EXHIBIT 99.3
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tibbetts Industries, Inc.
We have audited the accompanying balance sheets of Tibbetts Industries, Inc. as
of September 30, 2006 and October 1, 2005, and the related statements of
operations, changes in stockholders' equity 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 Tibbetts Industries, Inc. at
September 30, 2006 and October 1, 2005, 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/Baker Newman & Noyes
Portland, Maine Limited Liability Company
October 20, 2006
1
TIBBETTS INDUSTRIES, INC.
BALANCE SHEETS
September 30, 2006 and October 1, 2005
ASSETS (Note 3)
2006 2005
---------- ----------
Current assets:
Cash $ 33,507 $ 53,133
Accounts receivable, net of allowance
of $47,000 in 2005 (note 7) 1,287,496 973,456
Inventories (note 2) 932,069 705,436
Prepaid expenses 36,454 46,506
Deferred income taxes (note 4) 94,300 121,000
Income taxes receivable 2,500 30,041
Equity in income of joint venture (note 7) -- 4,500
---------- ----------
Total current assets 2,386,326 1,934,072
Property, plant and equipment, at cost:
Land 25,848 25,848
Buildings and improvements 526,143 559,322
Machinery and equipment 1,449,237 1,947,155
Furniture and office equipment 330,654 304,072
---------- ----------
2,331,882 2,836,397
Less accumulated depreciation and amortization 1,303,592 1,757,873
---------- ----------
1,028,290 1,078,524
Construction in process (note 9) 367,024 60,660
---------- ----------
1,395,314 1,139,184
Patents, at cost:
Issued 360,929 322,296
Pending 32,942 55,135
---------- ----------
393,871 377,431
Less accumulated amortization 128,980 109,750
---------- ----------
264,891 267,681
---------- ----------
$4,046,531 $3,340,937
========== ==========
2
LIABILITIES AND STOCKHOLDERS' EQUITY
2006 2005
---------- ----------
Current liabilities:
Note payable to bank (note 3) $ 400,000 $ 325,000
Current portion of long-term debt 405,915 277,118
Accounts payable 188,267 195,250
Accrued liabilities 242,691 218,255
Equity in loss of joint venture (note 7) 60,557 --
---------- ----------
Total current liabilities 1,297,430 1,015,623
Deferred income taxes (note 4) 136,100 121,000
Long-term debt, net of current portion (note 3) 697,788 569,279
---------- ----------
Total liabilities 2,131,318 1,705,902
Stockholders' equity:
Common stock, $1 stated value; authorized 250,000
shares; issued and outstanding 179,309 shares 179,309 179,309
Additional paid-in capital 575,016 575,016
Retained earnings 1,160,888 880,710
---------- ----------
Total stockholders' equity 1,915,213 1,635,035
$4,046,531 $3,340,937
========== ==========
See accompanying notes.
3
TIBBETTS INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
Years Ended September 30, 2006 and October 1, 2005
2006 2005
----------- -----------
Net sales $ 7,213,831 $ 7,029,258
Cost of goods sold 5,216,929 5,739,631
----------- -----------
Gross profit 1,996,902 1,289,627
Selling, general, administrative and research
and development expenses (note 5) 1,546,170 1,622,026
----------- -----------
Income (loss) from operations 450,732 (332,399)
Other income (expense):
Interest expense (79,334) (75,741)
Equity in income (loss) of joint venture
(note 7) (65,057) 33,250
Other income, net 20,871 31,220
----------- -----------
(123,520) (11,271)
----------- -----------
Income (loss) before income taxes 327,212 (343,670)
Income tax benefit (expense) (note 4) (47,034) 74,778
----------- -----------
Net income (loss) $ 280,178 $ (268,892)
=========== ===========
See accompanying notes.
4
TIBBETTS INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended September 30, 2006 and October 1, 2005
Additional
Common Paid-In Retained
Stock Capital Earnings Total
----------- ----------- ----------- -----------
Balances at October 2, 2004 $ 179,309 $ 575,016 $ 1,149,602 $ 1,903,927
Net loss -- -- (268,892) (268,892)
----------- ----------- ----------- -----------
Balances at October 1, 2005 179,309 575,016 880,710 1,635,035
Net income -- -- 280,178 280,178
----------- ----------- ----------- -----------
Balances at September 30, 2006 $ 179,309 $ 575,016 $ 1,160,888 $ 1,915,213
=========== =========== =========== ===========
See accompanying notes.
5
TIBBETTS INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
Years Ended September 30, 2006 and October 1, 2005
2006 2005
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 280,178 $(268,892)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation 218,661 276,766
Amortization 19,230 18,294
Equity in (income) loss of joint venture 65,057 (33,250)
Deferred income taxes 41,800 (85,000)
Changes in operating assets and liabilities:
Accounts receivable (314,040) (13,893)
Inventories (226,633) 262,424
Prepaid expenses 10,052 (3,925)
Accounts payable (6,983) (172,828)
Income taxes payable/receivable 27,541 (35,000)
Accrued liabilities 24,436 (17,729)
--------- ---------
Net cash provided (used) by operating activities 139,299 (73,033)
Cash flows from investing activities:
Additions to property, plant and equipment (474,791) (83,116)
Additions to patents (16,440) (27,112)
--------- ---------
Net cash used by investing activities (491,231) (110,228)
Cash flows from financing activities:
Increase in note payable to bank, net 75,000 225,000
Issuance of long-term debt 448,645 --
Principal payments on long-term debt (191,339) (143,834)
--------- ---------
Net cash provided by financing activities 332,306 81,166
--------- ---------
Net decrease in cash (19,626) (102,095)
Cash, beginning of year 53,133 155,228
--------- ---------
Cash, end of year $ 33,507 $ 53,133
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 81,430 $ 77,838
Cash paid for (received from) income taxes (22,307) 45,222
See accompanying notes.
TIBBETTS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and October 1, 2005
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Tibbetts Industries, Inc. (the Company) is located in Camden, Maine and
primarily produces microphones, receivers and audio coils used in hearing
aids and other communication products. The Company's chief markets include
the United States, Europe, Canada, Australia and Japan.
At September 30, 2006, accounts receivable from three commercial customers
(including the related party described in note 7) represented 71% of total
accounts receivable and accounts receivable from the U.S. Government
represented another 12%. At October 1, 2005, accounts receivable from two
commercial customers (including the related party described in note 7)
represented 60% of total accounts receivable and accounts receivable from
the U.S. Government represented another 24%.
Revenues from the U.S. Government represented approximately 31% and 43% of
total sales in 2006 and 2005, respectively.
FISCAL YEAR
The Company determines its fiscal year on a 52-53 week basis, ending on
the Saturday closest to September 30.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management of the Company to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
ACCOUNTS RECEIVABLE
Accounts receivable are carried net of an allowance for doubtful accounts,
as determined by management, after considering the nature and
circumstances of past due accounts. Accounts are charged off when deemed
uncollectible. Management determined that no allowance for doubtful
accounts was necessary at September 30, 2006.
INVESTMENT IN JOINT VENTURE
The Company accounts for its investment in a joint venture (note 7) using
the equity method.
INVENTORIES
Inventories are recorded at the lower of cost (first-in, first-out) or
market.
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TIBBETTS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and October 1, 2005
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
For financial statement purposes, depreciation is provided by the use of
the straight-line method over estimated useful lives, principally as
follows:
Years
Buildings and improvements 15 - 33
Machinery and equipment 5 - 10
Furniture and office equipment 5 - 10
Maintenance and repairs are charged to expense as incurred; replacements
and betterments are capitalized. Upon retirement or sale, the cost of the
assets disposed of and the related accumulated depreciation or
amortization are removed from the accounts and any resulting gain or loss
is included in the determination of net income.
Costs incurred in constructing machinery and equipment are included in
construction in process and depreciated when placed in service.
PATENTS
Patents are amortized over their estimated useful lives, principally
seventeen years, and written off when considered obsolete.
REVENUE RECOGNITION
Sales, other than revenues from cost reimbursable contracts, are recorded
as products are shipped.
Revenues under cost reimbursable contracts are recorded on a pro-rata
basis as costs are incurred under the terms of the related contracts.
INCOME TAXES
The Company provides for deferred income taxes using the liability method
as prescribed by Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES. Under this method, deferred income taxes are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of assets and liabilities
and their respective tax bases. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
8
TIBBETTS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and October 1, 2005
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Interpretation No. 46, CONSOLIDATION
OF VARIABLE INTEREST ENTITIES ("FIN 46"), was issued in January 2003 and
amended in December 2003. FIN 46 requires that if an entity is the primary
beneficiary of a variable interest entity, the assets, liabilities and
results of operations of the variable interest entity should be included
in the consolidated financial statements of the entity. The provisions of
FIN 46 are effective immediately for all arrangements entered into after
December 31, 2003. For those arrangements entered into prior to December
31, 2003, the provisions of FIN 46 were required to be adopted by the
Company at the beginning of fiscal 2006. Management has concluded that the
Company is not required to consolidate an affiliated joint venture whose
activities are described in note 7.
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 151, INVENTORY COSTS. The
new standard clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material. The
standard also requires the allocation of fixed production costs based on
normal capacity of production facilities. The Statement became effective
for the Company in fiscal 2006, but did not have a significant impact on
the Company's financial condition or results of operations.
In July 2006, the FASB issued Interpretation No. 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES, ("FIN 48"). FIN 48 will require several new
disclosures in financial statements and will be effective for the Company
in fiscal 2008.
2. INVENTORIES
A summary of inventories at September 30, 2006 and October 1, 2005 is set
forth below:
2006 2005
--------- ---------
Raw materials $ 465,937 $ 267,032
Supplies 27,661 21,635
Work-in-process 341,124 360,268
Finished units 97,347 56,501
---------- ----------
$ 932,069 $ 705,436
========== ==========
At September 30, 2006 and October 1, 2005, work in process inventory
included $86,000 and $174,000, respectively, of costs and estimated
earnings in excess of billings on uncompleted contracts.
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TIBBETTS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and October 1, 2005
3. NOTE PAYABLE TO BANK AND LONG-TERM DEBT
Note payable to bank consists of borrowings outstanding under a working
capital line of credit. Borrowings of up to $650,000 are available,
subject to levels of accounts receivable and inventories. At September 30,
2006, $400,000 was outstanding and $250,000 was available to be borrowed
under the line. The line bears interest at a variable rate (9.25% at
September 30, 2006) and is subject to renewal January 1, 2007.
At September 30, 2006 and October 1, 2005, long-term debt consisted of the
following:
2006 2005
------------ ----------
Mortgage note payable monthly through March 2011,
variable interest rate (9.25% at September 30, 2006) $ 301,301 $ 352,231
Mortgage note payable monthly through October 2007,
variable interest rate (7.75% at September 30, 2006) 7,909 99,757
Mortgage note payable monthly through March 2014, fixed
interest rate of 5.93% through March 2009 then variable 266,785 280,701
Borrowings under $350,000 equipment line of credit payable monthly through
January 1, 2007, when line is subject to renewal, variable interest
(9.00 - 9.25% at September 30, 2006) 312,708 113,708
Mortgage note payable monthly through September 2016,
variable interest (7.76% at September 30, 2006) 215,000 --
------------ ----------
1,103,703 846,397
Less current portion 405,915 277,118
------------ ----------
$ 697,788 $ 569,279
============ ==========
All of the borrowings are secured by substantially all Company assets and
are subject to the Company maintaining certain financial covenants.
The aggregate maturities of long-term debt at September 30, 2006 are as
follows:
2006 $ 405,915
2007 92,611
2008 100,704
2009 104,947
2010 82,708
Thereafter 316,818
------------
$ 1,103,703
============
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TIBBETTS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and October 1, 2005
3. NOTES PAYABLE TO BANK AND LONG-TERM DEBT (CONTINUED)
The above maturities include all borrowings under the equipment line of
credit ($312,708) as payable in 2007. Scheduled maturities for the
equipment line are approximately $73,000 in fiscal 2007.
4. INCOME TAXES
Income tax benefit (expense) consisted of the following for the years
ended September 30, 2006 and October 1, 2005:
2006 2005
---------- ----------
Current receivable (payable):
Federal $ -- $ --
State (5,234) (10,222)
---------- ----------
(5,234) (10,222)
Deferred:
Federal (30,500) 68,000
State (11,300) 17,000
---------- ----------
(41,800) 85,000
---------- ----------
$ (47,034) $ 74,778
========== ==========
The Company's effective income tax rate differed from statutory rates
primarily due to the valuation allowance related to net operating loss
carryforwards generated in 2005 but utilized in 2006.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting versus income tax purposes. Deferred tax assets (liabilities)
consisted of the following at September 30, 2006 and October 1, 2005,
respectively:
2006 2005
---------- ----------
Deferred tax assets:
Inventory $ 33,700 $ 44,000
Accrued expenses and other 60,600 77,000
Net operating loss carryforwards -- 100,000
---------- ----------
94,300 221,000
Less valuation allowance -- (77,000)
---------- ----------
94,300 144,000
Deferred tax liabilities:
Depreciation (136,100) (144,000)
---------- ----------
$ (41,800) $ --
=========== ==========
11
TIBBETTS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and October 1, 2005
5. RESEARCH AND DEVELOPMENT ACTIVITIES
The Company incurred research and development expenses of approximately
$489,000 and $623,000 during the years ended September 30, 2006 and
October 1, 2005, respectively.
6. EMPLOYEE BENEFITS
The Company sponsors a contributory retirement plan, which is a defined
contribution plan under Section 401(k) of the Internal Revenue Code and
which covers substantially all of its employees. Employer contributions to
the Plan are at the employer's discretion. Vesting of employer
contributions begins at six months at 20% and increases each year until
the participant is 100% vested at five years of service. Participants are
entitled, upon termination or retirement, to their vested portion of plan
assets, which are held by a third party trustee. The Company's
contributions were approximately $37,000 and $36,000 for the years ended
September 30, 2006 and October 1, 2005, respectively.
The Company also has an incentive bonus plan based on annual operating
results. No expense was incurred in fiscal 2006 and approximately $5,000
was incurred in 2005 related to this plan.
7. JOINT VENTURE
In 2003, the Company entered into a joint venture with a Swiss company to
market, design, manufacture, and sell audio coils to the hearing health
industry. The Company paid $7,590 for its 50% interest in the venture. The
Company recorded sales of approximately $2,560,000 and $1,558,000 through
the joint venture in 2006 and 2005, respectively. Related accounts
receivable due from the joint venture were $413,599 and $486,159 at
September 30, 2006 and October 1, 2005, respectively.
Condensed unaudited financial information of the joint venture at and for
the years ended September 30, 2006 and October 1, 2005 follows:
2006 2005
---- ----
Balance sheet:
Cash $ 257,023 $ 264,526
Accounts receivable 465,052 498,364
Other assets 24,219 1,864
------------ ------------
Total assets 746,294 764,754
Accounts payable (867,409) (755,754)
------------ ------------
Total stockholders' equity (deficit) $ (121,115) $ 9,000
============ ============
Income Statement:
Net revenues $ 3,195,000 $ 2,833,000
============ ============
Net income (loss) $ (130,115) $ 66,500
============ ============
12
TIBBETTS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and October 1, 2005
7. JOINT VENTURE (CONTINUED)
A substantial portion of the joint venture's accounts receivable and
revenues are with one commercial customer.
Also in connection with the joint venture, the Company entered into a
long-term supply agreement to have its audio coils manufactured by a
foreign-based company. The transfer of such manufacturing activities
occurred in fiscal 2005.
8. TECHNOLOGY TRANSFER
In fiscal 1999, the Company entered into an agreement with a start-up
venture to transfer certain of its technology and know-how and provide
initial consulting services. The Company received cash payments as well as
95,000 shares (0.3%) of the venture's common stock and per-unit royalties
(up to $800,000 in the aggregate) based on future sales of the product by
the venture. No value has been assigned to such stock in the accompanying
financial statements due to the start-up nature of the venture's
operations and the lack of marketability of its stock. No royalties were
received in fiscal 2006 or 2005.
9. CONSTRUCTION IN PROCESS
At September 30, 2006, construction in process includes approximately
$205,000 related to improvements to the Company's manufacturing facility
in Maine. The project is expected to be completed in early fiscal 2007 at
a total cost of approximately $215,000.
13