Exhibit 99.1
INDEPENDENT AUDITORS REPORT
Board of Directors
MTE Corporation
Menominee Falls, Wisconsin
We have audited the accompanying balance sheet of MTE CORPORATION (a Wisconsin
corporation) as of June 30, 2006, and the related statements of changes in
shareholders' equity, 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 MTE CORPORATION as of June 30,
2006, 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/ CHORTEK & GOTTSCHALK, LLP
- ---------------------------------
Waukesha, Wisconsin
August 11, 2006
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MTE CORPORATION
(a Wisconsin corporation)
BALANCE SHEET
AS OF JUNE 30, 2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,883,583
Accounts receivable - trade, less allowance for doubtful accounts
of $15,000 2,477,600
Inventories 2,496,028
Deferred income taxes 70,000
------------
TOTAL CURRENT ASSETS 6,927,211
------------
PROPERTY AND EQUIPMENT
Machinery and equipment 990,649
Office furniture and equipment 255,644
Computers and equipment 287,535
Leasehold improvements 184,599
------------
1,718,427
Accumulated depreciation and amortization 1,419,246
------------
299,181
------------
OTHER ASSETS
Intangible assets, net of accumulated amortization of $92,396 17,681
------------
$ 7,244,073
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 395,925
Accrued compensation 265,537
Accrued liabilities to estate of shareholder 1,060,000
Other accrued liabilities 62,612
Accrued income taxes 265,000
------------
TOTAL CURRENT LIABILITIES 2,049,074
DEFERRED INCOME TAXES 56,000
SHAREHOLDERS' EQUITY 5,138,999
------------
$ 7,244,073
============
The accompanying notes are an integral part of these financial statements.
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MTE CORPORATION
(a Wisconsin corporation)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK,
PAR VALUE $1
PER SHARE,
50,000 SHARES
AUTHORIZED ADDITIONAL TREASURY STOCK
------------------- PAID-IN RETAINED ----------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
-------- --------- ----------- ----------- -------- ------------ -----------
BALANCE,
July 1, 2005 2,080 $ 2,080 $ 10,765 $ 4,877,985 333 $ (1,000,000) $ 3,890,830
CORRECTION OF ERROR
Adjust accumulated depreciation and
amortization to computed amounts as
of July 1, 2005 0 0 0 (60,186) 0 0 (60,186)
NET INCOME 0 0 0 1,308,355 0 0 1,308,355
-------- --------- ----------- ----------- -------- ------------ -----------
BALANCE,
June 30, 2006 2,080 $ 2,080 $ 10,765 $ 6,126,154 333 $ (1,000,000) $ 5,138,999
-------- --------- ----------- ----------- -------- ------------ -----------
The accompanying notes are an integral part of these financial statements.
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MTE CORPORATION
(a Wisconsin corporation)
STATEMENT OF INCOME
YEAR ENDED JUNE 30, 2006
AMOUNT
------------
NET SALES $ 15,977,585
COST OF GOODS SOLD 10,480,136
------------
GROSS PROFIT 5,497,449
OPERATING EXPENSES 3,337,784
------------
INCOME FROM OPERATIONS 2,159,665
OTHER INCOME OR (EXPENSE)
Interest income 16,981
Miscellaneous income 9,081
------------
INCOME BEFORE INCOME TAXES 2,185,727
PROVISION FOR INCOME TAXES 877,372
------------
NET INCOME $ 1,308,355
============
The accompanying notes are an integral part of these financial statements.
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MTE CORPORATION
(a Wisconsin corporation)
STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,308,355
Adjustments to reconcile net income to net cash
provided from or (used in) operating activities -
Depreciation and amortization 80,526
Provision for doubtful accounts 8,751
Deferred income taxes (4,000)
Increase in accrued income taxes 84,872
-----------
1,478,504
Changes in operating assets and liabilities -
(Increase) or decrease in -
Accounts receivable - trade (394,676)
Inventories (391,669)
Other current assets 6,093
Increase or (decrease) in -
Accounts payable - trade (16,309)
Accrued expenses and other current liabilities 152,993
-----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 834,936
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from life insurance 1,000,000
Expenditures for property and equipment (142,093)
-----------
NET CASH PROVIDED FROM INVESTING ACTIVITIES 857,907
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,692,843
CASH AND CASH EQUIVALENTS, beginning of year 190,740
-----------
CASH AND CASH EQUIVALENTS, end of year $ 1,883,583
===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for -
Income taxes $ 796,500
-----------
The accompanying notes are an integral part of these financial statements.
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MTE CORPORATION
(a Wisconsin corporation)
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
MTE Corporation (the "Company"), is located in Menominee Falls, Wisconsin
and manufactures reactors, electrical filters and transformers under two
product lines which include industrial products and power quality. For the
year ended June 30, 2006, sales to one customer accounted for
approximately 22% of net sales. Two suppliers accounted for approximately
35% of the Company's purchases for the year ended June 30, 2006.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and cash
equivalents balances and accounts receivables - trade. The Company's trade
receivables are derived from sales to a diverse set of distributors and
manufacturers of industrial and electronic products located primarily
throughout the United States and Canada. The Company also has sales to
customers in Western Europe, Mexico, South America, and Southeast Asia.
The Company maintains cash and cash equivalents balances at financial
institutions which exceed the Federal Deposit Insurance Corporation
insured limit of $100,000. Deposits in excess of insured limits totaled
approximately $1,550,000 as of June 30, 2006.
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 reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of its products.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be "cash equivalents."
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ACCOUNTS RECEIVABLE - TRADE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable - trade are recorded at cost. The Company grants
credit to customers located in the United States and foreign countries.
The Company controls credit risk through credit approvals, credit limits,
and monitoring procedures. The Company performs ongoing credit evaluations
and does not require collateral from its customers.
The Company generally extends credit based on varying dates of payment.
The Company does not charge interest on accounts receivable - trade. After
the Company has exhausted all collection efforts, the account is written
off.
At June 30, 2006, one customer accounted for 23% of total trade
receivables in the aggregate.
The Company provides an allowance for doubtful accounts equal to the
estimated uncollectible amounts. The Company's estimate is based on
historical collection experience and a review of the current status of
accounts receivable - trade. It is reasonably possible that the Company's
estimate of the allowance for doubtful accounts will change. The allowance
for doubtful accounts totaled $15,000 at June 30, 2006.
INVENTORIES
Inventories are valued at the lower of cost (which approximates first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. The Company uses straight-line
and accelerated methods for recording depreciation and amortization
expense for financial reporting purposes. The estimated useful lives are
generally as follows:
Machinery and equipment 5-7 years
Furniture and fixtures 5-7 years
Computers and equipment 3-5 years
Leasehold improvements 5-39 years
Expenditures for additions, major renewals and betterments are capitalized
and expenditures for maintenance and repairs are charged to operations as
incurred.
The cost of assets retired or sold and the related depreciation are
eliminated from the accounts in the year of disposal, with the resulting
gain or loss credited or charged to operations.
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INTANGIBLE ASSETS
Intangible assets consist of the excess of purchase price over the fair
value of net assets acquired in a purchase transaction (goodwill) and the
cost of patents, trademarks, trade names and drawings. Trademarks and
patents are amortized using the straight-line method over periods ranging
from 15-17 years. Amortization expense was $1,771 for the year ended June
30, 2006. The value of goodwill is assessed annually for impairment and if
considered impaired will be written down to fair value and a corresponding
impairment loss would be recognized.
DEFERRED INCOME TAXES
Deferred income taxes are recorded to reflect the temporary differences
between the tax bases of assets and liabilities and their financial
reporting amounts. The differences relate to property and equipment, the
allowance for doubtful accounts, inventories, and certain accrued
expenses.
2. CORRECTION OF ERROR
As of July 1, 2005, the Company corrected an error in the recorded amount
of accumulated depreciation and amortization of property and equipment.
The effect of this adjustment is reflected in the Statement of Changes in
Shareholders' Equity.
3. INVENTORIES
Inventories at June 30, 2006 were comprised of the following:
RAW FINISHED
MATERIALS GOODS TOTAL
---------- ---------- ----------
Amount, at lower of cost or market $1,353,027 $1,233,301 $2,586,328
Less: reserve for obsolescence 56,300 34,000 90,300
---------- ---------- ----------
$1,296,727 $1,199,301 $2,496,028
========== ========== ==========
4. LINE OF CREDIT
At June 30, 2006, the Company has available a line of credit with JP
Morgan Chase Bank, NA, in the amount of $800,000 through June 1, 2007.
Interest is charged on outstanding Prime Rate advances and Eurodollar
advances at the bank's prime rate and LIBOR rate plus 2.5%, respectively.
The line of credit is collateralized by a security agreement on
substantially all business assets of the Company. There were no
outstanding borrowings on the credit facility as of June 30, 2006.
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5. LEASES - RELATED PARTY AND THIRD-PARTY
On January 1, 2006, the Company renewed an operating lease for its
corporate office and manufacturing facility in Menomonee Falls, Wisconsin
with two shareholders of the Company. The lease provides for payment of
monthly rentals of $11,076 for the term commencing January 1, 2006 through
December 31, 2008. Additionally, the Company is responsible for all taxes,
utilities, insurance, repairs and maintenance related to the building. The
Company has an option to extend the term of the lease for an additional
three year period through December 31, 2011, at the then-current market
rent for similar properties in the Menomonee Falls, Wisconsin area. Rent
expense on the facility for the year ended June 30, 2006 was $129,642.
On July 11, 2005, the Company entered into an operating lease for a sales
office and distribution facility in Menomonee Falls, Wisconsin with an
unrelated third party. The lease provides for payment of monthly rentals
of $10,504 (with 1.65% annual increases) for the term commencing August 1,
2005 through July 31, 2010. Additionally, the Company is responsible for
its share of taxes, utilities, insurance, repairs and maintenance related
to the building. The Company has an option to extend the term of the lease
for an additional five years period at established monthly rentals. Rent
expense for the facility for the year ended June 30, 2006 was $107,929.
On May 1, 2004, the Company entered into an operating lease agreement for
an offsite storage facility from a Company shareholder for a monthly
rental amount of $1,700. The original two year term through April 30, 2006
was automatically renewed for an additional two-year period through April
30, 2008. Rent expense for the offsite storage facility for the year ended
June 30, 2006 was $20,400.
The Company's commitment under the real estate leases (excluding real
estate taxes and operating expenses) is as follows:
YEAR ENDING
JUNE 30, AMOUNT
- ----------- ----------
2007 $ 281,267
2008 279,982
2009 198,668
2010 134,393
2011 11,215
----------
$ 905,525
----------
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6. INCOME TAXES
The components of the income tax provision or (benefit) for the year ended
June 30, 2006 is as follows:
AMOUNT
----------
CURRENT
Federal $ 684,310
State 197,062
----------
881,372
----------
DEFERRED
Federal 3,900
State (7,900)
----------
(4,000)
----------
TOTAL INCOME TAX PROVISION $ 877,372
==========
The components of the deferred income tax asset or (liability) as of June
30, 2006 is summarized below:
AMOUNT
-----------
NET CURRENT DEFERRED
INCOME TAX ASSET:
Allowance for doubtful accounts $ 5,200
Inventory reserve for obsolescence 35,400
Accrued vacation 29,400
-----------
$ 70,000
===========
NET NONCURRENT DEFERRED
INCOME TAX LIABILITY:
Property and equipment $ (56,000)
-----------
$ (56,000)
===========
7. SELF-INSURED HEALTH PLAN SUPPLEMENTED BY STOP-LOSS INSURANCE
The Company has a self-insured health plan for its employees. The Company
has purchased stop-loss insurance in order to limit its exposure, which
will reimburse the Company for individual claims in excess of $20,000
annually up to $2,000,000 per individual or aggregate claims exceeding a
minimum deductible, as specified in the policy, up to $1,000,000.
Self-insurance losses are accrued based on the Company's estimates of the
aggregate liability for uninsured claims incurred, but not paid. At June
30, 2006, the accrued liability for self-insured health losses was
$46,000.
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8. SHAREHOLDERS' AGREEMENTS
The Company has an agreement between itself and two of its shareholders
whereby the parties agree to restrict the sale, transfer or pledge of the
Company's common stock. The agreement includes certain provisions relating
to benefits payable to the shareholders upon triggering events of
permanent disability or death of a shareholder. In addition, the estate of
a deceased shareholder or the permanently disabled shareholder can demand
at their discretion that the other shareholder arrange for the sale of the
Company within one year, or cause the stock owned by the deceased
shareholder or the permanently disabled shareholder to be purchased at a
price to be determined according to the agreement.
As a result of the death of a company shareholder in December, 2005, the
Company became obligated to pay the estate of the shareholder $10,000 on a
monthly basis, beginning in January, 2006, for a maximum of twelve months.
A liability totaling $60,000 is presented in the Balance Sheet of these
financial statements for the unpaid portion of this obligation.
Additionally, the Company received proceeds from a term life insurance
policy insuring the life of the deceased shareholder in the amount of
$1,000,000. According to the terms of the shareholder agreement, the
proceeds are to be paid to the estate of the shareholder as an advance
payment for the redemption of the stock. The company has recognized a
liability totaling $1,000,000 for the unpaid portion of the life insurance
proceeds as of June 30, 2006.
9. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) retirement/profit sharing plan which covers
substantially all employees. Company contributions to the plan are made at
the discretion of the Board of Directors and are limited to 100% of
voluntary employee contributions. The Company matched 30% of the first 5%
of employee contributions, which totaled $26,169 for the year ended June
30, 2006.
On July 18, 2002, the Company established a Key Employee Equity
Participation Plan. Two key employees were granted a total of 231 equity
units on that date. As of June 30, 2006, one employee is currently
employed and covered by the plan, and holds 139 equity units. Employees
are 100% vested in the units after five years of service from the grant
date. Upon a participant's termination of employment, the participant is
entitled to receive an amount for the outstanding equity units equal to
the formula value per equity unit in excess of the participant's base
value of $2,463 per equity unit. Upon a disposition of the Company, the
participant is entitled to receive an amount for the outstanding equity
units equal to the excess of the proportionate share of the net proceeds
per equity unit over the base value per equity unit.
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