<PAGE> 1
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): October 1, 1998
------------------------
NOBLE INTERNATIONAL, LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Michigan 001-13581 38-3139487
- ---------------------------- ------------------------ -------------
<S> <C> <C>
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
</TABLE>
33 Bloomfield Hills Parkway, Suite 155, Bloomfield Hills, Michigan 48304
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 433-3093
---------------------
N/A
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of businesses acquired.
This report amends the current report filed by Noble International,
Ltd. (the "Company") dated October 16, 1998.
On October 1, 1998, Noble International, Ltd. (the "Company")
consummated the acquisition, through its wholly-owned subsidiary Noble Canada
Holdings II, Ltd., a Nova Scotia corporation ("NCH"), and NCH's wholly-owned
subsidiary Noble Canada II, Inc., an Ontario corporation ("Noble Canada"), of
all of the outstanding capital stock of Centrifugal Coaters, Inc., an Ontario
corporation ("CCI"). The selling shareholders of CCI included Wrayter
Investments Inc., an entity controlled by Fraser Wray, the president and chief
executive officer of Tiercon Holdings Inc., which was acquired by the Company in
July 1998. Prior to its acquisition by the Company, Tiercon Holdings Inc. was a
wholly-owned subsidiary of Wrayter Investments Inc.
The aggregate consideration paid for the acquisition of CCI (the "CCI
Acquisition") consisted of $881,661 in cash and 57,938 shares of Noble Canada's
Class C Exchangeable Non-Voting Preferred Shares, which are exchangeable for
57,938 shares of the Company's common stock, no par value ("Common Stock"). The
cash portion of the CCI Acquisition purchase price was funded by the Company's
existing revolving line of credit facility with Comerica Bank.
The audited financial statements of CCI as of December 31, 1997 and
1996 and for each of the two fiscal years in the period ended December 31, 1997
are presented below. The interim unaudited financial statements of CCI as of
September 30, 1998 and 1997 and for the nine month periods ended September 30,
1998 and 1997 are also presented.
Also on October 1, 1998, the Company completed the acquisition, through
it wholly-owned subsidiary Utilase Blank Welding Technologies, Inc., a Michigan
corporation ("UBWT"), of substantially all of the assets and the assumption of
certain specified liabilities of H&H Steel Processing Company, Inc., an Ohio
corporation ("H&H"), from Terry Hill and Robert G. Kreiling, the shareholders of
H&H. Concurrently with the October 1, 1998 closing of the acquisition of the
assets of H&H (the "H&H Acquisition"), UBWT changed its name to H&H Steel
Processing, Inc. ("HHSP").
The purchase price for the H&H Acquisition consisted of: (i)
$11,079,591.52 in cash; (ii) plus an amount equal to expenditures by H&H for
property plant and equipment at its North Vernon, Indiana plant between July 31,
1998 and October 1, 1998 (to be determined by reference to a closing balance
sheet prepared within 60 days of the closing, but estimated to be approximately
$669,494.80); (iii) plus $1,500,000 in cash representing H&H's actual cash
expenditure for the purchase of a 50% partnership interest in Precision Blanking
Limited (which resulted in H&H holding 100% of the partnership, the assets of
which included $1,150,000 in cash at October 1, 1998); and (iv) the assumption
of certain specified liabilities aggregating approximately $2,900,000 million.
In addition, HHSP will pay to H&H a performance premium based upon annual sales
for fiscal years 1999 through 2003 equal to a minimum of $500,000
<PAGE> 3
(payable at the rate of $100,000 per annum) and an aggregate maximum of
$2,000,000. The cash portion of the H&H Acquisition purchase price was funded by
the Company's existing revolving line of credit facility with Comerica Bank.
The audited financial statements of H&H as of December 31, 1997 and
1996 and for each of the two fiscal years in the period ended December 31, 1997
are presented below. The interim unaudited financial statements of H&H as of
September 30, 1998.
<PAGE> 4
FINANCIAL STATEMENTS
TIERCON COATINGS INC.
[formerly Centrifugal Coaters Inc. and Centrifugal
Coaters Corp.]
DECEMBER 31, 1997
<PAGE> 5
AUDITORS' REPORT
To the Directors of
TIERCON COATINGS INC.
We have audited the balance sheets of TIERCON COATINGS INC. [formerly
Centrifugal Coaters Inc. and Centrifugal Coaters Corp.] as at December 31, 1997
and 1996 and the statements of income (loss) and retained earnings (deficit) and
changes in financial position for the seven-month period ended December 31,
1997, the five-month period ended May 31, 1997 and for each of the years ended
December 31, 1996 and 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 an audit to obtain
reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1997 and 1996
and the results of its operations and the changes in its financial position for
the seven-month period ended December 31, 1997, the five-month period ended May
31, 1997 and for each of the years ended December 31, 1996 and 1995 in
accordance with accounting principles generally accepted in Canada.
Toronto, Canada,
November 11, 1998. Chartered Accountants
<PAGE> 6
TIERCON COATINGS INC.
[formerly Centrifugal Coaters Inc. and Centrifugal Coaters Corp.]
Incorporated under the laws of Ontario
BALANCE SHEETS
[in Canadian dollars]
As at December 31
<TABLE>
<CAPTION>
ACQUIRED
BUSINESS
[note 1]
1997 1996
$ $
---------- ---------
<S> <C> <C>
ASSETS [notes 6 and 8]
CURRENT
Cash [note 6] 593,376 515,534
Accounts receivable [note 4] 1,562,724 1,969,308
Inventory 358,242 351,560
Prepaid expenses 45,335 47,651
---------- ---------
TOTAL CURRENT ASSETS 2,559,677 2,884,053
---------- ---------
Deferred financing costs, net of accumulated
amortization of $48,624 352,265 --
Capital assets, net [note 5] 7,403,408 3,457,369
Goodwill, net of accumulated amortization of $140,236 [note 3] 3,077,875 --
---------- ---------
13,393,225 6,341,422
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities 1,481,341 1,782,529
Income taxes payable 139,000 309,130
Interest payable [note 9] 40,354 --
Current portion of long-term debt [note 7] 4,240,000 --
Current portion of subordinated debt [note 8] 152,000 --
---------- ---------
TOTAL CURRENT LIABILITIES 6,052,695 2,091,659
---------- ---------
Long-term debt [note 7] -- 3,613,388
Subordinated debt [note 8] 3,600,000 --
Special share obligation [note 9] 3,500,000 --
Deferred income taxes -- 280,500
---------- ---------
TOTAL LIABILITIES 13,152,695 5,985,547
---------- ---------
SHAREHOLDERS' EQUITY
Share capital [note 10] 500,021 110
Contributed surplus -- 273,191
Retained earnings (deficit) (259,491) 82,574
---------- ---------
TOTAL SHAREHOLDERS' EQUITY 240,530 355,875
---------- ---------
13,393,225 6,341,422
========== =========
</TABLE>
See accompanying notes
On behalf of the Board:
Director Director
<PAGE> 7
TIERCON COATINGS INC.
STATEMENTS OF INCOME (LOSS) AND
RETAINED EARNINGS (DEFICIT)
[in Canadian dollars]
<TABLE>
<CAPTION>
ACQUIRED BUSINESS [note 1]
------------------------------------------------------
SEVEN-MONTH FIVE-MONTH YEAR YEAR
PERIOD ENDED PERIOD ENDED ENDED ENDED
DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
$ $ $ $
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES [note 4] 8,705,237 6,872,887 19,122,631 15,489,553
Cost of sales 5,821,993 4,585,154 12,646,863 9,777,712
----------- ----------- ----------- -----------
GROSS PROFIT 2,883,244 2,287,733 6,475,768 5,711,841
----------- ----------- ----------- -----------
EXPENSES
Selling, general and
administrative 1,490,462 736,386 1,880,568 1,896,061
Depreciation and amortization 977,132 205,043 583,151 564,250
Interest on long-term and
subordinated debt 491,020 -- 23,218 96,703
Interest on loan from affiliated
company under common
control -- -- -- 47,635
Interest on special share
obligation [note 9] 66,353 -- -- --
Engineering fees on aborted
project [note 11] -- -- 258,878 --
----------- ----------- ----------- -----------
3,024,967 941,429 2,745,815 2,604,649
----------- ----------- ----------- -----------
Income (loss) before income taxes (141,723) 1,346,304 3,729,953 3,107,192
Provision for income taxes [note 12] 117,768 476,423 1,437,362 1,118,693
----------- ----------- ----------- -----------
NET INCOME (LOSS) FOR THE PERIOD (259,491) 869,881 2,292,591 1,988,499
Retained earnings, beginning
of period -- 82,574 89,983 2,401,484
Dividend paid -- -- (2,300,000) (4,300,000)
----------- ----------- ----------- -----------
RETAINED EARNINGS (DEFICIT),
END OF PERIOD (259,491) 952,455 82,574 89,983
=========== =========== =========== ===========
</TABLE>
See accompanying notes
<PAGE> 8
TIERCON COATINGS INC.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
[in Canadian dollars]
<TABLE>
<CAPTION>
ACQUIRED BUSINESS [note 1]
-------------------------------------------------------
SEVEN-MONTH FIVE-MONTH YEAR YEAR
PERIOD ENDED PERIOD ENDED ENDED ENDED
DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
$ $ $ $
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) for the period (259,491) 869,881 2,292,591 1,988,499
Add item not requiring a current
cash payment
Depreciation and amortization 977,132 205,043 583,151 564,250
----------- ----------- ----------- -----------
717,641 1,074,924 2,875,742 2,552,749
Net change in non-cash working capital
balances related to operations 605,871 (435,472) (431,394) 922,125
----------- ----------- ----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES 1,323,512 639,452 2,444,348 3,474,874
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Additions to capital assets (500,480) (242,857) (1,094,282) (478,808)
Acquisition of assets [note 3] (11,820,788) -- -- --
----------- ----------- ----------- -----------
CASH USED IN INVESTING ACTIVITIES (12,321,268) (242,857) (1,094,282) (478,808)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Deferred financing costs (400,889) -- -- --
Issuance of share capital 500,021 -- -- --
Proceeds from special share obligation 3,500,000 -- -- --
Proceeds from long-term debt 4,800,000 -- -- --
Repayment of long-term debt (560,000) --
Proceeds from subordinated debt 3,752,000 -- -- --
Proceeds from (repayment of)
loan to parent company -- -- 14,296 (271,939)
Proceeds from (repayment of)
loan from affiliated company
under common control -- (1,490,527) 1,288,833 2,014,884
Repayment of mortgage payable -- -- (762,310) (50,040)
Proceeds from (repayment of) bank loan -- 486,320 -- (699,994)
Dividend paid -- -- (2,300,000) (4,300,000)
----------- ----------- ----------- -----------
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 11,591,132 (1,004,207) (1,759,181) (3,307,089)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
DURING THE PERIOD 593,376 (607,612) (409,115) (311,023)
Cash, beginning of period -- 515,534 924,649 1,235,672
----------- ----------- ----------- -----------
CASH (BANK INDEBTEDNESS), END OF PERIOD 593,376 (92,078) 515,534 924,649
=========== =========== =========== ===========
</TABLE>
See accompanying notes
<PAGE> 9
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
1. BASIS OF PRESENTATION
The company was incorporated under the laws of Ontario on May 16, 1997 as
Centrifugal Coaters Corp., and was inactive until May 31, 1997 when it acquired
substantially all of the assets and the related operating liabilities of a
preexisting company, Centrifugal Coaters Inc. [the "acquired business"], in an
arm's length transaction [note 3]. The company changed its name to Centrifugal
Coaters Inc. on June 25, 1997 and to Tiercon Coatings Inc. on October 19, 1998.
The financial statements as at December 31, 1997 and for the seven-month period
then ended present the financial position, results of operations and changes in
financial position of the company. The values of the assets and liabilities
acquired on May 31, 1997 have been reflected in accordance with the accounting
basis established by the transaction described above. The financial statements
as at December 31, 1996 and for the five-month period ended May 31, 1997 and the
years ended December 31, 1996 and 1995 present the financial position, results
of operations and changes in financial position of the unrelated acquired
company, Centrifugal Coaters Inc. The assets and liabilities of the acquired
business are reflected in these financial statements at their historical book
values. Management believes these financial statements provide a reasonable
basis for comparison since the company's sole activity since inception has been
the acquisition of the assets of the acquired business and the continuation of
its business [the painting and coating of automotive parts].
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements were prepared in accordance with accounting
principles generally accepted in Canada which, as applied to the company, are in
conformity in all material respects with accounting principles generally
accepted in the United States, except as described in note 17 to the financial
statements. The following is a summary of the significant accounting policies
followed by the company in the preparation of these financial statements:
INVENTORY
Inventory, comprised of raw materials, is valued at the lower of cost, on a
weighted average basis, and net realizable value.
DEFERRED FINANCING COSTS
1
<PAGE> 10
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
Financing costs are amortized on an effective interest method over the terms of
the related term debt and subordinated debt, which is five years.
CAPITAL ASSETS
Capital assets are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using the following
annual rates and bases:
<TABLE>
<S> <C>
Buildings 4% declining balance
Plant equipment 20% declining balance
Office and computer equipment 20% declining balance
Automotive equipment 30% declining balance
Parking lots 8% declining balance
Computer software 50% straight-line
The acquired company's capital assets were recorded at cost and depreciated and
amortized using the same annual rates described above except for the following:
Buildings 2 1/2% straight-line
Parking lots 6% declining balance
Leasehold improvements 20% declining balance
</TABLE>
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of the
identifiable net assets acquired, and is amortized on a straight-line basis over
a period of 20 years. Annually, the company evaluates whether there has been a
permanent impairment in value of the unamortized portion of goodwill. The
measurement of possible impairment is based primarily on the ability to recover
the balance of goodwill from expected undiscounted future operating cash flows.
No impairment has been recorded to date.
REVENUE
Revenue is recognized when services performed are completed.
FOREIGN EXCHANGE TRANSLATION
2
<PAGE> 11
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
Monetary assets and liabilities denominated in foreign currencies are translated
into Canadian dollars at the rate of exchange prevailing at the balance sheet
dates. Revenue and expense items are translated into Canadian dollars at the
average rates for the period. The resulting exchange gains and losses are
recorded in the statements of income (loss).
INCOME TAXES
The company follows the deferral method of income tax allocation in accounting
for income taxes. Under this method, certain differences between income for
accounting and income for tax purposes give rise to deferred income taxes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect the
amounts reported and disclosed in the financial statements. Actual results could
differ from those estimates.
3. ACQUISITION OF CENTRIFUGAL COATERS INC.
The acquisition of the net assets of Centrifugal Coaters Inc. was made for
consideration of $11,820,788 consisting of cash consideration of $8,320,788 and
the issuance of Class X special shares of $3,500,000. The purchase price
allocation to identifiable net assets acquired is as follows:
<TABLE>
<CAPTION>
$
----------
<S> <C>
Purchase price 11,820,788
Fair value of working capital acquired 911,477
Fair value of capital assets acquired 7,691,200
----------
PURCHASE PRICE DISCREPANCY ALLOCATED TO GOODWILL 3,218,111
==========
</TABLE>
4. CONCENTRATION OF CREDIT RISK
The company provides services to many customers; however, four customers
represented 72% of accounts receivable at December 31, 1997 and 56% of sales
during the period.
3
<PAGE> 12
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
At December 31, 1996, three customers represented 67% of the accounts receivable
balance and 78% of sales during the year.
4
<PAGE> 13
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
5. CAPITAL ASSETS
Capital assets consist of the following:
<TABLE>
<CAPTION>
1997
-----------------------------------------------
ACCUMULATED NET
DEPRECIATION AND BOOK
COST AMORTIZATION VALUE
$ $ $
--------- ---------------- ---------
<S> <C> <C> <C>
Land 449,008 -- 449,008
Buildings 1,291,283 30,366 1,260,917
Plant equipment 6,067,836 705,870 5,361,966
Office and computer equipment 113,709 12,487 101,222
Automotive equipment 20,421 3,573 16,848
Parking lots 55,659 2,597 53,062
Computer software 106,634 33,379 73,255
Plant in progress 87,130 -- 87,130
--------- --------- ---------
8,191,680 788,272 7,403,408
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
ACQUIRED BUSINESS [note 1]
-----------------------------------------------
1996
-----------------------------------------------
ACCUMULATED NET
DEPRECIATION AND BOOK
COST AMORTIZATION VALUE
$ $ $
--------- ---------------- ---------
<S> <C> <C> <C>
Land 102,807 -- 102,807
Buildings 910,033 308,314 601,719
Plant equipment 5,791,716 3,509,105 2,282,611
Office and computer equipment 459,145 310,799 148,346
Automotive equipment 269,618 195,993 73,625
Parking lots 107,459 50,320 57,139
Computer software 325,794 219,393 106,401
Leasehold improvements 240,354 155,633 84,721
--------- --------- ---------
8,206,926 4,749,557 3,457,369
========= ========= =========
</TABLE>
5
<PAGE> 14
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
6. LINE OF CREDIT
At December 31, 1997, the company had an available revolving line of credit of
$500,000 bearing interest at the bank's prime rate plus 0.5% [6.5% at December
31, 1997]. To collateralize this line, the company has provided a $20,000,000
debenture and general security agreement granting a fixed charge against all the
assets of the company, a charge on inventory and a general assignment of book
debts. In July 1998, the available revolving line of credit was increased to
$1,000,000. As at December 31, 1997, no amount had been drawn on the line of
credit. The company is not in compliance with certain covenants as disclosed in
note 7.
7. LONG-TERM DEBT
Long-term debt consists of two outstanding senior term tranches of $4,800,000
for Tranche A and $3,600,000 for Tranche B. Tranche A is extended for the
purpose of financing a portion of the purchase price of the assets of the
company. Tranche B is extended to finance the purchase and installation of a new
automotive plastics paint line. As at December 31, 1997, Tranche B had not been
utilized. Tranche B bears interest at the bank's prime rate plus 3%. Principal
amounts on Tranche B are repayable in consecutive monthly instalments of
$42,857, maturing on May 31, 2002.
Tranche A has the following terms:
<TABLE>
<CAPTION>
1997
$
---------
<S> <C>
Tranche A bears interest at the bank's prime rate plus 2% [8% at December 31,
1997] until Tranche B is fully drawn down, after which the interest rate
will vary between the bank's prime rate plus 1% to 2% depending on the
ratio of senior debt to rolling twelve month income before interest, income
taxes, depreciation and amortization. Principal amounts are repayable in 59
consecutive monthly instalments of $80,000 commencing June 30, 1997 until
the date of maturity, May 31, 2002 4,240,000
Less current portion 4,240,000
---------
--
=========
</TABLE>
6
<PAGE> 15
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
These tranches are collateralized as described in note 6.
As at December 31, 1997, the company is not in compliance with two covenants
which require that it maintain a specific debt service ratio and ratio of total
liabilities to tangible net worth as set out in its credit agreement. As a
result, the debt has been reclassified as current.
At December 31, 1996, long-term debt consisted of the following:
<TABLE>
<CAPTION>
ACQUIRED BUSINESS
[note 1]
-----------------
1996
$
---------
<S> <C>
Loan from affiliated company under common control, which was non-interest
bearing. The loan was not callable prior to January 4, 1998 and was
postponed in favour of the bank 3,613,388
=========
</TABLE>
The loan from affiliated company under common control was not assumed by the
company from the acquired business.
7
<PAGE> 16
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
8. SUBORDINATED DEBT
Subordinated debt consists of the following:
<TABLE>
<CAPTION>
1997
$
---------
<S> <C> <C>
[a] Subordinated term debt from two lenders in the amount of $1,800,000
each. These term facilities bear interest at 10% per annum and mature
on April 15, 2002. In addition, on September 15, 1998, 1999, 2000, 2001
and April 15, 2002, the company shall issue to each lender Class Z
common shares equal to 1.5% of the common share capital of the company
calculated on a fully diluted basis at a nominal price of $10 per
share. In lieu of issuing Class Z common shares, the company may make
payments to each lender on each of the dates listed above for $135,000,
$135,000, $157,500, $180,000 and $225,000, respectively. As at December
31, 1997, the company has accrued $115,000 of the September 15, 1998
payments
To collateralize these term facilities, the company has provided a
$2,500,000 floating debenture on all the assets of the company to each
lender. This debenture is subordinate to the collateral described in
notes 6 and 7 3,600,000
[b] Subordinated debt due to the previous owner of the company. The debt is
non-interest bearing, and principal repayments are payable quarterly in
the amount of $38,000 152,000
---------
3,752,000
Less current portion 152,000
---------
3,600,000
=========
</TABLE>
The company is in violation of certain covenants at December 31, 1997.
Subsequent to December 31, 1997, as described in note 16[a], the subordinated
term debt from two lenders was refinanced by a Canadian subsidiary of Noble
International, Ltd. The debt extended to refinance the subordinated debt has no
specific terms of repayment but will not be called prior to October 1,
8
<PAGE> 17
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
1999 and thus the subordinated debt has been classified as long-term. The new
debt bears interest at the U.S. prime rate.
9
<PAGE> 18
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
9. SPECIAL SHARE OBLIGATION
Although the Class X special shares have the legal form of equity, they impose a
contractual obligation on the company to deliver cash and have been classified
as liabilities in these financial statements. The Class X special shares are
redeemable on or before December 1, 2002, at the company's option, at $1 per
share and provide for a preferred dividend of 3.25%, which has been classified
as interest expense in these financial statements. Should the company fail to
redeem the shares, the holder of the Class X special shares shall be entitled to
convert the shares to debt at the redemption price and the debt will bear
interest at 6% per annum.
Subsequent to December 31, 1997, as described in note 16[c], the special share
obligation was refinanced by a Canadian subsidiary of Noble International, Ltd..
The debt extended to refinance the special share obligation has no specific
terms of repayment but will not be called prior to October 1, 1999 and thus the
special share obligation has been classified as long-term. The new debt bears
interest at the U.S. prime rate.
10. SHARE CAPITAL
Prior to June 20, 1997, the authorized share capital of the company consisted of
an unlimited number of common shares. The outstanding common shares were
converted into Class Y common shares.
On June 20, 1997, the company filed Articles of Amendment under the Business
Corporations Act (Ontario) to amend the authorized share capital as follows:
<TABLE>
<CAPTION>
1997
$
-------
<S> <C>
AUTHORIZED
3,500,000 non-voting Class X special shares [note 9]
Unlimited voting Class X common shares
Unlimited voting Class Y common shares
Unlimited voting Class Z common shares
Unlimited voting Class M common shares
ISSUED
20,000 Class X common shares 1
60,000 Class Y common shares 500,000
</TABLE>
10
<PAGE> 19
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
<TABLE>
<S> <C>
20,000 Class Z common shares 20
-------
500,021
=======
</TABLE>
11
<PAGE> 20
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
During the seven-month period ended December 31, 1997, the company issued
3,500,000 Class X special shares for $3,500,000 [note 3], 20,000 Class X common
shares for $1, 60,000 Class Y common shares for $500,000, and 20,000 Class Z
common shares for $20.
At December 31, 1996, share capital consisted of the following:
<TABLE>
<CAPTION>
ACQUIRED BUSINESS
[note 1]
-----------------
1996
$
----
<S> <C>
AUTHORIZED
Unlimited voting Class A special shares, redeemable and retractable at $111.18
per share and providing for a non-cumulative dividend of $0.000006 per
share
Unlimited voting Class B special shares, redeemable and retractable at $1 per
share and providing for a non-cumulative dividend of $0.96 per share
Unlimited common shares
ISSUED
10,000 Class A special shares 100
10 common shares 10
---
110
===
</TABLE>
11. ENGINEERING FEES ON ABORTED PROJECT
During the year ended December 31, 1996, the company incurred engineering fees
with respect to the design of a potential new line. At December 31, 1996, the
company determined that it would not proceed with this new line and,
accordingly, the related fees were expensed.
12. PROVISION FOR INCOME TAXES
The tax values assigned to the assets acquired from the acquired business [note
3] were substantially less than their book values. As at December 31, 1997,
depreciation and amortization charged to the financial statements exceeds
capital cost allowance and cumulative eligible capital claimed for tax purposes
by approximately $380,000. In addition, the interest on the special share
12
<PAGE> 21
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
obligation, as described in note 9, has a legal form of a dividend and is not
deductible for tax purposes.
13
<PAGE> 22
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
13. LEASE COMMITMENTS
The company is committed under the terms of operating leases to future minimum
annual lease payments as follows:
<TABLE>
<CAPTION>
$
-------
<S> <C>
1998 293,000
1999 268,000
2000 235,000
2001 122,000
2002 4,000
-------
922,000
=======
</TABLE>
14. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
15. COMPARATIVE FINANCIAL STATEMENTS
The financial statements of the acquired business have been reclassified from
statements previously presented to conform to the presentation of the December
31, 1997 financial statements.
14
<PAGE> 23
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
16. SUBSEQUENT EVENTS
[a] On September 17, 1998, subordinated debt of $3,600,000 due to two lenders,
as described in note 8[a], was refinanced by a Canadian subsidiary of Noble
International, Ltd. In addition, $933,000 was paid as consideration for the
additional payments that were to be made in the next four years. This
amount, together with the unamortized deferred financing costs related to
the subordinated debt, will be recognized on September 17, 1998 as a loss on
settlement of debt.
[b] On October 2, 1998, the shareholders sold their interest in the company to a
wholly-owned Canadian subsidiary of Noble International, Ltd.
[c] On October 2, 1998, the special share obligation, as described in note 9,
was refinanced by a Canadian subsidiary of Noble International, Ltd. for
$2,000,000. In addition, the interest due at that time was repaid.
[d] On October 2, 1998, the subordinated debt due to the previous owner of the
company, as described in note 8[b], was repaid.
17. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE
UNITED STATES
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada ["Canadian GAAP"] which conform in all
material respects with accounting principles generally accepted in the United
States ["US GAAP"] except as set forth below:
SPECIAL SHARE OBLIGATION
Under US GAAP, the special share obligation would have been presented separately
outside shareholders' equity, and the financing charges associated with that
obligation [$66,353 for the seven-month period ended December 31, 1997] would
have been recognized as a direct charge to retained earnings (deficit).
15
<PAGE> 24
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
STATEMENT OF CASH FLOWS
Under US GAAP, non-cash investing and financing transactions are excluded from
the statements of cash flows. For the seven-month period ended December 31,
1997, the special shares of $3,500,000, issued in partial satisfaction of the
purchase price of the acquired business [note 3] would have been excluded from
the statement, resulting in cash provided by financing activities of $8,091,132
and cash used in investing activities of $8,821,268.
INCOME TAXES
Under US GAAP, the company would be required to follow the liability method of
accounting for income taxes whereby a deferred tax asset or liability is
measured using the enacted tax rates which will be in effect when any
differences between the financial statements and tax basis of assets or
liabilities reverse.
As at December 31, 1997, the company had a net deferred tax liability of
approximately $855,000. The net deferred tax liability results from the
differences between the assigned values and tax bases of the depreciable assets
acquired and accounted for as a purchase for financial statement purposes and
treated as a non-taxable transaction for income tax purposes. For US GAAP
purposes, upon the acquisition of the assets, a deferred tax liability of
approximately $977,000 would have been recognized with acquired assets being
increased by the same amount. The deferred tax liability will be relieved as the
depreciation on the differences between the assigned values and tax bases of the
acquired assets is recognized for financial statement purpose.
The reduction in the deferred tax liability is a result of the depreciation
being recognized for financial statement purposes on the differences [a] the
assigned values and tax bases of such assets and [b] timing differences between
depreciation for financial statement and for tax purposes.
16
<PAGE> 25
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
The impact of these differences on the financial statements is as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
ACQUIRED
BUSINESS
[note 1]
---------
1997 1996
$ $
---------- ---------
<S> <C> <C>
TOTAL ASSETS UNDER CANADIAN GAAP 13,393,225 6,341,422
Adjustments
Goodwill 977,000 --
Less amortization (29,000) --
---------- ---------
TOTAL ASSETS UNDER US GAAP 14,341,225 6,341,422
========== =========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
$ $
---------- ---------
<S> <C> <C>
TOTAL LIABILITIES UNDER CANADIAN GAAP 13,152,695 5,985,547
Adjustments
Deferred income taxes 855,000 --
Special share obligation (3,500,000) --
---------- ---------
TOTAL LIABILITIES UNDER US GAAP 10,507,695 5,985,547
========== =========
</TABLE>
17
<PAGE> 26
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
ACQUIRED BUSINESS [note 1]
------------------------------------------------
SEVEN-MONTH FIVE-MONTH
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
$ $ $ $
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) FOR THE PERIOD
UNDER CANADIAN GAAP (259,491) 869,881 2,292,591 1,988,499
Adjustments
Depreciation and amortization 29,000 -- -- --
Interest on special share obligation (66,353) -- -- --
Deferred income taxes (122,000) -- -- --
-------- ------- --------- ---------
NET INCOME (LOSS) FOR THE PERIOD
UNDER US GAAP (100,138) 869,881 2,292,591 1,988,499
======== ======= ========= =========
</TABLE>
18
<PAGE> 27
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Seven-month period ended December 31, 1997, five-month period ended May 31, 1997
and years ended December 31, 1996 and 1995
STATEMENTS OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
ACQUIRED BUSINESS [note 1]
------------------------------------------------------
SEVEN-MONTH FIVE-MONTH
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MAY 31, 1997 DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
$ $ $ $
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATING
ACTIVITIES UNDER CANADIAN GAAP 1,323,512 639,452 2,444,348 3,474,874
Adjustment
Special share obligation 66,353 -- -- --
---------- ---------- ---------- ----------
CASH PROVIDED BY OPERATING
ACTIVITIES UNDER US GAAP 1,389,865 639,452 2,444,348 3,474,874
========== ========== ========== ==========
CASH USED IN INVESTING ACTIVITIES
UNDER CANADIAN GAAP (12,321,268) (242,857) (1,094,282) (478,808)
Adjustment
Special share obligation 3,500,000 -- -- --
---------- ---------- ---------- ----------
CASH USED IN INVESTING ACTIVITIES
UNDER US GAAP (8,821,268) (242,857) (1,094,282) (478,808)
========== ========== ========== ==========
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES UNDER CANADIAN GAAP 11,591,132 (1,004,207) (1,759,181) (3,307,089)
Adjustments
Proceeds from special share obligation (3,500,000) -- -- --
Dividend paid (66,353) -- -- --
---------- ---------- ---------- ----------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES UNDER US GAAP 8,024,779 (1,004,207) (1,759,181) (3,307,089)
========== ========== ========== ==========
</TABLE>
19
<PAGE> 28
TIERCON COATINGS INC.
[formerly Centrifugal Coaters Inc. and Centrifugal Coaters Corp.]
Incorporated under the laws of Ontario
BALANCE SHEETS
[Unaudited - in Canadian dollars]
As at September 30
<TABLE>
<CAPTION>
1998 1997
$ $
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash -- 492,020
Accounts receivable [note 2] 3,028,769 2,183,858
Inventory 842,717 405,219
Prepaid expenses 118,660 108,438
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,990,146 3,189,535
- --------------------------------------------------------------------------------
Deferred financing costs, net of accumulated
amortization of $53,008 145,779 374,163
Capital assets, net 7,209,727 7,698,614
Goodwill, net of accumulated amortization of $317,165 2,900,946 3,139,476
- --------------------------------------------------------------------------------
14,246,598 14,401,788
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Bank indebtedness 1,722,854 --
Accounts payable and accrued liabilities 2,335,320 2,137,360
Income taxes payable -- 102,031
Current portion of long-term debt [note 3] 3,680,000 4,480,000
Current portion of subordinated debt 152,000 --
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,890,174 6,719,391
- --------------------------------------------------------------------------------
Subordinated debt [note 4] -- 3,752,000
Loan payable [note 5] 4,565,548 --
Special share obligation 3,500,000 3,500,000
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 15,955,722 13,971,391
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
Share capital 500,021 500,021
Deficit (2,209,145) (69,624)
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) (1,709,124) 430,397
- --------------------------------------------------------------------------------
14,246,598 14,401,788
================================================================================
</TABLE>
See accompanying notes
<PAGE> 29
TIERCON COATINGS INC.
STATEMENTS OF INCOME (LOSS) AND
RETAINED EARNINGS (DEFICIT)
[Unaudited - in Canadian dollars]
<TABLE>
<CAPTION>
ACQUIRED
BUSINESS
[note 1]
------------
NINE-MONTH FOUR-MONTH FIVE-MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30, MAY 31,
1998 1997 1997
$ $ $
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES 10,753,516 4,783,299 6,872,887
Cost of sales 7,673,266 3,190,790 4,585,154
- -----------------------------------------------------------------------------------------
GROSS PROFIT 3,080,250 1,592,509 2,287,733
- -----------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative 2,170,751 647,391 736,386
Depreciation and amortization 1,189,453 541,831 205,043
Interest on long-term and subordinated debt 474,720 332,964 --
Settlement fees [note 4] 1,109,669 -- --
Interest on special share obligation 85,311 37,916 --
- -----------------------------------------------------------------------------------------
5,029,904 1,560,102 941,429
- -----------------------------------------------------------------------------------------
Income (loss) before income taxes (1,949,654) 32,407 1,346,304
Provision for income taxes -- 102,031 476,423
- -----------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD (1,949,654) (69,624) 869,881
Retained earnings (deficit), beginning of period (259,491) -- 82,574
- -----------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), END OF PERIOD (2,209,145) (69,624) 952,455
=========================================================================================
</TABLE>
See accompanying notes
<PAGE> 30
TIERCON COATINGS INC.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
[Unaudited - in Canadian dollars]
<TABLE>
<CAPTION>
ACQUIRED
BUSINESS
[note 1]
------------
NINE-MONTH FOUR-MONTH FIVE-MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30, MAY 31,
1998 1997 1997
$ $ $
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) for the period (1,949,654) (69,624) 869,881
Add items not requiring a current cash payment
Depreciation and amortization 1,189,453 541,831 205,043
Write-down of deferred financing costs 176,669 -- --
- -----------------------------------------------------------------------------------------------------------
(583,532) 472,207 1,074,924
Net change in non-cash working capital
balances related to operations (1,349,220) 605,353 (435,472)
- -----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,932,752) 1,077,560 639,452
- -----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to capital assets (789,026) (443,884) (242,857)
Acquisition of assets -- (11,820,788) --
- -----------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (789,026) (12,264,672) (242,857)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Deferred financing costs -- (400,889) --
Issuance of share capital -- 500,021 --
Proceeds from special share obligation -- 3,500,000 --
Proceeds from (repayment of) long-term debt, net (560,000) 4,480,000 --
Proceeds from (repayment of) subordinated debt (3,600,000) 3,600,000 --
Proceeds from loan payable 4,565,548 -- --
Proceeds from (repayment of) loan from
affiliated company under common control -- -- (1,490,527)
Proceeds from bank loan -- -- 486,320
- -----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 405,548 11,679,132 (1,004,207)
- -----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
DURING THE PERIOD (2,316,230) 492,020 (607,612)
Cash, beginning of period 593,376 -- 515,534
- -----------------------------------------------------------------------------------------------------------
CASH (BANK INDEBTEDNESS), END OF PERIOD (1,722,854) 492,020 (92,078)
===========================================================================================================
</TABLE>
See accompanying notes
<PAGE> 31
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Nine-month period ended September 30, 1998, four-month period ended September
30, 1997 and five-month period ended May 31, 1997
1. BASIS OF PRESENTATION
The company was incorporated under the laws of Ontario on May 16, 1997 as
Centrifugal Coaters Corp., and was inactive until May 31, 1997 when it acquired
substantially all of the assets and the related operating liabilities of a
preexisting company, Centrifugal Coaters Inc. [the "acquired business"], in an
arm's length transaction. The company changed its name to Centrifugal Coaters
Inc. on June 25, 1997 and to Tiercon Coatings Inc.
[the "company"] on October 19, 1998.
The accompanying unaudited interim financial statements as at September 30, 1998
and 1997 and for the nine-month period ended September 30, 1998 and four-month
period ended September 30, 1997 present the financial position, results of
operations and changes in financial position of the company. The values of the
assets and liabilities acquired on May 31, 1997 have been reflected in
accordance with the accounting basis established by the transaction described
above. The unaudited interim financial statements for the five-month period
ended May 31, 1997 present the results of operations and changes in financial
position of the unrelated acquired company, Centrifugal Coaters Inc. Management
believes these financial statements provide a reasonable basis for comparison
since the company's sole activity since inception has been the acquisition of
the assets of the acquired business and the continuation of its business [the
painting and coating of automotive parts].
The accompanying unaudited interim financial statements of the company have been
prepared in Canadian dollars following accounting principles accepted in Canada.
These principles are also in conformity, in all material respects, with
accounting principles generally accepted in the United States, except as
described in note 8 to the interim financial statements. Accordingly , the
interim financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments of a normal recurring
nature considered necessary for a fair presentation have been included.
Results for interim periods should not be considered indicative of results for a
full year. The period-end balance sheets do not include all disclosures required
by generally accepted accounting principles. For further information, refer to
the audited financial statements and footnotes thereto for the seven-month
period ended December 31, 1997.
1
<PAGE> 32
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Nine-month period ended September 30, 1998, four-month period ended September
30, 1997 and five-month period ended May 31, 1997
2. CONCENTRATION OF CREDIT RISK
The company provides services to many customers; however, four customers
represented 74% of accounts receivable at September 30, 1998 and 43% of sales
during the period.
At September 30, 1997, four customers represented 76% of the accounts receivable
balance and 79% of sales during the period.
3. LONG-TERM DEBT
As at September 30, 1998 and 1997, the company is not in compliance with two
covenants which require that it maintain a specific debt service ratio and ratio
of total liabilities to tangible net worth as set out in its credit agreement.
As a result, the debt has been classified as current.
4. SUBORDINATED DEBT
The subordinated term debt from two lenders was refinanced by a Canadian
subsidiary of Noble International, Ltd. as described in note 5. In addition,
$933,000 was paid to the subordinated debt holders in lieu of additional
payments and the unamortized deferred financing costs in the amount of $176,669
related to the subordinated debt was written off.
5. LOAN PAYABLE
The loan payable to a Canadian subsidiary of Noble International, Ltd. bears
interest at the U.S prime rate and has no specific terms of repayment but will
not be called prior to October 1, 1999. This debt was extended to refinance the
subordinated debt from two lenders as described in note 4.
6. PROVISION FOR INCOME TAXES
The tax values assigned to the assets acquired from the acquired business were
substantially less than their book values. As at September 30, 1997,
depreciation and amortization charged to the financial statements exceed capital
cost allowance for tax purposes by approximately $210,000. As at September 30,
1998, the company has income tax losses available to reduce future years taxable
income of approximately $630,000.
2
<PAGE> 33
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Nine-month period ended September 30, 1998, four-month period ended September
30, 1997 and five-month period ended May 31, 1997
7. SUBSEQUENT EVENTS
[a] On October 2, 1998, the shareholders sold their interest in the company to a
wholly-owned Canadian subsidiary of Noble International, Ltd.
[b] On October 2, 1998, the special share obligation was refinanced by a
Canadian subsidiary of Noble International, Ltd. for $2,000,000. In
addition, the interest due at that time was repaid.
[c] On October 2, 1998, the subordinated debt due to the previous owner of the
company was repaid.
[d] On December 2, 1998, the company entered into an operating lease for a new
paint plant facility which requires initial annual payments of $1,090,000
escalating to $1,200,000 for a term of 15 years commencing on June 1, 1999.
8. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE
UNITED STATES
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada ["Canadian GAAP"] which conform in all
material respects with accounting principles generally accepted in the United
States ["US GAAP"] except as set forth below:
SPECIAL SHARE OBLIGATION
Under US GAAP, the special share obligation would have been presented separately
outside shareholders' equity, and the financing charges associated with that
obligation [$85,311 for the nine-month period ended September 30, 1998 and
$37,916 for the four-month period ended September 30, 1997] would have been
recognized as a direct charge to retained earnings (deficit).
STATEMENTS OF CASH FLOWS
Under US GAAP, non-cash investing and financing transactions are excluded from
the statements of cash flows. For the four-month period ended September 30,
1997, the special shares of $3,500,000, issued in partial satisfaction of the
purchase price of the acquired business would have been excluded from the
statement.
3
<PAGE> 34
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Nine-month period ended September 30, 1998, four-month period ended September
30, 1997 and five-month period ended May 31, 1997
INCOME TAXES
Under US GAAP, the company would be required to follow the liability method of
accounting for income taxes whereby a deferred tax asset or liability is
measured using the enacted tax rates which will be in effect when any
differences between the financial statement and tax bases of assets or
liabilities reverse.
As at September 30, 1998, the company had a net deferred tax liability of
approximately nil. The net deferred tax liability results from the differences
between the assigned values and tax bases of the depreciable assets acquired and
accounted for as a purchase for financial statement purposes and treated as a
non-taxable transaction for income tax purposes. For US GAAP purposes, upon the
acquisition of the assets, a deferred tax liability of approximately $977,000
would have been recognized with acquired assets being increased by the same
amount. However, the company has recognized the benefit of the income tax asset
relating to its loss carryforwards to fully offset this deferred tax liability
as at September 30, 1998.
The impact of these differences on the financial statements is as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
$ $
- --------------------------------------------------------------------------------
<S> <C> <C>
TOTAL ASSETS UNDER CANADIAN GAAP 14,246,598 14,401,788
Adjustments
Goodwill 977,000 977,000
Less amortization (66,000) (16,000)
- --------------------------------------------------------------------------------
TOTAL ASSETS UNDER US GAAP 15,157,598 15,362,788
- --------------------------------------------------------------------------------
TOTAL LIABILITIES UNDER CANADIAN GAAP 15,955,722 13,971,391
Adjustments
Deferred income taxes 333,000 911,000
Special share obligation (3,500,000) (3,500,000)
- --------------------------------------------------------------------------------
TOTAL LIABILITIES UNDER US GAAP 12,788,722 11,382,391
================================================================================
</TABLE>
4
<PAGE> 35
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Nine-month period ended September 30, 1998, four-month period ended September
30, 1997 and five-month period ended May 31, 1997
STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
ACQUIRED
BUSINESS
[note 1]
------------
NINE-MONTH FOUR-MONTH FIVE-MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30, MAY 31,
1998 1997 1997
$ $ $
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME (LOSS) FOR THE PERIOD
UNDER CANADIAN GAAP (1,949,654) (69,624) 869,881
Adjustments
Depreciation and amortization 37,000 16,000 --
Interest on special share obligation (85,311) (37,916) --
Deferred income taxes (522,000) (66,000) --
- ----------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD
UNDER US GAAP (1,379,343) 18,292 869,881
==================================================================================
</TABLE>
5
<PAGE> 36
TIERCON COATINGS INC.
NOTES TO FINANCIAL STATEMENTS
[in Canadian dollars]
Nine-month period ended September 30, 1998, four-month period ended September
30, 1997 and five-month period ended May 31, 1997
STATEMENTS OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
ACQUIRED
BUSINESS
[note 1]
------------
NINE-MONTH FOUR-MONTH FIVE-MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30, MAY 31,
1998 1997 1997
$ $ $
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES UNDER CANADIAN GAAP (1,932,752) 1,077,560 639,452
Adjustment
Special share obligation 85,311 37,916 --
- ---------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES UNDER US GAAP (1,847,441) 1,115,476 639,452
===================================================================================================
CASH USED IN INVESTING ACTIVITIES
UNDER CANADIAN GAAP (789,026) (12,264,672) (242,857)
Adjustment
Special share obligation -- 3,500,000 --
- ---------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES
UNDER US GAAP (789,026) (8,764,672) (242,857)
===================================================================================================
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES UNDER CANADIAN GAAP 405,548 11,679,132 (1,004,207)
Adjustments
Proceeds from special share obligation -- (3,500,000) --
Dividend paid (85,311) (37,916) --
- ---------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES UNDER US GAAP 320,237 8,141,216 (1,004,207)
===================================================================================================
</TABLE>
6
<PAGE> 37
TIERCON COATINGS INC.
UNAUDITED BALANCE SHEETS
AS AT SEPTEMBER 30
<TABLE>
<CAPTION>
1998 1997
1998 US$ f/x rate US$ Conversion 1997 US$ f/x rate US$ Conversion
CAN $ Sept. 30, 98 Amounts CAN $ 30-Sep-97 Amounts
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT 1.5312 1.3811
Cash -- -- 492,020 356,252
Accounts receivable 3,028,769 1,978,036 2,183,858 1,581,245
Inventories 842,717 550,364 405,219 293,403
Prepaid expenses 118,660 77,495 108,438 78,516
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,990,146 2,605,895 3,189,535 2,309,416
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred financing cost, net 145,779 95,206 374,163 270,917
Capital assets, net 7,209,727 4,708,547 7,698,614 5,574,263
Goodwill, net 3,811,946 2,489,515 4,100,476 2,968,993
- -----------------------------------------------------------------------------------------------------------------------------------
15,157,598 9,899,163 15,362,788 11,123,589
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Bank indebtedness 1,722,854 1,125,166 -- --
Accounts payable and accrued liabilities 2,335,320 1,525,157 2,137,360 1,547,578
Income taxes payable -- -- 102,031 73,877
Current portion of long-term debt 3,680,000 2,403,344 4,480,000 3,243,791
Current portion of subordinated debt 152,000 99,269 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,890,174 5,152,936 6,719,391 4,865,246
- -----------------------------------------------------------------------------------------------------------------------------------
Subordinated debt -- -- 3,752,000 2,716,675
Loan payable 4,565,548 2,981,680 -- --
Deferred income taxes 333,000 217,476 911,000 659,619
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 12,788,722 8,352,092 11,382,391 8,241,540
- -----------------------------------------------------------------------------------------------------------------------------------
Special Share Obligation 3,500,000 2,285,789 3,500,000 2,534,212
SHAREHOLDERS' EQUITY (DEFICIENCY)
Share capital 500,021 326,555 500,021 362,045
Contributed surplus -- -- -- --
Retained earnings (deficiency) (1,631,145) (1,114,245) (19,624) (14,173)
Cumulative translation adjustment 48,972 -- (35)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) (1,131,124) (738,718) 480,397 347,837
- -----------------------------------------------------------------------------------------------------------------------------------
15,157,598 9,899,163 15,362,788 11,123,589
===================================================================================================================================
Difference -- -- (0)
</TABLE>
<PAGE> 38
TIERCON COATINGS INC.
UNAUDITED STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
Nine months Four months
Nine months ended 09/30/98 Four months ended 09/30/97
ended 09/30/98 Average US$ ended 09/30/97 Average US$
$ US$ rate Amount $ US$ rate Amount
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SALES 10,753,516 1.46390 7,345,800 4,783,299 1.38460 3,454,643
Cost of sales 7,673,266 5,241,660 3,190,790 2,304,485
- ----------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 3,080,250 2,104,140 1,592,509 1,150,158
- ----------------------------------------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative 2,170,751 1,482,855 647,391 467,565
Depreciation and amortization 1,226,453 837,798 557,831 402,882
Interest on long-term and
subordinated debt 474,720 324,284 332,964 240,477
Settlement fees 1,109,669 758,022 -- --
- ----------------------------------------------------------------------------------------------------------------------
4,981,593 3,402,959 1,538,186 1,110,924
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (1,901,343) (1,298,819) 54,323 39,234
Provision for (recovery of)
income taxes
- current -- -- 102,031 73,690
- deferred (522,000) (356,582) (66,000) (47,667)
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD (1,379,343) (942,237) 18,292 13,211
Retained earnings (deficit),
beginning of period (166,491) (113,731) -- --
Dividend paid (85,311) (58,277) (37,916) (27,384)
- ----------------------------------------------------------------------------------------------------------------------
RETAINED EARNING (DEFICIT),
END OF PERIOD (1,631,145) (1,114,245) (19,624) (14,173)
======================================================================================================================
<CAPTION>
Acquired Business
--------------------------------------------
Five months
Five months ended 05/31/97
ended 05/31/97 Average US$
$ US$ rate Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES 6,872,887 1.37 5,016,706
Cost of sales 4,585,154 3,346,828
- ----------------------------------------------------------------------------------------
GROSS PROFIT 2,287,733 1,669,878
- ----------------------------------------------------------------------------------------
EXPENSES
Selling, general and administrative 736,386 537,508
Depreciation and amortization 205,043 149,666
Interest on long-term and
subordinated debt -- --
Settlement fees --
- ----------------------------------------------------------------------------------------
941,429 687,174
- ----------------------------------------------------------------------------------------
Income (loss) before income taxes 1,346,304 982,704
Provision for (recovery of)
income taxes 476,423 347,754
- current -- --
- deferred -- --
- ----------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD 869,881 634,950
Retained earnings (deficit),
beginning of period 82,574 60,273
Dividend paid -- --
- ----------------------------------------------------------------------------------------
RETAINED EARNING (DEFICIT),
END OF PERIOD 952,455 695,223
========================================================================================
</TABLE>
<PAGE> 39
TIERCON COATINGS INC.
UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine-months Four-months
Nine-months AVERAGE ended 09/30/98 Four-months AVERAGE ended 09/30/97
ended 09/30/98 US$ US$ ended 09/30/97 US$ US$
$ RATE Amount $ RATE Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES 1.46390 1.3846
Net income (loss) for the period (1,379,343) (942,237) 18,292 13,211
Add item not requiring a current cash payment --
Depreciation and amortization 1,226,453 837,798 557,831 402,882
Write-down of deferred financing costs 176,669 120,684 -- --
Deferred income taxes (522,000) (356,582) (66,000) (47,667)
- ------------------------------------------------------------------------------------------------------------------------------------
(498,221) (340,337) 510,123 368,426
Net change in non-cash working capital
balances related to operations (1,349,220) (921,661) 605,353 437,204
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES (1,847,441) (1,261,998) 1,115,476 805,630
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to capital assets (789,026) (538,989) (443,884) (320,586)
Purchase of assets, net -- (8,320,788) (6,009,525)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (789,026) (538,989) (8,764,672) (6,330,111)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Deferred financing costs -- (400,889) (289,534)
Issuance of share capital -- 500,021 361,130
Proceeds from long-term debt -- 4,480,000 3,235,592
Repayment of long-term debt (560,000) (382,540) -- --
Proceeds from (repayment of) subordinated debt (3,600,000) (2,459,184) 3,600,000 2,600,029
Proceeds from loan payable 4,565,548 3,118,757 -- --
Proceeds from (repayment of)
loan to parent company -- -- -- --
Proceeds from (repayment of)
loan from affiliated company under common control -- -- --
Repayment of mortgage payable -- -- --
Proceeds from (repayment of) bank loan -- -- --
Dividend paid (85,311) (58,277) (37,916) (27,384)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 320,237 218,756 8,141,216 5,879,833
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH DURING THE PERIOD (2,316,230) (1,582,231) 492,020 355,352
====================================================================================================================================
<CAPTION>
Acquired Business
-----------------------------------
Five-months AVERAGE 1997
ended 05/31/97 US$ US$
$ RATE Amount
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES 1.37
Net income (loss) for the period 869,881 634,941
Add item not requiring a current cash payment
Depreciation and amortization 205,043 149,664
Write-down of deferred financing costs -- --
Deferred income taxes
- -----------------------------------------------------------------------------------------
1,074,924 784,605
Net change in non-cash working capital
balances related to operations (435,472) (317,859)
- -----------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 639,452 466,746
- -----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to capital assets (242,857) (177,265)
Purchase of assets, net --
- -----------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (242,857) (177,265)
- -----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Deferred financing costs -- --
Issuance of share capital -- --
Proceeds from long-term debt -- --
Repayment of long-term debt -- --
Proceeds from (repayment of) subordinated debt -- --
Proceeds from loan payable -- --
Proceeds from (repayment of)
loan to parent company -- --
Proceeds from (repayment of)
loan from affiliated company under common control (1,490,527) (1,087,960)
Repayment of mortgage payable --
Proceeds from (repayment of) bank loan 486,320 354,973
Dividend paid --
- -----------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,004,207) (732,987)
- -----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH DURING THE PERIOD (607,612) (443,506)
=========================================================================================
</TABLE>
<PAGE> 40
H & H STEEL PROCESSING COMPANY, INC.
FINANCIAL STATEMENTS
AS OF
DECEMBER 31, 1997 AND 1996
TOGETHER WITH
AUDITORS' REPORT
<PAGE> 41
Report of Independent Public Accountants
To the Board of Directors of
H & H Steel Processing Company, Inc.:
We have audited the accompanying balance sheets of H & H STEEL
PROCESSING COMPANY, INC. (an Ohio corporation) as of December 31, 1997 and 1996,
and the related statements of earnings, stockholders' equity, 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 H & H Steel
Processing Company, Inc. as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Cincinnati, Ohio,
June 12, 1998
<PAGE> 42
H & H STEEL PROCESSING COMPANY, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 353,450 $ 1,104,640
Investment securities (Note 4)-
Available-for-sale -- 270,145
Trading 3,424,246 2,398,604
Receivables (Notes 5, 8 and 10)-
Trade, less allowance for doubtful accounts of $94,000 in 1997
and 1996 2,030,439 1,943,277
Stockholders and affiliates 17,887 288,376
Other 89,458 86,465
Inventories (Notes 3 and 5) 62,485 --
Prepaids and deposits 128,954 156,978
------------ ------------
Total current assets 6,106,919 6,248,485
INVESTMENT IN PARTNERSHIP (Note 9) 1,381,025 1,248,443
PROPERTY, PLANT AND EQUIPMENT, net (Notes 3 and 5) 11,948,350 12,428,891
DEFERRED FINANCING FEES AND OTHER, net (Note 3) 107,125 219,430
------------ ------------
$ 19,543,419 $ 20,145,249
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations (Note 5) $ 1,450,000 $ 1,450,000
Accounts payable 458,523 281,575
Accrued commissions and wages 196,544 110,747
Accrued and withheld payroll taxes 6,567 68,594
Other accrued expenses 973,708 682,106
Accrued dividends 391,194 495,000
------------ ------------
Total current liabilities 3,476,536 3,088,022
------------ ------------
LONG-TERM OBLIGATIONS, less current maturities (Note 5) 3,683,342 5,133,338
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 2):
Common stock, no par value, 100 shares authorized,
issued and outstanding, stated at 1,000 1,000
Unrealized gain on securities available-for-sale -- 3,643
Retained earnings 12,486,012 12,267,328
------------ ------------
12,487,012 12,271,971
Note receivable, stockholder (103,471) (348,082)
------------ ------------
12,383,541 11,923,889
------------ ------------
$ 19,543,419 $ 20,145,249
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets
<PAGE> 43
H & H STEEL PROCESSING COMPANY, INC.
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
SALES (Note 10) $ 15,359,324 $ 14,894,344
COST OF SALES AND SERVICES 8,098,383 7,385,981
------------ ------------
Gross profit 7,260,941 7,508,363
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,256,145 3,740,809
------------ ------------
Operating profit 2,004,796 3,767,554
OTHER INCOME (EXPENSE):
Interest expense, net (388,502) (326,864)
Realized gain (loss) on sale of trading securities, net 48,748 (166,322)
Unrealized gain (loss) on trading securities 110,028 (158,672)
Other 157,614 29,210
------------ ------------
(72,112) (622,648)
------------ ------------
Earnings before equity in earnings of
partnership 1,932,684 3,144,906
EQUITY IN EARNINGS OF PARTNERSHIP (Note 9) 132,582 240,949
------------ ------------
Net earnings $ 2,065,266 $ 3,385,855
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE> 44
H & H STEEL PROCESSING COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
COMMON NOTE AVAILABLE-
SHARES COMMON RETAINED RECEIVABLE, FOR-SALE
OUTSTANDING STOCK EARNINGS STOCKHOLDER SECURITIES TOTAL
----------- ----- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 100 $1,000 $ 10,216,932 $(348,082) $ 6,811 $ 9,876,661
Net earnings -- -- 3,385,855 -- -- 3,385,855
Net unrealized loss on available-
for-sale securities -- -- -- -- (3,168) (3,168)
Dividends declared -- -- (1,335,459) -- -- (1,335,459)
--- ------ ------------ --------- ------- ------------
BALANCE, December 31, 1996 100 1,000 12,267,328 (348,082) 3,643 11,923,889
Net earnings -- -- 2,065,266 -- -- 2,065,266
Change in stockholder
receivable -- -- -- 244,611 -- 244,611
Net unrealized loss on available-
for-sale securities -- -- -- -- (3,643) (3,643)
Dividends declared -- -- (1,846,582) -- -- (1,846,582)
--- ------ ------------ --------- ------- ------------
BALANCE, December 31, 1997 100 $1,000 $ 12,486,012 $(103,471) $ -- $ 12,383,541
=== ====== ============ ========= ======= ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE> 45
H & H STEEL PROCESSING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,065,266 $ 3,385,855
Adjustments to reconcile net earnings to net cash provided by
operating activities-
Depreciation and amortization 1,296,520 1,110,638
Equity in earnings of partnership (132,582) (240,949)
Decrease (increase) in receivables, inventory and prepaids
and deposits (124,616) 316,470
Unrealized (gain)/loss on trading securities (110,028) 158,672
Purchases of trading securities (4,631,894) (6,259,947)
Proceeds from sale of trading securities 3,716,280 5,777,881
Increase (decrease) in accounts payable, accrued expenses,
income taxes 492,320 (520,404)
Loss (gain) on sale of fixed assets, net (579) 15,958
----------- -----------
Net cash provided by operating activities 2,570,687 3,744,174
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment, including
construction in progress, net (732,309) (2,725,174)
Proceeds from sale of fixed assets 4,216 9,855
Decrease in notes receivable stockholder and affiliates, net 515,100 211,358
Proceeds from sale of available-for-sale securities, net 266,502 878,103
----------- -----------
Net cash provided by (used in) investing activities 53,509 (1,625,858)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments of long-term obligations (1,449,996) (1,449,996)
Decrease (increase) in deferred financing fees and other 24,998 (86,136)
Dividends paid (1,950,388) (1,599,199)
----------- -----------
Net cash used in financing activities (3,375,386) (3,135,331)
----------- -----------
Net decrease in cash and cash equivalents (751,190) (1,017,015)
CASH AND CASH EQUIVALENTS, beginning of year 1,104,640 2,121,655
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 353,450 $ 1,104,640
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid during the year, net of interest
capitalized in 1996 $ 396,860 $ 390,473
=========== ===========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
<PAGE> 46
H & H STEEL PROCESSING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) Organization and Business Activities-
The primary business activities of H & H Steel Processing Company, Inc.
(the Company) are shearing, slitting and automotive configurated
blanking. The Company currently has five locations throughout Ohio and
Indiana.
(2) Income Taxes - Election of S Corporation Status-
As of July 1, 1989, the Company elected for federal and state income tax
purposes to include its taxable income with that of its stockholders (an
S Corporation election). During the periods the S Corporation election is
in effect the stockholders will receive distributions in amounts equal to
their estimated federal and state tax liabilities attributable to the
earnings of the Company.
In connection with the S Corporation election, net income for the years
ended December 31, 1997 and 1996 does not include provisions for income
taxes of approximately $846,000 and $1,362,000, respectively which would
otherwise be considered in the determination of net income.
Deferred taxes result primarily from the use of accelerated methods of
depreciation of fixed assets for tax purposes. In the event the S
Corporation election is terminated, deferred income taxes applicable to
these differences would be reflected in the accompanying financial
statements. The components of retained earnings at December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred taxes $ 433,621 $ 266,624
Unrestricted retained earnings 12,052,391 12,000,704
----------- -----------
$12,486,012 $12,267,328
=========== ===========
</TABLE>
<PAGE> 47
-2-
(3) Summary of Significant Accounting Policies-
(a) Cash and Cash Equivalents--The Company considers all highly liquid
investments with an original maturity of three months or less to
be cash equivalents.
(b) Inventories--Inventories are stated at the lower of cost or
market. The inventory balance at December 31, 1997 consisted
mainly of dies. The Company maintained no inventory balance at
December 31, 1996.
(c) Property, Plant and Equipment--Property, plant and equipment are
recorded at cost, less accumulated depreciation computed using the
straight-line method over the estimated useful lives of the
related assets. Property, plant and equipment along with the
related estimated useful lives as of December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
USEFUL
1997 1996 LIVES
------------ ------------ ------------
<S> <C> <C> <C>
Land $ 638,892 $ 638,892 N/A
Buildings and improvements 7,589,420 7,302,765 10-40 yrs
Machinery and equipment 9,986,847 9,436,733 3-10 yrs
Transportation equipment 321,512 311,733 3-10 yrs
Furniture and fixtures 584,963 520,333 3-10 yrs
Rental property -- 36,328 5-10 yrs
Construction in progress 70,623 222,025 N/A
------------ ------------
Total cost 19,192,257 18,468,809
Less-accumulated depreciation (7,243,907) (6,039,918)
------------ ------------
$ 11,948,350 $ 12,428,891
============ ============
</TABLE>
Interest costs incurred for the construction of certain long-lived
assets are capitalized during the period such assets are under
construction. No interest costs were capitalized in 1997. Interest
costs capitalized were $94,900 for the year ended December 31,
1996.
(d) Deferred Financing Fees--The Company provides for amortization of
deferred financing fees using the straight-line method over the
lives of various outstanding obligations which range from five to
fifteen years.
<PAGE> 48
-3-
(e) Advertising--The Company expenses advertising costs as incurred.
Advertising expense approximated $35,700 and $20,400 in 1997 and
1996, respectively.
(f) 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.
(4) Investment Securities-
The Company has adopted Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities."
The Company's investments are accounted for as follows:
- Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with both realized
and unrealized gains and losses included in earnings.
- Investments not classified as trading securities or
held-to-maturity are classified as available-for-sale securities
and reported at fair value. Net unrealized gains and losses for
these securities are excluded from earnings and reported in a
separate component of stockholders' equity.
Realized gains (losses) are calculated based upon the proceeds received
less original cost.
Investment securities are composed of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
U.S. Treasuries and agencies $2,892,264 $2,556,481
Certificates of deposit 100,000 --
Corporate bonds -- 100,000
Investment trusts 309,505 --
Equity securities 122,477 12,268
---------- ----------
$3,424,246 $2,668,749
========== ==========
</TABLE>
<PAGE> 49
-4-
(5) Debt-
(a) Short-Term Borrowings--The Company has a revolving line-of-credit
with a bank of up to $4,000,000 which accrues interest at prime
less 1/2% and matures on October 15, 1998. Borrowings are secured
by accounts receivable, inventory and certain other assets of the
Company. There were no borrowings against the line at December 31,
1997 or 1996.
(b) Long-Term Obligations--Long-term obligations consist of the
following as of December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
City of Lawrence, Indiana, Economic Development Revenue Bonds,
floating monthly rate, 4.30% and 4.20% at December 31, 1997 and
1996, respectively, due in semi-annual installments through
August 2005, secured by substantially all the assets of the
Lawrence, Indiana facility $ 2,000,000 $ 2,250,000
Term loan with a bank, 7.98%, payable monthly in equal principal
payments through June 1999, secured by equipment, inventory,
accounts receivable and intangibles 300,000 500,000
Term loan with a bank, 7.63%, payable monthly in equal principal
payments through October 12, 2000, secured by equipment,
inventory, accounts receivable and intangibles 2,833,342 3,833,338
----------- -----------
5,133,342 6,583,338
Less-current maturities (1,450,000) (1,450,000)
----------- -----------
$ 3,683,342 $ 5,133,338
=========== ===========
</TABLE>
The Company has the option to select either a variable or fixed interest
rate for the Economic Development Revenue Bonds (the Bonds). If a fixed
interest rate is selected for a period of time, the rate assigned will
approximate the market rate for comparable securities, not to exceed 12%.
If the Bonds are at a variable rate the Bondholders reserve the right to
demand payment on the Bonds. In the event that any of the Bondholders
exercise their rights, a remarketing agent is responsible for remarketing
the Bonds on a best efforts basis for not less than the outstanding
principal and accrued interest. If the remarketing agent is not
successful, there will be an automatic draw on a remarketing loan due 366
days after the draw. The
<PAGE> 50
-5-
Bonds are secured by a letter of credit which expires July 31, 1999 and
carries a per annum charge of 13/8% of the then outstanding balance of
the Bonds plus 48 days interest at 12%.
Among others, the Company is required by the bank to maintain a certain
minimum net worth and a compensating balance of $250,000.
Scheduled maturities of the Company's long-term obligations at December
31, 1997, assuming the bonds are held to their maturity or are
successfully remarketed, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AMOUNT
----------- ----------
<S> <C>
1998 $1,450,000
1999 1,350,000
2000 1,083,342
2001 250,000
2002 250,000
Thereafter 750,000
----------
$5,133,342
==========
</TABLE>
Subsequent to yearend, the Company entered into two additional term notes
with a bank for a $2,500,000 and $1,000,000. These notes bear interest at
fixed rates of 7.10% and 7.15%, respectively. The $2,000,000 note is
payable in monthly installments of $41,667 beginning March 1, 1998 for 60
months and matures on January 22, 2003. The $1,000,000 note is payable in
monthly installments of $16,667 beginning August 1, 1998 for 60 months
and matures on June 25, 2003. These borrowings will be used to fund an
expansion at one of the Company's processing facilities.
(6) Commitments and Contingencies-
(a) Operating Leases--The Company leases certain vehicles used in its
operations under noncancelable operating leases. Minimum required
payments under these lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1998 $ 59,500
1999 31,700
2000 11,900
--------
$103,100
========
</TABLE>
<PAGE> 51
-6-
During 1997 and 1996 rental expense associated with these leases
approximated $77,300 and $54,400, respectively.
(b) Guarantees--The Company has guaranteed $2,000,000 in personal
loans of the majority shareholder at December 31, 1997.
(7) Employee Benefit Plans-
(a) Salaried 401(k) Plan--In 1992, the Company established a 401(k)
plan for the benefit of salaried employees previously covered
under the Company's defined benefit plan which was terminated in
1992. Under this plan, the Company matches employee contributions,
up to 3% of the employee's wages. Total expense approximated
$37,500 and $59,300 for the years ended December 31, 1997 and
1996, respectively.
(b) 401(k) Plan--In 1987, the Company established a 401(k) plan which
covers substantially all union employees. Under this plan, the
Company matches employee contributions up to 4% of employee wages.
Total expense approximated $57,000 and $40,900 for the years ended
December 31, 1997 and 1996, respectively.
(8) Transactions with Affiliate-
Through September 30, 1997, the Company rented real estate and equipment
to Strip Processing Equipment Company (Strip Processing), which was
majority-owned by the estate of the former principal stockholder of the
Company. Rental income from Strip Processing was $7,000 and $12,000 in
1997 and 1996, respectively. The Company also purchased equipment and
parts from Strip Processing and engaged it to perform maintenance on
certain equipment in the normal course of business. These purchases
approximated $458,000 and $569,000 in 1997 and 1996, respectively.
Effective September 30, 1997, the operations of Strip Processing were
merged into the Company and continues as a division of the Company. The
following assets of Strip Processing were acquired in settlement of the
Company's outstanding receivable from Strip Processing:
<TABLE>
<S> <C>
Cash $113,151
Inventories 42,078
Machinery and equipment 23,329
--------
$178,558
========
</TABLE>
(9) Investment and Earnings in Partnership-
(a) Investment in Partnership--On September 1, 1988, the Company
entered into a partnership agreement with a previously unrelated
entity. Concurrent with entering into the partnership agreement,
the Company exchanged a 50% interest in property,
<PAGE> 52
-7-
plant and equipment of one of their operating facilities for cash of
$720,000 and like kind property of another steel company. The Company and
its partner then contributed $50,000 each and their respective interests
in the operating facility to Precision Blanking Limited (the
Partnership). The Partnership provides first operational blanks to the
automotive industry.
(b) Earnings in Partnership--The Company's 50% investment in the
Partnership is recorded using the equity method. The following is
a summary of the Partnership's financial position and results of
operations for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Total assets $5,426,138 $5,208,563
========== ==========
Total liabilities $1,741,752 $1,646,083
========== ==========
Partners' equity $3,684,386 $3,562,480
========== ==========
Net income $ 121,908 $ 338,644
========== ==========
</TABLE>
The Company's carrying amount of this investment and earnings of the
partnership differ from the Company's pro-rata portion of the
Partnerships' equity and net income. These differences are the result of
certain assets contributed to the Partnership by the Company having a
higher carrying value on the Partnership's financial statements than the
Company's underlying basis in the assets contributed. In addition,
depreciation expense relative to these assets and amortization of certain
intangibles is higher on the Partnership financial statements than the
amount included in "Earnings of Partnership" in the accompanying
financial statements.
(10) Major Customers and Concentrations of Credit Risk-
The Company deals mainly with major steel companies and thus does not
require its customers to pledge collateral in satisfaction of trade
receivable obligations.
<PAGE> 53
-8-
The Company had sales to three large steel companies in 1997 which
approximated 70% of the Company's total sales for the year. In 1996,
sales to four large steel companies approximated 87% of the Company's
total sales for the year. At December 31, 1997 and 1996, accounts
receivable from these customers approximated 50% and 80% of total
accounts receivable, respectively.
(11) Subsequent Event-
Subsequent to December 31, 1997, the Company commenced negotiations with
Noble International, Ltd. (Noble) whereby Noble could acquire the
operating assets and assume certain liabilities of the Company.
<PAGE> 54
H & H STEEL PROCESSING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED YEAR ENDED
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
----------------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Earnings $ 582,728 $ 2,065,266 $ 3,385,855
Adjustments to reconcile net earnings to
net cash provided by operations
Depreciation and amortization 1,295,854 1,296,520 1,110,638
Equity in earnings of partnership (118,612) (132,582) (240,949)
Changes in operating assets and liabilities
Decrease (Increase) in receivables, inventory, prepaids
and deposits 386,836 (124,616) 316,470
Unrealized (gain)/loss on trading securities (14,042) (110,028) 158,672
Proceeds from sales of trading securities, net (686,985) (915,614) (482,066)
Increase (decrease) in accounts payable, accrued expenses (250,967) 492,320 (520,404)
Loss (gain) on sale of fixed assets, net -- (579) 15,958
----------- ----------- -----------
Net cash provided by operating activities 1,194,813 2,570,687 3,744,174
----------- ----------- -----------
Cash Flows From Investing Activities
Additions to property, plant and equipment, including
construction in progress, net (2,794,151) (732,309) (2,725,174)
Proceeds from sale of fixed assets -- 4,216 9,855
Decrease in notes receivable stockholder and affiliates, net 121,358 515,100 211,358
Purchase of remaining equity of partnership, net of cash rec'd (138,541) -- --
Proceeds from sale of available-for-sales securities, net -- 266,502 878,103
----------- ----------- -----------
Net cash provided by (used in) investing activities (2,811,334) 53,509 (1,625,858)
----------- ----------- -----------
Cash Flows From Financing Activities
Proceeds from term notes payable 3,500,000 -- --
Net payments of long-term obligations (1,491,664) (1,449,996) (1,449,996)
Net proceeds from working capital line 2,140,085 -- --
Decrease (increase) in deferred financing fees and other -- 24,998 (86,136)
Dividends paid (1,184,893) (1,950,388) (1,599,199)
----------- ----------- -----------
Net cash provided by (used in) financing activities 2,963,528 (3,375,386) (3,135,331)
----------- ----------- -----------
Net increase (decrease) in cash 1,347,007 (751,190) (1,017,015)
Cash at beginning of period 353,450 1,104,640 2,121,655
----------- ----------- -----------
Cash at end of period $ 1,700,457 $ 353,450 $ 1,104,640
=========== =========== ===========
Supplemental cash flow disclosure
Cash paid for: Interest paid during the period, net of interest
capitalized $ 284,650 $ 396,860 $ 390,473
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 55
H & H STEEL PROCESSING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
(UNAUDITED) (UNAUDITED)
------------- -------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,700,457 $ 3,934,470
Investment securities-
Available-for-sale -- --
Trading 4,125,273 --
Receivables-
Trade, less allowance for doubtful accounts 3,711,204 2,400,223
Stockholders and affiliates -- 4,085,097
Other 141,886 --
Inventories 764,859 29,227
Prepaids and deposits 29,135 35,873
----------- -----------
Total current assets 10,472,814 10,484,890
INVESTMENT IN PARTNERSHIP -- 1,395,445
PROPERTY, PLANT AND EQUIPMENT, net 15,038,310 12,053,040
DEFERRED FINANCING FEES AND OTHER, net 520,773 134,563
----------- -----------
$26,031,897 $24,067,937
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 4,240,085 $ 1,450,000
Accounts payable 1,832,238 50,376
Accrued commissions and wages 358,817 146,557
Accrued and withheld payroll taxes 99,929 28,793
Other accrued expenses 2,183,109 1,252,418
Accrued dividends 107,175 --
----------- -----------
Total current liabilities 8,821,353 2,928,145
LONG-TERM OBLIGATIONS, less current maturities
(Note 5) 5,041,678 6,678,739
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 2):
Common stock, no par value, 100 shares authorized,
issued and outstanding, stated at 1,000 1,000
Unrealized gain on securities available-for-sale -- 3,643
Retained earnings 12,167,866 14,456,410
----------- -----------
12,168,866 14,461,053
Note receivable, stockholder -- --
----------- -----------
12,168,866 14,461,053
----------- -----------
$26,031,897 $24,067,937
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 56
H & H STEEL PROCESSING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,700,457 $ 353,450 $ 1,104,640
Investment securities (Note 4)-
Available-for-sale -- -- 270,145
Trading 4,125,273 3,424,246 2,398,604
Receivables (Notes 5, 8 and 10)-
Trade, less allowance for doubtful accounts of $94,000 at September 30,
1998, December 31, 1997 and December
31, 1996 3,711,204 2,030,439 1,943,277
Stockholders and affiliates -- 17,887 288,376
Other 141,886 89,458 86,465
Inventories (Notes 3 and 5) 764,859 62,485 --
Prepaids and deposits 29,135 128,954 156,978
------------ ------------ ------------
Total current assets 10,472,814 6,106,919 6,248,485
INVESTMENT IN PARTNERSHIP (Note 9) -- 1,381,025 1,248,443
PROPERTY, PLANT AND EQUIPMENT, net (Notes 3 and 5) 15,038,310 11,948,350 12,428,891
DEFERRED FINANCING FEES AND OTHER, net (Note 3) 520,773 107,125 219,430
------------ ------------ ------------
$ 26,031,897 $ 19,543,419 $ 20,145,249
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations (Note 5) $ 4,240,085 $ 1,450,000 $ 1,450,000
Accounts payable 1,832,238 458,523 281,575
Accrued commissions and wages 358,817 196,544 110,747
Accrued and withheld payroll taxes 99,929 6,567 68,594
Other accrued expenses 2,183,109 973,708 682,106
Accrued dividends 107,175 391,194 495,000
------------ ------------ ------------
Total current liabilities 8,821,353 3,476,536 3,088,022
LONG-TERM OBLIGATIONS, less current maturities (Note 5) 5,041,678 3,683,342 5,133,338
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 2):
Common stock, no par value, 100 shares authorized,
issued and outstanding, stated at 1,000 1,000 1,000
Unrealized gain on securities available-for-sale -- -- 3,643
Retained earnings 12,167,866 12,486,012 12,267,328
------------ ------------ ------------
12,168,866 12,487,012 12,271,971
Note receivable, stockholder -- (103,471) (348,082)
------------ ------------ ------------
12,168,866 12,383,541 11,923,889
------------ ------------ ------------
$ 26,031,897 $ 19,543,419 $ 20,145,249
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 57
H & H STEEL PROCESSING COMPANY, INC.
STATEMENTS OF EARNINGS
NINE MONTHS ENDED
<TABLE>
<CAPTION>
SEPTEMBER 30, YEAR ENDED YEAR ENDED
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES (Note 10) 9,526,080 $ 15,359,324 $ 14,894,344
COST OF SALES AND SERVICES 5,639,998 8,098,383 7,385,981
------------ ------------ ------------
Gross Profit 3,886,082 7,260,941 7,508,363
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 3,599,810 5,256,145 3,740,809
------------ ------------ ------------
Operating Profit 286,272 2,004,796 3,767,554
OTHER INCOME (EXPENSE)
Interest expense (284,650) (388,502) (326,864)
Realized gain (loss) on sale of trading
securities, net 198,951 48,748 (166,322)
Unrealized gain (loss) on trading securities 14,042 110,028 (158,672)
Sundry, net 179,502 157,614 29,210
------------ ------------ ------------
394,117 1,932,684 3,144,906
EQUITY IN EARNINGS OF PARTNERSHIP (Note 9) 188,611 132,582 240,949
------------ ------------ ------------
Net earnings $ 582,728 $ 2,065,266 $ 3,385,855
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 58
H & H STEEL PROCESSING COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
COMMON NOTE AVAILABLE-
SHARES COMMON RETAINED RECEIVABLE, FOR-SALE
OUTSTANDING STOCK EARNINGS STOCKHOLDER SECURITIES TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 100 $ 1,000 $ 10,216,932 $ (348,082) $ 6,811 $ 9,876,661
Net Earnings -- -- 3,385,855 3,385,855
Net unrealized loss on available-
for-sale securities -- -- -- -- (3,168) (3,168)
Dividends declared -- -- (1,335,459) -- -- (1,335,459)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 100 1,000 12,267,328 (348,082) 3,643 11,923,889
Net earnings -- -- 2,065,266 -- -- 2,065,266
Change in stockholder
receivable -- -- -- 244,611 -- 244,611
Net unrealized loss on available-
for-sale securities -- -- -- -- (3,643) (3,643)
Dividends declared -- -- (1,846,582) -- -- (1,846,582)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 100 1,000 12,486,012 (103,471) -- 12,383,541
Net earnings -- -- 582,728 -- -- 582,728
Change in stockholder
receivable -- -- -- 103,471 -- 103,471
Dividends declared -- -- (900,874) -- -- (900,874)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, September 30, 1998 (Unaudited) $ 100 $ 1,000 $ 12,167,866 $ -- $ -- $ 12,168,866
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 59
H & H STEEL PROCESSING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
SEPTEMBER 30, 1998
1. Organization and Business Activities-
-------------------------------------
The primary business activities of H & H Steel Processing Company, Inc.
(the Company) are shearing, slitting and automotive configurated blanking.
The Company currently has five locations throughout Ohio and Indiana.
2. Income Taxes--Election of S Corporation Status-
-----------------------------------------------
As of July 1, 1989, the Company elected for federal and state income tax
purposes to include its taxable income with that of its stockholders (an
S-Corporation election). During the periods the S Corporation election is
in effect the stockholders will receive distributions in amounts equal to
their estimated federal and state liabilities attributable to the earnings
of the Company.
In connection with the S Corporation election, net income for the
nine-month period ended September 30, 1998 and the years ended December
31, 1997 and December 31, 1996 does not include provisions for the income
taxes of approximately $233,000, $846,000 and $1,362,000 respectively
which would otherwise be considered in the determination of net income.
Deferred taxes result primarily from the use of accelerated methods of
depreciation of fixed assets for tax purposes. In the event the S
Corporation election is terminated, deferred income taxes applicable to
these differences would be reflected in the accompanying financial
statements. The components of retained earnings at September 30, 1998,
December 31, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
September 30,
1998 December 31, December 31,
(Unaudited) 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Deferred taxes $ 398,657 $ 433,621 $ 266,624
Unrestricted retained earnings 11,769,209 12,052,391 12,000,704
----------- ----------- -----------
$12,167,866 $12,486,012 $12,267,328
=========== =========== ===========
</TABLE>
3. Summary of Significant Accounting Policies-
-------------------------------------------
a. Unaudited Interim Financial Statements- -The statements of
operations as of and for the period ended September 30, 1998 are
unaudited and are based upon the representations of management. In
the opinion of management, all adjustments have been included and all
adjustments considered necessary for a fair presentation have been
included.
Results for interim periods should not be considered indicative of
results for a full year. The period-end balance sheets do not include
all disclosures required by generally accepted accounting principles.
For further information, refer to the audited financial statements
and footnotes thereto for the year ended December 31, 1997.
<PAGE> 60
b. Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be
cash equivalents.
c. Inventories - Inventories are stated at the lower of cost or market.
The inventory balance at September 30, 1998 and at December 31, 1997
consisted mainly of dies, and coiled steel purchased from a major
customer. This customer requires the Company to purchase the steel as
a condition for processing the coiled steel. Processing revenues are
reflected net of the cost of the steel in the accompanying statements
of earnings. The Company maintained no inventory balance at December
31, 1996.
d. Property, Plant and Equipment - Property, plant and equipment are
recorded at cost, less accumulated depreciation computed using the
straight-line method over the estimated useful lives of the related
assets. Property, plant and equipment along with the related
estimated useful lives as of September 30, 1998, December 31, 1997
and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
September 30,
1998 December 31, December 31, Useful
(Unaudited) 1997 1996 Lives
------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Land $ 858,891 $ 638,892 $ 638,892 N/A
Buildings and improvements 8,618,660 7,589,420 7,302,765 10-40 yrs
Machinery and equipment 13,052,736 9,986,847 9,436,733 3-10 yrs
Transportation equipment 355,110 321,512 311,733 3-10 yrs
Furniture and fixtures 685,040 584,962 520,333 3-10 yrs
Rental property 63,619 36,328 5-10 yrs
Construction in progress 1,554,973 70,623 232,025 N/A
------------ ----------- -----------
Total Cost 25,189,029 19,192,257 18,468,809
Less-accumulated depreciation (10,150,719) (7,243,907) (6,039,918)
------------ ----------- -----------
$ 15,038,310 $11,948,350 $12,428,891
------------ ----------- -----------
</TABLE>
Interest costs incurred for the construction of certain long-lived
assets are capitalized during the period such assets are under
construction. No interest costs were capitalized for the nine month
period ended September 30, 1998 or for the year ended December 31,
1997. Interest costs capitalized were $94,900 for the year ended
December 31, 1996.
e. Deferred Financing Fees - The Company provides for amortization of
deferred financing fees using the straight-line method over the lives
of various outstanding obligations, which range from five to fifteen
years.
f. Advertising - The Company expenses advertising costs as incurred.
Advertising expense approximated $7,200 for the nine-month period
ended September 30, 1998, $35,700 for the year ended December 31, 1997
and $20,400 for the year ended December 31, 1996.
g. 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.
<PAGE> 61
4. Investment Securities
---------------------
The Company has adopted Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities."
The Company's investments are accounted for as follows:
o Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified
as trading securities and reported at fair value with both
realized and unrealized gains and losses included in earnings.
o Investments not classified as trading securities or
held-to-maturity are classified as available-for-sale securities
and reported at fair value. Net unrealized gains and losses for
these securities are excluded from earnings and reported in a
separate component of stockholders' equity.
Realized gains (losses) are calculated based upon the proceeds received
less original cost.
Investment securities are composed of the following:
<TABLE>
<CAPTION>
September 30,
1998 December 31, December 31,
(Unaudited) 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
U.S. Treasuries and agencies $ 1,783,267 $ 2,892,264 $ 2,556,481
Certificates of deposit 100,000 100,000
Commercial paper 498,317
Corporate bonds - - 100,000
Investment trusts 313,168 309,505
Equity securities 1,430,522 122,477 12,268
----------- ----------- -----------
$ 4,125,273 $ 3,424,246 $ 2,668,749
=========== =========== ===========
</TABLE>
<PAGE> 62
5. Debt-
-----
Long-Term Obligations consist of the following:
<TABLE>
<CAPTION>
September 30,
1998 December 31, December 31,
(Unaudited) 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Revolving credit facility with interest at
prime less 1/2%. The facility provides for
borrowings up to $4,000,000. The facility
is secured by certain other assets of the
Company. $ 2,140,085
City of Lawrence, Indiana, Economic
Development Revenue Bonds, floating
monthly rate, 4.10% at September 30,
1998, 4.30% at December 31, 1997 and
4.20% at December 31, 1996, due in semi
annual installments through August 2005,
secured by substantially all the assets of
the Lawrence, Indiana facility. 1,750,000 $ 2,000,000 $ 2,250,000
Term loan with a bank, 7.98%, payable
monthly in equal principal payments
through June 1999, secured by equipment,
inventory, accounts receivable and
intangibles. 150,000 300,000 500,000
Term loan with a bank, 7.10% payable
in monthly in equal principal payments
through January 2003, secured by
equipment, inventory, accounts receivable
and intangibles. 2,208,330
Term loan with a bank, 7.15% payable
in monthly in equal principal payments
through June 2003, secured by
equipment, inventory, accounts receivable
and intangibles. 950,000
Term loan with a bank, 7.63%, payable
monthly in equal principal payments
through October 12, 2000, secured by
equipment, inventory, accounts receivable
and intangibles 2,083,348 2,833,342 3,833,338
------------ ----------- -----------
9,281,736 5,133,342 (6,583,338)
Less-current maturities (4,240,085) (1,450,000) (1,450,000)
------------ ----------- -----------
$ 5,041,678 $ 3,683,342 $ 5,133,338
============ =========== ===========
</TABLE>
<PAGE> 63
The Company has the option to select either a variable or fixed interest
rate for the Economic Development Revenue Bonds (the Bonds). If a fixed
interest rate is selected for a period of time, the rate assigned will
approximate the market rate for comparable securities, not to exceed 12%.
If the Bonds are at a variable rate the Bondholders reserve the right to
demand payment on the Bonds. In the event that any of the Bondholders
exercise their rights, a remarketing agent is responsible for remarketing
the Bonds on a best effort basis for not less than the outstanding
principal and accrued interest. If the remarketing effort is not
successful, there will be an automatic draw on the remarketing loan due 366
days after the draw. The Bonds are secured by a letter of credit which
expires July 31, 1999 and carries a per annum charge of 1-3/8% of the then
outstanding balance of the Bonds plus 48 days interest at 12%.
Among others, the Company is required by the bank to maintain a certain
minimum net worth and a compensating balance of $250,000.
Scheduled maturities of the Company's long-term obligations at September
30, 1998, assuming the bonds are held to their maturity or are successfully
remarketed, are as follows:
<TABLE>
<CAPTION>
Year Ending Amount
----------- ----------
<S> <C>
1999 $4,240,085
2000 1,950,000
2001 1,033,345
2002 950,000
2003 608,333
Thereafter 500,000
----------
$9,281,763
==========
</TABLE>
6. Commitments and Contingencies
-----------------------------
a. Operating Leases. The Company leases certain vehicles used in its
operations under noncancelable operating leases. Minimum required
payments under these lease agreements are as follows:
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
1998 $ 19,228
1999 62,630
2000 42,263
--------
$124,121
========
</TABLE>
b. Guarantees. The Company has guaranteed $2,000,000 in personal loans
of the majority shareholder at September 30, 1998 and December 31,
1997.
7. Employee Benefit Plans
a. Salaried 401(k) Plan -- In 1992, the Company established a 401(k) plan
for the benefit of salaried employees previously covered under the
Company's defined benefit plan which was terminated in 1992. Under
this plan, the Company matches employee contributions up to 3% of the
employee's wages. Total expense approximated $21,600 for the nine
month period ended September 30, 1998, $37,500 for the year ended
December 31, 1997 and $59,300 for the year ended December 31, 1996.
<PAGE> 64
b. 401(k) Plan - In 1987, the Company established a 401(k) plan
which covers substantially all union employees. Under this plan,
the Company matches employee contributions up to 4% of employee
wages. Total expense approximated $44,500 for the nine-month
period ended September 30, 1998, $57,000 for the year ended
December 31, 1997 and $40,900 for the year ended December 31,
1996.
8. Transactions with Affiliate-
----------------------------
Through September 30, 1997, the Company rented real estate and
equipment to Strip Processing Equipment Company (Strip Processing),
which was majority owned by the estate of the former principal
stockholder of the Company. Rental income from Strip Processing was
$7,000 and $12,000 for the years ended December 31, 1997 and December
31, 1996 respectively. The Company also purchased equipment and parts
from Strip Processing and engaged it to perform maintenance on certain
equipment in the normal course of business. These purchases
approximated $458,000 and $569,000 in the years ended December 31,
1997 and December 31, 1996 respectively.
Effective September 30, 1997, the operations of Strip Processing were
merged into the Company and continues as a division of the Company.
The following assets of Strip Processing were acquired in settlement
of the Company's outstanding receivable from Strip Processing.
<TABLE>
<S> <C> <C>
Cash $113,151
Inventories 42,078
Machinery and equipment 23,329
--------
$178,558
========
</TABLE>
9. Acquisitions-
On September 1, 1998, the Company entered into a partnership agreement
with a previously unrelated entity. Concurrent with entering into the
partnership agreement, the Company exchanged a 50% interest in
property, plant and equipment of one of their operating facilities for
cash of $720,000 and like kind property of another steel company. The
Company and its partner then contributed $50,000 each and their
respective interests in the operating facility to Precision Blanking
Limited (the Partnership). The Partnership provides first operational
blanks to the automotive industry.
On September 15, 1998, the Company acquired the remaining interest in
the partnership in exchange for $1,500,000 in cash. Effective with the
purchase of the remaining interest the Partnership's operations have
been included in the consolidated results of operations.
10. Major Customers and Concentrations of Credit Risk-
--------------------------------------------------
The Company deals mainly with major steel companies and thus does not
require its customers to pledge collateral in satisfaction of trade
receivable obligations.
The Company had sales to three large steel companies for the
nine-month period ended September 30, 1998 which approximated 79% of
the Company's total sales for the year. For the year ended December
31, 1997 three large steel companies approximated 70% of the Company's
total sales and for the year ended December 31, 1996 four large steel
companies approximated 87% of the Company's total sales. At September
30, 1998 accounts receivable from these customers approximated 35% of
the total accounts receivable and the accounts receivable from these
customers approximated 50% and 80% of total accounts receivable at
December 31, 1997 and December 31, 1996 respectively.
<PAGE> 65
(b) Pro forma financial information.
The following unaudited pro forma combined statements of operations
data for the year ended December 31, 1997 and for the nine months ended
September 30, 1998 illustrates the effect of the CCI Acquisition and the H&H
Acquisition as if the transactions had been completed on January 1, 1997. The
statement of operations data for the Company for the year ended December 31,
1997 includes the pro forma effect of the Company's 1997 acquisitions of Noble
Metal Processing, Inc. and Noble Metal Forming, Inc. as well as the Company's
November 1997 initial public offering. The following unaudited pro forma
combined balance sheet as of September 30, 1998 illustrates the effect of the
CCI Acquisition and the H&H Acquisition as if the transactions had been
completed on that date. The CCI Acquisition and the H&H Acquisition are
reflected using the purchase method of accounting for business combinations. The
unaudited pro forma combined financial data is provided for comparative purposes
only and does not purport to represent the results of operations of the Company
that actually would have been obtained if the acquisitions of CCI and H&H had
been consummated on the date specified, nor is it necessarily indicative of the
results of operations that may be achieved in the future. Adjustments to pro
forma combined operating results include changes in depreciation and
amortization to reflect the cost basis of the assets acquired; changes to
selling, general and administrative expenses to remove non-recurring expenses
and salaries to officers and shareholders; changes in interest expense to
reflect debt incurred in financing the acquisition of H&H; and changes to the
provision for income taxes to reflect reductions resulting from the pro forma
adjustments. The unaudited pro forma combined financial data set forth below is
based upon certain assumptions and adjustments described in the notes thereto
and should be read in conjunction therewith.
<PAGE> 66
NOBLE INTERNATIONAL, LTD. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(NINE MONTHS ENDED SEPTEMBER 30, 1998)
(IN "000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Adjusted
Noble Centrifugal H&H Steel Pro Forma Pro Forma
Int'l Coaters Processing Adjustments Combined
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 56,455 $ 7,346 $ 9,526 $ 1,441 $ 74,768
Cost of goods sold 41,805 5,793 5,640 2,455 55,693
----------- ----------- ----------- ----------- -----------
Gross profit 14,650 1,553 3,886 (1,014) 19,075
Selling, general and
administrative expenses 9,572 1,890 3,600 (1,593) 13,469
----------- ----------- ----------- ----------- -----------
Operating profit 5,078 (337) 286 579 5,606
Other income (expense)
Equity in earnings of unconsolidated subsidiary -- -- 189 (189) --
Interest expense (1,594) (962) (285) 154 (2,687)
Sundry, net 44 -- 393 (322) 115
----------- ----------- ----------- ----------- -----------
(1,550) (962) 297 (357) (2,522)
Earnings/(loss) before income taxes
and minority interest 3,528 (1,299) 583 222 (3,034)
Minority interest 40 -- -- -- 40
----------- ----------- ----------- ----------- -----------
Earnings/(loss) before income taxes 3,488 (1,299) 583 222 (2,994)
Income tax expense 1,373 (357) -- 95 (1,315)
----------- ----------- ----------- ----------- -----------
Net earnings/(loss) 2,115 (942) 204 127 (1,679)
Preferred stock dividends -- (58) -- -- (58)
----------- ----------- ----------- ----------- -----------
Net earnings/(loss) on common shares $ 2,115 $ (1,000) $ 379 $ 127 $ (1,621)
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 67
<TABLE>
<S> <C> <C>
Basic earnings (loss) per common share $ 0.30 $ 0.23
=========== ===========
Weighted average shares outstanding 7,161,827 7,161,827
=========== ===========
Earnings (loss) per common share - assuming
dilution (A) $ 0.29 $ 0.26
=========== ===========
Weighted average shares outstanding
and common stock equivalents (A) 7,271,782 7,329,720
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
Notes to Unaudited Pro Forma Combined Statement of Operations - September 30,
1998
(A) Reflects the assumed conversion of the preferred shares of Noble Canada
into 57,938 shares of the Company's Common Stock.
<PAGE> 68
NOBLE INTERNATIONAL, LTD. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA ADJUSTMENTS FOR COMBINED STATEMENT OF OPERATIONS
(NINE MONTHS ENDED SEPTEMBER 30, 1998)
(IN "000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
------------------------------------------------------
PROFORMA ADJUSTMENTS FOR :
------------------------------------------------------ Pro Forma
Add PBL Centrifugal H&H Steel Other Adjustments
1/1-9/15 Coaters Processing Proforma Combined
-------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 1,441 $ -- $ -- $ -- $ 1,441
Cost of goods sold 915 A (120)D 1,660 -- 2,455
------- ------- ------- ------- -------
Gross profit 526 120 (1,660) -- (1,014)
Selling, general and
administrative expenses 1,262 A (195)E (2,660) -- (1,593)
------- ------- ------- ------- -------
Operating profit (736) 315 1,000 -- 579
Other income (expense)
Equity in earnings of unconsolidated subsidiary -- -- H (189) -- (189)
Interest expense 25 B 589 F (460) -- 154
Sundry, net 49 -- G (371) -- (322)
------- ------- ------- ------- -------
74 589 (1,020) -- (357)
Earnings/(loss) before income taxes
and minority interest (662) 904 (20) -- 222
Minority interest -- -- -- -- --
------- ------- ------- ------- -------
Earnings/(loss) before income taxes (662) 904 (20) -- 222
Income tax expense (232)C 334 C (7) -- 95
------- ------- ------- ------- -------
Net earnings/(loss) (430) 570 (13) -- 127
Preferred stock dividends -- -- -- -- --
------- ------- ------- ------- -------
Net earnings/(loss) on common shares $ (430) $ 570 $ (13) $ -- $ 127
======= ======= ======= ======= =======
</TABLE>
<PAGE> 69
Notes to Unaudited Pro Forma Combined Statement of Operations - September 30,
1998
Note: Results of Precision Blanking Limited are included prospectively for
January 1, 1997 through September 15, 1998. H&H Steel Processing, Inc.
owned 50% of PBL and reported on the equity method until purchasing full
ownership September 15, 1998.
A Reverse Amortization of Goodwill and Deferred Financing on CCI books
totaling $306,000 and record amortization of goodwill over 20 years
related to the CCI acquisition of $111,000. The amortization of goodwill
related to the CCI acquisition is based on the acquisition of current
assets of $2.104 million, property plant & equipment of $1.72 million,
assumption of liabilities of $5.388 million and Noble Canada preferred
stock issued to the sellers of $.398 million. The carrying values of
property, plant and equipment have been reduced $.802 and operating
liabilities have been increased $1.021 million to reflect the fair value
to the Company. Depreciation expense has been reduced by $120,000 for
expense that will not be incurred prospectively.
B Reflects $74,000 additional interest expense associated with senior
indebtedness incurred by the Company at a rate of 7.5% in connection with
the cash purchase of Centrifugal Coaters, and reversal of a $663,000
expense which will not be incurred prospectively from the early payoff of
$3.6 million in existing debt in connection with the purchase of CCI by
the Company.
C Income tax expense is calculated at the statutory rate of 35% for H&H
Steel processing and 37% for Centrifugal Coaters, Inc.
D Reflects reclassification of $1.660 million of plant administrative
expense from selling, general & administrative to be comparable with
classification of such expenses by the Company.
E Reflects reclassification of $1.660 million to cost of sales (Note D) and
elimination of $1.0 million paid to the former owners that will not be
incurred prospectively.
F Reflects additional interest expense associated with debt incurred by the
Company in connection with the cash purchase of H&H Steel Processing.
This expense includes interest of $745,000 on senior indebtedness at a
rate of 7.5%, less $285,000 of interest expense recorded by H&H.
G Reflects elimination of interest income on investments owned by the
former owners of H&H Steel Processing that will not be earned
prospectively.
H Reflects elimination of profit in PBL accounted for on the equity method
prior to the acquisition by H&H Steel
<PAGE> 70
Processing, Inc. which will not be incurred prospectively.
<TABLE>
<S> <C> <C> <C> <C> <C>
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
----- ----- ----- ----- -----
-- -- -- -- --
Proforma adjustments to SG&A
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
----- ----- ----- ----- -----
-- -- -- -- --
Proforma adjustments to Interest
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
----- ----- ----- ----- -----
-- -- -- -- --
</TABLE>
<PAGE> 71
<TABLE>
<S> <C> <C> <C> <C> <C>
Detail of Sundry Income (Expense)
Realized Gain (loss) on trading securities -- -- -- -- --
Unrealized gain (loss) on trading securities -- -- -- -- --
Interest Income -- -- -- -- --
Other 49 -- -- -- 49
----- ----- ----- ----- -----
Sundry, net 49 -- -- -- 49
Proforma adjustments to Income Tax
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
----- ----- ----- ----- -----
-- -- -- -- --
</TABLE>
<PAGE> 72
NOBLE INTERNATIONAL, LTD. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(YEAR ENDED DECEMBER 31, 1997)
(IN "000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Adjusted
Noble Centrifugal H&H Steel Pro Forma Pro Forma
Int'l Coaters Processing Adjustments Combined
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 61,632 $ 11,257 $ 15,359 $ 2,011 $ 90,259
Cost of goods sold 44,743 8,232 8,098 3,292 64,365
----------- ----------- ----------- ----------- -----------
Gross profit 16,889 3,025 7,261 (1,287) 25,894
Selling, general and
administrative expenses 11,225 1,765 5,256 (2,946) 15,300
----------- ----------- ----------- ----------- -----------
Operating profit 5,664 1,260 2,005 1,665 10,594
Other income (expense)
Equity in earnings of unconsolidated subsidiary -- -- 132 (133) (1)
Interest expense (1,333) (352) (389) (657) (2,731)
Sundry, net 353 -- 317 (214) 456
----------- ----------- ----------- ----------- -----------
(980) (352) 60 (1,004) (2,276)
Earnings/(loss) before income taxes
and minority interest 4,684 908 2,065 661 8,318
Minority interest -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Earnings/(loss) before income taxes 4,684 908 2,065 661 8,318
Income tax expense 1,592 345 723 235 2,895
----------- ----------- ----------- ----------- -----------
Net earnings/(loss) 3,092 563 1,342 426 5,423
Preferred stock dividends 215 -- -- -- 215
----------- ----------- ----------- ----------- -----------
Net earnings/(loss) on common shares $ 2,877 $ 563 $ 1,342 $ 426 $ 5,208
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 73
<TABLE>
<S> <C> <C>
Basic earnings (loss) per common share $ 0.40 $ 0.83
=========== ===========
Weighted average shares outstanding 7,187,326 7,187,326
=========== ===========
Earnings (loss) per common share - assuming
dilution (A) $ 0.40 $ 0.82
=========== ===========
Weighted average shares outstanding
and common stock equivalents (A) 7,187,326 7,245,264
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
Notes to Unaudited Pro Forma Combined Statement of Operations - December 31,
1997
(A) Reflects the assumed conversion of the preferred shares of Noble Canada
into 57,938 shares of the Company's Common Stock.
<PAGE> 74
NOBLE INTERNATIONAL, LTD. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA ADJUSTMENTS FOR COMBINED STATEMENT OF OPERATIONS
(YEAR ENDED DECEMBER 31, 1997)
(IN "000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
-------------------------------------------------
PROFORMA ADJUSTMENTS FOR :
------------------------------------------------- Pro Forma
Add PBL Centrifugal H&H Steel Other Adjustments
1/1-12/31 Coaters Processing Proforma Combined
------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,011 $ -- $ -- $ -- $ 2,011
Cost of goods sold 1,199 A (120)D 2,213 -- 3,292
------- ------- ------- ------- -------
Gross profit 812 (120) (2,213) -- 1,281
Selling, general and
administrative expenses 729 A (129)E (3,546) -- (2,946)
------- ------- ------- ------- -------
Operating profit 83 249 1,333 -- 1,665
Other income (expense)
Equity in earnings of unconsolidated subsidiary -- -- H (133) -- (133)
Interest expense 47 B (98)F (606) -- (657)
Sundry, net (8) -- G (206) -- (214)
------- ------- ------- ------- -------
39 (98) (945) -- (1,004)
Earnings/(loss) before income taxes
and minority interest 122 151 388 -- 661
Minority interest -- -- -- -- --
------- ------- ------- ------- -------
Earnings/(loss) before income taxes 122 151 388 -- 661
Income tax expense 43 C 56 C 136 -- 235
------- ------- ------- ------- -------
Net earnings/(loss) 79 95 252 -- 426
Preferred stock dividends -- -- -- -- --
------- ------- ------- ------- -------
Net earnings/(loss) on common shares $ 79 $ 95 $ 252 $ -- $ 426
======= ======= ======= ======= =======
</TABLE>
<PAGE> 75
- --------------------------------------------------------------------------------
Notes to Unaudited Pro Forma Combined Statement of Operations - December 31,
1997
Note: Results of Precision Blanking Limited are included prospectively for
January 1, 1997 through September 15, 1998. H&H Steel Processing, Inc.
owned 50% of PBL and reported on the equity method until purchasing full
ownership September 15, 1998.
A Reverse Amortization of Goodwill and Deferred Financing on CCI books
totaling $157,000 and record amortization of goodwill over 20 years
related to the CCI acquisition of $148,000. The amortization of goodwill
related to the CCI acquisition is based on the acquisition of current
assets of $2.104 million, property plant & equipment of $1.72 million,
assumption of liabilities of $5.388 million and Noble Canada preferred
stock issued to the sellers of $.398 million. The carrying values of
property, plant and equipment have been reduced $.802 and operating
liabilities have been increased $1.021 million to reflect the fair value
to the Company. Depreciation expense has been reduced by $120,000 for
expense that will not be incurred prospectively.
B Reflects additional interest expense associated with debt incurred by the
Company in connection with the cash purchase of Centrifugal Coaters. This
expense includes interest of $98,000 on senior indebtedness at a rate of
7.5%
C Income tax expense is calculated at the statutory rate of 35% for H&H
Steel processing and 37% for Centrifugal Coaters, Inc.
D Reflects reclassification of $2.213 million of H&H plant administrative
expense from selling, general & administrative to be comparable with
classification of such expenses by the Company.
E Reflects reclassification of $2.213 million to H&H cost of sales (Note D)
and elimination of $1.333 million paid to the former owners that will not
be incurred prospectively.
F Reflects additional interest expense associated with debt incurred by the
Company in connection with the cash purchase of H&H Steel Processing.
This expense includes interest of $994,000 on senior indebtedness at a
rate of 7.5%, less $388,000 of interest expense recorded by H&H in 1997.
G Reflects elimination of interest income on investments owned by the
former owners of H&H Steel Processing that will not be earned
prospectively.
H Reflects elimination of profit in PBL accounted for on the equity method
prior to the acquisition by H&H Steel Processing, Inc. which will not be
incurred prospectively.
<PAGE> 76
NOBLE INTERNATIONAL, LTD. AND ACQUIRED BUSINESSES
UNAUDITED BALANCE SHEET
SEPTEMBER 30, 1998
(IN "000'S,)
<TABLE>
<CAPTION>
Adjusted
Noble Centrifugal H&H Steel Pro Forma Pro Forma
Int'l Coaters Processing Adjustments Combined
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,517 $ -- $ 5,826 $ -- $ 9,343
Accounts receivable, trade 16,765 1,978 3,853 -- 22,596
Inventories 12,154 551 765 -- 13,470
Prepaid expenses and other assets 1,546 77 29 -- 1,652
Deferred income taxes 230 -- -- -- 230
--------- --------- --------- --------- ---------
Total Current Assets 34,212 2,606 10,473 -- 47,291
PROPERTY, PLANT AND EQUIPMENT, NET 41,470 4,709 15,038 (719) 60,498
OTHER ASSETS
Goodwill 39,537 2,490 -- 2,766 44,793
Covenants not to compete 1,233 -- -- -- 1,233
Sundry 7,072 95 521 (5,593) 2,095
--------- --------- --------- --------- ---------
47,842 2,585 521 (2,827) 48,121
--------- --------- --------- --------- ---------
$ 123,524 $ 9,900 $ 26,032 $ (3,546) $ 155,910
========= ========= ========= ========= =========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 512 $ 3,628 $ 3,765 $ -- $ 7,905
Current maturities of notes payable-
related parties 2,539 -- -- -- 2,539
Current maturities of capital lease obligations 239 -- -- -- 239
</TABLE>
<PAGE> 77
<TABLE>
<S> <C> <C> <C> <C> <C>
Accounts payable 10,887 1,525 1,832 -- 14,244
Accrued liabilities 6,420 -- 2,749 2,128 11,297
Income taxes payable 37 -- -- -- 37
--------- --------- --------- --------- ---------
Total Current Liabilities 20,634 5,153 8,346 2,128 36,261
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES 43,038 -- 5,517 11,899 60,454
NOTES PAYABLE - RELATED PARTIES,
EXCLUDING CURRENT MATURITIES 8,276 2,982 -- (2,982) 8,276
CAPITAL LEASE OBLIGATIONS,
EXCLUDING CURRENT MATURITIES 921 -- -- -- 921
CONVERTIBLE SUBORDINATED DEBENTURES 20,769 -- -- -- 20,769
DEFERRED INCOME TAXES 728 217 -- 400 1,345
PREFERRED STOCK OF SUBSIDIARY 737 -- -- -- 737
SPECIAL SHARE OBLIGATION -- 2,286 -- (2,286) --
SHAREHOLDERS' EQUITY
Preferred stock -- -- -- -- --
Common stock, no par value, authorized 27,338 327 1 951 28,617
Retained earnings 2,381 (1,065) 12,168 (13,656) (172)
Equity adjustment from foreign
currency translation (1,298) -- -- -- (1,298)
--------- --------- --------- --------- ---------
28,421 (738) 12,169 (12,705) 27,147
--------- --------- --------- --------- ---------
$ 123,524 $ 9,900 $ 26,032 $ (3,546) $ 155,910
========= ========= ========= ========= =========
</TABLE>
<PAGE> 78
NOBLE INTERNATIONAL, LTD. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
NOTE 1: PRO FORMA BALANCE SHEET ADJUSTMENTS
(IN 000'S)
The accompanying pro forma combined balance sheet as of September 30, 1998
giving effect to the closing Acquisitions and the Offering as if such
transactions occurred on September 30, 1998
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY
------ ------------------------------------
PROPERTY, PLANT DEBT TO FINANCIAL
CLOSING ACQUISITIONS AND & EQUIPMENT GOODWILL OTHER ACCRUED LIABILITIES ENTITIES
--------------- -------- -------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
Centrifugal Coaters, Inc.(A) $ (719) $ 2,766 (95) $ 914 $ 1,307
H&H Steel Processing, Inc.(B) -- -- -- 1,214 13,108
Reclassify Preclosing Advances for CCI(C) -- -- (5,498) -- (5,498)
-------- -------- -------- -------- --------
$ (719) $ 2,766 $ (5,593) $ 2,128 $ 8,917
======== ======== ======== ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
DEFERRED SPECIAL SHARE COMMON PAID-IN RETAINED
CLOSING ACQUISITIONS AND INCOME TAXES OBLIGATION STOCK CAPITAL EARNINGS
------------ ------------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Centrifugal Coaters, Inc.(A) $ -- $ (2,286) 952 $ -- $ 1,065
H&H Steel Processing, Inc.(B) 400 -- (1) -- (14,721)
Reclassify Preclosing Advances for CCI(C) -- -- -- -- --
-------- -------- -------- -------- --------
$ 400 $ (2,286) $ 951 $ -- $(13,656)
======== ======== ======== ======== ========
</TABLE>
Notes to Pro Forma Balance Sheet
(A) Adjustment represents Centrifugal Coaters acquisition under the purchase
method of accounting. Purchase price was $881,661 in cash and 57,938
shares of Noble Canada non voting preferred shares which are exchangeable
for shares of the Company's Common Stock. The cash portion of the
purchase price was funded by the Company's existing revolving line of
credit facility with Comerica Bank. Goodwill is based on the acquisition
of current assets of $2.606 million, property plant & equipment of $3.990
million, assumption of liabilities of $10.572 and Noble Canada stock
issued to the sellers of $.398 million. The carrying values of property,
plant and equipment have been reduced $.718 million and operating
liabilities have been increased $.914 million to reflect fair value to
the Company.
(B) Adjustment represents H&H Steel Processing, Inc. acquisition under the
purchase method of accounting. Purchase price was $13.248 million in
cash, the assumption of certain liabilities and performance premium of up
to $2.0 million based on sales for the next five years. The cash portion
of the purchase price was funded by the Company's existing revolving line
of credit facility with Comerica Bank. Goodwill is based on the
acquisition of current assets of $5.994 million, property plant &
equipment of $14.645 million, other assets of $.414 million and
assumption of liabilities of $7.945 million. The operating liabilities
have been increased $1.614 million to reflect fair value to the Company.
(C) Certain advance payments toward the funding of the Centrifugal Coaters
acquisition were made just prior to September 30, 1998. These amounts
totalled $5.498 million and were included in other assets on the
Company's September 30, 1998 balance sheet. These payments were financed
through the Company's existing lin of credit at Comerica Bank.
<PAGE> 79
(c) Exhibits.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
<PAGE> 80
SIGNATURE
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.
NOBLE INTERNATIONAL, LTD.,
A Michigan Corporation
(Registrant)
Date: December 15, 1998 By: /s/ Daniel W. Sampson
---------------------------
Daniel W. Sampson,
Chief Financial Officer
<PAGE> 81
Exhibits List
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated November 11, 1998, with respect to the
financial statements of Tiercon Coatings Inc. (formerly Centrifugal Coaters Inc.
and Centrifugal Coaters Corp.] included in the Amended Current Report (Form
8-K/A) of Noble International, Ltd.
Toronto, Canada /s/Ernst & Young LLP
December 15, 1998 Chartered Accountants
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 8-K/A, into Noble International, Ltd.'s
previously filed Registration Statement No. 333-68001 on Form S-3.
/s/ ARTHUR ANDERSEN LLP
------------------------------
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
December 14, 1998
