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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 February 28, 1998
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 April 13, 1998, 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
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TABLE OF CONTENTS
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Page
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PART I
ITEM 1. FINANCIAL STATEMENTS
- - CONSOLIDATED BALANCE SHEETS. FEBRUARY 28, 1998 (UNAUDITED) AND AUGUST 31, 1997
(AUDITED). 3
- - CONSOLIDATED STATEMENTS OF OPERATIONS. SIX MONTHS AND QUARTERS ENDED FEBRUARY 28, 1998 AND 1997
(UNAUDITED). 4
- - CONSOLIDATED STATEMENTS OF CASH FLOWS. SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(UNAUDITED) 5
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. 6
PART II 8
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
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ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Balance Sheets
February 28, 1998 (unaudited) and August 31, 1997 (audited)
<TABLE>
<CAPTION>
February 28 August 31
Assets 1998 1997
------ ----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 128,777 $ 36,810
Accounts receivable - trade, net of allowance
for doubtful accounts of $296 and $10,000
respectively 62,584 230,910
Inventories, net (note 2) 147,954
Prepaid expenses and other current assets 5,238 10,180
----------- -----------
Total current assets 196,599 425,854
----------- -----------
Property and equipment, net 42,000 162,918
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Other assets:
Note receivable from officer 84,776 84,648
Deposits and other assets -- 9,175
Cost in excess of net assets of acquired business,
net of accumulated amortization of $259,537
in 1997 -- 58,500
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Total other assets 84,776 152,323
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$ 323,375 $ 741,095
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current liabilities:
Current maturities of long-term debt 76,398 104,776
Current obligations under capital leases 5,199
Accounts payable, trade 647,426 839,897
Other accrued liabilities 91,015 47,714
Preferred dividend payable 71,818 47,878
Accrued bonus -- 5,558
----------- -----------
Total current liabilities 886,657 1,051,022
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Long-term debt, less current maturities 396,314 381,976
----------- -----------
Long-term obligations under capital leases -- 5,693
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Class A cumulative preferred stock, $50 par value;
with a preference in liquidation over the holders
of common stock of $50 plus accrued dividends;
authorized 30,000 shares, 550 shares,
issued and outstanding 31,113 30,077
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Stockholders' equity (deficit) :
Class A, preferred stock cumulative and convertible
$.01 par value; authorized 3,000,000 shares; 1,276,768
issued and outstanding 12,768 12,768
Common stock, $0.0025 par value; authorized 20,000,000
shares, 6,269,118 issued and outstanding 15,673 15,673
Additional paid-in capital 1,009,335 1,007,289
Retained deficit (2,028,485) (1,763,403)
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Total stockholders' equity (deficit) (990,709) (727,673)
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$ 323,375 $ 741,095
=========== ===========
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See accompanying notes to consolidated financial statements.
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ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Operations
For the Six Months and Quarter Ended February 28, 1998 and February 28, 1997
(Unaudited)
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For the For the
Six Months Ended Quarter Ended
2/28/98 2/28/97 2/28/98 2/28/97
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 729,094 $ 1,090,490 $ 360,042 $ 596,481
Cost of goods sold 610,268 1,085,066 303,704 631,190
----------- ----------- ----------- -----------
Gross profit (loss) 118,826 5,424 56,338 (34,709)
General, selling and administrative expenses 326,333 460,508 176,403 200,041
Operating (loss) (207,507) (455,084) (120,065) (234,750)
Other income (expenses):
Interest income 770 3,590 303 1,026
Interest expense (31,847) (31,876) (22,560) (15,395)
Other income (expense), net (31,077) (28,286) (22,257) (14,369)
(Loss) before income taxes and extraordinary item (238,584) (483,370) (142,322) (249,119)
Income taxes -- -- -- --
(Loss) before extraordinary item (238,584) (483,370) (142,322) (249,119)
Extraordinary item -- -- (7,000)
Net income (loss) after income taxes and
extraordinary item (238,584) (483,370) (142,322) (256,119)
Accretion of preferred stock (1,032) (1,012) (516) (516)
Dividends on preferred stock (23,939) (26,446) (11,969) (13,223)
Net income (loss) applicable to com shareholders (263,555) (510,828) (154,807) (269,858)
Weighted average number of shares 5,538,563 5,538,563 5,538,563 5,568,563
Earnings per common share and common share equivalent
Income (loss) before extraordinary item -- -- -- (7.35)
Extraordinary item -- -- -- 26.65
Net income (loss) (.05) (.09) (.03) 19.30
</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
Six Months ended February 28, 1998 and 1997
(Unaudited)
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1998 1997
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Cash flow from operating activities:
Net income (loss) after income taxes and after extraordinary item $(263,555) (483,370)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 55,058 117,388
Loss on disposal of equipment 16,414 20,918
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 168,326 (178,119)
Decrease (increase) in inventories 147,954 (217,178)
Decrease (increase) in prepaid expenses
and other current assets 4,942 (571)
Decrease (increase) in accounts receivable, other 128 3,555
Decrease (increase) in deposits and other assets 9,175 (39)
Increase (decrease) in accounts payable, trade (192,471) 628,229
Decrease in accrued bonus -- (20,822)
Increase (decrease) in other accrued liabilities 43,301 10,647
-------- --------
Net cash provided by (used in) operating activities (10,728) (119,362)
Cash flow from investing activities:
Capital expenditures -- (8,584)
Disposal of capital assets -- 39,971
--------
Net cash used in investing activities -- 31,387
Cash flow from financing activities:
Principal payments on long-term debt (13,219) (19,265)
Principal payments on capital lease obligations (1,673) (76,346)
Dividends paid -- (70,320)
Proceeds from issuance of common stock -- 25,000
Sale of Inventory 102,645 --
Net cash provided by (used in) financing activities 87,753 (140,931)
-------- --------
Net increase (decrease) in cash and
cash equivalents 77,025 (228,906)
Cash and cash equivalents:
Beginning of quarter 51,752 308,794
--------- ---------
End of quarter $ 128,777 $ 79,888
========= =========
Supplemental disclosure of cash flow information:
Cash paid during quarter for:
Interest $ 9,287 $ 31,876
========= =========
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 balance sheet has been adjusted to account for the shut-down of the
Company's sole operating division as a non-operating entity.
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:
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February 28 August 31
1998 1997
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<S> <C> <C>
Raw materials................................................ $ - $ 64,657
Work-in-progress............................................. - 75,914
Finished goods............................................... - 7,383
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$ - $ 147,954
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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 judgment concerning the future and
are subject to risks and uncertainties that could cause EMSG's actual operating
results and financial position to differ materially.
EMSG cautions that any such forward-looking statements are further
qualified by important factors that could cause EMSG's actual operating results
to differ materially from those in the forward-looking statements, including,
without limitation the following: possible loss of existing relationships in the
OEM industry and with specific large clients in that industry; potential loss of
contracts; greater than anticipated competition; possibility that expected
synergies from the Merger would not be achieved; possible volatility of the EMSG
stock price; difficulties encountered in the integration of the operations of
EMSG Systems Division, Inc. and J.A. Industries, Inc.; unexpected liabilities or
an inability to maintain adequate liability insurance to cover legal claims; and
dependence on key personnel.
The immediate focus of the organization is on restructuring and
recapitalizing the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
GENERAL
EMSG provided manufacturing services to original equipment
manufacturers ("OEM's") in the electronics industry, including producers of
telecommunication and data communication
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equipment, industrial controls, computers & peripherals and instrumentation.
Primary services include materials procurement, printed circuit card and chassis
assembly, and testing. Due to circumstances beyond its control, the Company has
decided to exit the electronics manufacturing business and close its operations
in an attempt to satisfy its creditors and avoid bankruptcy.
On February 27, 1998, the Company terminated most of its employees
anticipating the close of the sole operating subsidiary. It is expected that the
operation will be completely closed sometime in mid April 1998. The Company has
operated one facility in Raleigh, North Carolina with approximately 17 employees
in 21,000 square feet of flex space. Operations were 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 terminated its contract with a major customer.
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28,
1997 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 second
quarter in 1998 were $236,439 less than that of the same period in 1997
primarily due to the Company's inability to procure materials to fulfill
customer orders.
Gross Profit (Loss). Gross Profit (loss) equals net sales less cost of goods
sold, which consist of labor and material, manufacturing costs (primarily rent,
insurance, electricity and depreciation of, manufacturing equipment and
facilities) and other manufacturing costs. Gross profit in 1998
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increased to 15.6% in comparison to (5.8%) in 1997 as a result of reductions in
direct labor and 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 1998
was $23,638 less than that of 1997.
Operating Income (Loss). Operating income (loss) is gross profit less SG&A. Loss
from operations in 1998 decreased by $120,065 as a result of increased gross
profit of $91,047 and decreased general and administrative expenses of $23,638.
LIQUIDITY AND CAPITAL RESOURCES
EMSG's cash and cash equivalents increased by $91,967 from August 31, 1997
through February 28, 1998. The Company use $10,728 in cash for its operations
during this quarter.
Some payments were made to reduce long-term debt and for capital leases.
The Company has undertaken an initiative to restructure most of its debt, both
current and long-term, so that the debt service is appropriate to the size and
capability of the organization. Once such reorganization is complete, the
Company plans to pursue new sources of funding to improve liquidity and assure
adequate working capital. There are not 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. In February 1998, the Company signed a letter of
intent to sell some of the assets of its sole operating subsidiary. It is the
Company's intent to liquidate the operating subsidiary and use the proceeds to
payout its creditors to the extent possible.
PART II
ITEM 1. 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 judgment 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
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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 the subject of numerous law suits for claims made for
payment.
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.
Exhibit 27 Financial Data Schedule (For SEC use only)
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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, thereunto duly
authorized.
Signature
/s/Kenneth H. Marks
-------------------
Kenneth H. Marks
President
(principal executive financial and accounting officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 128,777
<SECURITIES> 0
<RECEIVABLES> 65,880
<ALLOWANCES> 296
<INVENTORY> 0
<CURRENT-ASSETS> 196,599
<PP&E> 42,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 323,375
<CURRENT-LIABILITIES> 886,657
<BONDS> 0
0
12,768
<COMMON> 15,673
<OTHER-SE> (1,019,150)
<TOTAL-LIABILITY-AND-EQUITY> 323,375
<SALES> 729,094
<TOTAL-REVENUES> 729,094
<CGS> 610,268
<TOTAL-COSTS> 936,601
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,077
<INCOME-PRETAX> (238,584)
<INCOME-TAX> 0
<INCOME-CONTINUING> (238,584)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (238,584)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
