<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
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 30, 1996 WAS APPROXIMATELY $ 1,897,000.
ON SEPTEMBER 30, 1996, 12,652,000 SHARES OF COMMON STOCK, $.10 PAR VALUE AND
12,375 SHARES OF REDEEMABLE, CUMULATIVE, CONVERTIBLE PREFERRED STOCK, $100
STATED VALUE WERE OUTSTANDING.
This report consists of 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................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.............. 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters......................................................... 12
Item 6. Selected Financial Data.......................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 14
Item 8. Financial Statements and Supplementary Data...................... 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 18
PART III
Item 10. Directors and Executive Officers of the Company.................. 19
Item 11. Executive Compensation........................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management... 23
Item 13. Certain Relationships and Related Transactions................... 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................ 26
<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 include 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) the increasing number of manufacturers of passive and
active components preferring distributors, such as the Company, which 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
Under a Capitalization Agreement (the "Agreement") signed on December 1,
1995, the Company received $2,475,000 from an unaffiliated investor group ("new
investors") in exchange for Secured Subordinated Debentures (the "debentures")
with a principal amount of $1,237,500, 12,375 shares of Senior Redeemable
Cumulative Convertible Preferred Stock ("preferred stock") with a stated value
of $100 per share and warrants to purchase 19,800,000 shares of common stock of
the Company.
-3-
<PAGE>
The debentures are due on June 19, 2001 and accrue interest at an annual
rate of 2% over the published prime rate of interest (10.25% at June 30, 1996),
payable quarterly over the life of the bonds. Such bonds are secured by all of
the assets of the Company, however, subordinate to the secured debt under the
revolving asset-based loan and the first and second mortgage loans as described
in the notes to the consolidated financial statements.
The preferred stock is redeemable on December 1, 2000 for $1,237,500 in
cash or common stock, based upon the lower of 70% of the fair market value of
the underlying common stock on such date or $.25 per common share, at the option
of the Company. The preferred shareholders are entitled to receive dividends
quarterly at an annual fixed rate of 12%, the effect of which is cumulative to
the extent the Company does not make such quarterly payment on the prescribed
basis. On or after June 1, 1996 and through December 1, 2000, each preferred
share may be converted into common stock of the Company at a conversion rate of
$.25 per share (400 common shares for each preferred share converted). Each
share of preferred stock contains 1,500 votes or voting rights on all matters
being voted on by the shareholders of the Company other than the election of
directors. Additionally, the holders of the preferred stock, voting as a class,
shall in each year elect seventy-five percent of the members of the Board of
Directors of the Company. Effective December 1, 1995 and pursuant to the
Agreement, the existing Board of Directors ("former directors") resigned in
favor of a new Board of Directors ("new directors").
The warrants to purchase common stock of the Company issued under the
Agreement to the new investors are currently exercisable at $.125 per common
share and have a term commencing June 1, 1996 and expiring December 1, 2000 for
4,950,000 of the warrants and an additional term commencing April 1, 1999 and
expiring March 31, 2009 for the remaining 14,850,000 warrants. In connection
with these issuances, the Company recorded a discount on the bonds payable of
$185,625 and a discount on preferred stock of $185,625, representing the
estimated relative fair market value of the warrants on the date of such
issuance as determined by the Company, which will be recognized as interest
expense and preferred stock dividends, respectively, on a straight-line basis
over the 60-month term of the Agreement.
Expenses of approximately $104,000 relating to various legal, accounting,
consulting and other fees were incurred in connection with the Agreement,
$52,000 of which has been attributed to the issuance of the debentures, which
has been recorded as a deferred charge and is being amortized over the 60-month
term on a straight-line basis, and $52,000 of which has been attributed to the
issuance of the preferred stock/warrants, which has been recorded as a direct
reduction to the equity received by the Company.
On March 21, 1996 and June 19, 1996, the Company received an additional
$1,237,500 and $1,290,00, respectively, from the new investors and certain
additional individual and institutional investors, in exchange for additional
Secured Subordinated Debentures for a principal amount of $1,237,500 and
$1,290,000 and warrants to purchase 24,750,000 and 25,800,000 shares of common
stock of the Company, respectively.
-4-
<PAGE>
The debentures are substantially identical and pari passu with the
debentures issued on December 1, 1995. Accordingly, such debentures are due on
June 19, 2001 and accrue interest at an annual rate of 2% over the published
prime rate of interest, payable quarterly over the life of the debentures. Such
debentures are secured by all of the assets of the Company, however, subordinate
to the secured debt under the revolving asset-based loan and the first mortgage
loan as described in the notes to the consolidated financial statements.
The warrants to purchase 50,550,000 shares of common stock of the Company
are exercisable at $.125 per common share and have a term commencing April 1,
1999 and expiring on March 31, 2009. In addition, the exercise price for the
19,800,000 warrants issued in connection with the December 1, 1995 agreement was
reduced from $.25 to $.125 per share in connection with the March financing. The
exercise of these warrants is contingent upon the authorization, by the
shareholders, of additional authorized common stock. In connection with this
issuance, the Company recorded a discount on the secured subordinated debentures
of $247,500 and $258,000 in March and June 1996, respectively, which represents
the estimated fair market value of the warrants on the date of such issuance as
determined by the Company, which will be recognized as interest expense on a
straight-line basis over the 60-month term of the agreement.
On September 2, 1996, the Company entered into a agreement to sell its
45,000 square foot corporate headquarters to an unaffiliated third party. Under
the terms of the agreement, the Company will receive cash proceeds of $2,331,621
for the sale of the property, a portion of which will be used to retire the
first and second mortgages described in the notes to the consolidated financial
statements. The transaction has a closing date of November 30, 1996, but, in
any event, no later than December 31, 1996 and is subject to the consent of the
secured lenders of the Company, to the extent required. The Company does not
anticipate that it will recognize a material gain or loss from sale upon closing
the transaction. The Company expects net cash proceeds of approximately
$800,000 from this transaction.
On October 3, 1996, the Company signed a letter of intent to purchase the
net assets of Elcan Technologies, Inc. ("Elcan") through the issuance of a
combination of cumulative, convertible preferred stock, and other debt and
equity securities. Under the terms of the letter of intent, through the receipt
of 12,375 shares of $100 stated value, preferred stock, which may be converted
into 4,950,000 shares of common stock and contain all of the rights as the
existing preferred stock outstanding, and long-term notes and subordinated,
secured debentures with detachable warrants to purchase 70,350,000 shares of
common stock at an exercise price ranging from $.10 - $.125 per share, the
owners of Elcan will possess an equal ownership in the Company on a fully
exercised basis with the new investors and will have equal representation on the
Company's board of directors. In addition, the current principal owner of Elcan
will become the Chief Executive Officer of the Company upon completion of the
transaction. The transaction is subject to the
-5-
<PAGE>
negotiation and execution of a definitive agreement, approval of the Boards of
Directors of the Company and Elcan, and consent of the secured lenders of the
Company, to the extent required.
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
improved 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 of custom-made electronic cable assemblies.
-6-
<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, Lucent Technologies, Siecor, Madison Wire & Cable, CDT, and Mod Tap. For
the fiscal year ended June 30, 1996, there were no vendors that accounted for
more than 10% of the Company's purchases. For the fiscal year ended June 30,
1995, purchases from Lucent Technologies (formerly AT&T) accounted for 15.7%.
Lucent and Madison Wire & Cable accounted for 10.8% and 12.1%, respectively, of
purchases in fiscal 1994.
Through stock rotation rights and price protection arrangements with most
of its major suppliers including AMP and Lucent Technologies, 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 write-offs.
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.
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,
-7-
<PAGE>
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.
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 salesperson to add value by providing alternative
solutions or more complete solutions to customers' requirements, thereby gaining
add-on sales. Where necessary, technical support personnel assist salespeople
in recommending the most appropriate solution. The Company generally does not
participate in the design of computer applications 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 focused 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, 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.
COMPANY LOCATIONS
The Company's locations, of which the Farmingdale location is owned and all
other locations are leased, are as follows:
Elkridge, Maryland
Elmwood Park, New Jersey
Farmingdale, New York
Folcroft, Pennsylvania
Marlboro, Massachusetts
San Jose, California
Torrance, California
Corby, United Kingdom
-8-
<PAGE>
MAJOR CUSTOMER
The Company has one customer that has accounted for 10% or more of its net
sales during the last three fiscal years. Bloomberg L.P. accounted for
approximately 11.4% of net sales in fiscal 1996, approximately 14.7% of net
sales in fiscal 1995 and approximately 16.3% of net sales in fiscal 1994.
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.
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.
-9-
<PAGE>
EMPLOYEES
As of September 1, 1996, the Company had 182 full-time employees. Of
these, 56 are sales and marketing personnel; 3 are design, engineering, and
technical support personnel; 26 are purchasing, warehouse and inventory control
personnel; 71 are cable assembly manufacturing personnel; 10 are quality control
personnel; and 16 are accounting, data processing and other administrative
personnel. 30 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.
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:
Lease
Square Expiration
Location Footage Use Date
-------- -------- --- ----------
Elkridge, Maryland 16,750 Sales Office, Manufacturing January 1997
and Warehouse
Elmwood Park, New Jersey 1,460 Sales Office May 1999
Farmingdale, New York 45,000 Executive Office, Sales Office, *
Manufacturing and Warehouse
Folcroft, Pennsylvania 15,000 Sales Office and Warehouse December 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
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. Based upon the aforementioned signing on an agreement to sell
the property, the Company will be required to relocate into a new facility.
-10-
<PAGE>
ITEM THREE - LEGAL PROCEEDINGS
An action was commenced in the New York State Supreme Court, County of Nassau,
by CPI Aerostructures, Inc. ("CPI"), alleging that VTX Electronics Corp. has
wrongfully failed to consummate a proposed merger transaction. The plaintiff is
seeking "break-up" fee damages in the amount of $400,000. VTX has served an
answer and counterclaim, denying any wrongdoing and alleging that CPI misled VTX
by failing to adequately disclose material losses. The case is in its early
stages; however, management believes VTX has a meritorious defense and will
vigorously defend the action.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-11-
<PAGE>
PART II
ITEM FIVE - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock had been trading on the American Stock Exchange
under the symbol VTX since September 17, 1986, its initial public offering date.
On September 15, 1995, the Company's Common Stock was delisted from the American
Stock Exchange, as it no longer satisfied all the financial requirements, and
has since traded on the Over-The-Counter Electronic Bulletin Board under the
symbol VTXL. 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 ended September 30, 1995 .38 .19
Second Quarter ended December 31, 1995 .28 .06
Third Quarter ended March 31, 1996 .35 .18
Fourth Quarter ended June 30, 1996 .39 .20
FISCAL 1997
First Quarter ended September 30, 1996 .32 .10
As of September 30, 1996, there were approximately 250 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.
-12-
<PAGE>
ITEM SIX - SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
Year Ended June 30,
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
INCOME STATEMENT DATA:
Net sales $29,116 $34,472 $42,864 $49,407 $41,295
Cost of goods sold 23,584 26,231* 32,149* 38,338* 30,972*
------- ------- ------- ------- -------
Gross profit $ 5,532 $ 8,241 $10,715 $11,069 $10,323
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Loss before extra-
ordinary items $(4,972) $(1,316) $(2,934) $(2,030) $(1,963)
Extraordinary items 747 2,492
Net income (loss)
attributable
to common stock (5,058) (1,316) (2,187) 462 (1,963)
PER SHARE DATA: (1)
Loss before extra-
ordinary items (.40) (.11) (.47) (.35) (.46)
Extraordinary items .12 .43
Net income (loss)
attributable to
common stock
per share (.40) (.11) (.35) .08 (.46)
Weighted average
number of shares
outstanding (2) 12,652 12,265 6,239 5,778 4,299
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital $ 5,079 $ 4,476 $ 5,320 $ 6,473 $10,183
Total assets 13,128 13,187 14,431 17,583 19,858
Long-term debt 9,496 5,966 6,338 9,413 13,311
Stockholders' equity
(deficiency) (1,011) 1,999 2,808 1,552 1,054
*Reclassified to conform to the current year presentation
(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.
-13-
<PAGE>
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996 AND 1995
Net sales for the year ended June 30, 1996 were approximately $29,116,000,
as compared to the year ended June 30, 1995 of $34,472,000, a decrease of 15.5%.
Value added distribution sales decreased by approximately $2,952,000 or 13.8%
from $21,401,000 in the prior fiscal year to $18,449,000 in the current fiscal
year. Sales of manufactured cable assemblies decreased by approximately
$2,404,000 or 18.4% from $13,071,000 in the prior fiscal year to $10,667,000 in
the current fiscal year. The decrease was primarily attributable to significant
sales employee turnover that had taken place during the eight months preceding
January 1, 1996 in addition to an overall reduction in salesperson headcount.
Gross profit decreased by $2,709,000 or 32.9% for the year ended June 30,
1996 to $5,532,000 from $8,241,000 as compared to fiscal 1995. Gross profit
percentage for the years ended June 30, 1996 and 1995 were 19.0% and 23.9%,
respectively. The decrease in gross profit was primarily the result of the
aforementioned decrease in net sales coupled with the decrease in gross profit
per sales dollar, which is due primarily to the poor absorption of fixed
overhead costs caused by the significant decrease is sales volume, in addition
to a decrease in unit selling prices. The prior year gross profit amount has
been reclassified to conform to the current year presentation, which is being
reclassified in this financial statement, which excludes the costs of receiving,
warehousing and shipping of distribution items. Such costs are presented as
part of selling, general and administrative expenses discussed below.
Selling, general and administrative expenses increased approximately
$914,000 or 10.6% to $9,566,000 for the year ended June 30, 1996 from $8,652,000
as compared to fiscal 1995. Selling, general and administrative expenses as a
percentage of net sales were 33% in fiscal 1996 as compared to 25% in fiscal
1995. The increase in these expenses was the result of costs associated with
the Company's marketing efforts required to re-establish itself in the
marketplace, recapitalization-related charges pertaining to the settlement of
certain contracts and agreements in connection with the December 1, 1995
transaction, and an increase in executive headcount in the current year.
Interest expense and dividends on preferred stock increased by $193,000 or
23.3% for the year ended June 30, 1996 to $1,020,000 from $827,000. The
increase was due to the requirements of interest and dividends resulting from
the December 1995, March 1996 and June 1996 financings.
-14-
<PAGE>
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%. 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. During the same period, value added
distribution sales of electronic components decreased by approximately
$9,204,000 from $30,605,000 to $21,401,000 (30.1%) 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
1995 resulted in delayed sales of value added distribution, or lost sales.
Gross profit decreased by $2,474,000 or 23.1% for the year ended June 30,
1995 to $8,241,000 from $10,715,000 as compared to fiscal 1994. The decrease
was primarily due to lower sales levels. The gross profit percentages for the
years ended June 30, 1995 and 1994 were 23.9% and 25.0%, respectively.
Selling, general and administrative expenses decreased approximately
$3,168,000 or 26.8% to $8,652,000 for the year ended June 30, 1995 from
$11,820,000 as compared to fiscal 1994. Selling, general and administrative
expenses as a percentage of net sales were 25.1% in fiscal 1995 as compared to
27.6% 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 during fiscal 1995. Decreased sales 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 fiscal 1995 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 nonsales personnel and other selling, general
and administrative expense decreases of approximately $775,000 from improved
financial controls over spending. In addition, included in selling, general and
administrative expenses for fiscal 1994 is approximately $524,000 of bad debt
expense that was not incurred during fiscal 1995 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 in fiscal 1995 associated with such
effort. 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.
-15-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Current assets have increased approximately $25,000 to $9,723,000 at
June 30, 1996 as compared to $9,698,000 at June 30, 1995. This increase
resulted primarily from an increase in accounts receivable of approximately
$871,000, which was offset by a $510,000 decrease in cash and a $492,000
decrease in inventory. As described in the notes to the consolidated
financial statements, in December 1995, March and June, 1996, the Company
received $2,475,000, $1,237,500, and $1,290,000, $1,290,000, respectively, of
cash proceeds from an unaffiliated investor group by issuing a combination of
cumulative convertible preferred stock, subordinated debentures and
detachable warrants. Cash proceeds received from these financings have been
utilized to reduce vendor payments, in addition to satisfying certain other
debts previously outstanding and funding of operating losses. The Company
had net working capital of $5,079,000 at June 30, 1996 as compared to
$4,476,000 at June 30, 1995. The Company anticipates that its cash on hand
coupled with amounts available under its revolving credit facility may not be
sufficient to meet its cash and working capital requirements based upon
expected sales. The Company intends to continue to seek additional debt
and/or equity financing to fund this shortfall. However, there can be no
assurance that the Company will be able to raise such additional financing to
fund such potential shortfall.
Total borrowings outstanding, including subordinated secured debentures, as
of June 30, 1996 were $9,518,000, an increase of $3,393,000 or 55.4% from
$6,125,000 at June 30, 1995. This was due primarily to the issuance of
subordinated debentures aggregating $3,074,000 (net) and a $250,000 second
mortgage on the Company's corporate headquarters which was executed in June
1996.
The Company's continued existence as a going concern is dependent on its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to comply with the terms and covenants of its financing agreements and to
obtain additional financing or refinancing as may be required. However, there
can be no assurance that the Company will be able to raise such additional
financing to fund ongoing operating shortfalls. As described in the notes to
the consolidated financial statements, the Company (i) on September 2, 1996
entered into an agreement to sell its corporate headquarters and (ii) on
October 3, 1996 signed a letter of intent to purchase the net assets of Elcan
Technologies Corp. ("Elcan") through the issuance of a combination of
redeemable, cumulative convertible preferred stock, and other debt and equity
securities. The sale of the corporate headquarters will provide the Company
with net proceeds of approximately $800,000 after satisfying related mortgage
obligations. The acquisition of Elcan would provide the Company with additional
cash availability from its revolving credit facility. Furthermore, the
increased sales volume resulting from the acquisition and the profits derived
through economies of scale are expected to provide the Company with additional
working capital.
The sale of the corporate headquarters has a closing date of November 30,
1996, but, in any event, no later than December 31, 1996 and is subject to the
consent of the secured lenders of the Company, to the extent required. The
-16-
<PAGE>
acquisition of Elcan is subject to the negotiation and execution of a definitive
agreement, approval of the Board of Directors of each company and consent of the
secured lenders of the Company to the extent required. Management expects that
upon completion of the transaction, the increased availability under the
revolving credit facility and the additional sales volume in conjunction with
current levels of working capital ($5,079,469 at June 30, 1996) will be adequate
to fund operations for the next fiscal year.
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, 1996, the Company had approximately $5,431,000 of availability under
the facility, of which $5,098,000 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.
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 on common stock 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,
including subordinated debentures, 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, 1996, the Company has net operating loss carryforwards for tax
purposes of approximately $11,829,000. Such net operating loss carryforwards
expire through fiscal year 2011. 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 Internal Revenue Code Section 382, during the fiscal year
ended June 30, 1994. Based upon the Company's estimate of fair value,
approximately $2,788,000 of the Company's total net operating loss of
$11,829,000 is limited to approximately $715,000 annually during the
carryforward period.
-17-
<PAGE>
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.
-18-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets as of June 30, 1996
and 1995 F-3
Consolidated Statements of Operations for the
years ended June 30, 1996, 1995 and 1994 F-4
Consolidated Statement of Changes in Stockholders'
Equity (Deficiency) for the years ended June 30, 1996,
1995 and 1994 F-5
Consolidated Statements of Cash Flows for the years
ended June 30, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-8 - F-29
Supplemental Schedule
Schedule II - Valuation and Qualifying Accounts F-30
F-1
<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, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for each of the three years in the period ended June 30, 1996. 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, 1996 and 1995 and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended June 30, 1996, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company incurred net losses attributable to common
stock of $5,058,331, $1,316,044 and $2,187,077 during the years ended June 30,
1996, 1995 and 1994, respectively, and has had to rely on cash flow from
financings to sustain operations. These factors, among others, as discussed in
Note A-1 to the consolidated financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note A-1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
In connection with our audits of the consolidated financial statements referred
to above, we have also audited Schedule II - Valuation and Qualifying Accounts
for each of the three years in the period ended June 30, 1996. 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
September 2, 1996 (except for Notes A-1 and P,
as to which the date is October 3, 1996)
F-2
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 73,230 $ 583,388
Accounts receivable, net of allowance for
doubtful accounts of $221,000 and $154,000,
in 1996 and 1995, respectively 5,734,965 4,864,443
Inventories, net 3,293,924 3,786,172
Prepaid expenses and other current assets 620,747 463,518
------------ ------------
TOTAL CURRENT ASSETS 9,722,866 9,697,521
PROPERTY, PLANT AND EQUIPMENT, net 3,006,709 3,264,975
DEFERRED CHARGES AND OTHER ASSETS, net 398,813 224,451
------------ ------------
TOTAL ASSETS $ 13,128,388 $ 13,186,947
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Current portion of long-term debt $ 21,747 $ 158,954
Accounts payable and accrued expenses 4,535,025 5,062,469
Preferred stock dividends payable 86,625 -
------------ ------------
TOTAL CURRENT LIABILITIES 4,643,397 5,221,423
LONG-TERM DEBT 6,388,495 5,966,383
SECURED SUBORDINATED DEBENTURES, net 3,107,908 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
Redeemable, cumulative, convertible, preferred
stock, stated value $100 per share;
authorized, 5,000,000 shares; 12,375 shares
issued and outstanding, net 1,073,530 -
Common stock, par value $.10 per
share; authorized, 40,000,000 shares;
issued and outstanding, 12,652,000 1,265,200 1,265,200
Paid-in capital 9,416,226 8,591,476
Accumulated deficit (12,763,881) (7,705,550)
Notes receivable from officers (50,000)
Deferred compensation (98,433)
Cumulative translation adjustment (2,487) (3,552)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (1,011,412) 1,999,141
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 13,128,388 $ 13,186,947
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $29,116,469 $34,472,386 $42,864,272
Cost of goods sold 23,584,189 26,231,037 32,149,460
----------- ----------- -----------
Gross profit 5,532,280 8,241,349 10,714,812
Selling, general and administrative expenses 9,566,459 8,651,586 11,819,818
Restructuring charges - 91,000 939,000
Interest expense 932,901 827,088 901,314
Other (income) expense 4,626 (12,281) (10,821)
----------- ----------- -----------
Loss before extraordinary item (4,971,706) (1,316,044) (2,934,499)
Extraordinary item
Gain of $780,496 on extinguishment
of debt in 1994, net of related
expenses of $33,074 - - 747,422
----------- ----------- -----------
Net loss (4,971,706) (1,316,044) (2,187,077)
Dividends on preferred stock 86,625 - -
----------- ----------- -----------
Net loss attributable to common stock $(5,058,331) $(1,316,044) $(2,187,077)
----------- ----------- -----------
----------- ----------- -----------
Net loss per share
Loss before extraordinary item $ (.40) $ (.11) $ (.47)
Extraordinary item - - .12
----------- ----------- -----------
Net loss per share $ (.40) $ (.11) $ (.35)
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of shares
outstanding 12,652,000 12,264,985 6,239,417
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
VTX Electronics Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Pre- Preferred Common
ferred stock Common stock Paid-in
shares amount shares amount capital
------ --------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1993 5,287,500 $ 528,750 $5,289,628
Net loss
Issuance of common stock
(net of related costs of
$560,000) 6,550,000 655,000 2,059,954
Note receivable from
officer
Warrants issued to lender 175,781
Warrants issued to officer 56,250
Options granted to officers
and directors 325,000
Warrants and options
granted to consultants 369,063
Foreign translation adjust-
ment
Amortization of deferred
compensation
------ --------- ---------- ---------- ----------
Balance at June 30, 1994 11,837,500 1,183,750 8,275,676
Net loss
Options exercised by
employees 25,000 2,500
Debt conversion to stock 789,500 78,950 315,800
Settlement of officer's note
Foreign translation adjust-
ment
Amortization of deferred
compensation
------ --------- ---------- ---------- ----------
Balance at June 30, 1995 12,652,000 1,265,200 8,591,476
(carried forward)
<CAPTION>
Notes Cumulative Total
receiv- transla- stock-
Accumu- able Deferred tion holders'
lated from compensa- adjust- equity
deficit officers tion ment (deficiency)
------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1993 $ (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) 2,714,954
Note receivable from
officer (50,000) (50,000)
Warrants issued to lender 175,781
Warrants issued to officer 56,250
Options granted to officers
and directors $(168,750) 156,250
Warrants and options
granted to consultants 369,063
Foreign translation adjust-
ment 7,496 7,496
Amortization of deferred
compensation 14,063 14,063
------------- ---------- --------- -------- ------------
Balance at June 30, 1994 (6,389,506) (100,000) (154,687) (6,923) 2,808,310
Net loss (1,316,044) (1,316,044)
Options exercised by
employees 2,500
Debt conversion to stock 394,750
Settlement of officer's note 50,000 50,000
Foreign translation adjust-
ment 3,371 3,371
Amortization of deferred
compensation 56,254 56,254
------------- ---------- --------- -------- ------------
Balance at June 30, 1995 (7,705,550) (50,000) (98,433) (3,552) 1,999,141
(carried forward)
</TABLE>
F-5
<PAGE>
VTX Electronics Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(CONTINUED)
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Pre- Preferred Common
ferred stock Common stock Paid-in
shares amount shares amount capital
------ --------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995
(brought forward) 12,652,000 $1,265,200 $8,591,476
Net loss attributable to
common stock
Issuance of preferred stock 12,375 $1,237,500
Discount on preferred stock (185,625)
Issuance of detachable
warrants net of related
costs of $52,000 824,750
Reclassification of
officer's note
Foreign translation adjust-
ment
Amortization of discount
on preferred stock 21,655
Amortization of deferred
compensation
------ ---------- ---------- ---------- ----------
Balance at June 30, 1996 12,375 $1,073,530 12,652,000 $1,265,200 $9,416,226
------ ---------- ---------- ---------- ----------
------ ---------- ---------- ---------- ----------
<CAPTION>
Notes Cumulative Total
receiv- transla- stock-
Accumu- able Deferred tion holders'
lated from compensa- adjust- equity
deficit officers tion ment (deficiency)
------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995
(brought forward) $ (7,705,550) $(50,000) $(98,433) $ (3,552) $ 1,999,141
Net loss attributable to
common stock (5,058,331) (5,058,331)
Issuance of preferred stock 1,237,500
Discount on preferred stock (185,625)
Issuance of detachable
warrants net of related
costs of $52,000 824,750
Reclassification of
officer's note 50,000 50,000
Foreign translation adjust-
ment 1,065 1,065
Amortization of discount
on preferred stock 21,655
Amortization of deferred
compensation 98,433 98,433
------------ -------- -------- --------- -----------
Balance at June 30, 1996 $(12,763,881) $ - $ - $ (2,487) $(1,011,412)
------------ -------- -------- --------- -----------
------------ -------- -------- --------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
F-6
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,971,706) $(1,316,044) $(2,187,077)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities
Depreciation and amortization 532,677 543,848 668,803
Noncash compensation 98,433 56,254 595,626
Provision for (recovery of) losses on accounts
receivable 67,000 (107,000) 524,000
Provision for slow moving and obsolete inventories 40,000 65,000 83,749
Loss on sale of assets - (3,967) (11,500)
Gain on extinguishment of debt - - (780,496)
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (937,522) 1,304,383 1,597,761
(Increase) decrease in inventories 452,248 (222,223) 753,851
(Increase) decrease in prepaid expenses and
other current assets 92,770 (155,327) 52,463
(Increase) decrease in deferred charges and
other assets (36,998) (69,785) 1,313
Decrease in accounts payable and
accrued expenses (527,444) (109,020) (670,181)
----------- ----------- -----------
Net cash provided by (used in) operating
activities (5,190,542) (13,881) 628,312
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (114,085) (126,957) (31,552)
Proceeds from sale of property, plant and
equipment - 6,500 -
----------- ----------- -----------
Net cash used in investing activities (114,085) (120,457) (31,552)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under debt and loan agreements 32,362,919 38,847,289 69,046,381
Debt repayments (32,302,648) (38,700,978) (71,742,018)
Principal payments under capital leases (25,367) (40,394) (110,260)
Proceeds from officer note - 12,500
Proceeds from issuance of debentures, net 3,073,875 - -
Proceeds from issuance of preferred stock, net 1,051,875 - -
Proceeds from issuance of warrants 824,750 - -
Issuance of common stock and exercise of
options/warrants, net - 2,500 2,714,954
Debt issue costs (192,000) - -
----------- ----------- -----------
Net cash provided by (used in) financing
activities 4,793,404 120,917 (90,943)
----------- ----------- -----------
Effect of exchange rate changes on cash 1,065 3,371 7,496
----------- ----------- -----------
INCREASE (DECREASE) IN CASH (510,158) (10,050) 513,313
Cash at beginning of year 583,388 593,438 80,125
----------- ----------- -----------
Cash at end of year $ 73,230 $ 583,388 $ 593,438
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 886,380 $ 817,237 $ 922,035
----------- ----------- -----------
----------- ----------- -----------
Income taxes $ - $ - $ 11,123
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-7
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. GENERAL AND REALIZATION OF ASSETS
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 principal market for the Company's product is in
the United States. The consolidated financial statements include the
accounts of VTX Electronics Corp., its wholly-owned subsidiaries,
Vertex Technologies, Inc. and 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's consolidated financial statements have been presented on
the basis that it is a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business. The Company had net losses attributable to common
stock of $5,058,331, $1,316,044 and $2,187,077 for the years ended
June 30, 1996, 1995 and 1994, respectively. These losses resulted
primarily from a decrease in sales. The Company has been able to
obtain adequate funding to support ongoing operations through external
sources. As described in Note F-1, the availability of additional
financing as of June 30, 1996 under the Company's secured revolving
credit agreement is limited to $333,000, which may not be adequate to
finance the Company's ongoing operations.
The Company's continued existence as a going concern is dependent on
its ability to generate sufficient cash flow to meet its obligations
on a timely basis, to comply with the terms and covenants of its
financing agreements and to obtain additional financing or refinancing
as may be required. However, there can be no assurance that the
Company will be able to raise such additional financing to fund
ongoing operating shortfalls. As described in Note P, the Company (i)
on September 2, 1996 entered into an agreement to sell its corporate
headquarters and (ii) on October 3, 1996 signed a letter of intent to
purchase the net assets of Elcan Technologies Corp. ("Elcan") through
the issuance of a combination of redeemable, cumulative convertible
preferred stock, and other debt and equity securities. The sale of
the corporate headquarters will provide the Company with net proceeds
of approximately $800,000 after satisfying related mortgage
obligations. The acquisition of Elcan would provide the Company with
additional cash availability from its revolving credit facility.
Furthermore, the increased sales volume resulting from the acquisition
and the profits derived through economies of scale are expected to
provide the Company with additional working capital.
F-8
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A (CONTINUED)
The sale of the corporate headquarters has a closing date of
November 30, 1996, but, in any event, no later than December 31, 1996
and is subject to the consent of the secured lenders of the Company,
to the extent required. The acquisition of Elcan is subject to the
negotiation and execution of a definitive agreement, approval of the
Board of Directors of each company and consent of the secured lenders
of the Company to the extent required. Management expects that upon
completion of the transaction, the increased availability under the
revolving credit facility and the additional sales volume in
conjunction with current levels of working capital ($5,079,469 at June
30, 1996) will be adequate to fund operations for the next fiscal
year.
2. INVENTORIES
Inventories, consisting principally of products held for sale, are
stated at the lower of cost (first-in, first-out method) or market.
3. 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.
4. REVENUE RECOGNITION
The Company recognizes revenue on the date the product is shipped to
the customer.
5. 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
unamortized refinancing costs deferred at June 30, 1996 and 1995 were
$334,000 and $171,400, respectively.
F-9
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A (CONTINUED)
6. INCOME TAXES
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and
loss carryforwards for which income tax benefits are expected to be
realized in future years. A valuation allowance has been established
to reduce the deferred tax assets as it is more likely than not that
all, or some portion, of such deferred tax assets will not be
realized.
7. NET LOSS PER SHARE
Net loss per share is based upon the weighted average number of common
shares outstanding during the year. The fiscal 1996 net loss per
share computation includes an adjustment for the preferred stock
dividend in deriving the net loss per share before and after
extraordinary item. The effect of stock options on the calculation of
net loss per common share was antidilutive in each of the years ended
June 30, 1996, 1995 and 1994.
8. 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
loss for the years ended June 30, 1996, 1995 and 1994, respectively.
9. USE OF ESTIMATES
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
10. FINANCIAL INSTRUMENTS
The Company's principal financial instruments consist of accounts
receivable, accounts payable, long-term debt and subordinated
debentures. The Company believes that the carrying amount of such
instruments approximates fair value.
F-10
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A (CONTINUED)
11. RECLASSIFICATION
Certain amounts in the prior years' consolidated financial statements
have been reclassified to conform to the current year presentation.
NOTE B - 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 remained as
payable in accordance with the terms of such settlements, all of which were
paid during fiscal 1996.
NOTE C - INVENTORIES
Inventory consists principally of products held for sale. The Company
regularly reviews its inventory for obsolete and slow-moving items, which
includes reviews of inventory levels of certain product lines and an
evaluation of the inventory based on changes in technology and markets. As
of June 30, 1996 and 1995, the reserve was approximately $575,000 and
$535,000, respectively.
June 30,
-------------------------
1996 1995
---------- ----------
Raw materials $ 77,011 $ 67,267
Work in process 33,555 31,934
Finished goods 3,183,358 3,686,971
---------- ----------
Inventories, net $3,293,924 $3,786,172
---------- ----------
---------- ----------
F-11
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE D - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consist of the following:
Asset lives
(years) June 30,
------- ------------------------
1996 1995
---------- ----------
Land -- $ 545,776 $ 545,776
Building and building improvements 30 2,574,116 2,569,947
Machinery and equipment 10 1,680,922 1,637,227
Furniture and fixtures 5-10 2,144,125 2,077,904
Vehicles 4 26,798 26,798
---------- ----------
6,971,737 6,857,652
Less accumulated depreciation
and amortization 3,965,028 3,592,677
---------- ----------
$3,006,709 $3,264,975
---------- ----------
---------- ----------
Depreciation and amortization of property, plant and equipment was
$372,351, $418,464, and $490,362 for the years ended June 30, 1996, 1995
and 1994, respectively.
NOTE E - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30,
------------------------
1996 1995
---------- ----------
Accounts payable $3,806,840 $4,463,076
Accrued payroll and commissions 263,400 248,796
Other accrued expenses 464,785 350,597
---------- ----------
$4,535,025 $5,062,469
---------- ----------
---------- ----------
F-12
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
------------------------
1996 1995
---------- ----------
Revolving asset-based loan (1) $5,097,664 $4,903,805
First mortgage loan, net of imputed
interest (2) 1,029,053 1,025,741
Second mortgage loan (2) 250,000
Subordinated mortgage loan, net of
imputed interest 31,649
Machinery and equipment loan (3) 105,250
Capitalized lease obligations (4) 33,525 58,892
---------- ----------
6,410,242 6,125,337
Less current portion of long-term debt 21,747 158,954
---------- ----------
$6,388,495 $5,966,383
---------- ----------
---------- ----------
1. On February 10, 1995, the Company entered into an amended and restated
revolving credit agreement with a lending institution. Such agreement
provided for a revolving credit facility with maximum available of
$10,000,000 and expires on December 31, 1997. Under the terms of the
credit facility, the Company is required to pay interest at prime plus
2-3/4% (11.0% at June 30, 1996) and a commitment fee of 1/2% per annum
on the daily unused portion of the credit. The agreement also
provides for termination fees as a result of default or early
termination of 1% and .5% of the maximum credit if such termination
occurs before December 31, 1996 and 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 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, 1996 and 1995, the Company had $5,431,000
and $5,406,000 available under the eligibility terms of the facility,
$5,098,000 and $4,904,000 of which 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-13
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE F (CONTINUED)
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 on common stock 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, amended on March 15, 1996, to include subordinated debentures,
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.
2. 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 of $.50 per share, which
was subsequently reduced to $.125 per share. A portion of the
proceeds of the loan has been allocated to the warrants based on the
Company's Board of Directors' assessment of their fair value at the
time of issuance ($.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 loan has
prepayment penalties which are calculated as a percentage of the
prepayment amount. The percentage is determined based upon the date
of payment as follows:
Period when prepaid Percentage
------------------- ----------
Between one and two years 3%
Between two and three years 1%
Thereafter 0%
F-14
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE F (CONTINUED)
The second mortgage loan is with substantially the same group of
lenders, and is payable over five years in monthly installments of
$3,630, inclusive of principal and interest at 14.875%, commencing
August 1, 1996, with a final installment of principal of $204,206
payable on July 1, 2001 and collateralized by a second mortgage lien
on the Company's corporate headquarters. In connection with such
loan, the Company issued 1,250,000 common stock purchase warrants,
which are exercisable beginning April 1, 1999 through March 31, 2009
at an exercise price of $.125 per share. The loan has prepayment
penalties which are calculated as a percentage of the prepayment
amount. The percentage is determined based upon the date of payment
as follows:
Period when prepaid Percentage
------------------- ----------
Year 1 5%
Year 2 4%
Year 3 3%
Year 4 2%
Year 5 1%
The loans contain covenants prohibiting certain types of transactions
and limiting capital expenditures to $250,000 per annum without the
prior consent of the lenders. The loans will be prepaid upon the
closing of the sale of the corporate headquarters as discussed in
Note P.
3. 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. 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, 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 was fully satisfied
on December 1, 1995.
F-15
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE F (CONTINUED)
4. The Company leases its telephone system under an agreement accounted
for as a capital lease. 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 (excluding the secured subordinated debentures, as described
in Note G):
June 30, Total
-------- ----------
1997 $ 21,747
1998 5,119,349
1999 1,042,248
2000 10,508
2001 12,184
Thereafter 204,206
----------
Total $6,410,242
----------
----------
NOTE G - SECURED SUBORDINATED DEBENTURES, PREFERRED STOCK AND WARRANTS ISSUED
Under a Capitalization Agreement (the "Agreement") signed on December 1,
1995, the Company received $2,475,000 from an unaffiliated investor group
("new investors") in exchange for Secured Subordinated Debentures (the
"debentures") with a principal amount of $1,237,500, 12,375 shares of
Senior Redeemable Cumulative Convertible Preferred Stock ("preferred
stock") with a stated value of $100 per share and warrants to purchase
19,800,000 shares of common stock of the Company.
The debentures are due on June 19, 2001 and accrue interest at an annual
rate of 2% over the published prime rate of interest (10.25% at June 30,
1996), payable quarterly over the life of the bonds. Such bonds are
secured by all of the assets of the Company, however, subordinate to the
secured debt under the revolving asset-based loan and the first and second
mortgage loans described in Note F.
The preferred stock is redeemable on December 1, 2000 for $1,237,500 in
cash or common stock, based upon the lower of 70% of the fair market value
of the underlying common stock on such date or $.25 per common share, at
the option of the Company. The preferred stockholders are entitled to
receive dividends quarterly at an annual fixed rate of 12%, the effect of
which is cumulative to the extent the Company does not make such quarterly
payment on the prescribed basis. On or after June 1, 1996 and through
December 1, 2000, each preferred share may be converted into common stock
of the Company at a conversion rate of $.25 per share (400 common shares
for each preferred share converted). Each share of preferred
F-16
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE G (CONTINUED)
stock contains 1,500 votes or voting rights on all matters being voted on
by the shareholders of the Company other than the election of directors.
Additionally, the holders of the preferred stock, voting as a class, shall
in each year elect seventy-five percent of the members of the Board of
Directors of the Company. Effective December 1, 1995 and pursuant to the
Agreement, the existing Board of Directors ("former directors") resigned in
favor of a new Board of Directors ("new directors").
The warrants to purchase common stock of the Company issued under the
Agreement to the new investors are currently exercisable at $.125 per
common share and have a term commencing June 1, 1996 and expiring
December 1, 2000 for 4,950,000 of the warrants and an additional term
commencing April 1, 1999 and expiring March 31, 2009 for the remaining
14,850,000 warrants. In connection with these issuances, the Company
recorded a discount on the bonds payable of $185,625 and a discount on
preferred stock of $185,625, representing the estimated relative fair
market value of the warrants on the date of such issuance as determined by
the Company, which will be recognized as interest expense and preferred
stock dividends, respectively, on a straight-line basis over the 60-month
term of the Agreement.
Expenses of approximately $104,000 relating to various legal, accounting,
consulting and other fees were incurred in connection with the Agreement,
$52,000 of which has been attributed to the issuance of the debentures,
which has been recorded as a deferred charge and is being amortized over
the 60-month term on a straight-line basis, and $52,000 of which has been
attributed to the issuance of the preferred stock/warrants, which has been
recorded as a direct reduction to the equity received by the Company.
On March 21, 1996 and June 19, 1996, the Company received an additional
$1,237,500 and $1,290,000, respectively, from the new investors and certain
additional individual and institutional investors, in exchange for
additional Secured Subordinated Debentures for a principal amount of
$1,237,500 and $1,290,000 and warrants to purchase 24,750,000 and
25,800,000 shares of common stock of the Company, respectively.
The debentures are substantially identical and pari passu with the
debentures issued on December 1, 1995. Accordingly, such debentures are
due on June 19, 2001 and accrue interest at an annual rate of 2% over the
published prime rate of interest, payable quarterly over the life of the
debentures. Such debentures are secured by all of the assets of the
Company, however, subordinate to the secured debt under the revolving
asset-based loan and the first mortgage loan as described in Note F.
F-17
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE G (CONTINUED)
The warrants to purchase 50,550,000 shares of common stock of the Company
are exercisable at $.125 per common share and have a term commencing
April 1, 1999 and expiring on March 31, 2009. In addition, the exercise
price for the 19,800,000 warrants issued in connection with the December 1,
1995 agreement was reduced from $.25 to $.125 per share in connection with
the March financing. The exercise of these warrants is contingent upon the
authorization, by the shareholders, of additional authorized common stock.
In connection with this issuance, the Company recorded a discount on the
secured subordinated debentures of $247,500 and $258,000 in March and June
1996, respectively, which represents the estimated fair market value of the
warrants on the date of such issuance as determined by the Company, which
will be recognized as interest expense on a straight-line basis over the
60-month term of the agreement.
Expenses of approximately $25,000 and $115,000 in March and June 1996,
respectively, relating to various legal, accounting and other fees incurred
in connection with the financings have been recorded as deferred charges
and are being amortized over the 60-month term on a straight-line basis.
NOTE H - OTHER EQUITY TRANSACTIONS
1. In 1989, the Company's former Board of Directors approved a
nonqualified 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. In April 1994, the plan expired. During fiscal 1995,
25,000 options were exercised and 10,000 options were cancelled. As
of June 30, 1996, 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 cannot presently
determine whether or not the shares underlying such options will be
issued to such ex-employees.
2. In January 1992, the Company's former 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
F-18
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE H (CONTINUED)
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 of the Plan, options that are cancelled may be reissued. Such
options expire ten years after the date of grant. At June 30, 1996,
an aggregate of 42,500 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, 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
Granted 430,000 .35
---------
Balance at June 30, 1996 $ 457,500 $.35 -$1.13
--------- -----------
--------- -----------
3. In April 1992, the Company's former 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, 1996, options to purchase 130,000 shares of
the Company's common stock remain outstanding.
4. In January 1993, the Company's former 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, 1996, options to purchase
130,000 shares of common stock are currently outstanding.
F-19
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE H (CONTINUED)
5. On February 25, 1993, an ex-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.
6. 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 H-14
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.
7. On March 28, 1994, pursuant to a consulting/investment banking
agreement with an underwriter (Note J-3), 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.
8. On March 31, 1994, pursuant to an employment agreement (Note J-1), the
Company's then 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, noninterest-bearing, nonrecourse note
collateralized by the shares issued. Since the resignation of this ex-
president on December 1, 1995, the note has been reclassified to other
long-term assets.
F-20
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE H (CONTINUED)
9. In March 1994, pursuant to an employment agreement, the Company's then
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 was recognized as compensation expense over the
employment period: $98,433, $56,254 and $14,063 were amortized as
compensation expense during fiscal 1996, 1995 and 1994, respectively.
The option expires five years after the date on which the options
become exercisable.
10. In connection with mortgage refinancings (Note F-2), the Company
issued (i) on March 31, 1994, 250,000 common stock purchase warrants
exercisable on or before March 31, 2001 at an exercise price of $.125
per share and (ii) on June 19, 1996, 1,250,000 common stock purchase
warrants which are exercisable beginning April 1, 1999 through
March 31, 2009 at an exercise price of $.125 per share.
11. 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 H-14 below, such warrants were fully
exercised in June 1994.
12. On April 18, 1994, the Company 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-21
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE H (CONTINUED)
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.
13. 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
H-14 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, 1996,
such options are fully exercisable.
14. 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).
15. On December 19, 1994, the Company issued 789,500 shares of its common
stock to extinguish $394,750 of debt (Note F-3).
16. On March 31, 1995, the Company issued stock options to the Company's
then 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 J-1
below, such options were granted in conjunction with the president's
employment contract.
F-22
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE H (CONTINUED)
17. Under the Company's Directors' plans, on December 4, 1995, the Company
issued options to the new Board of Directors to purchase 475,000
shares of common stock of the Company at an exercise price of $.25 per
share (which amount was not less than the fair market value at the
date of grant). As of June 30, 1996, 75,000 of such options were
cancelled due to a director's resignation. Such options become
exercisable in one-third increments on the grant anniversary date over
the first three years and have a December 4, 2005 expiration date.
18. On January 9, 1996, the Company issued options to its executive
officers to purchase 700,000 shares of common stock of the Company at
an exercise price of $.25 per share (which amount was not less than
the fair market value at the date of grant). Such options become
exercisable in one-third increments on the grant anniversary date over
the first three years and have a January 8, 2001 expiration date.
19. As described in Note G, during fiscal 1996, the Company issued
70,350,000 common stock purchase warrants in connection with
capitalization and debentures agreements.
20. The following information summarizes options and warrants at June 30,
1996:
<TABLE>
<CAPTION>
Reserved Range of
for exercise
Description issuance Issued Exercisable price
----------- -------- ------ ----------- --------
<S> <C> <C> <C> <C>
Options - 1989 Employees 12,500 12,500 $.10
Options - 1991 Employees 500,000 457,500 27,500 .35 - 1.13
Options - 1992 Directors 150,000 150,000 130,000 .25 - 1.25
Options - 1993 Directors 150,000 150,000 130,000 .25 - 1.13
Options - 1994 President's
Issuance 300,000 300,000 300,000 .50
Options - 1994 Directors 600,000 600,000 250,000 .25 - .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 .125
Options - 1995 President's
Issuance 100,000 100,000 100,000 .50
Options - 1996 Executive
Issuance 700,000 700,000 .25
Warrants - 1996 Debt Agreement 1,250,000 1,250,000 .125
Warrants - 1996 Capitalization
Agreement 19,800,000 19,800,000 4,950,000 .125
Warrants - 1996 Additional
Debentures 50,550,000 50,550,000 .125
---------- ---------- ---------
74,962,500 74,920,000 6,737,500 $.10 - $1.25
---------- ---------- --------- ------------
---------- ---------- --------- ------------
</TABLE>
F-23
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE I - INCOME TAXES
As a result of the Company's fiscal 1996, 1995 and 1994 losses and
inability to realize tax benefits, the Company recorded no tax benefit for
the years ended June 30, 1996, 1995 and 1994.
Deferred taxes recorded in prior years have either reversed or have been
eliminated by the recognition of net operating losses.
Reconciliation between actual income tax benefit and the amount computed by
applying the statutory Federal income tax rate to the pre-tax loss is as
follows:
1996 1995 1994
------ ------ ------
Tax benefit at statutory federal
income tax rates $(1,690,000) $(447,455) $(743,580)
Respective years' net operating
loss not currently utilizable 1,690,000 447,455 743,580
----------- --------- ---------
$ - $ - $ -
----------- --------- ---------
----------- --------- ---------
The tax effects of temporary differences and loss carryforwards giving rise
to deferred tax (assets) and liabilities are as follows:
June 30,
--------------------------
1996 1995
----------- -----------
Net operating loss carryforwards $(4,495,000) $(2,562,000)
Other deferred assets
Allowance for bad debts (115,000) (87,000)
Inventory reserves (219,000) (203,000)
Inventory capitalization (17,000) (70,000)
Other deferred assets (292,000) (300,000)
----------- -----------
Gross deferred tax (asset) (5,138,000) (3,222,000)
Depreciation (deferred liability) 58,000 271,000
----------- -----------
Net deferred tax (asset) (5,080,000) (2,951,000)
Deferred tax asset valuation allowance 5,080,000 2,951,000
----------- -----------
Net deferred tax asset $ - $ -
----------- -----------
----------- -----------
F-24
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE I (CONTINUED)
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, 1996, the Company has net operating losses available to
carryforward of approximately $11,829,000 for tax purposes. Such net
operating loss carryforwards expire through fiscal year 2011. No benefit
has been recorded for such loss carryforwards since realization cannot be
assured.
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
Internal Revenue Code Sec. 382, during the fiscal years ended June 30, 1992
and June 30, 1994. Based upon the Company's estimates of fair value,
approximately $2,788,000 of the Company's total net operating loss of
$11,829,000 is limited, pursuant to Internal Revenue Sec. 382, to
approximately $715,000 annually during the carryforward period.
NOTE J - COMMITMENTS AND CONTINGENCIES
1. EMPLOYMENT AGREEMENTS
On March 31, 1994, the Company entered into an employment agreement
with its then president which required 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. Effective
December 1, 1995, this agreement was terminated in connection with his
resignation and the obligation was settled for $134,000, charged to
fiscal 1996 operations and is payable monthly through March 1997.
On January 1, 1996, the Company entered into employment agreements
with two of its newly appointed executive officers. The terms of
these agreements extend through December 31, 1997 and provide for
monthly compensation payments of $11,250 each.
On May 1, 1996, the Company entered into an agreement with another
executive officer which provides for compensation of up to a maximum
of eight months of the executive's current base salary, approximating
$67,500, upon termination of employment for any reason other than for
certain circumstances, as defined in the agreement. The term of the
agreement extends through May 1, 1999.
F-25
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE J (CONTINUED)
2. MANAGEMENT AGREEMENT
On January 1, 1996, the Company entered into a management agreement
with a consulting firm, whereby the Company has retained one of the
consulting firm's principals to function as its Chairman of the Board
and Chief Executive Officer. The term of this agreement extends
through December 31, 2000 and provides for monthly management fees of
$12,000, provided, however, that the Company does not hire a president
or chief operating officer during that period of time. To the extent
that a president or chief operating officer is hired by the Company,
the management fee will be reduced to $5,000 per month for any
remaining term of the agreement.
3. 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. This
agreement was fully satisfied for approximately $25,000, an amount
less than its full agreement terms on December 1, 1995, and charged to
fiscal 1996 operations, as such services were no longer required.
Effective April 1, 1994, the Company entered into a three-year
consulting agreement with a director (currently a former director) for
financial/management services. Under the terms of the agreement, the
former director receives $4,000 per month. On December 1, 1995, the
remaining unpaid amount under such agreement of $64,000 was charged to
fiscal 1996 operations, as such services were no longer required.
4. LEASES
The Company's minimum annual lease commitments under noncancellable
operating leases for premises at June 30, 1996 are as follows:
Year ending June 30:
1997 $386,000
1998 143,000
1999 73,000
2000 26,000
--------
$628,000
--------
--------
F-26
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE J (CONTINUED)
Rent expense, including related real estate taxes and other operating
charges, was approximately $620,000, $429,000 and $542,000 for the
years ended June 30, 1996, 1995 and 1994, respectively.
NOTE K - MAJOR CUSTOMER AND VENDORS
During fiscal 1996, 1995 and 1994, one customer accounted for 11.4%, 14.7%,
and 16.3%, respectively, of the net sales of the Company. For the fiscal
year ended June 30, 1996, there were no vendors that accounted for more
than 10% of the Company's purchases. For the year ended June 30, 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. 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 on operations.
NOTE L - 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.
NOTE M - EMPLOYEE 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, 1996, 1995 and 1994 was $48,000, $61,000 and $82,000,
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 plan's underfunding, if any.
NOTE N - LITIGATION
An action was commenced in the New York State Supreme Court, County of
Nassau, by CPI Aerostructures, Inc.("CPI"), alleging that the Company had
wrongfully failed to consummate a proposed merger transaction. The
plaintiff is seeking "break-up" fee damages in the amount of $400,000. The
Company has served an answer and counterclaim, denying any wrongdoing and
alleging that CPI misled the Company by
F-27
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE N (CONTINUED)
failing to adequately disclose material losses. The case is in its early
stages; however, management believes the Company has a meritorious defense
and will vigorously defend the action.
NOTE O - NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which provides guidance on when to assess and how to measure
impairment of long-lived assets, certain intangibles and goodwill related
to those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. The Financial Accounting
Standards Board also issued Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", which give
companies a choice of the method of accounting used to determine stock-
based compensation. Companies may account for such compensation by either
using the intrinsic value-based method provided by APB Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employers" or the fair market
value-based method provided in SFAS No. 123. These statements are
effective for financial statements for fiscal years beginning after
December 15, 1995. The Company believes that the impact of adopting SFAS
No. 121 will not have a material effect on the Company. The Company
intends to use the intrinsic value-based method provided in APB No. 25 to
determine stock-based compensation. The sole effect of the adoption of
SFAS No. 123 is the obligation imposed on the Company to comply with the
new disclosure requirements provided thereunder.
NOTE P - SUBSEQUENT EVENTS
On September 2, 1996, the Company entered into a agreement to sell its
45,000 square foot corporate headquarters to an unaffiliated third party.
Under the terms of the agreement, the Company will receive cash proceeds of
$2,331,621 for the sale of the property, a portion of which will be used to
retire the first and second mortgages described in Note F-2. The
transaction has a closing date of November 30, 1996, but, in any event, no
later than December 31, 1996 and is subject to the consent of the secured
lenders of the Company, to the extent required. The Company does not
anticipate that it will recognize a material gain or loss from sale upon
closing the transaction. The Company expects net cash proceeds of
approximately $800,000 from this transaction.
F-28
<PAGE>
VTX Electronics Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE P(CONTINUED)
On October 3, 1996, the Company signed a letter of intent to purchase the
net assets of Elcan Technologies, Inc. ("Elcan") through the issuance of a
combination of cumulative convertible preferred stock, and other debt and
equity securities. Under the terms of the letter of intent, through the
receipt of 12,375 shares of $100 stated value, preferred stock, which may
be converted into 4,950,000 shares of common stock and contain all of the
rights as the existing preferred stock outstanding, and long-term notes and
subordinated, secured debentures with detachable warrants to purchase
70,350,000 shares of common stock at an exercise price ranging from $.10 -
$.12 per share, the owners of Elcan will possess an equal ownership in the
Company on a fully exercised basis with the new investors and will have
equal representation on the Company's board of directors. In addition, the
current principal owner of Elcan will become the Chief Executive Officer of
the Company upon completion of the transaction. The transaction is subject
to the negotiation and execution of a definitive agreement, approval of the
Boards of Directors of the Company and Elcan, and consent of the secured
lenders of the Company, to the extent required.
F-29
<PAGE>
VTX Electronics Corp. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance, charged to Balance,
beginning costs and end of
Description of year expenses Deductions year
----------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Year ended June 30, 1996:
Allowance for doubtful accounts $154,000 $ 67,000 $221,000
Allowance for slow-moving
and obsolete inventories $535,000 $ 40,000 $575,000
Year ended June 30, 1995:
Allowance for doubtful accounts $394,000 $133,000 (A) $154,000
$107,000 (D)
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
</TABLE>
(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-30
<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, 1996 are set forth below:
First Year
Became
Name Position With The Company Age Director
---- ------------------------- --- ----------
Albert Roth Chairman of the Board and 61 1995
Chief Executive Officer
Marshall D. Butler Director 69 1995
Hiro Hiranandani Director 58 1995
Ivor J. Jacobson Director 56 1996
Paul Lowell Director 44 1995
Dr. Kenneth Rind Director 61 1995
Executive Officers of the Company who are not Directors are set forth below:
Name Position With The Company Age
---- ------------------------- ---
Paul Snead Chief Financial Officer, 31
Vice President and
Secretary
Jeffrey S. Siansky Executive Vice President, 34
Marketing
Stephen J. Stahl Executive Vice President, 38
Sales and Operations
Albert Roth has been Chairman and Chief Executive Officer of the Company
since December 1995. For the five years prior thereto, Mr. Roth was
independently employed as a business consultant as a principal of GPR Eastwood
Inc. Mr. Roth has held several senior management and executive positions at
various electronic distribution companies during the thirty years prior to
becoming self-employed.
Marshall D. Butler has been a Director of the Company since December 1995.
Mr. Butler has been the Chairman of the Board of Alpha Technologies since April
1993, and served as its Chief Executive Officer from September 1994 through
April 1995. Prior thereto, Mr. Butler served as a director of AVX Corporation,
a manufacturer of ceramic capacitors and a subsidiary of Kyocera
- 19 -
<PAGE>
Corporation, since December 1973. Mr. Butler served as Chairman and Chief
Executive Officer of AVX Corporation from 1973 until his resignation in April
1993. Mr. Butler was a director of Kyocera Corporation from January 1990
through June 1995. Mr. Butler has been a director of Mass Mutual Corporate
Investors and Mass Mutual Participation Investors since 1989.
Hiro Hiranandani has been a Director of the Company since December 1995.
Mr. Hiranandani has been the Chief Executive Officer of Computer Power Inc. and
a member of its Board of Directors since June 1996. Prior thereto, Mr.
Hiranandani was an independent business consultant to various businesses. From
1990 to 1995, Mr. Hiranandani was the President of Pitney Bowes Worldwide
Mailing Systems, where he had held various other positions since 1977. Mr.
Hiranandani received a B.S. in electrical engineering from the University of
Missouri, an M.S. in electrical engineering from Purdue University, and an
M.B.A. from the University of Bridgeport.
Ivor J. Jacobson has been a Director of the Company since June 1996. Since
1994, Mr. Jacobson has been the Chief Executive Officer of Liberty Finance
Corporation, Fundex Capital Corporation, a federally licensed US Small Business
Investment Corporation and Anglo African Shipping Co. of New York Inc. For the
twenty-six years prior thereto, Mr. Jacobson was associated with Trade &
Industry Group ("T&I"), a financial services and investment and merchant banking
group, and was its Chairman and Chief Executive Officer from 1968 to 1987. Mr.
Jacobson received a Bachelor of Commerce degree from the University of the
Witwatersrand, South Africa in 1963 and qualified as a Chartered Accountant in
1965.
Paul Lowell has been a Director of the Company since December 1995. Since
1993, Mr. Lowell has been the General Partner of the Long Island Venture Fund,
L.P. and President of Amplicon Corp. since 1994. For the two years prior
thereto, Mr. Lowell was the President of Genetic MediSyn Corp.
Dr. Kenneth Rind has been a Director of the Company since December
1995. Dr. Rind is Chairman of Oxford Venture Corporation, an independent
venture capital management company which he co-founded in 1981. From 1976 to
1981, Dr. Rind was a principal at Xerox Development Corporation responsible for
acquisitions and venture capital investments. From 1970 to 1976, he was Vice
President of Corporate Finance at Oppenheimer & Co., Inc. and managed its
venture capital and high technology corporate finance activities. He is a
Director of Medical Sterilization, Inc., Alpha Technologies Group, Inc.,
Vasomedical, Inc., Computer Power Inc. and ESC Medical Systems, Ltd., in
addition to several private companies. Dr. Rind received a B.A. in chemistry
from Cornell University and a doctorate in nuclear chemistry from Columbia
University.
The following Executive Officers of the Company are not Directors:
Paul Snead has been Chief Financial Officer and Vice President of the
Company since January 1996. Mr. Snead has also been Corporate Secretary since
August 1996. From May 1995 through December 1995, Mr. Snead was employed as a
Manager at Grant Thornton LLP. From February 1993 through April 1995, Mr. Snead
was Executive Officer, serving as Treasurer and Principal Accounting Officer,
for Medical Action Industries Inc. For the six years prior thereto,
- 20 -
<PAGE>
Mr. Snead was employed by Ernst & Young, LLP. Mr. Snead is a Certified Public
Accountant and received a Bachelor of Business Administration degree in public
accounting from Hofstra University.
Jeffrey S. Siansky has been Executive Vice President, Marketing since
January 1996. From February 1995 through December 1995, Mr. Siansky was
employed as a Regional Sales Manager of VTEL Corporation, a manufacturer of
video conferencing equipment. For the twelve years prior thereto, Mr. Siansky
held various sales positions with Sprint Inc.
Stephen J. Stahl has been Executive Vice President, Sales and Operations of
the Company since his return to the Company in October 1995. From May 1995
through September 1995, Mr. Stahl was Vice President and General Manager of Fox
Computer Services. For the six years prior thereto, Mr. Stahl held various
sales positions with the Company.
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 $100,000 with respect to the fiscal year indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
Other ----------------------
Annual All Other
Compen- Number Compen-
Name and Salary Bonus sation of sation
Principal Position Year ($) ($) ($)(1) Options ($)
------------------ ---- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Albert Roth 1996 $ 85,470 $ - $ - 250,000 $ -
Chief Executive
Officer
Donald W. Rowley 1996 182,517 - - - -
President 1995 200,000 - - 100,000 3,580 (3)
1994 62,692 - - 300,000 3,580 (3)
Charles J. McMullin 1994 48,654 - - - -
Chief Executive 1993 146,579 - - 60,000 -
Officer (2)
</TABLE>
(1) Perquisites and other personal benefits, securities or property to
each executive officer did not exceed the lesser of $50,000 or 10% of such
executive officer's annual salary and bonus.
(2) As of October 1993, Mr. McMullin was no longer an Executive Officer or
employee of the Company. Mr. Rowley was appointed to replace Mr. McMullin in
March 1994. As of November 1995, Mr. Rowley was no longer an Executive Officer
or employee of the Company. Mr. Roth was appointed to replace Mr. Rowley.
- 21 -
<PAGE>
(3) The Company had purchased for Mr. Rowley a split dollar life insurance
policy. The Company had paid the premium on such policy.
The Company has no defined benefit pension plans.
DIRECTORS' COMPENSATION
In fiscal 1996, directors who were not employees of the Company did not
receive an annual fee.
STOCK OPTION TABLE
The following table provides further information with respect to the
options granted to the Executive Officers as of the fiscal year ended June 30,
1996.
<TABLE>
<CAPTION>
Options Granted in Last Fiscal Year
Individual Grants
-----------------------------------------------------------
% of Total
Options
Granted to Exercise
Options Employees or Base Expir-
Granted in Fiscal Price ation
Name (1) Year ($/Sh) Date
- ---- --------- ----------- --------- --------
<S> <C> <C> <C> <C>
Albert Roth 250,000 16% $.25 1-2001
</TABLE>
(1) Options become exercisable over three years from the date of issuance.
The following table provides information with respect to options exercised and
option values as of the fiscal year ended June 30, 1996.
Aggregated Options Exercised in Last Fiscal Year and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired Options Options at
on Value at 6/30/96 6/30/96($)(1)
Exercise Realized Exercisable/ Exercisable/
Name # $ Unexercisable Unexercisable
- ---- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Albert Roth 0 0 0/250,000 0/0
</TABLE>
- 22 -
<PAGE>
(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, 1996, and the exercise price of the
options.
EMPLOYMENT AGREEMENTS
On March 31, 1994, the Company entered into an employment agreement with
its then president which required 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. Effective December 1, 1995, this agreement was
terminated in connection with his resignation and the obligation was settled for
$134,000, charged to fiscal 1996 operations and is payable monthly through March
1997.
On January 1, 1996, the Company entered into employment agreements with two
of its newly and recently appointed executive officers. The terms of these
agreements extend through December 31, 1997 and provide for monthly compensation
payments of $11,250 each.
On May 1, 1996, the Company entered into an agreement with another
executive officer which provides for compensation of up to a maximum of eight
months of the executive's base salary, approximating $67,500, upon termination
of employment for any reason other than for certain circumstances, as defined in
the agreement. The term of the agreement extends through May 1, 1999.
MANAGEMENT AGREEMENT
On January 1, 1996, the Company entered into a management agreement with a
consulting firm whereas the Company has retained one of the consulting firm's
principals to function as its Chairman of the Board and Chief Executive Officer.
The term of this agreement extends through December 31, 2000 and provides for
monthly management fees of $12,000, provided, however, that the Company does
not hire a president or chief operating officer during that period of time. To
the extent that a president or chief operating officer is hired by the Company,
the management fee will be reduced to $5,000 per month for any remaining term of
the agreement.
ITEM TWELVE - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 30, 1996, 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.
- 23 -
<PAGE>
Beneficial Ownership
Name and Address ---------------------------
of Beneficial Owner Shares %
- ------------------- -------------- ----
Marshall Butler 1,200,000 (1) 4.9%
750 Lexington Ave.
New York, N.Y. 10022
Hiro Hiranandani 200,000 (2) .8%
7 La Villa Place
Wilton, Connecticut 06897
Long Island Venture Fund, L.P. 2,000,000 (3) 8.2%
Paul Lowell, Partner
110 Lake Avenue South
Nesconsett, N.Y. 11767
Kenneth Rind 400,000 (4) 1.6%
44 West 77th Street
New York, N.Y. 10024
Albert Roth 200,000 (2) .8%
LEG Partners SBIC, L.P. 2,000,000 (3) 8.2%
230 Park Avenue
New York, N.Y. 10169
All directors and officers as a 4,000,000 (5) 16.4%
group (10 persons)
Preferred Shareholders as a 9,900,000 (6) 40.7%
group (15 persons/institutions)
(1) Includes 1,500 shares of preferred stock which are convertible into 600,000
shares of common stock as of June 1, 1996 and exercisable warrants to purchase
600,000 shares of common stock.
(2) Includes 250 shares of preferred stock which are convertible into 100,000
shares of common stock as of June 1, 1996 and exercisable warrants to purchase
100,000 shares of common stock.
(3) Includes 2,500 shares of preferred stock which are convertible into
1,000,000 shares of common stock as of June 1, 1996 and exercisable warrants to
purchase 1,000,000 shares of common stock.
(4) Includes 500 shares of preferred stock which are convertible into 200,000
shares of common stock as of June 1, 1996 and exercisable warrants to purchase
200,000 shares of common stock.
- 24 -
<PAGE>
(5) Includes 5,000 shares of preferred stock which are convertible into
2,000,000 shares of common stock as of June 1, 1996 and exercisable warrants to
purchase 2,000,000 shares of common stock.
(6) Includes 12,375 shares of preferred stock which are convertible into
4,950,000 shares of common stock as of June 1, 1996 and exercisable warrants to
purchase 4,950,000 shares of common stock. Each share of preferred stock
contains 1,500 votes or voting rights on all matters being voted on by the
shareholders of the Company other than the election of directors. Additionally,
the holders of the preferred stock, voting as a class, shall in each year elect
seventy-five percent of the members of the Board of Directors of the Company.
ITEM THIRTEEN - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 4, 1995, the Company granted ten-year options to purchase
Common Stock at $.25 per share to the following members of its Board of
Directors: Marshall Butler - options to purchase 125,000 shares; Kenneth Rind
- - options to purchase 125,000 shares; Hiro Hiranandani - options to purchase
75,000 shares; Paul Lowell - options to purchase 75,000 shares; and Deborah
Nabavian (appointed to the Board on December 1, 1995 and resigned on May 17,
1996)- options to purchase 75,000 shares. The options were granted pursuant to
a Board-approved stock option plan. The adoption of the plan was approved at
the July 27, 1994 annual meeting of the shareholders.
- 25 -
<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 1996.
A Form 8-K was filed on August 20, 1996.
(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)
4.7 Form of senior subordinated note (incorporated by reference to
Exhibit 4.7 to the registrant's current report on Form 8-K dated
March 27, 1996)
4.8 Form of Warrant (incorporated by reference to Exhibit 4.8 to the
registrant's current report on Form 8-K dated March 27, 1996)
- 26 -
<PAGE>
4.9 Form of Debenture (incorporated by reference to Exhibit 4.9 to
the registrant's current report on Form 8-K dated August 20,
1996)
4.10 Form of Warrant (incorporated by reference to Exhibit 4.10 to the
registrant's current report on Form 8-K dated August 20, 1996)
4.11 Form of Mortgage note (incorporated by reference to Exhibit 4.11
to the registrant's current report on Form 8-K dated August
20,1996)
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
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
- 27 -
<PAGE>
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
- 28 -
<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 4th day of
November 1996.
VTX ELECTRONICS CORP.
By: /s/
---------------------
Albert Roth,
Chairman of the Board
By: /s/
---------------------
Paul Snead,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on November 4, 1996 by the following persons in the
capacities indicated:
/s/ Chairman of the Board
- -------------------------
Albert Roth
/s/ Director
- --------------------------
Marshall Butler
/s/ Director
- --------------------------
Ivor Jacobson
/s/ Director
- --------------------------
Kenneth Rind
/s/ Director
- --------------------------
Hiro Hiranandani
/s/ Director
- --------------------------
Paul Lowell
- 29 -
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report, which includes an explanatory paragraph relating to
the Company's ability to continue as a going concern, dated September 2, 1996
(except for Notes A-1 and P, as to which the date is October 3, 1996),
accompanying the consolidated financial statements and schedule included in the
Annual Report of VTX Electronics Corp. on Form 10-K for the year ended June 30,
1996. We hereby consent to the incorporation by reference of said report in the
Registration Statement of VTX Electronics Corp. on Form S-8 (Registration No.
33-86264).
GRANT THORNTON LLP
Melville, New York
November 4, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 73,230
<SECURITIES> 0
<RECEIVABLES> 5,734,965
<ALLOWANCES> 221,000
<INVENTORY> 3,293,924
<CURRENT-ASSETS> 9,722,866
<PP&E> 6,971,737
<DEPRECIATION> 3,965,028
<TOTAL-ASSETS> 13,128,388
<CURRENT-LIABILITIES> 4,643,397
<BONDS> 9,518,000
0
1,073,530
<COMMON> 1,265,200
<OTHER-SE> (3,350,142)
<TOTAL-LIABILITY-AND-EQUITY> 13,128,388
<SALES> 29,116,469
<TOTAL-REVENUES> 29,116,469
<CGS> 23,584,189
<TOTAL-COSTS> 33,150,648
<OTHER-EXPENSES> 4,626
<LOSS-PROVISION> 67,000
<INTEREST-EXPENSE> 932,901
<INCOME-PRETAX> (5,058,331)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,058,331)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,058,331)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
