Exhibit 99.2
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
AND
INDEPENDENT AUDITOR'S REPORT
[Letterhead of McKonley & Asbury, LLP]
INDEPENDENT AUDITOR'S REPORT
JoEl, Inc.
Elizabethtown, Pennsylvania
We have audited the accompanying balance sheet of JoEl, Inc. (d/b/a Simon Candy
Company and Pharmaloz) (an S Corporation) as of December 31, 2003, and the
related statements of operations and retained earnings, comprehensive income,
and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 JoEl, Inc. at December 31,
2003, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ MCKONLY & ASBURY, LLP
Harrisburg, Pennsylvania
February 20, 2004
JOEL, INC.
D/B/A/ SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Current assets
Cash and cash equivalents $ 22,606
Investments 79,369
Accounts receivable, trade 234,761
Inventories 867,532
Prepaid expenses 54,822
-----------
Total current assets 1,259,090
-----------
Property, plant and equipment, at cost 12,134,970
Accumulated depreciation (8,901,591)
-----------
Total property, plant and equipment, net 3,233,379
-----------
Other assets
Cash value of life insurance 1,067,168
Deposits 874
Art and development costs 82,227
-----------
Total other assets 1,150,269
-----------
Total assets $ 5,642,738
===========
The accompanying notes are an integral
Part of these financial statements.
2
JOEL, INC.
D/B/A/ SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
BALANCE SHEET
DECEMBER 31, 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $ 287,012
Current maturities of long-term debt 73,576
Accounts payable, trade 215,198
Accrued liabilities
Payroll 45,923
Payroll taxes 3,776
Self-funded health insurance 34,829
Notes payable, stockholders 524,550
-----------
Total current liabilities 1,184,864
-----------
Long-term liabilities
Notes payable, long-term maturities 481,711
-----------
Stockholders' equity
Common stock, par value $10 per share;
authorized 1,000 shares, issued
and outstanding 1,000 shares 10,000
Additional paid-in capital 8,000
Retained earnings 3,927,166
Accumulated other comprehensive income
Unrealized gain on investments 30,997
-----------
Total stockholders' equity 3,976,163
-----------
Total liabilities and stockholders' equity $ 5,642,738
===========
The accompanying notes are an integral
Part of these financial statements.
3
JOEL, INC.
D/B/A/ SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 2003
Net sales $ 6,073,821
Cost of sales 4,979,212
------------
Gross profit 1,094,609
Operating expenses
Sales and marketing 167,467
Administration 1,132,989
------------
Total operating expenses 1,300,456
------------
Operating loss (205,847)
------------
Other income (expense)
Gain on sale of investments 5,489
Net miscellaneous income 34,932
Interest expense (79,957)
------------
Total other income (expense) (39,536)
------------
Net loss (245,383)
Retained earnings - beginning 4,172,549
------------
Retained earnings - ending $ 3,927,166
============
The accompanying notes are an integral
Part of these financial statements.
4
JOEL, INC.
D/B/A/ SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2003
Net loss $(245,383)
Unrealized gain on securities
Unrealized holding gains on
securities arising during the period 36,066
Gain on sale of available for sale securities (5,489)
----------
Comprehensive loss $(214,806)
==========
The accompanying notes are an integral
Part of these financial statements.
5
JOEL, INC.
D/B/A/ SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
Cash flows from operating activities
Net loss $ (245,383)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation 465,609
Amortization 65,455
Gain on sale of equipment (10,146)
Gain on sale of investments (5,489)
Write off of art and development costs 1,200
Interest accrued on stockholder notes 23,400
(Increase) decrease in
Accounts receivable, trade (86,650)
Inventories 13,073
Prepaid expenses and other assets 12,252
Increase (decrease) in
Accounts payable, trade (197,188)
Accrued liabilities (6,687)
-----------
Net cash provided by operating activities 29,446
-----------
Cash flows from investing activities
Increase in cash value of life insurance (83,943)
Purchase of equipment (11,496)
Proceeds from sale of equipment 71,765
Purchase of art and development costs (51,664)
Proceeds from sale of investments 18,803
-----------
Net cash used in investing activities (56,535)
-----------
Cash flows from financing activities
Net repayments on line of credit (508,441)
Proceeds from long-term debt 600,000
Payments on long-term debt (44,713)
-----------
Net cash provided by financing activities 46,846
-----------
Net increase in cash and cash equivalents 19,757
Cash and cash equivalents - beginning 2,849
-----------
Cash and cash equivalents - ending $ 22,606
===========
Supplemental disclosures of cash flow information
Cash paid during the year for interest $ 79,957
===========
The accompanying notes are an integral
Part of these financial statements.
6
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS
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. For the year
ended December 31, 2003, bad debt expense in the amount of $44,036 was
determined and was 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
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
1. SUMMARY OF ACCOUNTING POLICIES (CONT'D)
ADVERTISING
Advertising costs are expensed within the period in which they are utilized.
For the year ended December 31, 2003, advertising expense in the amount of
$3,119 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 and retained
earnings.
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 flow, for the periods
indicated, have been made.
2. INVESTMENTS
Available for sale securities and their fair values at December 31, 2003 are
as follows:
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
--------------- --------- ------------ ------------ -----------
Common stock $ 48,143 $ 46,785 $(15,788) $ 79,140
Other 229 -- -- 229
--------- ------------ ------------ -----------
$ 48,372 $ 46,785 $(15,788) $ 79,369
========= ============ ============ ===========
(continued)
9
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS
3. INVENTORIES
Inventories at December 31, 2003 consist of the following:
Raw materials $ 644,504
Finished goods 223,028
------------
$ 867,532
============
4. CASH VALUE OF LIFE INSURANCE
The cash value of life insurance is recorded net of policy loans of $61,598
at December 31, 2003.
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at December 31, 2003 follows:
Estimated
Useful Lives Amount
------------ ------------
Land --- $ 146,458
Buildings 10-40 Years 3,571,612
Machinery and equipment 3-10 Years 7,655,527
Autos and trucks 3-5 Years 119,934
Furniture and fixtures 3-10 Years 635,788
Leasehold improvements 5 Years 5,651
------------
12,134,970
Accumulated depreciation (8,901,591)
------------
$ 3,233,379
============
Depreciation expense totaled $465,609 in 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 December 31, 2003. Any amounts borrowed are payable
on demand and bear interest at the bank's prime rate plus 0.5% (4.5% at
December 31, 2003). The amount advanced against this line of credit totaled
$287,012 as of 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.
(continued)
10
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS
7. NOTES PAYABLE - STOCKHOLDERS
Notes payable, in the amount of $524,550 in 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 year ended
December 31, 2003, interest expense was $23,400.
8. LONG-TERM DEBT
Long-term debt at December 31, 2003 consists of the following:
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. $ 555,287
Less current portion 73,576
------------
Total notes payable - long-term $ 481,711
============
Maturities of long-term debt in each of the next five years are as follows:
2004 $ 73,576
2005 78,419
2006 83,476
2007 88,859
2008 230,957
-----------
$ 555,287
===========
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
December 31, 2003.
(continued)
11
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS
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 year ended December 31, 2003 was
$29,977.
Future minimum lease payments under all operating leases for years ending
December 31 are as follows:
2004 $ 14,541
2005 11,571
2006 10,681
2007 4,327
-----------
$ 41,120
===========
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 December 31, 2003, a reserve of $34,829 has been
established by the Company for estimates 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. Pension expense
totaled $65,617 in 2003.
(continued)
12
JOEL, INC.
D/B/A SIMON CANDY COMPANY
AND PHARMALOZ
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS
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
Receivable at Percentage of
December 31, 2003 2003 Net Sales
---------------------- ------------------
Quigley Corporation 7% 50%
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.
Percentage of
2003 Total Purchases
------------------------
Domino Sugar Corporation 27%
C-P Converters, Inc. 16%
DPT Lakewood, Inc. 14%
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.
13