1 8-K/A 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) February 9, 1999 TRANSMATION, INC. (Exact Name of Registrant as Specified in Charter) Ohio 0-3905 16-0874418 (State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification No.) 10 Vantage Point Drive, Rochester, New York 14624 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 716-352-7777 (Former Name or Former Address, if Changed Since Last Report) 2 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (a) Financial Statements of Business Acquired INDEX TO FINANCIAL STATEMENTS OF METERMASTER, INC. Years Ended December 31, 1998 and 1997 Report of Independent Accountant. Balance Sheets as of December 31, 1998 and 1997 (audited). Statements of Operations for the 12 months ended December 31, 1998 and 1997 (audited). Statements of Stockholders' Equity (Capital Deficit) Years Ended December 31, 1998 and 1997 (audited). Statements of Cash Flows December 31, 1998 and 1997 (audited). Summary of Significant Accounting Principles December 31, 1998 & 1997. Notes to Financial Statements December 31, 1998 and 1997. Independent Auditors' Report on Supplemental Material December 31, 1998 and 1997 (audited). Supplemental Material December 31, 1998 and 1997 (audited). Years Ended December 31, 1996 and 1995 Report of Independent Accountant. Balance Sheets as of December 31, 1996 and 1995 (audited). Statements of Income for the 12 months ended December 31, 1996 and 4.5 months ended December 31, 1995 (audited). Statements of Stockholders' Equity Years ended December 31, 1996 and 1995 (audited). Statements of Cash Flows December 31, 1996 and 1995 (audited). Notes to Financial Statements December 31, 1996 and 1995. Supplemental Schedules December 31, 1996 and 1995 (audited). 2 3 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Metermaster Inc. Marietta, Georgia We have audited the accompanying balance sheets of Metermaster Inc. (a Georgia corporation) as of December 31, 1998 and 1997, and the related statements of operations, stockholders' equity (capital 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 audits. We conducted our audits 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 audits provide 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 Metermaster Inc. as of December 31, 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. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses, has a net capital deficiency and is in violation of certain financial covenants under its credit facility. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in regard to these matters is also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP January 29, 1999, except for Note 11, as to which the date is February 8, 1999 Atlanta, Georgia 3 4 METERMASTER INC. BALANCE SHEETS DECEMBER 31, DECEMBER 31, ------------------------------------------- 1998 1997 ------------- ------------------ Assets (Notes 4 and 11) Current Cash (Note 4) $ 84,043 $ 35,436 Accounts and notes receivable, net of allowance for possible losses of $60,000 each year (Note 4) 2,450,410 3,146,787 Inventories (Notes 2 and 4) 1,921,885 2,511,270 Other receivables 19,045 48,297 Deferred income taxes (Note 9) 86,000 58,000 Prepaid expenses 127,385 104,579 ---------- ---------- Total current assets 4,688,768 5,904,369 ---------- ---------- Property and equipment (Note 4) Test equipment 748,764 730,069 Computer equipment 373,044 332,991 Furniture, fixtures and office equipment 167,224 166,044 Leasehold improvements 29,293 25,595 Machinery and equipment 28,003 28,003 Vehicles 9,545 ---------- ---------- 1,355,873 1,282,702 Less accumulated depreciation 435,814 233,407 ---------- ---------- Net property and equipment 920,059 1,049,295 ---------- ---------- Other Assets Deposits 33,338 45,262 Loan origination/organization costs (Note 3) 33,914 70,389 ---------- ---------- Total other assets 67,252 115,651 ---------- ---------- Total Assets $5,676,079 $7,069,315 ========== ========== 4 5 METERMASTER INC. BALANCE SHEETS DECEMBER 31 DECEMBER 31 --------------------------------------- 1998 1997 ------------- ----------- Liabilities and Stockholders' Equity (Capital Deficit) Current liabilities Revolving lines of credit (Note 4) $ 2,332,241 $ 3,257,681 Checks issued against future deposits (Note 4) 250,020 429,557 Current maturities of long-term debt (Note 5) 569,432 293,042 Accounts payable 2,611,915 2,212,654 Accrued salaries and commissions 88,153 81,398 Accrued vacation and employee benefits 114,711 120,053 Other accrued liabilities 89,211 121,915 ----------- ----------- Total current liabilities 6,055,683 6,516,300 ----------- ----------- Long-term liabilities Long-term debt, less current maturities (note 5) 265,144 312,555 Deferred income taxes (Note 9) 86,000 58,000 ----------- ----------- Total long-term liabilities 351,144 370,555 ----------- ----------- Commitments and contingencies (Notes 7, 8 and 11) Stockholders' equity (capital deficit) (Note 6) 8% cumulative convertible preferred stock, $100 par; 200,500 shares authorized each year; 8,500 and 8,000 shares issued and outstanding 850,000 800,000 Common stock, $1 par; 2,000,000 and 100,000 shares authorized; 24,000 and 10,000 shares issued and outstanding 24,000 10,000 Additional paid-in capital 426,000 90,000 Accumulated deficit (2,030,748) (717,540) ----------- ----------- Total stockholders' equity (capital deficit) (730,748) 182,460 ----------- ----------- Total liabilities and stockholders' equity (capital deficit) $ 5,676,079 $ 7,069,315 =========== =========== See accompanying summary of significant accounting policies and notes to financial statements. 5 6 METERMASTER INC. STATEMENTS OF OPERATIONS YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------ ---------------- 1998 1997 ------------------ ---------------- Net sales $ 20,991,257 $ 20,475,134 Cost of sales 13,499,633 13,532,708 ------------ ------------ Gross profit 7,491,624 6,942,426 ------------ ------------ Operating expenses Payroll and fringe benefits 5,076,093 4,469,296 Overhead expenses 3,076,410 2,321,814 Depreciation 206,339 126,018 ------------ ------------ Total operating expenses 8,358,842 6,917,128 ------------ ------------ Income (loss) from operations (867,218) 25,298 ------------ ------------ Other income (expense) Interest expense and bank charges (489,730) (477,493) Miscellaneous 43,740 53,574 ------------ ------------ Total other expense (445,990) (423,919) ------------ ------------ Loss before income taxes (1,313,208) (398,621) Income tax provision (Note 9) - - - - - - ------------ ------------ Net loss ($ 1,313,208) ($ 398,621) ============ ============ See accompanying summary of significant accounting policies and notes to financial statements. 6 7 METERMASTER INC. STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) YEARS ENDED DECEMBER 31, 1998 AND 1997 ADD'L ACCUMU- PREFER'D COMMON PAID-IN LATED STOCK STOCK CAPITAL DEFICIT TOTAL -------------------------------------------------------------------------------- Balance, December 31, 1996 $ 650,000 $ 10,000 $ 90,000 ($ 318,919) $ 431,081 Issuance of 1,500 shares of preferred stock 150,000 - - - - - - - - - 150,000 Net loss - - - - - - - - - (398,621) (398,621) -------------------------------------------------------------------------------- Balance, December 31, 1997 800,000 10,000 90,000 (717,540) 182,460 Issuance of 500 shares of preferred stock 50,000 - - - - - - - - - 50,000 Issuance of 14,000 shares of common stock - - - 14,000 336,000 - - - 350,000 Net loss - - - - - - - - - (1,313,208) (1,313,208) -------------------------------------------------------------------------------- Balance, December 31, 1998 $ 850,000 $ 24,000 $ 426,000 ($2,030,748) ($ 730,748) ================================================================================ See accompanying summary of significant accounting policies and notes to financial statements. 7 8 METERMASTER INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 --------------- ------------- Operating activities Net loss ($1,313,208) ($ 398,621) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 287,748 147,676 Increase in allowance for doubtful accounts 10,000 Increase in inventory reserve 90,000 125,000 Loss from disposal of assets 5,669 Changes in assets & liabilities net of effects of acquisitions: Accounts receivable 696,377 (271,914) Inventories 499,385 345,380 Other receivables 29,252 (8,524) Prepaid expenses (22,806) 2,675 Refundable income taxes 87,088 Deposits 11,924 1,269 Accounts payable 399,261 (371,549) Accrued salaries & commissions 6,755 59,936 Accrued vacation & employee benefits (5,342) (26,933) Other accrued liabilities (32,704) 64,150 ----------- ----------- Cash provided by (used in) operating activities 652,311 (234,367) ----------- ----------- Investing activities Acquisition of net assets (Note 10) (304,000) Additions to property and equipment (82,772) (73,648) ----------- ----------- Cash used in investing activities (82,772) (377,648) ----------- ----------- 9 METERMASTER INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, ------------------------------------ 1998 1997 --------------- ------------ Financing activities Net (decrease) increase in revolving lines of credit (925,440) 391,433 Net decrease in checks issued against future deposits (179,537) (5,646) Proceeds from issuance of notes payable 469,000 250,000 Principal payments on long-term debt (115,021) (39,719) Proceeds from issuance of common stock (Note 6) 225,000 - - - Proceeds from issuance of preferred stock 50,000 - - - Loan origination/organization costs (44,934) (37,774) --------- --------- Cash provided by (used in) financing activities (520,932) 558,294 --------- --------- Net increase (decrease) in cash 48,607 (53,721) Cash, beginning of year 35,436 89,157 --------- --------- Cash, end of year $ 84,043 $ 35,436 ========= ========= See accompanying summary of significant accounting policies and notes to financial statements. 9 10 METERMASTER INC. ---------------- SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -------------------------------------------- ORGANIZATION AND BUSINESS - Metermaster Inc. (the "Company") was incorporated in the state of Georgia on May 25, 1995, and started operations on August 15, 1995. The Company is a leading nationwide distributor of electrical and electronic test and measurement instrumentation, and provides extensive modification, calibration, and repair services to a broad range of industrial customers. Metermaster (formerly known as Quality Electric Company) has been in business continuously since 1895. On January 22, 1999, the Company signed a definitive agreement to sell all of the stock of the Company to a third party. The sale is to be consummated in early February 1999 (see Note 11 for additional discussion). INVENTORIES - Inventories are valued at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost. Depreciation is provided using straight-line methods over the estimated useful lives of the respective assets, primarily seven years or less. REVENUE RECOGNITION - Revenues are recorded on the accrual basis of accounting and are recognized upon the shipment of the product. INCOME TAXES - The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. COMPREHENSIVE INCOME - In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. The Company was unaffected by implementation of this standard for the years ended December 31, 1998 and 1997 as it had no comprehensive income as defined herein. 10 11 USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK - The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable. The Company places its cash with high-quality credit institutions. At times, such cash balances may be in excess of the FDIC insurance limit of $100,000. Management continually monitors receivable balances and believes that its exposure to accounts receivable credit risk is limited. YEAR 2000 RISKS (UNAUDITED) - Like other companies, Metermaster Inc. could be adversely affected if the computer systems we, our suppliers or customers use do not properly process and calculate date-related information and data from the period surrounding and including January 1, 2000. This is commonly known as the "Year 2000" issue. Additionally, this issue could impact non-computer systems and devices such as production equipment, elevators, etc. At this time, because of the complexities involved in the issue, management cannot provide assurances that the Year 2000 issue will not have an impact on the Company's operations. RECLASSIFICATIONS - Certain 1997 amounts have been reclassified to conform to the 1998 presentation. 11 12 METERMASTER INC. ---------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- 1. Going Concern The Company incurred net losses of $1,313,208 and $398,621 for the years ended December 31, 1998 and 1997, respectively. The Company has a net capital deficiency of $730,748 as of December 31, 1998. Additionally, the Company is in violation of certain financial covenants under its credit facility. The Company's lender has reserved all of the rights available to it as a result of the Company's default of these financial covenants. The foregoing matters raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not reflect any adjustments which might be necessary if the Company were unable to continue as a going concern. Management plans to address these negative trends and losses through a merger of the Company with a subsidiary of Transmation, Inc. A definitive agreement was signed on January 21, 1999 with closing scheduled for early February 1999. See Note 11 for additional discussion. 2. Inventories Inventories are net of a reserve for slow-moving items of $315,000 and $225,000 at December 31, 1998 and 1997, respectively. The components of inventory at December 31, 1998 and 1997 are as follows: 1998 1997 ---- ---- Merchandise $ 1,574,904 $ 1,980,405 Demonstration equipment 161,764 162,725 Component parts 460,217 553,140 Freight 40,000 40,000 ----------- ----------- Sub-total 2,236,885 2,736,270 ----------- ----------- Inventory reserve (315,000) (225,000) ----------- ----------- Total inventory $ 1,921,885 $ 2,511,270 =========== =========== 3. Loan Origination/Organization Costs Loan origination and organization costs consist of $44,934 in loan closing costs and bank fees which are being amortized over the loan term of twenty-four months. Total accumulated amortization at December 31, 1998 and 1997 amounted to $11,020 and $42,215, respectively. Amortization expense was $78,430 and $20,740 in 1998 and 1997, respectively. Included in the 1998 expense were previously capitalized costs of $42,836 relating to start-up activities that were written off in the current year. 4. Credit Facility Agreement On June 12, 1998, the Company obtained a new, two-year $5,000,000 credit facility (the "Facility") with Congress Financial Corporation ("Congress") to replace the existing credit facility with LaSalle National Bank ("LaSalle"). The Facility is comprised of a revolving loan, term loan 12 13 and, if requested by the Company, equipment loans (the "Loan(s)"). Advances on the facility are restricted to loan limits as defined in the loan agreement (the "Agreement"). The terms of the Agreement provide for revolving cash borrowings of up to 85% of eligible trade accounts receivable plus the lesser of (i) 60% of eligible finished goods inventory plus $150,000 (reducing by $10,000 each month commencing August 1, 1998) or (ii) $2,000,000, less any reserves as Congress elects to establish. The aggregate Loan balance of the facility shall in no event exceed $5,000,000, with the aggregate of equipment loans not to exceed $100,000. As of December 31, 1998 and 1997, the Company owed $2,332,241 and $3,257,681, respectively, under its revolving loans with Congress and LaSalle, respectively. As of December 31, 1998 and 1997, the Company had $347,553 and $333,349, respectively, available for cash borrowings under its revolving loans. No equipment loans were outstanding as of December 31, 1998. A term loan in the original principal amount of $469,000 is payable in sixty consecutive monthly principal payments of $7,817. The outstanding balance on the term loan was $422,100 as of December 31, 1998 (see Note 5). Interest is payable on the first business day of each month, in arrears, at 0.5% above the prime rate, effective 8.25% at December 31, 1998. In addition, an unused line fee of 0.5% is payable monthly, in arrears, on the amount by which $5,000,000 exceeds the average monthly principal balance of the outstanding Loans. The original term of the loan agreement expires June 11, 2000 and has renewal options as defined in the Agreement. If, during the term of the Agreement, the Company elects to prepay all or part of the debt outstanding, the Company will be obligated to pay the bank an early termination fee. As stipulated in the Agreement, this fee will be $150,000 if terminated prior to June 12, 1999 and $100,000 if terminated between June 12, 1999 and June 11, 2000. As discussed in Note 11, if the Company's anticipated merger occurs as planned, all of the Company's outstanding debt will be paid off. The Company has negotiated with Congress to decrease the repayment penalty from $150,000 to $100,000 if the closing date of the merger is prior to February 15, 1999. The Facility is collateralized by virtually all tangible and intangible assets of the Company and has the personal guarantee of the president of the Company. Since August 1998, the Company has been in violation of certain financial covenants under its credit facility agreement. The Company's lender has reserved all of the rights available to it as a result of the Company's default of these financial covenants. Consequently, the balances of the revolving line of credit and term loan are classified as current liabilities at December 31, 1998. The checks issued against future deposits of $250,020 and $429,557 at December 31, 1998 and 1997, respectively, represent outstanding checks which had not cleared the bank account at year end. 13 14 5. Long-Term Debt Long-term debt consists of the following: 1998 1997 ---- ---- Term loan facility with bank; monthly principal payments of $7,817 plus interest at prime (7.75% as of December 31, 1998) plus .5%, maturing June 2003; collateralized by all fixed assets of the Company $ 422,100 Installment note at 10.7% interest, monthly principal and interest payments of $1,770 through 2015, secured by substantially all assets but subordinated to the note payable to bank 189,747 $ 189,994 Note payable at 14% interest, principal due in 1998, subordinated to the note payable to bank The note is unsecured 75,000 Notes payable at 16% interest, principal due in 1999, subordinated to the note payable to bank These notes are unsecured 100,000 175,000 Installment note at 7% interest, monthly principal and interest payments of $1,386 through 2001, subordinated to the note payable to bank. The Note is unsecured 38,046 51,500 Installment note at 8% interest, monthly principal and interest payments of $3,124 through 2001, secured by an interest in accounts receivable, subordinated to the note payable to bank 84,683 114,103 --------- --------- 834,576 605,597 Less current maturities (569,432) (293,042) --------- --------- Long-term portion $ 265,144 $ 312,555 ========= ========= Future maturities of long-term debt at December 31, 1998 are as follows: Year Amount ---- ------ 1999 $569,432 2000 52,035 2001 29,337 2002 81 2003 1,136 Thereafter 182,555 ------- $834,576 ======== As discussed in Note 4, the entire balance of the term loan is classified as a current liability at December 31, 1998. 14 15 6. Stockholders' Equity On March 11, 1998, the Company raised $400,000 of equity through the conversion of $125,000 of subordinated notes to common stock and the issuance of additional common and preferred stock for $275,000 cash. The subordinated notes had been outstanding as of December 31, 1997, matured in 1998 and bore interest rates ranging from 14% to 16%. Eight thousand (8,000) of the 8,500 issued preferred shares ("Series I") have a stated value of $100 per share, with a liquidation value of $200 per share callable at the Company's option at $200 per share. These preferred shares are convertible into 10 shares of common stock at the stockholders' election, beginning five years from the date of purchase, subject to the Company's right of first refusal to redeem any or all at $200 per share. In connection with the ISL acquisition, discussed in Note 10, 1,500 shares of Series I convertible preferred stock were issued. The remaining 500 preferred shares ("Series II") have the same basic features of the Series I shares except that the Series II shares have a liquidation value of $400 per share. Additionally, the Series II shares are convertible into 10 shares of common stock beginning 10 years from the date of issuance. Preferred dividends, which must be approved by the Board of Directors, are payable quarterly. Dividends are cumulative at 8% per annum and all arrearages must be paid before any common dividends may be paid or before any preferred shares may be called. Total cumulative unpaid dividends at December 31,1998 and 1997 amounted to $135,000 and $68,000, respectively. The aggregate liquidation value of the preferred stock including cumulative unpaid dividends was $1,935,000 and $1,768,000 as of December 31, 1998 and 1997, respectively. 7. Commitments The Company leases certain offices, warehouses and office equipment under noncancellable operating leases. Approximate future minimum payments at December 31, 1998 under these leases are as follows: Year Amount ---- ------ 1999 $ 570,190 2000 457,089 2001 229,310 2002 10,412 ---------- $1,267,001 ========== Total lease and rent expense for the years ended December 31, 1998 and 1997 amounted to approximately $667,000 and $572,000, respectively. 8. Employee Benefit Plan The Company has a 401(k) employee benefit plan that covers substantially all employees. Employees are eligible to participate in the plan after completion of ninety days of service, on eligible quarterly entry dates. The Company will match 25% of an employee's contributions up to a maximum of 6% of the employee's compensation excluding automobile allowances. The contribution by the Company amounted to $38,570 and $30,419 for the years ended December 31, 1998 and 1997, respectively. 15 16 9. Income Taxes There was no provision for income taxes for the years ended December 31, 1998 and 1997. The tax effects of temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows: 1998 1997 Deferred tax assets Net operating loss carryforwards $ 620,000 $ 130,000 Inventory allowances 120,000 86,000 Accrued vacation expenses 35,000 36,000 Uniform capitalization costs 26,000 30,000 Allowance for doubtful accounts 23,000 23,000 --------- --------- Total gross deferred tax assets 824,000 305,000 Valuation allowance (738,000) (247,000) --------- --------- Net deferred tax assets $ 86,000 $ 58,000 ========= ========= Deferred tax liabilities Basis difference of property And equipment $ 86,000 $ 58,000 ========= ========= The realization of the deferred tax assets is primarily dependent upon the Company's ability to generate sufficient taxable income which would allow it to utilize approximately $1,654,000 and $340,000 of accumulated net operating losses as of December 31, 1998 and 1997, respectively, as well as the ability to deduct reserves and allowances for tax purposes which have already been provided for book purposes. Management has determined that it is not "more likely than not" that the benefits to be derived from such deferred tax assets will be realized, accordingly, a 100% valuation allowance has been provided. The utilization of net operating losses may be significantly limited in the event of a change in ownership (Note 11). 10. Acquisitions Effective November 1997, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Industrial Service Laboratories Corporation (ISL) in exchange for consideration of $644,000. This consideration was comprised of a $304,000 cash payment, $150,000 of the Company's Series I cumulative convertible voting preferred stock and a subordinated promissory note in the amount of $190,000. This transaction can be summarized as follows: Fair value of assets acquired $1,018,000 Fair value of liabilities assumed (374,000) Series I convertible preferred stock Issued to seller (150,000) Note payable issued to seller (190,000) ---------- Cash paid to seller $ 304,000 ========== This acquisition was accounted for as a purchase in accordance with Accounting Principles Board Statement Number 16, "Business Combinations" (APB 16). Accordingly, the purchase price was allocated to the assets and 16 17 liabilities based on their estimated fair values at the date of acquisition. There was no excess of purchase price consideration over the fair value of the assets and liabilities acquired. Additionally, the Company entered into certain employment agreements with two shareholders of ISL, a consulting and non-compete agreement with another shareholder, and a commission agreement with ISL regarding the sale of certain products upon reaching specified base sales levels of those products. The employment, consulting, and commission agreements commenced in November 1997 and extend for a period of five years. The unaudited proforma results of operations which follow assume the ISL acquisition had occurred at the beginning of the period presented. In addition to combining historical results of operations of the companies, the proforma calculations include adjustments for estimated effects of the Company's historical results of operations for officers' salaries, consulting services, commissions, and depreciation. These results are not necessarily indicative of the results which would have occurred if the transactions had occurred at the beginning of each period presented, nor are the results indicative of future results. Year Ended December 31, 1997 Sales revenues (unaudited) $ 22,798,511 ============ Net loss (unaudited) $ (379,672) ============ 11. Subsequent Event On January 21, 1999, the board of directors of the Company unanimously approved the merger of the Company with MM Acquisition Corp., a wholly-owned subsidiary of Transmation, Inc., ("Transmation"). The merger closed on February 8, 1999. Prior to closing, the Company's Engineered Systems Division was sold to the Company's present shareholders. The aggregate merger consideration was $1,769,252. Included in this merger was a buyout by Transmation of all of the Company's long-term employment and consulting contracts and the settlement of certain liabilities, including all outstanding debt. 17 18 12. Supplemental Cash Flows Year Ended Year Ended December 31, December 31, ----------------- --------------- 1998 1997 ----------------- --------------- Income taxes received $ 87,088 Non-cash investing activity Assets acquired in acquisitions (Note 10) 1,018,000 Liabilities assumed in acquisitions (374,000) Seller financing with acquisitions (190,000) Issuance of Series I convertible preferred stock (150,000) ---------------- ----------- Acquisition of net assets $ 304,000 ================ =========== As discussed in Note 6, $125,000 of subordinated notes payable were converted to common stock on March 11, 1998. 18 19 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL MATERIAL Our audit was performed for the purpose of forming an opinion of the basic financial statements taken as a whole. The information included in the supplemental schedules is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in our audits of the basic financial statements, and, accordingly, we express no opinion on it. /s/ BDO Seidman, LLP Certified Public Accountants January 29, 1999 except for Note 11, as to which the date is February 8, 1999 Atlanta, Georgia 19 20 METERMASTER INC. PREPAID EXPENSES AND OTHER ACCRUED LIABILITIES 1998 1997 --------- -------- Prepaid expenses Prepaid insurance $ 61,059 $ 19,936 Prepaid operating expenses 19,459 28,893 Prepaid bank fees 27,344 37,500 Prepaid software maintenance 9,225 8,528 Travel advances 5,807 5,000 Prepaid tradeshow expense 4,722 Prepaid franchise tax 4,491 -------- -------- Total prepaid expenses 127,385 104,579 ======== ======== Other accrued liabilities Sales tax payable 18,672 32,702 Accrued miscellaneous 48,739 47,322 Accrued property taxes 7,800 12,533 Accrued legal and accounting 12,000 14,408 Accrued workers compensation 7,205 Accrued franchise taxes 2,000 7,745 -------- -------- Total other accrued liabilities $ 89,211 $121,915 ======== ======== See independent auditors' report on supplemental material. 20 21 METERMASTER INC. PAYROLL AND FRINGE BENEFITS AND OVERHEAD EXPENSES 1998 1997 ------------ ----------- Payroll and fringe benefits Salaries and wages $ 4,442,079 $ 3,858,411 Insurance 243,988 267,929 Employment taxes 351,456 312,537 401(k) company match 38,570 30,419 ----------- ----------- Total payroll and fringe benefits $ 5,076,093 $ 4,469,296 =========== =========== Overhead expenses Rent expense $ 666,891 $ 571,664 Communications 460,962 341,035 Subcontract labor 461,477 213,130 Travel & automobile expense 260,718 206,875 Office supplies & equipment 116,649 118,936 Freight 349,656 334,167 Freight billed to customers (496,376) (441,964) Agents' commissions 60,650 178,695 Operating supplies 242,266 197,255 Utilities 78,837 65,691 Bad debt & collection expense 87,056 38,970 Liability & property insurance 102,972 77,991 Repairs & maintenance 94,387 77,025 Legal and audit fees 148,199 72,597 Outside services 177,295 120,541 Personnel & relocation expense 109,751 38,675 Advertising & promotional expense 33,596 8,057 Miscellaneous expense 121,424 102,474 ----------- ----------- Total overhead expenses $ 3,076,410 $ 2,321,814 =========== =========== See independent auditors' report on supplemental material. 21 22 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Metermaster Inc. We have audited the accompanying balance sheets of Metermaster Inc. (a Georgia corporation) as of December 31, 1996 and 1995, and the related statements of income, stockholders' equity, and cash flows for the year ended December 31, 1996 and the period ended December 31, 1995. 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 audits provide 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 Metermaster Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the year and period then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole. The information included in the supplemental schedules is presented for purposes of additional analysis and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audits of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Gifford, Hillegass & Ingwersen, P.C. February 20, 1997 Atlanta, Georgia 22 23 METERMASTER INC. BALANCE SHEETS DECEMBER 31, 1996 AND 1995 1996 1995 ---------- ---------- CURRENT ASSETS Cash (Note C) $ 59,737 $ 63,703 Accounts receivable (Notes A, C, and D) 2,525,873 2,219,736 Inventory (Notes A, B and C) 2,838,650 2,156,025 Note receivable (Notes A and B) 0 72,152 Other receivables 39,773 58,261 Refundable income taxes 87,088 0 Deferred income taxes (Notes A, H and I) 25,000 20,600 Prepaid expenses 99,254 114,025 ---------- ---------- Total Current Assets 5,675,375 4,704,502 PROPERTY AND EQUIPMENT (Notes A, C and F) Machinery and equipment 20,747 12,737 Test equipment 333,614 99,528 Furniture, fixtures & office equipment 123,211 96,192 Computer equipment 216,170 169,531 Leasehold improvements 16,230 19,259 ---------- ---------- 709,972 397,247 Less accumulated depreciation 107,389 19,526 ---------- ---------- Net Property and Equipment 602,583 377,721 OTHER ASSETS Utility deposits 3,210 9,845 Security deposits 35,321 29,681 Organizational/Acquisition costs (Notes A and D) 53,355 39,750 ---------- ---------- Total Other Assets 91,886 79,276 ---------- ---------- TOTAL ASSETS $6,369,844 $5,161,499 ========== ========== The accompanying notes are an integral part of these financial statements. 23 24 LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ----------- ------------ CURRENT LIABILITIES Accounts payable $ 2,231,203 $ 1,670,007 Accrued salaries and commissions 60,117 23,923 Accrued vacation and employee benefits (Notes A and G) 102,331 83,922 Accrued income taxes (Notes A, H an I) 0 19,000 Other accrued liabilities 42,765 83,186 Current maturities of long-term debt (Note D) 39,713 0 Note payable - bank (Note C) 2,866,248 2,427,238 Due to bank (Note C) 405,783 100,636 ----------- ----------- Total Current Liabilities 5,748,160 4,407,912 LONG-TERM LIABILITIES Long-term debt less current maturities (Note D) 165,603 0 Deferred income taxes (Notes A, H, and I) 25,000 2,000 ----------- ----------- Total Long-Term Liabilities 190,603 2,000 COMMITMENTS AND CONTINGENCIES (Note F) STOCKHOLDERS' EQUITY Common stock & paid-in capital (Note E) 100,000 150,000 Preferred stock (Note E) 650,000 600,000 Retained earnings (deficit) (Note I) (318,919) 1,587 ----------- ----------- Total Stockholders' Equity 431,081 751,587 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,369,844 $ 5,161,499 =========== =========== 24 25 METERMASTER INC. STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD ENDED DECEMBER 31, 1995 1996 1995 ------------ ------------- (4 1/2 months of operations) NET SALES $ 18,761,596 $ 6,875,255 COST OF SALES 12,241,414 4,643,166 ------------ ------------ Gross Profit 6,520,182 2,232,089 OPERATING EXPENSES Payroll and fringe benefits 4,010,655 1,255,253 Overhead expenses 2,303,421 817,426 ------------ ------------ Total Operating Expenses 6,314,076 2,072,679 ------------ ------------ Income From Operations 206,106 159,410 OTHER EXPENSES Depreciation and amortization 104,438 24,321 Interest expense and bank charges 366,824 133,102 ------------ ------------ Total Other Expenses 471,262 157,423 ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (265,156) 1,987 INCOME TAX BENEFIT (PROVISION) 400 (400) ------------ ------------ Net Income (Loss) ($ 264,756) $ 1,587 ============ ============ The accompanying notes are an integral part of these financial statements. 25 26 METERMASTER INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD ENDED DECEMBER 31, 1995 COMMON PAID-IN PREFERRED RETAINED STOCK CAPITAL STOCK EARNINGS TOTAL ---------- --------- --------- ---------- --------- Issuance of 15,000 shares of common stock $ 15,000 $ 135,000 $ 0 $ 0 $ 150,000 Issuance of 6,000 shares of preferred stock 0 0 600,000 0 600,000 Net income 0 0 0 1,587 1,587 --------- --------- --------- --------- --------- Balance at December 31, 1995 15,000 135,000 600,000 1,587 751,587 Exchange of 5,000 shares of common stock for 500 shares of preferred stock (5,000) (45,000) 50,000 0 0 Net loss 0 0 0 (264,756) (264,756) Dividends paid 0 0 0 (55,750) (55,750) --------- --------- --------- --------- --------- Balance at December 31, 1996 $ 10,000 $ 90,000 $ 650,000 ($318,919) $ 431,081 ========= ========= ========= ========= ========= The accompanying notes are an integral part of these financial statements. 26 27 1996 1995 ------------ -------------- (4 1/2 MONTHS OF OPERATIONS) Cash Flows From Financing Activities Bank financing for acquisition $2,935,000 Net increase (decrease) in notes payable $ 439,010 (507,762) Net increase in due to bank 305,147 100,636 Proceeds from sale of common stock 0 150,000 Proceeds from sale of preferred stock 0 600,000 Dividends paid (55,750) 0 Principal payments on long-term debt (14,684) 0 ----------- ----------- Net Cash Provided by Financing Activities 673,723 3,277,874 ----------- ----------- NET INCREASE (DECREASE) IN CASH (3,966) 63,703 CASH, beginning of period 63,703 0 ----------- ----------- CASH, end of period $ 59,737 $ 63,703 =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid during the year for: Interest $ 294,043 $ 109,829 Facility fee 60,000 60,000 Other bank fees 12,782 773 ----------- ----------- Total Interest Expense & Bank Charges $ 366,825 $ 170,602 =========== =========== Income Taxes Paid $ 87,088 $ 0 =========== =========== Non-cash investing activity: Assets acquired in acquisitions $ 461,634 $ 5,527,198 Liabilities assumed in acquisitions (211,902) (1,827,198) Seller financing with acquisitions (220,000) 0 ----------- ----------- Acquisition of Net Assets $ 29,732 $ 3,700,000 =========== =========== 27 28 METERMASTER, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS: Metermaster Inc. (the Company) was incorporated in the state of Georgia on May 25, 1995, and started operations on August 15, 1995. The Company is a leading nationwide distributor of electrical and electronic test and measurement instrumentation, which provides extensive modification, calibration, and repair services to a broad range of industrial customers. Metermaster (originally known as Quality Electric Company) has been in business continuously since 1895. PURCHASE OF OPERATIONS: On August 15, 1995, the Company (previously known as MM Holdings, Inc.) purchased substantially all of the assets and trade liabilities of Metermaster Inc. (a subsidiary of BTR PLC) for $3,700,000. MM Holdings, Inc. changed its name to Metermaster Inc., effective October 16, 1995. In June 1996 the Company made other asset acquisitions from three companies with similar operations which were accounted for by the purchase method of accounting. Total assets acquired amounted to $461,634. Total liabilities assumed amounted to $211,902, and the Sellers accepted $220,000 in subordinated notes payable. Reference Note D for terms of notes payable. ACCOUNTS RECEIVABLE: Accounts receivable are stated net of a $50,000 reserve for bad debts at December 31, 1996 and 1995, respectively. INVENTORY: Inventory is valued at the lower of cost (first-in, first-out, "FIFO") OR MARKET. Inventory is net of a reserve for slow moving items of $100,000 and $75,000 at December 31, 1996 and 1995, respectively. The components of inventory at December 31, 1996 and 1995 are as follows: 1996 1995 ---- ---- Merchandise $ 2,093,533 $ 1,447,164 Demonstration equipment 271,680 210,021 Component parts 533,437 540,840 Freight 40,000 33,000 ----------- ----------- Sub-total 2,938,650 2,231,025 Inventory reserve (100,000) (75,000) ------------ ------------ Total inventory $ 2,838,650 $ 2,156,025 =========== =========== PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost. Depreciation is provided using straight line methods over the estimated useful lives of the respective assets. ORGANIZATIONAL/ACQUISITION COSTS: Organizational and acquisition costs consist of $31,680 in loan closing costs and bank fees which are being amortized over the loan term of thirty-six months, and $43,150 in other organizational and acquisition costs which are being amortized over sixty months. Total accumulated amortization at December 31, 1996 amounted to $21,475. INCOME TAXES: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109. Deferred income taxes are provided for temporary differences between book and income tax reporting, 28 29 primarily related to differences in accumulated depreciation, reserves for bad debts, accruals for vacation pay and inventory reserves. Bad debts are deductible for tax purposes when written off and vacation pay is deductible for tax purposes when taken or paid. Slow moving inventory is reserved when identified for book purposes and directly written off when disposed of for tax purposes. Note H details the provision for income taxes for the periods ended December 31, 1996 and 1995. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS: Certain 1995 amounts have been reclassified to conform to the 1996 presentation. NOTE B - NOTE RECEIVABLE AND SALE OF INVENTORY On November 30, 1995, the Company made a bulk sale of slow moving inventory. The amount of inventory sold had an original cost value of $1,187,602 which was offset by a reserve of $987,602 recorded at the time of acquisition of the assets and operations effective August 15, 1995. The net book value of this inventory of $200,000 was sold to the purchaser for $250,000. Of the $250,000 sale price, $100,000 was paid at closing and a promissory note was executed for the remaining $150,000, to be paid in three $50,000 installments due no later than December 28, 1995, January 30, 1996, and February 29, 1996. The agreement provided that any collection of sales proceeds from resale would be first applied against the principal balance of the note receivable. The agreement also provided that any proceeds from vendors for returns and/or inventory shortages based on subsequent physical inventory counts would be used to reduce the principal amount of the note receivable. The balance of the note receivable at December 31, 1995 of $72,152 was paid in full in 1996. The agreement also allows for the Company, at its option, to repurchase any of the inventory if needed by the Company, if quantities are still available. The repurchase price is 60% of the inventory's original cost to the Company. NOTE C - NOTE PAYABLE The Company has a demand note executed with LaSalle National Bank in the amount of $4,000,000. Advances on the note are restricted to loan limits as defined in the loan agreement. The loan limit may not exceed 85% of eligible trade accounts receivable plus up to 60% (reducing 1% per month beginning two months after the initial advance on the loan until 50%) of the lower of cost or market value of eligible inventory (merchandise and component parts) or $1,500,000, whichever is less, plus up to 75% of the purchase price of equipment or $150,000, whichever is less, minus any reserves as the Bank elects to establish; provided that the aggregate loan limit shall in no event exceed $4,000,000. The principal balance payable to the bank at December 31, 1996 and 1995 amounted to $2,866,248 and $2,427,238, respectively. Additional borrowings of $20,173 and $288,623 were available at December 31, 1996 and 1995 under the loan limits as defined in the agreement. Interest is payable on the last 29 30 business day, in arrears, at 1.5% above prime rate. In addition, an annual facilities fee equal to 1.5% of the aggregate loan limit of $4,000,000, or $60,000, is payable annually on the first day of the loan and on each anniversary date thereafter. The Company amortizes this fee $5,000 each month. A prepaid balance of $37,500 is included with prepaid expenses at December 31, 1996 and 1995. The Company, under the terms of the agreement, is required to repay monthly an amount sufficient to repay the extra principal amount of each advance related to equipment purchases within forty-eight months following the date of such advance. The original term of the loan agreement expires August 2, 1998 and has renewal options as defined in the agreement. If during the term of the agreement the Company elects to prepay all or part of the debt outstanding, the Company will be obligated to pay the bank a prepayment penalty equal to 50% of the average monthly interest earned on the loan preceding the date of prepayment multiplied by the number of months remaining under the terms of the agreement. The note payable to bank is secured by virtually all tangible and intangible assets of the Company and has the personal guarantee of all common stockholders. The loan agreement also requires the Company to keep compensating balances of $50,000 in the general checking account with the bank. On January 19, 1997, the bank waived the compensating balance requirement and reduced the outstanding loan balance by $50,000. The amount due to bank of $405,783 and $100,636 at December 31, 1996 and 1995, respectively, represents the net of outstanding checks of $435,203 and $176,746 which had not cleared the bank at December 31, 1996 and 1995, respectively, and deposits in transit of $29,420 and $76,110 at December 31, 1996 and 1995, respectively. NOTE D - LONG-TERM DEBT Long-term debt resulting from business acquisitions in 1996, as noted in Note A, consists of the following at December 31, 1996: Installment note at 7% interest, monthly principal and interest payments of $1,386 through June 2001. The note is unsecured. $ 64,047 Installment note at 8% interest, monthly principal and interest payments of $3,124 through June 2001, secured by a subordinated interest in accounts receivable. 141,269 ------- $205,316 ======== Future maturities of long-term debt at December 31, 1996 are as follows: 1997 $ 39,713 1998 42,875 1999 46,289 2000 49,977 2001 26,462 -------- $205,316 ======== 30 31 NOTE E - STOCKHOLDERS' EQUITY As of December 31, 1996 and 1995, common stock consists of 100,000 shares authorized and 10,000 and 15,000 shares issued an outstanding, respectively. The common stock was issued at $1 par value per share plus an additional $9 per share of contributed capital in excess of par value for total capital of $150,000. During 1996, 5,000 shares of common stock were exchanged for 500 shares of preferred stock. As of December 31, 1996 and 1995, the preferred stock consists of 200,500 and 200,000 shares authorized, respectively, and 6,500 and 6,000 shares issued and outstanding, respectively. The preferred shares have a stated value of $100 per share, with a liquidation value of $200 per share callable at the Company's option at $200 per share. The preferred shares are convertible into 10 shares of common stock at the stockholders' election, beginning five years from the date of purchase, subject to the Company's right of first refusal to redeem any or all at $200 per share. Preferred dividends, which must be approved by the Board of Directors, are payable quarterly. Dividends are cumulative at 8% per annum and all arrearages must be paid before any common dividends may be paid or before any preferred shares may be called. Total cumulative unpaid dividends at December 31, 1996 and 1995 amount to $13,000 and $17,750, respectively. NOTE F - COMMITMENTS The Company leases certain offices, warehouses and office equipment under noncancellable operating leases. Future minimum payments at December 31, 1996 under these leases are as follows: 1997 $525,486 1998 389,750 1999 264,175 2000 246,269 2001 154,864 Thereafter 10,412 Total lease and rent expense for the periods ended December 31, 1996 and 1995 amounted to approximately $519,600 and $158,000, respectively. NOTE G - EMPLOYEE BENEFIT PLAN The Company has a 401(k) employee benefit plan that covers substantially all employees. Employees are eligible to participate in the plan after completion of ninety days of service, on eligible quarterly entry dates. The Company will match 25% of an employee's contributions up to a maximum of 6% of the employee's compensation excluding automobile allowances. The amount contributed by the Company amounted to $30,036 and $12,200 for the periods ended December 31, 1996 and 1995, respectively. 31 32 NOTE H - INCOME TAXES The provision for income taxes consists of the following: Federal States Total ------- ------ ----- December 31, 1995 Current tax provision $ 14,000 $ 5,000 $ 19,000 Deferred tax expense (benefit) (13,700) (4,900) (18,600) -------- -------- -------- $ 300 $ 100 $ 400 ======== ======== ======== December 31, 1996 Current tax provision (benefit) $(14,000) $ (5,000) $(19,000) Deferred tax expense (benefit) 13,700 4,900 18,600 Total $ (300) $ (100) $ (400) ======== ======== ======== Deferred tax assets and liabilities are a result of the temporary differences between book and tax as described in Note A. Deferred tax liabilities at December 31, 1996 and 1995 were $25,000 and $2,000, respectively. Deferred tax assets at December 31, 1996 and 1995 were $25,000 and $20,600, respectively. The deferred tax asset at December 31, 1996 was limited to the extent of deferred tax liabilities, resulting in a valuation allowance of $70,000. As a result of the prior period adjustment as noted in Note I, the income tax returns for 1995 will be amended, resulting in a recovery of income taxes of approximately $33,000. A portion of the net operating losses for 1996 will be carried back to 1995 to recover approximately $19,000 in additional income taxes. Also, the Company made 1996 estimated income tax payments of approximately $35,000, which will be refunded. The federal net operating loss carryforward for future years is approximately $40,000 at December 31, 1996, which will expire in the year 2011. NOTE I - PRIOR PERIOD ADJUSTMENT The financial statements for December 31, 1995 have been restated to reflect a prior period adjustment due to an accounting error. The net effect of the adjustment resulted in a reduction of previously reported net income and retained earnings of $51,963. This amount is net of a $27,600 reduction of previously reported income tax provision. 32 33 SUPPLEMENTAL SCHEDULES 33 34 METERMASTER INC. SUPPLEMENTAL SCHEDULE DECEMBER 31, 1996 AND 1995 1996 1995 --------- ---------- Prepaid Expenses Prepaid insurance $ 29,000 $ 15,979 Prepaid operating expenses 18,247 12,899 Prepaid bank fees 37,500 37,500 Prepaid software maintenance 10,507 9,641 Travel advances 4,000 6,000 Prepaid rent 0 32,006 -------- -------- Total Prepaid Expenses $ 99,254 $114,025 ======== ======== Other Accrued Liabilities Sales tax payable $ 16,690 $ 27,106 Accrued miscellaneous 10,445 15,139 Accrued property taxes 10,130 21,000 Accrued legal & accounting 5,500 5,570 Accrued relocation cost 0 4,796 Accrued organizational cost 0 9,575 -------- -------- Total Other Liabilities $ 42,765 $ 83,186 ======== ======== 34 35 METERMASTER INC. SUPPLEMENTAL SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD ENDED DECEMBER 31, 1995 1996 1995 ------------ -------------- (4 1/2 months of operations) Payroll and Fringe Benefits Salaries and wages $ 3,443,384 $ 1,083,414 Insurance 222,885 74,148 Employment taxes 314,350 85,491 401(k) company match 30,036 12,200 ----------- ----------- Total Payroll & Fringe Benefits $ 4,010,655 $ 1,255,253 =========== =========== Overhead Expenses Rent expense $ 475,777 $ 158,063 Communications 350,273 119,638 Subcontractor labor 143,348 95,062 Travel expense 197,024 57,218 Office supplies & equipment 115,409 37,482 Prepaid operating expense write-off 0 17,422 Freight Freight $ 449,566 $ 144,237 Freight billed to customers (338,045) (92,290) ----------- ----------- Net freight expense 111,521 51,947 Agents' commissions 235,925 60,040 Operating supplies 166,064 55,681 Utilities 58,302 28,523 Bad debt expense 48,204 21,836 Liability & property insurance 80,739 34,743 Repairs & maintenance 85,218 33,134 Legal & audit fees 72,258 19,731 Temporary labor 48,209 30,167 Relocation expense 36,188 8,962 Advertising expense 24,885 3,952 Miscellaneous (income) expense 54,077 (16,175) ----------- ----------- Total Overhead Expenses $ 2,303,421 $ 817,426 =========== =========== 35 36 (b) Proforma Financial Information INDEX TO PROFORMA FINANCIAL STATEMENTS OF TRANSMATION, INC. Unaudited Proforma Combined Balance Sheet - December 31, 1998 Unaudited Proforma Combined Balance Sheet - March 31, 1998 Unaudited Proforma Combined Balance Sheet - March 31, 1997 Unaudited Proforma Combined Statement of Income for the year ended December 31, 1998 Unaudited Proforma Combined Statement of Income for the year ended March 31, 1998 Unaudited Proforma Combined Statement of Income for the year ended March 31, 1997 Notes to Unaudited Proforma Combined Financial Statements 36 37 TRANSMATION, INC. AND METERMASTER INC. UNAUDITED PROFORMA COMBINED BALANCE SHEET DECEMBER 31, 1998 TRANSMATION METERMASTER PROFORMA 12/31/98 12/31/98 PROFORMA COMBINED HISTORICAL HISTORICAL ADJUSTMENTS 12/31/98 ------------ ------------- ------------ ----------- ASSETS Current Assets: Cash 548,062 84,043 632,105 Accounts Receivable 10,777,484 2,450,410 13,227,894 Inventories 10,778,322 1,940,930 12,719,252 Prepaid Expenses & Def. Charges 1,828,400 127,385 1,955,785 Deferred Tax Assets 540,172 86,000 626,172 Taxes Receivable ------------ ------------ ------------ Current Assets 24,472,440 4,688,768 29,161,208 Properties, less depreciation 6,049,474 920,059 6,969,533 Goodwill 18,410,452 $ 2,533,914 20,944,366 Deferred Charges 277,779 277,779 Deferred Income Taxes 63,200 63,200 Other Assets 262,798 67,252 (33,914) 296,136 ------------ ------------ ------------ ------------ $ 49,536,143 $ 5,676,079 $ 2,500,000 $ 57,712,222 ============ ============ ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Notes Payable Revolving Credit $ 2,332,241 ($ 2,332,241) Current Portion of Long-Term Debt $ 2,000,000 241,136 (41,136) $ 2,200,000 Accounts Payable 7,120,921 2,861,935 9,982,856 Accrued Liabilities 1,642,149 292,075 1,934,224 Income Taxes Payable 365,086 365,086 ------------ ------------ ------------ ------------ 11,128,156 5,727,387 (2,373,377) 14,482,166 Long-Term Debt 23,197,300 593,440 4,142,629 27,933,369 Deferred Taxes 86,000 86,000 Deferred Compensation 456,808 456,808 ------------ ------------ ------------ ------------ 34,782,264 6,406,827 1,769,252 42,958,343 ------------ ------------ ------------ ------------ COMMITMENTS & CONTINGENT LIABILITIES Stockholders' Equity: Preferred Stock 850,000 (850,000) Common Stock 2,960,946 24,000 (24,000) 2,960,946 Capital in Excess of Par Value 2,509,895 426,000 (426,000) 2,509,895 Accum. Translation Adjustment (230,599) (230,599) Retained Earnings 9,919,702 (2,030,748) 2,030,748 9,919,702 ------------ ------------ ------------ ------------ 15,159,944 (730,748) 730,748 15,159,944 Treasury Stock, at Cost (406,065) (406,065) ------------ ------------ ------------ ------------ 14,753,879 (730,748) 730,748 14,753,879 ------------ ------------ ------------ ------------ $ 49,536,143 $ 5,676,079 $ 2,500,000 $ 57,712,222 ============ ============ ============ ============ 37 38 TRANSMATION, INC. AND METERMASTER INC. UNAUDITED PROFORMA COMBINED BALANCE SHEET MARCH 31, 1998 TRANSMATION METERMASTER PROFORMA 3/31/98 12/31/97 PROFORMA COMBINED HISTORICAL HISTORICAL ADJUSTMENTS 3/31/98 ---------------- --------------- -------------- ---------------- ASSETS Current Assets: Cash $ 652,664 $ 35,436 $ 688,100 Accounts Receivable 12,540,347 3,195,084 15,735,431 Inventories 10,675,829 2,511,270 13,187,099 Prepaid Expenses & Def. Charges 1,344,799 104,579 1,449,378 Deferred Tax Assets 540,172 58,000 598,172 Taxes Receivable ----------- ---------- ----------- Current Assets 25,753,811 5,904,369 31,658,180 ----------- ---------- ----------- Properties, less depreciation 6,405,053 1,049,295 7,454,348 Goodwill 19,199,947 $1,657,181 20,857,128 Deferred Charges 204,308 204,308 Deferred Income Taxes 58,582 58,582 Other Assets 253,513 115,651 (70,389) 298,775 ----------- ---------- ---------- ----------- $51,875,214 $7,069,315 $1,586,792 $60,531,321 =========== ========== ========== =========== LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Notes Payable $2,500,000 $ 2,500,000 Revolving Credit $3,257,681 3,257,681 Current Portion of Long-Term Debt 2,856,000 293,042 3,149,042 Accounts Payable 7,861,779 2,642,211 10,503,990 Accrued Liabilities 2,174,389 323,366 2,497,755 Income Taxes Payable 234,984 234,984 ----------- ---------- ----------- 15,627,152 6,516,300 22,143,452 Long-Term Debt 21,752,922 312,555 $1,769,252 23,834,729 Deferred Taxes 58,000 58,000 Deferred Compensation 509,981 509,981 ----------- ---------- ---------- ----------- 37,890,055 6,886,855 1,769,252 46,546,162 ----------- ---------- ---------- ----------- COMMITMENTS & CONTINGENT LIABILITIES Stockholders' Equity: Preferred Stock 800,000 (800,000) Common Stock 2,915,471 10,000 (10,000) 2,915,471 Capital in Excess of Par Value 2,227,117 90,000 (90,000) 2,227,117 Accum. Translation Adjustment (120,788) (120,788) Retained Earnings 8,963,359 (717,540) 717,540 8,963,359 ----------- ---------- ---------- ----------- 13,985,159 182,460 (182,460) 13,985,159 Treasury Stock, at Cost ----------- ---------- ---------- ----------- 13,985,159 182,460 (182,460) 13,985,159 ----------- ---------- ---------- ----------- $51,875,214 $7,069,315 $1,586,792 $60,531,321 =========== ========== ========== =========== 38 39 TRANSMATION, INC. AND METERMASTER INC UNAUDITED PROFORMA COMBINED BALANCE SHEET MARCH 31, 1997 TRANSMATION METERMASTER PROFORMA 3/31/97 12/31/96 PROFORMA COMBINED HISTORICAL HISTORICAL ADJUSTMENTS 3/31/97 -------------- ------------- ------------ ------------ ASSETS Current Assets: Cash $ 758,215 $ 59,737 $ 817,952 Accounts Receivable 6,773,669 2,565,646 9,339,315 Inventories 7,790,166 2,838,650 10,628,816 Prepaid Expenses & Def. Charges 956,235 99,254 1,055,489 Deferred Tax Assets 394,402 25,000 419,402 Taxes Receivable 87,088 87,088 ------------ ------------ ------------ Current Assets 16,672,687 5,675,375 22,348,062 ------------ ------------ ------------ Properties, less depreciation 2,355,757 602,583 2,958,340 Goodwill 5,947,558 $ 1,391,526 7,339,084 Deferred Charges 118,214 118,214 Deferred Income Taxes 226,352 226,352 Other Assets 537,790 91,886 (53,355) 576,321 ------------ ------------ ------------ ------------ $ 25,858,358 $ 6,369,844 $ 1,338,171 $ 33,566,373 ============ ============ ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Notes Payable $ 600,000 $ 2,866,248 $ 3,466,248 Revolving Credit Current Portion of Long-Term Debt 39,713 39,713 Accounts Payable 3,596,365 2,636,986 6,233,351 Accrued Liabilities 2,008,698 205,213 2,213,911 Income Taxes Payable 689,461 689,461 ------------ ------------ ------------ 6,894,524 5,748,160 12,642,684 Long-Term Debt 6,000,000 165,603 $ 1,769,252 7,934,855 Deferred Taxes 25,000 25,000 Deferred Compensation 594,026 594,026 ------------ ------------ ------------ ------------ 13,488,550 5,938,763 1,769,252 21,196,565 ------------ ------------ ------------ ------------ COMMITMENTS & CONTINGENT LIABILITIES Stockholders' Equity: Preferred Stock 650,000 (650,000) Common Stock 1,413,206 100,000 (100,000) 1,413,206 Capital in Excess of Par Value 3,121,746 3,121,746 Accum. Translation Adjustment (130,532) (130,532) Retained Earnings 7,965,388 (318,919) 318,919 7,965,388 ------------ ------------ ------------ ------------ 12,369,808 431,081 (431,081) 12,369,808 Treasury Stock, at Cost ------------ ------------ ------------ ------------ 12,369,808 431,081 (431,081) 12,369,808 ------------ ------------ ------------ ------------ $ 25,858,358 $ 6,369,844 $ 1,338,171 $ 33,566,373 ============ ============ ============ ============ 39 40 TRANSMATION, INC. AND METERMASTER INC. UNAUDITED PROFORMA COMBINED PROFIT & LOSS DECEMBER 31, 1998 TRANSMATION METERMASTER PROFORMA 1/1 - 1/1 - PROFORMA COMBINED 12/31/98 12/31/98 ADJUSTMENTS 1/1-12/31/98 -------------- -------------- --------------- ---------------- Net Sales $ 71,111,352 $ 20,991,257 $ 92,102,609 Costs and Expenses: Cost of Product Sold 47,254,620 13,499,633 ($ 195,000) 60,559,253 S G & A Expenses 17,942,580 8,315,102 (686,000) 25,571,682 R & D Expenses 1,709,128 1,709,128 Interest Expense 2,292,434 489,730 87,000 2,869,164 ------------ ------------ ------------ ------------ 69,198,762 22,304,465 (794,000) 90,709,227 ------------ ------------ ------------ ------------ 1,912,590 (1,313,208) 794,000 1,393,382 Other Income 244,494 244,494 ------------ ------------ ------------ ------------ Income Before Taxes 2,157,084 (1,313,208) 794,000 1,637,876 Provision for Taxes 867,845 (208,845) 659,000 ------------ ------------ ------------ ------------ Net Income $ 1,289,239 ($ 1,313,208) $ 1,002,845 $ 978,876 ============ ============ ============ ============ EPS - Basic $ 0.22 $ 0.17 EPS - Diluted $ 0.21 $ 0.16 Shares Outstanding - Basic 5,838,101 5,838,101 Shares Outstanding - Diluted 6,042,775 6,042,775 40 41 TRANSMATION, INC. AND METERMASTER INC. UNAUDITED PROFORMA COMBINED PROFIT & LOSS MARCH 31, 1998 PROFORMA TRANSMATION METERMASTER COMBINED 4/1/97 - 1/1 - PROFORMA 4/1/97 - 3/31/98 12/31/97 ADJUSTMENTS 3/31/98 ------------- ------------ ------------- ------------ Net Sales $ 78,483,565 $ 20,475,134 $ 98,958,699 Costs and Expenses: Cost of Product Sold 53,441,287 13,532,708 ($ 195,000) 66,778,995 S G & A Expenses 19,194,879 6,863,554 (686,000) 25,372,433 R & D Expenses 1,660,110 1,660,110 Interest Expense 2,547,218 477,493 87,000 3,111,711 ------------ ------------ ------------ ------------ 76,843,494 20,873,755 (794,000) 96,923,249 ------------ ------------ ------------ ------------ 1,640,071 (398,621) 794,000 2,035,450 Other Income ------------ ------------ ------------ ------------ Income Before Taxes 1,640,071 (398,621) 794,000 2,035,450 Provision for Taxes 642,100 154,900 797,000 ------------ ------------ ------------ ------------ Net Income $ 997,971 ($ 398,621) $ 639,100 $ 1,238,450 ============ ============ ============ ============ EPS - Basic $ 0.17 $ 0.22 EPS - Diluted $ 0.16 $ 0.20 Shares Outstanding - Basic 5,729,599 5,729,599 Shares Outstanding - Diluted 6,274,638 6,274,638 41 42 TRANSMATION, INC. AND METERMASTER INC. UNAUDITED PROFORMA COMBINED PROFIT & LOSS MARCH 31, 1997 PROFORMA TRANSMATION METERMASTER COMBINED 4/1/96 - 1/1 - PROFORMA 4/1/96 - 3/31/97 12/31/96 ADJUSTMENTS 3/31/97 -------------- ------------- ------------- ------------ Net Sales $ 47,311,224 $ 18,761,596 $ 66,072,820 Costs and Expenses: Cost of Product Sold 28,733,887 12,241,414 ($ 195,000) 40,780,301 S G & A Expenses 13,580,402 6,418,514 (686,000) 19,312,916 R & D Expenses 1,560,974 1,560,974 Interest Expense 633,638 366,824 87,000 1,087,462 ------------ ------------ ------------ ------------ 44,508,901 19,026,752 (794,000) 62,741,653 ------------ ------------ ------------ ------------ 2,802,323 (265,156) 794,000 3,331,167 Other Income 479,013 479,013 ------------ ------------ ------------ ------------ Income Before Taxes 3,281,336 (265,156) 794,000 3,810,180 Provision for Taxes 1,221,600 (400) 196,800 1,418,000 ------------ ------------ ------------ ------------ Net Income $ 2,059,736 ($ 264,756) $ 597,200 $ 2,392,180 ============ ============ ============ ============ EPS - Basic $ 0.37 $ 0.43 EPS - Diluted $ 0.35 $ 0.40 Shares Outstanding - Basic 5,606,752 5,606,752 Shares Outstanding - Diluted 5,942,410 5,942,410 42 43 TRANSMATION, INC. NOTES TO UNAUDITED PROFORMA COMBINED FINANCIAL STATEMENTS Note 1: Basis of Presentation The unaudited proforma combined statements of income and balance sheet reflect the acquisition of Metermaster Inc. which is to be accounted for under the purchase method of accounting, as of the beginning of the most recent two fiscal years. The unaudited proforma combined statements also reflect combined results for the most recent interim period (12/31/98). Transmation's management believes the assumptions used in preparing the unaudited proforma combined financial statements provide a reasonable basis for presenting all of the significant effects of its transactions, that the proforma adjustments give appropriate effect to those adjustments and that the proforma adjustments are properly applied in the unaudited proforma financial statements. Note 2: Proforma Adjustments Unaudited proforma adjustments consist of the following: Transmation will pay $1,769,252 for 100% of the outstanding preferred and common stock of Metermaster Inc. That amount will be adjusted downward on a dollar for dollar basis to the extent that the equity of Metermaster falls below a deficit of $730,748. To the extent that Metermaster's deficit is less than $730,748, Transmation will pay $1 more for each dollar Metermaster's deficit is less than $730,748, up to a maximum of $100,000 should Metermaster's deficit be reduced to $630,748. There will be no additional payments to Metermaster's shareholders should Metermaster's deficit improve such that it is less than $630,748. This transaction will be accounted for using the purchase method of accounting. The purchase price is allocated to the net assets acquired using the assumption that the net book basis of the long-term assets is reflective of their fair value. Goodwill is calculated as the difference between the purchase price and the fair value of the net assets acquired and is amortized over 20 years. The proforma adjustments to operating expenses in the statements of income for the years ended December 31, 1998, March 31, 1998 and March 31, 1997 represent the amortization of goodwill, differences in interest rates and amounts borrowed as between Transmation and Metermaster, differences in rental costs resulting from former Metermaster space which will not be continued under Transmation's ownership due to consolidations, and eliminations in employment, primarily senior management of Metermaster, which were effected on the date of the acquisition. Transmation's historical tax rate is used in each period presented to calculate the tax effect of the unaudited proforma combined statement of income adjustments. 43 44 (c) Exhibits. See Index to Exhibits. 44 45 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 hereunto duly authorized. TRANSMATION, INC. April 12 , 1999 By: /s/ Eric W. McInroy -------- ------------------------- Eric W. McInroy President April 12 , 1999 By: /s/ John A. Misiaszek -------- --------------------------- John A. Misiaszek Vice President-Finance 45 46 INDEX TO EXHIBITS (1) Underwriting Agreement Not applicable. (2) Plan of acquisition, reorganization, arrangement, liquidation or succession (a) Agreement and Plan of Merger dated January 21, 1999 and amended and restated February 4, 1999 among the Registrant, Metermaster Inc., MM Acquisition Corp., and certain other parties, together with a brief identification of the contents of all omitted exhibits and schedules thereto, is incorporated herein by reference to Exhibit 2(a) to the Registrant's Current Report on Form 8-K dated February 9, 1999, of which this Form 8-K/A forms a part. Upon written request, the Registrant will provide to security holders copies of any of the referenced omitted exhibits and schedules. (4) Instruments defining the rights of security holders, including indentures (a) Credit and Loan Agreement dated August 7, 1998 between the Registrant and KeyBank National Association is incorporated herein by reference to Exhibit 4(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (b) Second Amendment to Credit and Loan Agreement, dated as of February 9, 1999, by and among the Registrant, KeyBank National Association and the Lenders Party Thereto From Time to Time, together with a brief identification of the contents of all omitted exhibits thereto, is incorporated herein by reference to Exhibit 4(b) to the Registrant's Current Report on Form 8-K dated February 9, 1999, of which this Form 8-K/A forms a part. Upon written request, the Registrant will provide to security holders copies of any of the referenced omitted exhibits. (16) Letter re change in certifying accountant Not applicable. (17) Letter re director resignation Not applicable. (20) Other documents or statements to security holders Not applicable. (23) Consents of experts and counsel (a) Consent of BDO Seidman LLP is included herein as Exhibit 23(a). 46 47 (b) Consent of Gifford, Hillegass & Ingwersen, P.C. is included herein as Exhibit 23(b). (24) Power of Attorney Not applicable. (27) Financial Data Schedule Not applicable. (99) Additional Exhibits Not applicable. 47