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The following is an excerpt from a S-1 SEC Filing, filed by TRIAD MEDICAL INC on 9/11/1997.
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TRIAD MEDICAL INC - S-1 - 19970911 - AUDITORS_OPINION

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Kentec Medical, Inc.:

We have audited the accompanying balance sheet of Kentec Medical, Inc. (a California corporation) as of June 30, 1997, and the related statements of operations, stockholder's equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kentec Medical, Inc. as of June 30, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles.

Arthur Andersen LLP
Houston, Texas
August 6, 1997

F-73

KENTEC MEDICAL, INC.
BALANCE SHEET

JUNE 30,
1997

ASSETS

CURRENT ASSETS:

     Cash and cash equivalents..........  $    719,508
     Short-term investments.............       111,331
     Accounts receivable, net of
      allowance of $77,039..............     1,704,433
     Inventories, net...................     1,857,915
     Deferred income taxes..............        24,590
                                          ------------
               Total current assets.....     4,417,777
PROPERTY AND EQUIPMENT, net.............       152,359
OTHER NON-CURRENT ASSETS................       235,575
                                          ------------
               Total assets.............  $  4,805,711
                                          ============

  LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
     Accounts payable...................  $  1,344,957
     Accrued expenses and other current
      liabilities.......................       354,683
                                          ------------
               Total current
                liabilities.............     1,699,640
                                          ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
     Common stock, no par value; 75,000
      shares authorized, 46,000 shares
      issued and outstanding............        46,000
     Retained earnings..................     3,060,071
                                          ------------
               Total stockholder's
                equity..................     3,106,071
                                          ------------
               Total liabilities and
                stockholder's equity....  $  4,805,711
                                          ============

The accompanying notes are an integral part of this financial statement.

F-74

KENTEC MEDICAL, INC.
STATEMENT OF OPERATIONS

YEAR ENDED
JUNE 30,

                                               1997
                                          --------------
REVENUES................................  $   13,646,041
COST OF REVENUES........................       9,440,908
                                          --------------
          Gross profit..................       4,205,133
                                          --------------
SELLING EXPENSES........................       1,709,445
GENERAL AND ADMINISTRATIVE EXPENSES.....       2,446,230
DEPRECIATION AND AMORTIZATION...........          83,101
                                          --------------
     Total operating expenses...........       4,238,776
                                          --------------
          Loss from operations..........         (33,643)
OTHER INCOME (EXPENSE):
     Interest income....................          32,065
     Other expense, net.................          (6,164)
                                          --------------
LOSS BEFORE PROVISION FOR INCOME
  TAXES.................................          (7,742)
PROVISION FOR INCOME TAXES..............          12,396
                                          --------------
NET LOSS................................  $      (20,138)
                                          ==============

The accompanying notes are an integral part of this financial statement.

F-75

KENTEC MEDICAL, INC.
STATEMENT OF STOCKHOLDER'S EQUITY

                                           COMMON STOCK                           TOTAL
                                        ------------------      RETAINED      STOCKHOLDER'S
                                        SHARES     AMOUNT       EARNINGS          EQUITY
                                        -------    -------     ----------     --------------
BALANCE, June 30, 1996...............    46,000    $46,000     $3,080,669       $3,126,669
     Net loss........................     --         --           (20,138)         (20,138)
     Dividends.......................     --         --              (460)            (460)
                                        -------    -------     ----------     --------------
BALANCE, June 30, 1997...............    46,000    $46,000     $3,060,071       $3,106,071
                                        =======    =======     ==========     ==============

The accompanying notes are an integral part of this financial statement.

F-76

KENTEC MEDICAL, INC.
STATEMENT OF CASH FLOWS

YEAR ENDED
JUNE 30,
1997

CASH FLOWS FROM OPERATING
ACTIVITIES:
     Net loss........................  $    (20,138)
     Adjustments to reconcile net
      loss to net cash used in
      operating activities --
          Depreciation and
           amortization..............        83,101
          Provision for doubtful
           accounts
             receivable..............         7,788
          Deferred income taxes,
           net.......................         5,487
          Loss on disposal of
           property and equipment....         6,424
          Increase (decrease) in
           operating cash flows
           resulting from:
               Accounts receivable...        63,595
               Inventories...........        87,300
               Prepaid expenses and
                other current
                assets...............         7,102
               Other non-current
                assets...............       (22,620)
               Accounts payable,
                accrued expenses and
                other current
                liabilities..........      (225,840)
                                       ------------
                     Net cash used in
                    operating
                    activities.......        (7,801)
                                       ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of short-term
      investments....................      (219,632)
     Proceeds from short-term
      investments....................       216,468
     Purchases of property and
      equipment......................       (58,687)
                                       ------------
                     Net cash used in
                    investing
                    activities.......       (61,851)
                                       ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Dividends.......................          (460)
                                       ------------
                     Net cash used in
                    financing
                    activities.......          (460)
                                       ------------
NET DECREASE IN CASH AND CASH
  EQUIVALENTS........................       (70,112)
CASH AND CASH EQUIVALENTS, beginning
  of period..........................       789,620
                                       ------------
CASH AND CASH EQUIVALENTS, end of
  period.............................  $    719,508
                                       ============

The accompanying notes are an integral part of this financial statement.

F-77

KENTEC MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Kentec Medical, Inc., a California corporation (the Company or Kentec), was founded in 1970 and maintains its headquarters in Irvine, California. The Company is a contract seller and distributor and limited manufacturer of specialty medical products.

The Company and its stockholder intend to enter into a definitive merger agreement with TRIAD Medical Inc. (TRIAD) pursuant to which the Company will be acquired for consideration consisting of $3,240,000 in cash and 232,857 shares of TRIAD common stock, concurrently with the closing of the initial public offering by TRIAD of its common stock.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

These financial statements have been prepared on the accrual basis of accounting.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash, cash equivalents, trade receivables, trade payables and debt instruments. The carrying amounts of those instruments reported in the balance sheet are considered to estimate their respective fair values due to the short-term nature of such financial instruments and the current interest rate environment.

CASH AND CASH EQUIVALENTS

For purposes of the balance sheet and statement of cash flows, the Company considers all investments with original maturities of three months or less to be cash equivalents. As of June 30, 1997 and at various times during the year then ended, the Company maintained cash balances in various financial institutions in excess of federally insured limits.

SHORT-TERM INVESTMENTS

The Company's short-term investments consist of certificates of deposit that are all considered held-to-maturity securities. Held-to-maturity securities, which are fixed maturity securities that the Company has the ability and intent to hold until maturity, are carried at amortized cost.

CONCENTRATIONS OF CREDIT RISK

In the normal course of business, the Company extends credit to its customers, which are primarily hospitals and medical centers. The Company regularly reviews accounts receivable and makes provision for potentially uncollectible balances. At June 30, 1997, management believes the Company had incurred no material impairments in the carrying values of its accounts receivable, other than uncollectible amounts for which provision has been made.

INVENTORIES

Inventories consist of medical supplies and equipment. Inventories, net of allowances, are valued at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. At June 30, 1997, management believes the Company had incurred no material impairments in the carrying values of its inventories, other than impairments for which provision has been made.

F-78

KENTEC MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciation is computed using an accelerated method over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized using the straight-line method over the lesser of the life of the applicable lease or the estimated useful life of the applicable asset.

Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments that extend the useful lives of existing equipment are capitalized and depreciated. On retirement or disposition of property and equipment, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized in the statement of operations.

COLLATERAL INTEREST IN INSURANCE AGREEMENT

The Company has entered into an agreement with its stockholder for the sole purpose of financing life insurance premiums on a whole-life policy covering the president of the Company. The advances are collateralized by the cash surrender value of and the death benefit payable under the policy. The Company has recorded the advances in other non-current assets in the accompanying balance sheet totaling approximately $152,700 as of June 30, 1997.

REVENUES AND EXPENSES

The Company's revenues are primarily derived from sales of specialty medical products under agreements with various manufacturers. Cost of revenues consists primarily of product costs, net of rebates, and freight charges. Selling expenses consist primarily of sales commissions, salaries of sales managers, travel and entertainment expenses, trade show expenses and automobile allowances. General and administrative expenses consist primarily of executive compensation and related benefits, administrative salaries and benefits, office rent and utilities, communication expenses and professional fees.

REVENUE RECOGNITION

Revenues are recognized when products and supplies are shipped.

INCOME TAXES

The Company applies the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded based on differences between the 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 underlying assets or liabilities are received or settled.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information About Capital Structure." SFAS No. 129 requires nonpublic entities to disclose certain information about an entity's capital structure, including the pertinent rights and privileges of the various securities outstanding. The Company will be required to adopt SFAS No. 129 in 1997 and, in the opinion of management, SFAS No. 129 will not significantly change the existing financial statement disclosures.

F-79

KENTEC MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

                                  ESTIMATED
                                    USEFUL
                                   LIVES IN     JUNE 30,
                                    YEARS         1997
                                  ----------  ------------
Furniture and fixtures..........     5-7      $    412,745
Rental equipment................     5-7           150,978
Transportation equipment........     5-7           119,753
Leasehold improvements..........     7-15           88,227
Machinery and equipment.........     5-10           50,733
                                              ------------
                                                   822,436
Less -- accumulated depreciation
 and amortization...............                  (670,077)
                                              ------------
Property and equipment, net.....              $    152,359
                                              ============

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Accounts receivable consist of the following:

JUNE 30,

                                              1997
                                          ------------
Trade receivables.......................  $  1,466,303
Receivables from suppliers..............       315,169
                                          ------------
                                             1,781,472
Less -- allowance for doubtful
  accounts..............................       (77,039)
                                          ------------
                                          $  1,704,433
                                          ============

Accounts payable, accrued expenses and other current liabilities consist of the following:

JUNE 30,

                                           1997
                                        ----------
Accounts payable, trade..............   $1,344,957
Accrued compensation and benefits....      315,144
Other payables and accrued
  expenses...........................       39,539
                                        ----------
                                        $1,699,640
                                        ==========

5. LEASES:

The Company leases its two operating facilities from a trustee of its stockholder (a family trust) under two long-term noncancellable operating lease agreements. The leases expire in 2009 and provide for rents increasing subject to the Consumer Price Index. The total annual rent paid under these related-party leases was approximately $229,600 for the year ended June 30, 1997. The leases require the Company to pay taxes, maintenance, insurance and certain other operating costs of the leased property. The Company believes the terms of the related-party leases are at least as favorable as the terms that could have been obtained from an unaffiliated third party in similar transactions. The Company also leases certain office equipment under long-term noncancellable operating lease agreements which expire in 1999 and 2000. The total annual rent paid under these leases was approximately $4,600 for the year ended June 30, 1997.

F-80

KENTEC MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum lease payments required under noncancellable operating leases (including the related-party leases) that have initial or remaining noncancellable lease terms in excess of one year at June 30, 1997 are as follows:

Year ending June 30 --
     1998...............................  $    234,183
     1999...............................       234,183
     2000...............................       232,887
     2001...............................       230,773
     2002...............................       229,572
     Thereafter.........................     1,492,218
                                          ------------
                                          $  2,653,816
                                          ============

The Company has entered into an agreement to sublease its excess facilities through March 1998. The future minimum sublease payments due to the Company under this sublease as of June 30, 1997 are $60,281.

Rent income received for the year ended June 30, 1997 was approximately $61,900.

6. INCOME TAXES:

Federal and state income taxes are as follows:

YEAR ENDED
JUNE 30,

                                              1997
                                           -----------
Federal --
     Current............................     $ 3,611
     Deferred...........................       4,094
State --
     Current............................       3,298
     Deferred...........................       1,393
                                           -----------
                                             $12,396
                                           ===========

Actual income tax provision differs from income tax provision computed by applying the U.S. federal statutory corporate tax rate of 15 percent to income before income taxes as follows:

YEAR ENDED
JUNE 30,

                                              1997
                                           ----------
Benefit at the statutory rate...........    $ (1,161)
State income taxes......................       3,227
Non-deductible items....................      10,330
                                           ----------
                                            $ 12,396
                                           ==========

F-81

KENTEC MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax reporting purposes. The tax effects of these temporary differences representing current deferred income tax assets of $24,590 at June 30, 1997 result principally from accruals and reserves not currently deductible for income tax reporting purposes.

7. COMMITMENTS AND CONTINGENCIES:

LITIGATION

The Company is a party to certain legal proceedings arising in the ordinary course of business. Management believes the outcome of such legal proceedings will not have a material adverse effect on the Company's financial position or results of operations.

INSURANCE

The Company carries a broad range of insurance coverage, including general and business auto liability, commercial property, workers' compensation and a general umbrella policy. The Company has not incurred significant claims or losses under any of its insurance policies.

The sale, manufacture and distribution of medical products involve a risk of product liability claims. The Company maintains product liability insurance coverage in amounts that it considers adequate.

8. SIGNIFICANT SUPPLIER:

During the year ended June 30, 1997, the Company purchased approximately 62 percent of its products from Pall Biomedical Products Company (Pall). Revenues generated from the sales of these products accounted for 56 percent of the Company's distribution revenues for the year ended June 30, 1997. Under a distribution agreement with Pall, the Company has agreed to keep a 30-day supply of inventory on hand. The agreement may be terminated by either party, with or without cause, at any time after giving not less than 30 days' notice. The loss of this supplier would have a material adverse effect on the Company's business and operating results.

9. EMPLOYEE BENEFIT PLANS:

The Company has a money purchase pension plan, a profit sharing plan and a 401(k) plan for employees meeting certain requirements (substantially all employees). The Company's contributions to these plans vest over a period of six to seven years. The money purchase pension plan requires the Company to annually contribute 5 percent of participating employees' salaries, subject to certain limitations. The Company's contribution to the money purchase pension plan during the year ended June 30, 1997 was approximately $97,800. Company contributions to the profit sharing plan and to the 401(k) plan may be made at the discretion of the Company. No Company contributions were made to the profit sharing plan or to the 401(k) plan for the year ended June 30, 1997.

10. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED):

On September 9, 1997, the Company and its stockholder entered into a definitive merger agreement with TRIAD, providing for the acquisition of the Company by TRIAD.

Concurrently with the closing of the transactions under the merger agreement, the Company will enter into agreements with a trustee of its stockholder to lease certain office and warehouse space used in the Company's operations for a negotiated amount and term.

F-82

BROKERAGE PARTNERS