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, 1998
Commission File No. 811-08469
ACORN HOLDING CORP.
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(Name of small business issuer in its charter)
Delaware 59-2332857
- -------------------------------- --------------------------
(State or other jurisdiction of (IRS Employer Identifi-
incorporation or organization) cation No.)
1251 Avenue of the Americas, 45th Floor, New York, NY 10020-1104
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(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code (212) 536-4089
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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
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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. [ x ]
Issuer's revenues for the fiscal year ended December 31, 1998 were $6,967,176.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 26, 1999 (valued at the average of the bid price of
$.6875 and asked price of $.875 on such date) was $1,420,897.
The number of shares of Common Stock outstanding (including shares held by
affiliates of the issuer) as of March 26, 1998: 4,068,406.
Transitional Small Business Disclosure Format (check one):
Yes ; No X
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DOCUMENTS INCORPORATED BY REFERENCE: NONE
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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
- ------------------------
In November, 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. In addition, the Company has also repurchased an additional 170,500
shares of its Common Stock since November 1997 through March 26, 1999,
representing a total repurchase by the Company of approximately 26.5% of the
issued and outstanding shares of Common Stock. All of the repurchased shares
have been retired and have resumed the status of authorized but unissued 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
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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 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
1998, 13% of its raw materials were acquired from one supplier, while for 1997
it was 12%. 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 1998 three customers of Recticon accounted for 53%, 15% and 5% of
its sales, respectively. For 1997, three customers of the Company accounted for
39%, 18% 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 three executive officers, all of whom are
employees of the Company. Recticon presently employs 47 full-time people, all of
whom are located at its facility in Pottstown.
ITEM 2. Description of Property
- ------- -----------------------
The Company maintains its principal executive office in New York, New
York at no charge to the Company, and an office in New Canaan, Connecticut, at a
cost of $300 per month.
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.
ITEM 3. Legal Proceedings
- ------- -----------------
The Company is not currently engaged in any pending material legal
proceedings nor is it aware of any threatened claims against it.
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ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on December
18, 1998 (the "Meeting"). The following matters were voted on and approved by
the holders of a majority of the outstanding shares of the Company's Common
Stock in accordance with Delaware General Corporation Law:
(a) The first proposal presented to the stockholders was the election
of five 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 3,503,733 42,875
Edward N. Epstein 3,503,733 42,875
Ronald J. Manganiello 3,503,733 42,875
Stephen A. Ollendorff 3,500,183 46,425
Bert Sager 3,500,183 46,425
(b) 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 1998 fiscal year. There were 3,507,583 shares of Common Stock cast in
favor of such proposal, 38,125 shares of Common Stock voted against such
proposal, and 900 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
-------------- --- ----
1998
----
March 31 $1.25 $1.50
June 30 $1.25 $1.72
September 30 $ .81 $1.56
December 31 $ .75 $1.22
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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
As of March 26, 1999, there were approximately 420 holders of record of
the Company's Common Stock with 4,068,406 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 March
26, 1999, the closing bid and asked quotations of the Common Stock were $.6875
and $.875, 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
------------------------------------
On November 4, 1997, pursuant to the approval of the Company's
stockholders, the Company withdrew its election with the Commission to be
treated as a Business Development Company under the 1940 Act. Since that time,
the Company has been operating 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. The business in which the Company is engaged is highly
competitive and cyclical in nature. For the fiscal year ended December 31, 1998
("Fiscal 1998"), the Company's net sales declined approximately $1 Million from
the fiscal year ended December 31, 1997 and income from continuing operations
declined approximately $500,000 during the corresponding period.
The Company's sales and profitability have been adversely effected
during the first quarter of the fiscal year ending December 31, 1999 ("Fiscal
1999") and the Company is anticipating a loss for the first quarter of 1999.
Although the Company hopes to achieve profitability during the second quarter of
Fiscal 1999, no assurance can be given that the Company will return to
profitability during Fiscal 1999.
The Company has carefully reviewed the state of the Company's Year 2000
preparedness with the appropriate operating personnel of the Company. Based on
that investigation, the Company has determined that Year 2000 issues will not
have a material affect on the Company's business, results of operations or
financial condition.
The Company believes that it has identified and modified or replaced
all computer systems which were not previously Year 2000 compliant. The costs of
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modifying and replacing the software systems have been nominal and have been
expensed as incurred.
The Company has contacted its principal customers, and based on
discussions with such customers, the Company does not believe that its
operations will be materially affected by problems with the computer systems of
third parties with whom it deals.
From time to time in both written reports and oral statements by the
Company's senior management, we may express our expectations regarding future
performance by the Company. These "forward-looking statements" are inherently
uncertain, and investors must recognize that events could turn out to be other
than what senior management expected.
ITEM 7. Financial Statements.
- ------ ---------------------
See Index to Financial Statements after Signature Page.
ITEM 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
---------------------------------------------
Reference is made to the Company's Current Report on Form 8-K, dated
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
- ------ ------------------------------------------------------------
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 3/1/99)
Bert Sager(1) 1983 Director
(73)
Stephen A. Ollendorff 1983 Chairman of the Board,
(60) Chief Executive Officer,
Secretary and Director
Edward N. Epstein* 1995 President and Chief
(58) Operating Officer; Director
Larry V. Unterbrink (2) Treasurer
(64)
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Year of
Election
as
Name and Age Director Position
------------ -------- --------
(As of 3/1/99)
Robert P. Freeman - President and Chief
(64) Executive Officer
of Recticon
Paula Berliner 1990 Director
(55) (1)
Ronald J. Manganiello* 1997 Director
(49) (1)(3)
- --------------
*Designees of Edward N. Epstein. See "Certain Relationships and
Related Transactions."
(1) Member of the Audit Committee.
(2) Mr. Unterbrink was a member of the Board from
1985 until February 1995.
(3) 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 was Co-Chairman of the Board of the Company from November
1995 to December 1998 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 Artesyn Technologies, Inc.
("Artesyn"), 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 was of counsel to the law firm
of Hertzog, Calamari & Gleason from December 1990 until January 1999. He is
currently of counsel to the law firm of Kirkpatrick & Lockhart LLP. Mr.
Ollendorff also serves as a director of Artesyn and Pharmaceutical Resources,
Inc., a publicly-traded manufacturer of generic drugs, of Spring Valley, New
York.
EDWARD N. EPSTEIN was elected President and Chief Operating Officer of
the Company in November 1995. For more than the past five years, has been the
principal of Edward N. Epstein & Assoc., a consulting firm specializing in
corporate 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.
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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 was a Vice President of the Company from June 1992 until
December 1998, 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 Security Bank.
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.
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 filing of a report required
by Section 16(a) of the Exchange Act: Edward N. Epstein failed to file, on a
timely basis, a Statement of Changes in Beneficial Ownership on Form 4. This
filing was subsequently completed on the appropriate form.
ITEM 10. Executive Compensation
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Summary Compensation Table
- --------------------------
The following table sets forth information for the fiscal years ended
December 31, 1998, December 31, 1997 and December 31, 1996, respectively,
respecting compensation earned by the Chief Executive Officer of the Company and
the executive officers (whose salary and bonus earned in Fiscal 1998 exceeded
$100,000) of the Company serving at the end of Fiscal 1998 (the "Named
Executives").
Long-Term
Annual Compensation(1) Compensation
---------------------- ------------
Securities
Name and Underlying
Principal Position Year Salary($) Bonus($) Options(#)(2)
------------------ ---- --------- -------- -------------
Stephen A. Ollendorff 1998(3) $246,597 -0- --
Chairman and Chief 1997(3) $254,615(4) -0- 50,000
Executive Officer 1996(3) $264,042 -0 --
Edward N. Epstein 1998 $212,787 -0- --
President and Chief 1997 $182,090(4) -0- --
Operating Officer 1996 $150,000 -0- --
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Long-Term
Annual Compensation(1) Compensation
---------------------- ------------
Securities
Name and Underlying
Principal Position Year Salary($) Bonus($) Options(#)(2)
------------------ ---- --------- -------- -------------
Robert P. Freeman 1998 $197,830 $ 50,000 --
President and Chief 1997 $215,920 $ 95,673 50,000
Executive Officer - 1996 $242,480 $150,000 --
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.
(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,
effective July 1997, in order to increase Mr. Epstein's annual
compensation for 1997 by $24,280. See "Employment Arrangements" below.
The Company does not have any annuity, retirement, pension, deferred or
incentive compensation plan or arrangement under which any executive officers
are entitled to benefits, nor does the Company have any long-term incentive plan
pursuant to which performance units or other forms of compensation are paid.
Executives who qualify are permitted to participate in the Company's 1991 Stock
Option Plan.
Stock Option Grants In Last Fiscal Year
- ---------------------------------------
During the fiscal year ended December 31, 1998, there were no stock
option grants or stock appreciation rights granted to the Named Executives or
any other stock appreciation rights.
On March 2, 1998 the Stock Option and Compensation Committee authorized
the further amendment to certain of the Company's 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
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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 March 26, 1999, no such "change
of control" has occurred.
On November 7, 1996, the Board of Directors authorized the Company to
loan moneys to officers and employees of the Company in order to encourage them
to exercise their stock options. The term of such loans would be for the shorter
of ten years or 60 days after termination of employment of the officer or
employee, interest would accrue and be payable monthly on the principal, at the
prevailing rate applicable to 90-day treasury bills at the time the loan is
made, and the loan would be collateralized at all times, which collateral
(subject to applicable law) may include shares of the Company. The loans must be
collateralized so that the fair market value of the collateral would have to
equal or exceed the principal outstanding amount of the loan at all times. As of
March 26, 1999, no such loans to officers or employees have been made by the
Company.
Year-End Option Values Table
- ----------------------------
The following table sets forth information at December 31, 1998
respecting exercisable and non-exercisable options held by the Named Executives.
During Fiscal 1998, 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, 1998(1) Held at December 31, 1998(1)
----------------------- ----------------------------
Not Not
Name Exercisable Exercisable Exercisable Exercisable
- ---- ----------- ----------- ----------- -----------
Stephen A.
Ollendorff 300,000(2) -0- $-0- $-0-
Edward N.
Epstein 120,000(2) -0- $-0- $-0-
Robert P.
Freeman 100,000 -0- $-0- $-0-
- ----------------
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(1) Based upon the closing sales price of the Common Stock on December 31,
1998 ($.75).
(2) On October 31, 1998, Messrs. Ollendorff and Epstein each surrendered
30,000 stock options previously granted in order to enable the Company to
grant options to employees of Recticon.
Compensation of Directors
- -------------------------
Effective December 1998 directors who are not executive officers of
the Company are compensated for their services by payment of an annual retainer
of $12,000, $1,000 per day for each Board meeting attended in person by such
director and $750 per day 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 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. 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.
As a result of an agreement between Messrs. Epstein and Ollendorff, Mr.
Ollendorff voluntarily reduced his annual compensation by $24,280, effective
July 1997, in order to increase Mr. Epstein's annual compensation for 1997 by
$24,280. 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,
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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 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, 1999, 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 6.97%
405 Lexington Avenue
New York, NY 10174
Allen Landers, M.D.
1385 York Avenue
New York, NY 10021 253,800 6.24%
- ---------------
(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 15, 1999, the
beneficial ownership of the Common Stock of the Company of (i) each director
(including the Named Executives) of the Company, and (ii) all directors and
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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 Owned(1) of Class
- ------------------- ------------- --------
Bert Sager 428,125 10.12%
(3)(4)
Stephen A. Ollendorff 1,462,200 32.58%
(4)(5)(6)
Edward N. Epstein 936,000 22.35%
(4)(5)(7)
Paula Berliner 168,300 4.07%
(4)
Robert P. Freeman 140,000 3.36%
(4)
Ronald J. Manganiello 184,946 4.55%
(8)
All executive officers
and directors as 2,552,858 52.01%
a group (7 persons) (3)(4)(5)
(6)(7)(8)
- --------------------
* Less than 1%
(1) Unless otherwise indicated, the address of all the Company's directors and
executive officers is c/o the Company's principal executive offices at
1251 Avenue of the Americas, 45th Floor, New York, NY 10020-1104.
(2) A person is deemed to be the beneficial owner of voting securities that
can be acquired by such person within 60 days from March 15, 1999 upon the
exercise of options, warrants or convertible securities. Each beneficial
owner's percentage ownership is determined by assuming that convertible
securities, options or warrants that are held by such person (but not
those held by any other person) and which are exercisable within 60 days
of the Record Date have been exercised. Unless otherwise noted, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them.
13
<PAGE>
(3) Does not include 200 shares of Common Stock owned by Mr. Sager's spouse,
as sole trustee of a trust formed by Mrs. Sager's mother, as to which Mr.
Sager disclaims beneficial ownership
(4) Includes the following shares that may be acquired upon exercise of
options within 60 days from March 15, 1999: Mr. Sager - 160,000; Mr.
Ollendorff - 300,000; Mr. Epstein - 120,000; Ms. Berliner - 70,000; Mr.
Freeman - 100,000; and all directors and executive officers as group (7
persons) 840,000.
(5) Stephen A. Ollendorff, Chairman of the Board, Chief Executive Officer and
Secretary of the Company, has entered into an Irrevocable Proxy and Voting
Agreement with Respect to Election of Directors dated December 19, 1995
with Edward N. Epstein, President of the Company, with respect to 936,000
shares of Common Stock beneficially owned by Mr. Epstein. See "Certain
Relationship and Related Transactions." Accordingly, Mr. Ollendorff's
beneficial ownership includes such shares. Other than as set forth above,
Mr. Ollendorff disclaims beneficial ownership of such shares.
(6) Includes 1,000 shares owned by Mr. Ollendorff's spouse.
(7) Includes 10,000 shares owned by Mr.Epstein as trustee for his minor child.
(8) Includes 32,946 shares owned by Mr. Manganiello's spouse and 2,000 owned
by Mr. Manganiello as trustee for his children.
ITEM 12. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Mr. Ollendorff, Chief Executive Officer of the Company, was of counsel
to Hertzog, Calamari & Gleason, general counsel to the Company, through January
31, 1999. Effective February 1, 1999, the Company no longer retains counsel who
are affiliated with Mr.Ollendorff.
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.
14
<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 - incorporated by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997.
3.2 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 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.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
15
<PAGE>
10.8 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.
10.9 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.
10.10 Letter Agreement, dated as of February 15, 1995, between Robert
P. Freeman and Recticon - incorporated by reference to Exhibit 10-13 to the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.
21 List of subsidiaries of the Company.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by the Company during the
quarter ended December 31, 1998.
16
<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: March 29, 1999 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 March 29, 1999
- ------------------------ Chief Executive Officer
Stephen A. Ollendorff (Principal Executive
Officer), Secretary
and Director
Edward N. Epstein President and Chief March 29, 1999
- ------------------------ Operating Officer;
Edward N. Epstein Director
Larry V. Unterbrink Treasurer (Principal March 29, 1999
- ------------------------ Financial and Accounting
Larry V. Unterbrink Officer)
Paula Berliner Director March 29, 1999
- ------------------------
Paula Berliner
Ronald J. Manganiello Director March 29, 1999
- ------------------------
Ronald J. Manganiello
Bert Sager Director March 29, 1999
- ------------------------
Bert Sager
17
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ACORN HOLDING CORP. AND SUBSIDIARIES
December 31, 1998 and 1997
F-1
<PAGE>
C O N T E N T S
Page
ACORN HOLDING CORP. AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS F-4
CONSOLIDATED STATEMENTS OF INCOME F-5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
AUTOMOTIVE INDUSTRIES, INC.
REPORT OF INDEPENDENT ACCOUNTANTS F-18
FINANCIAL STATEMENTS
BALANCE SHEET F-19
STATEMENT OF OPERATIONS F-20
STATEMENT OF SHAREHOLDER'S EQUITY F-21
STATEMENT OF CASH FLOWS F-22
NOTES TO FINANCIAL STATEMENTS F-23
F-2
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Acorn Holding Corp.
We have audited the accompanying consolidated balance sheets of Acorn
Holding Corp. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the 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 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 statements 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 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, and the report of the other auditors, provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
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, 1998 and 1997, and the consolidated results of
their operations and their consolidated cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Grant Thornton LLP
Philadelphia, Pennsylvania
March 3, 1999, except for Note R as to which
the date is March 8, 1999
F-3
<PAGE>
Acorn Holding Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1997
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 1,126,838 $ 2,882,526
Restricted cash 11,798 41,439
Investment securities 668,439 986,706
Accounts receivable - trade 84,817 429,893
Current portion of note receivable from
sale of subsidiary 110,235 121,696
Current portion of note receivable
- employee 40,000 40,000
Inventories 2,055,827 2,506,763
Prepaid expenses 22,337 13,843
Deferred income tax asset 70,881 179,000
------------ ------------
Total current assets 4,191,172 7,201,866
------------ ------------
MACHINERY AND EQUIPMENT, net of accumulated
depreciation of $2,255,282 and
$1,998,010 in 1998 and 1997, respectively 1,978,743 1,706,823
------------ ------------
OTHER ASSETS
Deposits and other -- 82,563
Note receivable from sale of subsidiary,
less current portion 110,236 243,393
Note receivable, less current portion
- employee 80,000 120,000
Other investments 9,108 9,981
Goodwill, net of amortization of $555,947
and $470,417 in 1998 and 1997, respectively 299,357 384,887
Deferred income tax asset 1,322,583 1,306,000
------------ ------------
1,821,284 2,146,824
------------ ------------
$ 7,991,199 $ 11,055,513
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 121,062 $ 121,062
Accounts payable 20,157 303,474
Accrued expenses
Salaries and bonuses 86,688 142,672
Other 40,333 70,847
Machine purchase deposit liability 11,798 41,439
Deferred income 300,000 466,680
------------ ------------
Total current liabilities 580,038 1,146,174
------------ ------------
LONG-TERM DEBT, less current maturities 121,061 242,122
------------ ------------
DEFERRED INCOME 525,000 783,306
------------ ------------
COMMITMENTS -- --
STOCKHOLDERS' EQUITY
Common stock 40,684 55,389
Additional paid-in capital 11,823,449 14,090,156
Accumulated deficit (5,083,839) (5,247,684)
Less common stock in treasury, at
cost - 9,000 shares -- (13,950)
Accumulated other comprehensive income
(loss) (15,194) --
------------ ------------
Total stockholders' equity 6,765,100 8,883,911
------------ ------------
$ 7,991,199 $ 11,055,513
============ ============
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Acorn Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
1998 1997
------------ ------------
Net sales $ 6,967,176 $ 7,907,820
----------- -----------
Costs and expenses
Cost of sales 5,098,572 5,209,795
Selling, general and administrative 1,662,802 1,977,433
----------- -----------
6,761,374 7,187,228
Operating profit 205,802 720,592
----------- -----------
Other income (expense)
Gain on sale of fixed assets 18,000 --
(Loss) gain on investment (4,696) 102,000
Interest income, net 42,232 83,616
----------- -----------
55,536 185,616
----------- -----------
Income from continuing
operations before income taxes 261,338 906,208
Income taxes 97,493 142,749
----------- -----------
Income from continuing operations 163,845 763,459
----------- -----------
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 $ 163,845 $ 1,479,151
=========== ===========
Earnings per share
Income from continuing operations $ .04 $ 0.14
Income from discontinued operations -- 0.13
----------- -----------
Net income $ .04 $ 0.27
=========== ===========
Weighted average shares outstanding 4,179,542 5,538,164
=========== ===========
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Acorn Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Retained Accumulated
Additional earnings other
Common paid-in (accumulated comprehensive Treasury
stock capital (deficit) income stock Total
------------ ------------- ------------- ------------ ------------- ------------
<S> <C> <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 -- -- (8,725,978) -- -- (8,725,978)
business 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
Comprehensive income
Net income -- -- 163,845 -- -- 163,845
Other comprehensive income, net of
reclassification adjustments and
taxes -- -- -- (15,194) -- (15,194)
-------------
Total comprehensive income 148,651
-------------
Treasury shares purchased -- -- -- -- (2,267,462) (2,267,462)
Retirement of treasury stock (14,705) (2,266,707) -- -- 2,281,412 --
------------ ------------- ------------- ------------ ------------- -------------
Balance at December 31, 1998 $ 40,684 $ 11,823,449 $ (5,083,839) $ (15,194) $ -- $ 6,765,100
============ ============= ============= ============ ============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
Acorn Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997
------------ ------------
Cash flows from operating activities
Net income $ 163,845 $ 1,479,151
Adjustments to reconcile net income
to net cash provided by
operating activities
Depreciation and amortization 343,210 525,524
Deferred income taxes 91,536 584,000
Gain on sale of assets -- (1,795,225)
Imputed interest -- 53,321
(Gain) loss on sale of assets (18,000) 3,645
Deferred credit -- (53,321)
Decrease in assets
Accounts receivable 345,076 312,817
Inventories 450,936 256,719
Prepaid expenses and other assets 74,069 151,200
Increase (decrease) in liabilities
Accounts payable (283,317) (829,655)
Accrued expenses (86,498) 21,467
Deferred income (424,986) (466,680)
----------- -----------
Net cash provided by operating
activities 655,871 242,963
----------- -----------
Cash flows from investing activities
Purchase of machinery and equipment (529,600) (678,544)
Redemption of treasury notes -- 1,739,232
Purchase of investments 303,946 (2,735,919)
Proceeds from sale of machinery and equipment 18,000 6,000
Note receivable proceeds 184,618 41,200
Proceeds from sale of assets -- 2,863,322
----------- -----------
Net cash (used in) provided
by investing activities (23,036) 1,235,291
----------- -----------
Cash flows from financing activities
Payment of long-term debt and capital lease (121,061) (792,651)
Purchase of treasury stock (2,267,462) (13,950)
----------- -----------
Net cash used in financing activities (2,388,523) (806,601)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,755,688) 671,653
Cash and cash equivalents at beginning of year 2,882,526 2,210,873
----------- -----------
Cash and cash equivalents at end of year $ 1,126,838 $ 2,882,526
=========== ===========
Supplemental disclosure of cash flow information
Interest paid $ 26,060 $ 105,084
=========== ===========
Retirement of treasury stock $ 2,281,412 $ --
=========== ===========
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 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.
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.
(Continued)
F-8
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
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 (EPS) and requires presentation of basic
and diluted EPS in conjunction with the disclosure of the methodology used
in computing such EPS. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted average
common shares outstanding during the period. Diluted EPS 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 EPS of any year presented.
(Continued)
F-9
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
11. Comprehensive Income
--------------------
On January 1, 1998, the Company adopted the FASB issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards to
provide prominent disclosure of comprehensive income items. Comprehensive
income is the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources.
Other comprehensive income consists of net unrealized gains on investment
securities available for sale.
12. Investments
-----------
The Company accounts for its investments in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, the Company classifies its investments as available-for-sale,
whereby net unrealized gains and losses, net of tax, are required to be
recognized as a separate component of stockholders' equity.
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.
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 statements of
income as "Discontinued Operations." In addition, the net gain on the sale
of that subsidiary is shown " Gain on Sale of Assets and Liabilities of
Automotive Industries, Inc."
F-10
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
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.
NOTE E - INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses, and fair market value of
the Company's available-for-sale investment securities at December 31, 1998
are:
Gross Gross Fair
Amortized unrealized unrealized market
cost gain loss value
---------- ---------- ---------- -------
U.S. Government and agency $ 5,943 $ 82 $ -- $ 6,025
State and municipal obligations 677,690 -- (15,276) 662,414
--------- --------- --------- ---------
$ 683,633 $ 82 $ (15,276) $ 668,439
========== ========= ========= =========
The following table lists the contractual maturities of investments:
Fair
Amortized market
cost value
--------- --------
Less than one year $115,331 $115,044
After ten years 568,302 553,395
-------- --------
$683,633 $668,439
======== ========
At December 31, 1997, investments consisting U.S. Treasury bills had
amortized cost and fair market value of $986,706.
NOTE F - INVENTORIES
Inventories consist of the following:
1998 1997
--------------- --------------
Raw materials and supplies $ 961,333 $ 1,122,426
Work in process 943,134 1,273,883
Finished goods 151,360 110,454
---------- ----------
$ 2,055,827 $ 2,506,763
========== ==========
F-11
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
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 (7.75% at December 31,
1998). The line is available through April 30, 1999, and is secured by
Recticon's assets and is guaranteed by Acorn. At December 31, 1998 and 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:
1998 1997
------------ ------------
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 $ 242,123 $ 363,184
Less current maturities 121,062 121,062
----------- -----------
$ 121,061 $ 242,122
=========== ===========
Annual maturities of long-term debt are as follows:
Year ending December 31,
------------------------
1999 $ 121,062
2000 121,061
-----------
$ 242,123
===========
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,
------------------------
1999 $ 300,000
2000 300,000
2001 225,000
-----------
$ 825,000
===========
F-12
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
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).
The income tax provision consists of the following:
1998 1997
----------- -----------
Current
Federal $ -- $ 35,000
State 8,286 19,731
Deferred
Federal 89,207 512,036
State -- 36,531
----------- -----------
$ 97,493 $ 603,298
=========== ===========
Deferred tax assets consist of
the following:
1998 1997
----------- -----------
Net operating loss carryforwards $ 2,013,000 $ 2,079,000
Depreciation (174,000) (137,000)
Deferred income 334,000 507,000
Carrying value of assets 332,000 386,000
Note receivable 192,000 --
Other 93,464 47,000
----------- -----------
2,790,464 2,882,000
Less valuation allowance 1,397,000 1,397,000
----------- -----------
$ 1,393,464 $ 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 net operating losses.
The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows:
1998 1997
------- -------
Tax at statutory federal rate 34.0% 34.0%
State income taxes, net of federal benefits 3.3 4.5
Net operating losses -- (8.6)
Other -- (1.0)
---- ----
37.3% 28.9%
==== ====
F-13
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 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,
------------------------
1999 $ 96,000
2000 96,000
2001 116,000
2002 120,000
2003 120,000
Thereafter 656,000
----------
$ 1,204,000
===========
NOTE L - CONCENTRATIONS
Three customers of the Company accounted for 53%, 15% and 5% of sales in
1998 and 39%, 18%, and 11% of sales in 1997.
For 1998 and 1997, one vendor accounted for 13% and 12% of the Company's
materials purchases, respectively.
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 1998 and 1997, the Company and its subsidiaries paid a law firm, of
which the Company's Chief Executive Officer and Chairman was of counsel,
approximately $116,000 and $100,000 for services rendered, including
reimbursement of expenses.
During 1998, the Company and its subsidiaries entered into two consulting
agreements for approximately $25,000 each with two of its Board members to
provide professional services for 1999.
F-14
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE N - EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS No.
128 is as follows:
<TABLE>
<CAPTION>
Income Number of Shares
(numerator) (denominator) Per share amount
--------------------- ---------------- ----------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income from continuing
operations $ 163,845 $ 763,459 4,179,542 5,538,164 $ .04 $ .14
Income from discontinued
operations -- 715,692 -- 5,538,164 -- .13
---------- ---------- ------ -----
Net income $ 163,845 $1,479,151 $ .04 $ .27
========== ========== ====== =====
</TABLE>
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 720,000 shares of
common stock ranging from $0.91 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, 1998 and 1997:
1998 1997
----------------------- ---------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
---------- -------- -------- -----------
Outstanding at January 1, 900,000 $ 1.83 900,000 $ 1.85
Granted 60,000 0.91 100,000 1.58
Cancelled (60,000) 2.61 (100,000) 1.16
---------- --------
Outstanding at December 31, 900,000 1.81 900,000 1.83
========== ========
Options exercisable at
December 31, 900,000 1.81 900,000 1.83
========== ========
(Continued)
F-15
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE O - STOCK OPTIONS - Continued
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
Options outstanding and exercisable
-----------------------------------------------------
Weighted Weighted
Range of remaining average
exercise price Shares contractual life exercise price
-------------- ------- ---------------- --------------
1998
----
$ 3.38 130,000 3 years $ 3.38
$1.84 - 2.19 440,000 5 years 1.94
$ 1.16 50,000 6 years 1.16
$ 0.88 120,000 7 years 0.88
$ 1.58 100,000 9 years 1.58
$ 0.91 60,000 10 years 0.91
-------
900,000
=======
According to the stock option agreements, 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 agreements were 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
EPS.
As of December 31, 1998, 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 years ended December 31, 1998 and
1997, would have been reduced to the pro forma amounts indicated below:
1998 1997
---------------- --------------
Net earnings
As reported $ 163,845 $1,479,151
Pro forma 138,897 1,378,151
EPS
As reported $ .04 $ 0.27
Pro forma .03 0.25
(Continued)
F-16
<PAGE>
Acorn Holding Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 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
1998: expected volatility of 53%, risk-free interest rate of 4.91%, and
expected life of 10 years. The weighted average fair value of options
granted during fiscal year 1998 was $0.91.
NOTE P - COMMON STOCK
At December 31, 1998, the Company had 20,000,000 shares of common stock
authorized, 4,068,406 shares issued and outstanding.
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 1998 and 1997, the Company repurchased 1,461,500 and 9,000 shares of
its common stock through the open market. All treasury shares were retired.
NOTE Q - SEGMENT INFORMATION
The Company is a holding company which owns and operates one subsidiary
which manufactures monocrystalline silicon wafers used in the
microelectronics industry. The Company considers its business to consist of
one reportable operating segment.
Until May 31, 1997, the Company also owned another subsidiary which operated
automobile retail store. These operations are shown in the accompanying
consolidated statements of income as discontinued operations.
NOTE R - SUBSEQUENT EVENT
The Board of Directors has approved the submission of a proposal to the
shareholders for a two shares for five shares "Reverse Split" of the
Company's common stock. A special meeting of the stockholders has been
called for April 15, 1999 to consider the proposal.
F-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Automotive Industries, Inc.
We have audited the accompanying balance sheet of Automotive Industries, Inc., a
wholly owned subsidiary of Acorn Venture Capital Corporation, as of May 31,
1997, and the related statement of operations, shareholder's equity and cash
flows for the five months ended May 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Automotive Industries, Inc. as
of May 31, 1997, and the results of its operations and its cash flows for the
five months ended May 31, 1997, 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.
PricewaterhouseCoopers LLP
Jacksonville, Florida
August 31, 1997, except for the second paragraph of Note 2, as to which the date
is December 3, 1997
F-18
<PAGE>
Automotive Industries, Inc.
BALANCE SHEET
May 31, 1997
ASSETS
Current assets
Cash and cash equivalents $ 1,888,277
Receivable from parent 562,500
Receivable from purchaser 121,696
Prepaid expenses 4,500
------------
Total current assets 2,576,973
Deferred taxes 553,560
Receivable from purchaser 243,393
Total assets $ 3,373,926
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable $ 44,442
Current portion of long-term debt 562,500
Accrued expenses 81,602
------------
Total current liabilities 688,544
Contingencies and commitments (Notes 4 and 6)
Shareholder's equity
Common stock, $.01 par value; 3,000 shares authorized,
142 shares issued and outstanding 1
Additional paid-in capital 2,359,234
Retained earnings 326,147
------------
Total shareholder's equity 2,685,382
Total liabilities and shareholder's equity $ 3,373,926
============
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
Automotive Industries, Inc.
STATEMENT OF OPERATIONS
for the five months ended May 31, 1997
Sales
Merchandise sales $ 5,112,751
Labor sales 2,658,613
------------
Total sales 7,771,364
Cost of sales 3,528,024
------------
Gross profit 4,243,340
Operating expenses 4,393,415
Depreciation 196,342
Amortization 35,799
------------
Operating loss (382,216)
Other (expense) income
Gain on sale of assets and liabilities 1,795,225
Management fees to parent (475,000)
Severance pay to former employees (160,000)
Interest expense (82,529)
Other income 5,761
Total other income, net 1,083,457
Net income before income taxes 701,241
Income tax provision 275,299
Net income $ 425,942
============
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
Automotive Industries, Inc.
STATEMENT OF SHAREHOLDER'S EQUITY
for the five months ended May 31, 1997
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
------------------- Paid-In Earnings Shareholder's
Shares Amount Capital (Deficit) Equity
--------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 142 1 $ 2,793,234 $ (99,795) $ 2,693,440
Dividends ($3,056 per share) -- -- (434,000) -- (434,000)
Net income -- -- -- 425,942 425,942
-------- -------- ------------ ----------- -----------
Balance at May 31, 1997 142 $ 1 $ 2,359,234 $ 326,147 $ 2,685,382
======== ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
Automotive Industries, Inc.
STATEMENT OF CASH FLOWS
for the five months ended May 31, 1997
Cash flows from operating activities
Net income $ 425,942
Adjustments to reconcile net income to net cash
used in operating activities
Deferred taxes 275,299
Gain on sale of assets (1,795,225)
Depreciation and amortization 232,141
Imputed interest 53,321
Loss on sale of property and equipment 3,645
Changes in operating assets and liabilities:
Trade accounts receivable and other receivables 93,873
Inventory 98,524
Prepaid and other assets 89,292
Accounts payable (485,960)
Accrued expenses 103,070
Deferred credit (53,321)
------------
Net cash used in operating activities (959,399)
------------
Cash flows from investing activities
Proceeds from sale of property and equipment 6,000
Purchases of property and equipment (148,366)
------------
Net cash used in investing activities (142,366)
------------
Cash flows from financing activities
Payments on long-term debt and capital lease obligations (109,090)
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
------------
Increase in cash and cash equivalents 726,645
Cash and cash equivalents at beginning of year 1,161,632
------------
Cash and cash equivalents at end of year $ 1,888,277
============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 57,678
Supplemental Schedule of Noncash Investing and
Financing Activities
Dividend declared to parent for satisfaction
of receivable $ 434,000
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
Automotive Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Automotive Industries, Inc. (the Company) is a Delaware corporation,
headquartered in Jacksonville, Florida. The Company 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 the Company. The
Company is a wholly owned subsidiary of Acorn Holding Corp. (Acorn).
Cash and Cash Equivalents
Cash and cash equivalents represent demand deposits in banks and money
market accounts.
Deferred Taxes
The Company's parent company, Acorn, files a consolidated federal income tax
return which includes the Company's taxable income. Under Acorn's
tax-sharing agreement with its subsidiaries, the Company is required to pay
or receive to/from Acorn an amount equivalent to what it would have paid or
received had the Company 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
The Company entered into an agreement to sell its operating assets as of May
30, 1997. In accordance with the agreement, the Company 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-23
<PAGE>
Automotive Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
2. SALE OF ASSETS AND LIABILITIES - Continued
As of December 3, 1997, the Company and purchaser entered into an agreement
which amended the original purchase price. The Company and purchaser agreed
to delete the incentive purchase amount discussed above and the parties
agreed for the purchaser to pay the Company 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, the Company 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. LONG-TERM DEBT
The current portion of long-term debt consists of a non-interest bearing
note of $562,500 issued in connection with Falken Tire Corporation supply
agreement due December 31, 2001 (discounted at an imputed interest rate of
13%) without collateral.
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. 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. As of May 31, 1997, the purchaser assumed a significant
amount of the Company's outstanding debt, and the portion of the debt not
assumed by the purchaser of $562,500 at May 31, 1997 was paid by the Company
on June 2, 1997.
(Continued)
F-24
<PAGE>
Automotive Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
4. LEASES
The Company 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 was
$562,601.
All of the leases were assumed by the purchaser.
5. INCOME TAXES
The provision for income taxes for the five months ended May 31, 1997
consists of the following:
Current $ -
Deferred 275,299
----------
Income tax expense $ 275,299
==========
The 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:
Tax expense at federal statutory rate $ 245,434
State tax, net of federal benefit 25,028
Other 4,837
------------
$ 275,299
============
The Company's deferred tax asset as of May 31, 1997 consists of operating
loss carryforwards of $553,560 expiring in 2010.
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.
(Continued)
F-25
<PAGE>
Automotive Industries, Inc.
NOTES TO FINANCIAL STATEMENTS
6. DEFINED CONTRIBUTION PENSION PLAN
The Company 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 for the
five months ended May 31, 1997.
7. FINANCIAL INSTRUMENTS
Financial instruments that subject the Company to concentrations of credit
risk are cash and receivables. The Company 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.
8. RELATED PARTY TRANSACTIONS
In 1997, the Company declared a dividend of $434,000 to Acorn for
satisfaction of a receivable in connection with a tax sharing agreement.
During 1997, the Company 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, the Company declared a liquidating dividend of
its remaining assets to Acorn.
F-26
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 subsidairy
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, 1998
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,126,838
<SECURITIES> 668,439
<RECEIVABLES> 235,052
<ALLOWANCES> 0
<INVENTORY> 2,055,827
<CURRENT-ASSETS> 4,191,172
<PP&E> 1,978,743
<DEPRECIATION> 2,255,282
<TOTAL-ASSETS> 7,991,199
<CURRENT-LIABILITIES> 580,038
<BONDS> 0
0
0
<COMMON> 40,684
<OTHER-SE> 7,950,515
<TOTAL-LIABILITY-AND-EQUITY> 7,991,199
<SALES> 6,967,176
<TOTAL-REVENUES> 6,967,176
<CGS> 5,098,572
<TOTAL-COSTS> 6,761,374
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 261,338
<INCOME-TAX> 97,493
<INCOME-CONTINUING> 163,845
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 163,845
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0
</TABLE>
