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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended October 3, 1999 Commission file number: 1-5761
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LaBarge, Inc.
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(Exact Name of Registrant as specified in its charter)
DELAWARE 73-0574586
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9900A Clayton Road, St. Louis, Missouri 63124
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(Address) (Zip Code)
(314) 997-0800
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(Registrant's telephone number, including Area Code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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 the number of shares outstanding of each of the Issuer's classes of
common stock as of October 3, 1999. 14,740,760 shares of common stock.
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LABARGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands except per share data)
THREE MONTHS ENDED
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OCTOBER 3, September 27,
1999 1998
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NET SALES $ 16,502 $ 24,667
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COSTS AND EXPENSES:
Cost of sales 13,838 19,289
Selling and administrative expense 3,968 3,411
Interest expense 468 309
Loss from NotiCom 520 28
Minority interest (loss) income (10) 147
Other income, net (71) (152)
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18,713 23,032
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NET (LOSS) EARNINGS BEFORE INCOME TAXES (2,211) 1,635
INCOME TAX (BENEFIT) EXPENSE (813) 603
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NET (LOSS) EARNINGS $ (1,398) $ 1,032
=============================================================================================================================
BASIC NET (LOSS) EARNINGS PER COMMON SHARE $ (.09) $ .07
AVERAGE COMMON SHARES OUTSTANDING 14,744 15,455
=============================================================================================================================
DILUTED NET (LOSS) EARNINGS PER COMMON SHARE $ (.09) $ .07
AVERAGE COMMON SHARES OUTSTANDING 14,744 15,530
=============================================================================================================================
See accompanying notes to consolidated financial statements.
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LABARGE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
OCTOBER 3, June 27,
1999 1999
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 941 $ 495
Accounts and notes receivable, net 9,519 12,492
Inventories 17,146 16,093
Prepaid expenses 695 727
Deferred tax assets, net 664 664
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TOTAL CURRENT ASSETS 28,965 30,471
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PROPERTY, PLANT AND EQUIPMENT, NET 12,939 13,188
DEFERRED TAX ASSETS, NET 2,390 1,818
INVESTMENT IN NOTICOM 2,665 2,780
INTANGIBLE ASSETS, NET 6,763 6,941
OTHER ASSETS, NET 4,619 4,456
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$ 58,341 $ 59,654
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 2,750 $ 930
Current maturities of long-term debt 1,801 1,771
Trade accounts payable 5,543 5,847
Accrued employee compensation 3,599 3,873
Other accrued liabilities 2,654 2,863
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TOTAL CURRENT LIABILITIES 16,347 15,284
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LONG-TERM DEBT 14,993 15,866
SUBORDINATED DEBT 4,424 4,424
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value. Authorized 40,000,000 shares;
issued 15,733,795 shares at October 3, 1999 and 15,711,395
at June 27, 1999, including shares in treasury 157 157
Additional paid-in capital 13,661 13,615
Retained earnings 12,005 13,403
Less cost of common stock in treasury, 993,035 shares at
October 3, 1999 and 955,853 shares at June 27, 1999 (3,246) (3,095)
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TOTAL STOCKHOLDERS' EQUITY 22,577 24,080
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$ 58,341 $ 59,654
============================================================================================================================
See accompanying notes to consolidated financial statements.
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LABARGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
THREE MONTHS ENDED
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OCTOBER 3, September 27,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $ (1,398) $ 1,032
Adjustments to reconcile net cash (used) provided by operating
activities:
Undistributed loss from NotiCom 520 28
Minority interest (loss) income (10) 147
Depreciation and amortization 794 430
Deferred taxes (573) 500
Changes in assets and liabilities, net of acquisitions:
Accounts and notes receivable, net 2,973 2,149
Inventories (1,053) (80)
Prepaid expenses 33 (60)
Trade accounts payable (304) 753
Accrued liabilities (473) (554)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 509 4,345
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (243) (697)
Additions to other assets (288) (173)
Investments in other companies (405) (1,801)
Investment in technology - (1,700)
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NET CASH USED BY INVESTING ACTIVITIES (936) (4,371)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt - 7,336
Repayments of long-term debt (843) (20)
Net purchase of common stock (104) (520)
Net change in short-term borrowings 1,820 (4,270)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 873 2,526
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NET INCREASE IN CASH AND CASH EQUIVALENTS 446 2500
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 495 540
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 941 $ 3,040
==========================================================================================================================
See accompanying notes to consolidated financial statements.
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LABARGE, INC.
FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS - BASIS OF PREPARATION
The consolidated balance sheets at October 3, 1999 and June 27, 1999, the
related consolidated statements of operations for the three months ended October
3, 1999 and September 27, 1998 and the consolidated statements of cash flows for
the three months ended October 3, 1999 and September 27, 1998 have been prepared
by LaBarge, Inc. (the "Company") without audit. In the opinion of management,
adjustments, all of a normal and recurring nature, necessary to present fairly
the financial position and the results of operations and cash flows for the
aforementioned periods, have been made.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Forms 10-K and
10-K/A for the fiscal year ended June 27, 1999.
2. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
(dollars in thousands)
OCTOBER 3, June 27,
1999 1999
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Billed shipments, net of progress payments $ 9,444 $ 11,819
Less allowance for doubtful accounts 324 347
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Trade receivables, net 9,120 11,472
Notes receivables 2,000 2,000
Less allowance for doubtful notes 2,000 2,000
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Notes receivable, net - -
Income tax receivable 349 863
Other current receivables 50 157
===================================================================================================================
$ 9,519 $ 12,492
===================================================================================================================
Progress payments are payments from customers in accordance with contractual
terms for contract costs incurred to date. Such payments are credited to the
customer at the time of shipment.
On June 2, 1999, the Company should have received payment of a $2.0 million note
receivable plus interest due thereon from TransMedica International, Inc.
("TransMedica"). TransMedica defaulted on its obligation. Based on a review of
all facts available at the time, the Company wrote down to zero the carrying
value of its receivable, inventory and investment in TransMedica at June 27,
1999.
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3. INVENTORIES
Inventories consist of the following:
(dollars in thousands)
OCTOBER 3, June 27,
1999 1999
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Raw materials $ 9,937 $ 9,472
Work in progress 8,428 7,755
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18,365 17,227
Less progress payments 1,219 1,134
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$ 17,146 $ 16,093
===================================================================================================================
In accordance with contractual agreements, the U.S. Government has a security
interest in inventories identified with related contracts for which progress
payments have been received.
4. INTANGIBLE ASSETS, NET
Intangible assets, net, is summarized as follows:
(dollars in thousands)
OCTOBER 3, June 27,
1999 1999
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Software $ 1,252 $ 1,124
Patents 79 73
Goodwill 7,199 7,214
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8,530 8,411
Less amortization 1,767 1,470
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$ 6,763 $ 6,941
===================================================================================================================
Amortization expense was $303,000 for the quarter ended October 3, 1999 and
$28,000 for quarter ended September 27, 1998, respectively.
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5. INVESTMENT IN NOTICOM
Investment in NotiCom is summarized as follows:
(dollars in thousands)
OCTOBER 3, June 27,
1999 1999
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Investment in technology $ 1,686 $ 1,686
Less amortization 428 237
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Investment in technology, net 1,258 1,449
Investment in joint venture 1,407 1,331
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$ 2,665 $ 2,780
====================================================================================================================
The investments in joint venture and technology pertain to NotiCom and its
related advance notification technology. At quarter end October 3, 1999,
NotiCom's total assets were $4.0 million, total liabilities were $1.6 million.
NotiCom's operations incurred a loss for the three months ended October 3, 1999
of $658,000, including $257,000 of amortization. The Loss from NotiCom included
in the Company's results from operations are 50% of the losses from the joint
venture plus $191,000 of amortization of the technology.
6. OTHER ASSETS
Other assets consist of the following:
(dollars in thousands)
OCTOBER 3, June 27,
1999 1999
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Cash value of life insurance $ 3,036 $ 2,903
Deposits, licenses, and other 1,594 1,560
Investments in businesses 2,250 2,250
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6,880 6,713
Less allowance for revaluation of impaired assets 2,250 2,250
Less amortization 11 7
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$ 4,619 $ 4,456
===================================================================================================================
The investments in businesses and allowance for revaluation of impaired assets
pertain to the Company's equity interest in TransMedica's stock.
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7. SHORT AND LONG-TERM OBLIGATIONS
Short-term borrowings, long-term debt and the current maturities of long-term
debt consist of the following:
(dollars in thousands)
OCTOBER 3, June 27,
1999 1999
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Short-term borrowings:
Revolving credit agreements:
Balance at period end $ 2,750 $ 930
Interest rate at period end 7.43% 7.79%
Average amount of short-term borrowings outstanding during period $ 2,117 $ 1,681
Average interest rate for period 7.60% 6.69%
Maximum short-term borrowings at any month end $ 2,326 $ 6,390
===================================================================================================================
Long-term debt:
Senior lender:
Term loan 9,428 10,214
Mortgage loan 6,060 6,082
Subordinated debt 4,424 4,424
Other 1,306 1,341
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21,218 22,061
Less current maturities 1,801 1,771
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Subordinated debt 4,424 4,424
Long-term debt, less current maturities $ 14,993 $ 15,866
===================================================================================================================
The average interest rate was computed by dividing the sum of daily interest
costs by the sum of the daily borrowings for the respective periods.
Total cash payment for interest for the three months ended October 3, 1999 was
$548,000, compared with $351,000 for the three months ended September 27, 1998.
SENIOR LENDER
In fiscal 1999, the Company amended its senior loan agreement with Bank of
America. The original agreement included a term loan and revolving credit
facility totaling $20.0 million.
The current amendment reestablished the bank's secured position, reinstated a
borrowing base limitation on the revolver and established new covenants and
performance measures to reflect the effect of LaBarge's new investments (NotiCom
and OCS), as well as the reserve for loss on the TransMedica assets in fiscal
1999.
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The following is a summary of the current senior loan agreement:
- - A term loan, current balance $9,428,000 requiring repayments of principal
quarterly. This loan matures in September 2005.
- - A revolving credit facility up to $15.0 million based on a borrowing base
formula equal to the sum of 85% of eligible receivables, 50% of eligible
finished goods inventories, 30% of other eligible inventories, 50% of the
net book value of equipment and 75% of the net book value of certain real
property and 70% of appraised value of other real property less the current
term loan balance and outstanding letters of credit. As of October 3, 1999,
the maximum allowable was approximately $2.6 million. The revolver
borrowing at October 3, 1999 was $1.8 million.
- - Covenants and performance specify minimum performance criteria which
involve Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") and in addition, after June 30, 2000, EBITDA in relation to debt
and EBITDA in relation to fixed charges.
- - Interest on the loans at prime or a stated rate over LIBOR based on certain
ratios. As of quarter-end on October 3, 1999, the average rate was
approximately 7.1%.
In addition to the senior lending agreement, bank working capital borrowings
consist of the following:
Secondary Line of Credit:
LaBarge Clayco Wireless has a revolving line of credit with Mercantile Bank
N.A. This line is in the amount of $1.0 million and matures November 1999.
The interest rate on this note is a 1/4% over the bank's prime rate. At the
end of first quarter of fiscal 2000, the outstanding amount was $950,000 at
an interest rate of 8.25%. The Company anticipates renegotiating the
revolving line of credit prior to expiration on terms generally consistent
with those currently in place.
8. MINORITY INTEREST
On May 7, 1996, the Company, through its wholly owned subsidiary LaBarge
Wireless Inc., entered into a 50% joint venture with Clayco Construction Company
to form LaBarge Clayco Wireless L.L.C. The Company reported results of
operations using the equity method of accounting. In the second quarter of
fiscal 1998, the Company increased its ownership of LaBarge Clayco Wireless
L.L.C. to 51%. Beginning with the second quarter fiscal 1998, the Company began
consolidating 100% of the results of this unit into its financial statement and
deducting the minority interest share before arriving at earnings before taxes.
In the second quarter of fiscal 1999, the Company purchased from Clayco
Construction Company an additional 39% of LaBarge Clayco Wireless L.L.C. for
$300,000 to increase its ownership to 90%. The minority interest loss for three
months ending October 3, 1999 was $10,000 compared with $147,000 income for the
three months ending September 27, 1998. The minority holders' interest is
included in other liabilities and is $88,000 at October 3, 1999, compared with
$98,000 at June 27, 1999.
The Company intends to exercise its agreement to call the minority interest
share in its subsidiary, LaBarge-OCS, Inc. (See Management's Discussion and
Analysis - Significant Events.)
9. INCOME TAXES
As of October 3, 1999, the Company had alternative minimum tax credit
carryforwards and investment tax credits of approximately $821,000 available to
reduce future regular federal income taxes. Investment tax credits of $59,000
and $4,000 will expire in fiscal years 2000 and 2001, respectively.
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10. CASH FLOWS
Total cash payments for interest for the three months ended October 3, 1999 were
$548,000 compared with $351,000 for the three months ended September 27, 1998.
Cash refunds for income taxes for the three months ended October 3, 1999 were
$754,000, compared with a payment of $137,000 for the three months ended
September 27, 1998.
11. EARNINGS PER COMMON SHARE
Basic and diluted (loss) earnings per share are computed as follows:
THREE MONTHS ENDED
--------------------------------------------
OCTOBER 3, September 27,
1999 1998
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NUMERATOR:
Net (loss) earnings $ (1,398) $ 1,032
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DENOMINATOR:
Denominator for basic net (loss) earnings per share
-- weighted-average shares 14,744 15,455
Effect of dilutive securities-employee stock options - 75
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POTENTIAL COMMON SHARES:
Denominator for diluted net (loss) earnings per share
-- adjusted weighted-average shares and assumed conversions 14,744 15,530
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BASIC NET (LOSS) EARNINGS PER COMMON SHARE $ (.09) $ .07
===================================================================================================================
DILUTED NET (LOSS) EARNINGS PER COMMON SHARE $ (.09) $ .07
===================================================================================================================
The effect of conversion of the Subordinated Convertible Notes into common stock
is not considered in the calculations of diluted net earnings per common share
because they would have an anti-dilutive effect on earnings per share as stated
in SFAS No. 128, "Earnings Per Share."
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12. BUSINESS SEGMENT INFORMATION
Business segments:
(dollars in thousands)
NET SALES TO CUSTOMERS:
THREE MONTHS ENDED
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OCTOBER 3, September 27,
1999 1998
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Manufacturing Services Group $ 14,049 $ 21,081
LaBarge Clayco Wireless 2,371 3,586
Network Technologies Group 82 -
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$ 16,502 $ 24,667
===================================================================================================================
NET (LOSS) EARNINGS BEFORE INCOME TAXES:
THREE MONTHS ENDED
-----------------------------------------------------
OCTOBER 3, September 27,
1999 1998
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Manufacturing Services Group $ (842) $ 1,332
LaBarge Clayco Wireless (80) 317
Network Technologies Group (486) -
Loss from NotiCom (520) (28)
Corporate and other items 185 323
Interest expense (468) (309)
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$ (2,211) $ 1,635
===================================================================================================================
DEPRECIATION & INVESTMENTS & CAPITAL
AMORTIZATION EXPENSE EXPENDITURES
-------------------------------- ----------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 3, September 27, OCTOBER 3, September 27,
1999 1998 1999 1998
-------------------------------- ----------------------------------
Manufacturing Services Group $ 394 $ 311 $ 227 $ 892
LaBarge Clayco Wireless 28 8 10 5
Network Technologies Group 269 - 84 -
Investment in NotiCom - - 405 3,501
Corporate and other items 103 111 210 (27)
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$ 794 $ 430 $ 936 $ 4,371
======================================================================== ==================================
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TOTAL ASSETS
---------------------------------------------------
OCTOBER 3, June 27,
1999 1999
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Manufacturing Services Group $ 29,001 $ 30,752
LaBarge Clayco Wireless 3,942 3,537
Network Technologies Group 6,547 6,691
Investment in NotiCom 2,665 2,780
Corporate and other items 16,186 15,894
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$ 58,341 $ 59,654
=================================================================================================================
GEOGRAPHIC INFORMATION
The Company has no sales offices or facilities outside of the United States.
Sales for export did not exceed 10% of total sales in fiscal year 1999 or first
quarter of fiscal year 2000.
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LABARGE, INC.
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Statements contained in this Report which are not historical facts are
forward-looking statements within the meaning of the federal securities laws.
Forward-looking statements involve risks and uncertainties. Future events and
the Company's actual results could differ materially from those contemplated by
those forward-looking statements. Important factors which could cause the
Company's actual results to differ materially from those projected in, or
inferred by, forward-looking statements are (but are not necessarily limited to)
the following: the impact of increasing competition or deterioration of economic
conditions in the Company's markets; cutbacks in defense spending by the U.S.
Government; lack of acceptance by the market for the BusCall(TM) product; lack
of acceptance by the market for the products of LaBarge's Network Technologies
Group; the outcome of certain legal actions between LaBarge and TransMedica
International, Inc. regarding a note receivable and LaBarge's contractual
agreements with TransMedica; the outcome of other litigation the Company is
party to; unexpected increases in the cost of raw materials, labor and other
resources necessary to operate the Company's business; the availability, amount,
type and cost of financing for the Company and any changes to that financing;
and unexpected Year 2000 issues.
LaBarge, Inc. ("LaBarge" or the "Company") is a Delaware Corporation. The
Company is engaged in the following primary business activities:
- - The MANUFACTURING SERVICES GROUP is the Company's core manufacturing
business, which has been its principal business since 1985. This group
designs, engineers and produces sophisticated electronic systems and
devices and complex interconnect systems on a contract basis for its
customers. The Company derived approximately 85% of its total revenues from
this group for the three months ended both October 3, 1999 and September
27, 1998.
The group markets its services to companies desiring an engineering and
manufacturing partner capable of developing and providing high-reliability
electronic equipment, including products capable of performing in harsh
environmental conditions, such as high and low temperature, severe shock
and vibration. The group serves customers in a variety of markets with
significant revenues from customers in the defense, aerospace and
geophysical markets. The group's manufacturing facilities are located in
Arkansas, Missouri, Oklahoma and Texas.
- - LABARGE CLAYCO WIRELESS L.L.C. ("LaBarge Clayco Wireless") provides turnkey
construction, engineering and equipment installation services for the
wireless telecommunications industry. It was established in fiscal 1996 as
a 50%/50% joint venture with Clayco Construction Company in St. Louis,
Missouri. The operating results of LaBarge Clayco Wireless were accounted
for on the equity method through fiscal 1997. In the second quarter of
fiscal 1998, LaBarge increased its ownership interest in LaBarge Clayco
Wireless to 51% and began consolidating the total operations of this joint
venture. In the second quarter of fiscal 1999, the Company purchased from
Clayco Construction Company an additional 39% of LaBarge Clayco Wireless
for $300,000 to increase its ownership to 90%. LaBarge Clayco Wireless
became a reportable segment in fiscal 1999, due to the changes in ownership
and its growth in revenues. For the three months ended October 3, 1999, the
Company derived approximately 14% of its total revenues from this group
compared with 15% for the three months ended September 27, 1998.
- - The NETWORK TECHNOLOGIES GROUP is the Company's newest business activity.
This group was started in fiscal 1999 through the acquisition of privately
held Open Cellular Systems, Inc. ("OCS"). The group designs and markets
proprietary cellular and network communication system products and Internet
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services that provide monitoring and control of remote industrial and
municipal utility equipment. Results of the group are included in the
consolidated results of the Company since the date of the OCS acquisition,
March 2, 1999. This group is focusing its marketing efforts initially
toward the railroad industry to monitor railroad crossing equipment and its
performance, and toward the oil and gas pipeline industry to monitor
cathodic protection devices. In three months ended October 3, 1999,
approximately 1% of the Company's revenue was derived from this group.
- - NOTICOM L.L.C. JOINT VENTURE
In the first quarter of fiscal 1999, LaBarge and Global Research Systems,
Inc. of Rome, Georgia ("Global") formed NotiCom L.L.C. ("NotiCom"), a
Georgia limited liability company, to develop and market electronic systems
providing advance notice of the impending arrival of passenger motor
vehicles. The first product to be marketed by NotiCom is BusCall(TM) which
provides households with advance notice of the impending arrival of school
buses. In fiscal 1999, the NotiCom investment was accounted for using the
equity method. Throughout fiscal 1999, NotiCom was a development-stage
company.
During fiscal 1999, the BusCall system was used by two phone companies to
provide notification services to families in their service areas. NotiCom
expects to install another major system in fiscal 2000 which it is hoped
will provide the basis for a larger scale deployment beginning in fiscal
2001.
SIGNIFICANT EVENTS
Recent significant events include:
- - On June 2, 1999, TransMedica International, Inc., ("TransMedica") defaulted
on the payment of a $2.0 million note due the Company. The note is secured
by substantially all of TransMedica's assets. As a result, the Company
reevaluated the value of its assets related to TransMedica and decided to
reserve the full amount ($4.6 million) at June 27, 1999.
On October 16, 1998, the Company filed a Petition for Specific Performance
and Declaratory Judgment in the Circuit Court for St. Louis County,
Missouri, seeking resolution of LaBarge's right to develop and manufacture
new laser products and determination of the number of Laser Lancet(R)
devices TransMedica is presently obligated to purchase from LaBarge under
an exclusive manufacturing agreement between the two companies.
On June 3, 1999, the Company amended its suit to demand payment of the $2.0
million note receivable that was due June 2, 1999, and which remained
unpaid as of November 15, 1999. The Company is continuing its effort to
recover the amounts it believes are owed it by TransMedica.
- - On March 2, 1999, the Company acquired the remaining 90% of Open Cellular
Systems, Inc. ("OCS") for approximately $5.6 million. The purchase price
was paid by issuing Subordinated Convertible Notes due in June 2003 and
bearing interest of 7.5% per annum payable quarterly beginning June 29,
1999. Each share of OCS stock was valued at $4.25 in the transaction. Under
the terms of the Notes, each holder has the right to convert the Notes into
LaBarge, Inc. Common Stock at a conversion price of $8.00 per share at any
time after the first anniversary of the Notes up to their maturity date.
Further, the noteholders are entitled to receive participation payments
from the Company for each fiscal year through 2003 equal to the amount by
which 35% of the net income of OCS exceeds the 7.5% interest for the fiscal
year.
Initially, on March 2, 1999, 1,008,622 shares of OCS common stock were
exchanged for $4.3 million of Subordinated Convertible Notes. Options to
acquire 310,000 shares of OCS common stock were converted to 310,000 shares
of common stock of LaBarge-OCS, Inc., the acquiring subsidiary and
represent shares acquired by the holders through exercise of employee stock
options. These shares are callable by LaBarge, Inc. pursuant to a call
agreement whereby the Company, at its discretion, may
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exchange the shares for Subordinated Convertible Notes at $4.25 per share
or $1.3 million after the first anniversary of the merger (March 2, 2000)
and prior to June 15, 2000. This dollar amount is included in other current
liabilities at the balance sheet date due to the call agreement. The
Company recorded goodwill of $6.8 million in this transaction, which is
reflected in other assets.
- - In the first quarter of fiscal 1999, LaBarge and Global Research Systems,
Inc. of Rome, Georgia ("Global"), formed NotiCom L.L.C. ("NotiCom"), a
Georgia limited liability company, to develop and market electronic systems
providing advance notice of the impending arrival of passenger motor
vehicles. The first product to be marketed by NotiCom is BusCall(TM).
BusCall uses a combination of technologies, including Global Positioning
System satellite location data, wireless communications techniques and
telephony, to notify parents by phone when their children's school bus is
approaching the bus stop. It is being marketed to telephone companies and
other potential service providers, which can offer BusCall as a value-added
service. LaBarge's Manufacturing Services Group is the exclusive
manufacturer of all products sold by NotiCom.
LaBarge and Global each initially had a 50% interest in NotiCom, except
that after an aggregate of $1.0 million has been distributed by NotiCom,
Global will be entitled to 75% of subsequent distributions until it has
received preferred distributions aggregating $1.3 million. LaBarge has
invested $1.8 million in cash in NotiCom along with $500,000 of development
services. In addition, LaBarge has paid Global $1.7 million for a 50%
interest in intellectual property and has licensed the technology to
NotiCom. The Company is obligated to pay Global up to an aggregate of $23.3
million of additional purchase price for its 50% interest in the technology
if NotiCom meets or exceeds cumulative earnings before income taxes ("EBT")
through December 31, 2001. In order to generate the maximum purchase price,
NotiCom must generate $211.8 million of EBT between July 1, 1998 and
December 31, 2001. It appears unlikely at this time that such targets will
be met; therefore, the Company has not recorded the contingent purchase
price.
Because NotiCom is a start-up venture, it is too early to predict if or to
what extent NotiCom may contribute to the Company's revenues or earnings.
Given the risks inherent in a start-up operation, the Company elected,
during the fourth quarter of fiscal 1999, to amortize the technology over
three years. For the fiscal 2000 first quarter, the amortization of this
investment was approximately $257,000. Non-cash amortization in this
investment is expected to be $1.1 million for each of the fiscal years 2000
and 2001. The investment is accounted for using the equity method.
During the first quarter of fiscal 2000, NotiCom needed additional cash
infusions totaling approximately $405,000 to continue its development and
marketing efforts. LaBarge made these contributions. LaBarge expects
NotiCom to continue to incur similar losses for the next two quarters.
LaBarge anticipates a cash infusion will be required in the third quarter
of fiscal 2000.
RESULTS OF OPERATIONS -- QUARTER ENDED OCTOBER 3, 1999
SALES
(dollars in thousands)
THREE MONTHS ENDED
-------------------------------------------------------
Change OCTOBER 3, September 27,
1999 vs. 1998 1999 1998
--------------------------------------------------------------------------------------------------
Net sales -33.2 % $ 16,502 $ 24,700
==================================================================================================
During the quarter, sales were $16.5 million compared with $24.7 million for the
three months ended September 27, 1998.
The MANUFACTURING SERVICES GROUP. Sales for the first quarter of fiscal 2000
were $14.0 million compared
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to $21.0 million for the first quarter fiscal 1999, a 33.4% decline. The group,
which accounted for 85% of total sales, experienced lower sales to customers in
the defense and geophysical markets.
Sales to defense customers were down $6.4 million to a total of $5.9 million,
42.0% of first quarter fiscal 2000 sales. The decline was principally due to
lower shipments on the AEGIS program in first quarter of fiscal 2000 versus
first quarter of fiscal 1999. This program is winding down and future orders for
this program will be limited.
Approximately 58.0% of the group's sales were to customers in commercial
markets, including geophysical and aerospace. Sales to geophysical customers
were $2.9 million in the first quarter of fiscal 2000 compared with sales of
$4.0 million reported for the first quarter of fiscal 1999. The down turn in the
oil and gas industry, which has affected the entire market for equipment for the
exploration and production of oil, is the cause. The Company is encouraged by
the increase in oil and gas prices and is confident that when the industry
rebounds, LaBarge will benefit significantly from its new and expanded
relationships. However, the Company cannot predict when that will occur.
The group's backlog of firm, unshipped orders at October 3, 1999 was up
substantially to approximately $54.0 million compared with $42.7 million at June
27, 1999. The backlog at October 3, 1999 consisted of approximately $25.5
million for various defense customers and approximately $28.4 million for
commercial electronics customers. This is compared with $26.6 million for
defense customers and $16.1 million for commercial customers for the prior year
ended June 27, 1999.
LABARGE CLAYCO WIRELESS. Sales by LaBarge Clayco Wireless were $2.4 million and
represented 14% of total Company sales for the first quarter of fiscal 2000, a
decrease of $1.2 million from the first quarter of fiscal 1999. The decrease is
attributable to delays in several customers' build-out schedules during the
early part of the first quarter. However, the unit's backlog of new contracts at
October 3, 1999 was $4.1 million compared with $1.5 million at the end of the
prior year. The Company expects the second fiscal quarter sales to be higher due
to the increase in backlog.
The NETWORK TECHNOLOGIES GROUP. Sales by the Network Technologies Group were
insignificant for the first quarter fiscal 2000, but are expected to grow as the
year progresses.
GROSS PROFIT
(dollars in thousands)
THREE MONTHS ENDED
-----------------------------------------------
Change OCTOBER 3, September 27,
1999 vs. 1998 1999 1998
--------------------------------------------------------------------------------------------------
Gross profit -50.5% $ 2,664 $ 5,378
Gross margin -5.7 pts. 16.1% 21.8%
==================================================================================================
A breakdown of margins by group shows the following:
The MANUFACTURING SERVICES GROUP. This group's gross margin was 17.3% for the
three months ended October 3, 1999, compared with 21.4% for the three months
ended September 27, 1998. For the fiscal 2000 first quarter, excess capacity as
a result of lower sales led to higher fixed costs per sales dollar at several of
our manufacturing facilities, negatively impacting gross margins.
LABARGE CLAYCO WIRELESS. This group's gross margin was 8.5% for the three months
ended October 3, 1999, versus 19.1% for the quarter ended September 27, 1998.
The gross margin change was due to the mix of business in the first quarter of
fiscal 2000 compared with the fiscal 1999 first quarter.
The NETWORK TECHNOLOGIES GROUP. This group's gross margin was 9.2% for the three
months ended
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October 3, 1999. The group was formed in March 1999, so no comparable data for
prior periods exists.
SELLING AND ADMINISTRATIVE EXPENSES
(dollars in thousands)
THREE MONTHS ENDED
-----------------------------------
Change OCTOBER 3, September 27,
1999 vs. 1998 1999 1998
------------------------------------------------------------------------------------------------------
Selling and administrative expenses 16.3% $ 3,968 $ 3,411
Percent of sales 10.2% 24.0% 13.8%
======================================================================================================
Selling and administrative expenses increased 16.3% in the first quarter of
fiscal 2000, compared with the first quarter of fiscal 1999. The Network
Technologies Group was not purchased until March 2, 1999, and was not included
in September 27, 1998 totals.
The MANUFACTURING SERVICES GROUP. Selling and administrative expenses for this
group were $2.0 million (14.2% of sales) for the three months ended October 3,
1999, compared with $1.8 million (8.4% of sales) for the three months ended
September 27, 1998.
LABARGE CLAYCO WIRELESS. Selling and administrative expenses for this group were
$282,000 (11.9% of sales) for the three months ended October 3, 1999, compared
with $365,000 (10.2% of sales) for the three months ended September 27, 1998.
The dollar decrease was primarily attributable to lower sales volume.
The NETWORK TECHNOLOGIES GROUP. This group accounted for $451,000 of selling and
administrative expenses for the fiscal 2000 first quarter. This included
$257,000 in amortization of goodwill in the first quarter. The group was formed
in March 1999, so no comparable data for prior periods exits.
INTEREST EXPENSE
(dollars in thousands)
THREE MONTHS ENDED
-----------------------------------------------------
OCTOBER 3, September 27,
1999 1998
--------------------------------------------------------------------------------------------------
Interest expense $ 468 $ 309
==================================================================================================
Interest expense increased in the fiscal 2000 first quarter, due to higher
borrowings attributable to: $1.3 million in additional borrowing for the
expansion of one manufacturing plant; $4.4 million of new Subordinated
Convertible Notes related to the purchase of OCS on March 2, 1999; and,
approximately $1.8 million in higher senior borrowings during the quarter.
Additionally, LaBarge repurchased approximately 77,000 shares of its common
stock during the first quarter of fiscal 2000 at a total price of $104,000.
LOSS FROM NOTICOM
(dollars in thousands)
THREE MONTHS ENDED
---------------------------------------------
OCTOBER 3, September 27,
1999 1998
--------------------------------------------------------------------------------------------------
Loss from NotiCom $ 520 $ 28
==================================================================================================
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The loss at October 3, 1999 represents LaBarge's 50% interest in NotiCom L.L.C.
Included in NotiCom's loss is $257,000 of amortization of the technology
acquired in the acquisition. In the fourth quarter of fiscal 1999, after
reevaluating the amortization schedule for the NotiCom technology, the Company
decided to amortize the technology over a three-year period rather than a longer
period. The loss from NotiCom includes 50% of the losses from operations,
including $128,000 of amortization of the joint venture's start up cost and
$191,000 of amortization of the technology.
PRETAX (LOSS) EARNINGS
(dollars in thousands)
THREE MONTHS ENDED
-------------------------------------------------
OCTOBER 3, September 27,
1999 1998
-------------------------------------------------------------------------------------------------
Pretax (loss) earnings $ (2,211) $ 1,635
=================================================================================================
The change in earnings in the first quarter of fiscal 2000 as compared with the
first quarter of fiscal 1999 is attributable to: (1) $2.2 million in lower
profits from our Manufacturing Services Group as a result of lower sales volume;
(2) $520,000 in losses (including non-cash amortization of $319,000) in NotiCom,
started in fiscal 1999; (3) $159,000 in higher interest costs due to increased
borrowings; (4) a $401,000 decrease in earnings from LaBarge Clayco Wireless;
and, (5) a $489,000 loss from operations of Network Technologies Group.
TAX (BENEFIT) EXPENSE
(dollars in thousands)
THREE MONTHS ENDED
---------------------------------------------
OCTOBER 3, September 27,
1999 1998
-------------------------------------------------------------------------------------------------
Tax expense (benefit) $ (813) $ 603
=================================================================================================
NET (LOSS) EARNINGS AND (LOSS) EARNINGS PER SHARE
(dollars in thousands except per share data)
THREE MONTHS ENDED
---------------------------------------------
OCTOBER 3, September 27,
1999 1998
-------------------------------------------------------------------------------------------------
Net (loss) earnings $ (1,398) $ 1,032
Basic net (loss) earnings per share $ (.09) $ .07
Diluted net (loss) earnings per share $ (.09) $ .07
=================================================================================================
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FINANCIAL CONDITION AND LIQUIDITY
The following shows LaBarge's equity and debt positions:
STOCKHOLDERS' EQUITY AND DEBT
(dollars in thousands)
OCTOBER 3, June 27,
1999 1998
-------------------------------------------------------------------------------------------------
Stockholders' equity $ 22,577 $ 24,080
Debt $ 23,968 $ 22,991
=================================================================================================
Currently, our debt-to-equity ratio is 1.06 to 1 versus .95 to 1 at the end of
fiscal 1999.
As of June 25, 1999, we amended our senior lending agreement with Bank of
America. This included revising the borrowing base, granting a security interest
in the assets of the Company and revising covenants and performance measures to
reflect the reserve for loss of the TransMedica assets and the additions of OCS
and NotiCom as new businesses of the Company. At October 3, 1999, availability
under the Company's revolving line of credit was $2.6 million, with $1.8 million
outstanding. (See Note 7.)
RISK FACTORS
The NotiCom joint venture, as a start-up company, has a higher risk factor than
our manufacturing services business. Further, development and testing of the
BusCall product has required additional cash investment of approximately
$405,000 thus far in fiscal 2000, and it is expected that additional cash will
be needed to fully bring the product to market. Given the risks inherent in a
start-up operation, it is too early to predict if or to what extent NotiCom may
contribute to the Company's revenues or earnings.
The Network Technologies Group, although beyond the start-up stage, has used
cash during its first seven months of operation and has had limited sales. It is
too early to predict to what extent this group will contribute to the Company's
revenues, earnings and cash flow.
Overall, we believe our availability of funds going forward from cash generated
from operations and available credit under the Company's senior lending
agreement should be sufficient to support the planned operations of our
business.
FINANCIAL CONDITION & LIQUIDITY
Cash and cash equivalents at October 3, 1999 were $941,000 compared with
$495,000 at June 27, 1999. The cash amount held in escrow for the final payments
on the construction of the Berryville facility expansion at October 3, 1999 was
$67,000.
Accounts and notes receivable at October 3, 1999, were $9.5 million, compared
with $12.5 million at June 27, 1999, a decrease of $3.0 million. Accounts
receivables are down due to lower sales and better collections.
Inventories at October 3, 1999 and June 27, 1999 were $17.1 million and $16.1
million, respectively, an increase of $1.0 million.
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During the three months ended October 3, 1999, the Company purchased $243,000 in
property, plant and equipment.
Also during the three months ended October 3, 1999, the Company purchased 77,000
shares of its common stock for approximately $104,000 under its Stock Repurchase
Program.
During the first three months of fiscal 2000, the Company invested $405,000 in
NotiCom L.L.C.
YEAR 2000
We rely on computer technology for much of our operations. We have been
analyzing all of our information and data systems for possible Year 2000 ("Y2K")
problems.
We have completed testing of our basic manufacturing system, which covers our
accounting, billing, accounts payable and manufacturing operations, and have
concluded that this system, which uses a four-digit date field, is Y2K
compliant. We do not anticipate any significant Y2K problems with our basic
system.
In addition to our internal systems, we are dependent on the systems of
third-party vendors for certain of our operations. For instance, our payroll is
dependent upon a system operated by a third-party vendor. We have received
certification from this vendor that the system is Y2K compliant. We are
communicating with our other outside trading partners in order to assess their
Y2K readiness. These include, among others, our customers and suppliers. We have
received assurances of Y2K compliance from the substantial majority of the major
outside trading partners upon whom we rely and, while there can be no assurance
that they will be Y2K compliant, we believe that the significant third parties
upon whom we are dependent are or expect to be Y2K compliant before the end of
calendar 1999. Based upon information already gathered from these parties, we do
not presently have reason to believe that there will be Y2K problems with these
third parties that would impair our normal operations. We intend to complete our
communications with our outside trading partners prior to December 31, 1999.
We believe that the most likely worst-case scenario due to a Y2K failure of our
internal and third-party external systems would be the inability to manufacture
and ship products in a timely manner. This could have a negative impact on our
relationships with our customers and an adverse effect on our financial
condition and results of operations.
Currently, we have a contingency plan which involves manual protection of data
and an operating plan in the event of a Y2K failure.
Costs incurred to date for Y2K remediation activity have been immaterial and
have been included in operating expenses. We do not anticipate any material
costs for remaining Y2K compliance efforts, and we have not included any
expenditures for Y2K compliance in our budget. However, there can be no
assurance that additional expenses will not be significant.
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PART II
Not Applicable
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LABARGE, INC.
---------------------------
Date: November 15, 1999
-----------------
s/Donald H. Nonnenkamp
---------------------------
Vice President
and Chief Financial Officer
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