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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Xxxxxxxxxx was formed in July 1981 to manufacture rigid multilayer printed
circuit boards at its Dallas, Oregon facility. In 1983, the Company entered the
assembly contract manufacturing business (the Assembly Operations). In 1987, a
fire destroyed the entire Dallas facility. Much of the fiscal years ended June
30, 1988 and 1989 were spent building a new facility, installing state-of-the-
art equipment and formulating upgraded processes for operations. An affiliate of
the Company formed Xxxxxxxxxx Design, Inc. (PDI) in 1988 to provide circuit
design services. In January 1990, the Company acquired its White City, Oregon,
facility. The White City facility specializes in medium-volume production of
complex, rigid multilayer printed circuit boards. The acquisition of the White
City facility was a cost-effective means for the Company to expand production
and diversify and increase its customer base. In fiscal 1994, the Company sold
the Assembly Operations. This sale was prompted by the perception by the
Company's growing base of contract assembly customers that the Company was a
competitor and the Company's desire to concentrate on its core competencies of
printed circuit board design and fabrication. In November 1995, PDI merged with
and into the Company.
To provide its customers with fully integrated electronic interconnect
solutions, the Company acquired Circuit Technology, Inc. (CTI), a printed
circuit board manufacturer in Redmond, Washington, in November 1995 for
approximately $16 million, including assumption of liabilities. The Redmond
facility specializes in quick-turnaround prototype and low- volume production.
The acquisition was accomplished by a merger of CTI with and into Xxxxxxxxxx,
and was accounted for under the purchasing accounting method.
In April 1996, the Company acquired from Xxxxxxxxxx Property Group, in
exchange for approximately 1,370,000 shares of Company Common Stock, all of the
real property and improvements on which the Company's Dallas and White City,
Oregon, manufacturing facilities are located and assumed related indebtedness.
In August 1996, the Company completed the acquisition of Trend Circuits,
Inc., a printed circuit board manufacturer located in Fremont, California, for
one million shares of Common Stock of the Company and $5 million in cash. In
addition, the Company assumed approximately $11 million in debt. The cash
obligations of the Company were funded by draws under its bank line of credit.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the Company for the
periods indicated as a percentage of revenue:
YEARS ENDED JUNE 30,
1996 1995 1994
Revenue 100.0% 100.0% 100.0%
Cost of goods sold 76.7 83.2 89.3
Gross profit 23.3 16.8 10.7
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Selling, general and administrative expense 9.3 11.0 11.8
Income (loss) from operations 14.0 5.8 (1.1)
Interest expense 1.9 2.7 2.3
Other income (expense) 0.3 0.1 (0.7)
Income (loss) from continuing operations 12.4 3.2 (4.1)
Pro forma provision (benefit) for income taxes 4.7 1.2 (1.8)
Pro forma net income (loss) from
continuing operations 7.7% 2.0% (2.3)%
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
Revenue for the fiscal year ended June 30, 1996 was $95.1 million, an
increase of $37.0 million or 63.7% from the fiscal year ended June 30, 1995. The
increase resulted primarily from a net increase of $21.9 million or 38.0% in
unit volume sales of the Company's products to contract manufacturers and
telecommunications and instrumentation OEMs and, secondarily, approximately
$15.1 million of this increase was due to the acquisition of CTI in November
1995.
Gross profit for the fiscal year ended June 30, 1996 was $22.2 million or
23.3% of revenue, compared to $9.8 million or 16.8% of revenue for the fiscal
year ended June 30, 1995. Cost of goods sold includes direct labor, materials
and manufacturing overhead costs. The increase in gross margin was primarily the
result of improved capacity utilization, changes in product mix, which resulted
in increased sales of higher-priced printed circuit boards with a higher average
layer count and higher gross margin, and greater yields at the Company's
manufacturing facilities.
Selling, general and administrative expense consists of salaries, incentive
compensation and benefits for sales, marketing and administrative personnel,
advertising and promotional expenses, professional fees and commissions paid to
independent sales representatives. Selling, general and administrative expense
for the fiscal year ended June 30, 1996 was $8.9 million or 9.3% of revenue, an
increase of $2.5 million or 38.9% from the fiscal year ended June 30, 1995,
primarily as a result of increased personnel and fixed costs required to support
higher levels of sales and the acquisition of CTI. Selling, general and
administrative expense decreased as a percentage of revenue from 11.0% to 9.3%,
primarily as a result of operating efficiencies achieved by spreading fixed
costs over a larger revenue base.
Interest expense for the fiscal year ended June 30, 1996 was $1.8 million, an
increase of $236,000 or 15.1% from the fiscal year ended June 30, 1995. The
increase was the result of increased borrowing costs and increased borrowings
required to finance the acquisition of CTI and increased sales.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
Revenue for fiscal 1995 was $58.1 million, an increase of $6.3 million or
12.2% from fiscal 1994. The increase resulted primarily from a net increase of
$4.3 million or 8.3% in unit volume sales of the Company's products to
telecommunications and instrumentation OEMs that was offset in part by a
decrease of 39.9% in sales to computer OEMs, and, secondarily, to changes in
product sales mix, which resulted in an increase of $1.9 million or 3.5% in
sales of higher-priced printed circuit boards with a higher average layer count.
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Gross profit for fiscal 1995 was $9.8 million or 16.8% of revenue, compared
to $5.5 million or 10.7% of revenue for fiscal 1994. The increase in gross
margin was primarily the result of operating efficiencies, improved capacity
utilization, changes in product mix which resulted in increased sales of higher-
priced printed circuit boards with a higher average layer count and higher gross
margin, and greater yields at the Company's manufacturing facilities.
Selling, general and administrative expense for fiscal 1995 was $6.4 million
or 11.0% of revenue, an increase of $324,000 or 5.3% from fiscal 1994, primarily
as a result of increased employee benefits costs and consultant fees. Selling,
general and administrative expense decreased as a percentage of revenue from
11.8% to 11.0%, primarily as a result of spreading fixed costs over a larger
revenue base.
Interest expense for fiscal 1995 was $1.6 million, an increase of $346,000 or
28.4% from fiscal 1994. The increase was primarily the result of increased
borrowing costs, including increases in the prime interest rate.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and capital
expenditures with cash from operations and debt financing. Net cash provided by
operating activities for the fiscal year ended June 30, 1996 was $8.9 million,
compared to net cash provided by operating activities of $5.0 million and $2.1
million for fiscal 1995 and 1994, respectively. As of June 30, 1996, the Company
had $39,000 in cash and cash equivalents and working capital of approximately
$10.7 million.
In April 1996, the Company received net proceeds from its initial public
offering of $19,340,000. The proceeds were used to pay off the outstanding line
of credit balance at that time as well as other existing indebtedness and
accrued S corporation dividends. Also during April 1996, the Company established
a new $10.0 million line of credit, under which $985,000 was outstanding at June
30, 1996 and $9.0 million was available for borrowings based on eligible
accounts receivable and inventory. Amounts outstanding under the line of credit
bear interest at an annual rate equal to the 8.25%. At June 30, 1996, the
Company was in compliance with all loan covenants. The Company also has a $10.0
million equipment line of credit which was not utilized and all of which was
available for equipment purchases as of June 30, 1996.
The Company's loan agreements with Xxxxxx Financial, Inc. and Key Bank
contain covenants pertaining to maintenance of tangible net worth and
maintenance of certain financial ratios. These agreements provide that the
Company must maintain a ratio of current assets to current liabilities of 1.1 to
1.0, and tangible net worth of $18 million plus 50% of its cumulative positive
net income beginning March 31, 1996. They also provide that the Company can not
(i) borrow money or incur other debt except for debt subordinated to the
Company's obligations to these lenders and certain previously contemplated
equipment leases, (ii) acquire any business for a purchase price of more than $3
million, or (iii) grant other security interests without the lenders' consent,
in addition to other customary covenants. The Company was not in violation of
any covenants at June 30, 1996.
Capital expenditures were $7.5 million for the fiscal year ended June 30,
1996, and $3.7 million and $4.0 million in fiscal 1995 and 1994, respectively.
These capital expenditures were primarily for the purchase of manufacturing
equipment and plant modernization. Although the Company has no commitments in
material amounts, it expects capital expenditures for the next 12 months to
range from $8 million to $12 million for facilities expansion and equipment.
The Company intends to pursue acquisitions as part of its growth strategy.
Although the Company has no understandings, commitments or agreements with
respect to any acquisition, the Company anticipates that one or more potential
acquisition opportunities may become available in the future. The Company
believes its existing cash and cash equivalents, credit facilities and cash from
operations, will be sufficient to fund its operations for at least the next 12
months.
INDEPENDENT AUDITORS' REPORT
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The Board of Directors and Shareholders
Xxxxxxxxxx Industries, Inc.
We have audited the accompanying balance sheets of Xxxxxxxxxx Industries,
Inc. as of June 30, 1996 and 1995, and the related statements of operations,
shareholders' 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, such financial statements present fairly, in all material
respects, the financial position of Xxxxxxxxxx Industries, Inc. as of June 30,
1996 and 1995, and the 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.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
August 16, 1996
BALANCE SHEETS
Xxxxxxxxxx Industries, Inc.
June 30,
1996 1995
ASSETS
Current Assets:
Cash and cash equivalents $ 38,687 $ 23,060
Receivables, net of allowance for doubtful accounts
of $265,000 and $150,000 at June 30, 1996
and 1995, respectively 13,073,861 7,262,151
Due from related parties (Note 12) -- 381,807
Due from shareholder (Note 12) -- 347,852
Inventories (Note 4) 6,211,755 4,002,394
Prepaid expenses 206,129 84,932
Current deferred tax asset (Note 13) 394,000 --
Total current assets 19,924,432 12,102,196
Property, Plant, and Equipment, Net (Note 5) 24,795,705 17,130,246
Restricted Cash (Note 6) 305,956 303,625
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Other Assets (Note 7) 7,809,968 815,856
Total $ 52,836,061 $ 30,351,923
LIABILITIES AND EQUITY
Current Liabilities:
Bank overdraft $ 530,817 $ 969,087
Notes payable (Note 8) -- 4,794,672
Taxes payable 943,000 --
Accounts payable 5,157,913 5,891,228
Accrued payroll and related benefits 1,623,439 991,395
Other current liabilities 55,045 50,633
Current portion of long-term obligations 870,874 1,301,842
Total current liabilities 9,181,088 13,998,857
Long-Term Obligations, Net of current portion (Notes 9 and 10) 7,694,590 10,187,726
Deferred Tax Liability (Note 13) 896,000 --
Contingencies and Commitments (Note 16) 423,450 423,450
Deferred Gain, Net of current portion -- 43,271
Shareholders' Equity:
Preferred stock; 500,000 shares authorized, no shares
issued and outstanding -- --
Common stock, 50,000,000 shares authorized and
11,061,875 shares issued and outstanding at
June 30, 1996 and 8,086,875 at June 30, 1995 29,932,049 4,308,916
Retained earnings 4,708,884 1,389,703
Total shareholders' equity 34,640,933 5,698,619
Total $ 52,836,061 $ 30,351,923
See notes to financial statements.
STATEMENTS OF OPERATIONS
Xxxxxxxxxx Industries, Inc..
Years Ended June 30,
1996 1995 1994
Revenue $ 95,101,170 $ 58,096,178 $ 51,757,135
Cost of goods sold 72,941,213 48,343,022 46,244,144
Gross profit 22,159,957 9,753,156 5,512,991
Selling, general, and administration expense 8,283,048 6,405,667 6,082,006
Amortization of goodwill 612,500 -- --
Income (loss) from operations 13,264,409 3,347,489 (569,015)
Interest expense 1,798,914 1,562,790 1,217,002
Other income (expense) 301,642 91,689 (353,110)
Income (loss) from continuing operations
before income taxes 11,767,137 1,876,388 (2,139,127)
Provision for income taxes 1,445,000 -- --
Income from continuing operations 10,322,137 1,876,388 (2,139,127)
Discontinued operations (Note 3):
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Loss on disposal of assembly division,
including provision of $5,065,199 in 1994
for operating losses during phase-out period (612,000) --
(3,081,159)
Net income (loss) $ 9,710,137 $ 1,876,388 $ (5,220,286)
Pro forma net income (loss) data (Note 13) (Unaudited):
Income (loss) from continuing operations
before income taxes, as reported $ 11,767,137 $ 1,876,388 $ (2,139,127)
Pro forma (provision) benefit for income taxes (4,472,000) (690,865) 919,463
Discontinued operations, as reported (612,000) -- (3,081,159)
Pro forma tax benefit of discontinued operations 233,000 -- 1,181,933
Pro forma net income (loss) $ 6,916,137 $ 1,185,523 $ (3,118,890)
Pro forma net income per share (Note 19)
(Unaudited) from:
Continuing operations $ 0.80 $ 0.13
Discontinued operations (0.04) --
$ 0.76 $ 0.13
Pro forma weighted average shares outstanding
(Note 19) (Unaudited) 9,110,233 8,823,717
See notes to financial statements.
STATEMENTS OF CASH FLOWS
Xxxxxxxxxx Industries, Inc.
Years Ended June 30,
1996 1995 1994
Cash flows from operating activities:
Net income (loss) $ 9,710,137 $ 1,876,388 $ (5,220,286)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 4,911,279 3,704,780 3,714,157
Gain on sale of fixed assets (111,730) (177,844) (57,300)
Gain on disposal of assembly division assets -- -- (1,984,040)
Deferred taxes 502,000 -- --
Provision for doubtful accounts 292,354 64,518 53,932
Recognition of deferred gain (43,271) (18,547) --
Loss on discontinued operations 612,000 -- --
Changes in operating assets and liabilities:
Receivables (3,361,233) (1,132,447) 2,048,049
Inventory (688,624) 76,265 3,605,243
Other current assets (89,664) (20,892) 29,144
Accounts payable (2,684,743) 446,285 (343,774)
Income taxes payable 943,000 -- --
Accrued payroll and related benefits 288,645 252,468 (224,516)
Other current liabilities (1,336,809) (67,269) 435,920
Net cash provided by operating activities 8,943,341 5,003,705 2,056,529
Cash flows from investing activities:
Additions to property, plant, and equipment (7,525,631) (3,663,114) (3,951,359)
Proceeds from sale of assembly division assets -- -- 6,864,443
Additions to other assets -- (372,897) --
Proceeds from sale of property, plant, and equipment 217,955 371,821 372,970
Acquisition of Circuit Technology, Inc. (2,000,000) -- --
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Net (additions to) reductions in amounts due from
related parties and shareholders (2,594,714) (138,050) 120,533
Deposits refunded -- -- 154,403
Change in restricted cash (2,331) (13,946) (139,679)
Net cash provided by (used in) investing activities (11,904,721) (3,816,186) 3,421,311
Cash flows from financing activities:
Net additions to (reductions in) short-term borrowings (5,199,771) (2,887,768) 251,867
Borrowing of long-term debt 3,880,409 4,496,890 2,000,000
Payments on long-term debt (7,713,451) (2,401,743) (4,022,783)
Proceeds from initial public offering, net of expenses 19,340,185 -- --
Capital contributions -- 497,153 2,197,306
Dividends paid (6,783,635) (793,095) (4,330,772)
Payments on capital leases (108,460) (169,576) (1,267,184)
Increase (decrease) in bank overdrafts (438,270) 69,595 (305,819)
Net cash provided by (used in) financing activities 2,977,007 (1,188,544) (5,477,385)
Increase (decrease) in cash and cash equivalents 15,627 (1,025) 455
Cash and cash equivalents at beginning of year 23,060 24,085 23,630
Cash and cash equivalents at end of year $ 38,687 $ 23,060 $ 24,085
Supplemental disclosure of cash flow information-
Cash paid during the year for interest $ 1,789,375 $ 1,553,460 $ 1,179,881
Noncash investing and financing activities:
During the year ended June 30, 1994, the Company acquired $811,591 of
property, plant, and equipment under capital leases related to the assembly
division.
During the year ended June 30, 1994, the Company recorded a deferred gain of
$92,727 for equipment which was sold and subsequently leased back.
During the year ended June 30, 1994, the Company distributed $194,953 of
property to a related party in exchange for a note receivable.
During the year ended June 30, 1996, the Company used $526,720 of operating
lease deposits toward the purchase of equipment.
During the year ended June 30, 1996, the Company distributed dividends of
$468,087 to a shareholder by reducing amounts due from shareholder.
See notes to financial statements.
STATEMENTS OF SHAREHOLDERS' EQUITY
Xxxxxxxxxx Industries, Inc.
XXXXXXXXXX INDUSTRIES, INC.
TOTAL
COMMON STOCK
RETAINED
NUMBER EARNINGS
OF SHARES AMOUNT (DEFICIT)
Balances, July 1, 1993
as previously reported 6,717,000 $ 2,074,037 $ 4,887,213 $ 6,961,250
Effect of Xxxxxxxxxx Property Group merger
(Note 2) 1,369,875 4,510,675 -- 4,510,675
Balances, July 1, 1993, as restated 8,086,875 6,584,712 4,887,213 11,471,925
Net earnings June 30, 1994 -- 68,158 (5,288,444) (5,220,286)
Contributions -- 2,197,306 -- 2,197,306
Dividends -- (4,330,772) -- (4,330,772)
Balances, June 30, 1994 8,086,875 4,519,404 (401,231) 4,118,173
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Net earnings June 30, 1995 -- (705,390) 2,581,778 1,876,388
Contributions -- 497,153 -- 497,153
Dividends -- (2,251) (790,844) (793,095)
Balances, June 30, 1995 8,086,875 4,308,916 1,389,703 5,698,619
Acquisition of Circuit Technology, Inc. 700,000 7,143,714 -- 7,143,714
Net earnings June 30, 1996 -- (392,679) 10,102,816 9,710,137
Initial public offering, net of expenses 2,275,000 19,340,185 -- 19,340,185
Dividends -- (468,087) (6,783,635) (7,251,722)
Balances, June 30, 1996 11,061,875 $ 29,932,049 $ 4,708,884 $ 34,640,933
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS-- Xxxxxxxxxx Industries, Inc. (the Company or
Xxxxxxxxxx) is incorporated under the laws of the State of Oregon, and its
principal business is the manufacture and sale of electronic circuit boards.
USE 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. Actual results could differ from those estimates.
DISCONTINUED OPERATIONS-- In July 1993, the Company adopted a plan for the
disposition of its assembly division (see Note 3).
REVENUE RECOGNITION-- Revenue is recognized when goods are shipped to the
customer.
INVENTORIES are stated at the lower of cost (determined on a first-in, first-
out basis) or market.
CASH AND CASH EQUIVALENTS includes all cash and short-term debt instruments,
including nonrestricted certificates of deposit, purchased with an original
maturity of three months or less.
PROPERTY AND EQUIPMENT-- Depreciation of property and equipment is provided
on the straight-line method based on the estimated useful lives of the
individual assets, primarily 5 to 10 years for equipment and 31 years for
buildings. The Company records the assets and the related obligations of capital
leases at amounts based upon the cash purchase price of the assets involved at
the beginning of the lease term. Depreciation and amortization expense also
includes amortization of equipment recorded under capital leases provided on the
basis of the estimated useful lives of the individual assets, primarily 5 years,
on the straight-line method.
LOAN FEES-- Other assets include loan fees incurred by the Company. These
fees are being amortized straight-line over the terms of the loans.
GOODWILL-- The Company amortizes costs in excess of fair value of net assets
of businesses acquired using the straight-line method over a period of eight
years. Management reviews, on an ongoing basis, the continuing appropriateness
of the remaining amortizable life and the net realizable value of the
unamortized balance.
INCOME TAXES-- The Company elected to be taxed under the S corporation
provisions of the Internal Revenue Code through the effective date of the
initial public offering by Xxxxxxxxxx of common stock (the Offering). Under
those provisions, the Company did not pay federal or state corporate income
taxes on its taxable income. Instead, the shareholders were liable for federal
and state income taxes on the Company's taxable income.
Actual and pro forma income taxes have been provided for under Statement of
Financial Accounting Standards (FASB) No. 109, Accounting for Income Taxes.
Under this method, deferred tax assets and liabilities are recognized based on
differences between financial statement and tax basis of assets and liabilities
using presently enacted tax rates.
S CORPORATION DIVIDENDS-- Historically, the Company has paid dividends to its
shareholders in amounts which approximate the federal and state income taxes
that are due as a result of the Company electing to be taxed as an S corporation
as discussed above. In connection with the Offering, the Company distributed to
its former shareholders substantially all of the undistributed cumulative income
that had been taxed or was taxable to its former shareholders. This dividend was
paid from the proceeds of the Offering.
COMMON STOCK-- In November 1995, in anticipation of its Offering, the Board
of Directors declared a
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650,294-for-1 stock split of its common stock. All per share information in the
accompanying financial statements has been retroactively adjusted to reflect
this stock split.
2. ACQUISITIONS
On November 15, 1995, Xxxxxxxxxx acquired Circuit Technology, Inc. (CTI), a
circuit board manufacturing company. The acquisition was accomplished by a
merger of CTI with and into Xxxxxxxxxx. The purchase price included $2,000,000
of cash and 700,000 shares of Xxxxxxxxxx'x common stock which was valued at
$10.21 per share.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the operating results of CTI have been included in
the Company's combined financial statements since the date of acquisition. The
estimated fair market value of assets and liabilities acquired was approximately
$8,000,000 and $7,300,000, respectively. The excess of the aggregate purchase
price over the fair market value of net assets acquired of $8,400,000 was
recognized as goodwill and is being amortized over eight years.
The following unaudited pro forma results of operations assume the
acquisition occurred on July 1, 1994:
YEAR ENDED JUNE 30,
1996 1995
Revenue $ 103,755,000 $ 76,157,000
Net income 6,851,000 1,167,000
Net income per share 0.71 0.12
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the CTI acquisition been
consummated as of July 1, 1994, nor is it necessarily indicative of future
operating results.
In November 1995, Xxxxxxxxxx Design, Inc. (PDI) merged with and into
Xxxxxxxxxx. As the entities were commonly controlled, the transaction was
accounted for in a manner similar to a pooling of interests. The impact on the
financial statements was insignificant.
In April 1996, Xxxxxxxxxx acquired all the assets and the related liabilities
of Xxxxxxxxxx Property Group (PPG) for net consideration of $12,120,000.
Xxxxxxxxxx issued 1,369,875 shares of its common stock to the sole proprietor of
PPG. As the entities are commonly controlled, the transaction was accounted for
in a manner similar to a pooling of interests. The impact of accounting for the
transaction on the financial statements was insignificant.
On August 16, 1996, Xxxxxxxxxx acquired Trend Circuits, Inc. (Trend), a
circuit board manufacturing company. The acquisition was accomplished by a
merger of Trend with and into Xxxxxxxxxx. The purchase price included $5,000,000
of cash and $1,000,000 shares of Xxxxxxxxxx'x common stock valued at $10.65 per
share. The acquisition will be accounted for under the purchase method of
accounting and, accordingly, the operating results of Trend will be included in
the Company's financial statements after the date of acquisition. The excess of
the aggregate purchase price over the fair market value of the net assets
acquired will be recognized as goodwill and will be amortized over eight years.
3. DISCONTINUED OPERATIONS
On July 1, 1993, the Company adopted a formal plan to sell its assembly
contract manufacturing division. On April 25, 1994, the sale of substantially
all of the assets of the assembly division was completed. The assets sold
consisted primarily of inventory, property, plant and equipment. The selling
price was $7,084,661, resulting in a gain of $1,984,040. The $3,081,159 net loss
from discontinued operations for the year ended June 30, 1994 represents the
$1,984,040 gain on the disposal of assembly division inventory, property, plant
and equipment and a $5,065,199 loss incurred in 1994 on the assembly division
operations. In connection with the assembly division sale, the Company agreed
not to solicit any of the assembly division customers or employees for periods
of five and two years, respectively.
At June 30, 1994, the remaining assets of the assembly division were accounts
receivable of $530,000 and inventory of $630,060, both of which are stated at
net realizable value. These assets were disposed of in 1995 at no gain or loss.
During 1996, the Company paid $612,000 in settlement of a prior contingency
related to the assembly division. This amount was recorded as a loss from
discontinued operations.
The results of operations for the assembly division have been presented as
discontinued operations in the accompanying financial statements. The assets of
the assembly division sold in April 1994 consisted of the following:
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Inventories $ 484,661
Equipment, at cost 6,179,835
Less accumulated depreciation (3,826,305)
Total equipment, net 2,353,530
Building, at cost 1,801,530
Less accumulated depreciation (209,701)
Total building, net 1,591,829
Land, at cost 450,383
Total $ 4,880,403
Revenue for the assembly division for the year ended June 30, 1994 was
$15,927,588.
4. INVENTORIES
Inventories consist of the following:
1996 1995
Raw materials and supplies $ 1,824,463 $ 936,087
Work-in-process 4,387,292 3,066,307
Total inventories $ 6,211,755 $ 4,002,394
5. PROPERTY AND EQUIPMENT
USEFUL LIFE JUNE 30,
Land -- $ 489,729 $ 489,729
Buildings and leasehold improvements 10 to 31 10,752,978 9,276,851
Equipment 3 to 10 34,393,561 27,446,118
Office furniture and fixtures 5 to 7 537,190 532,759
Deposits on equipment -- 743,078 57,782
46,916,536 37,803,239
Less accumulated depreciation and amortization (22,120,831) (20,672,993)
Property and equipment $ 24,795,705 $ 17,130,246
At June 30, 1996 and 1995, the company had equipment of $347,208 and zero,
respectively, financed with capital leases. The total accumulated amortization
at June 30, 1996 and 1995 was $31,568 and zero, respectively.
6. RESTRICTED CASH
Restricted cash at June 30, 1996 and 1995 consists of a $150,000 certificate
of deposit maintained as collateral for a note payable and $155,956 and
$153,625, respectively, reserved for payment of medical insurance claims that
may arise subsequent to termination of the Company's current insurance contract.
The Company has renewed the insurance contract through June 30, 1998.
7. OTHER ASSETS
1996 1995
Equipment lease deposits $ -- $ 526,720
Loan fees, net of accumulated amortization of $20,088 and $97,953
at June 30, 1996 and 1995, respectively 22,468 289,136
Goodwill, net of accumulated amortization of $612,500
at June 30, 1996 7,787,500 --
Total other assets $ 7,809,968 $ 815,856
8. NOTES PAYABLE
1996 1995
Note payable to Finova Capital Corporation under a
$14,800,000 line of credit, paid April 1996 $ -- $ 4,794,672
9. LONG-TERM NOTES PAYABLE
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1996 1995
Note payable to Finova Capital Corporation, paid April 1996 $ -- $ 3,990,827
Mortgage payable to SeaFirst Mortgage Corporation, 8% at June 30, 1996,
rate varies based on six-month certificates of deposit plus 2.75%, payable
in monthly installments of $26,813 including interest, collateralized by
plant facilities 3,054,815 3,091,567
Note payable to MetLife Capital Corporation, 7.67% at June 30, 1996,
interest rate varies at 30-day commercial paper rate plus 2.35%, payable
in monthly installments of $7,622 including interest, collateralized by a
$150,000 certificate of deposit and a deed of trust on PPG facilities
located in White City, Oregon 943,783 960,621
Notes payable to Xxxxxx Financial, Inc., 10.10% at June 30, 1996,
interest rate varies at highest defined rate announced by The First
National Bank of Chicago plus 1.85%, due in monthly installments of
$47,207 plus interest, collateralized by machinery and equipment and
personally guaranteed by a shareholder 1,333,374 --
Note payable to First Security Bank of Idaho, paid April 1996 -- 881,367
Notes payable to Oregon Department of Energy, 7.4% to 9.95%, due in
monthly installments of $22,489 including interest, unpaid principal and
interest due June 1, 1998 through January 1, 2007, collateralized by
equipment and a second deed of trust on PPG land and facilities located
in Dallas, Oregon and personally guaranteed by a shareholder 1,936,902 2,035,145
Note payable to U.S. National Bank of Oregon, paid November 1995 -- 500,000
Note payable, 9.00%, due in semi-annual installments of $6,090 including
interest, collateralized by equipment 20,541 30,041
Note payable to PacifiCorp, 7.06%-8.25% at June 30, 1996 83,611 --
Line of credit of $10,000,000 payable to Key Bank, 8.25% at June 30, 1996,
collateralized by inventory and accounts receivable, expires April 12, 1998 984,592 --
Subtotal 8,357,618 11,489,568
Less current portion (767,227) (1,301,842)
Total long-term notes payable $ 7,590,391 $ 10,187,726
The Company's loan agreements with Xxxxxx Financial, Inc. and Key Bank
contain covenants pertaining to maintenance of tangible net worth and
maintenance of certain financial ratios. The Company was not in violation of any
covenants at June 30, 1996.
Maturities on the notes payable as of June 30, 1996 were as follows:
YEAR ENDING JUNE 30,
1997 $ 767,227
1998 2,232,098
1999 1,301,408
2000 215,076
2001 230,178
Thereafter 3,611,631
Total $ 8,357,618
10. OBLIGATIONS UNDER CAPITAL LEASES
1996 1995
Leases payable, 10.4% to 12.75% imputed interest, due in monthly
installments ranging from $705 to $6,517 including interest $ 207,846 $ --
Less current portion 103,647 --
Total $ 104,199 $ --
11. OPERATING LEASES
Xxxxxxxxxx leases equipment under operating lease agreements which expire at
various times. Future minimum rentals at June 30, 1996 under these agreements
are as follows:
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YEAR ENDING JUNE 30,
1997 $ 1,521,704
1998 1,300,968
1999 916,669
2000 551,417
2001 261,550
Total $ 4,552,308
Several of Xxxxxxxxxx'x operating leases contain renewal options.
Rent expense relating to the equipment leases totaled $796,642, $1,072,481,
and $880,824 for the years ended June 30, 1996, 1995, and 1994, respectively.
12. RELATED-PARTY TRANSACTIONS
The amounts due from shareholder of $347,852 at June 30, 1995 represents
demand notes receivable due from Xxxxxx X. Xxxxxxxxxx, a shareholder, bearing
interest at 8%. All amounts due have been repaid.
Xxxxxxxxxx has sold printed circuit boards to Carillon Corporation, an Oregon
corporation in which Xxxxxx X. Xxxxxxxxxx is a 50% shareholder. Prior to
August 17, 1994, Xxxxxx X. Xxxxxxxxxx was the sole shareholder of Carillon
Corporation. Sales to Carillon Corporation which related to the assembly
division were $981,630 for the year ended June 30, 1994. Sales to Carillon
Corporation for the years ended June 30, 1996 and 1995 were insignificant.
The amounts due from Carillon Corporation of $313,407 at June 30, 1995
represents the excess of advances made by Xxxxxxxxxx over repayments made by
Carillon Corporation. All amounts due have been repaid.
At June 30, 1995, the accompanying balance sheet includes $68,400 due from
Virtual Image Displays, Inc., a corporation in which Xxxxxxxxxx has a 50%
ownership interest. Sales to Virtual Image Displays, Inc. for the years ended
June 30, 1996 and 1995 were insignificant.
During the year ended June 30, 1996, the Company had notes payable to
shareholders of $3,337,960. The notes payable represented the undistributed
cumulative income that had been taxed or was taxable to the previous
shareholders of PDI and CTI, who are now shareholders of Xxxxxxxxxx. The notes
payable were repaid in April 1996.
13. INCOME TAXES
The following information reflects income taxes on the Company's earnings
from the date of the Offering to June 30, 1996. At the date of the Offering, the
Company terminated its S corporation election and is now taxed as a C
corporation.
Current:
Federal $ 891,000
State 52,000
943,000
Deferred:
Federal 466,000
State 36,000
502,000
$ 1,445,000
The income tax provision on earnings from continuing operations subsequent to
the date of the Offering which are subject to income taxes differs from the
statutory federal income tax rate due to the following:
Federal income taxes at the statutory rate $ 1,402,000
State income taxes, net of federal benefit 67,000
State tax credits (23,000)
Other (1,000)
$ 1,445,000
The significant items comprising the Company's net deferred tax liability
are disclosed below with the pro forma information. The following unaudited
information reflects pro forma income taxes as if the Company's earnings from
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continuing operations had been subject to federal and state income taxes as a C
corporation for all periods presented:
YEAR ENDED JUNE 30,
1996 1995 1994
Current:
Federal $ 4,278,000 $ 946,858 $ (680,279)
State 742,000 -- 134,338
5,020,000 946,858 (545,941)
Deferred:
Federal (595,000) (299,874) (35,240)
State 47,000 43,881 (338,282)
(548,000) (255,993) (373,522)
$ 4,472,000 $ 690,865 $ (919,463)
The pro forma income tax provision on earnings from continuing operations
subject to income taxes differs from the statutory federal income tax rate due
to the following:
YEAR ENDED JUNE 30,
1996 1995 1994
Federal income taxes at the statutory rate $ 4,118,000 $ 637,972 $ (727,303)
State income taxes, net of federal benefit 323,000 81,811 (93,266)
State tax credits (171,000) (39,084) (112,189)
Other 202,000 10,166 13,295
$ 4,472,000 $ 690,865 $ (919,463)
Pro forma income taxes related to discontinued operations differs from the
statutory rate primarily due to state income taxes, net of federal benefit.
The pro forma tax effect of significant items comprising the Company's net
deferred tax liability are as follows:
YEAR ENDED JUNE 30,
1996 1995
Allowance for doubtful accounts $ 117,000 $ 57,540
Accrued expenses 376,000 18,745
State income taxes - credits 117,000 151,273
State NOL -- 100,154
Property, plant, and equipment (1,112,000) (1,377,876)
$ (502,000) $ (1,050,164)
Net deferred tax assets and liabilities are included in the following balance
sheet accounts at June 30, 1996:
Current deferred tax asset $ 394,000
Deferred tax liability (896,000)
Net deferred tax liability $ (502,000)
14. MAJOR CUSTOMERS
During the years ended June 30, 1996, 1995, and 1994, the Company recognized
23%, 29%, and 46% of total revenue, respectively, from two customers.
15. EMPLOYEE BENEFIT PLAN
In April 1990, Xxxxxxxxxx instituted a 401(k) plan which covers all employees
and permits discretionary contributions by the participants. The Company has
contributed approximately $251,188 to the plan for the year ended June 30, 1996.
The Company had not contributed to the plan on behalf of the employees prior to
June 30, 1995.
16. CONTINGENCIES AND COMMITMENTS
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During the year ended June 30, 1994, a former employee brought suit against
Xxxxxxxxxx for wrongful discharge which resulted in a jury verdict against the
Company totaling $423,450. Xxxxxxxxxx has appealed the verdict and judgment.
Management believes that the jury verdict was excessive; however, due to the
uncertainty involved in the appeal process, the entire judgment has been
accrued.
The Company is involved as a defendant in litigation in the ordinary course
of business, the outcome of which cannot be predicted with certainty. Management
believes that any ultimate liability with respect to such litigation will not
materially affect the financial position or results of operations of the
Company.
17. STOCK INCENTIVE PLAN AND STOCK WARRANTS
Xxxxxxxxxx'x Board of Directors and shareholders adopted and approved the
1995 Stock Incentive Plan (the Stock Incentive Plan) on December 19, 1995. Under
the Stock Incentive Plan, the Board of Directors may grant incentive and non-
qualified options, stock bonuses, restricted stock, stock appreciation rights,
and cash bonus rights to employees and directors to purchase up to 1,500,000
shares of common stock. The Stock Incentive Plan shall continue in effect until
all shares available for issuance have been issued. However, the Board of
Directors can suspend or terminate the Stock Incentive Plan at any time except
with respect to options and shares subject to restrictions then outstanding
under the Stock Incentive Plan. Options to purchase a total of 667,000 shares of
common stock with an exercise price of $9.50 - $12.00 per share have been
granted and are outstanding. None of such options have been exercised. Such
options generally vest at the rate of 25% per year and expire ten years from
date of grant.
In connection of the acquisition of CTI (see Note 2), Xxxxxxxxxx issued stock
warrants to purchase 46,333 shares of common stock to the former shareholders of
CTI. The warrants can be exercised at $12 per share and expire in 2006.
At June 30, 1996, no shares had been purchased under the stock warrants.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, receivables, payables, accrued
liabilities, and short-term borrowings approximates fair value because of the
short-term maturity of these instruments.
The fair value of long-term debt has been estimated by discounting projected
future cash flows, using a current rate at which similar loans would be made to
borrowers with similar credit ratings and for the same maturities. Current
maturities of long-term debt were included and capital lease obligations were
excluded. The fair value of the Company's long-term debt is estimated to be
$8,400,289, or 100.5% of the carrying value of $8,357,617 at June 30, 1996.
19. PRO FORMA EARNINGS PER SHARE (UNAUDITED)
Pro forma net income per share is based on the weighted average number of
shares of common stock outstanding and dilutive common equivalent shares from
stock options (using the treasury stock method). The shares outstanding for all
periods give effect to the stock split described in Note 1 as well as the
following pro forma adjustments:
YEAR ENDED JUNE 30,
1996 1995
Average outstanding shares 7,161,872 6,717,000
Common stock equivalents - net 40,024 --
Shares deemed issued for S corporation dividend 538,462 736,842
Shares issued for merger of PPG 1,369,875 1,369,875
Pro forma average shares 9,110,233 8,823,717
Common and common equivalent shares issued during the 12-month period prior
to the proposed offering have been included in the calculation using the
treasury stock method as if they were outstanding for all periods presented.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
In the opinion of management, this unaudited quarter financial summary
includes all adjustments, which are of a normal and recurring nature,
necessary to present fairly the financial position, the results of
operations, and of cash flows of the Company for the periods represented (in
thousands, except per share amounts):
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SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
Net sales $ 17,951 $ 22,618 $ 25,778 $ 28,754
Gross profit 3,954 4,966 5,977 7,263
Increase from operations 2,540 2,839 3,717 4,168
Income before taxes 2,103 2,445 2,602 4,005
Pro forma net income 1,262 1,480 1,653 2,521
Pro forma earnings per share 0.14 0.16 0.22 0.23
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
Net sales $ 14,291 $ 14,324 $ 13,399 $ 16,082
Gross profit 2,306 2,180 2,069 3,198
Increase from operations 645 521 638 1,543
Income before taxes 336 137 290 1,113
Pro forma net income 217 82 183 703
Pro forma earnings per share 0.02 0.01 0.02 0.08
