UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to_______ .
Commission file number 0-16055
NATIONAL MANUFACTURING TECHNOLOGIES, INC.
(FORMERLY PHOTOMATRIX, INC.)
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3267788
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(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
1958 KELLOGG AVE., CARLSBAD, CALIFORNIA 92008
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(Address of principal executive offices) (Zip Code)
(760) 431-4999
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(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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At August 1, 2000, 10,540,000 shares of Common Stock of National Manufacturing
Technologies, Inc. were outstanding.
Transitional Small Business Disclosure Format.
Yes No X
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INDEX
NATIONAL MANUFACTURING TECHNOLOGIES, INC.
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PART I - FINANCIAL INFORMATION
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ITEM 1: FINANCIAL STATEMENTS
Consolidated balance sheets as of June 30, 2000 (unaudited) and March 31, 2000 2
Unaudited consolidated statements of operations for the three months ended
June 30, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited consolidated statements of cash flows for the three months ended
June 30, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Unaudited notes to consolidated financial statements . . . . . . . . . . . . 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . 11
PART II - OTHER INFORMATION
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ITEM 1: LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 2: CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 3: DEFAULT UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . . . . . 16
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . 16
ITEM 5: OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . 16
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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NATIONAL MANUFACTURING TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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JUNE 30, 2000
ASSETS . . . . . . . . . . . . . . . . . . . . . . . . (UNAUDITED) MARCH 31, 2000
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Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . $ 105,000 $ 101,000
Accounts receivable, net of allowance
of $503,000 and $584,000. . . . . . . . . . . . 3,602,000 2,450,000
Inventories. . . . . . . . . . . . . . . . . . . . . 1,735,000 1,254,000
Prepaid expenses and other . . . . . . . . . . . . . 58,000 31,000
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Total current assets. . . . . . . . . . . . . . 5,500,000 3,836,000
Property and equipment, net. . . . . . . . . . . . . . 4,542,000 4,638,000
Goodwill, net. . . . . . . . . . . . . . . . . . . . . 2,637,000 2,373,000
Other assets . . . . . . . . . . . . . . . . . . . . . 13,000 12,000
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Total assets . . . . . . . . . . . . . . . . . . . . . $ 12,692,000 $ 10,859,000
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . $ 2,337,000 $ 1,624,000
Accrued liabilities . . . . . . . . . . . . . . . . 1,559,000 1,441,000
Credit facility . . . . . . . . . . . . . . . . . . 2,842,000 2,368,000
Net liabilities of discontinued operations. . . . . 398,000 911,000
Current maturities of long-term debt. . . . . . . . 505,000 547,000
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Total current liabilities . . . . . . . . . . . 7,641,000 6,891,000
Other long-term liabilities. . . . . . . . . . . . . . 647,000 557,000
Long-term debt . . . . . . . . . . . . . . . . . . . . 3,498,000 3,563,000
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Total liabilities. . . . . . . . . . . . . . . . . . . 11,786,000 11,011,000
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Shareholders' equity:
Preferred Stock, no par value; 3,173,000 shares
Authorized, no shares issued and outstanding . -- --
Common stock, no par value; 30 million shares
Authorized and 10,540,000 and 10,114,000 shares
issued and outstanding respectively . . . . . . 21,801,000 21,449,000
Additional paid-in capital. . . . . . . . . . . . . 174,000 166,000
Accumulated deficit . . . . . . . . . . . . . . . . (21,069,000) (21,767,000)
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Total shareholders' equity. . . . . . . . . . . 906,000 (152,000)
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$ 12,692,000 $ 10,859,000
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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NATIONAL MANUFACTURING TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended June 30
2000 1999
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Revenues . . . . . . . . . . . . . . . . . . . . $ 5,014,000 $1,753,000
Cost of revenues . . . . . . . . . . . . . . . . 3,376,000 1,158,000
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Gross profit
1,638,000 595,000
Selling, general and administrative expenses. 1,343,000 1,446,000
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Operating income/(loss). . . . . . . . . . . . . 295,000 (851,000)
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Other expense, net . . . . . . . . . . . . . . . (72,000) (77,000)
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Income/(loss) from continuing operations before
income taxes. . . . . . . . . . . . . . . . . 223,000 (928,000)
Provision for income taxes . . . . . . . . . . . -- --
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Income/(loss) from continuing operations . . . . 223,000 (928,000)
Income from discontinued operations. . . . . . . 475,000 391,000
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Net income/(loss). . . . . . . . . . . . . . . . $ 698,000 $ (537,000)
============ ===========
Basic net income/(loss) per share:
Continuing operations . . . . . . . . . . . . $ 0.02 $ (0.09)
Discontinued operations . . . . . . . . . . . $ 0.05 $ 0.04
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Net income/(loss) . . . . . . . . . . . . . . $ 0.07 $ (0.05)
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Basic weighted average number of common shares
outstanding. . . . . . . . . . . . . . . . . . 10,234,000 9,914,000
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Diluted net income/(loss) per share:
Continuing operations . . . . . . . . . . . . $ 0.02 $ (0.09)
Discontinued operations . . . . . . . . . . . $ 0.04 $ 0.04
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Net income/(loss) . . . . . . . . . . . . . . $ 0.06 $ (0.05)
============ ===========
Diluted weighted average number of common
shares outstanding. . . . . . . . . . . . . . 12,089,000 9,914,000
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
NATIONAL MANUFACTURING TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS ENDED JUNE 30
2000 1999
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Cash flows from operating activities:
Net income/(loss): . . . . . . . . . . . . . . . . . . . . . . . $ 698,000 $ (537,000)
Net income from discontinued operations. . . . . . . . . . . . . 475,000 391,000
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Net income/(loss) from continuing operations . . . . . . . . . . 223,000 (928,000)
Adjustments:
Depreciation and amortization. . . . . . . . . . . . . . . 125,000 14,000
Amortization of goodwill . . . . . . . . . . . . . . . . . 51,000 19,000
Provision for doubtful accounts. . . . . . . . . . . . . . (81,000) (35,000)
Provision for inventory. . . . . . . . . . . . . . . . . . -- 8,000
Options issued for compensation. . . . . . . . . . . . . . 7,000 --
Changes in assets and liabilities, net of assets acquired:
Accounts receivable . . . . . . . . . . . . . . . . . . (1,071,000) 626,000
Inventories . . . . . . . . . . . . . . . . . . . . . . (481,000) (98,000)
Prepaid expenses and current assets . . . . . . . . . . (27,000) (53,000)
Other assets. . . . . . . . . . . . . . . . . . . . . . -- 50,000
Accounts payable. . . . . . . . . . . . . . . . . . . . 713,000 (467,000)
Accrued liabilities . . . . . . . . . . . . . . . . . . 118,000 65,000
Other long-term liabilities . . . . . . . . . . . . . . 90,000 --
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Cash used in continuing operations . . . . . . . . . . . . . (333,000) (799,000)
Cash provided by (used in) discontinued operations . . . . . (38,000) 2,493,000
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Cash provided by (used in) operations. . . . . . . . . . . . . . (371,000) 1,694,000
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Cash flows from investing activities:
(Acquisition) disposal of property and equipment . . . . . . (30,000) 22,000
Costs of acquisitions. . . . . . . . . . . . . . . . . . . . (50,000) (76,000)
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Cash used in investing activities. . . . . . . . . . . . . . . . (80,000) (54,000)
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Cash flows from financing activities:
Borrowings (payments) under credit facility and long-term debt . 368,000 (1,820,000)
Cash received for the issuance of stock. . . . . . . . . . . . . 87,000 --
Proceeds from sale of land and building. . . . . . . . . . . . . -- 651,000
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Cash provided by (used in) financing activities. . . . . . . . . 455,000 (1,169,000)
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Increase in cash. . . . . . . . . . . . . . . . . . . . . . . . $ 4,000 $ 471,000
Cash at beginning of period. . . . . . . . . . . . . . . . . . . 101,000 42,000
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Cash at end of period. . . . . . . . . . . . . . . . . . . . . . $ 105,000 $ 513,000
============ ============
Supplemental disclosure of non-cash investing and financing
activities:
Cash paid for acquisition. . . . . . . . . . . . . . . . . . . $ 265,000 --
Common stock issued. . . . . . . . . . . . . . . . . . . . . . $ 265,000 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NATIONAL MANUFACTURING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 AND MARCH 31, 2000 AND
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
1. GENERAL
Basis of Presentation
-----------------------
The accompanying unaudited consolidated financial statements reflect the
accounts of National Manufacturing Technologies, Inc. (formerly Photomatrix,
Inc.; the "Company"), together with its subsidiaries. The Company is a
value-added manufacturing company, specializing in the manufacture of enclosed
electronic systems and their various component assemblies. On June 5, 1998, the
Company acquired I-PAC Manufacturing, Inc. ("I-PAC"). On July 1, 1998, the
Company acquired the assets and business of MGM Techrep, Inc., and formed PHRX
Rep Co. On November 27, 1998, the Company acquired certain assets and the
business operations of Amcraft and incorporated the operations as I-PAC
Precision Machining, Inc. On December 18, 1998, the Company acquired certain
assets and the business operations of Greene International West, Inc. and
incorporated the operations as National Metal Technologies, Inc. ("NMT"). All
acquisitions were treated as purchases for accounting and financial reporting
purposes. These companies comprise the manufacturing group. Under the purchase
method of accounting, the results of operations of the acquired companies are
combined with those of the Company from the date of acquisition. In addition,
on June 21, 1999, the Company sold product rights and certain assets of its
document scanner operations to Scan-Optics, Inc. Accordingly, operational
results of the scanner operations have been reclassified as discontinued
operations for the respective periods presented herein. The balance sheets of
the scanner operations have similarly been reclassified as net assets
(liabilities) of discontinued operations. All significant intercompany
transactions and balances have been eliminated.
Certain information and disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to prevent the
information from being misleading. These unaudited consolidated financial
statements reflect, in the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present the Company's results of
operations and financial position as of the dates and for the periods presented.
These unaudited consolidated financial statements should be read in conjunction
with the audited financial statements and related notes included in the
Company's Report on Form 10-KSB filed with the Securities and Exchange
Commission for the year ended March 31, 2000. The results for the interim
periods presented are not necessarily indicative of results to be expected for a
full year.
The Company's accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in the Company's Form
10-KSB, for the year ended March 31, 2000, the Company has experienced recurring
losses in prior years and has a working capital deficiency on its balance sheet.
The Company believes that the quarter ended June 30, 2000 is indicative of
operating results that are required to continue as a going concern. For the
quarter ended June 30, 2000, the Company reported income from continuing
operations of $223,000 as compared to a net loss of $928,000 from continuing
operations. In addition, the Company's balance sheet as of June 30, 2000
reflects positive shareholder's equity of $906,000 as compared to a
shareholder's deficit as of March 31, 2000 of $152,000.
<PAGE>
2. CREDIT FACILITY
On June 18, 1999, the Company entered into a $1,500,000 credit facility with its
primary lender that included a $1,200,000 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. In June 2000, the A/R line was increased to $3,000,0000.
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 August 11, 2000 was $2,408,000 on the A/R line,
$288,000 on the term loan, and $420,000 on the inventory lines. The line of
credit accrues interest on outstanding borrowings at the bank's prime rate plus
4% per annum.
On July 6, 2000, in conjunction with the A/R line increase in June 2000, the
Company issued a Warrant to purchase common stock to its primary lender. The
Warrant allows the holder to purchase 200,000 shares of the Company's common
stock at a price of $1.43 per shares; the Warrant expires on June 18, 2001.
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 paid all outstanding balances under this credit facility on June 21,
1999.
3. SEGMENT INFORMATION
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.
In evaluating financial performance, management focuses on operating income as a
measure of profit or loss. Operating income is before interest expense, interest
income and income tax expense. Other includes corporate expenses, charges that
do not relate to current operations, divested operations and inter-company
elminations. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The following table
summarizes financial information by business segment from continuing operations.
<PAGE>
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THREE MONTHS ENDED THREE MONTHS ENDED
(000's omitted) JUNE 30, 2000 JUNE 30, 1999
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REVENUE:
Electronic Services. . . . . . $3,526 $ 885
Metal Services . . . . . . . . 1,488 842
Other. . . . . . . . . . . . . - 26
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Total. . . . . . . . . . . . . $5,014 $ 1,753
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SEGMENT OPERATING PROFIT (LOSS):
Electronic Services. . . . . . $ 550 $ (334)
Metal Services . . . . . . . . (190) (517)
Other. . . . . . . . . . . . . (65) --
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Total. . . . . . . . . . . . . $ 295 $ (851)
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4. COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components. SFAS No. 130 requires the cumulative
translation adjustment to be included as a component of comprehensive income
(loss) in addition to net income (loss) for the period. The Company had no
components of comprehensive income during the periods presented.
5. INCOME TAXES
The Company's effective tax rate differs from the statutory tax rate due to
valuation allowances on deferred tax assets.
6. BASIC AND DILUTED LOSS PER SHARE
In December 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
supersedes APB No. 15 and replaces "primary" and "fully diluted" earnings per
share ("EPS") under Accounting Principles Board ("APB") Opinion No. 15 with
"basic" and "diluted" EPS. Unlike primary EPS, basic EPS excludes the dilutive
effects of options, warrants and other convertible securities. The weighted
average number of common shares outstanding used in computing basic EPS was
10,234,000 and 9,914,000, in the first quarters of 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.
Incremental shares from assumed conversions of options and warrants representing
approximately 1,736,000 shares were used in computations of diluted earnings per
share for the three months ended June 30, 2000. For the three month period ended
June 30, 2000, outstanding options and warrants for the purchase of
approximately 103,000 shares were not used in computations of diluted earnings
per share because they were priced above the average market value for the three
month period ending June 30, 2000. For the three months ended June 30, 1999,
options and warrants to purchase approximately 1,607,000 shares were not used in
computations of diluted earnings per share because their effect was
anti-dilutive.
<PAGE>
7. DISCONTINUED OPERATIONS
Photomatrix Imaging, Inc. and Photomatrix, Ltd.
----------------------------------------------------
On March 2, 1999, the Company approved a plan to sell certain product rights,
assets and liabilities of Photomatrix Imaging, Inc. ("Imaging") and its
wholly-owned subsidiary, Photomatrix, Ltd. ("Ltd."). On June 21, 1999, the
Company completed the transaction whereby it sold product rights and certain
assets of its document scanner operations to Scan-Optics, Inc of Manchester,
Connecticut ("Scan-Optics"). Under the terms of the agreement, Scan-Optics paid
the Company approximately $2,100,000 in cash to acquire all receivables,
inventory and certain equipment. Scan-Optics also assumed nearly $2 million of
current and future liabilities of Imaging and Ltd. Scan-Optics also assumed
lease commitments associated with the Company's engineering facilities located
in Chandler, Arizona, as well as its facilities in Great Britain. In addition,
Scan-Optics agreed to pay certain royalties, not to exceed $250,000 over a
three-year period, and also entered into a Transition Agreement and a five year
Manufacturing Agreement, under which Imaging will continue to manufacture
document scanner parts for Scan-Optics. Proceeds from this sale were used to
reduce short-term debt and provide working capital to the Company. The
purchase price was subject to adjustment based upon certain additional due
diligence to be completed by Scan-Optics within ninety days. There was no
subsequent adjustment.
Current and prior period balances have been reclassified to present Imaging and
Ltd., as a discontinued operation.
Lexia Systems, Inc.
---------------------
During fiscal 1997, the Company sold its court reporting business (Xscribe Legal
Systems, Inc.) and discontinued Lexia Systems, Inc. Of the total liabilities
related to Lexia Systems, Inc. $457,000 is related to accounts payable and
unpaid rent claims to International Computers Limited, Inc. ("ICL"). Current
year income from discontinued operations included $457,000 for the write-off of
accounts payable and unpaid rent claims of ICL which had been carried on Lexia's
books. Lexia had disputed these liabilities with respect to ICL in light of its
own offsetting claims and defenses. The legal statute of limitations on these
ICL claims expired in the quarter ended June 30, 2000.
8. ACQUISITION OF I-PAC MANUFACTURING, INC.
On March 16, 1998, the Company entered into an Agreement and Plan of Merger and
Reorganization with I-PAC Manufacturing, Inc. The Agreement was approved by the
shareholders of the Company on June 5, 1998, and the transaction closed on June
11, 1998. As a result of the Merger, the 8,500 outstanding shares of I-PAC
common stock were exchanged for 4,848,000 shares of The Company's Common Stock
and possibly additional 4,652,000 shares of the Company's common stock in the
event that I-PAC 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. During the quarter ended June 30, 2000, 181,664
shares were issued to the former I-PAC shareholders in relation to the exercise
of pre-merger stock options. As of August 1, 2000, a total of 488,321 shares
have been issued to the former I-PAC shareholders in relation to the exercise of
pre-merger stock options and 254,416 pre-merger options and warrants remain
outstanding which, if exercised, would result in additional issuances of shares
to the former I-PAC shareholders. The Merger was accounted for as a purchase of
I-PAC by the Company for accounting and financial reporting purposes. Under the
purchase method of accounting, upon closing of the Merger, I-PAC's results of
operations were combined with those of the Company, and I-PAC's assets and
liabilities were recorded on the Company's books at their respective fair
values. The purchase price, amounting to $2,191,000, was comprised of the value
of the stock plus acquisition costs and was allocated among the assets acquired
and the liabilities assumed. The issuance of additional shares awarded to I-PAC
shareholders under the earn-out formula and/or in connection with the exercise
of the Company's outstanding options and warrants are treated in accordance with
APB 16, in that any additional shares are treated as additional costs of the
acquired enterprise and amortized accordingly over the benefit period. The
$2,200,000 excess of the purchase price over the fair value of I-PAC's net
assets is amortized over a twenty year period. As of August 1, 2000, the
Company is currently reviewing, but has not yet made a determination as to
whether any performance milestones have been achieved
9. ACQUISITION OF ASSETS OF 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.
10. RELATED PARTY TRANSACTIONS
During the quarter ended June 30, 2000 the Company recorded approximately $9,000
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 $32,000 in the quarter ended June
30, 1999. During the quarter ended June 30, 2000 the Company paid approximately
$9,000 of these earn out accruals as compared to $32,000 during the quarter
ended June 30, 1999. At June 30, 2000 the Company had approximately $6,000 in
earn out payments due to MGM.
During the quarter ended June 30, 2000 the Company did not pay anything to
Sullivan, Hill, Lewin, Rez, and Engle ("SHLRE") a law firm in which James P.
Hill, a director and major shareholder, is a partner, as compared to $1,000
during the quarter ended June 30, 1999. In the quarter ended June 30, 2000, the
Company paid approximately $7,000 to R. P. Hill and Lucy Hill, James P. Hill's
parents, for the letter of credit they posted in the amount of $275,000 which
guarantees the capitalized lease payment on the 1958 Kellogg facility; final
interest payment is due on July 2, 2003.
On October 1, 1999, the Company entered into a 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 consulting agreement, Mr. Grivas was paid $33,000 during the
quarter ended June 30, 2000.
In the quarter ended June 30, 2000, the Company paid approximately $5,000 and
recorded $8,000 in accounts payable to Epitech, Inc., a company that whose
officers and directors include William L. Grivas and Brian Kissinger (a
Director), for materials and services. In addition, the Company recorded
accounts receivable to Epitech for $18,000 for the quarter ended June 30, 2000.
During the quarter ended June 30, 2000, the Compensation Committee approved an
agreement with Jim Hill whereas Mr. Hill would provide consulting services to
the Company on certain pending business transactions outside of the normal scope
of services of a director. Mr. Hill was paid $5,000 for these services in the
quarter ended June 30, 2000.
11. 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS
RELATING TO THE COMPANY'S PLANS AND OBJECTIVES FOR FUTURE OPERATIONS INCLUDING
ACQUIRING OTHER BUSINESSES, INCREASING SALES AND IMPROVING MARGINS, ASSUMPTIONS
AND STATEMENTS RELATING TO THE COMPANY'S FUTURE ECONOMIC PERFORMANCE AND OTHER
NON-HISTORICAL INFORMATION. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, WITHOUT LIMITATION, THOSE RISKS DISCUSSED UNDER THE
HEADING "ADDITIONAL RISK FACTORS" AS WELL AS OTHER FACTORS AS DISCUSSED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH 31, 2000.
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and unaudited notes to consolidated financial statements included
elsewhere herein.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------------------
Continuing Operations
----------------------
Consolidated revenues for the quarter ended June 30, 2000 increased
approximately $3,261,000 or 186.0% to $5,014,000 from $1,753,000 for the quarter
ended June 30, 1999. The Electronic Manufacturing Services Group (EMS) revenue
increased $2,641,000 or 298.4 % to $3,526,000 from $885,000 for the quarter
ended June 30, 1999. The Metal Manufacturing Services Group (MMS) revenue
increased $645,000 or 76.6% to $1,488,000 from $842,000 for the quarter ended
June 30, 1999. The increase in the EMS Group revenue is the result of an
expanding customer base and increased demand from existing customers, which is
expected to continue. Revenue growth for the MMS Group continued to be
adversely affected by shortages of raw material for the metal stamping
operation.
Consolidated gross margin for the quarter ended June 30, 2000 increased
$1,043,000 or 175.3% to $1,638,000 from $595,000 for the quarter ended June 30,
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 decreased
1.2% to 32.7% for the three months ended June 30, 2000 as compared to 33.9% for
the three months ended June 30, 1999. The current quarter amount is comprised
of approximately $1,233,000 or 35.0% of EMS gross margin, an increase of
$885,000 compared with $348,000 or 39.3% for the quarter ended June 30, 1999.
The MMS group gross margin increased $158,000 to $405,000 or 27.2% as compared
with $247,000 or 29.3% for the quarter ended June 30, 1999. The consolidated
gross margin represents an amount considered by management to be less than
expected under normal operating conditions. Margins are expected to increase
during the current year as shipments increase on new production contracts, there
is increased utilization of capacity, and shortages of raw material for the
metal stamping operation ease.
Consolidated selling, general, and administrative ("SG&A") expenses for the
quarter ended June 30, 2000 decreased $103,000 or 7.1% to approximately
$1,343,000 from $1,446,000 for the quarter ended June 30, 1999. This amount is
comprised of approximately $326,000 of corporate SG&A expenses as compared to
$686,000 in the quarter ended June 30, 1999. The decrease is mainly due to
staff reductions which occurred as a result of the sale of the scanner
operations. EMS group SG&A expenses were $500,000, as compared to $330,000 in
the quarter ended June 30, 1999 and MMS group expenses were $517,000 as compared
to $430,000 for the quarter ended June 30, 1999. The increases in SG&A expense
at the group levels were mainly due to additional staff to support the increased
level of revenues.
Consolidated operating profit for the quarter ended June 30, 2000 increased
$1,146,000 or 134.7% from an operating loss of $851,000, or (48.5%), to an
operating profit of $295,000, or 5.9%, for the quarter ended June 30, 1999.
This increase is due to strong revenue growth concentrated in the EMS group.
The MMS group is expected to increase profitability during the current year as
new product lines with higher projected margins begin shipment. In addition,
increased use of capacity and the easing of shortages of raw material for the
metal stamping operation are expected to increase margins and profitability for
the MMS group.
Consolidated other expense for the quarter ended June 30, 2000 totaled
approximately $72,000 compared to an expense of $77,000 for the quarter ended
June 30, 1999. It was comprised primarily of interest expense of $184,000 as
compared to $109,000 for the quarter ended June 30, 1999, and other income of
$115,000. The other income resulted from accounts payable settlements in the
amount of $76,000, bad debt recovery of $28,000, rental income of $5,000,
recognition of deferred gain on the sale of assets of $4,000, and miscellaneous
income of $2,000.
The net effect of the increases in revenues and lower SG&A expenses resulted in
a consolidated net income from continuing operations of $223,000, or 4.4%, or
$0.02 basic and diluted earnings per share for the quarter ended June 30, 2000.
This is an increase of $1,151,000 in net income or 124.0% from the net loss from
continuing operations from the same period in 1999 of $928,000 ($0.09 per
share). Net income reflects $441,000, or 12.5%, of net income attributed to the
EMS Group, an increase of $821,000, or 216.1%, from a net loss of $380,000, or
42.9%, for the quarter ended June 30, 1999. Net income includes a loss of
$218,000, or 14.7%, attributable to the MMS Group, a decrease of $304,000, or
58.2% from a net loss of $522,000, or 62.0%, in the quarter ended June 30, 1999.
Discontinued Operations
------------------------
On June 21, 1999, the Company closed the sale of its scanner operations to
Scan-Optics.
Current quarter income that is related to the discontinued scanner operation is
$18,000 which is related to a write off of accounts payable as compared to
$391,000 for the quarter ended June 30, 1999. The quarter ended June 30, 1999
income included $232,000 of inventory reserves related to the Photomatrix, Ltd.
scanner operation that were not required and $159,000 of accruals for estimated
losses at the Photomatrix, Ltd. operation that were not required.
During fiscal 1997, the Company sold its court reporting business (Xscribe Legal
Systems, Inc.) and discontinued Lexia Systems, Inc. Of the total liabilities
related to Lexia Systems, Inc. $457,000 is related to accounts payable and
unpaid rent claims to International Computers Limited, Inc. ("ICL"). Current
year income from discontinued operations included $457,000 for the write-off of
accounts payable and unpaid rent claims of ICL which had been carried on Lexia's
books. Lexia had disputed these liabilities with respect to ICL in light of its
own offsetting claims and defenses. The legal statute of limitations on these
ICL claims expired during the quarter ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
RECENT AND FUTURE SOURCES OF AND DEMANDS ON LIQUIDITY AND CAPITAL RESOURCES
---------------------------------------------------------------------------
On June 18, 1999, the Company entered into a $1,500,000 credit facility with its
primary lender that included a $1,200,000 A/R line of credit and a $300,000 term
loan. Under the terms of this agreement, total borrowings under the line of
credit were limited to the lesser of $1,200,000 or 80% of eligible accounts
receivable (as defined under the agreement). In December 1999, the A/R line was
increased to $2,000,000, and 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 August 11, 2000
was $2,408,000 on the A/R line, $288,000 on the term loan and $420,000 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 which is December 2003,
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
GIW's election. Royalty payments thereafter will return to be paid in cash
only, in accordance with the amendment to the agreement reached in March 2000.
GIW also agreed to take a subordinate position on the equipment acquired at the
time of the original transaction with GIW and in return the Company granted GIW
a Warrant to purchase 100,000 shares of common stock at an exercise price of
$1.438 or at a price to be adjusted at exercise if the stock price is not $2.00
at July 6, 2002. This subordination is intended to allow the Company to secure
additional financing against that equipment as collateral.
The Company is also obligated under a series of notes payable totaling $240,000.
as of June 30, 2000. These notes bear interest at a rate of 8% per annum and
matured in April 2000. Interest and principal payments totaling $16,000 are due
monthly. Since October 1998, the Company 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 $32,000
as of June 30, 2000, with interest rates varying between 8% and 26.6% with final
payments due between 2001 and 2002. These notes are collateralized by
equipment. In addition, the Company also has certain capital leases in the
aggregate amount of $2,770,000 as of June 30, 2000, which includes a capitalized
lease for the property at 1958 Kellogg, Carlsbad, CA, in the amount of
$2,700,000 and capitalized leases on equipment in the amount of $70,000.
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 June 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. In June 2000, the
Company wrote-off the $457,000 of accounts payable and unpaid rent claims of
International Computers Limited, Inc. ("ICL") which had been carried on Lexia's
books. Lexia had disputed these liabilities with respect to ICL in light of its
own offsetting claims and defenses. The legal statute of limitations on these
ICL claims has now expired.
The Company's sources of future short-term liquidity are its cash balance of
$105,000 as of June 30, 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 also expects additional
financing from the equipment re-financing transaction with GIW which was
discussed above; at this time, the Company does not have a reasonable estimate
of the dollar value of this potential financing.
The Company is currently obligated as a guarantor under an assignment agreement
of a lease. The amount is approximately $18,550 per month through September
2002. As of July 2000, the Company has not been required to pay any amounts
related to this guarantee. The Company is also obligated to pay approximately
$5,000 per month on various other leases. Aside from these commitments, the
Company has not made any material commitments.
In the first quarter of fiscal year 2001, current and former employees exercised
stock options to purchase a total of 244,164 shares of the Company's common
stock. These exercises in the first quarter of fiscal year 2001, provided
$86,584 in cash to the Company. Subsequent to the end of the quarter,
additional stock options were exercised for the purchase of 266,667 shares of
common stock for a total purchase price of $90,130.
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 PRONOUNCEMENTS
-----------------------------
In December 1999, the SEC released Staff Accounting Bulletin 101 ("SAB 101") ,
Revenue Recognition in Financial Statements. SAB 101 clarifies the SEC's views
related to revenue recognition and disclosure. SAB 101A was subsequently issued
in March 2000, deferring the requirement to adopt the revised guidance until the
period ended June 30, 2000. The Company does not expect adoption of SAB 101 to
have a material effect on its financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions involving Stock Compensation." FIN 44 clarifies the
application of APB Opinion No. 25 regarding (a) the definition of employee for
purposes of applying APB Opinion No. 25, (b) the criteria for determining
whether a stock option plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions cover specific events that occur after either December
15, 1998, or January 12, 2000. The Company has adopted FIN 44 and it did not
have a material impact on its financial position or results of operations.
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.
<PAGE>
PART II - OTHER INFORMATION
-------------------------------
ITEM 1. LEGAL PROCEEDINGS
------------------
There are no material pending legal proceedings to which the Company
or any of its subsidiaries is a party or of which any of
their properties is the subject.
ITEM 2. CHANGES IN SECURITIES
-----------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
----------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
None
ITEM 5. OTHER INFORMATION
------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------
a. Reports on Form 8-K
----------------------
None
b. Exhibits
--------
10.61.1 Amendment to Employment Agreement with Patrick W.
Moore dated September 23, 1999
10.72 Stock Option Agreement with Patrick W. Moore,
dated July 5, 2000
27 Financial Data Schedule
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Issuer
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
NATIONAL MANUFACTURING TECHNOLOGIES, INC.
Date: August 15, 2000. . . . . . . . . . . . . . by /s/ Patrick W. Moore
--------------------------
Patrick W. Moore
Chairman, Chief Executive Officer and President
Date: August 15, 2000. . . . . . . . . . . . . . by /s/ Larry Naritelli
--------------------------
Larry Naritelli
Controller
Principal Accounting Officer
