EXHIBIT 99.2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cypress Industries, Inc.
Schaumburg, Illinois
We have audited the accompanying balance sheet of Cypress Industries, Inc.
as of December 31, 1997 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Cypress Industries, Inc. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 12, 1998
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CYPRESS INDUSTRIES, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Current assets
Cash............................... $ 24,803
Accounts receivable, less allowance
for doubtful accounts of
$165,000........................ 3,198,719
Accounts receivable -- other....... 39,159
Inventories........................ 348,930
Costs in excess of billings on
uncompleted contracts........... 216,499
------------
Total current assets....... 3,828,110
Property and equipment, net (Note
2)................................... 3,602,181
Other assets
Deposits........................... 10,779
Organizational costs, less
accumulated amortization of
$107,661........................ 272,339
------------
283,118
------------
$ 7,713,409
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit (Note 3)............ $ 1,800,000
Checks written in excess of bank
balance......................... 88,821
Current portion of long-term debt
(Note 4)........................ 640,029
Accounts payable................... 413,796
Accrued expenses................... 683,659
------------
Total current
liabilities.................. 3,626,305
Long-term debt, less current
maturities (Note 4).................. 2,136,823
Shareholders' equity
Common stock -- no par value; 300
shares authorized; 200 shares
issued and outstanding.......... 1,500,000
Retained earnings.................. 450,281
------------
Total shareholders'
equity....................... 1,950,281
------------
$ 7,713,409
============
See accompanying notes to financial statements.
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CYPRESS INDUSTRIES, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
Revenues................................ $ 20,061,164
Cost of services........................ 14,790,576
--------------
GROSS PROFIT............................ 5,270,588
General and administrative expenses..... 4,439,881
--------------
INCOME FROM OPERATIONS.................. 830,707
Other income (expense)
Gain on sale of fixed assets.......... 5,953
Interest expense...................... (477,332)
Interest income....................... 2,728
--------------
(468,651)
--------------
INCOME BEFORE PROVISION FOR STATE
REPLACEMENT TAXES..................... 362,056
Provision for state replacement taxes... 15,000
--------------
Net income.............................. $ 347,056
==============
See accompanying notes to financial statements.
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CYPRESS INDUSTRIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
---------- --------- -------------
Balance, December 31, 1996........... $1,500,000 $ 266,225 $1,766,225
Distributions to shareholders........ -- (163,000) (163,000)
Net income........................... -- 347,056 347,056
---------- --------- -------------
Balance, December 31, 1997........... $1,500,000 $ 450,281 $1,950,281
========== ========= =============
See accompanying notes to financial statements.
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CYPRESS INDUSTRIES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
Cash flows from operating activities
Net income......................... $ 347,056
Adjustments to reconcile net income
to net cash from operating
activities
Depreciation and amortization... 754,126
Provision for bad debts......... 43,000
Gain on sale of fixed assets.... (5,953)
Net changes in assets and
liabilities
Receivables................... 900,445
Inventories and jobs in
progress....................... (111,513)
Checks written in excess of
bank balance................. (72,627)
Accounts payable.............. (205,671)
Accrued expenses.............. (472,454)
--------------
Net cash from operating
activities................ 1,176,409
Cash flows from investing activities
Capital expenditures............... (161,540)
Proceeds on sale of fixed assets... 13,077
--------------
Net cash from investing
activities................ (148,463)
Cash flows from financing activities
Net payments on lines of credit.... (300,000)
Principal payments on long-term
debt............................... (584,811)
Distributions to shareholders...... (163,000)
--------------
Net cash from financing
activities................ (1,047,811)
--------------
Net change in cash................... (19,865)
Cash, beginning of year.............. 44,668
--------------
Cash, end of year.................... $ 24,803
==============
Supplemental disclosures of cash flow
information
Cash paid during the year for
interest........................ $ 489,958
See accompanying notes to financial statements.
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CYPRESS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION: The financial statements of Cypress Industries,
Inc. (the Company) include the divisions of Continental Field Machinery Co.,
Inc. (CFM); New PME, Inc. (PME); and VR-TESCO, Inc. (VR-TESCO) (the Companies).
The nature and summary of the significant accounting policies followed by the
Company are as follows:
NATURE OF OPERATIONS: CFM, located in Schaumburg, Illinois and Atlanta,
Georgia, provides on-site machining for utility, steel mill, and other heavy
industry companies primarily located in the United States. The location in
Atlanta was closed during 1997. PME, which is located in Atlanta, Georgia and
Cincinnati, Ohio, repairs babbitt bearings for utility, steel mill, electric
motor, marine, and other heavy industry companies located primarily in the
eastern half of the United States. VR-TESCO, which is located in Schaumburg,
Illinois, provides valve repair and specialty welding services for utility,
petro chemical, steel, and other heavy industry companies which are primarily
located in the continental United States.
BASIS OF ACCOUNTING: Income from contracts in which the price is firm is
recognized on the completed contract method. This method is used because the
typical firm contract is completed in two months or less and the financial
position and results of operations do not vary significantly from those which
would result from using the percentage-of-completion method. A contract is
considered complete when all costs except insignificant items have been incurred
and the installation is operating according to specifications or has been
accepted by the customer. Income from contracts in which the price is based on
time and materials is recognized on the percentage-of-completion method. Under
this method, revenues are recognized based on contract valuation rates assigned
to the costs incurred. The rates vary depending on the type of cost, such as
labor and materials. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Cost of services
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs, and
depreciation costs. Selling, general, and administrative costs are charged to
expense as incurred.
ACCOUNTS RECEIVABLE: Accounts receivable consists primarily of amounts due
on completed contracts.
INVENTORY: The inventory is valued at the lower of cost (determined on a
first-in, first-out method) or market. CFM inventory consists of carbide steel,
cast iron, carbon, and other machine repair materials and supplies. VR-TESCO
inventory consists of safety valve test systems and other valve testing
materials. PME inventory consists of babbitt tin chips and other babbitt
remanufacturing materials.
CONCENTRATION OF CREDIT RISK: For the year ended December 31, 1997, 28% of
the Company's sales were to one customer. At December 31, 1997, 22% of the
Company's accounts receivable were from one customer.
PROPERTY AND EQUIPMENT: Property and equipment (including major renewals
and betterments) are capitalized in the accounts and valued at cost.
Depreciation is computed using both straight-line and accelerated methods over
the estimated useful life of the asset. Leasehold improvements are amortized
over the remaining life of the lease. Depreciation methods are the same for both
financial reporting and income tax purposes.
ORGANIZATIONAL COSTS: Costs incurred in connection with the organization
of the Company are being amortized over a period of sixty months. Amortization
for the year ended December 31, 1997 totaled $75,996.
INCOME TAXES: The Company has elected to be taxed as an S corporation for
federal income tax purposes. Under the small business provisions of the Internal
Revenue Code, the Company's net income is reflected in the shareholders'
individual income tax returns. Consequently, no provision for federal income
taxes has been made.
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CYPRESS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (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 reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at December 31, 1997:
Machinery and equipment.............. $ 4,211,109
Transportation equipment............. 17,788
Furniture and fixtures............... 118,003
Leasehold improvements............... 120,110
Computer equipment and software...... 61,283
------------
4,528,293
Accumulated depreciation............. 926,112
------------
$ 3,602,181
============
NOTE 3 -- REVOLVING LINE OF CREDIT
The Company has a bank line of credit, which expires May 1, 1998, providing
for maximum borrowings of $4,000,000 secured by accounts receivable,
inventories, and machinery and equipment. Borrowings under the line were
$1,800,000 at December 31, 1997. The notes bear interest at the bank's prime
rate which was 8.5% at December 31, 1997. Borrowings under the line have been
guaranteed by the Company's shareholders.
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists of a 9% term note, payable in quarterly
installments of $217,962 including interest, with a final payment due August 1,
2001. This note is secured by accounts receivable, inventory, and machinery and
equipment as described in the loan and security agreement dated August 1, 1996.
Borrowings under this agreement have been guaranteed by the Company's
shareholders.
Long-term debt payments for the years subsequent to December 31, 1997 are
as follows:
1998................................. $ 640,029
1999................................. 700,461
2000................................. 766,271
2001................................. 670,091
------------
$ 2,776,852
============
The loan agreement contains certain covenants, including provisions setting
forth requirements that the Company maintain tangible net worth plus
subordinated debt of not less than $750,000, an unsubordinated debt to tangible
net worth ratio of not greater than 10 to 1, after-tax net income of not less
than $100,000, a debt coverage ratio of not less than 1.25 to 1, and capital
expenditures of not greater than $1,000,000. At December 31, 1997, the Company
was in compliance with these covenants.
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CYPRESS INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LEASE OBLIGATIONS
At December 31, 1997, the Company was obligated under various operating
leases for office space, shop facilities, and certain equipment which expire on
various dates through 2004. Future minimum lease payments for all leases as of
December 31, 1997 are as follows:
YEAR ENDING
DECEMBER 31,
- -------------------------------------
1998................................. $ 382,585
1999................................. 324,773
2000................................. 258,268
2001................................. 46,720
2002................................. 48,160
Thereafter........................... 85,120
------------
Total minimum lease payments.... $ 1,145,626
============
The Company also leases equipment used on a job-by-job basis. Rent expense,
including short-term equipment leases, for the year ended December 31, 1997 was
$638,343.
NOTE 6 -- 401(K) PLAN
The Company sponsors a 401(k) plan in which all full-time employees are
eligible to participate. Employees may make a voluntary contribution to the plan
as limited by current IRS regulations. The Company contributes 25% of the
employee's contribution up to the first $3,000 contributed for a maximum company
matching of $750 per participant. The Company's contribution for the year ended
December 31, 1997 was $47,395.
NOTE 7 -- WORKERS' COMPENSATION INSURANCE
The Company funds workers' compensation insurance for employee claims
through the use of a third-party administrator who provides aggregate stop loss
coverage. However, the Company is responsible for paying workers' compensation
claims subject to certain maximum aggregate policy limits per claim year.
Provision for losses expected under this program is recorded based upon the
Company's estimates of the aggregate liability for claims incurred. This amount
could vary significantly depending on the actual amount of claim settlements.
NOTE 8 -- COMMITMENTS
The Company has a non-compete/consulting agreement with the former
principal stockholder and chief executive officer of Continental Field Machining
Co., Inc., New PME, Inc., and VR-TESCO, Inc. The agreement provides for monthly
payments of $10,000 through July 31, 2006.
Additionally, the Company is to provide medical and dental coverage to this
individual through July 31, 2006. In consideration, this individual will provide
assistance to the Company through July 31, 2001 with respect to large projects
and to projects wherein his technical expertise or his relationship with
customers will be particularly beneficial to the Company. Additionally, this
individual commits not to directly compete with the Company through July 31,
2006.
NOTE 9 -- SUBSEQUENT EVENT
Subsequent to December 31, 1997, the Company's shareholders began
negotiating the sale of the Company's stock, or all of its net operating assets,
with a third party.
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