SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________________
Commission file number 0-935
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BELL NATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
California 94-1451828
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3600 Rio Vista Avenue, Suite A, Orlando, FL 32805
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (407) 849-0290
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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.
[ X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Company as of March 8, 1998 was $395,000 based upon the average bid and asked
prices of shares of the Company's Common Stock, no par value per share ("Common
Stock"), of $0.075 per share as reported in the Electronic Bulletin Board. The
number of shares of Common Stock outstanding at March 8, 1998 is 5,916,686.
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PART I
ITEM 1. BUSINESS
General
Bell National Corporation ("Bell National" and together with its subsidiaries,
the "Company") was incorporated in California on October 1, 1958. Through 1985,
its principal subsidiary was Bell Savings and Loan Association ("Bell Savings"),
a state chartered savings and loan association. On July 25, 1985, the Federal
Home Loan Bank Board appointed the Federal Savings & Loan Insurance Corporation
("FSLIC") as receiver of Bell Savings. At the same time, the assets of Bell
Savings were transferred to a new, unrelated, federally chartered mutual savings
and loan association, Bell Federal. The FSLIC's appointment followed shortly
after a determination that Bell Savings had a negative net worth. On August 20,
1985, Bell National filed a voluntary petition under Chapter 11 of the
Bankruptcy Code. A Plan of Reorganization (the "Plan") was approved by the
Bankruptcy Court, and became effective June 29, 1987.
After emerging from bankruptcy proceedings in June 1987, and a vote by
shareholders to continue the operations of Bell National in October 1988, the
Company reached an agreement ("Stock Purchase Agreement") with Milley Management
Incorporated ("MMI"), a private investment firm, in 1989 whereby Bell National
sold to a group of private investors (including MMI) Common Stock totaling
approximately 41% of the outstanding voting shares on a fully diluted basis.
On June 15, 1990, Bell National purchased 100% of the Common Stock of Payne
Fabrics, Inc. a designer and distributor of decorative drapery and upholstery
fabrics, for a purchase price of $6,493,000 and the issuance of stock
appreciation rights ("SAR's"). Bell National's other wholly owned subsidiaries,
Bell Savings and Pacific Coast Holdings Insurance Company, have no operations or
any significant assets or liabilities.
On August 4, 1997 Payne Fabrics, Inc. sold substantially all of its assets and
most of its liabilities related to the business of designing and distributing
decorative drapery and upholstery fabrics to Westgate Fabrics, Inc.
("Westgate"), an unaffiliated third party (the "Asset Sale"). The Asset Sale
included the transfer to the buyer of the use and rights to the Payne Fabrics
name, accordingly, Payne Fabrics, Inc., changed its name to PFI National
Corporation ("PFI"). The Asset Sale left PFI without any substantial assets and
on August 4, 1997 all operations were ceased.
The Board of Directors is reviewing the future direction of the Company. Among
alternatives are the possible sale of stock or debt to raise additional capital
to either fund the acquisition of an operating company or to fund a start-up
company (either from inception or in an early development phase). It is highly
likely that in order to fund an acquisition of a meaningful size significant
additional funds would be required, and no assurance can be given that such
funds
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could be obtained on terms deemed favorable by management. Another option would
be the possibility of a liquidating dividend. The discussion contained in this
section is not intended to be an exhaustive review of alternatives available to
the Company, nor does inclusion or omission of any alternative provide any
indication of what course of action may finally be decided upon. However, the
Company is not, nor does it intend to engage, in the business of investing,
reinvesting, owning, holding or trading securities.
ITEM 2. PROPERTIES
Simultaneous to the Asset Sale PFI's lease obligations were either settled or
assumed by the buyer. The one outstanding lease obligation remaining after this
transaction was settled on February 11, 1998. A provision for this settlement
has been made to the financial statements included herein. The Company has no
remaining physical properties.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject,
nor are there any proceedings known to be contemplated by government authorities
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter of 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is presently no established public trading market for the Common Stock of
the Company and trading activity is limited. The following dealers have
indicated an interest in trading the stock on the Electronic Bulletin Board:
Wedbush Securities, Inc.; Troster Singer Corporation; and Carr Securities
Corporation.
Holders
As of March 8, 1998 there were approximately 1,076 holders of record of Bell
National's Common Stock.
Dividend History
Bell National has not paid a cash dividend and the Board of Directors is not
contemplating paying one at this time.
Stock Transfer Agent
The Company's stock transfer agent is Continental Stock Transfer and Trust Co.,
2 Broadway, New York, New York 10004, phone (212) 509-4000.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data is derived from, and qualified by reference, to the
audited consolidated financial statements and notes included elsewhere in this
Annual Report on Form 10-K.
The following table sets forth the selected financial data as of the dates shown
and for the periods shown:
Balance Sheet Data
(dollars in thousands):
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total Assets $ 1,348 $ 6,119 $ 7,910 $ 7,505 $ 7,298
Notes Payable 0 2,225 3,042 2,921 3,139
Stockholders' Equity 388 1,575 1,574 1,526 1,203
Statement of Operations Data
(dollars in thousands except per share amounts):
Years Ended December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Net sales $ 6,576 $ 12,550 $ 13,653 $ 13,877 $ 14,107
Operating income 50 259 469 675 643
Net income (loss) before
extraordinary item (1,221) (14) 48 177 198
Net income (loss) after
extraordinary item (1,221) (14) 48 320 198
Net income per share
before extraordinary item (.21) -- .01 .03 .04
Net income per share
after extraordinary item (.21) -- .01 .06 .04
</TABLE>
On August 4, 1997 the Company sold substantially all the assets and most of its
liabilities relating to the business of designing and distributing decorative
drapery and upholstery fabrics. This business constituted all the operations of
the Company. See Item 1. (Business) above and Note 1 to the Consolidated
Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues and Expenses. See Note 1 to the consolidated financial statements for
background on the Company. The Company's 1997, 1996 and 1995 revenues and
expenses result from the operation of PFI, which was acquired in June 1990. The
comparisons included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations include the Company's ownership interest in
PFI's results up to the date of the Asset Sale. The Company's last day of
ownership was August 4, 1997.
In 1997 the Company had net sales of $6,576,000, cost of goods sold of
$3,521,000, and selling, general and administrative expenses of $3,005,000
resulting in an operating gain of $50,000. The operating gain was decreased by
interest expense of $134,000 and other expense of $17,000, resulting in a net
loss before the Asset Sale of $101,000. These results include the Company's
ownership of PFI through August 4, 1997. PFI's operations through the date of
sale caused an operating loss of $185,000, substantially offset by income
resulting from the complete release of $235,000 of reserves related to SAR
agreements. With a substantial amount of SAR agreements expiring and being
exercised in 1997, and the stock price well below the exercise price of
remaining SAR's, this liability was no longer needed. In connection with the
Asset Sale, PFI recorded a loss on the sale of assets of $1,169,000. This loss
together with the year to date operating loss resulted in a net loss of
$1,221,000.
The 1997 results are dramatically different than those of 1996 since the 1997
results include seven months of PFI operations while the 1996 results include a
full twelve months of PFI operations. The 1997 results also include a loss on
the Asset Sale.
The Company's 1996 sales were $12,550,000 compared to 1995 sales of $13,653,000.
The 1996 sales decrease of $1,103,000 was identifiable to $450,000 of decreased
sales of Warner/Harris fabrics (a competitors line the Company no longer
represents), a $380,000 decrease in upholstery, a $250,000 decrease in drapery
fabric, a $150,000 decrease in wallpaper, a $140,000 decrease in sample sales, a
$120,000 decrease in Hardware and Rods, and all others decreased $13,000, offset
by a $280,000 increase in sales of multipurpose fabric. The 1996 gross profits
were $5,671,000 compared to 1995 gross profit of $6,526,000. The $855,000
decrease in gross profit was due to the sales volume decrease and a 2.6%
decrease in the gross profit percentage from 47.8% in 1995 to 45.2% in 1996. The
decreased sales level had caused lower margin items and fixed costs to become a
larger component of the margin calculation resulting in the margin
deterioration. Selling, general and administrative expenses decreased $645,000
from $6,057,000 in 1995 to $5,412,000 in 1996. The decrease was identifiable to
decreased sample lengths expense, field sales expenses, agent commissions,
styling expenses and stock appreciation rights expenses, partially offset by
increased sample book expense. The decreased sample lengths expense was caused
by the smaller amount of product introduced in 1996 compare to 1995. Lower sales
in 1996 caused variable expenses in field sales and agent commissions to
decrease. Styling activity in New York was discontinued in late 1996 causing
this to decrease. Adjustments
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to the SAR reserve for expiring rights, a lower valuation due to the lower
market price for the Company's stock and the effect of exercises favorably
impacted expenses. Sample book expense in 1996 increased due to the large 1995
spending, 40% of which was expensed in 1996. As a result of the decrease in
gross margin offset by a decrease in selling, general and administrative
expense, operating income decreased $210,000.
Interest expense decreased $86,000 from $347,000 in 1995 to $261,000 in 1996 due
to the lower debt balance in 1996. Other expenses in 1996 were $162,000 in 1996,
up $117,000 from other expenses in 1995 of $45,000. The increased 1996 expenses
were caused by foreign currency exchange losses, deferred debt amortization and
receivable finance charges not recovered at levels higher than those of 1995.
The provision (benefit) for taxes decreased $179,000 to $(150,000) in 1996 from
$29,000 in 1995 reflecting the change in the accrual for federal taxes. Taking
into account these items the 1996 loss was $14,000, down $62,000 from 1995
income of $48,000. The resulting 1996 loss per share was $0.00 versus the
earnings per share of $0.01 in 1995.
The Company had a remaining goodwill balance net of amortization of $0 and
$663,000 at December 31, 1997 and 1996, respectively. Goodwill was being
amortized over a 40 year period.
The Company is not a party to any derivative or interest swap agreement.
LIQUIDITY AND CAPITAL RESOURCES
Available Resources. The Company's consolidated unrestricted cash position at
December 31, 1997 and December 31, 1996 was $1,300,000 and $0, respectively.
During 1997, the Company had negative cash flow from operations before working
capital changes of $870,000. Working capital and other changes increased cash
flow by $980,000 resulting in cash flow provided by operating activities of
$110,000. Included in the negative cash flow from operations was a loss on the
Asset Sale of $1,169,000. In 1997 the Company purchased or produced $369,000 of
sample books. The Asset Sale provided proceeds of $3,750,000 which was primarily
used to extinguish the bank debt of $2,225,000. In 1997 the Company also
received $34,000 from the issuance of SAR's. The net of this 1997 activity left
the Company with $1,300,000 of cash on hand at December 31, 1997.
During 1996, the Company had cash flow from operations before working capital
changes of $1,022,000. Working capital and other changes increased cash flow by
$490,000 resulting in cash flow provided by operating activities of $1,512,000.
Cash flow from operations funded spending for sample books of $689,000,
principal payments on capital lease obligations of $6,000 and net principal
payments of $817,000. The increase in 1996 working capital was due primarily to
decreases of $1,343,000 in inventory partly offset by a $854,000 decrease in
accounts payable.
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Future Needs For and Sources of Capital
The Board of Directors is reviewing the future direction of the Company. Among
alternatives are the possible sale of stock or debt to raise additional capital
to either fund the acquisition of an operating company or to fund a start-up
company (either from inception or in an early development phase). It is highly
likely that in order to fund an acquisition of a meaningful size significant
additional funds would be required, and no assurance can be given that such
funds could be obtained on terms deemed favorable by management. Another option
would be the possibility of a liquidating dividend. The discussion contained in
this section is not intended to be an exhaustive review of alternatives
available to the Company, nor does inclusion or omission of any alternative
provide any indication of what course of action may finally be decided upon. The
terms of the Asset Sale agreement have required the Company to concentrate all
of its efforts to the favorable settlement of the remaining liabilities to
insure the largest possible cash balance.
Absent another acquisition, the Company can survive as a non-operating entity on
it current cash balances for the foreseeable future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company for each of the fiscal
years in the three-year period ended December 31, 1997, together with the report
thereon of Ernst & Young LLP dated March 16, 1998, are filed as part of this
report commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Since the beginning of 1996: (i) Ernst & Young LLP, the Company's independent
accountants engaged as the principal accountant to audit the Company's financial
statements, has neither resigned (or indicated it has declined to stand for
re-election after the completion of a current audit) or been dismissed, and (ii)
no new independent accountant has been engaged by the Company as either the
principal accountant to audit the Company's financial statement, or as an
independent accountant to audit a significant subsidiary.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is information regarding the executive officers and directors of
Bell National, including information furnished by them as to principal
occupations for the last five years, certain other directorships held by them,
and their ages. Directors are elected to serve until the next annual meeting.
Officers are elected annually by Bell National's Board of Directors and serve at
the discretion of the Board, unless otherwise indicated.
Name Age Position
- ---- --- --------
Alexander M. Milley 45 Chairman and Secretary
Robert C. Shaw 45 Director, President and Treasurer
Raymond O'S. Kelly 63 Director
Nicholas E. Toussaint 60 Director
Thomas R. Druggish 42 Director and Chief Financial Officer
Alexander M. Milley became Chairman of the Board of Directors and Secretary on
November 20, 1989. Mr. Milley is the founder, president and majority shareholder
of Milley Management Incorporated ("MMI"), a private investment and management
consulting firm. From August 1985 to May 1986, Mr. Milley was Chairman of Neoax,
Inc. ("Neoax"), now an environmental services company known as EnviroSource,
Inc. and then a diversified custom vehicle and precision metal manufacturing
company. Mr. Milley was Senior Vice President-Acquisitions, from December 1983
until July 1986, of The Dyson-Kissner-Moran Corporation ("DKM"), a private
investment company. Mr. Milley is Chairman of the Board, President and Chief
Executive Officer of Azimuth Corporation ("Azimuth"), a producer of trade show
exhibits and a distributor of fuses and aerospace fasteners, and Chairman and
President of Cadmus Corporation ("Cadmus"), a management consulting firm of
which he is a controlling shareholder. Azimuth and Cadmus are both privately
held companies. Mr. Milley has been Chairman of the Board, Chief Executive
Officer and President of ELXSI Corporation ("ELXSI") since September 1989. ELXSI
is a NASDAQ-NMS company that owns and operates a chain of family restaurants in
New England and a manufacturer of environmental inspection equipment
incorporating video technology in Orlando, Florida.
Robert C. Shaw became President, Treasurer and a Director on November 20, 1989
and was Chief Financial Officer from November 20, 1989 to June 17, 1990. Mr.
Shaw has been a Vice President of MMI since March, 1989 an officer and/or
director of Azimuth and/or certain subsidiaries thereof since November 1990, a
director of Cadmus since January 1992 and an officer and/or director of ELXSI
since September 1989. Prior to that he was Vice President of Berkeley Softworks,
Incorporated ("Berkeley") from September 1987 to March 1989. From January 1987
to September 1987, he was Vice President, and from July 1985 until January 1987,
he was Director of Finance and Operations, at Ansa Software, Incorporated
("Ansa"). Berkeley and Ansa developed and produced personal computer software.
Raymond O'S. Kelly has been a Director since October 1987, and was a Vice
President of the Company from October 1987 to November 1989. Since January 1,
1982, Mr. Kelly has been the President and Chief Executive of
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Raymond O'S. Kelly, Inc., a firm specializing in providing financial, tax
advisory, and tax compliance services. Mr. Kelly has over thirty years of
experience with international and domestic accounting firms.
Nicholas E. Toussaint has been a Director since October 1987, and served as
President and Chief Executive of the Company from August 1985 to November 1989.
Since 1979, Mr. Toussaint has been President of N.E. Toussaint & Associates,
Ltd., a San Francisco consulting firm which advises banks, other institutions,
and individuals concerning the feasibility of real estate investments. The firm
specializes in planning corporate real estate portfolios, and in this
connection, performs investment analysis. Mr. Toussaint has over twenty-five
years of experience in real estate asset management, has held a senior
management position with the Bank of California, and was a founding Director of
a national bank and its associated bank holding company.
Thomas R. Druggish became a Director on June 1, 1992 and became the Chief
Financial Officer on June 17, 1990. He currently serves as Vice President,
Treasurer and Secretary of ELXSI and Secretary and Treasurer of MMI and has been
Vice President and Secretary of Cadmus since November 1992 and an officer and/or
director of Azimuth and/or certain subsidiaries thereof since November 1990.
Prior to that Mr. Druggish was Assistant Controller at Borland International
from April 1987 to December 1989.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation of each of the most highly
compensated executive officers of the Company and of all executive officers as a
group during the years ended December 31, 1997, 1996 and 1995.
Summary Compensation Table
Annual Compensation
-------------------------------------
Name and Principal Other Annual
Position Year Salary Bonus Compensation
------------------ ---- -------- ----- ------------
Robert C. Shaw (1) 1997 $ -- -- $ --
Director, President and 1996 -- -- --
Treasurer 1995 -- -- --
Val G. Blaugh (2) 1997 59,500 -- 1,960 (3)
1996 102,000 -- 3,360 (3)
1995 102,000 -- 2,230 (3)
(1) Mr. Shaw had been retained as of November 20, 1989 under a employment
agreement for three years, which expired in November 1992, at an annual
compensation of $50,000. As specified in the agreement, the remaining
balance of the compensation has been deferred by the Company. The amounts
payable are reflected in the attached Consolidated Balance Sheets for the
years ended December 31, 1997 and 1996.
(2) Mr. Blaugh served as President of PFI National Corporation up to the Asset
Sale date of August 4, 1997. Compensation excludes 375,000 shares of Common
Stock issued under an SAR agreement entered into in connection with the
Company's acquisition of PFI National Corporation. See Item 1 above.
(3) Represents calculated taxable value of leased vehicle used by Mr. Blaugh.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the ownership of
Bell National's capital stock as of March 8, 1998 by (i) all those known by Bell
National to be beneficial owners of more than 5% of the Common Stock, (ii) all
Directors and highly compensated executive officers and (iii) all executive
officers and Directors as a group. Ownership information is based upon
information furnished by the respective beneficial owners. Of the 5,916,686
shares of Common Stock of Bell National outstanding on March 8, 1998, 696,570 of
such shares of Common Stock have been designated "Class 4-B shares" (Class 4-B
shares are without value) pursuant to certain legal proceedings. Class 4-B
shares do not have voting rights and are not entitled to any distributions from
Bell National on liquidation or otherwise. James Grauer is currently the owner
of all of the Class 4-B shares outstanding. Each person has sole voting and sole
investment power with respect to the shares listed below and described in the
footnotes to the table, below (or shares such power with his or her spouse).
Percent of
Name and Address Amount and Nature Voting
of Beneficial Owner of Beneficial Ownership* Shares
- ------------------- ------------------------ -----------
The Airlie Group L.P. 453,176 8.7% (1)
115 East Putnam Avenue
Greenwich, CT 06830
Alexander M. Milley 1,512,514 24.5% (2)
(Director, Chairman of
the Board and Secretary)
Milley & Company
3600 Rio Vista Avenue, Suite A
Orlando, FL 32805
Robert C. Shaw, 37,084 0.7% (1)
(Director, President and
Treasurer)
Raymond O'S. Kelly 45,781 0.9% (1)(3)
(Director)
Santa Fe Mortgage and
Development Company 648,485 12.4% (1)
Don Hancock
Carol G. Avakian Hancock
dba C.G.A. Avakian Co.
Post Office Box 2540
Fair Oaks, CA 95628
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All officers and directors** 1,595,379 25.8% (2)
as a group (3 persons)
- ----------------------
* To the best of the Company's knowledge each of the persons and group has
sole voting and dispositive power with respect to the shares shown. (All
such shares are held directly.)
** The persons owning these shares, including Mr. Milley, may represent a
group under Section 13(d) of the Securities Exchange act of 1934, as
amended.
(1) These percentages are based upon 5,220,116 shares of Common Stock
outstanding and entitled to vote (excluding Class 4-B shares).
(2) This ownership percentage assumes the exercise of warrants for the purchase
of 957,373 shares for the Company's Common Stock, which expire in 1999.
This percentage is also based upon a total of 6,177,489 shares, the sum of
the shares outstanding noted above and the warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bell National retained Alexander M. Milley, as Chairman of the Board and
Secretary, and Robert C. Shaw, as President and Treasurer under the terms of the
Stock Purchase Agreement and related Employment Agreements. The Employment
Agreements, which became effective on November 20, 1989 and expired in November
1992, provided for annual compensation of $50,000 to Mr. Shaw and $20,000 to Mr.
Milley, of which only a portion of Mr. Shaw's compensation was paid. Under the
terms of the Employment Agreements, Mr. Shaw and Mr. Milley are free to pursue
other business ventures, investments and personal matters as long as such
activities do not unreasonably interfere with their respective obligations to
Bell National.
In 1988, Mr. Toussaint, a Director, was granted stock options to purchase
360,000 shares of Common Stock under the terms of Bell National's Stock Option
Plan at $.30 per share. Under the same Stock Option Plan, Mr. Kelly, a Director,
was also granted stock options to purchase 90,000 shares at $.30 per share. In
November 1989, such options granted under the Bell National Stock Option Plan to
Toussaint and Kelly as well as former directors, were canceled and replaced with
Stock Appreciation Rights ("SAR's"). In general, the number of stock options
previously granted were replaced with an equal number of SAR's. Each SAR
entitled the holder to receive upon exercise an amount equal to the excess, if
any, of the market value per share at the date of exercise over the exercise
price of the SAR, plus any dividends or distributions per share made by Bell
National prior to the exercise date. On November 15, 1995 Mr. Kelly and Mr.
Toussaint's SAR agreements were amended to extend the term of their agreements
to November 20, 2001.
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On June 15, 1990, Bell National completed the purchase of 83% of the stock of
PFI from Azimuth Corporation ("Azimuth") for $6,493,000, which was based upon
the net asset value of PFI as reflected on its unaudited balance sheet as of the
close of business on June 3, 1990. Of the total purchase price paid to Azimuth,
$600,000 was supported by a five-year senior subordinated note bearing interest
at the rate of 10% per annum. The balance of the purchase price was paid in
cash, partially with funds obtained under a bank credit agreement between Bell
National and Continental Bank N.A. (the "Bank"). The principals of MMI,
including Mr. Milley and Mr. Shaw, currently own 12% of Bell National's
outstanding voting capital stock and would own 25% upon their full exercise of
stock warrants currently held. Mr. Milley and Mr. Shaw, who are the Chairman and
President (respectively) as well as Directors of Bell National are also
officers, directors and/or significant stockholders of Azimuth.
In connection with the acquisition of PFI, the remaining 17% of the outstanding
capital stock was acquired from four individual stockholders who were management
employees of PFI. The Capital Stock was acquired pursuant to separate stock
purchase agreements, each dated June 14, 1990, in exchange for an aggregate of
455,357 SAR's of Bell National. The aggregate number of SAR's issued in exchange
for their PFI stock was determined based upon the initial investment paid by
these individuals for their holdings in PFI stock in relation to the initial
investment price paid by MMI for its shares of Bell National's Common Stock.
SAR's were allocated among individuals in accordance with the ratio of the
percentage of each individual's initial investment in PFI to the total
investment of all four. In 1994, 8,929 shares of Common Stock were issued to a
plan participant under the terms of the agreement. In 1997 the SAR agreements
were deemed exercised and 428,571 shares of Common Stock were issued with 17,858
shares held is reserve for possible issuance in the future. In accordance with
the terms of these SAR's, they became automatically exercised during 1997 and
the Company elected to issue shares of Common Stock (one for each SAR) in lieu
of cash otherwise payable by the Company upon exercise.
Bell National currently rents office space in Orlando, Florida from MMI. Rent
and administrative support expenses were approximately $120,000 in each of the
years ended December 31, 1997, 1996 and 1995. Mr. Milley, the Chairman of the
Company is the President, Chairman and majority shareholder of MMI. In addition,
certain of the other officers of the Company are also officers of MMI.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 10-K
(a) Documents filed as part of this report:
Index to Financial Statements
- -----------------------------
Page
1. Financial Statements Number (s)
----------
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1997 and 1996 F-2 to F-3
Consolidated Statements of Discontinued Operations for the years
ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-15
2. Financial Statement Schedules
Schedule Page
Number Description Number
-------- ------------------------------------ ------
II Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable or not required,
or because the required information is included in the Consolidated Financial
Statements or notes thereto.
3. Exhibits
Exhibit
Number Description
- ------- -----------
2.1 Bell National Corporation Plan of Reorganization (Annex I).
(Incorporated herein by reference to Item 1 of the Company's Annual
Report on Form 10-K for the period from August 20, 1985 to December
31, 1985 and for the years ended December 31, 1986 and 1987 (File No.
0-935)).
2.2 Asset Purchase Agreement, dated as of July 17, 1997, by and among
Payne Fabrics, Inc., Bell National Corporation and Westgate Fabrics,
Inc. (Incorporated herein by reference to Exhibit 2.2 to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997 (File No. 0-935)).
15
<PAGE>
2.3 Amendment No. 1 to the Asset Purchase Agreement, dated as of August
5, 1997, by and between Payne Fabrics, Inc., Bell National
Corporation and Westgate Fabrics, Inc. (Incorporated herein by
reference to Exhibit 2.3 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997 (File No. 0-935)).
2.4 Post-Closing Escrow Agreement, dated as of August 5, 1997, by and
among Westgate Fabrics, Inc. Payne Fabrics, Inc. and Crouch and
Hallet, L.L.P. (Incorporated herein by reference to Exhibit 2.4 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997 (File No. 0-935)).
3.1 Restated Articles of Incorporation. (Incorporated herein by reference
to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988 (File No. 0-935)).
3.2 Bylaws of the Company. (Incorporated herein by reference to Exhibit
3.2 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989 (File No. 0-935)).
4.1 Registration Rights Agreement dated as of November 20, 1989 among the
Company, The Airlie Group L.P., Liberty Associates Limited
Partnership, Winchester National, Inc., Alexander M. Milley, Alan D.
Gordon, Kim G. Davis, Brian E. Kinsman, Kevin P. Lynch and Robert C.
Shaw (collectively, the "Purchasers"). (Incorporated herein by
reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
4.2 Warrant to purchase 957,373 shares of Common Stock of the Company
issued by the Company on November 20, 1989 to Liberty Associates
Limited Partnership. (Incorporated herein by reference to Exhibit 4.4
of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989 (File No. 0-935)).
9.1 Voting Trust Agreement dated as of May 11, 1989 between Santa Fe and
Mr. Nicholas E. Toussaint, as amended. (Incorporated herein by
reference to Exhibit 9.1 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.1 Standstill Agreement between Bell National Corporation, Santa Fe
Development and Mortgage Company, Inc., Donald Hancock, Carol G.
Avakian Hancock, and Fred L. Harris, dated October 20, 1988.
(Incorporated herein by reference to Exhibit 3.1 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1988 (File No. 0-935)).
10.2 Stock Purchase Agreement dated as of August 17, 1989 by and among the
Company and the Purchasers. (Incorporated herein by reference to
Annex I of the Company's Proxy Statement dated October 2, 1989
delivered to shareholders of the Company in connection with a Special
Meeting of Shareholders of Company held on November 3, 1989. (File
No. 0-935)).
10.3 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Edward B. Collins. (Incorporated herein by
reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.4 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Charles J. Hart. (Incorporated herein by
reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.5 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Raymond O'S. Kelly. (Incorporated herein by
reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.6 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Edward K. Taapken. (Incorporated herein by
reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.7 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Nicholas E. Toussaint. (Incorporated herein
by reference to Exhibit 10.7 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1989 (File No. 0-935)).
16
<PAGE>
10.8 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and John Vida. (Incorporated herein by reference
to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989 (File No. 0-935)).
10.9 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Robert A. Huret. (Incorporated herein by
reference to Exhibit 10.9 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.10 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Alan E. Rothenberg. (Incorporated herein by
reference to Exhibit 10.10 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.11 Stock Purchase Agreement dated as of June 15, 1990 by and among the
Company, as purchaser, and Azimuth Corporation, as seller.
(Incorporated herein by reference to Exhibit 2(a) of the Company's
Form 8-K filed June 15, 1990. (File No. 0-935)).
10.12 Stock Appreciation Rights Agreement dated as of June 14, 1990 between
the Company and Val G. Blaugh. (Incorporated herein by reference to
Exhibit 4 of the Company's Form 8-K filed June 15, 1990. (File No.
0-935)).
10.13 Stock Appreciation Rights Agreement dated as of June 14, 1990 between
the Company and Mark van der Kloet. (Incorporated herein by reference
to Exhibit 4 of the Company's Form 8-K filed June 15, 1990. (File No.
0-935)).
10.14 Stock Appreciation Rights Agreement dated as of June 14, 1990 between
the Company and Roy D. Rafalco. (Incorporated herein by reference to
Exhibit 4 of the Company's Form 8-K filed June 15, 1990. (File No.
0-935)).
10.15 Stock Appreciation Rights Agreement dated as of June 14, 1990 between
the Company and Jeffrey Pratt. (Incorporated herein by reference to
Exhibit 4 of the Company's Form 8-K filed June 15, 1990. (File No.
0-935)).
10.16 Employment Agreement between the Company and Alexander M. Milley
dated November 20, 1989. (Incorporated herein by reference to Exhibit
10.17 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991 (File No. 0-935)).
10.17 Employment Agreement between the Company and Robert C. Shaw dated
November 20, 1989. (Incorporated herein by reference to Exhibit 10.18
of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 (File No. 0-935)).
10.18 Revolving Credit Agreement, dated as of May 1, 1995, among Payne
Fabrics, Inc., Bell National Corporation and Bank One, Dayton,
National Association. (Incorporated herein by reference to Exhibit
10.19 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (File No. 0-935)).
10.19 SAR Agreement Extension, dated November 15, 1995, between the Company
and Raymond O'S. Kelly. (Incorporated herein by reference to Exhibit
10.20 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (File No. 0-935)).
10.20 SAR Agreement Extension, dated November 15, 1995, between the Company
and Nicholas E. Toussaint. (Incorporated herein by reference to
Exhibit 10.21 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 (File No. 0-935)).
21.1 Subsidiaries of the Company. (Incorporated herein by reference to the
exhibits filed with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 (File No. 0-935)).
27 Financial data schedule.
17
<PAGE>
(b) Reports on Form 8-K
Reports on Form 8-K filed during the fourth quarter of 1997.
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BELL NATIONAL CORPORATION
Date: March 20, 1998 BY: /s/ Alexander M. Milley
-------------------------------
Alexander M. Milley
Chairman of the Board and Secretary
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C> <C>
/s/ Alexander M. Milley Director, Chairman of the March 20, 1998
-------------------------
Alexander M. Milley Board and Secretary
/s/ Robert C. Shaw Director, President and March 20, 1998
-------------------------
Robert C. Shaw Treasurer (Principal
Executive Officer)
/s/ Raymond O'S. Kelly Director March 20, 1998
-------------------------
Raymond O'S. Kelly
/s/ Nicholas E. Toussaint Director March 20, 1998
-------------------------
Nicholas E. Toussaint
/s/ Thomas R. Druggish Director, Chief Financial March 20, 1998
-------------------------
Thomas R. Druggish Officer (Principal Financial
Officer and Accounting
Officer)
</TABLE>
19
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
Bell National Corporation
We have audited the accompanying consolidated balance sheets of Bell National
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of discontinued operations, stockholders' equity, and
cash flow for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the accompanying
index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 Consolidated Financial Statements referred to above present
fairly, in all material respects, the consolidated financial position of Bell
National Corporation and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The accompanying financial statements have been prepared assuming Bell National
Corporation will continue as a going concern. As discussed in Note 1, on August
4, 1997 the Company sold all of its operating assets subject to the majority of
its liabilities. The Board of Directors is reviewing various alternatives
relating to the future of the Company. These alternatives include liquidation or
raising additional capital to fund an acquisition. Because of the nature of the
remaining assets and liabilities at December 31,1997, this balance sheet can
also be considered as comparable to a liquidation basis presentation.
/s/ Ernst & Young LLP
----------------------
Columbus, Ohio
March 16, 1998
F-1
<PAGE>
BELL NATIONAL CORPORATION
Consolidated Balance Sheets
(Dollars in Thousands)
ASSETS
December 31,
----------------------------
1997 1996
------------ -----------
Current assets:
Cash and cash equivalents $ 1,300 $ --
Accounts receivable, net 41 1,222
Inventory, net -- 2,740
Prepaid expenses and other current assets 7 95
---------- --------
Total current assets 1,348 4,057
Property and equipment, net -- 157
Goodwill, net -- 663
Deferred sample books, net -- 1,242
Other assets -- --
---------- --------
$ 1,348 $ 6,119
========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
BELL NATIONAL CORPORATION
Consolidated Balance Sheets
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
Current liabilities:
Accounts payable $ -- $ 1,047
Current portion of long-term debt--in default in 1996 -- 2,225
Accrued compensation and employee benefits 502 444
Accrued expenses 318 512
Reserve for Asset Sale 140 --
------------------ -----------------
Total current liabilities 960 4,228
Accrued stock appreciation rights -- 268
Other liabilities -- 48
------------------ -----------------
960 4,544
Stockholders' equity:
Common stock, no par value;
authorized 12,000,000 shares, issued and
outstanding 5,916,686 at December 31, 1997
and 5,488,114 at December 31, 1996 15,849 15,815
Additional paid-in capital 10 10
Accumulated deficit (15,471) (14,250)
------------------ -----------------
Total stockholders' equity 388 1,575
------------------ -----------------
$ 1,348 $ 6,119
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
BELL NATIONAL CORPORATION
Consolidated Statements of Discontinued Operations
(Amounts in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 6,576 $ 12,550 $ 13,653
Costs and expenses:
Cost of sales 3,521 6,879 7,127
Selling, general and administrative 3,005 5,412 6,057
------------- ------------- -------------
Operating income 50 259 469
Other income (expenses):
Interest expense (134) (261) (347)
Other (17) (162) (45)
------------- ------------- -------------
Income (loss) before income taxes and
loss on Sale of Assets (101) (164) 77
Provision (benefit) for income taxes 49 (150) 29
------------- ------------- -------------
Income (loss) before Asset Sale (52) (14) 48
Loss on Asset Sale (1,169) -- --
------------- ------------- -------------
Net Income (Loss) $ (1,221) $ (14) $ 48
============= ============= =============
Earnings per common share (basic and diluted)
Income (loss) before Asset Sale $ (.01) $ -- $ .01
Loss on Asset Sale (.20) -- --
------------- -------------- -------------
Net income $ (.21) $ -- $ .01
============= ============== =============
Weighted average number of common
shares outstanding 5,749,859 5,306,142 5,283,114
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
BELL NATIONAL CORPORATION
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Additional Accum- Total
------------------------- Paid-In ulated Stockholders'
Shares Dollars Capital Deficit Equity
--------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
January 1, 1995 5,283,114 $ 15,800 $ 10 $ (14,284) $ 1,526
Net income -- -- -- 48 48
--------- ----------- ----------- ----------- ----------
December 31, 1995 5,283,114 15,800 10 (14,236) 1,574
Issuance of common
stock in connection
with exercise
of SAR's 205,000 15 -- -- 15
Net loss -- -- -- (14) (14)
--------- ----------- ----------- ----------- ----------
December 31, 1996 5,488,114 15,815 10 (14,250) 1,575
Issuance of common
stock in connection
with exercise
of SAR's 428,572 34 -- -- 34
Net loss -- -- -- (1,221) (1,221)
--------- ----------- ----------- ----------- ----------
December 31, 1997 5,916,666 $ 15,849 $ 10 $ (15,471) $ 388
========= =========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
BELL NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (1,221) $ (14) $ 48
Adjustments to reconcile net income (loss) to
net cash provided by discontinued operating activities:
Depreciation 32 55 63
Amortization of goodwill 11 20 20
Amortization of deferred sample books 624 1,143 955
Accrual for Stock Appreciation Rights (268) (73) --
Amortization of deferred debt commitment fee -- 40 20
Provision for doubtful accounts and sales
returns -- 11 (7)
Provision (benefit) for income taxes (48) (160) --
(Increase) decrease in assets:
Accounts receivable 129 (151) 10
Inventory 64 1,343 390
Prepaid expenses and other current assets 17 19 (1)
Increase (decrease) in liabilities:
Accounts payable 155 (854) 312
Accrued compensation and employee benefits 321 (5) (66)
Accrued expenses 294 131 46
Other liabilities -- 7 (53)
---------- ----------- -----------
Net cash provided by operating activities 110 1,512 1,737
---------- ----------- -----------
Investing activities:
Acquisition of property and equipment -- -- (76)
Production and purchase of deferred
sample books (369) (689) (1,727)
---------- ----------- -----------
Net cash used in investing activities (369) (689) (1,803)
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
BELL NATIONAL CORPORATION
Consolidated Statements of Cash Flows (Continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Financing activities:
Proceeds from Asset Sale $ 3,750 $ -- $ --
Proceeds from the issuance of long-term debt -- -- 5,994
Principal payments on long-term debt (2,225) (817) (5,873)
Principal payments on capital leases -- (6) (3)
Proceeds from stock issued on SAR's 34 -- --
Payment of deferred debt commitment fee -- -- (52)
-------- --------- --------
Net cash (used in) financing activities 1,559 (823) 66
-------- --------- --------
Net increase in cash and cash equivalents 1,300 -- --
Cash and cash equivalents at beginning of year -- -- --
-------- --------- --------
Cash and cash equivalents at end of year $ 1,300 $ -- $ --
======== ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 133 $ 259 $ 371
Income taxes -- 1 77
</TABLE>
The accompanying notes are an integral part of these consolidated financial
Statements.
F-7
<PAGE>
BELL NATIONAL CORPORATION
Notes To Consolidated Financial Statements
December 31, 1997
NOTE 1. The Company and Basis of Presentation
Bell National Corporation ("Bell National" and together with its subsidiaries
the "Company") was incorporated in California on October 1, 1958. Through 1985,
its principal subsidiary was Bell Savings and Loan Association ("Bell Savings"),
a state chartered savings and loan association. On July 25, 1985, the Federal
Home Loan Bank Board appointed the Federal Savings & Loan Insurance Corporation
("FSLIC") as receiver of Bell Savings. At the same time, the assets of Bell
Savings were transferred to a new, unrelated, federally chartered mutual savings
and loan association, Bell Federal. The FSLIC's action followed shortly after a
determination that Bell Savings had a negative net worth. On August 20, 1985,
Bell National filed a voluntary petition under Chapter 11 of the Bankruptcy
Code. A plan of reorganization was approved by the Bankruptcy Court, and became
effective June 29, 1987.
On June 15, 1990, Bell National purchased 100% of the Common Stock of Payne
Fabrics, Inc., a designer and distributor of decorative drapery and upholstery
fabrics, for a purchase price of $6,493,000 and the issuance of stock
appreciation rights. Bell National's other wholly-owned subsidiaries, Bell
Savings and Pacific Coast Holdings Insurance Company, have no significant assets
or liabilities .
On August 4, 1997 Payne Fabrics, Inc. sold substantially all of its assets and
most of its liabilities related to the business of designing and distributing
decorative drapery and upholstery fabrics to Westgate Fabrics, Inc.
("Westgate"), an unaffiliated third party (the "Asset Sale"). The Asset Sale
included the transfer to the buyer of the use and rights to the Payne Fabrics
name, accordingly, Payne Fabrics, Inc., changed its name to PFI National
Corporation ("PFI"). The Asset Sale left PFI without any substantial assets and
on August 4, 1997 all operations were ceased.
Under the terms of the Asset Sale PFI received $3,750,000 from Westgate net of
an unfavorable working capital adjustment of roughly $100,000. The day just
preceding the Asset Sale saw net receivables of approximately $100,000 collected
as cash (which the Company retained). This offset the working capital adjustment
effectively yielding the Company the same $3,850,000 sale price. The Board of
Directors is reviewing the various options open to the Company. Among
alternatives are the possible sale of the corporate entity or the possibility of
a liquidating dividend. The Company could also try to raise additional capital
from the sale of either stock or debt to fund the acquisition of an operating
business. To fund an acquisition of a meaningful size, it is likely that
substantial additional funds would be required, and no assurance can be given
that these funds can be obtained.
F-8
<PAGE>
NOTE 2. Summary of Significant Accounting Policies
Principles of Consolidation. The Consolidated Financial Statements include Bell
National and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated.
Use of Estimates. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three monthsor less at the time of purchase to be cash
equivalents.
Inventory. Inventory is carried at the lower of cost (first-in, first-out) or
market and consist totally of finished goods. The reserve for obsolete inventory
at December 31, 1997 and 1996 is $0 and $137,000, respectively.
Property and Equipment. Property and equipment are stated at cost and are
depreciated using the straight-line method over the assets' estimated useful
lives. Principal useful lives are as follows:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures 10 years
Machinery and equipment 12 years
Leasehold improvements Useful life or life of lease, whichever is shorter
Computer equipment and software 5 years
</TABLE>
Normal maintenance and repairs are charged to expense as incurred, significant
improvements are capitalized.
Goodwill. Assets and liabilities related to the PFI business combination have
been accounted for as a purchase transaction and were recorded at their
respective fair values at the date of acquisition. Goodwill arising from the
excess of the purchase cost, plus related acquisition expenses, over the fair
value of aggregate net assets acquired is recorded as an asset and amortized on
a straight-line basis over 40 years. Accumulated amortization at December 31,
1997 and 1996 is $0 and $155,000, respectively.
Deferred Sample Books. The cost of producing and purchasing sample books were
initially recorded as an asset and amortized over a three year period, 20% in
the year of manufacture and initial distribution and 40% in each of the two
subsequent years. Accumulated amortization at December 31, 1997 and 1996 is $0
and $1,174,000, respectively. Costs included in the development of sample books
include labor, material, freight and supplies. Labor including internal and
subcontracted, together with fabric costs, constitute approximately 85% of total
sample book costs.
F-9
<PAGE>
Revenue Recognition. The Company recognizes revenue upon shipment of product to
customers.
Income Taxes. The Company follows the liability method in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using tax rates and laws that are expected to be in
effect when the differences are expected to reverse. Valuation allowances are
provided against deferred tax assets if it is more likely than not that the
deferred tax assets will not be realized.
Income (Loss) Per Common Share. In 1997, the Financial Accounting Standards
Board Issued Statement No. 128 Earnings per Share. Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options or warrants. Diluted earnings
per share is very similar to the previously reported fully diluted earnings per
share. This had no impact on the Company's per share results.
NOTE 3. Accounts Receivable
Accounts receivable are net of allowances for sales returns and doubtful
accounts of $0 and $80,000 at December 31, 1997 and 1996, respectively.
NOTE 4. Property and Equipment
Property and equipment consists of the following at December 31:
1996
-----------------
Furniture and fixtures $ 213,000
Machinery and equipment 228,000
Leasehold improvements 153,000
Computer equipment and software 286,000
-----------------
880,000
Less accumulated depreciation and amortization 723,000
-----------------
$ 157,000
=================
All property and equipment were included in the Asset Sale of August 4, 1997.
NOTE 5. Long-Term Debt
On May 1, 1995 the Company entered into a Revolving Credit Agreement with Bank
One, Dayton, National Association ("Revolving Agreement"). The terms provided
for a total loan facility of $4,125,000 consisting of a term loan of $1,025,000,
payable in seven quarterly installments of $100,000 and a balloon payment of
$325,000 due on June 1, 1997. The remaining portion of the Revolving Agreement
consisted of a revolving line of credit, which matured on June 1, 1998.
Borrowings under the revolving line of credit were based on a percentage of
PFI's
F-10
<PAGE>
eligible accounts receivable and a percentage of PFI's eligible inventory, as
defined. The Revolving Agreement was collateralized by all of the assets of PFI,
guaranteed by the Company and subject to restrictive covenants.
During 1996 the Company did not meet certain covenants of the existing loan
facility. The quarterly installments after September 1, 1996 had not been made,
but all interest payments had remained current. Accordingly, the entire balance
outstanding was classified as current at December 31, 1996.
This Long-Term Debt obligation was extinguished by payment from the proceeds of
the Asset Sale.
NOTE 6. Leases
At December 31, 1997 PFI either settled all leases or they were assumed by the
buyer as a part of the Asset Sale.
NOTE 7. Employee Pension Plans
PFI had a defined benefit pension plan covering substantially all of its
employees. The benefits were based on years of service and annual compensation
of the employee calculated on the projected unit credit method. PFI made annual
contributions to the plan equal to the maximum amount that could be deducted for
income tax purposes. No contributions were required for the years ended December
31, 1997, 1996 or 1995. Effective January 31, 1994, the plan was frozen and no
additional benefits accrued nor did additional employees become eligible for the
plan after that time. The individual employees eligible at that time became 100%
vested in their accumulated benefits at that date.
With the cessation of all activities on August 4, 1997 and the release of all
employees, the Company determined that terminating the plan would be the least
expensive method of handling the plan. Effective December 31, 1997 the plan was
terminated and the Company began the process of making distributions to eligible
employees and developing the final regulatory filings. At December 31, 1997 the
Company recorded $295,357 for liabilities and expenses in excess of plan assets.
This amount is included in accrued compensation and employee benefits in the
current liabilities section of the balance sheet.
The following table sets forth the plan's funded status. The amounts recognized
in the Consolidated Balance Sheet at December 31, 1997 and 1996 and the net
periodic pension cost recognized for the years then ended:
F-11
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation $ 620,160 $ 1,187,000
=============== ===============
Projected benefit obligation $ 620,160 $ 1,187,000
Plan assets at fair value 324,803 1,258,000
--------------- ---------------
Plan assets in excess of (less than) projected
benefit obligation (295,357) 71,000
Unrecognized net (gain) loss -- (21,000)
Unrecognized prior service gain -- --
Unrecognized transitional asset -- (19,000)
--------------- ---------------
Net pension asset (liability) $ (295,357) $ 31,000
=============== ===============
Net pension costs include the following components:
Service cost $ -- $ --
Interest on projected benefit obligation 92,000 122,000
Actual return on plan assets (110,000) (142,000)
Other 313,000 (25,000)
--------------- ---------------
Net periodic pension expense(income) $ 295,000 $ (45,000)
=============== ===============
</TABLE>
Plan assets consist primarily of fixed income securities, commingled investment
funds, commercial paper, and short-term securities.
The following is a summary of significant actuarial assumptions used as of
December 31:
1997 1996
---------- ----------
Discount rate 6.48% 8.0%
Expected long-term rate of return on assets N/A% 9.0%
PFI maintained an employee retirement savings plan under Section 401(k) of the
Internal Revenue Code. Under the terms of the plan, eligible employees were able
to contribute up to 20% of their annual compensation, up to a ceiling of $9,240.
The Plan allowed PFI to make matching contributions. In 1997, 1996 and 1995 PFI
made matching contributions of $0, $16,676 and $27,988. PFI had the ability to
activate sections of the plan in order to allow for discretionary contributions.
As of December 31, 1997, such sections had not been activated. Effective
November 1, 1996 the plan was amended and the matching contribution made by PFI
was suspended. Due to the Asset Sale of August 4, 1997 and the cessation of all
activities the Company has determined that the 401(k) plan would be
discontinued. The Company has undertaken the process of making distributions to
eligible employees and developing the final regulatory filings.
F-12
<PAGE>
NOTE 8. Income Taxes
The effective income tax rates differed from the Federal Statutory income tax
rates as follows for the year December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Statutory Federal income tax benefit (expense) $ 402,000 $ 56,000 $ (26,000)
(Increase) Decrease resulting from:
Effect of nondeductible amortization (4,000) (19,000) (16,000)
Deferred tax benefits not recognized (398,000) -- 42,000
Reduction in valuation allowance
for deferred tax assets -- 129,000 --
Other 49,000 (6,000) --
State income tax expense -- (10,000) (29,000)
------------- ------------- -------------
Reported Income tax benefit (expense) $ 49,000 $ 150,000 $ (29,000)
============= ============= =============
The components of income tax benefit (expense) are as follows:
1997 1996 1995
------------- ------------- -------------
Deferred benefit (expense) $ 49,000 $ 160,000 $ --
State and local -- (10,000) (29,000)
------------- ------------- -------------
$ 49,000 $ 150,000 $ (29,000)
</TABLE>
At December 31, 1997, the Company had federal income tax net operating loss
carryforwards ("NOL's") of approximately $116,000,000 which expire from 1997
through 2011. Approximately $114,000,000 of these NOL's primarily arose from
income tax returns which were subject to rulings by the Bankruptcy Court. The
Internal Revenue Service has objected to the Bankruptcy Court's ability to rule
as to the amount and character of the carryforwards. In addition, under the
Internal Revenue Code ("IRC"), the benefit of these NOL's could be limited, or
eliminated, if the IRS determines there was an "ownership change" involving more
than 50% of the Company's stock. There is risk that the Company does not meet
the continuity of business requirements of the IRC. These matters create doubt
as to whether these NOL's will be utilized by the Company. For financial
reporting purposes, the Company does not recognize the benefit of these NOL's.
The remaining $2,000,000 of NOL's were generated by the operations of the
Company subsequent to the bankruptcy reorganization. These post-bankruptcy NOL's
expire from 2005 through 2012. However, the discontinuation of the Company's
operations in August, 1997 and other federal income tax regulations relating to
the utilization of NOL's may impact the future utilization of these amounts.
The Company has recorded a valuation allowance for the total future value of the
NOL's.
F-13
<PAGE>
Significant components of the Company's deferred tax asset and liability as of
December 31 were as follows:
1997 1996
----------- -----------
Deferred tax assets related to:
Net operating loss carryforwards $39,440,000 $39,100,000
Accrued stock appreciation rights -- 91,000
Reserve for obsolete inventory -- 47,000
Inventory -- 235,000
Accounts receivable reserves -- 27,000
Accrued vacation 102,000 28,000
Other -- 11,000
---------- ----------
39,542,000 39,539,000
Less valuation allowance 39,542,000 39,475,000
---------- ----------
-- 64,000
Deferred tax liability related to:
Depreciation -- 64,000
---------- ----------
Net deferred tax asset $ -- $ --
---------- ----------
The Company has recorded valuation allowances to offset the amount of the
deferred tax asset in its entirety.
NOTE 9. Stockholders' Equity
On November 20, 1989, Bell National sold 1,317,373 shares of Common Stock to a
group of investors for approximately $443,000 or $0.34 per share. In addition,
Bell National issued a warrant to acquire 957,373 shares of Common Stock. The
warrant is exercisable through November 20, 1999 at $0.37 per share. The warrant
agreement, among other things, provides for the repurchase of unexercised
warrants. The obligation of Bell National is determined by multiplying the
unexercised number of shares subject to the warrant by the excess of the current
market price (as defined) per share of Common Stock and the current warrant
price (as defined) per share of Common Stock. Since the exercise price of the
warrant was greater than the fair market value of the stock at December 31, 1997
and 1996, no liability was recorded for this obligation.
In addition to the warrant, the Company had issued under various agreements,
1,470,357 stock appreciation rights (SAR's), of which 360,000 had expired and
642,500 had been exercised as of December 31, 1997. Included in these totals are
810,000 of $0.30 exercise price SAR's of which 360,000 have expired and none
issued. Also included in the total are 660,357 of $0.00 exercise price SAR's
642,500 of which have been issued and 17,858 which are held in reserve for
possible issuance. The remaining 450,000 SAR's with a $0.30 exercise price can
be exercised through November 20, 2001.
In general, each SAR entitles the holder to receive upon exercise an amount
equal to the excess, if any, of the market value per share at the date of
exercise over the exercise price of the SAR, plus
F-14
<PAGE>
any dividends or distributions per share made by Bell National prior to the
exercise date. In lieu of making cash payments, the Company may elect to issue
shares of Common Stock on a one share-for-one SAR basis. The warrant and SAR
agreements contain mandatory stock registration rights.
At December 31, 1997 and 1996 the value of all issued and outstanding SAR's,
including related registration costs, has been estimated to be $0 and $268,000,
respectively.
Included in the common shares outstanding are 696,570 of shares of Common Stock
which have been designated "Class 4-B shares" (Class 4-B shares are without
value) pursuant to certain legal proceedings. Class 4-B shares do not have
voting rights and are not entitled to any distributions from Bell National on
liquidation or otherwise. James Grauer is currently the owner of all of the
Class 4-B shares outstanding.
NOTE 10. Related Party Transactions
The Company pays Milley Management Incorporated, a private investment and
management consulting firm a monthly fee for management services. The Chairman
and Secretary of the Company, Mr. Milley, is the President and sole director of
Milley Management Incorporated, and he and a trust for the benefit of certain
members of his immediate family are its sole stockholders. The management
services include rent for administrative offices (including space, supplies,
furniture and fixtures, computers and electronic equipment and utilities),
clerical support staffing, investor relations, maintenance of banking relations,
preparation of management reports (including monthly, quarterly and annual
budgets, forecasts and results reporting) and staffing to prepare Securities and
Exchange Commission reports, among the more prominent of services provided.
These management service fees were approximately $120,000 in each of the years
ended December 31, 1997, 1996 and 1995, respectively and amount to an
outstanding liability of $242,000 at December 31, 1997. This amount is included
in the accrued expenses of current liabilities of the balance sheet.
F-15
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BELL NATIONAL CORPORATION AND SUBSIDIARIES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Column A Column B Column C: - Additions Column D Column E
-------- ---------- ----------------------------- -------- ----------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accts. Deductions End of
Description of period Expenses (Describe) (Describe) Period
----------- ---------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for sales returns $ 24 $ -- $ -- $ 24 (D) $ --
Allowance for doubtful accounts 56 -- -- 56 (D) --
----------- ---------- ---------- --------- -----------
$ 80 $ -- $ -- $ 80 $ --
=========== ========== ========== ========= ===========
Reserve for obsolete inventory $ 137 $ -- $ -- $ 137 (D) $ --
=========== ========== ========== ========= ===========
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for sales returns $ 16 $ 385 $ -- $ 377 (A) $ 24
Allowance for doubtful accounts 53 27 -- 24 (B) 56
----------- --------- ---------- --------- -----------
$ 69 $ 412 $ -- $ 401 80
=========== ========= ========== ========= ===========
Reserve for obsolete inventory $ 106 $ 63 $ -- $ 32 (C) $ 137
=========== ========= ========== ========= ===========
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for sales returns $ 18 $ 332 $ -- $ 334 (A) $ 16
Allowance for doubtful accounts 58 25 -- 30 (B) 53
----------- --------- ---------- --------- -----------
$ 76 $ 357 $ -- $ 364 69
----------- --------- ---------- --------- -----------
Reserve for obsolete inventory $ 132 $ 15 $ -- $ 41 (C) $ 106
=========== ========= ========== ========= ===========
(A) Returns by customers during the year. (C) Obsolete inventory written off during the year.
(B) Uncollectible accounts written off during the year. (D) Included in Asset Sale of August 4, 1997.
</TABLE>
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,300,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,348,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,348,000
<CURRENT-LIABILITIES> 960,000
<BONDS> 0
<COMMON> 15,849,000
0
0
<OTHER-SE> (15,461,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,348,000
<SALES> 6,576,000
<TOTAL-REVENUES> 6,576,000
<CGS> 3,521,000
<TOTAL-COSTS> 6,526,000
<OTHER-EXPENSES> (17,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (134,000)
<INCOME-PRETAX> (101,000)
<INCOME-TAX> 49,000
<INCOME-CONTINUING> (52,000)
<DISCONTINUED> (1,169,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,221,000)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
