EXHIBIT 99.1
VALENTEC SYSTEMS, INC
BALANCE SHEET
PERIOD ENDING SEPTEMBER 30, 2004
(Unaudited)
VSI VSI
SEPT 30 2005 SEPT 30 2004
Current Assets
Cash & Cash Equivalents 1,117,185 253,087
Accounts Receivable 7,950,986 3,477,501
Inventory 1,611,953 1,947,665
Contract Development 2,261,533 -
Other 146,579 91,576
---------- ----------
Total Current 13,088,236 5,769,829
---------- ----------
Fixed Assets
Furniture, Fixtures & Leasehold Improvements 470,709 360,420
Machinery & Equipment 2,246,049 1,986,381
---------- ----------
2,716,758 2,346,801
---------- ----------
Less Accumulated Depreciation (1,331,611) (985,534)
---------- ----------
Total Fixed 1,385,147 1,361,267
---------- ----------
TOTAL ASSETS 14,473,383 7,131,096
---------- ----------
Current Liabilities
Accounts Payable 2,397,890 877,886
Accrued Expense 529,567 1,364,098
Customer Deposits 76,056 59,605
Lines of Credit - Notes Payable 6,998,981 2,071,054
Due to Shareholders 933,455 2,292,250
---------- ----------
Total Current 10,935,949 6,664,893
---------- ----------
TOTAL LIABILITIES 10,935,949 6,664,893
---------- ----------
Shareholders Equity
Common stock, $0.01 par value per share,
100 shares authorized, issued and
outstanding 10 10
Additional Paid In Capital 2,884,773 3,485,663
Retained Earnings 652,651 (3,019,470)
---------- ----------
Total Equity 3,537,434 466,203
---------- ----------
TOTAL LIABILITIES & EQUITY 14,473,383 7,131,096
---------- ----------
EXHIBIT 99.1
VALENTEC SYSTEMS, INC
STATEMENT OF OPERATIONS
NINE MONTHS ENDING SEPTEMBER 30, 2004
(Unaudited)
9-MONTHS 9-MONTHS
SEPT 30 2005 SEPT 30 2004
Revenues 12,385,602 4,044,427
Direct Contract Cost
Direct Labor 1,136,180 894,541
Direct Materials 4,181,076 1,269,547
Other Direct 2,064,165 1,537,952
---------- ----------
Total Direct Cost 7,381,421 3,702,040
---------- ----------
Gross Margin 5,004,181 342,387
---------- ----------
Indirect Cost
Indirect Expenses 825,493 324,372
Overhead Expenses 721,919 1,426,215
Depreciation/Amortization 701,664 277,779
G&A Expense 1,869,691 1,901,238
---------- ----------
Total Indirect 4,118,767 3,929,604
---------- ----------
Income from Operation 885,414 (3,587,217)
---------- ----------
Other (Expense) Income
Interest Income 27,569 2,327
Interest Expense (201,924) (58,501)
Miscellaneous (20,340) 26,203
---------- ----------
Total Other (194,695) (29,971)
---------- ----------
Income Before taxes 690,719 (3,617,188)
---------- ----------
Provision for Taxes - 9,458
---------- ----------
Net Income 690,719 (3,607,730)
---------- ----------
Profit (loss) per Share 6,907.2 (36,077.3)
---------- ----------
Weighted Avg shares 100 100
EXHIBIT 99.1
VALENTEC SYSTEMS, INC
STATEMENT OF CASH FLOWS
NINE MONTHS ENDING SEPTEMBER 30, 2004
(Unaudited)
SEPT 30 2005 SEPT 30 2004
Cash from Operations
Net Income 690,719 (3,605,242)
Depreciation/Amortization 701,664 275,291
---------- ----------
Net From Operations 1,392,383 (3,329,951)
---------- ----------
(Increase) Decrease in Assets
Accounts Receivable (6,129,440) 613,581
Inventory (553,688) (1,389,390)
Restricted Cash 1,327,468
Contract Development (1,207,905) 1,468,391
Deferred Taxes (5,079)
Pre Paid Expenses (55,447) (444)
---------- ----------
Total (6,624,091) 692,138
---------- ----------
Increase (Decrease) in Liabilities
Accounts Payable 950,902 (1,061,012)
Accrued Expense 77,632 942,799
Due to Shareholders (158,239)
Customer Deposits 2,331,129 59,605
---------- ----------
Total 3,201,424 (58,608)
---------- ----------
Net Cash (used) by Operating Activities (2,030,284) (2,696,421)
---------- ----------
Cash Flow from Investing Activities
Purchase Property & Equipment (342,840) (176,241)
Add Paid In Capital (229,089) 71,246
Distribution to Parent (354,089)
---------- ----------
(926,018) (104,995)
---------- ----------
Cash Flow from Financing Activities
Lines of Credit - Notes Payable 4,694,000 1,120,770
Notes Payable (100,000)
Notes Payable 100,000
Due to Shareholders (1,168,909) 1,780,966
---------- ----------
3,525,091 2,901,736
---------- ----------
Net Increase in Cash 568,789 100,320
---------- ----------
Cash Beginning of Year 262,197 152,767
Cash End of Year 1,117,185 253,087
EXHIBIT 99.1
VALENTEC SYSTEMS, INC
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD ENDING SEPTEMBER 30, 2005
(Unaudited)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
VSI Balance Dec 31, 2004 10 3,484,773 316,021 3,800,804
Net Income - - 690,719 690,719
Reclass Add Paid In Cap (600,000) (600,000)
Distribution to Parent (354,089) (354,089)
-- --------- -------- ---------
VSI Sept 30, 2005 10 2,884,773 652,651 3,537,434
VALENTEC SYSTEMS, INC.
MINDEN, LOUISIANA
DECEMBER 31, 2003
VALENTEC SYSTEMS, INC.
MINDEN LOUISIANA
TABLE OF CONTENTS
PAGE
----
Independent Auditor's Report 1
Balance Sheet 2
Statement of Operations 3
Statement of Stockholders' Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6-9
HEARD MCELROY & VESTAL LLP 333 TEXAS STREET PARTNERS ROY E PRESTWOOD, CPA
CERTIFIED PUBLIC ACCOUNTANTS 15TH FLOOR J. PETER GAFFNEY, CPA, APC A. D. JOHNSON, JR., CPA
SHREVEPORT, LA 71101 SPENCER BERNARD, JR., CPA RON W. STEWART, CPA, APC
318 429-1525 H.Q. GAHAGAN, JR., CPA, APC
318 429-2070 FAX GERALD W. HEDGCOCK, JR., CPA, APC
POST OFFICE BOX 1607 TIM B. NIELSEN, CPA, APC
SHREVEPORT, LA JOHN W. DEAN, CPA, APC OF COUNSEL
71165-1607 MARK D. ELDREDGE, CPA GILBERT R. SHANLEY, JR., CPA
ROBERT L. DEAN, CPA C. CODY WHITE, JR., CPA, APC
STEPHEN W. CRAIG, CPA WILLIAM L. HIGHTOWER, CPA
March 10, 2004
Board Of Directors
Valentec Systems, Inc.
Minden, Louisiana
Independent Auditor's Report
We have audited the accompanying balance sheet of Valentec Systems, Inc. as of
December 31, 2003, and the related statements of operations, stockholders'
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 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 Valentec Systems, Inc. as of
December 31, 2003, and the results of their operations and their cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
(HEARD MCELROY & VESTAL LLP)
HMV
A PROFESSIONAL SERVICES FIRM
SHREVEPORT * BOSSIER CITY hmv@hmvcpa.com E-MAIL
WEST MONROE www.hmvcpa.com WEB ADDRESS
1
VALENTEC SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Current assets:
Cash 152,767
Accounts receivable 3,622,952
Accounts receivable-parent 486,130
Inventory 558,275
Contract development cost 1,468,391
Income tax receivable 91,132
---------
Total current assets 6,379,647
Property and equipment:
Furniture, fixtures and equipment 2,170,560
Less-accumulated depreciation (710,243)
---------
Net property and equipment 1,460,317
Other assets:
Deposits 11,598
---------
Total assets 7,851,562
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-line of credit 950,000
Note payable-stockholders 511,284
Accounts payable and accrued expenses 1,938,898
Accrued salaries and payroll withholding 166,046
Deferred income taxes payable 242,453
Investment in subsidiary 13,084
---------
Total current liabilities 3,821,765
Stockholders' equity:
Common stock-$.01 par value per share, 100 shares
authorized, issued and outstanding 10
Additional paid-in capital 2,914,450
Retained earnings 1,115,337
---------
Total stockholders' equity 4,029,797
---------
Total liabilities and stockholders' equity 7,851,562
=========
The accompanying notes to financial statements are an integral part of such
statements.
2
VALENTEC SYSTEMS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
Contract revenue 6,184,670
Direct contract costs:
Direct labor 981,331
Direct materials 2,188,418
Other direct costs 2,040,641
---------
Total direct contract costs 5,210,390
Gross margin on revenue 974,280
Facility lease revenue 2,445,732
Indirect costs:
Fringe benefit expenses 377,651
Overhead expenses 855,928
General and administrative expenses 1,562,717
---------
Total indirect costs 2,796,296
---------
Income from operations 623,716
Other (expense) income:
Interest income 1,040
Miscellaneous 23,371
Interest expense (41,993)
---------
Total other (expense) (17,582)
---------
Income before income taxes 606,134
Provision for income taxes-deferred (173,411)
---------
Net income 432,723
=========
The accompanying notes to financial statements are an integral part of such
statements.
3
VALENTEC SYSTEMS. INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2003
Additional
Common Paid-in Retained
Stock Capital Earnings Total
------ ---------- --------- ---------
Balance-December 31, 2002 10 2,914,450 682,614 3,597,074
Net income - - 432,723 432,723
------ --------- --------- ---------
Balance-December 31, 2003 10 2,914,450 1,115,337 4,029,797
====== ========= ========= =========
The accompanying notes to financial statements are an integral part of such
statements.
4
VALENTEC SYSTEMS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
Cash flows from operating activities:
Net income 432,723
Adjustments to reconcile net income to net cash (used)
by operating activities:
Depreciation and amortization 398,619
Change in deferred income taxes 242,453
(Increase) decrease in:
Accounts receivable 1,614,058
Inventory 116,586
Cost in excess of billings (1,468,391)
Prepaid expenses and travel advances 73,902
Income taxes receivable (42,632)
Increase (decrease) in:
Accounts payable and accrued expenses (1,572,922)
Accrued salaries and payroll withholding 641
Deferred revenue (128,092)
----------
Total adjustments (765,779)
----------
Net cash (used) by operating activities (333,056)
Cash flows from investing activities:
Purchase of property and equipment (325,358)
Cash flows from financing activities:
Proceeds from the line of credit 775,000
Repayments on notes payable (104,991)
Repayments to stockholders (22,217)
(Decrease) in due to subsidiary (107,107)
----------
Net cash provided by financing activities 540,685
----------
Net (decrease) in cash (117,729)
Cash-beginning of year 270,496
----------
Cash-end of year 152,767
==========
Supplemental cash flow information:
Cash paid for:
Interest 41,993
==========
The accompanying notes to financial statements are an integral part of such
statements.
5
VALENTEC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31,2003
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Valentec Systems, Inc. was organized under the laws of the
State Of Louisiana on September 1, 2000 as an ammunition plant facilities
contractor.
On September 25, 2000, Valentec Systems, Inc. established Valentec
International as a wholly-owned subsidiary to produce and sell ammunition
internationally.
The financial statements of the Corporation include only those of Valentec
Systems, Inc. Its wholly-owned subsidiary is accounted for on the equity
method. No income or loss was recognized from the subsidiary in 2003. The
Corporation's investment is a negative $13,084 at December 31, 2003.
Valentec Systems, Inc. is a wholly-owned subsidiary of VTECH Corporation.
CASH AND CASH EQUIVALENTS. For purposes of financial statement
presentation, the Corporation considers all highly liquid debt instruments
with initial maturities of ninety days or less to be cash equivalents.
The Corporation maintains cash balances which may exceed federally insured
limits. The Corporation does not believe that this results in any
significant credit risk.
CONTRACT REVENUE. Revenue from fixed-price type contracts is recognized
under the percentage-of-completion method of accounting, with costs and
estimated profits included in contract revenue as work is performed. If
actual and estimated costs to complete a contract indicate a loss, a
provision is made currently for the loss anticipated on the contract.
Advance payments received are reported in the accompanying balance sheets
as deferred revenue.
Revenue from time and materials type contracts is recognized as costs are
incurred at amounts represented by the agreed-upon billing amounts.
Revenue recognized on contracts for which billings have not been presented
to customers is included in the accounts receivable classification on the
balance sheet.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at the
original cost to the Corporation, Assets are being depreciated using the
double declining balance method over predetermined lives of three to seven
years.
GOODWILL. Goodwill was recorded at original cost to the Corporation. In
2001, goodwill was reduced by $126,876 to reflect an adjustment in the
purchase price of Valentec Systems, Inc. due to a refund of federal taxes
from a period prior to acquisition. There is no remaining goodwill at
December 31, 2003.
6
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY. Inventory is stated at the lower of cost or market value using
the average cost method. Inventories at December 31, 2003 consist of:
Raw materials 90,825
Shell casings 467,450
-------
558,275
=======
These inventories were generated from excess production under a completed
contract and are expected to be sold in a subsequent year.
INCOME TAXES. The Corporation files a consolidated federal income tax
return utilizing the accrual basis of accounting for tax reporting
purposes whereby revenue is recognized when earned and expenses are
recognized when incurred. Certain items, primarily accrued expenses and
depreciation will affect different periods for financial statement and
income tax reporting purposes. Deferred federal and state income taxes are
provided for these temporary differences.
CLASSIFICATION OF EXPENSES. The Corporation classifies expenses into four
categories: direct contract costs, fringe benefit expenses, overhead
expenses and general and administrative expenses.
USE OF ACCOUNTING 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 reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of billed and unbilled accounts under
contracts in progress with governmental units, principally with the
Department of Defense and with lessees (refer to Note 6). The components
of accounts receivable at December 31, 2003 are:
Billed (including lessees) 1,664,445
Unbilled 2,139,039
---------
3,803,484
Less-allowance for doubtful accounts (180,532)
---------
3,622,952
=========
Unbilled accounts receivable relates to work that has been performed for
which billings have not been presented to customers. It is anticipated
that the unbilled amounts will be collected within the next fiscal year.
3. NOTE PAYABLE-LINE OF CREDIT
The Corporation has a line of credit arrangement with a financial
institution which has a maximum borrowing amount of $1,000,000 and expires
on April 28, 2004, Interest is payable monthly at the institution's prime
rate. The line is secured by substantially all of the assets of the
Corporation and personally guaranteed by a stockholder of the Company. At
December 31, 2003, $950,000 was outstanding on the line with $50,000
available for borrowing.
7
4. NOTES PAYABLE-STOCKHOLDERS
The Corporation is indebted under notes payable to the stockholders of the
Corporation. The notes bear interest at various rates ranging from 10% to
12% per annum and include accrued interest of $-0-at December 31,2003. The
notes are due on demand and have an outstanding balance of $511,284 at
December 31, 2003.
5. INCOME TAXES
The components of the provision for income taxes in December 31, 2003
consisted of:
The provision for income taxes at December 31,2003 reflects deferred
federal and state income taxes.
The Corporation anticipates reporting an approximate loss of $860,000 due
to the timing of deductions for cost incurred on contracts. No deferred
tax asset has been recognized as of December 31, 2003, but has been fully
allowed for by the Corporation.
6. LEASES
The Corporation entered into an agreement with the U.S. Army to serve as
facility use contractor of the Louisiana Army Ammunition Plant (LAAP) in
Minden, Louisiana.
The Corporation does not pay rent for its space it uses but oversees the
property for the U.S. Army. It also pays cost associated with running the
LAAP (maintenance, utilities, security and other costs) and receives rent
from tenants. The Army must approve all leases.
If the Corporation receives rent in excess of $2,400,000 per year, it
splits that amount equally with the U.S. Army, No payment was due in 2003.
The Corporation has leases with tenants ranging from seven years to twenty
five years. The Corporation recognized rent income in 2003 of $2,445,732.
Based upon the current leases, the Corporation anticipates receiving
approximately $2,330,000 for each of the next five years.
7. PROFIT SHARING PLAN
The Corporation has adopted a qualified 401(k) Profit Sharing Plan for all
present and future eligible employees. The Corporation matches employee
contributions, dollar for dollar, up to 3% of salaries and may contribute
a discretionary amount annually as determined by the Board of Directors.
The contribution is limited to the maximum contribution allowed under the
Internal Revenue Service regulations, which is presently 15 % of eligible
gross salaries. Plan participants may elect to contribute up to 15% of
their gross annual earnings limited to $7,000, as indexed for inflation.
Employees vest 100% in all salary reduction contributions. The
Corporation's matching and discretionary contributions vest 100% after two
years of service. The Corporation contributed $27,156 for the year ended
December 31, 2003, as a match to employees and did not make any annual
discretionary contributions for either year.
8. RELATED PARTY
The Corporation's stockholders also control other companies whose
operations are similar to those of the Corporation. The Corporation
purchases and sells materials and services to these entities. Following is
a summary of transactions and balances with affiliates for the years ended
December 31, 2003:
Accounts receivable-parent 486,130
8
8. RELATED PARTY (CONTINUED)
Consulting services with an affiliate 180,000
Due to affiliates (included in accounts payable
and accrued expenses in the accompanying balance sheet) 772,703
There were no sales or purchases with affiliated companies,
9. CONTRACT STATUS
The Corporation has provided contracted services to the government under
fixed price contracts. In these types of contracts, prices are not subject
to any adjustment on the basis of costs incurred to perform the required
work. The award of any negotiated contract in excess of $100,000 ($500,000
for DOD, NASA and Coast Guard) with certain exemptions as provided by
regulation, requires certification by the contractor that cost and pricing
data used to negotiate the final price is current, accurate and complete.
This certification entitles the government to a price adjustment,
including profit or fee, of any significant amount by which the price was
increased because of defective data. The Corporation is also restricted in
the amount it can bill under contract until it has passed its first
article (inspection). That limit is 10% of the contract amount. The
Corporation, in the normal course of business, periodically reviews its
cost estimates and experience on all contracts. In the opinion of
management, the potential for any price adjustment on open contracts is
remote and, if adjusted, would not have a material effect on the
Corporation's financial position or results of operations for the period.
BACKLOG. The Corporation has authorized but uncompleted contracts on hand
for which work is in progress at December 31, 2003 approximately as
follows:
Total contract price of initial contract
awards including exercised options and
approved change orders (modifications) 20,658,589
Completed to date 783,060
----------
Authorized backlog 19,875,529*
==========
* Included in this amount is $16,745,000 contract from a related party (a
stockholder) which was finalized and signed in February 2004.
10. DEVELOPMENT COST
The Corporation incurred development cost associated with two contracts of
$ 1,468,391. These costs are anticipated to be allocated to those
contracts during 2004 when production is started.
9
VALENTEC SYSTEMS, INC.
MINDEN, LOUISIANA
DECEMBER 31, 2004
HEARD
MCELROY
& VESTAL
LLP
CERTIFIED PUBLIC ACCOUNTANTS
HEARD
MCELROY
& VESTAL
LLP
CERTIFIED PUBLIC ACCOUNTANTS
333 TEXAS STREET
15TH FLOOR
SHREVEPORT, LA 71101
318 429-1525
318 429-2070 FAX
POST OFFICE BOX 1607
SHREVEPORT, LA
71165-1607
PARTNERS
J. PETER GAFFNEY, CPA, APC
SPENCER BERNARD, JR., CPA
H.Q. GAHAGAN, JR., CPA, APC
GERALD W. HEDGCOCK, JR., CPA, APC
TIM B. NIELSEN, CPA, APC
JOHN W. DEAN, CPA, APC
MARK D. ELDREDGE, CPA
ROBERT L. DEAN, CPA
STEPHEN W. CRAIG, CPA
ROY E. PRESTWOOD, CPA
A. D. JOHNSON, JR., CPA
RON W. STEWART, CPA, APC
OF COUNSEL
GILBERT R. SHANLEY, JR., CPA
C. CODY WHITE, JR., CPA, APC
WILLIAM L. HIGHTOWER, CPA
March 1, 2005
Board of Directors
Valentec Systems, Inc.
Minden, Louisiana
Independent Auditor's Report
We have audited the accompanying balance sheet of Valentec Systems, Inc. as of
December 31, 2004, and the related statements of operations, stockholders'
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 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 Valentec Systems, Inc. as of
December 31, 2004, and the results of their operations and their cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
[HEARD MCELROY & VESTAL, LLP]
[HMV LOGO]
A PROFESSIONAL SERVICES FIRM
SHREVEPORT - BOSSIER CITY
WEST MONROE
hmv@hmvcpa.com E-MAIL
www.hmvcpa.com WEB ADDRESS
1
VALENTEC SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 2004
ASSETS
Current assets:
Cash 262,197
Restricted cash 1,327,468
Accounts receivable 1,599,573
Accounts receivable-stockholder 221,973
Inventory 1,058,265
Contract development cost 6,261,978
Income tax receivable 91,132
-----------
Total current assets 10,822,586
Property and equipment:
Furniture, fixtures and equipment 2,373,918
Less-accumulated depreciation (1,053,380)
-----------
Net property and equipment 1,320,538
-----------
Total assets 12,143,124
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-line of credit 2,255,545
Note payable-stockholders 333,455
Accounts payable and accrued expenses 1,515,372
Accrued salaries and payroll withholding 219,805
Deferred income taxes payable 237,207
Deferred revenue 2,453,787
Due to stockholder 1,327,149
-----------
Total current liabilities 8,342,320
Stockholders' equity:
Common stock-$.01 par value per share, 100 shares authorized,
issued and outstanding 10
Additional paid-in capital 3,484,773
Retained earnings 316,021
-----------
Total stockholders' equity 3,800,804
-----------
Total liabilities and stockholders' equity 12,143,124
===========
The accompanying notes to financial statements are an integral part of
such statements.
2
VALENTEC SYSTEMS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
Contract revenue 3,722,180
Direct contract costs:
Direct labor 1,200,072
Direct materials 1,398,177
Other direct costs 1,992,828
---------
Total direct contract costs 4,591,077
---------
Gross margin (loss) on revenue (868,897)
Facility lease revenue 2,697,303
Indirect costs:
Fringe benefit expenses 420,352
Overhead expenses 311,185
General and administrative expenses 879,372
---------
Total indirect costs 1,610,909
---------
Income from operations 217,497
Other (expense) income:
Interest income 2,683
Miscellaneous (12,095)
Interest expense (96,937)
---------
Total other (expense) (106,349)
---------
Income before income taxes 111,148
Provision for income taxes-deferred (28,725)
---------
Net income 82,423
=========
The accompanying notes to financial statements are an integral part of
such statements.
3
VALENTEC SYSTEMS, INC.
STATEMENT OF STOCK HOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2004
Additional
Common Paid-in Retained
Stock Capital Earnings Total
------ ---------- --------- ---------
Balance-December 31, 2003 10 2,914,450 1,115,337 4,029,797
Net income - - 82,423 82,423
Capital (charge) from dissolution
of parent - 570,323 (881,739) (311,416)
------ ---------- --------- ---------
Balance-December 31, 2004 10 3,484,773 316,021 3,800,804
====== ========== ========= =========
The accompanying notes to financial statements are an integral part of
such statements.
4
VALENTEC SYSTEMS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2004
Cash flows from operating activities:
Net income 82,423
Adjustments to reconcile net income to net cash (used) by operating activities:
Depreciation and amortization 345,626
Change in deferred income taxes (5,246)
(Increase) decrease in:
Accounts receivable 2,023,379
Inventory (499,990)
Cost in excess of billings (contract development cost) (4,793,587)
Other assets 11,598
Increase (decrease) in:
Accounts payable and accrued expenses (423,526)
Accrued salaries and payroll withholding 53,759
Deferred revenue 2,453,787
----------
Total adjustments (834,200)
----------
Net cash (used) by operating activities (751,777)
Cash flows from investing activities:
Purchase of property and equipment (205,847)
Increase in restricted cash (1,327,468)
----------
Net cash (used) by investing activities (1,533,315)
Cash flows from financing activities:
Proceeds from the line of credit 1,305,545
Repayments on notes payable (177,829)
Increase in due to/from stockholders 1,105,176
Increase in due to/from related entities 161,630
----------
Net cash provided by financing activities 2,394,522
----------
Net increase in cash 109,430
Cash-beginning of year 152,767
----------
Cash-end of year 262,197
==========
Supplemental cash flow information:
Cash paid for:
Interest 96,937
==========
The accompanying notes to financial statements are an integral part of
such statements.
5
VALENTEC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Valentec Systems, Inc. was organized under the laws of the
State of Louisiana on September 1, 2000 as an ammunition plant facilities
contractor.
On September 25, 2000, Valentec Systems, Inc. established Valentec
International as a wholly-owned subsidiary to produce and sell ammunition
internationally. Valentec International was dissolved in 2004.
The financial statements of the Corporation include only the accounts of
Valentec Systems, Inc. Its wholly-owned subsidiary was accounted for on
the equity method. The Corporation's investment at December 31, 2004 was
$-0- as this entity was dissolved.
Valentec Systems, Inc. was a wholly-owned subsidiary of VTECH Corporation
at December 31, 2003. During 2004, VTECH Corporation was dissolved.
CASH AND CASH EQUIVALENTS. For purposes of financial statement
presentation, the Corporation considers all highly liquid debt instruments
with initial maturities of ninety days or less to be cash equivalents.
The Corporation maintains cash balances which may exceed federally insured
limits. The Corporation does not believe that this results in any
significant credit risk.
CONTRACT REVENUE. Revenue from fixed-price type contracts is recognized
under the percentage-of-completion method of accounting, with costs and
estimated profits included in contract revenue as work is performed. If
actual and estimated costs to complete a contract indicate a loss, a
provision is made currently for the loss anticipated on the contract.
Advance payments received are reported in the accompanying balance sheets
as deferred revenue.
Revenue from time and materials type contracts is recognized as costs are
incurred at amounts represented by the agreed-upon billing amounts.
Revenue recognized on contracts for which billings have not been presented
to customers is included in the accounts receivable classification on the
balance sheet.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at the
original cost to the Corporation. Assets are being depreciated using the
double declining balance method over predetermined lives of three to seven
years.
6
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY. Inventory is stated at the lower of cost or market value using
the average cost method. Inventories at December 31, 2004 consist of:
Raw materials 590,815
Shell casings 467,450
---------
1,058,265
=========
These inventories were generated from excess production under a completed
contract and are expected to be sold in a subsequent year. The shell
casings will be utilized on a contract for the U.S. Army awarded in early
2005.
INCOME TAXES. The Corporation files a consolidated federal income tax
return utilizing the accrual basis of accounting for tax reporting
purposes whereby revenue is recognized when earned and expenses are
recognized when incurred. Certain items, primarily accrued expenses and
depreciation will affect different periods for financial statement and
income tax reporting purposes. Deferred federal and state income taxes are
provided for these temporary differences.
CLASSIFICATION OF EXPENSES. The Corporation classifies expenses into four
categories: direct contract costs, fringe benefit expenses, overhead
expenses and general and administrative expenses.
USE OF ACCOUNTING 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 reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of billed and unbilled accounts under
contracts in progress with governmental units, principally with the
Department of Defense and with lessees (refer to Note 6). The components
of accounts receivable at December 31, 2004 are:
Billed (including lessees) 461,447
Unbilled 1,185,354
---------
1,646,801
Less-allowance for doubtful accounts (47,228)
---------
1,599,573
=========
Unbilled accounts receivable relates to work that has been performed for
which billings have not been presented to customers. It is anticipated
that the unbilled amounts will be collected within the next fiscal year.
3. NOTE PAYABLE-LINE OF CREDIT
The Corporation has a line of credit arrangement with two financial
institutions which have a maximum borrowing amount of $2,500,000 and
expires in May and June 2005. Interest is payable monthly at the
institutions' prime rate. The line is secured by substantially all of the
assets of the Corporation and personally guaranteed by a stockholder of
the Company. At December 31, 2004, $2,255,545 was outstanding to the two
institutions. The unused portion of the line of credit was $244,455 at
December 31, 2004.
7
4. NOTES PAYABLE-STOCKHOLDERS
The Corporation is indebted under notes payable to the stockholders of the
Corporation. The notes bear interest at various rates ranging from 10% to
12% per annum and include accrued interest of $-0-at December 31, 2004.
The notes are due on demand and have an outstanding balance of $333,455 at
December 31, 2004.
5. INCOME TAXES
The components of the provision for income taxes in December 31, 2004
consisted of:
Deferred federal and state income taxes 28,725
======
The Corporation anticipates reporting an approximate loss of $860,000 due
to the timing of deductions for cost incurred on contracts. No deferred
tax asset has been recognized as of December 31, 2004, but has been fully
allowed for by the Corporation.
6. LEASES
The Corporation entered into an agreement with the U.S. Army to serve as
facility use contractor of the Louisiana Army Ammunition Plant (LAAP) in
Minden, Louisiana.
The Corporation does not pay rent for its space it uses but oversees the
property for the U.S. Army. It also pays cost associated with running the
LAAP (maintenance, utilities, security and other costs) and receives rent
from tenants. The Army must approve all leases.
If the Corporation receives rent in excess of $2,400,000 per year, it
splits that amount equally with the U.S. Army. No payment was due in 2004.
The Corporation had leases with tenants ranging from seven years to twenty
five years. The Corporation recognized rent income in 2004 of $2,697,303.
The U.S. Government donated the LAAP to the State of Louisiana, Louisiana
Military Department in late 2004. Effective with the change in ownership
of LAAP, Valentec's agreement with the U.S. Army to act as facility use
contractor was terminated. The State of Louisiana undertook that role and
Valentec no longer receives rents nor does it incur cost to provide
security, etc. for the facility.
Beginning in January 2005, Valentec entered into a lease with the State of
Louisiana, Louisiana Military Department for the space it occupies at
LAAP.
Annual rental payments over the term of the lease are: $360,609-2005;
$380,559-2006; $380,559-2007; $380,559-2008; $350,726-2009; and
$335,809-2010.
7. PROFIT SHARING PLAN
The Corporation has adopted a qualified 401(k) Profit Sharing Plan for all
present and future eligible employees. The Corporation matches employee
contributions, 50 cents for every dollar, up to 3% of salaries and may
contribute a discretionary amount annually as determined by the Board of
Directors. The contribution is limited to the maximum contribution allowed
under the Internal Revenue Service regulations, which is presently 15 % of
eligible gross salaries. Plan participants may elect to contribute up to
15 % of their gross annual earnings limited to $7,000, as indexed for
inflation. Employees vest 100% in all salary reduction contributions. The
Corporation's matching and discretionary contributions vest 100% after two
years of service. The Corporation contributed $-0-for the year ended
December 31, 2004, respectively, as a match to employees and did not make
any annual discretionary contributions for either year.
8
8. RELATED PARTY
The Corporation's stockholders also control other companies whose
operations are similar to those of the Corporation. The Corporation
purchases and sells materials and services to these entities. Following is
a summary of transactions and balances with affiliates for the years ended
December 31, 2004:
Consulting services with an affiliate 846,276
Due to affiliates (included in accounts payable and accrued
expenses in the accompanying balance sheet) 885,469
There were no sales or purchases with affiliated companies.
9. CONTRACT STATUS
The Corporation has provided contracted services to the government under
fixed price contracts. In these types of contracts, prices are not subject
to any adjustment on the basis of costs incurred to perform the required
work. The award of any negotiated contract in excess of $100,000 ($500,000
for DOD, NASA and Coast Guard) with certain exemptions as provided by
regulation, requires certification by the contractor that cost and pricing
data used to negotiate the final price is current, accurate and complete.
This certification entitles the government to a price adjustment,
including profit or fee, of any significant amount by which the price was
increased because of defective data. The Corporation is also restricted in
the amount it can bill under contract until it has passed its first
article (inspection). That limit is 10% of the contract amount. The
Corporation, in the normal course of business, periodically reviews its
cost estimates and experience on all contracts. In the opinion of
management, the potential for any price adjustment on open contracts is
remote and, if adjusted, would not have a material effect on the
Corporation's financial position or results of operations for the period.
BACKLOG. The Corporation has authorized but uncompleted contracts on hand
for which work is in progress at December 31, 2004 approximately as
follows:
Total contract price of initial contract awards including exercised
options and approved change orders (modifications) 23,473,974
Completed to date 2,278,912
----------
Authorized backlog 21,195,062 *
==========
* Included in this amount is $16,745,000 contract from a related party (a
stockholder).
10. DEVELOPMENT COST
The Corporation incurred development cost associated with four contracts
of $6,261,978 at 2004. These costs are anticipated to be allocated to
those contracts during 2005 and 2006 when production is started. The cost
relates to the following contracts:
Cardom 1,490,264
Illumination product startup 857,122
M235 1,041,679
Keshet 2,872,913
---------
6,261,978
=========
9
11. RESTRICTED CASH/DUE TO STOCKHOLDER
The restricted cash is in a foreign bank account and was deposited by a
stockholder in regard to a particular contract of Valentec. The job has
been completed and the funds are expected to be released in 2005. Once
those funds are released, the amount due to stockholder for the same
amount will be paid. It is anticipated that the funds will be released
directly to the stockholder.
10