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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 November 30, 1996
Commission file number 0-23528
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
(Name of small business issuer in its charter)
Delaware 13-3421337
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) 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 Janaury 1, 1997, there were 5,527,452 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
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PAGE
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PART I
IEM 1. FINANCIAL STATEMENTS
- - CONSOLIDATED BALANCE SHEETS. NOVEMBER 30, 1996 (UNAUDITED) AND AUGUST 31, 1996
(AUDITED). 3
- - CONSOLIDATED STATEMENTS OF OPERATIONS. QUARTERS ENDED NOVEMBER 30, 1996 AND 1995
(UNAUDITED). 5
- - CONSOLIDATED STEMENTS OF CASH FLOWS. QUARTERS ENDED NOVEMBER 30, 1996 AND 1995
(UNAUDITED) 6
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. 7
PART II 10
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
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Balance Sheets
November 30, 1996 (unaudited) and August 31, 1996 (audited)
<TABLE>
<CAPTION>
November 30 August 31
Assets 1996 1996
- ------ ---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $ 181,258 $ 308,794
Accounts receivable - trade, net of allowance
for doubtful accounts of $5,500 in 1996
and 1995, respectively 303,898 302,021
Accounts receivable - other 14,316 17,287
Inventories (Note 2) 136,795 73,066
Prepaid expenses and other current assets 44,306 60,910
---------- ----------
Total current assets 680,573 762,078
---------- ----------
Property and equipment, net 513,666 564,208
---------- ----------
Other assets:
Note receivable from officer 100,000 100,000
Deposits and other assets 13,345 14,136
Cost in excess of net assets of acquired business,
net of accumulated amortization of $226,875 and
$222,000 in Nov. 30 and Aug.31, respectively 73,125 78,000
---------- ----------
Total other assets 186,470 192,136
---------- ----------
$1,380,709 $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.
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ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Balance Sheets
November 30, 1996 (unaudited) and August 31, 1996 (audited)
<TABLE>
<CAPTION>
November 30 August 31
Liabilities and Stockholders' Equity (Deficit) 1996 1996
- -------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 87,387 56,628
Current obligations under capital leases 75,959 77,551
Accounts payable, trade 491,730 313,362
Other accrued liabilities 102,091 69,555
Preferred dividend payable -- 70,320
Accrued bonus 6,619 20,822
----------- -----------
Total current liabilities 763,786 608,236
----------- -----------
Long-term debt, less current maturities 437,886 486,753
----------- -----------
Long-term obligations under capital leases 92,934 110,085
----------- -----------
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 1996 and 1995, respectively 28,037 44,054
----------- -----------
Stockholders' equity
Class A, preferred stock cumulative and convertible, $ .01 par value;
authorized 2,000,000 shares, 267,872 issued and outstanding 2,679 2,679
Common stock, $0.0025 par value:
authorized 20,000,000 shares,
5,527,452 s issued and
outstanding 13,819 13,819
Additional paid-in capital 1,024,464 1,008,529
Retained deficit (982,896) (755,735)
----------- -----------
Total stockholders' equity 58,066 269,292
----------- -----------
1,380,709 $ 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.
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ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Operations
Quarters ended November 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Sales $ 494,009 566,210
Cost of goods sold 453,875 622,565
----------- -----------
Gross profit (loss) 40,134 (56,355)
----------- -----------
General, selling and administrative expenses 253,468 192,594
----------- -----------
Operating (loss) (213,334) (248,949)
----------- -----------
Other income (expenses):
Interest income 2,564 18,843
Interest expense (16,481) (15,165)
----------- -----------
Other income (expense), net (13,917) 3,678
----------- -----------
(Loss) before income taxes and
extraordinary item (227,251) (245,271)
----------- -----------
Income taxes -- --
----------- -----------
(Loss) before extraordinary item (227,251) (245,271)
Extraordinary item -- 1,681,162
----------- -----------
Net income (loss) after income taxes and
extraordinary item (227,251) 1,435,891
Accretion of preferred stock (516) (14,642)
Dividends on preferred stock -- --
----------- -----------
Net income (loss) applicable to common shareholders (227,767) 1,421,249
=========== ===========
Weighted average number of shares 5,524,452 64,714
Earnings (loss) per common share and common share equivalent
Income (loss) before extraordinary item $ (0.04) (3.79)
Extraordinary item -- 25.97
----------- -----------
Net income (loss) $ (0.04) $ 22.18
=========== ===========
</TABLE>
See notes to financial statements which are an integral part hereof.
.
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ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
Quarters ended November 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Cash flow from operating activities:
Net income (loss) after income taxes and after extraordinary item $ (227,251) 1,435,891
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 59,820 56,286
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (1,877) (110,143)
Decrease (increase) in inventories (63,509) 7,547
Decrease (increase) in prepaid expenses
and other current assets 16,604 (14,485)
Decrease (increase) in accounts receivable, other 2,971 3,831
Decrease (increqase) n deposits and other assets 791 (709)
Increase (decrease) in accounts payable, trade 178,368 (1,589,705)
Decrease in accrued bonus (14,203) --
Increase (decrease) in other accrued liabilities 32,536 (328,611)
---------- ----------
Net cash provided by (used in) operating activities (15,750) (540,098)
---------- ----------
Cash flow from investing activities:
Capital expenditures (4,615) (1,666)
---------- ----------
Net cash used in investing activities (4,615) (1,666)
---------- ----------
Cash flow from financing activities:
Principal payments on long-term debt (18,108) (35,729)
Principal payments on capital lease obligations (18,743) (9,044)
Dividends paid (70,320) --
---------- ----------
Net cash provided by (used in) financing activities (107,171) (44,773)
---------- ----------
Net increase (decrease) in cash and
cash equivalents (127,536) (586,537)
Cash and cash equivalents:
Beginning of period 308,794 1,632,630
---------- ----------
End of period $ 181,258 1,046,093
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during quarter for:
Interest $ 16,481 15,165
========== ==========
Income taxes -- --
========== ==========
</TABLE>
See notes to financial statements which are an integral part hereof
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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
Compzny's business.
(2) Inventories:
November 30, August 31
1996 1996
----------- ----------
Raw materials .......................... $ 53,427 $ 35,446
Work-in-progress ....................... 73,791 27,649
Finished goods ......................... 9,577 9,971
$136,795 $ 73,066
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 33 employees in 21,000 square feet of flex space. Operations are
near 30% of capacity with one shift active.
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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 QUARTERS ENDED NOVEMBER 30, 1995 AND NOVEMBER 30,
1996 BASED ON THE UNAUDITED FINANCIAL STATEMENTS REFERENCED HEREIN
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 the first
quarter in 1996 were $72,201 less than that of the same period in 1995 primarily
due to a slow start up of a contract signed with a new customer.
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 1996 increased to 8.1% in comparison
to (9.9%) in 1995 as a result of reductions in material costs of 4.2% and
manufacturing overhead of 5%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (`SG&A') consist primarily of non-manufacturing
salaries, sales commissions, and other general expenses. SG&A expense for 1996
was $60,874 more than that of 1995. Expenses of $169,771 were incurred for
legal, accounting and other consulting expenses, and general administration of
the small public company resulting from the July 29, 1996 merge, partially
offset by reductions in general and administrative expense of $79,639 and
marketing and sales expense of $29,258 at the EMSG Systems Division, Inc.
OPERATING INCOME (LOSS). Operating income (loss) is gross profit less SG&A. Loss
from operations in 1996 decreased by $35,615 as a result of increased gross
profit of $96,489, primarily offset by increased general and administrative
expenses and a reduction in interest income.
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,
8
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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 of 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 $127,536 from August 31, 1996
through November 30, 1996. The Company used $15,570 in cash for its operations
during this quarter.
EMSG used $4,615 in cash for capital expenditures. Payments were made to reduce
long-term debt ($18,108) and for capital leases ($18,743).
Effective August 31, 1996, shareholders of the Class A Cumulative Preferred
Stocks of ESD tendered 9,376 shares, out of the total 9,926 outstanding, in
exchange for 267,873 shares (at the exhange ratio of 28.57 to 1) of EMSG Class A
Cumulative Convertible Preferred Stock. In addition, EMSG paid each holder of
ESD Preferred Stock who exchanged his or her shares of such stock, pusuant to
the terms of the exchange offer, an amount equal to the accrued and unpaid
dividends with respect to such shares. The total amount of $70,320 was paid in
November 1996.
Cash and cash equivalents decreased by $586,537 from August 31, 1995 through
November 30, 1995. Cash used in reducing accounts payables ($1,589,705) and
accrued liabilities ($328,611) was partially offset by the extraordinary income
of $1,681,162. The Company also used $302,944 in operating activities, $35,729
in payments of long-term debt and $9,044 in payments of capital leases.
The Company anticipates the acquisition of new capital equipment during fiscal
1997 and plans to enter into lease agreements to finance such equipment.
The Company is negotiating a line of credit using receivables, inventory and
fixed assets as collateral. If these funds are made available to the Company,
they will be used to meet its working capital rquirements.
In addition, the Company is in discussions with equity investors to provide
capital to support internal growth and acquisitions. There are no assurances
that the Company will be successful in raising the required funds. Further,
without the addition of new capital there can be no assurances that the Company
can continue its operations or meet its business objectives.
9
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PART II
.ITEM 1. Legal Proceedings
Neither the registrant nor its subsidiary are a party, nor is any of their
property subject to materail pending legal proceedings.
ITEM 2. Changes in Securities.
None.
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.
None.
10
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ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
In accordance with the requiremts 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> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 181,258
<SECURITIES> 0
<RECEIVABLES> 309,398
<ALLOWANCES> 5,500
<INVENTORY> 136,795
<CURRENT-ASSETS> 680,573
<PP&E> 1,495,257
<DEPRECIATION> 981,591
<TOTAL-ASSETS> 1,380,709
<CURRENT-LIABILITIES> 763,786
<BONDS> 0
0
2,679
<COMMON> 13,819
<OTHER-SE> 41,508
<TOTAL-LIABILITY-AND-EQUITY> 1,380,709
<SALES> 494,009
<TOTAL-REVENUES> 494,009
<CGS> 453,875
<TOTAL-COSTS> 707,343
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,481
<INCOME-PRETAX> (227,251)
<INCOME-TAX> 0
<INCOME-CONTINUING> (227,251)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (227,767)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
