Exhibit 99.3

GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2014 AND 2013

(UNAUDITED)


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2014 and 2013

TABLE OF CONTENTS

 

     Page  

Consolidated Financial Statements:

  

Consolidated Balance Sheets

     1   

Consolidated Statements of Income

     3   

Consolidated Statements of Stockholders’ Equity

     4   

Consolidated Statements of Cash Flows

     5   

Notes to Consolidated Financial Statements

     6 - 15   


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2014 and 2013

(unaudited)

 

     2014      2013  
ASSETS      

CURRENT ASSETS

     

Cash and cash equivalents

   $ 469,549       $ 1,937,968   

Accounts receivable less allowance for doubtful accounts of $10,000

     4,106,108         4,496,129   

Inventories

     3,404,041         4,280,123   

Income taxes receivable

     71,076         64,000   

Prepaid expenses

     98,201         92,796   

Deferred income taxes

     1,210,000         135,000   
  

 

 

    

 

 

 

Total current assets

  9,358,975      11,006,016   
  

 

 

    

 

 

 

PROPERTY, PLANT AND EQUIPMENT

Land

  9,000      9,000   

Buildings and improvements

  7,224,922      3,402,270   

Machinery and equipment

  13,951,851      10,027,999   

Computer hardware and software

  670,987      491,574   

Office furniture and fixtures

  158,054      93,159   

Installations in progress

  —        3,090,561   
  

 

 

    

 

 

 
  22,014,814      17,114,563   

Less accumulated depreciation

  6,264,924      4,553,717   
  

 

 

    

 

 

 

Net property and equipment

  15,749,890      12,560,846   
  

 

 

    

 

 

 

OTHER ASSETS

Goodwill

  8,679,091      8,679,091   

Customer list, net

  833,284      1,563,535   
  

 

 

    

 

 

 
  9,512,375      10,242,626   
  

 

 

    

 

 

 
$ 34,621,240    $ 33,809,488   
  

 

 

    

 

 

 

 

1


     2014     2013  
LIABILITIES AND STOCKHOLDERS’ EQUITY     

CURRENT LIABILITIES

    

Current maturities of long-term debt

   $ 1,163,485      $ 920,754   

Construction lines-of-credit

     2,413,779        1,781,885   

Revolving line-of-credit

     2,050,250        —     

Accounts payable

     3,039,602        2,217,019   

Accrued expenses

     1,581,294        1,893,968   

Deferred revenue

     828,585        1,759,401   
  

 

 

   

 

 

 

Total current liabilities

  11,076,995      8,573,027   

LONG-TERM LIABILITIES

Long-term debt, less current maturities

  20,099,627      18,832,335   

Deferred income taxes

  1,767,000      2,348,000   
  

 

 

   

 

 

 

Total liabilities

  32,943,622      29,753,362   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

Preferred stock, Series A, par value $.01 per share; 5,000,000 shares authorized and 4,111,907 shares issued and outstanding, total liquidation preference of outstanding shares of $10,026,708

  4,028,707      4,028,707   

Preferred stock, Series B, par value $.01 per share; 5,000,000 shares authorized and 4,438,093 shares issued and outstanding, total liquidation preference of outstanding shares of $6,432,086

  4,138,093      4,138,093   

Preferred stock, Series C, par value $.01 per share; 1,000,000 shares authorized and 927,480 shares issued and outstanding, total liquidation preference of outstanding shares of $5,964,377

  3,246,178      3,246,178   

Preferred stock, Series D, par value $.01 per share; 1,000,000 shares authorized and 1,000,000 shares issued and outstanding, total liquidation preference of outstanding shares of $6,865,242

  4,105,731      4,105,731   

Common stock, Class A, par value $.01 per share; 200,000 shares authorized and 92,657 share issued and outstanding

  927      927   

Common stock, Class B, par value $.01 per share; 50,000 shares authorized and 48,093 shares issued and outstanding

  481      481   

Common stock, Class C, par value $.01 per share; 1,000 shares authorized and 1,000 shares issued and outstanding; issued for no consideration

  —        —     

Additional paid-in capital

  99,000      99,000   

Retained earnings (deficit)

  (6,890,021   (4,511,513

Excess of consideration paid over consideration contributed by continuing stockholder interests

  (7,051,478   (7,051,478
  

 

 

   

 

 

 

Total stockholders’ equity

  1,677,618      4,056,126   
  

 

 

   

 

 

 
$ 34,621,240    $ 33,809,488   
  

 

 

   

 

 

 

The accompanying notes are an integral part

of these consolidated financial statements.

 

2


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2014 and 2013

(unaudited)

 

     2014     2013  

Net Sales

   $ 27,059,611      $ 34,675,926   

Cost of goods sold

     24,999,893        25,962,117   
  

 

 

   

 

 

 

Gross profit

  2,059,718      8,713,809   

General and administrative expenses

  3,550,214      4,674,257   
  

 

 

   

 

 

 

Operating (loss) profit

  (1,490,496   4,039,552   

Interest expense

  2,548,917      2,094,454   
  

 

 

   

 

 

 

Income (loss) before income taxes

  (4,039,413   1,945,098   

Income tax (benefit) expense

  (1,660,905   574,000   
  

 

 

   

 

 

 

Net (loss) income

$ (2,378,508 $ 1,371,098   
  

 

 

   

 

 

 

The accompanying notes are an integral part

of these consolidated financial statements.

 

3


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2014 and 2013

(unaudited)

 

                                                    Excess of        
                                                    Consideration
Paid Over
       
                                                    Consideration        
                                        Additional     Retained     Contributed by
Continuing
       
    Preferred Stock     Common Stock     Paid-in     Earnings     Stockholder        
    Series A     Series B     Series C     Series D     Class A     Class B     Capital     (Deficit)     Interests     Total  

Balance, December 31, 2012

  $ 4,028,707      $ 4,138,093      $ 3,246,178      $ 12,300,000      $ 927      $ 481      $ 99,000      $ (1,776,880   $ (7,051,478   $ 14,985,028   

Equity to debt conversion

          (8,194,269               (8,194,269

Non-cash distribution in equity to debt conversion

                  (4,105,731       (4,105,731

Net income

    —          —          —          —          —          —          —          1,371,098        —          1,371,098   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

    4,028,707        4,138,093        3,246,178        4,105,731        927        481        99,000        (4,511,513     (7,051,478     4,056,126   

Net loss

    —          —          —          —          —          —          —          (2,378,508     —          (2,378,508
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2014

  $ 4,028,707      $ 4,138,093      $ 3,246,178      $ 4,105,731      $ 927      $ 481      $ 99,000      $ (6,890,021   $ (7,051,478   $ 1,677,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part

of these consolidated financial statements.

 

4


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2014 and 2013

(unaudited)

 

     2014     2013  

Cash flows from operating activities:

    

Net (loss) income

   $ (2,378,508   $ 1,371,098   

Adjustments to reconcile net (loss) income to net cash from operating activities:

    

Depreciation

     1,722,438        1,391,072   

Amortization

     730,251        751,827   

Deferred income tax (benefit) expense

     (1,656,000     112,000   

(Gain) loss on sale of equipment

     (795     5,914   

Change in operating assets and liabilities:

    

Accounts receivable

     390,021        1,026,912   

Prepaid expenses

     (5,405     (18,748

Inventories

     876,082        (1,466,754

Income taxes

     (7,076     (304,000

Accounts payable and accrued expenses

     509,909        601,736   

Deferred revenue

     (930,816     1,396,271   
  

 

 

   

 

 

 

Net cash from operating activities

  (749,899   4,867,328   
  

 

 

   

 

 

 

Cash flows from investing activities:

Purchase of property, plant and equipment

  (4,919,510   (6,727,905

Proceeds from sale of property, plant and equipment

  8,823      —     
  

 

 

   

 

 

 

Net cash from investing activities

  (4,910,687   (6,727,905
  

 

 

   

 

 

 

Cash flows from financing activities:

Net borrowings on revolving credit agreement

  2,050,250      —     

Borrowings on long-term debt

  3,131,894      3,856,622   

Principal payments on long-term debt

  (989,977   (531,733
  

 

 

   

 

 

 

Net cash from financing activities

  4,192,167      3,324,889   
  

 

 

   

 

 

 

Change in cash

  (1,468,419   1,464,312   

Cash at beginning of year

  1,937,968      473,656   
  

 

 

   

 

 

 

Cash at end of year

$ 469,549    $ 1,937,968   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

Interest paid

$ 2,541,700    $ 2,055,401   
  

 

 

   

 

 

 

Equity to debt conversion

$ —      $ 12,300,000   
  

 

 

   

 

 

 

Taxes

$ —      $ 771,000   
  

 

 

   

 

 

 

The accompanying notes are an integral part

of these consolidated financial statements.

 

5


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Operations—Galaxy Tool Holding Corporation and Subsidiary (d/b/a Galaxy Technologies) is in the business of manufacturing and designing precision tools and parts, fabricating steel and aluminum assemblies, and producing secondary equipment for the customers in the aerospace industry. Additionally, the Company serves customers in the plastic products industry with manufacturing and repairing injection and blow molds and designing component parts and secondary equipment. The Company’s customers are located throughout the United States and internationally. The Company is headquartered in Winfield, Kansas, where it has a manufacturing facility.

Principles of Consolidation—The accompanying consolidated financial statements include the accounts of Galaxy Tool Holding Corporation and its wholly-owned subsidiary, Galaxy Technologies, Inc. (the “Company”). All material intercompany related party balances and transactions have been eliminated in the consolidation.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities, (2) disclosures such as contingencies, and (3) the reported amounts of revenues and expenses included in such financial statements. Actual results could differ from those estimates.

Cash and Cash Equivalents—For purposes of reporting the statements of cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less, to be cash equivalents. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.

Accounts Receivable, Trade—Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.

A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 30 to 60 days, depending on the customer. Interest is not charged on past due accounts.

Inventories—Inventories are stated at the lower of cost or market, with cost determined by the first-in, first-out (FIFO) method. Work-in-process includes material, labor, and allocable factory overhead costs.

Property, Plant and Equipment—Property, plant and equipment are carried at cost. Depreciation is computed using the straight-line method, using estimated useful lives. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Deduction is made for retirements resulting from renewals or betterments.

 

6


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Customer List—The Company is amortizing its customer list, using a straight-line method, over a 7 12 year period.

Goodwill—Goodwill is not amortized, but is subject to an annual impairment test, as well as when an event triggering impairment may have occurred. The Company has elected to perform its annual analysis during the fourth quarter. No indicators of impairment were identified for the years ended December 31, 2014 and 2013.

Impairment of Long-Lived Assets—Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimate future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no impairment losses recognized for the years ending December 31, 2014 or 2013.

Deferred Revenue—Deferred revenue represents deposits and progress billings on jobs in progress.

Income Taxes—Deferred tax assets and liabilities are recognized for temporary differences and loss carryforwards. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. When applicable, deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company recognizes the financial statement effects of a tax position only when it believes it can more likely than not sustain the position upon an examination by the relevant tax authority. Tax years that remain subject to examination in the Company’s major tax jurisdictions (Federal and State of Kansas) are 2011, 2012, 2013 and 2014.

Revenue Recognition—Revenue is recognized upon shipment of goods. Shipping and handling charges are included in revenue. Shipping and handling costs are included in cost of goods sold.

Advertising Costs—The Company expenses costs of advertising as they are incurred. Advertising expense for the years ended December 31, 2014 and 2013 was $27,694 and $45,974, respectively.

Subsequent Events—Subsequent events have been evaluated through March 17, 2015, which is the date the financial statements were available to be issued.

 

7


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

2. BUSINESS ACQUISITION

On August 22, 2008, the Company acquired 100% of the stock of Galaxy Tool Corporation and its subsidiary, Encompass Tool & Machine, Inc., under the terms of a stock purchase agreement. The stock purchase transaction was accounted for in accordance with EITF Issue No. 88-16, Basis in Leveraged Buyout Transactions, and EITF Issue No. 90-12, Allocating Basis in Individual Assets and Liabilities for Transactions Within the Scope of EITF Issue No. 88-16. The aggregate purchase price was allocated to the assets and liabilities of the Company based upon an allocation of their respective carryover and fair market values. The carryover interest on the transaction was 38.6%. The portion of the acquisition recognized at fair value was 61.4%. The caption “consideration paid over consideration contributed by continuing stockholder interests” within the equity section of the accompanying balance sheets represents the difference between the fair value and the carrying value of the 38.6% carryover interest.

 

3. INVENTORIES

Inventories consist of the following at December 31:

 

     2014      2013  

Raw materials

   $ 266,991       $ 322,947   

Work-in-process parts and labor

     3,137,050         3,957,176   
  

 

 

    

 

 

 
$ 3,404,041    $ 4,280,123   
  

 

 

    

 

 

 

 

4. INSTALLATIONS IN PROGRESS

During 2013, the Company started an expansion project to expand capabilities of the Company. The expansion consists of new equipment and a new building to house the equipment. The total expected cost of the expansion project for the building and equipment was estimated at $5 million. Included in installations in progress at December 31, 2013, are costs of $3,090,561 ($1,784,084 for the building and $1,306,477 for the equipment). These costs have been financed through construction lines of credit (see Note 7). This project was completed and the respective assets were placed in service during 2014. The construction line of credit related to the new building was converted to an amortizing term note during 2014, and the construction line of credit related to the new equipment was converted to a term note subsequent to December 31, 2014 (see Note 7).

 

5. DEPRECIATION

Depreciation expense for the years ended December 31, 2014 and 2013, based on useful lives shown below, consists of:

 

     2014      2013      Useful Lives  

Building and improvements

   $ 100,776       $ 92,060         40 years   

Machinery and equipment

     1,528,938         1,214,675         3 to 10 years   

Computer hardware and software

     84,660         77,000         3 to 10 years   

Office furniture and equipment

     8,064         7,337         3 to 10 years   
  

 

 

    

 

 

    
$ 1,722,438    $ 1,391,072   
  

 

 

    

 

 

    

 

8


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

6. INTANGIBLE ASSETS

The net values for intangible assets at December 31, 2014 and 2013 were as follows:

 

     2014      2013  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Value
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Value
 

Customer list

   $ 5,476,880       $ (4,643,596   $ 833,284       $ 5,476,880       $ (3,913,345   $ 1,563,535   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense of the customer list for the years ended December 31, 2014 and 2013 was $730,251. Estimated amortization expense for each of the following years is:

 

2015

$ 730,251   

2016

  103,033   
  

 

 

 
$ 833,284   
  

 

 

 

Goodwill of $8,679,091 was recognized with the acquisition as described in Note 2 and there were no changes in its carrying amount for the years ended December 31, 2014 and 2013.

 

7. REVOLVING LINES-OF-CREDIT AND LONG-TERM DEBT

Revolving Lines-of-Credit—The Company has a revolving line of credit agreement with a shareholder of the Company that expires on September 30, 2015. Under the agreement, the Company may borrow up to $2,500,000. The unpaid principal balance carries an interest rate of LIBOR plus 8% with a minimum interest rate of 10% per annum. The interest rate as of December 31, 2014 was 10%. This revolving line-of-credit is also subject to an unused revolving commitment fee of 1% each month prior to the maturity date, as well as the terms and conditions that are outlined in the security agreement applicable to the subordinated notes payable shown below. At December 31, 2014, $2,050,250 was drawn on the line and $499,750 was available. Subsequent to year end, this line was extended to allow the Company to borrow up to $4,500,000. All other terms remained the same.

Under terms of the revolving line-of-credit agreement with a bank, which expired November 2014 and was not renewed, the Company was able to borrow up to $1,000,000, limited to 70% of eligible accounts receivable, 50% of the book value of eligible inventory (inventory is limited to 50% of eligible accounts receivable). The interest rate at December 31, 2013 was 5.75%. The agreement was secured by substantially all of the Company’s accounts receivable, inventories, and equipment. The agreement and other long-term debt with the same bank contain certain restrictive covenants common to these types of agreements. At December 31, 2013, the full line was available to be drawn on.

Construction Lines-of-Credit—Under terms of two construction line-of-credit agreements with a bank, the Company was able to borrow up to $2.5 million in relation to construction of a new building and $2.2 million for costs associated with the addition of new equipment. The interest rate for both lines-of-credit at December 31, 2013 was 4.5%. Payments of interest only were required on the outstanding balances until the asset completion dates.

 

9


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

7. REVOLVING LINES-OF-CREDIT AND LONG-TERM DEBT (CONTINUED)

 

During 2014, the construction line-of-credit of $2.5 million in relation to the construction of a new building was completed and the Company converted the construction line of credit to long-term debt, outlined below. Additional costs in excess of the original $2.2 million on the new equipment were incurred in 2014 and a new construction line of credit, subject to the same terms noted above, was created for an additional $214,000. The total amount drawn on the equipment lines as of December 31, 2014 was $2,413,779.

Subsequent to year end, the Company converted the construction lines-of-credit related to the equipment to a note payable to a bank; due in monthly payment of $33,680 including interest at 4.50% through maturity in February of 2020. The loan is collateralized by equipment.

Long-term debt at December 31, 2014 and 2013 consists of the following:

 

     2014      2013  

Subordinated notes payable to a stockholder of the Company; interest at the greater of 13.5% or a floating rate equal to the LIBOR plus 9.5% (the rate was 13.5% at December 31, 2014); due in full in August 2017. The loan is collateralized by substantially all assets of the Company. The note is subordinated to the revolving credit agreement, construction lines-of-credit and term loans disclosed above. Under the terms of the subordinated note payable agreement, the Company is subject to certain restrictions, which include, but are not limited to, making equity distributions; limitations on indebtedness, capital expenditures, management fees and leases; and restrictions on investments. The Company is also required to comply with certain financial covenants; including minimum EBITDA levels and a fixed charge coverage ratio. The subordinated note payable agreement contains a prepayment premium clause that requires the Company to pay a premium for prepayments on or prior to the maturity date. The dates and percentages related to this clause are 3% of principal prepaid in year one, 2% in year two, and 1% in year three from the anniversary of August 2010. The note also contains a clause that, as permitted under the subordination agreement, requires the Company to prepay the outstanding amount based on excess cash flow, as defined in the agreement. The note also provides for an exit fee of $1,939,532 plus 8.6% per annum of the greater of the outstanding principal balance or $11,640,000, payable upon any charge of control that occurs prior to the payoff of the amounts due under the note.

   $ 15,520,000       $ 15,520,000   

Note payable to a bank, converted from a construction line-of-credit; due in monthly payments of $26,005 including interest at 4.50% through maturity in October of 2019. The loan is collateralized by a building.

     2,468,562         —     

 

10


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

7. REVOLVING LINES-OF-CREDIT AND LONG-TERM DEBT (CONTINUED)

 

     2014      2013  

Note payable to a bank; due in monthly payments of $28,017 including interest at 4.50% through maturity in December of 2018. The loan is collateralized by equipment, accounts receivable, and inventory.

   $ 1,227,097       $ 1,501,030   

Note payable to a bank; due in monthly payments of $38,681 including interest at 5.95% through maturity in April of 2017. The loan is collateralized by equipment, accounts receivable, and inventory.

     1,007,968         1,398,653   

Note payable to a bank; due in monthly payments of $16,164 including interest at 5.95% through September 2016 and prime plus 2% thereafter, through maturity in September 2018. The loan is collateralized by equipment, accounts receivable, and inventory.

     649,516         799,519   

Note payable to a bank; due in monthly payments of $9,448 including interest at 4.50% through maturity in September of 2018. The loan is collateralized by equipment, accounts receivable, and inventory.

     389,969         483,019   

Financed vehicle payable to dealer; due in monthly payments of $1,159 including interest at 6.35%. The loan was collateralized by the vehicle and paid in full during 2014.

     —           50,868   
  

 

 

    

 

 

 
  21,263,112      19,753,089   

Less current maturities

  1,163,485      920,754   
  

 

 

    

 

 

 
$ 20,099,627    $ 18,832,335   
  

 

 

    

 

 

 

Annual maturities of long-term debt at December 31, 2014, are as follows:

 

Year ending December 31,

      

2015

   $ 1,163,485   

2016

     1,225,527   

2017

     16,495,367   

2018

     783,246   

2019

     1,595,487   
  

 

 

 
$ 21,263,112   
  

 

 

 

 

11


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

8. INCOME TAX

Deferred Income Taxes—Net deferred tax assets (liabilities) consist of the following at December 31, 2014 and 2013:

 

     2014      2013  

Deferred tax assets:

     

Accounts receivable

   $ 4,000       $ 4,000   

Accrued expenses

     86,000         90,000   

State net operating loss and credit carryforwards (expires starting 2021)

     414,000         41,000   

Federal net operating loss carryforward (expires 2034)

     1,714,000         —     
  

 

 

    

 

 

 

Deferred tax assets

  2,218,000      135,000   
  

 

 

    

 

 

 

Deferred tax liabilities:

Property, plant and equipment

  (2,442,000   (1,723,000

Customer list

  (333,000   (625,000
  

 

 

    

 

 

 

Deferred tax liabilities

  (2,775,000   (2,348,000
  

 

 

    

 

 

 

Net deferred tax liabilities

$ (557,000 $ (2,213,000
  

 

 

    

 

 

 

Deferred tax assets and (liabilities) are classified on the balance sheet as follows:

 

     2014      2013  

Short-term asset

   $ 1,210,000       $ 135,000   

Long-term liability

     (1,767,000      (2,348,000
  

 

 

    

 

 

 

Net deferred tax liabilities

$ (557,000 $ (2,213,000
  

 

 

    

 

 

 

Income Tax Expense (Benefit)—Income tax expense (benefit) for the years ended December 31, 2014 and 2013 is comprised of the following:

 

     2014      2013  

Current

   $ (4,905    $ 462,000   

Deferred

     (1,656,000      112,000   
  

 

 

    

 

 

 

Total

$ (1,660,905 $ 574,000   
  

 

 

    

 

 

 

The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from operations because of state taxes, nondeductible expenses, and tax credits.

 

12


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

9. EMPLOYEE BENEFIT PLAN

The Company has a defined contribution plan covering all employees meeting the eligibility requirements of the plan. The Company contributes a discretionary percentage of employee contributions as determined annually by the Board of Directors. Retirement plan matching expense for the years ended December 31, 2014 and 2013 was $121,550 and $121,290, respectively.

 

10. OPERATING LEASES

The Company leases equipment under operating leases expiring in the years 2015 through 2018. Total rent expense under all operating leases amounted to $313,681 and $290,683 for the years ended December 31, 2014 and 2013, respectively.

The following is a schedule of future minimum rental payments required under the operating leases as of December 31, 2014:

 

Year Ending December 31,

      

2015

   $ 269,294   

2016

     212,642   

2017

     134,924   

2018

     26,506   
  

 

 

 
$ 643,366   
  

 

 

 

 

11. COMMON AND PREFERRED STOCK

Common stock consists of Class A, B and C shares. Class A and B shares are voting. Class C shares are non-voting. Upon a triggering event, such as a letter of intent to sell the Company, failure to meet certain EBITDA levels, or a default under the loan agreements, the Class B shares may become Class A shares at the option of the holder. Upon corporate liquidation or dissolution, after preferred shareholders receive their liquidation value, the remaining proceeds are divided between Class A and B shares, except that the proceeds allocated to Class B shares are allocated in part to Class C shares based on certain internal rates of return earned by one of the principal stockholders on his preferred and common stock investment in the Company.

Preferred stock consists of series A, B, C, and D shares carried at the original issue price of $1 per share for Series A and B, $3.50 for Series C and $12.30 for Series D. All shares are designated as nonvoting. However, a majority of Series A, C and D shareholders must approve certain corporate matters of significance, including amendments to the Articles of Incorporation, share issuances or redemptions, asset or stock sales or mergers, hiring of a Chief Executive Officer and change in number of board members. Dividends on the shares are payable when and if declared by the board. Dividends compound annually and are cumulative. Dividend rates are 15% on Series A shares, 6% on Series B, 15% on Series C and 6% on Series D (prior to February 28, 2013 the dividend rate was 17.5% on Series D). Series D shares have first priority in liquidation or dissolution, receiving their original issuance

 

13


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

11. COMMON AND PREFERRED STOCK (CONTINUED)

 

price plus unpaid dividends. Series C shares have second priority receiving 1.5 times their original issuance price plus unpaid dividends; followed by Series A shares and lastly Series B shares, both of which receive their original issue price plus unpaid dividends. Dividend payments receive the same priority with Series C dividends payable only if Series D accumulated dividends have been paid, Series A after Series C dividends are paid and Series B after Series A dividends are paid.

All shares may be redeemed at the holder’s option after six years from the date of issuance. The redemption dates are August 2014 for Series A and B shares and August 2016 for Series C or D shares, or after satisfaction of all amounts due under loans extended to the Company by the holders (see Note 7). Redemption is mandatory in the case of a qualified public offering of the Company’s common stock.

The agreement between the stockholders also provides for various rights of electing the members of the Company’s Board of Directors and requires consents as to the sale of the Company.

In connection with the acquisition discussed in Note 2, the Company issued warrants to an outside entity for investment banker services to allow the entity to purchase 5,389 Class A common shares for $1 per share. No value was ascribed to the warrants. The warrants expire in August 2020.

During 2013, $8.2 million of preferred D stock was redeemed and a dividend of $4.1 million was paid on these shares through conversion into debt for the Company.

 

12. MAJOR CUSTOMERS

Sales to major customers and accounts receivable balances for the years ended December 31, 2014 and 2013 are as follows:

 

     2014     2013  
     Percent of
Revenues
    Percent of
Accounts
Receivable at
December 31
    Percent of
Revenues
    Percent of
Accounts
Receivable at
December 31
 

Customer A

     10     28     3     5

Customer B

     4     13     11     10

Customer C

     17     3     10     20

 

14


GALAXY TOOL HOLDING CORPORATION

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

13. RELATED PARTIES

The Company pays a management services fee to a stockholder. In August 2010 an agreement deferring payment until 2017 of the fee was entered into with the stockholder. The fee continues to accrue. Total expense for the years ended December 31, 2014 and 2013 was $225,000. Included in accrued expenses at December 31, 2014 and 2013 are fees of $1,008,750 and $783,750, respectively, that remain payable.

As discussed in Note 7, the Company has a line-of-credit and debt agreement with the same stockholder. Interest expense for the years ended December 31, 2014 and 2013 was $1,994,329 and $1,856,775, respectively.

 

15