ITEM 1. BUSINESS
GENERAL
M. H. Rhodes, Inc. (the "Company") manufactures mechanical and electrical timers. The Company has been in business since 1930. The Company's Canadian subsidiary, M. H. Rhodes (Canada) Limited, which also manufactures timers had been in business since 1960. In 1990, the Company expanded its product lines by acquiring machinery, equipment and inventory of the Ripley Company, Inc. (Ripley) Photocontrol Division. On September 30, 1996 the Company ceased active business operation for the Canadian subsidiary and transferred its assets and liabilities to its parent company, M. H. Rhodes, Inc. The Company's Board of Directors dissolved the Canadian subsidiary on December 31, 1996.
PRODUCTS
PHOTOCONTROLS: Photocontrols are devices that are inserted on the tops of street and roadway lights. Their prime purpose is to individually turn the light on at certain darkness levels and off at dawn lightness. There are over 19,000,000 units in service in the United States. As predicted in 1996 the electronic solid state photocontrol continues to gain market share in the U.S. utility market. Ripley's total sales in 1996 for photocontrols was approximately 10% of the total U.S. utility photocontrol market of which 60% was electronic solid state devices. Ripley also manufactures magnetic type photocontrols and thermal type photocontrols which are still the majority of types sold into the international market.
TIMERS: Timers are used in commercial cooking equipment, HVAC applications, bio-medical devices that require a set time interval with an opening and closing of an electrical switch. Rhodes' mechanical timer line sales remained stable in 1996. Rhodes' sales to OEM's were 68% of total timer and switch sales. Rhodes' OEM sales are made to "Original Equipment Manufacturers" who produce products that require time devices in their products, i.e.: oven manufacturers, blender manufacturers, battery chargers, etc. Much of 1996 was spent developing new products for the mechanical timer variety which will be introduced in the first quarter of 1997. These timers are projected to increase our timer sales by approximately 14%. These products are designed to sell in unique niche markets and will not be in competition with imports from China or Tunisia. Electronic niche markets are being studied for applications that Rhodes can take advantage of its larger OEM customer base.
SOURCE AND AVAILABILITY OF RAW MATERIALS
The Company has never experienced a serious problem in obtaining raw material and component parts, as there are generally many suppliers available to meet the Company's requirements.
PATENTS AND TRADEMARKS
The Company has held hundreds of patents over the past 66 years along with registered trademarks. These are maintained and reviewed as they come up for renewal. The Company retains a patent attorney who monitors all activities. The Company has seven (7) trademarks which are actively used: MARK TIME, RHODES, SUNSWITCH, LIGHT WATCHMAN and SPECTRUM INNOVATIONS. COMPETITOR AND SURVIVOR SERIES are the newest additions for the Photocontrol and new consumer lines.
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BUSINESS CYCLE
The Company business is not seasonal or cyclical.
CUSTOMERS
The customer base consists of approximately 1,500 accounts. The loss of any one customer would not have a material adverse financial effect on the companies.
GOVERNMENT BUSINESS
The Company does business with various municipal governments and U.S Government agencies. No significant portion of this business is subject to renegotiation of profits or termination at the election of a governmental agency.
NET SALES BACKLOG
The backlog at December 31, 1996 and 1995 was $3,435,000 and $2,809,000 respectively. The backlog includes orders which are deliverable over various periods and which may be changed or cancelled in the future. However, based on past experience, the effect of changes and cancellations is expected to be minimal. It is anticipated that the backlog at December 31, 1996 will be filled within the next 18 months.
COMPETITION
All mechanical interval timers sold in the U.S. other than Rhodes are imports. Rhodes produces all of its mechanical timers sold into the OEM, electrical distributor, special distributors, government sales and parking meter markets in Avon, Connecticut, U.S.A. This gives Rhodes a distinct advantage when quantities requested have to be delivered in just-in-time quantities on a weekly basis. It also allows Rhodes engineers to work with our customers on a first name basis and be available for meetings within a one day requirement.
As part of our consolidation of timer production in Avon, it was decided to close Rhodes Canadian assembly operation which had produced losses in 1995 and the first half of 1996. In doing so, the second half of 1996 became profitable and now positions 1997 in a much brighter perspective to make the company once again become profitable.
PRODUCT DEVELOPMENT
During the year the Company continued to develop new products directed toward niche markets. In the area of photocontrols, emphasis was placed on electronic units that will meet the requirements of utilities located in the Southern lighting belt areas, high heat applications, high humidity and corrosive atmospheres.
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In the timer line, new timers were developed for production in fire fighting equipment which signals the firemen the amount of air supply they have left in their oxygen equipment. Also timers were developed for extreme corrosive atmospheric conditions where stainless steel, brass and protective coatings are required. This is typical of our new development mission which is to develop niche markets such as timers for handicap applications, medical devices and other special requirements. 1997 will introduce several of these products.
EMPLOYEES
As of December 31, 1996, the Company employed 94 persons, 93 in Avon, Connecticut and 1 in El Paso, Texas. Of the Avon employees, 70 are represented by the International Association of Machinists, with the balance being salaried employees. The Company considers its relationship with its employees to be satisfactory.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns factory, warehouse and office facilities, aggregating 92,000 square feet in Avon, Connecticut.
In the Company's opinion, this facility is adequate for the Company's present needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of the Company's Executive Officers.
All Executive Officers serve for one-year terms or until their successors are duly elected and qualified. Officers are elected annually at the meeting of Directors, which immediately follows the Annual Meeting of Shareholders.
Name Company Position, Principal Occupation - ---- --------------------------------------
J. L. Morelli was appointed President and Chairman of the Board in April, 1989. Previously, since November, 1988, he was Acting General Manager, and prior to this, Vice President of Operations since January, 1987. From 1985 to 1987, he was Vice President of Operations with Rapid Power Technologies, a manufacturer of power supplies. Age 66.
H. B. Matles has served as a Vice President of Marketing in charge of the Company's consumer sales since 1973. Age 60.
A. D. Springer joined the Company in September, 1987 as Controller was elected its Corporate Controller/Treasurer in September, 1988 and was elected its Vice President-Finance in May 1994. Prior to joining the Company, he was with the Arrow Hart Division of Cooper Industries for 15 years in various financial positions. His last position was Controller. Age 57.
S. L. Vanasse has served the Company as an administrative employee since 1977. In September, 1988, she was elected Secretary of the Company. She had been elected Assistant Secretary in April, 1985. Age 41.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no generally recognized or established public trading market for the common stock of the Company.
The following chart reflects no payment of dividends over the past two years and, in the absence of any known source of published information, the range of bid prices for 1996 was supplied by a brokerage firm that follows the stock of the Company. This information does not necessarily represent actual transactions and may not reflect retail markups, markdowns, or commissions.
PRICES
As reported by one of the firms that follow the Company's stock, the bid price for such stock was $2.25 on March 12, 1997. No asked price was reported.
On March 12, 1997, there were approximately 667 record holders of the Company's common stock. The number of record shareholders excludes individual participants in security position listings.
Mellon Shareholders Services, L.L.C., 85 Challenger Rd., Overpeck Center, Ridgefield Park, N.J. 07660 is the Company's Stock Registrar and Transfer Agent. (1-800-288-9591)
It had been the Company's policy prior to 1988 to pay an annual dividend of $.10 per share. Pursuant to a loan agreement between the Company and the Connecticut National Bank (K/N/A Fleet Bank) dated December 19, 1985, now the Wilshire Credit Corporation, the Company has covenanted that it will not declare or pay dividends exceeding in the aggregate 10% of its annual net earnings after taxes. Due to this agreement no dividend was declared for 1995 (payable in 1996) and for 1996 (payable in 1997). The Company may or may not declare future dividends depending on its earnings, financial conditions and other factors.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
M. H. RHODES, INC. AND M. H. RHODES (CANADA) LIMITED CONSOLIDATED(1)
(1) M. H. Rhodes (Canada) Limited Financial Statements have been translated from Canadian to U.S. currency at applicable exchange rates.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
1996 Compared to 1995
Consolidated Net Sales for 1996 decreased by 1% compared to 1995. The principal reason for this slight decrease was the phaseout of active business operations in the Canadian subsidiary at the end of the fourth quarter. Canadian sales decreased due to this phaseout in the second half of 1996 by $100,000. Higher sales are expected in 1997 as manufacturing has been transferred to the parent and distribution has been revised.
Gross profit as a percentage of Consolidated Net Sales was 19.4% in 1996 compared with 10.5% in 1995. The principal reasons for this were: (1) Inventory obsolescence write-off of $50,000 compared to a 1995 write-off of $240,000. (2) Stability in certain production lines whereas in 1995 relocation of these lines was taking place at a cost of $46,000; (3) Significant decline in the inventory decrease of $311,000 in 1996 compared to $1,242,000 in 1995 resulting in lower non-cash accounting adjustments for prior years' items capitalized into inventory that were charged to earnings for 1996 at $72,000 compared to 1995 at $185,000; and, (4) Depreciation decreased as a result of assets being fully depreciated.
Selling, General and Administrative expenses as a percentage of Net Sales were 20.0% in 1996 compared to 19.5%. The principal reason for this was higher legal fees.
The decrease in interest expense was due to a lower bank prime rate involving the Company's line of credit (see Note 6) and the ESOP loan (see Note 8) in 1996 compared to 1995 and decreased borrowings. During 1996, the Company paid down principal on its' ESOP loan by $170,000. The remaining balance on the loan as of December 31, 1996 was $680,088. The State of Connecticut was paid $47,000 in principal during 1996 and a balance of $242,825 remains as of December 31, 1996. The line of credit was paid down $205,224 and the balance on December 31, 1996 was $393,755.
The increase in other expense was due to the write off of prior years' amortization costs of $6,000.
The Net Loss for 1996 was $177,373 compared to a Net Loss of $895,488 for 1995. In summary, the principal reasons for this 1996 loss were: (1) Non-cash accounting adjustments during the first six months of 1996 for prior years' items capitalized into inventory; (2) Canadian losses and the closing costs of Canada; and (3) Higher legal fees. It should be noted that both the 1996 third quarter and fourth quarter were profitable with a Net Income of $20,000 and $42,000 respectively.
1995 Compared to 1994
Consolidated net sales for 1995 decreased 18% compared to 1994. This decrease in net sales was directly due to decreases in the following market segments: OEM sales were down 21% or approximately $1,100,000; Retail and Government sales were down 21% and 53% respectively. Although no major customers were lost to competition, 1995 appeared to be a year where many of the Company's customers reduced their conventional blanket orders and large volume buys and proceeded to new smaller size production lots which is typical with J.I.T. (Just in Time or Kaizan Production techniques which is being implemented throughout the U.S.A.).
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Gross profit as a percentage of consolidated net sales was 10.5% in 1995 compared with 19.0% in 1994. The principal reasons for this were: (1) The decline in sales; (2) Relocation of certain production lines and inventory back to Avon from Mexico; (3) Additional write off of obsolete and slow moving inventory; and (4) Non-cash accounting adjustments for prior years' items capitalized into inventory that were charged to earnings due to the significant decrease in inventory in 1995.
Selling, general and administrative expenses as a percentage of net sales were 19.5% in 1995 compared to 17.0% in 1994. This increase was primarily due to fixed expenses which did not decrease in the same proportion as the sales decline.
The increase in interest expense was due to a higher bank prime rate in 1995 compared to 1994 which increased borrowing costs on the line of credit and the Employee Stock Ownership Plan (ESOP) loan.
The decrease in other income was a result of: (1) A decrease in the amount of machinery and equipment sold in 1995 compared to 1994; and (2) 1994 recorded interest earned on cash deposits from the State of Connecticut Financial Assistance Program which was used for tooling and equipment on the new Photocontrol line.
The net loss for 1995 was $895,488 compared to a net income of $79,351 for 1994. As stated above, the decrease in sales, an obsolete inventory write off, accounting inventory adjustments, and relocation of production lines to Avon contributed. Although the net loss was unfavorable, there were favorable sides to 1995. These were a reduction in liabilities to the Company of $884,000 and a decrease in inventories of $1,242,000.
LIQUIDITY
The Company during 1996 reduced its borrowing availability under the revolving line of credit from $1,000,000 to $650,000. The amount borrowed cannot exceed 75% of acceptable Accounts Receivables. This line of credit is the source for generating cash to meet liquidity needs. On December 31, 1996 the Company had $393,755 borrowed under the revolver.
Working capital increased $518,000 for the twelve month period ended December 31, 1996. This increase was the result of a long term mortgage note $510,096 classified as current in 1995 and at the end of 1996 reclassified back to long term debt. The reason for this was in 1995 the Company was not in compliance of certain covenants on a mortgage note and a technical default was invoked. However, the technical default has since been waived and the reclassification has been recorded.
The inventory reduction of $311,000 provided the majority of cash generated from operating activities. For investing activities, $50,000 of capital expenditures were incurred. For financing activities, $445,000 was used in the repayment of debt. The above resulted in the highest cash balances in several years.
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CAPITAL RESOURCES
Capital expenditures during 1996 were $50,000 compared to 1995 capital expenditures of $16,000. During 1997, the Company expects capital expenditures to be approximately $100,000, principally for tools and molds. Capital expenditures will be funded through internal cash flows.
INFLATION
The Company believes that inflation has not had a material effect on operations.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted on pages II-9 thru II-19 of this report.
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RIGGS & ASSOCIATES, LLP - ---------------- CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS - ---------------- INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of M.H. Rhodes, Inc.:
We have audited the accompanying consolidated balance sheets of M.H. Rhodes, Inc. (a Delaware corporation) and subsidiary (the Company) as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1994 were audited by other auditors whose report dated February 15, 1995 expressed an unqualified opinion thereon.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of M.H. Rhodes, Inc. and subsidiary as of December 31, 1996 and 1995 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
Riggs & Associates, LLP
Hartford, Connecticut February 7, 1997
One State Street Hartford, CT 06103 Telephone (860)549-8500 FAX (860)549-8501 II-7
WHITTLESEY & HADLEY, P.C. CERTIFIED PUBLIC ACCOUNTANTS 149 CHARTER OAK AVENUE HARTFORD, CONNECTICUT 06106-5101 (860) 522-3111 FAX (860) 728-0232
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of M.H. Rhodes, Inc.:
We have audited the accompanying consolidated balance sheet of M.H. Rhodes, Inc. (a Delaware corporation) and subsidiary as of December 31, 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurances about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of M.H. Rhodes, Inc. and subsidiary as of December 31, 1994, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
Whittlesey & Hadley, P.C.
Hartford, Connecticut February 15, 1995
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M.H. RHODES, INC. AND SUBSIDIARY 14 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
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M. H. RHODES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these consolidated financial statements.
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M.H. RHODES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these consolidated financial statements.
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M. H. RHODES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these consolidated financial statements.
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M. H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - GENERAL:
The Company manufactures timing devices and photoelectric lighting controls primarily for sale to distributors and original equipment manufacturers. These products are sold primarily in domestic and certain foreign markets.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements include the accounts of M.H. Rhodes, Inc. (the Company) and its 96% owned subsidiary, M.H. Rhodes (Canada) Limited. All significant intercompany balances and transactions have been eliminated. As of September 30, 1996 operations ceased at M. H. Rhodes (Canada) Limited and the Board of Directors voted for its dissolution. The Company purchased the minority stockholders interest and all assets, excluding fixed assets which were sold to outside parties, were transferred to the Company.
Foreign currency translation - The financial statements of M.H. Rhodes (Canada) Limited have been translated from Canadian to U.S. currency at the applicable exchange rates. The resulting translation adjustments are recorded directly in a separate component of stockholders' equity.
Cash and Cash Equivalents - For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents.
Inventories - Inventories are valued at the lower of cost or market using the first-in, first-out method of accounting.
Property, plant and equipment - Depreciation is provided using straight-line and accelerated methods over estimated useful lives which range from 10 to 40 years for buildings and improvements and 3 to 10 years for machinery and equipment.
Other assets - Other assets include transaction costs related to the Photocontrols acquisition and loan origination. The acquisition costs are being amortized on a straight-line basis over a ten-year period and the loan origination costs over eighteen months. The loan origination costs were fully amortized at December 31, 1995.
Revenue Recognition - Revenues from sales of timing devices and photoelectric lighting controls is generally recognized upon delivery to the customer.
Per share data - Net income(loss) per share is based on the weighted average number of shares outstanding during each year. The change in shares outstanding in 1995 and 1994 was due to the acquisition of treasury stock from terminated and/or retired employees who participated in the Employee Stock Ownership Plan (see Note 8).
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M.H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (continued):
Income taxes - Deferred income taxes, which are included in other non-current liabilities in the accompanying consolidated balance sheets, are provided for timing differences in the recognition of certain expenses for financial reporting and income tax purposes, primarily related to the use of differing methods of recording depreciation, investment in M. H. Rhodes (Canada) Limited, reserve for obsolete inventory, and allowance for doubtful accounts.
Concentration of Credit Risk - The Company maintains their cash and cash equivalents in high credit quality financial institutions. The balances, at times, may be in excess of federally insured limits.
Fair Values of Financial Instruments - The Company values financial instruments as required by Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Values of Financial Instruments." The carrying amounts of cash and cash equivalents, accounts receivable, and current liabilities approximate fair value.
Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
NOTE 3 - INVENTORIES:
Inventories consist of the following at December 31:
NOTE 4 - NET PROPERTY, PLANT AND EQUIPMENT:
Property, Plant and Equipment consists of the following at December 31:
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M. H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 5 - INCOME TAXES:
The components of the provision (benefit) for income taxes at December 31 are as follows:
An analysis of the provision (benefit) for income taxes at December 31 is as follows:
The Company has approximately $1,830,000 of net operating loss carryforwards available to reduce taxable income for Federal income tax reporting purposes which expire between 2003 and 2015. For State income tax purposes, the Company's net operating loss carryforwards are approximately $1,025,000, which expire between 1997 and 2001.
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M. H. RHODES, INC. AND SUBSIDIARY 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 5 - INCOME TAXES (continued):
Deferred tax assets and liabilities at December 31 resulted from the following:
The Company paid approximately, $8,200, $10,900 and $13,100 for income taxes for 1996, 1995 and 1994 respectively.
NOTE 6 - NOTES PAYABLE:
At December 31, 1996 and 1995, the Company had a note payable of $393,755 and $598,979 respectively, under an accounts receivable asset backed revolver not to exceed the lesser of $650,000 or 75% of acceptable accounts receivable and $1,000,000 or 80% of acceptable accounts receivable, respectively. Interest is paid monthly at the prime rate (8.25% and 8.5% at December 31, 1996 and 1995, respectively), plus 1 1/2% and principal is due upon the collection of accounts receivable backing the outstanding advances. The revolving loan expires February 28, 1997. The note is guaranteed by M.H. Rhodes (Canada) Limited, and collateralized by a life insurance policy on a key officer of the Company, and by all other assets of the Company. The Company is charged interest at a minimum base borrowing of $400,000 even if outstanding borrowings fall below that threshold.
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M. H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 7 - LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
Aggregate principal payments of long-term debt for the next five years are as follows:
Year ending December 31:
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M. H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 7 - LONG-TERM DEBT (continued):
The mortgage note payable contains various financial covenants primarily related to the current ratio, net worth, liabilities to net worth, current maturity of long-term debt ratio and restrictions on payment of dividends. As of and for the year ended at December 31, 1996 and 1995 the Company was not in compliance with the stipulated net worth and current maturity of long-term debt covenants. On February 4, 1997, the lender waived the provisions of the net worth and current maturity of long-term debt covenants as of and for the year ended December 31, 1996.
The Company has pledged, on a subordinated basis to the aforementioned accounts receivable asset backed revolving loan (see Note 6), substantially all assets as collateral for the mortgage note.
The Company received $400,000 in financial assistance from the State of Connecticut, Department of Economic Development (The State) on March 24, 1994. The State provided a $300,000 loan and a $100,000 grant to be used for new product tooling and equipment. The $100,000 grant, which is included with other non-current liabilities in the accompanying balance sheet, requires the fulfillment of certain conditions as set forth in the grant agreement. Failure to fulfill the conditions could result in the return of funds to the State along with a penalty charge of 7.5% per annum, per year the grant is outstanding.
The Company paid approximately $135,661, $173,388 and $138,200 for interest in 1996, 1995 and 1994, respectively.
NOTE 8 - EMPLOYEE STOCK OWNERSHIP PLAN:
The Company established a non-contributory Employee Stock Ownership Plan (ESOP) for qualified non-union employees effective January 1, 1983, and in 1985, the ESOP acquired approximately 55% of the Company's outstanding stock. The funds required to finance this purchase were loaned to the ESOP by the Company using funds borrowed from a bank on the same terms as the bank debt. (see Note 7).
At the time of the purchase, the Company recorded unallocated ESOP shares of $2,550,000 for current and future ESOP contributions as a deduction from stockholders' equity. Contributions to the ESOP are based upon the terms of the bank debt, resulting in ESOP expense of $169,992 per year. Interest expense for the related note payable was $65,495, $69,781 and $65,155 in 1996, 1995 and 1994, respectively.
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M. H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 8 - EMPLOYEE STOCK OWNERSHIP PLAN (continued):
The ESOP allows salaried employees to earn shares of the Company's stock while they are employed by the Company. Upon the cessation of their employment, former employees can require the Company to purchase their vested shares at an appraised value ($7.50 per share at December 31, 1995) payable over a five-year period. The amount owed to such former employees for their shares is included in long-term debt in the accompanying balance sheet (see Note 7).
Shares of the plan are released for allocation to participants as compensation based on annual principal payments of $169,992 made on the ESOP debt. At December 31, 1996, 79,574 shares are allocated, 5,245 shares are committed to be released and 18,105 shares are held in suspense. The value of unearned ESOP shares at December 31, 1996 is estimated to be $135,790.
NOTE 9 - REDEEMABLE COMMON STOCK:
In connection with the ESOP, 73,321 and 68,592 shares of common stock have been classified as redeemable at December 31, 1996 and 1995, respectively. These shares represent the vested portion of all common stock held by employees with the right to put those shares to the Company upon cessation of their employment (see Note 8).
NOTE 10 - CONTINGENCIES:
The Company is subject to legal proceedings, claims and liabilities, including environmental matters, which are incidental to its business. It is management's opinion that the disposition of these matters will not have a material effect on the Company's consolidated financial position or results of operations.
NOTE 11 - PENSION PLAN:
Under the terms of an agreement with the International Association of Machinists, the Company contributes specified amounts to union-administered pension funds. Contributions were $45,189, $28,397 and $37,244 in 1996, 1995 and 1994, respectively. Since this plan is a multiemployer plan, actuarial present values of accumulated plan benefits and other information for a particular employer are not available.
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ITEM 9.
ITEM 9. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
The Board of Directors of M. H. Rhodes, Inc. approved the recommendation of the Registrant's Officers to dismiss Whittlesey & Hadley, P.C., 147 Charter Oak Avenue, Hartford, Connecticut, 06106 as its independent accountants and to engage the accounting firm of Riggs Mahoney & Sabol, One State Street, Hartford, Connecticut, 06103 as independent accountants for the Registrant for 1995. The engagement of Whittlesey & Hadley,P.C. 147 Charter Oak Avenue, Hartford, Connecticut, 06106 has ceased as of January 31, 1996.
Whittlesey & Hadley, P.C. served as auditors for the Registrant since 1993. During none of the years for which Whittlesey & Hadley, P.C. served as independent auditors for the Company nor for the subsequent interim period preceding the replacement of Whittlesey & Hadley, P.C., were there any disagreements between the Registrant and Whittlesey & Hadley, P.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure that would have caused them to make reference in their report to the subject matter of the disagreement. There were no "reportable events" (within the meaning of the applicable rules and regulations of the Securities and Exchange Commission) during the two years ended December 31, 1994 or the subsequent interim period.
Whittlesey & Hadley, P.C.'s report on the financial statements as of December 1993 and 1994 for the years then ended was unqualified.
The registrant has requested that Whittlesey & Hadley, P.C. furnish it with a letter addressed to the SEC stating whether it agrees with the above statements. A copy of Whittlesey & Hadley, P.C.'s letter to the SEC dated January 31, 1996 is filed as Exhibit 1 to the Form 8-K.
The Registrant's Audit Committee of the Board of Directors approved the change in the accountants.
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PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to Directors is incorporated by reference in the Company's Proxy Statement for the Annual Shareholders meeting to be held in May, 1997, pursuant to General Instruction G to Form 10-K. Information concerning Executive Officers is included at the end of Part I of this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference in the Company's Proxy Statement for the Annual Shareholders meeting to be held in May, 1997.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated by reference in the Company's Proxy Statement for the Annual Shareholders meeting to be held in May, 1997.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as a part of this report:
1. Financial Statements Page No. -------------------- --------
The following Consolidated Financial Statements of M.H. Rhodes, Inc. and Subsidiaries are included in Item 8: II-6
Opinion of Independent Public Accountants. II-7-8
Consolidated Balance Sheets - December 31, 1996 and 1995. II-9
Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994. II-10
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1996, 1995 and 1994. II-11
Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994. II-12
Notes to Consolidated Financial Statements. II-13-19
2. Supplementary Data and Financial Statements Schedules
All Schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the Financial Statements or Notes thereto.
Separate Financial Statements and Supplemental Schedules of the Company are omitted since the Company is primarily an operating Company and its subsidiary, included in the Consolidated Financial Statements being filed, does not have a minority equity interest or indebtedness to any person other than the Company in an amount which exceeds five percent of the total assets as shown by the Consolidated Financial Statements as filed herein.
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3. Exhibits Cross Reference Information -------- ---------------------------
(3) Articles of Incorporation and By-Laws Filed as Exhibit to Form 10 filed on April 27, 1965
(4A) Specimen Common Stock Certificate Filed as Exhibit 4A to Form 10-K, File No. 0-1412 dated March 25, 1987. (4B) Loan Agreement, Term Loan Note and Open End Mortgage Between the Company and The Connecticut National Bank ** dated December 19, 1985
(4C) Loan Agreement 5-Year Term Loan Note Filed as Exhibit 4C to and Open End Mortgage Between the Form 10-K, File No. 0-1412 Company and The Connecticut National dated March 27, 1990. Bank dated December 7, 1989
(4D) Loan Agreement, Eighteen month Filed as Exhibit 4D to Accounts Receivable Asset Backed Form 10-K, File No. 0-1412 Revolver between the Company and dated March 30, 1994. Affiliated Business Credit Corporation dated October 21, 1993.
(4E) Loan Agreement/Grant, 7-year loan Filed as Exhibit 4E to between the Company and the State of Form 10-K, File No. 0-1412 Connecticut, dated March 24, 1994. dated March 30, 1994.
(4F) Loan Modification Agreement, Term Loan Filed as Exhibit 4F to Note and Open End Mortgage Between the Form 10-K, File No. 0-1412 Company and The Connecticut National dated March 30, 1994. Bank (K/N/A Shawmut Bank) dated December 19, 1985, modified on October 21, 1993.
(11) Statement re: computation per share earnings filed with this report
(16) Letter re: Change in certifying Accountants Pg. filed as Exhibit 16 to form 10-K, File No. 0-1412 dated March 30, 1994
(21) Subsidiaries of Company filed with this report
** Incorporated by reference in Exhibit 4 to Schedule 13D, dated December 27, 1985, filed by M. H. Rhodes, Inc. Employee Stock Ownership Trust for the Non-Bargaining Unit Employee Group of the M. H. Rhodes, Inc. Employee Stock Ownership Plan for the Non-Bargaining Unit Employee Group. This Schedule 13D was filed with the SEC on December 30, 1985. Exhibit 4 is found at pages 98, et seq. of such filing in accordance with the sequential numbering system.
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B. Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the last quarter of the period covered by this report.
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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.
M. H. RHODES, INC.
By: /s/ Joseph L. Morelli ---------------------------- Joseph L. Morelli, President and Chief Executive Officer March 25, 1997
Pursuant to the requirements of the Securities 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.
By: /s/ Joseph L. Morelli ---------------------------- Joseph L. Morelli, President and Chief Executive Officer March 25, 1997
By: /s/ Allan D. Springer --------------------------------- Allan D. Springer, Vice President Finance and Chief Financial Officer/Principal Accounting Officer March 25, 1997
By: /s/ Edward J. Doyle ------------------------- Edward J. Doyle, Director March 25, 1997
By: /s/ Anthony J. Campanelli ------------------------------- Anthony J. Campanelli, Director March 25, 1997
By: ------------------------- Harold T. LeMay, Director March , 1997
EXHIBIT INDEX
Sequential Numbering System, Page number or Exhibit Number Cross Reference Information - -------------- ---------------------------
(3) Articles of Incorporation and By-Laws Filed as Exhibit to Form 10 filed on April 27, 1965
(4A) Specimen Common Stock Certificate Filed as Exhibit 4A to Form 10-K, File No. 0-1412 dated March 25, 1987.
(4B) Loan Agreement, Term Loan Note and Open End Mortgage Between the Company and The Connecticut National Bank ** dated December 19, 1985
(4C) Loan Agreement 5-Year Term Loan Note Filed as Exhibit 4C to and Open End Mortgage Between the Form 10-k, File No. 0-1412 Company and The Connecticut National dated March 27, 1990. Bank dated December 7, 1989
(4D) Loan Agreement, Eighteen Month Filed as Exhibit 4D to Accounts Receivable Asset Backed Form 10-K, File No. 0-1412 Revolver between the Company and dated March 30, 1994. Affiliated Business Credit Corporation dated October 21, 1993.
(4E) Loan Agreement/Grant, 7-year loan Filed as Exhibit 4C to between the Company and the State Form 10-K, File No. 0-1412 of Connecticut, dated March 24, 1994. dated March 30, 1994.
(4F) Loan Modification Agreement, Term Loan Filed as Exhibit 4D to Note and Open End Mortgage Between the Form 10-K, File No. 0-1412 Company and The Connecticut National dated March 30, 1994. Bank (K/N/A Shawmut Bank) dated December 19, 1985, modified on October 21, 1993.
(11) Statement re: computation per share earnings filed with this report
(16) Letter re: Change in certifying Accountants Pg. filed as Exhibit 16 to form 10-K, File No. 0-1412 dated March 30, 1994
(21) Subsidiaries of Company filed with this report
** Incorporated by reference in Exhibit 4 to Schedule 13D, dated December 27, 1985, filed by M. H. Rhodes, Inc. Employee Stock Ownership Trust for the Non-Bargaining Unit Employee Group of the M. H. Rhodes, Inc. Employee Stock Ownership Plan for the Non-Bargaining Unit Employee Group. This Schedule 13D was filed with the SEC on December 30, 1985. Exhibit 4 is found at pages 98, et seq. of such filing in accordance with the sequential numbering system.