3-D SERVICE, LTD. & SUBSIDIARY
3-D Service, Ltd. and Subsidiary
We conducted our audits 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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.
/s/ ASHER & COMPANY, Ltd.
3-D SERVICE, LTD. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
3-D Service, Ltd. and Subsidiary (the “Company”), headquartered in Massillon, Ohio, was organized in 2002 for the purpose of operating an industrial sales and service company related to electrical and mechanical products and equipment. The Company conducts business out of its facilities located in Massillon and Cincinnati, Ohio and formerly in Farmington Hills, Michigan.
The rights and obligations of the equity holders of the Company (the “Members”) are governed by the Operating Agreement of 3-D Service, Ltd. dated as of March 1, 2002 (the “Operating Agreement”). Each Member’s interest in the Company is equal to the percentage of capital contributed by the Member in accordance with the Operating Agreement. The Operating Agreement provides that no officer or Member of the Company will be liable to the Company, its Members or holders of its membership interests for acts or omissions of such officer or Member in connection with the business or affairs of the Company, including for any breach of fiduciary duty or mistake of judgment, except for acts involving intentional misconduct, fraud or knowing violations of law.
Principles of consolidation
The consolidated financial statements include the accounts of 3-D Service, Ltd., its wholly-owned subsidiary, 3-D Service Michigan, Ltd., and 3D3E, Ltd. All significant intercompany transactions and balances have been eliminated in consolidation.
The Company is the primary beneficiary of 3D3E, Ltd. (“3D3E”), which qualifies as a variable interest entity under FASB Interpretation No. (“FIN”) 46(R), Consolidation of Variable Interest Entities. Accordingly, the assets, liabilities, revenues and expenses of 3D3E have been included in the accompanying consolidated financial statements. 3D3E was formed in April 2004 for the purpose of acquiring the property leased by the Company at its Massillon, Ohio location. On November 1, 2006, 3D3E acquired the property collateralized by an open-ended mortgage on the property guaranteed by the Company, and began leasing such property to the Company. An individual related to a Member of the Company has executed a guarantee limited to the sums of all obligations of 3D3E due to the bank up to but not exceeding $1,000,000. Also, the Company and 3D3E are under common control.
The effect of the consolidation of 3D3E as of and for the nine months ended September 30, 2007, was to increase assets by approximately $4,208,000, increase liabilities by $4,137,000, and increase net income by approximately $63,000. The effect of the consolidation of 3D3E as of and for the year ended December 31, 2006, was to increase assets by approximately $4,215,000, increase liabilities by approximately $4,207,000, and increase net income by approximately $8,000 (Note J).
3-D SERVICE, LTD. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Concentration of credit risk
The Company sells and provides service to companies in various industries located principally in the United States of America. Credit is extended based on an evaluation of the customer’s financial condition and generally, collateral is not required. Credit terms are consistent with the industry and losses from credit sales are provided for in the financial statements.
The Company maintains its cash primarily in bank deposit accounts. The Federal Deposit Insurance Corporation insures these balances up to $100,000 per bank. The Company has not experienced any losses on its bank deposits and management believes these deposits do not expose the Company to any significant credit risk.
Accounts receivable
An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts that is charged to earnings. Losses are charged against the allowance when management believes the uncollectibility of a receivable is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for doubtful accounts is evaluated on a regular basis by management based on historical experience and specifically identified receivables. The evaluation is inherently subjective, as it requires estimates that are susceptible to change as more information becomes available.
Inventory
The Company values inventory at the lower of cost or market. Cost is determined by the first-in, first-out method. The Company periodically reviews its inventories and makes provisions as necessary for estimated obsolescence and slow-moving goods. The amount of such markdown is equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demands, selling prices and market conditions.
3-D SERVICE, LTD. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and equipment
Property and equipment are stated at cost less accumulated depreciation. Additions and improvements are capitalized while expenditures for maintenance and repairs are charged to operations as incurred. Depreciation is computed over the estimated useful lives of the related assets using the straight-line method. Useful lives of property and equipment are as follows:
| | Building | 40 years | |
| | Leasehold improvements | 15 years | |
| | Machinery and equipment | 5 to 10 years | |
| | Furniture and fixtures | 10 years | |
| | Computer equipment | 5 years | |
| | Vehicles | 3 years | |
| | Tools and molds | 10 years | |
| | Signage | 10 years | |
| | Software | 3 years | |
Revenue recognition
The Company recognizes revenue when products are shipped and services are rendered.
Advertising costs
Advertising costs are expensed when incurred. Advertising expense for the nine months ended September 30, 2007 and the year ended December 31, 2006 was $55,835 and $93,873, respectively.
Warranty costs
The Company warrants workmanship after the sale of its products. An accrual for warranty costs is recorded based upon the historical level of warranty claims and management’s estimates of future costs.
Income taxes
The Company is incorporated as a limited liability company. Under these provisions, the Company does not pay Federal or state corporate income taxes on its taxable income. The Company has elected to pay certain state and local income taxes on behalf of its Members; however, the Members are liable for Federal and state income taxes on their respective portion of the Company’s taxable income.
3-D SERVICE, LTD. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
NOTE B - INVENTORY
Inventory consists of the following:
| | | | September 30, | | | December 31, | |
| | | | 2007 | | | 2006 | |
| | Raw materials | | $ | 727,175 | | | $ | 613,083 | |
| | Work in process | | | 768,310 | | | | 847,663 | |
| | Finished goods | | | 285,178 | | | | 304,097 | |
| | | | | 1,780,663 | | | | 1,764,843 | |
| | | | | | | | | | |
| | Less: allowance for slow moving and obsolete inventories | | | (200,000 | ) | | | (200,000 | ) |
| | | | $ | 1,580,663 | | | $ | 1,564,843 | |
3-D SERVICE, LTD. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
| | | | September 30, | | | December 31, | |
| | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| | Land | | $ | 250,000 | | | $ | 250,000 | |
| | Buildings | | | 2,367,503 | | | | 2,367,503 | |
| | Leasehold improvements | | | 511,170 | | | | 502,860 | |
| | Machinery and equipment | | | 2,507,580 | | | | 2,279,904 | |
| | Furniture and fixtures | | | 175,473 | | | | 166,609 | |
| | Computer equipment | | | 281,516 | | | | 271,886 | |
| | Vehicles | | | 628,618 | | | | 631,325 | |
| | Tools and molds | | | 30,969 | | | | 15,592 | |
| | Signage | | | 8,355 | | | | 8,355 | |
| | Software | | | 374,092 | | | | 5,686 | |
| | Construction in progress | | | - | | | | 265,443 | |
| | | | | 7,135,276 | | | | 6,765,163 | |
| | | | | | | | | | |
| | Less: accumulated depreciation and amortization | | | (1,335,308 | ) | | | (888,657 | ) |
| | | | $ | 5,799,968 | | | $ | 5,876,506 | |
Depreciation and amortization expense was $470,301 and $337,281 for the nine months ended September 30, 2007 and the year ended December 31, 2006, respectively.
NOTE D - DEBT
Lines of credit
The Company has a $750,000 line of credit with a bank for working capital. Borrowings under the line are secured by trade accounts receivable and inventories with interest at the Wall Street Journal prime rate plus 0.25% (8.00% and 8.50% at September 30, 2007 and December 31, 2006, respectively). There was no outstanding balance as of September 30, 2007 and December 31, 2006 (Note J).
The Company also has a $1,000,000 equipment line of credit with a bank for the purpose of financing its equipment acquisitions. Borrowings on this equipment are collateralized by a blanket lien on all assets of the Company with interest at the Wall Street Journal prime rate plus 0.25% (8.00% and 8.50% at September 30, 2007 and December 31, 2006, respectively). Borrowing on the line was $565,298 and $279,261 at September 30, 2007 and December 31, 2006, respectively (Note J).
3-D SERVICE, LTD. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D – DEBT (Continued)
Long-term debt
Long-term debt consists of the following:
| | | | September 30, | | | December 31, | |
| | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| | Note payable to bank in monthly installments of $32,051 through March 2009, plus interest at Libor plus 2.80% (8.52% and 8.12% at September 30, 2007 and December 31, 2006, respectively), secured by substantially all assets of the Company | | $ | 609,927 | | | $ | 865,007 | |
| | | | | | | | | | |
| | Mortgage note payable to bank in monthly installments of $8,616 through September 2011, including interest at 5.99%, secured by real estate | | | 377,268 | | | | 432,965 | |
| | | | | | | | | | |
| | Mortgage note payable to bank in monthly installments of $25,168 through August 2014, with balloon of $2,843,485 payable September 2014, including interest at 5.99%, secured by real estate | | | 3,694,477 | | | | 3,753,474 | |
| | | | | | | | | | |
| | Notes payable in monthly installments totaling $2,461 through June 2008, without interest, secured by certain vehicles | | | 22,152 | | | | 44,359 | |
| | | | | | | | | | |
| | Notes payable in monthly installments totaling $645 through June 2009, including interest at 6.75%, secured by certain vehicles | | | 12,738 | | | | 17,925 | |
| | | | | | | | | | |
| | Note payable in monthly installments of $734 through February 2010, including interest at 2.90%, secured by vehicle | | | 20,520 | | | | 26,672 | |
| | | | | | | | | | |
| | Note payable in monthly installments of $460 through June 2010, including interest at 7.74%, secured by vehicle | | | 13,648 | | | | 17,011 | |
| | | | | 4,750,730 | | | | 5,157,413 | |
| | Less: current portion | | | (594,386 | ) | | | (592,365 | ) |
| | | | $ | 4,156,344 | | | $ | 4,565,048 | |
3-D SERVICE, LTD. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D – DEBT (Continued)
Aggregate maturities of long-term debt for the periods subsequent to September 30, 2007 are as follows:
| | Years Ending December 31, | | Amount | |
| | 2007 | | $ | 181,740 | |
| | 2008 | | | 590,194 | |
| | 2009 | | | 293,638 | |
| | 2010 | | | 192,099 | |
| | 2011 | | | 188,164 | |
| | 2012 | | | 106,961 | |
Interest expense for the nine months ended September 30, 2007 and the year ended December 31, 2006 was $247,001 and $109,693, respectively (Note J).
NOTE E – COMMITMENTS AND CONTINGENCIES
Lease commitments
The Company leases certain office equipment at its Massillon facility pursuant to an operating lease. Under the terms of the lease, the Company pays $2,010 plus tax each month through March 2009. The Company also leases certain office equipment at its Cincinnati facility under another operating lease. This lease requires quarterly payments of $1,080 through June 2010.
The Company leases its office, factory and warehouse facilities located in Cincinnati, Ohio under an operating lease which expires in April 2008. Monthly rentals under the lease are $3,160. The Company rented its Farmington Hills, Michigan facilities under an operating lease agreement with monthly payments of $6,150. The lease expired in July 2006 and the operations at this location were discontinued.
Total rent expense under all operating leases for the nine months ended September 30, 2007 and the year ended December 31, 2006 was $65,062 and $526,598 respectively. Future minimum lease payments required under all operating leases in effect in excess of one year as of September 30, 2007 are as follows:
| | Years Ending December 31, | | Amount | |
| | 2007 | | $ | 16,590 | |
| | 2008 | | | 41,080 | |
| | 2009 | | | 10,350 | |
| | 2010 | | | 2,160 | |
3-D SERVICE, LTD. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E – COMMITMENTS AND CONTINGENCIES (Continued)
Potential lawsuits
The Company is subject to disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such legal actions will have a material adverse effect on the Company’s financial position or results of operations.
NOTE F - RELATED PARTY TRANSACTIONS
Employment Agreement
The Company entered into an employment contract with an officer effective March 1, 2002 continuing through February 28, 2006. The agreement is automatically renewed for successive one year periods unless either member gives written notice of its intent not to renew. The Company is not obligated to pay any compensation or benefits should the officer terminate for any reason (Note J).
Management Agreement
The Company entered into a management agreement with a related party that requires monthly payments of $2,000. The agreement renews automatically for successive one year periods unless either party gives written notice of its intent not to renew the agreement to the other party at least ninety days prior to the expiration of the current term. Management fees paid under this agreement were $18,000 and $24,000 for the nine months ended September 30, 2007 and the year ended December 31, 2006, respectively (Note J).
NOTE G - RETIREMENT PLAN
In March 2002, the Company adopted a defined contribution plan covering substantially all of its full-time employees. The plans contain deferred-salary arrangements under Internal Revenue Code Section 401(k). Employer contributions may be made at the discretion of the Board of Directors. Employer contributions to the plan were $31,239 and $37,210 for the nine months ended September 30, 2007 and the year ended December 31, 2006, respectively.
NOTE H - CONCENTRATIONS OF CREDIT RISK
The Company grants credit, generally without collateral, to its customers, which are primarily in the steel and energy industries. Consequently, the Company is subject to potential credit risk related to changes in economic conditions within those industries. However, management believes that its billing and collection policies are adequate to minimize the potential credit risk. Approximately 47% and 19% of gross accounts receivable were due from the steel and energy industries, respectively at September 30, 2007 and 51% and 12% of gross accounts receivable were due from entities in those industries at December 31, 2006.
3-D SERVICE, LTD. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - CONCENTRATIONS OF CREDIT RISK (Continued)
Approximately 51% and 18% of sales for the nine months ended September 30, 2007 and 55% and 10% of sales for the year ended December 31, 2006 were to entities in the steel and energy industries, respectively.
The Company conducts a major portion of its business with two customers, each of which accounted for a significant amount of revenues. Revenues from these two customers accounted for 29% and 15% from the nine months ended September 30, 2007 and 31% and 14% for the year ended December 31, 2006, respectively. Accounts receivable from these two customers accounted for 27% and 8% at September 30, 2007, respectively, and 34% and 10% at December 31, 2006, respectively.
NOTE I – DISCONTINUED OPERATIONS
During 2005 the Company decided to discontinue the operations of 3-D Service Michigan, Ltd. The Company utilized the net assets of the Michigan operation in its continuing operations. The operating results of the discontinued operations were as follows:
| | | | Year Ended | |
| | | | December 31, | |
| | | | 2006 | |
| | Operations: | | | |
| | Net revenues | | $ | 4,913 | |
| | Operating loss | | | (58,017 | ) |
| | Net loss | | | (92,629 | ) |
All assets and liabilities of the discontinued operations were transferred to 3-D Service, Ltd. in 2006.
NOTE J – SUBSEQUENT EVENTS
Sale of 3-D Service Ltd.
In November 2007, Magnetech Industrial Services, Inc. (“Magnetech”) , a subsidiary of MISCOR Group, Ltd. (“MISCOR”) acquired 100% of the Members’ Interest of 3-D Service, Ltd. for $22,700,000. In conjunction with the sale, the line of credit and all bank debt and other long term debt was paid off in full from the cash proceeds at closing (Note D). Also, the Company cancelled the employment agreement and management agreement as described in Note F.
3-D SERVICE, LTD. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J – SUBSEQUENT EVENTS (Continued)
Lease
The Company cancelled the related party lease of its Massillon, Ohio facilities (Note A) and entered into a new lease agreement with 3D3E, Ltd. for ten years through November 2017. Monthly lease payments are $45,000 through November 2010 and increase by the amount of the increase in the Consumer Price Index at that time and on each three year anniversary thereafter. The lease is guaranteed by Magnetech. The Company’s guarantee of the 3D3E, Ltd. mortgage on the facility was cancelled. Accordingly, the operations and carrying amounts of assets, liabilities and equity of 3D3E, Ltd. will not be included in the consolidated financial statements subsequent to November 2007 as the Company has determined that it is no longer the primary beneficiary of 3D3E, Ltd.
