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UNITED STATES
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 3, 1997
AIR-CURE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-10668 41-1667001
(STATE OF INCORPORATION) (COMMISSION FILE NO.) (IRS EMPLOYER IDENTIFICATION NO.)
2727 ALLEN PARKWAY, SUITE 760, HOUSTON, TEXAS 77019-2100
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: 713-285-2700
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The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K dated
December 5, 1996:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired.
See index on page 2.
(b) Pro forma financial information.
See index on page 2.
The following unaudited pro forma combined financial statements give effect
to the acquisition by Air-Cure Technologies, Inc. (the "Company") of Ohmstede,
Inc.("Ohmstede") on November 20, 1996, effective November 1, 1996 (the
"Acquisition"). The unaudited pro forma combined financial statements presented
were prepared utilizing the historical audited financial statements and the
unaudited interim financial statements of the Company and Ohmstede. The
unaudited pro forma combined financial statements should be read in conjunction
with the audited historical financial statements and notes thereto of Ohmstede
included elsewhere herein, the Company's audited consolidated financial
statements and notes thereto included in the Company's Annual Report filed on
Form 10-K with the Securities and Exchange Commission on March 27, 1996 and the
Company's unaudited consolidated financial statements and notes thereto included
in the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996. The Company will account for the Acquisition using the purchase method
of accounting. The allocation of the purchase price to the assets acquired and
liabilities assumed is based on estimates of fair market values. The unaudited
pro forma combined balance sheet assumes the Acquisition occurred on September
30, 1996. The unaudited pro forma combined income statements for the year ended
December 31, 1995 and the nine months ended September 30, 1996 assume the
Acquisition occurred at the beginning of each period. The pro forma combined
financial statements may not be indicative of the Company's financial position
or results of operations that would have occurred had the Acquisition been
completed as of or at the beginning of the periods presented, nor do such
statements purport to indicate the Company's financial condition or results of
operations at any future date or for any future period.
No expected benefits and cost reductions anticipated by the Company,
corporate allocations, additional costs from association with a public company
or additional revenues related to selling Ohmstede products through the
Company's international marketing network have been reflected in these unaudited
pro forma combined financial statements.
1
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
I. AIR-CURE TECHNOLOGIES, INC. -- UNAUDITED PRO FORMA COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Financial Statements
Headnote.............................................. 2
Unaudited Pro Forma Combined Balance Sheet as of
September 30, 1996.................................... 3
Notes to Unaudited Pro Forma Combined Balance Sheet.... 4
Unaudited Pro Forma Combined Income Statements for the
year ended December 31, 1995 and the nine months ended
September 30, 1996.................................... 5
Notes to Unaudited Pro Forma Combined Income
Statements............................................ 7
II. OHMSTEDE, INC. -- DECEMBER 31, 1996
Report of Independent Public Accountants............... 8
Balance Sheet as of December 31, 1996.................. 9
Statement of Operations for the two months ended
December 31, 1996..................................... 10
Statement of Changes in Equity and Advances From Parent
for the two months ended December 31, 1996............ 11
Statement of Cash Flows for the two months ended
December 31, 1996..................................... 12
Notes to Financial Statements.......................... 13
III. OHMSTEDE, INC. -- OCTOBER 31, 1996
Report of Independent Public Accountants............... 19
Statement of Assets Acquired and Liabilities Assumed by
Air-Cure Technologies, Inc. as of October 31, 1996.... 20
Statement of Operations for the seven months ended
October 31, 1996...................................... 21
Statement of Changes in Net Assets for the seven months
ended October 31, 1996................................ 22
Statement of Cash Flows for the seven months ended
October 31, 1996...................................... 23
Notes to Financial Statements.......................... 24
IV. OHMSTEDE, INC. -- MARCH 31, 1996
Report of Independent Certified Public Accountants..... 28
Statements of Assets Acquired and Liabilities Assumed
by Air-Cure Technologies, Inc. as of March 31, 1996... 29
Statement of Operations for the year ended March 31,
1996.................................................. 30
Statement of Changes in Net Assets for the year ended
March 31, 1996........................................ 31
Statement of Cash Flows for the year ended March 31,
1996.................................................. 32
Notes to Financial Statements.......................... 33
V. OHMSTEDE, INC. -- MARCH 31, 1995
Independent Auditors' Report........................... 36
Statement of Assets and Liabilities as of March 31,
1995.................................................. 37
Statement of Revenues and Expenses for the year ended
March 31, 1995........................................ 38
Statement of Cash Flows for the year ended March 31,
1995.................................................. 39
Notes to Financial Statements.......................... 40
</TABLE>
2
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AIR-CURE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ACQUISITION
COMPANY OHMSTEDE ADJUSTMENTS PRO FORMA
------- -------- ----------- ---------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................. $2,219 $ 15 $ 52,000(a) $ 2,234
(52,000)(a)
Restricted cash........................... 143 -- -- 143
Due on contracts and other receivables.... 16,229 19,701 -- 35,930
Accounts receivable C & D Robotics........ -- 1,212 -- 1,212
Costs and estimated earnings in excess of
billings on uncompleted contracts....... 23,768 -- -- 23,768
Inventories............................... 3,778 9,236 -- 13,014
Refundable income taxes................... 342 34 -- 376
Prepaid expenses, deposits and other
assets.................................. 986 48 535(b) 1,569
Deferred tax asset........................ 465 -- 1,067(c) 1,532
------- ------- -------- --------
Total Current Assets............ 47,930 30,246 1,602 79,778
------- ------- -------- --------
PROPERTY AND EQUIPMENT, NET............... 5,123 8,198 --(d) 13,321
------- ------- -------- --------
OTHER ASSETS:
Licenses, trademarks and tradenames,
net..................................... 4,250 8 7,500(e) 11,758
Excess costs over net assets acquired,
net..................................... 11,840 -- 22,051(f) 33,891
Other assets.............................. 255 19 2,467(b) 2,741
------- ------- -------- --------
Total Other Assets.............. 16,345 27 32,018 48,390
------- ------- -------- --------
TOTAL ASSETS.............................. $69,398 $38,471 $ 33,620 $141,489
======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................... $8,015 $ 6,238 $ 4,132(g) $ 18,385
Accrued liabilities....................... 16,275 3,763 1,414(h) 21,452
Billings in excess of costs and estimated
earnings on uncompleted contracts....... 1,462 -- -- 1,462
Progress billings......................... -- 1,025 -- 1,025
Current maturities of long-term
obligations............................. 3,332 3,725 (1,057)(i) 6,000
------- ------- -------- --------
Total Current Liabilities....... 29,084 14,751 4,489 48,324
LONG-TERM LIABILITIES:
Borrowings under line of credit........... 13,500 -- 13,226(j) 26,726
Long-term obligations, less current
maturities.............................. 4,169 -- 24,831(j) 29,000
Subordinated debt......................... -- -- 15,000(k) 15,000
Less: subordinated debt original
issue discount..................... -- -- (2,288)(l) (2,288)
Deferred tax liability.................... 257 -- -- 257
------- ------- -------- --------
Total Liabilities............... 47,010 14,751 55,258 117,019
------- ------- -------- --------
STOCKHOLDERS' EQUITY:
Preferred stock........................... -- --
Common stock.............................. 11 11
Additional paid-in capital................ 20,994 2,082(m) 23,076
Retained earnings......................... 1,136 1,136
Translation adjustment.................... 247 247
------- --------
Total Stockholders' Equity...... 22,388 23,720 (23,720)(n) 24,470
------- ------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. $69,398 $38,471 $ 33,620 $141,489
======= ======= ======== ========
</TABLE>
See Notes To Financial Statements on the following pages
3
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AIR-CURE TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
a) Reflects cash received from Company's lenders (see notes i, j, and k)
and cash paid to previous owners of Ohmstede.
b) Reflects deferred debt issuance costs which will be amortized over the
term of the related debt.
c) Represents deferred tax assets recognized for differences between the
book and tax basis of assets and liabilities acquired.
d) The fair value of property and equipment was estimated to approximate
Ohmstede's historical net book value and accordingly no adjustment was recorded.
e) Intangible assets recorded in purchase price allocation are as follows:
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
ASSET VALUE USEFUL LIVES
----- --------- ------------
(000'S) (YEARS)
<S> <C> <C>
Brand Name.................................................. $5,000 40
Customer Base............................................... 1,000 15
Customer Alliance Arrangements.............................. 500 10
Non-Compete Contracts....................................... 500 5
Key Officers................................................ 500 5
------
$7,500
======
</TABLE>
f) Represents the excess of costs paid over the net assets acquired which
will be amortized over 40 years. Ohmstede has been in business over 90 years and
has been making and maintaining heat exchangers for over 40 years. Management
believes the goodwill from the Ohmstede acquisition has an indefinite life but
has used the 40 year amortization period permitted by generally accepted
accounting principles.
g) Reflects Acquisition fees and deferred debt issuance costs.
h) Represents liabilities for non-compete payments and additional
liabilities incurred at the time of the Acquisition.
i) Represents a reclassification of a portion of consolidated current
maturities of long-term obligations to long-term obligations in order to reflect
the current maturities required under the Company's loan agreement as a
consequence of the Acquisition.
j) Additional borrowings from Company's senior lenders required to finance
the Acquisition including portion of current maturities referred to in note (i)
above.
k) Represents seven-year mezzanine financing from subordinated lenders used
to finance a portion of the Acquisition not financed by the Company's senior
lenders.
l) The Company issued 1,760,000 detachable warrants at an exercise price of
$5.10 per share to its subordinated lenders. The Company's investment bankers
valued the warrants at $1.30 per share or $2,288,000, which has been reflected
as a discount to the $15 million in subordinated debt and will be amortized as
interest expense over the seven year life of the subordinated notes.
m) Represents the detachable warrants (referred to in note (l) above), net
of expenses related to their issuance.
n) Reflects the elimination of the historical stockholders' equity of
Ohmstede since the acquisition has been accounted for using the purchase method
of accounting.
4
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AIR-CURE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 1995.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- ACQUISITION
COMPANY OHMSTEDE ADJUSTMENTS PRO FORMA
-------- -------- ----------- ---------
(AUDITED) (AUDITED)
<S> <C> <C> <C> <C>
Revenues..................................... $117,254 $88,937 -- $206,191
Cost of revenues............................. 95,514 72,495 -- 168,009
-------- ------- ------- --------
Gross profit............................ 21,740 16,442 -- 38,182
Selling, general and administrative
expenses................................... 11,475 10,280 $ (606)(a) 21,149
Sales commissions............................ 2,647 184 -- 2,831
Depreciation and amortization................ 1,399 145 993 (b) 2,537
Merger costs................................. 1,335 -- -- 1,335
-------- ------- ------- --------
Operating profit (loss)................. 4,884 5,833 (387) 10,330
-------- ------- ------- --------
Other income (expense):
Interest expense, net...................... (1,502) (186) (5,841)(c) (7,529)
Miscellaneous, net......................... 326 535 -- 861
-------- ------- ------- --------
Total other income (expense)....... (1,176) 349 (5,841) (6,668)
-------- ------- ------- --------
Earnings (loss) before taxes................. 3,708 6,182 (6,228) 3,662
Income tax provision (benefit)............... 1,340 210 (194)(d) 1,356
-------- ------- ------- --------
Net earnings (loss)................ $ 2,368 $ 5,972 $(6,034) $ 2,306
======== ======= ======= ========
Net earnings per common share.............. $ 0.21 $ 0.20
======== ========
Weighted average number of common and
common equivalent shares outstanding.... 11,552 11,552
======== ========
</TABLE>
See Notes To Financial Statements on the following pages
5
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AIR-CURE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------- ACQUISITION
COMPANY OHMSTEDE ADJUSTMENTS PRO FORMA
------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues........................................ $72,185 $75,915 -- $148,100
Cost of revenues................................ 57,389 58,523 -- 115,912(e)
------- ------- ------- --------
Gross profit............................... 14,796 17,392 -- 32,188
Selling, general and administrative expenses.... 7,648 8,357 $ (487)(a) 15,518
Sales commissions............................... 2,222 325 -- 2,547
Depreciation and amortization................... 812 118 745 (b) 1,675
Restructuring costs............................. 3,500 -- -- 3,500(e)
------- ------- ------- --------
Operating profit (loss).................... 614 8,592 (258) 8,948
------- ------- ------- --------
Other income (expense):
Interest expense, net......................... (1,299) (269) (4,600)(c) (6,168)
Miscellaneous, net............................ 40 226 -- 266
------- ------- ------- --------
Total other expense................... (1,259) (43) (4,600) (5,902)
------- ------- ------- --------
Earnings (loss) before taxes.................... (645) 8,549 (4,858) 3,046
Income tax provision (benefit).................. (225) 419 933 (d) 1,127
------- ------- ------- --------
Net earnings (loss)........................ $ (420) $ 8,130 $(5,791) $ 1,919
======= ======= ======= ========
Net earnings (loss) per common share............ $ (0.04) $ 0.17
======= ========
Weighted average number of common and common
equivalent shares outstanding................. 11,466 11,568
======= ========
</TABLE>
See Notes To Financial Statements on the following page
6
<PAGE> 8
AIR-CURE TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS
a) Represents estimated savings attributable to salaries, bonuses and
benefits of three members of the Ohmstede family whose positions have been
eliminated. No anticipated cost reductions, corporate allocations from Air-Cure
Technologies, Inc., or additional costs related to association with a public
company have been included in this adjustment.
b) Reflects the additional amortization related to the intangible assets
and the excess of costs over the net assets acquired.
c) Reflects the increase in interest expense related to the additional debt
borrowed for the Acquisition and the amortization of both the debt financing
costs and the subordinated debt discount.
d) Reflects pro forma income tax expense (benefit) based on the expected
effective tax rate of the Company (37%) related to the net pro forma adjustments
and conversion of Ohmstede's federal income tax status from an S-Corp to a
C-Corp.
e) A restructuring charge totaling $4,200,000 was taken during the three
months ended March 31, 1996. The charge includes the estimated future cost of
the employment agreement with the former president and chief executive officer
who was replaced in March 1996, and the anticipated cost to implement
management's plan to reduce the Company's overall cost structure including
employee severance, lease and other contract buyouts, inventory and other asset
impairments, excess machinery disposal, and other costs. These charges are
reflected as restructuring costs of $3,500,000 and a reserve of $700,000 which
has been included in cost of revenues.
If the Company had not incurred these charges the pro forma after tax net
earnings and net earnings per share for the nine months ended September 30, 1996
would have been $4,565,000 and $0.39, respectively.
7
<PAGE> 9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Ohmstede, Inc.:
We have audited the accompanying balance sheet of Ohmstede, Inc. a
wholly-owned subsidiary of Air-Cure Technologies, Inc. (Air-Cure) as of December
31, 1996, and the related statements of operations, changes in equity and
advances from parent and cash flows for the two months then ended. These
financial statements are the responsibility of Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ohmstede, Inc. as of
December 31, 1996, and the results of its operations and cash flows for the two
months then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
January 30, 1997
8
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OHMSTEDE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AIR-CURE TECHNOLOGIES, INC.)
BALANCE SHEET
DECEMBER 31, 1996
ASSETS:
<TABLE>
<S> <C>
Current assets --
Cash...................................................... $ 806,717
Accounts receivable, net of reserve of $323,370........... 21,075,016
Inventory................................................. 7,568,941
Prepaid expenses.......................................... 73,855
-----------
Total current assets.............................. 29,524,529
-----------
Property and equipment, at cost --
Land...................................................... 698,837
Transportation equipment.................................. 384,827
Furniture and fixtures.................................... 325,273
Machinery and equipment................................... 3,042,240
Buildings and improvements................................ 4,381,896
-----------
8,833,073
Less -- Accumulated depreciation.......................... (93,984)
-----------
Property and equipment, net........................ 8,739,089
-----------
Other Assets --
Excess costs over net assets acquired, net................ 21,563,898
Licenses, trademarks, and tradenames, net................. 7,426,388
Debt issuance costs, net.................................. 2,957,014
-----------
Total other assets................................ 31,947,300
-----------
Total assets...................................... $70,210,918
===========
LIABILITIES:
Current liabilities --
Current maturities of Long-term obligations............... $ 4,740,000
Accounts payable.......................................... 6,480,421
Progress billings......................................... 4,760,005
Accrued liabilities....................................... 5,568,038
-----------
Total current liabilities......................... 21,548,464
Long-term obligations, less current maturities.............. 41,810,000
-----------
Total liabilities................................. 63,358,464
-----------
Commitments and Contingencies
Equity and Advances From Parent............................. 6,852,454
-----------
Total liabilities and equity and advances from
parent............................................ $70,210,918
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 11
OHMSTEDE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AIR-CURE TECHNOLOGIES, INC.)
STATEMENT OF OPERATIONS
FOR THE TWO MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
NET SALES AND SERVICES...................................... $17,038,682
COST OF SALES AND SERVICES.................................. 13,480,629
-----------
Gross profit...................................... 3,558,053
OPERATING EXPENSES:
Selling, general and administrative....................... 1,686,455
Depreciation.............................................. 12,406
-----------
1,698,861
-----------
Income from operations............................ 1,859,192
OTHER INCOME (EXPENSE):
Rental income............................................. 29,124
Interest expense.......................................... (890,722)
Miscellaneous............................................. 6,190
-----------
(855,408)
-----------
Income before income taxes........................ 1,003,784
INCOME TAX PROVISION........................................ 371,642
-----------
NET INCOME.................................................. $ 632,142
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 12
OHMSTEDE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AIR-CURE TECHNOLOGIES, INC.)
STATEMENT OF CHANGES IN EQUITY AND ADVANCES FROM PARENT
FOR THE TWO MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Advance related to debt issuance costs...................... $3,001,782
Issuance of detachable warrants in conjunction with
subordinated debt......................................... 2,288,000
Distribution related to income taxes........................ (695,358)
Advance related to acquisition costs........................ 923,899
Advance related to expenses allocated from parent........... 701,989
Net income.................................................. 632,142
----------
BALANCE, December 31, 1996.................................. $6,852,454
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
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OHMSTEDE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AIR-CURE TECHNOLOGIES, INC.)
STATEMENT OF CASH FLOWS
FOR THE TWO MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 632,142
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 263,984
Non-cash interest...................................... 207,178
Cash provided by (used in) --
Accounts receivable, net............................. (2,908,350)
Inventory............................................ 2,316,508
Prepaid expenses..................................... 2,757
Accounts payable..................................... 993,477
Progress billings.................................... 3,751,328
Accrued liabilities.................................. (653,664)
-----------
Net cash provided by operating activities......... 4,605,360
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (380,338)
-----------
Net cash used in investing activities............. (380,338)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on line of credit............................ (4,725,000)
Increase in advances from parent.......................... 1,168,631
-----------
Net cash used in financing activities............. (3,556,369)
-----------
NET INCREASE IN CASH........................................ 668,653
CASH, November 1, 1996...................................... 138,064
-----------
CASH, December 31, 1996..................................... $ 806,717
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 118,666
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 14
OHMSTEDE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AIR-CURE TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND ACQUISITION:
Ohmstede, Inc. (Ohmstede or the Company), is a Texas corporation
specializing in the manufacture and maintenance of shell and tube heat
exchangers. The Company is headquartered in Beaumont, Texas, and has plants
located in Beaumont, Texas; LaPorte, Texas; St. Gabriel, Louisiana; Sulphur,
Louisiana; and Corpus Christi, Texas. The majority of the Company's customers
are within the United States and are concentrated within refineries in close
proximity to the Company's plants.
On November 20, 1996 (effective November 1, 1996), Air-Cure Technologies,
Inc. (Air-Cure) purchased all the outstanding stock (excluding certain assets
and liabilities) of Ohmstede for approximately $52 million in cash (the
Acquisition). Assets not purchased included the majority of receivables due from
and a 99 percent equity investment in C&D Robotics (C&D), a partnership formerly
consolidated by the Company; a federal tax deposit made by the owners; and the
cash surrender value of life insurance policies for certain owners.
Additionally, the former owners received approximately $600,000 in dividends
just prior to the transaction, as set forth in the agreement with Air-Cure. As
the Company continues to rent operating space to C&D, rental fees charged to C&D
are included in the financial statements.
The Company has approximately 600 employees, approximately 100 of whom are
represented by collective bargaining agreements. The Oil, Chemical and Atomic
Workers International, AFL-CIO Local Union 4-367 represents employees at the
LaPorte plant (30 employees); the International Brotherhood of Boilermakers,
Iron Workers, Shipbuilders and Blacksmiths, AFL-CIO Local Unions No. 79 and No.
582 represent employees at the Lake Charles plant (25 employees) and St. Gabriel
plant (45 employees), respectively.
2. THE ACQUISITION:
Air-Cure paid $52 million for Ohmstede's stock and $923,899 for related
acquisition costs. The Acquisition has been accounted for using the purchase
method of accounting, and, accordingly, the purchase price has been allocated to
the assets purchased and the liabilities assumed based upon the estimated fair
values at the date of the Acquisition, as follows:
<TABLE>
<S> <C>
Working capital............................................. $15,053,468
Property and equipment...................................... 8,452,735
Intangibles................................................. 7,500,000
Excess costs over net assets acquired....................... 21,660,286
Imputed interest expense.................................... 257,410
-----------
Total purchase price.............................. $52,923,899
===========
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Financial Reporting
These financial statements have been prepared to present the financial
position and results of operations of Ohmstede as a wholly-owned subsidiary of
Air-Cure in conformity with generally accepted accounting principles. All
significant intercompany transactions have been eliminated.
The purchase price allocation of the Acquisition has been reflected in
these financial statements as of November 1, 1996. Additionally, as applicable,
certain amounts have been pushed down from Air-Cure including, but not limited
to $52 million of debt and associated interest, fees related to the Acquisition
and costs incurred for the issuance of the aforementioned debt.
13
<PAGE> 15
OHMSTEDE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AIR-CURE TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company's products are generally configured to customer specifications.
Revenue is recognized when a project is complete and available for shipment.
Projects are generally two to three months in duration.
Inventory
Raw materials are stated at the lower of cost or market as determined by
the first-in, first-out (FIFO) method. Work in process includes materials, labor
and overhead cost allocations.
Property and Equipment
Property and equipment are recorded at cost, including costs to ready
assets for use. The fair market values of fixed assets purchased in the
Acquisition were estimated to approximate the sellers' net book value and were
used in allocating the purchase price. Improvements or betterments of a
permanent nature are capitalized. Expenditures for maintenance and repair costs
are charged to operations as incurred. The cost of assets retired or otherwise
disposed of and the related accumulated depreciation are eliminated from the
accounts in the year of disposal. Losses resulting from property disposals are
included in other expense.
Depreciation is computed using the straight-line method over the following
recovery periods:
<TABLE>
<S> <C>
Transportation equipment.................................... 3 years
Furniture and fixtures...................................... 3-15 years
Machinery and equipment..................................... 7-15 years
Buildings and improvements.................................. 7-39 years
</TABLE>
Under the provisions of Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews certain long-lived assets for
impairment whenever events indicate that the carrying amount of an asset may not
be recoverable and recognizes an impairment loss under certain circumstances in
the amount by which the carrying value exceeds the fair value of the asset. The
Company's adoption of SFAS No. 121, had no material effect on the Company's
results of operations or financial position.
14
<PAGE> 16
OHMSTEDE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AIR-CURE TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Other Assets
Other assets consist of the following as of December 31, 1996:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL ORIGINAL ACCUMULATED
DESCRIPTION LIVES (YEARS) AMOUNT AMORTIZATION NET
----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Excess costs over net assets acquired......... 40 $21,660,286 $96,388 $21,563,898
=========== ======= ===========
Licenses, trademarks and tradenames --
Customer Base............................... 15 $ 1,000,000
Brand Name.................................. 40 5,000,000
Alliance Arrangements....................... 10 500,000
Non-Compete Agreements...................... 5 500,000
Key Officers................................ 5 500,000
-----------
$ 7,500,000 $73,612 $ 7,426,388
=========== ======= ===========
Debt issuance costs --
Bank Facilities............................. 5 $ 1,881,112
Subordinated Notes.......................... 7 1,120,670
-----------
$ 3,001,782 $44,768 $ 2,957,014
=========== ======= ===========
</TABLE>
The costs related to the issuance of debt are capitalized and amortized to
interest expense over the lives of the related debt.
Progress Billings
Progress billings represents amounts billed prior to contract completion in
accordance with contract provisions. These amounts will be recognized as revenue
upon completion of the contract, at which time the cost of the contract is also
recognized.
Federal Income Taxes
The Company is included in the consolidated income tax return of Air-Cure.
Accordingly, all income taxes payable or receivable (both current and deferred)
have been included in advances from parent in the accompanying balance sheet.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires deferred taxes to be
provided based on temporary differences between the book and tax basis of assets
and liabilities using presently enacted tax rates. The primary temporary
differences relate to non-deductible reserves and accruals.
Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
15
<PAGE> 17
OHMSTEDE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AIR-CURE TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Values
The carrying amounts of cash, accounts receivable, accounts payable and
accrued liabilities are reasonable estimates of their fair values due to the
short maturities of these instruments. The fair value of long-term obligations
is estimated based on Air-Cure's current financing agreement and approximates
carrying value.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company maintains its cash with various financial institutions.
Accounts receivable at any given time are concentrated in a relatively small
number of primarily domestic customers that operate in the petroleum industry.
To mitigate this risk, the Company requires customers to make advance payments.
At December 31, 1996, the Company had approximately $1,641,000 in such advance
payments which are included in progress billings. An allowance for doubtful
accounts has been provided for estimated losses.
For the two months ended December 31, 1996, the Company purchased
approximately 20 percent of its component parts from one vendor. The Company
believes other viable suppliers are available to supply these component parts.
4. INVENTORY:
Inventories consist of the following:
<TABLE>
<S> <C>
Raw materials............................................... $ 445,112
Work in process............................................. 7,123,829
----------
Total............................................. $7,568,941
==========
</TABLE>
Contracts are performed to customer specifications and shipped upon
completion; consequently, there are no finished goods inventories.
5. LONG-TERM OBLIGATIONS:
Long-term obligations at December 31, 1996 include the following:
<TABLE>
<S> <C>
Secured term loan note (term loan), maturing October 31,
2001, due in quarterly installments of $1,185,000
commencing January 31, 1997 and increasing to $1,431,875
after the first four payments, with interest (December 31,
1996 -- 8.5%) fluctuating with the Offshore Rate defined
below..................................................... $27,499,000
Secured note maturing November 18, 2001, under a revolving
credit facility (revolver) totaling $38,000,000 with
interest (December 31, 1996 -- 8.9%) fluctuating with the
Offshore Rate and Base Rate............................... 6,339,000
Unsecured senior subordinated notes maturing November 18,
2003, at 12%.............................................. 15,000,000
Less debt discount related to issuance of detachable
warrants in conjunction with senior subordinated notes.... (2,288,000)
-----------
46,550,000
Less current maturities..................................... 4,740,000
-----------
Long-term obligations, net of current maturities............ $41,810,000
===========
</TABLE>
16
<PAGE> 18
OHMSTEDE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AIR-CURE TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of long-term obligations are as follows:
<TABLE>
<S> <C>
1997.................................................... $ 4,740,000
1998.................................................... 5,727,500
1999.................................................... 5,727,500
2000.................................................... 5,727,500
2001.................................................... 11,915,500
Thereafter.............................................. 12,712,000
-----------
$46,550,000
===========
</TABLE>
The total debt facilities and the related total outstanding balances
described below are larger than the portion allocated to Ohmstede, which was
allocated to the Company based on debt incurred in the Acquisition less payments
made by the Company to Air-Cure during the two month period ended December 31,
1996. No payments on the term loan or the subordinated notes were due or made
during the two month period ended December 31, 1996.
On November 18, 1996, Air-Cure revised its financing agreement to, among
other things, increase its credit capacity with participating financial
institutions ("Lenders"), including Bank of America National Trust and Savings
Association ("BoA"), as agent for the Lenders. The financing consists of a $35
million term loan and a $38 million revolving line of credit facility. The term
loan currently bears interest at the BoA Offshore Rate ("Offshore Rate"), as
defined by BoA, plus a floating spread and the line of credit bears interest
both at the Offshore Rate and the Base Rate ("Base Rate"), as defined by BoA,
plus floating spreads. The spread can range from 2% to 3% above the Offshore
Rate and from 0.25% to 1.25% above the Base Rate. The spread floats up or down
based on the Company's performance as determined by a leverage ratio.
Substantially all of the assets of Air-Cure (including the Company) serve as
collateral.
In addition to the bank financing, on November 18, 1996, the Company
entered into two Senior Subordinated Notes (subordinated notes) with
International Mezzanine Capital, B.V. and First Commerce Capital, (collectively,
the Investors), for $13 million and $2 million, respectively. The subordinated
notes, which mature November 18, 2003, bear interest at 12% through December 31,
1997 and increase by 0.5% per year for each year they remain unpaid. As further
consideration, the Investors received warrants to purchase an aggregate of
1,760,000 shares of Air-Cure's common stock at $5.10 per share. The warrants may
be exercised at any time or from time to time until they expire on November 18,
2003. Air-Cure's investment bankers valued the warrants at approximately
$2,288,000 which was reflected as equity and as a debt discount and will be
amortized as additional interest expense over the seven year life of the
subordinated notes.
The long-term obligations require Air-Cure to maintain certain levels of
working capital and stockholders' equity and contain other provisions some of
which restrict expenditures for the purchase of Air-Cure's stock, for capital
expenditures and for payment of dividends. Such agreements also limit the
creation, incurrence or assumption of indebtedness, as defined by the
agreements, and the acquisition of investments. At December 31, 1996, the
Company was in compliance with the provisions of its loan agreements.
6. COMMITMENTS AND CONTINGENCIES:
Letter of Credit
At December 31, 1996, the Company had outstanding a letter of credit
totaling $200,000. This letter of credit was established to support workers'
compensation and expires April 17, 1997. The worker's compensation plan will be
continued by Air-Cure.
17
<PAGE> 19
OHMSTEDE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF AIR-CURE TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Employee Benefit Plan
The Ohmstede, Inc. Profit Sharing Plus Plan (the Plan) is a combination
defined contribution and 401(k) plan. The Plan covers substantially all
employees not covered by collective bargaining agreements who have accumulated
one year of service prior to the semiannual enrollment dates. Employees may
elect to contribute a percentage of their wages subject to certain limitations.
Employer contributions to the Plan are at the discretion of the board of
directors and, if made, consist of a match of $.25 on each employee-contributed
dollar up to 6 percent of salary, a $250 enrollment bonus per employee and a
discretionary portion. Company contributions vest over seven years. Management
has made provision for contributions to the Plan in the amount of approximately
$36,000 for the two months ended December 31, 1996.
The Plan will either be continued by Air-Cure or dissolved and absorbed
into Air-Cure's plan.
Environmental
The Company's past and present operations include activities which are
subject to Federal and State environmental regulations. In connection with the
sale of the Company, an environmental review of the Company's facilities was
conducted. An accrual of $200,000 exists as of December 31, 1996 for future
costs associated with remediation activities, if any are required.
Claims and Lawsuits
The Company is subject to claims and lawsuits arising in the normal course
of business. In the opinion of management, any losses resulting from the
ultimate resolution of these matters will not be material to the Company's
financial position and results of operations.
7. RELATED-PARTY TRANSACTIONS:
In accordance with the terms of the agreement discussed in Note 1, the
Company recognized a receivable due from C&D at October 31, 1996. The receivable
was paid to the Company by C&D during the two month period ended December 31,
1996.
The Company performed several administrative functions on behalf of C&D
without reimbursement. Substantially all of C&D's cash receipts and cash
disbursements were administered by the Company and recorded as intercompany
transactions between C&D and the Company. These activities are in the process of
being discontinued.
The operations of C&D are located in the Company's Beaumont facility.
Ohmstede, Inc. has entered into a 36-month lease agreement with C&D effective
November 1996 and terminating in November 1999 which entitles the Company to
receive rental income of $14,560 a month, which management believes represents
estimated fair market rent.
18
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Ohmstede, Inc.:
We have audited the accompanying statement of assets acquired and
liabilities assumed by Air-Cure Technologies, Inc. (Air-Cure) of Ohmstede, Inc.
(the Company), a Texas corporation, as of October 31, 1996, and the related
statements of operations, changes in net assets and cash flows for the
seven-month period then ended. These financial statements are the responsibility
of Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 1, the accompanying financial statements have been
prepared pursuant to the November 20, 1996 purchase agreement between Ohmstede,
Inc. and Air-Cure, and are not intended to be a complete presentation of the
Company's assets, liabilities, operating results or cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets acquired and liabilities assumed by
Air-Cure of the Company as of October 31, 1996, and the results of its
operations and its cash flows for the seven months then ended, pursuant to the
purchase agreement referred to in Note 1 and in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 13, 1996
19
<PAGE> 21
OHMSTEDE, INC.
STATEMENT OF ASSETS ACQUIRED AND LIABILITIES
ASSUMED BY AIR-CURE TECHNOLOGIES, INC.
OCTOBER 31, 1996
(NOTE 1)
ASSETS
<TABLE>
<S> <C>
Current assets --
Cash...................................................... $ 138,064
Accounts receivable, net of reserves of $313,370.......... 17,092,405
Related-party receivable.................................. 1,065,516
Note receivable........................................... 8,745
Inventories............................................... 9,885,449
Prepaid expenses.......................................... 49,693
------------
Total current assets.............................. 28,239,872
------------
Property and equipment, at cost --
Land...................................................... 698,837
Transportation equipment.................................. 1,119,032
Furniture and fixtures.................................... 2,067,217
Machinery and equipment................................... 15,763,168
Buildings and improvements................................ 10,128,327
------------
29,776,581
Less -- Accumulated depreciation.......................... (22,574,502)
------------
7,202,079
Construction in progress.................................. 1,250,656
------------
Property and equipment, net....................... 8,452,735
Other assets................................................ 26,918
------------
Total assets...................................... $ 36,719,525
============
LIABILITIES
Current liabilities --
Note payable assumed and subsequently repaid by
Air-Cure............................................... $ 1,925,000
Accounts payable.......................................... 5,837,233
Progress billings......................................... 1,008,677
Accrued liabilities....................................... 3,934,833
------------
Total current liabilities......................... 12,705,743
Commitments and contingencies
------------
Total liabilities................................. 12,705,743
------------
Net Assets.................................................. 24,013,782
------------
Total Net Assets and Liabilities............................ $ 36,719,525
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 22
OHMSTEDE, INC.
STATEMENT OF OPERATIONS
FOR THE SEVEN MONTHS ENDED OCTOBER 31, 1996
(NOTE 1)
<TABLE>
<S> <C>
NET SALES AND SERVICES...................................... $55,174,413
COST OF SALES AND SERVICES.................................. 43,295,904
-----------
Gross profit...................................... 11,878,509
OPERATING EXPENSES:
Selling, general and administrative....................... 6,557,473
Depreciation.............................................. 94,151
-----------
6,651,624
-----------
Income from operations............................ 5,226,885
OTHER INCOME (EXPENSE):
Rental income............................................. 155,438
Interest expense.......................................... (90,701)
Miscellaneous............................................. 4,293
-----------
69,030
-----------
Income before taxes............................... 5,295,915
STATE TAXES................................................. 362,673
-----------
REVENUES IN EXCESS OF EXPENSES.............................. $ 4,933,242
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 23
OHMSTEDE, INC.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SEVEN MONTHS ENDED OCTOBER 31, 1996
(NOTE 1)
<TABLE>
<S> <C>
BALANCE, March 31, 1996..................................... $22,432,656
REVENUES IN EXCESS OF EXPENSES.............................. 4,933,242
STOCKHOLDER DISTRIBUTIONS................................... (3,352,116)
-----------
BALANCE, October 31, 1996................................... $24,013,782
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 24
OHMSTEDE, INC.
STATEMENT OF CASH FLOWS
FOR THE SEVEN MONTHS ENDED OCTOBER 31, 1996
(NOTE 1)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Revenues in excess of expenses............................ $ 4,933,242
Adjustments to reconcile revenues in excess of expenses to
net cash provided by operating activities --
Depreciation........................................... 704,505
Loss on retirement of assets........................... 44,429
Cash provided by (used in) --
Accounts and notes receivable, net................... 946,479
Related-party receivable............................. (1,065,516)
Inventory............................................ 1,985,329
Prepaid expenses..................................... (45,453)
Other assets......................................... (3,999)
Accounts payable..................................... 1,043,287
Progress billings.................................... (2,956,501)
Accrued liabilities.................................. 240,533
------------
Net cash provided by operating activities......... 5,826,335
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,918,898)
------------
Net cash used in investing activities............. (1,918,898)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on line of credit............................ (780,000)
Stockholder distributions................................. (3,352,116)
------------
Net cash used in financing activities............. (4,132,116)
------------
NET DECREASE IN CASH........................................ (224,679)
CASH, March 31, 1996........................................ 362,743
------------
CASH, October 31, 1996...................................... $ 138,064
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 98,248
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 25
OHMSTEDE, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND ACQUISITION:
Ohmstede, Inc. (Ohmstede or the Company), is a Texas corporation
specializing in the manufacture and maintenance of shell and tube heat
exchangers. The Company is headquartered in Beaumont, Texas, and has plants
located in Beaumont, Texas; LaPorte, Texas; St. Gabriel, Louisiana; Sulphur,
Louisiana; and Corpus Christi, Texas. The majority of the Company's customers
are within the United States and are concentrated within refineries in close
proximity to the Company's plants.
On November 20, 1996 (effective November 1, 1996), Air-Cure Technologies,
Inc. (Air-Cure) purchased all the outstanding stock (excluding certain assets
and liabilities) of Ohmstede for approximately $52 million in cash. Assets not
purchased (and excluded from the accompanying financial statements) include the
majority of receivables due from and a 99 percent equity investment in C&D
Robotics (C&D), a partnership formerly consolidated by the Company; a federal
tax deposit made by the owners; and the cash surrender value of life insurance
policies for certain owners. Additionally, the cash balance of $138,064 reflects
approximately $600,000 in dividends paid to the former owners, as set forth in
the agreement with Air-Cure. The consolidated earnings of C&D and interest
charged on intercompany advances has been eliminated from the statement of
operations. Premium expense related to the life insurance policies has also been
eliminated from the statement of operations. Current-year portions of the
above-mentioned eliminations have been treated as stockholder distributions in
the financial statements and are included with the other distributions taken by
the former owners. As the Company will continue to rent operating space to C&D,
rental fees charged to C&D are included in the financial statements.
The Company has approximately 600 employees, approximately 100 of whom are
represented by collective bargaining agreements. The Oil, Chemical and Atomic
Workers International, AFL-CIO Local Union 4-367 represents employees at the
LaPorte plant (30 employees); the International Brotherhood of Boilermakers,
Iron Workers, Shipbuilders and Blacksmiths, AFL-CIO Local Unions No. 79 and No.
582 represent employees at the Lake Charles plant (25 employees) and St. Gabriel
plant (45 employees), respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Financial Reporting
These financial statements have been prepared to present the financial
position and results of operations of Ohmstede related to the assets acquired
and liabilities assumed by Air-Cure under the terms of the agreement described
in note 1 and in conformity with generally accepted accounting principles. All
significant intercompany transactions have been eliminated. There are no
adjustments related to the purchase price allocation of Air-Cure reflected in
these financial statements.
Revenue Recognition
The Company's products are generally configured to customer specifications.
Revenue is recognized when a project is complete and available for shipment.
Projects are generally two to three months in duration.
Progress Billings
Progress billings represent amounts billed prior to contract completion.
These amounts will be recognized as revenue upon completion of the contract, at
which time the appropriate cost of the contract is also recognized.
24
<PAGE> 26
OHMSTEDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Raw materials are stated at the lower of cost or market as determined by
the first-in, first-out (FIFO) method. Work in process includes materials, labor
and overhead cost allocations.
Property and Equipment
Property and equipment are recorded at cost, including costs to ready
assets for use but excluding any pushdown of Air-Cure's purchase price
allocation. Improvements or betterments of a permanent nature are capitalized.
Expenditures for maintenance and repair costs are charged to operations as
incurred. The cost of assets retired or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts in the year of
disposal. Losses resulting from property disposals are included in other
expense.
Depreciation is computed using the straight-line method over the following
recovery periods:
<TABLE>
<S> <C>
Transportation equipment................................. 3 years
Furniture and fixtures................................... 3-15 years
Machinery and equipment.................................. 7-15 years
Buildings and improvements............................... 7-39 years
</TABLE>
Under the provisions of Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews certain long-lived assets for
impairment whenever events indicate that the carrying amount of an asset may not
be recoverable and recognizes an impairment loss under certain circumstances in
the amount by which the carrying value exceeds the fair value of the asset. The
Company's adoption of SFAS No. 121 in fiscal 1997 had no material effect on the
Company's results of operations or financial position.
Federal Income Taxes
The Company has elected, under applicable provisions of the Internal
Revenue Code, to be treated as an S Corporation for federal income tax purposes.
Under these provisions, all income, losses, credits and deductions of the
Company will be passed through to the individual stockholder's income tax return
through the closing date of the acquisition. Accordingly, there is no provision
for federal income taxes included in the accompanying financial statements. The
Company is subject to Louisiana income and Texas franchise taxes.
Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Values
The carrying amounts of cash, accounts receivable, accounts payable and
accrued liabilities are reasonable estimates of their fair values due to the
short maturities of these instruments. The fair value of notes payable is
estimated based on the Company's current financing agreement and approximates
carrying value.
25
<PAGE> 27
OHMSTEDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company maintains its cash with various financial institutions.
Accounts receivable at any given time are concentrated in a relatively small
number of primarily domestic customers that operate in the petroleum industry.
To mitigate this risk, the Company often requires customers to make advance
payments. At October 31, 1996, the Company had approximately $1,009,000 in such
advance payments. An allowance for doubtful accounts has been provided for
potential losses.
For the seven months ended October 31, 1996, the Company purchased
approximately 20 percent of its component parts from one vendor. The Company
believes other viable suppliers are available to supply these component parts.
3. INVENTORIES:
Inventories consist of the following:
<TABLE>
<S> <C>
Raw materials............................................ $ 431,832
Work in process.......................................... 9,453,617
----------
Total.......................................... $9,885,449
==========
</TABLE>
Contracts are performed to customer specifications and shipped upon
completion; consequently, there are no finished goods inventories.
4. NOTE PAYABLE:
Note payable at October 31, 1996, represents borrowings on a $8,000,000
revolving line of credit with a bank. This note bears interest, payable
quarterly, at the bank's prime rate (8.25 percent at and for the seven months
ended October 31, 1996) and matured in November 1996. In November, the Company
paid the matured note together with accrued interest, at face value, without
gain or loss. Borrowings under this credit facility were secured by accounts
receivable, inventory and general intangibles.
Under terms of the note agreement, the Company maintained certain financial
covenants. The Company was in compliance with these covenants at October 31,
1996.
5. COMMITMENTS AND CONTINGENCIES:
Letter of Credit
At October 31, 1996, the Company had outstanding a letter of credit totaling
$200,000. This letter of credit was established to support workers' compensation
and expires April 17, 1997. The workers' compensation plan will either be
continued by Air-Cure or dissolved and absorbed into Air-Cure's plan.
Employee Benefit Plan
The Ohmstede, Inc. Profit Sharing Plus Plan (the Plan) is a combination
defined contribution and 401(k) plan. The Plan covers substantially all
employees not covered by collective bargaining agreements who have accumulated
one year of service prior to the semiannual enrollment dates. Employees may
elect to contribute a percentage of their wages subject to certain limitations.
Employer contributions to the Plan are at the discretion of the board of
directors and, if made, consist of a match of $.25 on each employee-contributed
dollar up to 6 percent of salary, a $250 enrollment bonus per employee and a
wholly discretionary portion. Company contributions vest over seven years.
Management has made provisions for contributions to the Plan in the amount of
approximately $125,000 for the seven months ended October 31, 1996.
26
<PAGE> 28
OHMSTEDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Plan will either be continued by Air-Cure or dissolved and absorbed
into Air-Cure's plan.
Environmental Matters
The Company's past and present operations include activities which are
subject to Federal and State environmental regulations. In connection with the
sale of the Company, an environmental review of the Company's facilities was
conducted. This review identified certain environmental issues and a provision
of $200,000 has been accrued as of October 31, 1996 for future costs associated
with remediation activities related to these issues.
Claims and Lawsuits
The Company is subject to claims and lawsuits arising in the normal course
of business. In the opinion of management, any losses resulting from the
ultimate resolution of these matters will not be material to the Company's
financial position and results of operations.
6. RELATED-PARTY TRANSACTIONS:
In accordance with the terms of the agreement discussed in Note 1, the
Company acquired a receivable due from C&D at October 31, 1996. The receivable
was paid to the Company by C&D subsequent to the balance sheet date.
The Company performed several administrative functions on behalf of C&D
without reimbursement. Substantially all of C&D's cash receipts and cash
disbursements were administered by the Company and recorded as intercompany
transactions between C&D and the Company. These activities are in the process of
being discontinued.
The operations of C&D are located in the Company's Beaumont facility.
Ohmstede, Inc., as part of Air-Cure Technologies, Inc., has signed a 36-month
lease agreement with C&D effective November 1996 and terminating in November
1999 which entitles Air-Cure to receive rental income from C&D in the amount of
$14,560 a month, which management believes represents estimated fair market
rent.
27
<PAGE> 29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
December 13, 1996
To the Board of Directors and Stockholders of
Ohmstede, Inc.
We have audited the accompanying statement of assets acquired and
liabilities assumed by Air-Cure Technologies, Inc. ("Air-Cure") of Ohmstede,
Inc. (the "Company") as of March 31, 1996, and the related statements of
operations, changes in net assets and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 1, the accompanying financial statements have been
prepared pursuant to the November 20, 1996 purchase agreement between the
Company and Air-Cure, and are not intended to be a complete presentation of the
Company's assets, liabilities, operating results or cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets acquired and liabilities assumed by
Air-Cure of the Company as of March 31, 1996, pursuant to the purchase agreement
referred in Note 1, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Melton & Melton
28
<PAGE> 30
OHMSTEDE, INC.
STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
BY AIR-CURE TECHNOLOGIES, INC.
MARCH 31, 1996
(NOTE 1)
ASSETS
<TABLE>
<S> <C> <C>
Current Assets:
Cash (Note 5).......................................................... $ 362,743
Accounts receivable (net of allowance for doubtful accounts of
$290,000) (Notes 4 and 5)........................................... 18,035,114
Note receivable........................................................ 12,515
Inventories (Notes 1, 2 and 4)......................................... 11,870,778
Prepaid expenses....................................................... 4,240
-----------
Total current assets........................................... 30,285,390
Property and Equipment, at cost: (Note 1)
Land...................................................... $ 698,837
Transportation equipment.................................. 990,634
Furniture and fixtures.................................... 2,722,778
Machinery and equipment................................... 15,502,000
Buildings and improvements................................ 10,076,105
-----------
29,990,354
Less: Accumulated depreciation............................ 23,566,979
-----------
6,423,375
Construction in progress.................................. 859,396 7,282,771
-----------
Other Assets............................................................. 22,919
-----------
Total assets................................................... $37,591,080
===========
LIABILITIES AND NET ASSETS
Current Liabilities:
Note payable (Note 4).................................................. $ 2,705,000
Accounts payable....................................................... 4,793,946
Progress payments...................................................... 3,965,178
Accrued liabilities.................................................... 3,694,300
-----------
Total current liabilities...................................... 15,158,424
Commitments and Contingencies (Note 5)
Net Assets............................................................... 22,432,656
-----------
Total net assets and liabilities............................... $37,591,080
===========
</TABLE>
(See Notes to Financial Statements)
29
<PAGE> 31
OHMSTEDE, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1996
(NOTE 1)
<TABLE>
<S> <C> <C>
Net Sales and Services (Note 1)................................................. $88,753,395
Cost of Sales and Services...................................................... 72,495,117
-----------
Gross margin.......................................................... 16,258,278
Operating Expenses:
Salaries, payroll taxes, and group insurance.............. $4,922,887
Other selling, general and administrative................. 5,502,342 10,425,229
---------- -----------
Income from operations................................................ 5,833,049
Other Income (Expense):
Interest income........................................... 9,523
Rental income (Note 3).................................... 167,526
Interest expense.......................................... (195,617)
Other income.............................................. 367,042 348,474
---------- -----------
Income before taxes................................................... 6,181,523
State Taxes..................................................................... 209,488
-----------
Net income............................................................ $ 5,972,035
===========
</TABLE>
(See Notes to Financial Statements)
30
<PAGE> 32
OHMSTEDE, INC.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED MARCH 31, 1996
(NOTE 1)
<TABLE>
<S> <C>
Balance, March 31, 1995..................................... $22,009,433
Net income.................................................. 5,972,035
Stockholder distributions................................... (5,548,812)
-----------
Balance, March 31, 1996..................................... $22,432,656
===========
</TABLE>
(See Notes to Financial Statements)
31
<PAGE> 33
OHMSTEDE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1996
(NOTE 1)
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 5,972,035
-----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 1,097,998
Bad debt expense....................................... 240,299
Gain on sale of assets................................. (1,232)
Cash provided by (used for) the change in:
Accounts and note receivables........................ (6,253,851)
Inventories.......................................... (1,431,327)
Prepaid expenses..................................... (4,240)
Accounts payable..................................... 1,005,754
Progress payments.................................... 3,386,436
Accrued liabilities.................................. 1,044,768
-----------
Total adjustments................................. (915,395)
-----------
Net cash provided by operating activities......... 5,056,640
-----------
Cash Flows from Investing Activities:
Proceeds on sale of assets................................ 3,500
Purchases of property and equipment....................... (2,057,672)
-----------
Net cash used in investing activities............. (2,054,172)
-----------
Cash Flows from Financing Activities:
Net advances on line of credit............................ 2,705,000
Stockholder distributions................................. (5,548,812)
-----------
Net cash used in financing activities............. (2,843,812)
-----------
Net increase in cash.............................. 158,656
Cash, March 31, 1995........................................ 204,087
-----------
Cash, March 31, 1996........................................ $ 362,743
===========
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ 193,590
===========
</TABLE>
(See Notes to Financial Statements)
32
<PAGE> 34
OHMSTEDE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Ohmstede, Inc. (the "Company") is a Texas corporation specializing in the
manufacture and maintenance of shell and tube heat exchangers. The Company is
headquartered in Beaumont, Texas and has plants located in Beaumont; LaPorte,
Texas; St. Gabriel, Louisiana; Sulphur, Louisiana; and Corpus Christi, Texas.
On November 20, 1996 (effective November 1, 1996), Air-Cure Technologies,
Inc. ("Air-Cure") purchased all the outstanding stock (excluding certain assets
and liabilities) of the Company for approximately $52 million in cash. Assets
not purchased (and excluded from the accompanying financial statements) included
a receivable due from and a 99 percent equity investment in Ohmstede-Cawley,
Ltd. dba C & D Robotics (C & D), a partnership; a Federal tax deposit; and the
cash surrender value on life insurance policies and the related debt.
Transactions eliminated from the statement of operations include the Company's
equity in the net loss of C & D, interest income charged on the receivable due
from C & D, and the premium and interest expense related to the life insurance
policies. Current year portions of the above eliminations have been treated as
stockholder distributions in the financial statements. As the Company will
continue to rent operating space to C & D, rental fees charged to C & D are
included in the accompanying financial statements. (See Note 3.)
Basis of Financial Reporting
The financial statements of the Company have been prepared to present the
financial position and results of operations in conformity with generally
accepted accounting principles. The financial statements include the financial
position and results of operations of the Company related to the assets acquired
and liabilities assumed by Air-Cure. All significant intercompany transactions
have been eliminated.
Revenue Recognition
The Company's products are generally configured to customer specifications.
Revenue is recognized when a project is complete and it is available for
shipment.
Inventories
Raw materials are stated at cost determined by the first-in, first-out
(FIFO) method. Work in progress includes materials, labor, and overhead cost
allocations.
Property and Equipment
Property and equipment are recorded at cost. Improvements or betterments of
a permanent nature are capitalized. Expenditures for maintenance and repair
costs are charged to operations as incurred. The cost of assets retired or
otherwise disposed of and the related accumulated depreciation are eliminated
from the accounts in the year of disposal. Gains or losses resulting from
property disposals are credited or charged to operations currently.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Transportation equipment.................................... 5 years
Furniture and fixtures...................................... 3-15 years
Machinery and equipment..................................... 7-15 years
Buildings and improvements.................................. 7-39 years
</TABLE>
33
<PAGE> 35
OHMSTEDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
Federal Income Taxes
The Company has elected, under applicable provisions of the Internal
Revenue Code, to be treated as an S corporation for Federal income tax purposes.
Under these provisions, all income, losses, credits and deductions of the
Company will be passed through to the individual shareholder's income tax
return. Accordingly, there is no provision for Federal income taxes included in
the accompanying financial statements. The Company is subject to Louisiana
income and Texas franchise taxes.
Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 2 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
Raw materials............................................... $ 446,051
Work-in-progress............................................ 11,424,727
-----------
$11,870,778
===========
</TABLE>
NOTE 3 -- RELATED PARTY TRANSACTIONS
C & D rents shop and office space from the Company on a month-to-month
basis. Rent expense for the year ended March 31, 1996 amounted to $167,526 which
is included as rental income on the accompanying statement of operations.
NOTE 4 -- NOTE PAYABLE
Note payable at March 31, 1996 represents borrowings on a $8,000,000
revolving line of credit with a bank. This note bears interest, payable
quarterly, at the bank's prime rate (8.25% at March 31, 1996) and was paid off
in November 1996. Borrowings under this credit facility were secured by accounts
receivable and inventory.
Under terms of the note agreement, the Company must maintain certain
financial covenants. The Company was in compliance with these covenants at March
31, 1996.
NOTE 5 -- COMMITMENT AND CONTINGENCIES
Letter of Credit
At March 31, 1996, the Company had outstanding a letter of credit totaling
$200,000. This letter of credit was established to support workers' compensation
and expires April 17, 1997.
Employee Benefit Plan
The Company has adopted the Ohmstede, Inc. Profit Sharing Plus Plan which
is a combination defined contribution and 401(k) plan. The Plan covers
substantially all employees not covered by collective bargaining agreements.
Employees may elect to contribute a percentage of their wages subject to certain
limitations. Employer contributions to the Plan are at the discretion of the
Board of Directors. During fiscal year ended March 31, 1996, contributions to
the Plan charged to operations were approximately $215,000.
34
<PAGE> 36
OHMSTEDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
Claims and Lawsuits
The Company is subject to claims and lawsuits arising in the normal course
of business. In the opinion of management, any losses resulting from the
ultimate resolution of these matters will not be material to the Company's
financial position and results of operations.
Concentration Risks
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company maintains its cash with various financial institutions.
At times, such amounts may be in excess of FDIC insurance limits. Accounts
receivable at any given time are concentrated in a relatively small number of
customers that are concentrated in the petroleum industry. To mitigate this
risk, the Company often requires customers to make advance payments.
The Company has approximately 600 employees, approximately 100 of whom are
represented by collective bargaining agreements. The Oil, Chemical and Atomic
Workers International, AFL-CIO Local Union 4-367 represents employees at the
LaPorte plant (30 employees); the International Brotherhood of Boilermakers,
Iron Workers, Shipbuilders and Blacksmiths, AFL-CIO Local Unions No. 79 and 582
represent employees at the Lake Charles plant (25 employees); and St. Gabriel
plant (45 employees), respectively.
Environmental Matters
The Company's past and present operations include activities which are
subject to Federal and State environmental regulations. In connection with the
sale of the Company, an environmental review of the Company's facilities was
conducted. This review identified certain environmental issues and a provision
of $200,000 has been accrued as of March 31, 1996 for future costs associated
with environmental assessments and remediation activities related to these
issues.
Fair Values
The carrying amounts of cash, accounts receivable, accounts payable, and
accrued liabilities are reasonable estimates of their fair value due to the
short maturities of these instruments. The Company's fair value of the note
payable is estimated based on the Company's current financing agreement and
approximates carrying value.
Estimates of fair value are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect these statements.
35
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Ohmstede, Inc.:
We have audited the accompanying statement of assets and liabilities of
Ohmstede, Inc. as of March 31, 1995 and the related statements of revenues and
expenses and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities of Ohmstede, Inc. as of
March 31, 1995, and the results of its operations and its cash flows for the
year ended March 31, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Houston, Texas
June 16, 1995
36
<PAGE> 38
OHMSTEDE, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1995
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 204,087
Trade accounts receivable, net of allowance of $40,000.... 12,018,311
Notes receivable.......................................... 15,765
Inventories............................................... 10,428,917
-----------
Total current assets.............................. 22,667,080
-----------
Property, plant and equipment:
Land...................................................... 698,837
Transportation equipment.................................. 1,072,515
Buildings and improvements................................ 9,953,848
Machinery and equipment................................... 14,480,704
Furniture and fixtures.................................... 2,592,444
-----------
28,798,348
Less accumulated depreciation and amortization.............. 22,656,214
-----------
6,142,134
Construction in progress.................................... 193,766
-----------
Net property, plant and equipment................. 6,335,900
Other assets, at cost, less accumulated amortization........ 22,919
-----------
$29,025,899
===========
LIABILITIES
Current liabilities:
Trade accounts payable.................................... $ 3,788,192
Advance payments on work in-progress...................... 578,742
Deferred insurance premiums payable....................... 52,951
Accrued wages and bonuses................................. 1,132,760
Other accrued expenses.................................... 946,888
Vacation pay accrual...................................... 400,000
Accrued profit sharing contribution....................... 116,933
-----------
Total current liabilities......................... 7,016,466
-----------
Assets less liabilities..................................... $22,009,433
===========
</TABLE>
See accompanying notes to financial statements.
37
<PAGE> 39
OHMSTEDE, INC.
STATEMENT OF REVENUES AND EXPENSES
YEAR ENDED MARCH 31, 1995
<TABLE>
<S> <C>
Net sales................................................... $63,929,995
Cost of goods sold:
Raw materials and parts used.............................. 32,955,851
Labor and overhead costs.................................. 20,612,331
-----------
53,568,182
-----------
Gross profit...................................... 10,361,813
Expenses:
General and administrative................................ 8,000,763
Depreciation and amortization............................. 146,581
Selling................................................... 764,013
-----------
8,911,357
-----------
Income from operations...................................... 1,450,456
Gain on sale of property and equipment...................... 391,976
Interest expense............................................ (37,499)
Other income, net........................................... 485,086
-----------
Net income........................................ $ 2,290,019
===========
</TABLE>
See accompanying notes to financial statements.
38
<PAGE> 40
OHMSTEDE, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 2,290,019
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization.......................... 1,110,462
Write-off of note receivable........................... 4,712
Gain on sale of property and equipment................. (391,976)
Changes in assets and liabilities:
Accounts receivable -- trade......................... (1,531,209)
Inventories.......................................... (6,202,792)
Prepaid expenses..................................... 149,363
Required federal tax deposit......................... 1,562,170
Accounts payable..................................... 1,405,556
Accrued expenses and vacation pay accrual............ 115,799
Advance payments on work in-progress................. (299,137)
-----------
Total adjustments................................. (4,077,052)
-----------
Net cash used by operating activities............. (1,787,033)
-----------
Cash flows from investing activities:
Proceeds from sale of property and equipment.............. 403,761
Purchase of property and equipment........................ (612,020)
-----------
Net cash used by investing activities............. (208,259)
-----------
Cash flows from financing activities:
Dividends paid............................................ (3,878,749)
Amount due from/to affiliate.............................. (1,764,753)
-----------
Net cash used by financing activities............. (5,643,502)
-----------
Net decrease in cash and cash equivalents......... (7,638,794)
Cash and cash equivalents at beginning of year.............. 7,842,881
-----------
Cash and cash equivalents at end of year.................... $ 204,087
===========
Supplemental disclosures of cash flow information -- cash
paid for interest during the year......................... $ --
===========
</TABLE>
See accompanying notes to financial statements.
39
<PAGE> 41
OHMSTEDE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Financial Reporting
The Company's policy is to prepare its financial statements in conformity
with generally accepted accounting principles. The Company's investment in a 70%
owned partnership and life insurance policies have been excluded, as only assets
and liabilities that are being acquired from the Company are being presented
(see note 9).
The Company is an S Corporation under current Internal Revenue Service
regulations; and, accordingly, no corporate provision for federal income tax on
current period operations, other than the tax on built-in gains (see note 5), is
included in these financial statements. The Company is subject to Louisiana
income and Texas franchise taxes.
(b) Inventories
Inventories are stated at cost determined by the first-in, first-out (FIFO)
method and include material, labor and overhead.
(c) Cash Equivalents
For purposes of the statements of cash flows, cash equivalents include time
deposits, certificates of deposit and all highly liquid debt instruments with
original maturities of three months or less.
(d) Revenue Recognition
The Company records revenue on a completed contract basis, which does not
differ materially from recognizing revenues on a percentage of completion basis.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
Raw materials............................................... $ 453,510
Work-in-progress............................................ 9,975,407
-----------
$10,428,917
===========
</TABLE>
(3) PROPERTY AND EQUIPMENT
Maintenance and repairs are charged to operations when incurred.
Betterments and renewals are capitalized. When property and equipment is sold or
otherwise disposed of, the asset account and related accumulated depreciation
account are relieved; and any gain or loss is included in operations.
The useful lives of property and equipment for purposes of computing
depreciation are:
<TABLE>
<S> <C>
Buildings................................................... 5-31.5 years
Machinery and equipment..................................... 5-18 years
Office furniture and fixtures............................... 4-24 years
Trucks and automobiles...................................... 3-7 years
</TABLE>
40
<PAGE> 42
(4) CREDIT FACILITIES
At March 31, 1995, the Company had a letter of credit totaling $335,000.
This letter of credit was established to support workers' compensation and
expired April 17, 1995. On February 2, 1995, the Company obtained an additional
letter of credit totaling $292,115 which matures October 1, 1995. The letter of
credit was established as a security agreement between the Company and a
customer who makes advanced progress payments. These letters of credit are
secured by the receivables of the Company.
At March 31, 1995, the Company had $8,000,000 available on its unused line
of credit.
(5) INCOME TAXES
The Company is subject to IRC Sec. 1374 tax on pre-election built-in gains
on property held prior to election as an S Corporation for the ten year period
following the Company's election date of April 1, 1987.
The total built-in gain as of the election date was $4,617,290, of which
$7,875 has been recognized and subject to tax through March 31, 1995.
Recognition of the remaining built-in gain and the accompanying tax liability is
contingent upon assets owned as of April 1, 1987, being sold at amounts equal to
or exceeding the market value used in computing the Company's declaration of
total built-in gain.
The Company is required to make federal tax deposits for taxes that would
be due from its shareholders if the Company had a calendar rather than fiscal
tax year end.
(6) PROFIT SHARING PLAN
The Company has a combination profit sharing and 401(k) plan. The plan
covers all employees not covered by collective bargaining agreements.
Contributions to the plan are at the discretion of the board of directors.
During fiscal year ended March 31, 1995, contributions to the plan charged to
operations were $251,531.
(7) RELATED PARTY TRANSACTIONS
Throughout the year, the Company provides the necessary administrative
functions for C&D Robotics (a 70% owned partnership). The Company received
$13,961 per month for the partial rental of the Company's shop and office space.
(8) CONTINGENCIES
The Company is subject to claims and lawsuits arising in the ordinary
course of business. Management does not believe that the outcome of any pending
claims or lawsuits will have a material adverse effect on the Company's
financial position and results of operations.
(9) SUBSEQUENT EVENT (UNAUDITED)
The Company has agreed to sell substantially all the net operating assets
of Ohmstede, Inc. to Air-Cure Technologies, Inc., effective November 1, 1996.
In connection with the sale of the Company, an environmental review of the
Company's properties was conducted to determine compliance with state and
federal environmental standards. As a result of this review, certain
environmental issues have been identified. No provision has been recorded in
these financial statements due to uncertainty regarding the quantification of
costs to remediate to the Company.
41
<PAGE> 43
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 hereto duly authorized.
Date: February 3, 1997 AIR-CURE TECHNOLOGIES, INC.
By: /s/ LAWRANCE W. MCAFEE
----------------------------------
Lawrance W. McAfee,
Executive Vice President,
Chief Financial Officer and
Secretary
Date: February 3, 1997 By: /s/ DAVID E. CRAYS
----------------------------------
David E. Crays,
Corporate Controller and
Assistant Secretary
42
