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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________________
Commission file number 0-935
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BELL NATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
California 94-1451828
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
4209 Vineland Road, Suite J-1, Orlando, Florida 32811
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (407) 849-0290
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Company as of March 8, 1997 was $364,000 based upon the average bid and asked
prices of shares of the Company's common stock, no par value per share ("Common
Stock"), of $0.075 per share as reported in the Electronic Bulletin Board. The
number of shares of Common Stock outstanding at March 8, 1997 is 5,488,114.
PART I
ITEM 1. BUSINESS
General
Bell National Corporation ("Bell National" and together with its subsidiaries,
the "Company") was incorporated in California on October 1, 1958. Through 1985,
its principal subsidiary was Bell Savings and Loan Association ("Bell Savings"),
a state chartered savings and loan association. On July 25, 1985, the Federal
Home Loan Bank Board appointed the Federal Savings & Loan Insurance Corporation
("FSLIC") as receiver of Bell Savings. At the same time, the assets of Bell
Savings were transferred to a new, unrelated, federally chartered mutual savings
and loan association, Bell Federal. The FSLIC's appointment followed shortly
after a determination that Bell Savings had a negative net worth. On August 20,
1985, Bell National filed a voluntary petition under Chapter 11 of the
Bankruptcy Code. A Plan of Reorganization (the "Plan") was approved by the
Bankruptcy Court, and became effective June 29, 1987.
After emerging from bankruptcy proceedings in June 1987, and a vote by
shareholders to continue the operations of Bell National in October 1988, the
Company reached an agreement ("Stock Purchase Agreement") with Milley Management
Incorporated ("MMI"), a private investment firm, in 1989 whereby Bell National
sold to a group of private investors Common Stock totaling approximately 41% of
the outstanding voting shares on a fully diluted basis.
On June 15, 1990, Bell National purchased 100% of the common stock of Payne
Fabrics, Inc. ("Payne"), a designer and distributor of decorative drapery and
upholstery fabrics, for a purchase price of $6,493,000 and the issuance of stock
appreciation rights. Bell National's other wholly owned subsidiaries, Bell
Savings and Pacific Coast Holdings Insurance Company, have no operations or any
significant assets or liabilities.
Payne Business Summary
Payne, a designer and distributor of high quality fabric and wall coverings
since 1865, sells to the home furnishing industry. The Company's products
include printed and plain textured drapery fabric, woven upholstery fabric,
sheer fabrics, casement window trimmings and wallpaper. The selection, design
and distribution of decorative cut fabrics comprise approximately 86% of the
Company's annual revenues. The Company also custom manufactures draperies and
bedding items primarily for institutions; these sales represent the remaining
14% of total revenue.
Payne keeps in stock more than 7,100 different fabrics, composed of as many as
1,520 patterns, of which roughly half represent exclusive Payne designs. Most
patterns are produced in four to five color combinations. Payne's fabrics
reflect classical and traditional patterns adapted to contemporary color
combinations and weave blends. The Company's product line offers the decorator
the ability to purchase fabric from a single source.
2
The Company introduces collections of its product line each year in its fall and
spring fabric introductions. Each fabric collection is organized around a common
theme which is generally built upon in subsequent introductions as well as being
designed to coordinate with other collections. To facilitate the inventory
reductions, the Company maintains an outlet store in Dayton, Ohio where remnant
fabric pieces of less than five yards, and obsolete inventory, are sold.
Payne focuses the price range of its products on the medium and high end of the
market which it believes represents approximately 60% of the entire decorative
fabric market. Payne's line is primarily targeted to interior designers.
Interior designers are generally independent individuals whose taste and quality
requirements can only be met with a unique high-quality fabric or wall covering.
Payne currently maintains a customer list of 12,000 U.S. based designers
consisting of a network of independent agents, independent mini-show rooms,
company show rooms and company sales representatives. Payne's other major
customers are hospitality and institutional agencies such as hotels,
universities, government agencies and similar organizations responsible for
facilities maintenance and decoration. Printed fabrics are also supplied to top
quality furniture manufacturers for their production needs.
The Company markets its products principally through the use of four Company
leased showrooms (including one located at the Company's Dayton facility), as
well as sixteen U.S. and six foreign independent agent showrooms. The Company's
leased showrooms feature Payne's fabric exclusively, whereas the independent and
mini showrooms, which are operated by the Company's sales agents, display other
fabric lines in addition to those of the Company. The Company believes that it
is the dominant line for each of the independent showrooms, with the exception
of those in Boston, Seattle, San Francisco and Los Angeles. In these showrooms
it is the secondary line, after three fabric companies with products positioned
in a higher price segment than the Company. Payne's showrooms are supported by
nine Company salaried sales people and twenty-one independent commissioned sales
agents.
The following sets forth Payne's sales by major product category for 1996, 1995
and 1994, respectively: Upholstery fabrics accounted for 27.7%, 29.0% and 32.5%
of Payne's sales. The 1996 decrease in the upholstery sales percentage was due
to an increase in trim sales, while upholstery sales declined slightly. Drapery
fabric represented 31.2%, 30.5% and 29.7% of Payne's sales in 1996, 1995 and
1994, respectively. The slight increase in 1995 drapery fabric sales is the
result of the Company's emphasis on adding new institutional customers to
replace the loss in residential customers. Supplies, consisting of trim, rods,
etc., represented 15.4%, 16.2% and 15.7% in 1996, 1995 and 1994, respectively.
The increase in the percentage of trim sales is attributable to customer
acceptance of the product and decreasing sales of upholstery and draperies. A
wider range of products and variety offered by Payne accounts for the increased
trim sales.
3
Sources of Raw Materials
Many of Payne's fabrics, wall coverings and woven fabrics are designed by and
are exclusive to Payne. Other fabrics sold by Payne are licensed under exclusive
arrangements with independent designers. Product offerings are contracted for
manufacture by a network of independently owned printing and weaving mills
primarily located in the United States and Europe. Product is also provided from
sources in Africa, Asia, as well as Central and South America.
Payne's fabrics are printed by a variety of processes, such as hand-screening
and rotary printing. The type of process used in the printing of a fabric is the
major determinant of the cost of the product, the quality of the print design
and the color schemes employed. The hand-screening process is typically used for
the more expensive fabric products, since it provides a finer design and color
imprint than is possible with a rotary printer.
The Company is not dependent on any one single source for the manufacture of its
fabric or the printing of its designs. Sourcing of product from outside of the
U.S. is subject to fluctuations in foreign currency exchange rates.
Licenses
The Company has exclusive copyrights on all of its designs. In addition, the
Company obtains exclusivity on the sale of certain Company selected designs
provided by the manufacturers. Although not evidenced by written agreements,
independent designers, by industry standards, have maintained exclusivity until
notified otherwise by the original exclusive distributor.
Seasonality
New product has traditionally been introduced semi-annually in periods referred
to as the spring and fall introductions because the timing has roughly coincided
with these seasons. Sample lengths and books are produced to meet these
introduction periods. The Company's sales have generally not been subject to
significant seasonality fluctuations.
Customers
The Company's business is not dependent upon any single customer. The average
customer sale is approximately three hundred dollars.
Competitive Conditions
Because the Company has exclusive copyright, contract or exclusivity
arrangements on the designs that it markets, there is no direct competition for
the sale of those designs. However there are numerous competitors who market
different fabric designs in the medium to high price range categories and are
therefore in competition with the Company for a share of the decorative fabric
market.
4
The Company's designs are influenced by current fashion, home furnishing
lifestyles and consumer trends. The process from design inception to actual
production takes approximately eighteen months. The Company believes that after
production, six months are required before it can begin to determine a product's
degree of success or failure.
The long time frame necessary for the design of exclusive fabrics gives rise to
a greater risk of obsolescence for these products. Since Payne has to guarantee
minimum order commitments from its source mills before it receives any market
feedback on its product line, it runs the risk that it may misjudge the market,
thus creating an exclusive product for which there may be little demand and for
which it will have to hold significant inventory. When the fabric is not
exclusive to Payne, reorder of open stock fabrics directly from its milling
source alleviates the requirement that it carry the product in its own
inventory.
Employees
As of December 31, 1996, the Company had a total of 81 full and part time
employees (including officers). None of the employees are represented by a
union.
Environmental
Management believes that environmental compliance will have no material effect
on capital expenditures, earnings and competitive position.
ITEM 2. PROPERTIES
Payne's leased facilities in Dayton, Ohio serve as their principal offices,
storage and distribution facility, as well as housing an outlet store and a
showroom. Payne's facility in Dayton includes a workroom where customer
specified draperies and window appointments can be custom built. Bell National
rents office space for its Corporate headquarters in Orlando, Florida from
Milley Management Incorporated. The Chairman of the Company is the President,
Chairman and majority shareholder of Milley Management Incorporated. In
addition, certain of the other officers of the Company are also officers of
Milley Management Incorporated.
Payne leases various showroom facilities at which its product line is
displayed. The showrooms are located in strategic cities that have provided
strong acceptance, or potential acceptance, of Payne's line. Whenever possible,
the showrooms are located in design centers that various furniture, fabric and
design companies also use to display their goods and services. Designers,
Payne's principal customers, often use these centers as a "one stop" approach to
shopping for their needs. Location in these design centers provide Payne's line
with maximum exposure to its principal customers. Loss of Payne's current
locations, or inability to locate new facilities could negatively impact sales
volume in the affected region. With the exception of these design center
showrooms, facilities relocation would not affect the Company's operations.
5
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
or of which any of their property is subject nor are there any proceedings known
to be contemplated by government authorities against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter of 1996.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is presently no established public trading market for the common stock of
the Company and trading activity is limited. The following dealers have
indicated an interest in trading the stock on the Electronic Bulletin Board:
Wedbush Securities, Inc.; Troster Singer Corporation; and Carr Securities
Corporation.
Holders
As of March 8, 1997 there were approximately 1,070 holders of record of Bell
National's common stock.
Dividend History
Bell National does not pay a cash dividend and is not allowed to pay a dividend
under term of its credit agreement with Bank one, Dayton, National Association.
In the absence of such an agreement, it is likely that Bell National would
retain its earnings for use in the development of its business.
Stock Transfer Agent
The Company's stock transfer agent is Continental Stock Transfer and Trust Co.,
2 Broadway, New York, New York 10004, phone (212) 509-4000.
7
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data is derived from, and qualified by reference, to the
audited Financial Statements and Notes included elsewhere in this Annual Report
on Form 10-K.
The following table sets forth the selected financial data as of the dates shown
and for the periods shown:
Balance Sheet Data
(dollars in thousands):
December 31, December 31, December 31, December 31, December 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
Total Assets $ 6,119 $ 7,910 $ 7,505 $ 7,298 $ 7,596
Notes Payable 2,225 3,042 2,921 3,139 4,019
Stockholders' Equity 1,575 1,574 1,526 1,203 1,005
Statement of Operations Data
(dollars in thousands except per share amounts):
Years Ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ------------
Net sales $ 12,550 $ 13,653 $ 13,877 $ 14,107 $ 14,000
Operating income 259 469 675 643 463
Net income (loss) before
extraordinary item (14) 48 177 198 25
Net income (loss) after
extraordinary item (14) 48 320 198 25
Net income per share
before extraordinary item -- .01 .03 .04 --
Net income per share
after extraordinary item -- .01 .06 .04 --
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues and Expenses See Note 1 to the Consolidated Financial Statements for
background on the Company. The Company's 1996, 1995 and 1994 revenues and
expenses result from the operation of Payne, which was acquired in June 1990.
The Company's 1996 sales were $12,550,000 compared to 1995 sales of $13,653,000.
The 1996 sales decrease of $1,103,000 was identifiable to $450,000 of decreased
sales of Warner/Harris fabrics (a competitors line the Company no longer
represents), a $380,000 decrease in upholstery, a $250,000 decrease in drapery
fabric, a $150,000 decrease in wallpaper, a $140,000 decrease in sample sales, a
$120,000 decrease in Hardware and Rods, and all others decreased $13,000, offset
by a $280,000 increase in sales of multipurpose fabric. The 1996 gross profits
were $5,671,000 compared to 1995 gross profit of $6,526,000. The $855,000
decrease in gross profit was due to the sales volume decrease and a 2.6%
decrease in the gross profit percentage from 47.8% in 1995 to 45.2% in 1996. The
decreased sales level has caused lower margin items and fixed costs to become a
larger component of the margin calculation and the resulting margin
deterioration. Selling, general and administrative expenses decreased $645,000
from $6,057,000 in 1995 to $5,412,000 in 1996. The decrease was identifiable to
decreased sample lengths expense, field sales expenses, agent commissions,
styling expenses and stock appreciation rights expenses, partially offset by
increased sample book expense. The decreased sample lengths expense was caused
by the smaller amount of product introduced in 1996 compare to 1995. Lower sales
in 1996 caused variable expenses in field sales and agent commissions to
decrease. Styling activity in New York was discontinued in late 1996 causing
this to decrease. Adjustments to the stock appreciation rights reserve for
expiring rights, a lower valuation due to the lower market price for the
Company's stock and the effect of exercises favorably impacted expenses. Sample
book expense in 1996 increased due to the large 1995 spending, 40% of which was
expensed in 1996. As a result of the decrease in gross margin offset by a
decrease in selling, general and administrative expense, operating income
decreased $210,000. Management believes that significant earnings growth is
dependent upon an increase in sales. In comparison to prior years, 1996, 1995
and 1994 sales are down.
Interest expense decreased $86,000 from $347,000 in 1995 to $261,000 in 1996 due
to the lower debt balance in 1996. Other expenses in 1996 were $162,000 in 1996,
up $117,000 from other expenses in 1995 of $45,000. The increased 1996 expenses
were caused by foreign currency exchange losses, deferred debt amortization and
receivable finance charges not recovered at levels higher than those of 1995.
The provision (benefit) for taxes decreased $179,000 to $(150,000) in 1996 from
$29,000 in 1995 reflecting the change in the accrual for federal taxes. Taking
into account these items the 1996 loss was $14,000, down $62,000 from 1995
income of $48,000. The resulting 1996 loss per share was $0.00 versus the
earning per share of $0.01 in 1995.
9
The Company's 1995 sales were $13,653,000 compared to sales of $13,877,000 in
1994. The 1995 sales decrease of $224,000 was attributable to decreased sales of
drapery and upholstery fabrics partially offset by increased drapery
fabrications sales. Gross profit decreased $328,000 from $6,854,000 in 1994 to
$6,526,000 in 1995. The decrease in gross profit was due to the sales volume
decrease and a 1.6% decrease in the gross profit percentage from 49.4% in 1994
to 47.8% in 1995. This is identifiable to the lost high margin drapery and
upholstery fabric sales somewhat replaced with the lower margin drapery
fabrication sales. Selling, general and administrative expenses decreased
$122,000 from $6,179,000 in 1994 to $6,057,000 in 1995. The decrease was
identifiable to decreased stock appreciation rights accruals and decreased
sample book amortization expense partly offset by increased sample length
expense. During 1995 sample book amortization decreased as a result of a
decrease in the total expenditures for deferred sample books during the three
year period ended December 31, 1995 as compared to the three year period ended
December 31, 1994. The increased sample length expense in 1995 over 1994
reflects the larger number of new products introduced year to year. As a result
of the decrease in gross margin offset by a decrease in selling, general and
administrative expense, operating income decrease by $206,000. The decrease in
sales in 1995 reflects continuing weakness in the fabric market. Management
believes that significant earnings growth is dependent upon an increase in
sales. In comparison to prior years, both 1995 and 1994 sales are down.
Interest expense increased $39,000 from $308,000 in 1994 to $347,000 in 1995 due
mainly to the higher average debt balance in 1995. The provision for taxes
decreased $117,000 to $29,000 in 1995 from $146,000 in 1994 due to the lower
reported profit in 1995. Taking into account these items, 1995 income before
extraordinary items was $48,000 in 1995, down $129,000 from 1994 income before
extraordinary items of $177,000. In 1994 there was an extraordinary gain of
$143,000, net of taxes, due to the retirement of the senior subordinated note.
After taking this into account the net income in 1995 of $48,000 is down
$272,000 from 1994 net income of $320,000. 1995 earnings per share were $0.01
versus $0.06 in 1994, however 1994 earnings per share included $0.03 from the
non-recurring extraordinary item. Earnings per share before extraordinary items
in 1995 were $0.01 versus $0.03 in 1994.
The Company has a remaining Goodwill balance net of amortization of $663,000 and
$683,000 at December 31, 1996 and 1995. The Company believes this asset is
fairly valued and continues to amortize it over a 40 year period. A
determination contrary to this would require that the amortization period be
shortened and profitability effected by an adjustment which could be as much as
the then remaining balance.
The Company is not a party to any derivative or interest swap agreement.
LIQUIDITY AND CAPITAL RESOURCES
Available Resources. The Company's consolidated unrestricted cash position at
December 31, 1996 and December 31, 1995 was $0. The Company has instituted a
cash management system whereby the net cash generated by operations is used to
reduce bank debt. The reduction of
10
outstanding debt provides the Company with a greater reduction in interest
expense than could be offset with interest income from alternative investments.
A review of the financial statements, summary data, working capital and
discussion of liquidity must take into consideration that the Company does not
maintain any cash balances in its accounts by design.
During 1996, the Company had cash flow from operations before working capital
changes of $1,022,000. Working capital and other changes increased cash flow by
$490,000 resulting in cash flow provided by operating activities of $1,512,000.
Cash flow from operations funded spending for sample books of $689,000,
principal payments on capital lease obligations of $6,000 and net principal
payments of $817,000. The increase in 1996 working capital was due primarily to
decreases of $1,343,000 in inventory partly offset by a $854,000 decrease in
accounts payable.
During 1995, the Company had cash flow from operations before working capital
changes of $1,099,000. Working capital and other changes increased cash flow by
$638,000 resulting in cash flow provided by operating activities of $1,737,000.
The cash flow from operations and net borrowings under the bank credit
facilities of $121,000 funded the spending for sample books of $1,727,000,
property and equipment of $76,000, payment of deferred debt commitment fees of
$52,000 and capital lease obligations of $3,000. On May 17, 1995 the Company
entered into a new credit agreement (see below). Through May 17, 1995 the
Company made scheduled monthly installment payments totaling $275,000 and
borrowed $346,000 on the revolver loan facility with Bank of America, Illinois.
On May 17, 1995 the Company borrowed $2,992,000 under its new credit agreement
with Bank One, Dayton, N.A. to extinguish the then existing debt with Bank
America, Illinois. The Company thereafter made scheduled quarterly installment
payments totaling $200,000 and borrowed $250,000 on the new revolving loan
facility. The increase in 1995 working capital was due primarily to decreases of
$390,000 in inventory and increases of $312,000 in accounts payable.
Future Needs For and Sources of Capital
During 1996 the Company did not meet certain covenants of the existing loan
facility with Bank One, Dayton, National Association. The quarterly installments
due after September 1, 1996 payment have not been made, all interest payments
are current. The Company has been in discussions with Bank One, Dayton, National
Association related to the Revolving Agreement. The outcome of these discussions
are unknown and the Company has therefore classified all amounts owing to the
Bank as current liabilities reflecting the Bank's ability to require payment of
the loan.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company for each of the fiscal
years in the three-year period ended December 31, 1996, together with the report
thereon of Ernst & Young LLP dated March 7, 1997, are filed as part of this
report commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During 1996, 1995 and 1994, the Company neither changed its accountants nor
reported a disagreement on Form 8-K on any matter of accounting principle or
practice or financial statement disclosure.
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is information regarding the executive officers and directors of
Bell National, including information furnished by them as to principal
occupations for the last five years, certain other directorships held by them,
and their ages. Directors are elected to serve until the next annual meeting.
Officers are elected annually by Bell National's Board of Directors and serve at
the discretion of the Board, unless otherwise indicated.
Name Age Position
- ---- --- --------
Alexander M. Milley 44 Chairman and Secretary
Robert C. Shaw 44 Director, President and Treasurer
Raymond O'S. Kelly 62 Director
Nicholas E. Toussaint 59 Director
Thomas R. Druggish 41 Director and Chief Financial Officer
Alexander M. Milley became Chairman of the Board of Directors and Secretary on
November 20, 1989. Mr. Milley is the founder, president and majority shareholder
of Milley Management Incorporated ("MMI"), a private investment and management
consulting firm incorporated on September 25, 1990. Mr. Milley is also the
founder and President of Winchester National, Inc. ("Winchester"), another
private investment and management consulting firm. From August 1985 to May 1986,
Mr. Milley was Chairman of Neoax, Inc. ("Neoax"), now an environmental services
company known as EnviroSource, Inc. and then a diversified custom vehicle and
precision metal manufacturing company. Mr. Milley was Senior Vice
President-Acquisitions from December 1983 until July 1986, of The
Dyson-Kissner-Moran Corporation ("DKM"), a private investment company. Mr.
Milley is Chairman of the Board, President and Chief Executive Officer of
Azimuth Corporation ("Azimuth"), a producer of trade show exhibits and a
distributor of fuses and aerospace fasteners, and Chairman and President of
Cadmus Corporation ("Cadmus"), a management consulting firm. Each of Azimuth and
Cadmus is a privately held company, a majority of the directors of which are
officers of Winchester. Mr. Milley has been Chairman of the Board, Chief
Executive Officer and President of ELXSI Corporation ("ELXSI") since September
1989. ELXSI owns and operates a chain of family restaurants in New England and a
manufacturer of sewer inspection equipment incorporating video technology in
Orlando, Florida.
Robert C. Shaw became President, Treasurer and a Director on November 20, 1989,
as well as serving as Chief Financial Officer from November 20, 1989 to June 17,
1990. Mr. Shaw has been a Vice President of MMI since March, 1989. Prior
thereto, he was Vice President Berkeley Softworks, Incorporated ("Berkeley")
from September 1987 to March 1989. From January 1987 to September 1987, he was
Vice President, and July 1985 until January 1987, he was Director of Finance and
Operations, at Ansa Software, Incorporated ("Ansa"). Berkeley and Ansa developed
and produced personal computer software. Mr. Shaw has been Chief Financial
Officer and Executive Vice President of ELXSI since September 1989.
13
Raymond O'S. Kelly has been a Director since October 1987, and was a Vice
President of the Company from October 1987 to November 1989. Since January 1,
1982, Mr. Kelly has been the President and Chief Executive of Raymond O'S.
Kelly, Inc., a firm specializing in providing financial, tax advisory, and tax
compliance services. Mr. Kelly has over thirty years of experience with
international and domestic accounting firms.
Nicholas E. Toussaint has been a Director since October 1987, and served as
President and Chief Executive of the Company from August 1985 to November 1989.
Since 1979, Mr. Toussaint has been President of N.E. Toussaint & Associates,
Ltd., a San Francisco consulting firm which advises banks, other institutions,
and individuals concerning the feasibility of real estate investments. The firm
specializes in planning corporate real estate portfolios, and in this
connection, performs investment analysis. Mr. Toussaint has over twenty-five
years of experience in real estate asset management, has held a senior
management position with the Bank of California, and was a founding Director of
a national bank and its associated bank holding company.
Thomas R. Druggish became a Director effective June 1, 1992 and became Chief
Financial Officer of the Company on June 17, 1990. He currently serves as Vice
President, Treasurer and Secretary of ELXSI, Secretary and Treasurer of MMI
since September 1990. Prior thereto, Mr. Druggish was Assistant Controller at
Borland International from April 1987 to December 1989. Borland, which acquired
Ansa in September 1987, develops and markets personal computer software.
Val G. Blaugh has served as President of Payne Fabrics, Inc. since its inception
in July, 1988, when the assets of the Payne Fabrics Division of Stanley
Interiors Corporation were purchased by Azimuth Corporation. From December 1983
to July, 1988, Mr. Blaugh was President of the Payne Fabrics Division of Stanley
Interiors Corporation. Mr. Blaugh originally joined Payne Fabrics as a Vice
President of Sales and Marketing in January 1977.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation of each of the most highly
compensated executive officers of the Company and of all executive officers as a
group during the years ended December 31, 1996, 1995 and 1994.
Summary Compensation Table
Annual Compensation
--------------------------------------------
Name and Principal Other Annual
Position Year Salary Bonus Compensation
-------- ---- ------- ------ ------------
Robert C. Shaw (1) 1996 $ -- $ -- $ --
Director, President and 1995 -- -- --
Treasurer 1994 -- -- --
Val G. Blaugh (2) 1996 102,000 -- 3,360(3)
President of Payne 1995 102,000 -- 2,230(3)
1994 102,000 -- 1,570(3)
(1) Mr. Shaw had been retained as of November 20, 1989 under a employment
agreement for three years, which expired in November 1992, at an annual
compensation of $50,000. As specified in the agreement, the remaining balance of
the compensation has been deferred by the Company. The amounts payable are
reflected in the attached Consolidated Balance Sheets for the years ended
December 31, 1996 and 1995.
(2) Mr. Blaugh is a participant in the Company's defined benefit pension plan
(see Note 8 to the Consolidated Financial Statements for more detail). As of
March 1, 1997 his vested benefit was $294,000.
(3) Represents calculated taxable value of leased vehicle used by Mr. Blaugh.
15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the ownership of
Bell National's capital stock as of March 8, 1997 by (i) all those known by Bell
National to be beneficial owners of more than 5% of the Common Stock, (ii) all
Directors and highly compensated executive officers and (iii) all executive
officers and Directors as a group. Ownership information is based upon
information furnished by the respective beneficial owners. Of the 5,488,118
shares of common stock of Bell National outstanding on March 8, 1997, 696,570 of
such shares of common stock have been designated "Class 4-B shares" (Class 4-B
shares are essentially without value) pursuant to certain legal proceedings.
Class 4-B shares do not have voting rights and are not entitled to any
distributions from Bell National on liquidation or otherwise. James Grauer is
currently the owner of all of the Class 4-B shares outstanding. Each person has
sole voting and sole investment power with respect to the shares listed below
and described in the footnotes to the table, below (or shares such power with
his or her spouse).
Percent of
Name and Address Amount and Nature Voting
of Beneficial Owner of Beneficial Ownership* Shares (1)
- ------------------- ------------------------ --------------
The Airlie Group L.P. 453,176 9.5%
115 East Putnam Avenue
Greenwich, CT 06830
Alexander M. Milley 1,512,5142)(2) 26.3%
(Director, Chairman of
the Board and Secretary)
Milley & Company
4209 Vineland Road, Suite J-1
Orlando, FL 32811
Robert C. Shaw, 37,084 0.8%
(Director, President and
Treasurer)
Raymond O'S. Kelly 45,781(3) 1.0%
(Director)
Santa Fe Mortgage and
Development Company 648,485 13.5%
Don Hancock
Carol G. Avakian Hancock
dba C.G.A. Avakian Co.
Post Office Box 2540
Fair Oaks, CA 95628
16
All officers and directors** 1,595,379(4) 27.8%
as a group (3 persons)
_______________________
* To the best of the Company's knowledge each of the persons and group has
sole voting and dispositive power with respect to the shares shown. (All
such shares are held directly.)
** The persons owning these shares, including Mr. Milley, may represent a
group under section 13(d) of the Securities Exchange act of 1934, as
amended.
(1) These percentages are based upon 4,588,144 shares of common stock
outstanding and entitled to vote (excluding Class 4-B shares).
(2) Mr. Milley's ownership assumes the exercise of warrants for the
purchase of 957,373 shares for the Company's Common Stock, which expire
in 1999.
(3) Consists entirely of shares held in trust for Mr. O'S. Kelly.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bell National retained Alexander M. Milley, as Chairman of the Board and
Secretary, and Robert C. Shaw, as President and Treasurer under the terms of the
Stock Purchase Agreement and related Employment Agreements. The Employment
Agreements, which became effective on November 20, 1989 and expired in November
1992 provided, for annual compensation of $50,000 to Mr. Shaw and $20,000 to Mr.
Milley, of which only a portion of Mr. Shaw's agreement was paid. Under the
terms of the Employment Agreements, Mr. Shaw and Mr. Milley are free to pursue
other business ventures, investments and personal matters as long as such
activities do not unreasonably interfere with their respective obligations to
Bell National.
In 1988, Mr. Toussaint was granted stock options to purchase 360,000 shares of
common stock under the terms of Bell National's Stock Option Plan at $.30 per
share. Under the same Stock Option Plan, Mr. Kelly, a Director, was also granted
stock options to purchase 90,000 shares at $.30 per share. In November 1989,
such options granted under the Bell National Stock Option Plan to Toussaint and
Kelly as well as former directors, were canceled and replaced with Stock
Appreciation Rights ("SAR's"). In general, the number of stock options
previously granted were replaced with an equal number of SAR's. Each SAR
entitles the holder to receive upon exercise an amount equal to the excess, if
any, of the market value per share at the date of exercise over the exercise
price of the SAR, plus any dividends or distributions per share made by Bell
National prior to the exercise date. On November 15, 1995 Messrs. Kelly and
Toussaint's SAR agreements were amended to extend the term of their agreements
to November 20, 2001.
17
On June 15, 1990, Bell National completed the purchase of 83% of the stock of
Payne from Azimuth Corporation ("Azimuth") for $6,493,000, which was based upon
the net asset value of Payne as reflected on its unaudited balance sheet as of
the close of business on June 3, 1990. Of the total purchase price paid to
Azimuth, $600,000 was supported by a five-year senior subordinated note bearing
interest at the rate of 10% per annum. The balance of the purchase price was
paid in cash, partially with funds obtained under a bank credit agreement
between Bell National and Continental Bank N.A. (the "Bank"). The principals of
MMI currently own 12% of Bell National's outstanding voting capital stock and
would own 27% upon their full exercise of stock warrants currently held. Certain
members of MMI, among others, Alexander M. Milley and Robert S. Shaw, who are
principals of MMI and the Chairman and President as well as Directors of Bell
National, respectively, also own in the aggregate 16% of the outstanding voting
and non-voting common stock of Azimuth. Messrs. Milley and Shaw, together with
certain other members of MMI, also own approximately 4% of the combined classes
of non-voting preferred stock of Azimuth. In addition, Messrs. Milley and Shaw
are directors of Azimuth.
In connection with the acquisition of Payne, the remaining 17% of the
outstanding capital stock was acquired from four individual stockholders, some
of whom are current management employees of Payne. The Capital Stock was
acquired pursuant to separate stock purchase agreements, each dated June 14,
1990, in exchange for an aggregate of 455,357 SAR's of Bell National. The
aggregate number of SAR's issued in exchange for their Payne stock was
determined based upon the initial investment paid by these individuals for their
holdings in Payne stock in relation to the initial investment price paid by MMI
for its shares of Bell National's common stock. SAR's were allocated among
individuals in accordance with the ratio of the percentage of each individual's
initial investment in Payne to the total investment of all four. The terms and
conditions of the SAR's are set forth in stock appreciation rights agreements.
Bell National currently rents office space in Orlando, Florida from Milley
Management Incorporated. Rent and administrative support expenses were
approximately $120,000 in each of the years ended December 31, 1996 , 1995 and
1994. The Chairman of the Company is the President, Chairman and majority
shareholder of Milley Management Incorporated. In addition, certain of the other
officers of the Company are also officers of Milley Management Incorporated.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 10-K
(a) Documents filed as part of this report:
Index to Financial Statements
Page
1. Financial Statements Number(s)
----------
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1996 and 1995 F-2 to F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-15
2. Financial Statement Schedules
Schedule Page
Number Description Number
------ ----------- ------
VIII Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable or not required,
or because the required information is included in the consolidated financial
statements or notes thereto.
3. Exhibits
Exhibit
Number Description
- ------ -----------
2.1 Bell National Corporation Plan of Reorganization (Annex I).
(Incorporated herein by reference to Item 1 of the Company's Annual
Report on Form 10-K for the period from August 20, 1985 to December
31, 1985 and for the years ended December 31, 1986 and 1987 (File No.
0-935)).
3.1 Restated Articles of Incorporation. (Incorporated herein by reference
to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988 (File No. 0-935)).
19
3.2 Bylaws of the Company. (Incorporated herein by reference to Exhibit
3.2 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989 (File No. 0-935)).
4.1 Registration Rights Agreement dated as of November 20, 1989 among the
Company, The Airlie Group L.P., Liberty Associates Limited
Partnership, Winchester National, Inc., Alexander M. Milley, Alan D.
Gordon, Kim G. Davis, Brian E. Kinsman, Kevin P. Lynch and Robert C.
Shaw (collectively, the "Purchasers"). (Incorporated herein by
reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
4.2 Warrant to purchase 957,373 shares of common stock of the Company
issued by the Company on November 20, 1989 to Liberty Associates
Limited Partnership. (Incorporated herein by reference to Exhibit 4.4
of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989 (File No. 0-935)).
9.1 Voting Trust Agreement dated as of May 11, 1989 between Santa Fe and
Mr. Nicholas E. Toussaint, as amended. (Incorporated herein by
reference to Exhibit 9.1 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.1 Standstill Agreement between Bell National Corporation, Santa Fe
Development and Mortgage Company, Inc., Donald Hancock, Carol G.
Avakian Hancock, and Fred L. Harris, dated October 20, 1988.
(Incorporated herein by reference to Exhibit 3.1 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1988 (File No. 0-935)).
10.2 Stock Purchase Agreement dated as of August 17, 1989 by and among the
Company and the Purchasers. (Incorporated herein by reference to
Annex I of the Company's Proxy Statement dated October 2, 1989
delivered to shareholders of the Company in connection with a Special
Meeting of Shareholders of Company held on November 3, 1989. (File
No. 0-935)).
10.3 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Edward B. Collins. (Incorporated herein by
reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.4 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Charles J. Hart. (Incorporated herein by
reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.5 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Raymond O'S. Kelly. (Incorporated herein by
reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.6 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Edward K. Taapken. (Incorporated herein by
reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.7 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Nicholas E. Toussaint. (Incorporated herein
by reference to Exhibit 10.7 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.8 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and John Vida. (Incorporated herein by reference
to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989 (File No. 0-935)).
10.9 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Robert A. Huret. (Incorporated herein by
reference to Exhibit 10.9 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 (File No. 0-935)).
20
10.10 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Alan E. Rothenberg. (Incorporated herein by
reference to Exhibit 10.10 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1989 (File No. 0-935)).
10.11 Stock Purchase Agreement dated as of June 15, 1990 by and among the
Company, as purchaser, and Azimuth Corporation, as seller.
(Incorporated herein by reference to Exhibit 2(a) of the Company's
Form 8-K filed June 15, 1990. (File No. 0-935)).
10.12 Loan Agreement dated as of June 14, 1990 between the Company, the
borrower, and Continental Bank N.A., the lender. (Incorporated herein
by reference to Exhibit 10.12 of the Company's Form 8-K filed June
29, 1990. (File No. 0-935)).
10.13 Stock Appreciation Rights Agreement dated as of June 14, 1990 between
the Company and Val G. Blaugh. (Incorporated herein by reference to
Exhibit 4 of the Company's Form 8-K filed June 15, 1990. (File No.
0-935)).
10.14 Stock Appreciation Rights Agreement dated as of June 14, 1990 between
the Company and Mark van der Kloet. (Incorporated herein by reference
to Exhibit 4 of the Company's Form 8-K filed June 15, 1990. (File No.
0-935)).
10.15 Stock Appreciation Rights Agreement dated as of June 14, 1990 between
the Company and Roy D. Rafalco. (Incorporated herein by reference to
Exhibit 4 of the Company's Form 8-K filed June 15, 1990. (File No.
0-935)).
10.16 Stock Appreciation Rights Agreement dated as of June 14, 1990 between
the Company and Jeffrey Pratt. (Incorporated herein by reference to
Exhibit 4 of the Company's Form 8-K filed June 15, 1990. (File No.
0-935)).
10.17 Employment Agreement between the Company and Alexander M. Milley
dated November 20, 1989. (Incorporated herein by reference to Exhibit
10.17 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991 (File No. 0-935)).
10.18 Employment Agreement between the Company and Robert C. Shaw dated
November 20, 1989. (Incorporated herein by reference to Exhibit 10.18
of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 (File No. 0-935)).
10.19 Revolving Credit Agreement, dated as of May 1, 1995, among Payne
Fabrics, Inc., Bell National Corporation and Bank One, Dayton,
National Association. (Incorporated herein by reference to Exhibit
10.19 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (File No. 0-935)).
10.20 SAR Agreement Extension, dated November 15, 1995, between the Company
and Raymond O'S. Kelly. (Incorporated herein by reference to Exhibit
10.20 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (File No. 0-935)).
10.21 SAR Agreement Extension, dated November 15, 1995, between the Company
and Nicholas E. Toussaint. (Incorporated herein by reference to
Exhibit 10.21 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 (File No. 0-935)).
21.1 Subsidiaries of the Company. (Incorporated herein by reference to the
exhibits filed with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (File No. 0-935)).
27 Financial data schedule.
(b) Reports on Form 8-K
Reports on Form 8-K filed during the fourth quarter of 1996.
None
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BELL NATIONAL CORPORATION
Date: March 20, 1997 BY: /s/ Alexander M. Milley
------------------------
Alexander M. Milley
Chairman of the Board and Secretary
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Alexander M. Milley Director, Chairman of the March 20, 1997
-------------------------------- Board and Secretary
Alexander M. Milley
/s/ Robert C. Shaw Director, President and March 20, 1997
Robert C. Shaw Treasurer (Principal
Executive Officer)
/s/ Raymond O'S. Kelly Director March 20, 1997
--------------------------------
Raymond O'S. Kelly
/s/ Nicholas E. Toussaint Director March 20, 1997
--------------------------------
Nicholas E. Toussaint
/s/ Thomas R. Druggish Director, Chief Financial March 20, 1997
-------------------------------- Officer (Principal Financial
Thomas R. Druggish Officer and Accounting
Officer)
22
Report of Independent Auditors
Shareholders and Board of Directors
Bell National Corporation
We have audited the accompanying consolidated balance sheets of Bell National
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flow for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the accompanying index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bell
National Corporation and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The accompanying financial statements have been prepared assuming Bell National
Corporation will continue as a going concern. As discussed in Note 11, the
Company is in default with respect to its revolving credit agreement. Demand for
repayment by the lender would raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets and liabilities that may result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
----------------------
Dayton, Ohio
March 7, 1997
F-1
BELL NATIONAL CORPORATION
Consolidated Balance Sheets
(Dollars in Thousands)
ASSETS
December 31,
---------------------------
1996 1995
--------- ---------
Current assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net 1,222 1,082
Inventory, net 2,740 4,083
Prepaid expenses and other current assets 95 114
--------- ---------
Total current assets 4,057 5,279
Property and equipment, net 157 212
Goodwill, net 663 683
Deferred sample books, net 1,242 1,696
Other assets -- 40
--------- ---------
$ 6,119 $ 7,910
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
BELL NATIONAL CORPORATION
Consolidated Balance Sheets
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
-----------------------------
1996 1995
---------- ----------
Current liabilities:
Accounts payable $ 1,047 $ 1,901
Current portion of capitalized lease obligations -- 3
Current portion of long-term debt--in default in 1996 2,225 400
Accrued compensation and employee benefits 444 449
Accrued expenses 512 381
---------- ----------
Total current liabilities 4,228 3,134
Long-term debt -- 2,642
Accrued stock appreciation rights 268 356
Capital lease obligations, less current portion -- 3
Other liabilities 48 201
---------- ----------
4,544 6,336
Stockholders' equity:
Common stock, no par value;
authorized 12,000,000 shares, issued and
outstanding 5,488,114 at December 31, 1996
and 5,283,114 at December 31, 1995 15,815 15,800
Additional paid-in capital 10 10
Accumulated deficit (14,250) (14,236)
---------- ----------
Total stockholders' equity 1,575 1,574
---------- ----------
$ 6,119 $ 7,910
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
BELL NATIONAL CORPORATION
Consolidated Statements of Operations
(Amounts in Thousands, Except Share and Per Share Data)
Year Ended December 31,
----------------------------------------------------
1996 1995 1994
------------- ------------- -------------
Net sales $ 12,550 $ 13,653 $ 13,877
Costs and expenses:
Cost of sales 6,879 7,127 7,023
Selling, general and administrative 5,412 6,057 6,179
------------- ------------- -------------
Operating income 259 469 675
Other income (expenses):
Interest expense (261) (347) (308)
Other (162) (45) (44)
------------- ------------- -------------
Income (loss) before income taxes and
extraordinary item (164) 77 323
Provision (benefit) for income taxes (150) 29 146
------------- ------------- -------------
Income (loss) before extraordinary item (14) 48 177
Extraordinary item, net of taxes of $109 -- -- 143
------------- ------------- -------------
Net Income (Loss) $ (14) $ 48 $ 320
============= ============= =============
Earnings per common share
Income before extraordinary item $ -- $ .01 $ .03
Extraordinary item -- -- .03
------------- ------------- -------------
Net income $ -- $ .01 $ .06
============= ============= =============
Weighted average number of common
shares outstanding 5,306,142 5,283,114 5,280,790
============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
BELL NATIONAL CORPORATION
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands)
Common Stock Additional Accum- Total
--------------------------- Paid-In ulated Stockholders'
Shares Dollars Capital Deficit Equity
----------- ----------- ------------- ------------- -------------
January 1, 1994 5,274,186 15,797 10 (14,604) 1,203
Issuance of common
stock in connection
with exercise
of SAR's 8,928 3 -- -- 3
Net income -- -- -- 320 320
----------- ----------- ------------- ------------- -------------
December 31, 1994 5,283,114 15,800 10 (14,284) 1,526
Net income -- -- -- 48 48
----------- ----------- ------------- ------------- -------------
December 31, 1995 5,283,114 15,800 10 (14,236) 1,574
Net Loss -- -- -- (14) (14)
Issuance of common
stock in connection
with exercise
of SAR's 205,000 15 -- -- 15
----------- ----------- ------------- ------------- -------------
December 31, 1996 5,488,114 $ 15,815 $ 10 $ (14,250) $ 1,575
=========== =========== ============= ============== =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
BELL NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Year Ended December 31,
----------------------------------------------------
1996 1995 1994
------------- -------------- -------------
Operating activities:
Net income (loss) $ (14) $ 48 $ 320
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 55 63 80
Amortization of goodwill 20 20 20
Amortization of deferred sample books 1,143 955 1,003
Accretion of discount on notes payable to
Azimuth -- -- 14
Accrual for Stock Appreciation Rights (73) -- 146
Amortization of deferred debt commitment fee 40 20 17
Provision for doubtful accounts and sales
returns 11 (7) (10)
Provision (benefit) for income taxes (160) -- 209
(Increase) decrease in assets:
Accounts receivable (151) 10 117
Inventory 1,343 390 (605)
Prepaid expenses and other current assets 19 (1) (21)
Increase (decrease) in liabilities:
Accounts payable (854) 312 (53)
Accrued compensation and employee benefits (5) (66) 47
Accrued expenses 131 46 (286)
Other liabilities 7 (53) 45
------------- -------------- -------------
Net cash provided by operating activities 1,512 1,737 1,043
------------- ------------- -------------
Investing activities:
Acquisition of property and equipment -- (76) (24)
Production and purchase of deferred
sample books (689) (1,727) (784)
------------- ------------- -------------
Net cash used in investing activities (689) (1,803) (808)
------------- ------------- -------------
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
BELL NATIONAL CORPORATION
Consolidated Statements of Cash Flows (Continued)
(Dollars in Thousands)
Year Ended December 31,
----------------------------------------------------
1996 1995 1994
------------- -------------- -------------
Financing activities:
Proceeds from the issuance of long-term debt -- 5,994 14,783
Principal payments on long-term debt (817) (5,873) (15,015)
Principal payments on capital leases (6) (3) (3)
Payment of deferred debt commitment fee -- (52) --
------------- -------------- -------------
Net cash (used in) financing activities (823) 66 (235)
-------------- ------------- -------------
Net increase in cash and cash equivalents -- -- --
Cash and cash equivalents at beginning of year -- -- --
------------- ------------- -------------
Cash and cash equivalents at end of year $ -- $ -- $ --
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 259 $ 371 $ 267
Income taxes 1 77 55
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
BELL NATIONAL CORPORATION
Notes To Consolidated Financial Statements
December 31, 1996
NOTE 1. The Company and Basis of Presentation
Bell National Corporation ("Bell National" and together with its subsidiaries
the "Company") was incorporated in California on October 1, 1958. Through 1985,
its principal subsidiary was Bell Savings and Loan Association ("Bell Savings"),
a state chartered savings and loan association. On July 25, 1985, the Federal
Home Loan Bank Board appointed the Federal Savings & Loan Insurance Corporation
("FSLIC") as receiver of Bell Savings. At the same time, the assets of Bell
Savings were transferred to a new, unrelated, federally chartered mutual savings
and loan association, Bell Federal. The FSLIC's action followed shortly after a
determination that Bell Savings had a negative net worth. On August 20, 1985,
Bell National filed a voluntary petition under Chapter 11 of the Bankruptcy
Code. A plan of reorganization was approved by the Bankruptcy Court, and became
effective June 29, 1987.
On June 15, 1990, Bell National purchased 100% of the common stock of Payne
Fabrics, Inc. ("Payne"), a designer and distributor of decorative drapery and
upholstery fabrics, for a purchase price of $6,493,000 and the issuance of stock
appreciation rights. Bell National's other wholly-owned subsidiaries, Bell
Savings and Pacific Coast Holdings Insurance Company, have no significant assets
or liabilities .
NOTE 2. Summary of Significant Accounting Policies
Principles of Consolidation The consolidated financial statements include Bell
National and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated.
Use of Estimates The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents The Company has instituted a cash management system,
whereby cash generated by operations is immediately used to reduce debt.
Accordingly the Company maintains no cash or cash equivalents.
Inventories Inventories are carried at the lower of cost (first-in, first-out)
or market and consist totally of finished goods. The reserve for obsolete
inventory at December 31, 1996 and 1995 is $137,000 and $106,000, respectively.
F-8
Property and Equipment Property and equipment are stated at cost and are
depreciated using the straight-line method over the assets' estimated useful
lives. Principal useful lives are as follows:
Furniture and fixtures 10 years
Machinery and equipment 12 years
Leasehold improvements Useful life or life of lease,
whichever is shorter
Computer equipment and software 5 years
Normal maintenance and repairs are charged to expense as incurred, significant
improvements are capitalized.
Goodwill Assets and liabilities related to the Payne business combination have
been accounted for as a purchase transaction and were recorded at their
respective fair values at the date of acquisition. Goodwill arising from the
excess of the purchase cost, plus related acquisition expenses, over the fair
value of aggregate net assets acquired is recorded as an asset and amortized on
a straight-line basis over 40 years. Accumulated amortization at December 31,
1996 and 1995 is $155,000 and $135,000, respectively.
The Company has adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
impact of adopting the standard was not material to the results of operations.
Deferred Sample Books The cost of producing and purchasing sample books are
initially recorded as an asset and amortized over a three year period, 20% in
the year of manufacture and initial distribution and 40% in each of the two
subsequent years. Accumulated amortization at December 31, 1996 and 1995 is
$1,174,000 and $816,000, respectively. Costs included in the development of
sample books include labor, material, freight and supplies. Labor including
internal and subcontracted, together with fabric costs, constitute approximately
85% of total sample book costs.
Revenue Recognition The Company recognizes revenue upon shipment of product to
customers.
Income Taxes The Company follows the liability method in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using tax rates and laws that are expected to be in
effect when the differences are expected to reverse. Valuation allowances are
provided against deferred tax assets if it is more likely than not that the
deferred tax assets will not be realized.
F-9
Income Per Common Share Income per common share is computed using the weighted
average number of common shares outstanding during the respective periods. The
exercise of outstanding warrants, which are common stock equivalents, are not
included in the computation as their effect would be antidilutive. The fully
diluted per share calculation was anti-dilutive for each year.
NOTE 3. Accounts Receivable
Accounts receivable are net of allowances for sales returns and doubtful
accounts of $80,000 and $69,000 at December 31, 1996 and 1995, respectively. The
Company markets its decorative drapery and upholstery products principally to
interior designers located throughout the United States.
NOTE 4. Property and Equipment Property and equipment consists of the
following at December 31:
1996 1995
----------- -----------
Furniture and fixtures $ 213,000 $ 213,000
Machinery and equipment 228,000 228,000
Leasehold improvements 153,000 153,000
Computer equipment and software 286,000 286,000
----------- -----------
880,000 880,000
Less accumulated depreciation and amortization 693,000 668,000
----------- -----------
$ 157,000 $ 212,000
=========== ===========
NOTE 5. Long-Term Debt Long-term debt is summarized as follows at December 31:
1996 1995
----------- -----------
Bank revolving and term facility $ 2,225,000 $ 3,042,000
Less current portion 2,225,000 400,000
----------- -----------
Long-term debt less current portion $ -- $ 2,642,000
=========== ===========
On May 1, 1995 the Company entered into a Revolving Credit Agreement with Bank
One, Dayton, National Association ("Revolving Agreement"). The terms provide for
a total loan facility of $4,125,000 consisting of a term loan of $1,025,000,
payable in seven quarterly installments of $100,000 and a balloon payment of
$325,000 due on June 1, 1997. The remaining portion of the Revolving Agreement
consists of a revolving line of credit, which matures on June 1, 1998.
Borrowings under the revolving line of credit are based on a percentage of
Payne's eligible accounts receivable and a percentage of Payne's eligible
inventory, as defined. The Revolving Agreement is collateralized by all of the
assets of Payne, guaranteed by the Company and subject to restrictive covenants.
F-10
During 1996 the Company did not meet certain covenants of the existing loan
facility. The quarterly installments after the September 1, 1996 payment have
not been made, but all interest payments are current. The Company has been in
discussions with Bank One, Dayton, National Association related to the Revolving
Agreement. The outcome of these discussions are unknown and the Company has
therefore classified all amounts owing to the Bank as current liabilities
reflecting the Bank's ability to require repayment of the loan.
In connection with the 1990 acquisition of Payne the Company entered into a
$450,000 senior subordinated note, net of a $150,000 discount (the "Note"). The
note which bore interest at 10% per annum was due on July 15, 1995. In April
1994, Bell National Corporation prepaid the Note at its then present value of
$570,000. In connection therewith, the holder, Azimuth Corporation, forgave all
unpaid interest, which totaled $252,000 at December 31, 1993. The interest
forgiven is reflected as an extraordinary item on the 1994 consolidated
statement of operations.
In addition to the outstanding obligations noted above, the Company is
contingently liable for approximately $26,000 under an irrevocable letter of
credit.
NOTE 6. Leases
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996 are as follows:
1997 $ 469,000
1998 $ 495,000
1999 $ 479,000
2000 $ 413,000
2001 $ 206,000
2002 and thereafter $ 430,000
-------------
Total $ 2,492,000
=============
The noncancelable operating leases are primarily for Payne's warehouse and
office space and expire over the next nine years. Rent expense charged to
operations for the year ended December 31, 1996, 1995 and 1994 was $461,000,
$444,000 and $455,000, respectively.
NOTE 7. Employee Pension Plans
Payne has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and annual compensation of
the employee calculated on the projected unit credit method. Payne makes annual
contributions to the plan equal to the maximum amount that can be deducted for
income tax purposes. No contributions were required for the years ended December
31, 1996, 1995 and 1994.
Effective January 31, 1994, the plan was frozen and no additional benefits will
accrue nor additional employees become eligible for the plan beyond that point.
The individual employees currently eligible at that time became 100% vested in
their accumulated benefits as of that date.
F-11
The following table sets forth the plan's funded status, amounts recognized in
the Consolidated Balance Sheet at December 31, 1996 and 1995 and the net
periodic pension cost recognized for the years then ended.
December 31,
-------------------------------------
1996 1995
--------------- ---------------
Actuarial present value of accumulated benefit obligation $ 1,187,000 $ 1,689,000
=============== ===============
Projected benefit obligation $ 1,187,000 $ 1,689,000
Plan assets at fair value 1,258,000 1,618,000
--------------- ---------------
Plan assets in excess of (less than) projected
benefit obligation 71,000 (71,000)
Unrecognized net (gain) loss (21,000) 93,000
Unrecognized prior service gain -- --
Unrecognized transitional asset (19,000) (51,000)
--------------- ---------------
Net pension asset (liability) $ 31,000 $ (29,000)
=============== ===============
Net pension costs include the following components:
Service cost $ -- $ --
Interest on projected benefit obligation 122,000 119,000
Actual return on plan assets (142,000) (132,000)
Other (25,000) (25,000)
--------------- ---------------
Net periodic pension (income) $ (45,000) $ (38,000)
=============== ================
Plan assets consist primarily of fixed income securities, commingled investment
funds, commercial paper, and short-term securities.
The following is a summary of significant actuarial assumptions used as of
December 31:
1996 1995
--------------- ----------------
Discount rate 8.0% 7.5%
Rate of increase in compensation levels 0.0% 0.0%
Expected long-term rate of return on assets 9.0% 9.0%
The Company changed the assumed discount rate by adoption of the GATT pension
provisions in 1995 resulting in an increase in the December 31, 1995 benefit
obligation of $123,000.
Payne maintains an employee retirement savings plan under Section 401(k) of the
Internal Revenue Code. Under the terms of such plan, eligible employees may
contribute up to 20% of their annual compensation, up to a ceiling of $9,240.
The Plan allows Payne to make matching contributions. In 1996, 1995 and 1994
Payne made matching contributions of $16,676, $27,988 and $7,782, respectively.
Payne has the ability to activate sections of the plan in order to allow for
discretionary contributions. As of December 31, 1996, such sections have not
been activated. Effective November 1, 1996 the plan was amended and the matching
contribution made by Payne was suspended.
F-12
NOTE 8. Income Taxes
The effective income tax rates differed from the Federal Statutory income tax
rates as follows for the year December 31:
1996 1995 1994
------------- ------------- -------------
Statutory Federal income tax benefit (expense) $ 56,000 $ (26,000) $ (195,000)
(Increase) Decrease resulting from:
Effect of nondeductible amortization (19,000) (16,000) (14,000)
Deferred tax benefits not recognized -- 42,000 --
Reduction in valuation allowance
for deferred tax assets 129,000 -- --
Other (6,000) -- --
State income tax expense (10,000) (29,000) (46,000)
------------- ------------- -------------
Reported Income tax benefit (expense) $ 150,000 $ (29,000) $ (255,000)
============= ============= =============
The components of income tax benefit (expense) are as follows:
1996 1995 1994
------------- ------------- ---------
Deferred benefit (expense) $ 160,000 $ -- $ (209,000)
State and local (10,000) (29,000) (46,000)
------------- ------------- -------------
$ 150,000 $ (29,000) $ (255,000)
============= ============= =============
At December 31, 1996, the Company had federal income tax net operating loss
carryforwards ("NOL's") of approximately $114,000,000 which expire from 1997
through 2011. These NOL's primarily arose from income tax returns which were
subject to rulings by the Bankruptcy Court. The Internal Revenue Service has
objected to the Bankruptcy Court's ability to rule as to the amount and
character of the carryforwards. In addition, under the Internal Revenue Code
("IRC"), the benefit of these NOL's could be limited, or eliminated, if the IRS
determines there was an "ownership change" involving more than 50% of the
Company's stock. There is risk that the Company does not meet the continuity of
business requirements of the IRC. These matters create doubt as to whether these
carryforwards will be utilized by the Company. For financial reporting purposes,
the Company does not recognize the benefit of these NOL's.
F-13
Significant components of the Company's deferred tax asset and liability as of
December 31 were as follows:
1996 1995
--------------- -------------
Deferred tax assets related to:
Net operating loss carryforwards $ 39,100,000 $ 39,100,000
Accrued stock appreciation rights 91,000 121,000
Reserve for obsolete inventory 47,000 36,000
Inventory 235,000 330,000
Accounts receivable reserves 27,000 24,000
Accrued vacation 28,000 30,000
Other 11,000 27,000
------------- -------------
39,539,000 39,668,000
Less valuation allowance 39,475,000 39,604,000
------------- -------------
64,000 64,000
Deferred tax liability related to:
Depreciation 64,000 64,000
------------- -------------
Net deferred tax asset $ -- $ --
------------- -------------
The Company has recorded valuation allowances to offset the amount of the
deferred tax asset in its entirety.
NOTE 9. Stockholders' Equity
On November 20, 1989, Bell National sold 1,317,373 shares of common stock to a
group of investors for approximately $443,000 or $0.34 per share. In addition,
Bell National issued a warrant to acquire 957,373 shares of common stock. The
warrant is exercisable through November 20, 1999 at $0.37 per share. The warrant
agreement, among other things, provides for the repurchase of unexercised
warrants. The obligation of Bell National is determined by multiplying the
unexercised number of shares subject to the warrant by the excess of the current
market price (as defined) per share of common stock and the current warrant
price (as defined) per share of common stock. Since the exercise price of the
warrant is greater than the fair market value of the stock at December 31, 1996
and 1995, no liability has been recorded for this obligation.
In addition to the warrant, the Company has issued under various agreements,
1,470,357 stock appreciation rights (SAR's), of which 360,000 have expired and
213,928 have been exercised as of December 31, 1996. Included in these totals
are $0.30 exercise price SAR's issued of 810,000 of which 360,000 have expired
and none issued. Also included in the total are $0.00 exercise price SAR's
issued of 660,357 of which none have expired and 213,928 have been issued. The
remaining 450,000 SAR's, with a $0.30 exercise price can be exercised through
November 20, 2001. Included in the $0.00 exercise price SAR's are the 455,357
issued in connection with the acquisition of 17% of the outstanding shares of
Payne common stock which can be exercised at various dates through June 1997. In
general, each SAR entitles the holder to receive upon exercise an amount equal
to the excess, if any, of the market value per share at the date of
F-14
exercise over the exercise price of the SAR, plus any dividends or distributions
per share made by Bell National prior to the exercise date. The warrant and SAR
agreements contain mandatory stock registration rights.
At December 31, 1996, 1995 and 1994 the value of all issued and outstanding
SAR's, including related registration costs, has been estimated to be $268,000,
$356,000 and $356,000, respectively.
NOTE 10. Related Party Transactions
The Company currently rents corporate office space on a month-to-month basis in
Orlando, Florida from Milley Management Incorporated, a private investment and
management consulting firm. The Chairman and Secretary of the Company is the
President and sole stockholder of Milley Management Incorporated. Rent and
administrative support expenses were approximately $120,000 in each of the years
ended December 31, 1996, 1995 and 1994, respectively.
NOTE 11. Going Concern
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 5, the Company must
comply with certain restrictive covenants in connection with its borrowings. The
Company violated certain of these covenants during the year and, therefore, has
defaulted on its revolving credit note. In addition, it has not made required
quarterly principal payments subsequent to September 1, 1996. The debt from the
lender, amounting to $2,225,000 at December 31, 1996, has been classified as a
current liability. The Company's future existence is contingent upon its ability
to meet the requirements of the agreement and/or otherwise refinance the debt.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
F-15
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
BELL NATIONAL CORPORATION AND SUBSIDIARIES
(Dollars in Thousands)
Col. A Col. B Col. C - Additions Col. D Col. E
------ -------------- --------------------------------- ------------- -------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accts. Deductions End of
Description of period Expenses (Describe) (Describe) Period
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for sales returns $ 16 $ 385 $ -- $ 3770 (A) $ 24
Allowance for doubtful accounts 53 27 -- 24 (B) 56
-------------- -------------- ------------- ------------- --------------
$ 69 $ 412 $ -- $ 401 $ 80
============== ============== ============= ============= ==============
Reserve for obsolete inventory $ 106 $ 63 $ -- $ 32 (C) $ 137
============== ============== ============= ============= ==============
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for sales returns $ 18 $ 332 $ -- $ 334 (A) $ 16
Allowance for doubtful accounts 58 25 -- 30 (B) 53
-------------- -------------- ------------- ------------- --------------
$ 76 $ 357 $ -- $ 364 69
============== ============== ============= ============= ==============
Reserve for obsolete inventory $ 132 $ 15 $ -- $ 41 (C) $ 106
============== ============== ============= ============= ==============
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for sales returns $ 19 $ 321 $ -- $ 322 (A) $ 18
Allowance for doubtful accounts 67 29 -- 38 (B) 58
-------------- -------------- ------------- ------------- --------------
$ 93 $ 350 $ -- $ 360 76
============== ============== ============= ============= ==============
Reserve for obsolete inventory $ 157 $ 75 $ -- $ 100 (C) $ 132
============== ============== ============= ============= ==============
(A) Returns by customers during the year.
(B) Uncollectible accounts written off during the year.
(C) Obsolete inventory written off during the year.
S-1