UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
( ) 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 0-16055
NATIONAL MANUFACTURING TECHNOLOGIES, INC.
(FORMERLY PHOTOMATRIX, INC.)
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3267788
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(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
1958 KELLOGG AVE., CARLSBAD, CALIFORNIA 92008
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(Address of principal executive offices) (Zip Code)
(760) 431-4999
--------------
(Registrant'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 Exchange Act 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
--
At October 24, 2000, 11,846,000 shares of Common Stock of National Manufacturing
--------------------------------------------------------------------------------
Technologies, Inc., were outstanding.
Transitional Small Business Disclosure Format.
Yes No X
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INDEX
NATIONAL MANUFACTURING TECHNOLOGIES, INC.
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PART I - FINANCIAL INFORMATION
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ITEM 1: FINANCIAL STATEMENTS
Consolidated balance sheets as of September 30, 2000 (unaudited) and March 31, 2000 2
Unaudited consolidated statements of operations for the three and six months
ended September 30, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited consolidated statements of cash flows for the six months ended
September 30, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Unaudited notes to consolidated financial statements . . . . . . . . . . . . . . . . 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II - OTHER INFORMATION
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ITEM 1: LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 2: CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 3: DEFAULT UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . 17
ITEM 5: OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
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NATIONAL MANUFACTURING TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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SEPTEMBER 30, 2000
ASSETS (UNAUDITED) MARCH 31, 2000
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Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . $ 123,000 $ 101,000
Accounts receivable, net of allowance
of $581,000 and $584,000. . . . . . . . . . . . 4,703,000 2,450,000
Inventories. . . . . . . . . . . . . . . . . . . . . 2,982,000 1,254,000
Prepaid expenses and other . . . . . . . . . . . . . 223,000 31,000
-------------------- ----------------
Total current assets. . . . . . . . . . . . . . 8,031,000 3,836,000
Property and equipment, net. . . . . . . . . . . . . . 5,483,000 4,638,000
Goodwill, net. . . . . . . . . . . . . . . . . . . . . 3,352,000 2,373,000
Other assets . . . . . . . .. . . . . . . . . . . . . 217,000 12,000
-------------------- ----------------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 17,083,000 $ 10,859,000
==================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . $ 2,712,000 $ 1,624,000
Accrued liabilities . . . . . . . . . . . . . . . . 2,050,000 1,441,000
Credit facility . . . . . . . . . . . . . . . . . . 3,851,000 2,368,000
Net liabilities of discontinued operations. . . . . 378,000 911,000
Current maturities of long-term debt. . . . . . . . 446,000 547,000
-------------------- ----------------
Total current liabilities . . . . . . . . . . . 9,437,000 6,891,000
Other long-term liabilities. . . . . . . . . . . . . . 707,000 557,000
Long-term debt . . . . . . . . . . . . . . . . . . . . 4,286,000 3,563,000
-------------------- ----------------
Total liabilities. . . . . . . . . . . . . . . . . . . 14,430,000 11,011,000
-------------------- ----------------
Shareholders' equity:
Preferred Stock, no par value; 3,173,000 shares
Authorized, no shares issued and outstanding . -- --
Common stock, no par value; 30 million shares
Authorized and 11,827,000 and 10,114,000 shares
issued and outstanding, respectively. . . . . . 22,488,000 21,449,000
Additional paid-in capital. . . . . . . . . . . . . 805,000 166,000
Accumulated deficit . . . . . . . . . . . . . . . . (20,640,000) (21,767,000)
-------------------- ----------------
Total shareholders' equity. . . . . . . . . . . 2,653,000 (152,000)
-------------------- ----------------
$ 17,083,000 $ 10,859,000
==================== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NATIONAL MANUFACTURING TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2000 1999 2000 1999
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Revenues . . . . . . . . . . . . . . . . . . . . $ 5,887,000 $ 2,491,000 $10,901,000 $ 4,244,000
Cost of revenues . . . . . . . . . . . . . . . . 3,871,000 1,804,000 7,247,000 2,950,000
-------------- -------------- ------------ ------------
Gross profit
2,016,000 687,000 3,654,000 1,294,000
Selling, general and administrative expenses. 1,491,000 1,195,000 2,835,000 2,653,000
-------------- -------------- ------------ ------------
Operating income/(loss). . . . . . . . . . . . . 524,000 (508,000) 819,000 (1,359,000)
-------------- -------------- ------------ ------------
Other income/(expense), net. . . . . . . . . . . (127,000) 67,000 (198,000) (9,000)
-------------- -------------- ------------ ------------
Income/(loss) from continuing operations
before income taxes. . . . . . . . . . . . . 397,000 (441,000) 621,000 (1,368,000)
Provision for income taxes . . . . . . . . . . . -- -- -- --
-------------- -------------- ------------ ------------
Income/(loss) from continuing operations . . . . 397,000 (441,000) 621,000 (1,368,000)
Income from discontinued operations. . . . . . . 32,000 371,000 507,000 761,000
-------------- -------------- ------------ ------------
Net income/(loss). . . . . . . . . . . . . . . . $ 429,000 $ (70,000) $ 1,128,000 $ (607,000)
============== ============== ============ ============
Basic net income/(loss) per share:
Continuing operations . . . . . . . . . . . . $ 0.04 $ (0.04) $ 0.06 $ (0.14)
Discontinued operations . . . . . . . . . . . $ -- $ 0.03 $ 0.05 $ 0.08
-------------- -------------- ------------ ------------
Net income/(loss) . . . . . . . . . . . . . . $ 0.04 $ (0.01) $ 0.11 $ (0.06)
============== ============== ============ ============
Basic weighted average number of common
Shares outstanding . . . . . . . . . . . . . 10,823,000 9,922,000 10,535,000 9,918,000
============== ============== ============ ============
Diluted net income/(loss) per share:
Continuing operations . . . . . . . . . . . . $ 0.03 $ (0.04) $ 0.05 $ (0.14)
Discontinued operations . . . . . . . . . . . $ -- $ 0.03 $ 0.04 $ 0.08
-------------- -------------- ------------ ------------
Net income/(loss) . . . . . . . . . . . . . . $ 0.03 $ (0.01) $ 0.09 $ (0.06)
============== ============== ============ ============
Diluted weighted average number of common
shares outstanding. . . . . . . . . . . . . . 12,718,000 9,922,000 12,576,000 9,918,000
============== ============== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
NATIONAL MANUFACTURING TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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SIX MONTHS ENDED SEPTEMBER 30
2000 1999
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Cash flows from operating activities:
Net income/(loss): . . . . . . . . . . . . . . . . . . . . . . . $ 1,128,000 $ (607,000)
Net income from discontinued operations. . . . . . . . . . . . . 507,000 761,000
------------ ------------
Net income/(loss) from continuing operations . . . . . . . . . . 621,000 (1,368,000)
Adjustments:
Depreciation and amortization. . . . . . . . . . . . . . . 259,000 87,000
Amortization of goodwill . . . . . . . . . . . . . . . . . 80,000 38,000
Provision for doubtful accounts. . . . . . . . . . . . . . (3,000) 54,000
Provision for inventory. . . . . . . . . . . . . . . . . . -- 8,000
Options issued for compensation. . . . . . . . . . . . . . 5,000 8,000
Changes in assets and liabilities, net of assets acquired:
Accounts receivable . . . . . . . . . . . . . . . . . . (2,250,000) (207,000)
Inventories . . . . . . . . . . . . . . . . . . . . . . (1,728,000) (263,000)
Prepaid expenses and current assets . . . . . . . . . . (111,000) (53,000)
Intangibles . . . . . . . . . . . . . . . . . . . . . . -- (113,000)
Other assets. . . . . . . . . . . . . . . . . . . . . . -- 50,000
Accounts payable. . . . . . . . . . . . . . . . . . . . 1,088,000 (385,000)
Accrued liabilities . . . . . . . . . . . . . . . . . . 609,000 28,000
Other long-term liabilities . . . . . . . . . . . . . . 150,000 --
------------ ------------
Cash used in continuing operations . . . . . . . . . . . . . (1,280,000) (2,116,000)
Cash provided by (used in) discontinued operations . . . . . (27,000) 2,432,000
------------ ------------
Cash provided by (used in) operations. . . . . . . . . . . . . . (1,307,000) 316,000
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . . . (1,105,000) (16,000)
Costs of acquisitions. . . . . . . . . . . . . . . . . . . . (234,000) --
------------ ------------
Cash provided by (used in) investing activities. . . . . . . . . (1,339,000) (16,000)
------------ ------------
Cash flows from financing activities:
Borrowings (payments) under credit facility and long-term debt . 2,454,000 (662,000)
Cash received for the issuance of stock. . . . . . . . . . . . . 214,000 24,000
Proceeds from sale of land and building. . . . . . . . . . . . . -- 651,000
------------ ------------
Cash provided by (used in) financing activities. . . . . . . . . 2,668,000 13,000
------------ ------------
Increase in cash. . . . . . . . . . . . . . . . . . . . . . . . $ 22,000 $ 313,000
Cash at beginning of period. . . . . . . . . . . . . . . . . . . 101,000 42,000
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Cash at end of period. . . . . . . . . . . . . . . . . . . . . . $ 123,000 $ 355,000
============ ============
Supplemental disclosure of non-cash investing and financing
activities:
Goodwill - issuance of acquisition common stock. . . . . . . . $ 825,000 --
Common stock issued. . . . . . . . . . . . . . . . . . . . . . $ 825,000 --
Warrants issued in exchange for long-term debt reduction . . . $ 833,000 --
Long-term debt reduction . . . . . . . . . . . . . . . . . . . $ 833,000 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NATIONAL MANUFACTURING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND MARCH 31, 2000 AND
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
1. GENERAL
Basis of Presentation
-----------------------
The accompanying unaudited consolidated financial statements reflect the
accounts of National Manufacturing Technologies, Inc. (formerly Photomatrix,
Inc.; the "Company"), together with its subsidiaries. The Company is a
value-added manufacturing company, specializing in the manufacture of enclosed
electronic systems and their various component assemblies. On June 5, 1998, the
Company acquired I-PAC Manufacturing, Inc. ("I-PAC"). On July 1, 1998, the
Company acquired the assets and business of MGM Techrep, Inc., and formed PHRX
Rep Co. On November 27, 1998, the Company acquired certain assets and the
business operations of Amcraft and incorporated the operations as I-PAC
Precision Machining, Inc. On December 18, 1998, the Company acquired certain
assets and the business operations of Greene International West, Inc. and
incorporated the operations as National Metal Technologies, Inc. ("NMT"). On
August 17, 2000, the Company acquired certain assets and business operations
previously owned by a precision sheet metal and enclosure manufacturer. These
assets were acquired from that previous company's secured lender. On August 18,
2000, the Company then initiated its precision sheet metal and enclosure
business. All acquisitions were treated as purchases for accounting and
financial reporting purposes. Under the purchase method of accounting, the
results of operations of the acquired companies are combined with those of the
Company from the date of acquisition. In addition, on June 21, 1999, the
Company sold product rights and certain assets of its document scanner
operations to Scan-Optics, Inc. Accordingly, operational results of the scanner
operations have been reclassified as discontinued operations for the respective
periods presented herein. The balance sheets of the scanner operations have
similarly been reclassified as net assets (liabilities) of discontinued
operations. All significant intercompany transactions and balances have been
eliminated.
Certain information and disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to prevent the
information from being misleading. These unaudited consolidated financial
statements reflect, in the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present the Company's results of
operations and financial position as of the dates and for the periods presented.
These unaudited consolidated financial statements should be read in conjunction
with the audited financial statements and related notes included in the
Company's Report on Form 10-KSB filed with the Securities and Exchange
Commission for the year ended March 31, 2000. The results for the interim
periods presented are not necessarily indicative of results to be expected for a
full year.
The Company's accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in the Company's Form
10-KSB, for the year ended March 31, 2000, the Company has experienced recurring
losses in prior years and has a working capital deficiency on its balance sheet.
The Company believes that the three and six months ended September 30, 2000, are
indicative of operating results that are required to continue as a going
concern. For the quarter ended September 30, 2000, the Company reported income
from continuing operations of $397,000 as compared to a net loss of $441,000
from continuing operations for the quarter ended September 30, 1999. For the
six months ended September 30, 2000, the Company reported income from continuing
operations before income taxes of $621,000 as compared to a net loss of
$1,368,000 from continuing operations before income taxes for the six months
ended September 30, 1999. In addition, the Company's balance sheet as of
September 30, 2000 reflects positive shareholder's equity of $2,653,000 as
compared to a shareholder's deficit as of March 31, 2000 of $152,000.
2. CREDIT FACILITY
On June 18, 1999, the Company entered into a $1,500,000 credit facility with its
primary lender that included a $1,200,000 accounts receivable ("A/R") line of
credit and a $300,000 term loan. Under the terms of this agreement, total
borrowings under the line of credit were limited to the lesser of $1,200,000 or
80% of eligible accounts receivable (as defined under the agreement). In
December 1999, the A/R line was increased to $2,000,000, and inventory
facilities totaling $650,000 were added to the existing A/R financing line.
Total borrowings under the inventory line is limited to the lesser of $300,000
or 70% of the cost of eligible metal inventory (as defined under the agreement),
and the lesser of $350,000 or 35% of eligible electronics inventory (as defined
under the agreement). In June 2000, the A/R line was increased to $3,000,000.
In August 2000, the A/R line increased to $3,200,000 and again in October to
$3,500,000.
Outstanding borrowings are collateralized by primarily all of the Company's
assets. The line of credit expires on June 18, 2002. The balance outstanding
as of October 30, 2000 was $2,935,000 on the A/R line, and $631,000 on the
inventory line. The line of credit accrues interest on outstanding borrowings
at the bank's prime rate plus 4% per annum.
On August 14, 2000, the Company became obligated to its primary lender under a
$1,500,000 term loan, which bears interest at prime plus four (4%) per annum and
requires twenty-one principal payments of $31,200, with a final lump sum payment
due on June 15, 2002. This term loan was used to fund the asset acquisition of
the new Enclosure and Sheet Metal business (see Note 10), to buy out one
existing capital lease and to pay off the $300,000 term loan . As of October
31, 2000 the balance outstanding of this term loan was $1,438,000.
On July 6, 2000, in consideration for the A/R line increase in June 2000 and the
$1,500,000 term loan, the Company issued a Warrant to purchase common stock to
its primary lender. The Warrant allows the holder to purchase 200,000 shares of
the Company's common stock at a price of $1.43 per share; the Warrant expires on
October 28, 2001.
3. DEBT/EQUITY EXCHANGE
In December 1998, NMT became obligated under a five-year note, payable to Green
International West ("GIW") in conjunction with the acquisition of the metal
stamping operation, in the amount of $350,000, bearing interest at 8%. In
addition, NMT entered into a capital lease for the purchase of GIW equipment,
with an option to purchase the equipment for $490,000 at the end of the one-year
period. The Company exercised its option to purchase this equipment on December
1, 1999 and became obligated, to GIW, under a four year note in the amount of
$490,000 which bears interest at 8%.
In the quarter ended September 30, 2000, GIW and the Company completed
negotiations to re-schedule the notes described above and to exchange a portion
of the debt for equity. On August 17, 2000, GIW was granted a Warrant to
purchase 400,000 shares of the Company's common stock at a price of $1.37 per
share. The Warrant was exercised the same day at a cost of $548,000. The
Company accepted $200,000 of the cost to exercise in the form of a short-term
recourse note receivable due to NMT from GIW maturing on March 31, 2001. The
remaining $348,000 of the cost to exercise was applied to the outstanding
principal of the $350,000 and $490,000 notes discussed above. This resulted in
the rescheduling of the final payment to April 2003. As of October 30, 2000,
the remaining principal balance of the two notes totaled $362,000.
GIW also agreed to take a subordinate position on the equipment acquired at the
time of the original transaction with GIW and in return the Company granted GIW
a Warrant to purchase 100,000 shares of common stock at an exercise price of
$1.438 or at a price to be adjusted at exercise if the stock price is not $2.00
at July 6, 2002. This subordination allowed the Company to secure additional
financing against that equipment as collateral.
<PAGE>
4. SEGMENT INFORMATION
NMT is an Electronic Manufacturing Services ("EMS") company. The Company's
operations are managed by divisions which offer complementary manufacturing
services. These two reportable business segments are Electronic Interconnect
Manufacturing Services ("EI") and Enclosure and Metal Fabrication Manufacturing
Services ("EMF") In conjunction with addition of the enclosure and sheet metal
business in August 2000, the Company renamed its segments to be more
representative of types of manufacturing services each segment provides. The EI
segment manufactures and sells printed circuit board assemblies, and wire and
cable harnesses. The EMF segment manufactures electronic enclosures and other
sheet metal, machined and stamped metal products, as well as secondary
processing services, including phosphate, anodizing and heat treat services.
In evaluating financial performance, management focuses on operating income as a
measure of profit or loss. Operating income is before interest expense, interest
income and income tax expense. Other includes corporate expenses, charges that
do not relate to current operations, divested operations and inter-company
elimination. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The following
table summarizes financial information by business segment from continuing
operations.
<TABLE>
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THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------ ---------------- ----------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------- -------------------- -------------------- --------------------
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REVENUE:
EI. . . . . . . $ 4,236 $ 1,818 $ 7,763 $ 2,697
EMF . . . . . . 1,651 673 3,138 1,547
Other . . . . . -- -- -- --
------------------- -------------------- -------------------- --------------------
Total . . . . . $ 5,887 $ 2,491 $ 10,901 $ 4,244
=================== ==================== ==================== ====================
SEGMENT OPERATING
PROFIT (LOSS):
EI. . . . . . . $ 487 $ (136) $ 1,037 $ (530)
EMF . . . . . . 5 (363) (185) (889)
Other . . . . . 32 (9) (33) 60
------------------- -------------------- -------------------- --------------------
Total . . . . . $ 524 $ (508) $ 819 $ (1,359)
=================== ==================== ==================== ====================
</TABLE>
5. COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components. SFAS No. 130 requires the cumulative
translation adjustment to be included as a component of comprehensive income
(loss) in addition to net income (loss) for the period. The Company had no
components of comprehensive income during the periods presented.
6. INCOME TAXES
The Company's effective tax rate differs from the statutory tax rate due to
valuation allowances on deferred tax assets.
7. BASIC AND DILUTED INCOME (LOSS) PER SHARE
In December 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
supersedes APB No. 15 and replaces "primary" and "fully diluted" earnings per
share ("EPS") under Accounting Principles Board ("APB") Opinion No. 15 with
"basic" and "diluted" EPS. Unlike primary EPS, basic EPS excludes the dilutive
effects of options, warrants and other convertible securities. The weighted
average number of common shares outstanding used in computing basic EPS was
10,832,000 and 9,922,000, in the second quarters of fiscal years 2000 and 1999,
respectively and 10,535,000 and 9,918,000, in the six months periods ended
September 30, 2000 and 1999, respectively. Diluted EPS reflects the potential
dilution of securities that could share in the earnings of the Company, similar
to fully diluted EPS. Incremental shares from assumed conversions of options and
warrants representing approximately 1,585,000 shares and 1,473,000 were used in
computations of diluted earnings per share for the three months and six months
ended September 30, 2000, respectively. For the three and six months ended
September 30, 1999, options and warrants to purchase approximately 2,182,000
shares were not used in computations of diluted earnings per share because their
effect was anti-dilutive. For the three month and six months ended September
30, 2000, outstanding options and warrants for the purchase of approximately
391,000 and 466,000 shares, respectively, were not used in computations of
diluted earnings per share because they were priced above the average market
value for the three month and six months ending September 30, 2000.
8. DISCONTINUED OPERATIONS
Photomatrix Imaging, Inc. and Photomatrix, Ltd.
----------------------------------------------------
On March 2, 1999, the Company approved a plan to sell certain product rights,
assets and liabilities of Photomatrix Imaging, Inc. ("Imaging") and its
wholly-owned subsidiary, Photomatrix, Ltd. ("Ltd."). On June 21, 1999, the
Company completed the transaction whereby it sold product rights and certain
assets of its document scanner operations to Scan-Optics, Inc of Manchester,
Connecticut ("Scan-Optics"). Under the terms of the agreement, Scan-Optics paid
the Company approximately $2,100,000 in cash to acquire all receivables,
inventory and certain equipment. Scan-Optics also assumed nearly $2 million of
current and future liabilities of Imaging and Ltd. Scan-Optics also assumed
lease commitments associated with the Company's engineering facilities located
in Chandler, Arizona, as well as its facilities in Great Britain. In addition,
Scan-Optics agreed to pay certain royalties, not to exceed $250,000 over a
three-year period, and also entered into a Transition Agreement and a five year
Manufacturing Agreement, under which Imaging will continue to manufacture
document scanner parts for Scan-Optics. Proceeds from this sale were used to
reduce short-term debt and provide working capital to the Company. The
purchase price was subject to adjustment based upon certain additional due
diligence to be completed by Scan-Optics within ninety days. There was no
subsequent adjustment. Current and prior period balances have been reclassified
to present Imaging and Ltd., as a discontinued operation.
Lexia Systems, Inc.
---------------------
During fiscal 1997, the Company sold its court reporting business (Xscribe Legal
Systems, Inc.) and discontinued Lexia Systems, Inc. Of the total liabilities
related to Lexia Systems, Inc. $457,000 is related to accounts payable and
unpaid rent claims to International Computers Limited, Inc. ("ICL"). Current
year income from discontinued operations included $457,000 for the write-off of
accounts payable and unpaid rent claims of ICL which had been carried on Lexia's
books. Lexia had disputed these liabilities with respect to ICL in light of its
own offsetting claims and defenses. The legal statute of limitations on these
ICL claims expired in the quarter ended June 30, 2000.
9. ACQUISITION OF SHEET METAL AND ENCLOSURE MANUFACTURING ASSETS
On August 17, 2000, the Company acquired certain assets and business operations
previously owned by a precision sheet metal and enclosure manufacturer. These
assets were acquired from that previous company's secured lender. On August 18,
2000, the Company then initiated its precision sheet metal and enclosure
business. The cost of the asset and business operations acquisition was
approximately $1,011,000 and was financed by partial use of a term loan in the
amount $1,500,000 from the Company's primary lender (see Note 2). This term
loan bears interest at prime plus four (4%) per annum, requires twenty-one
monthly payments of $31,200, with lump sum payment due on June 15, 2002. The
Company also entered into a three month sublease for a 58,000 square foot
facility in Vista, CA., which provides for monthly rental payments of $20,000.
The Company has signed a letter of agreement with the lessor which would call
for a long-term lease that would provide for base rent of $29,000 per month and
expire on June 30, 2008. The Company recorded additional costs related to the
transaction of $171,000 in intangible assets which is being amortized over a
twenty year period.
10. ACQUISITION OF I-PAC MANUFACTURING, INC.
On March 16, 1998, the Company entered into an Agreement and Plan of Merger and
Reorganization with I-PAC Manufacturing, Inc. The Agreement was approved by the
shareholders of the Company on June 5, 1998, and the transaction closed on June
11, 1998. As a result of the Merger, the 8,500 outstanding shares of I-PAC
common stock were exchanged for 4,848,000 shares of The Company's Common Stock
and possibly additional 4,652,000 shares of the Company's common stock in the
event that I-PAC achieved certain performance milestones during a twelve month
period commencing on July 1, 1998 or outstanding options to purchase the
Company's common stock are exercised.
If any performance milestones are met, the issuance of additional shares awarded
to I-PAC shareholders under the earn-out formula and/or in connection with the
exercise of the Company's outstanding options and warrants will be treated as
additional costs of the acquired enterprise and amortized accordingly over the
benefit period. Per the terms of the Merger a stock option exercise of a
pre-merger stock option triggers the issuance of additional common shares to the
I-PAC Shareholders (the I-PAC Shareholders are Patrick W. Moore, the Company's
President, Chief Executive Officer, Chairman of the Board and major shareholder,
William L. Grivas, a major shareholder, James P. Hill, a director and major
shareholder and Michael Moore, a director), allocated among them in proportion
to their ownership of I-PAC shares as of the closing date of the Merger. During
the quarter ended September 30, 2000, 423,330 shares were issued to the former
I-PAC shareholders in relation to the exercise of pre-merger stock options. As
of October 15, 2000, a total of 644,994 shares have been issued to the former
I-PAC shareholders in relation to the exercise of pre-merger stock options and
97,749 pre-merger options and warrants remain outstanding which, if exercised,
would result in additional issuances of shares to the former I-PAC shareholders.
The Merger was accounted for as a purchase of I-PAC by the Company for
accounting and financial reporting purposes. Under the purchase method of
accounting, upon closing of the Merger, I-PAC's results of operations were
combined with those of the Company, and I-PAC's assets and liabilities were
recorded on the Company's books at their respective fair values. The purchase
price, amounting to $2,191,000, was comprised of the value of the stock plus
acquisition costs and was allocated among the assets acquired and the
liabilities assumed. The issuance of additional shares awarded to I-PAC
shareholders under the earn-out formula and/or in connection with the exercise
of the Company's outstanding options and warrants are treated in accordance with
APB 16, in that any additional shares are treated as additional costs of the
acquired enterprise and amortized accordingly over the benefit period. The
$2,200,000 excess of the purchase price over the fair value of I-PAC's net
assets is amortized over a twenty year period. As of October 24, 2000, the
Company is currently reviewing, but has not yet made a determination as to
whether any performance milestones have been achieved.
11. RELATED PARTY TRANSACTIONS
During the quarter ended September 30, 2000, the Company recorded approximately
$10,000 of goodwill related to earn out accruals from the July 1, 1998
acquisition of MGM Techrep, Inc., (a company previously owned by Patrick W.
Moore, National Manufacturing Technologies' President, Chief Executive Officer,
Chairman of the Board and major shareholder, William L. Grivas, a major
shareholder, and James P. Hill, a director and major shareholder) as compared to
$10,000 in the quarter ended September 30, 1999. During the quarter ended
September 30, 2000 the Company paid approximately $11,000 of these earn out
accruals as compared to $18,900 during the quarter ended September 30, 1999. At
September 30, 2000 the Company had approximately $5,000 in earn out payments due
to MGM.
During the quarter ended September 30, 2000 the Company did not pay anything to
Sullivan, Hill, Lewin, Rez, and Engle ("SHLRE") a law firm in which James P.
Hill, a director and major shareholder, is a partner, as compared to $70,000
during the quarter ended September 30, 1999. In the quarter ended September 30,
2000, the Company paid approximately $7,000 to R. P. Hill and Lucy Hill, James
P. Hill's parents, for the letter of credit they posted in the amount of
$275,000 which guarantees the capitalized lease payment on the 1958 Kellogg
facility; final interest payment is due on July 2, 2003.
On October 1, 1999, the Company entered into a contract agreement with William
L. Grivas, Sr., a major shareholder, whereby Mr. Grivas would represent the
Company in connection with selling or bartering certain inventory and
negotiating settlements of certain of the Company's liabilities. Under this
consulting agreement, Mr. Grivas was paid $42,000 during the quarter ended
September 30, 2000.
The Company recorded $711,000 and $719,000 in purchases for the three and six
months ended September 30, 2000 from Epitech, Inc., a company whose officers and
directors include William L. Grivas and Brian Kissinger (a director), for
materials and services. The company paid approximately $155,000 to Epitech and
had an accounts payable balance of approximately $564,000 as of September 30,
2000. In addition, the Company recorded revenues from Epitech for $129,000 and
$147,000 for the three and six months ended September 30, 2000 respectively.
The Company received payments of $113,000 and had an accounts receivable balance
of approximately $34,000 as of September 30, 2000.
During the quarter ended June 30, 2000, the Compensation Committee approved an
agreement with Jim Hill whereas Mr. Hill would provide consulting services to
the Company on certain pending business transactions outside of the normal scope
of services of a director. Mr. Hill was paid $7,500 and $14,000 for these
services in the three and six months ended September 30, 2000, respectively.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS
RELATING TO THE COMPANY'S PLANS AND OBJECTIVES FOR FUTURE OPERATIONS INCLUDING
ACQUIRING OTHER BUSINESSES, INCREASING SALES AND IMPROVING MARGINS, ASSUMPTIONS
AND STATEMENTS RELATING TO THE COMPANY'S FUTURE ECONOMIC PERFORMANCE AND OTHER
NON-HISTORICAL INFORMATION. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, WITHOUT LIMITATION, THOSE RISKS DISCUSSED UNDER THE
HEADING "ADDITIONAL RISK FACTORS" AS WELL AS OTHER FACTORS AS DISCUSSED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH 31, 2000.
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and unaudited notes to consolidated financial statements included
elsewhere herein.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Continuing Operations
----------------------
Consolidated revenues for the quarter ended September 30, 2000 increased
approximately $3,396,000 or 136.3% to $5,887,000 from $2,491,000 for the quarter
ended September 30, 1999. The Electronics Interconnect Manufacturing Services
Group ("EI") revenue increased $2,418,000 or 133.0 % to $4,236,000 from
$1,818,000 for the quarter ended September 30, 1999. The Enclosure and Metal
Fabrication Manufacturing Services Group ("EMF") revenue increased $978,000 or
145.3% to $1,651,000 from $673,000 for the quarter ended September 30, 1999.
The increase in the EI Group revenue is the result of an expanding customer base
and increased demand from existing customers, which is expected to continue.
The increase in the EMF Group is the result of the addition of the sheet metal
and enclosure operation and expanded shipments for the metal stamping facility.
Consolidated gross margin for the quarter ended September 30, 2000 increased
$1,329,000 or 193.4% to $2,016,000 from $687,000 for the quarter ended September
30, 1999. This increase is primarily attributable to higher sales volume in
both the EI and EMF Group. Total gross margin as a percent of revenues
increased 6.6% to 34.2% for the three months ended September 30, 2000 as
compared to 27.6% for the three months ended September 30, 1999. The current
quarter amount is comprised of approximately $1,246,000 or 29.4% of EI gross
margin, an increase of $729,000 compared with $517,000 or 28.4% for the quarter
ended September 30, 1999. The EMF group gross margin increased $600,000 to
$770,000 or 46.6% as compared with $170,000 or 25.3% for the quarter ended
September 30, 1999. The consolidated gross margin represents an amount
considered by management to be expected under normal operating conditions.
Consolidated selling, general, and administrative ("SG&A") expenses for the
quarter ended September 30, 2000 increased $296,000 or 24.8% to approximately
$1,491,000 from $1,195,000 for the quarter ended September 30, 1999. This
amount is comprised of approximately $383,000 of corporate SG&A expenses as
compared to $375,000 in the quarter ended September 30, 1999. EI group SG&A
expenses were $457,000, as compared to $390,000 in the quarter ended September
30, 1999 and EMF group expenses were $651,000 as compared to $430,000 for the
quarter ended September 30, 1999. The increases in SG&A expense at the group
levels were mainly due to the acquisition of the sheet metal and enclosure
operation as well as the addition of staff to support the increased level of
revenues.
Consolidated operating profit for the quarter ended September 30, 2000 increased
$1,032,000 or 203.1% to an operating profit of $524,000, or 8.9%, from an
operating loss of $508,000, or (20.4%), for the quarter ended September 30,
1999. This increase is due to strong revenue growth concentrated in the EI
group and new revenue growth created by the acquisition of the sheet metal and
enclosure operation in the EMF group.
Consolidated other expense for the quarter ended September 30, 2000 totaled
approximately $127,000 compared to other income of $67,000 for the quarter ended
September 30, 1999. It was comprised primarily of interest expense of $369,000
as compared to $42,000 for the quarter ended September 30, 1999, and other
income of $242,000 as compared to $109,000 for the quarter ended September 30,
1999. The other income resulted from accounts payable settlements in the amount
of $23,000, bad debt recovery of $188,000 and a gain on the sale of assets of
$31,000.
The net effect of the increases in revenues and the improved gross margins
resulted in a consolidated net income from continuing operations of $397,000, or
6.7%, or $0.04 basic and $0.03 diluted earnings per share for the quarter ended
September 30, 2000. This is an increase of $838,000 in net income or 190.0%
from the net loss from continuing operations from the same period in 1999 of
$441,000 ($0.04 per share).
Discontinued Operations
------------------------
On June 21, 1999, the Company closed the sale of its scanner operations to
Scan-Optics.
Current quarter income that is related to the discontinued scanner operation was
$32,000 as compared to $371,000 for the quarter ended September 30, 1999. The
current quarter income was related to a reduction of accrued liabilities for the
scanner operation that were not needed. The quarter ended September 30, 1999
income included $218,000 of inventory reserves related to the Photomatrix
scanner operation that were not required, $73,000 of accounts receivable
reserves for the Photomatrix scanner operation that were not required, $65,000
of accruals for estimated losses at Lexia that were not required and $15,000 of
miscellaneous accruals for the Photomatrix scanner operation that were not
required.
During fiscal 1997, the Company sold its court reporting business (Xscribe Legal
Systems, Inc.) and discontinued Lexia Systems, Inc. There is no current quarter
income related to Lexia Systems, Inc. Current year income from discontinued
operations included $457,000 for the write-off of accounts payable and unpaid
rent claims of ICL which had been carried on Lexia's books. Lexia had disputed
these liabilities with respect to ICL in light of its own offsetting claims and
defenses. The legal statute of limitations on these ICL claims expired during
the quarter ended June 30, 2000.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1999
Continuing Operations
----------------------
Consolidated revenues for the six months ended September 30, 2000 increased
approximately $6,657,000 or 156.9% to $10,901,000 from $4,244,000 for the six
months ended September 30, 1999. The Electronics Interconnect Manufacturing
Services Group ("EI") revenue increased $5,065,000 or 187.7 % to $7,763,000 from
$2,698,000 for the six months ended September 30, 1999. The Enclosure and Metal
Fabrication Manufacturing Services Group ("EMF") revenue increased $1,591,000 or
102.8% to $3,138,000 from $1,547,000 for the six months ended September 30,
1999. The increase in the EI Group revenue is the result of an expanding
customer base and increased demand from existing customers, which is expected to
continue. The increase in the EMF Group revenue is the result of the addition of
the sheet metal and enclosure operation and expanded shipments for the metal
stamping facility.
Consolidated gross margin for the six months ended September 30, 2000 increased
$2,360,000 or 182.4% to $3,654,000 from $1,294,000 for the six months ended
September 30, 1999. This increase is primarily attributable to higher sales
volume in both the EI and EMF Group. Total gross margin as a percent of
revenues increased 3.0% to 33.5% for the six months ended September 30, 2000 as
compared to 30.5% for the six months ended September 30, 1999. The current six
months amount is comprised of approximately $2,479,000 or 31.9% of EI gross
margin, an increase of $1,606,000 compared with $873,000 or 32.4% for the six
months ended September 30, 1999. The EMF group gross margin increased $754,000
to $1,175,000 or 37.4% as compared with $421,000 or 27.2% for the six months
ended September 30, 1999. The consolidated gross margin for the six months
ended September 30, 2000 represents an amount considered by management expected
under normal operating conditions.
Consolidated selling, general, and administrative ("SG&A") expenses for the six
months ended September 30, 2000 increased $182,000 or 6.9% to approximately
$2,835,000 from $2,653,000 for the six months ended September 30, 1999. This
amount is comprised of approximately $710,000 of corporate SG&A expenses as
compared to $1,019,000 in the six months ended September 30, 1999. The
decrease is mainly due to staff reductions which occurred as a result of the
sale of the scanner operations. EI group SG&A expenses were $957,000, as
compared to $774,000 in the six months ended September 30, 1999 and EMF group
SG&A expenses were $1,168,000 as compared to $860,000 for the six months ended
September 30, 1999. The increases in SG&A expense at the group levels were
mainly due to additional staff to support the increased level of revenues
created by an expanding customer base and the sheet metal and enclosure
acquisition.
Consolidated operating profit for the six months ended September 30, 2000
increased $2,178,000 or 160.3% from an operating loss of $1,359,000, or (32.0%),
to an operating profit of $819,000, or 7.5%, as compared to the six months ended
September 30, 1999. This increase is due to revenue growth in both the EI and
EMF groups. The EMF group also benefited from the acquisition of the sheet
metal and enclosure facility.
Consolidated other expense for the six months ended September 30, 2000 totaled
approximately $198,000 compared to an expense of $9,000 for the six months ended
September 30, 1999. It was comprised primarily of interest expense of $553,000
as compared to $152,000 for the six months ended September 30, 1999, and other
income of $355,000. The other income resulted from accounts payable settlements
in the amount of $95,000, bad debt recovery of $216,000, rental income of
$5,000, recognition of gain on the sale of assets of $35,000, and miscellaneous
income of $3,000.
The net effect of the increases in revenues resulted in a consolidated net
income from continuing operations of $621,000, or 5.7%, or $0.06 basic and $0.05
diluted earnings per share for the six months ended September 30, 2000. This is
an increase of $1,989,000 in net income from continuing operations or 145.4%
from the net loss from continuing operations from the same period in 1999 of
$1,368,000 ($0.14 per share). There was current year income from discontinued
operations of $507,000, or 4.7% as compared to $761,000, or 17.9% for the six
months ended September 30, 1999. The net result for the six months ended
September 30, 2000 was net income of $1,128,000, or 10.3%, an increase of 285.8%
as compared to a net loss of $607,000, or 14.3%, in the six months ended
September 30, 1999.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
RECENT AND FUTURE SOURCES OF AND DEMANDS ON LIQUIDITY AND CAPITAL RESOURCES
---------------------------------------------------------------------------
On June 18, 1999, the Company entered into a $1,500,000 credit facility with its
primary lender that included a $1,200,000 A/R line of credit and a $300,000 term
loan. Under the terms of this agreement, total borrowings under the line of
credit were limited to the lesser of $1,200,000 or 80% of eligible accounts
receivable (as defined under the agreement). In December 1999, the A/R line was
increased to $2,000,000, and inventory lines totaling $650,000 were added to the
existing line. In June 2000 the A/R line was increased to $3,000,000 to support
revenue growth and then increased to $3,500,000 in August 2000. Outstanding
borrowings are collateralized by primarily all of the Company's assets. Total
borrowings under the inventory line is limited to the lesser of $300,000 or 70%
of the cost of eligible metal inventory (as defined under the agreement) and the
lesser of $350,000 or 35% of eligible electronics inventory (as defined under
the agreement). The line of credit expires on June 18, 2002. The balance
outstanding, as of October 30, 2000 was $2,935,000 on the A/R line, and $631,000
on the inventory lines. The term loan of $300,000 was fully paid when the
company restructured its debt during the acquisition of the sheet metal and
enclosure operation (see below). The line of credit accrues interest on
outstanding borrowings at the bank's prime rate plus 4% per annum.
On August 14, 2000, the Company became obligated to its primary lender under a
$1,500,000 term loan, which bears interest at prime plus four (4%) per annum and
requires twenty-one principal payments of $31,200, with a final lump sum payment
due on June 15, 2002. This term loan was used to fund the asset acquisition of
the new Enclosure and Sheet Metal business and to buy out some existing capital
leases. It was also used to retire the debt on the then existing term loan of
$300,000. As of October 30, 2000 the balance remaining on the new term loan was
$1,438,000.
In December 1998, NMT became obligated under a five-year note, payable to Green
International West ("GIW"), in the amount of $350,000, bearing interest at 8%.
Future note payments may be made in a combination of National Manufacturing
Technologies stock and cash at the election of the parties. In addition, NMT
entered into a capital lease for the purchase of GIW equipment, with an option
to purchase the equipment for $490,000 at the end of the one-year period. The
first year rental payments under the equipment lease were satisfied with the
issuance of 25,000 shares of National Manufacturing Technologies common stock
valued at $2.00 per share. National Manufacturing Technologies agreed to price
protect the shares issued to GIW shareholders at a price of $2.00 per share, at
a point two years from the closing date, for these initial shares issued for the
first year's payments on the note and the equipment lease. The Company
exercised its option to purchase this equipment on December 1, 1999 and now is
obligated, to GIW, under a four year note in the amount of $490,000 which bears
interest at 8%. NMT also agreed to pay GIW certain royalties (1.75% of sales to
existing customers) over a three-year period, all royalties are payable in
common stock or cash, at the Company's election. As of March 31, 2000, a total
of 116,000 shares of common stock had been issued to GIW for the first 12 months
of royalty payments. On March 5, 2000, the agreement with GIW was modified so
that all future royalty payments to be payable in cash. To date the scheduled
note payments have been paid in cash.
In the quarter ended September 30, 2000, GIW and the Company completed
negotiations to re-schedule the notes described above and to exchange a portion
of the debt for equity. On August 17, 2000, GIW was granted a Warrant to
purchase 400,000 shares of the Company's common stock at a price of $1.37 per
share. The Warrant was exercised the same day at a cost of $548,000. The
Company accepted $200,000 of the cost to exercise in the form of a short-term
recourse note receivable due to NMT from GIW maturing on March 31, 2001. The
remaining $348,000 of the cost to exercise was applied to the outstanding
principal of the $350,000 and $490,000 notes discussed above. This resulted in
the rescheduling of the final payment to April 2003. As of August 16, 2000, the
remaining principal balance of the two notes totaled $362,000.
GIW also agreed to take a subordinate position on the equipment acquired at the
time of the original transaction with GIW and in return the Company granted GIW
a Warrant to purchase 100,000 shares of common stock at an exercise price of
$1.438 or at a price to be adjusted at exercise if the stock price is not $2.00
at July 6, 2002. This subordination allowed the Company to secure additional
financing against that equipment as collateral. In addition, the next royalty
payment due December 30, 2000, would be payable in stock in accordance with the
original terms of the agreement and the payment due June 30, 2001 could be
payable in cash or stock at GIW's election. Royalty payments thereafter will
return to be paid in cash only, in accordance with the amendment to the
agreement reached in March 2000.
The Company is also obligated under a series of notes payable totaling $240,000
as of September 30, 2000. These notes bear interest at a rate of 8% per annum
and matured in April 2000. Interest and principal payments totaling $16,000 are
due monthly. Since October 1998, the Company has made two payments on these
notes in July 1999 and August 1999. These notes are included in net liabilities
of discontinued operations.
The Company also has certain equipment notes in the aggregate amount of $29,000
as of September 30, 2000, with interest rates varying between 8% and 26.6% with
final payments due between 2001 and 2002. These notes are collateralized by
equipment. In addition, the Company also has certain capital leases in the
aggregate amount of $2,848,000 as of September 30, 2000 for the property at 1958
Kellogg, Carlsbad, CA. Combined, these leases call for minimum monthly payments
aggregating approximately $29,000 per month.
During September 1998, The Company's wholly owned subsidiary, Lexia Systems,
settled its outstanding dispute with Fujitsu. As a result, the Company reduced
its previously recorded liability of $340,000 to Fujitsu to $200,000 and began
making payments against this liability in November 1998 with the final payment
due to Fujitsu in September 1999. As of October 2000, the Company has made
payments totaling $25,000 since July 1999 on this liability which is currently
at a balance of $65,000. Lexia also has recorded liabilities reflecting
accounts payable and unpaid rent claims of International Computers Limited, Inc.
("ICL") and related entities in the amount of $457,000 at March 31, 2000. These
liabilities are included in current liabilities as net liabilities of
discontinued operations. In June 2000, the Company wrote-off the $457,000 of
accounts payable and unpaid rent claims of ICL which had been carried on Lexia's
books. Lexia had disputed these liabilities with respect to ICL in light of its
own offsetting claims and defenses. The legal statute of limitations on these
ICL claims has now expired.
The Company's sources of future short-term liquidity are its cash balance of
$123,000 as of September 30, 2000, and the unused amount of its $4.15 million
credit facility. $3.5 million of this credit facility is a line of credit
against eligible accounts receivable ("A/R line"). Additionally, $650,000 of
the credit facility can be used against eligible inventory. Availability under
the line of credit can be limited based upon the balance of eligible accounts
receivable as described above. Availability under the inventory lines of credit
can be limited based upon the balance of eligible metal inventory and
electronics inventory as described above. Increased limits for this line were
established in December 1999, June 2000, August 2000 and October 2000. The A/R
line was increased to $3.0 million from $2.0 million in June 2000, increased to
$3.2 million in August 2000 and increased to $3.5 million in October 2000.
Prior to that it was increased $2.0 million from $1.2 million in December 1999
to aid revenue growth in the both operating segments. The Company also expects
additional financing from the equipment re-financing transaction with GIW which
was discussed above; at this time, the Company does not have a reasonable
estimate of the dollar value of this potential financing.
The Company is currently obligated as a guarantor under an assignment agreement
of a lease. The amount is approximately $18,550 per month through September
2002. As of October 2000, the Company has not been required to pay any amounts
related to this guarantee. The Company is also obligated to pay approximately
$7,000 per month on various other leases. Aside from these commitments, the
Company has not made any material commitments.
In the first quarter of fiscal year 2001, current and former employees exercised
stock options to purchase a total of 244,164 shares of the Company's common
stock. These exercises in the first quarter of fiscal year 2001, provided
$86,584 in cash to the Company. In the second quarter of fiscal year 2001,
former employees exercised stock options for the purchase of 448,334 shares of
common stock for a total purchase price of $127,080.
The Company anticipates that its current cash position, revenue from operations,
favorable credit terms with several key vendors, funds from its existing line of
credit, and additional collateral financing that may be available to the
Company, will be sufficient to finance its working capital and capital
requirements for the next twelve months. However, the Company's capital
requirements may increase as a result of competitive and technological
developments and the terms and conditions of any future strategic transactions.
Although there can be no assurance that the Company will be able to raise
additional capital under favorable terms, if at all, the Company was successful
in negotiating an increase of $200,000 in its credit facility during the quarter
ended September 30, 2000. In October 2000, the Company was successful in
negotiating an additional increase of $300,000 in its credit facility.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In December 1999, the SEC released Staff Accounting Bulletin 101 ("SAB 101") ,
Revenue Recognition in Financial Statements. SAB 101 clarifies the SEC's views
related to revenue recognition and disclosure. SAB 101B was subsequently issued
in June, 2000, deferring the requirement to adopt the revised guidance until the
Company's quarter ended March 31, 2001. The Company does not expect adoption of
SAB 101 to have a material effect on its financial position or results of
operations.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions involving Stock Compensation." FIN 44 clarifies the
application of APB Opinion No. 25 regarding (a) the definition of employee for
purposes of applying APB Opinion No. 25, (b) the criteria for determining
whether a stock option plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions cover specific events that occur after either December
15, 1998, or January 12, 2000. The Company has adopted FIN 44 and it did not
have a material impact on its financial position or results of operations.
In March 2000, the Emerging Issues Task Force issued No. 00-02 ("EITF 00-02"),
"Accounting for Web Site Development Costs". EITF 00-02 states that all costs
relating to software used to operate a web site and relating to development of
initial graphics and web page design should be accounted for using Statement of
Position ("SOP") 98-1. Under this SOP, costs incurred in the preliminary project
stage should be expensed as incurred, as should most training and data
conversion costs. External direct costs of materials and services and internal
direct payroll-related costs should be capitalized once certain criteria are
met. EITF 00-02 is effective for all fiscal quarters beginning after June 30,
2000. The Company's has adopted EITF 00-02 and it did not have a material effect
on its financial position or results of operations.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities" ("SFAS 133") issued by the FASB is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS 133 provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. The Company has adopted
SFAS 133 and it did not have a material effect on its financial position or
results of operations.
<PAGE>
PART II - OTHER INFORMATION
-------------------------------
ITEM 1. LEGAL PROCEEDINGS
------------------
There are no material pending legal proceedings to which the Company
or any of its subsidiaries is a party or of which any of their properties
is the subject.
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. OTHER INFORMATION
------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------
a. Reports on Form 8-K
----------------------
None
b. Exhibits
--------
<TABLE>
<CAPTION>
<C> <S>
10.48.2 Warrant Exercise Agreement with Green International West dated August 17, 2000
10.57.1 First Amendment to Loan and Security Agreement with Celtic Capital dated December 15, 1999
10.57.2 Second Amendment to Loan and Security Agreement with Celtic Capital dated August 14, 2000
10.57.3 Third Amendment to Loan and Security Agreement with Celtic Capital dated October 16, 2000
10.57.4 $700,000 Term Note with Celtic Capital dated August 14, 2000
10.57.5 $800,000 Term Note with Celtic Capital dated August 14, 2000
10.71 Quitclaim Bill of Sale with Foothill Capital dated August 17, 2000
10.72 Warrant Agreement with Celtic Capital dated July 6, 2000
27 Financial Data Schedule
</TABLE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Issuer
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
NATIONAL MANUFACTURING TECHNOLOGIES, INC.
Date: November 13, 2000. . . . . . . . . . . . by /s/ Patrick W. Moore
--------------------------
Patrick W. Moore
Chairman, Chief Executive
Officer and President
Date: November 13, 2000. . . . . . . . . . . . by /s/ Larry Naritelli
--------------------------
Larry Naritelli
Controller
Principal Accounting Officer
