SCHEDULE 14C
INFORMATION STATEMENT PURSUANT TO SECTION 14(c) OF THE
SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box:
Preliminary Information Statement
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X Definitive Information Statement
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Confidential, for Use of the Commission Only (as permitted
by Rule 14c-5(d)(2))
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CENTERCORE, INC.
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (check the appropriate box):
$125 per Exchange Act Rules 0-11(c)(1)(ii) or 14c-5(g).
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Fee computed on table below per Exchange Act Rules 14c-5(g)
and 0-11.
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(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction
applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11.
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
- ----- Fee paid previously with preliminary materials.
X Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount previously paid: $1,300
(2) Form, Schedule or Registration Statement No.:
Preliminary Information Statement
(3) Filing Party: CenterCore, Inc.
(4) Date Filed: June 26, 1995
CENTERCORE LOGO GOES HERE
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 24, 1995
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
CenterCore, Inc. (the "Company") will be held at the offices of Maris
Equipment Company, Inc. at 110 Summit Drive, Exton, PA 19341 on
Thursday, August 24, 1995 at 9:00 a.m., local time, for the following
purposes:
1. To elect three directors;
2. To consider and vote upon a proposal to amend the 1993
Stock Option Plan;
3. To consider and vote upon a proposal for the sale of
substantially all of the assets of the Company's office
furnishings business, including the office seating business
operated by the Company's subsidiary, Corel Corporate Seating,
Inc.; and
4. To transact such other business as may properly come before
the meeting or any adjournment or adjournments thereof.
The Board of Directors has established the close of business on
June 27, 1995 as the record date for the determination of stockholders
entitled to notice of and to vote at the meeting or any adjournments
thereof.
The accompanying Information Statement is furnished on behalf of
the Board of Directors of the Company to provide notice of the Company's
Annual Meeting of Stockholders. WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
By order of the Board of Directors,
GEORGE E. MITCHELL
President and Chief Executive Officer
110 Summit Drive
Exton, PA 19341
August 4, 1995
CENTERCORE, INC.
110 Summit Drive
Exton, PA 19341
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
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INFORMATION STATEMENT
This Information Statement is furnished on behalf of the Board of
Directors of CenterCore, Inc. (the "Company") to provide notice of the
Annual Meeting of Stockholders to be held on August 24, 1995 (such
meeting and any adjournment or adjournments thereof referred to as the
"Annual Meeting") for the purposes set forth in the accompanying Notice
of Annual Meeting of Stockholders and in this Information Statement.
This Information Statement is being mailed to stockholders on or about
August 4, 1995.
Voting Securities
Only the holders of shares of common stock, par value $.01 per
share (the "Common Stock"), and Series A Redeemable Convertible
Preferred Stock, par value $.01 per share (the "Series A Shares"), of
the Company of record at the close of business on June 27, 1995
(cumulatively, the "Shares") are entitled to receive notice of, and to
vote at, the Annual Meeting. On that date, there were 10,437,326 shares
of Common Stock and 15,000 Series A Shares outstanding and entitled to
be voted at the Annual Meeting. Each share of Common Stock is entitled
to vote for up to three persons as directors and to cast one vote on
each other matter to be considered. Each Series A Share is entitled to
cast one vote for each share of Common Stock into which such Series A
Shares can be converted. At June 27, 1995, each Series A Share was
convertible into 100 shares of Common Stock.
The three nominees receiving the highest number of affirmative
votes of the Shares present or represented and entitled to be voted
shall be elected as directors. The approval of the adoption of the
proposed amendment to the 1993 Stock Option Plan requires the
affirmative vote of a majority of the votes cast at a meeting at which a
quorum is present, either in person or by proxy, and voting on such
amendment. Approval of the proposal to adopt a resolution for the sale
of substantially all of the assets of the Company's office furnishings
business, including the office seating business operated by the
Company's subsidiary, Corel Corporate Seating, Inc., requires the
affirmative vote of a majority of the outstanding Shares entitled to
vote at the Annual Meeting. At June 27, 1995, Safeguard Scientifics
(Delaware), Inc., the majority stockholder of the Company, was the
holder of 6,744,757 shares of Common Stock and 15,000 Series A Shares
and has advised the Company that it intends to vote its Shares in favor
of the election of the named nominees and in favor of proposals 2 and 3.
A majority of outstanding Shares will constitute a quorum for the
transaction of business at the Annual Meeting. Votes withheld from any
director, abstentions and broker non-votes will be counted for purposes
of determining the presence of a quorum for the transaction of business
at the Annual Meeting. Abstentions are counted in tabulations of the
votes cast on proposals presented to stockholders. Broker non-votes are
not counted for purposes of determining whether a proposal has been
approved.
Stockholder Proposals for 1996 Annual Meeting
Stockholders intending to present proposals at the next Annual
Meeting of Stockholders to be held in 1996 must notify the Company of
the proposal no later than March 8, 1996.
Securities Ownership of Certain Beneficial Owners and Management
The following table sets forth as of June 15, 1995, the Company's
Common Stock beneficially owned by each person known to the Company to
be the beneficial owner of more than 5% of the outstanding Common Stock,
and the number of shares of Common Stock owned beneficially by each
director, by each named executive officer, and by all executive officers
and directors as a group. In addition to the information regarding the
Company's Common Stock listed below, as of June 15, 1995, there were
15,000 Series A Shares issued and outstanding. All of such Series A
Shares are owned of record by Safeguard Scientifics (Delaware), Inc., a
wholly owned subsidiary of Safeguard Scientifics, Inc. ("Safeguard"),
and consequently are beneficially owned by Safeguard. The following
table does not take into account the agreement of Safeguard to
contribute 2,000,000 shares of Common Stock to the Company and to sell
2,500,000 shares of Common Stock to Company management. After
consummation of these transactions, Safeguard's ownership will be
reduced to 37.7% of the outstanding Common Stock, and the officers and
directors as a group will own 36.8% of the outstanding Common Stock.
Number of Percent of
Shares Owned(1) Class
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Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087 (2) 8,244,757 69.1%
George E. Mitchell (3) 651,250 6.2%
110 Summit Drive
Exton, PA 19341
Anthony A. Nichols (4) 29,688 *
Richard P. Richter (4) 5,100 *
Michael H. Pelosi III(4) 47,500 *
Officers and directors
as a group (5 persons)(5) 801,038 7.6%
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(*) Less than 1%.
(1) Except as otherwise disclosed, the nature of beneficial ownership
is the sole power to vote and to dispose of the shares (except for
shares held jointly with spouse).
(2) Safeguard Scientifics (Delaware), Inc. is the record owner of
6,744,757 shares of Common Stock and 15,000 Series A Shares, which are
presently convertible into 1,500,000 shares of Common Stock. Such
shares are beneficially owned by Safeguard. All of the shares
beneficially owned by Safeguard have been pledged by Safeguard as
collateral in connection with its bank line of credit.
(3) Includes 300,000 shares of Common Stock held by Mr. Mitchell's
spouse.
(4) Includes for Messrs. Nichols, Richter and Pelosi 5,000 shares,
5,000 shares and 37,500 shares, respectively, which may be acquired
pursuant to stock options which are currently exercisable or which will
become exercisable by August 14, 1995.
(5) Includes 115,000 shares which may be acquired pursuant to stock
options which are currently exercisable or which will become exercisable
by August 14, 1995.
1. ELECTION OF DIRECTORS
The Board has nominated the individuals set forth below for
election as directors of the Company, to hold office until the Annual
Meeting of Stockholders in 1996 and until their successors are elected
and have qualified. All of the nominees are presently serving as
directors of the Company and have consented to serve if elected.
<TABLE>
<CAPTION>
Principal Occupation and Business Has Been a
Name Experience During Last Five Years Director Since Age
---- --------------------------------- -------------- ---
<S> <C> <C> <C>
George E. Mitchell President, Chairman and Chief Executive
Officer of the Company 1984 57
Anthony A. Nichols President, The Nichols Company, which owns,
manages and leases commercial office and
industrial space(1)(2) 1988 55
Richard P. Richter President Emeritus, Ursinus College(1)(3)(4) 1989 64
- ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Committee.
(4) Prior to January 1995, Mr. Richter was President of Ursinus College.
</TABLE>
Committees and Meetings of the Board of Directors
The Board of Directors held five meetings in 1994. The Company's
Board of Directors has appointed standing Audit, Compensation and Stock
Option Committees. The Audit Committee, which met once in 1994, is
authorized to conduct such reviews and examinations as it deems
necessary or desirable with respect to the practices and procedures of
the independent accountants, the scope of the audit, accounting
controls, practices and policies, the recommendation to the Board of the
independent accountants to be selected, and the relationship between the
Company and the independent accountants, including the availability of
Company records, information and personnel. The Compensation
Committee, which met once during 1994, fixes compensation levels,
including incentive compensation for all officers and other principal
employees. The Stock Option Committee, which administers the Company's
stock option plans, did not meet during 1994. The Board does not have a
Nominating Committee. All of the directors attended at least 75% of the
Board and committee meetings of which they were members.
Directors' Compensation
Directors are elected annually and hold office until their
successors are elected and have qualified or until their earlier
resignation or removal. Directors who are not employees of the Company
or Safeguard Scientifics, Inc. are paid a quarterly fee of $1,000 and
$400 for each Board meeting attended, including committee meetings
attended on a date other than a Board meeting date.
The Company also maintains a stock option plan for Non-Employee
Directors (the "Directors' Plan") which provides for the grant of
options to directors not otherwise employed by the Company, its parent
or any of its subsidiaries ("Eligible Director"). Each Eligible
Director receives, as of the date such person first becomes an Eligible
Director, an option to purchase 5,000 shares of the Company's Common
Stock at an option exercise price equal to the asked price of the Common
Stock on the date of grant as reported in the National Association of
Securities Dealers Automated Quotations System. All options granted
under the Directors' Plan vest in four equal annual installments
beginning on the first anniversary of the date of option grant and have
a term of seven years. No options were granted to or exercised by an
Eligible Director during 1994.
REPORT OF THE BOARD COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the
"Committee") determines compensation levels, including incentive
compensation, for the executives of the Company. Anthony A. Nichols is
presently serving as the sole member of the Compensation Committee.
Charles A. Root was a member of the Compensation Committee until his
resignation from the Board of Directors in April 1995.
Executive Compensation Policies
The Company was and is in a highly competitive industry. In order
to succeed, the Company believes that it must be able to attract and
retain qualified executives, promote among them the economic benefits of
stock ownership in the Company, and motivate and reward executives who,
by their industry, loyalty and exceptional service, make contributions
of special importance to the success of the business of the Company.
The Company has structured its executive compensation program to support
the strategic goals and objectives of the Company.
Base compensation levels and benefits for executives generally had
been set in previous years to be between the lower end and the midpoint
of the scale of compensation paid by comparable companies in the
Company's principal industry. Conversely, incentive programs were
regarded to be above the midpoint of the scale in the industry. In
pursuing this philosophy, the Company believed it could keep the fixed
component of the compensation package at reasonable levels while
incenting its key executives and managers to achieve better than average
results. Therefore, the total cash compensation plan is made up of a
lower base and higher incentive opportunity which in total would be
competitive with comparable companies in the industry if the Company's
objectives are achieved. For the purpose of establishing these levels,
the Company had reviewed an evaluation by an independent compensation
consultant of various published industry salary surveys. In setting
executive compensation packages for 1994, the Committee considered an
evaluation of executive compensation levels for comparably-sized
companies in the electrical contracting industry, rather than in the
office furnishings industry.
Annual cash bonuses are based on return on assets and individual
performance. At the beginning of each year, the Committee approves a
target range of return on assets, and a range of potential bonus amounts
for the chief executive officer and each other executive officer, stated
as a percentage of base salary. Performance bonuses are awarded at
year-end based on the actual return on assets compared to the target
range of return on assets, and the achievement of individual objectives
and individual contributions during the year to the achievement by the
Company of its financial and strategic objectives as set forth in the
Company's annual strategic plan.
Grants of Company stock options are intended to align the
interests of executives and key employees with the long-term interests
of the Company's stockholders, and to encourage executives and key
employees to remain in the Company's employ. Generally, grants are not
made in every year, but are awarded subjectively based on a number of
factors, including the pre-tax operating earnings of the Company, the
individual's contributions to the achievement of the Company's financial
and strategic objectives, and the amount and remaining term of options
already held by an individual. The Stock Option Committee of the Board
administers the Company's stock option plan. No options were granted by
the Stock Option Committee to the Company's executive officers for
services rendered in 1994.
CEO Compensation
The Compensation Committee authorized an increase in Mr.
Mitchell's 1994 base salary to $140,000. However, based on the
Company's performance during the first quarter and its cash flow
problems, in April 1994, Mr. Mitchell initiated a 16% reduction in his
salary in order to conserve Company resources. Since the Company failed
to achieve the established target range of return on assets during 1994,
no bonus was paid for 1994 to Mr. Mitchell.
Other Executive Compensation
The Compensation Committee re-set executive salaries for 1994 for
certain executives based on its review of executive compensation in the
electrical contracting industry. However, based on the Company's
performance during the first quarter and its cash flow problems, in
April and May 1994, all executives accepted salary reductions in order
to conserve Company resources. Since the Company failed to achieve the
established target range of return on assets during 1994, no bonuses
were paid to any of the Company's executive officers for 1994.
By the Compensation Committee:
Anthony A. Nichols
Summary Compensation of Executive Officers
The following table sets forth information concerning compensation
paid to the Chief Executive Officer and to each other person who was an
executive officer of the Company at any time during 1994 and whose
salary and bonus exceeded $100,000 in 1994.
<TABLE>
<CAPTION>
Summary Compensation Table
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Long Term
Annual Compensation Compensation
------------------------------------------------ ------------
Awards
------------
Securities
Other Annual Underlying All Other
Compensation Options/ Compensa-
Name and Principal Position Year Salary ($)(1) Bonus ($)(2) ($)(3) SARS (#) tion ($)(4)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
George E. Mitchell, 1994 $125,354 $ 0 $ 13,816 0 $ 33,787
President, Chairman and
Chief Executive Officer 1993 130,001 0 13,350 0 36,084
1992 129,000 129,000 10,795 0 33,141
- ---------------------------------------------------------------------------------------------------------------------------------
Michael H. Pelosi III, 1994 $130,961 $ 0 $ 0 0 $ 0
President, Airo Clean, Inc.(5)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes annual compensation which has been deferred by the named
executives pursuant to the Company's 401(k) Tax Deferred Retirement and
Incentive Plan ("401(k) Plan").
(2) A portion of the cash bonus listed above for services rendered in
1992 was paid in 1993.
(3) Represents amounts reimbursed during the fiscal year for the
payment of taxes. Perquisites and other personal benefits did not
exceed the lesser of $50,000 or 10% of any executive officer's salary
and bonus and accordingly have been omitted from the table as permitted
by the rules of the Securities and Exchange Commission.
(4) The stated amounts for fiscal 1994 include the following amounts
for each named executive officer: Company contributions under the
401(k) Plan -- Mr. Mitchell, $1,216; Mr. Pelosi, $0; term life and
disability premiums -- Mr. Mitchell, $24,563; Mr. Pelosi, $0; current
dollar value of benefits to the named executives of the remainder of
split-dollar premiums paid by the Company -- Mr. Mitchell, $6,581; Mr.
Pelosi, $0.
(5) Mr. Pelosi was elected as an executive officer of the Company in
mid-1994.
Stock Options
The Company did not grant any stock options or stock appreciation
rights to its Chief Executive Officer or its other named executive
officer during 1994. The following table sets forth information with
respect to the number of unexercised options and the value of
unexercised in-the-money options at December 31, 1994.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
- ---------------------------------------------------------------------------------------------------------------------------------
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired Options/SARs at Fiscal in-the-Money Options/SARs
on Year-End ($)(1) at Fiscal Year-End (#)(1)
Exercise Value
Name (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
George E. Mitchell 0 $ 0 0 0 $ 0 $ 0
- ---------------------------------------------------------------------------------------------------------------------------------
Michael H. Pelosi III 0 $ 0 27,500 17,500 $ 0 $ 0
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On December 29, 1994, the fair market value was $.4063. No
options were in-the-money on that date.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements.
In connection with the acquisition of the assets of Airo Clean
Engineering, Inc. in 1993, Airo Clean, Inc. entered into a five-year
employment agreement with Michael H. Pelosi III providing for his
employment through February 1, 1998 as President of Airo Clean, Inc. at
a minimum base salary of $100,000 per year, which was subsequently
increased to $137,500 per year. The agreement also provided for Mr.
Pelosi to receive an incentive payment each year equal to 3.75% of Airo
Clean's net income, before allocated expenses and taxes, in excess of
$150,000 per year. Airo Clean did not achieve this target in 1994, and
consequently Mr. Pelosi did not receive any incentive payment for 1994.
In May 1994, in recognition of the Company's liquidity problems, Mr.
Pelosi accepted a temporary salary reduction for the balance of 1994 in
order to conserve Company resources. Upon the termination of Mr.
Pelosi's employment for reasons other than just cause or voluntary
resignation, he will be entitled to receive an amount equal to his base
salary for the balance of the term of the agreement. Pursuant to this
agreement, Mr. Pelosi has agreed to refrain from competing with the
Company until the earlier of February 1, 1998 or two years after the
termination of his employment.
STOCK PERFORMANCE GRAPH
The following chart compares the cumulative total stockholder
return on the Company's Common Stock for the period December 31, 1989
through December 31, 1994 with the cumulative total return on the NASDAQ
Index and the cumulative total return for a peer group index for the
same period. Because the Company has discontinued its furnishings
operations, the Company has selected as a new peer group SIC Code 1731--
Electrical Contractors, which is the primary industry in which the
Company is continuing to operate.
The following table of numbers were used to generate the graphic chart
in the printed piece.
200
180
160
140
120
100
80
60
40
20
0
1989 1990 1991 1992 1993 1994
1989 1990 1991 1992 1993 1994
CenterCore 100 49 49 55 73 39
NASDAQ 100 85 136 159 181 177
Peer Group 100 77 77 21 6 2
As required by the rules of the Securities and Exchange Commission, the
chart below compares the cumulative stockholder return on the Company's
Common Stock with the cumulative total return on the NASDAQ Index and
the peer group used in the chart presented in the Company's 1994 proxy
statement. The peer group in this chart consists of SIC Code 252--
Office Furniture.
The following table of numbers were used to generate the graphic chart
in the printed piece.
200
180
160
140
120
100
80
60
40
20
0
1989 1990 1991 1992 1993 1994
1989 1990 1991 1992 1993 1994
CenterCore 100 49 49 55 73 39
NASDAQ 100 85 136 159 181 177
Peer Group 100 77 77 21 6 2
Each of the above charts assumes that $100 was invested on December 31,
1989 in the Company's Common Stock and in each of the comparison groups,
and assumes reinvestment of dividends.
CERTAIN TRANSACTIONS
The Company and Safeguard are parties to an administrative
services agreement pursuant to which Safeguard provides the Company with
administrative support services for an annual fee and the reimbursement
of certain out-of-pocket expenses incurred by Safeguard in performing
services under the agreement. The administrative support services
include consultation regarding the Company's general management,
investor relations, financial management, human resources management,
certain legal services, insurance programs administration, and tax
research and planning. In conjunction with the Company refinancing its
bank credit facility in March, 1994, the maximum annual administrative
services fee was reduced to $300,000, retroactive to January 1, 1994,
and was subordinated to the bank loan. The Company paid administrative
services fees of $83,333 to Safeguard and accrued the remaining fees of
$216,667 in 1994. The administration services agreement was terminated
in 1995. However, Safeguard is providing certain administrative
services to the Company at no charge in 1995.
Maris Equipment Company, Inc., a subsidiary of the Company
("Maris"), rents 21,580 square feet of office space in Exton,
Pennsylvania from Safeguard. The lease expired April 1995, and has been
extended on a month-to-month basis. The Company pays monthly rental
payments to Safeguard of $11,539 and a monthly operating expense
allowance of $4,784, subject to adjustment based upon its proportionate
share of actual operating expenses. The Company also is responsible for
its proportionate share of utility charges and insurance for each of the
leased premises. The Company intends to retain this lease as its
corporate headquarters. The Company has advised that it believes the
lease terms are no less favorable than could be obtained from an
unrelated third party.
The Company also rents 4,600 square feet of office space in Exton,
Pennsylvania from Safeguard, which has served as its corporate
headquarters. The lease expired May 6, 1995, and has been extended on a
month-to-month basis. The Company pays monthly rental payments to
Safeguard of $3,067. The Company also pays a monthly operating expense
allowance of $1,303 subject to adjustment based upon its proportionate
share of actual operating expenses. The Company intends to terminate
this lease shortly.
In September 1993, Safeguard loaned $1.1 million to the Company on
a subordinated, unsecured basis to partially finance the Company's
acquisition of Maris Equipment Company. In the fourth quarter of 1994,
Safeguard contributed this loan to the capital of the Company.
In March 1994, Safeguard guaranteed payment of up to a maximum of
$940,000 under the Company's revolving credit agreement with Mellon
Bank, subject to reduction or elimination upon the Company satisfying
certain requirements imposed by the bank. In June 1994, Safeguard
guaranteed an additional $1.5 million under the Company's credit
facility with Mellon Bank. Safeguard received no monetary compensation
for the extension of these guarantees. The Company has agreed to
indemnify Safeguard against loss resulting from the above described
guarantees.
In June 1994, Safeguard purchased from the Company 15,000 shares
of its Series A Redeemable Convertible Preferred Stock ("Series A
Shares") for an aggregate purchase price of $1.5 million. The Series A
Shares are convertible into shares of Common Stock based on a conversion
price of $1.00 per share of Common Stock. The conversion price and
number of shares into which the Series A Shares may be converted are
subject to anti-dilutive adjustments. The Series A Shares are entitled
to a 6% per annum dividend payable out of legally available funds.
Dividends which are not declared and paid will accumulate. No dividends
have been declared to date. Unpaid undeclared cumulative dividends as
of March 31, 1995 were $67,500. The Series A Shares are entitled to one
vote for each share of Common Stock into which such Series A Shares may
be converted. The Company may redeem the Series A Shares at any time
after June 1, 1995 and must redeem all outstanding Series A Shares on
June 1, 2001.
In March 1995, the Company sold all of the capital stock of
CenterCore Canada Limited to Safeguard for $10,000. CenterCore Canada
had an intercompany liability to the Company of approximately $369,300,
which liability survived the stock sale. Safeguard intends to cause
CenterCore Canada to sell its assets, and to use the sale proceeds to
satisfy its outstanding liabilities, including its liability to the
Company. The purchase price for CenterCore Canada's assets is expected
to be paid over time, and is not expected to be sufficient to satisfy
all of CenterCore Canada's liabilities to the Company. The Company has
established a reserve against the entire amount of this intercompany
liability, and will treat any amounts collected as income at the time
received.
In 1995, Safeguard agreed to contribute 2,000,000 shares of the
Company's Common Stock to the capital of the Company. Safeguard also
agreed to sell to George E. Mitchell and certain other members of
management an aggregate of 2,500,000 shares of the Company's Common
Stock, at a price of $.10 per share, payable in the form of five-year,
interest bearing promissory notes secured by 1,800,000 of the purchased
shares. The parties estimated the fair market value of the shares to be
$.10, taking into account a discount for lack of liquidity after the
Common Stock of the Company was delisted from NASDAQ. Mr. Mitchell and
the other management purchasers agreed to contribute 700,000 of such
shares into escrow with the Company which the Company may redeem in
order to satisfy exercises of options under the Company's 1993 Stock
Option Plan when such exercises exceed 500,000 shares in the aggregate.
Safeguard also has agreed to provide loans and/or loan guarantees to the
Company for up to a maximum of $3 million, subject to certain
conditions. In accordance with Safeguard's agreement, in April 1995,
Safeguard pledged to the Company's bank a $1.5 million letter of credit
to secure advances, if any, which the bank might make in excess of the
Company's borrowing base formula. The Company has agreed to indemnify
Safeguard against loss resulting from the pledge.
In connection with the Airo Clean acquisition in 1993, Airo Clean,
Inc. entered into a five-year employment agreement with Joseph P.
Pelosi, the brother of Michael H. Pelosi, III. The agreement provides
for a minimum annual base salary of $80,000, and provides for an
incentive payment each year equal to 3.75% of Airo Clean's net income,
before allocated expenses and taxes, in excess of $150,000. During
1994, the Company paid Joseph Pelosi $80,000 plus normal employee
benefits.
Also in connection with the Airo Clean acquisition, Airo Clean
entered into a lease for approximately 15,300 square feet of flex
office, warehouse and assembly space in Exton, PA from Michael Pelosi,
Jr. and Lucille Pelosi, who are the parents of Michael H. Pelosi, III.
The lease continues through December 2001. During 1994, Airo Clean paid
$107,000 as rent to Mr. and Mrs. Pelosi, and also paid all operating
expenses for the leased premises. The Company plans to consolidate Airo
Clean's operations into Maris' facility and will attempt to sublet the
space.
2. PROPOSAL TO APPROVE AN AMENDMENT TO THE 1993 STOCK OPTION PLAN
Background
At the Annual Meeting, the stockholders will be asked to approve
an amendment to the Company's 1993 Stock Option Plan which was adopted
by the Board, subject to stockholder approval, in May 1995. The 1993
Stock Option Plan, as proposed to be amended, is hereinafter referred to
as the "1993 Plan."
Proposed Amendment to the 1993 Plan
The proposed amendment to the 1993 Plan authorizes an increase in
the number of shares of Common Stock which may be issued upon exercise
of options granted or to be granted under the 1993 Plan by 700,000
shares of Common Stock, from 500,000 to 1,200,000 shares of Common Stock
in the aggregate.
It is the Board's intention to issue options for an aggregate of
approximately 700,000 shares to all employees, excluding the current
executive officers, who remain in the Company's employ following the
consummation of the transaction set forth in Proposal 3 herein. In
connection with the sale by Safeguard to Company management of 2,500,000
shares of Common Stock, Company management has agreed that 700,000 of
such shares will be held in escrow with the Company which the Company
may redeem in order to satisfy exercises of options under the Company's
1993 Stock Option Plan when such exercises exceed 500,000 shares in the
aggregate. Therefore, the additional 700,000 shares authorized for
issuance under the Company's 1993 Plan will not be dilutive to existing
stockholders of the Company.
Approval by Stockholders
Approval of the adoption of the amendment to the 1993 Plan
requires the affirmative vote of a majority of the votes cast at a
meeting at which a quorum representing a majority of all outstanding
voting stock of the Company is present, either in person or by proxy,
and voting on the 1993 Plan. If not so approved, then the 1993 Plan in
the form as approved by the stockholders at the 1994 Annual Meeting will
remain in full force and effect and the aggregate number of shares of
Common Stock that are subject to options granted under the 1993 Plan
will not exceed 500,000 shares of Common Stock.
DESCRIPTION OF THE 1993 PLAN
The following description of the 1993 Plan is intended merely as a
summary of the principal features of the 1993 Plan.
Purpose of the 1993 Plan
The purpose of the 1993 Plan is to provide additional incentive to
employees of the Company and its subsidiaries and to increase their
proprietary interest in the success of the enterprise to the benefit of
the Company and its stockholders.
Shares Subject to the 1993 Plan
Subject to the adjustment provisions discussed below, the maximum
number of shares of Common Stock which may be issued under the 1993 Plan
is 1,200,000. Such shares may be authorized but unissued shares of
Common Stock or previously issued but reacquired shares of Common Stock.
Shares subject to options which remain unexercised upon expiration,
exchange of existing options, or earlier termination of such options
will again become available for issuance in connection with stock
options awarded under the 1993 Plan. On June 15, 1995, the average of
the bid and asked prices as quoted by the market makers of the Company's
Common Stock was $.125 per share.
Administration
The 1993 Plan is administered by the Stock Option Committee, which
currently is composed of Director Richard P. Richter. The Stock Option
Committee has the authority to interpret the 1993 Plan; to establish
appropriate rules and regulations for the proper administration of the
1993 Plan; to select the persons to whom options should be granted; to
determine the number of shares to be covered by such options, the times
and dates at which such options shall be granted, and whether the
options shall be incentive stock options ("ISO") or non-qualified stock
options ("NQSO"); and generally to administer the 1993 Plan.
Eligibility
Employees (including any directors who are also employees) of the
Company or of any subsidiary who are significant contributors to the
business of the Company and its subsidiaries are eligible to participate
in the 1993 Plan. On June 15, 1995, there were approximately 110
persons considered eligible to participate in the 1993 Plan.
Stock Options
The 1993 Plan requires that each optionee enter into a stock
option agreement with the Company which incorporates the terms of the
option and such other terms, conditions and restrictions, not
inconsistent with the 1993 Plan, as the Stock Option Committee may
determine.
The option price will be determined by the Stock Option Committee,
but may not, with respect to ISOs, be less than the greater of 100% of
the fair market value of the optioned shares of Common Stock or the par
value thereof on the date of grant. If the grantee of an ISO under the
1993 Plan owns more than 10% of the total combined voting power of all
shares of stock of the Company or of any parent or subsidiary of the
Company, the option price cannot be less than 110% of the fair market
value at the date of grant and the term of such option cannot be more
than five years.
The term of any other option granted under the 1993 Plan may not
exceed ten years. Options will become exercisable in such installments
and on such dates as the Stock Option Committee may specify. The Stock
Option Committee may accelerate the exercise date of any outstanding
options, in its discretion, if it deems such acceleration desirable.
Any option held by an individual who dies while employed by the Company
or any subsidiary, or whose employment with the Company and all
subsidiaries is terminated, prior to the expiration date of such option,
will remain exercisable by the former employee or his personal
representative for a period of time following the employee's termination
of employment or death as provided for in the 1993 Plan and the
applicable option agreement. Options are not transferable except at
death.
The 1993 Plan provides that the aggregate fair market value
(determined as of the time the ISO is granted) of the shares with
respect to which ISOs are exercisable for the first time by an optionee
during any calendar year under the 1993 Plan and any other ISO plan of
the Company, or any parent or subsidiary of the Company, cannot exceed
$100,000.
The option price is payable in cash or its equivalent or, in the
discretion of the Stock Option Committee, (i) in shares of Common Stock
of the Company previously acquired by the optionee, provided that if
such shares were acquired through exercise of an ISO, such shares have
been held by the optionee for a period of not less than the statutory
holding periods described in the Internal Revenue Code of 1986, as
amended (the "Code"), on the date of exercise (which as of June 15, 1995
are two years from the date of grant of the ISO and one year following
the date of transfer of the shares to the optionee), or if such shares
were acquired through exercise of an NQSO, such shares have been held by
the optionee for a period of more than one year on the date of exercise
and provided further that each optionee may use the procedure described
in this clause (i) only once during any six-month period; (ii) by
delivering a properly executed notice of exercise of the option to the
Company and a broker, with irrevocable instructions to the broker to
promptly sell the underlying shares of Common Stock and deliver to the
Company the amount of sale proceeds necessary to pay the exercise price
of the option; or (iii) by delivery of a full recourse promissory note.
The Stock Option Committee also may elect to cash-out all or part of the
portion of the option to be exercised by paying optionee an amount, in
cash or stock, equal to the excess of the fair market value of the stock
over the exercise price on the effective date of such cash-out.
Adjustments Upon Changes in Capitalization, Mergers and Other Events
The number of shares issuable under the 1993 Plan and upon the
exercise of options outstanding thereunder, and the exercise price of
such options, are subject to adjustment in the event of a stock split,
stock dividend or similar change in the capitalization of the Company.
In the event of a merger, consolidation or other specified corporate
transactions, options will be assumed by the surviving or successor
corporation, if any. However, in the event of such a corporate
transaction, the 1993 Plan also authorizes the Stock Option Committee to
terminate options to the extent they are not exercised prior to
consummation of such a transaction, and to accelerate the vesting of
options so that they are immediately exercisable prior to the
consummation of the transaction.
Duration and Amendment of the 1993 Plan
The Board may amend or modify the 1993 Plan at any time, but no
such amendment or modification, without the approval of the
stockholders, shall (a) increase the amount of stock on which options
may be granted, except pursuant to the adjustment provisions of the 1993
Plan, (b) change the provision relating to the eligibility of employees
to whom options may be granted, or (c) materially increase the benefits
accruing to participants under the 1993 Plan; provided, however, that no
stockholder approval will be required for an amendment or modification
pursuant to (a) and (b) above if the applicable sections of the Code,
and rules and regulations thereunder governing incentive stock options,
do not require stockholder approval and, provided further, that no
stockholder approval will be required for an amendment or modification
pursuant to (c) above if Rule 16b-3, or any successor provision
promulgated pursuant to Section 16 of the Securities Exchange Act of
1934, does not require stockholder approval. The 1993 Plan will
terminate on October 28, 2003 unless terminated earlier by the Board.
No options may be granted after such termination, but options
outstanding at the time of termination will remain exercisable in
accordance with their terms.
Federal Income Tax Consequences
Based on the advice of counsel, the Company believes that the
normal operation of the 1993 Plan should generally have, under the Code,
and the regulations and rulings thereunder, all as in effect on June 15,
1995, the principal federal income tax consequences described below.
Incentive Stock Options.
If the requirements regarding ISOs set forth in the 1993 Plan are
met, ISOs granted under the 1993 Plan will be afforded favorable federal
income tax treatment under the Code. The optionee will not recognize
taxable income and the Company will not be entitled to a deduction upon
the grant of an ISO. Moreover, the optionee will not recognize taxable
income (except alternative minimum taxable income, if applicable) and
the Company will not be entitled to a deduction upon the exercise by the
optionee of an ISO, provided the optionee was an employee of the Company
or any of its subsidiary corporations, as defined in Section 424(f) of
the Code, during the entire period from the date of grant of the ISO
until three months before the date of exercise.
If the employment requirements described above are not met, the
tax consequences relating to NQSOs (discussed below) will apply.
If the optionee disposes of the Common Stock acquired under an ISO
after at least two years following the date of grant of the ISO and at
least one year following the date of transfer of the Common Stock to the
optionee following exercise of the ISO, the optionee will recognize a
long-term capital gain or loss equal to the difference between the
amount realized upon the disposition and the exercise price. Any net
capital gain will be taxed at the ordinary income tax rates, but only up
to a maximum rate of 28%. Any net capital loss can only be used to
offset up to $3,000 per year ($1,500 per year in the case of a married
individual filing separately) of ordinary income.
If the optionee makes a disqualifying disposition of the Common
Stock (that is, disposes of the Common Stock within two years after the
date of grant of the ISO or within one year after the transfer of the
Common Stock to the optionee), but all other requirements of Section 422
of the Code are met, the optionee will generally recognize ordinary
income upon disposition of the Common Stock in an amount equal to the
lesser of (i) the fair market value of the Common Stock on the date of
exercise minus the exercise price, or (ii) the amount realized on
disposition minus the exercise price. However, in the case of a
disqualifying disposition made less than six months after the date of
grant of the option by a person subject to Section 16(b) of the
Securities Exchange Act of 1934, the determination of ordinary income
under (i) above will generally be based on the fair market value of the
Common Shares as of the date which is six months following the date the
ISO was granted, unless the optionee makes an election under Section
83(b) of the Code. Disqualifying dispositions of Common Stock also may,
depending upon the sales price, result in either long-term or short-term
capital gain or loss under the Code rules which govern other stock
dispositions.
If the requirements of Section 422 of the Code are not met, the
Company will be allowed a federal income tax deduction to the extent of
the ordinary income includible in the optionee's gross income in
accordance with the provisions of Section 83 of the Code (and Section
3402 of the Code, to the extent applicable) and the regulations
thereunder.
The use of Common Stock received upon the exercise of an ISO to
pay the exercise price in connection with the exercise of other ISOs
within either the two-year or one-year holding periods described above
will constitute a disqualifying disposition of the Common Stock so used
which will result in income (or loss) to the optionee and, to the extent
of a recognized gain, a deduction to the Company. If, however, these
holding period requirements are met and the number of shares of Common
Stock received on the exercise does not exceed the number of shares of
Common Stock surrendered, the optionee will recognize no gain or loss
with respect to the surrendered Common Stock, and will have the same
basis and holding period with respect to the newly acquired shares of
Common Stock as with respect to the surrendered shares. To the extent
that the number of shares of Common Stock received exceeds the number
surrendered, the optionee's basis in such excess shares will equal the
amount of cash paid by the optionee upon the exercise of the option, and
the optionee's holding period with respect to such excess shares will
begin on the date such shares are transferred to the optionee. The tax
treatment described above for shares of Common Stock newly received upon
exercise is not affected by using shares of Common Stock to pay the
exercise price.
Non-qualified Options
All other options granted under the 1993 Plan are NQSOs and will
not qualify for any special tax benefits to the optionee. Under present
Treasury Regulations, the Company's stock options are not deemed to have
a readily ascertainable value. Accordingly, an optionee will not
recognize any taxable income at the time he or she is granted an NQSO
and the Company will not be entitled to a deduction upon the grant of an
NQSO.
Generally, an optionee will recognize ordinary income at the time
of exercise of an NQSO, in an amount equal to the excess of the fair
market value of the shares of Common Stock at the time of such exercise
over the exercise price. If, however, an optionee who is subject to
Section 16(b) of the Securities Exchange Act of 1934 exercises an NQSO
less than six months after the date it is granted, he or she will
generally recognize ordinary income six months after the NQSO is
granted, unless he or she makes an election under Section 83(b) of the
Code to recognize income at an earlier date.
The Company will be entitled to a deduction to the extent of the
ordinary income recognized by an optionee in accordance with the rules
of Section 83 of the Code and the regulations thereunder. However, no
deduction will generally be allowed to the Company unless the Company
deducts and withholds federal income tax.
An optionee exercising an NQSO is subject to federal income tax on
the income recognized as a result of the exercise of an NQSO and federal
Income tax must be withheld. The Committee, in its discretion, may
permit the optionee to elect to surrender or deliver shares of Common
Stock otherwise issuable upon exercise, or previously acquired shares,
in order to satisfy the federal income tax withholding, subject to
certain restrictions set forth in the 1993 Plan. Such an election will
result in a disposition of the shares of Common Stock which are
surrendered or delivered, and an amount will be included in the
optionee's income equal to the excess of the fair market value of such
shares over the optionee's basis in such shares.
If the optionee pays the exercise price in cash, the basis of the
shares of Common Stock received by an optionee upon the exercise of an
NQSO is the exercise price paid plus the amount recognized by the
optionee as income attributable to such shares upon such exercise. If
the exercise price is paid in cash, the optionee's holding period for
such shares will begin on the day after the date on which the optionee
realized income with respect to the transfer of such option shares,
i.e., generally the day after the exercise date. Any net capital gain
realized by the optionee upon a subsequent disposition of any such
shares is subject to federal income tax on the income recognized at the
ordinary income tax rates, but only up to a maximum of 28%. Any loss
realized on a subsequent disposition, however, will be treated as a
capital loss and thus can only be used to offset up to $3,000 per year
($1,500 in the case of a married individual filing separately) of
ordinary income.
If the optionee surrenders shares of Common Stock to pay the
exercise price, and the number of shares received on the exercise does
not exceed the number of shares surrendered, the optionee will recognize
no gain or loss with respect to the surrendered shares, and will have
the same basis and holding period with respect to the newly acquired
shares as with respect to the surrendered shares. To the extent that
the number of shares of Common Stock received exceeds the number
surrendered, the fair market value of such excess shares on the date of
exercise, reduced by any cash paid by the optionee upon such exercise,
will be includible in the gross income of the optionee. The optionee's
basis in such excess shares will equal the sum of the cash paid by the
optionee upon the exercise of the option plus any amount included in the
optionee's gross income as a result of the exercise of the option and
the optionee's holding period with respect to such excess shares will
begin on the day following the date of exercise.
Other Tax Considerations
The 1993 Plan is not qualified under Section 401(a) of the Code
and is not subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended to date. The comments set forth in the
above paragraphs are only a summary of certain of the federal income tax
consequences relating to the 1993 Plan. No consideration has been given
to the effects of state, local and other tax laws on the optionee or the
Company.
NEW PLAN BENEFITS
The following table sets forth information with respect to the
number of options which were granted or which are expected to be granted
to each of the named individuals or groups under the 1993 Plan subject
to stockholder approval at the Annual Meeting of the proposal contained
in Proposal 2 above. The options set forth in this table will be
rescinded if such stockholder approval is not obtained.
Name and Position (1) Number of Options Dollar Value ($)(2)
- --------------------- ----------------- -------------------
George E. Mitchell, President and
Chief Executive Officer 0 0
Michael H. Pelosi III, President
Airo Clean, Inc. 0 0
Executive Officers as a Group 0 0
Non-Executive Officer Employees
as a Group 700,000 0
(1) Non-Employee Directors have been excluded from the above table as
they are not eligible to participate in the 1993 Plan.
(2) All options granted under the 1993 Plan have an exercise price
equal to or greater than the fair market value of the Common Stock on
the date of grant. As optionees must pay the exercise price to the
Copmany to acquire the shares upon exercise of the option, the dollar
value of benefits received by or allocated to the optionees on the grant
date was zero.
3. APPROVAL OF THE SALE OF THE OFFICE FURNISHINGS BUSINESS
Description of the Company
Prior to 1993, the Company was engaged solely in the business of
designing, manufacturing and distributing space-efficient, modular
workstation systems and a line of complementary office products,
including cable and wiring systems, ergonomically designed seating
products, and air management systems for temperature blending and
breathing zone filtration (collectively, the "Furnishings Business").
The Company conducted the Furnishings Business directly, and through its
90% owned subsidiary, Corel Corporate Seating, Inc. ("Corel"). In
February 1993, the Company, through a subsidiary, acquired the assets
and assumed the liabilities of Airo Clean Engineering, Inc., a designer
and manufacturer of cleanroom and air filtration components and systems
serving industry and the hospital and health care markets. In September
1993, the Company, through a subsidiary, purchased substantially all of
the assets and assumed certain liabilities of Maris Equipment Company, a
specialty contractor providing integration, installation and servicing
of advanced electronic systems for security access control, fire alarm,
sound, communications and other applications on a nationwide basis.
Maris provides these services to business, aviation and transportation
authorities and correctional facilities. The principal executive
offices of the Company are located at 110 Summit Drive, Exton, PA
19341, and its telephone number is (610) 524-7000.
Description of the Purchaser
The CenterCore Group, Inc. (the "Buyer") is a newly formed
Delaware corporation which was organized for the sole purpose of
acquiring the assets of and operating the Company's Furnishings
Business. The Buyer was organized by the principals of The Apollo
Group, Inc. ("Apollo"), a private investment group specializing in the
acquisition and continued management of established manufacturing
companies. The Buyer currently has no material assets, properties or
liabilities, and has not commenced any operations. The Buyer's stock is
all privately held, and there is no current prospect that its stock will
become publicly traded. At the time of the closing of the sale of the
Furnishings Business, the Buyer will be capitalized with an equity
investment of $400,000, will obtain a bank revolving line of credit for
a maximum of $8 million, subject to a borrowing base formula, and will
acquire the assets and assume the liabilities of the Furnishings
Business as described below under "Summary of Terms of the Sale
Transaction - Business to be Sold." The bank credit line will be
secured by a first lien on all of the assets of the Buyer, including
the Furnishings Business assets to be purchased. At the closing, the
Buyer anticipates that it will borrow approximately $2.3 million in
order to finance, together with the equity investment in the Buyer, the
cash portion of the purchase price for the Furnishings Business plus
anticipated closing costs. The Buyer expects that its borrowing
availability under the bank credit line after the closing will be in the
range of $2.5 million to $3 million, which the Buyer will use to finance
its working capital requirements. After the closing, the Buyer
currently intends to operate the Furnishings Business as its sole
business operation, although the Buyer is not restricted from entering
into or acquiring other businesses. Presented below under the heading
"The CenterCore Group, Inc. Pro Forma Financial Statements" are a pro
forma balance sheet and pro forma statements of operations for the Buyer
giving effect to its purchase of the Furnishings Business.
Apollo was founded in 1983, and has participated in the
acquisition and management of 12 small to middle market size operating
companies. The principal executive offices of Apollo and the Buyer are
located at One Captain Thomson Lane, Hingham, MA 02043, and its
telephone number is (617) 740-0460. Neither the Buyer, Apollo nor its
principals are affiliated with the Company, and neither the Company nor
any of its current executive officers, directors, nor controlling
persons has any ownership interest in the Buyer. A former executive
officer of the Company will become employed by the Buyer upon
consummation of the sale, and may be granted an equity interest in the
Buyer.
Background and Reasons for Sale
The Company's acquisitions of Airo Clean and Maris were part of an
overall strategy to improve the Company's operating performance by
penetrating new and growing markets to compensate for the steady decline
in Furnishings Business sales to the federal government, particularly
the Department of Defense. Furnishings Business sales to the federal
government decreased from $28 million in 1992 to $18.9 million in 1993
and $15.2 million in 1994. The reduced government sales have had a
major impact on the Company's Furnishings Business in recent years, and
the outlook for furnishings sales to the federal government continues to
be uncertain. This decline has been caused by a general decline in
government purchases due to downsizing, and by the increasing
participation of the Federal Prison Industries in the sale of
furnishings products to the government pursuant to preferences granted
to it. The Company has also attempted to offset the reduced government
sales by increasing its marketing efforts to the commercial sector.
However, the commercial furnishings market is highly competitive, with
participants who are substantially larger than the Company with much
greater resources. In light of industry rightsizing and downsizing
limiting overall demand for new office furnishings, it has become more
difficult for niche players such as the Company to successfully compete
in the commercial marketplace, and the Company's commercial sales have
not increased enough to offset the decline in federal government sales.
Overall sales for the domestic portion of the Furnishings Business,
which is the portion to be sold to the Buyers, decreased from $41.6
million in 1992 to $34.3 million in 1993 and $32.9 million in 1994.
The Company also attempted in 1993 to improve performance by
significantly downsizing its Canadian operations and consolidating most
of the manufacturing, product development, marketing and service
functions into its domestic furnishings operations based in Plainfield,
New Jersey. However, foreign sales declined from $5.2 million in 1993
to $3.4 million in 1994, and the Company determined in 1994 to dispose
of its remaining Canadian manufacturing operations. Despite these
measures, the Furnishings Business' manufacturing overhead costs were
not reduced as fast as sales. This factor combined with increasing
competitive pricing pressures in the commercial market, caused a
reduction in gross profit margins in the Company's Furnishings Business
(domestic and foreign) from 39.3% in 1992 to 36.4% in 1993 and 33.5% in
1994. Net income before tax from operations of the Company's
Furnishings Business (domestic and foreign) went from earnings of $1.2
million in 1992 to losses of $0.1 million in 1993 and $1.7 million in
1994, excluding restructuring charges.
In order to better meet its working capital needs, the Company
refinanced and increased its bank credit facility with a new bank in
March 1994. Safeguard Scientifics, Inc. ("Safeguard"), the Company's
majority stockholder, supported the refinancing by providing $2.4
million of guarantees to the new bank. Safeguard had previously
supported the Company's acquisition of Maris by providing a $1.1 million
subordinated loan to the Company. In June 1994, the Company raised an
additional $1.5 million of capital through the issuance of preferred
stock to Safeguard.
However, the Company realized a net loss of $15.4 million in 1994
resulting primarily from unanticipated costs and operating difficulties
associated with certain large, bonded correctional facility and airport
construction contracts acquired in the Maris acquisition. As a result
of these losses, the Company has suffered a severe liquidity problem in
that it was unable to pay its vendors on a timely basis, was having
difficulty completing work in progress, and defaulted on certain
financial covenants under its bank loan agreement.
In August 1994, Safeguard informed the Company that it would not
continue to provide ongoing financial support to the Company. As a
result, the Company's management and Board of Directors considered a
number of alternative possible means of resolving its liquidity and
operating problems. The alternatives considered included a sale of the
Furnishings Business, a sale of the security systems business, an action
for recission against the seller of Maris on the basis of substantial
apparent misrepresentations and breaches of warranties, or a
reorganization in bankruptcy. A bankruptcy reorganization was rejected
because of the damage it would do to the Company's employees, customers,
vendors, and lenders. An action for recission of the Maris acquisition
was considered unfeasible because of the time, expense and uncertainty
of success involved in such an action. As between a sale of the
Furnishings Business and a sale of the security systems business,
management and the Board concluded that if the Company could settle its
outstanding liabilities relating to Maris' large bonded projects and to
Maris' seller, Maris has the potential to realize significant future
growth in the business of providing low voltage electronic security
systems for smaller commercial projects and for "smart highway"
projects. The future potential of the Furnishings Business was
considered to be less bright. Therefore, the Board of Directors
determined to pursue a sale of the Furnishings Business in order to pay
down the Company's bank debt as quickly as possible and to pursue
settlements of Maris' outstanding liabilities. Safeguard supported this
decision by contributing its $1.1 million subordinated note to the
capital of the Company in December 1994 and by agreeing to provide the
Company with up to $3 million of additional credit to fund the Company's
negotiations relating to the sale of the Furnishings Business, the
settlement of Maris' outstanding liabilities, and the Company's
continuing working capital needs in addition to its available bank
credit facility.
Because of the Company's decision, supported by its majority
stockholder, to sell its Furnishings Business, the Company has
classified its Furnishings Business as discontinued operations.
The Company's management and directors, assisted by Safeguard,
began to pursue a sale of the Furnishings Business in August 1994. In
September 1994 the Company and Safeguard entered into discussions with
Stump & Company ("Stump"), a business broker and financial advisor
specializing in the furniture industry, with a view toward retaining
Stump to assist the Company in selling the Furnishings Business. Stump
performed certain due diligence on the Company, including a summary
valuation of the Company, in October 1994, and in November 1994 the
Company engaged Stump to act as its exclusive financial advisor to
assist in the sale of the Furnishings Business.
In valuing the Company, Stump considered the fact that the
Furnishings Business had recently produced limited or negative cash flow
and earnings. Therefore, Stump believed that prospective buyers would
likely tie their valuations of the business to the fair market value of
the Furnishings Business assets. Stump estimated that the Furnishings
Business assets had a fair market value of approximately $13 million,
without deduction of liabilities, with a possible range of $11 million
to $14 million. Stump also reviewed possible valuations based on
multiples of cash flow and earning, but concluded that these valuation
methodologies were not likely to be as relevant as an asset-based
valuation. The sale of the Furnishings Business will also include
approximately $6 million of liabilities to be assumed, therefore Stump's
asset-based valuation would be adjusted to $7 million, with a range of
$5 million to $8 million.
While the Company was pursuing a sale, the management of the
Furnishings Business based in Plainfield, New Jersey (the "MBO Group")
indicated an interest in pursuing a management buyout of the Furnishings
Business. The members of the Company's Board indicated a willingness to
consider an offer from the MBO Group, and directed Stump to also pursue
equity sources who would be willing to support such an offer. However,
in order to motivate the MBO Group to respond fairly to inquiries from
other buyers, the Company committed to pay to the MBO Group a bonus in
the aggregate amount of $85,000 if a sale of the Furnishings Business is
consummated to a buyer other than the MBO Group.
Stump conducted a broad search of strategic buyers within the
furniture business, operating buyout specialists, and equity sources to
support an MBO Group buyout. Stump contacted a total of 55 entities.
Stump qualified a number of potential buyers, who were then given access
to information about the Furnishings Business to perform their due
diligence. As a result, the Company received indications of interest
from five entities, although none from equity sources willing to finance
an offer from the MBO Group.
During the course of the process, Apollo was introduced to Stump.
Stump performed an initial due diligence check on Apollo, and in early
December 1994 provided Apollo with information about the Furnishings
Business. On December 12, 1994, Apollo made a due diligence visit to
the Company's Plainfield plant. On January 4, 1995, representatives of
Apollo met with management and directors of the Company and executives
of Safeguard, and presented their first proposal for a purchase of the
Furnishings Business. The proposal provided for the purchase by the
Buyer of substantially all of the domestic assets of the Furnishings
Business for a cash payment at closing, additional installment payments
beginning 9 months after closing, and a subordinated promissory note
payable in installments beginning approximately two years after closing.
The amount of each of the payments was to be determined by a formula
based on the working capital of the Furnishings Business at the time of
closing. The Buyer would assume only certain liabilities associated
with the ongoing operations of the Furnishings Business, would not
purchase any of the foreign assets, and would require the Company and
Safeguard to provide certain indemnities against undisclosed
liabilities, particularly with respect to any environmental liabilities.
Representatives of the Company, Safeguard and Apollo negotiated Apollo's
proposal during the meeting and during the following week.
As a result of the negotiations, the Company's directors and
senior management, in consultation with executives of Safeguard,
determined that Apollo's offer was more favorable than the other offers
the Company had received or was likely to receive. It was believed that
Stump had done a thorough job of identifying potential acquirers, and
only a relatively small number of them had presented a realistic
purchase offer. Apollo's offer was the highest bid. Apollo's offer
provided a significant up front cash payment which could be used to pay
down the Company's bank debt. It was also believed that Apollo had the
necessary management expertise and experience to restructure and operate
the Furnishings Business profitably, which would enable the Buyer to pay
the deferred purchase price. Apollo also indicated that it would offer
the MBO Group the opportunity to acquire up to a 20% equity interest in
the Buyer. This was significantly greater than the percentage interest
which any other bidder had been willing to offer, and was considered to
be a positive factor.
The major areas of negotiation involved the priority and limits of
Safeguard's and the Company's indemnities to the Buyer, the fair value
of the fixed assets to be included in the sale, the definition of
working capital for purposes of calculating the various purchase price
payments, the terms of the deferred purchase price payments, and the
rights of offset of the Buyer's right to indemnity against the deferred
payments. On January 11, 1995, the Company, Safeguard and Apollo signed
a letter of intent for the sale of the Furnishings Business to the Buyer
("the Sale Transaction"). The letter of intent was conditioned on
satisfactory completion of Apollo's due diligence investigation, the
Buyer obtaining financing for the acquisition, satisfactory resolution
of the state environmental review of the sale required because of the
transfer of the lease of the manufacturing facility in Plainfield, New
Jersey, and execution of a mutually agreeable definitive purchase
agreement. The letter of intent was renegotiated in early March 1995,
and an amendment was executed on March 13, 1995.
The Company's counsel prepared a draft purchase agreement, and
representatives of the Company, Safeguard and the Buyer and their
respective counsel pursued extensive negotiations on the terms of the
purchase agreement. The Company and Safeguard used common counsel in
the negotiations. Finally, on May 26, 1995, the Company, Safeguard and
the Buyer entered into a definitive Asset Purchase Agreement. The Asset
Purchase Agreement is contingent on a number of conditions, including
approval of the stockholders of the Company and satisfactory resolution
of the state environmental review of the sale. The terms and conditions
of the purchase agreement are described in more detail below under
"Summary of the Terms of the Sale." The Company's Board of Directors
determined that the sale is in the best interests of the Company's
stockholders and approved the purchase agreement on May 26, 1995. The
Board of Corel and the Company, as majority stockholder of Corel, have
also approved the purchase agreement on behalf of Corel.
Due to delays beyond the originally anticipated closing date, the
parties negotiated and entered into an amendment to the Asset Purchase
Agreement providing for (i) the Buyer to assume managerial operation of
the Furnishings Business, subject to the control of Company management,
commencing July 1, 1995; (ii) the Company to pay the Buyer 1.5% of
revenues of the Furnishings Business from July 1, 1995 through the
Closing or termination of the agreement; (iii) the revision of timing
and number of installment payments of the deferred portion of the
purchase price; and (iv) the extension of the agreement until August 25,
1995. The principals of Apollo, on behalf of the Buyer, assumed
managerial operation of the Furnishings Business on July 1, 1995. As
used below, the term "Asset Purchase Agreement" includes the above-
described amendment.
Summary of Terms of the Sale Transaction
Business to be Sold
The Company is selling all of its domestic Furnishings Business to
the Buyer. This business includes CenterCore's modular, configured
furniture systems business as well as the commercial and industrial
seating business of its subsidiary Corel. After the sale of the
Furnishings Business, the Company will continue to operate its security
and control system integration and installation business through its
subsidiary Maris and its indoor air quality and hospital/healthcare
environmental control business through its subsidiary Airo Clean.
Maris will focus on providing fire alarm systems, closed circuit
television surveillance systems, card access security systems, and other
systems to the commercial and institutional markets. Maris no longer
intends to pursue large, bonded correctional facility and airport jobs.
Airo Clean will continue its business substantially as it has operated
since the Company acquired Airo Clean, except that the sales and
marketing functions will no longer be coordinated with the Furnishings
Business.
Because all of the proceeds of the sale will be used to repay
outstanding bank debt (see "Use of Proceeds" below), the Company will
rely on operating cash flow and advances from Safeguard, together with
financing from the Company's Bank, if any is available, to fund its
continuing operations.
The assets to be sold include accounts receivable, furniture,
fixtures, machinery and equipment, intellectual property (including
rights to the name "CenterCore"), inventory, real property leases,
leasehold improvements, and outstanding dealer agreements, government
supply contracts, and other agreements. As a part of the sale, the
Company and the Buyer will grant to each other royalty-free licenses
(the "License Agreements") to use certain patents and trademarks
relating to air circulation and filtration products which are currently
marketed by both CenterCore and Airo Clean. The Buyer will have the
right to market the products in all places where contract furniture may
be sold, and the Company will have the right to market the products in
hospital and industrial cleanroom applications, except where the Buyer
may sell contract furniture.
The following is a summary of the terms of the Asset Purchase
Agreement, which has been filed by the Company as an exhibit to the
preliminary copy of this Information Statement filed with the Securities
and Exchange Commission (the "SEC"), and reference is hereby made
thereto for a complete description of the respective terms. All
statements herein are qualified in their entirety by reference to the
Asset Purchase Agreement. Copies of such agreements are available from
the Company free of charge upon written request. See "Incorporation of
Certain Documents by Reference."
Purchase Price
The purchase price (the "Purchase Price") for the Furnishings
Business is comprised of three components: cash consideration (the
"Cash Consideration") of $2.5 million less the amount, if any, by which
the Company's working capital (defined as accounts receivable plus
inventory minus accounts payable) is less than $5 million (the "Working
Capital Deficit"); installment payments equal to the sum of $1 million,
plus the amount of the Company's accounts receivable at Closing less
assumed liabilities at Closing, plus one-half the excess of the amount
of inventory at Closing over $1 million, less the Cash Consideration
(the "Installment Payments"); and a subordinated note component which is
equal to one-half of the difference between the amount of inventory at
Closing less $1 million, less any excess inventory reserve at Closing,
plus $1.065 million plus capital expenditures (determined in accordance
with GAAP) between January 1, 1995 and the Closing, less the book value
of fixed assets disposed of between January 1, 1995 and the Closing,
plus the Company's security deposits and pre-paid expenses at Closing
(the "Subordinated Note Component"). Assuming an August 25, 1995
closing, based on the Company's current best estimate of the assets and
liabilities which will be sold to the Buyer, the Cash Consideration will
be approximately $2.5 million, the aggregate Installment Payments will
be approximately $2 million, and the principal amount of the
Subordinated Note will be approximately $2 million for an aggregate
Purchase Price of approximately $6.5 million. The Company estimates
that the actual aggregate purchase price could vary by up to $500,000 in
either direction. However, because the Purchase Price is dependent
principally on accounts receivable, accounts payable and inventories,
any Purchase Price variation is likely to be substantially offset by an
opposite variation in the amount of cash flow realized by the Company
through the Closing Date.
The Cash Consideration is to paid at Closing with any Working
Capital Deficit to be determined, preliminarily, based on a preliminary
pro forma closing date balance sheet (the "Preliminary Balance Sheet")
prepared by the Company reflecting only the assets and liabilities of
the Company being sold to and assumed by the Buyer. The Cash
Consideration will be adjusted, as required, after Closing based on the
actual Working Capital Deficit, if any.
The Installment Payments are to be made in four payments with the
first installment for one-fifth of the total amount payable nine months
after the Closing Date. The remaining three installments will be in
equal amounts, and will be due on June 30, 1996, September 30, 1996 and
December 31, 1996. The Installment Payments will be non-interest
bearing, will be subordinated to the Company's senior debt, and will be
secured by a second lien on all of the Buyer's assets.
The Subordinated Note Component will be evidenced by the Buyer's
subordinated note (the "Subordinated Note") which will bear interest at
the rate of 8% per annum, commencing to accrue on the first anniversary
of the Closing Date. The principal amount of the Subordinated Note will
be amortized on a seven year level schedule with semi-annual payments
and with a balloon payment due on the fifth anniversary of the Closing
Date. Interest and principal payments will commence 18 months after the
Closing Date and continue semi-annually thereafter until maturity. In
the event that Buyer's EBITAD (earnings before interest, taxes,
depreciation and amortization) exceeds $2 million dollars for any fiscal
year prior to repayment of the Subordinated Note, an additional
principal payment equal to 50% of such excess shall be payable by the
Buyer and applied against the Subordinated Note in the inverse order of
maturity. The Subordinated Note will be subordinated to the Company's
senior debt and will be secured by a second lien on all of the Company's
fixed assets purchased by the Buyer. The Buyer's capital structure will
be heavily leveraged, and the Buyer's ability to make the Installment
Payments and the Subordinated Note payments will be subject to the Buyer
staying in compliance with its financial covenants and certain other
material covenants under its bank line of credit. There can be no
assurance that the Company will be able to collect all or any part of
the Installment Payments and the Subordinated Note payments.
At Closing, the Company is required to deliver to the Buyer the
Preliminary Balance Sheet reflecting all of the assets which would be
purchased by the Buyer and all of the liabilities which would be assumed
by the Buyer as of the last day of the month preceding the month in
which Closing occurs with the assets and liabilities determined assuming
that Closing occurred on such date. The Preliminary Balance Sheet will
be used to compute the Cash Consideration payable at Closing and the
principal amount of the Subordinated Note to be delivered at Closing.
Within 30 days following Closing, the Company, at its expense, must
prepare and deliver to Buyer a pro forma Closing Date balance sheet
reflecting all of the assets purchased and liabilities assumed by the
Buyer as of the Closing Date which is to be prepared, in so far as is
possible, in accordance with generally accepted accounting principals
consistently applied (the "Closing Balance Sheet"). Simultaneously, the
Company is to deliver its computation of the Working Capital Deficit for
purposes of computing the Cash Consideration, the amount of the
Installment Payments and the actual principal amount of the Subordinated
Note (collectively, the "Computed Items").
The Closing Balance Sheet and the Computed Items are to become
final and binding upon the parties unless the Buyer gives written notice
of its disagreement to the Company within 20 days following delivery to
it of the Closing Balance Sheet setting forth in reasonable detail the
nature of any disagreements so asserted. During the first 10 days
following receipt of any notice of disagreement, the parties are to
attempt to resolve in writing any differences they have. If at the end
of the 10 day period, the parties have reached such written agreement,
the Closing Balance Sheet and Computed Items are to be adjusted to
reflect such written agreement and thereafter shall become final and
binding on the parties. If at the end of the 10 day period the parties
have failed to reach agreement, all disputed matters shall be resolved
by an arbitrator which shall be any of the so called "Big Six"
accounting firms agreed upon by the Company and the Buyer other than
KPMG Peat Marwick. The determination of the arbitrator will be final
and binding on the Company and the Buyer and will control the
determination of the Closing Balance Sheet and the Computed Items.
At such time as the Closing Balance Sheet and the Computed Items
are finally determined, the various components of the Purchase Price are
to be recomputed. Specifically, the actual Cash Consideration shall be
recomputed using the actual Working Capital Deficit, with any excess
refunded by the Company to the Buyer, and any deficit paid by the Buyer
to the Company, in either case within five days of the final
determination of the Closing Balance Sheet. In addition, if based on
the Closing Balance Sheet and the Computed Items, the principal amount
of the Subordinated Note differs from that computed based on the
Preliminary Balance Sheet, the Seller will surrender for cancellation
the Subordinated Note delivered at Closing in return for a new
Subordinated Note with a principal amount based determined on the
Closing Balance Sheet.
At Closing, the Buyer will assume certain liabilities of the
Company including all accounts payable, commissions payable, prospective
warranty obligations, outstanding purchase orders and outstanding
customer sales contracts and obligations under certain real and personal
property leases.
Name Change
At the time of the Closing, the Company will change its name from
CenterCore, Inc. to Core Technologies, Inc. This name change was
approved by the Company's stockholders at the 1994 annual stockholders
meeting.
Representations, Warranties and Indemnities
In the Asset Purchase Agreement, the Company is making customary
representations and warranties to the Buyer including as to the
Company's financial and other information filed with the SEC, tax
matters, environmental matters, pending or threatened litigation
affecting the Company, compliance with applicable laws, title to the
Company's assets, third party approvals, status of employee benefit
plans and employee compensation arrangements, accounts receivable,
intellectual property, absence of changes, and labor relations. In the
Asset Purchase Agreement, the Buyer is making customary representations
and warranties to the Company including third party approvals and
existing and pending litigation.
The Asset Purchase Agreement also provides customary
indemnification obligations. Specifically, each of the parties has
agreed to indemnify the other in connection with inaccuracies, breaches
and non-fulfillment of any of the representations and warranties made,
and covenants and agreements to be performed prior to Closing, by the
Company or the Buyer (which have varying periods of survival ranging
from 24 months following Closing to unlimited survival). The Company
has also agreed to indemnify the Buyer in connection with any retained
liabilities, and the Buyer has agreed to indemnify the Company in
connection with any assumed liabilities. The Asset Purchase Agreement
provides generally that a minimum of $50,000 in damages must be
sustained before seeking recovery pursuant to the indemnifications
provisions and that no party will be obligated to pay more for
indemnification than an amount equal to the Purchase Price. The Asset
Purchase Agreement provides that the Buyer will have the right to offset
the Company's indemnification obligations against the Installment
Payments and/or the payments payable under the Subordinated Notes
subject to certain terms and conditions.
Closing Conditions.
The obligations of the Company and the Buyer to consummate the
transactions as contemplated by the Asset Purchase Agreement are subject
to the satisfaction or waiver of a number of specified conditions. The
obligations of the Buyer are subject to: (i) there having been no
misstatement in any material respect of any representation or warranty
of the Company when such representations and warranties were originally
made and as of the Closing (except for such changes as are permitted in
compliance with the Asset Purchase Agreement); (ii) the Company having
fully performed and complied in all material respects with its
obligations under the Asset Purchase Agreement required to be performed
by it prior to the Closing; (iii) all documents, instruments,
certificates and opinions required to be delivered by the Company or any
other party representing the Company, as contemplated by the Asset
Purchase Agreement, having been duly executed and delivered; (iv) all
consents, approvals and authorizations required to be obtained prior to
Closing from certain identified third parties in connection with the
execution and delivery and performance of the Asset Purchase Agreement
have been made or obtained; (v) the Buyer having obtained financing from
its senior lender, Shawmut Capital Corporation; (vi) the Company having
complied, on a basis acceptable to the Company, with applicable New
Jersey environmental statutes; (vii) completion by the Company of a
physical inventory of the tangible assets being acquired by the Buyer;
(viii) the Company having disseminated this Information Statement as
required under the Exchange Act and the requisite 20 day period
following such dissemination shall have been lapsed; and (ix) the
execution, and delivery by Safeguard of the Parent Guarantee Agreement.
The obligations of the Company to consummate the transactions
contemplated by the Asset Purchase Agreement are further subject to the
satisfaction or waiver of the following conditions at or prior to
Closing: (i) there having been no misstatement in any material respect
of any representation and warranty of the Buyer when such
representations and warranties originally made and as of the date of the
Closing (except for such changes permitted in compliance with the Asset
Purchase Agreement); (ii) the Buyer having fully performed and complied
in all material respects with its obligations required to be performed
prior to Closing under the Asset Purchase Agreement; (iii) all
documents, agreements, certificates and opinions required to be
delivered by the Buyer or any party representing the Buyer, as
contemplated by the Asset Purchase Agreement, having been duly executed
and delivered; (iv) the Company having complied, on a basis acceptable
to the Company, with the applicable New Jersey environmental statutes;
(v) the Company having received the approval of Mellon Bank to release
Mellon's liens on the assets being purchased by the Buyer and (vi) the
Company having disseminated this Information Statement as required under
the Exchange Act and the requisite 20 day period following such
dissemination shall have been lapsed.
No Sale Negotiations
The Asset Purchase Agreement provides that neither the Company nor
any person acting on its behalf will take any action to solicit,
encourage, initiate or participate in any way in discussions or
negotiations with, or furnish any information with respect to the
Furnishings Business to, any third party in connection with any possible
proposed sale of capital stock, sale of the substantial portion of the
assets, any merger, business combination or other similar transaction
involving the Furnishings Business.
Management
The Asset Purchase Agreement provides that the Company will pay to
the Buyer an amount equal to 1.5% of gross revenues of the Furnishings
Business from July 1, 1995 through Closing or termination of the
Agreement, as compensation for the Buyer assuming managerial operation
of the Furnishings Business.
Additional Covenants Prior to Closing
The Asset Purchase Agreement provides that the Company will
operate its business only in the ordinary course consistent with past
practices and will preserve its business organization and the
Furnishings Business intact, not to dispose of or transfer any portion
of the Furnishings Business or otherwise make any fundamental change
therein.
Termination Provisions
The Asset Purchase Agreement provides it may be terminated any
time prior to Closing (i) by mutual consent of the parties, (ii) by the
non-defaulting party as a result of inaccuracies in the representations
and warranties or the failure to perform covenants and agreements
required to be performed by the defaulting party, (iii) by either party
if one or more of the conditions to such party's obligations to proceed
to Closing has not been fulfilled by the Closing Date, (iv) by either
party if Closing has not occurred on or prior to August 25, 1995, and
(v) by either party if certain legal proceedings are commenced
challenging consummation of the Closing.
If at any time Safeguard receives a bona fide written letter of
intent regarding the purchase of its stock investment in CenterCore or
the purchase of substantially or all of the assets of CenterCore, within
seven days of receipt of notice of CenterCore's intent to terminate the
exclusive relationship described above, the Buyer shall have the option
of either (i) submitting a letter of intent in similar form and
substance to that received by Safeguard and initiating due diligence
regarding the purchase of Safeguard stock investment in Seller or (ii)
terminating all actions with respect to Seller. In such event, if the
Agreement is terminated pursuant to this provision, the Company will be
obligated to pay the Buyer a termination fee equal to Buyer's out of
pocket expenses to third parties plus $2,000 per business day from
January 11, 1995 to the decision to terminate, up to a maximum of
$150,000.
Non Competition Agreement
The Asset Purchase Agreement provides that the Company will not,
for a period of three years following the Closing Date, compete,
directly or indirectly, with the Buyer in the Furnishings Business in
the United States, Canada or any other country in which the Furnishings
Business has been conducted since January 1, 1994.
Expenses
The Asset Purchase Agreement provides that each party will pay all
of the fees and expenses incurred by it (including the fees and expenses
of counsel) in connection with the negotiation, execution and delivery
and performance of the Asset Purchase Agreement and transactions
contemplated hereby except that the fees of the arbitrator resolving
disputes respecting the Closing Balance Sheet are to be paid equally by
the parties.
Guarantee Agreement
Safeguard has agreed to guarantee the payment of the
indemnification obligations of the Company pursuant to a certain Parent
Guarantee Agreement subject to certain terms and conditions. In
addition, Safeguard has agreed that to the extent it receives funds from
the Company in reimbursement of any prior indemnifications paid by
Safeguard or any other funds from the Company after March 31, 1995,
under certain circumstances, Safeguard will be required to pay such
amounts to the Buyer to the extent the Buyer is entitled to
indemnification from the Company which is not paid or the Buyer is
required to disgorge amounts previously paid to it by the Company in
respect of indemnification obligations. Safeguard's obligation to make
guarantee payments on account of the Company's indemnification
obligations is limited to a maximum of $1 million. In addition, with
respect to indemnification relating to environmental matters, Safeguard
is only obligated to pay one-half of the first $250,000 that the Company
fails to pay in respect of any such matter and, with respect to other
Company indemnification obligations, Safeguard has no obligation to pay
until the Company has failed to pay $100,000 of such other
indemnification obligations and then only in amounts in excess of such
$100,000 threshold. The obligation of Safeguard to guarantee
indemnification obligations of the Company terminates on the earlier of
the expiration of the Company's indemnification obligations with respect
to any specific indemnification claim and 15 years after Closing.
Use of Proceeds
The Company anticipates that it will receive Cash Consideration of
approximately $2.5 million at Closing, $2 million of aggregate
Installment Payments during 1996, and $2 million of aggregate payments
as the Subordinated Note Component during 1997 through 2000. The
Company will use all of the proceeds from the sale to reduce its
outstanding bank debt, which it anticipates will be approximately $4.5
million immediately after the Closing on August 25, 1995. The Company
will assign its right to receive the Installment Payments and the
Subordinated Note Component to its bank as additional collateral for its
bank debt. The Company intends to draw on its credit facility from
Safeguard to pay closing costs associated with the sale.
Stockholder Approval
The Company is a Delaware corporation. The Company believes that
the Sale Transaction constitutes a sale of a substantial portion of the
assets of the Company under Delaware law, and therefore requires
stockholder approval by the affirmative vote of a majority of the votes
cast by all stockholders entitled to vote thereon. The Company will
continue to operate its security and control system integration and
installation business through its subsidiary Maris and its indoor air
quality business through its subsidiary Airo Clean. Safeguard, which is
the holder of 69.1% of the outstanding voting shares of the Company has
advised the Company that it will vote its shares to approve the Sale
Transaction in accordance with the purchase agreement. Safeguard's
vote, by itself, will be sufficient to achieve stockholder approval of
the Sale Transaction.
Rights of Dissenting Stockholders
Under Delaware law, dissenting stockholders will not have any
rights of appraisal as a result of the approval or consummation of the
Sale Transaction.
Accounting Treatment
Because the Company decided to dispose of the Furnishings Business
as of the end of 1994 and to treat the business as a discontinued
operation, the Company wrote down certain of its assets related to the
Furnishings Business in the fourth quarter of 1994 to reflect
management's estimate of their value in a disposition, and accrued a
reserve for anticipated costs of disposition of the business. As a
result, the sale price for the business will be approximately equal to
the net book value of the assets being sold, and the Company does not
expect to realize any material gain or loss on the Sale Transaction,
provided that the deferred purchase price payments are made in the
amounts provided for in the Purchase Agreement.
Federal Income Tax Consequences
As described above under "Accounting Treatment," the Company has
taken certain charges in the fourth quarter of 1994, as a result of
which the Company does not expect to realize any material gain or loss
for federal income tax purposes on the Sale Transaction, provided that
the deferred purchase price payments are made in the amounts provided
for in the Purchase Agreement. The Sale Transaction will not result in
any federal income tax consequences to the stockholders of the Company.
Regulatory Compliance
The transfer of the lease of the factory and warehouse facility in
Plainfield, New Jersey, which is a material part of the Sale
Transaction, is subject to review and approval by the New Jersey
Department of Environmental Regulation under New Jersey's so called
"ISRA" statute. Such approval has been received.
Market Price for the Company's Common Stock
The Company's Common Stock is quoted by certain market makers in
what is commonly referred to as the "bulletin board." On May 25, 1995,
the day before the announcement of the execution of the Purchase
Agreement, there was no trading in the Common Stock, but the bid and
asked prices quoted by a market maker on that day were $.06 and $.25,
respectively.
SELECTED FINANCIAL DATA
The historical financial data presented below for the five years
ended December 31, 1994 are derived from the Company's audited
consolidated financial statements. The presentation of selected pro
forma financial data would not clarify any trends in the Company's
operations or financial condition because the furnishings segment to be
sold is already treated as discontinued operations in the historical
financial data. Therefore, no selected pro forma financial data is
presented here. However, pro forma financial statements are presented
elsewhere in this Information Statement. This table should be read in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS," and the
historical and pro forma financial statements and information presented
elsewhere in this Information Statement and in the Company's 1994 Annual
Report to Stockholders. All amounts are in thousands, except per share
data. The Company has never declared cash dividends on its common
stock.
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
----------------------- -------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $4,189 $10,860 $31,245 $15,242 $-- $-- $--
Net earnings (loss)
Continuing operations (404) 2 (10,392) (113) -- -- --
Discontinued operations (509) (5,048) (703) 989 282 (1,249)
----------------------- -------------------------------------------------------
Net earnings (loss) (404) (507) (15,440) (816) 989 282 (1,249)
Earnings (loss) per share
Continuing operations (.04) (1.00) (.01) - - -
Discontinued operations (.05) (.48) (.07) .09 .03 (.12)
----------------------- -------------------------------------------------------
Net earnings (loss) (.04) (.05) (1.48) (.08) .09 .03 (.12)
March 31, December 31,
----------------------- -------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------------
Working capital (10,404) 5,831 (11,379) 3,947 -- -- --
Total assets 14,934 34,888 16,691 34,571 16,014 17,773 19,645
Long-term debt 0 11,636 0 9,939 4,451 6,393 8,335
Stockholders' equity (deficit) (4,866) 9,677 (4,425) 10,236 11,078 10,667 10,395
Book value per common share (.47) .93 (.40) .98 1.04 .99 .96
Discontinued operations includes the furnishings segment and Nord Systems.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
In 1995 the Company decided to significantly downsize the Maris
business by concentrating on the low voltage security and fire alarm
business and selected smart highway applications. The majority of net
sales in the first quarter of 1994 represented bonded correctional
facility and airport projects that the Company has not pursued in 1995.
Due to declining furniture sales, particularly to the federal
government, the Company has decided to dispose of the furnishings
segment. The Company has agreed to sell the assets of the domestic
furnishings segment including Corel for cash and notes receivable. The
Company will apply the proceeds of the sale, which is expected to close
in August 1995, to pay down its bank debt. The UK furnishings business
will be sold to local management in return for notes receivable. The
Canadian operation was sold to Safeguard Scientifics, Inc. in April
1995. Due to these plans, the furnishings segment has been presented as
a discontinued operation.
Continuing operations reflect the results of the on-going
businesses of Maris Equipment Company ("Maris") and Airo Clean. Due to
the disposition of the furnishings segment and the change in the focus
of the business, comparisons from year to year are not necessarily
meaningful.
Review of continuing operations during the first quarter of 1995
Net sales for the quarter ended March 31, 1995 were $4.2 million
compared to $10.9 million for the comparable period in 1994. The
Company reported a net loss of $403,900 or $.04 per share, compared to a
net loss of $507,500 in the same period in 1994. From continuing
operations the first quarter of 1995 loss was $403,900 compared to
essentially break-even for the comparable period in 1994.
First quarter 1995 Maris sales were $2.9 million compared to $9.6
million in 1994. Sales in 1994 included $7.1 million in bonded
correctional facility and airport projects which were turned over to the
bonding companies for completion. Maris gross profits as a percentage
of sales increased to 18.9% in the first quarter of 1995 from 15.4% in
the same period in 1994.
First quarter 1995 and 1994 Airo Clean sales were $1.3 million.
Airo Clean gross profits as a percentage of sales increased to 24.4% in
the first quarter of 1995 from 17.1% in the same period in 1994, due to
the Company obtaining price concessions from its vendors and selected
increases in selling prices.
Sales and marketing expenses decreased in the first quarter of
1995 by $380,600 compared to 1994 due to cost reductions implemented at
Maris and Airo Clean. Sales efforts at Maris are being concentrated in
expanding the electronic security systems business, which typically has
had higher gross profits than the correctional facility and airport
hardware construction business. The competitive environment and the
difficulty in estimating costs and collecting revenues has adversely
impacted Maris' gross margins on long-term correctional facility and
airport construction projects. The shorter completion cycle coupled
with a less competitive environment has enabled Maris to achieve higher
gross margins in the electronic security systems business. The Company
has elected to concentrate on the electronic security systems business
due to the Company's expertise and the higher potential profits
resulting from the relatively high gross margins.
Marketing efforts at Airo Clean have been focused on promoting the
BioShield and Ultraguard products which are air scrubbing devices for
controlling airborne pathogens and targeted for the health care
industry. First quarter 1995 general and administrative expenses
decreased $356,400 compared to 1994 due principally to staff reductions
and salary freezes implemented at Maris and Airo Clean. The Company
continues to closely monitor and control costs and recognizes that a
significantly downsized business in 1995 is necessary for survival. As
a percentage of net sales, sales and marketing and general and
administrative expenses increased in the first quarter of 1995 compare
to the first quarter of 1994. This is the result of the decrease in
sales. The Company believes that additional sales can be achieved
without a proportional increase in business infrastructure. However, it
may be difficult for the Company to increase its sales due to the
Company's recent difficulties and its constrained financial resources.
Interest expense in the first quarter of 1995 was $171,500
compared to $96,100 for the comparable period in 1994. The increase in
1995 reflects additional debt incurred to satisfy working capital
requirements, fund losses and higher interest rates.
The Company currently is not able to utilize any tax benefits from
the losses incurred. The Company has generated an unrecorded loss carry
forward of approximately $3 million which is available to off-set future
income until the year 2010.
Liquidity and Capital Resources
As a result of significant operating difficulties, the Company has
a severe liquidity problem. The Company is in default of its loan
facility ($8.3 million at March 31, 1995). These defaults cause the debt
to be due upon demand, and, should the lender demand payment, the
Company does not have the resources to satisfy the debt. The Company
has withdrawn from the correctional facility security business and is
undertaking to significantly downsize the business which includes the
sale of the furnishings business unit. The Company applied a $1.6
million tax refund received in the second quarter of 1995 to reduce
outstanding bank debt, and will apply proceeds from the sale of the
furnishings business to further reduce bank debt. As a result, the bank
continues to extend credit to the Company under the existing borrowing
base formula. Except for a $2.4 million guarantee of bank debt,
Safeguard is not contractually obligated to satisfy any of the Company's
obligations at December 31,1994. The Company believes that the
combination of cash received from the sale of the furnishings business,
the tax refund, the guarantee of Safeguard and the working capital
assets of the ongoing business will be sufficient to satisfy/support all
of the bank debt.
The Company has entered into an agreement with the parties from
whom it acquired Maris, to significantly restructure the original
purchase transaction. Under this agreement the seller has agreed to
offset its $3.6 million note receivable from the Company in exchange for
releases from its indemnification liabilities to the Company under the
original asset purchase agreement. Because the Company did not have the
required working capital to complete certain projects it turned to its
sureties to assume and complete certain construction contracts and has
extended its payables to vendors. The principal sureties have agreed to
release the Company from its indemnity obligations to them in return for
300,000 shares of CenterCore stock, cash payments of $495,000 and
additional payments equal to 20% of Maris' net earnings in 1998-2002 up
to $1 million in the aggregate. The Company is negotiating with all
principal vendors to arrange a repayment schedule while continuing to
supply the Company with materials needed to meet current requirements.
Safeguard has agreed to contribute 2 million shares of its
CenterCore common stock to the Company, sell 2.5 million shares of its
CenterCore common stock to CenterCore management, and provide up to $3
million in advances to the Company to address current funding
requirements of the downsized business which will be substantially
utilized by the Company in 1995. Through mid June of 1995 Safeguard has
funded approximately $700,000 of this advance.
As a result of the restructuring, the Company has emerged as a
significantly downsized company. Availability of bonding on jobs will,
at least in the near term, be limited. Bank financing may be available
for limited working capital requirements to augment any advances from
Safeguard. If these sources of funds prove to be inadequate or in the
case of bank financing, unavailable, then the Company will have to seek
additional funds from other investors in order to continue operations.
There can be no assurance that new sources of funds, if required, will
be available. Although the Company believes it will be able to continue
to operate in this new downsized mode, continuation is contingent on the
Company's ability to adequately reduce its cost structure to a point
where it is supported by the new downsized operations
<TABLE>
<CAPTION>
CENTERCORE, INC.
Consolidated Balance Sheets
March 31, December 31,
1995 1994
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 358,100 $ 583,600
Receivables, less allowances ($2,786,900 --1995; $2,865,100 --1994 4,349,500 5,024,900
Costs and estimated earnings in excess of billings on uncompleted contracts 362,300 292,500
Inventories 827,400 625,700
Income taxes receivable 1,399,500 1,357,900
Other current assets 479,500 231,300
----------- -------------
Total current assets 7,776,300 8,115,900
Net assets of discontinued operations 5,791,400 7,157,300
Plant and equipment
Leasehold improvements 155,400 155,400
Machinery and equipment 847,400 816,900
----------- -------------
1,002,800 972,300
Less accumulated depreciation and amortization (455,100) (385,400)
----------- -------------
Net plant and equipment 547,700 586,900
Other assets
Excess of cost over net assets of businesses acquired 188,500 192,300
Other 630,000 638,300
----------- -------------
Total other assets 818,500 830,600
----------- -------------
$14,933,900 $16,690,700
=========== =============
See note to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CENTERCORE, INC.
Consolidated Balance Sheets
March 31, December 31,
1995 1994
----------- -------------
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable $ 5,232,000 $ 5,885,500
Accrued expenses 3,325,600 3,793,500
Taxes on income
Billings in excess of costs and estimated earnings on uncomplete 1,180,500 1,419,800
Current debt 8,442,100 8,396,100
----------- -------------
Total current liabilities 18,180,200 19,494,900
Long-term debt
Other liabilities 120,200 121,300
Deferred taxes
Redeemable convertible preferred stock issued to Safeguard Scientifics, Inc. 1,500,000 1,500,000
Stockholders' equity (deficit)
Common stock, $.01 par value; Authorized -- 20,000,000 shares;
Issued - 10,767,326 shares 107,700 107,700
Additional paid-in capital 7,923,400 7,923,400
Retained earnings (accumulated deficit) (12,440,000) (12,036,100)
Foreign currency translation adjustment (37,100) 0
Treasury stock at cost - 330,000 shares (420,500) (420,500)
----------- -------------
Total stockholders' equity (deficit) (4,866,500) (4,425,500)
----------- -------------
$14,933,900 $16,690,700
See note to consolidated financial statements =========== =============
</TABLE>
<TABLE>
<CAPTION>
CENTERCORE, INC.
Consolidated Statements of Operations
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Net sales $ 4,187,800 $10,859,900
Cost of goods sold 3,322,500 9,165,700
----------- -----------
Gross profit 865,300 1,694,200
Expenses
Sales and marketing 518,300 898,900
General and administrative 579,400 935,800
Interest 171,500 96,100
----------- -----------
1,269,200 1,930,800
Loss from continuing operations before income taxes (403,900) (236,600)
Benefit of income taxes (238,100)
----------- -----------
(Loss) earnings from continuing operations (403,900) 1,500
Loss from discontinued operations (509,000)
----------- -----------
Net loss $(403,900) $(507,500)
=========== ===========
Earnings (loss) per share
Continuing operations $(.04) $.00
Discontinued operations (.05)
----------- -----------
Net earnings (loss) $(.04) $(.05)
=========== ===========
Weighted average shares outstanding 10,437,000 10,437,000
See note to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CENTERCORE, INC.
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
--------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Operations
Net Loss $ (403,900) $ (507,500)
Loss from discontinued operations 509,000
Adjustments to reconcile net (loss) to cash from operations
Depreciation and amortization 81,600 107,100
Decrease in deferred taxes (100)
Cash from discontinued operations 1,366,100 384,700
Cash provided by (used in) changes in working capital items
Receivables 675,400 566,400
Inventories (201,700) 62,000
Contracts in progress (309,100) (1,080,500)
Other current assets (248,200) (111,700)
Accounts payable (653,500) (284,200)
Accrued expenses (467,900) (458,100)
Taxes on Income (41,600) (605,900)
------------ ------------
Cash (used in) operations (202,800) (1,418,800)
Financing Activities
Borrowings of debt 44,900 1,762,100
------------ ------------
Cash provided by financing activities 44,900 1,762,100
Investing Activities
Expenditures for plant and equipment (30,500) (37,000)
Other, net (37,100) (72,300)
------------ ------------
Cash used in investing activities (67,600) (109,300)
------------ ------------
Increase (decrease) in cash (225,500) 234,000
Cash beginning of period 583,600 376,900
------------ ------------
Cash end of period $ 358,100 $ 610,900
============ ============
See note to consolidated financial statements
</TABLE>
CENTERCORE, INC.
NOTE TO FINANCIAL STATEMENTS
1. Organization and Business Operations
The accompanying unaudited interim financial statements were
prepared in accordance with generally accepted principles for
interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
The summary of significant accounting policies and notes to
financial statements included in the 1994 Form 10-K should be
read in conjunction with the accompanying statements. These
statements include all adjustments (consisting only of normal
recurring accurals) which the Company believes are necessary
for a fair presentation of the statements. The interim operating
results are not necessarily indicative of the results expected
for a full year.
2. Current Debt
Due to the losses incurred in the second half of 1994, the Company
is not in compliance with certain financial convenants under its
bank agreements. The Company has not been successful in
restructuring these covenants, therefore the formerly long-term
bank borrowings has been reflected as a current obligation as the
bank has the ability to request immediate loan repayment. By mutual
agreement with the bank availability under credit facility has been
reduced to $7.7 million in May 1995. As of July 24, 1995 outstanding
borrowings under the credit facility were $6.5 million.
The Company will use the proceeds from the sale of the furnishings
business (estimated to be approximately $2.5 million at closing plus
$4.0 million over five years), a tax refund of $1.6 million received
in the second quarter of 1995 and cash generated from the discounted
operation prior to its sale to reduce the outstanding bank debt. The
remaining bank debt will be supported by working capital of the
Company augmented by guarantees and letters of credit from Safegaurd.
CENTERCORE, INC.
PRO FORMA FINANCIAL STATEMENTS
(unaudited)
The pro forma financial statement and information presented below
for the Company give effect to the sale of the Furnishings Business to
the Buyer. The pro forma balance sheet is presented as of March 31,
1995, assuming a closing of the Sale Transaction on that date.
A narrative description of the pro forma effects of the Sale
Transaction on the Company's statements of operations for the fiscal
year ended December 31, 1994 and for the three months ended March 31,
1995 is provided below in lieu of pro forma statements of operations.
<TABLE>
<CAPTION>
CENTERCORE, INC.
Pro Forma Consolidated Balance Sheets
As of March 31,1995
(unaudited)
Pro Forma
Adjustments
increase
As reported (decrease) Pro Forma
------------- ------------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets
Cash $ 358,100 $ $ 358,100
Receivables, net 4,349,500 4,349,600
Notes receivable 801,500 (a) 801,500
Costs and estimated earnings in excess of billings on uncompleted contracts 362,300 362,300
Inventories 827,400 827,400
Income taxes receivable 1,399,500 1,399,500
Other current assets 479,500 479,500
----------- ----------- -----------
Total current assets 7,776,300 801,500 8,577,800
Net assets of discontinued operations 5,791,400 (5,791,400)(b) 0
Plant and equipment
Leasehold improvements 155,400 155,400
Machinery and equipment 847,400 847,400
----------- ----------- -----------
1,002,800 1,002,800
Less accumulated depreciation and amortization (455,100) (455,100)
----------- ----------- -----------
Net plant and equipment 547,700 547,700
Other assets
Excess of cost over net assets of businesses acquired 188,500 188,500
Notes receivable 2,871,900 (c) 2,871,900
Other 630,000 630,000
----------- ----------- -----------
Total other assets 818,500 2,871,900 3,690,400
----------- ----------- -----------
$14,933,900 $(2,118,000) $12,815,900
=========== =========== ===========
See notes to pro forma consolidated balance sheet
</TABLE>
<TABLE>
<CAPTION>
CENTERCORE, INC.
Pro Forma Consolidated Balance Sheets
As of March 31,1995
(unaudited)
Pro Forma
Adjustments
increase
As reported (decrease) Pro Forma
------------- ------------- -----------
(unaudited)
<S> <C> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable $ 5,232,000 $ 5,232,000
Accrued expenses 3,325,600 (350,000)(d) 2,975,600
Billings in excess of costs and estimated earnings on unccompleted contracts 1,180,500 1,180,500
Current debt 8,442,100 (1,768,000)(e) 6,674,100
----------- ----------- -----------
Total current liabilities 18,180,200 (2,118,000) 16,062,200
Other liabilities 120,200 120,200
Redeemable convertible preferred stock 1,500,000 1,500,000
Stockholders' equity (deficit)
Common stock, $.01 par value; Authorized -- 20,000,000 shares;
Issued - 10,767,326 shares 107,700 107,700
Additional paid-in capital 7,923,400 7,923,400
Retained earnings (accumulated deficit) (12,440,000) (12,440,000)
Foreign currency translation adjustment (37,100) (37,100)
Treasury stock at cost - 330,000 shares (420,500) (420,500)
----------- ----------- -----------
Total stockholders' equity (deficit) (4,866,500) (4,866,500)
----------- ----------- -----------
$14,933,900 $(2,118,000) $12,815,900
=========== =========== ===========
See notes to pro forma consolidated balance sheet
</TABLE>
CENTERCORE, INC.
NOTES TO PRO FORMA BALANCE SHEET
(unaudited)
The Furnishings Business will be sold for a purchase price comprised of
three components: cash consideration of $2.5 million less the amount,
if any, by which the working capital of the domestic furniture business
is less than $5 million; installment payments equal to the sum of
$1 million, plus accounts receivable less assumed liabilities at Closing,
plus one-half of the excess of inventory at Closing over $1 million,
less the cash consideration; and a subordinated note equal to one-half
of the difference between inventory at Closing less $1 million, less any
excess inventory reserve at Closing, plus $1.065 million plus or minus
certain capital expenditures, plus security deposits and pre-paid
expenses at Closing. Based on the Company's current best estimate, the
cash consideration will be approximately $2.5 million, the aggregate
installment payments will be approximately $2 million, and the
subordinated note will be approximately $2 million, for an aggregate
purchase price of approximate $6.5 million.
The following pro forma adjustments are based on working capital of
March 31, 1995. Actual proceeds expected to be received will differ.
(a) Represents the current portion of the installment note due from
the Apollo Group. The installment note, for $1,717,500 will be payable
in 4 installments beginning 9 months after the close of the transaction
which is expected to occur in August 1995 secured by a second lien on
all the assets of the buyer.
(b) Reflects payment to the Company of an assumed furnishings segment
purchase price of $5,791,400 (computed in accordance with terms of the
Asset Purchase Agreement, but based on the furnishing net book value, as
defined, at March 31, 1995.
(c) Represents the remaining two payments of the installment note and
the entire subordinated note due from the Apollo Group. The
subordinated note, for $1,955,900, will be payable in semiannual
installments beginning 18 months through 5 years after closing and bears
interest at 8% per annum secured by a second lien on the fixed assets of
the buyer.
(d) Closing costs include, professional fees and expenses of $350,000
related to the sale of furnishings segment.
(e) Reflects cash payment to the Company at closing of $2,118,000 less
estimated closing costs of $350,000, see note (d).
If the furnishings segment were sold on January 1, 1995 and 1994 net
earnings from continuing operations would not be materially different,
because the historical statements of operations for the fiscal year
ended 1994 and the first quarter of 1995 reflect the furnishings segment
as a discontinued operation. The only adjustments would be to reduce
interest expense by approximately $182,000 for fiscal year 1994 and by
$56,000 in the first quarter of 1995 to reflect the use of the sale
proceeds to pay down the Company's bank credit facility and the
elimination of the discontinued operations. Net loss from continuing
operations would be $10,210,000 or, $.98 per share, for fiscal year 1994
and $347,900, or $.03 per share, for the first quarter of 1995.
THE CENTERCORE GROUP, INC.
PRO FORMA FINANCIAL STATEMENTS
(unaudited)
The pro forma financial statements presented below for the Buyer
give effect to the sale of the Furnishings Business to the Buyer. The
pro forma balance sheet is presented as of March 31, 1995, assuming a
closing of the Sale Transaction on that date. The pro forma statements
of operations are presented for the year ended December 31, 1994,
assuming a closing of the Sale Transaction on January 1, 1994, and for
the three months ended March 31, 1995, assuming a closing of the Sale
Transaction on January 1, 1995.
THE CENTERCORE GROUP, INC.
Pro Forma Balance Sheet
As of March 31, 1995
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
increase
Actual (decrease) Pro Forma
--------------------------------------------------------------
Assets
<S> <C> <C> <C>
Current assets
Receivables, net $ 8,349,800 $ $ 8,349,800
Inventories 2,500,400 2,500,400
Other current assets 154,700 154,700
---------------------------------------------------------------
Total current assets 11,004,900 0 11,004,900
Net Plant and equipment 1,065,000 1,065,000
Other assets
Security deposits 56,900 56,900
---------------------------------------------------------------
$12,126,800 $ 0 $12,126,800
===============================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 3,042,500 $ 3,042,500
Accrued expenses 3,189,700 3,189,700
Current portion of note payable to CenterCore, Inc. 801,500 (a) 801,500
Other current liabilities 65,900 65,900
---------------------------------------------------------------
Total current liabilities 6,298,100 801,500 7,099,600
Long-term bank debt 1,718,000 (b) 1,718,000
Long-term portion of notes payable to CenterCore, Inc. 2,871,900 (c) 2,871,900
Other liabilities 37,300 37,300
Stockholders' equity
Common stock 6,510,600 (6,110,600)(d) 400,000
Accumulated deficit (719,200) 719,200 (d) 0
---------------------------------------------------------------
Total stockholders' equity 5,791,400 (5,391,400) 400,000
---------------------------------------------------------------
$12,126,800 $ (0) $12,126,800
===============================================================
See notes to pro forma financial statements
</TABLE>
THE CENTERCORE GROUP, INC.
Notes to Pro Forma Balance Sheet
As of March 31, 1995
(unaudited)
The following pro forma adjustments are based on working capital as of
March 31, 1995. Actual amounts expected to be received will differ.
(a) Represents the current portion of the installment payments due to
CenterCore, Inc. The installment payments, for a total of $1,717,500
will be payable in 4 installments beginning 9 months after the close
of the transaction, and will be secured by a second lien on all the
assets.
(b) Represents the bank debt used to finance the acquisition.
(c) Represents the remaining two installment payments and the entire
subordinated note due to CenterCore, Inc. The subordinated note,
for $1,955,900, will be payable in semiannual installments beginning
18 months through 5 years after closing and bears interest at 8% per
annum. The note will be secured by a second lien on the fixed assets
of the Buyer.
(d) Reflects contributions by the shareholders of the Buyer.
THE CENTERCORE GROUP, INC.
Pro Forma Statement of Operations
Year Ending December 31, 1994
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
increase
Actual (decrease) Pro Forma
-------------------------------------------------
<S> <C> <C> <C>
Net sales $32,905,600 $32,905,600
Cost of goods sold 21,954,700 (225,400) 21,729,300
-------------------------------------------------
Gross profit 10,950,900 225,400 11,176,300
Expenses
Sales and marketing 8,171,300 (198,700) (a) 7,972,600
General and administrative 4,177,000 (38,200) (a)(b) 4,138,800
Restructuring 2,274,500 (2,274,500) (c) 0
Interest 260,600 47,664 (d) 308,264
-------------------------------------------------
14,883,400 (2,463,736) 12,419,664
-------------------------------------------------
Net loss ($3,932,500) $2,689,136 ($1,243,364)
=================================================
</TABLE>
(a) Depreciation was adjusted to reflect the lower negotiated value of
the purchased plant and equipment. The purchased plant and
equipment was depreciated over seven years. The net reduction in
cost of goods sold, sales and marketing, and general and
administrative expenses was $225,400, $198,700 and $287,600,
respectively.
(b) Reflects the management fee to be charged by Apollo Group, Inc. of
1% of net sales ($329,100) net of the administrative fee of
$79,700 charged by Safeguard.
(c) Represents writedown of assets to net realizable value in
anticipation of the selling the business.
(d) Reflects interest on the acquisition debt and notes payable to
CenterCore, Inc. and the reversal of interest charged by
CenterCore, Inc.
THE CENTERCORE GROUP, INC.
Pro Forma Statement of Operations
Three Months Ending March 31, 1995
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
increase
Actual (decrease) Pro Forma
------------------------------------------------
<S> <C> <C> <C>
Net sales $7,635,000 $ $7,635,000
Cost of goods sold 5,093,700 12,100 5,105,800
------------------------------------------------
Gross profit 2,541,300 (12,100) 2,529,200
Expenses
Sales and marketing 1,582,700 10,600 (a) 1,593,300
General and administrative 603,100 91,800 (a)(b) 694,900
Restructuring 316,400 (316,400) (c) 0
Interest 39,100 35,300 (d) 74,400
------------------------------------------------
2,541,300 (178,700) 2,362,600
Income taxes 71,500 (e) 71,500
------------------------------------------------
Net income $ 0 95,100 $ 95,100
================================================
</TABLE>
(a) The purchased plant and equipment was depreciated over seven years.
During 1995 no depreciation was recorded as the assets were written
down to net realizable values. The depreciation was allocated
consistent with the prior year. The net reduction in cost of goods
sold, sales and marketing, and general and administrative expenses
was $12,100, $10,600 and $15,400, respectively.
(b) Reflects the management fee charged from Apollo Group, Inc. of 1%
of net sales.
(c) Represents additional writedown of assets to net realizable value
in anticipation of selling the business.
(d) Reflects interest on the acquisition debt and the reversal of
interest charge by CenterCore, Inc.
(e) Income taxes are estimated at 40%.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Information Statement incorporates by reference the following
documents:
1. The Company's Annual Report to Stockholders which is being
delivered to Stockholders herewith in respect to the annual stockholders
meeting to which this Information Statement relates.
2. The Asset Purchase Agreement dated May 26, 1995 between the
Company, Corel Corporate Seating, Inc., Safeguard Scientifics, Inc. and
The CenterCore Group, Inc., and Amendment No. 1 thereto dated as of June
30, 1995, which have been filed by the Company with the SEC together
with a preliminary copy of this Information Statement.
The Company will furnish to any stockholder without charge, upon written
or telephonic request, a copy of the Asset Purchase Agreement and
Amendment No. 1. Requests should be directed to Frederick B. Franks,
Chief Financial Officer, CenterCore, Inc., 110 Summit Drive, Exton, PA
19341; phone: (610) 524-7000.
INDEPENDENT PUBLIC ACCOUNTANTS
Since 1986, the Company has retained KPMG Peat Marwick LLP as its
independent public accountants, and it intends to retain KPMG Peat
Marwick LLP for the current year ending December 31, 1995.
Representatives of KPMG Peat Marwick LLP are expected to be present at
the Annual Meeting, will have an opportunity at the Annual Meeting to
make a statement if they desire to do so, and will be available to
respond to appropriate questions.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers, and persons who own more than
ten percent of a registered class of the Company's equity securities
("10% Stockholders") to file reports of ownership and changes in
ownership of Common Stock and other equity securities of the Company
with the Securities and Exchange Commission ("SEC"). Officers,
directors and 10% Stockholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of such forms received by it and
written representations from certain reporting persons that no other
reports were required for those persons, the Company believes that
during the period from January 1, 1994 to December 31, 1994, all Section
16(a) filing requirements applicable to its officers, directors and 10%
Stockholders were complied with, except for a late Form 3 filed by Mr.
Pelosi and one transaction which was reported late on a Form 4 by
Safeguard Scientifics, Inc.
OTHER MATTERS
The Company is not aware of any other business to be presented at
the Annual Meeting. The Company's Annual Report to Stockholders for
the year ended December 31, 1994, including financial statements and
other information with respect to the Company and its subsidiaries, is
being mailed simultaneously to the stockholders.
Dated: August 4, 1995
To the Stockholders:
The annual report and annual meeting were delayed until the Company
could complete agreements which will enable it to restructure and
recapitalize itself to begin the process of rebuilding shareholder
value.
As I begin this Stockholder Letter, I feel it best to state the obvious.
The acquisition of Maris was a near term financial mistake. Our
immediate goal will be to rebuild selected parts of that business
centering on a few markets that have higher growth potential, and weave
our way through a difficult liquidity situation. These markets include
security, fire alarm, and communication systems for the commercial
marketplace, and a variety of applications in the overall federal and
state level smart highway programs.
In the press release for the fourth quarter, we announced our decision
to exit the detention hardware part of Maris' security business. The
construction delays and complexities in the prison market made it very
difficult to either make a profit or maintain positive cash flow.
Fortunately, the commercial side of the security business has been shown
to be more viable and we are focusing our efforts in this area. Maris
has downsized to a work force of 80 people from over 250 people a few
short months ago. The major construction prison projects were turned
over to the bonding companies earlier this year for completion, and we
are cooperating with them in this effort. In effect, they supply the
cash flow until the specific projects are finished.
To address the liquidity issue, we have reached an agreement with The
Apollo Group, Inc., and CenterCore's domestic furniture company
management, to sell the furniture manufacturing and Corel Seating
operations to them for cash and notes. This transaction should be
completed in August, subject to stockholder approval, and the proceeds
will go to pay down the bank line. Concurrent with these actions, we
have sold the remaining pieces of the Canadian and UK furniture
operations with the funds also going to pay down the bank balance.
In further addressing our cash situation, we have negotiated the offset
of the $3.6 million sellers note related to the Maris acquisition for
certain claims relating to the acquisition. We have also concluded
arrangements with the three bonding companies to release us from the
indemnification provisions of the surety agreements in exchange for
300,000 shares of stock, $495,000 in cash payments, and a sharing of 20%
of after tax profits in the years 1998 - 2002 up to a maximum of $1
million. These actions will permit the company to go forward without
fear of being charged for the cost overruns on the detention projects
being completed by the bonding companies.
Safeguard Scientifics, a major shareholder, is contributing to the
corporate restructuring in several ways. First, they have forgiven a
$1.1 million inter-company note and have provided a $2.4 million loan
guarantee on the bank debt. They are also providing a $3.0 million
line-of-credit in support of the bank line. Additionally, they are
contributing 2 million shares back to the company. Along with two other
company officers, I will be purchasing 2.5 million shares from the
current Safeguard holding. Of the 2.5 million management shares,
700,000 shares will be converted into option shares for all employees.
CenterCore will now move forward under its new banner Core Technologies,
a name change approved by all of you last year. Its base business will
be commercial and industrial security systems integration, communication
systems for application in the intelligent vehicle and highway safety
programs, and cleanroom products and services for all markets requiring
less particle-laden environments.
The Company entered this year with a backlog of $9 million of contracts
in commercial security systems. The margins on these projects are
reasonable and they will start providing revenue in the second quarter
of 1995. Our Maris sales operations have been downsized to two
principal operations in Exton, Pennsylvania and Austin, Texas, with
smaller satellite operations in New York City, San Antonio, and Los
Angeles. We view this coming year as one of stabilization for Maris and
a major effort will be put into the selection criteria as to what work
we will take and improving the project controls on these jobs to ensure
that service is delivered to the customer and margin to the company.
Airo Clean finished last year with a profitable last quarter and reduced
their loss from a year ago. They had a profitable first quarter of '95
and bookings of new orders have been on plan through June. The BioShield
product, designed for hospital isolation rooms is now on the market and
we are hopeful this item, along with our UltraGuard fixed ceiling
module, will penetrate areas where patient isolation is of paramount
concern. We also have established distribution to service the Asian Rim
countries and business has been brisk to start the year. Clean
stations, a form of localized cleanrooms, have also shown growth, and
are expected to take market share away from the larger and more costly
clean room. This should benefit Airo Clean in that it favors a product
solution rather than a construction project.
As Core Technologies emerges from its beginning as CenterCore, our focus
will be on returning to profitability, strengthening our balance sheet
and rebuilding shareholder value. There is no way to rationalize the
disappointment in the recent financial statements. There is also
renewed vigor among your management to rebuild what we believe can be
achieved. Your patience is appreciated and hopefully, will not go
unrewarded.
George E. Mitchell
Chairman and CEO
CENTERCORE, INC.
1994 ANNUAL REPORT
General Development of the Business
Prior to 1993, CenterCore, Inc. (the "Company") was engaged solely
in the business of designing, manufacturing and distributing space-
efficient, modular workstation systems and a line of complementary
office products, including cable and wiring systems, ergonomically
designed seating products, and air management systems for temperature
blending and breathing zone filtration. In February 1993, the Company,
through a subsidiary, acquired the assets and assumed the liabilities of
Airo Clean Engineering, Inc., a designer and manufacturer of clean room
and air filtration components and systems serving industry and the
hospital and health care markets. In September 1993, the Company,
through a subsidiary, purchased substantially all of the assets and
assumed certain liabilities of Maris Equipment Company, a specialty
contractor providing integration, installation and servicing of advanced
electronic systems for security access control, fire alarm, sound,
communications and other applications on a nationwide basis. Maris
provides these services to business, aviation and transportation
authorities and correctional facilities. These acquisitions were part
of the Company's overall strategy to improve the Company's operating
performance by penetrating new and growing markets to compensate for the
continued government spending decline in its furnishings segment,
particularly by the Department of Defense. The reduced government sales
has had a major impact on the Company's domestic furnishings operations
in recent years, and the outlook for furnishings sales to the Federal
government continues to be uncertain.
The Company also attempted in 1993 to improve performance by
significantly downsizing its Canadian operations and consolidating most
of the manufacturing, product development, marketing and service
functions into its domestic furnishings operations based in Plainfield,
New Jersey.
In order to better meet its working capital needs, the Company
refinanced and increased its bank credit facility with a new bank in
March 1994. In June 1994, the Company raised an additional $1.5 million
of capital through the issuance of preferred stock to Safeguard
Scientifics, Inc. ("Safeguard"), the Company's majority shareholder.
However, the Company's results from its office furnishing
operations continued to deteriorate, and the Company realized
substantial losses resulting primarily from unanticipated costs and
operating difficulties associated with certain construction contracts
acquired in the Maris acquisition, which problems were somewhat
exacerbated by insufficient financing to support the timely performance
of the contracts. As a result of these losses, the Company suffered a
severe liquidity problem, in that it was not able to pay its vendors on
a timely basis, was having difficulty completing work in progress, and
defaulted on certain financial covenants under its bank loan agreement.
The Company's management has decided that it is in the Company's
best interest to dispose of its office furnishings business, to downsize
its electronic security systems and detention hardware business, and to
repay its bank debt as quickly as possible. In pursuance of this
determination, the Company has taken the following actions. The Company
has entered into an agreement for the sale of its office furnishings
business as currently carried on by CenterCore, Inc. directly and by its
subsidiary, Corel Corporate Seating, Inc. The Company expects to apply
the sale proceeds to pay down its bank debt. However, the closing of
the sale is subject to certain conditions, and there is no assurance
that the Company will successfully consummate the sale of its
furnishings business. Maris has turned over to its surety companies all
of its bonded construction projects in progress, and has obtained
agreements from the surety companies to release Maris and the Company
from their indemnity obligations to the surety companies in exchange for
cash payments, the issuance of Company common stock, and other
consideration. Most of Maris' largest construction projects were
bonded. Maris has stopped bidding for large, bonded correctional
facility and airport contracts, and all correctional facility projects,
regardless of size, involving the supply and installation of detention
hardware. The Company and Maris have entered into an agreement with the
parties from whom the Company purchased Maris to restructure the terms
of the Company's purchase of Maris and to settle all remaining
obligations and liabilities among them. Finally, Safeguard has agreed
to contribute a portion of its CenterCore stock to the Company, to sell
a portion of its CenterCore stock to the management of the Company, and
to provide the Company with up to $3 million of loans or loan guarantees
to enable the Company to address its current working capital needs. The
Company will continue to operate its electronic security systems
business and its air quality products business. The electronic security
systems business will focus on low voltage security and fire alarm
projects and selected "smart highway" projects.
Although management believes that the Company will be able to
operate profitably following the restructuring, there can be no
assurance that the Company will not continue to realize losses in the
future, or that it will have adequate capital to fund its operations.
Even though the Company is in default under its bank loan agreement, the
Company's bank lender is continuing to make loans available to the
Company in accordance with its borrowing base formula, plus additional
advances secured by collateral pledged by Safeguard. The bank could
determine to discontinue making loans available to the Company and/or to
declare the outstanding loan balance immediately due and payable at any
time, although it has not notified the Company that it intends to do so.
The Company intends to attempt to restructure the loan agreement. If
the Company is not successful in consummating a sale of its furnishings
business, it would be necessary to either locate another purchaser or
consider alternative restructuring plans. The Company has not developed
any definitive alternative plan. In either such event, the Company
would be unable to pay down its bank loan as quickly as it anticipates,
which would add an additional burden to the Company's working capital
and liquidity needs, and could cause the Company's bank to consider
discontinuing making loans available to the Company and/or declaring the
outstanding loan balance immediately due and payable.
Narrative Description of Business
SECURITY SYSTEMS
Products and Services
The Company, through its wholly owned subsidiary, Maris Equipment
Company, Inc., provides low voltage electronic security systems to the
commercial and institutional markets. Products include fire alarm
systems, closed circuit television surveillance systems, card access
security and alarm monitoring systems, paging and intercom systems,
hospital communications systems, parking and revenue control systems and
programmable logic controller based central alarm and control systems.
The Company no longer intends to pursue large, bonded correctional
facility and airport projects, and will no longer provide correctional
detention hardware, such as doors, security glazing and access operating
devices, to the correctional marketplace. Maris is also pursuing a
developing market--the "smart" highway program--which entails the
integration and installation of communications networks for automated
traffic management systems such as re-routing access lanes on bridges,
tunnels and superhighways as traffic patterns fluctuate throughout the
day. Because the smart highway projects are for state or federal
transportation departments, Maris may be required to provide surety
bonds as a condition to winning these jobs. It is likely that
availability of bonding at Maris will be limited, at best, in the near
future. This may inhibit the rate of growth of the Company's business
in the "smart" highway program.
Patents and Proprietary Rights
The Company is qualified as an electrical or alarm contractor,
where required, in most of the Continental United States. Maris does
not hold any material patents or proprietary rights. In its role as an
integrator, Maris obtains proprietary products from vendors for
integration and installation at customers' facilities or on construction
sites.
Marketing and Distribution; Contracting Practices
Maris has significantly reduced its marketing and sales staff in
accordance with its downsized business. The Company maintains a sales
force in its headquarters in Exton, Pennsylvania and in its regional
office in Austin, Texas. The Company also has satellite operations in
San Antonio, Texas; Los Angeles, California; and New York City.
Maris will focus on bidding for smaller projects involving new or
upgraded construction to electrical contractors and on providing
proposals to owners and building managers for new or upgraded systems.
These bids and proposals are generally made at a fixed price based on
the specifications provided by the contractor, owner or manager.
Accurate estimation of the Company's total cost to complete a project is
therefore crucial to profitability. The Company will no longer bid on
large, bonded correctional facility and airport projects or on any
correctional facility projects which require the provision or
installation of detention hardware. These are the projects which Maris
has in the past experienced difficulties managing and completing
profitably. Maris typically provides the integration engineering,
assembly shop drawings and system start-up with its own staff of project
managers, engineers, computer aided design (CAD) operators and
technicians.
As with any construction activities, there are risks associated
with the business. Cost overruns can occur from a variety of sources,
including but not limited to estimating errors, owner-initiated changes
to system performance or operation, unanticipated conditions at the
installation site, delays in collection of accounts receivable because
of performance issues, delays caused by other contractors which may
cause the Company to be delayed and not be compensated for such delay,
and subjective assessment of system performance compared to
specifications. Maris and its subcontractors may submit change orders
for additional work or costs incurred beyond their control or beyond the
scope of the contract, but they are subject to approval. Working
capital requires active management for several reasons. Contracts
frequently provide for a retention of five percent or more of the total
contract amount until satisfactory completion of the contract. Maris
retains comparable amounts from its subcontractors, but often the
subcontractors' work is completed before Maris' work is completed. The
timing and amounts of payments due to and from Maris are often subject
to dispute for the reasons described above resulting in delays in
collection of receivables and payment of payables. Maris attempts to
match the timing of payments to its subcontractors and vendors with
payments received from the general contractors or construction managers
wherever possible.
Design and Development; Product Availability; Inventory
As an integrator, Maris purchases proprietary products for
integration and installation at customer facilities or construction
sites. The Company does not manufacture, design or develop any of its
systems. The Company is a party to a number of distribution agreements
with the major manufacturers of the systems which it provides. Because
of the Company's financial difficulties, a number of its suppliers have
restricted their purchase terms to the Company, in some cases requiring
C.O.D. terms. The Company is continuing to negotiate with its suppliers
regarding purchase terms. The Company's relationships with several
different suppliers allows the Company to provide the latest technology
to its markets without the necessity of designing and developing new
products. The Company maintains only a sufficient amount of inventory
as may be necessary to provide materials for warranty service and
repairs.
Revenue Recognition and Backlog
The Company recognizes revenues on a percentage of completion
basis. Backlog consists of the uncompleted portion of the contracts.
The backlog for the security systems segment (excluding projects which
have been turned over to sureties) was approximately $9.2 million at
December 31, 1994. The Company anticipates that approximately 90% of
the backlog will be fulfilled during 1995. Backlog for the segment at
December 31, 1993 included substantial amounts from businesses Maris has
discontinued and therefore the amount is no longer meaningful.
Competition
The Company provides security systems to a variety of
institutional markets. In that marketplace, the Company competes with
numerous local dealers and factory direct operations. There are also
numerous firms operating nationally in the construction marketplace that
provide electronic security systems integration. Competition is based
primarily on price, quality of work, and ability to complete the work on
time. The Company's recent financial difficulties and limited ability
to obtain bonding are a competitive disadvantage in the institutional
markets. Many large institutional projects require the contractor to
provide a completion bond. However, in the commercial and industrial
building markets, the Company believes that its personnel and the depth
of their knowledge are important competitive factors.
U. S. Government Sales and Dependence on Significant Customers
In the past, the Federal Bureau of Prisons has been a substantial
direct and indirect customer of Maris. In 1994, Maris generated
revenues constituting 13% of the Company's revenues from one federal
correctional facility project. Maris' contract on that project was with
Omni Construction, the general contractor for the project. However, the
Company expects that it will do very little work, on federal or state
correctional facilities in the future. Maris has also performed in the
past numerous large airport projects for different customers, generally
lasting not more than 12 months. These projects had resulted in single
customers accounting for significant portions of Maris' revenues in any
single year. Maris surety companies have taken over all of its bonded
correctional facility and airport jobs, and Maris does not intend to
perform any more large bonded correctional facility or airport projects
for the foreseeable future, although it may perform a number of smaller
projects for a single institutional customer. See "Management's
Discussion and Analysis - Review of Continuing Operations" for a summary
of sales and gross margins for correctional facility and airport
projects compared to other projects.
Seasonality
The security systems business is not subject to any material
seasonal fluctuations.
AIR TECHNOLOGY PRODUCTS
Products
The Company designs, manufactures and distributes through its
wholly owned subsidiary, Airo Clean, Inc., air filtration components and
systems which are used in a variety of industries which require
particle-free, ultra clean working environments, as well as patient
isolation devices for hospital and health care applications.
The two room-size clean room systems manufactured and distributed
by the Company are the UDF Perforated Ceiling System and the
UltraGuard(registered trademark) HEPA/Fan Module Ceiling System, both
of which can be delivered prepackaged using standard components or can
be custom designed to meet precise client specifications. The UDF
Perforated Ceiling System provides mass air displacement for a more
uniform distribution of clean air throughout a cleanroom environment
and other critically controlled areas. The UltraGuard HEPA/Fan Module
Ceiling System is a pressurized plenum system which utilizes a self-
powered blower and HEPA filter packaged together in one compact housing
which can be installed in a suspended ceiling grid.
The Company also manufactures and distributes several application
specific, modular cleanroom systems which are available in a number of
prepackaged sizes or can be customized to meet special requirements.
The BioShield(trademark) air filtration unit, a health care
product introduced late in 1993, is an air scrubbing product for
controlling airborne pathogens. The product is targeted for the health
care industry. The BioShield product meets or exceeds the Center for
Disease Control guidelines for hospital isolation rooms which require a
minimum of 6 air changes per hour. The guidelines were issued during
the fourth quarter of 1994. The Company expects these guidelines to
have a positive impact on BioShield sales, and is aggressively promoting
the product. The Microlab(registered trademark) portable cleanroom can
be set up by one person and operational within 30 minutes to provide
Class 100 rooms for sanitized operations such as animal studies, health
care, hybrid electronics, and medical device assembly. The Microlab
unit's compact design fits through standard 36" doorways, can be expanded
by linking multiple units together where additional space is required,
and can be quickly moved to another location or folded and stored until
needed again. The CleanStation(registered trademark) single-pass
softwall cleanroom is available in 15 sizes for Class 100, 1,000 or
10,000 air requirements and is designed for customers with limited
budgets requiring fast delivery and quick setup using standard tools.
The Flexi-Jet(trademark) system is an economical solution that supplies
HEPA-filtered Class 100 air to a large area for industrial and
institutional applications that require minimal dust and other
airborne contaminants. The Bacteria Controlled Nursing Unit(trademark)
(BCNU) is a portable, transparent clean air isolation enclosure which
houses a standard size hospital bed and can provide patient access
through direct entry access curtains or arm/hand insertion gauntlets.
The PureZone(trademark) product is specifically targeted to the
commercial market and can be wall-mounted or retrofitted on existing
furniture systems.
Patents and Proprietary Rights
The Company has a number of patents, patent applications, patent
licenses and trademarks with respect to various air technology products.
The Company's issued patents and patent licenses expire between 2008 and
2011. The Company believes that these patents and trademarks help
differentiate the Company's product offerings, but price and flexibility
of product offerings are equally important competitive factors.
Marketing and Distribution
The Company primarily conducts its sales and marketing activities
for its cleanroom and other indoor air quality products from its Airo
Clean facility located in Exton, Pennsylvania. The Company markets and
sells these products to a wide variety of end-users throughout the
United States through a network of independent dealers and
manufacturers' representatives primarily located in the eastern United
States. Some of the dealers have exclusive rights to sell the
Company's air technology products to specific markets in a defined
territory, so that a territory servicing different markets may have more
than one dealer. These dealers are paid commissions for product sales.
Customers of cleanroom products include a variety of manufacturing
operations, including biomedical, microelectronics, medical devices,
pharmaceuticals, and the hospital and health care markets.
The Company also has a distributor in Singapore which accounted
for over 30% of the sales for the air technology products segment in
1994.
The Company's marketing activities seek to demonstrate the unique
applications and quality of its products. These activities include
distribution of sales literature, on-site demonstrations, direct mail
programs, advertising, publication of articles in the trade press and
participation in industry conferences and trade shows.
Airo Clean's marketing efforts have been targeted primarily to
end-users and facility managers for use in manufacturing applications.
However, the Company anticipates expanding the marketing efforts for its
air cleansing devices to satisfy the increased demand for the prevention
of infectious contaminants in hospitals and for a variety of industrial
applications.
Manufacturing
The Company's cleanrooms and indoor air quality products are
manufactured in Exton, Pennsylvania. This manufacturing operation
consists primarily of an assembly process and testing of finished
products.
Raw Materials and Supplies
The Company's air technology products include specific filters,
blowers and electronic components that are assembled with steel
assemblies and cabinets which constitute the majority of the products.
Some of these items are custom made for the Company and require
coordination from qualified vendors to assure availability of various
electronic and steel assemblies. If any supplier should terminate its
relationship for any reason, the Company anticipates that it will be
able to develop, or obtain from other sources, substitute components
without sustaining any material adverse effects.
Backlog
The backlog for the air quality segment was approximately $1.4
million at December 31, 1994, compared to approximately $2 million at
December 31, 1993. The Company anticipates that this backlog will be
fulfilled in 1995.
Backlog primarily represents firm accepted orders for air
technology products. Although orders included in backlog may be
canceled or rescheduled by the customer, cancellations are uncommon and
cancellation or restocking charges may apply to a canceled order.
Seasonality
The air quality segment of the business is not seasonal.
Competition
The Company competes primarily in the hospital and health care
segment and the small to mid-size commercial and industrial applications
segment of the market for indoor air quality products. The Company is
too small to compete for large industrial applications such as for the
semiconductor and biotech/pharmaceutical industries. The Company's
products are based on high efficiency filtration systems, and are
targeted at markets with strict air purity requirements. There are a
wide variety of companies providing services similar to Airo Clean, and
the market is very competitive. Competition is based on price, ability
of the products to satisfy specified air purity standards, ability to
customize products to meet specific customer needs, and reputation.
Management believes that the excellent long term reputation of Airo
Clean and its ability to provide customized solutions, combined with the
growing number of applications requiring air particle control, places
the Company in a good position to grow with the market and potentially
improve its market share.
U.S. Government Sales and Dependence on Significant Customers
Airo Clean does not sell any material amount of products to the
U.S. government. Airo Clean has one distributor located in Singapore
which sells products in China and Southeast Asia, and which accounted
for over 30% of Airo Clean's total revenues in 1994. The loss of this
distributor would have a material adverse effect on Airo Clean's
business.
Employees
As of December 31, 1994, the Company had 110 employees engaged in
its continuing operations, excluding certain individuals who are
employed by Maris but are exclusively assisting the surety companies in
completing jobs taken over by them, and who are being funded by the
surety companies. None of the Company's employees is represented by a
labor union. The Company considers its employee relations to be good
and has never experienced any work stoppages.
Financial Information About Foreign and Domestic Operations and Export
Sales
The Company has sold or is negotiating to sell all of its foreign
operations. The Company's air technology products segment had
approximately $1.3 million of export sales through a distributor in
Singapore. These sales are dollar-denominated. The security systems
segment does not have any export sales.
Executive Officers of Registrant
The following persons were executive officers of the Registrant at
June 15, 1995:
Has Been an
Officer
Name Age Since Position
George E. Mitchell 57 1984 President, Chairman and
Chief Executive Officer
Frederick B. Franks, III(1) 55 1989 Vice President-Finance,
Chief Financial Officer,
Treasurer and
Assistant Secretary
Michael Pelosi III(2) 37 1994 President, Airo Clean, Inc.
(1) Mr. Franks joined the Company in May 1989. From March 1981 to
April 1989, Mr. Franks served as Vice President-Finance and Chief
Financial Officer of Ferag, Inc., a manufacturer of newspaper
material handling equipment.
(2) Mr. Pelosi joined Airo Clean in 1981, and became Sales and
Marketing Director in 1985. He was appointed President in 1989.
Properties
The Company's continuing operations are conducted primarily at its
headquarters in Exton, Pennsylvania. This facility occupies
approximately 21,580 square feet of space and is currently leased on a
month-to-month basis from Safeguard. The Company's indoor air quality
products are manufactured and sold from its Airo Clean facility
occupying approximately 15,300 square feet of space in Exton,
Pennsylvania, which is leased through December 2001. The Company plans
to sublet its Airo Clean facility, and to consolidate its air products
operations into its Maris facility in Exton, Pennsylvania. The Company
believes that that facility will be adequate for its present and
anticipated purposes. The Company also leases sales and support offices
in Austin, Texas and Los Angeles, California.
The Company is moving out of its leased furniture operations
offices in Exton, Pennsylvania, and has agreed, subject to certain
conditions, to sell its furniture business, including its lease on its
furniture manufacturing facility which occupies approximately 176,000
square feet of space in Plainfield, New Jersey, and its lease on its
seating products manufacturing and office facility which occupies
approximately 26,700 square feet of space in Mansfield, Ohio. The
Plainfield lease runs through June 1998, and the Company's Mansfield
lease runs through June 1995. The Company continues to be obligated
under a lease for approximately 2,900 square feet of office space in
London, England which runs through September 2013. The Company is
negotiating with the landlord to terminate that lease.
Legal Proceedings
Maris is a named party to certain pending law suits relating to
certain of Maris' security system installation projects. In connection
with Maris' settlement with its surety companies, the surety companies
have assumed all liabilities and all claims and counterclaims in respect
of these law suits, and the surety companies have agreed to release
Maris from its indemnity obligations to them.
The Company and its subsidiaries are involved in various claims
and legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will
not have a material adverse effect on the Company's results of
operations, liquidity, or consolidated financial position.
Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter 1994.
Market for the Registrant's Common Stock and Related Stockholder Matters
As of May 4, 1995, the Company's common stock was de-listed from
the NASDAQ small-cap market. Since that date, there has been no
established public trading market for the common stock. The Company's
common stock continues to be quoted by a limited number of market makers
in what is commonly referred to as the "pink sheets" under the symbol
"CCOR." There can be no assurance that there will be regularly
available quotations from market makers in the Company's common stock in
the future. The following are the historical high and low bid
quotations for the Company's common stock prior to its de-listing from
NASDAQ.
1995 1994 1993
High Low High Low High Low
First Quarter $.50 $.34 $1.38 $.75 $.75 $.56
Second Quarter .38 .16 1.38 .81 1.06 .56
Third Quarter .88 .56 1.06 .56
Fourth Quarter .56 .38 .84 .69
The above bid quotations reflect inter-dealer prices without mark-
ups, mark-downs or commissions and may not necessarily represent actual
transactions.
There were approximately 1700 holders of the Company's Common
Stock on June 15, 1995. The Company has historically reinvested any
earnings in the growth of the business and has not paid cash dividends
on its common stock.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Due to declining furniture sales, particularly to the federal
government, the Company has decided to dispose of the furnishings
segment. Due to these plans, the furnishings segment has been
presented as a discontinued operation. The Company has agreed to sell
the assets of the domestic furnishings segment including Corel for cash
and notes receivable. The Company will apply the sale proceeds to pay
down its bank debt.
The UK furnishings business will be sold to local management of
the respective operations in return for notes receivable. The Canadian
operation was sold to Safeguard Scientifics, Inc. in April 1995.
Continuing operations reflect the results of the on-going
businesses of Maris Equipment Company ("Maris") and Airo Clean.
Airo Clean was acquired in February 1993 and Maris was purchased
in September 1993. Therefore, 1992 includes only discontinued
operations and 1993 includes the results of the acquired operations
subsequent to their acquisition. In 1995, the Company decided to
significantly downsize the Maris business by concentrating on the low
voltage security and fire alarm businesses and on selected smart highway
applications. Total 1994 Maris sales of $27.2 million includes
correctional facility and airport sales of approximately $16.2 million.
Maris does not expect to pursue larger bonded correctional facility and
airport projects in the future. Due to these developments comparisons
from year-to-year are not meaningful.
Review of continuing operations
Maris sales were $27.2 million in 1994 compared to $12.5 million
in 1993. This sales increase reflects the inclusion of Maris operations
for the entire year in 1994 compared to 1993 which included the results
subsequent to its September acquisition. Gross margins as a percentage
of sales at Maris were (8.4%) in 1994 and 15.9% in 1993. The negative
gross margin in 1994 reflects losses incurred to complete fixed fee
major correctional facility and airport projects in process at the time
of the September 1993 Maris acquisition. Since 1993, Maris has
experienced reductions in profitability or losses on fixed fee
contracts. This erosion was caused primarily by unforeseen operational
and contract problems which were exacerbated by insufficient financing
to support the timely performance of the contracts. As a result of this
profit degradation, the Company was not able to pay vendors on a timely
basis and had difficulty completing work in progress. Most of the
larger jobs affected by these issues were bonded and the Company entered
into agreements with the surety companies to have them assume
responsibility for completing their jobs and to release the Company from
its indemnity obligations with respect to those jobs. The Company has
recorded a provision for losses on transferring the contracts to the
surety companies of $4.0 million, more fully discussed in note three to
the financial statements.
As a result of these difficulties, the Company has ceased bidding
on major correctional facility and airport projects. Uncompleted bonded
projects have been turned over to the bonding companies for completion.
The following table summarizes correctional facility and airport
revenues and margins compared to all other revenues and margins for 1994
and for approximately three months in 1993.
(In thousands) Correctional All Other
Facility and Airport
1994 1993 1994 1993
Net sales $16,185 $9,162 $10,993 $3,353
Cost of goods sold 19,763 7,821 9,689 2,705
Gross margin % of sales (22.1%) 14.6% 11.9% 19.3%
Airo Clean sales were $4.1 million in 1994 compared to $2.7
million in 1993. The increase in sales in 1994 came from increased
product sales and the inclusion of Airo Clean for twelve months compared
to eleven months in 1993. Airo Clean gross margins as a percentage of
sales declined to 20.9% in 1994 from 24.2% in 1993. Lower margins in
1994 can be attributed to increased sales discounts on several large
export sales.
Sales and marketing expenses for continuing operations were $3.3
million in 1994 and $1.2 million in 1993. These costs, as a percentage
of sales, were 10.6% and 7.8% in 1994 and 1993, respectively. These
costs increased $2.1 million in 1994 primarily due to the inclusion of
Maris operations subsequent to its September 1993 acquisition. Sales
efforts at Maris are being concentrated in expanding the electronic
security systems business, which typically has had higher gross margins
than the correctional facility and airport hardware construction
business. The competitive environment and the difficulty in estimating
costs and collecting revenues has adversely impacted Maris' gross
margins on long-term correctional facility and airport construction
projects. The shorter completion cycle coupled with a less competitive
environment has enabled Maris to achieve higher gross margins in the
electronic security systems business. Marketing efforts at Airo Clean
have been focused on promoting the BioShield and Ultraguard products
which are air scrubbing devices for controlling airborne pathogens and
targeted for the health care industry. The Center for Disease Control
guidelines were issued in November 1994 for hospital isolation rooms,
and these more stringent guidelines should have a positive impact on
BioShield and Ultraguard sales in 1995.
General and administrative expenses were $4.5 million in 1994 and
$1.5 million in 1993. These costs, as a percentage of sales, were 14.4%
in 1994 and 9.9% in 1993. The absolute dollar increase of $3 million in
1994 reflects the acquisition of Maris. The Company continues to
closely monitor and control costs and recognizes that a significantly
downsized business in 1995 is necessary for survival.
During 1994 the Company restructured its security business which
resulted in a charge of $2,239,900 in the statement of operations more
fully described in note three to the financial statements.
Interest expense was $593,400 in 1994 compared to $116,200 in
1993. The increase in 1994 primarily reflects additional debt incurred
to finance the Maris acquisition and to fund losses. Also contributing,
but to a lesser extent, was higher interest rates.
The income tax benefit of $1.6 million in 1994 principally
reflects the benefit of recoverable U.S. income taxes as a result of the
losses incurred. In addition, the Company has generated an unrecorded
loss carryforward of approximately $3 million, more fully described in
note twelve to the financial statements.
Backlog at December 31, 1994 was $9.2 million at Maris and $1.4
million at Airo Clean. Backlog at December 31, 1993 was $4 million at
Maris and $2 million at Airo Clean. Maris' backlog excludes
correctional facility and airport projects.
Liquidity and Capital Resources
As a result of significant operating difficulties, the
Company has a severe liquidity problem. The Company is in default of
its loan facility ($8.3 million at December 31, 1994). These defaults
cause the debt to be due upon demand, and, should the lender demand
payment, the Company does not have the resources to satisfy the debt.
The Company has withdrawn from the correctional facility security
business and is undertaking to significantly downsize the business which
includes the sale of the furnishings business unit. Proceeds from the
sale, as well as a 1995 tax refund of $1.6 million, will be used to
reduce outstanding bank debt. In anticipation of these events, the bank
continues to extend credit to the Company under the existing borrowing
base formula. Except for a $2.4 million guarantee of bank debt,
Safeguard is not contractually obligated to satisfy any of the Company's
obligations at December 31,1994. The Company believes that the
combination of cash received from the sale of the furnishings business,
the tax refund, the guarantee of Safeguard and the working capital
assets of the ongoing business will be sufficient to satisfy/support all
of the bank debt.
The Company has entered into an agreement with the parties from
whom it acquired Maris, to significantly restructure the original
purchase transaction. Under this agreement the seller has agreed to
offset its $3.6 million note receivable from the Company in exchange for
releases from its indemnification liabilities to the Company under the
original asset purchase agreement. Because the Company did not have the
required working capital to complete certain projects it turned to its
sureties to assume and complete certain construction contracts and has
extended its payables to vendors. The principal sureties have agreed to
release the Company from its indemnity obligations to them in return for
300,000 shares of CenterCore stock, cash payments of $495,000 and
additional payments equal to 20% of Maris' net earnings in 1998-2002 up
to $1 million in the aggregate. The Company is negotiating with all
principal vendors to arrange a repayment schedule while continuing to
supply the Company with materials needed to meet current requirements.
Safeguard has agreed to contribute 2 million shares of its
CenterCore common stock to the Company, sell 2.5 million shares of its
CenterCore common stock to CenterCore management, and provide up to $3
million in advances to the Company to address current funding
requirements of the downsized business which will be substantially
utilized by the Company in 1995.
As a result of the restructurings, the Company will emerge as a
significantly downsized company. Availability of bonding on jobs will,
at least in the near term, be limited. Bank financing may be available
for limited working capital requirements to augment any advances from
Safeguard. If these sources of funds prove to be inadequate or in the
case of bank financing, unavailable, then the Company will have to seek
additional funds from other investors in order to continue operations.
There can be no assurance that new sources of funds, if required, will
be available. Although the Company believes it will be able to continue
to operate in this new downsized mode, continuation is contingent on the
Company's ability to adequately reduce its cost structure to a point
where it is supported by the new downsized operations.
Additional Information
The Company will furnish to any stockholder without charge, upon
written request, a copy of the Company's Annual Report on Form 10-K,
including the financial statements and financial statement schedules,
filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934. Requests should be directed to
Frederick B. Franks, Chief Financial Officer, CenterCore, Inc., 110
Summit Drive, Exton, PA 19341.
Independent Auditors' Report
The Board of Directors and Stockholders
CenterCore, Inc.:
We have audited the consolidated balance sheets of CenterCore, Inc. and
subsidiaries as of December 31, 1994 and 1993 and the related
consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the years in the three year period ended
December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
CenterCore, Inc. and subsidiaries as of December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1994, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Notes 3
and 15 to the financial statements, the Company has incurred losses from
operations, is experiencing liquidity problems, is in default under
certain borrowing agreements and has a net stockholders' deficit all of
which raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are described in
Note 15. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
May 3, 1995
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31,
Assets 1994 1993
----------- -----------
<S> <C> <C>
Current assets
Cash $ 583,600 $ 376,900
Receivables, less allowances ($2,864,700 --1994; $1,842,900 --1993) 5,024,900 12,705,200
Costs and estimated earnings in excess of billings on uncompleted contracts 292,500 3,233,100
Inventories 625,700 1,127,100
Income taxes receivable 1,357,900
Other current assets 231,300 427,500
----------- -----------
Total current assets 8,115,900 17,869,800
Net assets of discontinued operations 7,157,300 13,069,800
Plant and equipment
Leasehold improvements 155,400 150,800
Machinery and equipment 816,900 708,000
----------- -----------
972,300 858,800
Less accumulated depreciation and amortization (385,400) (90,000)
----------- -----------
Net plant and equipment 586,900 768,800
Other assets
Excess of cost over net assets of businesses acquired 192,300 1,961,300
Other 638,300 900,800
----------- -----------
Total other assets 830,600 2,862,100
----------- -----------
$16,690,700 $34,570,500
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable $ 5,885,500 $ 9,929,100
Accrued expenses 3,793,500 1,625,500
Taxes on income 361,400
Billings in excess of costs and estimated earnings on uncompleted contracts 1,419,800 1,623,100
Current debt 8,396,100 383,300
----------- -----------
Total current liabilities 19,494,900 13,922,400
Long-term debt 9,939,000
Other liabilities 121,300 124,500
Deferred taxes 348,600
Redeemable convertible preferred stock issued to Safeguard Scientifics, Inc. 1,500,000
Stockholders' equity (deficit)
Common stock, $.01 par value; Authorized -- 20,000,000 shares;
Issued - 10,767,326 shares 107,700
Additional paid-in capital 7,923,400 6,823,400
Retained earnings (accumulated deficit) (12,036,100) 3,404,000
Foreign currency translation adjustment 0 321,400
Treasury stock at cost - 330,000 shares (420,500) (420,500)
----------- -----------
Total stockholders' equity (deficit) (4,425,500) 10,236,000
----------- -----------
$16,690,700 $34,570,500
=========== ===========
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
Year Ended December 31,
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 31,244,700 $ 15,242,100 $
Cost of goods sold 32,668,200 12,593,100
------------- ------------- -------------
Gross margin (1,423,500) 2,649,000
Expenses
Sales and marketing 3,310,000 1,188,300
General and administrative 4,488,200 1,504,700
Restructuring 2,239,900
Interest 593,400 116,200
------------- ------------- -------------
10,631,500 2,809,200
Loss from continuing operations before income taxes (12,055,000) (160,200)
Benefit of income taxes (1,662,900) (47,000)
------------- ------------- -------------
Loss from continuing operations (10,392,100) (113,200)
Earnings (loss) from discontinued operations (net of tax
of $0 - 1994, $190,200 - 1993, and $1,091,200-19 (1,745,200) (703,000) 988,800
Loss on disposition of discontinued operation (3,302,800)
------------- ------------- -------------
Net earnings (loss) $(15,440,100) $ (816,200) $ 988,800
============= ============= =============
Earnings (loss) per share
Continuing operations $ (1.00) $ (.01)
Discontinued operations (.17) (.07) $ .09
Loss on disposition of discontinued operations (.31)
----- ----- -----
Net earnings (loss) $ (1.48) $ (.08) $ .09
-------- ------- -----
Weighted average shares outstanding 10,437,000 10,434,000 10,664,000
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Year Ended December 31,
1994 1993 1992
----------- ----------- ---------
<S> <C> <C> <C>
Operations
Net Loss $(15,440,100) $ (816,200)
Loss from discontinued operations 1,745,200 703,000
Loss on disposition of discontinued operations 3,302,800
Adjustments to reconcile net earnings (loss) to cash from operations
Provision for restructuring 2,239,900
Depreciation and amortization 473,800 160,400
Decrease in deferred taxes (36,000) (141,900)
Cash from discontinued operations 782,200 315,300
(102,400)
Cash provided by (used in) changes in working capital items
Receivables 1,703,200 (977,600)
Inventories 501,400 (205,600)
Contracts in progress 856,500 974,800
Other current assets (68,900) (52,700)
Accounts payable 326,300 (1,620,100)
Accrued expenses 1,673,900 504,000
Taxes on Income (1,719,300) 237,900
----------- ----------- ---------
Cash (used in) operations (3,659,100) (918,700)
(102,400)
Financing Activities
Additions of term debt 1,100,000
Issuance of preferred stock 1,500,000
Borrowings (repayments) of debt 2,773,700 586,100
Purchase of treasury stock
----------- ----------- ---------
Cash provided by financing activities 4,273,700 1,686,100
Investing Activities
Expenditures for plant and equipment (113,500) (2,500)
Businesses acquired, net of cash (1,170,300)
Other, net (294,400) 128,100
----------- ----------- ---------
Cash used in investing activities (407,900) (1,044,700)
----------- ----------- ---------
Increase (decrease) in cash 206,700 (277,300)
(102,400)
Cash beginning of year 376,900 654,200 756,600
----------- ----------- ---------
Cash end of year $ 583,600 $ 376,900 $ 654,200
=========== =========== =========
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity (Deficit)
Retained Foreign
Common stock Additional earnings/ currency
------------------- paid-in (accumulated translation Treasury
Shares Amount capital deficit) adjustment stock
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1991 10,764,826 $107,600 $6,830,800 $ 3,231,400 $ 497,600
Net earnings 988,800
Stock options exercised 2,500 100 1,200
Translation adjustment (133,400)
Purchase of treasury stock $(445,900)
---------- -------- ---------- ------------ ------------ ---------
Balance -- December 31, 1992 10,767,326 107,700 6,832,000 4,220,200 364,200 (445,900)
Net loss (816,200)
Translation adjustment (42,800)
Reissue of treasury stock (8,600) 25,400
---------- -------- ---------- ------------ ------------ ---------
Balance -- December 31, 1993 10,767,326 107,700 6,823,400 3,404,000 321,400 (420,500)
Net loss (15,440,100)
Note receivable contribution 1,100,000
Translation adjustment (196,800)
Write off translation adjustment (124,600)
---------- -------- ---------- ------------ ------------ ---------
Balance -- December 31, 1994 10,767,326 $107,700 $7,923,400 $(12,036,100) $ -- $(420,500)
========== ======== ========== ============ ============ =========
See notes to consolidated financial statements
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
DESCRIPTION OF BUSINESS - The Company provides low voltage electronic
security systems to the commercial and institutional markets. Work is
generally performed under fixed fee or unit price contracts as a
subcontractor to the general contractor or as a prime contractor to the
owner. The Company also designs, manufactures and distributes air
filtration components and systems which are used in a variety of
industries which require particulate-free, ultra-clean working
environments, as well as patient isolation devices for hospital and
healthcare applications.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of CenterCore, Inc. and its domestic wholly-owned
subsidiaries (the Company). All significant intercompany accounts and
transactions have been eliminated. The furnishings segment of the
Company is being disposed of and accordingly is reported as a
discontinued operation.
RETAINAGE RECEIVABLES AND PAYABLES under contracts which are expected to
be completed within one year are classified as current assets and
current liabilities. Accounts receivable under retainage provision
contracts at December 31, 1994 and 1993 was $795,100 and $2,659,900,
respectively. Accounts payable under retainage provision contracts at
December 31, 1994 and 1993 was $71,900 and $858,600, respectively.
INVENTORIES are valued at the lower of average cost or market.
PLANT AND EQUIPMENT are carried at cost and depreciated on a straight-
line basis over the estimated useful lives of the assets (leasehold
improvements - 5 years; machinery and equipment - 3 to 7 years).
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED is amortized on
a straight-line basis primarily over 15 years. Assessment of the
carrying amount of goodwill is made when changing facts and
circumstances suggest that the carrying value of goodwill or other
assets may be impaired using the forecasted undiscounted cash flow from
the related business activity (including possible proceeds from a sale
of the business). Accumulated amortization at December 31, 1994 and
1993 was $32,700 and $271,900, respectively.
TAXES ON INCOME are accounted for using the asset and liability
method. Under this method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The effect on deferred taxes of a change in
statutory tax rates is recognized in results of operations in the period
that includes the enactment date.
CONTRACTING SALES are recognized using the percentage of completion
accounting method determined by the ratio of cost incurred to date on
the contract to management's estimate of the total contract cost.
Provisions for estimated losses on uncompleted contracts are recorded in
the period in which the losses are determined. Changes in estimated
sales and costs are recognized in the periods in which such estimates
are revised.
SALES of air filtration products are recognized when product is
shipped and title or risk of loss is transferred. Revenue from
installation services is recognized when performed.
EARNINGS (LOSS) PER SHARE of common stock are computed on net
earnings (loss) using the weighted average number of shares outstanding
during each period, including common stock equivalents (unless
antidilutive) which would arise from the exercise of stock options.
2. Acquisitions
On February 1, 1993, the Company acquired the assets and assumed the
liabilities of Airo Clean Engineering, Inc. (Airo Clean), a designer and
manufacturer of cleanroom and air filtration components and systems for
$828,000. The acquisition was accounted for by the purchase method with
cost in excess of net assets of businesses acquired of $220,300
recorded.
On September 22, 1993, the Company purchased substantially all of the
assets and certain liabilities of Maris Equipment Company (Maris), a
wholly-owned subsidiary of JWP, Inc. (JWP). The purchase price was a
fixed amount of $4.3 million plus a contingent payment. The fixed
portion was funded by a note payable to JWP for $3.95 million and
$350,000 in cash at closing. The acquisition was accounted for by the
purchase method, and accordingly, the purchase price was allocated to
the assets acquired and the liabilities assumed based on the estimated
fair value at the date of acquisition. Cost in excess of net assets of
businesses acquired of $1,954,800 was recorded.
The pro forma information below is unaudited and reflects purchase
price accounting adjustments assuming the Maris acquisition occurred at
the beginning of the periods presented, including the impact of certain
adjustments, such as amortization of intangibles, interest expense on
the acquisition debt, and the related tax effects.
(In thousands, except per share amounts) 1993 1992
- -----------------------------------------------------------------------
Net sales $46,254 $41,953
Net loss (1,402) (2,134)
Net loss per share (.13) (.20)
3. Restructurings
Furnishing Business
Due to declining furniture sales, particularly to the federal
government, the Company has decided to sell the furnishings segment.
The Company has agreed to sell the domestic furniture business which
will generate an estimated $2.5 million of cash at closing, which is
expected to occur in August 1995, and deferred payments from the buyer
based on a contractually specified formula. Installment payments for
an aggregate of an estimated $2 million are payable in 4 installments
beginning 9 months after the close of the transaction, and are secured
by a second lien on all the assets of the buyer. A subordinated note,
for an estimated $2 million, is payable in semiannual installments from
18 months to 5 years after closing, and bears interest at 8% per annum
secured by a second lien on the fixed assets of the buyer. The Company
also has tentative agreements to sell the United Kingdom furnishings
businesses to United Kingdom management in return for a note. The
Canadian furnishings business was sold to Safeguard Scientifics, Inc.
who has a tentative agreement to sell the business to the Canadian
management for a note. Proceeds of the note will be applied to satisfy
certain indebtedness of CenterCore Canada to CenterCore after satisfying
remaining lease obligations of CenterCore Canada. The total of both the
UK and Canadian notes is expected to be $566,700. The Company recorded
an anticipated loss of $3,302,800 related to the sale of these
businesses, including accruals for estimated costs of satisfying lease
obligations in the U.K. Revenues for the furnishings segment, which are
not included in consolidated sales, for 1994, 1993 and 1992 were
$34,088,200, $37,924,900 and $45,638,800, respectively
The following is a summary of the net assets of the furnishings
business segment at December 31:
(in thousands) 1994 1993
---- ----
Current assets $12,787 $17,082
Net property and equipment 1,065 3,214
Other assets 325 152
Current liabilities (6,838) (7,218)
Long-term liabilities (182) (160)
-------- -------
Net assets $ 7,157 $13,070
======== =======
Security Business
Since its acquisition of Maris (Note 2) in 1993 the Company
experienced reductions in profitability or losses on fixed fee
contracts. This erosion was caused primarily by unforeseen costs and
operational and contract problems, which were exacerbated by
insufficient financing to support the timely performance of the effected
contracts. As a result of this profit degradation, the Company was not
able to pay its vendors on a timely basis and was having difficulty
completing work in progress.
Most of the larger jobs affected by these issues were bonded and the
Company entered into agreements with surety companies to have them
assume responsibility for completing their respective jobs. The Company
has obtained agreements with such sureties to release the Company from
any financial obligations with respect to completing the jobs in
exchange for 300,000 shares of the Company's stock and cash settlements
totaling $495,000 and additional payments of 20% of Maris' net earnings
in 1998-2002 up to $1 million in the aggregate.
The Company has agreed with the parties from whom it purchased Maris,
to restructure the original purchase transaction by offsetting its note
receivable from Maris of $3.6 million in exchange for releases from its
indemnification liabilities to the Company under the original asset
purchase agreement. The effective $3.6 million reduction in the note
payable net of the related write-off of $1.8 million of remaining costs
in excess of net assets of businesses acquired recorded for the Maris
acquisition has been reflected in 1994 financial statements.
The financial effect of the above transfer of contracts to the surety
companies and the restructuring of the original purchase transaction is
summarized below:
(In thousands)
Accounts receivable $ 5,977
Costs and estimated earnings in excess of
billings on uncompleted contracts net 1,881
Payables (4,370)
Settlement with surety companies 495
Costs in excess of net assets of business
acquired 1,794
Note payable (3,600)
Other 63
--------
Charge for restructuring $ 2,240
========
These transactions are recorded in the 1994 financial statements of
the Company.
As of December 31, 1994 Safeguard contributed a note receivable from
the Company of $1.1 million as additional paid-in capital.
4. Inventories
(In thousands) 1994 1993
---- ----
Raw materials $311 $ 329
Work in progress 0 46
Finished goods 315 752
---- ------
$626 $1,127
==== ======
5. Accrued Expenses
(In thousands) 1994 1993
---- ----
Commissions $ 122 $ 317
Salaries 794 507
Sales and Use Tax 1,025 164
Other 1,853 637
------ ------
$3,794 $1,625
====== ======
6. Commitments and Contingencies
In consideration for contributions to the development of certain air
filtration products, the Company agreed to pay royalties based on sales
of such products to a former shareholder of the dealer through December
1996. Royalty costs were $18,500 and $20,500 in 1994 and 1993,
respectively.
Maris is a named party to certain pending law suits relating to
certain of Maris' security system installation projects. Maris also
believes that it has certain claims with respect to other security
systems installation projects for which it has not yet filed law suits.
In connection with Maris' settlement with its surety companies, the
surety companies have assumed all claims and all liabilities in respect
of these law suits and potential law suits, and the surety companies
have agreed to release Maris from its indemnity obligations to them.
The company is subject to other pending and threatened legal
proceedings and claims which have arisen in the ordinary course of
business and which have not been fully adjudicated. These actions, when
ultimately concluded and determined, will not, in the opinion of
management, have a material effect on the results of operations,
liquidity, or financial position of the Company.
7. Contracts in progress
(In thousands) 1994 1993
- ----------------------------------------------------------------------
Costs incurred on uncompleted contracts $ 30,053 $ 81,557
Estimated earnings 4,258 11,840
-------- --------
34,311 93,367
Billings to date (35,438) (91,757)
-------- --------
$ (1,127) $ 1,610
======== ========
Such amounts are included in the
accompanying consolidated balance sheet as
follows:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 293 $ 3,233
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,420) (1,623)
-------- --------
$ (1,127) $ 1,610
======== ========
8. Related Party Transactions
Safeguard Scientifics, Inc. (Safeguard) owns 65% of the outstanding
common stock of the Company at December 31, 1994 and all of the
redeemable convertible preferred stock. In 1995, Safeguard agreed to
contribute 2 million shares of CenterCore, Inc. common stock to the
Company, sell 2.5 million shares of CenterCore, Inc. common stock to the
management of the Company to further incentivize them, and provide up to
$3 million in advances to address current funding requirements of the
business. Subsequent to these restructurings, Safeguard's ownership
percentage will fall below 50%.
The Company and Safeguard are parties to an administrative services
agreement pursuant to which Safeguard provides the Company with
administrative support. At January 1, 1994 the agreement for these
administrative services was for a maximum annual fee of $500,000 and the
reimbursement of certain out-of-pocket expenses incurred by Safeguard in
performing services under the agreement. However, in conjunction with
the Company's bank agreement in March 1994, the maximum annual fee was
reduced to $300,000 retroactive to January 1, 1994, and payment of the
fee was made subject to the Company's satisfaction of certain
requirements under its bank agreement which the Company has not been
able to satisfy. The Company made payments of $83,333 to Safeguard and
accrued the remaining fees of $216,667 in 1994. The amount charged to
continuing operations was $220,000 in 1994, $13,500 in 1993 and $0 in
1992, respectively. The balance of these fees were charged to
discontinued operations. The Company leases building space from
Safeguard. The amount payable to Safeguard at December 31, 1994 and
1993 for these transactions and other expenses incurred on behalf of the
Company was $502,400 and $164,200, respectively. In 1995 the
administrative services agreement was terminated. However, Safeguard is
providing certain administrative services to the Company at no charge in
1995.
During 1994 Safeguard purchased 15,000 shares of redeemable
convertible preferred stock for $1.5 million. The preferred stock has a
stated value of $100 per share and entitles holders to quarterly
dividends of $1.50 per share commencing on July 1, 1994. Unpaid
undeclared cumulative dividends as of December 31, 1994 were $45,000.
The Company may redeem all outstanding preferred stock any time after
June 1, 1995 at the stated value plus any unpaid dividends. However,
the preferred stock must be redeemed prior to June 1, 2001. The
preferred stock is convertible at any time into shares of the Company
common stock at one share for each dollar of stated value plus unpaid
dividends. The preferred stock has voting privileges equivalent to the
shares of common stock into which it converts. The Company has
authorized 1,000,000 shares of preferred stock.
9. Debt
Debt consists of the following:
(In thousands) 1994 1993
---- ----
Revolving secured bank facility $8,266 $ 5,199
Note payable 3,700
Safeguard note, subordinated to bank 1,100
Other 130 323
------ -------
8,396 10,322
Less current debt 8,396 383
------ -------
$ -- $ 9,939
====== =======
In March 1994, the Company entered into a $10 million revolving
credit agreement with a bank and repaid the prior credit facilities.
Borrowings bear interest at prime plus 1 1/2%. The agreement limits
borrowings under the credit facility to certain levels of receivables
and inventory and requires the maintenance of liquidity and indebtedness
ratios, minimum levels of net worth and earnings, and limits the amounts
available for capital expenditures and amounts to be advanced to the
Company's subsidiaries. The agreement prohibits the payment of cash
dividends. The Company pays a commitment fee of 1/4% on the unused
portion of the credit facility. Safeguard has guaranteed a portion
(maximum $2.4 million) of the outstanding debt.
Due to the losses incurred in the second half of 1994, the Company is
not in compliance with certain financial covenants under its bank
agreements. The Company has not been successful in restructuring these
covenants, therefore the $8.3 million of formerly long-term bank
borrowings has been reflected as a current obligation as the bank has
the ability to request immediate loan repayment. Additionally, in 1995,
by mutual agreement with the bank availability under the credit facility
has been reduced to $7.7 million. The bank continues to extend credit
to the Company under the existing borrowing base formula.
During 1994 and 1993, the Company borrowed a maximum of $8.8 and $5.7
million, respectively, under its credit facilities. The weighted
average interest rate was 8.1% and 6.1% in 1994 and 1993, respectively.
Interest paid in 1994, 1993 and 1992 was $844,000, $316,000 and
$267,000, respectively.
10. Operating Leases
The Company leases its plant and office facilities and certain
equipment under operating leases ranging from one to seven years.
Future minimum rental payments under operating leases that have initial
or remaining noncancelable lease terms in excess of one year are as
follows:
(In thousands)
1995 $ 333
1996 175
1997 130
1998 125
1999 107
Thereafter 214
------
$1,084
======
Rental expense in 1994, 1993 and 1992 was $776,900, $204,400 and $0,
respectively.
11. Major Customers
The Company's security systems segment has been primarily in the
prison and airport construction business where the customer is an agent
of either the federal or state governments or local municipalities.
During the year ended December 31, 1994, one customer generated 15%, and
during 1993 three customers generated 15%, 14% and 12% of security
systems sales.
The Company has turned over to its sureties most of its prison and
airport construction projects, and does not intend to bid for any
significant additional prison or airport projects.
12. Income Taxes
The benefit for taxes on losses from continuing operations was:
The benefit for taxes on losses from continuing operations was:
(In thousands) 1994 1993
---- ----
Current $(1,579) $(50)
Deferred (84) 3
------- ----
Continuing operations $(1,663) $(47)
------- ----
State tax provision included above $22 $6
A reconciliation of the provision (benefit) for income taxes to the
federal statutory rate follows:
Statutory tax benefit $(4,099) $(54)
State taxes net of federal tax benefit 15 4
Non-deductible U.S. losses 2,421 3
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$(1,663) $(47)
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The tax effects of temporary differences that give rise to
significant
portions of the deferred tax assets (liabilities) are presented below:
Deferred tax assets:
Foreign net operating loss carryforwards $ 856
U.S. net operating loss carryforwards $1,014
Bonded jobs allowance 1,420
Receivables allowance 1,146 240
Alternative minimum tax credit 97
Life insurance benefit 48
Goodwill allowance 717
Inventory capitalization 25
------ -----
Total gross deferred assets 4,394 1,169
Less valuation allowance (4,390) (856)
------ -----
Net deferred tax assets 4 313
------ -----
Deferred tax liabilities:
Accelerated depreciation (4) (349)
------ -----
As of December 31, 1994, the Company had net operating loss
carryforwards for U.S. income tax purposes of $8 million. Of this
amount, $5 million has been carried back to offset prior years taxable
income and resulted in the Company receiving a $1.6 million tax refund
in 1995. The remaining net operating loss carryforward of $3 million is
available to offset future taxable income until the year 2009.
Total income taxes paid (refunded) in 1994, 1993 and 1992, were
$158,200, ($34,900) and $0, respectively.
13. Stock Options
In 1994, the Company shareholders approved an additional 500,000
common shares for a new employee stock option plan. Under the various
incentive stock option plans, selected employees may be granted options
to purchase the Company's common stock at a price not less than fair
market value on the date of grant.
Generally, all options are exercisable 25% per year beginning one
year from date of grant. Options expire seven years from the date of
grant.
A summary of stock option activity in the plans follows:
1994 1993
---- ----
Shares under option beginning of year 749,250 455,625
Options granted 342,000
Options canceled (143,375) (48,375)
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Shares under option end of year 605,875 749,250
======== =======
Options exercisable 377,325 287,750
Shares available for future grant 443,000 425,000
Average price of shares under option $.90 $.94
Under the Company's non-employee Director stock option plan, 5,000
options at $1.75 and 5,000 options at $1.13 per share are outstanding at
December 31, 1994. These options are currently exercisable and expire
in 1995 and 1996, respectively.
At December 31, 1994, the Company has reserved 1,098,875 shares of
common stock for possible future issuance under all stock option plans.
14. Retirement Plans
The Company has defined contribution plans which cover substantially
all domestic employees. Certain plans provide for a limited Company
match of employee contributions. The Company contributed $85,600,
$35,000 and $0 in 1994, 1993 and 1992, respectively.
15. Liquidity and Capital Resources
As a result of significant operating difficulties, the Company has a
severe liquidity problem. The Company is in default of its loan
facility ($8.3 million at December 31, 1994). These defaults cause the
debt to be due upon demand, and, should the lender demand payment, the
Company does not have the resources to satisfy the debt. The Company
has withdrawn from the correctional facility security business and is
undertaking to significantly downsize the business which includes the
sale of the furnishings business unit. Proceeds from the sale, as well
as a 1995 tax refund of $1.6 million, will be used to reduce
outstanding bank debt. In anticipation of these events, the bank
continues to extend credit to the Company under the existing borrowing
base formula. Except for a $2.4 million guarantee of bank debt,
Safeguard is not contractually obligated to satisfy any of the Company's
obligations. The Company believes that the combination of cash received
from the sale of the furnishings business, the tax refund, the guarantee
of Safeguard and the working capital assets of the ongoing business will
be sufficient to satisfy/support all of the bank debt.
The Company has entered into an agreement with the parties from whom
it acquired Maris, to significantly restructure the original purchase
transaction. Under this agreement the seller has agreed to offset its
$3.6 million note receivable from the Company in exchange for releases
from its indemnification liabilities to the Company under the original
asset purchase agreement. Because the Company did not have the required
working capital to complete certain projects it turned to its sureties
to assume and complete certain construction contracts and has extended
its payables to vendors. The principal sureties have agreed to release
the Company from its indemnity obligations to them in return for 300,000
shares of CenterCore stock, cash payments of $495,000 and additional
payments equal to 20% of the Company's net earnings in 1998-2002 up to
$1 million in the aggregate. The Company is negotiating with all
principal vendors to arrange a repayment schedule while continuing to
supply the Company with materials needed to meet current requirements.
Safeguard has agreed to contribute 2 million shares of its CenterCore
common stock to the Company, sell 2.5 million shares of its CenterCore
common stock to CenterCore management, and provide up to $3 million in
advances to the Company to address current funding requirements of the
downsized business.
As a result of the restructurings, the Company will emerge as a
significantly downsized company. Availability of bonding on jobs will,
at least in the near term, be limited. Bank financing may be available
for limited working capital requirements to augment any advances from
Safeguard. If these sources of funds prove to be inadequate or in the
case of bank financing, unavailable, then the Company will have to seek
additional funds from other investors in order to continue operations.
There can be no assurance that new sources of funds, if required, will
be available. Although the Company believes it will be able to continue
to operate in this new downsized mode, it is contingent on the Company's
ability to adequately reduce its cost structure to a point where it is
supported by the new downsized operations.
16. Segment Data
In thousands
Security Systems Air Technology
Products
---------------- --------------
1994
- ----
Net sales $27,178 $4,067
Loss before income taxes (11,895) (160)
Assets employed 5,009 2,213
1993
- ----
Net sales 12,515 2,727
Earnings (Loss) before income taxes 92 (252)
Assets employed 17,649 1,922
Security systems provides low voltage electronic systems to the
commercial and institutional markets. Air Technology products designs
and manufactures clean room and air filtration components and systems.
Virtually all sales are to United States customers. During 1994 the
Company discontinued the furnishings segment. Assets employed include
continuing operations net of assets used for general corporate purposes
of $2,311 and $1,930 for 1994 and 1993, respectively.
