SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File No. 814-29
ACORN VENTURE CAPITAL CORPORATION
(Exact name of small business issuer in its charter)
Delaware 59-2332857
(State or other jurisdiction of (IRS Employer Identifi-
incorporation or organization) cation No.)
7020 A.C. Skinner Parkway, Jacksonville, Florida 32256
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code (904) 296-1760
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Check whether the Issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------- -------
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this Form, and no disclosure
will be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by refer-
ence in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. [ ]
Issuer's revenues for the fiscal year ended December 31, 1996 were
$2,029,162.
The aggregate market value of the voting stock held by non-
affiliates of the Registrant as of March 31, 1997 (valued at the
average of the bid price of $1.562 and asked price of $1.687 on
such date) was $6,658,307.50.
The number of shares of Common Stock outstanding (including shares
held by affiliates of the issuer) as of March 31, 1997: 5,538,906
Transitional Small Business Disclosure Format (check one):
Yes ; No X
------ ------
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
PART I
ITEM 1. Description of Business
Acorn Venture Capital Corporation (the "Company") is a non-
diversified, closed-end management investment company that has
elected to be treated as a business development company ("BDC")
under the Investment Company Act of 1940 (the "1940 Act"). The
Company's primary investment objective has historically been, and
continues to be, achievement of long-term capital appreciation of
its assets, rather than current income, by making investments in,
and providing managerial assistance to, emerging and established
companies that management believes offer significant potential
opportunities for growth ("portfolio companies"). Since October
1991, the Company has concentrated its efforts on making large,
controlling equity and/or equity-related investments in portfolio
companies.
As of December 31, 1996, the Company had controlling interests
in Recticon Enterprises, Inc. ("Recticon") (a manufacturer of
monocrystalline silicon wafers), and Automotive Industries, Inc.
("Automotive") (which operates 28 full-service automotive retail
centers, principally in Florida, and, to a lesser extent, Georgia).
The Company from time to time in the future may make
investments, in portfolio companies through "private placements"
which, in management's opinion, are likely to effect public
financings within approximately two to three years from the date of
investment or which otherwise have a viable plan to allow the
Company to liquidate its position within a reasonable period of
time.
The Company does not have a registered investment adviser and
its investment decisions are made by its management in accordance
with policies approved by its Board of Directors (the "Board").
The Company does not operate pursuant to a written investment
advisory agreement that must be approved periodically by
stockholders. The Company currently has five officers, all of whom
are employees of the Company.
Direct investments may be made in companies with operating
histories that are unprofitable or marginally profitable, that have
negative net worths or that are involved in bankruptcy or
reorganization proceedings. Such investments would involve
businesses that management believes have turnaround potential
through the infusion of additional working capital and a
strengthened management team. These companies may require
significant managerial assistance and investment therein may be of
higher risk and speculative. Investments in such situations will
be made only where management has identified a specific strategy to
improve operating performance. To date, a significant portion of
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the Company's investments have been of this nature. See "--Present
Portfolio-Venture Capital Investments."
Following its initial investment, the Company has made and may
in the future make additional debt and equity investments in
portfolio companies ("Additional Investments") in order to protect
or enhance its initial investment. The Company may, together with
other investors, including management and its affiliates, make
direct or Additional Investments in a number of other situations,
including attempts to salvage insolvent or bankrupt companies, the
acquisitions of divisions of companies, the acquisition of
privately-held companies, or the acquisition of companies in order
to spin-off portions of their operations or assets into independent
entities. Because of the substantial financial and management
commitment typically made to new portfolio companies, the Company
expects that it will make only a few, if any, new investments in
any one year. See "--Present Portfolio--Venture Capital
Investments" and "Management's Discussion and Analysis or Plan of
Operations."
The Company may also make direct and/or Additional Investments
in publicly-traded securities of relatively small, emerging growth
companies that management believes have long-term growth
possibilities.
Significant Events
On December 30, 1996, the Company and one of its portfolio
companies, a wholly-owned subsidiary, received $752,500 and
$997,500, respectively, from an unaffiliated third party with
respect to certain claims in exchange for general releases.
Reference is made to the Company's Current Report on Form 8-K,
dated December 30, 1996 filed with the Securities and Exchange
Commission on December 31, 1996.
As of June 15, 1996, all operations of ServiceMax Tire & Auto
Centers, Inc., ("ServiceMax") a wholly-owned subsidiary, which
operated tire and service facilities at gas station and convenience
store locations in Michigan, were terminated due to continued
losses and a significant liability.
Present Portfolio-Venture Capital Investments
Set forth below is certain information concerning the
Company's two present principal investments in portfolio companies.
The information below concerning the privately-held companies has
been obtained from those portfolio companies. For further
information concerning the Company's investments, including
acquisition dates, purchase prices and valuation at December 31,
1996, see Notes to Financial Statements included herein. The
Company's two principal investments in portfolio companies
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constituted, as of December 31, 1996, 98% of the Company's total
portfolio investments.
1. Recticon Enterprises, Inc. In July 1993, the Company
acquired Recticon, by issuing 800,000 shares of its Common Stock to
the stockholders of Recticon in exchange for all of the outstanding
shares of stock of Recticon. Such shares are restricted securities
and are not registered under either the Securities Act of 1933, as
amended, or the 1940 Act.
During the year ended December 31, 1996, the Company received
a total of $600,000 in management fees, a dividend in the amount of
$400,000 and a payment in the amount of $918,619 for Recticon's
portion of Federal income taxes filed on a consolidated basis. The
Company utilized such amounts to repay a loan in the amount of
$760,000 from Recticon and to make an additional contribution to
capital in the amount of $160,000. The Company has guaranteed a
$750,000 credit line, and a term loan of $484,246 for Recticon.
Recticon, located in Pottstown, Pennsylvania, manufactures
two, three and four-inch monocrystalline silicon wafers, which are
made from silicon crystals and are the basic substrate from which
integrated circuits and other semiconductor devices are fabricated.
Recticon's wafers are used by university research departments and
microelectronic manufacturers, and are best suited for use in
electronics devices employed in avionics, telecommunications and
computers.
Recticon's business is highly competitive and it believes that
there are many competitors who produce, sell, design and support
similar products. Many of these competitors have substantially
greater marketing, financial, administrative and other resources
than Recticon.
Recticon entered into long-term agreements with two of its
major customers, pursuant to which said customers have paid in cash
an aggregate of $2.3 Million for the right to receive a specified
number of silicon wafers at a predetermined gross profit margin.
In addition, Recticon entered into agreements pursuant to which
Recticon received $2.4 Million in cash from two customers in order
for Recticon to purchase additional furnaces and related equipment
(the "Units"). At the end of five years, the Units will be turned
over to Recticon at no cost. In exchange therefor, Recticon has
agreed to sell these customers the wafers produced by the Units at
a pre-determined gross profit margin. Recticon has expanded its
facilities and, as a result thereof, has the capacity to add an
additional four or five Units. Recticon presently has ten
functioning Units. These new Units will not only give Recticon
added capacity, but will also enable it to enter into the four and
six-inch wafer market and, subject to purchasing additional
equipment, give it the capacity to enter into the eight-inch
market.
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For 1996, three customers of Recticon accounted for 34%, 15%
and 11% of its sales, respectively. For 1995, three customers of
the Company accounted for 34%, 14% and 9% of its sales,
respectively. The loss of any or all of these customers, could
have an adverse, possibly severe, effect on the business of
Recticon.
The Company increased the valuation of Recticon during the
1996 calendar year from $12,500,000 to $13,900,000, due to the
increase in the fair market value of Recticon. However, the
Company decreased the valuation from $15,000,000 to $13,900,000
during the last quarter of 1996 primarily as a result of the
deferral of certain customer orders of four-inch wafers to the
latter half of 1997. However, Recticon intends to pursue and
accept orders for five and six inch wafers and anticipates that it
will ship five and six inch wafers in the beginning of the third
quarter of 1997. Based upon the projected increase in demand for
wafers (of which no assurance can be given), the management of
Recticon believes that the long-term outlook of its business
remains favorable.
Recticon Financial Data
The following selected financial data of Recticon has been
derived from the audited (by other auditors) financial statements
as of and for the periods ended December 31, 1996 and December 31,
1995.
<TABLE>
<CAPTION>
Income Statement Data:
Year Ended Year Ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Net Sales $9,842,345 $6,491,505
Cost of Goods Sold 6,163,131 4,670,714
Gross Margin 3,679,214 1,820,791
Expenses Before
Management Fees 1,250,587 835,525
Net Income Before
Management Fees 2,428,627 985,266
Management Fees 600,000 195,000
Net Income Before
Income Taxes 1,828,627 790,266
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Balance Sheet Data:
As of As of
December 31, December 31,
1996 1995
------------ ------------
Total Assets $5,977,167 $5,785,929
========== ==========
Total Liabilities 2,393,886 2,577,933
Deferred Income 1,249,997 1,716,665
Stockholders' Equity 2,333,284 1,491,331
---------- ----------
Total Liabilities and
and Stockholders'
Equity $5,977,167 $5,785,929
========== ==========
</TABLE>
2. Automotive Industries, Inc. Automotive, a wholly-owned
Delaware corporation, located in Jacksonville, Florida, operates 28
full-service automotive retail centers principally in Florida and
Georgia under the names Jim Martin Tire, Wall Tire Distributors and
Mott Tire. On December 22, 1993, the Company acquired all of the
outstanding stock of Automotive from General Tire, Inc. and other
minority stockholders for a cash purchase price of $2,400,000. In
addition, the Company has made cash investments in Automotive of
$500,000.
During the year ended December 31, 1996, the Company received
a total of $261,600 in cash dividends from Automotive. The Company
has guaranteed the repayment by Automotive of a $900,000 loan to
Automotive pursuant to a loan agreement and supply agreement with
a tire distributor. In addition, subsequent to year-end, the
Company received $1,075,000 from Automotive, which amount was
comprised of $475,000 in management fees and a $600,000 note
payable to Automotive.
The tires, auto parts and service business is highly
competitive. Automotive's principal competitors are national and
regional chains carrying automotive parts and accessories and
offering automotive services, most of which have greater financing
capability and greater capital than Automotive.
Automotive Financial Data
The following selected financial data of Automotive has been
derived from the financial statements as of and for the periods
ended December 31, 1996 and December 31, 1995.
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<PAGE>
<TABLE>
<CAPTION>
Income Statement Data:
Year Ended Year Ended
December 31, December 31,
1996 1995
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Total Net Sales $20,680,735 $19,307,943
Total Cost of Goods Sold 9,682,801 8,657,925
----------- ------------
Gross Margin 10,997,934 10,650,018
Total Expenses 10,290,415 12,155,704
----------- ------------
Net Income (Loss) $ 707,519 $(1,505,686)*
=========== ============
Balance Sheet Data:
As of As of
December 31, December 31,
1996 1995
(Unaudited) (Audited)
------------ ------------
Total Assets $ 7,101,664 $ 6,230,129
=========== ===========
Total Current Liabilities 3,063,296 3,282,838
Total Long-Term Debt 2,013,067 1,367,892
Total Stockholders' Equity 2,025,301 1,579,399
----------- -----------
Total Liabilities and Equity $ 7,101,664 $ 6,230,129
=========== ===========
*Includes a write-off of $1,430,883, relating to a
reserve established for a receivable due from ServiceMax.
</TABLE>
Liquid Net Assets of the Company
As a result of the settlement of certain claims, as
previously disclosed, as of December 31, 1996, the Company had
temporarily invested principally all of the remainder of its
net assets in bank checking and transaction accounts, United
States Treasury Bills, and a short-term certificate of deposit
($1,302,123 or approximately 8.2% of the net assets as of
December 31, 1996).
Competition
Numerous companies and individuals are engaged in the
venture capital business and such business is intensely
competitive. Most of the competitors have significantly
greater experience, resources and managerial capabilities than
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the Company and are therefore in a better position than the
Company to obtain access to and to consummate attractive
venture capital investments.
Regulation
The Small Business Investment Incentive Act of 1980 (the
"Incentive Act") modified the provisions of the 1940 Act that
are applicable to a closed-end investment BDC. After filing
its election to be treated as a BDC, a company may not
withdraw its election without first obtaining the approval of
holders of a majority of its outstanding voting securities (as
defined under the 1940 Act). The following is a brief
description of the 1940 Act, as modified by the Incentive Act,
and as qualified in its entirety by reference to the full
texts of the 1940 Act, the Incentive Act and the rules
thereunder.
Generally, to be eligible to elect BDC status, a company
must engage in the business of furnishing capital and
significant managerial assistance to companies which do not
have ready access to capital through conventional financial
channels. Such portfolio companies are termed "eligible
portfolio companies." More specifically, in order to qualify
as a BDC, a company must (i) be a domestic company; (ii) have
registered a class of its securities or have filed a
registration statement with the Commission pursuant to Section
12 of the Securities Exchange Act of 1934 (the "1934 Act");
(iii) operate for the purpose of investing in the securities
of certain types of portfolio companies, namely, immature or
emerging companies and businesses suffering or just recovering
from financial distress (see following paragraph); (iv) extend
significant managerial assistance generally to such portfolio
companies; (v) have a majority of directors who are not
"interested persons" (as defined in the 1940 Act); and (vi)
file (or, under certain circumstances, intend to file) a
proper notice of election with the Commission.
An eligible portfolio company generally is a U.S. company
that is not an investment company and that (i) does not have
a class of securities registered on an exchange or included in
the Federal Reserve Board's over-the-counter margin list; (ii)
is actively controlled by a BDC and has an affiliate of a BDC
on its board of directors; or (iii) meets such other criteria
as may be established by the Commission. Control under the
1940 Act is presumed to exist where a BDC owns more than 25%
of the outstanding voting securities of the portfolio company.
The 1940 Act prohibits or restricts companies subject to
the 1940 Act from investing in certain types of companies,
such as brokerage firms, insurance companies, investment
banking firms and investment companies. Moreover, the 1940
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Act limits the type of assets that BDCs may acquire to certain
prescribed qualifying assets and certain assets necessary for
its operations (such as office furniture, equipment and
facilities) if, at the time of acquisition, less than 70% of
the value of the BDC's assets consists of qualifying assets.
Qualifying assets include: (i) privately acquired securities
of companies that were eligible portfolio companies at the
time such BDC acquired their securities; (ii) securities of
bankrupt or insolvent companies; (iii) securities of eligible
portfolio companies controlled by a BDC; (iv) securities
received in exchange for or distributed in or with respect to
any of the foregoing; and (v) cash items, government
securities and high-quality short-term debt. The 1940 Act
also places restrictions on the nature of the transactions in
which, and the persons from whom, securities can be purchased
in order for the securities to be considered qualifying
assets. Such restrictions include limiting purchases to
transactions not involving a public offering and acquiring
securities directly from either the portfolio company or their
officers, directors or affiliates.
The Company is permitted by the 1940 Act, under specified
conditions, to issue multiple classes of senior debt and a
single class of preferred stock if its asset coverage, as
defined in the 1940 Act, is at least 200% after the issuance
of the debt or the preferred stock (i.e., such senior
securities may not be in excess of 50% of its net assets). If
the value of the Company's net assets, as defined, were to
increase through the issuance of additional capital stock or
otherwise, the Company would be permitted under the 1940 Act
to issue senior securities. The Company has no senior
securities outstanding and has no current intention of issuing
any senior securities although it may do so in the future.
The Company may sell its securities at a price that is
below the net asset value per share only after a majority of
its disinterested directors has determined that such sale
would be in the best interests of the Company and its
stockholders and upon the approval by the holders of a
majority of its outstanding voting securities, including a
majority of the voting securities held by non-affiliated
persons, of such policy or practice within one year prior to
such sale. If the offering of the securities is underwritten,
a majority of the disinterested directors (in consultation
with the underwriter(s)) must determine in good faith that the
price of the securities being sold is not less than a price
which closely approximates the market value of the securities,
less any distribution discounts or commissions. As defined in
the 1940 Act, the term "majority of the Company's outstanding
voting securities" means the vote of (i) 67% or more of the
Company's Common Stock present at a meeting, if the holders of
more than 50% of the outstanding Common Stock are present or
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represented by proxy, or (ii) more than 50% of the Company's
outstanding Common Stock, whichever is less.
Many of the transactions involving the Company and its
affiliates (as well as affiliates of those affiliates) which
were prohibited without the prior approval of the Commission
under the 1940 Act prior to its amendment by the Incentive Act
are now permissible upon the prior approval of a majority of
the Company's disinterested directors and a majority of the
directors having no financial interest in the transactions.
However, certain transactions involving certain persons
related to the Company, including its directors, officers, and
employees, may still require the prior approval of the
Commission. In general, (i) any person who owns, controls or
holds power to vote, more than 5% of the Company's outstanding
Common Stock; (ii) any director, executive officer or general
partner of that person; and (iii) any person who directly or
indirectly controls, is controlled by, or is under common
control with, that person, must obtain the prior approval of
a majority of the Company's disinterested directors and, in
some situations, the prior approval of the Commission, before
engaging in certain transactions involving the Company or any
company controlled by the Company. The 1940 Act generally
does not restrict transactions between the Company and its
portfolio companies.
While a BDC may change the nature of its business so as
to cease being a BDC (and in connection therewith withdraw its
election to be treated as a BDC) or, in certain circumstances,
to change its business purpose, only if authorized to do so by
a majority vote (as defined in the 1940 Act) of its
outstanding voting securities, stockholder approval of changes
in other fundamental investment policies of a BDC is not
required (in contrast to the general 1940 Act requirement,
which requires stockholder approval for a change in any
fundamental investment policy). The Company is entitled to
change its non-diversification status also without stockholder
approval. In addition, should the Company lose its status as
a BDC, it would become subject to more stringent regulation
under the 1940 Act if it did not become exempt from 1940 Act
regulation. The Company may, in the future, seek to become
exempt from 1940 Act regulation altogether.
ITEM 2. Description of Property
In April 1995, in order to reduce costs and consolidate
its operations, the Company relocated its principal executive
offices to the offices of Automotive in Jacksonville, Florida,
at no charge to the Company. The Company also maintains an
office in New York, New York, at no charge to the Company.
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ITEM 3. Legal Proceedings
The Company is in the process of instituting an action in
Broward County, Florida for nonpayment by Digital Products
Corporation, pursuant to a $500,000, 10% subordinated
convertible note due 1996, plus accrued interest since
November 22, 1995. In March 1996, the Board, in reviewing the
present financial condition of Digital Products Corporation,
has fully reserved against the note. No assurance can be
given as to the successful outcome of this action.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was
held on December 30, 1996 (the "Meeting"). The following
matters were voted on and approved by the holders of a
majority of the outstanding shares of the Company's Common
Stock in accordance with Delaware General Corporation Law and
the Investment Company Act of 1940:
1. The first proposal presented to the stockholders was
election of nine persons as directors of the Company to hold
office until the next Annual Meeting of Stockholders and until
their respective successors are duly elected and qualified.
The following persons were elected as directors of the
Company, and each person received that number of votes set
opposite that person's name:
VOTES
FOR WITHHELD
---------------------
Mark Auerbach 4,059,969 1,116,150
Paula Berliner 4,060,694 1,115,425
Edward N. Epstein 4,062,694 1,113,425
Ronald J. Manganiello 4,062,694 1,113,425
Paul C. Meyer 4,062,694 1,113,425
Stephen A. Ollendorff 4,062,694 1,113,425
Bert Sager 4,060,694 1,115,425
Kenneth I. Sawyer 4,061,969 1,114,150
Joel J. Silver 4,059,969 1,116,150
2. The second proposal presented to the stockholders was
to ratify the firm of Coopers & Lybrand L.L.P. as the
independent public accountants of the Company for the 1996
fiscal year. There were 4,019,919 shares of Common Stock cast
in favor of such proposal, 1,151,150 shares of Common Stock
voted against such proposal, and 5,050 shares abstained.
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PART II
ITEM 5. Market for the Registrant's Common Equity
and Related Stockholder Matters
The Company's Common Stock was accepted for listing in
October 1988 on NASDAQ under the symbol "AVCC". The following
table sets forth, for the periods indicated, the range of high
and low closing bid quotations as reported by NASDAQ. Such
quotations reflect inter-dealer prices, without retail mark-
up, mark-down or commission and do not necessarily represent
actual transactions. There presently is a limited public
market for the Common Stock.
Quarter Ending Low High
-------------- --- ----
1996
----
March 31 $ .88 $1.38
June 30 $1.09 $3.13
September 30 $1.50 $2.63
December 31 $1.31 $2.31
Quarter Ending Low High
-------------- --- ----
1995
----
March 31 $ .50 $1.13
June 30 $ .53 $ .81
September 30 $ .69 $ .88
December 31 $ .88 $1.00
As of March 31, 1997, there were approximately 459
holders of record of the Company's Common Stock with 5,538,906
shares of Common Stock outstanding. In addition, the Company
believes that there are more than 3,500 beneficial owners of
Common Stock whose shares are held in "street" name as of such
date. On March 31, 1997, the closing bid and asked quotations
of the Common Stock were $1.562 and $1.687, respectively.
The Company has never paid and does not currently intend
to pay cash dividends. In addition, the Company has never
made, nor adopted any policies with respect to, in-kind
distributions, and has no present intention of adopting any
such policies or of making any such distributions.
Furthermore, there may also be substantial legal and
contractual restrictions affecting the timing of any such
distributions by the Company or any such resales by
stockholders of distributed securities.
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ITEM 6. Management's Discussion and Analysis
or Plan of Operations
The primary investment objective of the Company continues
to be the achievement of long-term capital appreciation,
rather than current income, by making investments in emerging
and established companies that management believes offer
significant potential opportunities for growth. Since October
1991, the Company has concentrated its efforts on making
large, controlling investments in portfolio companies. To the
extent the Company does not make a controlling investment, the
Company believes it will be able to achieve its objective of
long-term appreciation by concentrating on investments in
companies which it believes are likely to effect public
financings within approximately two to three years from the
date of investment or which otherwise have a viable plan to
allow the Company to liquidate its position within a
reasonable period of time.
The following discussion and analysis should be read in
conjunction with the Company's financial statements and the
notes thereto appearing elsewhere in this report.
Results of Operations
Fiscal Years Ended December 31, 1996 and 1995
("Fiscal 1996" and "Fiscal 1995")
As a result of operations, net assets increased
$1,961,134 (or 12.1% of net assets) during Fiscal 1996, and
increased $3,828,345 (or 27.0% of net assets) during Fiscal
1995. The increase in Fiscal 1996 was primarily due to an
increase in the valuation of Recticon from $12,500,000 to
$13,900,000 and an increase in cash, certificates of deposit
and treasury bills from $582,656 to $1,302,123, offset by an
increase in deferred income taxes from $650,000 to $1,962,619.
The increase in liabilities was offset, however, by a decrease
by a note payable to Recticon of $760,000 and a capital
contribution payable to Automotive of $460,330. The increase
in Fiscal 1995 was primarily due to an increase in the
valuation of Recticon from $3,195,750 to $12,500,000, offset
however by the write-off in the valuation of certain portfolio
companies, primarily ServiceMax from $2,500,000 to zero.
The Company recognized investment income (which consisted
primarily of income from the Company's subsidiaries and other
income) of $2,029,162 for Fiscal 1996 and $741,312 for Fiscal
1995. Because of its business philosophy of seeking long-term
capital appreciation in its investment portfolio, the Company
has historically not generated substantial investment income.
However, it intends to generate sufficient income during 1997
from its principal portfolio companies (Recticon and
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Automotive), and its cash availability, in order to meet its
operating expenses.
Expenses aggregated $847,028 during Fiscal 1996 and
$878,465 during Fiscal 1995.
Liquidity and Capital Resources
As of December 31, 1996, the Company had cash and cash
equivalents of $951,782, United States Treasury Bills of
$250,341, and a certificate of deposit of $100,000, as
compared to cash and cash equivalents of $383,563, and United
States Treasury Bills of $199,093 at December 31, 1995. The
increase in capital resources of approximately $719,467 from
Fiscal 1995 was primarily as a result of the settlement of
certain claims, as previously disclosed. As of December 31,
1996, the Company had liabilities of $2,433,064, as compared
to liabilities of $1,918,266 at December 31, 1995. The
increase was primarily due to the increase in deferred income
tax liability of $1,312,619 (see Note 7 to Notes to Financial
Statements).
The Company believes that it has sufficient capital to
implement its current investment objectives. However, the
ability of the Company to meet its future investment
objectives is subject to Recticon maintaining profitable
operations and Automotive achieving profitable operations, of
which no assurance can be given. There can be no assurance
that the Company will be successful in its attempts, if any,
to raise additional funds. Except as set forth herein, the
Company currently has no material commitments for capital
expenditures or to finance the working capital needs of its
portfolio companies.
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ITEM 7. Financial Statements.
See Index to Financial Statements after Signature Page.
ITEM 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Reference is made to the Company's Current Report on Form
8-K, dated January 2, 1996, filed with the Commission on
January 5, 1996.
PART III
ITEM 9. Directors, Executive Officers, Promoters and
Control Persons
The following is a list (along with certain biographical
information) of the executive officers and directors of the
Company. All directors of the Company are serving a current
term of office which continues until the next annual meeting
of stockholders, and all officers are serving a current term
of office which continues until the next annual meeting of
directors:
Year of
Election
as
Name and Age Director Position
- ------------- -------- --------
(As of 3/1/97)
Bert Sager*(1)(2) 1983 Co-Chairman of the Board
(71) and Director
Stephen A. Ollendorff* 1983 Chairman of the Board,
(58) (1)(2) Chief Executive Officer,
Secretary and Director
Edward N. Epstein* 1995 President and Chief
(56) (1)(2) Operating Officer; Director
Larry V. Unterbrink* 1985(3) Treasurer
(62)
Paula Berliner* 1990 Vice President; Director
(53) (1)(2)
Mark Auerbach(1)(4)(5) 1995 Director
(57)
Edward S. Croft III 1997 Director
(54) (4)
15
<PAGE>
Year of
Election
as
Name and Age Director Position
- ------------ -------- --------
(As of 3/1/97)
Paul C. Meyer(4) 1990 Director
(49)
Kenneth I. Sawyer(2)(5) 1992 Director
(51)
Joel J. Silver(5) 1983 Director
(60)
______________
* Indicates "interested person" of the Company within the
meaning of the 1940 Act.
(1) Member of the Executive Committee
(2) Member of Nominating Committee
(3) Mr. Unterbrink was a member of the Board from
1985 until February 1995.
(4) Member of the Audit Committee
(5) Member of Stock Option and Compensation Committee
______________
BERT SAGER has been Co-Chairman of the Board of the
Company since November 1995 and was Chairman from June 1989 to
November 1995. Prior thereto, he was President since the
Company's inception until May 1989. Mr. Sager has been a
private investor for more than five years and has been a
practicing attorney since 1949. He is a director of Computer
Products, Inc. ("CPI"), a publicly-traded manufacturer of
standardized electronic products, of Boca Raton, Florida; and
Windmere-Durable Holdings, Inc., a publicly-traded Florida-
based manufacturer of personal care products.
STEPHEN A. OLLENDORFF has been Chief Executive Officer
of the Company since September 1992, Chairman of the Board
since November 1995, President of the Company from June 1989
until November 1995, and Secretary since the Company's
inception. He served as Vice President from the Company's
inception until his election as President. Mr. Ollendorff has
been of counsel to the law firm of Hertzog, Calamari & Gleason
since December 1990. Mr. Ollendorff also serves as a director
of CPI.
EDWARD N. EPSTEIN was elected President and Chief
Operating Officer of the Company in November 1995. For more
than the past five years, has been the principal of Edward N.
Epstein & Assoc., a consulting firm specializing in corporate
16
<PAGE>
structure and management. Since January 1996, a principal in
the merchant banking firm of New Canaan Capital LLC, and since
July 1996, a principal of Sylhan LLC, an integrated contract
manufacturer specializing in the precision machining of
refractory metal parts.
LARRY V. UNTERBRINK, Treasurer of the Company since
February 1990, is a private investor residing in Florida. Mr.
Unterbrink had been, from May 1982 to December 1994, President
and Treasurer of Seahorse Ltd., a leasing and publishing
company.
PAULA BERLINER has been a Vice President of the Company
since June 1992 and, since May 1990, has been a private
investor residing in Florida. She is presently a director of
the Family Bank of Hallandale located in Florida.
MARK AUERBACH, since June 1993, has been Senior Vice
President and Chief Financial Officer of Central Lewmar L.P.,
a distributor of fine papers. From August 1992 to June 1993,
Mr. Auerbach was a partner of Marron Capital L.P., an
investment banking firm. From July 1990 to August 1992, he
was President, Chief Executive Officer and Director of Implant
Technology Inc., a manufacturer of artificial hips and knees.
Mr. Auerbach is currently a director of Pharmaceutical
Resources, Inc., a New York Stock Exchange listed company, the
manufacturer of generic drugs, and a director and Chairman of
the Board of Oakhurst Company, Inc., a publicly-traded holding
company, whose subsidiaries operate automotive after-market
distributors.
EDWARD S. CROFT, III, since August 1996, has been a
partner of Croft & Bender L.L.C., an investment banking firm.
From 1983 until April 1996, Mr. Croft was Managing Director of
The Robinson-Humphrey Company, Inc., an investment banking
firm. He is a director of CPI, Tensar Corporation, a
manufacturer of plastic products, and Just For Feet, Inc., an
athletic footwear retailer.
PAUL C. MEYER, since October 1996, has been Executive
Vice President and Chief Operating Officer of PlayNet
Technologies, Inc., a developer and manufacturer of location-
based, pay-per-play, tournament games and entertainment
products. From January 1994 to October 1996, he held various
executive positions at Viacom New Media, a publisher and
distributor of multimedia products and a Division of Viacom
International, Inc.; from October 1991 through January 1994,
President of Paul C. Meyer & Inc., a financial consulting firm
17
<PAGE>
specializing in financial and operational restructuring of
companies; and from February 1990 until December 1991,
President of Superior Toy & Manufacturing Company.
KENNETH I. SAWYER has been Chairman of the Board,
President and Chief Executive Officer of Pharmaceutical
Resources, Inc. for more than the past five years.
JOEL J. SILVER, since December 1994, has been president,
chief executive officer and a director of International
Cutlery, Ltd., a publicly-traded specialty gift store
operation. Mr. Silver co-founded CW Acquisitions, Inc. in
1990 and served from its inception as a director and until
1993, as senior executive vice president. In June 1993, Mr.
Silver was appointed CW Acquisition, Inc.'s co-chairman,
president and chief executive officer. Mr. Silver was also a
director, president, treasurer and secretary of Hoffritz
Holding Company, Inc. and a director and senior executive vice
president of each of Hoffritz For Cutlery, Inc. and Edwin Jay,
Inc., which positions he held for approximately 19 years. In
August 1994, certain creditors of CW Acquisitions, Inc. and
the three Hoffritz entities filed involuntary petitions in the
Court pursuant to Chapter 11 of the U.S. Bankruptcy Code,
which petitions on September 28, 1994, placed the companies
into Chapter 11 reorganization proceedings. The bankruptcy
proceeding was dismissed on March 22, 1996. Mr. Silver is a
director of Claire's Stores, Inc., a New York Stock Exchange
listed company, located in Pembroke Pines, Florida.
There are no family relationships between any executive
officers or directors of the Company.
Section 16(a) Compliance
The Company is aware of the following late filings of
reports required by Section 16(a) of the Exchange Act: Paul
Meyer failed to file, on a timely basis, his Annual Statement
of Changes in Beneficial Ownership on Form 5; Kenneth I.
Sawyer failed to file, on a timely basis, a Statement of
Changes in Beneficial Ownership on Form 4. These filings were
subsequently completed on the appropriate forms.
ITEM 10. Executive Compensation
Summary Compensation Table
The following table sets forth information for the fiscal
years ended December 31, 1996, December 31, 1995 and December
31, 1994, respectively, respecting compensation earned by the
Chief Executive Officer of the Company and the only other
executive officer (whose salary and bonus earned in Fiscal
1996 exceeded $100,000) of the Company serving at the end of
Fiscal 1996 (the "Named Executives").
18
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Securities
Name and Principal Underlying
Position Year Salary($) Bonus($) Options(#)(1)
- ------------------ ---- --------- -------- -------------
<S> <C> <C> <C> <C>
Stephen A. Ollendorff 1996 $264,042(2) - -
Chairman and Chief 1995 $256,750(2) - -
Executive Officer 1994 $250,000(2) - -
Edward N. Epstein 1996 $150,000 - -
President and 1995 $122,500(3) $30,000 150,000
Chief Operating
Officer
- -------------
(1) Represents options awarded under the 1991 Stock Option
Plan.
(2) Mr. Ollendorff has voluntarily assumed responsibility for
rent and secretarial expenses relating to the New York
office. Mr. Ollendorff does not receive any fringe
benefits from the Company.
</TABLE>
The Company does not have any annuity, retirement,
pension, deferred or incentive compensation plan or
arrangement under which any executive officers are entitled to
benefits, nor does the Company have any long-term incentive
plan pursuant to which performance units or other forms of
compensation are paid. Executives who qualify are permitted
to participate in the Company's 1991 Stock Option Plan.
Stock Option Grants In Last Fiscal Year
During the fiscal year ended December 31, 1996, there
were no stock option grants or stock appreciation rights
granted to the Named Executives or any other stock
appreciation rights.
On November 22, 1994, the Stock Option and Compensation
Committee authorized the amendment to the Company's
outstanding stock options in order to deter a hostile
takeover, whereby each optionee would be given the opportunity
to exercise his/her options at the exercise price of $.5625
(equal to the "fair market value" of the Company's common
stock on November 22, 1994), in the event of a "change of
control." A "change of control" would occur in the following
circumstances: (i) the first purchase of shares of equity
securities of the Company pursuant to a tender offer or
exchange offer (other than an offer by the Company) for 25% or
19
<PAGE>
more of the equity securities of the Company, which offer has
not been approved by the Board of the Company, (ii) a single
purchaser or a group of associated purchasers acquiring,
without the approval or consent of the Board of the Company,
securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding
securities in one or a related series of transactions, or
(iii) in respect of an election of directors by the Company's
stockholders, the election of any or all of the management's
slate of directors being contested or opposed, whether through
a solicitation of proxies, or otherwise. As of March 31,
1997, no such "change of control" has occurred.
On November 7, 1996, the Board of Directors
authorized the Company to loan moneys to officers and
employees of the Company in order to encourage them to
exercise their stock options. The term of such loans would be
for the shorter of ten years or 60 days after termination of
employment of the officer or employee, interest would accrue
and be payable monthly on the principal, at the prevailing
rate applicable to 90-day treasury bills at the time the loan
is made, and the loan would be collateralized at all times,
which collateral (subject to applicable law) may include
shares of the Company. The loans must be collateralized so
that the fair market value of the collateral would have to
equal or exceed the principal outstanding amount of the loan
at all times. As of March 31, 1997, no such loans to officers
or employees have been made by the Company.
Year-End Option Values Table
The following table sets forth information at December
31, 1996 respecting exercisable and non-exercisable options
held by the Named Executives. During Fiscal 1996, the Named
Executives did not exercise any stock options. The table also
includes the value of "in-the-money" stock options which
represents the spread between the exercise prices of the
existing stock options and the year-end price of the Common
Stock.
20
<PAGE>
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-
Options Held the-Money Options
at December 31, 1996(1) Held at December 31, 1996(1)
-------------------------- ----------------------------
Not Not
Name Exercisable Exercisable Exercisable Exercisable
- ---- ----------- ----------- ----------- -----------
<S> <C> <S> <C> <C>
Stephen A.
Ollendorff 280,000(2) -0- $ 7,800 $-0-
Edward N.
Epstein 150,000 -0- $155,250 $-0-
________________
(1) Based upon the closing sales price of the Common Stock
on December 31, 1996 ($1.91).
(2) On November 19, 1995, Mr. Ollendorff surrendered an aggregate of
40,000 stock options previously granted to him in order to enable
the Company to grant options to another executive.
</TABLE>
Compensation of Directors
Effective December 1993, directors who are not executive
officers of the Company are compensated for their services by
payment of an annual retainer of $4,000, $500 for each Board
meeting attended in person by such director (excluding the four
regular quarterly Board meetings) and $250 for each committee
meeting attended in person by such director.
Paul C. Meyer, a director of the Company, reviews, on behalf
of the Board, the financial and operational viability of potential
portfolio companies at an annual compensation of $10,000, subject
to cost-of-living adjustments.
Employment Arrangements
The Company entered into an employment agreement with Stephen
A. Ollendorff, effective December 15, 1993, for a minimum period of
three years, which has been renewed by its terms, pursuant to which
Mr. Ollendorff receives annual compensation of $250,000, subject to
cost-of-living adjustments, from the Company. On January 17, 1996,
Mr. Ollendorff's employment agreement was amended in order to
clarify certain terms and conditions, including the geographic
location in which services are provided, events of termination and
his obligations with respect to confidential information, non-
solicitation of employees and covenants not to compete.
Effective January 1, 1997, Mr. Ollendorff receives a salary of
$120,000 per year as Chairman of the Board of Recticon, which
amount is paid by the Company from the amounts paid by Recticon to
21
<PAGE>
the Company each month. In addition, Recticon rents office space
in Mr. Ollendorff's New Jersey office and pays rent directly to Mr.
Ollendorff directly for such space in the amount of $500 per month.
Any amounts received by Mr. Ollendorff from Recticon as rent and/or
salary are deducted from his salary from the Company to the extent
and as long as he receives such monies from Recticon. This
arrangement in no way adversely effects Mr. Ollendorff's rights
under his employment agreement with the Company.
Mr. Ollendorff agrees to devote such time to the business and
affairs of the Company as he believes is necessary for the
operations of the Company. In addition, Mr. Ollendorff has
voluntarily assumed responsibility for rent and secretarial
expenses relating to the Company's New York office. Mr. Ollendorff
receives no fringe benefits from the Company.
The Company entered into an employment agreement with Edward
N. Epstein, effective January 1, 1996, for a minimum period of
three years, for an annual compensation of $150,000, subject to
cost-of-living adjustments. Mr. Epstein will devote such time to
the business and affairs of the Company as he believes is necessary
for the operations of the Company. Prior to the execution of the
foregoing employment agreement, Mr. Epstein had been retained as a
consultant to the Company at the annual compensation of $120,000,
primarily devoted to reviewing the sales and marketing efforts of
Automotive and ServiceMax.
In addition, effective October 31, 1991, the Company entered
into the employment agreements, for a minimum three year period,
with the following officers. These agreements were amended in
January 1996 to clarify certain terms and conditions, including the
geographic location in which services are provided, events of
termination and obligations with respect to confidential
information, non-solicitation of employees and covenants not to
compete.
Bert Sager--$20,000 per year, subject to cost-of-living
adjustments, to devote such time to the business and affairs of the
Company as he deems necessary to fulfill his obligations as
Chairman of the Board.
Larry V. Unterbrink--$20,000 per year, subject to cost-of-
living adjustments, to devote such time to the business and affairs
of the Company as he deems necessary to fulfill his obligations as
Treasurer.
Paula Berliner, Vice President of the Company since June 1992
and a director of the Company since September 1992, reviews, on
behalf of the Board, the financial and operational viability of
potential portfolio companies at an annual compensation of
approximately $22,300, subject to cost-of-living adjustments.
22
<PAGE>
Payments From Portfolio Companies
For Fiscal 1997, Automotive and Recticon have agreed to pay to
the Company, from operating cash flow, a monthly payment of $20,000
and $49,500, respectively.
During the year ended December 31, 1996, the Company received
a total of $600,000 in management fees, a dividend in the amount of
$400,000 and a payment in the amount $918,619 for Recticon's
portion of Federal income taxes filed on a consolidated basis. The
Company utilized such amounts to repay a loan in the amount of
$760,000 from Recticon and to make an additional contribution to
capital in the amount of $160,000.
During the year ended December 31, 1996, the Company received
a total of $261,600 in cash dividends from Automotive. The Company
has guaranteed the repayment by Automotive of a $900,000 loan to
Automotive pursuant to a loan agreement and supply agreement with
a tire distributor. In addition, subsequent to year-end, the
Company received $1,075,000 from Automotive, which amount was
comprised of $475,000 in management fees and a $600,000 note
payable to Automotive.
ITEM 11. Security Ownership of Certain Beneficial Owners and
Management
Security Ownership of Certain Beneficial Owners
The following table sets forth, as of the close of business on
March 15, 1997, information as to those stockholders (other than
members of the Company's management), which are known by the
Company to beneficially own more than 5% of its outstanding Common
Stock (based solely upon filings by each of said holders with the
Commission on Schedule 13D of the 1934 Act):
No. of Shares
Name and Address Beneficially Percentage
of Beneficial Owner Owned(1) of Class
- ------------------- ------------- ----------
Asset Value Fund 1,104,000 19.93%
Limited Partnership
376 Main Street
P.O. Box 74
Bedminster, NJ 07921
_______________
(1) Beneficial ownership, as reported in the above table, has been
determined in accordance with Rule 13d-3 under the 1934 Act.
Unless otherwise indicated, beneficial ownership includes both
sole voting and sole dispositive power.
23
<PAGE>
Ownership by Management
The following table sets forth, as of March 15, 1997, the
beneficial ownership of the Common Stock of the Company of (i) each
director (including the Named Executives) of the Company, and (ii)
all directors and executive officers of the Company as a group
(based upon information furnished by such persons). Under the
rules of the Commission, a person is deemed to be a beneficial
owner of a security if he has or shares the power to vote or direct
the voting of such security or the power to dispose or direct the
disposition of such security. Accordingly, more than one person
may be deemed to be a beneficial owner of the same securities. A
person is also deemed to be a beneficial owner of any securities of
which that person has the right to acquire beneficial ownership
within 60 days.
<TABLE>
<CAPTION>
No. of Shares
Name and Address Beneficially Percentage
of Beneficial Owner(1) Owned(2) of Class
- ---------------------- ------------- ----------
<S> <C> <C>
Bert Sager.............. 351,500(3)(4) 6.2%
Stephen A. Ollendorff... 1,463,700 25.2%
(4)(5)(6)
Edward N. Epstein....... 957,500(4)(5) 16.8%
Paula Berliner.......... 195,800(4)(7) 3.5%
Mark Auerbach........... - -
Edward S. Croft, III.... - -
Paul C. Meyer........... 8,665 *
Joel J. Silver.......... 3,000 *
Kenneth I. Sawyer....... 1,000 -
All directors and executive
officers as a group
(10 persons)........... 2,191,486(4) 34.8%
___________
* Less than 1%.
(1) The business address for purposes hereof of all of the
Company's directors and executive officers is in care of the
Company.
(2) Unless otherwise noted, the Company believes that all persons
in the table have sole voting and disposition power with
24
<PAGE>
respect to all shares of Common Stock beneficially owned by
them.
(3) Does not include 76,825 shares owned by Marilyn Sager, his
wife, with respect to which he disclaims beneficial ownership.
(4) Includes the following shares that may be acquired upon the
exercise of options within 60 days of March , 1997: Mr.
Sager - 160,000; Mr. Ollendorff - 280,000; Mr. Epstein -
150,000; Ms. Berliner - 70,000; and all directors and
executive officers as a group (10 persons) - 750,000.
(5) Stephen A. Ollendorff has entered into an Irrevocable Proxy
and Voting Agreement With Respect to Election of Directors,
dated December 19, 1995, with Edward N. Epstein, with respect
to the shares of Common Stock beneficially owned by Mr.
Epstein. Accordingly, Mr. Ollendorff's beneficial ownership
includes such shares. Other than as set forth, Mr. Ollendorff
disclaims beneficial ownership of such shares. See "Certain
Relationships and Related Transactions."
(6) Includes 1,000 shares owned of record by Bjorg Ollendorff, his
wife.
(7) Includes 27,500 shares owned of record by Warren Berliner, her
husband.
</TABLE>
ITEM 12. Certain Relationships and Related Transactions
Mr. Ollendorff, Chief Executive Officer of the Company, is of
counsel to Hertzog, Calamari & Gleason, general counsel to the
Company. Mr. Ollendorff has entered into an Irrevocable Proxy and
Voting Agreement With Respect to Election of Directors (the
"Proxy"), with Edward N. Epstein, with respect to the shares of
Common Stock beneficially owned by Mr. Epstein (the "Stock"),
commencing on December 19, 1995 and terminating on December 31 of
such year in which either party shall have given the other party at
least twelve (12) months' written notice thereof prior to December
31 of such year; provided, that, notwithstanding the foregoing the
Proxy shall remain in full force and effect until at least December
31, 1998. If any shares of the Stock covered by the Proxy are
sold to any other party, the Proxy as it relates to such shares of
Stock shall terminate immediately upon such sale. Pursuant to the
Proxy Mr. Ollendorff undertakes to vote the Stock, as well as use
his best efforts (including voting shares of stock of the Company
owned by him) for the election of the greater of (i) two (2)
directors or (ii) a number of directors equal to 22% (rounded up to
the next highest number) of the entire Board of Directors,
acceptable to Mr. Epstein.
25
<PAGE>
ITEM 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Certificate of Incorporation - incorporated by reference to
Exhibit 1 to the Company's Registration Statement on Form N-2 (No.
2-88798) filed with the Commission on January 9, 1984.
3.2 Certificate of Amendment of Certificate of Incorporation,
dated November 14, 1986, as filed and recorded with the Secretary
of State of Delaware on November 26, 1986 - incorporated by
reference to Exhibit 3.2 of the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1986.
3.3 By-laws, as amended, effective November 7, 1996 -
incorporated by reference to Exhibit 3 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1996.
10.1 Employment Agreement dated August 31, 1993, between the
Company and Stephen A. Ollendorff - incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form N-2
(No. 33-69610) filed with the Commission on September 19, 1993.
10.2 Agreement dated October 31, 1991 between the Company and
Bert Sager - incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10.3 Agreement dated October 31, 1991 between the Company and
Larry V. Unterbrink - incorporated by reference to Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10.4 Agreement between the Company and Paul C. Meyer &
Associates, Inc. dated October 31, 1991 - incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on Form N-2
(No. 33-52302) filed with the Commission on October 23, 1992.
10.5 1991 Stock Option Plan, as amended - incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement
on Form N-2 (No. 33-69610) filed with the Commission on September
29, 1993.
10.6 Purchase and Settlement Agreement, dated as of April 8,
1994, by and among ServiceMax, ServiceMax Tire and Auto Centers of
Michigan, Inc., the Company, Stephen A. Ollendorff, Orland Wolford,
Bert Sager, Donald R. Nance, C. James Sabo, Richard A. Sabo and
Robert L. Sabo - incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.
26
<PAGE>
10.7 Amendment No. 1 to Employment Agreement, dated as of
January 17, 1996, by and between the Company and Stephen A.
Ollendorff - incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995.
10.8 Employment Agreement, dated as of January 17, 1996, by and
between the Company and Edward N. Epstein - incorporated by
reference to Exhibit 10.8 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995.
10.9 Amendment No. 1 to Employment Agreement, dated as of
January 17, 1996, by and between the Company and Bert Sager -
incorporated by reference to Exhibit 10.9 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995.
10.10 Amendment No. 1 to Employment Agreement, dated as of
January 17, 1996, by and between the Company and Larry V.
Unterbrink - incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995.
10.11 Employment Agreement, dated as of January 17, 1996, by
and between the Company and Paula Berliner - incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995.
21 List of subsidiaries of the Company.
23 Consent of Ernst & Young LLP, independent auditors.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
On December 31, 1996, the Company filed with the Commission a
Current Report on Form 8-K, dated December 30, 1996, reporting the
receipt by the Company and a wholly-owned subsidiary of certain
amounts from an unaffiliated third party with respect to certain
claims in exchange for general releases.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ACORN VENTURE CAPITAL CORPORATION
(Registrant)
Dated: April 1, 1997 By: Stephen A. Ollendorff
-------------------------------
Stephen A. Ollendorff
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
Signature Title Date
Stephen A. Ollendorff Chairman of the Board April 1, 1997
- ----------------------- and Chief Executive
Stephen A. Ollendorff Officer (Principal
Executive Officer);
Secretary and Director
Bert Sager
- ----------------------- Co-Chairman of the Board April 1, 1997
Bert Sager and Director
Edward N. Epstein
- ----------------------- President and Chief April 1, 1997
Edward N. Epstein Operating Officer;
Director
Larry V. Unterbrink
- ------------------------ Treasurer (Principal April 1, 1997
Larry V. Unterbrink Financial and Accounting
Officer)
Paula Berliner
- ------------------------ Vice President and April 1, 1997
Paula Berliner Director
Mark Auerbach
- ------------------------ Director April 1, 1997
Mark Auerbach
Edward S. Croft III
- ------------------------ Director April 1, 1997
Edward S. Croft III
28
<PAGE>
Paul C. Meyer
- ------------------------ Director April 1, 1997
Paul C. Meyer
Kenneth I. Sawyer
- ------------------------ Director April 1, 1997
Kenneth I. Sawyer
Joel J. Silver
- ------------------------ Director April 1, 1997
Joel J. Silver
29
<PAGE>
Acorn Venture Capital Corporation
Financial Statements
for the years ended December 31, 1996, 1995 and 1994
<PAGE>
Table of Contents
Pages
Report of Independent Accountants F-1-F-1A
Financial Statements:
Balance Sheets F-2
Statement of Operations F-3
Statements of Changes in Net Assets F-4
Statements of Cash Flows F-5-F-6
Notes to Financial Statements F-7-F-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Acorn Venture Capital Corporation:
We have audited the accompanying balance sheet of Acorn Venture Capital
Corporation as of December 31, 1996 and 1995, and the related statements of
operations, changes in net assets, and cash flows for year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included verification of investments by physical inspection or
confirmation as of December 31, 1996 and 1995. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
As explained in the notes to the financial statements, as of December 31,
1996 and 1995 the financial statements include securities valued at
approximately $16,812,981 and $14,192,651, respectively, (comprising
substantially all of net assets), whose values have been estimated by the
Board of Directors in the absence of readily ascertainable market values. We
have reviewed the procedures used by the Board of Directors in arriving at
their estimate of value of such securities and have inspected underlying
documentation and, in the circumstances, we believe the procedures are
reasonable and the documentation appropriate. However, because of the
inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market
for the securities existed, and the differences could be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Acorn Venture Capital
Corporation as of December 31, 1996 and 1995, and the results of its
operations, changes in its net assets, and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
- ---------------------------
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
March 28, 1997
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
Acorn Venture Capital Corporation
We have audited the accompanying statements of operations, changes in net
assets and cash flows of Acorn Venture Capital Corporation for the year ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned as of December 31,
1994, by correspondence with the custodian and broker, or verification by
examination. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations, changes in net assets and
cash flows of Acorn Venture Capital Corporation for the year ended December
31, 1994, in conformity with generally accepted accounting principles.
As explained in Note 2, the financial statements as of December 31, 1994,
include securities whose values have been estimated by the Board of Directors
in the absence of readily ascertainable market values. We have reviewed the
procedures used by the Board of Directors in arriving at their estimate of
value of such securities and have inspected underlying documentation and, in
the circumstances, we believe the procedures are reasonable and the
documentation appropriate. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from the values
that would have been used had a ready market for the securities existed, and
the differences could be material.
Ernst & Young LLP
--------------------------
Ernst & Young LLP
Jacksonville, Florida
April 5, 1995
F-1A
<PAGE>
ACORN VENTURE CAPITAL CORPORATION
Balance Sheets
as of December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Assets:
Investments at fair or market value:
Investments in and advances to majority
owned companies:
Recticon Enterprises, Inc.(100% owned) $13,900,000 $12,500,000
Automotive Industries, Inc.(100% owned) 2,900,000 2,900,000
ServiceMax Tire & Auto Centers, Inc.
100% owned) - -
----------- -----------
$16,800,000 $15,400,000
Other common stocks and warrants 12,981 12,981
Certificate of deposit 100,000 -
U.S. Treasury bills 250,341 199,093
----------- -----------
Total investments (cost of
$13,122,865 and $13,104,617
at December 31, 1996 and 1995,
respectively) 17,163,322 15,612,074
Cash and cash equivalents 951,782 383,563
Receivable from affiliates 458,093 100,000
Other assets 4,555 6,183
----------- -----------
Total assets 18,577,752 16,101,820
Liabilities:
Accounts payable 36,445 4,392
Notes payable to Recticon Enterprises, Inc. - 760,000
Capital contribution payable to
Automotive Industries, Inc. - 460,330
Payables to affiliates 434,000 43,544
Deferred income taxes 1,962,619 650,000
----------- -----------
Net assets $16,144,688 $14,183,554
=========== ===========
Net assets:
Common Stock, par value $.01 per share
-authorized 20,000,000 shares,
issued 5,538,906 and 5,588,906 shares
at December 31, 1996 and 1995 and
outstanding 5,538,906 shares at
December 31, 1996 and 1995, $ 55,389 $ 55,889
Additional paid-in capital 14,090,156 14,128,656
Treasury stock (50,000 shares in 1995) - (39,000)
Accumulated:
Net investment income (losses) 274,607 (907,527)
Net realized losses on investments (886,921) (911,921)
Net unrealized accumulated appreciation
of investments (net of taxes of
$1,429,000 and $650,000 in 1996
and 1995 2,611,457 1,857,457
----------- -----------
1,999,143 38,009
=========== ===========
Net assets applicable to
outstanding common shares
(equivalent to $2.91 per
share in 1996 and $2.56 per
share in 1995, based on out-
standing common shares of
5,538,906 and in 1996 and 1995) $16,144,688 $14,183,554
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
ACORN VENTURE CAPITAL CORPORATION
Statements of Operations
for years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Investment income:
Interest, including interest
on notes from majority owned
companies of $67,740 (1995),
and $24,261 (1994) $ 15,062 $ 101,312 $ 126,091
Dividends from majority owned
companies 661,600 447,500 75,000
Consulting and management fees
from majority owned companies 600,000 182,500 96,875
Other Income 752,500 10,000 -
----------- ----------- -----------
2,029,162 741,312 297,966
----------- ----------- -----------
Expenses:
Compensation 552,842 374,542 369,723
Consulting fees 12,568 262,565 95,723
Legal and accounting 162,812 71,809 127,184
Registration fees 13,545 13,501 16,286
Interest and other 105,261 156,048 60,472
----------- ----------- -----------
847,028 878,465 669,388
----------- ----------- -----------
Net investment income (loss) 1,182,134 (137,153) (371,422)
----------- ----------- -----------
Realized and unrealized gains
(losses) on investments:
Realized gains (losses)
from sales of investments 25,000 (89,061) (1,120,496)
Net change in unrealized
appreciation (depreciation)
of investments 1,533,000 4,704,559 (2,313,464)
----------- ----------- -----------
Net realized and unrealized
(losses) gains on investments 1,558,000 4,615,498 (3,433,960)
----------- ----------- -----------
Net increase (decrease) in net
assets resulting from operations
before income tax provision 2,740,134 4,478,345 (3,805,382)
Income tax provision (779,000) (650,000) -
----------- ----------- -----------
Net increase (decrease) in net
assets resulting from
operations $ 1,961,134 $ 3,828,345 $(3,805,382)
=========== =========== ===========
Per-share amounts:
Net investment income (loss) $ 0.21 $ (0.02) $ (0.07)
Net realized gains (losses)
on investments 0.00 (0.02) (0.20)
Net unrealized gains (losses)
on investments 0.28 0.84 (0.42)
Income tax provision (0.14) (0.11) 0.00
----------- ----------- -----------
$ 0.35 $ 0.69 $ (0.69)
=========== =========== ===========
Weighted average number of shares
used in per-share computations 5,658,748 5,584,892 5,543,495
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ACORN VENTURE CAPITAL CORPORATION
Statements of Changes in Net Assets
for years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net investment income (loss) $ 1,182,134 $ (137,153) $ (371,422)
Net realized gains (losses)
from sales of investments 25,000 (89,061) (1,120,496)
Net change in unrealized
appreciation (depreciation) of
investments 1,533,000 (4,704,559) (2,313,464)
Income tax provision (779,000) (650,000) -
----------- ----------- -----------
Net increase (decrease) in net
assets resulting from
operations 1,961,134 3,828,345 (3,805,382)
----------- ----------- -----------
Capital share transactions:
Treasury stock (50,000 shares) - (39,000) -
Issuance of 175,000 shares
of Common Stock in exchange
for 5,810 shares of
ServiceMax Tire & Auto
Centers, Inc. - - 444,500
----------- ----------- -----------
- (39,000) 444,500
----------- ----------- -----------
Net increase (decrease) in net
assets 1,961,134 3,789,345 (3,360,882)
Net assets at beginning of year 14,183,554 10,394,209 13,755,091
----------- ----------- -----------
Net assets at end of year $16,144,688 $14,183,554 $10,394,209
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ACORN VENTURE CAPITAL CORPORATION
Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
for years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating
activities:
Net (decrease) increase in
net assets resulting from
operations $ 1,961,134 $ 3,828,345 $(3,805,382)
Adjustments to reconcile
net (decrease) increase
in net assets resulting
from operations to net
cash provided by (used in)
operating activities:
Change in unrealized depre-
ciation (appreciation) of
investments (1,533,000) (4,704,559) 2,313,464
(Gains) losses on sales
of investments (25,000) 89,061 1,120,496
Deferred income taxes 1,312,619 650,000 -
Adjustment to ServiceMax
cost basis for utilization
of net operating losses 293,000 - -
Changes in operating
assets and liabilities:
Receivable from affiliates (358,093) (50,000) 475,454
Interest receivable - - (34,354)
Other assets 1,628 131,881 67,532
Accounts payable 32,053 (1,508) 4,449
Payables to affiliates 390,456 43,544 -
----------- ----------- -----------
Net cash provided by
(used in) operating
activities 2,074,797 (13,236) 141,659
----------- ----------- -----------
Cash flows from investing activities:
Investment in Recticon
Enterprises, Inc. (160,000) - (249,750)
Investment in Automotive
Industries, Inc. (460,330) (217,005) -
Investment in ServiceMax Tire
& Auto Centers, Inc. - (1,200,000) (778,182)
Investment in Data Access
Systems, Inc. (AVCC) - - (25,000)
Investment in Madison Avenue
Propulsion Corporation - - (412,400)
Proceeds from sale of investment
in Madison Avenue Propulsion
Corporation - 388,555 -
Purchases of common stock - - (200,100)
Proceeds from sales of common
stock - - 314,957
Purchase (redemption) of
convertible debentures - 100,000 (100,000)
Collections on notes receivable 25,000 20,000 90,000
Purchases of certificates of
deposit (200,000) - -
Redemption of certificates of
deposit 100,000 100,000 1,000,000
Purchase of U.S. Treasury bills (740,710) (199,093) (983,721)
Proceeds from sales of U.S.
Treasury bills 689,462 593,691 400,000
Purchase of equipment and other - (5,325) -
----------- ----------- -----------
Net cash used in
investing activities (746,578) (419,177) (944,196)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from note payable to
Recticon Enterprises, Inc. - 760,000 -
Payment on note payable to
Recticon Enterprises, Inc. (760,000) - -
----------- ----------- -----------
Net cash provided by
(used in) financing
activities (760,000) 760,000 -
----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents 568,219 327,587 (802,537)
Cash and cash equivalents at
beginning of year 383,563 55,976 858,513
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 951,782 $ 383,563 $ 55,976
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ACORN VENTURE CAPITAL CORPORATION
Statements of Cash Flows, Continued
for years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid for taxes $ 38,000 $ - $ -
=========== =========== ===========
Non-cash investing activities:
Sale of investment in Data Access
Systems, Inc. in exchange for
a note receivable from
Proexe Corporation $ - $ - $ 1,212,017
=========== =========== ===========
Purchase of an additional 5,810
shares of ServiceMax Tire &
Auto Center, Inc. in exchange
for 175,000 shares of the
Company's common stock $ - $ - $ 444,500
=========== =========== ===========
Sale of note receivable from
Recticon Enterprises, Inc.
in exchange for a restricted
certificate of deposit $ - $ - $ 100,000
=========== =========== ===========
Capital contribution to
Automotive Industries,
Inc. approved in 1995 but
paid in 1996 $ - $ 460,330 $ -
=========== =========== ===========
Receipt of 50,000 shares of
the Company's common stock
for settlement of litigation
with former management of
ServiceMax Tire & Auto
Centers, Inc. $ - $ 39,000 $ -
=========== =========== ===========
Sale of investment in Madison
Avenue Propulsion Corporation
common stock in exchange for
a note receivable $ - $ 50,000 $ -
=========== =========== ===========
Retirement of 50,000 of treasury
stock received in settlement
of litigation with former
management of ServiceMax Tire
& Auto Centers, Inc. $ 39,000 $ - $ -
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ACORN VENTURE CAPITAL CORPORATION
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations - Acorn Venture Capital Corporation
(the "Company") was incorporated under the laws of the State of Delaware on
September 8, 1983. The Company is a nondiversified, closed-end management
investment company and has filed with the Securities and Exchange Commission
("SEC") a notification of election to be treated as a "business development
company" as that term is defined in the Investment Company Act of 1940, as
amended. The Company's primary investment objective has been and continues
to be, achievement of long-term capital appreciation of its assets, rather
than current income, by making investments in, and providing managerial
assistance to, emerging and established companies that management believes
offer significant potential for growth.
Investments - The Company held three wholly owned subsidiaries during 1996 -
Recticon Enterprises, Inc. (Recticon), Automotive Industries, Inc.
(Automotive), ServiceMax Tire & Auto Centers, Inc. (ServiceMax) - which are
neither investment companies nor business development companies.
Accordingly, the accounts of such subsidiaries are not consolidated with
those of the Company. Recticon manufactures monocrystalline silicon wafers
which are used in the microelectronics industry. Automotive owns and
operates full service automotive retail centers in northern Florida and
southeast Georgia. ServiceMax operated tire and service facilities at gas
station and convenience store locations in Michigan. ServiceMax closed its
facilities in 1996.
The Company's investments in these wholly owned subsidiaries, notes
receivable and other common stocks, warrants and convertible debentures are
restricted investments and are valued at fair value as determined by the
Board of Directors (see Notes 2, 3, and 4).
The net change in unrealized appreciation (depreciation) of investments, for
the years ended December 31, 1996, 1995 and 1994 was $1,533,000, $4,704,559
and $(2,313,464), respectively, and includes gross unrealized appreciation of
$1,533,000, $9,304,250 and $0, respectively, and gross unrealized
depreciation of $0, $4,599,691 and $2,313,464, respectively.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of gains, income and
expenses during the reporting period. Actual results could differ from those
estimates, particularly with respect to the fair value determination of
investments. Due to the inherent uncertainty of the valuation of investments,
those estimated values may differ significantly from the values that would
have been used had a ready market for the securities existed, and the
differences could be material.
Income Taxes - The Company is not entitled to the special treatment available
to regulated investment companies and is taxed as a regular corporation for
federal and state income tax purposes. The Company files a consolidated
federal income tax return with its three wholly owned subsidiaries.
F-7
<PAGE>
Notes to Financial Statements, Continued
- ----------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Under the Company's tax sharing agreement with its three wholly owned
subsidiaries, the subsidiaries are required to pay Acorn an amount equivalent
to the federal income taxes that would have been paid if the subsidiaries
filed separate federal income tax returns.
Cash and Cash Equivalents - For the purpose of the statements of cash flows,
the Company considers cash and liquid investments including certificates of
deposits with original maturities of three months or less to be cash and cash
equivalents.
Per Share Amounts - Per share amounts are computed using the weighted average
number of shares of common stock and common stock equivalents outstanding in
each year. Common stock equivalents consist of stock options.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per
Share." SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997. The Company has determined its earnings per
share based on APB Opinion No. 15 and has not yet determined the impact of
implementing SFAS No. 128.
2. INVESTMENTS IN AND ADVANCES TO MAJORITY OWNED COMPANIES:
The Company's wholly owned investments are valued at fair value by the Board
of Directors as these investments are not readily marketable. In determining
fair value, the Board of Directors considers a number of factors which
influence the value of the Company's investments, including current and
expected future operating performance, industry and general market and
economic trends, the competitive marketplace and other factors. A summary of
the Company's wholly owned investments at December 31, 1996 and 1995, is as
follows:
RECTICON ENTERPRISES, INC.
Value December 31
Number of Type of Issue and --------------------
Shares Name of Issuer 1996 1995
- --------- ---------------------------- ----------- -----------
100 Common stock, Recticon
Enterprises, Inc., 100%
owned (86.1% and 88.1% of
net assets at December 31,
1995 and 1995, respectively) $13,900,000 $12,500,000
=========== ===========
During the year ended December 31, 1996, the Company made capital
contributions to Recticon totaling $160,000. Recticon paid the Company
dividends of $400,000 during 1996. Also during 1996, Recticon paid the
Company $918,619 for utilization of net operating loss carryforwards, of
which the Company has established a payable of $53,267 to Automotive for
utilization of Automotive's net operating loss carryforwards. During 1995,
Recticon advanced funds and issued a promissory note to the Company in the
amount of $760,000, accruing interest at 10-1/4% and due July 15, 1997, which
was repaid in 1996. The accrued interest on this promissory note was
forgiven. Recticon paid the Company management fees totaling $600,000,
$195,000 and $62,500 during 1996, 1995 and 1994. As of December 31, 1996,
the Company has guaranteed a $750,000 line of credit and term loan with an
outstanding balance of $484,246 at December 31, 1996 obtained by Recticon.
F-8
<PAGE>
Notes to Financial Statements, Continued
- ----------------------------------------
2. INVESTMENTS IN AND ADVANCES TO MAJORITY OWNED COMPANIES,
CONTINUED
The Board of Directors approved increases in the valuation of the investment
in Recticon from $3,195,750 at December 31, 1994 to $12,500,000 at December
31, 1995 to $13,900,000 at December 31, 1996. Cost at December 31, 1996 and
1995 amounted to $3,355,750 and $3,195,750, respectively.
The following selected financial data of Recticon has been derived from the
audited (by other auditors) financial statements as of December 31, 1996 and
1995.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Statement of Operations Data
Total net sales $ 9,842,345 $ 6,491,505
Total cost of goods sold 6,163,131 4,670,714
----------- ------------
Gross margin 3,679,214 1,820,791
Operating expenses 1,250,587 835,525
Management fees to parent
company 600,000 195,000
Income taxes 746,674 367,936
----------- ------------
Net Income $ 1,081,953 $ 422,330
=========== ============
Balance Sheet Data
Total assets $ 5,977,167 $ 5,785,929
=========== ============
Total liabilities $ 3,643,883 $ 4,294,598
Stockholders' equity 2,333,284 1,491,331
----------- ------------
$ 5,977,167 $ 5,785,929
=========== ============
</TABLE>
AUTOMOTIVE INDUSTRIES, INC.
Value December 31
Number of Type of Issue and --------------------
Shares Name of Issuer 1996 1995
- --------- ---------------------------- ----------- -----------
142 Common stock, Automotive
Industries, Inc., 100% owned
(18.0% and 20.4% of net
assets at December 31, 1996
and 1995, respectively) $ 2,900,000 $ 2,900,000
=========== ===========
At December 31, 1996 and 1995, the Board of Directors valued the investment
in Automotive at $2,900,000. Cost at December 31, 1996 and 1995 amounted to
$3,577,335.
During 1996, 1995 and 1994, Automotive declared and paid dividends totaling
$261,600, $447,500 and $75,000. The Company's Board of Directors approved
capital contributions of $677,335 for 1995 which was recorded as an
unrealized loss in 1995 due to poor operating performance of Automotive in
1995. Of this contribution, $460,330 was paid in 1996.
F-9
<PAGE>
Notes to Financial Statements, Continued
- ----------------------------------------
2. INVESTMENTS IN AND ADVANCES TO MAJORITY OWNED COMPANIES,
CONTINUED
Subsequent to year-end, the Company received $1,075,000 from Automotive.
This amount was comprised of $475,000 management fees and a $600,000 note
payable to Automotive at 8% interest with the principal due on December 31,
1997.
The Company also guarantees a $900,000 note payable to a supplier of
Automotive.
The following selected financial data of Automotive has been derived from its
1996 and 1995 financial statements.
<TABLE>
<CAPTION>
(Unaudited) (Audited)
1996 1995
---------- -----------
<S> <C> <C>
Statement of Operations Data
Total net sales $20,680,735 $19,307,943
Total cost of goods sold 9,682,801 8,657,925
------------ -----------
Gross margin 10,997,934 10,650,018
Other Income 759,590 75,475
Total expenses (11,484,005) (12,314,179)
Income tax) benefit 434,000 83,000
------------ -----------
Net income (loss) $ 707,519 $(1,505,686)
============ ===========
Balance Sheet Data
Total assets $ 7,101,664 $ 6,230,129
============ ===========
Total current liabilities $ 3,063,296 $ 3,282,838
Long term debt 2,013,067 1,367,892
Stockholders' equity 2,025,301 1,579,399
------------ -----------
$ 7,101,664 $ 6,230,129
============ ===========
</TABLE>
During 1995, Automotive wrote off approximately $1.4 million of notes
receivable and advances to ServiceMax that were deemed uncollectible, of
which $997,500 was collected in 1996 as a result of a settlement with a third
party by ServiceMax. An audit of Automotive's 1996 financial statements is
currently in progress.
SERVICEMAX TIRE & AUTO CENTERS, INC.
The Company has 23,210 shares of common stock of ServiceMax with an
accumulated cost of $5,185,503 and $5,619,503 as of December 31, 1996 and
1995.
During 1995, the Company made additional capital contributions of $1,200,000.
As of December 31, 1996 and 1995, the Board of Directors valued its
investment in ServiceMax at zero, due to continued operating losses and a
significant liability. During 1996, the operations of ServiceMax were
closed.
F-10
<PAGE>
Notes to Financial Statements, Continued
- ----------------------------------------
2. INVESTMENTS IN AND ADVANCES TO MAJORITY OWNED COMPANIES,
CONTINUED
During 1996, $1,750,000 was received from a third party with respect to
certain claims in exchange for general releases, of which $752,500 was
remitted directly to the Company and is recorded as other income in the
accompanying statements of operations. The remaining balance of $997,500 was
remitted to Automotive in settlement of outstanding liens and payables.
3. NOTES RECEIVABLE:
The Company held a $500,000 note receivable from Digital Products Corporation
which the Board of Directors valued at zero at December 31, 1996 and 1995.
In connection with the Company's note, the Company held 750,000 restricted
warrants which expired during 1996.
4. OTHER COMMON STOCK AND WARRANTS:
<TABLE>
<CAPTION>
Number of Shares
December 31 Value December 31,
- ---------------------- Type of Issue and ---------------------
1996 1995 Name of Issuer 1996 1995
- ---------- ---------- ---------------------------- ---------- ----------
<C> <C> <S> <C> <C>
Common stock-restricted:
49,565 49,565 Amerinex Artificial
Intelligence, Inc. $ 9,913 $ 9,913
24 24 Cardiac Control Systems,
Inc. 68 68
Warrants-restricted:
30,000 30,000 Aqua Care Systems, Inc.
each entitling the
holders to purchase
1 common share at
$3 per share, exer-
cisable through April
17, 1997 3,000 3,000
- 750,000 Digital Products
Corporation, each
entitling the holder
to purchase 1 common
share at $2.00 per
share through November
22, 1996 - -
-------- --------
(.08% and .09% of net
assets at December 31,
1996 and 1995,
respectively) $ 12,981 $ 12,981
======== ========
</TABLE>
The investment in Amerinex Artificial Intelligence, Inc. ("AAII") is
restricted as to sale. The Company held shares at December 31, 1996 and 1995
which the Board of Directors valued at $.20 per share or $9,913. There is no
quoted market for AAII stock, and it has not paid any cash dividends. The
investment in Cardiac Control Systems, Inc. was received in connection with
the redemption of a convertible debenture in April 1995.
F-11
<PAGE>
Notes to Financial Statements, Continued
- ----------------------------------------
5. CERTIFICATE OF DEPOSIT:
The certificate of deposit for $100,000 has an interest rate of 4.85%,
matures on May 12, 1997 and represents .62% of net assets at December 31,
1996.
6. U.S. TREASURY BILLS:
<TABLE>
<CAPTION>
Value December 31
Face Type of Issue and --------------------
Value Name of Issuer 1996 1995
- --------- ---------------------------- ----------- -----------
<C> <S> <C> <C>
$ 200,000 U.S. Treasury bill, 5.51% due
February 8, 1996 $ - $ 199,093
250,000 U.S. Treasury bill, 5.05% due
March 27, 1997 250,341 -
--------- ---------
Total U.S. Treasury Bills
(1.5% and 1.4% of net
assets at December 31,
1996 and 1995) $ 250,341 $ 199,093
========= =========
7. INCOME TAXES:
The income tax provision for 1996 and 1995 is a follows:
</TABLE>
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current:
Federal $ 293,000 $ -
State - -
------------ ------------
293,000 -
Deferred:
Federal 429,000 574,000
State 57,000 76,000
------------ ------------
486,000 650,000
------------ ------------
Total $ 779,000 $ 650,000
============ ============
</TABLE>
There was no income tax provision for 1994.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred
tax assets recognized must be reduced by a valuation allowance to the extent
it is more likely than not the benefits may not be realized. As of December
31, 1996 and 1995, the significant components of the Company's deferred
income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets (liabilities)
Net operating loss carryforwards $ 294,000 $ 507,000
Unrealized appreciation on
investments (2,256,619) (1,157,000)
------------ ------------
Total deferred tax assets
(liabilities) (1,962,619) (650,000)
============ ============
</TABLE>
The Company files a consolidated tax return with its wholly owned
subsidiaries. For income tax purposes, at December 31, 1996, the Company had
a separate company net operating loss carryforwards of approximately $763,000
that begins to expire in 2006.
F-12
<PAGE>
Notes to Financial Statements, Continued
- ----------------------------------------
The Company files a consolidated tax return with its wholly owned
subsidiaries.
The reason for the differences between the provision for income taxes and the
amount which results from applying the federal statutory tax rate to income
(loss) before income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Income tax (benefit) expense
at statutory rate $ 932,000 $ 1,570,000 $(1,293,830)
Reversal of valuation allowance - (1,396,000) -
Limitations on recognition of
deferred taxes relating to
net unrealized and net
operating losses - - 1,293,830
State income taxes and other (153,000) 476,000 -
------------ ----------- ------------
$ 779,000 $ 650,000 $ -
============ =========== =============
</TABLE>
8. COMMON STOCK:
The following is a summary of the common stock transactions of the
Company.
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-in Treasury
Shares Amount Capital Stock Total
--------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance of December
31, 1993 5,413,906 $ 54,139 $13,685,906 $ - $13,740,045
Issuance of common
stock at the
Company's net
asset value per
share of $2.54 in
exchange for 5,810
shares of ServiceMax
Tire & Auto Centers,
Inc. 175,000 1,750 442,750 - 444,500
--------- -------- ----------- -------- ------------
Balance at December
31, 1994 5,588,906 55,889 14,128,656 - 14,184,545
Receipt of 50,000
shares per settle-
ment agreement with
former management
of ServiceMax Tire
& Auto Centers,
Inc. - - - (39,000) (39,000)
--------- -------- ----------- --------- ------------
Balance at December
31, 1995 5,588,906 55,889 14,128,656 (39,000) 14,145,545
Retirement of 50,000
shares of treasury
stock (50,000) (500) (38,500) 39,000 -
--------- -------- ----------- --------- ------------
Balance at December
31, 1996 5,538,906 $ 55,389 $14,090,156 $ - $14,145,545
========== ======== =========== ========= ============
</TABLE>
F-13
<PAGE>
Notes to Financial Statements, Continued
- ----------------------------------------
9. RELATED PARTY TRANSACTIONS:
During 1996, 1995 and 1994, the Company paid a law firm, of which the
Company's co-chairman is of counsel, $37,618, $27,692 and $74,838,
respectively, for services rendered including reimbursement of expenses.
The president of Automotive was a vice president of the Company through
December 1995. The vice president is also a shareholder of the Company.
During 1995 and 1994 this vice president received an annual salary of
$216,000 and $214,000, respectively, from Automotive.
The president of Recticon was a vice president of the Company. The vice
president is also a shareholder of the Company through December 1995. During
1995 and 1994 this vice president received an aggregate annual salary of
$171,000, and $194,000, respectively, from Recticon and Data Access Systems,
Inc., a former investee, but received no compensation from the Company.
10. STOCK OPTIONS:
The Company has issued stock options to various officers of the Company. The
stock options were issued at fair market value as of the date of grant and
have a term of ten years from date of grant. The following is a summary of
the stock options outstanding:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period 900,000 $ 1.85 790,000 $ 2.11 640,000 $ 2.34
Granted - - 150,000 0.88 150,000 1.16
Cancelled - - (40,000) 3.38 - -
------- --------- -------- --------- ------- ---------
Outstanding at
end of period 900,000 $ 1.85 900,000 $ 1.85 790,000 $ 2.11
======= ========= ======== ========= ======= =========
Options
exercisable at
end of period 800,000 $ 1.94 700,000 $ 2.09 640,000 $ 2.34
======= ======= =======
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Shares Exercise
Price Shares Life Price (in 000) Price
- ----------- ------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.88-$1.16 300,000 8 years $ 1.02 200,000 $ 0.95
$1.84-$2.00 450,000 6 years 1.09 450,000 1.90
$3.38 150,000 5 years 3.38 150,000 3.38
------- -------
Total 900,000 7 years 1.85 800,000 1.94
======= =======
</TABLE>
F-14
<PAGE>
Notes to Financial Statements, Continued
10. STOCK OPTIONS, CONTINUED:
The Company applies APB Opinion 25 and related interpretations in accounting
for the option plan. Accordingly, no compensation cost has been recognized.
The compensation cost that would have been recognized based on the estimated
fair value at the grant rates consistent with the method of SFAS Statement No.
123 "Accounting for Stock-Based Compensation" was immaterial.
Effective November 2, 1994, the Board of Directors amended the outstanding
option agreements whereby each outstanding option can be exercised at the fair
value of the Company's common stock on November 22, 1994, ($0.5625 per share),
if a "change in control" of the Company, as defined in the option agreements,
occurs. Assuming these shares were exercised, the earnings per share at
December 31, 1996 would have been $.32 per share.
As of December 31, 1996 no options had been exercised.
12. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK:
Financial instruments of the Company include investments and cash and cash
equivalents which are reported in the 1996 financial statement at their
estimated fair value.
Financial instruments that subject the Company to concentrations of credit
risk are cash and cash equivalents, as well as indirectly the assets and
liabilities of the Company's majority owned companies. In management's
opinion, there are no significant concentrations of credit risk at December
31, 1996.
The Company's investment in Recticon represents approximately 82% of total
investments held as of December 31, 1996. In addition, approximately 34% of
Recticon sales is attributable to three customers.
F-15
EXHIBIT 21 -- SUBSIDIARIES OF THE COMPANY
The following are subsidiaries of the Company, as set forth
below:
State of Incorporation
Name Ownership
Automotive Industries, Inc. Delaware
Wholly-owned subsidairy
of the Company
Recticon Enterprises, Inc. Pennsylvania
Wholly-owned subsidiary
of the Company
EXHIBIT 23
Consent of Ernst & Young LLP
Independent Auditors
We consent to the use of our report dated April 5, 1995, in
this 1996 Annual Report (Form 10-KSB) of Acorn Venture
Capital Corporation for the year ended December 31, 1996.
Ernst & Young LLP
----------------------
Ernst & Young LLP
Jacksonville, Florida
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ACORN VENTURE CAPITAL CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 13,122,865
<INVESTMENTS-AT-VALUE> 17,163,322
<RECEIVABLES> 458,093
<ASSETS-OTHER> 4,555
<OTHER-ITEMS-ASSETS> 951,782
<TOTAL-ASSETS> 18,577,752
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,433,064
<TOTAL-LIABILITIES> 2,433,064
<SENIOR-EQUITY> 55,389
<PAID-IN-CAPITAL-COMMON> 14,090,156
<SHARES-COMMON-STOCK> 5,538,906
<SHARES-COMMON-PRIOR> 5,588,906
<ACCUMULATED-NII-CURRENT> 274,607
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (886,921)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,611,457
<NET-ASSETS> 16,144,688
<DIVIDEND-INCOME> 661,600
<INTEREST-INCOME> 15,062
<OTHER-INCOME> 1,352,500
<EXPENSES-NET> 847,028
<NET-INVESTMENT-INCOME> 1,182,134
<REALIZED-GAINS-CURRENT> 25,000
<APPREC-INCREASE-CURRENT> 754,000
<NET-CHANGE-FROM-OPS> 1,961,134
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> (907,527)
<ACCUMULATED-GAINS-PRIOR> (911,921)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> (24,858)
<GROSS-EXPENSE> 871,886
<AVERAGE-NET-ASSETS> 15,788,192
<PER-SHARE-NAV-BEGIN> 2.56
<PER-SHARE-NII> 0.21
<PER-SHARE-GAIN-APPREC> 0.14
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 2.91
<EXPENSE-RATIO> 0.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
