EXHIBIT 99.3
D3 Technologies, Inc.
Financial Statements
Years Ended December 31, 2006, 2005 and 2004
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
D3 Technologies, Inc.
San Diego, California
We have audited the accompanying balance sheets of D3 Technologies, Inc. (a California corporation) as of December 31, 2006, 2005 and 2004 and the related statements of income and retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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 D3 Technologies, Inc. as of December 31, 2006, 2005 and 2004 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ LevitZacks
San Diego, California
July 10, 2007
D3 Technologies, Inc. Balance Sheets | |||||||||||||||
December 31, 2006, 2005 and 2004 | |||||||||||||||
ASSETS | |||||||||||||||
2006 | 2005 | 2004 | |||||||||||||
Current Assets: | |||||||||||||||
Cash | $ | 4,214,042 | $ | 5,445,037 | $ | 1,670,496 | |||||||||
Contract receivables, net | 9,127,047 | 4,681,547 | 2,601,979 | ||||||||||||
Costs and estimated earnings in excess of billings | |||||||||||||||
on uncompleted contracts | 119,602 | 86,115 | 3,374 | ||||||||||||
Prepaid expenses | 167,026 | 170,822 | 155,575 | ||||||||||||
Deferred income taxes | 399,000 | 232,000 | - | ||||||||||||
Total current assets | 14,026,717 | 10,615,521 | 4,431,424 | ||||||||||||
Property and equipment, net | 2,667,850 | 2,036,093 | 487,764 | ||||||||||||
Note receivable from stockholder | - | - | 96,971 | ||||||||||||
Deposits | 52,590 | 24,340 | 10,595 | ||||||||||||
Total assets | $ | 16,747,157 | $ | 12,675,954 | $ | 5,026,754 | |||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||
Current Liabilities: | |||||||||||||||
Accounts payable and accrued expenses | $ | 3,926,950 | $ | 3,730,840 | $ | 1,423,282 | |||||||||
Accrued income taxes | 7,288 | 1,177,513 | - | ||||||||||||
Current portion of capital lease obligation | 217,188 | 199,110 | - | ||||||||||||
Total current liabilities | 4,151,426 | 5,107,463 | 1,423,282 | ||||||||||||
Capital lease obligations, less current portion | 226,531 | 443,720 | - | ||||||||||||
Deferred income taxes | 195,000 | 79,000 | - | ||||||||||||
Total liabilities | 4,572,957 | 5,630,183 | 1,423,282 | ||||||||||||
Stockholders' Equity: | |||||||||||||||
Common stock, no par value; 25,000 shares authorized, | |||||||||||||||
issued, and outstanding | 50,000 | 50,000 | 50,000 | ||||||||||||
Additional paid-in capital | 330,832 | 330,832 | 330,832 | ||||||||||||
Retained earnings | 11,793,368 | 6,664,939 | 3,222,640 | ||||||||||||
Total stockholders' equity | 12,174,200 | 7,045,771 | 3,603,472 | ||||||||||||
Total liabilities and stockholders' equity | $ | 16,747,157 | $ | 12,675,954 | $ | 5,026,754 | |||||||||
See accompanying notes to financial statements.
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D3 Technologies, Inc. | ||||||||||||
Statements of Income and Retained Earnings | ||||||||||||
Years Ended December 31, 2006, 2005 and 2004 | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Contract revenues earned | $ | 63,981,438 | $ | 39,019,264 | $ | 17,698,285 | ||||||
Cost of contract revenues | 51,581,723 | 30,693,943 | 15,233,771 | |||||||||
Gross profit | 12,399,715 | 8,325,321 | 2,464,514 | |||||||||
General and administrative expenses | 4,034,016 | 2,763,961 | 1,843,885 | |||||||||
Income from operations | 8,365,699 | 5,561,360 | 620,629 | |||||||||
Other income (expense): | ||||||||||||
Other expense | (5,679 | ) | (15,580 | ) | - | |||||||
Interest expense | (52,101 | ) | (7,235 | ) | - | |||||||
Interest income | 139,510 | 40,754 | 24,414 | |||||||||
Total other income (expense) | 81,730 | 17,939 | 24,414 | |||||||||
Income before provision for income taxes | 8,447,429 | 5,579,299 | 645,043 | |||||||||
Provision for income taxes | 3,319,000 | 2,137,000 | 232,000 | |||||||||
Net income | 5,128,429 | 3,442,299 | 413,043 | |||||||||
Retained earnings, beginning of year | 6,664,939 | 3,222,640 | 2,809,597 | |||||||||
Retained earnings, end of year | $ | 11,793,368 | $ | 6,664,939 | $ | 3,222,640 | ||||||
See accompanying notes to financial statements.
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D3 Technologies, Inc. | ||||||||||||
Statements of Cash Flows | ||||||||||||
Years Ended December 31, 2006, 2005 and 2004 | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Net income | $ | 5,128,429 | $ | 3,442,299 | $ | 413,043 | ||||||
Adjustments to reconcile net income to net cash | ||||||||||||
provided by operating activities: | ||||||||||||
Depreciation and amortization | 775,199 | 431,861 | 217,176 | |||||||||
Deferred income taxes | (51,000 | ) | (153,000 | ) | ||||||||
(Increase) decrease in: | ||||||||||||
Contract receivables | (4,445,500 | ) | (2,079,568 | ) | (221,968 | ) | ||||||
Costs and estimated earnings in excess of billings | ||||||||||||
on uncompleted contracts | (33,487 | ) | (82,741 | ) | 220,626 | |||||||
Prepaid expenses | 3,796 | (15,247 | ) | (96,932 | ) | |||||||
Deposits | (28,250 | ) | (13,745 | ) | (1,439 | ) | ||||||
Increase (decrease) in: | ||||||||||||
Accounts payable and accrued expenses | 412,404 | 2,091,264 | (112,600 | ) | ||||||||
Accrued income taxes | (1,170,225 | ) | 1,177,513 | |||||||||
Net cash provided by operating activities | 591,366 | 4,798,636 | 417,906 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property and equipment | (1,623,250 | ) | (1,063,897 | ) | (177,697 | ) | ||||||
Increase in note receivable from stockholder | (110,000 | ) | ||||||||||
Repayment of note receivable from stockholder | - | 96,971 | 13,029 | |||||||||
Net cash used in investing activities | (1,623,250 | ) | (966,926 | ) | (274,668 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Payments of obligations under capital leases | (199,111 | ) | (57,169 | ) | - | |||||||
Net cash used in financing activities | (199,111 | ) | (57,169 | ) | - | |||||||
Net increase in cash | (1,230,995 | ) | 3,774,541 | 143,238 | ||||||||
Cash, beginning of year | 5,445,037 | 1,670,496 | 1,527,258 | |||||||||
Cash, end of year | $ | 4,214,042 | $ | 5,445,037 | $ | 1,670,496 | ||||||
See accompanying notes to financial statements.
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D3 Technologies, Inc. | ||||||||||||
Statements of Cash Flows | ||||||||||||
(Continued) | ||||||||||||
Years Ended December 31, 2006, 2005 and 2004 | ||||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Interest paid | $ | 52,101 | $ | 7,235 | $ | - | ||||||
Income taxes paid | $ | 4,540,225 | $ | 1,058,463 | $ | 550,583 | ||||||
Supplemental schedule of non-cash investing activities:
During 2005, the Company acquired assets by entering into capital lease obligations in the amount of $699,999.
During 2005, the Company acquired assets through a $216,294 trade payable accrual.
See accompanying notes to financial statements.
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D3 Technologies, Inc.
Notes to Financial Statements
Years Ended December 31, 2006, 2005 and 2004
Note 1. | THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES |
D3 Technologies, Inc.(the Company) was incorporated on May 5, 1982, under the laws of the State of California. The Company has its corporate office in San Diego, California and other offices in Washington, Colorado, Maryland, the District of Columbia, South Carolina and Texas. The Company provides engineering solutions to commercial and military aviation, aerospace, military weapons systems, marine and industrial markets. The Company works with both commercial enterprises and governmental agencies.
Revenue Recognition
For the year ended December 31, 2006, approximately 99% and 1% of the Company’s revenues were from time-and-materials contracts and fixed-price contracts, respectively. For the year ended December 31, 2005, approximately 98% and 2% of the Company’s revenues were from time-and-materials contracts and fixed-price contracts, respectively. For the year ended December 31, 2004, approximately 96% and 4% of the Company’s revenues were from time-and-materials contracts and fixed-price contracts, respectively. Revenue for time-and-materials contracts is recognized as the work is performed and as materials are purchased.
The Company recognizes revenue on fixed-price long-term contracts on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Change orders received under contracts with customers are accounted for as part of the original contract. Certain contract costs are subject to audit and adjustment by negotiations between the Company and the U.S. Government. Contract revenues are recorded in amounts which are expected to be realized upon final settlement.
The asset, “costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenue recognized on fixed-price contracts in excess of billings. The liability, “billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenue recognized on fixed price contracts.
Contract costs include all labor, overhead, subcontract and material costs and those indirect costs related to contract performance. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability and final contract settlements may result in revisions to estimated costs and income and are recognized in the period in which the revisions are determined. Because of the inherent uncertainties in estimating costs, it is reasonably possible that the estimates used will change in the next year.
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D3 Technologies, Inc.
Notes to Financial Statements
(continued)
Years Ended December 31, 2006, 2005 and 2004
Note 1. | THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES (continued) |
Cash
Cash includes cash on hand and cash in checking and savings accounts with banks. The Company maintains cash balances with banks that may, at times, exceed federally-insured limits.
Contract Receivables
Contract receivables are trade receivables consisting of (1) amounts billed but not yet received on fixed-price contracts and (2) revenues earned (billed and unbilled) on time and material contracts. Contract receivables are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to receivables.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of the related assets. Property and equipment under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. Repairs and maintenance are charged to expense as incurred.
Income Taxes
Deferred income taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
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D3 Technologies, Inc.
Notes to Financial Statements
(continued)
Years Ended December 31, 2006, 2005 and 2004
Note 1. | THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES (continued) |
Advertising
Advertising costs are expensed as incurred. The company had advertising expense of $67,246 in 2006, $5,430 in 2005 and $8,760 in 2004.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Reclassifications
Certain expenses previously presented as general and administrative expenses have been reclassified to cost of contract revenues in the 2006 and 2005 statements of income. Management believes that this presentation is a better representation of the Company’s operations. These reclassifications totaled $9,153,816 in 2006 and $5,810,614 in 2005 and have no effect on income from operations or net income.
Note 2. | CONTRACT RECEIVABLES |
2006 | 2005 | 2004 | |||||||||||
Contracts receivable, billed | $ | 7,944,555 | $ | 3,343,262 | $ | 1,899,975 | |||||||
Contracts receivable, unbilled | 1,232,492 | 1,388,285 | 722,004 | ||||||||||
9,177,047 | 4,731,547 | 2,621,979 | |||||||||||
Less allowance for doubtful accounts | (50,000 | ) | (50,000 | ) | (20,000 | ) | |||||||
$ | 9,127,047 | $ | 4,681,547 | $ | 2,601,979 |
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D3 Technologies, Inc.
Notes to Financial Statements
(continued)
Years Ended December 31, 2006, 2005 and 2004
Note 3. | COSTS AND ESTIMATED EARNINGS (LOSSES) ON UNCOMPLETED CONTRACTS |
2006 | 2005 | 2004 | |||||||||||
Costs incurred on uncompleted contracts | $ | 73,554 | $ | 88,755 | $ | 3,374 | |||||||
Estimated earnings (losses) | 46,048 | (2,640 | ) | ||||||||||
Less billings | 119,602 | 86,115 | 3,374 | ||||||||||
$ | 119,602 | $ | 86,115 | $ | 3,374 | ||||||||
Included in the accompanying balance sheets under the following captions: | |||||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | $ | 119,602 | $ | 86,115 | $ | 3,374 | |||||||
Billings in excess of costs and estimated | |||||||||||||
earnings on uncompleted contracts | |||||||||||||
$ | 119,602 | $ | 86,115 | $ | 3,374 |
Note 4. | PROPERTY AND EQUIPMENT |
2006 | 2005 | 2004 | |||||||||||
Computers and equipment | $ | 3,622,614 | $ | 2,673,798 | $ | 797,577 | |||||||
Computer hardware and software under capital leases | 699,999 | 699,999 | |||||||||||
Furniture and fixtures | 780,467 | 447,001 | 148,518 | ||||||||||
Leasehold improvements | 361,181 | 235,258 | 148,562 | ||||||||||
5,464,261 | 4,056,056 | 1,094,657 | |||||||||||
Less accumulated depreciation and | |||||||||||||
amortization, including $239,506 and $89,876 related to computer hardware and software under capital leases as of December 31, 2006 and 2005, respectively. | (2,796,411 | ) | (2,019,963 | ) | (606,893 | ) | |||||||
$ | 2,667,850 | $ | 2,036,093 | $ | 487,764 |
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D3 Technologies, Inc.
Notes to Financial Statements
(continued)
Years Ended December 31, 2006, 2005 and 2004
Note 5. | NOTE RECEIVABLE FROM STOCKHOLDER |
At December 31, 2004, the Company has a note receivable from a stockholder. The note bears interest at 5% and is payable in minimum bi-weekly installments of $450. The balance of the note was $96,971 as of December 31, 2004. The note was repaid in full in 2005. |
Note 6. | LINE OF CREDIT |
The Company has a $1,000,000 revolving line of credit agreement with a bank. The unpaid principal balance will bear interest at an annual rate equal to the prime rate announced by the bank, which was 8.25%, 7.25% and 5.25% at December 31, 2006, 2005 and 2004, respectively. All unpaid principal and interest is due October 5, 2007. The line is collateralized by substantially all of the Company’s assets and is guaranteed by a stockholder. Under the terms of the line of credit agreement the Company is required to maintain certain financial ratios. There was no outstanding balance as of December 31, 2006, 2005 and 2004.
Note 7. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable and accrued expenses consist of the following:
2006 | 2005 | 2004 | ||||||||||
Accrued compensation and related taxes | $ | 2,740,651 | $ | 1,912,691 | $ | 777,726 | ||||||
Accounts payable | 490,688 | 1,015,193 | 471,941 | |||||||||
Other | 695,611 | 802,956 | 173,615 | |||||||||
$ | 3,926,950 | $ | 3,730,840 | $ | 1,423,282 |
Note 8. | CAPITAL LEASES |
The Company is the lessee of computer hardware and software under capital leases expiring in various years through October 2010. The assets are amortized over the shorter of their related lease terms or their estimated productive lives and the amortization is classified with depreciation expense.
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D3 Technologies, Inc.
Notes to Financial Statements
(continued)
Years Ended December 31, 2006, 2005 and 2004
Note 8. | CAPITAL LEASES (continued) |
Minimum future lease payments under capital leases for the years ending December 31 are as follows:
2007 | $ | 247,636 | ||
2008 | 213,414 | |||
2009 | 12,181 | |||
2010 | 10,151 | |||
Total minimum lease payments | 483,382 | |||
Less amount representing interest | (39,663 | ) | ||
Present value of minimum lease payments | 443,719 | |||
Less current portion | (217,188 | ) | ||
$ | 226,531 |
Note 9. | OPERATING LEASES |
The Company leases office space and vehicles under noncancellable operating leases expiring through December 2011. Total rent expense was approximately $573,600, $382,000 and $320,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Future minimum lease payments under noncancellable operating leases for years ending December 31 are as follows:
2007 | $ | 589,852 | ||
2008 | 598,234 | |||
2009 | 312,171 | |||
2010 | 195,523 | |||
2011 | 175,231 | |||
$ | 1,871,011 | |||
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D3 Technologies, Inc.
Notes to Financial Statements
(continued)
Years Ended December 31, 2006, 2005 and 2004
Note 10. | INCOME TAXES |
The net deferred tax asset and liability in the accompanying balance sheets include the following amounts of deferred tax assets and liabilities:
Current: | ||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||
Deferred Tax asset | $ | 399,000 | $ | 232,000 | $ | - | ||||||||||
Long-term: | ||||||||||||||||
Deferred tax liability | $ | (195,000 | ) | $ | 79,000 | $ | - | |||||||||
The provision for (benefit from) income taxes consists of the following: | ||||||||||||||||
Current: | ||||||||||||||||
Federal | $ | 2,998,000 | $ | 2,039,473 | $ | 197,803 | ||||||||||
State | 372,000 | 250,527 | 34,197 | |||||||||||||
3,370,000 | 2,290,000 | 232,000 | ||||||||||||||
Deferred: | ||||||||||||||||
Federal | (52,000 | ) | (127,000 | ) | - | |||||||||||
State | 1,000 | (26,000 | ) | - | ||||||||||||
(51,000 | ) | (153,000 | ) | - | ||||||||||||
Total | $ | 3,319,000 | $ | 2,137,000 | $ | 232,000 | ||||||||||
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D3 Technologies, Inc.
Notes to Financial Statements
(continued)
Years Ended December 31, 2006, 2005 and 2004
Note 10. | INCOME TAXES (continued) |
Deferred income taxes result from temporary differences attributable to depreciation and amortization, accrued vacation, the allowance for doubtful accounts, and state taxes. The income tax expense is different from the amount which would result from applying the statutory federal income tax rate primarily due to state income taxes, net of apportionment.
Note 11. | COMMON STOCK PURCHASE AGREEMENT |
The Company and its stockholders have an agreement which governs all stock transfers. Under the terms of this agreement, all stock transfers are subject to first refusal rights by either the Company or current stockholders.
Note 12. | CUSTOMER CONCENTRATIONS |
The Company grants unsecured credit to its customers.
For the year ended December 31, 2006, two customers accounted for approximately 75% of revenues. These same two customers accounted for approximately 78% of contract receivables at December 31, 2006. For the year ended December 31, 2005, three customers accounted for approximately 85% of revenues. These same customers accounted for approximately 76% of contract receivables as of December 31, 2005. For the year ended December 31, 2004, three customers accounted for approximately 74% of revenues. These same customers accounted for approximately 63% of contract receivables as of December 31, 2004.
Note 13. | RETIREMENT PLAN |
The Company sponsors a 401(k) plan for its employees and may make discretionary contributions to the plan. The Company contributed $400,000, $220,000 and $67,500 to the plan for the years ended December 31, 2006, 2005, and 2004, respectively.
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D3 Technologies, Inc.
Notes to Financial Statements
(continued)
Years Ended December 31, 2006, 2005 and 2004
Note 14. SUBSEQUENT EVENTS
As of July 2007, the Company’s stockholders were negotiating the sale of their shares of common stock to LMI Aerospace, Inc. (LMI). Under the terms of a stock purchase agreement between these parties, LMI would purchase the 25,000 shares of common stock outstanding for $65 million in cash. The proposed stock purchase agreement specifies certain closing conditions which must be met to finalize the sale.
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