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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, 1997
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 November
19, 1997 held by those persons deemed by the registrant to be non-affiliates was
approximately $ 125,382. As of August 31, 1997, there were 6,269,118 shares of
the registrant's Common Stock, $.0025 par value per share, outstanding.
State issuer's revenues for its most recent fiscal year: $1,961,616.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
PART I
Item 1. Description of Business...............................................3
Item 2. Description of Property..............................................10
Item 3. Legal Proceedings....................................................10
PART II
Item 4. Market for Common Equity and Related Stockholder Matters.............11
Item 5. Management's Discussion and Analysis or Plan of Operation............12
Item 6. Financial Statements.................................................16
Item 7. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure..................................35
PART III
Item 8. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act...........36
Item 9. Executive Compensation...............................................37
Item 10. Security Ownership of Certain Beneficial Owners and
Management...........................................................38
Item 11. Certain Relationships and Related Transactions.......................39
Item 12. 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 judgement 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
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in inventory management can provide better control over inventory levels and
increase the OEM's return on assets.
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 $11 billion in 1997. 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 50 mid-sized contract manufacturers with sales
ranging from $50 million to $1.0 billion 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 service the market where the large and mid-tier EMS firms
choose not to compete and where EMSG has special or niche skills that allow it
to compete against smaller local and regional EMS firms. Niche areas include
certain hybrid microelectronic assemblies and relatively low technology medium
volume printed circuit card assemblies.
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STRATEGY
The Company's long-term strategic plan contemplates eventually
acquiring businesses with complementary capabilities that bolster EMSG's
competitiveness and value-added services. The short-term plans call for focused
production of certain hybrid microelectronic assemblies and production of
relatively low technology medium volume printed circuit card assemblies. 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 immediate focus of the organization is
on restructuring and recapitalizing the Company.
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
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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 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 plans to develop 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. In the long-term, the Company plans to
invest in developing these and other process capabilities.
MANUFACTURING
EMSG's Approach
In order to successfully implement these management techniques, EMSG
believes that it will need to develop 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
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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
changes to its manufacturing instructions and test plans. In order to assure
prompt customer response, the Company plans to assign each project a program
manager or single point of contact. 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 and
ceramic substrates, 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.
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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.
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 November 20, 1997, EMSG's backlog
was approximately $823,000. EMSG Systems Division, Inc.'s backlog was $763,000
on December 6, 1996. 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
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As of November 15, 1997, the Company employed 17 persons; 14 full-time
and 3 part-time.
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 is on a month-to-month basis.
The rent is approximately $8,100 per month for 21,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
During the spring of 1997, the Company made demand on one of its
customers, Miltope Corporation ("Miltope") for damages incurred as a result of
Miltope's alleged untimely termination of an agreement with the Company to
purchase components especially manufactured by the Company for Miltope. During
the course of those discussions, on May 28, 1997, Miltope, without notice,
instituted a declaratory judgement action in state court in Alabama (the
"Miltope Action"), asking the Court to declare the rights of the parties under
the agreement. Miltope also requested damages from the Company in the
approximate amount of $25,000. On June 19, 1997, the Company instituted suit
against Miltope in the United States District Court for the Eastern District of
North Carolina for damages in excess of $700,000 for Miltope's breach of its
agreement (the "Company's Action"). Miltope has moved to dismiss the Company's
Action, asserting lack of personal jurisdiction. The motion is pending before
the Court.
The Miltope Action was removed by the Company to Federal Court in
Alabama, and has since been transferred to federal court in the Eastern District
of North Carolina, where it likely will be consolidated with the Company Action.
The Company intends to pursue vigorously its claim against Miltope and to defend
vigorously the claim by Miltope against the Company.
The Company is not a party to any other pending legal proceedings,
other than routine litigation incidental to its business.
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PART II
ITEM 4. 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.
<TABLE>
<CAPTION>
Period High Low
- ------ ----- -----
<S> <C> <C>
Quarter ended August 31,1997............................................ .093 .031
Quarter ended May 30, 1997 ............................................. .156 .062
Quarter ended February 28, 1997......................................... .468 .375
Quarter ended November 29, 1996......................................... 1.250 1.062
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
</TABLE>
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, 1997 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).
Pursuant to the terms and conditions of the merger by and among Kenmar
Business Groups, Inc. and J. A. Industries, Inc., Kenmar stockholders had an
option to acquire 750,000 shares to be distributed on a prorata basis of their
previous ownership. This option was exercised in April 1997.
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.
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ITEM 5. 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
currently has approximately 10 customers, 4 of which accounted for 88% of its
sales for the twelve months ending August 31, 1997. 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 years 1996 and 1997. The
Company currently operates one facility in Raleigh, North Carolina with
approximately 17 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 Company has a three-year contract with a major customer. Due to
capitalization issues with the Company, the customer could cancel the contract
at any time. The products currently being produced under that contract could be
phased-out starting in mid 1998.
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.
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RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED AUGUST 31, 1996 AND AUGUST 31, 1997 BASED
ON THE AUDITED FINANCIAL STATEMENTS REFERENCED HEREIN
<TABLE>
<CAPTION>
Twelve Months Ending August 31, 1996
------------------------------------
& August 31, 1997
-----------------
1997 1996
----- -----
<S> <C> <C>
Net sales .......................................... 100.0% 100.0%
Cost of goods sold ................................. 103.0 102.9
----- -----
Gross profit ....................................... (3.0) (2.9)
Selling, general, and administrative ............... 43.4 36.9
Operating income ................................... (46.4) (39.8)
Interest & other expenses (net) .................... (2.5) (.7)
----- -----
Income before income taxes ......................... (48.9) (40.5)
Income taxes ....................................... -- --
Net income ......................................... (48.9) (40.5)
Extraordinary item ................................. -- 66.1
----- -----
Net income after income taxes and extraordinary item (48.9) 25.6
===== =====
</TABLE>
The factors affecting changes in the percentages shown in the foregoing table
are discussed below.
With twenty five percent reduction in net sales from the prior period
EMSG restructured its infrastructure, but continued operations with a core group
of employees and an average base revenue of $163,468 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 1997 were
$1,961,616, $651,974 less than that of the same period in 1996 primarily due to
decrease in orders from certain customers and difficulty in attracting new
customers due to capitalization issues.
One new customer with approximately $600,000 of new orders was added
in 1997. Weakness in this client order input has resulted in no orders from it
in 1998.
Gross Loss. Gross 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 loss decreased $16,750 from 1996 to 1997 resulting primarily from
better product mix and reduced direct labor costs and manufacturing overhead.
Material cost of sales were 11% lower, offsetting the effect of volume
reduction. There were also offsetting cost reductions in direct labor of
$108,000. Manufacturing overhead increased by $40,000 as a result of losses of
$121,425 in manufacturing lease cancellations partially offset by cost
reductions in 1997. Operations yielded a low 3.0 margin loss, as planned, due to
the fixed overhead expenses kept in place to continue EMSG efforts to
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regrow the business during 1997. 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 1997
was $112,882 less than that of 1996, resulting from $103,000 reduction in sales
and marketing expense and decreases in administrative and finance expenses,
although there were expenses resulting from a full year of overhead of the small
public company.
Operating Loss. Operating income (loss) is gross profit less SG&A. Loss from
operations for 1997 was ($910,625) or $129,632 less than that of 1996. This is
the result of lower volume offset by better margin mix and cost reductions as
explained above.
Interest Expense. Interest for 1997 of $54,246 was reduced from $60,732 in 1996
as a result of lease cancellations. A reduction of EMSG's cash and cash
equivalents position resulted in a reduction of $36,949 in interest income.
Income Tax Expense. The Company did not record an income tax provision in 1996
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. 1997 showed a net loss and therefore
there was no income tax provision.
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. There were no extraordinary items in 1997.
LIQUIDITY AND CAPITAL RESOURCES
EMSG's cash and cash equivalents decreased by ($271,984) from August
31, 1996 through August 31, 1997. The Company used $120,597 in cash for its
operations and $148,818 in financing activities during the year. Dividends for
the Class A Cumulative Preferred stock of EMSG Systems Division, Inc. ("ESD,") a
subsidiary of EMSG, were paid during 1997 in the amount of $70,320 as final
settlement of dividends in arrears to stockholders that converted their ESD
preferred stockholdings into EMSG Class A Cumulative Convertible Preferred
Stock.
14
<PAGE> 15
Equipment leases were cancelled during the year resulting in a reduction of
principal and interest payments.
EMSG used $2,018 in cash for capital expenditures There were proceeds
of $25,001 from the issuance of common stock.
The 350 shares of ESD Preferred Stock that were not tendered are shown
in the 8/31/97 balance sheet at their face value plus accretion and dividends in
arrears. The total amount is $30,077.
FUTURE FINANCING
The Company has undertaken an initiative to restructure most of its
debts, both current and long-term, so that the debt service is appropriate to
the size and capability of the organization. Once such restructuring is
complete, the Company plans to pursue new sources of funding to improve
liquidity and assure adequate working capital. There are no assurances that the
Company will be successful in either its planned restructuring or its attempts
to raise new capital; both of which raise concerns about the ability of the
Company to continue as a going concern.
15
<PAGE> 16
ITEM 6. FINANCIAL STATEMENTS.
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Financial Statements
August 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
16
<PAGE> 17
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, 1997 and
1996, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1997 and
1996, 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
November 3, 1997
Raleigh, North Carolina
17
<PAGE> 18
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Balance Sheets
August 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ----------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 36,810 308,794
Accounts receivable - trade, net of allowance
for doubtful accounts of $10,000 and $5,500
in 1997 and 1996, respectively 230,910 302,021
Accounts receivable - other (note 14) -- 17,287
Inventories, net (note 4) 147,954 73,066
Prepaid expenses and other current assets 10,180 60,910
----------- ----------
Total current assets 425,854 762,078
----------- ----------
Property and equipment, net (notes 5 and 8) 162,918 564,208
----------- ----------
Other assets:
Note receivable from officer (note 14) 84,648 100,000
Deposits and other assets 9,175 14,136
Cost in excess of net assets of acquired business,
net of accumulated amortization of $259,537
and $240,037 in 1997 and 1996, respectively 58,500 78,000
----------- ----------
Total other assets 152,323 192,136
----------- ----------
$ 741,095 1,518,422
=========== ==========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term debt (notes 7 and 14) 104,776 56,628
Current obligations under capital leases (note 8) 5,199 77,551
Accounts payable, trade 839,897 313,362
Other accrued liabilities 47,714 69,555
Preferred dividend payable (note 10) 47,878 70,320
Accrued bonus (note 14) 5,558 20,822
----------- ----------
Total current liabilities 1,051,022 608,238
----------- ----------
Long-term debt, less current maturities (notes 7 and 14) 381,976 486,753
----------- ----------
Long-term obligations under capital leases (note 8) 5,693 110,085
----------- ----------
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, 350 and 550 shares,
issued and outstanding in 1997 and 1996, respectively (note 10) 30,077 44,054
----------- ----------
Stockholders' equity (deficit) (notes 10 and 11):
Class A, preferred stock cumulative and convertible
$.01 par value; authorized 3,000,000 shares; 1,276,768 and
1,250,103 issued at August 31, 1997 and 1996, respectively 12,768 12,501
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
<S> <C> <C>
Common stock, $0.0025 par value; authorized 20,000,000
shares, 6,269,118 and 5,527,452 issued
and outstanding in 1997 and 1996, respectively 15,673 13,819
Additional paid-in capital 1,007,289 998,707
Retained deficit (1,763,403) (755,735)
----------- ----------
Total stockholders' equity (deficit) (727,673) 269,292
----------- ----------
Commitments (notes 8 and 9)
$ 741,095 1,518,422
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE> 20
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Operations
Years ended August 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Net sales $ 1,961,616 2,613,590
Cost of goods sold (note 5) 2,021,158 2,689,882
----------- ----------
Gross loss (59,542) (76,292)
----------- ----------
General, selling and administrative expenses 851,083 963,965
----------- ----------
Operating loss (910,625) (1,040,257)
----------- ----------
Other income (expenses):
Interest income 5,081 42,030
Interest expense (54,246) (60,732)
----------- ----------
Other expense, net (49,165) (18,702)
----------- ----------
Loss before income taxes and extraordinary item (959,790) (1,058,959)
Income taxes (note 12) -- --
----------- ----------
Loss before extraordinary item (959,790) (1,058,959)
Extraordinary item (note 16) -- 1,728,552
----------- ----------
Net income (loss) (959,790) 669,593
Accretion of preferred stock (2,064) (58,570)
Dividends on preferred stock (note 10) (47,878) (37,222)
----------- ----------
Net income (loss) applicable to common shareholders $(1,009,732) 573,801
=========== ==========
Weighted average number of shares (note 15) 5,847,590 2,994,037
=========== ==========
Earnings per common share and common share equivalent (note 15)
Loss before extraordinary item $ (0.17) (0.38)
Extraordinary item -- 0.57
----------- ----------
Net income (loss) $ (0.17) 0.19
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
Years ended August 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $(959,790) 669,593
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Extraordinary item -- (1,728,552)
Depreciation and amortization 207,140 254,122
Loss on disposal of property and equipment 85,794 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 71,111 (28,959)
Decrease (increase) in inventories (74,888) 258,474
Decrease in prepaid expenses and other current assets 50,730 26,236
Decrease in accounts receivable, other 4,915 1,845
Decrease in deposits and other assets 4,961 24,262
Increase (decrease) in accounts payable, trade 526,535 (428,820)
Increase in accrued bonus (15,264) 20,822
Decrease in other accrued liabilities (21,841) (356,401)
Net cash used in operating activities (120,597) (1,287,378)
--------- ----------
Cash flow from investing activities:
Capital expenditures (2,018) (20,043)
Issuance of note receivable from officer (551) (100,000)
--------- ----------
Net cash used in investing activities (2,569) (120,043)
--------- ----------
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 25,001 --
Principal payments on long-term debt (56,629) (38,999)
Principal payments on capital lease obligations (46,870) (112,219)
Dividends paid (70,320) (37,222)
--------- ----------
Net cash provided by (used in) financing activities (148,818) 83,585
--------- ----------
Net decrease in cash and cash equivalents (271,984) (1,323,836)
Cash and cash equivalents:
Beginning of year 308,794 1,632,630
--------- ----------
End of year $ 36,810 308,794
========= ==========
</TABLE>
(Continued)
21
<PAGE> 22
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Cash Flows, Continued
Years ended August 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during year for:
Interest $ 54,246 28,605
========= ========
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:
Capital lease obligations incurred $ -- 188,450
========= ========
Capital leases terminated:
Net equipment $(215,668) --
Capital lease obligations 129,874 --
Loss on terminations 85,794 --
--------- --------
Net effect on cash $ -- --
========= ========
Redemption of common stock:
Accounts receivable, other 12,372 --
Note receivable from officer 15,903 --
Common stock (187) --
Additional paid-in capital (28,088) --
--------- --------
Net effect on cash $ -- --
========= ========
During 1996 the Company entered into agreements with its major
suppliers 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.
22
<PAGE> 23
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended August 31, 1997 and 1996
<TABLE>
<CAPTION>
Class A Total
Preferred Stock Common Stock Treasury Stock Additional stockholders'
----------------- -------------------- --------------- paid-in Retained equity
Shares Amount Shares Amount Shares Amount capital deficit (deficit)
------ ------ ------ ------ ------ ------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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) 1,250,103 12,501 -- -- -- -- 661,539 -- 674,040
--------- ------- ---------- -------- ---- ----- ---------- ---------- --------
Balance at
August 31, 1996 1,250,103 12,501 5,527,452 13,819 -- -- 998,707 (755,735) 269,292
Issuance of common
stock upon
exercise of options -- -- 750,000 1,875 -- -- (1,874) --
Accretion of
preferred stock -- -- -- -- -- -- (2,064) -- (2,064)
Undeclared dividends
on preferred stock -- -- -- -- -- -- -- (47,878) (47,878)
Issuance of common stock -- -- 66,666 166 -- -- 24,834 -- 25,000
Redemption of
common stock -- -- (75,000) (187) -- -- (28,088) -- (28,275)
Net loss -- -- -- -- -- -- -- (959,790) (959,790)
Conversion of
preferred stock
(note 10) 26,665 267 -- -- -- -- 15,774 -- 16,041
--------- ------- ---------- -------- ---- ----- ---------- ---------- --------
Balance at
August 31, 1997 1,276,768 $12,768 6,269,118 $ 15,673 -- $-- 1,007,289 (1,763,403) (727,673)
========= ======= ========== ======== ==== ===== ========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Notes to Consolidated Financial Statements
August 31, 1997 and 1996
(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 outstanding 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 Customers
During the year ended August 31, 1997 the Company had approximately 10
customers, 4 of which accounted for 88% of its sales.
(3) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and EMSG Systems Division, Inc. All intercompany accounts and
transactions have been eliminated in consolidation.
24
<PAGE> 25
(3) Summary of Significant Accounting Policies, Continued
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.
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.
25
<PAGE> 26
(3) Summary of Significant Accounting Policies, Continued
Income Taxes
Income taxes are calculated using the asset and liability method in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." 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.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128 "Earnings Per Share". SFAS No. 128 is effective for fiscal
years ending after December 15, 1997, and establishes standards for
computing and presenting earnings per share (EPS). This statement will
require the Company to present Basic and Diluted EPS. There will be no
material impact of adoption of SFAS No. 128.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130 "Reporting Comprehensive Income." SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997, and establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. There
will be no material impact of adoption of SFAS No. 130.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997, and establishes standards for the way that
public business enterprises report information about operating
segments. There will be no material impact of adoption of SFAS No. 131.
Use of Estimates
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.
26
<PAGE> 27
(4) Inventories
Inventories consist of:
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Raw materials $ 64,657 35,446
Work-in-progress 75,914 27,649
Finished goods 7,383 9,971
-------- ------
$147,954 73,066
======== ======
</TABLE>
(5) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Leasehold improvements $ 164,912 164,912
Machinery and equipment 532,982 833,462
Computer hardware and software 392,003 389,985
Furniture and fixtures 93,207 93,207
Vehicles 9,182 9,182
---------- ---------
Total 1,192,286 1,490,748
Less accumulated depreciation and amortization 1,029,368 926,540
---------- ---------
Property and equipment, net $ 162,918 564,208
========== =========
</TABLE>
Depreciation expense was $187,640 and $234,622 in 1997 and 1996,
respectively.
(6) Acquisition
In 1992, the Company purchased all of the outstanding stock of TSI, a
manufacturer of electronic printed circuit board assemblies for
original equipment manufacturers. As a result of this 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 in 1997 and 1996.
27
<PAGE> 28
(7) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C> <C>
Subordinated promissory notes payable in monthly
installments of $9,009, including interest at 8%,
through October 2002 $456,261 508,216
8% uncollateralized note payable to stockholder
repayable in monthly installments of $610 and
a balloon payment of $30,083 on October 15, 1997,
renewed during October 1997 30,491 35,165
-------- -------
486,752 543,381
Less current maturities 104,776 56,628
-------- -------
$381,976 486,753
======== =======
</TABLE>
Principal maturities of debt at August 31, 1997 are as follows:
Year ending August 31,
----------------------
1998 $104,776
1999 80,452
2000 87,130
2001 94,361
2002 102,192
Thereafter 17,841
--------
Total long-term debt $486,752
========
(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:
1997 1996
------- -------
Machinery and equipment $65,182 365,662
Less accumulated amortization 43,860 88,011
------- -------
$21,322 277,651
======= =======
28
<PAGE> 29
(8) Obligations Under Capital Leases, Continued
The following is a schedule by years of future minimum lease payments
under capital leases as of August 31, 1997:
Year ending August 31
=====================
1998 $ 5,512
1999 5,610
-------
Total minimum lease payments 11,122
Less amounts representing interest (230)
-------
Present value of future minimum lease payments 10,892
Less current maturities 5,199
-------
$ 5,693
=======
(9) Commitments
The Company leases certain office and production space, machinery and
equipment under noncancellable operating leases expiring at various
dates through 2002. During the years ended August 31, 1997 and 1996,
the Company incurred rental expenses of $128,930 and $107,995,
respectively, under these leases. During 1997, the lease on the office
space expired. Rents for office space are being paid on a monthly
basis.
Future minimum lease payments under the terms of the above leases are
as follows:
1998 $ 3,468
1999 3,468
2000 3,468
2001 3,468
2002 578
-------
$14,450
=======
(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
issuance at a rate of one and one-half times the issue price.
Cumulative unpaid dividends are $3,063 and $73,008 as of August 31,
1997 and 1996, respectively. Dividends of $70,320 and $37,222 were paid
to the Class A preferred stockholders in 1997 and 1996, respectively.
Upon liquidation, the Class A cumulative preferred stock shares have
preference over holders of common stock in an amount equal to the issue
price ($50 per share) plus cumulative dividends in arrears.
29
<PAGE> 30
(10) Preferred Stock, Continued
During 1996, the Company offered to exchange Class A preferred stock,
$.01 par value ("EMSG Preferred Stock") for all of the Class A
cumulative preferred stock at an exchange rate of 28.57 shares of EMSG
preferred stock for each share of Class A cumulative preferred stock.
In addition the Company promised to pay each holder of Class A
cumulative 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 in 1996. During 1997, the offer was
extended and an additional 200 shares were converted.
During 1997, the exchange ratio was revised from 28.57 to 133.33 to
comply with the written consent of the Board of Directors. The Class A
Preferred Stock shares outstanding, Class A Preferred Stock and
additional paid in capital amounts have been restated to reflect the
revised exchange ratio.
Dividends
The holders of the EMSG preferred stock are entitled to receive
dividends at the rate of $.0375 per share per annum. Such dividends are
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 $.375 per share.
30
<PAGE> 31
(11) Stock Option Plan
The Company adopted a non-qualified stock option plan in 1996. Options
immediately vest and expire 10 years from the grant date. The options
entitle the holders to convert the options into shares of common stock
at prices ranging from $.06 to $2.50 per share. No options have been
exercised as of August 31, 1997, and $727,730 shares are exercisable.
The weighted average remaining contractual life of options outstanding
is 5.3 years.
<TABLE>
<CAPTION>
Weighted
Number of average
options exercise
outstanding price
----------- --------
<S> <C> <C>
Balance outstanding at August 31, 1995 -- $ --
Options granted 667,730 .69
------- -----
Balance outstanding at August 31, 1996 667,730 .69
Options granted 60,000 1.33
------- -----
Balance outstanding at August 31, 1997 727,730 $ .58
======= =====
</TABLE>
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
options are exercisable at times and in increments as specified by the
individual agreements. The options expire in April 2002 and have a two
year vesting period. During 1997, the option agreements were revised to
provide for an exercise price of $.16 per share. The fair market value
of options granted during 1997 was $.16 per share and 391,167 shares
are exercisable. The weighted average remaining contractual life of
options outstanding is 5 years.
<TABLE>
<CAPTION>
Weighted
Number of average
options exercise
outstanding price
----------- --------
<S> <C> <C>
Balance outstanding at August 31, 1995 -- $ --
Options granted 419,000 2.25
-------- -----
Balance outstanding at August 31, 1996 419,000 2.25
Options granted 57,667 .16
Options terminated (40,000) 2.25
-------- -----
Balance outstanding at August 31, 1997 436,667 $ .16
======== =====
</TABLE>
The Company uses the intrinsic value method of accounting for stock
based compensation plans. The exercise prices of the options in the
1996 and 1993 plans are in excess of the market price of the stock as
of August 31, 1997, and therefore, there is no impact on net income or
earnings per share under the fair value based method.
31
<PAGE> 32
(12) Income Taxes
The components of net deferred tax assets and the net deferred tax
liabilities as of August 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 1,658,502 1,310,575
Inventories, principally due to additional
costs inventoried for tax purposes, pursuant
to the Tax Reform Act of 1986 and inventory
reserves 39,767 36,171
Amortization of customer lists 94,463 86,835
Other accruals 16,535 13,815
----------- ---------
Total gross deferred tax assets 1,809,267 1,447,396
Valuation allowance (1,753,163) (1,375,759)
----------- ---------
Net deferred tax assets $ 56,104 71,637
=========== =========
Deferred tax liabilities:
Property, plant and equipment, principally due
to differences in depreciation $ 56,104 71,637
----------- ---------
Total gross deferred tax liabilities $ 56,104 71,637
=========== =========
</TABLE>
The Company recorded a valuation allowance because 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 realizable.
The actual income tax expense for 1997 and 1996 differs from the
"expected" amount (computed by applying the statutory federal income
tax rate of 34% to the earnings before income taxes) as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ---------------------------
% of % of
pretax pretax
Amount earnings Amount earnings
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Computed "expected tax expense" $(326,329) 34.0% $ 227,661 34.0%
Change in valuation allowance 326,329 (34.0%) (227,661) (34.0)
--------- ---- --------- ----
Income tax expense $ -- -- $ -- - %
========= ==== ========= ====
</TABLE>
At August 31, 1997, the Company has net operating loss carryforwards of
approximately $4,687,000. The net operating loss carryforwards expire
in various amounts from 2009 through 2011. Additionally, the Company
has net operating loss carryforwards of approximately $1,268,000 for
state income tax purposes which expire between 1999 and 2001.
(12) Income Taxes, Continued
The Tax Reform Act of 1986 contains provisions which limit the ability
to utilize net operating loss carryforwards in the case of significant
changes in ownership interests. Therefore, the Company's net
32
<PAGE> 33
operating loss carryforwards 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, 1997 and 1996, the outstanding principal balance was
approximately $274,000 and $305,000, respectively. Such amount is
included in subordinated promissory notes (see note 7).
During October 1992, the Company entered into a non-compete agreement
with a former member of the Board of Directors (see note 6).
In July 1996, an officer of the Company entered into an employment
agreement with the Company which included a loan of $100,000, and an
annual bonus based on net income before taxes. During 1997, the
principal balance on the loan was reduced by $15,903 for shares of
common stock tendered by the stockholder. The loan is non-interest
bearing.
Accounts receivable - other included an amount receivable from an
officer of the Company of $12,372 in 1996. During 1997, the receivable
was reduced in exchange for common stock of the officer.
The Company incurred rental expense for facilities paid to a preferred
stockholder of approximately $97,000 and $127,000 in 1997 and 1996,
respectively.
33
<PAGE> 34
(15) Net Income Per Common Share
At August 31, 1997 and 1996, there were 1,164,397 and 1,086,730,
respectively, 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 stock and common stock 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.
(17) Fair Value of Financial Instruments
Based on rates currently available to the Company, the estimated fair
value of subordinated debt at August 31, 1997 was approximately $21,000
lower than the carrying value. The fair value of cash and cash
equivalents, accounts receivable, note receivable from officer,
accounts payable, other accrued liabilities, obligations under capital
leases and uncollateralized debt approximate their carrying value.
(18) Future Financing
The Company has undertaken an initiative to restructure most of its
debts, both current and long-term, so that the debt service is
appropriate to the size and capability of the organization. Once such
restructuring is complete, the Company plans to pursue new sources of
funding to improve liquidity and assure adequate working capital. There
are no assurances that the Company will be successful in either its
planned restructuring or its attempts to raise new capital; both of
which raise concerns about the ability of the Company to continue as a
going concern.
(19) Commitments and Contingent Liabilities
The Company is party to certain claims and litigation in the normal
course of business. In the opinion of management, the outcome of such
matters will not have a material adverse effect on the financial
statements of the Company, taken as a whole.
34
<PAGE> 35
ITEM 7. 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> 36
PART III
ITEM 8. 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 34 Chairman of the Board of Directors, 1996
Chief Executive Officer, President,
and Treasurer
Alan G. Finkel 63 Director 1996
Ray Steckenrider 72 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.
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.
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
36
<PAGE> 37
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, 1997, its officers, directors, and greater than ten percent
shareholders complied with all applicable Section 16(a) filing requirements.
ITEM 9. 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 1997 125,000 - 4,804
1996 125,000 53,567 2,783
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.
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
severance equal to three years then salary. As of November 20, 1997, the annual
salary increase due Mr. Marks effective July 30, 1997 was accrued but not paid.
To date, Kenneth H. Marks has not exercised 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.
37
<PAGE> 38
ITEM 10. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of November 20, 1997,
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 2,329,610 1 26.00%
Alan G. Finkel 120,150 2 1.38%
Ray Steckenrider 19,616 3 0.22%
--------- -------
Directors and Officer 2,469,876 27.5%
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.
2 Includes the option to purchase 120,150 shares of the Company's common stock.
3 Includes the option to purchase 15,000 shares of the Company's common stock.
The following table indicates, as of November 20, 1997, the options to
purchase the Company's common stock held by the officers and directors of the
Company:
38
<PAGE> 39
No. of Shares
Common Stock Exercise Expiration Options
Name of Holder Underlying the Option Price/Share Date Vested
- -------------- --------------------- ----------- ---------- -------
Kenneth H. Marks 350,000 $ 0156 07/30/01 350,000
Alan G. Finkel 105,150 $0.156 10/07/03 105,150
15,000 $2.50 09/24/06 15,000
Ray Steckenrider 15,000 $2.50 09/24/06 15,000
------- -------
Directors and Officers 485,150 485,150
as a group
ITEM 11. 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.
Mr. Marks tendered 75,000 common shares resulting in a $15,903 partial
payment was booked in April 1997.
The Company is a party to a consulting agreement, as amended, with its
controller, Gonzalo Fernandez through August 31, 1997. This agreement has not
been renewed but Mr. Fernandez has continued providing accounting services on a
month-to-month basis. Mr. Fernandez is paid an hourly rate of $43.75.
39
<PAGE> 40
ITEM 12. 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 Notes Payable resulting from the
acquisition of TSI
10.2 Supply Agreement between EMSG Systems
Division, Inc and Ericsson, Inc.
21.1 Subsidiaries of the registrant
22.1 (1) Notice of Special Meeting of Shareholders
and Proxy Statement, dated July 10, 1996
27.1 Financial Data Schedule (for SEC use only)
(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> 41
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 1, 1997
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/ Ray Steckenrider
- --------------------
Director
Date: December 1, 1997
41
<PAGE> 1
EXHIBIT 10.1
Notes Payables Resulting From the Acquisition of TSI in 1992:
Outstanding Balances
on August 31, 1997
--------------------
Lee K. Simon $273,757
Joseph T. Hunt, Jr. 91,252
Daniel D. Cameron, Jr. 91,252
--------
Total $456,261
========
<PAGE> 1
ERICSSON [LOGO]
SUPPLY AGREEMENT #95618-969798
Between
Ericsson Inc.
and
EMSG Systems Division, Inc.
This Supply Agreement (this "Agreement") is made and entered into as of
August 1, 1996 (the "effective date"), by and between Ericsson Inc., a
corporation organized under the laws of the State of Delaware (hereinafter
referred to as "Ericsson") and EMSG Systems Division, Inc., a corporation
organized under the laws of the State of North Carolina (hereinafter referred to
as "Seller").
1.0 DEFINITIONS
"Product" or "Products shall mean the parts described by the drawing
numbers listed on ATTACHMENT A hereto, which is attached hereto and made a part
hereof, and any additional hybrid parts which Ericsson may hereafter elect to
add. ATTACHMENT A will be modified from time to time to reflect such additions.
"Requisition Number" shall mean the Product requirements as generated
by Ericsson's Mobile Orders Management System.
"Transaction Numbers" shall mean the Product requirements as generated
by Ericsson's Service parts Orders System.
"Consigned Equipment" means the equipment, fixtures, tools, test
equipment, test fixtures and other personal property (but not Purchased
Inventory) of Ericsson which is now or hereafter consigned by Ericsson to Seller
as provided under Section 4.A.1 hereof.
"Purchased Inventory", "Unique Purchased Inventory" and "Common
Purchased Inventory" shall have the meanings ascribed to those terms in Section
4.B.1 hereof.
"Seller's Facility" means Seller's plant facilities located in North
Carolina.
2.0 SCOPE OF AGREEMENT
Seller agrees to sell and Ericsson agrees to purchase Products in
accordance with terms and conditions of this Agreement. The purchase of Products
hereunder shall be by purchase order release made from time to time by Ericsson.
All such purchases shall be subject to the additional terms and conditions set
forth on the reverse side of Ericsson purchase orders except to the extent such
additional terms are in conflict with the terms of this Agreement, in which case
the terms of this Agreement shall control over the conflicting terms. (Any
provision of a purchase order which purports to make the purchase order the
exclusive agreement between the parties is deemed to be in conflict with the
terms of this Agreement.) In addition, Ericsson shall consign the Consigned
Equipment and sell the Purchased Inventory to Seller all as more fully set forth
in Section 4 hereof.
<PAGE> 2
3.0 TERM
The term of this Agreement (the "Agreement Period") shall commence upon
the effective date set above and, unless earlier terminated pursuant to Section
8 hereof, shall terminate upon the earlier of (i) August 31, 1999 or (ii) 12
months after Ericsson places with Seller a "lifetime build" order for all
Products (e.g., Ericsson's final order for Products under this Agreement).
Ericsson agrees to purchase all its requirements for Products listed on
ATTACHMENT A from Seller for the duration of this Agreement so long as Seller
remains competitive on price, quality and lead-times as outlined in Sections 5,
10 and 13. The pricing schedule as set forth in ATTACHMENT A hereto shall be in
effect for the Agreement Period, subject to the terms of Section 5 herein
This Agreement may be extended beyond the initial term only upon
written agreement of the parties; provided, however, Ericsson, at its option,
may extend this Agreement for up to two additional one-year periods, by giving
Seller written notice of Ericsson's election to extend at least 60 days prior to
the expiration of the initial agreement period or previous such extension
period, as the case may be. During any such extension the prices for the
Products shall be continue to be those provided for under Section 5 hereof
subject to adjustments for inflation.
4.0 CONSIGNMENT OF EQUIPMENT AND SALE OF PURCHASED INVENTORY
A. Consigned Equipment.
1. Delivery and Consignment: Ericsson shall deliver to
Seller on a consignment basis the equipment, fixtures, tools, test equipment,
test fixtures and other personal property listed on ATTACHMENT B (which,
together with any other equipment, fixtures, tools, test equipment, test
fixtures or personal property (except Purchased Inventory) that Ericsson may
hereafter elect to consign to Seller in connection with this Agreement, is
herein referred to collectively as the "Consigned Equipment" for Seller's use in
fulfilling Seller's obligations under this Agreement.
Ericsson will endeavor to have the majority of the
Consigned Equipment listed on ATTACHMENT B delivered to Seller's Facility on or
about August 7, 1996; however, it is understood that delays may occur. Ericsson
at its expense shall be responsible for shipment and delivery of Consigned
Equipment listed on ATTACHMENT B to loading dock at Seller's Facility.
2. Installation: Seller will install the Consigned
Equipment and ready it for use. Ericsson personnel will provide reasonable
technical assistance and advice if requested by Seller in connection with
Seller's installation and setup of Consigned Equipment and during the first two
production runs of any Product part number. Ericsson will remain responsible for
risk of casualty loss to the Consigned Equipment while in Seller's possession.
3. Operation, Maintenance, Repair; Seller will operate
the Consigned Equipment and provide parts, repairs, maintenance and
calibration, as required, to maintain the Consigned Equipment in working order.
To the extent that the documented, aggregate out of pocket costs of repair and
maintenance and calibration of the Consigned Equipment exceeds $25,000 in any
year, Ericsson shall be responsible for the excess cost. Seller will notify
Ericsson in advance of incurring any such costs in excess of said $25,000. Any
such excess costs of which Seller shall have given such advance notification to
Ericsson, shall be paid by Ericsson within 30 days of receipt by Ericsson of
Seller's invoice itemizing such incurred excess costs.
Ericsson and Seller acknowledge that due to the
aging of some of the Consigned Equipment that it may become necessary to make
equipment modifications and/or use parts from another
2
<PAGE> 3
piece equipment to assure operation of its counterpart(s) Seller and Ericsson
are to mutually agree to any such changes or modifications prior to effecting
such changes.
4. [Intentionally Omitted]
5. Ericsson's Interest in Consigned Equipment: Subject only to
Section 4.A.6 below, Ericsson will remain the sole owner of the Consigned
Equipment throughout the term of this Agreement and thereafter, and upon any
expiration or termination of this Agreement for any reason, Ericsson, in
addition to any other rights and remedies it may have, will be entitled to
retake possession of the Consigned Equipment and do with it as Ericsson pleases,
and Seller will de-install, pack, insure and return ship the Consigned Equipment
to Ericsson's Lynchburg, Virginia facility or other location within a 200 mile
radius of Lynchburg, Virginia as may be specified by Ericsson, all at Seller's
expense except that if this Agreement is rightfully terminated by Seller
pursuant to Section 8.A or terminates by reason of the expiration of its term or
any extended term as provided in Section 3 and Seller is current in its payment
obligations hereunder, the cost of return freight and insurance shall be borne
by Ericsson. At all times while the Consigned Equipment is in Seller's
possession, Seller will affix to the Consigned Equipment such nameplates or
other indication of Ericsson's ownership as Ericsson may reasonably request;
will execute and deliver, file and/or record all documents and instruments, and
take all other actions, as reasonably requested from time to time by Ericsson to
maintain and defend Ericsson's exclusive ownership of the Consigned Equipment;
will operate and maintain the Consigned Equipment in accordance with all
applicable laws, rules and regulations and insurance policies covering same; and
will keep the Consigned Equipment free and clear of any and all liens, claims
and encumbrances of any kind (except that Ericsson shall be responsible for any
personal property or similar taxes computed based on the value of such Consigned
Equipment). Seller will provide Ericsson with copies of all notices of tax
assessments or other sums asserted to be due with respect to the Consigned
Equipment, or other liens, claims or encumbrances asserted with respect to the
Consigned Equipment, within 10 days from the date each such notice is received
by Seller. Ericsson, at its option, may itself pay or discharge any lien, claim
or encumbrance asserted with respect to the Consigned Equipment, in which event
Ericsson shall be reimbursed by Seller within 30 days. Ericsson shall have the
right at any time during business hours and with reasonable advance notice to
inspect any of the Consigned Equipment.
6. Early Return/Disposition of Items of Consigned Equipment:
Ericsson may from time to time during the term of this Agreement conclude that
particular items of Consigned Equipment are no longer useful in connection with
the performance by Seller of Seller's obligations hereunder, in which event
Ericsson may elect:
(i) to have Seller return such items to Ericsson, and Seller's
obligations with respect to the de-installation, packing,
insuring and return shipment of such items shall be the same
as apply under Section 4.A.5 hereof with respect to the return
of all remaining Consigned Equipment upon termination of this
Agreement, or
(ii) to dispose of such items of Consigned Equipment, in which case
Ericsson agrees that it will notify Seller of Ericsson's
intention to dispose of such items and afford Seller the
opportunity to submit an offer for the purchase of same. In
any such event, should Seller make an offer of purchase which
Ericsson elects to accept, unless otherwise specifically
agreed in a writing signed by both parties, any sale of such
items by Ericsson to Seller shall be on an AS IS, WHERE IS
basis, and all costs and expenses associated with effecting
the transfer of ownership of the items of Consigned Equipment
to Seller will be paid by Seller.
3
<PAGE> 4
B. Purchased Inventory
1. Sale and Delivery:
a. On-Hand Purchased Inventory: Ericsson shall sell and
deliver to Seller Ericsson's remaining inventory of hybrid material of the kinds
and in the quantities listed in ATTACHMENT C hereto (the "On-Hand Purchased
Inventory"), for use by Seller in producing Products for sale to Ericsson
pursuant to this Agreement. Ericsson will endeavor to deliver the On-Hand
Purchased Inventory to Seller's Facility by the date on which the Consigned
Equipment shall have been installed and made ready for production at Seller's
Facility. The purchase prices to be paid by Seller to Ericsson for the On-Hand
Purchased Inventory are the prices set forth in ATTACHMENT C.
It is understood that the sale of On-Hand Purchased
Inventory is a one-time sale of remaining inventories and that, except only as
set forth in Section 4.B.1.b below, Ericsson will not replenish any Purchased
Inventory. As such remaining inventories are depleted, Seller shall be solely
responsible for procuring all additional inventories of such unique hybrid
materials as shall be needed for purposes of Seller's production of Products
under this Agreement.
b. After-Acquired Purchased Inventory: Additional
material needed for production of the Products for Ericsson hereunder during the
first 120 days from the effective date of this Agreement in addition to the
On-Hand Purchased Inventory (such additional material needed for production
during such 120 day period is herein referred to as "After-Acquired Purchased
Inventory") shall be provided by Ericsson during the first 120 days from the
effective date of this Agreement. The purchase price to be paid by Seller to
Ericsson for the After-Acquired Purchased Inventory shall be determined by
Ericsson.
The On-Hand Purchased Inventory and After-Acquired Purchased Inventory
are referred to collectively in this Agreement as the "Purchased Inventory".
2. Delivery: Ericsson shall deliver the Purchased Inventory to
Seller's loading dock at Seller's Facility.
3. Security Interest: Seller Responsibilities With Regard to
Purchased Inventory: Ericsson retains a purchase money security interest in all
Purchased Inventory supplied by Ericsson, and products and proceeds thereof, as
security for payment of the purchase price owing from Seller to Ericsson with
respect thereto and as security for Seller's other obligations hereunder with
respect to such Purchased Inventory. The Purchased Inventory will be maintained
by Seller in an area of Seller's Facility segregated from any other inventories
of Seller, designated as containing only items subject to Ericsson's security
interest ("Ericsson Stockroom"). Seller will provide Ericsson with inventory
reports on a monthly basis.
Ericsson may perform physical inventory and audit of the
Purchased Inventory at any time during normal business hours upon reasonable
notice to Seller.
Seller shall be responsible for maintaining accurate stock
records of the Purchased Inventory on a daily basis. Ericsson shall have access
to such records.
4. Insurance: During the term of this Agreement and thereafter
until any Purchased Inventory not paid for in full has been returned to
Ericsson's possession, Seller will be responsible for obtaining and maintaining
insurance, insuring the Purchased Inventory in an amount equal to the purchase
price to be paid for same by Seller to Ericsson hereunder, under insurance
policies in form and substance reasonably acceptable to Ericsson Issued by
insurance companies reasonably acceptable to Ericsson and
4
<PAGE> 5
naming Ericsson as the named insured. Such policies will be delivered to
Ericsson, and will provide that the coverages thereunder may not be terminated
or reduced without 20 days' prior written notice from the insurer(s) to
Ericsson. If Seller fails to maintain any such insurance coverage, Ericsson at
its option may itself arrange to continue such coverage under the same or
substituted policies, and any premiums or other cost incurred by Ericsson shall
be promptly reimbursed by Seller.
5. Payment: Seller shall pay Ericsson the purchase price
hereunder for each item of Purchased Inventory upon removal of such item from
the Ericsson Stockroom at Seller's Facility for use by Seller in production of
Products for sale to Ericsson pursuant to this Agreement. Seller's daily
transaction reports for the Ericsson Stockroom will be used as invoices and will
be submitted to Seller's accounts payable department with a copy to Ericsson.
Payment terms for items of Purchased Inventory shall be net 30 days after
shipment by Seller to Ericsson of any Products from the production run in which
such item of Purchased Inventory was used.
Each of the parties agrees that, absent a default in payment
by the other party of amounts due under this Agreement, it will, (i) if it is
Ericsson, pay amounts owing to Seller for Products rather than setoff against
such amounts any amounts owing to Ericsson from Seller, and (ii) if it is
Seller, pay amounts owing to Ericsson for Purchased Inventory rather than setoff
against such amounts any amounts owing to Seller from Ericsson
6. Title: Etc.: Title to each item of Purchased Inventory shall
pass to Seller upon shipment of such item to Seller; provided, however, that
Ericsson's security interest in each item of Purchased Inventory, and all
products and proceeds of same, shall continue until Ericsson has received the
purchase price therefor.
Seller will execute and deliver, file and/or record all
documents and instruments, and take all other actions, as reasonably requested
from time to time by Ericsson to maintain and defend Ericsson's interests in the
Purchased Inventory; and will keep the Purchased Inventory free and clear of any
and all liens, claims and encumbrances of any kind (except that Ericsson shall
be responsible for any personal property or similar taxes computed based on the
value of such Purchased Inventory). Seller will provide Ericsson with copies of
all notices of tax assessments or other sums asserted to be due with respect to
the Purchased Inventory, or other liens, claims or encumbrances asserted with
respect to the Purchased Inventory, within 30 days from the date each such
notice is received by Seller. Ericsson, at its option, may itself pay or
discharge any lien, claim or encumbrance asserted with respect to the Purchased
Inventory, in which event Ericsson shall be promptly reimbursed by Seller.
Upon any expiration or termination of this Agreement for any
reason, (a) Ericsson shall repurchase from Seller any remaining Purchased
Inventory which Seller has on-hand ("Repurchased Inventory"), for the same price
at which such Repurchased Inventory shall have been sold by Ericsson to Seller
hereunder, and (b) Ericsson shall at Seller's request purchase a portion of
Sellers other on-hand inventory (not purchased from Ericsson hereunder) of
unique hybrid material (meaning material usable only for manufacturing Products
under this Agreement), such portion not to exceed 1/12 of the estimated annual
usage ("EAU") of each such unique material with such EAU to be determined solely
on the basis of the EAU's as listed in ATTACHMENT A for Products which utilize
such unique material. As the price for such portion of the unique hybrid
material to be purchased by Ericsson, Ericsson shall pay Seller (i) the same
price as Seller shall have paid the third party therefor, In the case of unique
material acquired by Seller from a nonaffiliated third party in an arm's length
transaction, or (ii) at the lowest market price at the time Seller acquired the
unique material, in the case of unique hybrid material acquired by Seller from a
third party on a basis other than as described in clause (i) preceding.
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At Ericsson's request Seller shall pack and return ship, freight and
insurance prepaid the Repurchased Inventory and the portion of other
unique hybrid material being purchased by Ericsson, to Ericsson's
Lynchburg facility or other location within a 200 mile radius of
Lynchburg, Virginia specified by Ericsson, all at Seller's expense
except that if this Agreement is rightfully terminated by Seller
pursuant to Section 8.A or terminates by reason of the expiration of
its term or any extended term as provided in Section 3 and Seller is
current in its payment obligations hereunder, the cost of return
freight and insurance shall be borne by Ericsson. Upon receipt of such
shipment Ericsson shall pay Seller the purchase price determined in
accordance with the foregoing provisions (A) for the Repurchased
Inventory, by remitting to Seller the price for the portion of the
Repurchased Inventory for which Seller shall have previously paid
Ericsson the price pursuant to Section 4.B.5 hereof and for the rest
of the Repurchased Inventory, by crediting against the price still
owing from Seller to Ericsson pursuant to Section 4.B.1, the purchase
price therefor under this Section 4.B.6, and (B) for the portion of
other unique hybrid material being purchased by Ericsson as aforesaid,
by remitting to Seller the price therefor.
5.0 PRICING OF PRODUCTS
A. Pricing of Products sold by Seller to Ericsson shall consist
of two components, as follows.
1. Single Monthly Payment Component: Commencing with
October, 1996, Ericsson shall pay Seller a single payment of $14,583 per month
to cover certain fixed costs of Seller. This single, fixed monthly payment of
$14,583 shall be deemed applicable to all Products purchased by Ericsson under
this Agreement and will not vary in amount regardless of variations in volumes
or mix of Products purchased. The $14,583 monthly payment may be invoiced by
Seller as of the last day of each month, commencing with October, 1996, and such
invoice shall be payable as provided in Section 6.A hereof.
These monthly payments will terminate at the
expiration or termination of this Agreement.
2. Per Unit Selling Price: Ericsson shall, in addition,
pay Seller a per-unit Selling Price for each Product purchased hereunder which
shall be
(i) the Selling Price specified in ATTACHMENT A
hereto, in the case of Products for which a
Selling Price is so specified, or
(ii) in the case of Products for which a Selling
Price is not so specified, a Selling Price
determined in like manner and using like
assumptions as were used to derive the
Selling Prices in ATTACHMENT A, e.g., using
the Ericsson standard times in hours,
multiplied times 1.667, with the product
multiplied times the $30 per hour figure
provided by and agreed to by Seller, then
adding the amount for material cost
determined using the Ericsson raw material
usage standards plus 15% Raw Material Factor
(Seller agrees such 15% shall cover all
costs and losses associated with materials
yields, materials management, normal parts
attrition, risk of loss, etc.) multiplied
times the price paid by Seller for the raw
materials determined in the same manner as
specified in Section 5.C below,
subject to adjustment as hereinafter set forth in this Section 5.
B. The per unit Selling Price determined pursuant to Section
5.A.2 (i) or (ii) above (as the same may be adjusted in accordance with the
provisions hereinafter set forth in this Section 5) is to be the base price for
each item shown, F.O.B. Ericsson's Lynchburg, Virginia facility, inclusive of
freight and all other
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costs, whether direct or indirect, incurred by Seller in connection with this
Agreement and including without limitation all costs of labor, material,
supplies, equipment and facilities, except that (i) Ericsson will make the
single fixed monthly payment of $14,583 in accordance with Section 5.A.1 above,
and (ii) Ericsson will be responsible for obtaining its own insurance on
Products commencing when they leave Seller's Facility, and for any personal
property taxes imposed on such Products, and (iii) the per unit Selling Prices
assume that Ericsson will designate shipment via standard common carrier ground
transportation and if Ericsson exercises its right under Section 10.B hereof to
specify other means of transportation, Ericsson shall bear any incremental cost
thereof.
Seller may invoice Ericsson for the per unit Selling Prices of
Products shipped plus the incremental cost referred to in clause (iii) of the
preceding sentence, if applicable to such Products, at any time on or after the
date of shipment. Such invoices shall be payable as set forth in Section 6.A
hereof.
C. Adjustments:
1. The Selling Prices shown in ATTACHMENT A are derived
in the manner specified in ATTACHMENT A. The parties have agreed that these
Selling Prices vary only to reflect fluctuations in prices paid by Seller for
raw materials, all as more fully set forth below in this Section 5.C.
Accordingly, the portion of each Selling Price which was derived by applying $30
per hr. x the Ericsson standard time x 1.667, and which is shown in ATTACHMENT A
in the column entitled "$30.00 p hr X Labor", will not vary irrespective of
variations in Seller's actual labor or overhead rates or labor hours per unit or
other variations in Seller's costs. Also, the raw material usage per unit will
not vary from that used in deriving ATTACHMENT A and the "Raw Material Factor'
will not vary from 15%. However, as raw material prices paid by Seller
fluctuate, the columns in ATTACHMENT A entitled "Raw Material" and "Raw
Material + 15%" and "Selling Price" will be recalculated for the affected
Products using such higher or lower raw materials prices. Such recalculated
Selling Prices will take effect automatically, but only as raw materials are
used, determined on a first in, first out (FIFO) basis using the stipulated raw
materials usage rates + 15% as reflected in ATTACHMENT A for each Product
Seller agrees that it will exhaust all Purchased
Inventory before using other raw material(s) of the same kind.
2. Throughout the period while this Agreement remains in
effect Seller shall track and document in detail all prices it pays for each raw
material, and the dates and quantities of each raw material purchased at each
price, and shall upon request furnish Ericsson complete copies of all such data
and documentation. Seller will use reasonable efforts to notify Ericsson in
advance when fluctuations in one or mere raw materials prices Seller is paying
can be expected to increase or decrease the Selling Price for any Product(s) by
more than 10% and will use reasonable efforts to estimate approximately when,
using the FIFO method as described in Section 5.C.1 above, such increased or
decreased price(s) is likely to take effect. Raw materials not acquired by
Seller from unaffiliated third parties in arm's length transactions or from
Ericsson, will priced at the lesser of (i) the actual price paid or (ii) the
lowest market price then prevailing for the same raw material. Seller will at
all times use its best efforts to acquire raw materials at lowest available
prices.
D. Seller represents and warrants that prices of Products
provided for under this Agreement shall be no less favorable than the prices
applicable to the sales, if any, by Seller of similar products to third parties.
6.0 PAYMENT FOR PRODUCTS
A. Payment terms shall be net 20 days after receipt of invoice.
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B. Invoices shall be forwarded to the following address either
hand delivery or through overnight courier of the U. S. mails or via fax:
Accounts Payable
ERICSSON INC.
P.O. Box 4325
1 Mountain View Road
Lynchburg, Virginia 24502
Fax #:_____________________
7.0 SCHEDULING
A. Seller shall deliver Products to Ericsson in accordance with
and only in response to Purchase Order Releases. Ericsson agrees that, absent
prior written consent of Seller, Ericsson shall not place an order for any
Product listed in ATTACHMENT A in which the quantity specified in such order is
less than 1/12 of the Estimated Annual Usage (EAU) for that Product as set
forth in ATTACHMENT A
B. Ericsson reserves the right to schedule deliveries during the
Agreement Period with respect to quantity and delivery requirements according to
its needs.
Changes to order schedules are subject to the following:
(i) if an order has been placed by Ericsson but Seller
has not ordered materials, such order may be
rescheduled at Ericsson's will.
(ii) if an order has been placed by Ericsson and Seller
has ordered materials, the schedule change is subject
to Seller's ability to reschedule materials.
(iii) if an order has been placed by Ericsson and Seller
has the parts in-house, the schedule change is
subject to a maximum push out of forty-five days. In
the event of pull-in's, Seller will attempt to meet
Ericsson's requirements.
(iv) if an order has been placed by Ericsson and Seller
has such order in-process of being assembled,
schedule changes are subject to a maximum push out to
the later of (a) the end of the month that the order
was planned to ship in, or (b) 30 additional days.
C. Delivery schedule changes shall be made via Purchase Order
Release changes. Seller shall respond in writing to such Purchase Order Release
changes within three (3) business days or via Electronic Document Interchange
(EDI) within two (2) business days.
D. Due to known material availability issues, Seller shall
attempt to meet Ericsson delivery schedules within five (5) business days of the
Purchase Order Release and shall use best efforts not to exceed twenty (20)
business days for any Product.
E. On a monthly basis, Ericsson shall provide Seller with
nonbinding rolling 3-month forecasts of Ericsson's requirements for Products.
8.0 EARLY TERMINATION
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A. Notwithstanding Section 3 hereof, this Agreement may be
terminated at any time:
(i) by Ericsson, effective upon written notice to Seller,
if Seller breaches any of its obligations hereunder
with regard to the production, delivery, or quality
of Products ordered by Ericsson pursuant hereto and
fails to correct such breach within 90 days following
receipt of written notice thereof from Ericsson,
(ii) by Ericsson, effective upon written notice to Seller,
if Seller breaches any of its obligations with
respect to the Consigned Equipment or Purchased
Inventory, and fails to correct such breach within 90
days following receipt of written notice thereof from
Ericsson,
(iii) by either party, effective upon written notice to the
other party, if the other party terminates business,
becomes insolvent or becomes the subject of any
bankruptcy proceedings,
(iv) by either party, effective upon written notice to the
other party, if the other party breaches any other
obligation hereunder and fails to correct such breach
within 90 days following receipt of written notice
thereof from the aggrieved party,
(v) by either party, in accordance with Section 26.C upon
the notice prescribed therein, or
(vi) by the mutual written agreement of the parties so to
terminate.
B. A party's right to terminate hereunder shall be in addition to
any other rights and remedies such party may have hereunder or (subject to the
limitations set forth in this Agreement) under applicable law.
C. Expiration or termination of this Agreement shall not relieve
either party of its obligations which shall have accrued under this Agreement
prior to such expiration or termination, or of its obligations under any of the
following provisions which shall survive any expiration or termination of this
Agreement: Section 4, 10, 11, 12, 13, 14, 17, 18, 19, 20, 22, 23, 24, 25, 26,
27, 30, 31, 32, 36 and 37.
9.0 SAFETY STOCK
A. Seller will not be required to maintain safety stock for this
Agreement unless otherwise agreed to by both parties in writing. If such an
agreement is made, Ericsson will purchase the safety stock (up to the amount
required to be maintained under such written agreement) upon any expiration or
termination of this Agreement.
10.9 DELIVERY
A. Seller agrees to notify Ericsson immediately if, at any time,
it appears that the delivery schedule set forth on the Purchase Order Release
confirmed by Seller may not be met. Such notification shall include the reasons
for any anticipated delay and proposed revised delivery date. Without limitation
as to any other rights and remedies Ericsson may have with respect to any such
delay, Seller agrees that should it appear for any reason that the agreed upon
lead-time will be exceeded Seller shall, at its expense, exert best efforts and
take other actions as may be required including the application of overtime to
meet scheduled delivery dates.
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B. Ericsson reserves the right to designate means of
transportation to Ericsson's facilities.
11.0 TITLE AND RISK OF LOSS TO PRODUCTS
A. Title and risk of loss to Products shall pass to Ericsson upon
receipt of such Products at the designated Ericsson facility.
12.0 PACKING
A. No charges will be allowed for holding, wrapping or cartage.
Seller shall pack or otherwise prepare all articles for shipment so as to meet
carrier's requirements and shall safeguard against damage from weather and
transportation. Seller shall wrap all external threads, splines or serrations
and wrap or otherwise protect all parts so as to avoid damage in transit.
B. A packing list shall be attached to each carton and will
provide the Ericsson part number of the Product contained along with the (i)
Ericsson purchase order number and release the Product is being shipped against,
or (ii) (a) this Supply Agreement Number (95618-969798) and (b) either the
Requisition Number or the Transaction Number.
13.0 QUALITY ASSURANCE
A. Seller's standard workmanship and quality assurance systems
and procedures as may be reasonably modified and approved by Ericsson shall be
followed. Seller shall supply Ericsson with copies of these procedures and
standards for Ericsson's review and reference within 30 days following the
execution of this Agreement. Thereafter, Seller shall advise Ericsson of any
proposed changes thereto on an on-going basis.
B. Ericsson may conduct its own acceptance tests at its facility
to establish conformance to specifications, using identical test procedures and
equipment as used by Seller and specified by Ericsson. If Product fails such
tests, Ericsson will provide Seller a written notice of defect which shall
describe the portion of such tests in which the Product failed. Seller shall
provide defect analysis and corrective action plans as to case and disposition
of Seller induced defective Product within five (5) days of notification
C. Seller shall permit Ericsson representatives to have access to
its plant during normal business hours for the purpose of inspection of any
Products covered by this Agreement or work in process of production of said
items upon reasonable notice.
D. Seller shall provide reasonable facilities and assistance for
the safety of Ericsson representatives on Seller's premises, at no cost to
Ericsson. At the time of inspections, Seller shall make available to the
Ericsson representatives copies of all manufacturing drawings, specifications
and process preservation and packaging data applicable to the Products covered
herein.
14.0 COMPLIANCE WITH SPECIFICATIONS
A. Product shipped by Seller pursuant to this Agreement shall
comply with the following:
1) Ericsson drawings and specifications.
2) Revision level as specified on Purchase Order Releases.
3) Test Specifications, if applicable.
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15.0 PRODUCT ENHANCEMENTS
A. Some enhancements be made to the Products that provide faster,
more trouble free or better operation but which do not provide additional
capability in the form of additional types of performance to be delivered or
additional types of operation to be processed. These enhancements which provide
such improvements to the Product will be offered at no additional cost to
Ericsson.
16.0 PRODUCT SUPPORT
A. Seller also agrees to maintain engineering contact with
Ericsson during the term of this Agreement without additional charge.
17.0 CHANGES
A. Ericsson may at any time, in writing, make changes within the
general scope of this Agreement or any purchase order, in any one or more of the
following: I. drawings, designs, or specifications where the goods to be
furnished are to be specially manufactured for Ericsson in accordance therewith;
II. method of shipment or packing; III. place of delivery; and IV. the amount of
Government-furnished property. If any such change causes an increase or decrease
in the cost of, or the time required for the performance of, any work under this
Agreement or any purchase order, whether changed or not changed, an equitable
adjustment shall be made in the contract price or delivery schedule, or both,
and this Agreement and/or such purchase order shall be modified in writing
accordingly. Any claim by the Seller for adjustment under this clause must be
asserted within thirty (30) days from the date of receipt by the Seller of the
notification of change; Ericsson agrees to respond to any such asserted claim in
a timely manner. Any change in any purchase order shall be authorized only by a
duly executed Purchase Order Amendment thereto.
B. If an Ericsson standard process time for any Product is shown
to be inaccurate in that a process clearly required in making such Product has
been omitted, or an Ericsson bill of materials for any Product is shown to be
inaccurate in that a material clearly required in making such Product has been
omitted, Seller shall make such showing in writing to Ericsson whereupon
Ericsson, if it concurs, will make the necessary change, in writing, to the
Ericsson standard process time or bill of materials, as the case may be for such
Product and the parties will recalculate the per unit Selling Price for such
Product to reflect such change. Only the per unit Selling Price of the Product
for which the standard process time or bill of materials is so changed, will be
affected, and such change in per unit Selling Price of such Product will be
prospective only, and will be effective commencing as of the date on which
Ericsson first received Seller's written showing of the omission as set forth
above in this Section 17.B.
C. Seller shall not make any Product changes without Ericsson's
prior written approval.
18.0 WARRANTY
A. Seller warrants that each Product shall be delivered to
Ericsson free and clear of any liens, claims or encumbrances and that Seller
shall transfer to Ericsson, at the time specified in Section 11, good title to
each such Product.
B. Seller warrants and represents that each Product sold
hereunder will be free from defects in workmanship and materials and shall
comply with the specifications, samples and drawings, approved, amended or
adopted by Ericsson, for a period of twelve (12) months from the date of
shipment by Seller of such Product. This warranty does not cover any defect
resulting from defective Purchased Inventory delivered by Ericsson to Seller
hereunder
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C. Any attempt by Seller to limit, disclaim or restrict any such
warranties or any remedies of Ericsson, by acknowledgment or otherwise, in
accepting or performing this Agreement, shall be null, void and ineffective
without Ericsson's written consent.
D. Except as set forth above in this Section and as provided
below, SELLER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, RELATING TO THE PRODUCTS
INCLUDING, WITHOUT LIMITATION, AS TO MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
Except only to the extent specified in the last sentence of
Section 18.B above, ERICSSON MAKES NO WARRANTIES, EXPRESS OR IMPLIED, RELATING
TO THE PURCHASED INVENTORY INCLUDING, WITHOUT LIMITATION, AS TO MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE
19.0 IN-WARRANTY REPAIR/REPLACEMENT
Ericsson may ship in-warranty defective Product to Seller freight
prepaid, upon receipt from Seller of a Return Materials Authorization ("RMA")
number (which Seller shall issue promptly following request for same from
Ericsson). Seller shall repair or replace the Product at no cost to Ericsson and
deliver freight prepaid to Ericsson' within a time {from receipt of Product by
Seller) not to exceed Seller's normal delivery interval while this Agreement is
in effect and production is ongoing. In the event the Product is found not to be
defective, Ericsson shall pay for the return freight and troubleshoot/retest
time subject to formula and rates in ATTACHMENT A.
Ericsson in some instances experiences failure of Products (when
installed in Ericsson's end product) where the cause of failure is unknown and
suspected to be related to product and process engineering issues. In the event
that failures occur at rates that exceed the current rates, both parties will
work together with mutual resources to determine the cause of such failures and
to take the most reasonable appropriate corrective action.
20.0 OUT OF WARRANTY REPAIRS
A Product failure shall be out of warranty if the failure occurs
outside of the original 12-month period referred to above.
21.0 FOR WORK ON ERICSSON'S OR ITS CUSTOMER'S PREMISES
If Seller's work under this Agreement involves operations by Seller on
the premises of Ericsson or one of its customers, Seller shall take all
reasonably necessary precautions to prevent the occurrence of any injury to
person or property during the progress of such work, and Seller shall maintain
such Public Liability Property Damage and Employee's Liability and Compensation
insurance as will, in Ericsson's sole reasonable judgment, protect Ericsson from
said risks and from claims of any kind, including but not limited to, claims
under any applicable Worker's Compensation and Occupational Disease Acts.
22.0 TOOLING AND ARTWORK
Tooling (used in branding) and artwork purchased by Seller solely to
produce Product branded in accordance with Section 24 (Trademarks and Product
Branding) and sold to Ericsson hereunder shall be the property of Ericsson and
shall be permanently identified as such by Seller. Maintenance of this tooling
and artwork in good working order shall be the responsibility of Seller until
resumed to Ericsson at expiration or termination of this Agreement; provided,
however, that (i) Seller shall notify Ericsson in advance of any costs Seller
proposes to incur in connection therewith and will incur same only if Ericsson
approves thereof, and (ii)
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such costs, if approved in advance by Ericsson as aforesaid, shall count toward
the $25,000 amount referred to in Section 4.A.3 and Ericsson shall be
responsible for any such costs in excess of said $25,000.
23.0 TRADEMARKS AND PRODUCT BRANDING
A. Seller shall brand Products purchased hereunder with Ericsson
trademarks or other trademarks, or no trademarks, as may be requested from time
to time in writing by Ericsson. Such branding, along with markings and the
application of Ericsson trademarks on packaging for Product; shall be done by
Seller strictly in accordance with written specifications provided by Ericsson.
B. Seller shall not sell or otherwise dispose of Product bearing
a Ericsson part number branded in accordance with this Section to any party
other than Ericsson.
C. No licenses or other rights are granted to Seller for the use
of Ericsson trademarks other than for the limited purpose set forth herein.
D. Upon termination of this Agreement or upon written notice at
any time from Ericsson, Seller shall immediately cease the branding of product
with any Ericsson identification or trademark.
24.0 CONFIDENTIAL DATA and DISCLOSURES
A. Any information in written or printed form and identified as
proprietary or confidential by either party ("Disclosing Party") which the
Disclosing Party provides the other party hereunder ("Receiving Party"), shall
be and remain the property of the Disclosing Party. (However, any information
first prepared by Seller for Ericsson hereunder shall be deemed to be the
proprietary and confidential information of Ericsson and shall be and remain the
property of Ericsson and, for purposes of interpreting and applying this Section
24, Seller shall have the same obligations of a "Receiving Party" hereunder with
respect to such information as apply hereunder to Ericsson confidential or
proprietary information disclosed by Ericsson to Seller).
During the term of this Agreement and for a period of five (5) years
thereafter, the Receiving Party shall:
1) Except as required by law or bona fide legal process,
treat all such information of the Disclosing Party in the same manner as the
Receiving Party treats its own proprietary and confidential information,
exercising precautions to prevent the disclosure of such information to others;
and
2) Use such information of the Disclosing Party only for
the purposes set forth herein.
B. The foregoing commitments shall impose no obligation with
respect to any information received from the Disclosing Party which:
1) was known to the Receiving Party prior to receipt
from the Disclosing Party;
2) is now or hereafter, through no act or failure to act
on the part of the Receiving Party, becomes part of the public domain;
3) is hereafter furnished to the Receiving Party by a
third party as a matter of right and without restriction on disclosure;
4) is supplied by the Disclosing Party to a third party
without restrictive obligations similar to those herein imposed; or
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5) is independently developed by the Receiving Party
without any use of any proprietary or confidential information received from the
Disclosing Party (and, in the case of Seller's obligations as a "Receiving
Party" hereunder, without any use of any information first prepared by Seller
for Ericsson pursuant to this Agreement).
C. Each party represents that it has the full and unrestricted
right to disclose any information, knowledge and data which it may present to
the other party in the performance of this Agreement.
25.9 LIMITATIONS ON LICENSE; DISTRIBUTION
A. Seller acknowledges that the only rights granted Seller under
Ericsson patents and patent applications ("Ericsson patent rights") is the
nonexclusive, nontransferable right and license, under the applicable Ericsson
patent rights, to make the Products and to sell the same exclusively to Ericsson
pursuant to the terms and conditions of this Agreement.
This Agreement does not prohibit Seller from making, using
and/or selling to third parties any Products which are capable of being made,
used and sold without using or infringing any Ericsson patent rights, or any
Ericsson trademark, trade name, copyright, trade secret or other Ericsson
intellectual property right of any kind; provided, however, that
(i) for so long as Ericsson is purchasing its
requirements for such Products from Seller, as
aforesaid, Seller agrees not to solicit the sale of
such Products directly to Ericsson's existing
after-market customer base, and
(ii) this sentence shall not be construed as authorizing
Seller to sell, and Seller agrees that it shall not
sell, Products to any third party incorporating
features or enhancements developed by Ericsson or by
Seller for Ericsson at Ericsson's expense, and
(iii) no Purchased Inventory shall be used in connection
with any such manufacture, use or sale by Seller, and
(iv) any use of the Consigned Equipment in connection with
any such manufacture, use or sale by Seller shall
require Ericsson's prior written approval which
Ericsson at its option may either withhold or give
subject to conditions which may include, without
limitation, conditions (1) assuring that any such use
not interfere in any way with Seller's meeting
Ericsson's purchase requirements and delivery
schedules, (2) assuring that any such use not impair
Seller's ability to fulfill Seller's obligations to
maintain and return the Consigned Equipment in good
corking order and repair, and (3) relieving Ericsson
of its obligations to reimburse certain excess costs
of maintenance and repair as provided under Section
4.A.3 hereof and transferring to Seller Ericsson's
responsibility for certain taxes as provided in
Section 5 hereof.
26.0 FORCE MAJEURE
A. Neither Ericsson nor Seller shall be considered in default or
liable for any delay or failure to perform its obligations under this Agreement,
except for the failure to pay money owed, if such delay or failure arises
directly or indirectly out of an act of nature, war, strikes, lockouts, trade
disputes, fires, quarantine restrictions, governmental action or by causes
beyond the reasonable control of Ericsson or Seller.
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B. Any obligation of Ericsson or Seller under this Agreement will
be postponed until cause underlying the force majeure has been eliminated at
which time the obligations will again be in effect. Any loss of time occasioned
by the force majeure will not be held against the party who was unable to comply
with its obligations under this Agreement because of the force majeure.
Notwithstanding the foregoing, or Section 3 or any other
provision of this Agreement to the contrary, if at any time it appears that the
delivery schedule set forth on a Purchase Order Release may not be met due to
any cause(s) specified in Section 26.A above, Ericsson at its option and without
incurring any penalty may cancel, in whole or in part, or reschedule in whole or
in part, such Purchase Order Release effective upon written notice to Seller
and, at its option, may procure all or any of such cancelled or rescheduled
Products from a third party and/or manufacture the same for itself.
C. In the event a delay in a party's performance under this
Section should extend beyond two (2) months, the other party may terminate this
Agreement effective upon 30 days prior written notice.
27.0 COMPLIANCE WITH LAWS
The parties agree to comply with the provisions of all laws and all
orders, rules and regulations issued thereunder applicable to this Agreement and
performance hereunder.
28.0 APPLICABLE LAW
This Agreement shall be governed and construed in accordance with the
substantive laws of the State of Virginia.
29.0 ORDER OF PRECEDENCE
Any Inconsistency between this Agreement, Purchase Order Releases, the
specification and other documents will be resolved as provided in Section 2, and
otherwise by giving precedence to those documents in the following order with
the document to be given greatest precedence listed first:
1) This Agreement and Attachments, Schedules and
Exhibits hereto
2) Purchase Order Releases
3) Ericsson Purchased Part Drawings
30.0 ADVERTISING
Seller shall not, without first obtaining the written consent of
Ericsson, in any manner advertise or publish the fact that Seller has furnished
or contracted to furnish Ericsson with the Products, or disclose any of the
details connected with this Agreement to any third party except as may be
required to perform this Agreement or as may be required by law or bona fide
legal process.
31.0 NOTICES
Except as otherwise specifically provided in this Agreement, notices,
reports and other communications made with respect to this Agreement shall be
given in writing, addressed to the parties at the following addresses or such
other addresses as may be designated in writing by either party to the other.
Except as otherwise specifically provided in this Agreement, all notices
required to be given hereunder shall
15
<PAGE> 16
become effective when delivered by hand or when transmitted by telegraphic
means, or when received by the United States mail, registered or certified,
return receipt requested with proper postage for first class mail prepaid and
addressed as follows:
If to Ericsson: Ericsson Inc.
Mountain View Road
Lynchburg, Virginia 24502
Attention: Reggie Herndon
If to Seller: EMSG Systems Division, Inc.
6638 Old Wake Forest Road
Raleigh, North Carolina 27604
Attention: Kenneth H. Marks
32.0 ASSIGNMENT
Neither party hereto shall assign this Agreement or any rights,
responsibilities or obligations therein, without the express written approval of
the other; provided, however, that either party may assign or subcontract this
Agreement to a company controlling, controlled by, or under common control with
(e.g. an "affiliate" of) such party provided that (i) the party proposing to
effect such assignment or subcontracting shall first notify the other party
hereto in writing and furnish such other party an undertaking duly executed by
such affiliate wherein such affiliate agrees to be bound by all the terms and
conditions hereof, and (ii) no such assignment or subcontracting by either party
hereto shall relieve such party of any of its obligations hereunder. Any
purported assignment or subcontracting other than in conformity with the
foregoing provisions shall be void.
33.0 ENTIRE AGREEMENT AND MODIFICATION
This Agreement including the attachments, schedules and exhibits
attached hereto and made a part hereof sets forth the entire Agreement of the
parties with respect to the subject matter hereof and thereof and supersedes and
merges all prior agreements and understandings with respect thereto. No
amendment, modification or waiver of any provisions of this Agreement or consent
to any departure therefrom shall be effective unless in writing signed by a duly
authorized officer or representative of each party.
34.0 RELATIONSHIP OF THE PARTIES
The relationship of the parties is strictly that of vendor-vendee and
consignor-consignee as set forth herein and nothing herein shall be construed to
create a partnership, joint venture, employer-employee relationship or any other
continuing relationship or between the parties.
35.0 DISPUTE RESOLUTION
The parties recognize that a bona fide dispute as to certain matters
may from time to time arise during the term of this Agreement which relates to a
party's rights and/or obligations hereunder. In the event of the occurrence of
such a dispute, either party may, by notice to the other party, have such
dispute referred to their respective officers designated below, or such
officers' successors, for attempted resolution by good faith negotiations within
thirty (30) days after such notice is received. Such designated officers are as
follows:
For Ericsson - Jim Handel
For Seller - Kenneth H. Marks, Chief Executive Officer
16
<PAGE> 17
In the event the designated officers are not able to resolve such dispute within
such thirty (30) day period, or such other period of time as the parties may
mutually agree in writing, each party shall have the right to pursue any and all
remedies available at law or in equity except to the extent limited by any of
the other provisions of this Agreement.
The procedure described in this Section 35 shall not apply to disputes involving
any of Seller's obligations with respect to the preservation and protection of
Consigned Equipment and Purchased Inventory and Ericsson's interest therein or
otherwise involving Ericsson's right to retake possession of either; nor shall
this Section 35 apply to any dispute relating to any confidentiality obligations
or intellectual property rights.
17
<PAGE> 18
36.0 INDEMNIFICATION
Ericsson shall be responsible for and agrees to indemnify Seller and
hold Seller harmless from and against all third party claims, demands and causes
of action for direct damages (including reasonable legal fees) for personal
injuries or damage to tangible property directly resulting from the willful
misconduct or negligent acts or omissions of Ericsson, Ericsson's officers,
agents, employees, or subcontractors. Seller agrees to notify Ericsson as soon
as practical of any third party claim, demand or cause of action for which
Seller will request indemnification from Ericsson. Seller will provide Ericsson
with the necessary information and assistance to defend such claim, demand or
cause of action.
Seller shall be responsible for and agrees to indemnify Ericsson and
hold Ericsson harmless from and against all third party claims, demands and
causes of action for direct damages (including reasonable legal fees) for
personal injuries or damage to tangible property directly resulting from the
willful misconduct or negligent acts or omissions of Seller, Seller's officers,
officials, agents, employees, or subcontractors. Ericsson agrees to notify
Seller as soon as practical of any third party claim, demand or cause of action
for which Ericsson will request indemnification from Seller. Ericsson will
provide Seller with the necessary information and assistance to defend such
claim, demand, or cause of action.
37.0 LIMITATIONS OF LIABILITY
A. EXCEPT AS EXPRESSLY PROVIDED BELOW IN THIS SECTION 37.A,
NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY UNDER THIS AGREEMENT OR UNDER
ANY OTHER AGREEMENT BETWEEN THE PARTIES, OR IN TORT (INCLUDING BUT NOT LIMITED
TO NEGLIGENCE, OR OTHERWISE, FOR ANY SPECIAL, INDIRECT, INCIDENTAL,
CONSEQUENTIAL OR EXEMPLARY DAMAGES, INCLUDING BUT NOT LIMITED TO THE LOSS OF
OPPORTUNITY, LOSS OF BUSINESS, LOSS OF PRODUCTION, OR LOSS OF PROFITS OR
REVENUE, WHETHER OR NOT THE POSSIBILITY OF SUCH DAMAGES COULD HAVE BEEN
REASONABLY FORESEEN.
The limitation of liability provided for above, shall not apply with
respect to damages arising out of a breach by Seller of its obligations relating
to the preservation and protection of the Consigned Equipment and Purchased
Inventory and Ericsson's interest therein, any breach by either party of any
confidentiality obligations, or any breach or violation by either party of any
intellectual property rights of the other party.
B. No action, regardless of form, arising out of any alleged
breach of this Agreement or any other agreement between the parties may be
brought by either party more than two (2) years after the cause of action has
accrued.
38.0 PROGRAM REVIEWS
ATTACHMENT D hereto is an August 1, 1996 memorandum outlining suggested
agendas for cost reviews and for program reviews. The agenda for cost reviews
shall not apply and the parties acknowledge that it is superseded by the
provisions of Section 5.C of this Agreement. The agenda for program reviews
outlined in ATTACHMENT D shall apply, except that (i) these reviews, which may
be requested at any time by either party, shall be held only at mutually
agreeable times and locations, and (ii) in the event of any inconsistency
between such agenda and any provision of this Agreement, the provision of this
Agreement shall control, and (iii) nothing said or done, or omitted to be said
or done, by either party at any such program review shall be binding either as
an amendment, modification or waiver of, or as a consent to departure from, any
provision of this Agreement unless set forth in a writing duly executed by both
parties as provided under Section 33 hereof.
18
<PAGE> 19
39.0 HEADINGS
The headings herein are for convenience of reference only and shall not
constitute a part of this Agreement nor shall they affect its meaning,
construction or effect.
40.0 COUNTERPARTS/FACSIMILE
This Agreement may be signed in counterparts by facsimile transmission,
each of which shall constitute an original and which together shall constitute
one and the same agreement. Four sets of original signatures pages, not in
counterparts, shall be executed and delivered within three (3) business days of
the facsimile execution hereof.
41.0 PARTIAL INVALIDITY
The invalidity or unenforceability of any provision hereof shall not
affect the validity or enforceability of any other provision hereof.
19
<PAGE> 20
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE CAUSED THIS AGREEMENT TO BE
EXECUTED BY THEIR DULY AUTHORIZED OFFICERS OR REPRESENTATIVES AS OF THE DATE
FIRST ABOVE WRITTEN.
AGREED:
EMSG SYSTEMS DIVISION, INC.
By: /s/
----------------------------------------
Authorized Signature
Name: /s/
----------------------------------------
Title: CEO
----------------------------------------
Date: 10/18/96
----------------------------------------
ERICSSON INC.
By:
----------------------------------------
Authorized Signature
Name: Jim Handel
Title: Manager of Manufacturing and Procurement
Date: 10/17/96
----------------------------------------
By: /s/ Jim Handel
----------------------------------------
Authorized Signature
Name: Steve Gintowt
Title: Manager of Finance
Date: 10/19/96
---------------------------------------
By:
/s/
/s/ Steven Gintowt
---------------------------------------
Authorized Signature
Name: Phil Beeson
Title: Assistant General Counsel
Date:
---------------------------------------
20
<PAGE> 21
ATTACHMENT C
ERICSSON PURCHASED INVENTORY
The listing of Ericsson Purchased Inventory is being prepared but has not been
finalized as of the date of execution of this Agreement. The parties agree to
use all reasonable efforts to finalize the listing within the approx. 2 week
period following execution of this Agreement. The final listing will be
mutually agreed upon by the parties, will be signed by the parties and appended
hereto as ATTACHMENT C and will be deemed incorporated in this Agreement to the
same extent and with the same effect as if it had been appended hereto at the
date of execution of this Agreement.
<PAGE> 1
EXHIBIT 21.1
The only subsidiary of the Registrant is EMSG Systems Division, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 36,810
<SECURITIES> 0
<RECEIVABLES> 240,910
<ALLOWANCES> 10,000
<INVENTORY> 147,954
<CURRENT-ASSETS> 0
<PP&E> 1,192,285
<DEPRECIATION> 1,029,367
<TOTAL-ASSETS> 741,095
<CURRENT-LIABILITIES> 1,051,022
<BONDS> 0
0
12,768
<COMMON> 15,673
<OTHER-SE> (756,114)
<TOTAL-LIABILITY-AND-EQUITY> 741,095
<SALES> 1,961,616
<TOTAL-REVENUES> 1,961,616
<CGS> 2,021,158
<TOTAL-COSTS> 2,872,241
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,165
<INCOME-PRETAX> (959,790)
<INCOME-TAX> 0
<INCOME-CONTINUING> (959,790)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,009,732)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
