051,421 ============ ============ ============ ============ Earnings per share: Basic $ 0.14 $ 0.10 Diluted $ 0.13 $ 0.10 Weighted-average shares: Basic 18,773,138 884,167(3) 19,657,305 Diluted 19,974,857 884,167(3) 20,859,024
See notes to unaudited pro forma financial information 29 3 DENSE-PAC MICROSYSTEMS, INC. AND PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET AS OF AUGUST 31, 2000 - --------------------------------------------------------------------------------
COMBINED DENSE-PAC PEP TOTAL PRO FORMA AUGUST 31, JULY 2, AUGUST 31, PRO FORMA AUGUST 31, 2000 2000 2000 ADJUSTMENTS 2000 ------------ ------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 4,959,746 $ 283,333 $ 5,243,079 $ -- $ 5,243,079 Investments 11,198,240 11,198,240 (11,198,240)(4) Accounts receivable, net 2,760,945 1,025,271 3,786,216 3,786,216 Inventories, net 2,128,578 697,691 2,826,269 2,826,269 Prepaid expenses and other current assets 234,655 153,807 388,462 388,462 ------------ ------------ ------------ ------------ ------------ Total current assets 10,083,924 13,358,342 23,442,266 (11,198,240) 12,244,026 Property, net 5,446,139 213,073 5,659,212 5,659,212 Goodwill, net 5,068,323(1) 5,068,323 Other assets 29,171 94,872 124,043 124,043 ------------ ------------ ------------ ------------ ------------ $ 15,559,234 $ 13,666,287 $ 29,225,521 $ (6,129,917) $ 23,095,604 ============ ============ ============ ============ ============
See notes to unaudited pro forma financial information 30 4 DENSE-PAC MICROSYSTEMS, INC. AND PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET AS OF AUGUST 31, 2000 (CONTINUED) - --------------------------------------------------------------------------------
COMBINED DENSE-PAC TOTAL PRO-FORMA AUGUST 31, JULY 2, AUGUST 31, PRO FORMA AUGUST 31, 2000 2000 2000 ADJUSTMENTS 2000 ------------ ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,258,876 $ 678,434 $ 1,937,310 $ -- $ 1,937,310 Accrued compensation 443,773 116,318 560,091 560,091 Other accrued expenses 91,333 241,524 332,857 250,000(1) 582,857 Deferred income taxes 1,435,055 1,435,055 1,435,055 Current portion of long-term debt 560,586 773,888 1,334,474 1,334,474 Deferred revenue 300,000 297,432 597,432 597,432 ------------ ------------ ------------ ------------ ------------ Total current liabilities 2,654,568 3,542,651 6,197,219 250,000 6,447,219 Long-term debt, less current portion 1,009,153 24,700 1,033,853 1,033,853 Stockholders' equity: Common stock 20,766,929 46,000 20,812,929 3,673,019(1) 24,485,948 (Accumulated deficit) retained earnings (8,833,755) 3,377,001 (5,456,754) (3,377,001)(1) (8,833,755) Accumulated other comprehensive income 6,706,935 6,706,935 (6,706,935)(4) Notes receivable from sale of common stock (31,000) (31,000) 31,000(1) Unearned compensation (37,661) (37,661) (37,661) ------------ ------------ ------------ ------------ ------------ Total stockholders' equity 11,895,513 10,098,936 21,994,449 (6,379,917) 15,614,532 ------------ ------------ ------------ ------------ ------------ $ 15,559,234 $ 13,666,287 $ 29,225,521 $ (6,129,917) $ 23,095,604 ============ ============ ============ ============ ============
See notes to unaudited pro forma financial information 31 5 DENSE-PAC MICROSYSTEMS, INC. AND PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED AUGUST 31, 2000 - --------------------------------------------------------------------------------
COMBINED DENSE-PAC TOTAL PRO FORMA AUGUST 31, PEP AUGUST 31, PRO FORMA AUGUST 31, 2000 JULY 2, 2000 2000 ADJUSTMENTS 2000 ------------ ------------ ------------ ------------ ------------ Net sales $ 18,185,152 $ 3,454,052 $ 21,639,204 $ -- $ 21,639,204 Cost of sales 12,697,849 2,250,087 14,947,936 14,947,936 ------------ ------------ ------------ ------------ ------------ Gross profit 5,487,303 1,203,965 6,691,268 6,691,268 Costs and expenses: Research and development 858,944 858,944 858,944 Selling, general, and administrative 2,975,212 1,590,026 4,565,238 362,237(2) 4,927,475 ------------ ------------ ------------ ------------ ------------ Total costs and expenses 3,834,156 1,590,026 5,424,182 362,237 5,786,419 Income (loss) from operations 1,653,147 (386,061) 1,267,086 (362,237) 904,849 Other income, net 38,542 16,570 55,112 55,112 ------------ ------------ ------------ ------------ ------------ Income (loss) before income tax provision 1,691,689 (369,491) 1,322,198 (362,237) 959,961 Income tax provision (benefit) 53,000 349,858 402,858 (361,434)(5) 41,424 ------------ ------------ ------------ ------------ ------------ Net income (loss) from continuing operations $ 1,638,689 $ (719,349) $ 919,340 $ (803) $ 918,537 ============ ============ ============ ============ ============ Earnings per share: Basic $ 0.08 $ 0.03 Diluted $ 0.08 $ 0.02 Weighted-average shares: Basic 19,612,042 884,167(3) 20,496,209 Diluted 20,633,423 884,167(3) 21,517,590
See notes to unaudited pro forma financial information 32 6 DENSE-PAC MICROSYSTEMS, INC. AND PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION FOR THE YEAR ENDED FEBRUARY 29, 2000 AND AS OF AND FOR THE SIX MONTHS ENDED AUGUST 31, 2000 - -------------------------------------------------------------------------------- 1. To reflect the elimination of PEP's equity accounts and the allocation of the purchase price of $5,068,323 to goodwill. The purchase price consists of the common stock issued by Dense-Pac ($3,719,019), estimated transaction costs ($250,000), and assumed net liabilities of PEP as follows: Net assets of PEP as of July 2, 2000 $ 10,098,936 Less available-for-sale investments (Note 4) (11,198,240) Note receivable from sale of common stock 31,000 ------------ Net liabilities of PEP being assumed by Dense-Pac $ (1,068,304) ============
The allocation may change once the audit of PEP's closing balance sheet is completed and other valuation information is received. 2. To reflect the amortization of goodwill over seven years on a straight-line basis. 3. To adjust for the 884,167 shares of Dense-Pac common stock issued in the acquisition in the basic and diluted net income per share calculation. 4. To eliminate available-for-sale investments and related accumulated other comprehensive income associated with PEP's discontinued line of business. The securities are not being purchased by Dense-Pac. 5. To adjust the income tax provision to reflect estimated income tax expense on a combined basis. 33 EX-99.4 4 v68472a1ex99-4.txt EXHIBIT 99.4 1 EXHIBIT 99.4 DENSE-PAC MICROSYSTEMS, INC. AND PRODUCTIVITY ENHANCEMENT PRODUCTS, INC. AND SUBSIDIARIES INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-6659, 33-29615, 33-44807, 33-72922, 333-14733, and 333-76161 on Form S-8 and Registration Statement Nos. 33-87704, 333-01847, and 333-50848 on Form S-3 of Dense-Pac Microsystems, Inc. of our report dated June 9, 2000, relating to the financial statements of Productivity Enhancement Products, Inc. as of January 2, 2000 and for the year then ended appearing in this Current Report on Form 8-K/A of Dense-Pac Microsystems, Inc. /s/ Deloitte & Touche LLP Costa Mesa, California January 11, 2001 34 -----END PRIVACY-ENHANCED MESSAGE-----