Exhibit 99.2
TWINCRAFT, INC.
DECEMBER 31, 2004 AND 2003
CONTENTS
| | | Pages |
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS | | 2 |
| | | |
FINANCIAL STATEMENTS | | |
| | | |
BALANCE SHEETS | | 3 |
| | | |
STATEMENTS OF EARNINGS | | 4 |
| | | |
STATEMENTS OF RETAINED EARNINGS | | 5 |
| | | |
STATEMENTS OF CASH FLOWS | | 6 |
| | | |
NOTES TO FINANCIAL STATEMENTS | | 7-11 |
INDEPENDENT AUDITOR'S REPORT
Report of Independent Certified Public Accountants
To the Stockholders
and Board of Directors of
Twincraft, Inc.
We have audited the accompanying balance sheets of Twincraft, Inc., as of December 31, 2004 and 2003, and the related statements of operations, 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 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 Twincraft, Inc., as of December 31, 2004 and 2003, 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/ Gallagher, Flynn & Company, LLP | | | |
| | | |
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| January 26, 2005 | | | |
TWINCRAFT, INC.
BALANCE SHEETS
DECEMBER 31,
| | | 2004 | | 2003 | |
ASSETS | | | | | |
CURRENT ASSETS | | | | | |
| Cash and cash equivalents | | $ | 216,736 | | $ | 16,990 | |
Accounts receivable, less allowance for doubtful accounts
of approximately $190,000 in 2004 and $300,000 in 2003 | | | 3,216,040 | | | 4,086,215 | |
| Inventories | | | 3,451,559 | | | 3,802,273 | |
| Notes receivable from stockholders | | | 258,845 | | | — | |
| Prepaid expenses | | | 217,189 | | | 185,785 | |
| Total current assets | | | 7,360,369 | | | 8,091,263 | |
| | | | | | | | |
PROPERTY, PLANT AND EQUIPMENT, at cost | | | | | | | |
| Land and building held under capital leases | | | 3,705,957 | | | 3,667,780 | |
| Machinery and equipment | | | 8,632,175 | | | 8,397,593 | |
| Furniture, office equipment and software | | | 1,390,037 | | | 1,334,534 | |
| | | | 13,728,169 | | | 13,399,907 | |
| Less accumulated depreciation and amortization | | | 7,530,604 | | | 6,822,949 | |
| | | | 6,197,565 | | | 6,576,958 | |
OTHER ASSETS | | | | | | | |
| Other Assets | | | 21,000 | | | 32,520 | |
| | | | | | | | |
| | | $ | 13,578,934 | | $ | 14,700,741 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
CURRENT LIABILITIES | | | | | | | |
| Notes payable - bank | | $ | 3,550,000 | | $ | 2,800,000 | |
| Current maturities of capital lease obligations | | | 223,953 | | | 141,642 | |
| Current maturities of long-term debt | | | 350,000 | | | 350,000 | |
| Accounts payable | | | 1,475,287 | | | 1,725,384 | |
| Accrued liabilities | | | 620,537 | | | 882,766 | |
| Income taxes payable | | | 250 | | | 250 | |
| Total current liabilities | | | 6,220,027 | | | 5,900,042 | |
CAPITAL LEASE OBLIGATIONS, less current maturities | | | 1,791,336 | | | 1,670,217 | |
LONG-TERM DEBT, less current maturities | | | 560,000 | | | 910,000 | |
STOCKHOLDERS’ EQUITY | | | | | | | |
Common stock - no par value, 100,000 shares authorized;
49,000 shares issued and outstanding | | | 392 | | | 392 | |
| Additional paid-in capital | | | 681,232 | | | 681,232 | |
| Retained Earnings | | | 4,325,947 | | | 5,538,858 | |
| | | | 5,007,571 | | | 6,220,482 | |
| | | $ | 13,578,934 | | $ | 14,700,741 | |
The accompanying notes are an integral part of these statements.
TWINCRAFT, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
| | | 2004 | | 2003 | |
NET SALES | | $ | 22,266,303 | | $ | 24,179,859 | |
COST OF SALES | | | 17,283,307 | | | 17,883,889 | |
GROSS PROFIT | | | 4,982,996 | | | 6,295,970 | |
OPERATING EXPENSES | | | | | | | |
| Selling and shipping expenses | | | 1,997,350 | | | 1,937,477 | |
| Administrative expenses | | | 2,165,513 | | | 2,326,003 | |
| Lab and research and development expenses | | | 417,286 | | | 421,979 | |
| | | | 4,580,149 | | | 4,685,459 | |
EARNINGS FROM OPERATIONS | | | 402,847 | | | 1,610,511 | |
OTHER (INCOME) EXPENSE | | | | | | | |
| Interest expense | | | 373,283 | | | 337,653 | |
| Loss on abandoned business acquisition | | | 796,463 | | | — | |
| Other (income) expense, net | | | (5,032 | ) | | 6,608 | |
| | | | 1,164,714 | | | 344,261 | |
EARNINGS (LOSS) BEFORE INCOME TAXES | | | (761,867 | ) | | 1,266,250 | |
PROVISION FOR (BENEFIT FROM) INCOME TAXES | | | 250 | | | (145,098 | ) |
NET EARNINGS (LOSS) | | $ | (762,117 | ) | $ | 1,411,348 | |
| | | | | | | | |
The accompanying notes are an integral part of these statements.
TWINCRAFT, INC.
STATEMENTS OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 2004 AND 2003
BALANCE, January 1, 2003 | | $ | 4,127,510 | |
| | | | | |
| Net earnings for the year | | | 1,411,348 | |
| | | | | |
BALANCE, December 31, 2003 | | | 5,538,858 | |
| | | | | |
| Distributions to stockholders | | | (450,794 | ) |
| | | | | |
| Net loss for the year | | | (762,117 | ) |
| | | | | |
BALANCE, December 31, 2004 | | $ | 4,325,947 | |
The accompanying notes are an integral part of these statements.
TWINCRAFT, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
| | | 2004 | | 2003 | |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
| Net earnings (loss) | | $ | (762,117 | ) | $ | 1,411,348 | |
| Noncash items included in net earnings (loss): | | | | | | | |
| Net provision for (recovery from) bad debts | | | (99,000 | ) | | 209,176 | |
| Depreciation and amortization | | | 707,655 | | | 671,703 | |
| Deferred income taxes | | | — | | | (145,348 | ) |
| Gain on sale or disposal of equipment | | | — | | | — | |
| Inventory reserves | | | 33,355 | | | 72,616 | |
| Changes in assets and liabilities: | | | | | | | |
| Accounts receivable | | | 969,175 | | | (1,103,510 | ) |
| Refundable income taxes | | | — | | | 32,268 | |
| Inventories | | | 317,359 | | | (1,261,124 | ) |
| Prepaid expenses | | | (31,404 | ) | | (53,277 | ) |
| Other assets | | | 11,520 | | | (6,001 | ) |
| Accounts payable and accrued expenses | | | (512,326 | ) | | 184,253 | |
| Income taxes payable | | | — | | | (1,302 | ) |
| | | | 1,396,334 | | | (1,400,546 | ) |
| Net cash provided by operating activities | | | 634,217 | | | 10,802 | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
| Acquisition of property and equipment | | | (172,419 | ) | | (139,554 | ) |
| Issuance of notes receivable to stockholders | | | (258,845 | ) | | — | |
| Net cash used in investing activities | | | (431,264 | ) | | (139,554 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
| Net short-term borrowings | | | 750,000 | | | 500,000 | |
| Principal payments on long-term borrowings | | | (350,000 | ) | | (350,000 | ) |
| Proceeds from borrowings under capital lease obligations | | | 217,664 | | | — | |
| Principal payments on capital lease obligations | | | (170,077 | ) | | (78,543 | ) |
| Distributions to stockholders | | | (450,794 | ) | | — | |
| Net cash provided by (used in) financing activities | | | (3,207 | ) | | 71,457 | |
| Net increase (decrease) in cash | | | 199,746 | | | (57,295 | ) |
CASH AND CASH EQUIVALENTS, beginning of year | | | 16,990 | | | 74,285 | |
CASH AND CASH EQUIVALENTS, end of year | | $ | 216,736 | | $ | 16,990 | |
| | | | | | | | |
Supplemental Disclosures of Cash Flows Information | | | | | | | |
| Cash paid during the year for: | | | | | | | |
| Interest expense | | $ | 366,026 | | $ | 337,505 | |
| Income taxes | | $ | 250 | | $ | 1,100 | |
Noncash investing and financing activities:
The Company incurred capital lease obligations (in addition to the borrowings above) for the purchase of machinery and equipment of $155,843 in 2004 and $316,151 in 2003.
The accompanying notes are an integral part of these statements.
TWINCRAFT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
A) SUMMARY OF OPERATIONS AND ACCOUNTING POLICIES
Operations:
Twincraft, Inc., (the Company) a Vermont corporation, manufactures and distributes soap for sale to wholesalers throughout the United States and Canada.
Accounting policies:
A summary of the Company’s significant accounting policies applied in the preparation of the accompanying financial statements follows:
1. Cash and cash equivalents
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.
2. Accounts receivable
Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectibility of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
3. Depreciation and amortization
Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Leased property under capital leases is amortized over the lives of the respective leases or over the service lives of the assets for those leases that substantially transfer ownership. The straight-line and declining balance methods of depreciation are followed for substantially all assets for financial reporting purposes, but accelerated methods are used for tax purposes.
4. Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.
5. Income taxes
Effective January 1, 2003, the Company elected, under Subchapter S of the Internal Revenue Code, not to have the Company taxed as a corporation. Income taxes on net earnings are payable personally by the stockholders. Accordingly, no provision has been made for income taxes other than the state minimum income tax.
6. Use of estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
B) CONCENTRATIONS OF CREDIT RISK
The Company maintains bank account balances, which, at times, may exceed federally insured limits. The Company has not experienced any losses with these accounts. Management believes the Company is not exposed to any significant credit risk on cash.
C) INVENTORIES
| | | 2004 | | 2003 | |
| Inventories consist of the following at December 31: | | $ | 1,476,921 | | $ | 1,961,222 | |
| | | | | | | | |
| Raw materials and components | | | 228,233 | | | 301,457 | |
| Inventory in transit | | | 1,950,958 | | | 1,710,792 | |
| Finished and semi-finished goods | | | 3,656,112 | | | 3,973,471 | |
| | | | | | | | |
| Less reserve for obsolete and slow moving inventory | | | 204,553 | | | 171,198 | |
| | | | | | | | |
| | | $ | 3,451,559 | | $ | 3,802,273 | |
D) NOTE PAYABLE
Note payable consists of the amount due to the KeyBank National Association (“KeyBank National”) under a $5,000,000 revolving line of credit expiring June 2005, and subject to annual renewal thereafter. Borrowings are subject to borrowing base requirements as defined in the agreement. Interest is payable monthly at the bank’s prime rate (5.25% at December 31, 2004), or LIBOR, as defined, (2.44% at December 31, 2004), plus 1.85%. The line of credit is secured by substantially all assets of the Company and a security interest in the land and building owned by and leased from a related party (see Note F). Provisions of the loan agreement include, among other things, restrictions on borrowing and various financial ratios, as defined in the agreement.
The Company has established letters of credit with KeyBank National related to purchases of inventory. These commitments were $225,750 at December 31, 2004, and $433,950 at December 31, 2003.
E) LONG-TERM DEBT
| Long-term debt consists of the following at December 31: | | | | | |
| | | 2004 | | 2003 | |
| | | | | | |
KeyBank National Association - all of the following notes are collateralized by substantially all assets
and land and building leased from a related party (see Note F): | | | | | |
| | | | | | |
Payable in quarterly principal installments of $62,500. Interest payable monthly at the 90-day LIBOR rate (2.34% at December 31, 2004), plus 2%. Due May 1, 2007. | | $ | 625,000 | | $ | 875,000 | |
| | | | | | | | |
Payable in quarterly principal installments of $15,000. Interest payable monthly at the 30-day LIBOR rate (2.5% at December 31, 2004), plus 2.25%. Due July 1, 2007. | | | 165,000 | | | 225,000 | |
| | | | | | | | |
Payable in quarterly principal installments of $10,000. Interest payable monthly at the 30-day LIBOR rate (2.5% at December 31, 2004), plus 2.25%. Due December 1, 2007. | | | 120,000 | | | 160,000 | |
| | | | 910,000 | | | 1,260,000 | |
| | | | | | | | |
| Principal payments due within one year | | | 350,000 | | | 350,000 | |
| | | $ | 560,000 | | $ | 910,000 | |
As of December 31, 2004, long-term debt matures as follows:
Years ending
December 31, | | Amount | |
| 2005 | | $ | 350,000 | |
| 2006 | | | 350,000 | |
| 2007 | | | 210,000 | |
| | | $ | 910,000 | |
F) LEASE OBLIGATIONS
Capital leases - related party
The Company leases manufacturing and distribution facilities in Winooski, Vermont, under two capital leases from a partnership whose partners are related to the Company’s stockholders. The leased facilities are pledged as security for all debt due to KeyBank National Association (see Notes D and E), as well as the partnership’s mortgage debt. The original agreement expires December 31, 2008, and includes one five-year renewal option, which is included in the calculation of the obligation under capital leases. The attached distribution facility is leased under an agreement that expires in December 2013.
Capital leases - unrelated party
The Company leases equipment under a master lease agreement with Key Equipment Finance, a division of Key Corporate Capital, Inc., for the lease of various machinery and equipment under agreements that qualify for treatment as capital leases. The leases expire in July 2009 and October 2003, respectively.
Leases that meet the criteria of capital leases have been capitalized and the related assets are included in property, plant and equipment in the following amounts at December 31:
| | | 2004 | | 2003 | |
| Land and buildings | | $ | 1,769,268 | | $ | 1,769,268 | |
| Machinery and equipment | | | 752,078 | | | 353,425 | |
| | | | 2,521,346 | | | 2,122,693 | |
| Less accumulated amortization | | | 885,988 | | | 679,943 | |
| | | $ | 1,635,358 | | $ | 1,442,750 | |
The following is a schedule by years of future minimum lease payments, together with the present value of the net minimum lease payments, as of December 31, 2004:
| | Amount | |
| 2005 | | $ | 415,305 | |
| 2006 | | | 415,305 | |
| 2007 | | | 415,305 | |
| 2008 | | | 409,555 | |
| 2009 | | | 312,011 | |
| Thereafter | | | 1,056,000 | |
| Total minimum lease payments | | | 3,023,481 | |
| Amount representing interest | | | 1,008,192 | |
| | | | 2,015,289 | |
| Current obligation under capital leases | | | 223,953 | |
| | | | | |
| Present value of long-term obligation under capital leases | | $ | 1,791,336 | |
Total interest expense charged to operations in connection with the related party capital leases was approximately $181,000 in 2004 and $190,000 in 2003.
Operating lease - related party
During October 2003, the Company entered into a lease of warehouse and manufacturing facilities in Essex, Vermont from a related party. The lease agreement requires monthly payments of $18,975 and expires October 2005, with an option to extend from year to year thereafter. Rent expense in connection with this lease was approximately $245,000 in 2004 and $51,000 in 2003. Future minimum lease payments are $189,750 for the year ending December 31, 2005.
G) INCOME TAXES
The provision for (benefit from) income taxes consists of the following at December 31:
| | | 2004 | | 2003 | |
| Currently payable - state minimum taxes | | $ | 250 | | $ | 250 | |
| Deferred - change in tax status to S corporation | | | — | | | (145,348 | ) |
| | | $ | 250 | | $ | (145,098 | ) |
There were no deferred income tax assets and liabilities at December 31, 2004 and 2003.
The Company’s effective income tax rate for 2003 is lower than what would have been expected if the federal statutory rate was applied to earnings, primarily because of the conversion to S corporation status.
H) DEFINED CONTRIBUTION RETIREMENT PLAN
The Company has a 401(k) plan (the Plan) that covers substantially all employees. Contributions to the Plan are at the discretion of the board of directors. Contributions to the Plan charged to operations were $30,076 in 2004 and $26,640 in 2003.
I) MAJOR CUSTOMERS
During 2004, the Company sold a substantial portion of its products to two customers. Sales to these customers were approximately $3,516,000 (16.0% of net sales) and $3,111,000 (14.1% of net sales). Amounts due from these customers, included in trade accounts receivable, were approximately $763,000 and $175,000, respectively, at December 31, 2004.
During 2003, the Company sold a substantial portion of its products to two customers. Sales to these customers were approximately $3,440,000 (14.2% of net sales) and $3,030,000 (12.5% of net sales). Amounts due from these customers, included in trade accounts receivable, were approximately $998,000 and $693,000, respectively, at December 31, 2003.
J) MAJOR SUPPLIERS
During 2004, the Company purchased a substantial portion of its raw materials from one supplier. Purchases from this vendor were approximately $1,190,000 (11.8% of total purchases). Amounts due to this supplier, included in accounts payable, were approximately $185,000 at December 31, 2004.
During 2003, the Company purchased a substantial portion of its raw materials from one supplier. Purchases from this vendor were approximately $1,260,000 (11.9% of total purchases). Amounts due to this supplier, included in accounts payable, were approximately $155,000 at December 31, 2003.
K) LITIGATION AND CONTINGENT ASSETS
The Company was a plaintiff in a legal suit against a customer for which the Company manufactured products totaling approximately $100,000. The suit alleged that the customer defaulted on payment for these goods and was avoiding payment by diverting assets to another entity created by the customer’s owners. During 2003, the court ruled in the Company’s favor. In late 2003, funds representing the judgment in the amount of approximately $103,000 were deposited into an escrow account pending a final court decision for disposition of the funds. Although the Company is confident that it will prevail in the ultimate recovery of these funds, no provision for recovery has been recognized in the accompanying financial statements.
The Company is a plaintiff in a lawsuit against a vendor for damages incurred to correct defective materials provided by the vendor. The vendor has filed a counter-suit for the Company’s nonpayment of charges related to its sale of materials to the Company. Although management intends to vigorously pursue it claim and defend its position, outside counsel has advised that it is unable to offer an opinion as to the likelihood of an unfavorable outcome.
L) LOAN GUARANTEE
The Company’s owners are related to individuals who are 100% general partners in a partnership from which the Company leases its manufacturing facilities (see Note F). The partnership obtained bank financing secured by a mortgage in order to purchase and improve the facilities. For no consideration, the Company agreed to guarantee the bank debt on behalf of the partnership, and can be required to perform on the guarantee only in the event of nonpayment of the debt by the partnership. Management evaluates the Company’s exposure to loss at each balance sheet date and provides accruals for such as deemed necessary. No accruals were deemed necessary at December 31, 2004 or 2003.
M) OTHER (INCOME) EXPENSE - LOSS ON ABANDONED BUSINESS ACQUISITION
During 2004, the Company undertook an effort to acquire a business in a complementary segment of the industry. The potential acquisition included the Company operating the target company under an “operating agreement” that required the Company to make certain working capital investments. The effort was abandoned during the summer of 2004 and the Company wrote off as a charge to earnings the net investment in the operation during its period of operation. The total loss included in other expense of $796,463 includes all direct costs associated with the abandoned acquisition attempt.
N) PENDING ADOPTION OF ACCOUNTING STANDARD AND RELATIONSHIP WITH RELATED PARTNERSHIPS
In December 2003, the Financial Accounting Standards Board issued Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities. FIN 46R establishes standards for identifying a variable interest entity and for determining under what circumstances a variable interest entity should be consolidated with its primary beneficiary. The requirements of FIN 46R will apply to the Company for its year ending December 31, 2005.
Prior to FIN 46R, a company generally included another entity in the company’s financial statements only if it controlled the entity through ownership of the majority voting interests. FIN 46R changes that by requiring a variable interest entity to be consolidated by a company if that company is the primary beneficiary, as evidenced by being subject to a majority of the risk of loss from the variable interest entity’s activities, or entitled to receive a majority of the entity’s residual returns, or both.
While management has not yet completed its evaluation of the requirements of FIN 46R, management believes it is reasonably possible the Company will consolidate or be required to provide certain additional disclosures about the partnerships described in Notes F and L when FIN 46R becomes effective.
O) RELATED PARTY TRANSACTIONS
Notes receivable
During 2004, the Company issued unsecured notes receivable to the stockholders, due on demand, totaling $258,845. Interest is payable at 2.5%.
Capital leases
The Company leases facilities from related parties (see Note F).
