UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934. For the quarterly period ended June 28, 1998.
or
Transition report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934. For the transition period from _________________
to ________________.
Commission file number: 0-24020
SYPRIS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-1321992
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
455 South Fourth Street
Louisville, Kentucky 40202
(Address of principal executive offices, including zip code)
(502) 585-5544
(Registrant's telephone number, including area code)
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
----- -----
As of July 21, 1998 there were 9,440,689 shares of the registrant's Common Stock
outstanding.
Page 1
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and
Six Months ended June 28, 1998 and June 29, 1997..........3
Consolidated Balance Sheets at June 28, 1998 and
December 31, 1997.........................................4
Consolidated Statements of Cash Flows for the Six
Months ended June 28, 1998 and June 29, 1997..............5
Notes to Condensed Consolidated Financial Statements.......6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................9
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds.................13
Item 4. Submission of Matters to a Vote of Security Holders.......13
Item 5. Other Information.........................................13
Item 6. Exhibits and Reports on Form 8-K..........................14
Signatures...................................................................15
Page 2
Part I. Financial Information
Item 1. Financial Statements
Sypris Solutions, Inc.
Consolidated Statements of Operations
(in thousands, except for per share data)
Three Months Ended Six Months Ended
-------------------- --------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
--------- -------- --------- --------
(Unaudited) (Unaudited)
Net revenue........................................................................ $55,196 $62,134 $110,686 $111,484
Cost of sales...................................................................... 42,044 52,809 86,622 96,271
------- ------- -------- --------
Gross profit..................................................................... 13,152 9,325 24,064 15,213
Selling, general and administrative expense........................................ 7,695 6,917 14,855 12,735
Research & development............................................................. 1,354 972 2,860 1,796
Amortization of intangible assets.................................................. 331 56 484 131
------- ------- -------- --------
Operating income................................................................. 3,772 1,380 5,865 551
Interest expense, net.............................................................. 290 888 750 1,652
Other expense (income), net........................................................ 34 (269) (93) (524)
------- ------- -------- --------
Income (loss) before income taxes, minority interests and discontinued operations.. 3,448 761 5,208 (577)
Income tax expense................................................................. 1,361 323 2,060 168
------- ------- -------- --------
Income (loss) before minority interests and discontinued operations................ 2,087 438 3,148 (745)
Minority interests in losses of consolidated subsidiaries.......................... -- 247 -- 923
------- ------- -------- --------
Income from continuing operations.................................................. 2,087 685 3,148 178
Loss from discontinued operations (net of applicable tax of $138).................. -- -- -- (276)
Gain on disposal of discontinued operations (net of applicable tax of $2,160)...... -- -- -- 4,192
------- ------- -------- --------
Net income......................................................................... $ 2,087 $ 685 $ 3,148 $ 4,094
======= ======= ======== ========
Pro forma net income per common share:
Basic............................................................................ $0.22 $0.05 $0.33 $0.34
Diluted.......................................................................... $0.21 $0.04 $0.32 $0.32
Pro forma shares used in computing per common share amounts:
Basic............................................................................ 9,424 9,424 9,424 9,424
Diluted.......................................................................... 9,836 9,826 9,831 9,826
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 3
Sypris Solutions, Inc.
Consolidated Balance Sheets
(in thousands, except for share data)
June 28, December 31,
1998 1997
-------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents.......................... $ 11,683 $ 9,836
Accounts receivable, net........................... 28,636 28,560
Inventory, net..................................... 39,351 44,867
Other current assets............................... 2,039 2,062
-------- --------
Total current assets.............................. 81,709 85,325
Property, plant and equipment, net.................. 25,788 26,885
Other assets........................................ 14,965 8,398
-------- --------
$122,462 $120,608
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable................................... $ 12,227 $ 14,858
Accrued liabilities................................ 30,305 31,867
Current portion of long-term debt.................. 12,439 3,477
-------- --------
Total current liabilities......................... 54,971 50,202
Long-term debt...................................... 15,858 27,863
Other noncurrent liabilities........................ 5,379 10,325
-------- --------
Total liabilities................................. 76,208 88,390
Minority interests in subsidiaries.................. -- 3,569
Redeemable common stock............................. -- 921
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares
authorized; 9,424,489 shares issued and
outstanding in 1998............................... 94 7,892
Additional paid-in capital......................... 23,253 --
Retained earnings.................................. 22,907 19,836
-------- --------
Total shareholders' equity....................... 46,254 27,728
-------- --------
$122,462 $120,608
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 4
Sypris Solutions, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
-------------------
June 28, June 29,
1998 1997
-------- --------
(Unaudited)
Cash flows from operating activities:
Net income................................................................................... $ 3,148 $ 4,094
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization.............................................................. 3,678 4,757
Minority interests in losses of consolidated subsidiaries.................................. -- (923)
Gain on disposal of discontinued operations, net of tax.................................... -- (4,192)
Other noncash charges...................................................................... 156 563
Changes in operating assets and liabilities, net of dispositions:
Accounts receivable....................................................................... (232) 3,346
Inventory................................................................................. 5,274 (3,335)
Other current and non-current assets...................................................... 23 (192)
Accounts payable.......................................................................... (2,632) (2,725)
Accrued and other liabilities............................................................. (1,772) (4,306)
------- --------
Net cash provided by (used in) operating activities...................................... 7,643 (2,913)
Cash flows from investing activities:
Capital expenditures......................................................................... (2,054) (2,748)
Proceeds from disposal of assets............................................................. -- 21,586
Other........................................................................................ (643) (272)
------- --------
Net cash (used in) provided by investing activities...................................... (2,697) 18,566
Cash flows from financing activities:
Net (repayments) proceeds under revolving credit agreements.................................. (2,157) 949
Proceeds from long-term debt................................................................. -- 18,000
Repayments of notes payable and long-term debt............................................... (886) (34,128)
Payments for redemption of common stock in subsidiaries, net................................. (56) (1,313)
------- --------
Net cash used in financing activities.................................................... (3,099) (16,492)
------- --------
Net increase (decrease) in cash and cash equivalents.......................................... 1,847 (839)
Cash and cash equivalents at beginning of period.............................................. 9,836 6,012
------- --------
Cash and cash equivalents at end of period.................................................... $11,683 $ 5,173
======= ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 5
Sypris Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
(1) Organization
Effective March 30, 1998, Group Financial Partners, Inc. ("GFP") and its
majority-owned subsidiaries, Bell Technologies, Inc. ("Bell") and Tube Turns
Technologies, Inc. ("Tube Turns"), were merged with and into GFP's majority-
owned subsidiary, Group Technologies Corporation ("GTC"), or subsidiaries of
GTC, in a series of transactions pursuant to the Fourth Amended and Restated
Plan of Reorganization dated as of February 5, 1998 (the "Reorganization").
After completion of the Reorganization, GTC effected a 1-for-4 stock split (the
"Reverse Stock Split") and merged with and into Sypris Solutions, Inc. (the
"Company" or "Sypris"), a wholly-owned subsidiary incorporated in the state of
Delaware, and Bell, Metrum-Datatape, Inc. ("Metrum-Datatape"), Tube Turns and
GTC became wholly-owned subsidiaries of Sypris. Sypris thereafter assumed the
listing of GTC on the Nasdaq Stock Market under the new symbol SYPR.
Sypris is a diversified provider of specialized industrial products and
technical services. The Company's products range from integrated data
acquisition, storage and retrieval systems, magnetic instruments and current
sensors to high pressure closures and other industrial products. The Company's
technical services include a variety of specialized engineering, manufacturing,
testing, calibration and encryption capabilities.
(2) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Sypris and its subsidiaries and have been prepared by
the Company in accordance with the rules and regulations of the Securities and
Exchange Commission (the "Commission"). All significant intercompany
transactions and accounts have been eliminated. These unaudited condensed
consolidated financial statements reflect, in the opinion of management, all
material adjustments (which include only normal recurring adjustments) necessary
to fairly state the results of operations, financial position and cash flows for
the periods presented, and the disclosures herein are adequate to make the
information presented not misleading. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. Actual results for the three and six
months ended June 28, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. These unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements, and notes thereto, for the year ended
December 31, 1997 as presented in the Company's report on Form 8-K filed with
the Commission on April 14, 1998, and as amended on Form 8-K/A filed with the
Commission on May 13, 1998.
The historical financial statements presented in this report as of and for
the periods ended prior to the Reorganization are the consolidated financial
statements of GFP, since GFP is deemed to be the acquirer from an accounting
point of view. During the year ended December 31, 1997, the Company operated on
a calendar monthly closing period except for GTC, which operated under a fiscal
monthly closing period that resulted in the second quarter ending on June 29,
1997. For ease of presentation, the Company has used GTC's second quarter
closing date of June 29, 1997 as the date for the accompanying financial
statements and notes thereto. Certain amounts in the Company's 1997 consolidated
financial statements have been reclassified to conform with the 1998
presentation.
Effective with the Reorganization, the purchase accounting adjustments
necessary to reflect the purchase of the minority interests of GTC and the
issuance of the common stock of GTC to the shareholders of Bell and Tube Turns
were recorded in the Company's consolidated financial statements. The final
purchase accounting allocation is dependent upon certain valuations that have
not progressed sufficiently to enable the Company to make a final allocation
and, accordingly, the entire amount is classified as other assets in the
accompanying balance sheet.
Page 6
(3) Pro Forma Net Income per Common Share
For the three and six months ended June 29, 1997, the consolidated
statements of operations of GFP reflect minority interests in losses of
consolidated subsidiaries. Effective with the Reorganization, all subsidiaries
of GFP became wholly-owned subsidiaries of Sypris and, accordingly, minority
interests were eliminated. Per share amounts for income from continuing
operations and net income for periods ending prior to the Reorganization have
been computed excluding the effect of minority interests.
For periods ended prior to the Reorganization, shares used in computing pro
forma basic and pro forma diluted net income per common share include the
outstanding shares of Sypris common stock as of the date of the Reorganization
and the dilution associated with common stock options issued prior to the
Reorganization. For the three and six-month periods ended June 28, 1998, the
computation also gives effect to the dilution associated with the issuance of
common stock options subsequent to the Reorganization.
The following table presents information necessary to calculate pro forma
net income per common share for the three and six-month periods ended June 28,
1998 and June 29, 1997.
Three Months Ended Six Months Ended
-------------------- ---------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited) (Unaudited)
Pro forma shares outstanding:
Weighted average shares outstanding....................................... 9,424 9,424 9,424 9,424
Effect of dilutive employee stock options................................. 412 402 407 402
------- ------ -------- --------
Adjusted weighted average shares outstanding and assumed conversions...... 9,836 9,826 9,831 9,826
======= ====== ======== ========
Income (loss):
Income from continuing operations......................................... $ 2,087 $ 685 $ 3,148 $ 178
Discontinued operations................................................... -- -- -- 3,916
------- ------ -------- --------
Net income................................................................ 2,087 685 3,148 4,094
Minority interests in losses of consolidated subsidiaries................. -- (247) -- (923)
------- ------ -------- --------
Net income applicable to pro forma common stock........................... $ 2,087 $ 438 $ 3,148 $ 3,171
======= ====== ======== ========
Pro forma income (loss) per common share:
Basic income (loss) per common share
Income (loss) from continuing operations................................. $ 0.22 $ 0.05 $ 0.33 $ (0.08)
Discontinued operations.................................................. -- -- -- 0.42
------- ------ -------- --------
Net income per common share.............................................. $ 0.22 $ 0.05 $ 0.33 $ 0.34
======= ====== ======== ========
Diluted income (loss) per common share
Income (loss) from continuing operations................................. $ 0.21 $ 0.04 $ 0.32 $ (0.08)
Discontinued operations.................................................. -- -- -- 0.40
------- ------ -------- --------
Net income per common share.............................................. $ 0.21 $ 0.04 $ 0.32 $ 0.32
======= ====== ======== ========
Page 7
(4) Inventory
Inventory consists of the following (in thousands):
June 28, December 31,
1998 1997
--------- ------------
(Unaudited)
Raw materials........................................................... $ 29,614 $ 27,007
Work in process......................................................... 16,066 14,954
Finished goods.......................................................... 1,504 6,725
Costs relating to long-term contracts and programs, net of amounts
attributed to revenue recognized to date............................... 13,817 17,729
Progress payments related to long-term contracts and programs........... (5,384) (5,189)
LIFO reserve............................................................ (720) (720)
Reserve for excess and obsolete inventory............................... (15,546) (15,639)
-------- --------
$ 39,351 $ 44,867
======== ========
(5) Long-term Debt
The Company's borrowings under its revolving credit loan (the "BT
Revolver") as of June 28, 1998 and December 31, 1997 were $14,000,000 and
$16,150,000, respectively. Although there have been no modifications to the
Company's credit agreement with its bank during the six months ended June 28,
1998 which affect the maturity date of the BT Revolver on September 30, 2002,
outstanding borrowings of $9,000,000 under the BT Revolver were classified as
current maturities of long-term debt at June 28, 1998 due to the periodic use of
the Company's cash balances for repayments of borrowings under the BT Revolver.
At December 31, 1997, all borrowings on the BT Revolver were classified as long-
term debt.
(6) Commitments and Contingencies
Tube Turns is a co-defendant in two lawsuits in Louisiana arising out of an
explosion in a coker plant owned by Exxon Corporation located in Baton Rouge,
Louisiana. According to the complaints, Tube Turns is the alleged manufacturer
of a carbon steel pipe elbow, which failed causing the explosion which destroyed
the coker plant and caused unspecified damages to surrounding property owners.
The suits are being defended for Tube Turns by its insurance carrier. One of the
actions was brought by Exxon and claims damages for destruction of the plant
which Exxon estimates exceed $100,000,000. In this action, Tube Turns is a co-
defendant with the fabricator who built the pipe line in which the elbow was
incorporated and with the general contractor for the plant. The second action is
a class action suit filed on behalf of the residents living around the plant and
claims damages in an amount as yet undetermined. Exxon is a co-defendant with
Tube Turns, the contractor and the fabricator in this action. Tube Turns intends
to vigorously defend its case and believes that a settlement or related
judgement would not result in a material loss to Tube Turns or the Company. No
amounts are recorded on the books of the Company in anticipation of a loss on
this contingency.
Page 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth certain financial data, expressed as a
percentage of net revenue, from the Company's Consolidated Statements of
Operations for the three and six-month periods ended June 28, 1998 and June 29,
1997.
Three Months Ended Six Months Ended
------------------- -------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
Net revenue.............................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................................ 76.2 85.0 78.3 86.4
----- ----- ----- -----
Gross profit........................................................... 23.8 15.0 21.7 13.6
Selling, general and administrative expense.............................. 13.9 11.1 13.4 11.4
Research & development................................................... 2.5 1.6 2.6 1.6
Amortization of intangible assets........................................ 0.6 0.1 0.4 0.1
----- ----- ----- -----
Operating income....................................................... 6.8 2.2 5.3 0.5
Interest expense, net.................................................... 0.5 1.4 0.7 1.5
Other expense (income), net.............................................. 0.1 (0.4) (0.1) (0.5)
----- ----- ----- -----
Income (loss) before income taxes, minority interests and discontinued
operations.............................................................. 6.2 1.2 4.7 (0.5)
Income tax expense....................................................... 2.5 0.5 1.9 0.2
----- ----- ----- -----
Income (loss) before minority interests and discontinued operations...... 3.7 0.7 2.8 (0.7)
Minority interests in losses of consolidated subsidiaries................ -- 0.4 -- 0.8
----- ----- ----- -----
Income from continuing operations........................................ 3.7 1.1 2.8 0.1
Loss from discontinued operations........................................ -- -- -- (0.2)
Gain on disposal of discontinued operations.............................. -- -- -- 3.8
----- ----- ----- -----
Net income............................................................... 3.7% 1.1% 2.8% 3.7%
===== ===== ===== =====
For segment reporting purposes, the operations of Bell, GTC and Metrum-
Datatape are included in Electronics Services and Tube Turns' operations are
included in Forging and Fabrication Services. Segment discussion is included in
the following discussion and analysis of the Company's consolidated results of
operations.
Net revenue for the second quarter of 1998 was $55.2 million, a decrease of
$6.9 million, or 11.2%, from $62.1 million for the second quarter of 1997. Net
revenue for the first six months of 1998 was $110.7 million, a decrease of $0.8
million, or 0.7%, from $111.5 million for the first six months of 1997. The
decline in net revenue was attributable to the Electronics Services segment and
was due principally to the divestiture on June 30, 1997 of the Company's Latin
American operations which contributed net revenue of $10.6 million and $16.9
million in the second quarter and six-month periods of 1997, respectively. The
lower revenue also reflected the curtailment of certain contracts and decreased
shipment volumes for certain products that reduced net revenue by $5.6 million
and $0.2 million versus the year-earlier quarter and six-month periods,
respectively. These declines were offset in part by the expansion of the
Company's data acquisition, storage and retrieval product lines through the
acquisition of certain of the assets of Datatape, Inc. on November 14, 1997 (the
"Datatape Acquisition"). These assets contributed net revenue of $6.6 million
and $12.0 million in the second quarter and six-month periods of 1998,
respectively. A factor contributing to the decrease in net revenue in the
Electronics Services segment to $91.5 million for the first
Page 9
six months of 1998 from $96.6 million in the year-earlier period was the
decision to improve profitability by divesting high-volume, low-margin
manufacturing operations and expanding profitable Electronics Services products
and services. The Forging and Fabrication Services segment recorded an increase
in net revenue of $2.7 million, or 33.7%, and $4.3 million, or 28.8%, for the
comparable quarter and six-month periods, respectively. The net revenue increase
was primarily due to an increase in shipments to a customer based upon its
commitment to use the Company as its sole source for truck axles in its North
American market.
Gross profit for the second quarter of 1998 was $13.2 million, an increase
of $3.9 million, or 41.0%, compared to $9.3 million for the second quarter of
1997. Gross profit for the first six months of 1998 was $24.1 million, an
increase of $8.9 million, or 58.2%, compared to $15.2 million for the first six
months of 1997. The Electronics Services segment accounted for $3.0 million and
$7.8 million of the increase in gross profit for the comparable quarter and six-
month periods, respectively. This improvement is attributable to a change in
revenue mix which resulted from the divestiture of the Company's Latin American
operations in June 1997, the expansion of data acquisition, storage and
retrieval product lines generated by the Datatape Acquisition in November 1997,
and an increase in manufacturing and encryption services provided to government
agencies. While net revenue for Electronics Services decreased for the
comparable six-month periods, the favorable revenue mix and improved cost
management controls yielded an improvement in gross profit percentage to 22.4%
in 1998, an increase of 69.7% compared to 13.2% in 1997. The Forging and
Fabrication Services segment experienced an increase in gross profit of $0.9
million and $1.1 million for the comparable quarter and six-month periods,
respectively. In addition to the increased gross profit associated with higher
net revenue for this business segment, gross profit percentage improved by 1.9%
for the comparable six-month periods due to increased capacity utilization, a
favorable product mix and cost reductions on certain programs.
Selling, general and administrative expense for the second quarter of 1998
was $7.7 million, an increase of $0.8 million, or 11.2%, compared to $6.9
million for the second quarter of 1997. Selling, general and administrative
expense for the first six months of 1998 was $14.9 million, an increase of $2.2
million, or 16.6%, compared to $12.7 million for the first six months of 1997.
The change in revenue mix occurring in the Electronics Services segment gave
rise to an increase in selling, general and administrative expense, as the data
acquisition, storage and retrieval product line's expenses as a percentage of
net revenue exceed those of the Latin American operations.
Research and development expense for the second quarter of 1998 was $1.4
million, an increase of $0.4 million, or 39.3%, compared to $1.0 million for the
second quarter of 1997. Research and development expense for the first six
months of 1998 was $2.9 million, an increase of $1.1 million, or 59.2%, compared
to $1.8 million for the first six months of 1997. The increase in the comparable
quarter and six-month periods is primarily attributable to the increase in the
Company's data acquisition, storage and retrieval business.
Amortization of intangible assets increased in the second quarter and first
six months of 1998 due to goodwill recognized for the Datatape Acquisition and
the preliminary purchase accounting allocation of step-up in basis recorded in
connection with the Reorganization (see "Notes to Condensed Consolidated
Financial Statements").
Interest expense for the second quarter of 1998 was $0.3 million, a
decrease of $0.6 million, or 67.3%, from $0.9 million for the second quarter of
1997. Interest expense for the first six months of 1998 was $0.8 million, a
decrease of $0.9 million, or 54.6%, from $1.7 million for the comparable prior
year period. The decrease in interest expense for the comparable quarter and
six-month periods resulted from the combined impact of a reduction in weighted
average debt outstanding, a reduction in the Company's cost of borrowing and a
decrease in amortization expense for debt issuance costs and stock warrants
issued to a previous lender. The reduction in debt outstanding is attributable
to the repayment of debt with proceeds from the Latin American divestiture in
June 1997 coupled with repayments generated by the Company's improved cash flow
from operations in 1998 and partially offset by debt incurred to finance the
Datatape Acquisition. The divestiture proceeds were used to repay in full a
credit facility on which the effective interest rate was approximately 300 basis
points over the Company's cost of borrowing under its consolidated credit
facility during the second quarter of 1998.
Income tax expense, on an interim basis, is provided for at the anticipated
effective tax rate for the year.
Minority interests in losses of consolidated subsidiaries reported for the
second quarter and six-month periods ended June 29, 1997 represents the minority
shareholders' proportionate share of the losses incurred by
Page 10
GTC. As part of the Reorganization in 1998, GTC became a wholly-owned subsidiary
of the Company (see "Notes to Condensed Consolidated Financial Statements").
During the first quarter of 1997, the Company completed the sale of all of
the assets of its real estate operations. The consolidated statement of
operations for the six months ended June 29, 1997 includes the loss from
discontinued operations incurred prior to the divestiture, and the gain from
sale of the discontinued real estate operations.
Liquidity, Capital Resources and Financial Condition
Net cash provided by operating activities totaled $7.6 million for the
first six months of 1998 compared to net cash used in operating activities of
$2.9 million for the comparable period of 1997. Contributing to the improvement
in operating cash flow in the six-month periods was an increase in operating
income of $5.3 million from $0.6 million in 1997 to $5.9 million in 1998. In
addition, the Company experienced reductions in its inventory levels in the
first six months of 1998 compared to an increase in inventory levels during the
comparable period of 1997. The decrease in inventory during the first six months
of 1998 is attributable to the Electronics Services segment and resulted from
the utilization of inventory acquired for certain contracts prior to the
beginning of the period and a reduction in the material requirements on
contracts currently in progress.
Net cash used in investing activities totaled $2.7 million for the first
six months of 1998, compared to net cash provided by investing activities of
$18.6 million for the comparable period in 1997. The Company's divestiture of
its real estate operations generated $21.3 million of cash in 1997, while
capital expenditures remained relatively consistent for the year-to-year
comparable periods.
Net cash used in financing activities totaled $3.1 million and $16.5
million during the first six months of 1998 and 1997, respectively. During
February 1997, the Company repaid $18.7 million in debt in connection with the
divestiture of its real estate operations, and during March 1997, the Company
entered into a credit agreement under which proceeds from borrowings on
consolidated debt facilities were utilized to repay $15.4 million of debt
outstanding under credit agreements of certain subsidiaries.
Under the terms of the credit agreement between the Company and its bank,
the Company had total availability for borrowings and letters of credit under
its revolving credit loan of $16.0 million at June 28, 1998. Maximum borrowings
on the revolving credit loan are $30.0 million, subject to a $5.0 million limit
for letters of credit.
The Company's balance sheet at June 28, 1998 includes the effect of the
Reorganization and, accordingly, the comparison to the balance sheet at December
31, 1997 for other assets, other noncurrent liabilities, minority interests in
consolidated subsidiaries, redeemable common stock, common stock and additional
paid-in capital reflects changes resulting from the purchase accounting
adjustments recorded pursuant to the Reorganization (see "Notes to Condensed
Consolidated Financial Statements").
Impact of Year 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software which recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Sypris has completed an assessment of the year 2000 issue and will have to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
total year 2000 project cost for the purchase of new software is not expected to
be material. To date, Sypris has incurred minor expenses, primarily for
assessment of the year 2000 issue, the development of a modification plan and
purchase of new software.
The project is estimated to be completed not later than December 31, 1999,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and
Page 11
conversions to new software, the year 2000 issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions are not made, or are not completed timely, the year 2000 issue
could have a material impact on the operations of the Company.
Sypris has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which its interface
systems are vulnerable to those third parties' failure to remediate their own
year 2000 issues. There is no guarantee that the systems of other companies on
which the Company's systems rely will be converted on a timely basis and would
not have an adverse effect on the Company's systems.
The costs of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
Forward-Looking Statements
This report contains forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995) based on current plans and
expectations of Sypris, relating to, among other matters, analyses and estimates
of amounts that are not yet determinable. Such statements involve risks and
uncertainties which may cause actual future activities and results of operations
to be materially different from those suggested in this report, including, among
others: the Company's dependence on its current management; the risks and
uncertainties present in the Company's business; business conditions and growth
in the advanced manufacturing, engineering and testing services industry and the
general economy; competitive factors and price pressures; availability of third
party component parts at reasonable prices; inventory risks due to shifts in
market demand and/or price erosion of purchased components; changes in product
mix; cost and yield issues associated with the Company's manufacturing
facilities; as well as other factors described elsewhere in this report and in
the Company's other filings with the Commission.
Page 12
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
Information required by this item was previously reported by the Company
in its Form 8-K dated March 30, 1998, filed April 14, 1998, as amended by a Form
8-K/A filed May 13, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on June 24, 1998 in
Louisville, Kentucky. At the meeting, stockholders elected a Board of eight
directors pursuant to the following votes:
Votes In Votes
Director Favor Withheld
-------- --------- --------
Robert E. Gill 8,936,040 185,657
Jeffrey T. Gill 8,936,450 185,247
R. Scott Gill 8,937,535 184,162
Henry F. Frigon 8,936,672 185,025
William L. Healey 8,936,922 184,775
Roger W. Johnson 8,936,922 184,775
Sidney R. Petersen 8,936,497 185,200
Robert Sroka 8,936,922 184,775
In addition, the stockholders approved an amendment to the Sypris
Solutions, Inc. 1994 Stock Option Plan for Key Employees to increase the number
of authorized shares available for issuance thereunder by the vote of 8,632,493
in favor, 215,911 against, 2,106 abstentions and 271,187 broker non-votes.
Item 5. Other Information
Any shareholder proposal submitted outside the processes of Rule 14a-8
under the Securities Exchange Act of 1934 for presentation to the Company's 1999
Annual Meeting of Shareholders will be considered untimely for purposes of Rules
14a-4 and 14a-5 if notice thereof is received by Registrant after April 6, 1999.
Page 13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Note Description
- ------- ---- -----------
2.11 Asset Purchase Agreement among Datatape Incorporated, Delta
Tango, Inc., Metrum-D, Inc., Impactdata, Inc. and M. Stuart
Millar dated November 12, 1997.
3.1 (1) Certificate of Incorporation of Sypris Solutions, Inc.
3.2 (2) Bylaws of Sypris Solutions, Inc.
10.2.2 1998B Amendment to Loan Documents, dated February 18, 1998.
10.14 Sypris Solutions, Inc. Independent Directors' Stock Option
Plan Restated effective March 30, 1998, dated October 27,
1994.
10.15 Sypris Solutions, Inc. 1994 Stock Option Plan for Key
Employees Restated effective March 30, 1998, dated October 27,
1994.
10.16 Sypris Solutions, Inc. Independent Directors' Compensation
Program Restated effective April 28, 1998, dated September 1,
1995.
10.25 Lease between Metrum-Datatape, Inc. (assignee of Metrum, Inc.)
and Alliant Techsystems, Inc. dated March 29, 1993 and amended
July 29, 1993, May 2, 1994, November 14, 1995, December 4,
1996 and February 12, 1998 regarding 4800 East Dry Creek Road
Property.
10.26 Sublease between Pharmacia & Upjohn Company and Metrum-D, Inc.
dated November 14, 1997.
10.27 Group Financial Partners, Inc. Profit Sharing Bonus Plan,
effective as of January 2, 1998.
10.28 Sypris Solutions, Inc. Share Performance Program For Stock
Option Grants dated July 1, 1998.
27 Financial Data Schedule
- ------------
(1) Incorporated by reference to Appendix H of the Form S-4 Registration
Statement of Group Technologies Corporation, Registration No. 333-20299.
(2) Incorporated by reference to the Appendix I of the Form S-4 Registration
Statement of Group Technologies Corporation, Registration No. 333-20299.
(b) Reports on Form 8-K:
Form 8-K dated March 30, 1998 which reported the consummation of a Fourth
Amended and Restated Agreement and Plan of Reorganization was filed by the
Registrant on April 14, 1998 and was amended by Form 8-K/A filed by the
Registrant on May 13, 1998.
Page 14
SIGNATURES
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.
SYPRIS SOLUTIONS, INC.
(Registrant)
Date: August 4, 1998 By: /s/ David D. Johnson
-------------------- ----------------------------------------
(David D. Johnson)
Vice President & Chief Financial Officer
Date: August 4, 1998 By: /s/ Anthony C. Allen
-------------------- ----------------------------------------
(Anthony C. Allen)
Vice President, Controller & Chief
Accounting Officer
Page 15