PATCO ELECTRONICS, INC.
Financial Statements
December 31, 2009 and 2008
(With Independent Auditors’ Report Thereon)
Independent Auditors’ Report
The Board of Directors
PATCO Electronics, Inc.:
We have audited the accompanying balance sheets of PATCO Electronics, Inc. (Company) as of December 31, 2009 and 2008, and the related statements of operations, 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 PATCO Electronics, Inc. as of December 31, 2009 and 2008, 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/Kirkland, Russ, Murphy & Tapp, P.A.
February 26, 2010
Clearwater, Florida
PATCO ELECTRONICS, INC.
Balance Sheets
December 31, 2009 and 2008
| Assets | 2009 | 2008 | ||||||
| Current assets: | ||||||||
| Cash | $ | 1,187,080 | 368,906 | |||||
| Accounts receivable, net | 269,600 | 670,405 | ||||||
| Due from stockholder | 3,065 | - | ||||||
| Inventories | 549,716 | 763,059 | ||||||
| Prepaid expenses and other current assets | 11,016 | - | ||||||
| Total current assets | 2,020,477 | 1,802,370 | ||||||
| Property and equipment, net | 155,044 | 179,405 | ||||||
| $ | 2,175,521 | 1,981,775 | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 42,366 | 69,933 | |||||
| Accrued expenses | 22,101 | 25,622 | ||||||
| Bank lines of credit | - | 89,512 | ||||||
| Customer deposits | - | 659,985 | ||||||
| Income taxes payable | 739,000 | 247,000 | ||||||
| Total current liabilities | 803,467 | 1,092,052 | ||||||
| Long-term liabilities: | ||||||||
| Deferred tax liability | 51,000 | 58,000 | ||||||
| Total long-term liabilities | 51,000 | 58,000 | ||||||
| Total liabilities | 854,467 | 1,150,052 | ||||||
| Stockholders’ equity: | ||||||||
| Common stock, $.01 par value, authorized 1,000,000 shares; | ||||||||
| 208,000 shares issued and outstanding | 2,080 | 2,080 | ||||||
| Additional paid in capital | 68,490 | 68,490 | ||||||
| Treasury stock (15,500 shares at cost) | (80,700 | ) | (80,700 | ) | ||||
| Retained earnings | 1,331,184 | 841,853 | ||||||
| Total stockholders’ equity | 1,321,054 | 831,723 | ||||||
| Total liabilities and stockholders’ equity | $ | 2,175,521 | 1,981,775 | |||||
See accompanying independent auditor's report and notes to financial statements.
PATCO ELECTRONICS, INC. Statement of Operations Years Ended December 31, 2009 and 2008 | 2009 | 2008 | ||||||
| Net sales | $ | 5,988,013 | 3,044,320 | |||||
| Cost of sales | 2,763,905 | 1,796,350 | ||||||
| Gross profit | 3,224,108 | 1,247,970 | ||||||
| Selling, general and administrative expenses | 386,319 | 300,213 | ||||||
| Research, development and engineering | 89,389 | 121,786 | ||||||
| Operating income | 2,748,400 | 825,971 | ||||||
| Interest income (expense) | 2,678 | (329 | ) | |||||
| Income before provision for income taxes | 2,751,078 | 825,642 | ||||||
| Income tax expense | (1,024,847 | ) | (305,003 | ) | ||||
| Net income | $ | 1,726,231 | 520,639 | |||||
See accompanying independent auditor's report and notes to financial statements.
PATCO ELECTRONICS, INC.
Statements of Stockholders' Equity
Years Ended December 31, 2009 and 2008
| Additional | Total | |||||||||||||||||||
| Common | Paid-in | Treasury | Retained | Stockholders’ | ||||||||||||||||
| Stock | Capital | Stock | Earnings | Equity | ||||||||||||||||
| Balances at December 31, 2007 | $ | 2,080 | 68,490 | (29,200 | ) | 321,214 | 362,584 | |||||||||||||
| Common stock repurchase | - | - | (51,500 | ) | - | (51,500 | ) | |||||||||||||
| Net income | - | - | - | 520,639 | 520,639 | |||||||||||||||
| Balances at December 31, 2008 | 2,080 | 68,490 | (80,700 | ) | 841,853 | 831,723 | ||||||||||||||
| Dividends | - | - | - | (1,236,900 | ) | (1,236,900 | ) | |||||||||||||
| Net income | - | - | - | 1,726,231 | 1,726,231 | |||||||||||||||
| Balances at December 31, 2009 | $ | 2,080 | 68,490 | (80,700 | ) | 1,331,184 | 1,321,054 | |||||||||||||
See accompanying independent auditor's report and notes to financial statements.
PATCO ELECTRONICS, INC.
Statements of Cash Flows
Years Ended December 31, 2009 and 2008
| 2009 | 2008 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 1,726,231 | 520,639 | |||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depreciation | 43,964 | 32,775 | ||||||
| Deferred income taxes | (7,000 | ) | 58,000 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 400,805 | (631,485 | ) | |||||
| Inventories | 213,343 | (461,945 | ) | |||||
| Prepaid expenses and other current assets | (11,016 | ) | - | |||||
| Accounts payable and accrued expenses | (31,088 | ) | 69,606 | |||||
| Customer deposits | (659,985 | ) | 659,985 | |||||
| Income taxes payable | 492,000 | 202,799 | ||||||
| Net cash provided by operating activities | 2,167,254 | 450,374 | ||||||
| Cash flows from investing activities: | ||||||||
| Additions to property and equipment | (19,603 | ) | (165,876 | ) | ||||
| Due from stockholder, net | (3,065 | ) | 15,000 | |||||
| Net cash used in investing activities | (22,668 | ) | (150,876 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net borrowings (repayment) on bank lines of credit | (89,512 | ) | 81,667 | |||||
| Distribution to related party | (1,236,900 | ) | - | |||||
| Purchase of treasury stock | - | (51,500 | ) | |||||
| Net cash (used in) provided by financing activities | (1,326,412 | ) | 30,167 | |||||
| Net increase in cash | 818,174 | 329,665 | ||||||
| Cash at beginning of year | 368,906 | 39,241 | ||||||
| Cash at end of year | $ | 1,187,080 | 368,906 | |||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | - | 329 | |||||
| Cash paid for income taxes | $ | 539,847 | 44,201 | |||||
See accompanying independent auditor's report and notes to financial statements.
PATCO ELECTRONICS, INC.
Notes to Financial Statements
December 31, 2009 and 2008
(1) Summary of Significant Accounting Policies
(a) Organization
PATCO Electronics, Inc. (Company) was incorporated under the laws of the State of Florida on July 15, 1991. The Company provides the electronics industry with state of the art battery management tools spanning the chemistries employed in secondary batteries. The Company’s principal business is located in central Florida.
Management evaluated all subsequent events through February 26, 2010, the date the financial statements were available to be issued.
(b) Cash and Equivalents
Cash and equivalents include highly liquid investments with original maturities of three months or less.
(c) Accounts Receivable, Net
Credit is extended based on evaluation of the customer’s financial condition and generally collateral is not required. The Company estimates the allowance for doubtful accounts based on a detail review of past due accounts at the end of the period, the historical relationship of charge offs to annual sales and various other factors it considers appropriate in the circumstances. The Company charges uncollectible receivables against the allowance when there is no response or working solution from a customer. Credit losses are provided for in the financial statements and historically have been within management’s expectations.
(d) Revenue Recognition
Revenue from the sale of products is recognized when an order has been received and accepted, pricing is fixed, delivery has occurred and title to the product has passed and collectability is reasonably assured. There is no installation obligation subsequent to product shipment.
(e) Inventories
Inventories are stated at the lower of cost (using the first-in, first-out (FIFO) method) or market.
(f) Property and Equipment, Net
Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. 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 recognized currently. The cost of maintenance and repairs is charged to expense as incurred.
Property and equipment are periodically evaluated for impairment. No such impairment was considered necessary by management during 2009 and 2008.
PATCO ELECTRONICS, INC.
Notes to Financial Statements - Continued
(1) Summary of Significant Accounting Policies - Continued
(g) Concentration of Credit Risk
The Company maintains cash balances at a local office of a regional financial institution. From time to time cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation.
(h) Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the required amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(i) Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities of the change in tax rates is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets 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. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the levels of historical taxable income and projections of future taxable income over which the deferred tax assets are deductible, the Company believes that it is more likely than not that it will be able to realize the benefits of its deductible differences. Accordingly, a valuation allowance has not been provided for in the accompanying financial statements.
During 2009, the Company adopted Accounting Standards Codification Topic 740, “Income Taxes” (ASC 740). ASC 740 prescribes a recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The implementation of ASC 740 did not have a material impact on the Company’s financial statements for the year ended December 31, 2009. Tax years 2006 to 2009 remain subject to examination by the IRS.
PATCO ELECTRONICS, INC.
Notes to Financial Statements-Continued
(1) Summary of Significant Accounting Policies - Continued
(j) Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, other current assets, accounts payable, and accrued liabilities approximate fair value due to the short maturity of those instruments. Lines of credit and long-term debt reflect interest rates that are currently available to the Company based on the financing arrangements and collateral provided. As a result, the carrying amount of lines of credit and long-term debt approximates fair value.
(2) Inventories
Inventories consist of the following at December 31, 2009 and 2008:
| 2009 | 2008 | |||||||
| Raw materials | $ | 401,684 | 694,751 | |||||
| Work in process | 135,867 | 54,848 | ||||||
| Finished goods | 12,165 | 13,460 | ||||||
| $ | 549,716 | 763,059 | ||||||
(3) Property and Equipment, Net
Property and equipment, net consists of the following at December 31, 2009 and 2008:
| Estimated | ||||||||||||
| useful life | ||||||||||||
| 2009 | 2008 | (years) | ||||||||||
| Machinery and equipment | $ | 460,717 | 441,114 | 5 - 10 | ||||||||
| Office furniture and computer equipment | 45,609 | 53,111 | 5 - 10 | |||||||||
| 506,326 | 494,225 | |||||||||||
| Less accumulated depreciation | (351,282 | ) | (314,820 | ) | ||||||||
| $ | 155,044 | 179,405 | ||||||||||
On June 23, 2009, the Company purchased land and building that it previously leased from a related entity owned by one of its stockholders for $1,600,000. The Company paid $500,000 cash and issued a $1,100,000 note payable. The transaction was subsequently rescinded effective June 24, 2009. The net cash impact of these transactions was $1,236,900 and is shown as financing activity in the statements of cash flows.
Depreciation expense was approximately $44,000 and $33,000 for the years ended December 31, 2009 and 2008, respectively.
PATCO ELECTRONICS, INC.
Notes to Financial Statements-Continued
(4) Bank Lines of Credit
The Company has two line of credit agreements with financial institutions totaling $150,000 of available credit. Interest on these lines is payable monthly at the banks’ commercial rate plus 1.5% (3.25% at December 31, 2009). Amounts outstanding at December 31, 2009 and 2008 were approximately $0 and $90,000, respectively.
(5) Leases
The Company leases its facility on a month to month basis from one of its stockholders. Rent expense was approximately $95,000 and $76,000 for the years ended December 31, 2009 and 2008, respectively. This lease also requires the Company pay property taxes, insurance, sales taxes and other occupancy costs.
(6) Income Taxes
Income tax expense consists of the following:
| 2009 | 2008 | |||||||||||||||||||||||
| Current | Deferred | Total | Current | Deferred | Total | |||||||||||||||||||
| Federal | $ | 882,734 | (6,050 | ) | 876,684 | 211,003 | 50,123 | 261,126 | ||||||||||||||||
| State | 149,113 | (950 | ) | 148,163 | 36,000 | 7,877 | 43,877 | |||||||||||||||||
| $ | 1,031,847 | (7,000 | ) | 1,024,847 | 247,003 | 58,000 | 305,003 | |||||||||||||||||
Income tax expense differs from the amounts computed by applying an effective U.S. federal income tax rate of 34% to the results before income taxes due to the following:
| 2009 | 2008 | |||||||
| Computed “expected” tax expense | $ | 935,366 | 280,718 | |||||
| Increase in taxes resulting from: | ||||||||
| Permanent and other differences | (6,825 | ) | (4,235 | ) | ||||
| State tax, net of federal benefit | 96,306 | 28,520 | ||||||
| Income tax expense | $ | 1,024,847 | 305,003 | |||||
Temporary differences and carryforwards which give rise to deferred tax liabilities are as follows:
| 2009 | 2008 | |||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | $ | 51,000 | 58,000 | |||||
PATCO ELECTRONICS, INC.
Notes to Financial Statements - Continued
(7) Significant Customers
Sales to three and two customers represented approximately 75% of the Company’s total sales for 2009 and 2008. At December 31, 2009 and 2008, approximately $169,000 and $575,000, respectively, of accounts receivable were due from these customers.
The Company sells products to customers throughout the United States and certain foreign countries. Credit limits, ongoing credit evaluations and account monitoring are utilized to minimize the risk of loss. Collateral generally is not required.
(8) Significant Vendors
Purchases from two vendor represented approximately 50% and 74% of the Company’s total purchases for 2009 and 2008, respectively.
(9) Stock Options
On June 16, 2008, the Company issued 22,000 options to purchase common stock to an employee. The options have a strike price of $12.75 per share, and vest over five years. The Company valued the options using the Black – Scholes – Merton Model valuation technique. The issuance of these stock options did not have a material effect on the Company’s financial statements.