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ELEXSYS INTERNATIONAL, INC.
1995 ANNUAL REPORT
[GRAPHIC OMITTED]
FINANCIAL HIGHLIGHTS
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(In thousands except per
share data)
Years ended September 30, 1995 1994 1993 1992 1991 1990 1989 1988 1987
- - ----------------------------------------------------------------------------------------------------------------------------------
Net sales $103,970 $ 95,680 $ 99,272 $101,396 $105,885 $125,466 $118,771 $140,685 $111,053
Income (loss) before
income taxes $ 3,519 $ (7,613) $(16,331) $(12,674) $(15,755) $(17,543) $ (4,687) $ 15,758 $ 17,835
Net income (loss) $ 5,132 $ 2,554 $(16,331) $(12,674) $(11,255) $(10,243) $ (2,287) $ 9,858 $ 9,535
Net income (loss)
as % of net sales 4.9% 2.7% (16.5%) (12.5%) (10.6%) (8.2%) (1.9%) 7.0% 8.6%
Net income (loss) per
common and com-
mon equivalent
share, primary $ 0.57 $ 0.54 $ (3.18) $ (2.46) $ (2.16) $ (1.85) $ (0.39) $ 1.62 $ 1.56
Total assets $ 45,139 $ 36,983 $48,040 $ 65,013 $ 79,405 $ 95,181 $102,953 $107,012 $101,562
Total stockholders'
equity (deficit) $ 13,908 $ 6,085 $(1,669) $ 14,639 $ 27,626 $ 38,813 $ 52,265 $ 54,552 $ 44,583
Working capital $ 7,174 $ 3,791 $ 7,172 $ 18,003 $ 16,318 $ 28,951 $ 31,386 $ 30,760 $ 21,625
ABOUT THE COMPANY
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Elexsys International, Inc. is one of the country's leading manufacturers of
high performance medium and high density multilayer circuit boards, backpanel
assemblies and sophisticated card cage assemblies. The Company offers advance
interconnect solutions for the telecommunications, datacommunications,
industrial, medical and instrumentation markets.
As of September 30, 1995, Elexsys had 8,960,560 shares of common stock
outstanding. Elexsys is traded on Nasdaq's SmallCap Market under the symbol
ELEX.
1995 IN REVIEW Elexsys International, Inc.
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If 1994 was a pivotal year in the long-term fortunes of Elexsys International,
Inc., then 1995 will be remembered as the year the financial fortunes of the
Company stabilized, for 1995 was the first year in seven years that the Company
reported operating profit.
The Financial Results:
For the year ended September 30, 1995, the Company reported income after taxes
and before extraordinary item of $3,299,000 or $.36 per fully diluted share. For
fiscal 1994, the Company reported a loss before extraordinary item of $7,613,000
or $.91 per fully diluted share. Net income including extraordinary item for
fiscal 1995 was $5,132,000 or $.56 per fully diluted share compared to net
income including extraordinary item for fiscal 1994 of $2,554,000 or $.39 per
fully diluted share. Net sales increased to $103,970,000 in fiscal 1995 from
$95,680,000 in fiscal 1994.
For the fourth quarter of fiscal 1995, the Company reported net income
of $3,018,000 or $.32 per primary share compared to a fourth quarter of fiscal
1994 loss of $2,686,000 or $.32 per primary share. Net sales for the fourth
quarter of fiscal 1995 increased to $30,512,000 from $21,273,000 for the
comparable period in 1994.
Extraordinary Items:
1995: In fiscal 1995, the Company reported a gain of $1,833,000 from the early
extinguishment of $4,000,000 of 5 1/2 percent Convertible Subordinated
Debentures due 2012.
1994: In fiscal 1994, the Company reported a gain of
$10,167,000 from the early extinguishment of $16,000,000 of 5 1/2 percent
Convertible Subordinated Debentures due 2012.
The Year in Review:
On October 2, 1994, I assumed the responsibilities of Chief Executive Officer
and President, accepting the task of returning this Company to profitability. We
started by reducing the workforce, from approximately 1,200 employees to
approximately 800 in the beginning of fiscal 1995, and by increasing
accountability at all levels of management.
During the first quarter of fiscal 1995, all operations officially
received ISO 9002 certification. This certification was one of the first steps
implemented to stabilize our relationships with our customers and to reaffirm
our position as a supplier of quality circuit boards and backpanel assemblies.
Beginning in the second quarter, we moved the backpanel assembly
operation and corporate headquarters to a new, larger operation with capacity of
31,000 square foot in Sunnyvale, California and we leased a new, 31,000 square
foot facility in Plano, Texas. These two new facilities will enable the Company
to expand its backpanel and card cage assembly capabilities.
Another significant step was the acquisition of substantially all the
assets of Technet Electronics, Limited, a manufacturer of printed circuit boards
located in Peterborough, England, for approximately $3,300,000, which consisted
of $560,000 in cash and assumption of approximately $2,740,000 in liabilities.
This acquisition commenced our strategic initiative to capitalize on the
European market.
In February 1995, the Board of Directors elected W. Barry Hegarty as
Chief Operating Officer. Mr. Hegarty joined the Company after eight years as
Vice President of Sales and Marketing at Sanmina Corporation, a circuit board
and backpanel manufacturer.
And in February 1995, the shareholders approved the name change from
Diceon Electronics, Inc. to Elexsys International, Inc., thus marking a new
beginning and a new image. One month later, on March 20, 1995, the Company
gained listing on Nasdaq's SmallCap Market under the ticker symbol ELEX.
Finally, on March 31, 1995, the Company addressed its balance sheet,
exchanging 400,000 newly issued shares of common stock for an aggregate of
$4,000,000 in principal amount of the Company's outstanding 5 1/2 percent
Convertible Subordinated Debentures. The net gain of $1,833,000 was recorded as
an extraordinary item in the second quarter. This transaction eliminated
$220,000 in annual interest expense and $4,000,000 in debt from the Company's
balance sheet.
Significant Financial Highlights:
Gross margin as a percentage of net sales for fiscal 1995 was 15.2 percent
compared to 7.7 percent in fiscal 1994, a 97 percent increase over the prior
year. Significantly, gross margin as a percentage of net sales for the quarter
ended September 30, 1995, was 22.3 percent, which places us with the elite in
our industry.
Sales per employee increased 21 percent to approximately $120,000 per
employee for fiscal 1995 compared to approximately $99,000 for fiscal 1994.
Working capital improved 89 percent from September 30, 1994 to
$7,174,000 at September 30, 1995. The assets of the company grew 22 percent to
$45,139,000. Stockholders' equity increased 129 percent to $13,908,000.
How the turnaround was accomplished:
A critical step in fiscal 1995 was to better identify the needs of our customers
and to respond quickly to those needs. We focused on our core engineering and
manufacturing competencies, with emphasis on marketing and selling profitable
products and better utilization of our existing manufacturing capacity. We also
reduced our dependence on outside manufacturing sources, which helps us enhance
gross margins.
To accomplish a turnaround of this magnitude required a significant
shift in the culture of the Company. Employees responded to the opportunity to
be on a winning team and that spirit was incorporated in everyone's daily
efforts. We rewarded this culture change through several incentive plans.
Incentives alone do not define success. Success comes from active
management of the business. Throughout the year, the management team worked to
focus the Company on its basic business principles. The improved financial
condition is a result of those efforts.
By facilitating greater cooperation among departments and by improving
communication among all operations and support functions, we were able to
establish 'Elexsys Pride'. 'Elexsys Pride' has been crucial in our initiatives
to improve customer responsiveness, to increase operational efficiency and to
return the Company to profitability.
The Future:
With the recent acquisition and facility improvements, we have sufficient
capacity in place for our near-term growth plans. Equipment and employees can be
added as sales growth is achieved without acquiring additional facilities.
The Company's primary source of growth will be in the production and
sale of backpanels and card cage assemblies. In addition to the backpanel and
card cage assembly operations in Sunnyvale, California and Plano, Texas, we will
expand our backpanel assembly capabilities in the Peterborough, England and the
Nashua, New Hampshire operations. We believe that we have geographically
positioned our facilities to provide the service that our customers demand.
We continue to invest in the future by hiring key people in sales,
engineering, and marketing, while concurrently adhering to our cost control
program.
We continue to expand our customer base into new regions and across
industries. One of our strengths is the breadth of our customer list: we shipped
products to approximately 317 customers in fiscal 1995. Fifty- five percent of
our customers are in telecommunications and the remainder are in
datacommunications and medical instrumentation.
In Summary:
I am pleased with the progress made by the new management team during fiscal
1995. Although optimistic about our future, we realize our task is far from
over. At this time, we would like to thank our customers, our suppliers, and,
most importantly, our employees. We are also appreciative of the support
provided by stockholders during the difficult years and we hereby renew a
commitment to make Elexsys a company of which we can all be proud.
Sincerely,
/s/ Milan Mandaric
Milan Mandaric
Chairman of the Board
and President
SELECTED FINANCIAL DATA Elexsys International, Inc.
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Years ended September 30
(In thousands, except per share data) 1995 1994 1993 1992 1991
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STATEMENT OF OPERATIONS DATA:
Net sales $103,970 $95,680 $ 99,272 $101,396 $105,885
Cost of sales 88,137 88,301 98,024 100,864 104,391
-------- ------- -------- -------- --------
Gross profit 15,833 7,379 1,248 532 1,494
Operating expenses:
Selling, general and administrative 10,154 10,167 10,838 9,593 11,965
Research and development 395 718 2,302 2,868 1,542
Provision for restructuring of operations 2,100 3,000 3,500
-------- ------- -------- -------- --------
Total operating expenses 10,549 12,985 16,140 12,461 17,007
-------- ------- -------- -------- --------
Income (loss) from operations 5,284 (5,606) (14,892) (11,929) (15,513)
Other (income) expense:
Interest expense 1,765 2,034 1,856 1,872 1,928
Interest income (27) (417) (1,127) (1,686)
-------- ------- -------- -------- --------
Income (loss) before income tax provision (benefit) 3,519 (7,613) (16,331) (12,674) (15,755)
Income tax provision (benefit) 220 (4,500)
-------- ------- -------- -------- --------
Income (loss) before extraordinary item 3,299 (7,613) (16,331) (12,674) (11,255)
Extraordinary item:
Gain from exchange of Convertible
Subordinated Debentures for
common stock, net of expenses 1,833 10,167
-------- ------- -------- -------- --------
Net income (loss) $ 5,132 $ 2,554 $(16,331) $(12,674) $(11,255)
======== ======= ======== ======== ========
Net income (loss) per common and
common equivalent share:
Primary $ .57 $ .54 $ (3.18) $ (2.46) $ (2.16)
Fully diluted $ .56 $ .39 $ (3.18) $ (2.46) $ (2.16)
======== ======= ======= ======== ========
Weighted average common and common equivalent shares:
Primary 9,018 6,387 5,133 5,161 5,208
Fully diluted 9,087 8,769 5,133 5,161 5,208
======== ======= ======= ======== ========
September 30 (in thousands)
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BALANCE SHEET DATA:
Working capital $ 7,174 $ 3,791 $ 7,172 $ 18,003 $ 16,318
Total assets 45,139 36,983 48,040 65,013 79,405
Long-term debt 1,280 406 456 501 546
Convertible subordinated debentures 12,000 16,000 32,000 32,000 32,000
Stockholders' equity (deficit) 13,908 6,085 (1,669) 14,639 27,626
======== ======= ======= ======== ========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Elexsys International, Inc.
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The following discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements and Notes thereto
contained elsewhere within this Annual Report.
RESULTS OF OPERATIONS: FISCAL 1995 TO FISCAL 1994
Net Sales
Net sales increased 8.7 percent from fiscal 1994. The increase in net sales
resulted from an increase in demand for the Company's circuit board products
from the Company's recurring customer base and five months of sales from the
Company's recent acquisition in the United Kingdom. The increase in net sales
was partially offset by lower sales for the Company's backpanel product line due
to changes in product mix. Management has reorganized its sales and technical
team for the purpose, among other things, of improving sales of its backpanel
product line; however, management does not expect improvement to occur in the
near future.
Cost of Sales
Cost of sales as a percentage of net sales decreased from 92.3 percent for
fiscal 1994 to 84.8 percent for fiscal 1995. The decrease is attributable to
lower fixed and variable costs per unit shipped for the circuit board product
line, partially offset by higher direct material costs in our backpanel product
line due to changes in product mix. The improvement in fixed and variable costs
per unit shipped for the Company's circuit board product line is related to
improvement in operating efficiencies, product mix and cost reductions. Although
management is continuing to work to improve operating efficiencies and to reduce
costs further, there can be no assurance that increased operating efficiencies
and cost reductions will result.
Selling and Marketing
Selling, general and administrative (SG&A) expense was approximately equal to
fiscal 1994 in absolute dollars. As a percentage of net sales, SG&A decreased
from 10.6 percent for fiscal 1994 to 9.8 percent for fiscal 1995. SG&A was
approximately constant in absolute dollars as a consequence of a reduction in
legal and consulting fees and lower wages and salaries, partially offset by
increased costs due to commissions to manufacturers' representatives, profit
sharing costs and five months of the United Kingdom subsidiary's selling,
general and administrative costs. The reduction in legal and consulting fees
were associated with the elimination of certain legal and consulting fees
incurred in fiscal 1994. The decrease in lower wages and salaries is
attributable to the October 3, 1994 announced downsizing of operations,
partially offset by reorganizing the sales and technical team. The decrease in
SG&A as a percentage of net sales was attributable to increased sales.
Research and Development
Research and development expenditures decreased 45 percent during fiscal 1995
compared to fiscal 1994. The decrease in expenditures is directly attributable
to the lower labor and benefit costs of engineers, as a consequence of past
restructuring by the Company.
Restructuring of Operations
At the beginning of fiscal 1995, the Company's balance for restructuring reserve
was $861,000, mainly constituting severance pay to executives with agreements.
As of September 30, 1995, there was no remaining balance, as all costs
associated with these agreements were paid during fiscal 1995.
Interest Income and Interest Expense
Interest income decreased 100 percent from fiscal 1994. The decrease was
primarily due to a reduction in interest bearing investments held by the Company
during fiscal 1995 compared to fiscal 1994. Interest expense decreased 13.2
percent from fiscal 1994. The decrease was attributable to the elimination of
interest obligations through two exchanges of the Company's 5 1/2 percent
Convertible Subordinated Debentures due 2012 (the Debentures) during the last
quarter of fiscal 1994 and the second quarter of fiscal 1995 (See Note 13 of
Notes to Consolidated Financial Statements) partially offset by interest expense
incurred by the Company's United Kingdom subsidiary and an increase in
short-term borrowings from the Company's asset-based lender during fiscal 1995.
Provision for Income Taxes
Due to net operating losses and related loss carryforwards, there was no income
tax provision for fiscal 1993 and 1994. In fiscal 1995, the Company provided
$220,000 for income taxes related primarily to alternative minimum tax and
foreign income tax. As of September 30, 1995, the Company reported a net
operating loss carryforward for federal income tax purposes of approximately
$32,385,000 expiring in various amounts between 1996 and 2008, which net
operating loss carryforwards could offset 100 percent of taxable income for
regular tax purposes, and 90 percent of taxable income for federal and state
alternative minimum tax purposes. However, the Internal Revenue Code of 1986
contains limitations on the utilization of net operating loss carryforwards if a
"change of ownership," as described in Section 382 of the Internal Revenue Code,
occurs. In light of the substantial accumulation of common stock by Mr. Milan
Mandaric during fiscal 1994 and 1995, a modest change in ownership of the
Company could trigger such limitations. If such limitations are triggered,
utilization of net operating loss carryforwards could be delayed and such
carryforwards could expire prior to utilization. The United Kingdom subsidiary
has no available tax loss carryforwards and is taxed at the prevailing corporate
tax rates in that country. (See Note 8 of Notes to Consolidated Financial
Statements.)
Extraordinary Gain, Net of Expenses
On March 31, 1995, the Company and Mr. Mandaric exchanged an aggregate of
400,000 newly issued shares of common stock for $4,000,000 of principal amount
of Debentures. The net gain of $1,833,000 was recorded as an extraordinary item.
The net gain included a reduction of debt issuance costs related to the
Debentures and additional professional fees associated with the transaction. The
transaction included a payment of $18,333 for accrued interest on the Debentures
exchanged. (See Note 13 of Notes to Consolidated Financial Statements.)
RESULTS OF OPERATIONS: FISCAL 1994 TO FISCAL 1993
Net Sales
Net sales in fiscal 1994 decreased 3.6 percent from fiscal 1993. The decrease
resulted primarily from lower unit sales volume combined with a reduction in the
average sales price. The decrease in sales volume was attributable to a
decreased demand from the Company's recurring customer base. The reduction in
the average sales price was attributable to price discounting in a highly
competitive market.
Cost of Sales
Cost of sales as a percentage of net sales decreased from 98.7 percent for
fiscal 1993 to 92.3 percent for fiscal 1994. The decrease was attributable to
lower labor and benefits costs per units shipped, lower overhead costs per units
shipped, lower consumable materials costs per units shipped, and to a lesser
extent, lower direct material costs per units shipped. The improvement in labor
and overhead costs were due to more efficient utilization of labor after the
April 1993 closure of the Chatsworth, California facility, the January 1, 1994
reduction in the number of employees and reduced worker's compensation costs
resulting from a dividend received September 1994. The improvements in
consumable material costs and to a lesser extent, direct material costs were due
to improvements in operating efficiencies and cost reductions. The reduction in
direct material costs was partially offset by a change in product mix in our
backpanel operations.
Selling and Marketing
Selling, general and administrative expense decreased 6.2 percent from fiscal
1993. As a percentage of net sales, SG&A decreased from 10.9 percent for fiscal
1993 to 10.6 percent for fiscal 1994. The decrease in SG&A was due to a
reduction in labor and benefits related to the January 1, 1994 reduction in
personnel, a new compensation program for direct sales personnel resulting in a
reduction in commission expense and the Company's overall cost reduction
efforts. The decrease in SG&A was partially offset by an increase in marketing
literature costs and an increase in legal and consulting fees associated with a
line of credit agreement with an asset-based lender, costs associated with the
Company's discontinued, initial efforts to restructure its Debentures,
consulting fees related to improving manufacturing inefficiencies and legal
resolution of certain employee matters.
Research and Development
Research and development expenditures decreased 68.8 percent during fiscal 1994
compared to fiscal 1993. The decrease in expenditures primarily consisted of
reduced labor and overhead costs related to the closure of the Chatsworth,
California facility, which occurred during the second quarter of fiscal 1993.
Restructuring of Operations
On January 6, 1994, the company announced the downsizing of all of its
operations. In connection with the downsizing, the Company reduced its work
force by approximately 150 employees and accrued a one-time charge of $600,000,
recognized during the quarter ended January 1, 1994. On October 3, 1994, the
Company announced an additional downsizing of its West Coast operations. As a
result of this downsizing, the Company accrued a one time charge of $1,500,000,
for a total of $2,100,000 for all of fiscal 1994. Included in the October 1994
restructuring charges were costs associated with a further reduction in its work
force by approximately 150 employees and the revaluation of certain assets,
primarily real estate held for sale, reflecting current market conditions.
During fiscal 1994, the Company reduced its work force by over 340
employees through both the downsizing of operations and attrition. The Company
eliminated several executive positions. Of the total $2,100,000 restructuring
charge for fiscal 1994, $653,000 was incurred and paid during fiscal 1994.
Approximately $586,000 of the restructuring charge was recorded in the fourth
quarter of fiscal 1994 against land and buildings to reflect their net
realizable value. The remaining restructuring charge, mainly to executives with
severance agreements, was paid in fiscal 1995. The land and buildings continue
to be held for sale with no foreseeable change in the Southern California real
estate market.
Interest Income and Interest Expense
Interest income decreased 93.5 percent from fiscal 1993. The decrease was
primarily due to a reduction in interest bearing investments held by the Company
during fiscal 1994 compared to fiscal 1993. Interest expense increased 9.6
percent from fiscal 1993. The increase was attributable to borrowings from the
Company's asset-based lender, partially offset by lower interest expense on the
Company's Debentures during the last quarter of fiscal 1994 attributable to the
exchange of Debentures for the Company's common stock. (See Note 13 of Notes to
Consolidated Financial Statements.)
Provision for Income Taxes
The Company recorded no provision for income taxes in fiscal 1994 due to
available tax carryforwards, and in accordance with Internal Revenue Code
Section 108, it appears a substantial amount, if not all, of the gain from the
exchange of Debentures for common stock will not be subject to income tax.
In addition, the Internal Revenue Service concluded an examination of
the Company's federal income tax returns for fiscal 1986 through 1991 which
resulted in no net tax deficiency for the years under examination.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes", effective October 3, 1993. This
Statement supersedes SFAS No. 96, "Accounting for Income Taxes", that was
adopted by the Company in 1988. The cumulative effect of adopting SFAS No. 109
on the Company's consolidated financial statements for the year ended September
30, 1994 was not material. (See Note 8 of Notes to Consolidated Financial
Statement.)
Extraordinary Gain, Net of Expenses
In a two part transaction which occurred on June 30, 1994 and July 13, 1994, the
Company and Mr. Mandaric exchanged an aggregate issue of 3,200,000 common stock
for $16,000,000 in principal amount of Debentures. The net gain of $10,167,000
was recorded as an extraordinary item. The net gain included a reduction of debt
issuance costs related to the Debentures and professional fees associated with
the transaction. The transaction included a payment of $293,000 for accrued
interest on the Debentures exchanged and reimbursement of $50,000 for Mr.
Mandaric's professional expenses. (See Note 13 of Notes to Consolidated
Financial Statements).
Factors That May Affect Future Results
The Company's future operating results may be adversely affected by a number of
factors, including general economic conditions, foreign competition, industry
consolidation, the Company's ability to develop, manufacture, and sell its
products profitability, and the cyclical nature of the business of some of the
Company's customers.
The Company participates in a highly competitive industry. The printed
circuit board industry has been characterized by stringent customer demands for
timely deliveries, service and quality of products and by aggressive pricing
practices. The Company's operating results could be materially, adversely
affected should the Company be unable to meet any one of these customer demands.
Inflation
Management believes that inflation has not significantly affected the prices of
the Company's products, the cost of its materials and labor, and its operating
results.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company had cash and cash equivalents of $903,000,
which reflects a $659,000 decrease in the balance from September 30, 1994.
Working capital increased 89 percent from $3,791,000 to $7,174,000. Cash of
$4,403,000 was generated from operating activities with the principal sources of
cash provided by net income and an increase in accounts payable, offset by an
increase in accounts receivable and a decrease in the restructuring charge. The
increase in accounts receivable is attributable to the timing of shipments
during the last quarter of fiscal 1995 and the acquisition of the Company's
United Kingdom subsidiary. The increase in accounts payable is attributable to
an improvement of payment terms negotiated with a primary supplier in fiscal
1995. During fiscal 1995, the Company met its obligation to pay the annual
interest on its Debentures. All other activities experienced normal
fluctuations.
The cash generated from operating activities was offset by investing
activities of $4,683,000 at September 30, 1995 for the purchase of capital
equipment and $560,000 for the net asset purchase of Technet Limited. The
purchase of capital equipment was for normal replacement, equipment for
processes that the Company has outsourced, and equipment to enhance our assembly
capabilities.
Financing activities were partially funded by the exercise of stock
options by certain employees, offset by payment of approximately $282,000 of
long term debt of Technet Electronics Limited.
During fiscal 1995, the Company's maximum borrowings under the line of
credit established December 17, 1993 with an asset-based lender reached
approximately $6,974,000. During fiscal 1995, the Company repaid borrowings of
approximately $2,810,000, leaving net borrowings of $4,164,000 as of September
30, 1995. Also, under the terms of the loan agreement, all of the Company's cash
collections are applied to any outstanding borrowings upon the receipts clearing
the bank. At September 30, 1995, the asset-based lender was in possession of
approximately $916,000 of the Company's cash collections and, accordingly, such
funds have been applied to reduce the amount outstanding under the Company's
line of credit to $3,248,000.
At September 30, 1995, the Company's ratio of current assets to current
liabilities was 1.4 to 1. In addition, the Company had $903,000 in cash and cash
equivalents which are available for current operations, capital expenditures and
other purposes. The Company has requirements for capital expenditures of
approximately $500,000 to expand its backpanel assembly capabilities in addition
to normal replacement of capital equipment. The Company has no other material
cash obligations. Management believes that the Company's existing working
capital, the remaining borrowing capacity under the Company's line of credit and
funds generated from operations will be sufficient to meet presently anticipated
working capital requirements.
Environmental
The Company's manufacturing processes utilize substantial quantities of
chemicals as well as substantial quantities of water. The Company is subject to
and believes it is in compliance with federal, state and local environmental
laws and regulations regarding air, water and land use, the generation, use,
storage and disposal of hazardous materials and wastes and the operation and
closure of manufacturing facilities at which hazardous materials are used or
hazardous wastes are generated. The Company is aware of contamination of soil
and ground water (principally by metals and solvents) at two of its former
facilities in Northern California. At one of these facilities, soil has been
remediated, but the likely future cost of ground water cleanup at that facility
is not yet reasonably estimable. Investigative costs of $30,000 have been
incurred. At the other former facility in Northern California, the Company
incurred costs of approximately $137,000 for cleanup of soil contamination and
the property was returned to its owner during the second quarter of fiscal 1995.
In addition, the facility is adjacent to an existing State of California
administered Superfund site and may become part of a related State of California
administered regional ground water investigation; the likely future cost to the
Company in connection with possible ground water cleanup is not yet reasonably
estimable. At another former facility in Southern California, the Company
conducted limited groundwater sampling in connection with a potential sale of
the property, and low concentrations of solvents were detected. Notification was
made to the proper agencies. At this time, it is not possible to determine
whether any response actions will need to be taken; and accordingly, the likely
future cost to the Company is not yet reasonably estimable.
The Company is further aware of soil and ground water contamination
(principally by metals and solvents) at two currently used facilities, one in
Northern California and one in Southern California. At its Northern California
facility, the Company is indemnified by the former property owner who has
acknowledged his obligation. At its Southern California facility, the Company's
preliminary estimate of remedial costs, expected to be incurred over five to
seven years, ranges from approximately $880,000 to $1,480,000 (including between
approximately $300,000 and $400,000 estimated capital expenditures for waste
treatment equipment acquisition and installation costs). At its Northern
California facility, the Company has also received notice that regulatory
authorities plan to reduce the discharge limits for industrial waste water
discharge containing heavy metals. New limits are expected to become effective
in October 1996. Based on proposed limits, the cost to the Company of additional
equipment and process modifications needed to comply with the reduced limits is
preliminarily estimated by the Company to be between $100,000 and $250,000. As
of September 30, 1995, the Company believes it has appropriately recorded all
known costs related to environmental matters, including the minimum amounts
where the estimated costs are within a range. Such known costs are primarily
accrued in other current liabilities. However, actual future environmental
related expenditures are subject to numerous uncertainties, including the
discovery of additional environmental concerns, further development of cost
estimates, new and changing environmental laws and requirements, or new
interpretations of existing laws and requirements. Accordingly, there can be no
assurance that future environmental related expenditures will not exceed the
Company's current estimates or that they will not have a materially adverse
effect on the Company.
CONSOLIDATED STATEMENTS OF OPERATIONS Elexsys International, Inc.
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Years ended September 30
(In thousands, except per share data) 1995 1994 1993
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Net sales $103,970 $95,680 $ 99,272
Cost of sales 88,137 88,301 98,024
-------- ------- ---------
Gross profit 15,833 7,379 1,248
Operating expenses:
Selling, general and administrative 10,154 10,167 10,838
Research and development 395 718 2,302
Provision for restructuring of operations 2,100 3,000
-------- ------- ---------
Total operating expenses 10,549 12,985 16,140
-------- ------- ---------
Income (loss) from operations 5,284 (5,606) (14,892)
Other (income) expense:
Interest expense 1,765 2,034 1,856
Interest income (27) (417)
-------- ------- ---------
Income (loss) before income taxes 3,519 (7,613) (16,331)
Provision for income taxes 220
-------- ------- ---------
Income (loss) before extraordinary item 3,299 (7,613) (16,331)
Extraordinary item:
Gain from exchange of the Debentures for
common stock, net of expenses 1,833 10,167
-------- ------- ---------
Net income (loss) $ 5,132 $ 2,554 $(16,331)
======== ======= =========
Primary net income (loss) per share (Note 9)
Income (loss) before extraordinary item $ .37 $ (1.28) $ (3.18)
Extraordinary item $ .20 $ 1.82
-------- ------- ---------
Net income (loss) $ .57 $ .54 $ (3.18)
======== ======= =========
Fully diluted net income (loss) per share (Note 9)
Income (loss) before extraordinary item $ .36 $ (.91) $ (3.18)
Extraordinary item $ .20 $ 1.30
-------- ------- ---------
Net income (loss) $ .56 $ .39 $ (3.18)
======== ======= =========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
CONSOLIDATED BALANCE SHEETS Elexsys International, Inc.
- - --------------------------------------------------------------------------------
September 30
(In thousands, except share and per share data) 1995 1994
- - --------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 903 $ 1,562
Accounts receivable, less allowance for doubtful
accounts of $458 at September 30, 1995 and $450
at September 30, 1994 15,653 9,063
Inventories 7,860 7,277
Prepaid expenses and other current assets 709 381
--------- ---------
Total current assets 25,125 18,283
--------- ---------
Property, plant and equipment, net 18,980 17,778
Other assets 1,034 922
--------- ---------
Total assets $ 45,139 $ 36,983
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,854 $ 6,170
Accrued payroll and related costs 2,521 1,950
Restructuring reserve 861
Other current liabilities 1,965 2,005
Short-term borrowings 3,248 3,456
Current portion of long-term debt 363 50
--------- ---------
Total current liabilities 17,951 14,492
--------- ---------
Long-term debt 1,280 406
Convertible subordinated debentures 12,000 16,000
Stockholders' equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued
and outstanding at September 30, 1995 and 1994
Common stock, $1.00 par value, 20,000,000 shares authorized, 8,960,560
shares issued and outstanding at September 30,
1995 and 8,334,960 shares at September 30, 1994 8,961 8,335
Additional paid-in capital 5,460 3,373
Cumulative foreign currency translation adjustments (22)
Accumulated deficit (491) (5,623)
--------- ---------
Net stockholders' equity 13,908 6,085
--------- ---------
Total liabilities and stockholders' equity $ 45,139 $ 36,983
========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Elexsys International, Inc.
- - --------------------------------------------------------------------------------
Restated Cumulative
Earnings Foreign
Common Stock Additional (Accumu- Currency Treasury Stock
--------------- Paid-in lated Translation --------------
(In thousands) Shares Amount Capital Deficit) Adjustment Shares Amount Net
- - ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 1, 1992 5,835 $5,835 $4,181 $ 8,154 (709) $(3,531) $14,639
Stock issued under Employee Stock
Bonus Plan 9 9 14 23
Net loss (16,331) (16,331)
--------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1993 5,844 5,844 4,195 (8,177) (709) (3,531) (1,669)
Common stock issued in exchange for
the Debentures 3,200 3,200 2,000 5,200
Retirement of treasury stock, at cost (709) (709) (2,822) 709 3,531
Net income 2,554 2,554
--------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1994 8,335 8,335 3,373 (5,623) 6,085
Common stock issued in exchange for
the Debentures 400 400 1,625 2,025
Employee stock options exercised 226 226 462 688
Foreign currency translation adjustment (22) (22)
Net income 5,132 5,132
--------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 8,961 $8,961 $5,460 $ (491) $(22) $13,908
================================================================================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
CONSOLIDATED STATEMENTS OF CASH FLOWS Elexsys International, Inc.
- - --------------------------------------------------------------------------------
Years ended September 30
(In thousands) 1995 1994 1993
- - ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,132 $ 2,554 $ (16,331)
Adjustments to reconcile net income (loss) to net cash
(used) provided by operating activities net of
effect of business acquired:
Extraordinary item (1,833) (10,167)
Depreciation and amortization 5,325 6,301 7,664
Provision for restructuring operations 2,100 3,000
(Increase) decrease in accounts receivable (5,726) 250 1,706
(Increase) decrease in inventories (143) 932 (1,828)
(Increase) decrease in prepaid expenses
and other current assets (285) 107 256
Increase (decrease) in accounts payable 2,956 (5,297) (217)
Increase (decrease) in accrued payroll and related costs 429 (847) (533)
Decrease in restructuring reserve (861) (1,402) (1,953)
Increase (decrease) in other current liabilities (110) (440) 1,053
Other (481) 226 (88)
------- ---------- ---------
Net cash (used) provided by operating activities 4,403 (5,683) (7,271)
------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Technet Limited (560)
Proceeds from maturity of short-term investments 4,000 20,000
Investment in short-term investments (9,989)
Purchase of property, plant and equipment (4,683) (2,660) (4,663)
Proceeds from sale of property, plant and equipment 79 79 690
------- ---------- ---------
Net cash (used) provided by investing activities (5,164) 1,419 6,038
------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (356) (45) (45)
Proceeds from exercise of stock options 688
Net change in short-term borrowings (208) 3,456
------- ---------- ---------
Net cash (used) provided by financing activities 124 3,411 (45)
------- ---------- ---------
Effects of exchange rate changes on cash flows (22)
Net increase (decrease) in cash and cash equivalents (659) (853) (1,278)
Cash and cash equivalents, beginning of year 1,562 2,415 3,693
------- ---------- ---------
Cash and cash equivalents, end of year $ 903 $ 1,562 $ 2,415
======= ========== =========
<FN>
See notes 1 and 2 for supplemental information.
Supplemental schedule of noncash financing activity:
The Company exchanged $4,000,000 and $16,000,000 of Convertible
Subordinated Debentures for $2,025,000 and $5,200,000 of common stock,
respectively. In connection with these transactions, accruals of $50,000
and $250,000 for professional fees and the write-off of $92,000 and
$383,000 of deferred debt issuance costs, respectively, were netted
against the gain recognized on the two exchanges.
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Elexsys International, Inc.
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General and Summary -- Elexsys International, Inc., formerly Diceon Electronics,
Inc. (the "Company"), manufactures and sells on credit terms high performance
medium and high density multilayer circuit boards, backpanel assemblies and
sophisticated card cage assemblies. The Company offers advanced interconnect
solutions for data communications, telecommunications and instrumentation
industries. The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Accounting period -- For convenience of presentation, the Company has indicated
its fiscal year as ending on September 30. The Company actually utilizes a
fifty-two or fifty-three week fiscal year ending on the Saturday nearest to
September 30, which, for the fiscal years ended in 1995, 1994 and 1993, was
September 30, October 1 and October 2, respectively.
Supplemental cash flow information -- Cash paid for interest and income taxes
refunded for each of the three years in the period ended September 30, 1995 was
as follows:
Thousands of dollars 1995 1994 1993
----------------------------------------------------------
Interest $2,201 $1,602 $1,813
Income taxes (refunded) paid $ 158 $ (33)
Cash equivalents -- The Company classifies all short-term investments with
original maturities of three months or less as cash equivalents.
Accounts receivable -- The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses, and such losses have been within
management's expectations.
Inventories -- Inventories are stated at the lower of average cost or market and
consist of the following:
Thousands of dollars 1995 1994
------------------------------------------------------
Inventories:
Raw materials $2,843 $4,233
Work in progress 5,017 3,044
------ ------
Totals $7,860 $7,277
====== ======
Property, plant and equipment -- Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over estimated useful
lives as follows:
Buildings and improvements -- 30 years
Machinery and equipment -- 3 to 10 years
Leasehold improvements -- shorter of the
estimated useful life or lease term
Expenditures for repairs and maintenance were $4,201,000, $3,989,000 and
$4,386,000 in the years ended September 30, 1995, 1994 and 1993, respectively.
Income taxes -- The Company accounts for income taxes under the provision of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are
recognized to reflect the estimated future tax effects, calculated at currently
effective tax rates, of future deductible or taxable amounts attributable to
events that have been recognized on a cumulative basis in the financial
statements. A valuation allowance related to a deferred tax asset is recorded
when it is more likely than not that some portion of the deferred tax asset will
not be realized. The cumulative effect of adopting SFAS No. 109 on the Company's
financial statements for the year ended September 30, 1994 was not material.
Revenue recognition -- The Company recognizes revenues upon shipment of related
products.
Translations of Foreign Currencies -- Assets and liabilities of the Company's
United Kingdom subsidiary are translated into U.S. dollars at the exchange rates
in effect at the end of the period. Revenue and expense accounts are translated
at a weighted average of exchange rates which were in effect during the year.
Translation adjustments that arise from translating the Company's United Kingdom
subsidiary's financial statements from the pound sterling to U.S. dollars are
accumulated in a separate component of stockholders' equity. Transaction gains
and losses that arise from exchange rate changes on transactions denominated in
a currency other than the local currency are included in results of operations
as incurred. For the year ended September 30, 1995, transaction gains and losses
were immaterial.
2. PROVISIONS FOR RESTRUCTURING OF OPERATIONS
On March 1, 1993, the Company announced the closure of its Chatsworth,
California facility effective at the end of April 1993. In connection with the
closure, the Company reduced its work force by approximately 100 employees.
Accordingly, the Company accrued a one-time charge of $3,000,000 for closure
costs recognized during the quarter ended April 3, 1993. The majority of the
advanced fabrication previously handled in Chatsworth was transferred to Irvine,
California and to Nashua, New Hampshire. This provision initially included a
loss of $1,315,000 expected to be incurred upon disposition of excess equipment
and $1,685,000 in cost for the realignment and consolidation of operations.
As of September 30, 1994, the actual losses incurred and costs paid were
$924,000 for disposition of excess equipment, $584,000 for closure and cleanup
costs for returning the building to its original condition, $579,000 for rent
and other occupancy costs during the clean up period, $635,000 of wages and
benefits for severance pay and wages and benefits paid to employees to assist
with the cleanup, $194,000 to dispose of excess inventory and $84,000 related to
other realignment and consolidation costs. The Chatsworth building was turned
over to the landlord on April 29, 1994.
On January 6, 1994, the Company announced the downsizing of all its
operations. In connection with the downsizing, the Company reduced its work
force by approximately 150 employees and accrued a one-time charge of $600,000
recognized during the quarter ended January 1, 1994. As of September 30, 1994,
all costs incurred were paid.
On October 3, 1994, the Company announced an additional downsizing of its
West Coast operations. In connection with the downsizing, the Company further
reduced its work force by approximately 150 employees and accrued a one-time
charge of $1,500,000 recognized during the quarter ended September 30, 1994. In
addition, the President and Chief Executive Officer and a Senior Vice President
resigned and the employee stock bonus plan was cancelled.
As of September 30, 1995, the actual losses incurred and costs paid were
$1,500,000 which represented wages and benefits for severance pay, mainly to
executives.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
Thousands of dollars 1995 1994
--------------------------------------------------------
Land $ 2,357 $ 2,357
Buildings and improvements 1,939 1,939
Machinery and equipment 62,790 54,932
Leasehold improvements 6,594 6,253
--------- ---------
73,680 65,481
Less accumulated depreciation
and amortization (54,700) (47,703)
--------- ---------
$ 18,980 $ 17,778
========= =========
4. REVOLVING CREDIT AGREEMENT
On December 17, 1993, the Company entered into a revolving credit agreement
providing for working capital advances up to $7,500,000 (based on certain
eligible account balances and recent cash collections) and financing for
equipment purchases of up to $2,500,000 from an asset based financing company.
Cash borrowings under the line of credit bear interest at prime rate (8 3/4%)
plus 3 percent at September 30, 1995 which is payable monthly. The line of
credit is collateralized by substantially all of the Company's assets and will
remain in effect for three years. The credit facility contains covenants
including the maintenance of certain levels of working capital, tangible net
worth and certain financial ratios. In addition, the Company is restricted as to
the incurrence of additional indebtedness and certain other payments.
As of September 30, 1995, borrowings under this credit agreement were
$3,248,000.
5. LONG-TERM DEBT
Long-term debt consists of the following:
Thousands of dollars
(except payment amounts) 1995 1994
-----------------------------------------------------------
USA Subsidiary:
California Pollution Control
Revenue Bonds due in varying
annual principal amounts ranging
from $50,000 to $90,000 through
March 2011, with interest rates
ranging from 7.0% to 9.5% and
guaranteed by the Small Business
Administration $ 406 $456
United Kingdom Subsidiary:
Notes payable to an investor group
due in equal, annual principal
amounts of $99,166 due September
1999, with interest rates of 3%
above the bank base rate, currently
6.75%. The loan is collateralized
by the United Kingdom subsidiary's
assets 397
Notes payable to bank due in
equal, annual principal amounts
of $84,704 due September 1999,
with interest rates of 2% above
the bank base rate, currently
6.75%. The loan is collateralized
by the United Kingdom subsidiary's
assets 812
Capital lease obligations 7.6%
maturing at various dates
through 1997 28
----- -----
1,643 456
Less: current portion (363) (50)
------ -----
Net $1,280 $406
====== =====
The aggregate principal maturities are $363,000, $247,000, $254,000,
$160,000, and $165,000 in the years ending September 30, 1996 through 2000,
respectively, and $454,000 thereafter.
6. CONVERTIBLE SUBORDINATED DEBENTURES
In February 1987, the Company issued $32,000,000 of 5 1/2 percent Convertible
Subordinated Debentures due in 2012 (the "Debentures"). The Debentures are
convertible into shares of common stock at $39.50 per share, subject to
adjustment under certain conditions. The Debentures are redeemable by the
Company at declining premiums prior to March 1, 1997 and thereafter at 100
percent of the principal amount. The Debentures are also redeemable through the
operation of a sinking fund at 100 percent of the principal amount. Interest is
payable semi-annually on September 1 and March 1 of each year. Mandatory annual
sinking fund payments, sufficient to retire 5 percent of the aggregate principal
amount of the Debentures issued, were to be made on each March 1 commencing in
1997. As a result of the two exchanges of common stock for $20,000,000 of the
Debentures, as discussed in Note 13, the Company now has sinking fund credits
available to offset these obligations for twelve and one-half years. The revised
minimum annual sinking fund payments are $1,600,000, $1,600,000, $800,000 and
$8,000,000 for the years ending September 30, 2009, 2010, 2011 and 2012,
respectively. The Debentures are subordinated to all senior indebtedness of the
Company. At September 30, 1995, senior indebtedness aggregated $4,891,000.
7. OPERATING LEASES
The Company leases its principal office, several manufacturing facilities and
certain equipment under operating leases. As of September 30, 1995, these
obligations require aggregate minimum annual rental payments as follows:
Year ending September 30 (Thousands of dollars)
------------------------------------------------------
1996 $2,029
1997 1,746
1998 1,306
1999 1,040
2000 337
Thereafter 254
------
Total $6,712
======
The Company has options to renew its facilities leases, except the Irvine,
California facility whose lease ends January 1999, for various periods up to ten
years at the then existing fair market rental. Management expects that, in the
normal course of business, the leases will be renewed. Rent expense charged to
operations for the years ended September 30, 1995, 1994 and 1993 was
approximately $1,757,000, $1,766,000 and $1,861,000, respectively.
8. INCOME TAXES
The provision for income taxes for 1995 consisted of the following (due to net
operating losses, there was no income tax expense in 1993 or 1994):
Thousands of dollars 1995
-----------------------------------------------------
Current
Federal $ 90
State 64
Foreign 66
-----
Total Current $ 220
=====
A reconciliation between the statutory federal income tax rate as a
percentage of income from continuing operations is as follows:
1995
-----------------------------------------------------
Federal statutory tax rate 35.0%
State and local taxes 1.2%
Foreign 1.2%
Benefit of utilization of tax net
operating loss carryforwards (31.2)%
Other (2.1)%
Effective tax rate 4.1%
Deferred income taxes reflect the net tax effects of (i) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and (ii) net
operating loss and tax credit carryforwards. The tax effects of significant
items comprising the Company's income tax calculation as of September 30, 1995
are as follows:
(In thousands) 1995 1994
----------------------------------------------------------
Deferred tax liabilities:
Differences between book and
tax basis of property $ (835) $ (1,384)
Foreign operations (40)
Deferred tax assets:
Reserves not currently deductible 1,963 1,423
Net operating loss 12,466 14,402
Tax credit carryforwards 87 74
-------- --------
13,641 14,515
Valuation allowance (13,681) (14,515)
-------- --------
Net deferred tax asset/(liability) $ (40) $ 0
======== ========
Deferred income taxes include the tax impact of net operating loss
carryforwards. As of September 30, 1995, the Company had net operating loss
carryforwards for federal and state income tax purposes of $32,385,000 and
$23,706,000, respectively. These carryforwards, for which future benefit is not
assured, expire through 2008. In accordance with the provisions of SFAS No. 109,
a $13,681,000 valuation allowance is deemed adequate for these and other items
which may not be realized.
9. NET INCOME (LOSS) PER SHARE
For fiscal year 1995, primary and fully diluted earnings per share were computed
using the weighted average common and common equivalent shares (stock options)
outstanding during the year and excludes the assumed conversion of the principal
amount of the outstanding Debentures into common stock as such effect would have
been antidilutive.
For fiscal 1994, primary loss per share before extraordinary item was
computed using the weighted average common shares outstanding during the year
and primary net income per share was computed using the weighted average common
and common equivalent shares outstanding, excluding the assumed conversion of
the principal amount of the outstanding Debentures into common stock.
For fiscal 1994, fully diluted loss per share before extraordinary item
was computed using the weighted average common shares outstanding during the
year assuming the Debentures were converted into common shares as of the
beginning of the fiscal year and fully diluted net income per share was computed
using the weighted average common and common equivalent shares outstanding
assuming conversion of the Debentures as of the beginning of the fiscal year.
The losses per share for the year ended September 30, 1993 have been
computed based on average common shares outstanding as of their respective year
ends and do not include the effect of common stock equivalents as such effect
would have been antidilutive.
10. FOREIGN OPERATIONS
On April 28, 1995, the Company announced it had acquired substantially all the
assets of Technet Electronics Limited, a manufacturer of printed circuit boards
located in Great Britain, for approximately $3,300,000, which consisted of
$560,000 of cash and assumption of liabilities of approximately $2,740,000,
including its current lines of credit. To complete the transaction, the Company
borrowed $1,300,000 on its line of credit from an asset-based lender, of which
$740,000 was utilized as working capital.
The following is a summary of the financial position and results of
operations for five months of operation of the wholly-owned subsidiary located
in Great Britain.
SUMMARY FINANCIAL POSITION
(Thousands) September 30, 1995
-----------------------------------------------------
Current assets $1,641
Property, plant and equipment, net 2,030
-------
Total assets 3,671
Current liabilities (1,452)
Long term debt (1,981)
Other liabilities (40)
-------
Net assets $ 198
=======
SUMMARY STATEMENT OF INCOME
(Thousands) For the year ended September 30, 1995
-----------------------------------------------------
Net sales $2,695
Costs and expenses 2,431
Provision for income taxes 66
-------
Net income $ 198
=======
There were no dividends or foreign currency gains or losses from foreign
subsidiaries in 1995.
11. STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," which requires adoption of the disclosure provisions no later
than fiscal years beginning after December 15, 1995 and adoption of the
recognition and measurement provisions for nonemployees transactions no later
than after December 15, 1995. The new standard defines a fair value method of
accounting for stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period.
Pursuant to the new accounting standard, companies are encouraged, but are
not required, to adopt the fair value method of accounting for employee stock
based transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," but would be required to disclose in a note to the
financial statements pro forma net income and, if presented, earnings per share
as if the company had applied the new method of accounting.
The accounting requirements of the new method are effective for all
employee awards granted after the beginning of the fiscal year of adoption. The
Company has not yet determined if it will elect to change to the fair value
method, nor has it been determined the effect the new standard will have on net
income and earnings per share should it elect to make such a change. Adoption of
the new standard will have no effect on the Company's cash flows.
In August 1983, the Company adopted the 1983 Employee Stock Option Plan
("1983 Plan"). Under the terms of the 1983 Plan, which was amended in September
1984 and January 1988, 800,000 shares of the Company's common stock were
available for issuance under option grants to key employees, including officers,
at prices not less than the fair market value of the stock at the date of grant.
Options may have a term of up to ten years from the date of grant and vest at a
rate of 20 to 50 percent a year commencing one year from the date of grant.
In May 1984, the Company adopted the Elexsys International, Inc.
Non-Qualified Stock Option Plan ("1984 Plan"). Under the terms of the 1984 Plan,
200,000 shares of the Company's common stock were available for issuance under
option grants to key employees, including officers, who are not directors of the
Company. The terms and conditions of the 1984 Plan are similar to those of the
1983 Plan. During the year ended September 30, 1994 both plans expired.
Option activity for these plans is summarized as follows:
STOCK OPTION ACTIVITY
1983 Plan 1984 Plan
Number Price Number Price
of Shares per Share of Shares per Share
- - ----------------------------------------------------------------------
Sept. 30, 1992 655,750 $3.50 42,000 $3.50
Granted 193,350 $1.25-$3.50 60,000 $3.50
Cancelled (131,400) $3.50
------------------------- ----------------------
Sept. 30, 1993 717,700 $1.25-$3.50 102,000 $3.50
Granted 38,500 $1.25 60,000 $1.25
Cancelled (367,400) $1.25-$3.50
------------------------- ----------------------
Sept. 30, 1994 388,800 $1.25-$3.50 162,000 $1.25-$3.50
Granted $1.25 $1.25
Exercised (151,500) $1.25-$3.50 (33,600) $3.50
Cancelled (93,550) $1.25-$3.50 (118,400) $1.25-$3.50
------------------------- ------------------------
Sept. 30, 1995 143,750 $1.25-$3.50 10,000 $1.25-$3.50
========================= ========================
In June 1994, the Company adopted the Company's 1994 Incentive Stock
Option Plan ("the 1994 Plan"), authorizing the issuance of options to purchase a
maximum aggregate of 500,000 shares of common stock, the 1994 Plan was approved
by the stockholders' of the Company in February 1995. Options may have a term of
up to ten years from the date of grant and vest at a rate of 25 to 33.33 percent
per year.
1994 Non Qualified Options 1994 ISO Plan
Number Price Number Price
of Shares per Share of Shares per Share
- - -------------------------------------------------------------------------
Sept. 30, 1993
Granted 87,000 $1.25 235,000 $1.00
-------------------- -------------------------
Sept. 30, 1994 87,000 $1.25 235,000 $1.00
Granted 357,500 $2.88-$5.19
Exercised (30,500) $1.25
Cancelled (22,500) $1.25 (102,750) $1.00-$2.88
-------------------- -------------------------
Sept. 30, 1995 34,000 $1.25 489,750 $1.00-$5.19
==================== =========================
In March 1994, the Company granted to the Chief Financial Officer options
to purchase 10,000 shares of common stock at an option price of $1.25 per share
under the terms of the 1984 Plan. In addition, options to purchase 87,000 shares
of common stock at an option price of $1.25 per share, which were previously
intended to be granted to certain employees under the 1983 Plan that had expired
were instead granted as separate non-qualified stock options in April 1994. The
options vest at a rate of 50 percent per year commencing November 11, 1994.
In the third quarter of fiscal 1995, the Board of Directors adopted the
Company's 1995 Incentive Stock Option Plan ("the 1995 Plan"), authorizing the
issuance of options to purchase a maximum aggregate of 1,000,000 shares of
common stock, subject to approval by the Securities and Exchange Commission and
the stockholders of the Company. During the fiscal year, options to purchase an
aggregate of 82,000 shares had been granted under the 1995 Plan at an exercise
price of $8.88 to $11.25 per share (the market price on the date of grant).
Options may have a term of up to ten years from the date of grant and vest at a
rate of 25 percent a year commencing one year from the date of grant.
During the year ended September 30, 1991, the Company granted options to
purchase 30,000 shares to a then member of the Board of Directors at an option
price of $3.50 per share, and options to purchase 30,000 shares, at an option
price of $7.00 per share, granted to the same individual during the year ended
September 30, 1990, were cancelled. The options granted are exercisable as
follows: 10,000 shares during the year ended September 30, 1991 and 10,000
shares per year for the subsequent two years.
During the year ended September 30, 1993, the Company granted options to
purchase 10,000 shares to a then member of the Board of Directors at an option
price of $3.50 per share. The options granted are exercisable as follows: 3,000
shares during the year ended September 30, 1993 and 3,500 shares per year for
the subsequent two years.
In addition, during the year ended September 30, 1994, the Company granted
options to purchase 10,000 shares to a then member of the Board of Directors at
an option price of $1.25 per share and also granted options to purchase 10,000
shares to a member of the Board of Directors at an option price of $1.69 per
share. The options for 10,000 shares at $1.25 were subsequently amended to
provide that to the extent not previously vested, these options became fully
exercisable and were exercised during fiscal 1995. In addition, this person's
options granted during the year ended September 30, 1993 in the amount of 10,000
shares at the price of $3.50 per share also became fully exercisable. The new
options granted at $1.69 per share are exercisable as follows: 3,400 shares
during the year ended September 30, 1994, 3,300 shares during the year ending
September 30, 1995, and 3,300 shares during the year ending September 30, 1996.
At September 30, 1995, 1,737,750 shares of common stock are reserved for
the exercise of stock options granted or available for future grant. 122,500 of
these shares are exercisable under the 1983 or 1984 Plan or 1994 Non Qualified
Options.
12. ENVIRONMENTAL MATTERS
The Company's manufacturing processes utilize substantial quantities of
chemicals as well as substantial quantities of water. The Company is subject to
and believes it is in compliance with federal, state and local environmental
laws and regulations regarding air, water and land use, the generation, use,
storage and disposal of hazardous materials and wastes and the operation and
closure of manufacturing facilities at which hazardous materials are used or
hazardous wastes are generated. The Company is aware of contamination of soil
and ground water (principally by metals and solvents) at two of its former
facilities in Northern California. At one of these facilities, soil has been
remediated, but the likely future cost of ground water cleanup at that facility
is not yet reasonably estimable. Investigative costs of $30,000 have been
incurred. At the other former facility in Northern California, the Company
incurred costs of approximately $137,000 for cleanup of soil contamination and
the property was returned to its owner during the second quarter of fiscal 1995.
In addition, the facility is adjacent to an existing State of California
administered Superfund site and may become part of a related State of California
administered regional ground water investigation; the likely future cost to the
Company in connection with possible ground water cleanup is not yet reasonably
estimable. At another former facility in Southern California, the Company
conducted limited groundwater sampling in connection with a potential sale of
the property, and low concentrations of solvents were detected. Notification was
made to the proper agencies. At this time, it is not possible to determine
whether any response actions will need to be taken; and accordingly, the likely
future cost to the Company is not yet reasonably estimable.
The Company is further aware of soil and ground water contamination
(principally by metals and solvents) at two currently used facilities, one in
Northern California and one in Southern California. At its Northern California
facility, the Company is indemnified by the former property owner who has
acknowledged his obligation. At its Southern California facility, the Company's
preliminary estimate of remedial costs, expected to be incurred over five to
seven years, ranges from approximately $880,000 to $1,480,000 (including between
approximately $300,000 and $400,000 estimated capital expenditures for waste
treatment equipment acquisition and installation costs). At its Northern
California facility, the Company has also received notice that regulatory
authorities plan to reduce the discharge limits for industrial waste water
discharge containing heavy metals. New limits are expected to become effective
in October 1996. Based on proposed limits, the cost to the Company of additional
equipment and process modifications needed to comply with the reduced limits is
preliminarily estimated by the Company to be between $100,000 and $250,000. As
of September 30, 1995, the Company believes it has appropriately recorded all
known costs related to environmental matters, including the minimum amounts
where the estimated costs are within a range. Such known costs are primarily
accrued in other current liabilities. However, actual future environmental
related expenditures are subject to numerous uncertainties, including the
discovery of additional environmental concerns, further development of cost
estimates, new and changing environmental laws and requirements, or new
interpretations of existing laws and requirements. Accordingly, there can be no
assurance that future environmental related expenditures will not exceed the
Company's current estimates or that they will not have a materially adverse
effect on the Company.
13. EXTRAORDINARY ITEM
On June 30, 1994 and July 11, 1994, the Company exchanged for $16,000,000 of the
Debentures an aggregate of 3,200,000 newly issued shares of common stock, par
value $1.00 per share, with Mr. Milan Mandaric. The net gain of $10,167,000 was
recorded as an extraordinary item. The net gain included a reduction of debt
issuance costs related to the Debentures and additional professional fees
associated with the transaction. The transaction included a payment of $293,333
for accrued interest on Debentures exchanged and reimbursement of $50,000 for
Mr. Mandaric's professional expenses.
On March 31, 1995, the Company exchanged for $4,000,000 of its Debentures
an aggregate of 400,000 newly issued shares of common stock, par value $1.00 per
share, with Mr. Milan Mandaric. The net gain of $1,833,000 was recorded as an
extraordinary item. The net gain included a reduction of debt issuance costs
related to the Debentures and additional professional fees associated with the
transaction. The transaction included a payment of $18,333 for accrued interest
on the Debentures exchanged.
14. OTHER ITEMS
Major Customers -- For the years ended September 30, 1995, 1994 and 1993, one
customer accounted for approximately 24 percent, 22 percent, and 26 percent of
net sales, respectively, and for fiscal year 1995 two customers accounted for
12% and 10% of net sales, respectively.
Export Sales-- For the years ended September 30, 1995, 1994 and 1993, export
sales accounted for approximately $13,100,000, $8,500,000, $13,700,000 or 13
percent, 9 percent, and 14 percent of net sales, respectively.
Bonus Plan -- The Company has a discretionary profit sharing bonus plan which
provides for payment of bonuses to all eligible employees based on a formula
fixed annually by the Board of Directors. The bonus formula is applied
separately to each of the Company's profit centers. Bonus expense relating to
the plan amounted to $391,000 and $86,000 for the years ended September 30, 1995
and 1993, respectively. No bonuses were paid for the year ended September 30,
1994.
Treasury Stock -- On June 30, 1994, 709,100 shares of stock in treasury were
retired.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Thousands of dollars except per share data Quarter Quarter Quarter Quarter Year
- - ------------------------------------------------------------------------------------------------------------------
1995
Net sales $22,753 $23,407 $27,298 $30,512 $103,970
Gross profit 2,870 1,866 4,288 6,809 15,833
Income (loss) before extraordinary item 250 (870) 901 3,018 3,299
Net income 250 963 901 3,018 5,132
Net income (loss) before extraordinary
item per share $ .03 $ (.10) $ .10 $ .32 $ .37
Net income per primary share $ .03 $ .11 $ .10 $ .32 $ .57
1994
Net sales $24,311 $26,153 $23,943 $21,273 $ 95,680
Gross profit 620 2,847 2,404 1,508 7,379
Loss before extraordinary item (3,353) (582) (992) (2,686) (7,613)
Net income (loss) (3,353)(1) (582) 9,175 (2,686)(2) 2,554
Loss before extraordinary item per share $ (.65) $ (.11) $ (.18) $ (.32) $ (1.28)
Net income (loss) per primary share $ (.65) $ (.11) $ 1.67 $ (.32) $ .54
----------- -------- -------- ----------- ---------
<FN>
(1) Includes estimated restructuring costs of $600,000.
(2) Includes estimated restructuring costs of $1,500,000.
</FN>
INDEPENDENT AUDITORS' REPORT
- - --------------------------------------------------------------------------------
Elexsys International, Inc.:
We have audited the consolidated balance sheets of Elexsys International, Inc.
(formerly Diceon Electronics, Inc.) and its subsidiaries as of September 30,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended September 30, 1995. These consolidated 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 consolidated financial statements present fairly, in
all material respects, the financial position of Elexsys International, Inc. and
its subsidiaries at September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1995, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP (sig)
Costa Mesa, California
October 16, 1995
PRICE RANGE OF COMMON STOCK Elexsys International, Inc.
- - --------------------------------------------------------------------------------
The Company's common stock was traded in the Nasdaq National Market System under
the Nasdaq symbol DICN from the Company's initial public offering on December 1,
1983 until December 2, 1993. At that time the Company's common stock was
delisted from Nasdaq National Market trading because of its failure to meet
Nasdaq's requirements for capital and surplus and net tangible assets. The
Company's stock was traded on Nasdaq's Bulletin Board Market from December 3,
1993 to March 17, 1995. Since March 20, 1995, the Company`s common stock has
been traded on Nasdaq's SmallCap Market under the symbol ELEX. The table below
sets forth the reported closing prices for the quarter indicated. Prices
represent quotations between dealers without adjustments for retail markups,
markdowns or commissions.
The Company had approximately 668 stockholders of record as of September
30, 1995. The Company has not paid cash dividends on its common stock, and its
Board of Directors presently intends to continue this policy in order to retain
earnings for the development of the Company's business. Accordingly, it is
anticipated that no cash dividends will be paid in the foreseeable future.
Additionally, the Company's credit agreements with its asset-based lender
prohibit the payment of cash dividends without such person's consent.
Quarter ended Dec. 31 Mar. 31 June 30 Sept. 30
---------------------------------------------------------------
Fiscal 1995
High 4-1/4 5-5/8 7-1/8 15-1/14
Low 1-5/16 3-5/8 3-11/16 6-7/8
------ ----- ------- -------
Fiscal 1994
High 1-1/4 7/8 1-5/8 1-7/8
Low 1/8 3/8 3/4 1-1/4
------ ----- ------- -------
CORPORATE INFORMATION
- - --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Milan Mandaric
Chairman of the Board
and President, Elexsys
International, Inc.
Charles Handley
Private Investor
Peter S. Jonas
Private Investor and
Business Consultant
Roland G. Matthews
Private Investor
OFFICERS
Milan Mandaric
Chairman of the Board
and President
W. Barry Hegarty
Chief Operating Officer
Michael S. Shimada
Vice President Finance, Chief
Financial Officer and Secretary
CORPORATE OFFICE
Elexsys International, Inc.
1188 Bordeaux Drive
Sunnyvale, California 94089
(408) 743-5400
FAX (408) 743-5454
TRANSFER AGENT AND REGISTRAR
U. S. Stock Transfer Corporation
Glendale, California 91207
INDEPENDENT AUDITORS
Deloitte & Touche LLP
695 Town Center Drive
Costa Mesa, California 92626
LEGAL COUNSEL
Cooley Godward Castro
Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
FORM 10-K
A copy of Elexsys International, Inc.'s Form 10-K as filed with the Securities
and Exchange Commission for the fiscal year ended September 30, 1995 is
available without charge upon written request to: Investor Relations, Elexsys
International, Inc., 1188 Bordeaux Dr., Sunnyvale, California 94089.
COMMON STOCK
The Common Stock of Elexsys International, Inc. (symbol: ELEX) trades on
Nasdaq's SmallCap Market.
CONVERTIBLE DEBENTURES
The Convertible Debentures of Elexsys International, Inc. (symbol: DICNG) trades
over-the-counter on Nasdaq's Bulletin Board Market.
ELEXSYS INTERNATIONAL, INC.
- - ---------------------------
1188 Bordeaux Drive
Sunnyvale, California 94089
(408) 743-5400
FAX (408) 743-5454