SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
Amendment No. 1 to Original Form 8-K
Filed on March 29, 1999
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): December 31, 1998
C2, Inc.
(Exact name of registrant as specified in its charter.)
Wisconsin 001-14171 39-1915787
- ---------------------------- ----------------------- -------------------
(State of other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
700 North Water Street, Suite 1200, Milwaukee, WI 53202
---------------------------------------------------------------------------
(Address of principal executive offices including zip code.)
(414) 291-9000
--------------------------------------------
(Registrants' Telephone Number)
Page 1 of 21 Pages
<PAGE>
ITEM 2. ACQUISTION OR DISPOSITION OF ASSETS
On March 12, 1999, C2, Inc. ("C2") completed its acquisition of Zero
Zone, Inc., a Wisconsin corporation ("Zero Zone"). Details of the Zero Zone
acquisition were set forth in C2's original Form 8-K filed in regards to this
transaction on March 29, 1999.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS. The following financial statements are filed as
a part of this Report:
Zero Zone's Audited Financial Statements and Report of Independent
Auditors as of December 31, 1998.
(b) PRO FORMA FINANCIAL INFORMATION. The following Pro Forma Financial
Statements are filed as part of this report:
C2's and Zero Zone's Pro Forma Summary Combined Balance Sheet dated
December 31, 1998, Pro Forma Summary Combined Statements of Income for the year
ended December 31, 1998, and accompanying footnotes thereto.
(c) EXHIBITS. Filed as Exhibits to this Report are the following:
Exhibit 2.1 Recapitalization Agreement by and among Zero Zone and the
shareholders of Zero Zone, dated as of March 12, 1999
(incorporated by reference from the Company's Form 8-K
filed with the Commission on March 29, 1999).
Page 2 of 25 Pages
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: April 22, 1999 C2, Inc.
By: /s/William T. Donovan
William T. Donovan
Chairman
Page 3 of 21 Pages
<PAGE>
PRO FORMA SUMMARY COMBINED FINANCIAL DATA
Set forth below is unaudited pro forma summary combined financial
statements as of and for the year ended December 31, 1998.
The pro forma summary combined statement of income for the year ended
December 31, 1998 reflects the effects on the historical results of operations
of C2 of the following transactions as if these transactions had occurred on
January 1, 1998. The pro forma summary combined balance sheet reflects the
effect of the following transactions as if these transactions had occurred on
December 31, 1998.
TLC Acquisition:
o the sale of 5,202,664 shares of C2 common stock at $4.00 per
share;
o the application of the proceeds for the purchase of 666.667
membership units (two-thirds) of TLC from Christiana for
approximately $10.7 million;
o the additional operating expenses associated with corporate
charges including officers salaries, professional, legal,
occupancy, public company and other corporate related expenses;
o the establishment of deferred income taxes for TLC; and
o the establishment of minority interest related to the one-third
ownership of TLC not held by C2.
In addition, the pro forma financial data reflects the following TLC
pre-acquisition adjustments:
o the approximate $3 million repayment by TLC of a note to
Christiana;
o $10 million of borrowings by TLC and subsequent payment of the
dividend to Christiana;
o the additional interest expense associated with these
aforementioned increases in outstanding debt and the adjustment to
interest expense to reflect the costs of borrowing under TLC's new
credit facility; and
o the cash payment to Christiana for income taxes related to TLC
earnings and certain expenses paid by Christiana on behalf of TLC.
Zero Zone Acquisition:
o the issuance of debt to fund the redemption of Zero Zone common
stock and the additional interest expense related thereto;
o the purchase of 70.6% of the outstanding shares of Zero Zone
common stock by C2;
o the establishment of purchase price in excess of net assets
acquired and amortization thereof; and
o the establishment of deficit minority interest for the 29.4%
ownership of Zero Zone not held by C2.
The pro forma financial data does not purport to represent what C2's
financial position or results of operations would actually have been if such a
transaction in fact had occurred on those dates or to project C2's financial
position or results of operations for any future period.
Page 4 of 21 Pages
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA SUMMARY COMBINED BALANCE SHEET
As of December 31, 1998
-----------------------------------------------------------------------------------
TLC
Historical Pro Forma Offering As
TLC Adjustments (1) Adjustments Adjusted
---------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 9,000 $ -- $20,484,000 (9) $ 9,826,000
(10,667,000) (10)
Other current assets 11,842,000 -- 11,842,000
Purchase price in excess of
net assets acquired -- -- -- --
-- -- -- --
Total long-term assets 75,210,000 1,086,000 (4) -- 76,296,000
---------------- ----------------- ---------------- ---------------
Total assets $87,061,000 $ 1,086,000 $ 9,817,000 $97,964,000
================ ================= ================ ===============
Total current liabilities $12,997,000 $ 505,000 (4) -- $13,502,000
$12,997,000
Due to Parent company 3,000,000 (3,000,000) (2) -- --
Liability for purchase of 666.667
Membership Units of TLC -- 10,667,000 (8) (10,667,000) (10) --
Deferred income taxes -- 1,553,000 (7) -- 1,553,000
Long-term debt 35,277,000 10,000,000 (3) -- 50,566,000
3,000,000 (2)
2,289,000 (5)
Other liabilities 330,000 1,808,000 (4) 2,138,000
---------------- ----------------- ---------------- ---------------
Total liabilities 51,604,000 26,822,000 (10,667,000) 67,759,000
Minority interest -- 7,313,000 (6) -- 7,313,000
Preferred stock -- -- -- --
Common stock -- -- 52,000 (9) 52,000
Additional paid-in capital -- -- 20,432,000 (9) 20,432,000
Treasury stock --
Retained earnings/Members equity 35,457,000 (10,000,000) (3) 2,408,000
(7,313,000) (6)
(1,553,000) (7)
(1,227,000) (4)
(2,289,000) (5)
(10,667,000) (8)
---------------- ----------------- ---------------- ---------------
Total shareholders' equity 35,457,000 (33,049,000) 20,484,000 22,892,000
---------------- ----------------- ---------------- ---------------
Total liabilities and
shareholders' equity $87,061,000 $ 1,086,000 $ 9,817,000 $97,964,000
================ ================= ================ ===============
<PAGE>
<CAPTION>
PRO FORMA SUMMARY COMBINED BALANCE SHEET
As of December 31, 1998
-------------------------------------------------------------
Historical Pro Forma As
Zero Zone Adjustments Adjusted
--------------- ---------------- -------------------
<S> <C> <C> <C>
Cash and cash equivalents $ -- $ (4,500,000) (11) $ 6,176,000
850,000 (12)
Other current assets 5,625,000 17,467,000
Purchase price in excess of
net assets acquired -- 10,559,000 (13) 13,602,000
-- 3,043,000 (14) --
Total long-term assets 4,425,000 -- 80,721,000
--------------- ---------------- -------------------
Total assets $10,050,000 $ 9,952,000 $ 117,966,000
=============== ================ ===================
Total current liabilities $ 3,820,000 -- $ 17,322,000
Due to Parent company -- -- --
Liability for purchase of 666.667
Membership Units of TLC -- -- --
Deferred income taxes 54,000 1,607,000
Long-term debt 1,278,000 14,000,000 (11) 66,694,000
850,000 (12)
Other liabilities -- -- 2,138,000
--------------- ---------------- -------------------
Total liabilities 5,152,000 14,850,000 87,761,000
Minority interest -- -- 7,313,000
Preferred stock -- -- --
Common stock 29,000 (29,000) (15) 52,000
Additional paid-in capital 225,000 (225,000) (15) 20,432,000
Treasury stock (18,500,000) (11)
18,500,000 (15)
Retained earnings/Members equity 4,644,000 (4,644,000) (15) 2,408,000
--------------- ---------------- -------------------
Total shareholders' equity 4,898,000 (4,898,000) 22,892,000
--------------- ---------------- -------------------
Total liabilities and
shareholders' equity $ 10,050,000 $ 9,952,000 $ 117,966,000
=============== ================ ===================
</TABLE>
Page 5 of 21 Pages
<PAGE>
NOTES TO PRO FORMA SUMMARY COMBINED BALANCE SHEET
(1) The acquisition of 666.667 Membership Units of TLC by C2 represents a
combination of entities under common control because a single group of
shareholders controlled TLC and will control C2. Accordingly, no purchase
accounting adjustments have been recorded and the difference between the
acquisition price and the historical cost basis of TLC has been reflected
as an equity adjustment.
(2) Represents a $3 million draw on TLC's revolving credit facility and
subsequent payment of the Christiana note prior to the acquisition of
two-thirds of TLC.
(3) Represents a $10 million draw on TLC's revolving credit facility
(interest at LIBOR plus 175 basis points) and subsequent payment of a $10
million dividend to Christiana prior to the Acquisition. $10 million of
the required $20 million dividend was paid by TLC prior to December 31,
1998 and is reflected in the historical financial statements.
(4) Represents the book value of certain assets and liabilities of Christiana
which were contributed to TLC prior to the acquisition of two-thirds of
TLC:
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Long-term assets $ 1,086,000
LIABILITIES:
Accrued liabilities $ (505,000)
Other long-term liabilities (1,808,000)
----------------
Reduction to equity related to asset/liability transfer $(1,227,000)
================
</TABLE>
(5) Represents the cash payment to Christiana, prior to the acquisition for
taxes related to TLC's earnings and certain expenses paid by Christiana
on behalf of TLC financed by the revolving credit facility.
(6) Represents the establishment of minority interest for the one-third
interest in TLC not owned by C2. Minority interest represents one-third
of TLC's member's equity subsequent to the dividend to Christiana and
contribution of certain Christiana assets and liabilities.
(7) Represents the establishment of a deferred income tax liability
attributed to temporary differences between the purchase price and
carryover basis of TLC assets and liabilities.
(8) Represents the liability for cash consideration to be paid to Christiana
related to the purchase of 666.667 membership units of TLC.
(9) Represents the amount of net proceeds associated with the sale of
5,202,664 shares of common stock offered by C2 at $4.00 per share, net of
expenses of $327,000.
(10) Represents the payment of the purchase price due to Christiana in
connection with the acquisition of two-thirds of TLC by C2.
Page 6 of 21 Pages
<PAGE>
(11) Represents the payment to the former Zero Zone shareholders related to
the redemption of their common shares. The proceeds to fund this payment
were obtained from the following sources.
Investment in Zero Zone common stock $ 3,000,000
Investment in Zero Zone capital note 1,500,000
Issuance of debt as follows:
Bank debt 10,150,000
Minority shareholder capital note 1,500,000
Seller subordinated notes 2,350,000
---------------------
$18,500,000
=====================
(12) Represents additional bank debt issued at the time of acquisition to fund
current working capital needs.
(13) Represents (i) the purchase price paid for C2's ownership interest in
Zero Zone, Inc. (70.6%) in excess of net assets acquired ($10,309,000)
plus (ii) acquisition related costs of $250,000. Allocation of the
purchase price has not yet been determined. Accordingly, this entire
amount is being reflected as purchase price in excess of net assets
acquired.
(14) Represents the additional purchase price in excess of net assets acquired
resulting from the deficit stockholders investment of the 29.4% minority
shareholders.
(15) Represents the elimination of Zero Zone common stock, additional paid in
capital, treasury stock and retained earnings.
Page 7 of 21 Pages
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA SUMMARY COMBINED STATEMENTS OF INCOME
For the year ended December 31, 1998
-------------------------------------------------------------------------
Historical Pro Forma Pro Forma Historical
TLC Adjustments C2, Inc. Zero Zone
--------------- ------------------ --------------- --------------
<S> <C> <C> <C> <C>
Revenues $90,610,000 $ -- $90,610,000 $28,363,000
Operating expenses 83,760,000 1,000,000 (1) 84,760,000 25,636,000
Amortization of purchase price in excess of net
assets acquired --
Interest expense 2,586,000 1,615,000 (2) 4,201,000 129,000
Other (income) expense , net (111,000) -- (111,000) 46,000
Income (loss) before minority interest 4,375,000 (2,615,000) 1,760,000 2,552,000
and income taxes
Provision for income taxes -- 369,000 (3) 369,000 (104,000)
Minority interest expense -- 837,000 (4) 837,000 --
Net income (loss) 4,375,000 (3,821,000) 554,000 2,656,000
Basic and diluted net income per share of $0.20 (5)
common stock
Weighted average shares outstanding 2,750,000 (5)
(basic and diluted)
<CAPTION>
For the year ended December 31, 1998
---------------------------------------------
Pro Forma As
Adjustments Adjusted
----------------- --------------------
<S> <C> <C>
Revenues $ -- $118,973,000
Operating expenses 110,396,000
Amortization of purchase price in excess of net
assets acquired 422,000 (6) 422,000
Interest expense 1,168,000 (7) 5,498,000
Other (income) expense , net (65,000)
Income (loss) before minority interest (1,590,000) 2,722,000
and income taxes
Provision for income taxes 647,000 (8) 912,000
Minority interest expense 225,000 (9) 1,062,000
Net income (loss) (2,462,000) 748,000
Basic and diluted net income per share of $ 0.27 (5)
common stock
Weighted average shares outstanding 2,750,000 (5)
(basic and diluted)
</TABLE>
Page 8 of 21 Pages
<PAGE>
NOTES TO PRO FORMA SUMMARY COMBINED STATEMENTS OF INCOME
(1) Represents additional operating expenses resulting from corporate
expenses, including officers' salaries, occupancy expenses, professional,
legal, public company and other corporate related expenses.
For the Year
Ended
December 31, 1998
--------------------------
Officers' salaries $ 390,000
Occupancy expenses 150,000
Other corporate expenses 460,000
--------------------------
$1,000,000
==========================
(2) Represents the additional interest expense on the $20 million of
additional debt incurred in connection with the $20 million of dividends
to Christiana and the increase in interest expense related to higher
borrowing rates on the new revolving credit facility as follows:
For the Year
Ended
December 31, 1998
-----------------------
$20 million draw on TLC's revolving
credit facility,
interest at an average rate of LIBOR + 175
basis points $1,450,000
Additional interest expense on historical
outstanding debt bearing interest at a rate
of LIBOR + 175 basis points (revolving credit
facility rate) versus a historical rate of LIBOR
+ 125 basis points 165,000
-----------------------
$1,615,000
=======================
(3) Represents the incremental provision of Federal and state income taxes
required on the earnings of TLC, in addition to the required adjustment
for the tax impact of the pro forma adjustments.
(4) Represents 33.3% of net income allocable to TLC's minority interest
owner.
(5) Basic and diluted income per share have been calculated using the number
of shares required to complete the TLC acquisition and pay the expenses
of the offering (2,750,000 shares).
(6) Represents the amortization of the purchase price in excess of net assets
acquired, which is being amortized over its estimated composite life of
25 years.
Page 9 of 21 Pages
<PAGE>
(7) Represents the additional interest expense on the acquisition related
debt as follows:
For the Year
Ended
December 31, 1998
------------------
Bank debt, interest at LIBOR + 275 basis points $ 852,500
Minority shareholder capital note, interest at 8.5% 188,000
Seller subordinated notes, interest at 8% 127,500
------------------
$1,168,000
==================
(8) Represents the incremental provision of Federal and state income taxes
required on the earnings of Zero Zone in addition to the required
adjustment for the tax impact of the pro forma adjustments.
(9) Represents 29.4% of net income allocable to Zero Zone's minority interest
owners.
Page 10 of 21 Pages
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants....................................10
Balance Sheet as of December 31, 1998.......................................11
Statement of Earnings for the year ended December 31, 1998..................12
Statement of Stockholders' Equity for the year ended December 31, 1998......13
Statement of Cash Flows for the year ended December 31, 1998................14
Notes to Financial Statements...............................................15
Page 11 of 21 Pages
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Zero Zone, Inc.:
We have audited the accompanying balance sheet of Zero Zone, Inc. (a Wisconsin
corporation) as of December 31, 1998, and the related statements of earnings,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Zero Zone, Inc. as of December
31, 1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
February 19, 1999.
Page 12 of 21 Pages
<PAGE>
ZERO ZONE, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1998
ASSETS
CURRENT ASSETS:
Cash $
-
Accounts receivable, less allowance for doubtful accounts
of $100,000 2,223,945
Accrued rebate receivable 130,000
Inventories 2,976,773
Prepaid expenses 129,554
Deferred income tax benefit 164,700
----------------
Total current assets 5,624,972
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 106,028
Buildings and improvements 2,521,257
Machinery and equipment 1,832,620
Vehicles 198,288
Furniture and fixtures 715,558
----------------
5,373,751
Less- Accumulated depreciation 2,224,136
----------------
Net property, plant and equipment 3,149,615
OTHER ASSETS:
Goodwill, net of accumulated amortization of $489,385 1,108,670
Other 166,856
----------------
1,275,526
----------------
Total assets $10,050,113
================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $256,703
Cash overdraft 342,955
Accounts payable 1,773,452
Accrued liabilities 889,306
Income taxes payable 20,000
Accrued stockholder distributions 538,000
---------------
Total current liabilities 3,820,416
LONG-TERM DEBT, less current maturities 1,277,635
DEFERRED INCOME TAX LIABILITY 53,600
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 560,000 shares authorized,
285,715 shares issued and outstanding 28,572
Additional paid-in capital 225,000
Retained earnings 4,644,890
---------------
Total stockholders' equity 4,898,462
---------------
Total liabilities and stockholders' equity $10,050,113
===============
The accompanying notes to financial statements are an integral part
of this balance sheet.
Page 13 of 21 Pages
<PAGE>
ZERO ZONE, INC.
STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1998
NET SALES $28,363,042
COST OF SALES 21,385,213
-------------------
Gross profit 6,977,829
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,249,948
-------------------
Earnings from operations 2,727,881
OTHER EXPENSE:
Interest expense 129,114
Other, net 46,438
-------------------
175,552
-------------------
Earnings before income taxes 2,552,329
PROVISION FOR INCOME TAXES:
Current provision for income taxes 20,000
Net adjustment of deferred income taxes resulting
from a change in tax status (124,346)
-------------------
Total provision for income taxes (104,346)
-------------------
Net earnings $2,656,675
===================
Basic and diluted earnings per share $9.30
===================
Weighted average number of shares outstanding 285,715
===================
The accompanying notes to financial statements are an integral part of
this statement.
Page 14 of 21 Pages
<PAGE>
ZERO ZONE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
--------------- -------------- ------------------- -----------------
<S> <C> <C> <C> <C>
BALANCE, at December 31, 1997 $28,572 $225,000 $3,195,215 $3,448,787
Net earnings - - 2,656,675 2,656,675
Distributions declared to stockholders
($4.22 per share) - - (1,207,000) (1,207,000)
--------------- -------------- ------------------- -----------------
BALANCE, at December 31, 1998 $28,572 $225,000 $4,644,890 $4,898,462
=============== ============== =================== =================
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
Page 15 of 21 Pages
<PAGE>
ZERO ZONE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,656,675
Adjustments to reconcile net earnings to net cash provided by
operating activities-
Depreciation and amortization 470,638
Deferred income taxes (124,346)
Changes in assets and liabilities-
Increase in accounts receivable (582,796)
Increase in accrued rebate receivable (130,000)
Increase in inventories (637,451)
Increase in prepaid expenses (14,217)
Increase in other assets (69,872)
Increase in cash overdraft 86,237
Increase in accounts payable and accrued liabilities 495,215
Decrease in income taxes payable (251,434)
----------------
Net cash provided by operating activities 1,898,649
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (474,951)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on reciprocal credit facility (497,768)
Payments of long-term debt (256,930)
Distributions to stockholders (669,000)
----------------
Net cash used in financing activities (1,423,698)
NET INCREASE IN CASH -
CASH, beginning of year -
----------------
CASH, end of year $
-
================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 167,713
Income taxes 271,434
The accompanying notes to financial statements are an integral
part of this statement.
</TABLE>
Page 16 of 21 Pages
<PAGE>
ZERO ZONE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) Nature of Business-
Zero Zone, Inc. (the "Company") manufactures grocery and convenience store
refrigerator and freezer display cases and sells them throughout North
America.
(2) Summary of Significant Accounting Policies-
(a) Revenue recognition-
The Company recognizes revenue and related costs when products are shipped
to customers.
(b) 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 in the financial statements
and accompanying notes. Actual results could differ from those estimates.
(c) Inventories-
Inventories are stated at the lower of FIFO (first-in, first-out) cost or
market value. Cost includes materials, labor and manufacturing overhead. As
of December 31, 1998, inventories are comprised as follows:
Raw materials and work in process $1,889,759
Finished goods 1,087,014
---------------
$2,976,773
===============
(d) Property, plant and equipment-
Property, plant and equipment are stated at cost. Expenditures that
substantially increase the value of these assets or extend their useful
life are capitalized. Expenditures for normal and routine repairs and
maintenance are expensed as incurred.
Page 17 of 21 Pages
<PAGE>
Plant and equipment is depreciated over the estimated useful lives of
the assets using the straight-line method as follows.
Buildings and improvements 40 years
Machinery and equipment 5-7 years
Vehicles 3 years
Furniture and fixtures 3-7 years
(e) Goodwill-
Goodwill is being amortized on a straight-line basis over 40 years.
Amortization expense in 1998 was $39,948. The accumulated goodwill
amortization at December 31, 1998 was $489,385.
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life may warrant
revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the undiscounted
cash flows over the remaining life of the goodwill measuring whether the
goodwill is impaired. If impaired, a loss is recognized for the amount
by which carrying value exceeds the fair value.
(f) Long-lived assets-
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life may warrant
revision or that the remaining balance of its long-lived assets may not
be recoverable. When factors indicate that long-lived assets should be
evaluated for possible impairment, the Company uses an estimate of the
undiscounted cash flows over the remaining live of the long-lived assets
measuring whether the long-lived assets are impaired. If impaired, a
loss is recognized for the amount by which the carrying value exceeds
the fair value.
(g) Earnings per share-
Earnings per share has been computed based upon the weighted average
number of common shares outstanding during the year. As the Company did
not have common stock equivalents with a dilutive effect on earnings per
share, basic and diluted earnings per share are the same for 1998.
(h) Advertising-
The Company expenses all advertising costs as incurred. During 1998,
advertising costs of the Company were $201,170.
Page 18 of 21 Pages
<PAGE>
(3) Indebtedness-
Long-term debt at December 31, 1998, consists of the following:
Note payable to a trust company,
due in annual installments of
$245,000 through 2002, and $135,000
in 2003 through 2006, plus interest
payable quarterly at a variable
rate $1,520,000
Other 14,338
------------------
1,534,338
Less- Current maturities (256,703)
------------------
$1,277,635
==================
The note payable to the trust company was originally payable to the
Wisconsin Housing and Economic Development Authority ("WHEDA"). WHEDA
transferred the note in trust to the trust company for the benefit of the
owners of the WHEDA bonds which were sold to finance the loan to the
Company. The note payable to the trust company is supported by a loan
agreement, a security interest and an irrevocable bank letter of credit.
The interest rate on the note is variable. Each week the rate is set by the
remarketing agent at a rate necessary to effect a sale of the related bonds
at par. The rate at December 31, 1998 was 4.25%. The Company may fix the
interest rate for a specified period at the rate set by the remarketing
agent as the market rate for such period.
Future maturities of long-term debt are as follows:
1999 $256,703
2000 245,000
2001 245,000
2002 245,000
2003 135,000
Thereafter 407,635
The Company has a line of credit with a bank under which it may borrow up to
$1,000,000. This line of credit bears interest at the bank's prime rate
(7.75% at December 31, 1998) and is secured by substantially all of the
Company's assets other than those pledged to support the note payable to the
trust company. As of December 31, 1998, there were no borrowings outstanding
under this line of credit.
The Company has also entered into a reciprocal credit facility agreement
with GMK Companies, Inc. ("GMK"), a company owned by the Company's majority
stockholders. Under the terms of this credit facility, the Company may
borrow up to $1,000,000 from GMK, and GMK may borrow from the Company up to
$1,000,000. This credit facility bears interest at the bank's prime rate. As
of December 31, 1998, there were no borrowings outstanding under this credit
facility.
Page 19 of 21 Pages
<PAGE>
Both the note payable to the trust company and the line of credit agreement
have certain restrictive covenants which require the Company, among other
things, to maintain a certain minimum level of tangible net worth. As of
December 31, 1998, the Company was in compliance with these covenants.
(4) Retirement Plans-
Substantially all of the Company's employees are covered by a profit-sharing
plan with a 401(k) option. The Company matches employee contributions up to
3% of annual compensation. Additional profit sharing contributions are made
at the discretion of the board of directors. Company contributions to the
plan during 1998 were approximately $66,000.
(5) Income Taxes-
Effective January 1, 1998, the stockholders of the Company elected to
convert from a C Corporation to an S Corporation. For purposes of taxation,
all earnings of the Company are passed through to the stockholders and
includable in the individual tax returns of the stockholders. On December
27, 1998, the stockholders of the Company terminated their S Corporation
status and elected to once again become a C Corporation. The provision for
income taxes in the amount of $20,000 represents the current provision of
the Company during which time it was a C Corporation. The net adjustment of
deferred income taxes resulting from a change in tax status represents the
net effect of the removal of deferred income taxes from the balance sheet as
of January 1, 1998 and their subsequent restoration on December 27, 1998.
The provision for income taxes for 1998 is comprised of the following:
Current-
Federal $17,350
State 2,650
------------------
20,000
Deferred (124,346)
------------------
$(104,346)
==================
Deferred income taxes are provided for differences between the book basis
and tax basis of certain assets and liabilities. These differences are
primarily related to depreciation, inventories and certain accrued
liabilities and valuation reserves. Deferred income taxes as of December 31,
1998 are as follows:
Deferred income tax assets:
Accrued expenses and other reserves $164,700
Deferred income tax liabilities:
Tax over book depreciation (48,400)
Other (5,200)
-----------------
Total deferred income tax liabilities (53,600)
-----------------
Net deferred income tax asset $111,100
=================
Page 20 of 21 Pages
<PAGE>
(6) Related Party Transactions-
The Company has entered into a reciprocal credit facility agreement with GMK
Companies, Inc. ("GMK"). GMK is owned by the Company's majority stockholders
(Note 3).
The bank sweeps the Company's checking account balance to zero daily. Cash
shortfalls or excesses of up to $1,000,000 are borrowed from or loaned to
GMK. GMK invests the cash or loans it to other corporations that are
controlled by the Company's majority stockholders and have identical
reciprocal credit facilities. Balances loaned to or borrowed from GMK earn
or pay interest at the prime rate, after adjusting for bank minimum balance
requirements and funds availability.
The Company was due from GMK, $12,959 at December 31, 1998 which is included
as a component of accounts receivable. Outstanding checks created a cash
overdraft of $342,955 at December 31, 1998, as a result of the bank's cash
sweep.
Interest expense includes $16,754 related to the GMK borrowings and $51,953
related to amounts borrowed from other affiliates in 1998. Selling and
administrative expenses for 1998 include an $81,000 annual management fee
paid to GMK.
(7) Commitments-
The Company has operating leases for certain warehouse facilities and
equipment. Rental expense under these operating leases during 1998 was
approximately $71,000. As of December 31, 1998, approximate future minimum
lease payments under these operating leases are as follows:
1999 $49,000
2000 18,000
2001 17,000
2002 10,000
2003 10,000
Thereafter 14,000
The Company and its stockholders have an agreement that requires the Company
to repurchase the stock of any stockholder upon death or permanent
disability. The repurchase price is to be the appraised fair value of the
stock with payment to be made in up to four annual installments.
As of December 31, 1998, the Company had entered into a contract for the
construction of a building addition in the amount of $1,180,000.
Construction costs beginning in early 1999 will be financed, in the short
term, under the Company's line of credit.
(8) Significant Customers-
Sales to one customer totaled approximately 62% of 1998 sales. At December
31, 1998, approximately 57% of accounts receivable are due from this
customer.
Page 21 of 21 Pages
