1
EXHIBIT 99.1
[Letterhead of Friedman Eisenstein Raemer and Schwartz, LLP]
INDEPENDENT AUDITORS' REPORT
January 20, 1999
To the Partners
Plastron Industries L.P.
Bensenville, Illinois
We have audited the accompanying balance sheet of Plastron Industries L.P. as of
December 31, 1998 and 1997, and the related statements of income and partners'
equity and cash flows for the year ended December 31, 1998 and the period ended
December 31, 1997. 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 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 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 Plastron Industries L.P. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the year ended December 31, 1998 and the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Friedman Eisenstein Raemer and Schwartz, LLP
Friedman Eisenstein Raemer and Schwartz, LLP
2
PLASTRON INDUSTRIES L.P.
BALANCE SHEET
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
----------- -----------
CURRENT ASSETS
Cash $ 270,248 $ 5,480
----------- -----------
Receivables 1,897,048 2,113,294
Less: Allowance for doubtful accounts 10,000 10,000
----------- -----------
1,887,048 2,103,294
----------- -----------
Inventories 946,863 1,136,476
Prepaid expenses 25,604
----------- -----------
Total Current Assets 3,129,763 3,245,250
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $413,638 and $63,530 in 1998 and
1997, respectively 6,835,097 6,897,868
OTHER ASSETS
Intangibles, net of accumulated amortization of
$340,098 and $67,000 in 1998 and 1997,
respectively 1,025,393 1,273,000
----------- -----------
$10,990,253 $11,416,118
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 550,000 $ 550,000
Accounts payable 904,773 604,408
Deferred tooling revenue 8,600
Accrued expenses 517,073 362,041
Due to seller 445,833 370,832
----------- -----------
Total Current Liabilities 2,417,679 1,895,881
----------- -----------
NONCURRENT LIABILITIES
Long-term debt 4,400,000 6,227,632
Due to seller 250,000 695,835
----------- -----------
Total Noncurrent Liabilities 4,650,000 6,923,467
----------- -----------
Total Liabilities 7,067,679 8,819,348
PARTNERS' EQUITY 3,922,574 2,596,770
----------- -----------
$10,990,253 $11,416,118
=========== ===========
The accompanying notes are an integral part of this statement.
-4-
3
PLASTRON INDUSTRIES L.P.
STATEMENT OF INCOME AND PARTNERS' EQUITY
YEAR ENDED DECEMBER 31, 1998 AND PERIOD ENDED DECEMBER 31, 1997
1998 1997
---------------------------------- ------------------------------
% of % of
Amount Net Sales Amount Net Sales
------------ ------------- ------------ -------------
NET SALES $ 18,217,327 100.0% $ 4,735,757 100.0 %
------------ ----- ------------ -------
COST OF SALES
Materials 6,289,670 34.5 1,670,251 35.3
Direct labor 4,357,896 23.9 1,164,259 24.6
Manufacturing overhead 3,145,253 17.3 773,696 16.3
------------ ----- ------------ -------
Total Cost of Sales 13,792,819 75.7 3,608,206 76.2
------------ ----- ------------ -------
GROSS PROFIT 4,424,508 24.3 1,127,551 23.8
------------ ----- ------------ -------
OPERATING EXPENSES
Selling, general and
administrative expenses 1,159,912 6.4 308,542 6.5
Corporate expenses 445,654 2.4 124,195 2.6
------------ ----- ------------ -------
Total Operating
Expenses 1,605,566 8.8 432,737 9.1
------------ ----- ------------ -------
OPERATING INCOME 2,818,942 15.5 694,814 14.7
------------ ----- ------------ -------
OTHER EXPENSE
Amortization 273,098 1.5 67,000 1.4
Seller consulting fees 333,333 1.8 83,333 1.8
Interest expense 487,329 2.7 166,211 3.5
Other professional fees 83,179 .5
------------ ----- ------------ -------
Total Other Expense 1,176,939 6.5 316,544 6.7
------------ ----- ------------ -------
INCOME BEFORE STATE
INCOME TAXES 1,642,003 9.0 378,270 8.0
STATE INCOME TAXES 1,771
------------ ----- ------------ -------
NET INCOME 1,640,232 9.0% 378,270 8.0%
===== =======
PARTNERS' EQUITY
Beginning of year 2,596,770
Contributions (distributions) (314,428) 2,218,500
------------ ------------
End of year $ 3,922,574 $ 2,596,770
============ ============
The accompanying notes are an integral part of this statement.
-5-
4
PLASTRON INDUSTRIES L.P.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD ENDED DECEMBER 31, 1997
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,640,232 $ 378,270
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 623,206 130,530
Deferred tooling revenue (8,600) 8,600
Net (increase) decrease in assets
Receivables 216,246 39,929
Inventories 189,613 259,042
Prepaid expenses (25,604) 18,224
Net increase (decrease) in liabilities
Accounts payable 300,365 (106,693)
Accrued expenses 155,032 (245,724)
----------- -----------
Net Cash Provided by Operating Activities 3,090,490 482,178
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (287,337) (11,436)
Acquisition of assets, net of liabilities (9,038,061)
Acquisition costs (25,491) (206,847)
----------- -----------
Net Cash Used for Investing Activities (312,828) (9,256,344)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Partners' contributions 2,218,500
Distributions (314,428)
Net borrowings (repayments) on line of credit (1,277,632) 1,277,632
Principal payments on notes payable (550,000)
Payments to seller (370,834) (83,333)
Proceeds from issuance of debt 5,500,000
Loan costs (133,153)
----------- -----------
Net Cash (Used for) Provided by Financing Activities (2,512,894) 8,779,646
----------- -----------
NET INCREASE IN CASH 264,768 5,480
CASH
Beginning of year 5,480
----------- -----------
End of year $ 270,248 $ 5,480
=========== ===========
-6-
5
PLASTRON INDUSTRIES L.P.
STATEMENT OF CASH FLOWS - Continued
YEAR ENDED DECEMBER 31, 1998 AND PERIOD ENDED DECEMBER 31, 1997
1998 1997
---------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 503,683 $111,056
Income taxes 1,771
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
The Company acquired substantially all of the assets
of GFL Enterprises. In relation to the acquisition,
the Company assumed the following obligations:
Noncompete agreements $1,000,000
Note payable to seller 150,000
----------
Total $1,150,000
==========
-7-
6
PLASTRON INDUSTRIES L.P.
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Plastron Industries L.P. is a plastic injection molder of components for
the electronics industry. Substantially all sales are made on credit to
customers located throughout the United States.
PARTNERSHIP
The Company commenced operations on September 20, 1997 as a Limited
Partnership under the State of Delaware Revised Uniform Limited
Partnership Act. Plastron Management, Inc. is the general partner. The
Company has a partnership agreement which limits the transferability of
partnership interests. All gains and losses are allocated on the basis
of ownership percentage.
ACQUISITION
On September 20, 1997, the Company acquired substantially all of the
assets of GFL Enterprises, formerly known as Plastron Corp., a plastic
injection molder. The purchase price was $9,038,061, plus $1,150,000 due
to the seller for a total of $10,188,061. This amount approximated the
fair market value of the net assets acquired.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
INVENTORIES
The Company values its inventories at the lower of cost, on the
first-in, first-out (FIFO) method, or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on a straight-line method over
the following estimated useful lives:
7
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
PROPERTY AND EQUIPMENT - Continued
Description Years
----------- -----
Buildings and building improvements 40
Furniture and equipment 7
Machinery and equipment 15
Tooling 15
Transportation equipment 5
Maintenance and repairs, which neither materially add to the value of
the property nor appreciably prolong its life, are charged to expense as
incurred. Gains or losses on dispositions of property and equipment are
included in income.
INTANGIBLES
Intangible assets are recorded at cost less accumulated amortization as
follows:
1998 1997
---------- ----------
Acquisition costs, net of accumulated amortization
of $56,810 and $10,342 in 1998 and 1997,
respectively, straight-line amortization
over five years $ 175,528 $ 196,505
Loan costs, net of accumulated amortization of
$33,288 and $6,658 in 1998 and 1997,
respectively, straight-line amortization over
the term of the related notes payable 99,865 126,495
Covenants not to compete, net of accumulated
amortization of $250,000 and $50,000
in 1998 and 1997, respectively,
straight-line amortization over five years 750,000 950,000
---------- ----------
Totals $1,025,393 $1,273,000
========== ==========
8
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
INCOME TAXES
The Company is a Limited Partnership. As a result, Federal income taxes
on the net earnings of the Company are payable by the partners and no
provision is made for Federal income taxes in the accompanying financial
statements.
CONCENTRATION OF CREDIT RISK
The Company maintains bank accounts in two financial institutions. One
of these accounts is insured by the Federal Deposit Insurance
Corporation up to a maximum of $100,000. The other account is not
insured by the Federal Deposit Insurance Corporation.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 financial statements.
2. INVENTORIES
Inventories consist of the following:
1998 1997
---------- ----------
Raw materials $ 221,066 $ 312,222
Work in process 133,041 165,694
Finished goods 592,756 658,560
---------- ----------
Totals $ 946,863 $1,136,476
========== ==========
9
3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
1998 1997
---------- ----------
Land $ 790,000 $ 790,000
Buildings and building improvements 1,748,828 1,746,000
Furniture and equipment 100,233 72,538
Machinery and equipment 2,273,089 2,115,907
Tooling 2,242,163 2,170,087
Transportation equipment 66,866 66,866
Construction-in-progress 27,556
---------- ----------
7,248,735 6,961,398
Less: Accumulated depreciation 413,638 63,530
---------- ----------
Totals $6,835,097 $6,897,868
========== ==========
4. LONG-TERM DEBT
Substantially all assets of the Company are pledged as collateral for
the loans with the National Bank of Canada (the Bank). The debt to GFL
Enterprises is subordinated to the bank debt.
10
4. LONG-TERM DEBT - Continued
Long-term debt consists of the following:
1998 1997
---------- ----------
National Bank of Canada
$5,500,000 term note, due September 19, 2002, payable
in monthly installments of $45,833 commencing
January 2, 1998, plus interest at 8.17% $4,950,000 $5,500,000
$2,750,000 revolving line of credit, due September 19,
2002, borrowed in two segments:
Interest payable monthly at 8.3125% until
March 20, 1998 500,000
Interest payable monthly at the prime rate (8.5% at
December 31, 1997) 777,632
---------- ----------
Totals 4,950,000 6,777,632
Less: Current portion 550,000 550,000
---------- ----------
Noncurrent Portion $4,400,000 $6,227,632
========== ==========
The note payable and line of credit agreements with the Bank contain
restrictive covenants which, among other things, provide for maintaining
certain financial ratios and mandatory loan prepayments based on excess
cash flow, as defined in the loan agreement.
The bank debt contains interest rate options which allow the Company to
periodically change segments to either prime rate-based loans or LIBOR
plus 2.5%.
4. LONG-TERM DEBT - Continued
Maturities of the notes payable for years subsequent to December 31,
1999 are as follows:
Year Ending December 31, Amount
------------------------ ------
2000 $ 550,000
2001 550,000
2002 3,300,000
-----------
Total $ 4,400,000
===========
11
5. DUE TO SELLER
The liabilities to GFL Enterprises consist of:
1998 1997
---------- ----------
Covenants not to compete, due September 20, 2000,
payable in quarterly installments of $83,333 $ 583,333 $ 916,667
$150,000 term note, due September 20, 1999, payable
in quarterly installments of $37,500 plus interest at
8% beginning December 20, 1998 112,500 150,000
---------- ----------
Totals 695,833 1,066,667
Less: Current portion 445,833 370,832
---------- ----------
Noncurrent Portion $ 250,000 $ 695,835
========== ==========
The Company is also obligated under a consulting agreement with the
seller. The obligation is payable in quarterly installments of $83,333,
through September, 2000. The agreement requires performance and contains
rights to offset the obligation with certain items, as defined.
Consulting fee expense was $333,333 and $83,333 for the year ended
December 31, 1998 and the period ended December 31, 1997, respectively.
6. MAJOR CUSTOMER
Approximately 16% and 14% of sales for the year ended December 31, 1998
and for the period ended December 31, 1997, respectively, were made to
one customer. Approximately $469,000 and $312,000 of accounts receivable
at December 31, 1998 and 1997, respectively, are due from this customer.
7. MAJOR SUPPLIER
The Company purchased approximately 46% of its materials from two
suppliers during the year ended December 31, 1998. Approximately
$397,000 of accounts payable at December 31, 1998 are due to these
suppliers.
The Company purchased approximately 48% of its materials from one
supplier during the period ended December 31, 1997. Approximately
$186,000 of accounts payable at December 31, 1997 are due to this
supplier.
8. EQUITY APPRECIATION RIGHTS PLAN
The Company maintains an equity appreciation rights plan. Amounts are
payable under certain circumstances including the sale of the Company or
a public offering. Some percentage interests have been awarded. No
amounts have vested as of December 31, 1998.
12
9. PROFIT SHARING PLAN
The Company approved a qualified profit sharing plan (Plastron
Industries, L.P. 401(k) Retirement Plan), effective January 1, 1998,
covering all full-time employees, as defined, with a specified period of
service. Contributions are discretionary. The plan may be amended or
terminated at any time. Employer matching contributions for the year
ended December 31, 1998 were $82,172.
10. RELATED PARTY TRANSACTIONS
Certain members of the Company's corporate law firm are also limited
partners of the Company. Professional fees paid to this firm, relating
to the acquisition and other legal expenses, were $38,695 and $83,750
for the year ended December 31, 1998 and the period ended December 31,
1997, respectively.
10. RELATED PARTY TRANSACTIONS - Continued
Plastron Management, Inc. is the general partner in the Company. A
transaction fee of $125,000 was paid to an entity controlled by the
shareholders of Plastron Management, Inc. in 1997. The fee was for
finding, negotiating, financing and closing the acquisition of the
Company.
Additionally, management fees paid to this related party for the year
ended December 31, 1998 and the period ended December 31, 1997 were
$159,850 and $37,500, respectively.
During 1998, the Company loaned $1,000,000 to a company controlled by
the owners of Plastron Management, Inc. The loan was repaid during 1998,
with interest at 12%.