SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report: September 23, 1996 ---------------------------------- CENTENNIAL TECHNOLOGIES. INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware - -------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation) 1 - 12912 04-2978400 - ------------------------ ------------------------------------ (Commission File Number) (I.R.S. Employer Identification No.) 37 Manning Road, Billerica. Massachusetts 01821 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (508) 670-0646 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Not Applicable - -------------------------------------------------------------------------------- (Former Name or Former Address, if Changed Since Last Report) AMENDMENT NO. 1 The undersigned registrant hereby amends the following items, financial statements, exhibits or other portions of its Form 8-K dated July 24, 1996, as set forth in the pages attached hereto: 1. Item 7 - Financial Statements and Exhibits - Amended to provide the audited financial statements and pro forma financial information for Design Circuits, Inc. TABLE OF CONTENTS FORM 8-K/A September 23, 1996 Item Page ---- ---- Item 7. Financial Statements and Exhibits 1 Signature 2 Exhibits None i ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS Listed below are the financial statements, pro forma financial information and exhibits, if any, filed as part of this amendment: a. June 30, 1996 unaudited and October 31, 1995 Audited Financial Statements for Design Circuits, Inc. b. Pro forma Financial Information for the Registrant and Design Circuits, Inc. c. Exhibits. None. 1 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CENTENNIAL TECHNOLOGIES, INC. Dated: September 23, 1996 By: /S/ Emanuel Pinez -------------- Emanuel Pinez Chief Executive Officer -2- DESIGN CIRCUITS, INC. FINANCIAL STATEMENTS JUNE 30, 1996 AND OCTOBER 31, 1995 DESIGN CIRCUITS, INC. INDEX TO FINANCIAL STATEMENTS Page(s) ------- Independent Auditors' Report Financial Statements: Balance Sheets at June 30, 1996 (Unaudited) and October 31, 1995 4 Statements of Operations for the Eight Months Ended June 30, 1996 (Unaudited) and the Year Ended October 31, 1995 5 Statement of Stockholders' Equity for the Year Ended October 31, 1995 and the Eight Months Ended June 30, 1996 (Unaudited) 6 Statements of Cash Flows for the Eight Months Ended June 30, 1996 (Unaudited) and the Year Ended October 31, 1995 7 Notes to Financial Statements 8-20 INDEPENDENT AUDITORS' REPORT To the Board of Directors Design Circuits, Inc.: We have audited the accompanying balance sheet of Design Circuits, Inc. as of October 31, 1995 and the related statements of operations, stockholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Design Circuits, Inc. as of October 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. January 5, 1996, except as to Note 12, which is as of July 10, 1996 DESIGN CIRCUITS, INC. BALANCE SHEETS JUNE 30, 1996 AND OCTOBER 31, 1995 ASSETS (Unaudited) 1996 1995 ---- ---- Current assets: Cash $ 385,432 $ 2,522 Trade accounts receivable, net of allowance for doubtful accounts of $172,600 in 1996 and $115,000 in 1995 (Note 11) 1,809,101 1,534,882 Notes receivable - related parties (Note 2) 8,500 8,607 Inventories (Note 3) 2,723,045 3,020,714 Prepaid expenses and other current assets 52,434 32,476 ----------- ---------- Total current assets 4,978,512 4,599,201 Property and Equipment (Note 7) Machinery and equipment 2,659,994 2,489,298 Computer equipment 283,875 259,414 Furniture and fixtures 67,784 48,271 Leasehold improvements 98,302 98,302 ----------- ---------- 3,109,955 2,895,285 Less accumulated depreciation and amortization 1,634,998 1,387,999 ----------- ---------- Net property and equipment 1,474,957 1,507,286 ----------- ---------- Notes receivable - related parties (Note 2) 4,250 10,651 Deposits 17,481 17,481 Other assets, net of accumulated amortization - 1,851 ----------- ---------- Total assets $ 6,475,200 $ 6,136,470 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - bank (Note 4) 1,417,042 1,172,914 Subordinated notes payable (Note 5) 564,281 295,370 Current installments of long-term debt (Note 6) 8,500 76,648 Current installments of obligations under capital leases (Note 7) 190,980 167,916 Accounts payable 3,153,929 2,798,411 Accrued expenses 349,329 380,275 Income taxes payable (Note 8) 4,509 6,744 ----------- ---------- Total current liabilities 5,688,570 4,898,278 ----------- ---------- Subordinated notes payable, excluding current installments (Note 5) - 153,963 Long-term debt, excluding current installments (Note 6) 4,250 9,917 Obligations under capital leases, excluding current installments (Note 7) 478,012 475,266 ----------- ---------- Total liabilities 6,170,832 5,537,424 ----------- ---------- Stockholders' equity (Notes 9 and 10): Series C convertible preferred stock, $.0001 par value. Authorized 50,000 shares; issued and outstanding 47,711 and 39,711 shares at June 30, 1996 and October 31, 1995, respectively 5 4 Series B convertible preferred stock, $.0001 par value. Authorized 20,270 shares; issued and outstanding 20,270 shares 2 2 Common stock , $.0001 par value. Authorized 150,000 shares; issued and outstanding 26,428 and 26,744 shares at June 30, 1996 and October 31, 1995, respectively 3 3 Additional paid-in capital 4,557,663 4,323,124 Accumulated deficit (3,626,237) (3,097,335) ----------- ---------- 931,436 1,225,798 Less treasury stock at cost, 13,459 and 13,143 common shares at June 30, 1996 and October 31, 1995, respectively (627,068) (626,752) ----------- ---------- Total stockholders' equity 304,368 599,046 ----------- ---------- Commitments (Note 7) Total liabilities and stockholders' equity $ 6,475,200 $ 6,136,470 =========== =========== The accompanying notes are an integral part of the financial statements. 4 DESIGN CIRCUITS, INC. STATEMENTS OF OPERATIONS FOR THE EIGHT MONTHS ENDED JUNE 30, 1996 AND THE YEAR ENDED OCTOBER 31, 1995 (Unaudited) 1996 1995 ---- ---- Net sales (Note 11) $ 11,450,016 $ 9,069,993 Cost of sales 10,830,868 8,814,282 ------------ ----------- Gross profit 619,148 255,711 Selling, general and administrative expenses (Note 10): 973,665 1,342,165 ------------ ----------- Operating loss (354,517) (1,086,454) Other income (expense): Interest expense (185,830) (358,838) Interest income 18,817 11,796 Other (7,372) 219 ------------ ----------- Loss before income taxes (528,902) (1,433,277) Income tax expense (benefit) (Note 8) - (15,603) ------------ ----------- Net loss $ (528,902) $(1,417,674) ============ =========== The accompanying notes are an integral part of the financial statements. 5 DESIGN CIRCUITS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED OCTOBER 31, 1995 AND THE EIGHT MONTHS ENDED JUNE 30, 1996 Series C Series B Convertible Convertible Additional Total Preferred Preferred Common Paid-in Accumulated Treasury Stockholders' Stock Stock Stock Capital Deficit Stock Equity ----- ----- ----- ------- ------- ----- ------ Balances at October 31, 1994 $ 2 $ 3 $ 3,254,377 $(1,679,661) $ (322,500) $ 1,252,221 Series C preferred stock issued in private offering, net of issuance cost $ 4 969,822 969,826 Issuance of compensatory employee stock options 98,000 98,000 Exercise of common stock options 925 925 Acquisition of treasury stock (Note 2) (304,252) (304,252) Net loss (1,417,674) (1,417,674) ---------- --------- --------- ----------- ----------- ---------- ---------- Balances at October 31, 1995 4 2 3 4,323,124 (3,097,335) (626,752) 599,046 Series C preferred stock issued in private offering, net of issuance cost 1 199,999 200,000 Issuance of compensatory employee stock options 34,540 34,540 Acquisition of treasury stock (316) (316) Net loss (528,902) (528,902) ---------- --------- --------- ----------- ----------- ---------- ---------- Balances at June 30, 1996 (Unaudited) $ 5 $ 2 $ 3 $ 4,557,663 $(3,626,237) $ (627,068) $ 304,368 ========== ========= ========= =========== =========== ========== ========== The accompanying notes are an integral part of the financial statements. 6 DESIGN CIRCUITS, INC. STATEMENTS OF CASH FLOWS FOR THE EIGHT MONTHS ENDED JUNE 30, 1996 AND THE YEAR ENDED OCTOBER 31, 1995 (Unaudited) 1996 1995 ---- ---- Cash flow from operating activities: Net loss $ (528,902) $(1,417,674) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 246,999 346,184 Provision for doubtful accounts 82,571 45,000 Provision for deferred income taxes - 100,000 Deferred compensation expense - incentive stock options 34,540 98,000 Gain on sale of asset - (218) Changes in assets and liabilities: Decrease (increase) in accounts receivable (356,790) 163,674 Decrease (increase) in inventory 297,669 (1,784,509) Decrease (increase) in prepaid expenses and other current assets (19,958) 19,503 Decrease in deposits - 5,704 Decrease in other assets 1,851 27,581 Increase in accounts payable 355,518 1,720,188 Increase (decrease) in accrued expense (30,946) 119,531 Decrease in income taxes payable (2,235) (132,256) ----------- ----------- Net cash provided by (used in) operating activities 80,317 (689,292) ----------- ----------- Cash flows from investing activities: Capital expenditures (26,781) (71,875) Proceeds from sale of assets - 3,250 Collection of notes receivable - related party 6,508 90,015 ----------- ----------- Net cash provided by (used in) investing activities (20,273) 21,390 ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock - 925 Proceeds from issuance of preferred stock 200,000 969,826 Purchase of treasury stock (316) - Net borrowings (repayments) under notes payable - bank 244,128 (109,179) Proceeds from subordinated notes payable 350,000 235,052 Repayments of subordinated notes payable (235,052) (60,771) Repayments of long-term debt (73,815) (217,732) Payments under capital lease obligations (162,079) (175,936) ----------- ----------- Net cash provided by financing activities 322,866 642,185 ----------- ----------- Net increase (decrease) in cash 382,910 (25,717) Cash at beginning of period 2,522 28,239 ----------- ----------- Cash at end of period $ 385,432 $ 2,522 =========== =========== Supplemental Disclosures: Cash paid for interest $ 161,699 $ 312,416 =========== =========== Cash paid for income taxes $ 2,200 $ 32,256 =========== =========== Noncash investing and financing activities: Machinery and equipment acquired under capital lease obligations $ 187,889 $ 423,516 =========== =========== During fiscal 1995, the Company purchased common stock from two shareholders by canceling notes receivable in the amount of $245,945, canceling notes payable in the amount of $30,000, issuing notes payable in the amount of $50,000, reducing prepaid expenses by $47,932, and reducing accrued expenses by $9,625. An increase to treasury stock of $304,252 was recorded. The accompanying notes are an integral part of the financial statements. 7 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS (Information with respect to the eight months ended June 30, 1996 is unaudited) 1. Summary of Significant Accounting Policies: Description of Operations Design Circuits, Inc. (the "Company") is an independent provider of customized, integrated manufacturing services to original equipment manufacturers in the electronics industry, primarily production of printed circuit boards. These services include turnkey services, where the Company procures certain or all of the materials required for product assembly, and consignment services where customers supply certain or all of the materials and the Company provides assembly services. Turnkey services include material procurement and warehousing in addition to manufacturing, and typically involve greater resource investment than consignment services. On July 10, 1996, Centennial Technologies, Inc. acquired a majority interest in the Company. The preferred and common stock of the Company were retired and certain debt obligations were repaid. 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Revenue Recognition The Company recognizes revenue upon shipment of product to its customers. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed based on the lesser of the estimated useful lives or the lease term of the respective asset, using the straight-line method. Estimated useful lives are as follows: Machinery and equipment 7-10 years Computer equipment 5 years Furniture and fixtures 10 years Leasehold improvements shorter of lease term or useful life As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. Expenses for repairs and maintenance are charged to operations as incurred. Continued 8 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Information with respect to the eight months ended June 30, 1996 is unaudited) Other Assets Other assets consists primarily of deferred financing fees incurred in connection with the Company's long-term debt. Deferred financing fees are amortized using the straight-line method over three years. Income Taxes Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered and settled. The effect on deferred tax and assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Business and Credit Concentrations Financial instruments which potentially subject the Company to concentrations of credit risk consist of trade receivables. The Company has concentrations of credit risk due to sales to major customers (see Note 11). The Company monitors extension of credit and has not experienced significant credit losses in the past. Fair Value of Financial Instruments The carrying amount of the Company's financial instruments including cash, accounts receivable, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these instruments. The carrying value of notes receivable, notes payable and long-term debt approximate fair value based on the instruments' interest rate, maturity date, and collateral, if any, in comparison to the Company's incremental borrowing rate for similar financial instruments. 2. Notes Receivable - Related Parties: In October 1990, the Company sold manufacturing equipment used to produce printed circuit boards to Circuit Tech Inc. ("CTI"), an entity wholly-owned by a stockholder of the Company. The Company accepted a $475,000 note bearing interest at 9.6% from CTI in connection with the aforementioned sale. The original terms of the note required monthly payments of principal and interest of $10,000 until September 1995. During 1993, the Company modified the terms of the note receivable from CTI. The modified terms included a decrease in the stated interest rate to 7% and an extension of the maturity date to September 1997. The note was canceled in August 1995 in exchange for the shares of the Company held by the stockholder. Continued 9 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Information with respect to the eight months ended June 30, 1996 is unaudited) During 1994, the Company advanced $34,000 to an officer. The Company accepted a secured note bearing interest at 4.0%. The note requires bi-weekly principal and interest payments of $354 with a final principal payment due in December 1996. The officer has pledged his common stock in the Company as security for the note. The balance of the note as of October 31, 1995 was $19,258 with $8,607 of principal due in fiscal 1996. The balance of the note as of June 30, 1996 was $12,750 with $8,500 of principal due in the next twelve months. 3. Inventories: Inventories at June 30, 1996 and October 31, 1995 consisted of: 1996 1995 ---- ---- Raw materials $ 1,931,990 $ 1,835,575 Work-in-process 742,180 1,185,139 Finished goods 48,875 - ----------- ----------- $ 2,723,045 $ 3,020,714 =========== =========== 4. Notes Payable-Bank: The Company has a $2,000,000 secured revolving line of credit with U.S. Trust, (the Bank) which bears interest at the Bank's base lending rate plus 2% (10.25% and 10.75% at June 30, 1996 and October 31, 1995, respectively). The line of credit is secured by substantially all assets of the Company. Borrowings under this agreement are computed based upon a formula which includes, among other items, 80% of eligible trade accounts receivable. Drawings against the line of credit amounted to $917,042 and $1,172,914 June 30, 1996 and October 31, 1995, respectively. At June 30, 1996 and October 31, 1995, based upon the bank's formula, the Company had approximately $420,910 and $52,541, respectively, available to be drawn upon as needed. The line of credit agreement and the term loan described in Note 6 also contain certain financial covenants, restrictions on capital purchases, acquisitions and other indebtedness and the payment of cash dividends. As of June 30, 1996, the Company was in violation of certain covenants which have not been waived by the Bank. On March 26, 1996, the Company entered into an agreement with Fleet Bank for a $500,000 unsecured line of credit. The line bears interest at Fleet Bank's Prime Rate (8.25% at June 30, 1996) and all borrowings have been guaranteed by a significant investor. Drawings against the line of credit at June 30, 1996 amounted to $500,000. Continued 10 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Information with respect to the eight months ended June 30, 1996 is unaudited) On July 10, 1996, upon acquisition of the Company by Centennial Technologies, Inc., these lines of credit and all accrued interest were settled and both lines of credit were canceled. 5. Subordinated Notes Payable: Subordinated notes payable at June 30, 1996 and October 31, 1995 consisted of the following: June 30, October 31, 1996 1995 ---- ---- 14% unsecured subordinated demand note payable to a stockholder $ 235,052 10% unsecured subordinated demand note payable to a stockholder, due December 1996 or upon sale/merger of the Company, whichever occurs first $ 50,000 50,000 10% unsecured subordinated demand note payable to a stockholder, payable upon consent of the Bank 100,000 100,000 Prime plus one-half percent unsecured subordinated demand note payable to a stockholder, payable upon consent of the Bank 32,500 32,500 9% unsecured subordinated note payable to a former sales representative, payable in monthly principal and interest installments of $2,000 through December 1996, upon consent of the Bank 31,781 31,781 14% unsecured subordinated note payable to a related party, convertible to preferred stock, due December 1996 or upon sale/ merger of the Company, which ever occurs first 350,000 - ---------- ---------- Total subordinated notes payable 564,281 449,333 Less current installments 564,281 295,370 ---------- ---------- Subordinated notes payable, excluding current installments $ - $ 153,963 ========== ========== On July 10, 1996, upon acquisition of the Company by Centennial Technologies, Inc., the 10% unsecured subordinated demand note payable to a stockholder for $50,000 and the 14% unsecured subordinated note payable to a related party for $350,000 and all accrued interest were settled and the notes were canceled. Continued 11 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Information with respect to the eight months ended June 30, 1996 is unaudited) 6. Long-Term Debt: Long-term debt at June 30, 1996 and October 31, 1995 consisted of the following: 1996 1995 ---- ---- $306,668 term note payable to Bank, payable in eighteen monthly principal and interest installments of $17,037 through March 1996 with interest at the Bank's Base Lending Rate plus 1.5%, secured by substantially all of the Company's assets $ 68,148 $34,000 unsecured term note with the Bank, payable in forty-eight monthly principal and interest installments of $708 through December 1997 with interest at 8% $ 12,750 18,417 --------- --------- Total long-term debt 12,750 86,565 Less current installments 8,500 76,648 --------- --------- Long-term debt, excluding current installments $ 4,250 $ 9,917 ========= ========= The aggregate maturities of long-term debt for the succeeding two twelve month periods ending June 30 are as follows: 1997 - $8,500; 1998 - $4,250. 7. Leases: Capital Leases The Company is the lessee of certain equipment under capital leases expiring in various years through fiscal year 2000. Interest rates on capital leases range from 9% to 15.25%. The assets are amortized over their estimated useful lives. The following is a summary of equipment held under capital leases at June 30, 1996 and October 31, 1995: 1996 1995 Machinery and equipment $ 1,151,581 $ 963,692 Computer equipment 96,129 96,129 ------------ ------------ 1,247,710 1,059,821 Less accumulated amortization 340,620 231,706 ------------ ------------ $ 907,090 $ 828,115 ============ ============ Continued 12 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Information with respect to the eight months ended June 30, 1996 is unaudited) Minimum future lease payments under capital leases are as follows: Year Ending Year Ending June 30, October 31, -------- ----------- 1996 $ 228,201 1997 $ 255,849 208,562 1998 265,814 200,509 1999 222,363 133,879 2000 and thereafter 50,529 9,069 ------------- ------------ Total minimum lease payments 794,555 780,220 Less amounts representing interest 125,563 137,038 ------------- ------------ Present value of net minimum lease payments 668,992 643,182 Less current installments of obligations under capital leases 190,980 167,916 ------------- ------------ Obligations under capital leases, excluding current installments $ 478,012 $ 475,266 ============= ============ Operating The Company has noncancelable operating lease arrangements for certain office equipment and its office and manufacturing facility in Southborough, Massachusetts. Minimum future obligations on leases are as follows: Year Year Ending Ending June 30, October 31, -------- ----------- 1996 $ 235,760 1997 $ 244,903 231,760 1998 and thereafter 102,063 19,250 ---------- ---------- $ 346,966 $ 486,770 ========== ========== All leases expire prior to October 31, 1998. It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other equipment and properties. Rent expense under operating leases amounted to approximately $153,000 and $254,000 for the eight months ended June 30, 1996 and for the year ended October 31, 1995, respectively. Continued 13 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Information with respect to the eight months ended June 30, 1996 is unaudited) 8. Income Taxes: The Company did not incur federal or state income tax expense (benefit) for the eight months ended June 30, 1996. Total federal and state income tax expense (benefit) for the year ended October 31, 1995 consisted of the following: Current Deferred Total Federal $ (115,603) $ 103,000 $ (12,603) State - (3,000) (3,000) ----------- ----------- ----------- $ (115,603) $ 100,000 $ (15,603) =========== =========== =========== Income tax expense (benefit) amounted to $0 and ($15,603) for the eight months ended June 30, 1996 and the year ended October 31, 1995, respectively. The actual expense (benefit) differs from the "expected" tax expense (benefit) (computed by applying the statutory U.S. federal corporate tax rate of 34% to income (loss) before income taxes) as follows: 1996 1995 ---- ---- Computed "expected" tax expense (benefit) $ (179,827) $ (487,314) State income taxes, net of federal income tax benefit - (1,980) Change in valuation allowance for deferred tax assets 241,717 467,192 Non-deductible expenses 1,752 3,851 Other (63,642) 2,648 ---------- ---------- - $ (15,603) ========== ========== Continued 14 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Information with respect to the eight months ended June 30, 1996 is unaudited) At June 30, 1996 and October 31, 1995, deferred income tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. The sources and tax effects of these temporary differences are presented below: June 30, October 31, 1996 1995 ---- ---- Deferred tax assets: Excess of financial statement amortization over tax amortization $ 4,599 $ 4,509 Nondeductible reserves for inventory and accounts receivable 278,664 233,055 Deferred compensation and vacation pay 121,463 63,545 Federal tax credit carryforwards 25,355 23,000 Net operating loss carryforwards 1,288,505 1,148,167 ---------- ---------- Total gross deferred tax assets 1,718,586 1,472,276 Less valuation allowance 1,500,909 1,259,192 ---------- ---------- Net deferred tax assets $ 217,677 $ 213,084 ========== ========== Deferred tax liability: Excess of tax depreciation over financial statement depreciation $ 217,677 $ 213,084 ========== ========== Net deferred tax assets - - ========== ========== The net change in the total valuation allowance for the eight months ending June 30, 1996 and the year ended October 31, 1995 was an increase of $241,717 and $467,192, respectively. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management has concluded that it is more likely than not that the Company will not have sufficient taxable income of an appropriate character within the carryback and carryforward period permitted by current tax law to allow for the utilization of certain of the deductible amounts generating the deferred tax assets and, therefore, a valuation allowance of $1,500,909 has been established to reduce total deferred tax assets to $217,677 at June 30, 1996. Management believes that the remaining deferred tax assets of $217,677 at June 30, 1996 will be offset by the reversal of deferred tax liabilities in future periods; therefore, no valuation allowance is considered necessary. Continued 15 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Information with respect to the eight months ended June 30, 1996 is unaudited) As of June 30, 1996, the Company has net operating loss carryforwards of $3,219,456 for federal income tax purposes. The Company experienced an ownership change, as defined by Section 382 of the Internal Revenue Code to which the utilization of these losses will be limited. 9. Stockholders' Equity: Series C Convertible Preferred Stock In August 1995, the Board of Directors and stockholders of the Company authorized 50,000 shares of Series C convertible preferred stock, $.0001 par value per share. During 1995, the Company issued 39,711 shares of Series C convertible preferred stock in a private placement. Net proceeds totaled $969,826, net of issuance costs of $22,937. During November 1995, the Company issued an additional 8,000 shares of Series C convertible preferred stock in a separate private placement. Net proceeds of this issuance totaled $200,000. Proceeds of both placements were used to make capital expenditures, repay certain trade accounts payable, and to provide working capital. Each share of Series C convertible preferred stock may be converted at any time into the number of shares of common stock of the Company obtained by dividing $25.00 by the conversion price in effect at the time of conversion. At June 30, 1996 and October 31, 1995, the conversion price was such that each share of Series C convertible preferred stock was convertible into one share of common stock. The holders of Series C convertible preferred stock have preference over all other classes of capital stock as to the payment of dividends and liquidation, and are entitled to one vote per share on all matters on which stockholders are entitled to vote. Series B Convertible Preferred Stock Prior to the issuance of Series C convertible preferred stock in 1995, the Company executed a recapitalization of its existing capital stock. As part of the recapitalization, the 2,026,985 shares of Series B convertible preferred stock issued and outstanding at that date were converted to 20,270 shares. In addition, the par value per share was decreased from $.01 to $.0001. Each share of Series B convertible preferred stock may be converted at any time into the number of shares of common stock of the Company obtained by dividing $49.33 by the conversion price in effect at the time of conversion. At June 30, 1996 and October 31, 1995, the conversion price was such that each share of Series B convertible preferred stock was convertible into one share of common stock. The holders of Series B convertible preferred stock have preference over the holders of common stock, but are subordinate to the holders of Series C convertible preferred stock, as to the payment of dividends and liquidation. The holders of Series B convertible preferred stock are entitled to one vote per share on all matters on which stockholders are entitled to vote. Continued 16 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Information with respect to the eight months ended June 30, 1996 is unaudited) Common Stock As part of the recapitalization noted above, the 2,870,063 shares of common stock issued and outstanding at that date were converted to 28,701 shares. In addition, the par value per share was decreased from $.01 to $.0001. The holders of common stock are subordinate to the holders of Series C convertible preferred stock and the holders of Series B convertible preferred stock as to the payment of dividends and liquidation. The holders of common stock are entitled to one vote per share on all matters on which stockholders are entitled to vote. Common Stock Repurchase Agreements In December 1992, the Company executed agreements with two stockholders obtaining the exclusive right to repurchase 140,845 and 300,000 outstanding shares of common stock from such stockholders at $1.42 and $.50 per share, respectively. These rights were to expire on December 31, 1993. In January 1993, 170,000 shares of common stock were repurchased from two stockholders for the treasury. The purchases were made pursuant to common stock repurchase agreements described above. The Company purchased 70,000 shares for $1.42 per share and 100,000 shares for $.50 per share. Also in January 1993, the Company assigned its rights to repurchase the remaining 70,845 shares at $1.42 per share and the rights to repurchase 50,000 shares at $.50 per share to Fidelity Ventures Ltd. On December 31, 1993, the Company purchased 145,000 shares of common stock under the terms of the December 1992 stock redemption agreement between the Company and the stockholder for $.50 per share. The right to repurchase the remaining 5,000 shares under this stock redemption agreement expired. Continued 17 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Information with respect to the eight months ended June 30, 1996 is unaudited) 10. Stock Options and Warrants: Non-Qualified Compensatory Stock Option Plan The Company had a non-qualified, compensatory stock option plan for certain employee groups under which options to purchase shares of the Company's common stock were granted at less than the fair value of the stock at the date of grant (hereafter referred to as "the 1994 Option Plan"). The options issued under the 1994 Option Plan contained varying expiration dates and vested no later than ten years from the date granted. The following is a summary of the 1994 Option Plan activity for fiscal 1995: 1994 OPTION PLAN ---------------- Shares Under Exercise Option Prices ------ ------ Outstanding, October 31, 1994 1,219,650 $ .01 - .05 Granted 333,200 .05 Exercised (18,500) .05 Canceled - - ---------- ------------ 1,534,350 .01 - .05 Recapitalization of existing stock (1,519,006) .01 - .05 Canceled upon termination of the Plan (15,344) .01 - .05 ---------- ------------ Outstanding and vested, October 31, 1995 - - ========== ============ During fiscal 1995, the Company's Board of Directors approved the cancellation of all stock options under the 1994 Option Plan and reserved 40,000 shares of common stock for issuance under the 1995 Option Plan. All option holders with vested options in the 1994 Option Plan received new options in the 1995 Option Plan. The 1995 Option Plan is a non-qualified compensatory stock option plan for certain employee groups. Options issued under the 1995 Option Plan vest immediately upon issuance and have an exercise price of $.05 per share. The options expire ten years from the date of grant. Compensation expense related to the 1995 Option Plan charged to operations for the year ended October 31, 1995 was $98,000, and has been included in selling, general and administrative expenses in the accompanying Statements of Operations. In June 1996, the Company's Board of Directors resolved to revalue the fair value of the Company's common stock from $5.00 per share to $2.50 per share, retroactive for all shares issued subsequent to October 31, 1995. As a result, for the eight months ended June 30, 1996, compensation expense related to the 1995 Option Plan charged to operations was $34,540. This expense has been included in selling, general and administrative expenses in the accompanying Statements of Operations. Continued 18 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Information with respect to the eight months ended June 30, 1996 is unaudited) The following is a summary of the 1995 Option Plan activity for the fiscal year ended October 31, 1995 and for the eight months ended June 30, 1996: 1995 OPTION PLAN ---------------- Shares Under Exercise Option Price ------ ----- Outstanding balance, October 31, 1994 - - Granted 40,000 $ .05 ------ -------- Outstanding balance, October 31, 1995 40,000 .05 ------ -------- Granted 14,098 .05 ------ -------- Outstanding balance, June 30, 1996 54,098 $ .05 ====== ======== Vested, October 31, 1995 40,000 $ .05 ====== ======== Vested, June 30, 1996 54,098 $ .05 ====== ======== Non-Compensatory Stock Warrants The Company has also issued stock warrants to employees, former employees, stockholders, creditors, and other individuals. These warrants are vested upon issuance. The warrants are exercisable commencing on the date granted and expire on various dates which range from five to seventeen years from the date granted. The following is a summary of activity for the fiscal year ended October 31, 1995 and the eight months ended June 30, 1996: Continued 19 DESIGN CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED (Information with respect to the eight months ended June 30, 1996 is unaudited) Exercise Warrants Price -------- ----- Outstanding balance, October 31, 1994 245,238 $.25 - 3.00 Granted during fiscal 1995, prior to recapitalization 40,000 .05 Canceled during fiscal 1995 (20,000) 2.50 ------- -------------- 265,238 .25 - 3.00 Recapitalization of existing stock (262,586) .25 - 3.00 Granted during fiscal 1995, subsequent to recapitalization 2,407 5.00 ------- -------------- Outstanding balance, October 31, 1995 5,059 5.00 - 300.00 Granted during the eight months ended June 30, 1996 3,500 5.00 ------- -------------- Outstanding balance, June 30, 1996 8,559 $5.00 - 300.00 ======= ============== 11. Major Customers: A summary of the net sales to three major customers that exceeded 10% for the eight months ended June 30, 1996 and the fiscal year ended October 31, 1995, respectively, and the amount due from these customers as of June 30, 1996 and October 31, 1995 is as follows: 1996 1995 ---- ---- Net sales $ 8,342,471 $ 4,835,935 =========== =========== Amounts receivable $ 1,272,923 $ 921,542 =========== =========== 12. Subsequent Event: On July 10, 1996, the Company was acquired by Centennial Technologies, Inc. 20 UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CENTENNIAL TECHNOLOGIES, INC. AND DESIGN CIRCUITS, INC. The following unaudited pro forma combined condensed consolidated financial statements give effect to the acquisition of Design Circuits, Inc. ("DCI") by Centennial Technologies, Inc. ("Centennial"), by means of a merger (the "Merger"), under the purchase method of accounting. The unaudited pro forma combined condensed consolidated balance sheet combines the unaudited consolidated balance sheet of Centennial and the unaudited balance sheet of DCI at June 30, 1996 as if the Merger occurred on June 30, 1996. The unaudited pro forma combined condensed consolidated statement of operations combines the unaudited historical results of consolidated operations of Centennial and the unaudited historical results of operations of DCI, for the year ended June 30, 1996 as if the Merger had occurred at the beginning of such year. The unaudited pro forma combined condensed consolidated financial statements do not reflect cost savings and synergies which might be achieved from the Merger. The unaudited pro forma combined condensed consolidated financial statements do not purport to be indicative of the consolidated operating results or the consolidated financial position that would have been achieved had the Merger been effected for the year indicated or the consolidated results or the consolidated financial position which may by obtained in the future. These combined condensed consolidated pro forma financial statements are based on and should be read in conjunction with the unaudited consolidated financial statements of Centennial, including the notes thereto not separately presented herein, and the accompanying audited and unaudited financial statements of DCI, including the notes thereto. CENTENNIAL TECHNOLOGIES, INC. AND DESIGN CIRCUITS, INC. Pro Forma Combined Condensed Consolidated Balance Sheet as of June 30, 1996 (Unaudited) Centennial Design Pro Forma Combined Technologies, Inc. Circuits, Inc. Adjustments Pro Forma ----------------- --------------- --------------- --------------- ASSETS Current assets : Cash and marketable securities $11,114,283 $385,432 ($5,461,348)(2a) $6,038,367 Accounts receivable, net 12,592,231 1,809,101 0 14,401,332 Current portion of notes receivable 3,680,750 0 0 3,680,750 Notes receivable - related parties 0 8,500 (8,500)(2a) 0 Inventories 18,229,317 2,723,045 0 20,952,362 Deferred income taxes 211,100 0 0 211,100 Prepaid expenses and other current assets 2,362,887 52,434 0 2,415,321 ----------------- --------------- --------------- --------------- Total current assets 48,190,568 4,978,512 (5,469,848) 47,699,232 Equipment and leasehold improvements, net 4,698,616 1,474,957 200,475 (2b) 6,374,048 Notes receivable - related parties 0 4,250 (4,250)(2a) 0 Investments 2,472,381 0 0 2,472,381 Other assets 170,392 17,481 0 187,873 Deferred income taxes 121,300 0 0 121,300 Goodwill and intangible assets, net 128,918 0 9,392,234 (2d) 9,521,152 ----------------- --------------- --------------- --------------- Total assets $55,782,175 $6,475,200 $4,118,611 $66,375,986 ================= =============== =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities : Notes payable 4,683,876 1,417,042 (1,417,042)(2a) 4,683,876 Subordinated notes payable 0 564,281 (532,500)(2a) 31,781 Current installment of long-term debt 0 8,500 (8,500)(2a) 0 Current portion of long term obligations under capital leases 336,058 190,980 0 527,038 Accounts payable and accrued expenses 3,494,693 3,503,258 (227,229)(2a) 6,770,722 Income taxes payable 614,036 4,509 0 618,545 ----------------- --------------- --------------- --------------- Total current laibilities 9,128,663 5,688,570 (2,185,271) 12,631,962 Subordinated notes payable, excluding current installments 0 0 0 0 Long-term debt, excluding current installments 0 4,250 (4,250)(2a) 0 Long-term obligations under capital leases 366,944 478,012 0 844,956 Deferred income taxes 241,600 0 0 241,600 ----------------- --------------- --------------- --------------- Total liabilities 9,737,207 6,170,832 (2,189,521) 13,718,518 Minority interest 2,487,500 (2e) 2,487,500 Stockholders' equity : Preferred stock 0 7 (7) 0 Common stock 83,159 3 1,247 84,409 Additional paid-in capital 38,883,677 4,557,663 (433,913) 43,007,427 Retained earnings (accumulated deficit) 7,078,132 (3,626,237) 3,626,237 7,078,132 ----------------- --------------- --------------- --------------- 46,044,968 931,436 3,193,564 50,169,968 Treasury stock 0 (627,068) 627,068 0 ----------------- --------------- --------------- --------------- Total stockholders' equity 46,044,968 304,368 3,820,632 (2c) 50,169,968 ----------------- --------------- --------------- --------------- Total liabilities and stockholders' equity $55,782,175 $6,475,200 $4,118,611 $66,375,986 ================= =============== =============== =============== 1 CENTENNIAL TECHNOLOGIES, INC. AND DESIGN CIRCUITS, INC. Pro Forma Combined Condensed Consolidated Statement of Operations for the year ended June 30, 1996 (Unaudited) Centennial Design Pro Forma Combined Technologies, Inc. Circuits, Inc. Adjustments Pro Forma -------------- ------------- -------------- --------------- Sales $37,847,681 $15,064,093 $52,911,774 Cost of goods sold 23,636,299 14,568,075 0 38,204,374 -------------- ------------- -------------- --------------- Gross margin 14,211,382 496,018 14,707,400 General and administrative expenses 4,590,413 1,514,097 $959,223 (3a) 7,063,733 Research and development costs 1,433,765 0 0 1,433,765 -------------- ------------- -------------- --------------- Income (loss) from operations 8,187,204 (1,018,079) (959,223) 6,209,902 Other income (expense) : Interest income 352,606 19,675 (91,135)(3b) 281,146 Interest expense (369,584) (318,472) (290,684)(3c) (978,740) Other 0 (7,153) 0 (7,153) -------------- ------------- -------------- --------------- Income (loss) before minority interest and taxes 8,170,226 (1,324,029) (1,341,042) 5,505,155 Minority interest 0 0 662,365 (3d) 662,365 Income (loss) before income taxes 8,170,226 (1,324,029) (678,677) 6,167,520 Income tax expense (benefit) 3,268,090 (15,603) (152,000)(3e) 3,100,487 -------------- ------------- -------------- --------------- Net income (loss) $4,902,136 ($1,308,426) ($526,677) $3,067,033 ============== ============= ============== =================== Historical primary net income per common share $0.67 ============== Historical fully diluted net income per common share $0.66 ============== Historical primary weighted average common shares outstanding 7,338,906 ============== Historical fully diluted weighted average common shares outstanding 7,432,502 ============== Pro forma primary net income per share $0.41 =============== Pro forma fully diluted net income per share $0.41 =============== Pro forma primary weighted average common common shares outstanding 7,463,906 =============== Pro forma fully diluted weighted average common shares outstanding 7,557,502 =============== 2 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CENTENNIAL TECHNOLOGIES, INC. AND DESIGN CIRCUITS, INC. 1. Basis of Presentation: The pro forma adjustments described in notes 2 and 3 to the pro forma financial statements are required to allocate the purchase price and the estimated acquisition costs to the net assets of Design Circuits, Inc. based upon their estimated fair values at June 30, 1996 as determined by the management of the Company. Such allocation will be revised to reflect changes in assets and liabilities through July 10, 1996 (the date of the acquisition) and the determination of the actual acquisition costs. 2. Pro Forma Adjustments to Unaudited Pro Forma Combined Condensed Consolidated Balance Sheet: a. Cash and marketable securities have been reduced by $5,461,348 to reflect the cash portion of the purchase price of DCI ($5,622,077), the payment of acquisition costs of ($150,000) and the repayment of a portion of DCI's debt obligations ($2,176,771) offset by the collection of funds of $2,487,500 from the minority shareholders of DCI. b. Equipment and leasehold improvements has been increased by $200,475 to increase the value of DCI's equipment to appraised value. c. Stockholders' equity has been adjusted by $3,820,632 to reflect the issuance of Centennial's common stock as a portion of the total purchase price of DCI, net of the elimination of DCI's preferred stock, common stock, additional paid-in capital, accumulated deficit and treasury stock. d. Goodwill and intangible assets have been increased by $9,392,234 to reflect the estimated goodwill arising from the acquisition of DCI by Centennial and the balance sheet adjustments above. e. Minority interest reflects the interests of the minority shareholders of DCI. 3. Pro Forma Adjustments to Unaudited Pro Forma Combined Condensed Consolidated Statement of Operations: a. General and administrative expenses have been increased by $959,223 for the year ended June 30, 1996 reflecting (a) amortization over a 10-year period, of the net excess of the purchase price of DCI over the fair value of the assets acquired (goodwill) of $9,392,234, and (b) the depreciation expense of $20,000 associated with the increase in the appraised value of equipment and leasehold improvements. b. Interest income has been reduced by $91,135 for the year ended June 30, 1996 to adjust interest on cash and marketable securities. c. Interest expense has been increased by $290,684 to reflect borrowings of $7,811,598 under the Company's credit facility at an interest rate of 8.75% and to reflect repayment of a portion of DCI's debt obligations at a rate of interest ranging from 9% to 14%. NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CENTENNIAL TECHNOLOGIES, INC. AND DESIGN CIRCUITS, INC. d. Minority interest reflects the interests of the minority shareholders in the operating results of DCI for the year ended June 30, 1996. e. Income tax expense (benefit) has been reduced by $152,000 to reflect the tax effect of the adjustments in interest income and interest expense discussed above.