Financial Statements

 

Assets:

Money market fund

Investments, at fair value

Interest receivable

Pending trades

 

 

Total assets

 

Liabilities:

Notes payable

 

Net assets available for benefits at fair value

 

Adjustment from fair value to contract value for fully benefit-responsive contract

 

NET ASSETS AVAILABLE FOR BENEFITS

Assets:

Money market fund

Investments, at fair value

Company contributions

Employee receivable

Interest receivable

 

Total assets

 

Liabilities:

Notes payable

Pending trades

 

Total liabilities

 

Net assets available for benefits at fair value

 

Adjustment from fair value to contract value for fully benefit-responsive contract

 

NET ASSETS AVAILABLE FOR BENEFITS

Additions:

Investment income:

Net appreciation in fair value of investments

Interest and dividends

 

Total investment income

 

Contributions:

Company

Roll over

Participants

 

Total contributions

 

Total additions

 

Deductions:

Benefits paid to participants

Interest expense

Loan fees

 

Total deductions

 

Allocation of shares

 

Net increase

 

Net assets available for benefits:

Balance at beginning of year

 

Balance at end of year

Description of the Plan

General

The following description of Badger Meter Employee Savings and Stock Ownership Plan (“the Plan”) is for general information purposes only. Participants should refer to the plan agreement for a more complete description of the Plan. The Plan is a defined-contribution plan adopted under Section 401(k) of the Internal Revenue Code (the “Code”). The Plan was established as of January 1, 1991, to consolidate the Badger Meter Savings Plan, the Badger Meter Payroll-Based Employee Stock Ownership Plan, and the Badger Meter Employee Stock Ownership Plan into a single plan.

Substantially all domestic employees of Badger Meter, Inc. (“the Company”) are eligible to participate in the Plan. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).

Contributions

Participant contributions may be made up to a maximum of 20% of their compensation on a pretax basis, not to exceed the amount allowed by the Code. Company contributions are made at a rate of 25% of the participant contributions, with the Company contribution percentage applying to a maximum of 7% of the participant’s compensation for the year. The total Company match contribution for the year end December 31, 2007 totaled $483,225 which is reduced by $23,241 of unallocated cash and the net appreciation of unallocated Badger Meter, Inc. stock of $459,984. The Company may also contribute additional amounts over and above the required contribution at the discretion of the Company’s Board of Directors. No such contributions were made in 2007.

Description of the Plan (Continued)

Contributions (Continued)

Participant contributions are directed into various investment options (currently totaling twelve) at the participant’s discretion. Company contributions are made in cash and are used by the Plan to repay principal and interest on the note payable (see Note 4). As principal and interest payments are made on the note payable, unallocated shares of Badger Meter, Inc. common stock, which serve as collateral for the note payable, are released to Plan participants and provide the Company matching contribution at current market values. Participant contributions may be temporarily invested in a money market common trust fund before being invested in the aforementioned investments.

All participant contributions are excluded from the participant’s current wages for federal income tax purposes.

Participant Accounts

Each participant’s account is credited with the participant’s contributions, the Company’s matching contribution, an allocation of the Company’s discretionary contribution, if any, and Plan earnings. The Company’s discretionary contribution (excluding the matching contribution) is allocated equally to all participants. Plan earnings are allocated based on the participant’s account balances in relation to total participant account balances. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s account.

Vesting

Participants are fully vested in all amounts in their accounts.

Payment of Benefits

Upon retirement, death, disability, or termination of employment, the participant’s account shall generally be distributed in a single lump sum at the participant’s option. Final distributions will be made either in shares of Company common stock plus cash in lieu of fractional shares or entirely in cash.

Description of the Plan (Continued)

Reclassifications

Certain 2006 amounts were reclassified, to conform to the 2007 presentation. Included are the reclassifications to separately present the allocated and unallocated balances on the accompanying financial statements.

Withdrawals

A participant’s contribution may not be withdrawn prior to retirement, death, disability, termination of employment, or termination of the Plan, except for financial hardship, a one-time distribution after age 59¹/2, or in the form of loans to participants. The Plan defines financial hardship as expenses related to college education, uninsured major medical expense, purchase of the participant’s principal residence, or other financial need that cannot be met from other resources of the participant. All withdrawals are subject to approval by the Plan Administrator.

Loans to Participants

Participants are allowed to borrow from their separate account balance. The amount of a loan shall not be less than $1,000 or more than $50,000 and shall not exceed 50% of the participant’s account balance.

Loan maturities cannot exceed 60 months and are secured by the participants’ vested interests in the Plan. Amounts loaned to a participant do not share in the allocations of Plan earnings (see Participant’s Accounts above), but are credited with the interest earned on the loan balance payable by the participant charged at a reasonable rate as determined by the Plan Administrator.

Summary of Significant Accounting Policies

Basis of Accounting

The accompanying financial statements are prepared using the accrual basis of accounting in accordance with U.S. generally accepted accounting principles. The financial statements are based on information provided to the Company and certified as complete and accurate by its Custodian, Marshall and Ilsley Trust Company N.A. Certain adjustments have been made to the financial statements provided by the Custodian in order for them to conform to the accrual basis of accounting.

Investment Valuation

In December 2005, Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”), Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide and Defined-Contribution Health and Welfare and Pension Plans. This FSP amends the guidance in AICPA Statement of Position 94-4, Reporting of Investment Contracts Held by Health and Welfare Benefit Plans and Defined-Contribution Pension Plans, with respect to the definition of fully benefit-responsive investment contracts in plan financial statements. The FSP requires investments in benefit-responsive investment contracts be presented at fair value in the statement of net assets available for benefits and that the amount representing the difference between fair value and contract value of these investments be presented on the face of the statement of net assets available for benefits. The Plan has adopted the financial statement presentation and disclosure requirements effective December 31, 2006, and has restated the 2006 Statement of Net Assets Available for Benefits to present all investments at fair value, resulting in a change from $69,826,034 to $69,731,699 with the adjustment to contract value separately disclosed. The effect of adopting the FSP had no impact on the Plan’s net assets available for benefits or changes in net assets available for benefits, as such, investments, have historically been presented at contract value.

Summary of Significant Accounting Policies (Continued)

Investment Valuation (Continued)

This contract is an unallocated insurance contract with Mass Mutual, which is credited at least semi-annually for interest earned. Interest rates for 2007 and 2006 were 4.35% and 3.3% — 4.15% respectively. Mass Mutual determines the semi-annual guaranteed interest rate each January 1 and July 1. The average yields for 2007 and 2006 were 4.35% and 3.83%, respectively.

The insurance contract is subject to certain restrictions that may affect the plan’s ability to fully realize the insurance contract’s value under certain conditions.

The investments in mutual funds are valued at the redemption price established by the fund’s trustee based upon the quoted prices of the underlying assets.

Units of common trust funds are valued at the quoted redemption price.

The investment in Badger Meter, Inc. common stock, which is traded on the American Stock Exchange, is valued at the last reported sales price on the last business day of the Plan year.

The money market fund is valued at fair value based on quoted market or redemption price on the last business day of the Plan year.

Loans receivable from participants are reported at their unpaid principal balance, which approximates fair value.

Summary of Significant Accounting Policies (Continued)

Use of Estimates in Preparation of Financial Statements

The preparation of the accompanying financial statements in conformity with U.S. generally accepted accounting principles, requires the administrators to make estimates and assumptions that directly affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates.

Expenses

Expenses related to the administration of the Plan are paid by the Company. Investment expenses are payable by the Plan and reimbursed by the Company at its discretion. Loan fees are charged to the participant’s account requesting the loan.

Payment of Benefits

Benefits are recorded when paid.

Risk and Uncertainties

The Plan’s investments are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the values of investments, it is at least reasonably possible that changes in risks in the near term would materially affect participants’ account balances and the amounts reported in the statements of net assets available for benefits and the statement of changes in net assets available for benefits.

Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements. The adoption of SFAS 157 will not have a material impact on the Plan’s financial statements, but will expand the amount of disclosures in the Plan’s financial statements. SFAS 159 is effective for fiscal years beginning after November 15, 2007.

Investments

Guaranteed Income Group Annuity Contract No. IG 4178

The Plan’s investment in the guaranteed income group annuity insurance contract is valued at contract value as reported by Massachusetts Mutual Life Insurance Company (“Mass Mutual”). The Mass Mutual contract is a “fully benefit-responsive” investment contract. Contract value represents contributions made under the contract, plus interest at the contract rate, less funds used to pay benefits and the insurance company’s administrative expenses.

Certain events limit the ability of the Plan to transact at contract value with the issuer. These events include, but not limited to, the following: (1) amendments to the Plan documents, (2) bankruptcy of the Plan Sponsor or other Plan Sponsor events which cause a significant withdrawal from the Plan or (3) the failure of the Plan to qualify for exemption from federal income taxes or any required prohibited transaction exemption under ERISA. The Plan does not believe that the occurrence of any event limiting the Plan’s ability to transact at contract value with members is probable.

Investments (Continued)

Badger Meter, Inc. Common Stock

The Plan’s investment in Badger Meter, Inc. stock consists of 939,187 shares and 1,061,871 shares as of December 31, 2007 and 2006, respectively. At December 31, 2007 and 2006, the fair value of the Plan’s investment in Badger Meter, Inc. common stock, as determined by quoted market price, was $42,216,455 and $29,413,826, respectively.

Mutual Funds

The Plan’s Mutual Funds are stated at fair value. Quoted market prices are used to value mutual funds.

During 2007, the Plan’s investments (including investments purchased, sold, as well as held during
the year) appreciated in fair value as follows:

Badger Meter, Inc. common stock

Common trust funds

Mutual funds

 

Net appreciation in fair value of investments

Badger Meter, Inc. common stock

M&I Growth Balanced Portfolio

M&I Diversified Stock Portfolio

Massachusetts Mutual Unallocated Insurance Contract

Heartland Value Plus Fund

Note Payable

At December 31, 2007, the outstanding balance on the loan is $682,034. The terms of the loan allow variable payments of principal with the final principal and interest payment due April 30, 2008. Interest is payable at the prime interest rate (effective rate of 7.25% at December 31, 2007) or at the LIBOR rate plus 1.50% (effective rate of 6.54% at December 31, 2007). At December 31, 2007, the Plan has exercised its option to designate the outstanding balance as a LIBOR rate loan. The note payable is secured by the unallocated shares of Badger Meter, Inc. common stock held by the Plan (see summary below). In addition, the Company has guaranteed the note payable and is obligated to contribute sufficient cash to the Plan to enable it to repay the loan principal and interest in the event the Plan is unable to settle its obligation.

The pledged unallocated shares of Badger Meter, Inc. common stock are released as principal and interest payments are made on the note payable. The shares released, less any shares that are distributed as benefit payments, are considered available and are allocated to the participants’ accounts just prior to each annual principal due date on the note payable.

The note agreement contains certain restrictions and covenants, including a limitation on additional borrowings.

The Company contributions are used to make principal and interest payments on the note payable. The Plan will release unallocated shares with a value in excess of the principal payments made due to appreciation of the Company’s stock.

As of December 31, 2006, $743,405 was due under the note payable.

Note Payable (Continued)

At December 31, 2007 and 2006, the breakdown between allocated and unallocated shares was as follows:

Allocated

Unallocated

 

Total

 

Per share

Allocated

Unallocated

 

Total

 

Per share

Plan Termination

Although it has not expressed any intent to do so, the Company has the right to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA.

Income Tax Status

The Plan has received a determination letter from the Internal Revenue Service dated September 26, 2002, stating that the Plan is qualified under Section 401(a) and 401(k) of the Code and, therefore, the related trust is exempt from taxation. Subsequent to the issuance of the determination letter, the Plan was amended. However, the Plan Administrator believes the Plan is being operated in compliance with the applicable requirements of the Code and, therefore, believes that the Plan is qualified and the related trust is tax-exempt.

Related Party Transactions/Party in Interest

During 2007, the Plan received $335,710, in common stock dividends from the Company. The Plan paid $2,400 to Marshall & Ilsley Trust Company N.A. related to participant loan fees.

Voting Rights

Each participant is entitled to exercise voting rights attributable to the shares allocated to his or her account. Unallocated shares are voted on by the Plan’s administrative committee on behalf of the collective best interest of plan participants and beneficiaries.

Badger Meter, Inc. Common Stock *

 

Massachusetts Mutual Life Insurance

Company Insurance Contract

Heartland Value Plus Fund

Marshall Government Income Fund *

Marshall International Stock Fund *

M&I Growth Balanced Portfolio *

M&I Diversified Stock Portfolio *

Fidelity Advisor Mid Cap Fund

Managers Special Equity Fund

Goldman Sachs Small Cap Value

Davis N Y Venure Fund

T Rowe Price Growth

Participant loans

 

Total assets (held at end of year)

 

Badger Meter, Inc.

Massachusetts Mutual Life Insurance Co.

Massachusetts Mutual Life Insurance Co.

 

 

 

 

Date: June 24, 2008

 

 

 

 

 

 

 

 

Consent of Wipfli LLP, Independent Registered Public Accounting Firm