9
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 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 (IRS Employer Identification No.)
incorporation or organization)
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)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock
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 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
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information statement
incorporated hereby by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of May 31, 2000 based on the average of the highest and lowest
prices of such stock on that date was $6,743,000. The number of shares of
common stock of National Manufacturing Technologies, Inc outstanding as of May
31, 2000, was 10,275,000.
The issuer's revenues from continuing operations for the year ended March 31,
2000 totaled $9,677,000
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
This Annual Report 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, assumptions and
statements relating to the Company's future economic performance, management's
opinions about the competitive position of the Company's products, the ability
of the Company to compete successfully 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 in Item 6 under the heading "Additional Risk
Factors" as well as those discussed elsewhere in this Annual Report.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
National Manufacturing Technologies, Inc. (the "Company," or "NMT,") is a
value-added vertically integrated manufacturer of enclosed electronic systems
and their various sub-assembly components supplying original equipment customers
("OEMs") in aerospace, defense, power conversion, telecommunications, and fiber
channel storage industries We provide a wide range of integrated services
including, custom contract manufacturing of electrical and mechanical
assemblies, wire and cable harnesses, molded cables, as well as precision
machining, high speed metal stamping, metal treatment and processing and
complete box build assemblies, from our facilities located in Southern
California and Tijuana, Mexico.
On September 23, 1999 the Company's shareholders approved a change in the
name of the Company from Photomatrix, Inc. to National Manufacturing
Technologies, Inc. The Company changed its name to National Manufacturing
Technologies, Inc. to better reflect the Company's currently diverse vertically
integrated contract manufacturing business operations. The Company is a
California corporation which was originally incorporated in 1978 under the name
Xscribe Corporation. Today, the Company's headquarters are located in Carlsbad,
CA.
The Company has two reportable segments: the Electronics Group and the
Metals Group. Financial Information about these segments for the last two
fiscal years ended March 31, 2000, is set forth in Note 5 to the consolidated
financial statements included in this report and is incorporated herein by
reference.
MERGERS AND ACQUISITIONS
On June 5, 1998, the shareholders of NMT approved a merger ("Merger") with
I-PAC Manufacturing, Inc. ("I-PAC"). On July 1, 1998, the Company acquired
certain assets of MGM TechRep and formed PHRX Rep Co. ("Rep Co."), an outside
sales representative firm. On November 27, 1998, the Company acquired certain
assets of Amcraft, Inc. and formed I-PAC Precision Machining ("Precision
Machining"), a contract precision metal machining business. On December 18,
1998, the Company acquired certain assets of Greene International West and
formed National Metal Technologies ("NMT"), a contract metal stamping business.
On June 21, 1999, the Company sold certain assets and product rights of our
wholly owned subsidiary, Photomatrix Imaging, Inc. ("PMX") to Scan-Optics, Inc.
On September 17, 1999, the Company entered into an Asset Purchase Agreement
with Mirror USA and Espejomex, S.A. DE C.V. to acquire certain assets in
Tijuana, Mexico which were used by the Company's newly-created subsidiary,
Tecnologias Nacionales Manufactureras de Mexico. The new manufacturing facility
is located approximately five miles from the Otay Mesa border crossing in
Tijuana. The asset acquisition was a cash purchase.
For further information regarding the Company's acquisitions, please see
Note 3, "Acquisitions" in the Notes to consolidated financial statement, which
is included in this report and is incorporated herein by reference.
INDUSTRY OVERVIEW
The company operates in the contract electronics manufacturing or
electronic manufacturing services ("EMS") industry which provides program
management, technical and administrative support, and manufacturing expertise
required to take a product from the early design and prototype stages through
volume production and distribution. Over the past two decades, electronics
systems have become smaller, lighter and more reliable, while demands for
performance at lower costs have increased. The use of a contract manufacturer
allows an OEM to avoid large capital investments in plant, equipment and staff
and to concentrate instead on the areas of its greatest strength: innovation,
design and marketing.
According to Technology Forecasters, an EMS industry researcher and
consultant, the worldwide EMS industry is forecast to grow at a 25% compound
annual growth rate, from about $60 billion in 1998 to $150 billion in 2001. The
total available market for electronic enclosure industry, a subsector of the EMS
industry, which provides complete systems build is estimated to be $20 billion,
with less than 10% of the market served.
OEMs outsource their manufacturing requirements to EMS providers to:
Reduce Production Costs. EMS providers offer low cost manufacturing solutions
because of efficiencies associated with specialization and higher utilization of
capacity.
Accelerate Time to Market. In order to remain competitive in an environment
characterized by rapid technological advances and compressed product life
cycles, OEMs must accelerate the time required to bring a product to market. By
providing an established infrastructure and manufacturing expertise, EMS
providers can help OEMs shorten their product introduction cycles.
Access Advanced Technologies. Electronic products and electronic manufacturing
processes have become increasingly sophisticated and complex, making it
difficult for OEMs to maintain the manufacturing expertise required to remain
competitive.
Focus Resources. In the rapidly changing, increasingly competitive electronics
industry, OEMs must focus their attention and resources where they add the
greatest value. The use of EMS providers allows OEMs to focus their efforts on
their core competencies, such as product development and marketing and
distribution.
Reduce Capital Investment. As electronic products have become more
technologically advanced, manufacturing requirements have resulted in increased
investments in inventory, equipment, labor and infrastructure. EMS providers
enable OEMs to achieve high technological capabilities at a lower capital
investment level than required for internal manufacturing.
Improve Inventory Management and Purchasing Power. The experience of contract
manufacturers in inventory procurement and management can reduce OEM production
and inventory costs.
PRINCIPAL BUSINESS
The Company is a vertically integrated, contract manufacturer, serving
rapidly growing, technology driven OEMs. We provide custom contract
manufacturing of electrical and mechanical assemblies, including complex,
multi-layer printed circuit board ("PCB") assemblies, wire and cable harnesses,
molded cables, precision machining, high speed metal stamping, metal treatment
and processing and complete box build assemblies.
Electronics Services. All PCBs that we manufacture are designed by our
customers and manufactured to their specifications. Using computer controlled
manufacturing and test machinery and equipment, we provide manufacturing
services employing surface mount technology ("SMT") and pin-through-hole ("PTH")
interconnection technologies. We offer a wide range of manufacturing and
management services, either on a turnkey or consignment basis, including
material procurement and control, manufacturing and test engineering support,
and quality assurance. Our strategy is to develop long-term manufacturing
relationships with established and emerging OEMs.
PCBs are the basic platform used in virtually all advanced electronic
equipment to direct, sequence and control electronic signals between
semiconductor devices (such as microprocessors, memory chips and logic devices)
and passive components (such as resistors and capacitors). PCBs consist of one
or more layers of circuitry laminated into rigid insulating material composed of
fiberglass epoxy. Multi-layer PCBs provide a three dimensional system with
electronic signals traveling along horizontal planes of multiple layers of
circuitry patterns as well as along the vertical plane through plated holes or
vias.
SMT is an assembly process that allows the placement of a large number of
components in a dense array directly on both sides of a PCB. SMT is a recent
advance over the more mature PTH technology, which permits electronic components
to be attached to only one side of a PCB by inserting the component into holes
drilled through the board. The SMT process allows OEMs to use advanced
circuitry, while at the same time permitting the placement of a greater number
of components on a PCB without having to increase the size of the board. By
allowing increasingly complex circuits to be packaged with the components in
closer proximity to each other, SMT enhances circuit processing speed and board
and system performance.
Lead times for PCBs generally fall into two categories, "quick turn" and
"standard." Quick turn lead times range from one to 15 days for prototype and
pre-production quantities. Standard lead times typically run from six to twelve
weeks and are generally associated with larger volumes.
Wire harnessing and cable assembly capabilities include: injection molding,
mil spec wire harnessing and cable assembly, flat ribbon, multi-conductor and
coaxial, bus bar lamination, toroid windings.
Metal Services. The Company specializes in high-speed metal stamping,
progressive die and forming operations. We also maintains several secondary
metal processing capabilities, including phosphate coating, chem film, anodizing
and heat-treat tempering. The Company features metal stampings from miniature,
long run commodity grade parts produced in excess of 1000 parts per minute to
large, close tolerance specific parts produced at 2 parts per minute. Metals
that we process include stainless steel, copper, cold rolled steel, aluminum and
tin. NMT is capable of stamping a wide range of parts to meet commercial,
medical or military requirements.
Stamped metal products are used in the medical, commercial, aerospace,
electrical, automotive and defense industries. Because of the sophisticated
applications in which these products are used, they must be manufactured under
strict quality methods such as Statistical Process Control (SPC) or similar
quality management techniques. Highly accurate dies and quick-change punch
press tools are requirements for the expected tolerances within +/-0.001".
The Company currently manufactures and supplies metallic links for munitions
manufacturers and the United States and foreign militaries, as well as firearm
magazines for the after-market firearm industry.
Precision Machining provides a full range of machining services including
CNC milling, CNC turning, metal sawing, drilling/tapping, and centerless
grinding. Precision Machining also offers secondary operations including tumble
de-burring, bead blasting, heat treating, plating, broaching and plasma cutting.
BUSINESS STRATEGY
In response to the industry trends in the contract electronics
manufacturing industry, the Company has positioned itself as a vertically
integrated manufacturer of enclosed electronic systems and their various
sub-assembly components. National Manufacturing Technologies strategy is to:
Establish and Maintain Long-term Relationships. One of our primary
objectives is to pursue opportunities whereby we become an integral part of an
OEM's manufacturing operations. In this regard, the Company strives to work
closely with its customers in all phases of design and production in an attempt
to establish itself as the sole or primary source for our customers' specialized
manufacturing requirements. We believe that this effort to develop close,
reliable, long-term relationships builds customer loyalty that is difficult for
competitors to overcome. We specifically target turnkey manufacturing
opportunities, including electronic enclosure assemblies, because such business
offers increased profit margin, greater control over all variables of the
manufacturing process and greater reliance upon us by the OEM associated with
the turnkey operation.
Target and Maintain Balance Among Selected OEM Industries and Customers.
The Company markets its services to industries and customers that have strict
quality control standards for their products and that have service intensive
manufacturing requirements. We focus on complex assemblies in low and medium
volumes for commercial and industrial customers. The Company has not been, and
does not intend to become, a manufacturer of high volume PCB assemblies for
personal computers or other consumer related products, which typically have
relatively low margins. Instead, we have focused on a variety of industries that
produce products that generally have longer life cycles, customized
applications, higher engineering content, higher customer margins, more stable
demand and less price pressure.
Provide Comprehensive and Reliable Manufacturing Services. We believe that
our ability to attract and retain customers depends on our ability to offer a
broad range of specialized services. We provide our customers with services
ranging from prototype production to the manufacture of PCB assemblies, material
procurement and management, post-production testing, and final product assembly.
We also strive to provide the highest level of reliability in connection with
these services and have an ongoing program of investing in sophisticated
machinery and equipment to enable us to achieve this objective on a continuing
basis. Our ability to provide electrical mechanical assembly, wire and cable
assembly and harnessing, molded cable processing, high-speed metal stamping,
precision metal machining, metal finishing, offshore assembly and other related
services allows us to offer a broader range of value added services to our
customers.
Pursue Opportunities for Growth. We are committed to pursuing opportunities
to increase the scope and capabilities of our operations through acquisition.
Our strategy is to increase our contract electronics manufacturing business
through growth of our customer base, as well as the addition of other key
manufacturing capabilities that enhance our vertical integration strategy.
Maintain Flexibility. Many of our customers are leaders in their respective
industries. As such, these customers often require that their products be
continuously reengineered. The Company has organized its operations so that it
can respond rapidly to design changes and provide value added services where
needed.
MANUFACTURING AND SUPPLIES
The principal materials used by the Company in the manufacture of its
products are: electronic components such as memory chips, micro-processing
units, integrated circuits, resistors, capacitors, transformers, switches,
connectors, wire, stainless steel and related items purchased as stock items
from a variety of manufacturers and distributors. While we purchase most of
these materials from outside sources, we are not dependent upon a single source
of supply for any materials essential to our business. The Company has
generally been able to obtain adequate supplies of such materials, and no
shortage of such materials is currently anticipated that would significantly
impact operations. However, notwithstanding the foregoing, there can be no
assurance that we will continue to be able to procure such components and raw
materials in the future without material delay or other restrictions.
MARKETING
Senior management of the Company are currently primarily responsible for
marketing our electronic and metal manufacturing services. The Company also
utilizes direct sales personnel and sales representatives to develop
relationships with its customers. As part of its marketing strategy, the
Company attempts to work closely with our customers in all phases of design and
production in an attempt to establish itself as the sole or primary source for
its customers' specialized manufacturing requirements. We believe that this
effort to develop close, reliable, long-term relationships builds customer
loyalty that is difficult for competitors to overcome. As a result, we are
continually striving to develop new negotiated business with existing customers.
COMPETITION
The contract electronics manufacturing industry is highly fragmented and
extremely competitive. There are hundreds of companies, several of which have
substantial market share such as SCI Systems, Inc., Solectron Corporation,
Celestica, Inc., Flextronics International and Jabil Circuit, Inc. The services
provided by the Company are available from many independent sources as well as
the in-house manufacturing capabilities of current and potential customers.
Many of our competitors and potential competitors are larger and have
significantly more capital, direct buying power and management resources than
National Manufacturing Technologies. We believe that the principal competitive
factors in our targeted markets are flexible value added services, product
quality and reliability, flexibility and timeliness in responding to design and
schedule changes, reliability in meeting product delivery schedules, pricing and
geographical location. We believe that we compete favorably with respect to
these factors. However, we also expect that competition in our markets will
continue to be intense, and there can be no assurance that we will compete
successfully.
CUSTOMERS
One customer represented approximately 27.8% of the Company's total
revenues in the year ended March 31, 2000. Two other customers represented
approximately 9.5% and 8.5% respectively, of total revenues. No other customer
accounted for more than 10% of the Company's total revenues during fiscal year
2000.
DISCONTINUED OPERATIONS
The following represents a brief history of the discontinued operations of
National Manufacturing Technologies, Inc.
Sale of assets, liabilities and product rights of Photomatrix Imaging
Corporation. In June 1999, the Company sold certain assets and liabilities
related to its scanner business to Scan-Optics for $2.1 million. The Company
retained certain assets and liabilities. Under the terms of the Asset Purchase
Agreement, Scan-Optics, Inc., paid approximately $2.1 million in cash to acquire
product rights and certain assets, including all receivables, inventory and
certain equipment, as well as assuming approximately $2 million of current and
future liabilities of Photomatrix Imaging Corporation and Photomatrix, Ltd.,
located in Great Britain. Scan-Optics also assumed lease commitments associated
with Photomatrix's engineering facilities located in Chandler, Arizona, as well
as its facilities in Great Britain. In addition, the Company has the right to
receive royalties up to an aggregate of $250,000 over a three year period
dependent upon the release of a new product. The Company also entered into a
Transition Agreement during which the Company would continue to manufacture
scanners for Scan-Optics at its Carlsbad facility for a transitional period of
time. The Company also entered into a five year Manufacturing Agreement to
serve as a preferred supplier for certain outsourced manufacturing components as
required and ordered by Scan-Optics.
Sale of assets, liabilities and product rights of Xscribe Legal System,
Inc. In July 1996, the Company sold certain assets and liabilities related to
its computer-aided transcription business to its primary competitor for $2.2
million. The Company retained certain liabilities.
Lexia Systems, Inc. In October 1993, the Company acquired the North
American Sales Division of International Computers Limited, Inc. ("ICL"), a
developer of groupware (office automation) software and manufacturer of
Unix-based hardware, and formed Lexia Systems, Inc. ("Lexia"). Lexia and ICL
entered into a strategic alliance whereby Lexia was to distribute ICL's
groupware products in the United States and support the domestic installed base
of ICL customers. However, the business partnering efforts between the Company
and ICL and its sister company, Fujitsu ICL Computers Ltd. ("Fujitsu") have
proved to be ineffective primarily because of a difficult working relationship
between ICL, Fujitsu and Lexia, combined with the fact that Lexia did not own
the applicable software or proprietary rights and was not able to control the
marketing or product management of ICL and Fujitsu products. Consequently, in
December 1996, the Board of Directors of the Company approved a plan to
discontinue Lexia Systems, Inc.
The operations of Lexia were shut down on September 30, 1998. Approximately
$250,000 of reserves for discontinued operating losses was not required,
contributing to income from discontinued operations for the fiscal year ended
March 31, 1999. Lexia has entered into a settlement with Fujitsu Computers Ltd.
("Fujitsu") regarding its disagreements over outstanding claims. Lexia had
carried on its books accounts payable claims by Fujitsu in the amount of
$341,000. Lexia has disputed these liabilities. Lexia agreed to pay Fujitsu
$200,000 over an eight month period as payment in full of all outstanding claims
against Lexia, resulting in an additional $141,000 of income from discontinued
operations for the fiscal year 1999. Lexia also carries on its books accounts
payable and unpaid rent claims by ICL, a sister company of Fujitsu, in the
amount of $457,000. Lexia disputes any liability with respect to ICL in light
of its own offsetting claims and defenses. There is no assurance that Lexia
will be successful in prevailing in its position with regard to the outstanding
claims previously made by ICL.
OTHER INFORMATION REGARDING ALL SUBSIDIARIES
SEASONALITY
We do not consider our business to be seasonal. It is more accurately
subject to the business and product cycles that impact our customers.
BACKLOG
As of March 31, 2000, our consolidated backlog was approximately
$16,000,000, including multi-year contracts, for continuing operations. The
backlog consists of $12,500,000 for the Electronic Manufacturing Services Group
and $3,800,000 for the Metal Manufacturing Services Group. The Company defines
backlog as hard copy contracts or purchase orders for which it has firm delivery
dates. Certain customers have historically placed consistent monthly or
quarterly recurring orders with the Company; when the next twelve months
requirements for these continuously renewing commitments upon which the Company
can reasonably rely upon are added, the Company considers its total effective
backlog to be approximately $20,000,000.
<PAGE>
EMPLOYEES
As of March 31, 2000, the Company had approximately 143 full time employees
and 5 part time employees. 19 employees in the Mexico facility are represented
by a labor union. The Company believes its relations with employees are good.
GOVERNMENT REGULATION
The Company's operations are subject to certain federal, state and local
regulatory requirements related to environmental, waste management, health and
safety matters. While there can be no assurance that material costs and
liabilities will not be incurred or that past or future operations will not
result in exposure to claims of injury by employees or the public, the Company
believes that the business is operated in substantial compliance with such
regulations.
The Company periodically generates and temporarily handles limited amounts
of materials that are considered hazardous wastes under applicable law. The
Company contracts for the off-site disposal of these materials and have
implemented a waste management program to address related regulatory issues.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintain our executive offices and electronic manufacturing
facilities in a 40,000 square foot, two story concrete building located at 1958
Kellogg Ave., Carlsbad, California. The Company began leasing these facilities
under a sale and leaseback transaction that was completed on June 3, 1999. The
15-year lease provides for annual rent of $302,000 from June 1999 to May 2000.
Thereafter, until the lease expires in 2014, annual increases in rent will be
based on the Consumer Price Index ("CPI"), but in no case shall the increase be
greater than 6% or less than 3%. Effective June 2000, the annual rent was
increased to $311,000 through May 2001.
The Company also leases an 80,000 square foot facility located at 4040
Calle Platino Avenue, Oceanside, California. The lease for this facility
provides for annual rent of $300,000 from February 1999 to November 2000,
$422,400 from December 2000 to November 2001, and $576,000 from December 2001 to
November 2002. Thereafter, until the lease expires in 2013, annual increases in
rent will be based on the Consumer Price Index ("CPI"), but in no case shall the
increase be greater than 6% or less than 3%.
On August 25, 1999, the Company's Mexican corporation, Tecnologias
Nacionales Manufactureras de Mexico, executed a lease for a 18,000 square foot
manufacturing facility located approximately five miles from the Otay Mesa
border crossing in Tijuana. The 3-year lease agreement calls for monthly lease
payments of $4,500 for the first four months, $5,700 until August 2000, $5,900
until August 2001 and $6,000 until August 2002.
In April 1999, the Company terminated a lease for a 5,000 square foot
facility located at 1415 East McFadden Avenue, Santa Ana, California. These
operations were incorporated into the Carlsbad, CA building.
During the fiscal year ended March 31, 1999, the Company also leased
facilities in Chandler, Arizona and London, England. These facilities housed
the Photomatrix product development and Photomatrix European operations,
respectively. The Chandler facility consists of 5,100 square feet, and the lease
expires in June 2000. The London facility consists of 2,400 square feet, and
the lease expires in May 2013. Effective June 21, 1999, these leases were either
sub-leased or assigned to Scan-Optics as part of the sale of scanner operations.
Subsequent to March 31, 1998, we relocated our corporate headquarters from
San Diego, California to our current Carlsbad, California location. We are still
party to a lease of a facility located in San Diego, California, consisting of
approximately 23,400 square feet, which previously housed our corporate offices
and our manufacturing, sales and administrative functions. The lease expires in
September 2002. We have entered into an assignment of this lease, effective June
15, 1998.
During the fiscal year ended March 31, 1999, our discontinued subsidiary
Lexia also leased 880 square feet in Herndon, Virginia. This lease expired in
November 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company has indemnified Stenograph Corporation in connection with a
product liability case pending in the Nineteenth Judicial District, East Baton
Rouge Parish, in which Stenograph is a defendant (Brown v. Stenograph et al).
The Company has tendered this claim to its insurance carrier, St. Paul Fire
("St. Paul"). St. Paul has assumed the Company's defense. The insurance
carriers have prevailed in all similar judgments rendered to date. It may take
several years before this litigation is ultimately resolved. The Company
believes that this case is without merit and further believes that if any
liability results from these claims, the liability (excluding punitive damages,
if any) will be covered by its insurance policies.
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. The Company is not aware of any such proceedings known to be
contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On July 8, 1999 the Company was de-listed from the Nasdaq SmallCap Market
and is now traded in the Over-the-Counter Bulletin Board under the symbol NMFG.
On May 31, 2000, there were 10,275,000 shares outstanding, and there were
approximately 2,000 shareholders of record. Following is information regarding
National Manufacturing Technologies, Inc, Inc. common stock market prices:
<TABLE>
<CAPTION>
FISCAL YEAR 2000 FISCAL YEAR 1999
---------------- ----------------
<S> <C> <C> <C> <C>
Quarter Ended. . . Low Bid High Bid Low Bid High Bid
------------------ -------- --------- ------- --------
June 30 - 1st. . . 1/4 1/2 9/16 1-3/16
September 30 - 2nd 3/32 5/8 5/8 1-1/16
December 31 - 3rd. 13/64 29/32 3/8 31/32
March 31 - 4th . . 1/2 2-7/16 1/8 9/16
</TABLE>
The Company has not paid a cash dividend on its common stock, and it is not
anticipated that the Company will pay any dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Following is a comparative discussion by fiscal year of the results of
continuing operations for the last two fiscal years ended March 31, 2000 and
March 31, 1999. The Company believes that inflation has not had a material
effect on its operations to date.
On June 5, 1998, the Company acquired I-PAC and on July 1, 1998 the Company
acquired MGM. Both acquisitions were treated as purchases for accounting and
financial purposes. Accordingly, the one year period ending March 31, 1999
represents ten months of comparative results with the year ended March 31, 2000
for the Electronic Manufacturing Services Group ("EMS"). 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. Both acquisitions were treated as purchases for accounting
and financial purposes. These two entities comprise the Metal Manufacturing
Services Group ("MMS") of National Manufacturing Technologies, Inc.
Accordingly, the fiscal year period ending March 31, 2000 represents twelve
months of results as compared to less than four full months of results with the
prior fiscal year ended March 31, 1999 for the MMS Group.
FISCAL YEAR 2000 ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR 1999 ENDED MARCH
31, 1999
Continuing Operations
----------------------
Consolidated revenues for the year ended March 31, 2000 increased
approximately $4,668,000 or 93.2% to $9,677,000 from $5,009,000 for the year
ended March 31, 1999. EMS revenue increased $2,850,000 or 73.3% to $6,736,000
from $3,886,000 for the year ended March 31, 1999. MMS revenue increased
$1,879,000 or 176.9% to $2,941,000 from $1,062,000 for the year ended March 31,
1999. The increase in the EMS Group revenue is the result of an expanding
customer base and increased demand from existing customers. The increase in MMS
Group revenue is due to the fact that the MMS Group was only in operation for
three and one half months in the year ending March 31, 1999 as compared to
twelve months of operation in the year ending March 31, 2000. Revenue growth
for the MMS Group was adversely affected by worldwide shortages of raw material
for the metal stamping operation. Consolidated revenues for the quarter ended
March 31, 2000 increased $1,320,000 or 65.8% to $3,327,000 from $2,007,000 for
the quarter ended March 31, 1999. This was also an increase from the quarter
ended December 31, 1999 of $1,222,000 or 58.1%. Management believes this
revenue level is expected to increase into the quarter ending June 30, 2000 due
to higher demand from customers in the EMS group and additional supplies of raw
material for the MMS group. The higher level of revenue is projected to
generate profitability in the first fiscal quarter and during fiscal year 2001.
Consolidated gross margin for the year ended March 31, 2000 increased
$2,129,000 or 287.7% to $2,869,000 from $740,000 for the year ended March 31,
1999. This increase is primarily attributable to higher sales volume in both
the EMS and MMS Group. Total gross margin as a percent of revenues was 29.6%
for the twelve months ended March 31, 2000 as compared to 14.8% for the twelve
months ended March 31, 1999. The current year amount is comprised of
approximately $2,175,500 or 32.3% of EMS gross margin compared with $507,000 or
13.0% for the year ended March 31, 1999, and $693,500 or 23.6% of metal
manufacturing services gross margin compared with $172,000 or 16.2% for the year
ended March 31, 1999. EMS gross margin increased approximately 19.3% to 32.3%
from 13.0% and MMS gross margin increased approximately 7.4% to 23.6% from 16.2%
in the year ended March 31, 1999. The consolidated gross margin represents an
amount considered by management to be less than expected under normal operating
conditions. The MMS gross margin is significantly less than expected under
normal operating conditions due to the low volume of activity. Increased
shipments will result in improved margins as the capacity of the metal stamping
operation becomes more fully utilized.
Consolidated selling, general, and administrative ("SG&A") expenses for the
year ended March 31, 2000 increased $2,148,000 or 68.1% to approximately
$5,302,000 from $3,154,000 for the year ended March 31, 1999. This amount is
comprised of approximately $1,916,000 of corporate SG&A expenses, $1,610,000 of
electronic manufacturing services SG&A expenses, and $1,776,000 of metal
manufacturing services SG&A expenses. The increase is mainly due to the
inclusion of one full year of SG&A expenses for the MMS group as compared to
only three and one half months of SG&A expenses in the year ended March 31,
1999. No corporate general and administrative expenses were allocated to
discontinued operations; therefore all SG&A expenses for the full year are
allocated to continuing operations.
Consolidated other expense for the year ended March 31, 2000 totaled
approximately $211,000 compared to an expense of $280,000 for the year ended
March 31, 1999. It was comprised primarily of interest expense of $458,000 and
other income of $247,000. The other income resulted from accounts payable
settlements in the amount of $119,000, rental income of $65,000, bad debt
recovery of $11,000, recognition of deferred gain on the sale of assets of
$12,000, and miscellaneous income of $40,000.
The net effect of the increases in revenues and increases in other income
resulted in a consolidated net loss from continuing operations of $2,644,000
($0.26 per share) for the year ended March 31, 2000. This is a decrease of
$50,000 or 1.9% from the net loss from continuing operations from the same
period in 1999 of $2,694,000 ($0.30). This decrease was comprised of a net loss
in the MMS Group of $1,763,000 or 59.9%, and a net loss in the EMS Group of
$880,000 or 13.1%. This is a decrease in the EMS Group net loss of $558,000 or
38.8%, compared to a net loss of $1,438,000 or 37.0% for the year ended March
31, 1999. The loss in the MMS Group increased $1,359,000 or 336.4% compared to
a net loss of $404,000 or 38.0% in the year ended March 31, 1999. The increase
in the MMS Group loss over fiscal year 1999 was due to the fact that the MMS
Group was only in operation for three and one-half months in the year ending
March 31, 1999.
Management believes that the MMS Group was still operating significantly
below full capacity levels for the period ending March 31, 2000. Revenues for
the quarter ending June 30, 2000 will exceed those in previous quarters as the
Company expands its production to fill existing backlog.
In June 1999 the company sold its scanner business. The company recorded a
gain from discontinued operations of $733,000 (which is more fully described
below) during the current year ended March 31, 2000. Including the gain from
discontinued operations the net loss for the year ended March 31, 2000 was
$1,911,000 ($0.19 per share) compared to a net loss for the year ended March 31,
1999 of $4,376,000 ($0.49 per share). This is a decrease in the net loss of
$2,465,000 or 56.3% from the year ended March 31, 1999.
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 achieves 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. As of August 1, 2000, the Company has not
made a determination as to whether any performance milestones have been
achieved.
Management believes that the Company's return to profitability occurred in
the second half of the fourth quarter of fiscal year 2000. This trend is
projected to continue into fiscal year 2001, with continued revenues increase
and profitability. Discussions are currently underway which management believes
will result in debt restructuring and additional equity coming into the Company,
providing improved working capital and liquidity.
Discontinued Operations
------------------------
On June 21, 1999, the Company closed the sale of its scanner operations to
Scan-Optics.
Current year income related to the discontinued operations is $733,000.
This compares with a loss from discontinued operations for the year ended March
31, 1999 of $1,682,000. Current year income includes $668,000 from the
discontinued scanner operations and $65,000 from the discontinued Lexia Systems,
Inc. (see below). The income from the scanner operation is comprised of
$232,000 of inventory reserves related to the Photomatrix, Ltd. scanner
operation that were not required, $218,000 of accruals for inventory reserves
related to the Photomatrix scanner operation that were not required, $132,000 of
accruals for estimated losses at the Photomatrix, Ltd. operation that were not
required, $73,000 of accounts receivable reserves for the Photomatrix scanner
operation that were not required, and $13,000 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. Current liabilities
related to Lexia Systems, Inc. total approximately $523,000. Of this total
$457,000 is related to accounts payable and unpaid rent claims to ICL as stated
above. Lexia disputes any liability with respect to ICL in light of its own
offsetting claims and defenses. Current year income related to Lexia Systems,
Inc. is $65,000 that is comprised of accruals for estimated losses that were not
required.
<PAGE>
------
FISCAL YEAR 1999 ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR 1998 ENDED MARCH
31, 1998
Continuing Operations
----------------------
Consolidated revenues for the year ended March 31, 1999 totaled
approximately $5,009,000, and was comprised of approximately $3,886,000 of
electronic manufacturing services revenue, $1,062,000 of metal manufacturing
services revenue and $61,000 of other revenue. The electronic manufacturing
services revenue was generated over approximately ten months of operations,
while the metal manufacturing services revenue was generated over approximately
four months and the other revenue was generated over nine months. During this
period, revenues were adversely affected by the Company's tight cash position.
This tight cash condition continued subsequent to March 31, 1999.
Consolidated gross margin for the year ended March 31, 1999 was
approximately $740,000 or 14.8% of consolidated revenues. This amount is
comprised of approximately $507,000 of electronic manufacturing services gross
margin, $172,000 of metal manufacturing services gross margin and $61,000 of
other gross margin. The consolidated gross margin represents an amount
considered by management to be significantly less than expected under normal
operating conditions. The poor gross margin performance was primarily the
result of much lower volume and higher material costs related to the Company's
tight cash condition during the last five months of the fiscal year.
Consolidated selling, general and administrative ("SG&A") expenses for the
year ended March 31, 1999 was approximately $3,154,000. This amount is comprised
of approximately $1,704,000 of corporate general and administrative expenses,
$1,101,000 of electronic manufacturing services SG&A expenses and $349,000 of
metal manufacturing services SG&A expenses. No corporate general and
administrative expenses were allocated to discontinued operations.
Consolidated other expenses for the year ended March 31, 1999 totaled
approximately $280,000 and was comprised primarily of interest expense.
The low gross margins, combined with higher than normal SG&A expenses and
other expenses resulted in a loss from continuing operations of $2,694,000
($0.30 per share) for the year ended March 31, 1999. The Company experienced
higher than normal SG&A expenses because the benefits of the cost reduction from
the Merger with I-PAC had not yet been realized in the fiscal year ended March
31, 1999.
In June 1999, the Company sold its scanner business. The Company recorded a
loss on the sale of discontinued operations of approximately $1,036,000 for the
year ended March 31, 1999. In addition, the Company recorded a loss from
discontinued operations in the current year of $1,061,000 related to its scanner
operations (which is more fully described below), offset by approximately
$415,000 of income from discontinued operations related primarily to its
previously discontinued subsidiary, Lexia Systems, which is also more fully
described below. This compares with a loss from discontinued operations in the
prior year related to scanner operations of $1,696,000 , which was offset by
$214,000 of income from discontinued operations primarily related to its
previously discontinued subsidiary, Xscribe Legal Systems. Including the loss on
sale of discontinued operations and the loss from discontinued operations, the
net loss for the year ended March 31, 1999 was $4,376,000 ($0.49 per share)
compared to a net loss for the year ended March 31, 1998 of $1,482,000 ($0.29
per share), an increase of $2,977,000 (200.1%).
Discontinued Operations
------------------------
On March 2, 1999, the Company approved the sale of its scanner operations
to Scan-Optics. The following analysis compares the results of the scanner and
other discontinued operations for the fiscal year 1999 compared to the fiscal
year 1998.
Consolidated revenue for discontinued operations for the year ended March
31, 1999 decreased by $2,321,000 (27.0%) to $6,274,000 from $8,595,000 for the
year ended March 31, 1998. This decrease was due to decreases in scanner
revenue of $1,242,000 (29.6%), COM duplicator revenue of $169,000 (100.0%) and
spare parts revenue of $484,000 (36.0%) and service revenue of $300,000 (18.4%).
The decrease in scanner revenue was primarily attributable to a decrease in
orders of approximately $1,419,000 received from a major OEM customer.
Consolidated gross margins for discontinued operations for the year ended
March 31, 1999 decreased $878,000 (30.0%) to $1,828,000 from $2,706,000. This
excludes the effect of the $1,016,000 write-off of capitalized software, as more
fully discussed below, and goodwill. Gross margin, excluding the write-off of
intangible assets, as a percent of sales decreased 1.8% to 29.7% from 31.5% in
the year ended March 31, 1998. This decrease was due to production
inefficiencies resulting from reduced volume.
Selling, general and administrative ("SG&A") expenses for discontinued
operations decreased $220,000 to $2,978,000 from $3,198,000 in the prior year.
As a percent of revenue SG&A increased 10.6% to 47.8% from 37.2% in the prior
year. The cost reductions are attributable primarily due to cost reduction
efforts in both the sales and marketing and the general and administrative areas
of the Company, which were implemented during the current fiscal year.
Research and development expenses for discontinued operations decreased
$302,000 (30.4%) to $693,000 from $995,000 in the year ended March 31, 1998. No
software development expenditures were capitalized because they related to
non-technologically feasible projects in the current year, compared to $103,000
in the prior year. Total development spending decreased $405,000 to $693,000
from $1,098,000 in the prior year primarily because of decreased scanner
development activity.
As a result of the sale to Scan-Optics, fiscal year 1999 includes a
write-off of intangible assets in the amount of $1,016,000. This amount included
$44,000 related to capitalized software, $61,000 related to Filenet software
development and $911,000 related to goodwill. Fiscal year 1998 includes a
write-off of capitalized software in the amount of $366,000. During fiscal
1999, the Company relocated its scanner operations into the I-PAC facility
located in Carlsbad, California. The costs related to this move approximate
$181,000.
Interest expense for discontinued operations increased $1,000 to $42,000
from $41,000 in the prior year. Other income decreased $188,000 to $15,000 from
$203,000 in 1998. This reduction is the result of a one-time sale of an unused
trademark in the amount of $100,000, together with various other transactions
that were non-recurring in nature during the prior year.
The large decrease in gross margin, including the write-off of intangible
assets, and the reduction in other income, offset slightly by the decreases in
SG&A expenses, interest expense and product development expenses resulted in a
loss from the discontinued scanner operations of $2,694,000 ($0.30 per share)
for the year ended March 31, 1999. This is an increase of $998,000 (58.8%) over
the loss from the discontinued scanner operations of $1,696,000 ($0.33 per
share) for the year ended March 31, 1998.
During fiscal 1997, the Company sold its court reporting business (Xscribe
Legal Systems, Inc.) and discontinued Lexia Systems, Inc., as more fully
described in Note 4 of the Consolidated Financial Statements contained elsewhere
herein. The Company booked net income from discontinued operations in fiscal
1999 of $415,000 compared to income of $214,000 in fiscal 1998. The current
year income was comprised of approximately $250,000 of Lexia accruals for
estimated losses to dispose which were not required, an additional $141,000 of
Lexia income related to the settlement of outstanding claims with Fujitsu and
approximately $24,000 of XLS income related to the settlement of outstanding
claims. Prior year income was comprised of $214,000 XLS accruals for estimated
losses that were not required.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Following is a discussion of National Manufacturing Technologies' recent
and future sources of and demands on liquidity as well as an analysis of
liquidity levels.
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 two inventory lines totaling $650,000 were
added to the existing line. In June 2000 the A/R line was increased again to
$3,000,000 to support revenue growth. Outstanding borrowings are collateralized
by primarily all of the Company's assets. Total borrowings under the metal
inventory line is limited to the lesser of $300,000 or 70% of the cost of
eligible metal inventory (as defined under the agreement). Total borrowings
under the electronics inventory is limited to the lesser of $350,000 or 35% of
eligible electronics inventory (as defined under the agreement). The line of
credit expires on June 30, 2001. The balance outstanding, as of July 31, 2000
was $2,355,000 on the A/R line, $288,000 on the term loan and $417,000 on the
inventory lines. The line of credit accrues interest on outstanding borrowings
at the bank's prime rate plus 4% per annum.
In December 1998, NMT became obligated under a five-year note, payable to
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. As of July 20, 2000 the five
year note to GIW had a balance of approximately $306,000 and the four year
equipment note had a balance of $394,000. To date the scheduled note payments
have been paid in cash.
In July 2000, the Company began negotiating the re-scheduling of the next
four quarterly payments due under five and four year notes discussed above, as
well as modification to the royalty payment for the next two semi-annual royalty
periods. GIW agreed that if the next note payments due in October were
accelerated to August 2000, the following three quarterly payments would be
re-scheduled to the end of the current payment schedule and will accrue 8%
interest from the original payment date to the new re-scheduled payment date.
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 the Company'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. 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 50,000 shares of common stock at an exercise price of $1.4375 or at a
price to be adjusted at exercise if the stock price is not $2.00 at July 6,
2002.
The Company is also obligated under a series of notes payable totaling
$240,000 as of March 31, 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 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
$38,000 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
$2,977,000 which includes a capitalized lease for the property at 1958 Kellogg,
Carlsbad, CA, in the amount of $2,872,000 and capitalized leases on equipment in
the amount of $105,000. Combined these leases call for minimum monthly payments
aggregating approximately $38,000 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 June 1999. As of March 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 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. Lexia disputes any
liability with respect to ICL in light of its own offsetting claims and
defenses. There is no assurance that Lexia will be successful in prevailing in
its position with regard to outstanding claims previously made by ICL.
The Company had given Cabot Industrial Trust, the lessor of the building at
1958 Kellogg Avenue, Carlsbad, CA a deposit of $275,000 in connection with
capital lease entered into in June 1999. The lease allows for the deposit to be
held in the form of cash or a letter of credit. In February 2000, the Hill's
posted a letter of credit and the $275,000 in cash was released to the Company.
The Company's sources of future short-term liquidity are its cash balance
of $101,000 as of March 31, 2000, and the unused amount of its $3.95 million
credit facility. $3.0 million of this credit facility is a line of credit
against eligible accounts receivable. $300,000 of the credit facility is a term
loan that funded on September 30, 1999 and is due in equal monthly installments
of $6,250 over 2 years with a final payment of $150,000. This loan was refunded
in June 2000 to the original amount of $300,000 in order to finance new
equipment purchases. The current balance of this term loan is approximately
$288,000. 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 and
June 2000. The A/R line was increased to $3.0 million from $2.0 million in June
2000. Prior to that it was increased $2.0 million from $1.2 million in December
1999 to aid revenue growth in the metals and electronics segments.
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 June 2000, the Company has not been required to pay any
amounts related to this guarantee. The Company is also obligated to pay
approximately $60,000 per month on various other leases. Aside from these
commitments, the Company has not made any material commitments.
Subsequent to the end of fiscal year 2000, 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.
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 $1,450,000 in its credit facility during the
quarter ended December 31, 1999. In June 2000 the company negotiated another
increase of $1.0 million to its accounts receivable line.
NEW ACCOUNTING PRONOUNCEMENT
----------------------------
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
does not expect adoption of SFAS 133 to have a material effect on its financial
position or results of operations.
YEAR 2000
---------
The Company believes that its products are fully Year 2000 compliant. All
in house computers have been tested and upgraded to be Year 2000 compliant. In
house financial software has been upgraded to be Year 2000 compliant.
The Company has not encountered significant problems with respect to
customer compliance with Year 2000 issues.
The Company has not had to add additional staff or reassign existing staff
or acquire additional equipment or software during the time period leading up to
and immediately following December 31, 1999. As of July 20, 2000 there have
been no significant Year 2000 issues that have affected the Company's
operations.
ADDITIONAL RISK FACTORS
FUTURE OPERATING RESULTS
------------------------
National Manufacturing Technologies' business is subject to the following
risks and uncertainties in addition to those described above.
Status as a Going Concern
-----------------------------
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. This contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. As shown in the consolidated financial statements, the
Company has suffered recurring losses from operations and has a working capital
deficiency, the effects of which, raise substantial doubt about the Company's
ability to continue as a going concern. In addition, the Company has negative
shareholders equity, indicating that the Company does not have sufficient assets
to cover its outstanding liabilities.
The consolidated financial statements do not include any adjustments
relating to the recoverability of assets and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
As described in Note 8, June 1999, the Company retired all outstanding debt with
its bank and entered into a new $1,500,000 credit facility with another
financial institution. The new line of credit accrues interest on outstanding
borrowings at the bank's prime rate plus 4 % per annum and carries a minimum
monthly payment of $6,000 (see Note 8). This line of credit was increased in
December 1999 to $2.9 million. It was increased again in June 2000 to $3.9
million.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitability. The Company is concentrating on increasing sales and increasing
gross margins. In the current year ended March 31, 2000 consolidated revenues
increased by 93.2% or $4,668,000. Gross profit margins increased from 14.7% in
fiscal year 1999 to 29.6% in fiscal year 2000. However, there can be no
assurance as to the Company's success in these regards. During this same time
period, consolidated SG&A expenses for the year ended March 31, 2000 increased
$2,148,000 or 68.1% to approximately $5,302,000 from $3,154,000 for the year
ended March 31, 1999. The increase is mainly due to the inclusion of one full
year of SG&A expenses for the MMS group as compared to only three and one half
months of SG&A expenses in the year ended March 31, 1999.
Ability to Successfully Market Manufacturing Services
----------------------------------------------------------
The Company's growth strategy is dependent upon its ability to market
successfully its contract manufacturing and metal enclosed electronic systems
manufacturing services. During the last fiscal year 2000, our ability to do
this has been impacted by the tight cash position brought about by the operating
losses of our scanner operations. With (1) the completion of the sale of the
product rights and assets of the scanner operations, (2) the sale and leaseback
of our Carlsbad facility and (3) the establishment of a $3.95 million credit
facility with a new lender, we are concentrating our efforts on the marketing
and sales of our electronic contract and metal enclosure manufacturing services.
We have limited prior experience in marketing and manufacturing metal enclosed
electronic systems. There is no assurance that we will be successful in this
effort.
Competitive Environment
------------------------
There can be no assurance that National Manufacturing Technologies will be
able to overcome competitive forces and reactions in order to increase revenue
in an amount necessary to return to profitability. The Company was successful
in increasing revenues over the past year to substantially reduce the prior year
net losses. The Company's ability to increase its revenue is partially dependent
upon successfully developing additional OEM relationships and upon expanding its
direct sales. The Company's ability to improve its sales is in part dependent
upon its marketing expenditures. The Company's liquidity constraints may limit
these expenditures.
We operate in a highly competitive industry and face competition from a
number of domestic and foreign electronic and electronic enclosure manufacturing
services companies, many with financial and manufacturing resources greater than
the Company's. We also face competition in the form of current and prospective
customers that have the capabilities to develop and manufacture products
internally. In order to maintain a viable alternative, we must continue to
enhance our total engineering and manufacturing technologies.
Required Revenue Increases
----------------------------
We have reduced operating costs over the past eighteen months. In the past
year, the Company has consolidated many of its operations, including moving
I-PAC Express and Rep Co., to the Carlsbad, California facility and moving the
Precision Machining operations into the Oceanside, California facility. At
current revenue levels, these cost reductions will not, in and of themselves,
return the Company to profitability. Therefore, we are currently focused on
increasing our revenue through the pursuit of OEM opportunities in the
electronics industry in order to return the Company to profitable operations.
Total revenues increased approximately 93% in the year ended March 31, 2000 over
the prior year. We believe that the recent acquisitions and sale of scanner
operations enhances the likelihood that the Company will return to
profitability. There is no assurance, however, that the Company will be
profitable.
<PAGE>
------
Retention of Key Employees
-----------------------------
The Company is highly dependent upon the principal members of its
management staff and key individuals in all areas of the Company. We have
implemented certain programs we believe will help in retaining these key
employees. There can be no assurance that we will be able to retain all key
personnel or attract new qualified personnel on acceptable terms.
Retaining Availability of Line of Credit
---------------------------------------------
The Company has achieved a critical-mass level of revenue sufficient to
reach a financial break-even point. As of December 31, 1998, Photomatrix, Inc.
was in default of all loan covenants under a $2.1 million credit facility with
its bank. On February 10, 1999, the bank agreed to forebear from taking adverse
action, provided that Photomatrix found an alternative lending source or
otherwise paid off all debt prior to May 15, 1999. We immediately began
discussions with alternative lenders. Proceeds from the sale of the scanner
operations and the building were used to retire this credit facility. On June
18, 1999, we also entered into a $1.5 million credit facility with a lending
institution. This was expanded twice during the past year to assist revenue
growth. It was increased in December 1999 to $2.95 million and increased again
to $3.95 million in June 2000. We believe that the new credit facility will be
adequate to finance the Company's growth in the year ending March 31, 2001.
Furthermore, as discussed above, if the Company cannot maintain the increased
revenue levels sufficiently to generate profitability, we may not be able to
maintain our available credit line.
Bidding Long Term and Government Contracts
-----------------------------------------------
A significant portion of the metal group revenues currently come from
defense contractors. The majority of contracts with these customers are awarded
based on the lowest bid over a multiple year period of performance. While we
believe that we are able to accurately estimate costs, including increases in
labor and material costs, over the life of these multiple year defense
contracts, there can be no assurance that these estimates will approximate
actual costs over the life of the contract. The Company is pursuing the growth
of its MMS Group by targeting commercial customers in the electronic enclosure
segment.
Customer Concentration
-----------------------
Many companies in the electronic manufacturing services industry, including
the Company, have a high percentage of their revenues concentrated in a small
customer base. The greatest risk facing these companies is possible weakening
of a major customer or a slow-down in the industry. It may take several
quarters to replace significant customers. One customer represented
approximately 27.8% of our total revenues in the year ended March 31, 2000. Two
other customers represented approximately 9.5% and 8.5%, respectively, of total
revenues.
Internal Growth
----------------
Start-up costs and the management of labor and equipment efficiencies for
new manufacturing services programs and new customers can have the effect of
reducing the Company's gross margins. Due to these and other factors, gross
margins can be negatively impacted early on in the life cycle of new programs.
In addition, labor efficiency and equipment utilization rates ultimately
achieved and maintained by the Company impacts the Company's gross margins.
Acquisition Strategy
---------------------
Geographical expansion and growth by acquisition can have an effect on the
Company's operation. The successful operation of an acquired business will
require communication and cooperation among key managers, along with the
transition of customer relationships. There can be no assurance the Company
will successfully manage the integration of new locations or acquired operations
and may experience certain inefficiencies that could negatively impact the
results of operations. Additionally, no assurance can be given that any past or
future acquisition by the Company will enhance the Company's business.
Lexia Systems, Inc.
---------------------
Relative to the discontinuation of Lexia Systems, Inc. ("Lexia"), and to
the protracted nature of the negotiations and the disagreements with vendors,
ICL and Fujitsu, there is no assurance that Lexia and ICL/Fujitsu will settle
their current disagreements.
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 June 1999. As of March 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 ICL and related entities in the
amount of $457,000 at March 31, 2000. These liabilities are included in net
liabilities of discontinued operations. Lexia disputes any liability with
respect to ICL in light of its own offsetting claims and defenses. There is no
assurance that Lexia will be successful in prevailing in its position with
regard to outstanding claims previously made by ICL.
Commodity Prices
-----------------
The Company is exposed to fluctuations in market prices for steel. Steel
prices worldwide are expected to increase this year, along with demand and
production as continued fallout from the dumping of steel in the U.S. by foreign
competitors in 1998 impacts U.S. steel production. The Company has multiple
sources for steel and continues to look for additional alternative sources to
diminish the impact of price increases. The electronics industry is facing a
shortage of certain components and the Company may not be successful in
attaining these components as compared to larger EMS providers who have more
purchasing power.
The electric utility market has been de-regulated in California and prices
are now subject to competitive market pricing. In fiscal year 2001, the Company
has seen a significant increase in its electric utility costs and is currently
exploring negotiations with alternative energy providers for long-term
stabilized charges.
Other factors that could adversely affect forward-looking statements
include (1) the Company's ability to maintain and expand its customer base, (2)
gross margin pressures, (3) the effect of start-up costs related to new
facilities, (4) the overall economic conditions affecting the electronics
industry, and (5) other factors and risks detailed herein and in the Company's
other Securities and Exchange Commission filings.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The financial statements filed herewith are set forth in "F" pages and are
incorporated herein by reference.
The following consolidated financial statements are filed herewith:
Consolidated Balance Sheet as of March 31, 2000
Consolidated Statements of Operations for the years ended March 31, 2000
and 1999
Consolidated Statements of Shareholders' Equity for the years ended March
31, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended March 31, 2000
and 1999
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 19, 1999, KPMG LLP resigned as principal independent accountant
for Photomatrix, Inc. The reports of KPMG LLP on the Company's consolidated
financial statements for the prior two fiscal years did not contain an adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles. In connection with the
audits of the Company's financial statements for each of the two fiscal years
ended March 31, 1998, and in the subsequent interim period through February 19,
1999, there were no disagreements with KPMG LLP on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to the satisfaction of KPMG LLP would have
caused KPMG LLP to make reference to the matter in their report.
On May 26, 1999, we retained BDO Seidman, LLP as our new independent
principal accountant. During the last two fiscal years and subsequent interim
periods of the Company, the Company did not consult BDO Seidman, LLP regarding
(i) either, the application of accounting principles to a specified transaction
either completed or proposed; or the type of audit opinion that might be
rendered on the Company's financial statements, or (ii) any matter that was the
subject of a disagreement (as defined in Item 304(a)(1)(iv) of Securities and
Exchange Commission Regulation S-K) or was a reportable event (as defined in
Item 304(a)(1)(v) of Securities and Exchange Commission Regulation S-K).
On March 17, 2000, the Board of Directors of National Manufacturing
Technologies, Inc. (the "Company"), approved a recommendation brought fourth by
the Audit Committee which dismisses BDO Seidman, LLP, Costa Mesa, California
("BDO") as the Company's principal independent accountant. During the last
fiscal year and subsequent interim periods of the Company, BDO did not render
an adverse opinion, disclaimer of opinion, or modification. BDO did render a
qualification as to the Company's ability to continue as a going concern. There
were no disagreements between the Company and BDO for the past fiscal year
ending March 31, 1999, nor during the subsequent interim periods through
September 30, 1999, whether or not resolved, on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of BDO,
would have caused BDO to make reference to the subject matter of the
disagreements in connection with BDO's report.
On March 17, 2000, the Company engaged Levitz, Zacks and Ciceric as its
independent accountant. For fiscal year audits ended December 31, 1996 and
December 31, 1997 the firm of Levitz, Zacks and Ciceric served as the
independent accountant for I-PAC Manufacturing, Inc ("I-PAC") (a wholly owned
subsidiary of the Company as of June 1998). Prior to June 1998, I-PAC was not a
publicly traded company. With the exception of the above statement, during the
last two fiscal years and subsequent interim periods of the Company, the Company
did not consult Levitz, Zacks and Ciceric regarding (i) either, the application
of accounting principles to a specified transaction; or the type of audit
opinion that might be rendered on the Company's financial statements, or (ii)
any matter that was the subject of a disagreement (as defined in Item
304(a)(1)(iv) of Securities and Exchange Commission Regulation S-K) or was a
reportable event (as defined in Item 304(a)(1)(v) of Securities and Exchange
Commission Regulation S-K).
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
PATRICK W. MOORE has been a Director of the Company since January 1991. Mr.
Moore assumed the duties of Chief Executive Officer of the Company effective as
of June 5, 1998, and as Chairman and President as of September 23, 1999. Mr.
Moore, who has served as the President of I-PAC Manufacturing, Inc. since 1990,
has significant business experience in both the private and public sectors. From
1986 to 1990, Mr. Moore served as President of Southwest General Industries, a
privately-held electronic contract manufacturing company. From 1981 to 1986, Mr.
Moore served as President of the San Diego Private Industry Council and as
Executive Director of the San Diego Regional Employment and Training Consortium.
Mr. Moore has served on the National Commission on Employment Policy, committees
of the National Academy of Science, and as the national president of various
trade organizations based in Washington, D.C. Mr. Moore is 52 years of age.
JAMES P. HILL has been a Director of the Company since June 1998. Mr. Hill is,
and for at least the last five years has been, the managing partner,
specializing in bankruptcy law, commercial law, and civil litigation, of the San
Diego law firm of Sullivan, Hill, Lewin, Rez, Engel & LaBazzo. Mr. Hill was a
Director of the San Diego Bankruptcy Forum from 1991 through 1994 and the
Chairman of the Commercial Law Section of the San Diego County Bar Association
from 1985 through 1987. Mr. Hill is 48 years of age.
MICHAEL J. GENOVESE has been a Director of the Company since February 1999. Mr.
Genovese is a partner with the law firm of Grant, Hanley & Genovese, LLP,
specializing in the area of business transactional law, including general
business, real estate acquisition and sale, and taxation law. Mr. Genovese
started his professional career with Ernst & Ernst (currently Ernst & Young,
LLP) in 1971 until 1977 when he commenced the practice of law. Mr. Genovese is
a member of the Orange County Bar Association, the California State Bar
Association (Business Law, Real Property Law and Taxation Sections), and the
American Bar Association (Business law, Real Property, Probate & Trust Law, and
Taxation Sections). Mr. Genovese is 51 years of age.
MICHAEL R. MOORE is a physician specializing in the surgical treatment of
complex spinal disorders. He practices at the Bone and Joint Clinic in
Bismarck, North Dakota, where he is developing a Spinal Diagnostic and Treatment
Center that will bring to the region a range of medical services that previously
were unavailable in the State. Prior to relocating to North Dakota, Dr. Moore
practiced in Aurora, Colorado, where he was the co-founder of the Colorado Spine
Center, which was the first practice in the region dedicated solely to the
treatment of spinal disorders. Dr. Moore has recently been granted a patent on
a new spinal implant device that will allow minimally invasive and endoscopic
techniques to replace current open surgical techniques for certain painful
spinal conditions. Dr. Moore earned his medical degree from the Johns Hopkins
University School of Medicine, and has served in the past as an approved
investigator by the Food and Drug Administration for clinical trials of new
spinal fusion devices. From 1976 to 1980, he held various positions as an
engineer for Portland General Electric Company. Dr. Moore is the brother of
Patrick W. Moore. Dr. Moore is 45 years of age.
BINH Q. LE is General Director of BVT & Co. and General Director and shareholder
for DELICES Co., Ltd., a division of BVT & Co., Ltd., a Vietnam-based importer
since 1998. He also serves as President and sole shareholder of Le Mortgage,
Inc. (d.b.a. All City Financial Corporation), a commercial and residential
mortgage broker, a position which he has held since 1987. From 1985 to 1987, Mr.
Le was General Plant Manager at Southwest General Industries, a privately-held
electronic contract manufacturing company. From 1976 to 1985, he served on the
San Diego Private Industry Council. Mr. Le is 53 years of age.
BRIAN KISSINGER is President of Valtec Services, a company providing
authorization and process for pre-paid telephone and related services, a
position he has held since 1998. Mr. Kissinger has also been a marketing
consultant to LWS Entertainment Services, which is an internet service provider
and web-site design company, since 1998. From 1996 to 1998, Mr. Kissinger served
as President of Quest Communications, a leasing agent for SkyTel Paging, Inc.
From 1991 to 1996, he was Vice President of K & D Distributing, a wholesale food
distributor. Mr. Kissinger is 30 years of age.
JOHN G. HAMILTON, JR., has been the owner of North Hills Academy of Shorin
Karate and Indiana Shorin-Ryu Karate founded in 1974. From 1974 to 1984. Mr.
Hamilton also served as a process and development metallurgical engineer for
Westinghouse Electric Company working in their Specialty Metals Division. Mr.
Hamilton earned his Bachelor of Science degree in Metallurgical Engineering and
Anthropology from Lafayette College. Mr. Hamilton is 51 years of age.
EXECUTIVE OFFICERS
Set forth below is information about certain executive officers of National
Manufacturing Technologies, Inc and its subsidiaries effective as of May 31,
2000.
Mr. Stephan Jones is the Vice President and General Manager of the Electronics
Group. Mr. Jones joined Photomatrix in June 1998 as Operations Manager. Mr.
Jones was an Operations Consultant from 1997 to 1998 at Ficom and from 1996 to
1997 at Northstar. From 1993 to 1996, Mr. Jones was employed at Three Eagle as
a Venture Capital Consultant. Mr. Jones is 49 years of age.
Mr. Tim Mullennix is the Vice President of Corporate Marketing and Business
Development and has been serving in this position since December 1998. From
June 1998 to December 1998, Mr. Mullennix was the Vice President and General
Manager of I-PAC Manufacturing. Mr. Mullennix served as the Vice President of
the Advance Group of Companies from 1997 to 1998. From 1994 to 1997, Mr.
Mullennix was the President of MGM TechRep. Mr. Mullennix is 48 years of age.
Mr. Larry Naritelli is the Chief Accounting Officer and acting Chief Financial
Officer, and joined Photomatrix in March 1999 as Corporate Controller. From
1996 to 1999, Mr. Naritelli was employed at Dentsply/New Image in various
positions including Accounting Manager and Controller. From 1994 to 1996, Mr.
Naritelli was employed at Compton's New Media as Accounting Manager and later as
Manager of General Ledgers. Mr. Naritelli is 43 years of age.
Mr. Jeffery Tardiff is the Vice President and General Manager of the Metals
Group and joined the Company in December 1998. Prior to joining National
Manufacturing Technologies, Mr. Tardiff was the Quality Manager at Green
International West for approximately six months. From 1997 to 1998, Mr. Tardiff
was a Managing Partner at QC & Associates. From 1996 to 1997, Mr. Tardiff was
employed at D3 Technologies as Tool Design Manager. From 1995 to 1996, Mr.
Tardiff served as Quality Control Manager at Spec-Built Systems. From 1992 to
1995, Mr. Tardiff served as a Project Manager for the Convair Division of
General Dynamics. Mr. Tardiff is 53 years of age.
Set forth below is certain information about significant employees of the
Company as of May 31, 2000.
Ms. Jennifer Brown is the Director, Compliance & Corporate Planning and the
Corporate Secretary. She joined the Company in September 1998 as a Financial
and Systems Analyst. From 1997 to 1998, Ms. Brown was an Associate Economist at
the City of San Diego. In 1997, Ms. Brown worked for I-PAC Manufacturing as a
Business and Product Analyst. Ms. Brown worked for Advanced Marketing Services
in Operations Support from 1995 to 1997. From 1994 to 1995, Ms. Brown was a
Financial Data Researcher with Standard and Poor's Compustat division.
Mr. Joe Portillo is the Director of Sales of NMT's Electronics division. Mr.
Portillo started with the Company in October 1997 and held various position in
materials and project management. Mr. Portillo has served as Director of Sale
since January 1998. Prior to joining NMT, Mr. Portillo was employed at Palomar
Technologies as a Sub-Contracts Administrator from 1996 to 1997.
Mr. Rich Elliott joined NMT in May 2000 as Director of Quality and Manufacturing
Engineering. Mr. Elliott joined Signal Processing Systems (SPC) division of
Scientific Atlanta in 1984 as the Manger of Test Engineering. During his 15
years with SPC he served in several Operations positions and three years as
Electrical Hardware Design Manager.
Mr. Michael McCarthy joined NMT in April 2000 as the Sales Manager for the
Metals Group. Prior to joining NMT, Mr. McCarthy was the Marketing and Contract
Manager of the Greene Group; a position which held from 1987.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers and persons who own more than ten percent of the Company's
common stock, to file reports of ownership and changes in ownership of
securities with the Securities and Exchange Commission and to furnish to the
Company copies of all Section 16(a) forms they file. During the fiscal year
ended March 31, 2000, certain of the directors and officers of the Company did
not file Form 3 and 4 reports specified under Section 16(a) of the Securities
Exchange Act of 1934 on a timely basis. On December 3, 1999, Stephan Jones, Tim
Mullennix and Jeffrey Tardiff were appointed Executive Officers of the Company
and did not timely file a Form 3. On February 1, 2000, Patrick W. Moore, James
P. Hill, Michael R. Moore and William L. Grivas, Sr., were issued common stock
in accordance with the terms of the Photomatrix and I-PAC Manufacturing Merger
Agreement dated June 5, 1998. The Form 4's for this event were sent to the SEC
in late February but were returned in mid-March because they were not completely
filled out, and subsequently were not filed until March 22, 2000.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows, for the most recent three years, the cash
compensation paid by the Company, as well as all other compensation paid or
accrued for those years, to the Executive Officers of the Company as of March
31, 2000. No other executive officers of the Company earned annual salary and
bonus in excess of $100,000 during the fiscal year 2000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long Term Compensation Awards
-------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
NAME AND
PRINCIPAL POSITION . . . . . . . . . YEAR SALARY BONUS OTHER SECURITIES UNDERLYING OPTIONS/SARS(#)
Patrick W. Moore,
Chairman, CEO & President (1). . . . 2000 $148,300 $ 0 $ 4,200 (4) 350,667
1999 $125,000 $ 0 $ 2,700 (4) 153,941
1998 -- -- -- --
Suren G. Dutia,
Former Chairman, CEO & President (2) 2000 $109,800 $ 0 $ 1,600 (5) 266,667 (7)
1999 $140,000 $50,000 $46,500 (5) --
1998 $140,000 $ 0 $11,200 (5) --
Roy L. Gayhart,
Former Chief Financial Officer (3) . 2000 $112,200 $ 0 $ 2,400 (6) 210,000 (8)
1999 $114,000 $25,000 $ 7,750 (6) 210,000
1998 $ 97,000 $ 0 $ 5,800 (6) 40,000
</TABLE>
(1) Mr. Moore was not an Executive Officer of the Company prior to fiscal year
1999.
(2) Mr. Dutia resigned as Chairman and CEO on June 5, 1998, as President on June
21, 1999 and as a member of the Board of Directors as of September 23,
1999.
(3) Mr. Gayhart was not an employee or Executive Officer of the Company prior to
fiscal year 1998. Mr. Gayhart's employment agreement terminated on
September 30, 1999.
(4) Includes Company matching contributions to the NMT Savings and Investment
Plan ($0 and $0) and medical premiums ($4,200 and $2,700) for 2000 and
1999, respectively.
(5) Includes Company matching contributions to the NMT Savings and Investment
Plan ($0, $2,500 and $4,900) and supplemental life and medical premiums
($1,600, $11,700 and $7,400) for 2000, 1999 and 1998, respectively.
(6) Includes Company matching contributions to the NMT Savings and Investment
Plan ($0, $2,500 and $800) and medical premiums ($2,400, $5,250 and $5,000)
for 2000, 1999 and 1998, respectively.
(7) In accordance with the terms of Mr. Dutia's employment agreement, at the
termination of the agreement all existing stock option grants became
fully vested and he was granted a one year period to exercise those
vested stock options. The Company cancelled his existing grants and
granted new stock options with those terms.
(8) In accordance with the terms of Mr. Gayhart's employment agreement, at the
termination of the agreement all existing stock option grants became
fully vested and he was granted a one year period to exercise those
vested stock options. The Company cancelled his existing grants and
granted new stock options with those terms.
EMPLOYMENT AGREEMENTS. Mr. Moore is employed under an employment agreement that
expires on September 30, 2004. Mr. Dutia, former President, was employed under
an employment agreement, which expired on July 31, 1999. Mr. Gayhart's
employment agreement terminated on September 30, 1999. If Mr. Moore's
employment is terminated by the Company without cause prior to the end of his
term, then he will be entitled to receive his base salary, stock option vesting
and health insurance benefits for the remainder of the term.
OFFICERS SEVERANCE POLICY. In 1988, the Company's Board of Directors adopted an
Officers Severance Policy that was modified in November 1990, February 1997 and
in April 1999. Under the policy, Mr. Dutia began receiving twelve weeks'
compensation beginning August 1, 1999 and Mr. Gayhart began receiving eight
weeks compensation beginning October 1, 1999. In addition, Mr. Moore is to
receive twenty-nine weeks' compensation upon termination of employment by the
Company, in addition to amounts due him under his employment contract.
STOCK OPTION GRANTS
The following table shows certain information concerning stock options granted
during fiscal year 2000 to the Company's executive officers:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Individual Grants Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation for Option
Term (1)
Number of Percent of Total
Securities Options/SARs Exercise
Underlying Granted to Or Base
Options/SARs Employees in Price Expiration 5% 10%
Name Granted (#) Fiscal Year ($/Sh) Date ($) ($)
---------------- ------------- ---------------- ----------- ------------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Patrick W. Moore 166,667 17.3% $ 0.45 June 4, 2009 $170,000 $270,000
Patrick W. Moore 65,000 6.8% $ 0.25 September 22, 2009 $ 66,000 $105,000
Patrick W. Moore 64,000 6.7% $ 0.2969 September 30, 2009 $ 65,000 $104,000
Patrick W. Moore 55,000 5.7% $ 0.5625 January 6, 2010 $ 56,000 $ 89,000
</TABLE>
(1) The potential realizable value is calculated pursuant to SEC regulations
by assuming the indicated annual rates of stock price appreciation for the
option term. Actual realized value will depend on the actual annual rate of
stock price appreciation for the option term. This calculation assumes that
market price of the stock as of May 31, 2000 of $0.625 would appreciate to
$1.018 and $1.621, at 5% and 10% annual rates of price appreciation
respectively.
<PAGE>
AGGREGATED STOCK OPTION EXERCISES AND FISCAL YEAR-END STOCK OPTION VALUE TABLE
The following table sets forth certain information regarding the number and
value of specified unexercised options held by the Company's executive officers
as of March 31, 2000:
<TABLE>
<CAPTION>
Number of Unexercised Options Value of Unexercised
In-the-Money Options (1)
------------------------------- ---------------------
Shares
Acquired Value
Name on Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ------------ ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Patrick W. Moore - - 577,941 50,000 117,524 -
Suren G. Dutia - - 266,667 - 76,537 -
Roy Gayhart 40,000 16,250 210,000 - - -
</TABLE>
(1) The value is calculated as the total market value of stock subject to
the options on May 31, 2000 ($0.625 per share), less the total of the option
exercise prices.
TEN YEAR OPTION RE-PRICING TABLE
In July 1997 the Compensation Committee offered to re-price a portion of
the option shares previously granted to Mr. Dutia which had an original exercise
price in excess of the market value of the Company's common stock at that time.
This offer was made in conjunction with identical offers to most employees. The
following table sets forth the specified information concerning all options
re-priced for all executive officers of the Company for the period August 1987
(initial public offering) through June 1999.
<TABLE>
<CAPTION>
Length of
Number of Market Original
Shares Price Option Term
Underlying of Stock at Exercise Remaining at
Options Re- Time of Re- Price at Time New Exercise Date of
Name Date Priced Pricing of Re-pricing Price Re-pricing
------------------------- ------------ ----------- ------------ --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
S. Dutia, Former President November 1990 200,000 $0.18 $ 3.75 $0.18 8 years
S. Dutia, Former President June 1995 25,000 $1.25 $ 4.13 $1.69 9 years
S. Dutia, Former President November 1995 166,667 $0.88 $1.31-$2.91 $0.88 6-9 years
S. Dutia, Former President July 1997 166,667 $0.37 $ .88 $0.37 4-7 years
B. Myers, Former CFO . . . November 1995 100,000 $0.18 $1.50-$3.48 $0.18 8 years
B. Myers, Former CFO . . . June 1995 16,667 $1.25 $ 4.13 $1.69 9 years
B. Myers, Former CFO . . . November 1995 116,667 $0.88 $1.31-$2.91 $0.88 6-9 years
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of May 31, 2000, James P. Hill, William L. Grivas and Patrick W. Moore,
were the only shareholders known by the Company to be the beneficial owner of
more than five percent of its outstanding Common Stock.
The following table sets forth certain information regarding the ownership
of National Manufacturing Technologies common stock by Directors and Executive
Officers:
<TABLE>
<CAPTION>
Shares of Common Stock Percent of Shares of
Beneficially Owned Common Stock Outstanding
Name of Beneficial Owner or Group As of May 31, 2000(1) as of May 31, 2000(1)
------------------------------------------------ ----------------------- -------------------------
<S> <C> <C>
Patrick W. Moore, Chief Executive Officer. . . . 2,174,771 (2) 21.17%
William L. Grivas, Former Chairman (3) . . . . . 2,049,445 (4) 19.95%
Suren G. Dutia, Former President (5) . . . . . . 300,233 (6) 2.92%
James P. Hill, Director. . . . . . . . . . . . . 1,777,421 (7) 17.30%
Michael R. Moore, Director . . . . . . . . . . . 125,706 1.22%
Michael Genovese, Director . . . . . . . . . . . 12,500 (8) *
Binh Q. Le, Director . . . . . . . . . . . . . . -- *
Brian L. Kissinger, Director . . . . . . . . . . -- *
John G. Hamilton, Jr., Director. . . . . . . . . -- *
Roy L. Gayhart, Former CFO (9) . . . . . . . . . 210,000 (10) 2.04%
All directors and executive officers as a group. 6,650,076 64.72%
</TABLE>
(1) Includes and reflects the ownership by the named director or officer of
shares of Common Stock subject to options exercisable within 60 days of
May 31, 2000.
(2) Includes options to purchase 577,941 shares.
(3) Mr. Grivas resigned as director and chairman of the Board of Directors on
January 18, 1999.
(4) Includes 1,994,169 shares and options for shares owned directly by William
L. Grivas and 55,276 shares owned by family members.
(5) Mr. Dutia resigned as Chairman and CEO on June 5, 1998, as President on June
21, 1999 and as a member of the Board of Directors as of September 23,
1999.
(6) Includes options to purchase 266,667 shares.
(7) Includes 172,538 shares owned by Loma Services Corporation, of which Mr.
Hill's wife is the sole shareholder, 1,441,383 shares owned by Mr.
Hill as Trustee of the Hill Family Trust, 1,000 shares owned by
Loma Services Corporation Money Purchase Pension Plan, of which Mr. and
Mrs. Hill are the sole beneficiaries and options to purchase 162,500
(8) Includes options to purchase 12,500 shares.
(9) Mr. Gayhart's employment agreement terminated on September 30, 1999.
(10) Includes options to purchase 210,000 shares.
* Less than 1%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the acquisition of PMX, Photomatrix restructured
outstanding indebtedness to members and affiliates of the Wyly family into
non-negotiable seven-year term notes bearing interest at the rate of 8 percent
per annum. The total principal amount of the notes payable to members of the
Wyly family and their affiliates as of March 31, 2000 was $240,000. Interest
and principal payments totaling $16,000 are due monthly.
During the year ended March 31, 2000 the company recorded approximately
$53,000 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' 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 $112,000 in the
year ended March 31, 1999. During the year ended March 31, 2000 the company
paid approximately $33,000 of these earn out accruals as compared to $65,000
during the year ended March 31, 1999. At March 31, 2000 the company had
approximately $6,000 in earn out payments due to MGM.
During the year ended March 31, 2000 the company paid approximately $70,000
to Sullivan, Hill, Lewin, Rez, Engle and LaBazzo, ("SHLRE") a law firm in which
James P. Hill, a director and major shareholder, is a partner, as compared to
$139,000 during the year ended March 31, 1999. The company also entered into an
agreement with R. P. Hill and Lucy Hill, James P. Hill's parents, to pay them
approximately $2,300 per month in exchange for them posting a letter of credit
in the amount of $275,000 which guarantees the capitalized lease payment on the
1958 Kellogg facility. The interest represents a rate of 10% per annum of the
face value of the letter of credit. The letter of credit was posted to release
a $275,000 deposit on February 01, 2000. The letter of credit terminates on
June 30, 2003 and the final interest payment is due on July 2, 2003. In
addition to interest payments a warrant to purchase 50,000 shares at $0.40 per
share was granted to the Hills. The warrants expire January 31, 2005.
On July 20, 1999, the Company entered into an independent contracting
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,
and the provision of other technical and support services. The agreement,
expired on or before September 20, 1999 and required the Company to pay Mr.
Grivas $2,884 per week. On October 1, 1999, the Company entered into a new
independent contracting 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. The agreement, expires on September 30, 2002 and may
be extended for twelve months. Under this and the prior consulting agreements,
Mr. Grivas was paid $111,000 during the year ended March 31, 2000 and was
granted a stock option for the purchase of 101,044 shares of the Company's
common stock at an exercise price of $0.2969. The Company recognized non-cash
expense of approximately $29,000 for this stock option grant. A balance of
$13,000 was accrued and due to Mr. Grivas at March 31, 2000. The Board of
Directors approved these agreements.
Grivas, Moore and Hill were each awarded a bonus by the Compensation
Committee payable on March 31, 2000, for $50,000 cash or a stock option to
purchase 150,000 shares of the Company's common stock at an exercise price of
$0.2969, at the grantees election. Grivas, Moore and Hill elected the granting
of a stock option. The Company recognized approximately $84,000 of goodwill for
these stock option grants. This bonus was awarded for work Grivas, Moore and
Hill did in connection with the precision machining and metal stamping
acquisitions.
The former shareholders of I-PAC currently own interests in several
entities with which I-PAC has done business. During the year ended March 31,
1999, the Company recorded a write-off of approximately $25,000 of inventory
specifically manufactured for companies which are owned at least in part by or
otherwise associated with the brother of William L. Grivas, who was the Chairman
of the Company through January 18, 1999 and who is a major shareholder of the
Company. In addition, the Company also recorded approximately $20,000 of
additional allowance for doubtful accounts for uncollectible related party
accounts receivable from such companies and from a company owned by Mr. Grivas,
during the quarter ended December 31, 1998. The inventory and receivables were
acquired by the Company as a result of its acquisition of I-PAC. The Company has
therefore recorded the additional bad debt reserves and inventory write-off as
an increase to goodwill related to the purchase of I-PAC.
During the year ended March 31, 1999, the Company paid approximately
$127,000 to Evergreen Investments ("Evergreen"), a company owned by Mr. Grivas
and Patrick W. Moore, the Chief Executive Officer and a major shareholder.
$50,000 of this amount was intended to cover personal tax liabilities of the
former I-PAC shareholders arising from pre-merger S Corp. allocations for
calendar year 1997, pursuant to the Plan and Agreement of Merger and
Reorganization between the Company and I-PAC, approximately $34,000 was for
pre-merger management fees, and approximately $43,000 was for pre-acquisition
commission payments due MGM under the acquisition agreement entered in July
1998. In addition, approximately $31,000 was paid to James P. Hill, a director
and major shareholder, to cover personal tax liabilities of the former I-PAC
shareholders arising from pre-merger S Corp allocations for calendar year 1997,
pursuant to the Plan and Agreement of Merger and Reorganization between the
Company and I-PAC. Approximately $27,000 was paid to MGM for earn-out payments
due MGM under the acquisition agreement entered in July 1998. The Company also
recorded sales of approximately $7,000 to MGS Interconnect, a company owned by
Mr. Moore and Mr. Grivas during the current period. This amount has been fully
reserved as uncollectible as of March 31, 1999. In addition, the Company paid
approximately $139,000 to Sullivan, Hill, Lewin, Rez and Engel ("SHLRE"), a law
firm in which Mr. Hill, is a partner. At March 31, 1999, the Company had
approximately $3,000 in earn-out payments due to MGM and approximately $7,000
due from MGS Interconnect. In addition, the Company owed SHLRE approximately
$44,000 at March 31, 1999. The Audit Committee approved all items in excess of
$10,000 disclosed in this paragraph.
As mentioned in Note 8 to the consolidated financial statements, certain
shareholders of the Company have guaranteed approximately $2,023,000 of the
Company's debt at March 31, 1999. This debt was retired in June 1999. Prior to
the merger, I-PAC guaranteed approximately $113,000 of debt of the same
shareholders. This guarantee continued after the merger, and remains in effect.
Claudia Fullerton, who is the wife of Patrick W. Moore, was employed by the
Company as its Director of Administration at an annual salary of $54,000 from
June 11, 1998 until April 30, 1999. Ms. Fullerton is receiving severance pay
for the period from May 1, 1999 through August 29, 1999, under terms of a
pre-merger employment agreement.
William L. Grivas, Jr., son of William L. Grivas Sr., was employed by the
Company as a Program Manager at an annual salary of $30,000 from June 11, 1998
through August 20, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
The exhibits listed under Item 13(a) are filed as part of this Annual Report on
Form 10-KSB.
<TABLE>
<CAPTION>
<S> <C> <C>
3.1 . . Amended and Restated Articles of Incorporation (ix)
3.2 . . Amended and Restated Articles of Incorporation dated September 23, 1999 (xviii)
3.3 . . Bylaws (ix)
3.3.1 . Amendment to Bylaws dated June 5, 1998 (xii)
10.2. Settlement Agreement dated January 11, 1993 between Photomatrix Corporation
and Scan-Graphics, Inc. (iv)
10.4. Lease Agreement between Photomatrix and EVB Limited Partnership-I dated
December 17, 1987 (iv)
10.5 Lease Agreement between Photomatrix Limited and Bermer Limited dated May
31, 1989 (iv)
10.6. . Promissory Notes dated April 30, 1993 in the aggregate principal amount of
776,607 payable to the following members of the Wyly family and affiliates:
Sam Wyly, Charles Wyly, Jr., Evan Wyly, Donald Miller, First Dallas
International, Ltd., and Premier Partners (iv)
10.7. . Subcontract dated March 31, 1991 between PRC, Inc. and Photomatrix (iv)
10.8. . 1992 Xscribe Stock Option Plan and Sample Agreement (iv)
10.11 . Executive Employment Agreement between the Company and Suren G. Dutia
dated December 20, 1988 (i)
10.11.1 Amendment to Executive Employment Agreement between the Company and
Suren G. Dutia (xii)
10.24 . Description of executive bonus arrangements and executive severance plan (iv)
10.25 . 1994 Xscribe Stock Option Plan and Sample Agreements (vii)
10.30 . Security and Loan Agreement between Imperial Bank and Xscribe Corporation
dated June 17, 1996 and related documents (ix)
10.30.1 Amendment No. 1 to Security and Loan Agreement with Imperial Bank (xii)
10.30.2 Amendment No. 2 to Security and Loan Agreement with Imperial Bank (xii)
10.30.3 Amendment No. 3 to Security and Loan Agreement with Imperial Bank (xii)
10.31 . OEM Purchase Agreement for Photomatrix Scanners dated February 8, 1996
between Bell & Howell Limited and Photomatrix Corporation (Non-public
information has been filed with the Securities and Exchange Commission) (ix)
10.32 . OEM Purchase Agreement for Photomatrix Scanners dated June 12, 1996
between Bell & Howell Operating Company and Photomatrix Corporation
(Non-public information has been filed with the Securities and Exchange
Commission) (ix)
10.33 . Facilities Lease Agreement between Photomatrix and Manufacturers Life dated
November 7, 1996 (x)
10.33.1 Consent by Lessor to Assignment of Facilities Lease Agreement (xii)
10.35 . Business Agreement with Bell & Howell dated December 29, 1997 (xii)
10.35.1 Addendum to Business Agreement with Bell & Howell dated January 5, 1998 (xii)
10.35.2 Amendment to Business Agreement with Bell & Howell dated June 30, 1998 (xiii)
10.35.3 Settlement Agreement with Bell & Howell dated March 24, 1999
10.36 . Agreement and Plan of Reorganization and Merger, dated as of March 16, 1998,
by and among Photomatrix, Inc., Photomatrix Acquisition Corp., and I-PAC
Manufacturing, Inc. (xi)
10.37 . Executive Employment Agreement, dated as of June 5, 1998, between the
Company and Patrick W. Moore (xii)
10.38 . Executive Employment Agreement dated as of June 5, 1998, between the
Company and William L. Grivas (xii)
10.39 . 1998 Photomatrix, Inc. Stock Option Plan and Sample Agreements (xi)
10.40 . Lease Assignment and Assumption Agreement between Photomatrix Imaging
Corp. and Cryogen, Inc. (xiii)
10.41 . Management services Agreement with Dr. John Faessel (xiii)
10.42 . Promissory Note with Imperial Bank (xiii)
10.43 . Credit Agreement with Imperial Bank (xiii)
10.44 . Stock Option Agreement-Patrick W. Moore (xiv)
10.45 . Stock Option Agreement-William L. Grivas, Sr. (xiv)
10.46 . Employee Stock Purchase Plan (xiv)
10.47 . MGM TechRep Asset Transfer Agreement (xiv)
10.48 . Asset Purchase Agreement-National Metal Technologies (xv)
10.48.1 Amendment to Purchase Agreement - National Metal Technologies
10.49 . Asset Purchase Agreement-Amcraft (xv)
10.50 . John Deere equipment lease (xv)
10.51 . Agreement between Photomatrix and all affiliates and William L. Grivas, Sr. (xv)
10.52 . KPMG letter to SEC regarding resignation (xvi)
10.53 . Purchase Agreement with Cabot Industrial Properties, L.P. (xvii)
10.54 . Lease Agreement with Cabot Industrial Properties, L.P. (xvii)
10.55 . Asset Purchase Agreement with Scan-Optics, Inc. (xvii)
10.56 . Transition Agreement with Scan-Optics, Inc. (xvii)
10.57 . Loan and Security Agreement with Celtic Capital (xvii)
10.58 . Asset Purchase Agreement - Mirror USA (xviii)
10.59 . Facilities Lease - Tijuana (xviii)
10.60 . Stock Option Agreement with Patrick W. Moore, dated June 5, 1999 (xviii)
10.61 . Employment Agreement with Patrick W. Moore, dated September 23, 1999 (xix)
10.62 . Stock Option Agreement with Patrick W. Moore, dated September 23, 1999 (xix)
10.62.1 Amended Stock Option Agreement with Patrick W. Moore, dated September 23,
1999
10.63 . Stock Option Agreement with Patrick W. Moore, dated October 1, 1999
10.64 . Stock Option Agreement with James P. Hill, dated October 1, 1999
10.65 . Stock Option Agreement with William L. Grivas, Sr., dated October 1, 1999
10.66 . Stock Option Agreement with William L. Grivas, Sr., dated October 1, 1999
10.67 . Stock Option Agreement with Patrick W. Moore, dated January 7, 2000
10.68 . Stock Option Agreement with James P. Hill, dated April 27, 2000
10.69 . Stock Option Agreement with Patrick W. Moore, dated April 27, 2000
10.70 . Stock Option Agreement with William L. Grivas, Sr., dated April 27, 2000
10.71 Warrant Agreement with R. Putnam Hill and Lucy J. Hill, dated January 31,
2000
21.1. . Subsidiaries of the registrant as of March 31, 2000:
National Manufacturing Technologies de Mexico S. de R.L. de C.V., Mexico
Photomatrix Imaging, Inc., Nevada
I-PAC Manufacturing, Inc., California
National Metal Technologies, Inc., California
I-PAC Precision Machining, California
Photomatrix Acquisition Inc., California
PHRX Rep Co., California
I-PAC Express Assembly, Inc., California
Lexia Systems, Inc., California
Xscribe Imaging, Inc., California
Xscribe Legal Systems, Inc. California
23.2. . Independent Auditors' Consent from BDO Seidman LLP
24.1. . Power of Attorney (see signature pages)
(d) Schedule
27.1. . Financial Data Schedule
</TABLE>
(i) Incorporated by reference to exhibits filed with the Company's
Combined Annual Report to Shareholders and Annual Report on Form 10-K for the
fiscal year ended March 31, 1991, filed with the Securities and Exchange
Commission on June 26, 1991.
(ii) Incorporated by reference to exhibits filed with the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1992, filed with
the Securities and Exchange Commission on June 26, 1992.
(iii) Incorporated by reference to exhibits filed with the Company's
Post Effective Amendment No. 2 to its Registration Statement on Form S-2 (No.
33-43036) filed with the Securities and Exchange Commission on June 14, 1993.
(iv) Incorporated by reference to exhibits filed with the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1993, filed with
the Securities and Exchange Commission on June 29, 1993.
(v) Incorporated by reference to exhibits filed with the Company's
Current Report on Form 8-K dated October 25, 1993, filed with the Securities and
Exchange Commission on November 5, 1993.
(vi) Incorporated by reference to exhibits filed with the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1994, filed with
the Securities and Exchange Commission on June 29, 1994.
(vii) Incorporated by reference to exhibits filed with Company's
Registration Statement on Form S-8 with the Securities and Exchange Commission
on August 18, 1995.
(viii) Incorporated by reference to exhibits filed with the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1995, filed with
the Securities and Exchange Commission on June 29, 1995.
(ix) Incorporated by reference to exhibits filed with the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1996, filed with
the Securities and Exchange Commission on June 25, 1996.
(x) Incorporated by reference to exhibits filed with the Company's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1997, filed
with the Securities and Exchange Commission on June 30, 1997.
(xi) Incorporated by reference to exhibits to definitive proxy
materials filed on Schedule 14A on May 13, 1998.
(xii) Incorporated by reference to exhibits filed with the Company's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1998, filed
with the Securities and Exchange Commission on June 29, 1998.
(xiii) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998, filed with
the Securities and Exchange Commission on August 14, 1998.
(xiv) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1998, filed
with the Securities and Exchange Commission on November 9, 1998.
(xv) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998, filed
with the Securities and Exchange Commission on February 16, 1999.
(xvi) Incorporated by reference to exhibits filed with the Company's
Report on Form 8-K filed with the Securities and Exchange Commission on February
26, 1999.
(xvii) Incorporated by reference to exhibits filed with the Company's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999, filed
with the Securities and Exchange Commission on September 9, 1999.
(xviii) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999, filed with
the Securities and Exchange Commission on November 15, 1999.
(xix) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999, filed
with the Securities and Exchange Commission on January 8, 2000.
(xx) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1999, filed
with the Securities and Exchange Commission on March 23, 2000.
(xxi) Incorporated by reference to exhibits filed with the Company's
Report on Form 8-K/A filed with the Securities and Exchange Commission on March
30, 2000.
B. REPORTS ON FORM 8-K.
The Company filed a report on Form 8-K dated March 24 regarding the appointment
of Levitz, Zacks and Ciceric as its principal independent accountant.
The Company also filed a report on Form 8-K/A dated March 30 regarding the
appointment of Levitz, Zacks and Ciceric as its principal independent
accountant.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
NATIONAL MANUFACTURING
TECHNOLOGIES, INC. AND SUBSIDIARIES
Carlsbad, California
We have audited the accompanying consolidated balance sheet of National
Manufacturing Technologies, Inc. and Subsidiaries as of March 31, 2000, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the March 31, 2000 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of National Manufacturing Technologies, Inc. as of March 31, 2000, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2, the Company has suffered recurring losses from operations, has a working
capital deficiency of $3,055,000 and an accumulated deficit of $21,767,000 at
March 31, 2000, and limited cash resources with which to carry out management's
plans. These conditions raise substantial doubt about its ability to continue
as a going concern. Management's plans regarding these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
LEVITZ, ZACKS & CICERIC
San Diego, California
July 11, 2000 (except Note 3 as to
which the date is August 1, 2000)
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
National Manufacturing Technologies, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of National Manufacturing Technologies,
Inc. and subsidiaries (formerly known as Photomatrix, Inc. and subsidiaries) for
the year ended March 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
National Manufacturing Technologies, Inc. for the year ended March 31, 1999 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a working capital deficiency, the effects of which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO Seidman, LLP
Costa Mesa, California
July 16, 1999
<PAGE>
NATIONAL MANUFACTURING TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
<TABLE>
<CAPTION>
<S> <C>
ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000
-------------
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 101,000
Accounts receivable, net of allowance of $584,000. . . . . . . . . . . 2,450,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,254,000
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . 31,000
-------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . 3,836,000
-------------
Property and equipment, at cost . . . . . . . . . . . . . . . . . . . . 5,473,000
Less accumulated depreciation and amortization. . . . . . . . . . . . . (835,000)
-------------
Net property and equipment. . . . . . . . . . . . . . . . . . . . . . . 4,638,000
-------------
Goodwill, net of accumulated amortization of $217,000 (Notes 1,3 and 4) 2,373,000
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
-------------
$ 10,859,000
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,624,000
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,441,000
Credit facility (Note 8). . . . . . . . . . . . . . . . . . . . . . . . 2,368,000
Net liabilities of discontinued operations. . . . . . . . . . . . . . . 911,000
Current maturities of long-term debt (Note 8) . . . . . . . . . . . . . 547,000
-------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 6,891,000
-------------
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . 557,000
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,563,000
Commitments and contingencies (Note 11)
Shareholders' equity (Note 6):
Preferred stock, no par value; 3,173,000 shares authorized,
no shares issued and outstanding. . . . . . . . . . . . . . . . . . . -
Common stock, no par value; 30 million shares authorized,
10,114,000 shares issued and outstanding. . . . . . . . . . . . . . . 21,449,000
Additional paid in capital. . . . . . . . . . . . . . . . . . . . . . . 166,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (21,767,000)
-------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . (152,000)
-------------
$ 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
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,677,000 $ 5,009,000
Cost of revenues
6,808,000 4,269,000
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,869,000 740,000
Selling, general and administrative expenses . . . . . . . . . . . . . 5,302,000 3,154,000
------------ ------------
Operating loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,433,000) (2,414,000)
Other income (expense), net:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . (458,000) (292,000)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,000 12,000
------------ ------------
Net other income (expense) . . . . . . . . . . . . . . . . . . . (211,000) (280,000)
------------ ------------
Loss from continuing operations before income taxes . . . . . . . . . . (2,644,000) (2,694,000)
Provision for income taxes (Note 9) . . . . . . . . . . . . . . . . . . -- --
------------ ------------
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . (2,644,000) (2,694,000)
Gain (loss) from discontinued operations, net of income taxes (Note 4). 733,000 (646,000)
Loss on disposal of discontinued operation, including provision for
phase-out period of $0 and $270,000, net of income taxes (Note 4) -- (1,036,000)
------------ ------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,911,000) $(4,376,000)
------------ ------------
Other comprehensive income:
Foreign currency translation adjustment. . . . . . . . . . . . . . . -- --
Total comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . $(1,911,000) $(4,376,000)
------------ ------------
Basic and diluted net income (loss) per share:
Continuing operations. . . . . . . . . . . . . . . . . . . . . . . . $ (0.26) $ (0.30)
Discontinued operations. . . . . . . . . . . . . . . . . . . . . . . $ 0.07 $ (0.19)
------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.19) $ (0.49)
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NATIONAL MANUFACTURING TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Accumulated
Common other
Stock Additional Accumulated comprehensive
Shares Amount Paid in Capital Deficit income Total
-------- ------- ----------------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1998. . . . . 5,083,000 $19,351,000 -- $(15,480,000) $ 153,000 $ 4,024,000
Issuance of shares (Note 3) -
I-PAC acquisition . . . . . 4,848,000 1,939,000 -- -- -- 1,939,000
NMT asset acquisition . . . 100,000 200,000 -- -- -- 200,000
Repurchase of shares (Notes 6
& 10) (117,000) (114,000) -- -- -- (114,000)
Compensation expense . . . . . . -- -- 53,000 -- -- 53,000
Elimination of foreign currency
translation in connection with
discontinued operations. . . . -- -- -- -- (153,000) (153,000)
Net loss . . . . . . . . . . . . -- -- -- (4,376,000) -- (4,376,000)
----------- ------------ ---------- ------------- ---------- ------------
Balance, March 31, 1999. . . . . 9,914,000 $21,376,000 $ 53,000 $(19,856,000) -- $ 1,573,000
----------- ------------ ---------- ------------ ---------- ------------
Issuance of shares (Note 3) -
NMT Royalties . . . . . . . 116,000 38,000 -- -- -- 38,000
Stock issued IPAC purchase
agreement . . . . . . . . 40,000 21,000 -- -- -- 21,000
Stock Option Exercise . . . 40,000 13,000 -- -- -- 13,000
Compensation expense . . . . . . 4,000 1,000 113,000 -- -- 114,000
Net loss . . . . . . . . . . . . -- -- -- (1,911,000) -- (1,911,000)
----------- ------------ ---------- ------------- ---------- ------------
Balance, March 31, 2000. . . . . 10,114,000 $21,449,000 $ 166,000 $(21,767,000) -- $ (152,000)
----------- ------------ ---------- ------------- ---------- ------------
</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
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,911,000) $(4,376,000)
Net income (loss) from discontinued operations. . . . . . . . . . . . . 733,000 (1,682,000)
------------- ------------
Net loss from continuing operations . . . . . . . . . . . . . . . . . . (2,644,000) (2,694,000)
Adjustments:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 506,000 281,000
Amortization of goodwill. . . . . . . . . . . . . . . . . . . . . 126,000 96,000
Provision for doubtful accounts . . . . . . . . . . . . . . . . . 292,000 292,000
Provision for inventory . . . . . . . . . . . . . . . . . . . . . (640,000) 686,000
Options issued for compensation . . . . . . . . . . . . . . . . . 29,000 53,000
Changes in assets and liabilities, net of assets acquired:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . (1,294,000) (949,000)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 111,000 (1,198,000)
Prepaid expenses and current assets. . . . . . . . . . . . . . (23,000) 74,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 53,000 (31,000)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . (100,000) 787,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . 836,000 191,000
Other long-term liabilities. . . . . . . . . . . . . . . . . . 380,000 --
------------- ------------
Cash used in continuing operations. . . . . . . . . . . . . . . . . (2,368,000) (2,412,000)
Cash provided by discontinued operations. . . . . . . . . . . . . . 1,988,000 676,000
------------- ------------
Cash used in operations. . . . . . . . . . . . . . . . . . . . . . . . (380,000) (1,736,000)
------------- ------------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . . . . . . . (259,000) (456,000)
Disposal of land & building. . . . . . . . . . . . . . . . . . . . 651,000 --
Cash used for the repurchase of stock . . . . . . . . . . . . . . . -- (114,000)
Costs of acquisitions . . . . . . . . . . . . . . . . . . . . . . . (223,000) (150,000)
------------- ------------
Cash provided by (used in) investing activities . . . . . . . . . . . . 169,000 (720,000)
------------- ------------
Cash flows from financing activities:
Borrowings under credit facility and long-term debt . . . . . . . . 11,510,000 2,158,000
Payments of credit facility and long-term debt. . . . . . . . . . . (11,253,000) (977,000)
Cash received for the issuance of stock . . . . . . . . . . . . . . 13,000 --
Acquisition of land and building held for sale. . . . . . . . . . . -- (25,000)
------------- ------------
Cash provided by financing activities . . . . . . . . . . . . . . . . . 270,000 1,156,000
------------- ------------
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . $ 59,000 $(1,300,000)
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . 42,000 1,342,000
------------- ------------
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 101,000 $ 42,000
============= ============
Supplemental disclosures of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . $ 458,000 $ 292,000
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . 1,000 --
Supplemental disclosure of non-cash investing and financing activities:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . $ -- $ 7,861,000
Assets acquired under capital lease . . . . . . . . . . . . . . . . . . $ 2,925,000 $ --
Cash paid for acquisition . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 150,000
Capital lease obligation. . . . . . . . . . . . . . . . . . . . . . . . $ 2,925,000 $ --
Cost of acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . $ 84,000 $ --
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 5,572,000
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000 $ 2,139,000
Liabilities paid via common stock . . . . . . . . . . . . . . . . . . . $ 60,000 $ --
Options issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84,000 $ --
</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
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
-----------------------------
The consolidated financial statements include the financial statements of
National Manufacturing Technologies, Inc. and its wholly owned subsidiaries (the
consolidated entity referred to as the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
BUSINESS
--------
The Company is a value-added vertically integrated manufacturer of enclosed
electronic systems and their various sub-assembly components supplying original
equipment customers ("OEMs"). The Company also specializes in high-speed
metal stamping, progressive die and forming operations.
GOODWILL
--------
Goodwill represents the excess of purchase price over the fair value of the net
assets acquired through business combinations accounted for as purchases and is
amortized on a straight-line basis over its estimated useful life of twenty
years. During the fiscal year ended March 31, 2000 and 1999, the Company
wrote-down the value of goodwill by approximately $0 and $911,000, respectively
(see Note 4).
FOREIGN CURRENCY TRANSLATION
------------------------------
The accounts of the Company's discontinued foreign subsidiary are measured using
local currency as the functional currency; assets and liabilities are translated
into U.S. dollars at period-end exchange rates, and income and expense accounts
are translated at average monthly exchange rates. Net gains or losses resulting
from such translation are excluded from operations and accumulated in a separate
component of shareholders' equity ("accumulated other comprehensive income")
through the date of the Company's decision to dispose of Photomatrix, Ltd. (see
Note 4). The balance in the accumulated other comprehensive income account as
of the disposal date has been written off and included in loss on disposal of
discontinued operations in the accompanying statement of operations for the year
ended March 31, 1999.
INVENTORIES
-----------
Inventories include material, labor and overhead valued at the lower of cost
(first-in, first-out) or market, and consist of the following as of March 31,
2000. These amounts are net of reserves for excess and obsolete inventory of
$107,000 against raw materials and $51,000 against finished goods:
<TABLE>
<CAPTION>
<S> <C>
Raw materials . $ 534,000
Work in process 606,000
Finished goods. 114,000
----------
$1,254,000
==========
</TABLE>
REVENUE RECOGNITION
--------------------
Revenues are recorded at the time of shipment of products or performance of
services.
<PAGE>
------
PROPERTY AND EQUIPMENT
------------------------
Substantially all property and equipment is manufacturing equipment and personal
computers used in the Company's assembly, product development, sales and
administrative activities. These items are stated at cost. Depreciation is
provided over the estimated useful lives, typically three to ten years, using
the straight-line method. Additionally, during fiscal year 2000, the Company
entered into a capitalized lease for the property at 1958 Kellogg, Carlsbad, CA.
The land and building are valued at the lesser of fair market value at the time
of the purchase or the present value of future minimum lease payments. The
amortization of assets under capitalized leases is provided over three to
fifteen years and is included in depreciation and amortization expense. The
value of the property and equipment on March 31, 2000 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Land and building. . . $2,925
Equipment. . . . . . . 2,482
Leasehold improvements 66
------
$5,473
======
</TABLE>
LONG-LIVED ASSETS
------------------
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
effective April 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
INCOME TAXES
-------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
computed using enacted tax rates expected to apply to taxable income in the
years in which temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities from a change in tax rates is
recognized in income in the period that includes the enactment date. The Company
provides a valuation allowance for certain deferred tax assets, if it is more
likely than not that the Company will not realize tax assets through future
operations.
BASIC AND DILUTED LOSS PER SHARE
-------------------------------------
In December 1997, the Company adopted the provisions of 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 9,971,000 and 8,963,000 in fiscal
years 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. Options and warrants representing approximately 3,159,000 and
1,564,000 shares were excluded from the computations of net loss per common
share for the years ended March 31, 2000 and 1999, respectively, as their effect
is antidilutive.
STOCK OPTIONS
--------------
Prior to April 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. On April 1, 1996, the
Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net loss and pro forma loss per share disclosures for
employee stock option grants made in fiscal 1996 and future years as if the
fair-value based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
------------------------------------------------------------
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable.
Receivables are primarily from large manufacturers for whom the Company performs
manufacturing services. The Company grants unsecured trade credits to its
customers and performs ongoing credit evaluations of its customers' financial
conditions. One customer in the Electronic Manufacturing Services Group
accounted for 27.8% of total revenues; this same customer represented
approximately 36.8% of total accounts receivable as of March 31, 2000. Two
other customers represented approximately 9.5% and 8.5%, respectively, of total
revenues for fiscal year 2000. Four customers accounted for 18.8%, 14.2%, 13.8%
and 11.3%, respectively, of the Company's total revenue for fiscal year 1999.
No other customer accounted for more than 10% of the Company's total revenue or
accounts receivable during the years presented.
PRODUCT WARRANTY COSTS
------------------------
The products sold by the discontinued operations of Photomatrix Imaging,
provided product warranties covering products it manufactured for its customers
as part of its standard sales agreement. The warranties covered the repair
costs associated with hardware defects and ranged in term from 90 days to one
year from date of sale. The Company accrued for warranty costs at the time of
sale.
FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires that the fair values be disclosed for
the Company's financial instruments. The carrying amount of cash, accounts
receivable, accounts payable, accrued liabilities, and credit facility
approximate their fair values because of the short-term nature of these
instruments. The carrying amounts reported for notes payable and other
non-current liabilities approximate fair value because the underlying
instruments bear interest at rates that are comparable to rates available to the
Company for similar debt instruments.
USE OF ESTIMATES
------------------
Management of the Company has made estimates and assumptions relating to the
reporting of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting period to prepare
these consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
Estimates made for the year ended March 31, 1999 included provisions for the
disposition of discontinued operations. Actual amounts necessary were less than
expected thus the Company recognized $733,000 of income from discontinued
operations in fiscal year 2000.
<PAGE>
COMPREHENSIVE INCOME (LOSS)
-----------------------------
Effective April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
established new rules for the reporting and display of comprehensive income
(loss) and its components in a full set of general-purpose financial statements.
All prior period data presented has been restated to conform to the provisions
of SFAS 130.
REPORTABLE SEGMENTS
--------------------
Effective April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 requires public business enterprises to report
certain information about operating segments in complete sets of financial
statements and in condensed financial statements of interim periods issued to
shareholders. It also establishes standards for disclosures regarding products
and services, geographic areas and major customers. All prior period data
presented has been restated to conform to the provisions of SFAS 131. The
Company has determined that it operates two reportable segments: electronic
manufacturing services and metal manufacturing services.
NEW ACCOUNTING PRONOUNCEMENT
------------------------------
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 does not
expect adoption of SFAS 133 to have a material effect on its financial position
or results of operations.
2. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. This contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As shown in the consolidated financial statements, the Company has
suffered recurring losses from operations and has a working capital deficiency,
the effects of which, raise substantial doubt about the Company's ability to
continue as a going concern. In addition, the Company has negative shareholders
equity, indicating that the Company does not have sufficient assets to cover its
outstanding liabilities.
The consolidated financial statements do not include any adjustments relating to
the recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. As
described in Note 8, in June 1999, the Company retired all outstanding debt with
its bank and entered into a new $1,500,000 credit facility with another
financial institution. The new line of credit accrues interest on outstanding
borrowings at the bank's prime rate plus 4 % per annum and carries a minimum
monthly payment of $6,000 (see Note 8). This line of credit was increased in
December 1999 to $2.9 million. It was increased again in June 2000 to $3.9
million.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitability. The Company is concentrating on increasing sales and increasing
gross margins. In the current year ended March 31, 2000 consolidated revenues
increased by 93.2% or $4,668,000. Gross profit margins increased from 14.7% in
fiscal year 1999 to 29.6% in fiscal year 2000. However, there can be no
assurance as to the Company's success in these regards. During this same time
period, consolidated SG&A expenses for the year ended March 31, 2000 increased
$2,148,000 or 68.1% to approximately $5,302,000 from $3,154,000 for the year
ended March 31, 1999. The increase is mainly due to the inclusion of one full
year of SG&A expenses for the MMS group as compared to only three and one half
months of SG&A expenses in the year ended March 31, 1999.
<PAGE>
3. ACQUISITIONS
NMT DE MEXICO (TECNOLOGIAS NACIONALES MANUFACTURERAS DE MEXICO)
----------------------------------------------------------------------
On September 17, 1999, the Company entered into an Asset Purchase Agreement with
Mirror USA and Espejomex, S.A. DE C.V. to acquire certain assets in Tijuana,
Mexico which will be used by the Company's newly-created subsidiary, Tecnologias
Nacionales Manufactureras de Mexico. On August 25, 1999 Tecnologias Nacionales
Manufactureras de Mexico executed a lease of a 18,000 square foot manufacturing
facility located approximately five miles from the Otay Mesa border crossing in
Tijuana. The asset acquisition was a cash purchase for approximately $27,000.
The 3-year lease agreement calls for monthly lease payments of $4,500 for the
first four months, $5,700 until August 2000, $5,900 until August 2001 and
$6,000 until August 2002.
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 achieves 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. On December 30, 1999, Roy Gayhart former Chief Financial
Officer of National Manufacturing Technologies, Inc., exercised a stock option
grant for the purchase of 40,000 shares of the Company's common stock. Per the
terms of the Merger this stock option exercise triggered the issuance of
additional 40,000 shares to the I-PAC Shareholders (the I-PAC Shareholders are
Patrick W. Moore, the Company's 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. This issuance was ratified by the Board of Directors Compensation
Committee on January 7, 2000. As of June 30, 2000, a total of 221,654 shares
have been issued to the former I-PAC shareholders in relation to the exercise of
pre-merger stock options. 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 will be treated in accordance
with APB 16, in that any additional shares will be 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 August 1, 2000, the
Company is currently reviewing, but has not yet made a determination as to
whether any performance milestones have been achieved
If the I-PAC transaction had been consummated at the beginning of the fiscal
year 1999, the Company's consolidated revenues, net income (loss) and net income
(loss) per share for the year ended March 31, 1999 would have been:
<TABLE>
<CAPTION>
<S> <C>
1999
------------
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,508,000
Net loss from continuing operations. . . . . . . . . . . . . . . $(4,786,000)
Net loss per share from continuing operations, basic and diluted $ (0.53)
</TABLE>
These pro forma results may not be indicative of the results of operations that
would have been reported if the transaction had occurred as of these dates, or
which may be reported in the future.
NATIONAL METAL TECHNOLOGIES, INC.
------------------------------------
On December 18, 1998, the Company entered into an Agreement to acquire certain
assets and the business operations of Greene International West, Inc. ("GIW"), a
metal stamping company located in Oceanside, California. GIW recently emerged
from a Chapter 11 Federal Bankruptcy proceeding, which was canceled through the
infusion of new capital funds from its major shareholders. The new operation has
been incorporated as National Metal Technologies, Inc. ("NMT").
Under the terms of the agreement, NMT will pay a total of $500,000, comprised of
a down payment of $150,000 satisfied by the issuance of 75,000 shares of The
Company's common stock and a five year note in the amount of $350,000, for the
purchase of GIW's customer list, supplier registrations, contract backlog,
proprietary trade data, rights to hire employees and general intangibles of GIW.
Future note payments may be made in a combination of The Company's stock and
cash at the election of the parties. In addition, NMT agreed to enter into a
capital lease 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 will be satisfied with the issuance of 25,000 shares of the
Company's common stock. As the capital lease was a condition of the acquisition,
the Company has recorded the assets held under the capital lease at their
estimated fair value of $943,000 and the related bargain purchase obligation of
$490,000 as part of the net assets acquired. 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%
The Company 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 the
100,000 initial shares issued. This stock price guaranty would total an
additional amount of approximately $50,000 as of March 31, 2000, based on the
Company's current stock price.
National Metal Technologies also entered into a fifteen year lease of the 80,000
square foot facility housing the metal stamping operation, under terms that
provide rent abatements for the first three years of the facility lease. NMT
also agreed to purchase GIW's accounts receivable and usable inventory, and pay
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
are to be payable in cash. The $148,000 excess of the purchase price over the
fair value of NMT's net assets acquired is being amortized over twenty years.
I-PAC PRECISION MACHINING
---------------------------
On November 27, 1998, the Company entered into an agreement to acquire certain
assets and the business operations of Amcraft, Inc., a precision metal machining
company located in Carlsbad, California. The new operation has been incorporated
as I-PAC Precision Machining, Inc. ("Precision Machining")
The Company acquired the business assets of Amcraft out of an assignment for the
benefit of creditors proceeding. Under the terms of the purchase, the Company
paid a total of $20,000 for the purchase of work-in-process inventory,
miscellaneous equipment, customer list and backlog, rights to hire employees and
the business name of Amcraft. The Company also entered into leases of
approximately $450,000 primarily of CNC precision machining equipment, which had
previously been used by Amcraft. In addition, the Company leased the 10,000
square foot facility previously occupied by the Amcraft operations through April
of 1999, at which time the precision metal machining operation was relocated to
the newly acquired NMT facility located in Oceanside, California. The $163,000
excess of the purchase price over the fair market value of Amcraft's net assets
is being amortized over twenty years.
PHRX REP CO
-------------
On July 1, 1998, the Company acquired the assets and business of MGM Techrep,
Inc. ("MGM") and formed PHRX Rep Co. MGM, a private entity that is primarily
owned by the officers and former owners of I-PAC, is a manufacturer's sales
representative firm headquartered in Santa Ana, California. Established in
1994, MGM has been the primary sales rep firm in the Southern California area
for I-PAC. MGM also represents approximately 15 other companies engaged in the
manufacture and distribution of a wide range of industrial products used in the
manufacture and sale of electronic and related products.
The acquisition included all contracts with MGM's principals, its customer list,
all physical assets, and the MGM trade name. MGM retained existing liabilities
and released its sales personnel to the Company, and MGM's shareholders executed
non-compete agreements with respect to the sales rep business. The purchase
price of the transaction will be determined primarily on an earn-out basis by a
declining percentage (75% in the first year, 50% in the second year and 35% in
the final year following the closing date) of the commissions earned over a
three-year period by MGM on sales involving its existing principals and
customers as of the time of the acquisition. The Company has recorded
approximately $166,000 as excess of the purchase price over the fair value of
the acquired net assets related to these earn-out accruals. No payments will be
due to MGM for principals or customer accounts added after the closing date. In
addition, the Company forgave approximately $18,000 of amounts due from MGM as
of the closing date.
Consistent with the provisions of the Photomatrix/I-PAC merger agreement, this
related party transaction was reviewed and approved by the outside directors on
the Audit Committee of the Company's Board of Directors.
4. DIVESTITURE AND DISCONTINUATION
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. Under the terms of the
agreement, Scan-Optics paid the Company approximately $1,890,000 in cash and
agreed to pay an additional $210,000 to acquire all receivables, inventory and
certain equipment, as well as assume 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 enter into a transition agreement and a five-year manufacturing
agreement, under which the Company would continue to manufacture document
scanners and 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. Revenues related to discontinued operations
totaled $0, $6,274,000 and $8,595,000 for the years ended March 31, 2000, 1999
and 1998, respectively. During the year ended March 31, 2000, the Company
recorded a gain of $668,000 from discontinued scanner operations. This income
is comprised of $450,000 of inventory reserves that were not required, $145,000
of accruals for estimated losses that were not required, and $73,000 of reserves
for accounts receivable that were not required. During the year ended March 31,
1999, the Company recorded a write-off of intangible assets related to its
scanner operations in the approximate amount of $1,016,000, comprised of $44,000
related to capitalized software, $61,000 related to software development and
$911,000 related to goodwill. This write-off has been included in the loss on
disposal of discontinued operation in the accompanying consolidated statement of
operations for the year ended March 31, 1999.
LEXIA SYSTEMS, INC.
---------------------
In December 1996, the Board of Directors of the Company approved a plan to
discontinue the operations of Lexia Systems, Inc. ("Lexia"). The operations of
Lexia were shut down on September 30, 1998. Approximately $250,000 of reserves
for discontinued operating losses was not required, resulting in income from
discontinued operations in fiscal year 1999. Lexia has entered into a settlement
with a vendor, Fujitsu Computers Ltd. ("Fujitsu") regarding its disagreements
over outstanding claims. Lexia had carried on its books accounts payable claims
by Fujitsu in the amount of $341,000. Lexia has disputed these liabilities.
Lexia agreed to pay Fujitsu $200,000 over an eight month period as payment in
full of all outstanding claims against Lexia, resulting in an additional
$141,000 of income from discontinued operations for the fiscal year 1999. Lexia
also carries on its books accounts payable and unpaid rent claims by ICL, a
sister company of Fujitsu, in the amount of $457,000. Lexia disputes any
liability with respect to ICL in light of its own offsetting claims and
defenses. There is no assurance that Lexia will be successful in prevailing in
its position with regard to the outstanding claims previously made by ICL.
During the year ended March 31, 2000 approximately $65,000 of other income for
the Lexia discontinued operation was recognized from accrued accounts payable
that were no longer required.
5. SEGMENT INFORMATION
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. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies (Note
1). The following table summarizes financial information by business segment
from continuing operations.
The Company's operations are classified into two reportable business segments:
Electronic Manufacturing Services and Metal Manufacturing Services. Electronic
Services manufactures and sells electronic products, including electronic
enclosed systems, utilized in technology intensive products and business
environments. This segment is primarily comprised of I-PAC. Metal Services
manufactures and sells stamped and machined metal products and services,
including phosphate and heat treat services, utilized in military, government
and commercial weaponry products. This segment is comprised of NMT and
Precision Machining. Other includes corporate expenses, charges that do not
relate to current operations, divested operations and inter-company
eliminations.
<TABLE>
<CAPTION>
<S> <C> <C>
(000's omitted). . . . . . . . . . 2000 1999
-------- --------
REVENUE:
Electronic Services. $ 6,736 $ 3,886
Metal Services . . . 2,941 1,062
Other. . . . . . . . 0 61
-------- --------
Total. . . . . . . . $ 9,677 $ 5,009
======== ========
SEGMENT OPERATING PROFIT (LOSS):
Electronic Services. $ (880) $(1,339)
Metal Services . . . (1,763) (380)
Other. . . . . . . . 0 (695)
-------- --------
Total. . . . . . . . $(2,643) $(2,414)
======== ========
DEPRECIATION AND AMORTIZATION:
Electronic Services. $ 316 $ 172
Metal Services . . . 158 49
Other. . . . . . . . 158 2
-------- --------
Total. . . . . . . . $ 632 $ 223
======== ========
CAPITAL EXPENDITURES:
Electronic Services. $ 38 $ 3,603
Metal Services . . . 209 1,210
Other. . . . . . . . 12 2
-------- --------
Total. . . . . . . . $ 259 $ 4,815
======== ========
ASSETS:
Electronic Services. $ 6,315 $ 5,295
Metal Services . . . 2,125 2,187
Other. . . . . . . . 2,419 1,872
-------- --------
Total. . . . . . . . $10,859 $ 9,354
======== ========
INTEREST EXPENSE
Electronic Services. $ 366 $ 192
Metal Services . . . 26 0
Other. . . . . . . . 66 100
-------- --------
Total. . . . . . . . $ 458 $ 292
======== ========
</TABLE>
6. SHAREHOLDERS' EQUITY
The Company has three existing common stock option plans under which an
aggregate of 2,162,500 shares of the Company's common stock may be issued to
officers, directors and employees of the Company and its subsidiaries through
qualified incentive stock options or non-qualified stock options. The Company
has a fourth plan, which expired in fiscal 1994 with no options still
outstanding. Under the terms of the existing plans, incentive stock options are
granted at an exercise price which is not less than the fair market value of the
Company's common stock at the date of grant; non-qualified options are granted
at not less than 85% of the fair value at the date of grant. Options are
exercisable within the period and in the increments as determined by the
Company's Board of Directors or Compensation Committee appointed by the Board of
Directors.
At March 31, 2000, there were 509,957 additional shares available for grant
under the Plans. The per share weighted-average fair value of stock options
granted during 2000 and 1999 was $0.33 and $0.36, respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 2000 - expected dividend yield 0.0%, volatility of
106.8%, risk-free interest rate of 6.0%, and an expected life of 10 years; 1999
- expected dividend yield 0.0%, volatility of 84.3%, risk-free interest rate of
6.0%, and an expected life of 7 years.
The Company applied APB Opinion No. 25 in accounting for its Plans and,
accordingly, no employee compensation cost has been recognized for its stock
options in the consolidated financial statements. During 2000, the Company
recognized approximately $114,000 of compensation expense for options issued to
non-employees. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the Company's
net loss would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<S> <C> <C>
2000 1999
------------ ------------
Net loss, as reported . . . $(1,911,000) $(4,376,000)
Pro forma net loss. . . . . $(2,148,000) $(4,524,000)
Loss per share, as reported $ (0.19) $ (0.49)
Pro forma loss per share. . $ (0.22) $ (0.50)
</TABLE>
Pro forma net loss reflects only options granted in 1997 and thereafter.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting period of
2-3 years and compensation cost for options granted prior to April 1, 1996 is
not considered.
Additional information with respect to the options under the plans follows:
<TABLE>
<CAPTION>
SHARES RANGE OF EXERCISE PRICE
---------- ------------------------
<S> <C> <C>
Options outstanding March 31, 1998. 778,333 $ 0.18 - 0.47
Options granted. . . . . . . . . . 502,496 $ 0.31 - 1.03
Options canceled . . . . . . . . . (45,000) $ 0.38 - 0.75
---------- ------------------------
Options outstanding, March 31, 1999 1,235,829 $ 0.18 - 1.03
---------- ------------------------
Options granted. . . . . . . . . . 1,430,044 $ 0.19 - 0.66
Options canceled/expired . . . . . (973,330) $ 0.18 - 0.81
Options exercised. . . . . . . . . (40,000) $ 0.34
---------- ------------------------
Options outstanding, March 31, 2000 1,652,543 $ 0.18 - 0.94
---------- ------------------------
Options exercisable, March 31, 2000 795,043 $ 0.25 - 0.94
========== ========================
</TABLE>
In addition, the Company granted options for an additional 307,882 shares to two
officers in 1999. These options, which were not covered under any of the
Company's stock option plans, vested upon grant and carried an exercise price of
$0.49. In the fiscal year ended March 31, 2000, one officer was granted a fully
vested option to purchase 166,667 shares at an exercise price of $0.45. Prior
to the cessation of their relationships with the Company, two now former
directors were granted an extension to exercise stock option grants for 181,667
shares, with a range of exercise price of $0.38 to $0.69, two now former
officers were granted an extension to exercise stock option grants for 476,667
shares, with a range of exercise price of $0.18 to $0.81, and six now former
employees of the Photomatrix Imaging division were granted an extension to
exercise stock option grants for 139,999 with a range of exercise price of $0.31
to $0.38. In 1993, the Company granted two options for 21,264 shares with an
exercise price of $2.16 in connection with the Xscribe - Photomatrix merger. As
of March 31, 2000, the Company has 2,946,688 options outstanding with a weighted
average exercise price of $0.42 per share and a weighted average remaining
contractual life of 6.8 years.
At the beginning of fiscal year 2000, the Company had 1,564,475 options
outstanding with a weighted average exercise price of $0.48 per share. During
the fiscal year ended March 31, 2000, the Company granted 2,395,043 options with
a weighted average exercise price of $0.39 per share; 40,000 options were
exercised with a weighted average exercise price of $0.34 per share; 50,000
options expired with a weighted average exercise price of $0.40 per share, and
923,330 were cancelled with a weighted average exercise price of $0.45 per
share.
In addition to the options described above, the Company had outstanding warrants
and other options to acquire common shares as of March 31, 2000 as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
SHARES EXERCISE PRICE EXPIRATION
------ --------------- -------------
75,000 $ 0.44 April, 2002
87,500 $ 0.75 April, 2001
50,000 $ 0.40 January, 2005
</TABLE>
The Company is authorized to issue 3,173,000 shares of its preferred stock. No
preferred shares were outstanding as of March 31, 2000.
As discussed in Note 10, during the year ended March 31, 1999, the Company
purchased approximately 117,000 shares of the its common stock on the open
market on behalf of the National Manufacturing Technologies, Inc Employee Stock
Purchase Plan and recorded approximately $114,000 as a repurchase of common
stock in fiscal year 1999. These shares were retired.
NASDAQ had advised the Company on November 10, 1998, that it was not in
compliance with the minimum bid price requirement and that the Company was being
afforded a ninety day grace period, until February 10, 1999, to remedy this
deficiency or be de-listed from the NASDAQ SmallCap Stock Market. The Company
was unable to comply with the bid price requirement within the grace period. At
a formal hearing with NASDAQ on April 16, 1999, the Company requested an
extension period, during which time it could comply with the minimum bid
requirement. NASDAQ denied the Company's request for such an extension. On
July 8, 1999, the Company received written notification from NASDAQ that its
securities would be de-listed from the NASDAQ SmallCap Market effective the end
of trading on July 8, 1999. Effective July 9, 1999, the Company began trading on
the Over-the-Counter Bulletin Board under the symbol "PHRX". On September 23,
1999, the shareholder's approved a Company name change from Photomatrix, Inc.,
to National Manufacturing Technologies, Inc., and on October 1, 1999, the
Company's trading symbol changed from "PHRX" to "NMFG".
7. RELATED PARTY TRANSACTIONS
In connection with the acquisition of PMX, Photomatrix restructured outstanding
indebtedness to members and affiliates of the Wyly family into non-negotiable
seven-year term notes bearing interest at the rate of 8 percent per annum. The
total principal amount of the notes payable to members of the Wyly family and
their affiliates as of March 31, 2000 was $240,000. Interest and principal
payments totaling $16,000 are due monthly.
During the year ended March 31, 2000 the company recorded approximately $53,000
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' 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 $112,000 in the year ended March
31, 1999. During the year ended March 31, 2000 the company paid approximately
$33,000 of these earn out accruals as compared to $65,000 during the year ended
March 31, 1999. At March 31, 2000 the company had approximately $6,000 in earn
out payments due to MGM.
During the year ended March 31, 2000 the company paid approximately $70,000 to
Sullivan, Hill, Lewin, Rez, Engle and LaBazzo, ("SHLRE") a law firm in which
James P. Hill, a director and major shareholder, is a partner, as compared to
$139,000 during the year ended March 31, 1999. The company also entered into an
agreement with R. P. Hill and Lucy Hill, James P. Hill's parents, to pay them
approximately $2,300 per month in exchange for them posting a letter of credit
in the amount of $275,000 which guarantees the capitalized lease payment on the
1958 Kellogg facility. The interest represents a rate of 10% per annum of the
face value of the letter of credit. The letter of credit was posted to release
a $275,000 deposit on February 01, 2000. The letter of credit terminates on
June 30, 2003 and the final interest payment is due on July 2, 2003. In
addition to interest payments a warrant to purchase 50,000 shares at $0.40 per
share was granted to the Hills. The warrants expire January 31, 2005.
On July 20, 1999, the Company entered into an independent contracting 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, and the
provision of other technical and support services. The agreement, expired on or
before September 20, 1999 and required the Company to pay Mr. Grivas $2,884 per
week. On October 1, 1999, the Company entered into a new independent
contracting 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. The agreement, expires on September 30, 2002 and may be extended
for twelve months. Under this and the prior consulting agreements, Mr. Grivas
was paid $111,000 during the year ended March 31, 2000 and was granted a stock
option for the purchase of 101,044 shares of the Company's common stock at an
exercise price of $0.2969. The Company recognized non-cash expense of
approximately $29,000 for this stock option grant. A balance of $13,000 was
accrued and due to Mr. Grivas at March 31, 2000. The Board of Directors
approved these agreements.
Grivas, Moore and Hill were each awarded a bonus by the Compensation Committee
payable on March 31, 2000, for $50,000 cash or a stock option to purchase
150,000 shares of the Company's common stock at an exercise price of $0.2969, at
the grantees election. Grivas, Moore and Hill elected the granting of a stock
option. The Company recognized approximately $84,000 of goodwill for these
stock option grants. This bonus was awarded for work Grivas, Moore and Hill did
in connection with the precision machining and metal stamping acquisitions.
The former shareholders of I-PAC currently own interests in several entities
with which I-PAC has done business. During the year ended March 31, 1999, the
Company recorded a write-off of approximately $25,000 of inventory specifically
manufactured for companies which are owned at least in part by or otherwise
associated with the brother of William L. Grivas, who was the Chairman of the
Company through January 18, 1999 and who is a major shareholder of the Company.
In addition, the Company also recorded approximately $20,000 of additional
allowance for doubtful accounts for uncollectible related party accounts
receivable from such companies and from a company owned by Mr. Grivas, during
the quarter ended December 31, 1998. The inventory and receivables were acquired
by the Company as a result of its acquisition of I-PAC. The Company has
therefore recorded the additional bad debt reserves and inventory write-off as
an increase to goodwill related to the purchase of I-PAC.
During the year ended March 31, 1999, the Company paid approximately $127,000 to
Evergreen Investments ("Evergreen"), a company owned by Mr. Grivas and Patrick
W. Moore, the Chief Executive Officer and a major shareholder. $50,000 of this
amount was intended to cover personal tax liabilities of the former I-PAC
shareholders arising from pre-merger S Corp. allocations for calendar year 1997,
pursuant to the Plan and Agreement of Merger and Reorganization between the
Company and I-PAC, approximately $34,000 was for pre-merger management fees, and
approximately $43,000 was for pre-acquisition commission payments due MGM under
the acquisition agreement entered in July 1998. In addition, approximately
$31,000 was paid to James P. Hill, a director and major shareholder, to cover
personal tax liabilities of the former I-PAC shareholders arising from
pre-merger S Corp allocations for calendar year 1997, pursuant to the Plan and
Agreement of Merger and Reorganization between the Company and I-PAC.
Approximately $27,000 was paid to MGM for earn-out payments due MGM under the
acquisition agreement entered in July 1998. The Company also recorded sales of
approximately $7,000 to MGS Interconnect, a company owned by Mr. Moore and Mr.
Grivas during the current period. This amount has been fully reserved as
uncollectible as of March 31, 1999. In addition, the Company paid approximately
$139,000 to Sullivan, Hill, Lewin, Rez and Engel ("SHLRE"), a law firm in which
Mr. Hill, is a partner. At March 31, 1999, the Company had approximately $3,000
in earn-out payments due to MGM and approximately $7,000 due from MGS
Interconnect. In addition, the Company owed SHLRE approximately $44,000 at March
31, 1999. The Audit Committee approved all items in excess of $10,000 disclosed
in this paragraph.
As mentioned in Note 8 to the consolidated financial statements, certain
shareholders of the Company have guaranteed approximately $2,023,000 of the
Company's debt at March 31, 1999. This debt was retired in June 1999. Prior to
the merger, I-PAC guaranteed approximately $113,000 of debt of the same
shareholders. This guarantee continued after the merger, and remains in effect.
Claudia Fullerton, who is the wife of Patrick W. Moore, was employed by the
Company as its Director of Administration at an annual salary of $54,000 from
June 11, 1998 until April 30, 1999. Ms. Fullerton is receiving severance pay
for the period from May 1, 1999 through August 29, 1999, under terms of a
pre-merger employment agreement.
William L. Grivas, Jr., son of William L. Grivas Sr., was employed by the
Company as a Program Manager at an annual salary of $30,000 from June 11, 1998
through August 20, 1999.
8. CREDIT FACILITY AND DEBT
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 two inventory lines for $650,000 were added to the
existing line. Outstanding borrowings are collateralized by primarily all of
the Company's assets. Total borrowings under the metal inventory line is
limited to the lesser of $300,000 or 70% of the cost of eligible metal inventory
(as defined under the agreement). Total borrowings under the electronics
inventory is limited to the lesser of $350,000 or 35% of eligible electronics
inventory (as defined under the agreement). The line of credit expires on June
30, 2001. The balance outstanding as of July 31, 2000 was $2,355,000 on the A/R
line, $288,000 on the term loan, and $417,000 on the inventory lines. The line
of credit accrues interest on outstanding borrowings at the bank's prime rate
plus 4% per annum and carries a minimum monthly payment of $6,000.
In June 1999 the Company repaid a $2,100,000 credit facility with its primary
bank that included a $1,500,000 line of credit and a $600,000 term loan. The
line of credit accrued interest on outstanding borrowings at the bank's prime
rate plus 1% per annum until March 1, 1999, after which interest accrued at the
bank's prime rate plus 6% per annum. Under the terms of this agreement, total
borrowings under the line of credit were limited to the lesser of $1,500,000 or
70% of eligible accounts receivable (as defined under the agreement). The
Company had been required to (1) maintain a minimum tangible net worth of
$3,200,000 as of December 31, 1998, and $3,500,000 thereafter (2) maintain a
ratio of total liabilities to tangible net worth of not greater than 2.75 to
1.0, and (3) maintain a minimum debt service coverage of no less than 1.25 to
1.0. Based on December 31, 1998 financial data, the Company was not in
compliance with these covenants. The bank agreed to forebear from taking
adverse action, subject to the Company fulfilling certain reporting and other
conditions, including entering into discussions with alternative lenders to
replace the bank's credit facilities. The Company paid all outstanding balances
under this credit facility on June 21, 1999.
The Company has issued two notes in the aggregate amount of $2,023,000, which
are collateralized by trust deeds on the Company's real property located in
Carlsbad, California. The repayment of these notes was guaranteed by certain
major shareholders of the Company and the Small Business Administration. These
notes were payable in aggregate monthly installments of approximately $18,000,
including interest ranging from 7.5% to 9.5%. In June, 1999, the Company
retired this debt (Note 7).
Long-term debt includes the following:
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
--------------- ---------------
<S> <C> <C>
8 % note, collateralized by equipment $ 350,000 $ 350,000
8 % note, collateralized by equipment 490,000 --
Other equipment note. . . . . . . . . 255,000 --
Capitalized leases. . . . . . . . . . 2,977,000 773,000
Other notes . . . . . . . . . . . . . 38,000 44,000
--------------- ---------------
4,110,000 1,167,000
Less current portion. . . . . . . . . 547,000 158,000
--------------- ---------------
Long-term portion . . . . . . . . . . $ 3,563,000 $ 1,009,000
=============== ===============
</TABLE>
In December 1998, NMT became obligated under a five-year note, payable to 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%. The Company has
an equipment note due to its primary lender with a balance of $255,000 as of
March 31, 2000. This note bears interest at the bank's prime rate plus 4% per
annum. and matures on July 8, 2001.
On June 3, 1999, the Company entered into a sale-and-leaseback transaction of
its Carlsbad facility for $2,925,000. Under the terms of the Purchase and Sale
Agreement between Cabot Industrial Properties, L. P. ("Cabot") and the Company,
Cabot acquired all buildings, building improvements and land located at 1958
Kellogg Avenue, Carlsbad, California. The proceeds from the sale were used to
retire mortgage debt and pay down a portion of the outstanding balance under the
Company's line of credit. In a separate lease agreement, the Company agreed to
lease the Carlsbad facility under a fifteen-year capital lease with Cabot,
starting out at a monthly rental of approximately $25,000. The sale resulted in
a gain of approximately $240,000, which will be amortized to income over the
15-year life of the lease. Future minimum lease commitments of capitalized
leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
2001 . . . . . . . . . . . $ 442,000
2002 . . . . . . . . . . . 329,000
2003 . . . . . . . . . . . 328,000
2004 . . . . . . . . . . . 338,000
2005 . . . . . . . . . . . 348,000
Thereafter . . . . . . . . 3,718,000
5,503,000
----------
Less interest. . . . . . . 2,526,000
Net minimum lease payments $2,977,000
==========
</TABLE>
<PAGE>
The Company also has certain equipment notes in the aggregate amount of $38,000
with interest rates varying between 8% and 26.6% with final payments due between
2000 and 2002. These notes are collateralized by equipment, calling for minimum
monthly payments aggregating approximately $13,000 per month.
The aggregate maturities for long-term debt of continuing operations including
capital leases at March 31, 2000 are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
YEAR ENDING MARCH 31,
---------------------
2001. . . . . . . . . $ 547,000
2002. . . . . . . . . 452,000
2003. . . . . . . . . 279,000
2004. . . . . . . . . 247,000
2005. . . . . . . . . 117,000
Thereafter. . . . . . 2,468,000
----------
Total . . . . . . . . $4,110,000
==========
</TABLE>
The Company is also obligated under a series of notes payable totaling $240,000
as of March 31, 2000. These notes, which are included in net assets of
discontinued operations, bear interest at a rate of 8% per annum and mature in
April 2000. Interest and principal payments totaling $16,000 are due monthly.
Since October 1998, the Company made two payments on these notes in July 1999
and August 1999.
During the year ended March 31, 1999, the Company recorded the cancellation of a
$227,000 long-term liability due a lender/customer. This long-term liability
was previously assumed by the Company in connection with the acquisition of
I-PAC. Under terms of the agreement, the liability was only to be repaid if
sales were to be made to the lender prior to September 5, 1998 at a rate of 40%
of the non-material component of any such sales. As of September 5, 1998, the
$227,000 liability expired and all underlying security interest was released
under terms of the agreement. The Company has recorded the expiration of the
note as a reduction to goodwill related to the purchase of I-PAC.
9. INCOME TAXES
The components of loss before income taxes are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
2000 1999
------------ ------------
LOSS BEFORE INCOME TAXES
U.S. continuing operations. . . $(2,644,000) $(2,694,000)
U.S. discontinued operations. . 369,000 (1,696,000)
Foreign discontinued operations 364,000 14,000
------------ ------------
$(1,911,000) $(4,376,000)
============ ============
</TABLE>
RECONCILIATION STATUTORY TO EFFECTIVE RATES
A reconciliation from the federal income tax provision computed at the statutory
rate to the actual provision for taxes on loss from continuing operations for
fiscal year 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
---------- ------------
<S> <C> <C>
Tax at statutory federal tax rate . . . . . . . . . . . . . . . . . . . . . $(900,000) $(1,521,000)
State income taxes (net of federal benefit) . . . . . . . . . . . . . . . . 10,000 9,000
Federal impact on continuing operations from change in valuation allowance. 890,000 1,512,000
---------- ------------
$ -- $ --
========== ============
</TABLE>
DEFERRED TAX ASSETS/LIABILITIES
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The significant components of the deferred income tax assets and
deferred income tax liabilities as of March 31, 2000 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000
------------
Deferred tax assets:
Tax operating loss carryforward. . . . . . . . . . . . $ 7,431,000
Inventory and other reserves . . . . . . . . . . . . . 145,000
Capital lease obligation . . . . . . . . . . . . . . . 976,000
------------
8,552,000
Less valuation allowance . . . . . . . . . . . . . . . (6,949,000)
------------
$ 1,603,000
------------
Deferred tax liabilities:
Book basis of intangible assets greater than tax basis $ (160,000)
Book basis of fixed assets greater than tax basis. . . (1,443,000)
------------
$(1,603,000)
------------
Net deferred tax asset . . . . . . . . . . . . . . . . $ -
============
</TABLE>
The Company has recorded net tax assets in an amount approximately equal to net
tax liabilities because management believes that these items will offset in
future periods, considering statutory carryforward periods and limitations.
Management believes that sufficient uncertainty exists regarding the
realizability of the deferred tax asset items and that a valuation allowance,
equal to the net deferred tax asset amount, is required.
As of March 31, 2000, the Company has available for federal income tax purposes
a net operating loss ("NOL") carryforward of approximately $21,800,000 which can
offset future consolidated taxable income and which began to expire in fiscal
year 2000. The utilization of this NOL may be subject to an annual limitation
under Section 382 of the Internal Revenue Code.
10. EMPLOYEE BENEFIT PLANS
The Company maintains defined contribution savings and investment plans for the
benefit of all full-time employees. The Company's expense related to the plans
was $14,400 and $55,000 in 2000 and 1999, respectively. The Company has no
significant post-employment or post-retirement obligations.
On June 5, 1998, the Board of Directors authorized the National Manufacturing
Technologies Employee Stock Purchase Plan (the "Purchase Plan") and authorized
the purchase of up to $250,000 of National Manufacturing Technologies common
stock for the Purchase Plan on the open market. The purpose of the Purchase Plan
is to serve as an incentive to and to encourage stock ownership by eligible
employees of the Company so that they may acquire or increase their proprietary
interest in the success of the Company and to encourage them to remain in the
service of the Company.
All full-time employees of the Company who have been in the continuous
employment of the Company for more than nine months are eligible to participate
in the Purchase Plan, provided that no employee may be granted the right to
purchase stock under the Purchase Plan if, immediately after the right to
purchase such stock is granted, such employee owns stock representing 5% or more
of the total combined voting power or value of all classes of the Company's
stock. The option price will be determined by the Company, provided that it will
be at least 85% of the fair value of the Company's common stock on the date the
option is granted. Each participating employee may elect to contribute to the
Purchase Plan up to the lesser of $8,000 or 10% of his or her base compensation
during each calendar year.
A total of 750,000 shares of stock are available for purchase under the Purchase
Plan, subject to adjustment for various changes in the capitalization of the
Company. As of March 31, 2000, there were no shares issued for the Purchase
Plan. The Company has recorded approximately $114,000 as a repurchase of common
stock in fiscal year 1999.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
-----------------
The Company's operations in Oceanside, CA and Tijuana, Mexico are conducted in
facilities that are occupied under operating leases. The leases require payment
of taxes, maintenance expenses and insurance. Rental expense for continuing
operations (net of rental income under sublease of $65,000 and $17,000 in 2000
and 1999, respectively) incurred under operating leases (including leases which
have expired) was $575,000 and $157,000, in fiscal year 2000 and 1999,
respectively.
Future minimum lease commitments as of March 31, 2000, are as follows:
<TABLE>
<CAPTION>
<S> <C>
2001. . . . 724,000
2002. . . . 721,000
2003. . . . 720,000
2004. . . . 700,000
2005. . . . 691,000
Thereafter. 6,946,000
---------
10,502,000
==========
</TABLE>
In June 1998, the Company moved its corporate headquarters in Carlsbad, assigned
the lease of its former principal operating facility, and provided the lessor
with a guarantee of the lease through its expiration in September 2002.
Legal Proceedings
------------------
The Company and its subsidiaries are, from time to time, involved in legal
proceedings, claims and litigation arising in the ordinary course of business.
While amounts may be substantial, the ultimate liability cannot presently be
determined because of uncertainties that exist. Therefore, it is possible the
outcome of such legal proceedings, claims and litigation could have a material
effect on the quarterly or annual operating results or cash flows when resolved
in a future period. However, based on facts currently available, management
believes such matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
The Company has indemnified Stenograph Corporation in connection with a product
liability case pending in the Nineteenth Judicial District, East Baton Rouge
Parish, in which Stenograph is a defendant (Brown v. Stenograph et al). The
Company has tendered this claim to its insurance carrier, St. Paul Fire ("St.
Paul"). St. Paul has assumed the Company's defense. The insurance carriers have
prevailed in all similar judgments rendered to date. It may take several years
before this litigation is ultimately resolved. The Company believes that this
remaining case is without merit and further believes that if any liability
results from these claims, the liability (excluding punitive damages, if any)
will be covered by its insurance policies.
EMPLOYMENT AGREEMENTS
----------------------
The Company's Chief Executive Officer ("CEO") is employed under an employment
agreement that expires on September 30, 2004. The Company's former President was
employed under an employment agreement, which expired on July 31, 1999. The
former President resigned as an officer on June 21, 1999 and his employment
terminated on July 31, 1999. The CFO's employment terminated on September 30,
1999. If the CEO's employment is terminated by the Company without cause prior
to the end of his term, then he will be entitled to receive his base salary,
stock option vesting and health insurance benefits for the remainder of the
term.
OFFICERS SEVERANCE POLICY
---------------------------
In 1988, the Company's Board of Directors adopted an Officers Severance Policy
that was modified in November 1990, February 1997 and in April 1999. Under the
policy, the former President began receiving twelve weeks' compensation
beginning August 1, 1999 and the former CFO began receiving eight weeks
compensation beginning October 1, 1999. In addition, the CEO is to receive
twenty-nine weeks' compensation upon termination of employment by the Company,
in addition to amounts due him under his employment contract.
DIVIDEND RESTRICTION
---------------------
Pursuant to state laws, the Company may be restricted from paying dividends to
its stockholders as a result of its accumulated deficit as of March 31, 2000.
12. CORPORATE NAME CHANGE
On September 23, 1999 the Company's shareholders approved a change in the name
of the Company from Photomatrix, Inc. to National Manufacturing Technologies,
Inc. ("NMT"). The Company changed its name to National Manufacturing
Technologies, Inc. to better reflect the Company's currently diverse vertically
integrated contract manufacturing business operations. The Company closed its
sale of product rights and related assets of its scanner division to Scan-Optics
on June 21, 1999. During this past year, the Company has continued to
accomplish its strategy of vertically integrating complementary manufacturing
services to OEM customers, as demonstrated by its recent acquisitions of
National Metal Technologies, Inc. and I-PAC Precision Machining, Inc. Also, the
Company believes that the word "manufacturing" is more expressive of its basic
core competency, namely the creation of value-added manufactured goods.
13. FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of fiscal year 2000, an adjustment was made to the
accounting treatment on the lease on the building at 1958 Kellogg Avenue,
Carlsbad, CA (see Note 8). The lease had been treated as an operating lease
since its inception, June 1999. Upon review of the transaction in the course of
the preparation of the included financial statements for fiscal year 2000, it
was determined that the lease should be treated as a capitalized lease for
accounting purposes. This resulted in recording a $2,925,000 capital lease and
associated capital lease obligations.
<PAGE>
14. SUBSEQUENT EVENTS
In July 2000, the Company began negotiating the re-scheduling of the next four
quarterly payments due under five and four year notes payable to GIW, as well as
modification to the royalty payment for the next two semi-annual royalty
periods. GIW agreed that if the next note payments due in October were
accelerated to August 2000, the following three quarterly payments would be
re-scheduled to the end of the current payment schedule and will accrue 8%
interest from the original payment date to the new re-scheduled payment date.
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 the Company'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. 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 50,000 shares of common stock at an exercise price of $1.4375 or at a
price to be adjusted at exercise if the stock price is not $2.00 at July 6,
2002.
Subsequent to the end of fiscal year 2000, 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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on August 7, 2000.
NATIONAL MANUFACTURING TECHNOLOGIES, INC.
By /s/ Patrick W. Moore
-----------------------
Patrick W. Moore
Chief Executive
Officer, President
and Chairman of the Board
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Patrick W. Moore and Larry A. Naritelli, jointly
and severally, his attorney-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendment to the Report on Form
10-KSB and file the same with the exhibits thereto and any other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or a
substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Signature Capacity Date
-------- --------- --------
/s/ Patrick W. Moore 8/7/00
------------------------- ------
Patrick W. Moore Chief Executive Officer, President and
Chairman of the Board
/s/ Larry A. Naritelli 8/7/00
------------------------- ------
Larry A. Naritelli Principal Accounting Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on August 7, 2000.
NATIONAL MANUFACTURING TECHNOLOGIES, INC.
By /s/ Patrick W. Moore
-----------------------
Patrick W. Moore
Chief Executive
Officer, President
and Chairman of the Board
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Patrick W. Moore and Larry A. Naritelli, jointly
and severally, his attorney-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendment to the Report on Form
10-KSB and file the same with the exhibits thereto and any other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or a
substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Signature Capacity Date
-------- --------- --------
/s/ Patrick W. Moore 8/7/00
---------------------------- ------
Patrick W. Moore Chief Executive Officer, President and
Chairman of the Board
/s/ Larry A. Naritelli 8/7/00
---------------------------- ------
Larry A. Naritelli Principal Accounting Officer
/s/ James P. Hill 8/7/00
---------------------------- ------
James P. Hill Director
/s/ Michael J. Genovese 8/7/00
---------------------------- ------
Michael J. Genovese Director
/s/ Michael R. Moore 8/7/00
---------------------------- ------
Michael R. Moore Director
/s/ Binh Q. Le 8/7/00
---------------------------- ------
Binh Q. Le Director
/s/ John G. Hamilton, Jr. 8/7/00
---------------------------- ------
John G. Hamilton, Jr. Director
/s/ Brian L. Kissinger 8/7/00
---------------------------- ------
Brian L. Kissinger Director
<PAGE>
