FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1996
Commission file number 0-23528
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
(Name of small business issuer in its charter)
Delaware 13-3421337
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6638 OLD WAKE FOREST ROAD
RALEIGH, NORTH CAROLINA 27616
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (919) 876-6049
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0025 par value per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained in this form, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment of this Form 10-KSB. X
The aggregate market value of the registrant's Common Stock at October
28, 1996 held by those persons deemed by the registrant to be non-affiliates was
approximately $5,273,298.
As of October 28, 1996, there were 5,527,452 shares of the registrant's
Common Stock, $.0025 par value per share, outstanding.
State issuer's revenues for its most recent fiscal year: $2,613,590.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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PART I
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Item 1. Description of Business.........................................................................3
Item 2. Description of Property........................................................................10
Item 3. Legal Proceedings..............................................................................10
Item 4. Submission of Matters to a Vote of Security Holders............................................10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.......................................11
Item 6. Management's Discussion and Analysis or Plan of Operation......................................11
Item 7. Financial Statements...........................................................................17
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure............................................................35
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.....................................36
Item 10. Executive Compensation.........................................................................37
Item 11. Security Ownership of Certain Beneficial Owners and
Management.....................................................................................38
Item 12. Certain Relationships and Related Transactions.................................................39
Item 13. Exhibits and Reports on Form 8-K...............................................................40
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Information set forth in this Report contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which statements represent EMSG's reasonable judgment concerning the future and
are subject to risks and uncertainties that could cause EMSG's actual operating
results and financial position to differ materially.
EMSG cautions that any such forward-looking statements are further
qualified by important factors that could cause EMSG's actual operating results
to differ materially from those in the forward-looking statements, including,
without limitation the following: possible loss of existing relationships in the
OEM industry and with specific large clients in that industry; potential loss of
contracts; greater than anticipated competition; possibility that expected
synergies from the Merger would not be achieved; possible volatility of the EMSG
stock price; difficulties encountered in the integration of the operations of
EMSG Systems Division, Inc. and J.A. Industries, Inc.; unexpected liabilities or
an inability to maintain adequate liability insurance to cover legal claims; and
dependence on key personnel.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Electronic Manufacturing Services Group, Inc. (together with its
subsidiaries, "EMSG" or the "Company") is an independent provider of customized
manufacturing services to electronics original equipment manufacturers (OEMs),
including producers of telecommunication and data communications equipment,
industrial controls, computers and peripherals, medical devices and
instrumentation. EMSG provides a wide variety of pre-manufacturing,
manufacturing and post-manufacturing services. The Company's goal is to offer
its customers competitive advantages, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production and
more effective asset utilization that can be attained from outsourcing their
manufacturing.
EMSG was incorporated in Delaware in July 1987. The Company's corporate
headquarters are located at 6638 Old Wake Forest Road, Raleigh, North Carolina
27616 and its telephone number is (919) 876-6049. As used herein, "EMSG" and the
"Company" refer to Electronics Manufacturing Services Group, Inc. and its
subsidiaries, unless the context otherwise requires.
The Company, as currently organized, was formed by the merger in July
1996 of J.A. Industries of North Carolina, Inc. ("JANC"), a North Carolina
corporation and a wholly-owned subsidiary of J.A. Industries, Inc., a Delaware
corporation ("JA"), with and into Kenmar Business Groups, Inc., a North Carolina
corporation ("Kenmar"), with Kenmar surviving the merger and continuing its
existence as a North Carolina corporation and a wholly-owned subsidiary of JA.
(the "Merger"). Simultaneous with the Merger, each share of the Common Stock,
$1.00 par value, of Kenmar was converted into the right to receive 42.06 shares
of the Common Stock of JA, with the result that the former shareholders of
Kenmar acquired approximately 50% of the issued and outstanding Common Stock of
JA.
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Prior to such transactions, JA, a company subject to the reporting
requirements of the Securities Exchange Act of 1934, had divested itself of all
business operations so that upon completion of the merger, the operations of JA
(which, concurrent with the Merger, changed its name to Electronics
Manufacturing Services Group, Inc.) consisted solely of the operations of its
subsidiary, Kenmar. Subsequent to the Merger, Kenmar changed its name to EMSG
Systems Division, Inc.
INDUSTRY OVERVIEW
The Company is positioned to benefit from increased worldwide market
acceptance of the use of companies providing electronic manufacturing services
("EMS") to the electronics industry. Many electronics OEMs have adopted and are
becoming increasingly reliant upon manufacturing outsourcing strategies. The
Company believes the trend towards outsourcing manufacturing will continue. OEMs
utilize providers of electronic manufacturing services for many reasons
including the following:
Reduce Time to Market. Due to intense competitive pressures in the
electronics industry, OEMs are faced with increasingly shorter product
life-cycles and therefore have a growing need to reduce the time required to
bring a product to market. OEMs can reduce their time to market by using an EMS
firm's manufacturing expertise and infrastructure.
Reduce Capital Investment. As electronic products have become more
technologically advanced, the manufacturing process has become increasingly
automated, requiring a greater level of investment in capital equipment. EMS
firms provide OEMs access to advanced manufacturing facilities, thereby reducing
the OEMs' overall capital equipment requirements.
Focus Resources. Because the electronics industry is experiencing
greater levels of competition and more rapid technological change, many OEMs
increasingly are seeking to focus their resources on activities and technologies
in which they add the greatest value. By offering comprehensive electronics
assembly and related manufacturing services, EMS firms allow OEMs to focus on
their own core competencies such as product development and marketing.
Access Leading Manufacturing Technology. Electronic products and
electronics manufacturing technology have become increasingly sophisticated and
complex, making it difficult for OEMs to maintain the necessary technological
expertise to manufacture products internally. OEMs are motivated to work with
EMS firms in order to gain access to their expertise in interconnect, test and
process technologies.
Improve Inventory Management and Purchasing Power. Electronics industry
OEMs are faced with increasing difficulties in planning, procuring and managing
their inventories efficiently due to frequent design changes, short product
life-cycles, large investments in electronic components, component price
fluctuations and the need to achieve economies of scale in materials
procurement. OEMs can reduce production costs by using an EMS firm's volume
procurement capabilities. In addition, a provider of electronic manufacturing
services expertise in inventory management can provide better control over
inventory levels and increase the OEM's return on assets.
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Access Worldwide Manufacturing Capabilities. OEMs are increasing their
international activities in an effort to lower costs and access foreign markets.
EMS firms with worldwide capabilities are able to offer such OEMs a variety of
options on manufacturing locations to better address their objectives regarding
cost, shipping location, frequency of interaction with the EMS firm and local
content requirements of end-market countries.
The electronics contract manufacturing industry is transitioning
through a typical industry maturing cycle that began during the 1980's. The
market is broadly segmented as follows:
Nationally, there are fewer than twenty large contract manufacturers
with sales greater than $200 million; their growth driven is primarily by the
computer industry. SCI Systems and Solectron are the leaders with combined
projected sales of nearly $7 billion in 1996. In addition to the growth
generated by the computer industry, most of these companies have accelerated
their growth through the acquisition of their customers' manufacturing
facilities and operations.
There are approximately 30 mid-sized contract manufacturers with sales
ranging from $50 million to $200 million servicing many specialty niches and
supporting the production of computer peripherals.
There are hundreds of small contract manufacturers throughout the US
ranging from $1 million `mom-n-pop' businesses to small regional operations with
$25 to $50 million in sales.
With continued progress and technological advancements in the industry,
the barriers to entry and continued operations are rising. Much of the business
that was once consigned is being converted to turnkey, adding to the working
capital burden for the smaller contract manufacturers. The smaller contract
manufacturers are finding it difficult to access capital to support the
transition from consignment to turnkey, to purchase new equipment necessary to
compete in a dynamic market, to get resources to implement tightening quality
system requirements, and to achieve adequate gross profit to invest in the
engineering and technical staff required by customers in product development and
advanced manufactureability (as product life cycles and margins continue to
shrink, and global options proliferate). EMSG plans to fill the market void
where the large and mid-tier EMS firms can not and choose not to compete
effectively, and the small EMS firms can not meet customer demands and do not
have adequate resources to be viable long-term partners.
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STRATEGY
The Company's strategic plan contemplates acquiring businesses with
complementary capabilities that bolster EMSG's competitiveness and value-added
services. The organization plans to have strong conceptual and sustaining
engineering for value-added/value-engineering. EMSG plans to develop a
value-chain of operating companies and virtual supply partners to provide for
one-stop solutions (bundled services) in design, prototyping, manufacturing,
assembly, order fulfillment, and warranty depot, giving EMSG the customer and
market focus of a smaller EMS firm, but the financial, technical resources and
cross-functional capabilities of a larger, publicly financed firm.
The Company's operating strategy emphasizes the following key elements:
Quality. EMSG believes that product quality is a critical success
factor in the electronics manufacturing market. The Company strives for
continuous improvement of its processes and has adopted a number of quality
improvement and measurement techniques to monitor its performance.
Manufacturing Partnerships. An important element of EMSG's strategy is
to establish partnerships with major and emerging OEM leaders in the electronics
industry in its target markets. Due to the costs inherent in supporting customer
relationships, the Company focuses its efforts on customers with which the
opportunity exists to develop long-term business partnerships. The Company's
goal is to provide its customers with total manufacturing solutions for both new
and more mature products, as well as across product generations. The Company's
manufacturing services range from providing just-in-time delivery on low to
medium volume turnkey and consignment projects and projects that require more
value-added services, to servicing OEMs that require price-sensitive, higher
volume production. In order for the Company to continue to develop long-term
business partnerships with leading OEMs in the electronics industry, the Company
will be required to continue to increase staffing and other expenses, as well as
its expenditures on capital equipment and leasehold improvements. The Company's
customers generally do not commit to firm production schedules for more than one
quarter. Should the Company increase its expenditures in anticipation of a
future level of sales which does not materialize, its profitability would be
adversely affected. On occasion, customers may require rapid increases in
production which can place an excessive burden on the Company's resources. In
order to maintain its sales growth and profitability, the Company will be
required to continue managing its assets efficiently.
Turnkey Capabilities. Another element of EMSG's strategy is to provide
a complete range of manufacturing management and value-added services, including
materials management, board design, concurrent engineering, assembly of printed
circuit boards and other electronic assemblies, assembly and test of
electro-mechanical products and subassemblies, test engineering, software
manufacturing, accessory packaging and post-manufacturing services. The Company
believes that as manufacturing technologies become more complex and as product
life-cycles shorten, OEMs will increasingly contract for manufacturing on a
turnkey basis as they seek to reduce their time to market and capital asset and
inventory costs. A substantial portion of the Company's revenue is from its
turnkey business. The Company believes that the ability to manage
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and support turnkey projects is a critical success factor and a significant
barrier to entry for the market it serves. In addition, the Company believes
that due to the difficulty and long lead-time required to change manufacturers,
turnkey projects generally increase an OEM's dependence on its EMS firm,
resulting in greater stability of the Company's customer base and in closer
working relationships. The Company has been successful in establishing sole
source positions with many of its customers for certain of their products.
Manufacturing Process Technology. The Company intends to continue to
offer its customers manufacturing process technologies, including surface mount
technology ("SMT") assembly and testing and emerging interconnect technologies.
The Company is developing SMT expertise including advanced, vision-based
component placement equipment. The Company believes that the cost of SMT
assembly facilities and the technical capability required to operate a
high-yield SMT operation are significant competitive factors in the market for
electronic assembly. Further, the Company believes that providing completed
products and electro-mechanical subassembly manufacturing provides significant
differentiation in the markets it serves. The Company intends to continue to
invest in developing these and other process capabilities.
MANUFACTURING
EMSG's Approach
In order to successfully implement these management techniques, EMSG
has begun developing the ability to timely collect and utilize internal data and
a computer based information system. The Company believes these capabilities are
critical to a successful assembly operation and represents a significant
competitive factor, especially in turnkey projects. To manage this data, the
Company uses PC based computer systems for material resource planning, shop
floor control, work-in-process tracking, and other business functions.
In implementing its manufacturing approach, the Company emphasizes
timely delivery and accurate, up-to-date documentation for each product. The
Company develops an appropriate production process and a set of manufacturing
process instructions, inspection plans and a quality assurance plan. In the case
of turnkey orders, the Company analyzes each customer's materials specifications
to identify the suppliers from whom to purchase the materials. The Company then
plans and executes purchase orders and receives, inspects and warehouses
components, expedites critical components and delivers a set of components to
the production floor for assembly in sufficient time to meet customer
requirements.
Responsiveness to customers, particularly as to engineering changes
once manufacturing has commenced, is an important component of EMSG's
manufacturing approach. Some products manufactured by the Company are in the
early stages of their product life cycle and therefore may have many design or
engineering changes. Upon receiving an engineering change notice, the Company
identifies the impact of such changes on the production process, current
inventory and open purchase orders. To support a continuous production flow
while minimizing excess and obsolete inventory costs for the customer, the
Company restructures bills of material and expedites orders for new components,
as authorized. The Company also identifies and makes
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changes to its manufacturing instructions and test plans. In order to assure
prompt customer response, the Company assigns each project a program manager.
EMSG maintains regular contact with its customers to assure adequate information
exchange, document control and activities coordination necessary to support a
high level of quality and on-time delivery.
ELECTRONIC ASSEMBLY AND OTHER SERVICES
EMSG's assembly activities consist primarily of the placement and
attachment of electronic and mechanical components on printed circuit boards,
assembly of populated printed circuit cards into subassemblies or finished
products, electro-mechanical and chassis assembly, and miscellaneous support
operations including cable and harness assembly. The Company routinely assembles
higher-level sub-systems and systems incorporating printed circuit boards and
complex electromechanical components, in some cases manufacturing and packaging
products for shipment directly to the customer's distribution point. In
addition, EMSG provides other manufacturing services including refurbishment and
warranty repairs. EMSG manufactures on a turnkey basis with EMSG directly
procuring some or all of the components necessary for production, and on a
consignment basis, where the OEM customer supplies all components for assembly.
In conjunction with its assembly activities, EMSG also provides
computer-aided testing of printed circuit boards, sub-systems and systems, which
contributes significantly to the Company's ability to deliver high quality
products on a consistent basis. The Company has developed specific strategies
and routines to test board and system level assemblies. In-circuit tests verify
that all components have been properly inserted and that the electrical circuits
are complete. Functional tests determine if the board or system assembly is
performing to customer specifications. The Company either designs and procures
test fixtures and develops its own test software or utilizes the customer's
existing test fixtures and test software.
EMSG provides turnkey manufacturing management to meet its customers'
requirements, including procurement and materials management and consultation on
product design and manufacturability. Individual customers may select various
services from among the Company's full range of turnkey capabilities.
Procurement and materials management consists of the planning,
purchasing, expediting, warehousing, preparing and financing of the components
and materials required to assemble a printed circuit board or electronic system.
OEMs have increasingly utilized EMS firms to purchase all or some components
directly from component manufacturers or distributors and to finance and
warehouse the components.
The Company also assists its customers in evaluating product designs
for manufacturability. EMSG evaluates the specific design for ease and quality
of manufacture and, when appropriate, recommends design changes to reduce
manufacturing costs or lead times or to increase the quality of finished
assemblies.
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SALES AND MARKETING
Sales and marketing at EMSG is an integrated process involving customer
service, program managers, operating management, direct salesmen, manufacturers
representatives, and the Company's senior executives. The Company's sales
resources are directed at multiple management and staff levels within targeted
accounts. The Company also receives unsolicited inquiries resulting from
advertising and public relations activities, as well as referrals from current
customers. These opportunities are evaluated against the Company's customer
selection criteria and are assigned to the appropriate staff. Historically, the
Company has had substantial recurring sales from existing customers.
BACKLOG
Backlog consists of contracts or purchase orders with delivery dates
scheduled within the next twelve months. As of December 6, 1996, EMSG's backlog
was approximately $762,943. EMSG Systems Division, Inc.'s backlog was a similar
amount on the same date in 1995. Because customers may cancel or reschedule
deliveries and because certain customers have product demands that are forecast
driven vs firm order driven, backlog is not a meaningful indicator of future
financial results.
COMPETITION
The electronic assembly and manufacturing industry is comprised of a
large number of companies, many of which have achieved substantial market share.
The Company also faces competition from current and prospective customers which
evaluate EMSG's capabilities against the merits of manufacturing products
internally. EMSG competes with different companies depending on the type of
service or geographic area. Many of the Company's competitors have broader
geographic breadth. They also may have greater manufacturing, financial,
research and development and marketing resources than the Company. The Company
believes that the primary basis of competition in its targeted markets is
manufacturing technology, quality, responsiveness, the provision of value-added
services, financial strength and price. To remain competitive, the Company must
continue to provide technologically current manufacturing services, maintain
quality levels and achieve ISO 9002 certification, offer flexible delivery
schedules, deliver finished products on a reliable basis and compete favorably
on the basis of price. The Company currently may be at a competitive
disadvantage as to price when compared to manufacturers with lower cost
structures and greater purchasing leverage, particularly with respect to
manufacturers with established facilities where labor costs are lower.
EMPLOYEES
As of December 6, 1996, the Company employed 33 persons; 31 full-time
and 2 part-time.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains its corporate offices and manufacturing
facilities at 6638 Old Wake Forest Road, Raleigh, North Carolina 27616 which it
leases from K.D. Kennedy, Jr. The current lease expires in October of 1997. The
rent is approximately $8,100 per month for 21,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding, other than
routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a special meeting of the shareholders of the Company held on July
29, 1996, the shareholders of the Company (i) approved the transactions
contemplated by the Agreement and Plan of Merger, dated as of March 1, 1996 (the
"Merger Agreement"), among the Company, JANC and Kenmar, (ii) elected Kenneth H.
Marks, Craig McNab, Alan G. Finkel, Kenneth L. Marks and Ray Steckenrider as
directors of the Company for a term of one year, (iii) approved an amendment to
the Company's Certificate of Incorporation to change the name of the Company
from J.A. Industries, Inc. to Electronics Manufacturing Services Group, Inc. and
(iv) approved a one for four reverse split of the Company's Common Stock, all as
described more fully in the Company's Notice of Special Meeting and Proxy
Statement as filed with the Securities and Exchange Commission on July 10, 1996
and mailed to shareholders on the same day. None of the Company's directors who
were in office prior to the special meeting were nominated for, or elected to
serve, an additional term in office. The votes were as follows:
Agreement and Plan of Merger: 8,721,743 FOR, 340 AGAINST, 0 ABSTAINED.
Election of Directors: 8,722,203 FOR, 0 AGAINST, 0 ABSTAINED.
Amendment of the Certificate of Incorporation:
8,721,643 FOR, 340 AGAINST, 100 ABSTAINED.
1:4 Stock Split: 8,718,477 FOR, 6 AGAINST, 3,600 ABSTAINED
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
.
The principal market in which the Company's common stock is traded is
in the over-the-counter market (NASDAQ Bulletin Board Symbol: EMSG). The
Company's initial blank check / blind pool public offering closed March 21, 1988
and there was very minimal and sporadic trading until September 1992. On
December 12, 1994, the Company filed form 10SB/A, General Form for Registration
of Securities of Small Business issuers, thereby becoming a reporting company
under the Securities Exchange Act of 1934. The following chart sets forth the
range of high and low bid prices, adjusted for the reverse stock split that took
place on July 30, 1996, for the Company's Common Stock in the over-the-counter
market for the previous two years.
Period High Low
Quarter ended August 31 1996............................. 3.125 2.250
Quarter ended May 31, 1996 .............................. 3.000 1.500
Quarter ended February 29, 1996.......................... 1.625 2.375
Quarter ended November 30, 1995.......................... 4.250 1.000
Quarter ended August 31, 1995 ........................... 5.000 4.000
Quarter ended May 31, 1995 .............................. 4.750 4.000
Quarter ended February 28, 1995.......................... 7.750 4.000
Quarter ended November 30, 1994.......................... 7.500 6.000
Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
The approximate number of record holders of the Company's Common Stock
as of August 31, 1996 was 300 inclusive of those brokerage firms and/or clearing
houses holding the Company's common shares for their clientele (with each such
brokerage house and/or clearing house being considered as one holder).
The Company has not paid or declared any dividends upon its Common
Stock since its inception and, by reason of its present financial status and its
contemplated financial requirements, does not contemplate or anticipate paying
any dividends upon its Common Stock in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
EMSG provides manufacturing services to original equipment
manufacturers (`OEM's') in the electronics industry, including producers of
telecommunication and data communication equipment, industrial controls,
computers & peripherals and instrumentation. Primary services include materials
procurement, printed circuit card and chassis assembly, and testing. EMSG
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currently has approximately 15 customers, 5 of which accounted for 80% of its
sales for the twelve months ending August 31, 1996. Following the loss of its
largest customer in 1995, the Company conducted its operations in 42,000 square
feet of flex space with 85 employees. Since such loss, steps have been taken to
size the operations to more closely match the revenue without losing the key
employees and skills required to regrow the business. This has caused the
Company to incur losses from operations for fiscal 1996. The Company currently
operates one facility in Raleigh, North Carolina with approximately 33 employees
in 21,000 square feet of flex space. Operations are near 30% of capacity with
one shift active.
Operating results are generally affected by a number of factors,
including the relative mix of higher volume/lower margin business and lower
volume/higher margin business, price competition, raw material costs, labor
efficiencies, the degree of automation that can be used in the assembly process
and the efficiencies achieved by the Company in managing inventories and fixed
assets. The amount of sales the Company derives from turnkey manufacturing in
which it procures some or all of the components necessary for production, vs the
amount of sales it derives from labor sales, directly effects the overall gross
margin of the business. Inflation has not been a significant factor in the
results of the Company's operations because the Company's price quotations for
turnkey jobs are generally valid for thirty days and the Company typically
reserves the right to pass on certain cost increases under its turnkey orders or
contracts.
The financial information and discussion below should be read in
conjunction with the audited financial statements for the appropriate period and
the notes attached thereto.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED AUGUST 31, 1995 AND AUGUST 31, 1996
BASED ON THE AUDITED FINANCIAL STATEMENTS REFERENCED HEREIN
The following table sets forth certain operating data as a percentage
of net sales:
Twelve Months Ending August 31, 1996
& August 31, 1995
1996 1995
---- ----
Net sales .......................................... 100.0% 100.0%
Cost of goods sold ................................. 102.9 89.2
----- -----
Gross profit ....................................... (2.9) 10.8
Selling, general, and administrative ............... 36.9 7.9
Operating income ................................... (39.8) 2.9
Interest & other expenses (net) .................... (.7) (1.7)
----- -----
Income before income taxes ......................... (40.5) 1.2
Income taxes ....................................... -- --
Net income ......................................... (40.5) 1.2
Extraordinary item ................................. 66.1 --
----- -----
Net income after income taxes and extraordinary item 25.6 1.2
===== =====
The factors affecting changes in the percentages shown in the foregoing table
are discussed below.
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With eighty percent less order input than that of the prior period and
a reduced infrastructure, EMSG continued operations with a core group of
employees and an average base revenue of $217,800 per month. EMSG's financial
performance more closely mirrors that of a new company with fixed overheads
established to support higher levels of revenue than are currently attainable;
however, without such overhead and infrastructure, EMSG would not be able to
attract its targeted business.
NET SALES. Net sales are net of discounts and customer returns and are
recognized upon shipment of an order to a customer. Net sales for 1996 were
$2,613,590, $12,952,072 less than that of the same period in 1995 primarily due
to a $12,605,000 decrease in shipments to EMSG's largest customer. Four new
customers with approximately $1,000,000 of new orders were added in 1996.
GROSS PROFIT (LOSS). Gross Profit (loss) equals net sales less cost of goods
sold, which consist of labor and material, manufacturing costs (primarily lease
payments for, and depreciation of, manufacturing equipment and facilities) and
other manufacturing costs. Gross profit was reduced $1,758,864 from 1995 to 1996
resulting primarily from the substantial drop in net sales. Material cost of
sales were 11% lower, offsetting the effect of volume reduction. There were also
offsetting cost reductions in direct labor of $638,000 and manufacturing
overhead of $610,000. Operations were run at a loss, as planned, due to the
fixed overhead expenses kept in place to regrow the business during 1996. Such
overhead could not be fully absorbed by the level of sales during the twelve
month period discussed.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (`SG&A') consist primarily of non-manufacturing
salaries, sales commissions, and other general expenses. SG&A expense for 1996
was $269,622 less than that of 1995, resulting from $153,000 reduction in sales
commissions and from $121,000 reduction in outside servies, partially offset by
$5,000 increase in advertising and other expenses.
OPERATING INCOME (LOSS). Operating income (loss) is gross profit less SG&A. Loss
from operations for 1996 prior to the addition of miscellaneous income was
($1,040,257) or $1,489,242 less than that of 1995. This is the result of
substantial lower volume offset by margin mix and cost reductions as explained
above.
INTEREST EXPENSE. Interest for 1996 of $60,732 was substantially reduced from
$273,808 in 1995 as a result of EMSG's cash and cash equivalents position which
has permitted operations without outside banking or any other lending sources.
INCOME TAX EXPENSE. The Company has not recorded an income tax provision at this
time due to the tax loss carry forward from fiscal 1994. In addition, EMSG
believes that it met the insolvency tests per section 108 of the Internal
Revenue Code prior to the Settlements causing the income at that time to be
exempt from taxation. If EMSG fails to pass the aforementioned insolvency test,
the booking of a tax provision could adversely effect its net income and
earnings per share for the period ending August 31, 1996.
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EXTRAORDINARY: During the first quarter of fiscal 1996, the Company reached
various settlements with its largest customer, which represented 80% of EMSG's
ongoing order input at such time, and its suppliers for the cancellation and
discontinuation of production of nearly fifty products and assemblies. As a part
of the settlement, EMSG signed an agreement with its then largest customer that
relieved EMSG of trade accounts payable to the customer and other suppliers of
$1,121,151. The agreement provided the customer relief of trade payables to EMSG
of $48,054. Further, suppliers to EMSG for materials and services used on behalf
of its largest customer and related product lines relieved EMSG of $511,390 of
accounts payable. Supplier settlements were essentially 50% of the amount owed
with half of the 50% being paid in quarterly installments beginning January 1,
1996.
LIQUIDITY AND CAPITAL RESOURCES
EMSG's cash and cash equivalents decreased by $1,323,836 from August
31, 1995 through August 31, 1996. The Company used $1,287,378 in cash for its
operations during the year.
EMSG used $20,043 in cash in investing activities primarily for capital
expenditures in new test equipment to support new customer programs. Payments
were made to reduce long-term debt during 1996 as well as the three quarterly
installments due per the settlements, as described above, in an approximate
total amount of $120,000, starting on January 1, 1996. Dividends for the Class A
Cumulative Preferred stock of EMSG Systems Division, Inc. ("ESD") a subsidiary
of EMSG, were paid during 1996 for the quarters ending 11/30/95, 2/28/96 and
5/31/96 in the amount of $37,222.
Effective August 31, 1996, shareholders of the Class A Cumulative
Preferred Stocks of ESD tendered 9,376 shares, out of the total 9,926
outstanding, in exchange for 267,873 shares (at the exhange ratio of 28.57 to 1)
of EMSG Class A Cumulative Convertible Preferred Stock. In addition, EMSG paid
each holder of ESD Preferred Stock who exchanged his or her shares of such
stock, pusuant to the terms of the exchange offer, an amount equal to the
accrued and unpaid dividends with respect to such shares. The total amount of
$70,320 was paid in November 1996.
The 550 shares of ESD Preferred Stock that were not tendered are shown
in the 8/31/96 balance sheet at their face value plus accretion and dividends in
arrears. The total amount is $44,054.
Subsequent to August 31, 1996, the Company began discussions with
numerous lenders to re-establish an appropriate credit facility. The Company
anticipates the acquisition of new capital equipment during fiscal 1997 and
plans to enter into lease agreements to finance such equipment. The Company is
anticipating engagement of a regional investment bank to assist in
capitalization and other customary investment banking services provided to a
public company. In addition, the Company is in discussions with numerous equity
investors to provide capital to support internal
14
<PAGE>
growth and acquisitions. There are no assurances that the Company will be
successful in raising the required capital. Further, without the addition of new
capital there can be no assurances that the Company can continue its operations
or meet its business objectives.
COMPARISON OF YEARS ENDED AUGUST 31, 1994 AND AUGUST 31, 1995 BASED ON THE
AUDITED FINANCIAL STATEMENTS REFERENCED HEREIN
The follow table sets forth certain operating data as a percentage of
net sales:
Year Ending August 31st
------------------------
1995 1994
---- ----
Net sales ........................................ 100.0% 100.0%
Cost of goods sold ............................... 89.2 98.9
----- -----
Gross profit ..................................... 10.8 1.1
Selling, general, and administrative ............. 7.9 6.4
Operating income ................................. 2.9 (5.3)
Interest & other expenses (net) .................. (1.7) (1.0)
----- -----
Income before income taxes ....................... 1.2 (6.4)
Income taxes ..................................... -- (0.4)
Net income ....................................... 1.2 (6.0)
===== =====
The factors affecting changes in the percentages shown in the foregoing
table are discussed below.
NET SALES. Net sales are net of discounts and customer returns and are
recognized upon shipment of an order to a customer. Net sales decreased
$7,361,935 or 32% from $22,927,597 in 1994 to $15,565,662 in 1995 due to a
decrease of $8,070,393 of our highest volume product line at that time, offset
by other increases. Shipments to EMSG's largest customer accounted for
approximately 81% of sales in 1995 and approximately 65% of sales during 1994.
GROSS PROFIT. Gross Profit equals net sales less cost of goods sold, which
consist of labor and material, manufacturing costs (primarily lease payments
for, and depreciation of, manufacturing equipment and facilities) and other
manufacturing costs. Gross profit increased in 1995 to $1,682,572 from $242,429
in 1994 as the Company consolidated its operations from two facilities into one
and focused on its strategic customers and their key products. The negative
effect of the $7,361,935 volume drop was offset by a better product mix and by
reductions in direct labor of $193,393 and manufacturing expenses of $506,902.
There were also non-recurring expenses related to the 1994 restructuring. In
addition, EMSG reviewed its leashold improvements, machinery, equipment and
computer hardware and software for impairment as a result of it ceasing to do
business with its major customer. EMSG estimated future cash flows and compared
it with the net asset value of the related assets. This analysis resulted in a
writedown of approximately $180,000 which is included as part of cost of goods
sold in the income statement.
15
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (`SG&A') consist primarily of non-manufacturing
salaries, sales commissions, and other general expenses. SG&A expense were
reduced from $1,466,289 in 1994 to $1,223,587 in 1995 as the above mentioned
consolidation was effected. Changes made included a reduction of sales and
marketing expenses of $148,000, mostly sales commissions of $136,000, and other
reductions of administrative expenses of $35,000. There were also non-recurring
restructuring expenses in 1994 of approximately $60,000.
OPERATING INCOME. Operating income is gross profit less SG&A. Operating income
increased from a loss of $1,223,860 in 1994 to $448,985 in 1995 as the Company
eliminated the above mentioned product lines and consolidated its operations.
INTEREST & OTHER INCOME. The interest & other income for 1995 increased slightly
from $233,795 in 1994 to $267,487 due mainly to the increased cost of capital
from its lenders.
INCOME TAX EXPENSE. The Company did not book an income tax provision due to the
tax loss carry forward from fiscal 1994.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Financial Statements
August 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Electronic Manufacturing Services Group, Inc.:
We have audited the accompanying consolidated balance sheets of Electronic
Manufacturing Services Group, Inc. and subsidiaries as of August 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Electronic
Manufacturing Services Group, Inc. and subsidiaries as of August 31, 1996 and
1995, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered losses from
operations which raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are described in
note 18. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
October 3, 1996
Raleigh, North Carolina
18
<PAGE>
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Balance Sheets
August 31, 1996 and 1995
Assets 1996 1995
Current assets
Cash and cash equivalents $308,794 1,632,630
Accounts receivable - trade, net of allowance
for doubtful accounts of $5,500 in 1996
and 1995, respectively 302,021 273,062
Accounts receivable - other (note 14) 17,287 19,132
Inventories (note 4) 73,066 331,540
Prepaid expenses and other current assets 60,910 87,146
--------- -------
Total current assets 762,078 2,343,510
--------- ---------
Property and equipment, net (notes 5, 7 and 8) 564,208 590,307
--------- --------
Other assets:
Note receivable from officer (note 14) 100,000 -
Deposits and other assets 14,136 38,398
Cost in excess of net assets of acquired business,
net of accumulated amortization of $240,037,
and $220,537 in 1996 and 1995, respectively (note 6) 78,000 97,500
--------- -------
Total other assets 192,136 135,898
--------- --------
$1,518,422 3,069,715
========= =========
See accompanying notes to consolidated financial statements.
19
<PAGE>
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Balance Sheets (continued)
August 31, 1996 and 1995
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity (Deficit) 1996 1995
- ----------------------------------------------- ---- ----
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (notes 7 and 14) 56,628 22,359
Current obligations under capital leases (note 8) 77,551 35,203
Accounts payable, trade 313,362 2,206,535
Other accrued liabilities 69,555 425,956
Preferred dividend payable (note 10) 70,320 -
Accrued bonus (note 14) 20,822 -
------- --
Total current liabilities 608,236 2,690,053
-------- ---------
Long-term debt, less current maturities (notes 7 and 14) 486,753 560,021
-------- --------
Long-term obligations under capital leases (note 8) 110,085 76,172
-------- -------
Class A cumulative preferred stock, $50 par value; with a preference in
liquidation over the holders of common stock of $50 plus accrued dividends;
authorized 30,000 shares, 550 and 9,926 shares,
issued and outstanding in 1996 and 1995, respectively (note 10) 44,054 729,844
------- --------
Stockholders' equity (deficit) (notes 10, 11 and 14):
Class A, preferred stock cumulative and convertible
$.01 par value; authorized 350,000 shares; 267,873
issued at August 31, 1996 2,679 -
Common stock, $0.0025 and $1 par value at August 31,
1996 and 1995, respectively; authorized 20,000,000
shares, 5,527,452 and 64,714 shares issued
and outstanding in 1996 and 1995, respectively 13,819 64,714
Additional paid-in capital 1,008,529 99,667
Retained deficit (755,735) (1,150,756)
--------- ---------
Total stockholders' equity (deficit) 269,292 (986,375)
--------- ---------
Commitments (notes 8 and 9)
$ 1,518,422 3,069,715
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Operations
Years ended August 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Sales $ 2,613,590 15,565,662
Cost of goods sold (note 5) 2,689,882 13,883,090
----------- -----------
Gross profit (loss) (76,292) 1,682,572
----------- -----------
General, selling and administrative expenses 963,965 1,233,587
----------- -----------
Operating income (loss) (1,040,257) 448,985
----------- -----------
Other income (expenses):
Interest income 42,030 6,321
Interest expense (60,732) (273,808)
----------- -----------
Other expense, net (18,702) (267,487)
----------- -----------
Income (loss) before income taxes and
extraordinary item (1,058,959) 181,498
Income taxes (note 12) -- --
----------- -----------
Income (loss) before extraordinary item (1,058,959) 181,498
Extraordinary item (note 16) 1,728,552 --
----------- -----------
Net income after income taxes and
extraordinary item 669,593 181,498
Accretion of preferred stock (58,570) (54,006)
Dividends on preferred stock (note 10) (37,222) (49,630)
----------- -----------
Net income applicable to common shareholders $ 573,801 77,862
=========== ===========
Weighted average number of shares 2,994,037 2,647,340
=========== ===========
Earnings per common share and common share equivalent (note 15)
Income (loss) before extraordinary item $ (0.38) 0.03
Extraordinary item 0.57 --
----------- -----------
Net income $ 0.19 0.03
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended August 31, 1996 and 1995
<TABLE>
<CAPTION>
Class A Additional Total
Preferred Stock Common Stock Treasury Stock paid-in Retained stockholders'
Shares Amount Shares Amount Shares Amount capital deficit equity (deficit)
------ ------ ------ ------ ------ ------ ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1994 - $ - 58,197 $ 58,197 - $ - 203,303 (1,332,254) (1,070,754)
Issuance of common stock for cash,
net of $16,862 issuance costs - - 6,517 6,517 - - - - -
Accretion of preferred stock - - - - - - (54,006) - (54,006)
Undeclared dividends on preferred stock - - - - - - (49,630) - (49,630)
Net income - - - - - - - 181,498 181,498
--- --- --- --- --- --- --- -------- --------
Balance at August 31, 1995 - - 64,714 64,714 - - 99,667 (1,150,756) (986,375)
Preferred dividends paid (note 10) - - - - - - - (37,222) (37,222)
Accretion of preferred stock - - - - - - (58,570) - (58,570)
Purchase of treasury stock - - - - 250 (625) - - (625)
Net income - - - - - - - 669,593 669,593
Organization costs (note 1) - - - - - - - (237,350) (237,350)
Recapitalization (note 1) - - 5,462,738 (50,895) (250) 625 296,071 - 245,801
Conversion of preferred stock (note 10) 267,873 2,679 - - - - 671,361 - 674,040
------- ----- --- ----- --- --- ---------- --- --------
Balance at August 31, 1996 267,873 $ 2,679 5,527,452 $ 13,819 - $ - 1,008,529 (755,735) 269,292
======= ===== ========= ====== === == ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
Years ended August 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) after income taxes and after extraordinary item $ 669,593 181,498
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Extraordinary item (1,728,552) --
Depreciation and amortization 254,122 422,787
Loss on write off of property and equipment -- 209,733
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (28,959) 1,866,059
Decrease in inventories 258,474 1,045,752
Decrease in recoverable income taxes -- 103,208
Decrease (increase) in prepaid expenses
and other current assets 26,236 (75,665)
Decrease (increase) in accounts receivable, other 1,845 (9,125)
Decrease in deposits and other assets 24,262 124,822
Decrease in accounts payable, trade (428,820) (747,898)
Increase in accrued bonus 20,822 --
Increase (decrease) in other accrued liabilities (356,401) 271,248
----------- -----------
Net cash provided by (used in) operating activities (1,287,378) 3,392,419
----------- -----------
Cash flow from investing activities:
Capital expenditures (20,043) (24,213)
Issuance of note receivable from officer (100,000) --
----------- -----------
Net cash used in investing activities (120,043) (24,213)
----------- -----------
Cash flow from financing activities:
Acquisition of business 510,000 --
Organization costs (237,350) --
Purchase of treasury stock (625) --
Proceeds from issuance of common stock -- 6,517
Net borrowings (repayment) on line of credit -- (1,396,953)
Proceeds from issuance of note payable -- 350,122
Principal payments on note payable -- (350,122)
Principal payments on long-term debt (38,999) (367,896)
Principal payments on capital lease obligations (112,219) (51,722)
Dividends paid (37,222) --
----------- -----------
Net cash provided by (used in) financing activities 83,585 (1,810,054)
----------- -----------
Net increase (decrease) in cash and
cash equivalents (1,323,836) 1,558,152
Cash and cash equivalents:
Beginning of year 1,632,630 74,478
----------- -----------
End of year $ 308,794 1,632,630
=========== ===========
</TABLE>
(Continued)
23
<PAGE>
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Cash Flows, Continued
Years ended August 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during year for:
Interest $ 28,605 352,765
======= =======
Income taxes $ - -
=== ==
Acquisition of business:
Cash $ 510,000 -
Payables (264,199) -
------- --
Fair value of assets acquired $ 245,801 -
======= ==
Supplemental schedule of non-cash investing and financing activities:
During 1996 the Company entered into capital lease obligations totalling
$188,480. The Company did not enter into any capital leases in 1995.
During 1996 the Company entered into agreements with its major supplies and
largest customer which resulted in a noncash gain which is disclosed as
an extraordinary item (see note 17).
During 1996 the Company offered to exchange Class A convertible preferred
stock for all of the Class A preferred stock (see note 11).
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Notes to Consolidated Financial Statements
August 31, 1996 and 1995
(1) Description of Business
Electronic Manufacturing Services Group, Inc. (the "Company") is an
independent provider of customized manufacturing services to electronics
original equipment manufacturers, including producers of telecommunications
and data communications equipment, industrial controls, computers and
peripherals, medical devices and instrumentation. The Company provides a wide
variety of pre-manufacturing, manufacturing and post-manufacturing services.
The Company, as currently organized, was formed by the July 30, 1996 merger
of J.A. Industries of North Carolina, Inc., a wholly-owned subsidiary of J.A.
Industries, Inc. ("JA"), with and into Kenmar Business Groups, Inc.
("Kenmar"), with Kenmar surviving the merger and continuing its existence as
a wholly-owned subsidiary of JA. Simultaneous with the merger, each share of
the common stock of Kenmar was converted into the right to receive 42.06
shares of the common stock of JA, with the result that the former
shareholders of Kenmar acquired approximately 50% of the issued and
oustanding common stock of JA.
Prior to the merger, JA, a company subject to the reporting requirements of
the Securities Exchange Act of 1934, had divested itself of all business
operations so that upon completion of the merger, the operations of JA
consisted solely of the operations of its subsidiary, Kenmar.
The merger represented a reverse acquisition whereby Kenmar was the acquirer
of JA, as Kenmar management manages the combined entity, and its former
stockholders have initial control over the election of the board of
directors. The transaction was recorded as a recapitalization of Kenmar under
the purchase accounting rules.
Concurrent with the merger, JA changed its name to Electronic Manufacturing
Services Group, Inc., and Kenmar changed its name to EMSG Systems Division,
Inc.
(2) Concentration of Credit Risk and Major Customer
-----------------------------------------------
During 1995, Kenmar manufactured more than fifty different products and
repaired and refurbished over one hundred different products for its largest
customer, which is comprised of five different operating locations and two
subsidiaries. Accounts receivable from this customer accounted for
approximately 19% of accounts receivable-trade at August 31, 1995. Kenmar's
sales to this customer during 1995 comprised 81% of the Kenmar's total sales.
During the fourth quarter of 1995, Kenmar ceased doing business with this
customer. (See note 17). Accordingly, Kenmar took various steps to
restructure the business to be commensurate with the reduction in volume.
25
<PAGE>
During the year ended August 31, 1996 the Company had approximately 15
customers, 5 of which accounted for 80% of its sales.
(3) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
Test Services, Inc. ("TSI") and EMSG Systems Division, Inc. All intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts on deposit with banks
and all highly liquid investments with a maturity of 90 days or less when
purchased.
Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. A provision is made for obsolete and
slow moving inventory.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases is
stated at the present value of the minimum lease payments at the inception of
the lease. Depreciation is calculated using the straight-line method over the
estimated useful lives of the respective assets which range from 3 to 7
years. Equipment held under capital leases are amortized on a straight-line
basis over the lesser of the lease term or estimated useful life of the
asset. Maintenance and repairs are charged to expense as incurred. The cost
and related accumulated depreciation of the assets are removed from the
accounts upon disposition and any resulting gain or loss is reflected in
operations.
Accounts Receivable
The Company performs ongoing credit evaluations of its trade receivables and
generally does not require collateral. An allowance is provided for estimated
uncollectible accounts.
Revenue Recognition
The Company recognizes revenue upon shipment of products to customers.
Cost in Excess of Net Assets of Acquired Business
The excess cost of net assets of acquired business relates principally to the
value assigned to customer relationships and is being amortized over its
estimated useful life by the straight-line method.
26
<PAGE>
The Company evaluates, when circumstances warrant, the recoverability of the
cost in excess of net assets of acquired businesses by comparing the sum of
the undiscounted projected future cash flows attributable to each customer to
the carrying value of the related asset. Projected cash flows are estimated
for a period approximating the remaining lives of the Company's long-lived
assets.
As a result of such evaluation the Company recorded a writedown of $160,000
during the year ended August 31, 1995.
Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109 (SFAS
No. 109), "Accounting for Income Taxes", effective September 1, 1993. Under
the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Due to the Company's operating loss
carryforwards, management has determined that a valuation allowance equal to
the amount of net deferred tax assets is required.
Earnings Per Share
Earnings per share are based upon the weighted average number of common and
common equivalent shares outstanding during the period.
Impairment of Long-Lived Assets
During the year ended August 31, 1995, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Statement 121
requires the Company to determine whether recognition of an impairment loss
is required and, if so, to measure the impairment. If the sum of the expected
future cash flows, undiscounted and without interest costs, is less than the
asset's carrying amount, an impairment loss is recognized. Any impairment
loss recognized upon adoption for assets to be held and used is recorded in
continuing operations.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock-Based Compensation. SFAS 123 is effective for fiscal
years beginning after December 15, 1995, and requires that stock options
either be accounted for using a fair value method, or that proforma
disclosures of net income and earnings per share by provided as if the fair
value method had been applied. The Company intends to continue to use the
intrinsic value method as prescribed by Opinion 25 and will include a second
presentation of the Company's results of operations in addition to the amount
presented on the face of the income statement in future financial statements.
27
<PAGE>
<PAGE>
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(4) Inventories
Inventories consist of:
1996 1995
---- ----
Raw materials $ 35,446 193,649
Work-in-progress 27,649 111,330
Finished goods 9,971 26,561
------ -------
$ 73,066 331,540
====== =======
(5) Property and Equipment
Property and equipment consist of the following:
1996 1995
---- ----
Leasehold improvements $ 164,912 164,912
Machinery and equipment 833,462 672,538
Computer hardware and software 389,985 343,578
Furniture and fixtures 93,207 92,015
Vehicles 9,182 9,182
------ ------
Total 1,490,748 1,282,225
Less accumulated depreciation and amortization 926,540 691,918
-------- --------
Property and equipment, net $ 564,208 590,307
======== =======
Depreciation expense was $234,622 and $247,787 in 1996 and 1995,
respectively.
The Company reviewed its leasehold improvements, machinery and equipment and
computer hardware and software for impairment as a result of the Company
ceasing to do business with its major customer (see notes 2 and 16). The
Company estimated future cash flows and compared it with the net asset value
of the related assets. This analysis resulted in a writedown of approximately
$180,000 during the year ended August 31, 1995 which is included as part of
cost of goods sold in the consolidated statements of operations.
(6) Acquisition
On October 15, 1992 the Company purchased all of the outstanding stock of
TSI, a manufacturer of electronic printed circuit board assemblies for
original equipment manufacturers, for a purchase price of approximately
$750,000 consisting of $7,500 cash and three subordinated promissory notes
totaling $742,500. The promissory notes are being paid in equal monthly
installments over ten years and bear a fixed interest rate of 8%.
28
<PAGE>
The acquisition has been accounted for using the purchase method of
accounting. The following table presents the allocation of the purchase price
to the fair value of the assets acquired and liabilities assumed:
Assets acquired $ 966,145
Liabilities assumed 216,145
-------
Purchase price $ 750,000
=======
As a result of the TSI acquisition, the principal stockholder and chief
executive of TSI entered into a ten year non-compete agreement in return for
a monthly payment of $3,000 for ten years ending October 15, 2002. Cash
payments under the agreement were $36,000 and $72,000 in 1996 and 1995,
respectively. Cash payments in 1995 relate to years ended August 31, 1995 and
1996. Cash payments in 1996 relates to year ended August 31, 1997.
(7) Long-Term Debt
Long-term debt consists of the following:
1996 1995
Subordinated promissory notes payable in monthly
installments of $9,009, including interest at 8%,
through October 2002 $ 508,216 524,855
Uncollateralized note payable to stockholder
repayable with interest at 8% in 59 monthly
installments of $610 and a balloon payment
of $30,083 on October 15, 1997 35,165 39,482
Note payable secured by equipment repayable
in monthly installments of $2,435 including
interest at 16.85% through April 1996 - 18,043
--- -------
543,381 582,380
Less current maturities 56,628 22,359
------- -------
$ 486,753 560,021
======= =======
Principal maturities of debt at August 31, 1996 are as follows:
Year ending August 31,
1997 $ 56,628
1998 104,776
1999 80,452
2000 87,130
2001 94,361
Thereafter 120,034
-------
Total long-term debt $ 543,381
=======
29
<PAGE>
(8) Obligations Under Capital Leases
The Company leases equipment under capital leases which expire on various
dates through 1999. Included in property and equipment are the following
amounts applicable to these leases:
1996 1995
---- ----
Machinery and equipment $ 365,662 200,066
Less accumulated amortization 88,011 59,043
------- -------
$ 277,651 141,023
======= =======
The following is a schedule by years of future minimum lease payments under
capital leases as of August 31, 1996:
Year ending August 31
1997 $ 97,924
1998 88,479
1999 34,444
-------
Total minimum lease payments 220,847
Less amounts representing interest (33,211)
--------
Present value of future minimum lease payments 187,636
Less current maturities (77,551)
--------
$ 110,085
========
(9) Commitments
The Company leases certain office and production space, machinery and
equipment under noncancellable operating leases expiring at various dates
through 1998. During the years ended August 31, 1996 and 1995, the Company
incurred rental expenses of $107,995 and $214,505, respectively, under these
leases.
Future minimum lease payments under the terms of the above leases are as
follows:
1997 100,128
1998 3,468
1999 3,468
2000 3,468
2001 3,468
Thereafter 867
----
$ 114,867
=======
(10) Preferred Stock
The Class A cumulative preferred stock ("Class A preferred stock") is
entitled to a 10% cumulative dividend payable quarterly, subject to the
provisions of North Carolina law. Each share of Class A preferred stock may
be called or put at any time after five years from the date of
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issuance at a rate of one and one-half times the issue price. Cumulative
unpaid dividends are $73,008 and $73,008 as of August 31, 1996 and 1995,
respectively. Current year dividends of $37,222 and $-0- were paid to the
Class A preferred stockholders in 1996 and 1995, respectively. The Company
paid dividends of $70,320 in November 1996 and these are included in current
liabilities.
Upon liquidation, the Class A preferredstock shares have preference over
holders of common stock in an amount equal to the issue price ($50 per
share) plus cumulative dividends in arrears.
The Company offered to exchange Class A convertible prefered stock, $.01 par
value ("EMSG Preferred Stock") for all of the Class A preferred stock at an
exchange rate of 28.57 shares of EMSG preferred stock for each share of Class
A preferred stock. In addition the Company promised to pay each holder of
Class A preferred stock who exchanged their shares pursuant to this offer
which expired on August 31, 1996, an amount equal to the accrued and unpaid
dividends with respect to such shares as of the time of the exchange. Holders
of 9,376 shares of Class A preferred stock converted their shares pursuant to
this offer.
Dividends
The holders of the EMSG preferred stock will be entitled to receive dividends
at the rate of $.175 per share per annum. Such dividends shall be cumulative
from the issue date and shall be payable in arrears, when and as declared by
the board of directors on March 15, June 15, September 15 and December 15, of
each year.
Conversion Rights
The holders of the EMSG preferred stock shall be convertible into common
stock as follows:
(a) Option Conversion
The holders of any shares shall have the right to convert any of such shares
into fully paid and nonassessable unregistered shares of common stock at the
conversion price in effect on the conversion date.
(b) Conversion Price
Each share of Class A preferred stock shall be converted into a number of
shares of common stock determined by dividing the sum of (a) the subscription
price plus (b) any dividends on such shares of Class A preferred stock which
such holder is entitled to receive, but has not yet received, by (ii) the
conversion price in effect on the conversion date, and multiplying that
quotient by one and one-half (1.5). The conversion price at which shares of
common stock shall initially be issuable upon conversion of the shares of
Class A preferred stock shall be one and 75/100 dollars ($1.75).
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(11) Stock Option Plan
The Company adopted a non-qualified stock option plan in 1996. As of August
31, 1996 there were 667,730 options outstanding and exercisable. Options run
for 10 years from the grant date and entitle the holders to convert the
options into 667,730 shares of common stock at prices ranging from $.06 to
$2.25 per share. No options have been exercised as of August 31, 1996.
The Company adopted a qualified stock option plan in 1993, under which
1,000,000 shares of common stock are authorized to be issued. The Company has
outstanding options to purchase 419,000 shares at $2.25 per share which are
excercisable at times and in increments as specified by the individual
agreements. None of the options are exercisable at August 31, 1996.
(12) Income Taxes
The components of net deferred tax assets and the net deferred tax
liabilities as of August 31, 1996 and 1995 are as follows:
1996 1995
Deferred tax assets:
Net operating loss carryforward $ 1,310,575 72,566
Inventories, principally due to additional
costs inventoried for tax purposes, pursuant
to the Tax Reform Act of 1986 and inventory
reserves 36,171 83,470
Amortization of customer lists 86,835 16,575
Other accruals 13,815 32,107
Property, plant and equipment, principally due
to differences in depreciation and FAS 121
writedowns - 125,311
--- -------
Total gross deferred tax assets 1,447,396 330,029
Valuation allowance (1,375,759) (330,029)
--------- -------
Net deferred tax assets $ 71,637 -
======= =
Deferred tax liabilities:
Property, plant and equipment, principally due
to differences in depreciation 71,637 -
------- -
Total gross deferred tax liabilities $ 71,637 -
====== =
The Company recorded a valuation allowance because of the Company's financial
position, its lack of consistent earnings, possible limitations on the use of
carryforwards, and the expiration dates of certain of the net operating loss
carryforwards, give rise to uncertainty as to whether the deferred tax asset
is reliable.
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The actual income tax expense for 1996 and 1995 differs from the "expected"
amount (computed by applying the statutory federal income tax rate of 34% to
the earnings before income taxes) as follows:
1996 1995
--------------------- ------------------
% of % of
pretax pretax
Amount earnings Amount earnings
Computed "expected tax expense"$ 227,661 34.0% $ 61,709 34.0%
Change in valuation allowance (227,661) (34.0) (61,709) (34.0)
------- ---- ------ ----
Income tax expense $ - - % $ - - %
=== === === ===
At August 31, 1996, the Company has net operating loss carryforwards of
approximately $3,797,000. The net operating loss carryforwards expire in
various amounts from 2009 through 2011. Additionally, the Company has net
operating loss carryforwards of approximately $384,860 for state income tax
purposes which expire between 1999 and 2001.
The Tax Reform Act of 1986 contains provisions which limit the ability to
utilize net operating loss carryforards in the case of significant changes in
ownership interests. Therefore, the Company's net operating loss caryforwards
are limited. Consequently, if the Company has taxable income which exceeds
the permissible yearly net operating loss carryforwards, the Company would
incur a federal income tax liability even though net operating loss
carryforwards would be available in future years.
(13) Employee Benefit Plans
The Company has a 401(k) defined contribution plan (the "Plan") covering
substantially all full-time employees who meet certain age and length of
service requirements. Participants are eligible to contribute up to 15% of
their annual compensation, not to exceed legal limits. The Company does not
make contributions to the Plan. Participants vest immediately in their
contributions .
(14) Related Party Transactions
During October 1992, a member of the Board of Directors granted a ten year
unsecured loan to the Company in the amount of $445,500. As of August 31,
1996 and 1995, the outstanding principal balance was approximately $305,000
and $315,000, respectively. Such amount is included in subordinated
promissory notes (see note 8).
During October 1992, the Company entered into a non-compete agreement with a
former member of the Board of Directors (see note 6).
During 1995, a Director, in conjunction with an unrelated party entered into
an Agreement to lend the Company $350,122 on a 120 day Note, collateralized
by all the Company's plant, equipment, furniture and fittings. The proceeds
of the loan was used to repay approximately $105,000 of bank debt and for
operational purposes. The loan carried an interest rate of 12%. Under the
Agreement, the lenders purchased 6,380 shares of common stock, at a price of
$1 per
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share (representing approximately 10% of the present outstanding common
stock). The Company repaid this loan in 1995.
In July 1996, an officer of the Company entered into an employment agreement
with the Company which included a one year interest fee loan of $100,000, and
an annual bonus based on net income before taxes.
Accounts receivable - other included a note receivable from an officer of the
Company of $12,372 and $10,866 in 1996 and 1995, respectively. The annual
interest rate on this note is 8%.
(15) Net Income Per Common Share
At August 31, 1996, there were 1,086,730 stock options outstanding.
The net income per common share and common equivalent share are calculated by
deducting dividends applicable to preferred shares from net income and
dividing the result by the weighted average number of shares of common share
and common share equivalents outstanding during each of the years.
Presentation of fully diluted earnings per share is not presented as the
effect is insignificant.
(16) Gain from Settlement of Debt
On September 18, 1995, the Company signed an agreement with its largest
customer (see note 2). The provisions of the agreement relieved the Company
of trade accounts payable to the customer and other suppliers of $1,121,151.
The agreement provided the customer relief of trade payables to the Company
of $48,054 and required the customer to pay cash to the Company in the amount
of $250,000 in settlement of accounts receivable outstanding. This agreement
also provided for the release of both parties from any claims that might
arise from past business relations or transactions. The Company incurred
expenses of $105,935 in relation to these agreements.
Subsequent to August 31, 1995 the Company entered into negotiations with its
major suppliers. These negotiations have resulted in the suppliers forgiving
$511,390 of the accounts payable balance at August 31, 1995 in return for
payment of 25% of the balance due with a further 25% due in four quarterly
installments beginning January 1, 1996.
(17) Fair Value of Financial Instruments
The estimated fair value of debt at August 31, 1996 was approximately $29,000
lower than the carrying value. The fair value of cash and cash equivalents,
accounts receivable, note receivable from officer, accounts payable, other
accrued liabilities and obligations under capital leases approximates their
carrying value.
34
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(18) Future Financing
Subsequent to August 31, 1996, the Company began discussions with numerous
lenders to re-establish an appropriate credit facility. The Company
anticipates the acquisition of new capital equipment during fiscal 1997 and
plans to enter into lease agreements to finance such equipment. The Company
is anticipating engagement of a regional investment bank to assist in
capitalization and other customary investment banking services provided to a
public company. In addition, the Company is in discussions with numerous
equity investors to provide capital to support internal growth and
acquisitions. There are no assurances that the Company will be successful in
raising the required capital. Further, without the addition of new capital
there can be no assurances that the Company can continue its operations or
meet its business objectives.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company appointed KPMG Peat Marwick LLP as independent auditors as
reported in the Company's Current Report on Form 8-K, dated July 31, 1996.
35
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICES, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of the Company, their ages and
present positions with the Company are as follows:
Name Age Position Held with the Company Director Since
Kenneth H. Marks 33 Chairman of the Board of Directors, 1996
Chief Executive Officer, President, and
Treasurer
Craig Macnab 40 Director 1996
Alan G. Finkel 62 Director 1996
Kenneth L. Marks 61 Director and Secretary 1996
Ray Steckenrider 71 Director 1996
Directors hold office until the annual meeting of the shareholders next
succeeding their election, and until their successors are elected and qualified,
or until their prior death, resignation or removal. Officers hold office until
the annual meeting of the Board of Directors next succeeding their election, and
until their successors shall have been elected and qualified, or until their
death, resignation or removal.
Kenneth H. Marks has been the Chairman of the Board of Directors, Chief
Executive Officer, President, and Treasurer since 1996. Mr. Marks was Chairman
and Chief Executive Officer of Kenmar from 1984 until 1996. He is the son of
Kenneth L. Marks listed below.
Craig Macnab has been a Director of the Company since 1996. Mr. Macnab
was a Director of Kenmar from 1993 until 1996. He has been a managing partner
with Mcneil Advisors since 1992. Prior to joining Macneil Advisors, Mr. Macnab
was a Partner of Bradford Capital. He is a director of J.D.N. Realty.
Alan G. Finkel has been a Director of the Company since 1996. Mr.
Finkel was a Director of Kenmar from 1992 until 1996. He has been a Management
Consultant since 1989. Prior to 1989 Mr. Finkel held numerous positions with
ITT, including President and General Manager of MacKay Communications, a
division of ITT.
Kenneth L. Marks has been a Director of the Company since 1996. Mr.
Marks was a director of Kenmar from 1984 until 1996. He has been Manager of
Human Resources for Lowes Corporation, Logistics since 1996. Prior to 1996 Mr.
Marks was a Management Consultant and Director of Labor Relations and Personnel
for Carolina Freight Carriers Corporation from 1974
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<PAGE>
until 1995. Kenneth L. Marks is the father of Kenneth H. Marks listed above.
Ray Steckenrider has been a Director of the Company since 1996. Mr.
Steckenrider was a Director of Kenmar from 1995 until 1996. He has been the
President of Autotron Corporation since 1986. Prior to 1986 was one of the
founders of Telex and held numerous engineering and management positions with
IBM.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
its common stock, to file reports of ownership and changes of ownership with the
Securities and Exchange Commission ("SEC") and each exchange on which the
Company's securities are registered. Officers, directors and greater than ten
percent shareholders are required by SEC regulation to furnish the Company with
copies of all ownership forms they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain persons that no Forms 5 were required
for those persons, the Company believes that, during the fiscal year ended
August 31, 1996, its officers, directors, and greater than ten percent
shareholders complied with all applicable Section 16(a) filing requirements.
ITEM 10. EXECUTIVE COMPENSATION.
The following table provides information with respect to all
compensation paid or accrued by the Company during the fiscal years ended August
31, 1996 to the Company's Chief Executive Officer, the only officer of the
Company whose salary and bonus for fiscal year 1996 exceeded $100,000.
Summary Compensation Table
Name and Principal 1-Other Annual
Position Year Salary ($) Bonus ($) Compensation $
- ------------------ ---- ---------- --------- --------------
Kenneth H. Marks 1996 125,000 53,567 2,783
CEO 1995 120,000 - 2,200
1994 150,000 - 2,200
1 Includes allocation of automobile expenses and imputed interest on a
note payable to the Company.
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<PAGE>
On July 30, 1996 the Company entered into an employment agreement with
Kenneth H. Marks as its President and Chief Executive Officer. Under the terms
of this agreement Mr. Marks is entitled to an annual salary of $125,000,
adjusted 5% annually for inflation, plus an annual bonus of 8% of the pretax net
income of the corporation. Also contained in the contract is provision for
numerous customary benefits and clauses relating to termination, including
severence equal to three years then salary.
To date, Kenneth H. Marks has not execised any options available to
him.
Members of the Board of Directors are paid out of pocket expenses
related to attending each meeting. A determination is made at the end of the
fiscal year as to an award of stock options as compensation for the time
invested in performing their duties as board members.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of October 30, 1996
treating all outstanding shares of Class A Cumulative Convertible Preferred
Stock, warrants and options as if it were converted into common stock based on
information contained in the Company's corporate records with respect to
beneficial ownership of common stock by (i) each person known by the Company to
be the owner of more than 5% of the outstanding common stock, (ii) each director
of the Company, (iii) the CEO of the Company, and (iv) all officers and
directors as a group:
Name and Address of Shares of Common Percentage of
Beneficial Owner Stock Owned* Stock Outstanding
Kenneth H. Marks 1,872,110 1 25.97%
Craig Macnab 340,020 2 4.72%
Alan G. Finkel 120,150 3 1.66%
Kenneth L. Marks 98,331 4 1.36%
Ray Steckenrider 19,616 5 0.27%
----------- -------
Directors and Officer 2,450,227 33.98%
as a group
* as defined above
1 Includes the option to purchase 350,000 shares of the Company's common
stock. Also includes 36,000 shares that are owned by nine Gift to Minor Act
Trusts of which Mr. Marks is custodian. Includes 5,714 shares of Class A
Cumulative Convertible Preferred Stock owned by Mr. Marks and his wife.
Kenneth H. Marks is the son of Kenneth L. Marks.
2 Includes the option to purchase 73,884 shares of the Company's common
stock.
3 Includes the option to purchase 120,150 shares of the Company's common
stock.
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<PAGE>
4 Includes the option to purchase 25,515 shares of the Company's common
stock. Also includes 10,515 shares owned by his wife.
5 Includes the option to purchase 15,000 shares of the Company's common
stock.
The following table indicates, as of October 30, 1996, the options to
purchase the Company's common stock held by the officers and directors of the
Company:
No. of Shares
Common Stock Exercise Expiration Options
Name of Holder Underlying the Option Price/Share Date Vested
Kenneth H. Marks 350,000 $2.25 07/30/01 350,000
Craig Macnab 42,060 $0.06 12/06/05 42,060
16,824 $1.07 03/28/04 16,824
15,000 $2.50 09/24/06 15,000
Alan G. Finkel 105,150 $1.07 10/07/03 105,150
15,000 $2.50 09/24/06 15,000
Kenneth L. Marks 10,515 $0.06 12/30/05 10,515
15,000 $2.50 09/24/06 15,000
Ray Steckenrider 15,000 $2.50 09/24/06 15,000
-------- -------
Directors and Officers 584,549 584,549
as a group
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On July 30, 1996, as a part of the employment agreement by and between
the Company and Kenneth H. Marks, Mr. Marks exercised his right to borrow
$100,000 from the Company at no interest for a period of one year. The note has
twenty five renewal periods and is repayable with the Company's common stock.
Interest is imputed at the lowest allowable federal rate.
The Company is a party to a consulting agreement, as amended, with its
controller, Gonzalo Fernandez through August 31, 1997. Mr. Fernandez is paid an
hourly rate of $43.75.
39
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits required by Item 601 of Regulation S-B are listed below.
Exhibit Description
2.1 (1) Agreement and Plan of Merger, dated as of
March 1, 1996, by and among the Company,
EMSG Business Groups, Inc. and J.A. Industries
of North Carolina, Inc.
3.1 (2)(3) Articles of Incorporation
3.2 (2) Bylaws
4.1 (2) Specimen Certificate for Common Stock
10.1 Building Lease
10.2 Consulting Agreement w/Gonzalo Fernandez
10.3 Notes Payable resulting from the acquisition of TSI
21.1 Subsidiaries of the registrant
22.1 (1) Notice of Special Meeting of Shareholders
and Proxy Statement, dated July 10, 1996
23.1 Consent of KPMG Peat Marwick LLP
(1) Incorporated by reference from the Proxy Statement
date July 10, 1996.
(2) Incorporated by reference from documents filed
pursuant to the Securities Exchange Act of 1934.
(3) Filed herewith are board resolutions establishing
the rights and preferences of the Company's Class
A Cumulative Convertible Preferred Stock.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K and 8-K/A,
dated August 14, 1996 and October 15, 1996 respectively in connection with the
Merger, as described above.
(c) Financial Statements (included on pages 17 through 35 of
this report).
40
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
/s/Kenneth H. Marks
President and Chief Executive Officer
December 16, 1996
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
/s/Kenneth H. Marks
President and Chief Executive Officer
(principal executive financial,
and accounting officer)
/s/Kenneth H. Marks
Director
/s/Alan G. Finkel
Director
/s/Craig Macnab
Director
/s/Kenneth L. Marks
Director
/s/Ray Steckenrider
Director
Date: December 16, 1996
41
<PAGE>
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
WRITTEN CONSENT OF BOARD OF DIRECTORS
AUGUST 29, 1996
Pursuant to Section 141(f) of the Delaware General Corporation Law, the
undersigned, being all of the members of the Board of Directors of Electronic
Manufacturing Services Group, Inc., a Delaware corporation (the "corporation"),
do hereby take the following action and adopt the following resolutions by
written consent, effective for all purposes as of the date hereof:
WHEREAS, the corporation's Certificate of Incorporation, as amended,
authorizes the corporation to issue Two Million (2,000,000) shares of preferred
stock, par value One Cent ($.01) per share;
WHEREAS, the Certificate of Incorporation provides that preferred stock
may be issued in such classes or series, and may have such voting powers, full
or limited, or no voting powers, and such designations, preferences and
relative, participating, optional or other special rights and qualifications, or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue of such stock adopted by the Board of
Directors;
WHEREAS, the Board of Directors has determined that it would be in the
corporation's best interests to establish and authorize the issuance of a class
of preferred stock denominated as "Class A Cumulative Convertible Preferred
Stock," having the designations, preferences, and rights as set forth herein;
WHEREAS, the corporation's subsidiary, EMSG Systems Division, Inc.
("ESD") has 9,926 shares of Class A Cumulative Preferred Stock (the "ESD
Preferred Stock") issued and outstanding; and
WHEREAS, the Board of Directors has determined that it would be in the
corporation's best interests to offer to exchange shares of its newly-created
Class A Cumulative Convertible Preferred Stock for all of the outstanding shares
of the ESD Preferred Stock, effective August 31, 1996, on such terms and
conditions as the officers of the corporation determine to be in the
corporation's best interests.
NOW, THEREFORE, BE IT RESOLVED, that the corporation shall have the
authority to issue preferred stock denominated as Class A Cumulative Convertible
Preferred Stock ("Class A Preferred Stock"), to consist of 350,000 shares, par
value One Cent ($.01) per share. "Par value" shall mean the dollar amount fixed
as the nominal or face value, as opposed to the market value, of each share of
Class A Preferred Stock, such dollar amount appearing on each certificate for
shares of such stock. The designations, preferences, and rights of the shares of
the Class A Preferred Stock are set forth as follows:
(1) Certain Definitions. Unless the context otherwise
requires, the terms defined in this subparagraph 1 shall have, for
all purposes of this resolution, the meanings herein specified.
<PAGE>
Common Stock. The term "Common Stock" shall mean the common
voting stock, par value $.0025 per share, of the corporation and all shares
hereafter authorized of any class of common stock of the corporation; and any
other stock of the corporation hereafter authorized and howsoever designated
which has the right (subject always to prior rights of any class or series of
preferred stock) to participate in the distribution of the assets and earnings
of the corporation without limit as to per share amount.
Conversion Date. The term "Conversion Date" shall have the
meaning set forth in subparagraph 4(d) below.
Conversion Price. The term "Conversion Price" shall mean the
price per share of Common Stock used to determine the number of shares of Common
Stock deliverable upon conversion of a share of the Class A Preferred Stock,
which price shall initially be One and 75/100 Dollars ($1.75) per share, subject
to adjustment in accordance with the provisions of subparagraph 4 below.
Current Market Price. The term "Current Market Price"
shall have the meaning set forth in subparagraph 4(g) below.
Dividend Payment Date. The term "Dividend Payment Date"
shall have the meaning set forth in subparagraph 2(a) below.
Dividend Period. The term "Dividend Period" shall have the
meaning set forth in subparagraph 2(a) below.
Issue Date. The term "Issue Date" shall mean the date that
shares of Class A Preferred Stock are issued by the corporation. In the event
all of the authorized shares of Class A Preferred Stock are not issued on the
same date, the Issue Date for each particular share of Class A Preferred Stock
shall be the date upon which that particular share is issued by the corporation.
Junior Stock. The term "Junior Stock" shall mean, for purposes
of subparagraphs 2 and 6 below, the Common Stock, and any other class or series
of stock of the corporation hereafter authorized that is not entitled to receive
any dividends in any Dividend Period unless all dividends required to have been
paid or declared and set apart for payment on the Class A Preferred Stock shall
have been so paid or declared and set apart for payment; and for purposes of
subparagraphs 3 and 6 below, shall mean any class or series of stock of the
corporation hereafter authorized that is not entitled to receive any assets upon
the liquidation, dissolution, or winding up of the affairs of the corporation
until the Class A Preferred Stock shall have received the entire amount to which
such stock is entitled upon such liquidation, dissolution, or winding up.
Parity Stock. The term "Parity Stock" shall mean, for
purposes of subparagraphs 2 and 6 below, any other class or series of
stock of the corporation hereafter authorized that is entitled to
-2-
<PAGE>
receive payment of dividends on a parity with the Class A Preferred Stock; and
for purposes of subparagraphs 3 and 6 below, shall mean any other class or
series of stock of the corporation hereafter authorized that is entitled to
receive assets upon the liquidation, dissolution, or winding up of the affairs
of the corporation on a parity with the Class A Preferred Stock.
Senior Stock. The term "Senior Stock" shall mean, for purposes
of subparagraphs 2 and 6 below, any class or series of stock of the corporation
hereafter authorized that ranks senior to the Class A Preferred Stock in respect
of the right to receive dividends; and for purposes of subparagraphs 3 and 6
below, shall mean any class or series of stock of the corporation hereafter
authorized that ranks senior to the Class A Preferred Stock in respect of the
right to receive assets upon the liquidation, dissolution, or winding up of the
affairs of the corporation.
Subscription Price. The term "Subscription Price" shall
mean One and 75/100 Dollars ($1.75) per share.
(2) Dividends.
(a) Subject to the prior preferences and other rights of any
Senior Stock, each holder of Class A Preferred Stock shall be entitled to
receive, out of funds legally available for that purpose, cash dividends at the
rate of Seventeen and 50/100 Cents ($.175) per share per annum for each share of
Class A Preferred Stock owned by such holder, and no more. Such dividends shall
be cumulative from the Issue Date and shall be payable in arrears, when and as
declared by the Board of Directors, on March 15, June 15, September 15, and
December 15 of each year (each such date being herein referred to as a "Dividend
Payment Date"), commencing on the first Dividend Payment Date following the
Issue Date. The quarterly period between consecutive Dividend Payment Dates
shall hereinafter be referred to as a "Dividend Period." Dividends for any
period less than a full Dividend Period shall be calculated on a day-to-day
basis and on the basis of a 360-day year. Each dividend shall be paid to the
holders of record of the Class A Preferred Stock as their names appear on the
share register of the corporation on the corresponding Record Date. The term
"Record Date" means, with respect to the dividend payable on March 15, June 15,
September 15, and December 15, respectively, of each year, the preceding March
1, June 1, September 1, and December 1, or such other record date designated by
the Board of Directors of the corporation with respect to the dividend payable
on such respective Dividend Payment Date. Dividends on account of arrears for
any past Dividend Periods may be declared and paid at any time, without
reference to any Dividend Payment Date, to holders of record on such date as may
be fixed by the Board of Directors.
(b) In the event that full cash dividends are not paid or made
available to the holders of all outstanding shares of Class A Preferred Stock
and of any Parity Stock, and funds available shall be
-3-
<PAGE>
insufficient to permit payment in full in cash to all such holders of the
preferential amounts to which they are then entitled, the entire amount
available for payment of cash dividends shall be distributed among the holders
of the Class A Preferred Stock and of any Parity Stock ratably in proportion to
the full amount to which they would otherwise be respectively entitled, and any
remainder not paid in cash to the holders of the Class A Preferred Stock shall
cumulate as provided in subparagraph 2(c) below.
(c) If, on any Dividend Payment Date, the holders of the Class
A Preferred Stock shall not have received the full dividends provided for in the
other provisions of this subparagraph 2, then such dividends shall cumulate,
whether or not earned or declared, for each succeeding full Dividend Period
during which such dividends shall remain unpaid. Unpaid dividends for any period
less than a full Dividend Period shall cumulate on a day-to-day basis and shall
be calculated on the basis of a 360-day year.
(d) So long as any shares of Class A Preferred Stock shall be
outstanding, the corporation shall not declare or pay on any Junior Stock any
dividend whatsoever, whether in cash, property or otherwise (other than
dividends payable in shares of the class or series upon which such dividends are
declared or paid, or payable in shares of Common Stock with respect to Junior
Stock other than Common Stock, together with cash in lieu of fractional shares),
nor shall the corporation make any distribution on any Junior Stock, nor shall
any Junior Stock be purchased or redeemed by the corporation, nor shall any
monies be paid or made available for a sinking fund for the purchase or
redemption of any Junior Stock, unless all dividends to which the holders of
Class A Preferred Stock shall have been entitled for all previous Dividend
Periods shall have been paid or declared and a sum of money sufficient for the
payment thereof set apart.
(3) Distributions Upon Liquidation, Dissolution, or Winding Up. In the
event of any voluntary or involuntary liquidation, dissolution, or other winding
up of the affairs of the corporation, subject to the prior preferences and other
rights of any Senior Stock, but before any distribution or payment shall be made
to the holders of Junior Stock, the holders of the Class A Preferred Stock shall
be entitled to be paid the Subscription Price of all outstanding shares of Class
A Preferred Stock as of the date of such liquidation or dissolution or such
other winding up, plus any accrued and unpaid dividends thereon to such date,
and no more, in cash or in property taken at its fair value as determined by the
Board of Directors, or both, at the election of the Board of Directors. If such
payment shall have been made in full to the holders of the Class A Preferred
Stock, and if payment shall have been made in full to the holders of any Senior
Stock and Parity Stock of all amounts to which such holders shall be entitled,
the remaining assets and funds of the corporation shall be distributed among the
holders of Junior Stock, according to their respective shares and priorities.
If, upon any such liquidation, dissolution, or other winding up of the affairs
of
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<PAGE>
the corporation, the net assets of the corporation distributable among the
holders of all outstanding shares of the Class A Preferred Stock and of any
Parity Stock shall be insufficient to permit the payment in full to such holders
of the preferential amounts to which they are entitled, then the entire net
assets of the corporation remaining after the distributions to holders of any
Senior Stock of the full amounts to which they may be entitled shall be
distributed among the holders of the Class A Preferred Stock and of any Parity
Stock ratably in proportion to the full amounts to which they would otherwise be
respectively entitled. Neither the consolidation or merger of the corporation
into or with another corporation or corporations, nor the sale of all or
substantially all of the assets of the corporation to another corporation or
corporations shall be deemed a liquidation, dissolution, or winding up of the
affairs of the corporation within the meaning of this subparagraph 3.
(4) Conversion Rights. The Class A Preferred Stock shall be
convertible into Common Stock as follows:
(a) Optional Conversion. Subject to and upon compliance with
the provisions of this subparagraph 4, the holder of any shares of Class A
Preferred Stock shall have the right at such holder's option, at any time or
from time to time, to convert any of such shares of Class A Preferred Stock into
fully paid and nonassessable, unregistered shares of Common Stock at the
Conversion Price (as hereinafter defined) in effect on the Conversion Date (as
hereinafter defined) upon the terms hereinafter set forth.
(b) Certificate Legend. Certificates representing shares
of Common Stock issued pursuant to a conversion described in
subparagraph 4(a) shall bear legends in substantially the following
forms:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER ANY FEDERAL OR STATE SECURITIES LAWS AND HAVE
BEEN ISSUED UNDER EXEMPTIONS THAT DEPEND IN PART ON THE INTENT
OF THE HOLDER HEREOF NOT TO SELL OR TRANSFER SUCH SHARES IN
ANY MANNER NOT PERMITTED BY SUCH LAWS. THESE SHARES MAY NOT BE
SOLD OR TRANSFERRED EXCEPT UPON REGISTRATION UNDER ALL
APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR UPON DELIVERY
TO ELECTRONIC MANUFACTURING SERVICES GROUP, INC. OF EITHER (A)
A NO-ACTION LETTER FROM THE STATE AND FEDERAL AGENCIES HAVING
JURISDICTION THEREOF OR (B) AN OPINION OF COUNSEL ACCEPTABLE
TO THE CORPORATION THAT NEITHER THE SALE NOR THE PROPOSED
TRANSFER CONSTITUTES A VIOLATION OF ANY FEDERAL OR STATE
SECURITIES LAW.
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(c) Conversion Price. Each share of Class A Preferred Stock
shall be converted into a number of shares of Common Stock determined by
dividing (i) the sum of (A) the Subscription Price plus (B) any dividends on
such share of Class A Preferred Stock which such holder is entitled to receive,
but has not yet received, by (ii) the Conversion Price in effect on the
Conversion Date, and multiplying that quotient by one and one-half (1.5). The
Conversion Price at which shares of Common Stock shall initially be issuable
upon conversion of the shares of Class A Preferred Stock shall be One and 75/100
Dollars ($1.75). The Conversion Price shall be subject to adjustment as set
forth in subparagraph 4(f). No payment or adjustment shall be made for any
dividends on the Common Stock issuable upon such conversion.
(d) Mechanics of Conversion. The holder of any shares of Class
A Preferred Stock may exercise the conversion right specified in subparagraph
4(a) by surrendering to the corporation or any transfer agent of the corporation
the certificate or certificates for the shares to be converted, accompanied by
written notice specifying the number of shares to be converted. Conversion shall
be deemed to have been effected on the date when delivery of notice of an
election to convert and certificates for shares is made, and such date is
referred to herein as the "Conversion Date". Subject to the provision of
subparagraph 4(f)(vii), as promptly as practicable thereafter (and after
surrender of the certificate or certificates representing shares of Class A
Preferred Stock to the corporation or any transfer agent of the corporation) the
corporation shall issue and deliver to or upon the written order of such holder
a certificate or certificates for the number of full shares of Common Stock to
which such holder is entitled and a check or cash with respect to any fractional
interest in a share of Common Stock as provided in subparagraph 4(e). Subject to
the provisions of subparagraph 4(f)(vii), the person in whose name the
certificate or certificates for Common Stock are to be issued shall be deemed to
have become a holder of record of such Common Stock on the applicable Conversion
Date. Upon conversion of only a portion of the number of shares covered by a
certificate representing shares of Class A Preferred stock surrendered for
conversion, the corporation shall issue and deliver to or upon the written order
of the holder of the certificate so surrendered for conversion, at the expense
of the corporation, a new certificate covering the number of shares of Class A
Preferred Stock representing the unconverted portion of the certificate so
surrendered.
(e) Fractional Shares. No fractional shares of
Common Stock or scrip shall be issued upon conversion of shares of Class A
Preferred Stock. If more than one share of Class A Preferred Stock shall be
surrendered for conversion at any one time by the same holder, the number of
full shares of Common Stock issuable upon conversion thereof shall be computed
on the basis of the aggregate number of shares of Class A Preferred Stock so
surrendered. Instead of any fractional shares of Common Stock which would
otherwise be
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<PAGE>
issuable upon conversion of any shares of Class A Preferred Stock, the
corporation shall pay a cash adjustment in respect of such fractional interest
in an amount equal to that fractional interest of the then Current Market Price.
(f) Conversion Price Adjustments. The Conversion
Price shall be subject to adjustment from time to time as follows:
(i) Common Stock Issued at less than the
Conversion Price. If the corporation shall issue any Common Stock other than
Excluded Stock (as hereinafter defined) without consideration or for a
consideration per share less than the Conversion Price in effect immediately
prior to such issuance, the Conversion Price in effect immediately prior to each
such issuance shall immediately (except as provided below) be reduced to the
price determined by dividing (1) an amount equal to the sum of (A) the number of
shares of Common Stock outstanding immediately prior to such issuance multiplied
by the Conversion Price in effect immediately prior to such issuance and (B) the
consideration, if any, received by the corporation upon such issuance, by (2)
the total number of shares of Common Stock outstanding immediately after such
issuance.
For the purposes of any adjustment of the Conversion Price pursuant to
clause (i), the following provisions shall be applicable:
(A) Cash. In the case of the issuance of
Common Stock for cash, the amount of the consideration received by the
corporation shall be deemed to be the amount of the cash proceeds received by
the corporation for such Common Stock before deducting therefrom any discounts,
commissions, taxes or other expenses allowed, paid or incurred by the
corporation for any underwriting or otherwise in connection with the issuance
and sale thereof.
(B) Consideration Other Than Cash. In the
case of the issuance of Common Stock (otherwise than upon the conversion of
shares of capital stock or other securities of the corporation) for a
consideration in whole or in part other than cash, including securities acquired
in exchange therefor (other than securities by their terms so exchangeable), the
consideration other than cash shall be deemed to be the fair value thereof as
determined by the Board of Directors, irrespective of any accounting treatment;
provided that such fair value as determined by the Board of Directors shall not
exceed the aggregate Current Market Price of the share of Common Stock being
issued as of the date the Board of Directors authorizes the issuance of such
shares.
(C) Options and Convertible Securities. In
the case of the issuance of (i) options, warrants or other rights to purchase or
acquire Common Stock (whether or not at the time exercisable), (ii) securities
by their terms convertible into or exchangeable for Common Stock (whether or not
at the time so
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<PAGE>
convertible or exchangeable) or options, warrants or rights to purchase such
convertible or exchangeable securities (whether or not at the time exercisable):
(1) the aggregate maximum number of
shares of Common Stock deliverable upon exercise of such options, warrants or
other rights to purchase or acquire Common Stock shall be deemed to have been
issued at the time such options, warrants or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
subclauses (A) and (B) above), if any, received by the corporation upon the
issuance of such options, warrants or rights plus the minimum purchase price
provided in such options, warrants or rights for the Common Stock covered
thereby;
(2) the aggregate maximum number of
shares of Common Stock deliverable upon conversion of or in exchange for any
such convertible or exchangeable securities, or upon the exercise of options,
warrants or other rights to purchase or acquire such convertible or exchangeable
securities and the subsequent conversion or exchange thereof, shall be deemed to
have been issued at the time such securities were issued or such options,
warrants or rights were issued and for a consideration equal to the
consideration, if any, received by the corporation for any such securities and
related options, warrants or rights (excluding any cash received on account of
accrued interest or accrued dividends), plus the additional consideration
(determined in the manner provided in subclauses (A) and (B) above), if any, to
be received by the corporation upon the conversion or exchange of such
securities, or upon the exercise of any related options, warrants or rights to
purchase or acquire such convertible or exchangeable securities and the
subsequent conversion or exchange thereof;
(3) on any change in the number of
shares of Common Stock deliverable upon exercise of any such options, warrants
or rights or conversion or exchange of such convertible or exchangeable
securities or any change in the consideration to be received by the corporation
upon such exercise, conversion or exchange, including, but not limited to, a
change resulting from the anti-dilution provisions thereof, the Conversion Price
as then in effect shall forthwith be readjusted to such Conversion Price as
would have been obtained had an adjustment been made upon the issuance of such
options, warrants or rights not exercised prior to such change, or of such
convertible or exchangeable securities not converted or exchanged prior to such
change, upon the basis of such change;
(4) on the expiration or
cancellation of any such options, warrants or rights, or the termination of the
right to convert or exchange such convertible or exchangeable securities, if the
Conversion Price shall have been adjusted upon the issuance thereof, the
Conversion Price shall forthwith be readjusted to such Conversion Price as would
have been obtained had an adjustment been
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<PAGE>
made upon the issuance of such options, warrants, rights or such convertible or
exchangeable securities on the basis of the issuance of only the number of
shares of Common Stock actually issued upon the exercise of such options,
warrants or rights, or upon the conversion or exchange of such convertible or
exchangeable securities; and
(5) if the Conversion Price shall
have been adjusted upon the issuance of any such options, warrants, rights or
convertible or exchangeable securities, no further adjustment of the Conversion
Price shall be made for the actual issuance of Common Stock upon the exercise,
conversion or exchange thereof;
(ii) Excluded Stock. "Excluded Stock" shall mean (A)
shares of Common Stock issued or reserved for issuance by the corporation as a
stock dividend payable in shares of Common Stock, or upon any subdivision or
split-up of the outstanding shares of Common Stock or Class A Preferred Stock,
or upon conversion of shares of Class A Preferred Stock and (B) shares of Common
Stock to be issued pursuant to employee benefit plan transactions to key
employees, consultants and advisors of the corporation together with any such
shares that are repurchased by the corporation and reissued to any such
employee, consultant or advisor; provided, however, that shares of Common Stock
issued and to be issued to such persons shall not exceed twenty-five (25%) of
the issued and outstanding shares of Common Stock. All shares of Excluded Stock
which the corporation has reserved for issuance shall be deemed to be
outstanding for all purposes of computations under subparagraph 4(f)(i).
(iii) Stock Dividends, Subdivisions, Reclassifica-
tion or Combinations. If the corporation shall (i) declare a dividend or make a
distribution on its Common Stock in shares of its Common Stock, (ii) subdivide
or reclassify the outstanding shares of Common Stock into a greater number of
shares, or (iii) combine or reclassify the outstanding Common Stock into a
smaller number of shares, the Conversion Price in effect at the time of the
record date for such dividend or distribution or the effective date of such
subdivision, combination or reclassification shall be proportionately adjusted
so that the holder of any shares of Class A Preferred Stock surrendered for
conversion after such date shall be entitled to receive the number of shares of
Common Stock which he would have owned or been entitled to receive had such
Class A Preferred Stock been converted immediately prior to such date.
Successive adjustments in the Conversion Price shall be made whenever any event
specified above shall occur.
(iv) Other Distributions. In case the corporation
shall fix a record date for the making of a distribution to all holders of
shares of its Common Stock (i) of shares of any class other than its Common
Stock or (ii) of evidence of indebtedness of the corporation or (iii) of assets
(excluding cash dividends or distributions, and dividends or distributions
referred to in subparagraph 4(f)(iii) above), or (iv) of rights or warrants
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<PAGE>
(excluding those referred to in subparagraph 4(f)(i) above), in each such case
the Conversation Price in effect immediately prior thereto shall be reduced
immediately thereafter to the price determined by dividing (1) an amount equal
to the difference resulting from (A) the number of shares of Common Stock
outstanding on such record date multiplied by the Conversion Price per share on
such record date, less (B) the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive) of said shares or evidences
of indebtedness or assets or rights or warrants to be so distributed, by (2) the
number of shares of Common Stock outstanding on such record date. Such
adjustment shall be made successively whenever such a record date is fixed. In
the event that such distribution is not so made, the Conversion Price then in
effect shall be readjusted, effective as of the date when the Board of Directors
determines not to distribute such shares, evidences of indebtedness, assets,
rights or warrants, as the case may be, to the Conversion Price which would then
be in effect if such record date had not been fixed.
(v) Consolidation, Merger, Sale, Lease or Conveyance.
In case of any consolidation with or merger of the corporation with or into
another corporation, or in case of any sale, lease or conveyance to another
corporation of the assets of the corporation as an entirety or substantially as
an entirety, each share of Class A Preferred Stock shall after the date of such
consolidation, merger, sale, lease or conveyance be convertible into the number
of shares of stock or other securities or property (including cash) to which the
Common Stock issuable (at the time of such consolidation, merger, sale, lease or
conveyance) upon conversion of such share of Class A Preferred Stock would have
been entitled upon such consolidation, merger, sale, lease or conveyance; and in
any such case, if necessary, the provisions set forth herein with respect to the
rights and interests thereafter of the holders of the shares of Class A
Preferred Stock shall be appropriately adjusted so as to be applicable, as
nearly as may reasonably be, to any shares of stock or other securities or
property thereafter deliverable on the conversion of the shares of Class A
Preferred Stock.
(vi) Rounding of Calculations; Minimum Adjustment.
All calculations under this subparagraph 4(f) shall be made to the nearest cent
or to the nearest one hundredth (1/100th) of a share, as the case may be. Any
provision of this subparagraph 4 to the contrary notwithstanding, no adjustment
in the Conversion Price shall be made if the amount of such adjustment would be
less than $0.05, but any such amount shall be carried forward and an adjustment
with respect thereto shall be made at the time of and together with any
subsequent adjustment which, together with such amount and any other amount or
amounts so carried forward, shall aggregate $0.05 or more.
(vii) Timing of Issuance of Additional Common Stock
Upon Certain Adjustments. In any case in which the provisions of this
subparagraph 4(f) shall require that an adjustment shall become
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<PAGE>
effective immediately after a record date for an event, the corporation may
defer until the occurrence of such event (A) issuing to the holder of any share
of Class A Preferred Stock converted after such record date and before the
occurrence of such event the additional shares of Common Stock issuable upon
such conversion by reason of the adjustment required by such event over and
above the shares of Common Stock issuable upon such conversion before giving
effect to such adjustment and (B) paying to such holder any amount of cash in
lieu of a fractional share of Common Stock pursuant to subparagraph 4(e);
provided that the corporation upon request shall deliver to such holder a due
bill or other appropriate instrument evidencing such holder's right to receive
such additional shares, and such cash, upon the occurrence of the event
requiring such adjustment.
(g) Current Market Price. The Current Market Price at any date
shall mean, in the event the Common Stock is publicly traded, the average of the
daily closing prices per share of Common Stock for thirty (30) consecutive
trading days ending no more than fifteen (15) business days before such date (as
adjusted for any stock dividend, split, combination or reclassification that
took effect during such thirty (30) business day period). The closing price for
each day shall be the last reported sale price regular way or, in case no such
reported sale takes place on such day, the average of the last closing bid and
asked prices regular way, in either case on the principal national securities
exchange on which the Common Stock is listed or admitted to trading, or if not
listed or admitted to trading on any national securities exchange, the closing
sale price for such day reported by NASDAQ, if the Common Stock is traded
over-the-counter and quoted in the National Market System, or if the Common
Stock is so traded, but not so quoted, the average of the closing reported bid
and asked prices of the Common Stock as reported by NASDAQ or any comparable
system or, if the Common Stock is not listed on NASDAQ or any comparable system,
the average of the closing bid and asked prices as furnished by two members of
the National Association of Securities Dealers, Inc. selected from time to time
by the corporation for that purpose. If the Common Stock is not traded in such
manner that the quotations referred to above are available for the period
required hereunder, Current Market Price per share of Common Stock shall be
deemed to be the fair value as determined by the Board of Directors,
irrespective of any accounting treatment.
(h) Statement Regarding Adjustments. Whenever the Conversion
Price shall be adjusted as provided in subparagraph 4(f), the corporation shall
forthwith file, at the office of any transfer agent for the Class A Preferred
Stock and at the principal office of the corporation, a statement showing in
detail the facts requiring such adjustment and the Conversion Price that shall
be in effect after such adjustment, and the corporation shall also cause a copy
of such statement to be sent by mail, first class postage prepaid, to each
holder of shares of Class A Preferred Stock at its address appearing on the
corporation's records. Each such statement shall be
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<PAGE>
signed by the corporation's independent public accountants, if applicable. Where
appropriate, such copy may be given in advance and may be included as part of a
notice required to be mailed under the provisions of subparagraph 4(i).
(i) Notice to Holders. In the event the corporation shall
propose to take any action of the type described in clause (i) (but only if the
action of the type described in clause (i) would result in an adjustment in the
Conversion Price), (iii), (iv) or (v) of subparagraph 4(f), the corporation
shall give notice to each holder of shares of Class A Preferred Stock, in the
manner set forth in subparagraph 4(h), which notice shall specify the record
date, if any, with respect to any such action and the approximate date on which
such action is to take place. Such notice shall also set forth such facts with
respect thereto as shall be reasonably necessary to indicate the effect of such
action (to the extent such effect may be known at the date of such notice) on
the Conversion Price and the number, kind or class of shares or other securities
or property which shall be deliverable upon conversion of shares of Class A
Preferred Stock. In the case of any action which would require the fixing of a
record date, such notice shall be given at least ten (10) days prior to the date
so fixed, and in case of all other action, such notice shall be given at least
fifteen (15) days prior to the taking of such proposed action. Failure to give
such notice, or any defect therein, shall not affect the legality or validity of
any such action.
(j) Treasury Stock. For the purposes of this subparagraph 4,
the sale or other disposition of any Common Stock theretofore held in the
corporation's treasury shall be deemed to be an issuance thereof.
(k) Costs. The corporation shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance or delivery
of shares of Common Stock upon conversion of any shares of Class A Preferred
Stock; provided that the corporation shall not be required to pay any taxes
which may be payable in respect of any transfer involved in the issuance or
delivery of any certificate for such shares in a name other than that of the
holder of the shares of Class A Preferred Stock in respect of which such shares
are being issued.
(l) Reservation Shares. The corporation shall reserve at all
times so long as any shares of Class A Preferred Stock remain outstanding, free
from preemptive rights, out of its treasury stock (if applicable) or its
authorized but unissued shares of Common Stock, or both, solely for the purpose
of effecting the conversion of the shares Class A Preferred Stock, sufficient
shares of Common Stock to provide for the conversion of all outstanding shares
of Class A Preferred Stock.
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<PAGE>
(m) Approvals. If any shares of Common Stock to be reserved
for the purpose of conversion of shares of Class A Preferred Stock require
registration with or approval of any governmental authority under any federal or
state law before such shares may be validly issued or delivered upon conversion,
then the corporation will in good faith and as expeditiously as possible
endeavor to secure such registration or approval, as the case may be. If, and so
long as, any Common Stock into which the shares of Class A Preferred Stock are
then convertible is listed on any national securities exchange, the corporation
will, if permitted by the rules of such exchange, list and keep listed on such
exchange, upon official notice of issuance, all shares of such Common Stock
issuable upon conversion.
(n) Valid Issuance. All shares of Common Stock which may be
issued upon conversion of the shares of Class A Preferred Stock will upon
issuance by the corporation be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issuance thereof, and the corporation shall take no action which will cause a
contrary result (including without limitation, any action which would cause the
Conversion Price to be less than the par value, if any, of the Common Stock).
(5) Voting Rights. The holders of the issued and outstanding
shares of Class A Preferred Stock shall have no voting rights except
as set forth herein and as required by law.
(6) Covenants. In addition to any other rights provided by law, so long
as any Class A Preferred Stock is outstanding, the corporation, without first
obtaining the affirmative vote or written consent of the holders of not less
than a majority of such outstanding shares of Class A Preferred Stock, will not:
(a) amend or repeal any provision of, or add any provision to,
the corporation's Articles of Incorporation or Bylaws if such action
would alter adversely or reduce the preferences, rights, privileges or
powers of, or the restrictions provided for the benefit of, any Class A
Preferred Stock, or increase or decrease the number of shares of Class
A Preferred Stock authorized thereby;
(b) authorize or issue shares of any class or series of stock
not expressly authorized herein having any preference or priority as to
dividends, assets or other rights superior to or on a parity with any
such preference or priority of the Class A Preferred Stock, or
authorize or issue shares of stock of any class or any bonds,
debentures, notes or other obligations convertible into or exchangeable
for, or having option rights to purchase, any shares of stock of the
corporation having any preference or priority as to dividends, assets
or other rights superior to or on a parity with any such preference or
priority of the Class A Preferred Stock;
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(c) reclassify any class or series of any Junior Stock into
Parity Stock or Senior Stock or reclassify any series of Parity Stock
into Senior Stock; or
(d) pay or declare any dividend on any Junior Stock (other
than dividends payable in shares of the class or series upon which such
dividends are declared or paid, or payable in shares of Common Stock
with respect to Junior Stock other than Common Stock, together with
cash in lieu of fractional shares and dividends not in excess of
dividends paid to the Class A Preferred Stock) while the Class A
Preferred Stock remains outstanding, or apply any or its assets to the
redemption, retirement, purchase or acquisition, directly or
indirectly, through subsidiaries or otherwise, of any Junior Stock,
except from employees of the corporation upon termination of employment
or otherwise pursuant to the terms of stock purchase or option
agreements providing for the repurchase of, or right of first refusal
with respect to, such Junior Stock entered into with such employees.
(7) Board Liaison; Communications. The corporation's Board of Directors
from time to time will select one of its members to serve as a communications
liaison (the "Liaison") between the Board of Directors and the holders of the
Class A Preferred Stock. The Liaison will be responsible for ensuring that the
holders of the Class A Preferred Stock receive copies of all material
correspondence sent by the corporation to the holders of the corporation's
Common Stock, and for presenting to the Board of Directors all written positions
regarding the corporation adopted by the holders of the Class A Preferred Stock
as a group. The Board of Directors hereby appoints Ray Steckenrider to serve
initially as the Liaison.
(8) Exclusion of Other Rights. Except as may be otherwise required by
law, the shares of Class A Preferred Stock shall not have any preferences or
relative, participating, optional or other special rights, other than those
specifically set forth in this resolution (as such resolution may be amended
from time to time). The shares of Class A Preferred Stock shall have no
preemptive or subscription rights.
(9) Headings of Subdivisions. The headings of the various
subdivisions hereof are for convenience of reference only and shall
not affect the interpretation of any of the provisions hereof.
(10) Severability of Provisions. If any right, preference or limitation
of the Class A Preferred Stock set forth in this resolution (as such resolution
may be amended from time to time) is invalid, unlawful or incapable of being
enforced by reason of any rule of law or public policy, all other rights,
preferences and limitations set forth in this resolution (as so amended) which
can be given effect without the invalid, unlawful or unenforceable right,
preference or limitation shall, nevertheless, remain in full force
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and effect, and no right, preference or limitation herein set forth shall be
deemed dependent upon any other such right, preference or limitation unless so
expressed herein.
(11) Status of Reacquired Shares. Shares of Class A Preferred Stock
which have been issued and reacquired in any manner shall (upon compliance with
any applicable provisions of the laws of the State of North Carolina) have the
status of authorized and unissued shares of Class A Preferred Stock and may be
redesignated and reissued.
FURTHER RESOLVED, that the corporation shall offer to exchange shares
of its Class A Preferred Stock for all of the outstanding shares of the ESD
Preferred Stock, effective August 31, 1996, on such terms and conditions as the
officers of the corporation determine to be in the corporation's best interests.
FURTHER RESOLVED, that the officers of the corporation be, and they
hereby are, authorized to take all such action and to execute and deliver on
behalf of the corporation any and all such certificates, instruments, documents,
agreements, and undertakings as they or any of them may consider necessary or
appropriate to enable the corporation to carry out the intent and purposes of
the foregoing resolutions.
/s/ Alan G. Finkel /s/ Craig Macnab
- ---------------------------- ----------------------------
Alan G. Finkel Craig Macnab
/s/ Kenneth H. Marks /s/ Kenneth L. Marks
- ---------------------------- ----------------------------
Kenneth H. Marks Kenneth L. Marks
/s/ Ray Steckenrider
- ----------------------------
Ray Steckenrider
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ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
WRITTEN CONSENT OF BOARD OF DIRECTORS
AUGUST 30, 1996
Pursuant to Section 141(f) of the Delaware General Corporation Law, the
undersigned, being all of the members of the Board of Directors of Electronic
Manufacturing Services Group, Inc., a Delaware corporation (the "corporation"),
do hereby take the following action and adopt the following resolutions by
written consent, effective for all purposes as of the date hereof:
WHEREAS, on August 29, 1996, the corporation's Board of Directors
adopted certain resolutions by written consent (the "Consent"), which, among
other things, authorized the corporation to issue 350,000 shares of preferred
stock denominated as Class A Cumulative Convertible Preferred Stock ("Class A
Preferred Stock"), par value One Cent ($.01) per share;
WHEREAS, the Board of Directors of the corporation had previously
determined that the Class A Preferred Stock would be voting stock, issued to the
holders of the Class A Cumulative Preferred Stock of its subsidiary, EMSG
Systems Division, Inc., in connection with a "reverse B" reorganization of the
corporation;
WHEREAS, the Consent, at subparagraph 5, inadvertently provided that
the holders of the Class A Preferred Stock would have no voting rights;
WHEREAS, the Board of Directors desires to amend the Consent to give
the holders of the Class A Preferred Stock certain voting rights; and
WHEREAS, the corporation has not yet issued any shares of Class A
Preferred Stock.
NOW, THEREFORE, BE IT RESOLVED, that subparagraph 5 of the Consent
shall be amended to read as follows:
(5) Voting Rights. Except as otherwise set forth herein or required by
law, the holders of the issued and outstanding shares of Class A Preferred Stock
shall have the right to vote, with the holders of the corporation's Common Stock
and not as a separate class, on each matter submitted to the shareholders for a
vote, and each share of Class A Preferred Stock shall entitle its holder to
one-tenth of one (1/10) vote on each such matter.
FURTHER RESOLVED, that the officers of the corporation be, and they
hereby are, authorized to take all such action and to execute and deliver on
behalf of the corporation any and all such certificates, instruments, documents,
agreements, and undertakings as they or any of them may consider necessary or
appropriate to enable
<PAGE>
the corporation to carry out the intent and purposes of the foregoing
resolution.
/s/ Alan G. Finkel /s/ Craig Macnab
- ---------------------------- ----------------------------
Alan G. Finkel Craig Macnab
/s/ Kenneth H. Marks /s/ Kenneth L. Marks
- ---------------------------- ----------------------------
Kenneth H. Marks Kenneth L. Marks
/s/ Ray Steckenrider
- ----------------------------
Ray Steckenrider
-2-
<PAGE>
<PAGE>
EXHIBIT 10.1
LEASE (Carolantic Realty Logo Appears here)
STATE OF NORTH CAROLINA Carolantic Realty, Inc.
COUNTY OF WAKE P.O. Drawer 1550
Raleigh, NC 27602
THIS LEASE, made this the 19th day of December, 1995, by and between:
K.D. KENNEDY, JR., having a notice address of:
Post Office Box 6427
Raleigh, North Carolina 27608, hereinafter called "Landlord", and
KENMAR BUSINESS GROUPS, INC., having a notice address of:
6638 Old Wake Forest Road
Raleigh, North Carolina 27604, hereafter "Tenant";
WITNESSETH:
Upon the terms and conditions hereinafter set forth, the Landlord leases to
Tenant and the Tenant leases from Landlord, the property hereinafter described:
1. DEMISED PREMISES. The property hereby leased to Tenant (the "Demised
Premises") is that area shown on Exhibit A hereto attached, which consists of
approximately 21,000 square feet, located at 6638 Old Wake Forest Road Raleigh,
(27604) , North Carolina, together with the common areas, if any, in the
building(s) and on the lot(s) where the Demised Premises are located (said
building(s) and lot(s), including the Demised Premises, being hereafter called
the "Landlord Property") described on Exhibit A attached hereto.
2. TERM
2.1 INITIAL TERM. The Commencement Date of this Lease shall be the
earlier of the date that Tenant opens for business in any part of the Demised
Premises, or January 1, 1996. This Lease shall terminate (unless extended as
herein provided) at midnight on August 31, 1997.
2.2 OPTION PERIODS. Tenant may, by written notice delivered to Landlord
not more than one hundred twenty (120) days, nor less than sixty (60) days,
prior to the commencement of the applicable extension period, extend this Lease
for one (1) additional periods of one (1) years each (a separate notice being
required for each extension period), upon the same terms and conditions as are
set forth in this Lease for the initial term, and at the rental rate or rates
hereafter set forth. Tenant's right to extend this Lease is subject to the
further condition that no unsecured Default (as hereafter defined in Section 15)
by Tenant shall exist, either at the time Tenant's notice of extension is given,
or at the commencement of the applicable extension period.
2.3 YEAR. The initial term of this Lease and any properly exercised
extension periods are hereafter together called the "Lease Term". The first
"Calendar Year" of this Lease shall begin on January 1 of the year of the
Commencement date, and end December 31 of that same year.
3.USE. Tenant shall occupy the Demised Premises on commencement of the
Lease Term and thereafter continuously use the Demised Premises only for
office/warehouse/electronic assembly purposes, but for none other without
Landlord's prior written consent. Tenant shall remain open for business during
normal business hours for other businesses of a similar nature during the full
Lease Term. In no event shall Tenant make any use of the Demised Premises which:
(a.) violates any governmental laws, rules or regulations: (b.) violates any
recorded restrictive covenants applicable to the Demised Premises; (c.) is or
might constitute a nuisance; or (d.) makes hazard, liability, casualty,
property, or other required insurance unavailable to Landlord on Landlord's
property. Tenant shall not permit its agents, employees, contractors, or
invitees to place damaging loads on the parking lots and drives located thereon.
4. RENT
4.1 MINIMUM RENT. For the purposes of this Lease, all Minimum Rent
Payable under sections 4. and 5. of this Lease and all Additional Rent payable
under Section 6. of this Lease are hereafter together called "Rent". All Rent
payable by Tenant shall be paid without previous demand by Landlord, and without
setoff or deduction. Subject to any adjustments provided in Section 5. hereof,
Tenant shall pay Minimum Rent during the Lease Term in the amount of $8,055.00
per month, payable in advance on or before the first day of each calendar month
during the Lease Term, unless the Lease Term commences other than on the first
day of the month, in which event Minimum Rent at the above rate prorated until
the end of the first calendar month of the Lease Term, shall be due and payable
on the Commencement Date, and on the first day of each month thereafter.
4.2 LATE FEES-BAD CHECK FEES. In addition to such remedies as may be
provided under Section 15. of this Lease, Landlord shall be entitled to a late
charge for each monthly Minimum Rent payment which is past due more than ten
(10) days, equal to the greater of FIFTY DOLLARS ($50.00) or five percent (5%)
of such past due Minimum rent payment. In addition to paid late charge, Landlord
shall be entitled to receive a service charge of five percent (5%) of the amount
of any rent check given by Tenant to Landlord which is not honored when first
presented for payment by Landlord.
5. RENT ADJUSTMENTS. The Minimum Rent shall be increased on the
anniversary of the Commencement Date each year of the Lease Term (hereafter
called an "Adjustment Date") to reflect the increase in the numerical index
of the "Consumer Price Index, All Urban Consumers (1982-84=100) Consumer Price
Index" published by the Bureau of Labor Statistics of the United States
Department of Labor (the "Index") from the Commencement Date to that date
which is ninety (90) days prior to the applicable Adjustment Date. In the
manner hereafter provided, if the Department of Labor discontinues publication
of the Index, any comparable consumer price index which shall be subsequently
published to supersede the Index shall be used, and if none is published, then
the Consumer Price Index published by the United States Department of Commerce
(with proper adjustment) shall be used to determine the applicable Additional
Rent. At least fifteen (15) days prior to each requested rent adjustment,
Landlord shall furnish to Tenant a written statement of the additional Minimum
Rent payable from said Adjustment Date through the day immediately prior to
the following Adjustment Date, or the end of the Lease Term, as applicable.
The amount of such additional monthly Minimum Rent shall be determined by
multiplying the amount of monthly Minimum Rent payable on the Commencement
Date by a fraction, the numerator
1
<PAGE>
refusal to accept delivery or inability to deliver due to the
recipient having failed to keep the sender informed of the recipient address.
26. SECURITY DEPOSIT. Landlord acknowledges receipt from Tenant of the
sum of $9,175.00, which sum Landlord shall retain, without any interest payable
to the Tenant, as security for the performance by Tenant of each of its
obligations hereunder. After a Default by Tenant under this Lease, Landlord may,
at its option, apply said deposit to cure Tenant's Default; but if prior to the
termination of this Lease, Landlord depletes said deposit, Tenant shall
immediately restore the amount so used by Landlord. Unless the Landlord uses the
same to cure a Default of Tenant, or at the conclusion of the Lease Term to
restore the Demised Premises to its condition on the Commencement Date,
reasonable wear and tear excepted, Landlord shall, within thirty (30) days of
the termination of the Lease, refund to Tenant the balance of the deposit that
the Landlord holds.
27. PAYMENTS. All Rent and other charges (which total $8,055.00 per
month as of the first full regular month's payment called for in this lease)
shall be payable by Tenant to and addressed to:
KENNEDY SPACE CENTER
Post office Box 1550
Raleigh, North Carolina 27602, or to such other payee and such
other address as Landlord shall designate by prior written notice to Tenant.
28.OTHER PROVISIONS. The following additional provisions are attached
hereto and by this reference made a part hereof (if none, insert "None" in the
blank space which follows):
5. RENT ADJUSTMENTS. The Minimum Rent is calculated as follows: 18,000
square feet at $4.87 psf and 3,000 square feet at $3.00 psf, for a total of
$8,055.00 per month. This monthly amount of $8,055.00 shall be adjusted on
August 31, 1996, based on the Consumer Price Index (CPI).
25. COMMISSIONS. No commission shall be payable by Tenant in
connection with this Lease. Landlord shall pay to Carolantic Realty, Inc.,
quarterly during the term of this Lease, of any Option Periods therof, or of any
Holding Over Periods thereof, a commission of six percent (6%) of the Rent
collected each quarter.
26. SECURITY DEPOSIT. This Security Deposit of $9,175.00, is currently
being held by Landlord for lease dated August 5, 1993, between K.D. Kennedy, Jr.
and Kenmar-TSI Business Groups, Inc., and will be transferred to apply to this
Lease.
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be duly
executed in duplicate originals, all as of the day and year first above written.
TENANT: LANDLORD:
(By:) Signature: Kenneth H. Marks, President (By:) Signature: K.D. Kennedy, Jr.
(By:) Signature: (By:) Signature:
Printed Name: Kenneth H. Marks, President Printed Name:
The Agreement between Kenmar Business Groups, Inc. and GFA Consulting Inc.,
dated September 1, 1994 as amended on September 1, 1995, is extended through
August 31, 1997 and amended as indicated on this document:
1. Consultant will provide services to EMSG Systems Division, Inc. (SDI),
which is the new name for Kenmar Business Groups, Inc. Consultant will also
provide services under the terms and conditions of this agreement to
Electronic Manufacturing Systems Groups, Inc. (EMSG), which is SDI holding
company, and to any company that may be acquired by EMSG in the future.
2. The hourly rate is changed to $43.75.
/s/ Kenneth H. Marks /s/ Gonzalo Fernandez 9/1/96
Kenneth H. Marks Gonzalo Fernandez
President and CEO President
EMSG Systems Division, Inc. GFA Consulting Inc.
<PAGE>
AGREEMENT made this first day of September, 1994 between Kenmar
Business Groups, Inc. (Company) and GFA Consulting, Inc.
(Consultant).
1. Consultant shall perform accounting, financial and manufacturing cost
control services as determined by the President of the Company who will
agree with the Consultant on a standard of performance for this assignment.
Consultant shall assign Gonzalo Fernandez to this engagement. The
President of the Company shall assign employees to work under the direction
of the Consultant as determined by the standard of performance.
2. Consultant shall perform all services as an independent contractor and not
as a employee of the Company.
3. The course of this agreement is one year, renewable for another year
upon agreement between both parties. This agreement may be terminated by the
Company or the Consultant at any time upon the giving of sixty (60) days
written notice.
4. The Company shall compensate the Consultant at the rate of $4,000.00 monthly,
payable in semimonthly payments. The Consultant's performance will be
evaluated by the President at six month intervals. Satisfactory performance
shall entitle the Consultant to a twenty five percent (25%) premium amount
over the base rate of $24,000.00 for each six month interval. This amount
will be prorated over the next following six month interval, except
that upon termination of this agreement, the premium pay, if awarded, will
be paid to the Consultant in a lump sum.
5. Consultant understands and agrees that the Consultant will have access
to information not generally known to the public which is proprietary
and confidential to the Company. Consultant agrees that, during or at any
time after the termination of this agreement, it shall not use for itself
or for any other person or business or divulge or convey to any other person
or business any proprietary or confidential information disclosed or learned
in the performance of this agreement.
6. This agreement shall be interpreted in accordance with the laws of the
state of North Carolina.
7. This is the entire agreement of the parties and shall not be amended
or modified except by a written authorized and executed document signed by
the Company and the Consultant.
Kenmar Business Groups, Inc. GFA Consulting, Inc.
/s/ Kenneth H. Marks 9/1/95 /s/ Gonzalo Fernandez
Kenneth H. Marks Gonzalo Fernandez
President President
This contract is extended one year and amended as follows:
Consultant will provide the services of Gonzalo Fernandez half-days or by the
hour as required by the Company. Compensation for half-days will be $576.93
weekly. The hourly rate is $35.00.
/s/ Kenneth H. Marks 9/1/95 /s/ Gonzalo Fernandez
Kenneth H. Marks Gonzalo Fernandez
President President
<PAGE>
SATISFACTION: The debt evidenced by
this Note has been satisfied in full
this _________ day of ______________
Signed: ____________________________
PROMISSORY NOTE
$148,500.00 Raleigh, N.C.
October 15, 1992
FOR VALUE RECEIVED the undersigned, promises to pay to Daniel David
Cameron, or order, the principal sum of One hundred forty-eight thousand, five
hundred DOLLARS ($148,500.00), with interest from date hereof, at the rate of
eight per cent (8%) per annum on the unpaid balance until paid or until default,
both principal and interest payable in lawful money of the United States of
America, at the office of Daniel David Cameron, 1003 LeMond Avenue, Durham, NC
27701 or at such place as the legal holder hereof may designate in writing. It
is understood and agreed that additional amounts may be advanced by the holder
hereof as provided in the instruments, if any, securing this Note and such
advances will be added to the principal of this Note and will accrue interest at
the above specified rate of interest from the date of advance until paid. The
principal and interest shall be due and payable as follows:
In 119 equal monthly installments of $1,801.73 commencing on
the 15th day of November, 1992, and continuing on the 15th
day of each successive calendar month thereafter, until the
15th day of October, 2002, when the entire remaining balance
of indebtedness, principal and interest, if not sooner paid,
shall be due and payable in full.
Each installment shall, unless otherwise provided, be applied first to
amounts advanced by Holder to protect the security hereof, then to late charges,
then to payment of interest then accrued and due on the unpaid principal
balance, with the remainder applied to the unpaid principal.
This Note may be prepaid in full or in part at any time without penalty or
premium. Partial prepayments shall be applied to installments due in reverse
order of their maturity.
In the event of (a) default in payment of any installment of principal or
interest hereof as the same becomes due and such default is not cured within
fifteen (15) days from the due date, or (b) default under the terms of any
instrument securing this Note, and such default is not cured within fifteen (15)
days after written notice to maker, then in either such event if such default is
not cured within 60 days from the default date, the holder may without further
notice, declare the remainder of the principal sum, together with all interest
accrued thereon and, the prepayment premium, if any, at once due and payable.
Failure to exercise this option shall not constitute a waiver of the right to
exercise the same at any other time. Provided further that no notice of default
under this paragraph shall be required if any prior default remains uncured. The
unpaid principal of this Note and any part thereof, accrued interest and all
other sums due under this Note shall bear interest at the rate of Eighteen per
cent (18%) per annum commencing fifteen (15) days after default until paid.
All parties to this Note, including and any sureties, endorsers, or
guarantors hereby waive protest, presentment, notice of dishonor, and notice of
acceleration of maturity and agrees to continue to remain bound for payment of
principal, interest and all other sums due under this Note notwithstanding any
change or changes by way of release, surrender, exchange, modification
1
<PAGE>
or substitution of any security for this Note or by way of any extension or
extensions of time for the payment of principal and interest; and all such
parties waive all and every kind of notice of such change or changes and agree
that the same may be made without notice or consent of any of them.
Upon the default the holder of this Note may employ an attorney to enforce
the holder's rights and remedies and the maker, principal, surety, guarantor and
endorsers of this Note hereby agree to pay to the holder reasonable attorneys
fees not exceeding a sum equal to fifteen percent (15%) of the outstanding
balance owing on said Note, plus all other reasonable expenses incurred by the
holder in exercising any of the holder's rights and remedies upon default. The
rights and remedies of the holder as provided in this Note and any instrument
securing this Note shall be cumulative and may be pursued singly, successively,
or together against the property described in the Security Agreement or any
other funds, property or security held by the holder for payment or security, in
the sole discretion of the holder. The failure to exercise any such right or
remedy shall not be a waiver or release of such rights or remedies or the right
to exercise any of them at another time.
This Note and any payments hereunder (the "Subordinated Indebtedness") are
subordinate to any other indebtedness of the maker now or hereafter outstanding
("Senior Indebtedness") as follows (i) upon the distribution of any property of
the maker to creditors in connection with any dissolution, liquidation,
insolvency, bankruptcy or reorganization of the maker, all holders of Senior
Indebtedness shall first be paid in full in cash before any payment is made on
Subordinated Indebtedness and (ii) upon a default in the payment when due of any
portion of Senior Indebtedness or any other default which permits the
holders of Senior Indebtedness to accelerate the maturity thereof, the holders
of any such Senior Indebtedness then due shall first be paid in full in cash
before any payment is made on Subordinated Indebtedness and until any such
default shall have been cured or waived in writing, no payment shall be made on
Subordinated Indebtedness. This paragraph shall constitute a continuing
offer to all persons who, in reliance upon the provisions set forth herein,
become or continue to be holders of
Senior Indebtedness and these provisions are made for the benefit of such
persons.
This Note is to be governed and construed in accordance with the laws of
the State of North Carolina.
This Note is given for the balance of the purchase price of capital stock
of Test Services, Inc., and is secured by a Security Agreement of even date
herewith which creates a security interest in the property therein described.
IN TESTIMONY WHEREOF, the maker has caused this instrument to be executed
in its corporate name by its ________ President, attested by its Assistant
Secretary, and its corporate seal to be hereto affixed, all by order of its
Board of Directors first duly given, the day and year first above written.
(Corporate Seal) KENMAR BUSINESS GROUPS, INC.
By: /s/ Kenneth H. Marks
------------------------------
President
ATTEST:
/s/ Denise Kranz
- ------------------------------
Assistant Secretary
2
<PAGE>
SATISFACTION: The debt evidenced by
this Note has been satisfied in full
this _________ day of ______________
Signed: ____________________________
PROMISSORY NOTE
$445,500.00 Raleigh, N.C.
October 15, 1992
FOR VALUE RECEIVED the undersigned, promises to pay to Lee K. Simon, or
order, the principal sum of Four hundred forty-five thousand, five hundred
DOLLARS ($445,500.00), with interest from date hereof, at the rate of eight per
cent (8%) per annum on the unpaid balance until paid or until default, both
principal and interest payable in lawful money of the United States of America,
at the office of Lee K. Simon, 172 Beach Road South, Wilmington, NC 28405 or at
such place as the legal holder hereof may designate in writing. It is
understood and agreed that additional amounts may be advanced by the holder
hereof as provided in the instruments, if any, securing this Note and such
advances will be added to the principal of this Note and will accrue interest at
the above specified rate of interest from the date of advance until paid. The
principal and interest shall be due and payable as follows:
In 119 equal monthly installments of $5,405.17 commencing on
the 15th day of November, 1992, and continuing on the 15th
day of each successive calendar month thereafter, until the
15th day of October, 2002, when the entire remaining balance
of indebtedness, principal and interest, if not sooner paid,
shall be due and payable in full.
Each installment shall, unless otherwise provided, be applied first to
amounts advanced by Holder to protect the security hereof, then to late charges,
then to payment of interest then accrued and due on the unpaid principal
balance, with the remainder applied to the unpaid principal.
This Note may be prepaid in full or in part at any time without penalty or
premium. Partial prepayments shall be applied to installments due in reverse
order of their maturity.
In the event of (a) default in payment of any installment of principal or
interest hereof as the same becomes due and such default is not cured within
fifteen (15) days from the due date, or (b) default under the terms of any
instrument securing this Note, and such default is not cured within fifteen (15)
days after written notice to maker, then in either such event if such default is
not cured within 60 days from the default date, the holder may without further
notice, declare the remainder of the principal sum, together with all interest
accrued thereon and, the prepayment premium, if any, at once due and payable.
Failure to exercise this option shall not constitute a waiver of the right to
exercise the same at any other time. Provided further that no notice of default
under this paragraph shall be required if any prior default remains uncured. The
unpaid principal of this Note and any part thereof, accrued interest and all
other sums due under this Note shall bear interest at the rate of Eighteen per
cent (18%) per annum commencing fifteen (15) days after default until paid.
All parties to this Note, including and any sureties, endorsers, or
guarantors hereby waive protest, presentment, notice of dishonor, and notice of
acceleration of maturity and agrees to continue to remain bound for payment of
principal, interest and all other sums due under this Note notwithstanding any
change or changes by way of release, surrender, exchange, modification
1
<PAGE>
or substitution of any security for this Note or by way of any extension or
extensions of time for the payment of principal and interest; and all such
parties waive all and every kind of notice of such change or changes and agree
that the same may be made without notice or consent of any of them.
Upon the default the holder of this Note may employ an attorney to enforce
the holder's right and remedies and the maker, principal, surety, guarantor and
endorsers of this Note hereby agree to pay to the holder reasonable attorneys
fees not exceeding a sum equal to fifteen percent (15%) of the outstanding
balance owing on said Note, plus all other reasonable expenses incurred by the
holder in exercising any of the holder's rights and remedies upon default. The
rights and remedies of the holder as provided in this Note and any instrument
securing this Note shall be cumulative and may be pursued singly, successively,
or together against the property described in the Security Agreement or any
other funds, property or security held by the holder for payment or security, in
the sole discretion of the holder. The failure to exercise any such right or
remedy shall not be a waiver or release of such rights or remedies or the right
to exercise any of them at another time.
This Note and any payments hereunder (the "Subordinated Indebtedness") are
subordinate to any other indebtedness of the maker now or hereafter outstanding
("Senior Indebtedness") as follows (i) upon the distribution of any property of
the maker to creditors in connection with any dissolution, liquidation,
insolvency, bankruptcy or reorganization of the maker, all holders of Senior
Indebtedness shall first be paid in full in cash before any payment is made on
Subordinated Indebtedness and (ii) upon a default in the payment when due of any
portion of Senior Indebtedness or any other default which permits the
holders of Senior Indebtedness to accelerate the maturity thereof, the holders
of any such Senior Indebtedness then due shall first be paid in full in cash
before any payment is made on Subordinated Indebtedness and until any such
default shall have been cured or waived in writing, no payment shall be made on
Subordinated Indebtedness. This paragraph shall constitute a continuing offer
to all persons who, in reliance upon the provisions set forth herein, become
or continue to be holders of Senior Indebtedness and these provisions
are made for the benefit of such persons.
This Note is to be governed and construed in accordance with the laws of
the State of North Carolina.
This Note is given for the balance of the purchase price of capital stock
of Test Services, Inc., and is secured by a Security Agreement of even date
herewith which creates a security interest in the property therein described.
IN TESTIMONY WHEREOF, the maker has caused this instrument to be executed
in its corporate name by its ________ President, attested by its Assistant
Secretary, and its corporate seal to be hereto affixed, all by order of its
Board of Directors first duly given, the day and year first above written.
(Corporate Seal) KENMAR BUSINESS GROUPS, INC.
By: /s/ Kenneth H. Marks
------------------------------
President
ATTEST:
/s/ Denise Kranz
- ------------------------------
Assistant Secretary
2
<PAGE>
SATISFACTION: The debt evidenced by
this Note has been satisfied in full
this _________ day of ______________
Signed: ____________________________
PROMISSORY NOTE
$148,500.00 Raleigh, N.C.
October 15, 1992
FOR VALUE RECEIVED the undersigned, promises to pay to Joseph T. Hunt, or
order, the principal sum of One hundred forty-eight thousand, five hundred
DOLLARS ($148,500.00), with interest from date hereof, at the rate of eight per
cent (8%) per annum on the unpaid balance until paid or until default, both
principal and interest payable in lawful money of the United States of America,
at the office of Joseph T. Hunt, 209 Barnick Way, Knightdale, NC 27545 or at
such place as the legal holder hereof may designate in writing. It is
understood and agreed that additional amounts may be advanced by the holder
hereof as provided in the instruments, if any, securing this Note and such
advances will be added to the principal of this Note and will accrue interest at
the above specified rate of interest from the date of advance until paid. The
principal and interest shall be due and payable as follows:
In 119 equal monthly installments of $1,801.73 commencing on
the 15th day of November, 1992, and continuing on the 15th
day of each successive calendar month thereafter, until the
15th day of October, 2002, when the entire remaining balance
of indebtedness, principal and interest, if not sooner paid,
shall be due and payable in full.
Each installment shall, unless otherwise provided, be applied first to
amounts advanced by Holder to protect the security hereof, then to late charges,
then to payment of interest then accrued and due on the unpaid principal
balance, with the remainder applied to the unpaid principal.
This Note may be prepaid in full or in part at any time without penalty or
premium. Partial prepayments shall be applied to installments due in reverse
order of their maturity.
In the event of (a) default in payment of any installment of principal or
interest hereof as the same becomes due and such default is not cured within
fifteen (15) days from the due date, or (b) default under the terms of any
instrument securing this Note, and such default is not cured within fifteen (15)
days after written notice to maker, then in either such event if such default is
not cured within 60 days from the default date, the holder may without further
notice, declare the remainder of the principal sum, together with all interest
accrued thereon and, the prepayment premium, if any, at once due and payable.
Failure to exercise this option shall not constitute a waiver of the right to
exercise the same at any other time. Provided further that no notice of default
under this paragraph shall be required if any prior default remains uncured. The
unpaid principal of this Note and any part thereof, accrued interest and all
other sums due under this Note shall bear interest at the rate of Eighteen per
cent (18%) per annum commencing fifteen (15) days after default until paid.
All parties to this Note, including and any sureties, endorsers, or
guarantors hereby waive protest, presentment, notice of dishonor, and notice of
acceleration of maturity and agrees to continue to remain bound for payment of
principal, interest and all other sums due under this Note notwithstanding any
change or changes by way of release, surrender, exchange, modification
1
<PAGE>
or substitution of any security for this Note or by way of any extension or
extensions of time for the payment of principal and interest; and all such
parties waive all and every kind of notice of such change or changes and agree
that the same may be made without notice or consent of any of them.
Upon the default the holder of this Note may employ an attorney to enforce
the holder's rights and remedies and the maker, principal, surety, guarantor and
endorsers of this Note hereby agree to pay to the holder reasonable attorneys
fees not exceeding a sum equal to fifteen percent (15%) of the outstanding
balance owing on said Note, plus all other reasonable expenses incurred by the
holder in exercising any of the holder's rights and remedies upon default. The
rights and remedies of the holder as provided in this Note and any instrument
securing this Note shall be cumulative and may be pursued singly, successively,
or together against the property described in the Security Agreement or any
other funds, property or security held by the holder for payment or security, in
the sole discretion of the holder. The failure to exercise any such right or
remedy shall not be a waiver or release of such rights or remedies or the right
to exercise any of them at another time.
This Note and any payments hereunder (the "Subordinated Indebtedness") are
subordinate to any other indebtedness of the maker now or hereafter outstanding
("Senior Indebtedness") as follows (i) upon the distribution of any property of
the maker to creditors in connection with any dissolution, liquidation,
insolvency, bankruptcy or reorganization of the maker, all holders of Senior
Indebtedness shall first be paid in full in cash before any payment is made on
Subordinated Indebtedness and (ii) upon a default in the payment when due of any
portion of Senior Indebtedness or any other default which permits the
holders of Senior Indebtedness to accelerate the maturity thereof, the holders
of any such Senior Indebtedness then due shall first be paid in full in cash
before any payment is made on Subordinated Indebtedness and until any such
default shall have been cured or waived in writing, no payment shall be made on
Subordinated Indebtedness. This paragraph shall constitute a continuing
offer to all persons who, in reliance upon the provisions set forth herein,
become or continue to be holders of Senior Indebtedness and these
provisions are made for the benefit of such persons.
This Note is to be governed and construed in accordance with the laws of
the State of North Carolina.
This Note is given for the balance of the purchase price of capital stock
of Test Services, Inc., and is secured by a Security Agreement of even date
herewith which creates a security interest in the property therein described.
IN TESTIMONY WHEREOF, the maker has caused this instrument to be executed
in its corporate name by its ________ President, attested by its Assistant
Secretary, and its corporate seal to be hereto affixed, all by order of its
Board of Directors first duly given, the day and year first above written.
(Corporate Seal) KENMAR BUSINESS GROUPS, INC.
By: /s/ Kenneth H. Marks
------------------------------
President
ATTEST:
/s/ Denise Kranz
- ------------------------------
Assistant Secretary
2
21.1
Subsidiaries of the Registrant
Electronic Manufacturing Services Groups, Inc.
1. EMSG Systems Division, Inc.
6638 Old Wake Forest Road
Raleigh, North Carolina 27616
(919) 876-6049
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Electronic Manufacturing Services Group, Inc:
We consent to the incorporation by reference in the Registration Statement
related to the J.A. Industries, Inc. 1994 Employee Consultant and Advisor
Stock Compensation Plan on Form S-8 of J.A. Industries, Inc. (now known
as Electronic Manufacturing Services Group, Inc.) of our report, dated October
3, 1996, with respect to the consolidated balance sheets of Electronic
Manufacturing Services Group, Inc. as of August 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years then ended.
Our report dated October 3, 1996, contains an explanatory paragraph which
states that the Company has suffered losses from operations which raises
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Raleigh, North Carolina
December 13, 1996
