SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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 1-12912
CENTENNIAL TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-2978400
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
37 Manning Road, Billerica, Massachusetts 01821
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(Address of principal executive offices) (Zip Code)
(508) 670-0646
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock American Stock Exchange
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
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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. ____
The registrant had revenues of $37,847,681 in its most recent fiscal
year. The aggregate market value of the voting stock held by non-affiliates of
the registrant on September 18, 1996 was $210,537,276. As of September 26, 1996,
8,522,720 shares of Common Stock, $.01 par value per share, of the registrant
were outstanding.
Certain items of Part III of this Form 10-K incorporate by reference
certain portions of the registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission in connection with the registrant's 1996
Annual Meeting of Stockholders.
PART I
Except for historical information contained herein, the discussions
contained in this document include forward-looking statements. By way of
example, the discussions include statements regarding possible price
competition, expansion into new markets, future sales mix (PC cards and contract
manufacturing services), future supply of raw materials, gross margins and the
Company's customer base. Such statements involve a number of risks and
uncertainties, including, but not limited to, those (i) discussed below, (ii)
discussed under the heading "Risk Factors", and (iii) identified from time to
time in the Company's filings with the Securities and Exchange Commission. These
risks and uncertainties could cause actual results to differ materially from
those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements. The Company assumes no obligation to update these
forward-looking statements to reflect events or circumstances after the date
hereof.
ITEM 1. BUSINESS.
OVERVIEW
Centennial Technologies, Inc. (the "Company") designs, manufactures and
markets an extensive line of PC cards. A PC card is a rugged, lightweight,
credit card sized device inserted into a dedicated slot in a broad range of
electronic equipment that contain microprocessors, such as portable computers,
telecommunications equipment, manufacturing equipment and vehicle diagnostic
systems. The Company sells its PC cards primarily to original equipment
manufacturers ("OEMs") for industrial and commercial applications. The Company's
PC cards provide increased storage capacity, communications capabilities and
programmed software for specialized applications. These specialized applications
include data acquisition and processing, navigation, information encryption and
security.
The OEM market served by the Company has rigorous demands for quality
products, technical service and support and rapid order turnaround. The Company
provides its OEM customers with comprehensive PC card solutions, including
in-house design, programming, engineering, manufacturing and private labeling.
The Company believes its ability to provide a full range of services, rapid
order turnaround and manufacturing flexibility to accommodate both large and
small production runs provides a competitive advantage in servicing the OEM
market. The Company manufactures PC cards for over 200 customers, including Bay
Networks, Inc., Digital Equipment Corporation, Philips Electronics N.V., Sharp
Electronics Corporation, Trimble Navigation, Inc. and Xerox Corporation.
The principal executive offices of the Company are located at 37
Manning Road, Billerica, Massachusetts 01821. The Company's telephone number is
(508) 670-0646.
RECENT DEVELOPMENTS
In May 1996, the Company entered into an agreement to form Centennial
Technologies (Thailand) Limited ("Centennial Thailand"), which would provide
contract manufacturing services for third parties, as well a serve as an
offshore manufacturer of the Company's PC cards. Under the agreement, the
Company will acquire a 51% interest in Centennial Thailand in exchange for $1.25
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million in cash. The remaining 49% will be held by an unaffiliated company. The
Company expects Centennial Thailand to begin operations by January 1997. No
assurance can be given that Centennial Thailand will commence operations on
schedule, or that it will not experience significant and unforeseen expenses,
costs and delays, which could have a material adverse effect on the Company's
business, financial position and results of operations.
In July 1996, the Company purchased a majority interest in Design
Circuits, Inc. ("DCI"), a contract manufacturer of printed circuit boards and
related products primarily for OEMs. For the eight months ended June 30, 1996
and the fiscal years ended October 31, 1995 and 1994, sales at DCI totaled
approximately $11,450,000, $9,070,000 and $8,482,000, respectively, and net
income (losses) totaled approximately ($529,000) , ($1,418,000) and $171,000,
respectively. The Company acquired approximately a 75% interest in DCI in
exchange for approximately $3.2 million in cash and 125,000 shares of the
Company's common stock (the "Common Stock"). The remaining 25% of DCI was
acquired by outside investors for approximately $2.4 million.
The Company believes that DCI and Centennial Thailand may benefit from
the Company's existing supply relationships and customer contacts. In addition,
the Company believes that it may benefit from exposure to the products and
customers of DCI and Centennial Thailand. Although no assurance can be given,
many of these products may be used in applications suitable for PC cards, such
as those manufactured by the Company.
TECHNOLOGY AND INDUSTRY BACKGROUND
PC cards
In recent years, digital computing and processing have expanded beyond
the boundaries of desktop computer systems to include a broader array of
electronic systems, such as mobile communication systems, communications
switches, medical devices, navigation systems, cellular telephones, portable
computers, digital cameras and portable data collection terminals. PC card
characteristics, such as shock and vibration tolerance, low power usage, small
size and speed, are better suited for many of these emerging applications than
are characteristics of traditional hard drives and floppy disks. In addition, PC
cards can provide features, such as additional or specialized memory
technologies, that previously resided on computer add-in boards or required
external hardware devices.
The primary types of memory used in the Company's products are as
follows:
Flash Memory. Flash memory is an application of non-volatile
memory used to retain stored data after a system's power is turned off.
Flash memory also permits the user to rewrite data. Because of these
characteristics, flash memory has become one of the fastest growing
segments of the memory market. Flash memory modules are used in a wide
and growing range of applications, including industrial control and
instrumentation, networking, automotive diagnostics and consumer
electronics.
SRAM. Static random access memory, or SRAM, offers two
principal advantages, high speed and low power consumption, over other
storage devices. High speed SRAM may be used to augment other memory or
to accelerate data processing by disk drives.
OTP Memory/Mask ROM. One-time programmable ("OTP") memory and
Mask ROM memory cannot be rewritten. These types of memory are
generally used in read-only applications and contain system programming
or data that will remain unchanged.
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PC cards may contain configurations of more than one type of memory, as
well as communications software and related connection devices for
facsimile/modems and local area networks.
PC cards connect directly to an electrical device on a computer's main
circuit board, which contains both the computer memory and the central
processing unit ("CPU"). This direct connection results in more rapid retrieval
of information than with hard drives and floppy disks, which must have data
transferred to the main circuit board before it is available to the CPU.
Additionally, unlike hard drives and floppy disks, PC cards generally do not
have moving parts and therefore require less energy consumption and are
generally more rugged. These advantages have become important as computing
devices become smaller and more portable.
OEMs sell equipment containing PC cards for a wide range of industrial
and commercial applications, including network management, inventory control,
remote site monitoring, automobile diagnostics, data encryption and navigation.
These systems often are subjected to rough handling, are used in a variety of
temperature and humidity conditions and are required to operate for significant
amounts of time without external power sources or frequent battery changes. In
addition, the information stored on PC cards is frequently processed by a
computer system, and must therefore be easily transferable. The Company
primarily targets OEM customers in the following four industries: Communication
(routers, cellular data, local area networks); Transportation (fleet data
recording, navigation, auto diagnostics); Medical (medical devices); and Mobile
(handheld data collection terminals, notebooks, palmtops, personal digital
assistants).
The Company produces PC cards that conform to standards adopted by the
Personal Computer Memory Card International Association ("PCMCIA"), as well as
PC cards with specific characteristics. Revenues from the sale of PC cards
accounted for approximately 98% of the Company's revenues for fiscal 1996. PC
card sales may comprise a lower percentage of the Company's total sales in
future periods due to the recent acquisition of DCI, a contract manufacturer,
and the commencement of contract manufacturing operations at Centennial
Thailand, expected in January 1997.
Contract Manufacturing Services
The Company offers contract manufacturing services through its majority
owned subsidiaries, DCI and Centennial Thailand, the latter of which is
scheduled to begin operations in January 1997. DCI currently manufactures, and
Centennial Thailand is expected to manufacture, printed circuit boards and
related products for a variety of industrial, commercial and consumer
applications. The Company believes that it will benefit by exposure to these
applications, many of which may be suitable for PC cards, such as those
manufactured by the Company.
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PRODUCTS
In fiscal 1996, 1995 and 1994, PC cards comprised approximately 98%,
86% and 58%, respectively, of the Company's total sales. The Company's PC cards
contain memory chips for storage, input/output chips for transmitting and
receiving data, and memory chips with programmed software and other devices for
specific applications.
Memory Cards
The Company's PC memory cards, which may contain flash, SRAM or OTP
computer memory chips, are used to provide storage capacity. PC memory cards are
used in office automation products, consumer electronics, inventory control
devices, palmtop and pen-based computers and communications equipment, including
smart phones. Palmtop and pen-based computers generally require external storage
capacity, such as provided by PC cards, because the size and power constraints
of palmtop and pen-based computers prohibit the use of floppy disks and hard
drives. PC memory cards may also contain data or software for specific
industrial and commercial applications, described below.
Input/Output Cards
The Company's PC input/output cards contain special computer chips
designed to transmit data through facsimile/modems and over local area and
wireless communication networks.
Application-Specific Cards
Application-specific PC cards ("ASIC cards") are generally designed by
the Company in cooperation with an OEM for a specific industrial or commercial
application. The Company's ASIC cards may contain memory chips that are
programmed with specific data, embedded software, or other devices. The Company
has developed ASIC cards for the following applications:
Communications. PC cards are used in high-end cellular
telephones and other personal communication devices, which need small
storage devices that are shock and vibration tolerant and require low
amounts of power to operate. One of the Company's customers purchases
PC cards to store application information used in screen phones with
either standard or customized SRAM memory. Screen phones combine
certain functionality of a computer or personal digital assistant
("PDA") with that of a telephone.
Data Acquisition and Conversion. PC cards are used for data
acquisition and data conversion for serial interfaces and in mixed
signal converters, such as the Company's "frame grabber" PC card which
allows conversion of analog video signal to digital format. These cards
may be used to display images recorded by digital camera on a personal
computer. Other data acquisition and conversion cards are used by field
personnel to gather information, which can then be transmitted and
downloaded to computing devices in remote offices.
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Navigation Systems. The Company markets PC cards for
navigation systems, such as Global Positioning Satellite ("GPS")
equipment. GPS systems use a receiver to interpret signals collected
from a dedicated network of satellites that circle the earth, providing
data on the position, direction, altitude and speed of an object. This
data is communicated directly to a host computer via a PC card
interface, which transfers the data to the application software by
emulating a serial communication port on the GPS receiver. The Company
sells these cards to OEMs that manufacture navigation systems used in
rental cars, fleet vehicles, emergency and rescue vehicles, airplanes,
ships, and military vehicles.
Printer cards. The Company's PC cards are used in laser
printers to deliver additional fonts with applications to desktop
publishing, work processing and spreadsheet preparation. This
application had previously been served by font cartridges. With the
gradual acceptance of PCMCIA standards, there has been a migration
toward the delivery of additional fonts through PC cards rather than
through font cartridges.
Security. The Company offers Crypta Plus(TM) cards used for
security and data encryption. These cards control access to stored
information through the use of passwords. The user can be authenticated
to the card and the user/card combination can be authenticated to
remote systems and services. In addition, the Crypta Plus(TM) card can
store passwords with varying access levels (i.e., read-only or
read-write). These cards are compatible with host computers
incorporating PCMCIA standards.
Transportation. The Company develops PC cards used to interact
with on-board information systems embedded into air, marine and land
based vehicles. These fleet management systems provide a variety of
vehicle diagnostic and driver monitoring functions such as recording
top speeds, idle time, fuel efficiency and distance traveled.
Other Products
The Company provides other products based on flash memory technology.
Flash memory requires no power to retain data and is electronically
programmable, two characteristics that, combined, are not present in other
memory chips. Based on these advantages, the Company believes the use of flash
memory may become more prevalent in industrial and commercial equipment.
Management believes that the introduction of flash SIMM Modules (defined below)
and miniature cards could complement the Company's extensive PC card product
offerings and provide the Company's OEM customers with more alternatives to
address data acquisition and processing needs.
CompactFlash(TM) and MiniCards(TM). The Company offers
miniature flash cards, which are removable flash memory devices that
fit into small electronic devices such as compact digital cameras
through slots that are smaller than those designed for PC cards.
Miniature flash cards increase memory capacity and functionality and
are similar to PC cards in that they are made with existing flash
memory technology in a modified mechanical package with modified
electrical connections. The Company offers two types of miniature flash
cards.
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The CompactFlash (a trademark of SanDisk Corporation) is based
on the standard endorsed by the CompactFlash Association, an industry
organization established to promote uniform standards for miniature
flash cards, of which the Company is a member. The CompactFlash uses an
ATA design that relies on an on-board microprocessor.
The MiniCard (a trademark of Intel Corporation) is based upon
a design promoted by Intel. The MiniCard uses a linear design, as
opposed to the ATA design of the CompactFlash, and requires no on-board
microcontroller. The Company's strategy is to offer both types of flash
cards to its OEM customers.
SIMM Modules. The Company also sells flash Single In-line
Memory Modules ("SIMM modules"). SIMM modules are a type of compact
circuit board assembly consisting of flash memory devices and related
circuitry. Electronic systems increasingly employ SIMM modules as
building blocks in system design. SIMM modules allow OEMs to configure
a system with a variety of different levels of memory, thus enabling
OEMs to address cost-effectively multiple price points or applications
with a single base system design. In addition, the use of SIMM modules
enables OEMs to offer a relatively easy path to upgrade a
microprocessor or other device. The Company introduced SIMM modules in
the fourth quarter of fiscal 1995.
CUSTOMER SALES AND MARKETING
The Company targets industrial and commercial applications for PC cards
in the communications, transportation, medical device and mobile computing
industries.
Direct Sales Force. The Company markets its products through a direct
sales force of 12 sales people, of which ten focus on the OEM market, one
focuses on the corporate end-user market and one focuses on sales to government
agencies. The Company's sales staff operates from the Company's main office in
Billerica, Massachusetts, as well as domestic sales offices located in Los
Angeles and Santa Clara, California. In addition, the Company has established
foreign sales offices in Montreal, Canada, Camberley, England and Munich,
Germany.
Sales to OEMs. OEMs may incorporate the Company's products in equipment
sold to third parties, resell the Company's PC cards on a private label basis,
or resell them under the Centennial brand name. The Company's sales staff and
engineers often work with OEM engineers to design and engineer PC cards to OEM
requirements, which often leads to the Company providing custom-designed PC
cards for specific applications. The Company believes its interaction with OEM
customers provides exposure to emerging technologies and applications,
facilitating a proactive approach to product design. The Company's sales to its
OEM customers are generally made pursuant to purchase orders rather than
long-term sales agreements.
Sales to Corporate End-Users and Government Agencies. The Company also
markets its products to corporate end-users directly and through value-added
resellers. Corporate end-users purchase PC cards to provide additional memory
and for communications applications for local area
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networks and data and facsimile/modems. In addition, they purchase specialty
cards for terminal emulation, mixed signal converters and data encryption. The
Company recently began to market PC cards to the United States government for
data encryption and for use in conjunction with GPS equipment in military
equipment and vehicles. Data encryption devices are used by federal agencies to
ensure the security of confidential information.
Manufacturer' Representatives and Distributors. The Company has
agreements with 15 manufacturers' representatives, who market to OEMs, and with
foreign distributors, who distribute the Company's products in international
markets. The Company also sells a limited number of Centennial brand-name PC
cards on a wholesale basis to distributors of computer products and peripherals
that stock and sell the Company's products in the retail distribution channel.
International Sales. Approximately 12%, 23% and 22% of the Company's
sales in fiscal 1996, 1995 and 1994, respectively, were made outside the United
States, primarily in western European countries, Israel and Canada. In fiscal
1996, substantially all of the Company's foreign sales were made in United
States dollars; however, fluctuations in currency exchange rates could, in the
future, cause the Company's products to become less price competitive in a
particular country, leading to a reduction in sales or profitability in that
country. Manufacturing and sales of the Company's products may also be
materially adversely affected by factors such as unexpected changes in, or
imposition of, regulatory requirements, tariffs, import and export restrictions
and other barriers and restrictions, longer payment cycles, greater difficulty
in accounts receivable collection, potentially adverse tax consequences, the
burdens of complying with a variety of foreign laws and other factors beyond the
Company's control.
Major Customers. During the fiscal 1996, two customers, whose
individual sales exceeded 10% of total sales, accounted for an aggregate of
approximately 25% of the Company's sales. No one customer accounted for more
than 10% of the Company's sales during fiscal 1995 and 1994.
MANUFACTURING
PC Cards
The Company's PC card manufacturing process includes programming,
production, assembly, ultrasonic welding, cleaning, final assembly, labeling and
packaging. All of these operations are conducted at the Company's manufacturing
facility in Billerica, Massachusetts. The Company's manufacturing facility has
generally operated on a two shift, five day per week basis.
Manufacturing Flexibility. The Company has designed its manufacturing
facility to accommodate its customers' requirement for rapid order turnaround.
The Company's manufacturing process may be converted to accommodate the
production of different products with a minimum of down time. In addition, by
maintaining a substantial portion of its manufacturing in-house, the Company
believes it can respond quickly to meet customers needs, adapt rapidly to
changes in the marketplace, and coordinate better the manufacturing process with
product design, engineering and marketing functions.
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In fiscal 1996, the Company subcontracted a small portion of its
manufacturing to a Canadian electronic assembly contract manufacturer with
specialized manufacturing capabilities, which include wire bonding and ceramic
printing. The Company believes its ability to subcontract a portion of its
manufacturing will give it greater flexibility with respect to manufacturing
capacity. The Company acquired a minority interest in this manufacturer in
February 1996. In addition, the Company believes its recent acquisitions of DCI
and Centennial Thailand will give it additional manufacturing flexibility in
future periods.
Product Quality and Testing Procedures. The Company continually seeks
to improve product quality. The Company's zero defect policy, implemented in
April 1995, is designed to ensure that there are no defects in PC card products
shipped from the Company's facility. In connection with this effort, the Company
hired additional production and testing engineers and established additional
quality control checks throughout its manufacturing process. In October 1995,
the Company became a certified ISO 9001 manufacturer with respect to its
Billerica, Massachusetts facility. Certification requires that the Company
undergo an annual audit of certain policies and procedures.
Manufacturing Efficiency. The Company places a high priority on
maintaining efficient operations. The Company has established automated
production lines in order to reduce cost and increase throughput. For example,
the Company uses ultra-sonic welders that encase the Company's PC cards more
efficiently than manual labor and produce a more rugged card with better
protection against electrostatic discharge.
Contract Manufacturing Services
The Company offers contract manufacturing services through its
majority-owned subsidiaries, DCI and Centennial Thailand, the latter of which is
scheduled to commence operations in January 1997. DCI primarily manufactures
printed circuit boards and related products using similar equipment and
processes employed by the Company. Centennial Thailand is also expected to
manufacture printed circuit boards and related products. No assurance can be
given that Centennial Thailand will commence operations on schedule, or that it
will not experience significant and unforeseen expenses, costs and delays, which
could have a material adverse effect on the Company's business, financial
position and results of operations.
SOURCES OF SUPPLY
The Company has, from time to time, experienced shortages in electronic
components used to manufacture PC cards, specifically computer memory chips. The
Company expects such supply shortages to continue, particularly for electronic
components used in products targeted at high-growth market segments. These
components may include flash and SRAM memory chips, many of which are subject to
industry-wide allocation by chip suppliers.
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The Company purchases certain key components from sole or single source
vendors for which alternative sources are not currently available. The Company
does not maintain long-term supply agreements with any of its vendors. The
inability to develop alternative sources for these single or sole source
components or to obtain sufficient quantities of components could result in
delays or reductions in product shipments which could materially adversely
affect the Company's business, financial position and results of operations. The
Company relies on certain sole source suppliers to provide components used in
certain of the Company's products. No assurance can be given that such suppliers
or one or more of the Company's other vendors will not reduce supplies to the
Company, which could have a material adverse effect on the Company's business,
financial position and results of operations. Even where alternative sources of
supply are available, if a major vendor were to reduce supplies to the Company,
the Company may be forced to spend a significant amount of time to qualify an
additional vendor and obtain adequate supplies. In addition, shortages of
electronic components may result in higher prices, which could have a material
adverse effect on the Company's business, financial position and results of
operations. The Company seeks to maintain close working relationships with its
suppliers to ensure timely and reliable delivery.
ENGINEERING AND PRODUCT DEVELOPMENT
The Company directs its engineering and design efforts at products for
which the Company believes there is growing market demand and strong margins. In
particular, the Company seeks to meet the requirements of its OEM customers by
applying the latest available technology and the PC card design and engineering
know-how it has gained from its focus on the PC card market. For many of its OEM
customers, the Company provides engineering and design support to help integrate
the Company's products into OEM equipment. OEMs often require PC cards for new
applications within the Company's target markets. By working with these OEMs,
the Company believes it is exposed to new market opportunities for its PC cards.
The Company also seeks to establish close working relationships with
suppliers of computer chips used by the Company. In this manner, the Company
attempts to stay abreast of new technologies suitable for the Company's
products. The Company's research and development strategy is to design PC cards
that (i) cost less to produce; (ii) consume less power; and (iii) are more
reliable and durable. In addition, the Company seeks to design new PC cards and
other related products for which it believes there is substantial market demand.
In connection with this effort, the Company has designed SIMM Modules and
miniature flash cards, each of which utilize existing flash memory technology in
a modified storage and delivery format.
As of June 30, 1996 the Company employed 18 individuals in engineering
and product development, two of which are executive officers of the Company.
During fiscal 1996, 1995 and 1994, the Company's research and development
expenses
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totaled approximately $1,434,000, $753,000 and $567,000, or 3.8%, 6.1% and 6.9%
of sales, respectively. The Company expenses all software development costs as
incurred.
The Company's business strategy includes investing in companies which
offer the Company access to complementary technologies, additional manufacturing
capacity, and new markets within the Company's target industries. In September
1995, the Company purchased a minority interest in an Internet service provider.
The Company believes a market will exist for PC cards used in connection with
secure Internet transactions of the type provided by this company. In fiscal
1996, the Company also invested in a developer of small form factor hard drives
designed to increase the speed and processing capabilities of PC cards, in a
manufacturer of automated industrial imaging systems used in the production of
printed circuit boards and in a contract manufacturer located in Quebec, Canada.
In addition, the Company recently purchased minority interests in a holding
company of various technology-related corporations and a company which develops,
manufactures and markets products for vehicle and fleet management.
LICENSE AND DISTRIBUTOR AGREEMENTS
The Company, from time to time, enters into license and distribution
agreements to acquire the rights to technology which the Company believes is
complementary to that of its products.
In June 1994, the Company entered into an agreement under which the
Company licenses from a third party certain proprietary technology relating to a
PC flash memory card with a built-in encryption integrated circuit. These cards
can be used in mobile and desktop computers to protect data and applications,
including during their transmission over wired and wireless networks. The
initial term of this license agreement was one year. In June 1995, the Company
renewed the license for an additional fifteen month period. The license provides
for annual license fees, which the Company pays quarterly based on number of
units sold. The minimum annual license fee payable by the Company was $100,000
during the first year of the license and for the 15-month period ending
September 30, 1996. Under the current terms of the license, this fee will
increase by 100% annually for each additional year the license is renewed
through September 1999. The Company has the right to terminate this license when
the current term expires in September 1996.
In January 1995, the Company entered into a three-year license
agreement with a third party to license certain proprietary technology relating
to a 38 pin edge memory card used in automotive, medical and other industrial
applications. This license grants the Company the exclusive right to manufacture
and sell products using this technology in North America, Europe and Japan. The
license provides for an initial license fee of $300,000 and a 3% royalty on all
sales of products
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utilizing the licensed technology. The Company may renew the license for
successive one-year terms after the initial term upon payment by the Company of
a $100,000 renewal fee.
PROTECTION OF PROPRIETARY INFORMATION
The Company's products require technical know-how to engineer and
manufacture. To the extent proprietary technology is involved, the Company
relies on trade secrets that it seeks to protect, in part, though
confidentiality agreements with employees, consultants and other parties. No
assurance can be given that these agreement will not be breached, that the
Company will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known to, or independently developed by,
existing or potential competitors of the Company. The Company generally does not
seek to protect its proprietary information through patents or registered
trademarks, although it may seek to do so in the future. The Company may be
involved from time to time in litigation to determine the enforceability, scope
and validity of its rights. In addition, no assurance can be given that the
Company's products will not infringe any patents of others. Litigation could
result in substantial cost to the Company and diversion of effort by the
Company's management and technical personnel.
The Company currently licenses certain proprietary and patented
technology from third parties. No assurance can be given that such licenses will
provide meaningful protection from competitors. Even if a competitor's products
were to infringe on the technology subject to such licenses held by the Company,
it would be costly for the Company to enforce its rights in an infringement
action and would divert funds and management resources from the Company's
operations. No assurance can be given that the Company will be able to defend
adequately or prosecute a claim.
INSURANCE
The Company maintains coverage for the customary risks inherent in the
operation of a manufacturing facility and a business in general. Although the
Company believes its insurance policies to be adequate in amount and coverage
for its current operations, no assurance can be given that its coverage will, in
fact, be or will continue to be available in adequate amounts or at a reasonable
cost or that such insurance will be adequate to cover any future claims against
the Company.
COMPETITION
The markets in which the Company competes are characterized by rapid
technological change, evolving industry standards, rapid product obsolescence
and intense competition. The Company competes with manufacturers of PC cards and
related products, including SanDisk Corporation and Smart Modular Technologies,
Inc., as well as with electronic component manufacturers who also manufacture PC
cards, including Mitsubishi Electronic Corporation, Intel Corporation, Epson of
America, Inc. and Fujitsu Microelectronics, Inc. Certain of these competitors
also supply the Company with raw materials, including electronic components that
are from time to time subject to industry-wide allocation. Such competitors may
have the ability to manufacture PC cards at lower
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costs than the Company as a result of their higher levels of integration. In
addition, many of the Company's competitors or potential competitors have
greater financial, marketing and technological resources than the Company.
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or alternative solutions that may be less costly or
provide additional features. The Company believes that its ability to compete
successfully depends on a number of factors, which include product quality and
performance, order turnaround, the provision of competitive design capabilities,
success in developing new applications for PC cards, adequate manufacturing
capacity, efficiency of production, timing of new product introductions by the
Company, its customers and its competitors, the number and nature of the
Company's competitor in a given market, price and general market and economic
conditions. In addition, increased competitive pressure may lead to intensified
price competition, resulting in lower prices and gross margins, which could
materially adversely affect the Company's business, financial position and
results of operations. No assurance can be given that the Company will compete
successfully in the future.
EMPLOYEES
As of June 30, 1996, the Company had 119 full-time employees, of which
seven were executive officers, 17 were involved with sales and marketing
functions, 16 were involved with engineering and product development, 13 were
involved with administration, and 66 were involved with manufacturing.
None of the Company's employees are represented by a labor union, and
the Company is not aware of any activities seeking such organization. The
Company considers its relationships with its employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company maintains its principal executive offices and manufacturing
operations in a 22,000 square foot leased facility in Billerica, Massachusetts.
The Company currently pays rent in the amount of approximately $7,400 per month,
pursuant to a lease that expires on November 5, 1997. The lease contains an
option to renew for an additional five year period. The lease provides that the
Company will pay to its landlord as additional rent its pro rata share of
certain operational and maintenance costs at the facility during the term of the
lease.
DCI leases approximately 51,000 square feet of manufacturing and office
space in Southborough, Massachusetts pursuant to a lease under which DCI pays
approximately $19,300 per month, plus a pro rata share of operational and
maintenance costs. This lease expires on November 30, 1997.
Centennial Thailand has agreed to lease an aggregate of approximately
12,400 feet of manufacturing and office space in Thailand pursuant to two leases
under which it will pay an aggregate of approximately $13,200 per month.
-12-
The Company also maintains sales offices in Los Angeles, California;
Santa Clara, California; Montreal, Canada; Camberley, England and Munich,
Germany. The monthly rent for these four offices aggregates to approximately
$5,800 per month.
The Company believes that its facilities are adequate for its current
needs and that adequate facilities for expansion, if required, are available at
competitive rates.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any material pending
litigation. The Company may, from time to time, be involved in litigation either
as a plaintiff or defendant. Such litigation may be costly to the Company and
may divert management and other resources away from the operations of the
Company. No assurance can be given that any litigation in which the Company is
involved will not materially adversely affect the Company's business, financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 1996, the Company did not submit
any matter to a vote of its security holders, through a solicitation of proxies
or otherwise.
-13-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock has been traded on the American Stock
Exchange ("AMEX") since April 12, 1994. On September 18, 1996, the last sale
price for the Common Stock as reported by AMEX was $33.00 per share. The
Company's publicly traded redeemable common stock purchase warrants (the
"Redeemable Warrants") were traded on AMEX from April 12, 1994 through December
7, 1995, at which time all of the Redeemable Warrants had been exercised.
For the periods indicated, the following table sets forth the range of
high and low sale prices for the Common Stock and Redeemable Warrants as
reported by AMEX.
COMMON STOCK(1)
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1995
July 1, 1994 through September 30, 1994 $ 6 3/8 $ 3 1/2
October 1, 1994 through December 31, 1994 6 5/8 5 1/4
January 1, 1995 through March 31, 1995 7 7/8 5 1/8
April 1, 1995 through June 30, 1995 16 7 1/4
FISCAL 1996
July 1, 1995 through September 30, 1995 18 5/8 13 3/8
October 1, 1995 through December 31, 1995 20 3/4 12 1/2
January 1, 1996 through March 31, 1996 22 17 1/8
April 1, 1996 through June 30, 1996 30 7/8 16 5/8
REDEEMABLE WARRANTS
HIGH LOW
---- ---
FISCAL 1995
July 1, 1994 through September 30, 1994 $ 2 1/2 $ 5/8
October 1, 1994 through December 31, 1994 2 7/8 1 3/8
January 1, 1995 through March 31, 1995 4 3/4 1 3/4
April 1, 1995 through June 30, 1995 17 3 7/8
FISCAL 1996
July 1, 1995 through September 30, 1995 21 13 5/8
October 1, 1995 through December 7, 1995 23 11 3/4
</TABLE>
(1) All high and low sale prices for the Common Stock have been (i) adjusted
to reflect a 3 for 2 stock split effected on August 30, 1995 and (ii)
rounded to the nearest 1/8.
As of September 18, 1996, there were 107 holders of record of the
Company's Common Stock. Based upon the number of record holders, the Company
estimates there are approximately 4,400 beneficial holders of the Company's
Common Stock.
-14-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read
in conjunction with the Company's audited consolidated financial statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein. The selected consolidated
financial data as of June 30, 1992 and 1993 and for the years ended June 30,
1992 and 1993 have been derived from audited financial statements not included
herein.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ----------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Sales............................................... $37,848 $12,445 $8,213 $6,301 $3,138
Cost of goods sold.................................. 23,636 6,833 4,523 3,419 1,501
------ ----- ----- ----- -----
Gross margin........................................ 14,212 5,612 3,690 2,882 1,637
General and administrative expenses................. 4,591 3,366 1,889 1,566 880
Research and development costs...................... 1,434 752 567 444 401
------ ----- ----- ----- -----
Income from operations.............................. 8,187 1,494 1,234 872 356
Net interest expense................................ 17 64 161 53 15
Loss on sale of receivables to factor............... - - 77 59 -
Amortization of discount on bridge financing........ - - 248 - -
------ ----- ----- ----- -----
Income before income taxes.......................... 8,170 1,430 748 760 341
Provision for income taxes.......................... 3,268 556 284 318 93
------ ----- ----- ----- -----
Net income..........................................$ 4,902 $ 874 $ 464 $ 442 $ 248
======== ======= ======= ========= ========
Net income per share, primary(1)....................$ .67 $ .16 $ .14 $ .15 $ .08
======== ======= ======= ========= ========
Net income per share, fully diluted(1)..............$ .66 $ .14 $ .14 $ .15 $ .08
======== ======= ======= ========= ========
Weighted average shares outstanding, primary........ 7,339 5,512 3,325 3,000 3,000
Weighted average shares outstanding, fully
diluted.......................................... 7,433 6,287 3,325 3,000 3,000
</TABLE>
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- ------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Current assets................................... $48,191 $15,160 $6,437 $3,179 $1,036
Total assets..................................... 55,782 18,199 7,553 4,049 1,117
Current liabilities.............................. 9,129 5,593 1,132 2,982 510
Working capital.................................. 39,062 9,567 5,305 197 527
Stockholders' equity............................. 46,045 12,445 6,419 1,043 602
- -------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements.
</TABLE>
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Except for historical information contained herein, the discussions
contained in this document include forward-looking statements. By way of
example, the discussions include statements regarding possible price
competition, expansion into new markets, future sales mix (PC cards and contract
manufacturing services), future supply of raw materials, gross margins and the
Company's customer base. Such statements involve a number of risks and
uncertainties, including, but not limited to, those (i) discussed below, (ii)
discussed under the heading "Risk Factors", and (iii) identified from time to
time in the Company's filings with the Securities and Exchange Commission. These
risks and uncertainties could cause actual results to differ materially from
those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements. The Company assumes no obligation to update these
forward-looking statements to reflect events or circumstances after the date
hereof.
OVERVIEW
The Company designs, manufacturers and markets an extensive line of PC
cards used primarily by OEMs for products in industrial and commercial
applications. The Company's PC cards provide added functionality to devices
containing microprocessors by supplying increased storage capacity,
communications capabilities and programmed software for specialized
applications.
The Company was incorporated and began operation in 1987 to develop and
commercialize font cartridges for laser printers. Beginning in fiscal 1992, when
the Company began designing, manufacturing and marketing PC cards, the Company
gradually de-emphasized the marketing and sales of font cartridges in order to
focus on the rapidly growing PC card market. As the Company effected this shift
in focus, the Company's sales increased from $6.3 million in fiscal 1993 to
$37.8 million in fiscal 1996. Net income has correspondingly increased from
$442,000 in fiscal 1993 to $4.9 million in fiscal 1996.
The Company's gross margin has decreased from 45.7% in fiscal 1993 to
37.5% in fiscal 1996. The declining gross margin has been attributable to the
shift in the Company's product mix from font cartridges to lower margin PC cards
and, more recently, to increases in the cost of certain electronic components
used in the Company's PC cards. The cost of these components generally
stabilized during the latter half of fiscal 1996. PC card sales may comprise a
lower percentage of the Company's total sales in future periods due to the
recent acquisition of DCI, a contract manufacturer, and the commencement of
contract manufacturing operations at Centennial Thailand, expected in January
1997. The Company expects to realize lower gross margins associated with its
future contract manufacturing services than those realized from the sale of its
PC cards. Therefore, the Company anticipates that its gross margins may decline
in future periods. In future periods, the minority shareholders of DCI and
Centennial Thailand will share in a portion of the equity and operating results
of such subsidiaries to the extent of their respective interests.
-16-
In April 1994, the Company completed its initial public offering of
Common Stock and Redeemable Warrants, resulting in net proceeds to the Company
of approximately $4.7 million. Such proceeds were used to expand the Company's
sales and marketing capabilities, repay indebtedness, increase manufacturing
capacity, and for other general corporate purposes. The exercise of the
Redeemable Warrants issued in connection with the Company's initial public
offering resulted in additional proceeds to the Company of $3.8 million and $5.2
million in fiscal 1995 and 1996, respectively.
In March 1996, the Company conducted a subsequent public offering of
1,350,000 shares of its Common Stock resulting in net proceeds to the Company of
approximately $20.9 million. In April 1996, the underwriters exercised their
option to purchase 75,000 shares of Common Stock to cover over-allotments,
resulting in net proceeds to the Company of approximately $1.2 million.
The Company's acquisition activities prior to its March 1996 offering
have not, to date, had a material effect on its results of operations. During
fiscal 1993, the Company acquired two font cartridge product lines for aggregate
consideration of approximately $714,000 in cash and approximately $216,000 in
assumed liabilities. In June 1994, the Company issued 13,500 shares of Common
Stock to acquire Centennial Technologies, Ltd. (formerly Delamere Enterprises,
Ltd.), a U.K. distributor of PC cards and related products. During fiscal 1996,
the Company invested approximately $2,500,000 to acquire minority interests in
six companies with technologies or capabilities complementary to those of the
Company. In addition, in May 1996, the Company agreed to acquire a majority
interest in Centennial Thailand and in July 1996, the Company acquired a
majority interest in DCI.
The following table sets forth certain statement of operations data as a
percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................. 62.5 54.9 55.1 54.3 47.8
---- ---- ---- ---- ----
Gross margin....................................... 37.5 45.1 44.9 45.7 52.2
General and administrative expenses................ 12.1 27.0 23.0 24.9 28.1
Research and development costs..................... 3.8 6.1 6.9 7.0 12.8
---- ---- ---- ---- ----
Income from operations............................. 21.6 12.0 15.0 13.8 11.3
Net interest expense............................... - 0.5 2.0 0.8 0.4
Loss on sale of receivables to factor.............. - - 0.9 0.9 -
Amortization of discount on bridge financing....... - - 3.0 - -
---- ---- ---- ---- ----
Income before income taxes......................... 21.6 11.5 9.1 12.1 10.9
Provision for income taxes......................... 8.6 4.5 3.5 5.1 3.0
---- ---- ---- ---- ----
Net income......................................... 13.0% 7.0% 5.6% 7.0% 7.9%
===== ===== ===== ===== =====
</TABLE>
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto appearing elsewhere
herein.
-17-
RESULTS OF OPERATIONS
Years Ended June 30, 1996 and 1995
Sales. Sales increased 204% to approximately $37.8 million in fiscal
1996 from approximately $12.4 million in fiscal 1995, primarily as a result of
increased volume of sales of PC cards. Sales of PC cards as a percentage of
total sales increased to approximately 98% in fiscal 1996 from approximately 86%
in fiscal 1995. The growth in the Company's PC card sales resulted primarily
from expansion of the PC card market, increased sales and marketing efforts by
the Company and the broadening of the Company's PC card product line. The
increase in the Company's PC card sales was partially offset by a decrease in
sales of font cartridges. This decrease was attributable primarily to weakening
demand for font cartridges as laser printer fonts are increasingly being
delivered through PC cards rather than font cartridges, and the gradual shift in
the Company's focus, commenced in fiscal 1992, away from font cartridges and
toward the PC card market.
Sales outside of the United States represented 12% of sales in fiscal
1996 compared to approximately 23% of sales in fiscal 1995. In fiscal 1996, two
customers, whose individual sales exceeded 10% of total sales, accounted for an
aggregate of approximately 25% of the Company's sales. If either of these
customers were to reduce significantly the amount of business they conduct with
the Company, it could have a material adverse effect on the Company's business,
financial position and results of operations. No one customer or group of
related customers accounted for more than 10% of the Company's sales in fiscal
1995 and 1994.
Gross Margin. Gross margin increased 153% to approximately $14.2
million in fiscal 1996 from approximately $5.6 million in fiscal 1995. As a
percentage of sales, gross margin decreased to 37.5% in fiscal 1996 from 45.1%
for fiscal 1995, primarily due to an increase in the cost of electronic
components used in the Company's products and to the continuing shift in product
mix from font cartridges to lower margin PC cards. The Company expects that its
gross margin will continue to decrease as a percentage of sales in future
periods due to lower margins associated with sales of contract manufacturing
services provided by the Company's recently acquired majority-owned
subsidiaries, higher component costs, and increased competition that could
result in lower prices.
General and Administrative Expenses. General and administrative
expenses increased 36% to approximately $4.6 million in fiscal 1996 from
approximately $3.4 million in fiscal 1995. The increase was due to expanded
sales and marketing efforts, increased depreciation expense resulting primarily
from the acquisition of additional manufacturing equipment and to an increase in
personnel. As a percentage of sales, general and administrative expenses
decreased to 12.1% in fiscal 1996 from 27.0% for fiscal 1995 primarily due to
the Company's increased sales. The Company intends to amortize the goodwill
associated with its recent acquisition of a majority interest in DCI over a
ten-year period. The annual amortization expense of this goodwill is expected to
be approximately $940,000.
Research and Development Costs. Research and development costs
increased 91% to approximately $1.4 million in fiscal 1996 from approximately
$753,000 in fiscal 1995. As a percentage of sales, research and development
costs were 3.8% in fiscal 1996 as compared to
-18-
6.1% for fiscal 1995. In addition to its research and development spending, the
Company has invested in companies with technologies and capabilities
complementary to those of the Company and has licensed proprietary technology
from third parties. See "Business - Engineering and Product Development."
Income from Operations. Income from operations increased 448% to
approximately $8.2 million in fiscal 1996 from approximately $1.5 million in
fiscal 1995 primarily as a result of increased sales, which were partially
offset by higher component costs and increases in general and administrative and
research and development costs. As a percentage of sales, income from operations
was 21.6% in fiscal 1996 as compared to 12.0% for fiscal 1995.
Net Interest Expense. Net interest expense was approximately $17,000
in fiscal 1996 compared to the net interest expense of $64,000 in fiscal 1995.
Interest expense increased by approximately $296,000 due to increased borrowing
under its credit agreement. This increase was offset by an increase in interest
income of approximately $343,000 generated primarily from the net proceeds
received by the Company from its subsequent public offering in March 1996.
Provision for Income Taxes. Provision for income taxes increased 488%
to approximately $3.3 million in fiscal 1996 from approximately $556,000 in
fiscal 1995. The effective tax rates were 40.0% and 38.9% for fiscal 1996 and
1995, respectively.
Years Ended June 30, 1995 and 1994
Sales. Sales increased 52% to approximately $12.4 million in fiscal
1995 from approximately $8.2 million in fiscal 1994, primarily as a result of
increased volume of sales of PC cards. Sales of PC cards as a percentage of
total sales increased to approximately 86% in fiscal 1995 from approximately 58%
in fiscal 1994. Sales of PC cards increased primarily due to expansion of the PC
card market generally, increased sales and marketing efforts by the Company and
the broadening of the Company's PC card product line. The increase in the
Company's PC card sales was partially offset by a decrease in sales of font
cartridges. The decrease was attributable to weakening demand for font
cartridges as laser printer fonts were increasingly being delivered through PC
cards rather than font cartridges, and the shift in the Company's focus,
commenced in fiscal 1992, away from font cartridges and toward the PC card
market.
Gross Margin. Gross margin increased 52% to approximately $5.6 million
in fiscal 1995 from approximately $3.7 million in fiscal 1994. As a percentage
of sales, gross margin increased to 45.1% in fiscal 1995 from 44.9% in fiscal
1994.
General and Administrative Expenses. General and administrative
expenses increased 78% to approximately $3.4 million in fiscal 1995 from
approximately $1.9 million in fiscal 1994. The increase was due to an increase
in the Company's workforce, expanded sales and marketing efforts and increased
depreciation expense resulting from the acquisition of additional manufacturing
-19-
equipment. As a percentage of sales, general and administrative expenses were
27.0% in fiscal 1995 as compared to 23.0% in fiscal 1994.
Research and Development Costs. Research and development costs
increased 33% to approximately $753,000 in fiscal 1995 from approximately
$567,000 in fiscal 1994. As a percentage of sales, research and development
costs were 6.1% in fiscal 1995 as compared to 6.9% in fiscal 1994. See "Business
- - Engineering and Product Development."
Income from Operations. Income from operations increased 21% to
approximately $1.5 million in fiscal 1995 from approximately $1.2 million in
fiscal 1994, primarily as a result of increased sales, which were partially
offset by increases in general and administrative and research and development
costs. As a percentage of sales, income from operations was 12.0% in fiscal 1995
as compared to 15.0% in fiscal 1994.
Net Interest Expense. Net interest expense decreased 60% to
approximately $64,000 in fiscal 1995 from approximately $162,000 in fiscal 1994,
primarily due to reduced borrowings and, to a lesser extent, lower interest
rates.
Provision for Income Taxes. Provision for income taxes increased 96%
to approximately $556,000 in fiscal 1995 from approximately $284,000 in fiscal
1994. The effective tax rates were 38.9% and 38.0% for fiscal 1995 and 1994,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its activities primarily
from public and private offerings of equity securities and loans from financial
institutions and others.
Operating Activities
At June 30, 1996, working capital was approximately $39.1 million
compared to working capital of approximately $9.6 million at June 30, 1995. In
fiscal 1996 and 1995, the Company experienced negative cash flow from operations
of approximately $12.9 million and $5.7 million, respectively.
During fiscal 1996 and 1995, the Company used cash from operations of
approximately $9.6 million and $5.2 million, respectively, to finance increases
in inventory. The Company maintains a level of inventory that it believes is
necessary to offer a wide variety of products, to respond quickly to customer
orders and to lessen exposure to supply shortages and price increases associated
with components used in the Company's products. In the past, there have been
shortages of such components. If the Company's mix of sales or its assumptions
with respect to availability of supplies were to change, management's estimate
of inventory valuation may also change, which could result in a write-down of
the inventory value and could materially adversely affect the Company's
financial position and results of operations. See "Risk Factors - Raw Material
Shortages and Single Source Suppliers.
-20-
During fiscal 1996 and 1995, the Company used cash from operations of
approximately $8.9 million and $2.4 million, respectively, to finance increases
in accounts receivable resulting from increased sales. The Company's days sales
outstanding at June 30, 1996 and 1995 were 77 days and 81 days, respectively. At
June 30, 1996, two customers of the Company accounted for approximately $4.7
million, or 38%, of the Company accounts receivable balance. If any of the
Company's major customers fail to pay the Company on a timely basis, it could
have a material adverse effect on the Company's financial position and results
of operations.
Financing Transactions
In November 1995, the Company renewed its revolving line of credit
agreement with a bank, pursuant to which the Company may borrow up to the lesser
of (i) $7.5 million or (ii) an amount based on the Company's eligible accounts
receivable and inventory. The Company pays interest on loans at the bank's prime
interest rate (8.25% per annum at June 30, 1996). Under the terms of the credit
agreement, which expires in November 1996 and is collateralized by substantially
all of the assets of the Company, the Company is required to comply with certain
covenants relating to the Company's net worth and indebtedness, among others. At
June 30, 1996, approximately $4.7 million was outstanding under this credit
agreement with approximately $2.8 million remaining available for borrowing. The
Company is currently negotiating a renewal of its line of credit agreement.
The bank providing the Company's revolving credit line has made
available an additional $2.0 million of credit for lease financing and foreign
exchange. At June 30, 1996, there were loans outstanding under this additional
line aggregating approximately $703,000 with respect to the leasing of certain
equipment. The loans have terms of three years and bear interest at rates
ranging from 7.2% to 9.7% per annum.
During fiscal 1996, warrants to purchase approximately 1,108,000
shares of Common Stock were exercised, resulting in net proceeds to the Company
of approximately $5.2 million. These proceeds were used for working capital and
general corporate purposes.
In March 1996, the Company completed a subsequent public offering of
1,350,000 shares of Common Stock, resulting in net proceeds to the Company of
approximately $20.9 million. In April 1996, the Company sold an additional
75,000 shares of Common Stock to cover over-allotments in connection with the
offering, resulting in additional net proceeds to the Company of approximately
$1.2 million.
Management believes its existing cash, cash equivalents and
available-for-sale securities, together with its existing credit facilities, are
sufficient to meet the Company's current cash requirements.
-21-
Investing Transactions
In fiscal 1996 and 1995, the Company invested approximately $3.9
million and $862,000, respectively, in capital assets, primarily for
manufacturing equipment. The Company anticipates that it will continue to invest
in capital assets as required to support its manufacturing and product
development efforts and general business needs. The Company may also enter into
license agreements and joint ventures in the future, which could require capital
outlays.
In fiscal 1996, the Company invested approximately $2.5 million in
companies that have technologies or capabilities complementary to those of the
Company. Because these companies are typically privately held, the Company may
not have the ability to liquidate such investments. No assurance can be given
that the companies in which the Company has invested or may invest in the future
will develop successful products or technologies beneficial to the Company, or
that such investments will be economically justified. In addition, if the
companies in which the Company invests are not successful, the Company would
have to write-off or write-down such investments, which could result in the
Company recognizing a material expense in the period in which such adjustment
occurs.
In July 1996, the Company completed the acquisition of DCI, a provider
of manufacturing services to OEMs in the electronics industry, primarily for
production of printed circuit boards. The Company acquired a majority equity
position in DCI for approximately $3.2 million in cash and 125,000 shares of the
Company's Common Stock. This transaction will be accounted for under the
purchase method of accounting.
In August 1996, the Company invested $1.7 million in additional capital
assets, primarily for manufacturing equipment. The equipment was financed
through lease financing arrangements. The Company has commitments to invest
another $1.5 million for manufacturing equipment, which it expects to finance
through lease financing arrangements.
INFLATION
The impact of inflation on the operations of the Company is not
considered to be significant.
SEASONALITY
The Company generally does not experience seasonality with respect to
the sale of its products; however, the Company has experienced reduced sales to
certain customers in European countries during the months of July and August.
During fiscal 1996, 1995 and 1994, the Company derived approximately 12%, 23%
and 22%, respectively, of its total sales from outside the United States.
-22-
DIVIDENDS
The Company has never paid cash dividends. The Company currently
intends to retain all future earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future. In addition,
the Company's credit agreement with its bank prohibits the payment of cash
dividends without the bank's consent.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which is effective for the Company in fiscal 1997.
The Company intends to adopt the disclosure only alternative under SFAS 123. The
adoption of SFAS 123 is not expected to have a material impact on the Company's
financial statements.
RISK FACTORS
Historical Product Concentration. PC cards constituted approximately
98% and 86% of the Company's sales in fiscal 1996 and 1995, respectively. The
market for PC cards continues to develop and no assurance can be given that
computing and electronic equipment which utilize PC cards will not be modified
to render the Company's PC cards obsolete or have the effect of reducing demand
for the Company's PC cards. Decreased demand for the Company's PC cards as a
result of technological change, competition or other factors could have a
material adverse effect on the Company's business, financial position and
results of operations.
Expansion Into New Markets, Recent Acquisition. In July 1996, the
Company acquired a majority interest in DCI, a privately held contract
manufacturer primarily of printed circuit boards and related products. For its
fiscal years ended October 31, 1995 and 1994, DCI reported a net loss of
approximately $1,400,000 and net income of approximately $170,000, respectively,
and a net loss of approximately $529,000 for the eight months ended June 30,
1996. No assurance can be given that DCI will operate profitably in future
periods. If DCI continues to operate at a loss, or operates below the Company's
and/or analysts' expectations, the Company's business, financial position and
results from operations, as well as the market price of the Company's Common
Stock, could be materially adversely affected. Contract manufacturing represents
a new business for the Company. The Company may be subject to new competitive
pressures and other risks related to this business. No assurance can be given
that the Company will be successful in addressing these risks, or that this
business will not take time and management resources away from the Company's
other operations, which could have a material adverse effect on the Company's
business, financial position and results of operations.
Rapid Technological Change and Need for Continued Product Development.
The market for PC cards is characterized by rapid technological change, evolving
industry standards and rapid product obsolescence. The Company's growth and
future success will depend upon its ability, on a timely basis, to develop and
introduce new products, to enhance existing products, to adapt products for
various industrial applications and equipment platforms and to gain customer
acceptance of these products, enhancements and adaptations. The Company, having
more limited
-23-
resources than many of its competitors, must restrict its development efforts at
any given time to a relatively small number of development projects. No
assurance can be given that the Company will select the correct projects for
development resources or that the Company's development efforts will be
successful. In addition, no assurance can be given that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products, that new products and product
enhancements will meet the requirements of the marketplace and achieve market
acceptance, or that the Company's current or future products will conform to
applicable industry standards. The inability of the Company to introduce, on a
timely basis, new products or enhancements that contribute to profitable sales
would have a material adverse effect on the Company's business, financial
position and results of operations. In addition, the contract manufacturing
market is characterized by rapid technological change. The Company's growth and
future success in this market will, in addition to the factors described above,
depend on its ability to anticipate and respond to technological changes in
manufacturing processes on a cost-effective and timely basis, as to which no
assurance can be given.
Raw Material Shortages and Single Source Suppliers. The Company has,
from time to time, experienced shortages in the supply of computer memory chips
and other electronic components used to manufacture PC cards. The Company
expects such supply shortages may continue, particularly with respect to
computer memory chips and other electronic components used in products targeted
at high-growth market segments. Presently, certain memory chips important to the
Company's products are subject to industry-wide allocation by suppliers.
The Company purchases certain key components from sole or single source
vendors for which alternative sources are not currently available. The Company
does not maintain long-term supply agreements with any of its vendors. The
inability to develop alternative sources for these single or sole source
components or to obtain sufficient quantities of components could result in
delays or reductions in product shipments which could materially and adversely
affect the Company's business, financial position and results of operations. The
Company relies on certain sole source suppliers to provide components used in
certain of the Company's products. No assurance can be given that such suppliers
or one or more of the Company's other vendors will not reduce supplies to the
Company. Even where alternative sources of supply are available, if a major
vendor were to reduce supplies to the Company, the Company may be forced to
spend a significant amount of time to qualify an additional vendor and obtain
adequate supplies. The inability to obtain adequate supplies, on a timely basis,
could have a material adverse effect on the Company's business, financial
position and results of operations. In addition, shortages of electronic
components may result in higher prices, which could have a material adverse
effect on the Company's business, financial position and results of operations.
Fluctuations in Quarterly Results; Possible Volatility of Value of
Common Stock. The Company's operations may be subject to quarterly fluctuations
due to a number of factors, including
-24-
the timing and delivery of significant orders for the Company's products,
competitive pricing pressures, increases in raw material costs, higher costs
associated with the expansion of operations, changes in customer and product
mix, changes in the Company's distribution channels, production difficulties,
quality of the Company's products, increased research and development expenses
associated with new product introductions, write-downs or write-offs of
investments in other companies, exchange rate fluctuations and market acceptance
of new or enhanced versions of the Company's products, as well as other factors,
some of which are beyond the Company's control. Any future operating results of
the Company below the expectations of public market analysts and investors could
materially adversely affect the market price of the Company's Common Stock. The
market price of the Company's Common Stock could also be subject to wide
fluctuations in response to a number ofitems, such as quarterly variations in
operating results, announcements of technological innovations or new products by
the Company or its competitors, trading volume, general market trends and other
factors.
Competition. The markets in which the Company competes are
characterized by rapid technological change, evolving industry standards, rapid
product obsolescence and intense competition. The Company competes with
manufacturers of PC cards and related products, including SanDisk Corporation
and Smart Modular Technologies, Inc., as well as with electronic component
manufacturers who also manufacture PC cards, including Mitsubishi Electric
Corporation, Intel Corporation, Epson of America, Inc., Fujitsu
Microelectronics, Inc. Certain of these competitors also supply the Company with
raw materials, including electronic components currently subject to
industry-wide allocation. Such competitors may have the ability to manufacture
PC cards at lower costs than the Company as a result of their higher levels of
integration. In addition, many of the Company's competitors or potential
competitors have greater financial, marketing and technological resources than
the Company. The Company expects competition to increase in the future from
existing competitors and from other companies that may enter the Company's
existing or future markets with similar or alternative products that may be less
costly or provide additional features. The Company believes that its ability to
compete successfully in its PC card business depends on a number of factors,
including product quality and performance, order turnaround, the provision of
competitive design capabilities, timely response to advances in technology,
adequate manufacturing capacity, efficiency of production, timing of new product
introductions by the Company, its customers and its competitors, the number and
nature of the Company's competitors in a given market, price and general market
and economic conditions. In addition, increased competitive pressure may lead to
intensified price competition for both PC cards and contract manufacturing
services, resulting in lower prices and gross margins, which could materially
adversely affect the Company's business, financial position and results of
operations. No assurance can be given that the Company will compete successfully
in the future.
-25-
Major Customers; Concentration of Credit Risk. In fiscal 1996, two
customers, whose individual sales exceed 10% of total sales, accounted for an
aggregate of approximately 25% of the Company's sales. If either of these
customers were to reduce significantly th amount of business they conduct with
the Company, it could have a material adverse effect on the Company's business,
financial position and results of operations. At June 30, 1996, two customers of
the Company accounted for approximately $4.7 million, or 38%, of the Company's
accounts receivable balance. If any of the Company's major customers fail to pay
the Company on a timely basis, it could have a material adverse effect on the
Company's business, financial position and results of operations.
International Sales. During fiscal 1996, 1995 and 1994, the Company
derived approximately 12%, 23% and 22%, respectively, of its total sales from
outside the United States. Although the Company's sales are denominated
primarily in United States dollars, fluctuations in currency exchange rates
could cause the Company's products to become less price competitive in a
particular country, leading to a reduction in sales or profitability in that
country. Manufacturing and sales of the Company's products may also be
materially adversely affected by factors such as unexpected changes in, or
imposition of, regulatory requirements, tariffs, import and export restrictions
and other barriers and restrictions, longer payment cycles, greater difficulty
in accounts receivable collection, potentially adverse tax consequences, the
burdens of complying with a variety of foreign laws and other factors beyond the
Company's control. No assurance can be given that these factors will not have a
material adverse effect on the Company's business, financial position and
results of operations.
Failure to Maintain Quality Control Standards and Deliver Products on a
Timely Basis. Many of the Company's products and services must meet exacting OEM
specifications. As a result, the Company must adopt and adhere to stringent
quality control standards for its products and manufacturing processes. No
assurance can be given that the quality of the Company's products and services
will meet customer requirements in the future. If quality problems occur, the
Company could experience increased costs, reschedulings or cancellations of
orders and shipments, delays in collecting accounts receivable, increases in
product returns and reductions in new purchase orders, any of which could have a
material adverse effect on the Company's business, financial position and
results of operations. The Company may have a portion of its production
manufactured at other facilities, including DCI and Centennial Thailand. No
assurance can be given that such facilities, or other manufacturers to whom the
Company may subcontract a portion of its production, will produce products for
the Company that meet the quality requirements of the Company's customers.
The Company believes its ability to deliver products rapidly represents
an important competitive advantage. No assurance can be given, however, that
future delays or interruptions in production caused by problems with product
quality, supply shortages, facilities expansion, equipment failure, the
subcontracting of a portion of production, human error or other factors, some of
which may be beyond the control of the Company, will not result in the failure
to meet delivery schedules. Any such failure could harm the Company's reputation
in the marketplace and have a material adverse effect on the Company's business,
financial position and results of operations.
-26-
Manufacturing Operations. The Company has invested, and intends to
continue to invest, in facilities and equipment in order to increase, expand and
update its manufacturing capabilities and equipment at its facilities in
Billerica, Massachusetts and at its recently acquired contract manufacturing
facility in Southborough, Massachusetts and the facility in Thailand that is
expected to commence operations in January 1997. Changes in technology or sales
growth beyond currently established manufacturing capabilities will require
further investment. In particular, the future success of the Company's contract
manufacturing operations will depend on the Company's ability to utilize its
manufacturing capacity in an efficient manner, as to which no assurances can be
given. The inability of the Company to generate additional sales necessary to
utilize its contract manufacturing capacity in an efficient manner could have a
material adverse effect on the Company's business, financial position and
results of operations. In addition, no assurance can be given that Centennial
Thailand will not experience significant expenses, costs and delays that could
result in postponement in the commencement of its operations. As a new facility,
Centennial Thailand may also be more prone to experience production and quality
control difficulties, which could have a material adverse effect on the
Company's business, financial position and results of operations.
Substantially all of the Company's manufacturing operations for the
production of PC cards are presently conducted at its main office and
manufacturing facility in Billerica, Massachusetts. A disruption of the
Company's PC card manufacturing operations for any reason, including
interruptions in production, theft, government intervention or a natural
disaster such as fire, earthquake, flood or other casualty could cause the
Company to limit or cease its PC card manufacturing operations, which would have
a material adverse effect on the Company's business, financial position and
results of operations. Although the Company maintains business interruption
insurance to cover natural disasters, no assurance can be given that such
insurance would be sufficient to compensate the Company for damages resulting
from a casualty, or that such insurance will continue to be available to the
Company on commercially reasonable terms, if at all. Although no assurance can
be given, the Company believes that DCI and Centennial Thailand may be able to
manufacture certain of the Company's PC cards if market conditions warrant or
there is a sustained interruption of its manufacturing operations at its
Billerica, Massachusetts facility.
Management of Growth. The Company has experienced a period of rapid
growth due primarily to strong demand for the Company's PC cards. The Company's
ability to manage continued growth, including growth through the Company's
acquisition of DCI and other possible acquisitions (as to which there can be no
assurance), will require the continued improvement of operational, financial and
management information systems and the effective management of employees, as to
which no assurance can be given. If the Company's management is unable to manage
growth effectively, the Company's business, financial position and results of
operations would be materially adversely affected.
Acquisitions and Investments. From time to time, the Company considers
acquisitions of companies and technologies, which may require the Company to
secure additional financing and could result in dilution to the Company's
existing stockholders. No assurance can be given that such financing will be
available or, if available, will be on terms acceptable to the Company. The
Company may also incur significant expenditures in connection with acquisitions
that are not completed, which would result in the Company having to expense such
costs in its then current financial period. In the event the Company incurs
indebtedness in connection with an acquisition, the Company may be subject to
various risks, including interest rate fluctuations and insufficient cash flow.
In addition, the process of acquiring businesses or technologies frequently
results in unforeseen expenses, difficulties, complications and delays, which
could have a material adverse effect on the Company's business, financial
position and results of operations.
-27-
The Company has invested and intends to continue to invest in companies
that have technologies or capabilities complementary to those of the Company.
Because these companies are typically privately held, the Company may not have
the ability to liquidate readily such investments. No assurance can be given
that the companies in which the Company has invested or may invest in the future
will develop successful products or technologies beneficial to the Company or
that such investments will be economically justified. In addition, if companies
in which the Company invests are not successful, the Company would have to
write-off or write-down such investments, which could result in the Company
recognizing a material expense in the period in which such adjustment occurs. In
addition, the Company has guaranteed payment obligations totaling approximately
$950,000 under two leases entered into by one of the companies in which the
Company has invested. If the Company were required to pay either of the
obligations under its guaranties, it could have a material adverse effect on the
Company's business, financial position and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 below and the Index therein for a listing of the financial
statements and supplementary data filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
Items 10 to 13 are incorporated herein by reference to the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission.
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a)(1)Financial Statements. The financial statements required to be
filed by Item 8 herewith are as follows:
PAGE
----
Report of Independent Accountants - Coopers & Lybrand L.L.P................ F-1
Consolidated Balance Sheets as of June 30, 1996 and 1995 .................F-2
Consolidated Statements of Income for the years
ended June 30, 1996, 1995 and 1994.........................................F-4
Consolidated Statements of Stockholders' Equity
for the years ended June 30, 1994, 1995 and 1996 ..........................F-5
-28-
Consolidated Statements of Cash Flows for the years
ended June 30, 1996, 1995 and 1994.........................................F-6
Notes to Consolidated Financial Statements..................................F-7
(a)(2) No financial statement schedules are required to be filed
herewith.
(a)(3) Exhibits.
(i) The following exhibits were filed as part of the Company's Form
S-3 Registration Statement (No. 333-1008) declared effective by the Securities
and Exchange Commission (the "Commission") on March 19, 1996.
Exhibit No. Title
- ----------- -----
10a Amendment No. 1 dated as of November 8,1995 to the Revolving
Credit and Security Agreement between the Company and The
First National Bank of Boston.
*10b Employment Agreement between the Company and John J. McDonald,
dated October 20, 1995.
10d License Agreement between the Company and Telequip Corporation
dated August 24, 1995.
(ii) The following exhibits were filed as part of the Company's Annual
Report on Form 10-KSB filed with the Commission on October 13, 1995.
Exhibit No. Title
- ----------- -----
3a Certificate of Amendment to the Certificate of Incorporation.
*10a 1994 Stock Option Plan, as amended.
*10b 1994 Formula Stock Option Plan, as amended.
11 Computation of weighted average shares outstanding.
-29-
(iii) The following exhibits were filed as part of the Company's
Post-Effective Amendment No. 2 to its Form SB-2 Registration Statement (No.
33-74862-NY) filed with the Commission on February 1, 1995.
Exhibit No. Title
- ----------- -----
10a License Agreement with Telequip Corporation.
10b Subscription Agreement between the Company and A.I.M. Overseas
NV, dated January 5, 1995.
10c License Agreement with Synchro-Work Corporation, with an
English summary of material terms.
(iv) The following exhibits were filed as part of the Company's
Post-Effective Amendment No. 1 to its Form SB-2 Registration Statement (No.
33-74862-NY) originally filed with the Commission on December 22, 1994.
Exhibit No. Title
- ----------- -----
*10a 1994 Formula Stock Option Plan.
*10b Employment Agreement between the Company and James M. Murphy,
dated May 1, 1994.
10c Stock Purchase Agreement by and between the Company, Centennial
Technologies Limited, Reg Ellis-Bolton, and Sheryal Ellis-
Bolton, dated as of June 30, 1994.
*10d Employment Agreement between the Company and Reg Ellis-Bolton,
dated as of July 1, 1994.
*10e Employment Agreement between the Company and Sheryal Ellis-
Bolton, dated as of July 1, 1994.
10f Revolving Credit and Security Agreement between the Company
and the First National Bank of Boston, dated September 14,1994.
-30-
10g 3,000,000 Revolving Credit Note, dated September 14, 1994,
payable by the Company to the First National Bank of Boston.
10h Unlimited Guaranty, dated September 14, 1994, by NCT in favor
of the First National Bank of Boston for the benefit of the
Company.
10i Affiliate Subordination Agreement, dated September 14, 1994,
executed in favor of the First National Bank of Boston by the
Company, NCT and Emanuel Pinez.
(v) The following exhibit was filed as part of the Company's Annual
Report on Form 10-KSB filed with the Security and Exchange Commission (the
"Commission") on September 25, 1994.
Exhibit No. Title
- ----------- -----
10a Revolving Credit and Security Agreement between the Company
and the First National Bank of Boston, dated September 14,1994.
(vi) The following exhibits were filed as part of the Company's Form
SB-2 Registration Statement (33-74862-NY) declared effective by the Commission
on April 12, 1994.
Exhibit No. Title
- ----------- -----
3a Certificate of Incorporation.
3a(1) Articles of Organization of Setag, Inc., dated May 26, 1987, as
amended on July 15, 1988 to change its name to C. Centennial,
Inc.
3b Bylaws.
3c Certificate of Agreement of Merger between C. Centennial, Inc.,
a Massachusetts corporation, and the Company, dated January 21,
1994.
3d Articles of Merger between C. Centennial, Inc., a Massachusetts
corporation, and the Company, dated January 21, 1994.
4a Included in Exhibits 3a and 3b.
4b Specimen Stock Certificate.
-31-
4d Form of Warrant Agreement between the Company and American
Securities Transfer, Incorporated (includes Specimen Warrant
Certificate).
10a Lease Agreement between the Company and 37 Manning Road
Limited Partnership, dated November 6, 1992 and amended on
November 29, 1992.
10b Lease Agreement between the Company and 4 Point Interiors,
dated June 28, 1993 ("California Lease ").
10c Amendment to the California Lease, dated June 25, 1993.
10d Form of the Company's Domestic Distributor Agreement between
the Company and its domestic distributors.
10e Form of the Company's Agreement with its Manufacturer's
Representatives.
10f Contract for services between the Company and Camwill, S.A.,
dated November 1, 1989.
*10g Employment Agreement between the Company and Emanuel Pinez,
dated March 1, 1994.
10h Loan and Security Agreement between the Company and Saugus Bank
and Trust Company, dated November 10, 1992 and renewed on
January 13, 1994.
10i Personal guaranty between Emanuel Pinez and Saugus Bank and
Trust Company, dated November 10, 1992.
10j Pledge Agreement between the Company and Saugus Bank and Trust
Company, dated November 10, 1992.
10k Revolving Demand Loan and Security Agreement between the
Company and Saugus Bank and Trust Company, dated November
10, 1992 and renewed on January 13, 1994.
10l Loan Agreement between the Company's subsidiary, NCT, Inc.
( "NCT "), and Saugus Bank and Trust Company, dated
January 14, 1994.
10m Purchase and Sale Agreement for certain accounts receivable
between NCT and Western Fidelity Funding, Inc., dated
December 22, 1992.
10o Equipment Lease Agreement between the Company and TAL Financial
Corporation, dated November 30, 1992.
-32-
*10p 1994 Stock Option Plan.
10q Letter Agreement between Emanuel Pinez and the Company, dated
January 15, 1994, relating to the contribution of all
outstanding capital stock of NCT.
10s Indemnification Agreement dated April 11, 1994 between Emanuel
Pinez and the Company.
21 List of the Company's Subsidiaries.
* These exhibits relate to a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed by the
Company during the last quarter of the period covered by this report.
The Company filed a Form 8-K with the Commission subsequent to the
period covered by this report on July 25, 1996 reporting an
acquisition of assets, and the exhibit identified below was filed
therewith. The Company also filed a Form 8-K/A with the Commission
relating to this acquisition on September 23, 1996.
Exhibit No. Title
- ----------- -----
2a Agreement and Plan of Merger by and among Centennial
Technologies, Inc., Centennial Acquisition Corporation
and Design Circuits, Inc., dated July 10, 1996.
-33-
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CENTENNIAL TECHNOLOGIES, INC.
Date: September 30 , 1996 By:/s/ Emanuel Pinez
--------------------------------------
Emanuel Pinez, Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Name Capacity Date
- ---- -------- ----
<S> <C> <C>
/s/ Emanuel Pinez Chairman of the Board, Chief September 30, 1996
- ----------------------------------- Executive Officer, and Secretary
Emanuel Pinez
/s/ John J. Shields Vice Chairman of the Board September 30, 1996
- ----------------------------------
John J. Shields
/s/ John J. McDonald President and Director September 30, 1996
- -------------------------------
John J. McDonald
/s/ J.P. Luc Beaubien Director September 30, 1996
- -----------------------------------
J.P. Luc Beaubien
/s/ William M. Kinch Director September 30, 1996
- -----------------------------------
William M. Kinch
/s/ William Shea Director September 30, 1996
- -----------------------------------
William Shea
/s/ James M. Murphy Chief Financial Officer (Principal September 30, 1996
- ----------------------------------- financial and accounting officer),
James M. Murphy and Director
</TABLE>
-34-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of CENTENNIAL TECHNOLOGIES, INC.:
We have audited the accompanying consolidated balance sheets of Centennial
Technologies, Inc. as of June 30, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity 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 Centennial
Technologies, Inc. , as of June 30, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended June 30, 1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
August 21, 1996 except for Notes
4 and 17 as to which the date is
September 9, 1996
F-1
CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,181,520 $ 970,446
Available-for-sale securities 4,932,763 -
Accounts receivable, net of allowance for
doubtful accounts of $230,000 and $122,200
at June 30, 1996 and 1995, respectively 12,592,231 3,932,170
Inventories 18,229,317 8,609,492
Current portion of notes receivable 3,680,750 767,758
Deferred income taxes 211,100 209,300
Other current assets 2,362,887 670,812
--------------- ----------------
Total current assets 48,190,568 15,159,978
Equipment and leasehold improvements,
net of accumulated depreciation and
amortization of $822,011 and $299,355
at June 30, 1996 and 1995, respectively 4,698,616 1,322,637
Notes receivable, less current portion - 1,072,939
Investments 2,472,381 -
Other assets 170,392 266,658
Deferred income taxes 121,300 126,000
Intangible assets, net of accumulated
amortization of $412,463 and $290,437
at June 30, 1996 and 1995, respectively 128,918 250,944
--------------- ----------------
Total assets $ 55,782,175 $ 18,199,156
=============== ================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-2
CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---- ----
<S> <C> <C>
Current liabilities:
Note payable $ 4,683,876 $ 1,153,167
Current portion of long-term obligations under capital leases 336,058 102,645
Accounts payable and accrued expenses 3,494,693 3,570,519
Income taxes payable 614,036 591,265
Deferred revenue - 175,000
------------------- --------------------
Total current liabilities 9,128,663 5,592,596
------------------- --------------------
Long-term obligations under capital leases 366,944 161,134
Deferred income taxes 241,600 -
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 15,000,000
shares authorized 8,315,935 shares issued
and outstanding at June 30, 1996 and 5,591,288
shares issued and outstanding at June 30, 1995 83,159 55,913
Additional paid-in capital 38,883,677 10,213,517
Retained earnings 7,078,132 2,175,996
------------------- --------------------
Total stockholders' equity 46,044,968 12,445,426
------------------- --------------------
Total liabilities and stockholders' equity $ 55,782,175 $ 18,199,156
=================== ====================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales $ 37,847,681 $ 12,445,015 $ 8,213,236
Cost of goods sold 23,636,299 6,832,927 4,523,186
-------------------- -------------------- --------------------
Gross margin 14,211,382 5,612,088 3,690,050
General and administrative expenses 4,590,413 3,365,752 1,888,602
Research and development costs 1,433,765 752,654 567,248
-------------------- -------------------- --------------------
Income from operations 8,187,204 1,493,682 1,234,200
-------------------- -------------------- --------------------
Other income (expense):
Interest income 352,606 9,944 8,159
Interest expense (369,584) (73,952) (169,755)
Loss on sale of receivables to factor - - (76,892)
Amortization of discount on bridge financing - - (247,500)
-------------------- -------------------- --------------------
(16,978) (64,008) (485,988)
-------------------- -------------------- --------------------
Income before income taxes 8,170,226 1,429,674 748,212
Provision for income taxes 3,268,090 555,958 284,320
-------------------- -------------------- --------------------
Net income $ 4,902,136 $ 873,716 $ 463,892
==================== ==================== ====================
Earnings per share:
Primary $ .67 $ .16 $ .14
==================== ==================== ====================
Fully diluted $ .66 $ .14 $ .14
==================== ==================== ====================
Weighted average shares outstanding:
Primary 7,338,906 5,511,606 3,325,000
==================== ==================== ====================
Fully diluted 7,432,502 6,287,202 3,325,000
==================== ==================== ====================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------------------ Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
--------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993 3,013,500 $ 30,135 $ 175,800 $ 838,388 $ 1,044,323
Contributed capital in connection with 247,500 247,500
bridge financing
Issuance of common stock and
common stock purchase warrants
in connection with an initial public
offering, net of issuance costs of
$943,311 1,500,000 15,000 4,648,689 4,663,689
Net income 463,892 463,892
------------- ---------------- --------------- ------------- ---------------
Balance at June 30, 1994 4,513,500 45,135 5,071,989 1,302,280 6,419,404
Exercise of warrants 718,088 7,181 3,233,304 3,240,485
Exercise of options 39,750 398 149,152 149,550
Compensation from option grants 52,650 52,650
Exercise of representative warrants 94,950 949 568,196 569,145
Issuance of common stock in connection
with a private placement 225,000 2,250 1,138,226 1,140,476
Net income 873,716 873,716
------------- ---------------- --------------- ------------- ---------------
Balance at June 30, 1995 5,591,288 55,913 10,213,517 2,175,996 12,445,426
Exercise of warrants 1,006,897 10,069 4,580,961 4,591,030
Exercise of options 191,200 1,912 696,759 698,671
Compensation from option grants 19,875 19,875
Tax benefit related to
options 614,322 614,322
Exercise of representative warrants 101,550 1,015 601,740 602,755
Issuance of common stock in
connection with a public
offering, net of issuance costs
of $3,479,247 1,425,000 14,250 22,156,503 22,170,753
Net income 4,902,136 4,902,136
------------- ---------------- --------------- ------------- ---------------
Balance at June 30, 1996 8,315,935 $83,159 $38,883,677 $7,078,132 $46,044,968
============= ================ =============== ============= ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30,
--------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 4,902,136 $ 873,716 $ 463,892
Adjustments to reconcile net income to net cash used
for operating activities:
Depreciation and amortization 644,682 337,151 192,673
Provision for loss on accounts receivable 280,000 162,200 49,000
Discount on bridge financing - - 247,500
Compensation from option grants 19,875 52,650 -
Tax benefit related to stock option exercise 614,322 - -
Deferred income taxes 244,500 (219,593) (76,506)
Changes in operating assets and liabilities:
Accounts receivable (8,940,061) (2,432,829) (981,064)
Inventories (9,619,825) (5,238,039) (1,115,211)
Notes receivable - see Note 4 759,947 (1,840,697) -
Other assets (1,595,809) (564,033) (58,726)
Accounts payable and accrued expenses (75,826) 2,954,790 (974,411)
Income taxes payable 22,771 74,854 75,070
Deferred revenue (175,000) 175,000 -
------------ ----------- ------------
Net cash used for operating activities (12,918,288) (5,664,830) (2,177,783)
------------ ----------- ------------
Cash flows from investing activities:
- -----------------------------------------------------------------------
Capital expenditures (3,898,635) (862,396) (525,438)
Purchase of available-for-sale securities (8,913,741) - -
Proceeds from sale of available-for-sale securities 3,980,978 - -
Notes receivable - see Note 4 (2,800,000) - -
Purchases of investments (2,272,381) - -
------------ ----------- ------------
Net cash used for investing activities (13,903,779) (862,396) (525,438)
------------ ----------- ------------
Cash flows from financing activities:
- -----------------------------------------------------------------------
Cash overdraft - - (54,398)
Net borrowings under line of credit 3,530,709 1,153,167 -
Borrowings from sales leaseback of equipment 691,034 319,735 -
Payments on equipment financing (251,811) (55,956) -
Net proceeds from exercise of stock options 698,671 149,550 -
Net proceeds from exercise of warrants and representatives' warrants 5,193,785 3,809,630 -
Net proceeds from public offerings 20,928,753 - 4,637,589
Net proceeds pursuant to the underwriters' over-allotments 1,242,000 - 26,100
Net proceeds from private placement - 1,140,476 -
Proceeds from bridge financing - - 550,000
Repayment of bridge financing - - (550,000)
Payments on notes payable - - (925,000)
------------ ----------- ------------
Net cash provided by financing activities 32,033,141 6,516,602 3,684,291
------------ ----------- ------------
Net increase (decrease) in cash 5,211,074 (10,624) 981,070
Cash and cash equivalents at beginning of the year 970,446 981,070 -
------------ ----------- ------------
Cash and cash equivalents at end of the year $ 6,181,520 $ 970,446 $ 981,070
============ =========== ============
Supplemental disclosure:
Cash paid during the year for:
Interest $ 342,462 $ 71,164 $ 156,080
============ =========== ===========
Income taxes $ 2,601,456 $ 716,268 $ 285,790
============ =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of Centennial Technologies, Inc.
(the "Company") include the accounts of the Company, all wholly-owned
subsidiaries and majority-owned subsidiaries. Investments in companies in which
ownership interests range from 20 to 50 percent, and the Company exercises
significant influence over operating and financial policies, are accounted for
using the equity method. Other investments are accounted for using the cost
method. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the fiscal 1996 presentation.
Industry Segment
The Company operates in a single industry segment: the design,
manufacture, and marketing of PC Cards used primarily by original equipment
manufacturers for industrial and commercial applications. In May 1996, the
Company entered into an agreement to acquire a 51% interest in a joint venture.
The joint venture intends to manufacture PC Cards and provide contract
manufacturing services. In July 1996, the Company acquired a company that
provides contract manufacturing services.
Revenue Recognition
Revenue from product sales is recognized at time of shipment.
Warranty Costs
Costs relating to product warranty are expensed as incurred. In
addition, on sales to certain wholesalers, the Company offers a stock rotation
policy. The Company has not experienced material costs associated with its
warranty and restocking policy.
Research and Development Costs
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
has no requirements for compensating balances.
F-7
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade receivables. If any of
the Company's major customers fail to pay the Company on a timely basis, it
could have a material adverse effect on the Company's financial position and
results of operations.
For fiscal 1996, two customers, whose individual sales exceeded 10% of
total sales, accounted for an aggregate of approximately 25% of the Company's
sales. At June 30, 1996, these two customers accounted for approximately $4.7
million, or 38% of the Company's accounts receivable balance.
No one customer or group of related customers accounts for more than
10% of the Company's sales in fiscal 1995 and 1994. At June 30, 1995, two
customers of the Company accounted for approximately $1.4 million, or 35% of the
Company's accounts receivable balance.
Approximately 12%, 23% and 22% of the Company's sales in fiscal 1996,
1995 and 1994, respectively, were outside the United States, primarily in
several Western European countries, Israel and Canada. No one area comprised
more than 10% of the Company's sales.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash and
cash equivalents, available-for-sale securities, accounts receivable, notes
receivable and accounts payable, the carrying amounts approximate fair value due
to their short maturities. Long-term notes receivable, investments and notes
payable are carried at amounts that approximate fair value.
Inventories
Inventories are stated on a first-in, first-out (FIFO) basis at the
lower of cost or market.
Equipment and Leasehold Improvements
Equipment is stated at cost. Major renewals and improvements are
capitalized while repair and maintenance charges are expensed when incurred.
Depreciation is provided over the estimated useful life of the respective
assets, ranging from three to ten years, on a straight-line basis. Leasehold
improvements are amortized over the lesser of the term of the lease or the
estimated useful life of the related assets. When assets are sold or retired,
their cost and related accumulated depreciation are removed from the accounts.
Any gain or loss is included in the determination of net income.
Intangible Assets
Intangible assets consist of trademarks, copyrights and a covenant not
to compete. The trademarks and copyrights are being amortized over their
estimated lives of five years and the covenant not to compete over three years.
It is the Company's policy to evaluate periodically the carrying value of its
intangible assets and to make adjustments if necessary. To date, no adjustments
have been required.
F-8
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Income Taxes
The Company accounts for income taxes by the liability method. Under
the liability method, deferred taxes are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse.
Earnings Per Share
Primary earnings per share data are based on outstanding Common Stock
and Common Stock assumed to be outstanding to reflect the dilutive effects of
stock options and warrants using the treasury stock method. Fully diluted
earnings per share are based on outstanding Common Stock and Common Stock
assumed to be outstanding to reflect the maximum dilutive effect of stock
options and warrants.
The difference between primary and fully diluted earnings per share has
resulted from the differences in the average and ending market prices of the
Company's Common Stock during the periods presented.
For calculation of fully diluted earnings per share, the maximum
dilutive effect has been realized with respect to options and warrants
outstanding during the periods presented, as the end of the period market price
of the Company's Common Stock exceeded the average market price for the periods.
Stock Split
The Company effected a three-for-two stock split of its outstanding
shares of Common Stock in the form of a stock dividend on August 30, 1995. All
references in the accompanying consolidated financial statements to number of
shares, weighted average number of shares outstanding, per share amounts, stock
plan data and related prices reflect this split.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounting Standards
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") which is effective for the Company in fiscal 1997.
The Company intends to adopt the disclosure only alternative under SFAS 123. The
adoption of SFAS 123 is not expected to have a material impact on the Company's
consolidated financial statements.
F-9
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. AVAILABLE-FOR-SALE SECURITIES
The Company classifies its securities as available-for-sale and are
stated at amortized cost plus accrued interest, which approximate fair market
value. Gross unrealized losses on these available-for-sale securities are not
reported as a separate component of stockholders' equity due to their
immateriality. Dividend and interest income, including amortization of premium
and discount arising at acquisition, are included in income. The Company's
available-for-sale securities are classified as current assets, as they are held
to fund current operations. Available-for-sale securities at June 30, 1996
consist of mortgage backed-securities with an amortized cost and fair market
value of approximately $4.9 million. The available-for-sale securities held at
June 30, 1996 will mature within the next fiscal year. During fiscal 1996, gross
realized gains and losses were immaterial to the Company's results of
operations.
3. INVENTORIES
<TABLE>
<CAPTION>
Inventories consisted of:
June 30,
---------------------------------------
1996 1995
---- ----
<S> <C> <C>
Raw material, primarily electronic components $ 8,994,805 $ 4,511,892
Work in process 1,637,519 1,814,599
Finished goods 7,596,993 2,283,001
----------------- ---------------
$ 18,229,317 $ 8,609,492
================= ===============
</TABLE>
The Company maintains levels of inventories that it believes are
necessary based upon assumptions concerning its growth, mix of sales and
availability of raw materials. Changes in those underlying assumptions could
affect management's estimates of inventory valuation.
4. NOTES RECEIVABLE
Operating Activity
In fiscal 1995, the Company sold approximately $1,040,000 of accounts
receivable and $1,000,000 of inventory to an unrelated party for $200,000 in
cash and two promissory notes. The notes with an original aggregate principal
amount of approximately $1,840,000, are collateralized by the assets of the
unrelated party, bear interest at 9% per annum and are payable in equal
quarterly installments in 1996 and 1997. At June 30, 1996 and 1995, the notes
receivable balance was approximately $1,081,000 and $1,840,000, respectively.
In fiscal 1995, the Company recognized gross margin of $75,000 from
this transaction and deferred $175,000 of gross margin. During fiscal 1996, the
Company recognized this $175,000 deferred gross margin as income, as scheduled
payments continued to be made and an agreement was reached in the fourth quarter
of fiscal 1996 that certain payments were to be accelerated. These notes were
repaid in full with interest in August 1996. These notes receivable are
classified as operating activity in the accompanying Consolidated Statements of
Cash Flows.
F-10
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Investing Activity
During fiscal 1996, the Company advanced funds to affiliated and
unaffiliated companies which generally develop technologies complimentary to
that of the Company. At June 30, 1996, the notes receivable balance due from
these companies was approximately $2,600,000. The Company made eight such loans,
all of which are evidenced by notes (promissory or convertible). The terms of
these notes are one year or less and bear interest at rates ranging between
prime and prime plus 4%. These notes receivable are classified as investing
activity in the accompanying Consolidated Statements of Cash Flows.
In June 1996, a convertible note with a principal balance of $200,000
was converted into common stock of the investee, and has been accounted for as
an investment (see Note 6).
To date there has been no defaults associated with the terms of the
outstanding notes receivable. In August and September 1996, notes aggregating
$675,000 plus accrued interest were repaid to the Company.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
Equipment and leashehold improvements consisted of the following:
June 30,
----------------------------------------
1996 1995
---- ----
<S> <C> <C>
Equipment $ 4,302,016 $ 1,220,173
Equipment under capital leases 1,010,769 319,735
Leasehold improvements 207,842 82,084
----------------- ---------------
5,520,627 1,621,992
Accumulated depreciation and amortization (822,011) (299,355)
----------------- ---------------
Equipment and leasehold improvements, net $ 4,698,616 $ 1,322,637
================= ===============
</TABLE>
Depreciation expense for fiscal 1996, 1995 and 1994 was approximately
$523,000, $215,000 and $71,000, respectively.
6. INVESTMENTS
Fiscal 1996
The Company purchased for $500,000 in cash and a conversion of a
$200,000 note a 9.5% interest in a corporation which designs, manufactures and
markets automated optical vision and individual imaging systems for inspection
and identification of defects in printed circuit boards. The Company accounts
for this investment using the equity method of accounting since it can exercise
significant influence over the corporation. For fiscal 1996, the Company's
proportionate share of this corporation's operations was immaterial.
The Company purchased for $569,000 a minority interest in a corporation
which provides Internet services. The Company has also entered into guaranties
for the payment of certain lease obligations of the corporation aggregating
approximately $950,000. To date, the Company has not made any payments in
connection with these guaranties. The President and shareholder of the
corporation was a Director of the Company from February 1994 through November
1995. This investment is accounted for using the cost method.
F-11
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company purchased for $250,000 a minority interest in a corporation
which designs, manufactures and markets small form factor computer hard drives.
This technology is designed to increase the speed and processing capabilities of
PC Cards. This investment is accounted for using the cost method.
The Company purchased for $250,000 a minority interest in a contract
manufacturer which has surface mount, chip on board and ceramic printing
capabilities. This investment is accounted for using the cost method.
The Company purchased for $250,000 a minority interest in a holding
company of various technology-related corporations and purchased a minority
interest for $396,500 in a corporation which develops, manufactures and markets
products for vehicle and fleet management. These investments are accounted for
using the cost method.
Fiscal 1994
The Company exchanged 13,500 shares of the Company's Common Stock for
all the outstanding shares of a company located in the United Kingdom. The
acquisition has been accounted for as a pooling of interests. The accompanying
financial statements include the accounts of the acquired company.
7. DEBT
Note Payable
The Company maintains a $7,500,000 revolving line of credit agreement
with a bank. The Company's credit agreement limits borrowings to a percentage of
receivables and inventories and contains certain covenants relating to the
Company's net worth and indebtedness, among others. This credit agreement is
collateralized by substantially all the assets of the Company. The credit
agreement bears interest at the bank's prime interest rate (8.25% and 9.0% at
June 30, 1996 and 1995, respectively). The agreement expires in November 1996.
The Company is currently negotiating a renewal of and an increase in its credit
agreement with the bank. At June 30, 1996 and 1995, the Company had utilized
approximately $4.7 million and $1.2 million, respectively, under this credit
agreement.
Capital Leases
The Company leases certain equipment under lease financing agreements
with the bank that is currently providing the Company with its line of credit.
These lease arrangements have been accounted for as financing transactions. The
subject equipment is recorded as an asset for financial statement purposes, and
is being depreciated accordingly. These loans have terms of three years and bear
interest at rates ranging from 7.2% to 9.7% per annum.
Operating Leases
The Company leases its facilities under operating leases with renewal
options which expire at various dates through 2001. Under certain leases, the
Company is obligated to pay its pro-rata share of operational and maintenance
costs. The lease for the Company's principal executive office and manufacturing
operations in Billerica, MA expires in November 1997. The lease contains an
option to renew for an additional five year period.
F-12
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At June 30, 1996, the minimum annual rental commitments under
non-cancelable lease obligations are as follows:
Capital Operating
Leases Leases
Years ending June 30:
1997 $384,022 $299,035
1998 313,171 86,431
1999 74,020 19,589
2000 - 9,903
2001 - 1,614
-------- --------
Total minimum lease payments 771,213 $416,572
========
Less amounts representing interest (68,211)
-------
Present value of future minimum
lease payments 703,002
Less current portion (336,058)
--------
$366,944
========
Rental expense totaled approximately $396,000, $330,000 and $229,000 in
fiscal 1996, 1995 and 1994, respectively.
8. INCOME TAXES
The provision for income taxes for fiscal 1996, 1995 and 1994 is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $ 2,430,041 $ 608,079 $ 268,274
Deferred 186,775 (175,593) (64,808)
----------------- -------------------- ---------------
2,616,816 432,486 203,466
----------------- -------------------- ---------------
State:
Current 593,549 167,472 92,543
Deferred 57,725 (44,000) (11,689)
----------------- -------------------- ---------------
651,274 123,472 80,854
----------------- -------------------- ---------------
Provision for income taxes $ 3,268,090 $ 555,958 $ 284,320
================= ==================== ===============
</TABLE>
F-13
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of deferred tax assets and liabilities as of June 30,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Amortization $ 121,300 $ 84,000
Accounting reserves 110,600 67,200
Allowance for doubtful accounts 92,500 48,800
Compensation from option grants 8,000 20,300
Depreciation - 42,000
Other - 73,000
----------------- --------------------
$ 332,400 $ 335,300
Deferred tax liabilities:
Depreciation 241,600 -
----------------- --------------------
Net deferred tax asset $ 90,800 $ 335,300
================= ====================
</TABLE>
Reconciliation between the U.S. Federal statutory rate and the
effective tax rate for fiscal 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. Federal Statutory rate 34.0% 34.0% 34.0%
Increases (reductions) to statutory tax rate resulting from:
State income taxes, net of federal income tax benefit 5.3 5.7 6.4
Research and development tax credit - (3.6) (4.0)
Penalties - 3.5 -
Other 0.7 (0.7) 1.6
----------------- --------------- -------------
Total 40.0% 38.9% % 38.0
================= =============== ==============
</TABLE>
9. COMPLETION OF INITIAL PUBLIC OFFERING
In April 1994, the Company completed the initial public offering of
1,500,000 shares of its common stock and 1,000,000 redeemable Common Stock
purchase warrants (the "Redeemable Warrants"). The offering resulted in the net
proceeds to the Company of approximately $4.7 million. Each Redeemable Warrant
enabled the holder to purchase one and one half shares of Common Stock for $7.20
per share. In connection with the Company's initial public offering, the Company
issued warrants (the "Representative's Warrants") to purchase 300,000 shares of
Common Stock to the representative of the underwriters for the offering at an
average price of $6.15 per share.
The Redeemable Warrants were redeemable by the Company, in whole or in
part, at $.20 per Redeemable Warrant, provided that the closing price of the
Common Stock as quoted on the American Stock Exchange equaled or exceeded $6.00
per share for 10 consecutive trading days. If any Redeemable Warrant called for
redemption were not exercised, it would have ceased to be exercisable and the
holder would have only been entitled to the redemption price of the Redeemable
Warrant.
F-14
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. EXERCISE OF WARRANTS
In fiscal 1995, Redeemable Warrants to purchase 718,088 shares of the
Company's Common Stock were exercised, resulting in net proceeds to the Company
of approximately $3.2 million. In fiscal 1996, Redeemable Warrants to purchase
1,006,897 shares of the Company's Common Stock were exercised, resulting in net
proceeds to the Company of approximately $4.6 million. At June 30, 1996, none of
the Redeemable Warrants were outstanding.
In fiscal 1995, Representative's Warrants to purchase 94,950 shares of
the Company's Common Stock were exercised, resulting in net proceeds to the
Company of approximately $569,000. In fiscal 1996, Representative's Warrants to
purchase 101,550 shares of the Company's Common Stock were exercised, resulting
in net proceeds to the Company of approximately $603,000. At June 30, 1996,
Representative's Warrants to purchase 103,500 shares of the Company's Common
Stock were outstanding. In August 1996, Representative's Warrants to purchase
41,250 shares of the Company's Common Stock were exercised, resulting is net
proceeds to the Company of approximately $245,000.
11. PRIVATE PLACEMENT
In fiscal 1995, the Company sold 225,000 shares of Common Stock at
$5.83 per share to unaffiliated third parties, resulting in net proceeds to the
Company of approximately $1.1 million. The net proceeds of this sale were used
to pay license fees and for working capital purposes.
12. STOCK OPTION PLANS
Under the Company's 1994 Stock Option Plan (the "Plan") incentive and
non-qualified stock options may be granted to employees, officers, directors and
consultants of the Company. The Company reserved 750,000 shares of Common Stock
for issuance under the Plan. These options generally vest over a three-year
period.
On December 6, 1994, the Company's adopted a formula stock option plan
(the "Formula Plan"), which is designed to provide certain incentives to
non-employee directors. Under the Formula Plan, options will be granted pursuant
to a formula that determines the timing, pricing and amount of the option awards
using objective criteria. The Company has reserved ninety thousand (90,000)
shares of Common Stock for issuance under the Formula Plan. The exercise price
of the options granted to a non-employee director upon election as a director is
85% of the fair market value of the shares of Common Stock on the date of the
grant. These options vest and are exercisable on the date of grant. The exercise
price of the options granted to non-employee directors subsequent to election as
a director is at fair market value of the shares of Common Stock on the date of
the grant and these options vest and are exercisable one year from the date of
the grant. During fiscal 1995, pursuant to the Formula Plan, non-employee
directors were granted options aggregating 52,500 shares of Common Stock of the
Company at prices ranging from $4.66 to $11.90 per share. During fiscal 1995,
the Company incurred a compensation charge of $52,650 in connection with the
stock options granted under the Formula Plan. During fiscal 1996, non-employee
directors were granted options to purchase 9,000 shares of the Company's Common
Stock at prices ranging from $15.03 to $16.13 per share. During fiscal 1996, the
Company incurred a compensation charge of $19,875 in connection with the stock
options granted under the Formula Plan.
F-15
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the activities of the stock option plans for fiscal 1995
and 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Options outstanding at June 30, 1994 0
Granted 490,950 $3.50 - $11.90
Exercised (39,750) $3.50 - $4.67
Canceled (26,800) $3.50
-------
Options outstanding at June 30, 1995 424,400 $3.50 - $11.90
Granted 304,900 $12.81 - $18.00
Exercised (191,200) $3.50 - $5.54
Canceled (70,000) $3.50 - $17.00
-------
Options outstanding at June 30, 1996 468,100 $3.50 - $18.00
=======
</TABLE>
Options were exercisable for 77,500 and 76,250 shares of Common Stock
at June 30, 1995 and 1996, respectively. At June 30, 1995 and 1996, options for
the purchase of 375,850 and 130,950 shares of Common Stock, respectively, were
available for future grants. At June 30, 1996, there were 599,050 shares of
Common Stock reserved for issuance under the plans.
13. SUBSEQUENT PUBLIC OFFERING
In March 1996, the Company conducted a subsequent public offering of
1,350,000 shares of its Common Stock resulting in net proceeds to the Company of
approximately $20.9 million. In April 1996, the underwriters exercised their
option to purchase 75,000 shares of Common Stock to cover over-allotments,
resulting in net proceeds to the Company of approximately $1.2 million.
14. RELATED PARTY TRANSACTIONS
During a portion of fiscal 1994 the Company paid the compensation of
the Company's Chairman and principal stockholder, through a management
corporation. The corporation employed and contracted out his management services
to corporations, including the Company. The management corporation, which is not
affiliated with the Company, paid the Chairman approximately 70% of the amounts
which the Company paid to the management corporation for his services rendered
to the Company. During fiscal 1994, the Company paid the management corporation
approximately $176,000 under this arrangement.
In July 1995, the Company entered into an agreement with a consulting
firm with respect to acquisitions and investments. A non-employee Director of
the Company is a principal of the consulting firm. The Company agreed to pay the
consulting firm $3,500 per month and the reimbursement of certain travel
expenses related to its consulting services. The Company terminated this
agreement in June 1996.
F-16
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During fiscal 1996, the Company advanced approximately $514,000 to five
executive officers of the Company. At June 30, 1996, the balance due from these
executives was approximately $202,000. These demand loans bear interest at 9%
per annum and have been classified as other current assets in the accompanying
consolidated financial statements. In August 1996, notes aggregating $170,000
plus interest were repaid.
The Company has maintained a banking relationship with a bank since
September 1994. In August 1996, a senior executive of the bank became a member
of the Company's Board of Directors.
15. SAVINGS PLAN
In fiscal 1994, the Company established a 401(k) Savings Plan under
which substantially all U.S. employees may voluntarily defer a portion of their
compensation and the Company may elect to match a portion of the employee
deferral. The Company's contributions to this plan have been minimal for the
fiscal years 1996, 1995 and 1994.
16. LICENSE AGREEMENTS
In June 1994, the Company entered into a license agreement under which
the Company licenses from a third party certain patent pending technology
relating to a PC flash memory card with a built-in encryption integrated
circuit. The initial term of the license was for one year. In June 1995, the
Company renewed the license for an additional fifteen month period. The license
provides for annual license fees which the Company pays quarterly based on the
number of units sold. The minimum annual license fee payable by the Company was
$100,000 during the first year of the license and for the 15-month period ending
September 30, 1996. Under the current terms of the license the fee will increase
by 100% annually for each additional year the license is renewed through
September 1999. The Company has the right to terminate this license when the
current term expires in September 1996.
F-17
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In January 1995, the Company entered into a three-year license
agreement with a third party for certain proprietary technology relating to a 38
pin edge memory card. This license grants the Company the exclusive right to
manufacture and sell products using this technology in North America, Europe and
Japan. The license provides for an initial license fee of $300,000 and a 3%
royalty on sales of products utilizing the licensed technology. The Company may
renew the license for successive one-year terms upon payment of a $100,000
renewal fee.
17. COMMITMENTS
In June 1996, the Company entered into an agreement to advance
approximately $750,000 to a company in which it has taken a minority equity
interest. Such advances are for the purpose of financing the acquisition of
inventory components. As of September 9, 1996, the Company has advanced
approximately $750,000 under this agreement.
In August 1996, the Company purchased additional capital assets,
primarily manufacturing equipment, for approximately $1.7 million. The equipment
was financed through equipment lease financing. The loan has a term of three
years, bears interest at 7.75% per annum and requires minimum annual payments of
principal and interest of approximately $618,000.
As of September 9, 1996, the Company had entered into purchase
commitments outstanding of approximately $1.5 million for manufacturing
equipment. The Company expects to finance substantially all of these purchases
through equipment lease financing arrangements.
18. FACTORING
The Company had an agreement with a financial institution whereby it
agreed to sell receivables with recourse. The Chairman of the Company provided
his personal guaranty for the repayment of receivables assigned to the financial
institution in connection with the Company's factoring agreement. During fiscal
1994, the Company received proceeds of approximately $2.8 million for accounts
receivable sold. The Company terminated this arrangement in May 1994.
F-18
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
19. JOINT VENTURE
In May 1996, the Company entered into an agreement to acquire a 51%
interest in a joint venture for $1,250,000 in cash. The joint venture intends to
manufacture, in Thailand, PCMCIA products and related accessories, as well as
provide contract manufacturing services to others. As of June 30, 1996, the
Company advanced $25,000 in cash to the joint venture and incurred acquisition
costs, which were capitalized, of approximately $37,000. The Company expects the
joint venture to begin manufacturing operations by January 1997.
20. SUBSEQUENT EVENT
On July 10, 1996, the Company acquired Design Circuits, Inc. ("DCI"), a
provider of customized, integrated manufacturing services to original equipment
manufacturers in the electronics industry. The Company acquired a majority
equity position in DCI for approximately $3.2 million of cash, 125,000 shares of
the Company's Common Stock and the assumption of certain liabilities. The
transaction will be accounted under the purchase method of accounting. The
purchase price will be allocated to tangible assets based on their fair market
values of approximately $6.7 million and goodwill of approximately $9.4 million.
In addition, the Company will record approximately $2.5 million as a minority
interest for the proportionate share of equity held by the minority shareholders
of DCI.
F-19
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