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 27, 1999.
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 13, 1999, the Registrant had 9,521,867 shares of Common Stock
outstanding.
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Six Months
Ended June 27, 1999 and June 28, 1998..............................................2
Consolidated Balance Sheets at June 27, 1999 and
December 31, 1998..................................................................3
Consolidated Statements of Cash Flows for the Six Months
Ended June 27, 1999 and June 28, 1998..............................................4
Notes to Consolidated Financial Statements..........................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................8
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders................................12
Item 6. Exhibits and Reports on Form 8-K...................................................12
Signatures...........................................................................................13
1
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 27, June 28, June 27, June 28,
1999 1998 1999 1998
---------- ---------- ---------- -----------
(Unaudited) (Unaudited)
Net revenue......................................... $ 49,331 $ 55,196 $ 94,229 $ 110,686
Cost of sales....................................... 37,597 42,044 72,775 86,622
---------- ---------- ---------- -----------
Gross profit...................................... 11,734 13,152 21,454 24,064
Selling, general and administrative expense......... 5,929 7,695 11,371 14,855
Research and development............................ 1,857 1,354 3,460 2,860
Amortization of intangible assets................... 244 331 487 484
---------- ---------- ---------- -----------
Operating income.................................. 3,704 3,772 6,136 5,865
Interest expense, net............................... 329 290 627 750
Other (income) expense, net......................... (142) 34 (247) (93)
---------- ---------- ---------- -----------
Income before income taxes.......................... 3,517 3,448 5,756 5,208
Income tax expense.................................. 1,058 1,361 1,764 2,060
---------- ---------- ---------- -----------
Net income.......................................... $ 2,459 $ 2,087 $ 3,992 $ 3,148
========== ========== ========== ===========
Net income per common share:
Basic............................................. $ 0.26 $ 0.22 $ 0.42 $ 0.33
Diluted........................................... $ 0.25 $ 0.21 $ 0.41 $ 0.32
Shares used in computing per common share amounts:
Basic............................................. 9,488 9,424 9,472 9,424
Diluted........................................... 9,815 9,836 9,781 9,831
The accompanying notes are an integral part of the consolidated financial
statements.
2
Sypris Solutions, Inc.
Consolidated Balance Sheets
(in thousands, except for share data)
June 27, December 31,
1999 1998
----------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents.................................................................................. $ 10,959 $ 12,387
Accounts receivable, net................................................................................... 29,621 26,283
Inventory, net............................................................................................. 43,126 38,465
Other current assets....................................................................................... 1,541 1,724
-------- --------
Total current assets..................................................................................... 85,247 78,859
Property, plant and equipment, net........................................................................... 29,213 27,535
Intangible assets, net....................................................................................... 11,497 12,075
Other assets................................................................................................. 2,862 2,650
-------- --------
$128,819 $121,119
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable........................................................................................... $ 13,630 $ 13,004
Accrued liabilities........................................................................................ 17,232 23,651
Current portion of long-term debt.......................................................................... 9,602 10,083
-------- --------
Total current liabilities................................................................................ 40,464 46,738
Long-term debt............................................................................................... 28,750 18,500
Other liabilities............................................................................................ 5,954 6,522
-------- --------
Total liabilities........................................................................................ 75,168 71,760
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares authorized; no shares issued............................... -- --
Common stock, non-voting, par value $.01 per share, 10,000,000 shares authorized; no shares issued......... -- --
Common stock, par value $.01 per share, 20,000,000 shares authorized; 9,516,801 and 9,450,593 shares issued
and outstanding in 1999 and 1998, respectively........................................................... 95 95
Additional paid-in capital................................................................................. 23,538 23,238
Retained earnings.......................................................................................... 31,312 27,320
Accumulated other comprehensive income..................................................................... (1,294) (1,294)
-------- --------
Total shareholders' equity............................................................................... 53,651 49,359
-------- --------
$128,819 $121,119
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
3
Sypris Solutions, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
----------------------
June 27, June 28,
1999 1998
----------- ---------
(Unaudited)
Cash flows from operating activities:
Net income.................................................................................... $ 3,992 $ 3,148
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization............................................................... 3,696 3,678
Other noncash charges....................................................................... 202 156
Changes in operating assets and liabilities:
Accounts receivable....................................................................... (3,183) (232)
Inventory................................................................................. (5,192) 5,274
Other current and noncurrent assets....................................................... (373) 23
Accounts payable.......................................................................... 626 (2,632)
Accrued and other liabilities............................................................. (6,331) (1,772)
------- -------
Net cash (used in) provided by operating activities...................................... (6,563) 7,643
Cash flows from investing activities:
Capital expenditures.......................................................................... (4,665) (2,054)
Other......................................................................................... (268) (643)
------- -------
Net cash used in investing activities.................................................... (4,993) (2,697)
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements................................. 10,627 (2,157)
Principal payments on long-term debt.......................................................... (859) (886)
Proceeds from issuance (payments for redemption) of common stock.............................. 300 (56)
------- -------
Net cash provided by (used in) financing activities...................................... 10,068 (3,099)
------- -------
Net (decrease) increase in cash and cash equivalents............................................ (1,428) 1,847
Cash and cash equivalents at beginning of period................................................ 12,387 9,836
------- -------
Cash and cash equivalents at end of period...................................................... $10,959 $11,683
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
4
Sypris Solutions, Inc.
Notes to Consolidated Financial Statements
(1) Organization
Sypris Solutions, Inc. ("Sypris" or the "Company") is a Delaware
corporation which was organized in 1997 and began business on March 30, 1998
with the completion of the merger of Group Financial Partners, Inc. ("GFP") and
two of its subsidiaries, Bell Technologies, Inc. ("Bell") and Tube Turns
Technologies, Inc. ("Tube Turns"), with and into Group Technologies Corporation
("GroupTech"), a Nasdaq-traded company in which GFP owned an approximate 80%
interest. Effective immediately thereafter, GroupTech was merged with and into
Sypris, a subsidiary created to accomplish the reincorporation in Delaware. As a
result of these and other transactions (collectively referred to herein as the
"Reorganization"), Sypris became the holding company for Bell, GroupTech, Tube
Turns and Metrum-Datatape, Inc. ("Metrum-Datatape"), a wholly-owned subsidiary
of GFP prior to the Reorganization, and succeeded to the listing of GroupTech on
the Nasdaq Stock Market under the new symbol SYPR. In connection with the
Reorganization, a one-for-four reverse stock split was effected for shareholders
of record as of March 30, 1998. All references in the unaudited consolidated
financial statements to number of shares and per share amounts of the Company's
common stock have been retroactively restated to reflect the decreased number of
shares outstanding.
Sypris is a diversified provider of specialized industrial products and
technical services. The Company's products range from integrated data
acquisition, storage and analysis 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 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 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 27, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements, and
notes thereto, for the year ended December 31, 1998 as presented in the
Company's annual report on Form 10-K.
Certain amounts in the Company's 1998 consolidated financial statements
have been reclassified to conform with the 1999 presentation.
5
(3) Net Income per Common Share
For the six months ended June 28, 1998, shares used in computing basic and
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.
There were no adjustments required to be made to net income for purposes of
computing basic and diluted net income per common share. A reconciliation of the
average number of common shares outstanding used in the calculation of basic and
diluted net income per common share is as follows (in thousands):
Three Months Ended Six Months Ended
--------------------- ---------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- -------- ---------
(Unaudited) (Unaudited)
Shares used to compute basic net income
per common share....................... 9,488 9,424 9,472 9,424
Dilutive effect of stock options......... 327 412 309 407
------- ------- ------- -------
Shares used to compute diluted net
income per common share............... 9,815 9,836 9,781 9,831
======= ======= ======= =======
(4) Inventory
Inventory consists of the following (in thousands):
June 27, December 31,
1999 1998
------------- ------------
(Unaudited)
Raw materials...................................................................... $ 13,315 $ 15,697
Work-in-process.................................................................... 13,899 12,447
Finished goods..................................................................... 2,011 2,478
Costs relating to long-term contracts and programs, net of amounts attributed
to revenue recognized to date..................................................... 24,093 16,700
Progress payments related to long-term contracts and programs...................... (5,157) (4,224)
LIFO reserve....................................................................... (609) (609)
Reserve for excess and obsolete inventory.......................................... (4,426) (4,024)
---------- -----------
$ 43,126 $ 38,465
========== ===========
6
(5) Segment Data
The Company's operations are conducted in two reportable business segments:
the Electronics Group and the Industrial Group. There was no intersegment net
revenue recognized for all periods presented. The following table presents
financial information for the reportable segments of the Company for the three
and six months ended June 27, 1999 and June 28, 1998 (in thousands):
Three Months Ended Six Months Ended
------------------------- ----------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
----------- ----------- ---------- ---------
(Unaudited) (Unaudited)
Net revenue from unaffiliated customers:
Electronics Group........................ $ 40,257 $ 44,638 $ 75,778 $ 91,524
Industrial Group......................... 9,074 10,558 18,451 19,162
--------- --------- --------- ---------
$ 49,331 $ 55,196 $ 94,229 $ 110,686
========= ========= ========= =========
Gross profit:
Electronics Group........................ $ 10,176 $ 11,037 $ 18,059 $ 20,510
Industrial Group......................... 1,558 2,115 3,395 3,554
--------- --------- --------- ---------
$ 11,734 $ 13,152 $ 21,454 $ 24,064
========= ========= ========= =========
Operating income:
Electronics Group........................ $ 3,636 $ 3,098 $ 5,452 $ 5,141
Industrial Group......................... 941 1,581 2,275 2,572
General, corporate and other............. (873) (907) (1,591) (1,848)
--------- --------- --------- ---------
$ 3,704 $ 3,772 $ 6,136 $ 5,865
========= ========= ========= =========
(6) Commitments and Contingencies
Tube Turns is a co-defendant in two separate lawsuits filed in 1993 and
1994, one pending in federal court and one pending in state district court in
Louisiana, arising out of an explosion in a coker plant owned by Exxon
Corporation located in Baton Rouge, Louisiana. The suits are being defended for
Tube Turns by its insurance carrier, and the Company intends to vigorously
defend its case. The Company believes that a settlement or related judgment
would not result in a material loss to Tube Turns or the Company.
More specifically, 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. One of the actions was brought by Exxon and claims damages for
destruction of the plant, which Exxon estimates exceed one hundred million
dollars. 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. In both actions, Tube Turns maintains that the
carbon steel pipe elbow at issue was appropriately marked as carbon steel and
was improperly installed, without the knowledge of Tube Turns, by the fabricator
and general contractor in a part of the plant requiring a chromium steel elbow.
7
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 months ended June 27, 1999 and June 28, 1998.
Three Months Ended Six Months Ended
-------------------- ------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
Net revenue.................................. 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales................................ 76.2 76.2 77.2 78.3
-------- -------- -------- --------
Gross profit................................. 23.8 23.8 22.8 21.7
Selling, general and administrative expense.. 12.0 13.9 12.1 13.4
Research and development..................... 3.8 2.5 3.7 2.6
Amortization of intangible assets............ 0.5 0.6 0.5 0.4
-------- -------- -------- --------
Operating income............................. 7.5 % 6.8 % 6.5 % 5.3 %
======== ======== ======== ========
Net income................................... 5.0 % 3.8 % 4.2 % 2.8 %
======== ======== ======== ========
For reporting purposes, the operations of Bell, GroupTech and Metrum-
Datatape are included in the Electronics Group, and Tube Turns' operations are
included in the Industrial Group. 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 1999 was $49.3 million, a decrease of
$5.9 million, or 10.6%, from $55.2 million for the second quarter of 1998. Net
revenue for the first six months of 1999 was $94.2 million, a decrease of $16.5
million, or 14.9%, from $110.7 million for the first six months of 1998. The
Electronics Group reported a decrease in net revenue of $4.4 million and $15.8
million for the second quarter and six-month periods, respectively. During 1998,
the Electronics Group targeted new business opportunities aimed at improving
profitability and completed, without renewal, certain of its low-margin
electronics manufacturing contracts. The transition from the low-margin
contracts was substantially completed during 1998, but the effect has continued
into the first half of 1999 and is the primary source of the decrease in net
revenue for the comparable year-to-year periods. The business development
efforts have enabled sequential quarterly net revenue for the Electronics Group
in 1999 to increase from $35.5 million for the first quarter to $40.2 million
for the second quarter and resulted in an increase in backlog for the
Electronics Group to $107.4 million at June 27, 1999. The Electronics Group
expects to begin shipments on certain of its new contracts during the second
half of 1999. The Industrial Group reported a decrease in net revenue of $1.5
million and $0.7 million for the second quarter and six-month periods,
respectively. Volume reductions for a product line provided to customers in
foreign markets of the oil and gas industry was the primary factor for the
decline in net revenue for the comparable year-to-year periods. The Industrial
Group continued to increase shipments of truck axles during the second quarter,
thereby partially offsetting declines in other forged product lines.
Gross profit for the second quarter of 1999 was $11.7 million, or 23.8% of
net revenue, as compared to $13.1 million, or 23.8% of net revenue for the
second quarter of 1998. Gross profit for the first six months of 1999 was $21.5
million, or 22.8% of net revenue, as compared to $24.1 million, or 21.7% of net
revenue for the first six months of 1998. The Electronics Group's gross profit
for the second quarter of 1999 was $10.2 million, a decrease of $0.8 million, or
7.8%, compared to $11.0 million for the second quarter of 1998. The Electronics
Group's gross profit for the first six months of 1999 was $18.1 million, a
decrease of $2.4 million, or 12.0%, compared to $20.5 million for the first six
months of 1998. The decrease in the Electronics Group's gross profit for the
comparable second quarter and six-month periods is primarily attributable to the
reduced level of net revenue described above. The Electronics Group's gross
profit percentage increased to 25.3% in the second quarter of 1999 from 24.7%
for the comparable period in 1998. The gross profit percentage of the
Electronics Group for the first six months of 1999 and 1998 was 23.8% and 22.4%,
respectively. The margin improvement for the comparable year-to-
8
year periods further reflects management's actions to improve profitability by
focusing on specific manufacturing and service opportunities in which the
Company offers value-added solutions under a competitive cost structure. The
gross profit percentage comparison also reflects the mix change caused by
revenue reductions in certain of the Company's electronics assembly and test
operations that typically have lower margins than product sales. The Industrial
Group's gross profit for the second quarter of 1999 was $1.6 million, a decrease
of $0.5 million, or 26.3%, compared to $2.1 million for the second quarter of
1998. The lower level of revenue in the second quarter of 1999 combined with the
change in revenue mix associated with the increase in forged truck axles and
volume reductions for other product lines were the primary factors in the gross
profit reduction. Shipments of certain high-margin products during the second
quarter of 1998 contributed to a gross profit percentage of 20.0% for the second
quarter of 1998 as compared to 17.5% for the full year of 1998 and 18.4% for the
first six months of 1999.
Selling, general and administrative expense for the second quarter of 1999
was $5.9 million, or 12.0% of net revenue, as compared to $7.7 million, or 13.9%
of net revenue for the second quarter of 1998. Selling, general and
administrative expense for the first six months of 1999 was $11.4 million, or
12.1% of net revenue, as compared to $14.9 million, or 13.4% of net revenue for
the first six months of 1998. The Electronics Group reported a decrease of $1.8
million and $3.4 million for the second quarter and six-month periods,
respectively. The consolidation of certain functional activities that was
initiated in the first half of 1998 contributed to this decrease in the year-to-
year comparison. Other contributing factors include workforce reductions in
certain operations, a reduction in selling expense attributable to the decrease
in net revenue, and adjustments to the Company's estimated liability for the
sale of certain assets of the Electronics Group in June 1997, for which a final
settlement agreement was reached during the second quarter of 1999. The first
six months of 1998 also included professional fees and other costs associated
with the Reorganization which were nonrecurring.
Research and development expense for the second quarter of 1999 was $1.9
million, or 3.8% of net revenue, as compared to $1.4 million, or 2.5% of net
revenue for the second quarter of 1998. Research and development expense for the
first six months of 1999 was $3.5 million, or 3.7% of net revenue, as compared
to $2.9 million, or 2.6% of net revenue for the first six months of 1998. This
increase was generated by the Electronics Group, and reflects management's
continued investment in the data acquisition, storage and analysis product
lines.
Amortization of intangible assets for the second quarter and first six
months of 1999 was $0.2 million and $0.5 million, respectively, as compared to
$0.3 million and $0.5 million, respectively, for the comparable periods of 1998.
The amortization is primarily attributable to goodwill recorded in connection
with the Reorganization.
Interest expense for the second quarter and first six months of 1999 was
$0.3 million and $0.6 million, respectively, as compared to $0.3 million and
$0.8 million, respectively, for the comparable periods of 1998. Borrowings
during the second quarter of 1999 increased the Company's outstanding level of
debt; however, interest rates on outstanding borrowings for the second quarter
and the first six months of 1999 were lower than the comparable prior year
periods offsetting the increase in debt.
Income tax expense, on an interim basis, is provided for at the anticipated
effective tax rate for the year.
Liquidity, Capital Resources and Financial Condition
Net cash used by operating activities was $6.6 million for the first six
months of 1999 as compared to net cash provided by operating activities of $7.6
million for the year-earlier period. During the first six months of 1999, the
Company's accounts receivable and inventory balances increased by $3.2 million
and $5.2 million, respectively. The $3.2 million increase in accounts receivable
resulted from a high volume of shipments occurring late in the second quarter.
Inventory increased during the first six months of 1999 by $4.5 million and $0.7
million in the Electronics Group and Industrial Group, respectively. The
increase in the Electronics Group's inventory corresponds with the increase in
backlog and inventory requirements for the expected shipment schedule on certain
contracts scheduled to begin during the second half of 1999. Accrued liabilities
decreased by $6.3 million during the first six months of 1999, principally due
to the final settlement payment made during the second quarter with respect to
the June 1997 asset divestiture transaction.
Net cash used in investing activities was $5.0 million for the first six
months of 1999 as compared to $2.7 million for the year-earlier period. Capital
expenditures by the Electronics Group and the Industrial Group for the first six
months of 1999 were $2.9 million and $1.7 million, respectively. Capital
expenditures for the
9
Electronics Group include information system upgrades and replacements as well
as manufacturing, assembly and test equipment. The Industrial Group's capital
expenditures relate primarily to increasing production capacity to meet the
expanding needs of its customer base. At June 27, 1999, the Industrial Group
also had commitments for the purchase of $3.5 million of additional
manufacturing equipment to further increase production capacity, which is
expected to be funded through the Company's cash balances and borrowings under
its revolving credit facility. The Company expects total capital expenditures
during the second half of 1999 will be approximately $10.0 million. The planned
capital expenditures are for facilities and equipment to increase capacity,
expand production capabilities and improve efficiency through automation.
Net cash provided by financing activities was $10.1 million during the
first six months of 1999 as compared to net cash used in financing activities of
$3.1 million during the year-earlier period. The Company funded the additional
working capital investment and capital expenditures during the first six months
of 1999 through additional borrowings under its revolving credit facility.
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 facility of $2.5 million at June 27, 1999; however, the
Company repaid $6.5 million on its revolving credit facility during the first
week of the third quarter, thereby increasing its total availability to $9.0
million at July 4, 1999. Maximum borrowings on the revolving credit facility are
$30.0 million, subject to a $5.0 million limit for letters of credit. The
Company is currently reviewing financing alternatives that would increase its
total borrowing capacity to approximately $75.0 million. The Company expects to
complete any such financing during the second half of 1999 and intends to use
proceeds from the financing to repay in full all debt outstanding under its
existing credit agreement, fund the Company's capital expenditure plan for the
second half of 1999 and for other general corporate purposes, including
acquisitions.
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 implemented a company-wide Year 2000 Project (the "Y2K Project")
to address the Year 2000 issue. The Y2K Project encompasses both information
technology ("IT") and non-IT systems. The Y2K Project is being addressed by
project teams at each of the Company's subsidiaries and by the Company's IT
Committee, which consists of senior members of the IT departments from each
subsidiary.
Beginning in 1998, the Company began a program of reviewing its enterprise
resource planning ("ERP") systems to reduce the number of ERP systems utilized
across its business units and improve overall access to information. During
1998, the Company selected three primary ERP systems and is in the process of
implementing the upgrades or conversions for these new systems. All new ERP
systems are Year 2000 compliant, and the implementations have been completed or
are scheduled for completion at various dates through the third quarter of 1999.
The Company has a contingency plan for the implementation of one ERP system,
which provides for a Year 2000 compliance patch to its current system in the
event an unforeseen problem is encountered during the total system conversion.
The installation of the Year 2000 compliance patch was completed in the second
quarter of 1999.
A detailed assessment of all significant IT systems has been completed. The
project teams are implementing plans to correct problems identified during the
assessment phase of the Y2K Project. The implementation of the new ERP systems
and the related hardware modifications have addressed the majority of the
Company's business systems. The Company has also upgraded or replaced the
majority of its personal computers and standardized its desktop software
applications over the past three years. The Company expects that the testing and
remediation of all IT systems will be complete by the third quarter of 1999.
A detailed assessment of all significant non-IT systems has been completed.
The Company has identified the critical non-IT systems, which includes
microcontroller based systems and other devices with embedded chips used in the
engineering, manufacturing and testing processes and expects to complete the
assessment, testing and
10
remediation on the critical systems by the third quarter of 1999. Completion of
testing and remediation on certain of the lower priority non-IT systems will
continue during the third and fourth quarters of 1999. The Company is also
reviewing telephone, security, HVAC and other facility related systems and will
complete the testing and remediation of these systems by the third quarter of
1999.
The Company has identified and is communicating with customers, suppliers
and other critical service providers to determine if entities with which the
Company transacts business have an effective plan in place to address the Year
2000 issue, and to determine the extent of the Company's vulnerability to the
failure of first parties to remediate their own Year 2000 issue. The Company is
relying on statements from its service and goods suppliers and is not auditing
suppliers' preparation plans. Risks associated with this approach are being
identified and contingency plans will be developed as needed.
As of June 27, 1999, the Company has spent approximately $500,000 on its
Y2K Project. Additional costs to be incurred in 1999 to correct Year 2000
problems are estimated at approximately $300,000. Such costs do not include
normal system upgrades and replacements. The costs incurred by the Company for
the new ERP systems are considered to be normal system upgrades and replacements
and, therefore, are not included in costs for the Y2K Project. The Company does
not expect the costs relating to Year 2000 remediation to have a material effect
on its results of operations or financial condition.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of first-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Y2K Project is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material first-party suppliers and customers. The Company believes that, with
the implementation of new ERP systems and completion of the Y2K Project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
Forward-looking Statements
This Form 10-Q contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Similar forward looking
statements are made periodically in reports to the Securities and Exchange
Commission, press releases, reports and documents and in written and oral
presentations to investors, shareholders, analysts and others, regarding future
results or expected developments. Words such as "anticipates," "believes,"
"estimates," "expects," "is likely," "predicts," and variations of such words
and similar expressions are intended to identify such forward-looking
statements. Although Sypris believes that its expectations are based on
reasonable assumptions, it cannot assure that the expectations contained in such
statements will be achieved. 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 general economy and the electronics and industrial markets served by the
Company; 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 Securities and Exchange Commission.
11
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on April 29, 1999 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...... 9,194,326 9,329
Jeffrey T. Gill..... 9,195,076 8,579
R. Scott Gill....... 9,195,076 8,579
Henry F. Frigon..... 9,197,044 6,611
William L. Healey... 9,197,044 6,611
Roger W. Johnson.... 9,197,044 6,611
Sidney R. Petersen.. 9,196,294 7,361
Robert Sroka........ 9,197,044 6,611
In addition, the stockholders approved (i) an amendment to the Sypris
Solutions, Inc. 1994 Independent Directors' Stock Option Plan to increase the
number of authorized shares available for issuance thereunder by the vote of
8,875,474 in favor, 75,571 against and 2,652 abstentions; and (ii) the Sypris
Solutions, Inc. Employee Stock Purchase Plan by the vote of 8,923,181 in favor,
29,550 against and 966 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
------ -----------
27 Financial Data Schedule.
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the three months ended June
27, 1999.
12
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: July 27, 1999 By: /s/ David D. Johnson
------------- --------------------
(David D. Johnson)
Vice President & Chief
Financial Officer
Date: July 27, 1999 By: /s/ Anthony C. Allen
------------- --------------------
(Anthony C. Allen)
Vice President, Controller &
Chief Accounting Officer
13
5
1,000
6-MOS
DEC-31-1999
JAN-01-1999
JUN-27-1999
10,959
0
29,651
0
43,126
85,247
29,213
0
128,819
40,464
28,750
0
0
95
53,556
128,819
94,229
94,229
72,775
72,775
0
0
627
5,756
1,764
3,992
0
0
0
3,992
0.42
0.41
