<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 28, 1999 Commission file number: 1-5761
- ---------------------------------------------------------- ---------------------
LaBarge, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
DELAWARE 73-0574586
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9900A Clayton Road, St. Louis, Missouri 63124
- --------------------------------------------------------------------------------
(Address) (Zip Code)
(314) 997-0800
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(Registrant's telephone number, including Area Code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 |_|.
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock as of March 28, 1999. 14,904,823 common stock.
<PAGE> 2
LABARGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------------------------------------------
MARCH 28, March 29, MARCH 28, March 29,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 21,558 $ 26,996 $ 70,003 $ 70,692
- ---------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of sales 17,318 21,000 55,591 54,807
Selling and administrative expense 3,493 3,636 10,497 10,036
- ---------------------------------------------------------------------------------------------------------------------------------
20,811 24,636 66,088 64,843
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EARNINGS FROM OPERATIONS 747 2,360 3,915 5,849
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense 370 298 1,049 624
Equity in loss of joint ventures 243 - 514 94
Minority interest profit (loss) 31 (61) 172 (121)
Other (income) expense, net (92) 119 (302) 98
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 195 2,004 2,482 5,154
INCOME TAX EXPENSE 72 734 916 1,902
- ---------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 123 $ 1,270 $ 1,566 $ 3,252
=================================================================================================================================
BASIC NET EARNINGS PER COMMON SHARE $ .01 $ .08 $ .10 $ .21
AVERAGE COMMON SHARES OUTSTANDING 15,022 15,597 15,263 15,637
=================================================================================================================================
DILUTED NET EARNINGS PER COMMON SHARE $ .01 $ .08 $ .10 $ .21
AVERAGE DILUTED COMMON SHARES OUTSTANDING 15,071 15,707 15,319 15,761
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
LABARGE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
MARCH 28, June 28,
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 725 $ 540
Accounts and notes receivable, net 15,327 18,332
Inventories 16,700 18,968
Prepaid expenses 532 772
Deferred tax assets, net 1,387 2,087
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 34,671 40,699
- ------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 12,796 11,254
OTHER ASSETS, NET 17,346 7,039
- ------------------------------------------------------------------------------------------------------------------------------
$ 64,813 $ 58,992
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 2,175 $ 5,020
Current maturities of long-term debt 1,805 1,102
Trade accounts payable 4,767 6,034
Accrued employee compensation 3,734 4,710
Other accrued liabilities 2,479 2,321
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 14,960 19,187
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 20,770 10,163
- ------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value. Authorized
40,000,000 shares; issued 15,682,608 shares
at March 28, 1999 and 15,658,280 at
June 28, 1998, including shares in treasury 157 156
Additional paid-in capital 13,547 13,468
Retained earnings 18,049 16,683
Less cost of common stock in treasury, 777,785 shares at March 28, 1999 and
163,000 shares
at June 28, 1998 (2,670) (665)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 29,083 29,642
- ------------------------------------------------------------------------------------------------------------------------------
$ 64,813 $ 58,992
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
LABARGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------------------
MARCH 28, March 29,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,566 $ 3,252
Adjustments to reconcile net cash provided (used) by operating activities:
Undistributed loss in equity of joint venture 514 94
Minority interest in consolidated subsidiary 172 (121)
Depreciation and amortization 1,405 919
Loss on disposal of property and equipment 20 -
Deferred taxes 700 1,589
Changes in assets and liabilities, net of acquisition
of majority business interest:
Accounts and notes receivable, net 2,813 (4,250)
Inventories 2,308 (6,261)
Prepaid expenses 241 316
Trade accounts payable (1,995) (17)
Accrued liabilities (372) (97)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 7,372 (4,576)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,819) (7,588)
Additions to other assets (605) (2,476)
Acquisition of majority business interest 30 166
Investments in other companies (4,301) -
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (7,695) (9,898)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt 5,570 6,200
Change in short-term borrowings (3,044) 8,580
Repayments of long-term debt (92) (796)
Sale of common stock 79 -
Purchase of common stock for treasury (2,005) (471)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 508 13,513
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 185 (961)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 540 1,467
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 725 $ 506
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
LABARGE, INC.
FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS - BASIS OF PREPARATION
The consolidated balance sheets at March 28, 1999 and June 28, 1998, the related
consolidated statements of operations for the three and nine months ended March
28, 1999 and March 29, 1998 and the consolidated statements of cash flows for
the nine months ended March 28, 1999 and March 29, 1998 have been prepared by
LaBarge, Inc. (the "Company") without audit. In the opinion of management,
adjustments, all of a normal and recurring nature, necessary to present fairly
the financial position and the results of operations and cash flows for the
aforementioned periods, have been made. The Company adopted SFAS No. 130,
"Reporting Comprehensive Income" during the first quarter of fiscal 1999. The
adoption of SFAS No. 130 had no impact on the Company's consolidated financial
statements.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 28, 1998.
2. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
(dollars in thousands)
<TABLE>
<CAPTION>
MARCH 28, June 28,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Billed shipments, net of progress payments $ 13,381 $ 17,556
Less allowance for doubtful accounts 157 150
- ---------------------------------------------------------------------------------------------------------------------
Trade receivables - net 13,224 17,406
Notes receivables 2,000 903
Other current receivables 103 23
=====================================================================================================================
$ 15,327 $ 18,332
=====================================================================================================================
</TABLE>
Progress payments are payments from customers in accordance with contractual
terms for contract costs incurred to date. Such payments are credited to the
customer at the time of shipment.
Effective June 2, 1998, LaBarge, Inc. and TransMedica International, Inc.
("TransMedica") reached revised agreements concerning our exclusive
manufacturing agreement; and, negotiated payments of then open accounts
receivables. The Company agreed to accept an interest bearing note secured by
all of the assets including patents of TransMedica, for the $900,000 then owed
for prior work and to extend future credit up to an additional $1.1 million
under the same note for future work performed. The value of this note is $2.0
million at March 28, 1999 and $903,000 at June 28, 1998.
5
<PAGE> 6
Other current receivables are amounts due from employees for travel advances and
other miscellaneous sources.
3. INVENTORIES
Inventories consist of the following:
(dollars in thousands)
<TABLE>
<CAPTION>
MARCH 28, June 28,
1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 9,016 $ 10,353
Work in progress 8,467 9,070
- --------------------------------------------------------------------------------------------------------------
17,483 19,423
Less progress payments 783 455
- --------------------------------------------------------------------------------------------------------------
$ 16,700 $ 18,968
==============================================================================================================
</TABLE>
In accordance with contractual agreements, the government has a security
interest in inventories related to contracts for which progress payments have
been received.
4. OTHER ASSETS
Other assets consist of the following:
(dollars in thousands)
<TABLE>
<CAPTION>
MARCH 28, June 28,
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash value of life insurance $ 2,667 $ 2,229
Deposits, licenses, and other 1,751 1,879
Investment in technology 1,630
Investments in businesses 4,106 2,750
- -------------------------------------------------------------------------------------------------------------
10,154 6,858
- -------------------------------------------------------------------------------------------------------------
Software 1,116 1,047
Goodwill 7,208 412
- -------------------------------------------------------------------------------------------------------------
8,324 1,459
- -------------------------------------------------------------------------------------------------------------
Less amortization 1,132 1,278
- -------------------------------------------------------------------------------------------------------------
$ 17,346 $ 7,039
=============================================================================================================
</TABLE>
On March 2, 1999, the Company, through its subsidiary, LaBarge-OCS, Inc.,
completed its acquisition of privately held Open Cellular Systems, Inc. (OCS) by
purchasing the remaining 90% of OCS. Prior to the acquisition, LaBarge held a
10% equity stake in OCS, which it acquired in October 1997. OCS designs and
markets cellular and network communication system products and Internet services
that provide monitoring and control of remote industrial and municipal utility
equipment. The systems designed by OCS use existing cellular telephone
infrastructure and Internet technologies to provide companies with low-cost,
two-way data communication. OCS has identified broad applications for its
network communication system services, including systems designed to monitor and
control railroad crossing equipment, oil and gas pipelines, industrial process
equipment and power distribution networks. The transaction
6
<PAGE> 7
was accounted for as a purchase, and the results of OCS have been included in
the Company's consolidated results since the date of the acquisition. The
Company recorded $6.8 million of goodwill in other assets as a result of this
transaction. In the transaction, the Company issued its Subordinated Convertible
Notes (the "Convertible Notes") in the aggregate principal amount of $4.3
million in exchange for the outstanding shares of OCS not previously owned by
the Company. LaBarge-OCS, Inc. exchanged 310,000 shares of its common stock (the
"Minority Shares") (approximately 20% of shares outstanding after the
transaction) for previously outstanding options to purchase shares of OCS common
stock. The Minority Shares may be exchanged, at the option of LaBarge, for $1.3
million aggregate principal amount of Convertible Notes at any time after the
first anniversary of the acquisition and prior to June 15, 2000. Because of the
right and intent of the Company to exchange the Minority Shares for Convertible
Notes, $1.3 million is included in other current liabilities on the balance
sheet.
The Convertible Notes are payable in June 2003, bear interest at the rate of
7.5% per annum, and are convertible, at the option of the holders, into shares
of LaBarge Common Stock at a conversion price of $8.00 per share at any time
after the first anniversary of the acquisition and prior to maturity. Holders of
the Convertible Notes are also entitled to receive participation payments from
the Company for each fiscal year through 2003 equal to the amount (if any) by
which 35% of the net income of LaBarge-OCS, Inc. exceeds the 7.5% interest
payable on the Convertible Notes.
In the first quarter of fiscal 1999, LaBarge and Global Research Systems, Inc.
of Rome, Georgia ("Global") formed NotiCom L.L.C. ("NotiCom"), a Georgia limited
liability company, to develop and market electronic systems providing advance
notice of the impending arrival of passenger motor vehicles. The first product
to be marketed by NotiCom is BusCall(TM). BusCall notifies parents by phone when
their children's school bus is approaching their bus stop. It is being marketed
to telephone companies, which can offer BusCall as a value-added service, such
as call waiting and call forwarding. LaBarge is the exclusive manufacturer of
all products sold by NotiCom in the United States and Canada and will recognize
revenues as it sells products to NotiCom. Each of LaBarge and Global has a 50%
interest in NotiCom, except that after an aggregate of $1.0 million has been
distributed by NotiCom, Global will be entitled to 75% of subsequent
distributions until it has received preferred distributions aggregating $1.3
million. LaBarge has invested $1.8 million in cash in NotiCom along with
$500,000 of development services. In addition, LaBarge has paid Global $1.7
million for a 50% interest in technology and has licensed the technology to
NotiCom. The Company has committed to pay Global up to an aggregate of $23.3
million of additional purchase price for its 50% interest in the technology if
NotiCom meets or exceeds cumulative earnings before income tax ("EBT") targets
for the period from July 1, 1998 through December 1, 1999 and through each
six-month period thereafter through December 31, 2001. In order to generate the
maximum purchase price, NotiCom must generate $211.8 million of EBT between July
1, 1998 and December 31, 2001. Because NotiCom is a start-up venture, it is too
early to predict if or to what extent NotiCom may contribute to the Company's
revenues or earnings; therefore, the Company has not recorded the contingent
purchase price. The investment is accounted for using the equity method. For the
nine months ended March 28, 1999, LaBarge's share of the losses from the joint
venture is $514,000.
In the second quarter of fiscal 1998, the Company increased its ownership of
LaBarge Clayco Wireless L.L.C. to 51%. In the second quarter of fiscal 1999, the
Company purchased from Clayco Construction Company an additional 39% of LaBarge
Clayco Wireless L.L.C. for $300,000 to increase its ownership to 90%. Beginning
with the second quarter of fiscal 1998, LaBarge began consolidating 100% of the
results of this unit into its financial statements and
7
<PAGE> 8
deducting the minority interest share before arriving at earnings before income
taxes. The investment was previously recorded using the equity method.
In June 1997, the Company increased its equity investment in TransMedica by $2.0
million by exchanging approximately $1.2 million of current accounts receivable
and investing $800,000 cash. The Company's investment in TransMedica totals $2.3
million, which is carried at cost; the Company owns approximately 9.5% of
TransMedica's common stock. Also during this period, LaBarge finalized revised
agreements with TransMedica concerning our exclusive manufacturing agreement and
negotiated payment terms for open receivables and for future payments for Laser
Lancet(R) units. At March 28, 1999, the Company also has $2.0 million in notes
receivable from TransMedica.
On October 16, 1998, LaBarge filed a Petition for Specific Performance and
Declaratory Judgment against TransMedica in the Circuit Court for St. Louis
County, Missouri, seeking resolution of a dispute regarding LaBarge's rights to
develop and manufacture new laser products and determination of the number of
Laser Lancet devices TransMedica is presently obligated to purchase from
LaBarge. The result of this suit and its effect on the valuation of LaBarge's
investment in, or future sales to TransMedica cannot yet be determined.
Payment of the $2.0 million note receivable is due June 2, 1999. Management
previously has had a valuation of TransMedica completed. Based on this valuation
of TransMedica and the underlying collateral, management continues to believe
TransMedica will make the payment due on June 2, 1999 in order to release
LaBarge's security position in the collateral. Depending on whether or not this
payment is made as scheduled and the future operating plans of TransMedica, the
Company will evaluate its future course of action and reassess the carrying
value of the receivable and investment in TransMedica.
8
<PAGE> 9
5. SHORT AND LONG-TERM OBLIGATIONS
Short-term borrowings, long-term debt and the current maturities of long-term
debt consist of the following:
(dollars in thousands)
<TABLE>
<CAPTION>
MARCH 28, June 28,
1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term borrowings:
Revolving credit agreements:
Balance at period end $ 2,175 $ 5,020
Interest rate at period end 7.10% 6.80%
Average amount of short-term borrowings outstanding during period
$ 1,962 $ 4,751
Average interest rate for period 6.66% 6.94%
Maximum short-term borrowings at any month end $ 2,175 $ 9,250
================================================================================================================
Long-term debt:
Senior lender:
Revolving credit agreements - 2,000
Term loan 10,608 3,000
Mortgage loan 6,102 6,164
Subordinated convertible notes 4,471 -
Other 1,394 101
- ----------------------------------------------------------------------------------------------------------------
22,575 11,265
Less current maturities 1,805 1,102
- ----------------------------------------------------------------------------------------------------------------
Total long-term debt, less current maturities $ 20,770 $ 10,163
================================================================================================================
</TABLE>
The average interest rate was computed by dividing the sum of daily interest
costs by the sum of the daily borrowings for the respective periods.
SENIOR LENDER
The Company amended its lending agreement with NationsBank, N.A. on September
25, 1998. The amended agreement provides a seven-year, unsecured lending
agreement including an $11.0 million term loan payable in quarterly installments
of $393,000 beginning December 31, 1998 and a $15.0 million working capital
revolver. The interest rate on both loans is variable based on the ratio of
senior debt to earnings and is available as either a premium over LIBOR or a
discount from prime rate at the Company's option.
The Company also maintains a revolving credit agreement for a maximum $1.0
million with Mercantile Bank, N.A. that is used by LaBarge Clayco Wireless, Inc.
At the balance sheet dates, $875,000 and $750,000, respectively, were
outstanding under this agreement and included in short-term borrowings.
SUBORDINATED CONVERTIBLE NOTES
On March 2, 1999, the Company, through its subsidiary, LaBarge-OCS, Inc.,
purchased the remaining 90% of OCS for $5.6 million by (i) exchanging its
Subordinated Convertible Notes due June 2003 in the principal amount of $4.3
million for the outstanding shares of OCS and (ii)
9
<PAGE> 10
exchanging 310,000 shares of LaBarge-OCS, Inc. common stock for outstanding
options to purchase OCS common shares. For further details of this transaction,
see Note 4. The Convertible Notes bear interest at 7.5% per annum payable
quarterly beginning June 29, 1999 and are entitled to participation payments if
LaBarge-OCS, Inc. achieves certain levels of earnings before taxes. The Notes
are convertible by the holders into LaBarge Common Stock at $8.00 per share at
any time after the first anniversary of the Notes up to their maturity date. The
310,000 shares of LaBarge-OCS, Inc. common stock may be exchanged, at the option
of the Company, for $1.3 million of Convertible Notes after March 2, 2000, but
before June 15, 2000.
6. MINORITY INTEREST
On May 7, 1996, the Company, through its wholly owned subsidiary LaBarge
Wireless Inc., entered into 50% joint venture with Clayco Construction to form a
company of St. Louis - LaBarge Clayco Wireless L.L.C. The Company reported
results of operations using the equity method of accounting. In the second
quarter of fiscal 1998, the Company increased its ownership of LaBarge Clayco
Wireless L.L.C. to 51%. Beginning with the second quarter fiscal 1998, LaBarge,
Inc. began consolidating 100% of the results of this unit into its financial
statement and deducting the minority interest share before arriving at earnings
before taxes. In the second quarter of fiscal 1999, the Company purchased from
Clayco Construction Company an additional 39% of LaBarge Clayco Wireless L.L.C
for $300,000 to increase its ownership to 90%. The minority interest income for
nine months ending March 28, 1999, was $172,000 compared with a $121,000 loss
for the nine months ending March 29, 1998. The minority holders' interest is
included in other liabilities and is $106,000 at March 28, 1999, compared with
$252,000 at June 28, 1998.
The Company intends to exercise the call agreements of LaBarge-OCS, Inc. and
therefore, is not deducting the minority interest share in its consolidated
results of operations.
7. INCOME TAXES
As of June 28, 1998, the Company had alternative minimum tax credit
carryforwards and investment tax credits of approximately $712,000 available to
reduce future regular federal income taxes.
8. CASH FLOWS
Total cash payments for interest for the three and nine months ended March 28,
1999 were $215,000 and $991,000 compared with $222,000 and $421,000 for the
three and nine months ended March 29, 1998. Cash payments for income taxes for
the three and nine months ended March 28, 1999 were $-0- and $1.7 million,
compared with $669,000 and $2.0 million for the three and nine months ended
March 29, 1998.
10
<PAGE> 11
9. EARNINGS PER COMMON SHARE
Earnings per share are computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 28, March 29, MARCH 28, March 29,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net earnings $ 123 $ 1,270 $ 1,566 $ 3,252
- --------------------------------------------------------------------------------------------------------------------------
DENOMINATOR:
Denominator for basic net
Earnings per share - weighted-
average shares 15,022 15,597 15,263 15,637
Effect of dilutive securities-
Employee stock options 49 110 56 124
- --------------------------------------------------------------------------------------------------------------------------
POTENTIAL COMMON SHARES:
Denominator for diluted net earnings
per shares - adjusted weighted-
average shares and assumed conversions
15,071 15,707 15,319 15,761
- --------------------------------------------------------------------------------------------------------------------------
BASIC NET EARNINGS PER
COMMON SHARE $ .01 $ .08 $ .10 $ .21
==========================================================================================================================
DILUTED NET EARNINGS PER
COMMON SHARE $ .01 $ .08 $ .10 $ .21
==========================================================================================================================
</TABLE>
The effect of conversion of the Subordinated Convertible Notes into common stock
is not considered in the calculations of diluted net earnings per common share
because they would have an anti-dilutive effect on earnings per share as stated
in SFAS No. 128, "Earnings Per Share."
11
<PAGE> 12
LABARGE, INC.
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Statements contained herein, which are not historical facts, are forward-looking
statements that involve risks and uncertainties. Future events and the Company's
actual results could differ materially from those contemplated by those
forward-looking statements. Important factors which could cause the Company's
actual results to differ materially from those projected in, or inferred by,
forward-looking statements are (but are not necessarily limited to) the
following: the impact of increasing competition or deterioration of economic
conditions in the Company's markets, especially the geophysical market; further
cutbacks in defense spending by the U.S. Government; lack of acceptance in the
market of the Laser Lancet developed for TransMedica International, Inc.,
("TransMedica"), formerly Venisect, Inc.; legal actions between LaBarge and
TransMedica regarding contractual issues; the performance of the NotiCom L.L.C.
joint venture; unexpected increases in the cost of raw materials, labor and
other resources necessary to operate the Company's business; the availability,
amount, type, and cost of financing for the Company and any changes to that
financing; and unexpected Year 2000 issues.
LaBarge, Inc. designs, engineers and manufactures sophisticated,
high-performance electronic products and systems for specialized applications in
a variety of industries. The Company provides complete electronic system
solutions through customized applications, design and engineering services, and
product development. As a result, the Company relies heavily on continually
establishing relationships with new customers and maintaining strong
relationships with existing customers who are typically recognized leaders in
the defense, geophysical, commercial aerospace, and telecommunications
industries.
The Company's business strategy is to continue to grow its core design and
manufacturing business by developing or acquiring proprietary capabilities,
technologies and products, and the Company has made certain investments during
the last three fiscal years toward that end. During the last twelve months, the
Company has increased its ownership stake in its LaBarge Clayco Wireless L.L.C.
joint venture to 90% from 50%. LaBarge Clayco Wireless provides cell site
engineering, construction and equipment installation services to the
telecommunications market. The Company's joint venture partner retains a 10%
minority interest in the business, which was launched in 1996.
On March 2, 1999, the Company acquired the remaining 90% of Open Cellular
Systems, Inc. ("OCS") for approximately $5.6 million. The purchase price was
paid by issuing Subordinated Convertible Notes due in June 2003 and bearing
interest of 7.5% per annum payable quarterly beginning June 29, 1999. Each share
of OCS stock was valued at $4.25 in the transaction. Under the terms of the
Notes, each holder has the right to convert the Notes into LaBarge, Inc. Common
Stock at a conversion price of $8.00 per share at any time after the first
anniversary of the Notes up to their maturity date. Further, the noteholders are
entitled to receive participation payments from the Company for each fiscal year
through 2003 equal to the amount by which 35% of the net income of OCS exceeds
the 7.5% interest for the fiscal year.
Initially, on March 2, 1999, 1,008,622 shares of OCS common stock were exchanged
for $4.3 million of Subordinated Convertible Notes. Options to acquire 310,000
shares of OCS common stock were converted to 310,000 shares of common stock of
LaBarge-OCS, Inc., the acquiring subsidiary and represent shares acquired by the
holders through exercise of employee stock options. These shares are callable by
LaBarge, Inc. in accord with a call agreement whereby the
12
<PAGE> 13
Company, at its discretion, may exchange the shares for Subordinated Convertible
Notes at $4.25 per share or $1.3 million after the first anniversary of the
merger (March 2, 2000) and prior to June 15, 2000. This dollar amount is
included in other current liabilities at the balance sheet date due to the call
agreement. The Company recorded goodwill of $68 million in this transaction,
which is reflected in other assets.
In addition, in the first quarter of fiscal 1999, LaBarge and Global Research
Systems, Inc. of Rome, Georgia ("Global"), formed NotiCom L.L.C. ("NotiCom"), a
Georgia limited liability company, to develop and market electronic systems
providing advance notice of the impending arrival of passenger motor vehicles.
The first product to be marketed by NotiCom is BusCall(TM). Buscall uses a
combination of technologies, including Global Positioning System satellite
location data, wireless communications techniques and telephony, that notifies
parents by phone when their children's school bus is approaching the bus stop.
It is being marketed to telephone companies, which can offer BusCall as a
value-added service, such as call waiting and call forwarding. LaBarge is the
exclusive manufacturer of all products sold by NotiCom.
LaBarge and Global each have a 50% interest in NotiCom, except that after an
aggregate of $1.0 million has been distributed by NotiCom, Global will be
entitled to 75% of subsequent distributions until it has received preferred
distributions aggregating $1.3 million. LaBarge has invested $1.8 million in
cash in NotiCom along with $500,000 of development services. In addition,
LaBarge has paid Global $1.7 million for a 50% interest in intellectual property
and has licensed the technology to NotiCom. The Company has committed to pay
Global up to an aggregate of $23.3 million of additional purchase price for its
50% interest in the technology if NotiCom meets or exceeds cumulative earnings
before income tax ("EBT") targets for the period from July 1, 1998 through
December 1, 1999 and through each six-month period thereafter through December
31, 2001. To generate the maximum purchase price, NotiCom must generate $211.8
million of EBT between July 1, 1998 and December 31, 2001.
Because NotiCom is a start-up venture, it is too early to predict if or to what
extent NotiCom may contribute the Company's revenues or earnings; therefore, the
Company has not recorded the contingent purchase price. The investment is
accounted for using the equity method. For the nine months ended March 28, 1999,
LaBarge's share of the losses from the joint venture were $514,000.
In December 1997, the Board of Directors of the Company authorized the
repurchase of up to 1,000,000 shares of LaBarge common stock. In December 1998,
the Board extended the authorization and in January 1999 increased the
authorization to 2,000,000 shares. Through March 28, 1999, approximately 852,000
shares had been repurchased.
For the nine months ended March 28, 1999, approximately 52.4% of the Company's
sales were to customers in commercial markets, including geophysical (18.0%),
telecommunications (14.9%), aerospace (13.4%) and other (6.1%). Two customers
account for in excess of 10% each of total sales for the nine months:
Schlumberger in the geophysical market at 14.3% of total sales; and Lockheed
Martin in the aerospace and defense markets at 25.7% of total sales.
The Company's backlog of firm, unshipped orders at March 28, 1999 was
approximately $44.2 million compared with $67.7 million at March 29, 1998. The
backlog at March 28, 1999 consisted of approximately $25.5 million for various
defense customers and approximately $18.7 million for commercial electronics
customers. This is compared with $43.2 million for defense customers and $24.5
million for commercial customers for the prior year quarter ended March 29,
1998. The decline in defense backlog is primarily attributable to the near
completion of a long-term contract (i.e., AEGIS), for which follow-on orders
have not been placed to date; and customer requested
13
<PAGE> 14
delays in shipments on other programs which has, in turn, delayed reorders.
Approximately $13.5 million of the total backlog is not scheduled to ship within
the next 12 months pursuant to the shipment schedules outlined by our customers.
The Company is currently engaged in litigation with TransMedica International,
Inc. seeking resolution of certain disputes that have arisen between the two
companies concerning the Laser Lancet(R), a small medical laser the Company
developed under an exclusive manufacturing agreement with TransMedica. On
October 16, 1998, the Company filed a Petition for Specific Performance and
Declaratory Judgment in the Circuit Court for St. Louis County, Missouri,
seeking resolution of LaBarge's right to develop and manufacture new laser
product and determination of the number of Laser Lancet devices TransMedica is
presently obligated to purchase from LaBarge.
Since August 1995, the Company has acquired approximately 9.5% of TransMedica's
common stock for $2.3 million. The Company made an initial $250,000 cash
investment in fiscal 1996, and converted approximately $1.2 million of accounts
receivable and provided an additional $800,000 in operating capital in fiscal
1997. In addition, in June 1998, TransMedica issued the Company its interest
bearing promissory note in the amount of $2.0 million and warrants to purchase
an additional 4% of TransMedica stock for $25 per share in exchange for $900,000
of accounts receivable and an additional credit of $1.1 million for new
production of Laser Lancet devices. The note is secured by substantially all of
TransMedica's assets. Management believes the value of the security interest in
the assets of TransMedica supports the carrying value of the note receivable. It
is too early to determine what, if any, effect the litigation mentioned above
will have on either the value of LaBarge's investment in TransMedica (which is
accounted for at cost), or on its future revenues from TransMedica.
Payment of the $2.0 million note receivable is due June 2, 1999. Management
previously has had a valuation of TransMedica completed. Based on this valuation
of TransMedica and the underlying collateral, management continues to believe
TransMedica will make the payment due on June 2, 1999 in order to release
LaBarge's security position in the collateral. Depending on whether or not this
payment is made as scheduled and the future operating plans of TransMedica, the
Company will evaluate its future course of action and reassess the carrying
value of the receivable and investment in TransMedica.
14
<PAGE> 15
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 28, 1999
COMPARED TO NINE MONTHS ENDED MARCH 29, 1998
Net sales for the nine months ended March 28, 1999 were $70.0 million compared
with $70.7 million for the nine months ended March 29, 1998. Sales to customers
in the geophysical market continue to be depressed due to the slump in the oil
industry. In addition, third quarter 1999 revenues from the defense market were
down due to reductions in AEGIS sales. This lower volume has been replaced by
sales from LaBarge Clayco Wireless, Inc.
Gross profit for the nine months ended March 28, 1999 was $14.4 million, 20.6%
of sales, compared with $15.9 million, 22.5% of sales, for the nine months ended
March 29, 1998. Gross margin was negatively effected by lower volume. Further,
gross margin was affected by increased costs associated with added capacity
brought on-line in the last year which is currently under utilized due to lower
than planned volume.
Selling and administrative expenses for the nine months ended March 28, 1999
were $10.5 million or 15.0% of sales, compared with $10.0 million or 14.2% of
sales for the nine months ended March 29, 1998. The majority of the increase is
due to inclusion of LaBarge Clayco Wireless for nine months in fiscal 1999,
versus only six months in fiscal 1998.
Interest expense for the nine months ended March 28, 1999 was $1.0 compared with
$624,000 for the nine months ended March 29, 1998. Interest expense has
increased due to an increase in debt incurred in connection with: the purchase
of the Company's headquarters in St. Louis, Missouri for $6.2 million in January
1998; the investment in NotiCom L.L.C. and technology related thereto, totaling
$4.0 million in July 1998, the financing of the expansion of our Berryville,
Arkansas facility for $1.4 million in September 1998; additional investment in
TransMedica totaling approximately $2.3 million; and the addition of
Subordinated Convertible Notes of $4.3 million for the purchase of Open Cellular
Systems, Inc.
Equity in loss of joint ventures for the nine months ended March 28, 1999 was
$514,000 compared with $94,000 for the nine months ended March 29, 1998. These
amounts represent the Company's share of losses incurred by NotiCom L.L.C. for
the period ended March 28, 1999 and LaBarge Clayco Wireless L.L.C. for the
period ending March 29, 1998. In the second quarter of fiscal 1998, the Company
increased its ownership of LaBarge Clayco Wireless L.L.C. to 51%. At that time,
LaBarge, Inc. began consolidating 100% of the results of this unit into its
financial statements and deducting the minority interest before arriving at
earnings before taxes. The minority interest share of profit for the nine months
ended March 28, 1999 was $172,000 versus a $121,000 share of loss for the nine
months ended March 29, 1998.
Other income for the nine months ended March 28, 1999, was $302,000 compared
with $(98,000) for the nine months ended March 29, 1998. This increase is the
result of the purchase of our corporate headquarters in St. Louis, Missouri and
the revenues and expenses resulting from the leasing of space in that building
to third parties.
Income tax expense for the nine months ended March 28, 1999 was $916,000
compared with $1.9 million for the nine months ended March 29, 1998. The
effective tax rate for both periods was approximately 37%.
15
<PAGE> 16
Diluted net earnings per common share were $.10 for the nine months ended March
28, 1999, and $.21 for the nine months ended March 29, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 28, 1999
COMPARED TO THREE MONTHS ENDED MARCH 29, 1998
Net sales for the three months ended March 28, 1999 were $21.6 million, compared
with $27.0 million for the three months ended March 29, 1998. This is a 20.1%
decrease and is attributable to lower sales in the geophysical market due to
softness in the oil industry and lower defense market sales due to the wind-down
of the long-term AEGIS program.
Gross profit for the three months ended March 28, 1999 was $4.2 million or 19.7%
of sales, compared with $6.0 million or 22.2% of sales, for the three months
ended March 29, 1998. Gross margin was negatively effected by lower volume.
Further, gross margin was affected by increased costs associated with added
capacity brought on-line in the last year which is currently under utilized due
to lower than planned volume.
Selling and administrative expenses were $3.5 million or 16.2% of sales, for the
three months ended March 28, 1999, compared with $3.6 million or 13.5% of sales,
for the three months ended March 29, 1998. Interest expense for the three months
ended March 28, 1999 was $370,000, compared with $298,000 for the three months
ended March 29, 1998. Interest expense has increased due to an increase in debt
incurred in connection with: the investment in NotiCom L.L.C, totaling $4.0
million in July 1998, the financing of the expansion of our Berryville, Arkansas
facility for $1.4 million in September 1998; additional investment in
TransMedica totaling approximately $2.3 million and the purchase of Open
Cellular Systems, Inc. by issuing Subordinated Convertible Notes of $4.3
million.
Income tax expense for the three months ended March 28, 1999 was $72,000,
compared with $734,000 for the three months ended March 29, 1998. The effective
tax rate for both periods was approximately 37%.
Diluted earnings per common share were $.01 for the three months ended March 28,
1999 and $.08 for the three months ended March 29, 1998.
FINANCIAL CONDITION & LIQUIDITY
Cash and cash equivalents at March 28, 1999 were $725,000 compared with $540,000
at June 28, 1998. The cash amount held in escrow for the final payments on the
construction of the Berryville facility expansion at March 28, 1999 was
$298,000.
Accounts and notes receivable at March 28, 1999, were $15.3 million compared
with $18.3 million at June 28, 1998, a decrease of $3.0 million.
Inventories at March 28, 1999 and June 28, 1998 were $16.7 million and $19.0
million, respectively, a decrease of $2.3 million.
16
<PAGE> 17
During the nine months ended March 28, 1999, the Company purchased $2.8 million
in property, plant and equipment including $1.4 million for the Berryville plant
expansion.
Also during the nine months ended March 28, 1999, the Company purchased 852,000
shares of its common stock for approximately $2.0 million under its Stock
Repurchase Program.
During the nine months of the current fiscal year, the Company invested $4.0
million in NotiCom L.L.C., a joint venture between the Company and Global
Research Systems, Inc. The Company also purchased all of the remaining common
stock of Open Cellular Systems, Inc. for $4.3 million in Subordinated
Convertible Note due in June 2003.
In September 1998, the Company amended its lending agreement with NationsBank,
N.A., extending the term of the agreement, converting its short-term debt of
$4.3 million to long-term and adding additional long-term debt of $1.8 million.
In addition, other long-term debt of $1.4 million was added via an Industrial
Revenue Bond to expand the Berryville plant.
YEAR 2000
We rely on computer technology for much of our operations. We have been
analyzing all of our information and data systems for possible Year 2000, or
Y2K, problems.
We have completed testing of our basic manufacturing system, which covers our
accounting, billing, accounts payable and manufacturing operations, and have
concluded that this system, which uses a four-digit date field, is Y2K
compliant. We do not anticipate any significant Y2K problems with our basic
system.
In addition to our internal systems, we are dependent on the systems of
third-party vendors for certain of our operations. For instance, our payroll is
dependent upon a system operated by a third-party vendor. We have received
certification from this vendor that the system is Y2K compliant. We are
communicating with our other outside trading partners in order to assess their
Y2K readiness. These include, among others, our customers and suppliers. We have
received assurances of Y2K compliance from the substantial majority of the major
outside trading partners upon whom we rely and, while there can be no assurance
that they will be Y2K compliant, we believe that the significant third parties
upon whom we are dependent are or expect to be Y2K compliant before the end of
1999. Based upon information already gathered from these parties, we do not
presently have reason to believe that there will be Y2K problems with these
third parties that would impair our normal operations. We intend to complete our
communications with our outside trading partners prior to December 31, 1999.
We believe that the most reasonably likely worst-case scenario due to our
internal and third-party external systems not being Y2K compliant would be the
inability to perform our manufacturing activities and ship products in the most
time-efficient manner and thereby meet customer deadlines. This could have a
negative impact on our relationships with our customers and an adverse effect on
our financial condition and results of operations.
Currently, we have no written Y2K contingency plan. Costs incurred to date for
Y2K remediation activity have been immaterial and have been included in
operating expenses. We do not anticipate any material costs for remaining Y2K
compliance efforts, and we have not included any expenditures for Y2K compliance
in our budget. However, there can be no assurance that our additional expenses
will not be significant.
17
<PAGE> 18
SIGNATURE
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.
LABARGE, INC.
-------------
Date May 11, 1999
------------
/s/ William J. Maender
------------------------
William J. Maender
Vice President - Finance,
Treasurer and Secretary
18
<PAGE> 19
PART II
-------
Exhibit 10.9 First Amendment to the LaBarge, Inc. Employee
Stock Purchase Plan
19
<PAGE> 1
EXHIBIT 10.9
FIRST AMENDMENT
TO THE
LABARGE, INC. EMPLOYEE STOCK PURCHASE PLAN
WHEREAS, LaBarge, Inc. (the "Company"), a Delaware corporation,
adopted the LaBarge, Inc. Employee Stock Purchase Plan (the "Plan") on January
28, 1998; and
WHEREAS, the Company wants to amend the Plan;
NOW, THEREFORE, the Company amends the Plan effective April 1,
1999 in the following respects:
Delete Section 5.01 and insert the following new Section 5.01 in
lieu thereof:
5.1 Amount of Deduction
At the time a Participant files his or her
authorization for payroll deduction, he or she shall elect to
have deductions made from his or her pay on each payday
during the time he or she is a Participant in an offering
either in a whole dollar amount or at a whole percentage rate
of 1 through 10 percent of his or her Base Pay in effect at
the Offering Commencement Date of Such Offering, provided,
however, that such payroll deduction must not be less than
$5.00 for a weekly payroll period or $10.00 for a biweekly
pay period, and must not exceed 10 percent of Base Pay. In
the case of an hourly Employee, such Employee's hourly rate
of pay in effect on the Offering Commencement Date by the
number of regularly scheduled hours of work for such Employee
during such Offering.
IN WITNESS WHEREOF, the undersigned has caused this amendment
to be adopted this 28th day of April 1999.
LaBarge, Inc.
By: /s/Craig E. LaBarge/s
---------------------
Craig E. LaBarge, President
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