Exhibit 99.1
CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Consolidated Financial Statements
For the Nine Months Ended March 31, 2008
and the Year Ended June 30, 2007
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| Page |
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Independent Auditors’ Report |
| 1 |
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Consolidated Balance Sheets |
| 2 |
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Consolidated Statements of Operations |
| 3 |
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Consolidated Statements of Stockholder’s Equity |
| 4 |
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Consolidated Statements of Cash Flows |
| 5 |
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Notes to Consolidated Financial Statements |
| 6 - 12 |
Independent Auditors’ Report
To the Stockholder of
Custom Components, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Custom Components, Inc. and Subsidiary (collectively, the “Company”) as of March 31, 2008 and June 30, 2007, and the related consolidated statements of operations, stockholder’s equity, and cash flows for the nine months ended March 31, 2008 and the year ended June 30, 2007, respectively. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 also 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, as well as 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 Custom Components, Inc. and Subsidiary as of March 31, 2008 and June 30, 2007, and the results of their operations and their cash flows for the nine months ended March 31, 2008 and the year ended June 30, 2007, in conformity with accounting principles generally accepted in the United States of America.
As discussed in note 15, on August 20, 2008, the stockholders of the Company sold 100% of their stock in the Company.
/s/ Amper, Politziner & Mattia, LLP
August 21, 2008
Wall, New Jersey
CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 2008 and June 30, 2007
Assets |
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Current assets |
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Cash |
| $ | 1,753,117 |
| $ | 2,075,834 |
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Accounts receivable |
| 1,635,126 |
| 1,784,309 |
| ||
Inventories |
| 1,584,815 |
| 847,582 |
| ||
Income taxes receivable |
| 141,405 |
| 502,539 |
| ||
Deferred tax asset |
| 340,584 |
| 294,669 |
| ||
Prepaid expenses and other current assets |
| 58,115 |
| 8,524 |
| ||
|
| 5,513,162 |
| 5,513,457 |
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Property and equipment, net |
| 803,523 |
| 557,681 |
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Security deposits |
| 37,276 |
| 37,276 |
| ||
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| $ | 6,353,961 |
| $ | 6,108,414 |
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Liabilities and Stockholder’s Equity |
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Current liabilities |
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Borrowings under line of credit |
| $ | 286,025 |
| $ | 286,025 |
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Current maturities of long term debt |
| 4,417 |
| 4,406 |
| ||
Current maturities of capital lease obligations |
| 110,577 |
| 41,105 |
| ||
Accounts payable |
| 759,399 |
| 375,546 |
| ||
Accrued expenses |
| 873,298 |
| 1,000,675 |
| ||
Due to stockholder |
| 146,562 |
| 232,399 |
| ||
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| 2,180,278 |
| 1,940,156 |
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Long-term debt, net of current maturities |
| 4,553 |
| 7,674 |
| ||
Capital lease obligations, net of current maturities |
| 183,035 |
| 11,465 |
| ||
Deferred tax liability |
| 119,176 |
| 104,574 |
| ||
Total liabilities |
| 2,487,042 |
| 2,063,869 |
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Minority interest |
| 772,813 |
| 794,666 |
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Commitments and contingencies |
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Stockholder’s equity |
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Common stock, no par value, 1,000 shares authorized, 50 shares issued and outstanding |
| 12,446 |
| 12,446 |
| ||
Retained earnings |
| 3,081,660 |
| 3,237,433 |
| ||
Total stockholder’s equity |
| 3,094,106 |
| 3,249,879 |
| ||
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| $ | 6,353,961 |
| $ | 6,108,414 |
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See accompanying notes to consolidated financial statements.
2
CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
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| Nine Months |
| Percentage |
| Year Ended |
| Percentage |
| ||
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| 2008 |
| Sales |
| June 30, 2007 |
| Sales |
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Net sales |
| $ | 7,610,227 |
| 100.0 |
| $ | 15,733,792 |
| 100.0 |
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Cost of goods sold |
| 5,095,351 |
| 67.0 |
| 6,637,760 |
| 42.2 |
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Gross profit |
| 2,514,876 |
| 33.0 |
| 9,096,032 |
| 57.8 |
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Selling, general and administrative expenses |
| 2,673,688 |
| 35.1 |
| 3,287,292 |
| 20.9 |
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Operating (loss) income |
| (158,812 | ) | (2.1 | ) | 5,808,740 |
| 36.9 |
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Other income (expense) |
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Interest income |
| 71,731 |
| 0.9 |
| 31,895 |
| 0.2 |
| ||
Interest expense |
| (42,961 | ) | (0.5 | ) | (130,970 | ) | (0.8 | ) | ||
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| 28,770 |
| 0.4 |
| (99,075 | ) | (0.6 | ) | ||
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(Loss) income before income taxes and minority interest |
| (130,042 | ) | (1.7 | ) | 5,709,665 |
| 36.3 |
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Benefit from (provision for) income taxes |
| 6,896 |
| 0.1 |
| (2,118,395 | ) | (13.5 | ) | ||
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(Loss) income before minority interest |
| (123,146 | ) | (1.6 | ) | 3,591,270 |
| 22.8 |
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Minority interest, net of tax |
| 21,853 |
| 0.3 |
| (718,744 | ) | (4.6 | ) | ||
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Net (loss) income |
| $ | (101,293 | ) | (1.3 | ) | $ | 2,872,526 |
| 18.2 |
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See accompanying notes to consolidated financial statements.
3
CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholder’s Equity
For the Nine Months Ended March 31, 2008 and the Year Ended June 30, 2007
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| Common Stock |
| Retained |
| Total |
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| Shares |
| Amount |
| Earnings |
| Equity |
| |||
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Balance at June 30, 2006 |
| 1,000 |
| $ | 12,446 |
| $ | 364,907 |
| $ | 377,353 |
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Net income |
| — |
| — |
| 2,872,526 |
| 2,872,526 |
| |||
Balance at June 30, 2007 |
| 1,000 |
| 12,446 |
| 3,237,433 |
| 3,249,879 |
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Dividend |
| — |
| — |
| (54,480 | ) | (54,480 | ) | |||
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Net loss |
| — |
| — |
| (101,293 | ) | (101,293 | ) | |||
Balance at March 31, 2008 |
| 1,000 |
| $ | 12,446 |
| $ | 3,081,660 |
| $ | 3,094,106 |
|
See accompanying notes to consolidated financial statements.
4
CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
|
| Nine Months |
| Year Ended |
| ||
Cash flows from operating activities |
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Net (loss) income |
| $ | (101,293 | ) | $ | 2,872,526 |
|
Adjustments to reconcile net (loss) income to net cash from operating activities |
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Minority interest |
| (21,853 | ) | 718,744 |
| ||
Deferred tax benefit |
| (31,313 | ) | (60,435 | ) | ||
Depreciation and amortization |
| 118,515 |
| 157,580 |
| ||
(Increase) decrease in |
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|
|
|
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Accounts receivable |
| 149,183 |
| 352,938 |
| ||
Inventory |
| (737,233 | ) | (255,503 | ) | ||
Income tax receivable |
| 361,134 |
| (583,288 | ) | ||
Prepaid expenses and other current assets |
| (49,591 | ) | 1,346 |
| ||
Security deposits |
| — |
| 1,600 |
| ||
Increase (decrease) in |
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|
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Accounts payable |
| 383,853 |
| (84,810 | ) | ||
Accrued expenses |
| (127,377 | ) | 286,663 |
| ||
Total adjustments |
| 45,318 |
| 534,835 |
| ||
Net cash (used in) provided by operating activities |
| (55,975 | ) | 3,407,361 |
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Cash flows from investing activities |
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Purchases of property and equipment |
| (67,532 | ) | (98,021 | ) | ||
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Cash flows from financing activities |
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Repayment of loans from related parties |
| (85,837 | ) | (829,623 | ) | ||
Principal payments of long-term debt |
| (3,110 | ) | (499,473 | ) | ||
Principal payments on capital lease obligation |
| (55,783 | ) | (37,101 | ) | ||
Dividend |
| (54,480 | ) | — |
| ||
Net cash used in financing activities |
| (199,210 | ) | (1,366,197 | ) | ||
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Net change in cash |
| (322,717 | ) | 1,943,143 |
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Cash - beginning of period |
| 2,075,834 |
| 132,691 |
| ||
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Cash - ending of period |
| $ | 1,753,117 |
| $ | 2,075,834 |
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Supplemental disclosure of cash paid |
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Interest |
| $ | 110,909 |
| $ | 411,383 |
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Income taxes |
| $ | 163,283 |
| $ | 2,781,000 |
|
See accompanying notes to consolidated financial statements.
5
CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Business Description
Custom Components, Inc. (“Custom”), and its subsidiary, Advanced Control Components, Inc. (“Advanced”), (collectively the “Company”), was founded in 1975 and 1982, respectively, by engineers and entrepreneurs. The Company is a supplier of high performance solid-state RF and microwave components and sub-systems serving military, aerospace, commercial, and instrumentation markets.
Principles of Consolidation
The consolidated financial statements include the accounts of Custom and its 80% owned subsidiary, Advanced, after elimination of all significant intercompany transactions and balances.
Use of Estimates
The preparation of the 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 and disclosure of contingent assets and liabilities as of 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.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined using the first in - first out method.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight line method over the estimated useful lives as follows:
|
| Estimated |
Asset Category |
| Useful Life |
Machinery and equipment |
| 5 - 10 years |
Furniture and fixtures |
| 5 - 7 years |
Computers and software |
| 3 years |
Leasehold improvements |
| The lesser of the |
|
| lease term or the estimated useful life |
Certain equipment held under capital leases is classified as property and equipment and amortized using the straight-line method over its estimated life, and the related obligations are recorded as liabilities. Maintenance and repairs are charged to expense as incurred. Expenditures for betterments and major renewals are capitalized. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the accounts and any gain or loss on such disposal is reflected in operations.
Income Taxes
The Company accounts for income taxes under the asset and liability method as prescribed by Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” Under the asset and liability method, deferred tax assets and liabilities are recognized based upon differences arising from the carrying amounts of the Company’s assets and liabilities for tax and financial reporting purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company files a consolidated tax return.
6
CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (continued)
Income Taxes (continued)
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change in tax rates is enacted. A valuation allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, title and the risks and rewards of ownership of the products have been transferred to the customer, the sales price is fixed or determinable, and collectibility of the relevant receivable is reasonably assured. For arrangements requiring multiple shipments of products over a period of time, revenue is recognized for each shipment when all of the aforementioned criteria have been met and the Company has met all of its relevant obligations contained in the sales contract.
Accounts Receivable
On a periodic basis, the Company’s management evaluates its accounts receivable and allowance for doubtful accounts. In order to reduce its credit risk, the Company has adopted credit policies and procedures, which include the analysis of the financial position of its customers and the regular review of the credit limits. Based on the Company’s history and a review of the detailed accounts, an allowance for doubtful accounts was not necessary as all accounts receivable at March 31, 2008 and June 30, 2007 are deemed to be fully collectible.
Advertising Costs
Advertising costs are expensed as incurred and were approximately $87,800 for the nine months ended March 31, 2008 and approximately $88,600 for the year ended June 30, 2007.
Concentration of Cash Balance
At times during the year, the Company maintains balances in banks, which exceed the federally insured limit of $100,000. These balances fluctuate during the year and the uninsured portion can vary greatly. Management monitors regularly the financial condition of the banking institution, along with their balance of cash and cash equivalents in order to minimize this risk.
Shipping and Handling Costs
The Company has classified shipping and handling costs billed to customers as revenue. Related freight costs are reported as selling, general, and administrative expenses. Freight related costs were approximately $65,000 for the nine months ended March 31, 2008 and approximately $76,500 for the year ended June 30, 2007.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, accounts payable, accrued liabilities and customer advances approximates their fair value because of the short-term maturities of these items. The carrying value of borrowings under the line of credit agreement approximate their fair value because the related interest rate represents the market rate for comparable agreements.
7
CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 2 - Inventories
Inventories are summarized as follows:
|
| March 31, |
| June 30, |
| ||
Raw materials |
| $ | 1,049,120 |
| $ | 418,060 |
|
Work in process |
| 535,695 |
| 429,522 |
| ||
|
| $ | 1,584,815 |
| $ | 847,582 |
|
Note 3 - Property and Equipment
Property and equipment are summarized as follows:
|
| March 31, |
| June 30, |
| ||
|
| 2008 |
| 2007 |
| ||
Machinery and equipment |
| $ | 1,783,913 |
| $ | 1,430,997 |
|
Furniture and fixtures |
| 57,714 |
| 57,714 |
| ||
Computers and software |
| 278,589 |
| 267,147 |
| ||
Leasehold improvements |
| 102,491 |
| 102,491 |
| ||
|
| 2,222,707 |
| 1,858,349 |
| ||
Less accumulated depreciation and amortization |
| 1,419,184 |
| 1,300,668 |
| ||
Net property and equipment |
| $ | 803,523 |
| $ | 557,681 |
|
Depreciation and amortization expense for the nine months ended March 31, 2008 was approximately $118,500 and for the year ended June 30, 2007 was approximately $157,600.
Machinery and equipment includes assets recorded under capital leases of $437,337 and $140,513 at March 31, 2008 and June 30, 2007, respectively. Related accumulated depreciation was $51,105 and $42,415 as of March 31, 2008 and June 30, 2007, respectively.
Note 4 - Accrued Expenses
Accrued expenses are summarized as follows:
|
| March 31, |
| June 30, |
| ||
|
| 2008 |
| 2007 |
| ||
Vacation pay |
| $ | 292,195 |
| $ | 280,013 |
|
Customer advances |
| 224,927 |
| 186,494 |
| ||
Payroll |
| 106,516 |
| 208,624 |
| ||
Professional fees |
| 201,203 |
| 263,031 |
| ||
Warranty reserve |
| 5,169 |
| 10,970 |
| ||
Other |
| 43,288 |
| 51,543 |
| ||
Total accrued liabilities |
| $ | 873,298 |
| $ | 1,000,675 |
|
8
CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 5 - Income Taxes
Deferred tax attributes resulting from differences between financial accounting amounts and tax bases of assets and liabilities are summarized as follows:
|
| March 31, |
| June 30, |
| ||
Current assets |
|
|
|
|
| ||
Inventory reserve |
| $ | 174,556 |
| $ | 201,531 |
|
Accrued vacation |
| 107,220 |
| 88,731 |
| ||
Warranty reserve |
| 2,077 |
| 4,407 |
| ||
Net operating loss carryforward |
| 56,731 |
| — |
| ||
Total current deferred asset |
| $ | 340,584 |
| $ | 294,669 |
|
Non-current liabilities |
|
|
|
|
| ||
Depreciation and amortization |
| $ | 119,176 |
| $ | 104,574 |
|
The (benefit from) provision for income taxes consists of the following:
|
| Nine months |
|
|
| ||
|
| ended |
| Year ended |
| ||
|
| March 31, |
| June 30, |
| ||
|
| 2008 |
| 2007 |
| ||
Current tax expense |
| $ | 24,417 |
| $ | 2,178,830 |
|
Deferred tax benefit |
| (31,313 | ) | (60,435 | ) | ||
|
| $ | (6,896 | ) | $ | 2,118,395 |
|
The reconciliation of income taxes calculated at the U.S federal tax statutory rate to the Company’s effective tax rate is set forth below:
|
| Nine months |
|
|
| ||
|
| ended |
| Year ended |
| ||
|
| March 31, |
| June 30, |
| ||
|
| 2008 |
| 2007 |
| ||
Tax (benefit) at federal statutory rate |
| $ | (44,214 | ) | $ | 1,941,939 |
|
State income tax, net of federal benefit |
| (12,011 | ) | 343,264 |
| ||
Other, net |
| 49,329 |
| (166,808 | ) | ||
Effective income tax |
| $ | (6,896 | ) | $ | 2,118,395 |
|
Note 6 - Borrowings Under Line of Credit
At June 30, 2007, the Company had a short-term line of credit with a bank which was renewed in May of 2008 and expires on May 4, 2009, whereby it may borrow up to $1,500,000 at the bank’s prime rate which was 5.25% at March 31, 2008 and is personally guaranteed by the stockholder of the Company. The line is collateralized by inventory, accounts receivable, equipment and fixtures of the Company. The agreement provides for certain financial covenants.
9
CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 7 - Long-term Debt
|
| March 31, |
| June 30, |
| ||
Fixed rate bank note; due January 2010, payable in monthly installments of $429, including interest at 7.25%, collateralized by an automobile with a net book value of $13,965 |
| $ | 8,970 |
| $ | 12,080 |
|
Less current installments |
| 4,417 |
| 4,406 |
| ||
Long-term debt, less current installments |
| $ | 4,553 |
| $ | 7,674 |
|
Maturities of long-term debt are as follows: |
|
|
|
|
|
For the Years Ending |
|
|
| |
March 31, |
|
|
| |
2009 |
| $ | 4,417 |
|
2010 |
| 4,553 |
| |
Note 8 - Related Parties
Due to Stockholder
The Company has a note payable, with no repayment terms, due to the stockholder of Custom. The note is unsecured and had a balance of $146,562 and $232,399 at March 31, 2008 and June 30, 2007, respectively. Interest on the note is set at a fixed rate of 9%. Interest expense of $14,953 was accrued and added to the balance of the loan.
The Company paid off a note payable due to a former stockholder of Advanced during the year ended June 30, 2007. Interest on the note had been set at a fixed rate of 9%. Interest and principal payments of $10,854 and $207,252, respectively, were made during the year ended June 30, 2007.
Note 9 - Capital Leases
The Company has various capital leases for equipment expiring through February 2011.
The following is a schedule, by year, of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2008.
For the Twelve |
|
|
| |
2009 |
| $ | 145,590 |
|
2010 |
| 114,571 |
| |
2011 |
| 76,780 |
| |
Total minimum lease payments |
| 336,941 |
| |
Less: Amount representing interest |
| 43,329 |
| |
Present value of minimum lease payments |
| 293,612 |
| |
Less: Current maturities |
| 110,577 |
| |
Long-term maturities |
| $ | 183,035 |
|
10
CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 10 - Retirement Plan
The Company has a 401(k) defined contribution plan, which covers full-time employees upon completion of at least three months of continuous service with the Company. The Company currently contributes to the plan an amount equal to five percent of the employee’s contribution. The Company contributions to the 401(k) plan were approximately $7,200 and $12,300 for the nine months ended March 31, 2008 and the year ended June 30, 2007, respectively.
Note 11 - Significant Risks and Uncertainties
Major Customers
The Company did not have any individual concentrations for the nine months ended March 31, 2008.
The Company had two major customers who accounted for approximately 59% of sales during the year ended June 30, 2007, one of which accounted for approximately 46%. The 46% customer’s sales were made under a contract which was completed prior to June 30, 2007.
Significant Vendors
The Company had three major suppliers who accounted for approximately 39% of purchases during the nine months ended March 31, 2008.
The Company has three major suppliers who accounted for approximately 49% of purchases during the year ended June 30, 2007.
Note 12 - Operating Leases
The Company leases office and warehouse space under a lease which expires in October 2012. Rent expense charged to operations was approximately $235,000 and $296,000 for the nine months ended March 31, 2008 and the year ended June 30, 2007, respectively. The Company also leases various equipment for periods ending through September 2011. Rent expense charged to operations was approximately $8,400 and $11,000 for the nine months ended March 31, 2008 and the year ended June 30, 2007, respectively. At March 31, 2008, minimum rental commitments under existing noncancellable leases with an initial term of more than one year are summarized as follows:
For the Twelve |
|
|
| |
2009 |
| $ | 343,100 |
|
2010 |
| 331,100 |
| |
2011 |
| 325,600 |
| |
2012 |
| 320,000 |
| |
2013 |
| 186,700 |
| |
|
| $ | 1,506,500 |
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Note 13 - Stock Options
In July 2004, Advanced issued a stock option to one of its employees. The option was for 1% of the outstanding shares of the Company at a cost to the employee of $15,000. The option becomes null and void if employment ceases. If the Company undergoes a change of control, defined as change in majority ownership, the cost will revert to $100 and the option will be considered exercised.
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CUSTOM COMPONENTS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 14 - Non-Cash Investing and Financing Activities
During the nine months ended March 31, 2008, the Company acquired $296,825 of equipment under capital leases.
Note 15 - Subsequent Event
On August 20, 2008 the stockholders of the Company sold their stock in the Company to EMRISE, a designer, manufacturer and marketer of electronic devices and communications equipment that operates in the United States, England, France and Japan. The purchase price includes $13,000,000 paid at closing, subject to adjustments for working capital and cash as of the closing date. In addition, EMRISE is obligated to issue promissory notes in the aggregate principal amount of an additional $2,000,000 and pay up to an additional $3,000,000 in cash if the operations of the Company meet certain operating income targets for one or both of the two twelve-month periods following the closing.
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