UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 Date of Report: December 7, 1999 CECO ENVIRONMENTAL CORP. ------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) New York 0-7099 13-2566064 - ----------------------------- ---------- ------------------- (State or other jurisdiction Commission (IRS Employer of incorporation) File No.) Identification No.) 505 University Avenue, Suite 1400 Toronto, Canada M5G 1X3 - ---------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code: (416) 593-6543
Item 2. Acquisition or Disposition of Assets Stock Purchase Agreement - ------------------------ On December 7, 1999, CECO Environmental Corp. purchased all the issued stock of The Kirk & Blum Manufacturing Company and kbd/Technic, Inc., two companies with related ownership located in Cincinnati, Ohio (collectively, the "Companies"). The stock of the Companies were purchased from the Blum family and various trusts for their benefit. The Blum family members are the descendents of one of the founders of The Kirk & Blum Manufacturing Company. No member of the Blum family was affiliated with CECO Environmental Corp. prior to the acquisition of the Companies by CECO Environmental Corp. The consideration for each of the acquisitions was determined through arms-length negotiations between CECO Environmental Corp. and the former owners of the Companies. The purchase price was approximately $25 million dollars plus the assumption of $5 million of existing indebtedness of the Companies. Employment Agreements, Bonuses and Stock Purchase Warrants - ---------------------------------------------------------- In connection with such acquisition, CECO Group, Inc. entered into a five year employment agreement with Richard J. Blum. Lawrence J. Blum and David D. Blum entered into five year employment agreements with The Kirk and Blum Manufacturing Company. These employment agreements provide for annual salaries of $206,000, $100,000 and $154,000, respectively, for the three Blums. These agreements granted Richard, Lawrence and David Blum warrants to purchase 448,000, 217,000 and 335,000 shares of common stock of CECO Environmental Corp., respectively, at $2.9375, the closing price of CECO Environmental Corp.'s common stock on December 7, 1999. These warrants become exercisable at the rate of 25% per year over the four years following December 7, 1999. The warrants have a term of ten years. In addition, these employment agreements provide that each of the Blums will be paid a bonus with respect to each of the fiscal years ended as December 31, of 2000, 2001, 2002, 2003 and 2004 equal to, in the aggregate, (i) 25% of the net income before interest and taxes in excess of $4,000,000 of CECO Environmental Corp. as reported on its audited financial statements filed with the Securities and Exchange Commission with respect to such year, less (ii) the contribution made on behalf of such employees to any profit sharing or 401(k) plan by CECO Environmental Corp., CECO Group, Inc., The Kirk & Blum Manufacturing Company or any affiliate (other than contributions made by the employees) with respect to such fiscal year. Of such aggregate bonus, Richard J. Blum will receive 44.8%, Lawrence J. Blum will receive 21.7% and David D. Blum will receive 33.5%. No such bonus will be paid if CECO Environmental Corp. or CECO Group, Inc. is in default under any financing agreement with any bank or other financial institution or any other material agreement to which CECO 2
Environmental Corp. or CECO Group, Inc. is a party, or the payment of such bonus would cause CECO Environmental Corp. or CECO Group, Inc. to be in default under any such agreement. If no bonuses are paid as a result of the operation of the foregoing sentence, the unpaid bonuses will accrue interest at the rate of 8% per annum. Any accrued and unpaid bonuses and interest will be paid as soon as CECO Environmental Corp. or CECO Filters, Inc. ceases to be in default under such agreements and such payment would not cause a default under any such agreement. The payment of these bonuses is also subject to a subordination agreement between the employees and the banks providing financing for the acquisition of the Companies. Bank Financing - -------------- The financing for the transaction was provided by a bank loan facility in the amount of $25 million in term loans and a $10 million revolving credit facility. The $14.5 term loan has a maturity of November 30, 2004; the $8.5 million term loan has a maturity of May 31, 2006; and the $2 million term loan has a maturity of 90 days of December 7, 1999. Interim payments of principal are required with respect to the $14.5 million and the $8.5 million term loans. CECO Environmental Corp. intends to borrow against the cash value of life insurance owned by The Kirk & Blum Manufacturing Company in order to repay the $2 million term loan due 90 days after December 7, 1999. The bank loan facility was provided by PNC Bank, National Association, The Fifth Third Bank and Bank One, N.A. In addition, as a condition to obtaining the bank financing, CECO Environmental Corp. placed $5 million of subordinated debt. The proceeds of the bank loans and the additional $5 million of subordinated debt were used to pay the purchase prices for the Companies, to pay expenses incurred in connection with the acquisitions, to refinance existing indebtedness and for working capital purposes. In connection with these loans, the banks providing the loan facility received a lien on substantially all the assets of CECO Environmental Corp. and its subsidiaries. Subordinated Debt - ----------------- The subordinated debt was provided to CECO Environmental Corp. in the amount of $4,000,000 by Green Diamond Oil Corp., $500,000 by ICS Trustee Services, Inc. and $500,000 by Harvey Sandler. ICS Trustee Services, Inc. and Harvey Sandler are not affiliated with the Company. Green Diamond Oil Corp. is owned 50% by Phillip DeZwirek, the Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer of CECO Environmental Corp. and a major stockholder and 50% by Jason DeZwirek, Phillip DeZwirek's son and a director and secretary of CECO Environmental Corp. and a major stockholder of CECO Environmental Corp. The promissory notes which were issued to evidence the subordinated debt provide that they accrue interest at the rate of 12% per annum, payable semi-annually subject to the subordination agreement with the banks providing the financing referred to above. 3
In consideration for the subordinated lenders making CECO Environmental Corp. the subordinated loans, CECO Environmental Corp. issued to the subordinated lenders warrants to purchase up to 1,000,000 shares of CECO Environmental Corporation common stock for $2.25 per share, the closing price of CECO Environmental Corp. common stock on the day that the subordinated lenders entered into an agreement with CECO Environmental Corp. to provide the subordinated loans. The warrants are exercisable from June 6, 2000 until 5:30 p.m. New York time on December 7, 2009. In connection with such warrants, the subordinated lenders were granted certain registration rights with respect to their warrants and shares of common stock of CECO Environmental Corp. into which the warrants are convertible. The KBD/Technic, Inc. Voting Trust - ---------------------------------- One of the Companies being acquired, kbd/Technic, Inc., may engage in engineering services in the State of Ohio and in other states. In order to be corporation licensed to perform engineering services in the state of Ohio, Ohio law requires that a majority of the stock of kbd/Technic, Inc. be owned by a licensed engineer. CECO Group, Inc. has therefore arranged that the stock of kbd/Technic, Inc. be owned by a voting trust of which Richard J. Blum, the president of CECO Group, Inc., is the trustee. CECO Group, Inc. remains the beneficial owner of 100% of the stock of kbd/Technic, Inc. The Business of The Kirk & Blum Manufacturing Company and kbd/Technic, Inc. - --------------------------------------------------------------------------- The newly acquired Kirk & Blum Manufacturing Company ("K&B"), with headquarters in Cincinnati, Ohio, is a leading provider of turnkey engineering, design, manufacturing and installation services in the air pollution control industry. K&B's business is focused on designing, building, and installing clean air systems inside manufacturing plants, as well as systems that purify emissions from manufacturing facilities. K&B serves its customers from offices and plants in Cincinnati, OH, Indianapolis, IN, Louisville and Lexington, KY, Columbia, TN, and Greensboro, NC. In October 1998, Engineering News Record ranked K&B as the largest specialty sheet metal contractor in the country. With a diversified base of more than 1,500 active customers, K&B provides services to a number of industries including aerospace, ceramics, metalworking, printing, paper, food, foundries, metal plating, woodworking, chemicals, tobacco, glass, automotive, and pharmaceuticals. No customer accounted for more than 8% of total 1998 revenue, while the top 50 customers accounted for approximately 54% of K&B's revenues. K&B has four lines of business, all evolving from the original air pollution systems business. The largest division, located in six strategic locations and accounting for 76% of net sales in 1998, is the Air Pollution Control Systems Division. This division fabricates and installs industrial ventilation, dust, fume, and mist control systems, as well as automotive spray booth systems, industrial and process piping, and other industrial sheet metal work. Well known customers include General Motors, Procter & Gamble, Ingersoll Milling Machine, Toyota, Saturn, Matsushita, and Alcoa. 4
The Custom Metal Fabrication Division accounted for 11% of net sales in 1998. This division fabricates parts, subassemblies, and customized products for air pollution and non-air pollution applications from sheet, plate, and structurals. The Air Pollution Control Systems Division purchases products and services from this division and accounted for 12% of its total sales in 1998. This relationship gives K&B the ability to meet project schedules and cost targets in air pollution control projects while generating additional fabrication revenue in support of non-air pollution control industries in the tri-state region surrounding Cincinnati. External customers include Siemens Energy & Automation, Duriron and Eastman Chemical. At the end of 1998 in an effort to reduce overhead, the Custom Metal Fabrication Division was merged into the Cincinnati Air Pollution Control Systems Division operation. The Component Parts Division accounted for 11% of net sales in 1998. This division provides standard and custom components for contractors and companies that design and/or install their own air systems. Products include angle rings, elbows, cut-offs, and other components used in ventilation systems. Major distributors of this division's products include N.B. Handy, Three States Supply, Albina Pipe Bending, and Indiana Supply. Kbd/Technic, Inc., a sister company of K&B, is a specialty engineering firm concentrating in industrial ventilation. Services offered include air system testing and balancing, source emission testing, industrial ventilation engineering, turnkey project engineering (civil/structural, electrical), sound and vibration system engineering, and other special projects. In addition to generating service revenue, kbd/Technic, Inc. often serves as a referral source for other K&B divisions. Customers include General Motors, Ford, Baldwin Graphic Products, Emtec, and Heidelberg & Harris. K&B has approximately 550 full-time employees, including approximately 425 shop and field personnel represented by unions. The level of field personnel fluctuates with the level of work. Union contracts with shop and field personnel expire on various dates at various locations. Change in Corporate Structure - ----------------------------- As part of the acquisition of The Kirk & Blum Manufacturing Company, CECO Environmental Corp. created CECO Group, Inc. as a wholly-owned subsidiary for the purpose of holding all the stock of its operating companies. Immediately following the acquisition of The Kirk & Blum Manufacturing Company, CECO Group, Inc. beneficially owned The Kirk & Blum Manufacturing Company, kbd/Technic, Inc. (through the voting trust referred to above) and the approximately 94% of CECO Filters, Inc. formerly held by CECO Environmental Corp. The other operating companies controlled by CECO Environmental Corp. are wholly-owned subsidiaries of CECO Filters, Inc. 5
On December 10, 1999, pursuant to his employment contract with CECO Group, Inc., Richard J. Blum, the president of The Kirk & Blum Manufacturing Company, was appointed President and Chief Executive Officer of CECO Group, Inc. CECO Environmental Corp. has no plans to change the business of these two companies and will integrate these companies with the existing businesses of CECO Environmental Corp. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits: (a) Financial Statements of Business Acquired. No financial statements are included for kbd/Technic, Inc., the second company acquired, because kbd/Technic, Inc. constitutes a financially insignificant portion of the businesses acquired. The financial statements of The Kirk & Blum Manufacturing Company for the fiscal years ended December 31, 1996, 1997 and 1998 and the nine-month period ended September 30, 1999 and other data are presented on the following pages: 6
THE KIRK & BLUM MANUFACTURING COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 with INDEPENDENT AUDITORS' REPORT
RIPPE & KINGSTON CO PSC Certified Public Accountants & Consultants Rookwood Building o 1077 Celestial Street Cincinnati, Ohio 45202-1696 (513) 241-1375 Fax: (513) 241-7843 The Shareholders The Kirk & Blum Manufacturing Company Independent Auditors' Report ---------------------------- We have audited the accompanying balance sheet of The Kirk & Blum Manufacturing Company as of December 31, 1996, and the related statements of income, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of The Kirk & Blum Manufacturing Company as of December 31, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Rippe & Kingston Co.PSC April 16, 1997, except for Note 14, as to Which the date is December 2, 1999.
THE KIRK & BLUM MANUFACTURING COMPANY BALANCE SHEET December 31, 1996 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 441,578 Available-for-sale securities 2,290,448 Current portion of debt securities to be held-to-maturity 56,399 Accounts receivable: Trade 14,483,774 Employee advances and other 58,770 Related party 103,339 ------------- 14,645,883 Less allowance for doubtful accounts ( 87,000) ------------- 14,558,883 Inventories: Raw materials and supplies 810,657 Work in process and finished products 490,671 ------------- 1,301,328 Costs and estimated earnings in excess of billings on uncompleted contracts 3,131,953 Prepaid expenses and deposits 65,072 ------------- Total current assets 21,845,661 PROPERTY, PLANT AND EQUIPMENT 2,962,390 INVESTMENTS AND OTHER ASSETS: Capital stock of The Factory Power Company, at cost 24,300 Intangible pension asset 188,333 Debt securities to be held-to-maturity, net of current portion 696,464 Cash surrender value of life insurance, net of policy loans of $338,509 at December 31, 1996 2,484,956 ------------ Total investments and other assets 3,394,054 ------------ $28,202,104 ============ The accompanying notes are an integral part of these financial statements. 2
LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 3,563,547 Accrued liabilities: Salaries and wages 1,790,202 Taxes 195,017 Workers compensation 85,500 Profit sharing contribution 540,906 Other 225,051 ------------ 2,836,676 Billings in excess of costs and estimated earnings on uncompleted contracts 933,408 Current portion of long-term debt 10,000 Current portion of capital lease obligations 127,448 Current portion of post retirement health care liability 40,000 Note payable - related party 320,000 ------------ Total current liabilities 7,831,079 LONG-TERM DEBT, less current portion 723,670 CAPITAL LEASE OBLIGATIONS, less current portion 389,854 WORKERS COMPENSATION LIABILITY, net of current portion 354,763 POST RETIREMENT HEALTH CARE LIABILITY, net of current portion 646,349 PENSION LIABILITY 91,659 SHAREHOLDERS' EQUITY: Class A common stock, no par value, authorized 250,000 shares, Issued 104,420 shares 64,420 Excess of additional pension liability over unrecognized prior service cost ( 142,533) Retained earnings 18,242,843 ------------- Total shareholders' equity 18,164,730 ------------- $28,202,104 ============= The accompanying notes are an integral part of these financial statements. 3
THE KIRK & BLUM MANUFACTURING COMPANY STATEMENT OF INCOME For The Year Ended December 31, 1996 NET SALES $66,575,044 COST OF SALES: Materials purchased (less discounts and scrap sales) 24,246,975 Direct labor 14,996,013 Direct costs 8,366,860 Manufacturing expenses 5,281,449 Change in ending inventories and percentage of completion costs 631,707 ----------- 53,523,004 ----------- Gross profit 13,052,040 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling 3,510,625 General and administrative 4,785,614 ----------- 8,296,239 ----------- Income from operations 4,755,801 OTHER INCOME (EXPENSE): Interest income 146,812 Interest expense ( 112,634) Rental income 18,000 Pension ( 123,200) Other 1,600 ------------ ( 69,422) ------------ Income before taxes 4,686,379 PROVISION FOR INCOME TAXES 101,635 ------------ Net income $ 4,584,744 ============ The accompanying notes are an integral part of these financial statements. 4
THE KIRK & BLUM MANUFACTURING COMPANY STATEMENT OF SHAREHOLDERS' EQUITY For the Year Ended December 31, 1996 Common Stock Common Stock - Class A (Note 8) Class B (Note 8) Excess of Additional -------------------------------- ------------------- Pension Liability Over Held in Out- Out- Unrecognized Prior Treasury Standing Amount Standing Amount Service Cost -------- -------- ------ -------- ------ ---------------------- BALANCE, December 31, 1995, as previously reported 42,750 64,420 $64,420 $ - Prior period adjustment - minimum pension liability adjustment (Note 14) - - - ( 342,359) Prior period adjustment - retiree health care - - - - Prior period adjustment - self insured workers compensation - - - - ------ ------ ------ --------- BALANCE, December 31, 1995, Restated 42,750 64,420 64,420 ( 342,359) Retirement of common stock held in treasury ( 2,750) - - - Minimum pension liability adjustment - - - 199,826 Net income - - - - Earnings distributions - - - - ------ ------ ------- ------- -------- --------- BALANCE, December 31, 1996 40,000 64,420 $64,420 - $ - ($142,533) ====== ====== ======= ====== ======== ========= Total Retained Shareholders' Earnings Equity ---------- --------------- BALANCE, December 31, 1995, as previously reported $16,550,313 $16,614,733 Prior period adjustment - minimum pension liability adjustment (Note 14) - ( 342,359) Prior period adjustment - retiree health care ( 667,452) ( 667,452) Prior period adjustment - self insured workers compensation ( 337,262) ( 337,262) ------------ ------------ BALANCE, December 31, 1995, Restated 15,545,599 15,267,660 Retirement of common stock held in treasury - - Minimum pension liability adjustment - 199,826 Net income 4,584,744 4,584,744 Earnings distributions ( 1,887,500) ( 1,887,500) ------------ ------------ BALANCE, December 31, 1996 $18,242,843 $18,164,730 ============ ============ The accompanying notes are an integral part of these financial statements. 5
THE KIRK & BLUM MANUFACTURING COMPANY STATEMENT OF CASH FLOWS For The Year Ended December 31, 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $4,584,744 Adjustments to reconcile net income to net cash provided by operating activities: Loss on sale of equipment 14,471 Depreciation and amortization 786,640 Amortization of bond discount ( 50,056) Change in assets and liabilities: Increase in accounts receivable ( 2,930,744) Decrease in inventories 249,505 Decrease in prepaid expenses and deposits 8,798 Increase in cash surrender value of life insurance ( 148,310) Increase in accounts payable 340,271 Increase in accrued liabilities 278,117 Net decrease in billings in excess of costs and estimated earnings and costs and estimated earnings in excess of billings on uncompleted contracts ( 548,486) Post retiree health care liability 18,897 ----------- Net cash provided by operating activities 2,603,847 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment 22,876 Capital expenditures ( 703,028) Collections on note receivable 126,400 Proceeds from maturities of debt securities 55,000 Purchases of available-for-sale securities ( 5,040,448) Proceeds from sale of available-for-sale securities 2,750,000 ----------- Net cash used in investing activities ( 2,789,200) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable - related party 320,000 Principal payments on long-term debt ( 10,000) Principal payments on capital lease obligation ( 117,532) Distributions paid to shareholders ( 2,700,000) ----------- Net cash used in financing activities ( 2,507,532) ----------- Net decrease in cash and cash equivalents ( 2,692,885) CASH AND CASH EQUIVALENTS: Beginning of year 3,134,463 ----------- End of year $ 441,578 =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $111,307 ======== Income taxes $ 76,854 ======== The accompanying notes are an integral part of these financial statements. 6
NOTES TO FINANCIAL STATEMENTS For the Year Ended December 31, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - The Company manufactures and fabricates custom sheet metal products which include dust and fume control systems, automotive paint booths, tanks and sheet metal component parts. Sales are made on an unsecured basis to customers located throughout the United States. Revenue Recognition - For financial reporting purposes, the Company records revenue on all significant contracts using the percentage-of-completion method of accounting. The percentage-of-completion is determined by experienced company personnel on a contract-by-contract basis based on labor and/or material costs incurred relative to total estimated contract costs. The specific method chosen is the most applicable based on the nature of each contract. The contract price is recognized as revenue based upon the percentage of completion. If the contract extends beyond one year and revisions are necessary in cost and profit estimates during the course of the work, they are reflected in the accounting period in which the facts giving rise to the revision become known. General and administrative expenses are charged to expense when incurred. The Company uses the completed-contract method of accounting for all contracts where nominal costs have been incurred prior to year-end or the total contract value is relatively insignificant. Cash and Cash Equivalents - For purposes of the statement of cash flows, cash and cash equivalents include highly liquid investments with original maturities of three months or less. Inventories - The labor content of work-in-process and finished products and all inventories of steel of the Company are valued at the lower of cost or market using the last-in, first-out (LIFO) method. All other inventories of the Company are accounted for at the lower of average cost or market. If the first-in, first-out (FIFO) method of inventory valuation had been used by the Company for all classes of inventory, the carrying value of inventories would have been approximately $1,817,000 higher than that reported at December 31, 1996. Depreciation - Depreciation and amortization are computed generally on accelerated methods over the estimated useful lives of the related assets. Credit Risk - As of December 31, 1996, the Company's cash on deposit with its bank exceeded the federally insured amount. Income Taxes - The Company's shareholders have elected to be treated as an S-Corporation for income tax reporting purposes and, thereby, have the Company's taxable income pass 7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) through to its shareholders to be taxed on their individual returns. Certain state and local taxing authorities do not recognize S-Corporation status as allowed under the Internal Revenue Code. In these situations, the Company has provided for income taxes at appropriate rates on applicable taxable income. Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. 2. COSTS AND ESTIMATED EARNINGS ON CONTRACTS At year end, the Company has several uncompleted construction projects at stages of completion ranging from 5% to 99%. Costs and estimated earnings on these contracts consist of the following at December 31: Costs incurred on uncompleted contracts $7,079,266 Estimated earnings on uncompleted contracts 1,133,506 ---------- 8,212,772 Less billings to date ( 6,014,227) ---------- $2,198,545 ========== The above amounts are reflected in the financial statements as follows: Costs and estimated earnings in excess of billings on uncompleted contracts $3,131,953 Billings in excess of costs and estimated earnings on uncompleted contracts ( 933,408) ---------- $2,198,545 ========== 3. INVESTMENTS Available-For-Sale Securities - Available-for-sale securities consist of investments in a mutual fund at December 31, 1996. The carrying value of the shares approximate the fair market value at December 31, 1996. The mutual fund paid $38,732 in dividends during 1996. Debt Securities to be Held-to-Maturity - Debt securities to be held-to-maturity at December 31 consist of the following: Zero coupon municipal bonds, carried at amortized cost maturing through March, 1998. $745,363 Notes receivable 7,500 -------- $752,863 ======== 8
The face amount and fair value of the municipal bonds were $800,000 and $729,487 at December 31, 1996, respectively. 4. REVOLVING LINE OF CREDIT The Company has available through July 11, 1997, a $6,000,000 line-of-credit which bears interest at the bank's prime rate (8.25% at December 31, 1996). The Company has the option at any time to adjust the interest rate to the London Inter-Bank offered rate (LIBOR) plus 200 basis points. The line-of-credit is unsecured and, at December 31, 1996, had no outstanding borrowings. 5. LONG-TERM DEBT Long-term debt at December 31 consists of the following: Notes payable to the beneficiaries of an estate of a former shareholder in annual installments of $10,000 plus interest at 6% with payment of the remaining principal and interest due in 1998, secured by 40,000 shares of treasury common stock. $733,670 Less current portion ( 10,000) -------- $723,670 ======== Future maturities of long-term debt are as follows: Year Ending December 31, 1997 $ 10,000 1998 723,670 -------- $733,670 ======== 6. CAPITAL LEASE OBLIGATIONS The Company leases equipment under capital lease obligations expiring through 2001. The assets are being amortized over the related lease terms. The cost included in machinery and 9
6. CAPITAL LEASE OBLIGATIONS (Continued) equipment and accumulated amortization is $890,982 and $585,059 at December 31, 1996, respectively. Future minimum lease payments under the capital lease agreements as of December 31, 1996 for each of the next five years and in the aggregate are: Year Ending December 31, 1997 $156,552 1998 156,552 1999 156,552 2000 87,845 2001 23,961 -------- 581,462 Less amount representing interest ( 64,160) -------- 517,302 Less current portion ( 127,448) -------- $389,854 ======== 7. RELATED PARTY TRANSACTIONS Accounts Receivable - The Company has a non-interest bearing receivable due from an entity which is related through common ownership. The receivable results from expenses paid by the Company on behalf of the related entity, including 401(k) contributions, utility expenses and insurance expenses. The Company also leases space on a month-to-month basis to the related entity for $1,500 per month. Rental income for this related entity was $18,000 for the year ended December 31, 1996. Note Payable - The Company has an unsecured $320,000 demand note payable to The Factory Power Company, an entity in which the Company has stock ownership. Interest is due monthly at the London Inter-Bank offered rate (LIBOR) (5.5% at December 31, 1996) plus .75%. 8. COMMON STOCK AND SUBSEQUENT EVENT Under agreements with certain employee/shareholders, the Company is required to redeem their holdings of common stock in the event of the employee's death, desire to sell, termination of employment, or retirement. Shares purchased by the employee/shareholders prior to December 14, 1969 (1,750 shares) are redeemable at 75% of the book value per share of the Company for the fiscal year end preceding the date of the transaction. 10
8. COMMON STOCK AND SUBSEQUENT EVENT (Continued) Under agreements with certain other shareholders, the Company has the right of first refusal regarding the sale or other transfer of the Company's common stock. On March 19, 1997, the Company amended its Articles of Incorporation and authorized 300,000 shares of no par value common stock, of which 75,000 shares are Class A voting and 225,000 shares of Class B non-voting common stock. Each shareholder has the same rights and privileges except that the Class B non-voting shareholders cannot vote. The Company issued 188,010 shares of Class B non-voting common stock. 9. LEASE COMMITMENTS The Company is committed under noncancelable operating lease agreements to lease certain plant facilities, computer equipment and other equipment through January, 1998. Future minimum annual operating lease payments are approximately as follows: Year Ending December 31, 1997 $ 96,000 1998 4,000 -------- $100,000 ======== Total rental expense was approximately $1,107,000 for 1996. 10. PENSION AND PROFIT SHARING PLANS The Company sponsors a noncontributory defined benefit pension plan for certain union employees. The plan is funded in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974. Net periodic pension cost for the fiscal period ended December 31, 1996 is as follows: Service cost $155,400 Interest cost 183,700 Return on plan assets ( 168,300) Net amortization and deferral ( 47,600) -------- Net periodic pension cost $123,200 ======== 11
10. PENSION AND PROFIT SHARING PLANS (Continued) The following reconciles the funded status of the defined benefit plan with amounts recognized in the accompanying balance sheet at December 31: Actuarial present value of benefit obligations: Vested benefits $2,641,360 Nonvested benefits 44,712 ---------- Accumulated benefit obligation 2,686,072 Effect of anticipated future events 393,515 ---------- Projected benefit obligation 3,079,587 Plan assets at fair value ( 2,594,413) ---------- Unfunded excess of projected benefit obligation over plan assets $ 485,174 ========== The unfunded excess consists of the following: Unamortized prior service costs $188,333 Unrecognized net asset at transition ( 158,800) Unrecognized net loss 694,848 Prepaid pension asset ( 239,207) -------- $485,174 ======== Unamortized prior service cost $188,333 Unrecognized net asset at transition ( 158,800) Unrecognized net loss 694,848 Prepaid pension asset ( 239,207) -------- $485,174 ======== The Company has recognized the excess of the accumulated benefit obligation in excess of the plan assets, the minimum liability, of $91,659, in the balance sheet at December 31, 1996. The weighted average discount rate used in determining the net periodic pension income and the projected benefit obligation was 7% for the year ended December 31, 1996. The expected rate of return on plan assets utilized was 8.5% for the year ended December 31, 1996. Benefits under the plan are not based on wages and, therefore, future wage adjustments have no effect on the projected benefit obligation. The Company also sponsors a post retirement health care plan for office employees. Effective January 1, 1990, the plan was amended and retirees after that date are not eligible to receive benefits under the plan. The plan allows retirees who have attained the age of 65 to elect the type of coverage desired. The following amounts relate to the Company's defined benefit post retirement health care plan at December 31, 1996. 12
10. PENSION AND PROFIT SHARING PLANS (Continued) Benefit obligation $686,349 Fair value of plan assets - -------- Funded status ($686,349) ======== Accrued benefit cost recognized in the statement of financial position $686,349 Weighted average assumption - discount rate 7% Benefits under the plan are not based on wages and, therefore, future wage adjustments have no effect on the projected benefit obligation. For measurement purposes, a 7% annual rate of increase in the cost of health care benefits was assumed for 1996. The rate was assumed to increase through 2004 at 4% to 6%. Benefit cost $113,150 Company distributions 121,225 Benefits paid 121,225 In addition to the above, the Company contributes to several multi-employer defined benefit plans. These plans cover substantially all of its contracted union employees not covered in the aforementioned plan. If the Company were to withdraw from its participation in these multi-employer plans at that time, the Company will be required to contribute its share of the Plan's unfunded benefit obligation. Management has no intention of withdrawing from any plan and, therefore, no liability has been provided for in the accompanying financial statements. The Company also sponsors a profit sharing and 401(k) savings retirement plan for non-union employees. The plan covers substantially all employees who have completed one year of service, completed 1,000 hours of service and who have attained 21 years of age. The plan allows the Company to make discretionary contributions and provides for employee salary reductions of up to 15%. The Company provides matching contributions of 25% of the first 5% of employee contributions. Matching contributions during 1996 were $57,185. Discretionary contributions for the year ended December 31, 1996 were $542,815. Amounts charged to pension expense under the above plans totaled approximately $1,224,000 for the year ended December 31, 1996. 11. SELF-INSURANCE COVERAGES The Company is self-insured for workers compensation coverage in the state of Ohio, in accordance with the requirements of the state. In Ohio, the Company will pay all eligible workers 13
11. SELF-INSURANCE COVERAGES (Continued) compensation claims up to $350,000 per individual and the statutory limit in the aggregate for the state. All eligible claims in excess of these amounts are covered under a policy with an insurance company. The balance sheet includes a liability of $440,263 at December 31, 1996 for claims incurred. 12. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 1996 consist of the following: Land $ 247,773 Buildings and improvements 4,749,771 Machinery and equipment 8,204,993 Automotive 733,332 Office furniture and fixtures 1,223,776 ----------- 15,159,645 Less accumulated depreciation and amortization ( 12,197,255) ----------- Net property, plant and equipment $ 2,962,390 =========== 13. ACCOUNTS RECEIVABLE Accounts receivable at December 31, 1996 includes unbilled amounts of $2,477,066. Unbilled amounts at year end represent work performed during the year which are not billed until January of the following year. 14. PRIOR PERIOD ADJUSTMENT Shareholders' equity at December 31, 1995 has been adjusted to correct an error for not previously recording a minimum pension liability relating to a defined benefit plan for union employees. The accumulated benefit obligation exceeded the plan assets at December 31, 1995. The error had no effect on net income for 1996. The accompanying 1996 financial statements have been restated to correct for errors associated with the underrecording of liabilities related to self insured workers compensation for the State of Ohio and benefits due under a retiree health care plan. The net effect was to decrease net income for 1996 by $121,898. Retained earnings at the beginning of 1996 has been decreased by $1,004,714 for the effects of not recording the liabilities at December 31, 1995. 14
THE KIRK & BLUM MANUFACTURING COMPANY FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 with INDEPENDENT AUDITORS' REPORT
RIPPE & KINGSTON CO PSC Certified Public Accountants & Consultants Rookwood Building o 1077 Celestial Street Cincinnati, Ohio 45202-1696 (513) 241-1375 Fax: (513) 241-7843 The Shareholders The Kirk & Blum Manufacturing Company Independent Auditors' Report We have audited the accompanying balance sheet of The Kirk & Blum Manufacturing Company as of December 31, 1998 and 1997, and the related statements of income, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of The Kirk & Blum Manufacturing Company as of December 31, 1998 and 1997 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Rippe & Kingston Co.PSC March 11, 1999
THE KIRK & BLUM MANUFACTURING COMPANY BALANCE SHEET December 31, 1998 and 1997 ASSETS 1998 1997 - ------ ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 1,359,776 $ 1,129,544 Available-for-sale securities - 1,025,808 Securities to be held-to-maturity - 745,740 Accounts receivable: Trade 14,681,985 14,328,645 Employee advances and other 46,880 83,453 Related party 44,118 44,232 ------------ ------------ 14,772,983 14,456,330 Less allowance for doubtful accounts (125,000) (87,000) ------------ ------------ 14,647,983 14,369,330 Inventories: Raw materials and supplies 626,920 752,693 Work in process and finished products 460,505 399,781 ------------ ------------ 1,087,425 1,152,474 Costs and estimated earnings in excess of billings on uncompleted contracts 2,029,373 2,207,121 Prepaid expenses and deposits 211,305 191,303 ------------ ------------ Total current assets 19,335,862 20,821,320 PROPERTY, PLANT AND EQUIPMENT 2,762,749 2,782,558 INVESTMENTS AND OTHER ASSETS: Capital stock of The Factory Power Company, at cost 24,300 24,300 Intangible pension asset 186,467 173,934 Cash surrender value of life insurance, net of policy loans of $117,731 at December 31, 1998 and 1997 2,741,442 2,578,544 ------------ ------------ Total investments and other assets 2,952,209 2,776,778 ------------ ------------ $25,050,820 $26,380,656 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,817,657 $ 2,218,846 Accrued liabilities: Salaries and wages 1,842,472 1,652,361 Taxes 165,857 164,026 Workers compensation 98,000 109,000 Profit sharing contribution 432,557 390,538 Other 784,463 402,718 ------------ ------------ 3,323,349 2,718,643 Billings in excess of costs and estimated earnings on uncompleted contracts 364,446 1,536,410 Current portion of long-term debt - 723,670 Current portion of capital lease obligations 144,470 135,691 Current portion of post retirement healthcare liability 40,000 40,000 ------------ ------------ Total current liabilities 6,689,922 7,373,260 LINE OF CREDIT 4,000,000 - CAPITAL LEASE OBLIGATIONS, less current portion 107,521 254,164 WORKERS COMPENSATION LIABILITY less current portion 147,529 245,708 POST RETIREMENT HEALTHCARE LIABILITY, less current portion 627,699 656,244 PENSION LIABILITY - 161,710 SHAREHOLDERS' EQUITY: Class A common stock, no par value, 105,000 shares, authorized, 102,670 issued 62,670 62,670 Class B nonvoting common stock, no par value, 225,000 shares authorized, 188,010 shares issued and outstanding 188,010 188,010 Accumulated other comprehensive income - (214,226) Retained earnings 13,227,469 17,653,116 ------------ ------------ Total shareholders' equity 13,478,149 17,689,570 ------------ ------------ $25,050,820 $26,380,656 ============ ============ The accompanying notes are an integral part of these financial statements. 2
THE KIRK & BLUM MANUFACTURING COMPANY STATEMENT OF INCOME For The Years Ended December 31, 1998 and 1997 1998 1997 ----------- ----------- NET SALES $69,443,929 $63,420,741 COST OF SALES: Materials purchased (less discounts and scrap sales) 23,474,968 23,236,675 Direct labor 18,261,258 15,222,995 Direct costs 9,647,061 8,149,281 Manufacturing expenses 5,143,569 5,025,975 Change in ending inventories and percentage of completion costs 265,462 316,941 ----------- ----------- 56,792,318 51,951,867 ----------- ----------- Gross profit 12,651,611 11,468,874 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling 3,719,505 3,410,621 General and administrative 5,134,988 4,953,749 ----------- ----------- 8,854,493 8,364,370 ----------- ----------- Income from operations 3,797,118 3,104,504 OTHER INCOME (EXPENSE): Interest income 90,096 193,414 Interest expense (263,584) (90,345) Rental income 21,600 21,700 Other 26,694 185,808 ----------- ----------- (125,194) 310,577 ----------- ----------- Income before taxes 3,671,924 3,415,081 PROVISION FOR INCOME TAXES 62,571 60,110 ----------- ----------- Net income $ 3,609,353 $ 3,354,971 =========== =========== The accompanying notes are an integral part of these financial statements. 3
THE KIRK & BLUM MANUFACTURING COMPANY STATEMENT OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 1998 and 1997 Common Stock Accumulated Other Common Stock - Class A Class B Comprehensive ------------------------------- ------------------- Income - Minimum Held in Out- Out- Pension Liability Treasury Standing Amount Standing Amount Adjustment --------- --------- -------- --------- -------- ----------------- BALANCE, December 31, 1996, as previously reported 40,000 64,420 $64,420 ($142,533) Prior period adjustment - retiree health care - - - - Prior period adjustment - self insured workers compensation - - - - ------ ------ ------ -------- BALANCE, December 31, 1996, as restated 40,000 64,420 64,420 (142,533) Comprehensive income: Net income (Note 14) - - - - Other comprehensive income: Minimum pension liability adjustment - - - (71,693) Comprehensive income Purchase and retirement of common stock - (1,750) (1,750) - Issuance of common stock - - - 188,010 $188,010 - Distributions - - - - - - ------ ------ ------ ------- -------- --------- BALANCE, December 31, 1997 40,000 62,670 62,670 188,010 188,010 (214,226) Comprehensive income: Net income - - - - - - Other comprehensive income: Minimum pension liability adjustment - - - - - 214,226 Comprehensive income Distributions - - - - - - ------ ------ ------ ------- -------- --------- BALANCE, December 31, 1998 40,000 62,670 $62,670 188,010 $188,010 $ - ====== ====== ======= ======= ======== =========
[RESTUBBED TABLE] Total Retained Shareholders' Earnings Equity ----------- ------------- BALANCE, December 31, 1996, as previously reported $19,369,455 $19,291,342 Prior period adjustment - retiree health care (686,349) (686,349) Prior period adjustment - self insured workers compensation (440,263) (440,263) ----------- ----------- BALANCE, December 31, 1996, as restated 18,242,843 18,164,730 Comprehensive income: Net income (Note 14) 3,354,971 3,354,971 Other comprehensive income: Minimum pension liability adjustment - (71,693) ---------- Comprehensive income 3,283,278 Purchase and retirement of common stock (116,360) (118,110) Issuance of common stock (188,010) - Distributions (3,640,328) (3,640,328) ---------- ---------- BALANCE, December 31, 1997 17,653,116 17,689,570 Comprehensive income: Net income 3,609,353 3,609,353 Other comprehensive income: Minimum pension liability adjustment - 214,226 ------------ Comprehensive income 3,823,579 Distributions (8,035,000) (8,035,000) ----------- ----------- BALANCE, December 31, 1998 $13,227,469 $13,478,149 =========== =========== The accompanying notes are an integral part of these financial statements. 4
THE KIRK & BLUM MANUFACTURING COMPANY STATEMENT OF CASH FLOWS For The Years Ended December 31, 1998 and 1997 1998 1997 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $3,609,353 $3,354,971 Adjustments to reconcile net income to net cash provided by operating activities: Gain (loss) on sale of equipment (17,763) (4,004) Depreciation and amortization 740,303 751,574 Allowance for doubtful accounts 38,000 - Amortization of bond discount (4,260) (50,377) Changes in assets - (increase) decrease: Accounts receivable (316,653) 195,153 Inventories 65,049 148,854 Prepaid expenses and deposits 19,981 (113,474) Cash surrender value of life insurance (162,898) (93,588) Changes in liabilities - increase (decrease): Accounts payable 598,811 (1,344,701) Accrued liabilities 506,527 (227,088) Billings in excess of costs and estimated earnings and costs and estimated earnings in excess of billings (994,216) 1,527,834 Post retirement healthcare liability (28,545) 9,895 ---------- ---------- Net cash provided by operating activities 4,053,689 4,155,049 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment 17,763 13,165 Capital expenditures (720,494) (580,903) Collections on note receivable - 1,900 Proceeds from redemption of securities held to maturity 750,000 50,000 Purchases of available-for-sale securities - (1,335,360) Proceeds from sale of available-for-sale securities 1,025,808 2,600,000 ---------- ---------- Net cash provided by investing activities 1,073,077 748,802 CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on line of credit 4,000,000 - Principal payments on long-term debt (723,670) (330,000) Principal payments on capital lease obligation (137,864) (127,447) Distributions paid to shareholders (8,035,000) (3,640,328) Payments to purchase common stock - (118,110) ---------- ---------- Net cash used in financing activities (4,896,534) (4,215,885) ---------- ---------- Net increase in cash and cash equivalents 230,232 687,966 The accompanying notes are an integral part of these financial statements. 5
THE KIRK & BLUM MANUFACTURING COMPANY STATEMENT OF CASH FLOWS (CONTINUED) For The Years Ended December 31, 1998 and 1997 1998 1997 ----------- ----------- CASH AND CASH EQUIVALENTS: Beginning of year 1,129,544 441,578 ----------- ----------- End of year $1,359,776 $1,129,544 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 91,795 $ 99,600 =========== =========== Income taxes $ 56,573 $ 109,564 =========== =========== The accompanying notes are an integral part of these financial statements. 6
THE KIRK & BLUM MANUFACTURING COMPANY NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 1998 and 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - The Company manufactures and fabricates custom sheet metal products which include dust and fume control systems, automotive paint booths, tanks and sheet metal component parts. Sales are made on an unsecured basis to customers located throughout the United States. Revenue Recognition - For financial reporting purposes, the Company records revenue on all significant contracts using the percentage-of-completion method of accounting. The percentage-of-completion is determined by experienced company personnel on a contract-by-contract basis based in part on costs incurred, efforts expended and results achieved. The specific method chosen is the most applicable based on the nature of each contract. Because of inherent uncertainties in estimating, it is at least reasonably possible that the estimates used will change within the near term. The contract price is recognized as revenue based upon the percentage of completion. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative expenses are charged to expense when incurred. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. The Company uses the completed-contract method of accounting for all contracts where nominal costs have been incurred prior to year-end or the total contract value is relatively insignificant. Cash and Cash Equivalents - For purposes of the statement of cash flows, cash and cash equivalents include highly liquid investments with original maturities of three months or less. Inventories - The labor content of work-in-process and finished products and all inventories of steel of the Company are valued at the lower of cost or market using the last-in, first-out (LIFO) method. All other inventories of the Company are accounted for at the lower of average cost or market. If the first-in, first-out (FIFO) method of inventory valuation had been used by the Company for all classes of inventory, the carrying value of inventories would have been 7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) approximately $2,026,000 and $1,978,000 higher than that reported at December 31, 1998 and 1997, respectively. Depreciation - Depreciation and amortization are computed generally on accelerated methods over the estimated useful lives of the related assets. Credit Risk - As of December 31, 1998 and 1997, the Company's cash on deposit with its bank exceeded the federally insured amount. Income Taxes - The Company's shareholders have elected to be treated as an S-Corporation for income tax reporting purposes and, thereby, have the Company's taxable income pass through to its shareholders to be taxed on their individual returns. Certain state and local taxing authorities do not recognize S-Corporation status as allowed under the Internal Revenue Code. In these situations, the Company has provided for income taxes at appropriate rates on applicable taxable income. Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. Advertising - The Company expenses all advertising costs as incurred. Advertising expense was approximately $150,000 and $100,000 for 1998 and 1997, respectively. 2. COSTS AND ESTIMATED EARNINGS ON CONTRACTS At year end, the Company has several uncompleted construction projects at stages of completion ranging from 5% to 99%. Costs and estimated earnings on these contracts consist of the following at December 31: 1998 1997 ---------- ---------- Costs incurred on uncompleted contracts $6,645,680 $6,492,702 Estimated earnings on uncompleted contracts 1,214,520 871,535 ---------- ---------- 7,860,200 7,364,237 Less billings to date (6,195,273) (6,693,526) ---------- ---------- $1,664,927 $ 670,711 ========== ========== 2. COSTS AND ESTIMATED EARNINGS ON CONTRACTS (Continued) The above amounts are reflected in the financial statements as follows: 1998 1997 ---------- ---------- Costs and estimated earnings in excess of billings on uncompleted contracts $2,029,373 $2,207,121 Billings in excess of costs and estimated earnings on uncompleted contracts (364,446) (1,536,410) ---------- ---------- $1,664,927 $ 670,711 ========== ==========
3. INVESTMENTS Available-For-Sale Securities - Available-for-sale securities consist of investments in a mutual fund at December 31, 1997. The carrying value of the shares approximate the fair market value at December 31, 1997. The account was closed during 1998. The mutual fund paid $18,847 and $85,360 in dividends during 1998 and 1997, respectively. Debt Securities to be Held-to-Maturity - Debt securities to be held-to-maturity at December 31 consist of the following: 1998 1997 Zero coupon municipal bonds, carried at amortized cost maturing through March, 1998. $ - $745,740 The face amount and fair value of the municipal bonds were $750,000 and $745,193 at December 31, 1997. 4. REVOLVING LINE OF CREDIT The Company has available through April 30, 2001, a $12,000,000 line-of-credit ($6,000,000 at December 31, 1997) which bears interest at either the bank's prime rate minus 125 basis points or the London Inter-Bank offered rate (LIBOR) plus 100 basis points. The Company may elect the LIBOR rate on all or any portion of the outstanding line of credit balance, in minimum amounts of $250,000. If elected, the Company must select a LIBOR interest period between 30 and 360 days. Interest is due at the end of the selected period at the applicable LIBOR rate. The Company has elected the LIBOR rate and a 30 day interest period at December 31, 1998. The 30 day LIBOR rate at December 31, 1998 was 5.06%. The line-of-credit is unsecured. The Company is required to meet certain financial covenants regarding minimum net worth and debt to equity under this agreement. 8
5. LONG-TERM DEBT Long-term debt at December 31 consists of the following: 1998 1997 -------- -------- Notes payable to the beneficiaries of an estate of a former shareholder in annual installments of $10,000 plus interest at 6% with payment of the remaining principal and interest due in 1998, secured by 40,000 shares of treasury common stock. $ - $723,670 Less current portion - (723,670) ------- -------- $ - $ - ======= ======== 6. CAPITAL LEASE OBLIGATIONS The Company leases equipment under capital lease obligations expiring through 2001. The assets are being amortized over the related lease terms. The cost included in machinery and equipment and accumulated amortization is $890,982 and $751,962 at December 31, 1998, respectively and $890,982 and $672,464 at December 31, 1997, respectively. Future minimum lease payments under the capital lease agreements as of December 31, 1998 for each of the next five years and in the aggregate are: Year Ending December 31, ------------ 1999 $156,552 2000 87,845 2001 21,788 --------- 266,185 Less amount representing interest (14,194) --------- 251,991 Less current portion (144,470) --------- $107,521 ========= 7. RELATED PARTY TRANSACTIONS Accounts Receivable - The Company has a non-interest bearing receivable due from an entity which is related through common ownership. The receivable results from expenses paid by the Company on behalf of the related entity, including 401(k) contributions, utility expenses and insurance expenses. The Company also leases space on a month-to-month basis to the related entity for approximately $1,800 per month. Rental income from this related entity was $21,600 and $21,700 for the years ended December 31, 1998 and 1997, respectively. 9
8. COMMON STOCK Under agreements with certain employee/shareholders, the Company is required to redeem their holdings of common stock in the event of the employee's death, desire to sell, termination of employment, or retirement. Shares purchased by the employee/shareholders prior to December 14, 1969 (1,750 shares) are redeemable at 75% of the book value per share of the Company for the fiscal year end preceding the date of the transaction. Under agreements with certain other shareholders, the Company has the right of first refusal regarding the sale or other transfer of the Company's common stock. On March 19, 1997, the Company amended its Articles of Incorporation and authorized 300,000 shares of no par value common stock, of which 75,000 shares are Class A voting and 225,000 shares of Class B non-voting common stock. Each shareholder has the same rights and privileges except that the Class B non-voting shareholders cannot vote. The Company issued 188,010 shares of Class B non-voting common stock. On March, 16, 1998, the Company amended the Articles of Incorporation and increased the number of authorized Class A voting common stock to 105,000 shares. 9. LEASE COMMITMENTS The Company is committed under noncancelable operating lease agreements to lease certain plant facilities and office equipment through June, 2001. Future minimum annual operating lease payments are approximately as follows: Year Ending December 31, ------------ 1999 $142,000 2000 96,000 2001 10,000 -------- $248,000 ======== Total rental expense was approximately $1,238,000 and $1,144,000 for 1998 and 1997, respectively. 10. PENSION AND PROFIT SHARING PLANS The Company sponsors a noncontributory defined benefit pension plan for certain union employees. The plan is funded in accordance with the funding requirements of the Employee 10
10. PENSION AND PROFIT SHARING PLANS (Continued) Retirement Income Security Act of 1974. The Company also sponsors a postretirement health care plan for office employees. Effective January 1, 1990, the Plan was amended and retirees after that date are not eligible to receive benefits under the plan. The Plan allows retirees who have attained the age of 65 to elect the type of coverage desired. The following amounts relate to the Company's defined benefit pension and postretirement health care plans: Pension Benefits Postretirement Benefits ----------------------------- -------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Benefit obligation at December 31 $3,255,529 $3,297,069 $667,699 $696,244 Fair value of plan assets at December 31 2,959,800 2,756,614 - - ----------- ----------- ---------- --------- Funded status ($ 295,729) ($ 540,455) ($667,699) ($696,244) =========== =========== ========= ========= Unamortized prior service costs $ 186,467 $ 173,934 Unrecognized net asset at transition (78,200) (118,500) Unrecognized net loss 423,252 711,471 Prepaid pension asset (235,790) (226,450) ----------- ----------- ($ 295,729) ($ 540,455) =========== =========== The Company has recognized the excess of the accumulated benefit obligation in excess of the plan assets, the minimum liability, of $161,710 in the balance sheet at December 31, 1997. Pension Benefits Postretirement Benefits -------------------- -------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Accrued benefit cost recognized in the statement of financial position $667,699 $696,244 Weighted average assumptions as of December 31: Discount rate 7% 7% 7% 7% Expected return on plan assets 8.5% 8.5% - - Rate of compensation increase - - - - Benefits under the plans are not based on wages and, therefore, future wage adjustments have no effect on the projected benefit obligations. For measurement purposes, a 7% annual 11
10. PENSION AND PROFIT SHARING PLANS (Continued) rate of increase in the cost of health care benefits was assumed for 1999. The rate was assumed to increase through 2004 at 4% to 6%. Pension Benefits Postretirement Benefits -------------------------- -------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Benefit cost $ 91,300 $105,800 $118,602 $117,498 Company contributions 100,000 93,966 99,996 88,723 Benefits paid 163,494 143,721 99,996 88,723 In connection with collective bargaining agreements, the Company participates with other companies in defined benefit pension plans. These plans cover substantially all of its contracted union employees not covered in the aforementioned plan. If the Company were to withdraw from its participation in these multi-employer plans at that time, the Company will be required to contribute its share of the Plan's unfunded benefit obligation. Management has no intention of withdrawing from any Plan and, therefore, no liability has been provided for in the accompany-ing financial statements. The Company also sponsors a profit sharing and 401(k) savings retirement plan for non-union employees. The plan covers substantially all employees who have completed one year of service, completed 1,000 hours of service and who have attained 21 years of age. The plan allows the Company to make discretionary contributions and provides for employee salary reductions of up to 15%. The Company provides matching contributions of 25% of the first 5% of employee contributions. Matching contributions during 1998 and 1997 were $56,178 and $59,462, respectively. Discretionary contributions for the years ended December 31, 1998 and 1997 were $434,806 and $390,538, respectively. Amounts charged to pension expense under the above plans totaled approximately $2,038,177 and $1,495,700 for the years ended December 31, 1998 and 1997, respectively. 11. SELF-INSURANCE COVERAGES The Company is self-insured for workers compensation coverage in the state of Ohio, in accordance with the requirements of the state. In Ohio, the Company will pay all eligible workers compensation claims up to $225,000 per individual and the statutory limit in the aggregate for the state. All eligible claims in excess of these amounts are covered under a policy with an insurance company. The balance sheet includes a liability of $245,529 and $354,708 at December 31, 1998 and 1997, respectively, for claims incurred. 12
12. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31: 1998 1997 ----------- ----------- Land $ 247,772 $ 247,773 Buildings and improvements 4,841,033 4,841,033 Machinery and equipment 8,850,776 8,449,371 Automotive 918,377 786,345 Office furniture and fixtures 1,216,227 1,249,832 ------------ ------------ 16,074,185 15,574,354 Less accumulated depreciation and amortization (13,311,436) (12,791,796) ------------ ------------ Net property, plant and equipment $ 2,762,749 $ 2,782,558 ============ ============ 13. ACCOUNTS RECEIVABLE Accounts receivable at December 31, 1998 and 1997 includes unbilled amounts of $1,785,411 and $2,314,550, respectively. Unbilled amounts at year end represent work performed during the year which are not billed until January of the following year. 14. PRIOR PERIOD ADJUSTMENT The accompanying financial statements for 1997 have been restated to correct for errors associated with the underrecording of liabilities related to self insured workers compensation for the State of Ohio, additional insurance premiums and benefits due under a retiree health care plan. The net effect of the restatements was to decrease net income for 1997 by $72,709. Retained earnings at the beginning of 1997 has been decreased by $1,126,612 for the effects not recording the liabilities at December 31, 1996. 13
THE KIRK & BLUM MANUFACTURING COMPANY FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
THE KIRK & BLUM MANUFACTURING COMPANY BALANCE SHEET September 30, 1999 ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 668,980 Accounts receivable: Trade 9,786,839 Employee advances and other 20,814 Related party 43,468 ------------ 9,851,121 Less allowance for doubtful accounts ( 125,000) ------------ 9,726,121 Inventories: Raw materials and supplies 902,067 Work in process and finished products 490,448 ------------ 1,392,515 Costs and estimated earnings in excess of billings on uncompleted contracts 5,950,927 Prepaid expenses and deposits 129,562 ------------ Total current assets 17,868,105 PROPERTY, PLANT AND EQUIPMENT 2,594,941 INVESTMENTS AND OTHER ASSETS: Capital stock of The Factory Power Company, at cost 24,300 Intangible pension asset 270,488 Cash surrender value of life insurance, net of policy loans of $117,306 2,812,926 ------------ Total investments and other assets 3,107,714 ------------ $23,570,760 =========== The accompanying notes are an integral part of these financial statements. 2
LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Line of credit $ 5,000,000 Accounts payable 1,796,358 Accrued liabilities: Salaries and wages 1,320,135 Taxes 174,999 Workers compensation 98,000 Profit sharing contribution 282,000 Other 543,205 ------------ 2,418,339 Billings in excess of costs and estimated earnings on uncompleted contracts 164,815 Current portion of capital lease obligations 66,431 Current portion of post retirement healthcare liability 40,000 ------------ Total current liabilities 9,485,943 CAPITAL LEASE OBLIGATIONS, less current portion 32,625 WORKERS COMPENSATION LIABILITY less current portion 75,316 POST RETIREMENT HEALTHCARE LIABILITY, less current portion 674,085 PENSION LIABILITY 100,685 SHAREHOLDERS' EQUITY: Class A common stock, no par value, 105,000 shares, authorized, 102,670 issued and outstanding 62,670 Class B nonvoting common stock, no par value, 225,000 shares authorized, 188,010 shares issued and outstanding 188,010 Accumulated other comprehensive loss ( 57,297) Retained earnings 13,008,723 ------------ Total shareholders' equity 13,202,106 ------------ $23,570,760 ============ The accompanying notes are an integral part of these financial statements. 3
THE KIRK & BLUM MANUFACTURING COMPANY STATEMENT OF INCOME For The Nine Months Ended September 30, 1999 NET SALES $48,867,865 COST OF SALES: Materials purchased (less discounts and scrap sales) 16,907,069 Direct labor 13,700,833 Direct costs 7,928,316 Manufacturing expenses 4,019,964 Change in ending inventories and percentage of completion costs ( 2,891,735) ------------ 39,664,447 ------------ Gross profit 9,203,418 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling 2,670,739 General and administrative 3,471,525 ------------ 6,142,264 ------------ Income from operations 3,061,154 OTHER INCOME (EXPENSE): Interest income 31,494 Interest expense ( 198,142) Rental income 16,200 Other income 72,345 ------------ ( 78,103) ------------ Income before taxes 2,983,051 PROVISION FOR INCOME TAXES 86,797 ------------ Net income $ 2,896,254 ============ The accompanying notes are an integral part of these financial statements. 4
THE KIRK & BLUM MANUFACTURING COMPANY STATEMENT OF SHAREHOLDERS' EQUITY For the Nine Months Ended September 30, 1999 Common Stock Accumulated Other Common Stock - Class A Class B Comprehensive ----------------------------- ----------------- Income - Minimum Total Held in Out- Out- Pension Liability Retained Shareholders' Treasury Standing Amount Standing Amount Adjustment Earnings Equity --------- -------- ------- -------- ------ ----------------- ----------- -------------- BALANCE, December 31, 1998 40,000 62,670 $62,670 188,010 $188,010 $ - $13,227,469 $13,478,149 Comprehensive income: Net income - - - - - - 2,896,254 2,896,254 Other comprehensive income: Minimum pension liability adjustment - - - - - ( 57,297) - ( 57,297) ----------- Comprehensive income 2,838,957 Distributions - - - - - - (3,115,000) (3,115,000) ------ ------ ------- ------- -------- ------- ----------- ----------- BALANCE, September 30, 1999 40,000 62,670 $62,670 188,010 $188,010 ($57,297) $13,008,723 $13,202,106 ====== ====== ======= ======= ======== ======= =========== =========== The accompanying notes are an integral part of these financial statements. 5
THE KIRK & BLUM MANUFACTURING COMPANY STATEMENT OF CASH FLOWS For The Nine Months Ended September 30, 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,896,254 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of equipment ( 70,942) Depreciation and amortization 590,250 Changes in assets - (increase) decrease: Accounts receivable 4,921,862 Inventories ( 305,090) Prepaid expenses and deposits 41,110 Cash surrender value of life insurance ( 71,484) Changes in liabilities - increase (decrease): Accounts payable ( 1,021,299) Accrued liabilities ( 977,223) Billings in excess of costs and estimated earnings and costs and estimated earnings in excess of billings ( 4,121,185) Post retirement healthcare liability 46,386 ----------- Net cash provided by operating activities 1,928,639 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment 143,150 Capital expenditures ( 494,650) ----------- Net cash used in investing activities ( 351,500) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on line of credit 1,000,000 Principal payments on capital lease obligation ( 152,935) Distributions paid to shareholders ( 3,115,000) ----------- Net cash used in financing activities ( 2,267,935) ----------- Net decrease in cash and cash equivalents ( 690,796) CASH AND CASH EQUIVALENTS: Beginning of period 1,359,776 ----------- End of period $ 668,980 =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 389,193 =========== Income taxes $ 68,684 =========== The accompanying notes are an integral part of these financial statements. 6
THE KIRK & BLUM MANUFACTURING COMPANY NOTES TO FINANCIAL STATEMENTS For the Nine Months Ended September 30, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - The Company manufactures and fabricates custom sheet metal products which include dust and fume control systems, automotive paint booths, tanks and sheet metal component parts. Sales are made on an unsecured basis to customers located throughout the United States. Revenue Recognition - For financial reporting purposes, the Company records revenue on all significant contracts using the percentage-of-completion method of accounting. The percentage-of-completion is determined by experienced company personnel on a contract-by-contract basis based in part on costs incurred, efforts expended and results achieved. The specific method chosen is the most applicable based on the nature of each contract. Because of inherent uncertainties in estimating, it is at least reasonably possible that the estimates used will change within the near term. The contract price is recognized as revenue based upon the percentage of completion. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative expenses are charged to expense when incurred. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. The Company uses the completed-contract method of accounting for all contracts where nominal costs have been incurred prior to the end of the nine months or the total contract value is relatively insignificant. Cash and Cash Equivalents - For purposes of the statement of cash flows, cash and cash equivalents include highly liquid investments with original maturities of three months or less. Inventories - The labor content of work-in-process and finished products and all inventories of steel of the Company are valued at the lower of cost or market using the last-in, first-out (LIFO) method. All other inventories of the Company are accounted for at the lower of average cost or market. If the first-in, first-out (FIFO) method of inventory valuation had been used by the Company for all classes of inventory, the carrying value of inventories would have been 7
THE KIRK & BLUM MANUFACTURING COMPANY NOTES TO FINANCIAL STATEMENTS For the Nine Months Ended September 30, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) approximately $2,212,000 higher than that reported at September 30, 1999. Depreciation - Depreciation and amortization are computed generally on accelerated methods over the estimated useful lives of the related assets. Credit Risk - As of September 30, 1999, the Company's cash on deposit with its bank exceeded the federally insured amount. Income Taxes - The Company's shareholders have elected to be treated as an S-Corporation for income tax reporting purposes and, thereby, have the Company's taxable income pass through to its shareholders to be taxed on their individual returns. Certain state and local taxing authorities do not recognize S-Corporation status as allowed under the Internal Revenue Code. In these situations, the Company has provided for income taxes at appropriate rates on applicable taxable income. Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. Advertising - The Company expenses all advertising costs as incurred. Advertising expense was approximately $52,000 for the nine months ended September 30, 1999. 2. COSTS AND ESTIMATED EARNINGS ON CONTRACTS At September 30, 1999, the Company had several uncompleted construction projects at stages of completion ranging from 5% to 99%. Costs and estimated earnings on these contracts consisted of the following at September 30: Costs incurred on uncompleted contracts $16,866,671 Estimated earnings on uncompleted contracts 1,284,540 ----------- 18,151,211 Less billings to date (12,365,099) ----------- $ 5,786,112 =========== The above amounts are reflected in the financial statements as follows: Costs and estimated earnings in excess of billings on uncompleted contracts $5,950,927 Billings in excess of costs and estimated earnings on uncompleted contracts ( 164,815) ---------- $5,786,112 ========== 8
THE KIRK & BLUM MANUFACTURING COMPANY NOTES TO FINANCIAL STATEMENTS For the Nine Months Ended September 30, 1999 3. REVOLVING LINE OF CREDIT The Company has available through April 30, 2001, a $12,000,000 line-of-credit which bears interest at either the bank's prime rate minus 125 basis points or the London Inter-Bank offered rate (LIBOR) plus 100 basis points. The Company may elect the LIBOR rate on all or any portion of the outstanding line of credit balance, in minimum amounts of $250,000. If elected, the Company must select a LIBOR interest period between 30 and 360 days. Interest is due at the end of the selected period at the applicable LIBOR rate. The Company has elected the LIBOR rate and a 30 day interest period at September 30, 1999. The 30 day LIBOR rate at September 30, 1999 was 5.38%. The line-of-credit is unsecured. The Company is required to meet certain financial covenants regarding minimum net worth and debt to equity under this agreement. As part of the acquisition discussed Note 11, the revolving line of credit was refinanced in full by CECO Environmental Corp. 4. CAPITAL LEASE OBLIGATIONS The Company leases equipment under capital lease obligations expiring through April, 2001. The assets are being amortized over the related lease terms. The cost included in machinery and equipment and accumulated amortization is $890,982 and $811,636, respectively, at September 30, 1999. Future minimum lease payments under the capital lease agreements as of September 30, 1999 are as follows: Twelve Months Ending September 30, ------------- 2000 $ 70,817 2001 33,654 --------- 104,471 Less amount representing interest ( 5,415) --------- 99,056 Less current portion ( 66,431) --------- $ 32,625 ========= 5. RELATED PARTY TRANSACTIONS Accounts Receivable - The Company has a non-interest bearing receivable due from an entity which is related through common ownership. The receivable results from expenses paid 9
THE KIRK & BLUM MANUFACTURING COMPANY NOTES TO FINANCIAL STATEMENTS For the Nine Months Ended September 30, 1999 5. RELATED PARTY TRANSACTIONS (Continued) by the Company on behalf of the related entity, including 401(k) contributions, utility expenses and insurance expenses. The Company also leases space on a month-to-month basis to the related entity for approximately $1,800 per month. Rental income from this related entity was $16,200 for the nine months ended September 30, 1999. 6. COMMON STOCK Under agreements with certain employee/shareholders, the Company is required to redeem their holdings of common stock in the event of the employee's death, desire to sell, termination of employment, or retirement. Shares purchased by the employee/shareholders prior to December 14, 1969 (1,750 shares) are redeemable at 75% of the book value per share of the Company for the fiscal year end preceding the date of the transaction. Under agreements with certain other shareholders, the Company has the right of first refusal regarding the sale or other transfer of the Company's common stock. On March 19, 1997, the Company amended its Articles of Incorporation and authorized 300,000 shares of no par value common stock, of which 75,000 shares are Class A voting and 225,000 shares of Class B non-voting common stock. Each shareholder has the same rights and privileges except that the Class B non-voting shareholders cannot vote. The Company issued 188,010 shares of Class B non-voting common stock. On March, 16, 1998, the Company amended the Articles of Incorporation and increased the number of authorized Class A voting common stock to 105,000 shares. 7. LEASE COMMITMENTS The Company is committed under noncancelable operating lease agreements to lease certain plant facilities and office equipment through September, 2002. Future minimum annual operating lease payments are approximately as follows: Twelve Months Ending September 30, ------------- 2000 $151,000 2001 59,000 2002 11,000 -------- $221,000 ========
THE KIRK & BLUM MANUFACTURING COMPANY NOTES TO FINANCIAL STATEMENTS For the Nine Months Ended September 30, 1999 7. LEASE COMMITMENTS (Continued) Total rental expense was approximately $1,243,000 for the nine months ended September 30, 1999. 8. BENEFIT PLANS The Company sponsors a noncontributory defined benefit pension plan for certain union employees. The plan is funded in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974. The Company also sponsors a postretirement health care plan for office employees. Effective January 1, 1990, the plan was amended and retirees after that date are not eligible to receive benefits under the plan. The plan allows retirees who have attained the age of 65 to elect the type of coverage desired. The following amounts relate to the Company's defined benefit pension and postretirement health care plans: Pension Benefits Postretirement Benefits ---------------- ----------------------- Estimated Benefit obligation at September 30 $3,661,113 $714,085 Fair value of plan assets at September 30 3,062,855 - ---------- -------- Funded status ($ 598,258) ($714,085) ========== ======== Unamortized prior service costs $270,886 Unrecognized net asset at transition ( 37,900) Unrecognized net loss 606,014 Prepaid pension asset ( 240,742) --------- ($598,258) ========= The Company has recognized the excess of the accumulated benefit obligation in excess of the plan assets, the minimum liability, of $100,685 in the balance sheet at September 30, 1999. Pension Benefits Postretirement Benefits ---------------- ------------------------ Accrued benefit cost recognized in the statement of financial position $ - $714,085 11
THE KIRK & BLUM MANUFACTURING COMPANY NOTES TO FINANCIAL STATEMENTS For the Nine Months Ended September 30, 1999 8. BENEFIT PLANS (Continued) Pension Benefits Postretirement Benefits ---------------- ----------------------- Weighted average assumptions as of December 31: Discount rate 7% 7% Expected return on plan assets 8.5% - Rate of compensation increase - - Benefits under the plans are not based on wages and, therefore, future wage adjustments have no effect on the projected benefit obligations. For measurement purposes, no annual increase in the cost of health care benefits is assumed for 1999, and future years as the Company elected to pass along any future increases to the retirees. Pension Benefits Postretirement Benefits ---------------- ----------------------- Benefit cost $61,210 $100,687 Company contributions - 78,867 Benefits paid 99,502 78,867 In connection with collective bargaining agreements, the Company participates with other companies in defined benefit pension plans. These plans cover substantially all of its contracted union employees not covered in the aforementioned plan. If the Company were to withdraw from its participation in these multi-employer plans at that time, the Company will be required to contribute its share of the plans' unfunded benefit obligation. Management has no intention of withdrawing from any plan and, therefore, no liability has been provided for in the accompanying financial statements. The Company also sponsors a profit sharing and 401(k) savings retirement plan for non-union employees. The plan covers substantially all employees who have completed one year of service, completed 1,000 hours of service and who have attained 21 years of age. The plan allows the Company to make discretionary contributions and provides for employee salary reductions of up to 15%. The Company provides matching contributions of 25% of the first 5% of employee contributions. Matching contributions for the nine months ended September 30, 1999 were $39,581. Discretionary contributions for the nine months ended September 30, 1999 were $282,000. Amounts charged to pension expense under the above plans totaled approximately $1,881,534 for the nine months ended September 30, 1999. 12
THE KIRK & BLUM MANUFACTURING COMPANY NOTES TO FINANCIAL STATEMENTS For the Nine Months Ended September 30, 1999 9. SELF-INSURANCE COVERAGES The Company is self-insured for workers compensation coverage in the state of Ohio, in accordance with the requirements of the state. In Ohio, the Company will pay all eligible workers compensation claims up to $225,000 per individual and the statutory limit in the aggregate for the state. All eligible claims in excess of these amounts are covered under a policy with an insurance company. The balance sheet includes a liability of $173,316 at September 30, 1999 for claims incurred. 10. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at September 30, 1999: Land $ 247,772 Buildings and improvements 4,841,033 Machinery and equipment 8,883,440 Automotive 911,840 Office furniture and fixtures 1,237,549 ------------ 16,121,634 Less accumulated depreciation and amortization ( 13,526,693) ------------ Net property, plant and equipment $ 2,594,941 ============ 11. SUBSEQUENT EVENT On December 7, 1999, the shareholders of the Company sold all of the outstanding stock in the Company to CECO Environmental Corp. The purchase price was approximately $25 million plus the assumption of $5 million of existing indebtedness. 13
(b) Pro Forma Financial Information The following unaudited pro forma consolidated financial information presents the pro forma consolidated balance sheet at December 31, 1998 and September 30, 1999, giving effect to the acquisition of 100% of the common stock of The Kirk & Blum Manufacturing Company and kbd/Technic, Inc. (collectively referred to as "K & B") as if it had been consummated on those dates. Also presented are the pro forma consolidated statements of operations for the year ended December 31, 1998 and the nine months ended September 30, 1999, giving effect as if the acquisition had been consummated as of the beginning of the respective periods presented. The pro forma data is based on the historical combined statements of CECO Environmental Corp., The Kirk & Blum Manufacturing Company, and kbd/Technic, Inc. giving effect to the purchase method of accounting and to the assumptions and adjustments (which the Company believes to be reasonable) described in the accompanying notes to the unaudited pro forma consolidated condensed financial information. Under the purchase method of accounting, assets acquired and liabilities assumed will be recorded at their estimated fair value at the date of the acquisition. The pro forma adjustments set forth in the following unaudited pro forma consolidated condensed information are estimated and may differ from the actual adjustments when they become known. However, no material differences are anticipated by the Company. The following unaudited pro forma consolidated condensed financial information does not reflect certain cost savings that the Company believes will be realized following the K & B acquisition. Such cost savings are expected to be realized primarily by significantly eliminating the use of subcontractors by the Company's subsidiary, New Busch Co., Inc., which it relies upon heavily in the fabrication of products for its customers. In addition, the Company believes that a significant amount of overhead expenses will be eliminated as the result of efficiencies to be achieved from the combination of the Company with K & B. The pro forma data is provided for comparative purposes only. It does not purport to be indicative of the results that actually would have occurred if such acquisition had been consummated on the dates indicated or that may be obtained in the future. The unaudited pro forma combined financial information should be read in conjunction with the notes thereto, the audited financial statements of The Kirk & Blum Manufacturing Company for the year ended December 31, 1998 and its unaudited financial statements for the nine months ended September 30, 1999, and the Company's consolidated financial statements, incorporated herein by reference.
CECO ENVIRONMENTAL CORP. PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET DECEMBER 31, 1998 (NOTE 1) HISTORICAL ------------------------------------------------ ---------- CECO KIRK & BLUM ENVIRONMENTAL MANUFACTURING kbd/TECHNIC, CORP. COMPANY INC. TOTAL --------------- ------------- ------------ ---------- ASSETS Current assets: Cash and cash equivalents $364,648 $1,359,776 $55,989 $1,780,413 Marketable securities 695,944 695,944 Accounts receivable 4,068,640 14,556,985 481,638 19,107,263 Inventories 541,315 1,087,425 1,492 1,630,232 Costs and estimated earnings in excess of billings on uncompleted contracts 226,504 2,029,373 2,255,877 Due from former owners of Busch Co. 147,939 147,939 Investment in sales-type lease 95,400 95,400 Prepaid expenses and other current assets 344,961 302,303 647,264 Deferred income taxes 84,500 84,500 ----------- ----------- -------- ----------- Total current assets 6,569,851 19,335,862 539,119 26,444,832 Property and equipment, net 2,062,452 2,762,749 64,991 4,890,192 Cash surrender value of life insurance, net of policy loans 2,741,442 2,741,442 Goodwill, net 5,169,353 5,169,353 Other intangible assets, at cost, net 1,270,780 186,467 1,457,247 Investment in sales-type lease 333,900 333,900 Deferred income taxes 68,500 68,500 Investment 24,300 24,300 ----------- ----------- -------- ----------- $15,474,836 $25,050,820 $604,110 $41,129,766 =========== =========== ======== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term obligations $1,200,000 $100,000 $1,300,000 Current portion of long-term debt 388,372 388,372 Current portion of capital lease obligations $144,470 144,470 Accounts payable and accrued expenses 3,104,004 6,181,006 111,473 9,396,483 Billings in excess of costs and estimated earnings on uncompleted contracts 1,174,427 364,446 1,538,873 Unearned income 78,000 78,000 Income taxes payable 253,100 253,100 ----------- ----------- -------- ----------- Total current liabilities 6,197,903 6,689,922 211,473 13,099,298 ----------- ----------- -------- ----------- Long-term debt, less current portion 1,569,713 4,000,000 5,569,713 Capital lease obligations 107,521 107,521 Workers compensation liability 147,529 147,529 Post retirement healthcare liability 627,699 627,699 ----------- ----------- ----------- 1,569,713 4,882,749 6,452,462 ----------- ----------- ----------- Minority interest 149,941 149,941 ----------- ----------- Shareholders' equity: Common stock, CECO Environmental Corp. 83,888 83,888 Common stock, Kirk & Blum/kbd 250,680 930 251,610 Capital in excess of par value 10,139,013 10,139,013 Retained earnings (accumulated deficit) (2,316,953) 13,227,469 391,707 11,302,223 Less treasury stock, at cost (348,669) (348,669) ----------- ----------- -------- ----------- Net shareholders' equity 7,557,279 13,478,149 392,637 21,428,065 ----------- ----------- -------- ----------- $15,474,836 $25,050,820 $604,110 $41,129,766 =========== =========== ======== ===========
[RESTUBBED TABLE] PRO FORMA ------------------------------------- ADJUSTMENTS CONSOLIDATED ------------- ------------ ASSETS Current assets: Cash and cash equivalents $1,780,413 Marketable securities 695,944 Accounts receivable 19,107,263 Inventories $2,026,000 B 3,656,232 Costs and estimated earnings in excess of billings on uncompleted contracts 2,255,877 Due from former owners of Busch Co. 147,939 Investment in sales-type lease 95,400 Prepaid expenses and other current assets 647,264 Deferred income taxes 84,500 ----------- ----------- Total current assets 2,026,000 28,470,832 Property and equipment, net 8,614,476 B 13,504,668 Cash surrender value of life insurance, net of policy loans 2,741,442 Goodwill, net 1,638,738 C 6,808,091 Other intangible assets, at cost, net 1,457,247 Investment in sales-type lease 333,900 Deferred income taxes 68,500 Investment 24,300 ----------- ----------- $12,279,214 $53,408,980 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term obligations $2,197,085 A $3,497,085 Current portion of long-term debt 3,396,628 A 3,785,000 Current portion of capital lease obligations 144,470 Accounts payable and accrued expenses 9,396,483 Billings in excess of costs and estimated earnings on uncompleted contracts 1,538,873 Unearned income 78,000 Income taxes payable 253,100 ----------- ----------- Total current liabilities 5,593,713 18,693,011 ----------- ----------- Long-term debt, less current portion 20,556,287 A 26,126,000 Capital lease obligations 107,521 Workers compensation liability 147,529 Post retirement healthcare liability 627,699 ----------- ----------- 20,556,287 27,008,749 ----------- ----------- Minority interest 149,941 ----------- Shareholders' equity: Common stock, CECO Environmental Corp. 83,888 Common stock, Kirk & Blum/kbd (251,610) C Capital in excess of par value 10,139,013 Retained earnings (accumulated deficit) (13,619,176) C (2,316,953) Less treasury stock, at cost (348,669) ----------- ----------- Net shareholders' equity (13,870,786) 7,557,279 ----------- ----------- $12,279,214 $53,408,980 =========== =========== See accompanying notes to pro forma consolidated condensed financial information.
CECO ENVIRONMENTAL CORP. PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (NOTE 2) HISTORICAL ------------------------------------------------------------ CECO KIRK & BLUM ENVIRONMENTAL MANUFACTURING kbd/TECHNIC, CORP. COMPANY INC. TOTAL ------------- ------------- ------------ ----------- Revenues $26,381,622 $69,443,929 $1,744,313 $97,569,864 Cost of revenues 17,952,112 56,792,318 887,683 75,632,113 ------------- ------------- ----------- ----------- Gross profit 8,429,510 12,651,611 856,630 21,937,751 Selling and administrative expenses 6,674,739 8,114,190 755,926 15,544,855 ------------- ------------- ----------- ----------- Income from operations before depreciation and amortization, interest expense, and other credits 1,754,771 4,537,421 100,704 6,392,896 Depreciation and amortization 617,964 740,303 32,634 1,390,901 Interest expense, net 192,752 173,488 366,240 Other credits 48,294 48,294 ------------- ------------- ----------- ----------- Income before income taxes and minority interest 944,055 3,671,924 68,070 4,684,049 Income taxes 373,322 62,571 435,893 ------------- ------------- ----------- ----------- Income before minority interest 570,733 3,609,353 68,070 4,248,156 Minority interest in net income of CECO Filters, Inc. (37,807) (37,807) ------------- ------------- ----------- ----------- Net income $532,926 $3,609,353 $68,070 $4,210,349 ============= ============= =========== =========== Earnings per share: Basic $0.06 Diluted $0.06 Outstanding shares: Basic 8,250,896 Diluted 8,845,626
[RESTUBBED TABLE] PRO FORMA ------------------------------------ ADJUSTMENTS CONSOLIDATED --------------- ------------ Revenues $97,569,864 Cost of revenues 75,632,113 ----------- Gross profit 21,937,751 Selling and administrative expenses 15,544,855 ----------- Income from operations before depreciation and amortization, interest expense, and other credits 6,392,896 Depreciation and amortization $602,000 D 1,992,901 Interest expense, net 2,401,000 E 2,767,240 Other credits 162,000 F 210,294 ----------- ----------- Income before income taxes and minority interest (2,841,000) 1,843,049 Income taxes 449,497 G 885,390 ----------- ----------- Income before minority interest (3,290,497) 957,659 Minority interest in net income of CECO Filters, Inc. (37,807) ----------- ----------- Net income ($3,290,497) $919,852 =========== =========== Earnings per share: Basic $0.11 Diluted $0.10 Outstanding shares: Basic 8,250,896 Diluted 8,845,626 See accompanying notes to pro forma consolidated condensed financial information.
CECO ENVIRONMENTAL CORP. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET SEPTEMBER 30, 1999 (NOTE 1) HISTORICAL ----------------------------------------------------------- CECO KIRK & BLUM ENVIRONMENTAL MANUFACTURING kbd/TECHNIC, CORP. COMPANY INC. TOTAL ------------ ------------- ------------ ---------- ASSETS Current assets: Cash and cash equivalents $70,677 $668,980 $151,779 $891,436 Marketable securities 2,453,393 2,453,393 Accounts receivable 3,192,966 9,726,121 426,636 13,345,723 Inventories 919,098 1,392,515 13,638 2,325,251 Costs and estimated earnings in excess of billings on uncompleted contracts 228,879 5,950,927 6,179,806 Due from former owners of Busch Co. 243,212 243,212 Investment in sales-type lease 103,350 103,350 Prepaid expenses and other current assets 315,260 129,562 444,822 Deferred income taxes 84,500 84,500 ----------- ----------- -------- ----------- Total current assets 7,611,335 17,868,105 592,053 26,071,493 Property and equipment, net 2,028,099 2,594,941 41,312 4,664,352 Cash surrender value of life insurance, net of policy loans 2,812,926 2,812,926 Goodwill, net 4,929,612 4,929,612 Other intangible assets, at cost, net 1,290,003 270,488 1,560,491 Investment in sales-type lease 262,350 262,350 Deferred income taxes 296,900 296,900 Investment and other assets 356,567 24,300 380,867 ----------- ----------- -------- ----------- $16,774,866 $23,570,760 $633,365 $40,978,991 =========== =========== ======== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term obligations $2,800,000 $5,000,000 $7,800,000 Current portion of long-term debt 494,628 494,628 Current portion of capital lease obligations 66,431 66,431 Accounts payable and accrued expenses 2,813,551 4,254,697 $60,697 7,128,945 Billings in excess of costs and estimated earnings on uncompleted contracts 708,636 164,815 873,451 Unearned income 64,950 64,950 ----------- ----------- -------- ----------- Total current liabilities 6,881,765 9,485,943 60,697 16,428,405 ----------- ----------- -------- ----------- Long-term debt, less current portion 1,119,730 150,000 1,269,730 Due to officer 1,125,000 1,125,000 Capital lease obligations 32,625 32,625 Post retirement healthcare, pension and workers compensation liability 850,086 850,086 ----------- ----------- -------- ----------- Total liabilities 2,244,730 882,711 150,000 3,277,441 ----------- ----------- -------- ----------- Minority interest 115,586 115,586 ----------- ----------- Shareholders' equity: Common stock, CECO Environmental Corp. 83,888 83,888 Common stock, Kirk & Blum/kbd 250,680 930 251,610 Capital in excess of par value 10,139,013 10,139,013 Accumulated other comprehensive loss (57,297) (57,297) Retained earnings (accumulated deficit) (2,341,447) 13,008,723 421,738 11,089,014 Less treasury stock, at cost (348,669) (348,669) ----------- ----------- -------- ----------- Net shareholders' equity 7,532,785 13,202,106 422,668 21,157,559 ----------- ----------- -------- ----------- $16,774,866 $23,570,760 $633,365 $40,978,991 =========== =========== ======== ===========
[RESTUBBED TABLE] PRO FORMA ----------------------------------- ADJUSTMENTS CONSOLIDATED ----------- ------------ ASSETS Current assets: Cash and cash equivalents $891,436 Marketable securities 2,453,393 Accounts receivable 13,345,723 Inventories $2,212,000 B 4,537,251 Costs and estimated earnings in excess of billings on uncompleted contracts 6,179,806 Due from former owners of Busch Co. 243,212 Investment in sales-type lease 103,350 Prepaid expenses and other current assets 444,822 Deferred income taxes 84,500 ---------- ----------- Total current assets 2,212,000 28,283,493 Property and equipment, net 8,782,284 B 13,446,636 Cash surrender value of life insurance, net of policy loans 2,812,926 Goodwill, net 1,530,942 C 6,460,554 Other intangible assets, at cost, net 1,560,491 Investment in sales-type lease 262,350 Deferred income taxes 296,900 Investment and other assets 380,867 ----------- LIABILITIES AND SHAREHOLDERS' EQUITY $12,525,226 $53,504,217 =========== =========== Current liabilities: Short-term obligations ($2,031,642)A $5,768,358 Current portion of long-term debt 3,290,372 A 3,785,000 Current portion of capital lease obligations 66,431 Accounts payable and accrued expenses 7,128,945 Billings in excess of costs and estimated earnings on uncompleted contracts 873,451 Unearned income 64,950 ---------- ----------- Total current liabilities 1,258,730 17,687,135 ---------- ----------- Long-term debt, less current portion 24,891,270 A 26,161,000 Due to officer 1,125,000 Capital lease obligations 32,625 Post retirement healthcare, pension and workers compensation liability 850,086 ---------- ----------- Total liabilities 24,891,270 28,168,711 ---------- ----------- Minority interest 115,586 ----------- Shareholders' equity: Common stock, CECO Environmental Corp. 83,888 Common stock, Kirk & Blum/kbd (251,610)C Capital in excess of par value 10,139,013 Accumulated other comprehensive loss 57,297 Retained earnings (accumulated deficit) (13,430,461)C (2,341,447) Less treasury stock, at cost (348,669) ---------- ----------- Net shareholders' equity (13,624,774) 7,532,785 ---------- ----------- $12,525,226 $53,504,217 =========== =========== See accompanying notes to pro forma consolidated condensed financial information.
CECO ENVIRONMENTAL CORP. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (NOTE 2) HISTORICAL ----------------------------------------------------------- CECO KIRK & BLUM ENVIRONMENTAL MANUFACTURING kbd/TECHNIC, CORP. COMPANY INC. TOTAL ------------- ------------- ------------ ----------- Revenues $12,709,210 $48,867,865 $1,234,008 $62,811,083 Cost of revenues 7,467,243 39,664,447 602,772 47,734,462 ------------ ----------- ---------- ----------- Gross profit 5,241,967 9,203,418 631,236 15,076,621 Selling and administrative expenses 4,520,151 5,552,014 566,602 10,638,767 ------------ ----------- ---------- ----------- Income from continuing operations before depreciation and amortization, interest expense, and other income (expense) 721,816 3,651,404 64,634 4,437,854 Depreciation and amortization 453,732 590,250 29,250 1,073,232 Interest expense, net 124,626 198,142 5,353 328,121 Other income (expense) 120,039 120,039 ------------ ----------- ---------- ----------- Income from continuing operations before income taxes and minority interest 143,458 2,983,051 30,031 3,156,540 Income taxes 46,000 86,797 132,797 ------------ ----------- ---------- ----------- Income from continuing operations before minority interest 97,458 2,896,254 30,031 3,023,743 Minority interest in net loss of CECO Filters, Inc. 4,286 4,286 ------------ ----------- ---------- ----------- Income from continuing operations $101,744 $2,896,254 $30,031 $3,028,029 ============ =========== ========== =========== Earnings per share: Basic $0.01 Diluted $0.01 Outstanding shares Basic 8,250,896 Diluted 9,321,113
[RESTUBBED TABLE] PRO FORMA ------------------------------------ ADJUSTMENTS CONSOLIDATED ----------- ------------ Revenues $62,811,083 Cost of revenues 47,734,462 ----------- ----------- Gross profit 15,076,621 Selling and administrative expenses 10,638,767 ----------- ----------- Income from continuing operations before depreciation and amortization, interest expense, and other income (expense) 4,437,854 Depreciation and amortization $447,000 D 1,520,232 Interest expense, net 1,359,000 E 1,687,121 Other income (expense) (9,000)F 111,039 ----------- ----------- Income from continuing operations before income taxes and minority interest (1,815,000) 1,341,540 Income taxes 599,041 G 731,838 ----------- ----------- Income from continuing operations before minority interest (2,414,041) 609,702 Minority interest in net loss of CECO Filters, Inc. 4,286 ----------- ----------- Income from continuing operations ($2,414,041) $613,988 =========== =========== Earnings per share: Basic $0.07 Diluted $0.07 Outstanding shares Basic 8,250,896 Diluted 9,321,113 See accompanying notes to pro forma consolidated condensed financial information.
CECO ENVIRONMENTAL CORP. PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET DECEMBER 31, 1998 (NOTE 1) HISTORICAL ---------------------------------------------------------- CECO KIRK & BLUM ENVIRONMENTAL MANUFACTURING kbd/TECHNIC, CORP. COMPANY INC. TOTAL ------------- ------------- ------------ ---------- ASSETS Current assets: Cash and cash equivalents $ 364,648 $ 1,359,776 $ 55,989 $ 1,780,413 Marketable securities 695,944 695,944 Accounts receivable 4,068,640 14,556,985 481,638 19,107,263 Inventories 541,315 1,087,425 1,492 1,630,232 Costs and estimated earnings in excess of billings on uncompleted contracts 226,504 2,029,373 2,255,877 Due from former owners of Busch Co. 147,939 147,939 Investment in sales-type lease 95,400 95,400 Prepaid expenses and other current assets 344,961 302,303 647,264 Deferred income taxes 84,500 84,500 ----------- ----------- -------- ----------- Total current assets 6,569,851 19,335,862 539,119 26,444,832 Property and equipment, net 2,062,452 2,762,749 64,991 4,890,192 Cash surrender value of life insurance, net of policy loans 2,741,442 2,741,442 Goodwill, net 5,169,353 5,169,353 Other intangible assets, at cost, net 1,270,780 186,467 1,457,247 Investment in sales-type lease 333,900 333,900 Deferred income taxes 68,500 68,500 Investment 24,300 24,300 ----------- ----------- -------- ----------- $15,474,836 $25,050,820 $604,110 $41,129,766 =========== =========== ======== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term obligations $ 1,200,000 $100,000 $ 1,300,000 Current portion of long-term debt 388,372 388,372 Current portion of capital lease obligations $ 144,470 144,470 Accounts payable and accrued expenses 3,104,004 6,181,006 111,473 9,396,483 Billings in excess of costs and estimated earnings on uncompleted contracts 1,174,427 364,446 1,538,873 Unearned income 78,000 78,000 Income taxes payable 253,100 253,100 ----------- ----------- -------- ----------- Total current liabilities 6,197,903 6,689,922 211,473 13,099,298 ----------- ----------- -------- ----------- Long-term debt, less current portion 1,569,713 4,000,000 5,569,713 Capital lease obligations 107,521 107,521 Workers compensation liability 147,529 147,529 Post retirement healthcare liability 627,699 627,699 ----------- ----------- ----------- 1,569,713 4,882,749 6,452,462 ----------- ----------- ----------- Minority interest 149,941 149,941 ----------- ----------- Shareholders' equity: Common stock, CECO Environmental Corp. 83,888 83,888 Common stock, Kirk & Blum/kbd 250,680 930 251,610 Capital in excess of par value 10,139,013 10,139,013 Retained earnings (accumulated deficit) (2,316,953) 13,227,469 391,707 11,302,223 Less treasury stock, at cost (348,669) (348,669) ----------- ----------- -------- ----------- Net shareholders' equity 7,557,279 13,478,149 392,637 21,428,065 ----------- ----------- -------- ----------- $15,474,836 $25,050,820 $604,110 $41,129,766 =========== =========== ======== ===========
[RESTUB] PRO FORMA ---------------------------------- ADJUSTMENTS CONSOLIDATED ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 1,780,413 Marketable securities 695,944 Accounts receivable 19,107,263 Inventories $ 2,026,000 B 3,656,232 Costs and estimated earnings in excess of billings on uncompleted contracts 2,255,877 Due from former owners of Busch Co. 147,939 Investment in sales-type lease 95,400 Prepaid expenses and other current assets 647,264 Deferred income taxes 84,500 ----------- ----------- Total current assets 2,026,000 28,470,832 Property and equipment, net 8,614,476 B 13,504,668 Cash surrender value of life insurance, net of policy loans 2,741,442 Goodwill, net 1,638,738 C 6,808,091 Other intangible assets, at cost, net 1,457,247 Investment in sales-type lease 333,900 Deferred income taxes 68,500 Investment 24,300 ----------- ----------- $12,279,214 $53,408,980 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term obligations $ 2,197,085 A $ 3,497,085 Current portion of long-term debt 3,396,628 A 3,785,000 Current portion of capital lease obligations 144,470 Accounts payable and accrued expenses 9,396,483 Billings in excess of costs and estimated earnings on uncompleted contracts 1,538,873 Unearned income 78,000 Income taxes payable 253,100 ----------- ----------- Total current liabilities 5,593,713 18,693,011 ----------- ----------- Long-term debt, less current portion 20,556,287 A 26,126,000 Capital lease obligations 107,521 Workers compensation liability 147,529 Post retirement healthcare liability 627,699 ----------- ----------- 20,556,287 27,008,749 ----------- ----------- Minority interest 149,941 ----------- Shareholders' equity: Common stock, CECO Environmental Corp. 83,888 Common stock, Kirk & Blum/kbd (251,610)C Capital in excess of par value 10,139,013 Retained earnings (accumulated deficit) (13,619,176)C (2,316,953) Less treasury stock, at cost (348,669) ----------- ----------- Net shareholders' equity (13,870,786) 7,557,279 ----------- ----------- $12,279,214 $53,408,980 =========== =========== See accompanying notes to pro forma consolidated condensed financial information.
CECO ENVIRONMENTAL CORP. PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (NOTE 2) HISTORICAL PRO FORMA ----------------------------------------------------------- ---------------------------- CECO KIRK & BLUM ENVIRONMENTAL MANUFACTURING kbd/TECHNIC, CORP. COMPANY INC. TOTAL ADJUSTMENTS CONSOLIDATED ------------- ------------- ------------- ----------- ----------- ------------ Revenues $26,381,622 $69,443,929 $1,744,313 $97,569,864 $97,569,864 Cost of revenues 17,952,112 56,792,318 887,683 75,632,113 75,632,113 ----------- ----------- ---------- ----------- ----------- Gross profit 8,429,510 12,651,611 856,630 21,937,751 21,937,751 Selling and administrative expenses 6,674,739 8,114,190 755,926 15,544,855 15,544,855 ----------- ----------- ---------- ----------- ----------- Income from operations before depreciation and amortization, interest expense, and other credits 1,754,771 4,537,421 100,704 6,392,896 6,392,896 Depreciation and amortization 617,964 740,303 32,634 1,390,901 $ 602,000 D 1,992,901 Interest expense, net 192,752 173,488 366,240 2,401,000 E 2,767,240 Other credits 48,294 48,294 162,000 F 210,294 ----------- ----------- ---------- ----------- ----------- ----------- Income before income taxes and minority interest 944,055 3,671,924 68,070 4,684,049 (2,841,000) 1,843,049 Income taxes 373,322 62,571 435,893 449,497 G 885,390 ----------- ----------- ---------- ----------- ----------- ----------- Income before minority interest 570,733 3,609,353 68,070 4,248,156 (3,290,497) 957,659 Minority interest in net income of CECO Filters, Inc. (37,807) (37,807) (37,807) ----------- ----------- ---------- ----------- ----------- ----------- Net income $ 532,926 $ 3,609,353 $ 68,070 $ 4,210,349 ($3,290,497) $ 919,852 =========== =========== ========== =========== =========== =========== Earnings per share: Basic $ 0.06 $ 0.11 Diluted $ 0.06 $ 0.10 Outstanding shares: Basic 8,250,896 8,250,896 Diluted 8,845,626 8,845,626 See accompanying notes to pro forma consolidated condensed financial information.
CECO ENVIRONMENTAL CORP. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1998 NOTE 1: The unaudited pro forma consolidated condensed balance sheet is based on the individual balance sheets of CECO Environmental Corp. and its consolidated subsidiaries (CECO Filters, Inc., Air Purator Corporation, New Busch Co., Inc. and U.S. Facilities Management Company) (collectively referred to as "CEC") and The Kirk & Blum Manufacturing Company, and its sister company, kbd/Technic, Inc. (collectively referred to as "K & B") as of December 31, 1998 to reflect the acquisition of 100% of the common stock of K & B by CEC, which occurred on December 7, 1999, as if it occurred on December 31, 1998 after giving effect to pro forma adjustments to reflect the following: CEC paid approximately $25,000,000 for the common stock of K & B, in the form of cash. Total cash required at settlement amounted to approximately $26,150,000, which included approximately $1,150,000 of costs incurred in connection with the acquisition. Financing for the transaction was provided by a bank loan facility in the amount of $25,000,000 in term loans and a $10,000,000 revolving credit facility. The term loans require that $2,000,000 matures on March 6, 2000. Additional principal payments required on the term loans during the year ending December 31, 2000 are $437,500 each on February 28, May 31, August 31, and November 30. As a condition to obtaining the bank financing, CEC placed $5,000,000 of subordinated debt (of which $4,700,000 was borrowed at the time of the acquisition). The proceeds of the bank loans and the subordinated debt were used to pay the purchase price for K & B, to pay expenses incurred in connection with the acquisition, to refinance existing indebtedness and for working capital purposes. (A) The amounts reflected in the pro forma adjustments column for short-term obligations; current portion of long term-debt; and long-term debt, less current obligations represent the net adjustments to reflect the transactions described in the previous paragraph. K & B's inventories and property and equipment were written up by $2,026,000 and $8,614,476, respectively, to reflect estimated fair value (B). As a result of this acquisition, CEC has increased the amount of goodwill by $1,638,738 (C), including the related closing costs, based upon K & B's book basis of net assets as of December 31, 1998.
CECO ENVIRONMENTAL CORP. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION - (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1998 NOTE 2: The unaudited pro forma consolidated condensed statement of operations is based on the individual statement of operations of CEC and K & B for the year ended December 31, 1998, after giving effect to the pro forma adjustments necessary to reflect the acquisition described in Note 1, as if it had taken place on January 1, 1998. The pro forma adjustments are as follows: (D) Amortization of goodwill over 20 years ($82,000) and additional depreciation resulting from write-up of property and equipment to estimated fair value ($520,000). (E) Interest expense increase of $2,401,000 as a result of acquisition financing. (F) Annual bonuses for Blum brothers will be replaced by new bonus arrangement (25% of consolidated EBIT in excess of $4,000,000). (G) Tax effect of above adjustments and to provide for taxes on K & B's 1998 historical income using an assumed effective income tax rate of 50%.
CECO ENVIRONMENTAL CORP. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET SEPTEMBER 30, 1999 (NOTE 1) HISTORICAL ---------------------------------------------------------- CECO KIRK & BLUM ENVIRONMENTAL MANUFACTURING kbd/TECHNIC, CORP. COMPANY INC. TOTAL ------------- ------------- ------------ ---------- ASSETS Current assets: Cash and cash equivalents $ 70,677 $ 668,980 $151,779 $ 891,436 Marketable securities 2,453,393 2,453,393 Accounts receivable 3,192,966 9,726,121 426,636 13,345,723 Inventories 919,098 1,392,515 13,638 2,325,251 Costs and estimated earnings in excess of billings on uncompleted contracts 228,879 5,950,927 6,179,806 Due from former owners of Busch Co. 243,212 243,212 Investment in sales-type lease 103,350 103,350 Prepaid expenses and other current assets 315,260 129,562 444,822 Deferred income taxes 84,500 84,500 ----------- ----------- -------- ----------- Total current assets 7,611,335 17,868,105 592,053 26,071,493 Property and equipment, net 2,028,099 2,594,941 41,312 4,664,352 Cash surrender value of life insurance, net of policy loans 2,812,926 2,812,926 Goodwill, net 4,929,612 4,929,612 Other intangible assets, at cost, net 1,290,003 270,488 1,560,491 Investment in sales-type lease 262,350 262,350 Deferred income taxes 296,900 296,900 Investment and other assets 356,567 24,300 380,867 ----------- ----------- -------- ----------- $16,774,866 $23,570,760 $633,365 $40,978,991 =========== =========== ======== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term obligations $ 2,800,000 $ 5,000,000 $ 7,800,000 Current portion of long-term debt 494,628 494,628 Current portion of capital lease obligations 66,431 66,431 Accounts payable and accrued expenses 2,813,551 4,254,697 $ 60,697 7,128,945 Billings in excess of costs and estimated earnings on uncompleted contracts 708,636 164,815 873,451 Unearned income 64,950 64,950 ----------- ----------- -------- ----------- Total current liabilities 6,881,765 9,485,943 60,697 16,428,405 ----------- ----------- -------- ----------- Long-term debt, less current portion 1,119,730 150,000 1,269,730 Due to officer 1,125,000 1,125,000 Capital lease obligations 32,625 32,625 Post retirement healthcare, pension and workers compensation liability 850,086 850,086 ----------- ----------- -------- ----------- Total liabilities 2,244,730 882,711 150,000 3,277,441 ----------- ----------- -------- ----------- Minority interest 115,586 115,586 ----------- ----------- Shareholders' equity: Common stock, CECO Environmental Corp. 83,888 83,888 Common stock, Kirk & Blum/kbd 250,680 930 251,610 Capital in excess of par value 10,139,013 10,139,013 Accumulated other comprehensive loss (57,297) (57,297) Retained earnings (accumulated deficit) (2,341,447) 13,008,723 421,738 11,089,014 Less treasury stock, at cost (348,669) (348,669) ----------- ----------- -------- ----------- Net shareholders' equity 7,532,785 13,202,106 422,668 21,157,559 ----------- ----------- -------- ----------- $16,774,866 $23,570,760 $633,365 $40,978,991 =========== =========== ======== ===========
[RESTUB] PRO FORMA -------------------------------------- ADJUSTMENTS CONSOLIDATED ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 891,436 Marketable securities 2,453,393 Accounts receivable 13,345,723 Inventories $ 2,212,000 B 4,537,251 Costs and estimated earnings in excess of billings on uncompleted contracts 6,179,806 Due from former owners of Busch Co. 243,212 Investment in sales-type lease 103,350 Prepaid expenses and other current assets 444,822 Deferred income taxes 84,500 ----------- ----------- Total current assets 2,212,000 28,283,493 Property and equipment, net 8,782,284 B 13,446,636 Cash surrender value of life insurance, net of policy loans 2,812,926 Goodwill, net 1,530,942 C 6,460,554 Other intangible assets, at cost, net 1,560,491 Investment in sales-type lease 262,350 Deferred income taxes 296,900 Investment and other assets 380,867 ----------- ----------- $12,525,226 $53,504,217 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term obligations ($2,031,642)A $ 5,768,358 Current portion of long-term debt 3,290,372 A 3,785,000 Current portion of capital lease obligations 66,431 Accounts payable and accrued expenses 7,128,945 Billings in excess of costs and estimated earnings on uncompleted contracts 873,451 Unearned income 64,950 ----------- ----------- Total current liabilities 1,258,730 17,687,135 ----------- ----------- Long-term debt, less current portion 24,891,270 A 26,161,000 Due to officer 1,125,000 Capital lease obligations 32,625 Post retirement healthcare, pension and workers compensation liability 850,086 ----------- ----------- Total liabilities 24,891,270 28,168,711 ----------- ----------- Minority interest 115,586 ----------- Shareholders' equity: Common stock, CECO Environmental Corp. 83,888 Common stock, Kirk & Blum/kbd (251,610)C Capital in excess of par value 10,139,013 Accumulated other comprehensive loss 57,297 Retained earnings (accumulated deficit) (13,430,461)C (2,341,447) Less treasury stock, at cost (348,669) ----------- ----------- Net shareholders' equity (13,624,774) 7,532,785 ----------- ----------- $12,525,226 $53,504,217 =========== =========== See accompanying notes to pro forma consolidated condensed financial information.
CECO ENVIRONMENTAL CORP. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (NOTE 2) HISTORICAL PRO FORMA ---------------------------------------------------------- ----------------------------- CECO KIRK & BLUM ENVIRONMENTAL MANUFACTURING kbd/TECHNIC, CORP. COMPANY INC. TOTAL ADJUSTMENTS CONSOLIDATED ------------- ------------- ------------ ----------- ----------- ------------ Revenues $12,709,210 $48,867,865 $1,234,008 $62,811,083 $62,811,083 Cost of revenues 7,467,243 39,664,447 602,772 47,734,462 47,734,462 ----------- ----------- ---------- ----------- ---------- ----------- Gross profit 5,241,967 9,203,418 631,236 15,076,621 15,076,621 Selling and administrative expenses 4,520,151 5,552,014 566,602 10,638,767 10,638,767 ----------- ----------- ---------- ----------- ---------- ----------- Income from continuing operations before depreciation and amortization, interest expense, and other (expense) 721,816 3,651,404 64,634 4,437,854 4,437,854 Depreciation and amortization 453,732 590,250 29,250 1,073,232 $ 447,000 D 1,520,232 Interest expense, net 124,626 198,142 5,353 328,121 1,359,000 E 1,687,121 Other income (expense) 120,039 120,039 (9,000)F 111,039 ----------- ----------- ---------- ----------- ---------- ----------- Income from continuing operations before income taxes and minority interest 143,458 2,983,051 30,031 3,156,540 (1,815,000) 1,341,540 Income taxes 46,000 86,797 132,797 599,041 G 731,838 ----------- ----------- ---------- ----------- ---------- ----------- Income from continuing operations before minority interest 97,458 2,896,254 30,031 3,023,743 (2,414,041) 609,702 Minority interest in net loss of CECO Filters, Inc. 4,286 4,286 4,286 ----------- ----------- ---------- ----------- ---------- ----------- Income from continuing operations $ 101,744 $ 2,896,254 $ 30,031 $ 3,028,029 ($2,414,041) $ 613,988 =========== =========== ========== =========== ========== =========== Earnings per share: Basic $ 0.01 $ 0.07 Diluted $ 0.01 $ 0.07 Outstanding shares Basic 8,250,896 8,250,896 Diluted 9,321,113 9,321,113 See accompanying notes to pro forma consolidated condensed financial information.
CECO ENVIRONMENTAL CORP. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 NOTE 1: The unaudited pro forma consolidated condensed balance sheet is based on the individual balance sheets of CECO Environmental Corp. and its consolidated subsidiaries (CECO Filters, Inc., Air Purator Corporation, New Busch Co., Inc. and U.S. Facilities Management Company) (collectively referred to as "CEC") and The Kirk & Blum Manufacturing Company, and its sister company, kbd/Technic, Inc. (collectively referred to as "K & B") as of September 30, 1999 to reflect the acquisition of 100% of the common stock of K & B by CEC, which occurred on December 7, 1999, as if it occurred on September 30, 1999 after giving effect to pro forma adjustments to reflect the following: CEC paid approximately $25,000,000 for the common stock of K & B, in the form of cash. Total cash required at settlement amounted to approximately $26,150,000, which included approximately $1,150,000 of costs incurred in connection with the acquisition. Financing for the transaction was provided by a bank loan facility in the amount of $25,000,000 in term loans and a $10,000,000 revolving credit facility. The term loans require that $2,000,000 matures on March 6, 2000. Additional principal payments required on the term loans during the year ending December 31, 2000 are $437,500 on February 28, May 31, August 31, and November 30. As a condition to obtaining the bank financing, CEC placed $5,000,000 of subordinated debt (of which $4,700,000 was borrowed at the time of the acquisition). The proceeds of the bank loans and the subordinated debt were used to pay the purchase price for K & B, to pay expenses incurred in connection with the acquisition, to refinance existing indebtedness and for working capital purposes. (A) The amounts reflected in the pro forma adjustments column for short-term obligations; current portion of long term-debt; and long-term debt, less current obligations represent the net adjustments to reflect the transactions described in the previous paragraph. K & B's inventories and property and equipment were written up by $2,212,000 and $8,782,284, respectively, to reflect estimated fair value (B). As a result of this acquisition, CEC has increased the amount of goodwill by $1,530,942 (C), including the related closing costs, based upon K & B's book basis of net assets as of September 30, 1999.
CECO ENVIRONMENTAL CORP. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION - (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 NOTE 2: The unaudited pro forma consolidated condensed statement of operations is based on the individual statement of operations of CEC and K & B for the nine months ended September 30, 1999, after giving effect to the pro forma adjustments necessary to reflect the acquisition described in Note 1, as if it had taken place on January 1, 1999. The pro forma adjustments are as follows: (D) Amortization of goodwill over 20 years ($57,000) and additional depreciation resulting from write-up of property and equipment to estimated fair value ($390,000). (E) Interest expense increase of $1,359,000 as a result of acquisition financing. (F) Bonus arrangement for Blum brothers (25% of annual consolidated EBIT in excess of $4,000,000). (Note that the historical statement of operations of K & B for the nine months ended September 30, 1999 does not include a provision for bonuses for the Blum brothers.) (G) Tax effect of above adjustments and to provide for taxes on K & B's 1999 historical income using an assumed effective income tax rate of 50%.
(c) Exhibits. The following Exhibits were filed with the Form 8-K filed December 22, 1999 and numbered as set forth below. 10.1 Stock Purchase Agreement, dated as of December 7, 1999, among CECO Environmental Corp., CECO Filters, Inc and the Stockholders of The Kirk & Blum Manufacturing Company and kbd/Technic, Inc. and Richard J. Blum, Lawrence J. Blum and David D. Blum. 10.2 Employment Agreement, dated as of December 7, 1999, between Richard J. Blum and CECO Group, Inc. 10.3 Stock Purchase Warrant, dated as of December 7, 1999, granted by CECO Environmental Corp. to Richard J. Blum 10.4 Employment Agreement, dated as of December 7, 1999, between Lawrence J. Blum and The Kirk & Blum Manufacturing Company. 10.5 Stock Purchase Warrant, dated as of December 7, 1999, granted by CECO Environmental Corp. to Lawrence J. Blum 10.6 Employment Agreement, dated as of December 7, 1999, between David D. Blum and The Kirk & Blum Manufacturing Company. 10.7 Stock Purchase Warrant, dated as of December 7, 1999, granted by CECO Environmental Corp. to David D. Blum 10.8 Credit Agreement, dated as of December 7, 1999, among PNC Bank, National Association, The Fifth Third Bank, and Bank One, N.A. and PNC Bank, National Association as agent, and CECO Group, Inc., CECO Filters, Inc., Air Purator Corporation, New Busch Co., Inc., The Kirk & Blum Manufacturing Company and kbd\Technic, Inc. 10.9 Promissory Note in the amount of $4,000,000, dated as of December 7, 1999, made by CECO Environmental Corp. and payable to Green Diamond Oil Corp. 10.10 Promissory Note in the amount of $500,000, dated as of December 7, 1999, made by CECO Environmental Corp. and payable to Harvey Sandler 10.11 Promissory Note in the amount of $500,000, dated as of December 7, 1999, made by CECO Environmental Corp. and payable to ICS Trustee Services, Ltd. 10.12 Warrant Agreement, dated as of December 7, 1999, among CECO Environmental Corp. and Green Diamond Oil Corp., Harvey Sandler and ICS Trustee Services, Ltd. 10.13 KDB\Technic, Inc. Voting Trust Agreement, dated as of December 7, 1999, Richard J. Blum, trustee 10.14 Consulting Agreement, dated as of June 1, 1999, between CECO Environmental Corp. and CECO Filters, Inc. 23.1 Consent of Independent Public Accountants, dated as of December 14, 1999
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CECO Environmental Corp. CECO ENVIRONMENTAL CORP. Dated: February 16, 2000 /s/ Marshall J. Morris ---------------------------------- Marshall J. Morris Chief Financial Officer