UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 8-K/A
Amendment No. 2
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Event: January 24, 1997
HIREL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Commission File Number: 0-28524
DELAWARE 65-0666239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 SW 16th Terrace
Pompano Beach, Florida 33069
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (954) 942-5390
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
This is the second amendment designated as "Form 8-K/A" ("Amendment No.
2"), to the report on Form 8-K of Hirel Holdings, Inc. ("Company"), dated
January 24, 1997, and originally filed with the Securities and Exchange
Commission on or about February 6, 1997. This Amendment contains the financial
statements and information required by Item 7 of Form 8-K.
(a) Financial Statements
Attached are the financial statements of Marine Power, Inc. as of and
for the periods listed in the accompanying index.
(b) Pro Forma Financial Information
Attached are the unaudited pro forma condensed combined financial
statements of the Company, which give effect to the acquisition as of and for
the periods listed in the accompanying index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
HIREL HOLDINGS, INC.
DATED: April 3, 1997 By
William H. Aden, Duly Authorized and Chief
Financial Officer
2
INDEX TO FINANCIAL STATEMENTS
--------------------------------------------------------------------
Hirel Holdings, Inc. Pro Forma Condensed Combined Financial Statements
[Unaudited]:
Basis of Presentation....................................... P-1
Pro Forma Condensed Combined Balance Sheet as of September 30,
1996 [Unaudited]............................................ P-2
Pro Forma Condensed Combined Statement of Operation for the nine
months ended September 30, 1996 [Unaudited]................. P-3
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1995 [Unaudited].................... P-4
Notes to Pro Forma Condensed Combined Financial Statements
[Unaudited]................................................. P-5
Financial Statements of Marine Power, Inc.:
Report of Independent Auditors.............................. F-1
Balance Sheets as of June 30, 1996 and 1995................. F-2 - F-3
Statements of Operations and Accumulated Deficit for the years ended
June 30, 1996 and 1995...................................... F-4
Statements of Cash Flows for the years ended June 30, 1996 andF-595
Notes to Financial Statements............................... F-6 - F-11
Balance Sheet as of September 30, 1996 [Unaudited].......... F-12 - F-13
Statements of Operations and Accumulated Deficit for the three months
ended September 30, 1996 and 1995 [Unaudited]............... F-14
Statements of Cash Flows for the three months ended September 30,
1996 and 1995 [Unaudited]................................... F-15
Notes to Financial Statements............................... F-16
. . . . . . . . . . .
3
HIREL HOLDINGS, INC.
- --------------------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
[UNAUDITED]
- -------------------------------------------------------------------------------
The following pro forma condensed combined balance sheet as of
September 30, 1996 and the condensed combined statements of operations for the
nine months ended September 30, 1996 and the year ended December 31, 1995, give
effect to Hirel Holdings, Inc. and subsidiaries ["HHI" or the "Company"]
acquiring through its Hirel Technologies, Inc. subsidiary, substantially all of
the operating assets of Marine Power, Inc. ["MPI"] for 390,000 shares of common
stock of HHI..
The pro forma information is based on the historical financial
statements of the Company and the aforementioned acquired company, giving effect
to the transactions under the purchase method of accounting and the assumptions
and adjustments in the accompanying notes to the pro forma financial statements.
The pro forma balance sheet at September 30, 1996 gives effect to
the transaction as if it occurred on the balance sheet date.
The pro forma statements of operations for the nine months ended
September 30, 1996 and for the year ended December 31, 1995, gives effect to
these transactions as if they occurred at the beginning of the respective
periods presented.
The pro forma condensed combined financial statements have been
prepared by the Company 's management based upon the historical financial
statements of the Company and MPI. These pro forma condensed combined financial
statements may not be indicative of the results that actually would have
occurred if the acquisitions had been in effect on the dates indicated. The pro
forma condensed combined financial statements should be read in conjunction with
the historical financial statements and notes contained elsewhere herein, and in
the Company's registration statement on Form SB-2 and the Company's quarterly
reports on Form 10QSB.
P-1
HIREL HOLDINGS, INC.
- -------------------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1996.
[UNAUDITED]
- -------------------------------------------------------------------------------
Historicals
Hirel Marine Pro Forma Pro Forma
Holdings, Inc.Power, Inc. Adjustments Combined
Assets:
Current Assets:
Cash $4,084,442 $ 62,736 $ -- $ 4,147,178
Accounts Receivable [Net] 747,380 1,289,726 -- 2,037,106
Inventory 1,343,993 2,633,118 -- 3,977,111
Other Current Assets 672,485 472,481 (139,753)[1] 1,005,213
---------- --------- ---------- -----------
Total Current Assets 6,848,300 4,458,061 (139,753) 11,166,608
Property and Equipment [Net] 768,900 487,602 -- 1,256,502
Intangibles -- -- 1,950,000[3] 2,088,299
138,299[2]
Other Assets 510,330 270,004 (123,131)[1] 657,203
---------- --------- ---------- -----------
Total Assets $8,127,530 $5,215,667$1,825,415 $15,168,612
========== ==================== ===========
Liabilities and Equity:
Liabilities:
Line of Credit $1,540,221 $ 634,650 $ -- $ 2,174,871
Current Portion of Debt -- 107,609 -- 107,609
Accounts Payable 619,251 2,478,674 -- 3,097,925
Other Current Liabilities 204,123 431,310 -- 635,433
---------- --------- ---------- -----------
Total Current Liabilities 2,363,595 3,652,243 -- 6,015,838
---------- --------- ---------- -----------
Long-Term Liabilities 13,111 1,438,839 -- 1,451,950
---------- --------- ---------- -----------
Equity:
Preferred Stocks -- 1,494,360 (1,494,360)[2] --
Common Stock 4,814 831,769 (831,769)[2] 5,204
390[3]
Additional Paid-in Capital 5,963,674 -- 1,949,610[3] 7,913,284
Retained Earnings [Deficit] (217,664) (2,201,544) (262,884)[1] (217,664)
2,464,428[2]
Total Equity 5,750,824 124,585 1,825,415 7,700,824
---------- --------- ---------- -----------
Total Liabilities and Equity $8,127,530 $5,215,667 $1,825,415 $15,168,612
========== ========== ========== ===========
P-2
HIREL HOLDINGS, INC.
- ------------------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996.
[UNAUDITED]
--------------------------------------------------------------------
Historicals
Hirel Marine Pro Forma Adjustments Pro Forma
Holdings, Inc.Power, Inc. DR CR Combined
Net Sales $19,368,243 $11,039,147 $1,494,805[4]$ -- $28,912,585
Cost of Sales 18,046,938 10,852,047 -- 1,361,069[4] 27,537,916
---------- ---------- --------- --------- -----------
Gross Profit 1,321,305 187,100 1,494,805 1,361,069 1,374,669
Operating Expenses 1,592,670 1,021,211 104,415[6] 109,045[4] 2,621,251
12,000[7]
Interest and Other
Expenses 68,602 244,626 -- 72,973[4] 240,255
---------- --------- --------- --------- -----------
[Loss] Income Before
Income Taxes (339,967) (1,078,737)1,611,220 1,543,087 (1,486,837)
Provision for Income Taxes -- 59,286 -- -- 59,286
-------- --------- --------- --------- -----------
Net [Loss] $ (339,967) $(1,019,451$1,611,220 $1,543,087 $(1,427,551)
========== ===================== ========== ===========
Net [Loss] Per Share $ (.08) $ (.32)
========== ===========
Weighted Average Shares
Outstanding 4,021,761 4,411,761
========== ===========
P-3
HIREL HOLDINGS, INC.
-------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE YEAR ENDED
DECEMBER 31, 1995.
[UNAUDITED]
- -------------------------------------------------------------------------------
Historicals
Hirel [A] Marine Pro Forma AdjustmentsPro Forma
Holdings, Inc.Power, Inc. DR CR Combined
Net Sales $22,453,195 $11,441,016$ -- $ 23,143[5]$33,917,354
Cost of Sales 21,272,514 10,408,241 139,692[5] -- 31,820,447
---------- ---------- --------- --------- -----------
Gross Profit 1,180,681 1,032,775 139,692 23,143 2,096,907
Operating Expense 2,344,779 792,300 76,883[5] -- 3,369,182
139,220[6]
16,000[7]
Interest and Other
Expenses 442,902 107,511 66,177[4] -- 616,590
---------- --------- --------- --------- -----------
[Loss] Income Before
Income Taxes (1,607,000) 132,964 437,972 23,143 (1,888,865)
Provision for Income Taxes -- 59,286 -- 59,286[8] --
-------- --------- --------- --------- -----------
Net [Loss] Income $(1,607,000)$ 73,678 $ 437,972 $ 82,429 $(1,888,865)
=========== ========= ========= ========= ===========
Net [Loss] Per Share $ (.43) $ (.46)
========== ===========
Weighted Average Shares
Outstanding 3,750,000 4,140,000
========== ===========
[A] Results are those presented on a pro forma combined basis as included in
the Company's Registration Statement on Form SB-2 as filed on or about July
22, 1996 except that weighted average shares outstanding excludes the
925,000 shares issued in connection with the Company's initial public
offering.
P-4
HIREL HOLDINGS, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
[UNAUDITED]
-------------------------------------------------------------------
[1] To adjust balance sheet for assets not acquired.
[2] To eliminate equity accounts of acquired enterprise.
[3] To record issuance of 390,000 shares with a fair value of $1,950,000 in
exchange for substantially all of the assets and liabilities of MPI which
gives rise to goodwill of $2,088,299 calculated as follows:
Purchase Price $1,950,000
Add: Liabilities in Excess of Assets Acquired138,299
Goodwill $2,088,299
[4] To adjust year ended June 30, 1996 to nine months ended September 30, 1996
by subtracting from June 30, 1996 the six months ended December 31, 1995
and adding the three months ended September 30, 1996.
[5] To adjust year ended June 30, 1995 to the year ended December 31,1995 by
subtracting from June 30, 1995 the six months ended December 31, 1994 and
adding the six months ended December 31, 1995.
[6] To record amortization of goodwill over 15 years utilizing the
straight-line method. Calculated as
follows:
Goodwill $2,088,299
Life 15
Annual Amortization $ 139,220
------------------- ==========
[7] To adjust salary expense from actual to that called for in the officers
employment contract.
[8] To adjust actual taxes to amount which would have been payable on a combined
basis.
. . . . . . . . . . . . . . .
P-5
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Marine Power, Inc.
Ponchatoula, Louisiana
We have audited the accompanying balance sheet of Marine Power, Inc.
(the "Company") as of June 30, 1996, and the related statements of operations
and accumulated deficit, 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. The Company's financial statements as of June 30, 1995, were audited
by other auditors whose report dated September 21, 1995, expressed an
unqualified opinion on those statements. As discussed in Note 10, the Company
has restated its 1996 and 1995 financial statements to correct certain errors
which resulted in the understatement of previously reported warranty
obligations, in conformity with generally accepted accounting principles. The
other auditors reported on the 1995 financial statements before the restatement.
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 1996 financial statements referred to above
present fairly, in all material respects, the financial position of Marine
Power, Inc. as of June 30, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
As discussed in Note 10 to the financial statements, certain errors
resulting in understatement of previously reported warranty obligations as of
June 30, 1996 and 1995, were discovered by management of the Company during
fiscal 1997. Accordingly, the 1996 and 1995 financial statements have been
restated to correct the error.
Legier & Materne
New Orleans, Louisiana
September 12, 1996, except for Note 10, as to
which the date is March 27, 1997
F-1
MARINE POWER, INC.
- ------------------------------------------------------------------------------
BALANCE SHEETS
- ------------------------------------------------------------------------------
June 30,
1 9 9 6 1 9 9 5
Assets:
Current Assets:
Cash $ 24,909 136,388
Accounts Receivable:
Trade (Net of $30,000 Allowance in 1996) 1,204,892 1,154,627
Affiliate 291,612 253,050
Employees 86,934 82,299
Other 37,088 107,332
Inventories 2,236,239 2,692,884
Current Portion of Note Receivable - Affiliate 32,377 40,054
Prepaid Expenses 94,098 68,572
Deferred Income Tax Asset - Net -- 35,474
----------- -----------
Total Current Assets 4,008,149 4,570,680
Plant and Equipment - Net 501,820 587,041
Note Receivable - Affiliate 148,864 181,241
Deferred Charges 128,468 155,462
Other Assets 15,210 80,004
----------- -----------
Total Assets $ 4,802,511 $ 5,574,428
=========== ===========
See Notes to Financial Statements.
F-2
MARINE POWER, INC.
- ------------------------------------------------------------------------------
BALANCE SHEETS
- ------------------------------------------------------------------------------
June 30,
1 9 9 6 1 9 9 5
Liabilities and Equity:
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 1,945,685 $ 1,588,113
Outstanding Borrowings under Line of Credit 638,800 512,819
Accrued Warranty Obligations 200,000 200,000
Current Portion of Notes Payable 94,165 140,669
Current Portion of Obligations under Capital Lease 36,383 38,145
Other Liabilities 13,617 51,630
Taxes Payable 19,920 94,760
----------- -----------
Total Current Liabilities 2,948,570 2,626,136
Long-Term Debt:
Notes Payable 1,386,569 1,449,505
Obligations under Capital Lease 23,066 35,030
----------- -----------
Total Long-Term Debt 1,409,635 1,484,535
----------- -----------
Total liabilities 4,358,205 4,110,671
----------- -----------
Equity:
Redeemable Capital Stock:
Class C Common Stock 425,000 300,000
Series B Redeemable Preferred Stock 1,313,600 1,313,600
Accrued Dividends Payable on Redeemable Preferred Stock 155,760 50,000
----------- -----------
Total Redeemable Capital Stock 1,894,360 1,663,600
Class A Common Stock 75,519 75,519
Class B Common Stock 300,000 300,000
Accumulated Deficit (1,825,573) (575,362)
----------- -----------
Total Equity 444,306 1,463,757
----------- -----------
Total Liabilities and Equity $ 4,802,511 $ 5,574,428
=========== ===========
See Notes to Financial Statements.
F-3
MARINE POWER, INC.
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
- ------------------------------------------------------------------------------
Years ended
June 30,
1 9 9 6 1 9 9 5
------- -------
Net Sales $11,039,147 $11,441,016
----------- -----------
Cost of Goods Sold 10,363,422 10,408,241
Inventory Adjustment 488,625 --
----------- -----------
Total Cost of Goods Sold 10,852,047 10,408,241
----------- -----------
Gross Profit 187,100 1,032,775
----------- -----------
Selling, General and Administrative Expenses 1,021,211 792,300
----------- -----------
Other Expenses:
Interest Expense 255,756 137,278
Other (Income) Expense, Net (11,130) (29,767)
----------- -----------
Total Other Expense 244,626 107,511
----------- -----------
Income (Loss) Before Income Taxes (1,078,737) 132,964
Provision for Income Taxes (59,286) 59,286
----------- -----------
Net Income (Loss) (1,019,451) 73,678
Dividends Payable on Series B Mandatorily
Redeemable Preferred Stock (105,760) (50,000)
Accreted Value of Class C Common Stock (125,000) (300,000)
Accumulated Deficit, Beginning of Periods (575,362) (299,040)
----------- -----------
Accumulated Deficit, End of Periods $(1,825,573)$ (575,362)
=========== ===========
See Notes to Financial Statements.
F-4
MARINE POWER, INC.
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Years ended
June 30,
1 9 9 6 1 9 9 5
------- -------
Operating Activities:
Net (Loss) Income $(1,019,451)$ 73,678
Adjustments to Reconcile Net Income to Net Cash Used by
Operating Activities:
Depreciation and Amortization 204,247 170,809
Loss on Sale of Fixed Asset -- 2,852
Provision (Benefit) for Deferred Taxes 35,474 (35,474)
Changes in Assets and Liabilities:
(Increase) Decrease in Assets:
Increase in Accounts Receivable (105,517) (417,876)
Decrease (Increase) in Inventories 456,645 (191,290)
Decrease (Increase) in Deferred Charges 26,994 (155,462)
Decrease in Prepaid Expenses and Other Assets 39,268 148,554
Increase (Decrease) in Liabilities:
Increase (Decrease) in Accounts Payable and Accrued Expenses 357,572 (899,471)
Increase (Decrease) in Other Liabilities (38,013) 29,475
Decrease in Income Taxes Payable (74,840) 94,760
Net Cash - Operating Activities (117,621) (1,179,445)
----------- -----------
Investing Activities:
Capital Expenditures, Net (96,619) (88,994)
Repayments on Notes Receivable 122,353 34,852
----------- -----------
Net Cash - Investing Activities 25,734 (54,142)
----------- -----------
Financing Activities:
Proceeds from Issuance of Term Loan -- 1,508,500
Proceeds from Issuance of Preferred Stock -- 600,000
Principal Payments on Notes Payable (109,440) (1,242,291)
Principal Payments on Capital Lease Obligations (36,133) (16,070)
Increase in Borrowings under Revolving Loan 125,981 512,819
----------- -----------
Net Cash - Financing Activities (19,592) 1,362,958
----------- -----------
Net (Decrease) Increase in Cash (111,479) 129,371
Cash, Beginning of Periods 136,388 7,017
----------- -----------
Cash, End of Periods $ 24,909 $ 136,388
=========== ===========
See Notes to Financial Statements.
F-5
MARINE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
Marine Power, Inc. (the "Company") assembles and sells marine engines and
related parts to recreational boat distributors and manufacturers primarily
throughout the United States. The following is a description of the more
significant accounting policies which the Company follows in presenting its
financial statements.
Basis of Accounting - The books and records of the Company are kept on the
accrual basis of accounting, whereby revenues are recognized when earned and
expenses are recognized when incurred.
Accounts Receivable - The Company provides an allowance for doubtful accounts
based on a review of specific past-due accounts and past loss experience. The
allowance for doubtful accounts was $30,000 at June 30, 1996. The provision for
bad debts was $100,578 for fiscal 1996. The provision for bad debts in fiscal
1996 was primarily attributable to the write-off of a $69,573 note receivable
from a customer.
Inventories - Inventories are valued at the lower of cost or market using the
weighted average cost method.
Plant and Equipment - Plant and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. Assets recorded under capital leases are amortized using the
straight-line method over their useful lives or the term of the related leases,
whichever is less. The estimated useful lives used in computing depreciation and
amortization expenses are as follows:
Leasehold improvements 3 - 15 years
Furniture and fixtures 5 - 7 years
Machinery and equipment 3 - 5 years
Research and Development Costs - Research and development costs are expensed as
incurred. Such costs of $20,842 and $41,260 for the years ended June 30, 1996
and 1995, respectively, are included in selling, general and administrative
expenses in the accompanying financial statements.
Income Taxes - The Company recognizes the amount of taxes payable or refundable
for the current year, and recognizes deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns.
Deferred Charges - Deferred charges represent costs of acquiring long-term debt.
Such costs are amortized using the straight-line method over the term of the
related debt (Note 4).
Inventory Adjustment - During fiscal 1996, the Company experienced certain
difficulties with its inventory accounting system. These difficulties included
miscomputations of average cost and problems with the standard costing models
used in relieving inventory upon sale of assembled engines. The inventory
adjustment amount included in total cost of goods sold in the accompanying
fiscal 1996 statement of operations was the amount necessary to reconcile
inventory at June 30, 1996 to the physical inventory detail.
Management intends to take several measures during fiscal 1997 to address these
issues, including a detail review of its inventory system and monthly physical
inventories. It is possible that some or all of the inventory adjustment
recorded in fiscal 1996 might be recaptured during fiscal 1997 as a result of
these measures, but the ultimate outcome of this matter is uncertain at this
time.
F-6
MARINE POWER, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
Statement of Cash Flows - The Company considers all short-term investments with
an original maturity of three months or less to be cash equivalents. The Company
paid interest of $254,931 and $184,796 for the fiscal years ended June 30, 1996
and 1995, respectively.
During fiscal year 1995, note payable and accrued interest totaling $475,000 and
Series A Preferred Stock and accrued dividends totaling $239,000 were repaid and
redeemed through the issuance of Series B Preferred Stock. ( See Note 5)
During fiscal year 1996, a capital lease obligation of $22,407 was incurred for
the purchase of machinery and equipment.
Reclassifications - Certain reclassifications have been made to the fiscal 1995
financial statements to conform to the current year's presentation.
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 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. The Company's significant estimates include those regarding the
collectibility of accounts receivable and the related allowance for doubtful
accounts.
[2] Inventories
Inventories consisted of the following at June 30, 1996 and 1995:
1 9 9 6 1 9 9 5
------- -------
Materials and Supplies $ 2,098,891 $ 2,416,667
Finished Goods 106,088 214,693
Work-in-Progress 31,260 61,524
----------- -----------
Totals $ 2,236,239 $ 2,692,884
------ =========== ===========
[3] Plant and Equipment
Plant and equipment consisted of the following at June 30, 1996 and 1995:
1 9 9 6 1 9 9 5
------- -------
Machinery and Equipment $ 1,250,614 $ 1,194,454
Leasehold Improvements 75,677 65,337
Furniture and Fixtures 63,480 10,954
----------- -----------
Totals 1,389,771 1,270,745
Less: Accumulated depreciation and amortization(887,951) (683,704)
Totals $ 501,820 $ 587,041
------ =========== ===========
F-7
MARINE POWER, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[3] Plant and Equipment [Continued]
Machinery and equipment includes assets under capital lease totaling $154,237
and $126,571 as of June 30, 1996 and 1995, respectively. Accumulated
amortization related to these assets was $71,629 and $45,672 at June 30, 1996
and 1995, respectively. The Company also leases other equipment and property
under operating leases. Rental expense for operating leases totaled $48,526 and
$54,422 for the years ended June 30, 1996 and 1995, respectively.
Minimum annual rentals for fiscal years subsequent to June 30, 1996 are as
follows:
Capital LeasesOperating Leases
1997 $ 35,882 $ 48,000
1998 14,055 48,000
1999 5,189 48,000
2000 4,481 48,000
2001 373 48,000
Thereafter -- 312,000
----------- -----------
Total Minimum Lease Payments $ 59,980
Less: Amount Representing Interest 531
-----------
Present Value of Net Minimum Lease Payments
Under Capital Lease $ 59,449
[4] Notes Payable
Long-term debt consisted of the following at June 30, 1996 and 1995:
1 9 9 6 1 9 9 5
------- -------
Note payable to bank, interest at prime rate plus 1.5%, with monthly payments of
principal and interest through 2$08 1,432,661 $ 1,470,085
Various notes payable, with varying interest rates, monthly
payments and maturities 48,073 120,089
Totals 1,480,734 1,590,174
Less: Current Maturities 94,165 140,669
----------- -----------
Totals $ 1,386,569 $ 1,449,505
------ =========== ===========
Substantially all of the Company's assets are pledged as security for the notes
payable.
The note payable to bank contains certain covenants that restrict payment of
dividends, loans, acquisitions and guaranties. It also requires the Company to
maintain certain financial ratios. For the year ended June 30, 1996, the Company
was not in compliance with the covenant to maintain a certain debt to tangible
net worth ratio and certain financial reporting requirements. These instances of
default were subsequently waived by the bank.
Subsequent to year-end, the Company renewed an $850,000 revolving line of credit
with a local bank which matures October 18, 1997. Interest is at the bank's
prime plus two percent. The credit line is secured by the Company's accounts
receivable.
F-8
MARINE POWER, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[4] Notes Payable [Continued]
Aggregate maturities of notes payable in the fiscal years subsequent to June 30,
1996 are as follows:
1997 $ 94,165
1998 96,641
1999 85,806
2000 94,243
2001 104,166
Thereafter 1,005,713
-----------
Total $ 1,480,734
----- ===========
[5] Capital Stock
At June 30, 1996 and 1995, the Company's capital stock consisted of the
following:
Shares
Authorized Issued and Outstanding
Class A Common Stock - no par value:
Voting 5,000 4,200
Non-voting 4,500 2,800
Class B Common Stock - no par value,
non-voting 10,500 3,000
Class C Common Stock - no par value,
non-voting 5,152 5,152
Series B Preferred Stock - 8% cumulative,
$100 par value, non-voting 13,136 13,136
On December 30, 1994, the Company issued its Series B Preferred Stock and Class
C Common Stock in exchange for: (1) $600,000 cash, (2) 2,000 shares of
previously outstanding Series A Preferred Stock plus any accrued but unpaid
dividends and (3) a $400,000 previously outstanding note payable to affiliate
plus any accrued but unpaid interest and royalties. The Series B Preferred Stock
is mandatorily redeemable within 90 days after December 31, 1999 at par value
plus any accrued but unpaid dividends.
Terms of the Class C Common Stock agreement provide for a "put" option which
requires the Company to repurchase the stock at any time after December 31, 1999
at a price equal to the greater of five times the earnings in year five before
interest, taxes, depreciation and amortization, or fair market value. The
carrying amount of the Class C Common Stock is accreted annually by the
estimated annual amount necessary to ultimately value the shares at the amount
at which the Company expects to repurchase these shares. The rights of the Class
C Common Stockholders are subordinate to those of the Series B Preferred
Stockholders.
The stock agreements contain certain covenants that, among other things,
restrict creation of additional liens on assets or additional obligations of the
Company, issuance of equity-oriented securities which would be senior to the
Company's currently outstanding equity securities, bonuses or salary increases
for management, significant related party transactions, declaration of dividends
and fixed asset additions and disposals. In addition, the covenants require
maintenance of certain financial ratios. At June 30, 1996, the Company was not
in compliance with the covenants to maintain a financial ratio of earnings
before interest, taxes, depreciation, and amortization at 7.5% of gross sales
less discounts and returns, and maintain equity of at least $1,700,000. The
instances of default were subsequently waived by the stockholders.
F-9
MARINE POWER, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[5] Capital Stock [Continued]
Terms of the original Class B Common Stock agreement provided for a "put" option
which would have required the Company to repurchase these shares at a stipulated
price, as defined, in excess of the purchase price at any time after December
31, 1998, at the sole election of the Class B stockholders. On December 30,
1994, the agreement was retroactively amended to December 31, 1993 whereby an
officer and Class A Common stockholder assumed responsibility for the "put"
option, thereby releasing the Company from any future liability related to the
option.
At June 30, 1996 and 1995, 1,050 Class A non-voting Common Stock options at an
undetermined option price were outstanding.
[6] Income Taxes
The components of the provision for income taxes for the years ended June 30,
1996 and 1995 were:
1 9 9 6 1 9 9 5
------- -------
Current Tax Expense:
Federal $ (79,283) $ 79,283
State (15,477) 15,477
Deferred Tax Expense (Benefit):
Federal 31,740 (31,740)
State 3,734 (3,734)
---------- -----------
Income Tax Expense $ (59,286) $ 59,286
------------------ =========== ===========
Deferred income taxes are provided for temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. The Company's temporary differences primarily relate to differences
in depreciation for book and tax purposes, the allowance for bad debts and the
capitalization of certain costs into inventory for tax purposes. The Company
also had net operating loss carryforwards of approximately $1,000,000 at June
30, 1996, which are available to reduce future income taxes. The net operating
loss carryforwards expire primarily in 2011.
The following represent total deferred tax assets and liabilities at June 30,
1996 and 1995:
1 9 9 6 1 9 9 5
------- -------
Total Deferred Tax Assets $ 432,845 $ 129,386
Total Deferred Tax Liabilities (6,353) (5,955)
Valuation Allowance (426,492) (87,957)
----------- -----------
Net Deferred Tax Asset $ -- $ 35,474
---------------------- =========== ===========
The Company has recorded valuation allowances on the deferred tax assets at June
30, 1996 and 1995, due to the uncertainty of realization of the tax benefits
from these future deductions.
The provision for income taxes for the year ended June 30, 1996 is different
than the amount which would be derived by applying statutory rates to the
pre-tax loss primarily because of the valuation allowance established for the
fiscal 1996 net operating loss.
F-10
MARINE POWER, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[7] Related Party Transactions
Sales to Commercial Marine Sales & Service, Inc., an affiliated company, were
$606,317 and $412,458 for the years ended June 30, 1996 and 1995, respectively.
Amounts due related to these sales are included in accounts receivable -
affiliate in the accompanying balance sheet. In addition, at June 30, 1996 and
1995, the Company had a note receivable from Commercial Marine Sales & Service,
Inc. with balances of $163,241 and $203,295, respectively, which accrues
interest at 10% and is unsecured. The Company receives monthly payments of
principal and interest through the maturity of this note in 2000. Amounts due to
Commercial Marine Sales & Service, Inc. of $13,172 are included in Accounts
Payable at June 30, 1996.
Various unsecured, non-interest bearing notes receivable with various maturity
dates totaling $79,164 and $76,289 at June 30, 1996 and 1995, respectively, are
due from an officer, stockholder and employees of the Company and are included
in accounts receivable - employees in the accompanying balance sheets.
Rent expense of approximately $48,000 was paid to AA Land Development, Inc., an
affiliated company, for the years ended June 30, 1996 and 1995. The lease
includes provisions for price increases in proportion to changes in the United
States consumer price index and has an option to renew for an additional seven
years at expiration on January 4, 2008. In addition, the Company has a
non-interest bearing note receivable of $18,000 at June 30, 1996 and 1995 from
AA Land Development, Inc. which is due upon demand.
[8] Contingent Liabilities and Concentrations
The Company is subject to claims arising out of the ordinary course of its
business. While the ultimate outcome of such claims cannot be determined,
management does not expect that these matters will have a material adverse
effect on the financial position of the Company.
The Company does a major portion of its business with three customers in the
marine retail sales business. Sales to these customers comprised 57% of fiscal
year 1996 revenue, and receivables from these customers comprised 57% of trade
accounts receivable at June 30, 1996.
The Company purchases engines, the base component of its product, primarily from
one major supplier. During fiscal year 1996, purchases from this supplier
accounted for 37% of cost of goods sold.
[9] Retirement Plan
The Company sponsors a qualified retirement plan whereby employees who meet
certain eligibility requirements relating to age and length of service are
entitled to contribute a portion of their compensation under a tax deferred
arrangement pursuant to section 401(k) of the Internal Revenue Code. The Company
matches contributions made to the plan by the employees equal to 25% of the
first 6% of gross pay contributed to the plan. The company contributed $10,504
and $7,873 in fiscal years 1996 and 1995, respectively. The plan also allows
discretionary contributions to be made by the Company, which are allocated to
all eligible employees based on relative compensation.
[10] Restatement
During fiscal 1997, management of the Company discovered certain errors
resulting in understatement of previously reported warranty obligations.
Accordingly, the accompanying financial statements have been restated to correct
the error. Correction of this error resulted in increases in previously reported
accrued warranty obligations and decreases in previously reported retained
earnings as of June 30, 1996 and 1995 of $189,500.
. . . . . . .
F-11
MARINE POWER, INC.
- ------------------------------------------------------------------------------
BALANCE SHEET AS OF SEPTEMBER 30, 1996. [UNAUDITED]
- ------------------------------------------------------------------------------
ASSESTS:
Current Assets:
Cash $ 62,736
Accounts Receivable:
Trade [Net of $30,000 Allowance ] 1,289,726
Affiliate 249,620
Employees 86,738
Inventories 2,633,118
Current Portion of Note Receivable - Affiliate 32,377
Prepaid Expenses 103,746
-----------
Total Current Assets 4,458,061
Plant and Equipment - Net 487,602
Note Receivable - Affiliate 143,937
Deferred Charges 110,863
Other Assets 15,204
Total Assets $ 5,215,667
===========
See Notes to Financial Statements.
F-12
MARINE POWER, INC.
- ------------------------------------------------------------------------------
BALANCE SHEET AS OF SEPTEMBER 30, 1996. [UNAUDITED]
- ------------------------------------------------------------------------------
Liabilities and Equity:
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 2,478,674
Outstanding Borrowings under Line of Credit 634,650
Accrued Warranty Obligations 220,000
Current Portion of Notes Payable 71,226
Current Portion of Obligations under Capital Lease 36,383
Other Liabilities 191,390
Taxes Payable 19,920
-----------
Total Current Liabilities 3,652,243
Long-Term Debt:
Notes Payable 1,427,106
Obligations under Capital Lease 11,733
Total Long-Term Debt 1,438,839
Total Liabilities 5,091,082
Equity:
Redeemable Capital Stock:
Class C Common Stock 456,250
Series B Redeemable Preferred Stock 1,313,600
Accrued Dividends Payable on Redeemable Preferred Stock 180,760
-----------
Total Redeemable Capital Stock 1,950,610
Class A Common Stock 75,519
Class B Common Stock 300,000
Accumulated Deficit (2,201,544)
Total Equity 124,585
Total Liabilities and Equity $ 5,215,667
===========
See Notes to Financial Statements.
F-13
MARINE POWER, INC.
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS [UNAUDITED]
- ------------------------------------------------------------------------------
Three months ended
September 30,
1 9 9 6 1 9 9 5
------- -------
Net Sales $ 3,208,937 $ 2,525,224
Cost of Goods Sold 3,159,834 2,468,135
----------- -----------
Gross Profit 49,103 57,089
----------- -----------
Selling, General and Administrative Expenses 315,029 213,135
----------- -----------
Other Expenses:
Interest Expense 45,668 56,601
Other Expense - Net 7,877 552
----------- -----------
Total Other Expenses 53,545 57,153
----------- -----------
[Loss] Before Income Taxes (319,471) (213,199)
Provision for Income Taxes -- --
----------- -----------
Net [Loss] (319,471) (213,199)
Dividends Payable on Series B Mandatorily
Redeemable Preferred Stock (25,000) (25,000)
Accreted Value of Class C Common Stock (31,500) (75,000)
Accumulated Deficit - Beginning of Periods (1,825,573) (575,362)
----------- -----------
Accumulated Deficit - End of Periods $(2,201,544)$ (888,561)
=========== ===========
See Notes to Financial Statements.
F-14
MARINE POWER, INC.
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS [UNAUDITED]
- ------------------------------------------------------------------------------
Three months ended
September 30,
1 9 9 6 1 9 9 5
------- -------
Operating Activities:
Net [Loss] $ (319,471)$ (213,199)
Adjustments to Reconcile Net Income to Net Cash Used by
Operating Activities:
Depreciation and Amortization 39,275 48,643
Loss on Sale of Fixed Asset 3,641 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 5,558 47,715
Inventories (396,879) (424,382)
Deferred Charges 17,605 4,271
Prepaid Expenses and Other Assets (4,715) 42,621
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 522,489 503,731
Other Liabilities 208,273 (51,630)
Income Taxes Payable -- (74,840)
----------- -----------
Net Cash - Operating Activities 75,776 (117,070)
----------- -----------
Investing Activities:
Capital Expenditures - Net (9,796) (79,584)
Repayments on Notes Receivable 4,927 8,581
----------- -----------
Net Cash - Investing Activities (4,869) (71,003)
----------- -----------
Financing Activities:
Principal Payments on Notes Payable (17,598) (9,554)
Principal Payments on Lease Obligations (11,333) (21,968)
Increase [Decrease] in Borrowings under Revolving Loan (4,150) 133,283
----------- -----------
Net Cash - Financing Activities (33,081) 101,761
----------- -----------
Net Increase [Decrease] in Cash 37,826 (86,312)
Cash - Beginning of Periods 24,910 136,388
----------- -----------
Cash - End of Periods $ 62,736 $ 50,076
=========== ===========
See Notes to Financial Statements.
F-15
MARINE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Unaudited Interim Statements
The financial statements as of September 30, 1996 and for the three months ended
September 30, 1996 and 1995 are unaudited, however, in the opinion of management
all adjustments [consisting solely of normal recurring adjustments] which are
necessary in order to make the interim financial statements not misleading have
been made.
The results of the interim period are not necessarily indicative of the results
to be obtained for a full fiscal year.
. . . . . . . . . . .
F-16