<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report February 22, 1999
Date of earliest event reported): (December 7, 1998)
------------------
Berger Holdings, Ltd.
- - -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Pennsylvania 000-12362 23-2160077
- - -------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
805 Pennsylvania Boulevard, Feasterville, PA 19053
- - -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (215) 355-1200
--------------
<PAGE>
Item 2. Acquisition of Assets.
On December 22, 1998 the Registrant filed with the Securities and
Exchange Commission a Current Report on Form 8-K (the "December 8-K")
regarding its acquisition of all of the assets of Sheet Metal Manufacturing
Co., Inc., a Delaware corporation ("Sheet Metal"), pursuant to a certain
Asset Purchase Agreement, dated as of December 2, 1998, by and among the
Registrant, Sheet Metal and Bund Capital Limited Partnership, a Maryland
limited partnership and the 95% shareholder of Sheet Metal.
In accordance with Rule 3-05(b)(i) and Article 11 under Regulation S-X,
as referenced by Items 7(a) and 7(b) of Form 8-K, the Registrant is required to
furnish (i) the below-listed financial statements of Sheet Metal and (ii)
certain pro forma information with regard to the Registrant in filing its Form
8-K. The Registrant hereby amends the December 8-K to file such financial
statements and pro forma information, in accordance with Item 7(a)(4) of Form
8-K.
Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits.
(a.) Financial Statements of business acquired.
The required audited financial statements of Sheet Metal Manufacturing Co.,
Inc. are attached to this document.
(b.) Pro forma financial information.
The following unaudited pro forma combined condensed balance sheet as of
December 31, 1997 and the unaudited pro forma combined condensed income
statements for the year ended December 31, 1997, give effect to the
acquisition of Sheet Metal's business segment as if it had occurred on
January 1, 1997. The unaudited pro forma information is based on the
historical financial statements of the Registrant and Sheet giving effect to
the transaction as an asset purchase.
The unaudited pro forma statements have been prepared by the Registrant's
management based upon the financial information of the Registrant and Sheet
Metal. The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the financial position or results of operations
which would actually have been reported had the acquisition been in effect
during these periods or may be reported in the future. These unaudited pro forma
financial statements should be read in conjunction with the separate notes to
unaudited financial statements and related notes thereto of the Registrant and
Sheet Metal.
(c.) Exhibits
23.1 Consent of Independent Auditor
<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.
BERGER HOLDINGS, LTD.
Dated: February 22, 1999 By: /s/ JOSEPH F. WEIDERMAN
---------------------------
Joseph F. Weiderman
President
<PAGE>
Pro Forma Condensed Combined Balance Sheets
of the Registrant and Sheet Metal
As of December 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
Registrant Sheet Mtl.(a) Adjustments Results
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 4,411,347 108,056 -- $ 4,519,403
Accounts Receivable 1,655,327 1,276,344 $ 2,931,671
Inventories 2,652,466 1,279,696 $ 281,000 (b) $ 4,213,162
Prepaid and other expenses 372,721 450,192 -- $ 822,913
Deferred income taxes 800,000 22,000 -- $ 822,000
------------ ------------ ---------------- ------------
Total current assets 9,891,861 3,136,288 $ 13,309,149
Property, plant and equipment, net 6,110,128 1,513,388 (703,388)(b) $ 6,920,128
Other assets 1,526,575 394,613 -- $ 1,921,188
Deferred income taxes 700,000 -- -- $ 700,000
Goodwill 1,522,649 -- 766,267 (g) $ 2,288,916
------------ ------------ ---------------- ------------
TOTAL ASSETS $ 19,751,213 $5,044,289 343,879 $ 25,139,381
------------ ------------ ---------------- ------------
------------ ------------ ---------------- ------------
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Current portion of long-term obligations 522,679 $2,760,555 (2,760,555)(f) $ 522,679
Accounts Payable 251,093 791,238 (791,238)(f) $ 251,093
Accrued expenses 462,023 141,997 (141,997)(f) $ 462,023
------------ ------------ ---------------- ------------
Total current liabilities 1,235,795 3,693,790 (3,693,790) $ 1,235,795
Long-term debt, net of current portion 6,022,147 1,324,352 2,839,246 (c) $ 10,185,745
------------ ------------ ---------------- ------------
Total liabilities 7,257,942 5,018,142 (854,544) $ 11,421,540
Stockholders' equity 12,493,271 26,147 1,198,423 $ 13,717,841
------------ ------------ ---------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 19,751,213 $5,044,289 343,879 $ 25,139,381
------------ ------------ ---------------- ------------
------------ ------------ ---------------- ------------
</TABLE>
See Notes to Pro Forma Condensed Combined Financial Statements.
<PAGE>
Pro Forma Condensed Combined Statements of Operations
of the Registrant and Sheet Metal
Year ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
Registrant Sheet Mtl. (a) Adjustments Results
------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 20,748,017 $ 11,750,035 $ 32,498,052
Cost of Sales 16,196,776 10,380,640 167,821 (d) 26,745,237
------------ --------------- ------------ ------------
Gross profit 4,551,241 1,369,395 ($ 167,821) 5,752,815
------------ --------------- ------------ ------------
Selling administrative and general
expenses 2,963,614 1,931,983 (1,588,994)(h) 3,306,603
------------ --------------- ------------ ------------
Income (loss) from operations 1,587,627 (562,588) 2,446,212
------------ --------------- ------------ ------------
Other (expense) income:
Interest expense (581,624) (382,035) 87,035 (e) (876,624)
Other income, net 14,374 88,253 -- 102,627
------------ --------------- ------------ ------------
Income (loss) before income taxes $ 1,020,377 ($ 856,370) 1,508,208 1,672,215
Provision for income tax benefit 1,000,000 309,785 -- 1,000,000
------------ --------------- ------------ ------------
Net income (loss) $ 2,020,377 ($ 546,585) $1,198,423 $ 2,672,215
------------ --------------- ------------ ------------
------------ --------------- ------------ ------------
</TABLE>
See Notes to Pro Forma Condensed Combined Financial Statements.
<PAGE>
Berger Holdings, Ltd.
Notes to Pro Forma Condensed Combined Financial Statements
(a) Certain reclassifications were made to conform to the Registrant's headings.
(b) Adjustments to the Sheet Metal assets based on appraisals of the particular
assets which were acquired.
(c) Net increase in long-term debt resulting from the following:
<TABLE>
<S> <C>
Additional debt incurred in connection with the acquisition $ 4,163,598
Less Sheet Metal's debt, not assumed by Registrant (1,324,352)
-----------
Net increase $ 2,839,246
-----------
-----------
</TABLE>
(d) Additional depreciation expense and rent expense resulting from the assets
acquired from Sheet Metal, assuming the purchase had taken place on
January 1, 1997. Depreciation of purchased assets was based on a 10-year
life.
(e) Net interest expense relating to the purchase of Sheet Metal, assuming an
interest rate of 9% annually.
(f) Removal of Sheet Metal's liabilities which are not being assumed by the
Registrant.
(g) Goodwill resulting from the purchase of Sheet Metal's assets is as follows:
<TABLE>
<S> <C>
Goodwill from acquisition $ 821,000
Less annual amortization (54,733)
---------
Net increase $ 766,267
---------
---------
</TABLE>
(h) Reduction of certain Sheet Metal sales and administrative and general
expenses net of additional amortization as follows:
<TABLE>
<S> <C>
Reduction of expenses $ 1,643,727
Less amortization of goodwill (54,733)
-----------
Net decrease $ 1,588,994
-----------
-----------
</TABLE>
Goodwill is amortized over a 15-year life.
<PAGE>
Sheet Metal Manufacturing Company, Inc.
Balance Sheet
As of September 30, 1998
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 9,502
Accounts Receivable 1,984,570
Inventories 1,974,500
Prepaid and other expenses 128,566
Deferred income taxes 55,000
----------
Total current assets 4,152,138
Property, plant and equipment, net 1,470,742
Other assets 418,309
----------
TOTAL ASSETS $6,041,189
----------
----------
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Current portion of long-term obligations $1,906,459
Accounts Payable 1,412,260
Accrued expenses 153,919
----------
Total current liabilities 3,472,638
Long-term debt, net of current portion 2,462,374
----------
Total liabilities 5,935,012
Stockholders' equity 106,177
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,041,189
----------
----------
</TABLE>
<PAGE>
Sheet Metal Manufacturing Company, Inc.
Statement of Operations
As of September 30, 1998
(Unaudited)
<TABLE>
<S> <C>
Net Sales $ 8,502,204
Cost of Sales 7,345,450
-----------
Gross profit 1,156,754
-----------
Selling administrative and general
expenses 1,122,815
-----------
Income (loss) from operations 33,939
Other (expense) income:
Interest expense (279,000)
Other income, net 52,000
-----------
Income (loss) before income taxes ($ 193,061)
Provision for income tax benefit --
-----------
Net income (loss) ($ 193,061)
-----------
-----------
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
SHEET METAL MANUFACTURING
COMPANY, INC.
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report ............................................... 1
Financial Statements:
Balance Sheets .......................................................... 2-3
Statements of Operations ................................................ 4
Statements of Shareholders' Equity ...................................... 5
Statements of Cash Flows ................................................ 6-7
Notes to Financial Statements ..............................................8-14
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Sheet Metal Manufacturing Company, Inc.
Ridgewood, Queens, New York
We have audited the accompanying balance sheets of Sheet Metal Manufacturing
Company, Inc. as of December 31, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sheet Metal Manufacturing
Company, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/Friedman & Fuller, P.C.
February 6, 1998
November 10, 1998 as to the
last paragraph of Note 5
1
<PAGE>
METAL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
YEARS ENDED DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Current assets:
Cash $ 108,056 $ 27,558
Accounts receivable:
Trade (net of allowance for doubtful accounts of
$33,919 in 1997 and $47,245 in 1996) 1,276,344 1,869,446
Other 4,051
Inventory 1,279,696 1,339,731
Due from affiliates 84,291 60,971
Prepaid expenses and other 86,401 106,651
Income tax refunds receivable 279,500
Deferred income tax asset 22,000 25,000
---------- ----------
Total current assets 3,136,288 3,433,408
---------- ----------
Property, plant and equipment:
Land 324,432 324,432
Building and improvements 1,510,864 1,510,864
Machinery and equipment 1,036,893 1,026,712
Trucks and automobiles 296,768 296,768
Computer equipment 98,480 89,965
Furniture and fixtures 37,506 37,506
---------- ----------
3,304,943 3,286,247
Less accumulated depreciation 1,791,555 1,690,174
---------- ----------
1,513,388 1,596,073
---------- ----------
Other assets:
Notes and loans receivable, affiliates 318,721 404,913
Deferred charges, net of accumulated amortization
of $184,300 in 1997 and $54,208 in 1996 75,892 205,984
---------- ----------
394,613 610,897
$5,044,289 $5,640,378
---------- ----------
---------- ----------
</TABLE>
See Notes to Financial Statements
2
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
BALANCE SHEETS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current liabilities:
Note payable, bank $ 1,397,817 $ 1,240,772
Current portion of long-term debt 1,362,738 252,762
Accounts payable 791,238 807,434
Accrued expenses 141,997 77,657
Income taxes payable 20,600
----------- -----------
Total current liabilities 3,693,790 2,399,225
----------- -----------
Non-current liabilities:
Deferred income taxes 164,500 201,800
Long-term debt, net of current portion 93,531 1,456,267
Subordinated debt, shareholders 1,066,321 1,010,354
----------- -----------
1,324,352 2,668,421
----------- -----------
Shareholders' equity:
Common stock, $10 par; authorized, 100 shares;
issued and outstanding 85 shares 850 850
Paid-in capital 320,511 320,511
Retained earnings (deficit) (295,214) 251,371
----------- -----------
26,147 572,732
----------- -----------
$ 5,044,289 $ 5,640,378
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements
3
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Sales $ 11,750,035 $ 12,558,456
Cost of sales 9,239,765 9,774,971
------------ ------------
Gross profit 2,510,270 2,783,485
------------ ------------
Operating expenses:
Warehouse and distribution 1,140,875 1,143,488
Selling 488,256 449,036
General and administrative 1,443,727 883,553
------------ ------------
3,072,858 2,476,077
------------ ------------
Income (loss) from operations (562,588) 307,408
------------ ------------
Other income (expense):
Rental income 43,865 49,488
Interest expense (382,035) (338,242)
Other 44,388 125,457
------------ ------------
(293,782) (163,297)
------------ ------------
Income (loss) before income taxes (856,370) 144,111
Income tax expense (benefit) (309,785) 65,234
------------ ------------
Net income (loss) $ (546,585) $ 78,877
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements
4
<PAGE>
See Notes to Financial Statements
METAL MANUFACTURING COMPANY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $ 1,000 $ 320,362 $ 172,494 $ 493,856
Repurchase and retirement of 15 shares of
common stock (150) 149 (1)
Net income for the year 78,877 78,877
--------- --------- --------- ---------
Balance, December 31, 1996 850 320,511 251,371 572,732
Net loss for the year (546,585) (546,585)
--------- --------- --------- ---------
Balance, December 31, 1997 $ 850 $ 320,511 $(295,214) $ 26,147
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See Notes to Financial Statements
5
<PAGE>
METAL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 12,388,439 $ 12,063,126
Cash paid to suppliers and employees (11,772,254) (11,770,408)
Interest received 12,021 10,725
Interest paid (326,068) (279,347)
Income taxes refunded 100,266
Income taxes paid (24,615) (7,200)
------------ ------------
Net cash provided by operating activities 277,523 117,162
------------ ------------
Cash flows from investing activities:
Loans made to affiliates (82,614) (157,433)
Loan acquisition costs (260,192)
Repayment of affiliate loans 82,000
Acquisition of property and equipment (18,696) (15,422)
------------ ------------
Net cash used in investing activities (101,310) (351,047)
------------ ------------
Cash flows from financing activities:
Repayment of prior note payable, bank (1,109,396)
Net borrowings on note payable, bank 157,045 1,240,772
Repayment of prior long-term debt (1,400,000)
Proceeds from issuance of long-term debt 1,600,000
Principal payments on long-term debt (252,760) (121,584)
------------ ------------
Net cash provided by (used in) financing activities (95,715) 209,792
------------ ------------
Net increase (decrease) in cash 80,498 (24,093)
Cash, beginning of year 27,558 51,651
------------ ------------
Cash, end of year $ 108,056 $ 27,558
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements
6
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Reconciliation of net income (loss) to net cash
provided by operating activities:
Net income (loss) $(546,585) $ 78,877
--------- ---------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for losses on accounts receivable (13,326) 6,033
Depreciation and amortization 231,473 220,736
Interest on subordinated debt 55,967 58,895
Subordinated debt forgiven (67,905)
Deferred income taxes (34,300) 22,700
(Increase) decrease in:
Accounts receivable, trade 606,428 (562,559)
Accounts receivable, other 4,051 11,516
Inventory 60,035 (20,797)
Due from affiliates (23,320) (21,630)
Prepaid expenses and other 20,250 (31,183)
Income tax refunds receivable (279,500) 115,000
Accrued interest on notes and loans receivable,
affiliate (24,987) (18,973)
Rental payments applied against notes
receivable, affiliate 193,793
Increase (decrease) in:
Accounts payable (16,196) 319,089
Accrued expenses 64,340 (13,237)
Income taxes payable (20,600) 20,600
--------- ---------
Total adjustments 824,108 38,285
--------- ---------
Net cash provided by operating activities $ 277,523 $ 117,162
--------- ---------
--------- ---------
Supplemental schedule of noncash investing and
financing activities:
Equipment purchased and obligation incurred under
capital lease $ 80,000
Buyout of former shareholder's stock and
subordinated debt for issuance of note 150,001
---------
$ 230,001
---------
---------
</TABLE>
See Notes to Financial Statements
7
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND DESCRIPTION OF OPERATIONS:
Sheet Metal Manufacturing Co., Inc. (the Company) consists of two
manufacturing and distribution divisions of roof drainage products
located in Ridgewood, New York, and Waterbury, Connecticut. The Company's
customers are building material wholesalers located throughout the United
States with most located in the northeastern United States. Credit is
granted to substantially all of these customers on an unsecured basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH BALANCES:
The Company maintains cash in a financial institution in amounts which at
times exceed the Federal government's deposit insurance.
INVENTORY:
Inventory is stated at full absorption cost, computed on the last-in,
first-out (LIFO) method.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION:
Property, plant and equipment are stated at cost. Depreciation is being
provided on the straight-line method over the estimated useful lives of
the related assets as follows:
<TABLE>
<CAPTION>
ASSET LIFE
- - ------------------------------ -------------------------
<S> <C>
Building and improvements 30 to 31-1/2 years
Machinery and equipment 10 years
Trucks and automobiles 5 years
Data processing equipment 7 years
Furniture and fixtures 7 years
</TABLE>
Included in property, plant and equipment at December 31, 1997 and 1996,
is $74,900 of equipment acquired under a capital lease. Depreciation
expense and accumulated depreciation at December 31, 1997 and 1996,
related to this equipment was $14,980 and $7,490, respectively.
INCOME TAXES:
The Company provides for deferred income taxes arising from differences
in the financial statement and tax bases of assets and liabilities which
will result in taxable or deductible amounts in the future.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS: The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
8
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
3. INVENTORY:
At December 31, 1997 and 1996, inventory consisted of the following
components:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $ 598,197 $ 697,022
Manufactured finished goods, and goods
purchased for resale 681,499 642,709
---------- ----------
$1,279,696 $1,339,731
---------- ----------
---------- ----------
</TABLE>
If inventory had been determined by the first-in, first-out (FIFO)
method, net income (loss) would have been approximately $(466,000) in
1997 and $37,000 in 1996; retained earnings would have been approximately
$(33,000) in 1997 and $433,000 in 1996; and inventory would have been
greater by approximately $381,000 in 1997 and $254,000 in 1996.
4. RELATED PARTIES:
Amounts due from affiliates represent transactions occurring in the
ordinary course of business. There is no interest associated with any of
these transactions. During the years ended December 31, 1997 and 1996,
the Company sold approximately $648,000 and $659,000, respectively, of
product to affiliates, which are related through common ownership.
Amounts classified as "notes and loans receivable" bear interest at rates
of 9-3/4% to 12% per annum, with interest payable monthly. A portion of
these amounts is due on demand; however, management does not intend to
call the notes during the next fiscal year and, accordingly, the amounts
are reflected as long-term. The remaining notes have stated maturity
dates ranging from December 1999 through August 2001. Interest income
related to the notes for the years ended December 31, 1997 and 1996, was
approximately $37,000 and $30,000, respectively.
9
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
5. NOTE PAYABLE, BANK:
In July 1996, the Company entered into a new line of credit that provides
for maximum borrowings of $2,250,000. The borrowing base is determined by
80% of eligible receivables plus 50% of eligible inventory. The line of
credit bears interest at the prime rate plus 1-1/2%, which is payable
monthly. Substantially all assets of the Company are pledged as
collateral under this agreement. Borrowings are available through July
1998 when all amounts outstanding become due in full.
The Company incurred costs of $260,192 related to the above financing.
These costs have been capitalized as a deferred charge and are being
amortized over the two-year life of the loan. Amortization expense
related to these costs was $130,092 and $54,208 for the years ended
December 31, 1997 and 1996.
In connection with this agreement, the Company has agreed to maintain,
among other provisions, certain minimums of tangible net worth, debt to
equity ratio, debt service coverage, net income and working capital. The
Company has also agreed to subordinate certain shareholder loans (see
Note 8). At December 31, 1997, the Company was not in compliance with all
of these covenants. As of November 10, 1998, the lender has agreed to
extend the maturity of the debt to December 15, 1998.
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Mortgage note payable, interest
at prime plus 1-7/8% per annum,
payable in monthly principal
installments of $5,833 plus
interest through July 1998 at
which time the balance is due. (a) $1,300,833 $1,370,834
Term note payable, interest at
prime plus 2.25% per annum;
payable in monthly principal
install-ments of $11,111 plus
interest through January 1998. (a) 11,111 144,445
Note payable to former
shareholder, interest at 10% per
annum, payable in quarterly
principal installments of $8,824
plus interest through January
1999 when outstanding amounts are
payable in full. 88,236 123,529
</TABLE>
10
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
6. LONG-TERM DEBT (CONTINUED):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Capital lease obligation, interest at 9-1/4%, payable in
monthly principal and interest install-ments of $1,670
through March 2001. (b) $ 56,089 $ 70,221
---------- ----------
1,456,269 1,709,029
Less current portion 1,362,738 252,762
---------- ----------
Long-term portion $ 93,531 $1,456,267
---------- ----------
---------- ----------
</TABLE>
(a) Terms and conditions are the same as the note payable, bank
(see Note 5.)
(b) During 1996, the Company entered into a noncancellable capitalized
lease for equipment that expires in March 2001. Future minimum
lease payments under this agreement for years ending December 31,
are as follows:
<TABLE>
<S> <C>
1998 20,040
1999 20,040
2000 20,040
2001 5,010
---------
65,130
Less amount representing interest at 9.25% 9,041
---------
Present value of future minimum lease payments $ 56,089
---------
---------
</TABLE>
Long-term debt matures during years ending December 31, as follows:
<TABLE>
<S> <C>
1998 1,362,738
1999 69,934
2000 18,631
2001 4,966
-----------
$ 1,456,269
-----------
-----------
</TABLE>
11
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
7. SUBORDINATED DEBT, SHAREHOLDERS:
The subordinated debt payable to shareholders bears interest at 6.19%
compounded annually. Payment of principal and interest is subordinated to
the note payable, bank, mortgage note payable, and term note payable.
Included in the balance at December 31, 1997 and 1996, is $862,321 and
$806,354, respectively, of accrued interest.
On January 1, 1996, a portion of the subordinated debt was repaid in
connection with the buyout of a shareholder (see Note 9).
8. SHAREHOLDER BUYOUT:
On January 1, 1996, the Company repurchased and retired the stock of a
15% shareholder. In return, the shareholder received the following
consideration:
- $1 for the stock of the Company
- $100,000 for his portion of the subordinated debt
- $50,000 for his interest in an affiliated partnership, for which
the Company has assumed the primary obligation for payment.
The retired subordinated debt at January 1, 1996, was $167,905.
Accordingly, the Company recorded income in the amount of $67,905
relating to this forgiveness of debt which is included in other income on
the financial statements for the year ended December 31, 1996.
The Company has also agreed to hire the former shareholder as a
consultant through September 2000 and has agreed to pay the following
amounts for his services:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- ---------
<S> <C>
1998 $ 30,000
1999 30,000
2000 40,000
--------
$100,000
--------
--------
</TABLE>
9. 401(K) PLAN:
The Company has a 401(k) plan available to all eligible employees who are
not covered by the union contract. Participants may make pre-tax
contributions in an amount not to exceed that allowable under applicable
provisions of the Internal Revenue Code.
12
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
10. COMMITMENTS:
The Company leases certain real estate in Waterbury, Connecticut, from a
limited partnership affiliated by common ownership. Under the terms of
the lease, the Company pays all utilities, real estate taxes, insurance
and repairs up to $5,000 per year. The lease expires in March 1999. Rent
expense, which includes amounts paid for real estate taxes, was
approximately $326,000 and $316,000 for the years ended December 31, 1997
and 1996, respectively. The Company subleases a portion of the Waterbury
property under short-term operating leases. Sublease income for 1997 and
1996 was approximately $44,000 and $49,000, respectively.
Future minimum lease payments relating to this lease for years ending
December 31, exclusive of real estate taxes are:
<TABLE>
<S> <C>
1998 $224,000
1999 56,000
--------
$280,000
--------
--------
</TABLE>
The Company has also entered into a consulting agreement with its
chairman and chief executive officer. The consulting fee under this
agreement will be $108,000 for 1998. The fee is payable monthly.
The Company has a volume rebate program for its customers. The rebates
earned by customers during the years ended December 31, 1997 and 1996,
were approximately $85,000 and $80,000, respectively. These amounts have
been included in selling expenses.
11. INCOME TAXES:
FASB Statement No. 109 "Accounting for Income Taxes", requires an asset
and liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized. No valuation allowance has been
necessary. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets
and liabilities.
13
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
11. INCOME TAXES (CONTINUED):
The tax effects of principal temporary differences are shown as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accelerated tax depreciation on fixed assets $(218,500) $(201,800)
Allowance for doubtful accounts 14,000 17,500
Inventory costs capitalized for tax purposes 8,000 7,500
State net operating loss carryforward 54,000
--------- ---------
Net deferred tax liability $(142,500) $(176,800)
--------- ---------
--------- ---------
The temporary differences are classified as follows:
Short-term deferred tax asset $ 22,000 $ 25,000
Long-term deferred tax liability (164,500) (201,800)
--------- ---------
$(142,500) $(176,800)
--------- ---------
--------- ---------
</TABLE>
The components of income tax expense (benefit) for the years ended
December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Federal:
Current $(274,385) $ 34,199
Deferred 40,000 14,000
--------- ---------
(234,385) 48,199
--------- ---------
State:
Current (1,100) 8,335
Deferred (74,300) 8,700
--------- ---------
(75,400) 17,035
--------- ---------
Income tax expense (benefit) $(309,785) $ 65,234
--------- ---------
--------- ---------
</TABLE>
14
<PAGE>
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
SHEET METAL MANUFACTURING
COMPANY, INC.
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................................1
Financial Statements:
Balance Sheets.........................................................2-3
Statements of Operations.................................................4
Statements of Shareholders' Equity.......................................5
Statements of Cash Flows...............................................6-7
Notes to Financial Statements............................................8-14
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Sheet Metal Manufacturing Company, Inc.
Ridgewood, Queens, New York
We have audited the accompanying balance sheets of Sheet Metal Manufacturing
Company, Inc. as of December 31, 1996 and 1995, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sheet Metal Manufacturing
Company, Inc. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Friedman & Fuller, P.C.
February 12, 1997
1
<PAGE>
See Notes to Financial Statements
SHEET METAL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
YEARS ENDED DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current assets:
Cash $ 27,558 $ 51,651
Accounts receivable:
Trade (net of allowance for doubtful accounts of
$47,245 in 1996 and $41,212 in 1995) 1,869,446 1,312,920
Other 4,051 15,567
Inventory 1,339,731 1,318,934
Due from affiliates 36,291 39,341
Prepaid expenses and other 106,651 75,468
Income tax refunds receivable 115,000
Deferred income tax asset 25,000 57,300
---------- ----------
Total current assets 3,408,728 2,986,181
---------- ----------
Property, plant and equipment:
Land 324,432 324,432
Building and improvements 1,510,864 1,509,339
Machinery and equipment 1,026,712 937,893
Trucks and automobiles 296,768 296,768
Computer equipment 89,965 84,887
Furniture and fixtures 37,506 37,506
---------- ----------
3,286,247 3,190,825
Less accumulated depreciation 1,690,174 1,523,646
---------- ----------
1,596,073 1,667,179
---------- ----------
Other assets:
Notes and loans receivable, affiliates 429,593 260,508
Deferred charges, net of accumulated amortization
of $54,208 205,984
---------- ----------
635,577 260,508
---------- ----------
$5,640,378 $4,913,868
---------- ----------
---------- ----------
</TABLE>
See Notes to Financial Statements
2
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
BALANCE SHEETS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current liabilities:
Note payable, bank $1,240,772 $1,109,396
Current portion of long-term debt 252,762 1,400,613
Accounts payable 807,434 488,345
Accrued expenses 77,657 90,894
Income taxes payable 20,600
---------- ----------
Total current liabilities 2,399,225 3,089,248
---------- ----------
Non-current liabilities:
Deferred income taxes 201,800 211,400
Long-term debt, net of current portion 1,456,267
Subordinated debt, shareholders 1,010,354 1,119,364
---------- ----------
2,668,421 1,330,764
---------- ----------
Shareholders' equity:
Common stock, $10 par; authorized, 100 shares;
issued and outstanding 85 shares in 1996, 850 1,000
100 shares in 1995
Paid-in capital 320,511 320,362
Retained earnings 251,371 172,494
---------- ----------
572,732 493,856
---------- ----------
$5,640,378 $4,913,868
---------- ----------
---------- ----------
</TABLE>
See Notes to Financial Statements
3
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Sales $ 12,558,456 $ 11,336,924
Cost of sales 9,774,971 9,199,073
------------ ------------
Gross profit 2,783,485 2,137,851
------------ ------------
Operating expenses:
Warehouse and distribution 1,143,488 1,043,146
Selling 449,036 295,414
General and administrative 883,553 799,843
------------ ------------
2,476,077 2,138,403
------------ ------------
Income (loss) from operations 307,408 (552)
------------ ------------
Other income (expense):
Rental income 49,488 59,666
Interest expense (338,242) (437,962)
Write-off of capitalized loan costs (63,041)
Other 125,457 25,217
------------ ------------
(163,297) (416,120)
------------ ------------
Income (loss) before income taxes 144,111 (416,672)
Income tax expense (benefit) 65,234 (167,315)
------------ ------------
Net income (loss) $ 78,877 $ (249,357)
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements
4
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 $ 1,000 $ 320,362 $ 1,500,239 $ 1,821,601
Spin-off of Castle Building Products subsidiary (1,078,388) (1,078,388)
Net loss for the year (249,357) (249,357)
----------- ----------- ----------- -----------
Balance, December 31, 1995 1,000 320,362 172,494 493,856
Repurchase and retirement of 15 shares of
common stock (150) 149 (1)
Net income for the year 78,877 78,877
----------- ----------- ----------- -----------
Balance, December 31, 1996 $ 850 $ 320,511 $ 251,371 $ 572,732
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See Notes to Financial Statements
5
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 12,087,806 $ 11,638,637
Cash paid to suppliers and employees (11,770,408) (11,069,125)
Interest received 10,725
Interest paid (279,347) (291,958)
Income taxes refunded 100,266
Income taxes paid (7,200) (332,664)
------------ ------------
Net cash provided by (used in) operating activities 141,842 (55,110)
------------ ------------
Cash flows from investing activities:
Loans made to affiliates (182,113) (178,783)
Loan acquisition costs (260,192)
Repayment of affiliate loans 82,000
Acquisition of property and equipment (15,422) (89,256)
------------ ------------
Net cash used in investing activities (375,727) (268,039)
------------ ------------
Cash flows from financing activities:
Repayment of prior note payable, bank (1,109,396)
Net borrowings on new note payable, bank 1,240,772
Repayment of prior long-term debt (1,400,000)
Proceeds from issuance of long-term debt 1,600,000
Net increase in note payable, bank 302,360
Principal payments on long-term debt (121,584) (34,909)
Net cash provided by financing activities 209,792 267,451
------------ ------------
Net decrease in cash (24,093) (55,698)
Cash, beginning of year 51,651 107,349
------------ ------------
Cash, end of year $ 27,558 $ 51,651
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements
6
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss) $ 78,877 $ (249,357)
----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for losses on accounts receivable 6,033 (11,288)
Depreciation and amortization 220,736 166,635
Write-off of capitalized loan costs 63,041
Interest on subordinated debt 58,895 146,004
Subordinated debt forgiven (67,905)
Deferred income taxes 22,700 (79,900)
(Increase) decrease in:
Accounts receivable, trade (562,559) 50,479
Accounts receivable, other 11,516 9,012
Inventory (20,797) 1,063,506
Due from subsidiary 221,897
Due from affiliates 3,050 (39,341)
Prepaid expenses and other (31,183) (15,760)
Income tax refunds receivable 115,000 (115,000)
Accrued interest on notes and loans receivable,
affiliate (18,973)
Increase (decrease) in:
Accounts payable 319,089 (841,184)
Accrued expenses (13,237) (118,775)
Income taxes payable 20,600 (305,079)
----------- -----------
Total adjustments 62,965 194,247
----------- -----------
Net cash provided by (used in) operating activities $ 141,842 $ (55,110)
----------- -----------
----------- -----------
Supplemental schedule of noncash investing and financing activities:
Spin-off of Castle Building Products subsidiary $ 1,078,388
-----------
-----------
Equipment purchased and obligation incurred under
capital lease $ 80,000
Buyout of former shareholder's stock and
subordinated debt for issuance of note 150,001
-----------
$ 230,001
-----------
-----------
</TABLE>
See Notes to Financial Statements
7
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND DESCRIPTION OF OPERATIONS:
Sheet Metal Manufacturing Co., Inc. (the Company) consists of two
manufacturing and distribution divisions of roof drainage products
located in Ridgewood, New York, and Waterbury, Connecticut. The Company's
customers are building material wholesalers located throughout the United
States with most located in the northeastern United States. Credit is
granted to substantially all of these customers on an unsecured basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH BALANCES:
The Company maintains cash in a financial institution in amounts which at
times exceed the Federal government's deposit insurance.
INVENTORY:
Inventory is stated at full absorption cost, computed on the last-in,
first-out (LIFO) method.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION: Property, plant and
equipment are stated at cost. Depreciation is being provided on the
straight-line method over the estimated useful lives of the related
assets as follows:
<TABLE>
<CAPTION>
ASSET LIFE
------------------------------- -------------------------
<S> <C>
Building and improvements 30 to 31-1/2 years
Machinery and equipment 10 years
Trucks and automobiles 5 years
Data processing equipment 7 years
Furniture and fixtures 7 years
</TABLE>
Included in property, plant and equipment at December 31, 1996, is
$80,000 of equipment acquired under a capital lease. Depreciation expense
and accumulated depreciation at December 31, 1996, related to this
equipment was $7,490.
INCOME TAXES:
The Company provides for deferred income taxes arising from differences
in the financial statement and tax bases of assets and liabilities which
will result in taxable or deductible amounts in the future.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS: The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
8
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
3. INVENTORY:
At December 31, 1996 and 1995, inventory consisted of the following
components:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $ 697,022 $ 784,503
Manufactured finished goods, and goods
purchased for resale 642,709 534,431
---------- ----------
$1,339,731 $1,318,934
---------- ----------
---------- ----------
</TABLE>
If inventory had been determined by the first-in, first-out (FIFO)
method, net income (loss) would have been approximately $37,000 in 1996
and ($121,000) in 1995; retained earnings would have been approximately
$433,000 in 1996 and $396,000 in 1995; and inventory would have been
greater by approximately $254,000 in 1996 and $331,000 in 1995.
4. RELATED PARTIES:
Amounts due from affiliates represent transactions occurring in the
ordinary course of business. There is no interest associated with any of
these transactions.
Amounts classified as "notes and loans receivable" bear interest at rates
of 9-3/4% to 12% per annum, with interest payable monthly. A portion of
these amounts is due on demand; however, management does not intend to
call the notes during the next fiscal year and, accordingly, the amounts
are reflected as long-term. The remaining notes have stated maturity
dates ranging from December 1999 through August 2001. Interest income
related to the notes for the years ended December 31, 1996 and 1995, was
approximately $30,000 and $14,000, respectively.
5. SPIN-OFF OF SUBSIDIARY:
As of January 1, 1995, the Company spun off its wholly-owned subsidiary,
Castle Building Products, Inc., (Castle) as an independent entity. The
spin-off was tax free under Internal Revenue Service guidelines. At the
time of the spin-off, the net assets of the subsidiary were $1,078,388.
This amount has been charged against retained earnings on the effective
date of the spin-off.
During the years ended December 31, 1996 and 1995, the Company sold
approximately $659,000 and $520,000, respectively, of product to Castle,
which is now related through common ownership.
9
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
6. NOTE PAYABLE, BANK:
In July 1996, the Company entered into a new line of credit that provides
for maximum borrowings of $2,250,000. The borrowing base is determined by
80% of eligible receivables plus 50% of eligible inventory. The line of
credit bears interest at the prime rate plus 1-1/2%, which is payable
monthly. Substantially all assets of the Company are pledged as
collateral under this agreement. Borrowings are available through July
1998 when all amounts outstanding become due in full.
The Company incurred costs of $260,192 related to the above financing.
These costs have been capitalized as a deferred charge and are being
amortized over the two-year life of the loan. Amortization expense
related to these costs was $54,208 for the year ended December 31, 1996.
In connection with this agreement, the Company has agreed to maintain,
among other provisions, certain minimums of tangible net worth, debt to
equity ratio, debt service coverage, net income and working capital. The
Company has also agreed to subordinate certain shareholder loans (see
Note 8). At December 31, 1996, the Company was in compliance with all of
the required covenants.
At December 31, 1995, the note payable, bank represented amounts
outstanding under a line of credit agreement which included certain
financial covenants. The Company was not in compliance with all of these
covenants as of or during the year ended December 31, 1996. In January
1996, the bank entered into a modification and forbearance agreement with
the Company. In July 1996, this note was refinanced with the new lender
as described above.
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Mortgage note payable (a) $1,400,613
Mortgage note payable, interest at prime plus 1-7/8% per annum, payable
in monthly principal installments of $5,833 plus interest through July
1998 at which time the balance
is due. (b) $1,370,834
Term note payable, interest at prime plus 2.25% per annum; payable in
monthly principal install-ments of $11,111 plus interest through August
1998. (b)
144,445
Note payable to former shareholder, interest at 10% per annum, payable in
quarterly principal installments of $8,824 plus interest through January
1999 when outstanding amounts are payable in full
123,529
</TABLE>
10
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
7. LONG-TERM DEBT (CONTINUED):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Capital lease obligation, interest at 9-1/4%, payable in
monthly principal and interest installments of $ 1,670
through March 2001. (c) 70,221
---------- ----------
1,709,029 1,400,613
Less current portion 252,762 1,400,613
---------- ----------
Long-term portion $1,456,267 $ -0-
---------- ----------
---------- ----------
</TABLE>
(a) The mortgage note payable outstanding at December 31, 1995, became
callable by the lender due to violations of certain financial
covenants, and the entire balance was classified as a current
obligation. This note was refinanced in 1996.
(b) Terms and conditions are the same as the note payable, bank (see
Note 6.)
(c) During 1996, the Company entered into a noncancellable capitalized
lease for equipment that expires in March 2001. Future minimum
lease payments under this agreement for years ending December 31,
are as follows:
<TABLE>
<S> <C>
1997 $ 20,040
1998 20,040
1999 20,040
2000 20,040
2001 5,010
-------------
85,170
Less amount representing interest at 9.25% 14,949
-------------
Present value of future minimum lease payments $ 70,221
-------------
-------------
</TABLE>
Long-term debt matures during years ending December 31, as follows:
<TABLE>
<S> <C>
1997 $ 252,762
1998 1,362,740
1999 69,931
2000 18,631
2001 4,965
----------
$1,709,029
----------
----------
</TABLE>
11
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
8. SUBORDINATED DEBT, SHAREHOLDERS:
The subordinated debt payable to shareholders bears interest at 6.19%
compounded annually for the year ended December 31, 1996. For the year
ended December 31, 1995, the interest rate was 15% per annum. This was
changed in 1996 by formal consent of the note holders. Payment of
principal and interest is subordinated to the note payable, bank,
mortgage note payable, and term note payable. Included in the balance at
December 31, 1996 and 1995, is $806,354 and $719,364, respectively, of
accrued interest.
On January 1, 1996, a portion of the subordinated debt was repaid in
connection with the buyout of a shareholder (see Note 9).
9. SHAREHOLDER BUYOUT:
On January 1, 1996, the Company repurchased and retired the stock of a
15% shareholder. In return, the shareholder received the following
consideration:
- - - $1 for the stock of the Company
- - - $100,000 for his portion of the subordinated debt
- - - $50,000 for his interest in an affiliated partnership, for
which the Company has assumed the primary obligation for payment.
The retired subordinated debt at January 1, 1996, was $167,905.
Accordingly, the Company has recorded income in the amount of $67,905
relating to this forgiveness of debt which is included in other income on
the financial statements for the year ended December 31, 1996.
The Company has also agreed to hire the former shareholder as a
consultant through September 2000 and has agreed to pay the following
amounts for his services:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------ -------
<S> <C>
1997 $ 30,000
1998 30,000
1999 30,000
2000 40,000
---------
$ 130,000
---------
---------
</TABLE>
12
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
10. COMMITMENTS:
The Company leases certain real estate in Waterbury, Connecticut, from a
limited partnership affiliated by common ownership. Under the terms of
the lease, the Company pays all utilities, real estate taxes, insurance
and repairs up to $5,000 per year. The lease expires in March 1999. Rent
expense, which includes amounts paid for real estate taxes, was
approximately $316,000 for each of the years ended December 31, 1996 and
1995. The Company subleases a portion of the Waterbury property under
short-term operating leases. Sublease income for 1996 and 1995 was
approximately $49,000 and $60,000, respectively.
Future minimum lease payments relating to this lease for years ending
December 31, exclusive of real estate taxes are:
<TABLE>
<S> <C>
1997 $210,000
1998 221,000
1999 58,000
--------
$489,000
--------
--------
</TABLE>
The Company has also entered into a consulting agreement with its
chairman and chief executive officer. The consulting fee under this
agreement will be $108,000 for each of the years 1997 and 1998. The fee
is payable monthly.
The Company has a volume rebate program for its customers. The rebates
earned by customers during the years ended December 31, 1996 and 1995,
were approximately $61,000 and $80,000, respectively. These amounts have
been included in selling expenses.
11. INCOME TAXES:
FASB Statement No. 109 "Accounting for Income Taxes", requires an asset
and liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized. No valuation allowance has been
necessary. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets
and liabilities.
13
<PAGE>
SHEET METAL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
11. INCOME TAXES (CONTINUED):
The tax effects of principal temporary differences are shown as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Accelerated tax depreciation on fixed assets $(201,800) $(211,400)
Allowance for doubtful accounts 17,500 15,100
Inventory costs capitalized for tax purposes 7,500 7,200
State net operating loss carryforward 35,000
--------- ---------
Net deferred tax liability $(176,800) $(154,100)
--------- ---------
--------- ---------
The temporary differences are classified as follows:
Short-term deferred tax asset $ 25,000 $ 57,300
Long-term deferred tax liability (201,800) (211,400)
--------- ---------
$(176,800) $(154,100)
--------- ---------
--------- ---------
</TABLE>
The components of income tax expense (benefit) for the years ended
December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Federal:
Current $ 34,199 $ (78,898)
Deferred 14,000 (42,900)
--------- ---------
48,199 (121,798)
--------- ---------
State:
Current 8,335 (8,517)
Deferred 8,700 (37,000)
--------- ---------
17,035 (45,517)
--------- ---------
Income tax expense (benefit) $ 65,234 $(167,315)
--------- ---------
--------- ---------
</TABLE>
14
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITOR
Berger Holdings, Ltd. and Subsidiaries
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-15725) and related Prospectus of Berger Holdings,
Ltd. (the "Company"), to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-30511) and related Prospectus of the Company and
to the incorporation by reference in the Registration Statement on Form S-8 (No.
333-24917) and related Prospectus of the Company, of (i) our report dated
February 6, 1998 (November 10, 1998 as to the last paragraph of Note 5) on our
audit of the balance sheets of Sheet Metal Manufacturing Co., Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
shareholders' equity and cash flows for the years then ended and (ii) our report
dated February 12, 1997 on our audit of the balance sheets of Sheet Metal
Manufacturing Co., Inc. as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity and cash flows for the years then
ended.
/s/ Friedman & Fuller, P.C.
Friedman & Fuller, P.C.
Rockville, Maryland
February 22, 1999
