SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(X ) Filed by the Registrant
( ) Filed by a Party other than the Registrant
Check the appropriate box:
( ) Preliminary Proxy Statement
( ) Confidential, for Use of the Commission Only (as permitted by
Rule 14a-b(e)(2))
(X ) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to (section mark)240.14a-11(c) or
(section mark)240.14a-12
J.A. INDUSTRIES, INC.
(Name of Registrant as Specified In Its Charter)
J.A. INDUSTRIES, INC.
(Name of Person(s) Filing Proxy Statement If Other Than Registrant)
PAYMENT OF FILING FEE (Check the appropriate box):
( ) $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
( ) $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
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:
(Set forth the amount on which the filing fee is calculated and state how
it was determined)
(X) Fee previously paid with preliminary materials.
( ) 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: $
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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[Preliminary Proxy Statement]
J.A. Industries, Inc.
34A-2755 Lougheed Highway
Port Coquitlam, B.C. V3B 5Y9 Canada
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Meeting Date: , 1996
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of J.A.
INDUSTRIES, INC. a Delaware corporation ("Company" or "JA"), will be held at the
offices of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., at
2500 First Union Capitol Center Raleigh, North Carolina 27601 on , 1996 at 8:00
a.m. in the forenoon, for the following purposes:
1. To consider and vote upon a proposal to approve and
adopt an Agreement and Plan of Merger by and among
the Company, J.A. Industries of North Carolina,
Inc., a newly formed wholly owned subsidiary of the
Company ("Sub") and Kenmar Business Groups, Inc.
("Kenmar") (the "Merger Agreement") and the
transactions contemplated thereby. The Merger
Agreement provides for a reverse triangular merger
whereby Kenmar will become a wholly-owned subsidiary
of JA. Pursuant to the Merger Agreement each share
of Kenmar's common stock shall be converted into the
right to receive 41 shares (subject to adjustment)
of unregistered common stock of the Company (the
"Exchange Ratio"). The Exchange Ratio shall be a
number that upon consummation of the merger will
result in the Kenmar stockholders owning an
aggregate number of shares of the Company equal to
50 percent of the Company's issued and outstanding
shares. The Exchange Ratio will be adjusted at the
consummation of the merger. The Company's common
stock issued and exchanged for the Kenmar common
stock is referred to collectively herein as the
("Merger Consideration"). Contemporaneously with
the issuance of the Merger Consideration, the
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Company shall grant to Kenmar an option to acquire 750,000
shares of its Common Stock for an aggregate purchase price of
one dollar upon the occurrence of a breach of any
representation, warranty, covenant or other obligation of the
Company under the Merger Agreement.
2. To elect (5) directors of the Company for the
ensuing year.
3. To approve an amendment to the Company's Certificate
of Incorporation to provide for a change in name to
Electronic Manufacturing Services Group, Inc.
4. To approve a 1 for 4 reverse stock split of each
outstanding share of the Company's Common Stock.
5. To transact such other business as may properly come
before the meeting.
Please fill out, sign and mail the enclosed form of proxy, whether or not you
expect to be present at the Special Meeting. A self-addressed envelope is
enclosed for your convenience.
By Order of the Board of Directors
PORT COQUITLAM, B.C. ROBERT KNIGHT, PRESIDENT
, 1996
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE FILL IN,
DATE AND RETURN THE PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. NO POSTAGE NEED BE AFFIXED IF THE PROXY IS MAILED
IN THE UNITED STATES.
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SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION SET FORTH ELSEWHERE IN
THIS PROXY STATEMENT AND IS NOT INTENDED TO BE COMPLETE. IT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS
PROXY STATEMENT, THE ACCOMPANYING APPENDICES AND THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE.
THE COMPANIES
J.A. INDUSTRIES, INC. The Company was organized under the laws of the State of
Delaware in 1987 and presently has no operations. As of March 31, 1996 the
Company had no assets. The principal executive offices of the Company are
located at 34A-2755 Lougheed Highway #522, Port Coquitlam, B.C. V3B 5Y9 Canada
and its telephone number is (604) 941-3413.
J.A. INDUSTRIES OF NORTH CAROLINA, INC. Sub was organized under the laws of the
State of North Carolina in January 1996 and presently has no operations. As of
March 31, 1996 Sub had no assets. The principal executive offices of Sub are
located at 34A- 2755 Lougheed Highway #522, Port Coquitlam, B.C. V3B 5Y9 Canada
and its telephone number is (604) 941-3413.
KENMAR BUSINESS GROUPS, INC. Kenmar was organized under the laws of the State of
North Carolina in 1984 and is a contract provider of manufacturing services to
the electronics industry. As of February 29, 1996 Kenmar had total assets of
$3,069,000. The principal executive offices of Kenmar are located at 6638 Old
Forest Wake Road, Raleigh, North Carolina and its telephone number is (919)
876-6049.
Kenmar provides manufacturing services to original equipment
manufacturers ('OEM's') in the electronics industry, including producers of
industrial controls, computers & peripherals and instrumentation. Primary
services include materials procurement, printed circuit card and chassis
assembly, and testing. Kenmar has approximately 20 customers, 6 of which
accounted for 79% of its sales for the six months ending February 29, 1996.
Prior to the loss of its largest
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customer in 1995, Kenmar conducted its operations in 42,000 square feet of flex
space with 85 employees. Since such loss, steps have been taken to size the
operations to more closely match the revenue without losing its key employees
and skills required to regrow the business. To date, this has caused Kenmar to
incur losses from operations for fiscal 1996. Kenmar currently operates one
facility in Raleigh, North Carolina with approximately 25 employees in 21,000
square feet of flex space. Operations are near 40% capacity with one shift
active.
SPECIAL MEETING
A Special meeting of Shareholders of the Company will be held on , 1996
at 8:00 a.m. local time at the offices of Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P. at 2500 First Union Capitol Center Raleigh, North
Carolina 27601 at which time the shareholders of the Company will be asked to
approve the Merger Agreement and the transactions contemplated thereby; elect
directors, amend the Company's Certificate of Incorporation and approve a 1 for
4 reverse stock split. The record holders of the Company's common stock at the
close of business on June 3, 1996 (the "Record Date") are entitled to notice
of and to vote at the special meeting. On the Record Date, there were
approximately 301 holders of record of the Company's common stock and 9,417, 304
shares of Company common stock outstanding.
The affirmative vote of the holders of a majority of the
outstanding shares of the Company's common stock present at the meeting is
required to approve the Merger Agreement and other proposals presented herein.
Directors will be elected by a plurality of the votes cast. It is expected that
all of the 307,259 shares of the Company's common stock beneficially owned by
the directors and executive officers of the Company and their affiliates at the
Record Date will be voted for the proposals set forth herein.
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Effective Time of the Merger
The Merger will become effective upon the filing of properly
executed Articles of Merger relating thereto with the Secretary of the State of
North Carolina, or at such later time as may be specified therein. See "The
Merger-Effective Time of the Merger".
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Available Information 1
Incorporation of Certain Documents by Reference 1
Information Concerning the Special Meeting
Summary i
Date, Place and Time of Special Meeting ii
Voting; Revocation of Proxy 2
Solicitation of Proxies 2
Quorum and Vote Required 2
Dissenters' Rights 3
Proposal One - Approval of the Merger 5
Approval Sought 5
History of JA 6
Background of the Merger 6
Terms of the Merger 8
Business of Kenmar 9
Recommendation of the Board of Directors 11
Additional Terms of the Merger Agreement 12
Issuance of Restricted Shares 16
Registration Rights 18
Effective Time of the Merger 19
Accounting Treatment 19
Federal Income Tax Consequences 19
Rights of Dissenting Stockholders 21
Option Agreement 23
Selected Financial Data for the Company and Kenmar 23
JA 23
Kenmar 25
Per Share Data 26
Management's Discussion and Analysis of
Financial Condition and Results of Operations 27
JA 27
Liquidity 29
Notes Payable and Long Term Debt 31
Results of Operations 36
Kenmar 40
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Results of Operations 40
Liquidity and Capital Resources 42
Statements of Income 44
Proposal Two - Election of Directors 47
Nominees 47
Executive Compensation 48
Security Ownership of Certain Beneficial
Owners and Management 51
Principal Stockholders (post merger) 52
Common Stock of the Company 53
Market Price Information 53
Dividend Policy 54
Post Meeting Financing 54
Proposal Three - Approval of Amendment to
Certificate of Incorporation 55
Description of Capital Stock of the Company 55
Proposal Four - Reverse Stock Split 56
Financial Statements 56
Presence of Accountants at Special Meeting 57
Stockholder's Proposals 57
Other Matters 57
EXHIBITS
Section 262 of the Delaware General Corporation
Law - Appraisal Rights A
Agreement and Plan of Merger B
Option Agreement C
Proposed Amendment to Certificate of Incorporation D
Financial Statements E
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AVAILABLE INFORMATION
JA is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files proxy statements, reports and other information with the
Securities and Exchange Commission (the "Commission"). Proxy statements, reports
and other information concerning JA can be inspected and copied at Room 1024 of
the Commission's offices at 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the Commission's regional offices in New York (7 World Trade Center, 13th
Floor, New York, New York 10048) and in Chicago (Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661). Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement and, if given or made, such
information or representation should not be relied upon as having been
authorized. Neither the delivery of this Proxy Statement, nor any distribution
of the securities issuable in connection with the Merger Agreement, shall, under
any circumstances, create any implication that there has been no change in the
information concerning JA contained in this Proxy Statement since the date of
such information.
The following documents filed with the Securities and Exchange
Commission by the Company pursuant to the Exchange Act accompany this Proxy
Statement:
1. Form 10-KSB/A for its fiscal year ended June
30, 1995;
2. Form 10-QSB/A for the quarters ended March 31, 1996;
3. Forms 8-K dated June 30, September 15, 1995 and
January 26, 1996 and Form 8-K/A dated July 18, 1995.
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SOLICITATION OF PROXIES
This Proxy Statement, together with the accompanying Proxy, is
furnished in connection with the solicitation of proxies to be used at the
Special Meeting of Stockholders of J.A. Industries, Inc., a Delaware corporation
(hereinafter called the "Company"), to be held at the offices of Smith,
Anderson, Blount, Dorsett, Mitchell & Jernigan L.L.P., 2500 First Union Capitol
Center, Raleigh, North Carolina on __________, 1996 at 8:00 in the forenoon or
any adjournment thereof.
A stockholder signing and returning a proxy in the enclosed form
has the power to revoke it any time before the exercise thereof by giving
written notice to that effect to the Secretary of the Company, by the submission
of another signed proxy bearing a later date or by the stockholder's personal
attendance at the meeting and voting by ballot.
The solicitation of proxies in the enclosed form is made on
behalf of the Board of Directors of the Corporation.
The cost of preparing, assembling and mailing the proxy material
and of reimbursing brokers, nominees and fiduciaries for the out-of-pocket and
clerical expense of transmitting copies of the proxy material to the beneficial
owners of stock held in their names will be borne by the Company. The Company
does not intend to solicit proxies other than by the use of the mails, but
certain officers and regular employees of the Company or its subsidiaries, for
no additional remuneration, may use their personal efforts, by telephone or
otherwise, to obtain proxies. No firm has ben retained to assist in the
solicitation of broker and nominee proxies.
VOTING SECURITIES OUTSTANDING
At the close of business of June 3, 1996, the record date for
the meeting, the Company had outstanding 9,417,304 shares of Common Stock, each
of which shares is entitled to one vote.
QUORUM AND VOTE REQUIRED
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The presence, in person or by proxy, of the holders of at least
a majority of the outstanding shares of Common Stock is necessary to constitute
a quorum at the Special Meeting. Approval of each Proposal will require the
affirmative vote of the holders of at least a majority of the shares of Common
Stock of the Company present in person or by proxy except directors will be
elected by a plurality of the votes cast. Management of the Company recommends
that holders vote their shares in favor of all proposals.
In situations where brokers are prohibited from exercising
discretionary authority for beneficial owners who have not returned Proxies to
the brokers (so-called "broker non-votes"), the affected shares will be counted
for purposes of determining the presence or absence of a quorum for the
transaction of business but will not be included in the vote totals and,
therefore, will have no effect on the outcome of the votes.
Dissenters' Rights.
Pursuant to Section 262 of the General Corporation Law of the
State of Delaware, a copy of which is attached hereto as Exhibit A, any holder
of JA Common Stock who objects to the Merger will be entitled to dissent and
exercise appraisal rights. That Section enables an objecting stockholder to be
paid, in cash, the value of his JA Common Stock as determined by the Delaware
Court of Chancery, provided that the following conditions are satisfied:
(1) Such stockholder must file with the Company a written demand
for appraisal of his shares, separate and apart from any proxy or vote
against the Merger, before the taking of the vote on the Merger. If a
stockholder elects to exercise dissenters' rights, such right may only
be exercised as to all shares of JA capital stock held by the
dissenting stockholder.
(2) Such stockholder must not vote in favor of the Merger, nor
submit a proxy in which directions are not given.
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(3) Within 120 days after the Effective Date of the Merger,
either the Company or any stockholder who has complied with Section 262
may, by petition filed in the Delaware Court of Chancery, demand a
determination by the Court of the value of the shares of all objecting
stockholders with whom agreements as to the value of such shares have
not been reached.
Within 10 days after the Effective Date of the Merger, the Company will notify
each stockholder who has complied with Section 262 and not voted for, or
consented to, the Merger of the date on which the Merger became effective.
If the Company and the dissenting stockholder cannot agree on
the value of the shares, the Court, based upon an appraisal prepared by an
independent appraiser, will make its own determination. Under Delaware law, the
dissenting shares would be valued on a going concern and not a liquidation
basis. An appraiser would be obligated to determine the intrinsic value of the
shares, without giving effect to the proposed Merger, considering all factors
and elements which reasonably may enter into such a determination, including
market value, asset value, earnings prospects and the nature of the enterprise.
The value determined by the court may be more than, less than or equal to the
Merger consideration (i.e., the value of the JA Common Stock after the Merger).
Notwithstanding the foregoing, at any time within 60 days after
the Effective Date of the Merger or thereafter, with the written approval of the
Company, any objecting stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered pursuant to the Merger, provided
that no appraisal proceeding in the Delaware Court of Chancery may be dismissed
without the approval of such Court. The cost of an appraisal proceeding may be
determined by such Court and taxed upon the parties as the Court deems equitable
under the circumstances.
FAILURE BY A STOCKHOLDER TO FOLLOW THE STEPS REQUIRED
BY DELAWARE LAW FOR PERFECTING HIS DISSENTER'S RIGHTS WILL
RESULT IN THE LOSS OF SUCH RIGHTS.
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PROPOSAL ONE
APPROVAL OF THE MERGER
Approval Sought.
Stockholders are being asked to approve an Agreement and Plan of
Merger, dated as of March 1,1996 (the "Merger Agreement"), a copy of which,
including all schedules and exhibits, is annexed hereto as Exhibit B, among the
Company, Sub and Kenmar, which provides for, among other things (i) the merger
of Sub with and into Kenmar, with Kenmar continuing as a surviving corporation
and a wholly-owned subsidiary of JA (the "Merger"), and (ii) the conversion of
each outstanding share of common stock, no par value, of Kenmar ("Kenmar Common
Stock") into 41 shares (subject to adjustment) of JA Common Stock.
The Exchange Ratio of 41 shares of JA Common Stock for each
share of Kenmar Common Stock was negotiated by the board of directors of the
Company in its independent judgment concerning the relative value of a share of
Kenmar Common Stock and a share of JA Common Stock, taking into consideration
such factors as the market value of the JA Common Stock, the value of Kenmar's
assets, and value of Kenmar's business and future prospects. See "Background of
the Merger."
Pursuant to the Merger Agreement and taking into account the 1
for 4 reverse stock split, approximately 2,734,326 shares of the Company's
common stock will be issued to Kenmar shareholders in exchange for all of the
outstanding shares of Kenmar. It is the intention of the parties that the former
shareholders of Kenmar shall receive such number of shares of the Company to
enable them to obtain a 50% interest in the post transaction entity. The
Exchange Ratio is subject to adjustment to insure that Kenmar shareholders will
receive a 50% interest in the post transaction entity.
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HISTORY OF JA
JA was incorporated in the State of Delaware on July 21, 1987
and was inactive until September 1991 when its Board made the decision to
acquire companies in the contract manufacturing business. A total of 3 such
companies were acquired. However, because the growth and profitability of its
acquired operations fell short of expectations, beginning in June 1995, the
Company began disposing of its operations. By November 1995 the Company had sold
or disposed of all of its operations.
BACKGROUND OF THE MERGER
In December 1995, the Company initiated discussions with Kenmar,
a privately held company engaged in the contract manufacturing business. After
an analysis by the Board of opportunities available to the Company, in January
1996 the Company agreed to seek to effect a merger between Kenmar and the
Company. The terms of the Merger would be subject to execution of a definitive
merger agreement, stockholder approval and the completion of due diligence. None
of the current members of the Board of Directors of the Company is affiliated
with Kenmar.
The Board also considered the risks and potential disadvantages
associated with the Merger. Effectively, the Merger will result in a change in
control. After the Merger, the stockholders of Kenmar will, in the aggregate,
hold 50% of the outstanding JA Common Stock. Kenmar has 38 Common Stockholder
and 42 Class A Preferred Stockholders. If such shares are voted together, the
shares held by the former Kenmar stockholders might constitute a plurality of
the outstanding shares. Moreover, pursuant to the terms of the Merger Agreement,
for a period of 3 years after the Merger, the Company is to be managed by the
present management of Kenmar. See "Additional Terms of the Merger", page 35.
As a "shell company" with no existing business and an
insignificant net worth, the Board believes that the merger poses little
additional risk to stockholders. The Board believes that if the Merger is not
approved, the only alternatives available to the Company would be to liquidate
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(in which case it is unlikely that there would be any distribution to
stockholders), or to continue as a "dormant" company until another business
combination is identified and the Company is uncertain whether any other viable
business combination could be identified. In any event the Board believes that
given the current financial condition of the Company, it is unlikely that any
other business combination would provide the same value to stockholders as the
proposed merger with Kenmar.
As a result of the merger, the Company would assume the
liabilities of Kenmar which as of February 29, 1996 totaled $1,355,000 and
included the following:
Current maturites of long-term debt $ 4,317
Current obligations under capital leases $ 35,203
Accounts payable - trade $ 621,852
Other accrued liabilities $ 94,833
==========
Total Current Liabilities $ 756,205
Long term debt, less current maturities $ 541,236
Long-term obligations under capital lease $ 57,750
==========
Total Liabilities $1,355,191
The above presentation does not reflect the redemption and
dividend obligations of Kenmar's preferred stock (See "Preferred Stock of
Kenmar", page 35).
Kenmar's expenses related to the Merger include legal and
accounting fees estimated at $80,000 and travel and miscellaneous expenses
estimated at $20,000. The Company's expenses are estimated at $93,000, including
legal and accounting expenses estimated at $70,000; travel and miscellaneous
expenses estimated at $20,000; shareholder meeting $2,000; organization of J.A.
Industries Inc. of North Carolina $1,000. In addition, the Company will pay to
George Solloum, an unrelated third party, a finder's fee of 20,000 shares of
pre-split Common Stock. No cash remuneration will be paid to Mr. Solloum . To
the extent monies are raised to fund expenses associated with the Merger, the
Company will pay fees equal to 10% of the monies raised.
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Terms of the Merger.
At the effective time of the Merger (the "Effective Time"), Sub
will merge with and into Kenmar, with Kenmar continuing as a surviving
corporation and a wholly-owned subsidiary of JA. All of the common stock of
Kenmar issued and outstanding immediately prior to the consummation of the
Merger (other than dissenting shares, if any), will be converted into shares of
JA Common Stock. All of the JA Common Stock which is issued and outstanding
immediately prior to the consummation of the Merger will remain outstanding and
will not change as a result of the Merger. 9,417,994 shares of JA Common Stock
are presently outstanding (there would be 10,937,304 shares outstanding upon the
closing of the private placement, see Post Meeting Financing, page 54). At the
Effective Time after the reverse stock split is consummated, 5,468,652 shares
would be outstanding after issuance of share to the Kenmar shareholders. The
Certificate of Incorporation of JA shall be and remain the certificate of
incorporation of the surviving corporation and the by-laws of JA shall be the
by-laws of the surviving corporation.
At the Effective Time, each share of Kenmar Common Stock
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger, be converted into the right to receive 41 shares of JA Common Stock
subject to adjustment. It is anticipated that the same number of shares of JA
Common Stock presently outstanding will be issued pursuant to the Merger. After
giving effect to the issuance of such shares, the former Kenmar stockholders
will hold approximately 50% of the outstanding JA Common Stock.
On or immediately after the Effective Time, each holder of an
outstanding certificate or certificates which prior thereto represented shares
of Kenmar Common Stock, shall surrender the same to JA. Each Kenmar stockholder
who shall have surrendered its certificate representing shares of Kenmar common
stock shall be entitled to receive in exchange therefor, a certificate or
certificates representing the number of whole shares of JA Common Stock into
which the Kenmar Common Stock shall have been converted.
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When the Merger becomes effective, the former stockholders of
Kenmar shall thereupon cease to have any rights in respect of Kenmar Common
Stock, other than the right to receive the certificates for JA Common Stock.
Unless and until any certificates shall be so surrendered and exchanged, (i) the
holders of Kenmar Common Stock shall not have any voting rights in respect of
the JA Common Stock into which the shares of Kenmar Common Stock shall have been
converted, and (ii) dividends or other distributions (if any) payable to holders
of record of shares of JA Common Stock shall not be paid to the holder of the
certificate.
Upon surrender of the certificate representing shares of Kenmar
Common Stock, the dividends or other distributions which shall be or become
payable subsequent to the Effective Time with respect to the number of whole
shares of JA Common Stock represented by the certificate issued in exchange for
the surrendered Kenmar certificate, shall be paid, but without interest. No
fraction of a share of JA Common Stock will be issued pursuant to the Merger.
Business of Kenmar
Kenmar was organized in 1984 to provide high quality electronic
manufacturing services. The principal offices of Kenmar are located at 6638 Old
Wake Forest Road, Raleigh, North Carolina and the telephone number at that
address is (919) 876-6049.
Kenmar provides manufacturing services to original equipment
manufacturers ('OEM's') in the electronics industry, including producers of
industrial controls, computers & peripherals and instrumentation. Primary
services include material procurement, printed circuit cards and chassis
assembly, and testing. Kenmar currently has approximately 20 customers, 6 of
which comprise the majority of its sales. Prior to the loss of its largest
customer in 1995, the Company conducted its operations in 42,000 square feet of
flex space with 85 employees. Since such loss described above, steps have been
taken to size the operations to more closely match the revenue without losing
the key employees and skills required to regrow the business. To date, this has
caused the Company to incur losses from operations for fiscal 1996. The
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Company currently operates one facility in Raleigh, North Carolina with
approximately 25 employees in 21,000 square feet of flex space. Operations are
near 40% capacity with one shift active.
In anticipation of the Merger, Kenmar has begun
exploratory discussions with numerous potential acquisition
candidates. To date, Kenmar has not consummated any
agreements or letters of intent with any of such candidates.
Preferred Stock
Kenmar currently has nine thousand nine hundred twenty-six
(9,926) shares of Class A Cumulative Redeemable Preferred Stock ("Class A
Preferred Stock"), Fifty Dollars ($50) par value, issued and outstanding. The
Class A Preferred Stock will not be converted, exchanged or otherwise affected
as a result of the Merger, and will remain issued and outstanding, subject to
the terms described below. The Class A Preferred Stock represents a significant
obligation of Kenmar, and may accordingly have a significant adverse effect on
the value of the Kenmar Common Stock acquired by JA pursuant to the Merger.
Commencing in 1997, the Class A Preferred Stock may be called or
put at any time after five (5) years. Dividends are cumulative from the issue
date and payable quarterly at the rate of ten percent (10%) annually, subject to
the provisions of North Carolina law. Assuming statutory requirements are met
regarding the declaration of dividends, the dividends are declared payable on
3/31, 6/30, 9/30, and 12/31 or each year until the shares are redeemed for
shareholders of record as of 3/15, 6/15, 9/15, and 12/15 of each such year. Any
dividends in arrears may be declared and paid at any time. If only a partial
dividend can be paid, the unpaid balance immediately accumulates. Dividends
payable for any period less than a full period are calculated on a day to day
basis on the basis of a three hundred sixty (360) day year. No other dividends
on any other stock(s) can be either declared or paid until the dividends on the
Class A Preferred Stock are fully paid from all previous periods.
If the Class A Preferred Stock is redeemed, it will
be redeemed at a multiple of one and one half (1 1/2) times the
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issue price. Additionally, from the time the securities are either put or
called, Kenmar will have the option to complete the redemption within twelve
(12) months. Dividends will continue to accrue during the phased redemption
period. To put the Class A Preferred Stock to Kenmar, a stockholder must notify
Kenmar of said action by first class mail.
The Class A Preferred Stock has no preemptive or subscription
rights. Reacquired shares of Class A Preferred Stock may be redesignated and
reissued by Kenmar.
In the event of a liquidation of Kenmar, the Class A Preferred
Stock would be redeemed at Fifty Dollars ($50) per share plus accrued dividends
from assets of Kenmar. If assets are insufficient to fully redeem, the
distribution would be made ratably. A sale of Kenmar or a merger of Kenmar with
another company does not constitute a liquidation.
As of August 31, 1995, cumulative unpaid dividends are $73,008.
Redemption requirements of the Class A Preferred Stock are currently:
1997 $150,000
1998 447,000
1999 68,700
2000 86,250
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Total $751,950
Recommendation of the Board of Directors
On January 22, 1996, the Board of Directors of JA unanimously
agreed for the Company to enter into a Merger Agreement with Kenmar. The Board
believes that the Merger is in the best interests of stockholders and recommends
that stockholders vote for the proposed Merger.
Numerous factors were considered by the Board in approving and
recommending that stockholders approve the Merger Agreement.
11
<PAGE>
Factors considered by the Board included the agreed upon
exchange ratio and the tax-free nature of the transaction to the stockholders of
both companies for federal income tax purposes. The board also evaluated and
took into consideration the following:
(i) the Board's familiarity with the financial condition,
business prospects and strategic objectives of JA. The Company is
unable to enter into a new line of business without a significant
capital infusion. The Board believes that a sale of the Company is not
feasible since the Company has no significant assets to sell.
Accordingly, the Board believes that it is in the best interests of
stockholders to merge with another company.
(ii) the trading history of JA Common Stock;
(iii) the Board's analysis of Kenmar's history,
business, financial condition and prospects;
(iv) the terms and conditions of the Merger Agreement, including
the fact that the consideration will consist of the issuance of
additional shares of Common Stock of the Company.
While Kenmar reported income of $181,000 on sales of $15,566,000
in 1995, sales and revenues for the 6 months period ending February 29, 1996
(unaudited) were $1,354,383. Despite the deterioration in financial results
(primarily attributable to the loss of Kenmar's largest customer), Kenmar listed
assets of $2,377,000 including cash of $745,000. Management of the Company
believes, but cannot assure, Kenmar's relationships with electronic
manufacturers will enable Kenmar to increase its level of sales and achieve
profitability.
Additional Terms of the Merger Agreement.
The Merger Agreement provides for customary representations and
warranties by each party to the transaction including, among others, (i) its due
incorporation and organization, (ii) capitalization, (iii) title and condition
of assets, (iv) material contracts, (v) absence of
12
<PAGE>
employee benefit plans, (vi) licenses and permits, (vii) compliance with other
instruments, (viii) need for consents, (ix) compliance with laws, (x) accuracy
of financial statements, (xi) authority and enforceability of Merger Agreement,
and (xii) absence of litigation.
Prior to the Effective Time (as defined in the Merger
Agreement), each corporation has agreed to conduct its business only in the
ordinary course of business and to provide access to the other company to
facilitate the completion of all necessary due diligence investigations.
The obligations of JA and Kenmar to consummate the Merger are
subject to the satisfaction of the following conditions, among others, unless
waived: (i) approval and adoption of the Merger Agreement by the requisite
stockholder votes by the stockholders of JA and Kenmar respectively, (ii) the
absence of any pending litigation or proceeding initiated by any governmental
authority to enjoin or prohibit the Merger, (iii) the continued accuracy of the
representations and warranties made by the parities, (iv) the performance by
each party of its respective obligations under the Merger Agreement, and (v) the
receipt of certain opinions, certificates and consents.
Pursuant to the Merger Agreement, JA, Kenmar, Sub, and Kenneth
H. Marks ("Marks") (as representative of the Kenmar stockholders, the
"Representative") will enter into an option agreement, the form of which is
attached as Exhibit C to the Merger Agreement (the "Option Agreement"). Under
the Option Agreement, the Representative will be issued an option (the "Option")
to purchase, upon the occurrence of certain conditions, Seven Hundred Fifty
Thousand (750,000) shares of JA Common Stock for an aggregate purchase price of
One Dollar ($1). The conditions to the exercise of the Option are a breach of
any representation, warranty, covenant, or other obligation of JA or Sub under
the Merger Agreement. In the event the Option is exercised, the Representative
will distribute the shares purchased thereby to the Kenmar stockholders.
The purpose of the Option Agreement is to provide a
remedy to the Kenmar stockholders in the event of any breach
13
<PAGE>
of the Merger Agreement by JA. Because Kenmar will become a subsidiary of JA
pursuant to the Merger, and because the Kenmar stockholders will receive JA
Common Stock in exchange for their Kenmar stock pursuant to the Merger,
customary remedies for breach (such as indemnification payments by JA to Kenmar)
are of little value to the Kenmar stockholders. In light of the circumstances of
this transaction, the parties negotiated the Option Agreement as a mechanism to
address Kenmar's desire for a remedy in the event of any breach by JA.
If exercised, the Option would have the effect of increasing the
ownership position in JA of the current Kenmar stockholders and diluting the
current ownership position of the existing JA stockholders. Immediately upon the
consummation of the Merger, JA anticipates that there will be approximately
5,468,652 shares of its Common Stock outstanding, with the current JA
stockholders owning fifty percent (50%) and the current Kenmar stockholders
owning fifty percent (50%). If the Option were to be exercised (and assuming no
further changes in the capitalization of JA), the current Kenmar stockholders'
ownership position in JA would be increased to 3,125,000 aggregate shares or
approximately fifty-seven percent (57%) of the total shares; the percentage
ownership position of the current JA stockholders would decrease to
approximately forty-three percent (43%).
The Merger Agreement (at Section 6.2) also provides that JA
shall use its best efforts to permit Marks to control and elect a majority of
JA's board of directors for a period of thirty-six (36) months following the
Effective Time. During any period within such thirty-six (36) months when a
majority of JA's board of directors is not comprised of directors voted for and
elected by Marks, except in the event that he intentionally fails to cast his
votes in a manner that would result in his voting for and electing a majority of
JA's board of directors during such period, the written consent of Marks will be
required prior to the occurrence of any "material transactions." "Material
transactions" are defined to include (but not be limited to): (i) any contract
or agreement; (ii) any decision to transfer any material portion of the assets
of JA or any subsidiary; (iii) any amendment to the Certificate of Incorporation
of JA; (iv) the sale, issuance or repurchase of any shares of stock of JA; (v)
the
14
<PAGE>
investment of over Ten Thousand Dollars ($10,000) by JA or any subsidiary in any
venture or business investment; (vi) any amendment of the Bylaws of JA or any
subsidiary; (vii) the declaration or payment by JA or any subsidiary of any
dividends on its Common Stock or the distribution by JA of its assets to the
holders of its Common Stock; (viii) the incurrance of any indebtedness by JA or
any subsidiary; (ix) the sale of stock by JA or any subsidiary; (x) any decision
to pledge or mortgage any assets of JA or any subsidiary; (xi) any decision to
hire or terminate any officer or executive employee, including but not limited
to Marks; (xii) any change in compensation or responsibilities or any officer or
executive employee; (xiii) any contract payments or payment of consulting fees
to G.M. Capital Partners Ltd., or any other consultant.
In the event that a majority of JA's board of directors is not
comprised of directors voted for and elected by Marks during any period within
thirty-six (36) months from the Effective Time (except in the event that Marks
intentionally fails to cast his votes in a manner that would result in his
voting for and electing a majority of JA's board of directors during such
period), and in the further event that JA undertakes a material transaction
during such period without Marks' written consent, (i) the Option shall become
immediately exercisable by the Representative, as more specifically set forth in
the Option Agreement, and (ii) JA shall, immediately upon Marks' request: (A)
grant Marks access to all of JA's books, records, and shareholder lists (any
notice that might be otherwise required to be given by Marks being expressly
waived), and (B) pay Marks Fifty Thousand Dollars ($50,000) in cash. Also, in
the event that Marks shall fail to serve (except as a result of his voluntary
resignation) as JA's President and Chief Executive Officer, then JA must
promptly pay or prepay, as the case may be, each of the following promissory
notes: (i) Promissory Note, dated October 15, 1992, made by Kenmar in favor of
Lee K. Simon in the original principal amount of Four Hundred Forty-five
Thousand Five Hundred Dollars ($445,000); (ii) Promissory Note, dated October
15, 1992, made by Kenmar in favor of Daniel David Cameron in the original
principal amount of One Hundred Forty-Eight Thousand Five Hundred Dollars
($148,500); and (iii) Promissory Note, dated October 15, 1992, made by
15
<PAGE>
Kenmar in Favor of Joseph T. Hunt in the original principal amount of One
Hundred Forty-Eight Thousand Five Hundred Dollars ($148,500). As of February 29,
1996, the unpaid balances of the Promissory Notes had been reduced to $304,930,
$101,643 and $101,643 respectively.
The purpose of the provisions relating to control of the board
of directors is to protect the interests of the Kenmar stockholders by ensuring
(through affirmative covenants as well as financial incentives) that Marks will
have operating control of JA for the first three (3) years after the
consummation of the Merger. Kenmar's operations will be JA's sole operations
during the initial period after the Merger (as described above, JA is currently
a "shell company"), and Marks has served as the President or Chief Executive
Officer of Kenmar since its formation in 1984. During the negotiation of the
Merger Agreement, Kenmar indicated that because of Marks' experience in that
regard, it would require that the Merger Agreement be structured to ensure that
Marks would lead the combined entity for the
initial three (3)-year period after consummation of the Merger. The provisions
of the Merger Agreement described above represent the results of the
negotiations in that regard.
At or before the Effective Time of the Merger,JA will undertake
and consummate a 1 for 4 reverse stock split, whereby every 4 shares of JA's
issued and outstanding Common Stock will be converted into 1 share of JA's
Common Stock.
Issuance of Restricted Shares.
The shares of JA Common Stock issuable pursuant to the Merger
will not be registered under the Securities Act of 1933, as amended (the
"Securities Act"), or the securities laws of any state, but will be issued in
reliance upon the exemption from registration afforded by Section 4(2) of the
Securities Act and Regulation D promulgated by the Securities and Exchange
Commission thereunder and similar exemptions from registration available under
state securities laws. As provided in the Merger Agreement, the shares of JA
Common
16
<PAGE>
Stock which will be received by the Kenmar stockholders will not be registered
under the Securities Act or applicable state securities laws and such shares may
not be transferred, sold or assigned until such shares are registered pursuant
to the Securities Act and applicable state securities laws upon certain other
circumstances as described in the Merger Agreement. Kenmar shall notify each of
its stockholders prior to the Effective Time of Merger that such stockholder may
not sell, pledge, transfer, or otherwise dispose of such shares except in
compliance with all applicable federal and state securities laws, rules and
regulations and upon (i) the registration and qualification of such shares under
all applicable federal and state securities laws, (ii) such stockholder's
delivery to JA of a no-action letter from the state and federal agencies having
jurisdiction over such transfer of such shares to the effect that such
registration or qualification is not required in connection therewith, or (iii)
such stockholder's delivery to JA of an opinion prepared by counsel reasonably
acceptable to JA to the effect that neither the sale nor the proposed transfer
constitutes a violation of any federal or state securities laws.
The JA Common Stock issuable to the Kenmar stockholders may not be sold
or transferred in the absence of registration under the Securities Act and
applicable state securities laws, or the availability of an exemption from such
registration requirements. Each certificate of JA Common Stock issued pursuant
to the Merger will bear an appropriate restrictive legend prohibiting the
transfer of such shares.
17
<PAGE>
Registration Rights
The Merger Agreement (in Section 6.8) provides that the Kenmar
stockholders will have demand and "piggyback" registration rights with regard to
the shares of JA Common Stock issued to them in the Merger. Pursuant to the
demand registration rights, JA must use its best efforts to register JA Common
Stock if the holders of fifty percent (50%) or more of JA's "Registrable
Securities" submit a written demand for such registration to JA and the demand
is for a registration of at least fifty percent (50%) of JA's Registrable
Securities. The Merger Agreement defines "Registrable Securities" to mean JA's
Common Stock that has not been (i) sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction, or (ii)
sold or made available for sale, in the opinion of counsel to JA, in a single
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act so that all transfer restrictions and restrictive legends
with respect thereto are or may be removed upon the consummation of such sale.
Pursuant to the "piggyback" registration rights, JA must register the shares of
any stockholder who so requests in the event that JA undertakes a registration
of any of its securities (with the exception of registrations relating to
employee benefit plans and registrations relating solely to an SEC Rule 145
transaction).
All registration expenses incurred in connection with one demand
registration and any and all "piggyback" registrations are to be borne by JA.
Generally, all selling expenses relating to securities registered on behalf of
the stockholders and all other registration expenses are to be borne by the
stockholders of such securities pro rata on the basis of the number of shares so
registered.
18
<PAGE>
Other provisions regarding such registration rights are also
included in Section 6.8 of the Merger Agreement, including registration
procedures and indemnification.
Effective Time of the Merger.
The Merger will become effective (the "Effective Time") at the
time that a Certificate of Merger is filed in accordance with the North Carolina
Business Corporation Act. These filings will be made immediately after the
Merger Agreement is approved by the stockholders of JA, unless the parties agree
to a later date.
Accounting Treatment.
The Merger will be accounted for as a reverse acquisition
whereby, for accounting purposes, Kenmar will be the acquirer of JA and the
transaction will be accounted for as a recapitalization of Kenmar. It is
characterized as a reverse acquisition because even though JA will continue as
the surviving corporation, only Kenmar has significant assets or operations.
Also, Kenmar management will manage the combined entity and its stockholders
will initially control the election of the board and other matters.
The unaudited pro forma financial information contained in this
Proxy Statement has been prepared accounting for the Merger as a reverse
acquisition.
Federal Income Tax Consequences.
THE FOLLOWING IS A SUMMARY OF THE OPINION PROVIDED BY COUNSEL TO
THE COMPANY OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. THIS
SUMMARY IS A COMPLETE DESCRIPTION OF ALL THE CONSEQUENCES OF THE MERGER.
THIS SUMMARY IS BASED UPON RELEVANT PROVISIONS OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED, THE APPLICABLE TREASURY REGULATIONS
PROMULGATED THEREUNDER, JUDICIAL AUTHORITY AND CURRENT ADMINISTRATIVE RULINGS
AND PRACTICE, ALL OF WHICH ARE SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE
BASIS. THIS SUMMARY DOES NOT ADDRESS ALL ASPECTS OF FEDERAL
19
<PAGE>
INCOME TAXATION THAT MAY BE RELEVANT TO PARTICULAR STOCKHOLDERS IN LIGHT OF
THEIR PERSONAL CIRCUMSTANCES, OR TO STOCKHOLDERS SUBJECT TO SPECIAL TREATMENT
UNDER THE CODE (FOR EXAMPLE, S CORPORATIONS, CERTAIN ESTATES AND TRUSTS,
INSURANCE COMPANIES, FOREIGN PERSONS, TAX EXEMPT ORGANIZATIONS, TAXPAYERS
SUBJECT TO THE ALTERNATIVE MINIMUM TAX, FINANCIAL INSTITUTIONS, BROKERS, DEALERS
OR HOLDERS THAT OWN 10% OR MORE OF THE VOTING POWER OF KENMAR.) THE COMPANY HAS
NOT REQUESTED A RULING FROM THE INTERNAL REVENUE SERVICE WITH RESPECT TO THESE
MATTERS.
EACH STOCKHOLDER'S INDIVIDUAL CIRCUMSTANCES MAY AFFECT THE TAX
CONSEQUENCES OF THE MERGER TO SUCH STOCKHOLDER. IN ADDITION, NO INFORMATION IS
PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER UNDER
APPLICABLE FOREIGN, STATE OR LOCAL LAWS. CONSEQUENTLY, EACH KENMAR STOCKHOLDER
IS ADVISED TO CONSULT ITS OWN TAX ADVISOR AS TO THE SPECIFIC IMPACT ON SUCH
STOCKHOLDER OF FEDERAL, FOREIGN, STATE OR LOCAL LAWS.
Steven A. Sanders, P.C., Counsel to the Company has provided
its opinion that the Merger will be treated as a tax-free reorganization as
defined in Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended (the "Code"), and that, accordingly, (i) no gain or loss will be
recognized by the stockholders of Kenmar upon the exchange of their shares of
Kenmar Common Stock solely for shares of JA Common Stock pursuant to the
Merger; (ii) the basis of the JA Common Stock received by each stockholder of
Kenmar in exchange for shares of Kenmar Common Stock will be the same,
immediately after the exchange, as the basis of such stockholder's Kenmar
Common Stock exchanged therefor, and (iii) the holding period for any JA Common
Stock received in exchange for Kenmar Common Stock will include the period
during which the Kenmar Common Stock surrendered for exchange was held,
provided such stock was held as a capital asset on the date of the exchange.
A dissenting Kenmar stockholder who receives only cash for his
shares of Kenmar Common Stock will recognize gain or loss for federal income tax
purposes measured by the difference, if any, between such holder's basis in the
stock and the amount received by him for his stock. The gain or loss will be
characterized for federal income tax purposes as
20
<PAGE>
capital gain or loss or as ordinary income. The gain or loss will be
characterized as capital if (i) the holder's shares of Kenmar Common Stock are
held as capital asset, and (ii) the holder receives cash with respect to all
shares of Kenmar Common Stock which he owns, including shares owned by
application of the attribution rules of Section 318 of the Code.
Section 318 of the Code provides, in part, that a stockholder
will be considered to be the owner of shares which are owned by certain
corporations, partnerships, trusts and estates in which the stockholder has a
beneficial ownership interest, shares which such stockholder has an option to
acquire, and shares owned by certain members of his family (not including
brothers and sisters). Under certain circumstances, the attribution rules with
respect to shares attributed from a family member may be waived.
Rights of Dissenting Stockholders.
Pursuant to Section 262 of the General Corporation Law of the
State of Delaware, a copy of which is attached hereto as Exhibit A, any holder
of JA Common Stock who objects to the Merger will be entitled to dissent and
exercise appraisal rights. That Section enables an objecting stockholder to be
paid, in cash, the value of his JA Common Stock as determined by the Delaware
Court of Chancery, provided that the following conditions are satisfied:
(1) Such stockholder must file with the Company a written demand
for appraisal of his shares, separate and apart from any proxy or vote
against the Merger, before the taking of the vote on the Merger. If a
stockholder elects to exercise dissenters' rights, such right may only
be exercised as to all shares of JA capital stock held by the
dissenting stockholder.
(2) Such stockholder must not vote in favor of the Merger, nor
submit a proxy in which directions are not given.
(3) Within 120 days after the Effective Date of the Merger,
either the Company or any stockholder who has
21
<PAGE>
complied with Section 262 may, by petition filed in the Delaware Court
of Chancery, demand a determination by the Court of the value of the
shares of all objecting stockholders with whom agreements as to the
value of such shares have not been reached.
Within 10 days after the Effective Date of the Merger, the Company will notify
each stockholder who has complied with Section 262 and not voted for, or
consented to, the Merger of the date on which the Merger became effective.
If the Company and the dissenting stockholder cannot agree on
the value of the shares, the Court, based upon an appraisal prepared by an
independent appraiser, will make its own determination. Under Delaware law, the
dissenting shares would be valued on a going concern and not a liquidation
basis. An appraiser would be obligated to determine the intrinsic value of the
shares, without giving effect to the proposed Merger, considering all factors
and elements which reasonably may enter into such a determination, including
market value, asset value, earnings prospects and the nature of the enterprise.
The value determined by the court may be more than, less than or equal to the
Merger consideration (i.e., the value of the JA Common Stock after the Merger).
Notwithstanding the foregoing, at any time within 60 days after
the Effective Time of the Merger or thereafter, with the written approval of the
Company, any objecting stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered pursuant to the Merger, provided
that no appraisal proceeding in the Delaware Court of Chancery may be dismissed
without the approval of such Court. The costs of an appraisal proceeding may be
determined by such Court and taxed upon the parties as the Court deems equitable
under the circumstances.
FAILURE BY A STOCKHOLDER TO FOLLOW THE STEPS REQUIRED
BY DELAWARE LAW FOR PERFECTING HIS DISSENTER'S RIGHTS WILL
RESULT IN THE LOSS OF SUCH RIGHTS.
22
<PAGE>
Option Agreement
As provided in an option agreement constituting an exhibit to the
Merger Agreement, the Company granted Kenmar an option to acquire 750,000 shares
of its post-split Common Stock for a purchase price of $1.00. The option may be
exercised upon the occurrence any breach of any representation, warranty,
covenant or other obligation of the Company under the Merger Agreement. The
option agreement provides for arbitration to resolve any disputed assertion of a
breach of the Merger Agreement by the Company.
SELECTED FINANCIAL DATA
FOR THE COMPANY AND KENMAR
The following is a summary of selected financial data for the JA
and Kenmar. See the financial statements included herein for more complete
information.
J.A. INDUSTRIES
The following year end financial information has been derived
from JA's audited financial statements for each of the fiscal years set forth
below, which statements for the years ended December 31, 1991 and 1992; June 30,
1994 and 1995 are included herein (in December, 1993, the Company changed its
fiscal year to June). The financial information for the six month periods ended
June 30, 1993 and March 31, 1996 was derived from audited and unaudited
financial statements respectively. In the opinion of management, the unaudited
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary to present the financial data for such periods. The
following should be read in conjunction with the financial statements and notes
related thereto included elsewhere herein.
23
<PAGE>
FOR THE PERIOD ENDING
<TABLE>
<CAPTION>
DEC 31-91 DEC 31-92 JUNE 30-93 JUNE 30-94 JUNE 30-95 MAR 31-96
<S> <C> <C> <C> <C> <C> <C>
SALES $ - - $ - - $191,836 $4,042,940 $4,330,211 $
COST OF SALES - - - - 144,451 3,674,699 3,618,347
GROSS PROFIT - - - - 47,38 368,252 711,864
SELL AND MARKETING - - - - 8,232 134,163 1,593,838 --
EXP
G&A EXPENSES 121,140 47,933 175,566 1,256,765 1,593,838 (1,043,970)
LOSS FROM
OPERATIONS (121,140) (47,933) (136,413) (1,467,617) (1,384,114) (1,043,970)
OTHER INCOME
(EXPENSES) (500,000) - - ( 21,126) (85,656) ( 330,412) (74,591)
CONSOLIDATED
NET LOSS (621,140) (47,933) (157,539) (1,553,273) (1,714,526) (1,118,561)
LOSS PER
SHARE (3.03) (0.05) (0.04) (0.28) (0.25) ( 0.12)
WORKING CAPITAL
(DEFICIT) (178,572) (7,728) 24,238 (245,683) (751,726) (203,695)
TOTAL ASSETS 3 656,677 610 2,616,445 1,020,723 16,981
TOTAL
LIABILITIES 178,575 8,33 539,344 1,948,887 1,061 ,226 220,676
LONG TERM DEBT - - 143,247 249,927 18,046
STOCKHOLDER'S
EQUITY (178,572) (7,728) 117,333 667,558 (40,503) (203,695)
</TABLE>
24
<PAGE>
KENMAR BUSINESS GROUP, INC.
The following year end financial information has been derived from Kenmar's
audited financial statements for fiscal years 1995 and 1994 and unaudited
financial statements for six months ended 2/29/96 and fiscal years 1993, 1992
and 1991 set forth below, which statement are included herein. In the opinion
of management, the unaudited financial statements include all adjustments,
consisting of normal recurring adjustments, necessary to present the financial
data for such periods. The following should be read in conjunction with the
financial statements and notes related thereto included elsewhere herein.
(In thousands)
at August 31 and for the years then ended
<TABLE>
<CAPTION>
6 months
ended
1991 1992 1993 1994 1995 2/29/96
<S> <C> <C> <C> <C> <C> <C>
SALES $ 1,816 $ 10,015 $ 22,732 $ 22,928 $ 15,566 $1,357
NET INCOME
(LOSS) 39 51 129 (1,359) 181 (416)
WORKING CAPITAL
( deficit) 219 265 387 (1,123) (346) 963
TOTAL ASSETS 1,298 2,475 5,526 5,175 3,069 2,376
TOTAL LIABILITIES 1,080 2,024 4,694 5,619 3,326 1,355
LONG TERM DEBT 122 127 742 780 636 541
PREFERRED STOCK 136 351 529 626 730 730
STOCKHOLDERS
EQUITY (deficit) 82 99 303 (1,071) 1,021 1,021
</TABLE>
25
<PAGE>
PER SHARE DATA
J.A. INDUSTRIES, INC. SHARES OUTSTANDING
June 30, 1995 - 7,551,603
February 29, 1995 - 7,906,603
KENMAR BUSINESS GROUPS, INC. SHARES OUTSTANDING
August 31, 1995 - 64,714
February 29, 1996 - 65,714
<TABLE>
<CAPTION>
J.A. INDUSTRIES, INC. KENMAR BUSINESS GROUPS, INC.
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
YEAR END 6 MONTHS YEAR END 8 MONTHS YEAR END 6 MONTHS YEAR END 6 MONTHS
JUN-30-95 DEC-31-95 JUNE-30-95 FEB-29-96 AUG-31-95 FEB-29-96 AUG-31-95 FEB-29-96
--------- --------------------- --------- --------------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Book Value (deficit)
per Share $ (0.01) $ (0.03) $ 0.18 N/A $ (15.24) $ 4.05 $ 21.48 N/A
Cash Dividend Declared $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
per Share
Income (loss) per Share $ (0.25) $ (0.09) $ 0.09 $ 0.08 $ 2.13 $ 19.30 $ 11.07 $ 9.72
Income (loss) per common
share before extraordinary
item $ (0.25) $ (0.09) $ 0.09 $ 0.08 $ 2.13 $ (7.35) $ 11.07 $ 9.72
Extraordinary item per
common share $ -- $ -- $ -- $ -- $ -- $ 26.35 $ -- $ --
Net Income per common
share $ (0.25) $ (0.09) $ 0.09 $ 0.08 $ 2.13 $ 19.30 $ 11.07 $ 9.72
</TABLE>
26
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
J.A. Industries, Inc.
The following discussion of the results of operations and financial
condition should be read in conjunction with the audited financial statements
and related notes appearing subsequently under the caption "Financial
Statements".
Overview
In July of 1992, the existing management took over the direction of J
A. Industries, Inc. It was the intention of the management to enhance the value
of its shares on behalf of its shareholders by acquiring cash flow entities
which were, firstly, synergistic with existing subsidiaries and secondly were
companies with consistent growth potential.
The first acquisition was Torik, Inc. in September, 1992, which at that
time was just breaking even on its sales of $300,000 per month. Subsequent to
the Torik acquisition, the Company had entered into litigation and lost the case
to the former management of Torik returning all shares back to the Torik
management. The Company was booking that acquisition at the cost of $200 which
has been written off.
The second acquisition of the assets of Pacific Rim Polytech, took
place in February, 1993 by the Company's wholly owned subsidiary J.A.
Industries (Canada) Inc. ("J.A. Canada"). J.A. Canada immediately started the
manufacturing of underground junction boxes and cable tray. In June, 1995 the
Company sold J.A. Canada to a non-affiliate British Columbia Corporation.
The Company also entered into two licensing agreements and
manufacturing agreements for the manufacture and distribution of electronic
ballasts of which both licenses are inactive.
In September of 1993, the Company acquired Hutronix, Inc., of Tucson,
Az ("Hutronix"). Subsequent to the year ended, 1996, the Company returned the
shares of Hutronix to Baboquivari Cattle Company ("BCC") to settle outstanding
liabilities with BCC.
In December of 1993, the Company acquired the assets of Capital City
Plastic ("CCP"). CCP had been inactive since May of 1993. As CCP was unable to
deliver the equipment as detailed in the purchase agreement, the Company
cancelled the purchase agreement.
In May, 1994 the Company signed an option agreement to acquire 100% of
Link Technologies (Canada) Ltd. ("Link"). The Company was to pay $500,000 USD
plus issue
27
<PAGE>
500,000 shares of common stock to acquire 100% of Link. The Company was also to
provide $1,500,000 USD in working capital for Link. Subsequent to this agreement
the option has expired and no further agreement has been reached.
On March 30, 1994 Granite Marketing Corporation. ("Granite"), then a
wholly owned subsidiary of the Company, entered into an agreement with
Queensland Industries, Inc. ("Queensland") whereby Queensland purchased from
Granite an exclusive license to manufacture, promote, market, sell and
distribute the products of J.A. Canada relating to polyurethane underground
junction boxes. Queensland is a wholly owned subsidiary of Wincanton,
Corporation ("Wincanton"), a publicly traded Washington State Corporation.
Subsequent to this agreement, the Company rescinded the licensing agreement in
exchange for a $50,000 USD payment by Queensland Industries to Granite. Granite
is currently inactive. Subsequent to the year end, Granite was sold to an
unrelated third party in exchange for assumption of Granite's liabilities.
On June 28, 1995 the Company signed a letter of intent to merge with
privately held MiNT Corporation ("Mint") through a stock for stock exchange. The
share exchange would have resulted in a change of control of J.A. Industries to
the majority shareholders of Mint. Mint is in the business of providing high
quality contract manufacturing of electronic and electromechanical printed
circuit board assemblies. Subsequent to this letter of intent and subsequent to
the year ended June 30, 1995, the shareholders of Mint elected not to proceed
with the acquisition.
Subsequent to the year ended June 30, 1995, the Company entered into an
Agreement and Plan of Merger with Kenmar of Raleigh, NC. Kenmar founded in 1984,
is a provider of high quality electronic manufacturing services. It is located
in the Research Triangle area of North Carolina. Kenmar has a broad array of
technical capabilities to bring products to the market from concept to final
production. Kenmar's manufacturing team has experience in producing electronic
and electro-mechanical subassemblies and products for use in the
telecommunication, industrial control, computer, medical and instrumentation
industries. Kenmar has both Surface Mount Technology and Pin Thru-Hole
capabilities as well as cable, harnesses and interconnect assembly lines.
Pursuant to the terms of the agreement, current shareholders of Kenmar
will receive common stock of J.A. Industries such that Kenmar shareholders will
own approximately 50% of the outstanding shares of J.A. Industries, Inc. on
closing. Upon completion of the Merger, current management of Kenmar would
assume management of the Company. The merger is subject to shareholder's
approval of both companies. Another condition of the Merger is the settlement of
a dispute with a former stockholder, Karl Ronstadt and Hutronix, Inc. Subsequent
to the year ended June 30, 1995, the Company did resolve its outstanding dispute
with Baboquivari Cattle Company as described above (see "Hutronix").
28
<PAGE>
Prior to the Merger, the Company must reduce its liabilities and
contingent liabilities to zero and have working capital of a minimum of two
hundred thousand ($200,000) dollars. To this end, the Company has disposed of,
settled or is in the process of settling all outstanding liabilities. The
Company has reached agreements and has signed releases for potential contingent
liability claims arising or potentially arising from several of the Company's
former agreements.
The Company intends to fund its capital requirements through a private
placement to meet the terms of the agreement. To date the funds necessary to
complete the Merger are being held in escrow pending shareholder approval of the
merger and will be released to the Company upon such approval . If Shareholder's
approval is not obtained to complete the Merger, then the funds in escrow would
not be released to the Company.
Management believes that the trend towards outsourcing in the
electronic manufacturing industry is expanding. To this end, management still
believes that its strategy to acquire synergistic businesses in the contract
manufacturing industry is a sound plan. The planned Merger between the Company
and Kenmar is the first step in trying to re-establish that plan.
Seasonal factors do not influence the Company's sales.
Liquidity and Capital Resources
During fiscal 1994 the Company principally provided for its cash needs
through equity financing from a Regulation D Rule 504 offering. Most
acquisitions were completed with a combination of shares and cash. The
day-to-day operations were funded from cash flow provided by the operating
entities and an infusion of working capital from the parent Company. The
subsidiary J.A. Industries (Canada) Inc. lost money in 1995, and it was sold to
a non-affiliate in June, 1995. The agreement called for the buyer to assume all
of the liabilities of J.A. Canada. Hutronix, Inc. also lost money for the year
ending June 30, 1995. Subsequent to the year end, Hutronix was returned to
Baboquivari Cattle Company (former shareholder of Hutronix, "BCC") for release
of all liabilities owed by the Company to BCC and BCC's assumption of all
liabilities associated with Hutronix.
Subsequent to the year ended June 30, 1995, the Company had disposed of
all of its operating assets and there is currently not an adequacy of cash flow
from operations to cover capital resources and liquidity requirements. In the
year ending June 30, 1994 the Company had revenues of $4,042,940 to allow the
Company to manage its day to day operations. The Company's financial results
were prepared assuming it would continue as a going concern. However, the report
of its auditor raised substantial doubts about the Company's ability to continue
as a going concern. For the year ending June 30, 1995, the Company's audited
report reflected the subsequent disposition of all operations. Revenue of
$4,330,211 from operations for the period ended June 30, 1995, though, was used
to fund the day to day operations of the subsidiaries. Currently, the Company
has no cash
29
<PAGE>
flow and its ability to maintain operations is severely impaired. If the Company
cannot raise additional capital it is unlikely the Company would be able to
operate and it may be forced to seek protection under Chapter 11 of the
Bankruptcy Act.
During the period commencing September, 1992 and ending June 30, 1995,
the Company raised $1,185,000 through two Regulation D Rule 504 offerings and
$496,250 through private placements of the Company's common stock. It is the
Company's goal in the fiscal year ending June 30, 1996 to find a suitable
acquisition candidate. Management anticipates that the Company will do further
equity financing. Management believes that from these sources the Company will
adequately fund the operations of the Company and allow it to maintain its
aggressive acquisition strategy. To date, no commitments for such capital have
been received and the likelihood of such financing cannot be guaranteed.
To address the accountant's report of a "going concern" uncertainty, it
is anticipated that the Company will continue to look for new opportunities in
the contract manufacturing area. On March 1, 1996 the Company entered into an
agreement to merge with Kenmar to fulfill the Company's business strategy. As
part of the Merger, the Company must eliminate all outstanding liabilities and
have working capital of $200,000. At the date of this report, the Company has
approximately $133,000 in liabilities it must satisfy to complete the Merger. As
of May 15, 1996, the Company has raised the required funds to complete the
Merger through a private placement of its common stock. The funds are in escrow
with the Company's legal counsel and will be released to the Company upon it
shareholder's approval of the Merger. In the event the Company does not receive
shareholder approval, the funds would not be released from escrow and the
Company would not be able to meet its financial requirements pursuant to the
Merger Agreement.
In the event that the conditions of the Merger are satisfied and the
Merger is completed it is anticipated that cash flow from ongoing operations
will satisfy the day to day needs of the Company. Furthermore, as of February
29, 1996, Kenmar had approximately $744,500 in cash or cash equivalents
(unaudited). It is anticipated that the merged company will use these funds to
maintain and grow the existing business that it has. It is also the Company's
goal to try and arrange an equity financing in the amount of $3 million dollars
to expand its business. No commitment for such financing has been arranged and
the likelihood of its completion cannot be guaranteed. In the event the merged
company could not raise any additional capital, it is anticipated that current
rates of growth of the merged company would satisfy its working capital
requirements.
Future cash needs of the merged entity would include funds to implement
the Company's acquisition strategy and to sustain the Company through a period
of restructuring and growth.
30
<PAGE>
Notes Payable and Long term debt
Hutronix, Inc. a former subsidiary has a note payable to Bank One
executed through the Industrial Development Authority of the City of Douglas due
in quarterly instalments of $12,821, plus interest at 65% of prime (7.25% as of
June 30, 1994), due may 2005; secured by a deed of trust on the real estate held
for sale and an irrevocable letter of credit from a bank in the amount of the
outstanding note payable balance guaranteed by the Company. At June 30, 1995 the
amount outstanding was $546,125. The subsequent agreement between BCC and the
Company calls for BCC and Hutronix to indemnify the Company against any
liability under this bond. As the solvency of Hutronix, Inc. is uncertain, the
ability for Hutronix, Inc. to indemnify the Company is unlikely. Furthermore, on
November 21, 1995 an agreement was reached between Baboquivari Cattle Company,
Karl and Marilyn Ronstadt, Hutronix, Inc. and the Company whereby the parties
exchanged mutual releases relieving the Company of any liabilities that it had
or might have in the future with the parties. On March 4, 1996 the liability
under the guarantee to Bank One was satisfied.
On closing of the Merger between Kenmar and the Company, the Company is
obligated to pay a former minority shareholder of Hutronix, Inc. $10,000 and
issue 50,000 shares of restricted common stock in exchange for a release from
all future obligations the minority shareholder may be entitled to. Also, on
closing, the Company is obligated to pay the former landlord of Hutronix, Inc. a
fee for releasing the Company from a Corporate guarantee on the lease of the
building located at 1150 E. Palmdale, Tucson, AZ. The funds for these
transactions are part of the funding needed for the closing of the Merger
agreement. If the Merger is not completed, these liabilities would still be
outstanding.
On June 30, 1995 the Company sold its wholly owned subsidiary, J.A.
Industries (Canada) Inc. to an unrelated third party. The sale relieved the
Company of any long term debt associated with the subsidiary. Furthermore, the
Company obtained releases for all corporate guarantees that it had provided for
the subsidiary subject to certain cash payments as follows. The Company settled
with one creditor by issuing shares of restricted stock in the amount of 136,000
shares to satisfy approximately $34,000 USD of debt. On completion of the Merger
between Kenmar and the Company, the Company will incurred a cost of $5,000 USD
to settle with one creditor that comes from a corporate guarantee of the
Company. The funds for settling this amount will come from the funds necessary
to close the Merger transaction. If the Merger is not completed, then this
liability would still be outstanding with the creditor.
In March, 1996, the Company came to a final agreement with the former
owners of Capital City Plastics whereby Capital City Plastic and John Szaniszlo
will provide the Company with a release from all liabilities and deliver to the
Company 600,000 shares of common stock issued to Capital City Plastics in
exchange for the Company's release from liabilities, $10,000 and the issuance of
50,000 restricted common stock of the Company.
31
<PAGE>
The funds necessary to complete this transaction are part of the funding needs
of the Merger. If the necessary funds were not raised or the Merger was not
completed, the Company's position would be that there are no liabilities
outstanding with Capital City Plastic or John Szaniszlo as they had breached the
original agreement between the parties.
On completion of the Merger, for which there can be no guarantee, the
Company will be assuming the following liabilities based on the Kenmar audited
financial statements for the period ending August 31, 1995 and unaudited
financial statements for the six month period ending February 29, 1996:
Line of credit/loans $ 0
Current maturities of long term debt $ 4,317
Current obligations under capital lease $ 35,203
Accounts payable - trade $ 621,852
Income tax payable $ 0
Other accrued liabilities $ 94,833
===========
Total Current Liabilities $ 756,205
Long Term Debt, less current maturities $ 541,236
Long term obligations under capital lease $ 57,750
===========
Total Liabilities as of February 29, 1996 $ 1,021,386
(See also "Preferred Stock of Kenmar", Page 35)
Line of Credit: In March, 1994, Kenmar negotiated a $4 million revolving line of
credit with a commercial lender which allowed it to borrow up to 80% of eligible
receivables and was secured by a first lien on all the Company's receivables and
inventory. Borrowing under this line bears interest at prime plus 2.5% (minimum
7.5%) in addition to an annual facility fee and other costs. Kenmar paid off the
line of credit in the fourth quarter of its fiscal year ended August 31, 1995.
Kenmar has not requested a renewal of the line of credit.
Long-term Debt: Long term debt of Kenmar consists of the following:
1995 1994
-------- --------
Subordinated promissory notes payable monthly $524,855 $646,674
instalments of $9,009 including interest at 8%
through October 2002
Bank debt collateralized by a first lien on all the -- $217,932
Company's plant, equipment, furniture and
fixtures payable in monthly instalments of
$7,950, including interest at prime +1%. this
loan was paid off prior to august 31, 1995
32
<PAGE>
Uncollateralized note payable to stockholder $ 39,482 $ 43,468
repayable with interest at 8% in 59 monthly
installments of 4610 and a balloon payment
of $30,083 on October 15, 1997
Notes payable secured by equipment repayable $ 18,403 $ 42,202
in monthly installments of $2,435 including
interest at 16.85% through April 1996.
(Subsequently, this note was satisfied)
Note payable to stockholder in monthly -- --
installments of $2,535 including interest
at 8% through April, 1994, collateralized
by certain equipment.
$582,380 $950,276
Less current maturities $ 22,359 $293,242
-------- --------
$560,021 $657,034
======== ========
========
Principal maturities of debt Kenmar at August 31, 1995 are as follows:
Year ending August 31
1996 $ 22,359
1997 $ 73,269
1998 $104,776
1999 $ 80,451
2000 $ 87,130
Thereafter $214,395
--------
Total Long-term debt $582,380
=======
Obligations Under Capital Leases of Kenmar:
Kenmar leases equipment under capital leases which expire on various
dates through 1998.
1995 1994
---- ----
Machinery and equipment $200,066 $200,066
Vehicles - $ 27,871
-------- --------
Total $200,006 $227,937
The following is a schedule by years of future minimum lease payments
under capital leases as of august 31, 1995 for Kenmar
Year ending August 31
33
<PAGE>
1996 $ 48,272
1997 $ 49,701
1998 $ 29,431
--------
Total minimum lease payment $127,404
Further Kenmar Commitments:
Kenmar leases certain office and production space, machinery and
equipment under noncancellable operating leases expiring at various dates
through 1998. During the years ended August 31, 1995, 1994 and 1993, Kenmar
incurred rental expenses of $214,505, $271,488 and $230,175 respectively under
these leases. Future minimum lease payments under the terms of the above leases
are as follows:
1996 $38,422
1997 $ 2,952
1998 $ 2,460
Preferred Stock of Kenmar:
The aggregate number of authorized shares of preferred stock is
100,000. Of the 100,000 shares of preferred stock 30,000 shares have been
designated as Class A cumulative preferred stock. The designation of the
remaining 70,000 shares will be determined by the Board of Directors of Kenmar.
Kenmar issued 1,150 shares of $50 par value Class A cumulative
preferred stock ("Class A Preferred") in 1994. During 1993, the Company issued
716 shares of Class A Preferred including upon receipt of the issue price, 200
shares subscribed at August 31, 1992. Each share of Class A Preferred may be
called or put at any time after five years from the date of issuance at a rate
of one and one-half times the issue price. Redemption requirements of Class A
Preferred stock at August 31, 1995 were as follows:
1997 $150,000
1998 $447,000
1999 $ 68,700
2000 $ 86,250
--------
Total $751,950
========
The Class A Preferred is entitled to a 10% cumulative dividend payable
quarterly, subject to the provisions of North Carolina law. Cumulative unpaid
dividends are $73,008, $23,378, and $7,643 as of August 31, 1995, 1994, and 1993
respectively.
Upon liquidation, the Class A shares have preference over holders of
common stock in an amount equal to the issue price plus cumulative dividends in
arrears. Cash dividends of $0, $32,910 and $40,031 were paid in 1995, 1994, and
1993, respectively.
34
<PAGE>
Results of Operations
The following information is derived from the attached financial
statements and sets forth, for the periods indicated, the relative percentage
that certain income and expense items bear to net sales.
Fiscal Period Year Ended June 30, 1995 Compared to Fiscal Period Year
Ended June 30, 1994. The auditors report for the period ending June 30, 1995
states that as a result of the discontinuation of operations of the Company
there is substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
In June, 1995 the Company disposed of one of its wholly owned operating
subsidiaries J.A. Industries (Canada) Inc. Subsequent to the year end the
Company disposed of an inactive subsidiary, Granite Marketing Corporation. In
early March 1995, the Company entered into negotiations with Karl G. Ronstadt
and Baboquivari Cattle Company, former shareholders of Hutronix, Inc. to settle
outstanding issues and potential liabilities. The Company and the former
shareholders could not come to any resolution. On September 23, 1995, the former
shareholder of Hutronix, Inc. exercised his right under a put/call agreement
dated September 23, 1993 and attached to the original purchase agreement of
Hutronix, Inc. dated September 15, 1993. The put option allowed the former
shareholder to put 262,000 shares of the Company to the Company at a price of
$2.25 creating a liability of $589,500. The Company did not have the resources
to pay the liability. On November 21, 1995, subsequent to the year end, the
Company entered into an agreement to reverse the acquisition of Hutronix, Inc.
the only remaining operating subsidiary of the Company to satisfy all
outstanding liabilities between the former shareholder of Hutronix and the
Company. The condition that effected the decision to enter into the agreement to
reverse the Hutronix acquisition occurred prior to the Company's year end.
Although the assets and operations of Hutronix were included in the Company's
June 30, 1995 financial statement, they were subsequently disposed of and it was
so reported in the Company's December 31, 1995 financial statement.
As of June 30, 1995, the Company had revenue of $4,330,211 which was a
7.8% increase over the comparable period ended June 30, 1994. Cost of sales were
$3,618,347 for the period ended June 30, 1995 as compared cost of sales of
$3,674,688 for the corresponding period ending June 30, 1994. The maintaining of
cost of sales at the same level as 1994 but an increase in revenue by 7.8%
generated a gross margin of $711,864 or 16.9% of Sales for the period ended June
30, 1995 compared to gross margin of $368,252 or 9.1% for the period ended June
30, 1994. General and administrative expenses for June 30, 1995 were $1,623,487
which was a 22.8% increase compared to the corresponding period for June 30,
1994 of $1,256,765. The increase is partly reflected by the increase in
management expenses to increase the revenue for the period. Part of the General
and Administrative expenses for 1995 were paid of non-cash items whereby the
Company issued restricted common shares for services rendered or settlement of
debt in the amount of $51,982 compared to the issuance of no shares for the
corresponding
35
<PAGE>
period ending June 30, 1994 for similar reasons. The Company had a total loss
for the year of $1,714,526 or ($0.25)/shares as compared to a total loss of
$1,497,305 or ($0.28)/share for the period ending June 30, 1994.
Subsequent to the year ending June 30, 1995 the Company entered into a
Merger with Kenmar. A condition of the Merger is that the Company is to have no
liabilities and working capital of $200,000. To this end, though the Company has
an inactive status, there are substantial one time charges to eliminate all
liabilities and to settle contract obligations.
For the first quarter period ending September 30, 1995 the Company had
revenue of $532,310. compared to sales of $1,179,629 for the corresponding
period in 1994. The decrease in sales can be attributed to the disposition of
J.A. Industries (Canada) Inc. prior to year end June 30, 1995 as Hutronix, Inc.,
the only remaining operating subsidiary, had an increase in sales of 18% over
the corresponding period ended September 30, 1994. Cost of sales for the 3 month
period ended September 30, 1995 were $455,030 generating a gross profit margin
of $77,280 or 14.5% of sales compared to a cost of sales of $1,013,768
generating a gross profit of $165,861 or 14% of sales for the 3 month period
ended September 30, 1994. Again, the decrease in cost of sales can be attributed
to the disposition of J.A. Industries (Canada) Inc. prior to the year ended June
30, 1995. For the three month period ending September 30, 1995 G&A was $781,384
compared to $239,620 for the corresponding period in 1994. Increased legal and
accounting expenses accounted for approximately $75,000 of the expense. As well,
a large portion of the expense was a one time charge to pay outstanding
liabilities and the termination of outstanding contracts. The preceding items,
except for accounting fees, were mostly settled with the issuance of restricted
common stock of the Company. On September 23, 1995, Baboquivari Cattle Company
exercise its put option under a put/call agreement dated September 23, 1993. The
option obligated the Company to purchase 262,000 shares of the Company's stock
from Baboquivari at a price of $2.25 creating an unfunded liability of $589,500.
Subsequent to the first quarter ended September 30, 1995, the Company entered
into an agreement with Baboquivari Cattle Company to reverse its September 15,
1993 acquisition agreement of Hutronix, Inc. in exchange for the release of all
liabilities from Hutronix, Inc and Baboquivari Cattle Company.
On November 21, 1995 the Company entered into an agreement with
Baboquivari Cattle Company to transfer all title of Hutronix, Inc. to
Baboquivari Cattle Company in exchange for a release of all liabilities. Due to
this disposition of the last operating subsidiary of the Company, the Company
had no revenue for the three month period ending December 31, 1995 compared to
of $1,237,956 for the three month period and $2,417,585 for the six month period
ending December 31, 1994. General and administrative expenses for the period
three month period ended December 31, 1995 were $81,921 compared to the
corresponding three month period in 1994 of $239,877. The Company experienced a
net loss of $83,316 for the three month period ending December 31, 1995 compared
to a loss of $86,107 for the corresponding period in 1994. The net loss from
operations for the six month period ending December 31, 1995 was $746,960
compared to $190,989 for the corresponding period in 1994. The loss in 1995 is
36
<PAGE>
attributed to the reorganization and elimination of ongoing contracts and
liabilities the Company needed to satisfy to proceed with its Merger with
Kenmar. The Company had a shareholder's deficit of $282,683 for the period ended
December 31, 1995 compared to net equity of $595,265 for the corresponding
period in 1994. Accounts payable at December 31, 1995 were $138,167 compared to
$928,358 for the corresponding period 1994. Due to the discontinuation of
operations, the Company's payables were reduced dramatically. Most of the
expense is attributed to legal and accounting costs due to the restructuring of
the Company. Subsequent to the disposition of Hutronix, the Company was relieved
of its obligation to guarantee the mortgage on the facilities occupied by
Hutronix in Douglas, Arizona. Therefore, long term debt was reduced to zero from
$561,842 in the corresponding prior year period.
For the three month period ending March 31, 1996 the Company had no
operations and therefore no revenue compared to sales of $1,035,397 for the
three month period ended March 31, 1995 and sales of $3,452,982 for the nine
month period ended March 31, 1995. General and Administrative expenses for the
three month period ended March 31, 1996 were $298,405 compared to $262,027 for
the corresponding period in 1995. G&A for the nine month period ended March 31,
1996 was $1,043,970 compared to $741,524 for the corresponding period in 1995.
The G&A costs can be attributed to the restructuring and reorganization the
Company experienced from the disposition and discontinuation of operations and
the Merger agreement the Company entered into with Kenmar Business Groups, Inc.
The Company had a net loss from operations of $1,118,561 for nine month period
ended March 31, 1996 compared to $300,884 for the corresponding nine month
period in 1995. The Company had a Shareholder's deficit of $203,695 at March 31,
1996 compared to Net Equity of $670,141 for the same period 1995. Current
liabilities were significantly reduce due to cessation of operations to 220,276e
for the period ended March 31, 1996 compared to Current Liabilities of $964,465
for the corresponding period ended March 31, 1995.
37
<PAGE>
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38
<PAGE>
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39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
Kenmar provides manufacturing services to original equipment manufacturers
('OEM's') in the electronics industry, including producers of industrial
controls, computers & peripherals and instrumentation. Primary services include
materials procurement, printed circuit card and chassis assembly, and testing.
Kenmar has approximately 20 customers, 6 of which accounted for 79% of its sales
for the six months ending February 29, 1996. Following to the loss of its
largest customer in 1995, Kenmar conducted its operations in 42,000 square feet
of flex space with 85 employees. Since such loss, steps have been taken to size
the operations to more closely match the revenue without losing the key
employees and skills required to regrow the business. To date, this has caused
Kenmar to incur losses from operations for fiscal 1996. Kenmar currently
operates one facility in Raleigh, North Carolina with approximately 25 employees
in 21,000 square feet of flex space.
Operations are near 40% capacity with one shift active.
Operating results are generally affected by a number of factors, including the
relative mix of higher volume/lower margin business and lower volume/higher
margin business, price competition, raw material costs, labor efficiencies, the
degree of automation that can be used in the assembly process and the
efficiencies achieved by Kenmar in managing inventories and fixed assets. The
amount of sales Kenmar has derives from turnkey manufacturing in which it
procures some or all of the components necessary for production vs the amount of
sales derived from labor sales directly effects the overall gross margin of the
business. Inflation has not been a significant factor in the results of Kenmar's
operations because Kenmar's price quotations for turnkey jobs are generally
valid for thirty days and Kenmar typically reserves the right to pass on certain
cost increases under some of its turnkey orders or contracts.
The financial information and discussion below should be read in conjunction
with the unaudited financial statements dated February 29, 1996 and February 28,
1995 and the audited financial statements, and the notes attached thereto, dated
August 31, 1995.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 1995 AND FEBRUARY 29,
1996 BASED ON THE UNAUDITED FINANCIAL STATEMENTS REFERENCED HEREIN
The following table sets forth certain operating data as a percentage of net
sales:
<TABLE>
<CAPTION>
Six Months Ending February 29, 1996
& February 28, 1995
1996 1995
<S> <C> <C>
Net sales 100% 100%
Cost of goods sold 101.4 90.1
------ ------
Gross profit (1.4) 9.9
Selling, general, and administrative 29.3 5.4
Operating income (30.7) 4.5
Interest & other expenses (net) 126.1 (1.7)
------ ------
Income before income taxes 95.4 2.8
Income taxes -- --
Net income 95.4 2.8
====== ======
</TABLE>
The factors affecting changes in the percentages shown in the foregoing table
are discussed below. SETTLEMENTS: During the first quarter of fiscal 1996,
Kenmar reached various Settlements with its largest customer, which represented
80% of Kenmar's ongoing order input at such time, and its suppliers for the
40
<PAGE>
cancellation and discontinuation of production of nearly fifty products and
assemblies. As a part of the settlement, Kenmar signed an agreement with its
then largest customer that relieved Kenmar of trade accounts payable to the
customer and other suppliers of $1,121,151. The agreement provided the customer
relief of trade payables to Kenmar of $52,957. Further, suppliers to Kenmar for
materials and services used on behalf of its largest customer and related
product lines relieved Kenmar of approximately $500,000 of accounts payable.
Supplier Settlements were essentially 50% of the amount owed with half of the
50% being paid in quarterly installments beginning January 1, 1996. Though a
significant number of suppliers were involved above, Kenmar has been able to
continue to purchase materials through ordinary sources, including some of the
suppliers mention above.
With eighty percent less order input than that of the prior period and a reduced
infrastructure, Kenmar continued operations with a core group of employees and
an average base revenue of approximately $225,000 per month. Kenmar's financial
performance more closely mirrors that of a company emerging from a new company
with fixed overheads established to support higher levels of revenue than are
currently attainable; however, without such overhead and infrastructure, Kenmar
will not be able to attract its targeted business.
NET SALES. Net sales for 1996 were $1,354,383, $6,911,885 less than that of the
same period in 1995 primarily due to a $7,434,602 decrease in shipments to
Kenmar's largest customer, offset by increases to other customers. Three new
customers with approximately $250,000 of new orders were added in 1996.
GROSS PROFIT. Gross profit was reduced $835,702 from 1995 to 1996 resulting
primarily from the substantial drop in net sales. Material cost of sales were
18% lower, offsetting the effect of volume reduction. There were also offsetting
cost reductions in direct labor of $366,554 and manufacturing overhead of
$280,155. Operations were run at a loss, as planned, due to the fixed overhead
expenses kept in place to regrow the business during 1996. Such overhead could
not be fully absorbed by the level of sales during the six month period
discussed.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A expense for 1996 was
$49,175 less than that of 1995, resulting from $86,050 reduction in sales
commissions, partially offset by compensation to a new sales employee. Kenmar
evaluates, when circumstances warrant, the recoverability of the cost in excess
of net assets of acquired businesses by comparing the sum of the undiscounted
projected future cash flows attributable to each customer to the carrying value
of the related asset. Projected cash flows are estimated for a period
approximating the remaining lives of Kenmar's long-lived assets. As a result of
such evaluation Kenmar took a writedown of $160,000 during the year ended August
31, 1995.
OPERATING INCOME. Profit from operations for 1996 prior to the addition of
misc. income was ($416,760) or $664,240 less than that of 1995. This is the
result of substantial lower volume offset by margin mix and cost reductions
as explained above. The misc. income of $1,724,781 reflects the income
generated from the Settlements described above.
INTEREST EXPENSE. Interest for 1996 of $29,214 was substantially reduced from
$141,968 in 1995 as a result of Kenmar's cash and cash equivalents position
which has permitted operations without outside banking or any other lending
sources.
INCOME TAX EXPENSE. Kenmar has not recorded an income tax provision at this time
due to the tax loss carry forward from fiscal 1994. In addition, Kenmar believes
that it met the insolvency tests per section 108 of the Internal Revenue Code
prior to the Settlements causing the income at that time to be exempt from
taxation. If Kenmar fails to pass the aforementioned insolvency test, the
booking of a tax provision could adversely effect its net income and earnings
per share for the period ending February 29, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Kenmar's cash and cash equivalents increased by $699,187 from 2/28/95 through
2/29/96. The majority of the cash flow generated during 1996 came from the
Settlements as described above.
41
<PAGE>
Kenmar used approximately $50,000 in cash in investing activities primarily for
capital expenditures in new test equipment to support new customer programs.
Payments were made to reduce long-term debt during 1996 as well as the first
quarterly installment due per the Settlements, as described above, in an
approximate amount of $46,500 on January 1, 1996. Dividends for the Class A
Cumulative Preferred stock were paid during 1996 for the first quarter ending
11/30/95 in the amount of $12,408.
As of February 29, 1996, Kenmar has not required financing from outside banking
or any lending sources.
COMPARISON OF YEARS ENDED AUGUST 31, 1994 AND AUGUST 31, 1995 BASED ON
THE AUDITED FINANCIAL STATEMENTS REFERENCED HEREIN
The follow table sets forth certain operating data as a percentage of net sales:
Year Ending August 31st
1995 1994
Net sales 100% 100%
Cost of goods sold 89.2 98.9
------ ------
Gross profit 10.8 1.1
Selling, general, and administrative 7.9 6.4
Operating income 2.9 (5.3)
Interest & other expenses (net) (1.7) (1.0)
------ ------
Income before income taxes 1.2 (6.4)
Income taxes -- (0.4)
Net income 1.2 (6.0)
====== ======
The factors affecting changes in the percentages shown in the foregoing table
are discussed below.
NET SALES. Net sales are net of discounts and customer returns and are
recognized upon shipment of an order to a customer. Net sales decreased
$7,361,935 or 32% from $22,927,597 in 1994 to $15,565,662 in 1995 due to a
decrease of $8,070,393 of our highest volume product line at that time, offset
by other increases. Shipments to Kenmar's largest customer accounted for
approximately 81% of sales in 1995 and approximately 65% of sales during 1994.
GROSS PROFIT. Gross Profit equals net sales less cost of goods sold, which
consist of labor and material, manufacturing costs (primarily lease payments
for, and depreciation of, manufacturing equipment and facilities) and other
manufacturing costs. Gross profit increased in 1995 to $1,682,572 from $242,429
in 1994 as Kenmar consolidated its operations from two facilities into one and
focused on its strategic customers and their key products. The negative effect
of the $7,361,935 volume drop was offset by a better product mix and by
reductions in direct labor of $193,393 and manufacturing expenses of $506,902.
There were also non-recurring expenses related to downsizing. During 1995,
Kenmar reviewed its leasehold improvements, machinery, equipment and computer
hardware and software for impairment as a result of it ceasing to do business
with its major customer. Kenmar estimated future cash flows and compared it with
the net asset value of the related assets. This analysis resulted in a write
down of approximately $180,000 which is included as part of cost of goods sold
in the income statement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ('SG&A') consist primarily of non-manufacturing
salaries, sales commissions, and other general expenses. SG&A expense were
reduced from $1,466,289 in 1994 to $1,223,587 in 1995 as the above mentioned
consolidation was effected. Changes made included a reduction of sales and
marketing expenses of $148,000, mostly sales
42
<PAGE>
commissions of $136,000, and other reductions of administrative expenses of
$35,000. There were also non-recurring expenses in 1994 of approximately
$60,000.
OPERATING INCOME. Operating income is gross profit less SG&A. Operating income
increased from a loss of $1,223,860 in 1994 to $448,985 in 1995 as Kenmar
eliminated the above mentioned product lines and consolidated its operations.
INTEREST & OTHER INCOME. The interest & other income for 1995 increased slightly
from $233,795 in 1994 to $267,487 due mainly to the increased cost of capital
from its lenders.
INCOME TAX EXPENSE. Kenmar did not book an income tax provision due to the
tax loss carry forward from fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
In past years Kenmar has financed its operations primarily with borrowing from
banks, lending institutions, private lenders and cash flow from operating
activities. Cash flow provided by operating activities was $3,392,419 and used
by operating activities was $184,162 in 1995 and 1994 respectively. Of the cash
provided/(used) in 1995, the major items were a 55% reduction of inventory, 30%
reduction of accounts receivable, and a (22%) reduction of accounts payable. The
majority of the cash flow from operating activities in 1995 was the result of
the phase-out of the manufacturing activities that resulted in the Settlements
described above in 'Results of Operations'.
Kenmar used cash in investing activities primarily for capital expenditures in
1994 and 1995. These outlays consisted primarily of manufacturing equipment and
leasehold improvements.
Kenmar generated cash from financing activities in 1994 from the issuance of
short & long-term debt and Class A Cumulative Preferred and Common stock
totaling $443,982. In 1995 Kenmar repaid $1,810,054 in debt obligations.
43
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Statements of Income
Six-month periods ended February 29, 1996 and February 28, 1995
UNAUDITED
<TABLE>
<CAPTION>
Six Months Ending
February 29, February 28,
1996 1995
<S> <C> <C>
Sales $ 1,354,383 $ 8,266,268
Cost of Goods Sold 1,373,793 7,449,976
----------- -----------
Gross profit (19,410) 816,292
General, selling and administrative expenses 397,350 446,525
----------- -----------
Operating income (loss) (416,760) 369,767
Other income (expense)
Interest income 30,443 2,610
Interest expense (29,214) (141,968)
Miscellaneous expense (18,300) --
----------- -----------
Other income (expense) (17,071) (139,358)
----------- -----------
Income (loss) before income taxes and
extraordinary items (433,831) 230,409
Income tax benefit (expense) -- --
----------- -----------
Income (loss) before extraordinary item (433,831) 230,409
Extraordinary Item 1,724,781 --
Net Income 1,290,950 230,409
Accretion of preferred stocks (29,285) (27,003)
Undeclared dividend on preferred stock (12,408) (24,323)
----------- -----------
Net income applicable to common stockholders $ 1,249,257 $ 179,084
----------- -----------
Weighted average number of shares 64,714 60,369
----------- -----------
Income (loss) per common share
before extraordinary item (7.35) 2.97
Extraordinary item per
common share 26.65 --
Net income per common share 19.30 2.97
</TABLE>
44
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Balance Sheets
February 29, 1996 and February 28, 1995
UNAUDITED
<TABLE>
<CAPTION>
February 29, February 28,
1996 1995
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 744,533 $ 45,346
Accounts receivable - trade, net of allowance for
doubtful accounts of $5,500 in 1996 and $65,807
in 1995. Also net of allowance for returns of
$22,410 in 1995 531,478 2,165,026
Accounts receivable - other 15,865 3,609
Inventories 317,531 1,256,409
Prepaid expenses and other current assets 110,085 51,296
---------- ----------
Total current assets 1,719,492 3,521,686
---------- ----------
Property and equipment - net 496,337 908,665
---------- ----------
Other assets:
Deposits and other assets 72,998 352,382
Cost in excess of net assets of acquired business
net of accumulated amortization of $ 212,250
In 1996 and $ 35,000 in 1995 87,750 265,000
---------- ----------
Total other assets 160,748 617,382
---------- ----------
Total assets 2,376,577 5,047,733
---------- ----------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Line of credit -- 1,911,547
Current maturities of long-term debt 4,317 132,003
Current obligations under capital leases 35,203 35,203
Accounts payable, trade 621,852 2,397,521
Ohter accrued liabilities 94,833 57,182
---------- ----------
Total current liabilities 756,205 4,533,456
---------- ----------
Long-term debt, less current maturities 541,236 627,614
---------- ----------
Long-term obligations under capital leases 57,750 94,283
---------- ----------
Class A preferred stock, including accretion and
accrued dividends 759,129 626,206
---------- ----------
</TABLE>
45
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Balance Sheets
February 29, 1996 and February 28, 1995
UNAUDITED
<TABLE>
<CAPTION>
February 29, February 28,
1996 1995
<S> <C> <C>
Stockholders' equity (deficit)
Common stock, $1 par value; authorized 100,000
shares in 1996 and 1995 issued and outstanding 64,714 64,714
Additional paid-in capital 213,941 243,226
Retained earnings (deficit) (16,398) (1,141,766)
---------------- ---------------
Total stockholders' equity (deficit) 262,257 (833,826)
---------------- ---------------
Total liabilities and stockholders' equity (deficit) 2,376,577 5,047,733
---------------- ---------------
</TABLE>
46
<PAGE>
Proposal 2
ELECTION OF DIRECTORS
Five (5) directors are to be elected at the Special Meeting,
each to hold office until the next Annual Meeting of Stockholders and until a
successor is elected. It is the intention of the persons named in the enclosed
proxy form to vote, if authorized, the proxies for the election as directors of
the five (5) persons named below as nominees. If any nominee declines or is
unable to service as a director (which is not anticipated), the persons named as
proxies reserve full discretion to vote for any other persons who may be
nominated.
None of the nominees have previously held positions with the
Corporation. Election of the nominees is a condition precedent for the
effectiveness of the Merger Agreement. The following table sets forth for each
nominee for election as a director his or her name and his or her principal
occupation:
<TABLE>
<CAPTION>
PERSONAL INFORMATION DIRECTOR
NAME AGE AND OCCUPATION SINCE
<S> <C> <C> <C>
Kenneth H. Marks 32 Has been Chief Executive, --
President, and a director
of Kenmar since 1984. Kenneth
H. Marks is the son of Kenneth
L. Marks listed below
Craig Macnab 39 Has been a director of Kenmar --
Since 1993. He has been a
managing partner with McNeil
Advisors since 1992. Prior
to joining McNeil Advisors, Mr.
Macnab was the Managing Partner
Of Bradford & Co. He is a
director of J.D.N. Realty.
47
<PAGE>
Alan G. Finkel 62 Has been a director of Kenmar --
since 1992. Has been a Manage-
ment consultant since 1989
Prior to 1989 he held numerous
Positions with ITT, including
President & General Manager of
MacKay Communications, a division
of ITT
Kenneth L. Marks(1) 61 Has been a director of Kenmar --
since 1984. Management Consultant
Since October 1995. Director of
Labor Relations and personnel
positions from 1974 thru 1995
with Carolina Freight Carriers
Corporation. Is the father of
Kenneth H. Marks, listed above
Ray Steckenrider 71 has been a director of Kenmar --
since 1995. Has been President
of Autotron Corporation since
1986
</TABLE>
(1) Kenneth L. Marks is the father of Kenneth H. Marks
Executive Compensation
The following table shows all the cash compensation paid or to be paid
by the Company or any of its subsidiaries, as well as certain other compensation
paid or accrued, during the fiscal years indicated, to the Chief Executive
Officer for such period in all capacities in which he served. No other Executive
received total annual salary and bonus in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ----------------- ------ ------ ------ ------ ------- ------ ------- -----
Other Restrict All other
Annual ed stock LTIP Compensa-
Name and Principal Bonus/ Compen- Award Options Payouts tion
Position Year Salary ($) sation($) ($) SARs ($) (i)
- ------------------ ---- ------ ------ --------- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Knight 1995 $36,000 0 0 0 0
President 1994 $36,000 0 10,000
1993 $36,000
Alexander Michie 1995 $10,000 0 0 0
former director 1994 $36,000 0 10,000
1993 $36,000
Karl Ronstadt 1995 $62,000 0 0 0
former director 1994 $72,000 0 10,000
1993 $54,000
48
<PAGE>
James Burns 1995 $55,000 0 0 0 0
Chairman of the 1994 0
Board 1993 0
</TABLE>
The following table sets forth information with respect to the Chief
Executive Officer concerning exercise of options during the last fiscal year and
unexercised options and SARs held as of the end of the fiscal year:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Percent of total
Options/SARs
Options/ Granted to
SARs Employee Exercise or base Expiration
Name Granted Fiscal Year Price ($/SH) Date
<S> <C> <C>
Robert W. Knight 0 0 N/A N/A
</TABLE>
The following table sets forth information with respect to the Chief
Executive Officer concerning exercise of options during the last fiscal year and
unexercised options and SARs held as of the end of the fiscal year:
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-money
Options/SAR Options/SAR
Shares at FY-end (#) at FY-end (#)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Robert W. Knight 0 N/A 10,000 0
</TABLE>
The following table sets forth information with respect to the Chief
Executive officer concerning the grants of options and Stock Appreciation Rights
("SAR") during the past fiscal year:
Estimated Future Payout under Non-Stock
Price Based Plans
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
Performance
Number of or Other
Shares, Units Period Until
or Other maturation or Threshold Target Maximum
Name Rights (#) Payout ($ or#) $ or #) ($ or #)
- ------------------ ------------- ------------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Robert W. Knight 0 0 N/A N/A N/A
</TABLE>
49
<PAGE>
Under the terms of the Merger Agreement, the following persons
have been designated to serve as executive officers of the Company following the
consummation of the Merger:
Present
Name Age Title Position at Kenmar
Kenneth H. Marks 32 President President
Chief Executive Chief Executive
Officer Officer
Kenneth L. Marks 61 Secretary Secretary
As a condition precedent of the Merger, JA shall enter into a
management consulting agreement with G.M. Capital Partners Ltd. ("GMCP") a,
corporation unaffiliated with any parties to the Merger Agreement. The agreement
provides for a term of 12 months with monthly payments to GMCP of $5,000. In
addition, certain additional fees shall be paid to GMCP in the event it arranges
any financing for the benefit of the Company.
These additional fees include a cash payment equal to 10% of the
gross proceeds of any private financing it arranges for the Company. In the
event GMCP arranges a public offering or sells more than 5% of the Company, its
fees shall be a cash payment of 3% of the gross proceeds of the offering. GMCP
had no role in connection with the proposed merger between the Company and
Kenmar.
The Company has sole discretion in accepting financing arranged
by GMCP and all additional fees earned by GMCP shall be paid on the closing of
the transaction.
50
<PAGE>
Commencing at the Effective Time of the Merger, the Company
shall enter into an employment agreement with Kenneth H. Marks providing for Mr.
Marks to become its Chief Executive Officer for a period of 5 years at a salary
of $125,000 per year. Among additional terms, the agreement also provides for a
yearly bonus equal to 8% of the net after tax profit of the Company; a 5% annual
salary increase; a grant of 350,000 options pursuant to a Qualified Stock Option
Plan and either a $100,000 (1) loan or (2) payment upon the signing of an
employment agreement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT
The following table sets forth, as of March 15, 1996 information
with respect to (1) any person known by the Company to own beneficially more
than five percent (5%) of the Company's Common Stock, (2) the shares of Common
Stock beneficially owned by each officer and director of the Company, and (3)
the total of the Company's Common Stock beneficially owned by the Company's
officers and directors as a group.
Stockholder Beneficially owned Class
Karl Gelbard 10,000 0.1%
4001 South Ocean Drive
Hollywood, FL 33019
Robert W. Knight 297,259 3.2%
4025 Sunset Boulevard
North Vancouver, B.C
Canada
All directors and 307,259 3.2%
offices as a group
(2 persons)
51
<PAGE>
PRINCIPAL STOCKHOLDERS OF J.A. INDUSTRIES, INC.
(AFTER MERGER WITH KENMAR)
The following table sets forth as of the effective date of the merger
and after the 1 for 4 reverse split, certain information with respect to the
shares of the Company's Common Stock to be beneficially owned by (i)
stockholders owning more than 5% of the Company's Common Stock, (ii) the
Company's directors and officers, and (iii) all of the Company's directors and
officers as a group.
Stockholder Beneficially owned Class
Kenneth H. Marks 1,668,352 30.4%
Craig Macnab 266,136 4.8%
Royal Bank of Scotland 375,000 6.9%
Kenneth L. Marks 72,816 1.2%
Ray Steckenrider 4,616 nil
All directors and
officers as a group
(4 persons) 2,011,920 36.7%
52
<PAGE>
COMMON STOCK OF THE COMPANY
Market Price Information
The Company's Common Stock is traded over-the-counter and its
quotations are carried in the National Quotation Bureau's daily "Pink Sheets."
The following table shows the range of high and low bid or last
trade quotations for the Company's Common Stock in the over-the-counter market
as reported to the Company by the National Quotation Bureau Incorporated. The
quotations reflect prices between dealers, without retail mark-ups, mark-downs
or commissions and may not necessarily represent actual transactions or be
indicative of prices at which the Company's stock was traded. In November of
1992, the Company effected a reverse stock split on a one for five basis. All
bids reflected below have been adjusted to give effect to the reverse split.
COMMON STOCK
Period Bid Price
High Low
through April 30, 1996 3/4 13/32
Quarter ended March 31, 1996 21/32 13/32
Quarter ended December 31, 1995 11/16 .19
Quarter ended September 30, 1995 1 3/8 27/32
Quarter ended June 30, 1995 1 3/8 1
Quarter ended March 31, 1995 2 1
Quarter ended December 31, 1994 2 1/8 1 9/16
Quarter ended September 30, 1994 2 1 1/2
Quarter ended June 30, 1994 2 1 3/4
Quarter ended March 31, 1994 2 1/4 1 5/8
Quarter ended December 31, 1993 2 3/8 1 3/8
Quarter ended September 30, 1993 21/2 1 1/2
The number of record holders of the Company's Common Stock, as
of June 3, 1996, was approximately 301. However, the Company believes that
there may be substantially more beneficial holders.
53
<PAGE>
Dividend Policy.
The Company has not paid any dividends on its Common Stock since
its inception. The Company anticipates that for the foreseeable future,
earnings, if any, will be retained for use in the business or for other
corporate purposes, and it is not anticipated that cash dividends will be paid
on its Common Stock.
POST MEETING FINANCING
In a private transaction, subject to stockholder approval of the Merger
Agreement, the Company has raised $510,000 through the sale of 1,500,000 shares
(pre-split) of its Common Stock. The monies are being held in escrow, to be
released to the Company upon the approval by stockholders of the terms of the
Merger Agreement. As of May 31, 1996 there were approximately 9,437,304 shares
of the Company's Common Stock outstanding. In the event the Merger Agreement is
approved by the stockholders an additional 1, 500,000 shares would be issued and
accordingly , approximately 10, 937,304 shares will then be outstanding. As a
result of the issuance of these additional 1,500,000 shares, the existing
shareholders of the Company will receive a 43 % interest in the merged entity
and the holder of the 1,500,000 shares 7% interest. The interest of the former
Kenmar shareholders in the merged entity remains at 50%.
Proceeds of the post meeting financing shall be used as follows:
Commissions $ 51,000
Professional Fees 70,000
Accounts Payable 168,000
Working Capital 221,000
--------
$ 510,000
54
<PAGE>
PROPOSAL 3
APPROVAL OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION TO
PROVIDE FOR A CHANGE OF NAME
On January 22, 1996, the Company's Board of Directors approved
subject to stockholder approval, an amendment to the Company's Certificate of
Incorporation to provide for a change in name of the Corporation to Electronic
Manufacturing Services Group, Inc. The purpose of the change in name is to more
adequately describe the future operations of the Company.
The affirmative vote of a majority of the votes present or
represented by proxy and entitled to vote at the Special Meeting of
Stockholders, at which a quorum representing a majority of all outstanding
shares of Common Stock of the Company is present and voting, either in person or
by proxy, is required for approval of this proposal. Abstentions and broker non-
votes will each be counted as present for purposes of determining the presence
of a quorum. Abstentions will have the same effect as a negative vote. Broker
non-votes, on the other hand, will have no effect on the outcome of the vote.
The Board of Directors unanimously recommends a vote "FOR"
approval of the proposed amendment to the Certificate of Incorporation to
provide for a change of name.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The Company is authorized to issue twenty million (20,000,000)
shares of Common Stock, $.0025 par value per Share and 2,000,000 shares of
Preferred Stock, $.01 par value per share. Each outstanding Share of Common
Stock is entitled to one vote, either in person or by proxy, on all matters that
may be voted upon by the owners thereof at meetings of the stockholders.
The holders of Common Stock (i) have equal ratable rights to
dividends from funds legally available therefor, when, and if declared by the
Board of Directors of the Company; (ii) are entitled to share ratably in all of
the assets of the Company available for distribution to holders of Common Stock
upon liquidation, dissolution or winding up of the affairs of the Company; (iii)
do not have preemptive, subscription or conversion rights, or redemption or
sinking fund provisions applicable thereto; and (iv) are entitled to one
non-cumulative vote per Share on all matters on which stockholders may vote at
all meeting of stockholders.
There are no preferred shares currently designated, issued or
outstanding. The Board of Directors is empowered to designate classes of the
Company's Common and Preferred Stock and to establish relative rights,
preferences, qualifications and restrictions with regard to any designated
classes.
55
<PAGE>
Proposal 4
Approval for a 1 for 4 Reverse Stock Split
On January 22, 1996 the Company's Board of Directors approved,
subject to stockholder approval, a 1 for 4 reverse stock split in which one (1)
share of Common Stock will be outstanding for each four (4) shares of Common
Stock previously outstanding. The primary reason for the proposed reverse stock
split is to reduce the number of outstanding shares as well as comply with the
provisions of the Merger Agreement.
Currently, the Company is authorized pursuant to its Certificate
of Incorporation to issue 20,000,000 shares of Common Stock and 2,000,000 shares
of Preferred Stock. As of May 31, 1996, there were 9,437,304 shares of Common
Stock outstanding and no shares of Preferred Stock outstanding. Presuming the
issuance 1,500,000 pre split shares of Common Stock in the private transaction,
the reverse split will result in a reduction in the number of shares of Common
Stock outstanding to approximately 2,734,326 shares. The reverse split will not
alter the number of authorized shares of stock or any other provision of the
Company's Certificate of Incorporation.
Presently, the Company has 9,437,304 shares of Common Stock
outstanding and 10,562,696 unissued shares. If the reverse split and merger are
approved by the stockholders (and 1,500,000 shares are issued pursuant to the
private placement), outstanding shares will be reduced to 2,734,326 and unissued
shares increased to 17,265,674. Potential uses for such authorized unissued
shares include acquisitions, additional stock option plans and stock dividends.
At the present time, the Company has no plans to issue additional authorized
shares.
The Board of Directors unanimously recommends a vote "For"
approval of a proposed amendment to the Certificate of Incorporation to provide
for 1 for 4 Reverse Stock Split of each outstanding share of the Company's
common stock.
Financial Statements
The audited financial statements of J.A. for the years ended
June 30, 1994 and 1995 included in this proxy statement, have been audited by
MacKay & Partners and Semple & Cooper, independent certified public
accountants, respectively. On July 17, 1995 the Board of Directors of the
Registrant engaged the firm of Semple & Cooper, to act as the Company's
independent certified public accountants as successor to MacKay & Partners.
At the time of the dismissal of the MacKay firm, during the company's two
most recent fiscal years or any later interim period there were no adverse
opinions, disclaimer of opinion or modification or disagreements with the
MacKay firm. The audited financial statements of Kenmar for the years
ended August 31, 1994 and 1995 included in this proxy statement, have been
audited by KPMG Peat Marwick LLP, independent certified public accountants.
Presence of Accountants
at Special Meeting
Representatives of JA's and Kenmar's independent accountants are
not expected to be present at the Special Meeting, but will be available by
telephone to respond to appropriate questions of stockholders.
56
<PAGE>
Stockholder's Proposal
From time to time, stockholders present proposals which may be
proper subjects for inclusion in the Proxy Statement and for consideration at
the Annual Meeting. To be considered, proposals must be submitted on a timely
basis. Proposals for the 1996 Annual Meeting must be received by the Corporation
no later than March 15, 1997.
Other Matters
At the date of the proxy statement, the only business which
management intends to present or knows that others will present at the meeting
is hereinabove set forth. If any other matter or matters are properly brought
before the meeting, or any adjournment thereof, it is the intention of the
persons named in the accompanying form of proxy to vote the proxy on such
matters in accordance with their best judgment.
Robert Knight,
President
Dated: March ____, 1996
57
<PAGE>
J.A. INDUSTRIES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR
SPECIAL MEETING ON , 1996
The undersigned hereby constitutes and appoints Robert W. Knight
who is authorized to act as attorney and proxy with full power of substitution
according to the number of shares of Common Stock of J.A. Industries, Inc. which
the undersigned may be entitled to vote with all powers which the undersigned
would possess if personally present at the Special Meeting of its Stockholders
to be held on _________, 1996 at 8:00 a.m. in the forenoon at the offices of
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. at 2500 First
Union Capitol Center Raleigh, North Carolina 27601 and at any adjournment
thereof, on matters properly coming before the Meeting. Without otherwise
limiting the general authorization hereby given, said attorney and proxy is
instructed to vote on the proposals set forth below and described in the Proxy
Statement dated ______________, 1996.
The undersigned acknowledges receipt of the Notice of Special
Meeting and Proxy Statement, each dated _________, 1996.
UNLESS OTHERWISE SPECIFIED IN THE SPACE PROVIDED, THE
UNDERSIGNED'S VOTE IS TO BE CAST "FOR" THE ELECTION OF ALL LISTED NOMINEES;
"FOR" APPROVAL OF AGREEMENT AND PLAN OF MERGER; "FOR" APPROVAL OF AMENDMENT TO
THE CERTIFICATE OF INCORPORATION AND "FOR" THE APPROVAL OF A REVERSE STOCK SPLIT
AND IN ACCORDANCE WITH THE DIRECTOR'S RECOMMENDATIONS, ON ANY OTHER MATTERS THAT
MAY PROPERLY COME BEFORE THE MEETING.
PLEASE SIGN, DATE AND RETURN YOUR PROXY PROMPTLY.
A vote "FOR" is recommended by the Board of Directors on the following
proposals.
58
<PAGE>
I. Approval of Agreement and Plan of Merger
( ) FOR ( ) AGAINST ( ) ABSTAIN
II. The election of five directors
NOMINEES: KENNETH H. MARKS, CRAIG MACNAB, ALAN G. FINKEL, KENNETH L. MARKS
AND RAY STACKENRIDER
( ) FOR ( ) AGAINST ( ) ABSTAIN
For all nominees except as noted above
III. Approval of Amendment to the Certificate of Incorporation to provide for
change of name.
( ) FOR ( ) AGAINST ( ) ABSTAIN
IV. Approval of a 1 for 4 reverse stock split.
( ) FOR ( ) AGAINST ( ) ABSTAIN
IMPORTANT: IN SIGNING THIS PROXY, PLEASE SIGN YOUR NAME OR NAMES ON THE
SIGNATURE LINES BELOW IN THE EXACT FORM APPEARING ON THIS PROXY. WHEN SIGNING AS
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE YOU FULL
TITLE AS SUCH.
EACH JOINT TENANT MUST SIGN.
SIGNATURE: DATE:
SIGNATURE: DATE:
59
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
AMENDMENT (the "Amendment") TO AGREEMENT AND PLAN OF MERGER,
dated as of , 1996 (the "Agreement") by and among J.A. Industries, Inc., a
Delaware corporation ("JAI"), J.A. Industries of North Carolina, Inc., a North
Carolina corporation and a wholly-owned subsidiary of JAI ("Acquisition"), and
Kenmar Business Groups, Inc., a North Carolina corporation ("Kenmar").
WITNESSETH:
WHEREAS, the parties to the Agreement desire to amend the Agreement as
set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreement herein contained and of other good and valuable consideration, the
receipt and legal sufficiency of which they hereby acknowledge, and intending to
be legally bound hereby, the parties hereto agrees as follows:
1. Section 6.7(d) of the Agreement is hereby amended to delete the
following language from the certificate legend set forth therein: "THIS
RESTRICTIVE LEGEND SHALL BE VOID AND OF NO FURTHER EFFECT AS OF APRIL 12, 1998."
2. Except as expressly provided this Amendment, all terms and
conditions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, all of the date
first above written.
KENMAR BUSINESS GROUPS, INC.
ATTEST: BY:
NAME:
TITLE:
BY:
NAME:
TITLE: J.A. INDUSTRIES, INC.
ATTEST: BY:
NAME:
TITLE:
BY:
NAME:
TITLE: J.A. INDUSTRIES OF NORTH CAROLINA, INC.
ATTEST:
BY:
BY: NAME:
NAME: TITLE
TITLE:
<PAGE>
MacKay
& Partners
Chartered Accountants
Independent Auditors' Report
To the Shareholders
J.A. Industries Inc.
We have audited the consolidated balance sheet of J.A. Industries Inc.
as at June 30, 1994 and related consolidated statements of loss, changes
in shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the company as at
June 30, 1994, and the results of its operations and the changes in the
shareholders' equity and changes in its financial position for the year
then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the company will continue as a going concern. As shown in
the financial statements, the company incurred a net loss of $1,497,305
and a cash flow deficit from operations of $976,513 during the year
ended June 30, 1994, and as at that date had a working capital
deficiency of $180,031 and a net worth of $667,558. As described in
Notes 8 and 11 to the financial statements, the company is not in
compliance with certain loan covenants on two notes and the company's
revolving line of credit matures in October 1994. These conditions raise
substantial doubt about the company's ability to continue as a going
concern, however, no adjustments have been made to reflect this outcome.
The financial statements as at June 30, 1993 and for the period then
ended were audited by other independent auditors who expressed an
opinion without restriction on those statements in their report dated
September 29, 1993.
/s/ MacKay & Partners
Chartered Accountants
Vancouver, Canada
September 29, 1994
(except for notes 8, 11, and 12
as to which the date is October 19, 1994)
<PAGE>
Exhibit E
<PAGE>
J.A. INDUSTRIES, INC./KENMAR BUSINESS GROUPS, INC.
INDEX TO FINANCIAL STATEMENTS
J.A.- Financial Statements
Report of Independent Auditors F-1
Balance Sheets as of June 30, 1995 and 1994 F-2/3
Statements of Operations for the years
ended June 30, 1995 and 1994 F-4
Statements of Stockholder Equity for the
years ended June 30, 1995 and 1994 F-5
Statements of Cash Flows for the years
ended June 30, 1995 and 1994 F-6
Notes to Financial Statements F-7-F-21
J.A.- Pro Forma Consoldiated Financial
Statements-Unaudited
Balance Sheet as of August 31, 1995 F-22
Statement of Operations for the year
ended August 31, 1995 F-23
Statement of Operations for the six
months ended February 29, 1996 F-24
J.A.- Financial Statements (Unaudited)
Balance Sheets as of December 31, 1995
and 1996 F-25/26
Statements of Operations for six months
ended December 31, 1995 and 1994 F-27/28
Statement of Changes in Financial Position
for six months ended December 31, 1995
and 1994 F-29
Statement of Changes in Stockholder's Equity
for six months ended December 31, 1995 and
June 30, 1995 F-30
Notes to Financial Statements F-31-F-35
Kenmar - Financial Statements (Audited)
Report of Independent Auditors F-36
Balance Sheets as of August 31, 1995 and 1994 F-37
Statements of Income (Loss) years ended
August 31, 1995 and 1994 F-38
Statement of Stockholder's Deficit years
ended August 31, 1995 and 1994 F-39
<PAGE>
Statement of Cash Flows years ended August
31, 1995 and 1994 F-40/41
Notes to Financial Statements F-42-F-51
Kenmar - Financial Statements (Unaudited)
Balance Sheets as of February 29, 1996 and 1995 F-52/53
Statements of Income, six months ended February
29, 1996 and 1995 F-54
Statements of Cash Flows F-55
Notes to Financial Statements F-56
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
J.A. Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of J.A. Industries,
Inc. and Subsidiaries as of June 30, 1995 and the related consolidated
statements of operations, changes in stockholders' equity (deficit), and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of J.A. Industries,
Inc. and Subsidiaries as of June 30, 1995, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $1,714,526, and a cash flow
deficit from operations of $133,297 during the year ended June 30, 1995, and as
of that date had a working capital deficiency of $566,587, and a net capital
deficiency of $40,503. Additionally, as of the date of the auditors' report, the
Company has sold subsidiaries which accounted for all of the operating
activities of the consolidated corporation. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(Signature of Semple & Cooper, P.L.C. appears here)
Certified Public Accountants
Phoenix, Arizona
November 20, 1995 (except for Note 18 as to which the date is May 12, 1996).
F-1
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 1) $ 45,274 $ 6,679
Accounts receivable (Notes 1 and 9)
- trade 246,180 485,943
- other 73 18,363
Inventory (Notes 1, 4 and 9) 170,261 454,982
Prepaid expenses 14,805 27,338
---------- ----------
Total Current Assets 476,593 993,305
---------- ----------
Real Estate Held for Sale (Notes 6 and 9) 488,750 875,000
Property and Equipment, Net
(Notes 1, 5 and 9) 53,330 598,533
Investments (Note 7) - 22,075
Intangible Assets, Net (Notes 1 and 8) 2,050 127,532
---------- ----------
544,130 1,623,140
---------- ----------
$1,020,723 $2,616,445
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-2
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, 1995 and 1994
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current Liabilities:
Notes payable - current portion (Note 9) $ 590,986 $ 922,436
Loans payable - related parties (Note 10) 35,766 -
Accounts payable 165,625 776,474
Accrued expenses 250,753 -
Income taxes payable (Notes 1 and 12) 50 50
---------- ----------
Total Current Liabilities 1,043,180 1,698,960
---------- ----------
Notes Payable - Long-Term Portion (Note 9) 18,046 117,563
Loans Payable - Related Parties (Note 10) - 132,364
---------- ----------
18,046 249,927
---------- ----------
Commitments and Contingencies: (Note 11) - -
Stockholders' Equity (Deficit):
Common stock (Note 14) 18,879 16,234
Additional paid-in capital 4,993,915 3,849,152
Accumulated deficit (4,904,793) (3,190,267)
---------- ----------
108,001 675,119
Stock subscriptions receivable (144,000) -
Cumulative translation adjustment
(Note 1) (4,504) (7,561)
---------- ----------
(40,503) 667,558
---------- ----------
$1,020,723 $2,616,445
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-3
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Sales $ 4,330,211 $ 4,042,940
Cost of Sales 3,618,347 3,674,688
----------- -----------
Gross Profit 711,864 368,252
----------- -----------
Selling and Marketing Expense - 134,163
General and Administrative Expense 1,593,838 1,256,765
Impairment of real estate held
for sale (Note 6) 386,250 444,941
Impairment of goodwill (Note 8) 115,890 -
----------- -----------
2,095,978 1,835,869
----------- -----------
Loss from Operations (1,384,114) (1,467,617)
----------- -----------
Other Income (Expense):
Interest income 952 373
Interest expense (72,868) (93,989)
Gain on foreign exchange translation - 7,960
Loss on sale of assets (Note 5) (59,726) -
Loss on sale of subsidiary (Note 3) (198,770) -
----------- -----------
(330,412) (85,656)
----------- -----------
Loss before Income Taxes (1,714,526) (1,553,273)
Income Tax Benefit - 65,973
----------- -----------
(1,714,526) (1,487,300)
Pre-acquisition Earnings of Hutronix, Inc. - (10,005)
----------- -----------
Net Loss $(1,714,526) $(1,497,305)
=========== ===========
Net Loss per Share $ (.25) $ (.28)
=========== ===========
Weighted Average Shares Outstanding 6,724,440 5,389,500
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-4
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For The Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
Equity
Adjustment
Additional from Foreign Stock
Common Stock Paid-in Accumulated Currency Subscription
Shares Amount Capital Deficit Translation Receivable
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 4,107,129 $ 10,268 $ 1,800,027 $(1,692,962) $ - $ -
Issued for cash 993,950 2,485 1,005,578 - - -
Issued for equipment 600,000 1,500 52,148 - - -
Issued for shares of
Hutronix, Inc. 717,699 1,794 895,330 - - -
Issued for legal services 25,000 62 7,944 - - -
Issued to repay debt 50,000 125 88,125 - - -
Aggregate adjustment
resulting from translation
of financial statement
into U.S. dollars - - - - (7,561) -
Net loss for the year ended
June 30, 1994 - - - (1,497,305) - -
--------- ---------- ----------- ----------- ----------- -----------
Balance, June 30, 1994 6,493,778 16,234 3,849,152 (3,190,267) (7,561) -
Issued for cash 631,383 1,578 494,672 - - -
Issued for consulting fees 1,032,292 2,581 637,517 - - (144,000)
Issued to repay debt 50,000 125 51,982 - - -
Issued as compensation 12,600 32 12,569 - - -
Reverse equipment
purchase (600,000) (1,500) (52,148) - - -
Shares cancelled (68,450) (171) 171 - - -
Aggregate adjustment
resulting from translation
of financial statements
into U.S. dollars - - - - 3,057 -
Net loss for the year
ended June 30, 1995 - - - (1,714,526) - -
--------- ---------- ----------- ----------- ----------- -----------
7,551,603 $ 18,879 $ 4,993,915 $(4,904,793) $ (4,504) $ (144,000)
========= ========== =========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash Used by Operating Activities:
Net loss $(1,714,526) $(1,497,305)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 110,623 113,549
Loss on sale of fixed assets 59,726 -
Issuance of stock for services
and debt repayment 514,759 -
Impairment on real estate held
for sale 386,250 444,941
Impairment of goodwill 115,890 -
Loss on sale of subsidiary 198,770 -
Changes in Assets and Liabilities:
Accounts receivable
- trade 239,763 (350,711)
- other 18,290 -
Inventory 284,721 (324,732)
Prepaid expenses 12,533 (10,147)
Accounts payable (610,849) 662,081
Accrued expenses 250,753 -
Income taxes payable - 50
Equipment loans - 119,048
Purchase agreement - (133,287)
----------- -----------
Cash used by operations (133,297) (976,513)
----------- -----------
Investing Activities:
Proceeds from sale of fixed assets 244 -
Purchase of property and equipment (4,578) (1,713,705)
Disposal of license agreement - 50,000
Acquisition of intangible assets - (140,409)
Disposal (acquisition) of investment 21,875 (21,875)
----------- -----------
Cash provided (used) by investing activities 17,541 (1,825,989)
----------- -----------
Financing Activities:
Issuance of common stock 496,250 2,055,091
Loans from related parties 35,766 13,065
Proceeds from debt 72,288 753,722
Repayment of debt (423,079) -
Repayment of debt from related parties (22,370) -
----------- -----------
Cash provided by financing activities 158,855 2,821,878
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents (4,504) (7,561)
----------- -----------
Net Change in Cash and Cash Equivalents 38,595 11,815
Cash and Cash Equivalents at Beginning of Year 6,679 (5,136)
----------- -----------
Cash and Cash Equivalents at End of Year $ 45,274 $ 6,679
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-6
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Corporation:
J.A. Industries, Inc. is a Corporation organized under the laws of the
State of Delaware. The principal purpose of the Corporation is to act as
the holding company of its subsidiaries. Subsequent to the balance sheet
date, the Company disposed of its only remaining operating subsidiary
through a reversal of the acquisition (Note 3).
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation:
The consolidated financial statements include the accounts of:
J.A. Industries, Inc., a Delaware corporation, and the
following wholly-owned subsidiaries:
J.A. Industries (Canada) Inc., a Canadian
corporation
Granite Marketing Corp., a Cayman Island
corporation
Hutronix, Inc., an Arizona corporation
QDS, de Mexico, S.A. de C.V., a Mexican
corporation and the 96% owned subsidiary
Hutronix de Mexico, S.A. de C.V., (a
subsidiary of Hutronix, Inc., which has
been inactive since August 17, 1982)
All significant intercompany balances and transactions have been
eliminated in consolidation.
As further described in Note 3, J.A. Industries (Canada) Inc. was sold
during the year ended June 30, 1995, and Hutronix, Inc. and QDS, de
Mexico, S.A. de C.V. were disposed of subsequent to the balance sheet
date through a reversal of the acquisition (Note 3).
F-7
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Cash and Cash Equivalents:
Cash and cash equivalents are considered to be all highly liquid
investments with an initial maturity of three (3) months or less.
Accounts Receivable:
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance is provided for based upon a review
of the individual accounts outstanding and the prior history of
uncollectable accounts receivable. At June 30, 1994, an allowance has
been provided for potentially uncollectible accounts receivable in the
amount of $30,803. At June 30, 1995, no allowance has been provided for
as management believes all accounts receivable to be collectible.
Inventory:
Raw materials are valued at the lower of cost or replacement cost. Work
in process and finished goods are valued at the lower of cost or net
realizable value. Cost for all inventory is determined on the first-in,
first-out method which, for work in process and finished goods, includes
the cost of material, direct labor and applied manufacturing overhead.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method over the estimated useful lives of the
assets, ranging from five to seven years. Maintenance and repairs that
neither materially add to the value of the property nor appreciably
prolong its life are charged to expense as incurred. Betterments or
renewals are capitalized when incurred.
Long-Lived and Intangible Assets:
Long-lived assets include office and manufacturing equipment and real
estate. Intangible assets include goodwill, incorporation costs, and
patent development costs, and are being amortized on the straight-line
method over their estimated useful lives as disclosed in Note 8.
Goodwill represents the excess of the cost of acquiring Hutronix, Inc.
over the fair value of the net assets at the date of acquisition. The
carrying value of the assets will be periodically reviewed by the
Company and impairments, if any, will be recognized when expected future
operating cash flows derived from the assets are less than their
carrying value.
F-8
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Income Taxes:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax basis, in addition to the use of net operating losses. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Translation of Foreign Currencies:
Account balances and transactions denominated in foreign currencies and
the accounts of the Corporation's foreign operations have been
translated into United States funds, as follows:
Assets and liabilities at the rates of exchange
prevailing at the balance sheet date;
Revenue and expenses at average exchange rates for the
period in which the transaction occurred;
Exchange gains and losses arising from foreign currency
transactions are included in the determination of net earnings
for the period;
Exchange gains and losses arising from the translation of
the Corporation's foreign operations are deferred and
included as a separate component of stockholders' equity.
Loss per Share:
The loss per share calculation is based on the weighted average number
of shares outstanding during the year. Fully diluted loss per share has
not been presented because the effect of exercising the options
outstanding would be anti-dilutive.
F-9
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Business Combinations:
In 1994, the Company purchased all of the outstanding shares of
Hutronix, Inc. for common share consideration. The acquisition was
accounted for by the purchase method. The results of operations are
included in the accounts from the effective date of acquisition,
September 15, 1993.
Details of the purchase are as follows:
Fair market value of assets acquired:
Working capital deficiency $ (42,739)
Fixed assets 1,462,099
Other liabilities (69,814)
Long-term debt (581,189)
Goodwill 128,767
----------
$ 897,124
==========
Consideration given:
Common shares issued $ 897,124
==========
As further described in Note 3, the acquisition of Hutronix, Inc. and
QDS, de Mexico, S.A. de C.V. was reversed subsequent to the year ended
June 30, 1995.
3. Sale of Subsidiaries:
During the year ended June 30, 1995 and subsequent to year end, the
Company disposed of one operating subsidiary and entered into a plan to
reverse the purchase of another operating subsidiary. These two
subsidiaries comprised principally all of the operating activity of the
consolidated entity. The disposals are as follows:
J.A. Industries (Canada) Inc.:
On June 30, 1995, the Company sold all of the common stock of J.A.
Industries (Canada) Inc. for $73. The transaction resulted in a loss of
$198,770, which has been included in loss on sale of subsidiary for the
year ended June 30, 1995.
F-10
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Sale of Subsidiaries: (Continued)
Hutronix, Inc.:
On November 21, 1995, the Company entered into an agreement to reverse
the acquisition of Hutronix, Inc. and its Mexican manufacturing
subsidiary, QDS, de Mexico, S.A. de C.V. The Company returned all of the
common shares of Hutronix, Inc. in exchange for cancellation of a
buy/sell agreement for 262,500 common shares of J.A. Industries, Inc.
with the former principal stockholder of Hutronix, Inc. The Company
realized a loss on the subsequent disposition of Hutronix, Inc. of
approximately $70,000, which has not been included in the accompanying
consolidated statement of operations for the year ended June 30, 1995.
4. Inventory:
As of June 30, 1995 and 1994, inventory consists of the following:
1995 1994
---- ----
Raw materials $ 352,223 $ 532,435
Less: reserve for obsolescence (210,000) (190,000)
---------- ----------
142,223 342,435
Work in process 25,170 91,962
Finished goods 2,868 20,585
---------- ----------
$ 170,261 $ 454,982
========== ==========
5. Property and Equipment:
As of June 30, 1995 and 1994, property and equipment consist of the
following:
1995 1994
---- ----
Forklift $ - $ 10,049
Vehicles 13,121 14,046
Office equipment 46,382 53,834
Computers 152,361 147,778
Manufacturing equipment 277,230 576,051
Assets not-in-service - 232,520
---------- ----------
489,094 1,034,278
Less: accumulated depreciation (435,764) (435,745)
---------- ----------
$ 53,330 $ 598,533
========== ==========
F-11
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Property and Equipment: (Continued)
Assets not-in-service represents manufacturing equipment and production
molds purchased but not yet on location or in use.
These assets were purchased by way of an agreement with 488190 Alberta
Ltd. dated December 3, 1993. Consideration given in exchange for the
equipment was:
600,000 shares of J.A. Industries, Inc.;
$100,000 relocation fee payable upon relocation; and
$ 78,872 assumption of debt and chattel mortgage against the
equipment.
This transaction has been recorded as follows:
Shares issued $ 53,648
Debt assumed 78,872
Relocation fee 100,000
----------
Fair market value of the equipment $ 232,520
==========
Subsequent to June 30, 1995, the Company entered into an agreement to
reverse the equipment purchase agreement. The equipment was returned to
488190 Alberta Ltd., which returned the 600,000 common shares of J.A.
Industries, Inc. A loss on disposal of fixed assets of $59,823 was
recorded, which is made up of payments made by J.A. Industries, Inc.
against the chattel mortgage and expenses incurred in moving the
equipment.
6. Real Estate Held for Sale:
In January, 1994, Hutronix, Inc. ceased all manufacturing operations at
its Douglas, Arizona facility. As of June 30, 1995 and 1994, the Company
recorded real estate held for sale in the amounts of $488,750 and
$875,000, respectively. The Company recognized impairment losses for
June 30, 1995 and 1994 in the amounts of $386,250 and $444,941,
respectively. The losses represented management's best estimate of the
net realizable value of the property.
F-12
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Investments:
On March 30, 1994, Granite Marketing Corp. entered into a licensing
agreement with Queensland Industries, Inc. Under the agreement,
Queensland Industries, Inc. was granted a license of certain patents to
manufacture, promote, market, sell and distribute industrial electrical
products. The license provides for an exclusive territory, including
Asia, Japan, Australia, Zimbabwe, Nambia, South Africa, and all nations
who are currently members of the European Economic Community. The
purchase price for the license was $10,000,000, with $2,500,000 payable
upon signing of the agreement and four (4) equal payments of $1,875,000
due 120, 210, 300 and 390 days from signing.
Wincanton Corporation, 100% stockholder of Queensland Industries, Inc.,
has agreed to guarantee the payment obligations of Queensland
Industries, Inc.
At June 30, 1994, the sale of this license was recorded at a nominal
$50,000. At June 30, 1994, the investment was recorded at $22,075. The
first two (2) installments were paid in the form of 875,000 shares of
Wincanton Corporation, which have been recorded at $0.0249 each, which
represents the net asset value per share of Wincanton Corporation at
June 30, 1994.
During 1995, Wincanton Corporation paid Granite Marketing Corp. $50,000
to cancel the licensing agreement. In addition, Granite Marketing Corp.
returned the 875,000 shares of Wincanton Corporation.
8. Intangible Assets:
Intangible assets at June 30, 1995 and 1994 are comprised of the
following:
1995 1994
---- ----
Goodwill amortized over ten years
(Note 2) $ - $ 128,767
Incorporation costs amortized over
five years 3,000 3,000
Patent pending amortized over five
years from final patent - 8,642
---------- ----------
3,000 140,409
Amortization (950) (12,877)
---------- ----------
$ 2,050 $ 127,532
========== ==========
During the year ended June 30, 1995, the Company recognized an
impairment of the valuation of goodwill in the amount of $115,890.
F-13
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes Payable:
As of June 30, 1995 and 1994, notes payable consist of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Note payable to a bank executed through the Industrial Development
Authority of the City of Douglas, Arizona, due in quarterly installments
of $12,821, plus interest at 65% of prime (7.25% as of June 30, 1994),
due May, 2005; secured by a deed of trust on the real estate held for
sale, an irrevocable letter of credit from a bank in the amount of the
outstanding note payable balance and the assignment of a life insurance
policy owned by a related party, on the president of Hutronix, Inc. At
June 30, 1994, the Company was not in compliance with certain
restrictive covenants
contained in this note. $ 546,125 $ 576,908
Note payable to a vendor, due in monthly installments of $594, plus
interest at 8.5%, due September, 1994; secured by
equipment. - 1,883
Note payable to a supplier, due in
quarterly installments of $8,361 plus
interest at 6%; unsecured, due
March 15, 1995. - 25,084
Note payable to an employee in monthly installments of $2,500, plus
interest at 7%, due July, 1994; secured by the common stock of QDS, de
Mexico, S.A.
de C.V. - 5,000
Unsecured promissory note payable to a lender. The principal of $36,155
(CDN $50,000) plus accrued interest at 24% per annum is payable on
demand. The lender has stated that it is not her intention to demand
repayment of
the note before June 30, 1995. - 47,636
</TABLE>
F-14
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes Payable: (Continued)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Unsecured note payable to the Province
of British Columbia, Canada, due in
monthly payments of $1,808 (CDN $2,500)
plus interest at 6% per annum. The
principal balance is due July 1, 1995. - 91,619
Revolving line of credit for $250,000 with a bank. Credit line is
payable at $5,000 per month until October, 1994 when all principal and
accrued interest is due in full. The credit line accrues interest at
prime plus two percent; collateralized by accounts receivable,
inventory, property, plant and equipment,
and 2,025 shares of common stock. - 172,821
Equipment loan for the "assets not-in-
service" described in Note 5. Note was
due on demand with no stated interest
rate. - 119,048
8% note payable to ITT Cannon, monthly
installments of $1,500, including
principal and interest, due June, 1997;
unsecured. 33,907 -
8% note payable to Molloy, Jones & Donahue, P.C., monthly installments
of $1,381, including principal and interest,
due February, 1996; unsecured. 10,725 -
10% note payable to KPMG Peat Marwick,
L.L.P., due on demand; unsecured. 18,275 -
---------- ----------
609,032 1,039,999
Less: current portion (590,986) (922,436)
---------- ----------
$ 18,046 $ 117,563
========== ==========
</TABLE>
F-15
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes Payable: (Continued)
A schedule of future minimum principal payments due on the notes
payable, is as follows:
Year Ended
June 30, Amount
1996 $ 590,986
1997 18,046
----------
$ 609,032
==========
10. Related Party Transactions:
Loans Payable - Related Parties:
As of June 30, 1995 and 1994, loans payable - related parties consist of
the following:
1995 1994
---- ----
Loan payable to Alexander Michie,
balance due on demand with no
stated interest rate. $ 15,000 $ -
Loan payable to 391566 B.C., Ltd.,
balance due on demand with no stated
interest rate. 20,766 -
Loan payable to Alexander Michie.
The loan is unsecured and has no
terms of repayment. The loan has
a stated interest rate of prime
plus 2%. - 132,364
---------- ----------
35,766 132,364
Less: current portion (35,766) -
---------- ----------
$ - $ 132,364
========== ==========
F-16
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Related Party Transactions: (Continued)
Other Transactions:
The Company paid $25,200 in 1994 to a related party to maintain a life
insurance policy on the life of the president of Hutronix, Inc. Included
in accounts payable at June 30, 1994 is $10,346 due to the related
party.
The Company also paid a combined $46,800 to its president (a former
stockholder) under a salary and management fee commitment in the year
ended June 30, 1994. The commitment requires the Company to pay $6,000
per month and expires December 31, 1995.
Repayment of the mortgage from the Province of British Columbia has been
guaranteed by A. Michie, a stockholder.
11. Commitments and Contingencies:
Under the terms of various agreements, the Company has guaranteed
payment of $18,275 in accounting fees and the $546,125 mortgage on the
Douglas, Arizona plant owned by Hutronix, Inc. The reversal of the
Hutronix, Inc. purchase in November, 1995 included an indemnification on
the above guarantees. Should the other party fail to perform, additional
obligations could be asserted against the Company. The Company has been
unable to estimate any liability for potential payments as a guarantor
on the debt.
12. Income Taxes:
As of June 30, 1995, the components of the deferred income tax asset,
are as follows:
Deferred Tax Asset
Net operating loss carryforwards $ 498,000
Less: valuation allowance (498,000)
----------
Net deferred tax asset $ -
==========
F-17
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes: (Continued)
The valuation allowance for the deferred tax asset as of June 30, 1994
is $368,371. The net change in the total valuation allowance for the
year ended June 30, 1995 was an increase of $129,629.
At June 30, 1995, the Company has net operating loss carryforwards for
federal purposes, as follows:
Expiring June 30, Amount
2009 $ 540,000
2010 2,780,000
----------
$3,320,000
==========
For the years ended June 30, 1995 and 1994, the Company reported
provisions for income taxes in the amount of $50. The provisions relate
to state income taxes.
13. Significant Customers and Vendors:
Four (4) customers comprised approximately 91.1% of total sales for the
year ended June 30, 1995, and 54% of total accounts receivable at June
30, 1995.
Three (3) customers comprised approximately 68% of total sales for the
year ended June 30, 1994, and 70% of total accounts receivable at June
30, 1994.
Five (5) vendors provided approximately 44% of total raw materials
purchased during the year ended June 30, 1995.
Four (4) vendors provided approximately 52% of total raw materials
purchased during the year ended June 30, 1994.
14. Common Stock:
Common stock is comprised of $.0025 par value, 20,000,000 shares
authorized, 7,551,603 and 6,493,778 shares issued and outstanding as of
June 30, 1995 and 1994, respectively.
15. Management's Plan to Address Going Concern Considerations:
The management of the Company is in the process of attempting to secure
additional capital sources to acquire additional companies to fit their
corporate mission.
F-18
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Stock Option Plan:
Under its employee stock option plan, which authorizes the issuance of
up to 1,000,000 common shares with a par value of $0.0025 each, the
Company has issued and outstanding options to purchase 98,600 shares at
$2.00 each, and 520,000 shares at $1.10 each. These options expire on
December 31, 1999.
17. Statement of Cash Flows:
Non-Cash Investing and Financing Activities:
During the year ended June 30, 1995, the Company recognized investing
and financing activities that affected assets, liabilities and equity,
but did not result in cash receipts or payments. These non-cash
activities are as follows:
The Company reversed an equipment purchase agreement
with C.C. Plastics. The Company recognized a loss of
$59,823 on the transaction due to payments on the debt
obligation, which were subsequently voided for return of
the equipment.
The Company issued 1,032,292 shares, with an average
price of $.62 per share, for payment of consulting
services. Additionally, the Company issued 12,600
shares, valued at $1 per share, to employees for
performance bonuses.
The Company issued 50,000 shares at $1.04 per share,
for payment of a debt obligation.
During the year ended June 30, 1994, the Company recognized investing and
financing activities that affected assets, liabilities and equity, but did not
result in cash receipts or payments. These non-cash activities are as follows:
The Company issued 600,000 shares to C.C. Plastic to
purchase equipment.
The Company issued 717,699 shares to acquire all of the
outstanding common stock of Hutronix, Inc.
The Company issued 25,000 shares as payment for legal
fees.
The Company issued 50,000 shares for payment of a debt
obligation.
F-19
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Statement of Cash Flows: (Continued)
Non-Cash Investing and Financing Activities: (Continued)
Cash paid for interest for the year ended June 30, 1994
was $155. For the year ended June 30, 1995, the Company
did not pay any income taxes.
18. Restatement of the Consolidated Financial Statements:
The previously issued financial statements gave retroactive effect to
the disposal of Hutronix, Inc., which was formally disposed of under
contract in November, 1995. These financial statements do not provide
retroactive treatment for the disposal of the subsidiary.
In addition, management had proposed a prior period adjustment for
approximately $65,000 of expenses paid by a third party on the Company's
behalf, which were expenses for the year ended June 30, 1994. Management
was unable to obtain the prior accountant's concurrence with the
adjustment, and determined that, due to immateriality, they would forego
the prior period adjustment.
As a consequence of restoring the balance sheet of Hutronix, Inc. as of
June 30, 1995, the Company recorded an impairment allowance for one
hundred percent of the remaining goodwill of approximately $128,000. In
addition, the original financial statements reported a misallocation on
the net loss on disposal of J.A. Industries (Canada), Inc. and Hutronix,
Inc. Both companies were disposed of at losses of approximately $200,000
and $70,000, respectively.
A summary of the changes and their effects, is as follows:
Net loss, as originally reported $(1,590,820)
Deferral of loss on disposition of Hutronix, Inc. 69,946
Impairment of goodwill of Hutronix, Inc. (128,000)
Reversal of prior period adjustment (65,652)
-----------
Restated net loss $(1,714,526)
===========
F-20
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Unaudited Pro Forma Condensed Consolidated Financial Statements
The following unaudited pro forma condensed consolidated financial
statements give effect to the reverse acquisition by J.A. Industries,
Inc. of Kenmar Business Group, Inc., pursuant to the Agreement and Plan
of Merger between the parties, and is based on the estimates and
assumptions set forth herein and in the notes to such statements. This
pro forma information has been prepared utilizing the historical
financial statements and notes thereto, which are incorporated by
reference herein. The pro forma financial data does not purport to be
indicative of the results which actually would have been obtained had
the purchase been effected on the dates indicated or of the results
which may be obtained in the future.
The pro forma financial information is based on the purchase method of
accounting for the merger of Kenmar Business Group, Inc.. The pro forma
entries are described in the accompanying notes to the unaudited pro
forma condensed consolidated financial statements. The pro forma
unaudited condensed consolidated balance sheet assumes the merger took
place on the date of the balance sheet. The pro forma unaudited
condensed consolidated statements of operations assume the acquisition
took place on the first day of the period presented.
Unaudited pro forma adjustments are based upon historical information,
preliminary estimates and certain assumptions that management deems
appropriate. The unaudited pro forma combined financial data presented
herein are not necessarily indicative of the results the Company would
have obtained had such events occurred at the beginning of the period,
as assumed, or of the future results of the Company. The pro forma
combined financial statements should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus.
Merger:
On March 1, 1996, J.A. Industries, Inc. entered into an Agreement and
Plan of Merger with Kenmar Business Group, Inc. Under the Agreement,
J.A. Industries, Inc. will issue a private placement of stock, the
proceeds of which will be used to pay outstanding liabilities of J.A.
Industries, Inc., provide at least $200,000 of cash, and a book value
of $200,000. J.A. Industries, Inc. will then perform a 1 for 4 reverse
stock split, and issue common stock of an amount equal to the
post-split number of shares outstanding to provide Kenmar Business
Group, Inc. a fifty percent ownership interest.
F-21
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
February 29, 1996
The following represents the unaudited pro forma condensed consolidated balance
sheet for February 29, 1996, assuming the following transactions were
consummated on February 29, 1996:
(1) Issuance of stock through private placements to meet capital
conditions of the Agreement, and to terminate consulting agreements
(2) Reverse merger of Kenmar Business Group, Inc. for issuance of
approximately 2,400,000 shares of common stock of J.A. Industries,
Inc.
<TABLE>
<CAPTION>
J.A.
Industries, Kenmar
Inc. and Business
Subsidiaries Group, Inc. Pro forma Pro forma
December 31, February 29, Merger Consolidated
ASSETS 1995 1996 Adjustments Amounts
---- ---- ----------- -------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ - $ 744,533 (1) $ 560,000 $1,304,533
Other current assets - 974,959 974,959
---------- ---------- ----------
Total Current Assets - 1,719,492 2,279,492
---------- ---------- ----------
Property and Equipment, Net - 496,337 496,337
Other Assets - 160,748 160,748
---------- ---------- ----------
$ - $2,376,577 $2,936,577
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 68 $ 39,520 39,588
Accounts payable 138,167 621,852 (1) (50,000) 710,019
Share subscription deposits 123,383 - (1) (123,383) -
Accrued expenses - 94,833 94,833
---------- ---------- ----------
Total Current Liabilities 261,618 756,205 844,440
---------- ---------- ----------
Long-term debt 21,064 598,986 620,050
Preferred stock - 759,129 759,129
---------- ---------- ----------
21,064 1,358,115 1,379,179
---------- ---------- ----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 19,792 64,714 (1) 7,666 11,797
(2) (80,375)
Additional paid-in capital 5,129,253 213,941 (1) 807,466 717,559
(2) (5,433,101)
Accumulated deficit (5,427,223) (16,398)(1) (81,749) (16,398)
(2) (5,508,972)
Cumulative translation adjustment (4,504) (2) 4,504 -
---------- ---------- ----------
(282,682) 262,257 712,958
---------- ---------- ----------
Total Liabilities and Stockholders'
Equity $ - $2,376,577 $2,936,577
========== ========== ==========
</TABLE>
J.A. Industries, Inc.'s balance sheet was prepared using the Company's December
31, 1995 balance sheet. Kenmar Business Group, Inc.'s balance sheet was prepared
using their February 29, 1996 balance sheet. J.A. Industries, Inc. did not enter
into any significant transactions subsequent to December 31, 1996 that would
materially distort the financial position of the pro forma combined company as
of February 29, 1996.
F-22
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED OPERATING STATEMENT
For The Year Ended August 31, 1995
The following represents the unaudited pro forma condensed consolidated
operating statement for the year ended August 31, 1995, assuming the following
transactions were consummated on August 31, 1994:
(1) Record disposal of Hutronix, Inc. and J.A. (Canada), Inc.
(2) Issuance of stock through private placements to meet conditions of the
Agreement.
<TABLE>
<CAPTION>
J.A.
J.A. Industries, Kenmar
Industries, Record Inc. Business
Inc. Disposal of as Adjusted, Group, Inc.
for the Hutronix, Inc. for the for the
Year Ended and J.A. Year Ended Year Ended Pro Forma Pro Forma
June 30, (Canada) June 30, August 31, Merger Consolidated
1995 (a) Inc. (1) 1995 1995 (a) Adjustments Amounts
---- ---- ---- ---- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 4,330,211 $(4,330,211) $ - $15,565,662 $15,565,662
Cost of Sales 3,618,347 (3,618,347) - 13,883,090 13,883,090
----------- ---------- ----------- -----------
Gross Profit 711,864 - 1,682,572 1,682,572
General, Selling and
Administrative 2,095,978 (1,328,210) 767,768 1,233,587 (2) $ 81,749 2,083,104
----------- ----------- ----------- -----------
Operating Income
(Loss) (1,384,114) (767,768) 448,985 (400,532)
Other Income (Expense) (330,412) 270,928 (59,484) (267,487) (326,971)
----------- ----------- ----------- -----------
Income (Loss) before
Income Taxes (1,714,526) (827,252) 181,498 (727,503)
Income Taxes - - - -
----------- ----------- ----------- -----------
Net Income (Loss) (1,714,526) (827,252) 181,498 (727,503)
Accretion of
Preferred Stock - - (54,006) (54,006)
Undeclared Dividends
on Preferred Stock - - (49,630) (49,630)
----------- ----------- ----------- -----------
Net Income (Loss)
Applicable to Common
Shareholders $(1,714,526) $ (827,252) $ 77,862 $ (831,139)
=========== =========== =========== ===========
Net Income (Loss)
per Share $ (.25) $ (.12) $ 1.26 $ (.19)
=========== =========== =========== ===========
Weighted Average
Shares Outstanding 6,724,440 6,724,440 61,999 4,415,473
=========== =========== =========== ===========
</TABLE>
(a) J.A. Industries, Inc.'s income statement was prepared using the Company's
June 30, 1995 year end. Kenmar Business Group, Inc.'s income statement was
prepared using their August 31, 1995 year end. J.A. Industries, Inc. did not
enter into any significant transactions subsequent to their June 30, 1995 fiscal
year end that would materially distort the operating results of the pro forma
combined company for the year ended August 31, 1995.
F-23
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED OPERATING STATEMENT
For The Six Month Period Ending February 29, 1996
The following represents the unaudited pro forma condensed consolidated
operating statement for February 29, 1996, assuming the following transactions
were consummated on August 31, 1995:
(1) Record disposal of Hutronix, Inc. as of November 23, 1995.
(2) Issuance of stock through private placements to meet conditions of the
Agreement and to terminate consulting agreements.
<TABLE>
<CAPTION>
J.A. Industries Kenmar
Inc. and Business
Subsidiaries Group, Inc.
For The For The
Six Month Record J.A. Six Month
Period Ended Disposal Industries, Period Ended Pro Forma Pro Forma
December 31, of Hutronix, Inc., February 29, Merger Consolidated
1995 (a) Inc. (1) As Adjusted 1996 (a) Adjustments Amounts
---- ----- ----------- ---- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 709,747 $ (709,747) $ - $1,354,383 $ 1,354,383
Cost of Sales 606,707 (606,707) - 1,373,793 1,373,793
---------- ---------- ---------- -----------
Gross Profit (Loss) 103,040 - (19,410) (19,410)
General, Selling and
Administrative 550,879 (157,231) 393,648 397,350 (2) $ 81,749 872,747
---------- ---------- ---------- -----------
Operating Loss (447,839) (393,648) (416,760) (892,157)
Other Expense (74,591) (86) (74,677) (17,071) (91,748)
---------- ---------- ---------- ----------
Loss before Income Taxes (522,430) (468,325) (433,831) (983,905)
Income Taxes - - - -
---------- ---------- ---------- -----------
Net Income from
Continuing Operations (522,430) (468,325) (433,831) (983,905)
Accretion of Preferred
Stock - - (29,285) (29,285)
Undeclared Dividends on
Preferred Stock - - (12,408) (12,408)
---------- ---------- ---------- -----------
Net Loss from Continuing
Operations Applicable
to Common Shareholders $ (522,430) $ (468,325) $ (475,524) $(1,025,598)
========== ========== ========== ===========
Net Loss per Share from
Continuing Operations $ (0.07) $ (.06) $ (7.35) $ (.21)
========== ========== ========== ===========
Weighted Average Shares
Outstanding 7,696,310 7,696,310 64,714 4,925,009
========== ========== ========== ===========
</TABLE>
(a) J.A. Industries, Inc.'s operating statement was prepared using the
Company's December 31, 1995 six month operating statement. Kenmar Business
Group, Inc.'s operating statement was prepared using their February 29,
1996 six month operating statement. J.A. Industries, Inc. did not enter
into any significant transactions subsequent to December 31, 1995 that
would materially distort the operating results of the pro forma combined
company for the six month period ended February 29, 1996.
F-24
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Balance Sheets
(unaudited)
- --------------------------------------------------------------------------------------------------------------
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Assets
Current
Cash $ --- $ 5,538
Accounts receivable
Trade --- 569,292
Other --- 59,437
Inventory (note 3) --- 453,274
Prepaid expenses and deposits --- 21,892
---------------- ----------------
--- 1,109,433
Real estate held for resale --- 875,000
Property and equipment (note 4) --- 514,836
Investments --- 22,075
Intangible assets (note 5) --- 120,978
---------------- ----------------
$ --- $ 2,642,322
---------------- ----------------
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Balance Sheets
(unaudited)
- --------------------------------------------------------------------------------------------------------------
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Liabilities
Current
Bank indebtedness $ 68 $ 105,000
Accounts payable 269,417 928,358
Due to shareholders --- 51,426
Share subscription deposits 123,383 ---
Equipment loans --- 119,048
Current portion of long-term debt (note 7) --- 155,270
---------------- ----------------
392,869 1,359,102
Loans from shareholders (note 6) 21,064 136,691
Long-term debt (note 7) - 551,264
---------------- ----------------
413,933 2,047,057
---------------- ----------------
Share Capital and Deficit
Capital stock:
Authorized:
20,000,000 common shares with a par value of $0.0025 per share
Issued:
7,906,603 shares (1994 - 6,817,034) 19,792 17,043
Additional paid-in capital 5,129,253 3,948,343
Accumulated deficit (5,427,223) (3,381,265)
Cumulative translation adjustment (4,504) 11,144
Treasury stock, at cost (131,250) ---
---------------- ----------------
(413,933) 595,265
---------------- ----------------
$ --- $ 2,642,322
---------------- ----------------
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statements of Operations
(unaudited)
- --------------------------------------------------------------------------------------------------------------
For the six months ended
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Sales $ 709,747 $ 2,417,585
Cost of sales 606,707 1,977,458
---------------- ----------------
Gross profit 103,040 440,127
Selling and marketing expenses 244 97,254
General and administrative expenses 505,635 479,497
---------------- ----------------
Loss from operations (447,839) (136,624)
Other income (expense) (1,395) (54,374)
Loss on disposal of subsidiary (73,196) ---
---------------- ----------------
Consolidated net loss $ (522,430) $ (190,998)
---------------- ----------------
Loss per share $ 0.07 $ 0.03
---------------- ----------------
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statements of Operations
(unaudited)
- --------------------------------------------------------------------------------------------------------------
For the three months ended
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Sales $ 177,437 $ 1,237,956
Cost of sales 151,677 963,690
---------------- ----------------
Gross profit 25,760 274,266
Selling and marketing expenses 61 71,820
General and administrative expenses 85,252 239,877
---------------- ----------------
Income/(loss) from operations (59,553) (37,431)
Other income (expense) (1,459) (48,676)
Loss on disposal of subsidiary (73,196) ---
---------------- ----------------
Consolidated net loss $ (134,208) $ (86,107)
---------------- ----------------
Loss per share $ 0.02 $ 0.01
---------------- ----------------
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statement of Changes in Financial Position
(unaudited)
- --------------------------------------------------------------------------------------------------------------
For the six months ended
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Cash provided by (used in)
Operating activities
Net loss for the period $ (522,430) $ (190,998)
Items not affecting cash:
Amortization --- 80,543
Issuance of stock for services 160,251 ---
Loss on sale of subsidiary 73,196 ---
Changes in non-cash working capital 138,243 85,991
---------------- ----------------
(150,740) (24,464)
---------------- ----------------
Financing activities
Issue of common shares 120,000 100,000
Loan from shareholders (14,702) 4,327
Long-term debt --- (41,596)
---------------- ----------------
105,298 62,731
---------------- ----------------
Investing activities
Purchase of property and equipment --- (4,578)
Proceeds on sale of subsidiary 100 ---
---------------- ----------------
100 (4,578)
---------------- ----------------
Increase (decrease) in cash position (45,342) 33,689
Effect of currency translation on cash flow --- 32,991
Cash position beginning of period 45,274 (166,142)
---------------- ----------------
Cash position end of period $ (68) $ (99,462)
---------------- ----------------
Represented by:
Cash $ --- $ 5,538
Bank indebtedness (68) (105,000)
---------------- ----------------
$ (68) $ (99,462)
---------------- ----------------
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
For the six months ended December 31, 1995
and the year ended June 30, 1995
Capital Stock Additional Foreign Stock
Paid In Operating Currency Subscription Treasury
Shares Amount Capital Deficit Translation Receivable Stock
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1994 6,493,778 $ 16,234 $ 3,849,152 $ (3,190,267)$ (7,561)$ --- $ ---
Issued for cash 631,383 1,578 494,672 --- --- --- ---
Issued for consulting fees 1,032,292 2,581 637,517 --- --- (144,000) ---
Issued to repay debt 50,000 125 51,982 --- --- --- ---
Issued as compensation 12,600 32 12,569 --- --- --- ---
Reverse equipment purchase (600,000) (1,500) (52,148) --- --- --- ---
Shares cancelled (68,450) (171) 171 --- --- --- ---
Aggregate adjustment resulting
from translation of financial
statements into U.S. dollars --- --- --- --- 3,057 --- ---
Net loss for the year ended
June 30, 1995 --- --- --- (1,714,526) --- --- ---
----------------------------------------------------------------------------------------------
Balance June 30, 1995 7,551,603 18,879 4,993,915 (4,904,793) (4,504) (144,000) ---
Issued for cash 300,000 750 119,250 --- --- --- ---
Issued for consulting fees 55,000 163 16,088 --- --- --- ---
Services rendered as consideration
for shares --- --- --- --- --- 144,000 ---
Reverse Hutronix, Inc. acquisition --- --- --- --- --- --- (131,250)
Net loss for the six months ended
December 31, 1995 --- --- --- (522,430) --- --- ---
----------------------------------------------------------------------------------------------
Balance December 31, 1995 7,906,603 $ 19,792 $ 5,129,253 $ (5,427,223)$ (4,504)$ --- $ (131,250)
----------------------------------------------------------------------------------------------
</TABLE>
F-30
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of:
J.A. Industries, Inc., a Delaware corporation and the following
wholly owned subsidiaries:
J.A. Industries (Canada), Inc., a Canadian corporation.
Granite Marketing Corp., a Cayman Island corporation.
Hutronix, Inc. an Arizona corporation.
QDS, de Mexico, S.A. de C.V. a Mexican corporation.
and the 96% owned subsidiary, Hutronix de Mexico, S.A. de C.V. which
has been inactive since August 17, 1982.
All significant inter-company balances and transactions have been
eliminated on consolidation.
J.A. Industries (Canada), Inc. was disposed of during the year ended
June 30, 1995. Hutronix, Inc. and QDS de Mexico were disposed of
during the year ended June 30, 1996 subject to shareholder approval.
Translation of Foreign Currencies
Account balances and transactions denominated in foreign currencies have
been translated into U.S. funds as follows:
Assets and liabilities at the rates of exchange prevailing at the
balance sheet date; Revenue and expenses at average exchange rates for
the period in which the transaction occurred; Exchange gains and
losses arising from foreign currency transactions are included in the
determination of net earnings for the period.
2. Sale of Subsidiary
On November 23, 1995, the Company sold all of the common shares of
Hutronix, Inc. and on and on August 15, 1995 the Company sold all of the
common share of Granite Marketing Corporation for $100. The two
transaction resulted in a loss of $74,591, which has been included in
other expense for the period ended December 31, 1995. Granite Marketing
Corp. was inactive during the period.
F-31
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
3. Inventory
Inventory consists of: 1995 1994
Raw materials $ --- $ 531,321
Less: Reserve for obsolescence --- 190,000
----------------- -----------------
--- 341,321
Work-in-process --- 104,604
Finished goods --- 7,349
----------------- -----------------
$ --- $ 453,274
----------------- -----------------
4. Property and equipment
<TABLE>
<CAPTION>
Accumulated Net Book Value
Cost amortization 1995 1994
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Land $ --- $ --- $ --- $ ---
Building --- --- --- ---
Forklift --- --- --- 7,410
Vehicles --- --- --- 81
Office equipment --- --- --- 46,264
Computer equipment --- --- --- 27,957
Manufacturing equipment --- --- --- 199,669
Leasehold improvements --- --- --- 935
Assets not-in-service --- --- --- 232,520
----------------- ----------------- ----------------- -----------------
$ --- $ --- $ --- $ 514,836
----------------- ----------------- ----------------- -----------------
</TABLE>
F-32
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
5. Intangible assets
Intangible assets comprise the following: 1995 1994
Goodwill $ --- $ 128,767
Incorporation costs --- 3,000
Patent costs --- 8,895
------------- -----------------
--- 140,662
Amortization --- 16,096
------------- -----------------
$ --- $ 124,566
------------- -----------------
6. Loans from shareholders
<TABLE>
<CAPTION>
Loans from shareholders comprise the following: 1995 1994
<S> <C> <C>
Loan payable to Alexander Michie, balance due on demand with
no stated interest rate. $ 20,000 $ ---
Loan payable to 391566 B.C. Ltd., balance due on demand with no
stated interest rate. 1,064 ---
Loan payable to Alexander Michie. The loan is unsecured and
has no terms of repayment. The loan has a stated interest rate
of prime plus 2%. --- 138,146
----------------- -----------------
$ 21,064 $ 138,146
----------------- -----------------
</TABLE>
F-33
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
7. Long-term debt
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Note payable to a bank executed through the Industrial Development
Authority of the City of Douglas, Arizona due in quarterly instalments of
$12,821, plus interest at 65% of prime (9.0% as of March 31, 1995), due
May 2005; secured by a deed of trust on the real estate held for sale, an
irrevocable letter of credit from a bank in the amount of the outstanding
note payable balance and the assignment of a life insurance policy owned
by a related party on the president of Hutronix, Inc. At March 31, 1995
the company was not in compliance with certain restrictive
covenants contained in this note. $ - $ 564,087
Note payable to a supplier due in quarterly instalments of
$8,361 plus interest at 6% unsecured, due March 15, 1995 --- 8,086
Promissory note payable to a lender. The principal of $36,155 (CDN
$50,000) plus accrued interest at 24% per annum is payable on demand. The
lender has stated that it is not her intention to
demand repayment of the note before March 31, 1996. --- 51,283
Mortgage payable, on manufacturing equipment, to the Province of British
Columbia, Canada due in monthly payments of $1,787 (CDN $2,500) plus
interest at 6% per annum. The principal balance
is due July 1, 1995. --- 83,078
----------------- -----------------
0 706,534
Less: Current portion --- 155,270
----------------- -----------------
$ 0 $ 551,264
----------------- -----------------
</TABLE>
8 Income tax
The Company has losses for income tax purposes which may be carried
forward and applied to reduce future income taxes. The deferred tax
benefit related to these losses has not been recorded in the accounts as
there is not virtual certainty of realization.
All of the income attributable to Granite Marketing Corp. (a Cayman Island
corporation) is reported as non-taxable.
F-34
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
9 Commitments and Contingencies
Under the terms of various agreements, the Company has guaranteed payment
of $18,275 in accounting fees and the $546,125 mortgage on the Douglas,
Arizona plant owned by Hutronix, Inc. The reversal of the Hutronix, Inc.
purchase included an idemnification on the above guarantees. Should the
other party fail to perform, the obligations could be asserted against the
Company.
10 Subsequent event
On January 26, 1996 the shareholders ratified the sale of Hutronix, Inc.
and QDS, de Mexico, S.A. de C.V.
11 Correction of Errors in Previously Issued Financial Statements
The financial statements for the period ended December 31, 1995 have
been issued twice previously.
The first amended financial statements recorded the loss on disposition
of Hutronix, Inc. and related subsidiaries during the second quarter.
This had been omitted because it was the Company's intention to
dispose of the subsidiary at the beginning of the fiscal period.
As a result of this change the Company's net loss for the six months
ended December 31, 1995 and the three months ended December 31, 1995
increased by $73,196. The net loss per share was unchanged from the
amounts previously reported.
The second amended financial statement's recorded the results of
operation for Hutronix, Inc. and related subsidiaries for the period
until disposition. Futhermore, the effect of audit adjustments from
fiscal 1995 were recorded.
As a result of these changes the Company's net loss for the six months
ended December 31, 1995 decreased by $297,726 and the net loss for
the three months ended December 31, 1995 decreased by $22,304. The
Company's net loss per share for the six months ended December 31, 1995
decreased by $0.02 and the net loss per share for the three months ended
December 31, 1995 increased by $0.01.
F-35
<PAGE>
KPMG Peat Marwick LLP
150 Fayetteville Street Mall
Suite 1200
Post Office Box 29543
Raleigh, NC 27626-0543
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Kenmar Business Groups, Inc.:
We have audited the accompanying consolidated balance sheets of Kenmar Business
Groups, Inc. as of August 31, 1995 and 1994, and the related consolidated
statements of income (loss), stockholders' deficit, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
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 1995 and 1994 financial statements referred to above present
fairly, in all material respects, the financial position of Kenmar Business
Groups, Inc. as of August 31, 1995 and 1994, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
As discussed in note 3, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of" on September 1, 1994.
/s/ KPMG Peat Marwick LLP
October 20, 1995
F-36
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Balance Sheets
August 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
<S> <C> <C>
Current assets
Cash and cash equivalents $1,632,620 74,478
Accounts receivable-trade, net of allowance
for doubtful accounts of $5,500 and $80,000
in 1995 and 1994, respectively (note 7) 273,062 2,139,121
Accounts receivable-other (note 15) 19,132 10,007
Inventories (notes 4 and 7) 331,540 1,377,292
Recoverable income taxes - 103,208
Prepaid expenses and other current assets 87,146 11,481
Total current assets 2,343,510 3,715,587
Property and equipment, net (notes 5, 8 and 9) 590,307 1,023,614
Other assets:
Deposits and other assets 38,398 163,220
Cost in excess of net assets of acquired business,
net of accumulated amortization of $220,537 and
45,537 in 1995 and 1994, eruptively (note 6) 97,500 272,500
Total other assets 135,898 435,720
Liabilities and Stockholders' Deficit $3,069,715 5,174,921
========== =========
Current liabilities:
Line of credit (note 7) - 1,396,953
Current maturities of long-term debt (note 8) 22,359 293,242
Current obligations under capital leases (note 9) 35,203 40,313
Accounts payable, trade 2,206,535 2,954,433
Other accrued liabilities 425,956 154,708
Total current liabilities 2,690,053 4,839,649
Long-term debt, less current maturities (notes 8 and 15) 560,021 657,034
Long--term obligations under capital leases (note 9) 76,172 122,784
Class A cumulative preferred stock, $50 par value;
with a preference in liquidation over the holders
of common stock of $50 plus accrued dividends;
authorized 30,000 shares, 9,926 shares in 1995
and 1994 issued and outstanding (note 11) 729,844 166,208
Stockholders' deficit (notes 12 and 15):
Preferred stock, undersignated; authorized
70,000 shares; no shares issued - -
Common Stock, $1 par value; authorized 100,000
shares, 64,714 and 58,197 shares issued and
outstanding in 1995 and 1994, respectively 64,714 58,197
Additional paid-in capital 99,667 203,303
Retained deficit (1,150,756) (1,332,254)
Commitments (notes 9 and 10) (986,375) (1,070,754)
$3,069,715 5,174,921
========== ==========
</TABLE>
See Notes to consolidated financial statements.
F-37
<PAGE>
KENMAR BUSINESS GROUPS, INC
Consolidated Statements of Income (Loss)
Years ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Sales $15,565,662 22,927,597
Cost of goods sold 13,883,090 22,685,168
Gross profit 1,682,572 242,429
General, selling and administrative expenses 1,233,587 1,466,289
Operating income (loss) 448,985 (1,223,860)
Other income (expenses):
Interest income 6,321 7,669
Miscellaneous income - 10,868
Interest expenses (273,808) (252,332)
Other expenses, net (267,487) (233,795)
Income (loss) become income taxes 181,498 (1,457,655)
Income tax benefit (note 13) - 98,768
Net income 181,498 (1,358,887)
Accretion of preferred stock (54,006) (24,188)
Undeclared dividends on preferred stock (49,630) (48,645)
Net income (loss) applicable to common shareholders $ 77,862 (1,431,720)
Weighted average number of shares 61,999 56,988
Net income (loss) per common share and common share
equivalent (note 16) $ 1.26 (25.12)
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Statements of Stockholders' Deficit
Years ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
Additional Total
Common Stock paid-in Retained stockholders'
Shares Amount capital earnings deficit
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1993 56,586 $56,586 186,704 59,543 302,833
Dividends paid - - - (32,910) (32,910)
Issuance of common stock for cash, net
of $16,862 issuance costs 1,611 1,611 56,522 - 58,133
Accretion of preferred stock - - (24,188) - (24,188)
Undeclared dividends on preferred stock - - (15,735) - (15,735)
Net loss - - - (1,358,887) (1,358,887)
Balance at August 31, 1994 58,197 58,197 203,303 (1,332,254) (1,070,754)
Issuance of common stock of cash 6,517 6,517 - - 6,517
Accretion of preferred stock - - (54,006) - (54,006)
Undeclared dividends on preferred stock - - (49,630) - (49,630)
Net income - - - 181,498 181,498
Balance at August 31, 1995 64,714 $64,714 99,667 (1,150,756) (986,375)
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Statements of Cash Flows
Years ended August 31 and 1995, 1994
<TABLE>
<CAPTION>
1995 1994
Cash flow from operating activities:
<S> <C> <C>
Net income (loss) $ 181,498 (1,358,887)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 422,787 236,925
Loss on disposal of property and equipment 30,657 5,932
Writedown of property and equipment 179,076 -
Provision (credit) for deferred income taxes - 2,200
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,866,059 (357,332)
Decrease (increase) in inventories 1,045,752 1,002,133
Decrease (increase) in recoverable income taxes 103,208 (102,208)
Decrease (increase) in prepaid expenses
and other current assets (75,665) 14,888
Increase in accounts receivable, other (9,125) (6,255)
Decrease (increase) in deposits and other assets 124,822 (19,223)
Increase (decrease) in accounts payable, trade (747,898) 376,532
Increase (decrease) in income taxes payable - (63,626)
Increase in other accrued liabilities 271,248 85,759
Net cash provided by (used in) operating
activities 3,392,419 (184,162)
Cash flow from investing activities:
Capital expenditures (24,213) (333,451)
Net cash used in investing activities (24,213) (333,451)
Cash flow from financing activities:
Proceeds from issuance of preferred stock - 57,500
Proceeds from issuance of common stock 6,517 58,133
Net borrowings (repayment) on line of credit (1,396,953) 251,518
Proceeds from issuance of note payable 350,122 -
Principle payments on note payable (350,122) -
Proceeds from issuance of long-term debt - 250,000
Principal payments on long-term debt (367,896) (118,937)
Principal payments on capital lease obligations (51,722) (21,322)
Dividends paid - (32,910)
Net cash provided by (used in) financing
activities (1,810,054) 443,983
Net increase (decrease) in cash and
cash equivalents 1,558,152 (73,631)
Cash and cash equivalents:
Beginning of year 74,478 148,109
End of year $ 1,632,630 74,478
(Continued)
</TABLE>
F-40
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Statement of Cash Flows, Continued
Years ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
Supplement disclosure of cash information:
<S> <C> <C>
Cash paid during year for:
Interest $ 352,765 237,069
Income taxes $ - 73,255
Supplemental schedule of non-cash investing and financing
activities:
During 1994 the Company entered into capital lease
obligations totalling $114,911. The Company did not
enter into any capital leases in 1995.
During 1994, the Company entered into a financing agreement
to purchase a new software system. Total financed amount
was $49,320.
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements
August 31, 1995 and 1994
(1) Description of Business
Kenmar Business Groups, Inc.'s (the "Company") principal business
activity is the manufacture of electronic products and assemblies for
original equipment manufactures (OEM) located in the southeastern United
States. The Company provides products and services to OEM's in the
telecommunications, industrial controls, instrumentation, medical
devices, and computer industries.
(2) Concentration of Credit Risk and Major Customer
The Company manufactured more than fifty different products and repaired
and refurbished over one hundred different products for its largest
customer, which is comprised of five different operating locations and
two subsidiaries. Accounts receivable from this customer accounted for
approximately 19% and 75% of total receivables at August 31, 1995 and
1994, respectively. The Company's sales to this customer during 1995
comprised 81% of the Company's total sales. During the fourth quarter of
1995, the Company ceased doing business with this customer. (See note
17). Accordingly, the Company has taken various steps to restructure the
business to be commensurate with the reduction in volume. The Company
may have to take additional measures in the future as a result of the
decrease in volume.
(3) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and Test Services, Inc. ("TSI") which was inactive in the years
ended August 31, 1995 and 1994. All intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts on deposit with
banks and all highly liquid investments with a maturity of 90 days or
less when purchased.
Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. A provision is made for obsolete and
slow moving inventory.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital
leases is stated at the present value of the minimum lease payments at
the inception of the lease. Depreciation is calculated using the
half-year convention, straight-line method over the estimated useful
lives of the respective assets which range from 3 to 7 years. Equipment
held under capital leases are amortized on a straight-line basis over
the lesser of the lease term or estimated useful life of the asset.
Maintenance and repairs are charged to expenses as incurred. The cost
and related accumulated depreciation of the assets are removed from the
accounts upon disposition and any resulting gain or loss is reflected in
operations.
F-42
<PAGE>
(3) Summary of Significant Accounting Policies, Continued
Accounts Receivable
The Company performs ongoing credit evaluations of its trade receivables
and generally does not require collateral. An allowance is provided for
estimated uncollectible accounts.
Revenue Recognition
The Company recognizes revenue upon shipment of products to customers.
Cost in Excess of Net Assets of Acquired Business
The excess cost of net assets of acquired business relates principally
to the value assigned to customer relationships and is being amortized
by the straight-line method over a period of 20 years.
The Company evaluates, when circumstances warrant, the recoverability of
the cost in excess of net assets of acquired businesses by comparing the
sum of the undiscounted projected future cash flows attributable to each
customer to the carrying value of the related asset. Projected cash
flows are estimated for a period approximating the remaining lives of
the Company's long-lived assets.
As a result of such evaluation the Company took an writedown of $160,000
during the year ended August 31, 1995.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Statement 109 requires a change from the deferred method
of accounting for income taxes of APB Opinion 11 to the asset and
liability method of accounting for income taxes. Under the asset and
liability method of Statement 109, deferred tax assets and liabilities
are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The Company has adopted Statement of Financial Accounting Standards No.
109 (SFAS No. 109), "Accounting for Income Taxes", effective September
1, 1993. As of September 1, 1993, there is no impact as a result of
adopting SFAS No. 109 and as such no cumulative effect adjustment was
required for the adoption of SFAS No. 109. Due to the Company's
operating loss carryforwards, management has determined that a valuation
allowance equal to the amount of net deferred tax assets is required.
Earnings Per Share
Earnings per share are based upon the weighted average number of common
and common equivalent shares outstanding during the period.
F-43
<PAGE>
(3) Summary of Significant Accounting Policies, Continued
Impairment of Long-Lived Assets
During the year ended August 31, 1995, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". Statement 121 requires the Company to determine whether recognition
of an impairment loss is required and, if so, to measure the impairment.
If the sum of the expected future cash flows, undiscounted and without
interest costs, is less than the asset's carrying amount, an impairment
loss is recognized. Any impairment loss recognized upon adoption for
assets to be held and used is recorded in continuing operations.
(4) Inventories
Inventories consist of:
1995 1994
Raw materials $193,649 997,549
Work-in-progress 111,330 249,620
Finished goods 26,561 130,123
$331,540 1,337,292
(5) Property and Equipment
Property and equipment consist of the following:
1995 1994
Leasehold improvements $ 164,912 233,816
Machinery and equipment 672,538 737,578
Computer hardware and software 343,578 408,000
Furniture and fixtures 92,015 91,469
Vehicles 9,182 37,053
Total $1,282,225 1,507,916
Less accumulated depreciation and
amortization 691,918 484,320
Property and equipment, net $ 590,307 1,023,614
Depreciation expense was $247,787 and $203,888 in 1995 and 1994,
respectively.
The Company reviewed its leasehold improvements, machinery and equipment
and computes hardware and software for impairment as a result of the
Company ceasing to do business with its major customer (see notes 2 and
17). The Company estimated future cash flows and compared it with the
net asset value of the related assets. This analysis resulted in a
writedown of approximately $180,000 which is included as part of cost of
goods sold in the income statement.
F-44
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(6) Acquisition
On October 15, 1992 the Company purchased all of the outstanding stock
of TSI, a manufacturer of electronic printed circuit board assemblies
for original equipment manufacturers, for a purchase price of
approximately $750,000 consisting of $7,500 cash and three subordinated
promissory notes totaling $742,500. The promissory notes are being paid
in equal monthly installments over ten years and bear a fixed interest
rate of 8%.
The acquisition has been accounted for using the purchase method of
accounting. The following table presents the allocation of the purchase
price to the fair value of the assets acquired and liabilities assumed:
Assets acquired $966,145
Liabilities assumed 216,145
--------
Purchase price $750,000
========
As a result of the TSI acquisition, the principal stockholder and chief
executive of TSI entered into a ten year non-compete agreement in return
for a monthly payment of $3,000 for ten years ending October 15, 2002.
Cash payments under the agreement were $72,000 and $36,000 and in 1995
and 1994, respectively. Cash payments in 1995 relate to years ended
August 31, 1995 and 1996.
(7) Line of Credit
In March 1994, the Company negotiated a $4,000,000 revolving line of
credit with a commercial lender which allowed it to borrow up to 80%
of eligible receivables and was secured by a first lien on all the
Company's receivables and inventory. Borrowings under this line bear
interest at prime plus 2.5% (minimum 7.5%) in addition to an annual
facility fee and other costs. The Company paid off the line of credit
in the fourth quarter of its fiscal year ended August 31, 1995. The
Company has not requested a renewal of the line of credit.
F-45
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(8) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Subordinated promissory notes payable in monthly
installments of $9,009, including interest at 8%,
through October 2002 $524,855 646,674
Bank debt collateralized by a first lien on all the
Company's plant, equipment, furniture and
fixtures payable in monthly installments of
$7,950, including interest at prime + 1%. This
loan was paid off prior to August 31, 1995. - 217,932
Uncollateralized note payable to stockholder
repayable with interest at 8% in 59 monthly
installments of $610 and a balloon payment
of $30,083 on October 15, 1997 39,482 43,468
Notes payable secured by equipment repayable
in monthly installments of $2,435 including
interest at 16.85% through April 1996 18,043 42,202
582,380 950,276
Less current maturities 22,359 293,242
$560,021 657,034
</TABLE>
Principal maturities of debt at August 31, 1995 are as follows:
Year ending August 31,
1996 $ 22,359
1997 73,269
1998 104,776
1999 80,451
2000 87,130
Thereafter 214,395
Total long-term debt $582,380
F-46
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(9) Obligation Under Capital Leases
The Company leases equipment under capital leases which expire on
various dates through 1998. Included in property and equipment are the
following amounts applicable to these leases:
1995 1994
---- ----
Machinery and equipment $200,066 200,066
Vehicles - 27,871
-------- -------
200,066 227,937
Less accumulated amortization 59,043 44,397
-------- -------
$141,023 183,540
======== =======
The following is a schedule by years of future minimum lease payments
under capital leases as of August 31, 1995:
Year ending August 31
1996 $ 48,272
1997 49,701
1998 29,431
-------
Total minimum lease payments 127,404
Less amounts representing interest 16,029
-------
Present value of future minimum
lease payments 111,375
Less current maturities 35,203
-------
$ 76,172
=======
(10) Commitments
The Company leases certain office and production space, machinery and
equipment under noncancellable operating leases expiring at various
dates through 1998. During the years ended August 31, 1995 and 1994,
the Company incurred rental expenses of $214,505 and $271,448,
respectively, under these leases.
Future minimum lease payments under the terms of the above leases are
as follows:
1996 $38,422
1997 2,952
1998 2,460
F-47
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(11) Preferred Stock
The aggregate number of authorized shares of preferred stock is 100,000.
Of the 100,000 shares of preferred stock 30,000 shares have been
designated as Class A cumulative preferred stock. The designation of the
remaining 70,000 shares will be determined by the Board of Directors.
The Company issued 1,150 shares of $50 par value Class A cumulative
preferred stock ("Class A Preferred Stock") in 1994. During 1993, the
Company issued 716 shares of $50 par value Class A cumulative preferred
stock including upon receipt of the issue price, the 200 shares
subscribed at August 31, 1992. Each share of Class A preferred stock
may be called or put at any time after five years from the date of
issuance at a rate of one and one-half times the issue price.
Redemption requirements of Class A cumulative preferred stock at
August 31, 1995 are as follows:
1997 $150,000
1998 447,000
1999 68,700
2000 86,250
--------
$751,950
========
The Class A preferred stock is entitled to a 10% cumulative dividend
payable quarterly, subject to the provisions of North Carolina law.
Cumulative unpaid dividends are $73,008 and $23,378 as of August 31,
1995 and 1994, respectively.
Upon liquidation, the Class A shares have preference over holders of
common stock in an amount equal to the issue price ($50 per share) plus
cumulative dividends in arrears. Cash dividends of $-0- and $32,910 were
paid in 1995 and 1994, respectively.
(12) Stock Option Plan
The Company adopted a non-qualified stock option plan in 1992 to attract
and retain employees, officers, directors and advisors.
As of August 31, 1995 there were 4,178 options outstanding of which
3,878 were vested. Options run for 10 years from the grant date and
entitle the holder to convert each option into one share of common stock
at $45 per share. No options have been exercised as of August 31, 1995.
F-48
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes
As discussed in note 3, the Company adopted Statement 109 as of
September 1, 1993. There is no cumulative effect of this change in
accounting for income taxes as reported in the statement of earnings
for the year ended August 31, 1994. Prior years' financial statements
have not been restated.
Components of income tax benefit are as follows:
1995 1994
----- -----
Taxes currently payable:
Federal and State $ - (98,768)
Deferred:
Federal and State - -
------ -------
$ - (98,768)
====== =======
Deferred income tax expense (benefit) results from timing differences
in the recognition of income and expense for tax and financial
statement purposes. Such timing differences relate primarily to
differences in financial statement and tax depreciation expense,
amounts accrued and expensed for financial statement purposes but not
deductible for taxes until paid, and tax uniform capitalization rules
for inventory.
The components of net deferred tax assets and the net deferred tax
liabilities as of August 31, 1995 and 1994 are as follows:
1995 1994
----- -----
Deferred tax assets:
Net operating loss carryforward $ 72,566 232,918
Inventories, principally due to additional
costs inventoried for tax purposes,
pursuant to the Tax Reform Act of 1986
and inventory reserves 83,470 122,815
Amortization of customer lists 16,575 10,725
Accounts receivable, principally due to
allowance for doubtful accounts 2,145 31,200
Other accruals 29,962 21,756
Property, plant and equipment, principally
due to differences in depreciation and
FAS 121 writedowns 125,311 -
--------- -------
Total gross deferred tax assets 330,029 419,414
Valuation allowance (330,029) (408,864)
--------- -------
Net deferred tax assets $ - 10,550
========= =======
Deferred tax liabilities:
Property, plant and equipment, principally
due to differences in depreciation $ - 10,550
--------- -------
Total gross deferred tax liabilities $ - 10,550
========= =======
F-49
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, Continued
The actual income tax expense (benefit) for 1995 and 1994 differs from
the "expected" amount (computed by applying the statutory federal
income tax rate of 34% to the earnings before income taxes and
cumulative effect of a change in accounting principle) and is
principally due to loss carryforwards, nondeductible travel and
entertainment expenses, state income taxes net of federal tax benefit,
non-deductible officer's life insurance and changes in the amount of
the valuation allowance.
At August 31, 1995, the Company has a net operating loss carryforward
of approximately $187,000 and a net economic loss carryforward for state
income taxes of approximately $984,000, expiring in various amounts
through 2010.
(14) Employee Benefit Plans
The Company has a 401(k) defined contribution plan (the "Plan")
covering substantially all full-time employees who meet certain age
and length of service requirements. Participants are eligible to
contribute up to 15% of their annual compensation, not to exceed legal
limits. The Company does not make contributions to the Plan.
Participants vest immediately in their contributions.
(15) Related Party Transaction
During October 1992, a member of the Board of Directors granted a ten
year unsecured loan to the Company in the amount of $445,500. As of
August 31, 1995 and 1994, the outstanding principal balance was
approximately $315,000 and $388,000, respectively. Such amount is
included in long term debt.
During October 1992, the Company entered into a non-compete agreement
with a former member of the Board of Directors (see note 6).
During 1995, a Director, in conjunction with an unrelated party entered
into an Agreement to lend the Company $350,122 on a 120 day Note,
collarteralized by all the Company's plant, equipment, furniture and
fittings. The proceeds of the loan was used to repay approximately
$105,000 of bank debt and for operational purposes. The loan carried
an interest rate of 12%. Under the Agreement, the lenders purchased
6,380 shares of common stock, at a price of $1 per share (representing
approximately 10% of the present outstanding common stock).
At August 31, 1995, accounts receivable - other included a note
receivable from an officer of the Company of $10,866 with an interest
rate of 8%.
F-50
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(16) Net Income Per Common Share
At August 31, 1995, there were 4,178 stock options outstanding.
The net income per common share and common equivalent share are
calculated by deducting dividends applicable to preferred shares
from net income and dividing the result by the weighted average
number of shares of common share and common share equivalents
outstanding during each of the years. Presentation of fully diluted
earnings per share is not required because the effect is anti-dilutive.
(17) Subsequent Events
On September 18, 1995, the Company signed an agreement with its
largest customer (see note 2). The provisions of the agreement
relieved the Company of trade accounts payable to the customer
and other suppliers of $1,121,151. The agreement provided the
customer relief of trade payables to the Company of $52,957 and
required the customer to pay cash to the Company in the amount of
$250,000. This agreement also provided for the release of both
parties from any claims that might arise from past business relations
or transactions.
Subsequent to the year end the Company entered into negotiations with
its major suppliers. These negotiations have resulted in the suppliers
forgiving approximately $440,000 of the accounts payable balance at
August 31, 1995 in return for payment of 25% of the balance due with
a further 25% due in four quarterly installments beginning
January 1, 1996.
F-51
<PAGE>
KENMAR BUSINESS GROUP, INC.
Consolidated Balance Sheets
February 29, 1996 and February 28, 1995
UNAUDITED
February 29, February 28,
1996 1995
------------ -------------
Assets
Current assets:
Cash and cash equivalents $ 744,533 $ 45,346
Accounts receivable - trade, net of
allowance for doubtful accounts of
$5,500 in 1996 and $65,807 in 1995.
Also net of allowance for returns of
$22,410 in 1995. 513,478 2,165,026
Accounts receivable - other 15,865 3,609
Inventories 317,531 1,256,409
Prepaid expenses and other current assets 110,085 51,296
--------- ---------
Total current assets 1,719,492 3,521,686
--------- ---------
Property and equipment - net 496,337 908,665
--------- ---------
Other assets:
Deposits and other assets 72,998 352,382
Cost in excess of net assets of acquired
business net of accumulated amortization
of $212,250 in 1996 and $35,000 in 1995 87,750 265,000
--------- ---------
Total other assets 160,748 617,382
--------- ---------
Total assets 2,376,577 5,047,733
--------- ---------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Line of credit - 1,911,547
Current maturities of long-term debt 4,317 132,003
Current obligations under capital leases 35,203 35,203
Accounts payable, trade 621,852 2,397,521
Other accrued liabilities 94,833 57,182
--------- ---------
Total current liabilities 756,205 4,533,456
--------- ---------
Long-term debt, less current maturities 541,236 627,614
--------- ---------
Long-term obligations under capital leases 57,750 94,283
--------- ---------
Class A preferred stock, including accretion
and accrued dividends 759,129 626,206
--------- ---------
F-52
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Balance Sheets
February 29, 1996 and February 28, 1995
UNAUDITED
February 29, February 28,
1996 1995
Stockholders' equity (deficit)
Common stock, $1 par value; authorized 100,000
shares in 1996 and 1995 issued and outstanding 64,714 64,714
Additional paid-in capital 213,941 243,226
Retained earnings (deficit) (16,398) (1,141,766)
Total stockholders' equity (deficit) 262,257 (833,826)
Total liabilities and stockholders'
equity (deficit) 2,376,577 5,047,733
F-53
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Statements of Income
Six-month periods ended February 29, 1996 and February 28, 1995
UNAUDITED
<TABLE>
<CAPTION>
Six Months Ending
February 29, February 28,
1996 1995
<S> <C> <C>
Sales $ 1,354,383 $ 8,266,268
Cost of Goods Sold 1,373,793 7,449,976
----------- -----------
Gross profit (19,410) 816,292
General, selling and administrative expenses 397,350 446,525
----------- -----------
Operating income (loss) (416,760) 369,767
Other income (expense)
Interest income 30,443 2,610
Interest expense (29,214) (141,968)
Miscellaneous expense (18,300) --
----------- -----------
Other income (expense) (17,071) (139,358)
----------- -----------
Income (loss) before income taxes and
extraordinary items (433,831) 230,409
Income tax benefit (expense) -- --
----------- -----------
Income (loss) before extraordinary item (433,831) 230,409
Extraordinary Item 1,724,781 --
Net Income 1,290,950 230,409
Accretion of preferred stocks (29,285) (27,003)
Undeclared dividend on preferred stock (12,408) (24,323)
----------- -----------
Net income applicable to common stockholders $ 1,249,257 $ 179,084
----------- -----------
Weighted average number of shares 64,714 60,369
----------- -----------
Income (loss) per common share
before extraordinary item (7.35) 2.97
Extraordinary item per
common share 26.65 --
Net income per common share 19.30 2.97
</TABLE>
F-54
<PAGE>
KENMAR BUSINESS GROUPS, INC.
STATEMENTS OF CASH FLOWS
Six months ending
February 29, February 28,
1996 1995
Cash flow from operating activities:
Net income $1,290,950 $230,409
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 111,588 162,626
Changes in operating assets and liabilities:
(Increase) in accounts receivable (258,416) (25,905)
(Increase) in deposits and other assets (34,600) (189,162)
Decrease in inventories 14,009 120,885
Decrease in recoverable income tax -- 103,205
(Increase) in prepaid expenses
and other current assets (22,939) (39,814)
Decrease in accounts receivable other 3,267 8,398
(Decrease) in accounts payable, trade (1,584,683) (558,915)
(Decrease) in other accrued liabilities (331,123) (97,526)
---------- --------
Net cash provided by (used in) operating
activities (811,947) (295,796)
---------- --------
Cash flow from investing activities:
Capital expenditures (7,888) (40,177)
---------- --------
Cash flow from financing activities:
Proceeds from issuance of common stock 6,517
Net borrowing on line of credit -- 514,594
Principal payments on long term debt (36,827) (190,659)
Principal payments on capital lease obligations (18,422) (33,611)
Repurchase of common stocks (625) --
Dividends paid (12,408) --
---------- --------
Net cash provided by (used in) financing activities (68,282) 296,841
---------- --------
Net increase (decrease) in cash and cash
equivalents (888,097) (29,132)
Cash and cash equivalents:
Beginning of period 1,632,630 74,478
---------- --------
End of period $744,533 $45,346
---------- --------
F-55
<PAGE>
KENMAR BUSINESS GROUPS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) Basis of Presentation:
The accompanying Consolidated Condensed Financial Statements are
unaudited. In management's opinion, all adjustments necessary for a fair
presentation have been made. The accompanying financial information should be
read in conjunction with the Company's annual audited financial statements for
the year ended August 31, 1995.
(2) Inventories:
August 31, 1995 February 29, 1996
Raw materials $193,649 202,529
Work-in-process 111,330 104,066
Finished goods 26,561 10,936
-------- -------
$331,540 317,531
-------- -------
(3) Extraordinary items:
On September 18, 1995, the Company signed an agreement with its largest
customer. The provisions of the agreement relieved the Company of trade
accounts payable to the customer and other suppliers of $1,127,519. The
agreement provided the customer relief of trade payables to the Company of
$52,957 and required the customer to pay cash to the Company in the amount
of $250,000. This agreement also provided for the release of both parties
from any claims that might arise from past business relations or transactions.
During the six months ended February 29, 1996, the Company renegotiated
$1,097,881 of its accounts payable balances with its major suppliers. These
renegotiations resulted in the suppliers forgiving $507,619 of the
amounts due in return for payment of 25% of the remaining balance due
principally in September and October 1995 with a further 25% due in four
quarterly installments beginning January 1, 1996.
The above transactions resulted in an extraordinary gain of $1,724,781
(net of legal and other consulting fees of $107,400) or $26.65 per common
share and are included in the accompanying unaudited consolidated condensed
statement of income for the six months ended February 29, 1996.
F-56
<PAGE>
