<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 November 30, 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 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 January 2, 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
PART I PAGE
ITEM 1. FINANCIAL STATEMENTS
- CONSOLIDATED BALANCE SHEETS. NOVEMBER 30, 1997 (UNAUDITED) AND
AUGUST 31, 1997 (AUDITED). 3
- CONSOLIDATED STATEMENTS OF OPERATIONS. QUARTERS ENDED NOVEMBER
30, 1997 AND 1996 (UNAUDITED). 5
- CONSOLIDATED STATEMENTS OF CASH FLOWS. QUARTERS ENDED NOVEMBER
30, 1997 AND 1996 (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
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ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Balance Sheets
November 30, 1997 (unaudited) and August 31, 1997 (audited)
<TABLE>
<CAPTION>
November 30 August 31
1997 1997
----------- -----------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 51,752 $ 36,810
Accounts receivable - trade, net of allowance
for doubtful accounts of $296 and $10,000
respectively 128,493 230,910
Inventories, net (note 2) 152,929 147,954
Prepaid expenses and other current assets 15,334 10,180
----------- -----------
Total current assets 348,508 425,854
----------- -----------
Property and equipment, net 118,154 162,918
----------- -----------
Other assets:
Note receivable from officer 84,776 84,648
Deposits and other assets 9,175 9,175
Cost in excess of net assets of acquired business,
net of accumulated amortization of $259,537
and $240,037 in 1997 and 1996, respectively 53,625 58,500
----------- -----------
Total other assets 147,576 152,323
----------- -----------
$ 614,238 $ 741,095
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term debt $ 76,398 $ 104,776
Current obligations under capital leases 3,649 5,199
Accounts payable, trade 792,276 839,897
Other accrued liabilities 78,690 47,714
Preferred dividend payable 59,849 47,878
Accrued bonus 5,558 5,558
----------- -----------
Total current liabilities 1,016,420 1,051,022
----------- -----------
Long-term debt, less current maturities 397,135 381,976
----------- -----------
Long-term obligations under capital leases 5,988 5,693
----------- -----------
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 30,597 30,077
----------- -----------
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 (1,873,678) (1,763,403)
----------- -----------
Total stockholders' equity (deficit) (835,902) (727,673)
----------- -----------
$ 614,238 $ 741,095
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Operations
Quarters ended November 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sales $ 369,052 $ 494,009
Cost of goods sold 306,564 453,875
Gross profit (loss) 62,488 40,134
----------- -----------
General, selling and administrative expenses 149,930 253,468
----------- -----------
Operating (loss) (87,442) (213,334)
Other income (expenses):
Interest income 467 2,564
Interest expense (9,287) (16,481)
----------- -----------
Other income (expense), net (8,820) (13,917)
(Loss) before income taxes (96,262) (227,251)
----------- -----------
Income taxes -- --
----------- -----------
(Loss) before extraordinary item (96,292) (227,251)
Extraordinary item -- --
----------- -----------
Net income after income taxes and
extraordinary item (96,292) (227,251)
Accretion of preferred stock (516) (516)
Dividends on preferred stock -- --
----------- -----------
Net income applicable to common shareholders (96,778) (227,767)
=========== ===========
Weighted average number of shares 6,269,118 5,524,452
Earnings per common share and common share equivalent
Income (loss) before extraordinary item $ (0.015) (0.04)
Extraordinary item -- --
----------- -----------
Net income (loss) $ (0.015) $ (0.04)
=========== ===========
</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, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) after income taxes and after extraordinary item $ (96,262) $(227,251)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 33,225 59,820
Loss on disposal of equipment 16,414
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 102,417 (1,877)
Decrease (increase) in inventories (4,975) (63,509)
Decrease (increase) in prepaid expenses
and other current assets (4,758) 16,604
Decrease (increase) in accounts receivable, other -- 2,971
Decrease (increase) in deposits and other assets -- 791
Increase (decrease) in accounts payable, trade (47,621) 178,368
Decrease in accrued bonus -- (14,203)
Increase (decrease) in other accrued liabilities 30,976 32,536
--------- ---------
Net cash provided by (used in) operating activities 29,416 (15,750)
Cash flow from investing activities:
Capital expenditures -- (4,615)
--------- ---------
Net cash used in investing activities -- (4,615)
--------- ---------
Cash flow from financing activities:
Principal payments on long-term debt (13,219) (18,108)
Principal payments on capital lease obligations (1,255) (18,743)
Dividends paid -- (70,320)
--------- ---------
Net cash provided by (used in) financing activities (14,474) (107,171)
--------- ---------
Net increase (decrease) in cash and
cash equivalents 14,942 (127,536)
Cash and cash equivalents:
Beginning of quarter 36,810 308,794
End of quarter $ 51,752 $ 181,258
========= =========
Supplemental disclosure of cash flow information:
Cash paid during quarter for:
Interest $ 9,287 $ 16,481
========= =========
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
Company's business.
(2) Inventories:
<TABLE>
<CAPTION>
November 30th August 31st
1997 1997
-------- --------
<S> <C> <C>
Raw materials $ 52,709 $ 64,657
Work-in-progress 97,265 75,914
Finished goods 2,955 7,383
-------- --------
$152,929 $147,954
</TABLE>
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 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 17
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.
The Company has a three-year contract with a major customer. Due to
capitalization and performance issues with the Company, the customer could
cancel the contract any time. The products currently being produced under the
contract could be phased-out starting in mid 1998.
Subsequent to the close of this reporting period, the Company signed an
agreement to terminate the existing employment agreement with its President, CEO
and Chairman, Kenneth H. Marks effective January 4th, 1998. The Company is
unable to continue to meet its commitments under the existing employment
agreement. Mr. Marks will continue as the Company's Chairman and President on an
interim and part-time basis until a new President/CEO can be hired who has skill
and compensation requirements that are aligned with the current needs and
capabilities of EMSG.
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED NOVEMBER 30, 1997 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 1997 were $124,957 less than that of the same period in 1996
primarily due to difficulty in making timely shipments because of cashflow and
manufacturing process issues.
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 1997 increased to
16.9% in comparison to 8.1 in 1996 as a result of reductions in direct labor of
7% and manufacturing overhead of 11%,. partially offset by an increase in
material costs of 11%.
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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 $103,538 less than that of 1996. Expenses of $169,771 were incurred in 1996
for legal, accounting and other consulting expenses, and general administration
of the small public company resulting from the July 29, 1996 merge. The small
public company general and administrative expense was reduced by $85,000 in
1997. Other reductions in 1997 took place at the subsidiary in the amount of
$18,500.
Operating Income (Loss). Operating income (loss) is gross profit less
SG&A. Loss from operations in 1997 decreased by $125,892 as a result of
increased gross profit of $22,354 and decreased general and administrative
expenses of $103,538.
LIQUIDITY AND CAPITAL RESOURCES
EMSG's cash and cash equivalents increased by $14,942 from August 31,
1997 through November 30, 1997. The Company provided $29,416 in cash for its
operations during this quarter. Payments were made to reduce long-term debt
($13,219) and for capital leases ($1,255).
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. If the reorganization 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. The Company is also pursuing other alternatives in
an effort to resolve its capitalization problems.
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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 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.
Certain claims have been made against the Company for non-payment of
liabilities. The Company is working to resolve such claims as appropriate to the
situation. In addition, the Company has received notice of default by its
long-term note holders and is in discussions in an attempt to restructure such
debt.
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)
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 51,752
<SECURITIES> 0
<RECEIVABLES> 128,789
<ALLOWANCES> 296
<INVENTORY> 152,929
<CURRENT-ASSETS> 0
<PP&E> 1,157,816
<DEPRECIATION> 1,039,662
<TOTAL-ASSETS> 614,238
<CURRENT-LIABILITIES> 1,016,420
<BONDS> 0
0
12,768
<COMMON> 15,673
<OTHER-SE> (864,343)
<TOTAL-LIABILITY-AND-EQUITY> 614,238
<SALES> 369,052
<TOTAL-REVENUES> 369,052
<CGS> 306,564
<TOTAL-COSTS> 456,494
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,820
<INCOME-PRETAX> (96,262)
<INCOME-TAX> 0
<INCOME-CONTINUING> (96,262)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (96,778)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
