<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
[X] THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended Dec. 31, 1997
-------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[_] SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
Commission File Number 1-8912
------
SBM INDUSTRIES, INC.
---------------------------------------------
(Name of Small Business Issuer in it Charter)
Delaware 36-1805030
--------------------------------- ---------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1865 Palmer Avenue
Larchmont, New York 10538
- ---------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(914) 833-0649
--------------
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $1.00 par value American Stock Exchange
- ----------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: None
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
----- -----
<PAGE>
Check if disclosure of no delinquent filers pursuant to Item 405 of
Regulation S-B 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 the Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $13,716,000.
Based on the closing sales price on March 18, 1998, the aggregate
market value of the voting stock held by non-affiliates of the registrant
was approximately $2,095,000.
The number of shares outstanding of the registrant's common stock was
2,025,929 at March 18, 1998.
DOCUMENTS INCORPORATED BY REFERENCE: Part III -Definitive Proxy
Statement relating to May 5, 1998 Annual Meeting of Shareholders. Parts I
and II - Annual Report to Shareholders for the year ended December 31, 1997.
-2-
<PAGE>
PART I
Item I. Description of Business
-----------------------
General
-------
SBM Industries, Inc. (the "Company") is a holding company whose
operating subsidiary corporations are primarily engaged in the distribution
of watch batteries and related products. The Company was organized in 1935
as an Illinois corporation, was reincorporated as a Delaware corporation in
1985, and changed its name from Speed-O-Print Business Machines Corporation
in 1992. The Company's principal executive offices have been located in
Larchmont, New York since 1992.
Star Struck, Inc.
-----------------
The Company's principal operating subsidiary is Star Struck, Inc., a
Connecticut corporation ("SSI"), whose principal offices are in Bethel,
Connecticut. SSI is a distributor throughout the United States of watch
batteries. SSI also sells related products, such as alkaline, photo and
hearing aid batteries, jewelry findings, tools, supplies, and plastic bags
and manufactures and sells watch straps.
Since late 1995, SSI has also distributed a line of sports apparel.
These products consist principally of caps and shirts bearing logos of
various professional and college sports teams. These products are
manufactured for SSI by various apparel manufacturers under license from the
respective teams whose logos are being used. In 1997, sales of sports
apparel products were approximately $1.2 million.
SSI sells its watch batteries and related products through direct mail
and telemarketing to jewelry stores, discount store chains and other retail
vendors. SSI sells its sports apparel products primarily through direct
mail and print media advertising directly to consumers.
SSI competes in competitive, but highly fragmented, industries.
SSI's business does not depend on the availability of raw materials.
SSI distributes watch batteries for Sony, Eveready, Maxell, Renata, Rayovac
and Varta under the manufacturer's and SSI's private label. SSI sells its
watch straps under the Sahara, Town & Country, Downing and R. C.
Manufacturing tradenames.
-3-
<PAGE>
SSI has approximately 8,000 active customers for its watch batteries
and related products. SSI's two largest customers account for 21% and 6%,
respectively, of its sales.
Governmental regulation is not a specific influence on the business of
SSI, and generally compliance with environmental regulations have not been
burdensome to SSI.
SSI has approximately 70 full-time employees, and 2 part-time
employees.
Carlton Press, Corp.
-------------------
Carlton Press Corp. ("Carlton"), which the Company acquired in
December 1993, became the subject of a voluntary bankruptcy proceeding under
Chapter 7 of the Bankruptcy Code on December 3, 1996. Carlton ceased
operations on November 14, 1996.
Prior to the bankruptcy, Carlton was a subsidy book publisher. It
published manuscripts submitted by authors for which it charged the authors
a publishing fee. Although most of its revenue derived from the contracts
with the authors, Carlton also received royalty revenues from sales of the
books.
The Company wrote off its entire investment in Carlton in the third
and fourth quarter of 1996.
Investments
-----------
The Company generally holds its liquid assets in government
securities. Government securities include only such securities as defined
in the Investment Company Act of 1940, as amended.
General
-------
The Company does not hold any patents, trademarks, licenses,
franchises or concessions in connection with its business, except as
described above.
The Company expended no money on research and development in 1996 or
1997.
-4-
<PAGE>
Item 2. Properties.
----------
The Company leases offices in Larchmont, New York for use as its
executive offices.
SSI owns property located in the Francis J. Clarke Industrial Park at
8 Francis J. Clarke Circle in Bethel, Connecticut. The property consists of
2.344 acres of land and a warehouse/office building. The building comprises
approximately 20,500 square feet. Approximately sixty percent of the
building is used as a warehouse and the remaining forty percent is used as
offices by SSI. The warehouse space contains a loading dock. The property
is encumbered by a mortgage. SSI also leases a warehouse facility,
comprising approximately 7,000 square feet, in the various Francis J. Clarke
Industrial Park.
SSI's subsidiary, RCM, Inc., leases a manufacturing and office
facility in St. Petersburg, Florida, comprising approximately 5,000 square
feet.
Item 3. Legal Proceedings.
-----------------
The Company is not a party to any legal proceeding required to be
described in this Report.
Item 4. Submission of Matters to a Vote of Security
Holders.
-------------------------------------------
None.
-5-
<PAGE>
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters.
------------------------------------
The principal United States market in which the Company's common stock
is traded is the American Stock Exchange. See page 14 of the Company's 1997
Annual Report to Shareholders, in the section entitled "Market and Dividend
Information", which is incorporated herein by refer ence, for information
concerning the high and low sales prices for the Company's common stock for
each quarter of 1996 and 1997. As of March 18, 1998, the Company had
approximately 600 shareholders of common stock. No dividends were paid by
the Company during the 1996 and 1997 fiscal years.
Item 6. Management's Discussion and Analysis or
Plan of Operation.
---------------------------------------
See pages 12 through 13 of the Company's 1997 Annual Report to
Shareholders, which are incorporated herein by reference.
Item 7. Financial Statements and Supplementary Data.
-------------------------------------------
See pages 2 through 10 of the Company's 1997 Annual Report to
Shareholders, which are incorporated herein by reference.
Item 8. Changes in and Disagreements on Accounting
and Financial Disclosure.
------------------------------------------
None.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
----------------------------------------------------------------
See the sections entitled "Nominees for Election as Directors" and
"Executive Officers and Executive Compensation" and "Compliance with
Section 16(a) of the Exchange Act" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on May 5, 1998 which are
incorporated herein by reference, for information concerning directors,
executive officers, promoters and control persons of the Company.
-6-
<PAGE>
Item 10. Executive Compensation.
----------------------
See the section entitled "Executive Officers and Executive
Compensation" in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 5, 1998, which is incorporated herein by
reference, for information concerning executive compensation.
Item 11. Security Ownership of Certain Beneficial Owners
and Management.
-----------------------------------------------
See the sections entitled "Executive Officers and Executive
Compensation -- Stock Options," "Security Ownership of Management" and
"Other Principal Holders of Voting Securities" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 5, 1998
which are incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
----------------------------------------------
See the section entitled "Nominees for Election as Directors --
Additional Information" in the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held on May 5, 1998, which is incorporated
herein by reference.
Item 13. Exhibits, Lists and Reports on Form 8-K.
---------------------------------------
(a) 1. & 2. Financial Statements.
--------------------
A copy of the Company's Annual Report to Shareholders for the year
ended December 31, 1997 has been furnished as an exhibit to this Annual
Report on Form 10-KSB. Pages 2 through 11 of such Annual Report to
Shareholders contain the Consolidated Balance Sheet as of December 31, 1997,
and the Consolidated Statements of Income, Shareholders' Investment and Cash
Flows and Notes to Consolidated Financial Statements for each of the two
years ended December 31, 1997 and 1996, and the Auditors' Report covering
the aforementioned financial statements. These Financial Statements and the
Auditors' Report thereon are incorporated herein by reference.
(a) Exhibits
--------
(3) The Articles of Incorporation and Bylaws of the Company, as
amended, filed as Exhibit to a report on Form 8, Amendment No. 1 to the
Company's Form 10-K for the fiscal year ended December 31, 1988 and filed
May 26, 1989, are incorporated herein by reference, and Amendment to the
Articles of Incorporation of the Company, changing the name of the Company,
filed as an exhibit to the Company's report
-7-
<PAGE>
on 8-K dated September 15, 1992 and filed September 29, 1992, is
incorporated herein by reference.
(4) Certificate of Rights, Designations and Preferences relating to
the 1992 Series A Preferred Stock, filed as Exhibit (4) to the Company's
report on Form 8-K dated September 15, 1992 and filed September 29, 1992, is
incorporated herein by reference.
(10) Material Contracts.
(a) Term Loan Agreement, dated July 6, 1996, between Star Struck,
Inc. and First Fidelity Bank, filed as Exhibit 10(c) to the
Company's report on Form 10-KSB for the fiscal year ended
December 31, 1995, filed with Amendment No. 1 thereto on
April 3, 1996, is incorporated herein by reference.
(b) Guaranty and Suretyship Agreement, dated July 6, 1995 from
the Company to First Union National Bank (formerly First
Fidelity Bank), filed as Exhibit 10(d) to the Company's
report on Form 10-KSB for the fiscal year ended December 31,
1995, filed with Amendment No. 1 thereto on April 3, 1996, is
incorporated herein by reference.
(c) Mortgage, Assignment of Lease and Security Agreement, dated
July 6, 1995, between Star Struck, Inc., as mortgagor, and
First Union National Bank (formerly First Fidelity Bank), as
mortgagee, in the original amount of $800,000.00, secured by
property known as 8 Francis J. Clarke Circle, Bethel,
Connecticut, filed as Exhibit 10(e) to the Company's report
on Form 10-KSB for the fiscal year ended December 31, 1995,
filed with Amendment No. 1 thereto on April 3, 1996, is
incorporated herein by reference.
(d) Pledge Agreement, dated December 6, 1993, between SBM
Industries, Inc. and Michael Sheldon and Carlton Press, Inc.,
filed as Exhibit 10(h) to the Company's report on Form 10-KSB
for the year ended December 31, 1993.
-8-
<PAGE>
(e) Consulting Agreement, dated December 6. 1993, between SBM
Press Acquisition Corp. and Carlton Press, Inc., filed as
Exhibit 10(i) to the Company's report on Form 10-KSB for the
year ended December 31, 1993, filed March 31, 1994.
(f) Non-Compete Agreement, dated December 6, 1993, among Michael
Sheldon, SBM Press Acquisition Corp. and SBM Industries,
Inc., filed as Exhibit 10(j) to the Company's report on Form
10-KSB for the year ended December 31, 1993, filed March 31,
1994.
(11) Statement re: Computation of Per Share Earnings. See page 2 of
the Company's 1997 Annual Report to Shareholders for a description of the
computation of the Company's per share earnings, which description is
incorporated herein by reference.
(13) 1997 SBM Industries, Inc. Annual Report to Shareholders (which,
except for those portions thereof incorporated by reference in this Form 10-
KSB Annual Report, is furnished for the information of the Commission, but
is not deemed to be "filed" as part of this report).
(21) The Company owns 100% of the outstanding shares of Star Struck,
Inc., a Connecticut corporation, which owns 80% of the outstanding shares of
RCM Inc., a Florida corporation.
(27) Financial Data Schedule summary financial information extracted
from SBM Industries, Inc.'s Annual Report to Stockholders for the period
ended December 31, 1997.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
-9-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SBM INDUSTRIES INC.
s/Peter Nisselson
By:____________________________
Peter Nisselson, President,
Secretary and Chief Executive
Officer, March 25, 1998
s/Lawrence J. Goldstein
By:____________________________
Lawrence J. Goldstein,
Vice President and Treasurer
March 25, 1998
Dated: March 25, 1998
In accordance with the Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
s/Peter Nisselson
_____________________________________
Peter Nisselson, March 25, 1998
(Director)
s/Lawrence J. Goldstein
_____________________________________
Lawrence J. Goldstein, March 25, 1998
(Director)
s/Robert Morris
_____________________________________
Robert Morris, March 25, 1998
(Director)
s/Arthur Salzfass
_____________________________________
Arthur Salzfass, March 25, 1998
(Director)
s/Kenneth Karlan
_____________________________________
Kenneth Karlan, March 25, 1998
(Director)
-10-
<PAGE>
s/Keith Sessler
_____________________________________
Keith Sessler, March 25, 1998
(Director)
s/Michael Sweedler
_____________________________________
Michael Sweedler, March 25, 1998
(Director)
-11-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
- --------
(3) The Articles of Incorporation and Bylaws *
of the Company, as amended, filed as Exhibit to a
report on Form 8, Amendment No. 1 to the Company's
Form 10-K for the fiscal year ended December 31,
1988 and filed May 26, 1989, are incorporated
herein by reference, and Amendment to the Articles
of Incorporation of the Company, changing the name
of the Company, filed as an exhibit to the
Company's report on Form 8-K dated September 15,
1992 and filed September 29, 1992, is incorporated
herein by reference.
(4) Certificate of Rights, Designations and *
Preferences relating to the 1992 Series A
Preferred Stock, filed as Exhibit (4) to the
Company's report on Form 8-K dated September 15,
1992 and filed September 29, 1992, is incorporated
herein by reference.
(10) Material Contracts.
(a) Term Loan Agreement, dated July 6, *
1995, between Star Struck, Inc. and
First Union National Bank (formerly
First Fidelity Bank), filed as
Exhibit 10(c) to the Company's
report on Form 10-KSB for the
fiscal year ended December 31,
1995, is incorporated herein by
reference.
(b) Guaranty and Suretyship Agreement, *
dated July 6, 1995, from the
Company to First Union National
Bank (formerly First Fidelity
Bank), filed as Exhibit 10(d) to
the Company's report on Form 10-KSB
for the fiscal year ended December
31, 1995, is
-12-
<PAGE>
incorporated herein by reference.
(c) Mortgage, dated July 6, 1995, Star *
Struck, Inc., as mortgagor, and
First Union National Bank (fomerly
First Fidelity Bank), in the amount
of $800,000.00, secured by property
known as 8 Francis J. Clarke
Circle, Bethel, Connecticut, filed
as Exhibit 10(e) to the Company's
report on Form 10-KSB for the
fiscal year ended December 31,
1995, is incorporated herein by
reference.
(d) Pledge Agreement, dated December 6, *
1993, between SBM Industries, Inc.
and Michael Sheldon and Carlton
Press, Inc., filed as Exhibit 10(h)
to the Company's report on Form 10-
KSB for the year ended December 31,
1993, filed March 31, 1994.
(e) Consulting Agreement, dated *
December 6, 1993, between SBM
Press Acquisition Corp. and Carlton
Press, Inc., filed as Exhibit 10(I)
to the Company's report on Form 10-
KSB for the year ended December 31,
1993, filed March 31, 1994.
(f) Non-Compete Agreement, dated *
December 6, 1993, among Michael
Sheldon, SBM Press Acquisition
Corp. and SBM Industries, Inc.,
filed as Exhibit 10(j) to the
Company's report on Form 10-KSB for
the year ended December 31, 1993,
filed March 31, 1994.
-13-
<PAGE>
(11) Statement re: Computation of Per Share *
Earnings. See page 2 of the Company's 1997 Annual
Report to Shareholders for a description of the
computation of the Company's per share earnings,
which description is incorporated herein by
reference.
(13) 1997 SBM Industries, Inc. Annual Report *
to Shareholders (which, except for those portions
thereof incorporated by reference in this Form 10-
KSB Annual Report, is furnished for the
information of the Commission, but is not deemed
to be "filed" as part of this report).
(21) The Company owns 100% of the outstanding *
shares of Star Struck, Inc., a Connecticut
corporation, which owns 80% of the outstanding
shares of RCM Inc., a Florida Corporation.
(27) Financial Data Schedule
___________________________
* Incorporated by reference.
-14-
<PAGE>
SBM
- ----------
Industries
1*9*9*7
ANNUAL
REPORT
<PAGE>
SBM Industries, Inc.
- --------------------------------------------------------------------------------
To Our Shareholders 1
Selected Financial Information 2
Consolidated Statements of Income 3
Consolidated Balance Sheet 4
Consolidated Statements of Shareholders' Investment 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-10
Report of Independent Public Accountants 11
Management's Discussion and Analysis 12-13
Shareholder Information 14
Officers and Directors 15
- --------------------------------------------------------------------------------
<PAGE>
SBM Industries, Inc.
To Our Shareholders
- --------------------------------------------------------------------------------
To Our Shareholders,
Sales were $13,716,000 in 1997 versus $15,693,000 in 1996. The Company
recorded a loss of ($475,000), or (23(cent)) per share in 1997 versus a profit
of $121,000, or 6(cent) per share from continuing operations in 1996. These
results do not reflect a loss of ($2,248,000), or ($1.11) per share in 1996
resulting from the Company's discontinued subsidy publishing business.
SBM's core business (through its 100% owned Star Struck subsidiary) is the
distribution of watch batteries and watch straps for the replacement market to
jewelry and other retail stores. The Company also distributes jewelry findings,
tools, accessories and certain sports apparel.
The decreased sales and corresponding reduction in earnings in 1997 versus
the performance from continuing operations in 1996 was in large part due to the
loss of business from a major watch strap customer and lower battery sales
during the first quarter of 1997. Additionally, the loss increased by $100,000
due to the drop in the price of gold and a corresponding writedown of the
Company's jewelry findings inventory.
In mid 1996 Star Struck began selling sport caps via catalog. Cap sales
through December 1996 were $277,000. In September 1997, sport jerseys were added
to the line and a combined cap and jersey catalog was created. For the year
ended December 1997, combined sales for caps and jerseys ("sports apparel
sales") were $1,206,000. This segment of our business continues to grow.
Enclosed herewith is Star Struck's most recent sports apparel catalog for your
perusal and use.
Very truly yours,
/s/ PETER NISSELSON
Peter Nisselson
President
March 31, 1998
- --------------------------------------------------------------------------------
one
<PAGE>
SBM Industries, Inc.
Selected Financial Information
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------- ------------ ------------ ------------ ------------ ------------
December 31, 1997 1996 1995 1994 1993
- ---------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 13,716,000 $ 15,693,000 $ 14,026,000 $ 11,802,000 $ 7,823,000
Income (loss) from continuing
operations before income
taxes and extraordinary item $ (475,000) $ 121,000 $ (337,000) $ 596,000 $ 196,000
Income (loss) from continuing
operations after taxes $ (475,000) $ 121,000 $ (343,000) $ 531,000 $ 185,000
Net income (loss) $ (475,000) $ (2,127,000) $ (707,000) $ 1,119,000 $ 40,000
Basic and diluted income (loss)
per common share $ (.23) $ (1.05) $ (.35) $ .55 $ .02
Shareholders' investment $ 3,392,000 $ 3,871,000 $ 6,001,000 $ 6,708,000 $ 5,706,000
per common share $ 1.67 $ 1.91 $ 2.96 $ 3.31 $ 2.81
- ---------------------------------- ------------ ------------ ------------ ------------ ------------
Total assets $ 7,147,000 $ 8,463,000 $ 11,537,000 $ 11,715,000 $ 8,878,000
- ---------------------------------- ------------ ------------ ------------ ------------ ------------
Long-term debt $ 899,000 $ 1,103,000 $ 1,333,000 $ 1,233,000 $ 1,301,000
- ---------------------------------- ------------ ------------ ------------ ------------ ------------
Cash dividends per share $ .00 $ .00 $ .00 $ .00 $ .00
- ---------------------------------- ------------ ------------ ------------ ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
two
<PAGE>
SBM Industries, Inc.
Consolidated Statements of Income
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------- ------------ ------------
For the years ended December 31, 1997 1996
- ------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
NET SALES $ 13,716,000 $ 15,693,000
Cost of Sales 8,375,000 9,573,000
- ------------------------------------------------------------------------- ------------ ------------
Gross Profit on Sales 5,341,000 6,120,000
- ------------------------------------------------------------------------- ------------ ------------
OPERATING EXPENSES
Selling, General and Administrative 5,295,000 5,486,000
Depreciation and Amortization 336,000 327,000
- ------------------------------------------------------------------------- ------------ ------------
Total Operating Expenses 5,631,000 5,813,000
- ------------------------------------------------------------------------- ------------ ------------
Operating Income (Loss) (290,000) 307,000
- ------------------------------------------------------------------------- ------------ ------------
OTHER INCOME (EXPENSES)
Interest Expense, Net (185,000) (186,000)
- ------------------------------------------------------------------------- ------------ ------------
(185,000) (186,000)
- ------------------------------------------------------------------------- ------------ ------------
Income (Loss) from Continuing Operations Before Income Taxes (475,000) 121,000
Provision for Income Taxes (Note 6) -- --
- ------------------------------------------------------------------------- ------------ ------------
Income (Loss) from Continuing Operations (475,000) 121,000
- ------------------------------------------------------------------------- ------------ ------------
Loss from Discontinued Operations -- (2,248,000)
- ------------------------------------------------------------------------- ------------ ------------
Net Loss $ (475,000) $ (2,127,000)
- ------------------------------------------------------------------------- ------------ ------------
EARNINGS/(LOSS) PER COMMON SHARE (Note 1)
Basic:
Loss per Common Share
Income (Loss) from Continuing Operations $ (.23) $ .06
- ------------------------------------------------------------------------- ------------ ------------
Loss from Discontinued Operations -- (1.11)
- ------------------------------------------------------------------------- ------------ ------------
Net Loss per Common Share $ (.23) $ (1.05)
- ------------------------------------------------------------------------- ------------ ------------
Diluted:
Loss per Common Share
Income (Loss) from Continuing Operations $ (.23) $ .06
- ------------------------------------------------------------------------- ------------ ------------
Loss from Discontinued Operations -- (1.11)
- ------------------------------------------------------------------------- ------------ ------------
Net Loss per Common Share $ (.23) $ (1.05)
- ------------------------------------------------------------------------- ------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
Basic 2,027,000 2,027,000
- ------------------------------------------------------------------------- ------------ ------------
Diluted 2,027,000 2,027,000
- ------------------------------------------------------------------------- ------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
three
<PAGE>
SBM Industries, Inc.
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------- ------------
December 31, 1997
- -------------------------------------------------------------------------------- ------------
<S> <C>
ASSETS
Current Assets:
Cash $ 91,000
Accounts Receivable, Less Allowance for Doubtful Accounts of $175,000 1,455,000
Inventories (Note 1) 3,014,000
Prepaid Expenses and Other Current Assets 213,000
- -------------------------------------------------------------------------------- ------------
Total Current Assets 4,773,000
- -------------------------------------------------------------------------------- ------------
Property, plant and equipment, at cost (Note 1):
Land, Building and Improvements 1,235,000
Machinery and Equipment 1,025,000
- -------------------------------------------------------------------------------- ------------
2,260,000
Less - Accumulated Depreciation 714,000
- -------------------------------------------------------------------------------- ------------
1,546,000
================================================================================ ============
Intangible Assets and Goodwill, Net (Note 1) 828,000
================================================================================ ============
Total Assets $ 7,147,000
================================================================================ ============
- -------------------------------------------------------------------------------- ------------
LIABILITIES & SHAREHOLDERS' INVESTMENT
Current Liabilities:
Borrowings Under Lines of Credit (Note 4) $ 1,125,000
Accounts Payable and Accrued Expenses (Note 2) 1,440,000
Current Portion of Notes Payable (Note 5) 291,000
- -------------------------------------------------------------------------------- ------------
Total Current Liabilities 2,856,000
- -------------------------------------------------------------------------------- ------------
Other Liabilities:
Notes Payable (Note 5) 899,000
================================================================================ ============
Total Liabilities 3,755,000
================================================================================ ============
Commitments and Contingencies (Notes 10 and 11)
================================================================================ ============
Shareholders' Investment:
Preferred Shares, $1 Par Value - 500,000 Shares Authorized; Issued and
Outstanding - 0 shares in 1997 --
Common Shares, $1 Par Value - 5,000,000 Shares Authorized; Issued and
Outstanding - 2,025,929 shares in 1997 2,026,000
Paid in Surplus 4,344,000
Accumulated Deficit (2,978,000)
================================================================================ ============
Total Shareholders' Investment 3,392,000
================================================================================ ============
Total Liabilities and Shareholders' Investment $ 7,147,000
================================================================================ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this balance sheet.
- --------------------------------------------------------------------------------
four
<PAGE>
SBM Industries, Inc.
Consolidated Statements of Shareholders' Investment
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------- ------------ ------------
For the years ended December 31, 1997 1996
- -------------------------------------- ------------ ------------
<S> <C> <C>
COMMON SHARES
Balance at beginning of year $ 2,027,000 $ 2,028,000
Retirement of common shares (1,000) (1,000)
====================================== ============ ============
Balance at End of Year $ 2,026,000 $ 2,027,000
====================================== ============ ============
PAID IN SURPLUS
Balance at beginning of year $ 4,347,000 $ 4,349,000
Retirement of common shares (3,000) (2,000)
====================================== ============ ============
Balance at End of Year $ 4,344,000 $ 4,347,000
====================================== ============ ============
ACCUMULATED DEFICIT
Balance at beginning of year $(2,503,000) $ (376,000)
Net Loss (475,000) (2,127,000)
====================================== ============ ============
Balance at End of Year $(2,978,000) $(2,503,000)
====================================== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
five
<PAGE>
SBM Industries, Inc.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------ ------------ ------------
For the years ended December 31, 1997 1996
- ------------------------------------------------------ ------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (475,000) $(2,127,000)
Adjustments to reconcile net loss
to cash provided by (used in) operating activities:
Bad debt expense 216,000 105,000
Depreciation and amortization 336,000 327,000
Loss from discontinued operations -- 2,649,000
Gain on disposal of discontinued operations -- (401,000)
Changes in operating assets and liabilities:
Accounts receivable 761,000 (763,000)
Inventories 127,000 619,000
Prepaid expenses and other current assets (40,000) 40,000
Accounts payable and accrued expenses (610,000) 146,000
Deferred income (18,000) (2,000)
Changes in discontinued operations -- (1,400,000)
- ------------------------------------------------------ ------------ ------------
Total Adjustments 772,000 1,320,000
- ------------------------------------------------------ ------------ ------------
Net Cash Provided By (Used In) Operating Activities 297,000 (807,000)
====================================================== ============ ============
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Fixed Assets (122,000) (105,000)
====================================================== ============ ============
Net Cash Used In Investing Activities (122,000) (105,000)
====================================================== ============ ============
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Notes Payable -- 567,000
Proceeds from Line of Credit -- 375,000
Retirement of Common Shares (4,000) (3,000)
Payment on Notes Payable (209,000) (119,000)
====================================================== ============ ============
Net Cash Provided By (Used In) Financing Activities (213,000) 820,000
====================================================== ============ ============
Net Decrease in Cash & Cash Equivalents (38,000) (92,000)
====================================================== ============ ============
Cash & Cash Equivalents at Beginning of Year 129,000 221,000
====================================================== ============ ============
Cash & Cash Equivalents at End of Year $ 91,000 $ 129,000
====================================================== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
six
<PAGE>
SBM Industries, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Major Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of SBM Industries,
Inc. (the "Company") and its subsidiaries, Star Struck, Inc. ("SSI") and RCM,
Inc. ("RCM"). The Carlton Press Corp. ("CPC") business is accounted for as a
discontinued operation (See Note 7). SSI is 100% owned by the Company, while RCM
is an 80% owned subsidiary. As a result of the minority shareholders'
proportionate share of the deficiency of RCM, the Company will recognize the
first $88,000 of RCM's net income, if any, before recording any funds due to the
minority stockholders. All intercompany transactions have been eliminated.
Utilization 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.
Inventories
Inventories, with the exception of gold, are stated at the lower of cost
(first-in, first-out) or market. Gold inventory is valued at market. Inventories
consist principally of finished goods.
Property, Plant and Equipment
The company provides for depreciation generally using the straight-line method
for financial reporting and an accelerated method for income tax purposes.
Estimated useful lives are as follows:
<TABLE>
<CAPTION>
Assets Life
------ ----
<S> <C>
Office Equipment 5-7 Years
Machinery and Equipment 7 Years
Building and Improvements 31.5-39 Years
</TABLE>
Repair and maintenance costs are expensed as incurred. Renewals and betterments
are capitalized. Upon retirement or other disposition of property, the cost and
related depreciation or amortization are removed from the accounts. Gains and
losses on such retirements are included in income.
Income Taxes
Income taxes have been provided using the liability method in accordance with
Financial Accounting Standards Board ("FASB") Statement No. 109, "Accounting for
Income Taxes."
Advertising Costs
The Company expenses the costs of advertising at the initial time of
advertisement, except for those costs related to direct response advertising
through catalog mailings. Direct response advertising costs, consisting
primarily of catalog preparation, paper and printing, are amortized over the
three month period following the mailing of the catalogs, the period during
which the benefits are expected.
Fair Value of Financial Instruments
The fair value of notes payable outstanding is estimated by discounting the
future cash flows using the current rates offered by lenders for similar
borrowings with similar credit ratings. The carrying amounts of the accounts
receivable and debt approximate their fair value.
Earnings/(Loss) Per Common Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." In accordance with SFAS No. 128, net earnings (loss) per common share
amounts ("basic EPS") were computed by dividing net earnings (loss) by the
weighted average number of common shares outstanding and excluded any potential
dilution. Net earnings (loss) per common share amounts assuming dilution
("diluted EPS") were computed by reflecting potential dilution from the exercise
of stock options. SFAS No. 128 requires the presentation of both basic EPS and
diluted EPS on the face of the income statement. Earnings per share amounts for
the same prior-year periods have been restated to conform with the provisions of
SFAS No. 128.
Reclassifications
Certain 1996 balances have been reclassified to conform with the 1997
presentation.
Revenue Recognition
Revenue is recognized upon shipment of merchandise to customers.
Amortization of Intangibles
Goodwill is being amortized on a straight-line basis over fifteen, twenty, or
forty years. Subsequent to its acquisitions, the Company continually evaluates
whether later events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of the
related business segments undiscounted net income over the remaining life of the
goodwill in measuring whether the goodwill is recoverable.
Major components of intangibles are as follows:
<TABLE>
<CAPTION>
- ------------------------------ --------------- -------
Amortization
Amounts in thousands Period (Years) 1997
- ------------------------------ --------------- -------
<S> <C> <C>
Non-compete agreements 7-10 $ 981
Other intangibles and goodwill 15-40 375
- ------------------------------ --------------- -------
1,356
Accumulated amortization 528
- ------------------------------ --------------- ========
$ 828
=======
</TABLE>
Stock Options
The Company currently follows the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), which
requires compensation expense for the Company's options to be recognized only if
the market price of the underlying stock exceeds the exercise price on the date
of the grant.
The Company has not adopted the measurement requirements of SFAS No. 123,
"Accounting for Stock Based Compensation", for stock option grants to employees
and, accordingly, has made all the required proforma disclosures for the years
ended December 31, 1997 and 1996 in Note 3.
- --------------------------------------------------------------------------------
seven
<PAGE>
SBM Industries, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued a new disclosure
standard. Results of operations and financial position will be unaffected by
implementaion of this new standard.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enteprise and Related Information" ("SFAS No. 131"), which supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS No. 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by management in deciding
how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. The Company has not yet determined what additional disclosures, if
any, may be required in connection with adopting these statements.
2. Accounts Payable and Accrued Expenses
A breakdown of significant accounts payable and accrued expenses at December 31,
1997, is as follows:
<TABLE>
<CAPTION>
- ------------------------------- -------
Amounts in thousands 1997
- ------------------------------- -------
<S> <C>
Accounts payable 1,230
Accrued expenses 210
- ------------------------------- -------
$ 1,440
=======
</TABLE>
3. Stock Options
The 1992 Incentive Stock Option Plan of SBM Industries, Inc. is a qualified plan
which reserved 100,000 shares of the Company's unissued common stock for
issuance to officers and salaried employees at option prices not less than 100%
of the fair market value on the date of grant. Options are exercisable after the
date of grant and expire five years from the date of grant.
After a one year waiting period forty percent of the options granted may be
exercised in the second year and twenty percent in each of the next three
years.
The Company accounts for all plans under APB Opinion No. 25. No compensation
cost has been recognized as all options granted during 1996 have been granted at
the fair market value of the Company's common stock. No options were granted in
1997. Had compensation cost for these plans been determined in accordance with
SFAS 123, the Company's proforma net loss and EPS would be the same as the
reported amounts.
Under SFAS 123, the fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996: (1) expected life of option of eight years;
(2) dividend yield of 0%; (3) expected volatility of 46%; and (4) risk-free
interest rate of 6.87%.
Because SFAS 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting proforma compensation cost may not be
representative of that to be expected in future years.
Transactions under the Incentive Stock Option Plan during 1996 and 1997 were as
follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
- ---------------------------------------------- ------------------- ------------------
Weighted Weighted
Average Average
Exercise Exercise
Amount Price Shares Price
- ---------------------------------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 13,400 4.64 34,400 5.65
Granted -- -- 4,900 4.63
Exercised -- -- -- --
Terminated/Expired (4,250) 4.45 (25,900) 5.97
------ -------
Options outstanding at end of year 9,150 4.74 13,400 4.64
====== =======
Exercisable at end of year 3,970 5,280
====== =======
Weighted average fair value of options granted 5.48 5.48
==== ====
- ----------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
- --------------- -----------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Excercisable Average
at Contractual Excercise at Exercise
Exercise Prices 12/31/97 Life Price 12/31/97 Price
- --------------- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.31-$4.63 7,200 2.54 $4.00 2,800 $3.31
$7.50 1,950 2.00 $7.50 1,170 $7.50
----- -----
9,150 2.43 $4.74 3,970 $4.54
===== =====
- --------------- -----------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
eight
<PAGE>
SBM Industries, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
4. Borrowings Under Line of Credit
The Company has $1,225,000 available in line of credit agreements with two of
its banks. These agreements for $1,000,000 and $225,000 extend through May 1998
and January 1999, respectively. Borrowings under the lines bear interest at the
prime rate plus one percent (9.5% at December 31, 1997) and prime rate plus one
and one-half percent (10% at December 31, 1997), respectively. The Company's
accounts receivable and a portion of its inventory have been pledged as
collateral for these lines of credit. As of December 31, 1997, the Company had
$1,125,000 outstanding under these lines of credit.
5. Notes Payable
The Company's outstanding long-term debt as of December 31, 1997, is summarized
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------- -----------
1997
- -------------------------------------------------------------------------------- -----------
<S> <C>
Variable rate mortgage payable, due in monthly installments to 2003; the current
annual rate is 9.25%. The Company's building has been pledged as collateral. $ 703,000
Promissory note payable, due in monthly installments from 1999 through 2000, net
of $17,000 discount. Interest imputed at 6%. 133,000
Promissory note payable, due in monthly installments through 1999. Interest
imputed at 6%. 271,000
9.75% promissory note payable, due in 1998. 3,000
7.75% promissory note payable, due to related party in 1998. 80,000
----------
1,190,000
- -------------------------------------------------------------------------------- -----------
Less Current Portion 291,000
================================================================================ ===========
$ 899,000
================================================================================ ===========
</TABLE>
Scheduled maturities of all long-term debt instruments at December 31,1997 are
as follows:
<TABLE>
<S> <C>
1998 $ 291,000
1999 215,000
2000 101,000
2001 40,000
2002 40,000
Thereafter 503,000
----------
$1,190,000
----------
</TABLE>
Total interest expense was $261,000 and $247,000 in 1997 and 1996, respectively.
Land, building and improvements include a building with a cost of $674,000,
which has a $703,000 mortgage balance at December 31, 1997.
6. Income Taxes
Deferred income taxes result from timing differences in recording of certain
expenses for financial reporting and tax purposes. The source of these
differences and the tax effects are as follows:
<TABLE>
<CAPTION>
- -------------------------------- ------- --------
Amounts in thousands 1997 1996
- -------------------------------- ------- --------
<S> <C> <C>
Net operating loss carryforward $ 1,345 $ 1,219
Excess of financial depreciation
over tax depreciation 73 54
Bad debt reserves 54 54
Alternative minimum tax 0 0
- -------------------------------- ------- --------
$ 1,472 $ 1,324
Valuation Allowance (1,472) (1,324)
- -------------------------------- ------- --------
$ 0 $ 0
======= =======
</TABLE>
Reconciliations between actual tax expense and the amount computed by applying
the statutory U.S. Federal Income tax rate to income (loss) from continuing
operations are as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------- --------------------------------------
% of % of
Pre-Tax Pre-Tax
Amounts in thousands Amount Income Amount Income
- -------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Tax at statutory
Federal Income tax rate $(162) (34.0%) $(723) (34.0%)
Current year addition
to Net Operating Loss 162 34.0 723 34.0
State and local taxes, and other 0 0 0 0
- -------------------------------- --------------------------------------
$ 0 0 $ 0 0
================ ================
</TABLE>
At December 31, 1997, for tax reporting purposes, the Company had approximately
$3,957,000 of operating loss carryforwards. The tax operating loss carryforwards
will begin expiring in 2005.
7. Discontinued Operations
In December 1996, the Company's 80% owned subsidiary, CPC, filed a voluntary
petition under chapter 7 of the United States Bankruptcy Code. The gain on
discontinuance of $401,000 and the loss from operations of $2,649,000 have been
recognized as discontinued operations in the 1996 consolidated statement of
income.
- --------------------------------------------------------------------------------
nine
<PAGE>
SBM Industries, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
8. Business Segments
The Company's operations by business segment for the years ended December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Battery, Watch Strap
and Sports Apparel Leather
1997 Distribution Manufacturing Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 12,389,000 $ 1,327,000 $ 13,716,000
Operating Loss $ (73,000) $ (217,000) $ (290,000)
Identifiable Assets $ 7,036,000* $ 111,000 $ 7,147,000
Depreciation & Amortization $ 295,000 $ 41,000 $ 336,000
Capital Expenditures $ 121,000 $ 1,000 $ 122,000
</TABLE>
* Includes corporate assets amounting to $17,000.
<TABLE>
<CAPTION>
Battery, Watch Strap
and Sports Apparel Leather
1996 Distribution Manufacturing Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $13,379,000 $ 2,314,000 $15,693,000
Operating Income $ 134,000 $ 173,000 $ 307,000
Identifiable Assets $ 8,062,000* $ 401,000 $ 8,463,000
Depreciation & Amortization $ 292,000 $ 35,000 $ 327,000
Capital Expenditures $ 43,000 $ 62,000 $ 105,000
</TABLE>
* Includes corporate assets amounting to $31,000.
The majority of the customers in the battery, watch strap and sports apparel
distribution line of business are small retail jewelers and consumers
nationwide. The leather manufacturing sales are made to distributors in the
United States and Hong Kong.
9. Major Customers
During 1997 and 1996, 21% and 13%, respectively, of the Company's total sales
were made to a single customer in the battery, watch strap and sports apparel
distribution line of business.
10. Commitments
The Company leases certain property and equipment under operating leases
expiring on various dates through 2002. Total rent expense amounted to $164,322
and $131,623 in 1997 and 1996, respectively. Aggregate future minimum rent
payments under the terms of non-cancelable leases as of December 31 are as
follows:
<TABLE>
<S> <C>
1998 $121,000
1999 82,000
2000 69,000
2001 60,000
2002 25,000
</TABLE>
In 1996, the Company entered into a consulting agreement which includes annual
payments of $10,000 for three years.
11. Contingencies
The Company has contingent liabilities with respect to litigation and claims
arising in the ordinary course of business. In the opinion of management, such
contingent liabilities are not likely to result in any loss that would have a
material adverse effect on the Company's operating results or financial
condition.
- --------------------------------------------------------------------------------
ten
<PAGE>
SBM Industries, Inc.
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders of SBM Industries, Inc.:
We have audited the accompanying consolidated balance sheet of SBM Industries,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997, and the
related consolidated statements of income, shareholders' investment and cash
flows for each of the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SBM Industries, Inc., and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for each of the two years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
February 27, 1998
- --------------------------------------------------------------------------------
eleven
<PAGE>
SBM Industries, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
1997
- ----
Net Sales
Total sales for SBM from continuing operations in 1997 decreased 13% to
$13,716,000 from $15,693,000 in 1996. These sales, as well as the sales and
earnings from continuing operations for the five years covered by the foregoing
financial statements and selected financial data, are primarily attributable to
SBM's Star Struck, Inc. ("SSI") subsidiary.
Sales for SSI were $12,389,000, down 7% from $13,379,000 in 1996. Increased
sales in the second and third quarters of 1997 of $67,000 and $247,000,
respectively, over 1996's sales for the same periods were offset by decreased
sales in the first and fourth quarters of 1997 of $1,142,000 and $162,000,
respectively, from 1996's sales for these periods.
RCM, Inc. ("RCM"), SBM's 80% owned watch strap and small leather goods
manufacturer, had sales of $1,327,000. This represents a decrease in sales of
$987,000, or 43%, from $2,314,000 in 1996 due to the loss of business from a
major watch strap customer.
Gross Profit
Gross profit, as a percentage of sales, did not change from 1996's gross profit
of 39%.
SSI's gross profit on sales of 41% was up 2% from 39% in 1996. This increase can
be attributable to increased sports apparel sales which had a higher gross
margin than the other product lines distributed by SSI. While sports apparel
sales accounted for only 2% of SSI's total sales in 1996, in 1997 they comprised
10% of SSI's total sales.
RCM's gross profit on sales of 18% was down 22% from 40% in 1996. This gross
margin reflects start up costs relative to RCM's efforts to establish themselves
in the small leather goods industry.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of sales,
increased to 39% in 1997 as compared with 35% in 1996 for the Company. SSI's
expenses were 35% of the Company's total sales in 1997 as opposed to 30% of
total sales in 1996, while RCM decreased its expenses from 5% of total sales in
1996 to 3% of total sales in 1997.
Operating Income (Loss)
Operating income decreased by $597,000 from 1996's profit of $307,000 to show a
loss of $290,000. Reflected in 1997's operating loss were SSI's and RCM's
operating losses of $27,000 and $217,000, respectively, and SBM's corporate loss
of $46,000.
Interest Expense
Net interest expense was $185,000 in 1997 versus $186,000 in 1996. Approximately
$98,000 in interest expense related to the borrowings on the Company's lines of
credit was recorded in 1997 compared to $102,000 in 1996. Interest on a mortgage
totaled approximately $67,000 in 1997.
Net Income (Loss)
The Company showed a net loss of $475,000, or $(.23) per share in 1997 compared
to a net loss of $2,127,000, or $(1.05) per share in 1996. While 1996's net loss
reflected a loss from discontinued operations of $2,248,000, or $(1.11) per
share, income from continuing operations decreased $596,000 in 1997 to show a
loss of $475,000.
1996
- ----
In December 1996, SBM Industries, Inc.'s ("SBM" or the "Company") 80% owned
subsidiary, Carlton Press Corp. ("CPC") filed a voluntary petition under chapter
7 of the United States Bankruptcy Code. The gain on discontinuance of $401,000
and the loss from operations of $2,649,000 have been recognized as discontinued
operations in the 1996 consolidated statement of income.
Net Sales
Total sales for SBM from continuing operations in 1996 increased 12% to
$15,693,000 from $14,026,000 in 1995. These sales, as well as the sales and
earnings from continuing operations for the five years covered by the foregoing
financial statements and selected financial data, are primarily attributable to
SBM's Star Struck, Inc. ("SSI") subsidiary.
Sales for SSI were $13,379,000, up 2% from $13,094,000 in 1995.
RCM, Inc. ("RCM"), SBM's 80% owned watch strap manufacturer, had sales of
$2,314,000. This $1,382,000 increase over 1995 sales of $932,000 can be
attributed to the additional revenue obtained from a new customer relationship
that was established late in 1995 and grew during 1996.
- --------------------------------------------------------------------------------
twelve
<PAGE>
SBM Industries, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Gross Profit
Gross profit, as a percentage of sales, decreased to 39% in 1996 from 40% in
1995.
SSI's gross profit on sales of 39% was down 2% from 41% in 1995. This decrease
is attributable to more competitive pricing offered to customers in the market
place.
RCM's gross profit on sales increased 17% to 40% from 23% in 1995. 1996's gross
margin is more indicative of RCM's performance than that of 1995, as it includes
only minimal start up costs associated with establishing new business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of sales,
decreased to 35% in 1996 as compared with 40% in 1995 for the Company. RCM's
expenses were 5% of total sales in 1996 as opposed to 4% of total sales in 1995,
while SSI decreased its expenses from 36% of total sales in 1995 to 30% of total
sales in 1996. SSI's decrease is a combination of several items. A consulting
agreement, as a result of a prior year acquisition, expired in 1996 and
commission agreements with sales representatives have been modified to maintain
profitability in specific product lines.
Operating Income (Loss)
Operating income increased by $627,000 from 1995's loss of $320,000 to show a
profit of $307,000. Reflected in 1996's operating profit were SSI's and RCM's
operating profits of $201,000 and $173,000, respectively, which were offset by
SBM's corporate loss of $67,000.
Interest Expense
Net interest expense was $186,000 in 1996, up $77,000 from $109,000 in 1995.
Approximately $102,000 in interest expense related to the additional borrowings
on the Company's lines of credit was recorded in 1996. Interest on a mortgage
that was refinanced in 1995 totaled approximately $70,000.
Net Income
The Company showed a net loss of $2,127,000, or $(1.05) per share in 1996
compared to a net loss of $707,000, or $(.35) per share in 1995. Income from
continuing operations increased $464,000 to show a profit of $121,000, or $.06
per share in 1996, as compared to a loss from continuing operations of $343,000,
or $(.17) per share in 1995.
Liquidity and Capital Resources
The net decrease in cash and cash equivalents of $38,000 is attributable to cash
provided by operating activities of $297,000, which was offset by cash used in
investing and financing activities of $122,000 and $213,000, respectively. The
combined accounts receivable of SSI and RCM decreased $977,000 or 40%, in 1997
from 1996's combined accounts receivable balance for the two entities. Inventory
levels for SSI and RCM decreased $127,000 or 4%, in 1997 from those for 1996.
During 1997, the Company repaid $209,000 of its outstanding debt; $163,000
related to the Carlton Press Corp. ("CPC") debt which was assumed by the Company
in 1996.
The Company has a line of credit agreements with two of its banks. The Company
has $1,225,000 available under the lines of credit, of which $1,125,000 was used
at December 31, 1997.
The Company believes is has adequate funds available to conduct and continue its
business and to repay the approximately $291,000 in long-term debt which will
mature in 1998.
Year 2000 Compliance
The Company has addressed and evaluated the overall year 2000 issue. Necessary
changes to the Company's computer systems have been identified and are being
implemented. Date sensitive computer programs that do not properly recognize the
year 2000 could generate incorrect data or cause a system to fail, resulting in
business interruption. Costs incurred, which were immaterial relative to the
year 2000 issue, have been expensed.
The year 2000 issue is expected to affect the systems of suppliers and vendors
with which the Company interacts. There can be no assurance that any potential
year 2000 noncompliance within the systems of these other companies will not
have a material adverse effect on the Company.
- --------------------------------------------------------------------------------
thirteen
<PAGE>
SBM Industries, Inc.
Shareholder Information
- --------------------------------------------------------------------------------
Market and Dividend Information
The following table shows the quarterly per share sales price ranges of the
Company's common stock on the American Stock Exchange for 1997 and 1996. No
dividends were paid during this period. On March 18, 1998 there were 2,025,929
shares of common stock outstanding.
<TABLE>
<CAPTION>
------------------- -------------------
1997 1996
- ---------------------- ------ ------ ------ ------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $3.875 $3.188 $5.375 $3.938
Second Quarter 3.313 3.063 5.188 4.000
Third Quarter 3.500 3.063 5.250 4.188
Fourth Quarter 3.250 3.000 4.438 3.125
</TABLE>
Annual Meeting
The Annual Meeting of Shareholders of SBM Industries, Inc. will be held on May
5, 1998.
Availability of Form 10-KSB
A copy of SBM Industries, Inc's. 1997 Annual Report to the Securities and
Exchange Commission Form 10-KSB will be furnished without charge to shareholders
upon written request to the Corporate Secretary.
Capital Stock Listing
American Stock Exchange
Symbol: SBM
Transfer Agent and Registrar
Harris Trust and Savings Bank, Chicago
Auditors
Arthur Andersen LLP, New York
- --------------------------------------------------------------------------------
fourteen
<PAGE>
SBM Industries, Inc.
- --------------------------------------------------------------------------------
Officers and Directors
Lawrence J. Goldstein
Vice President and Director; General
Partner, Santa Monica Partners
Kenneth Karlan
Vice President and Director
Robert J. Morris
Director; President of Dunhill
Personnel of Manhattan
Peter Nisselson
President and Director
Arthur Salzfass
Director; President, Rutledge Books, Inc.
Keith Sessler
Vice President and Director
Michael J. Sweedler
Director; Partner, Darby and Darby,
P.C.
- --------------------------------------------------------------------------------
fifteen
<PAGE>
SBM
Industries
1865 Palmer Avenue
Larchmont, NY 10538
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SBM
INDUSTRIES, INC.'S ANNUAL REPORT TO STOCKHOLDERS FOR THE PERIOD ENDED DECEMBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 91,000 0
<SECURITIES> 0 0
<RECEIVABLES> 1,630,000 0
<ALLOWANCES> 175,000 0
<INVENTORY> 3,014,000 0
<CURRENT-ASSETS> 4,773,000 0
<PP&E> 2,260,000 0
<DEPRECIATION> 714,000 0
<TOTAL-ASSETS> 7,147,000 0
<CURRENT-LIABILITIES> 2,856,000 0
<BONDS> 0 0
0 0
0 0
<COMMON> 2,026,000 0
<OTHER-SE> 1,366,000 0
<TOTAL-LIABILITY-AND-EQUITY> 7,147,000 0
<SALES> 13,716,000 15,693,000
<TOTAL-REVENUES> 13,716,000 15,693,000
<CGS> 8,375,000 9,573,000
<TOTAL-COSTS> 5,631,000 5,813,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 185,000 186,000
<INCOME-PRETAX> (475,000) 121,000
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (475,000) 121,000
<DISCONTINUED> 0 (2,248,000)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (475,000) (2,127,000)
<EPS-PRIMARY> (.23) (1.05)
<EPS-DILUTED> (.23) (1.05)
</TABLE>
