ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
(i) Financial Statements of DWZM, Inc.
(b) Pro Forma financial information
(i) Unaudited Pro Forma combined condensed Balance Sheet as of
February 28, 1999, including notes thereto.
(ii) Unaudited Pro Forma combined condensed Statement of Operations
for the fiscal year ended May 31, 1998 and for the nine months ended
February 28, 1999, including notes thereto.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
- -----------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- -----------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets as of January 31, 1999 (unaudited)
and as of October 25, 1998 2 - 3
Statements of income for the three months ended
January 31, 1999 and 1998 (unaudited) and for the
years ended October 25, 1998 and October 26, 1997 4
Statements of retained earnings (deficit) for the
three months ended January 31, 1999 and 1998
(unaudited) and for the years ended
October 25, 1998 and October 26, 1997 5
Statements of cash flows for the three months ended
January 31, 1999 and 1998 (unaudited) and for the
years ended October 25, 1998 and October 26, 1997 6
Notes to financial statements 7 - 10
- -----------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
DWZM, Inc., d/b/a Parker Industries
King of Prussia, Pennsylvania
We have audited the accompanying balance sheet of DWZM, Inc., d/b/a Parker
Industries, a wholly-owned subsidiary of Owosso Corporation, as of October 25,
1998, and the related statements of income, retained earnings (deficit) and cash
flows for the years ended October 25, 1998 and October 26, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 DWZM, Inc., d/b/a Parker
Industries as of October 25, 1998, and the results of its operations and its
cash flows for the years ended October 25, 1998 and October 26, 1997 in
conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Waterloo, Iowa
February 19, 1999, except for
Note 5 as to which the date is
March 5, 1999
<PAGE>
DWZM, INC.
d/b/a PARKER INDUSTRIES
BALANCE SHEETS (NOTE 5)
January 31, October 25,
ASSETS (Note 6) 1999 1998
- --------------------------------------------------------------------------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 7,000 $ 7,000
Trade receivables, less allowance
for doubtful accounts and discounts
1999 and 1998 $450,000 3,611,454 4,931,745
Inventories (Note 2) 3,732,819 2,905,896
Prepaid expenses 3,838 1,750
Deferred income taxes (Note 3) 394,000 394,000
---------------------------------
Total current assets 7,749,111 8,240,391
---------------------------------
Property and Equipment
Land and improvements 76,935 76,935
Buildings 888,214 888,214
Machinery and equipment 1,018,941 1,015,081
---------------------------------
1,984,090 1,980,230
Less accumulated depreciation 1,071,868 1,025,868
---------------------------------
912,222 954,362
---------------------------------
Other Assets
Deferred income taxes (Note 3) 198,000 198,000
Other 12,470 12,470
---------------------------------
210,470 210,470
---------------------------------
$ 8,871,803 $ 9,405,223
=================================
See Notes to Financial Statements.
<PAGE>
January 31, October 25,
LIABILITIES AND STOCKHOLDER'S EQUITY 1999 1998
- --------------------------------------------------------------------------------
(Unaudited)
Current Liabilities
Accounts payable $ 300,882 $ 298,996
Accrued commissions payable 169,431 280,995
Other accrued expenses 111,584 166,773
Due to Owosso Corporation, parent 5,528,926 5,694,924
---------------------------------
Total current liabilities 6,110,823 6,441,688
---------------------------------
Commitments (Note 5)
Stockholder's Equity
Capital stock, common, $.01 par value;
authorized 1,000 shares; issued 100
shares 1 1
Additional paid-in capital 2,872,306 2,872,306
Retained earnings (deficit) (111,327) 91,228
---------------------------------
2,760,980 2,963,535
---------------------------------
$ 8,871,803 $ 9,405,223
=================================
<PAGE>
DWZM, INC.
d/b/a PARKER INDUSTRIES
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Three Months Ended Year Ended
January 31, October 25, October 26,
----------------------------------------------------------------
1999 1998 1998 1997
----------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 601,521 $ 2,099,623 $ 11,392,690 $ 12,696,766
Cost of goods sold 602,194 1,701,237 9,749,446 10,020,305
----------------------------------------------------------------
Gross profit (loss) (673) 398,386 1,643,244 2,676,461
----------------------------------------------------------------
Operating expenses:
Selling 166,903 223,124 1,050,887 997,131
Provision for doubtful accounts 4,500 3,000 100,850 17,700
Other general and administrative,
including annual allocated
corporate costs 1998 $352,000;
1997 $382,000 159,982 220,163 956,946 999,792
----------------------------------------------------------------
331,385 446,287 2,108,683 2,014,623
----------------------------------------------------------------
Operating income (loss) (332,058) (47,901) (465,439) 661,838
----------------------------------------------------------------
Nonoperating income (expense):
Interest expense, parent (13,723) (203,596) (302,975)
Write-down of long-lived assets
(Note 5) (340,000)
Other 821 30,893
----------------------------------------------------------------
(13,723) (542,775) (272,082)
----------------------------------------------------------------
Income (loss) before (332,058) (61,624) (1,008,214) 389,756
income taxes
Federal and state income taxes (credits)
(Note 3) (129,503) (24,033) (415,208) 110,068
----------------------------------------------------------------
Net income (loss) $ (202,555) $ (37,591) $ (593,006) $ 279,688
================================================================
Earnings (loss) per common share,
basic and diluted $ (2,026) $ (376) $ (5,930) $ 2,797
================================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
DWZM, INC.
d/b/a PARKER INDUSTRIES
<TABLE>
<CAPTION>
STATEMENTS OF RETAINED EARNINGS (DEFICIT)
Three Months Ended Year Ended
January 31, October 25, October 26,
-----------------------------------------------------------------
1999 1998 1998 1997
-----------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Balance, beginning $ 91,228 $ 684,234 $ 684,234 $ 404,546
Net income (loss) (202,555) (37,591) (593,006) 279,688
-----------------------------------------------------------------
Balance, ending $ (111,327) $ 646,643 $ 91,228 $ 684,234
=================================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
DWZM, INC.
d/b/a PARKER INDUSTRIES
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Three Months Ended Year Ended
January 31, October 25, October 26,
----------------------------------------------------------------
1999 1998 1998 1997
----------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (202,555) $ (37,591) $ (593,006) $ 279,688
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation 46,000 42,973 183,630 160,780
Amortization 233 933 918
Deferred income taxes (483,374) (49,921)
Write-down of long-lived assets 340,000
Change in assets and liabilities:
(Increase) decrease in:
Trade receivables 1,320,291 (234,247) (1,441,485) (355,458)
Inventories (826,923) (1,027,779) (192,602) (1,138,058)
Prepaid expenses (2,088) 7,051 7,651 (9,401)
Increase (decrease) in accounts
payable and accrued expenses (164,867) (229,990) (281,372) 272,673
----------------------------------------------------------------
Net cash provided by (used
in) operating activities 169,858 (1,479,350) (2,459,625) (838,779)
----------------------------------------------------------------
Cash Flows From Investing Activities,
purchase of property and equipment (3,860) (48,040) (235,251) (265,850)
----------------------------------------------------------------
Cash Flows from Financing Activities
Increase (decrease) in outstanding
checks in excess of bank balance (22,487) (22,487) 22,487
Principal payments on long-term
borrowings (25,656) (26,530) (48,251)
Increase (decrease) in balances due
to Owosso Corporation, parent (165,998) 1,575,533 2,750,893 1,123,928
----------------------------------------------------------------
Net cash provided by (used
in) financing activities (165,998) 1,527,380 2,701,876 1,098,164
----------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 7,000 (6,465)
Cash and cash equivalents:
Beginning 7,000 6,465
----------------------------------------------------------------
Ending $ 7,000 $ $ 7,000 $
================================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
DWZM, INC.
D/B/A PARKER INDUSTRIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: The Company's operations consist of the design, manufacture
and sale of agricultural equipment and repair and replacement parts to dealers
located primarily in the midwest states on credit terms that the Company
establishes for individual customers.
Significant accounting policies:
Accounting estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount 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.
Fiscal year: The Company's fiscal year ends on the last Sunday in October each
year. The years ended October 25, 1998 and October 26, 1997 each contained 52
weeks.
Cash and cash equivalents: For purposes of reporting cash flows, the Company
considers all money market funds and savings accounts to be cash equivalents.
Inventories: Inventories are valued at the lower of cost (first-in, first-out
method) or market.
Property and equipment and depreciation: Property and equipment is carried at
cost. Depreciation on property and equipment is computed by the straight-line
method over the estimated useful lives of the assets.
Revenue recognition: Sales of all products are recognized as goods are shipped.
Income taxes:
The Company files its income tax returns on a consolidated basis with its parent
and other affiliates. The members of the consolidated group have elected to
allocate income taxes among the members of the group by the separate return
method, under which the parent company makes an allocation to any member of the
group for the income tax reductions resulting from the member's inclusion in the
consolidated return, or the member makes an allocation to the parent company for
its allocated share of the consolidated income tax liability. These allocations
are included on the balance sheet in balances due to Owosso Corporation, parent.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
<PAGE>
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Research and development expenses: Research and development costs are charged to
operations as they are incurred. Expenses for the years ended October 25, 1998
and October 26, 1997 were approximately $222,000 and $192,000, respectively.
Fair value of financial instruments: The carrying amount of cash and cash
equivalents, trade receivables, accounts payable and balances due to Owosso
Corporation, parent, approximate fair value because of the short maturity of
these instruments.
Earnings (loss) per share: Basic earnings (loss) per share is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of shares outstanding. In computing diluted earnings per share,
the dilutive effect of contingently issuable shares increases the weighted
average number of shares. During the years ended October 25, 1998 and October
26, 1997, the Company had no dilutive securities outstanding.
Asset impairment: The Company reviews for the impairment of long-lived assets to
be held and used by the Company whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recently issued accounting standards: The Company does not feel that the
adoptions of recently issued accounting standards will have a material effect on
the required information in its financial statements and related disclosures.
Interim financial information (unaudited): The financial statements and notes
related thereto as of January 31, 1999, and for the three-month periods ended
January 31, 1999 and 1998 are unaudited, but in the opinion of management
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position and
results of operations. The operating results for the interim periods are not
indicative of the operating results to be expected for a full year or for other
interim periods. Not all disclosures required by generally accepted accounting
principles necessary for a complete presentation have been included.
Note 2. Composition of Inventories
Inventories at October 25, 1998 are as follows:
Raw materials $ 1,120,025
Work in process 439,966
Finished goods 1,345,905
-------------------
$ 2,905,896
===================
Note 3. Income Taxes
Net deferred tax liabilities consist of the following components as of October
25, 1998:
Deferred tax assets:
Allowance for doubtful accounts $ 165,000
Accrued expenses 33,000
Inventory 196,000
Property and equipment 198,000
-------------------
$ 592,000
===================
The deferred tax amounts mentioned above have been classified on the
accompanying balance sheet as of October 25, 1998 as follows:
Current assets $ 394,000
Noncurrent assets 198,000
-------------------
$ 592,000
===================
Total reported tax expense applicable to the Company's operations varies from
the amount that would have resulted by applying the federal income tax rate to
income before income taxes for the following reasons:
Year Ended
---------------------------------
October 25, October 26,
1998 1997
---------------------------------
Income tax expense (credit) at
statutory federal income tax rate $ (352,875) $ 136,415
State income tax provisions (40,329) 15,590
Other (22,004) 10,784
--------------------------------
$ (415,208) $ 162,789
================================
Note 4. Employee Benefit Plan
Substantially all of the Company's employees are covered under the 401(k)
defined contribution plan of Owosso Corporation, the Company's parent
corporation. Eligible employees may contribute up to 15% of their compensation
to the plan. The plan provides for a fixed contribution of 3% of the
compensation of eligible employees and matching employer contribution of 50% of
the first 4% of the employee's contributions. Contributions and related expenses
allocated to the Company from Owosso Corporation for the years ended October 25,
1998 and October 26, 1997 were approximately $77,000 and $57,000, respectively.
Note 5. Sale of Certain Net Assets and Impairment of Long-Lived Assets
On March 5, 1999 the Company sold substantially all of its assets to Top Air
Manufacturing, Inc. and a local development authority in Jefferson, Iowa. The
proceeds from the sale to these parties included cash and a noninterest bearing
note receivable totaling approximately $7.5 million and the assumption of
approximately $500,000 of liabilities.
In connection with the sale, the Company realized a loss on the property and
equipment of $340,000. Based on the terms of the sale, the carrying value of the
property and equipment has been reduced by $340,000 which is reflected on the
statement of income for the year ended October 25, 1998 as a nonoperating
expense.
Note 6. Pledged Assets
Substantially all of the Company's assets are pledged as collateral on the debt
of Owosso Corporation, its parent corporation.
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information set forth below presents
the pro forma condensed balance sheet of Top Air and Parker Industries as of
February 28, 1999, as if the transaction had been consummated at such date. In
addition, the unaudited pro forma condensed statements of income of Top Air and
Parker Industries for the fiscal year ended May 31, 1998 and the nine-month
period ended February 28, 1999, is presented as if the transaction had been
consummated as of the beginning of the respective periods. The pro forma
adjustments do not reflect any operating efficiencies or cost savings which Top
Air believes are achievable or the cost of achieving any such operating
efficiencies and cost savings.
The following unaudited pro forma financial information has been
prepared from, and should be read in conjunction with, the financial statements,
including the notes thereto, of Top Air set forth in the Form 10-KSB of Top Air
for its fiscal year ended May 31, 1998 and Form 10-QSB for the nine month period
ended February 28, 1999, which financial statements are incorporated herein by
this reference, and of Parker Industries, set forth elsewhere herein.
This unaudited pro forma financial information presented below has been
prepared using the purchase method of accounting, whereby the total cost of the
acquisition of the business, assets and operations of Parker Industries will be
their respective fair values at the effective date of the transaction.
The unaudited pro forma financial information is provided for
informational purposes only and is not necessarily indicative of the financial
position or operating results that would have occurred had the transaction been
consummated on the dates, or at the beginning of the period, for which the
consummation of such transaction is being given effect, nor is it necessarily
indicative of future operating results or financial position.
