1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 COMMISSION FILE NUMBER: 1-10560
BENCHMARK ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-2211011
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
3000 TECHNOLOGY DRIVE 77515
ANGLETON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(409)849-6550
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
As of August 13, 1996 there were 4,712,414 shares of Common Stock, par
value $0.10 per share, outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BENCHMARK ELECTRONICS, INC.
CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 72 $ 2,785
Accounts receivable 23,529 20,167
Income taxes receivable 88 393
Inventories 33,772 22,983
Prepaid expenses and other assets 204 255
Deferred tax asset 372 372
------- -------
Total current assets 58,037 46,955
------- -------
Land 306 306
Property, plant and equipment, at cost 22,684 17,650
Accumulated depreciation (9,182) (7,874)
------- -------
Net property, plant and equipment 13,808 10,082
------- -------
Deferred acquisition costs 413 -
------- -------
Total assets $72,258 $57,037
======= =======
See accompanying notes to condensed financial statements.
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BENCHMARK ELECTRONICS, INC.
CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(CONTINUED)
JUNE 30, DECEMBER 31,
1996 1995
------- ------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of Credit $ 5,000 $ -
Accounts payable 14,745 9,116
Accrued liabilities 963 554
------ ------
Total current liabilities 20,708 9,670
Deferred income taxes 839 743
Shareholders' equity:
Preferred shares, $0.10 par value; 5,000,000 shares
authorized, none issued - -
Common shares, $0.10 par value; 10,000,000 shares
authorized; issued - 4,060,192 and 4,046,142,
respectively; outstanding - 4,035,400 and 4,021,400,
respectively 404 402
Additional paid-in capital 20,028 19,808
Retained earnings 30,339 26,474
Less treasury shares, at cost; 24,742 shares (60) (60)
------- -------
Total shareholders' equity 50,711 46,624
------- -------
Total liabilities and shareholders' equity $72,258 $57,037
======= =======
See accompanying notes to condensed financial statements.
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BENCHMARK ELECTRONICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Sales $33,500 $23,646 $63,883 $46,761
Cost of sales 29,016 20,521 55,574 40,547
------- ------- ------- -------
Gross profit 4,484 3,125 8,309 6,214
Selling expense 465 337 849 651
General and administrative expense 637 384 1,137 782
------- ------- ------- -------
Operating expenses 1,102 721 1,986 1,433
------- ------- ------- -------
Income from operations 3,382 2,404 6,323 4,781
Interest income - 78 34 153
Interest expense (89) - (86) -
Other income (expense) - 6 2 13
------- ------- ------- -------
Income before income tax expense 3,293 2,488 6,273 4,947
Income tax expense (1,268) (900) (2,408) (1,790)
------- ------- ------- -------
Net income $ 2,025 $ 1,588 $ 3,865 $ 3,157
======= ======= ======= =======
Earnings per common share:
Net income $ 0.49 $ 0.39 $ 0.93 $ 0.77
======= ======= ======= =======
Weighted common shares outstanding 4,160 4,078 4,144 4,090
======= ======= ======= =======
See accompanying notes to condensed financial statements.
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BENCHMARK ELECTRONICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------
1996 1995
---- ----
Cash flows from (used in) operating activities:
Net Income $ 3,865 $ 3,157
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
1,308 1,013
Deferred income taxes 96 63
(Increase) decrease in net accounts receivable (3,362) 1,226
Decrease in income taxes receivable 305 -
Increase in inventory (10,789) (4,564)
(Increase) decrease in prepaid expenses and other assets 51 (99)
Increase in accounts payable 5,629 536
Increase(decrease) in accrued liabilities 409 (314)
Increase in current income taxes payable - (75)
-------- -------
Total adjustments (6,353) (2,214)
-------- -------
Net cash provided by operations (2,488) 943
-------- -------
Cash flows used in investing activities:
Capital expenditures, net (5,034) (1,094)
Deferred acquisition costs (413) -
Proceeds from exercise of employee stock options 222 80
-------- -------
Cash flows used in investing activities (5,225) (1,014)
Cash flows provided by financing activities -
Borrowings under revolving line of credit 5,000 -
-------- -------
Net increase (decrease) in cash (2,713) (71)
Cash at beginning of year 2,785 8,371
-------- -------
Cash at June 30 72 8,300
======== =======
Supplemental disclosures of cash flow information:
Income taxes paid $ 1,450 $ 1,801
======== =======
See accompanying notes to condensed financial statements.
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BENCHMARK ELECTRONICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Benchmark Electronics, Inc. (the "Company") is a Texas corporation
which provides contract manufacturing services to original equipment
manufacturers (OEMs) in the electronics industry, including manufacturers of
medical devices, communications equipment, industrial and business computers,
testing instrumentation, and industrial instruments.
The accompanying unaudited interim condensed financial statements
reflect all normal and recurring adjustments which in the opinion of management
are necessary for a fair presentation of the results of operations and cash
flows for the interim periods presented. The results of operations for the
periods presented are not necessarily indicative of the results to be expected
for the full year. The accompanying unaudited condensed financial statements
should be read in conjunction with the financial statements and notes included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
NOTE 2 - EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income by the
weighted average number of common and common equivalent shares outstanding.
For the purposes of this calculation, outstanding employee stock options are
considered common equivalent shares. Fully diluted earnings per share are
materially equivalent to primary earnings per share for all periods presented.
Weighted common shares outstanding for the three months ended June 30, 1996 and
June 30, 1995 were 4,159,567 and 4,078,304 respectively.
NOTE 3 - BORROWING FACILITY
At June 30, 1996, the Company had a short-term revolving line of
credit with a commercial bank which was available primarily to finance accounts
receivable and inventory requirements. The Company was entitled to borrow under
the line of credit up to the lesser of $10 million or the sum of 80% of its
eligible accounts receivable and 25% of its eligible inventories. The Company's
borrowings under the line of credit bore interest at the lower of the rate
applicable to Alternate Base Rate Loans or Eurodollar Loans as defined in the
credit agreement. The line of credit was collateralized by substantially all of
the Company's current assets. The line of credit agreement also contained
certain financial covenants and restricted the ability of the Company to incur
additional debt without the consent of the bank. The Company had $5,000,000
outstanding under its line of credit at June 30, 1996.
In connection with the acquisition of EMD Technologies, Inc. ("EMD"),
which was completed on July 30, 1996, the Company replaced the above mentioned
credit facility with a $35 million four-year revolving line of credit with a
commercial bank which is available primarily to finance accounts receivable and
inventory requirements. The Company is entitled to borrow under the line of
credit up to the lesser of $35 million or the sum of 80% of its eligible
accounts receivable and 25% of its eligible inventories. The Company's
borrowings under the line of credit may bear interest at the lower of the rate
applicable to Base Rate Loans or Eurodollar Loans as defined in the credit
agreement. The line of credit agreement contains certain financial covenants
and restricts the ability of the Company to incur additional debt without the
consent of the bank. The line of credit matures on July 31, 2000.
NOTE 4 - INVENTORIES
Inventory costs are summarized as follows:
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JUNE 30, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED)
Raw materials $ 23,425,375 $ 16,365,280
Work in process 10,346,489 6,617,875
------------ ------------
$ 33,771,864 $ 22,983,155
============ ============
NOTE 5 - INCOME TAXES
The provision for income taxes in the statement of operations is
summarized below:
Federal - current $2,062,000
Federal - deferred 96,000
State 250,020
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TOTAL $2,408,020
==========
The provision for income taxes did not vary significantly from the amount
computed by applying the U.S. federal statutory rate for the six month period
ended June 30, 1996.
NOTE 6 - SUBSEQUENT EVENTS
On July 30, 1996 the Company completed its purchase of EMD. This
business, headquartered in Winona, Minnesota, was acquired for approximately
675,000 shares of common stock and approximately $30.4 million in cash. The
transaction will be accounted for under the purchase method of accounting.
In connection with this acquisition the Company issued a 10 year 8.02%
Senior Note in the amount of $30 million to finance a portion of the cash
consideration for the acquisition. The purchase agreement relating to this note
contains certain financial covenants and restricts the ability of the Company to
incur additional debt without the consent of the noteholder. Additionally, the
Company replaced its existing revolving line of credit with a new revolving line
of credit in the amount of $35 million (see note 3).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company sells its products to electronics system original
equipment manufacturers from its manufacturing facilities in Angleton, Texas
and Beaverton, Oregon. The majority of the Company's customers compete in the
medical devices, telecommunications, instrumentation, industrial controls and
high-end computer systems industries.
The Company has no long-term contracts with its customers, and
lead-times for customer orders and product-life cycles continue to diminish.
Customer programs can be canceled and volume levels can be changed or delayed
at any time. The timely replacement of delayed, canceled or reduced programs
with new business cannot be assured. Because of these and other factors, there
can be no assurance that the Company's historical revenue growth rate will
continue.
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On July 30, 1996 the Company completed the purchase of EMD
Technologies, Inc. ("EMD") This business, headquartered in Winona, Minnesota,
was acquired for approximately 675,000 shares of common stock and
approximately $30.4 million in cash. The transaction will be accounted for
under the purchase method of accounting.
The acquisition of EMD presents a number of risks, including whether
the Company will be able to successfully manage the transition, integrate
purchasing operations and information systems and manage a larger and more
geographically disparate business. Although the Company believes it has
adequate resources and capabilities to successfully manage the integration of
EMD, if it is unsuccessful in doing so, the Company's results of operations
could be materially adversely affected.
FORWARD LOOKING STATEMENTS
The statements contained in this Form 10-Q that are not historical
facts are forward looking statements that involve risks and uncertainties,
including, but not limited to, the Company's ability to maintain its current
customer base, the risk of customer reductions, the impact of technological
changes and increased competition and other factors discussed herein. Such
risks and uncertainties could cause actual circumstances to differ materially
from those set forth in the forward looking statements.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
in the Company's Condensed Statements of Operations as a percentage of sales:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -----------------
1996 1995 1996 1995
---- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 86.6 86.8 87.0 86.7
----- ----- ----- -----
Gross profit 13.4 13.2 13.0 13.3
Selling expense 1.4 1.4 1.3 1.4
General and administrative expense 1.9 1.6 1.8 1.7
----- ----- ----- -----
Operating expenses 3.3 3.0 3.1 3.1
----- ----- ----- -----
Income from operations 10.1 10.2 9.9 10.2
Interest income 0.0 0.3 0.1 0.3
Interest expense (0.3) 0.0 (0.1) 0.0
----- ----- ----- -----
Income before income tax 9.8 10.5 9.9 10.5
Income tax expense (3.8) (3.8) (3.8) (3.8)
----- ----- ----- -----
Net income 6.0% 6.7% 6.1% 6.7%
===== ===== ===== =====
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BENCHMARK ELECTRONICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF
OPERATIONS (CONTINUED)
Sales for the second quarter of 1996 were approximately $33.5 million,
a 42% increase from sales of approximately $23.6 million for the same quarter
of 1995. The Company's sales increased as a result of the Company's continued
aggressive sales efforts, which resulted in additional orders from new and
existing customers. The increase in sales resulted from increased production
volumes as compared to the second quarter of 1995. The increased production
volumes were made possible by the expansion of the surface mount assembly
capacity, which was completed during the first quarter of 1996.
Gross profit increased 43% to approximately $4.5 million in the second
quarter of 1996 from approximately $3.1 million in the same quarter of 1995.
Gross profit as a percentage of sales increased from 13.2% for the second
quarter of 1995 to 13.4% for the second quarter of 1996. The increase in gross
profit and in gross profit as a percentage of sales was due primarily to
improved manufacturing efficiencies and to normal changes in product mix and
customer mix. The Company expects gross margins to fluctuate based on product
mix and customer mix.
Selling expenses were $465,000 in the second quarter of 1996, an
increase of 38% from the first quarter of 1995. General and administrative
expenses were $637,000, an increase of 66% from $384,000 for the same quarter
of 1995. In order to satisfy the increased level of business activity and to
continue the development and improvement of the systems and processes necessary
to accommodate future growth, the Company has added management personnel. The
increase in general and administrative expenses during the second quarter of
1996 reflects these additional personnel and related departmental expenses, as
well as the additional administrative expenses, such as travel and
communication costs incurred in connection with the acquisition of EMD
Technologies. The Company anticipates selling, general and administrative
expenses will continue to increase in nominal terms as the Company continues to
build the internal management and support systems necessary to support higher
revenue levels.
Interest expense for the second quarter of 1996 was $89,000, which was
incurred by the Company for the borrowings under the revolving line of credit
facility.
Income tax expense in the first quarter of 1996 was $1,268,000, an
increase of 41% from the same period in 1995. The increase is due to higher
pre-tax income. The Company's effective tax rate approximates the blended
Federal and state statutory rates as a result of all of the Company's
operations being located within the United States.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth and operations to date through
funds generated from operations, proceeds from the sale of its common stock
and, during the second quarter of 1996, funds borrowed under its revolving line
of credit facility. Prior to the second quarter of 1996 the Company had never
borrowed any amounts under its credit facility.
Cash flows used in operating activities were $2.5 million for the six
months ended June 30, 1996. Cash used by operations was utilized primarily by
the increase in inventories to accommodate the increased backlog. Additionally,
a high level of inventories on new programs for existing customers has been
added. Further, customer-imposed program delays have influenced the overall
level of inventories. The Company is attempting to mitigate the impact of such
delays by obtaining customer deposits for inventories carried by the Company in
these situations.
The Company completed the planned expansion of its production capacity
at the Angleton plant during the second quarter of 1996. The Company had twelve
surface mount assembly lines in operation for the second quarter of 1996.
Capital expenditures of $5.0 million for the six months ended June 30, 1996
were primarily concentrated in the expansion of the facility and surface mount
assembly equipment associated with this expansion.
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At June 30, 1996, the Company had a short-term revolving line of
credit with a commercial bank which was available primarily to finance accounts
receivable and inventory requirements. At June 30, 1996, the Company had $5
million outstanding under its line of credit. The Company was entitled to
borrow under the line of credit up to the lesser of $10 million or the sum of
80% of its eligible accounts receivable and 25% of its eligible inventories.
This line of credit was collateralized by substantially all of the
Company's current assets. The line of credit agreement contained certain
financial covenants and restricted the ability of the Company to incur
additional debt without the consent of the bank. See Note 3 of Notes to
Condensed Financial Statements.
On July 30, 1996 the Company obtained a $35 million revolving line
of credit which replaced the prior revolving credit facility, financed a portion
of the cash consideration for the acquisition of EMD, refinanced the revolving
line of credit at EMD and provided for future working capital needs. The $35
million four year revolving line of credit is unsecured and is guaranteed by
each of the Company's United States subsidiaries. This credit agreement
contains certain financial covenants and restricts the ability of the Company to
incur additional debt without the consent of the bank. The Company is entitled
to borrow under the line of credit up to the lesser of $35 million or the sum of
80% of its eligible accounts receivable and 25% of its eligible inventories. The
Company may prepay the revolving line of credit facility at any time upon proper
notice to the bank.
Interest on the revolving credit facility accrues, at the Company's
option, at either the bank's Fixed Eurodollar Rate plus from .625% to 1.75% per
annum or prime rate. The margin on the Fixed Eurodollar Rate fluctuates with
the Company's ratio of Funded Debt to EBITDA. Interest is payable quarterly.
A commitment fee of 1/4% per annum on the unused portion of the revolving
credit facility is payable quarterly in arrears. As of August 8, 1996, the
Company had $20 million outstanding under the revolving credit facility.
In order to finance a portion of the cash consideration for the
acquisition, the Company issued a $30 million, 8.02% Senior Note due 2006
("Senior Note") to Northwestern Mutual Life Insurance Company. The Senior Note
is unsecured and guaranteed by each of the Company's United States subsidiaries.
Principal on the Senior Note is payable in annual installments of $5 million
beginning July 31, 2001 with a final installment of the unpaid principal amount
due July 31, 2006.
Upon any prepayment of all or a portion of the Senior Note, the
Company is obligated to pay the Purchaser a Make-Whole Premium on the amount
prepaid. The Note Purchase Agreement contains a provision that in the event of
a change of control, the Company must offer to repurchase the Note at par plus
the Make-Whole Premium.
The Note Purchase Agreement includes customary affirmative and negative
covenants. The financial covenants include maintenance of: (i) a fixed charge
coverage ratio, (ii) an interest coverage ratio, (iii) an indebtedness ratio,
(iv) a level of tangible net worth.
The Company may require additional capital to finance further
enhancements to or acquisitions or expansions of its manufacturing capacity.
Management believes that the level of working capital will continue to grow at a
rate generally consistent with the growth of the Company's operations. Although
no assurance can be given that future financing will be available on terms
acceptable to the Company, the Company may seek additional funds from time to
time through public or private debt or equity offerings or through bank
borrowings to the extent permitted by its existing debt agreements. Management
believes that the Company's existing revolving credit agreement dated July 30,
1996, existing cash balances, funds generated from operations, and borrowings
under the Company's Senior Note will be sufficient to permit the Company to meet
its liquidity requirements in 1996 and for the foreseeable future.
The Company does not hold or issue derivative financial instruments in
the normal course of business.
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ACQUISITION
On July 30, 1996 the Company completed its purchase of EMD (the
"Acquisition"). EMD is located in Winona, Minnesota and, through its operating
subsidiary EMD Associates, Inc., provides engineering services and contract
manufacturing to original equipment manufacturers in the electronics industry.
The purchase price paid by the Company in the Acquisition was
approximately $30.4 million in cash and 675,000 shares of common stock.
Approximately 14% of the shares of common stock issued by the Company in the
Acquisition are subject to certain restrictions on the transferability and
voting thereof for a three year period.
The Company had been actively examining opportunities for the
establishment or acquisition of a third manufacturing facility that satisfied
its criteria for such expansion, including without limitation substantial
customer base, geographic expansion and management philosophy. The Company
believes that the Acquisition satisfies these criteria; however, no assurance
may be given that it will have a positive effect on the Company's results of
operations, or that it will not be dilutive to earnings.
QUARTERLY RESULTS
Although Management does not believe that the Company's business is
affected by seasonal factors, the Company's sales and earnings may vary from
quarter to quarter, depending primarily upon the timing of manufacturing
orders. Therefore, the Company's operating results for any particular quarter
may not be indicative of the results for any future quarter or for the year.
ACCOUNTING FOR INCOME TAXES
For income tax purposes, certain items of expense are reported in
periods different from their inclusion in determining income for financial
accounting purposes. The income tax effects of timing differences are allocated
to the periods in which the amounts are included in the statement of
operations.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed herewith.
Exhibit
Number Description
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2 Agreement and Plan of Merger dated as of March 27, 1996, by and among the Company, Electronics
Acquisition, Inc., EMD Technologies, Inc., David H. Arnold and Daniel M. Rukavina (incorporated
herein by reference to Exhibit 2 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.1 Note Purchase Agreement dated as of July 30, 1996 by and between the Company and Northwestern
Mutual Life Insurance Company (incorporated herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated July 30, 1996).
10.2 Credit Agreement dated as of July 30, 1996 by and between the Company and Texas Commerce Bank
National Association (incorporated herein by reference to Exhibit 99.2 to the Company's Current
Report on Form 8-K filed July 30, 1996).
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months
ended June 30, 1996.
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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 thereunto duly authorized on August 13, 1996.
BENCHMARK ELECTRONICS, INC.
(Registrant)
By: /s/ Donald E. Nigbor
-------------------------------------
Donald E. Nigbor
President
(Principal Executive Officer)
By: /s/ Cary T. Fu
-------------------------------------
Cary T. Fu
Executive Vice President
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
2 Agreement and Plan of Merger dated as of March 27, 1996, by and among the Company, Electronics
Acquisition, Inc., EMD Technologies, Inc., David H. Arnold and Daniel M. Rukavina. (incorporated herein
by reference to Exhibit 2 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).
10.1 Note Purchase Agreement dated as of July 30, 1996 by and between the Company and Northwestern
Mutual Life Insurance Company (incorporated herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated July 30, 1996).
10.2 Credit Agreement dated as of July 30, 1996 by and between the Company and Texas Commerce Bank
National Association (incorporated herein by reference to Exhibit 99.2 to the Company's Current
Report on Form 8-K filed July 30, 1996).
27 Financial Data Schedule
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