AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Page
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INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996 and 1995 2
Consolidated Statements of Earnings and Retained Earnings for the
years ended December 31, 1996 and 1995 3
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
INDEPENDENT AUDITORS' REPORT ON
FINANCIAL STATEMENTS
The Board of Directors and Stockholders
Audio International, Inc.
North Little Rock, Arkansas
We have audited the accompanying consolidated balance sheets of Audio
International, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of earnings and retained earnings and
consolidated statements of 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 audits to
obtain reasonable assurance about whether the consolidated 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 of the consolidated financial statements referred to in the preceding
paragraph provide a reasonable basis for our opinion.
In our previously issued auditors' reports dated April 4, 1996, and
February 21, 1997, we did not express an opinion on the consolidated
statement of earnings and retained earnings, or the consolidated statement of
cash flows for the year ended December 31, 1995, since we had not audited
such statements. In accordance with your subsequent instructions, we have now
audited the consolidated statement of earnings and retained earnings and the
consolidated statement of cash flows for the year ended December 31, 1995, in
accordance with generally accepted auditing standards. Accordingly, our
present opinion on these financial statements, as presented herein, is
different from that expressed in our previous reports.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Audio International, Inc. and subsidiary as of December 31, 1996 and 1995,
and the results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
As discussed in Note 12, the Company prepared its financial statements
for years prior to 1995 on the income tax basis of accounting. Effective
January 1, 1995, the Company adopted generally accepted accounting principles
for the preparation of its financial statements, and accordingly, appropriate
adjustments have been made to retained earnings as of January 1, 1995.
THOMAS & THOMAS
Certified Public Accountants
Little Rock, Arkansas
February 21, 1997
(Except for paragraph 3 above, as to
which the date is December 17, 1997)
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AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
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CURRENT ASSETS
Cash in financial institutions $ 46,140 $ 2,868
Repurchase agreements 1,543,200 470,862
Receivables:
Trade, net 1,206,764 633,258
Employees and other 13,471 28,668
Inventories 1,503,346 830,660
Prepaid income taxes -- 55,368
Deferred income taxes 37,898 30,135
---------- -----------
Total current assets 4,350,819 2,051,819
PROPERTY AND EQUIPMENT, NET 1,298,834 1,243,160
OTHER ASSETS
Other investments 100,000 --
Utility deposits 1,013 1,050
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TOTAL ASSETS $5,750,666 $3,296,029
---------- -----------
---------- -----------
CURRENT LIABILITIES
Construction contract payable $ -- $ 268,587
Accounts payable, trade 426,182 438,456
Accrued expenses 312,842 154,070
Income taxes payable 817,257 --
Current portion of long-term debt 43,699 38,826
---------- -----------
Total current liabilities 1,599,980 899,939
DEFERRED INCOME TAXES 22,605 31,220
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 723,841 578,809
---------- -----------
TOTAL LIABILITIES 2,346,426 1,509,968
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $1 par value, 1,000 shares
authorized, 129 shares issued and outstanding 129 129
Additional paid-in capital 600,887 600,887
Contributed capital 90,000 90,000
Retained earnings 2,713,224 1,095,045
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TOTAL STOCKHOLDERS' EQUITY 3,404,240 1,786,061
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,750,666 $3,296,029
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
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SALES AND SERVICE REVENUES, NET $10,134,263 $5,182,046
COST OF SALES AND SERVICE 4,666,917 2,710,253
----------- -----------
Gross Profit 5,467,346 2,471,793
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,925,873 2,174,280
----------- -----------
Operating Income 2,541,473 297,513
OTHER INCOME (EXPENSE)
Investment income 32,228 14,769
Interest expense (45,346) (28,400)
Gain (loss) on disposal of assets, net 11,278 (38,224)
Other 4,625 788
----------- -----------
Earnings Before Income Taxes 2,544,258 246,446
PROVISION FOR INCOME TAXES 926,079 66,000
----------- -----------
NET EARNINGS 1,618,179 180,446
RETAINED EARNINGS, BEGINNING OF YEAR 1,095,045 914,599
----------- -----------
RETAINED EARNINGS, END OF YEAR $ 2,713,224 $1,095,045
----------- -----------
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES
NET EARNINGS $1,618,179 $ 180,446
---------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
(Gain) loss on disposal of assets, net (11,278) 38,224
Depreciation 151,055 93,963
Increase (decrease) in operating assets:
Accounts receivable, trade (573,506) (102,793)
Accounts receivable, employee and other 15,197 (22,312)
Inventories (672,686) (472,191)
Prepaid income taxes 55,368 (55,368)
Deferred income taxes (7,763) --
Increase (decrease) in operating
liabilities:
Accounts payable (12,274) 352,522
Accrued expenses 158,772 22,079
Construction contract payable (268,587) 268,588
Income taxes payable 817,257 (137,119)
Deferred income taxes (8,615) 4,045
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Total adjustments, net (357,060) (10,362)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,261,119 170,084
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchase of property and equipment,
net (195,451) (992,087)
Other investments (100,000) --
Repayments of stockholder loans -- (240,000)
Other assets 37 (1,050)
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NET CASH USED BY INVESTING ACTIVITIES (295,414) (1,233,137)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock issuance -- 600,000
Payments on long-term debt (18,160) (14,867)
Proceeds from issuance of long-term debt 168,065 596,942
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NET CASH PROVIDED BY FINANCING ACTIVITIES 149,905 1,182,075
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,115,610 119,022
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 473,730 354,708
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CASH AND CASH EQUIVALENTS, END OF YEAR $1,589,340 $ 473,730
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BUSINESS ACTIVITY
Audio International, Inc. (the Company), an Arkansas Corporation, was
incorporated January 2, 1987 for the primary purpose of designing,
manufacturing and marketing audio and video systems for the aviation
industry. On February 16, 1995, the Company formed a new corporation,
Audio International Sales, Inc. (a Foreign Sales Corporation), in the
Virgin Islands which is a wholly-owned subsidiary of the Company. Foreign
sales accounted for approximately 6.9% and 7.2% of total revenues for the
years ended December 31, 1996 and 1995, respectively.
B) CONSOLIDATION
The accompanying financial statements present the consolidated accounts of
the Company and its wholly-owned subsidiary. Accordingly, the consolidated
financial statements include all of the assets, liabilities, income,
expenses, and cash flows for these companies. All significant intercompany
transactions and balances have been eliminated.
C) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
D) ALLOWANCE FOR DOUBTFUL ACCOUNTS
Bad debts are provided on the allowance method based on historical
experience and management's evaluation of outstanding accounts receivable.
The balance of the allowance at December 31, 1996 and 1995, was $20,000.
E) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Major renewals and betterments
are capitalized while replacements, maintenance, and repairs which do not
improve or extend the life of an asset are expensed. Property and
equipment is depreciated over the estimated useful lives of the various
assets using the straight-line method for financial statement purposes.
F) INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities,
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Current income taxes are based on taxable income for
federal and state tax reporting purposes.
G) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, management considers all
highly liquid debt instruments, including repurchase agreements, with an
original maturity of three months or less to be cash equivalents.
H) RESEARCH AND DEVELOPMENT
Current operations are charged with all research, engineering, and product
development expenses which amounted to approximately $640,000 and $376,000
for the years ended December 31, 1996 and 1995.
I) WARRANTY RESERVE
The financial statements include product warranty reserves of approximately
$62,000 and $25,000 at December 31, 1996 and 1995, respectively. The
reserve, which is classified as a current liability for
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financial statement purposes, is based upon estimates of future costs
associated with fulfilling warranty obligations.
6
AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J) ADVERTISING EXPENSE
Advertising expenditures, including production cost related to various
units utilized for demonstrations and display, are expensed as incurred.
K) CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash in financial institutions, repurchase
agreements, and trade accounts receivable. The Company places its cash and
temporary cash investments with high credit quality institutions. At times
such deposits may be in excess of insurance limits. The Company routinely
assesses the financial strength of its customers and, as a consequence,
believes that its trade accounts receivable credit risk exposure is
limited.
L) 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, the
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.
M) RECLASSIFICATIONS
Certain amounts for the year ended December 31, 1995, have been
reclassified to conform with the presentation of the December 31, 1996
amounts. The reclassifications have no effect on net income for the years
ended December 31, 1996 or 1995.
NOTE 2: REPURCHASE AGREEMENTS
The Company is party to a contract with a local bank under which all
operating funds on deposit with the bank are invested in repurchase
agreements on a daily basis. The bank maintains, as collateral for the
benefit of the Company, certain securities in its investment portfolio. The
collateral consists of United States government obligations, obligations of
United States government agencies, or other obligations guaranteed by the
United States government. The securities are held by an agent bank or
registered in the agent's name as an owner or pledgee at the Federal
Reserve Bank. Interest, at a rate determined by the bank, is paid on a
daily basis. The agreements are repurchased by the bank upon presentation
of any check or other withdrawal of funds from the Company's operating
account.
NOTE 3: INVENTORIES
Inventories at December 31, 1996 and 1995 consist of the following:
1996 1995
---------- --------
Raw materials $ 863,373 $546,078
Work-in-process 403,193 147,187
Finished goods 236,780 137,395
---------- --------
Total inventories $1,503,346 $830,660
---------- --------
---------- --------
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AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 4: PROPERTY AND EQUIPMENT
During 1995 the City of North Little Rock Industrial Development
Corporation conveyed title to certain land to the Company for consideration
of $10 and an agreement that the Company would locate its new facility on
the property. This land, and the related contribution of capital, was
recorded for financial statement purposes at its estimated fair market
value of $90,000 at the date of receipt.
The following is a summary of property and equipment as of December 31:
Cost
----------------------- Estimated
1996 1995 Useful Lives
---------- ---------- ------------
Land, contributed $ 90,000 $ 90,000 --
Building and improvements 785,740 727,295 40 years
Machinery and equipment 657,974 536,166 3-7 years
Office furniture and equipment 96,303 70,407 3-7 years
Motor vehicles 95,230 110,498 5 years
---------- ----------
1,725,247 1,534,366
Accumulated depreciation (426,413) (291,206)
---------- ----------
Net property and equipment $1,298,834 $1,243,160
---------- ----------
---------- ----------
The Company substantially completed construction of its new facility, and
moved its operations from leased facilities, in December 1995. This change
in facilities resulted in losses from abandonment of leasehold improvements
of approximately $42,000.
NOTE 5: OTHER INVESTMENTS
In December 1996, the Company entered into a contract with an unrelated
entity, whereby the Company advanced the entity $100,000 to be used to
manufacture and develop certain products for the Company. The advance
payment will be recovered through annual discounts on Company purchases of
products from the entity over the term of the contract.
NOTE 6: BANK LINE OF CREDIT
A revolving line of credit, which bears interest at the lender's prime
rate, is provided to the Company under the terms of a credit agreement
dated June 15, 1996. The terms of the agreement allow the Company to
borrow up to $200,000. The line of credit is secured by amounts on deposit
with the financial institution. There was no balance outstanding on this
line of credit at December 31, 1996 or 1995.
8
AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 7: ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1996 and 1995:
1996 1995
-------- --------
Payroll $106,746 $ 52,471
Vacation 54,239 36,139
Payroll taxes withheld and accrued 74,983 32,808
Reserve for warranties 61,568 25,000
Other 15,306 7,652
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Total accrued expenses $312,842 $154,070
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NOTE 8: LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 consists of the following:
1996 1995
-------- --------
Note payable to Arkansas Development Finance
Authority; due in annual installments through
May, 2011, including interest ranging from 5.25%
to 6.0%, secured by property and equipment. $750,000 $596,942
Notes payable to bank; secured by vehicles;
payable in monthly installments including
interest at 7.3%, through February, 2000. 17,540 20,693
-------- --------
767,540 617,635
Current portion (43,699) (38,826)
-------- --------
Long-term debt, excluding current portion $723,841 $578,809
-------- --------
-------- --------
During the year ended December 31, 1996, the Company obtained permanent
financing, which refinanced its interim note on its new facility. Thus, the
note has been classified as long-term debt as of December 31, 1996 and
1995, for financial statement purposes. This debt requires a reserve
account for monthly deposits to provide for the next installment of debt
service. The balance in this account, which totaled $42,490 and $-0- at
December 31, 1996 and 1995, respectively, is included in Cash in Financial
Institutions. The terms of the note also require the Company to meet
certain restrictive debt covenants, which have been met as of December 31,
1996 and 1995.
Cash payments for interest on all debt amounted to $46,210 and $22,640 for
the years ended December 31, 1996 and 1995, respectively.
9
AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8: LONG-TERM DEBT (Continued)
Maturities of long-term debt, based upon the Company's monthly sinking fund
and other debt requirements, is as follows at December 31, 1996:
1997 $ 43,699
1998 38,851
1999 44,242
2000 40,748
2001 40,000
Thereafter 560,000
--------
$767,540
--------
--------
NOTE 9: INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1996 and
1995, is summarized as follows:
1996 1995
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Current:
Federal $793,693 $61,262
State 148,764 693
-------- -------
942,457 61,955
-------- -------
Deferred:
Federal $(13,750) $ 3,780
State (2,628) 265
-------- -------
(16,378) 4,045
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Total provision for income taxes $926,079 $66,000
-------- -------
-------- -------
The actual income tax expense differs from "expected" tax expense (computed
by applying appropriate U.S. Federal corporate income tax rates to income
before income taxes) primarily due to the effects of state income tax,
Federal and state tax credits, nondeductible life insurance premiums,
Foreign Sales Corporation income exclusions and entertainment expenses.
Cash payments for income taxes amounted to $87,617 and $259,147 for the
years ended December 31, 1996 and 1995, respectively.
The Company's deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995, are as follows:
1996 1995
-------- -------
Current deferred tax assets, net $37,898 $30,135
Noncurrent deferred tax liabilities, net 22,605 31,220
-------- -------
Net deferred tax asset (liability) $15,293 $(1,085)
-------- -------
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10
AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 9: INCOME TAXES (Continued)
The Company's deferred tax assets and deferred tax liabilities result
primarily from the use of accelerated methods of depreciation for tax
purposes; bad debt reserves, accrued warranty expense and accrued vacation
expense being recorded for financial statement purposes; and different
inventory valuations for tax and book purposes.
In assessing of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax asset
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Based upon the
level of historical taxable income, management believes it is more likely
than not the Company will realize the benefits of these deductible
differences.
NOTE 10: EMPLOYEE BENEFIT PLAN
The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code and therefore includes certain salary
deferral features for eligible employees. Employees may elect to contribute
up to fifteen percent of their gross earnings to the plan. The Company
makes matching contributions equal to employee contributions up to 3% of
each participating employee's salary. Matching contributions to the plan
were approximately $39,900 and $24,700 for the years ended December 31,
1996 and 1995, respectively.
NOTE 11: BUSINESS CONCENTRATIONS
The majority of the Company's sales and service revenues are generated
through customers in the private aviation industry located throughout the
United States. At any given time, certain customers may account for
significant portions of the Company's business. The Company's largest six
customers accounted for approximately 63% and 58% of net sales for the
years ended December 31, 1996 and 1995, respectively.
NOTE 12: RESTATEMENT OF BALANCES
Effective January 1, 1995, the Company adopted generally accepted
accounting principles for the preparation of its financial statements. In
previous years, the records and financial statements of the Company were
prepared on the income tax basis of accounting. Certain adjustments have
been applied to the beginning retained earnings in order to restate amounts
in accordance with generally accepted accounting principles.
An analysis of these adjustments, and the restated beginning retained
earnings, is as follows:
January 1, 1995 balance, as previously reported $853,765
Adjustments for expense accruals and reserves (70,000)
Adjustments for inventory, property and equipment valuations 130,834
--------
January 1, 1995 balance, as restated $914,599
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--------
11
AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 13: COMMON STOCK ISSUANCE
During 1995, the Company and its shareholders entered into an agreement
under which twenty-nine shares of the Company's $1 par value capital stock
were to be issued to a new shareholder in exchange for consideration of
$600,000 deposited with the Company during 1995. In addition, the then
existing shareholders of the Company each would sell seven shares of their
capital stock to the new shareholder, creating a one-third interest for
each of the three shareholders. This agreement was consummated February 20,
1996. For comparative financial statement purposes, certain
reclassifications have been made to reflect this transaction as of December
31, 1995. Thus, at December 31, 1996 and 1995, one hundred and twenty-nine
of the Company's one thousand authorized shares were considered to be
issued and outstanding.
The stock acquisition agreement contained additional provisions requiring
the employment of each of the three shareholders for a minimum of five
years from the date of the agreement and various other provisions related
to bonus arrangements and fringe benefits.
NOTE 14: EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT
On November 14, 1997, the Company's stockholders entered into an
acquisition agreement, under which all shares of the Company were acquired
by DeCrane Aircraft Holdings, Inc.
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