SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 to 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 12, 1996
(Required financial statement and proforma financial information relative to
Form 8-K filed November 14, 1995).
MESTEK, INC.
(Exact name of registrant as specified in Charter)
Pennsylvania 1-448 25-0661650
(state of jurisdiction of (Commission File Number) (IRS Employer
incorporation Identification No.)
260 North Elm Street, Westfield, Massachusetts 01085
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (413) 568-9571
Not Applicable
(Former name or former address, if changed since last report)
1
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Item 7. Financial Statements and Exhibits.
(b) Financial Statements of Business Acquired.
Page No.
National Northeast, Inc.
- Audited Balance Sheets December 31, 1994 and 1993 9
- Audited Statements of Income for the 12 months ended
December 31, 1994 and December 31, 1993 10
- Statements of Cash Flows for the 12 months ended
December 31, 1994 and December 31, 1993 12
- Notes to Financial Statements 13 - 19
National Southeast, Inc.
- Audited Balance sheet as of December 31, 1994 21
- Audited Statement of Income for the period June 21,
1994 (inception) through December 31, 1994 22
- Statements of Cash Flow for the period June 21, 1994
(inception) through December 31, 1994 24
- Notes to Financial Statements 25 - 30
National Northeast, Inc. &
National Southeast, Inc.
- Unaudited Combined Balance Sheet as of September 30, 1995 32 - 33
- Unaudited Combined Statement of Income for the nine
months ended September 30, 1995. 31
(4)(b) Pro Forma Financial Information
The following unaudited pro forma condensed consolidated financial statements
are filed with this report:
Pro Forma Condensed Consolidated Balance as at September 30, 1995. 5 - 6
Pro Forma Condensed Consolidated Statements of Earnings:
Year Ended December 31, 1994 3
Nine Months Ended September 30, 1995 4
The Pro Forma Condensed Consolidated Balance Sheet of Registrant as at September
30, 1995 reflects the financial position of Registrant after giving effect to
the acquisition of the assets and assumption of the liabilities discussed in
Registrant's Form 8-K filing on November 14, 1995, and assumes the acquisition
took place on September 30, 1995. The Pro Forma Condensed Consolidated
Statements of Earnings for the fiscal year ended December 31, 1994 and the nine
months ended September 30, 1995 assume that the acquisition occurred on January
1, 1994 and are based on the operations of Registrant for the year ended
December 31, 1994 and the nine months ended September 30, 1995.
The unaudited pro forma condensed consolidated financial statements have been
prepared by Registrant based upon assumptions deemed proper by it. The unaudited
pro forma condensed consolidated financial statements presented herein are shown
for illustrative purposes only and are not necessarily indicative of the future
financial position or future result of operations of Registrant, or of the
financial position or results of operations of Registrant that would have
actually occurred had the transaction been in effect as of the date or for the
periods presented. In addition, it should be noted that Registrant's financial
statements will reflect the acquisition only from October 29, 1995, the
Agreement date.
The unaudited pro forma condensed consolidated financial statements should be
read in conjunction with the historical financial statements and related notes
of Registrant.
2
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Disclosure required under Item 304 of regulation S-K (Item 4 of Form 8-K)
MESTEK, INC. (CONSOLIDATED) AND NATIONAL NORTHEAST, INC.
PROFORMA CONSOLIDATED CONDENSED STATE OF INCOME
Twelve Months Ended December 31, 1994
Historical Pro-Forma
Mestek, Inc. National Adjustments Consolidated
Consolidated Northeast
Inc.
*Dollars in Thousands* *Dollars in Thousands*
Net sales $ 209,557 $ 18,179 $ 227,736
Service revenues 14,461 14,461
---------- ---------- ----------- ----------
Total revenues 224,018 18,179 242,197
Cost of goods sold 149,180 14,370 b 593 164,143
Cost of service revenue 8,928 8,928
---------- ---------- ----------- ----------
Gross margin 65,910 3,809 ( 593) 69,126
Sales expense 28,282 319 28,601
G & A expense 12,757 2,550 b8 d(1065) ( 1,057) 14,250
Engineering expense 5,734 5,734
---------- ---------- ----------- ----------
Operating income 19,137 940 464 20,541
Other income (loss) ( 2,250) 41 a ( 185) ( 2,394)
Interest expense ( 839) ( 65) e ( 597) ( 1,501)
----------- ---------- ---------- ----------
Income (loss) before
Income taxes 16,048 916 ( 318) 16,646
Income tax expense 6,750 65 c 174 6,989
----------- ---------- ---------- ----------
Net income $ 9,298 $ 851 $( 492) $ 9,657
=========== ========== =========== ==========
Weighted average
shares outstanding 9,137
Earnings per common share $ 1.06
Pro-forma adjustments:
a. to reflect amortization of goodwill based on a hypothetical purchase date of
January 1, 1994.
b. to reflect incremental depreciation as of January 1, 1994 based on asset
values in accordance with APB 16.
c. to adjust National Northeast income tax expense from S corp basis to C corp
basis.
d. to eliminate management bonuses paid to cover shareholder level income tax
on National Northeast S corp. earnings.
e. to record increase in interest expense
3
<PAGE>
MESTEK, INC. (CONSOLIDATED) AND NATIONAL NORTHEAST, INC.
PROFORMA CONSOLIDATED CONDENSED STATE OF INCOME
Nine Months Ended September 30, 1995
Historical Pro-Forma
Mestek, Inc. National Adjustments Consolidated
Consolidated Northeast
Inc.
*Dollars in Thousands* *Dollars in Thousands*
Net sales $ 159,549 $ 19,488 $ 179,037
Service revenues 11,375 11,375
----------- ------------ ---------- ----------
Total revenues 170,924 19,488 190,412
Cost of goods sold 114,269 15,481 b 416 130,166
Cost of service revenue 6,689 6,689
----------- ------------ ----------- ----------
Gross margin 49,966 4,007 ( 416) 53,557
Sales expense 21,453 311 21,764
G & A expense 10,525 2,298 b13 d(924)( 911) 11,912
Engineering expense 4,117 0 4,117
----------- ------------ ---------- ----------
Operating income 13,871 1,398 495 15,764
Other income (loss) ( 348) 57 a ( 138) ( 429)
Interest expense ( 520) ( 68) e ( 538) ( 1,126)
----------- ------------ ---------- ----------
Income (loss) before
Income taxes 13,003 1,387 ( 181) 14,209
Income tax expense 5,457 59 c 423 5,939
----------- ----------- ---------- ----------
Net income $ 7,546 $ 1,328 $( 604) $ 8,270
=========== =========== ========== ==========
Weighted average
shares outstanding 9,022
Earnings per common share $0.92
Pro-forma adjustments:
a. to reflect amortization of goodwill based on a hypothetical purchase date of
January 1, 1994.
b. to reflect incremental depreciation as of January 1, 1994 based on asset
values in accordance with APB 16.
c. to adjust National Northeast income tax expense from S corp. basis to C
corp. basis.
d. to eliminate management bonuses paid to cover shareholder level income tax
on National Northeast S corp. earnings.
e. to record increase in interest expense
4
<PAGE>
MESTEK, INC. (CONSOLIDATED) AND NATIONAL NORTHEAST, INC.
PROFORMA CONSOLIDATED CONDENSED BALANCE SHEET
September 30, 1995
*Unaudited*
Historical Pro-Forma
Mestek, Inc. National Adjustments Consolidated
Consolidated Northeast
Inc. (a)
Assets *Dollars in Thousands* *Dollars in Thousands*
Current assets:
Cash & cash equivalents $ 930 $ 1,077 $ $ 2,007
Accounts receivable 42,764 2,778 45,542
Unbilled accounts receivable 184 184
Inventories 39,228 630 300 40,158
Other current assets 8,685 128 8,813
---------- --------- ---------- ------------
Total current assets 91,791 4,613 300 96,704
Property & equipment 17,937 1,177 5,522 24,636
Other assets 16,676 19 16,695
Goodwill 4,189 4,189
---------- --------- ---------- ------------
Total assets $ 126,404 $ 5,809 $ 10,011 $ 142,224
========== ========= ========== ============
(a) to reflect effect of purchase accounting entries (APB 16) as of September
30, 1995.
5
<PAGE>
MESTEK, INC. (CONSOLIDATED) AND NATIONAL NORTHEAST, INC.
PROFORMA CONSOLIDATED CONDENSED BALANCE SHEET
September 30, 1995
*Unaudited*
Historical Pro-Forma
Mestek, Inc. National Adjustments Consolidated
Consolidated Northeast
Inc (a)
Liabilities & Shareholders' Equity:
*Dollars in Thousands* *Dollars in Thousands*
Current liabilities:
Current portion - long term
debt $ 6,469 $ 684 $ $ 7,153
Accounts payable 10,393 2,679 13,072
Progress billings 3,033 0 3,033
Other current liabilities 18,083 207 18,290
--------- ---------- ---------- ----------
Total current liabilities 37,978 3,570 41,548
Long term debt 187 250 9,960 10,397
Deferred compensation 23 23
--------- ---------- ---------- ----------
Total liabilities 38,188 3,820 9,960 51,968
Shareholders' equity:
Minority shareholders interest 2,040 2,040
Common stock - no par,
stated value $.05 per share,
9,610,135 shares issued 479 550 ( 550) 479
Paid in capital 15,434 15,434
Retained earnings 78,105 1,439 ( 1,439) 78,105
Treasury shares (at cost)
594,864 shares ( 5,009) ( 5,009)
Cumulative translation
adjustment ( 793) ( 793)
---------- ---------- ---------- ----------
Total shareholders' equity 88,216 1,989 51 90,256
---------- -------- ---------- ----------
Total liabilities & shareholders'
equity $ 126,404 $ 5,809 $ 10,011 $142,224
========= ======= ========== =========
(a) to reflect effect of purchase accounting entries (APB 16) as of September
30, 1995.
6
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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 thereunto duly authorized.
Mestek, Inc.
Dated: January 12, 1996 By: /S/ Stephen M. Shea
---------------------
Stephen M. Shea
Vice President - Finance,
Chief Financial Officer
7
Ernst & Young LLP 200 Clarnedon St. Phone: 617 266-2000
Boston, Fax: 617 266 5843
Massachusetts 02116-5072
Report of Independent Auditors
The Board of Directors and Stockholders
National Northeast Corporation
We have audited the balance sheet of National Northeast Corporation as of
December 31, 1994, and the related statements of income, changes in
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 audits. The financial statements of National Northeast Corporation for the
year ended December 31, 1993, and the balance sheet as of February 28, 1992
(date of inception) were audited by other auditors, whose report dated March 4,
1994, expressed an unqualified opinion on those statements.
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 1994 financial statements referred to above present fairly,
in all material respects, the financial position of National Northeast
Corporation at December 31, 1994, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
As discussed in note 4 to the financial statements, in 1994 the Company changed
its method of accounting for certain inventories from the first-in, first-out
(FIFO) method to the last-in, first-out (LIFO) method.
/s/ Ernst & Young LLP
March 3, 1995
8
<PAGE>
National Northeast Corporation
Balance Sheets
February 28,
December 31 1992 (date of
inception)
1994 1993
Assets
Current assets:
Cash and cash equivalents (Note 3) 628,654 695 2,209
Accounts receivable, less allowance
of $70,887 in 1994 and $50,000 in
1993 for uncollectible accounts
(Note 6) 2,730,639 1,707,480 1,175,378
Inventories (Note 4) 585,463 664,652 370,809
Prepaid expenses and other current assets 28,168 50,121 990
------ ------ ---
Total current assets 3,972,924 2,422,948 1,549,386
Machinery and equipment, net (Notes 5 and 6) 871,285 702,047 687,039
Other assets 21,625 31,605
------ ------
Total assets $4,865,834 $3,156,600 $2,236,425
---------- ---------- ----------
Liabilities and stockholders' equity -Current liabilities:
Accounts payable (Note 3) $2,717,391 $1,474,115 $889,658
Accrued expenses 149,990 79,933 14,931
Current portion of subordinated
note payable (Note 6) 144,952 133,839 86,433
Short term note payable (Note 6) 144,797
Note payable - related party 250,000
State income taxes payable 38,076 9,874
------ -----
Total current liabilities 3,050,409 1,697,761 1,385,819
Subordinated note payable (Note 6) 198,225 343,181 600,606
------- ------- -------
Total liabilities 3,248,634 2,040,942 1,986,425
Commitments (Notes 7 and 8)
Stockholders' equity:
Common stock, no par value; 1,000 shares authorized,
issued and outstanding 250,000 250,000 250,000
Retained earnings:
Accumulated earnings 2,467,200 1,365,658
Accumulated distributions (1,100,000) (500,000)
----------- ---------
1,367,200 865,658
Total stockholders' equity 1,617,200 1,115,658 250,000
--------- --------- -------
Total liabilities and stockholders' equity$4,865,834 $3,156,600 $2,236,425
---------- ---------- ----------
See accompanying notes.
9
<PAGE>
National Northeast Corporation
Statements of Income
Year ended December 31
1994 1993
Net sales $15,923,539 $11,642,664
Cost of sales 12,214,457 8,816,907
---------- ---------
3,709,082 2,825,757
Selling, general and administrative exp. 2,550,678 1,887,441
--------- ---------
Income from operations 1,158,404 938,316
Interest expense (34,742) (44,062)
Other income(expense), net 43,082 (2,722)
------ -------
Income before income taxes 1,166,744 891,532
Provision for state income taxes 65,202 36,052
------ ------
Net income $ 1,101,542 $ 855,480
----------- ---------
See accompanying notes.
10
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National Northeast Corporation
Statements of Changes in Stockholders' Equity
Common Stock Retained Stockholders'
Shares Amount Earnings Equity
Balance at December 31, 1992 1,000 $250,000 $ 510,178 $ 760,178
----- -------- --------- ---------
Net income 855,480 855,480
------- -------
Distribution to stockholders (500,000) (500,000)
--------- ---------
Balance at December 31, 1993 1,000 250,000 865,658 1,115,658
Net income 1,101,542 1,101,542
Distribution to stockholders (600,000) (600,000)
--------- ---------
Balance at December 31, 1994 1,000 $250,000 $1,367,200 $1,617,200
----- -------- ---------- ----------
See accompanying notes.
11
<PAGE>
National Northeast Corporation
Statements of Cash flows
Year ended December 31
1994 1993
Operating activities
Net income $ 1,101,542 $ 855,480
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 224,596 176,900
Amortization of organization costs 9,980 9,980
Gain on disposal of machinery and equipment (6,855)
Changes in operating assets and liabilities:
Accounts receivable (1,023,159) (258,402)
Inventories 79,189 63,445
prepaid expenses and other current assets 21,953 (31,417)
Accounts payable 949,595 (586,012)
Accrued expenses 70,057 21,709
State income taxes payable 28,202 (12,134)
--------- --------
Net cash provided by operating activities 1,455,100 239,549
Investing activities
Capital expenditures (403,006) (235,390)
proceeds from disposal of machinery and equipment 16,027
------
Net cash used in investing activities (386,979) (235,390)
Financing activities
Principal payments on subordinated debt (133,843) (123,586)
Checks not presented for payment 293,681 259,299
Distribution to stockholders (600,000) (500,000)
----------- --------
Net cash used in financing activities (440,162) (364,287)
----------- --------
Net increase(decrease) in cash and cash equivalents 627,959 (360,128)
Cash and cash equivalents, beginning of year 695 360,823
---------- --------
Cash and cash equivalents, end of year $ 628,654 $ 695
--------- -----
Supplemental disclosure of cash flow information:
Interest paid $ 34,742 $ 44,062
--------- --------
Income taxes paid $ 37,000 $ 48,186
--------- --------
See accompanying notes
12
<PAGE>
National Northeast Corporation
Notes to Financial Statements
December 31, 1994
1. Nature of Business
National Northeast Corporation (the Company) is a custom extruder, fabricator
and assembler of aluminum.
2. Acquisition
The Company, previously known as National Northeast Acquisition, Inc., purchased
substantially all of the assets and assumed certain liabilities of National
Northeast Corporation pursuant to an asset purchase agreement dated February 28,
1992. Consideration paid consisted of $500,000 in cash, a $144,797 short-term
non interest bearing note and a $833,840 five-year non interest bearing note.
The acquisition has been accounted for by the purchase method of accounting and,
accordingly, the purchase price of $1,331,836 (adjusted to reflect the
interest-free terms of the five-year note) has been allocated to the assets
acquired of $2,236,425 and the liabilities assumed of $904,589 based upon the
estimated fair value at the date of acquisition. The resulting net asset value
approximated the purchase price.
3. Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue upon shipment of goods to customers. During
fiscal years 1994 and 1993, the three largest customers accounted for
approximately 51% and 54% of product sales, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of 90 days
or less at the time of acquisition to be cash equivalents. Under the Company's
cash management program, checks issued are not considered reductions of cash or
accounts payable balances until presented to the bank for payment. At December
31, 1994 and December 31, 1993, checks not presented for payment amounted to
$492,217 and $198,536, respectively.
Other Assets
Other assets include organization costs which are being amortized over a
five-year period using the straight-line method.
13
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National Northeast Corporation
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Polices (continued)
Machinery and Equipment
Machinery and equipment are stated at cost. Depreciation is computed using the
straight-line method over a five year period which is considered to be the
estimated useful lives of the various assets. The cost of improvements is
capitalized in the appropriate fixed asset accounts, while maintenance and
repairs are expensed as incurred. On disposition of assets, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
included in the results of operations.
Tooling Costs
The Company purchases tools and dies for extrusion and fabrication and expenses
these costs as incurred. Tooling expense during the years ended December 31,
1994 and December 31, 1993 was $294,215 and $262,613, respectively.
Income Taxes
The Company has elected to have its income taxed directly to its stockholders in
accordance with the "5" Corporation provisions of the Internal Revenue Code.
Therefore, there is no provision for federal income taxes. The Company continues
to pay state income taxes to those states that do not recognize "S" Corporation
provisions of the Internal Revenue Code.
4. Inventories
The Company values its inventory at the lower of cost or market Effective
January 1, 1994, the Company elected to change its method of accounting for the
material component of inventory from the fast-in, fast-out (FIFO) method to the
last-in, last-out (LIFO) method. Management believes the LIFO method will more
fairly present its results of operations by reducing the effect of inflationary
cost increases in inventory and thus match current costs with current revenues.
Other components of inventory, amounting to approximately $156,000 at December
31, 1994, continue to be accounted for on the FIFO method.
The effect of the change in inventory methods in 1994 was a reduction to
inventory and net income of $300,000. The Company intends to apply to the
Internal Revenue Service to change to the LIFO method of inventory valuation for
income tax reporting purposes also.
14
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National Northeast Corporation
Notes to Financial Statements (continued)
4. Inventories (continued)
The composition of inventories was as follows:
February 28, 1992
December 31 (date of
1994 (a) 1993 inception)
Raw materials $245,273 $588,345 $265,692
Work in process 227,789 45,356 82,109
Finished goods 112,401 30,951 23,008
---------------------------------------
$585,463 $664,652 $370,809
(a) As noted above, the material component of inventory is valued on the LIFO
method as of December 31, 1994 and on the FIFO method as of December 31, 1993
and February 28, 1992.
5. Machinery and Equipment
Machinery and equipment consists of the following:
February 28, 1992
December 31 (date of
1994 1993 inception)
Machinery, equipment, and improvements $1,284,879 $931,655 $635,171
Furniture and office equipment 96,496 66,276 51,868
1,381,375 997,931 687,039
Less accumulated depreciation 510,090 295,884
-----------------------------------
$ 871,285 $702,047 $687,039
15
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National Northeast Corporation
Notes to Financial Statements (continued)
6. Borrowings
Subordinated Note Payable
In connection with the asset purchase, the Company issued a non interest bearing
$835,840 promissory note to the seller, payable in sixty equal installments of
$13,931 commencing April I, 1992.
The final payment on the subordinated note will occur in March 1997. This note
is subordinated to the revolving loan agreement and is collateralized by all
machinery and equipment included in the purchased assets. The Company recorded
the note at an 8% discount to reflect the interest- free terms of the note. For
the years ended December 31, 1994 and 1993, $33,325 and $43,582, respectively,
of discount was recorded as interest expense. The remaining discount of $32,951
is included in the outstanding balance at December 31, 1994.
Revolving Loan Agreement
On March 12, 1992, the Company entered into a demand revolving loan agreement
with a bank:. On June 30, 1993, the amount available under the revolving loan
agreement was amended to the lesser of $ 1,500,000 or the sum of 35% of
inventory (not to exceed $300,000) plus 80% of accounts receivable. On December
12, 1994, the amount available under the revolving loan agreement was further
amended to the lesser of $2,500,000 or the sum of 50% of inventory (not to
exceed $500,000) plus 85% of accounts receivable. The loan's interest rate is
equal to the bank's base rate plus 1/2% (9% at December 31, 1994). Borrowings
under the agreement are collateralized by inventories and receivables. During
1994 and 1993 the weighted average borrowings outstanding were approximately
$23,000 and $6,700 and the weighted average interest rate was approximately 6.6%
and 7%, respectively. At December 31, 1994 and December 31, 1993 there were no
amounts outstanding under this agreement.
16
<PAGE>
National Northeast Corporation
Notes to Financial Statements (continued)
7. Commitments
Lease Commitments
The Company leases its facilities under an operating lease expiring in 1997. The
annual future minimum lease payments are as follows:
1995 $ 60,000
1996 60,000
1997 10,000
$ 130,000
Rental expense under this lease amounted to $60,000 for each of the years ended
December 31, 1994 and 1993.
Pursuant to the terms of the lease agreement, the Company has the option at any
time during the lease term to purchase the building at a price of $926,477.
Should the Company elect to exercise this option, all previous rent payments
will reduce the purchase price. Total rent payments through December 31, 1994
were $170,000 which would reduce the purchase price to $756,477 at December
31,1994.
Purchase Commitment
At December 31, 1993, the Company had outstanding commitments to purchase raw
materials for approximately $409,000. The Company had no significant outstanding
purchase commitments at December 31, 1994.
8. Debt Guarantee
National Northeast Corporation has guaranteed the borrowings of National
Southeast Aluminum Corporation from a bank under a revolving line of credit The
revolving line of credit agreement permits borrowings up to the lesser of
$1,500,000 or a variable amount dependent on inventory and accounts receivable
balances. At December 31, 1994, $866,540 was outstanding in accordance with the
terms of the revolving line of credit agreement.
17
<PAGE>
National Northeast Corporation
Notes to Financial Statements (continued)
9. Related Party Transactions
The Company's majority stockholder receives a management fee in the amount of
approximately 1% of net sales for services rendered. During the year ended
December 31, 1994 and December 31, 1993, management fees amounted to $177,843
and $130,675, of which $24,313 and $10,897 were included in accounts payable at
December 31, 1994 and December 31, 1993 respectively.
Stockholders/officers received $1,323,457 and $880,368 in bonuses during the
years ended December 31, 1994 and December 31, 1993, respectively. Accounts
payable and accrued expenses include a payable to stockholders amounting to
$66,894 at December 31, 1994. Prepaid expenses and other current assets included
a receivable from stockholders amounting to $27,017 at December 31, 1993.
The original purchase of the assets of the Company was partially financed by a
$250,000 note payable to a related patty. Interest was charged at the rate of
10% per annum. All amounts due under this note have been paid in fall.
The stockholders of National Northeast Corporation also own a majority interest
in National Southeast Aluminum Corporation ("NSE"). NSE began operations on June
1, 1994 in Winter Haven, Florida.
National Northeast Corporation and certain stockholders of the Company and NSE
perform accounting and managerial services for NSE for a fee equal to
approximately 3% of NSE sales, of which 1.5% is payable to the Company and 1.5%
is payable to the stockholders. The gross management fees incurred by NSE for
the period ended December 31, 1994 amounted to $82,368. A receivable from NSE
for management fees of $17,180 is included in accounts receivable at December
31, 1994.
During 1994 the Company purchased approximately $335,000 of extruded aluminum
from NSE. At December 31, 1994, $109,398 payable to NSE is included in accounts
payable.
18
<PAGE>
National Northeast Corporation
Notes to Financial Statements (continued)
10. Related Party Transactions (continued)
When consistent with the Company's cash management objectives and as permitted
by the Company's loan agreements, National Northeast Corporation may provide
short teem loans to NSE. During 1994, the average amount outstanding related to
these short term loans amounted to approximately $203,000 and the weighted
average interest rate was approximately 8.7%. Interest earned on these
borrowings amounted to approximately $ 10,500 for the year ended December 31,
1994. At December 31, 1994 there were no principal amounts outstanding from NS
El. Interest receivable related to these loans amounted to $2,875 at December
31, 1994.
In December 1994, the Company sold machinery and equipment with a net book value
of $2,454 to NSE. A receivable from NSE of $2,454 for this equipment is included
in accounts receivable at December 31, 1994.
19
Ernst & Young LLP 200 Clarnedon St. Phone: 617 266-2000
Boston, Fax: 617 266 5843
Massachusetts 02116-5072
Report of Independent Auditors
The Board of Directors and Stockholders
National Southeast Aluminum Corporation
We have audited the accompanying balance sheets of National Southeast Aluminum
Corporation as of December 31, 1994 and June 1, 1994, and the statements of
operations, changes in stockholders' equity, and cash flows for the period from
June 1, 1994 (date of inception) to December 31, 1994. 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 National Southeast Aluminum
Corporation at December 31, 1994 and June 1, 1994 and the results of its
operations and its cash flows for the period from June 1, 1994 (date of
inception) to December 31, 1994 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
March 3, 1995
20
<PAGE>
National Southeast Aluminum Corporation
Balance Sheets
June 1, 1994
December 31 (date of
1994 inception)
Current assets:
Cash (Note 3) $ 400 $302,000
Accounts receivable, less allowance for uncollectible
accounts of $27,456 (Note 6) 1,266,151
Inventories (Notes 4 and 6) 141,390
Prepaid expenses and other current assets 3,895 82,705
-----------------------------
Total current assets 1,411,836 384,705
Machinery and equipment, net (Notes Sand 6) 271,316 218,750
Other assets 5,296 5,995
-----------------------------
Total assets $1,688,448 $609,450
-----------------------------
Liabilities and stockholders' equity Current liabilities:
Note payable - bank (Now 6) $ 866,541
Accounts payable 513,945 $101,901
Accrued expenses 41,563
Current portion of long-term debt seller (Note 6) 33,409 13,597
------------------------------
Total current liabilities 1,455,458 115,498
Long-term debt - seller (Note 6) 184,021 193,952
------------------------------
Total liabilities 1,639,479 309,450
Commitments (Note 7)
Stockholders' equity:
Common stock, no par value; 1,000 shares authorized,
issued and outstanding 300,000 300,000
Accumulated deficit (251,031)
Total stockholders' equity 48,969 300,000
-------
Total liabilities and stockholders' equity $1,688,448 $609,450
-------------------------------
See accompanying notes.
21
<PAGE>
National Southeast Aluminum Corporation
Statement of Operations
For the period from June 1, 1994 (date of inception)
to December 31, 1994
Net sales $2,737,877
Cost of sales 2,637,752
100,125
Selling, general and administrative expenses 317,635
Loss from operations (217,510)
Interest expense 30,318
Other expense 3,203
Net loss $ (251,031)
-----------
See accompanying notes.
22
<PAGE>
National Southeast Aluminum Corporation
Statement of Changes in Stockholders' Equity
For the period from June 1, 1994 (date of inception)
to December 31 1994
Common Stock Accumulated Stockholders'
Shares Amount Deficit Equity
Balance at June 1, 1994 1,000 $300,000 $300,000
Net loss ($251,031) (251,031)
Balance at December 31, 1994 1,000 $300,000 ($251,031) $48,969
========= =========== ========== =========
See accompanying notes.
23
<PAGE>
National Southeast Aluminum Corporation
Statement of Cash Flows
For the period from June 1, 1994 (date of inception)
to December 31, 1994
Operating activities
Net loss $ (251,031)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 33,165
Amortization of organization costs 699
Amortization of debt discount 9,881
Changes in operating assets and liabilities:
Accounts receivable (1,266,151)
Inventories (141,390)
Prepaid expenses and other current assets 78,810
Accounts payable 234,401
Accrued expenses 41,563
------
Net cash used in operating activities (1,260,053)
Investing activities
Capital expenditures (85,731)
Net cash used in investing activities (85,731)
Financing activities
Borrowings under line of credit 866,541
Checks not presented for payment 177,643
-------
Net cash provided by financing activities 1,044,184
---------
Net decrease in cash (301,600)
Cash, beginning of period 302,000
Cash, end of period $ 400
-----------
Supplemental disclosure of cash flow information:
Interest paid $ 20,437
--------
See accompanying notes.
24
<PAGE>
National Southeast Aluminum Corporation
Notes to Financial Statements
December 31, 1994
1. Nature of Business
National Southeast Aluminum Corporation (the Company) is a custom extruder of
aluminum.
2. Acquisition
Effective June 1, 1994, the Company purchased all of the tangible personal
property relating to the aluminum extrusion business formerly operated in Winter
Haven, Florida by High Performance Finishers and Extruders, Inc. The acquisition
has been accounted for by the purchase method of accounting and, accordingly,
the purchase price of $207,549 has been allocated to the assets acquired based
upon the estimated fair value at the date of acquisition. The Company has
granted the seller a security interest in the purchased assets to secure its
obligation under the purchase agreement.
3. Summary of Significant Accounting Policies,
Revenue Recognition
The Company recognizes revenue upon shipment of goods to customers. During 1994,
the three largest customers accounted for approximately 48% of product sales.
Cash
Under the Company's cash management program, checks issued are not considered
reductions of cash or accounts payable balances until presented to the bank for
payment At December 31, 1994, checks not presented for payment amounted to
$177,643.
Other Assets
Other assets include organization costs which are being amortized over a
five-year period using the straight-line method.
25
<PAGE>
National Southeast Aluminum Corporation
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market Machinery and Equipment Machinery and equipment are
stated at cost Depreciation is computed using the straight-line method over a
five year period which is considered to he the estimated useful life of the
various assets. The cost of improvements is capitalized in the appropriate fixed
asset accounts, while maintenance and repairs are expensed as incurred. On
disposition of assets, the cost and related accumulated depreciation are removed
from the accounts and any gain or loss is included in the results of operations.
Income Taxes
The Company has elected to have its income taxed directly to its stockholders in
accordance with the "S" Corporation provisions of the Internal Revenue Code.
Therefore, there is no provision for federal income taxes. The Company continues
to pay state income taxes to those states that do not recognize "S" Corporation
provisions of the Internal Revenue Code.
Tooling Costs
The Company purchases tools and dies for extrusion and expenses these costs as
incurred. Tooling expense for the period from June 1, 1994 (date of inception)
to December 31, 1994 was $219,684.
26
<PAGE>
National Southeast Aluminum Corporation
Notes to Financial Statements (continued)
4. Inventories
The composition of inventories was as follows:
December 31
1994
Raw materials $123,548
Finished goods 17,842
$141,390
5. Machinery and Equipment
Machinery and equipment consists of the following:
June 1, 1994
December 31 (date of
1994 inception)
Machinery and equipment $297,004 $215,854
Furniture and office equipment 7,477 2,896
304,481 218,750
Less accumulated depreciation 33,165 0
$271,316 $218,750
27
<PAGE>
National Southeast Aluminum Corporation
Notes to Financial Statements (continued)
6. Borrowings
Revolving Loan Agreement
On June 16, 1994, the Company entered into a revolving line of credit agreement
with a bank under which an amount up to the lesser of $1,500,000 or a variable
amount dependent on inventory and accounts receivable balances is available. The
interest rate on the loan is equal to the bank's base rate plus 1/2% (9% at
December 31, 1994). Borrowings under the agreement are collateralized by
inventories and receivables. During the period ended December 31, 1994, the
weighted average borrowings outstanding was approximately $187,000 and the
weighted average interest rate was approximately 8.7%. The outstanding balance
at December 31, 1994 under this agreement was $866,541. This line of credit
agreement is guaranteed by National Northeast Corporation, a related party (see
Note 8).
Note Payable - Seller
On April 28, 1994, the Company entered into an agreement to purchase certain
machinery and equipment located in Winter Haven, Florida effective June 1, 1994.
Under this agreement, the Company has agreed to pay the seller $268,645 in 65
installments of $4,133 commencing January 1995 and continuing through May 2000.
The fair value of this installment note payable has been estimated using
discounted cash flow analysis based on the current incremental borrowing rates
available to the Company. For the period from June 1, 1994 (date of inception)
to December 31, 1994, $9,881 of discount was recorded as interest expense. The
outstanding balance of $217,430 at December 31, 1994 is net of the remaining
discount of $51,215.
Pursuant to the terms of this agreement, additional "volume" payments are
required by the Company if shipments (based on pounds) in any calendar year
through May 2000 exceed a certain level. For the period ended December 31, 1994,
an additional payment of $20,810 was due under these terms.
28
<PAGE>
National Southeast Aluminum Corporation
Notes to Financial Statements (continued)
7. Commitments
Lease Commitments
The Company leases its facilities under an operating lease expiring in 2000. The
annual future minimum lease payments are as follows:
1995 $ 70,400
1996 70,400
1997 70,400
1998 70,400
1999 70,400
2000 33,733
------
Total future minimum lease payments $385,733
Rental expense under this lease amounted to $41,069 for the period ended
December 31, 1994. Pursuant to the terms of the lease agreement, the Company has
the option to four successive renewals of this lease for a period of five years
each, except that the first renewal shall commence June 1, 2000 and end December
31, 2004.
8. Related Party Transactions
The majority stockholders of National Southeast Aluminum Corporation also own a
majority interest in National Northeast Corporation ("NNE"). NNE was formed in
February 1992 and is located in Lawrence, Massachusetts.
NNE and certain stockholders of NNE and National Southeast Aluminum Corporation
perform accounting and managerial services for the Company for a fee equal to
approximately 3% of the Company's sales, of which 1.5% is payable to NNE and
1.5% is payable to the stockholders. The gross management fees incurred by the
Company amounted to $82,368 for the period ended December 31, 1994. A payable to
NNE for management fees of $17,180 is included in accounts payable at December
31, 1994.
29
<PAGE>
National Southeast Aluminum Corporation
Notes to Financial Statements (continued)
8. Related Party Transactions (continued)
During 1994 the Company sold approximately $335,000 of extruded aluminum to NNE.
At December 31, 1994, $204,232 receivable from NNE is included in accounts
receivable.
When consistent with the cash management objectives of National Northeast
Corporation and as permitted by their loan agreement, NNE provides short term
loans to the Company. During 1994, the average amount outstanding related to
these short term loans amounted to approximately $203,000 and the weighted
average interest rate was approximately 8.7%. interest expense related to these
borrowings amounted to approximately $10,500 for the year ended December 31,
1994. At December 31, 1994 there were no principal amounts outstanding to NNE.
Interest payable related to these short term loans amounted to $3,090 at
December 31, 1994.
In December 1994, the Company purchased machinery and equipment with a net book
value of $2,454 from NNE. A payable to NNE of $2,454 for this equipment is
included in accounts payable at December 31, 1994.
30
National Northeast, Inc.
Combined Income Statement
Nine Months Ended September 30, 1995
* unaudited *
National National consolidating National
Northeast Southeast adjustments Northeast
inc. inc. Combined
Net sales 16,516 3,884 (912) 19,488
Service revenues
- - - -
Total revenues 16,516 3,884 (912) 19,488
Cost of goods sold 12,939 3,454 (912) 15,481
Cost of service revenue
- - - -
Gross margin 3,577 430 0 4,007
Sales expense 281 30 311
G & A expense 2,074 224 2,298
Engineering expense
- - - -
Operating income 1,222 176 0 1,398
Other income (loss) 60 (3) 57
Interest expense (14) (54) (68)
- - - -
Income (loss) before 1,268 119 0 1,387
income taxes
Income tax expense 59 59
- - - -
Net income 1,209 119 0 1,328
= = = =
31
<PAGE>
National Northeast, Inc.
Combined Balance Sheet
September 30, 1995
*unaudited*
National National consolidating National
Northeast Southeast adjustments Northeast
inc. inc. Combined
Assets
Current assets:
Cash & cash equiv 1,084 (7) 1,077
Accounts receivable 2,349 936 (507) 2,778
Unbilled accounts rec
Inventories 409 221 630
Other current assets 95 33 128
- - - -
Total current assets 3,937 1,183 (507) 4,613
Property & equipment 899 278 1,177
Other assets 15 4 19
Goodwill
- - - -
Total assets 4,851 1,465 (507) 5,809
= = = =
32
<PAGE>
National Northeast, Inc.
Combined Balance Sheet
September 30, 1995
*unaudited*
National National consolidating National
Northeast Southeast adjustments Northeast
inc. inc. Combined
Liablilities & shareholders
equity:
Current liabilities:
Current portion - long
term debt 144 540 684
Accounts payable 2,609 577 (507) 2,679
Other accrued liabilities 187 20 207
- - - -
Total current liabilities 2,940 1,137 (507) 3,570
Long term debt 91 159 250
- - - -
Total Liabilities 3,031 1,296 (507) 3,820
- - - -
Shareholders' equity:
Common stock 250 300 550
Paid in capital
Retained earnings 1,570 (131) 1,439
- - - -
Total shareholders' equity 1,820 169 0 1,989
- - - -
Total liabilities and share-
holders' equity 4,851 1,465 (507) 5,809
= = = =
33
