<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 1998
( ) For the transition period from to
---------- ----------
Commission file number: 000-22855
NEW DIRECTIONS MANUFACTURING, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 86-0671974
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2940 W. WILLETTA STREET, PHOENIX, ARIZONA 85009
(Address of principal executive offices) (Zip Code)
(602) 352-1165
(Issuer's telephone number, including area code)
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 preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
The issuer had 5,052,270 shares of common stock outstanding as of
December 31, 1998.
Transitional Small Business Disclosure Format (check one)
Yes No X
--- ---
<PAGE> 2
NEW DIRECTIONS MANUFACTURING, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements
Comparative Unaudited Consolidated Balance
Sheets as of December 31, 1998 and June 30, 1998 3
Comparative Unaudited Consolidated Statements of
Operations for the Three Months and Six Months
Ended December 31, 1998 and 1997 4
Comparative Unaudited Consolidated Statements of
Cash Flow for the Six Months Ended December 31,
1998 and 1997 5-6
Notes to the Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 10
(b) Reports on Form 8-K 10
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1
NEW DIRECTIONS MANUFACTURING, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, 1998 June 30, 1998
----------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 65,460 $ 232,203
Accounts receivable, Net 780,374 564,565
Inventories 355,844 287,893
Other 30,950 29,361
----------- -----------
Total Current Assets 1,232,628 1,114,022
Property, Plant and Equipment, Net 468,014 474,915
Other Assets:
Covenant not-to-compete, Net 480,002 560,000
Goodwill, Net 568,354 584,734
Deferred tax asset 50,000 0
Other 17,376 16,926
----------- -----------
Total Assets $ 2,816,374 $ 2,750,597
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 315,438 $ 168,455
Commissions payable 17,480 16,932
Accrued expenses 27,462 70,545
Income taxes payable 300 20,000
Short-term debt 209,314 0
Current portion long-term debt 207,334 199,231
Current portion capital lease obligations 27,729 26,132
----------- -----------
Total Current Liabilities 805,057 501,295
----------- -----------
Long-Term Liabilities:
Long-term debt, less current portion 224,203 329,936
Deferred income taxes 0 17,000
Capital lease obligations, less current portion 62,527 77,071
----------- -----------
Total Long-Term Liabilities 286,730 424,007
----------- -----------
Commitments and Contingencies (See Notes)
Stockholders' Equity:
Common stock, $.001 par value, 25,000,000 shares
authorized, 5,052,270 shares issued and outstanding 5,052 5,052
Additional paid in capital 1,922,489 1,923,575
Accumulated deficit (202,954) (103,332)
----------- -----------
Total Stockholders' Equity 1,724,587 1,825,295
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,816,374 $ 2,750,597
=========== ===========
</TABLE>
3
<PAGE> 4
NEW DIRECTIONS MANUFACTURING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales $ 1,550,954 $ 1,915,266 $ 2,999,421 $ 3,483,138
Cost of Sales 1,373,089 1,669,119 2,656,683 3,019,803
----------- ----------- ----------- -----------
Gross Profit 177,865 246,147 342,738 463,335
----------- ----------- ----------- -----------
Operating Expenses:
Selling and marketing 33,633 24,828 69,126 53,906
Administrative and general 216,748 201,654 415,192 387,807
----------- ----------- ----------- -----------
Total Operating Expenses 250,381 226,482 484,318 441,713
----------- ----------- ----------- -----------
Operating Income (Loss) (72,516) 19,665 (141,580) 21,622
----------- ----------- ----------- -----------
Interest Income (Expense):
Interest income 131 3,872 2,345 9,630
Interest expense (14,367) (15,772) (27,387) (31,953)
----------- ----------- ----------- -----------
Net Interest Expense (14,236) (11,900) (25,042) (22,323)
----------- ----------- ----------- -----------
Income (Loss) Before Taxes (86,752) 7,765 (166,622) (701)
Taxes on Income (Recovery) (36,000) 40,010 (67,000) 40,010
----------- ----------- ----------- -----------
Net Income (Loss) $ (50,752) $ (32,245) $ (99,622) $ (40,711)
=========== =========== =========== ===========
Earnings (Loss) Per Share $ (0.01) $ (0.01) $ (0.02) $ (0.01)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding 5,052,270 4,987,770 5,052,270 4,987,770
=========== =========== =========== ===========
</TABLE>
4
<PAGE> 5
NEW DIRECTIONS MANUFACTURING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (99,622) $ (40,711)
Adjustments to reconcile net loss to
cash used for operating activities:
Amortization of covenant-not-to-compete 79,998 79,998
Amortization of goodwill 16,380 14,160
Depreciation 40,678 26,007
Deferred income taxes (67,000) (30,000)
Increase in accounts receivable (215,809) (288,810)
Increase in inventory (67,951) (84,702)
(Increase) decrease in other assets (2,039) 1,559
Increase (decrease) in accounts payable 146,983 (23,238)
Decrease in accrued expenses (43,083) (10,863)
Increase (decrease) in commissions payable 548 (13,258)
Increase (decrease) in income taxes payable (19,700) 70,000
--------- ---------
Net cash used for operating activities (230,617) (299,858)
--------- ---------
Cash flows for investing activities:
Purchase of property and equipment (33,777) (77,638)
--------- ---------
Net cash used for investing activities (33,777) (77,638)
--------- ---------
Cash flows for financing activities:
Advance on line of credit 209,314 0
Repayment of debt (97,630) (90,401)
Payment of capital lease obligations (12,947) (26,475)
Proceeds from capital stock, net (1,086) 4,371
--------- ---------
Net cash provided by (used for) financing activities 97,651 (112,505)
--------- ---------
Net decrease in cash and cash equivalents (166,743) (490,001)
Cash and cash equivalents, beginning of period 232,203 570,486
--------- ---------
Cash and cash equivalents, end of period $ 65,460 $ 80,485
========= =========
</TABLE>
5
<PAGE> 6
NEW DIRECTIONS MANUFACTURING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Supplementary Disclosure of Cash Flow Information
Cash paid during the period for interest $27,387 $31,953
======= =======
Cash paid for income taxes $ 4,700 $ 0
======= =======
</TABLE>
Summary of Non-cash Investing and Financing Activities
1) During 1998, the Company acquired various equipment. A portion of
the equipment was financed by a capital lease obligation of
$98,400.
6
<PAGE> 7
NEW DIRECTIONS MANUFACTURING, INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
1. PRESENTATION OF INTERIM INFORMATION
In the opinion of the management of New Directions Manufacturing, Inc. (the
"Company"), the accompanying unaudited financial statements include all normal
adjustments considered necessary to present fairly the financial position as of
December 31, 1998, the results of operations for the three months and six months
ended December 31, 1998, and December 31, 1997, and cash flows for the six
months ended December 31, 1998, and December 31, 1997. Interim results are not
necessarily indicative of results for a full year.
The financial statements and notes are presented as permitted by Form 10-QSB,
and do not contain certain information included in the Company's audited
financial statements and notes for the fiscal year ended June 30, 1998. Audited
financial statements for the fiscal year ended June 30, 1998 were filed with the
SEC as part of the Issuer's Form 10-KSB on September 15, 1998, and are
incorporated herein by reference. Copies of the 10-KSB may be obtained by faxing
the Company at (602) 352-1505 or may be viewed on-line via the SEC's EDGAR
database at www.sec.gov.
2. ADJUSTMENTS TO DECEMBER 31, 1997 FINANCIAL STATEMENTS
As described in Amendment No. 2 to our March 31, 1998 10-QSB, it was discovered
in taking our physical inventory in conjunction with our year-end audit that our
perpetual inventory system had errors in input and withdrawals. Due to this
discovery, prior financial statements, including the December 31, 1997 financial
statements presented herein, were adjusted to correct for these errors. Steps
have been taken to ensure the accuracy of this system in the future.
7
<PAGE> 8
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
New Directions Manufacturing Inc. ("Company") is a manufacturer of quality oak
furniture. The Company produces oak contemporary home furnishing items such as
television stands, stereo towers, entertainment centers, wall systems,
bookcases, and both adult and youth bedroom units. The Company sells its product
through retailers on both the East and West Coasts of the United States, and
Alaska, Hawaii, Puerto Rico, Canada, and the Bahamas. The Company includes New
Directions Manufacturing, Inc., a Nevada corporation, and its wholly owned
subsidiary, New Directions Manufacturing, Inc., an Arizona corporation, which
was founded in 1989.
RESULTS OF OPERATIONS
Three Months and Six Months Ended December 31, 1998 as compared to the Three
Months and Six Months Ended December 31, 1997.
NET SALES
Net sales of $1,550,954 for the second quarter of fiscal 1999, which ended
December 31, 1998, were less than the sales of the same quarter for the previous
year of $1,915,266 by $364,312 or 19.0%. Net sales of $2,999,421 for the six
months ended December 31, 1998, were less than the sales of the same period for
the previous year of $3,483,138 by $483,717 or 13.9%. The second quarter sales
loss can largely be attributed to the loss of a major customer in July of last
year and soft sales in October. Another contributing factor to the losses over
the six months is the loss of approximately $40,000 in freight revenues due to
larger customers using their own freight carriers. While we have offset some of
the loss of the major customer through adding new customers and introducing
additional products to the marketplace, it has had a short-term impact.
Management believes that new customers and new products will offset the impact
in the long-term.
COST OF SALES AND GROSS PROFIT
The gross profit was $177,865 or 11.5% in the quarter ending December 31, 1998
in comparison with $246,147 or 12.9% for the same quarter the previous year. As
a percentage of sales, cost of sales was 88.5% compared to 87.1% during the same
aforementioned time periods. The gross profit was $342,738 or 11.4% in the six
months ending December 31, 1998 in comparison with $463,335 or 13.3% for the
same period the previous year. As a percentage of sales, cost of sales was 88.6%
compared to 86.7% during the same aforementioned time periods. The decrease in
gross profit margin for both the quarter and six-months was primarily due to an
increase in labor costs, higher depreciation expense, and an increase in
building lease costs.
OPERATING EXPENSES
Operating expenses were $250,381 or 16.1% of net sales during the quarter ending
December 31, 1998. This compares with $226,482 or 11.8% for the quarter ending
December 31, 1997. Operating expenses were $484,318 or 16.1% of net sales during
the six months ending December 31, 1998. This compares with $441,713 or 12.7%
for the six months ending December 31, 1997.
8
<PAGE> 9
Operating expenses for the quarter ending December 31, 1998 increased $23,899 or
10.6% compared to the same quarter in 1997. Operating expenses for the six
months ending December 31, 1998 increased $42,605 or 9.6% compared to the same
time period in 1997. The difference was primarily due to an increase in
administrative payroll costs, insurance expense, and showroom expenses for both
the quarter and six-month periods.
INTEREST
Net interest expense for the quarter ending December 31, 1998 increased $2,336
or 19.6% compared to the same quarter in 1997. Net interest expense for the six
months ending December 31, 1998 increased $2,719 or 12.2% compared to the same
time period in 1997. The increase was primarily due to the reduction of interest
income in fiscal 1998 compared to fiscal 1997 and the use of our bank credit
line.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for capital expenditures and
operating expenses, including labor costs, raw materials purchases, and funding
of accounts receivable. The Company's primary sources of cash have been from
operations and the use of our bank credit line.
Accounts receivable-net at December 31, 1998 increased $215,809 or 38.2% from
June 30, 1998. This represents 27.7% of total assets at December 31, 1998 versus
20.5% at June 30, 1998. The increase in the receivables is primarily due to a
traditionally stronger sales period in the 4th calendar quarter and does not
represent a change in uncollectible accounts. The Company has not recognized any
significant bad debt expense in any of the periods represented.
The Company's current plans require additional capital expenditures for the
remainder of the year of approximately $25,000. Year to date, the Company has
expended approximately $33,775. As of December 31, 1998, the Company believes
the availability of credit under its $500,000 line of credit agreement and
internally generated cash will be adequate to finance its operations and
anticipated capital expenditures through fiscal 1999.
YEAR 2000 ISSUE
The Company is addressing possible remedial efforts in connection with
computer software that could be affected by the Year 2000 problem. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations.
The Company has begun work on the Year 2000 compliance issue. The scope of
the project includes ensuring the compliance of all applications, operating
systems, and hardware. The Company is currently in the process of upgrading its
computer system hardware and software. The target date for completion of the
project is June 1, 1999 with an estimated total cost of approximately $6,000.
The suppliers of substantially all of the Company's software have informed
the Company that all of those suppliers' software that is used by the Company is
Year 2000 compliant. The Company has no internally generated software. After
reasonable investigation, the Company has not yet identified any Year 2000
problems but will continue to monitor the issue. There can be no assurances,
however, that Year 2000 problems will not occur with respect to the Company's
computer systems. The Year 2000 problem may impact other entities with which the
Company transacts business, and the Company cannot predict the effect of the
Year 2000 problem on such entities. However, the Company has received
notification from a number of suppliers, vendors, and our payroll service that
their systems are currently Year 2000 compliant. Also, the Company is not
directly linked to any supplier or vendor by computer.
9
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 10, 1997, the Company was served with a complaint, which
alleges claims for strict liability and negligence in connection with
an accident with a piece of furniture. The litigation has been
forwarded to the Company's insurance carrier who is handling the
defense of this claim on behalf of the Company. Due to the early stage
of this litigation, the Company has not been able to determine the
estimated loss or range of loss. Management believes, however, that
this matter will be completely covered by its liability insurance and
that the Company will not suffer any out-of-pocket cash losses in
defending/settling this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of New Directions Manufacturing,
Inc., a Nevada Corporation, was held at the principal office of the
Company, 2940 West Willetta, Phoenix, Arizona 85009-3518 on Thursday,
October 8, 1998 at 10:00 a.m., Arizona time. The results of this
meeting were reported in our 10-QSB for the quarter ended September 30,
1998 filed on November 4, 1998, and is hereby incorporated by
reference.
The Company's proxy statement filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, filed with the SEC on September 16,
1998, is also hereby incorporated by reference.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
(10)Material Contracts
Amendment to Repurchase Agreement between New Directions
Manufacturing, Inc. and shareholders, Donald A. Metke,
Sean F. Lee, and Jack Horner, Jr. Amendment dated December
10, 1998.
(27)Financial Data Schedule
(b) REPORTS ON FORM 8-K:
None.
10
<PAGE> 11
SIGNATURES
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.
NEW DIRECTIONS MANUFACTURING, INC.
(Registrant)
Date: February 3, 1999 /s/ Donald A. Metke
-------------------
DONALD A. METKE
President, Chief Executive Officer,
Chief Financial Officer,
Chief Operating Officer
11
<PAGE> 12
Index to Exhibits
(10) Material Contracts
Amendment to Repurchase Agreement between New Directions
Manufacturing, Inc. and shareholders, Donald A. Metke, Sean F.
Lee, and Jack Horner, Jr. Amendment dated December 10, 1998.
(27) Financial Data Schedule
<PAGE> 1
Exhibit 10
AMENDMENT TO REPURCHASE AGREEMENT
This Amendment to Repurchase Agreement is dated as of December 10, 1998
(the "Amendment"), by and among New Directions Manufacturing, Inc., a Nevada
corporation (the "Company") and the individuals listed in Exhibit A hereto
(collectively, the "Shareholders"). All undefined capitalized terms shall have
the meanings set forth for them in the Repurchase Agreement among the Parties
hereto effective as of March 17, 1998 (the "Agreement").
1. Section 3.2, Repurchase Price, is hereby amended to read as
follows:
3.2 Repurchase Price. The repurchase price of the Shares which
the Company must purchase pursuant to the Repurchase Requirement (the
"Repurchase Price") shall be the greater of (i) the average closing bid price
for the Stock over the last sixty (60) trading days; or (ii) one dollar ($1.00)
per Share. However, in any event, the total Repurchase Price cannot exceed the
amount of the proceeds of the life insurance policy as set forth in Exhibit A.
2. This Amendment may be executed in multiple counterparts, each
of which shall be deemed to be an original, but all of which
shall be one and the same document.
3. This Amendment shall be governed and construed in accordance
with the laws of the State of Nevada.
4. Except as otherwise set forth herein, the Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the Parties hereto have duly executed this
Amendment to Repurchase Agreement as of the date first above written.
THE COMPANY
NEW DIRECTIONS MANUFACTURING, INC.
A Nevada corporation
/s/ Donald A. Metke
-------------------
BY: Donald A. Metke
ITS: President
THE SHAREHOLDERS
[As set forth in Exhibit A]
<PAGE> 2
EXHIBIT A
SHAREHOLDERS
<TABLE>
<CAPTION>
AMOUNT OF
SHAREHOLDER NAME SHAREHOLDER SIGNATURE LIFE INSURANCE POLICY
---------------- --------------------- ---------------------
<S> <C> <C>
Donald A. Metke /s/ Donald A. Metke $510,000
---------------------
SPOUSAL CONSENT:
Joanne B. Metke /s/ Joanne B. Metke
---------------------
Jack Horner, Jr. /s/ Jack Horner, Jr. $510,000
---------------------
SPOUSAL CONSENT:
Leslie Horner /s/ Leslie Horner
---------------------
Sean F. Lee /s/ Sean F. Lee $1,410,000
---------------------
SPOUSAL CONSENT:
Lee Family Limited Partnership /s/ Janet H. Lee
---------------------
</TABLE>
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
10-QSB OF NEW DIRECTIONS MANUFACTURING, INC. FOR THE 3 MONTHS AND 6 MONTHS
PERIODS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 65,460
<SECURITIES> 0
<RECEIVABLES> 821,562
<ALLOWANCES> 41,188
<INVENTORY> 355,844
<CURRENT-ASSETS> 1,232,628
<PP&E> 575,505
<DEPRECIATION> 107,491
<TOTAL-ASSETS> 2,816,374
<CURRENT-LIABILITIES> 805,057
<BONDS> 0
0
0
<COMMON> 5,052
<OTHER-SE> 1,719,535
<TOTAL-LIABILITY-AND-EQUITY> 2,816,374
<SALES> 2,999,421
<TOTAL-REVENUES> 2,999,421
<CGS> 2,656,683
<TOTAL-COSTS> 2,656,683
<OTHER-EXPENSES> 484,320
<LOSS-PROVISION> 12,000
<INTEREST-EXPENSE> 27,387
<INCOME-PRETAX> (166,624)
<INCOME-TAX> (67,000)
<INCOME-CONTINUING> (99,624)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (99,624)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
