Exhibit 99.3
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
FINANCIAL STATEMENTS
BALANCE SHEETS AT JUNE 30, 2004 AND DECEMBER 31, 2003
AND
STATEMENTS OF OPERATIONS, COMPREHENSIVE
INCOME, AND CASH FLOWS FOR THE
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
AND
ACCOUNTANT'S REPORT ON FINANCIAL STATEMENTS
[Letterhead of McKonly & Asbury, LLP]
ACCOUNTANT'S REPORT
Joel, Inc. d/b/a Simon Candy Company and Pharmaloz
Elizabethtown, Pennsylvania
We have reviewed the accompanying balance sheet of Joel Inc. d/b/a Simon Candy
Company and Pharmaloz (an S Corporation) as June 30, 2004, and the related
statements of operations, comprehensive income, and cash flows for the six
months ended June 30, 2004 and 2003, in accordance with Statements on Standards
for Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these financial statements is
the representation of the management of Joel, Inc. d/b/a Simon Candy Company and
Pharmaloz.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with auditing standards generally accepted in the United
States of America, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying interim financial statements in order for them to be
in conformity with accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Joel, Inc. as of
December 31, 2003, and the related statements of operation and retained
earnings, comprehensive income, and cash flows for the year then ended (not
presented herein); and in our report dated February 20, 2004, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying balance sheet as of December 31, 2003,
is fairly stated, in all material respects, in relation to the balance sheet
from which it has been derived.
/s/ MCKONLY & ASBURY, LLP
Harrisburg, Pennsylvania
August 19, 2004
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
ASSETS
JUNE 30, DECEMBER 31,
2004 2003
(Unaudited) (1)
------------- -------------
Current assets
Cash and cash equivalents $ 22,796 $ 22,606
Investments 74,820 79,369
Accounts receivable, trade 166,510 234,761
Inventories 979,644 867,532
Prepaid expenses 43,652 54,822
------------- ------------
Total current assets 1,287,422 1,259,090
------------- ------------
Property, plant and equipment, at cost 11,173,853 12,134,970
Accumulated depreciation (8,157,373) (8,901,591)
------------- ------------
Total property, plant and equipment, net 3,016,480 3,233,379
------------- ------------
Other assets
Cash value of life insurance 1,107,000 1,067,168
Deposits 1,903 874
Art and development costs 50,789 82,227
------------- ------------
Total other assets 1,159,692 1,150,269
------------- ------------
Total assets $ 5,463,594 $ 5,642,738
============= =============
(1) Derived from the audited financial statements for the year ended
December 31, 2003
See accompanying notes and accountant's report.
2
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
2004 2003
(Unaudited) (1)
----------- ------------
Current liabilities
Line of credit $ 369,425 $ 287,012
Current maturities of long-term debt 80,241 73,576
Accounts payable, trade 252,574 215,198
Accrued liabilities
Payroll 71,313 45,923
Payroll taxes 13,723 3,776
Self-funded health insurance 36,241 34,829
Accrued bonuses 19,207 --
Notes payable, stockholders 536,250 524,550
---------- ----------
Total current liabilities 1,378,974 1,184,864
---------- ----------
Long-term liabilities
Notes payable, long-term maturities 444,018 481,711
---------- ----------
Stockholders' equity
Common stock, par value $10 per share;
authorized 1,000 shares, issued
and outstanding 1,000 shares 10,000 10,000
Additional paid-in capital 8,000 8,000
Retained earnings 3,596,059 3,927,166
Accumulated other comprehensive income
Unrealized gain on investments 26,543 30,997
---------- ----------
Total stockholders' equity 3,640,602 3,976,163
---------- ----------
Total liabilities and stockholders' equity $5,463,594 $5,642,738
========== ==========
(1) Derived from the audited financial statements for the year ended
December 31, 2003
See accompanying notes and accountant's report.
3
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
STATEMENTS OF OPERATIONS - UNAUDITED
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
------------ ------------
Net sales $ 2,592,438 $ 2,532,179
Cost of sales 2,187,429 2,242,727
------------ ------------
Gross profit 405,009 289,452
Operating expenses
Sales and marketing 64,264 58,730
Administration 639,573 622,425
------------ ------------
Total operating expenses 703,837 681,155
------------ ------------
Operating loss (298,828) (391,703)
------------ ------------
Other income (expense)
Net miscellaneous income (expense) 1,540 (6,840)
Interest expense (33,819) (28,271)
------------ ------------
Total other income (expense) (32,279) (35,111)
------------ ------------
Net loss $ (331,107) $ (426,814)
============ ============
See accompanying notes and accountant's report.
4
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
---------- ----------
Net loss $(331,107) $(426,814)
Unrealized gain (loss) on securities
Unrealized holding gains (losses) on
securities arising during the period (4,454) 15,576
---------- ----------
Comprehensive loss $(335,561) $(411,238)
========== ==========
See accompanying notes and accountant's report.
5
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
STATEMENTS OF CASH FLOWS - UNAUDITED
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
---------- ----------
Cash flows from operating activities
Net loss $(331,107) $(426,814)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation 213,889 240,000
Amortization 46,227 30,000
(Gain) loss on sale of equipment 12,161 (8,144)
Interest accrued on stockholder notes 11,700 11,700
(Increase) decrease in
Accounts receivable, trade 68,251 (79,697)
Inventories (112,112) (59,737)
Prepaid expenses and other assets 11,170 19,877
Increase (decrease) in
Accounts payable, trade 37,376 61,341
Accrued liabilities 55,956 4,430
---------- ----------
Net cash provided by (used in)
operating activities 13,511 (207,044)
---------- ----------
Cash flows from investing activities
Increase in cash value of life insurance (39,832) (43,410)
Purchase of equipment (13,085) (7,457)
Proceeds from sale of equipment 3,000 69,767
Purchase of art and development costs (14,789) (38,148)
---------- ----------
Net cash used in investing activities (64,706) (19,248)
---------- ----------
Cash flows from financing activities
Net advances (repayments) on line of credit 82,413 (358,154)
Proceeds from long-term debt -- 600,000
Payments on long-term debt (31,028) (9,831)
---------- ----------
Net cash provided by financing activities 51,385 232,015
---------- ----------
Net increase in cash and cash equivalents 190 5,723
Cash and cash equivalents - beginning 22,606 2,849
---------- ----------
Cash and cash equivalents - ending $ 22,796 $ 8,572
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the year for interest $ 34,404 $ 28,271
========== ==========
See accompanying notes and accountant's report.
6
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF ACCOUNTING POLICIES
INCORPORATION
Joel, Inc. d/b/a Simon Candy Company and Pharmaloz (the Company) was
incorporated on June 12, 1973 under the laws of the Commonwealth of
Pennsylvania for the purpose of manufacturing hard candy and cough drops.
The accompanying financial statements include the results of operations of
the Company's two divisions, Simon Candy and Pharmaloz, which is considered
to be one operating segment.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements,
and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. Bad debt
expense in the amount of $0 and $44,678 for the six months ending June 30,
2004 and 2003 were determined and were expensed.
Trade accounts receivable potentially subjects the Company to credit risk.
The Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not
require collateral.
INVESTMENTS
The Company classifies its marketable debt and equity securities as
"available for sale." Securities classified as "available for sale" are
carried in the financial statements at fair value. Fair values of equity
securities are based on quoted market prices. Realized gains and losses,
determined using the specific identification method, are included in
earnings and unrealized holding gains and losses are reported as a separate
component of stockholders' equity.
(continued)
7
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF ACCOUNTING POLICIES (CONT'D)
INVENTORY
Inventory is valued at the lower of cost or market using the first-in,
first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts, and any resulting gain or loss is reflected in income for the
period. The cost of maintenance and repairs is charged to income as
incurred, whereas significant renewals and betterments are capitalized and
deductions are made for retirements resulting from the renewals or
betterments.
REVENUE RECOGNITION
Sales are recognized when the product is delivered and customer acceptance
is obtained. Sales returns and allowances are immaterial.
SHIPPING AND HANDLING
Shipping and handling are included as part of the price offered to the
customer. In all cases, costs related to this revenue are recorded in cost
of sales.
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
reporting requirements of comprehensive income and its components.
Comprehensive income for the Company consists of net loss and unrealized
gains and losses on available for sale securities and is presented in the
statement of comprehensive income. Accumulated other comprehensive income
is presented as a separate component of equity.
INCOME TAXES
Effective January 1, 1987, the Company elected by unanimous consent of its
stockholders to be taxed as an S Corporation under the provisions of the
Internal Revenue Code. Under these provisions, the Company does not pay
federal or state corporate income taxes on its taxable income. Instead, the
stockholders are liable for individual federal and state income taxes on
their respective shares of the Company's taxable income.
(continued)
8
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF ACCOUNTING POLICIES (CONT'D)
ADVERTISING
Advertising costs are expensed within the period in which they are
utilized. For the six months ended June 30, 2004 and 2003, advertising
expense in the amount of $3,599 and $1,084 is presented as part of
operating expenses.
ART AND DEVELOPMENT COSTS
Art and development costs are costs for printing dies, artwork design, and
cutting dies for the candy and cough drop wrappers. These costs are
amortized on a straight-line basis over a period of three years.
IMPAIRMENT
The Company reviews its long-lived assets for impairment on an exception
basis whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through future cash
flows. If it is determined that an impairment loss has occurred based on
the expected cash flows, a loss is recognized in the statement of
operations.
BASIS OF PRESENTATION
The financial statements have been prepared by management. In the opinion
of management, all adjustments necessary for a fair presentation of the
financial position, results of operations and cash flows, for the periods
indicated, have been made.
2. INVESTMENTS
Available for sale securities and their fair values at June 30, 2004 and
December 31, 2003 are as follows:
Gross Gross
Unrealized Unrealized
June 30, 2004 Cost Gains Losses Fair Value
---------------------- ----------- ---------- ---------- ----------
Common stock $ 48,048 $ 43,612 $ (17,069) $ 74,591
Other 229 -- -- 229
----------- --------- ---------- ----------
$ 48,277 $ 43,612 $ (17,069) $ 74,820
=========== ========= ========== ==========
(continued)
9
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
2. INVESTMENTS (CONT'D)
Gross Gross
Unrealized Unrealized
December 31, 2003 Cost Gains Losses Fair Value
---------------------- ----------- ---------- ---------- ----------
Common stock $ 48,143 $ 46,785 $(15,788) $ 79,140
Other 229 --- --- 229
----------- ---------- --------=- ----------
Equity securities $ 48,372 $ 46,785 $(15,788) $ 79,369
=========== ========== ========== ==========
3. INVENTORIES
Inventories at June 30, 2004 and December 31, 2003 consist of the
following:
2004 2003
------------ ------------
Raw materials $ 719,220 $ 644,504
Finished goods 260,424 223,028
------------ ------------
$ 979,644 $ 867,532
============ ============
4. CASH VALUE OF LIFE INSURANCE
The cash value of life insurance is recorded net of policy loans of $71,785
and $61,598 at June 30, 2004 and December 31, 2003.
(continued)
10
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at June 30, 2004 and December
31, 2003 as follows:
Estimated
Useful Lives 2004 2003
-------------- ------------ -----------
Land --- $ 146,458 $ 146,458
Buildings 10-40 Years 3,530,897 3,571,612
Machinery and equipment 3-10 Years 7,103,148 7,655,527
Autos and trucks 3-5 Years 108,672 119,934
Furniture and fixtures 3-10 Years 284,678 635,788
Leasehold improvements 5 Years --- 5,651
11,173,853 12,134,970
Accumulated depreciation (8,157,373) (8,901,591)
----------- -----------
$ 3,016,480 $ 3,233,379
Depreciation expense totaled $213,889 and $240,000 for the six months ended
June 30, 2004 and 2003.
6. LINE OF CREDIT
The Company has available for its use a line of credit with M&T Bank in the
amount of $700,000 at June 30, 2004 and December 31, 2003. Any amounts
borrowed are payable on demand and bear interest at the bank's prime rate
plus 0.5% (4.75% at June 30, 2004 and 4.5% at December 31, 2003). The
amount advanced against this line of credit totaled $369,425 and $287,012
as of June 30, 2004 and December 31, 2003. This agreement is secured by
various corporate assets and four life insurance policies on the officers.
The line of credit agreement expires April 15, 2008.
7. NOTES PAYABLE - STOCKHOLDERS
Notes payable, in the amount of $536,250 at June 30, 2004 and $524,550 at
December 31, 2003 to stockholders Kristin Deck and Andrew Deck are payable
upon demand and bear interest at 5.43% per annum. No annual principal
repayments are required per the note agreement. However, these notes are
subordinate to the M&T Bank debt and no payments shall be demanded or
required until such time as repayment is permitted under the terms of the
Company's commercial financing agreement. Interest continues to be accrued
during the deferral period. For the six month periods ended June 30, 2004
and 2003, interest expense was $11,700 and $11,700.
(continued)
11
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
8. LONG-TERM DEBT
Long-term debt at June 30, 2004 and December 31, 2003 consists of the
following:
2004 2003
---------- ----------
Capital Lease Payable - Susquehanna Commercial Leasing
requires monthly payments of $182 including interest at
11% through March 2007. $ 4,975 $ ---
Note payable - M&T Bank, requires monthly payments of
$8,863 including interest at 6.25% through April 2008.
The note is secured by virtually all assets of the
Company. 519,284 555,287
---------- -----------
524,259 555,287
Less current portion 80,241 73,576
---------- -----------
Total notes payable - long-term $ 444,018 $ 481,711
========== ===========
Maturities of long-term debt in each of the next four years are as follows:
For the 12 Months Ended
-----------------------------
June 30, 2005 $ 80,241
June 30, 2006 85,508
June 30, 2007 89,142
June 30, 2008 269,368
----------
$ 524,259
==========
9. LOAN COVENANTS
There are certain financial covenants applicable to the line of credit and
term loan agreement pertaining to current ratio, debt coverage ratio, and
tangible net worth. The Company met each of these financial covenants as of
June 30, 2004 and December 31, 2003.
(continued)
12
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
10. OPERATING LEASES
The Company leases computer equipment and lab equipment under
non-cancelable operating leases expiring through May 2007. Lease expense
under these operating leases for the six months ended June 30, 2004 and
2003 was $19,000 and $32,141.
Future minimum lease payments under all operating leases for years ending
June 30 are as follows:
2005 $ 17,749
2006 14,660
2007 4,623
-----------
$ 37,032
===========
11. SELF-FUNDING GROUP INSURANCE RESERVE
The Company administers a limited self-funding group insurance plan for the
medical and dental health benefits of its employees. Employee medical
claims are paid by the Company as incurred up to a maximum of $25,000 per
person per year. A "stop-loss" insurance policy is carried by the Company
to cover individual medical claims in excess of $25,000. Employee dental
claims are paid by the Company as incurred up to a limit of $1,000 per
person per year. At June 30, 2004 and December 31, 2003, a reserve of
$36,241 and $34,829 has been established by the Company to settle claims
and for incurred but not reported claims.
12. PENSION PLAN
In October 1987, the Company adopted a 401(k) plan. The Company contributes
$10 on the first $2 each employee contributes per week. If the employee
contributes greater than $2, the Company matches 50% of employee
contributions to the plan up to 5% of total compensation. For the periods
ended June 30, 2003 and 2004 pension expense was $30,612 and $31,489.
(continued)
13
13. SIGNIFICANT CUSTOMERS
The Company made sales to the following company, which is considered to be
a significant customer. Revenues earned from all other customers included
those whose revenues earned during the year did not constitute more than
10% of the total.
Percentage of Accounts Percentage of Net Sales,
Receivable at Six Months Ended
----------------------- ------------------------
June 30, December 31, June 30, June 30,
2004 2003 2004 2003
--------- ------------ --------- -----------
Quigley Corporation 20% 7% 58% 42%
14. SIGNIFICANT SUPPLIERS
The Company made purchases from the following companies, which are
considered to be significant suppliers. However, management believes that
alternative suppliers of equivalent products are available if these vendors
are unable to provide necessary products or services.
Total Purchases,
Six Months Ended
---------------------------
June 30, June 30,
2004 2003
----------- -----------
The American Sugar Refining Co. 8% 11%
C-P Converters, Inc. 5% 6%
Dee Paper Company, Inc. 6% 3%
15. EXCLUSIVE SUPPLY AGREEMENT
On March 17, 1997, the Company entered into an exclusive supply agreement
with the Quigley Corporation (a significant customer - see note 13). An
amendment to the original agreement was signed which is effective for an
additional period of two years from March 17, 2004, with yearly renewal
thereafter.
14