Houston Wire & Cable Company
Houston Wire & Cable CO (Form: 8-K/A, Received: 10/20/2017 15:57:59)

 

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K/A

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

 

Date of Report (Date of Earliest Event Reported): October 3, 2016

 

Houston Wire & Cable Company

(Exact name of registrant as specified in its charter)

 

Delaware   000-52046   36-4151663
(State of Incorporation)   (Commission File Number)   (IRS employer identification no.)

 

 10201 North Loop East, Houston, TX   77029
 (Address of principal executive offices)   (Zip code)

 

(713) 609-2100

Registrant’s telephone number, including area code:

 

Not Applicable

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

 Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

 

 

 

 

EXPLANATORY NOTE

 

On October 5, 2016, Houston Wire & Cable Company (the “Company”) filed with the Securities and Exchange Commission a Current Report on Form 8-K (the “Original Form 8-K”) reporting, among other things, the completion of its acquisition of Vertex Corporate Holdings, Inc., a Delaware corporation (“Vertex”). This Current Report on Form 8-K/A amends Item 9.01 of the Original Form 8-K to include the required financial statements and to present certain unaudited pro forma financial information in connection with the acquisition, which unaudited pro forma financial information is filed as an exhibit hereto.

 

Item 9.01 Financial Statements and Exhibits.

 

(a)           Financial statements of businesses acquired .

 

The audited consolidated financial statements of Vertex as of and for the year ended December 31, 2015 and the related Notes thereto, are filed herewith as Exhibit 99.1.

 

The unaudited consolidated financial statements of Vertex as of and for the nine months ended September 30, 2016 and the related Notes thereto, are filed herewith as Exhibit 99.2.

 

(b)           Pro forma financial information .

 

The following pro forma financial information is filed herewith as Exhibit 99.3.

 

(i)  Unaudited Pro Forma Combined Balance Sheet at September 30, 2016.

 

(ii)  Unaudited Pro Forma Combined Statement of Income for the nine months ended September 30, 2016.

 

(iii)  Unaudited Pro Forma Combined Statement of Income for the year ended December 31, 2015.

 

(iv)  Notes to the Unaudited Pro Forma Condensed Combined Financial Information.

 

(c)           Not applicable .

 

(d)           Exhibits .

 

Exhibit No.   Description
     
99.1   Audited Consolidated Financial Statements of Vertex as of and for the year ended December 31, 2015.
     
99.2   Unaudited Consolidated Financial Statements of Vertex as of and for the nine months ended September 30, 2016.
     
99.3  

Unaudited Pro Forma Combined Financial Information and the related Notes thereto.  

 

 

 

 

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.

 

Date: October 20, 2017      
       
    By: /s/ Nicol G. Graham
      Name: Nicol G. Graham
      Title: Chief Financial Officer

 

 

 

 

EXHIBIT INDEX

 

Exhibit No.   Description
     
99.1   Audited Consolidated Financial Statements of Vertex as of and for the year ended December 31, 2015.
     
99.2   Unaudited Consolidated Financial Statements of Vertex as of and for the nine months ended September 30, 2016.
     
99.3   Unaudited Pro Forma Combined Financial Information and related Notes thereto.

 

 

Exhibit 99.1

 

VERTEX CORPORATE HOLDINGS INC.

ANNUAL REPORT

 

Year ended December 31, 2015

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

Index to Consolidated Financial Statements

 

  Page
   
Independent Auditor’s Report 3
   
Consolidated Balance Sheet 4
   
Consolidated Statement of Income and Comprehensive Income 5
   
Consolidated Statement of Stockholder’s Equity 6
   
Consolidated Statement of Cash Flows 7
   
Notes to Consolidated Financial Statements 8

 

2

 

 

INDEPENDENT AUDITOR’S REPORT

 

Independent Auditor’s Report

 

Board of Directors

Vertex Corporate Holdings Inc.

 

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Vertex Corporate Holdings Inc. and its subsidiaries (the Company), which comprise the consolidated balance sheet as of December 31, 2015, the related consolidated statements of income, comprehensive income, statement of stockholder’s equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

 

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vertex Corporate Holdings Inc. and its subsidiaries as of December 31, 2015 and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Hein & Associates LLP

 

Houston, Texas

October 4, 2017

 

3  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

CONSOLIDATED BALANCE SHEET

 

(In thousands, except share and per share amounts)

 

    December 31,  
    2015  
Assets      
       
Current assets:        
Cash   $ 8  
Accounts receivable, net     2,561  
Inventories, net     15,517  
Deferred tax assets (current portion)     161  
Other current assets     69  
Total current assets     18,316  
Property and equipment, net     74  
Goodwill     5,363  
Deferred tax assets, net     612  
Other assets     116  
Total assets   $ 24,481  
         
Liabilities and stockholder’s equity        
Current liabilities:        
Trade accounts payable   $ 2,597  
Accrued expenses     743  
Total liabilities     3,340  
Commitments and contingencies (Note 5 and 6)      
Stockholder’s equity:        
Common stock, $1.00 par value, 4,300,000 shares authorized, issued and outstanding     4,300  
Distribution to parent     (15,365 )
Retained earnings     32,206  
Total stockholder’s equity     21,141  
Total liabilities and stockholder’s equity   $ 24,481  

 

The accompanying notes are an integral part of this consolidated financial statement.

 

4  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

 

(In thousands)

 

    Year Ended  
    December 31,  
    2015  
       
Revenue   $ 33,996  
Cost of sales     20,794  
  Gross profit     13,202  
         
Selling expenses     9,011  
General and administrative expenses     969  
Income before income taxes     3,222  
Income tax expense     1,157  
Net income   $ 2,065  
Comprehensive income   $ 2,065  

 

The accompanying notes are an integral part of this consolidated financial statement.

 

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VERTEX CORPORATE HOLDINGS INC.

 

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

 

(In thousands)

 

                            Total  
    Common Stock     Distribution     Retained     Stockholder’s  
    Shares     Amount     to Parent     Earnings     Equity  
                               
Balances - December 31, 2014     4,300     $ 4,300     $ (13,368 )   $ 30,141     $ 21,073  
Distributions                 (1,997 )           (1,997 )
Net income                       2,065       2,065  
Balances - December 31, 2015     4,300     $ 4,300     $ (15,365 )   $ 32,206     $ 21,141  

 

The accompanying notes are an integral part of this consolidated financial statement.

 

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VERTEX CORPORATE HOLDINGS INC.

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

(In thousands)

 

    Year Ended
December 31,
 
    2015  
Operating activities:        
Net income   $ 2,065  
Adjustments to reconcile net income to cash flows provided by operating activities:        
 Bad debt expense     103  
 Depreciation and amortization     48  
 Deferred income taxes     (102 )
Changes in assets and liabilities:        
 Trade accounts receivable     842  
 Inventory     (1,544 )
 Trade accounts payable     440  
 Other assets and liabilities, net     160  
Net cash provided by operating activities     2,012  
Investing activities:        
 Capital expenditures     (16 )
Cash used in investing activities     (16 )
Financing Actvities:        
 Distribution to parent     (1,997 )
Cash used in financing activities     (1,997 )
Net change in cash     (1 )
Cash at beginning of year     9  
Cash at end of year   $ 8  

 

The accompanying notes are an integral part of this consolidated financial statement.

 

7  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Summary of Significant Accounting Policies

 

Description of Business

 

Vertex Corporate Holdings, Inc., together with its subsidiaries (collectively “Vertex” or the “Company”) is a master distributor of industrial fasteners with sales and distribution centers throughout the United States specializing in corrosion resistant and specialty alloy inch and metric threaded fasteners, rivets, and hose clamps. Vertex products are used in a broad array of end markets including industrial supply, water and waste water, general manufacturing, power generation, marine, and oil and gas.

 

Basis of Presentation and Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company, and its subsidiaries, and have been prepared following accounting principles generally accepted in the United States (“GAAP”). The accompanying consolidated financial statements include the accounts of Vertex Corporate Holdings, Inc. (“VERTEX”) and its direct wholly owned subsidiary, Vertex PFI, Inc. (“VPFI”) and its indirect subsidiary, PFI, LLC (“PFILLC”), which is a wholly owned subsidiary of VPFI. VERTEX and VPFI are both Delaware corporations and PFILLC is a Rhode Island Limited Liability Corporation. VERTEX is a direct wholly owned subsidiary of DXP Enterprises, Inc. (“DXP”, or “Parent”), a Texas Corporation. All significant subsidiary intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company’s presentation of cash includes cash equivalents. Cash equivalents are defined as short-term investments with maturity dates of 90 days or less at time of purchase. The Company places its cash and equivalents with institutions with high credit quality.

 

Accounts Receivables and Credit Risk

 

Trade receivables consist primarily of uncollateralized customer obligations due under normal trade terms, which usually require payment within 30 days of the invoice date. However, these payment terms are extended in select cases and customers may not pay within stated trade terms.

 

The Company has trade receivables from a diversified customer base located in various regions of the United States. The Company believes no significant concentration of credit risk exists. The Company evaluates the credit worthiness of its customers’ financial positions and monitors accounts on a regular basis, but generally does not require collateral. Provisions to the allowance for doubtful accounts are made monthly and adjustments are made periodically (as circumstances warrant) based upon management’s best estimate of the collectability of such accounts. The Company writes-off uncollectible trade accounts receivable when the accounts are determined to be uncollectible. At December 31, 2015, no customer accounted for at least 10% of our accounts receivable balance.

 

8  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company maintains an allowance for losses based upon the expected collectability of accounts receivable. Changes in this allowance for 2015 were as follows:

 

    (In thousands)  
Balance at beginning of year   $ 104  
Bad debt expense     103  
Balance at end of year   $ 207  

Inventories

 

Inventories consist principally of finished goods and are priced at lower of cost or market, cost being determined using the first-in, first-out (“FIFO”) method. Reserves are provided against inventories for estimated obsolescence based upon the aging of the inventories and market trends and are applied as a reduction in cost of associated inventory. The reserve for inventory may periodically require adjustment as the factors identified above change. At December 31, 2015 the inventory reserve was approximately $2.7 million.

 

Property and Equipment

 

Property and equipment are carried on the basis of cost. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives. Maintenance and repairs of depreciable assets are charged against earnings as incurred. When properties are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and gains or losses are credited or charged to earnings.

 

The principal estimated useful lives used in determining depreciation are as follows:

 

Furniture, fixtures and equipment 3-20 years
Leasehold improvements Shorter of estimated useful life or related lease term

 

Total depreciation expense was approximately $48,000 for the year ended December 31, 2015.

 

Goodwill

 

Goodwill represents the excess of the amount paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items. At December 31, 2015, the goodwill balance was approximately $5.4 million representing 21.9% of the Company’s total assets.

 

The Company’s goodwill impairment assessment first permits evaluating qualitative factors to determine if a reporting unit’s carrying value would more likely than not exceed its fair value. If the Company concludes, based on the qualitative assessment, that a reporting unit’s carrying value would more likely than not exceed its fair value, the Company would perform a two-step quantitative test for that reporting unit. When a quantitative assessment is performed, the first step is to identify a potential impairment, and the second step measures the amount of the impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit’s goodwill exceeds its estimated fair value. The Company’s qualitative assessment for the year ended December 31, 2015 indicated that there were no significant changes in qualitative factors that would otherwise require the Company to prepare a step-two quantitative test for impairment of goodwill. Consequently, no impairment of goodwill was recognized in the financial statements for the year ended December 31, 2015.

 

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VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Impairment of Long-Lived Assets, Excluding Goodwill

 

The Company normally tests long-lived assets or asset groups for recoverability on an annual basis and when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. At December 31, 2015 the long-lived assets were significantly depreciated with a net book basis of $74,000. Consequently, the Company determined no impairment test was warranted and no impairment was recognized during the year ended December 31, 2015.

 

Defined Benefit Plan

 

VERTEX has a non-contributory defined benefit pension plan for those current and former warehouse employees at its Attleboro, Massachusetts location who are subject to a collective bargaining agreement under the PFI Union.

 

The benefit provisions to participants of the defined benefit plan are calculated based on the number of years of service and an annual negotiated Plan benefit per year of service. Annual compensation (or future compensation increases) is not used in calculating the benefit or future Plan contributions.

 

It is the Company’s practice to fund amounts for pensions sufficient to meet the minimum funding requirements set forth in applicable employee benefit laws. A total contribution of approximately $22,000 in cash was made to the Plan in the year ended September 30, 2015.

 

Segment Reporting

 

The Company operates in a single operating and reporting segment sales of industrial fasteners to the U.S. market.

 

Revenue Recognition, Returns & Allowances

 

The Company recognizes revenue when the following four basic criteria have been met:

 

1. Persuasive evidence of an arrangement exists;

 

2. Delivery has occurred or services have been rendered;

 

3. The seller’s price to the buyer is fixed or determinable; and

 

4. Collectability is reasonably assured.

 

The Company records revenue when customers take delivery of products. Customers may pick up products at any distribution center location or products may be delivered via third party carriers. Products shipped via third party carriers are considered delivered based on the shipping terms, which are generally FOB shipping point. Normal payment terms are net 30 days. Customers are permitted to return product only on a case by case basis. Product exchanges are handled as a credit, with any replacement item being re-invoiced to the customer. Customer returns are recorded as an adjustment to sales.

 

In the past, customer returns have not been material. The Company has no installation obligations. The Company may offer sales incentives, which are accrued monthly as an adjustment to sales. The Company reserves for potential customer returns based upon the historical level of returns.

 

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VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Shipping and Handling Costs

 

The Company classifies shipping and handling charges billed to customers as sales. Shipping and handling charges paid to others are classified as a component of cost of sales.

 

Cost of Sales and Selling, General and Administrative Expense

 

Cost of sales includes product and product related costs, inbound freight charges, internal transfer costs and depreciation. Selling, general and administrative expense includes purchasing and receiving costs, inspection costs, warehousing costs, depreciation and amortization.

 

Accounting for Uncertainty in Income Taxes

 

A position taken or expected to be taken in a tax return is recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

 

Financial Instruments

 

The carrying values of accounts receivable, trade accounts payable and accrued and other current liabilities approximate fair value, due to the short maturity of these instruments.

 

Recent Accounting Pronouncements

 

The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standard Update (“ASU”) to communicate changes to the codification. The Company considers the applicability and impact of all ASUs. The following are those ASUs that are relevant to the Company.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The amendments in this ASU address eight cash flow issues with the intention of reducing current diversity in practice among business entities. The Company will evaluate the eight issues in the amendment and determine if any changes are necessary for compliance. ASU No. 2016-15 is effective for annual and interim periods beginning after December 31, 2017; early adoption is permitted and should be applied retrospectively where practical. The Company will determine the date of adoption, once the Company has evaluated the impact of this ASU.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases greater than 1 year, both capital and operating leases. This update is effective for public companies for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company has not yet evaluated this ASU.

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740) — Balance Sheet Classification of Deferred Taxes.” ASU No. 2015-17 eliminates the requirement to classify deferred tax assets and liabilities as current or long-term based on how the related assets or liabilities are classified. All deferred taxes are now required to be classified as long-term including any associated valuation allowances. This guidance is effective for public companies for fiscal years beginning after December 15, 2016 with early adoption permitted on either a prospective or retrospective basis. The Company is currently evaluating the timing of adoption of this ASU which impacts only the balance sheet presentation.

 

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VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (Topic 330), which changes guidance for subsequent measurement of inventory within the scope of the update from the lower of cost or market to the lower of cost and net realizable value. This update is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the effects of adoption of this guidance on the Company’s consolidated financial statements as well as determining the timing of adoption.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in the ASU must be applied using one of two retrospective methods and are effective for annual and interim periods beginning after December 15, 2018. Early adoption for annual and interim periods beginning after December 31, 2017 is permitted. As the Company recognizes revenue only once product has shipped, it does not believe this ASU will have a significant impact on its revenue recognition policy. However, the Company is still evaluating the impact of this ASU on its financial position and results of operations, timing of adoption, and which implementation method the Company will use.

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

2. Detail of Selected Balance Sheet Accounts

 

Inventories

 

At December 31, 2015, the carrying values of the Company’s finished goods inventories are $15.5 million net of inventory reserves of approximately $2.7 million.

 

Property and Equipment

 

Property and equipment, as of December 31, 2015, were as follows:

 

    (In thousands)  
Leasehold improvements   $ 396  
Furniture and fixtures     109  
Computer equipment and software     395  
Tools and equipment     999  
      1,899  
Accumulated depreciation     (1,825 )
    $ 74  

 

Depreciation expense was approximately $48,000 for the year ended December 31, 2015.

 

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VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Goodwill

 

At December 31, 2015, the goodwill balance was $5.4 million, representing 21.9% of the Company’s total assets. No impairments or additions were recognized during the year ended December 31, 2015.

 

Distribution to Parent

 

The balance at December 31, 2015, reflects the net of movements of cash, inventory, income taxes and expense charges between the Company and Parent.

 

Accrued Expenses

 

Accrued expenses, as of December 31, 2015, were as follows:

 

    (In thousands)  
Income taxes payable   $ 304  
Accrued commissions     241  
Net pension liability     101  
Other     97  
    $ 743  

3. Fair Value

 

Within the framework for measuring fair value, ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard defines the three levels of inputs used to measure fair value as follows:

 

Level 1: Inputs are unadjusted quoted prices for identical assets or liabilities in active markets, which primarily consist of financial instruments, traded on exchange or futures markets.

 

Level 2: Inputs are other than quoted prices in active markets (included in Level 1), which are directly or indirectly observable as of the financial reporting date, including derivative instruments transacted primarily in over-the-counter markets.

 

Level 3: Unobservable inputs, which include inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

 

As of December 31, 2015, the Company had no outstanding assets or liabilities (except plan assets) measured at fair value on a recurring basis which were measured using Level 1 and Level 2 inputs.

 

The Plan assets at December 31, 2015 of $847,000 are all classified as Level 1 and as such have readily observable prices and therefore a reliable fair market value.

 

Inventories consist principally of finished goods and are priced at lower of cost or market, cost being determined using the FIFO method. Reserves are provided against inventories for estimated obsolescence based upon the aging of the inventories and market trends (which were determined to be level 3 inputs) and are applied as a reduction in cost of associated inventory.

 

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VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

4. Income Taxes

 

The provision for income taxes for the year ended December 31, 2015 was as follows:

 

 

    (In thousands)  
Current:      
Federal   $ 1,020  
State     35  
Deferred        
Federal     95  
State     7  
         
Income tax expense   $ 1,157  

 

The difference between income taxes computed at the federal statutory income tax rate (35%) and the provision for income taxes, for year ended December 31, 2015, was as follows:

 

    (In thousands)  
Income before income taxes   $ 3,222  
Statutory federal income tax rate     35 %
Computed “expected” federal income tax expense     1,128  
Increase in tax resulting from:        
State tax, net of federal benefit     27  
Other, net     2  
Total income tax expense   $ 1,157  

 

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VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Deferred tax liabilities and assets as of December 31, 2015 were comprised of the following:

 

    (In thousands)  
Deferred tax assets:      
Allowance for doubtful accounts   $ 72  
Uniform Cap Sec 263 A Costs     89  
Property and equipment     46  
Goodwill     573  
Total deferred tax assets     780  
Deferred tax liabilities:        
Other     7  
Total deferred tax liabilities     7  
Net deferred tax assets   $ 773  

 

5. Commitments and Contingencies

 

The Company leases facilities under various operating leases. The future minimum rental commitments as of December 31, 2015, for non-cancelable leases are as follows:

 

      (In thousands)  
2016     $ 1,447  
2017       1,426  
2018       1,094  
2019       967  
2020       959  
      $ 5,893  

 

Rental expense for operating leases was approximately $1.8 million for the year ended December 31, 2015.

 

From time to time, the Company may be party to various legal proceedings arising in the ordinary course of business. While VERTEX is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on VERTEX’s consolidated financial position, cash flows, or results of operations.

 

6. Retirement-related Benefits

 

Defined Contribution Plan

 

Through its Parent, the Company’s employees are offered a 401(k) plan which is available to substantially all employees. The Company matches employee contributions at a rate of 50 percent of up to 4 percent of salary deferral.

 

15  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Defined Benefit Plan

 

VERTEX has a non-contributory defined benefit pension plan for those current and former warehouse employees at its Attleboro, Massachusetts location who are subject to a collective bargaining agreement under the PFI Union. At December 31, 2015 there were thirty-six employees covered by the Plan with the following breakdown, fourteen active, fourteen retired and eight terminated.

 

The benefit provisions to participants of the defined benefit plan are calculated based on the number of years of service and an annual negotiated Plan benefit per year of service. Annual compensation (or future compensation increases) is not used in calculating the benefit or future Plan contributions.

 

It is the Company’s practice to fund amounts for pensions sufficient to meet the minimum funding requirements set forth in applicable employee benefit laws. A total contribution of approximately $22,000 in cash was made to the Plan in the year ended September 30, 2015.

 

Provided below, as of and for the year ended September 30, 2015 were the components of the changes in the benefit obligation and Plan assets and a reconciliation of the funded status to the assets and liabilities recognized in the consolidated balance sheet:

 

    (In thousands)  
Change in benefit obligation:      
Benefit obligation at October 1, 2014   $ 795  
Service cost     56  
Interest cost     34  
Actuarial gain/(loss)     (33 )
Benefits paid     (22 )
Benefit obligation at September 30, 2015     830  
         
Change in plan assets:        
Fair value of plan assets at October 1, 2014     809  
Actual return on plan assets     9  
Employer contributions     22  
Benefits paid     (22 )
         
Fair value of plan assets at September 30, 2015     818  
         
Under funded at September 30, 2015   $ (12 )

 

The $12,000 difference between Plan assets and accrued obligations represents the amount by which the Plan was under funded as of September 30, 2015 and is reflected in the Company’s balance sheet at December 31, 2015 in accrued expenses.

 

Weighted-average assumptions used to measure net periodic benefit obligation for the Plan year ended September 30, 2015:

 

Discount rate 4.40%
Compensation increase 0.00%

 

Weighted-average assumptions used to measure net periodic benefit cost for the Plan year ended September 30, 2015:

 

Discount rate 4.32%
Expected long-term return on plan assets 5.00%
Compensation increase 0.00%

 

16  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table represents the pension plan’s weighted-average asset allocations for the Plan year ended September 30, 2015:

 

Equity securities     60 %
Debt securities     40 %
Real estate     0 %
Other     0 %

 

The Plan assets at December 31, 2015 of $847,000 are all classified as Level 1 and as such have readily observable prices and therefore a reliable fair market value.

 

The following table represents the total expected benefit payments to defined benefit pension plan participants:

 

      (In thousands)  
2016     $ 224  
2017       85  
2018       85  
2019       142  
2020       16  
2021 to 2026       402  
Total     $ 954  

 

7. Subsequent Events

 

On October 3, 2016, HWC Wire & Cable Company (the “Buyer”), a wholly owned subsidiary of Houston Wire and Cable Company acquired all of the issued and outstanding shares of common stock of VERTEX and its subsidiaries from DXP pursuant to a Stock Purchase Agreement, dated as of October 3, 2016 between DXP and the Buyer (the “Purchase Agreement”). Houston Wire and Cable Company has guaranteed the obligations of the Buyer under the Purchase Agreement.

 

The purchase price for the acquisition consisted of $32.million in cash and is subject to a post-closing adjustment based on the net working capital of Vertex as of the closing date. The Buyer financed the payment of the purchase price through borrowings under an amendment to the Fourth Amended and Restated Loan and Security Agreement (the “2015 Loan Agreement”).

 

In addition, the Company granted 21,000 shares of restricted stock to four members of the Vertex management team. The shares will vest and declared dividends will be accrued, subject to their employment with the Buyer.

 

Also on October 3, 2016, in connection with the Vertex acquisition, the Buyer, Houston Wire and Cable Company, Vertex, and Bank of America, N.A., as agent and lender, entered into a First Amendment to the 2015 Loan Agreement (the “Loan Agreement Amendment”) amending the 2015 Loan Agreement. The Loan Agreement Amendment adds Vertex as borrower (and lien grantor) and provides the terms for inclusion of Vertex’s eligible accounts receivable and eligible inventory in the borrowing base for the 2015 Loan Agreement.

 

The Company has evaluated subsequent events through October 4, 2017, and determined that, other than the above, there were no events which should be disclosed or recognized in the financial statements.

 

17

Exhibit 99.2

 

VERTEX CORPORATE HOLDINGS INC.  

QUARTERLY REPORT

 

For Nine Months Ended September 30, 2016

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

Index to Consolidated Financial Statements

 

(Unaudited)

 

  Page
   
Independent Auditor’s Review Report 3
   
Consolidated Balance Sheet as of September 30, 2016 4
   
Consolidated Statements of Income and Comprehensive Income for the nine months ended September 30, 2016 and 2015 5
   
Consolidated Statements of Stockholder’s Equity as of September 30, 2016 6
   
Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 7
   
Notes to Consolidated Financial Statements 8

 

2  

 

 

Independent Auditor’s Review Report

 

Board of Directors 

Vertex Corporate Holdings Inc.

 

Report on the Financial Statements 

We have reviewed the accompanying consolidated financial statements of Vertex Corporate Holdings Inc. and its subsidiaries (the Company) as of September 30, 2016, and for the nine-month periods ended September 30, 2016 and 2015.

 

Management’s Responsibility  

Management is responsible for the preparation and fair presentation of the interim financial information in accordance with accounting principles generally accepted in the United States of America; this responsibility includes the design, implementation and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with generally accepted accounting principles.

 

Auditor’s Responsibility 

Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.

 

Conclusion 

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Hein & Associates LLP

 

Houston, Texas 

October 4, 2017

 

3  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

CONSOLIDATED BALANCE SHEET

 

(Unaudited)

 

(In thousands, except share and per share amounts)

 

    September 30,
2016
 
       
Assets        
         
Current assets:        
Cash   $ 3  
Accounts receivable, net     2,854  
Inventories, net     14,796  
Deferred tax assets (current portion)     94  
Other current assets     160  
         
Total current assets     17,907  
         
Property and equipment, net     59  
Goodwill     5,363  
Deferred tax assets, net     525  
Other assets     116  
         
Total assets   $ 23,970  
         
Liabilities and stockholder’s equity        
         
Current liabilities:        
Trade accounts payable   $ 1,071  
Accrued expenses     1,441  
         
Total liabilities     2,512  
         
Commitments and contingencies (Note 5 and 6)      
         
Stockholder’s equity:        
Common stock, $1.00 par value, 4,300,000 shares authorized, issued        
and outstanding     4,300  
Distribution to parent     (16,386 )
Retained earnings     33,544  
         
Total stockholder’s equity     21,458  
         
Total liabilities and stockholder’s equity   $ 23,970  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

(Unaudited)

 

(In thousands)

 

    Nine Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2016     2015  
             
Revenue   $ 22,668     $ 26,854  
Cost of sales     13,639       16,911  
  Gross profit     9,029       9,943  
                 
Selling expenses     6,191       6,922  
General and administrative expenses     722       734  
                 
Income before income taxes     2,116       2,287  
                 
Income tax expense     778       829  
                 
Net income   $ 1,338     $ 1,458  
                 
Comprehensive income   $ 1,338     $ 1,458  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

 

(Unaudited)

 

(In thousands)

 

                            Total  
    Common Stock     Distribution     Retained     Stockholder’s  
    Shares     Amount     to Parent     Earnings     Equity  
                               
                               
                               
Balances, December 31, 2015     4,300       4,300       (15,365 )     32,206       21,141  
                                         
Distributions                 (1,021 )           (1,021 )
                                         
Net income                       1,338       1,338  
                                         
Balances, September 30, 2016     4,300     $ 4,300     $ (16,386 )   $ 33,544     $ 21,458  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

6  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

(In thousands)

 

    Nine Months
Ended
September 30,
    Nine Months
Ended
September 30,
 
    2016     2015  
             
Operating activities:                
Net income   $ 1,338     $ 1,458  
Adjustments to reconcile net income to cash flows provided by operating activities:                
Bad debt expense           81  
Depreciation and amortization     35       36  
Deferred income taxes     154       (607 )
                 
Changes in assets and liabilities:                
Trade accounts receivable     (293 )     (50 )
Inventory     721       876  
Trade accounts payable     (1,526 )     (847 )
Other assets and liabilities, net     600       80  
Net cash provided by operating activities     1,029       1,027  
                 
Investing activities                
Capital expenditures     (13 )     (17 )
Cash used in investing activities     (13 )     (17 )
                 
Financing activities                
Distribution to parent     (1,021 )     (1,010 )
Cash used in financing activities     (1,021 )     (1,010 )
Net change in cash     (5 )      
Cash at beginning of year     8       9  
                 
Cash at end of year   $ 3     $ 9  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

7  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited) 

 

1.      Organization and Summary of Significant Accounting Policies

 

Description of Business

 

Vertex Corporate Holdings, Inc., together with its subsidiaries (collectively “Vertex” or the “Company”) is a master distributor of industrial fasteners with sales and distribution centers throughout the United States, specializing in corrosion resistant and specialty alloy inch and metric threaded fasteners, rivets, and hose clamps. Vertex products are used in a broad array of end markets including industrial supply, water and waste water, general manufacturing, power generation, marine, and oil and gas.

 

Basis of Presentation and Principles of Consolidation

 

The consolidated financial statements for the nine months ended September 30, 2016, include the accounts of the Company and its subsidiaries, and have been prepared following accounting principles generally accepted in the United States (“GAAP”) for interim financial information. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the results of the interim period has been included. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the full year. The accompanying consolidated financial statements include the accounts of Vertex Corporate Holdings, Inc. (“VERTEX”) and its direct wholly owned subsidiary, Vertex PFI, Inc. (“VPFI”) and its indirect subsidiary, PFI, LLC (“PFILLC”), which is a wholly owned subsidiary of VPFI. VERTEX and VPFI are both Delaware corporations and PFILLC is a Rhode Island Limited Liability Corporation. VERTEX is a direct wholly owned subsidiary of DXP Enterprises, Inc. (“DXP”, or “Parent”), a Texas Corporation. All significant subsidiary intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates.

 

Cash

 

Cash equivalents are defined as short-term investments with maturity dates of 90 days or less at time of purchase. The Company places its cash and equivalents with institutions with high credit quality.

 

Accounts Receivables and Credit Risk

 

Trade receivables consist primarily of uncollateralized customer obligations due under normal trade terms, which usually require payment within 30 days of the invoice date. However, these payment terms are extended in select cases and customers may not pay within stated trade terms.

 

8  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited) 

 

The Company has trade receivables from a diversified customer base located in various regions of the United States. The Company believes no significant concentration of credit risk exists. The Company evaluates the credit worthiness of its customers’ financial positions and monitors accounts on a regular basis, but generally does not require collateral. Provisions to the allowance for doubtful accounts are made monthly and adjustments are made periodically (as circumstances warrant) based upon management’s best estimate of the collectability of such accounts. The Company writes-off uncollectible trade accounts receivable when the accounts are determined to be uncollectible.

 

The Company maintains an allowance for losses based upon the expected collectability of accounts receivable. Changes in this allowance for the nine months ended September 30, were as follows:

 

    2016  
      (In thousands)  
Balance at December 31   $ 207  
Net change     (167 )
         
Balance at September 30   $ 40  

   

Inventories

 

Inventories consist principally of finished goods and are priced at lower of cost or market, cost being determined using the first-in, first-out (“FIFO”) method. Reserves are provided against inventories for estimated obsolescence based upon the aging of the inventories and market trends and are applied as a reduction in cost of associated inventory. The reserve for inventory may periodically require adjustment as the factors identified above change. At September 30, 2016 the inventory reserve was approximately $1.8 million.

 

Property and Equipment

 

Property and equipment are carried on the basis of cost. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives. Maintenance and repairs of depreciable assets are charged against earnings as incurred. When properties are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and gains or losses are credited or charged to earnings.

 

The principal estimated useful lives used in determining depreciation are as follows:

 

Furniture, fixtures and equipment 3-20 years
Leasehold improvements Shorter of estimated useful life or related lease term

 

Total depreciation expense was approximately $35,000 and $36,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

9  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

Goodwill

 

Goodwill represents the excess of the amount paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items. At September 30, 2016, the goodwill balance was approximately $5.4 million representing 22.4% of the Company’s total assets.

 

The Company’s goodwill impairment assessment first permits evaluating qualitative factors to determine if a reporting unit’s carrying value would more likely than not exceed its fair value. If the Company concludes, based on the qualitative assessment, that a reporting unit’s carrying value would more likely than not exceed its fair value, the Company would perform a two-step quantitative test for that reporting unit. When a quantitative assessment is performed, the first step is to identify a potential impairment, and the second step measures the amount of the impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit’s goodwill exceeds its estimated fair value.

 

Impairment of Long-Lived Assets, Excluding Goodwill

 

The Company normally tests long-lived assets or asset groups for recoverability on an annual basis and when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. At September 30, 2016, the long-lived assets were significantly fully depreciated with a net book basis of $59,000. Consequently, the Company determined no impairment test was warranted and no impairment was recognized during the nine months ended September 30, 2016.

 

Defined Benefit Plan

 

VERTEX has a non-contributory defined benefit pension plan for those current and former employees at its Attleboro, Massachusetts location who are subject to a collective bargaining agreement under the PFI Union.

 

The benefit provisions to participants of the defined benefit plan are calculated based on the number of years of service and an annual negotiated Plan benefit per year of service. Annual compensation (or future compensation increases) is not used in calculating the benefit or future Plan contributions.

 

It is the Company’s policy to fund amounts for pensions sufficient to meet the minimum funding requirements set forth in applicable employee benefit class, which currently approximates the benefit payments made each year.

 

10  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

Segment Reporting

 

The Company operates in a single operating and reporting segment, sales of industrial fasteners to the U.S. market.

 

Revenue Recognition, Returns & Allowances

 

The Company recognizes revenue when the following four basic criteria have been met:

 

1. Persuasive evidence of an arrangement exists;

 

2. Delivery has occurred or services have been rendered;

 

3. The seller’s price to the buyer is fixed or determinable; and

 

4. Collectability is reasonably assured.

 

The Company records revenue when customers take delivery of products. Customers may pick up products at any distribution center location, or products may be delivered via third party carriers. Products shipped via third party carriers are considered delivered based on the shipping terms, which are generally FOB shipping point. Normal payment terms are net 30 days. Customers are permitted to return product only on a case by case basis. Product exchanges are handled as a credit, with any replacement item being re-invoiced to the customer. Customer returns are recorded as an adjustment to sales.

 

In the past, customer returns have not been material. The Company has no installation obligations. The Company may offer sales incentives, which are accrued monthly as an adjustment to sales. The Company reserves for potential customer returns based upon the historical level of returns.

 

Shipping and Handling Costs

 

The Company classifies shipping and handling charges billed to customers as sales. Shipping and handling charges paid to others are classified as a component of cost of sales.

 

Cost of Sales and Selling, General and Administrative Expense

 

Cost of sales includes product and product related costs, inbound freight charges, internal transfer costs and depreciation. Selling, general and administrative expense includes purchasing and receiving costs, inspection costs, warehousing costs, depreciation and amortization.

 

Accounting for Uncertainty in Income Taxes

 

A position taken or expected to be taken in a tax return is recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

 

11  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

Financial Instruments

 

The carrying values of accounts receivable, trade accounts payable and accrued and other current liabilities approximate fair value, due to the short maturity of these instruments.

 

Recent Accounting Pronouncements

 

The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standard Update (“ASU”) to communicate changes to the codification. The Company considers the applicability and impact of all ASUs. The following recently issued ASUs are relevant to the Company.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The amendments in this ASU address eight cash flow issues with the intention of reducing current diversity in practice among business entities. The Company will evaluate the eight issues in the amendment and determine if any changes are necessary for compliance. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017; early adoption is permitted and should be applied retrospectively where practical. The Company will determine the date of adoption, once the Company has evaluated the impact of this ASU.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases greater than 1 year, both capital and operating leases. This update is effective for public companies for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company has not yet evaluated this ASU.

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740) — Balance Sheet Classification of Deferred Taxes.” ASU No. 2015-17 eliminates the requirement to classify deferred tax assets and liabilities as current or long-term based on how the related assets or liabilities are classified. All deferred taxes are now required to be classified as long-term including any associated valuation allowances. This guidance is effective for public companies for fiscal years beginning after December 15, 2016 with early adoption permitted on either a prospective or retrospective basis. The Company is currently evaluating the timing of adoption of this ASU which impacts only the balance sheet presentation.

 

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (Topic 330), which changes guidance for subsequent measurement of inventory within the scope of the update from the lower of cost or market to the lower of cost and net realizable value. This update is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the effects of adoption of this guidance on the Company’s consolidated financial statements as well as determining the timing of adoption.

 

12  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in the ASU must be applied using one of two retrospective methods and are effective for annual and interim periods beginning after December 15, 2017. Early adoption for annual and interim periods beginning after December 31, 2017 is permitted. As the Company recognizes revenue only once product has shipped, it does not believe this ASU will have a significant impact on its revenue recognition policy. However, the Company is still evaluating the impact of this ASU on its financial position and results of operations, timing of adoption, and which implementation method the Company will use.

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

2. Detail of Selected Balance Sheet Accounts

 

Inventories

 

At September 30, 2016, the carrying values of the Company’s finished goods inventories are $14.8 million net of inventory reserves of $1.8 million.

 

Property and Equipment

 

Property and equipment were as follows (in thousands):

 

    September 30,
2016
 
      (In thousands)  
Leasehold improvements   $ 409  
Furniture and fixtures     110  
Computer equipment and software     395  
Tools and equipment     999  
         
      1,913  
Accumulated depreciation     (1,854 )
          
    $ 59  

 

Depreciation expense was approximately $35,000 and $36,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

13  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

Goodwill

 

At September 30, 2016, the goodwill balance was $5.4 million representing 22.4% of the Company’s total assets. No impairments or additions were recognized during the nine months ended September 30, 2016.

 

Distribution to Parent

 

The balance at September 30, 2016, reflects the net of movements of cash, inventory, income taxes and expense charges between the Company and Parent.

 

Accrued Expenses

 

Accrued expenses, as of September 30, were as follows:

 

    2016  
      (In thousands)  
Income taxes payable   $ 908  
Accrued commissions     242  
Net pension liability     63  
Other     228  
         
    $ 1,441  

  

3. Fair Value

 

Within the framework for measuring fair value, ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard defines the three levels of inputs used to measure fair value as follows:

 

Level 1: Inputs are unadjusted quoted prices for identical assets or liabilities in active markets, which primarily consist of financial instruments, traded on exchange or futures markets.

 

Level 2: Inputs are other than quoted prices in active markets (included in Level 1), which are directly or indirectly observable as of the financial reporting date, including derivative instruments transacted primarily in over-the-counter markets.

 

Level 3: Unobservable inputs, which include inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

 

As of September 30, 2016, the Company had no outstanding assets or liabilities (except plan assets) measured at fair value on a recurring basis which were measured using Level 1 and Level 2 inputs.

 

The Plan assets at September 30, 2016 of $914,000 are all classified as Level 1 and as such have readily observable prices and therefore a reliable fair value.

 

14  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

Inventories consist principally of finished goods and are priced at lower of cost or market, cost being determined using the FIFO method. Reserves are provided against inventories for estimated obsolescence based upon the aging of the inventories and market trends (which were determined to be level 3 inputs) and are applied as a reduction in cost of associated inventory.

 

4. Income Taxes

 

Tax expense for the nine months ended September 30, 2016, was $0.8 million on pretax income of $2.1 million. The effective tax rate for the nine months ended September 30, 2016 was 36.8%.

 

At September 30, 2015, tax expense was $0.8 million on pretax income of $2.3 million. The effective tax rate for the nine months ended September 30, 2015 was 36.2%.

 

5. Commitments and Contingencies

 

From time to time, the Company may be party to various legal proceedings arising in the ordinary course of business. While the Company is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on the Company’s consolidated financial position, cash flows, or results of operations.

 

6. Retirement-related Benefits

 

Defined Contribution Plan

 

Through its Parent, the Company’s employees are offered a 401(k) plan which is available to substantially all employees. The Company matches employee contributions at a rate of 50 percent of up to 4 percent of salary deferral.

 

Defined Benefit Plan

 

VERTEX has a non-contributory defined benefit pension plan for those current and former warehouse employees at its Attleboro, Massachusetts location who are subject to a collective bargaining agreement under the PFI Union. At September 30, 2016 there were thirty-six employees covered by the plan with the following breakdown, fourteen active, fourteen retired and eight terminated.

 

The benefit provisions to participants of the defined benefit plan are calculated based on the number of years of service and an annual negotiated Plan benefit per year of service. Annual compensation (or future compensation increases) is not used in calculating the benefit or future Plan contributions.

 

It is the Company’s practice to fund amounts for pensions sufficient to meet the minimum funding requirements set forth in applicable employee benefit laws. A total contribution of approximately $24,000 in cash was made to the Plan in the year ended September 30, 2016 and approximately $22,000 was contributed for the prior year period.

  

15  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

The following tables present the changes in benefit obligations and plan assets of the defined benefit plan for the Plan years ended September 30:  

 

    2016     2015  
Change in benefit obligation:   (In thousands)  
Benefit obligation at October 1   $ 830     $ 795  
Service cost     58       56  
Interest cost     36       34  
Actuarial gain/(loss)     77       (33 )
Benefits paid     (24 )     (22 )
                 
Benefit obligation at September 30     977       830  
                 
Change in plan assets:                
Fair value of plan assets at October 1     818       809  
Actual return on plan assets     96       9  
Employer contributions     24       22  
Benefits paid     (24 )     (22 )
                 
Fair value of plan assets at September 30     914       818  
                 
Under funded at September 30   $ (63 )   $ (12 )

 

The $63,000 difference between Plan assets and accrued obligations represents the amount by which the Plan was under funded as of September 30, 2016 and is reflected in the Company’s balance sheet at September 30, 2016 in accrued expenses.

 

Weighted-average assumptions used to measure net periodic benefit obligation for the Plan years ended September 30:

 

  2016   2015
Discount rate 3.62%   4.40%
Compensation increase 0.00%   0.00%

 

Weighted-average assumptions used to measure net periodic benefit cost for the Plan years ended September 30:

 

  2016   2015
Discount rate 4.40%   4.32%
Expected long-term return on plan assets 5.00%   5.00%
Compensation increase 0.00%   0.00%

 

The following table represents the pension plan’s weighted-average asset allocations for the Plan year ended September 30:

 

  2016
Equity securities 60%
Debt securities 40%
Real estate 0%
Other 0%

 

The Plan assets are all classified as Level 1 and as such have readily observable prices and therefore a reliable fair market value.

 

16  

 

 

VERTEX CORPORATE HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

The following table represents the total expected benefit payments to defined benefit pension plan participants for the Plan year ended September 30:

 

      (In thousands)  
2017     $ 281  
2018       97  
2019       132  
2020       23  
2021       230  
2022 to 2027       254  
Total     $ 1,017  

 

7. Subsequent Events

 

On October 3, 2016, HWC Wire & Cable Company (the ‘Buyer”) a wholly owned subsidiary of Houston Wire and Cable Company [Company has already been defined]acquired all of the issued and outstanding shares of common stock of VERTEX and its subsidiaries from DXP pursuant to a Stock Purchase Agreement, dated as of October 3, 2016 between DXP and the Buyer (the “Purchase Agreement”). Houston Wire and Cable Company has guaranteed the obligations of the Buyer under the Purchase Agreement.

 

The purchase price for the acquisition consisted of $32 million in cash and is subject to a post-closing adjustment based on the net working capital of Vertex as of the closing date. The Buyer financed the payment of the purchase price through borrowings under an amendment to the Fourth Amended and Restated Loan and Security Agreement (the “2015 Loan Agreement”).

 

In addition, the Company granted 21,000 shares of restricted stock to four members of the Vertex management team. The shares will vest and declared dividends will be accrued, subject to their employment with the Buyer.

 

Also on October 3, 2016, in connection with the Vertex acquisition, the Buyer, Houston Wire and Cable Company, Vertex, and Bank of America, N.A., as agent and lender, entered into a First Amendment to the 2015 Loan Agreement (the “Loan Agreement Amendment”) amending the 2015 Loan Agreement. The Loan Agreement Amendment adds Vertex as borrower (and lien grantor) and provides the terms for inclusion of Vertex’s eligible accounts receivable and eligible inventory in the borrowing base for the 2015 Loan Agreement.

 

The Company has evaluated subsequent events through [The 12/15 financial statements say “through October 4, 2017, rather than the date the financials were issued]the date the consolidated financial statements were issued, and determined that, other than the above, there were no events which should be disclosed or recognized in the financial statements.

 

17

Exhibit 99.3

 

Unaudited Pro Forma Combined Financial Information

 

On October 3, 2016, HWC Wire & Cable Company (the “Buyer”) a subsidiary of Houston Wire & Cable Company, (the “Company” or “HWC”), entered into a Stock Purchase Agreement, (the “Purchase Agreement”), between Buyer and DXP Enterprises, Inc. (“DXP”). Pursuant to the Purchase Agreement, the Buyer acquired all of the issued and outstanding shares of common stock of Vertex Corporate Holdings, Inc. and its subsidiaries (“Vertex”) from DXP (the “Acquisition”). Vertex is engaged in the wholesale distribution of industrial fasteners.

 

The following unaudited pro forma combined financial information presents the combined financial position and results of operations of HWC and Vertex as if the Acquisition occurred and the debt used to fund the Acquisition were incurred, as of September 30, 2016, , for purposes of the unaudited pro forma combined balance sheet as of September 30, 2016, and as of January 1, 2015 for purposes of the unaudited pro forma combined statements of income for the year ended December 31, 2015 and for the nine months ended September 30, 2016.

 

The historical consolidated financial statements and notes thereto of HWC are included in its Annual Report on Form 10-K for the year ended December 31, 2016. The historical financial statements and related notes thereto of Vertex are filed with this Form 8-K/A. Vertex’s results of operations were included in HWC’s results of operations beginning on October 3, 2016. The unaudited pro forma combined financial information is presented in accordance with Article 11 of Regulation S-X. The accompanying unaudited pro forma combined financial information and the historical consolidated financial information presented therein should be read in conjunction with the historical consolidated financial statements and notes thereto for HWC described above.

 

The unaudited pro forma combined balance sheet and statements of income include pro forma adjustments which reflect transactions and events that (a) are directly attributable to the Acquisition, (b) are factually supportable, and (c) with respect to the statement of income, do not have a continuing impact on consolidated results. The pro forma adjustments are described in the accompanying combined notes to the unaudited pro forma combined financial information.

 

The pro forma adjustments are based upon information and assumptions available at the time of the filing of this Form 8-K/A and result in an allocation of the purchase price based on estimates of the fair value of the assets acquired and liabilities assumed. The fair value of certain assets acquired and liabilities assumed while substantially complete, are subject to completion of our fair value assessment. The estimated fair values of the assets acquired and liabilities assumed are included in the Annual Report on Form 10-K as of and for the year ended December 31, 2016 and quarterly reports on Form 10-Q for the quarterly periods ended March 31, 2017 and June 30, 2017.

 

The unaudited pro forma combined financial information does not reflect any cost savings or other synergies that might result from the transaction. It is provided for informational purposes only and is not necessarily indicative of the combined financial position or results of operation for future periods or the financial position or results that actually would have been realized had the Acquisition occurred during the specified period.

 

1  

 

 

Houston Wire & Cable Company

Unaudited Pro Forma Combined Balance Sheet

As of September 30, 2016

(in thousands, except share data)

                                 
    Historical   Pro Forma         Pro Forma  
    HWC   Vertex   Adjustments         Combined  
ASSETS                                
Current assets:                                
Cash   $   $ 3   $           $ 3  
Accounts receivable, net     42,929     2,854     20     (a)     45,803  
Inventories, net     63,563     14,796     210     (b)     78,569  
Income taxes     1,577                     1,577  
Deferred tax assets         94     (94 )   (c)      
Other current assets         160     (160 )   (d)      
Prepaids     1,095         46     (e)     1,141  
Total current assets     109,164     17,907     22           127,093  
                                 
Property and equipment, net     10,884     59               10,943  
                                 
Intangible assets, net     4,734         9,161     (f)     13,895  
Goodwill     12,504     5,363     4,609     (g)     22,476  
Deferred income taxes     4,090     525     (3,079 )   (h)     1,536  
Other assets     415     116                 531  
Total assets   $ 141,791   $ 23,970   $ 10,713         $ 176,474  
                                 
LIABILITIES & STOCKHOLDERS’ EQUITY                                
Current liabilities:                                
Book overdraft   $ 1,102   $     $         $ 1,102  
Trade accounts payable     8,488     1,071     63     (i)     9,622  
                                 
Accrued and other current liabilities     11,053     1,441     (389 )   (j)     12,105  
Total current liabilities     20,643     2,512     (326 )         22,829  
                                 
Debt     28,619         32,177     (k)     60,796  
Other long term obligations     516         320     (l)     836  
Total liabilities     49,778     2,512     32,171           84,461  
                                 
Stockholders’ equity:                                
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding                              
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued: 16,402,204 outstanding at September 30, 2016     21     4,300     (4,300 )   (m)     21  
Additional paid-in-capital     55,007                   55,007  
Distribution to parent       (16,386 )   16,386     (m)      
Retained earnings     99,374     33,544     (33,544 )   (m)     99,374  
Treasury stock     (62,389 )               (62,389 )
Total stockholders’ equity     92,013     21,458     (21,458 )         92,013  
Total liabilities & stockholders’ equity   $ 141,791   $ 23,970   $ 10,713         $ 176,474  

 

2  

 

 

Houston Wire & Cable Company

Unaudited Pro Forma Combined Statement of Income

For the Nine Months Ended September 30, 2016

(in thousands, except share and per share data)

 

    Historical              
    HWC   Vertex   Pro Forma Adjustments       Pro Forma Combined  
                       
Sales   $ 192,387   $ 22,668   $         $ 215,055  
Cost of sales     154,513     13,639                 168,152  
Gross profit     37,874     9,029                 46,903  
                                 
Selling expenses           6,191     (6,191 )   (n)      
General and administrative expenses           722     (722 )   (n)      
Operating expenses:                                
Salaries and commissions     20,895           3,024     (n)     23,919  
Other operating expenses     17,302           3,132     (n)     20,434  
Depreciation and amortization     2,198           617     (o)     2,815  
Impairment charge     2,384                       2,384  
Total operating expenses     42,779     6,913     (140 )         49,552  
                                 
Operating income (loss)     (4,905 )   2,116     140           (2,649 )
Interest expense     453         559     (p)     1,012  
Income (loss) before income taxes     (5,358 )   2,116     (419 )         (3,661 )
Income tax expense (benefit)     (1,178 )   778     (202 )   (q)     (602 )
Net income (loss)   $ (4,180 ) $ 1,338   $ (217 )       $ (3,059 )
                                 
Earnings (loss) per share:                                
Basic   $ (0.26 )                   $ (0.19 )
Diluted   $ (0.26 )                   $ (0.19 )
Weighted average common shares outstanding:                                
Basic     16,388,892                       16,388,892  
Diluted     16,388,892                       16,388,892  
                                 
Dividend declared per share   $ 0.15                     $ 0.15  

 

3  

 

 

Houston Wire & Cable Company

Unaudited Pro Forma Combined Statement of Income

For the Year Ended December 31, 2015

(in thousands, except share and per share data)

 

    Historical              
    HWC   Vertex   Pro Forma Adjustments       Pro Forma Combined  
Sales   $ 308,133   $ 33,996   $         $ 342,129  
Cost of sales     242,223     20,794                 263,017  
Gross profit     65,910     13,202                 79,112  
                                 
Selling expenses           9,011     (9,011 )   (r)      
General and administrative expenses           969     (969 )   (r)      
Operating expenses:                                
Salaries and commissions     28,537           4,665     (r)     33,202  
Other operating expenses     25,023           4,298     (r)     29,321  
Depreciation and amortization     2,915           825     (s)     3,740  
Impairment charge     3,417                       3,417  
Total operating expenses     59,892     9,980     (192 )         69,680  
                                 
Operating income     6,018     3,222     192           9,432  
Interest expense     901           745     (t)     1,646  
Income before income taxes     5,117     3,222     (553 )         7,786  
Income tax expense     3,073     1,157     (260 )   (u)     3,970  
Net income   $ 2,044   $ 2,065   $ (293 )       $ 3,816  
                                 
Earnings per share:                                
Basic   $ 0.12                     $ 0.22  
Diluted   $ 0.12                     $ 0.22  
Weighted average common shares outstanding:                                
Basic     17,012,560                       17,012,560  
Diluted     17,067,593                       17,067,593  
                                 
Dividends declared per share   $ 0.42                     $ 0.42  

 

4  

 

 

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

(in thousands)

 

1. Basis of Presentation

 

On October 3, 2016, HWC completed its acquisition of Vertex Corporate Holdings, Inc. (Vertex) in a transaction accounted for using the purchase method of accounting in accordance with ASC Topic 805, Business Combinations. The aggregate cash consideration paid by HWC for the issued and outstanding shares of common stock of Vertex which was subject to a working capital adjustment, resulted in a total consideration paid of $32,177.

 

The unaudited pro forma combined financial statements are presented as of and for the nine months ended September 30, 2016, and for the year ended December 31, 2015. Certain reclassifications have been reflected from Vertex’s financial statements to conform the presentation to the format used by HWC. Additionally, certain pro forma adjustments have been made to reflect the assets and liabilities of Vertex at fair value. Additional reclassifications may be necessary in the final accounting for the acquisition.

 

The unaudited pro forma combined financial statements present the combined financial position and results of operations of HWC and Vertex as if the acquisition described above occurred as of September 30, 2016, for purposes of the unaudited pro forma combined balance sheet as of September 30, 2016, and as of January 1, 2015 for purposes of the unaudited pro forma combined statements of income for the year ended December 31, 2015, and for the nine months ended September 30, 2016.

 

The unaudited pro forma combined financial statements include estimates to adjust the assets and liabilities of Vertex to their respective fair values based on information available at this time. These fair value estimates while substantially complete may vary from the estimates in the final accounting for the acquisition as additional information becomes available, which may result in a change in the amount of goodwill recognized.. These pro forma financial statements have been prepared on the assumption that the acquisition is a stock transaction.

 

2. Preliminary Purchase Price Allocation

 

The following table provides information regarding the allocation of the total consideration paid for the Vertex assets acquired and liabilities assumed as of the transaction’s closing date, October 3, 2016:

 

Total purchase price         $ 32,177  
               
Net assets acquired     15,598        
Other adjustments to reflect assets and liabilities at fair value:              
Customer relationships     6,990        
Trademark and trade names     2,171        
Deferred income tax     (2,554 )      
            22,205  
Pro forma goodwill           9,972  
Total:         $ 32,177  

 

Identifiable intangible assets with an estimated fair value of approximately $9,161 have been identified and included in the unaudited pro forma combined balance sheet. These fair value estimates while substantially complete may vary from the final accounting for the acquisition as additional information becomes available, which may result in a change in the amount of goodwill recognized. The identifiable intangible assets include customer relationships $6,990 (useful life of nine years), and trademarks and trade names $2,171 (indefinite lives). The estimated amortization of these identifiable intangible assets over their respective estimated useful lives has been reflected in the unaudited pro forma combined statements of income.

 

Any additional adjustments to reflect Vertex assets and liabilities at fair value would affect the pro forma goodwill and may affect depreciation or amortization expense in the future. Accordingly, the final valuation could result in different amounts from the amounts presented in the pro forma information. The final allocation may include additional reserve or tax adjustments and other fair value adjustments.

 

5  

 

 

3. Pro Forma Adjustments

 

Adjustments to Balance Sheet

At September 30, 2016

 

(a) Represents the following adjustments to account receivables      
  To record fair market value adjustment   $ 20  

 

(b) Represents the following adjustments to inventories      
  To record fair market value adjustment   $ 210  

 

(c) Represents the following adjustment to current deferred income taxes:      
  Reclass of Vertex’s deferred tax asset to long-term   $ (94 )

 

(d) Represents the following adjustment to other current assets      
  Reclass to prepaids to conform to HWC’s presentation   $ (160 )

 

(e) Represents the following adjustment to prepaid      
  Reclass from (d) above to conform to HWC’s presentation   $ 160  
  To record fair market value adjustment     (114 )
            Total:   $ 46  

 

(f) Represents the following adjustment to intangible assets:      
  To record fair market value adjustment   $ 9,161  

 

(g) Represents the following adjustment to goodwill:      
  Eliminate the historical Vertex goodwill amount   $ (5,363 )
  Excess purchase price over the fair market value of the net assets acquired     9,972  
  Total:   $ 4,609  

 

(h) Represents the following adjustments to long-term deferred income taxes:      
  Reclass of Vertex’s deferred tax assets to long-term from (c) above   $ (94 )
  Elimination of historical balance on a stand-alone basis     (525 )
  Deferred tax on above noted adjustments     (2,460 )
  Total:   $ (3,079 )

  

(i) Represents the following adjustments to trade accounts payables      
  To record fair market value adjustment   $ 63  

 

6  

 

 

(j) Represents the following adjustments to accrued and other current liabilities      
  To record fair market value adjustment   $ 519  
  Elimination of current tax liability on the stand-alone basis, not assumed as part of        
  the purchase     (908 )
  Total:   $ (389 )

 

(k) Represents the following adjustment to long-term obligations:      
  Record debt for funds borrowed to finance the acquisition date purchase price   $ 32,177  

 

(l) Record lease fair market value adjustment   $ 320  

 

(m) Represents the following adjustment to Vertex’s stockholder’s equity:      
  Eliminate historical common stock   $ (4,300 )
  Eliminate historical distribution to parent     16,386  
  Eliminate historical retained earnings     (33,544 )
      $ (21,458 )

 

Adjustments to Statement of Income

Nine Months ended September 30, 2016

 

(n) Reclass operating expenses to conform to HWC’s presentation:      
         
  Selling expenses   $ (6,191 )
  General and administrative expenses     (722 )
  Salaries and commissions     3,024  
  Other operating expenses     3,132  
  Depreciation and amortization     35  
  Interest expense     722  
  Total:   $ 0  

 

(o) Represents the following adjustments to depreciation and amortization:      
  Reclass from (n) above to conform to HWC’s presentation.   $ 35  
  Amortization expense associated with intangible assets     582  
  Total:   $ 617  

 

(p) Represents the following adjustments to interest expense:      
  Reclass from (n) above to conform to HWC’s presentation   $ 722  
  Adjustment to interest expense to reflect cost of borrowings to fund the acquisition     (163 )
  Interest associated with borrowings on third party loan agreement to finance the purchase price paid by HWC, at HWC’s acquisition date borrowing rate of 2.3%. A 1/8% increase in the interest rate would increase pre-tax interest expense by approximately $32 for the nine months ended September 30, 2016.        
  Total:   $ 559  

 

(q) Represents the following adjustment to income taxes:      
  The adjustment necessary to reflect as a pro-forma combined basis the correct tax amount for the period.   $ (202 )

 

7  

 

 

Adjustments to Statement of Income

Year ended December 31, 2015

 

(r) Reclass operating expenses to conform to HWC’s presentation.      
         
  Selling expense   $ (9,011 )
  General and administrative expenses     (969 )
  Salaries and commissions     4,665  
  Other operating expenses     4,298  
  Depreciation and amortization     48  
  Interest expense     969  
  Total:   $ 0  

 

(s) Represents the following adjustments to depreciation and amortization:      
  Reclass from (r) above to conform to HWC’s presentation.   $ 48  
  Amortization expense associated with intangible assets     777  
  Total:   $ 825  

 

(t) Represents the following adjustments to interest expense:      
  Reclass from (r) above to conform to HWC’s presentation   $ 969  
  Adjustment to interest expense to reflect cost of borrowings to fund the acquisition     (224 )
  Interest associated with borrowings on third party loan agreement to finance the purchase price paid by HWC, at HWC’s acquisition date borrowing rate of 2.3%.  A 1/8% increase in the interest rate would increase pre-tax interest expense by approximately $42 for the year ended December 31, 2015        
  Total:   $ 745  

 

(u) Represents the following adjustment to income taxes:      
  The adjustment necessary to reflect as a pro-forma combined basis the correct tax amount for the period.   $ (260 )

 

8