<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 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:
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
----- -----
As of July 7, 1997, there were 6,269,118 shares of the registrant's
Common Stock, $.0025 par value per share, outstanding.
Transition Small Business Disclosure Format (Check one):
Yes X No
----- -----
1
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TABLE OF CONTENTS
PAGE
PART I
ITEM 1. FINANCIAL STATEMENTS
- CONSOLIDATED BALANCE SHEETS, MAY 31, 1997
(UNAUDITED) AND AUGUST 31, 1996 (AUDITED). 3
- CONSOLIDATED STATEMENTS OF OPERATIONS. NINE MONTH
ENDED MAY 31, 1997 AND MAY 31, 1996 (UNAUDITED) AND
THREE MONTHS ENDED MAY 31 1997 AND MAY 31, 1996
(UNAUDITED). 5
- CONSOLIDATED STATEMENTS OF CASH FLOWS. NINE MONTHS
ENDED MAY 31, 1997 AND MAY 31, 1996 (UNAUDITED) 6
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 8
PART II 11
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
2
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ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Balance Sheets
May 31, 1997 (unaudited) and August 31, 1996 (audited)
<TABLE>
<CAPTION>
May 31 August 31
Assets 1997 1996
- ------ ---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $ 136,274 $ 308,794
Accounts receivable - trade, net of allowance
for doubtful accounts of $5,500 in 1997
and 1996, respectively 198,451 302,021
Accounts receivable - other 0 17,287
Inventories (Note 2) 270,031 73,066
Prepaid expenses and other current assets 32,992 60,910
---------- ----------
Total current assets 637,748 762,078
---------- ----------
Property and equipment, net 357,772 564,208
---------- ----------
Other assets:
Note receivable from officer 84,550 100,000
Deposits and other assets 9,175 14,136
Cost in excess of net assets of acquired business,
net of accumulated amortization of $236,625 and
$222,000 on May. 31 and Aug. 31, respectively 63,375 78,000
---------- ----------
Total other assets 157,100 192,136
---------- ----------
$1,152,620 $1,518,422
========== ==========
</TABLE>
See notes to financial statements which are an integral part hereof.
See notes to consolidated financial statements regarding the audited balance
sheet on August 31, 1996, as included in the Annual Report filed on form 10-KSB.
3
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ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Balance Sheets
May 31, 1997 (unaudited) and August 31, 1996 (audited)
<TABLE>
<CAPTION>
May 31 Aug 31
Liabilities and Stockholders' Equity (Deficit) 1997 1996
- ----------------------------------------------- ---- ----
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 103,057 56,628
Current obligations under capital leases 52,863 77,551
Accounts payable, trade 835,358 313,362
Other accrued liabilities 95,958 69,555
Preferred dividend payable 35,909 70,320
Accrued bonus -- 20,822
----------- ----------
Total current liabilities 1,123,145 608,236
----------- ----------
Long-term debt, less current maturities 402,563 486,753
----------- ----------
Long-term obligations under capital leases 51,809 110,085
----------- ----------
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 29,565 44,054
----------- ----------
Stockholders' equity
Class A, preferred stock cumulative and
convertible, $.01 par value; authorized
2,000,000 shares, 1,276,768 and 267,873
issued and outstanding in 1997 and 1996,
respectively (Note 3) 12,768 2,679
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 1,005,760 1,008,529
Retained deficit (1,488,663) (755,735)
----------- ----------
Total stockholders' equity (deficit) (454,462) 269,292
----------- ----------
1,152,620 1,518,422
========== ==========
</TABLE>
See notes to financial statements which are an integral part hereof.
See notes to consolidated financial statements regarding the audited balance
sheet on August 31, 1996, as included in the Annual Report filed on form 10-KSB.
4
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ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Operations
For the Nine Months and Quarter Ended May 31, 1997 and May 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Nine Months Ended Quarter Ended
5/31/97 5/31/96 5/31/97 5/31/96
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $ 1,576,970 $ 2,151,951 $ 486,480 $ 797,567
Cost of goods sold 1,518,412 2,169,631 433,346 795,838
----------- ----------- ----------- ---------
Gross profit (loss) 58,558 (17,680) 53,134 1,729
General, selling and administrative expenses 711,993 655,590 251,485 239,939
----------- ----------- ----------- ---------
Operating (loss) (653,435) (673,270) (198,351) (238,210)
Other income (expenses):
Interest income 4,355 35,459 765 5,017
Interest expense (46,411) (43,250) (14,535) (14,036)
----------- ----------- ----------- ---------
Other income (expense), net (42,056) (7,791) (13,770) (9,019)
(Loss) before income taxes and
extraordinary item (695,491) (681,061) (212,121) (247,229)
Income taxes -- -- -- --
(Loss) before extraordinary item (695,491) (681,061) (212,121) (247,229)
Extraordinary item -- 1,728,552 -- 3,771
Net income (loss) after income taxes and
extraordinary item (695,491) 1,047,491 (212,121) (243,458)
Accretion of preferred stock (1,528) (29,285) (516) --
Dividends on preferred stock (35,909) (12,408) (9,463) --
Net income (loss) applicable to com
shareholders (732,928) 1,005,798 (222,100) (243,458)
Weighted average number of shares 5,707,081 64,714 6,044,118 64,714
Earnings per common share and common share equivalent
Income (loss) before extraordinary item (.13) (11.16) (.04) (3.82)
Extraordinary item -- 26.71 -- .05
Net income (loss) (.13) 15.55 (.04) (3.77)
</TABLE>
See notes to financial statements which are an integral part hereof.
5
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ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
Nine Months ended May 31, 1997 and 1996
<TABLE>
<CAPTION>
(Unaudited) 1997 1996
--------- ----------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) after income taxes and after extraordinary item $(695,491) 1,047,491
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 166,527 169,736
Net loss in disposition of equipment 26,986 0
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 103,570 (265,484)
Decrease (increase) in inventories (196,965) 138,177
Decrease (increase) in prepaid expenses
and other current asset 27,918 2,955
Decrease (increase) in accounts receivable, other 17,287 2,664
Decrease (increase) in note receivable 15,450 --
Decrease (increase) in deposits and other assets 4,960 (84,354)
Increase (decrease) in accounts payable, trade 521,996 (1,635,147)
Decrease in accrued bonus (20,822) --
Increase (decrease) in other accrued liabilities 26,403 (364,962)
--------- ----------
Net cash provided by (used in) operating activities (2,181) (988,924)
--------- ----------
Cash flow from investing activities:
Capital expenditures (10,110) (171,807)
Disposal of capital asset 39,971 --
--------- ----------
Net cash used in investing activities 29,861 (171,807)
Cash flow from financing activities:
Principal payments on long-term debt (37,761) (37,887)
New lease obligations -- 131,799
Principal payments on capital lease obligations (89,032) (42,034)
Dividends paid (70,320) (24,814)
Proceeds from issuance of common stock 25,000 (650)
Purchase of common shares (28,087) --
Net cash provided by (used in) financing activities (200,200) 26,414
--------- ----------
Net increase (decrease) in cash and
cash equivalents (172,520) (1,134,317)
Cash and cash equivalents:
Beginning of period 308,794 1,632,630
--------- ----------
End of period $ 136,274 498,313
========= ==========
Supplemental disclosure of cash flow information:
Cash paid during quarter for:
Interest $ 14,535 14,036
========= ==========
Income taxes -- --
========= ==========
</TABLE>
See notes to financial statements which are an integral part hereof
6
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Notes to Financial Statements:
(1) The accompanying Consolidated Financial Statements are unaudited, unless
otherwise indicated. In management's opinion, all adjustments (consisting of
only normal recurring accruals) necessary for a fair presentation have been
made.
The results of operations and financial position, including working capital, for
interim periods are not necessarily indicative of those to be expected for a
full year, due, in part, to seasonal fluctuations which are normal for the
Company's business.
(2) Inventories:
<TABLE>
<CAPTION>
May 31 August 31
1997 1996
-------- -------
<S> <C> <C>
Raw materials $109,275 $35,446
Work-in-progress 153,220 27,649
Finished goods 7,536 9,971
-------- -------
$270,031 $73,066
======== =======
</TABLE>
7
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ITEM 2
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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.
The Company currently operates one facility in Raleigh, North Carolina
with approximately 13 employees in 21,000 square feet of flex space. Operations
are near 15% 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.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS AND QUARTERS ENDED MAY 31, 1997 AND MAY
31, 1996 BASED ON THE UNAUDITED FINANCIAL STATEMENTS REFERENCED HEREIN
8
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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. Management is currently
re-evaluating the Company's strategic plan as to its target business and capital
structure.
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 the nine month
period in 1997 were $574,981 less than that of the same period in 1996 due to a
slow start up of contracts signed with two new customers. Also, the company's
ability to get required materials to support shipments was impaired by cash flow
issues.
Gross Profit (Loss). Gross Profit (loss) equals net sales less cost of
goods sold, which consist of labor and material, manufacturing costs (primarily
lease payments for, and depreciation of, manufacturing equipment and facilities)
and other manufacturing costs. Gross profit in 1997 increased to 3.7% in
comparison to (.8%) in 1996 as a result of reductions in material costs of 8.3%,
partially offset by a 6.5% increase in manufacturing overhead.
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 $56,403 more than that of 1996. Expenses of $387,890 were incurred for
legal, accounting, consulting, and general administration of the small public
company resulting from the July 29, 1996 merger, partially offset by reductions
in general, selling and administrative expense of $331,487.
Operating Income (Loss). Operating income (loss) is gross profit less
SG&A, and other income and expenses. Loss from operations in 1997 was reduced by
$19,835 as a result of increased gross profit of 76,238, partially offset by
increased general, selling and administrative expense.
Extraordinary: During the first nine-month period 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. The agreement provided the customer relief of trade
payables to EMSG of $48,054, and cash payments to EMSG. The net benefits to EMSG
were $1,217,162. 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% paid in quarterly installments beginning
January 1, 1996.
LIQUIDITY AND CAPITAL RESOURCES
EMSG's cash and cash equivalents decreased by $172,520 from August 31,
1996 through May 31, 1997. The Company used $2,181 in cash for its operations
during this nine-month period. Increased accounts payable of $521,996 were
primarily offset by a net loss of $695,491.
9
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EMSG used $10,110 in cash for capital expenditures. Payments were made
to reduce long-term debt ($37,761) and for capital leases ($89,032). Disposal of
equipment yielded $39,371 and the sale of 66,666 common shares generated
$25,000.
Effective August 31, 1996, shareholders of the Class A Cumulative
Preferred Stocks of ESD tendered 9,576 shares, out of the total 9,926
outstanding, in exchange for 1,276,768 shares (at the exchange ratio of 133.33
to 1) of EMSG Class A Cumulative Convertible Preferred Stock. In addition, EMSG
paid each holder of ESD Preferred Stock who exchanged his or her shares of such
stock, pursuant to the terms of the exchange offer, an amount equal to the
accrued and unpaid dividends with respect to such shares. The total amount of
$70,320 was paid in November 1996. Outstanding and unpaid dividends for the EMSG
Class A Cumulative Preferred shares were $35,909 on May 31, 1997.
Cash and cash equivalents decreased by $1,134,317 from August 31, 1995
through May 31, 1996. Cash used in reducing accounts payables ($1,635,147) and
accrued liabilities ($364,962) was partially offset by the extraordinary income
of $1,728,552. The Company also used $988,924 in operating activities, $37,887
in payments of long-term debt, $42,034 in payments of capital leases and $24,814
in dividend payments.
The Company has been in discussions with equity investors to provide
capital to support internal growth and acquisitions. The Company has also had
discussions with potential strategic and joint-venture partners to effect a
relationship that would assist it in better meeting its objectives and that
could improve the financial position of the Company. There are no assurances
that the Company will be successful in raising the required funds or
consummating a relationship with a strategic or joint-venture partner. Further,
without the addition of new capital or other financial support from outside
sources there can be no assurances that the Company can continue its operations
or meet its business objectives. Management is currently re-evaluating the
Company's strategic plan as to its target business and capital structure. The
Company has engaged outside professionals to assist Management in developing a
plan to restructure the balance sheet in an effort to strengthen the Company's
financial position and improve cash flow. There are no assurances that such a
restructure can be accomplished or will result in the expected outcome. Without
a successful restructure of the Company's debts, it is unlikely the Company can
continue as a going concern.
PART II
ITEM 1. Legal Proceedings
Neither the registrant nor its subsidiary are a party, nor is any of
their property subject to material pending legal proceedings except as noted
herein. The Company is involved with a claim and a counter claim with a previous
customer concerning the customer's cancellation of product manufacturing. A
negative outcome for the Company is not expected to be material with respect to
its financial position, however, a positive outcome benefiting the Company is
expected to be material if such claim were to be upheld by the courts. At this
time, there is no certainty of the outcomes of the claims involved.
10
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The Company's sole subsidiary is in default on payment to a leasing
company for the purchase of certain equipment. The leasing company is currently
cooperating with the Company to sell the equipment and satisfy the indebtedness.
This equipment is not expected to be used in the Company's ongoing operations.
ITEM 2. Changes in Securities.
During the reported quarter, an officer of the Company tendered 75,000
shares of EMSG common stock at a price of $0.375 per share in exchange for
indebtedness, as previously agreed to in his employment agreement.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Exhibits and Reports on Form 8-K.
27 Financial Data Schedule (for SEC use only).
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereonto duly
authorized.
Signature
/s/ Kenneth H. Marks
--------------------
Kenneth H. Marks
President and Chief Executive Officer
(principal executive financial and accounting officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 136,274
<SECURITIES> 0
<RECEIVABLES> 203,951
<ALLOWANCES> 5,500
<INVENTORY> 270,031
<CURRENT-ASSETS> 0
<PP&E> 1,389,054
<DEPRECIATION> 1,031,282
<TOTAL-ASSETS> 1,152,620
<CURRENT-LIABILITIES> 1,123,145
<BONDS> 0
0
12,768
<COMMON> 15,673
<OTHER-SE> (482,903)
<TOTAL-LIABILITY-AND-EQUITY> 1,152,620
<SALES> 1,576,970
<TOTAL-REVENUES> 1,576,970
<CGS> 1,518,412
<TOTAL-COSTS> 2,230,405
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,411
<INCOME-PRETAX> (695,491)
<INCOME-TAX> 0
<INCOME-CONTINUING> (695,491)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (732,928)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
