UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No.: 0-27878
NORTHGATE INNOVATIONS, INC.
(exact name of registrant as specified in its charter)
Delaware 13-3779546
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
801 Sentous Street, City of Industry, California 91748
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (626) 923-6000
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
TITLE OF CLASS
COMMON STOCK, $.03 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
The aggregate market value of shares of Common Stock held by non-affiliates of
the registrant on the last business day of the registrant's most recently
completed second fiscal quarter (June 30, 2002) was approximately $1,287,000
(computed on the basis of $0.30 per share, the last reported sale price for
shares of the Company's Common Stock on the OTC Bulletin Board on such date).
As of April 14, 2003, the registrant had outstanding 14,694,084 shares of Common
Stock.
EXPLANATORY STATEMENT
This Amendment No. 1 to the Annual Report on Form 10-K ("Amendment No. 1") for
Northgate Innovations, Inc. ("Northgate" or the "Company") for the fiscal year
ended December 31, 2002, is being filed to amend and restate the items described
below contained in the Company's Annual Report on Form 10-K originally filed
with the Securities and Exchange Commission ("SEC") on April 16, 2003.
This Amendment No. 1 makes changes to Item 6, Selected Financial Data, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Item 8, Financial Statements and Supplementary Data, and Item 15,
Exhibits, Financial Statement Schedules and Reports on Form 8-K, for the
following purposes:
o To restate the Company's Consolidated Financial Statements as of December
31, 2002 and for the year ended December 31, 2002 to correct an error in
the amount of accounts payable recorded for consigned inventory during
2002, and to adjust the amount of recorded deferred tax assets at December
31, 2002.
o To amend Item 6, Selected Financial Data, to take into account the effect
of the restatement.
o To amend Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, to take into account the restatement.
In order to preserve the nature and character of the disclosures set forth in
such Items as originally filed, this Amendment No. 1 continues to speak as of
the date of the original filing of the Annual Report on Form 10-K on April 16,
2003, and the Company has not updated the disclosures in this report to speak as
of a later date.
In connection with the preparation of the Company's quarterly report for the six
months ended June 30, 2003, management became aware of certain differences in
its detailed records and the liabilities included in the Company's financial
statements for the year ended December 31, 2002. The Board of Directors
instructed management to conduct an investigation into those differences. As a
result of that investigation, the Company concluded that the amount of accounts
payable was understated as a result of incorrect adjustments for consigned
inventory. This understatement of accounts payable in the period resulted in
lower costs of goods sold and higher net income for the period. The restatement
caused the net loss of the Company to be increased for the year ended December
31, 2002. In addition, management reviewed certain deferred tax assets reflected
in the financial statements at December 31, 2002 and determined that certain of
those assets may expire before the Company can utilize those assets and as a
result the Company recorded a valuation allowance for such deferred tax assets
as of December 31, 2002.
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from the
restated financial statements of the Company, which have been prepared in
accordance with United States generally accepted accounting principles. The
consolidated financial statements of the Company for the year ended December 31,
2002, and as of December 31, 2002 (as restated), and the related report of
Corbin & Company LLP are included elsewhere in this report. The financial
statements for the years ended December 31, 2001 and 2000, and as of December
31, 2001, and the related report of Singer Lewak Greenbaum & Goldstein LLP are
included elsewhere in this report. The financial statements as of December 31,
2000, 1999 and 1998, and for the years ended December 31, 1999 and 1998 , have
been derived from financial statements audited by Singer Lewak Greenbaum &
Goldstein LLP. The following data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements included elsewhere in this report. For
additional information regarding the restatement, please see Note 14 to the
Consolidated Financial Statements included in Item 8.
1
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002
(As Restated)
-------- -------- -------- -------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................. $ 78,919 $ 87,158 $ 69,101 $ 73,883 $ 65,176
Cost of sales ......................... 69,718 76,845 60,326 64,872 58,650
-------- -------- -------- -------- --------
Gross profit .......................... 9,201 10,313 8,775 9,011 6,526
Operating expenses..................... 6,186 10,176 7,700 7,273 8,032
-------- -------- -------- -------- --------
Income (loss) from operations ......... 3,015 137 1,075 1,738 (1,506)
Other (income) expense ............... (46) (282) 202 (217) 268
-------- -------- -------- -------- --------
Income (loss) before income taxes ..... 3,061 419 873 1,955 (1,774)
Provision for income taxes ............ 1,060 173 358 467 489
-------- -------- -------- -------- --------
Net income (loss) ..................... $ 2,001 $ 246 $ 515 $ 1,488 $ (2,263)
======== ======== ======== ======== ========
Basic income (loss) per share ......... $ 0.20 $ 0.02 $ 0.05 $ 0.15 $ (0.17)
======== ======== ======== ======== ========
Diluted (loss) income per share ....... $ 0.20 $ 0.02 $ 0.05 $ 0.13 $ (0.17)
======== ======== ======== ======== ========
Weighted average shares of common stock
outstanding:
Basic .............................. 9,854 9,854 9,854 9,854 13,694
======== ======== ======== ======== ========
Diluted ............................ 10,129 10,129 10,714 11,305 13,694
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999 2000 2001 2002
----- ------ ------ ------ ------
(As Restated)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .......... $ 51 $ 1,307 $ 2,884 $ 8,555 $ 2,327
Working capital .................... 2,629 5,483 3,836 5,245 2,026
Total assets ....................... 19,688 20,775 13,913 24,091 14,841
Long-term debt ..................... -- 11,303 9,880 9,263 8,050
Total stockholders' equity (deficit) 2,946 (5,412) (5,609) (3,238) (1,162)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere herein
and reflects certain restatements to the Company's previously reported results
of operations for the year ended December 31, 2002. See Note 14 to the
consolidated financial statements for a discussion of these restatements.
OVERVIEW
Northgate is a marketer of personal computers, or PCs, and related products and
services and manufactures, markets, and supports a broad line of desktop PCs,
servers and workstations used by individuals, families, businesses, government
agencies and educational institutions. The Company also offers diversified
products and services such as software, peripherals, Internet access services,
support programs and general merchandise.
Net sales of the Company are primarily derived from the sale of personal
computer hardware, software, peripherals and accessories. Gross profit consists
of net sales less product and shipping costs.
On March 20, 2002, the Company closed its merger with Lan Plus. At the closing
of the merger, Lan Plus shareholders received a number of shares such that they
now own approximately 75% of the Company. In addition, at the close of the
merger, the Company also completed a 10:1 reverse stock split and changed its
name to Northgate Innovations, Inc. Pursuant to the merger agreement, upon close
of merger, the Company's accounts payable to, and advances from Lan Plus, in the
amount of approximately $2.3 million was converted to common stock eliminating
the debt; the stock was then retired to Treasury and cancelled. The Company has
reported combined operations with Lan Plus beginning with its 10-Q for the
period ended March 31, 2002.
2
The Company purchases a substantial percentage of its products from a single
manufacturer. Purchases from this manufacturer accounted for more than 15% of
our aggregate merchandise purchases for 2002. The Company has no long-term
contracts or arrangements with this manufacturer, or other vendors, that
guarantee the availability of merchandise.
RESTATEMENT
In connection with the preparation of the Company's quarterly report for the six
months ended June 30, 2003, management became aware of certain differences in
its detailed records and the liabilities included in the Company's financial
statements for the year ended December 31, 2002. The Board of Directors
instructed management to conduct an investigation into those differences. As a
result of that investigation, the Company concluded that the amount of accounts
payable in 2002 was understated as a result of incorrect adjustments for
consigned inventory. This understatement of accounts payable in the period
resulted in lower costs of goods sold and higher net income for the period. The
restatement caused the net loss of the Company to be increased for the year
ended December 31, 2002. In addition, management reviewed certain deferred tax
assets reflected in the financial statements at December 31, 2002 and determined
that certain of those assets may expire before the Company can utilize those
assets and as a result the Company recorded a valuation allowance for such
deferred tax assets as of December 31, 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses Northgate's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the 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. On an on-going basis, management evaluates its
estimates and judgments, including those related to customer incentives, product
returns, bad debts, inventories, intangible assets, financing operations,
warranty obligations, contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS: Northgate maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. If the financial condition of Northgate's customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Northgate provides for the estimated cost
of product warranties at the time revenue is recognized.
WARRANTIES: While certain of the products Northgate sells are covered by third
party manufacturer warranties, Northgate may have products returned by customers
that Northgate may not be able to recover from the manufacturer. Returns of this
nature have been immaterial in the past; however, should actual product failure
rates increase or the manufacturers go out of business, Northgate may be forced
to cover these warranty costs and the costs may differ from Northgate's
estimates.
INVENTORY: Northgate writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
The Company from time to time also maintains at its facilities consigned
inventory that remains the property of the vendors supplying the inventory
("consigned inventory") until such time as the Company elects to use the
inventory. At the time that the Company elects to use the consigned inventory,
the cost of such inventory is reflected in the Company's inventory accounts and
a corresponding account payable to the vendor is generated.
PURCHASE AND ADVERTISING REBATES: We earn rebates from our vendors which are
based on various quantitative contract terms. Amounts expected to be received
from vendors relating to the purchase of merchandise inventories are recognized
as a reduction of cost of goods sold as the merchandise is sold. Amounts that
represent a reimbursement of incremental costs, such as advertising, are
recorded as a reduction to the related expense in the period that the related
expense is incurred. Several controls are in place that we believe allow us to
ensure that these amounts are recorded in accordance with the terms of the
contracts. Should vendors reach different judgments regarding the terms of these
contracts, they may seek to recover amounts from us.
3
IMPAIRMENT OF LONG-LIVED ASSETS: We review our long-lived assets for impairment
when indicators of impairment are present and the undiscounted cash flow
estimated to be generated by those assets are less than the assets' carrying
amount. If actual market conditions are less favorable than management's
projections, future write-offs may be necessary.
IMPAIRMENT OF GOODWILL AND INDEFINITE LIVED INTANGIBLE ASSETS: As a result of
our adoption of Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" ("SFAS No. 142"), we now annually review goodwill
and other intangible assets that have indefinite lives for impairment and when
events or changes in circumstances indicate the carrying value of these assets
might exceed their current fair values. These reviews require the Company to
estimate the fair value of its identified reporting units and compare those
estimates against the related carrying values. For each of the reporting units,
the estimated fair value is determined as compared to the Company's stock price.
DEFERRED TAXES: We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. We have
considered estimated future taxable income and ongoing tax planning strategies
in assessing the amount needed for the valuation allowance. If actual results
differ unfavorably from those estimates used, we may not be able to realize all
or part of our net deferred tax assets and additional valuation allowances may
be required.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated the percentage of net
sales represented by certain items reflected in the Company's consolidated
statements of operations. There can be no assurance that the trends in sales
growth or operating results will continue in the future. The discussion of the
"Results of Operations" includes both Northgate and Mcglen since the date of
merger, March 15, 2002.
PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
2002 2001 2000
------ ------ ------
(As Restated)
Net sales 100.0% 100.0% 100.0%
Cost of sales 90.0% 87.8 87.3
------ ------ ------
Gross profit 10.0 12.2 12.7
Operating expenses 12.3 9.8 11.1
------ ------ ------
Operating (loss) income (2.3) 2.4 1.6
Other (income)expense, net 0.4 (0.3) 0.3
------ ------ ------
(Loss) income before income taxes (2.7) 2.6 1.3
Provision for income taxes 0.8 0.6 0.5
------ ------ ------
Net (loss) income (3.5)% 2.0% 0.8%
====== ====== ======
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Net sales decreased by $8.7 million, or 11.8%, to $65.2 million for the year
ended December 31, 2002, compared to $73.9 million for the year ended December
31, 2001. The decrease in net sales was a result of a decrease in the number of
computer systems shipped during the period as well as a decrease in the average
selling price per system due to lower component costs and also competition in
the marketplace. The fourth quarter of 2002 was significantly impacted by price
reductions in the marketplace by competitors such as Dell and Gateway as well as
reduction in consumer demand. In addition, in the fourth quarter of 2002 the
Company's airtime on one of the home shopping networks decreased significantly
as compared to the prior year.
Gross profit decreased by $2.5 million or 27.6% to $6.5 million for the year
ended December 31, 2002, compared to $9.0 million for the year ended December
31, 2001. The decrease in gross profit was due to the decrease in sales. Gross
profit, as a percentage of net sales decreased to 10.0% for the year ended
December 31, 2002 from 12.2% for the year ended December 31, 2001. The decrease
in gross profit margin as a percentage of sales was due to: an increase in labor
and applied overhead costs associated with the integration of the two companies
following the merger; an increase in costs due to integration of the Company's
new enterprise software in 2002; and less units being produced in 2002 as
compared to 2001.
4
On a forward-looking basis, future gross profit margins may fluctuate from
recent levels. The statement concerning future gross profit is a forward looking
statement that involves certain risks and uncertainties which could result in a
fluctuation of gross margins below those achieved for the year ended December
31, 2002. Although the Company believes it provides a high level of value and
added services, pricing and gross profit could be negatively impacted by the
activities of larger computer manufacturers.
Operating expenses increased by $0.7 million or 9.6%, to $8.0 million for the
year ended December 31, 2002, from $7.3 million for 2001. The increase in
operating expenses was attributable to an increase in payroll and related costs
and an increase in advertising costs in 2002. ESOP compensation expense
decreased by $0.2 million for the year ended December 31, 2002 as the Company
did not make any discretionary ESOP contributions in 2002. Payroll and related
costs (e.g., employer taxes, health and workers compensation insurance)
increased by approximately $0.9 million, or 19.1% for the year ended December
31, 2002 compared to 2001. The increase in payroll and payroll related costs was
due to a 15% increase in insurance costs in 2002 and a 20% increase in average
head count for the year ended December 31, 2002 as the Company exceeded sales
forecasts through September 2002. Advertising expense increased by approximately
$250,000 in 2002 as Northgate received less market development funds from OEM
suppliers such as Intel. Northgate also increased its print advertising
expenditures as the Company began to advertise the Northgate brand.
Other (income) expense decreased by approximately $485,000 or 223.5%, to
$268,000 for the year ended December 31, 2002, from ($217,000) for the prior
year. The increase was partially due to decreased gains on the Company's
marketable securities portfolio in 2002 and lower interest income in 2002. In
addition, during the fourth quarter of 2002 the Company reviewed its MSN royalty
accrual and determined that the accrual was overstated by approximately $1.0
million; the result was an increase in other income by $1.0 million.
Additionally, also in the fourth quarter of 2002, the Company reviewed its
marketable securities portfolio for permanent impairment. Due to the overall
decline in the stock and bond markets from when the Company purchased the
investments, as well as specific factors affecting individual investments within
the portfolio, the Company recorded a $827,000 loss on its marketable securities
portfolio.
Income tax provision for the year ended December 31, 2002 was $489,000 versus
$467,000 for the year ended December 31, 2001. The income tax provision for 2002
increased primarily as a result of a valuation allowance applied to the
Company's tax asset acquired during 2002, offset by certain changes in the
estimates for the Company's past income tax liabilities, and amounts refundable
from prior years' tax payments.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Net sales increased by $4.8 million, or 6.9%, to $73.9 million for the year
ended December 31, 2001, compared to $69.1 million for the year ended December
31, 2000. The increase in net sales was a result of an increase in the number of
computer systems shipped during the year ended December 31, 2000, mainly in the
fourth quarter of 2001. Northgate recorded record revenues for the fourth
quarter of 2001 as compared to prior years.
Gross profit increased by $0.2 million or 2.3% to $9.0 million for the year
ended December 31, 2001, compared to $8.8 million for the year ended December
31, 2000. The increase in gross profit was due to the increase in sales. Gross
profit, as a percentage of net sales decreased to 12.2% for the year ended
December 31, 2001 from 12.7% for the year ended December 31, 2000. The decrease
in gross profit margin was due to lower royalties paid during 2000, Lan Plus
developing more relationships with original equipment manufacturers (OEM) that
provide component products at lower costs than distributors, and the acquisition
of new customers in 2001with sales at a higher margin.
Operating expenses decreased by $0.4 million or 5.2%, to $7.3 million for the
year ended December 31, 2001, from $7.7 million for 2000. The decrease in
operating expenses was attributable to a $640,000 decrease in bad debt expense
in 2001. In 2000, one of the Company's largest accounts filed for bankruptcy
resulting in Northgate writing off more than $1.0 million for this account.
In 2001, a customer closed resulting in approximately $300,000 of write-offs.
The decrease in bad debt expense was offset with a $180,000 increase in payroll
and payroll related costs due to a higher average headcount in 2001 as compared
to 2000; a $200,000 increase in the Company's ESOP expense in 2001 as the
discretionary contribution increased in 2001 as compared to 2000; and a $100,000
increase in professional fees, primarily related to the merger of the Company
and Mcglen.
5
Other (income) expense increased by $419,000 or 207.4%, to ($217,000) for the
year ended December 31, 2001, from $202,000 for the prior year. The increase was
a result of lower interest costs associated with Lan Plus' ESOP due to a
reduction in the average amount outstanding during the year as well as a
decrease in the ESOP loan interest rate from 8% to 6%. Additionally, the Company
recorded larger capital gains on its investments in 2001 as compared to 2000.
Income tax provision for the year ended December 31, 2001 was $467,000 versus a
provision of $358,000 for the year ended December 31, 2000. The effective tax
rate for 2001 decreased to 23.9% from 41.0% in 2000. The decrease in income
taxes was a result of increased ESOP contributions in 2001 as compared to 2000.
INCOME TAXES
For the three years ended December 31, 2002, the difference between the amount
of income tax recorded and the amount of income tax expense calculated using the
federal statutory rate of 34% is due to state income taxes, other permanent
differences and (for 2002) the recording of a valuation allowance against
deferred tax assets.
As a result of the Company's reverse merger in March 2002, the Company has
federal and state net operating loss carryforwards of approximately $16 million
and $10 million. The net operating loss carryforwards will expire at various
dates beginning in 2012 through 2022 for federal purposes and 2003 through 2009
for state purposes, if not utilized. Utilization of the net operating loss
carryforwards is subject to a substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986, as amended,
and similar state provisions. The annual limitation will result in the Company
being able to only utilize $3.8 million and $0.5 million, to offset federal and
state income, respectively as of December 31, 2002. The remaining net operating
loss carryforwards will go unused. As of December 31, 2002, the Company has
recorded a 100% valuation allowance against these tax assets as a result of
operating losses sustained since the merger.
LIQUIDITY AND CAPITAL RESOURCES
Northgate's primary capital need has been the funding of working capital
requirements created by its growth. Historically, Northgate's primary sources of
financing have been cash provided by operations and borrowings from private
investors and financial institutions. Cash (used in) provided by operations was
approximately ($2.8 million), $3.5 million, and $5.0 million for the three years
ended December 31, 2002. Cash was used to pay down Northgate's working capital
obligations during the year ended December 31, 2002.
During the year ended December 31, 2002, Northgate's capital expenditures were
approximately $337,000 compared to $511,000 for the same period in 2001,
primarily for computer hardware and leasehold improvements related to
Northgate's new facility that it occupied in September 2002. Northgate believes
that it will not require substantial capital expenditures through 2003.
The Company has a $2,500,000 line of credit with a bank. The line of credit
provides for borrowings secured by substantially all of the Company's assets and
is guaranteed by the Company's majority shareholder. Borrowings under the line
are advanced based upon 70% of eligible accounts receivable, as defined, less
any letters of credit issued on the Company's behalf. The line of credit was
extended to September 30, 2003. Advances under the line bear interest at the
bank's prime rate plus 0.5% (4.75% at December 31, 2002). The line contains
certain covenants that required Northgate to maintain profitability in the third
and fourth quarters of 2002, a minimum of ($4.25 million) tangible net worth (as
defined), a Current Ratio of at least 1.2:1, Working Capital of at least $2.5
million, and limits the capital expenditures the Company can make in any one
year to $750,000. As of December 31, 2002, the Company is not in compliance with
these covenants, but is working with the lender to obtain forbearance agreements
and extend the term of the facility. At December 31, 2002, approximately $1.0
million of the Company's short term investments were held as collateral for
letters of credit taken out to secure open account terms with one of the
Company's primary vendors. The Company believes that current working capital,
together with cash flows from operations will be adequate to support the
Company's current operating plans through 2003.
In August 2002, the Company renegotiated its $1.3 million note payable,
extending the due date to January 1, 2005. In September 2002, the Company
reached a settlement with the Mcglen line of credit holder whereby Northgate
repaid $40,000 of the $90,000 due under the line. The resulting gain of $50,000
is included in other income for the year ended December 31, 2002.
In September 2002, the Company paid the $186,000 dividends payable to holders of
the Company's preferred stock, and funded $1,067,000 to the Company's ESOP to
reduce the ESOP note.
6
At December 31, 2002 and 2001, the Company had cash and short-term investments
of $2.3 million and $8.6 million, respectively, and working capital of $2.0
million and $5.2 million, respectively. However, if the Company needs extra
funds, such as for acquisitions or expansion or to fund a significant downturn
in sales that causes losses, there are no assurances that adequate financing
will be available at acceptable terms, if at all. The Company operates in a very
competitive market against many companies that are substantially larger than
Northgate. Pricing and gross profit could be negatively impacted by the
activities of larger computer manufacturers and product supply and demand in the
market.
Northgate's management has routinely invested excess operating funds in the
stock market. From time to time, management invests these funds in short sales
of stock that they typically cover within 60 days of the date of the short
purchase. Short sales typically have a higher degree of risk than traditional
stock purchases and management attempts to limit their concentration in
Northgate's overall invested and cash portfolio. At December 31, 2001,
approximately $426,000 was invested in short sales of common stock and an
unrealized loss of $102,000 was recorded on these investments. Management
covered the short sales in January and April 2002 recording a loss of $60,000.
The Company had no such investments at December 31, 2002.
Since computer retailers typically have low product gross margins, Northgate's
ability to remain profitable is dependent upon its ability to continue to drive
down the cost of its computer systems through its product sourcing, inventory
management and labor management systems. To the extent that Northgate does not
continue to effectively manage its business, Northgate may be materially
adversely affected. Northgate may also experience significant fluctuations in
its future operating results due to a variety of factors, many of which are
outside its control.
Factors that may affect its operating results include: lack of working capital
to carry out Northgate's business plans, the frequency and success of new
product introductions, mix of product sales and seasonality of sales typically
experienced by retailers, political unrest, and the pricing of component parts
in the world-wide marketplace. Many of Northgate's competitors offer broader
product lines, have substantially greater financial, technical, marketing and
other resources than Northgate and may benefit from component volume purchasing
arrangements that are more favorable in terms of pricing and component
availability than the arrangements enjoyed by the Company. Sales in the computer
retail industry are significantly affected by the release of new products.
Infrequent or delayed new product releases can negatively impact the overall
growth in retail sales.
As part of its growth strategy, Northgate may, in the future, acquire other
companies, in the same or complementary lines of business. Any such acquisition
and the ensuing integration of the operations of the acquired company with those
of Northgate would place additional demands on Northgate's management, and
operating and financial resources.
INFLATION AND SEASONALITY
While neither inflation nor deflation has had, nor do we expect it to have, a
material impact upon operating results, there can be no assurance that our
business will not be affected by inflation or deflation in the future. We
believe that our business is somewhat seasonal, with sales and profitability
slightly lower during the first and second quarters of our fiscal year.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities", an interpretation of Accounting
Research Bulletin 51, " Consolidated Financial Statements," to improve financial
reporting of special purpose and other entities. In accordance with the
interpretation, business enterprises that represent the primary beneficiary of
another entity by retaining a controlling financial interest in that entity's
assets, liabilities, and results of operations must consolidate the entity in
their financial statements. Prior to the issuance of FIN 46, consolidation
generally occurred when an enterprise controlled another entity through voting
interests. FIN 46 is effective immediately for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. The Company does not expect FIN 46 to have a material impact on its
financial statements as it has no variable interest entities.
7
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123." SFAS 148 amends SFAS 123
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition guidance and annual disclosure
provisions of SFAS 148 are effective for financial statements issued for fiscal
years ending after December 15, 2002. The interim disclosure provisions are
effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. The Company has applied the
disclosure provisions in SFAS 148 in its consolidated financial statements and
the accompanying notes.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company does not expect FIN 45 to have a material impact on its
financial position or results of operations as it does not act as a guarantor.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires recording costs associated with exit or disposal
activities at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon management's commitment
to an exit plan, which is generally before an actual liability has been
incurred. Adoption of SFAS 146 is required with the beginning of fiscal year
2003. The Company does not anticipate a significant impact on its results of
operations from adopting this Statement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements listed below are included on pages F-1
through F-22 following the signature page to this report:
Page
----
Independent Auditors' Reports F-1
Consolidated Financial Statements:
Balance Sheets as of December 31, 2002 and 2001 F-3
Statements of Income for the Years Ended December
31, 2002, 2001 and 2000 F-4
Statements of Stockholders' Equity (Deficit) and Comprehensive
Income (Loss) for the Years Ended December 31, 2002, 2001 and 2000 F-5
Statements of Cash Flows for the Years Ended December 31, 2002,
2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7
8
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Exhibit No. Description
----------- ----------------------------------------------------------------
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
March 21, 2001, by and among Mcglen Internet Group, Inc., Mcglen
Acquisition Company, Lan Plus Corporation and Andy Teng
incorporated by reference to Appendix A to the Proxy
Statement/Prospectus dated February 12, 2002.
2.2 Amendment No. 4 dated March 14, 2002 to the Amended and Restated
Agreement and Plan of Merger, incorporated by reference to
Exhibit 2.1 to our Current Report on Form 8-K, filed April 9,
2002.
3.1 Amended Certificate of Incorporation of Mcglen Internet Group,
Inc., incorporated by reference from Exhibit 3.2 to our Form
10-K, dated April 16, 2002.
3.2 Certificate of Amendment of Certificate of Incorporation of
Mcglen Internet Group, Inc., filed with the Delaware Secretary
of State on March 15, 2002, incorporated by reference from
Exhibit 3.2 to our Form 10-K, dated April 16, 2002.
3.3 Bylaws of Mcglen Internet Group, Inc., incorporated by reference
from Exhibit 3.2 to Amendment No. 1 filed April 17, 2000 to our
Form 10-KSB for the year ended December 31, 1999 ("April 2000
Form 10-KSB/A").
10.1 1999 Stock Option Plan of Mcglen Micro, Inc., as amended, as
adopted by the Company after the merger with Adrenalin
Interactive, Inc., incorporated by reference from Exhibit 10.1
to our April 2000 Form 10-KSB/A.
10.2 2000 Stock Option Plan, incorporated by reference from Exhibit
10.21 to Amendment No. 1 filed September 27, 2000 to our
Registration Statement on Form SB-2, No. 333-41070 ("Form
SB-2").
10.3 Convertible Promissory Note, dated March 20, 2000, by and
between Mcglen Internet Group, Inc. and various Lenders
introduced by Institutional Equity Holdings Corporation,
incorporated by reference from Exhibit 10.14 to our April 2000
Form 10-KSB/A.
10.4 Employment Agreement, dated January 1, 2000, between Mcglen
Internet Group, Inc. and Grant Trexler, incorporated by
reference from Exhibit 10.15 to our April 2000 Form 10-KSB/A.
10.5 Employment Agreement, dated December 2, 1999, between Adrenalin
Interactive, Inc. and George Lee, incorporated by reference from
Exhibit 10.16 to our April 2000 Form 10-KSB/A.
10.6 Employment Agreement, dated December 2, 1999, between Adrenalin
Interactive, Inc. and Mike Chen, incorporated by reference from
Exhibit 10.17 to our April 2000 Form 10-KSB/A.
10.7 Employment Agreement, dated December 2, 1999, between Adrenalin
Interactive, Inc. and Alex Chen, incorporated by reference from
Exhibit 10.18 to our April 2000 Form 10-KSB/A.
10.8 Founders Agreement, dated August 15, 2000, between Mcglen
Internet Group, Inc. and George Lee, Mike Chen and Alex Chen,
incorporated by reference from Exhibit 10.22 to Amendment No. 1
filed September 27, 2000 to our Form SB-2.
10.9 Financing Agreement, dated December 22, 2000, between Mcglen
Internet Group, Inc. and Dillow and Dillow, Inc., incorporated
by reference from Exhibit 10.23 to Amendment No. 2 filed January
10, 2001 to our Form SB-2.
10.10 Consulting Agreement, dated August 17, 2000, between Mcglen
Internet Group, Inc. and Peter Janssen Associates incorporated
by reference to Exhibit 10.10 to our 2000 Form 10-KSB.
9
21 Subsidiaries of Northgate Innovations, Inc., incorporated by
reference from Exhibit 21 to our April 2003 Form 10-K.
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP
23.2 Consent of Corbin & Company, LLP
31 Section 302 CEO/CFO Certification
32 Section 906 CEO/CFO Certification
The following consolidated financial statements of Registrant are filed as part
of this report.
(a)(1) Consolidated Financial Statements. See Index to Consolidated Financial
Statements.
(2) Financial Statement Schedules. See Index to Consolidated Financial
Statements.
(3) Exhibits.
The exhibits listed in the Exhibit Index following the Consolidated Financial
Statements are incorporated herein by reference or are filed with this Form
10-K/A as indicated.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NORTHGATE INNOVATIONS, INC.
By: /s/ Andy Teng
------------------------------------
Andy Teng, CEO and Acting CFO
Date: September 17, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/Andy Teng Chairman, Chief Executive Officer, September 17, 2003
-------------------- Secretary, and Director (Principal
Andy Teng Executive Officer) and acting CFO
/s/ Richard Shyu President and Director September 17, 2003
--------------------
Richard Shyu
/s/ Mike Chen Director September 17, 2003
--------------------
Mike Chen
10
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
----
Independent Auditors' Reports F-1
Consolidated Financial Statements:
Balance Sheets as of December 31, 2002 (restated) and 2001 F-3
Statements of Income for the Years Ended December 31, 2002 (restated),
2001, and 2000 F-4
Statements of Stockholders' Equity (Deficit) and Comprehensive Income
(Loss) for the Years Ended December 31, 2002 (restated), 2001 and 2000 F-5
Statements of Cash Flows for the Years Ended December 31, 2002
(restated), 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7
11
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Northgate Innovations, Inc. (formerly known as Mcglen Internet Group, Inc.)
We have audited the accompanying consolidated balance sheet of Northgate
Innovations, Inc., as of December 31, 2002 and the related consolidated
statements of income, stockholders' equity (deficit) and comprehensive income
(loss) and cash flows for the year then ended. In connection with our audit, we
have also audited the related consolidated financial statement schedule for the
year ended December 31, 2002. These consolidated financial statements, and the
consolidated financial statement schedule, are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the related consolidated financial
statement schedule 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 consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northgate
Innovations, Inc., at December 31, 2002, 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. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the consolidated financial statements, taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As discussed in Note 14 to the consolidated financial statements, the
accompanying consolidated financial statements have been restated.
/s/Corbin & Company, LLP
Irvine, CA
March 31, 2003
(September 5, 2003 as to the effects of the restatement discussed in Note 14)
F-1
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders of Northgate Innovations, Inc. (formerly
known as Mcglen Internet Group, Inc.)
City of Industry, California
We have audited the accompanying balance sheet of Northgate Innovations, Inc.
(formerly LAN Plus Corporation) as of December 31, 2001, and the related
statements of operations, changes in stockholders' equity (deficit) and cash
flows for each of the two years in the period ended December 31, 2001. 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 audits.
We conducted our audits 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 audits provide 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 Northgate Innovations, Inc.,
(formerly LAN Plus Corporation) as of December 31, 2001, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Singer Lewak Greenbaum & Goldstein LLP
Los Angeles, California
April 12, 2002
F-2
NORTHGATE INNOVATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS (Note 4) 2002 2001
(As Restated,
see Note 14)
------------ -------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 1) $ 1,837 $ 7,178
Certificates of deposit -- 187
Certificates of deposit - restricted (Note 1) 1,016 --
Marketable securities (Note 1) 490 1,377
Accounts receivable, net of allowance for doubtful accounts of
$280 and $254 in 2002 and 2001, respectively (Note 1) 2,898 9,475
Inventories, net (Note 1) 3,178 3,944
Prepaid expenses and other current assets (Note 6) 560 182
Advances to Mcglen Internet Group, Inc. (Note 2) -- 845
Deferred tax asset (Note 6) -- 123
------- -------
Total current assets 9,979 23,311
Equipment, net (Notes 1 and 3) 900 750
Goodwill (Notes 1 and 2) 3,886 --
Other assets 76 30
------- -------
$14,841 $24,091
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 5,240 $10,048
Securities sold, not yet purchased (Note 1) -- 426
Accrued expenses (Note 1) 440 1,076
Income taxes payable (Note 6) -- 1,053
Accrued royalties (Note 1) 1,427 4,999
Convertible notes payable (Note 5) 100 --
Dividends payable -- 186
ESOP interest payable (Note 8) 746 278
--------- ---------
Total current liabilities 7,953 18,066
Note payable (Notes 5) 1,300 1,300
Guarantee of ESOP loan payable (Note 8) 6,750 7,963
--------- ---------
Total liabilities 16,003 27,329
--------- ---------
Commitments and contingencies (Note 12)
Stockholders' Equity (deficit) (Notes 1, 7, 8 and 9):
Preferred stock, $0.01 par value; 5,000 shares authorized,
1,350 shares issued and outstanding, liquidation
preference of $1,350 (Note 8) 14 14
Common stock, $0.03 par value; 50,000 shares authorized,
14,694 and 9,854 shares issued and outstanding in 2002 and
2001, respectively 441 296
Additional paid in capital 3,764 271
Accumulated other comprehensive loss (Note 1) (7) (496)
Retained earnings 1,189 3,452
-------- --------
5,401 3,537
Less: Unearned ESOP shares (Note 8) (6,563) (6,775)
-------- --------
Total stockholders' equity (deficit) (1,162) (3,238)
-------- --------
$14,841 $24,091
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
F-3
NORTHGATE INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
2002 2001 2000
(As Restated,
see Note 14)
----------- -------- --------
<S> <C> <C> <C>
NET SALES $ 65,176 $ 73,883 $ 69,101
COST OF SALES 58,650 64,872 60,326
-------- -------- --------
GROSS PROFIT 6,526 9,011 8,775
OPERATING EXPENSES (INCLUDING ESOP CONTRIBUTIONS OF
$ 0, $525 AND $322 IN 2002, 2001 AND 2000) 8,032 7,273 7,700
-------- -------- --------
OPERATING (LOSS) PROFIT (1,506) 1,738 1,075
-------- -------- --------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE (INCLUDING $468, $502 AND $762
RELATED TO ESOP DEBT IN 2002, 2001 AND 2000) (636) (647) (914)
INTEREST INCOME 118 205 177
OTHER INCOME, NET 250 659 535
-------- -------- --------
TOTAL OTHER (EXPENSE) INCOME (268) 217 (202)
-------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES (1,774) 1,955 873
PROVISION FOR INCOME TAXES 489 467 358
-------- -------- --------
NET INCOME (LOSS) $ (2,263) $ 1,488 $ 515
======== ======== ========
BASIC NET INCOME PER SHARE $ (0.17) $ 0.15 $ 0.05
======== ======== ========
DILUTED NET INCOME PER SHARE $ (0.17) $ 0.13 $ 0.05
======== ======== ========
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
BASIC 13,694 9,854 9,854
======== ======== ========
DILUTED 13,694 11,305 10,714
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
F-4
NORTHGATE INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED STOCK- COMPRE-
ADDITIONAL OTHER UNEARNED HOLDERS' HENSIVE
PREFERRED STOCK COMMON STOCK PAID-IN COMPREHENSIVE ESOP RETAINED EQUITY INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS SHARES EARNINGS (DEFICIT) (LOSS)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 1,350 $ 14 9,854 $ 296 $ 640 $ (4) $(8,580) $ 2,222 $(5,412)
Unrealized loss on marketable
Securities (1,016) (1,016) $(1,016)
Dividends declared on allocated
ESOP shares (192) (192)
Release of ESOP shares 616 616
Decrease in fair value of
released ESOP shares (120) (120)
Net income 515 515 515
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive loss $ (501)
=======
Balance at December 31, 2000 1,350 14 9,854 296 520 (1,020) (7,964) 2,545 (5,609)
Unrealized gain on marketable
Securities 524 524 $ 524
Dividends declared on allocated
ESOP shares (285) (285)
Release of ESOP shares 1,189 1,189
Decrease in fair value of
released ESOP shares (249) (296) (545)
Net income 1,488 1,488 1,488
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive income $ 2,012
=======
Balance at December 31, 2001 1,350 14 9,854 296 271 (496) (6,775) 3,452 (3,238)
Unrealized gain on marketable
securities 489 489 $ 489
Shares issued in recapitalization 4,830 145 3,695 3,840
Shares issued to consultant 10 10 10
Adjustment to prior year
decrease in fair value of
released ESOP shares (212) 212 --
Net loss (as restated,
see Note 14) (2,263) (2,263) (2,263)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive loss $(1,774)
========
Balance at December 31, 2002 1,350 $ 14 14,694 $ 441 $ 3,764 $ (7) $(6,563) $ 1,189 $(1,162)
(as restated, see Note 14) ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
F-5
NORTHGATE INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
2002 2001 2000
(As Restated,
See Note 14)
Cash flows from operating activities:
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) $ (2,263) $ 1,488 $ 515
-------- -------- --------
Adjustments to reconcile net income (loss) to net
cash (used in) provided by
operating activities:
Depreciation and amortization 282 158 88
Gain on debt settlement (50) -- --
Stock issued for services 10 -- --
Provision for losses on accounts receivable 30 661 1,300
Release of shares to ESOP -- 903 616
Deferred taxes 858 15 192
Realized and permanent losses on marketable securities 928 -- --
Decrease in fair value of released ESOP shares -- (545) (120)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 6,782 (5,758) 8,929
Inventories 1,114 (1,320) (396)
Prepaid expenses and other current assets (350) 216 (277)
Other assets (46) 8 (2)
Accounts payable (5,380) 5,675 (5,261)
Accrued expenses (910) 709 (92)
Income taxes payable (388) 1,053 (324)
Dividends payable -- 186 (96)
ESOP interest payable 468 (536) 757
Advances to Mcglen (307) (845) --
Accrued royalties (3,572) 1,467 (878)
-------- -------- --------
Total adjustments (531) 2,047 4,436
-------- -------- --------
Net cash (used in) provided by operating activities (2,794) 3,535 4,951
-------- -------- --------
Cash flows from investing activities:
Purchase of investment (200) -- --
Sale of investment 200 -- --
Purchases of equipment (337) (511) (113)
Proceeds from sale of securities and certificates of deposit 3,231 21,188 --
Purchases of marketable securities (3,088) (19,205) (1,544)
Purchases of certificates of deposit (1,022) -- (294)
Acquisition of Mcglen, net of cash 108 -- --
-------- -------- --------
Net cash (used in) provided by investing activities (1,108) 1,472 (1,951)
-------- -------- --------
Cash flows from financing activities:
Payments on line of credit (6,433) -- --
Borrowings on line of credit 6,393 -- --
Dividends paid on preferred stock (186) (96) --
Payment on ESOP debt (1,213) (617) (1,423)
-------- -------- --------
Net cash used in financing activities (1,439) (713) (1,423)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (5,341) 4,294 1,577
Cash and cash equivalents, beginning of year 7,178 2,884 1,307
-------- -------- --------
Cash and cash equivalents, end of year $ 1,837 $ 7,178 $ 2,884
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
NORTHGATE INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF COMPANY
The consolidated financial statements include the accounts of Northgate
Innovations, Inc. (a Delaware corporation) (formerly Mcglen Internet Group, Inc.
"Mcglen") and its wholly owned subsidiaries ("Northgate" or the "Company"). The
Company is a developer, manufacturer and distributor of innovative PCs,
peripherals, software, and over 100,000 computer products. The Company
specializes in selling its computers through television shopping networks, mail
order catalog companies and large electronic chain stores as well as targeting
specific business-to-business and business-to-consumer markets through the
Internet to customers principally in the United States. The operations division,
which includes a call center, sourcing, warehousing, fulfillment, accounting,
business development and information technology, supports order processing,
logistics, customer service, financial transactions and core technology for the
business divisions located in the City of Industry, California. The business
divisions include sales, marketing, content management, product management and
service management teams focused on building unique customer experiences for
each business division.
CASH EQUIVALENTS
All highly liquid debt instruments purchased with an original maturity of three
months or less are considered cash equivalents.
RESTRICTED CERTIFICATES OF DEPOSIT
Certain of Northgate's certificates of deposit with a bank are held as
collateral against letters of credit issued by the bank to one of Northgate's
primary suppliers (see Note 12). The supplier allows Northgate to purchase up to
double the aggregate amount of the restricted certificates of deposit under open
account terms.
REVENUE RECOGNITION
For sales of merchandise owned and warehoused by Northgate, Northgate recognizes
revenue when title to products sold has transferred to the customer in
accordance with shipping terms. Northgate also sells merchandise from suppliers
on a "drop-ship" basis. Northgate takes title to this merchandise from the time
it is shipped by the supplier until the time it is received by the customer.
ACCOUNTING FOR SHIPPING AND HANDLING REVENUE, FEES AND COSTS
The Company classifies amounts billed for shipping and handling as revenue in
accordance with EITF 00-10 "Accounting for Shipping and Handling Fees and
Costs." Shipping and handling fees and costs are included in cost of sales.
F-7
INVENTORIES
Northgate accounts for inventory under the average cost method. Inventory costs
include raw materials, labor and overhead. Inventory is carried at lower of cost
or market realization. The following are the major classes of inventory as of
December 31:
2002 2001
(As Restated,
see Note 14)
-------- --------
Raw materials $ 2,757 $ 1,800
WIP and finished goods 614 2,449
-------- --------
3,371 4,249
Obsolescence and lower of cost or market reserves (193) (305)
-------- --------
$ 3,178 $ 3,944
======== ========
The Company from time to time also maintains at its facilities consigned
inventory that remains the property of the vendors supplying the inventory
("consigned inventory") until such time as the Company elects to use the
inventory. At the time that the Company elects to use the consigned inventory,
the cost of such inventory is reflected in the Company's inventory accounts and
a corresponding account payable to the vendor is recorded.
MERCHANDISE RETURN AND WARRANTY POLICY
Computers manufactured by Northgate carry a one-year return policy. The majority
of products used by Northgate in the production of computers are covered by the
original manufacturers warranties, which are generally one to three years. Other
products sold by Northgate are covered by the third-party manufacturer's
warranty. Northgate provides for allowances for estimated future returns and
product warranty (included in accrued liabilities) at the time of shipment to
the customer based on historical experience.
SOFTWARE DEVELOPMENT COSTS
In accordance with SOP 98-1 and EITF 00-2, internal and external costs incurred
to develop internal-use computer software are expensed during the preliminary
project stage. During the three years ended December 31, 2002, $162,000,
$52,000, and $62,000, respectively was expensed for software development costs.
The Company capitalized $32,000 and $331,000 for the years ended December 31,
2002 and 2001, respectively.
EQUIPMENT
Equipment is stated at cost. Depreciation is computed using the straight-line
method based on the estimated useful lives of the assets, which range from three
to five years. Leasehold improvements are stated at cost and amortization is
computed using the straight-line method over the shorter of the useful life of
the asset or the term of the lease.
GOODWILL
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
142 "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill
associated with acquisitions consummated after June 30, 2001 is not to be
amortized, and effective January 1, 2002, goodwill and other intangible assets
with indefinite lives are no longer subject to periodic amortization but are
instead reviewed annually, or more frequently if impairment indicators arise.
These reviews require the Company to estimate the fair value of its identified
reporting units and compare those estimates against the related carrying values.
For each of the reporting units, the estimated fair value is determined as
compared to the Company's stock price.
Identifiable assets and liabilities acquired in connection with business
combinations accounted for under the purchase method are recorded at their
respective fair values. Deferred income taxes have been recorded to the extent
of differences between the fair value and the tax basis of the assets acquired
and liabilities assumed. Company management has allocated the intangible assets
between identifiable intangibles and goodwill.
F-8
LONG-LIVED ASSETS
Northgate's management assesses the recoverability of its long-lived assets by
determining whether the depreciation and amortization of long-lived assets over
their remaining lives can be recovered through projected undiscounted future
cash flows. The amount of long-lived asset impairment, if any, is measured based
on fair value and is charged to operations in the period in which long-lived
asset impairment is determined by management. At December 31, 2002 and 2001, the
Company's management believes there is no impairment of its long-lived assets.
There can be no assurance however, that market conditions will not change or
demand for the Company's services will continue, which could result in
impairment of long-lived assets in the future.
ADVERTISING REVENUE AND COSTS
Advertising revenue is recognized upon receipt of income. Advertising costs are
charged to expense as incurred. Net advertising (expense) income was ($76,000),
$178,000 and $235,000 for the years ended December 31, 2002, 2001 and 2000,
respectively, and is included in operating expenses.
INCOME TAXES
Northgate follows the provisions of SFAS No. 109, "Accounting for Income Taxes,"
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements and tax returns. Deferred tax assets and liabilities are
determined based upon the difference between the financial statement and tax
bases of assets and liabilities, using the enacted tax rates in effect for the
year in which the differences are expected to reverse. A valuation allowance is
provided when it is more likely than not that deferred tax assets will not be
realized.
MARKETABLE SECURITIES
Northgate accounts for marketable securities in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
standard requires Northgate to classify and account for investments in equity
securities that have readily determinable fair values and all debt securities as
follows: (1) debt securities that Northgate has the intent and the ability to
hold to maturity are classified as held-to-maturity securities and are reported
at amortized cost; (2) debt and equity securities that are bought and held
principally for the purpose of selling them in the near-term are classified as
trading securities and are reported at fair value, with unrealized gains and
losses included in earnings; and (3) debt and equity securities not classified
as held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity.
In the fourth quarter of 2002, the Company reviewed its marketable securities
portfolio for permanent impairment. Due to the overall decline in the stock and
bond markets from when the Company purchased the investments, as well as
specific factors affecting individual investments within the portfolio, the
Company recorded a $827,000 "other than temporary" loss on its marketable
securities portfolio, which is included in other income for the year ended
December 31, 2002.
At December 31, 2002 and 2001, all of Northgate's trading securities were
classified as available for sale. Cost and fair market value for available
for-sale securities were as follows at December 31 (in thousands):
2002 2001
-------- --------
Adjusted cost $ 497 $ 1,873
Unrealized losses (7) (496)
-------- --------
Fair value $ 490 $ 1,377
======== ========
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of Northgate's financial instruments, consisting primarily of
certificates of deposit and marketable securities, receivables, accounts payable
and notes payable, approximates fair value due to the maturity of these
financial instruments and the borrowing costs to Northgate.
F-9
STOCK-BASED COMPENSATION
Northgate has adopted SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 requires disclosure of the compensation cost for stock-based
incentives granted after January 1, 1995 based on the fair value at grant date
for awards. At December 31, 2002, the Company has one stock-based employee
compensation plan, which is described more fully in Note 7. The Company accounts
for those plans under the recognition and measurement principles of APB 25, and
related interpretations. No stock-based employee compensation cost is reflected
in the statement of operations, as all options granted under those plans had
exercise prices equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the minimum value recognition
provisions SFAS 123, to stock-based employee compensation.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
IN THOUSANDS, EXCEPT PER SHARE DATA
--------------------------------------
2002 2001 2000
(As Restated,
See Note 14)
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) as reported $ (2,263) $ 1,488 $ 515
Deduct:
Total stock-based employee compensation
expense under fair value based method
for all awards, net of related tax effects (56) -- --
----------- ----------- -----------
Pro forma net income (loss) $ (2,319) $ 1,488 $ 515
=========== =========== ===========
Basic EPS As reported $(0.17) $0.15 $0.05
Diluted EPS As reported $(0.17) $0.13 $0.05
Basic EPS Pro forma $(0.17) $0.15 $0.05
Diluted EPS Pro forma $(0.17) $0.13 $0.05
</TABLE>
401K PLAN
Northgate has a 401K plan that covers all full time employees who are not
covered by a collective bargaining agreement. Employees are eligible for the
plan following one year of service. Northgate made matching contributions to
participants equal to 50% of the first 6% of the employee's contribution through
June 2001. Expenses relating to Northgate's 401K plan were approximately $3,000,
$19,000 and $39,000 for the years ended December 31, 2002, 2001, and 2000,
respectively.
OFF- BALANCE SHEET RISK
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which Northgate
adopted effective in 2000. SFAS No. 133 requires Northgate to record all
derivatives on the balance sheet at fair value. The Company had no derivatives
at December 31, 2002 and 2001.
SECURITIES SOLD, NOT YET PURCHASED
Securities sold not yet purchased represent obligations of Northgate to make a
future delivery of a specific security and, correspondingly create an obligation
to purchase the security at prevailing market prices. As a result, short sales
create the risk that Northgate's ultimate obligation to satisfy the delivery
requirements may exceed the amount of liability recorded in the financial
statements. At December 31, 2001, approximately $426,000 was invested in short
sales of common stock and an unrealized loss of $102,000 was recorded on these
investments. Management covered the short sales in January and April 2002
recording a loss of $60,000. The Company had no such investments at December 31,
2002.
F-10
NET INCOME PER SHARE
Basic net income per share excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding during the
reported periods. Diluted net income per share reflects the potential dilution
that could occur if other commitments to issue common stock were exercised. Each
share of ESOP preferred stock is convertible into 3.12828 shares of common
stock. Allocated ESOP shares (including shares released for allocation) are
considered dilutive for all periods presented. The computation of basic and
diluted shares outstanding is as follows for the years ended December 31(in
thousands):
2002 2001 2000
(As Restated,
See Note 14)
------------ ------- -------
Weighted average shares - Basic 13,694 9,854 9,854
Effect of dilutive preferred shares -- 1,451 860
Weighted average shares - Diluted 13,694 11,305 10,714
Since 2002 is a loss, the Company's basic and diluted weighted average shares
are the same for 2002, as the effect of stock options and warrants per share are
anti-dilutive and thus not included in the diluted loss per share calculation.
As of December 31, 2002, the additional potential dilutive shares are 1,451,000.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Northgate to a concentration of
credit risk consist of accounts receivable from individuals and merchants,
located in the United States. Northgate maintains an allowance for doubtful
accounts receivable based upon the expected collectibility of accounts
receivable and potential credit losses.
CONCENTRATION OF SUPPLIERS
Northgate is dependent upon key suppliers for merchandise. For the years ended
December 31, 2002, one supplier accounted for approximately 15.6 % of total
purchases while in 2001 another supplier accounted for approximately 10.2% of
total purchases. For the year ended December 31, 2000, two suppliers accounted
for approximately 27.4% of total purchases. Management believes other suppliers
could provide similar merchandise on comparable terms. A change in suppliers,
however, could cause a delay in fulfillment of customer orders and a possible
loss of sales, which would adversely affect operating results.
Northgate has entered into nonexclusive licensing agreements with Microsoft
Corporation for various operating system and application software, for which,
Northgate pays Microsoft a royalty. Royalty expense was $2,962,000, $3,448,000,
and $3,728,000, respectively, for the years ended December 31, 2002, 2001 and
2000. During the fourth quarter of 2002, the Company revised its estimate for
accruals related to its liability for certain subscriber fees to the Microsoft
Network ("MSN") resulting in recognition of other income of approximately
$1,000,000.
PRODUCT LICENSES
From time to time, Northgate receives notices from companies and individuals
asserting exclusive patent, copyright, trademark or other intellectual property
rights to technologies or marks that are important to the technology industry
and/or Northgate's business. Northgate evaluates each claim relating to its
products and, if appropriate, seeks a license to use the protected technology.
The licensing agreements generally do not require the licensor to assist
Northgate in duplicating its patented technology nor do these agreements protect
Northgate from trade secret, copyright or other violations by Northgate or its
suppliers in developing or selling these products. Liabilities are recorded when
claims asserted are probable and such costs to Northgate can be estimated. No
such costs have been recorded at December 31, 2002 or 2001.
SIGNIFICANT CUSTOMERS
Northgate has historically been dependent upon key customers for its sales. For
the years ended December 31, 2002, 2001 and 2000, three customers accounted for
approximately 54.4%, 66.5% and 58.4%, respectively, of total sales. At December
31, 2002 and 2001, $1.5 million and $8.6 million, respectively, of accounts
receivable related to these customers. Management believes other customers could
be located which would purchase merchandise on comparable terms; however, the
establishment of new customer relationships could take several months. One of
these companies announced plans for its closure in the first quarter of 2002 and
was sold to new owners who began operations in the fourth quarter of 2002. The
loss of any one of these customers could cause a loss of sales that would
adversely affect operating results.
F-11
In addition to the customers mentioned above, sales to Mcglen Internet Group,
Inc., with whom the Company merged in March 2002 (see Note 2) were $8.9 million
and $300,000 for the years ended December 31, 2001 and 2000, respectively. The
Company also had an accounts receivable balance from Mcglen of $184,000 at
December 31, 2001.
COMPREHENSIVE INCOME
Northgate has adopted SFAS No. 130, Reporting Comprehensive Income. This
statement established standards for the reporting of comprehensive income and
its components. Comprehensive income, as defined, includes all changes in equity
(net assets) during a period from non-owner sources. For the years ended
December 31, 2002, 2001 and 2000, the difference between net income and
comprehensive net income was unrealized (losses) gains on available-for-sale
securities of $489,000, $524,000, and ($1,016,000), respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities", an interpretation of Accounting
Research Bulletin 51, " Consolidated Financial Statements," to improve financial
reporting of special purpose and other entities. In accordance with the
interpretation, business enterprises that represent the primary beneficiary of
another entity by retaining a controlling financial interest in that entity's
assets, liabilities, and results of operations must consolidate the entity in
their financial statements. Prior to the issuance of FIN 46, consolidation
generally occurred when an enterprise controlled another entity through voting
interests. FIN 46 is effective immediately for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. The Company does not expect FIN 46 to have a material impact on its
financial statements as it has no variable interest entities.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS No.
148 are effective for financial statements issued for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. The Company has applied the disclosure provisions in SFAS No.
148 in its consolidated financial statements and the accompanying notes.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company does not expect FIN 45 to have a material impact on its
financial position or results of operations as it does not act as a guarantor.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 requires recording costs associated
with exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan, which is generally before an actual
liability has been incurred. Adoption of SFAS No. 146 is required with the
beginning of fiscal year 2003. The Company does not anticipate a significant
impact on its results of operations from adopting this Statement.
F-12
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS 4, 44, and 64,
Amendment of SFAS 13, and Technical Corrections." SFAS No. 145 eliminates the
requirement (in both SFAS No. 4 and SFAS No. 64) that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. However, an entity is
not be prohibited from classifying such gains and losses as extraordinary items,
so long as certain criteria are met. SFAS No. 145 also amends paragraph 14(a) of
SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the
accounting for sale-leaseback transactions and certain lease modifications that
have economic effects that are similar to sale-leaseback transaction. The
Company has adopted this Statement in its 2002 financial statements (see Note
4).
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived ASSETS." SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively. The
Company's adoption of this Statement in 2002 had no material impact on its
financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
Company's adoption of this Statement had no material impact on its financial
statements.
In June 2001, the FASB finalized SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use
of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires that the Company recognize
acquired intangible assets apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS No. 141 applies to all business combinations
initiated after June 30, 2001 and for purchase business combinations completed
on or after July 1, 2001 (see Note 2). It also requires, upon adoption of SFAS
No. 142, that the Company reclassify the carrying amounts of intangible assets
and goodwill based on the criteria in SFAS No. 141.
SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. SFAS No. 142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. SFAS No. 142 requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption, see
above. The Company is also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of SFAS No.
142.
F-13
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
Our Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates including but not limited to, those related to (i) the
allowance for doubtful accounts receivable, (ii) allowance for inventories,
(iii) sales allowances, (iv) useful life or impairment of intangible assets, (v)
deferred tax asset valuation allowances and (vi) litigation settlements accrual.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis of making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 2001 and 2000
financial statements to conform to the December 31, 2002 presentation. These
reclassifications had no effect on previously reported net income for 2001 and
2000.
2. MERGER WITH MCGLEN INTERNET GROUP, INC.
On October 11, 2000, Northgate entered into a definitive merger agreement and
plan of merger with Lan Plus Corporation ("Lan Plus"). Lan Plus manufactures
both private-label and branded turnkey computer products and services, with over
ten years of operating history. On March 21, 2001, the companies entered into an
amended and restated merger agreement that, among other things, eliminated
certain conditions to closing contained in the original merger agreement. The
amended and restated merger agreement was subsequently amended several times,
ending on March 14, 2002. Upon the close of the merger on March 20, 2002, Lan
Plus shareholders received approximately 3.128 shares of Northgate common stock
for each Lan Plus share they owned, totaling 9,854,000 shares, and owned
approximately seventy-five percent (75%), on a fully diluted basis, of the
outstanding stock of Northgate (after taking into account a 10:1 reverse split
that took place immediately prior to the close of the merger). Pursuant to the
merger agreement, upon close of the merger, the Company's accounts payable to,
and advances from Lan Plus, in the amount of approximately $2.3 million was
converted to common stock eliminating the debt; the stock was then retired to
Treasury and cancelled.
Although Lan Plus was merged into a subsidiary of Northgate, the merger was
accounted for as a reverse acquisition since Lan Plus shareholders controlled
the combined entity after the merger. As a result, for financial accounting
purposes, the merger is treated as a purchase of Northgate by Lan Plus.
Therefore, the historical financial statements of Lan Plus are presented for
comparison purposes for all periods presented.
After the 10:1 reverse stock split, Mcglen shareholders held 4,830,000 shares of
Northgate's $0.03 par value common stock. For accounting purposes, the shares
retained by Mcglen in the merger were valued on Lan Plus' books as an issuance
of new shares at $0.788 per share (after the 10:1 reverse stock split and based
on the weighted average closing price of the shares just prior to and after the
merger date), totaling $3,806,000. In addition, Lan Plus assumed previously
issued options and warrants resulting in additional fair value of $34,000 (see
Notes 7 and 9).
Upon closing of the merger, Andy Teng, founder, Chairman and Chief Executive
Officer of Lan Plus, became the Chief Executive Officer and Chairman of the
Board of the combined company. Richard Shyu, previously President and Chief
Operating Officer of Lan Plus, became President of the combined company. Both
were added to the Board of Directors in March 2002. Grant Trexler, Mcglen's
Chief Financial Officer, became Chief Financial Officer of the combined company.
The following represents the estimated fair value of net assets acquired by Lan
Plus in the reverse acquisition at March 14, 2002 (in thousands):
Cash $ 108
Other current assets 539
Fixed assets 95
Deferred income taxes 1,400
Intangibles 3,886
Accounts payable and accrued expenses (846)
Inter-company payables (1,152)
Notes payable (190)
-------
$ 3,840
=======
F-14
Deferred income taxes represent the Company's estimate at the time of the merger
of Mcglen's net operating loss carryforwards ("NOLs") that were expected to be
used to offset Northgate's future taxable income, after considering limitations
imposed on NOLs upon a change in control. As a result of losses generated
subsequent to the merger, the Company has recorded a valuation allowance equal
to the entire NOL balance (see Note 6).
Intangibles represent the excess of the purchase price of Mcglen over the
estimated fair value of the tangible assets acquired. The Company has not yet
determined if any specifically identifiable intangibles should be recorded
related to this purchase in accordance with SFAS No. 141. Any unidentified
intangibles will be reflected as non-amortizable goodwill and will be evaluated
periodically for recoverability in accordance with SFAS No. 142. For the year
ended December 31, 2002, the Company has recorded no intangible amortization.
On a pro forma basis, the statements of operations would have been as follows
for the years ended December 31, if the acquisition had occurred on January 1,
2002 and 2001, respectively:
(in thousands, except per share data) 2002 2001
(As Restated,
see Note 14)
------------ --------
Net sales $ 69,615 $ 86,214
Gross profit 7,030 11,306
Loss (income) before taxes and extraordinary item (1,832) 108
Extraordinary item, gain on debt settlements -- 639
Net income (loss) (2,321) 746
Net income (loss) per share $ (0.16) $ 0.01
3. EQUIPMENT, LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS
Equipment consists of the following at December 31:
(In thousands) 2002 2001
------- -------
Machinery and equipment $ 708 $ 479
Software 353 331
Leasehold improvements 349 171
Vehicles 71 71
Furniture and fixtures 80 77
------- -------
1,561 1,129
Less accumulated depreciation (661) (379)
------- -------
$ 900 $ 750
======= =======
The company leased its office/manufacturing facility under a non-cancelable
operating lease with its Chairman and Chief Executive Officer (CEO) that was
terminated in September 2002. The lease provided for minimum annual rentals and
escalations based on increases in real estate taxes and other operating
expenses.
Minimum annual operating lease commitments at December 31, 2002 are $445,000
through December 31, 2006. Rent expense was approximately $421,000, $345,000 and
$344,000 for the years ended December 31, 2002, 2001, and 2000 respectively; of
these amounts $258,000, $345,000 and $344,000 was paid to the Company's Chairman
and CEO.
4. LINE OF CREDIT
At December 31, 2002, Northgate had a $2,500,000 line of credit with a bank. The
line of credit provides for borrowings secured by substantially all of
Northgate's assets and is guaranteed by Northgate's majority shareholder.
Borrowings under the line are advanced based upon 70% of eligible accounts
receivable, as defined, less any letters of credit issued on Northgate's behalf,
and a $500,000 holdback for potential chargebacks on credit cards processed. The
line of credit expires on April 30, 2003. Advances under the line bear interest
at the bank's prime rate (4.25%) plus 0.5% (a total of 4.75% at December 31,
2002). The line contains certain covenants (as defined) that required Northgate
to maintain profitability in the third and fourth quarter of 2002, a minimum of
($4.25 million) tangible net worth (as defined), a Current Ratio of at least
1.2:1, Working Capital of at least $2.5 million, and limits the capital
expenditures the Company can make in any one year to $750,000. As of December
31, 2002 (as a result of the restatement) the Company is not in compliance with
the terms of these covenants, and is currently working with the lender to
resolve this instance of non-compliance.
In September 2002, the Company reached a settlement with the holder of the
Mcglen line of credit whereby Northgate repaid $40,000 of the $90,000 due under
the line. The resulting gain of $50,000 is included in other income for the year
ended December 31, 2002.
F-15
5. NOTES PAYABLE
At December 31, 2002, Northgate had a $1,300,000 note payable to an individual.
Interest on the note is payable monthly at 9% and the note is due January 1,
2005. Accrued but unpaid interest of approximately $58,000 and $78,000 is
included in accrued expenses at December 31, 2002 and 2001, respectively. At
December 31, 2002, the Company also had $100,000 of convertible notes payable to
an individual, dated June 18, 1999. Interest was payable at 10% per annum
through December 18, 2000 and is payable at 12% thereafter. The note and accrued
interest were due December 18, 2000. The note is convertible at $20.00 per share
and is currently in default. Management has held settlement discussions with the
note holder but has been unable to reach a settlement for payment.
6. INCOME TAXES
The components of the income tax provision (benefit) were as follows for the
years ended December 31(in thousands):
2002 2001 2000
(As Restated,
See Note 14)
------ ------ ------
Current $ (369) $ 452 $ 167
Deferred 858 15 191
------ ------ ------
$ 489 $ 467 $ 358
====== ====== ======
At December 31, 2002, 2001 and 2000, income tax expense differed from the
amounts computed applying the federal statutory rate of 34% to pre-tax income as
follows (in thousands):
2002 2001 2000
(As Restated,
See Note 14)
------ ------ ------
Computed "expected" tax expense (benefit) $(603) $ 665 $ 297
(Decrease) increase in income taxes resulting
from expenses not deductible for tax purposes 47 (267) 8
Release of accrual for change in estimate (637) -- --
State and local income taxes, net of federal
effect (104) 69 53
Increase in valuation allowance 1,786 -- --
------ ------ ------
$ 489 $ 467 $ 358
====== ====== ======
Under SFAS No. 109, "Accounting for Income Taxes," deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Deferred taxes consist of the following at December 31 (in thousands):
Deferred tax assets: 2002 2001
(As Restated,
See Note 14)
------- -------
Net operating loss carryforward $ 1,443 $ --
Reserves and allowances 120 386
Marketable securities 197 --
State taxes - current -- 53
Other 58 25
Less valuation allowance (1,786) --
------- -------
Total deferred tax assets 32 464
------- -------
Deferred tax liabilities:
ESOP deduction -- (288)
Fixed assets (12) (25)
State tax (20) (28)
------- -------
Total deferred tax liabilities (32) (341)
------- -------
$ -- $ 123
======= =======
F-16
As a result of the Company's reverse merger in March 2002, the Company has
federal and state net operating loss carryforwards of approximately $16 million
and $10 million. Utilization of the net operating loss carryforwards is subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation will result in the Company being able to only
utilize $3.8 million and $0.5 million, to offset federal and state income,
respectively as of December 31, 2002. The remaining net operating loss
carryforwards will go unused. The net operating loss carryforwards will expire
at various dates beginning in 2012 through 2022 for federal purposes and 2003
through 2009 for state purposes, if not utilized. As of December 31, 2002 all
such loss carryforwards have been reserved, due to the likelihood that such
amounts will not be utilized before expiration.
During the fourth quarter of 2002, the Company revised its estimate for tax
accruals related to its 1997 and 1998 tax years resulting in a tax benefit of
$637,000.
7. STOCKHOLDERS' EQUITY
STOCK SPLIT
In connection with the merger with Mcglen in March 2002, Northgate effected a
3.12828 split of its Common Stock and changed its par value to $0.03 per share.
All common shares and per share data have been retroactively adjusted to reflect
the stock split.
DIVIDENDS
In December 2001 and 2000, the Board of Directors of Northgate approved a
dividend of $1.00 per share for all preferred shareholders. The dividends were
paid in September 2002 and 2001, respectively, and were used to service the ESOP
debt. No dividends were declared in 2002.
NON-PLAN OPTIONS
At December 31, 2002, there were 4,500 non-plan options outstanding. At December
31, 2002, outstanding non-plan options are exercisable at $7.50 per share. In
2002, 51,700 options expired per their terms.
EMPLOYEE STOCK OPTION PLANS
Terms and conditions of the Company's option plans, including exercise price and
the period in which options are exercisable, generally are at the discretion of
the Board of Directors; however, no options are exercisable for more than 10
years after date of grant.
In February 2000, the Board of Directors of Northgate approved the 1999 Stock
Option Plan (the 1999 Plan) for issuance of common stock to eligible
participants. The Plan provides for the granting of incentive stock options and
non-qualified stock options. Options generally expire after 10 years.
F-17
The following table summarizes employee stock option plan activity:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------
WEIGHTED
NUMBER PRICE AVERAGE PRICE
OF SHARES PER SHARE PER SHARE
---------- ---------------- -------------
<S> <C> <C> <C>
Options assumed in reverse acquisition 124,000 $1.00 to $15.90 $6.70
Options granted 518,000 $0.35 to $.050 $0.43
Options forfeited (39,000) $0.35 $0.35
---------- ---------------- -------------
Outstanding December 31, 2002 603,000 $0.35 to $15.90 $1.53
========== ================ =============
</TABLE>
The following table summarizes information about Northgate's stock options
outstanding at December 31, 2002:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Weighted Number Weighted
Outstanding at Average Average Exercisable at Average
Range of December 31, Remaining Exercise December 31, Exercise
Exercise Price 2002 Contractual Life (Yrs) Price 2002 Price
----------------- -------------- ---------------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.35 259,000 3.0 $0.35 0 $0.35
0.50 259,000 4.5 0.50 0 0.50
1.00 28,000 0.3 1.00 28,000 1.00
9.40 to 15.90 57,000 2.5 11.86 57,000 11.86
----------------- -------------- ---------------------- -------- -------------- --------
$0.35 to $15.90 603,000 3.2 $1.53 85,000 $8.28
================= ============== ====================== ======== ============== ========
</TABLE>
Pro forma information (see Note 1) regarding net (loss) income and net (loss)
income per share is required by SFAS 123, and has been determined as if the
Company had accounted for its employee stock purchase plan and employee stock
options granted under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model for the single option approach with the following assumptions:
risk-free interest rate of 4.0%, volatility factor of the expected market price
of the Company's common stock of 150%, an expected life of the options of 2
years from the grant date, a 33% forfeiture rate, and a dividend yield of zero.
The average fair value of options at the date of grant was $0.20 per share
during 2002.
8. EMPLOYEE STOCK OWNERSHIP PLAN
On December 1, 1999, Northgate established a leveraged employee stock ownership
plan (ESOP) that covers all employees who complete 1,000 or more hours of
service in a Plan year. To establish the plan, the ESOP borrowed $10,000,000
from Northgate's majority shareholder which it then used to purchase all of
Northgate's outstanding Preferred stock (a total of 1,350,000 shares) from
Northgate's majority shareholder at the then market price, $7.05 per share.
The Preferred Stock is convertible into common stock at an exchange rate of 1
share of Preferred to 3.12828 shares of Common, has a liquidation preference of
$1.00 per share, and has certain protective provisions which allow the preferred
shareholders to vote on matters that would alter the preferred shareholders
rights, privileges, powers or restrictions from those currently granted to the
preferred shareholders.
Northgate received no funds from this transaction; however, it is required to
record the liability on its books as it has guaranteed the ESOP debt, in
accordance with the American Institute of Certified Public Accountants Statement
of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans"
(SOP 93-6). Under SOP 93-6, the loan obligation is considered unearned employee
benefit expense and, as such, Northgate records it as a reduction to
stockholders' equity, "Unearned ESOP shares."
F-18
Northgate makes annual contributions to the ESOP equal to a minimum of the
ESOP's required debt service less dividends received by the ESOP. All dividends
received by the ESOP are used to pay debt service. The ESOP shares initially
were pledged as collateral for its debt. As the debt is repaid, shares are
released from collateral and allocated to active employees, based on the
proportion of debt service paid in the year. As shares are released from
collateral, Northgate reports compensation expense equal to the current market
price of the shares and the released shares become outstanding for
earnings-per-share computations. Northgate recognized compensation expense of
$0, $550,000, and $322,000 for the years ended December 31, 2002, 2001, and
2000, respectively. Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt and accrued interest when paid. ESOP interest
expense related to the ESOP note was $468,000, $502,000, and $762,000 for the
years ended December 31, 2002, 2001, and 2000, respectively.
The ESOP note payable required monthly principal payments of $119,000 commencing
January 1, 2000 plus interest at 8% for the first two years. In January 2001,
the ESOP renegotiated its note with the Company's majority stockholder reducing
the interest rate from 8% to 6% and lowering the required monthly principal
payments from $119,000 to $25,000. The note's maturity date was also extended to
December 2009 from January 2006. The Company has prepaid required principal
payments through January 2007. Future principal payments are due as follows:
During the year ending December 31: (In thousands)
2007 $ 275
Due thereafter 6,475
-------
Total amounts due $6,750
=======
Preferred Shares of Northgate held by the ESOP are as follows at December 31(in
thousands):
2002 2001
------- --------
Allocated shares 464 275
Shares released for allocation -- 189
Unreleased (unearned) shares 886 886
------- --------
Total ESOP shares 1,350 1,350
======= ========
Fair value of unreleased (unearned shares) $ 760 $ 3,702
======= ========
In the event a terminated ESOP participant desires to sell his or her shares of
Northgate's Preferred stock, or for certain employees who elect to diversify
their account balances, Northgate may be required to purchase the shares from
the participant at their fair market value. During the years ended December 31,
2002, 2001 and 2000, Northgate did not purchase any stock from ESOP
participants. In addition, at December 31, 2002, approximately 8,000 shares of
Northgate's Preferred stock, with an aggregate fair market value of
approximately $3,000 are held by ESOP participants who are eligible to elect
their diversification privileges under the ESOP.
9. WARRANTS
Warrant activity for the year ended December 31, 2002 is as follows:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING
--------------------
WEIGHTED
NUMBER PRICE AVERAGE PRICE
OF SHARES PER SHARE PER SHARE
---------- --------------- -------------
<S> <C> <C> <C>
Warrants assumed in reverse acquisition 237,000 $2.00 to $61.70 $12.50
Issued in connection with consulting agreement 100,000 $1.50 $1.50
Expired (106,000) $3.00 to $61.70 $12.50
---------- --------------- -------------
Outstanding and exercisable at December 31, 2002 231,000 $1.50 to $10.00 $5.61
========== =============== =============
</TABLE>
F-19
The following table summarizes information about Northgate's warrants
outstanding at December 31, 2002:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
-------------------- --------------------
Number Weighted Weighted Number Weighted
Outstanding at Average Average Exercisable at Average
Range of December 31, Remaining Exercise December 31, Exercise
Exercise Price 2002 Contractual Life (Yrs) Price 2002 Price
---------------- -------------- ---------------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$1.50 100,000 2.3 $1.50 100,000 $1.50
2.50 12,000 2.5 2.50 12,000 2.50
5.00 15,000 1.2 5.00 15,000 5.00
10.00 104,000 1.2 10.00 104,000 10.00
---------------- -------------- ---------------------- -------- -------------- --------
$1.50 to $10.00 231,000 1.7 $5.61 231,000 $5.61
================ ============== ====================== ======== ============== ========
</TABLE>
10. SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131 "Disclosure about Segments
of an Enterprise and Related Information" (SFAS No. 131) requires companies to
report financial and descriptive information about its reportable operating
segments, including segment profit or loss, certain specific revenue and expense
items, and segment assets, as well as information about the revenues derived
from Northgate's products or services, the countries in which Northgate earns
revenues and holds assets, and major customers. SFAS No. 131 also requires
companies that have a single reportable segment to disclose information about
products and services, information about geographic areas, and information about
major customers. SFAS No. 131 requires the use of the management approach to
determine the information to be reported. The management approach is based on
the way management organizes the enterprise to assess performance and make
operating decisions regarding the allocation of resources. It is management's
opinion that Northgate has only one reportable segment, and has no concentration
of customers in one specific geographic area within the United States. Major
customers, as defined, have been discussed in Note 1 above.
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
DECEMBER 31,
(In thousands) 2002 2001 2000
------- ------- -------
Cash paid during the period ended:
Interest $ 126 $1,076 $ 835
Income Taxes $ 417 $ 178 $ 679
Non-cash investing and financing activities:
Purchase of Mcglen with the Company's
common stock $3,840 -- --
12. COMMITMENTS AND CONTINGENCIES
The Company has a $1 million standby letter of credit issued by its bank in
favor of one of its major suppliers. The letter of credit was renewed in
February 2003 and expires in August 2003. The letter of credit is secured by a
$1 million certificate of deposit.
From time to time, other companies and individuals assert exclusive patent,
copyright, trademark or other intellectual property rights to technologies or
marks that are important to the technology industry or our business. Certain
companies have asserted such rights related to products that we manufacture. We
evaluate each claim relating to our products and, if appropriate, seek a license
to use the protected technology. The licensing agreements generally do not
require the licensor to assist us in duplicating its patented technology nor do
these agreements protect us from trade secret, copyright or other violations by
us or our suppliers in developing or selling these products. The Company also
may be responsible for any product liability issues that may arise from the sale
of its products.
F-20
During the normal course of business, the Company has made certain indemnities
and guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include certain agreements with the
Company's officers, under which the Company may be required to indemnify such
persons for liabilities arising out of their employment relationship. The
duration of these indemnities and guarantees varies and, in certain cases, is
indefinite. The majority of these indemnities and guarantees do not provide for
any limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated to make
significant payments for these obligations and no liabilities have been recorded
for these indemnities and guarantees in the accompanying consolidated balance
sheets.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables contain selected unaudited consolidated quarterly financial
data for the Company (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH JUNE SEPT. DEC. MARCH JUNE SEPT. DEC.
31, 2001 30, 2001 30, 2001 31, 2001 31, 2002 30, 2002 30, 2002 31, 2002
(As restated,
see Note 14)
--------- --------- --------- --------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ................................ $ 14,454 $ 7,839 $ 18,733 $ 32,857 $ 19,432 $ 15,645 $ 18,562 $ 11,537
Cost of sales ............................ 13,551 5,996 16,163 29,162 17,692 13,005 16,473 11,480
--------- --------- --------- --------- --------- --------- --------- ---------
Gross Profit ............................. 903 1,843 2,570 3,695 1,740 2,640 2,089 57
Operating expenses.................... 1,468 1,464 2,123 2,218 2,145 1,941 2,002 1,944
--------- --------- --------- --------- --------- --------- --------- ---------
Operating (loss) profit .............. (565) 379 447 1,477 (405) 699 87 (1,887)
Other income (expense) ............... 574 307 (61) (603) 5 (372) 36 63
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ........ 9 686 386 874 (400) 327 123 (1,824)
Provision for income taxes ............... 4 203 128 132 (160) 127 45 477
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) ........................ $ 5 $ 483 $ 258 $ 742 $ (240) $ 200 $ 78 $ (2,301)
========= ========= ========= ========= ========= ========= ========= =========
Basic and diluted income (loss) per
share ................................ $ 0.00 $ 0.05 $ 0.03 $ 0.07 $ (0.02) $ 0.01 $ 0.00 $ (0.15)
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares of common
stock outstanding:
Basic ................................ 9,854 9,854 9,854 9,854 10,666 14,737 14,737 14,737
========= ========= ========= ========= ========= ========= ========= =========
Diluted ............................ 10,129 10,129 10,129 11,012 10,666 16,927 16,927 14,737
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Overhead expenses for the year ended December 31, 2002 totaling $1,061,000 were
reclassified from operating expenses to cost of sales in the fourth quarter of
2002. The effect of this reclassification has been presented in each of the
quarters of fiscal 2002 above based on relative sales amounts. As a result, cost
of sales has been increased by (and operating expenses have been decreased by)
$316,000, $255,000 and $302,000 for the quarters ended March 31, 2002, June 30,
2002 and September 30, 2002, respectively, from the amounts previously reflected
on the Company's respective quarterly reports.
14. RESTATEMENT OF HISTORICAL FINANCIAL STATEMENTS
In July 2003, management of the Company became aware of certain differences that
existed between the Company's detailed records, and the amount of liabilities
reported in the Company's financial statements for the year ended December 31,
2002. The Board of Directors authorized the Company's management to conduct an
investigation of these differences. Based on the results of management's
investigation, the Company concluded that the balance of accounts payable as of
December 31, 2002 was understated as a result of an incorrect adjustment for
consigned inventory. The result of the removal of these accounts payable
decreased the cost of goods sold and thereby mistakenly increased the Company's
net income for the year ended December 31, 2002 and for the fourth quarter of
2002. The correction of this error increased accounts payable and cost of sales
for the fourth quarter of 2002, and generated a corresponding increase in the
Company's net loss. Due to the increased loss as a result of the findings of
this investigation, the Company concluded that certain deferred tax assets
resulting from its merger with Lan Plus, Inc. during the fiscal year ended
December 31, 2002 (see Note 2) will likely expire before they can be utilized,
and therefore have recorded a valuation allowance for all such deferred tax
assets as of December 31, 2002.
F-21
As a result of the restatement, during the fourth quarter of 2002 and for the
year ended December 31, 2002, (i) cost of sales increased by $1,061,000 and (ii)
provision for income taxes increased by $1,359,000, as follows:
CONSOLIDATED BALANCE SHEET
As of December 31, 2002
---------------------------------------
As Previously
Reported As Restated
------------------ ----------------
ASSETS
Inventories $ 2,984 $ 3,178
Prepaid expense and other current assets $ 262 $ 560
Deferred tax asset - current $ 418 $ --
Deferred tax asset $ 1,247 $ --
Total assets $16,014 $14,841
LIABILITIES
Accounts payable $ 3,983 $ 5,240
Accrued expenses $ 450 $ 440
STOCKHOLDERS EQUITY
Retained earnings $ 3,609 $ 1,189
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For The Quarter Ended For The Year Ended
December 31, 2002 December 31, 2002
------------------------------------ -----------------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
---------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Net sales $ 11,537 $ 11,537 $ 65,176 $ 65,176
Cost of sales (1) 10,419 11,480 57,589 58,650
---------- ----------- ------------- -------------
Gross profit 1,118 57 7,587 6,526
Operating expenses (1) 1,944 1,944 8,032 8,032
---------- ----------- ------------- -------------
Loss from operations (826) (1,887) (445) (1,506)
Other income (expenses), net 63 63 (268) (268)
---------- ----------- ------------- -------------
Loss before income taxes (763) (1,824) (713) (1,774)
Provision(benefit)for income taxes (882) 477 (870) 489
---------- ----------- ------------- -------------
Net income (loss) $ 119 $ (2,301) $ 157 $ (2,263)
========== =========== ============= =============
Basic and diluted net income (loss) $ 0.01 $ (0.15) $ 0.01 $ (0.17)
========== ============ ============= =============
per share
</TABLE>
(1) After effects of reclassification - see Note 13.
F-22
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
Column A Column B Column C Column D Column E
----------- ------- -------- -------- --------
Balance at Balance
Beginning at End
Description of year Additions Deductions of Year
----------- ------- --------- ---------- -------
2002
----
Allowance for doubtful accounts
deducted from accounts receivable
in the balance sheet $ 254 $ 30 $ 4 $ 280
Reserve for obsolescence deducted
from inventories on the balance sheet 305 1,322 1,434 193
======= ======== ========= =======
$ 559 $ 1,352 $ 1,438 $ 473
======= ======== ========= =======
2001
----
Allowance for doubtful accounts
deducted from accounts receivable
in the balance sheet $ 559 $ 661 $ 966 $ 254
Reserve for obsolescence deducted
from inventories on the balance sheet 292 3,689 3,676 305
------- -------- --------- -------
$ 851 $ 4,350 $ 4,642 $ 559
======= ======== ========= =======
2000
----
Allowance for doubtful accounts
deducted from accounts receivable
in the balance sheet $ 254 $ 1,300 $ 995 $ 559
Reserve for obsolescence deducted
from inventories on the balance sheet 248 1,215 1,171 292
------- -------- --------- -------
$ 502 $ 2,515 $ 2,166 $ 851
======= ======== ========= =======
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-38622 of Northgate Innovations, Inc. (formerly LAN Plus Corporation) on Form
S-8 of our report, dated April 12, 2002, appearing in this Annual Report on Form
10-K of Northgate Innovations, Inc. (formerly LAN Plus Corporation) for the year
ended December 31, 2001.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
September 17, 2003
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
Northgate Innovations, Inc.
We hereby consent to the incorporation by reference in the previously filed
Registration Statement of Northgate Innovations, Inc. on Form S-8 (No.
333-38622) of our report, dated March 31, 2003 (September 5, 2003 as to the
effects of the restatement discussed in Note 14), appearing in the Annual Report
on Form 10-K/A of Northgate Innovations, Inc. for the year ended December 31,
2002.
/s/ Corbin & Company LLP
Irvine, California
September 17, 2003
EXHIBIT 31
CERTIFICATION
I, Andy Teng, Chief Executive Officer of Northgate Innovations, Inc., certify
that:
1. I have reviewed this annual report on Form 10-K/A of Northgate Innovations,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Date: September 17, 2003
/s/ Andy Teng
-------------------------------------
Andy Teng
Chief Executive Officer and Acting CFO
EXHIBIT 32
WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350
The undersigned, Andy Teng, the Chief Executive Officer, of Northgate
Innovations, Inc. (the "Company"), pursuant to 18 U.S.C.ss.1350, hereby
certifies that:
(i) the annual report on Form 10-K/A of the Company (the "Report) fully complies
with the requirements of section 13(a) and 15(d) of the Securities Exchange Act
of 1934; and
(ii) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: September 17, 2003
/s/ Andy Teng
-------------------------
Andy Teng
Chief Executive Officer and Acting Chief Financial Officer
The foregoing certification accompanied the Form 10-K/A filing pursuant to 18
U.S.C. ss. 1350. It is being reproduced herein for information only. It is not
being filed for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended, and it is not to be incorporated by reference into any filing of the
Company, whether made before or after the date hereof, regardless of any general
incorporation language in such filing. A signed original of this written
statement required by Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission
or its staff upon request.
END OF FILING