FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1997
Commission file number 0-23528
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
(Name of small business issuer in its charter)
Delaware 13-3421337
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6638 OLD WAKE FOREST ROAD
RALEIGH, NORTH CAROLINA 27616
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (919) 876-6049
Securities registered pursuant to Section 12(g) of the Act:
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
As of April 8, 1997, there were 6,344,118 shares of the registrant's
Common Stock, $.0025 par value per share, outstanding.
Transition Small Business Disclosure Format (Check one): Yes X No
1
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. FINANCIAL STATEMENTS
- - CONSOLIDATED BALANCE SHEETS, FEBRUARY 28, 1997 (UNAUDITED)
AND AUGUST 31, 1996 (AUDITED). 3
- - CONSOLIDATED STATEMENTS OF OPERATIONS. SIX MONTH ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 (UNAUDITED) AND
THREE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29,
1996 (UNAUDITED). 5
- - CONSOLIDATED STATEMENTS OF CASH FLOWS. SIX MONTHS ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 (UNAUDITED) 7
ITEM 2. - MANAGEMENT'S DISUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 8
PART II 11
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
2
ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Balance Sheets
February 28, 1997 (unaudited) and August 31, 1996 (audited)
February 28 August 31
Assets 1997 1996
- ------ ---- ----
Current assets
Cash and cash equivalents $ 79,888 $ 308,794
Accounts receivable - trade, net of allowance
for doubtful accounts of $5,500 in 1997
and 1996, respectively 480,140 302,021
Accounts receivable - other 13,836 17,287
Inventories (Note 2) 290,244 73,066
Prepaid expenses and other current assets 61,841 60,910
---------- ------------
Total current assets 925,949 762,078
---------- ------------
Property and equipment, net 400,315 564,208
Other assets:
Note receivable from officer 100,000 100,000
Deposits and other assets 14,175 14,136
Cost in excess of net assets of acquired business,
net of accumulated amortization of $231,750 and
$222,000 on Feb. 28 and Aug.31, respectively 68,250 78,000
---------- ------------
Total other assets 182,425 192,136
---------- ------------
$ 1,508,689 $ 1,518,422
See notes to financial statements which are an integral part hereof.
See notes to consolidated financial statements regarding the audited balance
sheet on August 31, 1996, as included in the Annual Report filed on form 10-KSB.
3
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Balance Sheets
February 28, 1997 (unaudited) and August 31, 1996 (audited)
February 28 August 31
Liabilities and Stockholders' Equity (Deficit) 1997 1996
- ----------------------------------------------- ---- ----
Current liabilities:
Current maturities of long-term debt $ 104,237 56,628
Current obligations under capital leases 53,472 77,551
Accounts payable, trade 941,591 313,362
Other accrued liabilities 80,202 69,555
Preferred dividend payable 23,446 70,320
Accrued bonus -- 20,822
Total current liabilities 1,202,948 608,236
----------- --------
Long-term debt, less current maturities 419,879 486,753
----------- --------
Long-term obligations under capital leases 57,818 110,085
----------- --------
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, 350 and
550 shares, issued and outstanding in 1997
and 1996, respectively 29,049 44,054
----------- --------
Stockholders' equity
Class A, preferred stock cumulative and
convertible, $ .01 par value; authorized
2,000,000 shares, 1,276,768 and 273,586
issued and outstanding in 1997 and 1976,
respectively (Note 3) 12,768 2,679
----------- --------
Common stock, $0.0025 par value:
authorized 20,000,000 shares, 5,594,118
and 5,527,452 issued and outstanding in
1997 and 1996, respectively 13,985 13,819
----------- --------
Additional paid-in capital 1,035,337 1,008,529
Retained deficit (1,263,095) (755,735)
----------- ---------
Total stockholders' equity (deficit) (201,005) 269,292
----------- ---------
1,508,689 $ 1,518,422
=========== ===========
See notes to financial statements which are an integral part hereof.
See notes to consolidated financial statements regarding the audited balance
sheet on August 31, 1996, as included in the Annual Report filed on form 10-KSB.
4
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Operations
For the Six Months and Quarter Ended February 28, 1997 and February 29, 1996
(Unaudited)
For the For the
Six Months Ended Quarter Ended
2/28/97 2/29/96 2/28/97 2/29/96
Sales $1,090,490 $1,354,383 $ 596,481 $ 788,173
Cost of goods sold 1,085,066 1,373,793 631,190 751,228
--------- ---------- -------- -------
Gross profit (loss) 5,424 (19,410) (34,709) 36,945
General, selling and administrative expenses 460,508 415,650 200,041 222,947
------- ------- ------- -------
Operating (loss) (455,084) (435,060) (234,750) (186,002)
Other income (expenses):
Interest income 3,590 30,443 1,026 11,490
Interest expense (31,876) (29,214) (15,395) (14,048)
-------- -------- ------- -------
Other income (expense), net (28,286) 1,229 (14,369) (2,558)
(Loss) before income taxes and
extraordinary item (483,370) (433,831) (249,119) (188,560)
Income taxes - - - -
(Loss) before extraordinary item (483,370) (433,831) (249,119) (188,560)
Extraordinary item - 1,724,781 (7,000) 43,619
Net income (loss) after income taxes and
extraordinary item (483,370) 1,290,950 (256,119) (144,941)
Accretion of preferred stock (1,012) (29,285) (516) (14,642)
Dividends on preferred stock (26,446) (12,408) (13,223) (12,408)
Net income (loss) applicable to common
shareholders (510,828) 1,249,257 (269,858) (171,991)
Weighted average number of shares 5,538,563 64,714 5,568,563 64,714
5
Earnings per common share and common share equivalent
Income (loss) before extraordinary item ( .09) ( 7.35) ( .05) (3.33)
Extraordinary item - 26.65 - .67
Net income (loss) ( .09) 19.30 ( .05) (2.66)
See notes to financial statements which are an integral part hereof.
6
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
Six Months ended February 28, 1997 and 1996
(Unaudited)
1997 1996
Cash flow from operating activities:
Net income (loss) after income taxes and after extraordinary item $ (483,370) 1,290,950
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 117,388 111,588
Net loss in disposition of equipment 20,918
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (178,119) (258,416)
Decrease (increase) in inventories (217,178) 14,009
Decrease (increase) in prepaid expenses
and other current assets (571) (22,939)
Decrease (increase) in accounts receivable, other 3,555 3,267
Decrease (increase) in deposits and other assets (39) (34,600)
Increase (decrease) in accounts payable, trade 628,229 (1,584,683)
Decrease in accrued bonus (20,822) -
Increase (decrease) in other accrued liabilities 10,647 (331,123)
------- ----------
Net cash provided by (used in) operating activities (119,362) (811,947)
--------- ----------
Cash flow from investing activities:
Capital expenditures (8,584) (7,843)
Disposal of capital asset 39,971
--------
Net cash used in investing activities 31,387 (7,843)
Cash flow from financing activities:
Principal payments on long-term debt (19,265) (36,827)
Principal payments on capital lease obligations (76,346) (18,422)
Dividends paid (70,320) (12,408)
Proceeds from issuance of common stock 25,000 (650)
Net cash provided by (used in) financing activities (140,931) (68,307)
--------- --------
Net increase (decrease) in cash and
cash equivalents (228,906) (888,097)
Cash and cash equivalents:
Beginning of period 308,794 1,632,630
--------- ---------
End of period $ 79,888 744,533
========== =========
Supplemental disclosure of cash flow information: Cash paid during quarter
for:
Interest $ 31,876 15,395
========== =========
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 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:
February 28 August 31
1997 1996
------------- ------------
Raw materials................................ $ 140,831 $ 35,446
Work-in-progress............................. 140,391 27,649
Finished goods............................... 9,022 9,971
$ 290,244 $ 73,066
(3) The sale of 66,666 common stock shares at $ .375 on February 4, 1997
resulted in a revision of the exchange ratio of 28.57 to 133.33, in compliance
with the Written Consent of Board of Directors dated August 29,1996.
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 judgement 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
GENERAL
EMSG provides manufacturing services to original equipment
manufacturers (`OEM's') in the electronics industry, including producers of
telecommunication and data communication equipment, industrial controls,
computers & peripherals and instrumentation. Primary services include materials
procurement, printed circuit card and chassis assembly, and testing.
8
The Company currently operates one facility in Raleigh, North Carolina with
approximately 30 employees in 21,000 square feet of flex space. Operations are
near 30% of capacity with one shift active.
Operating results are generally affected by a number of factors,
including the relative mix of higher volume/lower margin business and lower
volume/higher margin business, price competition, raw material costs, labor
efficiencies, the degree of automation that can be used in the assembly process
and the efficiencies achieved by the Company in managing inventories and fixed
assets. The amount of sales the Company derives from turnkey manufacturing in
which it procures some or all of the components necessary for production, vs the
amount of sales it derives from labor sales, directly effects the overall gross
margin of the business. Inflation has not been a significant factor in the
results of the Company's operations because the Company's price quotations for
turnkey jobs are generally valid for thirty days and the Company typically
reserves the right to pass on certain cost increases under its turnkey orders or
contracts.
.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS AND QUARTERS ENDED FEBRUARY 28, 1997
AND FEBRUARY 29, 1996 BASED ON THE UNAUDITED FINANCIAL STATEMENTS REFERENCED
HEREIN
EMSG's financial performance more closely mirrors that of a new company with
fixed overheads established to support higher levels of revenue than are
currently attainable; however, without such overhead and infrastructure, EMSG
would not be able to attract its targeted business.
NET SALES. Net sales are net of discounts and customer returns and are
recognized upon shipment of an order to a customer. Net sales for the six month
period in 1997 were $263,893 less than that of the same period in 1997 due to a
slow start up of contracts signed with two new customers. Also, the company's
ability to get required materials to support shipments was impaired by cash flow
issues.
GROSS PROFIT (LOSS). Gross Profit (loss) equals net sales less cost of goods
sold, which consist of labor and material, manufacturing costs (primarily lease
payments for, and depreciation of, manufacturing equipment and facilities) and
other manufacturing costs. Gross profit in 1997 increased to .4% in comparison
to (1.4%) in 1996 as a result of reductions in material costs of 7%, partially
offset by a 2% increase in 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 1997
was $44,858 more than that of 1996. Expenses of $268,300 were incurred for
legal, accounting, consulting, and general administration of the small public
company resulting from the July 29, 1996 merger, partially offset by reductions
in general, selling and administrative expense of $223,442.
OPERATING INCOME (LOSS). Operating income (loss) is gross profit less SG&A, and
other income and expenses. Loss from operations in 1997 increased by $49,539 as
a result of increased general,
9
selling and administrative expenses and a reduction in interest income of
$26,853, primarily offset by a $24,834 increase in gross profit.
EXTRAORDINARY: During the first semester of fiscal 1996, the Company reached
various settlements with its largest customer, which represented 80% of EMSG's
ongoing order input at such time, and its suppliers for the cancellation and
discontinuation of production of nearly fifty products and assemblies. As a part
of the settlement, EMSG signed an agreement with its then largest customer that
relieved EMSG of trade accounts payable to the customer and other suppliers of
$1,121,151. The agreement provided the customer relief of trade payables to EMSG
of $48,054 Further, suppliers to EMSG for materials and services used on behalf
of its largest customer and related product lines relieved EMSG of $555,576 of
accounts payable. Supplier settlements were essentially 50% of the amount owed
with half of the 50% paid in quarterly installments beginning January 1, 1996..
LIQUIDITY AND CAPITAL RESOURCES
EMSG's cash and cash equivalents decreased by $228,906 from August 31, 1996
through February 28, 1997. The Company used $119,362 in cash for its operations
during this semester. Increased accounts payable of $668,229 were partially
offset by increases in accounts receivable of $178,119 and inventories of
$217,178.
EMSG used $8,584 in cash for capital expenditures. Payments were made to reduce
long-term debt ($19,265) and for capital leases ($76,346). Disposal of equipment
yielded $39,371 and the sale of 66,666 common shares generated $25,000.
Effective August 31, 1996, shareholders of the Class A Cumulative Preferred
Stocks of ESD tendered 9,576 shares, out of the total 9,926 outstanding, in
exchange for 1,276,768 shares (at the exhange ratio of 133.33 to 1) of EMSG
Class A Cumulative Convertible Preferred Stock. In addition, EMSG paid each
holder of ESD Preferred Stock who exchanged his or her shares of such stock,
pusuant to the terms of the exchange offer, an amount equal to the accrued and
unpaid dividends with respect to such shares. The total amount of $70,320 was
paid in November 1996. Outstanding and unpaid dividends for the EMSG Class A
Cumulative Preferred shares were $23,939 on February 28, 1997.
Cash and cash equivalents decreased by $888,097 from August 31, 1995 through
February 29, 1996. Cash used in reducing accounts payables ($1,584,683) and
accrued liabilities ($331,123) was partially offset by the extraordinary income
of $1,724,781. The Company also used $620,922 in operating activities, $36,827
in payments of long-term debt, $18,422 in payments of capital leases and $12,408
in dividend payments.
The Company is considering the acquisition of new capital equipment during
fiscal 1997 and plans to enter into lease agreements to finance such equipment.
The Company is in discussions with equity investors to provide capital to
support internal growth and acquisitions. The Company is also in discussions
with potential strategic and joint-venture partners to effect a relationship
that would assist it in better meeting its objectives and that could
10
improve the financial position of the Company. There are no assurances that the
Company will be successful in raising the required funds or consummating a
relationship with a strategic or joint-venture partner. Further, without the
addition of new capital or other financial support from outside sources there
can be no assurances that the Company can continue its operations or meet its
business objectives.
PART II
ITEM 1. Legal Proceedings
Neither the registrant nor its subsidiary are a party, nor is any of their
property subject to materail pending legal proceedings.
ITEM 2. Changes in Securities.
During the reported quarter, EMSG issued 66,666 shares of its common stock in
exchange for an investment of $25,000. In addition, the former stockhoders of
Kenmar Business Groups, Inc. excercised their right to purchase 750,000 shares
of the Company's common stock for $1.00 pursuant to the terms and conditions of
the Merger Agreement and its related documents by and among Kenmar Business
Groups, Inc., J.A. Industries, Inc., J.A. Industries of North Carolina Inc., and
G.M. Capital Partners Ltd. whereby there was a breach of the of the terms and
conditions because of G.M. Capital Partners Ltd. failure to invest or cause to
be invested $100,000 into EMSG within sixty days of the close of the
aforementioned merger on July 30, 1996 and other breaches of that agreement.
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.
None.
11
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
In accordance with the requiremts of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereonto duly
authorized.
Signature
/s/Kenneth H. Marks
Kenneth H. Marks
President and Chief Executive Officer
(principal executive financial and accounting officer)
12