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, 1997
Commission File No. 811-08469
ACORN HOLDING CORP.
---------------------------------------------
(Name of small business issuer in its charter)
Delaware 59-2332857
- ------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer Identifi-
incorporation or organization) cation No.)
100 Park Avenue, 23rd Floor, New York, New York 10017
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(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code (212) 685-5654
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 reference 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, 1997 were $7,907,820.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 8, 1998 (valued at the average of the bid price of $1.625
and asked price of $1.7188 on such date) was $3,232,140.
The number of shares of Common Stock outstanding (including shares held by
affiliates of the issuer) as of April 8, 1998: 4,172,906
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
ITEM 1. Description of Business
- ------- -----------------------
General
- -------
Acorn Holding Corp. (the "Company") is a holding company with one
wholly-owned subsidiary, Recticon Enterprises, Inc. ("Recticon"), which it
acquired in 1993 by issuing 800,000 shares of the Company's common stock, $.01
par value (the "Common Stock") to the stockholders of Recticon in exchange for
all of the outstanding shares of stock of Recticon. The principal purpose of the
Company is to derive earnings from the operation of Recticon and possibly other
businesses rather than for the purpose of obtaining dividend and interest income
through the efforts of others. The Company may acquire other companies or
operating businesses in the future. While there can be no assurance that any
such acquisitions will be made, the Company intends only to acquire the entire
or, at the least, controlling interests in such companies and have such
companies operate as subsidiaries of the Company.
Significant Developments
- ------------------------
Since January 1, 1997, the following significant developments occurred:
(a) On May 30, 1997, the Company consummated the sale and transfer of
substantially all of the assets of its wholly-owned subsidiary, Automotive
Industries, Inc., a Delaware corporation (the "Seller"), to Morgan Tire & Auto,
Inc., a Florida corporation (the "Purchaser"), pursuant to an Asset Purchase
Agreement by and among the Purchaser, the Company and the Seller. In addition,
the parties entered into an Assumption Agreement pursuant to which the Purchaser
agreed to assume and pay certain liabilities and obligations of the Seller. The
purchase price paid to the Seller by Purchaser was $2,500,000, subject to
adjustment. In addition, by subsequent agreement, Purchaser agreed to the
payment to Seller of the amount of $425,000 in settlement of all of the
adjustments (payable over a three-year period). Reference is made to the
Company's Current Report on Form 8-K, dated June 9, 1997, filed with the
Securities and Exchange Commission (the "Commission ") on June 9, 1997.
(b) On November 4, 1997, pursuant to the approval of the Company's
stockholders, the Company filed Form N-54C with the Commission in order to
withdraw its election to be treated as a Business Development Company under the
Investment Company Act of 1940 (the "1940 Act"). See "Submission of Matters to a
Vote of Security Holders."
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(c) On November 3, 1997, pursuant to the approval of the Company's
stockholders, the Company filed a Certificate of Amendment to its Certificate of
Incorporation with the Secretary of State of Delaware changing the Company's
name from "Acorn Venture Capital Corporation" to "Acorn Holding Corp." See
"Submission of Matters to a Vote of Security Holders."
(d) On November 17, 1997 the Company announced its intention to
repurchase up to 1,500,000 shares of the Company's Common Stock (approximately
27% of the issued and outstanding shares), depending upon market conditions and
other factors. On January 22, 1998, the Company repurchased, for an aggregate
consideration of $2,060,000, 1,300,000 shares of the Common Stock (approximately
22% of the outstanding Common Stock) from Asset Value Fund Limited Partnership
and entered into a "standstill agreement" with Asset Value and one of its
principals. The Company has also repurchased an additional 66,000 shares of its
Common Stock through April 8, 1998, representing a total repurchase by the
Company of approximately 25% of the issued and outstanding shares of Common
Stock.
Recticon's Present Business
- ---------------------------
Recticon, located in Pottstown, Pennsylvania, manufactures two, three,
four, five and six-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.
The business in which Recticon is engaged is highly competitive and the
Company 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.
In 1995, Recticon entered into long-term agreements with two of its major
customers, pursuant to which said customers have paid an aggregate of $2.3
Million in cash for the right to receive a specified number of silicon wafers at
a predetermined gross profit margin. In addition, in 1996, 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 mutually agreed to gross profit
margin to Recticon. 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 have
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not only given Recticon added capacity, but have also enabled it to enter into
the five and six-inch wafer market and, subject to purchasing additional
equipment, give it the capacity to enter into the eight-inch market. There can
be no assurance that Recticon will acquire any additional Units or successfully
enter into the eight-inch wafer market.
Recticon's raw materials are acquired from silicon wholesalers. For 1997,
12% of its raw materials were acquired from one supplier. Although Recticon has
from time to time experienced shortages of certain supplies, such shortages have
not resulted in any significant disruptions in production. Recticon believes
that there are adequate alternative sources of supply to meet its requirements.
For 1997, three customers of Recticon accounted for 39%, 18% and 11% of its
sales, respectively. For 1996, three customers of the Company accounted for 34%,
15% and 11% 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.
Compliance with federal, state and local laws and regulations regulating
the discharge of materials into the environment has not had, and under present
conditions, Recticon does not anticipate that such laws and regulations will
have a material effect on the results of operations, capital expenditures or the
competitive position of Recticon.
Employees
- ---------
The Company currently has five executive officers, all of whom are
employees of the Company. Recticon presently employs 53 full-time people, all of
whom are located at its facility in Pottstown.
ITEM 2. Description of Property
- --------------------------------
In June 1997, in order to reduce costs and consolidate its operations, the
Company relocated its principal executive offices to New York, New York, at no
charge to the Company. The Company also maintains an office in New Canaan,
Connecticut, at no charge to the Company.
Recticon currently leases approximately 30,000 square feet in a facility in
Pottstown, Pennsylvania, pursuant to a lease agreement which expires on February
28, 2009. Recticon has a right of first refusal to purchase the property in the
event of a sale by the lessor. Recticon considers the facility to be generally
well-maintained, adequate for its current needs and capable of supporting a
reasonably higher level of demand for its products.
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ITEM 3. Legal Proceedings
- --------------------------
The Company instituted suit against Digital Products Corporation
("Digital") in Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida for nonpayment of $500,000 owing on a 10% subordinated
convertible note due 1996 (the "Note"), plus accrued interest since November 22,
1995. Since such time, Digital has filed a petition under Chapter 11 in the U.S.
Bankruptcy Court, in the Southern District of Florida (Case No.
97-21987-BKC-RBR). The Company has fully reserved against the Note. No assurance
can be given as to the successful outcome of the collection of all or any part
of the Note.
ITEM 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company held two meetings of its stockholders in 1997, as follows:
(a) The Company held a Special Meeting of Stockholders on November 3,
1997 (the "Special Meeting"), at which a majority of the outstanding voting
shares of Common Stock of the Company were present in person or by proxy, for
the following purposes:
(i) The stockholders were asked to consider and act upon a
proposal that the Company withdraw its election to be treated as a
business development company under the 1940 Act. 4,150,653 shares of
Common Stock of the Company voted in favor of the proposal, 21,575
shares of Common Stock voted against such proposal, 13,650 shares
abstained and 965,968 broker shares were not voted. The affirmative
vote of (a) 67% or more of the shares of Common Stock present (in
person or by proxy) at the Special Meeting, or (b) more than 50% of the
outstanding shares of Common Stock, whichever is less, was required to
approve this proposal. Accordingly, the proposal received more than the
vote required for approval in accordance with Delaware General
Corporation Law and the 1940 Act.
(ii) Upon approval of the foregoing proposal, the
stockholders were then presented with the proposal to amend the
Company's Certificate of Incorporation to change the Company's name to
"Acorn Holding Corp." 5,122,621 shares of Common Stock voted in favor
of the proposal, 16,125 shares voted against such proposal and 13,100
shares abstained. The proposal received the affirmative vote of a
majority of the outstanding shares of Common Stock required to approve
this proposal in accordance with Delaware General Corporation Law.
(b) The Annual Meeting of Stockholders of the Company was held on
December 30, 1997 (the "Meeting"). The following matters were voted on and
approved by the holders of a majority of the
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5 outstanding shares of the Company's Common Stock in accordance with Delaware
General Corporation Law:
(i) The first proposal presented to the stockholders was the election
of seven 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
---------------------------------
Paula Berliner 3,679,011 1,295,625
Edward S. Croft, III 3,677,511 1,297,125
Edward N. Epstein 3,675,461 1,299,175
Ronald J. Manganiello 3,679,011 1,295,625
Stephen A. Ollendorff 3,671,461 1,303,175
Bert Sager 3,671,461 1,303,175
Kenneth I. Sawyer 3,677,511 1,297,125
(ii) The second proposal presented to the stockholders was
to ratify the firm of Grant Thornton LLP as the independent public
accountants of the Company for the 1997 fiscal year. There were
3,684,811 shares of Common Stock cast in favor of such proposal,
1,287,525 shares of Common Stock voted against such proposal, and 2,300
shares abstained.
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
-------------- --- ----
1997
----
March 31 $1.56 $2.00
June 30 $1.38 $2.19
September 30 $1.56 $2.06
December 31 $1.38 $1.84
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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
As of April 8, 1998, there were approximately 441 holders of record of the
Company's Common Stock with 4,172,906 shares of Common Stock outstanding. In
addition, the Company believes that there are more than 1,500 beneficial owners
of Common Stock whose shares are held in "street" name as of such date. On April
8, 1998, the closing bid and asked quotations of the Common Stock were $1.625
and $1.7188, 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.
ITEM 6. Management's Discussion and Analysis
or Plan of Operations
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During the fiscal year ended December 31, 1997 ("Fiscal 1997"), the Company
completed the divestiture of all of its major operating assets other than
Recticon and, on November 4, 1997, pursuant to the approval of the Company's
stockholders, withdrew its election with the Commission to be treated as a
Business Development Company under the 1940 Act. Accordingly, the Company will
be operating in the foreseeable future as a holding company with one
wholly-owned subsidiary, Recticon. The Company believes that it has sufficient
short-term and long-term liquidity either from cash on hand, credit arrangements
or cash flow from operations. Although the business in which the Company is
engaged is highly competitive and cyclical in nature, the Company does not
foresee any material impact during the upcoming calendar year on its net sales
or income from continuing operations.
The Company has reviewed its computer software and hardware requirements
with respect to the Year 2000 issue. Recticon is the only portion of the Company
which is affected by the Year 2000 issue.
Recticon has identified the changes in its computer software which were
required to make their computer systems Year 2000 compliant. The majority of the
changes which were required have been completed. The remaining system changes
are scheduled to be
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completed and tested during 1998. The costs to complete the remaining software
alterations are nominal.
ITEM 7. Financial Statements.
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See Index to Financial Statements after Signature Page.
ITEM 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
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Reference is made to the Company's Current Report on Form 8-K, dated
November 10, 1997, filed with the Commission on November 10, 1997, with respect
to the change of its accountants.
PART III
ITEM 9. Directors, Executive Officers, Promoters and
Control Persons
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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 3/1/98)
Bert Sager(1)(2) 1983 Co-Chairman of the Board
(72) and Director
Stephen A. Ollendorff 1983 Chairman of the Board,
(59) (1)(2) Chief Executive Officer,
Secretary and Director
Edward N. Epstein* 1995 President and Chief
(57) (1)(2) Operating Officer; Director
Larry V. Unterbrink (3) Treasurer
(63)
Robert P. Freeman - President and Chief
(63) Executive Officer
of Recticon
Paula Berliner 1990 Vice President; Director
(54) (1)(2)
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Year of
Election
as
Name and Age Director Position
- ------------ -------- --------
(As of 3/1/98)
Edward S. Croft, III 1997 Director
(54) (2)(4)(5)
Ronald J. Manganiello* 1997 Director
(48) (2)(4)(5)(6)
Kenneth I. Sawyer 1992 Director
(52) (2)(4)(5)
- --------------
*Designees of Edward N. Epstein. See "Certain Relationships and
Related Transactions."
(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.
(6) Mr. Manganiello was a member of the Board from November 1995 until January
1997, and was elected to the Board in December 1997.
- --------------
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 June 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.
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.,
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a consulting firm specializing in corporate structure and management. He has
also been, 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. Since November 1986, Mr. Unterbrink has
been a principal of Groupe Financier, a publishing and consulting firm
specializing in international finance. 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 Republic Security Financial Corp., a holding company for
Republic Securities Bank.
EDWARD S. CROFT, III, since August 1996, has been Managing Director of
Croft & Bender L.L.C., an investment banking firm and strategic financial
advisory firm; from April 1996 to August 1996 Mr. Croft was President of Croft &
Co., a financial advisory firm. For more than five years prior to April 1996,
Mr. Croft was Managing Director of The Robinson-Humphrey Company, Inc., an
investment banking firm. He is a director of CPI and Just For Feet, Inc., an
athletic footwear retailer.
RONALD J. MANGANIELLO has been a principal in the merchant banking firm of
New Canaan Capital LLC, since January 1996. Since July 1996 he has been a
principal of Sylhan LLC. From 1986 to January 1996, Mr. Manganiello was Chairman
and Chief Executive Officer of Hanger Orthopedic Group, Inc,, a publicly-traded
provider of patient care services and products for orthotic and prosthetic
rehabilitation; director of Hanger Orthopedic Group, Inc.
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.
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: Paula Berliner failed to file, on a timely
basis, a Statement of Changes in
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Beneficial Ownership on Form 4; Ronald J. Manganiello failed to file, on a
timely basis, an Initial Statement of Beneficial Ownership on Form 3; Stephen A.
Ollendorff failed to file, on a timely basis, his Annual Statement of Changes in
Beneficial Ownership on Form 5; and 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
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Summary Compensation Table
- --------------------------
The following table sets forth information for the fiscal years ended
December 31, 1997, December 31, 1996 and December 31, 1995, respectively,
respecting compensation earned by the Chief Executive Officer of the Company and
the executive officers (whose salary and bonus earned in Fiscal 1997 exceeded
$100,000) of the Company serving at the end of Fiscal 1997 (the "Named
Executives").
Long-Term
Annual Compensation(1) Compensation
------------------------------------ ------------
Securities
Name and Principal Underlying
Position Year Salary($) Bonus($) Options(#)(2)
- ------------------ ---- --------- -------- -------------
Stephen A. Ollendorff 1997(3) $254,615(4) -- 50,000
Chairman and Chief 1996(3) $264,042 -- --
Executive Officer 1995(3) $256,750 -- --
Edward N. Epstein 1997 $182,090(4) -- --
President and 1996 $150,000 -- --
Chief Operating 1995 $122,500(5) $ 30,000 150,000
Officer
Robert P. Freeman 1997 $215,920 $ 95,673 50,000
President and Chief 1996 $242,480 $150,000 --
Executive Officer - 1995 $171,340 $ 50,000 --
Recticon Enterprises,
Inc.
- --------
(1) No officer received perquisites which, are in the aggregate, greater than
or equal to the lesser of $50,000 or 10% of annual salary and bonus.
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(2) Represents options awarded under the 1991 Stock Option Plan.
(3) 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.
(4) As a result of an agreement between Messrs. Epstein and Ollendorff, Mr.
Ollendorff voluntarily reduced his annual compensation by $24,280 to
$242,475, effective July 1997, in order to increase Mr. Epstein's annual
compensation by $24,280 to $209,230. See "Employment Arrangements" below.
(5) This amount was paid to Mr. Epstein pursuant to his consulting arrangement
with the Company.
The Company does not have any annuity, retirement, pension, deferred or
incentive compensation plan or arrangement under which any executive officers
are entitled to benefits, nor does the Company have any long-term incentive plan
pursuant to which performance units or other forms of compensation are paid.
Executives who qualify are permitted to participate in the Company's 1991 Stock
Option Plan.
Stock Option Grants In Last Fiscal Year
- ---------------------------------------
The following table sets forth information concerning stock options granted
to the Named Executives during the fiscal year ended December 31, 1997:
No. of Percentage of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Per Expiration
Name Granted(#) Fiscal Year(%) Share($) Date
- ---- ---------- -------------- -------- ----------
Stephen A. 50,000 50 $1.58 6/1/07
Ollendorff
Edward N. - - - -
Epstein
Robert P. 50,000 50 $1.58 6/1/07
Freeman
- -------------
On March 2, 1998 the Stock Option and Compensation Committee authorized the
further amendment to certain of the Company's
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outstanding stock options (which had previously been amended on November 22,
1994). In exchange for each optionee agreeing to an increase in the exercise
price in the event of a "change of control" from $.5625 to $1.25 (equal to the
"fair market value" of the Company's Common Stock on March 2, 1998), the Company
would expand the definition of "change of control" to include the merger, sale
or liquidation of the business as set forth in (iv) below. The amended and
expanded definition of "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 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, (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, or (iv) on the day the stockholders of the Company
approve (A) a definitive agreement for the merger or other business combination
of the Company with or into another corporation pursuant to which the
stockholders of the Company do not own, immediately after the transaction, more
than 50% of the voting power of the corporation that survives and is a publicly
owned corporation and not a subsidiary of another corporation, or (B) a
definitive agreement for the sale, exchange, or other disposition of all or
substantially all of the assets of the Company, or (C) any plan or proposal for
the liquidation or dissolution of the Company. As of April 8, 1998, 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
April 8, 1998, no such loans to officers or employees have been made by the
Company.
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Year-End Option Values Table
The following table sets forth information at December 31, 1997 respecting
exercisable and non-exercisable options held by the Named Executives. During
Fiscal 1997, 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.
Number of Unexercised Value of Unexercised In-
Options Held the-Money Options
at December 31, 1997(1) Held at December 31, 1997(1)
-------------------------- ----------------------------
Not Not
Name Exercisable Exercisable Exercisable Exercisable
- ---- ----------- ----------- ----------- -----------
Stephen A.
Ollendorff 330,000 -0- $-0- $-0-
Edward N.
Epstein 150,000 -0- $80,250 $-0-
Robert P.
Freeman 100,000 -0- $14,000 $-0-
- ----------------
(1) Based upon the closing sales price of the Common Stock on December 31,
1997 ($1.44).
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.
Employment Arrangements
- -----------------------
The Company has entered into an employment agreement, for a minimum
three-year period, which has been renewed by its terms, with Stephen A.
Ollendorff, pursuant to which Mr. Ollendorff receives annual compensation of
$250,000, subject to annual cost-of-living adjustments, from the Company. On
January 17, 1996, Mr. Ollendorff's employment agreement was amended in order to
clarify
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certain terms and conditions, including the geographic location in which
services are to be provided, events of termination and his obligations with
respect to confidential information, non-solicitation of employees and covenants
not to compete. 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.
Effective January 1, 1997, Mr. Ollendorff receives a salary of $120,000 per
year as Chairman of the Board of Recticon Enterprises, Inc. ("Recticon"), which
amount is paid by the Company from the amounts paid by Recticon to 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.
The Company entered into an employment agreement with Edward N. Epstein,
effective January 1, 1996, for a three year period, for an annual compensation
of $150,000, subject to cost-of-living adjustments. In addition, the Stock
Option and Compensation Committee granted Mr. Epstein a $30,000 bonus in 1995.
Mr. Epstein agrees to 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 such employment agreement, Mr. Epstein had been retained as a
consultant to the Company, at the annual compensation of $120,000.
As a result of an agreement between Messrs. Epstein and Ollendorff, Mr.
Ollendorff voluntarily reduced his annual compensation by $24,280 to $242,475,
effective July 1997, in order to increase Mr. Epstein's annual compensation by
$24,280 to $209,230. Mr. Ollendorff has agreed not to accept any increased
compensation (other than cost-of-living increases) until Mr. Epstein's annual
compensation shall be equal to Mr. Ollendorff's.
Robert P. Freeman, President and Chief Executive Officer of Recticon,
entered into a letter agreement with Recticon as of February 15, 1995, which
provides that if, within one (1) year of a "change of control" (as defined in
the agreement) of Recticon, his employment is terminated without cause by
Recticon, or he resigns because of (i) assignment, without his written consent,
of any duties inconsistent with his position, duties, responsibilities and
status with Recticon, or change in his reported responsibilities, titles of
offices or any plan, act, scheme or design to constructively terminate him, or
(ii) reduction by Recticon of his annual base salary, he shall receive the
following
15
<PAGE>
benefits: (i) annual base salary through the date of termination; (ii) in lieu
of any further salary payments, severance pay on the tenth business day
following the date of termination, a lump sum equal to two times his annual base
salary; and (iii) if Mr. Freeman terminates his employment with Recticon between
the first and second year of a change of control for any reason other than "for
cause", Recticon will pay him the amount he would have been paid if he had
remained employed through the end of the second year of a change of control, but
in no event less than an amount equal to six months of base salary. In addition,
Recticon will maintain all medical, health and accident plans for a period of
the earlier of (i) 24 months or (ii) the date of which he is covered by reason
of his being employed by a new employer.
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,
1998, information as to those stockholders (other than members of the Company's
management), which is known by the Company to beneficially own more than 5% of
its outstanding Common Stock.
No. of Shares
Name and Address Beneficially Percentage
of Beneficial Owner Owned(1) of Class
- ------------------- -------- --------
Estate of Herbert Berman(2) 283,000 6.8%
405 Lexington Avenue
New York, NY 10174
Allen Landers, M.D.
1385 York Avenue
New York, NY 10021 253,800 6.1%
- ---------------
(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.
(2) Excludes 51,000 shares of Common Stock owned by the adult children of
the late Herbert Berman.
Ownership by Management
- -----------------------
The following table sets forth, as of March 30, 1998, the beneficial
ownership of the Common Stock of the Company of (i) each director (including the
Named Executives) of the Company, and (ii)
16
<PAGE>
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.
No. of Shares
Name and Address Beneficially Percentage
of Beneficial Owner(1) Owned(2) of Class
- ---------------------- ----------- ----------
Bert Sager 428,125(3)(4) 9.88%
Stephen A. Ollendorff 1,513,700 32.53%
(4)(5)(6)
Edward N. Epstein 957,500(4)(5) 22.10%
Paula Berliner 168,300(4) 4.00%
Robert P. Freeman 140,000(4) 3.30%
Edward S. Croft, III -- --
Ronald J. Manganiello 184,946(7) 4.43%
Kenneth I. Sawyer -- --
All directors and executive
officers as a group
(9 persons) 2,602,892(4) 51.31%
- -------------
(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 respect to all shares
of Common Stock beneficially owned by them.
(3) Does not include 200 shares owned by Marilyn Sager, his wife, as sole
trustee of a trust formed by her mother, 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 30, 1998: Mr. Sager - 160,000; Mr.
17
<PAGE>
Ollendorff - 330,000; Mr. Epstein - 150,000; Ms. Berliner - 70,000; Mr.
Freeman - 100,000; and all directors and executive officers as a group
(9 persons) - 900,000.
(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 32,946 shares owned of record by Lisa Manganiello, Mr.
Manganiello's wife
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. Mr. Epstein had designated himself and Ronald J.
Manganiello to Mr. Ollendorff with respect to the election of members of the
Board as acceptable to him.
18
<PAGE>
ITEM 13. Exhibits and Reports on Form 8-K
- -------- --------------------------------
(a) Exhibits:
---------
3.1 Certificate of Incorporation as filed and recorded with the Secretary
of State of Delaware, as amended.
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 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
19
<PAGE>
10.9 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.
10.10 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-K for the fiscal year ended December 31,
1995.
10.11 Asset Purchase Agreement, dated May 30, 1997, by and among Morgan
Tire & Auto, Inc., the Company and Automotive Industries, Inc. - incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated June
9, 1997.
10.12 Assumption Agreement, dated May 30, 1997, by and among Morgan Tire &
Auto, Inc., the Company and Automotive Industries, Inc. - incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form 8-K dated June
9, 1997.
10.13 Letter Agreement, dated as of February 15, 1995, between Robert P.
Freeman and Recticon.
21 List of subsidiaries of the Company.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
-----------------------
On November 10, 1997, the Company filed with the Commission a Current
Report on Form 8-K, dated November 10, 1997, reporting the change of its
accountants.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACORN HOLDING CORP.
(Registrant)
Dated: April 9, 1998 By: Stephen A. Ollendorff
---------------------------------------
Stephen A. Ollendorff, Chairman
of the Board and Chief Executive
Officer
In accordance with 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 9, 1998
- ------------------------ Chief Executive Officer
Stephen A. Ollendorff (Principal Executive
Officer), Secretary
and Director
Bert Sager Co-Chairman of the Board April 9, 1998
- ------------------------ and Director
Bert Sager
Edward N. Epstein President and Chief April 9, 1998
- ------------------------ Operating Officer
Edward N. Epstein Director
Larry V. Unterbrink Treasurer (Principal April 9, 1998
- ------------------------ Financial and Accounting
Larry V. Unterbrink Officer)
Paula Berliner Vice President and April 9, 1998
- ------------------------ Director
Paula Berliner
Edward S. Croft, III Director April 9, 1998
- ------------------------
Edward S. Croft, III
Ronald J. Manganiello Director April 9, 1998
- ------------------------
Ronald J. Manganiello
Kenneth I. Sawyer Director April 9, 1998
- ------------------------
Kenneth I. Sawyer
21
<PAGE>
FINANCIAL STATEMENTS AND REPORTS OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ACORN HOLDING CORP. AND SUBSIDIARIES
December 31, 1997 and 1996
F1
<PAGE>
CONTENTS
Page
----
ACORN HOLDING CORP. AND SUBSIDIARIES
- ------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-4
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET F-5
CONSOLIDATED STATEMENT OF INCOME F-6
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY F-7
CONSOLIDATED STATEMENT OF CASH FLOWS F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
AUTOMOTIVE INDUSTRIES, INC.
- ---------------------------
REPORT OF INDEPENDENT ACCOUNTANTS F-19
FINANCIAL STATEMENTS
BALANCE SHEETS F-20
STATEMENTS OF OPERATIONS F-21
STATEMENTS OF SHAREHOLDER'S EQUITY F-22
STATEMENTS OF CASH FLOWS F-23
NOTES TO FINANCIAL STATEMENTS F-24
F-2
<PAGE>
Page
----
ACORN VENTURE CAPITAL CORPORATION
- ---------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS F-31
FINANCIAL STATEMENTS
BALANCE SHEET F-32
STATEMENTS OF OPERATIONS F-33
STATEMENTS OF CHANGES IN NET ASSETS F-34
STATEMENTS OF CASH FLOWS F-35
NOTES TO FINANCIAL STATEMENTS F-37
F-3
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Acorn Holding Corp.
We have audited the accompanying consolidated balance sheet of Acorn
Holding Corp. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the 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 did not audit the financial
statements of Automotive Industries, Inc. as of and for the period ended May 31,
1997, at which date the net assets of that company were sold. The net operations
of that company for the period ended May 31, 1997 and the gain on the sale of
that company's net assets at that date are included in the consolidated
statement of income as "Discontinued Operations." This caption, except for the
elimination of intercompany transactions and related tax effects, was audited by
other auditors, whose report thereon has been furnished to us, and our opinion,
insofar as it relates to those amounts included in the statement of income of
Automotive Industries, Inc., is based solely on the report of the other
auditors.
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. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Acorn Holding
Corp. and Subsidiaries as of December 31, 1997, and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.
As explained in note A, the Company changed its method of reporting as of
January 1, 1997 from the fair value accounting basis used for business
development companies to the historical cost basis used for operating companies.
Therefore, the 1997 consolidated financial statements are not comparable to
previous years.
Grant Thornton LLP
Philadelphia, Pennsylvania
March 23, 1998
F-4
<PAGE>
Acorn Holding Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Operating Company)
December 31, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,882,526
Restricted cash 41,439
U.S. Treasury bills 986,706
Accounts receivable - trade 429,893
Current portion of note receivable
from sale of subsidiary 121,696
Current portion of note receivable
- employee 40,000
Inventories 2,506,763
Prepaid expenses 13,843
Deferred income tax asset 179,000
------------
Total current assets 7,201,866
------------
MACHINERY AND EQUIPMENT, net of accumulated
depreciation of $1,998,010 1,706,823
------------
OTHER ASSETS
Deposits and other 82,563
Note receivable from sale of subsidiary,
less current portion 243,393
Note receivable, less current portion
- employee 120,000
Other investments 9,981
Goodwill, net of amortization of $470,417 384,887
Deferred income tax asset 1,306,000
------------
2,146,824
------------
$ 11,055,513
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 121,062
Accounts payable 303,474
Accrued expenses
Salaries and bonus 142,672
Other 70,847
Machine purchase deposit liability 41,439
Deferred income 466,680
------------
Total current liabilities 1,146,174
------------
LONG-TERM DEBT, less current maturities 242,122
------------
DEFERRED INCOME 783,306
------------
COMMITMENTS --
STOCKHOLDERS' EQUITY
Common stock 55,389
Additional paid-in capital 14,090,156
Accumulated deficit (5,247,684)
Less common stock in treasury, at cost - 9,000 shares (13,950)
------------
Total stockholders' equity 8,883,911
------------
$ 11,055,513
============
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
Acorn Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(Operating Company)
Year ended December 31, 1997
Net sales $ 7,907,820
-----------
Costs and expenses
Cost of sales 5,209,795
Selling, general and administrative 1,977,433
-----------
7,187,228
-----------
Operating profit 720,592
-----------
Other income
Gain on investment 102,000
Interest income, net 83,616
-----------
185,616
-----------
Income from continuing operations
before income taxes 906,208
Income taxes 142,749
-----------
Income from continuing operations 763,459
-----------
Discontinued operations
Loss from operations of Automotive
Industries, Inc. (net of income tax
benefit of $239,589) (379,395)
Gain on sale of assets and liabilities
of Automotive Industries, Inc.
(net of income taxes of $700,138) 1,095,087
-----------
715,692
-----------
NET INCOME $ 1,479,151
===========
Earnings per share (note N)
Income from continuing operations $ 0.14
Income from discontinued operations 0.13
-----------
Net income $ 0.27
===========
Weighted average shares outstanding 5,538,164
=========
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
Acorn Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Operating Company)
Year ended December 31, 1997
<TABLE>
<CAPTION>
Retained
Additional earnings
Common paid-in (accumulated Treasury
stock capital deficit) stock Total
------ ---------- ------------ -------- -----
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 $ 55,389 $ 14,090,156 $ 1,999,143 $ -- $ 16,144,688
Cumulative adjustment
at January 1,
1997 due to
deregistration
as a business -- -- (8,725,978) -- (8,725,978)
development company
Treasury shares
purchased -- -- -- (13,950) (13,950)
Net income -- -- 1,479,151 -- 1,479,151
------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1997 $ 55,389 $ 14,090,156 $ (5,247,684) $ (13,950) $ 8,883,911
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
Acorn Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Operating Company)
Year ended December 31, 1997
Cash flows from operating activities
Net income $ 1,479,151
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 525,524
Deferred income tax asset 584,000
Gain on sale of assets (1,795,225)
Imputed interest 53,321
Loss on sale of assets 3,645
Deferred credit (53,321)
Decrease in assets
Accounts receivable 312,817
Inventories 256,719
Prepaid expenses and other assets 151,200
Increase (decrease) in liabilities
Accounts payable (829,655)
Accrued expenses 21,467
Deferred income (466,680)
-----------
Net cash provided by operating activities 242,963
-----------
Cash flows from investing activities
Purchase of machinery and equipment (678,544)
Redemption of treasury notes 1,739,232
Purchase of investments (2,735,919)
Proceeds from the sale of machinery and equipment 6,000
Note receivable 41,200
Proceeds from sale of assets 2,863,322
-----------
Net provided by investing activities 1,235,291
Cash flows from financing activities
Payment of long-term debt and capital lease (792,651)
Purchase of treasury stock (13,950)
-----------
Net cash used in financing activities (806,601)
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 671,653
Cash and cash equivalents at beginning of year 2,210,873
-----------
Cash and cash equivalents at end of year $ 2,882,526
===========
Supplemental disclosure of cash flow information
Interest paid $ 105,084
===========
The accompanying notes are an integral part of this statement.
F-8
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE A - ORGANIZATION AND PURPOSE
Acorn Holding Corp. (Acorn) (formerly Acorn Venture Capital Corporation) was
incorporated under the laws of the State of Delaware on September 8, 1983.
Acorn filed an election with the Securities and Exchange Commission to be
treated as a "business development company" under the Investment Company Act of
1940, as amended and operated as such until November 1997. In November 1997,
Acorn withdrew its election as an investment company, ceased to be a Business
Development Company, and commenced business as an operating company. At that
date, the name of the company was changed to Acorn Holding Corp.
The effect of the change in status from a business development company to an
operating company was to decrease retained earnings by $8,728,978 at January 1,
1997, principally due to reflecting its investment in Recticon Enterprises, Inc.
on a historical cost equity basis from a fair value basis.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Nature of Business and Principles of Consolidation
The consolidated financial statements include the accounts of Acorn and its two
wholly-owned subsidiaries: Automotive Industries, Inc. (Automotive) and Recticon
Enterprises, Inc. (Recticon) (collectively, the Company). All intercompany
transactions and balances have been eliminated. Automotive operated full-service
automotive retail stores until the assets of Automotive were sold as of May 31,
1997. Recticon manufactures monocrystalline silicon wafers which are used in the
microelectronics industry.
2. Use of Estimates
In preparing the financial statements in accordance with generally accepted
accounting principles, management is required 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
revenues and expenses during the reported period. Actual results could differ
from those estimates.
3. Concentration of Risk
The subsidiaries provide their products to customers throughout the United
States. The subsidiaries perform ongoing credit evaluations of their customers'
financial condition and generally require no collateral from their customers.
Bad debt expense is not significant.
(Continued)
F-9
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with a
maturity of three months or less when purchased.
5. Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
6. Machinery and Equipment
Machinery and equipment are stated at cost less accumulated depreciation.
Depreciation is provided by the straight-line method over estimated useful
lives. Maintenance and repair costs are charged to expense as incurred.
7. Deferred Income
Deferred income is an amount received from customers in exchange for Recticon's
commitment to provide certain quantities of product over periods extending until
September 2001. The deferred amounts are amortized on a straight-line basis over
the terms of the agreements.
8. Income Taxes
Deferred income tax assets and liabilities represent the tax effects, based on
current tax law, of future deductible or taxable amounts attributable to events
that have been recognized in the financial statements. Income tax expense
represents taxes payable, net of changes in deferred income tax assets and
liabilities during the year. The Company files a consolidated federal income tax
return which includes the subsidiaries' taxable income. Under the Company's
tax-sharing agreement with its subsidiaries, the subsidiaries are required to
pay to the Company an amount equivalent to what it would have paid had it filed
a separate company federal income tax return.
(Continued)
F-10
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
9. Earnings Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, which eliminates primary and fully
diluted earnings per share and requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common shareholders by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock. The adoption of SFAS No. 128 had no impact on earnings per
share of any year presented.
10. Goodwill
Goodwill represents the excess of cost over the fair value of the net assets
acquired for the purchase of Recticon. This excess is being amortized over a
period of 10 years.
NOTE C - SALE OF ASSETS AND LIABILITIES OF AUTOMOTIVE INDUSTRIES, INC.
Automotive entered into an agreement to sell its operating assets as of May 30,
1997. In accordance with the agreement, Automotive sold substantially all of its
assets and liabilities for a price of $2,500,000 plus an incentive amount equal
to 1% of the aggregate gross sales of all the currently existing 28 locations
for each of the three years beginning June 1, 1997 through May 31, 2000, not to
exceed $500,000.
As of December 31, 1997, Automotive and the purchaser entered into an agreement
which amended the original purchase price. Automotive and the purchaser agreed
to delete the incentive purchase amount discussed above, and the parties agreed
for the purchaser to pay Automotive an aggregate amount of $425,000 in equal
annual installments through June 2000, with no interest. The $425,000 has been
recorded at its present value, assuming an 8% imputed interest rate.
In accordance with the sale agreement, essentially all operating assets of that
company were sold and liabilities assumed by the buyer.
In accordance with generally accepted accounting principles, the operations of
Automotive are included in the accompanying consolidated statement of income as
"Discontinued Operations." In addition, the net gain on the sale of that
subsidiary is shown as "Gain on Sale of Assets and Liabilities of Automotive
Industries, Inc."
NOTE D - RESTRICTED CASH
Recticon has entered into agreements with customers and has purchased machinery
consisting of crystal growing and wafer finishing units. The customers have
provided cash to Recticon for the purchase and construction of the units. Title
of all machinery and equipment purchased is in the name of the customers.
Amounts received and not utilized are refundable. At the conclusion of the
contracts with these customers, title to the machinery will be given to Recticon
for a nominal sum.
F-11
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE E - U.S. TREASURY BILLS
U.S. Treasury bills consist of the following:
Face Value at
value Interest rate and due date December 31, 1997
----- -------------------------- -----------------
$500,000 5.38% due January 22, 1998 $493,345
500,000 6.00% due April 2, 1998 493,361
--------
$986,706
========
NOTE F - INVENTORIES
Inventories consist of the following:
Raw materials and supplies $1,122,426
Work in process 1,273,883
Finished goods 110,454
----------
$2,506,763
==========
NOTE G - CREDIT ARRANGEMENTS
Recticon has available a $750,000 revolving line of credit which is due on
demand. Interest is payable monthly at the prime rate plus 1/2% (8.25% at
December 31, 1997). The line is secured by Recticon's assets and is
guaranteed by Acorn. At December 31, 1997, there was $750,000 available
under the line of credit.
NOTE H - LONG-TERM DEBT
Recticon has long-term debt consisting of the following:
Term loan at 8.25% interest per annum; principal payable
in 48 monthly installments of $10,088, with
final payment due December 30, 2000; secured
by Recticon's assets $ 363,184
Less current maturities 121,062
-----------
$ 242,122
===========
(Continued)
F-12
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE H - LONG TERM DEBT - Continued
Annual maturities of long-term debt are as follows:
Year ending December 31,
1998 $ 121,062
1999 121,062
2000 121,060
----------
$ 363,184
===========
NOTE I - DEFERRED INCOME
Recticon received nonrefundable payments of $2,300,000 from customers in
exchange for its commitment to provide certain quantities of product over
periods extending until September 2001. The payments received have been
recorded as deferred income and are being amortized over the periods of the
contracts. The sales price of the product to be delivered under the
agreements is permitted to provide a gross profit not to exceed 35%. The
customers are not required to purchase any amount of product under the
agreements.
Annual recognition of deferred income is as follows:
Year ending December 31,
1998 $ 466,680
1999 300,000
2000 300,000
2001 183,306
-----------
$ 1,249,986
===========
NOTE J - INCOME TAXES
The Company depreciates its machinery and equipment for income tax purposes
at rates which vary from those used for financial reporting purposes. In
addition, the Company has reported certain income for tax purposes which is
being recognized over a period of years for financial statement purposes
(note I).
(Continued)
F-13
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE J - INCOME TAXES - Continued
The income tax provision consists of the following:
Current
Federal $ 35,000
Deferred
Federal 568,298
------------
$ 603,298
============
Deferred tax assets consist of the following:
Net operating loss carryforwards $ 2,079,000
Depreciation (137,000)
Deferred income 507,000
Carrying value of assets 386,000
Other 47,000
-----------
2,882,000
Less valuation allowance 1,397,000
-----------
$ 1,485,000
===========
A valuation allowance has been established against the deferred tax assets
of net operating loss carryforwards due to separate return limitations that
are applicable to $4,109,000 of losses. The income tax benefits must be
reduced to the extent that it is more likely than not the benefits may not
be realized.
The income tax provisions reconciled to the tax computed at the statutory
federal rate was as follows:
Tax at statutory federal rate 34.0%
State income taxes, net of federal benefits 4.5
Net operating losses (8.6)
Other (1.0)
-----
28.9%
=====
F-14
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE K - COMMITMENTS
Recticon leases its facilities under a lease agreement which expires on
February 28, 2009. Minimum lease payments are as follows:
Year ending December 31,
1998 $ 96,000
1999 96,000
2000 96,000
2001 116,000
2002 120,000
Thereafter 778,000
-----------
$ 1,302,000
===========
NOTE L - CONCENTRATIONS
For 1997, three customers of Recticon accounted for 39%, 18% and 11% of
sales, respectively.
For 1997, one vendor accounted for 12% of Recticon's materials purchases.
The Company and its subsidiaries maintain cash balances at financial
institutions, mutual funds and brokerage accounts located throughout the
United States. Accounts with financial institutions are insured by the
Federal Deposit Insurance Corporation up to $100,000. The Company believes
it is not exposed to any significant credit risk on cash and cash
equivalents.
NOTE M - RELATED PARTY TRANSACTIONS
During 1997, the Company and its subsidiaries paid a law firm, of which the
Company's Chief Executive Officer and Chairman is of counsel, $100,367 for
services rendered, including reimbursement of expenses.
F-15
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE N - EARNINGS PER SHARE
The Company's calculation of EPS in accordance with SFAS No.
128 is as follows:
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic EPS
Income from continuing operations $ 763,459 5,538,164 $ 0.14
Income from discontinued operations 715,692 5,538,164 0.13
---------- --------
Net income $1,479,151 5,538,164 $ 0.27
========== ========
Diluted EPS is not presented, as the effect of dilutive
securities, consisting of options, has no impact.
Of the total options outstanding, options to purchase 600,000 shares of
common stock ranging from $1.84 to $3.38 per share were outstanding during
the year. They were not included in the computation of diluted EPS
because the option exercise price was greater than the average market
price.
NOTE O - STOCK OPTIONS
The Company has issued stock options to various officers of the Company. The
stock options were issued at fair value as of the date of grant and have a
term of 10 years from the date of grant. The following is a summary of stock
options outstanding at December 31, 1997:
Weighted
average
exercise
Shares price
------ --------
Outstanding at January 1, 1997 900,000 $ 1.85
Granted 100,000 1.58
Cancelled (100,000) 1.16
--------
Outstanding at December 31, 1997 900,000 $ 1.83
========
Options exercisable at December 31, 1997 900,000 $ 1.83
========
(Continued)
F-16
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE O - STOCK OPTIONS - Continued
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
Options outstanding Options exercisable
------------------------------- -----------------------------
Weighted Weighted Weighted
Range of remaining average average
exercise contractual exercise exercise
price Shares life price Shares price
- ------------- ------ ----------- -------- ------ ---------
$0.88 - $1.16 200,000 7 years $1.02 200,000 $ 0.95
$1.58 - $2.00 550,000 6 years 1.18 550,000 1.18
$ 3.38 150,000 4 years 3.38 150,000 3.38
------- -------
900,000 900,000
======= =======
The Company applies Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, 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 upon
estimated fair value at the grant dates consistent with the method used in
SFAS No. 123, Accounting for Stock-Based Compensation, was immaterial.
According to the stock option plan, outstanding options can be exercised at
the fair value of the Company's common stock as of November 22, 1994
($0.5625) if a "change of control" of the Company, as defined in the
agreements, occurs. The plan was amended on March 2, 1998 to increase the
exercise price to $1.25 in the event of a "change in control." Assuming
these shares were exercised, there would be no material impact on earnings
per share.
As of December 31, 1997, no options had been exercised.
The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB Opinion No. 25 and related interpretations in accounting
for its plans and does not recognize compensation expense for its
stock-based compensation plans. Had compensation cost been determined
based on the fair value of the options at the grant date consistent with
SFAS No. 123, the Company's net earnings and EPS for the year ended December
31, 1997 would have been reduced to the pro forma amounts indicated below:
Net earnings
As reported $ 1,479,151
Pro forma 1,378,151
Earnings per share
As reported 0.27
Pro forma 0.25
(Continued)
F-17
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE O - STOCK OPTIONS - Continued
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants before January 1, 1998. The fair value of these options is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions for grants in fiscal year
1997: expected volatility of 40%, risk-free interest rate of 6.81%, and
expected life of 10 years. The weighted average fair value of options
granted during fiscal year 1997 was $1.59.
NOTE P - COMMON STOCK
At December 31, 1997, the Company had 20,000,000 shares of common stock
authorized, 5,538,906 shares issued, and 5,529,908 shares outstanding.
During November and December 1997, the Company repurchased 9,000 shares of
its common stock through the open market. The total cash outlay was $13,950.
NOTE Q - SUBSEQUENT EVENT
Subsequent to December 31, 1997, the Company announced its intention to
repurchase up to 1,500,000 shares of its common stock. Through February 2,
1998, 1,357,000 shares had been repurchased at a cost of $2,141,492.
F-18
<PAGE>
Report of Independent Accountants
Board of Directors
Automotive Industries, Inc.
We have audited the accompanying balance sheets of Automotive Industries, Inc.,
a wholly owned subsidiary of Acorn Venture Capital Corporation, as of May 31,
1997 and December 31, 1996, and the related statements of operations,
shareholder's equity and cash flows for the five months ended May 31, 1997 and
for the year ended December 31, 1996. 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 audits 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. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Automotive Industries, Inc. as
of May 31, 1997 and December 31, 1996, and the results of its operations and its
cash flows for the five months ended May 31, 1997 and for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
As more fully described in Note 2, on May 30, 1997 the Company sold
substantially all of its assets and liabilities to a third party.
Coopers & Lybrand L.L.P.
Jacksonville, Florida
August 21, 1997, except for the second paragraph of
Note 2, as to which date is December 3, 1997
F-19
<PAGE>
Automotive Industries, Inc.
BALANCE SHEETS
May 31, 1997 and December 31, 1996
ASSETS 1997 1996
------ ---- ----
Current assets:
Cash and cash equivalents $ 1,888,277 $ 1,161,632
Trade accounts receivable (net
of allowance for doubtful
accounts of $49,420 in
December 31, 1996)
-- 510,411
Receivable from parent 562,500 434,000
Other receivables -- 118,290
Receivable from purchaser 121,696 --
Inventory -- 1,570,991
Prepaid expenses 4,500 141,812
Deferred taxes -- 150,665
----------- -----------
Total current assets 2,576,973 4,087,801
Property and equipment, net -- 1,881,897
Deferred taxes 553,560 678,194
Goodwill, net -- 1,031,011
Receivable from purchaser 243,393 --
Other assets -- 136,547
----------- -----------
Total assets $ 3,373,926 $ 7,815,450
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 44,442 $ 2,153,241
Current portion of long-term debt 562,500 165,335
Current portion of capital leases -- 36,992
Accrued expenses 81,602 378,476
Deferred revenue -- 185,510
----------- -----------
Total current liabilities 688,544 2,919,554
Long-term debt -- 1,633,049
Obligations under capital leases -- 63,788
Deferred credit -- 505,619
----------- -----------
Total liabilities 688,544 5,122,010
----------- -----------
Contingencies and commitments (Notes
5 and 7)
Shareholder's equity:
Common stock, $.01 par value;
3,000 shares authorized,
142 shares issued and outstanding
1 1
Additional paid-in capital 2,359,234 2,793,234
Retained earnings (deficit) 326,147 (99,795)
----------- -----------
Total shareholder's equity 2,685,382 2,693,440
----------- -----------
Total liabilities and
shareholder's
equity $ 3,373,926 $ 7,815,450
=========== ===========
The accompanying notes are an integral part of these financial statements
F-20
<PAGE>
Automotive Industries, Inc.
STATEMENTS OF OPERATIONS
for the five months ended May 31, 1997 and the year ended December 31, 1996
1997 1996
---- ----
Sales:
Merchandise sales $ 5,112,751 $ 13,560,831
Labor sales 2,658,613 7,119,904
------------ ------------
Total sales 7,771,364 20,680,735
Cost of sales 3,528,024 9,282,321
------------ ------------
Gross profit 4,243,340 11,398,414
Operating expenses 4,393,415 11,403,224
Depreciation 196,342 395,474
Amortization 35,799 94,918
------------ ------------
Operating loss (382,216) (495,202)
Other (expense) income:
Gain on sale of assets and liabilities 1,795,225 --
Recovery of receivable and advances
made to affiliate, net -- 750,070
Management fees to parent (475,000) --
Severance pay to former employees (160,000) --
Interest expense (82,529) (151,606)
Other income 5,761 9,520
------------ ------------
Total other income, net 1,083,457 607,984
------------ ------------
Net income before income taxes 701,241 112,782
Income tax benefit (provision) (275,299) 1,262,859
------------ ------------
Net income $ 425,942 $ 1,375,641
============ ============
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
Automotive Industries, Inc.
STATEMENTS OF SHAREHOLDER'S EQUITY
for the five months ended May 31, 1997 and the year ended December 31,
Common Stock Additional Retained Total
------------ Paid-In Earnings Shareholder's
Shares Amount Capital (Deficit) Equity
------ ------ ------- --------- -------------
Balance at 142 $ 1 $ 3,054,834 $(1,475,436) $ 1,579,399
December 31,
1995
Dividends -- -- (261,600) -- (261,600)
($1,842 per
share)
Net income -- -- -- 1,375,641 1,375,641
Balance at 142 1 2,793,234 (99,795) 2,693,440
December 31,
1996
Dividends -- -- (434,000) -- (434,000)
($3,056 per
share)
Net income -- -- -- 425,942 425,942
-------- -------- ----------- ----------- -----------
Balance at May 142 $ 1 $ 2,359,234 $ 326,147 $ 2,685,382
31, 1997 ======== ======== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
Automotive Industries, Inc.
STATEMENTS OF CASH FLOWS
for the five months ended May 31, 1997 and the year ended December 31, 1996
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 425,942 $ 1,375,641
Adjustments to reconcile net
income to net cash (used in)
provided by
operating activities:
Deferred taxes 275,299 (828,859)
Gain on sale of assets (1,795,225) --
Depreciation and amortization 232,141 490,392
Imputed interest 53,321 97,740
Loss on sale of property and equipment 3,645 66,248
Changes in operating assets and
liabilities:
Trade accounts receivable and other
receivables 93,873 (12,342)
Note receivable from related party -- 341,053
Receivable from parent -- (434,000)
Inventory 98,524 372,137
Prepaid and other assets 89,292 52,463
Accounts payable (485,960) (548,234)
Accrued expenses 103,070 (38,772)
Deferred revenue -- 55,510
Deferred credit (53,321) (97,758)
----------- -----------
Net cash (used in) provided by
operating activities (959,399) 891,219
----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and
equipment 6,000 21,025
Purchases of property and equipment (148,366) (686,676)
----------- -----------
Net cash used in investing
activities (142,366) (665,651)
----------- -----------
Cash flows from financing activities:
Payments on long-term debt and capital
lease obligations (109,090) (275,702)
Dividends paid -- (261,600)
Capital contribution received from
parent -- 460,330
Proceeds from borrowings of long-term
debt -- 987,929
Loan to parent (600,000) --
Repayment of loan to parent 37,500 --
Proceeds from sale of assets 2,500,000 --
----------- -----------
Net cash provided by
financing activities 1,828,410 910,957
----------- -----------
Increase in cash and cash equivalents 726,645 1,136,525
Cash and cash equivalents at
beginning of year 1,161,632 25,107
----------- -----------
Cash and cash equivalents at end of year $ 1,888,277 $ 1,161,632
=========== ===========
Supplemental Disclosure of Cash
Flow Information:
Cash paid for interest $ 57,678 $ 53,866
Supplemental Schedule of Noncash Investing
and Financing Activities:
Imputed interest recorded from
bond discount $ -- $ 312,810
Dividend declared to parent for
satisfaction of receivable 434,000 --
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
Automotive Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations
Automotive Industries, Inc. (Automotive) is a Delaware corporation,
headquartered in Jacksonville, Florida. Automotive operated 28 retail stores
which sold automotive tires, accessories, and related services through a network
of company-owned retail stores located primarily in North Florida and South
Georgia. See Note 2 for sale of assets of Automotive. Automotive is a wholly
owned subsidiary of Acorn Venture Capital Corporation (Acorn).
Accounts Receivable
Automotive sold its products and services and extended credit to local
businesses and individual consumers located in North Florida and South Georgia.
Automotive maintained allowances for uncollectible accounts based on historical
experience, an evaluation of estimated collectibility of outstanding balances
and other relevant information. Automotive did not require collateral.
Cash and Cash Equivalents
Cash and cash equivalents represent demand deposits in banks and money market
accounts.
Inventory
Inventory of tires and automotive accessories were stated at the lower of
weighted average cost or market.
Property and Equipment
Property and equipment was stated at cost and is depreciated using straight-line
methods over the assets' estimated useful lives. Estimated useful lives were as
follows:
Years
----------
Buildings 15 to 40
Shop equipment 3 to 10
Office equipment and automobiles 3 to 10
Leasehold improvements 3 to 10
(Continued)
F-24
<PAGE>
Automotive Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued
Goodwill
Goodwill represented the excess of cost over the fair value of the net assets
acquired and was being amortized on a straight-line basis over 15 years.
Deferred Revenue
Automotive sold a road hazard warranty on certain of its tires. This revenue was
deferred and recognized over the warranty period in which service costs were
incurred.
Deferred Taxes
Automotive's parent company, Acorn, files a consolidated federal income tax
return which includes Automotive's taxable income. Under Acorn's tax-sharing
agreement with its subsidiaries, Automotive is required to pay or receive
to/from Acorn an amount equivalent to what it would have paid or received had
Automotive filed a separate federal income tax return.
Deferred income tax liabilities and assets are determined using currently
enacted tax rates applicable to the period in which deferred tax liabilities or
assets are expected to be settled or realized. The tax benefits recognized must
be reduced by a valuation allowance to the extent it is more likely than not the
benefits may not be realized.
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. SALE OF ASSETS AND LIABILITIES:
Automotive entered into an agreement to sell its operating assets as of May 30,
1997. In accordance with the agreement, Automotive has sold substantially all
of its assets and liabilities for a price of $2,500,000 plus an incentive amount
equal to one percent (1%) of the aggregate gross sales of all the currently
existing 28 locations for each of the three years beginning June 1, 1997 through
May 31, 2000 not to exceed $500,000.
(Continued)
F-25
<PAGE>
Automotive Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
2. SALE OF ASSETS AND LIABILITIES, Continued:
As of December 3, 1997, Automotive and purchaser entered into an agreement
which amended the original purchase price. Automotive and purchaser agreed to
delete the incentive purchase amount discussed above and the parties agreed for
the purchaser to pay Automotive an aggregate amount of $425,000 to be paid in
equal annual installments through June 2000, with no interest. The $425,000 has
been recorded at its present value assuming a 8% imputed interest rate.
In accordance with the agreement, the following assets were sold: all trade
accounts receivable and other miscellaneous receivables excluding receivables
from Acorn and from any officers, directors or affiliates; all inventory; all
property and equipment; all leases used in the conduct of business; all prepaid
expenses excluding any prepaid income taxes; all guarantees, warranties,
indemnities and similar rights related to any asset; all goodwill; and all cash
and cash equivalents.
In addition, Automotive assigned the following liabilities to the purchaser:
All current and long-term debt other than such debt owed to Falken Tire in
excess of $300,000; all regular accounts payable excluding amounts due to
officers or affiliates; all accrued expenses; all current sales tax payable; all
deferred revenue; all capitalized lease obligations; all liabilities and
obligations under contracts accrued or to be performed from and after the
closing date; all indemnities, warranties, service or other obligations and
liabilities arising out of or relating to goods manufactured or sold or services
provided by the seller on or before the closing date.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
1997 1996
---- ----
Land $ -- $ 176,100
Buildings and building improvement -- 203,904
Plant and shop equipment -- 1,215,140
Office equipment and automobiles -- 694,562
Leasehold improvements -- 440,353
-------------- -----------------
-- 2,730,059
Less accumulated depreciation -- (848,162)
-------------- -----------------
$ -- $ 1,881,897
============== =================
F-26
<PAGE>
Automotive Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
4. LONG-TERM DEBT:
Long-term debt is summarized as follows at
December 31:
1997 1996
---- ----
Non-interest bearing note issued in connection
with Falken Tire Corporation supply agreement
due December 31, 2001 (discounted at an imputed
interest rate of 13%) net of unamortized
discount of $312,810 at December 31, 1996,
without collateral $ 562,000 $ 579,690
Non-interest bearing note payable to Pirelli
Armstrong in installments through February 1, 2002
(discounted at an imputed interest rate of 13%) net
of unamortized discount of $192,809 at December 31,
1996 without collateral
-- 853,191
Note payable, interest at 11.75%, payable in monthly
installments of $258, through May 1, 2000,
collateralized by a vehicle
-- 8,796
Note payable, interest at 12.77% payable in monthly
installments of $3,781, through May 1, 2002,
collateralized by computer equipment
-- 124,117
Note payable, interest at 13.15% payable in monthly
installments of $5,069, through July 1, 2000,
collateralized by computer equipment
-- 171,705
Note payable, interest at 12.77% payable in monthly
installments of $1,646, through December 2000,
collateralized by computer equipment
-- 60,885
---------- ----------
Total 562,000 1,798,384
Less current portion 562,500 165,335
---------- ----------
Long-term portion $ -- $1,633,049
========== ==========
The non-interest bearing note to Pirelli Armstrong (Pirelli) was renegotiated on
November 20, 1996 and extended the terms through February 1, 2002. The note was
in the form of a supply agreement, however, Automotive is no longer selling
Pirelli tires through the supply agreement and Automotive was paying off the
related note payable in monthly installments through the purchase date. The
Pirelli note was assumed by the purchasers.
(Continued)
F-27
<PAGE>
4. LONG-TERM DEBT - Continued
The non-interest bearing note issued in connection with the Falken Tire
Corporation (Falken) supply agreement was renegotiated on January 1, 1997, which
provided additional proceeds of $600,000 and extended the terms through December
31, 2001. Interest was imputed on this transaction at a rate deemed commensurate
with the current rate of borrowing and, accordingly, debt discount totaling
$312,810 was recorded as a reduction of the carrying value of this debt at
December 31, 1996. The Falken agreement provides that if the amount of tire
purchases required by the agreement is not met over specified periods of time,
the debt becomes due upon demand and interest accrues at a rate of 1.5% per
month or at the maximum rate permitted by law, whichever is less thereafter. At
December 31, 1996, Automotive was in compliance with all debt covenants. As of
May 31, 1997, the purchaser assumed a significant amount of Automotive's
outstanding debt, and the portion of the debt not assumed by the purchaser of
$562,500 at May 31, 1997 was paid by Automotive on June 2, 1997.
The deferred credit of $505,619 at December 31, 1996 resulted from imputed
interest on the Pirelli and Falken notes and was amortized as a reduction of
cost of goods sold over the lives of the related notes. Amortization of $53,321
and $97,740 was recorded for the five months ended May 31, 1997 and the year
ended December 31, 1996. This deferred credit was assumed by the purchaser as a
result of the sale of Automotive on May 31, 1997.
5. LEASES:
The cost and related accumulated amortization of assets under capital leases was
$144,517 and $24,500 at December 31, 1996.
Automotive also leases certain store sites, office space, and equipment under
operating leases. The leases expire at various dates through August 15, 2000.
Total rent expense for the five months ended May 31, 1997 and year ended
December 31, 1996 was $562,601 and $1,389,080, respectively.
All of the leases were assumed by the purchaser.
6. INCOME TAXES:
The provision (benefit) for income taxes for the five months ended
May 31, 1997 and the year ended December 31, 1996 consists of the following:
1997 1996
---- ----
Current $ -- $ (434,000)
Deferred 275,299 (828,859)
---------- -----------
Income tax expense (benefit) $ 275,299 $(1,262,859)
========== ===========
(Continued)
F-28
<PAGE>
Automotive Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
6. INCOME TAXES, Continued:
The benefit (provision) for income taxes on income differs from the amount
computed by applying the U.S. federal income tax (35%) because of the effect of
the following items:
1997 1996
---- ----
Tax expense at federal statutory rate $ 245,434 $ 39,500
Net operating losses utilized in the
current year by
consolidated group -- (434,000)
State tax, net of federal benefit 25,028 --
Valuation allowance -- (828,859)
Other 4,837 (39,500)
----------- -----------
$ 275,299 $(1,262,859)
=========== ===========
Significant components of Automotive's deferred tax liabilities and assets as
of May 31, 1997 and December 31, 1996 are as follows:
1997 1996
---- ----
Deferred tax assets (liabilities):
Operating loss carryforward, expires 2010 $ 553,560 $ 739,000
Bad debt reserve -- 4,521
Inventory costs -- 62,631
Property and equipment -- (70,509)
Other assets -- 9,703
Accrued vacation and deferred revenue -- 83,513
--------- ---------
Total net deferred tax assets $ 553,560 $ 828,859
========= =========
Pursuant to a tax sharing agreement with Acorn, deferred tax assets (principally
arising from net operating loss carryforwards) can be used within the
consolidated group, therefore no valuation allowance has been recognized, since
it is more likely than not that the deferred tax assets will be realized.
7. DEFINED CONTRIBUTION PENSION PLAN:
Automotive had a defined contribution pension plan which covers all full-time
employees who have completed six months of service and are 21 years of age or
older. Employer matching contributions to the plan are at the discretion of
management. No employer contributions were made in 1997 and 1996.
F-29
<PAGE>
Automotive Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
8. FINANCIAL INSTRUMENTS:
Financial instruments that subject Automotive to concentrations of credit risk
are cash and receivables. Automotive places its cash in what it believes to be
high quality financial institutions which may, at times, exceed FDIC insurance
limits. In management's opinion, there are no significant concentrations of
credit risk at May 31, 1997.
9. RELATED PARTY TRANSACTIONS:
During 1996, Automotive received $997,500 from an affiliate for payment of
receivables outstanding at December 31, 1995 that were written off in 1995. The
affiliate received the above funds from a litigation settlement with a third
party. During 1996, approximately $247,430 of expenses were allocated to the
affiliate which were incurred by Automotive on behalf of the affiliate.
During 1996, Automotive approved and paid dividends of $261,600. The Board of
Directors of Acorn approved a capital contribution of $677,335 to Automotive for
1995, of which $460,330 was paid in 1996.
During 1996, Automotive recorded a receivable of $434,000 due from Acorn in
connection with the tax sharing agreement entered into during the year. In 1997,
Automotive declared a dividend of $434,000 to Acorn for satisfaction of this
receivable. During 1997, Automotive advanced $1,075,000 to Acorn. This amount
was comprised of $475,000 of management fees and a $600,000 note receivable from
Acorn at 8% interest with the principal due on May 31, 1997.
Subsequent to May 31, 1997 Automotive Industries, Inc. declared a
liquidating dividend of its remaining assets to Acorn.
F-30
<PAGE>
Report of Independent Accountants
Board of Directors
Acorn Venture Capital Corporation
We have audited the accompanying balance sheet of Acorn Venture Capital
Corporation as of December 31, 1996, and the related statements of operations,
changes in net assets and cash flows for the two years 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 audits.
We conducted our audits 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. 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 audits provide a
reasonable basis for our opinion.
As explained in the notes to the financial statements, as of December 31,
1996 the financial statements include securities valued at $16,812,981
(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 the results of its operations, changes
in net assets and cash flows for the two years then ended in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
March 28, 1997
F-31
<PAGE>
Acorn Venture Capital Corporation
BALANCE SHEET
December 31, 1996
ASSETS
Investments at fair or market value
Investments in and advances to
majority-owned companies
Recticon Enterprises, Inc.(100% owned) $ 13,900,000
Automotive Industries, Inc.(100% owned) 2,900,000
ServiceMax Tire & Auto Centers, Inc.
(100% owned) --
------------
16,800,000
Other common stocks and warrants 12,981
Certificate of deposit 100,000
U.S. Treasury bills 250,341
------------
Total investments (cost of $13,122,865) 17,163,322
Cash and cash equivalents 951,782
Receivable from affiliates 458,093
Other assets 4,555
------------
Total assets 18,577,752
LIABILITIES
Accounts payable 36,445
Payables to affiliates 434,000
Deferred income taxes 1,962,619
------------
Net assets $ 16,144,688
NET ASSETS
Common stock, par value $0.01 per share,
authorized 20,000,000 shares, issued
and outstanding 5,538,906 shares $ 55,389
------------
Additional paid-in capital 14,090,156
Accumulated
Net investment income 274,607
Net realized losses on investments (886,921)
Net unrealized accumulated appreciation
of investments (net of taxes
of $1,429,000) 2,611,457
------------
1,999,143
------------
Net assets applicable to outstanding
common shares (equivalent to $2.91 per
share based on outstanding common shares of
5,538,906) $ 16,144,688
============
The accompanying notes are an integral part of this statement.
F-32
<PAGE>
Acorn Venture Capital Corporation
STATEMENTS OF OPERATIONS
Year ended December 31,
1996 1995
----------- -----------
Investment income
Interest, including interest on notes
from majority-owned
companies of $67,740 in 1995 $ 15,062 $ 101,312
Dividends from majority-owned companies 661,600 447,500
Consulting and management fees from
majority-owned companies 600,000 182,500
Other income 752,500 10,000
----------- -----------
2,029,162 741,312
----------- -----------
Expenses
Compensation 552,842 374,542
Consulting fees 12,568 262,565
Legal and accounting 162,812 71,809
Registration fees 13,545 13,501
Interest and other 105,261 156,048
----------- -----------
847,028 878,465
----------- -----------
Net investment income (loss) 1,182,134 (137,153)
----------- -----------
Realized and unrealized gains (losses)
on investments
Realized gains (losses) from
sales of investments 25,000 (89,061)
Net change in unrealized
appreciation of investments 1,533,000 4,704,559
----------- -----------
Net realized and unrealized
gains on investments 1,558,000 4,615,498
----------- -----------
Net increase in net assets
resulting from operations
before income tax expense 2,740,134 4,478,345
Income tax expense 779,000 650,000
----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $ 1,961,134 $ 3,828,345
=========== ===========
Per share amounts
Net investment income (loss) $ 0.21 $ (0.02)
Net realized gains (losses)
on investments -- (0.02)
Net unrealized gains on
investments 0.28 0.84
Income tax provision (0.14) (0.11)
----------- -----------
$ 0.35 $ 0.69
=========== ===========
Weighted average number of shares
used in per share
computations 5,658,748 5,584,892
=========== ===========
The accompanying notes are an integral part of these statements.
F-33
<PAGE>
Acorn Venture Capital Corporation
STATEMENTS OF CHANGES IN NET ASSETS
Year ended December 31,
1996 1995
------------ -------------
Net investment income (loss) $ 1,182,134 $ (137,153)
Net realized gains (losses)
from sales of investments 25,000 (89,061)
Net change in unrealized
appreciation of investments 1,533,000 4,704,559
Income tax provision (779,000) (650,000)
------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 1,961,134 3,828,345
Capital share transactions
Treasury stock (50,000 shares) -- (39,000)
------------ ------------
Net increase in net assets 1,961,134 3,789,345
Net assets at beginning of year 14,183,554 10,394,209
------------ ------------
Net assets at end of year $ 16,144,688 $ 14,183,554
============ ============
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
Acorn Venture Capital Corporation
STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995
----------- -----------
Cash flows from operating activities
Net increase in net assets resulting
from operations $ 1,961,134 $ 3,828,345
Adjustments to reconcile net
increase in net assets resulting
from operations to net cash
provided by (used in)
operating activities
Change in unrealized appreciation of
investments (1,533,000) (4,704,559)
(Gains) losses on sales of investments (25,000) 89,061
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)
Other assets 1,628 131,881
Accounts payable 32,053 (1,508)
Payables to affiliates 390,456 43,544
----------- -----------
Net cash provided by (used in)
operating activities 2,074,797 (13,236)
----------- -----------
Cash flows from investing activities
Investment in Recticon Enterprises, Inc. (160,000) --
Investment in Automotive Industries, Inc. (460,330) (217,005)
Investment in ServiceMax Tire & Auto
Centers, Inc. -- (1,200,000)
Proceeds from sale of investment
in Madison Avenue Propulsion
Corporation -- 388,555
Purchase of convertible debentures -- 100,000
Collections on notes receivable 25,000 20,000
Purchase of certificates of deposit (200,000) --
Redemption of certificates of deposit 100,000 100,000
Purchase of U.S. Treasury bills (740,710) (199,093)
Proceeds from sales of U.S. Treasury bills 689,462 593,691
Purchase of equipment and other -- (5,325)
----------- -----------
Net cash used in investing activities (746,578) (419,177)
----------- -----------
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 (used in) provided
by financing activities (760,000) 760,000
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 568,219 327,587
Cash and cash equivalents at
beginning of year 383,563 55,976
----------- -----------
Cash and cash equivalents at
end of year $ 951,782 $ 383,563
=========== ===========
(Continued)
F-35
<PAGE>
Acorn Venture Capital Corporation
STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995
-------- -------------
Supplemental disclosure of cash flow information
Cash paid for taxes $ 38,000 $ --
======== =============
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 $ --
======== =============
The accompanying notes are an integral part of these statements.
F-36
<PAGE>
Acorn Venture Capital Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
1. 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 was a
nondiversified, closed-end management investment company and has filed with
the Securities and Exchange Commission 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 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.
2. Investments
The Company held three wholly-owned subsidiaries during 1996 - Recticon
Enterprises, Inc. (Recticon), Automotive Industries, Inc. (Automotive) and
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 B, C and D).
The net change in unrealized appreciation of investments for the years ended
December 31, 1996 and 1995 was $1,533,000 and $4,704,559, respectively, and
includes gross unrealized appreciation of $1,533,000 and $9,304,250,
respectively, and gross unrealized depreciation of $0 and $4,599,691,
respectively.
3. 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.
(Continued)
F-37
<PAGE>
Acorn Venture Capital Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued
4. 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.
Under the Company's tax sharing agreement with its 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.
5. 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.
6. 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 (SFAS) No. 128, Earnings Per Share. SFAS
No. 128 is effective for financial statements issued for periods ending
after December 15, 1997. The Company has determined its earnings per share
based on Accounting Principles Board (APB) Opinion No. 15.
NOTE B - 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. The
Company's wholly-owned investments at December 31, 1996 are as follows:
Recticon Enterprises, Inc.
Value at
Number of Type of issue December 31,
shares and name of issuer 1996
- ----------------- ------------------------- ------------------------
100 Common stock of Recticon
Enterprises, Inc.,
100% owned (86.1% of net
assets at December 31,
1996) $13,900,000
===========
(Continued)
F-38
<PAGE>
Acorn Venture Capital Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE B - INVESTMENTS IN AND ADVANCES TO MAJORITY-OWNED COMPANIES - Continued
During the year ended December 31, 1996, the Company made capital
contributions to Recticon totalling $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 10.25% 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 totalling $600,000 and
$195,000 during 1996 and 1995, respectively. 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.
The Board of Directors approved increases in the valuation of the investment
in Recticon from $12,500,000 at December 31, 1995 to $13,900,000 at December
31, 1996. Cost at December 31, 1996 amounted to $3,355,750.
The following selected financial data of Recticon has been derived from the
audited financial statements as of and for the years ended December 31, 1996
and 1995:
1996 1995
---------- ----------
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
==========
Total liabilities $3,643,883
Stockholders' equity 2,333,284
----------
$5,977,167
==========
(Continued)
F-39
<PAGE>
Acorn Venture Capital Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE B - INVESTMENTS IN AND ADVANCES TO MAJORITY-OWNED COMPANIES - Continued
Automotive Industries, Inc.
Value at
Number of Type of issue December 31,
shares and name of issuer 1996
- ----------------- ------------------------- ------------------------
142 Common stock of Automotive
Industries, Inc., 100%
owned (18% of net assets
at December 31, 1996) $ 2,900,000
===========
The Board of Directors valued the investment in Automotive at
$2,900,000. Cost at December 31, 1996 amounted to $3,577,335.
During 1996 and 1995, Automotive declared and paid dividends totalling
$261,600 and $447,500, respectively. 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.
Subsequent to year-end, the Company received $1,075,000 from Automotive.
This amount was comprised of management fees of $475,000 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 financial statements.
1996 1995
------------ ------------
Statement of Operations Data
Total net sales $ 20,680,735 $ 19,307,943
Total cost of goods sold 9,282,321 8,657,925
------------ ------------
Gross margin 11,398,414 10,650,018
Other income 607,984 75,475
Total expenses (11,893,616) (12,314,179)
Income tax benefit 1,262,859 83,000
------------ ------------
Net income (loss) $ 1,375,641 $ (1,505,686)
============ ============
(Continued)
F-40
<PAGE>
Acorn Venture Capital Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE B - INVESTMENTS IN AND ADVANCES TO MAJORITY-OWNED COMPANIES - Continued
Balance Sheet Data
Total assets $ 7,815,450
============
Total current liabilities $ 2,919,554
Other liabilities and debt 2,202,456
Stockholders' equity 2,693,440
------------
$ 7,815,450
============
During 1995, Automotive wrote off approximately $1,400,000 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.
ServiceMax Tire & Auto Centers, Inc.
The Company has 23,210 shares of common stock of ServiceMax with an
accumulated cost of $5,619,503 as of December 31, 1996.
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 $-0- due to continued operating losses and a
significant liability. During 1996, the operations of ServiceMax were
closed.
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.
NOTE C - NOTES RECEIVABLE
The Company held a $500,000 note receivable from Digital Products
Corporation which the Board of Directors valued at $-0- at December 31, 1996
and 1995. In connection with the Company's note, the Company held 750,000
restricted warrants which expired during 1996.
(Continued)
F-41
<PAGE>
Acorn Venture Capital Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE D - OTHER COMMON STOCK AND WARRANTS
Value at
Number of December 31,
shares Type of issue and name of issuer 1996
- --------- ---------------------------------------------- ------------
Common stock - restricted
-------------------------
49,565 Amerinex Artificial Intelligence, Inc. $ 9,913
24 Cardiac Control Systems, Inc. 68
Warrants - restricted
30,000 Aqua Care Systems, Inc. - each entitling the holders
to purchase 1 common share at $3.00 per share,
exercisable through April 17, 1997 3,000
------------
(0.08% of net assets at December 31, 1996) $ 12,981
============
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 $0.20 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.
NOTE E - CERTIFICATE OF DEPOSIT
The certificate of deposit for $100,000 has an interest rate of 4.85%,
matures on May 12, 1997, and represents 0.62% of net assets at December 31,
1996.
NOTE F - U.S. TREASURY BILLS
Value at
Number of December 31,
shares Type of issue and name of issuer 1996
- --------- ---------------------------------------------- ------------
$250,000 U.S. Treasury bill, 5.05%, due March 27,
1997 (1.5% of net assets at December 31,
1996) $ 250,341
===========
F-42
<PAGE>
Acorn Venture Capital Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE G - INCOME TAXES
The income tax provision for the years ended December 31, 1996 and 1995 is
as follows:
1996 1995
-------- -----------
Current
Federal $ 293,000 $ --
State -- --
-------- -----------
293,000 --
-------- -----------
Deferred
Federal 429,000 574,000
State 57,000 76,000
-------- -----------
486,000 650,000
-------- -----------
$779,000 $ 650,000
======== ===========
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, the significant components of the Company's deferred income taxes
are as follows:
Deferred tax assets (liabilities)
Net operating loss carryforwards $ 294,000
Unrealized appreciation on investments (2,256,619)
-----------
$(1,962,619)
============
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 carryforward of approximately $763,000
that begins to expire in 2006.
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 before income taxes are as follows:
1996 1995
------------ -------------
Income tax expense at statutory rate $ 932,000 $ 1,570,000
Reversal of valuation allowance - (1,396,000)
State income taxes and other (153,000) 476,000
----------- ------------
$ 779,000 $ 650,000
=========== ============
F-43
<PAGE>
Acorn Venture Capital Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE H - 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 at January 1, 1995 5,588,906 $ 55,889 $ 14,128,656 $ -- $ 14,184,545
Receipt of 50,000
shares per settlement
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>
NOTE I - RELATED PARTY TRANSACTIONS
During 1996 and 1995, the Company paid a law firm, of which the Company's
co-chairman is of counsel, $37,618 and $27,692, 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, this vice president received an annual salary of $216,000 from
Automotive.
The president of Recticon was a vice president of the Company. The vice
president was also a shareholder of the Company through December 1995.
During 1995, this vice president received an aggregate annual salary of
$171,000 from Recticon and Data Access Systems, Inc., a former investee, but
received no compensation from the Company.
F-44
<PAGE>
Acorn Venture Capital Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE J - 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 10 years from the date of grant. The following is a summary
of the stock options outstanding:
1996 1995
------------------- --------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
-------- -------- -------- --------
Outstanding at beginning of year 900,000 $ 1.85 790,000 $ 2.11
Granted -- -- 150,000 0.88
Cancelled -- -- (40,000) 3.38
------- ------- ------- --------
Outstanding at end of year 900,000 $ 1.85 900,000 $ 1.85
======= ======= ======= ========
Options exercisable at end of year 800,000 $ 1.94 700,000 $ 2.09
======= ======= ======= ========
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
Options outstanding Options exercisable
-------------------------------- -----------------------
Weighted Weighted Weighted
Range of remaining average average
exercise contractual exercise exercise
price Shares life price Shares price
- -------------- -------- ----------- --------- -------- ---------
$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
------- -------
900,000 7 years 1.85 800,000 1.94
======= =======
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, 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 No. 123, Accounting for
Stock-Based Compensation, had no effect on earnings per share.
(Continued)
F-45
<PAGE>
Acorn Venture Capital Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE J - STOCK OPTIONS - Continued
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 $0.32 per share.
As of December 31, 1996, no options had been exercised.
NOTE K - 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's sales are attributable to three customers.
F-46
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation as filed
and recorded with the Secretary of
State of Delaware, as amended
10.13 Letter Agreement, dated as of
February 15, 1995, between Robert
P. Freeman and Recticon
21 List of subsidiaries of the Company
27 Financial Data Schedule
EXHIBIT 3.1
FILED
Sep 8 1983
Secretary of State
CERTIFICATE OF INCORPORATION
OF
ACORN VENTURE CAPITAL CORPORATION
THE UNDERSIGNED, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the provisions of the General
Corporation Law of the State of Delaware, do hereby certify as follows:
FIRST: The name of the corporation is Acorn Venture Capital Corporation.
SECOND: The registered office of the corporation is to be located at 306
South State Street, in the City of Dover, in the County of Kent, in the State of
Delaware. The name of its registered agent at that address is the United States
Corporation Company.
THIRD: The purpose of the corporation is to (i) advise, counsel, consult
with, and otherwise to render significant managerial assistance to, all types of
business and corporate entities in their formation, growth, development,
financial planning, marketing, management, practices, general operation, and
related activities, and to supply all manner of goods and services and to take
all other action necessary to the foregoing, and (ii) engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of Delaware.
FOURTH: The total number of shares of common stock which the corporation is
authorized to issue is 10,000,000, $.01 par value.
FIFTH: The name and address of the sale incorporator is as follows:
NAME ADDRESS
Stephen A. Ollendorff 405 Lexington Avenue
New York, New York 10174
<PAGE>
SIXTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the corporation, and for further
definition, limitation and regulation of the powers of the corporation and of
its directors and stockholders:
(1) The number of directors of the corporation shall be such as from time
to time shall be fixed by, or in the manner provided in the by-laws. Election of
directors need not be by ballot unless the by-laws so provide.
(2) The Board of Directors shall have power without the assent or vote of
the stockholders:
(a) To make, alter, amend, change, add to or repeal the by-laws of the
corporation; to fix and vary the amount to be reserved for any proper purpose;
to authorize and cause to be executed mortgages and liens upon all or any party
of the property of the corporation; to determine the use and disposition of any
surplus or net profits; and to fix the times for the declaration and payment of
dividends.
(b) To determine from time to time whether, and to what extent, and at what
times and places, and under what conditions and regulations, the accounts and
books of the corporation (other than the Stock Ledger) or any of them, shall be
open to the inspection of the stockholders.
(3) The directors in their discretion may submit any contract or act for
approval or ratification at any annual meeting of the stockholders or at any
meeting of the stockholders called for the purpose of considering any such act
or contract, and any contract or act that shall be approved or be ratified by
the vote of the holders of a majority of the stock of the corporation which is
represented in person or by proxy at such meeting and entitled to vote thereat
(provided that a lawful quorum of stockholders be there represented in person or
by proxy) shall be as valid and as binding upon the corporation and upon all the
stockholders as though it had been approved or ratified by every stockholder of
the corporation, whether or not the contract or act would otherwise be open to
legal attack because of directors' interest, or for any other reason.
(4) In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the corporation; subject, nevertheless, to the provisions of the statutes of
Delaware, of this certificate, and to any by-laws from time to time made by the
stockholders; provided, however, that no by-laws so made shall invalidate any
prior act of the directors which would have been valid if such by-law had not
been made.
<PAGE>
SEVENTH: The corporation shall, to the full extent permitted by Section 145
of the Delaware General Corporation Law, as amended from time to time, indemnify
all persons whom it may indemnify pursuant thereto.
EIGHTH: Whenever a compromise or arrangement is proposed between the
corporation and its creditors or any class of them and/or between the
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware, may, on the application in a summary
way of the corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the corporation under the
provisions of Section 279 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
corporation under the provisions of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths (3/4) in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of the
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of the corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of the corporation, as the case may be,
and also on the corporation.
NINTH: The corporation reserves the right to amend, alter, change or repeal
any provision contained in this certificate of incorporation in the manner now
or hereafter prescribed by law, and all rights and powers conferred herein on
stockholders, directors and officers are subject to this reserved power.
The undersigned incorporator affirms that the statements made herein are
true under the penalties of perjury and executes this Certificate of
Incorporation the 7th day of September, 1983.
Stephen A. Ollendorff(L.S.)
-----------------------------
Stephen A. Ollendorff
<PAGE>
8603300370
FILED
NOV 26 1986 9 AM
SECRETARY OF STATE
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
ACORN VENTURE CAPITAL CORPORATION
----------------------------------------------
Adopted in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware
--------------------------------------------------------
I, BERT SAGER, President of ACORN VENTURE CAPITAL CORPORATION, a
corporation organized and existing under the laws of the State of Delaware (the
"Corporation"), does hereby certify as follows:
FIRST: The Certificate of Incorporation of the Corporation is amended to
include a new Article, TENTH, to read as follows:
"No director of the Corporation shall be personally liable to the
Corporation or its stockholders for any monetary damages for breaches of
fiduciary duty as a director, provided that this provision shall not eliminate
or limit the liability of a director (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law; (iii) under Section 174 of the General Corporation Law of the State of
Delaware; (iv) for any transaction from which the director derived an improper
personal benefit; or (v) for any action or omission occurring prior to the
effective date of this Article TENTH."
SECOND: Such amendment has been duly adopted in accordance with the
provisions of the General Corporation Law of the State of Delaware by the
approval of the holders of a majority of the outstanding shares of capital stock
entitled to vote at an annual meeting of stockholders duly called and held for
such purpose.
IN WITNESS WHEREOF, I have signed this Certificate on this 14th day of
November, 1986.
Bert. Sager
----------------------------
Bert. Sager, President
Attested to:
Stephen A. Ollendorff
- ----------------------
Secretary
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 09/23/1993
753266111 - 2016590
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
ACORN VENTURE CAPITAL CORPORATION
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
Acorn Venture Capital Corporation.
2. The certificate of incorporation of the Corporation is hereby amended by
striking out Article FOURTH thereof and by substituting in lieu of said Article
FOURTH the following new Article:
"FOURTH: The total number of shares of common stock which the Corporation
is authorized to issue is Twenty Million (20,000,000) shares, $.01 par value."
3. The amendment of the Certificate of Incorporation herein certified has
been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware by the approval of the holders
of a majority of the outstanding shares of capital stock entitled to vote at an
annual meeting of stockholders duly called and held for such purpose.
IN WITNESS WHEREOF, we have signed this Certificate this 21st day of
September, 1993.
Stephen A. Ollendorff
----------------------
Stephen A. Ollendorff
President
Attest:
Marian E. Gustafson
- ------------------------
Marian E. Gustafson
Assistant Secretary
<PAGE>
8736814
FILED
NOV 13 1997 9 AM
EDWARD J. FREEL,
SECRETARY OF STATE
STATE OF DELAWARE
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ACORN VENTURE CAPITAL CORPORATION
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
Acorn Venture Capital Corporation.
2. The certificate of incorporation of the Corporation is hereby amended
by striking out Article FIRST thereof and by substituting in lieu of said
Article FIRST the following new Article:
"FIRST: The name of the Corporation is ACORN HOLDING CORP."
3. The amendment of the Certificate of Incorporation herein certified has
been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware by the approval of the holders
of a majority of the outstanding shares of capital stock entitled to vote at a
special meeting of stockholders duly called and held for such purpose.
IN WITNESS WHEREOF, we have signed this Certificate this 3rd day of
November, 1997.
Stephen A. Ollendorff
----------------------------
Stephen A. Ollendorff,
Chairman and Chief
Executive Officer
Attest:
Marian E. Gustafson
- --------------------------------
Marian E. Gustafson
Assistant Secretary
EXHIBIT 10.13
As of February 15, 1995
Mr. Robert P. Freeman
280 Abrahams Lane
Villanova, PA 19085
Dear Bob:
This letter will confirm that if, within one (1) year of a Change of
Control (as defined below) of Recticon Enterprises, Inc. ("Employer"), your
employment is terminated without cause by Employer, or by you (the "Executive")
because of (i) assignment to the Executive, without the Executive's written
consent, of any duties inconsistent with his position, duties, responsibilities
and status with Employer, or change in the Executive's reported
responsibilities, titles of offices or any plan, act, scheme or design to
constructively terminate the Executive or (ii) reduction by the Employer of the
Executive's Base Salary, the Executive shall receive the following benefits:
1. Employer will pay the Executive at the time provided for in this
letter the Base Salary through the date of termination at the rate then in
effect;
2. In lieu of any further salary payments to the Executive for periods
subsequent to the date of termination, Employer will, pay as severance pay to
the Executive on the 10th business day following the date of termination (the
"Payment Date"), a lump sum equal to two times the Executive's annual Base
Salary;
3. If the Executive terminates his employment with the Company between
the first and second year of a Change of Control for any reason whatsoever
(other than "For Cause"), the Employer will pay to the Executive at the time
provided for in this letter, the amount he would have been paid if he had
remained employed through the end of the second year of a Change of Control, but
in no event less than an amount equal to six months of Base Salary.
<PAGE>
2
4. Employer will maintain all medical, health and accident plans and
programs in which the Executive was entitled to participate immediately prior to
the date of termination in full force and effect, for the Executive's continued
benefit until the earlier of (A) twenty-four months, or (B) the date on which
the Executive is covered for such benefits by reason of his being employed with
any other person or entity, provided that the Executive's continued
participation is possible under the general terms and provisions of Employer's
plans and programs. In the event that the Executive's participation in any such
plan or program is barred, Employer, at its sole cost and expense, will use its
reasonable efforts to provide the Executive with benefits substantially similar
to those which the Executive was entitled to receive under such plans and
programs; and
5. The Executive will not be required to mitigate the amount of any
payment provided for in this letter by seeking other employment or otherwise,
nor will the amount of any payment provided for in this letter be reduced by any
compensation earned by the Executive as the result of employment by another
employer after the date of termination, or otherwise.
"Change of Control" Defined. A "Change in Control" of Employer means (A)
the approval of the stockholders of the Employer of the sale, lease, exchange or
other transfer (other than pursuant to internal reorganization) by the Employer
of all or substantially all of its assets to a single purchaser or to a group of
associated purchasers; (B) the acquisition by a single purchaser or a group of
associated purchasers of securities of the Employer representing fifty-one (51%)
percent or more of the combined voting power of the Employer's then outstanding
securities in one or a related series of transactions (other than pursuant to an
internal reorganization); or (C) the change of the membership of a majority of
the Board of Employer during any period of two consecutive years, unless the
election, or the nomination for election by the Employer's stockholders, of each
new director was approved by a vote of at least two-thirds of the directors
still in office who were directors at the beginning of the period.
<PAGE>
3
If the foregoing is acceptable, please sign and return the enclosed copy of
this letter to the undersigned.
Very truly yours,
RECTICON ENTERPRISES, INC.
Stephen A. Ollendorff
Stephen A. Ollendorff
Chairman of the Board
ACCEPTED AND AGREED:
Robert P. Freeman
- ---------------------
Robert P. Freeman
EXHIBIT 21 -- SUBSIDIARIES OF THE COMPANY
The following are subsidiaries of the Company, as set forth below:
State of Incorporation
Name Ownership
- ---- ----------------------
AI Liquidating Corp. Delaware
Wholly-owned subsidiary
of the Company
Recticon Enterprises, Inc. Pennsylvania
Wholly-owned subsidiary
of the Company
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ACORN HOLDING CORP. FOR THE YEAR ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000737243
<NAME> ACORN HOLDING CORP.
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,882,526
<SECURITIES> 986,706
<RECEIVABLES> 591,589
<ALLOWANCES> 0
<INVENTORY> 2,506,763
<CURRENT-ASSETS> 7,201,866
<PP&E> 1,701,823
<DEPRECIATION> 1,998,010
<TOTAL-ASSETS> 11,055,513
<CURRENT-LIABILITIES> 1,146,174
<BONDS> 0
0
0
<COMMON> 55,389
<OTHER-SE> 8,828,522
<TOTAL-LIABILITY-AND-EQUITY> 11,055,513
<SALES> 7,907,820
<TOTAL-REVENUES> 7,907,820
<CGS> 5,209,795
<TOTAL-COSTS> 7,187,228
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 906,208
<INCOME-TAX> 142,749
<INCOME-CONTINUING> 763,459
<DISCONTINUED> 715,692
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,479,151
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0
</TABLE>
