1
MECHTRONICS OF ARIZONA, INC.
REPORT OF INDEPENDENT ACCOUNTANTS AND
FINANCIAL STATEMENTS OF MECHTRONICS OF ARIZONA, INC.
FOR THE TWELVE MONTHS ENDED
SEPTEMBER 30, 1995
Exhibit 99.2
2
MECHTRONICS OF ARIZONA, INC.
Financial Statements
Year Ended September 30, 1995, and
Independent Auditors' Report
3
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
MechTronics of Arizona, Inc.
Phoenix, Arizona
We have audited the accompanying balance sheet of MechTronics of Arizona, Inc.
(the "Company") as of September 30, 1995, and the related statements of income,
stockholder's equity 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 generally accepted auditing standards.
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, such financial statements present fairly, in all material
respects, the financial position of the Company as of September 30, 1995, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
November 3, 1995
4
MECHTRONICS OF ARIZONA, INC.
BALANCE SHEET
SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash (Notes 2 and 9) $ 4,087
Accounts receivable 2,870,182
Inventories (Note 3) 3,917,272
Prepaid expenses 29,537
-----------
Total current assets 6,821,078
-----------
PLANT AND EQUIPMENT (Notes 4 and 6) 1,448,326
-----------
OTHER ASSETS 199,614
-----------
TOTAL $ 8,469,018
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable to bank (Note 9) $ 150,000
Accounts payable (Note 2) 904,594
Accrued expenses (Note 5) 817,957
Customer deposits 600,000
Current portion of long-term debt (Note 6) 257,068
-----------
Total current liabilities 2,729,619
LONG-TERM DEBT (Note 6) 1,008,988
-----------
Total liabilities 3,738,607
-----------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
STOCKHOLDER'S EQUITY:
Common stock, $1 par value - authorized, 1,000,000 shares; issued, 10,000 shares 10,000
Retained earnings 5,885,008
Common stock in treasury - at cost, 4,500 shares (Note 6) (1,164,597)
-----------
Total stockholder's equity 4,730,411
-----------
TOTAL $ 8,469,018
===========
See notes to financial statements.
-2-
5
MECHTRONICS OF ARIZONA, INC.
STATEMENT OF INCOME
YEAR ENDED SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
PERCENT
AMOUNT OF SALES
------ --------
SALES (Note 9) $16,769,085 100.00 %
COST OF SALES (Notes 7 and 9) 13,932,470 83.09
----------- ------
Gross profit 2,836,615 16.91
----------- ------
EXPENSES AND OTHER INCOME:
Administrative and selling (Notes 7 and 9) 1,521,430 9.07
Interest 196,618 1.17
Other income (155,539) (.93)
----------- ------
Total expenses and other income 1,562,509 9.31
----------- ------
NET INCOME $ 1,274,106 7.60 %
=========== ======
See notes to financial statements.
-3-
6
MECHTRONICS OF ARIZONA, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
COMMON
COMMON STOCK RETAINED STOCK IN
----------------------------
SHARES AMOUNT EARNINGS TREASURY TOTAL
BALANCE,
OCTOBER 1, 1994 10,000 $10,000 $ 5,760,351 $(1,164,597) $ 4,605,754
Net income 1,274,106 1,274,106
Dividend (Note 8) (1,149,449) (1,149,449)
------ ------- ----------- ----------- -----------
BALANCE,
SEPTEMBER 30, 1995 10,000 $10,000 $ 5,885,008 $(1,164,597) $ 4,730,411
====== ======= =========== =========== ===========
See notes to financial statements.
-4-
7
MECHTRONICS OF ARIZONA, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 1,274,106
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 379,382
Gain on disposal of equipment (6,888)
Change in assets and liabilities:
Accounts receivable (272,438)
Inventories (522,428)
Prepaid expenses 7,473
Accounts payable 600,906
Accrued compensation and related taxes 8,256
Accrued expenses (92,088)
-----------
Net cash provided by operating activities 1,376,281
-----------
INVESTING ACTIVITIES:
Capital expenditures (198,515)
Proceeds from sale of assets 46,873
Deposits (78,449)
-----------
Net cash used in investing activities (230,091)
-----------
FINANCING ACTIVITIES:
Net borrowings under revolving credit agreement 120,000
Borrowings under term loan agreement 624,633
Principal payments on long-term debt (862,630)
Dividend (1,149,449)
-----------
Net cash used in financing activities (1,267,446)
-----------
NET DECREASE IN CASH (121,256)
CASH, BEGINNING OF YEAR 125,343
-----------
CASH, END OF YEAR $ 4,087
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid for interest $ 193,468
===========
See notes to financial statements.
-5-
8
MECHTRONICS OF ARIZONA, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following are the accounting policies significant to the financial
statements of MechTronics of Arizona, Inc. (the "Company"), including
those selected from acceptable alternatives.
a. Method of Accounting for Long-Term Subcontracts - The Company is a
subcontractor under certain long-term government contracts for which
the Company records sales and gross margins on a basis that
approximates the percentage completion method. Such contracts are
estimated to be completed in fiscal 1996 and the Company does not
anticipate losses on completion of the contracts.
b. Inventories are stated at the lower of cost (first-in, first-out
method) or market.
c. Plant and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives of 5 to 10
years for machinery and equipment and 25 years for plant and
improvements. Expenditures for maintenance and repairs are charged to
operations as incurred while expenditures representing additions or
betterments are capitalized.
d. Income taxes are the personal liability of the stockholder as a result
of the election of an S Corporation status.
e. Statement of Cash Flows - Cash is defined as monies on deposit.
2. CASH
Checks outstanding in excess of certain cash balances and not yet
presented for payment totaling approximately $125,000 at September 30,
1995 are included in accounts payable.
3. INVENTORIES
Inventories consist of the following:
Raw materials $1,384,181
Work in process 2,533,091
----------
Total inventories $3,917,272
==========
-6-
9
4. PLANT AND EQUIPMENT
Plant and equipment consists of the following:
Plant and improvements $ 185,842
Machinery and equipment 4,477,675
Other 665,519
----------
Total 5,329,036
Less accumulated depreciation and amortization 3,880,710
----------
Plant and equipment - net $1,448,326
==========
5. ACCRUED EXPENSES
Accrued expenses consist of the following at September 30, 1995:
Vacation $ 243,136
Employee bonuses (Note 9) 175,000
Salaries, wages and related taxes 135,617
Accrued property taxes (Note 7) 130,237
Employee medical and disability 100,837
Other 33,130
---------
Total accrued expenses $ 817,957
=========
6. LONG-TERM DEBT
Long-term debt consists of the following:
Non-interest bearing notes payable to former stockholders, payable
annually to 2000, net of unamortized discount of $590,704 based on an
imputed interest rate of 13%, collateralized by a stock pledge agreement $ 714,296
Note payable to bank, due in equal monthly installments beginning March
1995 through February 2000 plus interest at prime plus .25% (9% at
September 30, 1995), collateralized by equipment
551,760
-----------
Total 1,266,056
Less current portion 257,068
-----------
Long-term debt - net $ 1,008,988
===========
Annual maturities of long-term debt, including notes payable to former
stockholders, for the four fiscal years ending in 2000 are $274,399
(1997), $293,830 (1998), $315,788 (1999) and $124,971 (2000).
-7-
10
7. RELATED PARTY TRANSACTIONS
In October 1984, the Company guaranteed the repayment of a $5,000,000
Industrial Development Bond obligation of a partnership controlled by the
Company's stockholder. The bond proceeds were used to construct a
manufacturing facility which the Company leased from such partnership.
The Company's sole stockholder is responsible, as general partner of the
partnership, for the payments under the industrial revenue bonds. The
Company entered into an operating lease agreement with the Company's
stockholder for the use of the premises occupied by the Company. The
agreement, which expires December 31, 1995, requires the Company to pay
the stockholder rent totaling $40,000 a month and a management fee of
$15,000 per month in addition to building repairs and maintenance expenses
and property taxes related to the facility. Rent and management expenses
for the lease of the building totaled $660,000 for the year ended
September 30, 1995. The rent and management expenses included in cost of
sales and administrative and selling expenses totaled $605,590 for the
year ended September 30, 1995. Accrued property taxes of totaling $130,237
(Note 5) are included in accrued expenses at September 30, 1995. The
Industrial Revenue Bond obligation of approximately $4,200,000 at
September 30, 1995.
8. INCOME TAXES
Effective October 1, 1987, the Company elected S Corporation status under
the Internal Revenue Service regulations. Under these regulations,
virtually all future tax will be attributed to the Company's sole
stockholder rather than the Company.
As a result of the S Corporation's earnings for the year ended September
30, 1995, the Company paid the sole stockholder a dividend totaling
$1,149,449, a portion of which is for the stockholder's estimated tax
liability.
9. OTHER MATTERS
The Company has an unsecured revolving credit agreement with a bank which
provides for borrowings up to a maximum of $2,000,000, with interest at
the bank's prime rate (8.75% at September 30, 1995). The Company has
agreed to maintain a minimum cash balance with the bank of $50,000.
Borrowings under the line totaled $150,000 at September 30, 1995.
The Company provides a profit sharing plan for its employees. The Company
may make an annual lump sum contribution to the Plan, the amount of which
is determined by the Board of Directors. A contribution was not made to
the Plan in 1995. Instead, a bonus totaling $175,000 was granted to
employees for the year ended September 30, 1995. Such amount was included
in expenses (Note 5) for the year ended September 30, 1995.
-8-
11
The Company leases certain machinery and equipment under operating leases.
The leases expire at various dates through 2001. Future minimum lease
payments for such leases for the years ending September 30 are as follows:
1996 $ 124,500
1997 135,900
1998 128,400
1999 105,900
2000 105,900
Thereafter 110,900
---------
Total $ 711,500
=========
Approximately 71% of the Company's 1995 sales were made to two customers
comprised of five divisions.
* * * * * *
-9-