UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10 - Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the period ended October 31, 1998.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission file number 0-15407
Circuit Systems, Inc.
(Exact name of registrant as specified in charter)
Illinois 36-2663010
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2400 East Lunt Avenue, Elk Grove Village, Illinois 60007
(Address of principal executive offices) (Zip Code)
2350 E. Lunt Avenue
(847) 439 - 1999 Elk Grove Village, IL 60007
(Registrant's telephone number, (Former name, former address
including area code) 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
subject to such filing requirements for the past 90 days. Yes X No .
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15 (d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes No .
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the
latest practicable date: November 30, 1998, 4,120,167.
<PAGE>
CIRCUIT SYSTEMS, INC.
AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Operations 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risks 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
<TABLE>
CIRCUIT SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
10/31/98 4/30/98
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS . . . . . . $ 368,193 $ 1,531,526
ACCOUNTS RECEIVABLE, LESS ALLOWANCE
OF $150,000. . . . . . . . . . . . 14,417,943 14,286,084
INVENTORIES
RAW MATERIALS. . . . . . . . . . 3,191,737 3,118,101
WORK IN PROCESS. . . . . . . . . . 2,339,685 2,533,346
FINISHED GOODS. . . . . . . 3,371,293 2,863,661
---------- ----------
8,902,715 8,515,108
REFUNDABLE INCOME TAXES . . . . . . . 1,044,124 1,150,000
DEFERRED INCOME TAXES. . . . . . . . 330,000 330,000
PREPAID EXPENSES. . . . . . . . . . . 611,075 572,082
---------- ----------
TOTAL CURRENT ASSETS. . . . . . . 25,674,050 26,384,800
INVESTMENT IN AFFILIATE. . . . . . . . . . 3,005,592 2,930,595
PROPERTY, PLANT AND EQUIPMENT - AT COST
BUILDING AND IMPROVEMENTS. . . . . . . 13,691,197 13,686,852
MACHINERY AND EQUIPMENT. . . . . . . . 44,985,135 43,073,334
AUTOMOTIVE EQUIPMENT. . . . . . . . . 85,481 98,938
---------- ----------
58,761,813 56,859,124
LESS ACCUMULATED DEPRECIATION. . . 25,237,568 22,740,838
---------- ----------
33,524,245 34,118,286
LAND. . . . . . . . . . . . . . . 2,506,703 2,693,089
---------- ----------
36,030,948 36,811,375
OTHER ASSETS
DEPOSITS AND SUNDRY. . . . . . . . . . 1,042,207 1,479,927
---------- ----------
TOTAL ASSETS. . . . . . . . . . . $65,752,797 $67,606,697
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
<PAGE>
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF L/T OBLIGATIONS. $ 5,555,492 $ 7,088,855
ACCOUNTS PAYABLE. .. . . . . . . . . . 8,979,474 10,203,540
ACCRUED LIABILITIES. . . . . . . . . . 2,790,667 1,880,966
INCOME TAXES PAYABLE . . . . . . . . . 527,018 -
---------- ----------
TOTAL CURRENT LIABILITIES. . . . . 17,852,651 19,173,361
LONG-TERM OBLIGATIONS. . . . . . . . . . . 27,861,974 27,380,107
DEFERRED INCOME TAXES. . . . . . . . . . . 2,283,000 2,108,000
MINORITY INTEREST. . . . . . . . . . . . . - 417,878
SHAREHOLDERS EQUITY
COMMON STOCK. . . . . . . . . . . . . 2,301,468 2,554,579
RETAINED EARNINGS. . . . . . . . . . . 15,453,704 16,107,750
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENT. . . . . . - (134,978)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY. . 17,755,172 18,527,351
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $65,752,797 $67,606,697
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
</TABLE>
<PAGE>
<TABLE>
CIRCUIT SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
10/31/98 10/31/97 10/31/98 10/31/97
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES. . . . . . . $25,101,583 $20,473,136 $47,655,296 $33,395,754
COST OF GOODS SOLD. . . 21,021,036 18,242,125 40,522,254 30,525,683
---------- ---------- ---------- ----------
GROSS PROFIT. . . . 4,080,547 2,231,011 7,133,042 2,870,071
SALES AND MARKETING
EXPENSES. . . . . . . . 843,767 729,079 1,637,932 1,369,168
ADMINISTRATIVE EXPENSES 741,038 645,503 1,654,089 1,233,858
RESTRUCTURING CHARGE. . - - 1,520,000 -
---------- ---------- ---------- ----------
1,584,805 1,374,582 4,812,021 2,603,026
---------- ---------- ---------- ----------
OPERATING INCOME. . 2,495,742 856,429 2,321,021 267,045
OTHER(INCOME)DEDUCTIONS
INTEREST EXPENSE. . 712,725 661,154 1,439,904 1,016,157
GAIN ON SALE OF
EQUIPMENT. . . . . - (325) - (325)
EQUITY IN EARNINGS
OF UNCONSOLIDATED
AFFILIATE. . . . (71,208) (45,960) (74,997) (78,488)
MINORITY INTEREST IN
LOSS OF SUBSIDIARY. - (22,817) (31,782) (51,192)
RENTAL INCOME. . . (100,460) (118,460) (204,520) (209,320)
SUNDRY. . . . . . . (6,950) (1,827) 4,740 (20,155)
---------- ---------- ---------- ----------
534,107 471,775 1,133,345 656,677
---------- ---------- ---------- ----------
EARNINGS (LOSS)
BEFORE INCOME TAXES 1,961,635 384,654 1,187,676 (389,632)
INCOME TAX EXPENSE
(BENEFIT) 722,000 168,000 447,000 (104,000)
---------- ---------- ---------- ----------
NET EARNINGS (LOSS). $ 1,239,635 $ 216,654 $ 740,676 $ (285,632)
PER SHARE DATA
NET EARNINGS (LOSS) PER
COMMON SHARE - BASIC $ 0.29 $ 0.04 $ 0.17 $ (0.06)
========== ========== ========== ==========
NET EARNINGS (LOSS) PER
COMMON SHARE - DILUTED.$ 0.29 $ 0.04 $ 0.17 $ (0.06)
========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
</TABLE>
<PAGE>
<TABLE>
CIRCUIT SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
10/31/98 10/31/97
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS (LOSS). . . . . . . . . $ 740,676 $ (285,632)
ADJUSTMENTS TO RECONCILE NET
EARNINGS (LOSS) TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION. . . . . . . . . . . . 2,593,016 2,166,059
GAIN ON SALE OF PROPERTY & EQUIPMENT - (325)
DEFERRED INCOME TAXES. . . . . . . 175,000 (64,000)
MINORITY INTEREST IN LOSS OF
SUBSIDIARY. . . . .. . . . . . . (31,782) (51,192)
EQUITY IN EARNINGS OF
UNCONSOLIDATED AFFILIATE . . . . (74,997) (78,488)
CHANGES IN ASSETS AND LIABILITIES,
NET OF EFFECTS FROM ACQUISITION AND
DIVESTITURE:
ACCOUNTS RECEIVABLE. . . . . . . . (516,195) (5,870,026)
INVENTORIES. . . . . . . . . . . . (648,246) (1,521,035)
PREPAID EXPENSE. . . . . . . . . . (38,993) 15,848
OTHER ASSETS . . . . . . . . . . . 404,413 (115,954)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 679,201 2,280,617
---------- ----------
TOTAL ADJUSTMENTS . . . . . 2,541,417 (3,238,496)
---------- ----------
NET CASH PROVIDED BY (USED
IN) OPERATIONS . . . . . . 3,282,093 (3,524,128)
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES. . . . . . . . (3,439,458) (1,497,275)
PROCEEDS FROM SALE OF EQUIPMENT . . - 325
MINORITY INTEREST CAPITAL
CONTRIBUTION TO SUBSIDIARY. . . . . - 12,047
PAYMENT FOR PURCHASE OF PRINTED
CIRCUIT BOARD OPERATION OF PHILIPS - (10,150,000)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES. (3,439,458) (11,634,903)
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
NET BORROWINGS UNDER LINE OF CREDIT. . 2,543,240 8,331,778
PROCEEDS FROM LONG-TERM OBLIGATIONS. . 365,750 10,898,632
REPURCHASE OF COMMON STOCK . . . . . . (872,832) (1,075,721)
PAYMENTS ON LONG-TERM OBLIGATIONS. . . (3,049,452) (2,649,005)
---------- ----------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES. . . . . (1,013,294) 15,505,684
EFFECT OF FOREIGN EXCHANGE RATE CHANGES. 7,236 (6,284)
---------- ----------
(DECREASE) INCREASE IN CASH. . . . . . . (1,163,333) 340,369
CASH AT THE BEGINNING OF THE PERIOD. . . 1,531,526 294,204
---------- ----------
CASH AT THE END OF THE PERIOD. . . . . . $ 368,193 $ 634,573
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
INTEREST. . . . . . . . . . . . $ 1,403,799 $ 1,001,514
INCOME TAXES. . . . . . . . . . (105,876) 320,227
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
DIVESTITURE OF NET INVESTMENT IN CIRCUIT
SYSTEMS(INDIA) LIMITED AND CIRCUIT SIGMA
INDIA LIMITED IN SATISFACTION OF CERTAIN
ACCRUED LIABILITIES AND REPURCHASE OF
COMMON STOCK. . . . . . . . . . . . $ 1,270,049 $ -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
</TABLE>
<PAGE>
CIRCUIT SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. These interim Consolidated Condensed Financial Statements
should be read in conjunction with the Consolidated Financial
Statements and notes included in the Company's April 30, 1998
Annual Report and Form 10-K.
2. In the opinion of the Company, the accompanying unaudited
condensed consolidated financial information reflects all
adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the statements contained
herein.
3. These consolidated statements are presented in accordance
with the requirements of Form 10-Q and consequently may not
include all disclosures normally required by generally
accepted accounting principles normally made in the Company's
Annual Report and Form 10-K.
4. The following table illustrates a reconciliation of the basic
and diluted earnings per share calculations.
Three Months Ended Six Months Ended
10/31/97 10/31/97
Net Earnings (Loss) $ 216,654 $(285,632)
======== ========
Shares Per Share Shares Per Share
Amount Amount
--------- -------- --------- --------
Basic Earnings (Loss) per Share 5,015,741 $ 0.04 5,056,792 $ (0.06)
Effect of Dilutive Securities:
Stock Options 29,297 - N/A N/A
--------- -------- --------- --------
Diluted Earnings (Loss) per Share 5,045,038 $ 0.04 5,056,792 $ (0.06)
========= ======== ========= ========
Three Months Ended Six Months Ended
10/31/98 10/31/98
Net Earnings $1,239,635 $ 740,676
========= ========
Shares Per Share Shares Per Share
Amount Amount
--------- -------- --------- --------
Basic Earnings (Loss) per Share 4,281,228 $ 0.29 4,425,262 $ 0.17
Effect of Dilutive Securities:
Stock Options - - - -
--------- -------- --------- --------
Diluted Earnings (Loss) per Share 4,281,228 $ 0.29 4,425,262 $ 0.17
========= ======== ========= ========
<PAGE>
CIRCUIT SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Effective for the quarter ended July 31, 1998, the Company
adopted the provisions of Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income", which
requires that an entity report, by major components and as a
single total, the change in its net assets during the period
from non-shareholder resources. Total comprehensive income
(loss) for the three months and six months ended October 31,
1998 was $1,239,635 and $821,662, respectively, and for the
three months and six months ended October 31, 1997 was
$209,844 and $(289,402) , respectively.
6. Effective July 27, 1998, the Company's executive vice
president resigned as an officer and director of the Company.
In connection therewith, the Company agreed to repurchase
the 181,181 shares held by him for $775,000 and entered into
severance and non-compete agreements and agreed to sell to
him its 70% interest in Circuit Systems (India) Limited and
its 100% interest in Circuit Sigma India Limited.
In addition, during the quarter ended July 31, 1998, the
Company recorded a restructuring charge of approximately
$1,520,000, relating to a reorganization of the Company's
management and plant operations. The majority of the
restructuring charge relates to severance and termination
benefits for its executive vice president and five other
managers and supervisors.
7. On August 25, 1998, the Company announced that it entered into
a nonbinding letter of intent with the three shareholders of
Silicon Valley Printed Circuits ("SV") of Santa Clara,
California, to acquire the assets and assume certain
liabilities of SV. SV specializes in quick turnaround
production for both prototype and low to medium volume orders.
Through the Company's newly formed subsidiary, SVPC Circuit
Systems, Inc. ("SVPC"), the acquisition was completed on
December 7, 1998 with an effective date of December 1, 1998.
The purchase price was $7,000,000 plus the assumption of
certain liabilities of approximately $5,000,000. The
purchase price will be funded utilizing $3,000,000 of
collateralized bank borrowings (due to SV on January 4, 1999)
plus $4,000,000 in subordinated notes, payable over 60 months.
The acquisition will be accounted for as a purchase. The
purchase price, including direct costs of acquisition, will be
allocated to the assets acquired and liabilities assumed based
upon their estimated fair values when all of the necessary
information becomes available. Results of operations for SVPC
will be included with those of the Company for periods
subsequent to the effective date of the acquisition. The excess
of the purchase price over the net assets acquired, which is
expected to exceed $6,000,000, will be amortized to operations
over 10 years.
<PAGE>
In consideration of the acquisition of SV, the Company's
commercial lender increased the line of credit to $18,000,000
during December, 1998. The overall line consists of
$15,000,000, which matures August 31, 2000 and $3,000,000,
which matures on August 31, 1999. The line has various pricing
grids (based on certain debt to tangible net worth ratios),
which will initially bear interest at the bank's prime rate
(7.75% at November 30, 1998) plus 1/4% , or the Company may
borrow $1,000,000 increments at LIBOR plus 3%. The maximum
borrowings of $18,000,000 is limited to 80% of eligible
accounts receivable, 75% of eligible finished goods (not to
exceed $2,500,000) and 50% of eligible raw material inventory
(not to exceed $2,500,000).
CIRCUIT SYSTEMS, INC.
AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but
are not limited to, those discussed herein, as well as those
discussed in the Company's Annual Report on Form 10-K for the
year ended April 30, 1998. Reliance on these forward-looking
statements reflect management's analysis only as of the date
hereof. The Company undertakes no obligation to publicly
release the results of any revision to these forward-looking
statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of
unanticipated events. Although the Company believes the
expectations expressed in such forward-looking statements are
based on reasonable assumptions within the bounds of its
knowledge of its business, a number of factors could cause
actual results to differ materially from those expressed in any
forward-looking statements, whether oral or written, made by or
on behalf of the Company. Many of these factors have
previously been identified in filings or statements made by or
on behalf of the Company. The Company does not intend to
update these forward-looking statements.
Reference to "IL" hereinafter refers to the Company's Illinois
operations only; reference to "CST" refers to Circuit Systems
of Tennessee; reference to "CSIL" refers to Circuit Systems
(India) Limited.
<PAGE>
Net sales for the quarter ended October 31, 1998, were
$25,102,000, increasing by 23% when compared to $20,473,000 for
the same quarter last year. The net sales of IL, CST, and CSIL
for fiscal 1999 were $17,668,000, $7,434,000 and $0,
respectively, as compared to $14,376,000, $5,992,000 and
$105,000, respectively, for fiscal 1998. The increase in sales
is primarily due to new or increased activity from new
customers as well as increased demand from the current customer
base. Net sales to three customers accounted for approximately
$15,980,000 or 64% for the quarter ended October 31, 1998,
compared to five customers representing approximately
$15,969,000 or 78% of net sales for the same quarter last year.
Gross profit for the quarter was $4,081,000 or 16.3% of net
sales, compared to $2,231,000 or 10.9% of net sales for the
same quarter last year. The increase in the gross profit is
primarily due to the increase in the net sales as well as a
decrease in the material and labor costs as a percentage of net
sales which is attributable to better operating efficiencies
and yields. Overhead expenses have increased by approximately
$1,300,000 partially due to the overall increased
infrastructure of the Company's facilities. Overall, margins
have and will continue to be impacted as a result of continued
pricing pressures, primarily from Asian competition.
The net sales for the six months ended October 31, 1998 were
$47,655,000, increasing by 43% from $33,396,000 for the same
period last year. CST sales for the 1997 period were included
from July 28, 1997, the date of acquisition. The net sales of
IL, CST and CSIL for fiscal 1999 were $34,405,000, $12,638,000
and $612,000, respectively, as compared to $26,961,000,
$6,262,000 and $173,000, respectively, for fiscal 1998. Net
sales to three individual customers accounted for approximately
58% compared to the same period last year in which four
customers accounted for approximately 66% of net sales. The
gross profit for the six months ended October 31, 1998 was
$7,133,000 or 15.0% of net sales, compared to $2,870,000 or
8.6% of net sales for the same period in the prior year. The
gross profit for the Company was affected by the same factors
as noted above.
Sales and marketing, and administrative expenses for the three
and six months ended October 31, 1998, were $1,585,000 or 6.3%
of net sales and $3,292,000 or 6.9% of net sales, respectively,
compared to $1,375,000 or 6.7% of net sales and $2,603,000 or
7.8% of net sales, respectively, for the same periods last
year. The decrease in expenses as a percentage of net sales
is partially due to a majority of CST revenue base not being
subject to sales commissions as well as the overall increase in
Company sales.
<PAGE>
CIRCUIT SYSTEMS, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating expenses for the six months ended October 31, 1998
also included a restructuring charge of $1,520,000 (which was
recorded in the first quarter) relating to the reorganization
of the Company's management and plant operations. The majority
of the charge relates to severance and other termination
benefits for an executive vice president and five other
managers and supervisors. Excluding the restructuring charge,
income from operations was $3,841,000 or 8.1% of net sales for
the six months ended October 31, 1998 compared to income from
operations of $267,000 or 0.8% of net sales in the prior year.
Other deductions-net for the three and six months ended October
31, 1998, were $534,000 and $1,133,000, respectively, compared
to $472,000 and $657,000, respectively, for the same periods in
the prior year. Interest expense increased to $713,000 and
$1,440,000, respectively, in 1998, compared to $661,000 and
$1,016,000, respectively, for the same periods last year. The
increase is due to the debt incurred to acquire the Phillip's
operation in July 1997 and increased borrowing under the line
of credit to fund the additional working capital needs of the
IL and CST operations and the Company's stock repurchases
during fiscal 1998 and 1999.
The effective income tax rate for the six months ended October
31, 1998 is 37.6%, compared to the 1997 rate of (26.7)%. The
lower effective tax rate in 1997 was due to the inability to
recognize the tax effects of certain foreign net operating
losses.
The net earnings and diluted earnings per share for the three
months and six months ended October 31, 1998, were $1,240,000 or
$.29, and $741,000 or $.17, compared to net earnings (loss) and
diluted earnings (loss) per share of $217,000 or $.04 and
$(286,000) or $(.06) for the three and six month periods in the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations, capital
expenditures, stock repurchases and debt payment requirements
through its line of credit, other collateralized borrowings and
cash generated from operations.
<PAGE>
CIRCUIT SYSTEMS, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Effective December 1, 1998, the Company, through its newly formed
subsidiary, SVPC Circuit Systems, Inc., completed the acquisition
of assets and assumption of certain liabilities of Silicon Valley
Printed Circuits ("SV") of Santa Clara, California. SV
specializes in quick turnaround production for both prototype and
low to medium volume orders. The purchase price was $7,000,000
plus the assumption of certain liabilities of approximately
$5,000,000. The purchase price will be funded utilizing
$3,000,000 of collateralized bank borrowings (due to SV on
January 4, 1999) plus $4,000,000 in subordinated notes payable
over 60 months. The acquisition will be accounted for as a
purchase. The purchase price, including direct costs of
acquisition, will be allocated to the assets acquired and
liabilities assumed based upon their estimated fair values when
all of the necessary information becomes available. Results of
operations for SVPC will be included with those of the Company
for periods subsequent to the effective date of the acquisition.
The excess of the purchase price over the net assets acquired,
which is expected to exceed $6,000,000, will be amortized to
operations over 10 years.
In consideration of the acquisition of SV, the Company's
commercial lender increased the line of credit to $18,000,000
during December 1998. The overall line consists of $15,000,000,
which matures August 31, 2000 and $3,000,000, which matures on
August 31, 1999. The line has various pricing grids (based on
certain debt to tangible net worth ratios), which will initially
bear interest at the bank's prime rate (7.75% at November 30,
1998)plus 1/4% or the Company may borrow in $1,000,000 increments
at LIBOR plus 3%. The maximum borrowings of $18,000,000 is
limited to 80% of eligible accounts receivable, 75% of eligible
finished goods (not to exceed $2,500,000) and 50% of eligible raw
material inventory (not to exceed $2,500,000). At October 31,
1998, there was approximately $1,380,000 of unused credit
available under the line of credit (based upon a total facility
of $15,000,000 at October 31, 1998). The agreement contains
certain covenants which have been amended, which restrict the
amount of dividends the Company could pay, capital stock
redemptions, and capital expenditures. Other financial covenants
pertain to the maintenance of specified current debt to tangible
net worth and debt service ratio and tangible net worth as
defined. The Company was in violation of its capital stock
redemption covenant which has since been waived by the bank.
<PAGE>
Effective July 27, 1998, the Company's executive vice president
resigned as an officer and director of the Company. In
connection therewith, the Company agreed to repurchase the
181,181 shares held by him for $775,000 and entered into
severance and non-compete agreements and agreed to sell to him
its 70% interest in Circuit Systems (India) Limited and its
100% interest in Circuit Sigma India Limited. The net cash
outlay to the former officer is approximately $400,000.
The Company has purchase commitments as of October 31, 1998 of
approximately $3,400,000 for future deliveries of machinery and
equipment and building improvements/furniture for the 2400 E.
Lunt Avenue property. The Company has completed the move of
a majority of its administrative staff to this location. The
Company intends to finance such purchases through collateralized
borrowings and existing cash flow. The amount of anticipated
capital expenditures will frequently change based on future
changes in business plans.
CIRCUIT SYSTEMS, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's backlog at October 31, 1998 is approximately
$16,419,000, which included approximately $4,900,000 for CST,
compared to $18,615,000 at October 31, 1997, which included
approximately $6,230,000 for CST. Backlog is comprised of
orders for which artwork has been received, a delivery date has
been scheduled and the Company reasonably anticipates it will
manufacture and deliver the order. The majority of the October
31, 1998 backlog is scheduled to be shipped within
approximately 4 months. The reliability of backlog as an
indicator of future sales varies substantially with the make-up
of customers' orders and the Company's scheduled production
and delivery dates. A significant portion of the Company's
backlog at any time may be subject to cancellation or
postponement without penalty.
YEAR 2000 COMPLIANCE
During the first six months, the Company continued its Year 2000
compliance project as previously discussed in its 1998 Form 10-
K. The Company has hired an independent consulting firm and the
evaluation phase process has begun whereby the firm will verify
the inventory of all existing Company hardware application as
well as the relevant software portfolio required to run these
applications such as operating systems, workstations, source
codes, databases, data files, etc.
The Company believes that the costs of the Year 2000 compliance
project are consistent with its previous estimates.
<PAGE>
The Company anticipates completion of the Year 2000 project by
mid 1999. The Company's assessments and plans to complete its
Year 2000 project are based upon management's best estimates,
which were derived utilizing presently available information and
numerous assumptions about future events such as availability of
certain resources, ability to identify and correct relevant codes
and other uncertainties. The Company believes that its
compliance with Year 2000 issues will not have a material impact
on its business, operations or financial condition.
Item 3. Quantitative and Qualitative Disclosures about Market
Risks
Not Applicable.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
(b)Reports on Form 8-K
None.
<PAGE>
CIRCUIT SYSTEMS, INC.
AND SUBSIDIARIES
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, registrant's principal
financial officer, thereunto duly authorized.
Circuit Systems, Inc.
(registrant)
/s/ James E. Robbs
James E. Robbs
Chief Financial Officer
(Principal Financial Officer)
December 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY OF FINANCIAL
INFORMATION EXTRACTED FROM FORM 10 - Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> OCT-31-1998
<CASH> 386,193
<SECURITIES> 0
<RECEIVABLES> 14,567,943
<ALLOWANCES> 150,000
<INVENTORY> 8,902,715
<CURRENT-ASSETS> 25,674,050
<PP&E> 61,268,516
<DEPRECIATION> 25,237,568
<TOTAL-ASSETS> 65,752,797
<CURRENT-LIABILITIES> 17,852,651
<BONDS> 27,861,974
0
0
<COMMON> 2,301,468
<OTHER-SE> 15,453,704
<TOTAL-LIABILITY-AND-EQUITY> 65,752,797
<SALES> 47,655,296
<TOTAL-REVENUES> 47,655,296
<CGS> 40,522,254
<TOTAL-COSTS> 40,522,254
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,439,904
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<INCOME-CONTINUING> 740,676
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<CHANGES> 0
<NET-INCOME> 740,676
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