1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------- FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 April 1, 1999 Date of Report (Date of earliest event reported) PH GROUP INC. (Exact name of Registrant as specified in its charter) Ohio 0-8115 31-0737351 (State or other Jurisdiction (Commission (IRS Employer of Incorporation File Number) Identification No.) 2365 Scioto Harper Drive, Columbus, OH 43204 (Address of Principal Executive Offices) (Zip Code) (614) 279-8877 (Registrant's telephone number, including area code) Not Applicable (Former name or former address, if changed since last report.) ---------------------------- ================================================================================ -1- 2 This Form 8-K/A, Amendment No. 1, supplements the Form 8-K filed on April 15, 1999 by the Registrant with the Securities and Exchange Commission. The Form 8-K described the acquisition by the Registrant of substantially all of the assets of Vertech Systems, LLC. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial Statements of Business Acquired. The following financial information is being filed in order to satisfy the financial statement information requirement for the Form 8-K filed on April 15, 1999. VERTECH SYSTEMS, LLC FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT DECEMBER 31, 1998 AND 1997 -2- 3 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Vertech Systems, LLC We have audited the accompanying balance sheets of Vertech Systems, LLC as of December 31, 1998 and 1997, and the related statements of operations, members' deficit, and cash flows for the year ended December 31, 1998 and the period from inception, August 29, 1997, to December 31, 1997. 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 Vertech Systems, LLC as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the year ended December 31, 1998 and the period from inception, August 29, 1997, to December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, the Company had a net loss of $215,606 for the period from inception, August 29, 1997, to December 31, 1997, and a net loss of $1,027,945 for the year ended December 31, 1998 and had a working capital deficit of $231,048 and $122,252 at December 31, 1997 and 1998, respectively. These matters raise substantial doubt about the Company's ability to continue as a going concern. The Company was sold subsequent to year end, as discussed in Note 13. HEIN + ASSOCIATES LLP Houston, Texas March 31, 1999, except as to Note 13, which is dated April 1, 1999 -1- 4 VERTECH SYSTEMS, LLC BALANCE SHEETS DECEMBER 31, -------------------------------------- 1998 1997 ----------------- ----------------- ASSETS ------ CURRENT ASSETS: Cash $ - $ 3,596 Accounts receivable, no allowance for doubtful accounts 8,894 213 Inventory 278,582 8,214 Prepaids - 17,914 --------------- --------------- Total current assets 287,476 29,937 PROPERTY AND EQUIPMENT, net 534,083 373,504 OTHER ASSETS, net 204,081 201,646 --------------- --------------- Total assets $ 1,025,640 $ 605,087 =============== =============== LIABILITIES AND MEMBERS' EQUITY (DEFICIT) ----------------------------------------- CURRENT LIABILITIES: Revolving line of credit with a bank $ 35,428 $ 20,000 Note payable to real estate developer - 23,918 Current portion of long-term debt 150,000 102,628 Current portion of capital lease obligation 7,482 2,110 Accounts payable 128,146 50,109 Customer deposits 65,035 47,350 Accrued expenses 23,637 14,870 --------------- --------------- Total current liabilities 409,728 260,985 LONG-TERM DEBT, less current portion 382,588 348,568 CAPITAL LEASE OBLIGATION, less current portion 25,615 9,880 --------------- --------------- Total liabilities 817,931 619,433 COMMITMENTS AND CONTINGENCIES (Notes 9 and 12) MEMBERS' EQUITY (DEFICIT): Series A convertible preferred units, no par value; 500,000 units authorized; 416,667 units issued and outstanding 1,250,000 - Common stock, no par value; 1,000,000 shares authorized; 630,000 shares issued and outstanding at December 31, 1997 - 201,260 Accumulated deficit - (215,606) Members' deficit (1,042,291) - --------------- --------------- Total members' equity (deficit) 207,709 (14,346) --------------- --------------- Total liabilities and members' equity (deficit) $ 1,025,640 $ 605,087 =============== =============== SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS -2- 5 VERTECH SYSTEMS, LLC STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM INCEPTION, AUGUST 29, 1997, TO DECEMBER 31, 1997 1998 1997 ----------------- ----------------- REVENUES $ 315,704 $ - COST OF GOODS SOLD 434,025 - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 862,780 206,799 --------------- --------------- Loss from operations (981,101) (206,799) OTHER INCOME (EXPENSE): Interest expense (52,218) (9,232) Interest income 5,374 425 --------------- --------------- Net loss $ (1,027,945) $ (215,606) =============== =============== SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS -3- 6 VERTECH SYSTEMS, LLC STATEMENTS OF MEMBERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM INCEPTION, AUGUST 29, 1997, TO DECEMBER 31, 1997 TOTAL SERIES A MEMBERS' CONVERTIBLE EQUITY AND COMMON ACCUMULATED PREFERRED MEMBERS' STOCKHOLDERS' STOCK DEFICIT UNITS DEFICIT EQUITY ---------------- ---------------- ---------------- ---------------- ---------------- BALANCES, August 29, 1997 (inception) $ - $ - $ - $ - $ - - Sale of common stock 201,260 - - - 201,260 - Net loss - (215,606) - - (215,606) -------------- -------------- -------------- -------------- -------------- - BALANCES, December 31, 1997 201,260 (215,606) - - (14,346) Common stock exchanged for Vertech Systems, LLC members' units (201,260) 215,606 - (14,346) - Sale of convertible preferred units - - 1,250,000 - 1,250,000 Net loss - - - (1,027,945) (1,027,945) -------------- -------------- -------------- -------------- -------------- BALANCES, December 31, 1998 $ - $ - $ 1,250,000 $ (1,042,291) $ 207,709 ============== ============== ============== ============== ============== SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS -4- 7 VERTECH SYSTEMS, LLC STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM INCEPTION, AUGUST 29, 1997, TO DECEMBER 31, 1997 1998 1997 ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,027,945) $ (215,606) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 122,189 16,278 Changes in operating assets and liabilities: Accounts receivable (8,681) (213) Inventory (270,368) (8,214) Prepaids 17,914 (17,914) Bank overdraft 20,127 - Accounts payable 57,910 50,109 Customer deposits 17,685 47,350 Accrued expenses 8,767 14,870 --------------- --------------- Net cash used in operating activities (1,062,402) (113,340) --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (238,612) (344,012) Additions to other assets (18,488) (206,089) --------------- --------------- Net cash used in investing activities (257,100) (550,101) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit with bank 15,428 20,000 Proceeds from bank loan 211,562 453,649 Payments on bank loan (130,170) (2,453) Payments on capital lease (6,996) (419) Payments on note to real estate developer (23,918) (5,000) Sale of common stock - 201,260 Sale of convertible preferred units 1,250,000 - --------------- --------------- Net cash provided by financing activities 1,315,906 667,037 --------------- --------------- NET CHANGE IN CASH (3,596) 3,596 CASH, beginning of period 3,596 - --------------- --------------- CASH, end of period $ - $ 3,596 =============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 48,372 $ 931 =============== =============== NON-CASH ACTIVITIES: Equipment acquired under capital lease $ 28,103 $ 12,409 =============== =============== Leasehold improvements financed by real estate developer $ - $ 28,918 =============== =============== SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS -5- 8 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------------------- GENERAL - Vertech Systems, LLC (the "Company") was formed in August 1997 as a Delaware corporation and designs, manufactures and markets vertical injection molding equipment. Vertical molding machinery is a niche market targeted at customers needing to mold plastic around some other object. On January 6, 1998, the Company merged with Vertech Systems, LLC (the "LLC"). All assets, rights, liabilities and obligations of the Company were transferred to Vertech Systems, LLC. The stockholders of the Company became members of the LLC, and their stockholdings were converted into common units of the LLC on a one-for-one basis. All of the common stock grants of the corporation become common unit grants of the LLC under the same terms. Vertech Systems, LLC has authority to issue up to 500,000 units designated as preferred units, with such designation, rights and preferences as it may determine. INVENTORY - Inventory is carried at the lower of cost or market, with cost determined on the first-in, first-out ("FIFO") method. PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. The cost of repairs and maintenance is charged to expense as incurred. OTHER ASSETS - Other assets consist primarily of a patent and organization costs. The patent is recorded at cost and is being amortized on the straight-line method over 15 years. Organization costs are being amortized over five years. RESEARCH AND DEVELOPMENT - Research and development costs are expensed as incurred. Research and development costs expensed for the year ended December 31, 1998 amounted to $58,221 and for the period from inception to December 31, 1997, amounted to $34,554. 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. 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued) ------------------------------------------------------ FEDERAL INCOME TAXES - The Company was treated as an S Corporation in accordance with Internal Revenue Code Section 1362 from inception until January 6, 1998. On January 6, 1998, the Company merged with Vertech Systems, LLC, a limited liability company. Accordingly, no provision for Federal income taxes has been recorded by the Company. CONCENTRATION OF CREDIT RISK - The Company periodically maintains deposits in banks which exceed the amount of federal deposit insurance available. Management believes the possibility of loss on these deposits is minimal. 2. GOING CONCERN: -------------- As shown in the accompanying financial statements, the Company had a net loss of $1,027,945 and $215,606 for the periods ended December 31, 1998 and 1997, respectively. The Company had a working deficit of $122,252 and $231,048 at December 31, 1998 and 1997, respectively. These -6- 9 matters raise substantial doubt about the Company's ability to continue as a going concern. As discussed in Note 13, the Company was purchased by a third party in 1999. 3. INVENTORY: ---------- Inventory consisted of the following as of the dates indicated: DECEMBER 31, ----------------------------------- 1998 1997 ---------------- ---------------- Raw materials $ 45,793 $ 8,214 Work in process 149,616 - Finished goods 83,173 - --------------- --------------- $ 278,582 $ 8,214 =============== =============== 4. PROPERTY AND EQUIPMENT: ----------------------- Property and equipment consisted of the following as of the dates indicated: DECEMBER 31, USEFUL LIFE ----------------------------------- (YEARS) 1998 1997 ---------------- ---------------- ---------------- Machinery 3-7 $ 439,424 $ 230,654 Furniture and equipment 3-7 170,637 112,925 Leasehold improvements 3 41,993 41,760 --------------- --------------- 652,054 385,339 Accumulated depreciation (117,971) (11,835) --------------- --------------- $ 534,083 $ 373,504 =============== =============== Depreciation expense for the year ended December 31, 1998 and for the period ended December 31, 1997 amounted to $106,136 and $11,835, respectively. 5. OTHER ASSETS: ------------- Other assets consisted of the following as of the dates indicated: DECEMBER 31, ----------------------------------- 1998 1997 ---------------- ---------------- Organization Costs $ 14,785 $ 9,528 Patents 180,000 180,000 Other 29,794 16,561 --------------- --------------- 224,579 206,089 Accumulated amortization (20,498) (4,443) --------------- --------------- $ 204,081 $ 201,646 =============== =============== Amortization expense for the year ended December 31, 1998 and the period ended December 31, 1997 amounted to $16,053 and $4,443, respectively. -7- 10 6. NOTE PAYABLE: ------------- The note payable to real estate developer of $23,918 at December 31, 1997 was paid off on June 21, 1998. 7. REVOLVING LINE OF CREDIT: ------------------------- The Company has a $150,000 revolving line of credit with a bank which expires on May 10, 1999. Interest on the unpaid principal balance of advances under the line is payable monthly at the bank's prime rate plus .5% (8.25% at December 31, 1998). The line of credit is collateralized by substantially all of the assets of the Company and is guaranteed by the Company's president. At December 31, 1998 and 1997, $35,428 and $20,000, respectively, was outstanding under this line of credit. 8. LONG-TERM DEBT: --------------- The Company has a $750,000 line of credit with a bank, under which the Company may request loans and/or equipment leases to facilitate the acquisition of equipment. The credit line expires on May 10, 1999. At the time of each advance, the Company may choose between two interest rate/loan repayment options: a fixed option or a variable option. At December 31, 1998, the Company has elected the fixed option for each of its advances. Under this option, interest due under the line is fixed at the Treasury Rate, as defined, plus 2.25% at the time of an advance. Principal and interest on each advance is payable monthly in equal monthly installments sufficient to amortize the principal between 36 months to 96 months, as determined at the time of each advance. The equipment line is collateralized by all equipment purchased with proceeds from this line of credit and is guaranteed by the president of the Company. At December 31, 1998, amounts outstanding under this line of credit totaled $532,588. At December 31, 1997, amounts outstanding under this line of credit totaled $451,196. At December 31, 1998, the outstanding debt consisted of 15 advances with fixed interest rates that ranged from 7.55% to 9.00%, and maturity dates that ranged from December 5, 2000 to June 20, 2003. Annual maturities of principal on long-term debt at December 31, 1998 are as follows: YEARS ENDING DECEMBER 31, -------------------- 1999 $ 150,000 2000 166,532 2001 102,833 2002 101,557 2003 11,666 ------------- $ 532,588 ============= All debt was assumed subsequent to December 31, 1998 (see Note 13). -8- 11 9. COMMITMENTS AND CONTINGENCIES: ------------------------------ The Company is obligated for equipment under capital leases which expire at various dates through 2000. The carrying value of the leased equipment and related accumulated amortization included in equipment is as follows: DECEMBER 31, -------------------------------- 1998 1997 -------------- --------------- Furniture and fixtures $ 40,742 $ 12,409 Less accumulated depreciation (4,350) (295) ------------ ------------ $ 36,392 $ 12,114 ============ ============ LEASES - Future payments under the Company's non-cancelable equipment capital leases and building operating lease as of December 31, 1998 are as follows: YEARS ENDING DECEMBER 31, Equipment Office ------------------------- Capital Building Lease Operating Lease ------------- -------------- 1999 $ 9,836 $ 42,300 2000 9,836 42,300 2001 8,206 42,300 2002 7,159 35,250 2003 and thereafter 4,997 - ------------ ------------ Total minimum lease payments 40,034 $ 162,150 ============ Less amount representing interest (6,937) ------------ Present value of net minimum lease payments 33,097 Less current portion of capitalized lease obligations (7,482) ------------ Capitalized lease obligations, net of current portion $ 25,615 ============ EMPLOYMENT AGREEMENTS - The Company has employment agreements with its president and vice president which provide for annual salaries payable in equal monthly installments. The agreements terminate September 30, 2002 and may be automatically extended for consecutive one-year terms and may be terminated upon the occurrence of certain events specified in such agreements. -9- 12 10. STOCK GRANTS: ------------- In February 1998, the Company created the 1998 Unit Option Plan (the "Plan"). The Plan provides for grants of nonqualified or incentive stock options. The Company has adopted the disclosure-only provisions of the Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for the Plan as the exercise price of the options exceeded management's estimate of the fair value of the underlying member units. Had compensation cost of the Company's stock option plan been determined based on the fair value at the grant date for awards in 1998 consistent with the provisions of SFAS No. 123, the Company's pre-tax income in 1998 would have been reduced by an amount not material to the financial statements. Under the Plan, 100,000 is the total number of units of common units that may be granted. Each option vests over a period determined by the Company's Compensation Committee. The maximum term of the options is ten years, and the vested options may be exercised any time during the option period. Options to acquire 6,000 member units with an exercise price of $5.25 have been issued under the Plan. As of December 31, 1998, all of these options were outstanding and were vested. These options were terminated as a result of the subsequent sale of the Company (see Note 13). 11. EQUITY TRANSACTIONS: -------------------- UNIT SPLIT - On January 27, 1998, the Board of Vertech Systems, LLC declared a 10-to-1 common unit split. This increased the number of units outstanding from 63,000 to 630,000. All references in the financial statements to number of units of the Company's common units have been retroactively restated to reflect the unit split. PREFERRED UNIT OFFERING - During the year ended December 31, 1998, the Company sold $1,250,000 of Series A convertible preferred units. The Company had 500,000 shares of preferred units authorized; 416,667 were issued and outstanding at December 31, 1998. These units (all or a portion thereof) are convertible at the holders' option anytime into common units. The conversion is computed by multiplying the number of preferred units by $3.00. 11. EQUITY TRANSACTIONS: (continued) -------------------- During 1998, the Company granted to one employee 20,000 member units that vested immediately. As of December 31, 1998, 28,000 shares were fully vested. No compensation expense was recorded upon issuance of these units because the fair value of such units was considered to be immaterial. 12. YEAR 2000: ---------- The Company has begun to address possible remedial efforts in connection with computer software that could be affected by the Year 2000 problem. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Year 2000 problem may impact or be impacted by other entities with whom the Company transacts business. -10- 13 13. SUBSEQUENT EVENTS: ------------------ On April 1, 1999, the Company entered into an agreement with PH Group, Inc., a publicly-traded manufacturer based in Columbus, Ohio, to sell all of its assets. Under the agreement, PH Group, Inc. will receive title to all assets including property, equipment, patents, trademarks, accounts receivable, and sales contracts in return for a cash payment of $400,000 and the assumption of up to $650,000 in debt. PH Group, Inc. will assume all open accounts payable on the books as of April 1, 1999 and for any subsequent payables for a period of 30 calendar days. The Company will receive a total of 50,000 shares of PH Group, Inc. common stock. All Vertech Unit Holders, common and preferred, will receive future royalties from the sale of any machine that is manufactured by PH Group, Inc. with Vertech-designed technology equal to 5% of the gross selling price of any such machine for a period of ten years. In addition, Vertech Unit Holders will receive a "Net Profits Interest" equal to 5% of the net profit from the sale of said machines for a period of ten years. Upon closing of this agreement, Vertech Systems, LLC will discontinue ongoing operations and will permanently close its manufacturing facility. (b) Pro Forma Financial Information. The following pro forma financial information is being filed in order to satisfy the pro forma financial information requirement for the Form 8-K filed on April 15, 1999. Effective April 1, 1999 (the "Closing Date"), the Registrant, PH Group Inc. ("PHHH"), purchased substantially all of the assets of Vertech Systems, LLC, a Delaware limited liability company with operations based at 6125 West Sam Houston Parkway, North, Suite 406, Houston, Texas ("Seller"), pursuant to an Amended and Restated Asset Purchase Agreement between the Seller and PHHH dated April 1, 1999 (the "Agreement"). Prior to the Closing Date, the Seller was engaged in the design, manufacture and sale of small insert injection molding machines (the "Business"). PHHH purchased, among other things, all of the Seller's licenses and permits, deposits, inventory, equipment, accounts receivable and purchase orders including all work in progress. Under the Agreement, Seller licensed to PHHH certain intangible assets relating to the Business including all of Seller's trademarks, trade names, trade secrets, corporate names, designs, patents and other intellectual property related to the Business. Upon payment in full of the promissory notes described below, title to the intangible assets transfers to PHHH. As consideration for the sale and purchase of the assets and the license of the intangible assets, PHHH: (i) delivered a promissory note in the principal amount of $650,000 payable over approximately four years, (ii) assumed certain contractual obligations of the Seller including certain trade payables not exceeding $100,000 in the aggregate, (iii) delivered a promissory note in the principal amount of $350,000 payable over two years, (iv) paid the Seller $25,000 at closing in addition to the $25,000 already paid the Seller, (v) issued 50,000 shares of common stock of PHHH to the members of the Seller, -11- 14 PH GROUP INC. PRO FORMA BALANCE SHEET AS OF MARCH 31, 1999 (UNAUDITED) HISTORICAL PRO FORMA PRO FORMA PH GROUP VERTECH ADJUSTMENTS MARCH 31 ------------------- ------------------ ---------------- ---------------- ASSETS - ------ Current Assets - -------------- Cash 3,104 17,713 (13,213) 7,604 Accounts Receivable 2,674,898 81,193 (3,212) 2,752,879 Federal and State Income Tax Receivables 86,914 - - 86,914 Inventories 3,195,629 131,636 (21,636) 3,305,629 Deferred Income Taxes 186,300 - - 186,300 Other Current Assets 156,220 - - 156,220 ------------------- ------------------ ---------------- ---------------- Total Current Assets 6,303,065 230,542 (38,061) 6,495,546 ------------------- ------------------ ---------------- ---------------- Property and Equipment, at cost - ------------------------------- Office Equipment 765,274 170,637 24,363 960,274 Manufacturing Equipment 1,110,802 439,424 160,576 1,710,802 Leasehold Improvements 281,821 41,992 (41,992) 281,821 Vehicles 140,271 - - 140,271 ------------------- ------------------ ---------------- ---------------- 2,298,168 652,053 142,947 3,093,168 Less: Accumulated Depreciation & Amortization (1,397,153) (172,341) 172,341 (1,397,153) ------------------- ------------------ ---------------- ---------------- Net Property and Equipment 901,015 479,712 315,288 1,696,015 ------------------- ------------------ ---------------- ---------------- Other Non-Current Assets - ------------------------ Land Held for Investment 20,570 - - 20,570 Goodwill, net 692,767 - 326,150 1,018,917 Deferred Income Taxes, Net 287,500 - - 287,500 Other Noncurrent Assets, Net 261,499 228,810 (228,810) 261,499 ------------------- ------------------ ---------------- ---------------- Total Other Non-Current Assets 1,262,336 228,810 97,340 1,588,486 ------------------- ------------------ ---------------- ---------------- TOTAL ASSETS 8,466,416 939,064 374,567 9,780,047 ============================= =================== ================== ================ ================ See notes to the pro forma financial statements. 15 PH GROUP INC. PRO FORMA BALANCE SHEET AS OF MARCH 31, 1999 (UNAUDITED) HISTORICAL PRO FORMA PRO FORMA PH GROUP VERTECH ADJUSTMENTS MARCH 31 ------------------- ------------------ ---------------- ---------------- LIABILITIES - ----------- Current Liabilities - ------------------- Accounts Payable 2,142,896 101,179 (1,179) 2,242,896 Current Portion of Debt 2,728,288 324,143 104,732 3,157,163 Accrued Expenses 413,813 35,407 (35,407) 413,813 Customer Deposits 814,285 126,700 - 940,985 ------------------- ------------------ ---------------- ---------------- Total Current Liabilities 6,099,282 587,429 68,146 6,754,857 ------------------- ------------------ ---------------- ---------------- Noncurrent Liabilities - ---------------------- Long-Term Debt (less current portion) 676,518 368,903 220,153 1,265,574 Deferred Compensation 14,289 - - 14,289 ------------------- ------------------ ---------------- ---------------- Total Noncurrent Liabilities 690,807 368,903 220,153 1,279,863 ------------------- ------------------ ---------------- ---------------- Total Liabilities 6,790,089 956,332 288,299 8,034,720 ------------------- ------------------ ---------------- ---------------- Common Stock Subject To Repurchase, 125,000 shares issued, 93,750 shares outstanding 262,500 - - 262,500 ------------------- ------------------ ---------------- ---------------- Shareholders' Equity - -------------------- Common Stock, with no par value, authorized 10,000,000 shares; issued and outstanding at stated value (pre acquisition -1,526,636; post acquisition -1,576,636) 12,211 1,260 (860) 12,611 Additional Paid- In Capital 1,412,199 200,000 (131,400) 1,480,799 Retained Earnings (accumulated deficit) (10,583) (1,468,528) 1,468,528 (10,583) Preferred Units - 1,250,000 (1,250,000) - ------------------- ------------------ ---------------- ---------------- Total Shareholders' Equity 1,413,827 (17,268) 86,268 1,482,827 ------------------- ------------------ ---------------- ---------------- TOTAL LIABILITIES AND EQUITY 8,466,416 939,064 374,567 9,780,047 ============================ =================== ================== ================ ================ See notes to the pro forma financial statements. 16 PH GROUP INC. PRO FORMA STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) HISTORICAL PRO FORMA PRO FORMA PH GROUP VERTECH ADJUSTMENTS MARCH 31, 1999 ---------------------- --------------------- ------------------- ------------------- NET SALES 2,831,953 218,731 0 3,050,684 Cost of Goods Sold 2,031,211 185,751 7,390 2,224,352 ---------------------- --------------------- ------------------- ------------------- Gross Margin 800,742 32,980 (7,390) 826,332 Selling, General and Administrative Expense 731,951 246,266 (133,250) 844,967 ---------------------- --------------------- ------------------- ------------------- Income (Loss) From Operations 68,791 (213,286) 125,860 (18,635) ---------------------- --------------------- ------------------- ------------------- Other Income (Expense) Interest Expense (73,278) (11,690) (5,992) (90,960) Other, net 4,728 - - 4,728 ---------------------- --------------------- ------------------- ------------------- Total Other (Expense) (68,550) (11,690) (5,992) (86,232) ---------------------- --------------------- ------------------- ------------------- Income (Loss) Before Income Taxes 241 (224,976) 119,868 (104,867) Provision (Benefit) for Income Taxes - - (40,000) (40,000) ====================== ===================== =================== =================== NET INCOME(LOSS) 241 (224,976) 159,868 (64,867) ====================== ===================== =================== =================== PRO FORMA PER SHARE DATA: Basic Earnings (Loss) per Share $ 0.00 $ (0.04) ====================== =================== Diluted Earnings (Loss) per Share $ 0.00 $ (0.04) ====================== =================== Weighted Average Shares Outstanding Basic 1,525,694 1,575,694 Diluted 1,647,774 1,697,774 See notes to the pro forma financial statements. 17 PH GROUP INC. PRO FORMA STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) HISTORICAL PRO FORMA PRO FORMA PH GROUP VERTECH ADJUSTMENTS DEC. 31, 1998 ---------------------- --------------------- ------------------- ------------------- NET SALES 13,394,357 315,704 0 13,710,061 Cost of Goods Sold 10,042,780 434,025 53,402 10,530,207 ---------------------- --------------------- ------------------- ------------------- Gross Margin 3,351,577 (118,321) (53,402) 3,179,854 Selling, General and Administrative Expense 4,006,233 862,780 (434,580) 4,434,433 ---------------------- --------------------- ------------------- ------------------- Income (Loss) From Operations (654,656) (981,101) 381,178 (1,254,579) ---------------------- --------------------- ------------------- ------------------- Other Income (Expense) Interest Expense (285,623) (52,218) (23,834) (361,675) Other, net 151,977 5,374 (5,374) 151,977 ---------------------- --------------------- ------------------- ------------------- Total Other (Expense) (133,646) (46,844) (29,208) (209,698) ---------------------- --------------------- ------------------- ------------------- Income (Loss) Before Income Taxes (788,302) (1,027,945) 351,970 (1,464,277) Provision (Benefit) for Income Taxes (297,000) - (256,000) (553,000) ---------------------- --------------------- ------------------- ------------------- NET INCOME(LOSS) (491,302) (1,027,945) 607,970 (911,277) ====================== ===================== =================== =================== PRO FORMA PER SHARE DATA: Basic Earnings (Loss) per Share $ (0.33) $ (0.59) ====================== =================== Diluted Earnings (Loss) per Share $ (0.31) $ (0.56) ====================== =================== Weighted Average Shares Outstanding Basic 1,490,475 1,540,475 Diluted 1,577,546 1,627,546 See notes to the pro forma financial statements. 18 (vi) agreed to make certain contingent payments to the Seller in the future based on a certain percentage of the gross revenue (less deductions) derived from the sale of Vertech machines (as defined in the Agreement), and (vii) agreed to make certain royalty payments to the Seller in the future based on a certain percentage of the gross revenue (less deductions) derived from the sale of Vertech machines (as defined in the Agreement). The cash paid at or prior to closing by PHHH was derived from cash on hand. Certain of the assets purchased by PHHH constitute equipment and other physical property. Such assets were used by Seller in the operation of the Business. Any assets not needed by PHHH in the continued operation of the Business will be sold. The pro forma balance sheet as of March 31, 1999 assumes the acquisition took place on that date and is based on the Company's unaudited historical balance sheet, as reported on Form 10-QSB for the respective period, and Vertech Systems, LLC's unaudited historical balance sheets as of March 31, 1999. The pro forma adjustments allocate the pro forma purchase price to the assets acquired and the liabilities assumed based on their fair market values on date of acquisition. The pro forma adjustments relating to the acquisition represent the Company's preliminary determinations of purchase accounting adjustments based on available information and certain assumptions that the Company considers reasonable under the circumstances. The acquisition has been accounted for under the purchase method of accounting. The pro forma statement of operations for the three months ended March 31, 1999 includes the Company's unaudited historical statement of operations, as reported on Form 10-QSB for the respective period, and Vertech Systems, LLC's unaudited historical statement of operations for the three months ended March 31, 1999. The pro forma statement of operations for the year ended December 31, 1998 includes the Company's audited historical results, as reported on Form 10-KSB for the respective period, and Vertech Systems, LLC's audited historical statements of operations for the year ended December 31, 1998. The pro forma adjustments to both statements of operations reflect the impact of the transaction as if it had occurred on January 1, 1998. These pro forma financial statements have been prepared for information purposes only and are not necessarily indicative of the future financial position or future results of the Company's operations or of the financial position or results of operations of the Company that would have actually occurred had the transaction been in effect as of the date or for the periods presented. The accompanying pro forma financial statements should be read in conjunction with the historical financial statements of the Company and the historical financial statements of Vertech Systems, LLC included with this filing. PRO FORMA FINANCIAL STATEMENTS NOTES TO THE PRO FORMA FINANCIAL STATEMENTS NOTE a To record the fair value of assets purchased from Vertech Systems, LLC assuming the acquisition was effective on March 31, 1999. The assets are comprised of cash held in checking accounts and customer accounts receivable. Inventories were comprised of finished goods, stock inventory and work-in-process. Property and equipment acquired consists of Vertech computer equipment and furniture and fixtures. Machinery and equipment include CNC machining centers and related tooling. Goodwill is -12- 19 recorded for the excess of the purchase price over the fair value of the assets purchased and liabilities assumed. NOTE b To record the fair value of the liabilities related to the Vertech transaction. Accounts payable of up to $100,000 were assumed by the Company. Current portion of debt includes payments due on the notes to Vertech shareholders that are due and payable within one year. Customer deposits on orders received but not yet fulfilled have been recorded at invoiced value. Long-term debt is recorded for the principal amount of the promissory notes payable to Vertech shareholders, less the portion deemed current as referenced above. NOTE c To record changes in shareholders equity as the result of the Vertech transaction. Fifty thousand shares of PH Group Inc. common stock valued at $1.38 per share were issued as part of the consideration given to shareholders of Vertech. Common stock is recorded at stated value of .008 per share. NOTE d To record cost of sales of Vertech Systems, LLC injection molding machines, repair parts and service, net of sales commissions which were reclassified as selling expenses. Depreciation expense of acquired manufacturing machinery and equipment increased the pro forma cost of sales. NOTE e To adjust selling, general and administrative expenses provided by Vertech that would not have been incurred had Vertech been operated by the Company. Selling, general and administrative expenses recognized include salaries and fringe benefits of retained employees, amortization of purchased goodwill, depreciation of acquired office equipment, and sales commissions incurred by Vertech. NOTE f To record additional interest expense related to the additional debt incurred as a result of purchase agreement with Vertech. This interest is based on an 8% interest rate, plus 150 basis points. NOTE g To record the income tax benefit associated with the pro forma adjustments at the statutory tax rate in effect during the periods for which pro forma statements of operations are presented. The tax benefit is not reduced by any valuation allowances. -13- 20 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PH GROUP INC. June 14, 1999 By: /s/C.T. SHERMAN Name: Charles T. Sherman Title: President -14-