WASHINGTON, PITTMAN & McKEEVER, LLC
CERTIFIED PUBLIC ACCOUNTANTS AND
| 819 South Wabash Avenue | Ph. (312) 786-0330 |
| Suite 600 | Fax (312) 786-0323 |
| Chicago. Illinois 60605-2184 | www.wpmck.com |
AAA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TOGETHER WITH INDEPENDENT AUDITOR'S REPORT
AAA INDUSTRIES, INC. AND SUBSIDIARIES
I N D E X T O R E P O R T
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| SUPPLEMENTARY INFORMATION | 20 |
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| INDEPENDENT AUDITOR'S REPORT ON CONSOLIDATING INFORMATION | 21 |
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WASHINGTON, PITTMAN & McKEEVER, LLC
CERTIFIED PUBLIC ACCOUNTANTS
| 819 South Wabash Avenue | Ph. (312) 786-0330 |
| Suite 600 | Fax (312) 786-0323 |
| Chicago, Illinois 60605-2184 | www.wpck.com |
To the Board of Directors and Shareholders of
AAA Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of AAA Industries, Inc. and Subsidiaries (an Illinois corporation) as of December 31, 2007, and the related consolidated statements of income, changes in the shareholders' 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 AAA Industries, Inc. and Subsidiaries as of December 31, 2007, 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/ Washington, Pittman & McKeever, LLC |
| | WASHINGTON, PITTMAN & McKEEVER, LLC |
AAA INDUSTRIES, INC. AND SUBSIDIARIES
| ASSETS | | | |
| | | | |
| Current Assets | | | |
| Cash and cash equivalents | | $ | 4,215,021 | |
| Accounts receivable, net of allowance for doubtful accounts of $518,561 | | | 7,532,244 | |
| Inventory | | | 12,797,239 | |
| Prepaid expenses | | | 129,608 | |
| Due from employees | | | 183 | |
| | | | | |
| Total Current Assets | | | 24,674,295 | |
| | | | | |
| Property and equipment, net of accumulated depreciation of $15,010,196 | | | 33,054,359 | |
| | | | | |
| Other Assets | | | | |
| Loan issue cost, net of accumulated amortization of $24,112 | | | 16,075 | |
| Non-compete agreement, net of accumulated of $56,000 | | | 224,000 | |
| Security deposit | | | 29,381 | |
| Goodwill | | | 601,838 | |
| | | | | |
| Total Other Assets | | | 871,294 | |
| | | | | |
| TOTAL ASSETS | | $ | 58,599,948 | |
| | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
| | | | | |
| Current Liabilities | | | | |
| Accounts payable | | $ | 3,265,765 | |
| Notes payable | | | 12,237,517 | |
| Current portion of capital lease obligation | | | 154,211 | |
| Current portion of auto loan payable | | | 57,474 | |
| Wage payable | | | 566,221 | |
| Other current liabilities | | | 417,116 | |
| | | | | |
| Total Current Liabilities | | | 16,698,304 | |
| | | | | |
| Long-Term Liabilities | | | | |
| Notes payable, less current portion | | | 22,619,539 | |
| Capital lease obligation, less current portion | | | 1,054,425 | |
| Auto loan payable | | | 101,446 | |
| | | | | |
| Total Long-Term Liabilities | | | 23,775,410 | |
| | | | | |
| Total Liabilities | | | 40,473,714 | |
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| Shareholders' Equity | | | | |
| Capital stock (No par value; 20,000 shares authorized; 14,196 issued and 13,546 outstanding as of December 31, 2007 | | | 1,777,076 | |
| Less: Treasury stock (650 common shares at cost) | | | (233,184 | ) |
| Retained earnings | | | 16,582,342 | |
| | | | | |
| Total Shareholders' Equity | | | 18,126,234 | |
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| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 58,599,948 | |
See accompanying Notes to Consolidated Financial Statements.
AAA INDUSTRIES, INC, AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, 2007
| REVENUES | | | |
| | | | |
| Net sales | | $ | 56,759,286 | |
| | | | | |
| Cost of Goods Sold | | | 43,587,108 | |
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| Gross Profit | | | 13,172,178 | |
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| OPERATING EXPENSES | | | | |
| | | | | |
| Office salaries and benefits | | | 876,763 | |
| Professional fees | | | 399,352 | |
| Payroll taxes | | | 82,564 | |
| Travel and entertainment | | | 63,120 | |
| Corporate expenses | | | 2,682,974 | |
| Office supplies and expenses | | | 191,778 | |
| Repairs and maintenance | | | 13,082 | |
| Utilities and telephone | | | 64,011 | |
| Insurance expenses | | | 94,019 | |
| Freight out | | | 11,291 | |
| Scavenger service | | | 406,288 | |
| Depreciation and amortization | | | 106,297 | |
| Bad debts | | | 32,907 | |
| Other operating expenses | | | 359,339 | |
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| Total Operating Expenses | | | 5,383,785 | |
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| Operating Income | | | 7,788,393 | |
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| OTHER INCOME AND (EXPENSES) | | | | |
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| Interest income | | | 159,994 | |
| Donated land | | | 90,000 | |
| Bad debts recovery | | | 217,218 | |
| Miscellaneous income | | | 2,693 | |
| Amortization of non-compete agreement | | | (56,000 | ) |
| Impairment of goodwill | | | (128,355 | ) |
| Interest expenses | | | (2,074,036 | ) |
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| Total Other Income and (Expenses) | | | (1,788,486 | ) |
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INCOME BEFORE STATE REPLACEMENT TAX | | | 5,999,907 | |
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| State replacement tax | | | (207,199 | ) |
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| NET INCOME | | $ | 5,792,708 | |
See accompanying Notes to Consolidated Financial Statements.
FOR THE YEAR ENDED DECEMBER 31, 2007
| | | Common Stock | | | Treasury Stock | | | Retained Earnings | | | Total | |
| Balance at December 31, 2006 | | $ | 1,777,076 | | | $ | (233,184 | ) | | | 16,453,620 | | | $ | 17,997,512 | |
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| Net Income | | | - | | | | - | | | | 5,792,708 | | | | 5,792,708 | |
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| Distributions to shareholders | | | - | | | | - | | | | (5,663,986 | ) | | | (5,663,986 | ) |
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| BALANCE AT DECEMBER 31, 2007 | | $ | 1,777,076 | | | $ | (233,184 | ) | | $ | 16,582,342 | | | $ | 18,126,234 | |
See accompanying Notes to Consolidated Financial Statements.
AAA INDUSTRIES, INC. AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, 2007
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| | $ | 5,792,708 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | |
Depreciation and amortization | | | 2,399,492 | |
| | | (245,655 | ) |
| | | | |
| | | 2,210,651 | |
| | | 26,429 | |
| | | (1,335,524 | ) |
| | | 100,000 | |
| | | 10,785 | |
| | | (280,000 | ) |
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| | | (2,056,051 | ) |
Other current liabilities | | | 728,841 | |
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Net Cash Provided by Operating Activities | | | 7,351,676 | |
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Purchase of property and equipment | | | (12,884,098 | ) |
Net Cash Used by Investing Activities | | | (12,884,098 | ) |
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| | | 16,346,410 | |
Principal payment on loans | | | (1,896,206 | ) |
Payment on lease obligations | | | (151,159 | ) |
| | | (36,334 | ) |
Distribution to shareholders | | | (5,663,986 | ) |
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Net Cash Provided by Financing Activities | | | 8,598,725 | |
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| | | 3,066,303 | |
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Cash and cash equivalents, Beginning of Year | | | 1,148,718 | |
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CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 4,215,021 | |
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| | $ | 2,074,036 | |
| | $ | 207,199 | |
See accompanying Notes to Consolidated Financial Statements.
AAA INDUSTRIES, INC. AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AAA Galvanizing, Inc. was incorporated in Illinois on January 7, 1993. The Company's business is coating oxide free iron or steel with a thin high quality layer of zinc, by a well-established process called hot dip galvanizing. This process protects the surface against corrosion, thus extending the product life and resulting in minimal maintenance costs. On June 29, 2002, AAA Galvanizing, Inc. changed its corporate name to AAA Industries, Inc. ("AAA or the "Company").
On July 3, 2002, under a Bill of Sale and Assignment Agreement, the operating assets and liabilities of AAA were transferred to AAA Galvanizing of Joliet, Inc. ("Joliet"), a new company that was incorporated on July 2, 2002. After such transfer, AAA became a holding company having Joliet, AAA Galvanizing of Dixon, Inc. ("Dixon"), AAA Galvanizing of Hamilton, Indiana, Inc. ("Hamilton"), AAA Galvanizing of Peoria, Inc. ("Peoria"), and AAA Quality Galvanizing, Inc. ("Oklahoma") as its wholly-owned subsidiaries. Dixon was incorporated in Illinois on August 4, 1998. Hamilton was incorporated in Indiana on February 12, 2001 and commenced its operations in April 2002. Peoria was incorporated in Illinois on September 23, 2003 and started its operations in March 2004. Oklahoma was incorporated in Illinois and began operations in October 2006. Effective the close of business on January 2, 2007, AAA acquired Brightly Galvanizing, Inc ("Brightly") under a stock purchase agreement. In 2006, AAA incorporated the AAA Galvanizing of Minnesota to be located at Winsted, ("Winsted"). During 2007, AAA began the construction of this plant; the plant commenced operation in February 2008.
The consolidated financial statements of AAA for 2007 include accounts of Joliet, Dixon, Hamilton, Peoria, Oklahoma, Brightly and Winsted.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
The accompanying financial statements have been prepared on the accrual basis of accounting. The accrual basis recognizes revenues in the accounting period in which revenues are earned and recognizes expenses in the period in which expenses are incurred.
AAA INDUSTRIES, INC. AM) SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, depreciation and amortization, and sales returns. Actual results could differ from those estimates.
The Company has elected to be treated as a "small business corporation" under Section 1362 of the Internal Revenue Code for federal income tax purposes. As an S Corporation, the Company does not pay federal income tax; its income is passed to its shareholders. The Company has also elected to treat its wholly owned subsidiaries as Qualified Subchapter S Subsidiaries (QSUB).
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid investments available for current use with an initial maturity of three months or less to be cash equivalents.
Accounts Receivable and Related Allowance
The Company extends credit to some of its customers. The Company maintains an allowance for doubtful accounts carried at a level that, in management's judgment, is adequate to provide for estimated probable losses from uncollectible receivables. The amount of the allowance is based on management's formal review and analysis of total receivables as of year-end. Receivables are considered past due when payment is not received within 120 days. Receivables over 120 days are $524,908 as of December 31, 2007.
The Company's inventory is valued at cost, under the first in, first out method.
AAA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of assets of approximately five to seven years for personal property and approximately thirty-nine years for real property. Assets costing over $2,500 and having useful life of more than one year are capitalized.
Loan Issue cost is being amortized over 15 years, which is the term of the loan.
Goodwill is assigned to certain plants acquired by AAA and is reviewed annually for possible impairment. Impairment loss, if any, is recognized as other expense in the Consolidated Statement of Income. Information pertaining to the reporting of goodwill and impairment loss is presented in Note 12.
Short-term notes payable is estimated at fair value. Long-term notes payable is reported at discounted value based on the loan agreement.
Salary and related benefits of key officers, certain administrative staff, and other expenses that are not directly related to a specific plant, are charged to corporate expense. The total amount is allocated to each plant based on sales volume ratio.
Concentration of Credit Risk
Throughout the year, the Company may have amounts on deposit with financial institutions in excess of the $100,000 insured by the Federal Deposit Insurance Corporation (FDIC). Cash in excess of $100,000 at December 31, 2007 was $5,411,499. Management does not anticipate nonperformance by this financial institution.
AAA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory as of December 31, 2007 consists of the following:
| Zinc | | $ | 12,340,077 | |
| Chemicals and others | | | 457,162 | |
| | | | | |
| TOTAL INVENTORY | | $ | 12,797,239 | |
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2007 consist of the following:
| Land | | $ | 1,509,798 | |
| Building and improvements | | | 23,022,700 | |
| Factory equipment | | | 22,549,297 | |
| Office furniture and equipment | | | 512,720 | |
| Automobile and trucks | | | 470,039 | |
| Sub Total | | | 48,064,554 | |
| Less: Accumulated depreciation | | | (15,010,195 | ) |
| | | | | |
| PROPERTY AND EQUIPMENT | | $ | 33,054,359 | |
NOTE 4 - OTHER CURRENT LIABILITIES
Other current liabilities as of December 31, 2007 are as follows:
| Payroll tax payable | | $ | 16,179 | |
| State replacement tax payable | | | 227,872 | |
| Interest and other payables | | | 173,065 | |
| | | | | |
| TOTAL OTHER CURRENT LIABILITIES | | $ | 417,116 | |
AAA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes payable as of December 31, 2007 consist of the following:
4.95% note payable to TCP National Bank In monthly installments of $33,104 through July 1, 2012, secured by all assets of Hamilton, Indiana. | | $ | 3,040,404 | |
| | | | | |
4.95% note payable to TCF National Bank in monthly installments of $47,946 through November 1, 2011, secured by all assets of Dixon, Illinois. | | | 1,752,973 | |
| | | | | |
6.70625% Note payable to TCF National Bank in monthly installments of $35,002 including interest through September 1, 2010, secured by all assets of Joliet, Illinois, Dixon, Illinois, and Hamilton, Indiana. | | | 995,450 | |
| | | | | |
7% revolving line of credit at TCF National Bank, (Hamilton, Indiana) due May 1, 2007, secured by all business assets. | | | 704,688 | |
| | | | | |
7% revolving line of credit at TCF National Bank, (Dixon, Illinois) due May 1, 2007, secured by all business assets. | | | 3,576,138 | |
| | | | | |
7% revolving line of credit at TCF National Bank, (Joliet, Illinois) due May 1, 2007, secured by all business assets. | | | 737,776 | |
| | | | | |
7% revolving line of credit at TCF National Bank, (Peoria, Illinois) due May 1, 2007, secured by all business assets. | | | 905,997 | |
| | | | | |
7% revolving line of credit at TCF National Bank, (Oklahoma, Illinois) due May 1, 2007, secured by all business assets. | | | 67,531 | |
| | | | | |
7% revolving line of credit at TCF National Bank, (Brightly, Illinois) due May 1, 2007, secured by all business assets. | | | 499,885 | |
| | | | | |
7% revolving line of credit at TCF National Bank, (Winsted, Minnesota) due May 1, 2007, secured by all business assets. | | | 639,011 | |
| | | | | |
7.16% note payable to TCF National Bank in monthly installments of $11,905 plus Interest through April 1, 2011 secured by all assets of Peoria, Illinois. | | | 494,657 | |
AAA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 NOTES PAYABLE (Continued)
7.15% note payable to TCF National Bank in monthly installments of $7,806 plus interest through May 1, 2009, secured by all assets of Peoria, Illinois. | | $ | 1,116,060 | |
| | | | | |
7.2% note payable to TCF National Bank, requires payment of interest only (Hamilton, Indiana). | | | 512,402 | |
| | | | | |
6.5% note payable to TCF National Bank in monthly installments of $25,382 including interest through January 17, 2018, secured by all assets of Chelsea, Oklahoma. | | | 2,239,267 | |
| | | | | |
7% non-revolving line of credit at TCF National Bank, (Dixon, Illinois) due May 20, 2008, secured by all business assets. | | | 3,176,737 | |
| | | | | |
7% non-revolving line of credit at TCF National Bank, (Hamilton, Illinois) due May 1, 2008, secured by all business assets. | | | 454,000 | |
| | | | | |
5.25% non-revolving line of credit at TCF National Bank, (Hamilton, Illinois) due May 1, 2008, secured by all business assets. | | | 2,744,080 | |
| | | | | |
5.0925% construction loan payable to TCF National Bank, requires payment of interest only (Winsted, Minnesota). | | | 10,000,000 | |
| | | | | |
0% interest loan payable to Millerbernd Manufacturing Company, (Winsted, Minnesota) due January 1, 2017. | | | 700,000 | |
| | | | | |
3% loan payable to City of Winsted, (Winsted, Minnesota) due November 1,2017. | | | 500,000 | |
| | | 34,857,056 | |
| | | (12,237,517 | ) |
| | | | | |
| | $ | 22,619,539 | |
AAA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NOTES PAYABLE (Continued)
The following is a summary of principal maturities of notes payable over the next five years:
| Year Ending | | Amount | |
| December 31, 2008 | | $ | 12,237,517 | |
| December 31, 2009 | | | 3,500,628 | |
| December 31, 2010 | | | 2,758,678 | |
| December 31, 2011 | | | 2,229,318 | |
| December 31, 2012 | | | 1,960,227 | |
| December 31, 2012 and thereafter | | | 12,170,688 | |
| | | | | |
| TOTAL | | $ | 34,857,056 | |
The Company is leasing certain factory and office equipment under capital lease agreements. The lease terms range from two to ten years. These assets are being depreciated over their estimated useful economic lives and are included in depreciation expense for the year ended December 31, 2007. At December 31, 2007, the leased factory and office equipment are carried at a cost of $ 1,602,004, less accumulated depreciation of $459,825. The carrying cost of factory equipment included $1,250,000, representing equipment leased from Real Estate Development Associates, a related entity (see Note 9).
Future minimum lease payments under capital leases are:
| | $ | 239,392 | |
| | | 207,482 | |
| | | 196,133 | |
| | | 183,940 | |
| | | 180,449 | |
| | | 592,817 | |
| | | 1,600,213 | |
Less: Amount Representing Interest | | | (391,577 | ) |
Present Value of Minimum Lease Payments | | | 1,208,636 | |
| | | (154,211 | ) |
| | | | | |
| | $ | 1,054,425 | |
AAA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 -LEASES (Continued)
The Company leases a section of its Peoria facilities from a company that is 100% owned by its majority shareholder. There were two lease agreements. The first lease term ends on May 1, 2009 and requires monthly payment of $3,413; the second lease ends on December 31, 2010 and requires monthly payment of $9,615. Total rent expense under these agreements was $156,336 for the year ended December 31, 2007.
Also, the Company leases certain factory equipment and vehicles under operating leases expiring in various years through 2014.
At December 31, 2007, future minimum rental payments are as follows:
| December 31, 2008 | | $ | 377,340 | |
| December 31, 2009 | | | 350,036 | |
| December 31, 2010 | | | 336,384 | |
| December 31, 2011 | | | 216,964 | |
| December 31, 2012 | | | 206,730 | |
| Thereafter | | | 396,420 | |
| | | | | |
| Total Minimum Future Rental Payments | | $ | 1,883,874 | |
AAA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 7 - COST OF GOODS SOLD
Cost of Goods Sold at December 31, 2007 consists of the following:
| Beginning inventory | | $ | 11,749,920 | |
| Purchase of raw materials | | | 26,325,639 | |
| Direct and casual labor | | | 9,536,874 | |
| Payroll taxes | | | 648,814 | |
| Purchased services | | | 151,419 | |
| Health and dental Insurance | | | 547,472 | |
| Factory supplies | | | 1,165,976 | |
| Repairs and maintenance | | | 1,083,747 | |
| Utilities | | | 2,190,655 | |
| Rental expenses | | | 96,885 | |
| Factory insurance | | | 410,975 | |
| Freight-in | | | (3,996 | ) |
| Real estate taxes | | | 228,609 | |
| Depreciation | | | 2,237,195 | |
| Other cost of goods sold | | | 13,827 | |
| Ending inventory | | | (12,797,239 | ) |
| | | | | |
| COST OF GOODS SOLD | | $ | 43,587,108 | |
NOTE 8 - OTHER OPERATING EXPENSES
The following is a summary of the items included in other operating expenses at December 31, 2007:
| Bank charges | | $ | 17,711 | |
| Advertising | | | 6,942 | |
| Dues & publications | | | 2,898 | |
| Rental Expense | | | 163,321 | |
| Fees & licenses | | | 29,501 | |
| Contributions & gifts | | | 26,946 | |
| Auto expenses | | | 16,112 | |
| Seminars & Training | | | 7,943 | |
| Computer Expense | | | 2,899 | |
| Miscellaneous | | | 85,066 | |
| | | | | |
| TOTAL | | $ | 359,339 | |
AAA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTY TRANSACTONS
In May 2006, the Company entered into a capital lease agreement for factory equipment owned by Real Estate Development Associates, LLC (REDA). REDA is 100% owned by the Chief Executive Officer and a majority shareholder of the Company. At the same time, REDA obtained a loan from Amcore Bank for $1,250,000 to purchase this equipment. AAA is not party to the loan and is not obligated to repay the loan. The terms of the lease agreement is 10 years at the interest rate charged to REDA by Amcore Bank. The monthly lease payment of $14,811.13 is paid directly by AAA to Amcore Bank on behalf of REDA. The lease obligation was $1,100,737 at December 31, 2007; see Note 6.
Also, the Company leases a section of its Peoria facilities from REDA under two separate rental agreements. The first lease requires monthly payments of $3,413 and the second lease requires monthly payments of $9,615. Total rent expense under these agreements was $156,336 for the year ended December 31, 2007.
NOTE 10 - RETIREMENT SAVINGS PLAN
The Company changed from a Simple Retirement 401(k) Savings Plan to a 401(k) Savings Plan effective January 1, 2006. The plan covers all employees who have worked for the company for at least one year with a minimum age of 21 years. Employees may defer up to 50% of their gross earnings, up to a maximum of $13,000 and the Company matches the same percentage of the employee's deferral up to 4% of the gross income with a cap of $8,200. During 2007, the Company's contribution was $61,063.
NOTE 11 - CONTINGENT LIABILITIES
The Company is a defendant in a lawsuit filed by the estate of a former employee, who was deceased as a result of an accident at the Joliet plant on November 11, 2002. The outside counsel believes that the Company has a 75% chance to prevail in the lawsuit. In the event of an unfavorable outcome, the possible loss estimated by the counsel is in the range of $500,000 to $750,000. The Company has an insurance policy that provides coverage for such losses up to $500,000 of a primary coverage and an additional $5 million of umbrella liability coverage.
In 2007, a petition was filed against the Company alleging that fugitive dust was emitted from the Oklahoma plant, which caused damage to property and persons residing in the surrounding area. The petition seeks actual and punitive damages in excess of $10,000 along with injunctive relief. This matter was referred to the Company's insurance carrier, which denied the coverage.
AAA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CONTINGENT LIABILITIES (Continued)
Although the Company is vigorously defending this action, the parties are also actively discussing potential settlement of the matter. No estimate can be made of the potential settlement.
Pursuant to an indemnification clause in the stock purchase agreement executed in December 2006 for the acquisition of Brightly Galvanizing, Inc., AAA deposited $250,000 of the purchase price in an escrow account, pending resolution of issues that may arise in connection with indemnity matters as indicated in Article 8 of the agreement. AAA is unaware of any indemnification matter as of December 31, 2007. Also, an escrow account for $125,000 was established under the purchase agreement to cover potential environmental remediation costs. Previously in 2005, Brightly was cited by the Illinois Environmental Protection Agency (EPA) for violation of environmental codes. As a corrective action plan, Brightly submitted a Compliance Commitment Agreement to EPA.
NOTE 12 - INTANGIBLE ASSETS- GOODWILL
In October 2005, assets of Quality Galvanizing LLC at Chelsea, Oklahoma, were acquired. The excess of the cost of this acquisition over the fair value of the acquired net assets totaling $601,638 was reported as goodwill. The Company adopted SFAS 142 as of the acquisition date, and accordingly, did not amortize amounts related to goodwill starting from that date. Also, as a part of the purchase of Brightly Galvanizing Inc. on January 2, 2007, the Company recognized goodwill of $128,355.
As required by SFAS 142, goodwill is subject to an annual impairment test. The test consists of a two-step process whereby a determination is made as to whether impairment exists, and then whether an adjustment is required. No impairment loss was recognized for 2007 on the $601,638 recognized for Quality Galvanizing LLC. However, an impairment loss of $128,355, representing the goodwill reported for Brightly Galvanizing Inc. was recognized as other expense in the 2007 Consolidated Statement of Income. The Company has decided to close Brightly for operations effective March 31, 2008; a loss is anticipated on the sale of the plant.
NOTE 13 - SUBSEQUENT EVENT
Effective the close of business on March 31, 2008, AAA and its subsidiaries (Joliet, Dixon, Hamilton, Peoria, Oklahoma, Brightly and Winsted) were acquired by AZZ Incorporated ("AZZ") for $80,939,000. Under the terms of the asset purchase agreement, substantially all assets of AAA and its subsidiaries were acquired and certain liabilities were either assumed by AZZ or paid in full from the proceeds.
AAA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENT (Continued)
The assets acquired included all accounts receivable, inventories, factory and office equipment, and real properties except for Brightly plant at Cicero, Illinois. An intangible asset in the form of customer list for the seven plants was also acquired.
On April 1, 2008, the following outstanding loans and obligations of AAA as of March 31, 2008 were paid-off:
| TCF Bank (various notes and lines-of-credit as disclosed in Note 5 above) | | $ | 33,109,130 | |
| Capital lease obligation with REDA (payoff to | | | | |
| AMCORE Bank for REDA's loan) ' | | | 1,093,867 | |
| Cityof Winsted | | | 485,634 | |
| Millerbernd Manufacturing Company | | | 700,000 | |
| | | | | |
| Total Liabilities Paid-off | | $ | 35,388,631 | |
During 2008, the Company paid service fee totaling $1,540,000 to Global Professional Services Group, LLC ("Global"), a firm, related to AAA. Global served as the exclusive financial advisor to the Company in connection with the sale of its assets to AZZ. Global is 100% owned by the son of AAA Chief Executive Officer and its majority shareholder.
On March 31, 2008, there were 13,546 outstanding common shares of AAA. During April 2008, $35,219,600 was distributed to shareholders from the sale proceeds at the rate of $2,600 per share. The board of directors of AAA has not implemented a plan of liquation as of March 31,2008.
SUPPLEMENTARY INFORMATION
WASHINGTON, PITTMAN & McKEEVER, LLC
CERTIFIED PUBLIC ACCOUNTANTS AND
819 South Wabash Avenue | Ph. (312) 786-0330 |
| Suite 600 | Fax (312) 786-0323 |
| Chicago, Illinois 60605-2184 | www.wpck.com |
INDEPENDENT AUDITOR'S REPORT ON CONSOLIDATING INFORMATION
To the Board of Directors and Shareholders of
AAA Industries, Inc. and Subsidiaries
Our report on our audit of the consolidated financial statements of AAA Industries, Inc. and Subsidiaries as of and for the year ended December 31, 2007 appears on page 3. That audit was made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.
| | /s/ Washington, Pittman & McKeever, LLC |
| | WASHINGTON, PITTMAN & McKEEVER, LLC |
AAA INDUSTRIES, INC. AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | Winsted | | | Elimination | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | (58,913 | ) | | $ | 2,451,262 | | | $ | (97,987 | ) | | $ | (12,120 | ) | | $ | (18,936 | ) | | $ | (48,376 | ) | | $ | 2,000,091 | | | $ | - | | | | 4,215,021 | |
| | | 1,679,438 | | | | 1,664,692 | | | | 1,890,739 | | | | 1,487,518 | | | | 574,189 | | | | 235,668 | | | | - | | | | - | | | | 7,532,244 | |
| | | 2,149,405 | | | | 2,232,732 | | | | 2,056,020 | | | | 3,168,894 | | | | 1,241,582 | | | | 289,173 | | | | 1,659,433 | | | | - | | | | 12,797,239 | |
| | | 25,624 | | | | 9,491 | | | | 25,068 | | | | 8,052 | | | | 12,024 | | | | 29,123 | | | | 20,226 | | | | - | | | | 129,608 | |
| | | 183 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 183 | |
| | | 3,795,737 | | | | 6,358,177 | | | | 3,873,840 | | | | 4,652,344 | | | | 1,808,859 | | | | 505,588 | | | | 3,679,750 | | | | - | | | | 24,674,295 | |
Property and equipment, net | | | 4,678,839 | | | | 4,590,233 | | | | 7,323,990 | | | | 3,833,957 | | | | 3,100,125 | | | | 898,663 | | | | 8,628,552 | | | | - | | | | 33,054,359 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 4,467,677 | | | | 6,705,507 | | | | 3,534,453 | | | | 1,067,544 | | | | - | | | | 345 | | | | 421,601 | | | | (16,197,127 | ) | | | - | |
Intercompany corporate expenses | | | 4,926,522 | | | | (767,326 | ) | | | (1,399,537 | ) | | | (1,674,044 | ) | | | (732,018 | ) | | | (66,290 | ) | | | (287,307 | ) | | | - | | | | - | |
| | | | | | | - | | | | - | | | | 29,381 | | | | - | | | | - | | | | - | | | | - | | | | 29,381 | |
| | | - | | | | 16,075 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 16,075 | |
| | | - | | | | - | | | | - | | | | - | | | | - | | | | 224,000 | | | | - | | | | - | | | | 224,000 | |
| | | - | | | | - | | | | - | | | | - | | | | 601,838 | | | | - | | | | - | | | | - | | | | 601,838 | |
| | | 9,394,199 | | | | 5,954,256 | | | | 2,134,916 | | | | (577,119 | ) | | | (130,180 | ) | | | 158,055 | | | | 134,294 | | | | (16,197,127 | ) | | | 871,294 | |
| | | 17,868,775 | | | | 16,902,666 | | | | 13,332,746 | | | | 7,909,182 | | | | 4,778,804 | | | | 1,562,306 | | | | 12,442,596 | | | | (16,197,127 | ) | | | 58,599,948 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND NET ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 500,650 | | | $ | 608,764 | | | $ | 565,350 | | | $ | 418,191 | | | $ | 295,518 | | | $ | 183,457 | | | $ | 693,835 | | | $ | - | | | | 3,265,765 | |
| | | 959,905 | | | | 4,129,255 | | | | 4,263,828 | | | | 1,106,993 | | | | 591,290 | | | | 500,000 | | | | 686,246 | | | | - | | | | 12,237,517 | |
Current portion of capital lease obligation | | | 8,806 | | | | - | | | | 6,616 | | | | 102,604 | | | | 36,185 | | | | - | | | | | | | | - | | | | 154,211 | |
Current portion of auto loan payable | | | 34,127 | | | | 7,826 | | | | 5,614 | | | | 9,907 | | | | - | | | | - | | | | - | | | | - | | | | 57,474 | |
| | | 429,270 | | | | 29,890 | | | | 40,068 | | | | 27,118 | | | | 30,915 | | | | 5,997 | | | | 2,963 | | | | - | | | | 566,221 | |
Other current liabilities | | | 45,682 | | | | 78,754 | | | | 113,242 | | | | 44,895 | | | | 28,097 | | | | 58,618 | | | | 47,828 | | | | - | | | | 417,116 | |
Total Current Liabilities | | | 1,978,440 | | | | 4,854,489 | | | | 4,994,718 | | | | 1,709,708 | | | | 982,005 | | | | 748,072 | | | | 1,430,872 | | | | - | | | | 16,698,304 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notes payable, less current portion | | | 625,094 | | | | 1,601,265 | | | | 3,808,951 | | | | 2,211,791 | | | | 3,219,656 | | | | - | | | | 11,152,782 | | | | - | | | | 22,619,539 | |
Lease obligation, less current portion | | | 14,389 | | | | - | | | | 5,303 | | | | 1,010,304 | | | | 24,429 | | | | | | | - | | | | - | | | | 1,054,425 | |
Auto loan payable - long term | | | 76,420 | | | | 2,695 | | | | 7,471 | | | | 14,860 | | | | . | | | | | | | - | | | | - | | | | 101,446 | |
| | | 2,682,284 | | | | 4,715,134 | | | | 2,824,701 | | | | 2,586,444 | | | | 1,565,236 | | | | 1,314,862 | | | | 508,466 | | | | (16,197,127 | ) | | | - | |
Total Long-Term Liabilities | | | 3,398,187 | | | | 6,319,094 | | | | 6,646,426 | | | | 5,823,399 | | | | 4,809,321 | | | | 1,314,862 | | | | 11,661,248 | | | | (16,197,127 | ) | | | 23,775,410 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 5,376,627 | | | | 11,173,583 | | | | 11,641,144 | | | | 7,533,107 | | | | 5,791,326 | | | | 2,062,934 | | | | 13,092,120 | | | | (16,197,127 | ) | | | 40,473,714 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1,775,076 | | | | 1,000 | | | | 1,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,777,076 | |
| | | (233,184 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | - | | | | (233,184) | |
| | | 10,950,256 | | | | 5,728,083 | | | | 1,690,602 | | | | 376,075 | | | | (1,012,522 | ) | | | (500,628 | ) | | | (649,524 | ) | | | - | | | | 16,582,342 | |
Total Stockholders' Equity | | | 12,492,148 | | | | 5,729,083 | | | | 1,691,602 | | | | 376,075 | | | | (1,012,522 | ) | | | (500,628 | ) | | | (649,524 | ) | | | - | | | | 18,126,234 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 17,868,775 | | | $ | 16,902,666 | | | $ | 13,332,746 | | | $ | 7,909,182 | | | $ | 4,778,804 | | | $ | 1,562,306 | | | $ | 12,442,596 | | | $ | (16,197,127 | ) | | $ | 58,599,948 | |
AAA INDUSTRIES, INC. AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, 2007
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 12,921,108 | | | $ | 16,453,297 | | | $ | 12,642,853 | | | $ | 7,298,867 | | | $ | 5,897,513 | | | $ | 1,545,648 | | | $ | - | | | $ | - | | | $ | 56,759,286 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 9,291,550 | | | | 11,253,498 | | | | 9,969,842 | | | | 6,033,831 | | | | 5,605,858 | | | | 1,388,154 | | | | 44,375 | | | | - | | | | 43,587,108 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 3,629,558 | | | | 5,199,799 | | | | 2,673,011 | | | | 1,265,036 | | | | 291,655 | | | | 157,494 | | | | (44,375 | ) | | | - | | | | 13,172,178 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Office salaries and benefits | | | 190,360 | | | | 215,864 | | | | 215,790 | | | | 140,025 | | | | 88,621 | | | | 25,401 | | | | 702 | | | | | | | | 876,763 | |
| | | 46,599 | | | | - | | | | 5,236 | | | | 8,535 | | | | 95,923 | | | | 230,975 | | | | 12,084 | | | | - | | | | 399,352 | |
| | | 17,386 | | | | 18,077 | | | | 16,138 | | | | 14,596 | | | | 13,587 | | | | 2,733 | | | | 47 | | | | - | | | | 82,564 | |
| | | 26,012 | | | | 2,801 | | | | 12,151 | | | | 5,401 | | | | 10,664 | | | | 114 | | | | 5,977 | | | | - | | | | 63,120 | |
| | | 587,873 | | | | 611,001 | | | | 558,913 | | | | 321,419 | | | | 249,070 | | | | 67,391 | | | | 287,307 | | | | - | | | | 2,682,974 | |
Office supplies and expenses | | | 88,913 | | | | 19,172 | | | | 22,950 | | | | 16,110 | | | | 30,235 | | | | 12,001 | | | | 2,397 | | | | - | | | | 191,778 | |
| | | 5,147 | | | | - | | | | 5,758 | | | | 2,085 | | | | - | | | | 92 | | | | - | | | | - | | | | 13,082 | |
| | | 28,237 | | | | 10,404 | | | | 7,602 | | | | 4,598 | | | | 8,018 | | | | 3,650 | | | | 1,502 | | | | - | | | | 64,011 | |
| | | 12,044 | | | | 12,784 | | | | 16,359 | | | | 8,693 | | | | 25,533 | | | | 4,939 | | | | 13,667 | | | | - | | | | 94,019 | |
| | | 2,453 | | | | 2,533 | | | | 6,305 | | | | - | | | | | | | - | | | | - | | | | - | | | | 11,291 | |
| | | 70,175 | | | | 27,788 | | | | 72,149 | | | | 179,975 | | | | 34,413 | | | | 19,200 | | | | 2,588 | | | | - | | | | 406,288 | |
Depreciation and amortization | | | 41,265 | | | | 26,280 | | | | 4,145 | | | | 7,926 | | | | 25,181 | | | | 1,500 | | | | - | | | | - | | | | 106,297 | |
| | | - | | | | - | | | | - | | | | - | | | | 21,553 | | | | 11,354 | | | | - | | | | - | | | | 32,907 | |
| | | 27,403 | | | | 38,787 | | | | 19,336 | | | | 166,757 | | | | (92,504 | ) | | | 6,808 | | | | 192,752 | | | | - | | | | 359,339 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1,143,867 | | | | 985,491 | | | | 962,832 | | | | 876,120 | | | | 510,294 | | | | 386,158 | | | | 519,023 | | | | - | | | | 5,383,785 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2,485,691 | | | | 4,214,308 | | | | 1,710,179 | | | | 388,916 | | | | (218,639 | ) | | | (228,664 | ) | | | (563,398 | ) | | | - | | | | 7,788,393 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
OTHER INCOME AND (EXPENSES) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 159,994 | | | | - | | | | 159,994 | |
| | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 90,000 | | | | - | | | | 90,000 | |
| | | 61,161 | | | | 3,882 | | | | 66,111 | | | | 86,064 | | | | - | | | | - | | | | - | | | | - | | | | 217,218 | |
| | | - | | | | 793 | | | | - | | | | - | | | | - | | | | 1,900 | | | | - | | | | - | | | | 2,693 | |
Amortization of non-compete agreement | | | - | | | | - | | | | - | | | | - | | | | - | | | | (56,000 | ) | | | - | | | | - | | | | (56,000 | ) |
| | | - | | | | - | | | | - | | | | - | | | | - | | | | (128,355 | ) | | | - | | | | - | | | | (128,355 | ) |
| | | (138,151 | ) | | | (428,814 | ) | | | (503,450 | ) | | | (341,9041 | | | | (291,560 | ) | | | (34,037 | ) | | | (336,120 | ) | | | - | | | | (2,074,036 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (76,990 | ) | | | (424,139 | ) | | | (437,339 | ) | | | (255,840 | ) | | | (291,560 | ) | | | (216,492 | ) | | | (86,126 | ) | | | - | | | | (1,788,486 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
INCOME BEFORE STATE REPLACEMENT TAX | | | 2,408,701 | | | | 3,790,169 | | | | 1,272,840 | | | | 133,076 | | | | (510,199 | ) | | | (445,156 | ) | | | (649,524 | ) | | | - | | | | 5,999,907 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 3,338 | | | | (45,921 | ) | | | (106,055 | ) | | | (2,054 | ) | | | (1,035 | ) | | | (55,472 | ) | | | - | | | | - | | | | (207,199 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 2,412,039 | | | $ | 3,744,248 | | | $ | 1,166,785 | | | $ | 131,022 | | | $ | (511,234 | ) | | $ | (500,628 | ) | | $ | (649,524) | | | $ | - | | | $ | 5,792,708 | |
