Business Context and Reporting Period
This Form 6-K filing by B.O.S. Better Online Solutions Ltd. (BOS), dated June 30, 2008, discloses the acquisition of two entities: Dimex Systems (1988) Ltd. (Dimex) and Summit Radio Corp. (Summit). The filing incorporates the audited financial statements of Dimex and Summit for the year ended December 31, 2007, and presents unaudited pro forma condensed combined financial statements reflecting these acquisitions as if they occurred on January 1, 2007.
Dimex is an Israeli company engaged in the import and marketing of control and measurement appliances and laser scanners. Summit is a U.S. distributor of electronic components and aircraft spare parts. BOS acquired 100% of Summit in November 2007 and the assets of Dimex in March 2008.
Key Financial Metrics
Dimex Systems (1988) Ltd. (Year Ended Dec 31, 2007)
- Revenue: NIS 54,205,000 (approx. $13.2M USD)
- Net Loss: NIS 926,000 (approx. $241k USD)
- Operating Loss: NIS 350,000
- Cash and Equivalents: NIS 84,000
- Total Assets: NIS 30,475,000
- Total Liabilities: NIS 25,018,000 (Current: NIS 17,409,000; Long-term: NIS 7,609,000)
- Shareholders' Equity: NIS 5,315,000
Summit Radio Corp. (Year Ended Dec 31, 2007)
- Revenue: $17,020,842
- Net Loss: $(104,644)
- Operating Income: $44,255
- Cash and Equivalents: $644,052
- Total Assets: $8,012,601
- Total Liabilities: $4,422,061 (Includes $2.45M long-term bank loan)
- Shareholders' Equity: $3,590,540
Pro Forma Combined Results (Year Ended Dec 31, 2007)
- Combined Revenue: $52,305,000
- Combined Net Loss: $(8,841,000)
- Combined Operating Loss: $(1,810,000)
- Combined Total Assets: $42,373,000
- Combined Total Liabilities: $26,882,000
Material Changes and Acquisitions
The primary material change is the consolidation of Dimex and Summit into BOS. The pro forma statements reflect significant adjustments:
- Acquisition of Dimex: Consideration totaled approximately $10.5 million, consisting of $4.3 million cash, $1.1 million in BOS shares, and $5.0 million in accrued/future consideration. This resulted in the recognition of $4.2 million in goodwill and $1.2 million in other intangible assets.
- Acquisition of Summit: Consideration totaled approximately $5.7 million, consisting of $4.5 million cash and $0.9 million in BOS shares, with up to $0.5 million in contingent payments. This resulted in $1.9 million in goodwill and $0.3 million in other intangibles.
- Amortization: Pro forma adjustments include additional amortization expenses of $145,000 related to acquired intangible assets, impacting the combined operating loss.
Outlook, Risks, and Contingencies
Management Commentary and Outlook: The pro forma financial statements are for illustrative purposes only and do not reflect potential cost savings or synergies. The filing notes that the acquisitions are treated under the purchase method of accounting.
Risks and Contingencies:
- Discontinued Operations: Dimex's financial statements include a note regarding a discontinued operation related to the asset purchase agreement with BOS, though the statements do not reflect the impact of this agreement.
- Goodwill Impairment: Dimex recorded a goodwill impairment of 1.7 million NIS and 351,000 NIS in subsidiaries due to the discontinued operation.
- Debt Covenants: Summit's $2.45 million bank loan includes restrictive covenants regarding debt incurrence, dividend payments, and minimum financial ratios (tangible net worth, net income, fixed charge coverage).
- Related Party Transactions: Summit granted a loan of approximately $1.7 million to its parent, Lynk USA, Inc. (a BOS subsidiary), which is convertible into shares.
- Contingent Consideration: BOS is obligated to pay up to $500,000 in additional cash to Summit's former shareholders based on financial milestones in 2008 and 2009.
Investor Verification Checklist
- Verify the final allocation of purchase price for Dimex and Summit, as the pro forma figures are based on preliminary estimates.
- Confirm the realization of the contingent consideration payments for Summit ($500k max) based on 2008/2009 performance.
- Monitor Summit's compliance with bank loan covenants, specifically regarding tangible net worth and fixed charge coverage ratios.
- Assess the collectibility of the $1.7 million loan granted by Summit to its parent company, Lynk USA.
- Review the integration progress and actual cost synergies, as the pro forma statements explicitly exclude these benefits.
- Validate the valuation of Dimex's inventory and receivables, noting the auditor's emphasis on the discontinued operation.