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 after 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-casement window fabrics, trimmings and wallpaper. The selection, design and distribution of decorative cut fabrics comprise approximately 90% of the Company's annual revenues. The Company also custom manufactures draperies and bedding items primarily for institutions; these sales represent the remaining 10% 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.
The Company introduces approximately twenty collections, composed of 1,500 fabrics, or 20% 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. The Company believes that its current number of fabrics and patterns represent an appropriate product mix for its targeted markets, the medium and upper price ranges, of the decorative cut fabric market. The Company plans to maintain its current level of patterns by retiring approximately the same number of patterns that it introduces each year in its semiannual 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 represents approximately 60% of the entire decorative fabric market. Approximately 70% of the Company's fabric patterns are considered to be in the medium price range, with the remaining 30% in the upper price range.
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 services 12,000 U.S. based designers through 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 1995, 1994 and 1993, respectively: Upholstery fabrics accounted for 29.0%, 32.5% and 33.0% of Payne's sales. The decrease in the upholstery sales percentage was due to an increase in trim sales, while upholstery sales declined slightly. Drapery fabric represented 30.5%, 29.7% and 30.6% of Payne's sales in 1995, 1994 and 1993, 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. The 1994 decrease in sales of drapery fabrics represents a continuing trend by consumers and decorators in the residential market toward "hard" window treatments such as mini blinds, window shades and a change in distribution from decorators to retail fabric discount stores. Supplies, consisting of trim, rods, etc., represented 16.2%, 15.7% and 14.4% in 1995, 1994 and 1993, 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.
Sources of Raw Materials
Many of Payne's fabrics, wall coverings and woven fabrics are designed at its New York City design studio 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. Occasionally 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, as it gives 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 designs developed in its New York City studio. In addition, the Company obtains exclusivity on the sale of certain Company selected designs from the manufacturers. Although not evidenced by written agreements these manufacturers, by industry standards, have maintained exclusivity until notified otherwise by the original exclusive distributor.
Seasonality
New product has traditionally been introduced in 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 the 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.
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, 1995, the Company had a total of 89 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.
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 also leases a New York City design studio. In addition, 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.
ITEM 3.
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.
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 1995.
PART II
ITEM 5.
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, 1996 there were approximately 1,075 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. (212) 509-4000.
ITEM 6.
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):
Statement of Operations Data (dollars in thousands except per share amounts):
Years Ended December 31, --------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ----
Net sales $ 13,653 $ 13,877 $ 14,107 $ 14,000 $ 13,715 Operating income 469 675 643 463 188 Net income (loss) before extraordinary item 48 177 198 25 321) Net income (loss) after extraordinary item 48 320 198 25 (321)
Net income (loss) per share before extraordinary item .01 .03 .04 -- (.06) Net income (loss) per share after extraordinary item .01 .06 .04 -- (.06)
ITEM 7.
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 1995, 1994 and 1993 revenues and expenses result from the operation of Payne, which was acquired in June 1990.
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 loss of 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 decreased 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 decrease $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's 1994 sales were $13,877,000 compared to sales of $14,107,000 in 1993. The sales decrease of $230,000 was attributable to a combined decrease in sales of drapery and upholstery fabrics along with a decrease in wallpaper fabrics. Gross profit decreased $148,000 in 1994 from $7,002,000 in 1993 to $6,854,000 in 1994. The decrease in gross profit was due to a combination of the sales volume decrease and a 0.2% decrease in the gross profit percentage from
49.6% in 1993 to 49.4% in 1994. Selling, general and administrative expenses decreased $180,000 from $6,359,000 in 1993 to $6,179,000 in 1994. The decrease was almost entirely due to the drop is Payne's selling expenses of $344,000 consisting of a decrease in sample book amortization and lower showroom rent due to renegotiated lease terms. During 1994, sample book amortization decreased as a result of a decrease in expenditures for deferred sample books during the three year period ended December 31, 1994 as compared to the three year period ended December 31, 1993. The decrease in Payne's selling expense was partially offset by an increase in the corporate general and administrative expense of $180,000 due mainly to the increase in expense related to the SAR's accrual. As a result of the decrease in gross margin offset by a decrease in selling, general and administrative expense, operating income increased by $32,000. The company will continue to attempt to reduce costs but does not anticipate being able to find additional cost savings of the same magnitude in the future. The slight decrease in sales in 1994 and the continuing flat sales over the last few years reflects the continuing weakness in the fabric market.
Furthermore interest expense decreased by $112,000 from $420,000 in 1993 to $308,000 in 1994 due mainly to a decrease in the subordinated debt interest as a result of the May 1994 prepayment partially offset by a $10,000 increase in bank interest. The provision for taxes increased by $132,000 from $14,000 in 1993 to $146,000 in 1994. This increase is a result of higher pre-tax income and a higher effective tax rate in comparison to 1993. Management has taken a conservative approach to reporting income taxes in the financial statement by eliminating the utilization of Federal net operating loss benefit carryforwards from the income tax provision calculation. As a result of the above, the Company recorded net income before the extraordinary item in 1994 of $177,000 ($0.03 per share) compared to a net income in 1993 of $198,000 ($0.04 per share). During 1994, the Company prepaid the senior subordinated note with a face value of $600,000 for $570,000, which was the book value net of the discount at the closing date. In connection with the prepayment, the holder of the note forgave all unpaid interest totaling $252,000 as of December 31, 1993. As a result of the interest forgiveness, the Company recorded an extraordinary item of $143,000 (net of $109,000 of tax). Earnings after this extraordinary item in 1994 were $320,000 or $.06 per share.
The Company's 1993 sales were $14,107,000 compared to sales of $14,000,000 in 1992. The sales increase of $107,000 was mainly attributable to an increase in sales of woven cut fabric used for furniture coverings and sales by Payne of fabric under a license and distribution agreement partially offset by a decline in wall covering and drapery fabric. Gross profit increased $76,000 in 1993 from $6,926,000 in 1992 to $7,002,000 in 1993. The increase in gross profit was due to the sales volume increase and a .1% increase in the gross profit percentage from 49.5% in 1992 to 49.6% in 1993. Selling, general and administrative expenses decreased $104,000 from $6,463,000 in 1992 to $6,359,000 in 1993 due to personnel related expense reductions.
As a result of the increase in gross margin and the decrease in selling, general and administrative expenses, operating income increased by 39% or $180,000 in 1993. Furthermore interest expense decreased by $25,000 from $445,000 in 1992 to $420,000 in 1993 due to a decrease in the average bank debt balance somewhat offset by an increase in subordinated debt interest due to the effect of the penalty rates on late payments of interest. As a result of the above, the Company
recorded net income in 1993 of $198,000 ($0.04 per share) compared to a net income in 1992 of $25,000 ($0.0 per share).
The Company has a remaining Goodwill balance net of amortization of $683,000 and $703,000 at December 31, 1995 and 1994. 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. In the unlikely event of such an occurrence certain financial covenants of the Company's Revolving Agreement (see below) would likely be violated.
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, 1995 and December 31, 1994 was $0. The Company has instituted a cash management system whereby the net cash generated by operations is immediately used to reduce bank debt. The immediate reduction of outstanding debt provides the Company with a greater reduction in interest expense than could be offset with interest income from alternative investments. In the absence of the Agreement requiring such a system, the Company would continue to use excess funds to immediately reduce bank debt. 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 any of its accounts by design. Working capital needs, when they arise, are met by daily borrowings.
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.
During 1994, the Company had cash flow from operations before working capital changes of $1,444,000. Working capital and other changes decreased cash flow by $401,000 resulting in cash flow provided by operating activities of $1,043,000. The cash flow from operations and net borrowing on the bank credit facility of $338,000 funded the spending for sample books of
$784,000, property, plant and equipment of $24,000, the prepayment of the senior subordinated note in the amount of $570,000 and the payment of capital lease obligations of $3,000. The net borrowing on the bank credit facility consisted of scheduled monthly installment payments totaling $645,000 on the term loan facility, plus the increase in the term facility of $570,000, to prepay the senior subordinated note, and an increase in the revolver loan facility of $413,000. During 1994, working capital decreased primarily due to an increase in inventory of $605,000 due to the receipt of the spring line in the fourth quarter of 1994 that was greater than the spring line in the prior year.
During 1993, the Company had cash flow from operations before working capital changes of $1,600,000. Working capital and other changes added $172,000 of cash flow to operations resulting in cash flow provided by operating activities of $1,772,000. The cash flow from operations funded the spending for sample books of $741,000, property, plant and equipment of $55,000, and repaid long term bank debt of $910,000, and capital leases obligations of $66,000. The repayment of long term bank debt consisted of scheduled monthly installments of $50,000 on the term loan facility and voluntary reductions in the revolver loan facility totaling $210,000. During 1993, current assets, primarily inventory increased by $284,000. Inventory increased due to the receipt of the spring line in the fourth quarter of 1993 that was greater than the spring line in the prior year. The increase in inventory was offset by a $450,000 increase in current liabilities, excluding the change in the current portion of long term debt and capitalized leases. The increase primarily related to accounts payable growth as a result of the increase in the inventory at year end.
Future Needs For and Sources of Capital. Management believes that cash to be provided by operations and funds available under the Revolving Agreement (see below) will be sufficient to fund the Company's, 1996 cash needs.
As of December 31, 1995, the Company is in compliance with all covenants of the Revolving Agreement.
On May 1 1995, the Company entered into a Revolving Credit Agreement with Bank One, Dayton, National Association (the "Revolving Agreement"). The terms of the Revolving Agreement provide for a total loan facility of $4,125,000 consisting of a term loan of $1,025,000, payable in seven quarterly installment of $100,000 and a balloon payment of $325,000 due on June 30, 1997. The remaining portion of the Revolving Agreement consists of a revolving line of credit, which matures three years from the loan closing date. 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 in the Revolving Agreement. The Revolving Agreement is collateralized by all of the assets of Payne, guaranteed by the Company and subject to certain restrictive covenants.
ITEM 8.
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, 1995, together with the report thereon of Ernst & Young LLP dated March 27, 1996, are filed as part of this report commencing on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During 1995, 1994 and 1993, 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.
PART III
ITEM 10.
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 43 Chairman and Secretary
Robert C. Shaw 43 Director, President and Treasurer
Raymond O'S. Kelly 61 Director
Nicholas E. Toussaint 58 Director
Thomas R. Druggish 40 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.
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.
ITEM 11.
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, 1995, 1994 and 1993.
Summary Compensation Table
Annual Compensation -------------------------------------- Name and Principal Other Annual Position Year Salary Bonus Compensation -------- ---- ------ ----- ------------
Robert C. Shaw 1995 $ -- $ -- $ -- Director, President and 1994 -- -- -- Treasurer 1993 -- -- -- (1)
Val G. Blaugh (2) 1995 102,000 -- 2,230 (3) President of Payne 1994 102,000 -- 1,570 (3) 1993 102,000 -- 1,170 (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, 1995 and 1994.
(2) Mr. Blaugh is a participant in the Company's defined benefit pension plan (see Note 7 to the Consolidated Financial Statements for more detail). As of January 1, 1995 his vested benefit was $281,000.
(3) Represents calculated taxable value of leased vehicle used by Mr. Blaugh.
ITEM 12.
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, 1996 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 5,283,114 shares of common stock of Bell National outstanding on March 8, 1996, 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 9.9% 115 East Putnam Avenue Greenwich, CT 06830
Alexander M. Milley 1,512,514 (2) 27.3% (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 14.1% Don Hancock Carol G. Avakian Hancock dba C.G.A. Avakian Co. Post Office Box 2540 Fair Oaks, CA 95628
All officers and directors** 1,595,379 (2) 28.8% 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 4,577,616 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.
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.
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 owns 14% of Bell National's outstanding voting capital stock and would own 29% upon their full exercise of stock warrants currently held. Certain members of MMI, including 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, 1995 , 1994 and 1993. 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.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
Page 1. Financial Statements Number (s) ----------
Report of Independent Auditors Consolidated Balance Sheets at December 31, 1995 and 1994 to Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 to Notes to Consolidated Financial Statements to
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. 3-935)).
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. 3-935)).
3.2 Bylaws of the Company. (Incorporated herein by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
10.10 Stock Appreciation Rights Agreement dated as of November 20, 1989 between the Company and Alan E. Rothenberg. (Incorporated herein by reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
10.19 Revolving Credit Agreement, dated as of May 1, 1995, among Payne Fabrics, Inc., Bell National Corporation and Bank One, Dayton, National Association.
10.20 SAR Agreement Extension, dated November 15, 1995, between the Company and Raymond O'S. Kelly.
10.21 SAR Agreement Extension, dated November 15, 1995, between the Company and Nicholas E. Toussaint.
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. 3-935)).
27 Financial data schedule.
(b) Reports on Form 8-K
Reports on Form 8-K filed during the fourth quarter of 1995.
None
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, 1996 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, 1996 - --------------------------- Board and Secretary Alexander M. Milley Board and Secretary
/s/ Robert C. Shaw Director, President and March 20, 1996 - --------------------------- Treasurer (Principal Robert C. Shaw Executive Officer)
/s/ Raymond O'S. Kelly Director March 20, 1996 - --------------------------- Raymond O'S. Kelly
/s/ Nicholas E. Toussaint Director March 20, 1996 - --------------------------- Nicholas E. Toussaint
/s/ Thomas R. Druggish Director, Chief Financial March 20, 1996 - --------------------------- Officer (Principal Financial Thomas R. Druggish Officer and Accounting Officer)
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, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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.
/s/ Ernst & Young LLP
Dayton, Ohio March 27, 1996
BELL NATIONAL CORPORATION Consolidated Balance Sheets (Dollars in Thousands)
ASSETS
December 31, -------------------------- 1995 1994 ---- ---- Current assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net 1,082 1,085
Inventory, net 4,083 4,473
Prepaid expenses and other current assets 114 113 --------- ---------
Total current assets 5,279 5,671
Property and equipment, net 212 199
Goodwill, net 683 703
Deferred sample books, net 1,696 924
Other assets 40 8 --------- ----------
$ 7,910 $ 7,505 ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
BELL NATIONAL CORPORATION Consolidated Balance Sheets (Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, ------------------------ 1995 1994 ---- ----
Current liabilities: Accounts payable $ 1,901 $ 1,589 Current portion of capitalized lease obligations 3 3 Current portion of long-term debt 400 300 Accrued compensation and employee benefits 449 515 Accrued expenses 381 335 ---------- ----------
Total current liabilities 3,134 2,742
Long-term debt 2,642 2,621
Accrued stock appreciation rights 356 356
Capital lease obligations, less current portion 3 6
Other liabilities 201 254 ---------- ---------- 6,336 5,979 Stockholders' equity: Common stock, no par value; authorized 12,000,000 shares, issued and outstanding 5,283,114 at December 31, 1995 and 5,283,114 at December 31, 1994 15,800 15,800
Additional paid-in capital 10 10
Accumulated deficit (14,236) (14,284) --------- --------
Total stockholders' equity 1,574 1,526 --------- ---------
$ 7,910 $ 7,505 ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
BELL NATIONAL CORPORATION Consolidated Statements of Operations (Amounts in Thousands, Except Share and Per Share Data)
Year Ended December 31, ---------------------------------- 1995 1994 1993 ---- ---- ----
Net sales $ 13,653 $ 13,877 $ 14,107
Costs and expenses: Cost of sales 7,127 7,023 7,105 Selling, general and administrative 6,057 6,179 6,359 ---------- ---------- ----------
Operating income 469 675 643
Other income (expenses): Interest expense (347) (308) (420) Other (45) (44) 11 ---------- ---------- ----------
Income before income taxes and extraordinary item 77 323 212
Provision for income taxes (29) (146) (14) ---------- ---------- ----------
Income before extraordinary item 48 177 198
Extraordinary item, net of taxes of $109 -- 143 -- ---------- ---------- ----------
Net Income $ 48 $ 320 $ 198 ========== ========== ==========
Earnings per common share Income before extraordinary item $ .01 $ .03 $ .04 Extraordinary item -- .03 -- ---------- ---------- ---------- Net income $ .01 $ .06 $ .04 ========== ========== ========== Weighted average number of common shares outstanding 5,283,114 5,280,790 5,274,186 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
BELL NATIONAL CORPORATION Consolidated Statements of Stockholders' Equity (Dollars in Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
BELL NATIONAL CORPORATION Consolidated Statements of Cash Flows (Dollars in Thousands)
Year Ended December 31, ----------------------------- 1995 1994 1993 ---- ---- ----
Operating activities:
Net income $ 48 $ 320 $ 198 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 63 80 146 Amortization of goodwill 20 20 26 Amortization of deferred sample books 955 1,003 1,190 Accretion of discount on notes payable to Azimuth -- 14 30 Amortization of deferred debt commitment fee 20 17 16 Provision for doubtful accounts and sales returns (7) (10) (6)
(Increase) decrease in assets: Accounts receivable 10 117 30 Inventory 390 (605) (293) Prepaid expenses and other current assets (1) (21) (15)
Increase (decrease) in liabilities: Accounts payable 312 (53) 584 Accrued compensation and employee benefits (66) 47 (132) Accrued expenses 46 (286) (2) SAR accrual -- 146 -- Other liabilities (53) 254 -- ------ ------ ------
Net cash provided by operating activities 1,737 1,043 1,772 ------ ------ ------
Investing activities:
Acquisition of property and equipment (76) (24) (55) Production and purchase of deferred sample books (1,727) (784) (741) ------ ------ ----
Net cash used in investing activities (1,803) (808) (796) ------ ------ ----
The accompanying notes are an integral part of these consolidated financial statements.
BELL NATIONAL CORPORATION Consolidated Statements of Cash Flows (Continued)
(Dollars in Thousands)
Year Ended December 31, ---------------------------------- 1995 1994 1993 ---- ---- ---- Financing activities:
Proceeds from the issuance of long-term debt 5,994 14,783 13,800 Principal payments on long-term debt (5,873) (15,015) (14,710) Principal payments on capital leases (3) (3) (66) Payment of deferred debt commitment fee (52) -- -- ------- ------- -------
Net cash provided by (used in) financing activities 66 (235) (976) ------- ------- -------
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 $ 371 $ 267 $ 283 Income taxes 77 55 15
The accompanying notes are an integral part of these consolidated financial statements.
BELL NATIONAL CORPORATION Notes To Consolidated Financial Statements December 31, 1995
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, 1995 and 1994 is $106,000 and $132,000, respectively.
Property and Equipment. Property and equipment are stated at cost and are depreciated using the straight-line method over the assets' estimated useful lives. Principal useful lives are as follows:
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, 1995 and 1994 is $135,000 and $115,000, respectively.
The Company has not yet adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, but believes the impact of adopting the standard will be immaterial 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, 1995 and 1994 is $816,000 and $601,000, respectively. The Company prefers to produce these books internally due to cost advantages over outside vendor production. Distribution scheduling often requires the use of outside vendors causing a varying mix of sources for sample books from period to period. 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.
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 $69,000 and $76,000 at December 31, 1995 and 1994, 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:
1995 1994 ------------ ------------ Furniture and fixtures $ 213,000 $ 201,000 Machinery and equipment 228,000 166,000 Leasehold improvements 153,000 151,000 Computer equipment and software 286,000 286,000 ------------ ------------ 880,000 804,000 Less accumulated depreciation and amortization 668,000 605,000 ------------ ------------ $ 212,000 $ 199,000 ============ ============
NOTE 5. Long-Term Debt Long-term debt is summarized as follows at December 31:
1995 1994 ------------ ------------ Bank revolving and term facility $ 3,042,000 $ 2,921,000 Less current portion 400,000 300,000 ------------ ------------ Long-term debt less current portion $ 2,642,000 $ 2,621,000 ============ ============
Aggregate maturities of long-term debt as of December 31, 1995 are as follows:
1996 $ 400,000 1997 425,000 1998 2,217,000 ------------ $ 3,042,000
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 installment 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 yet to be determined 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.
As of December 31, 1995, the Company is in compliance with all covenants under its existing loan facility.
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
NOTE 6. Leases
Future minimum lease payments under noncancelable operating leases as of December 31, 1995 are as follows:
1996 $ 523,000 1997 534,000 1998 498,000 1999 479,000 2000 413,000 2001 and thereafter 635,000 ------------ Total $ 3,082,000 ============
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, 1995, 1994 and 1993 was $472,000, $455,000 and $563,000, 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, 1995, 1994 and 1993.
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.
The following table sets forth the plan's funded status, amounts recognized in the Consolidated Balance Sheet at December 31, 1995 and 1994 and the net periodic pension cost recognized for the years then ended.
December 31, -------------------------- 1995 1994 ----------- ----------- Actuarial present value of accumulated benefit obligation $ 1,689,000 $ 1,444,000
Projected benefit obligation $ 1,689,000 $ 1,444,000 Plan assets at fair value 1,618,000 1,502,000 ----------- ----------- Plan assets in excess of (less than) projected benefit obligation (71,000) 58,000 Unrecognized net (gain) loss 93,000 (49,000) Unrecognized prior service gain -- -- Unrecognized transitional asset (51,000) (76,000) ----------- ---------- Net pension liability $ (29,000) $ (67,000) =========== ==========
Net pension costs include the following components: Service cost $ -- $ 7,000 Interest on projected benefit obligation 119,000 127,000 Actual return on plan assets (132,000) (151,000) Other (25,000) (24,000) ----------- ---------- Net periodic pension (income) $ (38,000) $ (41,000) =========== ==========
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:
1995 1994 ----------- ----------- Discount rate 7.5% 8.5% 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 the 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 1995 and 1994 Payne made matching contributions of $27,988 and $7,782, respectively. Payne made no matching contribution to the plan in 1993 or 1992. Payne has the ability to activate sections of the plan in order to allow for discretionary contributions. As of December 31, 1995, such sections have not been activated.
NOTE 8. Income Taxes
The effective income tax rates differed from the Federal Statutory income tax rates as follows for the year December 31:
1995 1994 1993 --------- ---------- ---------
Statutory Federal income tax expense $ (26,000) $ (195,000) $ (72,000) (Increase) Decrease resulting from: Effect of nondeductible expenses (16,000) (14,000) (43,000) Deferred tax benefits not recognized 42,000 -- -- Other -- -- (11,000) Utilization of tax loss carryforwards -- -- 126,000 State income tax expense (29,000) (46,000) (14,000) --------- ---------- --------- Reported Income tax expense $ (29,000) $ (255,000) $ (14,000) ========= ========== =========
The components of income tax expense are as follows:
1995 1994 1993 --------- ---------- ---------
Current federal income tax expense $ -- $ (209,000) $(120,000) Deferred benefit -- -- 120,000 State and local (29,000) (46,000) (14,000) --------- ---------- --------- $ (29,000) $ (255,000) $ (14,000) ========= ========== =========
At December 31, 1995, the Company has federal income tax net operating loss carryforwards ("NOL's") of approximately $115,000,000 which expire from 1996 through 2010. 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.
Significant components of the Company's deferred tax asset and liability as of December 31 were as follows:
1995 1994 ----------- ----------- Deferred tax assets related to: Net operating loss carryforwards $39,100,000 $39,100,000 Accrued stock appreciation rights 121,000 121,000 Reserve for obsolete inventory 36,000 45,000 Inventory 330,000 381,000 Accounts receivable reserves 24,000 26,000 Accrued vacation 30,000 40,000 Other 27,000 30,000 ----------- ---------- 39,668,000 39,683,000 Less valuation allowance 39,604,000 39,683,000 ----------- ---------- 64,000 60,000 Deferred tax liability related to: Depreciation 64,000 60,000 ----------- ---------- Net deferred tax asset $ -- $ -- =========== ==========
The Company has taken a conservative approach to the valuation of it's deferred assets and has recorded valuation allowances to offset the amount of the deferred tax asset in it 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, 1995 and 1994, 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). 810,000 of these SAR's, are exercisable at $0.30 and expire in 1999. The remaining 660,357 SAR's, which include the 455,357 SAR's issued in connection with the acquisition of 17% of the outstanding shares of Payne common stock, have an exercise price of zero and are exercisable at varying exercise 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 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 the SAR
agreements of Messrs. Kelly and Toussaint for 90,000 and 360,000 SAR's respectively, was amended to extend the termination date to November 20, 2001.
During 1994, the Company issued 8,928 shares of Common Stock in connection with the exercise of vested SAR's that had a zero exercise price. The accrued value of such SAR's were transferred from the SAR liability to equity upon the exercise and the related stock issuance.
At December 31, 1995, 1994 and 1993 the value of all issued and outstanding SAR's has been estimated to be $356,000, $356,000 and $213,000, 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, 1995, 1994 and 1993, respectively.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS BELL NATIONAL CORPORATION AND SUBSIDIARIES (Dollars in Thousands)
S-1
Exhibit Number Description Page No - ------ ----------- --------
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. 3-935)).
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. 3-935)).
3.2 Bylaws of the Company. (Incorporated herein by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
10.10 Stock Appreciation Rights Agreement dated as of November 20, 1989 between the Company and Alan E. Rothenberg. (Incorporated herein by reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
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. 3-935)).
10.19 Revolving Credit Agreement, dated as of May 1, 1995, among Payne Fabrics, Inc., Bell National Corporation and Bank One, Dayton, National Association.
10.20 SAR Agreement Extension, dated November 15, 1995, between the Company and Raymond O'S. Kelly.
10.21 SAR Agreement Extension, dated November 15, 1995, between the Company and Nicholas E. Toussaint.
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. 3-935)).
27 Financial data schedule.