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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 1995
Commission File Number 1-9263
______________________________________________________________________________
VTX ELECTRONICS CORP.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________
Delaware 11-2816128
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
61 Executive Boulevard, Farmingdale, New York 11735
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 293-1610
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of 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 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 voting stock held by nonaffiliates of the
registrant as of September 18, 1995 was approximately $3,688,776.
The number of shares outstanding of the registrant's common stock as of
September 18, 1995 was 12,652,000 shares.
This report consists of 46 consecutively numbered pages (inclusive of all
exhibits and including this cover page).
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page Number
PART I
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 10
Item 3. Legal Proceedings................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.............. 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters......................................................... 11
Item 6. Selected Financial Data.......................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 13
Item 8. Financial Statements and Supplementary Data...................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 16
PART III
Item 10. Directors and Executive Officers of the Company.................. 17
Item 11. Executive Compensation........................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and Managers..... 21
Item 13. Certain Relationships and Related Transactions................... 22
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on
Form 8-K........................................................ 24
<PAGE>
PART I
ITEM ONE - BUSINESS
THE COMPANY
VTX Electronics Corp. (the "Company") through its wholly-owned Vertex
Technologies, Inc. subsidiary ("Vertex') is a multi-regional value-added
specialty distributor of electronic components and cable, and a manufacturer of
custom-made electronic cable assemblies used in providing connectivity solutions
which includes system integration for customers operating a wide range of data
communications. The Company adds value by providing connectivity solutions for
customers. This includes linking or connecting standard or proprietary
electronic devices and peripheral components from different manufacturers to
provide solutions for various customer requirements and system integration.
These may include sales of passive or active electronic components and/or the
manufacture of custom-made electronic cable assemblies which the Company designs
specifically to meet individual customer's unique and complete connectivity
requirements.
Management believes that the Company's technical ability for providing
connectivity solutions between the data system capabilities of many
manufacturers and the specific connectivity needs of its customers, along with
its reputation for providing the design and manufacture of custom-made
electronic cable assemblies that are subject to 100% computerized quality
control testing will be the principal factors on which the Company will plan its
future growth.
The Company expects internal growth to be enhanced by what the Company
perceives to be three continuing trends: (i) the increasing demand for data
communications to provide timely information in the office environment and
factory floor that requires connectivity solutions; (ii) the growing number of
alternatives available to organizations of all sizes in all types of industries
to increase productivity through improved or upgraded computer data
communications; and (iii) increasing number of manufacturers of passive and
active components preferring distributors, such as the Company, who are capable
of offering complete connectivity solutions to the end user.
The Company's executive offices are located at 61 Executive Boulevard,
Farmingdale, New York 11735 and its telephone number is (516) 293-1610. Unless
the context requires otherwise, all references herein to the Company and Vertex
mean VTX Electronics Corp. and its subsidiaries.
RECENT DEVELOPMENTS
On August 24, 1995, the Company signed a letter of intent in principal
to merge with CPI Aerostructures, Inc. ("CPI"), a publicly-traded company in the
commercial/military aircraft business. Under the terms of the letter, shares of
the Company's common stock will be converted into shares of CPI common stock at
a conversion rate of one share of CPI common stock for three shares of the
Company's common stock, as adjusted for a price guarantee. The agreement may be
terminated by the mutual consent of both parties or if a definitive Merger
Agreement has not been executed by October 15, 1995. In the event either party
unilaterally terminates the letter of intent, the terminating party shall pay to
the other party an amount equal to all of the expenses incurred by the other
party in connection with the contemplated transaction, up to a maximum of
$150,000 in the aggregate, plus a break-up fee of $250,000. The merger plan is
subject to the negotiation and execution of a definitive acquisition agreement,
approval of the respective Board of Directors and stockholder's of the Company
and CPI, and consent of lenders, to the extent required. Subsequent to the
signing of the letter of intent, certain developments have occurred that may
preclude completion of the transaction.
<PAGE>
On September 15, 1995, the Company's Common Stock was delisted from the
American Stock Exchange. The Company no longer fully satisfies all the financial
guidelines of the American Stock Exchange for continued listing. The Company's
Common Stock is presently trading on the Over-The-Counter Electronic Bulletin
Board.
BUSINESS STRATEGY
The Company's business strategy is to develop a value-added distribution
network through internal growth with a focus on connectivity solutions for data
communications. Management believes it will continue to (i) introduce new
connectivity solutions, (ii) improve operating efficiencies through a more
efficient organizational structure, eliminate duplicated activities, and
integrate manufacturing capabilities between the three separate manufacturing
facilities located in the United States, (iii) derive the benefits of critical
mass through the opportunity to develop stronger relationships with, and obtain
the best terms from, key suppliers, and (iv) derive the benefits of critical
mass through the ability to distribute to and service large national and
international customers.
In its relationship with its customers, the Company focuses on providing
connectivity solutions, thus adding significant value to the passive and active
components it distributes. Such solutions include advising customers on the
options available to meet their specific needs, and manufacturing custom-made
electronic cable assemblies for the customers. In addition, the Company
continues to service the customers with components and assemblies as the
customer's system grows. Management believes that manufacturers of products
generally choose to build relationships with distributorships capable of
offering advisory services, technical support, and other services such as
manufacturing custom-made electronic cable assemblies. The Company believes it
is perceived as a value-added distributor by both suppliers and customers as a
result of its technical skills and knowledge of the marketplace, access to and
understanding of the product capabilities, and technical design and
manufacturing capabilities for custom-made electronic cable assemblies.
PRODUCTS AND SERVICES
The Company's products and services consist principally of the distribution
of a broad range of passive and active electronic components, and the design and
manufacture of custom-made electronic cable assemblies used as solutions for
connectivity requirements in data communications. Typically, passive components
carry data signals without any processing or filtering of the data (e.g.,
electronic connectors, electronic wire and cable, cabinets and racks, and patch
panels), while active components generate and/or regenerate and filter data
signals (e.g., hubs, bridge, routers, gateways, and modems). The Company's
principal product lines focus on connectivity solutions for data communications.
The Company also designs and manufactures custom-made cable assemblies
tailored to the customer's requirements and offers project management and
installation of structured wiring and network design for data communications.
The Company employs design, engineering, and technical support personnel to
develop alternative connectivity solutions including system integration and
manufacture custom-made electronic cable assemblies.
The Company has restructured its operations to improve focus and
productivity, which emphasizes the passive and active component areas of
connectivity solutions, while discontinues hardware and application and
operating software areas of connectivity solutions. See "Restructuring Plan"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
<PAGE>
PRINCIPAL SUPPLIERS
Management believes that the Company is not dependent on any particular
supplier. The products that the Company distributes are generally characterized
by a large number of products manufactured by a variety of companies. The
Company deals with preferred suppliers and believes the Company has a good
working relationship with each of its existing strategic suppliers including
AMP, AT&T, Andrews, Cable Design Technologies, IBM, Madison Wire & Cable,
Microtest, Novell, Racal Datacom, Siecor, and Synoptics. For the fiscal year
ended June 30, 1995, purchases from AT&T accounted for 15.7%. AT&T and Madison
Wire & Cable accounted for 10.8% and 12.1%, respectively of purchases in fiscal
1994. In fiscal 1993, AT&T and IBM accounted for 15.3% and 10.1%, respectively,
of purchases. During fiscal 1995, certain plenum cable and wire items were in
tight industry supply due to a world shortage of fluorinated-ethylene-propylene
(FEP) which is used in the production of plenum products. Management believes
the tight supply situation has stabilized and should improve through 1996.
Through stock rotation rights and price protection arrangements with most
of its major suppliers including AMP, AT&T and IBM, the Company can reduce the
risk of holding obsolete or over-priced product. Stock rotation rights allow
distributors to return a certain proportion of their purchases in the event that
the product does not sell. A price protection program gives the distributor a
rebate on purchases during a specified period if the manufacturer subsequently
lowers it prices. The price protection generally covers any purchases made
within the most recent 60 to 90 day period prior to the manufacturer's price
reduction.
The Company works off manufacturers' lead times. Deliveries range from one
week to approximately 90 days. The Company has a fully integrated on-line
computer system that enables it to determine immediate inventory availability of
the Company's entire inventory at its stocking facilities. The Company monitors
and maintains manufacturers' delivery schedules to ensure "on-time" delivery for
customers and to maintain proper inventory levels for the Company. The Company
believes that it has adopted more thorough inventory control systems, and
management currently does not believe it will be required to expense any
significant amounts of inventory in the foreseeable future. However, there can
be no assurance there will not be further inventory writeoffs.
The Company's objective is to minimize lead times for its customers
without financing excess stock levels or risking technological obsolescence.
Several manufacturers have provided the Company an expedited shipping function
in order to better service the Company's customers.
The Company has restructured its operations to improve productivity,
which emphasizes centralized purchasing and establishment of preferred suppliers
including primary and secondary supplier bases. The Company has written off
approximately $1,200,000 of inventory during fiscal 1993 because of
technological obsolescence and an additional write-down for discontinued
products and obsolete inventory was taken during the fiscal year ended June 30,
1994 of approximately $262,000.
<PAGE>
SALES AND MARKETING
The Company offers a broad range of passive and active electronic
components used as connectivity solutions to end-users, professionals who
install and service data communications, and original equipment manufacturers
(OEM's).
The Company operates through seven locations in the Northeast, Mid-
Atlantic, and Western regions of the United States, and one location in the
United Kingdom. All but one of the eight locations operate as a sales office
and warehouse, whereas the one location is solely a sales office. In addition,
the Company operates manufacturing operations in the states of New York,
Maryland and California, plus one operation in the United Kingdom. These
operations support the design and manufacture of custom-made and standard cable
assembly requirements for the entire Company.
The Company consolidated its operations by closing two facilities and
realigned the organizational structure of the other facilities in order to
improve support of the Company's sales and marketing efforts to better service
the Company's customers. See "Restructuring Plan".
In order to effectively meet each customer's needs, the sales force first
gains an understanding of the customer's system connectivity requirements before
recommending one or more possible solutions. The variety of products offered by
the Company often allows the sales person to add value by providing alternative
solutions or more complete solutions to customers requirements and thereby
gaining add-on sales. Where necessary, technical support personnel assist sales
people in recommending the most appropriate solution. The Company generally does
not participate in the design of computer application but rather participates in
the design and implementation of the connectivity solutions required for data
communications including system integration.
The field sales force is supported by inside sales personnel who handle
incoming customer calls, perform sales estimates, provide rapid responses to
customer questions and assist in sales prospecting. In addition, compensation
policies have been tailored to promote a profit-oriented, rather than a revenue-
oriented, sales philosophy.
Sales leads are typically generated by ongoing interaction with existing
customers, sales calls to companies not currently customers, referrals from
suppliers, and by advertising and promotional efforts. The advertising and
promotion program for the Company consists of: (i) exhibits at national and
regional trade shows; (ii) Company sponsored seminars and product demonstrations
in regional areas; (iii) advertisements in trade publications; and (iv) direct
mail campaigns to targeted market niches.
The Company has recently refocused its sales and marketing strategy to
concentrate its efforts in certain market niches in which it only distributes
the products of preferred suppliers. These products represent passive components
such as category 5 wiring products, fiber optics, and wireless communication
products, and active components such as bridges, hubs, modems and routers,
included in the design and implementation of structured wiring solutions for
network applications. The market for the Company's refocused products has
historically remained more stable and has not been affected to the same degree
by technological changes or price fluctuations. The majority of the products
distributed by the Company are readily adaptable to various end-users in all
industries.
<PAGE>
COMPANY LOCATIONS
The Company's locations, of which the Farmingdale location is owned and all
other locations are leased, are as follows:
Elkridge, Maryland
Farmingdale, New York
Folcroft, Pennsylvania
Marlboro, Massachusetts
San Jose, California
Torrance, California
Totowa, New Jersey
Corby, United Kingdom
MAJOR CUSTOMER
The Company has one customer that has accounted for 10% or more of its
sales during the last three fiscal years. Bloomberg L.P. accounted for
approximately 11.4% of sales in fiscal 1993, approximately 16.3% of sales in
fiscal 1994 and approximately 14.7% of sales in fiscal 1995.
COMPETITION
All aspects of the Company's business are highly competitive. The
Company competes with several national distributors including Anixter, Inc., a
subsidiary of Anixter International Inc., and Kent Electronics Corporation,
which have greater financial and other resources than the Company. The Company
also competes with numerous distributors and systems integrators operating on a
local or regional basis. The Company's principal method of competing with the
other national distributors is by adding value to the active and passive
components it sells by assisting its customers in achieving appropriate
connectivity solutions. National distributors generally sell components on a
higher volume driven basis than the Company and, therefore, can sell those
components at a lower price to customers buying in bulk. However, such national
distributors generally do not focus on connectivity solutions.
The Company also competes with a large number of regional and local
distributors and systems integrators. These entities generally provide value-
added components to their customers, but frequently cannot provide comparable
volume discounts and the price advantages as the Company is able to provide. The
Company purchases many of the system components on a national scale directly
from manufacturers and, following the equity financing and repayment of certain
trade creditors, expects to be able to enhance its ability to obtain these price
advantages. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
The Company believes that its ability to provide value-added specialty
distribution, together with its design and manufacture capability to custom make
electronic cable assemblies as well as making available technical support
differentiates the Company's from its primary competitors and gives the Company
a competitive advantage. There can be no assurance the Company will be able to
successfully exploit such advantage.
PRODUCT LIABILITY INSURANCE
The Company maintains a comprehensive general liability insurance policy
in the amount of $2,000,000, with an umbrella policy, including products
liability, providing coverage in the aggregate amount of $20,000,000 which it
believes to be adequate coverage.
<PAGE>
EMPLOYEES
As of September 1, 1995, the Company had 192 full-time employees. Of
these, 70 are sales and marketing personnel; 7 are design, engineering, and
technical support personnel; 25 are purchasing, warehouse and inventory control
personnel; 62 are cable assembly manufacturing personnel; 9 are quality control
personnel; and 19 are accounting, data processing and other administrative
personnel. 33 employees are covered by a collective bargaining agreement in the
Company's Farmingdale facility. In addition to its employees, the Company uses
other workers on a contract basis, as its needs require. The Company considers
its relations with its employees to be good.
RESTRUCTURING PLAN
In November, 1993, the Board of Directors retained Mr. Donald W. Rowley as
a consultant to conduct an ongoing analysis of the Company's strategic strengths
and weaknesses, and current operations. After Mr. Rowley's analysis, he
recommended a restructuring plan including short term, near term and long term
objectives. The Company's Board of Directors adopted all of Mr. Rowley's
recommendations and plans, and in March 1994, retained him as president to enact
them.
The Short Term Plan involved the following steps which have been
implemented:
* Closing Ohio and Georgia branch operations due to the extended
period of time necessary to make these operations profitable.
* "Right-sizing" the Maryland and Philadelphia branches through
employee reductions of approximately 16 people to improve
profitability.
* Lowering corporate office operating expenses through employee
reductions of approximately 18 people.
* Reducing overtime more than 60% since December 1993 by
manufacturing products based on forecasted product demand.
The Near Term Plan involved the following steps which have been
implemented:
* Implementing a new freight management program throughout the
Company in August 1994.
* Implementing centralized purchasing.
* Establishing standard sales operating procedures for all
branches.
* Establishing standard manufacturing and quality control
policies and procedures in order to utilize the separate
manufacturing operations as an integrated/interchangeable
manufacturing resource; and completing ISO-9002 Certification
at the San Jose facility.
<PAGE>
The Long Term Plan involved the following steps which have been
implemented:
* Establishing preferred suppliers including primary and
secondary supplier bases and reducing the number of vendors by
more than 35%.
* Preparing and communicating to suppliers the Company's strategy
of value added component distribution for connectivity
solutions.
* Utilizing the equity financing to rebuild financial
relationships with suppliers to finance the Company's
restructuring plan emphasizing products with a greater profit
margin.
* Implementing centralized purchasing and eliminating smaller
purchases from multiple sources, thereby improving gross
profit margins.
The Restructuring Plan was initiated in fiscal 1994 and completed
during fiscal 1995. Management believes that the completion of the operational
restructuring plan directs the Company toward profitability by:
* Reducing corporate overhead.
* Lowering certain branches operating expenses.
* Improving operations to enable completion of ISO-9002
Certification.
* Increasing end-user sales focus for connectivity solutions.
* Improving financial and inventory management to minimize write-
off exposure.
Management believes that the completion of the Restructuring Plan,
along with improving availability of FEP related products, and improving sales
force stability and productivity, will enable the Company to return to
profitability.
<PAGE>
ITEM TWO - PROPERTIES
The location and size of each of the Company's facilities, the
principal use of each facility and lease expiration date are summarized below:
Square Lease
Location Footage Use Expiration Date
- ----------------------- ------- --------------------------- ---------------
Elkridge, Maryland 16,750 Sales Office, Manufacturing January 1997
and Warehouse
Farmingdale, New York 45,000 Executive Office, Sales Office,
Manufacturing and Warehouse *
Folcroft, Pennsylvania 15,000 Sales Office and Warehouse September 1996
Marlboro, Massachusetts 14,650 Sales Office and Warehouse January 2000
San Jose, California 12,450 Sales Office, Manufacturing May 1997
and Warehouse
Torrance, California 11,200 Sales Office and Warehouse May 1997
Totowa, New Jersey 2,085 Sales Office January 1996
Corby, England 3,000 Sales Office, Manufacturing November 1996
and Warehouse
* The Company owns the Farmingdale facility.
The Company's Headquarters are located in Farmingdale, New York. These
premises, which consist of approximately 10,000 square feet of office space and
approximately 35,000 square feet of manufacturing and warehouse space, are owned
by the Company. The Company believes that its facilities are adequate for its
current and presently foreseeable needs or that adequate replacement space is
available.
ITEM THREE - LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings; however,
the Company is involved in routine litigation incidental to the business.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM FIVE -MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been trading on the American Stock
Exchange under the symbol VTX since September 17, 1986, its initial public
offering date. The Company no longer fully satisfies all the financial
guidelines of the American Stock Exchange for continued listing. On September
15, 1995, the Company's Common Stock was delisted from the American Stock
Exchange. The Company's Common Stock is presently trading on the Over-The-
Counter Electronic Bulletin Board. The following table shows the quarterly
range of the high and low closing sale prices for the Common Stock on the
American Stock Exchange prior to September 15, 1995 and on the Over-The-Counter
Electronic Bulletin Board since September 15, 1995, for the periods indicated.
Common Stock
Period High Low
------------------------------------------ ---- ----
Fiscal 1994
First Quarter ended September 30, 1993.... 1.38 .75
Second Quarter ended December 31, 1993.... 1.00 .69
Third Quarter ended March 31, 1994........ 1.75 1.06
Fourth Quarter ended June 30, 1994........ 1.31 1.08
Fiscal 1995
First Quarter ended September 30, 1994.... 1.06 .56
Second Quarter ended December 31, 1994.... .81 .38
Third Quarter ended March 31, 1995........ .63 .38
Fourth Quarter ended June 30, 1995........ .44 .25
Fiscal 1996
First Quarter (thru September 22, 1995)... .38 .19
As of September 18, 1995, there were approximately 239 holders of
record of the Company's Common Stock.
The Company has never paid a cash dividend on its Common Stock and the
Company does not anticipate paying any dividends on the Common Stock in the
foreseeable future. Pursuant to the terms of its revolving credit facility, the
Company is not permitted to pay or declare any dividends or otherwise make any
distribution of capital.
<PAGE>
ITEM SIX - SELECTED FINANCIAL DATA
Selected Financial Data
(In thousands except per share data)
Year Ended June 30,
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Income Statement Data:
Net sales $34,472 $42,864 $49,407 $41,295 $46,728
Cost of goods sold 27,311 33,490 39,935 32,262 37,359
--------- --------- --------- --------- ---------
Gross profit $ 7,161 $ 9,374 $ 9,472 $ 9,033 $ 9,369
========= ========= ========= ========= =========
Loss before extraordinary
items ($ 1,316) ($ 2,934) ($ 2,030) ($ 1,963) ($ 3,493)
Extraordinary items - 747 2,492 - -
--------- --------- --------- --------- ---------
Net income (loss) ($ 1,316) ($ 2,187) $ 462 ($ 1,963) ($ 3,493)
========= ========= ========= ========= =========
Per Share Data: (1)
Loss before extraordinary
items ($ .11) ($ .47) ($ .35) ($ .46) ($ 1.43)
Extraordinary items - .12 .43 - -
--------- --------- --------- --------- ---------
Net income (loss)
per share ($ .11) ($ .35) $ .08 ($ .46) ($ 1.43)
========= ========= ========= ========= =========
Weighted average number of
shares outstanding (2) 12,265 6,239 5,778 4,299 2,438
========= ========= ========= ========= =========
Balance Sheet Data:
Working capital $ 4,476 $ 5,320 $ 6,473 $10,183 $ 9,914
Total assets 13,187 14,431 17,583 19,858 20,836
Long-term debt 5,966 6,338 9,413 13,311 11,989
Stockholders' equity 1,999 2,808 1,552 1,054 1,975
(1) Cash dividends per share have never been paid on Common Stock and the
Company is prohibited under its current long term credit facility from
paying a dividend because it currently has insufficient availability.
(2) See Notes to Consolidated Financial Statements.
<PAGE>
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1995 AND 1994
Net sales for the year ended June 30, 1995 were $34,472,000, as compared to
the year ended June 30, 1994 of $42,864,000, a decrease of 19.6%. Value-added
distribution sales of electronic components, including systems integration,
decreased by approximately $9,204,000 from $30,605,000 to $21,401,000 (30.1%).
The decrease was due to tight industry supply of certain cable and wire items
and lost sales from related items without the "pull through" effect of the items
in tight supply; and turnover of sales personnel and to recently hired sales
people learning the Company's operation. During the same period, the aspect of
the Company's business involving the Company's custom-made cable assemblies
(referred to as manufacturing) increased by approximately $812,000 from
$12,259,000 to $13,071,000 (6.6%) during the fiscal year ended June 30, 1995 as
compared with the prior fiscal year. The increase in manufacturing was due to
value added sales focus which was uninterrupted by any tight industry supply of
product. The Company estimates that the profit margins from custom-made cable
assemblies are slightly higher than value added distribution sales.
Gross profit decreased by $2,213,000 or 23.6% for the year ended June 30,
1995 to $7,161,000 from $9,374,000 as compared to fiscal 1994. The decrease was
mainly due to lower sales levels as a result of tight industry supply of certain
cable and wire items, and turnover of sales personnel and to recently hired
sales personnel learning the Company's operation. The gross profit percentage
for the year ended June 30, 1995, 1994, and 1993 was 20.8%, 21.9%, and 19.2%
respectively. The lower gross profit percentage in fiscal 1995 was due to
product mix change as a result of tight industry supply of certain cable and
wire items. The gross profit for the year ended June 30, 1993 was reduced when
compared to June 30, 1992 and June 30, 1994 due to the $1,200,000 write-off of
obsolete and slow moving inventory in the second quarter of fiscal year 1993.
Selling, general and administrative expenses decreased approximately
$2,907,000 or 27.7% to $7,572,000 for the year ended June 30, 1995 from
$10,479,000 as compared to fiscal 1994. Selling, general and administrative
expenses as a percentage of net sales were 22% in fiscal 1995 as compared to
24.4% in fiscal 1994. The decrease was due primarily to the aforementioned
decrease in sales and the positive effects from the implementation of the
Company's restructuring plan in the current fiscal year. Decreased sales in
the current year resulted in a decrease of approximately $290,000 in sales
commissions and an $830,000 decrease in general selling expenses. These
decreases were partially offset by a $256,000 increase in sales salaries and
related expenses resulting from additional sales personnel hired during the
current fiscal year which resulted from significant sales force turnover.
The implementation of the Company's restructuring plan contributed
approximately $637,000 toward the decrease in salaries and related expense of
non-sales personnel, and other selling, general and administrative expense
decreases of approximatley $775,000 from improved financial controls over
spending. In addition, the prior year expenses included $524,000 of bad debt
expense that was not incurred in the current year as a result of improved credit
and collections management.
The Company's restructuring activities were completed during fiscal 1995.
Additional costs of $91,000 were incurred. Such costs were primarily associated
with final settlements reached in fiscal 1995 for the termination of certain
employment contracts, employee severance and benefit arrangements, as well as
additional related legal fees associated therewith.
Interest expense decreased by $74,000 or 8.2% for the year ended June 30,
1995 to $827,000 from $901,000. The decrease was due to lower borrowing levels
for most of the fiscal year ended June 30, 1995 compared to the prior fiscal
year.
<PAGE>
YEARS ENDED JUNE 30, 1994 AND 1993
Net sales for the year ended June 30, 1994 were $42,864,000, as compared to
the year ended June 30, 1993 of $49,407,000, a decrease of 13.2%. The aspect of
the Company's business involving the Company's custom-made cable assemblies
(referred to as manufacturing) increased by approximately $174,000 from
$12,085,000 to $12,259,000 (1.4%) during the fiscal year ended June 30, 1994 as
compared with the prior fiscal year. During the same period, value added
distribution sales of electronic components decreased by approximately
$6,717,000 from $37,322,000 to $30,605,000 (18.0%) because the Company gave
priority with respect to the above described manufacturing activities. The
Company estimates that the profit margins respecting custom-made cable
assemblies and value added distribution sales are approximately the same. This
allocation of priorities was due to the Company's limited resources during the
last fiscal year. Insufficient inventory stocking levels for most of fiscal
1994 resulted in delayed sales of value added distribution, or lost sales.
Gross profit decreased by $98,000 or 1% for the year ended June 30, 1994 to
$9,374,000 from $9,472,000 as compared to fiscal 1993. The decrease was
primarily due to lower sales levels. The gross profit percentage for the year
ended June 30, 1994, 1993, and 1992 was 21.9%, 19.2%, and 21.9% respectively.
The gross profit for the year ended June 30, 1993 was reduced when compared to
June 30, 1992 and June 30, 1994 due to the $1,200,000 write-off of obsolete and
slow moving inventory in the second quarter of fiscal year 1993.
Selling, general and administrative expenses increased approximately
$68,000 or 0.7% to $10,479,000 for the year ended June 30, 1994 from $10,411,000
as compared to fiscal 1993. Selling expenses decreased by approximately
$907,000 mainly as a result of replacing several high fixed salary sales people
with lower fixed salary plus commission sales people and reducing the number of
sales people through closing two operations. A $524,000 provision for doubtful
accounts was recorded for the year ended June 30, 1994 (which includes $33,000
for the United Kingdom accounts receivables) versus $255,000 in the prior fiscal
year. Selling, general and administrative expenses included noncash
compensation expense attributed to the Common Stock, stock options and warrants
issued to officers, directors and consultants aggregating $582,000. Other
selling, general and administrative expenses increased by $124,000 for the year
ended June 30, 1994 as compared to fiscal 1993 mainly due to an increase of
expense associated to recruiting and hiring new sales people, restructuring the
Philadelphia branch operation, hiring outside programmers for the Bill of
Materials system application, and general provision for employee issues.
The Company's restructuring activities, which began at the end of the second
quarter of fiscal 1994, are expected to continue through the second quarter of
fiscal 1995. Certain of these activities, including the implementation of
centralized purchasing, standardized manufacturing and quality control policies
and procedures, and new freight management programs are intended to improve
profitability without increasing expenses. In addition, the Company's
restructuring plan is designed to realign its corporate headquarters and field
operations (increasing overall profitability through the closing of certain
branches), eliminate marginally profitable product lines and disposing of
certain assets. Discontinued product lines included lower margin items such as
hookup wire and outside plant cable and high technology hardware and software
items. Approximately 16 people were terminated from branch closures and 18
people were terminated from "right-sizing" branch and corporate operations.
The restructuring charges of $939,000 consists of provisions for termination
of certain employment contracts, employee severance and benefit settlements of
$264,000, inventory write-downs for discontinued product lines of $321,000, and
abandonment of leased facilities, equipment and other assets of $354,000.
<PAGE>
Interest expense decreased by $147,000 or 14% for the year ended June 30,
1994 to $901,000 from $1,048,000. The decrease was due to lower borrowing
levels for most of the fiscal year ended June 30, 1994 compared to the prior
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of June 30, 1995 was $4,476,000 as compared with
$5,320,000 as of June 30, 1994. The $844,000 decline in working capital was
largely a result of a decrease in sales volume for year ended June 30, 1995.
Accounts receivable decreased by approximately $1,197,000, offset by an increase
in inventory of approximately $157,000 and an increase of current portion of
long term debt of approximately $83,000 due to the reclassification of an
equipment note due March 31, 1996.
During March and April of 1994, the Company completed a series of two
equity transactions whereby the Company sold 2,500,000 shares of its Common
Stock together with 2,500,000 common stock purchase warrants for which the
Company received $1,250,000. In June 1994, the Company completed the
registration of the shares of Common Stock underlying the common stock purchase
warrants aggregating 3,950,000, and received $1,415,000 representing the net
proceeds from the exercise of these warrants. The proceeds from these
transactions were used to reduce outstanding trade accounts payable, purchase
additional inventory and reduce the revolving credit facility.
The Company has typically been extended trade credit for its inventory
purchases from suppliers. In normal business practice, a supplier will establish
a credit line and payment terms for the Company. Suppliers usually require
payment on trade credit between 30 and 60 days. Generally, the Company has been
able to arrange extended payment terms with its key suppliers and establish
schedules to reduce the trade credit days outstanding with suppliers over an
extended period of time during the past year. As of June 30, 1995, the Company
had $5,062,000 in accounts payable and accrued expenses which represents about
68 days of trade credit.
The Company has approximately $654,000 of inventory that is estimated slow
moving, with reserves against this inventory of $535,000. The Company believes
it will be able to realize the net amount of this inventory through customer
incentive programs and disposals.
Long term debt as of June 30, 1995 was $5,966,000, a decrease of $372,000
from $6,338,000 at June 30, 1994. The decrease was mainly due to the Company
exchanging $394,750 of an equipment loan for 789,500 shares of the Company's
common stock. The Company reclassified the balance of this equipment loan of
$105,250 to current portion of long term.
The Company currently has a revolving credit facility which provides for
maximum borrowings of $10,000,000 at an interest rate of prime plus 2 3/4% with
an additional commitment fee of 1/2% per annum on the daily average unused
portion of the credit. Under the terms of the agreement, borrowings are limited
to 80% of eligible accounts receivable (constituting those amounts outstanding
90 days or less) and 50% of eligible accounts receivable outstanding between 91
and 120 days, and 40% of regular inventory and 20% of slow moving inventory. As
of June 30, 1995 the Company had approximately $5,406,000 availability under the
facility, of which $4,904,000 was outstanding on that date. The loan is
collateralized by substantially all of the assets of the Company not otherwise
collateralized. This credit facility expires on December 31, 1997. The Company
intends to continue to employ this line of credit to finance inventory and
accounts receivable.
<PAGE>
In connection with its revolving credit facility, the Company is subject to
restrictive covenants which impose certain limitations with respect to the
Company's incurrence of indebtedness, capital expenditures, creation or
recurrence of liens, declaration or payment of dividends or other distribution,
mergers, consolidations and sales or purchases of substantial assets. In
general, the Company is not allowed to incur further indebtedness or create
additional liens on its assets except for unsecured current liabilities incurred
in the ordinary course of business or liabilities incurred in the ordinary
course of business secured by purchase money security interests not to exceed
an aggregate of $750,000. The Company is not allowed to make loans or
investments or provide guarantees or to prepay indebtedness. The Company is
prohibited from paying dividends and may not enter into a merger, consolidation
or sale of all or substantially all of its assets. Additionally, the Company
is required to maintain consolidated net worth of not less than $750,000 and to
maintain consolidated working capital, defined as current assets less current
liabilities and debt outstanding under the credit facility, of not less than a
negative $1.5 million. The Company is currently in compliance with the
restrictive covenants and financial tests under the credit facility.
At June 30, 1995, the Company has net operating loss carryforwards for tax
purposes of approximately $6,742,000. Such net operating loss carryforwards
expire through fiscal year 2010. The Company's use of its net operating loss
carryforward is limited as the Company is deemed to have undergone an "ownership
change", as defined in the Internal Revenue Code Section 382, during the fiscal
years ended June 30, 1992 and June 30, 1994. In connection with such net
operating loss limitation, the Company must obtain a fair valuation of the
Company as of the date of the ownership change. Based upon the Company's
estimate of fair value, approximately $3,504,000 of the Company's total net
operating loss of $6,742,000 is limited to approximately $715,000 annually
during the carryforward period.
INFLATION
For the last three fiscal years, the Company has not been significantly
affected by inflation.
ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements listed in the accompanying Index to
the Consolidated Financial Statements are attached as part of this report.
ITEM NINE - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Not applicable.
(b) Not applicable.
<PAGE>
PART III
ITEM TEN - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Directors of the Company and certain information concerning them as
of June 30, 1995 are set forth below:
First Year
Name Position With The Company Age Became Director
Robert J. Eide Chairman of the Board 42 1991
Donald W. Rowley President and Director 43 1994
Steven J. Bayern Director 47 1992
Mark E. Bloom Director 43 1995
Robert L. Frome Director 55 1992
Paul L. McDermott Director 41 1992
Jeffrey S. Podell Director 54 1992
An Executive Officer of the Company who is not a Director is set forth below:
Name Position With The Company Age
Nicholas T. Hutzel Controller and Secretary 25
Robert J. Eide, age 42, has been a Director of the Company since
October, 1991 and was Secretary of the Company from October, 1991 to January,
1992. Mr. Eide was named Chairman of the Board in April, 1994. Mr. Eide is
Executive Vice President and Secretary of VX Acquisition Corp. which is the
general partner of VX Capital Partners, L.P. Mr. Eide is a private investor and
has been a principal owner of Aegis Capital Corp., a member firm of the NASD for
more than five years. Mr. Eide is a director of Nathans Famous, Inc., a Nasdaq
National Market listed company and Brooke Group Ltd., a New York Stock Exchange
listed company. Mr. Eide is an attorney licensed to practice law in the State
of New York. Mr. Eide has been a shareholder and officer of a corporate general
partner of various limited partnerships organized to acquire and operate real
estate properties. Several of these partnerships filed for protection under the
federal bankruptcy laws in 1989, 1990 and 1991.
Donald W. Rowley, age 43, has been a Director and President of the
Company since March 31, 1994. From 1992 to March, 1994, Mr. Rowley served as
Chairman and Director of Lantek Electronics, Inc., a specialty wire and cable
distributor which formerly provided the Company with consulting services. From
March, 1992 to December, 1992, he served as a Director of the Maddox Group, Plc.
From 1989 to June 1995, Mr. Rowley served as Director of The Peak Technologies
Group, Inc., a Nasdaq National Market listed company, and also served from
February, 1989 to November, 1992, as Vice President and Chief Financial Officer.
Since 1989, Mr. Rowley has been Vice President, Treasurer and Chief Financial
Officer of Edwardstone & Company, Inc. From 1988 to 1989, he was Vice President
and Chief Financial Officer of Thomson T-Line, Inc., a wholly-owned subsidiary
of Thomson T-Line Plc.
Steven J. Bayern, age 47, has been a Director of the Company since 1992.
Mr. Bayern is a principal of Cyndel & Co., Inc., a financial/management company
from October 1992 to the present. Mr. Bayern was registered as a principal with
Aegis Capital Corp., a member firm of the National Association of Securities
Dealers, Inc., from February, 1991 to November, 1992. From 1984 to 1990, Mr.
Bayern was President and a principal of S.J. Bayern & Co., Inc., a member firm
of the National Association of Securities Dealers, Inc.
<PAGE>
Mark E. Bloom, age 43, has been a Director of the Company since December
1994. Mr. Bloom has been Managing Director of Client Services for Walsh,
Greenwood & Co., an investment management firm, since June, 1992. From October
1979 until 1992, Mr. Bloom was a tax partner and subsequently a managing
partner, with BDO Seidman, a certified public accounting firm. Mr. Bloom is a
Director of SkyBox International Inc., a Nasdaq National Market listed company,
B&T Holdings Inc. a London Stock Exchange company and Cray Electronics Holding,
a London Stock Exchange company.
Robert L. Frome, age 55, has been a Director of the Company since
January, 1992. Mr. Frome has been engaged in the practice of law for more than
five years as a member of the law firm of Olshan Grundman Frome & Rosenzweig.
Mr. Frome is a Director of Sidari Corp., an Italian food importing company, and
Healthcare Services Group, Inc. and is Assistant Secretary of United Capital
Corp., an American Stock Exchange listed company.
Paul L. McDermott, age 41, has been a Director of the Company since
January, 1992. Mr. McDermott has been with Nomura Securities International,
Inc. since November, 1986 most recently as a Managing Director of Nomura
Securities International, Inc. and prior thereto the Vice President and Section
Head of the Mergers and Acquisitions Group. In such capacities, he is
responsible for overseeing the structuring and negotiation of mergers and
acquisitions transactions. Mr. McDermott is a Director of Perception, Inc., a
Nasdaq National Market listed company.
Jeffrey S. Podell, age 54, has been a Director of the Company since
January, 1992. Mr. Podell has been the Chairman of the Board and President of
Newsote Inc. since September, 1989 and has been a private investor for more than
five years. Mr. Podell is an attorney licensed to practice law in the State of
New York. Mr. Podell is a Director of Brooke Group, Ltd., a New York Stock
Exchange listed company.
The following is an Executive Officer of the Company who is not a
Director.
Nicholas T. Hutzel- Controller and Secretary, age 25, has been employed
by the Company since 1993. Mr. Hutzel became Controller and Secretary in March
1994. Prior thereto, Mr. Hutzel was a Controller of Corporate Service, Inc.
from February, 1992 to May, 1993. Previous to that time, Mr. Hutzel was a staff
accountant at Griesmeyer & Olsen, Certified Public Accountants for more than
three years.
ITEM ELEVEN - EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year indicated, all
compensation awarded to, earned by or paid to all individuals serving as the
Company's Chief Executive Officer ("CEO") or acting in a similar capacity and
the one other Executive Officer of the Company other than the CEO whose salary
and bonus exceeded $100,000 with respect to the fiscal year indicated.
<PAGE>
SUMMARY COMPENSATION TABLE
Other LONG TERM COMPENSATION
Annual
Compen- All Other
Name and Salary Bonus sation Number Compensation
Principal Position Year ($) ($) ($)(1) of Options ($)
- ------------------ ---- ------- ----- ------ ---------- ------------
Donald W. Rowley, 1995 200,000 - - 100,000 3,580 (3)
President 1994 62,692 - - 300,000 3,580 (3)
Michael Scanzano, 1994 59,711 - - - -
President 1993 126,770 - - 20,000 -
Charles J. McMullin, 1994 48,654 - - - -
Chief Executive 1993 146,579 - - 60,000 -
Officer (2)
(1) Perquisites and other personal benefits, securities or property to
each executive officer did not exceed the lesser of $50,000 or 10% of such
executive officer's annual salary and bonus.
(2) As of October 1993, Mr. McMullin was no longer Executive Officer or
Employee of the Company. Mr. Rowley was appointed to replace Mr. McMullin in
March 1994.
(3) The Company has purchased for Mr. Rowley a split dollar life insurance
policy. The Company pays the premium on such policy.
The Company has no defined benefit pension plans.
DIRECTORS' COMPENSATION
In fiscal 1995, directors who were not employees of the Company
received an annual fee of $6,000 and a fee of $1,000 for each Board of Directors
meeting attended and were reimbursed for their expenses. Non-employee members
of committees of the Board of Directors were paid an annual fee of $1,000 for
each committee they serve on and $500 for each committee meeting attended.
<PAGE>
STOCK OPTION TABLE
The following table provides further information with respect to the
options granted to the President, Mr. Rowley as of the fiscal year ended June
30, 1995.
Options Granted in Last Fiscal Year
Individual Grants
% of Total
Options
Granted to Exercise
Employees or Base Expir-
Options in Fiscal Price ation
Name Granted (#) Year ($/Sh) Date
- ---------------- ------------ ---------- -------- ------
Donald W. Rowley 100,000 (1) 100% .50 (2)
(1) Mr. Rowley deposited $50,000 with a lender as cash collateral for a
portion of a loan made to an entity he previously served as an officer and
director. The Company had agreed, pursuant to his employment agreement, to
purchase such cash collateral from Mr. Rowley for $50,000 in the event
such cash collateral was not released by March 31, 1995 and, in turn, Mr.
Rowley had agreed to assign to the Company his rights and privileges with
respect to such cash collateral. At March 31, 1995, however, the Company
was released from this guarantee obligation by Mr. Rowley.
Contemporaneous with the release, the Company issued Mr. Rowley stock
options to purchase 100,000 shares of the Company's common stock at $.50
per share (which was for an amount not less than the fair market value at
date of grant).
(2) Options expire five years from the date they become exercisable.
The following table provides information with respect to options
exercised and option values as of the fiscal year ended June 30, 1995.
Aggregated Options Exercised in Last Fiscal Year and
Fiscal Year-End Option Values
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired Options Options
on Value at 6/30/95 at 6/30/95($)(1)
Exercise Realized Exercisable/ Exercisable/
Name # $ Unexercisable Unexercisable
- ---------------- -------- -------- ------------- -------------
Donald W. Rowley 0 0 200,000/200,000 0/0
(1) The dollar value of unexercised options is calculated by determining
the difference between the fair market of the Company's Common Stock which
underlies the option at June 30, 1995, and the exercise price of the
options.
<PAGE>
EMPLOYMENT AGREEMENT
On March 31, 1994, the Company entered into an employment agreement with its
President, Donald W. Rowley, which requires total annual minimum compensation of
$200,000 through March 1997 plus an annual bonus based on a percent of specified
levels of achieved net profits. In addition, the Company's president deposited
$50,000 with a lender as cash collateral for a portion of a loan made to an
entity the president previously served as an officer and director. The Company
had agreed, pursuant to the employment agreement, to purchase such cash
collateral from its president for $50,000 in the event such cash collateral was
not released by March 31, 1995 and, in turn, the president had agreed to assign
to the Company his rights and privileges with respect to such cash collateral.
At March 31, 1995, however, the Company was released from this guarantee
obligation by the president. Contemporaneous with the release, the Company
issued the president stock options to purchase 100,000 shares of the Company's
common stock at $.50 per share (which was for an amount not less than the fair
market value at date of grant).
ITEM TWELVE - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 30, 1995, certain information
regarding beneficial ownership of the Common Stock held by each person known by
the Company to own beneficially more than 5% of the Common Stock, each of the
Company's directors, each of the executive officers named in the Summary
Compensation Table, and all of the Company's executive officers and directors as
a group.
Name and Address Beneficial Ownership
of Beneficial Owner Shares %
- --------------------- -----------------------
Aeorflex Incorporated 1,247,600 (1) 9.9
35 South Service Road
Plainview, NY 11803
Steven J. Bayern 419,781 (2)(3) 3.3
Robert J. Eide 258,750 (4) 2.0
Robert J. Eide Family Trust 481,519 (2) 3.8
Robert L. Frome 758,625 (2)(5) 6.0
505 Park Avenue
New York, NY 10022
Paul L. McDermott 641,994 (2)(6) 5.1
180 Maiden Lane
New York, NY 10038
Jeffrey S. Podell 641,994 (2)(7) 5.1
70 East Sunrise Highway
Valley Stream, NY 11581
Donald W. Rowley 382,350 (2)(8) 3.0
Mark E. Bloom - -
All directors and officers as a 2,903,494 (9) 22.0
group (9 persons)
<PAGE>
(1)Based upon a Statement on Schedule 13D filed with the Securities and
Exchange Commission on February 9, 1990 and the sale of 500,000 shares of
Common Stock to VX Capital Partners, L.P. ("VX") on October 18, 1991.
VX, with the consent of Aeroflex Incorporated, has granted Norstar Bank
presently exercisable options to purchase 250,000 shares of Common Stock
at $3.00 per share (market price at date of grant was $.81) Mr. Michael
Gorin, President of Aeroflex Incorporated, exercises voting power over the
shares owned by Aeroflex Incorporated.
(2)The shares of Common Stock were transferred to such individuals or
entities in December 1994 pursuant to the liquidation of VX.
(3)Includes presently exercisable options to purchase 90,000 shares.
Mr. Bayern has been a Director of the Company since January 1992.
(4)Includes presently exercisable options to purchase 190,000 shares. Does
not include shares held by the Robert J. Eide Family Trust, for the
benefit of his family of which Mr. Eide disclaims beneficial interest.
Mr. Eide has been a Director of the Company since October 1991 and was
Secretary of the Company from October 1991 to January 1992. Mr. Eide was
named Chairman of the Board of the Company in April, 1994. Also includes
68,750 shares owned of record by an unaffiliated party, as to which Mr.
Eide and two other individuals have an irrevocable proxy to vote.
(5)Includes presently exercisable options to purchase 90,000 shares and 1,000
shares purchased by the minor daughter of Mr. Frome. Mr. Frome has been
a Director of the Company since January 1992 and is a member of Olshan
Grundman Frome & Rosenweig, which is general counsel to the Company.
(6)Includes presently exercisable options to purchase 40,000 shares.
Mr. McDermott has been a Director of the Company since January, 1992.
(7)Includes presently exercisable options to purchase 40,000 shares.
Mr. Podell has been a Director of the Company since January, 1992.
(8)Includes presently exercisable options to purchase 200,000 shares and
excludes options to purchase 200,000 shares which are not presently
exercisable.
(9)Includes presently exercisable options and warrants to purchase 510,000
shares.
ITEM THIRTEEN - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Robert L. Frome, a Director of the Company, is a member of the law firm
of Olshan Grundman Frome & Rosenzweig, general counsel to the Company. Fees
received from the Company by such firm during the fiscal year ended June 30,
1995 did not exceed 5% of such firm's or the Company's revenues.
On April 18, 1994, the Company granted five year options to purchase
Common Stock at $.50 per share to the following members of its Board of
Directors: Robert J. Eide - options to purchase 150,000 shares; Steven J.
Bayern - options to purchase 50,000 shares; and Robert L. Frome - options to
purchase 50,000 shares. The options were granted pursuant to a Board approved
stock option plan. The adoption of the plan and issuance of the options were
approved at the July 27, 1994 annual meeting of the shareholders. In addition,
the Company recently entered into a three year management consulting agreement
with Mr. Bayern pursuant to which he will receive $4,000 per month for his
services.
<PAGE>
In connection with the Company's completion of an equity transaction in
March, 1994, one investor, Henry Hackel, who purchased 500,000 shares and
warrants received personal guarantees from certain partners of VX Capital
Partners, L.P., all of whom are Directors of the Company and collectively
constitute the majority of the Company's Board of Directors, that in the event
of a loss from the sale of the shares, they will indemnify Mr. Hackel at any
time through February 16, 1996. Mr. Hackel was the first investor in the equity
transactions commenced in March 1994 and the guarantors agreed to provide the
guarantees as an incentive for his participation in the equity transactions.
The guarantees have been mutually terminated by the parties thereto.
On September 20, 1994 the Company's Board of Directors approved a bonus
agreement for the Company's Chairman of the Board. The agreement provides for
the Chairman to receive a bonus of 5% of the Company's net operating profits up
to a maximum of $100,000 for the fiscal year ended June 30, 1995. No bonus
payments will be made under this bonus agreement for such year.
<PAGE>
PART IV
ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
See index to consolidated financial statements.
(b) Form 8-K Reports
No reports on Form 8-K were filed during the fourth quarter of fiscal
1995.
(c) Exhibits
3.1(a) Certificate of Incorporation (Exhibit 3(a) of Form S-18
Registration Statement No. 33-7693-NY)
3.1(b) Certificate of Incorporation, as amended (Exhibit 3.1(a)
to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1993 File No. 1-9263)
3.1(c) Certificate of Amendment of the Certificate of
Incorporation,
3.2 By-Laws (Exhibit 3(b) of Form S-18 Registration Statement
No. 33-7693-NY)
4.1 Form of Investment Banking Warrants (Exhibit 4.1 to the
Company's Quarterly Report on form 10-Q for the quarter
ended March 31, 1994 File No. 33-7693)
4.2 Form of Private Placement Warrants (Exhibit 4.2 to the
Company's Quarterly Report on form 10-Q for the quarter
ended March 31, 1994 File No. 33-7693)
4.3 Warrant to Sterling Commercial Capital, Inc. (Exhibit 4.3 to the
Company's Quarterly Report on form 10-Q for the quarter ended
March 31, 1994 File No. 33-7693)
10.1 Sublease Agreements between Registrant and VTX Associates dated
December 1, 1985 (Exhibit 10(a) of Form S-18 Registration
Statement No. 33-7693-NY)
10.2 Assignment and Assumption Agreement dated June 30, 1986 between
Registrant and VTX Associates (Exhibit 10(i) of Form S-18
Registration Statement No. 33-7693-NY)
10.3 1989 Non-Qualified Stock Option Plan (Exhibit 10.12 of Annual
Report on Form 10-K for the year ended June 30, 1990)
10.4 1991 Stock Option Plan (Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1993 File
No. 1-9263)
10.5 Accounts Receivable Agreement [Security Agreement] between
Congress Financial Corporation and Vertex Electronics, Inc.,
filed as exhibit 10(a) on Form 8-K on December 31, 1992.
10.6 Term Note of Vertex Electronics, Inc. dated December 31, 1992
in the principal amount of $1,500,000 in favor of Fleet Bank,
filed as exhibit 10(b) on Form 8-K on December 31, 1992.
<PAGE>
10.7 Stock Purchase Agreement dated as of October 17, 1991 between
VX Capital Partners, L.P. and VTX Electronics, Corp,
incorporated by reference to exhibit 28(a) to the Registrant's
Current Report on Form 8-K dated October 18, 1991.
10.8 Warrant Agreement, dated as of October 17, 1991, between VX
Capital Partners, L.P. and VTX Electronics Corp., incorporated
by reference to exhibit 28(b) to the Registrant's Current Report
on Form 8-K dated October 18, 1991
10.9 Loan Agreement dated as of October 17, 1991 between Vertex
Electronics, Inc. and VX Capital Partners, L.P., incorporated
by reference to exhibit 28(c) to the Registrant's Current Report
on Form 8-K dated October 18, 1991
10.10 Guaranty, dated as of October 17, 1991, by VTX Electronics Corp.
in favor of VX Capital Partners, L.P., incorporated by reference
to exhibit 28(e) to the Registrant's Current Report on Form 8-K
dated October 18, 1991
10.11 Investment Banking Agreement with Chatfield Dean & Co., Inc.
dated March 28, 1994 (Exhibit 10.1 to the Company's Quarterly
Report on form 10-Q for the quarter ended March 31, 1994 File
No. 33-7693)
10.12 Employment Agreement with Donald W. Rowley, dated March 31,
1994. (Exhibit 10.2 to the Company's Quarterly Report on form
10-Q for the quarter ended March 31, 1994 File No. 33-7693)
10.13 Loan Agreement dated March 31, 1994 between VTX Electronics
Corp., Vertex Electronics Inc. and Sterling Commercial Capital,
Inc. (Exhibit 10.3 to the Company's Quarterly Report on form
10-Q for the quarter ended March 31, 1994 File No. 33-7693)
10.14 $1,200,000 promissory note, dated March 31, 1994 made by VTX
Electronics Corp. and Vertex Electronics Inc. in favor of
Sterling Commercial Capital, Inc. (Exhibit 10.4 to the Company's
Quarterly Report on form 10-Q for the quarter ended March 31,
1994 File No. 33-7693)
10.15 1994 Directors Stock Option Plan.
21 Subsidiaries -
Name Place of Incorporation
Vertex Technologies, Inc. New York
Vertex Electronics UK Ltd. United Kingdom
Vertex Data Systems, Inc. Delaware (inactive)
* 23 Consent of Grant Thornton LLP, Independent Certified Public
Accountants.
*Filed herewith
<PAGE>
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 on the 28th day of
September, 1995.
VTX ELECTRONICS CORP.
By: /s/ Robert J. Eide
---------------------
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on September 28, 1995 by the following persons in
the capacities indicated:
/s/ Robert J. Eide Chairman of the Board
- ----------------------
Robert J. Eide
/s/ Donald W. Rowley President and Director
- ----------------------
Donald W. Rowley
/s/ Steven J. Bayern Director
- ----------------------
Steven J. Bayern
/s/ Mark E. Bloom Director
- ----------------------
Mark E. Bloom
/s/ Robert L. Frome Director
- ----------------------
Robert L. Frome
/s/ Paul L. McDermott Director
- ----------------------
Paul L. McDermott
/s/ Jeffrey S. Podell Director
- ----------------------
Jeffrey S. Podell
/s/ Nicholas T. Hutzel Controller, Secretary and
- ----------------------
Nicholas T. Hutzel Principal Accounting Officer
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
- -----------------
Page
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants F-1
Balance Sheets - June 30, 1995 and 1994 F-2
Statements of Operations - Years
Ended June 30, 1995, 1994 and 1993 F-3
Statement of Changes in Stockholders'
Equity - Years Ended June 30, 1995,
1994 and 1993 F-4
Statements of Cash Flows - Years
Ended June 30, 1995, 1994 and 1993 F-5
Notes to Consolidated Financial Statements F-6
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
II. Valuation and Qualifying Accounts F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
VTX Electronics Corp.
We have audited the accompanying consolidated balance sheets of VTX Electronics
Corp. and Subsidiaries as of June 30, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of VTX Electronics
Corp. and Subsidiaries as of June 30, 1995 and 1994 and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended June 30, 1995, in conformity with generally accepted
accounting principles.
In connection with our audits of the consolidated financial statements referred
to above, we have also audited Schedule II for each of the three in the period
ended June 30, 1995. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
Grant Thornton LLP
Melville, New York
August 30, 1995
F-1
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
ASSETS 1995 1994
------------ ------------
CURRENT ASSETS:
Cash $ 583,388 $ 593,438
Accounts receivable, net of allowance for
doubtful accounts of $154,000 and $394,000,
in 1995 and 1994, respectively 4,864,443 6,061,826
Inventories, net 3,786,172 3,628,949
Prepaid expenses and other current assets 463,518 308,191
------------ ------------
TOTAL CURRENT ASSETS 9,697,521 10,592,404
PROPERTY, PLANT AND EQUIPMENT, net 3,264,975 3,558,540
DEFERRED CHARGES AND OTHER ASSETS 224,451 280,525
------------ ------------
TOTAL ASSETS $13,186,947 $14,431,469
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 158,954 $ 75,815
Accounts payable and accrued expenses 5,062,469 5,196,455
------------ ------------
TOTAL CURRENT LIABILITIES 5,221,423 5,272,270
LONG-TERM DEBT 5,966,383 6,338,355
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY - 12,534
STOCKHOLDERS' EQUITY:
Preferred stock, par value $ .01 per
share; authorized 5,000,000 shares;
none issued - -
Common stock, par value $ .10 per
share; authorized 40,000,000 shares;
issued and outstanding 12,652,000
and 11,837,500 shares in 1995
and 1994, respectively 1,265,200 1,183,750
Paid-in capital 8,591,476 8,275,676
Accumulated deficit (7,705,550) (6,389,506)
Notes receivable from officers (50,000) (100,000)
Deferred compensation (98,433) (154,687)
Cumulative translation adjustment (3,552) (6,923)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,999,141 2,808,310
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,186,947 $14,431,469
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30,
1995 1994 1993
------------ ------------ ------------
Net sales $34,472,386 $42,864,272 $49,406,815
Cost of goods sold 27,311,037 33,490,460 39,934,940
------------ ------------ ------------
Gross profit 7,161,349 9,373,812 9,471,875
Selling, general and
administrative expenses 7,571,586 10,478,818 10,410,870
Restructuring charges 91,000 939,000 -
Interest expense 827,088 901,314 1,047,972
Foreign currency (gain) loss (12,281) (10,821) 68,961
------------ ----------- -----------
Loss before income taxes and
extraordinary items (1,316,044) (2,934,499) (2,055,928)
Income tax benefit - - (26,000)
------------ ----------- -----------
Loss before extraordinary
items (1,316,044) (2,934,499) (2,029,928)
Extraordinary items
Gain of $780,496 and $2,600,000 on
extinguishment of debt in 1994 and
1993, respectively, net of related
expenses of $33,074 and $90,000,
respectively, and income taxes of
$188,400 in 1993 - 747,422 2,321,600
Utilization of net operating loss
carryforward - - 170,000
------------ ------------ ------------
Net income (loss) $(1,316,044) $(2,187,077) $ 461,672
============ ============ ============
Income (loss) per share
Loss before extraordinary items ($.11) ($.47) ($.35)
Extraordinary items - .12 .43
------ ------ ------
Net income (loss) per share ($.11) ($.35) $.08
====== ====== ======
Weighted average number of shares
outstanding 12,264,985 6,239,417 5,777,548
========== ========= =========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER' EQUITY
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Receivable Cumulative Total
Common Stock Paid-in Accumulated From Deferred Translation Stockholder'
Shares Amount Capital deficit Officers Compensation Adjustment Equity
--------- -------- ---------- ----------- --------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1 1992 5,187,500 $518,750 $5,199,628 ($4,664,101) $1,054,277
Net Income 461,672 461,672
Sale of common stock 100,000 10,000 90,000 100,000
Notes receivable
from officer ($50,000) (50,000)
Foreign translation adjustment ( $14,419) (14,419)
Balance, June 30, 1993 5,287,500 528,750 5,289,628 (4,202,429) ( 50,000) ( 14,419) 1,551,530
Net Loss (2,187,077) (2,187,077)
Issuance of common stock
(net of related costs of
$560,000) 6,550,000 655,000 2,059,954 2,714,954
Note receivable from officer ( 50,000) (50,000)
Warrants issued to lender 175,781 175,781
Warrants issued to officer 56,250 56,250
Options granted to officers
and directors 325,000 ($168,750) 156,250
Warrants and options granted
to consultants 369,063 369,063
Freign translation adjustment 7,496 7,496
Amortization of deferred
compensation 14,063 14,063
Balance, June 30, 1994 11,837,500 1,183,750 8,275,676 (6,389,506) (100,000) (154,687) (6,923) 2,808,310
Net loss (1,316,044) (1,316,044)
Options exercised by employees 25,000 2,500 2,500
Debt conversion to stock 789,500 78,950 315,800 394,750
Settlement on officers note 50,000 50,000
Foreign translation adjustment 3,371 3,371
Amortization of deferred
compensation 56,254 56,254
Balance, June 30, 1995 12,652,000 $1,265,200 $8,591,476 ($7,705,550) ($50,000) ($98,433) ($3,552) $1,999,141
</TABLE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
1995 1994 1993
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss).................................. ($1,316,044) ($2,187,077) $ 461,672
Adjustments to reconcile net income (loss) to net
cash provided by/(used in) operating activities:
Depreciation and amortization................... 543,848 668,803 623,711
Provision for (recovery of) losses on accounts
receivable..................................... (107,000) 524,000 255,000
Provision for slow moving and obsolete
inventories.................................... 65,000 83,749 1,200,000
Non-cash compensation........................... 56,254 595,626 -
Gain (loss) on sale of assets.................... (3,967) (11,500) 19,824
Deferred income tax benefit...................... - - (26,000)
Gain on extinguishment of debt................... - (780,496) (2,491,600)
Changes in operating assets and liabilities:
(Increase)/decrease in accounts receivable...... 1,304,383 1,597,761 (797,698)
(Increase)/decrease in inventories.............. (222,223) 753,851 1,647,898
(Increase)/decrease in prepaid expenses and
other current assets........................... (155,327) 52,463 160,534
(Increase)/decrease in deferred charges and
other asset.................................... (69,785) 1,313 (404,800)
Increase/(decrease) in accounts payable and
accrued expenses............................... (109,020) (670,181) 587,500
----------- ----------- -----------
Net cash provided by/(used in) operating
activities..................................... (13,881) 628,312 1,236,041
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................. (126,957) (31,552) (591,768)
Proceeds from sale of property, plant and
equipment....................................... 6,500 - 7,000
------------ ----------- -----------
Net cash used in investing activities......... (120,457) (31,552) (584,768)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under debt and loan agreements......... 38,847,289 69,046,381 59,402,253
Debt repayments.................................. (38,700,978) (71,742,018) (60,000,516)
Principal payments under capital leases.......... (40,394) (110,260) (244,751)
Proceeds from officer note....................... 12,500
Issuance of common stock and exercise of
options/warrants, net........................... 2,500 2,714,954 50,000
------------- ------------ ------------
Net cash provided by/(used in) financing
activities..................................... 120,917 (90,943) (793,014)
------------- ------------ ------------
Effects of exchange rate changes on cash........... 3,371 7,496 (14,419)
------------- ------------ ------------
INCREASE/(DECREASE) IN CASH........................ (10,050) 513,313 (156,160)
CASH at beginning of year.......................... 593,438 80,125 236,285
------------- ------------ ------------
CASH at end of year................................ $ 583,388 $ 593,438 $ 80,125
============= ============ ============
<CAPTION>
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 817,237 $ 922,035 $ 1,104,499
=========== =========== ===========
Income taxes $ - $ 11,123 $ 68,822
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. General - VTX Electronics Corp. and subsidiaries (the "Company") operate
primarily in one business segment - distribution and assembly of
electronic wire, cable and related products used primarily for data
communication. The consolidated financial statements include the
accounts of VTX Electronics Corp. and its wholly-owned subsidiaries,
Vertex Technologies, Inc., Vertex Data Systems, Inc. [inactive] and its
foreign subsidiary, Vertex Electronics UK, LTD. All significant
intercompany transactions and balances have been eliminated in
consolidation.
The Company had losses before extraordinary items of $1,316,044,
$2,934,499 and $2,029,928 for the years ended June 30, 1995, 1994 and
1993, respectively. Sales during fiscal 1995 were negatively impacted
due to tight industry supply of certain cable and wire items and lost
sales from related items without the "pull through" effect of the items
in tight supply. The tight supply situation has stabilized and should
improve through 1996. In addition, turnover of sales personnel and
recently hired sales personnel learning the Company's operation had a
further negative impact on sales. Management has increased efforts to
hire and train new sales personnel.
Management's plans to continue operating the Company include generating
sufficient cash flows from operations, primarily through the timely
liquidation of receivables and careful management of inventory
purchases, including the respective payments thereof. In addition, the
Company completed a financial reorganization and operational
restructuring during the year ended June 30, 1995, which commenced in
fiscal 1994. The financial reorganization included the satisfaction of
certain lender obligations at a discount during fiscal 1994, and the
amendment of a long-term revolving credit facility, which was extended
to December 31, 1997, as described in Note 6a. The operational
restructuring included the discontinuance of certain product lines,
closing of certain branch operations and the termination of certain
employees (Note 2). Management believes that the restructuring will
position the Company toward profitable growth in margins as a result of
greater specialization and purchasing leverage, and by reducing
corporate overhead. Management believes that current levels of working
capital ($4,476,098 at June 30, 1995) including cash balances of
$583,388 and excess cash availability of approximately $502,000 from its
revolving credit facility at June 30, 1995 (Note 6a), will be adequate
to fund operations for the next fiscal year.
b. Inventories - Inventories, consisting principally of products held for
sale, are stated at the lower of cost (first-in, first-out method) or
market.
c. Property, Plant and Equipment - Property, plant and equipment are stated
at cost less accumulated depreciation and amortization computed on a
straight-line basis over the estimated useful lives of the respective
assets. Building improvements are amortized over the useful life of the
improvement. Expenditures for maintenance, repairs and betterments
which do not materially extend the useful lives of the assets are
charged to operations as incurred. The cost and related accumulated
depreciation of assets retired or sold are removed from the respective
accounts and any gain or loss is recognized in operations.
F-6
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
d. Revenue Recognition - The Company recognizes revenue on the date the
product is shipped to the customer.
e. Deferred Costs - Costs incurred in connection with debt refinancing
consisting primarily of loan origination fees, broker's commission,
legal and other fees have been capitalized and are being amortized on
a straight-line basis over the term of the loans. Amounts of
refinancing costs deferred at June 30, 1995 and 1994 were $171,400 and
$202,100, respectively.
f. Income Taxes - The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 109. "Accounting for Income Taxes", as of July 1,
1993. SFAS No. 109 requires an asset/liability approach for financial
accounting and reporting for income taxes.
g. Income (Loss) Per Share - The weighted average shares outstanding
include common shares outstanding and common equivalent shares
attributable to outstanding stock options and warrants, if dilutive.
The income (loss) per share amounts are computed by dividing the net
income or (loss) for each year by the weighted average number of common
and common equivalent shares (if dilutive) outstanding during the
period. The weighted average number of shares outstanding includes
common stock equivalents of 555,527 for the year ended June 30, 1993.
For the years ended June 30, 1995 and 1994, the outstanding options and
warrants were not considered in the determination of the Company's net
loss per share as their effect was antidilutive.
h. Foreign Currency Translation and Transactions - Assets and liabilities
of the Company's foreign subsidiary are translated at year-end exchange
rates. Results of operations are translated using the average exchange
rates prevailing throughout the year. Exchange rate changes arising
from translation are included in the cumulative translation component
of stockholders' equity. Gains and losses from foreign currency
transactions are included in the net income (loss) for the year.
i. Reclassification - Certain amounts in the prior years' financial
statements have been reclassified to conform to the current year
presentation.
2. RESTRUCTURING CHARGES
The consolidated statements of operations for the years ended June 30, 1995
and 1994 reflect the costs of a fiscal 1994 restructuring plan designed to
realign the Company's corporate headquarters and field operations to
increase its overall profitability through the closing of certain branches,
the elimination of certain marginally profitable product lines and the
disposal of certain assets. The fiscal 1994 restructuring charge of
$939,000 consisted of provisions for termination of certain employment
contracts, employee severance and benefit settlements of $264,000,
inventory write-downs for discontinued product lines of $321,000, and the
abandonment of leased facilities, equipment and other assets of $354,000.
Additional costs of $91,000 associated with the Company's restructuring
effort were incurred in fiscal 1995. Such costs were primarily associated
with final settlements reached in fiscal 1995 for the termination of
certain employment contracts, employee severance and benefit arrangements,
as well as additional related legal fees associated therewith. As of June
30, 1995, approximately $127,000 of restructuring charges remain payable
in accordance with the terms of such settlements.
F-7
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
3. INVENTORIES
The Company has recorded a reserve for obsolete and slow-moving inventory
following a review of inventory levels of certain product lines and an
evaluation of the inventory based on changes in technology and markets.
As of June 30, 1995 and 1994, the reserve was approximately $535,000 and
$903,000, respectively.
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consist of the following:
Asset
lives June 30,
(years) 1995 1994
---------- ----------
Land -- $ 545,776 $ 545,776
Building and building
improvements 30 2,569,947 2,547,450
Machinery and equipment 10 1,637,227 1,610,963
Furniture and fixtures 5-10 2,077,904 1,999,709
Vehicles 4 26,798 55,918
--------- ---------
6,857,652 6,759,816
Less accumulated depreciation
and amortization 3,592,677 3,201,276
---------- ----------
$3,264,975 $3,558,540
========== ==========
Depreciation and amortization of property, plant and equipment was
$418,464, $490,362, and $484,053 for the years ended June 30, 1995,
1994 and 1993, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30,
1995 1994
---------- ----------
Accounts payable $4,463,076 $3,490,787
Accrued payroll and commissions 248,796 347,799
Other accrued expenses 350,597 1,357,869
---------- ----------
$5,062,469 $5,196,455
========== ==========
F-8
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
6. LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
1995 1994
----------- ----------
Revolving asset-based loan (a) $ 4,903,805 $4,713,180
First mortgage loan, net of imputed interest (b) 1,025,741 1,024,496
Subordinated mortgage loan, net of imputed
interest (b) 31,649 77,208
Machinery and equipment loan (c) 105,250 500,000
Capitalized lease obligations (d) 58,892 99,286
----------- ---------
6,125,337 6,414,170
Less current portion of long-term debt 158,954 75,815
----------- ----------
$ 5,966,383 $6,338,355
=========== ==========
a. On December 31, 1992, the Company entered into a three-year long-term
revolving credit facility, providing a maximum availability of
$12,500,000, which replaced a $10,900,000 revolving asset-based loan
facility (which had an outstanding balance of approximately
$10,100,000), and restructured a $2,000,000 asset-based term loan. The
Company satisfied these outstanding obligations aggregating $12,100,000
by paying approximately $8,000,000 and converting $1,500,000 to a new
subordinated term loan collateralized by a second mortgage on its
corporate headquarters. The balance of $2,600,000 was forgiven and
recorded as an extraordinary gain net of related expenses in the
consolidated statement of operations for the year ended June 30, 1993.
In connection with this financing, the Company incurred in fiscal 1993
costs approximating $405,000 which have been accounted for as deferred
charges and are being amortized through December 31, 1995. On February
10, 1995, this credit facility was amended to: (i) extend the expiration
date to December 31, 1997, (ii) reduce the maximum availability from
$12,500,000 to $10,000,000, and (iii) provide for termination fees as
a result of default or early termination of 2%, 1% and .5% of the
maximum credit if such termination occurs before December 31, 1995,
December 31, 1996 or December 31, 1997, respectively. In connection
with this financing amendment, the Company incurred in fiscal 1995 costs
approximating $80,000, which have been accounted for as deferred charges
and are being amortized through December 31, 1997. Under the terms of
the credit facility, the Company is required to pay interest at prime
plus 2 3/4% and a commitment fee of 1/2% per annum on the daily average
unused portion of the credit. Under the terms of the agreement,
borrowings are limited to 80% of eligible accounts receivable
(constituting those amounts outstanding 90 days or less) and 50% of
eligible accounts receivable outstanding between 91 and 120 days, and
40% of regular inventories and 20% of slow moving inventory. As of June
30, 1995 and 1994, the Company had $5,406,000 and $5,513,000
availability under the eligibility terms of the facility, of which
$4,903,805 and $4,713,180 was outstanding on such dates, respectively.
This loan is collateralized by substantially all of the assets of the
Company not otherwise collateralized. In connection with its revolving
credit facility, the Company is subject to restrictive covenants which
impose certain limitations with respect to the Company's incurrence of
F-9
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
indebtedness, capital expenditures, creation or recurrence of liens,
declaration or payment of dividends or other distributions, mergers,
consolidations and sales or purchases of substantial assets. In
general, the Company is not allowed to incur further indebtedness or
create additional liens on its assets except for unsecured current
liabilities incurred in the ordinary course of business or liabilities
incurred in the ordinary course of business secured by purchase money
security interest not to exceed an aggregate of $750,000. The Company
is not allowed to make loans or investments or provide guarantees or to
prepay indebtedness. The Company is prohibited from paying dividends
and may not enter into a merger, consolidation or sale of all or
substantially all of its assets. Additionally, the Company is required
to maintain consolidated net worth of not less than $750,000 and to
maintain consolidated working capital, defined as current assets less
current liabilities and debt outstanding under the credit facility, of
not less than a negative $1.5 million.
b. On March 31, 1994, the Company satisfied its subordinated asset-based
term loans and the Industrial Development Agency Bonds aggregating
$2,080,496 on such date with the $1,200,000 proceeds from a first
mortgage loan and the issuance of a $100,000 non-interest bearing
subordinated mortgage loan payable in 24 monthly installments of $4,167
each commencing March 31, 1994. As a result of this debt refinancing,
the Company recorded an extraordinary gain of $747,422 in the
consolidated statement of operations for the year ended June 30, 1994
net of related expenses of $33,074.
The first mortgage loan is with a group of lenders, and is payable over
five years in monthly installments of $15,980, inclusive of principal
and interest at 14%, commencing May 1, 1994, with a final installment
of principal of $1,033,183 payable on April 1, 1999 and collateralized
by a first mortgage lien on the Company's corporate headquarters. In
connection with such loan, the Company issued to one of the lenders
250,000 common stock purchase warrants exercisable on or before March
31, 2001 at an exercise price at $.50 per share. A portion of the
proceeds of the loan has been allocated to the warrants based on the
Company's Board of Directors' assessment of their fair value at the time
of issuance ($.70 per share). For financial statement purposes, the
fair value ascribed to the warrants of $175,781 has been deducted from
the proceeds of the mortgage loan as additional interest expense and is
being amortized over the term of the mortgage to yield an effective
interest rate of approximately 20% per annum. The loans have prepayment
penalties which are calculated as a percentage of the prepayment amount.
The percentage is determined based upon the date of payment as follows:
Prepaid Percentage
Between one and two years 3%
Between two and three years 1%
Thereafter 0%
The loan contains covenants prohibiting certain types of transactions
and limiting capital expenditures to $250,000 per annum without the
prior consent of the lenders.
F-10
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
c. On October 18, 1991, the Company received $500,000 in cash from an
unaffiliated investor group in exchange for a mortgage on certain
machinery and equipment. Concurrently, such investor group acquired a
50.6% interest in the then outstanding issued common stock of the
Company for $1,000,000 (or $.40 per-share) and was granted a five-year
warrant to purchase 1,000,000 shares of the Company's common stock for
$.50 per-share. As described in Note 8n below, such warrants were fully
exercised in June 1994. The loan, which bears interest at the rate of
1-1/4% above the prime lending rate (9.00% and 6.75% at June 30 1995 and
1994, respectively), was originally due on September 30, 1994; however,
on April 25, 1994, such due date was extended to September 30, 1995.
On December 19, 1994; however, the Company extinguished $394,750 of the
$500,000 loan balance in exchange for 789,500 shares of the Company's
common stock. The Company's Board of Directors and management believe
based upon a fairness opinion rendered by an independent investment
banking firm and other analysis, that the fair value of the shares
exchanged was equal to the carrying amount of the converted portion of
the loan. The fairness opinion stated that the exchange was fair to the
stockholders of the Company from a financial point of view. The
remaining $105,250 principal balance of the loan has an amended due date
of March 31, 1996. All other terms remain unchanged.
d. The Company leases its telephone system under agreements accounted for
as capital leases. The obligation for the telephone system requires the
Company to make monthly payments of $1,963 through December 1997.
The following is a summary of the aggregate annual maturities of long-term
debt and capitalized lease obligations:
Capitalized
Long-term lease
Year ending June 30: debt obligation Total
---------- ----------- -----------
1996 $ 135,398 $ 23,556 $ 158,954
1997 - 23,556 23,556
1998 4,897,864 11,780 4,909,644
1999 1,033,183 - 1,033,183
---------- ----------- -----------
$6,066,445 $ 58,892 $ 6,125,337
========== =========== ===========
7. RELATED PARTY TRANSACTIONS
A Director of the Company is a member of the law firm which serves as
general counsel to the Company. The Company was billed $87,000, $338,000
and $183,000 for legal services rendered by such law firm during fiscal
1995, 1994 and 1993, respectively, of which $47,000, $183,000 and $81,000
is included in accounts payable and accrued expenses as of June 30, 1995,
1994 and 1993, respectively.
F-11
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
8. EQUITY TRANSACTIONS
a. In 1989, the Company's Board of Directors approved a non-qualified five-
year stock option plan under which key employees could be granted
options to purchase up to an aggregate 115,000 shares of the Company's
common stock at an option price of $ .10 per share. Under the terms of
this plan, options that were cancelled could not be re-issued. During
fiscal 1995 and 1993, 10,000 options were cancelled. In April 1994, the
plan expired. During fiscal 1995, 25,000 options were exercised. As
of June 30, 1995, options to purchase 12,500 shares of the Company's
common stock remain outstanding. These options are held by two ex-
employees of the Company who exercised such options prior to
termination of their employment with the Company. The Company has not
issued stock certificates for the exercise of such options because of
certain disputes between the Company and such ex-employees relating to
their prior employment with the Company. The Company can not presently
determine whether or not the shares underlying such options will be
issued to such ex-employees.
b. In January 1992, the Company's Board of Directors and stockholders
approved the 1991 Incentive and Non-Qualified Stock Option Plan (the
"Plan"), under which current and perspective employees may be granted
options to purchase an aggregate of 500,000 shares of the Company's
common stock. The Plan is administered by a committee consisting of
three members of the Board of Directors. The committee designates which
options granted under the Plan are Incentive Options and which are Non-
Qualified Options. The option price may not be less than the fair market
value on the date of grant with exceptions required by the Internal
Revenue Code of 1986, as amended, with respect to incentive stock
options. The shares vest one-third each over three years of employment
following the date of grant of the option. None of the options issued
have been exercised. Under the terms the Plan, options that are
cancelled may be reissued. At June 30, 1995, an aggregate of 472,500
options remain available for grant under the Plan.
The following is a summary of the activity of the Plan:
Stock options Shares Price per share
----------------------- --------- ----------------
Balance at July 1, 1992 70,000 $1.25 - $1.63
Granted 290,000 $1.00 - $1.13
Cancelled (82,500) $1.13 - $1.63
--------- ----------------
Balance at June 30, 1993 277,500 $1.00 - $1.13
Cancelled (155,000) $1.00 - $1.13
--------- ----------------
Balance at June 30, 1994 122,500 $1.13
Cancelled (95,000) $1.13
--------- ----------------
Balance at June 30, 1995 27,500 $1.13
========= ================
F-12
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
c. In April 1992, the Company's Board of Directors authorized and issued
options to purchase an aggregate of 150,000 shares of common stock to
the members of the Board of Directors at a price of $1.25 per share (the
fair market value at date of grant) which options expire on May 1, 1997.
No options have been exercised to date. During fiscal 1995, 20,000
options were cancelled upon resignation of a director. As of June 30,
1995, options to purchase 130,000 shares of the Company's common stock
remain outstanding.
d. In January 1993, the Company's Board of Directors authorized and issued
options to purchase an aggregate of 150,000 shares of the common stock
to the members of the Board of Directors at a price of $1.13 per share
(the fair market value at date of grant) which options expire on January
4, 1998. No options have been exercised to date. During fiscal 1995,
20,000 options were cancelled upon resignation of a director. As of
June 30, 1995, options to purchase 130,000 shares of common stock are
currently outstanding.
e. On February 25, 1993, an officer of the Company purchased 100,000 shares
of the Company's common stock for $100,000 (representing the fair market
value at date of purchase) of which $50,000 was paid in cash and $50,000
in a 6% three-year promissory note. The interest on this note was
payable quarterly and the principal of $50,000 was due on February 25,
1996. During fiscal 1995, such note was settled for $12,500 and the
balance was written off.
f. On March 4, 1994, the Company completed a series of equity transactions
whereby the Company sold 2,000,000 shares of its common stock together
with 2,000,000 common stock purchase warrants for a total of $1,000,000.
Each warrant entitles the holder to purchase one share of common stock
for $.50 per-share. As described in Note 8n below, such warrants were
fully exercised in June 1994. One investor who purchased 500,000 shares
received personal guarantees from members of the Company's Board of
Directors that in the event the investor would sustain loss from the
sales of the shares (including the shares obtained through the exercise
of the warrants) such directors will indemnify the investor at any time
through February 16, 1996. Should the guarantors have to perform under
the terms of the guarantee, the ownership interest in the shares will
transfer to the guarantors. During fiscal 1995, such guarantees were
mutually terminated by the parties thereto.
g. On March 28, 1994, pursuant to a consulting/investment banking agreement
with an underwriter (Note 10b), the Company issued warrants to purchase
350,000 shares of its common stock at an exercise price of $1.25 per-
share (which was not less than the fair market value on such date).
Such warrants are fully exercisable and expire five years from date of
grant.
F-13
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
h. On March 31, 1994, pursuant to an employment agreement (Note 10a), the
Company's president purchased 100,000 shares of the Company's common
stock for $.50 per-share, representing an amount less than the
unadjusted quoted market price of the stock on such date. Consequently,
the Company recognized compensation expense in the amount of $56,250 for
the year ended June 30, 1994 representing the difference between the
unadjusted quoted market price of the stock on such date and the price
payable per-share. The shares were purchased by the president with a
$50,000 non-interest bearing, non-recourse note collateralized by the
shares issued.
i. In March 1994, pursuant to an employment agreement, the Company's
president was granted an option to purchase 300,000 shares of the
Company's common stock at an exercise price of $.50 per-share,
representing an amount less than the unadjusted quoted market price of
the stock on such date. The options become exercisable at the rate of
one-third on each successive anniversary date over three years.
Consequently, the Company recorded unearned compensation in the amount
of $168,750, which will be recognized as compensation expense ratably
over the employment period of three years: $56,254 and $14,063 have been
amortized as compensation expense during fiscal 1995 and 1994,
respectively. The option expires five years after the date on which the
options become exercisable.
j. On March 31, 1994, in connection with a mortgage refinancing (Note 6b),
the Company issued 250,000 common stock purchase warrants exercisable
on or before March 31, 2001 at an exercise price of $.50 per share.
k. On April 6, 1994, the Company completed additional equity transactions
by selling 500,000 shares of its common stock together with 500,000
common stock purchase warrants for a total of $250,000. Each warrant
entitles the holder to purchase one share of common stock for $.50 per-
share. As described in Note 8n below, such warrants were fully
exercised in June 1994.
l. On April 18, 1994, the Company's Board of Directors adopted the 1994
Directors Stock Option Plan. This plan is intended to assist the
Company in securing and retaining directors by allowing them to
participate in the ownership and growth of the Company through the grant
of stock options. The persons eligible for the 1994 Directors Stock
Option Plan are any director who is not a full or part-time employee of
the Company ("Eligible Director"). The granting of options will give
the Eligible Directors an additional inducement to remain with the
Company and will provide them with an increased incentive to work toward
the Company's success.
The 1994 Directors Stock Option Plan provides for the issuance of up to
600,000 shares of common stock. The plan is administered by a committee
composed of two or more "disinterested" directors of the Company ("Stock
Option Committee"). The Stock Option Committee has full power and
authority to designate recipients of the options and to determine the
terms and conditions of option agreements. Each option generally vests
ratably over a three-year period provided such individual continues to
serve as a director of the Company, unless such individual no longer
serves as a result of his death or disability, in which case the option
immediately vests.
F-14
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
On April 18, 1994, three directors of the Company were granted fully
exercisable options under this plan to purchase an aggregate of 250,000
shares of the Company's common stock for a five year period at an
exercise price of $.50 per-share representing an amount less than the
unadjusted quoted market price of the stock on such date. Consequently,
the Company recognized compensation expense in the amount of $156,250
for the year ended June 30, 1994 representing the difference between the
unadjusted quoted market price of the stock on such date and the price
payable per share.
m. During November 1993 and April 1994, the Company issued options to
purchase 250,000 shares of common stock at $1.25 per share (100,000
options vested immediately and the remaining options vested at the rate
of 12,500 each month beginning November 1993) and warrants to purchase
468,750 shares of common stock at $.50 per share to consultants for
services provided to the Company. In connection with these issuances,
the Company recognized compensation expense in the amount of $369,063
for the year ended June 30, 1994, representing the estimated relative
fair market value of the options ($.07 per share) and warrants ($.75 per
share) on the dates of such issuance as determined by the Company's
Board of Directors. As described in Note 8n below, 450,000 of such
warrants were exercised in June 1994. The 18,750 unexercised warrants
expired during fiscal 1995. The options expire five years from the
date of issuance and, as of June 30, 1995, such options are fully
exercisable.
n. In June 1994, the Company completed the registration of 3,950,000 shares
of its common stock underlying outstanding common stock purchase
warrants. The Company did not receive any of the proceeds from the sale
of the common stock sold by the selling shareholders. However, the
Company did receive $1,415,000 representing the net proceeds from the
exercise of common stock purchase warrants ($1,975,000 in gross
proceeds).
o. On December 19, 1994, the Company issued 789,500 shares of its common
stock to extinguish $394,750 of debt (Note 6c).
p. On March 31, 1995, the Company issued stock options to the Company's
president to purchase 100,000 shares of common stock at an exercise
price of $.50 per share (which amount was not less than the fair market
value at the date of grant). Such options are fully exercisable and
expire on March 31, 2000. As described in Note 10a below, such options
were granted in conjunction with the president's employment contract.
F-15
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
q. The following information summarizes options and warrants at June 30,
1995:
Reserved Range of
for exercise
Stock plan issuance Issued Exercisable price
-------------------------- -------- -------- ----------- --------
Options - 1989 Employees - 12,500 12,500 $.10
Options - 1991 Employees 500,000 27,500 20,833 $1.13
Options - 1992 Directors 150,000 130,000 130,000 $1.25
Options - 1993 Directors 150,000 130,000 130,000 $1.13
Options - 1994 President's
Issuance 300,000 300,000 100,000 $.50
Options - 1994 Directors 600,000 250,000 250,000 $.50
Options - 1994 Consultants 250,000 250,000 250,000 $1.25
Warrants - 1994 Consultants 350,000 350,000 350,000 $1.25
Warrants - 1994 Debt Agreement 250,000 250,000 250,000 $.50
Options - 1995 President's
Issuance 100,000 100,000 100,000 $.50
--------- --------- --------- ----------
2,650,000 1,800,000 1,593,333 $.10-$1.25
========= ========= ========= ==========
9. INCOME TAXES
As a result of the Company's fiscal 1995 and 1994 losses and inability to
realize tax benefits, the Company recorded no tax benefit for the years
ended June 30, 1995 and 1994.
Income tax provision (benefit) for the year ended June 30, 1993 consisted
of the following:
1993
----------
Current:
Federal $ -
State 18,400
----------
18,400
Deferred (26,000)
----------
($ 7,600)
==========
Deferred taxes recorded in prior years have either reversed or have been
eliminated by the recognition of net operating losses.
F-16
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
Reconciliation between actual income tax (benefit) and the amount computed
by applying the statutory Federal income tax rate to the loss before taxes
is as follows:
1995 1994 1993
---------- ---------- ----------
Tax expense (benefit) at statutory
federal income tax rates......... ($447,455) ($743,580) $154,400
State income taxes, net of
federal income tax benefit....... - - 34,000
Reversal of deferred tax
liability........................ - - (26,000)
Utilization of net operating loss
carryforward..................... - - (170,000)
Respective years' net operating
loss not currently utilizable.... 447,455 743,580 -
---------- ---------- ----------
$ -0- $ -0- ($ 7,600)
========== ========== ==========
The tax effect of temporary differences and loss carryforwards giving rise
to deferred tax (assets) and liabilities are as follows:
June 30,
---------------------------
1995 1994
------------ ------------
Net operating loss carryforwards........... $(2,562,000) $(1,666,000)
Other deferred assets:
Allowance for bad debts................... (87,000) (150,000)
Inventory reserves........................ (203,000) (343,000)
Inventory capitalization.................. (70,000) (74,000)
Other deferred assets..................... (300,000) (223,000)
------------ ------------
Gross deferred tax (asset)................. (3,222,000) (2,456,000)
Depreciation (deferred liability).......... 271,000 242,000
------------ ------------
Net deferred tax (asset)................... (2,951,000) (2,214,000)
Deferred tax asset valuation allowance..... 2,951,000 2,214,000
------------ ------------
Net deferred tax asset..................... $ -0- $ -0-
============ ============
The Company anticipates that for the foreseeable future it will continue to
be required to provide a 100% valuation allowance for the tax benefit of its
net operating loss carryforwards and temporary differences.
At June 30, 1995, the Company has net operating losses available to
carryforward of approximately $6,742,000 for tax purposes. Such net
operating loss carryforwards expire through fiscal year 2010. No benefit
has been recorded for such loss carryforwards since realization cannot be
assured.
F-17
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
The Company's use of its net operating loss carryforward is limited as the
Company is deemed to have undergone an "ownership change", as defined in the
Internal Revenue Code Sec. 382, during the fiscal years ended June 30, 1992
and June 30, 1994. In connection with such net operating loss limitation,
the Company must obtain a fair valuation of the Company as of the date of
the ownership change. Based upon the Company's estimates of fair value,
approximately $3,504,000 of the Company's total net operating loss of
$6,742,000 is limited, pursuant to Internal Revenue Sec. 382, to
approximately $715,000 annually during the carryforward period.
10. COMMITMENTS AND CONTINGENCIES
a. Employment agreement
On March 31, 1994, the Company entered into an employment agreement with its
newly appointed president which requires total annual minimum compensation
of $200,000 through March 1997 plus an annual bonus based on a percentage
of specified levels of achieved net profits. In addition, the Company's
president deposited $50,000 with a lender as cash collateral for a portion
of a loan made to an entity the president previously served as an officer
and director. The Company had agreed, pursuant to the employment agreement,
to purchase such cash collateral from its president for $50,000 in the event
such cash collateral was not released by March 31, 1995 and, in turn, the
president had agreed to assign to the Company his rights and privileges with
respect to such cash collateral. At March 31, 1995, however, the Company
was released from this guarantee obligation by the president.
Contemporaneous with the release, the Company issued to the president stock
options to purchase 100,000 shares of the Company's common stock at $.50 per
share (Note 8p).
b. Consulting Agreements
Under the terms of a nonexclusive consulting/investment banking agreement,
the Company is obligated to pay an underwriter $4,115 per month for 24
months which commenced in April 1995 for consulting services related to
investment banking and finance services.
Effective April 1, 1994, the Company entered into a three-year consulting
agreement with a director for financial/management services. Under the
terms of the agreement, the director receives $4,000 per-month.
F-18
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
c. Leases
The Company's minimum annual lease commitments under noncancellable
operating leases for premises at June 30, 1995 are as follows:
Year ending June 30:
1996 $ 435,447
1997 343,642
1998 119,434
1999 51,317
2000 25,658
----------
$ 975,498
==========
Rent expense, including related real estate taxes and other operating
charges, was approximately $429,230, $541,691 and $736,156 for the years
ended June 30, 1995, 1994 and 1993, respectively.
11. MAJOR CUSTOMER AND VENDORS
During fiscal 1995, 1994 and 1993, one customer accounted for 14.7%, 16.3%
and 11.4%, respectively, of the net sales of the Company. During fiscal
1995, one vendor accounted for 15.7% of the Company's product purchases.
During fiscal 1994, two vendors accounted for 10.8% and 12.1% of the
Company's product purchases. During fiscal 1993, two vendors accounted for
15.3% and 10.1% of the Company's product purchases. Although the Company
believes that it may be able to obtain competitive products of comparable
quality from other suppliers, the loss of certain suppliers could have an
adverse impact of operations.
12. UNITED KINGDOM OPERATIONS
The United Kingdom subsidiary was 80% owned by the Company. On January 10,
1995, VTX Electronics Corp. purchased the 20% minority shareholder interest
in Vertex Electronics UK, LTD for approximately $8,400.
13. EMPLOYEE PENSION, BONUS AND STOCK OWNERSHIP PLANS
a. Multi-Employer Pension Plan
The Company participates in a multi-employer, union-sponsored pension plan
covering all union employees pursuant to a negotiated labor contract.
Pension expense for the defined contribution plan for the years ended June
30, 1995, 1994 and 1993 was $61,059, $81,771 and $92,705, respectively. In
the event of the Company's withdrawal from the multi-employer, union
sponsored plan, the Company could be liable for a portion of the plans
underfunding, if any.
F-19
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
b. Bonus Plan
A bonus plan was adopted with respect to fiscal 1993, 1994 and 1995. The
plan provides additional compensation to senior management employees of the
Company based on the achievement of specified amounts of pre-tax profits, as
determined by the Chief Executive Officer with the approval of the Executive
Committee of the Board of Directors. No bonuses were awarded for the fiscal
years ended June 30, 1995, 1994 and 1993.
c. Employee Stock Ownership Plan
In January 1989, the Company began an Employee Stock Ownership Plan (the
"Plan"). In October 1993, such plan was cancelled and the assets were
distributed as stock to the Company. There were no contributions for the
years ended June 30, 1994 and 1993. The Plan covered substantially all
employees not covered by collective bargaining agreements and who met
certain service requirements. The annual contribution to the Plan was
discretionary as determined by the Company's Board of Directors. In April
1995, the underlying stock was sold and distributed to the plan holders.
14. SUBSEQUENT EVENT
On August 24, 1995, the Company signed a letter of intent in principal to
merge with CPI Aerostructures, Inc. ("CPI"), a publicly-traded company in
the commercial/military aircraft business. Under the terms of the letter,
shares of the Company's common stock will be converted into shares of CPI
common stock at a conversion rate of one share of CPI common stock for three
shares of the Company's common stock, as adjusted for a price guarantee.
The agreement may be terminated by the mutual consent of both parties or if
a definitive Merger Agreement has not been executed by October 15, 1995. In
the event either party unilaterally terminates the letter of intent, the
terminating party shall pay to the other party an amount equal to all of the
expenses incurred by the other party in connection with the contemplated
transaction, up to a maximum of $150,000 in the aggregate, plus a break-up
fee of $250,000. The merger plan is subject to the negotiation and
execution of a definitive acquisition agreement, approval of the respective
Board of Directors and stockholder's of the Company and CPI, and consent of
lenders, to the extent required. Subsequent to the signing of the letter of
intent, certain developments have occurred that may preclude completion of
the transaction.
F-20
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance, Charged to Balance,
Beginning Costs and End of
Description of Year Expenses Deductions Year
- ------------------------- --------- ---------- ---------- --------
Year ended June 30, 1995:
Allowance for doubtful $133,000(A)
accounts $394,000 $ - $107,000(D) $154,000
Allowance for slow-moving
and obsolete inventories $903,000 $ 65,000 $433,000(B) $535,000
Year ended June 30, 1994:
Allowance for doubtful
accounts $216,000 $524,000 $346,000(A) $394,000
Allowance for slow-moving $84,000
and obsolete inventories $641,000 $178,000(C) - $903,000
Year ended June 30, 1993:
Allowance for doubtful
accounts $311,000 $255,000 $350,000(A) $216,000
Allowance for slow-moving
and obsolete inventories $822,000 $1,200,000 $1,381,000(B) $641,000
(A) Net write-offs of uncollectible amounts.
(B) Inventory returned to vendor or liquidated.
(C) Inventory written down due to restructuring.
(D) Net recovery of losses on accounts receivable.
F-21
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in Registration Statement No.
33-86264 of VTX Electronics Corp. and Subsidiaries on Form S-8 of our report
dated August 30, 1995, appearing in the Annual Report on Form 10-K of VTX
Electronics Corp. and Subsidiaries for the year ended June 30, 1995.
GRANT THORNTON LLP
Melville, New York
August 30, 1995
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