NOTE 2 —ACQUISITION

Effective October 25, 2019 (the “Gears Closing Date”), the Company, through a wholly owned subsidiary of Hy-Tech, acquired substantially all the assets comprising the businesses of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc., (the “Gears Acquisition”), each an Illinois-based corporation that manufactures and distributes custom gears. The Company believes that the acquisition of these two businesses will provide added expertise and market exposure into the customized/specialty gears market. The purchase price consisted of an aggregate of approximately $3.5 million in cash, which was funded by Revolver borrowings and the assumption of certain payables and contractual obligations. In addition, the sellers may be entitled to additional contingent consideration based upon sale of certain categories of acquired inventory during the two-year period following the Gears Closing Date.

In connection with the Gears Acquisition, the Company entered into Consent, Joinder and Amendment No. 8 (“Amendment No. 8”) to Second Amended and Restated Loan and Security Agreement (the “Credit Agreement”), with Capital One, National Association. Amendment No. 8, among other things, provided consent to the Gears Acquisition. Amendment No. 8 also modified the Credit Agreement to suspend the requirement pertaining to compliance with the covenant relating to a Fixed Charge Coverage Ratio, unless a Default or Event of Default occurs, or availability is less than 17.5% of the aggregate amount of the Revolver Commitments, as each such term is defined, at any time. Further, it granted permission to the Company to continue its issuance of dividends and allow the Company to repurchase shares of its own Common Stock, provided that no Default or Event of Default has occurred, subject to Revolver availability limitations, among other things.

Additionally, on the Gears Closing Date, the Company entered into a new five-year lease with the ultimate intention of combining all gear manufacturing operations into one location. The new leased premises, located in Punxsutawney, PA is approximately 42,000 square feet, with annual lease payments of $165,800.The Company has two three-year options to renew the lease. As the result of the Company’s decision to vacate leased space in Punxsutawney, which housed Hy-Tech’s gear operations prior to the Gears Acquisition, it wrote off the fair value of the vacated old lease by a reduction in the Right of Use Assets and leasehold improvements on the Balance Sheet of approximately $99,000 and included a like amount in Selling, general and administrative expenses on its Consolidated Statement of Income and Comprehensive Income. The Company will continue to make monthly lease payments toward the old vacated lease through February 2021 unless the Company and the landlord agree to other terms.

Additionally, the Sellers of the Gear Businesses may be entitled to additional consideration (“contingent consideration”), should the Company sell within a two-year period from the date of acquisition, certain portions of acquired inventories, which had no fair value at the time of the acquisition. Accordingly, the Company, determined that, based upon historical sales history provided or otherwise, the most likely scenario could result in a payment of contingent consideration of approximately $64,000.


	Total
Cash paid at closing	$	3,518,000
Fair value of contingent consideration		64,000
Total estimated purchase price	$	3,582,000

The following table presents purchase price allocation:


Accounts receivable	$	218,000
Inventories		630,000

Machinery, equipment and vehicle		1,437,000
Identifiable intangible assets:
Customer relationships		995,000
Trademarks and trade names		54,000
Non-compete agreements		95,000
Liabilities assumed		(131,000)
Goodwill		284,000
Total estimated purchase price	$	3,582,000

The excess of the total purchase price over the fair value of the net assets acquired, including the value of the identifiable intangible assets, has been allocated to goodwill. Goodwill will be amortized over 15 years for tax purposes, but not deductible for financial reporting purposes. The intangible assets subject to amortization will be amortized over 15 years for tax purposes. For financial reporting purposes their respective useful lives have been determined as follows:


Customer relationships	10	years
Non-Compete agreements	4	years
Trademarks and trade names	indefinite

The following unaudited pro-forma combined financial information gives effect to the Acquisitions as if the transactions were consummated January 1, 2018. This unaudited pro-forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the Acquisition been completed as of January 1, 2018 (the beginning of the earliest period presented)or to project potential operating results as of any future date or for any future periods.


	For the Year Ended		For the Year Ended
	December 31, 2019		December 31, 2018
Revenue	$	61,087,000	$	68,523,000
Net income	$	5,356,000	$	1,028,000
Earnings per share – basic	$	1.67	$	0.28
Earnings per share – diluted	$	1.64	$	0.28