FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
COMMISSION FILE NUMBER: 0-7235
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ................ TO ................
FEDERATED PURCHASER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 22-1589344
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
268 CLIFFWOOD AVENUE
CLIFFWOOD, NEW JERSEY 07721
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (732) 290-2900
_________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS:
Common Stock, $.10 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the 1,158,240 shares of the common stock of
the Registrant held by non-affiliates on January 7, 1998 based upon the average
of the bid and asked prices was approximately $122,158. The number of shares
of the registrant's common stock outstanding as of January 7, 1998 was
1,611,317 shares, par value $.10 per share.
DOCUMENTS INCORPORATED BY REFERENCE
PART III: Certain portions of the Proxy Statement for the 1998
Annual Meeting of Shareholders.
FEDERATED PURCHASER, INC.
Cross Reference Sheet
Form 10-K Heading(s) in Proxy Statement for
ITEM NO. THE ANNUAL MEETING OF SHAREHOLDERS
10. Directors and Election of Directors
Executive Executive Officers
Officers of the
Registrant
11. Executive Compensation of Directors
Compensation and Executive Officers
12. Security Voting Securities and Principal
Ownership of Holders
Certain Bene-
ficial Owners
and Management
13. Certain Relation- Compensation Committee Interlocks
ships and Related and Insider Participation
Transactions
The balance of this page is intentionally blank.
-1-
TABLE OF CONTENTS
ITEM PAGE
PART I. 1. Business 3
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of
Security Holders 6
PART II. 5. Market for Company's Common
Equity and Related Stockholder
Matters 7
6. Selected Financial Data 8
7. Management's Discussion and Analysis
of Financial Condition and Results
of Operation 9
8. Financial Statements and Supplementary
Data 15
9. Disagreements on Accounting and
Financial Disclosure 28
PART III. 10. Directors and Executive Officers of
the Company 28
11. Executive Compensation 28
12. Security Ownership of Certain
Beneficial Owners and Management 28
13. Certain Relationships and Related
Transactions 28
PART IV. 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
SIGNATURES
-2-
PART I
ITEM 1. BUSINESS.
A. GENERAL DEVELOPMENT OF BUSINESS
Federated Purchaser, Inc. ("Federated") was incorporated in the state of
New York in 1928. On November 15, 1994, the Company divested Freedom,
Electronics, Inc. a subsidiary acquired in July 1989 (the "Divestiture"). This
Divestiture was based upon a strategic decision by management to re-focus its
efforts on the Company's traditional core business: the marketing of a broad
range of electronics components and related equipment to industrial customers.
Unless otherwise noted, references herein to the "Company" means
Federated and its subsidiary.
B. SIGNIFICANT FACTORS
1. PROPOSED ACQUISITION
On October 1, 1997, Federated Purchaser, Inc. ("Federated")
announced that it signed an agreement with Wise Components, Inc.
("Wise"), and its chairman and sole shareholder, Martin L.
Blaustein ("Blaustein"), under which Federated will issue
approximately 4.5 million shares of its common stock to Blaustein
in a tax-free exchange for all of the outstanding shares of
Wise's common stock (the "Proposed Transaction"). Upon closing,
Wise will become a wholly owned subsidiary of Federated and
Blaustein will become Federated's principal shareholder, owning
approximately 74% of Federated's common stock. The remaining 26%
will continue to be held by current shareholders of Federated.
The transaction is expected to close in the second quarter of
fiscal 1998.
2. CONTINUING SIGNIFICANT LOSSES; ACCUMULATED DEFICIT
The Company has experienced significant and continuous operating losses
amounting to $1,932,259 during the past five operating periods. For the years
ended October 31, 1997 ("fiscal 1997"), October 31, 1996 ("fiscal 1996"),
October 31, 1995 ("fiscal 1995"), October 31, 1994 ("fiscal 1994") and October
31, 1993 ("fiscal 1993"), the Company incurred losses of $281,901, $414,826,
$546,062, $373,849, and $315,621, respectively. As of October 31, 1997, the
Company's accumulated deficit was $1,335,234. See Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations".
3. IMPAIRED LIQUIDITY
The Company's liquidity position has been and continues to be adversely
affected by a variety of factors, including continued losses from operations.
During fiscal 1997, the Company used net cash of $71,461 for operating
activities, primarily as a result of the net loss of $281,901 for the year.
Since the Company currently has no access to any outside source of capital
(except for an existing equipment financing arrangement), management must meet
its short-term capital requirements solely from cash from operations (if any)
and existing cash reserves. While the Company enhanced its short-term
liquidity position through the one-time receipt of $762,345 in cash from the
Divestiture, those proceeds have been used to finance the Company's operations
during the past two operating periods. At October 31, 1997, the Company's
-3-
cash reserves amounted to $69,358, which could be insufficient to finance the
Company's operations throughout the upcoming operating period unless (i) the
Company's results of operations improve significantly, or (ii) management is
able to secure financing from an outside source. To date, management has been
unable to negotiate such financing from any outside source on acceptable terms.
There can be no assurances that the Company's cash reserves will be sufficient
to satisfy the Company's operating or financing requirements or that the
Company's inability to obtain capital from outside sources will not force the
Company to seek protection under the United States Bankruptcy Code. See Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." While there can be no
assurances, management believes that the Proposed Transaction will improve the
Company's operating performance and financial condition. See Note 14 -
Consolidated Financial Statements.
4. AUDIT REPORT - UNCERTAINTY
As a result of the Company's repeated operating losses, impaired
liquidity and current lack of access to any outside source of financing, the
Company's independent accountants have included an explanatory paragraph
raising substantial uncertainty as to the Company's ability to continue as a
going concern in their audit report. See Note 2 of the Company's Consolidated
Financial Statements.
5. NEGATIVE TRENDS IMPACTING SMALL ELECTRONICS DISTRIBUTORS; INTENSE
COMPETITION
The Company's sales levels have been and may continue to be negatively
impacted by a variety of factors, including the slowdown in the electronics
segment of the national economy and the loss of certain customers due to the
departure of key sales personnel to competitors. Management believes that
certain industry trends, such as customers migrating from smaller to larger
distributors and the increase in the relative volume of business conducted
directly between suppliers and manufacturers, have negatively impacted smaller
electronics distributors such as the Company. In addition, the Company faces
intense competition from numerous substantially larger companies having greater
resources, larger staffs, more extensive facilities and equipment, and which
offer a broader range of products, than the Company. In view of these factors,
there can be no assurances that the Company will be able to return to
profitability.
C. NARRATIVE DESCRIPTION OF BUSINESS
PRINCIPAL PRODUCTS AND SERVICES
Federated and its wholly-owned subsidiary are engaged in one segment of
the electronics industry: marketing of a broad range of electronic parts,
components and related equipment (including, for example, such items as
semi-conductors, wire, transformers, relay systems, capacitors and electronic
tubes) to industrial customers.
The Company conducts its business through its two locations in Cliffwood,
New Jersey, and Allentown, Pennsylvania, and through the direct solicitation of
certain industrial customers by the Company's own sales personnel.
The Company assembles and markets a broad range of products, none of
which accounted for 15% or more of the Company's consolidated revenues during
fiscal 1997, fiscal 1996 or fiscal 1995.
-4-
SOURCES AND AVAILABILITY OF RAW MATERIALS
The products marketed and distributed by the Company are obtained either
through distributorship agreements or are otherwise normally available to the
Company from a number of commercial sources on a competitive basis. While the
Company has not generally experienced difficulties in obtaining such products,
a supplier of electronic parts to Federated terminated the Company's
appointment as a distributor in 1993 and 1997. There can be no assurances
that the Company will not be terminated by any of its other suppliers or that
any such termination will not have a material adverse impact on the Company's
results of operations. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PATENTS, TRADEMARKS AND LICENSES
The Company does not hold any patents, trademarks, licenses, franchises
or concessions with respect to its continuing operations.
SEASONAL BUSINESS
The Company's business is generally not affected by seasonal factors.
WORKING CAPITAL ITEMS
Management believes that the Company's inventory practices and other
practices which impact working capital are similar to those employed by other
similarly sized distributors doing business in this segment of the electronics
industry. See Item 1 "Business - Significant Factors" and Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MATERIAL CUSTOMERS
During fiscal 1997, net sales by the Company to its largest customer
comprised approximately 4% of the Company's consolidated net sales. Given the
Company's current liquidity situation and the Company's need to significantly
improve its sales revenues, there can be no assurances that the loss of this or
any other customer would not have a material adverse effect on the Company.
All but a nominal amount of the Company's sales are made to industrial
customers within the continental United States.
BACKLOG
As of October 31, 1997, the Company had a firm backlog of approximately
$550,000 compared to a firm backlog at October 31, 1996 of approximately
$666,687.
GOVERNMENT CONTRACTS
No portion of the Company's business is subject to renegotiation of
profits or to termination of contracts or subcontracts at the election of the
Government.
-5-
COMPETITIVE CONDITIONS
The Company faces intense competition from numerous companies assembling
and marketing products similar to those sold by the Company. Many of the
Company's competitors are substantially larger than the Company, have greater
resources, larger staffs, more extensive facilities and equipment, and offer a
broader range of products than the Company. Competition is generally based
upon price, service and breadth of product lines offered. In addition, the
Company believes that the industry is moving towards a reduction in the number
of distributors which service each customer, a trend which management believes
favors the larger distributors and negatively impacts the Company. As a result
of these factors, there can be no assurances that the Company will be able to
reverse its negative operating results and return to profitability.
RESEARCH AND DEVELOPMENT
During fiscal 1996 and the interim periods of fiscal 1997, the Company
did not spend any amount on research and development activities.
ENVIRONMENTAL MATTERS
Management believes that the Company's capital expenditures, earnings and
competitive position have not been affected by compliance with Federal, State
and local laws relating to the protection of the environment.
NUMBER OF EMPLOYEES
As of October 31, 1997, the Company had 17 employees, 2 of whom were
engaged in administration, 9 in clerical and shipping positions, and 6 in
sales. This represents a reduction of 4 employees from fiscal 1995, all of
whom were laid off in February, 1996 as part of management's plan to reduce
overhead expenses. The Company is not a party to any collective bargaining
agreement and considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES.
The Company currently operates its principal administrative, sales and
warehousing facilities from an 11,600 square foot facility located in Cliffwood,
New Jersey. The annual rental during the current term under the terms of a 6-
year net lease (i.e., the annual rental is exclusive of property taxes and all
other property-connected charges payable by the Company) is $58,000. The
Company also leases approximately 2,800 square feet in a building in Allentown,
Pennsylvania, on a month-by-month basis for a minimum annual rental of $10,800.
Management believes that the present facilities are adequate to meet the
Company's current and reasonably foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to, nor is any of its property the subject of,
any material pending legal proceedings, other than ordinary routine litigation
incidental to its business.
-6-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of its shareholders,
through the solicitation of proxies or otherwise, during the fourth quarter of
fiscal 1996.
-7-
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since July 14, 1992, Federated's stock has been quoted on the "pink
sheets" by the National Quotation Bureau, Inc. These quotations represent
prices between dealers and do not include retail mark-up, mark-down or
commissions and may not represent actual transactions.
BID PRICES ASKED PRICES
Quarter ended: HIGH LOW HIGH LOW
January 31, 1995 5/16 1/4 3/4 9/16
April 30, 1995 5/16 1/16 3/4 5/16
July 31, 1995 1/4 1/8 3/4 7/16
October 31, 1995 1/4 1/8 3/4 1/2
January 31, 1996 1/4 1/4 1/2 7/16
April 30, 1996 1/4 1/8 7/16 3/8
July 31, 1996 7/32 7/32 3/8 3/8
October 31, 1996. 7/32 7/32 3/8 3/8
January 31, 1997 3/8 1/8 7/16 1/4
April 30, 1997 5/16 1/8 5/16 1/4
July 31, 1997 5/32 1/8 5/16 5/16
October 31, 1997 1/8 1/8 5/16 5/16
January 20, 1998 3/8 3/8 9/32 9/32
At January 20, 1998, there were approximately 785 shareholders of record
of Federated's Common Stock.
Given Federated's repeated operating losses, accumulated deficit, and
impaired liquidity position, management intends to retain all remaining
available cash for the operation of Federated's business and does not
anticipate paying cash dividends on its common stock in the foreseeable future.
Any future determination as to the payment of dividends on the common stock
will depend upon future earnings, capital requirements, the financial condition
of Federated and any other factors the Board of Directors may consider.
For information regarding the effect of the Exchange on the principal
holders of Common Stock, see "Description of Capital Stock -- Voting and
Principal Holders" above. For information regarding the effect of the Exchange
on the Common Stock ownership of Federated's directors and officers, see
"Directors and Officers" above. There are no commitments with any of such
persons with respect to the issuance of any class of Federated's common equity.
-8-
ITEM 6. SELECTED FINANCIAL DATA.
The consolidated selected financial data of and for each of the five
years in the period ended October 31, 1997 have been derived from the audited
financial statements of Federated. These data should be read in conjunction
with, and is qualified in its entirety to, the related financial statements and
notes included elsewhere in this Proxy Statement.
Year Ended
October 31,
_____________________________________________________________________________________
1997 1996 1995 1994 1993
Net sales $3,252,670 $3,980,560 $4,118,799 $6,281,006 $6,245,276
Net loss from
continuing
operations (281,901) (414,826) (546,062) (373,849) (315,621)
Net loss per
share from
continuing
operations (.17) (.26) (.34) (.22) (.19)
Cash
dividends
paid -- -- -- -- --
Cash
dividends
paid per
share .00 .00 .00 .00 .00
Total assets 1,001,175 1,287,324 1,605,604 2,768,863 2,788,001
Working
capital 274,835 490,614 871,875 1,452,970 1,852,245
Current ratio 1.5:1 2.0:1 3.5:1 2.5:1 4.0:1
Long-term debt
8,331 18,955 29,697 44,989 69,613
Stockholders'
equity 468,006 749,907 1,164,733 1,755,240 2,129,089
Stockholders'
equity per
share $ .29 $ .47 $ .72 $ 1.03 $ 1.25
(1) The data for fiscal years 1995 and 1996 reflect the divesture of a
former Federated subsidiary, Freedom. See further discussion at
Management's Discussion and Analysis of Financial Condition and Results
of Operation for the fiscal years ended October 31, 1997, 1996 and 1995.
-9-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The Company has experienced significant operating losses throughout the
past five operating periods. For fiscal 1997, fiscal 1996, fiscal 1995, fiscal
1994, and fiscal 1993, the Company incurred losses of $281,901, $414,826,
$546,062, $373,849, and $315,621, respectively. As a result of negative cash
flows associated with these losses, as of October 31, 1997, working capital had
decreased 88.5% to $274,835 from $2,389,580 at October 31, 1991 and the Company
had an accumulated deficit of $1,335,234. While management is seeking to
address these problems by increasing sales and reducing operating costs, there
can be no assurances that the Company will be successful in its efforts to
improve either its liquidity position or operating results. In addition,
because the Company currently has no access to any outside source of capital
(except for an existing equipment financing arrangement), management must meet
its short-term capital requirements solely from cash from operations (if any)
and existing cash reserves. There can be no assurances that the Company's cash
reserves will be sufficient to satisfy the Company's capital requirements or
that the Company's inability to obtain capital from outside sources will not
force the Company to seek protection under the United States Bankruptcy Code.
While there can be no assurances, management believes that the Proposed
Transaction will improve the Company's operating performance and financial
condition. See Note 14 - Consolidated Financial Statements.
In November 1994, the Company divested its subsidiary, Freedom. In
accordance with generally accepted accounting principles, the divestiture of
the operations of Freedom has not been accounted for as a discontinued
operation because Freedom was not a separate business entity. As a result,
management's discussion compares (i) the Company's results of operations for
fiscal 1996 (which do not include Freedom) to the Company's results of
operations for fiscal 1995 (which do not include Freedom), (ii) the Company's
results of operations for fiscal 1995 (which do not include Freedom) to the
Company's results of operations for fiscal 1994 (which include Freedom) and
(iii) Federated's results of operations for fiscal 1995 to Federated's Pro
Forma results for fiscal 1994 (which include Freedom). Management believes this
approach more accurately reflects the Company's recent financial performance.
RESULTS OF OPERATIONS
The Company recognized a net loss of $281,901 for the year ended October
31, 1997 on net sales of $3,252,670, as compared to a net loss of $414,826 for
the year ended October 31, 1996 on net sales of $3,980,560, and a net loss of
$546,062 for the year ended October 31, 1995 on net sales of $4,118,799. The
loss of $546,062 for the year ended October 31, 1995 included a loss of
$182,791 on the divestiture of the Company's subsidiary, Freedom Electronics
Corp. ("Freedom").
Despite the relative improvement in the magnitude of the loss when
compared with the years ended October 31, 1996 and 1995, the loss represents a
continuation of repeated significant operating losses experienced by Federated
since prior to 1992. As a result of negative cash flows associated with these
losses, as of October 31, 1997, working capital had decreased to $274,835 and
Federated had an accumulated deficit of $1,335,234. Because Federated
currently has no access to any outside source of capital (except for an
existing equipment financing arrangement), management must meet its short-term
capital requirements solely from cash from operations (if any) and existing
cash reserves. At October 31, 1997, Federated's cash reserves were $69,358.
There can be no assurances that Federated's cash reserves will be sufficient to
satisfy Federated's capital requirements or that Federated's inability to
obtain capital from outside sources will not force Federated to seek protection
under the United States Bankruptcy Code. While there can be no assurances,
management believes that the Proposed Transaction will improve the Company's
operating performance and financial condition. See Note 14 - Consolidated
Financial Statements.
-10-
Net sales were $3,252,670 for the year ended October 31, 1997 as compared
to $3,980,560 for the year ended October 31, 1996, or a decrease of $727,890 or
18.2% over the prior year. Net sales were $3,980,560 for the year ended
October 31, 1996 as compared to $4,118,799 for the year ended October 31, 1995,
a decrease of $138,239 or 3.4% over the prior year. The decrease in sales for
the year 1997 as compared to 1996 of $727,890 and the decrease in sales for the
year 1996 as compared to 1995 of $138,239 is due to intense competition,
particularly in the Northeast United States, and trends adversely affecting the
electronics industry as a whole (as described in more detail below). These
competitive circumstances have continued to reduce Federated's sales volume,
which, along with gross margins, must improve in the short-term and in the
long-term, for Federated to reverse its negative results of operations. The
likelihood of achieving the necessary increases in both sales volume and gross
margins continues to be compromised by several factors, including the loss of
certain customers due to the departure of key sales personnel, intense industry
competition which has resulted in management seeking additional sales volume
through price reductions, and certain other industry trends which adversely
impact smaller electronics distributors. These trends include the
consolidation of other small distributors, the increase in the use of
technology (which Federated's limited capital resources have not permitted it
to acquire), the diminished availability of capital within the business,
marketplace changes favoring value-added services, and the reduction of
franchises by major vendors. While management continues its effort to improve
sales volume while preserving Federated's current customer base, there can be
no assurances that management will succeed in achieving the sales increases,
improved margins and cost reductions which are necessary to reverse Federated's
negative results of operations.
Cost of sales were $2,493,482 or 76.6% of sales for the year ended
October 31, 1997 as compared to $3,128,019 or 78.6% of sales for the year ended
October 31, 1996 and $3,172,060 or 77.0% of sales for the year ended October
31, 1995. The decrease in cost of sales for the years ended October 31, 1997,
1996 and 1995 are the result of Federated's decrease in sales volume. The
gross profit percentage for the year ended October 31, 1997 was 23.4% as
compared to 21.4% for the year ended October 31, 1996 and 23.0% for the year
ended October 31, 1995. The increase of 2.0% in gross profit percentage for
the year ended October 31, 1997 when compared to October 31, 1996, is the
result of management's attempt to increase sales prices to customers and
decrease prices paid to suppliers. The decrease in gross profit percentage of
1.6% from 23.0% for the year ended October 31, 1995 to 21.4% for the year ended
October 31, 1996 was the result of increased competition within the industry
and management's decision to attempt to improve the Company's sales volume and
operating results by reducing prices to its customers. There can be no
assurances that the minor improvement in Federated's gross margin can be
sustained, or that lower gross profits associated with the reduction in sales
volume will not force Federated to seek protection under the United States
Bankruptcy Code.
Selling, shipping and general and administrative ("SSG&A") expenses were
$1,061,382 for the year ended October 31, 1997, compared to $1,286,444 for the
year ended October 31, 1996 and $1,353,609 for the year ended October 31, 1995.
Fiscal year 1997 thus showed a decrease in SSG&A of $225,062 when compared to
year ended October 31, 1996. The decrease of $225,062 is the result of a
reduction of sales salaries of 18.6%, a reduction of administrative salaries of
14.0% a reduction of telephone expense of 32.2% and a reduction of general
expenses of 36.2%. The decrease of $225,062 for the year ended October 31,
1997 when compared to the year ended October 31, 1996 represented a 17.4%
decrease in SSG&A expenses. SSG&A expenses for the year ended October 31, 1996
were $1,286,444 compared to $1,353,609 for the year ended October 31, 1995, a
decrease of $67,165 over the prior year. The decrease of $67,165 is the result
of a reduction in warehouse salaries of 48.6%, a reduction of administrative
salaries of 10.3%, a reduction of insurance costs of 36.0%, a reduction of bad
debt expense of 64.1%, partially offset by an increase in sales salaries of
7.7%. Management anticipates that further reductions in SSG&A expenses will be
necessary to reverse Federated's negative results of operations.
Interest earned on the Company's cash reserves and notes receivable were
$11,054 for the year ended October 31, 1997 as compared to $14,830 for the year
ended October 31, 1996 and $32,530 for the year ended October 31, 1995. The
decrease of $3,776 for the year ended October 31, 1997 as compared to October
31, 1996 was attributable to lower cash balances, which continue to deteriorate
-11-
as a result of the Company's operating losses and lower note receivable
balances. The decrease of $17,700 for the year ended October 31, 1996 when
compared to October 31, 1995 was due to lower cash balances as a result of
recurring operating losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position has been and continues to be adversely
affected by a variety of factors, including the $281,901 loss for the year
ended October 31, 1997, the loss of $414,826 for the year ended October 31,
1996 and the loss of $546,062 for the year ended October 31, 1995. Moreover,
the Company's liquidity position may be further negatively impacted to the
extent that certain trends, including intense competition from larger
competitors in the electronics industry and the migration of certain customers
from smaller to larger distributors, continue to decrease Federated's sales
levels, gross profit margins, or both. While Federated enhanced its short-term
liquidity position when it received a one-time cash payment of $762,345 from
its November 15, 1994 divestiture of a former subsidiary, Freedom Electronics,
those proceeds have been used to sustain operations since that time. Thus,
Federated's ability to satisfy its fixed costs of operations in the future will
depend upon management's success in increasing sales, improving gross margins,
reducing operations costs, securing additional lines of credit from outside
lenders or entering into strategic alliances. Due to Federated's impaired
liquidity position, negative financial performance, reliance on cash to sustain
operations and certain other factors, Federated's independent auditors raise
substantial doubt regarding Federated's ability to continue as a going concern
in Federated's annual report for the year ended October 31, 1997. If Federated
is not successful in achieving any or all of its strategic objectives, it may
have to seek protection under the United States Bankruptcy Code. While there
can be no assurances, management believes that the Proposed Transaction will
improve the Company's operating performance and financial condition. See Note
14 - Consolidated Financial Statements.
Cash and cash equivalents decreased by $26,560 for the year ended October
31, 1997 as compared to a decrease of $90,597 for the year ended October 31,
1996 and a decrease of $38,500 for the year ended October 31, 1995. During the
year ended October 31, 1997, the Company used net cash of $71,461 from
operating activities primarily from the net loss of $281,901, a decrease of
$118,762 in accounts receivable, a decrease of $85,864 in inventories and a
increase of $30,741 in accounts payable and accrued expenses. The Company
generated cash of $55,525 for the year ended October 31, 1997, primarily though
collections of a note receivable from Freedom Electronics of $55,000. During
the year ended October 31, 1997, the Company used cash of $10,624 for payments
on long-term debt.
During the year ended October 31, 1996, the Company used net cash of
$190,456 from operating activities, primarily because of the net loss for the
year, the decrease of $77,835 in inventories and the increase of $127,913 in
accounts payable and accrued expenses. The Company generated cash of $110,601
for the year ended October 31, 1996, primarily through the receipt of $99,744
on the redemption of marketable securities and the collection of $35,000 in
notes receivable; these decreases were partially offset by the $23,672 increase
in association membership costs. The collection of $35,000 in notes receivable
is due to Federated's renegotiation of certain terms relating to debt owed by
Freedom to Federated as a result of the divestiture. During the year ended
October 31, 1996, the Company used cash of $10,742 for payments on long-term
debt.
During the year ended October 31, 1995, the Company used net cash of
$609,348 from operating activities, primarily because the net loss for the
year. The Company generated cash from investing activities of $645,472 for the
year ended October 31, 1995, primarily from the $762,345 proceeds on the
divestiture of Freedom, and used cash of $286,224 to purchase marketable
securities, while redeeming marketable securities of $192,439. During the year
ended October 31, 1995, the Company used cash of $74,624 to pay off a note
payable in the amount of $63,999 and long-term debt in the amount of $10,625.
The note was pursuant to a credit line agreement with New Jersey National Bank,
which had previously been withdrawn by the bank. The note was secured by
accounts receivable and inventory of the Company. As part of the consideration
received in connection with the divestiture of Freedom, Federated was relieved
-12-
of its obligations under a note payable to United Jersey Bank in the amount of
$250,000. Federated had been a guarantor of this obligation of Freedom.
Based upon the Company's continuing losses, the Company has experienced
periods of declining cash balances, which have negatively impacted the accounts
payable balances of trade creditors. The Company has been slow in the payment
of its accounts payable and approximately 47% of its accounts payable are over
30 days old and 21% are over 60 days old as of October 31, 1997. On open trade
accounts payable for unsecured creditors, the Company has no knowledge of any
pending or threatened legal actions which would force the Company into
bankruptcy. As of October 31, 1997, open trade accounts payable and accrued
expenses for unsecured creditors totaled $500,463. Secured creditors on long-
term debt, namely for the purchase of computer equipment totaled $8,331. As of
October 31,1996, open trade accounts payable and accrued expenses for unsecured
creditors totaled $469,712, and secured creditors on long-term debt, namely for
the purchase of computer equipment totaled $18,955. The Company anticipates
that the increased cash flow and greater efficiency resulting from the Exchange
will enable it to resume a current payment schedule, and plans to do so as soon
as it becomes practicable; although its ability to do so quickly is limited by
the fact that Federated is not receiving cash under the Exchange.
CAPITAL RESOURCES - WORKING CAPITAL REQUIREMENTS
Federated currently has no access to any outside source of capital,
except for approximately $8,300 outstanding under an existing equipment
financing arrangement. While management continues to seek new sources of
financing from other financial institutions, no such arrangements has yet been
established. As a result, management must meet substantially all of its short-
term capital requirements from cash from operations (if any) and existing cash
reserves which continue to deteriorate as a result of the Company's recurring
operating losses. There can be no assurances that the Company's current cash
reserves will be sufficient to satisfy the Company's financing requirements or
that the Company's inability to obtain capital from outside sources will not
impair its ability to continue future operations. While there can be no
assurances, management believes that the Proposed Transaction will improve the
Company's operating performance and financial condition. See Note 14 -
Consolidated Financial Statements.
A supplier of electronic parts to Federated Purchaser terminated
Federated Purchaser's franchise agreement as an Industrial Electronic
Distributor effective July 1, 1997. Federated expects to continue to be able
to obtain electronic parts from the supplier through a cooperative purchasing
group.
Federated maintains its records on the accrual basis of accounting.
Income is recorded when earned and expenses are recorded when incurred.
Federated's accounting policies with respect to customer right of returns is to
require written authorization by Federated, except for special order items,
which are handled on a case by case basis.
The Company's balance sheet reflects working capital of $274,835 and
$490,614 at October 31, 1997 and 1996, respectively, a decrease of $215,779 or
43.9% for the year 1997.
The Company's stockholders' equity amounted to $468,006 at October 31,
1997, equivalent to a book value per common share of $.29. As of October 31,
1996, stockholders' equity amounted to $749,907 equivalent to a book value per
common share of $.47.
On October 1, 1997, Federated Purchaser, Inc. signed an agreement whereby
Federated will acquire all of the outstanding shares of stock of Wise
Components, Inc. in an exchange of stock which will be accounted for as a
purchase.
-13-
On November 15, 1994, by unanimous vote of all non-interested directors,
Federated divested its subsidiary, Freedom. In consideration of the divesture
of 100% of the outstanding shares of Freedom, Federated received approximately
$360,500, including $106,500 in cash, a $210,000 promissory note and 88,889
shares of common stock of Federated (representing 4.9% of the outstanding class
of common shares) held personally by Freedom's President. In addition, the
parties entered into customary covenants not to compete, pursuant to which
Federated became entitled to receive $90,000 over a four year period. As part
of this transaction, certain intercompany indebtedness to Federated was
satisfied by payment of an additional $656,000. While there are no written,
oral or other binding agreements between Federated and Freedom regarding their
ongoing business relationship, both Federated and Freedom anticipate selling
certain goods to each other on mutually beneficial terms. During the period
November 16, 1994 to October 31, 1995, the period immediately following the
divestiture of Freedom, Freedom sold goods to Federated in the amount of
$76,112 and Federated sold goods to Freedom for $69,193. During the year ended
October 31, 1996, Federated purchased goods from Freedom totaling $776 and did
not sell any goods to Freedom during the same period. During the year ended
October 31, 1997, Federated did not purchase any goods from Freedom, nor did it
sell any goods to Freedom.
The loss on the divestiture of Freedom amounted to $182,791 or $.11 per
share.
-14-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE
Independent Auditors' Report 16
Consolidated Balance Sheets 17
Consolidated Statements of Operations 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20 - 21
Notes to Consolidated Financial Statements 22 - 28
-15-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Federated Purchaser, Inc.
Cliffwood, New Jersey
We have audited the consolidated balance sheets of Federated Purchaser, Inc.
and its subsidiaries as of October 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended October 31, 1997, 1996 and 1995. These consolidated financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these consolidated 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 audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatements. 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 Federated
Purchaser, Inc. and its subsidiaries as of October 31, 1997 and 1996, and the
results of its operations and its cash flows for the years ended October 31,
1997, 1996 and 1995 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
which raise substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BEDERSON & COMPANY LLP
January 8, 1998
West Orange, New Jersey
-16-
FEDERATED PURCHASER, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
ASSETS
1997 1996
CURRENT ASSETS:
Cash $ 69,358 $ 95,918
Accounts receivable, less allowance for doubtful
accounts of $16,803 and $26,339, respectively 384,059 493,285
Inventories 228,583 314,447
Prepaid expenses and sundry receivables 49,754 22,925
Note receivable - Freedom Electronics Corporation 27,500 20,000
Restrictive covenant receivable 24,375 24,375
TOTAL CURRENT ASSETS 783,629 970,950
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 20,600 32,028
OTHER ASSETS:
Note receivable - Freedom Electronics Corporation,
net of current portion 92,500 155,000
Restrictive covenant receivable, net of current portion - 24,375
Security deposits 10,845 10,845
Association membership 93,601 94,126
TOTAL OTHER ASSETS 196,946 284,346
TOTAL ASSETS $1,001,175 $1,287,324
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 8,331 $ 10,624
Accounts payable 468,479 375,851
Accrued expenses 31,984 93,861
TOTAL CURRENT LIABILITIES 508,794 480,336
LONG-TERM DEBT, less current portion - 8,331
DEFERRED INCOME 24,375 48,750
TOTAL LIABILITIES 533,169 537,417
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, authorized, 5,000,000
shares, 1,719,758 shares issued 171,976 171,976
Additional paid-in capital 1,692,342 1,692,342
Accumulated deficit (1,335,234) (1,053,333)
Total 529,084 810,985
Less: Treasury stock, 108,441 shares, at cost 61,078 61,078
TOTAL STOCKHOLDERS' EQUITY 468,006 749,907
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,001,175 $1,287,324
The accompanying notes are an integral part of these financial statements.
-17-
FEDERATED PURCHASER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
1997 1996 1995
REVENUES:
Sales, net $3,252,670 $3,980,560 $4,118,799
COSTS AND EXPENSES (INCOME):
Cost of sales 2,493,482 3,128,019 3,172,060
Selling, shipping, and general and
administrative 1,061,381 1,286,444 1,353,609
Loss on sale of subsidiary - - 182,791
Depreciation and amortization 11,427 11,575 11,260
Interest expense 2,850 2,828 3,811
Interest income (11,054) (14,830) (32,530)
Restrictive covenant (24,375) (20,625) (20,625)
Other income (240) - (9,878)
TOTAL COSTS AND EXPENSES (INCOME) 3,533,471 4,393,411 4,660,498
LOSS BEFORE PROVISION FOR INCOME TAXES (280,801) (412,851) (541,699)
PROVISION FOR INCOME TAXES 1,100 1,975 4,363
NET LOSS $ (281,901) $ (414,826) $ (546,062)
LOSS PER SHARE $ (.17) $ (.26) $ (.34)
The accompanying notes are an
integral part of these financial statements.
-18-
FEDERATED PURCHASER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
Common Stock
Additional Held in
COMMON STOCK Paid-in Accumulated TREASURY AT COST
SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT
BALANCES - October 31, 1994 1,719,758 $171,976 $1,692,342 $ (92,445) 19,552 $ 16,633
Purchase of treasury stock - - - - 88,889 44,445
Net loss - - - (546,062) - -
BALANCES - October 31, 1995 1,719,758 171,976 1,692,342 (638,507) 108,441 61,078
Net loss - - - (414,826) - -
BALANCES - October 31, 1996 1,719,758 171,976 1,692,342 (1,053,333) 108,441 61,078
Net loss - - - (281,901) - -
BALANCES - October 31, 1997 1,719,758 $171,976 $1,692,342 $(1,335,234) 108,441 $ 61,078
The accompanying notes are an
integral part of these financial statements.
-19-
FEDERATED PURCHASER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(281,901) $(414,826) $(546,062)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 11,427 11,575 11,260
Allowance for doubtful accounts (9,525) 4,751 4,001
Accrued interest income - - (5,959)
Loss on divestiture of Freedom Electronics, Corp. - - 182,791
Freedom Electronics, Corp., net assets and
liabilities disposed of - - (160,457)
Noncash operating expenses - - 2,154
Deferred income taxes - - (1,947)
(Increase) decrease in current assets:
Accounts receivable 118,762 (11,647) (114,540)
Inventories 85,864 77,835 48,370
Prepaid expenses and sundry receivables (26,829) 13,943 33,967
Tax refund receivable - - 5,119
Decrease in security deposits - - 9,228
Increase (decrease) in current liabilities:
Accounts payable 92,628 92,526 (47,095)
Accrued expenses (61,887) 35,387 (30,178)
NET CASH USED BY OPERATING ACTIVITIES (71,461) (190,456) (609,348)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on divestiture of Freedom Electronics, Corp. - - 762,345
Purchase of marketable securities - - (286,224)
Sale of marketable securities - 99,744 192,439
Purchase of property and equipment - (471) (2,688)
Collection of note receivable 55,000 35,000 -
(Increase) decrease in association membership costs 525 (23,672) (20,400)
NET CASH PROVIDED BY INVESTING ACTIVITIES 55,525 110,601 645,472
CASH FLOWS USED BY FINANCING ACTIVITIES:
Payments on notes payable and long-term debt (10,624) (10,742) (74,624)
NET DECREASE IN CASH (26,560) (90,597) (38,500)
CASH - beginning of year 95,918 186,515 225,015
CASH - end of year $ 69,358 $ 95,918 $ 186,515
(Continued)
The accompanying notes are an
integral part of these financial statements.
-20-
FEDERATED PURCHASER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
1997 1996 1995
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 2,850 $ 2,828 $ 3,811
Income taxes $ 404 $ - $ 421
NON-CASH INVESTING AND FINANCING ACTIVITY:
Divestiture of Freedom Electronics Corp.,
summarized as follows:
Selling price $ - $ - $1,100,290
Add: Management fee - - 6,500
Less: Note receivable - - (210,000)
Restrictive covenant - - (90,000)
Treasury stock - - (44,445)
Cash received $ - $ - $ 762,345
Cash received $ - $ - $ 762,345
Applied to:
Management fee - - (6,500)
Sale of stock - - (100,000)
Intercompany indebtedness - - (655,845)
- - (762,345)
$ - $ - $ -
(Concluded)
The accompanying notes are an
integral part of these financial statements.
-21-
FEDERATED PURCHASER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Companies are engaged in the sale of electronic parts, components and
related equipment.
ACCOUNTING 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.
REVENUE RECOGNITION
Federated Purchaser, Inc. and its subsidiaries, ("The Company" or
"Federated") maintain their records on the accrual basis of accounting.
Income is earned and recorded when title passes and expenses are recorded
when incurred. Any merchandise returned by customers in the normal course
of business must be pre-approved by management.
DEFERRED REVENUE
In conjunction with the sale of all the common stock of its wholly-owned
subsidiary, Freedom Electronics Corporation, on November 14, 1994,
Federated entered into a noncompete agreement with the purchaser. The
$90,000 noncompete agreement is being recognized into income over the
four-year term of the agreement based upon monthly installments received.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
intercompany items have been eliminated. (See Note 13, Sale of
Subsidiary.)
INVENTORIES
Inventories are stated at lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment, including significant betterments, are recorded at
cost. Upon retirement or disposal of properties, the cost and accumulated
depreciation are removed from the accounts, and any gain or loss is
included in income. Maintenance and repair costs are charged to expense
as incurred. Provisions for depreciation are made using the straight-line
method over the estimated economic lives of the assets.
ADVERTISING
Advertising costs are expensed as incurred and included in Selling,
Shipping and General and Administrative Expenses. Advertising expenses
for the years ended October 31, 1997, 1996 and 1995 were $6,898, $19,792
and $20,149, respectively.
DEFERRED INCOME TAXES
Deferred income taxes are provided on a liability method whereby deferred
income tax assets are recognized for deductible temporary differences and
operating loss carryforwards and deferred income tax liabilities are
recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and
their tax bases. Deferred income tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not
that some portion or all deferred tax assets will not be realized.
Deferred income tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
-22-
FEDERATED PURCHASER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with current
year presentation. Such reclassifications had no effect on reported net
losses.
NET LOSS PER COMMON SHARE
The computations of losses per share are based on the weighted average
number of shares outstanding during the year: 1,611,317 in 1997 and 1996
and 1,614,726 in 1995.
LONG-LIVED ASSETS
Effective November 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. In
accordance with SFAS No. 121, the Company reviewed long-lived assets for
impairment whenever events or changes in business circumstances occur that
indicate that the carrying amount of the assets may not be recoverable.
The Company assesses the recoverability of long-lived assets held and to
be used based on undiscounted cash flows, and measures the impairment, if
any, using discounted cash flows. Adoption of SFAS No. 121 did not have a
material impact on the Company's financial position, operating results or
cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash, trade accounts
receivable, notes receivable, accounts payable, accrued expenses, the
carrying amounts approximate fair value due to their short term
maturities. The amount shown for long-term receivables also approximate
fair value. The fair value of the Company's long-term debt is based upon
rates currently available to the Company for loans with similar terms and
average maturities. The fair value of the long-term debt approximates its
carrying value.
NOTE 2 - GOING CONCERN
The Company's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
As shown in the financial statements, the Company has incurred net losses
of $281,901, $414,826 and $546,062 for the fiscal years ended October 31,
1997, 1996 and 1995, respectively and sales and working capital have
continued to decline. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
The Company's continued operations will depend on its ability to raise
additional funds through a combination of equity or debt financing,
strategic alliances, increased revenues and reduction of operating costs.
See Note 14 - Proposed Acquisition.
The Company's long-term liquidity will depend on its ability to raise
substantial additional funds. There can be no assurances that such funds
will be available to the Company on acceptable terms, if at all.
-23-
NOTE 3 - CONCENTRATION OF CREDIT RISK AND RISK ARISING FROM CASH DEPOSITS
IN EXCESS OF INSURED LIMITS
The Company sells its products to various customers primarily in the
Northeast United States. The Company performs ongoing credit evaluations
on its customers and generally does not require collateral. The Company
maintains reserves for potential credit losses and such losses have been
within management's expectations. At times throughout the year the
Company may maintain certain bank accounts in excess of the FDIC insured
limits.
-24-
FEDERATED PURCHASER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997, 1996 AND 1995
NOTE 4 - INVENTORIES
Inventories consist of the following:
1997 1996
Merchandise for resale $228,583 $314,447
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1997 1996 USEFUL LIFE
Leasehold improvements $ 12,522 $ 12,522 5 - 31 years
Furniture, fixtures and equipment 110,626 110,626 5 - 15 years
Automotive equipment 24,139 24,139 4 years
Total 147,287 147,287
Less: Accumulated depreciation
and amortization 126,687 115,259
Net property and equipment $ 20,600 $ 32,028
NOTE 6 - ASSOCIATION MEMBERSHIP
The Company is a member of a cooperative buying group and has been
purchasing stock in such group pursuant to group guidelines. The total
investment as of October 31, 1997 and 1996 was $93,601 and $94,126,
respectively. In the event that the Company were to leave the group,
the group would be obligated to refund all invested amounts over a five
year period. The association membership is valued at cost, which
approximates the current market value.
NOTE 7 - LONG-TERM DEBT
Long-term debt payable consist of the following:
1997 1996
IBM Credit Corporation, payable in monthly
installments of $1,122, including interest
at 11% through July 1998, secured by data
processing equipment. $ 8,331 $18,955
Less: Current portion 8,331 10,624
Total long-term debt $ - $ 8,331
NOTE 8 - ACCRUED EXPENSES
Accrued expenses as of October 31, consist of the following:
1997 1996
Payroll $12,944 $17,693
Professional fees 11,680 63,470
Sundry 7,360 12,698
Total accrued expenses $31,984 $93,861
-25-
FEDERATED PURCHASER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997, 1996 AND 1995
NOTE 9 - RETIREMENT PLAN
The Company sponsored a profit sharing plan covering substantially all
employees. There was no charge to income for 1996 and 1995. The Board
of Directors adopted a resolution on December 1, 1995 to terminate the
Company's sponsored profit sharing plan covering substantially all
employees.
NOTE 10 - INCOME TAXES DEFERRED AND PAYABLE
Components of provision for income taxes are as follows:
1997 1996 1995
Current:
Federal $ - $ - $ -
State 1,100 1,975 4,363
Total 1,100 1,975 4,363
Deferred:
Federal - - -
Total taxes $ 1,100 $ 1,975 $ 4,363
Accounting for income taxes provides for an asset and liability
approach to accounting for income taxes that require the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's
financial statements or tax returns.
In estimating future consequences, all expected future events other
than proposed changes in the tax law or rates prior to enactment. A
valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities that give rise to significant
portions of the net deferred tax asset relate to the following:
1997 1996
Accounts receivable, principally due to
allowance for doubtful accounts $ 7,225 $ 11,326
Carryforward losses 801,423 672,025
Valuation allowance (808,648) (683,351)
Net deferred tax assets and liabilities $ - $ -
At October 31, 1997, the Company had net operating loss carryforwards
of approximately $1,796,000 that expire in the years 2008 to 2012.
The consolidated income tax (benefit) was different than the amount
computed using the United States statutory income tax rate for the
reasons set forth in the following table:
1997 1996 1995
Expected tax (credit) at U.S.
statutory income tax rate $ (95,472) $(141,041) $(184,178)
State income taxes 1,100 1,975 4,363
Valuation allowance 95,472 141,041 184,178
$ 1,100 $ 1,975 $ 4,363
-26-
FEDERATED PURCHASER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997, 1996 AND 1995
NOTE 11 - LEASE COMMITMENT
As of September 30, 1992, the Company moved to a new facility under an
operating lease agreement which will expire on December 31, 1998 at a
minimum annual lease rental of $106,970. The lease was modified on
June 1, 1995 to remove the premises used by Freedom Electronics
Corporation at a minimum annual lease rental of $58,000. In addition
to minimum rentals, the Company will be responsible for real estate
taxes and a pro-rata share of all common charges. Rent charged to
operations was $76,528, $80,979 and $82,885, respectively, for the
years ended October 31, 1997, 1996 and 1995.
The future aggregate minimum rental payments under this operating lease
agreement are as follows:
Years Ended
OCTOBER 31,
1998 $ 58,000
1999 9,667
$ 67,667
NOTE 12 - MAJOR SUPPLIER INFORMATION
The Company had one supplier from whom it purchased approximately
$418,000 or 17% of purchases for the year ended October 31, 1997 and
one supplier from whom it purchased approximately $523,000 or 16% of
purchases for the year ended October 31, 1996.
NOTE 13 - SALE OF SUBSIDIARY
On November 15, 1994, by unanimous vote of all non-interested
directors, Federated Purchaser, Inc. (Federated) divested its
subsidiary, Freedom Electronics Corporation (Freedom).
In consideration of the divestiture of 100% of the outstanding shares
of Freedom Electronics Corporation, Federated Purchaser, Inc. received
approximately $360,000, including $106,500 in cash, a $210,000 7%
promissory note due on November 15, 1998 and 88,889 shares of common
stock of Federated (representing 4.9% of the class outstanding) held
personally by Freedom's President. In addition, the parties entered
into customary covenants not to compete, pursuant to which Federated
would become entitled to receive $90,000 over a period of four years.
As part of this transaction certain intercompany indebtedness to
Federated was satisfied by payment of an additional $656,000.
The loss on the divestiture of Freedom amounted to $182,791 or $.11 per
share.
NOTE 14 - PROPOSED ACQUISITION
On October 1, 1997, Federated Purchaser, Inc. signed an agreement
whereby Federated will acquire Wise Components, Inc. for an exchange of
stock which will be accounted for as a purchase. The purchase of Wise
Components, Inc. has not been consummated as of October 31, 1997.
The terms of the agreement call for Federated Purchaser, Inc. to
exchange 4,491,988 newly issued shares of its common stock for all of
the outstanding capital stock of Wise Components, Inc.
-27-
FEDERATED PURCHASER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997, 1996 AND 1995
NOTE 14 - PROPOSED ACQUISITION (CONTINUED)
The following unaudited proforma information for the years ended
October 31, 1997, 1996 and 1995 give retroactive effect of the proposed
acquisition of Wise Components, Inc., which will be accounted for as a
purchase when consummated. The unaudited proforma information gives
retroactive effect to the foregoing transaction as if it had occurred
at the beginning of each year presented. Such information does not
purport to represent what the Company's results of operations would
actually have been if the foregoing transactions had actually been
consummated on such dates or project the Company's results of
operations for any future period or date.
YEARS ENDED OCTOBER 31,
1997 1996 1995
(Unaudited Proforma Information)
Revenues, rounded $15,559,000 $19,417,000 $19,296,000
Net income (loss), rounded $ 3,000 $ 189,000 $ 100,000
Income (loss) per share $ .00 $ .03 $ .02
Cash dividends per share $ - $ - $ -
Weighted average number
of shares outstanding 6,103,305 6,103,305 6,106,714
-28-
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement for the 1998 Annual Meeting
of Shareholders, which the Company will file with the Securities and Exchange
Commission no later than 120 days after October 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement for the 1998 Annual Meeting
of Shareholders, which the Company will file with the Securities and Exchange
Commission no later than 120 days after October 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders, which the Company will file with the Securities and Exchange
Commission no later than 120 days after October 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in response to this item is incorporated by
reference to the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders, which the Company will file with the Securities and Exchange
Commission no later than 120 days after October 31, 1997.
-29-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A)(1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
These documents are included in the response to Item 8 of this report.
See the index on page 14.
(3) EXHIBITS
The following exhibits are filed with this report:
SEQUENTIALLY
EXHIBIT NUMBER EXHIBIT DESCRIPTION NUMBERED PAGE
22 Subsidiaries of the Company
(C) REPORTS ON FORM 8-K:
On October 1, 1997, Federated Purchaser, Inc. ("Federated") announced
that it signed an agreement with Wise Components, Inc. ("Wise"), and its
chairman and sole shareholder, Martin L. Blaustein ("Blaustein"), under which
Federated will issue approximately 4.5 million shares of its common stock to
Blaustein in a tax-free exchange for all of the outstanding shares of Wise's
common stock. Upon closing, Wise will become a wholly-owned subsidiary of
Federated and Blaustein will become Federated's principal shareholder, owning
approximately 74% of Federated's common stock. The remaining 26% will continue
to be held by current shareholders of Federated. The transaction is expected
to close in the second quarter of fiscal 1998.
(D) EXHIBITS:
Exhibits are listed above in response to Item 14(a)3.
FINANCIAL STATEMENT SCHEDULES:
Schedule V - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are either inapplicable, or
not required, or because the required information is included in the
consolidated financial statements or notes thereto.
Individual financial statements of the Company are omitted because the
Company is primarily an operating company and the subsidiaries included in the
consolidated financial statements filed herein are wholly-owned subsidiaries.
-30-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FEDERATED PURCHASER, INC.
By:/S/ HARRY J. FALLON
HARRY J. FALLON, President
January 28, 1998
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 Company
and in the capacities and on the date indicated.
SIGNATURES: TITLE DATE
/S/ HARRY J. FALLON Acting Chairman, President, January 28, 1998
HARRY J. FALLON Principal Executive Officer,
Principal Financial
Officer, Principal
Accounting Officer and
Director
/S/ EDMUND L. HOENER Director January 28, 1998
EDMUND L. HOENER
/S/ EDWIN S. SHORTESS Director January 28, 1998
EDWIN S. SHORTESS
/S/ JANE A. CHRISTY Director, Vice January 28, 1998
JANE A. CHRISTY President Operations
-31-
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBER EXHIBIT DESCRIPTION NUMBERED PAGE
8 Opinion Letter of Bederson & Co.
dated October 23, 1997
10 (a) Employment Agreement between Federated and Harry J.
Fallon
(b) Lease dated September 1, 1992 relating to Federated's
total operations (including Freedom Electronics)
located in Cliffwood, New Jersey (incorporated by
reference to Federated's Form 10-K Annual Report for
the year ended October 31, 1992)
(c) Lease Modification, dated July 18, 1995 between
Cliffwood Avenue Partners and Federated Purchaser
(incorporated by reference to Federated's Form 10-K
Annual Report for the year ended October 31, 1995)
(d) Agreement by and among Federated Purchaser, Wise
Components, Inc. and Martin L. Blaustein, dated October
1, 1997 (incorporated by reference to Federated's
Report on Form 8-K dated October 1, 1997)
(e) Employment Agreement between Wise Components, Inc. and
Robert Berwick, dated June 12, 1997.
99.1 Press Release dated October 1, 1997 (incorporated by
reference to Federated's Report on Form 8-K dated
October 1, 1997)
22 Subsidiaries of the Company (filed as an exhibit
hereto).
-32-
EXHIBIT 22
Subsidiaries of the Company
SUBSIDIARIES OF THE COMPANY
Percentage of Voting
Jurisdiction of Securities Owned by
SUBSIDIARY INCORPORATION THE COMPANY
Federated Purchaser, Inc. Pennsylvania 100%
SCHEDULE V
FEDERATED PURCHASER, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
Charged to
Balance at Profit and Deductions Balance
Beginning Loss or From at Close
CLASSIFICATION OF PERIOD INCOME RESERVES OF PERIOD
Year ended October 31, 1997:
Allowance for doubtful accounts $ 26,339 $ 6,000 $ 15,536 $ 16,803
Year ended October 31, 1996:
Allowance for doubtful accounts $ 22,835$ 4,751 $ 1,247 $ 26,339
Year ended October 31, 1995:
Allowance for doubtful accounts $ 28,682 $ 13,235 $ 19,082 $ 22,835