SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996 Commission file number 1-12912
CENTENNIAL TECHNOLOGIES, INC.
-----------------------------
(Exact name of registrant as
Specified in its Charter)
Delaware 04-2978400
- ----------------------- ---------------------------------------
(State of Organization) (I.R.S. Employer Identification Number)
37 Manning Road, Billerica, Massachusetts 01821
--------------------------------------------------
(Address of principal executive offices, Zip Code)
(508) 670-0646
--------------
(Issuer's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of May 10, 1996, there were 8,296,270 shares of Common Stock, $.01 par
value per share, of the issuer outstanding.
CENTENNIAL TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets; June 30, 1995 and
March 31, 1996 (Unaudited) ............................. 1
Consolidated Income Statements (Unaudited); Three and
Nine Months Ended March 31, 1995 and 1996 .............. 3
Consolidated Statements of Cash Flows (Unaudited);
Nine Months Ended March 31, 1995 and 1996 .............. 4
Notes to Consolidated Financial Statements ............. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 12
PART II. OTHER INFORMATION
Item 4. Summission of Matters to a Vote of Security Holders .... 19
Item 5. Other Information ...................................... 19
Item 6. Exhibits and Reports on Form 8-K ....................... 19
</TABLE>
CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
June 30, March 31,
1995 1996
-------- ---------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents .............................. $ 970,446 $12,281,049
Accounts receivable, net of allowance for doubtful
accounts of $122,200 and $245,000 at June and March ... 3,932,170 9,587,971
Inventory .............................................. 8,609,492 16,880,804
Current portion of notes receivable .................... 767,758 2,563,353
Deferred taxes ......................................... 293,300 335,600
Other current assets ................................... 870,812 1,466,449
----------- -----------
Total current assets ............................... 15,443,978 43,115,226
Equipment and leasehold improvements, net of accumulated
depreciation and amortization of $299,355 and $640,487
at June and March, respectively ......................... 1,322,637 3,174,074
Intangible assets, net of accumulated amortization of
$290,437 and $386,706 at June and March, respectively ... 250,944 154,675
Notes receivable, less current portion ................... 1,072,939 412,225
Investments .............................................. 0 761,743
Other assets ............................................. 66,658 65,031
Deferred income taxes .................................. 42,000 37,200
----------- -----------
Total assets ....................................... $18,199,156 $47,720,174
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 1
CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
June 30, March 31,
1995 1996
----------- -----------
(unaudited)
<S> <C> <C>
Current Liabilities:
Notes payable .............................................. $ 1,153,167 $ 0
Current portion of long-term obligations ................... 102,645 330,381
Accounts payable and accrued expenses ...................... 3,570,519 2,334,365
Income taxes currently payable ............................. 591,265 2,264,634
Deferred revenue ........................................... 175,000 125,000
----------- -----------
Total current liabilities .............................. 5,592,596 5,054,380
----------- -----------
Long-term obligations under capital leases ................... 161,134 461,200
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, none issued ................................... 0 0
Common stock, $.01 par value; 15,000,000 shares
authorized, 5,591,288 shares issued and outstanding at
June 30, 1995 and 8,221,070 shares issued and outstanding
at March 31, 1996 ......................................... 55,913 82,211
Additional paid in capital ................................. 10,213,517 36,912,473
Retained earnings .......................................... 2,175,996 5,209,910
----------- -----------
Total stockholders' equity ............................. 12,445,426 42,204,594
----------- -----------
Total liabilities and stockholders' equity ............. $18,199,156 $47,720,174
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 2
CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales ........................................ $3,494,403 $10,560,374 $8,311,628 $25,420,449
Cost of goods sold ........................... 1,928,805 6,584,188 4,485,740 15,886,834
---------- ----------- ---------- -----------
Gross margin ................................. 1,565,598 3,976,186 3,825,888 9,533,615
General and administrative expenses .......... 801,521 1,254,407 2,162,104 3,269,059
Research and development costs ............... 162,824 434,396 469,786 1,125,572
---------- ----------- ---------- -----------
Income from operations ....................... 601,253 2,287,383 1,193,998 5,138,984
---------- ----------- ---------- -----------
Other income (expense):
Interest income ............................ 0 109,000 9,944 124,608
Interest expense ........................... (15,782) (143,479) (45,483) (298,678)
Other ...................................... 2,976 0 (4,532) 0
---------- ----------- ---------- -----------
(12,806) (34,479) (40,071) (174,070)
---------- ----------- ---------- -----------
Income before income taxes ................... 588,447 2,252,904 1,153,927 4,964,914
Provision for income taxes ................... 223,140 874,000 438,022 1,931,000
---------- ----------- ---------- -----------
Net income ................................... $ 365,307 $ 1,378,904 $ 715,905 $ 3,033,914
========== =========== ========== ===========
Earnings per share
Primary .................................... $ .07 $ .19 $ .14 $ .44
========== =========== ========== ===========
Fully diluted .............................. $ .07 $ .19 $ .14 $ .44
========== =========== ========== ===========
Weighted average shares outstanding
Primary .................................... 5,130,186 7,281,178 4,941,831 6,905,466
========== =========== ========== ===========
Fully diluted .............................. 5,516,186 7,281,178 5,068,872 6,941,276
========== =========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 3
CENTENNIAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................... $ 715,905 $ 3,033,914
Adjustments to reconcile net income to net cash used
for operating activities:
Depreciation and amortization ............................ 201,875 437,401
Provision for loss on accounts receivable .................. (10,400) 280,000
Deferred income taxes ...................................... (25,101) (37,500)
Changes in operating assets and liabilities:
Accounts receivable ...................................... (2,146,937) (5,935,801)
Inventories .............................................. (2,186,487) (8,271,312)
Notes receivable ......................................... 0 (1,134,881)
Other assets ............................................. (344,756) (597,264)
Accounts payable and accrued expenses .................... 393,586 (1,236,154)
Income taxes currently payable ........................... 165,731 1,673,369
Deferred revenue ......................................... 0 (50,000)
----------- ------------
Net cash used for operating activities ................. (3,236,584) (11,834,974)
----------- ------------
Cash flows from investing activities:
Capital expenditures ......................................... (390,389) (2,192,569)
Investments purchased ........................................ 0 (761,743)
----------- ------------
Net cash used for investing activities ................. (390,389) (2,954,312)
----------- ------------
Cash flows from financing activities:
Net borrowings under line of credit .......................... 987,125 (1,153,167)
Borrowings from sales leaseback of equipment ................. 319,735 702,325
Payments on equipment financing .............................. (31,633) (174,523)
Net proceeds from exercise of stock options .................. 98,150 697,191
Net proceeds from exercise of warrants ....................... 214,000 5,079,435
Net proceeds from private placement .......................... 1,140,569 0
Net proceeds from secondary offering of Common Stock ......... 0 20,948,628
----------- ------------
Net cash provided by financing activities .............. 2,727,946 26,099,889
----------- ------------
Net increase (decrease) in cash and cash equivalents ........... (899,027) 11,310,603
Cash and cash equivalents at beginning of the period ........... 981,070 970,446
----------- ------------
Cash and cash equivalents at end of the period $ 82,043 $ 12,281,049
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 4
CENTENNIAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - Basis of Presentation
The consolidated financial statements of Centennial Technologies, Inc.
(the "Company") include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany balances and transactions have been eliminated.
Certain reclassifications have been made to prior years' consolidated financial
statements to conform to the current fiscal periods' presentation.
NOTE B - Unaudited Consolidated Financial Statements
The accompanying consolidated financial statements of the Company as of
March 31, 1996 and for the three and nine months then ended are unaudited, but
in the opinion of management include all adjustments (consisting only of normal
recurring adjustments) necessary for fair presentation thereof. The results of
operations for the three and nine months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year or any
future period.
NOTE C - Industry Segment
The Company designs, manufactures and markets PC cards used primarily by
original equipment manufacturers for industrial and commercial applications. No
one customer or group of related customers accounted for more than 10% of the
Company's sales in any of the last three fiscal years. During the nine months
ended March 31, 1996, one customer, a distributor that often serves as a
purchasing agent for some of the Company's OEM customers, accounted for
approximately 12% of the Company's sales.
NOTE D - 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.
NOTE E - Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and trade receivables.
The Company maintains cash and cash equivalents with a major financial
institution with high credit standing and invests available cash in money market
securities of the bank and securities backed by the United States government.
At March 31, 1996, seven customers of the Company accounted for
approximately $5.1 million, or 53% of the Company's accounts receivable balance.
If any of these customers fail to pay the Company on a timely basis, it could
have an adverse effect on the Company's financial condition and results of
operations.
<PAGE> 5
NOTE F - Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and other accrued
expenses, the carrying amounts approximate fair value due to their short
maturities. Long-term notes receivable and notes payable are carried at amounts
that approximate fair value.
NOTE G - Earnings Per Share
Primary earnings per share data are based on outstanding shares of Common
Stock and shares of 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 data are based on outstanding shares of Common
Stock and shares of Common Stock assumed to be outstanding to reflect the
maximum dilutive effect of stock options and warrants.
The difference between primary and fully diluted weighted average shares
outstanding resulted primarily due to the differences in the average and ending
market prices of the Company's Common Stock during the periods presented.
For the Company's 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 Company's end of the period
market price of the Company's Common Stock exceeded the average market price for
the periods.
NOTE H - 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 financial statements to the number of shares, weighted average
number of shares outstanding and related prices, per share amounts, and stock
plan data reflect this split.
NOTE I - 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.
NOTE J - Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123") which is effective for
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.
<PAGE> 6
NOTE K - Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1995 1996
-------- ---------
<S> <C> <C>
Raw material, primarily electronic components ......... $4,512,000 $ 4,950,000
Work in process ....................................... 1,814,000 11,081,000
Finished goods ........................................ 2,283,000 850,000
---------- -----------
$8,609,000 $16,881,000
========== ===========
</TABLE>
The Company maintains a level of inventory that it believes is 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.
NOTE L - Notes Receivable
In fiscal 1995, the Company sold inventory and accounts receivable to an
unrelated party for cash and two promissory notes as consideration. The notes
with an original aggregate principal amount of approximately $1,840,000 are
collateralized by certain assets of the maker, bear interest at a rate of 9% per
annum and are payable in equal quarterly installments in 1996 and 1997. At March
31, 1996, the note receivable balance was approximately $1,330,000.
In March 1996, the Company advanced approximately $1,600,000 in loans to
four corporations that develop technologies complimentary to that of the
Company. These loans are evidenced by promissory notes, payable upon demand and
bear interest at the rate of 9% per annum. During April 1996, one of the
corporations repaid $250,000 of these loans.
NOTE M - Debt
Line of credit:
- ---------------
On November 8, 1995, the Company renewed its revolving line of credit
agreement with a bank. Under the renewed line of credit agreement the Company
may borrow up to $7,500,000 at the bank's prime interest rate (8.25% at March
31, 1996). The renewed credit agreement limits borrowings to a percentage of
receivables and inventory and contains certain covenants relating to the
Company's net worth and indebtedness, among others. The line of credit is
secured by substantially all the assets of the Company. As of March 31, 1996,
the Company repaid the line and had approximately $7,406,000 available under the
terms of the credit agreement.
<PAGE> 7
Long-term obligations under capital leases:
- -------------------------------------------
In December 1994, the Company entered into an equipment lease financing
arrangement with the bank that is currently providing the Company with its line
of credit. This arrangement has been accounted for as a financing transaction,
and accordingly the subject equipment is recorded as an asset for financial
statement purposes and is being depreciated. This arrangement involves a loan
with an original principal amount of approximately $320,000 which bears interest
of 8.6%, has a term of three years and requires minimum annual payments of
principal and interest of approximately $121,000.
In September 1995 and October 1995 the Company completed the refinancing
of certain other equipment under its lease financing agreement with the bank.
These loans each have a term of three years. The loans with original principal
amounts aggregating approximately $691,000 bear interest at rates of 7.2% and
9.7% and require minimum annual payments of principal and interest of
approximately $263,000.
NOTE N - Completion of Initial Public Offering
On April 19, 1994, the Company conducted the initial public offering of
1,500,000 shares of its Common Stock, and 1,150,000 redeemable common stock
purchase warrants (the "Reedemable Warrants"), resulting in net proceeds to the
Company of approximately $4,664,000. Each Redeemable Warrant enabled the holder
to purchase one and one-half shares of Common Stock for $7.20. 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 exercise 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 was not exercised, it would have ceased to be exercisable and the
holder would have been entitled only to the redemption price of the Redeemable
Warrant.
NOTE O - Exercise of Warrants
During the nine months ended March 31, 1996, Redeemable Warrants to
purchase 1,006,897 of Common Stock were exercised, resulting in net proceeds to
the Company of approximately $4.6 million. As of March 31, 1996, none of the
Redeemable Warrants remained outstanding.
During the nine months ended March 31, 1996, Representative's Warrants to
purchase 82,050 shares of Common Stock of the Company were exercised and
resulted in net proceeds to the Company of approximately $488,000. At March 31,
1996, Representative's Warrants to purchase 123,000 shares of Common Stock
remained outstanding.
<PAGE> 8
NOTE P - Secondary Offering
On March 19, 1996, the Company conducted a secondary 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.
NOTE Q - Stock Option Plans
Under the Company's 1994 Stock Option Plan (the "Plan") incentive and
nonqualified stock may be granted to employees, officers, Directors and
consultants of the Company. At June 30, 1995, there were reserved for issuance
under the Plan, 750,000 shares of Common Stock and there were outstanding
options to purchase a total of 383,150 shares of Common Stock at exercise prices
ranging from $3.50 to $5.54 per share. Options granted under the Plan generally
vest over a three-year period. During the nine months ended March 31, 1996,
options to purchase 190,835 shares of Common Stock of the Company were exercised
at exercise prices ranging from $3.50 to $5.54 per share, resulting in net
proceeds to the Company of approximately $697,000.
In December 1994, the Company's adopted the Formula Stock Option Plan (the
"Formula Plan), which is designed to incentivize 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 is 85% of the fair market value of the shares of Common
Stock on the date of the grant and the options vest and are exercisable on the
date of the grant. The exercise price of the options granted to a non-emploee
Director upon subsequent election as a Director is at fair market value of the
shares of Common Stock on the date of the grant and vest and are exercisable one
year from the date of 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 a price 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. In April 1996, a new
Director was granted options to purchase 7,500 shares of Common Stock of the
Company at a price of $15.03.
<PAGE> 9
NOTE R - Related Party Transactions
In July 1995, the Company entered into an agreement with a consulting firm
with respect to acquistions 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 may terminate this
agreement with thirty days notice.
During the nine months ended March 31, 1996, the Company advanced, as
loans, approximately $325,000 to three executive officers of the Company. At
March 31, 1996, the balance due from these executives was approximately
$136,000. In April 1996, the Company advanced an additional $120,000 to one of
these executives. These demand loans bear interest at 9% per annum and have been
classified as other current assets in the accompanying financial statements.
NOTE S - Investments
The Company has invested and intends to continue to invest in early-stage
companies that have technologies or capabilities complementary to those of the
Company. The Company's investments in nonconsolidated companies owned 20% or
more are accounted for using the equity method. Investments in companies owned
less than 20% are carried at cost.
In July 1995, the Company purchased a minority interest in a corporation
which provides Internet services. The Company invested $10,000 as equity. In
September 1995, the Company entered into a guaranty for the payment of the
corporation's lease payments for its premises aggregating approximately
$500,000. To date, the Company has not made any payments in connection with this
guaranty. The President and a shareholder of the corporation was a Director of
the Company from February 1994 through November 1995. In April 1996, the Company
purchased an additional minority interest in the corporation for approximately
$550,000. These investments are carried on the equity method of accounting.
In October 1995, 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. The Company carries this investment at cost since it
cannot exercise significant influence over this entity.
In February 1996, the Company purchased for $250,000 a minority 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. In addition, the Company holds a warrant to
purchase 100,000 shares of common stock of the corporation at an exercise price
of $1.00 per share. This warrant expires in three years from date of issuance.
The Company carries this investment at cost since it cannot exercise significant
influence over this entity.
<PAGE> 10
In February 1996, the Company purchased for $250,000 a minority interest
in a contract manufacturer which has surface mount, chip on board and ceramic
printing capabilities. The Company carries this investment at cost since it
cannot exercise significant influence over this entity.
In April 1996, the Company purchased for $250,000 a minority interest in a
holding company of various technology-related corporations and purchased a
minority interest for $386,500 in a corporation which develops, manufactures and
markets products for vehicle and fleet management. The Company carries these
investments at cost since it cannot exercise significant influence over these
entities.
<PAGE> 11
CENTENNIAL TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Centennial Technologies, Inc. (the "Company") designs, manufactures and
markets an extensive line of PC cards used primarily by original equipment
manufacturers ("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 operations in 1987 to develop and commercialize font
cartridges for laser printers. Beginning in fiscal 1992, the Company gradually
de-emphasized the marketing and sales of font cartridges in order to focus on
the rapidly growing PC Card market.
Results of Operations
Comparison of Three Month Periods Ended March 31, 1996 and 1995
Sales. Sales increased 202% to approximately $10.6 million for the three
months ended March 31, 1996 from approximately $3.5 million for the three months
ended March 31, 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 the third quarter of fiscal 1996 from approximately 90% in
the third quarter of fiscal 1995. The growth in the Company's PC card sales
resulted primarily from 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 are increasingly
being delivered through PC cards rather than cartridges, and the gradual shift
in the Company's focus, commenced in fiscal 1992, away from font cartridges and
towards the PC card market.
Gross Margin. Gross margin increased 154% to approximately $4.0 million
for the three months ended March 31, 1996 from approximately $1.6 million for
the three months ended March 31, 1995. As a percentage of sales, gross margin
decreased to 37.7% in the third quarter of fiscal 1996 from 44.8% for the same
period in the prior year, primarily due to an increase in the costs 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, as a percentage of sales, in future periods will
continue to decrease as compared to the gross margin of same period of the prior
year due to higher component costs and increased competition.
<PAGE> 12
General and Administrative Expenses. General and administrative expenses
increased 57% to approximately $1.3 million for the three months ended March 31,
1996 from approximately $802,000 for the three months ended March 31, 1995. The
increase was primarily due to expanded marketing and sales 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 11.9% in the third
quarter of fiscal 1996 from 22.9% for the same period in the prior year due
primarily to the higher sales levels.
Research and Development Expenses. Research and development expenses
increased 167% to approximately $434,000 for the three months ended March 31,
1996 from approximately $163,000 for the three months ended March 31, 1995. As a
percentage of sales, research and development expenses were 4.1% for the third
quarter of fiscal 1996 as compared to 4.7% for the same period of the prior
year. 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.
Income from Operations. Income from operations increased 280% to
approximately $2.3 million for the three months ended March 31, 1996 from
approximately $601,000 for the three months ended March 31, 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
expenses. As a percentage of sales, income from operations increased to 21.7%
for the third quarter of fiscal 1996 from 17.2% for the same period of the prior
year.
Net Interest Expense. Net interest expense was approximately $34,000 for
the three months ended March 31, 1996 compared to net interest expense of
approximately $16,000 for the three months ended March 31, 1995. The increase in
interest expense was due to increased borrowings by the Company.
Provision for Income Taxes. Provision for income taxes increased 292% to
$874,000 for the three months ended March 31, 1996 from approximately $223,000
for the three months ended March 31, 1995. The Company's effective tax rate
increased to 38.8% for the three months ended March 31, 1996 from 37.9% for the
three months ended March 31, 1995.
<PAGE> 13
Comparison of Nine Month Periods Ended March 31, 1996 and 1995.
Sales. Sales increased 206% to approximately $25.4 million for the nine
months ended March 31, 1996 from approximately $8.3 million for the nine months
ended March 31, 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 97% in the first nine months of fiscal 1996 from approximately 83%
in the first nine months of fiscal 1995. The growth in the Company's PC card
sales resulted primarily from 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. This decrease was
attributable 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.
Gross Margin. Gross margin increased 149% to approximately $9.5 million
for the nine months ended March 31, 1996 from approximately $3.8 million for the
nine months ended March 31, 1995. As a percentage of sales, gross margin
decreased to 37.5% in the first nine months of fiscal 1996 from 46.0% for the
same period in the prior year, 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 as compared to the gross margin of the same period of the
prior year due to higher component costs and increased competition.
General and Administrative Expenses. General and administrative expenses
increased 51% to approximately $3.3 million for the nine months ended March 31,
1996 from approximately $2.2 million for the nine months ended March 31, 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 12.9% for the first nine
months of fiscal 1996 from 26.0% for the same period in the prior year due
primarily to the higher sales level.
Research and Development Expenses. Research and development expenses
increased 140% to approximately $1.1 million for the nine months ended March 31,
1996 from approximately $470,000 for the nine months ended March 31, 1995. As a
percentage of sales, research and development expenses were 4.4% for the first
nine months of fiscal 1996 as compared to 5.7% for the same period year of the
prior year. 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.
<PAGE> 14
Income from Operations. Income from operations increased 330% to
approximately $5.1 million for the nine months ended March 31, 1996 from
approximately $1.2 million for the nine months ended March 31, 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
expenses. As a percentage of sales, income from operations increased to 20.2%
for the first nine months of fiscal 1996 from 14.4% for the same period of the
prior year.
Net Interest Expense. Net interest expense was approximately $174,000 for
the nine months ended March 31, 1996 compared to net interest expense of
approximately $36,000 for the nine months ended March 31, 1995. The increase in
interest expense was due to increased borrowings by the Company.
Provision for Income Taxes. Provision for income taxes increased 341% to
approximately $1.9 million for the nine months ended March 31, 1996 from
approximately $438,000 for the nine months ended March 31, 1995. The effective
tax rate increased to 38.9% for the nine months ended March 31, 1996 from 38.0%
for the nine months ended March 31, 1995.
Liquidity and Capital Resources
Since 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 March 31, 1996, working capital was approximately $38.1 million
compared to working capital of approximately $9.9 million at June 30, 1995.
During the nine months ended March 31, 1995 and 1996, the Company experienced
negative cash flow from operations of approximately $11.7 million and $3.2
million, respectively. Cash from operations during these periods was used
primarily to finance inventory and accounts receivable.
During the nine months ended March 31, 1995 and 1996, the Company used
cash from operations of approximately $2.2 million and $8.3 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 a portion of the
Company's inventory were to be deemed obsolete, it would result in a write-down
of the inventory value and could materially adversely affect the Company's
financial condition and results of operations.
<PAGE> 15
During the nine months ended March 31, 1995 and 1996, the Company used
cash from operations of approximately $2.1 million and $5.9 million,
respectively, to finance increases in accounts receivable resulting from
increased sales. The Company's days sales outstanding at June 30, 1995 and March
31, 1996 were 81 days and 72 days, respectively. At March 31, 1996, seven
customers of the Company accounted for approximately $5.1 million, or 53%, of
the Company's accounts receivable balance. If any of these customers fail to pay
the Company on a timely basis, it could have a material adverse effect on the
Company's financial condition and results of operations.
During the nine months ended March 31, 1996, the Company used
approximately $1.2 million to reduce accounts payable and accrued expenses. In
addition, during the nine months ended March 31, 1996 the Company used
approximately $1.6 million to make loans to companies with technologies and
capabilities complimentary to the Company. Approximately $500,000 of other loans
advanced by the Company were repaid during the nine months ended March 31, 1996.
Investing Activities
As of March 31, 1996, the Company had no material commitmens for capital
expenditures. However, the Company anticipates that it will continue to invest
in capital assets as required to support its product development efforts and
general business needs. In the first nine months of fiscal 1995 and 1996, the
Company invested approximately $390,000 and $2.2 million, respectively, in
capital assets, primarily in manufacturing equipment. The Company may also enter
into license agreements and joint ventures in the future, which could require
capital outlays.
In July 1995, the Company purchased for $10,000 a minority interest in a
corporation which provides Internet services. The Company has also guaranteed
the payment of the corporation's lease payments for its premises aggregating
approximately $500,000. To date, the Company has not made any payments in
connection with this guaranty. The President and a shareholder of the
corporation was a Director of the Company from February 1994 through November
1995. In April 1996, the Company purchased an additional minority interest in
the corporation for approximately $550,000.
In October 1995, the Company purchased a minority interest for $250,000 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.
In February 1996, the Company purchased for $250,000 for a minority
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. In addition, the Company holds a warrant
to purchase 100,000 shares of common stock of the corporation at an exercise
price of $1.00 per share. This warrant expires in three years from date of
issuance.
In February 1996, the Company purchased a minority interest for $250,000
in a contract manufacturer which has surface mount, chip on board and ceramic
printing capabilities.
<PAGE> 16
In April 1996, the Company purchased a minority interest for $250,000 in a
holding company of various technology-related corporations and purchased a
minority interest for $386,500 in a corporation which develops, manufactures and
markets products for fleet management.
The Company has invested and intends to continue to invest in early-stage
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 companies
in which the Company invests are not successful, the Company would have to
write-off or write-down such investments, which would result in the Company
recognizing an expense in the period in which such adjustment occurs.
Financing Activities
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 milliion or (ii) an amount based on the Company's eligible accounts
receivable and inventory. Interest on borrowings is at the bank's prime interest
rate (8.25% at March 31, 1996). Under the terms of this credit agreement, which
expires in November 1996 and is secured 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 indebtness, among others. At March 31, 1996,
there was approximately $7.4 million available for borrowing under this credit
agreement.
The bank providing the Company's revolving credit line has extended an
additional $2.0 million for lease financing and a foreign exchange line. At
March 31, 1996, there were three loans outstanding under this additional line
aggregating approximately $792,000 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 the nine months ended March 31, 1996, options to purchase 190,835
shares of Common Stock of the Company were exercised at exercise prices ranging
from $3.50 to $5.54 per share, resulting in net proceeds to the Company of
approximately $697,000.
During the nine months ended March 31, 1996, warrants to purchase
approximately 1,089,000 shares of Common Stock were exercised, resulting in net
proceeds to the Company of approximately $5.1 million. These proceeds were used
for working capital and general corporate purposes.
<PAGE> 17
On March 9, 1996 the Company conducted 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 underwriters exercised their
option to purchase 75,000 share of Common Stock to cover over-allotments,
resulting in net proceeds to the Company of approximately $1.2 million.
Management believes it has sufficient cash resources and other sources of
working capital to meet the Company's current cash requirements.
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 the fiscal 1995 and first nine months of fiscal 1996, the Company derived
approximately 23% and 14%, respectively, of its total sales from outside the
United States.
<PAGE> 18
CENTENNIAL TECHNOLOGIES, INC.
PART II - Other Information
Items 1 through 5: Not applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) No exhibits are filed herewith.
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
<PAGE> 19
CENTENNIAL TECHNOLOGIES, INC.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Centennial Technologies, Inc.
-----------------------------
(Registrant)
May 13, 1996 /s/ Emanuel Pinez
------------------
(Signature)
Emanuel Pinez
Chief Executive Officer
May 13, 1996 /s/ James M. Murphy
-------------------
(Signature)
James Murphy
Chief Financial Officer
<PAGE> 20
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