SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1997
Commission File Number 33-7693
___________________________________________________________________________
VTX ELECTRONICS CORP.
(DEBTOR-IN-POSSESSION)
(Exact name of registrant as specified in its charter)
___________________________________________________________________________
Delaware 11-2816128
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
920 Conklin Street, Farmingdale, New York 11735
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (516) 293-1610
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 _______
On May 1, 1997, 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.
Note: This is Page 1 of a document consisting of 19 pages.
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1: UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets - March 31, 1997 and June 30, 1996................. 3
Statements of Operations - Nine Months Ended
March 31, 1997 and 1996......................................... 4
Statements of Operations - Three Months Ended
March 31, 1997 and 1996......................................... 5
Statements of Cash Flows - Nine Months Ended
March 31, 1997 and 1996.................... ..................... 6
Notes to Condensed Consolidated Financial Statements............... 7-14
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 15-17
PART II- OTHER INFORMATION........................................... 18
SIGNATURES........................................................... 19
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
1997 1996
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash....................................... $ 385,586 $ 73,230
Accounts receivable, net of allowance
for doubtful accounts of $355,000 and
$221,000 as of March 31, 1997 and
June 30, 1996, respectively.............. 3,173,394 5,734,965
Inventories, net............................. 3,410,488 3,293,924
Prepaid expenses and other current
assets............................ ...... 56,011 620,747
----------- -----------
TOTAL CURRENT ASSETS....................... 7,025,479 9,722,866
PROPERTY, PLANT AND EQUIPMENT, net........... 639,384 3,006,709
DEFERRED CHARGES AND OTHER ASSETS............ 157,655 398,813
----------- -----------
TOTAL ASSETS................................. $ 7,822,518 $13,128,388
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
LIABILITIES NOT SUBJECT TO COMPROMISE:
Current portion of long-term debt.......... $ 2,961,816 $ 21,747
Accounts payable and accrued expenses........ 1,597,875 4,535,025
Preferred stock dividends payable.......... 198,000 86,625
----------- -----------
TOTAL LIABILITIES NOT SUBJECT TO
COMPROMISE............................... 4,757,691 4,643,397
ESTIMATED LIABILITIES SUBJECT TO COMPROMISE:
Accounts payable and accrued expenses...... 5,863,659 -
LONG-TERM DEBT NOT SUBJECT TO COMPROMISE..... 29,615 6,388,495
SECURED SUBORDINATED DEBENTURES, net......... 2,581,579 3,107,908
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Redeemable, Cumulative, Convertible Preferred
stock, stated value $100 per share,
authorized 5,000,000 shares, 12,375 issued
and outstanding, net..................... 1,101,379 1,073,530
Common stock, par value $.10 per share;
authorized 40,000,000 shares; issued
and outstanding 12,652,000 shares ....... 1,265,200 1,265,200
Paid-in capital.............................. 9,416,226 9,416,226
Accumulated Deficit.......................... (17,199,342) (12,763,881)
Cumulative foreign currency translation
adjustment............................... 6,511 (2,487)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY (5,410,026) (1,011,412)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'DEFICIENCY $ 7,822,518 $13,128,388
============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
March 31,
1997 1996
Net sales.................................... $18,394,919 $21,587,578
Cost of goods sold........................... 15,459,331 18,369,931
----------- -----------
Gross profit................................. 2,935,588 3,217,647
Selling, general and administrative expenses. 5,530,378 6,021,720
Interest expense............................. 1,085,062 618,955
Other expense (income)....................... 117,449 (3,445)
Chapter 11 Reorganization related expenses... 278,285 -
Recapitalization related charge.............. - 297,767
---------- ----------
Net loss before extraordinary item........... (4,075,586) (3,717,350)
Extraordinary loss on early extinguishment
of debt, net............................... 248,500 -
---------- ----------
Net loss..................................... (4,324,086) (3,717,350)
Dividends on preferred stock................. 111,375 49,500
---------- ----------
Net loss attributable to common stock........ $(4,435,461) $(3,766,850)
============ ============
Share Information
Loss per share............................... $ (.35) $ (.30)
============ ============
Weighted average number of common shares
outstanding................................. 12,652,000 12,652,000
============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1997 1996
Net sales.................................... $ 3,574,598 $ 7,451,964
Cost of goods sold........................... 3,198,185 6,292,124
----------- -----------
Gross profit................................. 376,413 1,159,840
Selling, general and administrative expenses. 1,775,445 2,174,358
Interest expense............................. 251,812 240,330
Other (income) expense....................... (3,104) (512)
Chapter 11 Reorganization related expenses... 278,285 -
----------- ------------
Net loss..................................... (1,926,025) (1,254,336)
Dividends on preferred stock................. 37,125 37,125
----------- ------------
Net loss attributable to common stock........ $(1,963,150) $ (1,291,461)
============ =============
Share Information
Loss per share............................... $ (.16) $ (.10)
============ ============
Weighted average number of common shares
outstanding................................. 12,652,000 12,652,000
============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss attributable to common stock.............. $(4,435,461) $(3,766,850)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 526,048 380,035
Deferred compensation amortization.............. - 98,433
Provision for losses on accounts receivable..... 245,000 25,000
Provision for slow moving and obsolete
inventories..................................... 70,000 250,000
Loss on sale of Corporate Headquarters........... 122,000 -
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable....... 2,316,571 (1,292,939)
(Increase) decrease in inventories............... (186,564) (297,824)
Decrease in prepaid expenses and other
current assets................................. 565,657 40,539
Decrease (increase) in other assets.............. 205,301 (56,851)
Increase in accounts payable and
accrued expenses............................... 3,026,056 601,014
---------- -----------
Net cash provided by (used in) operating
activities...................................... 2,454,608 (4,019,173)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (80,769) (92,651)
Proceeds from sale of Corporate Headquarters,net. 2,086,502 -
---------- -----------
Net cash provided by (used in) investing
activities...................................... 2,005,733 (92,651)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements.................. 20,016,070 23,612,446
Debt repayments................................... (24,173,053) (23,501,826)
Proceeds from issuance of debentures, net......... - 2,015,875
Proceeds from issuance of preferred stock, net.... - 1,025,875
Proceeds from issuance of warrants................ - 618,750
---------- -----------
Net cash (used in) provided by financing
activities...................................... (4,156,983) 3,771,120
---------- -----------
Effect of exchange rate changes on cash............ 8,998 4,928
---------- -----------
NET INCREASE (DECREASE) IN CASH.................... 312,356 (335,776)
CASH at beginning of period........................ 73,230 583,388
---------- -----------
CASH at end of period.............................. $ 385,586 $ 247,612
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 812,448 $ 584,413
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION & PETITION FOR RELIEF UNDER CHAPTER 11
The accompanying condensed consolidated financial statements include the
accounts of VTX Electronics Corp. and its wholly-owned subsidiaries (the
"Company"), Vertex Technologies, Inc., Vertex Data Systems, Inc.
[inactive], and its foreign subsidiary, Vertex Technologies UK, LTD. As a
result of the loss of its major United Kingdom customer, the Company initiated
in February, 1997 the liquidation of its UK subsidiary. Under an agreement
with an unrelated third party, the Company sold its fixed assets and
inventories. The Company does not anticipate recording any material gain or
loss as result of this liquidation. All significant intercompany
transactions and balances have been eliminated in consolidation.
The consolidated balance sheet as of March 31, 1997 and the related
consolidated statements of operations and cash flows for the three and nine
months ended March 31, 1997 and 1996, have been prepared by the Company
without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and changes in cash flows at
March 31, 1997 and for all periods presented have been made. Results of
operations for the nine months ended March 31, 1997 are not necessarily
indicative of results of operations that may be expected for the year
ending June 30, 1997. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. It is suggested that
these condensed consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended June 30, 1996.
On January 10, 1997, the Company (the "Debtor") filed petitions for relief
under Chapter 11 of the federal bankruptcy laws in the United States
Bankruptcy Court for the Eastern District of New York. Under Chapter 11,
certain claims against the Debtor in existence prior to the filing of the
petitions for relief under the federal bankruptcy laws are stayed while the
Debtor continues business operations as Debtor-in-possession. Additional
claims (liabilities subject to compromise) may arise subsequent to the filing
date resulting from rejection of executory contracts, including leases, and
from the determination by the courts (or agreed to by parties in interest) of
allowed claims for contingencies and other disputed amounts. Claims secured
against the Debtor's assets ("secured claims") also are stayed, although the
holders of such claims are secured primarily by liens on the Debtor's
property, plant and equipment, accounts receivables and inventories.
The accompanying consolidated financial statements have been prepared on a
going concern basis assuming the realization of assets and liquidation of
liabilities in the ordinary course of business. However, under Chapter 11,
claims arose, or are based on events that occured, before the filing date.
The terms of reorganization to be confirmed by the Bankruptcy Court. Such
liabilities are reflected in the Consolidated Balance Sheets as liabilities
subject to compromise under reorganization proceedings.
The debtor received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including employee wages. The
Company continues to manage its affairs and operate its business as a debtor-
in-possession, subject to the supervision of the Bankruptcy Court while the
case is pending.
On May 7, 1997, the Company entered into an agreement, subject to Bankruptcy
Court approval, with TW Cable LLC, whose owner is a director of the Company,
(the "Asset Purchase Agreement") pursuant to which TW Cable LLC would
acquire the Company;s Distribution Business and all of its assets used in
connection with the Distribution Business. The proposed purchase price for
the Distribution Assets is an amount equal to $500,000 plus an amount equal to
82.5% of the net book value of the Company's Distribution Inventory.
Pursuant to the Asset Purchase Agreement, TW Cable LLC agreed to assume
certain leases of the Company. TW Cable is permitted pursuant to the
Asset Purchase Agreement to pay the purchase price for the Distribution
Assets, other than the Distribution Inventory, by credit bidding the secured
liens held by it, including the liens securing the Debentures. The terms of
the Asset Purchase agreement are subject to higher and better offers in a
proceeding to be conducted by the Bankruptcy Court. The Closing of the
transaction contemplated by the Asset Purchase Agreement is currently
scheduled to be held as soon as practicable, but not later than ten (10)
days after receipt of such approval from the Bankruptcy Court.
Since the Company filed for protection under the Bankruptcy Code, TW Cable
has provided $350,000 cash collateral to the Company's
revolving credit lender (Note 3a), in an effort to support the Company's
continuing cashflows.
Notwithstanding the above, the office of the US Trustee has brought a motion
to convert this case to Chapter 7 or dismiss the case. The Company and its
counsel believe this motion to be defendable at this time.
2. INVENTORIES
Inventory consists principally for 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 March 31, 1997 and June 30, 1996, the reserve was approximately $645,000
and $520,000, respectively.
March 31, June 30,
1997 1996
Raw Materials $ 93,355 $ 77,011
Work in Process 11,228 33,555
Finished Goods 3,305,905 3,183,358
---------- ----------
Inventories, net $3,410,488 $3,293,924
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM DEBT
Long-term debt consists of the following:
March 31, June 30,
1997 1996
Revolving asset-based loan (a).............. $ 2,924,822 $5,097,664
First mortgage loan, net of imputed
interest (b)............................... - 1,029,053
Second mortgage loan (b).................... - 250,000
Capitalized lease obligations (c)........... 66,609 33,525
----------- ----------
2,991,431 6,410,242
Less current portion of long-term debt...... 2,961,816 21,747
----------- ----------
$ 29,615 $6,388,495
=========== ==========
a.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 .5% of the
maximum credit if such termination occurs before December 31, 1997,
respectively. In connection with this financing amendment, the Company
incurred in fiscal 1995 costs approximating $80,000, which have been
accounted for as deferred charges and are being amortized through December
31, 1997. The unamortized balance of approximately $25,000 has been written
off during the quarter ended March 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 March 31, 1997 and
June 30, 1996, the Company had $3,036,000 and $5,431,000 availability
under the eligibility terms of the facility, of which $2,925,000 and
$5,098,000 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 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.
As of March 31, 1997, the Company is in default of certain covenants of the
aforementioned agreement. The lender continues to provide financing under
this credit facility.
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
b.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 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.
On December 20, 1996, the first and second mortgage loans were satisfied
using the proceeds from the sale of the Company's headquarters in
Farmingdale, NY. In addition, a portion of the remaining proceeds were
used to retire approximately $750,000 of the secured subordinated
debentures, as described in Note 5. Accordingly, the Company recorded an
extraordinary loss totaling $248,500 related to the early extinguishment of
the mortgages and secured subordinated debt. The extraordinary loss
consists primarily of the write-off of the associated debt discount and
deferred debt costs, prepayment penalties, and other costs associated with
the retirement of debt.
c.The Company leases its telephone system under agreements accounted for as
capital leases. The obligation for the telephone system requires the
Company to make monthly payments of $1,963 through December 1997. The
Company also leases certain warehouse equipment accounted for as capital
leases. The obligation for the warehouse equipment requires the Company to
make monthly payments of $1,745 through August 1999.
The following is a summary of the aggregate annual maturities of long-term
debt (excluding the secured subordinated debentures, as described in Note
4):
March 31: Total
1998 $ 2,961,816
1999 20,940
2000 8,675
-----------
$ 2,991,431
===========
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. 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 mortgage loans
described in Note 3.
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. Since 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 issuance's, 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 bonds, 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 he preferred stock, which has been recorded
as a direct reduction to the equity recieved by the Company. The unamortized
balance of approximately $40,000 has been written off during the quarter ended
March 31, 1997.
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 mortgage loans as described in Note 4.
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 1996 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 $174,000 in March and June 1996,
respectively, relating to various legal, accounting and other fees incurred
in connection with the financing have been recorded as a deferred charge
and are being amortized over the 60 month term on a straight line basis. The
unamortized balance of approximately $147,000 has been written off during the
quarter ended March 31, 1997.
On December 20, 1996, the Company paid pro-rata to all secured subordinated
debenture holders, the sum of $750,000 with the proceeds received from the
closing of the sale of the Farmingdale, New York facility, as required.
The Company is informed that on TW Cable LLC, whose owner is a
director of the Company, concluded a transaction with the holders of the
Company's preferred stock and debentures pursuant to the terms of a certain
Securities Purchase Agreement dated as of January 10, 1997 (the "Securities
Purchase Agreement"). As a result of the transaction, TW Cable LLC acquired
all of the issued and outstanding preferred stock (12,75 shares) and
$2,615,000 principal face amount of debentures, together with warrants to
purchase 70,350,000 shares of common stock, for a total purchase price of
$1,100,000. The preferred stock is convertible into 4,950,000 shares of
common stock at a conversion rate equal to 400 common shares for each share
of preferred stock that is converted. Each share of preferred stock is
entitled to 1,500 votes on all matters other than the election of directors.
The holders of the perferred stock, voting as a class, are entitled to elect
75% of the members of the Board of Directors
Pursuant to the terms of the Securities Purchase Agreement, TW Cable LLC is
required to redeem or purchase all or part of the debentures not then owned
by it under certain circumstances, including the application of the debentures
against the purchase price for any assets of VTX or any of its subsidiaries.
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. SALE OF CORPORATE HEADQUARTERS
On December 20, 1996, the Company sold its 45,000 square foot corporate
headquarters in Farmingdale, NY to an unaffiliated third party. The
Company used proceeds of approximately $2,332,000 to retire the first and
second mortgages and a portion of the secured subordinated debentures, as
described in Notes 3 and 4.
The Company recognized a loss of approximately $122,000 on the sale of the
headquarters. The losses are included in other expense (income) for the
nine month periods ended March 31, 1997, in the accompanying statements of
operations.
6. COMMITMENTS AND CONTINGENCIES
a. 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 (see Note 1).
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 (see Note 1).
b. 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 requires 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.
c. Leases
The Company's minimum annual lease commitments under noncancellable
operating leases for premises at March 31, 1997 are as follows:
March 31:
1998 235,807
1999 102,989
2000 38,484
---------
$ 377,280
=========
<PAGE>
VTX ELECTRONICS CORP. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Rent expense, including related real estate taxes and other operating
charges, was approximately $534,117 and $462,843 for the nine months ended
March 31, 1997 and 1996, respectively.
d. 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 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.
7. TERMINATION OF INTENT TO MERGE WITH ELCAN TECHNOLOGIES, INC.
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. On December 24, 1996, the Company terminated the letter
of intent.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DEBTOR-IN-POSSESSION)
Results of Operations
Nine Months Ended March 31, 1997 and 1996
Net sales for the nine months ended March 31, 1997 decreased $3,193,000 or
14.8% to $18,395,000 compared to $21,588,000 for the nine months ended
March 31, 1996. Value added distribution sales decreased approximately
$3,682,000 or 26.5% to $10,199,000, for the nine months ended March 31,
1997 from $13,881,000 for the nine months ended March 31, 1996. Sales of
manufactured cable assemblies increased approximately $488,000 or 6.3% to
$8,195,000 for the nine months ended March 31, 1997 from $7,707,000 for the
nine months ended March 31, 1996. The decrease in sales is a result of the
Company focusing on manufacturing only since filing Chapter 11 (Note 1).
The structure of the reorganized company, when a plan is filed, will be
manufacturing only of cable assemblies.
Gross profit for the nine months ended March 31, 1997 decreased $282,000 or
8.8% to $2,936,000 from $3,218,000 for the nine months ended March 31,
1996. Gross profit as a percentage of sales was 16.0% for the nine months
ended March 31, 1997 compared to 14.9% for the nine months ended March 31,
1996. The decrease in gross profit is primarily due to decreased sales.
The prior nine months ended March 31, 1996 includes a provision for
obsolesence inventory of $250,000 versus $70,000 recorded in the current
nine months ended March 31, 1997.
Selling, general and administrative expenses decreased $492,000 to
$5,530,000 for the nine months ended March 31, 1997 from $6,022,000 for the
nine months ended March 31, 1996 due to the Company decreasing payrolls and
other expenses as a result of filing Chapter 11 (Note 1).
Interest expense, including dividends on preferred stock, increased
$528,000 or 79.0% to $1,196,000 for the nine months ended March 31, 1997
from $668,000 for the nine months ended March 31, 1996. The increase was
due to the subordinated debentures and preferred stock outstanding during
the nine months ended March 31, 1997 which were not respectively
outstanding during the nine months ended March 31, 1996.
Other (income) expense consists primarily of the loss recorded on the sale
of the Company's headquarters of approximately $122,000.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DEBTOR-IN-POSSESSION)
Results of Operations
Quarter Ended March 31, 1997 and 1996
Net sales for the quarter ended March 31, 1997 decreased $3,877,000 or
52.0% to $3,575,000 compared to $7,452,000 for the quarter ended March 31,
1996. Value added distribution sales decreased approximately $2,958,000 or
61.6% to $1,845,000, for the quarter ended March 31, 1997 from $4,803,000
for the quarter ended March 31, 1996. Sales of manufactured cable
assemblies decreased approximately $919,000 or 34.7% to $1,730,000 for the
quarter ended March 31, 1997 from $2,649,000 for the quarter ended March
31, 1996. The decrease in sales is a result of the Company focusing on
manufacturing only since filing Chapter 11 (Note 1). The structure of the
reorganized company, when a plan is filed, will be manufacturing only of cable
assemblies.
Gross profit for the quarter ended March 31, 1997 decreased $784,000 or
67.6% to $376,000 from $1,160,000 for the quarter ended March 31, 1996.
Gross profit as a percentage of sales was 10.5% for the quarter ended March
31, 1997 compared to 15.6% for the quarter ended March 31, 1996. The
decrease in gross profit is due to the decrease in sales.
Selling, general and administrative expenses decreased $399,000 to
$1,775,000 for the quarter ended March 31, 1997 from $2,174,000 for the
quarter ended March 31, 1996 due to the Company decreasing payrolls and
other expenses as a result of filing Chapter 11 (Note 1).
Interest expense, including dividends on preferred stock, decreased
$12,000 or 4.3% to $289,000 for the quarter ended March 31, 1997 from
$277,000 for the quarter ended March 31, 1996.
Liquidity and Financial Condition
As of March 31, 1997
Current assets have decreased $2,698,000 to $7,025,000 at March 31, 1997
from $9,723,000 at June 30, 1996. This decrease resulted primarily from a
decrease in accounts receivable (decreased sales) and prepaid expenses and
other current assets, offset by an increase in cash. The Company has net
working capital deficiency of $3,596,000 at March 31, 1997, which includes
liabilities subject to compromise, as compared to $5,079,000 at June 30, 1996
due to the reclassification of the Company's revolving asset based loan to
current portion of long term debt in the current period and also due to
a decrease in accounts receivable. Total borrowings outstanding were
$5,573,000 at March 31, 1997 as compared to $9,518,150 at June 30, 1996.
The decrease was due to the Company satisfying certain mortgages of
approximately $1,276,000 on the Company's headquarters in Farmingdale,
NY, which was sold (see Note 5), repaying $750,000 to the secured subordinated
debenture holders using the remaining proceeds from the sale of the Company's
headquarters, and reducing the amount outstanding under the Company's
revolving credit facility by approximately $2,173,000.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DEBTOR-IN-POSSESSION)
Liquidity and Financial Condition (continued)
As of March 31, 1997
On January 10, 1997, the Company (the "Debtor") filed petitions for relief
under Chapter 11 of the federal bankruptcy laws in the United States
Bankruptcy Court for the Eastern District of New York. Under Chapter 11,
certain claims against the Debtor in existence prior to the filing of the
petitions for relief under the federal bankruptcy laws are stayed while the
Debtor continues business operations as Debtor-in-possession. Additional
claims (liabilities subject to compromise) may arise subsequent to the filing
date resulting from rejection of executory contracts, including leases, and
from the determination by the courts (or agreed to by parties in interest) of
allowed claims for contingencies and other disputed amounts. Claims secured
against the Debtor's assets ("secured claims") also are stayed, although the
holders of such claims have the right to move the court for relief from the
stay. Secured claims are secured primarily by liens on the Debtor's
property, plant an equipment, accounts receivables and inventories.
The debtor received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including employee wages. The
Company continues to manage its affairs and operates its business as a debtor-
in-possession, subject to the supervision of the Bankruptcy Court while the
case is pending.
<PAGE>
PART II- OTHER INFORMATION
Item 1. 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. had 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 very early stages, however management believes VTX has a
meritorious defense and will vigorously defend the action.
Item 5. Other Information
The Company is informed that TW Cable LLC, whose owner is
a director of the Company, concluded a transaction with the holders of
the Company's preferred stock and debentures pursuant to the terms of
a certain Securities Purchase Agreement dated as of January 10, 1997
(the "Securities Purchase Agreement"). As a result of that transaction,
TW Cable LLC acquired all of the issued and outstanding preferred stock
(12,375 shares) and $2,615,000 principal face amount of debentures,
together with warrants to purchase 70,350,000 shares of common stock,
for a total purchase price of $1,100,000. The preferred stock is
convertible into 4,950,000 shares of common stock at a conversion rate
equal to 400 common shares for each share of preferred stock that is
converted. Each share of perferred stock is entitled to 1,500 votes on
all matters other than the election of directors. The holdersof the
perferred stock, voting as a class, are entitled to elect 75% of the
members of the Board of Directors
Pursuant to he tems of the Securities Purchase Ageement, TW Cable LLC
is required to redeem or purchase all or part of the debentures
not then owned by it under certain circumstances, including the
application of the debentures against the purchase price for any
assets of VTX or any of its subsidiaries.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VTX ELECTRONICS CORP.
(DEBTOR-IN-POSSESSION)
By: /s/ Albert Roth
Chief Executive Officer
By: /s/ Nicholas T. Hutzel
Chief Financial Officer
Dated: May 20, 1997
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