1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Date of Report (date of earliest event reported): October 17, 1996 AIRGAS, INC. ______________________________________________________ (Exact name of registrant as specified in its charter) Delaware 1-9344 56-0732648 _______________ _______________________ _____________ (State or other (Commission File Number) (I.R.S. Employer jurisdiction of Identification incorporation) No.) 100 Matsonford Road, Suite 550 Radnor, PA 19087 _______________________________________ (Address of principal executive offices) Registrant's telephone number, including area code: (610) 687-5253 _______________ 2 Item 5. Other Events. ____________ From April 1, 1996 through September 30, 1996, the Registrant has acquired sixteen individually insignificant businesses. The Registrant is filing this current report on Form 8-K in order to provide audited financial statements and pro forma information for three individually insignificant business acquisitions in accordance with Regulation S-X, Rule 3-05(b)(1)(i), although such acquisitions, in the aggregate, do not exceed 20% of any of the conditions set forth in Rule 1-02(w). Effective April 1, 1996, TriStates Airgas, Inc., a wholly-owned subsidiary of U.S. Airgas, Inc., a wholly-owned subsidiary of the Registrant, purchased substantially all of the assets of Randall-Graw Company, Inc. ("Randall- Graw") for $12.1 million plus the assumption of certain liabilities. Additionally, a non-competition and confidentiality agreement was entered into with Randall-Graw's shareholder, for which $500 thousand was paid at closing. Effective May 6, 1996, Mid America Airgas, Inc., a wholly-owned subsidiary of U.S. Airgas, Inc., purchased substantially all of the assets of Welders Supply Company, Inc. ("Welders Supply") for $10.5 million plus the assumption of certain liabilities. Additionally, a non-competition and confidentiality agreement was entered into with the Welders Supply shareholder, for which $154 thousand was paid at closing and $616 thousand will be paid over the term of the agreement. Effective September 5, 1996, West Coast Airgas, Inc., a 95% owned subsidiary of the Registrant, purchased all of the issued and outstanding stock of Rutland Tool & Supply Company, Inc. ("Rutland"). Rutland was acquired with the issuance of approximately 3.4 million shares of the Registrant's common stock and cash of $7.1 million. Additionally, non-competition and confidentiality agreements were entered into with the Rutland shareholders, aggregating $7 million and are due in five years. The acquisitions were financed using the Registrant's revolving credit facilities with NationsBank of North Carolina, N.A., the issuance of promissory notes to the sellers, the issuance of the Registrant's common stock and the assumption of certain liabilities. At the time of the acquisitions, Randall-Graw and Welders Supply were engaged in the distribution and marketing of industrial gases and related welding equipment and supplies. The Registrant intends to continue to use the acquired assets to operate industrial gas and welding supply businesses. At the time of the Rutland acquisition, Rutland was engaged in the distribution of metal working and industrial tools and supplies. The Registrant intends to continue to use the acquired assets in its recently formed industrial distribution division which is called Airgas Direct Industrial. 3 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits __________________________________________________________________ (a) Financial Statements 1. Audited balance sheet of Randall-Graw Company, Inc. as of March 31, 1996 and the related statements of earnings, stockholder's equity and cash flows for the year then ended. 2. Audited balance sheet of Welders Supply Company, Inc. as of December 31, 1995 and the related statements of earnings, stockholders' equity and cash flows for the year then ended. 3. Audited balance sheet of Rutland Tool & Supply Company, Inc. as of December 31, 1995 and the related statements of income, shareholders' equity and cash flows for the year then ended. (b) Pro Forma Financial Information The tables on pages five through eleven set forth selected pro forma balance sheet and operating data of the Registrant for the year ended March 31, 1996 and the three months ended June 30, 1996 as if the acquisitions had been consummated on April 1, 1995 and April 1, 1996, respectively. (c) Exhibits. 23.1 Consent of Hawkins, Ash, Baptie & Company 23.2 Consent of KPMG Peat Marwick LLP 23.3 Consent of Deloitte & Touche LLP 4 Signatures __________ Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AIRGAS, INC. BY: /s/Jeffrey P. Cornwell _____________________ Jeffrey P. Cornwell Vice President Finance and Corporate Controller DATED: October 17, 1996 5 AIRGAS, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION (DOLLARS IN THOUSANDS) June 30, 1996 ________________________________________________________ Airgas, Inc. Rutland Notes Pro Balance Sheet Data (Historical) Tool Ref. Forma __________________ ____________ _________ _____ _____ Accounts Receivable, Net $ 139,228 $ 6,440 (1) $ 145,668 Inventories, net 106,113 17,500 (1) 123,613 Other Current Assets 16,508 2,127 (1) 18,635 _________ _______ _________ 261,849 26,067 287,916 Property, Plant & Equipment, Net 460,619 1,782 (2) 462,401 Goodwill, Net 212,113 64,251 (3) 276,364 Investments and Other Noncurrent Assets 117,598 7,204 (4) 124,802 _________ _______ _________ $1,052,179 $ 99,304 $1,151,483 ========= ======= ========= Current Portion of Long-Term Debt $ 17,644 $ 15 (1) $ 17,659 Accounts Payable,Trade 57,703 2,584 (1) 60,287 Accrued Expenses and Other Current Liabilities 76,149 5,383 (1) 81,532 _________ _______ _________ Current Liabilities 151,496 7,982 159,478 Long Term Debt 522,288 14,412 (5) 536,700 Other Liabilities 37,998 __ 37,998 Deferred Income Taxes 90,233 __ 90,233 Stockholders' Equity 250,164 76,910 (6) 327,074 _________ _______ _________ $1,052,179 $ 99,304 $1,151,483 ========= ======= ========= (1) Represents the fair value of current assets acquired and current liabilities assumed at the acquisition date. (2) The carrying amount reflects fair market value at the date of acquisition. (3) Represents cost in excess of net assets acquired. (4) Represents the fair market value of a non-competition agreement and other noncurrent assets of the acquired business. (5) Represents debt incurred to finance the business acquisition plus assumption of certain noncurrent liabilities. (6) Represents the fair value of the registrant's common stock issued at the acquisition date. 6 AIRGAS, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Year Ended March 31, 1996 _______________________________________________ Randall Welders Graw Supply Rutland Tool Airgas, Inc. (Historical) (Historical) (Historical) Operating Data (Historical) (Note 1) (Note 2) (Note 2) ________________ ___________ __________ __________ ________ Net Sales $838,144 $ 18,214 $ 10,208 $ 55,982 Cost of Products Sold (Excluding Depreciation and Amortization) 419,491 12,585 6,292 33,923 Selling, Distribution & Administrative Expenses 279,906 4,269 3,323 16,966 Depreciation & Amortization 45,762 288 369 598 _______ _______ ______ _______ Total Costs & Expenses 745,159 17,142 9,984 51,487 _______ _______ ______ _______ Operating Income 92,985 1,072 224 4,495 Interest Expense, Net (24,862) 69 (18) (469) Other Income, Net 782 14 185 (3,429) Minority Interest (663) __ __ __ ______ _______ ______ ______ Earnings Before Income Taxes 68,242 1,155 391 597 Income Taxes 28,522 5 5 245 ______ ______ _______ ______ Net Earnings $39,720 $ 1,150 $ 386 $ 352 ====== ====== ====== ====== Earnings Per Share (4) $ .60 ====== Weighted Average Shares 66,215 ====== Notes: (1) Includes audited financial data for the twelve months ended March 31, 1996 (2) Includes unaudited financial data for the twelve months ended March 31, 1996. (3) See page 10 for explanations of pro forma adjustments. (4) See earnings per share calculations on page 11. Columns continued on next page. 7 AIRGAS, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) CONTINUED FROM PREVIOUS PAGE. Year Ended March 31, 1996 _______________________________________________ Pro Forma Adjustments Note Pro Operating Data (Note 3) Ref. Forma ________________ ___________ ____ _____ Net Sales $ __ $922,548 Cost of Products Sold (Excluding Depreciation and Amortization) __ 472,291 Selling, Distribution & Administrative Expenses 304,464 Depreciation & Amortization 3,467 a 50,484 _______ _______ Total Costs & Expenses 3,467 827,239 _______ _______ Operating Income (3,467) 95,309 Interest Expense, Net (2,185) b (27,465) Other Income, Net 3,653 c 1,205 Minority Interest (18) d (681) _______ _______ Earnings Before Income Taxes (2,017) 68,368 Income Taxes 5 e 28,782 _______ _______ Net Earnings $ (2,022) $ 39,586 ======= ======= Earnings Per Share (4) $ .56 ======= Weighted Average Shares 69,676 ======= 8 AIRGAS, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Three Months Ended June 30, 1996 _______________________________________________ Welders Airgas, Inc. Supply Rutland Tool (Historical) (Historical) (Historical) Operating Data (Note 1) (Note 2) (Note 1) ________________ ___________ __________ ________ Net Sales $274,098 $ 857 $ 15,755 Cost of Products Sold (Excluding Depreciation and Amortization) 146,352 559 9,548 Selling, Distribution & Administrative Expenses 86,187 225 4,733 Depreciation & Amortization 14,238 37 151 _______ _____ ______ Total Costs & Expenses 246,777 821 14,432 _______ _____ ______ Operating Income 27,321 36 1,323 Interest Expense, Net (8,281) (2) (102) Other Income, Net 281 38 (170) Minority Interest (229) __ __ ______ _____ ______ Earnings Before Income Taxes 19,092 72 1,051 Income Taxes 7,942 __ 431 ______ _____ ______ Net Earnings $11,150 $ 72 $ 620 ====== ===== ====== Earnings Per Share (4) $ .17 ====== Weighted Average Shares 67,095 ====== Notes: (1) Includes unaudited financial data for the three months ended June 30, 1996. (2) Includes unaudited financial data for the one month ended April 30, 1996. (3) See page 10 for explanation of pro forma adjustments. (4) See earnings per share calculations on page 11. Columns continued on next page. 9 AIRGAS, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) CONTINUED FROM PREVIOUS PAGE. Three Months Ended June 30, 1996 _______________________________________________ Pro Forma Adjustments Note Pro Operating Data (Note 3) Ref. Forma ________________ ___________ ____ _____ Net Sales $ __ $290,710 Cost of Products Sold (Excluding Depreciation and Amortization) __ 156,459 Selling, Distribution & Administrative Expenses 91,145 Depreciation & Amortization 765 a 15,191 _______ _______ Total Costs & Expenses 765 262,795 _______ _______ Operating Income (765) 27,915 Interest Expense, Net (229) b (8,614) Other Income, Net __ 149 Minority Interest (4) d (233) _______ _______ Earnings Before Income Taxes (998) 19,217 Income Taxes (340) e 8,033 _______ _______ Net Earnings $ (658) $ 11,184 ======= ======= Earnings Per Share (3) $ .16 ======= Weighted Average Shares 70,556 ======= 10 (a) Depreciation and amortization expense has been increased by $3,467 for the year ended March 31, 1996 and by $765 for the three months ended June 30, 1996. The adjustments were made to reflect the estimated purchase accounting adjustments related to the fixed assets, goodwill and other intangible assets. (b) The pro forma interest expense adjustments of $2,185 and $229 for the year ended March 31, 1996 and the three months ended June 30, 1996, respectively, reflect the debt incurred in financing the acquisitions at the Registrant's effective interest rate. (c) Other expense has been decreased by $3,653 for the year ended March 31, 1996 to eliminate the non-recurring compensation expense related to Rutland's issuance of common stock to certain key employees and the related cash bonuses paid in connection with the stock bonus. (d) Minority interest adjustments have been made to reflect a 5% minority interest in the net earnings of Rutland after the applicable proforma adjustments described above. (e) Income tax adjustments have been made to reflect the Registrant's effective tax rates and include a provision for income taxes for the businesses which were previously taxed under Subchapter S of the Internal Revenue Code. 11 AIRGAS, INC. EARNINGS PER SHARE CALCULATIONS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Year Ended Three Months Ended March 31, 1996 June 30, 1996 Adjustment of Weighted Average Shares Outstanding Historical Pro Forma Historical Pro Forma ______________________________ ___________ _________ __________ _________ Shares of Common Stock Outstanding - Weighted 62,821 66,247 64,239 67,665 Net Common Stock Equivalents 3,394 3,429 2,856 2,891 ______ ______ ______ ______ Adjusted Shares Outstanding 66,215 69,676 67,095 70,556 ====== ====== ====== ====== Net Earnings $39,720 $39,586 $11,150 $11,184 ====== ====== ====== ====== Earnings Per Share $ .60 $ .56 $ .17 $ .16 ====== ====== ====== ====== Earnings per share amounts were determined using the treasury stock method. This method assumes the exercise of all dilutive outstanding options and warrants and the use of the aggregate proceeds therefrom to acquire the Registrant's outstanding common stock. Net earnings were divided by the average number of shares outstanding adjusted for the assumed exercise of the options and warrants outstanding and repurchase of common stock to calculate per share amounts. 12 RANDALL-GRAW COMPANY, INC. FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS' REPORT MARCH 31, 1996 13 RANDALL-GRAW COMPANY, INC. CONTENTS MARCH 31, 1996 Page 2 Independent Auditors' Report 3 Balance Sheet 4 Statement of Earnings 5 Statement of Stockholder's Equity 6 Statement of Cash Flows 7-10 Notes to Financial Statements 14 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors Randall-Graw Company, Inc. We have audited the accompanying balance sheet of Randall-Graw Company, Inc., as of March 31, 1996, and the related statements of earnings, stockholder's 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 generally accepted auditing standards. 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 Randall-Graw Company, Inc., as of March 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. HAWKINS, ASH, BAPTIE & COMPANY La Crosse, Wisconsin May 24, 1996 15 RANDALL-GRAW COMPANY, INC. BALANCE SHEET MARCH 31, 1996 ASSETS CURRENT ASSETS Cash and cash equivalents $491,503 Trade receivables, less allowance for doubtful accounts of $20,000 2,308,462 Inventories 1,740,591 Prepaid expenses 56,872 Other current assets 24,762 _________ TOTAL CURRENT ASSETS $4,622,190 PLANT AND EQUIPMENT, at cost $4,826,794 Less accumulated depreciation 3,396,360 _________ PLANT AND EQUIPMENT, net $1,430,434 OTHER ASSETS Goodwill, net of accumulated amortization of $6,500 $ 19,500 Other non-current assets 11,792 _________ TOTAL OTHER ASSETS $ 31,292 _________ TOTAL ASSETS $6,083,916 ========= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable - trade $834,654 Accrued expenses and other current liabilities 849,766 _________ TOTAL CURRENT LIABILITIES $1,684,420 _________ STOCKHOLDER'S EQUITY Common stock, $2.50 par value, authorized 100,000 shares, issued 57,195 shares $142,988 Retained earnings 4,256,508 _________ TOTAL STOCKHOLDER'S EQUITY $4,399,496 _________ TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $6,083,916 ========= 16 RANDALL-GRAW COMPANY, INC. STATEMENT OF EARNINGS YEAR ENDED MARCH 31, 1996 NET SALES $18,214,133 COST OF SALES 12,585,448 __________ GROSS PROFIT $5,628,685 __________ COSTS AND EXPENSES Salaries, wages, and benefits $3,228,034 Distribution expense 119,985 Selling, general, and administrative 721,308 Occupancy expense 199,602 Depreciation and amortization 287,977 _________ TOTAL COSTS AND EXPENSES $4,556,906 _________ OPERATING INCOME $1,071,779 OTHER INCOME (EXPENSE) Interest income, net 69,013 Other income 13,799 _________ EARNINGS BEFORE INCOME TAXES $1,154,591 PROVISION FOR INCOME TAXES 4,732 _________ NET EARNINGS $1,149,859 ========= 17 RANDALL-GRAW COMPANY, INC. STATEMENT OF STOCKHOLDER'S EQUITY COMMON RETAINED STOCK EARNINGS TOTAL BALANCE, MARCH 31, 1995 $ 142,988 $ 3,712,149 $3,855,137 Net earnings for the year -- 1,149,859 1,149,859 Distributions to shareholder -- (605,500) (605,500) _______ ___________ _________ BALANCE, MARCH 31, 1996 $ 142,988 $ 4,256,508 $4,399,496 18 RANDALL-GRAW COMPANY, INC. STATEMENT OF CASH FLOWS INDIRECT METHOD YEAR ENDED MARCH 31, 1996 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 1,149,859 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 287,977 (Gain) from sale of assets (5,600) Bad debt expense 21,227 Changes in assets and liabilities (Increase) decrease in assets Receivables (398,882) Inventories (186,358) Prepaid expenses and other assets (50,975) Increase (decrease) in liabilities Accounts payable 153,317 Accrued expenses (70,413) Cylinder deposits 62,374 _______ NET CASH PROVIDED BY OPERATING ACTIVITIES $962,526 _______ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures $(425,842) Decrease in cash surrender value of life insurance 10,709 Proceeds from sale of fixed assets 5,600 ________ NET CASH (USED IN) INVESTING ACTIVITIES $(409,533) ________ CASH FLOWS FROM FINANCING ACTIVITIES Repayments under debt agreements $(21,542) Distributions to shareholder (605,500) ________ NET CASH (USED IN) FINANCING ACTIVITIES $(627,042) ________ NET (DECREASE) IN CASH AND CASH EQUIVALENTS $(74,049) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 565,552 ________ CASH AND CASH EQUIVALENTS AT THE END OF YEAR $491,503 ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 676 ======= Income taxes $ 4,000 ======= 19 RANDALL-GRAW COMPANY, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 NOTE 1 - Nature of Organization and Significant Accounting Policies Information About the Company's Activities - Randall-Graw Company, Inc., is primarily a wholesaler of welding and industrial supplies. The Company operates out of facilities located in La Crosse, Eau Claire, and Wisconsin Rapids in Wisconsin, and Minneapolis, and Winona in Minnesota. A summary of significant accounting policies consistently applied in the preparation of the accompanying financial statements follows. Cash and Cash Equivalents - For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Bad Debt Provision - The provision for credit losses on the customers accounts is made in amounts required to maintain adequate reserves to cover anticipated losses. Inventories - Inventories are valued at cost using the last-in, first-out (LIFO) method which is not in excess of market. If the FIFO method of inventory accounting had been used by the Company, merchandise inventories would have been $96,940 higher at March 31, 1996. Plant and Equipment - Plant and equipment are stated at cost. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Straight-line and accelerated methods of depreciation are used for both financial reporting and tax purposes. For the year ended March 31, 1996, $287,977 of depreciation and amortization was charged to operations. Income Taxes - On January 1, 1992, the Company converted to S-Corporation status for income tax purposes with all items of income or loss passed through to the shareholder. Therefore, no provision or liability for federal income taxes has been included in the financial statements. A temporary recycling surcharge and a minimum fee are payable in Wisconsin and Minnesota, respectively. Excess of Purchase Price of Company Acquired Over Net Assets at Date of Acquisition - It is the Company's policy to amortize any excess of purchase price of companies acquired over book value of net assets at date of acquisition over a period of 40 years. The Company assesses the recoverability of this tangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flow. Revenue Recognition - Sales are recorded upon shipment to the customer. 20 RANDALL-GRAW COMPANY, INC. NOTES TO FINANCIAL STATEMENTS - Continued MARCH 31, 1996 NOTE 1 - Nature of Organization and Significant Accounting Policies - Continued Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Fair Values of Financial Instruments - The carrying amount of cash approximates fair value because of the short maturity of those instruments. The carrying amount of security deposits approximates fair value because of their demand upon return nature. NOTE 2 - Concentration of Credit Risk The Company maintains cash balances at several institutions located in Wisconsin and Minnesota. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At March 31, 1996, the Company's uninsured bank cash balances total $578,048. NOTE 3 - Inventories Inventories consist of: Hardgoods $1,827,051 Gas 10,480 _________ $1,837,531 Less reduction to LIFO cost (96,940) _________ TOTAL $1,740,591 NOTE 4 - Plant and Equipment Estimated Useful Lives ____________ PLANT AND EQUIPMENT, at cost Land -- $222,384 Land improvements 15 - 19 59,723 Building and improvements 7 - 40 960,126 Machinery and equipment 5 - 10 398,247 Cylinders 5 - 10 1,988,054 Furniture and fixtures 5 - 10 174,322 Vehicles 3 - 7 530,035 Computers 5 493,903 _________ $4,826,794 Less accumulated depreciation 3,396,360 _________ PLANT AND EQUIPMENT, net $1,430,434 ========= 21 RANDALL-GRAW COMPANY, INC. NOTES TO FINANCIAL STATEMENTS - Continued MARCH 31, 1996 NOTE 5 - Other Long-Term Assets Other long-term assets include: Organizational costs $ 1,100 Notes receivable 10,692 ______ TOTAL $11,792 ====== NOTE 6 - Accrued Expenses and Other Current Liabilities Accrued expenses include: Cylinder deposits $ 612,608 Payroll taxes 18,150 Profit sharing 56,439 Property taxes 53,863 Sales taxes 31,947 Vacation 76,759 _______ TOTAL $ 849,766 ======= NOTE 7 - Profit Sharing Plans The Company has two profit sharing plans covering most full-time employees who have completed one year of service with the Company. Contributions to the plans were $205,099 in 1996. NOTE 8 - Other Income Other income includes: Net gain on sale of assets $ 5,600 Miscellaneous income 8,199 ______ TOTAL $13,799 ====== NOTE 9 - Interest Income, Net Interest income, net, consists of: Interest expense $ (676) Interest and finance charge income 69,689 ______ TOTAL $69,013 ====== NOTE 10 - Major Customer Sales to The Trane Company constituted approximately 12 percent of 1996 sales. 22 RANDALL-GRAW COMPANY, INC. NOTES TO FINANCIAL STATEMENTS - Continued MARCH 31, 1996 NOTE 11 - Leases The Company leases gas cylinders primarily from its welding gas supplier on a monthly basis. Cylinder lease expense for 1996 was $90,700. The Company also leased two vehicles under operating leases until March of 1996. Rental expense under these leases was $14,600 in 1996. NOTE 12 - Commitments The Company also has established a $250,000 line of credit with Norwest Bank - La Crosse to meet short-term cash requirements. At March 31, 1996, the line of credit was terminated by the Company. NOTE 13 - Related Party Transactions The Company leased real estate from the sole stockholder until March of 1996. Rent expense on these properties was $36,000 for the year ended March 31, 1996. The Company also leased cylinders from the sole stockholder and certain employees until March of 1996. Rent expense on these leases was $18,186 for the year ended March 31, 1996. NOTE 14 - Subsequent Event In April 1996, the Company's stockholders entered into an agreement to sell the assets of the Company to Tri-State Airgas, Inc., a Delaware corporation and subsidiary of U.S. Airgas, Inc., a wholly-owned subsidiary of Airgas, Inc., a Delaware corporation. It is anticipated that the Company will incur a built-in gains tax due to the sale of assets. 23 WELDERS SUPPLY, INC. Financial Statements December 31, 1995 (With Independent Auditors' Report Thereon) 24 Independent Auditors' Report ___________________________ The Board of Directors Welders Supply, Inc.: We have audited the accompanying balance sheet of Welders Supply, Inc. as of December 31, 1995, and the related statements of earnings, 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 generally accepted auditing standards. 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 Welders Supply, Inc. as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Nashville, Tennessee June 5, 1996 25 WELDERS SUPPLY, INC. Balance Sheet December 31, 1995 Assets ______ Current assets: Cash and cash equivalents $ 318,037 Trade accounts receivable 1,067,363 Inventories (note 2) 980,174 Prepaid expenses 19,385 State income taxes receivable 1,838 _________ Total current assets 2,386,797 Property and equipment, net (note 3) 2,445,040 Cash value of life insurance 55,734 Deposits 3,048 _________ Total assets $4,890,619 ========= Liabilities and Stockholders' Equity ____________________________________ Current liabilities: Note payable to bank (note 4) $ 189,000 Current portion of long-term debt (note 5) 2,407 Current portion of capital lease obligation (note 6) 12,287 Trade accounts payable and accrued expenses 337,559 Accrued compensation 117,934 _________ Total current liabilities 659,187 Long-term debt, excluding current installments (note 5) 11,312 Capital lease obligation, excluding current installments (note 6) 22,371 _________ Total liabilities 692,870 Stockholders' equity: Common stock, no par value, authorized 3,000 shares, 2,337 shares issued and outstanding 41,600 Retained earnings 4,156,149 _________ Total stockholders' equity 4,197,749 _________ Commitments and contingencies (notes 6, 7, and 8) Total liabilities and stockholders' equity $4,890,619 ========= See accompanying notes to financial statements. 26 WELDERS SUPPLY, INC. Statement of Earnings Year ended December 31, 1995 Net sales $10,659,080 Cost of sales 6,675,394 _________ Gross profit 3,983,686 Selling, general and administrative expenses 3,636,452 _________ Earnings from operations 347,234 Other income (expense): Interest income 18,724 Interest expense (25,648) Miscellaneous income 144,282 _________ Earnings before state income taxes 484,592 State income tax expense 5,295 _________ Net earnings $ 479,297 ========= See accompanying notes to financial statements. 27 WELDERS SUPPLY, INC. Statement of Stockholders' Equity Year ended December 31, 1995 Common Stock Retained Shares Amount Earnings Total ______ _______ ________ _____ Balance at December 31, 1994 2,337 $ 41,600 4,092,437 4,134,037 Net earnings - - 479,297 479,297 Dividends - - (415,585) (415,585) _____ ______ _________ _________ Balance at December 31, 1995 2,337 $ 41,600 4,156,149 4,197,749 ===== ====== ========= ========= See accompanying notes to financial statements. 28 WELDERS SUPPLY, INC. Statement of Cash Flows Year ended December 31, 1995 Cash flow from operating activities: Net earnings $479,297 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation 428,491 Gain on sale of equipment (8,221) Changes in assets and liabilities affecting cash flows: Decrease in trade accounts receivable 214,529 Increase in inventories (80,529) Decrease in prepaid expenses 4,269 Increase in state income taxes receivable (5,242) Increase in cash value of life insurance (3,099) Decrease in deposits 10,170 Decrease in trade accounts payable and accrued expenses (73,643) Increase in accrued compensation 5,066 ________ Net cash provided by operating activities 971,088 ________ Cash flow from investing activities: Additions to property and equipment (746,118) Proceeds from sale of property and equipment 13,120 ________ Net cash used by investing activities (732,998) ________ Cash flow from financing activities: Increase in notes payable to bank, net 5,000 Proceeds from issuance of long-term debt 14,454 Principal payments on long-term debt (735) Principal payments on capital lease obligations (10,014) Dividends paid to stockholders (415,585) ________ Net cash used by financing activities (406,880) ________ Net decrease in cash and cash equivalents (168,790) Cash and cash equivalents - beginning of year 486,827 ________ Cash and cash equivalents - end of year $318,037 ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 17,462 State income taxes 10,537 ======= See accompanying notes to financial statements. 29 WELDERS SUPPLY, INC. Notes to Financial Statements December 31, 1995 (1) Summary of Significant Accounting Policies _______________________________________ (a)Description of Business ______________________ The Company is engaged in the retail and wholesale sale of welding supplies, industrial gases and specialty steels. The Company also manufactures acetylene gas. The Company's products are sold through its sales locations in Paducah and Hopkinsville, Kentucky, Evansville and Vincennes, Indiana, and Clarksville, Tennessee. Two of the Company's principal customers collectively represented eight percent of the Company's accounts receivable and sales as of and for the year ended December 31, 1995. (b)Cash and Cash Equivalents ________________________ For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. (c)Inventories __________ Inventories are stated at the lower of cost or market. At December 31, 1995, 98% of the inventories are valued on the last-in, first-out (LIFO) method, and 2% of the inventories are valued on the first-in, first-out (FIFO) method. (d)Property and Equipment ______________________ Property and equipment are stated at cost. It is the Company's policy to provide depreciation using the rates and methods allowed for federal income tax purposes which approximate the estimated useful lives of the respective assets. The following is a summary of the useful lives over which property and equipment are being depreciated: Building and improvements 15-40 years Cylinders 5-7 years Pumping and warehouse equipment 5-7 years Autos and trucks 5-7 years Leasehold improvements 5-10 years (e)Revenue Recognition ___________________ Sales of welding supplies, industrial gases, and specialty steels are recorded upon shipment to the customer, and welding equipment rental income is recorded ratably during the rental term. Retail sales are net of returns and exclude sales tax. (f)Advertising Costs ________________ The Company expenses advertising costs as incurred. 30 WELDERS SUPPLY, INC. Notes to Financial Statements December 31, 1995 (g)Income Taxes ____________ The Company is an S corporation for federal income tax purposes. Accordingly, earnings or losses and tax credits are passed through to the stockholders of the Company and are the responsibility of the stockholders. No provision for federal income taxes has been made for the year ended December 31, 1995. Two of the states in which the Company operates do not recognize S corporation status. The Company has recorded a provision for state income taxes for these states. The actual tax rates approximates the expected tax rates for those states in which the Company is subject to state income tax. (h)Use of Estimates _______________ The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (i)Fair Value of Financial Instruments ________________________________ The Company has adopted Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments (FAS 107), which requires disclosure of the fair values of most on-and-off balance sheet financial instruments for which it is practicable to estimate that value. The scope of FAS 107 excludes certain financial instruments such as trade receivables and payables when the carrying value approximates the fair value, employee benefit obligations, lease contracts, and all nonfinancial instruments such as land, buildings, and equipment. The fair values of the financial instruments are estimated based upon current market conditions and quoted market prices for the same or similar instruments as of December 31, 1995. Book value approximates fair value for substantially all of the Company's assets and liabilities which fall under the scope of FAS 107. (2) Inventories ___________ Inventories at December 31, 1995 consisted of the following: Merchandise purchased for resale $1,304,187 Acetylene gas 13,105 Raw materials 3,836 ________ 1,321,128 Less LIFO reserve (340,954) ________ Inventories, net $980,174 ======== 31 WELDERS SUPPLY, INC. Notes to Financial Statements December 31, 1995 (3) Property and Equipment ______________________ A summary of property and equipment at December 31, 1995, is as follows: Land $ 208,953 Buildings and improvements 1,720,124 Gas cylinders 3,058,961 Pumping and warehouse equipment 732,781 Autos and trucks 1,098,375 Office equipment 496,922 Equipment under capital lease 62,746 _________ 7,378,862 Less accumulated depreciation (4,933,822) _________ Property and equipment, net $2,445,040 ========= (4) Note Payable to Bank ____________________ Note payable to bank at December 31, 1995, consists of an unsecured line of credit under which the Company may borrow at the prime rate of interest (8.5% at December 31, 1995) up to $500,000. Interest payments are due monthly and the principal was paid in full in June 1996, at which time the agreement was terminated. At December 31, 1995, there was $189,000 outstanding under the line of credit. The note payable to bank is guaranteed by the Company's President. (5) Long-Term Debt _______________ Long-term debt at December 31 1995, consisted of an obligation under loan and security agreement used for the purchase of equipment secured by certain equipment. Monthly payments, including principal and interest of $303, are due through September 1, 2000. The long-term debt matures as follows: December 31, ____________ 1996 $ 2,407 1997 2,646 1998 2,908 1999 3,197 2000 2,561 _______ $ 13,719 ======= 32 WELDERS SUPPLY, INC. Notes to Financial Statements December 31, 1995 (6) Leases ______ The Company leases certain equipment under noncancelable operating and capital leases. Equipment under capital lease had a book value of $12,550 at December 31, 1995. In addition, the Company rents on a month-to-month basis its Paducah and Hopkinsville, Kentucky offices, warehouse facilities, and certain industrial cylinders from its principal stockholder and/or a related corporation on terms which management believes are comparable to those which could be obtained from unaffiliated third parties. Rent expense in 1995 was $209,180, of which $145,895 was paid to related parties. Future minimum lease payments under noncancelable leases as of December 31, 1995, are as follows: Year ending Capital Operating December 31, Leases Leases Total ____________ ______ ______ _____ 1996 $ 18,200 4,273 22,473 1997 18,200 4,273 22,473 1998 7,000 - 7,000 _______ ______ ______ Total $ 43,400 8,546 51,946 ====== ====== Less interest at 20.5% imputed rate 8,742 _______ Obligation under capital lease 34,658 Less current portion 12,287 _______ Capital lease obligation, long-term $22,371 ======= (7) Employee Benefit Plan ____________________ The Company sponsors a non-contributory profit-sharing retirement plan which includes all employees 21 years of age or older who work a minimum of 1,000 hours a year and who have been employed by the Company for at least one year. Operating expenses include amounts attributable to the plan of $198,440 in 1995. (8) Subsequent Event ________________ Effective May 6, 1996, Airgas, Inc. acquired for cash and a non-negotiable promissory note, certain assets and liabilities of the Company. This purchase excludes certain real property which will be maintained by the majority shareholder and leased to Airgas, Inc. 33 RUTLAND TOOL & SUPPLY COMPANY, INC. FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 AND INDEPENDENT AUDITORS' REPORT 34 INDEPENDENT AUDITORS' REPORT To The Board of Directors Rutland Tool & Supply Company, Inc.: We have audited the accompanying balance sheet of Rutland Tool & Supply Company, Inc. as of December 31, 1995 and the related statements of income, 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 generally accepted auditing standards. 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, such financial statements present fairly, in all material respects, the financial position of the Rutland Tool & Supply Company, Inc. as of December 31, 1995 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP June 3, 1996 35 RUTLAND TOOL & SUPPLY COMPANY, INC. BALANCE SHEET AS OF DECEMBER 31, 1995 ASSETS CURRENT ASSETS: Cash $ 86,033 Trade accounts receivable, net of allowance for doubtful accounts of $25,000 (Notes 4 and 6) 5,870,594 Related party receivables (Note 2) 446,611 Income tax refund receivable (Note 10) 225,000 Inventories, net of reserves for obsolescence of $625,700 (Notes 4, 6 and 7) 16,540,728 Prepaid expenses 480,815 Net deferred tax asset (Note 10) 597,000 __________ Total current assets 24,276,781 PROPERTY AND EQUIPMENT, net (Notes 3, 4, 6 and 7) 1,948,718 OTHER ASSETS 70,737 _________ $26,266,236 ========== See accompanying notes to financial statements. 36 RUTLAND TOOL & SUPPLY COMPANY, INC. BALANCE SHEET AS OF DECEMBER 31, 1995 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit (Note 4) $ 2,827,000 Accounts payable 2,942,287 Accrued expenses (Note 5) 2,055,251 Current portion of notes payable (Note 6) 434,640 Current portion of obligations under capital leases (Note 7) 210,984 _________ Total current liabilities 8,470,162 NOTES PAYABLE, less current portion (Note 6) 1,336,326 OBLIGATIONS UNDER CAPITAL LEASES, less current portion (Note 7) 190,737 SHAREHOLDER NOTE PAYABLE (Note 8) 1,583,670 COMMITMENTS (Note 7) SHAREHOLDERS' EQUITY (Notes 9 and 12): Preferred stock, $100 par value; 100,000 shares authorized; 60,000 shares issued and outstanding 3,062,273 Common stock, no par value; 50,000 shares authorized; 11,726 shares issued and outstanding 2,010,000 Retained earnings 9,613,068 _________ Total shareholders' equity 14,685,341 __________ $ 26,266,236 ========== See accompanying notes to financial statements. 37 RUTLAND TOOL & SUPPLY COMPANY, INC. STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 NET SALES $ 53,586,633 COST OF GOODS SOLD 32,242,808 __________ GROSS PROFIT 21,343,825 OPERATING EXPENSES: Salaries and related expenses 8,210,240 General and administrative expenses 3,839,514 Selling expenses 2,818,147 Rent expense 1,189,839 Depreciation expense 527,408 __________ Total operating expenses 16,585,148 INCOME FROM OPERATIONS 4,758,677 OTHER INCOME (EXPENSE): Bonuses (Note 9) (3,652,742) Interest expense (Notes 6, 7 and 8) (427,306) Other income 407,310 Net other income (expense) (3,672,738) INCOME BEFORE INCOME TAX PROVISION 1,085,939 INCOME TAX PROVISION (Note 10) 446,000 _________ NET INCOME $ 639,939 ========= See accompanying notes to financial statements. 38 RUTLAND TOOL & SUPPLY COMPANY, INC. STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1995 Total Preferred stock Common stock Retained shareholders' _______________ _____________ earnings equity Shares Amount Shares Amount BALANCE, January 1, 1995 60,000 $3,062,273 10,000 $10,000 $9,018,487 $12,090,760 Stock bonus 1,726 2,000,000 2,000,000 Dividends declared (Note 9) (45,358) (45,358) Net income 639,939 639,939 ________ ________ BALANCE, December 31, 1995 60,000 $3,062,273 11,726 $2,010,000 $9,613,068 $14,685,341 ====== ========= ====== ========= ========= ========== See accompanying notes to financial statements. 39 RUTLAND TOOL & SUPPLY COMPANY, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 639,939 Adjustments to reconcile net income to net cash used in operating activities: Compensation related to stock bonus 2,000,000 Depreciation expense 527,408 Deferred income taxes 178,000 Change in operating assets and liabilities: Trade accounts receivable (681,364) Income tax refund receivable (725,799) Inventories (4,011,747) Prepaid expenses (66,819) Other assets (42,822) Accounts payable 603,617 Accrued expenses 855,424 _________ Net cash used in operating activities (724,163) CASH FLOWS FROM INVESTING ACTIVITIES - Purchase of property and equipment (868,942) CASH FLOWS FROM FINANCING ACTIVITIES: Loans to shareholder (273,764) Proceeds from line of credit loan payable 4,535,000 Proceeds from notes payable 1,000,000 Payments on line of credit loan payable (3,363,000) Payments on notes payable (282,386) Payments on capital lease obligations (185,816) Payment of common stock dividend declared in current year (42,298) Payment of common stock dividend declared in prior year (2,222) _________ Net cash provided by financing activities 1,385,514 _________ NET DECREASE IN CASH (207,591) CASH, beginning of year 293,624 _________ CASH, end of year $ 86,033 ========= SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 403,445 Income taxes paid $ 1,027,328 SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES: The Company had accrued $3,060 for common stock dividends at December 31, 1995. The Company financed the purchase of $78,256 of fixed assets through capital leases in 1995. See accompanying notes to financial statements. 40 RUTLAND TOOL & SUPPLY COMPANY, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - Rutland Tool & Supply Company, Inc. (the Company) was incorporated on May 5, 1959. The Company is engaged in the business of retail and wholesale sales of machinery, supplies and related hardware. Wholesale distributions are conducted under the dba name of Washington Wholesale Tools. The Company's main warehouse and administrative offices are located in the City of Industry, California. Warehouses and showrooms are also operated in Santa Ana, California; San Jose, California; Ontario, California; Newark, California; Canoga Park, California; Phoenix, Arizona; Houston, Texas; Cleveland, Ohio; Chicago, Illinois; and Greenville, South Carolina. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition - Revenue is recognized when merchandise is shipped to a customer. Concentration of Credit Risk - The Company sells its products primarily to retailers and consumers. Credit is extended based on an evaluation of the customer's financial condition, and collateral is generally not required. Inventories - Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Property and Equipment - Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line and declining balance methods over the estimated useful lives of the related assets, generally ranging from five to seven years. Leasehold improvements are amortized using the straight-line method over the lesser of the term of the related lease or the useful life. Income Taxes - Income taxes are recorded in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. This statement requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting basis and tax basis of the Company's assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. 41 RUTLAND TOOL & SUPPLY COMPANY, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 (Continued) Fair Value of Financial Instruments - The Company's balance sheet includes the following financial instruments: cash, trade accounts receivable, related party receivables, line of credit and accounts payable. The Company considers the carrying amounts for these financial instruments to approximate fair value due to the relatively short period of time between their origination and their expected realization. The carrying value of the Company's notes payable and capital leases is considered to approximate fair value based on the current borrowing rates offered to the Company. Based upon the current borrowing rates available to the Company for similar terms and maturities, the fair value of the shareholder note payable is approximately $1,305,000. 2. RELATED PARTY RECEIVABLES The Company has a note receivable from a shareholder of $446,611 at December 31, 1995, which is included in related party receivables. The note is an unsecured demand obligation and bears interest at the applicable federal rate for short-term obligations (5% at December 31, 1995) and is compounded semiannually. Interest on the loan is payable annually and amounted to $12,766 for the year ended December 31, 1995. 3. PROPERTY AND EQUIPMENT Property consists of the following at December 31, 1995: Computer equipment $ 1,723,355 Furniture and equipment 1,391,687 Warehouse equipment 758,412 Transportation equipment 85,377 Leasehold improvements 689,634 _________ 4,648,465 Less accumulated depreciation and amortization (2,699,747) _________ Property and equipment, net $ 1,948,718 ========= 4. LINE OF CREDIT At December 31, 1995, the Company has a $3,500,000 line of credit agreement with a bank which bears interest at the bank's reference rate (8.75% at December 31, 1995) and expires on August 1, 1996. The line is collateralized by the Company's trade receivables, inventories and equipment. Borrowings under the line of credit were $2,827,000 at December 31, 1995. The Company was in compliance with these covenants as of December 31, 1995. 42 RUTLAND TOOL & SUPPLY COMPANY, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 (Continued) 5. ACCRUED EXPENSES Accrued expenses consist of the following at December 31, 1995: Accrued compensation and related expense $ 979,713 Accrued catalog expense 580,541 Accrued retirement plan contributions 75,000 Insurance contract and premiums payable 176,360 Sales tax payable 158,931 Interest payable 63,170 Other liabilities 21,536 _________ $ 2,055,251 ========= 6. NOTES PAYABLE Notes payable consists of the following at December 31, 1995: Note payable to a bank, bearing interest at the bank's reference rate (8.75% at December 31, 1995), collateralized by trade receivables, inventories and equipment; principal installments of $16,667 plus interest, due monthly through November 1999 $ 783,333 Note payable to a bank, bearing interest at the bank's reference rate (8.75% at December 31, 1995), collateralized by trade receivables, inventories and equipment; principal installments of $16,667 plus interest, due monthly through September 2000 949,999 Note payable, bearing interest at 6.75% per annum, principal installments of $3,010 plus interest, due monthly through January 1997 37,634 _________ 1,770,966 Less current portion of notes payable (434,640) _________ $ 1,336,326 ========= 43 RUTLAND TOOL & SUPPLY COMPANY, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 (Continued) Notes payable at December 31, 1995, matures as follows: Year ending: 1996 $ 434,640 1997 402,993 1998 400,000 1999 383,334 2000 149,999 _________ $ 1,770,966 ========= Interest expense related to notes payable was $114,092 for the year ended December 31, 1995. 7. COMMITMENTS Leases - The Company leases certain facilities and office equipment under noncancelable operating leases for a monthly rental of approximately $26,500. The Company also leases four buildings under noncancelable operating leases from a related party for an approximate monthly rental of $44,600. In addition, the Company leases certain equipment under capital lease agreements. Rent expense was approximately $853,000 for the year ended December 31, 1995, of which $534,700 was paid to the related party. A summary of lease commitments as of December 31, 1995 is as follows: Capital Operating lease leases Year ending December 31: 1996 $ 235,846 $ 1,183,125 1997 156,310 1,192,860 1998 20,209 1,064,875 1999 20,210 525,506 2000 9,555 496,385 Thereafter 4,007,748 Total future minimum lease payments 442,130 $ 8,470,499 ========= Less amounts representing interest (40,409) _______ Present value of future minimum lease payments 401,721 Less current portion (210,984) _______ Capital lease obligation, net of current portion $ 190,737 ======= 44 RUTLAND TOOL & SUPPLY COMPANY, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 (Continued) Assets financed under capital leases included in the accompanying balance sheet as of December 31, 1995 are as follows: Machinery and equipment $ 729,417 Less accumulated depreciation (330,716) _______ $ 398,701 ======= Letters of Credit - The Company has an agreement with its bank to facilitate the purchase of goods by issuing letters of credit to various companies overseas. The letters of credit are collateralized by inventories. At December 31, 1995, the Company had outstanding letters of credit of approximately $379,000. 8. SHAREHOLDER NOTE PAYABLE On September 30, 1993, the Company purchased 100% of the outstanding common stock in Lorake, Inc. from a related party for $1,683,670. The Company paid $100,000 in cash and issued two unsecured notes payable totaling $1,583,670. The notes provide for quarterly interest-only payments of 5% per annum. Interest expense amounted to $79,184 for the year ended December 31, 1995. The principal balance for both notes is due and payable on September 30, 2003. 9. SHAREHOLDERS' EQUITY The Company has a phantom stock plan (the Phantom Plan) enabling, at the discretion of the Board of Directors, the granting of stock units to certain employees of the Company. The stock units are directly related to the book value of the Company and vest upon the sale of all of the outstanding common and preferred stock, assets of the Company or a merger of the Company. In November 1995, the Board of Directors canceled the Phantom Plan and approved a stock bonus under which holders of stock units under the Phantom Plan, and certain other employees of the Company, were issued 1,726 shares of common stock. Compensation expense of $2,000,000 was recorded at the date of issuance based on the market value of the shares. In connection with this stock bonus, the Company paid an additional $1,652,742 cash bonus. The aggregate bonus of $3,652,742 is shown as a separate component within the statement of income. On November 30, 1995, the Board of Directors declared a cash dividend of $4.44 per share to individuals holding shares for the entire period of January 1, 1995 through December 18, 1995. Additionally, individuals who became shareholders of the Company between October 1, 1995 and November 20, 1995 received a cash dividend of $0.555 per share. 45 RUTLAND TOOL & SUPPLY COMPANY, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 (Continued) 10. INCOME TAXES The provision for income taxes consists of the following at December 31, 1995: Current: Federal $ 184,000 State 84,000 _______ 268,000 Deferred federal and state 178,000 _______ Income tax provision $ 446,000 ======= A reconciliation of the income tax provision compared to the federal statutory rate of 35% for the year ended December 31, 1995 is as follows: Income taxes at statutory rate $ 380,000 State income taxes, net of federal benefit 68,400 Other (2,400) _______ Income tax provision $ 446,000 ======= Temporary differences which give rise to deferred tax assets and liabilities at December 31, 1995 are as follows: Deferred tax liabilities: Accelerated depreciation $ (11,500) Other (13,800) Deferred tax assets: Inventories 537,300 State taxes 42,800 Other 42,200 _______ $ 597,000 ======= 46 RUTLAND TOOL & SUPPLY COMPANY, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 (Continued) 11. PROFIT SHARING PLAN The Company has a defined contribution retirement plan to which the Company may elect to make contributions at its discretion. The plan also provides for the deferral of up to 15% of an employee's qualifying compensation under Section 401(k) of the Internal Revenue Code. For the year ended December 31, 1995, Company contributions to the retirement and 401(k) plans were $75,000 and $95,631, respectively. 12. SUBSEQUENT EVENT In May 1996, the Company converted the 60,000 shares of its preferred stock in exchange for shares of its common stock. As a result, 1,636 shares of common stock were issued in exchange for the preferred stock.