SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
May 12, 2000 (February 25, 2000)
Peerless Mfg. Co.
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(Exact name of registrant as specified in its charter)
Texas 0-5214 75-0724417
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(State or other (Commission (IRS employer
jurisdiction of file number) identification no.)
incorporation)
2819 Walnut Hill Lane, Dallas Texas 75229
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
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(214) 357-6181
Item 2. Acquisition or Disposition of Assets.
On February 25, 2000, Peerless Mfg. Co. ("Peerless" or the
"Registrant"), through its wholly-owned subsidiary PMC Acquisition, Inc., a
Texas corporation, closed its acquisition of substantially all of the assets
of ABCO Industries, Inc. pursuant to an Asset Purchase Agreement dated
February 25, 2000 by and between ABCO Industries and PMC Acquisition. The
purchase price for the assets was $1.7 million plus the assumption of
certain liabilities, which price was determined pursuant to a competitive
auction held pursuant to an order of the United States Bankruptcy Court for
the Northern District of Texas, in the case styled In re ABCO Indus., Inc.,
Case No. 99-51322-11. The Registrant borrowed funds under its credit
facility with Bank of America to obtain the purchase price for the assets.
For more information with respect to the terms of the ABCO Industries
acquisition, reference is made to the Asset Purchase Agreement dated as of
February 25, 2000, by and between ABCO Industries and PMC Acquisition, which
is attached hereto as Exhibit 2.1 and is incorporated in its entirety herein
by reference.
The assets acquired by PMC Acquisition were substantially all of the
assets of ABCO Industries used in its business of designing, marketing,
distribution, and selling of industrial boilers. The Registrant intends to
use the engineering and manufacturing assets of ABCO Industries in the
Registrant's operations, and to continue selected portions of the ABCO
Industries business. The Registrant's press release on February 28, 2000
announcing the closing of the acquisition is attached hereto as Exhibit 99.1
and is incorporated in its entirety herein by reference.
Item 7.Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired.
ABCO INDUSTRIES, INC. Financial Statements For the Years
Ended September 30, 1999 and 1998.
ABCO INDUSTRIES, INC. Financial Statements For the Years
Ended September 30, 1998 and 1997.
ABCO INDUSTRIES, INC. Financial Statements For the Years
Ended September 30, 1997 and 1996.
(b) Proforma Financial Information.
Pro Forma Condensed Consolidated Balance Sheet
December 31, 1999
Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended June 30, 1999
Pro Forma Condensed Consolidated Statement of Operations
For the Six Months Ended December 31, 1999
(c) Exhibits
2.1 Asset Purchase Agreement, dated as of February 25, 2000, by and
between PMC Acquisition, Inc. and ABCO Industries, Inc. (filed as
Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated
March 13, 2000 and incorporated herein by reference)
23.1 Consent of Wolfe and Company, P.C.
99.1 Press Release dated February 28, 2000 (filed as Exhibit 99.1 to
the Registrant's Current Report on Form 8-K dated March 13, 2000
and incorporated herein by reference).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Date: May 12, 2000
PEERLESS MFG. CO.
By: /s/ SHERRILL STONE
-------------------------------------
Sherrill Stone
President and Chief Executive Officer
INDEX TO EXHIBITS
Exhibit
Number Description
2.1 Asset Purchase Agreement, dated as of February 25, 2000, by
and between PMC Acquisition, Inc. and ABCO Industries, Inc.
(filed as Exhibit 2.1 to the Registrant's Current Report on
Form 8-K dated March 13, 2000 and incorporated herein by
reference)
23.1 Consent of Wolfe and Company, P.C.
99.1 Press Release dated February 28, 2000 (filed as Exhibit 99.1
to the Registrant's Current Report on Form 8-K dated March
13, 2000 and incorporated herein by reference).
Financial Statements of Business Acquired.
ABCO INDUSTRIES, INC.
Financial Statements
For the Years Ended
September 30, 1999 and 1998
INDEPENDENT AUDITORS' REPORT
Board of Directors
ABCO Industries, Inc.
Abilene, Texas
We have audited the accompanying balance sheets of ABCO Industries, Inc. as
of September 30, 1999 and 1998, and the related statements of income (loss)
and retained earnings (deficit) and cash flows for the years 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 ABCO Industries, Inc.,
as of September 30, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of
the Company as a going concern. However, the Company has sustained
substantial operating losses over the past 2 years. At September 30, 1999,
current liabilities exceed current assets by $3,687,631 and total
liabilities exceed total assets by $3,364,690. These factors, and others
discussed in Note 18, raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
As explained in Note 17 to the financial statements, during the year ended
September 30, 1998, ABCO Industries, Inc. changed its method of accounting
for the progress toward completion on jobs in progress.
As explained in Note 19 to the financial statements, subsequent to September
30, 1999, the Company filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code and sold substantially all of its
assets.
Wolfe and Company, P.C.
Certified Public Accountants
May 2, 2000
Abilene, Texas
ABCO INDUSTRIES, INC.
BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
ASSETS
1999 1998
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,182,286 $ 125,008
Receivables - trade, net 5,425,088 2,487,169
Receivables - retainage 333,145 784,032
Receivables - miscellaneous 9,973 3,402
Costs and estimated earnings in excess
of billings on uncompleted contracts 107,679 1,358,351
Inventories 136,439 241,957
Prepaid expenses 122,497 22,942
Prepaid Federal income taxes 71,487 66,336
Deposits 27,578 22,578
Current portion of notes receivable 129,200 261,028
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Total current assets 7,545,372 5,372,803
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PROPERTY AND EQUIPMENT, net of accumulated
depreciation 1,505,104 1,761,461
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OTHER ASSETS:
Receivable from officer 15,326 15,326
Receivables - related company - 822,207
Split-dollar value of officers' life insurance 351,750 319,717
Notes receivable, long-term - 129,200
Loan costs, net of amortization 4,748 8,310
----------- -----------
Total other assets 371,824 1,294,760
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TOTAL ASSETS $ 9,422,300 $ 8,429,024
=========== ===========
The accompanying notes are an integral part of the financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
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CURRENT LIABILITIES:
Cash overdraft $ 33,894 $ -
Accounts payable - trade 1,745,154 1,523,654
Accrued liabilities 597,698 409,324
Billings in excess of costs and estimated
earnings on uncompleted contracts 6,080,333 1,687,363
Trade notes payable, current 538,030 460,217
Notes payable 1,784,105 1,000,000
Current maturities of long-term debt 453,789 607,785
----------- -----------
Total current liabilities 11,233,003 5,688,343
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NONCURRENT LIABILITIES:
Trade notes payable, long-term 688,387 1,145,005
Long-term debt, net of current maturities 865,600 1,324,279
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Total noncurrent liabilities 1,553,987 2,469,284
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STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 500,000 shares
authorized: 103,070 shares issued and
outstanding 103,070 103,070
Paid-in capital 406,907 406,907
Retained earnings (deficit) (3,695,232) (59,145)
Treasury stock, 8,050 shares at cost (179,435) (179,435)
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Total stockholders' equity (3,364,690) 271,397
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,422,300 $ 8,429,024
=========== ===========
ABCO INDUSTRIES, INC.
STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
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SALES $ 15,411,557 $ 16,592,012
Less commissions 517,185 451,119
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NET SALES 14,894,372 16,140,893
COST OF SALES 12,322,841 13,156,025
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GROSS PROFIT 2,571,531 2,984,868
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OPERATING EXPENSES:
Selling expenses 1,000,937 1,215,852
General and administrative expenses 660,396 761,779
Engineering expenses 828,741 1,125,223
Purchasing and warehouse expenses 235,352 305,609
Operations expenses 747,845 682,352
Warranty expense 1,378,593 1,124,225
Bad debt expense 999,465 -
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Total operating expenses 5,851,329 5,215,040
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INCOME (LOSS) FROM OPERATIONS (3,279,798) (2,230,172)
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OTHER INCOME (EXPENSE):
Interest, dividend, and miscellaneous income 93,534 71,052
Interest expense (449,353) (342,210)
Gain (loss) on sale of assets (470) (8,521)
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Net other income (expense) (356,289) (279,679)
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INCOME (LOSS) BEFORE FEDERAL INCOME TAXES (3,636,087) (2,509,851)
PROVISION FOR FEDERAL INCOME TAXES - -
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (3,636,087) (2,509,851)
EXTRAORDINARY ITEM - vendor settlements on
restructuring accounts payable - 224,040
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - (705,072)
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NET INCOME (LOSS) (3,636,087) (2,990,883)
RETAINED EARNINGS (DEFICIT), Beginning of year (59,145) 2,931,738
----------- -----------
RETAINED EARNINGS (DEFICIT), End of year $ (3,695,232) $ (59,145)
=========== ===========
Pro forma amount assuming accounting change is
applied retroactively:
Income (loss) before extraordinary item $ (3,636,087) $ (2,509,851)
Net income (loss) $ (3,636,087) $ (2,285,811)
The accompanying notes are an integral part of the financial statements.
ABCO INDUSTRIS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
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CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,636,087) $ (2,990,883)
----------- -----------
Adjustments to reconcile net income to net cash:
Depreciation and amortization of:
Property and equipment 275,767 295,886
Loan costs 3,561 3,561
Deferred Federal income taxes - (34,006)
Bad debt expense from related company
charge-off 983,940 -
(Gain) loss on sale of assets 470 8,521
Changes in operating assets and liabilities:
Receivables and retainages - trade, net of
allowance (2,487,032) (1,645,792)
Receivables - miscellaneous (6,571) 205,955
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,250,672 2,764,113
Inventories 105,518 393,437
Prepaid expenses (104,706) 107,913
Other assets (5,000) (17,765)
Billings in excess of costs and estimated
earnings on uncompleted contracts 4,392,970 1,509,749
Payables and accrued liabilities 409,874 141,050
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Total adjustments 4,819,463 3,732,622
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Net cash provided by operating activities 1,183,376 741,739
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (22,153) (267,879)
Sale of property and equipment 2,275 4,200
Collection of note receivable 261,028 430,441
Addition to receivable from related company (161,734) (359,412)
Increase in split-dollar value of life insurance (32,033) (47,056)
----------- -----------
Net cash provided by (used in) investing
activities 47,383 (239,706)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issue of debt 500,000 1,466,668
Payment of debt (991,480) (1,238,206)
Lines of credit - net 284,105 (550,000)
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Net cash provided by (used in) financing
activities (207,375) (321,538)
----------- -----------
NET INCREASE IN CASH 1,023,384 180,495
CASH AND CASH EQUIVALENTS, Beginning of year 125,008 (55,487)
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CASH AND CASH EQUIVALENTS, End of year $ 1,148,392 $ 125,008
=========== ===========
Supplementary disclosures:
Federal income taxes paid $ 5,151 $ 23,227
Interest paid $ 440,378 $ 365,088
The accompanying notes are an integral part of the financial statements.
ABCO INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
ABCO Industries, Inc. was incorporated under the laws of the State of Texas
in 1958. The Company specializes in custom-designed boilers of all types,
typically for heavy industrial applications in power, chemical, and
petrochemical industries. The Company has a fiscal year end of September 30.
Accounts Receivable
The Company uses the reserve method of accounting for uncollectible
accounts.
Revenue and Cost Recognition
The Company records contract revenue and costs on a percentage-of-completion
basis, measured by the percentage of direct manufacturing hours incurred to
date to the total estimated direct manufacturing hours for each boiler.
Adjustments to estimates of contract revenues, costs, or extent of progress
toward completion are sometimes required as work progresses and more
information is obtained. These adjustments, which result from changed
conditions and new developments and which are characteristic of the process,
are reported in the year in which they occur. Any losses expected to be
incurred on contracts in process are charged to operations in the period
such losses are determined.
The current asset, costs and estimated earnings in excess of billings on
uncompleted contracts, represents the aggregate of costs incurred and income
recognized on uncompleted contracts in excess of related billings. The
current liability, billings in excess of costs and estimated earnings on
uncompleted contracts, represents the aggregate of billings on uncompleted
contracts in excess of related costs incurred and income recognized.
A reconciliation of costs and earnings recognized on contracts in process to
the related progress billings on such contracts is provided in Note 5.
Inventories
The Company's materials inventory is stated at the lower of first-in, first-
out cost or market.
Property and Equipment
Property and equipment are stated at historical cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line and
declining-balance methods and amounted to $275,767 and $295,886 for the
years ended September 30, 1999 and 1998, respectively. Estimated lives used
in calculating depreciation are summarized by major asset category as
follows:
Category Useful Life
--------------------- -----------
Buildings 25 years
Building improvements 5-15 years
Shop equipment 5-20 years
Automotive equipment 3-10 years
Office equipment 5-15 years
Maintenance and repairs on property and equipment are charged to expense as
incurred; whereas, additions and improvements are capitalized. The cost of
assets, which are sold or retired, and the related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is reflected
in income.
Provision for Warranties
A warranty provision has been established for the costs estimated to be
incurred to correct defects in workmanship or material during the warranty
period of completed projects.
Federal Income Taxes
Federal income taxes are provided for all items on the income statements,
including deferred Federal income taxes resulting from timing differences in
the recognition of income and expense items for financial accounting and tax
purposes. As of September 30, 1999 and 1998, a deferred tax liability did
not exist.
Cash and Cash Equivalents
For purposes of these financial statements, the Company considers short-term
investments with a maturity of three months or less to be cash equivalents.
Cash and cash equivalents at September 30, 1999 and 1998, include the
following:
1999 1998
----------- ----------
Cash on hand and in checking $ 1,182,286 $ 125,008
Cash (overdraft) in checking (33,894) -
----------- ----------
Total cash and cash equivalents $ 1,148,392 $ 125,008
=========== ==========
Cash
The Company maintains all of its cash balances in federally insured
financial institutions. These balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. The cash balances exceeding the
$100,000 are not insured.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amount of assets, liabilities, revenues and
expenses. Actual results could differ from these estimates.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, trade and other
receivables, and other short term instruments approximates fair value. The
carrying amount of the material long-term notes receivable and debt
approximates the fair value due to the interest rates on these notes being
tied to a base rate that is variable and would be available to the Company
at September 30, 1999.
NOTE 2: TRADE RECEIVABLES
At September 30, 1999 and 1998, trade receivables consisted of the
following:
1999 1998
--------- ---------
Billed:
Completed contracts $ 354,872 $1,413,135
Uncompleted contracts 5,122,448 952,710
Unbilled - 156,324
--------- ---------
Total 5,477,320 2,522,169
Less allowance for warranty accruals 52,232 35,000
--------- ---------
Net trade receivables $5,425,088 $2,487,169
========= =========
NOTE 3: RETAINAGE RECEIVABLES
Retainage receivables are amounts billed on contracts but not paid by
customers, which, pursuant to retainage provisions in contracts, are due
upon completion of the contract and acceptance by the customer.
Substantially all retentions are deemed collectible within one year.
The retainages receivable are net of related known warranty accruals of
$365,292 and $-0- at September 30, 1999 and 1998, respectively.
NOTE 4: RELATED PARTY TRANSACTIONS
ABCO Industries, Inc. sold parts to Global Boiler and Mechanical, Inc. The
same family are the major stockholders of both companies. The total sales
by ABCO Industries, Inc. to Global Boiler and Mechanical, Inc. were $-0- and
$25,041 for the years ended September 30, 1999 and 1998, respectively.
ABCO Industries, Inc. purchased repair and boiler installation services from
Global Boiler and Mechanical, Inc. amounting to $-0- and $516,142 for the
years ended September 30, 1999 and 1998, respectively.
Other intercompany transactions include charges for insurance, credit card
payments, and other miscellaneous expenses.
The Company has provided financing to Global Boiler and Mechanical, Inc., in
the form of advances. Advances of $161,734 were made to Global during the
year ended September 30, 1999. Global ceased operations during the year
ended September 30, 1999 and the receivable balance from Global in the
amount of $983,940 was written off. The amount due from Global was $-0- and
$822,207 at September 30, 1999 and 1998, respectively, and is reflected on
the accompanying balance sheets under other assets.
NOTE 5: CONTRACTS IN PROCESS
Comparative information at September 30, 1999 and 1998, with respect to
contracts in process, is as follows:
1999 1998
---------- ----------
Expenditures on uncompleted contracts $ 3,426,902 $ 5,153,725
Estimated earnings recognized thereon 1,124,266 1,261,752
---------- ----------
Total 4,551,168 6,415,477
Less applicable progress billings 10,523,822 6,744,489
---------- ----------
Net $(5,972,654) $ (329,012)
========== ==========
The aforementioned amounts are included in the accompanying balance sheets
under the following captions:
1999 1998
---------- ----------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 107,679 $ 1,358,351
Billings in excess of costs and estimated
earnings on uncompleted contracts (6,080,333) (1,687,363)
---------- ----------
Net $(5,972,654) $ (329,012)
========== ==========
NOTE 6: INVENTORIES
Inventories consist of raw materials, which are used in the boiler
manufacturing process. The Company did not have any finished goods at
September 30, 1999 and 1998.
NOTE 7: PROPERTY AND EQUIPMENT
At September 30, 1999 and 1998, property and equipment consisted of the
following:
1999 1998
---------- ----------
Land and land improvements $ 469,121 $ 469,121
Buildings 1,505,454 1,505,454
Shop equipment 2,194,390 2,227,916
Automotive equipment 237,375 245,921
Office equipment 707,692 694,766
Equipment held under a capital lease 79,342 79,342
---------- ----------
Total 5,193,374 5,222,520
Less accumulated depreciation 3,688,270 3,461,059
---------- ----------
Net property and equipment $ 1,505,104 $ 1,761,461
========== ==========
NOTE 8: OFFICERS' LIFE INSURANCE
The Company is the owner and beneficiary of whole life insurance policies
aggregating $2,000,000 on the lives of its officers at September 30, 1999
and 1998. The cash surrender value on these policies amounted to $8,393 and
$9,684 at September 30, 1999 and 1998, respectively. The Company also pays
premiums on various split-dollar life insurance policies on its Chairman of
the Board and CEO. One of these policies amounting to $1,000,000 was
assigned to a bank as collateral for the Company's outstanding loan balance.
The Company is not the beneficiary on these split-dollar policies. The
premiums paid on the split-dollar policies amounted to $33,324 and $40,062
for the years ended September 30, 1999 and 1998, respectively, and are
included in cash value of officers' life insurance on the balance sheets.
NOTE 9: NOTES PAYABLE
The Company held a revolving line of credit at a bank in the amount of
$2,000,000, of which $1,006,949 had been drawn at September 30, 1999. The
credit line was due on September 30, 1999, with interest tied to the bank's
base rate. The line of credit was not renewed and was subsequently paid in
full in October, 1999.
The Company also held a revolving line of credit at a bank in the amount of
$1,000,000, of which $777,156 had been drawn at September 30, 1999. The
credit line was renewed on August 13, 1999 and matures on January 31, 2000,
with interest tied to the bank's base rate. The line of credit is secured by
the Company's real property and personal guaranties by certain stockholders
of the Company. There are no compensating balance requirements or commitment
fees.
NOTE 10: LONG-TERM DEBT
At September 30, 1999 and 1998, long-term debt consisted of the following:
1999 1998
-------- --------
Note payable to bank, due February 7, 2001,
secured by all machinery and equipment
excluding vehicles, real property, a life
insurance policy on the president of the
Company, stockholder's personal, and the Small
Business Administration guaranties; payable
in monthly installments of $10,936 each
including interest at 2.75% above the Wall
Street Journal prime (Prime was 8.25% at
September 30, 1999). $ 171,053 $ 278,422
Vehicle note payable to bank, payable of
demand or if no demand is made in monthly
installments ranging from $732 to $746
including interest at rates ranging from 8.5%
to 8.75%, maturity dates from February 19,
2000 to December 15, 2001, secured by vehicles
and personal guaranties by stockholders' of
the company. 22,436 38,112
Note payable to bank, due March 20, 2000
secured by a note receivable from a customer,
insurance policy issued by the Export-Import
Bank of the United States, commercial
guaranties executed by stockholders' of the
company; payable in semi-annual installments
of $129,200 each, plus interest at the bank's
base rate which was 9.25% at September 30
1999. 129,200 387,600
Note payable to bank, due November 15, 2000,
secured by deed of trust on real estate and
guaranties executed by stockholders' of the
company, payable in monthly installments of
$6,600, including interest at the bank's base
rate which was 9.25% at September 30, 1999. 352,281 397,568
Note payable on capital lease obligation, due
December 28, 2001, payable in monthly
installments of $1,324, including imputed
interest rate of 8.9%, secured by equipment. 31,196 43,693
Note payable to bank, due March 30, 2003
secured by inventory, equipment, general
intangibles, real property, and commercial
guaranties executed by stockholders' of the
company, payable in monthly installments of
$12,500, plus interest at the bank's index
rate which was 9.25% at September 30, 1999. 541,266 700,000
Note payable to Corporation as a result of a
default judgement, due November 1, 2001
payable in monthly installments of $2,803
including interest at 10%. 71,957 86,669
--------- ---------
Total 1,319,389 1,932,064
Less current maturities 453,789 607,785
--------- ---------
Net long-term debt $ 865,600 $1,324,279
========= =========
Principal payments for the next five years are as follows:
September 30, 2000 $ 453,789
September 30, 2001 274,364
September 30, 2002 202,164
September 30, 2003 201,616
September 30, 2004 187,456
Thereafter -
----------
Total $ 1,319,389
==========
NOTE 11: FEDERAL INCOME TAXES
Federal income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes. Federal Temporary differences giving rise to the deferred
income at September 30, 1999 and 1998 consist primarily of depreciation,
contract revenue, inventory expenses, contributions, and warranty liability.
The difference resulting from depreciation is due to accelerated
depreciation used for tax purposes and straight line depreciation used for
financial accounting purposes. The contract revenue difference is a result
of the percentage-of-completion method being used for financial accounting
purposes and the completed contract method used for tax purposes. Internal
Revenue Code Section 263A requires certain inventory costs to be capitalized
for tax purposes. These costs are not capitalized for financial accounting
purposes, which cause the inventory difference. The Internal Revenue Code
limits current contribution expenses to 10% of the taxable income prior to
the deduction for contributions. Contributions in excess of this amount are
available for carryover to the following five tax years.
The Internal Revenue Code currently allows a tax credit for increasing
research activities. This credit will only offset the regular corporate
income tax and does not apply against the alternative minimum tax; however,
any unused credits may be carried forward for fifteen years. The amount of
the tax credit available for the year ended September 30, 1999 was $400,481.
The tax credit that was currently allowed and utilized against the current
year's Federal income tax, due for the years ended September 30, 1999 and
1998, was $-0- for both years. These credits will expire on September 30,
2007 through September 30, 2014.
The Company has utilized the special tax provisions of the Internal Revenue
Code as they pertain to foreign sales. The maximum sales allowable under
the provisions applicable to the Small Foreign Sales Corporation is
$5,000,000 of foreign sales. This incentive was placed in our tax code to
encourage the manufacture and export of United States made products to
foreign countries. ABCO did not utilize the foreign sales in each of the
years ended September 30, 1999 and 1998.
The Company has available at September 30, 1999, an unused net operating
loss carryforward in the amount of $4,766,368, which may be applied against
future taxable income. This net operating loss carryforward will expire on
September 30, 2009 through September 30, 2014, and has been utilized to
offset deferred Federal income taxes at September 30, 1999.
NOTE 12: CONTINGENCIES
The Company is a defendant in two lawsuits relating to matters that are in
the ordinary course of the Company's business activities. One is the result
of work related injuries occurring during the normal course of business.
The Company does not maintain workman's compensation insurance coverage, but
provides these benefits through self insurance. A loss, if any, will be
born by the Company. The second lawsuit alleges that a boiler provided by
the company leaked and caused damage to the owner's plant. The Company's
management does not believe that any material liability will be imposed as a
result of these matters.
The Company is in the process of collecting various trade receivables and
retainage receivables that are either being settled or in dispute. The
amount included in trade and retainage receivables, net of any warranty
reserve, on the accompanying balance sheet at September 30, 1999, for which
a settlement is being negotiated or litigation is anticipated, amounts to
$105,363 and $266,337, respectively. In the opinion of management, the
amounts reported are expected to be collected.
The Company was involved in other litigation from creditors as a result of
the financial difficulties mentioned in Note 18. These should be resolved
through the bankruptcy proceedings mentioned in Note 19.
NOTE 13: 401K PROFIT SHARING PLAN & TRUST
The Company has a "401K Profit Sharing Plan & Trust". The plan covers
substantially all employees and continues to maintain individual employee
accounts to reflect the prior year's allocation to all participants of the
Company's Stock owned by the plan. As of September 30, 1999 and 1998, the
plan owned 12,094 shares of the Company's issued and outstanding common
stock.
The plan provides for voluntary matching of the employee's elected salary
reductions subject to all 401(k) provisions of the internal revenue code.
The amount of the voluntary matching contribution is to be determined
annually by the Board of Directors of the Company. The Company did not make
any contributions for the years ended September 30, 1999 and 1998.
NOTE 14: LOAN COSTS
The Company incurred costs associated with obtaining long-term financing for
the year ended September 30, 1991, in the amount of $35,614. The note for
the new financing expires on February 7, 2001. The loan costs are being
amortized over the life of the loan, which was 10 years. Amortization for
the each of the years ended September 30, 1999 and 1998, was $3,561.
NOTE 15: CAPITAL LEASE COMMITMENT
The company is the lessee of a forklift under a capital lease expiring on
December 28, 2001. This lease originated on December 28, 1995. The asset
and liability under this capital lease are recorded at the fair value of the
asset which is the present value of the minimum lease payments. The asset
is being depreciated over its estimated productive life. Depreciation of
this asset is included in depreciation expense for the years ended September
30, 1999 and 1998. The accumulated depreciation on this asset at September
30, 1999 and 1998 was $42,505 and $31,170, respectively.
Minimum future lease payments under capital leases as of September 30, 1999
for each of the next five years and in aggregate are:
September 30, 2000 $ 15,884
September 30, 2001 15,884
September 30, 2002 2,647
September 30, 2003 -
September 30, 2004 -
Subsequent to September 30, 2004 -
--------
Total minimum lease payments 34,415
Less amount representing interest (3,219)
--------
Present value of net minimum lease payments $ 31,196
========
The interest rate on the capitalized lease of 8.9% is the lessor's implicit
rate of return which is lower than the company's incremental borrowing rate
at the inception of the lease.
NOTE 16: DEBT RESTRUCTURE
In July, 1998, the Company held a public meeting with trade creditors and
offered a workout plan for payment of their accounts payable balances
accumulated through June 30, 1998. As a result of the meeting, a vendor
response letter was mailed to all trade creditors allowing them to choose
among several options, with the main options including: (1) agree to be
paid $500 and forgive the balance, (2) be paid 50% in October, 1998 and
forgive the balance, (3) accept a term note for the balance due, payable in
36 monthly installments with interest at 6%. A summary of the response from
these letters is as follows:
i) Those electing to be paid $500 and forgive the balance was only
elected by one vendor and was settled prior to September 30, 1998.
ii) Those electing to be paid 50% and forgive the balance amounted to a
total of $448,080 of accounts payable balances and resulted in debt
forgiveness of $224,040, which is reflected on the accompanying
statement of income (loss) as an extraordinary item for the year ended
September 30, 1998.
iii) Trade creditors accepting a term note with 36 monthly installments
amounted to $1,605,222. The terms of the payout call for 36 monthly
installments starting in November, 1998, with interest at the rate of
6%. The monthly payments will be approximately $52,330 including
interest. The liability for the term note payout of the $1,226,417 and
$1,605,222 as of September 30, 1999 and 1998, respectively, is reflected
on the accompanying balance sheet as trade notes payable with $538,030
and $460,217 being current at September 30, 1999 and 1998, respectively,
and $688,387 and $1,145,005 being long-term at September 30, 1999 and
1998, respectively. The debt maturity schedule of these trade notes are
as follows:
Due in the year ended September 30, 2000 $ 538,030
Due in the year ended September 30, 2001 $ 571,215
Due in the year ended September 30, 2002 $ 117,172
Due in the year ended September 30, 2003 $ -
----------
Total $ 1,226,417
==========
iv) Many of the trade creditors did not respond to the letter or responded
without agreeing to any of the options. Accounts payable in the amount
of $460,368 at September 30, 1998, are attributable to non responses and
remain as part of the accounts payable on the accompanying balance
sheet. The Company started accruing interest at 6% on these balances in
November, 1998, but payment on these amounts have not been scheduled.
The amount attributable to responses not agreeing with any of the
options was $671,489 at September 30, 1998, and is included as part of
the trade notes payable on the accompanying balance sheet. Monthly
payments will be made on this amount the same as the creditors agreeing
to the term note with 36 monthly installments.
NOTE 17: ACCOUNTING CHANGE
During the year ended September 30, 1998, the Company changed its method of
accounting for the progress toward completion on jobs in progress from the
cost-to-cost method to the direct manufacturing hours method. The cost-to-
cost method used the cost incurred to date on the jobs in progress divided
by the total estimated cost of the job to determine the percentage complete,
whereas the direct manufacturing hours incurred are divided by the total
estimated manufacturing hours for the job to determine the percentage
complete under the new method. The company believes that the direct
manufacturing hours provides a more realistic measure of the actual progress
towards completion on jobs. As a result of the change, the Company
recognized a noncash cumulative charge of $705,072, net of tax benefit of
$34,006, to net income for the year ended September 30, 1998. Pro forma
amounts are presented on the income statement showing the effect of applying
the new method retroactively.
NOTE 18: GOING CONCERN UNCERTAINTY
The Company's financial statements for the year ended September 30, 1999
have been prepared on a going concern basis which contemplates continuation
of the Company as a going concern. The Company incurred net losses of
$3,636,087 and $2,990,883 for the years ended September 30, 1999 and 1998,
respectively, and as of September 30, 1999 had an accumulated deficit of
$3,695,232. The Company's working capital at September 30, 1999 plus
limited revenue from product sales will not be sufficient to meet
obligations as presently structured. After failed attempts to secure
contracts on jobs that would enable the Company to generate the cash flow
needed to meet its current obligations, the Company filed for protection
under Chapter 11 of the U.S. Bankruptcy Code as more fully explained in Note
19 below.
NOTE 19: SUBSEQUENT EVENTS
The Company filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code in the Northern District of Texas on December
1, 1999. During the initial phase of the bankruptcy case, the Company
continued in possession of its property and operated and managed its
business, as a Debtor-in-Possession. On February 29, 2000, the Company sold
substantially all of its assets to PMC Acquisition, Inc. for $1,680,000 less
an allowance for a crane repair of $71,000. The assets sold consisted of
all of the Company's real property, equipment, furniture and fixtures,
vehicles and materials inventory.
The Company's 401(k) Profit Sharing Plan and Trust was terminated effective
February 29, 2000. All participants became 100% vested in their account
balance as of February 29, 2000.
ABCO INDUSTRIES, INC.
Financial Statements
For the Years Ended
September 30, 1998 and 1997
WOLFE AND COMPANY, PC
Certified Public Accountants
WOLFE AND COMPANY, PC.
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
Board of Directors
ABCO Industries, Inc.
Abilene, Texas
We have audited the accompanying balance sheets of ABCO Industries, Inc. as
of September 30, 1998 and 1997, and the related statements of income and
retained earnings and cash flows for the years 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 ABCO Industries, Inc.,
as of September 30, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
As explained in Note 17 to the financial statements, during the year ended
September 30, 1998, ABCO Industries, Inc. changed its method of accounting
for the progress toward completion on jobs in progress.
/s/
Wolfe and Company, P.C.
Certified Public Accountants
December 4, 1998
Abilene, Texas
3102 South Clack, Suite * Abilene, Texas 79606-2299
Telephone 915/698-4861 * FAX 915/698-5654
wwwwolfecpa.com * mail@wolfecpacom
ABCO INDUSTRIES, INC.
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
ASSETS
1998 1997
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 125,008 $ 8,856
Receivables - trade, net 2,487,169 280,351
Receivables retainage 784,032 1,345,058
Receivables - miscellaneous 3,402 209,357
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,358,351 4,122,464
Inventories 241,957 635,394
Prepaid expenses 22,942 154,082
Prepaid Federal income taxes 66,336 43,109
Deposits 22,578 4,813
Current portion of notes receivable 261,028 302,867
----------- -----------
Total current assets 5,372,803 7,106,351
----------- -----------
PROPERTY AND EQUIPMENT 1,761,461 1,802,191
----------- -----------
OTHER ASSETS:
Receivable from officer 15,326 16,326
Receivables - related company 822,207 462,795
Cash value - officers' life insurance 319,717 272,661
Notes receivable, long-term 129,200 516,800
Loan costs, net of amortization 8,310 11,871
----------- -----------
Total other assets 1,294,760 1,280,453
----------- -----------
TOTAL ASSETS $ 8,429,024 $10,188,995
=========== ===========
The accompanying notes are an integral part of the financial statements.
1998 1997
----------- -----------
CURRENT LIABILITIES:
Cash overdraft $ - $ 64,343
Accounts payable - trade 1,523,654 2,604,986
Accrued liabilities 409,324 792,164
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,687,363 177,614
Trade notes payable, current 460,217 -
Notes payable 1,000,000 1,550,000
Current maturities of Long-term debt 607,785 449,519
----------- -----------
Total current liabilities 5,688,345 5,638,626
----------- -----------
NONCURRENT LIABILITIES:
Trade notes payable, long-tern 1,145,005 -
Long-term debt, net of current maturities 1,324,279 1,254,083
Deferred Federal income taxes - 34,006
----------- -----------
Total noncurrent liabilities 2,469,284 1,288,089
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 500,000
shares authorized; 103,070 shares
issued and outstanding 103,070 103,070
Paid in capital 406,907 406,907
Retained earnings (deficit) (59,145) 2,931,738
Treasury stock, 8,050 shares at cost (179,435) (179,435)
----------- -----------
Total stockholders' equity 271,397 3,262,280
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 8,429,024 $10,188,995
=========== ===========
ABCO INDUSTRIES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
---------- ----------
SALES $16,592,012 $23,321,988
Less commissions 451,119 413,281
---------- ----------
NET SALES 16,140,892 22,908,707
COST OF SALES 13,156,025 17,290,373
---------- ----------
GROSS PROFIT 2,984,868 5,618,334
---------- ----------
OPERATING EXPENSES:
Selling expenses 1,215,852 855,402
General and administrative expenses 761,779 1,136,980
Engineering expenses 1,125,223 1,466,963
Purchasing and warehouse expenses 305,609 317,434
Operations expenses 682,352 312,827
Warranty expense 1,124,225 614,183
---------- ----------
Total operating expenses 5,215,040 4,703,789
---------- ----------
INCOME (LOSS) FROM OPERATIONS (2,230,172) 914,545
---------- ----------
OTHER INCOME (EXPENSE):
Interest, dividend, and
miscellaneous income 71,052 94,898
Interest expense (342,210) (271,016)
Gain (loss) on sale of assets (8,521) 25,009
---------- ----------
Net other income (expense) (279,679) (151,109)
---------- ----------
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES (2,509,851) 763,436
PROVISION FOR FEDERAL INCOME TAXES:
Current - 6,384
Deferred expense - 34,006
---------- ----------
Total provision for Federal income taxes - 40,390
---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (2,509,851) 723,046
EXTRAORDINARY ITEM - vendor settlements on
restructuring accounts payable 224,040 -
-
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (705,072)
---------- ----------
NET INCOME (LOSS) (2,990,883) 723,046
RETAINED EARNINGS, Beginning of year 2,931,738 2,208,692
---------- ----------
RETAINED EARNINGS (DEFICIT), End of year $ (59,145) $ 2,931,738
========== ==========
Pro forma amount assuming accounting change
is applied retroactively:
Income (loss) before extraordinary item $(2,509,851) $ 616,397
Net income (loss) $(2,285,811) $ 616,397
The accompanying notes are an integral part of the financial statements.
ABCO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from:
Customers $ 18,658,855 $ 21,092,379
Interest 99,712 103,084
Other 9,355 5,517
----------- -----------
Total cash received 18,767,922 21,200,980
----------- -----------
Cash paid to or for:
Suppliers and employees 17,637,868 20,903,561
Interest 365,088 289,788
Federal income taxes 23,227 25,775
----------- -----------
Total cash paid 18,026,183 21,219,124
----------- -----------
Net cash provided by (used in)
operating activities 741,739 (18,144)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (267,879) (248,195)
Sale of property and equipment 4,200 29,049
Addition to note receivable - (15,533)
Collection of note receivable 430,441 288,701
Addition to receivable from related company (359,412) (462,795)
Collection of receivable from related company - -
Increase in cash value of life insurance (47,056) (32,694)
----------- -----------
Net cash (used in) investing activities (239,706) (441,467)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issue of debt 1,466,668 -
Payment of debt (1,238,206) (457,758)
Line of credit - net (550,000) 550,000
----------- -----------
Net cash provided by (used in)
financing activities (321,538) 92,242
----------- -----------
NET INCREASE (DECREASE) IN CASH 180,495 (367,369)
CASH AND CASH EQUIVALENTS, Beginning of year (55,487) 311,882
----------- -----------
CASH AND CASH EQUIVALENTS, End of year $ 125,008 $ (55,487)
=========== ===========
The accompanying notes are an integral part of the financial statements.
ABCO INDUSTRIES, INC.
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
----------- -----------
NET INCOME (LOSS) $ (2,990,883) $ 723,046
NONCASH CHARGES TO INCOME:
Depreciation 295,886 286,302
Amortization 3,561 3,561
Deferred Federal income taxes (34,006) 34,006
NONOPERATING CHARGES (CREDITS) TO INCOME
(Gain) Loss on sale of assets 8,521 25,009
DECREASE (INCREASE) IN OPERATING ASSETS:
Receivables and retainages - trade,
net of allowance (1,645,792) (722,543)
Intercompany account receivable from
related company - 4,300
Receivables - miscellaneous 205,955 91,220
Costs and estimated earnings in excess
of billings on uncompleted contracts 2,764,113 (1,747,335)
Inventories 393,437 60,672
Prepaid expenses 107,913 (127,314)
Other assets (17,765) 1,925
INCREASE (DECREASE) IN OPERATING LIABILITIES:
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,509,749 95,834
Payables and accrued liabilities 141,050 1,303,191
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 741,739 $ (18,144)
=========== ===========
The accompanying notes are an integral part of the financial statements
ABCO INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
ABCO Industries, Inc. was incorporated under the laws of the State of Texas
in 1958. The Company specializes in custom-designed boilers of all types,
typically for heavy industrial applications in power, chemical, and
petrochemical industries. The Company has a fiscal year end of September 30.
Accounts Receivable
The Company uses the reserve method of accounting for uncollectible
accounts.
Revenue and Cost Recognition
The Company records contract revenue and costs on a percentage-of-completion
basis, measured by the percentage of direct manufacturing hours incurred to
date to the total estimated direct manufacturing hours for each boiler.
Adjustments to estimates of contract revenues, costs, or extent of progress
toward completion are sometimes required as work progresses and more
information is obtained. These adjustments, which result from changed
conditions and new developments and which are characteristic of the process,
are reported in the year in which they occur. Any losses expected to be
incurred on contracts in process are charged to operations in the period
such losses are determined.
The current asset, costs and estimated earnings in excess of billings on
uncompleted contracts, represents the aggregate of costs incurred and income
recognized on uncompleted contracts in excess of related billings. The
current liability, billings in excess of costs and estimated earnings on
uncompleted contracts, represents the aggregate of billings on uncompleted
contracts in excess of related costs incurred and income recognized.
A reconciliation of costs and earnings recognized on contracts in process to
the related progress billings on such contracts is provided in Note 5.
Inventories
The Company's materials inventory is stated at the lower of first-in, first-
out cost or market.
Property and Equipment
Property and equipment are stated at historical cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line and
declining-balance methods and amounted to $295,886 and $286,302 for the
years ended September 30, 1998 and 1997, respectively. Estimated lives used
in calculating depreciation are summarized by major asset category as
follows:
Category Useful Life
--------------------- -----------
Buildings 25 years
Building improvements 5-15 years
Shop equipment 5-20 years
Automotive equipment 3-10 years
Office equipment 5-15 years
Maintenance and repairs on property and equipment are charged to expense as
incurred; whereas, additions and improvements are capitalized. The cost of
assets, which are sold or retired, and the related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is reflected
in income.
Provision for Warranties
A warranty provision has been established for the costs estimated to be
incurred to correct defects in workmanship or material during the warranty
period of completed projects.
Federal Income Taxes
Federal income taxes are provided for all items on the income statements,
including deferred Federal income taxes resulting from timing differences in
the recognition of income and expense items for financial accounting and tax
purposes. As of September 30, 1998, a deferred tax liability did not exist.
Cash and Cash Equivalents
For purposes of these financial statements, the Company considers short-term
investments with a maturity of three months or less to be cash equivalents.
Cash and cash equivalents at September 30, 1998 and 1997, include the
following:
1998 1997
--------- ----------
Cash on hand and in checking $ 125,008 $ 8,856
Cash (overdraft) in checking - (64,343)
--------- ----------
Total cash and cash equivalents $ 125,008 $ (55,487)
========= ==========
Cash
The Company maintains all of its cash balances in one bank. These balances
are insured by the Federal Deposit Insurance Corporation up to $100,000. The
cash balances exceeding the $100,000 are not insured.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amount of assets, liabilities, revenues and
expenses. Actual results could differ from these estimates.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, trade and other
receivables, and other short term instruments approximates fair value. The
carrying amount of the material long-term notes receivable and debt
approximates the fair value due to the interest rates on these notes being
tied to a base rate that is variable and would be available to the Company
at September 30, 1998.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
presentation for the year ended September 30, 1998.
NOTE 2: TRADE RECEIVABLES
At September 30, 1998 and 1997, trade receivables consisted of the
following:
1998 1997
---------- --------
Billed:
Completed contracts $ 1,413,136 $ 171,558
Uncompleted contracts 952,710 108,793
Unbilled 156,324 -
---------- --------
Total 2,522,169 280,361
Less allowance for warranty accruals 35,000 -
---------- --------
Net trade receivables $ 2,487.169 $ 280.351
========== ========
NOTE 3: RETAINAGE RECEIVABLES
Retainage receivables are amounts billed on contracts but not paid by
customers, which, pursuant to retainage provisions in contracts, are due
upon completion of the contract and acceptance by the customer.
Substantially all retentions are deemed collectible within one year.
The retainages receivable are net of related known warranty accruals of $-O-
and $114,000 at September 30, 1998 and 1997, respectively.
NOTE 4: RELATED PARTY TRANSACTIONS
ABCO Industries, Inc. sells parts to Global Boiler and Mechanical, Inc. The
same family are the major stockholders of both companies. The total sales by
ABCO Industries, Inc. to Global Boiler and Mechanical, Inc. were $25,041 and
$17,560 for the years ended September 30, 1998 and 1997, respectively.
ABCO Industries, Inc. purchased repair and boiler installation services from
Global Boiler and Mechanical, Inc. amounting to $516,142 and $390,139 for
the years ended September 30, 1998 and 1997, respectively.
Other intercompany transactions include charges for insurance, credit card
payments, and other miscellaneous expenses.
The Company has provided financing to Global Boiler and Mechanical, Inc.,
in the form of advances. The amount due from Global as a result of these
advances was $822,207 and $462,795 at September 30, 1998 and 1997,
respectively, and is reflected on the accompanying balance sheets under
other assets.
NOTE 5: CONTRACTS IN PROCESS
Comparative information at September 30, 1998 and 1997, with respect to
contracts in the process, is as follows:
1998 1997
----------- -----------
Expenditures on uncompleted contracts $ 5,153,725 $ 9,943,362
Estimated earnings recognized thereon 1,261,752 3,237,642
----------- ----------
Total 6,415,477 13,181,004
Less applicable progress billings 6,744,489 9,236,154
----------- ----------
Net $ (329,012) $ 3,944,850
=========== ==========
The aforementioned amounts are included in the accompanying balance sheets
under the following captions:
1998 1997
----------- -----------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 1,358,351 $ 4,122,464
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,687,363) (177,614)
----------- -----------
Net $ (329,012) $ 3,944,850
=========== ===========
NOTE 6: INVENTORIES
Inventories consist of raw materials, which are used in the boiler
manufacturing process. The Company did not have any finished goods at
September 30, 1998 and 1997.
NOTE 7: PROPERTY AND EQUIPMENT
At September 30, 1998 and 1997, property and equipment consisted of the
following:
1998 1997
---------- ----------
Land and land improvements $ 469,121 $ 469,121
Buildings 1,505,454 1,367,249
Shop equipment 2,227,916 2,204,320
Automotive equipment 245,921 211,687
Office equipment 694,766 679,351
Equipment held under a capital lease 79,342 79,342
---------- ----------
Total 5,222,520 5,011,070
Less accumulated depreciation 3,461,059 3,208,879
---------- ----------
Net property and equipment $1,761,461 $1,802,191
========== ==========
NOTE 8: OFFICERS' LIFE INSURANCE
The Company is the owner and beneficiary of whole life insurance policies
aggregating $2,000,000 on the lives of its officers at September 30, 1998
and 1997. The cash surrender value on these policies amounted to $9,684 and
$2,690 at September 30, 1998 and 1997, respectively. The Company also pays
premiums on various split-dollar life insurance policies on its Chairman of
the Board and CEO. One of these policies amounting to $1,000,000 has been
assigned to a bank as collateral for the Company's outstanding loan balance.
The Company is not the beneficiary on these split-dollar policies. The
premiums paid on the split-dollar policies amounted to $40,062 and $30,005
for the years ended September 30, 1998 and 1997, respectively, and are
included in cash value of officers' life insurance on the balance sheets.
NOTE 9: NOTES PAYABLE
The Company's bank provides $1,250,000 on a revolving line of credit, of
which $1,000,000 had been drawn at September 30, 1998. The credit line was
renewed on August 30, 1998 and matures on October 31, 1998, with interest
tied to the bank's base rate. The line of credit is secured by the Company's
inventory, work in process, accounts and notes receivable, and personal
guaranties by certain stockholders of the Company. There are no compensating
balance requirements or commitment fees.
NOTE 10: LONG-TERM DEBT
At September 30, 1998 and 1997, long-term debt consisted of the following:
1998 1997
---------- ----------
Note payable to bank, due February 7,
2001, secured by all machinery and
equipment, excluding vehicles, real
property, a Life insurance policy on the
president of the Company, stockholder's
personal, and the Small Business
Administration guaranties; payable in
monthly installments of $10,936 each,
including interest at 2.75% above the
Wall Street Journal prime (Prime was
8.50% at September 30, 1998). $ 278,422 $ 371,787
Vehicle note payable to bank, payable on
demand or if no demand is made in monthly
installments ranging from $732 to $746,
including interest at rates ranging from
8.5% to 8.75%, maturity dates from
February 19, 2000 to December 15, 2001,
secured by vehicles and personal
guaranties by stockholders' of the
company. 38,112 19,071
Note payable to bank, due March 20, 2000,
secured by a note receivable from a
customer, insurance policy issued by the
Export-Import Bank of the United States,
commercial guaranties executed by
stockholders' of the company; payable in
semi-annual installments of $129,200
each, pius interest at the bank's base 387,600 775,200
rate which was 9.5% at September 30,
1998.
Note payable to bank, due November 15,
2000, secured by deed of trust on real
estate and guaranties executed by
stockholders' of the company, payable in
monthly installments of $6,600, including
interest at the bank's base rate which
was 95% at September 30, 1998. 397,568 436,073
Note payable to an individual, due June
15, 1998, unsecured, payable in monthly
installments of $5,355, including
interest at 9.5%. - 46,342
Note payable on capital lease obligation,
due December 28, 2001, payable in monthly
installments of $1,324, including imputed
interest rate of 8.9%, secured by equip-
ment. 43,693 55,129
Note payable to bank, due March 30, 2003
secured by inventory, equipment, general
intangibles, real property,and commercial
guaranties executed by stockholders of
the company, payable in monthly install-
ments of $12,500, plus interest at the
bank's index rate which was 9.5% at
September 30, 1998. 700,000 -
Note Payable to Corporation as a result
of a default judgement, due November 1,
2001, payable in monthly installments of
$2,803, including interest at 10%. 86,669 -
--------- ----------
Total 1,932,064 1,703,602
Less current maturities 607,785 449,519
--------- ----------
Net long-term debt $ 1,324,279 $ 1,254,083
========== ==========
Principal payments for the next five years are as follows
September 30,1999 $ 607,785
September 30,2000 499,631
September 30,2001 567,271
September 30,2002 157,377
September 30,2003 100,000
Thereafter -
----------
Total $ 1,932,064
==========
NOTE 11: FEDERAL INCOME TAXES
Federal income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes. Federal Temporary differences giving rise to the deferred
income at September 30, 1998 and 1997 consist primarily of depreciation,
contract revenue, inventory expenses, contributions, and warranty liability.
The difference resulting from depreciation is due to accelerated
depreciation used for tax purposes and straight line depreciation used for
financial accounting purposes. The contract revenue difference is a result
of the percentage-of-completion method being used for financial accounting
purposes and the completed contract method used for tax purposes. Internal
Revenue Code Section 263A requires certain inventory costs to be capitalized
for tax purposes. These costs are not capitalized for financial accounting
purposes, which cause the inventory difference. The Internal Revenue Code
limits current contribution expenses to 10% of the taxable income prior to
the deduction for contributions. Contributions in excess of this amount are
available for carryover to the following five tax years.
The Internal Revenue Code currently allows a tax credit for increasing
research activities. This credit will only offset the regular corporate
income tax and does not apply against the alternative minimum tax; however,
any unused credits may be carried forward for fifteen years. The amount of
the tax credit available for the years ended September 30, 1998 and 1997,
was $293,118 and $275,089, respectively. The tax credit that was currently
allowed and utilized against the current year's Federal income tax, due for
the years ended September 30, 1998 and 1997, was $-O- for both years. The
Company currently has unused credits in the amount of $293,118. These
credits will expire on September 30, 2007 through September 30, 2013.
The Company has utilized the special tax provisions of the Internal Revenue
Code as they pertain to foreign sales. The maximum sales allowable under the
provisions applicable to the Small Foreign Sales Corporation is $5,000,000
of foreign sales. This incentive was placed in our tax code to encourage the
manufacture and export of United States made products to foreign countries.
ABCO had foreign sales in each of the years ended September 30, 1998 and
1997. As a result of the amount subject to this special treatment under
current provisions of the law, the Company received tax exempt income of
$-O- and $115,967, respectively for these two years.
The Company has available at September 30, 1998, an unused net operating
loss carryforward in the amount of $2,863,797, which may be applied against
future taxable income. This net operating loss carryforward will expire on
September 30, 2009 through September 30, 2013, and has been utilized to
offset deferred Federal income taxes at September 30, 1998.
NOTE 12: CONTINGENCIES
The Company is a defendant in two lawsuits relating to a matters that are in
the ordinary course of the company's business activities. One is the result
of work related injuries occurring during the normal course of business. The
Company does not maintain workman's compensation insurance coverage, but
provides these benefits through self insurance. A loss, if any, will be born
by the Company. The second lawsuit alleges that a boiler provided by the
company leaked and caused damage to the owner's plant. The Company's
management does not believe that any material liability will be imposed as a
result of these matters.
NOTE 13: 401K PROFIT SHARING PLAN & TRUST
The Company has a "401K Profit Sharing Plan & Trust". The plan covers
substantially all employees and continues to maintain individual employee
accounts to reflect the prior year's allocation to all participants of the
Company's Stock owned by the plan. As of September 30, 1998 and 1997, the
plan owned 12,094 shares of the Company's issued and outstanding common
stock.
The plan provides for voluntary matching of the employee's elected salary
reductions subject to all 401(k) provisions of the internal revenue code.
The amount of the voluntary matching contribution is to be determined
annually by the Board of Directors of the Company. The total Company
contributions including administrative costs for the years ended September
30, 1998 and 1997 were $-O- and $19,784, respectively.
NOTE 14: LOAN COSTS
The Company incurred costs associated with obtaining Long-term financing for
the year ended September 30, 1991, in the amount of $35,614. The note for
the new financing expires on February 7, 2001. The loan costs are being
amortized over the life of the loan, which was 10 years. Amortization for
the each of the years ended September 30, 1998 and 1997, was $3,561.
NOTE 15: CAPITAL LEASE COMMITMENT
The company is the lessee of a forklift under a capital lease expiring on
December 28, 2001. This lease originated on December 28, 1995. The asset
and liability under this capital lease are recorded at the fair value of the
asset which is the present value of the minimum lease payments. The asset is
being depreciated over its estimated productive life. Depreciation of this
asset is included in depreciation expense for the years ended September 30,
1998 and 1997. The accumulated depreciation on this asset at September 30,
1998 and 1997 was $31,170 and $19,836, respectively.
Minimum future lease payments under capital leases as of September 30, 1998
for each of the next five years and in aggregate are:
September 30, 1999 $ 15,884
September 30, 2000 15,884
September 30, 2001 15,884
September 30, 2002 2,647
September 30, 2003 -
Subsequent to September 30, 2003 -
-------
Total minimum lease payments 50,299
Less amount representing interest (6,938)
-------
Present value of net minimum lease
payments $ 43,361
=======
The interest rate on the capitalized lease of 8.9% is the lessor's implicit
rate of return which is lower than the company's incremental borrowing rate
at the inception of the lease.
NOTE 16: DEBT RESTRUCTURE
In July, 1998, the Company held a public meeting with trade creditors and
offered a workout plan for payment of their accounts payable balances
accumulated through June 30, 1998. As a result of the meeting, a vendor
response Letter was mailed to all trade creditors allowing them to choose
among several options, with the main options including: (1) agree to be paid
$500 and forgive the balance, (2) be paid 50% in October, 1998 and forgive
the balance, (3) accept a term note for the balance due, payable in 36
monthly installments with interest at 6%. A summary of the response from
these letters is as follows:
i) Those electing to be paid $500 and forgive the balance was only
elected by one vendor and was settled prior to September 30, 1998.
ii) Those electing to be paid 50% and forgive the balance amounted to
a total of $448,080 of accounts payable balances and resulted in
debt forgiveness of $224,040, which is reflected on the
accompanying statement of income (loss) as an extraordinary item.
iii) Trade creditors accepting a term note with 36 monthly installments
amounted to $1,605, 222. The terms of the payout call for 36
monthly installments starting in November, 1998, with interest at
the rate of 6%. The monthly payments will be approximately $52,330
including interest. The liability for the term note payout of the
$1,605,222 is reflected on the accompanying balance sheet as trade
notes payable with $460,217 being current and $1,145,005 being
long-term. The debt maturity schedule of these trade notes are as
follows:
Due in the year ended September 30, 1999 $ 460,217
Due in the year ended September 30, 2000 $ 531,746
Due in the year ended September 30, 2001 $ 564,540
Due in the year ended September 30, 2002 $ 48,719
----------
Total $1,605,222
==========
iv) Many of the trade creditors did not respond to the letter or
responded without agreeing to any of the options. Accounts payable
in the amount of $460,368 are attributable to non responses and
remain as part the accounts payable on the accompanying balance
sheet. The Company started accruing interest at 6% on these
balances in November, 1998, but payment on these amounts have not
been scheduled. The amount attributable to responses not agreeing
with any of the options is $671,489 and is included as part of the
trade notes payable on the accompanying balance sheet. Monthly
payments will be made on this amount the same as the creditors
agreeing to the term note with 36 monthly installments.
NOTE 17: ACCOUNTING CHANGE
During the year ended September 30, 1998, the Company changed its method of
accounting for the progress toward completion on jobs in progress from the
cost-to-cost method to the direct manufacturing hours method. The cost-to-
cost method used the cost incurred to date on the jobs in progress divided
by the total estimated cost of the job to determine the percentage complete,
whereas the direct manufacturing hours incurred aer divided by the total
estimated manufacturing hours for the job to determine the percentage
complete under the new method. The company believes that the direct
manufacturing hours provides a more realistic measure of the actual progress
towards completion on jobs. As a result of the change, the Company
recognized a noncash cumulative charge of $705,072, net of tax benefit of
$34,006, to net income for the year ended September 30, 1998. Pro forma
amounts are presented on the income statement showing the effect of applying
the new method retroactively.
ABCO INDUSTRIES, INC.
Financial Statements
For the Years Ended
September 30, 1997 and 1996
WOLFE AND COMPANY, PC
Certified Public Accountants
WOLFE AND COMPANY, PC
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
Board of Directors
ABCO Industries, Inc.
Abilene, Texas
We have audited the accompanying balance sheets of ABCO Industries, Inc.
as of September 30, 1997 and 1996, and the related statements of income
and retained earnings and cash flows for the years 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 ABCO
Industries, Inc., as of September 30, 1997 and 1996, and the results of
its operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/
Wolfe and Company, P.C.
Certified Public Accountants
November 26, 1997
Abilene, Texas
3102 South Clack, Suite 1 * Abilene, Texas 79606-2299
Telephone 915/698-4861 * FAX 915/698-5654
www.wolfecpa.com * mail@wolfecpa.com
ABCO INDUSTRIES, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
ASSETS
1997 1996
---------- ---------
CURRENT ASSETS:
Gash and cash equivalents $ 8,856 $ 311,882
Receivables - trade, net 280,351 137,815
Receivables - retainage 1,345,058 765,051
Receivables - miscellaneous 209,357 300,577
Receivables - related company - 4,300
Costs and estimated earnings in excess
of billings on uncompleted contracts 4,122,464 2,375,129
Inventories 635,394 696,066
Prepaid expenses 154,082 46,159
Prepaid Federal income taxes 43,109 23,718
Deposits 4,813 6,738
Current portion of notes receivable 302,867 417,701
---------- ---------
Total current assets 7,106,351 5,085,136
---------- ---------
PROPERTY AND EQUIPMENT 1,802,191 1,844,337
---------- ---------
OTHER ASSETS:
Receivable from officer 16,326 16,326
Receivables - related company 462,795 -
Cash value - officers' life insurance 272,661 239,967
Notes receivable, long-term 516,800 675,134
Loan costs, net of amortization 11,871 15,433
---------- ---------
Total other assets 1,280,453 946,860
---------- ---------
TOTAL ASSETS $10,188,995 $7,876,333
========== =========
The accompanying notes are an integral part of the financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
---------- ----------
CURRENT LIABILITIES:
Cash overdraft $ 64,343 $ -
Accounts payable - trade 2,604,986 1,310,502
Accrued liabilities 792,164 783,457
Billings in excess of costs and estimated
earnings on uncompleted contracts 177,614 81,780
Notes payable 1,550,000 1,000,000
Current maturities of long-term debt 449,519 581,586
---------- ----------
Total current liabilities 5,638,626 3,757,325
---------- ----------
NONCURRENT LIABILITIES:
Long-term debt, net of current maturities 1,254,083 1,579,774
Deferred Federal income taxes 34,006 -
---------- ----------
Total noncurrent liabilities 1,288,089 1,579,774
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 500,000 shares
authorized; 103,070 shares issued and
outstanding 103,070 103,070
Paid-in capital 406,907 406,907
Retained earnings 2,931,738 2,208,692
Treasury stock, 8,050 shares at cost (179,435) (179,435)
---------- ----------
Total stockholders' equity 3,262,280 2,539,234
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,188,995 $ 7,876,333
========== ==========
ABCO INDUSTRIES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
----------- -----------
SALES $ 23,321,988 $ 21,144,252
COST OF SALES 17,290,373 15,125,913
----------- -----------
GROSS PROFIT 6,031,615 6,018,389
----------- -----------
OPERATING EXPENSES:
Selling expenses 855,402 1,706,547
General and administrative expenses 1,136,980 1,130,393
Engineering expenses 1,491,279 2,243,528
Purchasing and warehouse expenses 317,484 267,789
Operations expenses 1,315,975 -
----------- -----------
Total operating expenses 5,117,070 5,348,257
----------- -----------
INCOME FROM OPERATIONS 914,545 670,082
----------- -----------
OTHER INCOME (EXPENSE):
Interest and dividend income 89,381 113,771
Interest expense (271,016) (317,858)
Gain (loss) on sale of assets 25,009 970
Refund of prior years' income tax - 157,733
Miscellaneous income 5,517 198,558
----------- -----------
Net other income (expense) (151,109) 153,674
----------- -----------
INCOME BEFORE FEDERAL INCOME TAXES 763,436 823,756
PROVISION FOR FEDERAL INCOME TAXES:
Current 6,384 5,324
Deferred expense 34,006 -
Total provision for Federal income taxes 40,390 5,324
----------- -----------
NET INCOME 723,046 818,432
RETAINED EARNINGS, Beginning of year 2,208,692 1,390,260
----------- -----------
RETAINED EARNINGS, End of year $ 2,931,738 $ 2,208,692
=========== ===========
The accompanying notes are an integral part of the financial statements.
ABCO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from:
Customers $ 21,092,379 $ 20,594,347
Interest 103,084 71,955
Refund of taxes paid in prior year - 157,733
Other 5,517 39,558
----------- -----------
Total cash received 21,200,980 20,863,593
Cash paid to or for:
Suppliers and employees 20,903,561 20,595,245
Interest 289,788 265,152
Federal income taxes 25,775 9,962
Payment to settle lawsuit - 112,314
----------- -----------
Total cash paid 21,219,124 20,982,673
----------- -----------
Net cash (used in) operating activities (18,144) (119,080)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (248,195) (437,609)
Sale of property and equipment 29,049 12,968
Addition to note receivable (15,533) -
Collection of note receivable 288,701 156,710
Addition to receivable from related company 462,795 -
Collection of receivable from related company - 449,950
Increase in cas value of insurance (32,694) (31,343)
----------- -----------
Net cash provided by (used in)
investing activities (441,467) 150,676
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issue of debt - 719,122
Payment of debt (457,758) (264,607)
Line of credit - net 550,000 -
Purchase of treasury stock - (179,435)
----------- -----------
Net cash provided by financing activities 92,242 275,080
----------- -----------
NET INCREASE (DECREASE) IN CASH (367,369) 306,676
CASH AND CASH EQUIVALENTS, Beginning of year 311,882 5,206
----------- -----------
CASH AND CASH EQUIVALENTS, End of year $ (55,487) $ 311,882
=========== ===========
The accompanying notes are an integral part of the financial statements.
ABCO INDUSTRIES, INC.
RECONCILIATION OF NET INCOME TO NET
CASH (USED IN) OPERATING ACTIVITIES
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
----------- ---------
NET INCOME $ 723,046 $ 818,432
NONCASH CHARGES TO INCOME:
Depreciation 286,302 277,633
Amortization 3,561 3,561
Deferred Federal income taxes 34,006 -
NONOPERATING CHARGES (CREDITS) TO INCOME -
(Gain) Loss on sale of assets (25,009) (970)
DECREASE (INCREASE) IN OPERATING ASSETS:
Receivables and retainages - trade,
net of allowance (722,643) 305,172
Intercompany account receivable from
related company 4,300 (4,300)
Receivables - miscellaneous 91,220 (243,635)
Costs and estimated earnings in excess
of billings on uncompleted contracts (1,747,335) (727,323)
Inventories 60,672 (186,859)
Prepaid expenses (127,314) 2,759
Other assets 1,925 2,398
INCREASE (DECREASE) IN OPERATING LIABILITIES:
Billings in excess of costs and estimated
earnings on uncompleted contracts 95,834 (127,754)
Payables and accrued liabilities 1,303,191 (125,880)
Accrued guaranty loss - (112,314)
----------- ---------
NET CASH (USED IN) OPERATING ACTIVITIES $ (18,144) $ (119,080)
=========== =========
The accompanying notes are an integral part of the financial statements.
ABCO INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
ABCO Indnstries, Inc. was incorporated under the laws of the State of Texas
in 1958. The Company specializes in custom-designed boilers of all types,
typically for heavy industrial applications in power, chemical, and
petrochemical industries. The Company has a fiscal year end of September 30.
Accounts Receivable
The Company uses the reserve method of accounting for uncollectible
accounts.
Revenue and Cost Recognition
The Company records contract revenue and costs on a percentage-of-completion
basis, measured by the percentage of costs incurred to date to the total
estimated costs for each boiler. Adjustments to estimates of contract
revenues, costs, or extent of progress toward completion are sometimes
required as work progresses and more information is obtained. These
adjustments, which result from changed conditions and new developments and
which are characteristic of the process, are reported in the year in which
they occur. Any losses expected to be incurred on contracts in process are
charged to operations in the period such losses are determined.
The current asset, costs and estimated earnings in excess of billings on
uncompleted contracts, represents the aggregate of costs incurred and income
recognized on uncompleted contracts in excess of related billings. The
current liability, billings in excess of costs and estimated earnings on
uncompleted contracts, represents the aggregate of billings on uncompleted
contracts in excess of related costs incurred and income recognized.
A reconciliation of costs and earnings recognized on contracts in process to
the related progress billings on such contracts is provided in Note 5.
Inventories
The Company's materials inventory is stated at the lower of first-in, first-
out cost or market.
Property and Equipment
Property and equipment are stated at historical cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line and
declining-balance methods and amounted to $286,302 and $277,633 for the
years ended September 30, 1997 and 1996, respectively. Estimated lives used
in calculating depreciation are summarized by major asset category as
follows:
Category Useful Life
--------------------- -----------
Buildings 25 years
Building improvements 5-15 years
Shop equipment 5-20 years
Automotive equipment 3-10 years
Office equipment 5-16 years
Maintenance and repairs on property and equipment are charged to expense as
incurred; whereas, additions and improvements are capitalized. The cost of
assets, which are sold or retired, and the related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is reflected
in income.
Provision for Warranties
A warranty provision has been established for the costs estimated to be
incurred to correct defects in workmanship or material during the warranty
period of completed projects.
Federal Income Taxes
Federal income taxes are provided for all items on the income statements,
including deferred Federal income taxes resulting from timing differences in
the recognition of income and expense items for financial accounting and tax
purposes. As of September30, 1996, a deferred tax liability did not exist.
Cash and Cash Equivalents
For purposes of these financial statements, the Company considers short-term
investments with a maturity of three months or less to be cash equivalents.
Cash and cash equivalents at September 30, 1997 and 1996, include the
following:
1997 1996
--------- ---------
Cash on hand and in checking $ 8,856 $ 311,882
Cash (overdraft) in checking (64,343) -
--------- ---------
Total cash and cash equivalents $ (55,487) $ 311,882
========= =========
Cash
The Company maintains all of its cash balances in one bank. These balances
are insured by the Federal Deposit Insurance Corporation up to $100,000. The
cash balances exceeding the $100,000 are not insured.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amount of assets, liabilities, revenues and
expenses. Actual results could differ from these estimates.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, trade and other
receivables, and other short term instruments approximates fair value. The
carrying amount of the material long-term notes receivable and debt
approximates the fair value due to the interest rates on these notes being
tied to a base rate that is variable and would be available to the Company
at September 30, 1997.
NOTE 2: TRADE RECEIVABLES
At September 30, 1997 and 1996, trade receivables were aged as follows:
1997 1996
--------- --------
Current $ 222,918 $ 62,543
30 - 60 days 12,182 40,306
60 - 90 days 10,200 27,429
Over 90 days 35,051 17,635
--------- --------
Total 280,351 137,913
Less allowance for doubtful accounts - 98
--------- --------
Net trade receivables $ 280,351 $137,815
========= ========
NOTE 3: RETAINAGE RECEIVABLES
Retainage receivables are amounts billed on contracts but not paid by
customers, which, pursuant to retainage provisions in contracts, are due
upon completion of the contract and acceptance by the customer.
Substantially all retentions are deemed collectible within one year.
The retainages receivable are net of related known warranty accruals of
$114,000 and $73,886 at September 30, 1997 and 1996, respectively.
NOTE 4: RELATED PARTY TRANSACTIONS
ABCO Industries, Inc. sells parts to Global Boiler and Mechanical, Inc. The
same family are the major stockholders of both companies. The total sales by
ABCO Industries, Inc. to Global Boiler and Mechanical, Inc. were $17,560 and
$273,010 for the years ended September 30, 1997 and 1996, respectively.
ABCO Industries, Inc. purchased repair and boiler installation services from
Global Boiler and Mechanical, Inc. amounting to $390,139 and $205,516 for
the years ended September 30, 1997 and 1996, respectively.
Other intercompany transactions include charges for insurance, credit card
payments, and other miscellaneous expenses.
The Company has provided financing to Global Boiler and Mechanical, Inc., in
the form of advances. The amount due from Global as a result of these
advances is $462,795 at September 30, 1997, and is reflected on the
accompanying balance sheet under other assets. The Company has committed to
provide additional financing to Global for working capital, if needed.
NOTE 5: CONTRACTS IN PROCESS
1997 1996
----------- ----------
Expenditures on uncompleted contracts $ 9,943,362 $5,654,921
Estimated earnings recognized thereon 3,237,642 1,441,898
------------ ----------
Total 13,181,004 7,096,819
Less applicable progress billings 9,236,154 4,803,470
Net $ 3,944,850 2,293,349
============ ==========
The aforementioned amounts are included in the accompanying balance sheets
under the following captions:
1997 1996
----------- -----------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 4,122,464 $ 2,375,129
Billings in excess of costs and estimated
earnings on uncompleted contracts (177,614) (81,780)
---------- -----------
Net $ 3,944,850 $ 2,293,349
========== ===========
NOTE 6: INVENTORIES
Inventories consist of raw materials, which are used in the boiler
manufacturing process. The Company did not have any finished goods at
September 30, 1997 and 1996.
NOTE 7: PROPERTY AND EQUIPMENT
At September 30, 1997 and 1996, property and equipment consisted of the
following:
1997 1996
--------- ---------
Land and land improvements $ 469,121 $ 461,421
Buildings 1,367,249 1,367,249
Shop equipment 2,204,320 2,138,570
Automotive equipment 211,687 211,687
Office equipment 679,351 550,161
Equipment held under a capital lease 79,342 79,342
--------- ---------
Total 5,011,070 4,808,430
Less accumulated depreciation 3,208,879 2,964,093
--------- ---------
Net property and equipment $1,802,191 $1,844,337
========= =========
NOTE 8: OFFICERS' LIFE INSURANCE
The Company is the owner and beneficiary of whole life insurance policies
aggregating $2,000,000 on the lives of its officers at September 30, 1997
and 1996. The cash surrender value on these policies amounted to $2,690 and
$-O- at September 30, 1997 and 1996, respectively. There is no cash value at
September 30, 1996 on these policies as a result of the Company canceling
the policies with cash values at September 30, 1995 and taking out new
policies during the year ended September 30, 1996. The Company also pays
premiums on various split-dollar life insurance policies on its Chairman of
the Board and CEO. One of these policies amounting to $1,000,000 has been
assigned to a bank as collateral for the Company's outstanding loan balance.
The Company is not the beneficiary on these split-dollar policies. The
premiums paid on the split-dollar policies amounted to $30,005 and $47,009
for the years ended September 30, 1997 and 1996, respectively, and are
included in cash value of officers' life insurance on the balance sheets.
NOTE 9: NOTES PAYABLE
The Company's bank provides $1,650,000 on a revolving lines of credit, of
which $1,550,000 had been drawn at September 30, 1997. One of the credit
Lines in the amount of $1,250,000 was renewed on April 30, 1997 and matures
on April 30, 1998, while the other credit line was established an September
19, 1997 and matures on December 19, 1997, with interest tied to the bank's
base rate. The lines of credit is secured by the Company's inventory, work
in process, accounts and notes receivable, and personal guaranties by
certain stockholders of the Company. There are no compensating balance
requirements or commitment fees.
NOTE 10: LONG-TERM DEBT
At September 30, 1997 and 1996, long-term debt consisted of the following:
1997 1996
--------- ---------
Note payable to bank, due February
7, 2001, secured by all machinery
and equipment, excluding vehicles,
real property, a life insurance
policy on the president of the
Company, stockholder's personal, and
the Small Business Administration
guaranties; payable in monthly
installments of $10,936 each,
including interest at 2.75% above
the Wall Street Journal prime (Prime
was 8.50% at September 30, 1997). $ 371,787 $ 455,149
Vehicle notes payable to bank,
payable in monthly installments
ranging from $645 to $732, including
interest at rates ranging from 8.5%
to 11%, maturity dates from August
30, 1997 to February 19, 2000,
secured by vehicles. 19,071 32,382
Note payable to bank, due March 20,
2000, secured by a note receivable
from a customer, insurance policy
issued by the Export-Import Bank of
the United States, commercial
guaranties executed by stockholders'
of the company; payable in semi-
annual installments of $129,200
each, plus interest at the bank's
base rate which was 9.5% at
September 30, 1997. 775,200 1,033,600
Note payable to bank, due November
15, 2000, secured by deed of trust
on real estate and guaranties
executed by stockholders' of the
company, payable in monthly
installments of $6,600, including
interest at the bank's base rate
which was 9.5% at September 30,
1997. 436,073 471,402
Note payable to an individual, due
June 15, 1998, unsecured, payable in
monthly installments of $5,355,
including interest at 9.5%. 46,342 103,232
Note payable on capital lease
obligation, due December 28, 2001,
payable in monthly installments of
$1,324, including imputed interest
rate of 8.9%, secured by equipment. 55,129 65,595
--------- ---------
Total 1,703,602 2,161,360
Less current maturities 449,519 581,586
--------- ---------
Net long-term debt $1,254,083 $1,579,774
========= =========
Principal payments for the next five years are as follows:
September 30, 1998 $ 449,519
September 30, 1999 419,822
September 30, 2000 433,113
September 30, 2001 398,530
September 30, 2002 2,618
Thereafter -
-----------
Total $ 1,703,602
===========
NOTE 11: FEDERAL INCOME TAXES
Federal income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes. Federal Temporary differences giving rise to the deferred
income at September 30, 1997 and 1996 consist primarily of depreciation,
contract revenue, inventory expenses, contributions, and warranty liability.
The difference resulting from depreciation is due to accelerated
depreciation used for tax purposes and straight line depreciation used for
financial accounting purposes. The contract revenue difference is a result
of the percentage-of-completion method being used for financial accounting
purposes and the completed contract method used for tax purposes. Internal
Revenue Code Section 263A requires certain inventory costs to be capitalized
for tax purposes. These costs are not capitalized for financial accounting
purposes, which cause the inventory difference. The Internal Revenue Code
limits current contribution expenses to 10% of the taxable income prior to
the deduction for contributions. Contributions in excess of this amount are
available for carryover to the following five tax years.
The Internal Revenue Code currently allows a tax credit for increasing
research activities. This credit will only offset the regular corporate
income tax and does not apply against the alternative minimum tax; however,
any unused credits may be carried forward for fifteen years. The amount of
the tax credit available for the years ended September 30, 1997 and 1996,
was $275,089 and $246,466, respectively. The tax credit that was currently
allowed and utilized against the current year's Federal income tax, due for
the years ended September 30, 1997 and 1996, was $-O- for both years. The
Company currently has unused credits in the amount of $275,089. These
credits will expire on September 30, 2007 through September 30, 2012, and
have been utilized to offset deferred Federal income taxes in the amount of
$275,089 as of September 30, 1997.
The Company has utilized the special tax provisions of the Internal Revenue
Code as they pertain to foreign sales. The maximum sales allowable under the
provisions applicable to the Small Foreign Sales Corporation is $5,000,000
of foreign sales. This incentive was placed in our tax code to encourage the
manufacture and export of United States made products to foreign countries.
ABCO had foreign sales in each of the years ended September 30, 1997 and
1996. As a result of the amount subject to this special treatment under
current provisions of the law, the Company received tax exempt income of
$115,967 and $23,221, respectively for these two years.
The Company has available at September30, 1997, an unused net operating loss
carryforward in the amount of $1,604,188, which may be applied against
future taxable income. This net operating loss carryforward will expire on
September 30, 2009 through September 30, 2012, and has been utilized to
offset deferred Federal income taxes at September 30, 1997.
The Company carried back a net operating loss from the year ended September
30, 1995, resulting in a refund of $157,733 that was received in the year
ended September 80, 1996 and reported on the accompanying statement of
income under Other Income (Expense). The carryback resulted in a $124,812
increase in the unused research credit, which is included in the total
unused credit of $275,089.
NOTE 12: CONTINGENCIES
The Company is a defendant in a lawsuit relating to a matter that is in the
ordinary course of the company's business activities. This lawsuit alleges
that equipment provided by the company did not meet certain contractual
requirements. The Company's management does not believe that any material
liability will be imposed as a result of this matter.
NOTE 13: 401K PROFIT SHARING PLAN & TRUST
The Company amended its Employee Stock Ownership Plan and Trust, as of April
1, 1996, to include the "salary reduction" provisions of the Internal
Revenue Code. The name of the plan was amended to "401K Profit Sharing Plan
& Trust".
The plan covers substantially all employees and continues to maintain
individual employee accounts to reflect the prior year's allocation to all
participants of the Company's Stock owned by the plan. As of September 30,
1997 and 1996, the plan owned 12,094 shares of the Company's issued and
outstanding common stock.
The plan as amended on April 1, 1996, provides for voluntary matching of the
employee's elected salary reductions subject to all 401(k) provisions of the
internal revenue code. The amonnt of the voluntary matching contribution is
to be determined annually by the Board of Directors of the Company. The
total Company contributions including administrative costs for the years
ended September 30, 1997 and 1996 were $19,784 and $75,128, respectively.
NOTE 14: LOAN COSTS
The Company incurred costs associated with obtaining long-term financing for
the year ended September 30, 1991, in the amount of $35,614. The note for
the new financing expires on February 7, 2001. The loan costs are being
amortized over the Life of the loan, which was 10 years. Amortization for
the each of the years ended September 30, 1997 and 1996, was $3,561.
NOTE 15: CAPITAL LEASE COMMITMENT
The company is the lessee of a forklift under a capital lease expiring on
December 28, 2001. This lease originated on December 28, 1995. The asset
and liability under this capital lease are recorded at the fair value of the
asset which is the present value of the minimum lease payments. The asset is
being depreciated over its estimated productive life. Depreciation of this
asset is included in depreciation expense for the years ended September 30,
1997 and 1996. The accumulated depreciation on this asset at September 30,
1997 and 1996 was $19,836 and $8,501, respectively.
Minimum future lease payments under capital leases as of September 30, 1997
for each of the next five years and in aggregate are:
September 30, 1998 $ 15,884
September 30, 1999 15,884
September 30, 2000 15,884
September 30, 2001 15,884
September 30, 2002 2,647
Subsequent to September 30, 2002 -
--------
Total minimum lease payments 66,183
Less amount representing interest (11,054)
--------
Present value of net minimum lease payments $ 55,129
========
The interest rate on the capitalized lease of 8.9% is the lessor's implicit
rate of return which is lower than the company's incremental borrowing rate
at the inception of the lease.
Pro Forma Condensed Consolidated Balance Sheet
December 31, 1999
Pro Forma
Peerless ABCO Adjustment (1) Pro Forma
---------- ---------- ----------- ----------
Assets
Current Assets
Cash and cash equivalents $ 2,528,940 $ 1,271,941 $ (1,271,941) $ 2,528,940
Short-term investments 273,343 - - 273,343
Accounts receivable 10,399,558 1,891,859 (1,891,859) 10,399,558
Inventories 2,144,978 281,580 (193,580) 2,232,978
Costs and earnings in excess of billings on
uncompleted contracts 4,569,604 - - 4,569,604
Other receivables - 1,022,154 (1,022,154) -
Other 1,292,320 262,409 (262,409) 1,292,320
---------- ---------- ----------- ----------
Total current assets 21,208,743 4,729,943 (4,641,943) 21,296,743
Property, Plant and Equipment - at Cost,
less accumulated depreciation 2,087,582 1,440,303 100,697 3,628,582
Property held for investment - at Cost,
less accumulated depreciation 68,9000 - - 68,900
Other Assets 748,865 468,101 (468,101) 748,865
$24,114,090 $ 6,638,347 $ (5,009,347) $25,743,090
========== ========== =========== ==========
Liabilities and Stockholders' Equity
Current Liabilites
Accounts payable - trade $ 5,127,302 $ 1,194,415 $ (1,194,415) $ 5,127,302
Notes payable - - 1,629,000 1,629,000
Billings in excess of costs and earnings on
uncompleted contracts 1,844,378 3,754,713 (3,754,713) 1,844,378
Commissions payable 1,189,459 - - 1,189,459
Current portion of notes payable - 1,082,548 (1,082,548) -
Accrued liabilities 1,075,566 508,746 (508,746) 1,075,566
---------- ---------- ----------- ----------
Total current liabilities 9,236,705 6,540,422 (4,911,422) 10,865,705
Notes payable - 2,363,850 (2,363,850) -
---------- ---------- ----------- ----------
9,236,705 8,904,272 (7,275,272) 10,865,705
Stockholders' Equity
Common stock - authorized, 10,000,000 shares
of $1 par value; issued and outstanding, 1,459,992 1,459,992 103,070 (103,070) 1,459,992
Additional paid-in capital 2,610,658 406,907 (406,907) 2,610,658
Unamortized value of restricted stock grants (42,486) - - (42,486)
Cumulative foreign currency translation adjustment (120,741) - - (120,741)
Treasury stock - (179,435) 179,435 -
Retained earnings 10,969,962 (2,596,467) 2,596,467 10,969,962
---------- ---------- ----------- ----------
14,877,385 (2,265,925) 2,265,925 14,877,385
---------- ---------- ----------- ----------
$24,114,090 $ 6,638,347 $ (5,009,347) $25,743,090
========== ========== =========== ==========
Note:
(1) To record purchase of Inventory and Property, Plant and Equipment assets of ABCO for $1,629,000,
eliminate other accounts of ABCO not acquired, and record debt incurred to finance purchase price.
Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended June 30, 1999
Pro Forma
Peerless ABCO ( 1 ) Adjustments Proforma
----------- ----------- ----------- ----------
Net Sales $ 40,568,443 $ 14,894,372 $ - $ 55,462,815
Cost of goods sold 26,296,724 12,322,841 (21,600) ( a ) 38,597,965
----------- ----------- ----------- -----------
Gross profit 14,271,719 2,571,531 21,600 16,864,850
Operating expenses 11,293,251 5,851,329 - 17,144,580
----------- ----------- ----------- ----------
Operating profit 2,978,468 (3,279,798) 21,600 (279,730)
Other income (expense) (132,898) (356,289) (134,000) ( b ) (623,187)
----------- ----------- ----------- ----------
Earnings (loss) before income
taxes 2,845,570 (3,636,087) (112,400) (902,917)
Income tax expense (benefit) 996,000 - (1,349,455) ( c ) (353,455)
----------- ----------- ----------- ----------
Net earnings (loss) $ 1,849,570 $ (3,636,087) $ 1,237,055 $ (549,462)
=========== =========== =========== ==========
Earnings (loss) per share $ 1.27 $ (0.38)
=========== ==========
Weighted average number of
shares outstanding 1,456,354 1,456,354
=========== ==========
Notes:
(1) The statement of operations for ABCO is for the year ended September 30, 1999.
(2) Pro forma adjustments:
( a ) To adjust depreciation on ABCO's assets for new basis of accounting.
( b ) To record interest on debt incurred to purchase assets of ABCO.
( c ) To record tax effects of pro forma adjustments and tax benefits of loss of ABCO.
Pro Forma Condensed Consolidated Statement of Operations
For the Six Months Ended December 31, 1999
Pro Forma
Peerless ABCO Adjustments ( 1 ) Proforma
----------- ---------- ----------- -----------
Net Sales $ 22,665,368 $ 6,386,986 $ - $ 29,052,354
Cost of goods sold 15,170,512 4,859,105 (10,800) ( a ) 20,018,817
----------- ---------- ----------- -----------
Gross profit 7,494,856 1,527,881 10,800 9,033,537
Operating expenses 6,387,992 2,390,903 - 8,778,895
----------- ---------- ----------- -----------
Operating profit 1,106,864 (863,022) 10,800 254,642
Other income (expense) 20,119 (280,101) (67,000) ( b ) (326,982)
----------- ---------- ----------- ----------
Earnings (loss) before income
tax 1,126,983 (1,143,123) (56,200) (72,340)
Income tax expense (benefit) 401,314 - (431,756) ( c ) (30,442)
----------- ---------- ----------- ----------
Net earnings (loss) $ 725,669 $(1,143,123) $ 375,556 $ (41,898)
=========== ========== ========== ==========
Earnings (loss) per share $ 0.50 $ (0.03)
=========== ==========
Weighted average number of
shares outsanding 1,451,338 1,451,338
=========== ==========
Notes:
( 1 ) Pro forma adjustments:
( a ) To adjust depreciation on ABCO's assets for new basis of accounting.
( b ) To record interest on debt incurred to purchase assets of ABCO.
( c ) To record tax effects of pro forma adjustments and tax benefits of loss of ABCO.