ITEM 1. BUSINESS
General
Adage, Inc. (together with its subsidiaries, "Adage" or the "Company") is a holding company that owns, directly or indirectly, at least 80% of the capital stock of entities involved in principally three industry segments: Wireless Communications Equipment; Specialty Manufacturing; and Recycled Paper Manufacturing. In 1996, Adage decided to sell its wholly-owned, Specialty Manufacturing subsidiary, Allister Manufacturing Company, Inc., Pennsylvania corporation that manufactures automatic garage door and gate control systems ("Allister"), to an entity to be formed by Robert T. Holland, the current Chief Financial Officer of Adage. Adage and Mr. Holland have come to an understanding on the terms and conditions of such sale, subject to the satisfaction of certain conditions precedent. Accordingly, Adage declared Allister and its Specialty Manufacturing segment a discontinued operation as of December 31, 1996.
The predecessor of Adage, General Business Investment Corporation ("GBIC"), was formed in 1960 under the laws of the District of Columbia as a small business investment company under the Small Business Investment Act of 1958. In January 1968, GBIC was acquired by a group headed by Donald Goebert, the current Chairman of the Board and principal shareholder of Adage. In November 1969, GBIC surrendered its license with the Small Business Administration and ceased doing business as a small business investment company. In December 1980, GBIC amended its Articles of Incorporation and reincorporated from Massachusetts to a Pennsylvania corporation.
In February 1990, an acquisition subsidiary of Adage merged with and into GBIC, with GBIC thereby becoming a wholly-owned subsidiary of Adage. This transaction provided for the issuance of 1,961,275 shares of Adage stock to the GBIC shareholders in exchange for their GBIC stock. In June 1991, Adage reincorporated in Pennsylvania, and GBIC was thereafter merged with and into Adage.
Adage's principal executive offices are located at 400 Willowbrook Lane, West Chester, Pennsylvania 19382, and its telephone number is 610-430-3900. As of December 31, 1996, Adage employed 667 persons (including those employed by Allister) all located in various facilities in Pennsylvania, New York, Indiana, Florida, California, Kansas and Nebraska. Adage currently employs four (4) individuals at its corporate offices.
Products and Subsidiaries of Adage
Wireless Communications Equipment
Relm Communications, Inc., is a Florida corporation located in West Melbourne, Florida ("Relm"). On January 24, 1992, Adage acquired all of the outstanding stock of Relm in exchange for 1,946,183 shares of Adage Common Stock.
Relm operates exclusively in one dominant segment, the electronics communications industry. Relm designs, manufactures and markets electronic communications equipment consisting of voice communications equipment (land mobile two-way radios), and digital data communications equipment (electronic utility load management systems). Relm also manufactures base station components and subsystems which reduce radio signal interference related to frequency connection at radio transmitter sites. In addition, Relm engages in contract manufacturing of communications products for original equipment manufacturers including the radio control products sold by Allister Access Controls and the electronic circuit boards used in Allister's door and gate operators.
In September 1993 Relm purchased the assets and business of the Bendix/King Mobile Communications Division of Allied Signal and hired the sales and engineering employees of the division. This product line consists of primarily portable voice communications equipment which compliments Relm's existing line of voice communications equipment in that the products have different features and applications than the Relm products. Relm did not purchase this division's manufacturing facilities. Relm facilities operated at approximately 70% of maximum capacity during 1996. Relm's backlog was approximately $8,875,000 at December 31, 1996.
Description of Products and Markets
Voice Communications Equipment. Relm's current voice communications products consist of land mobile two-way radios. Such products are sold for use by businesses and municipalities requiring two-way communications between or among vehicles, personnel in remote locations, and/or central locations. Such products include base stations for the central location, mobile two-way radios for mounting in vehicles, portable two-way radios for hand-held use, and repeaters, which enable the two-way radio to operate over a greater area. Relm manufactures base station components and subsystems which are installed at radio transmitter sites to improve performance by reducing or eliminating signal interference and enable the use of one antenna for both transmission and reception. Relm sells land mobile products to original equipment manufacturers, government agencies and dealers who resell the products to end users. In addition, Relm has recently introduced to its product line a scanner, which is a radio receiver that allows the user to listen to various radio frequencies. The frequencies range from 26 megahertz to 960 megahertz.
Digital Data Communications Equipment. Relm manufactures load management systems for sale to electric utilities, dealers and jobbers. The load management system enables a utility to limit usage during peak demand periods. Using radio transmitters, a signal is sent
by the utility to individual receivers which are wired to residential appliances, generally air conditioners or hot water heaters. The appliances are turned off for short periods of time which reduces demand and shifts consumption to non-peak hours.
Radio Controls for Access Control Industry. Relm manufactures small low-powered receivers, transmitters, and control circuit boards designed by Allister Access Controls to control automatic garage door and gate operators. These radio products are manufactured under the Allister and Pulsar brand names for sale by Allister to door operator and gate operator dealers and distributors.
Electronic Components. Relm markets electronic components, primarily microprocessors and clock oscillators, to electronic component distributors and original equipment manufacturers through its' subsidiary RXD Corp. The components are used in various electronic products including computers, electric scales, electronic organs and keyboards, and electronic toys.
Research and Development.
Relm employs 30 persons who devote some portion of their time to research and development. Research and development costs were approximately $3,000,000, $3,300,000 and $3,300,000 for the years ended December 31, 1996, 1995 and 1994 respectively. Management will continue research and development efforts to expand the business and remain competitive.
Patents.
Relm holds patents and patent licenses covering various products currently marketed. While it is difficult to assess the precise importance of the patents and licenses, it is believed they enhance Relm's marketing position.
Relm also holds patents covering its digital communication product line. The patents cover, among other techniques, decoding of digital data messages, retrieving of digital data, and high speed date transmission on FM sub-carrier frequencies. These patents have various expiration dates to the year 2001.
Raw Materials.
Raw materials and component parts are purchased for assembly into finished products. Although certain components are available from only one supplier, during the three years ended December 31, 1996, 1995 and 1994, Relm did not experience any significant delays in deliveries from any single source supplier.
While the value of single source components is not material in comparison to the value of all components, the absence of a single source component would delay the manufacture of finished products. Relm attempts to minimize any risk of such delays by securing second sources, and maintaining automated engineering design capabilities to redesign around shortages.
Competition.
Relm competes with numerous domestic and foreign companies in the highly competitive electronics communications industry. Many of Relm's competitors have substantially greater financial, marketing and technical resources than Relm and Adage. The principal methods of competition are price, payment terms, quality, engineering capability, and technological advances, and service after sale. Relm believes it is generally competitive with regard to such factors.
Employees.
Relm currently employs approximately 398 persons on a full-time basis.
Environmental Matters.
A property sold by Relm during 1996 (vacant factory and seven acres of land located in Satellite Beach, Florida) contained soil and water contaminants of higher levels than are currently acceptable under regulations established by the U.S. Environmental Protection Agency. In February, 1996, after taking certain remediation action, Relm received a letter from the Florida Department of Environmental Protection stating that no further remediation action is required at this site.
Recycled Paper Manufacturing
Fort Orange Paper Co., Inc., is a New York corporation located in Castleton-on-Hudson, New York ("Fort Orange Paper").
Fort Orange Paper is a manufacturer of high quality, coated, recycled paperboard which is used primarily in the folding paper box industry. Recycled paperboard is made from a fibrous slurry derived from the mixing of water with newspaper, corrugated cardboard and clippings from other boxboard. The fibrous slurry is extruded through a screen and the water is pressed out as the material is passed through a series of cylindrical dryers. A clay coating is applied at the end of the process to produce a surface capable of accepting high quality print.
As more communities adopt mandatory recycling regulations, the available supply of fiber is increasing. Regulations requiring increased use of recycled fiber have increased which has increased demand. Post consumer fiber is a commodity product and accordingly the cost of fiber varies from time to time based on market conditions. Paperboard is a commodity product subject to short-term market fluctuations. Demand for recycled paperboard has increased and consequently prices have increased. Recycled paperboard manufactured by Fort Orange Paper is used in its own conversion operations to manufacture folding cartons and is sold to other folding carton producers. Approximately 80% of Fort Orange Paper's mill output is sold to independent converters. Competition among board manufacturers is fragmented and includes a broad spectrum of suppliers ranging from large, integrated manufacturing and conversion operations to small, family owned independents.
During 1990 through 1992, Fort Orange Paper had undertaken a capital program to update and increase efficiency in its plants while raising product capacity and quality levels. Operations and product output at Fort Orange Paper have, in the opinion of management, shown improvement as a result of these capital expenditures.
The five largest purchasers of Fort Orange Paper output comprise 64.7% of sales, and the largest customer comprises 16.3% of their combined business.
Fort Orange Paper is subject to the Clean Water Act, federal legislation that regulates the type and amount of contamination that is permitted to be discharged into rivers, streams and other waterways. In addition, Fort Orange Paper, since it burns coal in boilers, is subject to the Clean Air Act, federal legislation which, in this case, regulates the amount of pollutants permitted to be discharged. Fort Orange Paper believes that it is in compliance with all such regulations. Moreover, Adage believes that compliance with federal, state, and local environmental laws do not have a material effect upon capital expenditures, earnings and competitive positions of Adage.
Fort Orange Paper has approximately 200 employees. Production employees are represented by the United Paperworkers International Union Local 420 and 22. Collective bargaining agreements with each of these unions are in place until May 31, 1999 and May 31, 1997, respectively. Fort Orange Paper also sponsors a salary deferred retirement plan for their non-union employees.
Fort Orange Paper is currently involved in a co-generation steam supply agreement with Cogen Energy Technology, Inc., ("Cogen"). The project is owned and operated by Cogen on land leased from Fort Orange Paper under a 20 year lease. Start up of the project occurred in late 1992. Under the terms of the project, Cogen provides steam to Fort Orange Paper at approximately 50% of its historical cost adjusted for changes in fuel costs.
Fort Orange Paper operated at approximately 85% of its capacity during 1996. Fort Orange Paper's backlog was $2,310,500 at December 31, 1996.
Other Industries
The Other Industries segment of Adage's business is represented by the parent company's operations, which are financial in nature. Its assets are made up of cash, short and long term investments, and loans to subsidiary companies. Income consists of interest and investment income.
ITEM 2.
ITEM 2. PROPERTIES
Owned
A 275,000 square foot office and industrial building on 105.6 acres located on River Road, Castleton, New York, which is used in the production of paperboard and folding cartons by Fort Orange Paper.
A 105,000 square foot office and industrial building on 20 acres located in West Melbourne, Florida which is used by Relm to manufacture wireless communication equipment. Relm is currently in the process of constructing an approximately 30,000 square foot addition to this facility at an estimated cost of approximately $2.2 million. Relm currently has construction and permanent financing in place to fund such improvements.
Leased
A 2,500 square foot office facility located in West Chester, Pennsylvania used by Redgo Properties, Inc., a wholly-owned subsidiary of Adage, as administrative and sales offices, and by Adage as its corporate headquarters and administrative offices. This facility is leased at a total monthly rental of $3,107 with the term of the lease expiring November 30, 1997.
A 18,500 square foot facility of leased office space located in Lawrence, Kansas, which houses a portion of Relm's design engineering and sales. The lease expires December 1998 and monthly rent payments of $10,622 are due to April 1997 and then $13,980 through the expiration date. Upon completion of the expansion of the West Melbourne, Florida facility, this facility will be vacated.
A 37,600 square foot facility located in Indianapolis, Indiana used by Relm for engineering, sales and executive offices. The lease expires in 1997. The lease payments are $6,805 per month.
A 5,000 square foot facility located in Norfolk, Nebraska, which is used for the operations of RXD, Inc., a wholly-owned subsidiary of Relm. The lease payments are $1,000 per month.
Discontinued Operations - Leased
A 35,000 square foot facility located in West Chester, Pennsylvania, used by Allister in the manufacture of garage door operators. This facility is leased at a monthly rental of $16,000 plus operating costs with the term of the lease expiring in February, 1998.
A 17,000 square foot facility located in Downingtown, Pennsylvania, used by Allister in the manufacture of garage door operators. This facility is leased at a monthly rental of $4,719 plus operating costs with the term of the lease expiring in October, 1999.
A 2,500 square foot facility located in Vista, California, used by Allister for the warehousing of garage door and gate operators. This facility is leased at a monthly rental of $1,584 with the term of the lease expiring in September, 1998.
Adage believes that its' facilities are suitable and adequate for the needs of the entity that uses such facility.
ITEM 3.
ITEM 3. LITIGATION
On February 14, 1996, the Insurance Commissioner of the Commonwealth of Pennsylvania (the "Insurance Commissioner"), in her capacity as statutory liquidator for Corporate Life Insurance Company ("Corporate Life"), filed a complaint against multiple defendants in the Commonwealth Court of Pennsylvania, including Adage and Mr. Donald Goebert (in his capacity as an officer and Director of Adage). The specific claims alleged against Adage and Mr. Goebert in the complaint are for a preferential transfer, conspiracy and common law fraud arising from a 1987 transaction between Adage and Corporate Investment Company ("CIC"), the parent company of Corporate Life, pursuant to which Adage and CIC exchanged promissory notes in the amount of $1,700,000 (the "Note Transaction"). In connection with the Note Transaction, CIC pledged to Adage as security for its note payment obligation its shares of stock of Corporate Life. CIC subsequently defaulted on its note. In 1991, at the demand of the Insurance Commissioner, CIC sold Corporate Life to American Homestead, Inc. ("AHI") and, in connection with such sale, Adage assigned its note receivable from CIC along with the collateral to AHI. As consideration for this assignment, AHI agreed to assume Adage's obligations under its note to CIC in the amount of $1,700,000. Accordingly, although the complaint alleges a claim for a preferential transfer, Adage received no payment of funds from CIC. The conspiracy claims are non-specific but pertain to the sale of Corporate Life to AHI in 1991. Mr. Goebert was an officer and director of CIC.
In one of two related actions, in 1994 the Trustee and statutory liquidator of CIC, in connection with the current bankruptcy proceedings of CIC, brought an adversarial proceeding in the United States District Court for the Eastern District of Pennsylvania against Adage, Mr. Goebert and other individuals and entities that were involved in the sale of Corporate Life to AHI. This adversarial proceeding alleges the same claims as in the action brought by the Insurance Commissioner in connection with the Note Transaction and the sale of Corporate Life. In the other related action, in 1993 two individual creditors of CIC filed a complaint against, among others, Adage and Mr. Goebert in the United States District Court for the Southern District of New York. The specific claims alleged against Adage and Mr. Goebert in the complaint are for fraud, fraudulent conveyance, securities fraud and RICO in connection with the Note Transaction, the sale of Corporate Life and other investments made by CIC in an effort
to raise capital for Corporate Life. Each of the above related matters are in civil suspense. Adage believes that an adjudication of the action brought by the Insurance Commissioner will in effect resolve both of the related matters on the legal principals of collateral estoppel and/or issue preclusion.
Allister is a defendant in approximately 14 pending claims for personal injuries and-or property damages alleged to have resulted from the malfunction of a garage door or gate operator. The Company maintains product liability insurance with coverages of $2,000,000, subject to deductibles ranging from $75,000 to $500,000. During the times that such claims were made, the Company maintained umbrella coverage extending its insurance coverage for various periods by $3,000,000 to $10,000,000. It is currently anticipated that the proposed sale of Allister will not include an assignment and assumption of the foregoing claims.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1996 Annual Meeting of Shareholders of Adage was held on December 11, 1996 (the "Meeting"). Of the 5,129,175 shares of Common Stock outstanding and entitled to vote at the Meeting, 4,710,349 shares were represented at the Meeting in person or by proxy.
On the proposal to elect Donald F.U. Goebert, Buck Scott, Robert L. MacDonald, Ralph R. Whitney, Jr., Robert T. Holland, James C. Gale, Joel A. Schleicher and George M. Benjamin, III directors to serve until the 1997 Annual Meeting of Shareholders and until their successors are duly elected and qualified, the nominees for director received the number of votes set forth opposite their respective names.
FOR WITHHELD --- --------
Donald F.U. Goebert 4,484,491 225,858
Buck Scott 4,485,064 225,285
Robert L. MacDonald 4,485,158 226,191
Ralph R. Whitney, Jr. 4,485,350 224,999
Robert T. Holland 4,485,152 225,197
James C. Gale 4,485,223 225,126
Joel A. Schleicher 4,485,239 225,110
George M. Benjamin, III 4,485,258 225,091
On the proposal to approve the Company's 1996 Stock Option Plan for Non-Employee Directors, 4,071,056 shares were voted For the proposal, 442,895 shares were voted Against the proposal, and 36,933 shares Abstained from the vote.
There were no broker non-votes recorded. On the basis of the above vote, all of the nominees for director were elected as directors to serve until the next Annual Meeting of Shareholders and until their respective successors are duly elected and qualified, and the 1996 Stock Option Plan for Non-Employee Directors was adopted and approved.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth in the table below is certain information with respect to the executive officers of Adage:
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the symbol "ADGE". The following table sets forth for the periods indicated the high and low closing sale prices of the Common Stock as furnished by Nasdaq.
COMMON STOCK
1996 Quarter Ended High Low - ------------------ ---- --- March 31, 1996 5.0000 3.7500 June 30, 1996 5.6250 3.7500 September 30, 1996 5.6250 3.7500 December 31, 1996 4.4375 3.1875
COMMON STOCK
1995 Quarter Ended High Low - ------------------ ---- --- March 31, 1995 5.875 4.750 June 30, 1995 6.375 4.750 September 30, 1995 6.625 3.375 December 31, 1995 6.000 3.875
On March 31, 1997, the closing sale price of the Common Stock was $3.50. On that date, there were in excess of 5,300 holders of record of the Common Stock of the Company.
No cash dividends were paid with respect to the Company's Common Stock during the past five calendar years. The Company presently intends to retain its earnings to finance growth and, therefore, it does not intend on paying dividends on its Common Stock in the foreseeable future. In addition, the Company's revolving credit arrangement with its institutional lenders places restrictions on the payment of dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31, --------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Select Income Statement Data
Net sales and revenues $ 68,650 $71,236 $69,891 $53,012 $44,875
Income (loss) from continuing operations (185) 258 1,157 1,026 1,685
Discontinued Operations (3,841) 854 (2,215) (1,351) (830) Cumulative effect of change in accounting principle - - - - 234 -------- ------- ------- ------- --------
Net Income ((Loss) $ (4,026) $ 1,112 $(1,058) $ (325) $ 1,089 ======== ======= ======== ======== ======== Earnings per share from continuing operations $ (.04) $ .05 $ .23 $ .20 $ .33 Discontinued operations per share (.75) .17 (.44) (.26) (.16)
Cumulative effect of a change in accounting principle per share - - - - .04 ------- ------- ------- ------- ------
Net earnings per share $ (.79) $ .22 $ (.21) $ (.06) $ .21 ======= ======= ======= ------- =======
December 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ------ Selected Balance Sheet Data
Working capital $22,621 $22,776 $24,504 $28,629 $22,920
Total assets 52,053 57,537 78,912 77,300 71,693
Long term debt 14,073 13,154 22,891 26,676 21,950
Total shareholders equity 29,214 32,620 31,236 32,479 33,686
Dividends declared per share - - - - -
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
As an aid to understanding the Company's operating results, the following table shows items from the consolidated statement of operations expressed as a percentage of net sales:
Net Sales
Net sales for the year ended December 31, 1996 decreased 3.6%. The details of this decrease are made up as follows:
Sales in the Recycled Paper Manufacturing segment decreased in 1996 due to a 15% decrease in selling prices of paperboard compared to 1995, combined with an 11% increase in tons sold. Carton sales decreased 32% in 1996 due to the loss of a large customer and increased in 1995 and 1994 due to increased volume and prices. The Recycled Paper Manufacturing segment has several large customers. It is not known how rapidly this segment could replace the volume generated by the loss of one or more of these customers.
The increase in 1996 sales of the Wireless Communications Equipment segment was due to an increase in sales of land mobile radios and a decrease in sales of Demand Side Management Products to the electric utility industry. The decrease in the Wireless Communications Equipment segment in 1995 was due to lower international sales of land mobile radios and lower sales of Demand Side Management Products. The 1994 increases in sales of the Wireless Communications Equipment segment was partially due to the Bendix/King Mobile Communications product line which was acquired on September 15, 1993, and increases in other product lines in this segment.
Cost of Sales
Cost of sales as a percentage of net sales decreased 0.3% to 76.7% for the year ended December 31, 1996, and increased 2.8% from 74.2% to 77.0% for the year ended December 31, 1995. Details of these changes by segment follow:
Cost of recycled fiber decreased to $80 per ton in 1996 compared to $170 per ton in 1995 and $85 per ton in 1994. Prices of fiber have been decreasing since mid 1995. Price changes normally follow the changes in fiber costs. The Company expects that recycled fiber costs will be stable in 1997.
Costs of sales remained essentially the same in the Wireless Communications Equipment segment in 1996 and 1995.
Selling, General and Administrative Expenses
Selling, general and administrative expenses which consist primarily of commissions, marketing, product development, salary and related costs, data processing and occupancy costs increased to 21.6% of sales for the year ended December 31, 1996 from 21.2% of sales in 1995, and decreased from 22.7% for the year ended December 31, 1994. Details of these changes by segment follow:
The increase in 1996 in the Recycled Paper Manufacturing segment was due to the relationship of decreased sales and fixed selling, general and administrative expenses. The decrease in 1995 in the Recycled Paper Manufacturing segment was due to increased sales volumes which created more efficient absorption of fixed selling and administration costs.
The Wireless Communications Equipment segment has higher costs associated with engineering and product development. These costs decreased in 1996 compared to 1995 and 1994 due to increased sales which more efficiently absorbed fixed selling, general and administrative expenses and staff reductions that took place in mid 1994. Development costs in this segment are expected to increase in 1997.
Corporate expenses decreased due to lower legal and insurance costs compared to 1995 and 1994.
Interest Expense
Interest expense decreased for the year ended December 31, 1996 compared to the year ended December 31, 1995. This decrease was due to lower debt levels in 1996 compared to 1995.
Income Taxes
Income taxes represented a (15.4%), 40.1% and 40.9% effective tax rates for the years ended December 31, 1996, 1995 and 1994, respectively. These rates are made up of a 34% effective federal tax rate and the respective state tax rates where the Company conducts business. The rate for 1996 includes an increase in the realization reserve for deferred tax assets due primarily to capital loss carryovers that may expire prior to their utilization.
Discontinued Operations
In 1996, the Company decided to discontinue and sell its Specialty Manufacturing business. A provision for loss on disposal (pre-tax and after tax) of $1,832,000 was recorded in 1996.
In August 1995, the Company sold its steel processing subsidiary for $6.8 million in cash. Minority interests were decreased by $1.5 million and long-term debt was decreased by this segment's debt of $6.0 and payments on the consolidated debt of the Company of $4.0 million.
In January 1995, the Company decided to discontinue and dispose of its real estate development and management segment. Real estate inventories were written down to their estimated orderly liquidation value as of December 31, 1994. On December 31, 1996, the Company revised its estimates and reduced its recorded book values of remaining real estate by $1,300,000 ($860,000 net of tax).
Management of the Company will consider disposal of subsidiaries that do not earn an adequate return or fit the long-term goals of the Company.
Inflation and Changing Prices
Inflation and changing prices for the years ended December 31, 1996, 1995 and 1994 have contributed to increases in wages, facility and raw material costs. Effects of these inflationary pressures were partially offset by increased prices to customers. The Company believes that it will be able to pass on most of its future inflationary increases to its customers. The Wireless Communications Equipment segment is also subject to changing foreign currency exchange rates in its purchases of raw materials. The Company employs several methods to protect against increases in costs due to currency fluctuations. It is not always possible to pass on the effects of currency fluctuations to customers. However, competition in these markets are subject to similar fluctuations in product costs.
Liquidity and Capital Resources
Working capital decreased by $155,000 during the year ended December 31, 1996. This decrease was immaterial. The Company had credit available under its existing lines of credit of approximately $500,000 at December 31, 1996.
Capital expenditures for the year ended December 31, 1996 were $1,572,000. These capital expenditures were financed from existing credit facilities and cash flow of the Company.
Capital expenditures for 1997 for the combined entity are not expected to exceed $3.0 million. The current credit agreement that the Company has restricts capital expenditures. Management believes that these restrictions will allow the Company to make the necessary capital expenditures during the term of the credit agreement. Management expects that capital expenditures will be funded through operating cash flow and financing sources available to the Company. Based on the anticipated replacement needs, and expected purchases of equipment for additional capacity, management expects that capital expenditures will remain at this level for the foreseeable future.
Inventories decreased $5,042,000 during 1996. Inventories decreased $2,718,000 due to the discontinuance of the Specialty Manufacturing segment. Inventories decreased in the Wireless Communications Equipment and the Recycled Paper Manufacturing segments by $715,000 and $1,609,000 respectively.
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe-harbor created by such sections. Such forward-looking statements concern the Company's operations, economic performance and financial condition. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; changes in customer preferences; competition; changes in technology; the integration of any acquisitions; changes in business strategy; the indebtedness of the Company; quality of management, business abilities and judgment of the Company's personnel; the availability, terms and deployment of capital; and various other factors referenced in this Report. The forward-looking statements are made as of the date of this Report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Independent Auditor's Report 18
Consolidated Balance Sheet 19
Statement of Consolidated Operations 21
Statement of Consolidated Stockholders' Equity 22
Statement of Consolidated Cash Flows 23
Notes to Consolidated Financial Statements 24
MACDADE ABBOTT LLP
Independent Auditor's Report
To the Board of Directors and Stockholders of Adage, Inc. West Chester, Pennsylvania
We have audited the accompanying consolidated balance sheet of Adage, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related statements of consolidated operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Adage, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles.
Paoli, Pennsylvania March 7, 1997
ADAGE, INC. CONSOLIDATED BALANCE SHEET (In Thousands)
See notes to consolidated financial statements.
See notes to consolidated financial statements.
ADAGE, INC. STATEMENT OF CONSOLIDATED OPERATIONS (In Thousands, Except Per Share Amounts)
See notes to consolidated financial statements.
ADAGE, INC. STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (In Thousands)
See notes to consolidated financial statements.
ADAGE, INC. STATEMENT OF CONSOLIDATED CASH FLOWS (In Thousands)
See notes to consolidated financial statements.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accounts of the Company and its controlled subsidiaries have been included in the consolidated financial statements. When the control of a subsidiary is considered to be temporary or the company owns less than the majority of the outstanding stock of a subsidiary, the equity method is used to account for the investment. All significant intercompany balances and transactions have been eliminated.
Inventories - Inventories are stated at the lower of cost or market, determined by the first-in, first-out (FIFO) method.
Investment Securities - Investments that are purchased and held principally for the purpose of selling them in the near term are classified as "trading securities" and carried at fair value, with unrealized gains and losses included in earnings. Other equity securities are classified as "available for sale" and carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses are computed by the specific identification method on a trade-date basis.
The classification of investment securities is determined by management at the date of purchase. When the Company subsequently changes its purpose for holding the security, it is transferred among classifications at the fair value at the date reclassified.
Property, Plant and Equipment - Property, plant and equipment is carried at cost and includes expenditures for new facilities and those which substantially increase the useful life of existing property, plant and equipment. Maintenance, repairs and minor renewals are expensed as incurred. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the gain or loss on disposition is credited or charged to income.
Depreciation - The Company provides for depreciation of property, plant and equipment at rates designed to allocate the cost over the estimated useful lives of the assets. Depreciation is generally computed on the straight-line method using lives of 3 to 20 years on machinery and equipment, 5 to 30 years on buildings and improvements. The Company revised the estimated useful life of some of its equipment from 5 to 8 years as of January 1, 1996. This increased operation income by $117,000, net income by $73,000 and earnings per share for 1996 by $.01 per share.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred Financing Charges - These include costs incurred to obtain financing. These costs are amortized over the life of the loans using the interest method for term loans and straight-line method for lines of credit.
Cash Flows - Cash includes time deposits, certificates of deposit and highly liquid marketable securities with original maturities of less than three months.
Real Estate - A portion of the real estate held by the Company is for sale. This real estate is valued at lower of cost or estimated net realizable value.
Cost in Excess of Net Assets of Businesses Acquired - Cost in excess of net assets of businesses acquired is being amortized over 25 years.
Income Taxes - The Company files a consolidated federal income tax return with its subsidiaries in which it owns 80% or more of the outstanding capital stock.
Income taxes are recognized for the tax consequences of all events that have been recognized in the financial statements, calculated based on provisions of enacted tax laws, including the tax rates in effect for current or future years. Deferred tax assets are recognized subject to an assessment as to future realizability.
Concentration of Credit Risk - Financial instruments which potentially subject the Company to credit risk consist primarily of trade receivables and short-term and long-term investments. The Company's two operating segments, wireless equipment and paper manufacturing, sell to different classes of customers and have different credit exposures which are described in Note L.
At December 31, 1996 and 1995 the carrying value of trade receivables approximated fair value.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings Per Share - Earnings per share are computed on the weighted average number of shares of common stock and common stock equivalents outstanding during the years (5,125,637, 5,105,860, and 5,106,846, in 1996, 1995 and 1994, respectively).
Common Stock - Par value $.60 per share; authorized 10,000,000 shares, issued and outstanding 5,129,150 shares and 5,121,535 shares at December 31, 1996 and 1995, respectively.
Implementation of New Financial Accounting Standards - Effective January 1, 1996 the Company adopted Statement of Financial Accounting Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." FAS No. 121 requires that impairments, measured using fair market value, are recognized whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable and the future undiscounted cash flows attributable to the asset are less than its carrying value. Adoption of this statement did not affect the Company's consolidated results of operations.
Effective January 1, 1996 the Company adopted FAS No. 123, "Accounting for Stock Based Compensation." This statement requires the Company to choose between two different methods of accounting for stock options. The statement defines a fair-value-based method of accounting for stock options but allows an entity to continue to measure compensation cost for stock options using the accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has elected to continue using the accounting methods prescribed by APB Opinion No. 25. The use of FAS No. 123 would have no material effect on the Company's consolidated financial statements.
Fair Value of Financial Instruments - Cash and cash equivalents are carried at approximate fair value.
The Company determines the fair values of its investment securities based on quoted market values.
Short-term borrowings are carried at approximate fair value and the rates are based on market interest indicators. The fair value of long-term was based on estimated quoted market prices.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Presentation - Prior years' financial statements have been restated to conform with current presentation. Dollars are stated in thousands (000 omitted) except for nontabular amounts in the notes to the consolidated financial statements and per share data.
NOTE B INVENTORIES
Inventory of the wireless equipment subsidiary, although higher than optimal operating levels, was reduced to $14,485,000 at December 31, 1996 from $15,200,000 the previous year. During the year management implemented a program to reduce inventory to desired levels. This program is continuing in 1997. Management believes no loss will be incurred in the near term upon disposition of the inventory.
Discontinued segment inventories consisted of the following at December 31, 1995:
NOTE C INVESTMENT SECURITIES
During 1996 the long-term investment - available for sale at December 31, 1995, had a market decline which was considered other than temporary and management reclassified this investment as current - trading. The market decline was recognized as a reduction in cost and reported with net (gains) losses on investments in the statement of consolidated operations.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE C INVESTMENT SECURITIES (continued)
Investment securities at December 31 were as follows:
NOTE D PROPERTY, PLANT AND EQUIPMENT
Depreciation expense on property, plant and equipment for the years ended December 31, 1996, 1995 and 1994 was $2,109,000, $2,088,000 and $2,912,000, respectively.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE E DEBT
The debt at December 31 consisted of the following:
Bank revolving line of credit agreement expiring February 27, 1999 with availability based on collateral levels to $15,000,000 reduced by outstanding letters of credit and bank acceptances funded by the line. The agreement is secured or guaranteed by substantially all the assets of the Company. The credit agreement requires among other things maintenance of financial ratios and limits certain expenditures. Interest varies according to a selection of market interest rates on amounts outstanding and .25% on the unused portion of the line.
As of December 31, 1996 and 1995 the Company had approximately $500,000 and $3,000,000 of unused lines of credit available.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE E DEBT (continued)
On February 27, 1997 the Company entered into a commercial mortgage in the amount of $4,312,500. $2,000,000 of the mortgage was used to reduce the bank revolving line of credit, the balance will be used to fund the construction of a 30,000 square foot addition to the company's wireless communication manufacturing facility in West Melbourne, Florida which is expected to be completed in the third quarter of 1997. The mortgage is secured by the West Melbourne, Florida property. Interest is payable monthly on outstanding borrowings at a rate which varies according to selected market interest rates. Monthly principal repayments of $12,222 are required beginning July 1, 1997 until July 1, 2012 when the outstanding balance will be due.
Maturities of long-term debt for the succeeding four years which reflect the February 27, 1997 financing are:
1998 $ 389 1999 10,848 2000 147 2001 147
NOTE F LEASES
The Company leases equipment and real estate under capital and operating leases. These leases require payment of all maintenance costs.
Property, plant and equipment includes equipment purchased under capital leases at December 31: 1996 1995 ------ ------ Cost $2,058 $1,751 Accumulated depreciation 403 173 ------ ------ Net carrying value $1,655 $1,578 ====== ======
The Company occupies certain properties under long-term leases which expire at various dates. Total rental expense for the years ending December 31, 1996, 1995 and 1994 amounted to $728,000, $718,000 and $1,195,000, respectively.
One of the operating leases is for a sales and support facility whose functions will be moved to the West Melbourne, Florida facility when its addition is completed. The net book value of the leasehold improvements at the expected date of abandonment
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE F LEASES (continued)
in 1997 and the lease termination fee totaling $110,000 were charged to operations in 1996.
Assets under capital leases are capitalized using interest rates appropriate at the inception of each lease. Future minimum payments, by year and in the aggregate under capital and non-cancelable operating leases with initial remaining terms of one year or more consisted of the following at December 31, 1996:
NOTE G PENSION PLANS
The Company participates in a multi-employer pension plan. The plan provides defined benefits for those employees covered by two collective bargaining agreements. Contributions for employees are based on hours worked at rates set in the bargaining agreements. If the Company curtailed employment or withdrew from the multi-employer plans, a withdraw liability may be incurred. The amount of such liability, if any, cannot be presently determined. Total amounts charged to pension expense and contributed to the multi-employer plan were $145,000, $174,000, and $166,000 for 1996, 1995 and 1994, respectively.
The Company sponsors participant contributory retirement plans (401k) which are available to employees not covered by union plans; the Company's contributions to these plans is either a percentage of the participants salary or basic amount which totaled $245,000, $429,000 and $369,000 for 1996, 1995 and 1994, respectively.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE H INCOME TAXES
The provisions for income taxes for the years ended December 31 are based on income (loss) from continuing operations before income taxes as follows:
The provision for income taxes is provided in the statement of consolidated operations as follows:
The components of consolidated income taxes (benefit) for the years ended December 31 are as follows:
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE H INCOME TAXES (continued)
The deferred tax effect of temporary differences between financial and tax reporting at December 31 is as follows:
Valuation allowances against deferred tax assets are required if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company believes that some uncertainty exists with respect to future realization of the total deferred tax assets due to annual limitation of deductibility and expiration of loss carryforwards, and because realization of this asset is contingent on future earnings. In addition, capital losses can only be utilized to offset capital gains in the year realized and are limited in carryovers, if unused, to offset future capital gains to the five following years. The Company believes that the likelihood of realizing future capital gains within the carryover period is remote. Therefore, the Company established valuation allowances relating to the realization of its deferred tax assets. The net amount of the deferred tax asset considered realizable, however, could vary in the near term if estimates of future taxable income or capital gains during the carryforward periods change.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE H INCOME TAXES (continued)
Part of the Federal loss carryforward is attributed to the prior operation of the wireless electronic subsidiary. This loss carryforward is limited to a tax benefit of approximately $320,000 per year. If unused, the federal and state tax loss carryforward benefit (at current rates) expires in the following years:
2004 - $1,177,000; 2005 - $1,436,000; 2006 - $363,000; 2009 - $5,000; 2010 - $90,000; 2011 - $317,000
NOTE I RELATED PARTY TRANSACTIONS
The Company leased its headquarters and leases a manufacturing facility from a corporation controlled by officers of the Company (affiliate). Rentals under these leases were $230,000, $239,000, and $274,000 for the years ending December 31, 1996, 1995, and 1994, respectively. The Company managed rental properties owned by the affiliate and other companies controlled by the officers for fees related to a percentage of gross rents plus a percentage of new leases signed. Property management fees received by the Company during 1996, 1995 and 1994 from related parties were $133,000, $124,000 and $154,000, respectively.
Included in future minimum lease payments is $225,000 for non-cancelable operating leases due to the affiliate.
During 1994 the Company's discontinued real estate development and management segment sold development land to an entity that was controlled by the Company's principal shareholder for $380,000.
NOTE J SUPPLEMENTAL CASH FLOW INFORMATION
Property, plant and equipment acquisitions were debt financed; 1996 - $355,000, 1995 - $920,000, and 1994 -$652,000.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE K COMMITMENTS
The paper manufacturing subsidiary company purchases steam from a company which has an electric/steam co-generation plant on the subsidiary's property. The subsidiary will purchase steam to the year 2012 at one half the subsidiary's 1986 steam generation cost adjusted for changes in the cost of fuels from the 1986 base. The Company, as part of this agreement, leased approximately 5 acres to the co-generation company to 2012 and has a 20 year renewal period of the steam purchase agreement. The annual rental is $1.
NOTE L SEGMENT INFORMATION
The Company operates principally in two manufacturing industries: wireless equipment; and paper. The real estate development and management segment was discontinued in 1994, the steel processing subsidiary was sold in 1995, and the specialty manufacturing segment was discontinued in 1996. The Company's operations in industry segments are as follows:
Wireless equipment - electronic wireless communication equipment
Paper - recycled paperboxboard and printed folding cartons
Other industries - management, investing and financing subsidiary activities; assets consist primarily of cash, short-term investments and loans to subsidiaries
Operating profit (loss) is total revenue less operating expenses. Total revenue by industry includes inter-segment sales. In computing operating profit, none of the following items have been added or deducted: general corporate expenses; interest expense; income taxes; equity in loss of unconsolidated subsidiary income or loss on discontinued operations.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE L SEGMENT INFORMATION (continued)
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE L SEGMENT INFORMATION (continued)
Sales by geographic region and government - exclusive of inter segment eliminations:
Credit Exposure
Wireless Equipment
Trade receivables are primarily short-term receivables which arise in the normal course of business from government agencies, domestic public utilities and domestic and foreign independently owned and operated dealers and manufacturers. The Company performs regular credit evaluations of its dealers and manufacturers. The Company generally does not require collateral, and the majority of its trade receivables are unsecured. The Company does make use of various devices such as security agreements and letters of credit to protect its interest as it deems necessary. At December 31, 1996 approximately 10% of the Company's trade receivables were from a dealer in Brazil and approximately 7% of the Company trade receivables were from other foreign dealers and manufacturers.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE L SEGMENT INFORMATION (continued)
Paper Manufacturing
Trade receivables are primarily short-term receivables which arise in the normal course of business from paper converters and manufacturers purchasing cartons located in the northeastern United States. The Company performs regular credit evaluations of its customers. The Company generally does not require collateral, and the majority of its trade receivables are unsecured. No single customer represented a significant concentration of risk at December 31, 1996.
NOTE M STOCK OPTION AND OTHER STOCK PLANS
Adage has two plans whereby eligible officers, directors and employees can be granted options for future purchases of Adage common stock at the market price on the grant date. The options, if not exercised within a five year period, expire. Other conditions and terms apply to stock option plans.
The following is a summary of all stock option plans:
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE M STOCK OPTION AND OTHER STOCK PLANS (continued)
Shares become exercisable as options vest. Currently 160,230 options are exercisable. Future vesting is as follows:
1997 44,668 1998 23,026 1999 3,417 2000 1,292
At December 31, 1996, 468,061 of unissued options were available under the two plans.
Adoption of FAS No. 123 would have no material effect on pro forma net income or loss or earnings per share for years presented. No compensation cost has been recognized for stock based compensation awards.
NOTE N DISCONTINUED OPERATIONS
Real Estate Development and Management
In February 1995 the Company formulated a Plan to discontinue its real estate development and management business segment. This segment included subsidiaries which each own a particular real estate development ("development"), to be sold in subdivided units as improved commercial land, or completed residential or commercial properties. The Plan anticipates that each development will be separately sold to different buyers and some unit sales will occur in the normal course prior to the sale of the development. In 1994 the Company recorded a pretax estimated loss on disposal of discontinued businesses of $2,450,000 which included valuation allowances of $2,150,000 and a provision of $300,000 for costs expected to be incurred prior to the sales. Prior years have been restated to include the Company's real estate development and management business segment as a discontinued operation.
In December, 1996 the Company revised the estimate of net realizable value of the remaining completed properties, properties under construction and lots available for construction given the current real estate market conditions in the areas of southeastern Pennsylvania where the real estate developments are located. As a result, a charge to discontinued operations amounting to $1,300,000 ($860,000 net of tax) was recorded at December 31, 1996. This charge had no effect on cash flow of the Company and increased loss per share for 1996 by $.17 per share.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE N DISCONTINUED OPERATIONS (continued)
The net assets held for sale represents the total assets less related liabilities to be divested by the Company at estimated net realizable values.
A summary of the net assets held for sale at December 31 is as follows:
The realization of the net assets held for sale is contingent on concluding sales and obtaining approval of mortgage holders. The amounts the Company will ultimately realize could differ materially in the near term from the amounts assumed in arriving at the loss on disposal of the discontinued operations.
Summarized results of operation and financial position data of the real estate development and management business segment's discontinued operations were as follows:
Specialty Manufacturing
In December 1996 the Company agreed in principal to sell its specialty manufacturing segment subsidiary to an officer and director of the Company. The sale which is conditional upon the buyer obtaining the necessary financing is anticipated to be concluded in the second quarter of 1997. A loss on the sale of $1,832,000 (pre-tax and after-tax) was recorded in December 31, 1996. This change had no effect on cash flow of the Company and increased loss per share for 1996 by $.36 per share.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE N DISCONTINUED OPERATIONS (continued)
Summarized results of operations and financial position data for the specialty manufacturing business segment's discontinued operations were as follows:
Financial position and net asset held for sale at December 31:
Steel Processing
In August 1995 the Company sold its steel processing business segment for approximately $6,789,000 in cash. The gain on the sale was $1,193,000 after income tax expense of $779,000. Prior years have been restated to include the Company's former steel processing business as a discontinued operation.
Summarized results of operations and financial position data for the steel processing business segment's discontinued operations were as follows:
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE O CONTINGENT LIABILITIES
From time to time, the Company may become liable with respect to pending and threatened litigation, tax, environmental and other matters.
Environmental
The Company is subject to federal, state and local environmental laws and regulations concerning, among other matters, water emissions and waste disposal.
General Insurance
Under the Company's insurance programs, coverage is obtained for catastrophic exposures as well as those risks required to be insured by law or contract. It is the policy of the Company to retain a significant portion of certain expected losses related primarily to workers' compensation, physical loss to property, business interruption resulting from such loss and comprehensive general, product, and vehicle liability. Provisions for losses expected under these programs are recorded based upon the Company's estimates of the aggregate liability for claims incurred. Such estimates utilize certain actuarial assumptions followed in the insurance industry and are included in accrued expenses.
Former Affiliate
In 1993 a civil action was brought against the Company by a plaintiff to recover losses sustained on notes of a former affiliate. The plaintiff alleges violations of federal securities and other laws by the Company in collateral arrangements with the former affiliate. In response, the Company filed a motion to dismiss the complaint in the fall of 1993, which the court has yet to rule. In February 1994 the plaintiff executed and circulated for signature, a stipulation of voluntary dismissal. After the stipulation was executed the plaintiff refused to file the stipulation with the court. Subsequently the Company and others named in the complaint filed a motion to enforce their agreement with the plaintiff. The court has also yet to rule on that motion.
In a second related action, an adversarial action in connection with the bankruptcy proceedings of the former affiliate has been filed. In response to that complaint the Company filed a motion to dismiss for failure to state a cause of action. Although the motion for dismissal was filed during 1994, the bankruptcy court has not yet ruled on the motion. The range of potential loss, if any, as a result of these actions cannot be presently determined.
ADAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
NOTE O CONTINGENT LIABILITIES (continued)
In February 1996 the liquidator of the former affiliate filed a complaint claiming intentional and negligent conduct by the Company and others named in the complaint caused the former affiliate to suffer millions of dollars of losses leading to its ultimate failure. The complaint does not specify damages but an unfavorable outcome could have a material adverse impact on the Company's financial position. The range of potential loss, if any, cannot be presently determined.
Management, with the advice of counsel, believes the Company has meritorious defenses and the likelihood of an unfavorable outcome in each of these actions is remote.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report and will be contained in the Company's definitive proxy statement with respect to the Company's 1997 Annual Meeting of Shareholders (the "Proxy Statement"), to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report, and is hereby incorporated by reference thereto.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the executive officers of the Registrant, reference is made to "Executive Officers of the Registrant," set forth in ITEM 4A of PART I of this Annual Report on Form 10-K. The balance of the information required by this Item will be contained in the Proxy Statement and is hereby incorporated by reference thereto.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be contained in the Proxy Statement and is hereby incorporated by reference thereto.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be contained in the Proxy Statement and is hereby incorporated by reference thereto.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be contained in the Proxy Statement and is hereby incorporated by reference thereto.
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. The following Consolidated Financial Statements of Adage and Report of Independent Public Accountants are filed as part of this Report:
Independent Auditor's Report Consolidated Balance Sheet - December 31, 1996 and 1995 Statement of Consolidated Operations - Years Ended December 31, 1996, 1995, and Statement of Consolidated Stockholders' Equity - Years Ended December 31, 1996, 1995 and 1994 Statement of Consolidated Cash Flows - Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements
2. Financial Statement Schedules. The following financial statement schedules of Adage for the years ended December 31, 1996, 1995, and 1994 are filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Adage:
Schedule V - Property, Plant and Equipment Schedule VI - Accumulated Depreciation, Depletion and Amortization Schedule VIII - Valuation and Qualifying Accounts Schedule IX - Short-term Borrowings Schedule X - Supplementary Income Statement Information Schedule XI - Real Estate and Accumulated Depreciation Schedule XII - Mortgage Loans on Real Estate
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits: The Exhibits listed below are filed as part of, or incorporated by reference into, this Report.
- ---------- * Compensatory plan required to be filed pursuant to Item 601(b)(10)(iii) of Regulation S-K. ** Filed herewith.
(b) Report 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf of the undersigned, thereunto duly authorized.
Date: April 14, 1997 ADAGE, INC.
By:/s/Donald F.U. Goebert ---------------------- Donald F.U. Goebert, Chairman and President
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 or the dates indicated.
ADAGE, INC. DECEMBER 31, 1996
SCHEDULE V Property, Plant & Equipment (000 Omitted)
(a) Discontinued operations (b) Reclassified during year
ADAGE, INC. DECEMBER 31, 1996
SCHEDULE V Property, Plant & Equipment (000 Omitted)
(a) Discontinued operations (b) Reclassified during year (c) Transfer of completed construction
ADAGE, INC. DECEMBER 31, 1996
SCHEDULE VI Accumulated Depreciation, Depletion, and Amortization of Property, Plant and Equipment (000 Omitted)
(a) Discontinued operations
ADAGE, INC. DECEMBER 31, 1996
SCHEDULE VIII Valuation and Qualifying Account (000 Omitted)
* Write off of uncollectible accounts receivable. (a) Recoveries (b) Discontinued operations
ADAGE, INC. DECEMBER 31, 1996
SCHEDULE IX Short Term Borrowings (000 Omitted)
ADAGE, INC. DECEMBER 31, 1996
SCHEDULE X Supplementary Income Statement Information (000 Omitted)
Charged to Costs and Expenses 1996 1995 1994 ---- ---- ----
Maintenance and Repairs $2,804 $ 2,491 $ 2,347
ADAGE, INC. DECEMBER 31, 1996
SCHEDULE XI Real Estate and Accumulated Depreciation (000 Omitted)
(a) Sold
ADAGE, INC. DECEMBER 31, 1996
SCHEDULE XII Mortgage Loans on Real Estate (000 Omitted)
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE
10(c) - Adage, Inc. 1996 Stock Option Plan For Non-Employee 57 Directors.
10(d) - Loan and Security Agreement dated February 27, 1997 64 between Adage, Inc., Allister Manufacturing Co., Inc., Fort Orange Paper Company, Inc., Relm Communications, Inc., Redgo Properties, Inc. and UJB Financial Corp.
21 - Subsidiaries of the Registrant. 135
23 - Consent of MacDade Abbott LLP. 136
27 - Financial Data Schedule (EDGAR filing only). 137