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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1998
Commission file number 0-23528
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
(Name of small business issuer in its charter)
Delaware 13-3421337
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Post Office Box 58674
Raleigh, North Carolina 27658
(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 May 31, 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
Page
Part I
Item 1. Financial Statements
- Consolidated Balance Sheets. May 31, 1998 (unaudited) and
August 31, 1997 (audited). 3
- Consolidated Statements of Operations. Nine months ended May
31, 1998 and May 31,1997 and three months ended May 31, 1998
and May 31, 1997 (unaudited). 5
- Consolidated Statements of Cash Flows. Nine months ended May
31, 1998 and May 31, 1997 (unaudited) 7
Item 2. Management's discussion and analysis of financial condition and
results of operations. 9
Part II 12
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
May 31, 1998 (unaudited) and August 31, 1997 (audited)
May 31 August 31
1998 1997
----------- -----------
Assets
Current assets
Cash and cash equivalents $ 3,402 $ 36,810
Accounts receivable - trade, net of allowance
for doubtful accounts of $296 and $10,000
respectively -- 230,910
Inventories, net (note 2) 147,954
Prepaid expenses and other current assets -- 10,180
----------- -----------
Total current assets 3,402 425,854
----------- -----------
Property and equipment, net -- 162,918
----------- -----------
Other assets:
Note receivable from officer 2,961 84,648
Deposits and other assets -- 9,175
Cost in excess of net assets of acquired business,
net of accumulated amortization of $259,537
in 1997 -- 58,500
-----------
Total other assets 2,961 152,323
----------- -----------
$ 6,363 $ 741,095
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term debt -- 104,776
Current obligations under capital leases 5,199
Accounts payable, trade 100,000 839,897
Other accrued liabilities -- 47,714
Preferred dividend payable -- 47,878
Accrued bonus -- 5,558
----------- -----------
Total current liabilities 100,000 1,051,022
Long-term debt, less current maturities -- 381,976
----------- -----------
Long-term obligations under capital
leases -- 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 31,113 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 (1,162,526) (1,763,403)
----------- -----------
Total stockholders' equity (deficit) (93,637) (727,673)
----------- -----------
$ 6,363 $ 741,095
=========== ===========
See accompanying notes to consolidated financial statements.
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ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Operations
For the Nine Months and Quarters Ended May 31, 1998 and May 31, 1997
(Unaudited)
For the For the
Nine Months Ended Quarter Ended
5/31/98 5/31/97 5/31/98 5/31/97
----------- ----------- ----------- -----------
Sales $ 729,094 $ 1,576,970 $ -- $ 486,480
Cost of goods sold 610,268 1,518,412 -- 433,346
----------- ----------- ----------- -----------
Gross profit (loss) 118,826 58,558 -- 53,134
General, selling and administrative expenses 326,333 711,993 -- 251,485
Operating (loss) (207,507) (653,435) -- (198,351)
Other income (expenses): 1,135,656 -- 1,135,656 --
Interest income 770 4,355 -- 765
Interest expense (31,847) (46,411) -- (14,535)
----------- ----------- ----------- -----------
Other income (expense), net 1,104,579 (42,056) 1,135,656 (13,770)
(Loss) before income taxes and
extraordinary item 897,072 (695,491) 1,135,656 (212,121)
Income taxes -- -- -- --
(Loss) before extraordinary item 897,072 (695,491) 1,135,656 (212,121)
Extraordinary item -- -- -- --
Net income (loss) after income taxes and
extraordinary item 897,072 (695,491) 1,135,656 (212,121)
Accretion of preferred stock (1,528) (1,528) (1,032) (516)
Dividends on preferred stock -- (35,909) -- (9,463)
Net income (loss) applicable to com
shareholders 896,040 (732,928) 1,134,624 (222,100)
Weighted average number of shares 6,269,118 5,538,563 6,269,118 6,044,118
Earnings per common share and common share equivalent
Income (loss) before extraordinary item -- -- -- --
Extraordinary item -- -- -- --
Net income (loss) 0.14 (.13) 0.18 (.04)
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
Nine Months ended May 28, 1998 and 1997
(Unaudited)
1998 1997
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Cash flow from operating activities:
Net income (loss) after income taxes and after extraordinary item $ 897,072 (695,491)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization -- 166,527
Loss on disposal of equipment 162,918 26,986
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 230,910 103,570
Decrease (increase) in inventories 147,954 (196,965)
Decrease (increase) in prepaid expenses
and other current assets 10,180 27,918
Decrease (increase) in accounts receivable, other 81,687 17,287
Decrease (increase) n deposits and other assets 9,175 4,960
Increase (decrease) in accounts payable, trade (739,897) 521,996
Decrease in accrued bonus 5,558 (20,822)
Increase (decrease) in other accrued liabilities 47,714 26,403
--------- ---------
Net cash provided by (used in) operating activities 101,608 (2,181)
Cash flow from investing activities:
Capital expenditures -- (10,110)
Disposal of capital assets -- 39,971
--------- ---------
Net cash used in investing activities -- 29,861
Cash flow from financing activities:
Principal payments on long-term debt (68,200) (37,761)
Principal payments on capital lease obligations -- --
Dividends paid -- (89,032)
Proceeds from issuance of common stock -- 25,000
Sale of Inventory -- (28,087)
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Net cash provided by (used in) financing activities -- (200,200)
Net increase (decrease) in cash and
cash equivalents 33,408 (172,520)
Cash and cash equivalents:
Beginning of period 36,810 308,794
--------- ---------
End of period $ 3,402 $ 136,274
========= =========
Supplemental disclosure of cash flow information:
Cash paid during quarter for:
Interest $ 14,535 $ 14,535
========= =========
Income taxes -- --
========= =========
See notes to financial statements which are an integral part hereof
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Notes to Financial Statements:
(1) The accompanying Consolidated Financial Statements are unaudited, unless
otherwise indicated. In management's opinion, all adjustments (consisting of
only normal recurring accruals) necessary for a fair presentation have been
made. The balance sheet has been adjusted to account for the shut-down of the
Company's sole operating division as a non-operating entity.
The results of operations and financial position, including working capital, for
interim periods are not necessarily indicative of those to be expected for a
full year, due, in part, to seasonal fluctuations which are normal for the
Company's business.
(2) Inventories:
May 31 August 31
1998 1997
------------ --------
Raw materials $ -- $ 64,657
Work-in-progress -- 75,914
Finished goods -- 7,383
------------ --------
$ -- $147,954
(3) All balance sheet items have been adjusted to approximate present value
given the circumstances of the Company and the accompanying items based on
management's estimates. Certain liabilities have been shown as zero based on
final payments made to creditors without explicit agreement of settlement based
on appropriate case law relating to the method of payment. There are no
assurances that if the Company were legally challenged that such amounts would
not be deemed due and payable.
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 completing the restructuring
of the Company, resolving all outstanding liabilities and legal actions, and
then seeking an entity that desires to be public and consummating some type of
transaction in an attempt to increase shareholder value. There are no assurances
that management can accomplish any of this given the current state of the
business and the lack of required resources.
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Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
EMSG provided manufacturing services to original equipment
manufacturers (`OEM's') in the electronics industry, including producers of
telecommunication and data communication equipment, industrial controls,
computers & peripherals and instrumentation. Primary services include materials
procurement, printed circuit card and chassis assembly, and testing. Due to
circumstances beyond its control, the Company has decided to exit the
electronics manufacturing business and close its operations in an attempt to
satisfy its creditors and avoid bankruptcy.
On February 27, 1998, the Company terminated most of its employees
anticipating the close of the sole operating subsidiary. Substantially all of
the Company's sole operating subsidiary assets were sold via a bulk sale in
April 1998. The Company closed its operations in late April 1998. The Company
had operated one facility in Raleigh, North Carolina with approximately 17
employees in 21,000 square feet of flex space. Operations were near 30% of
capacity with one shift active. Today, its President is the only employee; he is
part-time.
Operating results are generally affected by a number of factors,
including the relative mix of higher volume/lower margin business and lower
volume/higher margin business, price competition, raw material costs, labor
efficiencies, the degree of automation that can be used in the assembly process
and the efficiencies achieved by the Company in managing inventories and fixed
assets. The amount of sales the Company derives from turnkey manufacturing in
which it procures some or all of the components necessary for production, vs the
amount of sales it derives from labor sales, directly effects the overall gross
margin of the business. Inflation has not been a significant factor in the
results of the Company's operations because the Company's price quotations for
turnkey jobs are generally valid for thirty days and the Company typically
reserves the right to pass on certain cost increases under its turnkey orders or
contracts.
The Company has terminated its contracts with all customers.
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Results of Operations
Comparison of the quarters ended May 31, 1998 and May 31, 1997 based on
the unaudited financial statements referenced herein
EMSG's financial performance mirrored 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. The Company has ceased operations.
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 nine
months in 1998 were $847,876 less than that of the same period in 1997 primarily
due to the Company's inability to procure materials to fulfill customer orders.
Gross Profit (Loss). Gross Profit (loss) equals net sales less cost of goods
sold, which consist of labor and material, manufacturing costs (primarily rent,
insurance, electricity and depreciation of, manufacturing equipment and
facilities) and other manufacturing costs. Gross profit in 1998 increased to
16.2% in comparison to 3.7% in 1997 as a result of reductions in direct labor
and manufacturing overhead.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (`SG&A') consist primarily of non-manufacturing
salaries, sales commissions, and other general expenses. SG&A expense for 1998
was $385,660 less than that of 1997.
Operating Income (Loss). Operating income (loss) is gross profit less SG&A. Loss
from operations in 1998 decreased by $445,928 as a result of increased gross
profit of $60,268 and decreased general and administrative expenses of $385,660.
Liquidity and Capital Resources
EMSG's cash and cash equivalents decreased by $33,408 from August 31, 1997
through May 31, 1998. Payments were made to reduce long-term debt and for
capital leases. In addition, payments were made in an attempt to settle the
Company's liabilities.
The Company undertook an initiative to restructure most of its debt, both
current and long-term. Once (and if) such reorganization is complete, the
Company plans to seek a merger partner. There are not assurances that the
Company will be successful in either its planned restructuring or its merger
plans; both of which raise significant concerns about the ability of the Company
to continue as a going concern. In April 1998, the Company liquidated its sole
operating subsidiary and used the proceeds to payout its creditors to the extent
possible.
Though the Company has plans and wishes to seek alternatives to increase
shareholder value, it must be noticed that the Company has almost no assets or
resources from which to act. There is significant concern that the Company can
execute on any plans or strategies.
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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. Such motion has subsequently been over-ruled.
Miltope has since made motion for summary judgement; such motion is pending.
The Miltope Action was removed by the Company to Federal court in Alabama,
and has since been transferred to federal court in the Eastern District of North
Carolina, where it likely will be consolidated with the Company Action. The
Company intends to pursue vigorously its claim against Miltope and to defend
vigorously the claim by Miltope against the Company.
The Company is the subject of numerous law suits for claims made for payment.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Exhibits and Reports on Form 8-k.
27 -- Financial Data Schedule (for SEC use only)
None.
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ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Signature
/s/ Kenneth H. Marks
- -------------------------------
Kenneth H. Marks
President
(principal executive financial and accounting officer)
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