EXHIBIT 99.2
THERMAL STRUCTURES, INC.
Financial Statements for the Years Ended
October 25, 1998 and October 26, 1997,
Supplemental Schedules, and Independent
Auditors' Report
THERMAL STRUCTURES, INC.
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Balance sheets as of October 25, 1998 and October 26, 1997 2
Statements of income and retained earnings
for the years ended October 25, 1998 and October 26, 1997 3
Statements of cash flows
for the years ended October 25, 1998 and October 26, 1997 4
Notes to financial statements
for the years ended October 25, 1998 and October 26, 1997 5
SUPPLEMENTARY INFORMATION -
Schedules of cost of sales
for the years ended October 25, 1998 and October 26, 1997 12
Schedules of selling, general and administrative expenses
for the years ended October 25, 1998 and October 26, 1997 13
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Thermal Structures, Inc.
We have audited the accompanying balance sheets of Thermal Structures, Inc. (the
Company) as of October 25, 1998 and October 26, 1997, 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 these financial statements based on
our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Thermal Structures, Inc. as of October 25,
1998 and October 26, 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information in the
schedules of cost of sales and the schedules of selling, general, and
administrative expenses (pages 12 and 13) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements. These schedules are the responsibility of the Company's management.
Such schedules have been subjected to the auditing procedures applied in our
audit of the basic financial statements and, in our opinion, are fairly stated
in all material respects when considered in relation to the basic financial
statements taken as a whole.
/s/ Deloitte & Touche LLP
January 28, 1999
THERMAL STRUCTURES, INC.
BALANCE SHEETS
AS OF OCTOBER 25, 1998 AND OCTOBER 26, 1997
1998 1997
------------ ------------
ASSETS
Cash $ 602,839 $ 102,436
Accounts receivable, net of allowance for doubtful accounts
of $38,550 in 1998 and 1997 3,913,953 2,528,792
Current portion of note receivable (Note 4) 145,305 133,969
Inventories (Note 2) 1,574,984 1,033,295
Prepaid expenses and other current assets 73,615 66,500
Deferred tax asset (Note 8) 149,000 66,000
Asset held for sale 125,000
------------ ------------
Total current assets 6,584,696 3,930,992
MACHINERY, EQUIPMENT, AND IMPROVEMENTS (Note 3) 805,330 565,502
OTHER ASSETS 120,133 81,089
NOTES RECEIVABLE, less current portion (Note 4) 488,937 644,031
------------ ------------
$ 7,999,096 $ 5,221,614
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,711,164 $ 963,434
Current portion of capital lease obligation (Note 5) 5,097
------------ ------------
Total current liabilities 1,716,261 963,434
CAPITAL LEASE OBLIGATION, less current portion (Note 5) 22,528
LEASE COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, no par value; 1,000,000 shares authorized;
2,460 shares issued and outstanding 221,223 221,223
Retained earnings 12,375,016 10,282,513
Due from affiliates (Note 6) (6,335,932) (6,245,556)
------------ ------------
Total stockholders' equity 6,260,307 4,258,180
------------ ------------
$ 7,999,096 $ 5,221,614
============ ============
See accompanying notes to financial statements. 2
THERMAL STRUCTURES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997
% of % of
1998 net sales 1997 net sales
----------- ------------- ----------- -------------
NET SALES $19,021,788 100.0% $15,474,975 100.0%
COST OF SALES 10,065,566 52.9 8,203,505 53.0
----------- ------------- ----------- -------------
GROSS PROFIT 8,956,222 47.1 7,271,470 47.0
OPERATING EXPENSES:
Selling, general, and administrative
expenses (Notes 7 and 9) 3,173,653 16.7 2,302,316 14.9
Research and development expense -- -- 98,934 0.6
Management fees (Note 9) 2,445,942 12.9 -- 12.9
----------- ------------- ----------- -------------
Total operating expenses 5,619,595 29.6 2,401,250 15.5
----------- ------------- ----------- -------------
OPERATING INCOME 3,336,627 17.5 4,870,220 31.5
INTEREST INCOME, net 51,876 0.3 53,778 0.3
----------- ------------- ----------- -------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 3,388,503 17.8 4,923,998 31.8
PROVISION FOR INCOME TAXES
(Note 8) 1,296,000 6.8 1,939,000 12.5
----------- ------------- ----------- -------------
NET INCOME 2,092,503 11.0% 2,984,998 19.3%
============= =============
RETAINED EARNINGS, beginning of year 10,282,513 7,297,515
----------- -----------
RETAINED EARNINGS, end of year $12,375,016 $10,282,513
=========== ===========
See accompanying notes to financial statements. 3
THERMAL STRUCTURES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,092,503 $ 2,984,998
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 173,717 56,326
Deferred taxes (83,000) 139,000
Changes in operating assets and liabilities:
Accounts receivable (1,385,161) (45,497)
Inventories (541,689) (417,472)
Prepaid expenses and other current assets (7,115) 2,639
Other assets (40,779) 138,328
Accounts payable and accrued expenses 747,730 78,747
Other liabilities -- 12,980
----------- -----------
Net cash provided by operating activities 956,206 2,950,049
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of machinery, equipment, and improvements (386,430) (244,233)
Collection on notes receivable 143,758
----------- -----------
Net cash used in investing activities (242,672) (244,233)
CASH FLOWS FROM FINANCING ACTIVITIES -
Advances to Parent (213,131) (2,633,678)
----------- -----------
NET INCREASE IN CASH 500,403 72,138
CASH, beginning of year 102,436 30,298
----------- -----------
CASH, end of year $ 602,839 $ 102,436
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS -
During the year ended October 25, 1998, the Company transferred machinery of
$125,000 to a current asset held for sale, $122,755 to its parent, CME, and
purchased fixed assets and executed a capital lease for $27,625.
See accompanying notes to financial statements. 4
THERMAL STRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Thermal Structures, Inc. (TSI or the Company) is a
majority-owned subsidiary of Thermal Holding, Inc., which is a wholly owned
subsidiary of California Manufacturing Enterprises, Inc. (CME or the
Parent). The Company manufactures thermal insulation devices primarily for
the aerospace industry, as well as the mass transit, automotive, and
construction industries.
FISCAL YEAR - The Company's fiscal year for financial reporting and income
tax purposes ends on the last Sunday in October.
CREDIT RISK - The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses.
INVENTORIES - Inventories are stated at the lower of cost or market; cost
is determined using the first-in, first-out method.
MACHINERY, EQUIPMENT, AND IMPROVEMENTS - Machinery, equipment, and
improvements are stated at cost less accumulated depreciation and
amortization. Property is depreciated or amortized over the estimated
useful lives of the assets. Leasehold improvements are amortized over the
shorter of the estimated useful lives of improvements or the term of the
related lease. Assets are depreciated on a straight-line basis. The
estimated useful lives of the related assets range from five to ten years.
LONG-LIVED ASSETS - The Company accounts for impairment and disposition of
long-lived assets in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. In accordance with SFAS
No. 121, long-lived assets to be held are reviewed for events or changes in
circumstances which indicate that their carrying value may not be
recoverable. At October 25, 1998, the Company evaluated its long-lived
assets and determined that all amounts as stated were recoverable.
INCOME TAXES - The results of the operations of the Company are included in
the tax return of CME. The Company's provision in lieu of income taxes is
based on a tax-sharing agreement with CME, which, in general, allocates a
provision in lieu of income taxes to the Company as if it were calculated
on a stand-alone basis. Income taxes are accounted for in accordance with
SFAS No. 109, ACCOUNTING FOR INCOME TAXES. A valuation allowance related to
any net deferred tax assets is recorded when it is more likely than not
that some portion or all of the deferred tax asset will not be realized.
REVENUE RECOGNITION - Revenues are recognized upon shipment of products to
the customer.
RESEARCH AND DEVELOPMENT - Research and development costs consist of
expenditures incurred during the course of planned search and investigation
aimed at discovery of new knowledge which will be useful in developing new
products or processes, or significantly enhancing existing products or
5
THERMAL STRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997 (CONTINUED)
production processes, and the implementation of such through design,
testing of product alternatives, or construction of prototypes. The Company
expenses all research and development costs as they are incurred.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management 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 year. Actual results could differ from those
estimates.
SIGNIFICANT CUSTOMERS - For the years ended October 25, 1998 and October
26, 1997, four and three customers, respectively, accounted for
approximately 53% and 35%, respectively, of the Company's sales. The loss
of, or a reduction in sales to, any such customers could have a material
adverse effect on the Company's business, operating results, and financial
condition.
RECLASSIFICATIONS - Certain reclassifications have been made to the October
26, 1997, financial statements to conform them to the October 25, 1998,
presentation.
2. INVENTORIES
Inventories consist of the following at October 25, 1998 and October 26,
1997:
1998 1997
---------- ----------
Raw materials and supplies $ 921,146 $ 587,898
Work-in-process 347,077 238,747
Finished goods 306,761 206,650
---------- ----------
$1,574,984 $1,033,295
========== ==========
6
THERMAL STRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997 (CONTINUED)
3. MACHINERY, EQUIPMENT, AND IMPROVEMENTS
Machinery, equipment, and improvements consist of the following at October
25, 1998 and October 26, 1997:
1998 1997
----------- -----------
Computer equipment $ 75,263 $ 36,407
Machinery and equipment 1,697,120 1,650,835
Leasehold improvements 618,293 327,255
Office furniture and fixtures 84,614 38,757
Auto and truck 11,363 39,134
Construction-in-process 151,436 167,033
----------- -----------
2,638,089 2,259,421
Less accumulated depreciation
and amortization (1,832,759) (1,693,919)
----------- -----------
$ 805,330 $ 565,502
=========== ===========
4. NOTES RECEIVABLE
Notes receivable consists of the following at October 25, 1998 and October
26, 1997:
1998 1997
--------- ---------
8% note receivable from an individual,
collateralized by certain business assets
and two deeds of trust on personal
residences, payable in monthly installments
of $15,620 including interest through
September 14, 2002 $ 634,242 $ 778,000
Less current portion (145,305) (133,969)
--------- ---------
$ 488,937 $ 644,031
========= =========
7
THERMAL STRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997 (CONTINUED)
5. LEASE COMMITMENTS
The Company entered into a five-year capital lease for its phone system
during the year ended October 25, 1998. Future minimum commitments under
the lease as of October 25, 1998, consist of the following:
Year ending:
1999 $ 7,152
2000 7,152
2001 7,152
2002 7,152
2003 4,172
--------
Total future minimum lease payments 32,780
Less amount representing interest (5,155)
--------
Present value of net future minimum lease payments 27,625
Less current portion (5,097)
--------
Noncurrent portion $ 22,528
========
The Company has a noncancelable operating lease for its facility, which
expires on July 1, 2003, and operating equipment leases expiring through
1999. Future minimum rental commitments under the leases consist of the
following at October 25, 1998:
FACILITY EQUIPMENT TOTAL
Year ending:
1999 $ 427,555 $15,471 $ 443,026
2000 404,304 404,304
2001 351,312 351,312
2002 167,400 167,400
2003 109,812 109,812
---------- ------- ----------
$1,460,383 $15,471 $1,475,854
========== ======= ==========
Total facility and equipment rent expense was $509,651 and $330,864,
respectively, for the years ended October 25, 1998 and October 26, 1997.
8
THERMAL STRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997 (CONTINUED)
6. DUE FROM AFFILIATES
A summary of significant balances with affiliated companies at October 25,
1998 and October 26, 1997, is as follows:
1998 1997
---------- ----------
Receivable from affiliates:
California Manufacturing Enterprises, Inc. $6,180,666 $6,217,126
Quality Honeycomb, Inc. 122,353 28,430
R&R Stamping & Fourslide (dba CME Metalforming) 31,468
Intriplex Technologies, Inc. 1,445
---------- ----------
$6,335,932 $6,245,556
========== ==========
The Company's parent, CME, receives substantially all cash flows resulting
from the operations of the Company. As such, the financial statements
include amounts due from affiliate within stockholders' equity representing
cash flows transferred from the Company to CME. The receivable from Quality
Honeycomb, Inc. resulted from charges for certain general management,
accounting, and administrative support provided by the Company to its
affiliate, Quality Honeycomb.
7. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution retirement plan (the Plan) that
meets the requirements of Section 401(k) of the Internal Revenue Code and
covers substantially all employees. During the years ended October 25, 1998
and October 26, 1997, the Company contributed $70,678 and $57,579,
respectively, to the Plan.
8. INCOME TAXES
The provision for income taxes for the years ended October 25, 1998 and
October 26, 1997, is based on the following components:
1998 1997
---------- ----------
Current income taxes:
Federal $1,073,000 $1,405,000
State 306,000 395,000
---------- ----------
1,379,000 1,800,000
========== ==========
9
THERMAL STRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997 (CONTINUED)
1998 1997
---------- ----------
Deferred income taxes:
Federal $ (70,000) $ 104,000
State (13,000) 35,000
---------- ----------
(83,000) 139,000
---------- ----------
$1,296,000 $1,939,000
========== ==========
The primary difference between income tax expense and the amount of income
tax that would result from applying the federal statutory rate to income
resulted primarily from state income taxes, nondeductible officers' life
insurance premiums, and meal and entertainment expenses.
Components of the Company's net deferred taxes at October 25, 1998 and
October 26, 1997, are accelerated depreciation, capitalized overhead costs,
an allowance for doubtful accounts, state enterprise zone tax credits, and
certain accrued liabilities.
9. RELATED-PARTY TRANSACTIONS
The Company recorded $48,600 of general management, accounting, and
administrative support costs in selling, general, and administrative
expense allocated from its parent, CME, for the year ended October 26,
1997.
Commencing on November 1, 1997, the Company entered into a professional
consulting agreement with a professional corporation whose shareholders are
related parties through ownership of CME. Terms of the agreement provide
for employment of the professional corporation whose duties include
management, litigation management, consulting, and marketing advice in
connection with the market position of the Company. Management fees of
$2,027,200 were paid to this entity for the year ended October 25, 1998.
Commencing on November 1, 1997, the Company entered into a second
professional consulting agreement with a professional corporation whose
shareholder is a key member of management. Terms of the agreement provide
for employment of the professional corporation whose duties include
management, consulting, and marketing advice in connection with the market
position and sales activities of the Company. Management fees of $418,742
were paid to this entity for the year ended October 25, 1998.
10
THERMAL STRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997 (CONTINUED)
The Company's professional consulting agreements described above represent
significant related-party transactions. The financial statements may not be
indicative of the financial position and results of operations which would
exist if the Company did not have the relationship and transactions
described in the professional consulting agreements described in the
previous two paragraphs.
10. SUBSEQUENT EVENT (UNAUDITED)
Effective June 30,1999, the Company consummated an agreement and plan of
merger whereby the Company's parent, Thermal Holdings, Inc., formerly a
subsidiary of California Manufacturing Enterprises, Inc. (CME), was merged
with the Company and CME. The Company continues as the surviving entity.
The Company has accounted for the merger as an exchange of common stock
between companies under common control, accordingly, assets and liabilities
transferred were accounted for at historical costs in a manner similar to
that in pooling-of-interests accounting. The accompanying financial
statements for the years ended October 25, 1998 and October 26, 1997 were
not retroactively restated to reflect this transaction due to
immateriality.
* * * * * *
11
SUPPLEMENTARY INFORMATION
THERMAL STRUCTURES, INC.
SCHEDULES OF COST OF SALES
FOR THE YEARS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997
% of % of
1998 net sales 1997 net sales
------------ --------- ------------ ----------
BEGINNING INVENTORIES $ 1,033,295 5.4% $ 615,823 4.1%
MANUFACTURING COSTS:
Purchases 3,526,407 18.5 2,557,314 16.5
Shop labor 3,737,187 19.6 3,222,110 20.8
Overhead:
Employee benefits 217,131 1.1 224,763 1.5
Bonus expense 202,570 1.1 138,421 0.9
Outside labor 717,539 3.8 749,739 4.8
Group insurance 186,963 1.0 153,410 1.0
401(k) matching contribution 47,747 0.3 36,639 0.2
Workers' compensation insurance 64,716 0.3 128,906 0.8
Payroll taxes 282,441 1.5 238,202 1.5
Depreciation and amortization 173,717 0.9 51,792 0.3
Equipment rental 10,598 0.1 10,660 0.1
Facility lease 426,588 2.2 261,829 1.7
Repairs and maintenance 151,648 0.8 162,370 1.0
Shipping and delivery 336,503 1.8 211,554 1.4
Shop supplies and tools 415,454 2.2 384,758 2.5
Utilities 110,046 0.6 88,510 0.6
------------ ---- ------------ ----
Total overhead costs 3,343,661 17.7 2,841,553 18.3
------------ ---- ------------ ----
Total manufacturing costs 11,640,550 61.2 9,236,800 59.7
Less ending inventories (1,574,984) (8.3) (1,033,295) (6.7)
------------ ---- ------------ ----
Total cost of sales $ 10,065,566 52.9% $ 8,203,505 53.0%
============ ==== ============ ====
12
THERMAL STRUCTURES, INC.
SCHEDULES OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE YEARS ENDED OCTOBER 25, 1998 AND OCTOBER 26, 1997
% of % of
1998 net sales 1997 net sales
------------ --------- ------------ ----------
SALARIES AND EMPLOYEE BENEFITS:
Salaries $ 992,482 5.2% $ 650,370 4.3%
Consulting fees 352,895 1.9 320,467 2.1
Payroll taxes 75,131 0.4 52,071 0.3
Employee benefits 110,068 0.6 109,103 0.7
Training 4,953 0.1 18,351 0.1
Group insurance 135,708 0.6 49,544 0.3
Workers' compensation 10,653 0.1 6,909
401(k) matching contributions 22,931 0.1 20,940 0.1
Bonus expense 330,943 1.7 215,850 1.4
------------ ---- ------------ ----
Total salaries and employee benefits 2,035,764 10.7 1,443,605 9.3
SELLING EXPENSES:
Advertising and trade shows 82,835 0.4 31,660 0.2
Automobile lease expense 57,355 0.3 31,424 0.2
Automobile costs 17,651 0.1 23,654 0.2
Travel and entertainment 258,903 1.4 222,864 1.4
Miscellaneous selling expenses 38,533 10.2 30,222 10.2
------------ ---- ------------ ----
Total selling expenses 455,277 2.4 339,824 2.2
OCCUPANCY COSTS:
Other insurance 74,109 0.4 61,974 0.4
Other office costs 203,005 1.1 113,257 0.8
Telephone 69,867 0.3 52,172 0.3
Office and computer lease expense 31,744 10.2 26,951 0.2
------------ ---- ------------ ----
Total occupancy costs 378,725 2.0 254,354 1.7
OTHER EXPENSES:
Bad debts -- -- 7,706 0.1
Professional fees 180,455 0.9 115,416 0.7
Taxes and licenses 81,429 0.4 46,071 0.3
Corporate allocation -- -- 48,600 0.3
ISO 9000 certification 31,023 0.2 34,740 0.2
Miscellaneous expense 10,980 0.1 12,000 10.1
------------ ---- ------------ ----
Total other expenses 303,887 11.6 264,533 1.7
------------ ---- ------------ ----
Total selling, general, and administrative
expenses $ 3,173,653 16.7% $ 2,302,316 14.9%
============ ==== ============ ====
13